11th Accountancy

Contents
FOREWORD Introduction to Accounting Meaning of Accounting Accounting as a Source of Information Objectives of Accounting Role of Accounting Basic Terms in Accounting Theory Base of Accounting Generally Accepted Accounting Principles (GAAP) Basic Accounting Concepts Systems of Accounting Basis of Accounting Accounting Standards Recording of Transactions - I Business Transactions and Source Document Accounting Equation Using Debit and Credit Books of Original Entry The Ledger Posting from Journal Recording of Transactions - II Cash Book Purchases (Journal) Book Purchases Return (Journal) Book Sales (Journal) Book Sales Return (Journal) Book Journal Proper Balancing the Accounts iii 1 2 6 10 13 14 22 23 24 33 34 35 41 41 45 47 56 64 67 91 92 117 119 121 123 129 131
Chapter 1 1.1 1.2 1.3 1.4 1.5 Chapter 2 2.1 2.2 2.3 2.4 2.5 Chapter 3 3.1 3.2 3.3 3.4 3.5 3.6 Chapter 4 4.1 4.2 4.3 4.4 4.5 4.6 4.7
Chapter 5 5.1 5.2 Chapter 6 6.1 6.2 6.3 6.4 6.5 6.6 Chapter 7 7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 7.9 7.10 7.11 7.12 7.13 Chapter 8 8.1 8.2 8.3 8.4 8.5 8.6 8.7 8.8 8.9 8.10 8.11 8.12
Bank Reconciliation Statement Need for Reconciliation Preparation of Bank Reconciliation Statement Trial Balance and Rectification of Errors Meaning of Trial Balance Objectives of Preparing the Trial Balance Preparation of Trial Balance Significance of Agreement of Trial Balance Searching of Errors Rectification of Errors Depreciation, Provisions and Reserves Depreciation Depreciation and other Similar Terms Causes of Depreciation Need for Depreciation Factors Affecting the Amount of Depreciation Methods of calculating Depreciation Amount Straight Line Method and Written Down Method A Comparative Analysis Methods of Recording Depreciation Disposal of Asset Effect of any Addition or Extension to the Existing Asset Provisions Reserves Secret Reserve Bill of Exchange Meaning of Bill of Exchange Promissory Note Advantages of Bill of Exchange Maturity of Bill Discounting of Bill Endorsement of Bill Accounting Treatment Dishonour of a Bill Renewal of the Bill Retiring of the Bill Bills Receivable and Bills Payable Books Accommodation of Bills
150 151 156 181 181 182 185 190 192 193 227 227 231 231 232 234 235 240 242 251 261 264 266 270 279 280 282 284 285 285 286 286 293 298 301 303 317
Accountancy
Financial Accounting
Volume I
Textbook for Class XI
CONTENTS
FOREWORD
Chapter 9 9.1 9.2 9.3 9.4 9.5 9.6 9.7 Chapter 10 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 10.10 10.11 10.12 10.13 Chapter 11 11.1 11.2 Financial Statements - I Stakeholders and Their Information Requirements Distinction between Capital and Revenue Financial Statements Trading and Profit and Loss Account Operating Profit (EBIT) Balance Sheet Opening Entry Financial Statements Need for Adjustments Closing Stock Outstanding Expenses Prepaid Expenses Accrued Income Income Received in Advance Depreciation Bad Debts Provision for Bad and Doubtful Debts Provision for Discount on Debtors Managers Commission Interest on Capital Methods of Presenting the Financial Statements Accounts from Incomplete Records Meaning of Incomplete Records Reasons of Incompleteness and its Limitations iii 331 331 333 335 337 351 353 362 372 372 374 376 377 379 381 382 383 384 387 389 392 416 437 437 438
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11.3 11.4 Ascertainment of Profit and Loss Preparing Trading and Profit and Loss Account and the Balance Sheet Applications of Computers in Accounting Meaning and Elements of Computer System Capabilities of Computer System Limitations of a Computer System Components of Computer Evolution of Computerised Accounting Features of Computerised Accounting System Management Information System and Accounting Information System Computerised Accounting System Concept of Computerised Accounting System 439 444 475 475 477 478 479 480 483 485 492 492
Chapter 12 12.1 12.2 12.3 12.4 12.5 12.6 12.7
Chapter 13 13.1 13.2 13.3 13.4 13.5 13.6
Comparison between Manual and Computerised Accounting494 Advantages of Computerised Accounting System Limitations of Computerised Accounting System Sourcing of Accounting Software Generic Considerations before Sourcing an Accounting Software 501 504 506 507 508 518 520 523 524 525 527 495 497 498
Chapter 14 14.1 14.2 14.3 14.4 14.5 14.6 14.7 14.8 14.9
Structuring Database for Accounting Data Processing Cycle Designing Database for Accounting Entity Relationship (ER) Model Database Technology An Illustration of Accounting Database Relational Data Model Relational Databases and Schemas Constraints and Database Schemas Operations and Constraint Violations
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14.10 14.11 14.12 Chapter 15 15.1 15.2 Designing Relational Database Schema 528
llustrating the Database Structure for Example Realities 531 Interacting with Databases Accounting System Using Database Management System MS Access and its Components Creating Tables and Relationships for Accounting Database 560 566 588 622 539 555 555
15.3 15.4 15.5
Vouchers Using Forms Information Using Queries Generating Accounting Reports
Introduction to Accounting
LEARNING OBJECTIVES
After studying this chapter you will be able to: state the meaning and need of accounting; discuss accounting as a source of information ; identify the internal and external users of accounting information; explain the objectives of accounting; describe the role of accounting; explain the basic terms used in accounting.
ver the centuries, accounting has remained confined to the financial record-keeping functions of the accountant. But, todays rapidly changing business environment has forced the accountants to reassess their roles and functions both within the organisation and the society. The role of an accountant has now shifted from that of a mere recorder of transactions to that of the member providing relevant information to the decision-making team. Broadly speaking, accounting today is much more than just bookkeeping and the preparation of financial reports. Accountants are now capable of working in exciting new growth areas such as: forensic accounting (solving crimes such as computer hacking and the theft of large amounts of money on the internet); ecommerce (designing web-based payment system); financial planning, environmental accounting, etc. This realisation came due to the fact that accounting is capable of providing the kind of information that managers and other interested persons need in order to make better decisions. This aspect of accounting gradually assumed so much importance that it has now been raised to the level of an information system. As an information system, it collects data and communicates economic information about the organisation to a wide variety of users whose decisions and actions are related to its per for mance. This introductory chapter therefore, deals with the nature, need and scope of accounting in this context.
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1.1
Meaning of Accounting
In 1941, 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. With greater economic development resulting in changing role of accounting, its scope, became broader. In 1966, the American Accounting Association (AAA) defined accounting as the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of information.
Fig. 1.1 : Showing the process of accounting
In 1970, the Accounting Principles Board of AICPA also emphasised that the function of accounting is to provide quantitative information, primarily financial in nature, about economic entities, that is intended to be useful in making economic decisions. Accounting can therefore be defined as the process of identifying, measuring, recording and communicating the required information relating to the economic events of an organisation to the interested users of such
information. In order to appreciate the exact nature of accounting, we must understand the following relevant aspects of the definition: Economic Events Identification, Measurement, Recording and Communication Organisation Interested Users of Information
Box 1 History and Development of Accounting Accounting enjoys a remarkable heritage. The history of accounting is as old as civilisation. The seeds of accounting were most likely first sown in Babylonia and Egypt around 4000 B.C. who recorded transactions of payment of wages and taxes on clay tablets. Historical evidences reveal that Egyptians used some form of accounting for their treasuries where gold and other valuables were kept. The incharge of treasuries had to send day wise reports to their superiors known as Wazirs (the prime minister) and from there month wise reports were sent to kings. Babylonia, known as the city of commerce, used accounting for business to uncover losses taken place due to frauds and lack of efficiency. In Greece, accounting was used for apportioning the revenues received among treasuries, maintaining total receipts, total payments and balance of government financial transactions. Romans used memorandum or daybook where in receipts and payments were recorded and wherefrom they were posted to ledgers on monthly basis. (700 B.C to 400 A.D). China used sophisticated form of government accounting as early as 2000 B.C. Accounting practices in India could be traced back to a period when twenty three centuries ago, Kautilya, a minister in Chandraguptas kingdom wrote a book named Arthashasthra, which also described how accounting records had to be maintained. Luca Paciolis, a Franciscan friar (merchant class), book Summa de Arithmetica, Geometria, Proportion at Proportionality (Review of Arithmetic and Geometric proportions) in Venice (1494) is considered as the first book on double entry bookkeeping. A portion of this book contains knowledge of business and book-keeping. However, Pacioli did not claim that he was the inventor of double entry book-keeping but spread the knowledge of it. It shows that he probably relied on thencurrent book-keeping manuals as the basis for his masterpiece. In his book, he used the present day popular terms of accounting Debit (Dr.) and Credit (Cr.). These were the concepts used in Italian terminology. Debit comes from the Italian debito which comes from the Latin debita and debeo which means owed to the proprietor. Credit comes from the Italian credito which comes from the Latin credo which means trust or belief (in the proprietor or owed by the proprietor. In explaining double entry system, Pacioli wrote that All entries have to be double entries, that is if you make one creditor, you must make some debtor. He also stated that a merchants responsibility include to give glory to God in their enterprises, to be ethical in all business activities and to earn a profit. He discussed the details of memorandum, journal, ledger and specialised accounting procedures.
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1.1.1 Economic Events Business organisations involves economic events. An economic event is known as a happening of consequence to a business organisation which consists of transactions and which are measurable in monetary terms. For example, purchase of machinery, installing and keeping it ready for manufacturing is an event which comprises number of financial transactions such as buying a machine, transportation of machine, site preparation for installation of a machine, expenditure incurred on its installation and trial runs. Thus, accounting identifies bunch of transactions relating to an economic event. If an event involves transactions between an outsider and an organisation, these are known as external events. The following are the examples of such transactions: Sale of Reebok shoes to the customers. Rendering services to the customers by Videocon Limited. Purchase of materials from suppliers. Payment of monthly rent to the landlord. An internal event is an economic event that occurs entirely between the internal wings of an enterprise, e.g., supply of raw material or components by the stores department to the manufacturing department, payment of wages to the employees, etc. 1.1.2 Identification, Measurement, Recording and Communication Identification : It means determining what transactions to record, i.e., to identity events which are to be recorded. It involves observing activities and selecting those events that are of considered financial character and relate to the organisation. The business transactions and other economic events therefore are evaluated for deciding whether it has to be recorded in books of account. For example, the value of human resources, changes in managerial policies or appointment of personnel are important but none of these are recorded in books of account. However, when a company makes a sale or purchase, whether on cash or credit, or pays salary it is recorded in the books of account. Measurement : It means quantification (including estimates) of business transactions into financial terms by using monetary unit, viz. rupees and paise as a measuring unit. If an event cannot be quantified in monetary terms, it is not considered for recording in financial accounts. That is why important items like the appointment of a new managing director, signing of contracts or changes in personnel are not shown in the books of accounts. Recording : Once the economic events are identified and measured in financial terms, these are recorded in books of account in monetary terms and in a chronological order. Recording is done in a manner that the necessary financial
information is summarised as per well-established practice and is made available as and when required. Communication : The economic events are identified, measured and recorded in order that the pertinent information is generated and communicated in a certain form to management and other internal and external users. The information is regularly communicated through accounting reports. These reports provide information that are useful to a variety of users who have an interest in assessing the financial performance and the position of an enterprise, planning and controlling business activities and making necessary decisions from time to time. The accounting information system should be designed in such a way that the right information is communicated to the right person at the right time. Reports can be daily, weekly, monthly, or quarterly, depending upon the needs of the users. An important element in the communication process is the accountants ability and efficiency in presenting the relevant information. 1.1.3 Organisation Organisation refers to a business enterprise, whether for profit or not-forprofit motive. Depending upon the size of activities and level of business operation, it can be a sole-proprietory concern, partnership firm, cooperative society, company, local authority, municipal corporation or any other association of persons. 1.1.4 Interested Users of Information Accounting is a means by which necessary financial information about business enterprise is communicated and is also called the language of business. Many users need financial information in order to make important decisions. These users can be divided into two broad categories: internal users and external users. Internal users include: Chief Executive, Financial Officer, Vice President, Business Unit Managers, Plant Managers, Store Managers, Line Supervisors, etc. External users include: present and potential Investors (shareholders), Creditors (Banks and other Financial Institutions, Debentureholders and other Lenders), Tax Authorities, Regulatory Agencies (Department of Company Affairs, Registrar of Companies, Securities Exchange Board of India, Labour Unions, Trade Associations, Stock Exchange and Customers, etc. Since the primary function of accounting is to provide useful information for decision-making, it is a means to an end, with the end being the decision that is helped by the availability of accounting information. You will study about the types of accounting information and its users later in this chapter.
6 Box 2 Why do the Users Want Accounting Information?
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The owners/shareholders use them to see if they are getting a satisfactory return on their investment, and to assess the financial health of their company/business. The directors/managers use them for making both internal and external comparisons in their attempts to evaluate the performance. They may compare the financial analysis of their company with the industry figures in order to ascertain the companys strengths and weaknesses. Management is also concerned with ensuring that the money invested in the company/organisation is generating an adequate return and that the company/organisation is able to pay its debts and remain solvent. The creditors (lenders) want to know if they are likely to get paid and look particularly at liquidity, which is the ability of the company/organisation to pay its debts as they become due. The prospective investors use them to assess whether or not to invest their money in the company/organisation. The government and regulatory agencies such as Registrar of companies, Custom departments IRDA, RBI, etc. require information for the payment of various taxes such as Value Added Tax (VAT), Income Tax (IT), Customs and Excise duties for protecting the interests of investors, creditors(lenders), and also to satisfy the legal obligations imposed by the Companies Act 1956 and SEBI from time-totime.
1.2
Accounting as a Source of Information
As discussed earlier, accounting is a definite processes of interlinked activities, (refer figure 1.1) that begins with the identification of transactions and ends with the preparation of financial statements. Every step in the process of accounting generates information. Generation of information is not an end in itself. It is a means to facilitate the dissemination of information among different user groups. Such information enables the interested parties to take appropriate decisions. Therefore, dissemination of information is an essential function of accounting. To be useful, the accounting information should ensure to: 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 managements ability to utilise resources effectively in meeting goals;
provide factual and interpretative information by disclosing underlying assumptions on matters subject to interpretation, evaluation, prediction, or estimation; and provide information on activities affecting the society.
Test Your Understanding - I Complete the following sentences with appropriate words: (a) Information in financial reports is based on ..................... transactions. (b) Internal users are the ..................... of the business entity. (c) A ..................... would most likely use an entities financial report to determine whether or not the business entity is eligible for a loan. (d) The Internet has assisted in decreasing the ..................... in issuing financial reports to users. (e) ..................... users are groups outside the business entity, who uses the information to make decisions about the business entity. (f) Information is said to be relevent if it is ...................... (g) The process of accounting starts with ............ and ends with ............ (h) Accounting measures the business transactions in terms of ............ units. (i) Identified and measured economic events should be recording in ............ order.
The role of an accountant in generating accounting information is to observe, screen and recognise events and transactions to measure and process them, and thereby compile reports comprising accounting information that are communicated to the users. These are then interpreted, decoded and used by management and other user groups. It must be ensured that the information provided is relevant, adequate and reliable for decision-making. The apparently divergent needs of internal and external users of accounting information have resulted in the development of sub-disciplines within the accounting discipline namely, financial accounting, cost accounting and management accounting (refer box 3). Financial accounting assists keeping a systematic record of financial transactions the preparation and presentation of financial reports in order to arrive at a measure of organisational success and financial soundness. It relates to the past period, serves the stewardship function and is monetary in nature. It is primarily concerned with the provision of financial information to all stakeholders. Cost accounting assists in analysing the expenditure for ascertaining the cost of various products manufactured or services provided by the firm and
Accountancy
fixation of prices thereof. It also helps in controlling the costs and providing necessary costing information to management for decision-making. Management accounting deals with the provision of necessary accounting information to people within the organisation to enable them in decision-making, planning and controlling business operations. Management accounting draws the relevant information mainly from financial accounting and cost accounting which helps the management in budgeting, assessing profitability, taking pricing decisions, capital expenditure decisions and so on. Besides, it generates other information (quantitative and qualitative, financial and non-financial) which relates to the future and is relevant for decision-making in the organisation. Such information includes: sales forecast, cash flows, purchase requirement, manpower needs, environmental data about effects on air, water, land, natural resources, flora, fauna, human health, social responsibilities, etc. As a result, the scope of accounting has become so vast, that new areas like human resource accounting, social accounting, responsibility accounting have also gained prominance.
Lets Do It Many People in todays society think of an accountant as simply a glorified bookkeeper. But the role of an accountant is continually changing. Discuss in the classroom what really the role of accounting is?
1.2.1 Qualitative Characteristics of Accounting Information Qualitative characteristics are the attributes of accounting information which tend to enhance its understandability and usefulness. In order to assess whether accounting information is decision useful, it must possess the characteristics of reliability, relevance, understandability and comparability. Reliability Reliability means the users must be able to depend on the information. The reliability of accounting information is determined by the degree of correspondence between what the information conveys about the transactions or events that have occurred, measured and displayed. A reliable information should be free from error and bias and faithfully represents what it is meant to represent. To ensure reliability, the information disclosed must be credible, verifiable by independent parties use the same method of measuring, and be neutral and faithful (refer figure 1.3).
Introduction to Accounting Box 3 Branches of Accounting The economic development and technological improvements have resulted in an increase in the scale of operations and the advent of the company form of business organisation. This has made the management function more and more complex and increased the importance of accounting information. This gave rise to special branches of accounting. These are briefly explained below : Financial accounting : The purpose of this branch of accounting is to keep a record of all financial transactions so that: (a) the profit earned or loss sustained by the business during an accounting period can be worked out, (b) the financial position of the business as at the end of the accounting period can be ascertained, and (c) the financial information required by the management and other interested parties can be provided. Cost Accounting : The purpose of cost accounting is to analyse the expenditure so as to ascertain the cost of various products manufactured by the firm and fix the prices. It also helps in controlling the costs and providing necessary costing information to management for decision-making. Management Accounting : The purpose of management accounting is to assist the management in taking rational policy decisions and to evaluate the impact of its decisons and actions.
Relevance To be relevant, information must be available in time, must help in prediction and feedback, and must influence the decisions of users by : (a) helping them form prediction about the outcomes of past, present or future events; and/or (b) confirming or correcting their past evaluations. Understandability Understandability means decision-makers must interpret accounting information in the same sense as it is prepared and conveyed to them. The qualities that distinguish between good and bad communication in a message are fundamental to the understandability of the message. A message is said to be effectively communicated when it is interpreted by the receiver of the message in the same sense in which the sender has sent. Accountants should present the comparable information in the most intenlligible manner without sacrificing relevance and reliability.
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Comparability It is not sufficient that the financial information is relevant and reliable at a particular time, in a particular circumstance or for a particular reporting entity. But it is equally important that the users of the general purpose financial reports are able to compare various aspects of an entity over different time period and with other entities. To be comparable, accounting reports must belong to a common period and use common unit of measurement and format of reporting.
Test Your Understanding - II You are a senior accountant of Ramona Enterprises Limited. What three steps would you take to make your companys financial statements understandable and decision useful? 1. 2. 3. [Hint : Refer to qualitative characteristics of accounting information]
1.3
Objectives of Accounting
As an information system, the basic objective of accounting is to provide useful information to the interested group of users, both external and internal. The necessary information, particularly in case of external users, is provided in the form of financial statements, viz., profit and loss account and balance sheet. Besides these, the management is provided with additional information from time to time from the accounting records of business. Thus, the primary objectives of accounting include the following: 1.3.1 Maintenance of Records of Business Transactions Accounting is used for the maintenance of a systematic record of all financial transactions in book of accounts. Even the most brilliant executive or manager cannot accurately remember the numerous amount of varied transactions such as purchases, sales, receipts, payments, etc. that takes place in business everyday. Hence, a proper and complete records of all business transactions are kept regularly. Moreover, the recorded information enables verifiability and acts as an evidence. 1.3.2 Calculation of Profit and Loss The owners of business are keen to have an idea about the net results of their business operations periodically, i.e. whether the business has earned profits
Introduction to Accounting Qualitative Characteristic of Accounting Information
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Decision Makers (Users of Accounting Information)
Understandability
Decision Usefulness
Relevance
Relability
Timliness Dedicative Value Feedback Value Verifiability Faithfulness
Nutrality Comparability Fig. 1.3 : The qualitative characteristics of accounting information
or incurred losses. Thus, another objective of accounting is to ascertain the profit earned or loss sustained by a business during an accounting period which can be easily workout with help of record of incomes and expenses relating to the business by preparing a profit or loss account for the period. Profit represents excess of revenue (income), over expenses. If the total revenue of a given period is Rs 6,00,000 and total expenses are Rs. 5,40,000 the profit will be equal to Rs. 60,000(Rs. 6,00,000 Rs. 5,40,000). If however, the total expenses exceed the total revenue, the difference reflects the loss. 1.3.3 Depiction of Financial Position Accounting also aims at ascertaining the financial position of the business concern in the form of its assets and liabilities at the end of every accounting period. A proper record of resources owned by business organisation (Assets)
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and claims against such resources (Liabilities) facilitates the preparation of a statement known as balance sheet position statement. 1.3.4 Providing Accounting Information to its Users The accounting information generated by the accounting process is communicated in the form of reports, statements, graphs and charts to the users who need it in different decision situations. As already stated, there are two main user groups, viz. internal users, mainly management, who needs timely information on cost of sales, profitability, etc. for planning, controlling and decision-making and external users who have limited authority, ability and resources to obtain the necessary information and have to rely on financial statements (Balance Sheet, Profit and Loss account). Primarily, the external users are interested in the following: Investors and potential investors-information on the risks and returns on investments; Unions and employee groups-information on the stability, profitability and distribution of wealth within the business; Lenders and financial institutions-information on the creditworthiness of the company and its ability to repay loans and pay interest; Suppliers and creditors-information on whether amounts owed will be repaid when due, and on the continued existence of the business; Customers-information on the continued existence of the business and thus the probability of a continued supply of products, parts and after sales service; Government and other regulators- information on the allocation of resources and the compliance to regulations; Social responsibility groups, such as environmental groups-information on the impact on environment and its protection; Competitors-information on the relative strengths and weaknesses of their competition and for comparative and benchmarking purposes. Whereas the above categories of users share in the wealth of the company, competitors require the information mainly for strategic purposes.
Test Your Understanding - III Which stakeholder g roup _____________________________ _____________________________ _____________________________ _____________________________ _____________________________ _____________________________ Would be most interested in (a) the VAT and other tax liabilities of the firm (b) the potential for pay awards and bouns deals (c) the ethical or environmental activities of the firm (d) whether the firm has a long-term future (e) profitability and share performance (f) the ability of the firm to carry on providing a service or producing a product.
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1.4
Role of Accounting
For centuries, the role of accounting has been changing with the changes in economic development and increasing societal demands. It describes and analyses a mass of data of an enterprise through measurement, classification and summarisation, and reduces those date into reports and statements, which show the financial condition and results of operations of that enterprise. Hence, it is regarded as a language of business. It also performs the service activity by providing quantitative financial information that helps the users in various ways. Accounting as an information system collects and communicates economic information about an enterprise to a wide variety of interested parties. However, accounting information relates to the past transactions and is quantitative and financial in nature, it does not provide qualitative and nonfinancial information. These limitations of accounting must be kept in view while making use of the accounting information.
Test Your Understanding - IV Tick the Correct Answer 1. Which of the following is not a business transaction? a. Bought furniture of Rs.10,000 for business b. Paid for salaries of employees Rs.5,000 c. Paid sons fees from his personal bank account Rs.20,000 d. Paid sons fees from the business Rs.2,000 2. Deepti wants to buy a building for his business today. Which of the following is the relevant data for his decision? a. Similar business acquired the required building in 2000 for Rs. 10,00,000 b. Building cost details of 2003 c. Building cost details of 1998 d. Similar building cost in August, 2005 Rs. 25,00,000 3. Which is the last step of accounting as a process of information? a. Recording of data in the books of accounts b. Preparation of summaries in the form of financial statements c. Communication of information d. Analysis and interpretation of information 4. Which qualitative characteristics of accounting information is reflected when accounting information is clearly presented? a. Understandability b. Relevance c. Comparability d. Reliability 5. Use of common unit of measurement and common format of reporting promotes; a. Comparability b. Understandability c. Relevance d. Reliability
14 Box 4 Different Roles of Accounting
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As a language it is perceived as the language of business which is used to communicate information on enterprises; As a historical record- it is viewed as chronological record of financial transactions of an organisation at actual amounts involved; As current economic reality- it is viewed as the means of determining the true income of an entity namely the change of wealth over time; As an information system it is viewed as a process that links an information source (the accountant) to a set of receivers (external users) by means of a channel of communication; As a commodity- specialised information is viewed as a service which is in demand in society, with accountants being willing to and capable of providing it.
1.5
Basic Terms in Accounting
1.5.1 Entity Entity means a thing that has a definite individual existence. Business entity means a specifically identifiable business enterprise like Super Bazaar, Hire Jewellers, ITC Limited, etc. An accounting system is always devised for a specific business entity (also called accounting entity). 1.5.2 Transaction A event involving some value between two or more entities. It can be a purchase of goods, receipt of money, payment to a creditor, incurring expenses, etc. It can be a cash transaction or a credit transaction. 1.5.3 Assets Assets are economic resources of an enterprise that can be usefully expressed in monetary terms. Assets are items of value used by the business in its operations. For example, Super Bazar owns a fleet of trucks, which is used by it for delivering foodstuffs; the trucks, thus, provide economic benefit to the enterprise. This item will be shown on the asset side of the balance sheet of Super Bazaar. Assets can be broadly classified into two types: Fixed Assets and Current Assets. Fixed Assets are assets held on a long-term basis, such as land, buildings, machinery, plant, furniture and fixtures. These assets are used for the normal operations of the business.
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Current Assets are assets held on a short-ter m basis such as debtors(accounts receivable), bills receivable (notes receivable), stock (inventory), temporary marketable securities, cash and bank balances. 1.5.4 Liabilities Liabilities are obligations or debts that an enterprise has to pay at some time in the future. They represent creditors claims on the firms assets. Both small and big businesses find it necessary to borrow money at one time or the other, and to purchase goods on credit. Super Bazar, for example, purchases goods for Rs. 10,000 on credit for a month from Fast Food Products on March 25, 2005. If the balance sheet of Super Bazaar is prepared as at March 31, 2005, Fast Food Products will be shown as creditors on the liabilities side of the balance sheet. If Super Bazaar takes a loan for a period of three years from Delhi State Co-operative Bank, this will also be shown as a liability in the balance sheet of Super Bazaar. Liabilities are classified as long-term liabilities and short-term liabilities (also known as short-term liabilities). Long-term liabilities are those that are usually payable after a period of one year, for example, a term loan from a financial institution or debentures (bonds) issued by a company. Short-term liabilities are obligations that are payable within a period of one year, for example, creditors, bills payable, bank overdraft. 1.5.5 Capital Amount invested by the owner in the firm is known as capital. It may be brought in the form of cash or assets by the owner for the business entity capital is an obligation and a claim on the assets of business. It is, therefore, shown as capital on the liabilities side of the balance sheet. 1.5.6 Sales Sales are total revenues from goods or services sold or provided to customers. Sales may be cash sales or credit sales. 1.5.7 Revenues These are the amounts of the business earned by selling its products or providing services to customers, called sales revenue. Other items of revenue common to many businesses are: commission, interest, dividends, royalities, rent received, etc. Revenue is also called income.
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1.5.8 Expenses Costs incurred by a business in the process of earning revenue are known as expenses. Generally, expenses are measured by the cost of assets consumed or services used during an accounting period. The usual items of expenses are: depreciation, rent, wages, salaries, interest, cost of heater, light and water, telephone, etc. 1.5.9 Expenditure Spending money or incurring a liability for some benefit, service or property received is called expenditure. Payment of rent, salary, purchase of goods, purchase of machinery, purchase of furniture, etc. are examples of expenditure. If the benefit of expenditure is exhausted within a year, it is treated as an expense (also called revenue expenditure). On the other hand, the benefit of an expenditure lasts for more than a year, it is treated as an asset (also called capital expenditure) such as purchase of machinery, furniture, etc. 1.5.10 Profit The excess of revenues of a period over its related expenses during an accounting year profit. Profit increases the investment of the owners. 1.5.11 Gain A profit that arises from events or transactions which are incidental to business such as sale of fixed assets, winning a court case, appreciation in the value of an asset. 1.5.12 Loss The excess of expenses of a period over its related revenues its termed as loss. It decreases in owners equity. It also refers to money or moneys 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. 1.5.13 Discount Discount is the deduction in the price of the goods sold. It is offered in two ways. Offering deduction of agreed percentage of list price at the time selling goods is one way of giving discount. Such discount is called trade discount. It is generally offered by manufactures to wholesellers and by wholesellers to retailers. After selling the goods on credit basis the debtors may be given certain deduction in amount due in case if they pay the amount within the stipulated period or earlier. This deduction is given at the time of payment on
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the amount payable. Hence, it is called as cash discount. Cash discount acts as an incentive that encourages prompt payment by the debtors. 1.5.14 Voucher The documentary evidence in support of a transaction is known as voucher. For example, if we buy goods for cash, we get cash memo, if we buy on credit, we get an invoice; when we make a payment we get a receipt and so on. 1.5.15 Goods It refers to the products in which the business units is dealing, i.e. in terms of which it is buying and selling or producting and selling. The items that are purchased for use in the business are not called goods. For example, for a furniture dealer purchase of chairs and tables is termed as goods, while for other it is furniture and is treated as an asset. Similarly, for a stationery merchant, stationery is goods, whereas for others it is an item of expense (not purchases) 1.5.16 Drawings Withdrawal of money and/or goods by the owner from the business for personal use is known as drawings. Drawings reduces the investment of the owners. 1.5.17 Purchases Purchases are total amount of goods procured by a business on credit and on cash, for use or sale. In a trading concern, purchases are made of merchandise for resale with or without processing. In a manufacturing concern, raw materials are purchased, processed further into finished goods and then sold. Purchases may be cash purchases or credit purchases. 1.5.18 Stock Stock (inventory) is a measure of something on hand-goods, spares and other items in a business. It is called Stock in hand. In a trading concern, the stock on hand is the amount of goods which are lying unsold as at the end of an accounting period is called closing stock (ending inventory). In a manufacturing company, closing stock comprises raw materials, semi-finished goods and finished goods on hand on the closing date. Similarly, opening stock (beginning inventory) is the amount of stock at the beginning of the accounting period. 1.5.19 Debtors Debtors are persons and/or other entities who owe to an enterprise an amount for buying goods and services on credit. The total amount standing against
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such persons and/or entities on the closing date, is shown in the balance sheet as sundry debtors on the asset side. 1.5.20 Creditors Creditors are persons and/or other entities who have to be paid by an enterprise an amount for providing the enterprise goods and services on credit. The total amount standing to the favour of such persons and/or entities on the closing date, is shown in the Balance Sheet as sundry creditors on the liabilities side.
Test Your Understanding - V Mr. Sunrise started a business for buying and selling of stationery with Rs. 5,00,000 as an initial investment. Of which he paid Rs.1,00,000 for furniture, Rs. 2,00,000 for buying stationery items. He employed a sales person and clerk. At the end of the month he paid Rs.5,000 as their salaries. Out of the stationery bought he sold some stationery for Rs.1,50,000 for cash and some other stationery for Rs.1,00,000 on credit basis to Mr.Ravi. Subsequently, he bought stationery items of Rs.1,50,000 from Mr. Peace. In the first week of next month there was a fire accident and he lost Rs. 30,000 worth of stationery. A part of the machinery, which cost Rs. 40,000, was sold for Rs. 45,000. From the above, answer the following : 1. What is the amount of capital with which Mr. Sunrise started business. 2. What are the fixed assets he bought? 3. What is the value of the goods purchased? 4. Who is the creditor and state the amount payable to him? 5. What are the expenses? 6. What is the gain he earned? 7. What is the loss he incurred? 8. Who is the debtor? What is the amount receivable from him? 9. What is the total amount of expenses and losses incurred? 10. Determine if the following are assets, liabilities, revenues, expenses or none of the these: sales, debtors, creditors, salary to manager, discount to debtors, drawings by the owner. Summary with Reference to Learning Objectives 1. Meaning of Accounting : Accounting is a process of identifying, measuring, recording the business transactions and communicating thereof the required information to the interested users. Accounting as a source of information : Accounting as a source of information system is the process of identifying, measuring, recording and communicating the economic events of an organisation to interested users of the information.
2.
Introduction to Accounting 3. Users of accounting information : Accounting plays a significant role in society by providing information to management at all levels and to those having a direct financial interest in the enterprise, such as present and potential investors and creditors. Accounting information is also important to those having indirect financial interest, such as regulatory agencies, tax authorities, customers, labour unions, trade associations, stock exchanges and others. Qualitative characteristics of Accounting : To make accounting information decision useful, it should possess the following qualitative characteristics. Reliability Understandability Relevance Comparability Objective of accounting : The primary objectives of accounting are to : maintain records of business; calculate profit or loss; depict the financial position; and make information available to various groups and users. Role of accounting : Accounting is not an end in itself. It is a means to an end. It plays the role of a : Language of a business Historical record Current economic reality Information system Service to users Questions for Practice Short Answers 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. Define accounting. State what is end product of financial accounting. Enumerate main objectives of accounting. List any five users who have indirect interest in accounting. State the nature of accounting information required by long-term lenders. Who are the external users of information? Enumerate informational needs of management. Give any three examples of revenues. Distinguish between debtors and creditors. Accounting information should be comparable. Do you agree with this statement. Give two reasons. If the accounting information is not clearly presented, which of the qualitative characteristic of the accounting information is violated? The role of accounting has changed over the period of time- Do you agree? Explain. Giving examples, explain each of the following accounting terms : Fixed assets Gain Profit Revenue Expenses Short-term liability Capital How will you define revenues and expenses?
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5.
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14.
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Accountancy 15. What is the primiary reason for the business students and others to familiarise themselves with the accounting discipline? Long Answers 1. 2. 3. 4. 5. 6. 7. 8. 9. Explain the factors, which necessitated systematic accounting. Describe the brief history of accounting. Explain the development of and role of accounting. Define accounting and state its objectives. Describe the informational needs of external users. What do you mean by an asset and what are different types of assets? Explain the meaning of gain and profit. Distinguish between these two terms. Explain the qualitative characteristics of accounting information. Describe the role of accounting in the modern world. Checklist to Test Your Understanding Test Your Understanding I (a) (d) (g) (h) Economic (b) Management/Employees (c) Creditor Time-gap (e) External (f) Free from bias Identifying the transactions and communicating information Monetory (i) Chronological
Test Your Understanding - II 1. 2. 3. Reliability, i.e. Verifiability, Faithfulness, Nutrality Relevance, i.e. Timeliness Understandability and Comparibility
Test Your Understanding - III (a) (b) (c) (d) (e) (f) Government and other regulators Management Social responsibility groups Lenders Suppliers and Creditors Customers
Test Your Understanding - IV 1. (c) 2. (c) 3. (a) 4. (a) 5. (b) 6. (c) 7. (a) 8. (a) 9. (d)
Test Your Understanding - V 1. 4. 7. 10. Rs. 5,00,000 2. Rs. 1,00,000, 3. Rs. 2,00,000 Mr. Reace, Rs. 1,50,000 5. Rs. 5,000 6. Rs. 5,000 Rs. 30,000 8. Mr. Ravi, Rs. 1,00,000 9. Rs. 35,000 Assets : debtors; Liabilities : creditors; drawings; Revenues : sales expenses, discount, salary.
Introduction to Accounting Lets Do It Accountants today can work in exciting new growth areas such as forensic accounting, budget accounting, cost accounting, environmental accounting, e-commerce and the various agencies within the public sector.The advent of information technology have resulted inthe development of necessary skills for todays accountant include the ability to: Develop competence in systems analysis and computer technology; Develop facilitation skills, such as persuasion and communication skills; Acquire a broad business knowledge in strategy, operations, human resources, marketing, finance and economics; Develop analytical skills; Develop a willingness to embrace change and assume risk; Complete an internship in business and/or public accounting; Develop proficiency in accounting and tax issues.
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Theory Base of Accounting
LEARNING OBJECTIVES
After studying this chapter, you will be able to: identify the need for theory base of accounting; explain the nature of Generally Accepted Accounting Principles (GAAP); describe the meaning and purpose of the basic accounting concepts; enumerate the accounting standards issued by Institute of Chartered Accountants of India; describe the systems of accounting; and describe various basis of accounting.
s discussed in the previous chapter, accounting is concerned with the recording, classifying and summarising of financial transactions and events and interpreting the results thereof. It aims at providing information about the financial performance of a firm to its various users such as owners, managers employees, investors, creditors, suppliers of goods and services and tax authorities and help them in taking important decisions. The investors, for example, may be interested in knowing the extent of profit or loss earned by the firm during a given period and compare it with the performance of other similar enterprises. The suppliers of credit, say a banker, may, in addition, be interested in liquidity position of the enterprise. All these people look forward to accounting for appropriate, useful and reliable information. For making the accounting information meaningful to its internal and external users, it is important that such information is reliable as well as comparable. The comparability of information is required both to make inter-firm comparisons, i.e. to see how a firm has performed as compared to the other firms, as well as to make inter-period comparison, i.e. how it has performed as compared to the previous years. This becomes 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
Theory base of Accounting
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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 calls for developing a proper theory base of accounting. The importance of accounting theory need not be over-emphasised as no discipline can develop without a sound theoretical base. The theory base of accounting consists of principles, concepts, rules and guidelines developed over a period of time to bring uniformity and consistency to the process of accounting and enhance its utility to different users of accounting information. Apart from these, the Institute of Chartered Accountants of India, (ICAI), which is the regulatory body for standardisation of accounting policies in the country has issued Accounting Standards which are expected to be uniformly adhered to, in order to bring consistency in the accounting practices. These are discussed in the sections to follow. 2.1 Generally Accepted Accounting Principles (GAAP)
In order to maintain uniformity and consistency in accounting records, certain rules or principles have been developed which are generally accepted by the accounting profession. These rules are called by different names such as principles, concepts, conventions, postulates, assumptions and modifying principles. The term principle has been defined by AICPA as A general law or rule adopted or professed as a guide to action, a settled ground or basis of conduct or practice. The word generally means in a general manner, i.e. pertaining to many persons or cases or occasions. Thus, 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. For example, one of the important rule is to record all transactions on the basis of historical cost, which is verifiable from the documents such as cash receipt for the money paid. This brings in objectivity in the process of recording and makes the accounting statements more acceptable to various users. The Generally Accepted Accounting Principles have evolved over a long period of time on the basis of past experiences, usages or customs, statements by individuals and professional bodies and regulations by government agencies and have general acceptability among most accounting professionals. However, the principles of accounting are not static in nature. These are constantly influenced by changes in the legal, social and economic environment as well as the needs of the users.
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These principles are also referred as concepts and conventions. The term concept refers to the necessary assumptions and ideas which are fundamental to accounting practice, and the term convention connotes customs or traditions as a guide to the preparation of accounting statements. In practice, the same rules or guidelines have been described by one author as a concept, by another as a postulate and still by another as convention. This at times becomes confusing to the learners. Instead of going into the semantics of these terms, it is important to concentrate on the practicability of their usage. From the practicability view point, it is observed that the various terms such as principles, postulates, conventions, modifying principles, assumptions, etc. have been used inter-changeably and are referred to as Basic Accounting Concepts in the present chapter. 2.2 Basic Accounting Concepts
The basic accounting concepts are referred to as the fundamental ideas or basic assumptions underlying the theory and practice of financial accounting and are broad working rules for all accounting activities and developed by the accounting profession. The important concepts have been listed as below: Business entity; Money measurement; Going concern; Accounting period; Cost Dual aspect (or Duality); Revenue recognition (Realisation); Matching; Full disclosure; Consistency; Conservatism (Prudence); Materiality; Objectivity.
2.2.1 Business Entity Concept The concept of business entity assumes that business has a distinct and separate entity from its owners. It means that for the purposes of accounting, the business and its owners are to be treated as two separate entities. Keeping this in view, when a person brings in some money as capital into his business, in accounting records, it is treated as liability of the business to the owner. Here, one separate entity (owner) is assumed to be giving money to another distinct entity (business unit). Similarly, when the owner withdraws any money from the business for his personal expenses(drawings), it is treated as reduction of the owners capital and consequently a reduction in the liabilities of the business. The accounting records are made in the book of accounts from the point of view of the business unit and not that of the owner. The personal assets and
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liabilities of the owner are, therefore, not considered while recording and reporting the assets and liabilities of the business. Similarly, personal transactions of the owner are not recorded in the books of the business, unless it involves inflow or outflow of business funds. 2.2.2 Money Measurement Concept The concept of money measurement states that only those transactions and happenings in an organisation which can be expressed in terms of money such as sale of goods or payment of expenses or receipt of income, etc. are to be recorded in the book of accounts. All such transactions or happenings which can not be expressed in monetary terms, for example, the appointment of a manager, capabilities of its human resources or creativity of its research department or image of the organisation among people in general do not find a place in the accounting records of a firm. Another important aspect of the concept of money measurement is that the records of the transactions are to be kept not in the physical units but in the monetary unit. For example, an organisation may, on a particular day, have a factory on a piece of land measuring 2 acres, office building containing 10 rooms, 30 personal computers, 30 office chairs and tables, a bank balance of Rs.5 lakh, raw material weighing 20-tons, and 100 cartons of finished goods. These assets are expressed in different units, so can not be added to give any meaningful information about the total worth of business. For accounting purposes, therefore, these are shown in money terms and recorded in rupees and paise. In this case, the cost of factory land may be say Rs. 2 crore; office building Rs. 1 crore; computers Rs.15 lakh; office chairs and tables Rs. 2 lakh; raw material Rs. 33 lakh and finished goods Rs. 4 lakh. Thus, the total assets of the enterprise are valued at Rs. 3 crore and 59 lakh. Similarly, all transactions are recorded in rupees and paise as and when they take place. The money measurement assumption is not free from limitations. Due to the changes in prices, the value of money does not remain the same over a period of time. The value of rupee today on account of rise in prices is much less than what it was, say ten years back. Therefore, in the balance sheet, when we add different assets bought at different points of time, say building purchased in 1995 for Rs. 2 crore, and plant purchased in 2005 for Rs. 1 crore, we are in fact adding heterogeneous values, which can not be clubbed together. As the change in the value of money is not reflected in the book of accounts, the accounting data does not reflect the true and fair view of the affairs of an enterprise.
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2.2.3 Going Concern Concept The concept of going concern assumes that a business firm would continue to carry out its operations indefinitely, i.e. for a fairly long period of time and would not be liquidated in the foreseeable future. This is an important assumption of accounting as it provides the very basis for showing the value of assets in the balance sheet. An asset may be defined as a bundle of services. When we purchase an asset, for example, a personal computer, for a sum of Rs. 50,000, what we are buying really is the services of the computer that we shall be getting over its estimated life span, say 5 years. It will not be fair to charge the whole amount of Rs. 50,000, from the revenue of the year in which the asset is purchased. Instead, that part of the asset which has been consumed or used during a period should be charged from the revenue of that period. The assumption regarding continuity of business allows us to charge from the revenues of a period only that part of the asset which has been consumed or used to earn that revenue in that period and carry forward the remaining amount to the next years, over the estimated life of the asset. Thus, we may charge Rs. 10,000 every year for 5 years from the profit and loss account. In case the continuity assumption is not there, the whole cost (Rs. 50,000 in the present example) will need to be charged from the revenue of the year in which the asset was purchased. 2.2.4 Accounting Period Concept Accounting period refers to the span of time at the end of which the financial statements of an enterprise are prepared, to know whether it has earned profits or incurred losses during that period and what exactly is the position of its assets and liabilities at the end of that period. Such information is required by different users at regular interval for various purposes, as no firm can wait for long to know its financial results as various decisions are to be taken at regular intervals on the basis of such information. The financial statements are, therefore, prepared at regular interval, normally after a period of one year, so that timely information is made available to the users. This interval of time is called accounting period. The Companies Act 1956 and the Income Tax Act require that the income statements should be prepared annually. However, in case of certain situations, preparation of interim financial statements become necessary. For example, at the time of retirement of a partner, the accounting period can be different from twelve months period. Apart from these companies whose shares are listed on the stock exchange, are required to publish quarterly results to ascertain the profitability and financial position at the end of every three months period.
Theory base of Accounting Test Your Understanding - I
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Choose the Correct Answer 1 During the life-time of an entity accounting produce financial statements in . accordance with which basic accounting concept: () Conservation a ( ) Matching b () c Accounting period ( ) None of the above d 2 When information about two different enterprises have been prepared presented . in a similar manner the information exhibits the characteristic of: () Verifiability a ( ) Relevance b () c Reliability ( ) None of the above d 3 A concept that a business enterprise will not be sold or liquidated in the near . future is known as : () Going concern a ( ) Economic entity b () c Monetary unit ( ) None of the above d 4 The primary qualities that make accounting information useful for decision-making . are : () Relevance and freedom from bias a ( ) Reliability and comparability b () c Comparability and consistency ( ) None of the above d
2.2.5 Cost Concept The cost concept requires that all assets are recorded in the book of accounts at their purchase price, which includes cost of acquisition, transportation, installation and making the asset ready to use. To illustrate, on June 2005, an old plant was purchased for Rs. 50 lakh by Shiva Enterprise, which is into the business of manufacturing detergent powder. An amount of Rs. 10,000 was spent on transporting the plant to the factory site. In addition, Rs. 15,000 was spent on repairs for bringing the plant into running position and Rs. 25,000 on its installation. The total amount at which the plant will be recorded in the books of account would be the sum of all these, i.e. Rs. 50,50,000. The concept of cost is historical in nature as it is something, which has been paid on the date of acquisition and does not change year after year. For example, if a building has been purchased by a firm for Rs. 2.5 crore, the
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purchase price will remain the same for all years to come, though its market value may change. Adoption of historical cost brings in objectivity in recording as the cost of acquisition is easily verifiable from the purchase documents. The market value basis, on the other hand, is not reliable as the value of an asset may change from time to time, making the comparisons between one period to another rather difficult. However, an important limitation of the historical cost basis is that it does not show the true worth of the business and may lead to hidden profits. During the period of rising prices, the market value or the cost at (which the assets can be replaced are higher than the value at which these are shown in the book of accounts) leading to hidden profits. 2.2.6 Dual Aspect Concept Dual aspect is the foundation or basic principle of accounting. It provides the very basis for recording business transactions into the book of accounts. This concept states that every transaction has a dual or two-fold effect and should therefore be recorded at two places. In other words, at least two accounts will be involved in recording a transaction. This can be explained with the help of an example. Ram started business by investing in a sum of Rs. 50,00,000 The amount of money brought in by Ram will result in an increase in the assets (cash) of business by Rs. 50,00,000. At the same time, the owners equity or capital will also increase by an equal amount. It may be seen that the two items that got affected by this transaction are cash and capital account. Let us take another example to understand this point further. Suppose the firm purchase goods worth Rs. 10,00,000 on cash. This will increase an asset (stock of goods) on the one hand and reduce another asset (cash) on the other. Similarly, if the firm purchases a machine worth Rs. 30,00,000 on credit from Reliable Industries. This will increase an asset (machinery) on the one hand and a liability (creditor) on the other. This type of dual effect takes place in case of all business transactions and is also known as duality principle. The duality principle is commonly expressed in terms of fundamental Accounting Equation, which is as follows :
Assets = Liabilities + Capital
In other words, the equation states that the assets of a business are always equal to the claims of owners and the outsiders. The claims also called equity of owners is termed as Capital(owners equity) and that of outsiders, as
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Liabilities(creditors equity). The two-fold effect of each transaction affects in such a manner that the equality of both sides of equation is maintained. The two-fold effect in respect of all transactions must be duly recorded in the book of accounts of the business. In fact, this concept forms the core of Double Entry System of accounting, which has been dealt in detail, in chapter 3. 2.2.7 Revenue Recognition (Realisation) Concept The concept of revenue recognition requires that the revenue for a business transaction should be included in the accounting records only when it is realised. Here arises two questions in mind. First, is termed as revenue and the other, when the revenue is realised. Let us take the first one first. Revenue is the gross inflow of cash arising from (i) the sale of goods and services by an enterprise; and (ii) use by others of the enterprises resources yielding interest, royalties and dividends. Secondly, revenue is assumed to be realised when a legal right to receive it arises, i.e. the point of time when goods have been sold or service has been rendered. Thus, credit sales are treated as revenue on the day sales are made and not when money is received from the buyer. As for the income such as rent, commission, interest, etc. these are recongnised on a time basis. For example, rent for the month of March 2005, even if received in April 2005, will be taken into the profit and loss account of the financial year ending March 31, 2005 and not into financial year beginning with April 2005. Similarly, if interest for April 2005 is received in advance in March 2005, it will be taken to the profit and loss account of the financial year ending March 2006. There are some exceptions to this general rule of revenue recognition. In case of contracts like construction work, which take long time, say 2-3 years to complete, proportionate amount of revenue, based on the part of contract completed by the end of the period is treated as realised. Similarly, when goods are sold on hire purchase, the amount collected in installments is treated as realised. 2.2.8 Matching Concept The process of ascertaining the amount of profit earned or the loss incurred during a particular period involves deduction of related expenses from the revenue earned during that period. The matching concept emphasises exactly on this aspect. It states that expenses incurred in an accounting period should be matched with revenues during that period. It follows from this that the
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revenue and expenses incurred to earn these revenues must belong to the same accounting period. As already stated, revenue is recognised when a sale is complete or service is rendered rather when cash is received. Similarly, an expense is recognised not when cash is paid but when an asset or service has been used to generate revenue. For example, expenses such as salaries, rent, insurance are recognised on the basis of period to which they relate and not when these are paid. Similarly, costs like depreciation of fixed asset is divided over the periods during which the asset is used. Let us also understand how cost of goods are matched with their sales revenue. While ascertaining the profit or loss of an accounting year, we should not take the cost of all the goods produced or purchased during that period but consider only the cost of goods that have been sold during that year. For this purpose, the cost of unsold goods should be deducted from the cost of the goods produced or purchased. You will learn about this aspect in detail in the chapter on financial statement. The matching concept, thus, implies that all revenues earned during an accounting year, whether received during that year, or not and all costs incurred, whether paid during the year, or not should be taken into account while ascertaining profit or loss for that year. 2.2.9 Full Disclosure Concept Information provided by financial statements are used by different groups of people such as investors, lenders, suppliers and others in taking various financial decisions. In the corporate form of organisation, there is a distinction between those managing the affairs of the enterprise and those owning it. Financial statements, however, are the only or basic means of communicating financial information to all interested parties. It becomes all the more important, therefore, that the financial statements makes a full, fair and adequate disclosure of all information which is relevant for taking financial decisions. The principle of full disclosure requires that all material and relevant facts concerning financial performance of an enterprise must be fully and completely disclosed in the financial statements and their accompanying footnotes. This is to enable the users to make correct assessment about the profitability and financial soundness of the enterprise and help them to take informed decisions. To ensure proper disclosure of material accounting information, the Indian Companies Act 1956 has provided a format for the preparation of profit and loss account and balance sheet of a company, which needs to be compulsorily adhered to, for the preparation of these statements. The regulatory bodies
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like SEBI, also mandates complete disclosures to be made by the companies, to give a true and fair view of profitability and the state of affairs. 2.2.10 Consistency Concept The accounting information provided by the financial statements would be useful in drawing conclusions regarding the working of an enterprise only when it allows comparisons over a period of time as well as with the working of other enterprises. Thus, both inter-firm and inter-period comparisons are required to be made. This can be possible only when accounting policies and practices followed by enterprises are uniform and are consistent over the period of time. To illustrate, an investor wants to know the financial performance of an enterprise in the current year as compared to that in the previous year. He may compare this years net profit with that in the last year. But, if the accounting policies adopted, say with respect to depreciation in the two years are different, the profit figures will not be comparable. Because the method adopted for the valuation of stock in the past two years is inconsistent. It is, therefore, important that the concept of consistency is followed in preparation of financial statements so that the results of two accounting periods are comparable. Consistency eliminates personal bias and helps in achieving results that are comparable. Also the comparison between the financial results of two enterprises would be meaningful only if same kind of accounting methods and policies are adopted in the preparation of financial statements. However, consistency does not prohibit change in accounting policies. Necessary required changes are fully disclosed by presenting them in the financial statements indicating their probable effects on the financial results of business. 2.2.11 Conservatism Concept The concept of conservatism (also called prudence) provides guidance for recording transactions in the book of accounts and is based on the policy of playing safe. The concept states that a conscious approach should be adopted in ascertaining income so that profits of the enterprise are not overstated. If the profits ascertained are more than the actual, it may lead to distribution of dividend out of capital, which is not fair as it will lead to reduction in the capital of the enterprise. The concept of conservatism requires that profits should not to be recorded until realised but all losses, even those which may have a remote possibility,
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are to be provided for in the books of account. To illustrate, valuing closing stock at cost or market value whichever is lower; creating provision for doubtful debts, discount on debtors; writing of intangible assets like goodwill, patents, etc. from the book of accounts are some of the examples of the application of the principle of conservatism. Thus, if market value of the goods purchased has fallen down, the stock will be shown at cost price in the books but if the market value has gone up, the gain is not to be recorded until the stock is sold. This approach of providing for the losses but not recognising the gains until realised is called conservatism approach. This may be reflecting a generally pessimist attitude adopted by the accountants but is an important way of dealing with uncertainty and protecting the interests of creditors against an unwanted distribution of firms assets. However, deliberate attempt to underestimate the value of assets should be discouraged as it will lead to hidden profits, called secret reserves. 2.2.12 Materiality Concept
The concept of materiality requires that accounting should focus on material facts. Efforts should not be wasted in recording and presenting facts, which are immaterial in the determination of income. The question that arises here is what is a material fact. The materiality of a fact depends on its nature and the amount involved. Any fact would be considered as material if it is reasonably believed that its knowledge would influence the decision of informed user of financial statements. For example, money spent on creation of additional capacity of a theatre would be a material fact as it is going to increase the future earning capacity of the enterprise. Similarly, information about any change in the method of depreciation adopted or any liability which is likely to arise in the near future would be significant information. All such information about material facts should be disclosed through the financial statements and the accompanying notes so that users can take informed decisions. In certain cases, when the amount involved is very small, strict adherence to accounting principles is not required. For example, stock of erasers, pencils, scales, etc. are not shown as assets, whatever amount of stationery is bought in an accounting period is treated as the expense of that period, whether consumed or not. The amount spent is treated as revenue expenditure and taken to the profit and loss account of the year in which the expenditure is incurred. 2.2.13 Objectivity Concept The concept of objectivity requires that accounting transaction should be recorded in an objective manner, free from the bias of accountants and others.
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This can be possible when each of the transaction is supported by verifiable documents or vouchers. For example, the transaction for the purchase of materials may be supported by the cash receipt for the money paid, if the same is purchased on cash or copy of invoice and delivery challan, if the same is purchased on credit. Similarly, receipt for the amount paid for purchase of a machine becomes the documentary evidence for the cost of machine and provides an objective basis for verifying this transaction. One of the reasons for the adoption of Historical Cost as the basis of recording accounting transaction is that adherence to the principle of objectivity is made possible by it. As stated above, the cost actually paid for an asset can be verified from the documents but it is very difficult to ascertain the market value of an asset until it is actually sold. Not only that, the market value may vary from person to person and from place to place, and so objectivity cannot be maintained if such value is adopted for accounting purposes.
Test Your Understanding - II Fill in the correct word: 1 Recognition of expenses in the same period as associated revenues is called . _______________concept. 2 The accounting concept that refers to the tendency of accountants to resolve . uncertainty and doubt in favour of understating assets and revenues and overstating liabilities and expenses is known as _______________. 3 Revenue is generally recongnised at the point of sale denotes the concept . of _______________. 4 The _______________concept requires that the same accounting method should . be used from one accounting period to the next. 5 The_______________concept requires that accounting transaction should be free . from the bias of accountants and others.
2.3
Systems of Accounting
The systems of recording transactions in the book of accounts are generally classified into two types, viz. Double entry system and Single entry system. Double entry system is based on the principle of Dual Aspect which states that every transaction has two effects, viz. receiving of a benefit and giving of a benefit. Each transaction, therefore, involves two or more accounts and is recorded at different places in the ledger. The basic principle followed is that every debit must have a corresponding credit. Thus, one account is debited and the other is credited. Double entry system is a complete system as both the aspects of a transaction are recorded in the book of accounts. The system is accurate and
3 4
Accountancy
more reliable as the possibilities of frauds and mis-appropriations are minimised. The arithmetic inaccuracies in records can mostly be checked by preparing the trial balance. The system of double entry can be implemented by big as well as small organisations. Single entry system is not a complete system of maintaining records of financial transactions. It does not record two-fold effect of each and every transaction. Instead of maintaining all the accounts, only personal accounts and cash book are maintained under this system. In fact, this is not a system but a lack of system as no uniformity is maintained in the recording of transactions. For some transactions, only one aspect is recorded, for others, both the aspects are recorded. The accounts maintained under this system are incomplete and unsystematic and therefore, not reliable. The system is, however, followed by small business firms as it is very simple and flexible (you will study about them in detail later in this book). 2.4 Basis of Accounting
From the point of view the timing of recognition of revenue and costs, there can be two broad approaches to accounting. These are: ( Cash basis; and i ) () Accrual basis. i i Under the cash basis, entries in the book of accounts are made when cash is received or paid and not when the receipt or payment becomes due. Let us say, for example, if office rent for the month of December 2005, is paid in January 2006, it would be recorded in the book of account only in January 2006. Similarly sale of goods on credit in the month of January 2006 would not be recorded in January but say in April, when the payment for the same is received. Thus this system is incompatible with the matching principle, which states that the revenue of a period is matched with the cost of the same period. Though simple, this method is inappropriate for most organisations as profit is calculated as a difference between the receipts and disbursement of money for the given period rather than on happening of the transactions. Under the accrual basis, however, revenues and costs are recognised in the period in which they occur rather when they are paid. A distinction is made between the receipt of cash and the right to receive cash and payment of cash and legal obligation to pay cash. Thus, under this system, the monitory effect of a transaction is taken into account in the period in which they are earned rather than in the period in which cash is actually received or paid by the enterprise. This is a more appropriate basis for the calculation of profits as expenses are matched against revenue earned in relation thereto. For example, raw material consumed are matched against the cost of goods sold.
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2.5
Accounting Standards
As discussed in the preceding section, the Generally Accepted Accounting Principles in the form of Basic Accounting Concept have been accepted by the accounting profession to achieve uniformity and comparability in the financial statement. This is aimed at increasing the utility of these statement to various users of the accounting information. But the difficulty is that GAAP permit a variety of alternative treatments for the same item. For example, various methods of calculation of cost of inventory are permissible which may be followed by different enterprises. This may cause problem to the external users of information, which becomes inconsistent and incomparable. This necessitates brining in uniformity and consistency in the reporting of accounting information. Recognising this need, the Institute of Charted Accountants of India (ICAI) constituted an Accounting Standards Board (ASB) in April, 1977 for developing Accounting Standards. The main function of ASB is to identify areas in which uniformity in standards is required and develop draft standards after wide discussion with representative of the Government, public sector undertakings, industry and other organisations. ASB gives due consideration to the International Accounting Standards as India is a member of International Account Setting Body. ASB submits the draft of the standards to the Council of the ICAI, which finalises them and notifies them for use in the presentation of the financial statements. ASB also makes a periodic review of the accounting standards. Accounting standards are written statements of uniform accounting rules and guidelines or practices for preparing the uniform and consistent financial statements and for other disclosures affecting the user of accounting information. However, the accounting standards cannot override the provision of applicable laws, customs, usages and business environment in the country. The Institute tries to persuade the accounting profession for adopting the accounting standards, so that uniformity can be achieved in the presentation of financial statements. In the initial years the standards are of recommendatory in nature. Once an awareness is created about the requirements of a standard, steps are taken to enforce its compliance by making them mandatory for all companies to comply with. In case of non-compliance, the companies are required to disclose the reasons for deviations and the financial effect, if any, arising due to such deviation. The list of accounting standards is given in the appendix to this chapter.
3 6 Key Terms Introduced in the Chapter Cost Matching Materiality Objectivity Consistency Dual aspect Conservatism(Prudence) Going concern Comparibility
Accountancy
Full discloser Generally accepted Revenue Relisation Operating guidelines Accounting period Money measurement Accounting concept Accounting Principles (GAAP)
Summary with Reference to Learning Objectives 1 Generally Accepted Accounting Principles (GAAP) : Generally Accepted . Accounting principles refer to the rules or guidelines adopted for recording and reporting of business transactions in order to bring uniformity in the preparation and presentation of financial statements. These principles are also referred to as concepts and conventions. From the practicality view point, the various terms such as principles, postulates, conventions modifying principles, assumptions, etc. have been used interchangeably and are referred to as basic accounting concepts, in the present book. 2 Basic Accounting Concepts : The basic accounting concepts are referred to as . the fundamental ideas or basic assumptions underlying the theory and practice of financial accounting and are broad working rules of accounting activities. 3 Business Entity : This concept assumes that business has distinct and . separate entity from its owners. Thus, for the purpose of accounting, business and its owners are to be treated as two separate entities. 4 Money Measurement : The concept of money measurement states that only those . transactions and happenings in an organisation, which can be expressed in terms of money are to be recorded in the book of accounts. Also, the records of the transactions are to be kept not in the physical units but in the monetary units. 5 Going Concern : The concept of going concern assumes that a business firm . would continue to carry out its operations indefinitely (for a fairly long period of time) and would not be liquidated in the near future. 6 Accounting Period : Accounting period refers to the span of time at the end of . which the financial statements of an enterprise are prepared to know whether it has earned profits or incurred losses during that period and what exactly is the position of its assets and liabilities, at the end of that period. 7 Cost Concept : The cost concept requires that all assets are recorded in the . book of accounts at their cost price, which includes cost of acquisition, transportation, installation and making the asset ready for the use. 8 Dual Aspect : This concept states that every transaction has a dual or two. fold effect on various accounts and should therefore be recorded at two places. The duality principle is commonly expressed in terms of fundamental accounting equation, which is :
Assets = Liabilities + Capital
Theory base of Accounting 9 Revenue Recognition : Revenue is the gross in-flow of cash arising from the . sale of goods and services by an enterprise and use by others of the enterprise resources yielding interest royalities and divididends. The concept of revenue recognition requires that the revenue for a business transaction should be considered realised when a legal right to receive it arises. 10. Matching : The concept of matching emphasises that expenses incurred in an accounting period should be matched with revenues during that period. It follows from this that the revenue and expenses incurred to earn these revenue must belong to the same accounting period. 11. Full Disclosure : This concept requires that all material and relevant facts concerning financial performance of an enterprise must be fully and completely disclosed in the financial statements and their accompanying footnotes. 12. Consistency : This concepts states that accounting policies and practices followed by enterprises should be uniform and consistent one the period of time so that results are composable. Comparability results when the same accounting principles are consistently being applied by different enterprises for the period under comparison, or the same firm for a number of periods. 13. Conservatism : This concept requires that business transactions should be recorded in such a manner that profits are not overstated. All anticipated losses should be accounted for but all unrealised gains should be ignored. 14. Materiality : This concept states that accounting should focus on material facts. If the item is likely to influence the decision of a reasonably prudent investor or creditor, it should be regarded as material, and shown in the financial statements. 15. Objectivity : According to this concept, accounting transactions should be recorded in the manner so that it is free from the bias of accountants and others. 16. Systems of Accounting : There are two systems of recording business transactions, viz. double entry system and single entry system. Under double entry system every transaction has two-fold effects where as single entry system is known as incomplete records. 17. Basis of Accounting : The two broad approach of accounting are cash basis and accrual basis. Under cash basis transactions are recorded only when cash are received or paid. Whereas under accrual basis, revenues or costs are recognises when they occur rather than when they are paid. 18. Accounting Standards : Accounting standards are written statements of uniform accounting rules and guidelines in practice for preparing the uniform and consistent financial statements. These standards cannot over ride the provisions of applicable laws, customs, usages and business environment in the country. Questions for Practice Short Answers 1 . 2 . Why is it necessary for accountants to assume that business entity will remain a going concern? When should revenue be recognised? Are there exceptions to the general rule?
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3 8 3 . 4 .
Accountancy What is the basic accounting equation? The realisation concept determines when goods sent on credit to customers are to be included in the sales figure for the purpose of computing the profit or loss for the accounting period. Which of the following tends to be used in practice to determine when to include a transaction in the sales figure for the period. When the goods have been: a. dispatched b. invoiced c. delivered d. paid for Give reasons for your answer. Complete the following work sheet: ( i ) If a firm believes that some of its debtors may default, it should act on this by making sure that all possible losses are recorded in the books. This is an example of the ___________ concept. (i The fact that a business is separate and distinguishable from its owner i) is best exemplified by the ___________ concept. (i) Everything a firm owns, it also owns out to somebody. This co-incidence ii is explained by the ___________ concept. (v The ___________ concept states that if straight line method of depreciation i) is used in one year, then it should also be used in the next year. () A firm may hold stock which is heavily in demand. Consequently, the v market value of this stock may be increased. Normal accounting procedure is to ignore this because of the ___________. (i If a firm receives an order for goods, it would not be included in the v) sales figure owing to the ___________. (i) The management of a firm is remarkably incompetent, but the firms vi accountants can not take this into account while preparing book of accounts because of ___________ concept. The accounting concepts and accounting standards are generally referred to as the essence of financial accounting. Comment. Why is it important to adopt a consistent basis for the preparation of financial statements? Explain. Discuss the concept-based on the premise do not anticipate profits but provide for all losses. What is matching concept? Why should a business concern follow this concept? Discuss. What is the money measurement concept? Which one factor can make it difficult to compare the monetary values of one year with the monetary values of another year?
5 .
Long Answers 1 . 2 . 3 . 4 . 5 .
Theory base of Accounting Project Work Activity 1 Ruchicas father is the sole proprietor of Friends Gifts, a firm engaged in the sale of gift items. In the process of preparing financial statements, the accountant of the firm Mr. Goyal fell ill and had to proceed on leave. Ruchicas father was urgently in need of the statements as these had to be submitted to the bank, in pursuance of a loan of Rs. 5 lakh applied for the expansion of the business of the firm. Ruchica who is studying Accounting in her school, volunteered to complete the work. On scrutinising the accounts, the banker found that the value of building bought a few years back for Rs. 7 lakh has been shown in the books at Rs. 20 lakh, which is its present market value. Similarly, as compared to the last year, the method of valuation of stock was changed, resulting in value of goods to be about 15 per cent higher. Also, the whole amount of Rs. 70,000 spent on purchase of personal computer (expected life 5 years) during the year had been charged to the profits of the current year. The banker did not rely on the financial data provided by Ruchica. Advise Ruchica for the mistakes committed by her in the preparation of financial statements in the context of basic concepts in accounting. Activity 2 A customer has filed a suit against a trader who has supplied poor quality goods to him. It is known that the court judgment will be in favour of the customer and the trader will be required to pay the damages. However, the amount of legal damages is not known with certainity. The accounting year has already been ended and the books are now finalised to ascertain true profit or loss. The accountant of the trader has advised him not to consider the expected loss on account of payment of legal damages because the amount is not certain and the final judgment of the court is not yet out. Do you think the accountant is right in his approach. Checklist to Test Your Understanding Test Your Understanding - I 1. (c) 1 . 3 . 5 . 2. (d) 3. (a) 4. (b) 2. Conservatism 4. Consistency Test Your Understanding - II Matching Revenue Realisation Objectivity
3 9
APPENDIX
Accounting Standards (AS)

The ICAI has issued the following standards: AS AS AS AS AS AS AS AS AS AS AS AS AS AS AS AS AS AS AS AS AS AS AS AS AS AS AS AS AS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 Disclosure of Accounting Policies Valuation of Inventories Cash Flow Statements Contingencies and Events Occurring after the Balance Sheet Date Net Profit or Loss for the Period, Prior Period items and Changes in Accounting Policies Depreciation Accounting Construction Contracts Accounting for Research and Development Revenue Recognition Accounting for Fixed Assets The Effects of Changes in Foreign Exchange Rates Accounting for Government Grants Accounting for Investments Accounting for Amalgamations Accounting for Retirement Benefits in the Financial Statements of Employers (recently revised and titled as Employee Benefits) Borrowing Costs Segment Reporting Related Party Disclosures Leases Earnings Per Share Consolidated Financial Statements Accounting for Taxes on Income Accounting for Investments in associates in Consolidated Financial Statements Discontinuing Operations Interim Financial Reporting Intangible Assets Financial Reporting of Interests in Join Ventures Impairment of Assets Provisions, Contingent Liabilities and Contingent Assets
Recording of Transactions-I
LEARNING OBJECTIVES
After studying this chapter, you will be able to: describe the nature of transaction and source documents; explain the preparation of accounting vouchers; apply accounting equation to explain the effect of transactions; record transactions using rules of debit and credit; explain the concept of book of original entry and recording of transactions in journal; explain the concept of ledger and posting of journal entries to the ledger accounts.
n chapter 1 and 2, while explaining the development and importance of accounting as a source of disseminating the financial information along with the discussion on basic accounting concepts that guide the recording of business transactions, it has been indicated that accounting involves a process of identifying and analysing the business transactions, recording them, classifying and summarising their ef fects and finally communicating it to the interested users of accounting information. In this chapter, we will discuss the details of each step involved in the accounting process. The first step involves identifying the transactions to be recorded and preparing the source documents which are in turn recorded in the basic book of original entry called journal and are then posted to individual accounts in the principal book called ledger. 3.1 Business Transactions and Source Document After securing good percentage in your previous examination, as promised, your father wishes to buy you a computer. You go to the market along with your father to buy a computer. The dealer gives a cash memo along with the computer and in exchange your father makes cash payment of Rs. 35,000. Purchase of computer for cash is an example of a transaction, which involves reciprocal exchange of two things: (i) payment of cash, (ii) delivery of a computer. Hence, the transaction
42
Accountancy
involves this aspect, i.e. Give and Take. Payment of cash involves give aspect and delivery of computer is a take aspect. Thus, business transactions are exchanges of economic consideration between parties and have two-fold effects that are recorded in at least two accounts. Business transactions are usually evidenced by an appropriate documents such as Cash memo, Invoice, Sales bill, Pay-in-slip, Cheque, Salary slip, etc. A document which provides evidence of the transactions is called the Source Document or a Voucher. At times, there may be no documentary for certain items as in case of petty expenses. In such case voucher may be prepared showing the necessary details and got approved by appropriate authority within the firm. All such documents (vouchers) are arranged in chronological order and are serially numbered and kept in a separate file. All recording in books of account is done on the basis of vouchers.
Transaction Voucher Name of Firm : Voucher No : Date : Debit account : Credit account: Amount (Rs.) : Narration :
Authorised By :
Prepared By :
Fig. 3.1 : Showing specimen transaction voucher
3.1.1 Preparation of Accounting Vouchers Accounting vouchers may be classified as cash vouchers, debit vouchers, credit vouchers, journal vouchers, etc. There is no set format of accounting vouchers. A specimen of a simple transaction voucher is used in practice is shown in figure 3.1. These must be preserved in any case till the audit of the accounts and tax assessments for the relevant period are completed. Now a days, accounting is computerised and the necessary accounting vouchers showing the code number and name of the accounts to be debited and credited are prepared for the purpose of necessary recording of transactions. A transaction with one debit and one credit is a simple transaction and the accounting vouchers prepared for such transaction is known as Transaction Voucher, the format of
Recording of Transactions - I
43
which is shown in figure 3.1. Voucher which records a transaction that entails multiple debits/credits and one credit/debit is called compound voucher. Compound voucher may be: (a) Debit Voucher or (b) Credit Voucher; the specimen is shown in figure 3.2.
Debit Voucher Name of Firm : Voucher No : Credit Account : Amount : Debit Accounts S. No. Code Account Name Amount Rs. Narration (i.e. Explanation) Date :
Authorised By :
Prepared By :
CreditVoucher Name of Firm : Voucher No : Debit Account : Amount : Credit Accounts S. No. Code Account Name Amount Rs. Narration (i.e. Explanation) Date :
Authorised By :
Prepared By :
Fig. 3.2 : Showing debit and credit vouchers
44
Accountancy
Transactions with multiple debits and multiple credits are called complex transactions and the accounting voucher prepared for such transaction is known as Complex Voucher/ Journal Voucher. The format of a complex transaction voucher is shown in figure 3.3.
Journal Voucher Name of Firm : Voucher No : Debit Entries S. No. Code Account Name Amount Rs. Narration (i.e. Explanation) Date :
Credit Entries S. No. Code Account Name Amount Rs. Narration (i.e. Explanation)
Authorised By :
Prepared By :
Fig. 3.3 : Showing specimen of complex transaction voucher
The design of the accounting vouchers depends upon the nature, requirement and convenience of the business. There is no set format of an accounting voucher. To distinguish various vouchers, different colour papers and different fonts of printing are used. Some of the specimen of the accounting vouchers are given in the earlier pages. A accounting voucher must contain the following essential elements : It is written on a good quality paper; Name of the firm must be printed on the top; Date of transaction is filled up against the date and not the date of recording of transaction is to be mentioned; The number of the voucher is to be in a serial order; Name of the account to be debited or credited is mentioned;
45
Debit and credit amount is to be written in figures against the amount; Description of the transaction is to be given account wise; The person who prepares the voucher must mention his name along with signature; and The name and signature of the authorised person are mentioned on the voucher.
3.2 Accounting Equation Accounting equation signifies that the assets of a business are always equal to the total of its liabilities and capital (owners equity). The equations reads as follows: A=L+C Where, A = Assets L = Liabilities C = Capital The above equation can also be presented in the following forms as its derivatives to enable the determination of missing figures of Capital(C) or Liabilities(L). (i) A L = C (ii) A C = L Since, the accounting equation depicts the fundamental relationship among the components of the balance sheet, it is also called the Balance Sheet Equation. As the name suggests, the balance sheet is a statement of assets, liabilities and capital. At any point of time resources of the business entity must be equal to the claims of those who have financed these resources. The proprietors and outsiders provide the resources of the business. The claim of the proprietors is called capital and that of the outsides is known as liabilities. Each element of the equation is the part of balance sheet, which states the financial position of the business on a particular date. When we analyse the transactions, we actually try to know that how balance sheet of a business entity gets affected. Asset side of the balance sheet is the list of assets, which the business entity owns. The liabilities side of the balance sheet is the list of owners claims and outsiders claims, i.e., what the business entity owes. The equality of the assets side and the liabilities side of the balance sheet is an undeniable fact and this justifies the name of accounting equation as balance sheet equation also.
46
Accountancy
For example, Rohit started business with a capital of Rs. 5,00,000. From the accounting point of view, the resources of this business entity is in the form of cash, i.e., Rs. 5,00,000. Sources of this business entity is the contribution by Rohit (Proprietor) Rs. 5,00,000 as Capital . (For the purpose of understanding we will refer this example as example 1, throughout the chapter) . If we put this information in the form of equality of resources and sources, the picture would emerge somewhat as follows:
Books of Rohit Balance Sheet as at .......... Liabilities Capital Amount Rs. 5,00,000 5,00,000 Assets Cash in hand Amount Rs. 5,00,000 5,00,000
In the above balance sheet, the total assets are equal to the liabilities of the business. Since, the business has not yet started its activities and has not earned any profits; the amount invested in business is still Rs. 5,00,000. In case any profits are earned, it will increase the invested amount in business. On the other hand, if business suffers any losses, it will decrease the invested amount in business. We will now analyse the transactions listed in example 1 and its effect on different elements and you will observe that the accounting equation always remain balanced: Example 1. 1. Opened a bank account in State Bank of India with an amount of Rs. 4,80,000. Analysis of transaction: This transaction increases the cash in hand (assets) and decreases cash (asset) by Rs. 4,80,000. 2. Bought furniture for Rs. 60,000 and cheque was issued on the same day. Analysis of transaction: This transaction increases furniture (assets) and decreases bank (assets) by Rs. 60,000. 3. Bought plant and machinery for the business for Rs. 1,25,000 and an advance of Rs. 10,000 in cash is paid to M/s Ramjee Lal. Analysis of transaction: This transaction increases plant and machinery (assets) by Rs. 1,25,000, decreases cash by Rs. 10,000 and increases liabilities (M/s Ramjee lal as creditor)by Rs. 1,15,000.
47
4.
5.
Goods purchased from M/s Sumit Traders for Rs. 55,000. Analysis of transaction: This transaction increases goods (assets) and increases liabilities (M/s Sumit Traders as creditors) by Rs. 55,000. Goods costing Rs. 25,000 sold to Rajani Enterprises for Rs. 35,000. Analysis of transaction: This transaction decreases stock of goods (assets) by Rs. 25,000 and increases assets (Rajani Enterprises as debtors Rs. 35,000) and capital (with the profit of Rs. 10,000)
The final equation as per the above analysis table can be summarised in the form of a balance sheet as under:
Balance Sheet as at.....2005 Liabilities Outsiders Claims (Creditors) Capital Amount Rs. 1,70,000 5,10,000 Assets Cash Bank Debtors Stock Furniture Plant & Machinery Amount Rs. 10,000 4,20,000 35,000 30,000 60,000 1,25,000 6,80,000
6,80,000 In terms of accounting equation A=L+C Rs. 6,80,000 = Rs. 1,70,000 + Rs. 5,10,000
3.3 Using Debit and Credit As already stated every transaction involves give and take aspect. In double entry accounting, every transaction affects and is recorded in at least two accounts. When recording each transaction, the total amount debited must equal to the total amount credited. In accounting, the terms debit and credit indicate whether the transactions are to be recorded on the left hand side or right hand side of the account. In its simplest form, an account looks like the letter T. Because of its shape, this simple form called a T -account (refer figure 3.4). Notice that the T format has a left side and a right side for recording increases and decreases in the item. This helps in ascertaining the ultimate position of each item at the end of an accounting period. For example, if it is an account of a customer all goods sold shall appear on the left (debit) side of customers account and all payments received on the right side. The difference between the totals of the two sides called balance shall reflect the amount due to the customer. In a T account, the left side is called debit (often abbreviated as Dr.) and the right side is known as credit (often abbreviated as Cr.). To
48
The summary of effects of transactions on accounting equation is in the following analysis table:
(Figures in rupees)
Bank 5,00,000 4,80,000 4,80,000 (60,000) 4,20,000 60,000 60,000 ....... 5,00,000 ....... 5,00,000 ....... Assets Debtors Goods (Stock) Furniture Plant and Machinery Total Assets Liabilities Capital 5,00,000 ....... 5,00,000 ....... 5,00,,000 Total 5,00,000 ....... 5,00,000 ....... 5,00,000
Transaction No.
Cash
5,00,000
4,20,000
60,000
1,25,000 1,25,000
1,15,000 6,15,000
1,15,000 1,15,000
5,00,000
1,15,000 6,15,000
1. (4,80,000) Post Trans. 20,000 Equation 2. ....... Post Trans. 20,000 Equation 3. (10,000) Post Trans. 10,000 Equation 4. Post Trans. 10,000 Equation 5. 4,20,000 35,000 4,20,000 35,000 30,000 60,000 (25,000) 1,25,000 55,000 55,000 60,000 1,25,000 55,000 6,70,000 10,000 6,80,000
55,000 1,70,000
5,00,000 10,000 1,70,000 5,10,000
55,000 6,70,000 10,000 6,80,000
Final Equation
10,000
Accountancy
49
enter amount on the left side of an account is to debit the account. To enter amount on the right side is to credit the account.
Account Title (Left Side) (Right Side) Fig. 3.4 : Showing T-account
3.3.1 Rules of Debit and Credit All accounts are divided into five categories for the purposes of recording the transactions: (a) Asset (b) Liability (c) Capital (d) Expenses/Losses, and (e) Revenues/Gains. Two fundamental rules are followed to record the changes in these accounts: (1) For recording changes in Assets/Expenses (Losses): (i) Increase in asset is debited, and decrease in asset is credited. (ii) Increase in expenses/losses is debited, and decrease in expenses/ losses is credited. (2) For recording changes in Liabilities and Capital/Revenues (Gains): (i) Increase in liabilities is credited and decrease in liabilities is debited. (ii) Increase in capital is credited and decrease in capital is debited. (iii) Increase in revenue/gain is credited and decrease in revenue/gain is debited. The rules applicable to the different kinds of accounts have been summarised in the following chart:
Rules of Debit and Credit Asset (Increase) + Debit Capital (Decrease) Debit Revenues/Gains (Decrease) Debit (Increase) + Credit (Increase) + Credit Expenses/Losses (Increase) + Debit (Decrease) Credit (Decrease) Credit (Decrease) Debit Liabilities (Increase) + Credit
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Accountancy
The transactions in Example 1 on page 47 will help you to learn how to apply these debit and credit rules. Observe the analysis table given on page 48 carefully to be sure that you understand before you go on to the next one. To illustrate different kinds of events, three more transactions have been added (transactions 7 to 9).
1. Rohit started business with cash Rs. 5,00,000 Analysis of Transaction : The transaction increases cash on one hand and increases capital on the other hand. Increases in assets are debited and increases in capital are credited. Therefore record the transaction with debit to Cash and credit to Rohits Capital. Cash Account Capital Account (1) 5,00,000 (1) 5,00,000 (6) 10,000 2. Opened a bank account with an amount of Rs. 4,80,000 Analysis of Transaction: The transaction increases the cash at bank on one hand and decreases cash in hand on the other hand. Increases in assets are debited and a decreases in assets are credited. Therefore, record the transactions with debit to Bank account and credit to Cash account. Cash Account (1) 5,00,000 (2) 4,80,000 (2) 4,80,000 Bank Account
3.
Bought furniture for Rs. 60,000 and issued cheque for the same Analysis of Transaction : This transaction increases furniture (assets) on one hand and decreases bank (assets) on the other hand by Rs. 60,000. Increases in assets are debited and decreases are credited. Therefore record the transactions with debit to Furniture account and credit to Bank account. Furniture Account Bank Account (2) 4,80,000 (3) 60,000
(1) 60,000
4.
Bought Plant and Machinery from Ramjee lal for the business for Rs. 1,25,000 and an advance of Rs. 10,000 in cash is given. Analysis of Transaction : This transaction increases plant and machinery (assets) by Rs. 1,25,000, decreases cash by Rs. 10,000 and increases liabilities (M/s Ramjee Lal as creditor) by Rs. 1,15,000. Increases in assets are debited whereas decreases in assets are credited. On the other hand increases in liabilities are credited. Therefore, record the transaction with debit to furniture account and with credit to Cash and Ramjee Lals account.
Recording of Transactions - I Cash Account (1) 5,00,000 (2) 4,80,000 (4) 10,000 Plant and Machinery Account (4) 1,25,000
51
Ramjee Lals Account (4) 1,15,000
5.
Goods purchased from Sumit Traders for Rs. 55,000 Analysis of transaction : This transaction increases purchases (expenses) and increases liabilities (M/s Sumit Traders as creditors) by Rs. 55,000. Increases in expenses are debited and increases in liabilities are credited. Therefore record the transaction with debit to Purchases account and credit to Sumit Traders account. Purchases Account Sumit Traders Account (5) 55,000
(5) 55,000
6. Goods costing Rs. 25,000 sold to Rajani Enterprises for Rs. 35,000 Analysis of transaction : This transaction increases sales (Revenue) and increases assets (Rajani Enterprises as debtors). Increases in assets are debited and increases in revenue are credited. Therefore record the entry with credit to Sales account and debit to Rajani Enterprises account. Sales Account (6) 35,000 Rajani Enterprises Account (6) 35,000
7.
Paid the monthly store rent Rs. 2,500 in cash Analysis of transaction : The payment of rent is an expense which decreases capital thus, are recorded as debits. Credit cash to record decrease in assets. Rent Account Cash Account (7) 5,00,000 (2) 4,80,000 (4) 10,000 (7) 2,500
(7) 2,500
8.
Paid Rs. 5,000 as salary to the office employees
Analysis of transaction : The payment of salary is an expense which decreases capital thus, are recorded as debits. Credit Cash to record decrease in assets.
52 Salary Account (8) 5,000 (1) 5,00,000 Cash Account
Accountancy
(2) 4,80,000 (4) 10,000 (7) 2,500 (8) 5,000
9.
Received cheque as full payment from Rajani Enterprises and deposited same day into bank Analysis of transaction : This transaction increase assets( Bank) on the one hand and decreases assets(Rajani Enterprises as debtors) on the other hand. Increase in assets is debited whereas decrease in assets is credited. Therefore record the entry with debit to Bank account and credit to Rajani Enterprises account. Rajani Enterprises Account Banks Account (2) 4,80,000 (9) 35,000 (3) 60,000
(6) 35,000
(9) 35,000
Test Your Understanding - I 1. Double entry accounting requires that : (i) All transactions that create debits to asset accounts must create credits to liability or capital accounts; (ii) A transaction that requires a debit to a liability account require a credit to an asset account; (iii) Every transaction must be recorded with equal debits equal total credits. 2. State different kinds of transactions that increase and decrease capital. 3. Does debit always mean increase and credit always mean decrease? 4. Which of the following answers properly classifies these commonly used accounts: (1) Building (2) Wages (3) Credit sales (4) Credit purchases (5) Electricity charges due but not yet paid(outstanding electricity bills) (6) Godown rent paid in advance(prepaid godown rent) (7) Sales (8) Fresh capital introduced (9) Drawings (10) Discount paid Assets (i) (ii) (iii) 5,4, 1, 6 2,10,4 Liabilities 3, 4, 5 4,6 Capital 9,6 8 8 Revenue 2,10 7, 3 7,5 Expense 8,7 2,9,10 1,3,9
Illustration 1 Analyse the effect of each transaction on assets and liabilities and show that the both sides of Accounting Equation (A = L + C) remains equal : (i) Introduced Rs. 8,00,000 as cash and Rs. 50,000 by stock.
Recording of Transactions - I (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x)
53
Purchased plant for Rs. 3,00,000 by paying Rs. 15,000 in cash and balance at a later date. Deposited Rs. 6,00,000 into the bank. Purchased office furniture for Rs. 1,00,000 and made payment by cheque. Purchased goods worth Rs. 80,000 for cash and for Rs. 35,000 in credit. Goods amounting to Rs. 45,000 was sold for Rs. 60,000 on cash basis. Goods costing to Rs. 80,000 was sold for Rs. 1,25,000 on credit. Cheque issued to the supplier of goods worth Rs. 35,000. Cheque received from customer amounting to Rs. 75,000. Withdrawn by owner for personal use Rs. 25,000.
Solution Transaction (i) It affects Cash and Inventory on the assets side and Capital on the other hand. There is increase in cash by Rs. 8, 00,000 and Inventory of goods by Rs. 50,000 on assets side of the equation. Capital is increased by Rs. 8, 50,000. Rs.
Assets Cash + 8,00,000 + Total = Inventory(Stock) 50,000 8,50,000 = = 8,50,000 Liabilities + Capital 8,50,000
Transaction (ii) It affects Cash and Plant and Machinery on the assets side and liabilities on the other side of the equation. There is an increase in plant and machinery by Rs. 3, 00,000 and decrease in cash by Rs. 15,000. Liability to pay to the supplier of plant and machinery increases by Rs. 2,85,000. Rs.
Assets Cash +Inventory + Plant and Machinery 8,00,000 + 50,000 (15,000) 3,00,000 7,85,000 + 50,000 +3,00,000 Total 11,35,000 = = = = = Liabilities + Capital 8,50,000 2,85,000 2,85,000 + 8,50,000 11,35,000
Transaction (iii) It affects assets side only. The composition of the asset side changes. Cash decreases by Rs. 6,00,000 and by the same amount bank increases. Rs.
+ Inventory + Plant and + Bank Machinery 7,85,000 + 5,0000 + 3,00,000 (6,00,000) + 6,00,000 1,85,000 + 50,000 + 3,00,000 + 6,00,000 Total 11,35,000 Assets Cash = = = = = Liabilities + Capital
2,85,000
+ 8,50,000
2,85,000 + 8,50,000 11,35,000
Transaction (iv) It affects assets side only. The composition of the asset side changes. Furniture increases by Rs. 1,00,000 and by the same amount bank decreases.
54
Accountancy Rs.
+ Inventory + Plant and + Bank + Furniture Machinery 1,85,000 + 50,000 + 3,00,000 + 6,00,000 (1,00,000) + 1,00,000 1,85,000 + 50,000 +3,00,000 +5,00,000 + 1,00,000 Total 11,35,000
Assets Cash
= Liabilities +
Capital
2,85,000 + 8,50,000
= 2,85,000 + 8,50,000 = 11,35,000
Transaction (v) It affects Cash and Inventory on the assets side and liability on the other side. There is decrease in cash by Rs. 80,000 and increase of inventory of goods by Rs. 1,15,000 on the assts side of the equation. Liabilities increases by Rs. 35,000. Rs.
+ Inventory +Plant and + Bank + Furniture Machinery 1,85,000 + 50,000 + 3,00,000 + 5,00,000 + 1,00,000 (80,000) + 1,15,000 1,05,000 + 1,65,000 +3,00,000 +5,00,000 + 1,00,000 Total 11,70,000 Assets Cash = Liabilities + Capital
= 2,85,000 + 8,50,000 = 35,000 = 3,20,000 + 8,50,000 = 11,70,000
Transaction (vi) It affects Cash and Inventory on the assets side and capital on the other side. There is an increase in cash by Rs. 60,000 and decrease in inventory of goods by Rs. 45,000 on the assets side of the equation. Capital increases by Rs. 15,000. Rs.
+ Inventory + Plant and + Bank + Furniture Machinery 1,05,000 + 1,65,000 + 3,00,000 + 5,00,000 + 1,00,000 60,000 + (45,000) 1,65,000 + 1,20,000 +3,00,000 +5,00,000 + 1,00,000 Total 11,85,000 Assets Cash = Liabilitie + Capital
3,20,000 + 8,50,000 + 15,000 = 3,20,000 + 8,65,000 = 11,85,000
Transaction (vii) It affects Debtors and Inventory on the assets side and capital on the other side. There is increase in debtors by Rs. 1, 25,000 and decrease in Inventory of goods by Rs. 80,000 on the assets side of the equation. Capital increases by Rs.45, 000. Rs.
Assets Cash = Liabilities + Capital + Inventory +Plant and + Bank + Furniture + Debtors Machinery 1,65,000 + 1,20,000 + 3,00,000 + 5,00,000 + 1,00,000 (80,000) + 1,25,000 1,65,000 + 40,000 +3,00,000 +5,00,000 + 1,00,000 + 1,25,000 Total 12,30,000
= 3,20,000 + 8,65,000 = + 45,000 = 3,20,000 + 9,10,000 = 12,30,000
Transaction (viii) It affects Bank on the assets side on one side and liability on the other side. There is decrease in bank by Rs. 35,000 on the assets side and liability also decreases by Rs. 35,000.
55 Rs.
Assets Cash
= Liabilities +
Capital
+ Inventory +Plant and + Bank + Furniture + Debtors Machinery 1,65,000 + 40,000 + 3,00,000 + 5,00,000 + 1,00,000 + 1,25,000 = 3,20,000 + 9,10,000 (35,000) = (35,000) 1,65,000 + 40,000 + 3,00,000 +4,65,000 + 1,00,000 + 1,25,000= 2,85,000 + 9,10,000 Total 11,95,000 = 11,95,000
Transaction (ix) It affects assets side only. The composition of the assets side changes. Bank increases by R. 75,000 and by the same amount Debtors decreases. Rs.
Assets Cash = Liabilities + Capital + Inventory +Plant and + Bank + Furniture + Debtors Machinary 1,65,000 + 40,000 + 3,00,000 + 4,65,000 + 1,00,000 + 1,25,000 + 75,000 (75,000) 1,65,000 + 40,000 + 3,00,000 + 5,40,000 + 1,00,000 + 50,000 Total 11,95,000
2,85,000 + 9,10,000
= 2,85,000 + 9,10,000 = 11,95,000
Transaction (x) It affects Cash on the asset side and Capital on the other hand. There is decrease in Cash by Rs. 25,000 on the assets side whereas capital decreases by Rs. 25,000. Rs.
Assets Cash = Liabilities + Debtors 50,000 50,000 = 2,85,000 + 9,10,000 + (25,000) = 2,85,000 + 8,85,000 = 11,95,000 Capital + Inventory +Plant and + Bank + Furniture + Machinery 1,65,000 + 40,000 + 3,00,000 + 5,40,000 + 1,00,000 + (25,000) 1,40,000+ 40,000 +3,00,000 +5,40,000 + 1,00,000 + Total 11,95,000
3.4 Books of Original Entry In the preceding pages, you learnt about debits and credits and observed how transactions affect accounts. This process of analysing transactions and recording their effects directly in the accounts is helpful as a learning exercise. However, real accounting systems do not record transactions directly in the accounts. The book in which the transaction is recorded for the first time is called journal or book of original entry. The source document, as discussed earlier, is required to record the transaction in the journal. This practice provides a complete record of each transaction in one place and links the debits and credits for each transaction. After the debits and credits for each transaction are entered in the journal, they are transferred to the individual accounts. The process of recording transactions in journal is called journalising. Once the journalising process is completed, the journal entry provides
56
Accountancy
a complete and useful description of the events effect on the organisation. The process of transferring journal entry to individual accounts is called p o s t i n g . This sequence causes the journal to be called the Book of Original Entry and the ledger account as the Principal Book of entry. In this context, it should be noted that on account of the number and commonality of most transactions, the journal is subdivided into a number of books of original entry as follows: (a) Journal Proper (b) Cash book (c) Other day books: (i) Purchases (journal) book (ii) Sales (journal) book (iii) Purchase Returns (journal) book (iv) Sale Returns (journal) book (v) Bills Receivable (journal) book (vi) Bills Payable (journal) book In this chapter you will learn about the process of journalising and their posting into ledger. The cash book and other day books are dealt in detail in chapter 4. 3.4.1 Journal This is the basic book of original entry. In this book, transactions are recorded in the chronological order, as and when they take place. Afterwards, transactions from this book are posted to the respective accounts. Each transaction is separately recorded after determining the particular account to be debited or credited. The format of Journal is shown is figure 3.5
Journal Date Particulars L.F. Debit Amount Rs. Credit Amount Rs.
Fig. 3.5 : Showing the format of journal
The first column in a journal is Date on which the transaction took place. In the Particulars column, the account title to be debited is written on the first line beginning from the left hand corner and the word Dr. is written at the end of the column. The account title to be credited is written on the second line leaving sufficient margin on the left side with a prefix To. Below the
57
account titles, a brief description of the transaction is given which is called Narration. Having written the Narration a line is drawn in the Particulars column, which indicates the end of recording the specific journal entry. The column relating to Ledger Folio records the page number of the ledger book on which relevant account is appears. This column is filled up at the time of posting and not at the time of making journal entry. The Debit amount column records the amount against the account to be debited and similarly the Credit Amount column records the amount against the account to be credited. It may be noted that, the number of transactions is very large and these are recorded in number of pages in the journal book. Hence, at the end of each page of the journal book, the amount columns are totaled and carried forward (c/f) to the next page where such amounts are recorded as brought forward (b/f) balances. The journal entry is the basic record of a business transaction. It may be simple or compound. When only two accounts are involved to record a transaction, it is called a simple journal entry. For Example, Goods Purchased on credit for Rs.30,000 from M/s Govind Traders on December 24, 2005, involves only two accounts: (a) Purchases A/c (Goods), (b) Govind Traders A/c (Creditors). This transaction is recorded in the journal as follows :
Journal Date Particulars L.F. Debit Amount Rs. 30,000 30,000 Credit Amount Rs.
2005 Dec.24 Purchases A/c To Govind Traders A/c (Purchase of goods- in-trade from Govind Traders) Dr.
It will be noticed that although the transaction results in an increase in stock of goods, the account debited is purchases, not goods. In fact, as explained in chater 7 the goods account is divided into five accounts, viz. purchases account, sales account, purchases returns account, sales returns account, and stock account. When the number of accounts to be debited or credited is more than one, entry made for recording the transaction is called compound journal entry. That means compound journal entry involves multiple accounts. For example, For Rs. 25,000 Office furniture is purchased from Modern Furnitures on July 4, 2005 and Rs. 5,000 is paid by cash immediately and balance of Rs. 20,000 is still payable. It increases furniture (assets) by Rs. 25,000, decreases cash (assets) by Rs. 5,000 and increases liability by Rs. 20,000. The entry made in the journal on July 4, 2005 is :
58 Journal Date Particulars L.F. Debit Amount Rs. 25,000
Accountancy
Credit Amount Rs.
2005 July 4
Office Furniture A/c To Cash A/c To Modern Furniture A/c (Purchase of office furniture from Modern Furnitures)
Dr.
5,000 20,000
Now refer to example 1(on page 47 again and observe how the transactions listed are recorded in the journal:
Books of Rohit Journal Date Particulars L.F. Debit Amount Rs. 5,00,000 5,00,000 4,80,000 4,80,000 Credit Amount Rs.
Cash A/c To Capital A/c (Business started with cash)
Dr.
Bank A/c Dr. To Cash A/c (Opened bank account with State Bank of India) Furniture A/c To Bank A/c ( Purchased furniture and made payment through bank)) Dr.
60,000 60,000
Plant and Machinery A/c Dr. To Cash A/c To Ramjee Lal (Bought Plant and Machinery from M/s Ramjee Lal, made an advance payment by cash for Rs. 10,000 and balance at the later date ) Purchases A/c To M/s Sumit Traders A/c (Goods bought on credit) Rajani Enterprises A/c To Sales A/c (Goods sold on profit) Total Dr.
1,25,000 10,000 1,15,000
55,000 55,000
Dr.
35,000 35,000 12,55,000 12,55,000
59
Illustration 2.
Soraj Mart furnishes the following information : Transactions during the month of April, 2005 are as under : Date 1.4.2005 1.4.2005 1.4.2005 2.4.2005 2.4.2005 3.4.2005 5.4.2005 08.4.2005 10.4.2005 14.4.2005 18.4.2005 20.4.2005 24.4.2005 29.4.2005 30.4.2005 30.4.2005 30.4.2005 30.4.2005 30.4.2005 Details Business started with cash Rs. 1,50,000. Goods purchased form Manisha Rs. 36,000. Stationery purchased for cash Rs. 2,200. Open a bank account with SBI for Rs. 35,000. Goods sold to Priya for Rs. 16,000. Received a cheque of Rs. 16,000 from Priya. Sold goods to Nidhi Rs. 14,000. Nidhi pays Rs. 14,000 cash. Purchased goods for Rs. 20,000 on credit from Ritu. Insurance paid by cheque Rs. 6,000. Paid rent Rs. 2,000. Goods costing Rs. 1,500 given as charity. Purchased office furniture for Rs. 11,200. Cash withdrawn for household purposes Rs. 5000. Interest received cash Rs.1,200. Cash sales Rs.2,300. Commission paid Rs. 3,000 by cehque. Telephone bill paid by cheque Rs. 2,000. Payment of salaries in cash Rs. 12,000.
Journalise the transactions. Solution Books of Saroj Mart Journal Date Particulars L.F. Debit Amount Rs. 1,50,000 1,50,000 Dr. 36,000 36,000 Dr. 2,200 2,200 1,88,200 1,88,200 Credit Amount Rs.
2005 Apr.01
Cash A/c To Capital A/c (Business started with cash) Purchases A/c To Manisha A/c (Goods purchase on credit) Stationery A/c To Cash A/c ( Purchase of stationery for cash) Total c/f
Dr.
Apr.01
Apr.01
60 Total b/f Apr.02 Bank A/c Dr. To Cash A/c (Opened a bank account with SBI) Priya A/c To Sales A/c (Goods sold to Priya On Credit) Bank A/c To Priya A/c (Cheque Received from Priya) Nidhi A/c To Sales A/c (Sale of goods to Nidhi on credit) Cash A/c To Nidhi A/c (Cash received from Nidhi) Purchases A/c To Ritu A/c (Purchase of goods on credit) Dr. 1,88,200 35,000
Accountancy 1,88,200 35,000 16,000 16,000 Dr. 16,000 16,000 Dr. 14,000 14,000 Dr. 14,000 14,000 Dr. 20,000 20,000 6,000 6,000
Apr.02
Apr.03
Apr.05
Apr.08
Apr.10
Apr.14
Insurance Premium A/c Dr. To Bank A/c (Payment of Insurance premium by cheque) Rent A/c To Cash A/c (Rent paid) Charity A/c To Purchases A/c (Goods given as charity) Furniture A/c To Cash A/c (Purchase of office furniture) Dr.
Apr.18
2,000 2,000
Apr.20
Dr.
1,500 1,500
Apr.24
Dr.
11,200 11,200 5,000 5,000
Apr.29
Drawings A/c Dr. To Cash A/c (With drawl of cash from the business for personal use of the proprietor) Cash A/c To Interest received A/c (Interest received) Cash A/c To Sales A/c (Sale of goods for cash) Total c/f Dr.
Apr.30
1,200 1,200
Apr.30
Dr.
2,300 2,300 3,32,400 3,32,400
Recording of Transactions - I Total c/f Commission A/c To Bank A/c (Commission paid by cheque) Telephone expenses A/c To Cash A/c (Payment of telephone bill) 3,32,400 3,000
61 3,32,400 3,000 Dr. 2,000 2,000 12,000 12,000 3,49,400 3,49,400
Apr.30
Dr.
Apr.30
Apr.30
Salaries A/c Dr. To Cash A/c (Payment of salary to the office persons) Total
Illustration 3 Prove that the accounting equation is satisfied in all the following transactions of Sita Ram house by preparing the analysis table. Also record the transactions in Journal. (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) Solution Journal Date Particulars L.F. Debit Amount Rs. 6,00,000 6,00,000 Dr. 4,50,000 4,50,000 10,50,000 10,50,000 Credit Amount Rs. Business commenced with a capital of Rs. 6,00,000. Rs. 4,50,000 deposited in a bank account. Rs. 2,30,000 Plant and Machinery Purchased by paying Rs. 30,000 cash immediately. Purchased goods worth Rs. 40,000 for cash and Rs. 45,000 on account. Paid a cheque of Rs. 2, 00,000 to the supplier for Plant and Machinery. Rs. 70,000 cash sales (of goods costing Rs. 50,000). Withdrawn by the proprietor Rs. 35,000 cash for personal use. Insurance paid by cheque of Rs. 2,500. Salary of Rs. 5,500 outstanding. Furniture of Rs. 30,000 purchased in cash.
(i)
Cash A/c To Capital A/c (Business started with cash) Bank A/c To Cash A/c (Cash deposited into the bank) Total c/f
Dr.
(ii)
62 Total c/f Plant and Machinery A/c Dr. To Cash A/c To Creditors A/c (Purchase of plant and machinery by paying Rs. 30,000 cash and balance on a later date) Purchases A/c Dr. To Cash A/c To Creditors A/c (Bought goods for cash as well as on credit) Creditors A/c Dr. To Bank A/c (Payment made to the supplier of plant and machinery) Cash A/c To Sales A/c (Sold goods on profit) Drawings A/c To Cash A/c (Withdrew cash for personal use) Insurance A/c To Bank A/c (Paid insurance by cheque) Outstanding salary A/c To Salary A/c (Salary outstanding ) Furniture A/c To Cash A/c (Furniture purchased for cash) Dr. 10,50,000 2.30,000
Accountancy 10,50,000 30,000 2,00,000
(iii)
(iv)
85,000 40,000 45,000
(v)
2,00,000 2,00,000
(vi)
70,000 70,000
(vii)
Dr.
35,000 35,000
(viii)
Dr.
2,500 2,500
(ix)
Dr.
5,500 5,500
(x)
Dr.
30,000 30,000
Total
17,08,000
17,08,000
Test Your Understanding - II State the title of the accounts affected, type of account and the account to be debited and account to be credited : Rs 1. Bhanu commenced business with cash 1,00,000 2. Purchased goods on credit from Ramesh 40,000 3. Sold goods for cash 30,000 4. Paid salaries 3,000 5. Furniture purchased for cash 10,000
Statement showing the effect of various transaction on accounting equation (Figures in rupees)
Bank Stock Furniture = = = = = = = = 6,00,000 6,00,000 = = 6,00,000 6,00,000 6,00,000 6,00,000 Plant and Machinery Total = Non-trade Creditors Trade Creditors Capital Total
No.
Cash
1 2
7 30,000 30,000 2,30,000 6,27,500 = 2,30,000 6,27,500 2,30,000 2,30,000
-45,000
2,30,000 2,30,000 2,30,000 2,30,000 2,30,000
2,00,000 2,00,000 2,00,000 (2,00,000) -
45,000 45,000 45,000 45,000
6,00,000 6,00,000 (4,50,000) 1,50,000 (30,000) 1,20,000 (40,000) 80,000 80,000 70,000 1,50,000 (35,000) 1,15,000 6,00,000 2,00,000 8,00,000 45,000 8,45,000 (2,00,000) 6,45,000 20,000 6,65,000 (35,000) 6,30,000 (2,500) 6,27,500 5,500 5,500 5,500 45,000 45,000 45,000
9 35,000 35,000
1,15,000
4,50,000 4,50,000 -4,50,000 - 85,000 4,50,000 85,000 (2,00,000) 2,50,000 85,000 - (50,000) 2,50,000 35,000 2,50,000 35,000 (2,500) 2,47,500 35,000 6,00,000 600,000 600,000 6,00,000 20,000 6,20,000 (35,000) 5,85,000 (2,500) 5,82,500 (5,500) 5,77,000 5,77,000
6,00,000 2,00,000 8,00,000 45,000 8,45,000 (2,00,000) 20,000 20,000 6,65,000 (35,000) 6,30,000 (2,500) 6,27,500 6,27,500
10
1,15,000 (30,000)
2,47,500 -
85,000
2,47,500
6,27,500
63
64 6. 7. 8. 9. Borrowed from bank Sold goods to Sarita Cash paid to Ramesh on account Rent paid Name of Accounts Affected 1 1. 2. 3. 4. 5. 6. 7. 8. 9. 2 Type of Accounts (Assets, Liabilities Capital, Revenues and Expenses) 1 2 50,000 10,000 20,000 1,500
Accountancy
Transaction No.
Affected Accounts Increase/Decrease 1 2
3.5 The Ledger The ledger is the principal book of accounting system. It contains different accounts where transactions relating to that account are recorded. A ledger is the collection of all the accounts, debited or credited, in the journal proper and various special journal (about which you will learn in chapter 4). A ledger may be in the form of bound register, or cards, or separate sheets may be maintained in a loose leaf binder. In the ledger, each account is opened preferably on separate page or card. Utility A ledger is very useful and is of utmost importance in the organisation. The net result of all transactions in respect of a particular account on a given date can be ascertained only from the ledger. For example, the management on a particular date wants to know the amount due from a certain customer or the amount the firm has to pay to a particular supplier, such information can be found only in the ledger. Such information is very difficult to ascertain from the journal because the transactions are recorded in the chronological order and defies classification. For easy posting and location, accounts are opened in the ledger in some definite order. For example, they may be opened in the same order as they appear in the profit and loss account and in balance sheet. In the beginning, an index is also provided. For easy identification, in big organisations, each account is also allotted a code number. Format of the account is shown in figure 3.6.
Recording of Transactions - I Name of the Account Dr. Date Particulars J.F. Amount Rs. Date Particulars J.F.
65
Cr. Amount Rs.
Fig. 3.6 : Showing format of a ledger
According to this format the columns will contain the information as given below: An account is debited or credited according to the rules of debit and credit already explained in respect of each category of account. Title of the account : The Name of the item is written at the top of the format as the title of the account. The title of the account ends with suffix Account. Dr./Cr. : Dr. means Debit side of the account that is left side and Cr. means Credit side of the account, i.e. right side. Date : Year, Month and Date of transactions are posted in chronological order in this column. Particulars : Name of the item with reference to the original book of entry is written on debit/credit side of the account. Journal Folio : It records the page number of the original book of entry on which relevant transaction is recorded. This column is filled up at the time of posting. Amount : This column records the amount in numerical figure, corresponding to what has been entered in the amount column of the original book of entry.
Test Your Understanding - III Choose the Correct Answer : 1. The (a) (b) (c) (d) The (a) (b) (c) (d) ledger folio column of journal is used to: Record the date on which amount posted to a ledger account. Record the number of ledger account to which information is posted. Record the number of amounts posted to the ledger account. Record the page number of the ledger account. journal entry to record the sale of services on credit should include: Debit to debtors and credit to capital. Debit to cash and Credit to debtors. Debit to fees income and Credit to debtors. Debit to debtors and Credit to fees income.
2.
3.
The journal entry to record purchase of equipment for Rs. 2,00,000 cash and a balance of Rs. 8,00,000 due in 30 days include: (a) Debit equipment for Rs. 2,00,000 and Credit cash 2,00,000.
66 (b) (c) (d) 4.
Accountancy Debit equipment for Rs. 10,00,000 and Credit cash Rs. 2,00,000 and creditors Rs. 8,00,000. Debit equipment Rs. 2,00,000 and Credit debtors Rs. 8,00,000. Debit equipment Rs. 10,00,000 and Credit cash Rs. 10,00,000.
When a entry is made in journal: (a) Assets are listed first. (b) Accounts to be debited listed first. (c) Accounts to be credited listed first. (d) Accounts may be listed in any order. If a (a) (b) (c) (d) transaction is properly analysed and recorded: Only two accounts will be used to record the transaction. One account will be used to record transaction. One account balance will increase and another will decrease. Total amount debited will equals total amount credited.
5.
6.
The journal entry to record payment of monthly bill will include: (a) Debit monthly bill and Credit capital. (b) Debit capital and Credit cash. (c) Debit monthly bill and Credit cash. (d) Debit monthly bill and Credit creditors. 7. Journal entry to record salaries will include: (a) Debit salaries Credit cash. (b) Debit capital Credit cash. (c) Debit cash Credit salary. (d) Debit salary Credit creditors.
Distinction between Journal and Ledger The Journal and the Ledger are the most important books of the double entry mechanism of accounting and are indispensable for an accounting system. Following points of comparison are worth noting : 1. The Journal is the book of first entry (original entry); the ledger is the book of second entry. 2. The Journal is the book for chronological record; the ledger is the book for analytical record. 3. The Journal, as a book of source entry, gets greater importance as legal evidence than the ledger. 4. Transaction is the basis of classification of data within the Journal; Account is the basis of classification of data within the ledger. 5. Process of recording in the Journal is called Journalising; the process of recording in the ledger is known as Posting.
67
3.5.1 Classification of Ledger Accounts We have seen earlier that all ledger accounts are put into five categories namely, assets, liabilities, capital, revenues/gains and expense losses. All these accounts may further be put into two groups, i.e. permanent accounts and temporary accounts. All permanent accounts are balanced and carried forward to the next accounting period. The temporary accounts are closed at the end of the accounting period by transferring them to the trading and profit and loss account. All permanent accounts appears in the balance sheet. Thus, all assets, liabilities and capital accounts are permanent accounts and all revenue and expense accounts are temporary accounts. This classification is also relevant for preparing the financial statements. 3.6 Posting from Journal Posting is the process of transferring the entries from the books of original entry (journal) to the ledger. In other words, posting means grouping of all the transactions in respect to a particular account at one place for meaningful conclusion and to further the accounting process. Posting from the journal is done periodically, may be, weekly or fortnightly or monthly as per the requirements and convenience of the business. The complete process of posting from journal to ledger has been discussed below: Step 1 : Locate in the ledger, the account to be debited as entered in the journal. Step 2 : Enter the date of transaction in the date column on the debit side. Step 3 : In the Particulars column write the name of the account through which it has been debited in the journal. For example, furniture sold for cash Rs. 34,000. Now, in cash account on the debit side in the particulars column Furniture will be entered signifying that cash is received from the sale of furniture. In Furniture account, in the ledger on the credit side is the particulars column, the word, cash will be recorded. The same procedure is followed in respect of all the entries recorded in the journal. Step 4 : Enter the page number of the journal in the folio column and in the journal write the page number of the ledger on which a particular account appears. Step 5 : Enter the relevant amount in the amount column on the debit side. It may be noted that the same procedure is followed for making the entry on the credit side of that account to be credited. An account is opened only once in the ledger and all entries relating to a particular account is posted on the debit or credit side, as the case may be. We will now see how the transactions listed in example on page 47 are posted to different accounts from the journal.
68 Cash Account Dr. Date Particulars Capital J.F. Amount Rs. 5,00,000 Date Particulars Bank Plant and Machinery J.F.
Accountancy
Cr. Amount Rs. 4,80,000 10,000
Capital Account Dr. Date Particulars J.F. Amount Rs. Date Particulars Cash Bank Account Dr. Date Particulars Cash J.F. Amount Rs. 4,80,000 Furniture Account Dr. Date Particulars Bank J.F. Amount R s. 60,000 Date Particulars J.F. Cr. Amount Rs. Date Particulars Furniture J.F. Cr. Amount Rs. 60,000 J.F. Cr. Amount Rs. 5,00,000
Plant and Machinery Account Dr. Date Particulars Cash Ramjee lal J.F. Amount Rs. 10,000 1,15,000 Ramjee Lals Account Dr. Date Particulars J.F. Amount Rs. Date Particulars Plant and Machinery J.F. Cr. Amount Rs. 1,15,000 Date Particulars J.F. Cr. Amount Rs.
Recording of Transactions - I Purchases Account Dr. Date Particulars Sumit Traders J.F. Amount Rs. 55,000 Date Particulars J.F.
69
Cr. Amount Rs.
Sumit Traders Account Dr. Date Particulars J.F. Amount Rs. Date Particulars Purchases Rajani Enterprises Account Dr. Date Particulars Sales J.F. Amount Rs. 35,000 Date Particulars J.F. Cr. Amount Rs. J.F. Cr. Amount Rs. 55,000
Sales Account Dr. Date Particulars J.F. Amount Rs. Date Particulars Rajani Enter prises J.F. Cr. Amount Rs. 35,000
Test Your Understanding - IV Fill in the blanks: 1. Issued a cheque for Rs.8,000 to pay rent. The account to be debited is ............ 2. Collected Rs. 35,000 from debtors. The account to be credited is ............ 3. Purchased office stationary for Rs. 18,000. The account to be credited is ........... 4. Purchased new machine for Rs. 1,70,000 and issued cheque for the same. The account to be debited is ............ 5. Issued cheque for Rs. 70,000 to pay off on of the creditors. The account to be debited is ............ 6. Returned damaged office stationary and received Rs. 50,000. The account to be credited is ............ 7. Provided services for Rs. 65,000 on credit. The account to be debited is ...........
70 Illustration 4
Accountancy
Journalise the following transactions of M/s Mallika Fashion House and post the entries to the Ledger: Date 2005 June June June June June June June June June June Amount Rs. Business started with cash 2,00,000 Opened a bank account with Syndicate Bank 80,000 Goods purchased on credit from M/s Gulmohar Fashion House 30,000 Purchase office machines, paid by cheque 20,000 Rent paid by cheque 5,000 Sale of goods on credit to M/s Mohit Bros 10,000 Cash sales 15,000 Cash paid to M/s Gulmohar Fashion House 30,000 Received a cheque from M/s Mohit Bros 10,000 Salary paid in cash 6,000 Details
05 08 12 12 18 20 22 25 28 30
Solution (i) Recording the transactions Books of Mallika Fashion House Journal Date Particulars L.F. Debit Amount Rs. 2,00,000 2,00,000 80,000 80,000 Credit Amount Rs.
2005 June 05 Cash A/c To Capital A/c (Business started with cash)
Dr.
June 08 Bank A/c Dr. To Cash A/c (Opened a current account with syndicate bank) June 12 Purchases A/c Dr. To Gulmohar Fashion House A/c (Goods purchased on credit) June 12 Office Machines A/c To Bank A/c (Office machine purchased) June 18 Rent A/c To Bank A/c (Rent paid) June 20 Mohit Bros A/c To Sales A/c (Goods sold on credit) Total c/f Dr.
30,000 30,000 20,000 20,000
Dr.
5,000 5,000
Dr.
10,000 10,000 3,45,000 3,45,000
Recording of Transactions - I Total b/f June 22 Cash A/c To Sales A/c (Goods sold for cash) June 25 Gulmohar Fashion House A/c To Cash A/c (Cash paid to Gulmohar Fashion House) June 28 Bank A/c To Mohit Bros A/c (Payment received in full and final settlement) June 30 Salary A/c To Cash A/c (Monthly salary paid) Total (ii) Posting in the Ledger Book Cash Account Dr. Date 2005 June 5 June 22 Particulars J.F. Amount Rs. 2,00,000 15,000 Date 2005 June 8 June 25 June 30 Capital Account Dr. Date Particulars J.F. Amount Rs. Date 2005 June 5 Bank Account Dr. Date 2005 June 08 June 28 Cash Mohit Bros. 80,000 10,000 Particulars J.F. Amount Rs. Date 2005 June 12 June 18 Office Machines Rent Particulars J.F. Particulars J.F. Particulars J.F. Dr. 10,000 Dr. 3,45,000 15,000
71 3,45,000 15,000 Dr. 30,000 30,000
10,000
Dr.
6,000 6,000 4,06,000 4,06,000
Cr. Amount Rs. 80,000 30,000 6,000
Capital Sales
Bank Gulmohar Fashion House Salary
Cr. Amount Rs. 2,00,000
Cash
Cr. Amount Rs. 30,000 5,000
72 Purchases Account Dr. Date 2005 June 12 Gulmohar Fashion House 30,000 Particulars J.F. Amount Rs. Date 2005 Particulars J.F.
Accountancy
Cr. Amount Rs.
Gulmohar Fashion House Account Dr. Date 2005 June 25 Particulars J.F. Amount Rs. 30,000 Date 2005 June 12 Particulars J.F. Cr. Amount Rs. 30,000
Cash
Purchases
Office Machines Account Dr. Date 2005 June 12 Particulars J.F. Amount Rs. 20,000 Rent Account Dr. Date 2005 June 18 Particulars J.F. Amount Rs. 5,000 Mohit Bros. Account Dr. Date 2005 June 20 Particulars J.F. Amount Rs. 10,000 Date 2005 June 28 Particulars J.F. Cr. Amount Rs. 10,000 Date Particulars J.F. Cr. Amount Rs. Date Particulars J.F. Cr. Amount Rs.
Bank
Bank
Sales
Cash
Sales Account Dr. Date 2005 June 20 Particulars J.F. Amount Rs. Date 2005 June 20 June 22 Particulars J.F. Cr. Amount Rs. 10,000 15,000
Mohit Bros. Cash
Recording of Transactions - I Salary Account Dr. Date 2005 June 30 Illustrtion 5 Particulars J.F. Amount Rs. 6,000 Date Particulars J.F.
73
Cr. Amount Rs.
Cash
Journalise the following transactions of M/s Time Zone and post them to the ledger accounts : Date 2005 Dec. Dec. Dec. Dec. Dec. Dec. Dec. Dec. Dec. Dec. Dec. Dec. Dec. Dec. Dec. Dec. Dec. 01 02 04 10 12 14 16 18 19 20 22 24 26 28 29 30 31 Details Business started with cash Opened a bank account with ICICI Goods purchased for cash Paid cartage Goods sold on credit to M/s Lara India Cash received from M/s Lara India Goods returned from Lara India Paid trade expenses Goods purchased on credit from Taranum Cheque received from M/s Lara India for final settlement and deposited sameday into bank Goods returned to Taranum Paid for stationery Cheque given to Taranum on account Paid rent by cheque Drew cash for personal use Cash sales Goods sold to M/s Rupak Traders Books of Time Zone Journal Date Particulars L.F. Debit Amount Rs. 1,20,000 1,20,000 Dr. 40,000 40,000 Credit Amount Rs. Amount Rs. 1,20,000 4,00,00 12,000 500 25,000 10,000 3,000 700 32,000 11,500 1,500 1,200 20,000 4,000 10,000 12,000 11,000
Solution
2005 Dec. 01
02
04
Cash A/c To Capital A/c ( Business started with cash) Bank A/c To Cash A/c (Opened a current account with ICICI bank) Purchases A/c To Cash A/c (Goods purchased for cash) Total c/f
Dr.
Dr.
12,000 12,000 1,72,000 1,72,000
74 Total b/f 10 Cartage A/c To Cash A/c (Cartage paid) Lara India A/c To Sales A/c (Goods sold on credit) Cash A/c To Lara India A/c (Cash received from Lara India) Sales Return A/c To Lara India A/c (Goods returned from Lara India) Trade Expenses A/c To Cash A/c (Trade expenses paid) Purchases A/c To Tranums A/c (Goods purchased on credit) Dr. 1,72,000 500
Accountancy 1,72,000 500 Dr. 25,000 25,000 Dr. 10,000 10,000 Dr. 3,000 3,000 Dr. 700 700 Dr. 32,000 32,000 11,500 500 12,000 1,500 1,500 1,200 1,200 20,000 20,000 4,000 4,000 10,000 10,000 12,000 12,000 11,000 11,000 Total 3,14,900 3,14, 900
12
14
16
18
19
20
22
24
Bank A/c Dr. Discount A/c Dr. To Lara India A/c (Cheque received for final settlement) Taranums A/c Dr. To Purchase Returns A/c (Goods returned to Tranum) Stationery A/c Dr. To Cash A/c (Cash paid for stationery) Taranums A/c Dr. To Bank A/c (Cheque given to Tranum) Rent A/c Dr. To Bank A/c (Rent paid by cheque) Drawings A/c Dr. To Cash A/c (Cash withdrawn for personal use) Cash A/c Dr. To Sales A/c (Goods sold for cash) Rupak Trader A/c To Sales A/c (Goods sold on credit) Dr.
26
28
29
30
31
Recording of Transactions - I Posting in the Ledger Book : Cash Account Dr. Date 2005 Dec. 01 Dec. 14 Dec. 30 Particulars J.F. Amount Rs. 1,20,000 10,000 12,000 Date 2005 Dec. 02 Dec. 04 Dec. 10 Dec. 18 Dec. 24. Dec. 29 Capital Account Dr. Date Particulars J.F. Amount Rs. Date 2005 Dec.01 Bank Account Dr. Date 2005 Dec.02 Dec.20 Particulars J.F. Amount Rs. 40,000 11,500 Date 2005 Dec.26 Dec.28 Particulars J.F. Particulars J.F. Particulars J.F.
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Cr. Amount Rs. 40,000 12,000 500 700 1,200 1,000
Capital Lara India Sales
Bank Purchase Cartage Trade Expenses Stationery Drawings
Cash
Cr. Amount Rs. 20,000 4,000
Cash Lara India
Taranums Rent
Purchases Account Dr. Date 2005 Dec.04 Dec.19 Particulars J.F. Amount Rs. 12,000 32,000 Cartage Account Dr. Date 2005 Dec.10 Particulars J.F. Amount Rs. 500 Date Particulars J.F. Cr. Amount Rs. Date Particulars J.F. Cr. Amount Rs.
Cash Taranum
Cash
76 Lara India Account Dr. Date 2005 Dec.12 Particulars J.F. Amount Rs. 25,000 Date 2005 Dec. 14 Dec. 16 Dec. 20 Particulars J.F.
Accountancy
Cr. Amount Rs. 10,000 3,000 11,500 500
Sales
Cash Sales return Bank Discount
Sales Account Dr. Date Particulars J.F. Amount Rs. Date 2005 Dec.12 Dec.30 Dec.31 Sales Return Account Dr. Date 2005 Dec.16 Particulars J.F. Amount Rs. 3,000 Trade Expenses Account Dr. Date 2005 Dec.18 Dr. Date 2005 Dec.22 Dec.26 Particulars J.F. Amount Rs. 700 Taranum Account Particulars J.F. Amount Rs. 1,500 20,000 Date 2005 Dec.19 Particulars J.F. Cr. Amount Rs. 32,000 Date Particulars J.F. Cr. Amount Rs. Date Particulars J.F. Cr. Amount Rs. Particulars J.F. Cr. Amount Rs. 25,000 12,000 11,000
Lara India Cash Rupak Traders
Lara India
Cash
Purchase Return Bank
Purchase
Recording of Transactions - I Discount Received Account Dr. Date 2005 Dec.20 Particulars J.F. Amount Rs. 500 Purchases Return Account Dr. Date Particulars J.F. Amount Rs. Date 2005 Dec.22 Stationery Account Dr. Date 2005 Dec. Particulars J.F. Amount Rs. 1,200 Rent Account Dr. Date 2005 Dec. 28 Particulars J.F. Amount Rs. 4,000 Drawings Account Dr. Date 2005 Dec. 29 Particulars J.F. Amount Rs. 10,000 Rupak Traders Account Dr. Date 2005 Dec. 31 Particulars J.F. Amount Rs. 11,000 Date Particulars J.F. Date Particulars J.F. Date Particulars J.F. Date Particulars J.F. Particulars J.F. Date Particulars J.F.
77
Cr. Amount Rs.
Lara India
Cr. Amount Rs. 1,500
Taranum
Cr. Amount Rs.
Cash
Cr. Amount Rs.
Bank
Cr. Amount Rs.
Cash
Cr. Amount Rs.
Sales
78 Test Your Understanding - V Select Right Answer: 1. Voucher is prepared for: (i) Cash received and paid (ii) Cash/Credit sales (iii) Cash/Credit purchase (iv) All of the above 2. Voucher is prepared from: (i) Documentary evidence (ii) Journal entry (iii) Ledger account (iv) All of the above 3. How many sides does an account have? (i) Two (ii) Three (iii) one (iv) None of These 4. A purchase of machine for cash should be debited to: (i) Cash account (ii) Machine account (iii) Purchase account (iv) None of these 5. Which of the following is correct? (i) Liabilities = Assets + Capital (ii) Assets = Liabilities Capital (iii) Capital = Assets Liabilities (iv) Capital = Assets + Liabilities. 6. Cash withdrawn by the Proprietor should be credited to: (i) Drawings account (ii) Capital account (iii) Profit and loss account (iv) Cash account 7. Find the correct statement: (i) Credit a decrease in assets (ii) Credit the increase in expenses (iii) Debit the increase in revenue (iv) Credit the increase in capital 8. The book in which all accounts are maintained is known as: (i) Cash Book (ii) Journal (iii) Purchases Book (iv) Ledger 9. Recording of transaction in the Journal is called: (i) Casting (ii) Posting (iii) Journalising (iv) Recording
Accountancy
Recording of Transactions - I Key Terms Introduced in the Chapter Source Documents Accounting Equation Books of Original Entry Journalising and Posting Double Entry Book Keeping Credit Debit Account Ledger Journal
79
Summary with Reference to Learning Objectives 1. Meaning of source documents : Various business documents such as invoice, bills, cash memos, vouchers, which form the basis and evidence of a business transaction recorded in the books of account, are called source documents. Meaning of accounting equation : A statement of equality between debits and credits signifying that the assets of a business are always equal to the total liabilities and capital. Rules of debit and credit : An account is divided into two sides. The left side of an account is known as debit and the credit. The rules of debit and credit depend on the nature of an account. Debit and Credit both represent either increase or decrease, depending on the nature of an account. These rules are summarised as follows : Name of an account Assets Liabilities Capital Revenues Expenses 4. Debit Increase Decrease Decrease Decrease increase Credit Decrease Increase Increase Increase Decrease
2.
3.
Books of Original entry : The transactions are first recorded in these books in a chronological order. Journal is one of the books of original entry. The process of recording entries in the journal is called journalising. Ledger : A book containing all accounts to which entries are transferred from the books of original entry. Posting is process of transferring entries from books of original entry to the ledger. Questions for Practice
5.
Short Answers 1. States the three fundamental steps in the accounting process. 2. Why is the evidence provided by source documents important to accounting? 3. Should a transaction be first recorded in a journal or ledger? Why? 4. Are debits or credits listed first in journal entries? Are debits or credits indented? 5. Why are some accounting systems called double accounting systems? 6. Give a specimen of an account.
80
Accountancy 7. Why are the rules of debit and credit same for both liability and capital? 8. What is the purpose of posting J.F numbers that are entered in the journal at the time entries are posted to the accounts. 9. What entry (debit or credit) would you make to: (a) increase revenue (b) decrease in expense, (c) record drawings (d) record the fresh capital introduced by the owner. 10. If a transaction has the effect of decreasing an asset, is the decrease recorded as a debit or as a credit? If the transaction has the effect of decreasing a liability, is the decrease recorded as a debit or as a credit? Long Answers 1. Describe the events recorded in accounting systems and the importance of source documents in those systems? 2. Describe how debits and credits are used to analyse transactions. 3. Describe how accounts are used to record information about the effects of transactions? 4. What is a journal? Give a specimen of journal showing at least five entries. 5. Differentiate between source documents and vouchers. 6. Accounting equation remains intact under all circumstances. Justify the statement with the help of an example. 7. Explain the double entry mechanism with an illustrative example. Numerical Questions Analysis of Transactions 1. Prepare accounting equation on the basis of the following : (a) Harsha started business with cash Rs.2,00,000 (b) Purchased goods from Naman for cash Rs. 40,000 (c) Sold goods to Bhanu costing Rs.10,000/Rs. 12,000 (d) Bought furniture on credit Rs. 7,000 (Ans: Asset = cash Rs. 1,60,000 + Goods Rs. 30,000 + Debtors Rs. 12,000 + Furniture Rs. 7,000 = Rs. 2,09,000; Liabilities = Creditors Rs. 7,000 + Capital Rs. 2,02,000 = Rs. 2,09,000) 2. Prepare accounting equation from the following: (a) Kunal started business with cash Rs.2,50000 (b) He purchased furniture for cash Rs. 35,000
Recording of Transactions - I (c) He paid commission (d) He purchases goods on credit (e) He sold goods (Costing Rs.20,000) for cash Rs. 2,000 Rs. 40,000 Rs. 26,000
81
(Ans: Asset = Cash Rs. 2,39,000 + Furniture Rs. 35,000 + Goods Rs. 20,000 = Rs. 2,94,000; Liabilities = Creditors Rs. 40,000 + Capital Rs. 2,54,000= Rs. 2,94,000) 3. Mohit has the following transactions, prepare accounting equation: (a) Business started with cash (b) Purchased goods from Rohit (c) Sales goods on credit to Manish (Costing Rs. 17,500) (d) Purchased furniture for office use (e) Cash paid to Rohit in full settlement (f) Cash received from Manish (g) Rent paid (h) Cash withdrew for personal use Rs. 1,75,000 Rs. 50,000 Rs. 20,000 Rs. 10,000 Rs. 48,500 Rs. 20,000 Rs. 1,000 Rs. 3,000
(Ans: Cash Rs. 1,33,000 + Goods Rs. 32,500 + Furniture Rs. 10,000 = Rs. 1,75,500; Liabilition = Capital Rs. 1,77,500) 4. Rohit has the following transactions : (a) Commenced business with cash (b) Purchased machinery on credit (c) Purchased goods for cash (d) Purchased car for personal use (e) Paid to creditors in full settlement (f) Sold goods for cash costing Rs. 5,000 (g) Paid rent (h) Commission received in advance Rs.1,50,000 Rs. 40,000 Rs. 20,000 Rs. 80,000 Rs. 38,000 Rs. 4,500 Rs. 1,000 Rs. 2,000
Prepare the Accounting Equation to show the effect of the above transactions on the assets, liabilities and capital. (Ans: Assets = Cash Rs. 17,500 + Machine Rs. 40,000 + Goods Rs. 15,000 = Rs. 72,500; Liabilities = Commission Rs. 2,000 + Capital Rs. 70,500 = Rs. 72,500) 5. Use accounting equation to show the effect of the following transactions of M/s Royal Traders: (a) Started business with cash (b) Purchased goods for cash (c) Rent received (d) Salary outstanding (e) Prepaid Insurance Rs.1,20,000 Rs. 10,000 Rs. 5,000 Rs. 2,000 Rs. 1,000
82 (f) Received interest (g) Sold goods for cash (Costing Rs. 5,000) (h) Goods destroyed by fire
Accountancy Rs. 700 Rs. 7,000 Rs. 500
(Ans: Assets = Cash Rs. 1,22,700 + Goods Rs. 4,500 + Prepaid insurance Rs. 1,000; Liabilities = Outstanding salary Rs. 2,000 + Capital Rs. 1,26,200) 6. Show the accounting Equation on the basis of the following transaction: (a) Udit started business with: (i) Cash (ii) Goods Purchased building for cash Purchased goods from Himani Sold goods to Ashu (Cost Rs. 25,000) Paid insurance premium Rent outstanding Depreciation on building Cash withdrawn for personal use Rent received in advance Cash paid to himani on account Cash received from Ashu Rs. 5,00,000 Rs. 1,00,000 Rs. 2, 00,000 Rs. 50,000 Rs. 36, 000 Rs. 3,000 Rs. 5,000 Rs. 8,000 Rs. 20,000 Rs. 5,000 Rs. 20,000 Rs. 30,000
(b) (c) (d) (e) (f) (g) (h) (i) (j) (k)
(Ans : Assets = Cash Rs. 2,92,000 + Goods Rs. 1,25,000 + Building Rs. 1,92,000 + Debitors Rs. 6,000 = 6,15,000: Laibilities = Creditors Rs. 30,000 + Outstanding Rent Rs. 5,000 + Rent Rs. 5,000 + Capital Rs. 5,75,000 = Rs. 6,15,000) 7. Show the effect of the following transactions on Assets, Liabilities and Capital through accounting equation: (a) Started business with cash (b) Rent received (c) Invested in shares (d) Received dividend (e) Purchase goods on credit from Ragani (f) Paid cash for house hold Expenses (g) Sold goods for cash (costing Rs.10,000) (h) Cash paid to Ragani (i) Deposited into bank Rs. 1,20,000 Rs. 10,000 Rs. 50,000 Rs. 5,000 Rs. 35,000 Rs. 7,000 Rs. 14,000 Rs. 35,000 Rs. 20,000
(Ans: Assets = Cash Rs. 37,000 + Shares Rs. 50,000 + Goods Rs. 25,000 + Bank Rs. 20,000 = Rs. 1,32,000; Liabilities = Capital Rs. 1,32,000) 8. Show the effect of following transaction on the accounting equation: (a) Manoj started business with (i) Cash Rs. 2,30,000
Recording of Transactions - I (ii) Goods Rs. 1,00,000 Rs. 2,00,000 Rs. 50,000 Rs. 35,000 Rs. 55,000 Rs. 60,000 Rs. 53,000 Rs. 20,000 Rs. 59,000 Rs. 3,000 Rs. 2,000 Rs. 13, 000 Rs. 20,000 Rs. 10,000 Rs. 50,000 Rs. 6,000
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(iii) Building (b) He purchased goods for cash (c) He sold goods(costing Rs.20,000) (d) He purchased goods from Rahul (e) He sold goods to Varun (Costing Rs. 52,000) (f) He paid cash to Rahul in full settlement (g) Salary paid by him (h) Received cash from Varun in full settlement (i) Rent outstanding (j) Prepaid Insurance (k) Commission received by him (l) Amount withdrawn by him for personal use (m) Depreciation charge on building (n) Fresh capital invested (o) Purchased goods from Rakhi
(Ans: Assets = Cash Rs. 2,42,000 + Goods Rs. 1,43,000 +Building Rs.1,90,000 + Prepaid Insurouce Rs. 2,000 = Rs. 5,77,000; Liabilities = Outstanding Rent Rs. 3,000 + Creditor Rs. 10,000 + Capital Rs. 5,64,000 = Rs. 5,77,000) 9. Transactions of M/s Vipin Traders are given below. Show the effects on Assets, Liabilities and Capital with the help of accounting Equation. (a) Business started with cash (b) Purchased goods for cash (c) Purchase furniture from R.K. Furniture (d) Sold goods to Parul Traders (Costing Rs. 7,000 vide bill no. 5674) (e) Paid cartage (f) Cash Paid to R.K. furniture in full settlement (g) Cash sales (costing Rs.10,000) (h) Rent received (i) Cash withdrew for personal use Rs. 1,25,000 Rs. 50,000 Rs. 10,000 Rs.9,000 Rs. 100 Rs. 9,700 Rs. 12,000 Rs. 4,000 Rs. 3,000
(Ans: Asset = cash Rs. 78,200 + Goods Rs. 33,000 + Furniture Rs. 10,000 Debtors Rs. 9,000= Rs. 1,30,200; Liabilities = Capital Rs. 1,30,200) 10. Bobby opened a consulting firm and completed these transactions during November, 2005:
84
Accountancy (a) Invested Rs. 4,00,000 cash and office equipment with Rs. 1,50,000 in a business called Bobbie Consulting. (b) Purchased land and a small office building. The land was worth Rs. 1,50,000 and the building worth Rs. 3, 50,000. The purchase price was price was paid with Rs. 2,00,000 cash and a long term note payable for Rs. 8,00,000. (c) Purchased office supplies on credit for Rs. 12,000. (d) Bobbie transferred title of motor car to the business. The motor car was worth Rs. 90,000. (e) Purchased for Rs. 30,000 additional office equipment on credit. (f) Paid Rs. 75,00 salary to the office manager. (g) Provided services to a client and collected Rs. 30,000 (h) Paid Rs. 4,000 for the months utilities. (i) Paid supplier created in transaction c. (j) Purchase new office equipment by paying Rs. 93,000 cash and trading in old equipment with a recorded cost of Rs. 7,000. (k) Completed services of a client for Rs. 26,000. This amount is to be paid within 30 days. (l) Received Rs. 19,000 payment from the client created in transaction k. (m) Bobby withdrew Rs. 20,000 from the business. Analyse the above stated transactions and open the following T-accounts: Cash, client, office supplies, motor car, building, land, long term payables, capital, withdrawals, salary, expense and utilities expense. Journalising 11. Journalise the following transactions in the books of Himanshu: 2005 Dec.01 Dec.07 Dec.09 Dec.12 Dec.18 Dec.25 Dec.30 12. 2006 Jan.01 Jan.01 Jan.02 Commenced business with cash Building Goods purchased for cash Business started with cash Purchased goods for cash Sold goods to Swati Purchased furniture Cash received from Swati In full settlement Paid rent Paid salary Rs. 75,000 10,000 5,000 3,000 4,000 1,000 1,500 Rs. 1,75,000 1,00,000 75,000
Enter the following Transactions in the Journal of Mudit :
Recording of Transactions - I Jan.03 Jan.04 Jan.06 Jan.10 Jan.12 Jan.14 Jan.18 Jan.20 Jan.22 Jan.25 13. Sold goods to Ramesh Paid wages Sold goods for cash Paid for trade expenses Cash received from Ramesh Discount allowed Goods purchased for Sudhir Cartage paid Drew cash for personal use Goods use for house hold Cash paid to Sudhir Discount allowed Journalise the following transactions: 2005 Dec. 01 Dec. 02 Dec. 04 Dec.06 Dec.10 Dec.13 Dec.16 Dec.20 Dec.22 Dec.23 Dec.25 Dec.26 Dec.28 Dec.29 Dec.31 14. Hema started business with cash Open a bank account with SBI Purchased goods from Ashu Sold goods to Rahul for cash Bought goods from Tara for cash Sold goods to Suman Received cheque from Suman Discount allowed Cheque given to Ashu on account Rent paid by cheque Deposited into bank Machine purchased from Parigya Trade expenses Cheque issued to Parigya Paid telephone expenses by cheque Paid salary Rs. 1,00,000 30,000 20,000 15,000 40,000 20,000 19,500 500 10,000 2,000 16,000 10,000 2,000 10,000 1,200 4,500 30,000 500 10,000 700 29,500 500 27,000 1,000 5,000 2,000 26,700 300
85
Jouranlise the following transactions in the books of Harpreet Bros.: (a) Rs.1,000 due from Rohit are now a bad debts. (b) Goods worth Rs.2,000 were used by the proprietor. (c) Charge depreciation @ 10% p.a for two month on machine costing Rs.30,000. (d) Provide interest on capital of Rs. 1,50,000 at 6% p.a. for 9 months.
86
Accountancy (e) Rahul become insolvent, who owed is Rs. 2,000 a final dividend of 60 paise in a rupee is received from his estate. 15. Prepare Journal from the transactions given below : (a) Cash paid for installation of machine (b) Goods given as charity (c) Interest charge on capital @7% p.a. when total capital were (d) Received Rs.1,200 of a bad debts written-off last year. (e) Goods destroyed by fire (f) Rent outstanding (g) Interest on drawings Rs. 2,000 Rs. 1,000 Rs. 900 Rs. 500 Rs. 2,000 Rs. 70,000
(h) Sudhir Kumar who owed me Rs. 3,000 has failed to pay the amount. He pays me a compensation of 45 paise in a rupee. (i) Commission received in advance Posting 16. Journalise the following transactions, post to the ledger: 2005 Nov. 01 Nov. 03 Nov. 05 Nov. 08 Nov. 10 Nov. Nov. Nov. Nov. Nov. Nov. Nov. Nov. Nov. 13 15 18 20 22 25 26 27 29 Business started with (i) Cash (ii) Goods Purchased goods from Harish Sold goods for cash Purchase furniture for cash Cash paid to Harish on account Paid sundry expenses Cash sales Deposited into bank Drew cash for personal use Cash paid to Harish in full settlement of account Good sold to Nitesh Cartage paid Rent paid Received cash from Nitesh Discount allowed Salary paid Rs. 1,50,000 50,000 30,000 12,000 5,000 15,000 200 15,000 5,000 1,000 14,700 7,000 200 1,500 6,800 200 3,000 Rs. 7,000
Nov. 30 17.
Journalise the following transactions is the journal of M/s Goel Brothers and post them to the ledger. 2006 Jan. 01 Started business with cash
Rs. 1,65,000
Recording of Transactions - I Jan. Jan. Jan. Jan. Jan. Jan. Jan. Jan. Jan. Jan. Jan. Jan. Jan. Jan. Jan. Jan. Jan. 18 02 04 05 08 10 15 16 18 20 22 23 24 26 27 28 29 30 Open bank account in PNB Goods purchased from Tara Goods purchased for cash Goods sold to Naman Cash paid to tara Cash received from Naman Discount allowed Paid wages Furniture purchased for office use withdrawn from bank for personal use Issued cheque for rent goods issued for house hold purpose drawn cash from bank for office use Commission received Bank charges Cheque given for insurance premium Paid salary Cash sales 80,000 22,000 30,000 12,000 22,000 11,700 300 200 5,000 4,000 3,000 2,000 6,000 1,000 200 3,000 7,000 10,000
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Give journal entries of M/s Mohit traders, Post them to the Ledger from the following transactions : August 2005 1. 2. 3. 7. 8. 10. 14. 16. 18. 20. 22. 23. 25. 30. Commenced business with cash Opened bank account with H.D.F.C. Purchased furniture Bought goods for cash from M/s Rupa Traders Purchased good from M/s Hema Traders Sold goods for cash Sold goods on credit to M/s. Gupta Traders Rent paid Paid trade expenses Received cash from Gupta Traders Goods return to Hema Traders. Cash paid to Hema Traders Bought postage stamps Paid salary to Rishabh Rs. 1,10,000 50,000 20,000 30,000 42,000 30,000 12,000 4,000 1,000 12,000 2,000 40,000 100 4,000
19.
Journalise the following transaction in the Books of the M/s Bhanu Traders and Post them into the Ledger. December, 2005 Rs. 1. Started business with cash 92,000 2. Deposited into bank 60,000
88 4. 6. 8. 10. 14. 17. 19. 21. 22. 26. 28. 29. 30. 31. 20. Bought goods on credit from Himani Purchased goods from cash Returned goods to Himani Sold goods for cash Cheque given to Himani Goods sold to M/s Goyal Traders. Drew cash from bank for personal use Goyal traders returned goods Cash deposited into bank Cheque received from Goyal Traders Goods given as charity Rent paid Salary paid Office machine purchased for cash
Accountancy 40,000 20,000 4,000 20,000 36,000 3,50,000 2,000 3,500 20,000 31,500 2,000 3,000 7,000 3,000
Journalise the following transaction in the Book of M/s Beauti traders. Also post them in the ledger. 1. 2. 3. 5. 6. 8. 9. 12. 14. 15. 16. 18. 20. 22. 24. 26. 28. 29. 30. Dec. 2005 Started business with cash Bought office furniture Paid into bank to open an current account Purchased a computer and paid by cheque Bought goods on credit from Ritika Cash sales Sold goods to Karishna on credit Cash paid to Mansi on account Goods returned to Ritika Stationery purchased for cash Paid wages Goods returned by Karishna Cheque given to Ritika Cash received from Karishna on account Insurance premium paid by cheque Cheque received from Karishna Rent paid by cheque Purchased goods on credit from Meena Traders Cash sales Rs. 2,00,000 30,000 1,00,000 2,50,000 60,000 30,000 25,000 30,000 2,000 3,000 1,000 2,000 28,000 15,000 4,000 8,000 3,000 20,000 14,000
21.
Journalise the following transaction in the books of Sanjana and post them into the ledger :
Recording of Transactions - I January, 2006 1. Cash in hand Cash at bank Stock of goods Due to Rohan Due from Tarun 3. Sold goods to Karuna 4. Cash sales 6. Goods sold to Heena 8. Purchased goods from Rupali 10. Goods returned from Karuna 14. Cash received from Karuna 15. Cheque given to Rohan 16. Cash received from Heena 20. Cheque received from Tarun 22. Cheque received from to Heena 25. Cash given to Rupali 26. Paid cartage 27. Paid salary 28. Cash sale 29. Cheque given to Rupali 30. Sanjana took goods for Personal use 31. Paid General expense Checklist to Test Your Understanding Test Your Understanding - I 1. (iii), 2 (Capital increases by net profit and fresh capital introduced, decreases by drawings and net loss), 3 (No), 4 (ii) Test Your Understanding - II 1. Cash account and capital account, Assets and Liabilities, Assest increase and capital increase. 2. Purchase account and Remesh account, Expenses and Liabilities, Expenses and Liabilities increases. 3. Cash account and sales account, Assets and Revenues, Assets and Revenues increases. 4. Salaries account and cash account, Expense and Assets, Expenses increases Assets decreases. 5. Furniture account and Cash account, Asset increases Asset decreases. 6. Loan account and Bank, Liability and Asset, Liabilities increases Asset decreases. Rs. 6,000 55,000 40,000 6,000 10,000 15,000 10,000 5,000 30,000 2,000 13,000 6,000 3,000 10.000 2,000 18,000 1,000 8,000 7,000 12,000 4,000 500
89
90
Accountancy 7. Sarita account and Sales account, Asset and Revenue, Assets decreases Revenue decreases. 8. Ramesh account and Cash, liabilities and Assets, Liabilities decreases Assets increases. 9. Rent account and Cash account, Expense and Assets, Expenses increases Assets decreases. Test Your Understanding - III 1(d), 2(d), 3(b), 4(b), 5(d), 6(c), 7(a)
Test your understanding - IV 1. Rent 4. Machine 7. Debtors Test Your Understanding - V 1 (iv), 2 (i), 3 (i), 4 (ii), 5 (iii), 6 (iv), 7 (iv), 8 (iv), 9 (iii). 2. Debtors 5. Creditors 3. Cash 6. Office stationary
Recording of Transactions-II
LEARNING OBJECTIVES
After studying this chapter, you will be able to : state the need for special purpose books; record the transactions in cash book and post them in the ledger; prepare the petty cash book; record the transactions in the special purpose books; post the entries in the special purpose book and to the ledger; balance the ledger accounts.
n chapter 3, you lear nt that all the business transactions are first recorded in the journal and then they are posted in the ledger accounts. A small business may be able to record all its transactions in one book only, i.e., the journal. But as the business expands and the number of transactions becomes large, it may become cumbersome to jour-nalise each transaction. For quick, efficient and accurate recording of business transactions, Journal is sub-divided into special journals. Many of the business transactions are repetitive in nature. They can be easily recorded in special journals, each meant for recording all the transactions of a similar nature. For example, all cash transactions may be recorded in one book, all credit sales transactions in another book and all credit purchases transactions in yet another book and so on. These special journals are also called daybooks or subsidiary books. Transactions that cannot be recorded in any special journal are recorded in journal called the Journal Proper. Special journals prove economical and make division of labour possible in accounting work. In this chapter we will discuss the following special purpose books: Cash Book Purchases Book Purchases Return (Return Outwards) Book Sales Book Sales Return (Return Inwards) Book Journal Proper
Recording of Transactions - II
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4.1 Cash Book Cash book is a book in which all transactions relating to cash receipts and cash payments are recorded. It starts with the cash or bank balances at the beginning of the period. Generally, it is made on monthly basis. This is a very popular book and is maintained by all organisations, big or small, profit or not-for-profit. It serves the purpose of both journal as well as the ledger (cash) account. It is also called the book of original entry. When a cashbook is maintained, transactions of cash are not recorded in the journal, and no separate account for cash or bank is required in the ledger. 4.1.1 Single Column Cash Book The single column cash book records all cash transactions of the business in a chronological order, i.e., it is a complete record of cash receipts and cash payments. When all receipts and payments are made in cash by a business organisation only, the cash book contains only one amount column on each (debit and credit) side. The format of single column cash book is shown in figure 4.1.
Cash Book Dr. Date Particulars L.F. Amount Rs. Date Particulars L.F. Cr. Amount Rs.
Fig. 4.1 : Format of single column cash book
Recording of entries in the single column cash book and its balancing is illustrated by an example. Consider the following transactions of M/s Roopa Traders observe how they are recorded in a single column cash book.
Date 2005 Nov. 01 Nov. 04 Nov. 08 Nov. 13 Nov. 16 Nov. 17 Nov. 20 Nov. 24 Details Amount Rs. 30,000 12,000 6,000 13,800 28,000 17,400 1,100 12,500
Cash in hand Cash received from Gurmeet Insurance paid (Annual Instalment) Purchased furniture Sold goods for cash Purchased goods from Mudit in cash Purchase stationery Cash paid to Rukmani in full settlement of account
Recording of Transactions - II Nov. Nov. Nov. Nov. 27 30 30 30 Sold goods to Kamal for cash Paid monthly rent Paid salary Deposited in bank Roopa Traders Cash Book Dr. Date 2005 Nov. 01 Nov. 04 Nov. 16 Nov. 27 Particulars L.F. Amount Rs. 30,000 12,000 28,000 18,200 Date 2005 Nov. 08 Nov. 13 Nov. 17 Nov. 20 Nov. 24 Nov. 30 Nov. 30 Nov. 30 Nov. 30 Particulars L.F. 18,200 2,500 3,500 8,000
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Cr. Amount Rs. 6,000 13,800 17,400 1,100 12,500 2,500 3,500 8,000 23,400 88,200
Balance b/d Gurmeet Sales Sales
Insurance Furniture Purchases Stationery Rukmani Rent Salary Bank Balance c/d
88,200 Dec.01 Balance b/d 23,400
Posting of the Single Column Cash Book As evident from figure 4.1, the left side of the cash book shows the receipts of the cash whereas the right side of the cash book shows all the payments made in cash. The accounts appearing on then debit side for the cash book are credited in the respective ledger accounts because cash has been received in respect of them. Thus, in our example, an entry cash received from Gurmeet appears on the debit side of the cash book conveys that the cash has been received from Gurmeet. Therefore, in the ledger, Gurmeets account will be credited by writing Cash in the particulars column on the credit side. Similarly, all the account names appearing on the credit side of the cash book are debited as cash/cheque has been paid in respect of them. Now, notice, how the transactions in our example are posted to the related ledger accounts:
Recording of Transactions - II Books of Roopa Traders Gurmeets Account Dr. Date Particulars J.F. Amount Rs. Date 2005 Nov.04 Sales Account Dr. Date Particulars J.F. Amount Rs. Date 2005 Nov. 16 Nov. 27 Insurance Account Dr. Date 2005 Nov. 08 Particulars J.F. Amount Rs. 6,000 Furniture Account Dr. Date 2005 Nov. 13 Particulars J.F. Amount Rs. 13,800 Purchases Account Dr. Date 2005 Nov. 17 Particulars J.F. Amount Rs. 17,400 Stationery Account Dr. Date 2005 Nov. 20 Particulars J.F. Amount Rs. 1,100 Date Particulars J.F. Date Particulars J.F. Date Particulars J.F. Date Particulars J.F. Particulars J.F. Particulars J.F.
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Cash
Cr. Amount Rs. 28,000 18,200
Cash Cash
Cr. Amount Rs.
Cash
Cr. Amount Rs.
Cash
Cr. Amount Rs.
Cash
Cr. Amount Rs.
Cash
Recording of Transactions - II Rukmanis Account Dr. Date 2005 Nov.24 Particulars J.F. Amount Rs. 12,500 Rent Account Dr. Date 2005 Nov.30 Particulars J.F. Amount Rs. 2,500 Salary Account Dr. Date 2005 Nov. 30 Particulars J.F. Amount Rs. 3,500 Banks Account Dr. Date 2005 Nov.30 Particulars J.F. Amount Rs. 8,000 Date Particulars J.F. Date Particulars J.F. Date Particulars J.F. Date Particulars J.F.
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Cr. Amount Rs.
Cash
Cr. Amount Rs.
Cash
Cr. Amount Rs.
Cash
Cr. Amount Rs.
Cash
4.1.2 Double Column Cash Book In this type of cash book, there are two columns of amount on each side of the cash book. In fact, now-a-days bank transactions are very large in number. In many organisations, as far as possible, all receipts and payments are affected through bank. A businessman generally opens a current account with a bank. Bank, do not allow any interest on the balance in current account but charge a small amount, called incidental charges, for the services rendered. For depositing cash/cheques in the bank account, a form has to be filled, which is called a pay-in-slip. (refer figure 4.2) It contains a counterfoil also which is returned to the customer (depositor) with the signature of the cashier, as receipt. The bank issues blank cheque forms, to the account holder for withdrawing money. (refer figure 4.3) The depositor writes the name of the party to whom payment is to be made after the words Pay printed on the cheque. Cheque
96
Fig. 4.2 : A pay-in-slip
Fig. 4.3 : A cheque
forms have the printed word bearer, which means payment is to be made to the person whose name has been written after the words pay or the bearer of the cheques. When the world bearer is struck off by drawing a line, the cheque becomes an order cheque. It means payment is to be made to the person whose name is written on the cheque or to his order after proper identification. Cheques are generally crossed in practice. The payment of a crossed cheque cannot be made direct to the party on the counter. It is to be paid only through a bank. When two parallel lines are drawn across the cheque, it is said to be crossed. The various types of crossing providing different degrees of safety to the payment are shown in figure 4.4.
97
In case of an A/c payee only crossing, the amount of the cheque can be deposited only in the account of the person whose name appears on the cheque. When the name of the bank is written between two parallel lines, it becomes a special crossing and the payment can be made only to the bank whose name has been written between the two lines. Though this is rarely done, a cheque can be transferred by the payee (the person in whose favour the cheque has been drawn) to another person, if it is not crossed A/c payee only. A bearer cheque can be passed on by mere delivery. An order cheque can be transferred by endorsement and delivery. Endorsement means the writing of instructions to pay the cheque to a particular person and then singing it on the back of the cheque.
ble
On
tia
ee
tN e
&
ay
cP
No
A/
Fig. 4.4 : Types of crossing
When the number of bank transactions is large; it is convenient to have a separate amount column for bank transactions in the cash book itself instead of recording them in the journal. This helps in getting information about the position of the bank account from time to time. Just like cash transactions, all payments into the bank are recorded on the left side and all withdrawals/ payments through the bank are recorded on the right side. When cash is deposited in the bank or cash is withdrawn from the bank, both the entries are recorded in the cash book. This is so because both aspects of the transaction appear in the cash book itself. When cash is paid into the bank, the amount deposited is written on the left side in the bank column and at the same time the same amount is entered on the right side in the cash column. The reverse entries are recorded when cash is withdrawn from the bank for use in the office. Against such entries the word C, which stands for contra is written in the L.F. column indicating that these entries are not to be posted to the ledger account.
Sta
te
Ba
nk
of
Ind
Co
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ly
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The bank column is balanced in the same way as the cash column. However, in the bank column, there can be credit balance also because of overdraft taken from the bank. Overdraft is a situation when cash withdrawn from the bank exceeds the amount of deposit. Entries in respect of cheques received should be made in the bank column of the cash book. When a cheque is received, it may be deposited into the bank on the same day or it may be deposited on another day. In case, it is deposited on the same day the amount is recorded in the bank column of the cash book on the receipts side. If the cheque is deposited on another day, in that case, on the date of receipt it is treated as cash received and hence recorded in the cash column on the receipts side. On the day of deposit to the bank, it is shown in the Bank Column on receipt (Dr.) side and in the Cash Column on the payment (Cr.) side. This is a contra entry. If a cheque received from a customer is dishonoured, the bank will return the dishonoured cheque and debit the firms account. On receipt of such cheque or intimation from the bank, the firm will make an entry on the credit side of the cash book by entering the amount of the dishonoured cheque in the bank column and the name of the customer in the particulars column. This entry will restore the position prevailing before the receipt of the cheque form the customer and its deposit in the bank. Dishonour of a cheque means return of the cheque unpaid, generally due to insufficient funds in the customers account with the bank. If the bank debits the firm on account of interest, commission or other charges for bank services, the entry will be made on the credit side in bank column. If the bank credits the firms account, the entry will be made on the debit side of the cash book in the appropriate column. The format of double column cash book is shown in figure 4.5.
Cash Book Dr. Date Particulars L.F. Cash Rs. Bank Date Rs. Particulars L.F. Cash Rs. Cr. Bank Rs.
Fig. 4.5 : Format of a double column cashbook
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We will now learn how the transactions are recorded in the double column cash book. Consider the following example: The following transactions related to M/s Tools India :
Date 2005 Sept. Sept. Sept. Sept. Sept. Sept. Sept. Sept. Sept. Sept. Sept. Sept. 01 01 04 08 13 16 17 20 24 27 30 30 Bank balance Cash balance Purchased goods by cheque Sales of goods for cash Purchased machinery by cheque Sold goods and received cheque (deposited same day) Purchase goods from Mriaula in cash Purchase stationery by cheque Cheque given to Rohit Cash withdrawn from bank Rent paid by cheque Paid salary 42,000 15,000 12,000 6,000 5,500 4,500 17,400 1,100 1,500 10,000 2,500 3,500 Details Amount Rs.
The double column cash book based upon above business transactions will prepared as follows :
Cash Book Dr. Date Particulars 2005 Sept. 01 08 16 27 L.F. Cash Rs. Bank Date Rs. 2005 Sept. 04 13 17 20 24 27 30 30 30 Particulars L.F. Cash Rs. Cr. Bank Rs.
Balance b/d Sales Sales Bank
15,000 6,000 C 10,000
42,000 4,500
Purchases Machine Purchase Stationery Rohit Cash Rent Salary Balance c/d
12,000 5,500 17,400 1,100 1,500 10,000 2,500 3,500 10,100 13,900 31,000 46,500
31,000 Oct. 01 Balance b/d 10,100
46,500 13,900
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Posting of the Double Column Cash Book When the bank column is maintained in the cash book, the bank account also is not opened in the ledger. The bank column serves the purpose of the bank account. Entries marked C (being contra entries as explained earlier) are ignored while posting from the cash book to the ledger. These entries represent debit or credit of cash account against the bank account or viceversa. We will now see how the transactions recorded in double column cash book are posted to the individual accounts.
Purchases Account Dr. Date 2005 Sept.04 Sept. 17 Particulars J.F. Amount Rs. 12,000 17,400 Sales Account Dr. Date Particulars J.F. Amount Rs. Date 2005 Sept. 08 Sept. 16 Machinery Account Dr. Date 2005 Sept. 13 Bank 5,500 Stationery Account Dr. Date 2005 Sept.20 Particulars J.F. Amount Rs. 1,100 Date Particulars J.F. Cr. Amount Rs. Particulars J.F. Amount Rs. Date Particulars J.F. Cr. Amount Rs. Particulars J.F. Cr. Amount Rs. 6,000 4,500 Date Particulars J.F. Cr. Amount Rs.
Bank Cash
Cash Bank
Bank
Recording of Transactions - II Rohits Account Dr. Date 2005 Sept.24 Particulars J.F. Amount Rs. 1,500 Rent Account Dr. Date 2005 Sept.30 Particulars J.F. Amount Rs. 2,500 Salary Account Dr. Date 2005 Sept.30 Particulars J.F. Amount Rs. 3,500 Date Particulars J.F. Date Particulars J.F. Date Particulars J.F.
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Cr. Amount Rs.
Bank
Cr. Amount Rs.
Bank
Cr. Amount Rs.
Cash
4.1.3 Petty Cash Book In every organisation, a large number of small payments such as conveyance, cartage, postage, telegrams and other expenses (collectively recorded under miscellaneous expenses) are made. These are generally repetitive in nature. If all these payments are handled by the cashier and are recorded in the main cash book, the procedure is found to be very cumbersome. The cashier may be overburdened and the cash book may become very bulky. To avoid this, large organisations normally appoint one more cashier (petty cashier) and maintain a separate cash book to record these transactions. Such a cash book maintained by petty cashier is called petty cash book. The petty cashier works on the Imprest system. Under this system, a definite sum, say Rs. 2,000 is given to the petty cashier at the beginning of a certain period. This amount is called imprest amount. The petty cashier goes on making all small payments out of this imprest amount and when he has spent the substantial portion of the imprest amount say Rs.1,780, he gets reimbursement of the amount spent from the head cashier. Thus, he again has the full imprest amount in the beginning of the next period. The reimbursement may be made on a weekly, fortnightly or monthly basis, depending on the frequency of small payments. (In certain cases, the petty cash system is operated through the
102
main cash book itself. In such instances, the petty cash book is not maintained independently.) The petty cash book generally has a number of columns for the amount on the payment side (credit) besides the first other amount column. Each of the amount columns is allotted for items of specific payments, which are most common. The last amount column is designated as Miscellaneous followed by a Remarks column. In the miscellaneous column those payments are recorded for which a separate column does not exist. In the Remarks the nature of payment is recorded. At the end of the period, all amount columns are totaled. The total amount column l shows the total amount spent and to be reimbursed. On the receipt (debit) side, there is only one amount column. Columns for the date, voucher number and particulars are common for both receipts and payments.
Box 1 Advantages of Maintaining Petty Cash Book 1. Saving of Time and efforts of chief cashier: The chief cashier is not required to deal with petty disbursements. He can concentrate on cash transactions involving large amount of cash. It saves time and labour and helps chief cashier to discharge his duties more effectively 2. Effective control over cash disbursements: Cash control becomes easy because of division of work. The head cashier can control big payments directly and petty payments by keeping a proper check on the petty cashier. This way the chances of making frauds and embezzlements become very difficult. 3. Convenient recording: Recording of petty disbursements in the main cash book makes it bulky and unmanageable. Further, the materiality principle requires that insignificant details need not be given in the main cashbook. This way the cash book reveals only material and useful information. Recording of such small payments becomes easy as the totals of different types of expenses are posted to ledger. It also saves time and effort of posting individual items in the ledger. In nutshell it can be stated that preparation of petty cash book is a cost reduction control measure.
For example, Mr. Mohit, the petty cahier of M/s Samaira Traders received Rupees 2,000 on May 01, 2005 from the Head Cashier. For the month, details of petty expenses are listed here under:
Recording of Transactions - II Date 2005 May 02 03 04 05 06 08 08 10 12 13 14 16 19 19 20 22 23 28 29 30 Auto fare Courier services Postal stamps Erasers/Sharpeners/Pencils/Pads Speed post charges Taxi fare (Rs.105 + Rs.90) Refreshments Auto fare Registered postal charges Telegram Cartage Computer stationery Bus fare STD call charges Office sanitation including disinfectant (Rs. 36 + Rs. 24) Refreshment Photo stating charges Courier services Unloading charges Bus fare 55 40 105 225 98 195 85 60 42 34 25 165 24 87 60 45 47 40 40 15 Details Amount Rs.
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Posting from the Petty Cash Book The petty cash book is balanced periodically. The difference between the total receipts and total payments is the balance with the petty cashier. The balance is carried to the next period and the petty cashier is paid the amount actually spent. A petty cash account is opened in the ledger. It is debited with the amount given to petty cashier. Each expense account is individually debited with the periodic total as per the respective column by writing petty cash account and the petty cash account is credited with the total expenditure incurred during the period by writing sundries as per petty cash book. The petty cash account is balanced. It reflect the actual cash with the petty cashier.
The petty cash book for the month will be prepared as follows :
Book of Samaira Traders Petty Cash Book Voucher No. Postage Telephone & Telegram 55 40 105 225 98 195 85 60 42 34 25 165 24 87 60 Conveyance Stationery Misc. Amount paid Rs. Analysis of Payments
Amount Date Received Rs. 2005 May 2,000 01 02 03 04 05 55 40 105 225 98 195 85 60 42 34 25 165 24 87 60
Particulars
06 08 08 10 12
13 14 16 19 19 20
45 47 40 40 325 121 15 349 390 302
22 23 28 29 30
Cash received Auto fare Courier services Postal stamps Erasers/Sharpeners /Pencils Speed post charges Taxi fare (105 + 90) Refreshments Auto fare Registered postal charges Telegram Cartage Computer stationery Bus fare STD call charges Office sanitation including disinfectant (36+24) Refreshment Photo stating charges Courier services Unloading charges Bus fare 45 47 40 40 15 1,487 513 2,000
31
Balance c/d
2,000
Jun. 513 01 Balance b/d 1,487 01 Cash received
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Recording of Transactions - II Books of Samaira Traders Journal Date Particulars L.F. Debit Amount Rs. 2,000
105
Credit Amount Rs.
2005 May 01
May 31
Petty cash A/c To Cash A/c (Cash paid to petty cashier) Postage A/c Telephone & Telegram A/c Conveyance A/c Stationary A/c Miscellaneous expenses A/c To Petty cash A/c (Petty expenses posted to petty cash account) Petty cash A/c To Cash A/c (Cash paid to petty cashier)
Dr.
2,000 Dr. Dr. Dr. Dr. Dr. 325 121 349 390 302 1,487
Dr.
1,487 1,487
Petty Cash Account Dr. Date 2005 May 01 Particulars J.F. Amount Rs. 2,000 Date 2005 May 31 May 31 Jun. 01 Jun. 01 Balance b/d Cash 2,000 513 1,487 Books of Samaria Traders Postage Account Dr. Date 2005 May 31 Particulars J.F. Amount Rs. 325 Telephone and Telegrams Account Dr. Date 2005 May 31 Particulars J.F. Amount Rs. 121 Date Particulars J.F. Cr. Amount Rs. Date Particulars J.F. Cr. Amount Rs. Particulars J.F. Cr. Amount Rs. 1,487 513 2,000
Cash
Sundries as per petty cash book Balance c/d
Petty cash
Petty cash
Recording of Transactions - II Conveyance Account Dr. Date 2005 May 31 Particulars J.F. Amount Rs. 349 Stationery Account Dr. Date 2005 May 31 Particulars J.F. Amount Rs. 390 Miscellaneous Expenses Account Dr. Date 2005 May 31 Particulars J.F. Amount Rs. 302 Date Particulars J.F. Date Particulars J.F. Date Particulars J.F.
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Cr. Amount Rs.
Petty cash
Cr. Amount Rs.
Petty cash
Cr. Amount Rs.
Petty cash
4.1.4 Balancing of Cash Book On the left side, all cash transactions relating to cash receipts (debits) and on the right side all transactions relating to cash payments (credits) are entered date-wise. When a cash book is maintained, a separate cash book in the ledger is not opened. The cash book is balanced in the same way as an account in the ledger. But it may be noted that in the case of the cash book, there will always be debit balance because cash payments can never exceed cash receipts and cash in hand at the beginning of the period. The source document for cash receipts is generally the duplicate copy of the receipt issued by the cashier. For payment, any document, invoice, bill, receipt, etc. on the basis of which payment has been made, will serve as a source document for recording transactions in the cash book. When payment has been made, all these documents, popularly known as vouchers, are given a serial number and filed in a separate file for future reference and verification.
Illustration 1 From the following transactions made by M/s Kuntia Traders, prepare the single column cashbook.
Recording of Transactions - II Date 2005 Sept. 01 Sept. 02 Sept. 04 Sept. 05 Sept. 06 Sept. 06 Sept. Sept. Sept. Sept. Sept. Sept. Sept. Sept. Sept. Sept. Sept. Sept. Sept. Sept. Sept. Solution Books of Kuntia Traders Cash Book Dr. Date 2005 Sept. Sept. Sept. Sept. Sept. Sept. Particulars L.F. Amount Rs. 40,000 11,700 14,800 14,500 23,000 15,600 Date 2005 Sept. Sept. Sept. Sept. Sept. Sept. Sept. Sept. Sept. Sept. Particulars L.F. 07 07 07 10 11 12 14 17 21 24 26 28 29 29 30 Cash in hand Deposited in bank Received from Puneet in full settlement of claim of Rs. 12,000. Cash paid to Rukmani in full settlement of claim of Rs.7,000 Sold goods to Sudhir for cash Paid quarterly insurance premium on policy for proprietors wife Purchased office furniture Purchased stationery Paid cartage Paid Kamal, discount allowed by him Rs. 6,800 Received from Gurmeet, discount allowed to him Rs.14,500 Amount withdrawn for house hold use Electricity bill paid Goods sold for cash Bought goods from Kamal on cash basis Paid telephone charges Paid postal charges Paid monthly rent Paid monthly wages and salary Bought goods for cash Sold goods for cash Details
107 Amount Rs. 40,000 16,000 11,700 6,850 14,800 2,740 8,000 1,700 120 200 500 5,000 1,160 23,000 17,000 2,300 520 4,200 8,250 11,000 15,600
Cr. Amount Rs. 16,000 6,850 2,740 8,000 1,700 120 6,800 5000 1,160 17,000
01 04 06 11 17 30
Balance b/d Puneet Sales Gurmeet Sales Sales
02 05 06 07 07 07 10 12 14 21
Bank Rukmani Drawings Office furniture Stationery Cartage Kamal Drawings Electric charges Purchases
Recording of Transactions - II Sept. 24 Sept. Sept. Sept. Sept. Sept. 1,19,600 Oct. 01 Balance b/d 27,960 28 29 29 30 30 Telephone charges Postal charges Rent Wages & Salary Purchases Balance c/d
108 2,300 520 4,200 8,250 11,000 27,960 1,19,600
Illustration 2 Record the following transactions in double column cash book and balance it. Date 2005 Aug. 01 Aug. 03 Aug. 08 Aug. 09 Aug. Aug. Aug. Aug. Aug. 09 10 14 16 20 Cash balance Bank balance Paid insurance premium by cheque Cash sales Cash discount Payment for cash purchases Cash discount Cash deposited in bank Telephone bill paid by cheque Withdrawn from bank for personal use Withdrawn from bank office use Received cheque from John in full and final settlement and deposited the same in the bank Received cash from Michael Discount allowed Stationery purchased for cash Cartage paid in cash Cheque received from Kumar Cheque received from Kumar deposited in Bank Cheque deposited on Aug. 28 dishonoured and returned by the bank Rent paid by cheque Paid wages to the watchman in cash Paid cash for postage 15,000 10,000 4,200 22,000 750 21,000 700 15,000 2,300 6,000 14,500 10,700 6,850 150 1,800 350 4,500 4,500 Details Amount Rs.
Aug. 23 Aug. Aug. Aug. Aug. Aug. 24 25 25 28 31
Aug. 31 Aug. 31 Aug. 31
4,000 3,000 220
Recording of Transactions - II Solution Cash Book Dr. Date Particulars L.F. Cash Rs. Bank Date Rs. 2005 Aug. 03 09 09 10 14 16 24 25 28 31 31 31 31 31 Particulars L.F. Cash Rs.
109
Cr. Bank Rs.
2005 Aug. 01 08 09 16 20 23 25 28 31
Balance b/d Sales Cash Bank John Michael Kumar Cash Balance c/d
15,000 22,000
10,000
C 15,000 C 14,500 10,700 6,850 4,500 C 4,500 6,000
Insurance Purchases Bank Telephone expenses Drawings Cash Printing and stationery Cartage Bank Kumar Rent Wages Postage Balance c/d
4,200 C 21,000 15,000 2,300 6,000 14,500 1,800 350 4,500 4,500 4,000 3,000 220 16,980
4,700
62,850 Sept. 01 Balance b/d Illustration 3 16,980
40,200 4,700
62,850 40,200
Prepare bank column cash book from the following tansactions of M/s Laser Zone for the month of January 2005 and post them to the related ledger accounts : Date Jan. 01 Jan. Jan. Jan. Jan. Jan. Jan. Jan. Jan. 04 05 07 09 11 13 14 16 Details Cash in hand Bank overdraft Wage paid Cash sales Purchased goods by cheque Purchased furniture for cash Cash paid to Rohit Cash sales Deposited into bank Bank charged interest on overdraft Amount Rs. 4,000 3,200 400 7,000 2,000 2,200 2,000 4,500 7,000 200
Recording of Transactions - II Jan. 20 Jan. 25 Jan. Jan. Jan. Jan. Solution Books of Laser Zone Cash Book Dr. Date Particulars 2005 Jan. 01 05 13 14 25 31 L.F. Cash Rs. Bank Rs. Date 2005 Jan. 01 04 07 09 11 14 16 20 27 29 30 01 15,500 11,700 Oct. 01 Balance b/d 1,600 5,700 Wages Account Dr. Date 2005 Jan.04 Particulars J.F. Amount Rs. 400 Date Particulars J.F. Particulars L.F. Cash Rs. 27 29 30 31 Paid telephone bill by cheque Sale of goods and received cheque (deposited same day) Paid rent Drew cash for personal use Paid salary Interest collected by bank 600 3,000 800 500 1,000 1,700
110
Cr. Bank Rs.
Balance b/d Sales Sales Cash Sales Interest
4,000 7,000 4,500 C 7,000 3,000 1,700
Balance b/d Wages Purchase Furniture Rohit Bank Overdraft interest Telephone Rent Drawings Salary Balance c/d
3,200 400 2,000 2,200 2,000 7,000 200 600 800 500 1,000 1,600 5,700 15,500 11,700
Cr. Amount Rs.
Cash
Recording of Transactions - II Sales Account Dr. Date Particulars J.F. Amount Rs. Date 2005 Jan. 05 Jan.13 Jan.25 Purchases Dr. Date 2005 Jan.07 Particulars J.F. Amount Rs. 2,000 Furniture Account Dr. Date 2005 Jan. 09 Particulars J.F. Amount Rs. 2,200 Rohit Account Dr. Date 2005 Jan. 11 Particulars J.F. Amount Rs. 2,000 Ovedraft Interest (Paid) Account Dr. Date 2005 Jan.16 Particulars J.F. Amount Rs. 200 Telephone Expenses Account Dr. Date 2005 Jan.20 Particulars J.F. Amount Rs. 600 Date Particulars J.F. Date Particulars J.F. Date Particulars J.F. Date Particulars J.F. Date Particulars J.F. Account Particulars J.F.
111
Cr. Amount Rs. 7,000 4,500 3,000
Cash Cash Bank
Cr. Amount Rs.
Bank
Cr. Amount Rs.
Cash
Cr. Amount Rs.
Cash
Cr. Amount Rs.
Bank
Cr. Amount Rs.
Bank
Recording of Transactions - II Rent Account Dr. Date 2005 Jan.27 Particulars J.F. Amount Rs. 800 Drawings Account Dr. Date 2005 Jan.29 Particulars J.F. Amount Rs. 500 Salary Account Dr. Date 2005 Jan.30 Particulars J.F. Amount Rs. 1,000 Interest (Received) Account Dr. Date Particulars J.F. Amount Rs. Date 2005 Jan.31 Illustration 4 Particulars J.F. Date Particulars J.F. Date Particulars J.F. Date Particulars J.F.
112
Cr. Amount Rs.
Cash
Cr. Amount Rs.
Cash
Cr. Amount Rs.
Cash
Bank
Prepare double column cash book of M/s Advance Technology Pvt. Ltd for the month of December 2005 from the following transactions : Date 2005 Dec. 01 Dec. Dec. Dec. Dec. Dec. Dec. Dec. Dec. 02 03 04 05 06 08 10 12 Details Amount Rs. 3,065 6,780 1,000 3,000 2,000 1,200 3,000 6,500 400 9,000
Cash in hand Cash at bank Cash paid to petty cashier Received cheque from Priya Cash sales Deposited into bank Priyas cheque deposited into bank Purchased furniture by cheque Paid trade expenses Cash sales
Recording of Transactions - II Dec. Dec. Dec. Dec. Dec. Dec. Dec. Dec. Dec. Dec. Dec. Dec. Dec. Dec. Dec. 13 15 16 17 19 21 22 23 24 25 26 27 28 29 30 Bank charges Dividend collected by bank Paid electric bill by cheque Cash purchases Paid for advertising Goods sold and received a cheque (deposited same day) Paid legal charges Drew from bank for personal use Paid establishment expenses Paid for printing of bill book Paid insurance premium by cheque Cash sales Paid salary by cheque Rent paid Commission received by cheque (deposited same day) Paid for charity by cheque 300 1,200 600 2,000 1,000 6,000 500 2,000 340 850 2,150 7,200 4,000 3,000 2,500 800
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Dec. 31 Solution
Books of Advance Technology Cash Book Dr. Date Particulars 2005 Dec. 01 03 04 05 06 12 15 21 27 30 L.F. Cash Rs. Bank Date Rs. 2005 Dec. 02 05 06 08 10 13 16 17 19 22 23 24 25 26 28 29 Particulars L.F. Cash Rs. Cr. Bank Rs.
Balance b/d Priya Sales Cash Cash Sales Dividend Sales Sales Commission
3,065 3,000 2,000 C C 9,000
6,780
1,200 3,000 1,200 6,000 7,200 2,500
Petty Cashier Bank C Bank C Furniture Trade expenses Bank charges Electric charges Purchases Advertisement Legal charges Drawings Establishment expenses Printing Insurance premium Salary Rent
1,000 1,200 3,000 6,500 400 300 600 2,000 1,000 500 2,000 340 850 2,150 4,000 3,000
Recording of Transactions - II 31 31 24,265 2006 Jan. 01 Balance b/d (ii) Ledger Posting Petty Cashiers Account Dr. Date 2005 Dec.02 Particulars J.F. Amount Rs. 1,000 Priyas Account Dr. Date Particulars J.F. Amount Rs. Date 2005 Dec. 03 Sales Account Dr. Date Particulars J.F. Amount Rs. Date 2005 Dec.04 Dec.12 Dec.21 Dec.27 Furniture Account Dr. Date 2005 Dec.08 Particulars J.F. Amount Rs. 6,500 Date Particulars J.F. Particulars J.F. Particulars J.F. Date Particulars J.F. 20,680 Charity Balance c/d
114 800 4,330
10,975
24,265 20,680
10,975
4,330
Cr. Amount Rs.
Cash
Cash
Cr. Amount Rs. 2,000 9,000 6,000 7,200
Cash Cash Bank Cash
Cr. Amount Rs.
Bank
Recording of Transactions - II Trade Expenses Account Dr. Date 2005 Dec.10 Particulars J.F. Amount Rs. 400 Bank Charges Account Dr. Date 2005 Dec.13 Particulars J.F. Amount Rs. 300 Dividend Account Dr. Date Particulars J.F. Amount Rs. Date 2005 Dec.15 Particulars J.F. Date Particulars J.F. Date Particulars J.F.
115
Cr. Amount Rs.
Cash
Cr. Amount Rs.
Bank
Bank
Electric Charges Account Dr. Date 2005 Dec.16 Particulars J.F. Amount Rs. 600 Purchases Account Dr. Date 2005 Dec. 17 Particulars J.F. Amount Rs. 2,000 Advertisement Account Dr. Date 2005 Dec. 19 Particulars J.F. Amount Rs. 1,000 Date Particulars J.F. Cr. Amount Rs. Date Particulars J.F. Cr. Amount Rs. Date Particulars J.F. Cr. Amount Rs.
Bank
Cash
Cash
Recording of Transactions - II Legal Charges Account Dr. Date 2005 Dec. 22 Particulars J.F. Amount Rs. 500 Drawings Account Dr. Date 2005 Dec. 24 Particulars J.F. Amount Rs. 2,000 Establishment Expenses Account Dr. Date 2005 Dec. 24 Particulars J.F. Amount Rs. 340 Printing Account Dr. Date 2005 Dec. 25 Particulars J.F. Amount Rs. 850 Date Particulars J.F. Date Particulars J.F. Date Particulars J.F. Date Particulars J.F.
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Cr. Amount Rs.
Cash
Cr. Amount Rs.
Bank
Cr. Amount Rs.
Cash
Cr. Amount Rs.
Cash
Insurance Premium Account Dr. Date 2005 Dec. 26 Particulars J.F. Amount Rs. 2,150 Salary Account Dr. Date 2005 Dec. 28 Particulars J.F. Amount Rs. 4,000 Date Particulars J.F. Cr. Amount Rs. Date Particulars J.F. Cr. Amount Rs.
Bank
Bank
Recording of Transactions - II Rent Account Dr. Date 2005 Dec. 29 Particulars J.F. Amount Rs. 3,000 Commission Received Account Dr. Date Particulars J.F. Amount Rs. Date 2005 Dec. 30 Charity Dr. Date 2005 Dec. 31 Particulars J.F. Amount Rs. 800 Date Particulars J.F. Account Particulars J.F. Date Particulars J.F.
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Cr. Amount Rs.
Cash
Bank
Cr. Amount Rs.
Bank
4.2 Purchases (Journal) Book All credit purchases of goods are recorded in the purchases journal whereas cash purchases are recorded in the cash book. Other purchases such as purchases of office equipment, furniture, building, are recoded in the journal proper if purchased on credit or in the cash book if purchased for cash. The source documents for recording entries in the book are invoices or bills received by the firm from the supplies of the goods. Entries are made with the net amount of the invoice. Trade discount and other details of the invoice need not be recorded in this book. The format of the purchases journal is shown in figure 4.6.
Purchases (Journal) Book Date Invoice No. Name of Supplier (Account to be credited) L.F. Amount Rs.
Fig. 4.6 : Format of purchases (journal) book
The monthly total of the purchases book is posted to the debit of purchases account in the ledger. Individual suppliers accounts may be posted daily. Consider the following details obtained from M/s Kanika Traders and observe how the entries are recorded in the purchase journal.
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Date Details 2005 Aug. 04 Purchased from M/s Neema Electronics (invoice no. 3250): 20 Mini-size T.V. @ Rs.2,000 per piece, 15 Tape recorders @ Rs. 12,500 per piece. Trade discount on all items @ 20%. Aug. 10 Bought from M/s Pawan Electronics (invoice no. 8260): 10 Video cassettes @ Rs. 150 per piece, 20 Tape recorders @ Rs. 1,650 per piece. Trade discout @ 10% on purchases. Aug. 18 Purchased from M/s. Northern Electronics (invoice no. 4256): 15 Northern stereos @ Rs. 4,000 per piece, 20 Northern colour T.V. @ Rs. 14,500 per piece. Trade discount @ 12.5%. Aug. 26 Purchased form M/s Neema Electronics (Invoice No. 3294): 10 Mini-size T.V. @ Rs. 1,000 per piece, 5 Colour T.V. @ Rs. 12,500 per piece. Trade discount @ 20%. Aug. 29 Bought from M/s Pawan Electronics: (Invoice No. 8281) 20 Video cassettes @ 150 per piece 25 Tape recorders @ Rs. 1,600 per piece. Trade discount @ 10% on purchases. Books of Kanika Traders Purchases (Journal) Book Date 2005 Aug.04 Aug.10 Aug.18 Aug.26 Aug.29 Aug.31 Invoice No. 3250 8260 4256 3294 8281 Name of Supplier (Account to be credited) Neema Electronics Pawan Electronics Northern Electronics Neema Electronics Pawan Electronics L.F. Amount Rs. 1,82,000 31,050 3,06,250 54,000 38,700 6,12,000
Posting from the purchases journal is done daily to their respective accounts with the relevant amounts on the credit side. The total of the purchases journal is periodically posted to the debit of the purchases account normally on the monthly basis. However, if the number of transactions is very large, this total may be done and posted at some other convenient time interval such as daily, weekly or fortnightly. The posting from the purchases journal to the ledger from is illustrated as follows:
Books of Kanika Electronics Neema Electronics Dr. Date Particulars J.F. Amount Rs. Date 2005 Aug.04 Aug. 26 Particulars J.F. Cr. Amount Rs. 1,82,000 54,000
Purchases Purchases
Recording of Transactions - II Pawan Electronics Dr. Date Particulars J.F. Amount Rs. Date 2005 Aug. 10 Aug. 29 Northern Electronics Dr. Date Particulars J.F. Amount Rs. Date 2005 Aug.18 Purchases Account Dr. Date 2005 Aug. 31 Particulars J.F. Amount Rs. 6,12,000 Date Particulars J.F. Particulars J.F. Particulars J.F.
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Cr. Amount Rs. 31,050 38,700
Purchases Purchases
Purchases
Cr. Amount Rs.
Sundries as per Purchases Journal
4.3 Purchases Return (Journal) Book In this book, purchases return of goods are recorded. Sometimes goods purchased are returned to the supplier for various reasons such as the goods are not of the required quality, or are defective, etc. For every return, a debit note (in duplicate) is prepared and the original one is sent to the supplier for making necessary entries in his book. The supplier may also prepare a note, which is called the credit note. The source document for recording entries in the purchases return journal is generally a debit note. A debit note will contain the name of the party (to whom the goods have been returned) details of the goods returned and the reason for returning the goods. Each debit note is serially numbered and dated. The format of the purchases return journal is shown in figure 4.7(a).
Purchases Return (Journal) Book Date Debit Note No. Name of the Supplier (Account to be debited) L.F. Amount Rs.
Fig 4.7(a) : Format of Purchases return (journal)book
Recording of Transactions - II Box 2 Debit and Credit Notes
120
A Debit note is a document evidencing a debit to be raised against a party for reasons other than sale on credit. On finding that goods supplied are not as per the terms of the order placed, the defective goods are returned to the supplier of the goods and a note is prepared to debit the supplier; or when an additional sum is recoverable from a customer such a note is prepared to debit the customer with the additional dues. In these two situations the note is called a debit note (refer figure 4.7(b)). A Credit note is prepared, when a party is to be given a credit for reasons other than credit purchase. It is a common practice to make it in red ink. When goods are received back from a customer, a credit note should be sent to him. The suggested proforma of credit note is shown in figure 4.7(c).
Name of the Firm Issuing the Note
No.
Address of the Firm Date of Issue .........
DEBIT NOTE Against : Suppliers Name Goods returned as per delivery Amount (Rs) Challan No. (Details of goods returned) (Rupees ...........only) Signature of the Manager with date Fig. 4.7(b) : Showing a specimen of debit note Name of the Firm Issuing the Note
No.
Address of the Firm Date of Issue .........
CREDIT NOTE Against : Customers Name Goods returned by the customer Amount (Rs) Challan No. (Details of goods returned) (Rupees ...........only) Signature of the Manager with date Fig. 4.7(c) : Showing a specimen credit note
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Refer to the purchases (journal) book of Kanika Traders you will notice that 20 mini size T.V.s and 15 tape- recorders were bought from Neema Electronics for Rs. 1,82,000 However, on delivery 2 mini T.V.s and tape recorders were found defective and were returned back vide debit note no. 03/2005. In this case, the purchases return books will be prepared as follows :
Purchases Return (Journal) Book Date Debit Note No. 03/2005 Name of the Supplier (Account to be debited) Neema Electronics L.F. Amount Rs. 13,200 13,200
Posting from the purchases returns journal requires that the suppliers individual accounts are debited with the amount of returns and the purchases returns account is credited with the periodical total.
Neema Electronics Account Dr. Date Particulars Purchases Return J.F. Amount Rs. 13,200 Date Particulars J.F. Cr. Amount Rs.
Purchases Return Account Dr. Date Particulars J.F. Amount Rs. Date Particulars Sundries as per purchase returns book J.F. Cr. Amount Rs. 13,200
4.4 Sales (Journal) Book All credit sales of merchandise are recorded in the sales journal. Cash sales are recorded in the cash book. The format of the sales journal is similar to that of the purchases journal explained earlier. The source document for recording entries in the sales journal are sales invoice or bill issued by the firm to the customers. The date of sale, invoice number, name of the customer and amount of the invoice are recorded in the sales journal. Other details about the sales transaction including terms of payment are available in the invoice. In fact, two or more than two copies of a sales invoice are prepared for
122
each sale. The book keeper makes entries in the sales journal from one copy of the sales invoice. The format of the sales joournal is shown in figure 4.8. In the sales journal, one additional column may be added to record sales tax recovered from the customer and to be paid to the government within the stipulated time. Periodically, at the end of each month the amount column is total led and posted to the credit of sales account in the ledger. Posting to the debit side of individual customers accounts may be made daily.
Sales (Journal) Book Date Invoice No. Name of the Customer (Account to be debited) L.F. Amount Rs.
Fig. 4.8 : Format of sales (journal) cash book
For example M/s Koina Supplies sold on credit: (i) Two water purifiers @ Rs. 2,100 each and five buckets @ Rs 130 each to M/s Raman Traders (Invoice no. 178 dated April 06, 2005). (ii) Five road side containers @ Rs 4,200 each to M/s Nutan enterprises (Invoice no 180 dated April 09, 2005) . (iii) 100 big buckets @ Rs 850 each to M/s Raman traders (Invoice no. 209, dated April 28, 2005). The above stated transactions will be entered in a sales journal as follows:
Books of Koina Suppliers Sales (Journal) Book Date 2005 April 06 April 09 April 28 April 30 Invoice No. 178 180 209 Name of the customer (Account to be debited) Raman Traders Nutan Enterprises Raman Traders L.F. Amount Rs. 4,850 21,000 85,000 1,10,850
Posting from the sales journal are done to the debit of customers accounts kept in the ledger. Like the purchases journal, individual customers accounts are generally posted daily, with the amount involved. The sales journal is also totaled periodically (generally monthly), and this total is credited to sales account in the ledger. The sales (journal) book illustrated above will be posted in the related ledger account in the following manner:
Recording of Transactions - II Raman Traders Account Dr. Date 2005 Apr. 06 Apr. 28 Particulars J.F. Amount Rs. 4,850 85,000 Nutan Enterprises Account Dr. Date 2005 Apr.01 Particulars J.F. Amount Rs. 21,000 Sales Account Dr. Date Particulars J.F. Amount Rs. Date 2005 Apr. 30 Particulars J.F. Date Particulars J.F. Date Particulars J.F.
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Cr. Amount Rs.
Sales Sales
Cr. Amount Rs.
Sales
Sundries as per sales book
4.5 Sales Return (Journal) Book This journal is used to record return of goods by customers to them on credit. On receipt of goods from the customer, a credit note is prepared, like the debit note referred to earlier. The difference between the credit not and the debit note is that the former is prepared by the seller and the latter is prepared by the buyer. Like the debit note, the credit note is also prepared in duplicate and contains detail relating to the name of the customer, details of the merchandise received back and the amount. Each credit note is serially numbered and dated. The source document for recording entries in the sales return book is generally the credit note. The format of the sales return book is shown in figure 4.9
Sales Return (Journal) Book Date Credit No. Name of the customer (Account to be Credited) L.F. Amount Rs.
Fig. 4.9 : Format of sales return (journal) book
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Refer to the sales (journal) book of Koina Supplier of you will find that two water purifiers were sold to Raman Traders for Rs 2,100 each, out of which one purifier was returned back due to the manufacturing defect (credit note no. 10/2005). In this case, the sales return (Journal) book will be prepared as follows :
Sales Return (Journal) Book Date Credit Name of the customer No. (Account to be Credited) 10/2005 Raman Traders L.F. Amount Rs. 2,100 2,100
Posting to the sales return journal requires that the customers account be credited with the amount of returns and the sales return account be debited with the periodical total in the same way as is done in case of posting from the purchases journal.
Raman Traders Account Dr. Date Particulars J.F. Amount Rs. Date Particulars Sales Return Sales Return Account Dr. Date Particulars Sundries as per sales return book J.F. Amount Rs. 2,100 Date Particulars J.F. Cr. Amount Rs. J.F. Cr. Amount Rs. 2,100
Illustration 5 Enter the following transactions of M/s Hi-Life Fashions in purchases and purchases return book and post them to the ledger accounts for the month of September 2005: Date Sept. 01 Details Purchase of following goods on cr edit from M/s Ratna T raders, as per Invoice No.714: 25 Shirts @ Rs.300 per shirt 20 Pants @ Rs.700 per pant Less 10% trade discount Purchase of following goods on credit from M/s Bombay Fashion House, as per Invoice No.327 ;
Sept. 08
125
Sept. 10
Sept. 15
Sept. 20
Sept. 24
Sept. 28
10 Fancy Trousers @ Rs.500 per trouser 20 Fancy Hat @ Rs. 100 per hat Less 5% trade discount Goods returned to M/s Ratana Traders,as per debit note No.102 : 3 shirts @ Rs.300 per shirt 1 Pant @ Rs.700 per pant Less 10% trade discount Pur chase of following goods on credit from M/s Zolta Fashions, as per Invoice No.6781 : 10 Jackets @ Rs.1000 per jacket 5 Plain shirts Rs.200 per shirts Less 15% trade discount. Purchase of following goods on cr edit from M/s Bride Palace, as per Invoice No.1076 : 10 Fancy Lengha @ Rs.2,000 per lengha Less 5% trade discount. Goods returned to M/s Bombay Fashion House as per debit note No.103 : 2 Fancy Trousers @ Rs.500 per trouser 4 Fancy Hat @ Rs.100 per hat Less 5% trade discount. Goods returned to M/s Bride Palace as per debit note No.105 : 1 Fancy Lengha @ Rs.2,000 per lengha Less 5% trade discount.
Solution Books of Hi-life Fashions Purchases (Journal) Book Date 2005 Sept.01 Sept.08 Sept.15 Sept.20 Sept.30 Invoice No. 714 327 6781 1076 Name of the Supplier (Account to be credited) Ratana Traders Bombay Fashion House Zolta Fashions Bride Palace L.F. Amount Rs. 19,350 6,650 9,350 19,000 54,350
Purchases Return (Journal) Book Date 2005 Sept. Sept. Sept. Sept. Invoice No. 10 24 28 30 102 103 106 Name of the Supplier (Account to be debited) Ratana Traders Bombay Fashion House Bride Palace L.F. Amount Rs. 1,440 1,330 1,900 4,670
Recording of Transactions - II (ii) Ledger Posting Books of M/s Hi-Life Fashions Ratana Traders Account Dr. Date 2005 Sept. 10 Particulars J.F. Amount Rs. 1,440 Date 2005 Sept.01 Particulars J.F.
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Purchases return
Purchases
Bombay Fashion House Account Dr. Date 2005 Sept. 24 Particulars J.F. Amount Rs. 1,330 Date 2005 Sept. 08 Particulars J.F. Cr. Amount Rs. 6,650
Purchases return
Purchases
Zolta Fashions Account Dr. Date Particulars J.F. Amount Rs. Date 2005 Sept. 15 Bride Palace Account Dr. Date 2005 Sept. 28 Particulars J.F. Amount Rs. 1,900 Date Particulars J.F. Cr. Amount Rs. 19,000 Particulars J.F. Cr. Amount Rs. 9,350
Purchases
Purchases return
Sept. 20
Purchases
Purchases Account Dr. Date 2005 Sept. 30 Particulars J.F. Amount Rs. 54,350 Date Particulars J.F. Cr. Amount Rs.
Sundries as per purchases journal
Recording of Transactions - II Purchases Return Account Dr. Date Particulars J.F. Amount Rs. Date 2005 Sept. 30 Particulars J.F.
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Sundries as per purchases return book
Illustration 6 Enter the following transactions in the Sales and Sales Return book of M/s Vineet Stores: Date Dec.01. Details Sold goods on credit to M/s Rohit Stores as per invoice no.325 : 30 Kids Books @ Rs. 60 each. 20 Animal Books @ Rs. 50 each Sold goods on credit to M/s Mera Stores as per invoice no.328 : 100 Greeting Cards @ Rs.12 each. 50 Musical Cards @ Rs. 50 each Less 5% trade discount. Sold Goods on credit to M/s Mega Stationers as per invoice no.329 : 50 Writing Pads @ Rs. 20 each. 50 Colour Books @ Rs. 30 each 20 Ink Pads @ 16 each Goods Returned from M/s Rohit Stores as per credit note no.201: 2 Kids Books @ Rs. 60 each 1 Animal Book @ Rs. 50 each Sold goods on credit to M/s Abha Traders as per invoice no.355 : 100 Cards Books @ Rs. 10 each. 50 Note Books @ Rs. 35 each Less 5% trade discount. Goods returned from M/s Mega Stationers as per credit note no.204: 2 Colour Books @ Rs. 30 each Sold goods on credit to M/s Bharti Stores as per invoice no.325 : 100 Greeting Cards @ Rs. 20 each. 100 Fancy Envelopes @ Rs. 5 each Goods returned from M/s Abha Traders as per credit note no.207 : 20 Cards Books @ Rs. 10 each 5 Note Book@ Rs. 35 each Less 5% trade discount
Dec. 05
Dec. 10
Dec. 15
Dec. 19
Dec. 22 Dec. 26
Dec. 30
Recording of Transactions - II Solution Books of Veneet Stores Sales (Journal) Book Date 2005 Dec.01 Dec.05 Dec.10 Dec.19 Dec.26 Dec. 31 Invoice No. Name of the Customer (Account to be debited) J.F.
128
Amount Rs. 2,800 3,515 2,820 2,375 2,500 14,010
325 Rohit Stores 328 Mera Stores 329 Mega Stationers 335 Abha Traders 340 Bharti Stores
Sales Return (Journal) Book Date 2005 Dec. 15 Dec. 22 Dec. 30 Dec. 31 Credit Note No. 201 204 206 Name of the Customer (Account to be credited) Rohit Stores Mega Stationers Abha Traders L.F. Amount Rs. 170 150 333 653
(ii) Ledger Posting Rohit Stores Account Dr. Date 2005 Dec. 01 Particulars J.F. Amount Rs. 2800 Date 2005 Dec.15 Particulars J.F. Cr. Amount Rs. 170
Sales
Sales return
Mera Stores Account Dr. Date 2005 Dec. 05 Particulars J.F. Amount Rs. 3,515 Mega Stationers Account Dr. Date 2005 Dec.10 Particulars J.F. Amount Rs. 2,820 Date 2005 Dec.22 Particulars J.F. Cr. Amount Rs. 150 Date Particulars J.F. Cr. Amount Rs.
Sales
Sales
Sales return
Recording of Transactions - II Abha Traders Account Dr. Date 2005 Dec.19 Particulars J.F. Amount Rs. 2,375 Date Particulars J.F.
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Cr. Amount Rs. 333
Sales
Dec.30
Sales return
Bharti Stores Account Dr. Date 2005 Dec.26 Particulars J.F. Amount Rs. 2,500 Sales Account Dr. Date 2005 Dec. 31 Sundries as per sales book 14,010 Particulars J.F. Amount Rs. Date Particulars J.F. Cr. Amount Rs. Date Particulars J.F. Cr. Amount Rs.
Sales
Sales Return Account Dr. Date 2005 Dec.31 Particulars Sundries as per sales return book J.F. Amount Rs. 653 Date Particulars J.F. Cr. Amount Rs.
4.6 Journal Proper A book maintained to record transactions, which do not find place in special journals, is known as Journal Proper or Journal Residual. Following transactions are recorded in this journal: 1. Opening Entry: In order to open new set of books in the beginning of new accounting year and record therein opening balances of assets, liabilities and capital, the opening entry is made in the journal. 2. Adjustment Entries: In order to update ledger account on accrual basis, such entries are made at the end of the accounting period. Such as Rent outstanding, Prepaid insurance, Depreciation and Commission received in advance.
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3. Rectification entries: To rectify errors in recording transactions in the books of original entry and their posting to ledger accounts this journal is used. 4. Transfer entries: Drawing account is transferred to capital account at the end of the accounting year. Expenses accounts and revenue accounts which are not balanced at the time of balancing are opened to record specific transactions. Accounts relating to operation of business such as Sales, Purchases, Opening Stock, Income, Gains and Expenses etc and drawing are closed at the end of the year and their Total/balances are transferred to Trading and Profit and Loss account by recording the journal entries. These are also called closing entries. 5. Other entries: In addition to the above mentioned entries in the points number 1 to 4, recording of the following transaction is done in the journal proper : (i) At the time of a dishonour of a cheque the entry for cancellation for discount received or discount allowed earlier. (ii) Purchase/sale of items on credit other than goods. (iii) Goods withdrawn by the owner for personal use. (iv) Goods distributed as samples for sales promotion. (v) Endorsement and dishonour of bills of exchange. (vi) Transaction in respect of consignment and joint venture, etc. (vii) Loss of goods by fire/theft/spoilage.
Test Your Understanding - I Select the Correct Answer (a) When a firm maintains a cash book, it need not maintain ; (i) Journal Proper (ii) Purchases (journal) book (iii) Sales (journal) book (iv) Bank and cash account in the ledger (b) (i) (ii) (iii) (iv) (c) Double column cash book records: All transactions Cash and bank transactions Only cash transactions Only credit transactions
Goods purchased on cash are recorded in the : (i) Purchases (journal) book (ii) Sales (journal) book (iii) Cash book (iv) Purchases return (journal)book
Recording of Transactions - II (d) (i) (ii) (iii) (iv) (e) Cash book does not record transaction of : Cash nature Credit nature Cash and credit nature None of these
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Total of these transactions is posted in purchase account : (i) Purchase of furniture (ii) Cash and credit purchase (iii) Purchases return (iv) Purchase of stationery The periodic total of sales return journal is posted to : (i) Sales account (ii) Goods account (iii) Purchases return account (iv) Sales return account
(f)
(g) (i) (ii) (iii) (iv) (h)
Credit balance of bank account in cash book shows : Overdraft Cash deposited in our bank Cash withdrawn from bank None of these
The periodic total of purchases return journal is posted to : (i) Purchase account (ii) Profit and loss account (iii) Purchase returns account (iv) Furniture account
(i)
Balancing of account means : (i) Total of debit side (ii) Total of credit side (iii) Difference in total of debit & credit (iv) None of these
4.7 Balancing the Accounts Accounts in the ledger are periodically balanced, generally at the end of the accounting period, with the object of ascertaining the net position of each amount. Balancing of an account means that the two sides are totaled and the difference between them is shown on the side, which is shorter in order to make their totals equal. The words balance c/d are written against the amount of the difference between the two sides. The amount of balance is brought (b/d) down in the next accounting period indicating that it is a continuing account, till finally settled or closed. In case the debit side exceeds the credit side, the difference is written on the credit side, if the credit side exceeds the debit side, the difference between
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the two appears on the debit side and is called debit and credit balance respectively. The accounts of expenses losses and gains/revenues are not balanced but are closed by transferring to trading and profit and loss account. The balancing of the an account is illustrated below with the help of an example explaining the complete process of recording the transactions, posting to ledger and balancing there of.
Date 2005 Apr. 01 Apr.02 Apr. 02 Apr.l 03 Apr. 04 Details Commenced business with cash Rs. 1,00,000. Deposited in bank Rs. 40,000. Purchased for cash furniture Rs. 6,000; Land Rs. 42,000. Paid cheque to M/s Malika & Brothers for purchase of electric wires and plugs Rs. 17,000. Bought of M/s Handa Co. vide invoice no. 544: (i) 28 Immersion Heaters 1,000 Watt of Smg. Ltd. @ Rs. 50, and (ii) 40 Tube lights @ Rs.35. trade discount @ 12.5%. Purchased stationery for cash Rs. 2,300. Loan from M/s Dayal Traders. @ 6% Rs. 25,000 and deposited money in the bank on the next day. Paid cartage Rs. 80 and other charges Rs. 20. Bought of M/s Burari. Ltd. on account vide Invoice No. 125: (i) 50 Table lamps (Universal) @ Rs. 80 : (ii) 20 Electric kettles (General) @ Rs. 125. (iii) 5 Electric iron@ Rs. 300. trade discount 20%. Sales to M/s Ramneek on account vide invoice no. 871: (i) 10 Immersion heaters1000 watt @ Rs. 60. (ii) 5 Table lamps @ Rs. 100: (iii) 2 Electric irons @ 320. Sales to M/s Kapadia on credit vide invoice no. 880 (i) 15 Immersion heaters @ 60: (ii) 15 Tube lights @ Rs. 38. Return inwards from Ramneek : (i) 2 Immersion heaters, (ii) 1 Electric iron. Paid rent by cheque Rs. 4,000. Purchased from M/s Rungta. for cash: (i) 5 Immersion heaters 1000 watt @ Rs. 45. Returned goods to Burari Ltd. : (i) 3 Table lamps (Universal) (ii) 2 Electric kettles (iii) 1 Electric iron.
Apr.l 04 Apr. 05 Apr. 05 Apr. 06
Apr. 07
Apr. 08
Apr. 10
Apr. 11 Apr. 11 Apr. 12
Recording of Transactions - II Apr. 15 Apr. 16 Apr. 18 Apr. 19
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Apr. 20 Apr. 21 Apr. 21
Apr. 23 Apr. 23 Apr. 24 Apr. 25 Apr. 25 Apr. 26 Apr. 27
Apr. Apr. Apr. Apr. Apr.
28 30 30 30 30
Purchased on account furniture from quality Furniture Ltd. Rs. 8,000. Paid for advertisement Rs. 1,200. Sales to M/s Daman on account vide invoice no. 902: (i) 10 Electric kettles (General) @ Rs. 130. Purchased from M/s Kochhar Co. on credit vide invoice no.205: (i) 25 Electric Mixers @ Rs. 600. (ii) 40 Electric irons (Special) @ Rs. 540. trade discount 20%. Sales to M/s Ramneek on account vide bill no.925: 4 Electric Mixers @ Rs. 600. Received cheque of Rs.3,700 from M/s Ramneek for full and final settlement of claim. The cheque deposited in bank after two days. Purchased from M/s Burari Ltd. on credit vide invoice no.157: (i) 10 Electric kettles @ Rs. 125 (ii) 20 Electric lamps @ Rs. 80 trade discount @ 20%. Sales to M/s Nutan on account vide invoice no.958: (i) 2 Electric Mixers @ Rs. 600. Cash sales of Electric wires and plugs Rs. 14,500, cash discount allowed Rs. 200. Cash purchases from M/s Hitesh: (i) 5 Electric fans @ Rs. 740. Paid electricity bill Rs. 1,320. Made full and final payment to M/s Burari Ltd. by cheque discount allowed by them Rs. 320. Purchased stationery on account from M/s Mohit Mart Rs. 3,200. Sales to M/s Daman on account vide Invoice No. 981: (i) 15 Table lamps @ Rs. 100 (ii) 10 Immersion heaters 1000 watt @ Rs. 80. Deposited in bank Rs. 5,000. Withdrew Rs. 8,000 for personal use. Paid telephone bill Rs. 2700 by cheque. Paid insurance Rs. 1,600 by cheque. Paid to M/s Handa Co. Rs.2,450 by cheque; and Rs. 28,000 to M/s Kochhar and co. by cheque who allowed Rs. 1,280 as discount. Purchases (Journal) Book
Date 2005 Apr. 04 Apr. 06 Apr. 19 Apr. 21 Apr. 30
Invoice No. 544 125 205 157
Name of the Supplier (Account to be credited) Handa Co. Burari Ltd. Kochhar Co. Burari Ltd.
L.F.
Amount Rs. 2,450 6,400 29,280 2,280 40,410
Recording of Transactions - II Sales (Journal) Book Date 2005 Apr. 07 Apr. 08 Apr. 18 Apr. 20 Apr. 23 Apr. 27 Apr. 30 Purchases Return (Journal) Book Date 2005 Apr. 12 Apr. 30 Debit Name of the Supplier (Account to be debited) Burari Ltd. L.F. Invoice No. 871 880 902 925 958 981 Ramneek Kapadia Daman Ramneek Nutan Daman Name of the Supplier (Account to be credited) L.F.
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Amount Rs. 1,740 1,470 1,300 2,400 1,200 2,300 10,410
Amount
632 632
Sales Return (Journal) Book Date Apr. 10 Apr. 30 Credit Ramneek Name of the customer (Account to be credited) L.F. Amount Rs. 440 440 Journal Proper Date Particulars L.F. Debit Amount Rs. 8,000 8,000 320 320 3,200 3,200 1,280 1,280 12,800 12,800 Credit Amount Rs.
2005 Apr. 15
Apr. 25
Apr. 26
Apr. 30
Furniture A/c Dr. To Quality Furniture A/c (Purchase of furniture on credit) Burari Ltd A/c Dr. To Discount A/c (Discount received) Stationery A/c Dr. To Mohit Mart A/c (Purchase of Stationery items on credit) Kochhar A/c To Discount A/c (Discount received) Total
Recording of Transactions - II Cash Book Date Particulars L.F. 2005 Apr. 01 02 05 06 21 23 23 28 Cash Rs. Bank Date Rs. Particulars L.F. Cash Rs.
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Bank Rs.
Capital Cash 6% Loan Cash Ramneek Cash Sales Cash
C C C
2005 April 1,00,000 02 40,000 02 25,000 02 25,000 03 3,700 04 3,700 05 14,500 06 11 11 16 23 24 25 25 28 30 30 30 30 30 30
5,000
Bank Furniture Land Purchases Stationery Miscellaneous expenses Bank Rent Purchases Advertisement Bank Purchases Electric charges Burari Ltd. Bank Drawings Telephone charges Insurance Handa Co. Kochhar & Co. Balance c/d
40,000 6,000 42,000 17,000 2,300 100
25,000 4,000 225 1,200 3,700 3,700 1,320 7,728
5,000 8,000 2,700 1,600 2,450 28,000 4,655 10,222 1,43,200 73,700
30 May 01 Balance b/d
1,43,200 4,655
73,700 10,222
30
The recorded transactions will be posted in the ledger. Capital Account Dr. Date 2005 Apr.30 Particulars J.F. Amount Rs. 1,00,000 1,00,000 Date 2005 Apr.01 Particulars J.F. Cr. Amount Rs. 1,00,000 1,00,000
Balance c/d
Cash
Recording of Transactions - II 6% Loan Account Dr. Date 2005 Apr. 30 Particulars J.F. Amount Rs. 25,000 25,000 Date 2005 April 05 Particulars J.F.
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Cr. Amount Rs. 25,000 25,000
Balance c/d
Cash
Ramneeks Account Dr. Date 2005 Apr. 07 Apr. 20 Particulars J.F. Amount Rs. 1,740 2,400 4,140 Date 2005 April10 April21 Particulars J.F. Cr. Amount Rs. 440 3,700 4,140
Sales Sales
Sales return Cash
Sales Account Dr. Date Particulars J.F. Amount Rs. Date 2005 Apr. 23 Apr. 30 Particulars J.F. Cr. Amount Rs. 14,500 10,410 24,910 Furniture Account Dr. Date 2005 Apr. 02 Apr. 15 Particulars J.F. Amount Rs. 6,000 8,000 14,000 Date 2005 Apr. 30 Particulars J.F. Cr. Amount Rs. 14,000
Cash Sundries
Cash Quality Furniture
Balance c/d
14,000
Recording of Transactions - II Land Account Dr. Date 2005 Apr. 02 Particulars J.F. Amount Rs. 42,000 42,000 Date 2005 Apr.30 Particulars J.F.
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Cr. Amount Rs. 42,000 42,000
Cash
Balance c/d
Purchases Account Dr. Date 2005 Apr. 03 Apr. 11 Apr. 24 Apr. 30 Particulars J.F. Amount Rs. 17,000 225 3,700 40,410 61,335 Stationery Account Dr. Date 2005 Apr. 04 Apr. 26 Particulars J.F. Amount Rs. 2,300 3,200 5,500 Miscellaneous Expenses Account Dr. Date 2005 Apr. 05 Particulars J.F. Amount Rs. 100 100 Date Particulars J.F. Cr. Amount Rs. Date Particulars J.F. Cr. Amount Rs. Date Particulars J.F. Cr. Amount Rs.
Bank Bank Cash Sundries
Cash Mohit mart
Cash
Recording of Transactions - II Rent Account Dr. Date 2005 Apr. 04 Particulars J.F. Amount Rs. 4,000 4,000 Advertisement Account Dr. Date 2005 Apr.16 Particulars J.F. Amount Rs. 1,200 1,200 Electric Charges Account Dr. Date 2005 Apr. 25 Particulars J.F. Amount Rs. 1,320 1,320 Drawings Account Dr. Date 2005 Apr. 30 Particulars J.F. Amount Rs. 8,000 8,000 Telephone Charges Account Dr. Date 2005 Apr. 30 Particulars J.F. Amount Rs. 2,700 2,700 Date 2005 Bank Particulars J.F. Date Particulars J.F. Date Particulars J.F. Date Particulars J.F. Date Particulars J.F.
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Cr. Amount Rs.
Bank
Cr. Amount Rs.
Cash
Cr. Amount Rs.
Cash
Cr. Amount Rs.
Cash
Cr. Amount Rs.
Recording of Transactions - II Insurance Account Dr. Date 2005 Apr. 30 Particulars J.F. Amount Rs. 1,600 1,600 Quality Furniture Account Dr. Date 2005 Apr. 30 Particulars J.F. Amount Rs. 8,000 8,000 Date 2005 Apr. 15 Particulars J.F. Date Particulars J.F.
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Cr. Amount Rs.
Bank
Cr. Amount Rs. 8,000 8,000
Balance c/d
Furniture
Mohit Mart Account Dr. Date 2005 Apr. 30 Particulars J.F. Amount Rs. 3,200 3,200 Date 2005 Apr. 26 Particulars J.F. Cr. Amount Rs. 3,200 3,200
Balance c/d
Stationery
Purchases Return Account Dr. Date Particulars J.F. Amount Rs. Date 2005 Apr. 30 Particulars J.F. Cr. Amount Rs. 632 632 Handa Company Account Dr. Date 2005 Apr. 30 Particulars J.F. Amount Rs. 2,450 2,450 Date 2005 Apr. 04 Particulars J.F. Cr. Amount Rs. 2,450 2,450
Sundries
Bank
Purchases
Recording of Transactions - II Burari Ltd. Account Dr. Date 2005 Apr. 12 Apr. 25 Particulars J.F. Amount Rs. 632 7,728 320 8,680 Date 2005 Apr. 06 Apr. 21 Particulars J.F.
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Cr. Amount Rs. 6,400 2,280 8,680
Purchases return Bank Discount
Purchases Purchases
Kochhar Account Dr. Date 2005 Apr. 30 Particulars J.F. Amount Rs. 28,000 1,280 29,280 Date 2005 Apr. 19 Particulars J.F. Cr. Amount Rs. 29,280 29,280
Bank Discount
Purchases
Sales Return Account Dr. Date 2005 Apr. 30 Particulars J.F. Amount Rs. 440 440 Date 2005 Apr. 30 Particulars J.F. Cr. Amount Rs.
Sundries .
Kapadia Account Dr. Date 2005 Apr. 08 Particulars J.F. Amount Rs. 1,470 1,470 Date 2005 Apr. 30 Particulars J.F. Cr. Amount Rs. 1,470 1,470
Sales
Balance c/d
Daman Account Dr. Date 2005 Apr. 18 Apr. 27 Particulars J.F. Amount Rs. 1,300 2,300 3,600 Date 2005 Apr. 30 Particulars J.F. Cr. Amount Rs. 3,600 3,600
Sales Sales
Balance c/d
Recording of Transactions - II Nutan Account Dr. Date 2005 Apr. 23 Particulars J.F. Amount Rs. 1,200 1,200 Date 2005 Apr. 30 Particulars J.F.
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Cr. Amount Rs. 1,200 1,200
Sales
Balance c/d
Discount Received Account Dr. Date Particulars J.F. Amount Rs. Date 2005 Apr. 25 Apr. 30 Particulars J.F. Cr. Amount Rs. 320 1,280 1,600
Burari Ltd Kochhar
Test Your Understanding - II 1. Fill in the Correct Words : (a) Cash book is a ......... journal. (b) In Journal proper, only.........discount is recorded. (c) Return of goods purchased on credit to the suppliers will be entered in ...... Journal. (d) Assets sold on credit are entered in ......... (e) Double column cash book records transaction relating to .........and ......... (f) Total of the debit side of cash book is .........than the credit side. (g) Cash book does not record the .........transactions. (h) In double column cash book .........transactions are also recorded. (i) Credit balance shown by a bank column in cash book is ......... (j) The amount paid to the petty cashier at the beginning of a period is known as .........amount. (k) In purchase book goods purchased on .........are recorded. 2. State whether the following statements are True or False : (a) Journal is a book of secondary entry. (b) One debit account and more than one credit account in a entry is called compound entry. (c) Assets sold on credit are entered in sales journal. (d) Cash and credit purchases are entered in purchasejJournal. (e) Cash sales are entered in sales journal. (f) Cash book records transactions relating to receipts and payments. (g) Ledger is a subsidiary book. (h) Petty cash book is a book having record of big payments.
Recording of Transactions - II (i) (j) (k) (l)
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Cash received is entered on the debit side of cash book. Transaction recorded both on debit and credit side of cash book is known as contra entry. Balancing of account means total of debit and credit side. Credit purchase of machine is entered in purchase journal.
Key Terms Introduced in the Chapter Posting Day books Cash book Petty Cash book Sales return (Journal) Book Sales (Journal) Book Balancing of Accounts Purchase (Journal) book Purchases return (Journal) Book
Summary with Reference to Learning Objectives 1. 2. 3. 4. 5. 6. 7. Journal : Basic book of original entry. Cash book : A book used to record all cash receipts and payments. Petty cash book : A book used to record small cash payments. Purchase journal : A special journal in which only credit purchases are recorded Sales journal : A special journal in which only credit sales are recorded Purchases Return Book : A book in which return of merchandise purchased is recorded. Sales Return Book : A special book in which returns of merchandise sold on credit are recorded. Questions For Practice Short Answers 1. Briefly state how the cash book is both journal and a ledger. 2. What is the purpose of contra entry? 3. What are special purpose books? 4. What is petty cash book? How it is prepared? 5. Explain the meaning of posting of journal entries? 6. Define the purpose of maintaining subsidiary journal. 7. Write the difference between return Inwards and return ouwards. 8. What do you understand by ledger folio? 9. What is difference between trade discount and cash discount? 10. Write the process of preparing ledger from a journal. 11. What do you understand by Imprest amount in petty cash book? Long Answers 1. 2. 3. Explain the need for drawing up the special purpose books. What is cash book? Explain the types of cash book. What is contra entry? How can you deal this entry while preparing double column cash book?
Recording of Transactions - II 4. 5. 6. What is petty cash book? Write the advantages of petty cash book? Describe the advantages of sub-dividing the Journal. What do you understand by balancing of account? Numerical Questions Simple Cash Book 1. Enter the following transactions in a simple cash book for December 2005: Rs. 01 Cash in hand 12,000 05 Cash received from Bhanu 4,000 07 Rent Paid 2,000 10 Purchased goods Murari for cash 6,000 15 Sold goods for cash 9,000 18 Purchase stationery 300 22 Cash paid to Rahul on account 2,000 28 Paid salary 1,000 30 Paid rent 500 (Ans. Cash in hand Rs. 13,200) 2. Record the following transaction in simple cash book for November 2005: Rs 01 Cash in hand 12,500 04 Cash paid to Hari 600 07 Purchased goods 800 12 Cash received from Amit 1,960 16 Sold goods for cash 800 20 Paid to Manish 590 25 Paid cartage 100 31 Paid salary 1,000 (Ans. Cash in hand Rs. 12,170) 3. Enter the following transaction in Simple cash book for December 2005 : Rs. 01 Cash in hand 7,750 06 Paid to Sonu 45 08 Purchased goods 600 15 Received cash from Parkash 960 20 Cash sales 500 25 Paid to S.Kumar 1,200 30 Paid rent 600 (Ans. Cash in hand Rs. 6,765)
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Bank Column Cash Book 4. Record the following transactions in a bank column cash book for December 2005: Rs. 01 Started business with cash 80,000 04 Deposited in bank 50,000
Recording of Transactions - II 10 15 22 25 30 31 (Ans. 5. Received cash from Rahul Bought goods for cash Bought goods by cheque Paid to Shyam by cash Drew from Bank for office use Rent paid by cheque Cash in hand Rs. 5,000: cash at bank Rs. 37,000) 1,000 8,000 10,000 20,000 2,000 1,000
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Prepare a double column cash book with the help of following information for December 2005 : 01 03 05 06 10 14 18 20 22 27 30 (Ans. Rs. Started business with cash 1,20,000 Cash paid into bank 50,000 Purchased goods from Sushmita 20,000 Sold goods to Dinker and received a cheque 20,000 Paid to Sushmita cash 20,000 Cheque received on December 06, 2005 deposited into bank Sold goods to Rani 12,000 Cartage paid in cash 500 Received cash from Rani 12,000 Commission received 5,000 Drew cash for personal use 2,000 Cash in hand Rs. 64,500 : Cash at bank Rs. 70,000)
6.
Enter the following transactions in double column cash book of M/s Ambica Traders for November 2005: 01 03 05 10 15 18 20 22 25 30 (Ans. Commenced business with cash Opened bank account with ICICI Purchased goods for cash Purchased office machine for cash Sales goods on credit from Rohan and received chaeque Cash sales Rohans cheque deposited into bank Paid cartage by cheque Cash withdrawn for personal use Paid rent by cheque Cash in hand Rs. 11,000, Cash at bank Rs. 35,500) Rs. 50,000 30,000 10,000 5,000 7,000 8,000 500 2,000 1,000
7.
Prepare double column cash book from the following information for September 2005: 01 03 05 10 15 20 Cash In hand Bank overdraft Paid wages Cash sales Cash deposited into bank Goods purchased and paid by cheque Paid rent Rs. 7,500 3,500 200 7,000 4,000 2,000 500
Recording of Transactions - II 25 Drew from bank for personal use 30 Salary paid (Ans. Cash in hand Rs. 8,800, Bank overdraft Rs. 1,900) 8. 400 1,000
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Enter the following transaction in a double column cash book of M/s.Mohit Traders for January 2005 : Cash in hand Bank overdraft 03 Goods purchased for cash 05 Paid wages 10 Cash sales 15 Deposited into bank 22 Sold goods for cheque which was deposited into bank same day 25 Paid rent by cheque 28 Drew from bank for personal use 31 Bought goods by cheque (Ans. Cash in hand Rs. 4,100 Cash at bank Rs. 2,500) 01 Rs. 3,500 2,300 1,200 200 8,000 6,000 2,000 1,200 1,000 1,000
9.
Prepare double column cash book from the following transactions for the year December 2005: Cash in hand Cash at bank 03 Purchased goods for cash 05 Received cheque from Jasmeet 08 Sold goods for cash 10 Jasmeets cheque deposited into bank 12 Purchased goods and paid by cheque 15 Paid establishment expenses through bank 18 Cash sales 20 Deposited into bank 24 Paid trade expenses 27 Received commission by cheque 29 Paid Rent 30 Withdrew cash for personal use 31 Salary paid (Ans. Cash in hand Rs. 8,800 cash at bank Rs. 10,000) 01 Rs. 17,500 5,000 3,000 10,000 7,000 20,000 1,000 7,000 10,000 500 6,000 2,000 1,200 6,000
10.
M/s Ruchi trader started their cash book with the following balances on Dec. 01 2005 : cash in hand Rs.1,354 and balance in bank current account Rs.7560. He had the following transaction in the month of December, 2005: 03 05 08 12 15 18 Cash sales Purchased goods, paid by cheque Cash sales Paid trade expenses Sales goods, received cheque(deposited same day) Purchased motor car paid by cheque Rs. 2,300 6,000 10,000 700 20,000 15,000
Recording of Transactions - II 20 22 25 28 29 31 Cheque received from Manisha(deposited same day) Cash Sales Manishas cheque returned dishonoured Paid Rent Paid telephone expenses by cheque Cash withdrawn for personal use Prepare bank column cash book (Ans. Cash in hand Rs. 15,954 cash at bank Rs. 6,060) Petty Cash Book 11. Prepare petty cash book from the following transactions. The imprest amount is Rs.2,000. Rs. January 01 Paid cartage 50 02 STD charges 40 02 Bus fare 20 03 Postage 30 04 Refreshment for employees 80 06 Courier charges 30 08 Refreshment of customer 50 10 Cartage 35 15 Taxi fare to manager 70 18 Stationery 65 20 Bus fare 10 22 Fax charges 30 25 Telegrams charges 35 27 Postage stamps 200 29 Repair on furniture 105 30 Laundry expenses 115 31 Miscellaneous expenses 100 (Ans. Cash balance Rs. 925) Record the following transactions during the week ending Dec.30, 2005 with a weekly imprest Rs. 500 24 25 25 26 27 29 (Ans. Stationery Bus fare Cartage Taxi fare Wages to casual labour Postage Cash balance Rs. 98) Rs. 100 12 40 80 90 80 10,000 7,000 2,000 500 2,000
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12.
Other Subsidiary Books 13. Enter the following transactions in the Purchase Journal (Book) of M/s Gupta Traders of July 2005 :
Recording of Transactions - II 01 Bought from Rahul Traders as per invoice no.20041 40 Registers @ Rs.60 each 80 Gel Pens @ Rs.15 each 50 note books @ Rs.20 each Trade discount 10%. Bought from Global Stationers as per invoice no.1132 40 Ink Pads @ Rs.8 each 50 Files @ Rs.10 each 20 Color Books @ Rs. 20 each Trade Discount 5% Purchased from Lamba Furniture as per invoice no.3201 2 Chairs @ 600 per chair 1 Table @ 1000 per table Bought from Mumbai Traders as per invoice no.1111 10 Paper Rim @ Rs.100 per rim 400 drawing Sheets @ Rs.3 each Packet water colour @ Rs.40 per packet
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15
23
25
20 14.
(Ans: Total of purchases book Rs. 8,299) Enter the following transactions in sales (journal) book of M/s.Bansal electronics: September 01 Sold to Amit Traders as per bill no.4321 20 Pocket Radio @ 70 per Radio 2, T.V. set, B&W.(6) @ 800 Per T.V. 10. Sold to Arun Electronics as per bill no.4351 5 T.V. sets (20) B&W @ Rs.3,000 per T.V. 2 T.V. sets (21) Colour @ Rs. 4,800 per T.V. 22 Sold to Handa Electronics as per bill no.4,399 10 Tape recorders @ Rs. 600 each 5 Walkman @ Rs. 300 each 28 Sold to Harish Trader as per bill no.4430 10 Mixer Juicer Grinder @ Rs. 800 each. (Ans. Total of sales book Rs. 43,100) Prepare a purchases return (journal) book from the following transactions for January 2006. Returned goods to M/s Kartik Traders Goods returned to Sahil Pvt. Ltd. Goods returned to M/s Kohinoor Traders. for list price Rs.2,000 less 10% trade discount. 28 Return outwards to M/s Handa Traders (Ans. Total of purchases return book Rs. 6,050) 05 10 17 Rs. 1,200 2,500
15.
550
Recording of Transactions - II 16. Prepare Return Inward Journal(Book) from the following transactions of M/s Bansal Electronics for November 2005: M/s Gupta Traders returned the goods Goods returned from M/s Harish Traders M/s Rahul Traders returned the goods not as per specifications 28 Goods returned from Sushil Traders (Ans : Total of sales return Rs. 4,500) Recording, Posting and Balancing 17. Prepare proper subsidiary books and post them to the ledger from the following transactions for the month of February 2006: 01 04 06 07 08 10 14 15 17 20 22 24 25 26 28 28 Ans 18. Rs. Goods sold to Sachin 5,000 Purchase from Kushal Traders 2,480 Sold goods to Manish Traders 2,100 Sachin returned goods 600 Returns to Kushal Traders 280 Sold to Mukesh 3,300 Purchased from Kunal Traders 5,200 Furniture purchased from Tarun 3,200 Bought of Naresh 4,060 Return to Kunal Traders 200 Return inwards from Mukesh 250 Purchased goods from Kirit & Co. for list price of 5,700 less 10% trade discount Sold to Shri Chand goods 6600 less 5% trade discount Sold to Ramesh Brothers 4,000 Return outwards to Kirit and Co. 1,000 less 10% trade discount Ramesh Brothers returned goods Rs. 500. : (Total of sales book Rs.20,670, purchases book Rs.16,870, Purchases return book Rs.1,380, sales return book Rs.1,350). 04 10 18 Rs. 1,500 800 1,200 1,000
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The following balances of ledger of M/s Marble Traders on April 01, 2006 Rs. Cash in hand 6,000 Cash at bank 12,000 Bills receivable 7,000 Ramesh (Cr.) 3,000 Stock (Goods) 5,400 Bills payable 2,000 Rahul (Dr.) 9,700 Himanshu (Dr.) 10,000
Recording of Transactions - II Transactions during the month were: April 01 Goods sold to Manish 02 Purchased goods from Ramesh 03 Received cash from Rahul in full settlement 05 Cash received from Himanshu on account 06 paid to Remesh by cheque 08 Rent paid by cheque 10 Cash received from manish 12 Cash sales 14 Goods returned to Ramesh 15 Cash paid to Ramesh in full settlement Discount received 18 Goods sold to Kushal 20 Paid trade expenses 21 Drew for personal use 22 Goods return from Kushal 24 Cash received from Kushal 26 Paid for stationery 27 Postage charges 28 Salary Paid 29 Goods purchased from Sheetal Traders 30 Sold goods to Kirit Goods purchased from Handa Traders Journlise the above transactions and post them to the ledger. Checklist to Test Your Understanding Test Your Understanding - I a. (iv) b. (ii) c. (iii) d. (ii) e. (ii) f. (iv) g .(ii) h. (iii) i. (iii)
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Rs. 3,000 8,000 9,200 4,000 6,000. 1,200 3,000 6,000 1,000 3,700 300 10,000 200 1,000 1,200 6,000 100 60 2,500 7,000 6000 5,000
Test Your Understanding - II 1. (a) subsidiary (e) cash, bank (i) overdraft (a) False (e) False (i) True (b) cash (f) more (j) imprest (b) True (f) True (j) True (c) purchases return (g) credit (k) credit (c) False (g) True (k) False (d) journal proper (h) bank (d) False (h) False (l) False
2.
Bank Reconciliation Statement
LEARNING OBJECTIVES
After studying this chapter, you will be able to : state the meaning and need for the preparation of bank reconciliation statement; identify causes of difference between bank balance as per cash book and pass book; prepare the bank reconciliation statement; ascertain the correct bank balance as per cash book;
n chapter 4, you have learnt that the business organisations keep a record of their cash and bank transactions in a cash book. The cash book also serves the purpose of both the cash account and the bank account and shows the balance of both at the end of the period. Once the cash book has been balanced, it is usual to check its details with the records of the firms bank transactions as recorded by the bank. To enable this check, the cashier needs to ensure that the cash book is completely up to date and a recent bank statement (or a bank passbook) has been obtained from the bank. A bank statement or a bank passbook is a copy of a bank account as shown by the bank records. This enable the bank customers to check their funds in the bank regularly and update their own records of transactions that have occurred. An illustrative bank passbook of a current account is shown in figure 5.1. The amount of balance shown in the passbook or the bank statement must tally with the balance as shown in the cash book. But in practice, these are usually found to be different. Hence, we have to ascertain the causes for such difference. It will be observed that a bank statement/passbook shows all deposits in the credit column and withdrawals in the debit column. Thus, if deposits exceed withdrawals it shows a credit balance and if withdrawals exceed deposits it will show a debit balance (overdraft).
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5.1 Need for Reconciliation It is generally experienced that when a comparison is made between the bank balance as shown in the firms cash book, the two balances do not tally. Hence, we have to first ascertain the causes of difference thereof and then reflect them in a statement called Bank Reconciliation Statement to reconcile (tally) the two balances. In order to prepare a bank reconciliation statement we need to have a bank balance as per the cash book and a bank statement as on a particular day along with details of both the books. If the two balances differ, the entries in both the books are compared and the items on account of which the difference has arisen are ascertained with the respective amounts involved so that the bank reconciliation statement may be prepared. Its format shown in figure 5.5.
Particulars Balance as per cash book Cheques issued but not presented Interest credited by the bank Cheques deposited but not credited by the bank Bank charges not recorded in the cash book Balance as per the passbook Fig. 5.2 : Proforma of bank reconciliation statement Amount Rs. ....... ....... ....... ....... ....... ....... xxxx
Add:
Less:
It can also be prepared with two amount columns one showing additions (+ column) and another showing deductions (-column). For convenience, we usually adopt this treatment.
Particulars Amount Rs. (+) ...... ...... ...... ...... ...... xxxx Amount Rs. ()
Balance as per cash book Cheques issued but not presented ` Interest credited by the bank Cheque deposited but not credited by the bank Bank charges not recorded in the cash book Balance as per the passbook.
Fig. 5.3 : Proforma of bank reconcitiation statement (table form)
DHERENDRA NATIONAL BANK CONNAUGHT PLACE
MULTI-MODULE PACKAGE STATEMENT OF ACCOUNT FROM 01/09/2005 TO 29/12/2005
DATE : 01/09/2005 OP.ID : GK PAGE NO. : 1
ACCOUNT NO. 03355 NAME : DEV PANDIT KHADWAI, RUNAKUTA, DELHI
PIN CODE : 110034 PARTICULARS CHEQUE No. Opening Balance : 356376 356377 10,673,00 9,143.00 356378 25,808.00 32,949.00 356381 356382 657755 356380 9,500,00 5,320.00 18,564.00 356383 356385 120.00 20,000.00 10,000.00 16,198.00 30,000.00 10,000.00 6,074.00 3,146.00 20,000.00 DELHI PLA TO SELF BY CLG BY CLG TO SELF BY CLG BY CLG To SELF DELHI PLASTIC ICICI BY CLG TO SELF BY CLG BY CLG TO SERVICE CHARGES TO SELF TO SELF BY CLG 35,000.00 10,000.00 15,782.30 5,782.30 16,455,30 25,598.30 5,598.30 31,406.30 64,355,30 34,355.30 24,355.30 18,281.30 21,427.30 11,927.30 17,247.30 35,811.30 35,691.30 15,691.30 5,691.30 21,889.30 50,782.30 DEBIT Rs. P. CREDIT Rs. P. BALANCE + REMARKS Rs. P. + + + + + + + + + + + + + + + + + + +
DATE
04/08/2005 07/08/2005 13/08/2005 13/08/2005 17/08/2005 21/08/2005 26/08/2005 02/09/2005 04/09/2005 08/09/2005 09/09/2005 13/09/2005 15/09/2005 15/09/2005 16/09/2005 21/09/2005 25/09/2005 27/09/2005
FOR DHERENDRA NATIONAL BANK ACCOUNTANT/MANAGER
Fig. 5.1 : Specimen of bank statement (current account)
152
153
Reconciliation of the cash book and the bank passbook balances amounts to an explanation of differences between them. The differences between the cash book and the bank passbook is caused by: timing differences on recording of the transactions. errors made by the business or by the bank. 5.1.1 Timing Differences When a business compares the balance of its cash book with the balance shown by the bank passbook, there is often a difference, which is caused by the time gap in recording the transactions relating either to payments or receipts. The factors affecting time gap includes : 5.1.1(a) Cheques issued by the bank but not yet presented for payment When cheques are issued by the firm to suppliers or creditors of the firm, these are immediately entered on the credit side of the cash book. However, the receiving party may not present the cheque to the bank for payment immediately. The bank will debit the firms account only when these cheques are actually paid by the bank. Hence, there is a time lag between the issue of a cheque and its presentation to the bank which may cause the difference between the two balances. 5.1.1(b) Cheques paid into the bank but not yet collected When firm receives cheques from its customers (debtors), they are immediately recorded in the debit side of the cash book. This increases the bank balance as per the cash book. However, the bank credits the customer account only when the amount of cheques are actually realised. The clearing of cheques generally takes few days especially in case of outstation cheques or when the cheques are paid-in at a bank branch other than the one at which the account of the firm is maintained. This leads to a cause of difference between the bank balance shown by the cash book and the balance shown by the bank passbook. 5.1.1(c) Direct debits made by the bank on behalf of the customer Sometimes, the bank deducts amount for various services from the account without the firms knowledge. The firm comes to know about it only when the bank statement arrives. Examples of such deductions include: cheque collection charges, incidental charges, interest on overdraft, unpaid cheques deducted by the bank i.e. stopped or bounced, etc. As a result, the balance as per passbook will be less than the balance as per cash book.
154
5.1.1(d) Amounts directly deposited in the bank account There are instances when debtors(customers) directly deposits money into firms bank account. But, the firm does not receive the intimation from any source till it receives the bank statement. In this case, the bank records the receipts in the firms account at the bank but the same is not recorded in the firms cash book. As a result, the balance shown in the bank passbook will be more than the balance shown in the firms cash book. 5.1.1(e) Interest and dividends collected by the bank When the bank collects interest and dividend on behalf of the customer, then these are immediately credited to the customers account. But the firm will know about these transactions and record the same in the cash book only when it receives a bank statement. Till then the balances as per the cash book and passbook will differ. 5.1.1(f) Direct payments made by the bank on behalf of the customers Sometimes the customers give standing instructions to the bank to make some payment regularly on stated days to the third parties. For example, telephone bills, insurance premium, rent, taxes, etc. are directly paid by the bank on behalf of the customer and debited to the account. As a result, the balance as per the bank passbook would be less than the one shown in the cash book. 5.1.1(g) Cheques deposited/bills discounted dishonoured If a cheque deposited by the firm is dishonoured or a bill of exchange drawn by the business firm is discounted with the bank is dishonoured on the date of maturity, the same is debited to customers account by the bank. As this information is not available to the firm immediately, there will be no entry in the firms cash book regarding the above items. This will be known to the firm when it receives a statement from the bank. As a result, the balance as per the passbook would be less than the cash book balance. 5.1.2 Differences Caused by Errors Sometimes the difference between the two balances may be accounted for by an error on the part of the bank or an error in the cash book of the business. This causes difference between the bank balance shown by the cash book and the balance shown by the bank statement.
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5.1.2(a) Errors committed in recording transaction by the firm Omission or wrong recording of transactions relating to cheques issued, cheques deposited and wrong totalling, etc. committed by the firm while recording entries in the cash book cause difference between cash book and passbook balance. 5.1.2(b) Errors committed in recording transactions by the bank Omission or wrong recording of transactions relating to cheques deposited and wrong totalling, etc. committed by the bank while posting entries in the passbook also cause differences between passbook and cash book balance.
Test Your Understanding - I I. Read the following transactions and identify the cause of difference on the basis of time gap or errors made by business firm/bank. Put a sign ( ) for the correct cause. Time Gap Errors made by business/ bank
S.No. Transactions
1. 2.
Cheques issued to customers but not presented for payment. Cheque amounting to Rs. 5,000 issued to M/s. XYZ but recorded as Rs. 500 in the cash book. Interest credited by the bank but yet not recorded in the cash book. Cheque deposited into the bank but not yet collected by the bank. Bank charges debited to firms current account by the bank. Fill in the blanks : (i) Passbook is a copy of.............as it appears in the ledger of the bank. (ii) When money is with drawn from the bank, the bank ............. the account of the customer. (iii) Nor mally, the cash book shows a debit balance, passbook shows .............balance. (iv) Favourable balance as per the cash book means .............balance in the bank column of the cash book.
3. 4. 5.
II.
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(v) If the cash book balance is taken as starting point the items which make the cash book balance smaller than the passbook must be .............for the purpose of reconciliation. (vi) If the passbook shows a favourable balance and if it is taken as the starting point for the purpose of bank reconciliation statement then cheques issued but not presented for payment should be .............to find out cash balance. (vii) When the cheques are not presented for payment, favourable balance as per the cash book is .............than that of the passbook. (viii) When a banker collects the bills and credits the account passbook overdraft shows .............balance. (ix) If the overdraft as per the passbook is taken as the starting point, the cheques issued but not presented are to be .............in the bank reconciliation statement. (x) When the passbook balance is taken as the starting point items which makes the passbook balance .............than the balance in the cash book must be deducted for the purpose of reconciliation.
5.2 Preparation of Bank Reconciliation Statement After identifying the causes of difference, the reconciliation may be done in the following two ways: (a) Preparation of bank reconciliation statement without adjusting cash book balance. (b) Preparation of bank reconciliation statement after adjusting cash book balance. It may be noted that in practice, the bank reconciliation statement is prepared after adjusting the cash book balance, about which you will study later in the chapter. 5.2.1 Preparation of Bank Reconciliation Statement without adjusting Cash Book Balance To prepare bank reconciliation statement, under this approach, the balance as per cash book or as per passbook is the starting item. The debit balance as per the cash book means the balance of deposits held at the bank. Such a balance will be a credit balance as per the passbook. Such a balance exists when the deposits made by the firm are more than its withdrawals. It indicates the favourable balance as per cash book or favourable balance as per the passbook. On the other hand, the credit balance as per the cash book indicates bank overdraft. In other words, the excess amount withdrawn over the amount deposited in the bank. It is also known as unfavourable balance as per cash book or unfavourable balance as per passbook.
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We may have four different situations while preparing the bank reconciliation statement. These are : 1. When debit balance (favourable balance) as per cash book is given and the balance as per passbook is to be ascertained. 2. When credit balance (favourable balance) as per passbook is given and the balance as per cash book is to be ascertained. 3. When credit balance as per cash book (unfavourable balance/overdraft balance) is given and the balance as per passbook is to ascertained. 4. When debit balance as per passbook (unfavourable balance/overdraft balance) is given and the cash book balance as per is to ascertained. 5.2.1(a) Dealing with favourable balances The following steps may be initiated to prepare the bank reconciliation statement: (i) The date on which the statement is prepared is written at the top, as part of the heading. (ii) The first item in the statement is generally the balance as shown by the cash book. Alternatively, the starting point can also be the balance as per passbook. (iii) The cheques deposited but not yet collected are deducted. (iv) All the cheques issued but not yet presented for payment, amounts directly deposited in the bank account are added. (v) All the items of charges such as interest on overdraft, payment by bank on standing instructions and debited by the bank in the passbook but not entered in cash book, bills and cheques dishonoured etc. are deducted. (vi) All the credits given by the bank such as interest on dividends collected, etc. and direct deposits in the bank are added. (vii) Adjustment for errors are made according to the principles of rectification of errors. (The rectification of errors has been discussed in detail in chapter 6.) (viii) Now the net balance shown by the statement should be same as shown by the passbook. It may be noted that treatment of all items shall be the reverse of the above if we adjust passbook balance as the starting point.(see illustration 3) The following solved illustrations will help you understand dealing with favourable balance as per cash book and passbook.
Bank Reconciliation Statement Illustration 1
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From the following particulars of Mr. Vinod, prepare bank reconciliation statement as on March 31, 2005. 1. Bank balance as per cash book Rs. 50,000. 2. Cheques issued but not presented for payment Rs. 6,000. 3. The bank had directly collected dividend of Rs. 8,000 and credited to bank account but was not entered in the cash book. 4. Bank charges of Rs. 400 were not entered in the cash book. 5. A cheques for Rs. 6,000 was deposited but not collected by the bank. Solution Bank Reconciliation Statement of Mr. Vinod as on March 31, 2005 Particulars + Rs. 50,000 6,000 8,000 6,000 400 57,600 64,000 Illustration 2 From the following particulars of Anil & Co. prepare a bank reconciliation statement as on August 31, 2005. 1. Balance as per the cash book Rs. 54,000. 2. Rs. 100 bank incidental charges debited to Anil & Co. account, which is not recorded in cash book. 3. Cheques for Rs. 5,400 is deposited in the bank but not yet collected by the bank. 4. A cheque for Rs. 20,000 is issued by Anil & Co. not presented for payment. Solution Bank Reconciliation Statement of Anil & Co. as on August 31, 2005 Particulars (+) Amount Rs. 54,000 20,000 74,000 () Amount Rs. 5,400 100 68,500 74,000 64,000 Rs.
1. 2. 3. 4. 5. 6.
Balance as per cash book Cheques issued but not presented for payment Dividends collected by the bank Cheque deposited but not credited by the bank Bank charges debited by the bank Balance as per passbook.
1. 2. 3. 4. 5.
Balance as per cash book Cheqeus issued but not presented for payment Cheques deposited but not credited by the bank Bank incidental charges debited by the bank Balance as per passbook
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The bank passbook of M/s. Boss & Co. showed a balance of Rs. 45,000 on May 31, 2005. 1. Cheques issued before May 31,2005, amounting to Rs. 25,940 had not been presented for encashment. 2. Two cheques of Rs. 3,900 and Rs. 2,350 were deposited into the bank on May 31 but the bank gave credit for the same in June. 3. There was also a debit in the passbook of Rs. 2,500 in respect of a cheque dishonoured on 31.5.2005. Prepare a bank reconciliation statement as on May 31, 2005. Solution Bank Reconciliation Statement of Bose & Co as on May 31, 2005 Particulars (+) Amount Rs. 45,000 6,250 2,500 25,940 27,810 53,750 53,750 () Amount Rs.
1. 2. 3. 4. 5.
Balance as per passbook Cheques deposited but not collected by the bank (Rs. 3,900+ Rs. 2,350) Cheque dishonoured recorded only in passbook Cheques issued but not presented for payment Balance as per cash book
5.2.1(b) Dealing with overdrafts So far we have dealt with bank reconciliation statement where bank balances has been positive i.e., there has been money in the bank account. However, businesses sometimes have overdrafts at the bank. Overdrafts are where the bank account becomes negative and the businesses in effect have borrowed from the bank. This is shown in the cash book as a credit balance. In the bank statement, where the balance is followed by Dr. (or sometimes OD) means that there is an overdraft and called debit balance as per passbook. An overdraft is treated as negative figure on a bank reconciliation statement. The following solved illustration will help you understand the preparation of bank reconciliation statement when there is an overdraft.
Illustration 4 On March 31, 2005, Rakesh had on overdraft of Rs. 8,000 as shown by his cash book. Cheques amounting to Rs. 2,000 had been paid in by him but were not collected by the bank. He issued cheques of Rs. 800 which were not presented to the bank for payment. There was a debit in his passbook of Rs. 60 for interest and Rs. 100 for bank charges. Prepare bank reconciliation statement.
Bank Reconciliation Statement Solution Bank Reconciliation Statement of Rakesh as on April 01, 2005 Particulars (+) Amount Rs.
160
() Amount Rs. 8,000 2,000 60 100 10,160
1. 2. 3. 4. 5.
Overdraft as per cash book Cheques deposited but not yet collectedcharged by the bank Bank charges Cheques issued but not presented for payment Balance as per bank passbook (overdraft)
800 9,360 10,160
Illustration 5 On March 31, 2005 the bank column of the cash book of Agrawal Traders showed a credit balance of Rs. 1,18,100 (Overdraft). On examining of the cash book and the bank statement, it was found that : 1. Cheques received and recorded in the cash book but not sent to the bank of collection Rs. 12,400. 2. Payment received from a customer directly by the bank Rs. 27,300 but no entry was made in the cash book. 3. Cheques issued for Rs. 1,75,200 not presented for payment. Interest of Rs. 8,800 charged by the bank was not entered in the cash book. Prepare bank reconciliation statement. Solution Bank Reconciliation Statement of Agarwal Traders as on March 31, 2005 Particulars (+) Amount Rs. () Amount Rs. 1,18,100 12,400 8,800
1. 2. 3. 4. 5. 6. 7.
Overdraft as per cash book Cheques received and recorded in the cash book but not sent to the bank for collection Interest on bank overdraft debited by the bank but not entered in the cash book Payment received from the customer directly 27,300 Credited in the bank a/c but not entered in the cash book 1,75,200 Cheques issued but not presented for payment Balance as per the passbook (favourable balance) 2,02,500
63,200 2,02,500
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From the following particulars of Asha & Co. prepare a bank reconciliation statement on December 31, 2005. Rs. Overdraft as per passbook 20,000 Interest on overdraft 2,000 Insurance Premium paid by the bank 200 Cheque issued but not presented for payment 6,500 Cheque deposited but not yet cleared 6,000 Wrongly debited by the bank 500 Solution Bank Reconciliation Statement of Asha & Co as on December 31, 2005 Particulars (+) Amount Rs. 2,000 200 6,500 6,000 500 17,800 26,500 Illustration 7 From the following particulars, prepare a bank reconciliation statement as on March 31, 2001. (a) Debit balance as per cash book is Rs. 10,000. (b) A cheque for Rs. 1,000 deposited but not recorded in the cash book. (c) A cash deposit of Rs. 200 was recorded in the cash book if there is not bank, column therein. (d) A cheque issued for Rs. 250 was recorded as Rs. 205 in the cash column. (e) The debit balance of Rs. 1,500 as on the previous day was brought forward as a credit balance. (f) The payment side of the cash book was under cast by Rs. 100. (g) A cash discount allowed of Rs. 112 was recorded as Rs. 121 in the bank column. (h) A cheque of Rs. 500 received from a debtor was recorded in the cash book but not deposited in the bank for collection. (i) One outgoing cheque of Rs. 300 was recorded twice in the cash book. 26,500 () Amount Rs. 20,000
1. 2. 3. 4. 5. 6. 7.
Overdraft as per passbook Interest on overdraft Insurance premium paid by the bank Cheque issued but not presented for payment Cheques deposited but not yet cleared Wrongly debited by the bank Balance as per the cash book (overdraft)
Bank Reconciliation Statement Solution Bank Reconciliation statement as on September 30, 2004 Particulars (+) Amount Rs. 10,000 3,000 300 200 1,000
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() Amount Rs.
1. 2. 3. 4. 5. 6, 7. 8. 9. 10.
Debit balance as per cash book Error in carrying forward Cheque recorded twice in cash book Cheque deposit not record in bank column Cheque deposit but not recorded Under casting of payment side Cheque issued but not entered A cash discount wrongly recorded in bank column Cheque recorded but not deposited Credit balance as per passbook
14,500 Illustration 8
100 250 121 500 13,529 14,500
From the following particulars, prepare the bank reconciliation statement of Shri Krishan as on March 31, 2005. (a) Balance as per passbook is Rs. 10,000. (b) Bank collected a cheque of Rs. 500 on behalf of Shri Krishan but wrongly credited it to Shri Krishans account. (c) Bank recorded a cash book deposit of Rs. 1,589 as Rs. 1,598. (d) Withdrawal column of the passbook under cast by Rs. 100. (e) The credit balance of Rs. 1,500 as on the pass-book was recorded in the debit balance. (f) The payment of a cheque of Rs. 350 was recorded twice in the passbook. (g) The pass-book showed a credit balance. For a cheque of Rs. 100 deposited by Shri Kishan. Solution Bank Reconciliation Statement as on March 31, 2005 Particulars (+) Amount Rs. 10,000 500 3,000 350 9 100 1,000 12,741 13,850 13,850 () Amount Rs.
1. 2. 3. 4. 5. 6. 7. 8.
Credit balance as per passbook Cheque wrongly credited to another customer account Error in carrying forward Cheque recorded twice Excess credit for cash deposit Under casting of withdrawal column Wrong credit Debit balance as per cash book
Bank Reconciliation Statement Test Your Understanding - II Select the Correct Answer: 1. A bank reconciliation statement is prepared by : (a) Creditors (b) Bank (c) Account holder in a bank (d) Debtors 2. A bank reconciliation statement is prepared with the balance : (a) Passbook (b) Cash book (c) Both passbook and cash book (d) None of these 3. Passbook is a copy of : (a) Copy of customer Account (c) Cash column of cash book (b) Bank column of cash book (d) Copy of receipts and payments
163
4. Unfavourable bank balance means : (a) Credit balance in passbook (b) Credit balance in cash book (c) Debit balance in cash book (d) None of these 5. Favourable bank balance means : (a) Credit balance in the cash book (c) Debit balance in the cash book (b) Credit balance in passbook (d) Both b and c
6. A bank reconciliation statement is mainly prepared for : (a) Reconcile the cash balance of the cash book. (b) Reconcile the difference between the bank balance shown by the cash book and bank passbook (c) Both a and b (d) None of these
5.2.2 Preparation of Bank Reconciliation Statement with Adjusted Cash Book When we look at the various items that normally cause the difference between the passbook balance and the cash book balance, we find a number of items, which appear only in the passbook. Why not first record such items in the cash book to work out the adjusted balance (also known as amended balance) of the cash book and then prepare the bank reconciliation statement. This shall reduce the number of items responsible for the difference and have the correct figure of balance at bank in the balance sheet. In fact, this is exactly what is done in practice whereby only those items which cause the difference on account of the time gap in recording appear in bank reconciliation statement. These are as (i) cheques issued but not yet presented, (ii) cheques deposited but not yet collected, and (iii) due to an error in the passbook. The step wise preparation of bank reconciliation statement is shown in figure 5.4.
Bank Reconciliation Statement Illustration 9 The following is the summary of a cash book for December, 2004. Cash Book (Bank Column) Receipts Balance c/d Rs. 13,221 4,986 18,207 Balance b/d Payments Rs. 6,849 11,358 18,207
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All receipts are banked and payments are made by cheques. On investigation the following are observed: 1. Bank charges of Rs. 1,224 entered in the bank statement have not been entered in cash book. 2. Cheques drawn amounting to Rs. 2,403 have not been presented to the bank for payment. 3. Cheques received totalling Rs. 6,858 have been entered in the cash book and deposited in the bank, but have not been credited by the bank until January, 2005. 4. A cheque for Rs. 198 has been entered as a receipt in the cash book instead of as payment. 5. A cheque for Rs. 225 has been debited by the bank in error. 6. A cheque received for Rs. 720 has been returned by the bank and marked No funds available, no adjustment had been made in the cash book. 7. All dividends receivable are credited directly to the bank account. During December, an amount of Rs. 558 was credited by the bank and no entry is made in the cash book. 8. A cheque drawn for Rs. 54 has been incorrectly entered in the cash book as Rs.594. 9. The balance brought forward should have been Rs. 639. 10. The bank statement as on December, 31, 2004 showed an overdraft of Rs. 10,458. (a) You are required to prepare an amended cash book and (b) Prepare a bank reconciliation statement as on Dec. 31, 2004. Solution Amended Cash Book (Bank column) Dr. Date Particulars Dividends received Adj. for cheque drawn for Rs.54 entered as Rs.594 Adj. of balance brought forward Balance c/d L.F. Amount Date Particulars Rs. 558 540 450 5,778 7,326 Balance b/d Balance b/d Bank charges Adj. regarding cheque entered as receipt Adj. regarding cheque returned Cr. L.F. Amount Rs. 4,986 1,224 396 720
7,326 5,778
Bank Reconciliation Statement Bank Reconciliation Statement as on Dec. 31, 2004 Rs. Add: Less: Overdraft as per bank statement Cheque issued but not yet presented for payment Cheques deposited but not yet credited Cheque debited in error Balance as per cash book Illustration 10 6,858 225
165
Rs. 10,458 2,403 12,861 7,083 5,778
The bank overdraft of Smith Ltd., on December 31, 2004 as per cash book is Rs.18,000 From the following information, asscertain the adjusted cash balance and prepare bank reconciliation statement Rs. (i) Unpresented cheques 6,000 (ii) Uncleared cheques 3,400 (iii) Bank interest debited in the passbook only 1,000 (iv) Bills collected and credited in the passbook only 1,600 (v) Cheque of Arun traders dishonoured 1,000 (vi) Cheque issued to Kapoor & Co. not yet entered in the 600 of cash book. Amended Cash Book (Bank Column) Dr. Date Particulars Bills collected as per passbook Balance c/d L.F. Amount Date Particulars Rs. 1,600 19,000 Balance b/d Interest Cheque dishonoured (Arun Traders) Kapoor and Co. (cheque) Balance b/d Bank Reconciliation Statement as on December 31, 2004 Bank overdraft as per cash book Uncleared cheques Unpresented cheques Bank overdraft as per passbook 19,000 3,400 22,400 6,000 16,400 Cr. L.F. Amount Rs. 18,000 1,000 1,000 600 20,600 19,000
20,600
Add Less
166
Fig. 5.4 : Showing the step wise preparation of bank reconcilation statement
A Small Project An Activity of Preparation of Bank Reconcilation Statement Kamlesh works as a cashier for Aqua Products Co. His responsibilities include maintainance of the firms. The firms cash book for July 2005 which Kamlesh has just finished entering and balancing for the month is shown in exhibit 1. Help Kamlesh to prepare the bank reconciliation statement.
Note : the cash column is omitted). A copy of firms bank statement dated July 31, 2005 is also illustrated in exhibiy 2. The numerical difference between the two is Rs. 261.30. (Bank statement Rs. 903.00 Cash book Rs. 641.70). Aqua Products Cash Book Date 2005 July 01 July 03 July 15 July 31 Particulars Bank Rs. 756.20 220.00 330.00 63.00 Date 2005 July 02 July 02 July 02 July 08 July 14 July 14 July 15 July 26 July 31 1,369.20 July 31 Balance b/d 641.70 Exhibit-1 Particulars Bank Rs. 50.00 130.00 10.00 27.50 89.00 49.00 250.00 122.00 641.70 1,369.20
Balance b/d Kanishk Enterprises Rampaul and Sons Sarin Bros
Aditya 004450 Verma & Co. 004451 Gytri & Co. 004452 Mehta Ltd. 004453 Subash & Co. Kaushik 004454 Kriosk Ltd. 004455 Insurance premium (SO) Balance c/d
5.4
Bank Reconciliation Statement Bank Statement Account Account Number Ledger No. Date Date 2005 July 01 July 04 July 09 July 14 July 16 July 19 July 24 July 26 July 30 July 31 July 31 Details Aqual Products Co. 79014456 17 July 31, 2005 Debit Rs. Credit Rs.
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Balance Rs. 756.20 976.20 926.20 916.20 827.20 1,157.20 907.20 785.20 736.20 723.25 903.00 Cr. Cr. Cr. Cr. Cr. Cr. Cr. Cr. Cr. Cr. Cr.
Balance Cheques 004450 004452 Subash & Co. (DD) Cheques 004455 Insurance Premium 004454 Bank charges Ruchita Limited
220.00 50.00 10.00 89.00 330.00 250.00 122.00 49.00 12.95 179.75 Exhibit 2
Solution Step 1 : Tick off the items in both cash book and bank statement (as shown in Exhibit 2). Step 2 : Updating the cash book from the bank statement. The unticked items on the bank statement indicate items that have not yet been entered in Aqua Products Co.s cash book. These are : (i) Receipt on July 31 by Ruchita Limited amounting to Rs. 179.75 (ii) Bank charges debited by bank on July 31 amounting to Rs. 12.95 These items needs to be entered in the cash book to up date it (refer exhibit 3 The new entries are shown in darker type). Aqua Products Cash Book (Extract) Date Details Bank Rs. 641.70 179.75 821.45 Aug. 01 Balance b/d 808.50 Exhibit 3 Date 2005 July 31 Jul. 31 Details Bank Rs. 12.95 808.50 821.45
2005 July 31 Balance b/d July 31 Ruchita Limited
Bank charges Balance c/d
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Step 3 : Balance the cash book bank columns to produce an updated balance. As shown in exhibit 3, the balance of the bank column stands at Rs. 808.50. But then a difference is Rs. 94.50 (i.e. Rs. 903.00 808.50) still exists. Step 4 : Identify the remaining unticked items from the cash book. These are Rs. 1. Receipts on July 31 from Sarin Bros 63.00 2. Payments made on July 02 to Verma & Co. 130.00 (Cheque No. 004457) 3. Payments made on July 08 to Mehta Ltd. 27.50 (Cheque No. 004453) These above three items will appear in next months bank statement as these are due to time gap. These are the items which will appear in the bank reconciliation statement. Aqua Products Co. Bank Reconciliation Statement as on July 31, 2005 Rs. 808.50 130.00 27.50
Balance at bank as per cash book Add Unpresented cheques Verma and Co. Mehta and Co. Less Outstanding lodgement Balance at bank as per bank statement
157.50 966.00 63.00 903.00
Do it Yourself You are a trainee accountant for Kamraj Limited, a small printing company. One of your tasks is to enter transactions in the companys cash book, check the entries on receipt of the bank statement, update the cash book and make any amendments as necessary. You are then asked to prepare a bank reconciliation statement at the end of the month. The companys cash book (showing the bank money columns only) and the bank statement are shown below. You are required to : compare the cash book with the bank statement. Make the entries necessary to update the cash book. Calculate the adjusted bank balance as per cash book.
Bank Reconciliation Statement Kamrat Ltd. Cash Book Date Particulars Bank Date Rs. 1,946 Particulars Bank Rs. 75
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2005 Aug. 01 Balance b/d Aug. Aug. Aug. Aug. Aug. Aug. Aug. 01 05 08 10 18 27 30 Kapoor & Co. V. S. Rao S. K. Alok E. Norries Ltd. Samaira Ltd. Harsh Vardan IBP Partners
2005 Aug. 02 XYZ Insurance
249 Aug. 02 Nanda & Co. 200100 206 188 Aug. 04 Daily Ltd. 200101 315 150 Aug. 07 Garage Charges200102 211 440 Aug. 09 M.D. Finance 120 65 Aug. 13 Hill Bros 200103 22 520 Aug. 20 Akshey Ltd. 200104 137 82 Aug. 27 Kalakriti Ltd. 270 Aug. 31 Balance c/d 2,284 3,640 3,640 2,284 Exhibit 1
Sep. 01 Balance b/d
ABC 12, Mall Road, Gurgaon. Account Kamraj Limited 78300582 Date August 31, 2004
STATEMENT Account No.
Date 2005 Aug. 01 Aug. 02 Aug. 04 Aug. 04 Aug. 05 Aug. 08 Aug. 09 Aug. 12 Aug. 12 Aug. 20 Aug. 27 Aug. 30 Aug. 31 Aug. 31
Particulars
Debit
Credit
Balance Rs. 1,946 2,195 2,120 1,805 1,993 2,143 1,932 2,372 2,252 2,317 2,047 2,139 2,084 1,084 CR CR CR CR CR CR CR CR CR CR CR CR CR CR
Balance Cheques XYZ Insurance (DD) 200101 V. S. Rao Cheques 200102 Cheques N. P. Finance (SO) Cheques Kalakriti Ltd. Tony Bros Bank charges Surya Finance (SO)
249 75 315 188 150 211 440 120 65 270 92 55 1,000 Exhibit 2
Bank Reconciliation Statement Name of business.......... Bank Reconciliation Statement as at .......... Balance at bank as per cash book Add : unpresented cheque(s) Less : outstanding lodgement(s) not yet entered on bank statement Balance at bank as per bank statement Note : show the working clearly and step-wise Test your Understanding - III State whether each of the following statements is True or False .......... .......... ..........
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1. Passbook is the statement of account of the customer maintained by the bank. 2. A business firm periodically prepares a bank reconciliation statement to reconcile the bank balance as per the cash book with the passbook as these two show different balances for various reasons. 3. Cheques issued but not presented for payment will reduce the balance as per the passbook. 4. Cheques deposited but not collected will result in increasing the balance of the cash book when compared to passbook. 5. Overdraft as per the passbook is less than the overdraft as per cash book when there are cheques deposited but not collected by the banker. 6. The debit balance of the bank account as per the cash book should be equal to the credit balance of the account of the business in the books of the bank. 7. Favourable bank balance as per the cash book will be less than the bank passbook balance when there are unpresented cheques for payment. 8. Direct collections received by the bank on behalf of the customers would increase the balance as per the bank passbook when compared to the balance as per the cash book. 9. When payments made by the bank as per the standing instructions of the customer, the balance in the passbook will be more when compared to the cash book. Key Terms Introduced in the Chapter 1. 2. Bank Reconciliation Statement Cash book and Passbook
Bank Reconciliation Statement Summary with Reference to Learning Objectives 1. Bank Reconciliation Statement : A statement prepared to reconcile the bank balance as per cash book with the balance as per passbook or bank statement, by showing the items of difference between the two accounts. Causes of difference : timing of recoding the transaction. error made by business or by the bank. Correct cash balance: It may happens that some of the receipts or payments are missing from either of the books and errors, if any, need to be rectified. This arise the need to look at the entries/errors recorded in both statements and other information available and compute the correct cash balance before reconciling the statements. Questions for Practice Short Answers 1. State the need for the preparation of bank reconciliation statement? 2. What is a bank overdraft? 3. Briefly explain the statement wrongly debited by the bank with the help of an example. 4. State the causes of difference occurred due to time lag. 5. Briefly explain the term favourable balance as per cash book 6. Enumerate the steps to ascertain the correct cash book balance. Long Answers 1. What is a bank reconciliation statement. Why is it prepared? 2. Explain the reasons where the balance shown by the bank passbook does not agree with the balance as shown by the bank column of the cash book. 3. Explain the process of preparing bank reconciliation statement with amended cash balance. Numerical Questions Favourable balance of cash book and passbook 1. From the following particulars, prepare a, bank reconciliation statement as at March 31, 2005. (i) Balance as per cash book Rs. 3,200 (ii) Cheque issued but not presented for payment Rs. 1,800 (iii) Cheque deposited but not collected upto March 31, 2005 Rs. 2000 (iv) Bank charges debited by bank Rs. 150 (Ans: Balance as per passbook Rs. 2,800) 2. On March 31 2005 the cash book showed a balance of Rs. 3,700 as cash at bank, but the bank passbook made up to same date showed that cheques for Rs. 700, Rs. 300 and Rs. 180 respectively had not presented for payment,
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2.
3.
Bank Reconciliation Statement Also, cheque amounting to Rs. 1,200 deposited into the account had not been credited. Prepare a bank reconciliation statement. (Ans : Balance as per passbook Rs. 3,680). The cash book shows a bank balance of Rs. 7,800. On comparing the cash book with passbook the following discrepancies were noted : (a) Cheque deposited in bank but not credited Rs. 3,000 (b) Cheque issued but not yet present for payment Rs. 1,500 (c) Insurance premium paid by the bank Rs. 2,000 (d) Bank interest credit by the bank Rs. 400 (e) Bank charges Rs. 100 (d) Directly deposited by a customer Rs. 4,000 (Ans: Balance as per passbook Rs. 8,600). Bank balance of Rs. 40,000 showed by the cash book of Atul on December 31, 2005. It was found that three cheques of Rs. 2,000, Rs. 5,000 and Rs. 8,000 deposited during the month of December were not credited in the passbook till January 02, 2005. Two cheques of Rs. 7,000 and Rs. 8,000 issued on December 28, were not presented for payment till January 03, 2005. In addition to it bank had credited Atul for Rs. 325 as interest and had debited him with Rs. 50 as bank charges for which there were no corresponding entries in the cash book. Prepare a bank reconciliation statement as on December 31, 2004. (Ans: Balance as per passbook Rs. 40,245). On comparing the cash book with passbook of Naman it is found that on March 31, 2005, bank balance of Rs. 40,960 showed by the cash book differs from the bank balance with regard to the following : (a) Bank charges Rs 100 on March 31, 2005, are not entered in the cash book. (b) On March 21, 2005, a debtor paid Rs. 2,000 into the companys bank in settlement of his account, but no entry was made in the cash book of the company in respect of this. (c) Cheques totaling Rs. 12,980 were issued by the company and duly recorded in the cash book before March 31, 2005, but had not been presented at the bank for payment until after that date. (d) A bill for Rs. 6,900 discounted with the bank is entered in the cash book with recording the discount charge of Rs. 800. (e) Rs. 3,520 is entered in the cash book as paid into bank on March 31st, 2005, but not credited by the bank until the following day. (f) No entry has been made in the cash book to record the dishon or on March 15, 2005 of a cheque for Rs. 650 received from Bhanu. Prepare a reconciliation statement as on March 31, 2005. (Ans: Balance as per passbook Rs. 50,870). Prepare bank reconciliation statement as on December 31, 2004. On this day the passbook of Mr. Himanshu showed a balance of Rs. 7,000. (a) Cheques of Rs. 1,000 directly deposited by a customer.
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3.
4.
5.
6.
Bank Reconciliation Statement (b) The bank has credited Mr. Himanshu for Rs. 700 as interest. (c) Cheques for Rs. 3000 were issued during the month of December but of these cheques for Rs. 1,000 were not presented during the month of December. (Ans: Balance as per cash book Rs. 3,300). 7. From the following particulars prepare a bank reconciliation statement showing the balance as per cash book on December 31, 2005. (a) Two cheques of Rs. 2,000 and Rs. 5,000 were paid into bank in October, 2005 but were not credited by the bank in the month of December. (b) A cheque of Rs. 800 which was received from a customer was entered in the bank column of the cash book in December 2004 but was omitted to be banked in December, 2004. (c) Cheques for Rs. 10,000 were issued into bank in January 2005 but not credited by the bank on December 31, 2005. (d) Interest on investment Rs. 1,000 collected by bank appeared in the passbook. Balance as per Passbook was Rs. 50,000 (Ans: Balance as per cash book Rs. 47,800) 8. Balance as per passbook of Mr. Kumar is 3,000. (a) Cheque paid into bank but not yet cleared Ram Kumar Rs. 1,000 Kishore Kumar Rs. 500 (b) Bank Charges Rs. 300 (c) Cheque issued but not presented Hameed Rs. 2,000 Kapoor Rs. 500 (d) Interest entered in the passbook but not entered in the cash book Rs. 100 Prepare a bank reconciliation statement. (Ans: Balance as per cash book Rs. 2,200). 9. The passbook of Mr. Mohit current account showed a credit Balance of Rs. 20,000 on dated December 31, 2005. Prepare a Bank Reconciliation Statement with the following information. (i) A cheque of Rs. 400 drawn on his saving account has been shown on current account. (ii) He issued two cheques of Rs. 300 and Rs. 500 on of December 25, but only the Ist cheque was presented for payment. (iii) One cheque issued by Mr. Mohit of Rs. 500 on December 25, but it was not presented for payment whereas it was recorded twice in the cash book. (Ans: Balance as per cash book Rs. 18,900).
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Bank Reconciliation Statement Unfavourable balance of cash book 10. On Ist January 2005, Rakesh had an overdraft of Rs. 8,000 as showed by his cash book. Cheques amounting to Rs. 2,000 had been paid in by him but were not collected by the bank by January 01, 2005. He issued cheques of Rs. 800 which were not presented to the bank for payment up to that day. There was a debit in his passbook of Rs. 60 for interest and Rs. 100 for bank charges. Prepare bank reconciliation statement for comparing both the balance. (Ans : Overdraft as per passbook Rs. 9,360) 11. Prepare bank reconciliation statement. (i) Overdraft shown as per cash book on December 31, 2005 Rs. 10,000. (ii) Bank charges for the above period also debited in the passbook Rs. 100. (iii) Interest on overdraft for six months ending December 31, 2005 Rs. 380 debited in the passbook. (iv) Cheques issued but not incashed prior to December 31, 2005 amounted to Rs. 2,150. (v) Interest on Investment collected by the bank and credited in the passbook Rs. 600. (vi) Cheques paid into bank but not cleared before December, 31 2005 were Rs. 1,100. (Ans: overdraft as per passbook Rs. 8,830). 12. Kumar find that the bank balance shown by his cash book on December 31, 2005 is Rs. 90,600 (Credit) but the passbook shows a difference due to the following reason: A cheque (post dated) for Rs. 1,000 has been debited in the bank column of the cash book but not presented for payment. Also, a cheque for Rs. 8,000 drawn in favour of Manohar has not yet been presented for payment. Cheques totaling Rs. 1,500 deposited in the bank have not yet been collected and cheque for Rs. 5,000 has been dishonoured. (Ans: overdraft as per passbook Rs. 1,03,600). 13. On December 31, 2005, the cash book of Mittal Bros. Showed an overdraft of Rs. 6,920. From the following particulars prepare a Bank Reconciliation Statement and ascertain the balance as per passbook. (1) Debited by bank for Rs. 200 on account of Interest on overdraft and Rs. 50 on account of charges for collecting bills. (2) Cheques drawn but not encashed before December, 31 2005 for Rs. 4,000. (3) The bank has collected interest and has credited Rs. 600 in passbook. (4) A bill receivable for Rs. 700 previously discounted with the bank had been dishonoured and debited in the passbook. (5) Cheques paid into bank but not collected and credited before December 31, 2005 amounted Rs. 6,000. (Ans : Overdraft as per passbook Rs. 9,270).
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Bank Reconciliation Statement Unfavourable balance of the passbook 14. Prepare bank reconciliation statement of Shri Bhandari as on December 31, 2005 (i) The Payment of a cheque for Rs. 550 was recorded twice in the passbook. (ii) Withdrawal column of the passbook under cast by Rs. 200 (iii) A Cheque of Rs. 200 has been debited in the bank column of the Cash Book but it was not sent to bank at all. (iv) A Cheque of Rs. 300 debited to Bank column of the passbook was not sent to the bank. (v) Rs. 500 in respect of dishonoured cheque were entered in the passbook but not in the cash book. Overdraft as per passbook is Rs. 20,000. (Ans: Overdraft as per cash book Rs. 20,350). 15. Overdraft shown by the passbook of Mr. Murli is Rs. 20,000. Prepare bank reconciliation statement on dated December 31, 2005. (i) Bank charges debited as per passbook Rs. 500. (ii) Cheques recorded in the cash book but not sent to the bank for collection Rs. 2,500. (iii) Received a payment directly from customer Rs. 4,600. (iv) Cheque issued but not presented for payment Rs. 6,980. (v) Interest credited by the bank Rs. 100. (vi) LIC paid by bank Rs. 2,500. (vii) Cheques deposited with the bank but not collected Rs. 3,500. (Ans: Overdraft as per cash book Rs. 22,680). 16. Raghav & Co. have two bank accounts. Account No. I and Account No. II. From the following particulars relating to Account No. I, find out the balance on that account of December 31, 2005 according to the cash book of the firm. (i) Cheques paid into bank prior to December 31, 2005, but not credited for Rs. 10,000. (ii) Transfer of funds from account No. II to account no. I recorded by the bank on December 31, 2005 but entered in the cash book after that date for Rs. 8,000. (iii) Cheques issued prior to December 31, 2005 but not presented until after that date for Rs. 7,429. (iv) Bank charges debited by bank not entered in the cash book for Rs. 200. (v) Interest Debited by the bank not entered in the cash book Rs. 580. (vi) Overdraft as per Passbook Rs. 18,990. (Ans: Overdraft as per cash book Rs. 23,639).
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Bank Reconciliation Statement 17. Prepare a bank reconciliation statement from the following particulars and show the balance as per cash book. (i) Balance as per passbook on December 31, 2005 overdrawn Rs. 20,000. (ii) Interest on bank overdraft not entered in the cash book Rs. 2,000. (iii) Rs. 200 insurance premium paid by bank has not been entered in the cash book. (iv) Cheques drawn in the last week of December, 2005, but not cleared till date for Rs. 3,000 and Rs. 3,500. (v) Cheques deposited into bank on November, 2005, but yet to be credited on dated December 31, 2005 Rs. 6,000. (vii) Wrongly debited by bank Rs. 500. (Ans: Overdraft as per cash book Rs. 17,800). 18. The passbook of Mr. Randhir showed an overdraft of Rs. 40,950 on March 31, 2005. Prepare bank reconciliation statement on March 31, 2005. (i) Out of cheques amounting to Rs. 8,000 drawn by Mr. Randhir on March 27 a cheque for Rs. 3,000 was encashed on April 03. (ii) Credited by bank with Rs. 3,800 for interest collected by them, but the amount is not entered in the cash book. (iii) Rs. 10,900 paid in by Mr. Randhir in cash and by cheques on March, 31 cheques amounting to Rs. 3,800 were collected on April, 07. (iv) A Cheque of Rs. 780 credited in the passbook on March 28 being dishonoured is debited again in the passbook on April 01, 2005. There was no entry in the cash book about the dishonour of the cheque until April 15. (Ans: Overdraft as per cash book Rs. 36,350)
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Bank Reconciliation Statement Project 1. You are employed by Silk and Carpets as their cashier. Your main responsibility is to maintain the companys cash book and prepare a bank reconciliation statement at the end of each month. The cash book (showing the bank money columns only) is set out below together with a copy of the bank statement for February 2005. You are required to : Reconcile the cash book with the bank statement. Make the entries necessary to update the cash book.. Start with the balance as per the cash book, list any unpresented cheques and sub-total on the reconciliation statement. Enter details of bank lodgements. Calculate the balance as per the bank statement and check your total against the bank statement for accuracy. Silk & Carpets Ltd. Cash Book Cash Book Dr. Date 2005 Feb. 01 Feb. 01 Feb. 04 Feb. 08 Feb. 13 Feb. 20 Feb. 28 Particulars Bank Rs. Date 2005 Feb. 01 Feb. 01 Feb. 03 Feb. 09 Feb. 09 Feb. 10 Feb. 16 Feb. 23 Feb. 27 Feb. 28 Particulars Cr. Bank Rs. 98 50 540 42 490 300 110 50 120 705 2,505
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Balance b/d 1,425 Brown & Co. 157 Brindas 243 Robinson Ltd. 91 Morris 75 Kinki and Co. 420 Howell Ltd. 94
Bhargav Bros Maruti Ltd. 400460 Jackson Ltd. 400461 Spencer Partners 400462 Ivory Computer 400463 Surya Insurance Shankar Garage 400464 Petty cash 400465 Swaroop & Co. 400466 Balance c/d
2,505 Feb. 08 Balance b/d 705
Bank Reconciliation Statement ROHTAGI BANK 10, Shastri Road, New Delhi. Account Brooklyn Limited Date February 28, 2005 Particulars Balance Cheques Maruti Ltd. 400460 Brindas Cheques Surya Insurance (DD) Morris 400463 Cheques Rajeshwar 400465 Soumya Bank charges Debit Credit Balance 1,425 1,582 1,532 1,434 1,677 1,768 1,468 1,543 1,053 1,473 1,370 1,320 1,540 1,502 Cr. Cr. Cr. Cr. Cr. Cr. Cr. Cr. Cr. Cr. Cr. Cr. Cr. Cr. STATEMENT
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Account No. 29842943
Date 2004 Feb. 01 Feb. 02 Feb. 04 Feb. 02 Feb. 06 Feb. 10 Feb. 12 Feb. 14 Feb. 14 Feb. 23 Feb. 26 Feb. 26 Feb. 27 Feb. 28
157 50 98 243 91 300 75 490 420 103 50 220 38
2. As accounts assistant for Chinnar Limited your main task is to enter transactions into the companys cash book, check the entries against the bank statement and prepare a monthly bank reconciliation statement. The cash book (showing the bank money columns only) and bank statement for October 2005 are set out below. You are required to : Reconcile the cash book with the bank statement. Make the entries necessary to update the cash book. Balance the bank columns of the cash book and calculate the revised bank balance. Start with the balance as per the cash book, list any unpresented cheques and sub-total on the reconciliation statement. Enter details of bank lodgements. Calculate the balance as per the bank statement and check your total against the bank statement for accuracy.
Bank Reconciliation Statement Chinnar Limited Cash Book Cash Book Date Oct. Oct. Oct. Oct. Oct. Oct. Oct. Oct. Oct. 01 04 08 11 11 12 20 25 31 Particulars Bank Rs. Date Oct. Oct. Oct. Oct. Oct. Oct. Oct. Oct. Oct. 01 04 05 08 13 14 22 25 30 Particulars Bank. Rs.
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Balance b/d 2,521 Allen Rogers 620 Moore & Kale 27 Howard Limited 48 Barrett & Bryson 106 D Patel 301 Cohen & Co. 58 J McGilvery 209 Balance c/d 604 4,494
Sharp & Co Rent 400 I. Oswal 210526 367 Health & Sports 210527 1,108 Evon & Son 210528 320 Khare Garage 210529 32 J. Choudrey 210530 28 Astha Insurance (DD) 139 Soma Computers 210531 1,800 Rastogi 300 4,494
Nov. 01 Balance b/d
604
OM BANK 99, Jawahar Marg Account Chinnar Limited Date October 31, 2005 Date 2004 Oct. 01 Oct. 01 Oct. 04 Oct. 07 Oct. 11 Oct. 13 Oct. 15 Oct. 18 Oct. 18 Oct. 22 Oct. 27 Oct. 28 Oct. 29 Oct. 29 Oct. 29 Particulars
STATEMENT Account No. 06618432
Debit
Credit
Balance Rs. 2,521 Cr. 2,121 Cr. 2,741 Cr. 2,374 Cr. 2,528 Cr. 2,829 Cr. 2,856 Cr. 2,536 Cr. 1,428 Cr. 1,289 Cr. 511 Dr. 397 Dr. 697 Dr. 750 Dr. 795 Dr.
Balance Sharp & Co Allen Rogers 210526 Cheques D Patel (BGC) Cheques 210528 210527 Astha Insurance (DD) 210531 Bharadwajs Rastogi Bank Interest Bank Charges
400 620 367 154 301 27 320 1,108 139 1,800 114 300 53 45
Bank Reconciliation Statement Checklist to Test Your Understanding Test Your Understanding - I (I) 1. Time Gap 4. Time gap (II) (i) Customer account (iv) Debit (vii) loss (x) Higher Test Your Understanding - II 1. (b) 2. (c) 3. (a) 4. (a) 5. (c) 6.(b) 2. Error 5. Time gap (ii) Debit (v) Added (viii) Loss 3. Time gap (iii) Credit (vi) Deducted (ix) Added
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Test Your Understanding - III 1. (T) 2. (T) 3. (F) 4. (T) 5. (F) 6.(T), 7.(T) 8.(T) 9.(F)
Trial Balance and Rectification of Errors
LEARNING OBJECTIVES
After studying this chapter, you will be able to : state the meaning of trial balance; enumerate the objectives of preparing trial balance ; prepare trial balance; explain the types of errors; state various process of locating errors ; identify the errors which affect the agreement of trial balance and those which do not affect the agreement of trial balance; rectify the errors without preparing suspense account; and rectify the errors with suspense account.
n the earlier chapters, you have learnt about the basic principles of accounting that for every debit there will be an equal credit. It implies that if the sum of all debits equals the sum of all credits, it is presumed that the posting to the ledger in terms of debit and credit amounts is accurate. The trial balance is a tool for verifying the correctness of debit and credit amounts. It is an arithmetical check under the double entry system which verifies that both aspects of every transaction have been recorded accurately. This chapter explains the meaning and process of preparation of trial balance and the types of errors and their rectification. 6.1 Meaning of Trial Balance A trial balance is a statement showing the balances, or total of debits and credits, of all the accounts in the ledger with a view to verify the arithmatical accuracy of posting into the ledger accounts. Trial balance is an important statement in the accounting process. which shows final position of all accounts and helps in preparing the final statements. The task of preparing the statements is simplified because the accountant can take the account balances from the trial balance instead of looking them up in the ledger.
182 Trial Balance of ......as on March 31, 2005 Account T itle L.F Debit Amount Rs. Credit Amount Rs.
Accountancy
Total Fig. 6.1 : Showing format of a trial balance
It is normally prepared at the end of an accounting year. However, an organisation may prepare a trial balance at the end of any chosen period, which may be monthly, quarterly, half yearly or annually depending upon its requirements. In order to prepare a trial balance following steps are taken: Ascertain the balances of each account in the ledger. List each account and place its balance in the debit or credit column, as the case may be. (If an account has a zero balance, it may be included in the trial balance with zero in the column for its normal balance). Compute the total of debit balances column. Compute the total of the credit balances column. Verify that the sum of the debit balances equal the sum of credit balances. If they do not tally, it indicate that there are some errors. So one must check the correctness of the balances of all accounts. It may be noted that all assets expenses and receivables account shall have debit balances whereas all liabilities, revenues and payables accounts shall have credit balances (refer figure 6.2). 6.2 Objectives of Preparing the Trial Balance The 1. 2. 3. trial balance is prepared to fulfill the following objectives : To ascertain the arithmetical accuracy of the ledger accounts. To help in locating errors. To help in the preparation of the financial statements.
Trial Balance and Rectification of Errors Account T itle L.F. Debit Amount Rs. Credit Amount Rs.
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Capital Land and Buildings Plant and Machinery Equipment Furniture and Fixtures Cash in Hand Cash at Bank Debtors Bills Receivable Stock of Raw Materials Work in Progress Stock of Finished Goods Prepaid Insurance Purchases Carriage Inwards Carriage Outwards Sales Sales Return Purchases Return Interest Paid Commission/Discount Received Salaries Long Term Loan Bills Payable Creditors Outstanding Salaries Outstanding Interest Earned Advances from Customers Drawings Reserve Fund Provision for Doubtful Debts Total xxx xxx
Fig. 6.2 : Illustrative trial balance
6.2.1 To Ascertain the Arithmetical Accuracy of Ledger Accounts As stated earlier, the purpose of preparing a trial balance is to asceitain whether all debits and credit are properly recorded in the ledger or not and that all accounts have been correctly balanced. As a summary of the ledger, it is a list of the accounts and their balances. When the totals of all the debit balances
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Accountancy
and credit balances in the trial balance are equal, it is assumed that the posting and balancing of accounts is arithmetically correct. However, the tallying of the trial balance is not a conclusive proof of the accuracy of the accounts. It only ensures that all debits and the corresponding credits have been properly recorded in the ledger. 6.2.2 To Help in Locating Errors When a trial balance does not tally (that is, the totals of debit and credit columns are not equal), we know that at least one error has occured. The error (or errors) may have occured at one of those stages in the accounting process: (1) totalling of subsidiary books, (2) posting of journal entries in the ledger, (3) calculating account balances, (4) carrying account balances to the trial balance, and (5) totalling the trial balance columns. It may be noted that the accounting accuracy is not ensured even if the totals of debit and credit balances are equal because some errors do not affect equality of debits and credits. For example, the book-keeper may debit a correct amount in the wrong account while making the journal entry or in posting a journal entry to the ledger. This error would cause two accounts to have incorrect balances but the trial balance would tally. Another error is to record an equal debit and credit of an incorrect amount. This error would give the two accounts incorrect balances but would not create unequal debits and credits. As a result, the fact that the trial balance has tallied does not imply that all entries in the books of original record (journal, cash book, etc.) have been recorded and posted correctly. However, equal totals do suggest that several types of errors probably have not occured. 6.2.3 To Help in the Preparation of the Financial Statements Trial balance is considered as the connecting link between accounting records and the preparation of financial statements. For preparing a financial statement, one need not refer to the ledger. In fact, the availability of a tallied trial balance is the first step in the preparation of financial statements. All revenue and expense accounts appearing in the trial balance are transferred to the trading and profit and loss account and all liabilities, capital and assets accounts are transferred to the balance sheet. (Preparation of the financial statements is explained in chapters, 9 and 10).
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6.3 Preparation of Trial Balance A trial balance can be prepared in the following three ways : (i) Totals Method (ii) Balances Method (iii) Totals-cum-balances Method 6.3.1 Totals method Under this method, total of each side in the ledger (debit and credit) is ascertained separately and shown in the trial balance in the respective columns. The total of debit column of trial balance should agree with the total of credit column in the trial balance because the accounts are based on double entry system. However, this method is not widely used in practice, as it does not help in assuming accuracy of balances of various accounts and and preparation of the fianancial statements. 6.3.2 Balances Method This is the most widely used method in practice. Under this method trial balance is prepared by showing the balances of all ledger accounts and then totalling up the debit and credit columns of the trial balance to assure their correctness. The account balances are used because the balance summarises the net effect of all transactions relating to an account and helps in preparing the financial statements. It may be noted that in trial balance, normally in place of balances in individual accounts of the debtors, a figure of sundry debtors is shown, and in place of individual accounts of creditors, a figure of sundry creditors is shown. 6.3.3 Totals-cum-balances Method This method is a combination of totals method and balances method. Under this method four columns for amount are prepared. Two columns for writing the debit and credit totals of various accounts and two columns for writing the debit and credit balances of these accounts. However, this method is also not used in practice because it is time consuming and hardly serves any additional or special purpose. Let us now learn how will the trial balance be prepared using each of these methods with the help of the following example : Mr. Rawats ledger shows the following accounts for his business. Help him in preparing the trial balance using : (i) Totals method, (ii) Balances method, (iii) Totals-cum-Balances method.
186 Rahuls Capital Account Dr. Date 2005 Dec. 31 Particulars J.F. Amount Rs. 60,000 60,000 Date 2005 Jan. 01 2006 Jan. 01 Particulars J.F.
Accountancy
Cr. Amount Rs. 40,000 20,000 60,000 60,000
Balance c/d
Balance b/d Cash Balance b/d
Rohans Account Dr. Date 2005 Dec. 31 Cash Balance c/d 40,000 20,000 60,000 Particulars J.F. Amount Rs. Date 2005 Jan. 01 Balance b/d Purchases 10,000 50,000 60,000 Balance b/d 20,000 Particulars J.F. Cr. Amount Rs.
2006 Jan. 1
Machinery Account Dr. Date 2005 Dec. 31 Particulars J.F. Amount Rs. 20,000 Dec. 31 20,000 2006 Jan. 01 Balance b/d 17,000 Rahuls Account Dr. Date 2005 Jan. 01 2006 Jan. 01 Balance b/d Particulars J.F. Amount Rs. 15,000 60,000 75,000 20,000 Date 2005 Balance b/d Sales Dec. 31 Cash Balance c/d 55,000 20,000 75,000 Particulars J.F. Cr. Amount Rs. Date 2005 Balance b/d Depreciation Balance c/d 3,000 17,000 20,000 Particulars J.F. Cr. Amount Rs.
Trial Balance and Rectification of Errors Sales Account Dr. Date Particulars J.F. Amount Rs. Date 2005 Rahul Cash Particulars J.F.
187
Cr. Amount Rs. 60,000 10,000 70,000
Cash Account Dr. Date 2005 Jan. 01 Particulars J.F. Amount Rs. 15,000 20,000 55,000 10,000 1,00,000 2006 Jan. 01 Balance b/d 43,000 Date 2005 Balanc e b/d Capital Rahul Sales Rohan Wages Purchases Balance c/d 40,000 5,000 12,000 43,000 1,00,000 Particulars J.F. Cr. Amount Rs.
Dec. 31
Wages Account Dr. Date 2005 Cash 5,000 5,000 Depreciation Account Dr. Date 2005 Machinery 3,000 3,000 Particulars J.F. Amount Rs. Date Particulars J.F. Cr. Amount Rs. Particulars J.F. Amount Rs. Date Particulars J.F. Cr. Amount Rs.
188 Purchases Account Dr. Date 2005 Rohan Cash 50,000 12,000 62,000 Particulars J.F. Amount Rs. Date Particulars J.F.
Accountancy
Cr. Amount Rs.
The trial balance under the three methods is illustrated below: (i) Trial Balance as at March 31, 2005 (Using Totals Method) Account Title Rawats Capital Rohan Machinery Rahul Sales Cash Wages Depreciation Purchases L.F. Debit Total Rs. 40,000 20,000 75,000 1,00,000 5,000 3,000 62,000 3,05,000 (ii) Trial Balance as at March 31, 2005 (Using Balances Method) Account T itle L.F. Debit Balance Rs. Credit Balance Rs. 60,000 20,000 17,000 20,000 70,000 43,000 5,000 3,000 62,000 1,50,000 1,50,000 Credit Total Rs. 60,000 60,000 3,000 55,000 70,000 57,000
3,05,000
Rawats Capital Rohans Capital Machinery Rahul Sales Cash Wages Depreciation Purchases Total
Trial Balance and Rectification of Errors (iii) Trial Balance as at March 31, 2005 (Using Totals-cum-Balances Method) Account Title L.F. Debit Total Rs. 40,000 20,000 75,000 1,00,000 5,000 3,000 62,000 3,05,000 Credit Total Rs. 60,000 60,000 3,000 55,000 70,000 57,000 Debit Balance Rs.
189
Rawats Capital Rohan Machinery Rahul Sales Cash Wages Depreciation Purchases Total
Credit Balance Rs. 60,000 20,000
17,000 20,000 70,000 43,000 5,000 3,000 62,000 1,50,000
3,05,000
1,50,000
Test Your Understanding - I Indicate against each amount wheather it is a debit or a credit balance, and prepare a trial balance as at March 31, 2005 based on the following balances: Accounts T itle Capital Drawings Machinery Sales Purchases Sales return Purchases return Wages Goodwill Interest received Discount allowed Bank overdraft Bank loan Debtors : Nathu Roopa Creditors : Reena Ganesh Cash Stock on April 01, 2004 Amount Rs. 1,00,000 16,000 20,000 2,00,000 2,10,000 20,000 30,000 40,000 60,000 15,000 6,000 22,000 90,000 55,000 20,000 35,000 25,000 54,000 16,000
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6.4. Significance of Agreement of Trial Balance It is important for an accountant that the trial balance should tally. Normally a tallied trial balance means that both the debit and the credit entries have been made correctly for each transaction. However, as stated earlier, the agreement of trial balance is not an absolute proof of accuracy of accounting records. A tallied trial balance only proves, to a certain extent, that the posting to the ledger is arithmetically correct. But it does not guarantee that the entry itself is correct. There can be errors, which affect the equality of debits and credits, and there can be errors, which do not affect the equality of debits and credits. Some common errors include the following: Error in totalling of the debit and credit balances in the trial balance. Error in totalling of subsidiary books. Error in posting of the total of subsidiary books. Error in showing account balances in wrong column of the tiral balance, or in the wrong amount. Omission in showing an account balance in the trial balance. Error in the calculation of a ledger account balance. Error while posting a journal entry: a journal entry may not have been posted properly to the ledger, i.e., posting made either with wrong amount or on the wrong side of the account or in the wrong account. Error in recording a transaction in the journal: making a reverse entry, i.e., account to be debited is credited and amount to be credited is debited, or an entry with wrong amount. Error in recording a transaction in subsidiary book with wrong name or wrong amount. 6.4.1 Classification of Errors Keeping in view the nature of errors, all the errors can be classified into the following four categories: Errors of Commission Errors of Omission Errors of Principle Compensating Errors 6.4.2 Errors of Commission These are the errors which are committed due to wrong posting of transactions, wrong totalling or balancing of the accounts, wrong casting of the subsidiary books, or wrong recording of amount in the books of original entry, etc. For example: Raj Hans Traders paid Rs. 25,000 to Preetpal Traders (a supplier of goods). This transaction was correctly recorded in the cashbook. But while
191
posting to the ledger, Preetpals account was debited with Rs. 2,500 only. This constitutes an error of commission. Such an error by definition is of clerical nature and most of the errors of commission affect in the trial balance. 6.4.3 Errors of Omission The errors of omission may be committed at the time of recording the transaction in the books of original entry or while posting to the ledger. There can be of two types: (i) error of complete omission (ii) error of partial omission When a transaction is completely omitted from recording in the books of original record, it is an error of complete omission. For example, credit sales to Mohan Rs. 10,000, not entered in the sales book. When the recording of transaction is partly omitted from the books, it is an error of partial omission. If in the above example, credit sales had been duly recorded in the sales book but the posting from sales book to Mohans account has not been made, it would be an error of partial omission. 6.4.4 Errors of Principle Accounting entries are recorded as per the generally accepted accounting principles. If any of these principles are violated or ignored, errors resulting from such violation are known as errors of principle. An error of principle may occur due to incorrect classification of expenditure or receipt between capital and revenue. This is very important because it will have an impact on financial statements. It may lead to under/over stating of income or assets or liabilities, etc. For example, amount spent on additions to the buildings should be treated as capital expenditure and must be debited to the asset account. Instead, if this amount is debited to maintenance and repairs account, it has been treated as a revenue expense. This is an error of principle. Similarly, if a credit purchase of machinery is recorded in purchases book instead of journal proper or rent paid to the landlord is recorded in the cash book as payment to landlord, these errors of principle. These errors do not affect the trial balance. 6.4.5 Compensating Errors When two or more errors are committed in such a way that the net effect of these errors on the debits and credits of accounts is nil, such errors are called compensating errors. Such errors do not affect the tallying of the trial balance. For example, if purchases book has been overcast by Rs. 10,000 resulting in excess debit of Rs. 10,000 in purchases account and sales returns book is undercast by Rs. 10,000 resulting in short debit to sales returns account is a
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case of two errors compensating each others effect. One plus is set off by the other minus, the net effect of these two errors is nil and so they do not affect the agreement of trial balance. 6.5 Searching of Errors If the trial balance does not tally, it is a clear indication that at least one error has occured. The error (or errors) needs to be located and corrected before preparing the financial statements. If the trial balance does not tally, the accountant should take the following steps to detect and locate the errors : Recast the totals of debit and credit columns of the trial balance. Compare the account head/title and amount appearing in the trial balance, with that of the ledger to detect any difference in amount or omission of an account. Compare the trial balance of current year with that of the previous year to check additions and deletions of any accounts and also verify whether there is a large difference in amount, which is neither expected nor explained. Re-do and check the correctness of balances of individual accounts in the ledger. Re-check the correctness of the posting in accounts from the books of original entry. If the difference between the debit and credit columns is divisible by 2, there is a possibility that an amount equal to one-half of the difference may have been posted to the wrong side of another ledger account. For example, if the total of the debit column of the trial balance exceeds by Rs. 1,500, it is quite possible that a credit item of Rs.750 may have been wrongly posted in the ledger as a debit item. To locate such errors, the accountant should scan all the debit entries of an amount of Rs. 750. The difference may also indicate a complete omission of a posting. For example, the difference of Rs. 1,500 given above may be due to omissions of a posting of that amount on the credit side. Thus, the accountant should verify all the credit items with an amount of Rs. 1,500. If the difference is a multiple of 9 or divisible by 9, the mistake could be due to transposition of figures. For example, if a debit amount of Rs. 459 is posted as Rs. 954, the debit total in the trial balance will exceed the credit side by Rs. 495 (i.e. 954 459 = 495). This difference is divisible by 9. A mistake due to wrong placement of the decimal point may also be checked by this method. Thus, a difference in trial balance divisible by 9 helps in checking the errors for a transposed mistake.
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6.6 Rectification of Errors From the point of view of rectification, the errors may be classified into the following two categories : (a) errors which do not affect the trial balance. (b) errors which affect the trial balance. This distinction is relevant because the errors which do not affect the trial balance usually take place in two accounts in such a manner that it can be easily rectified through a journal entry whereas the errors which affect the trial balance usually affect one account and a journal entry is not possible for rectification unless a suspense account has been opened. 6.6.1 Rectification of Errors which do not Affect the Trial Balance These errors are committed in two or more accounts. Such errors are also known as two sided errors. They can be rectified by recording a journal entry giving the correct debit and credit to the concerned accounts. Examples of such errors are complete omission to record an entry in the books of original entry; wrong recording of transactions in the book of accounts; complete omission of posting to the wrong account on the correct side, and errors of principle. The rectification process essentially involves: Cancelling the effect of wrong debit or credit by reversing it; and Restoring the effect of correct debit or credit. For this purpose, we need to analyse the error in terms of its effect on the accounts involved which may be: (i) Short debit or credit in an account ; and/or (ii) Excess debit or credit in an account. Therefore, rectification entry can be done by : (i) debiting the account with short debit or with excess credit, (ii) crediting the account with excess debit or with short credit. The procedure for rectification for such errors is explained with the help of following examples :
(a) Credit sales to Mohan Rs. 10,000 were not recorded in the sales book. This is an error of complete omission. Its affect is that Mohans account has not been debited and Sales account has not been credited. Accordingly, recording usual entry for credit sales will rectify the error. Mohans A/c To Sales A/c Dr. 10,000 10,000
194 (b)
Accountancy Credit sales to Mohan Rs. 10,000 were recorded as Rs. 1,000 in the sales book. This is an error of commission. The effect of wrong recording is shown below: Mohans A/c To Sales A/c Dr. 1,000 1,000
Correct effect should have been: Mohans A/c To Sales A/c Dr. 10,000 10,000
Now that Mohans account has to be given an additional debit of Rs. 9,000 and sales account has to be credited with additional amount of Rs. 9,000, rectification entry will be : Mohans A/c To Sales A/c Dr. 9,000 9,000
(c)
Credit sales to Mohan Rs. 10,000 were recorded as Rs. 12,000. This is an error of commission. The effect of wrong entry made has been : Mohans A/c To Sales A/c Dr. 12,000 12,000
Correct effect should have been : Mohans A/c To Sales A/c Dr. 10,000 10,000
You can see that there is an excess debit of Rs. 2,000 in Mohans account and excess credit of Rs. 2,000 in sales account. The, rectification entry will be recorded as follows: Sales A/c To Mohans A/c Dr. 2,000 2,000
Trial Balance and Rectification of Errors (d)
195
Credit sales to Mohan Rs. 10,000 was correctly recorded in the sales book but was posted to Rams account. This is an error of commission. The effect of wrong posting has been : Rams A/c To Sales A/c Correct effect should have been : Mohans A/c To Sales A/c Dr. 10,000 10,000 Dr. 10,000 10,000
Notice that there is no error in sales account. But Rams account has been debited with Rs. 10,000 instead of Mohans account. Hence rectification entry will be : Mohans A/c To Rams A/c (e) Dr. 10,000 10,000
Rent paid Rs. 2,000 was wrongly shown as payment to landlord in the cash book: The effect of wrong posting has been : Landlords A/c To Cash A/c Correct effect should have been : Rent A/c To Cash A/c Dr. 2,000 2,000 Dr. 2,000 2,000
Landlords account has been wrongly debited instead of Rent account. Hence, rectification entry will be : Rent A/c To Landlords A/c Dr. 2,000 2,000
196 Test Your Understanding - II Record the rectification entry for the following transactions: 1. Credit sales to Rajni Rs. 5,000 recorded in Purchases book: This is an error of .......................................... State the wrong entry recorded in the book of accounts
Accountancy
Correct effect should have been:
The rectification entry will be:
2. Furniture purchased from M/s Rao Furnishigs for Rs. 8,000 was entered into the purchases book . This is the error of ........................................ State the wrong entry recorded in the book of accounts
3. Cash sales to Radhika Rs. 15,000 was shown as receipt of commission in the cash book. This is the error of .............................................. State the wrong entry recorded in the book of accounts
197
Correct effect should have been :
The rectificatin entry will be:
4. Cash received from Karim Rs. 6,000 posted to Nadeem. This is the error of ........................................ State the wrong entry recorded in the book of accounts:
6.6.2 Rectification of Errors Affecting Trial Balance The errors which affect only one account can be rectified by giving an exaplanatory note in the account affected or by recording a journal entry with the help of the Suspense Account. Suspense Account is explained later in this chapter. Examples of such errors are error of casting; error of carrying forward; error of balancing; error of posting to correct account but with wrong amount; error of posting to the correct account but on the wrong side; posting to the wrong side with the wrong amount; omitting to show an account in the trial balance. An error in the books of original entry, if discovered before it is posted to the ledger, may be corrected by crossing out the wrong amount by a single line and writing the correct amount above the crossed amount and initialling it. An error in an amount posted to the correct ledger account may also be
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corrected in a similar way, or by making an additional posting for the difference in amount and giving an explanatory note in the particulars column. But errors should never be corrected by erasing or overwriting reduces the authenticity of accounting records and give an impression that something is being concealed. A better way therefore is by noting the correction on the appropriate side for neutralising the effect of the error. Take for example a case where Shyams account was credited short by Rs. 190. This will be rectified by an additional entry for Rs. 190 on the credit side of his account as follows.
Shyams Account Dr. Date Particulars J.F. Amount Rs. Date Particulars Difference in amount posted short on..... J.F. Cr. Amount Rs. 190
Take another example, purchases book was undercast by Rs. 1,000. The effect of this entry is on purchases account (debit side) where the total of purchases book is posted
Purchases Account Dr. Date Particulars Undercasting purchases book for the month of.... J.F. Amount Rs. 1,000 Date Particulars J.F. Cr. Amount Rs.
Suspese Account Even if the trial balance does not tally due to the existence of one sided errors, accountant has to carry forward his accounting process prepare financial statements. The accountant tallies his trial balance by putting the difference on shorter side as suspense account. The process of opening of suspense account can be understood with the help of the following example : Consider the sales book of an organisation.
Trial Balance and Rectification of Errors Sales Book (Journal) Date Invoice No. Name of customers (Accounts to be debited) Ashok traders Bimal service centre Chopra enterprises Diwakar and sons L.F. Amount Rs. 20,000 10,000 5,000 15,000 50,000
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If sales to Diwakar and sons were not posted to his account, ledger will show the following position :
Ashok Traders Account Dr. Date Particulars Sales J.F. Amount Rs. 20,000 20,000 Date Particulars Balance c/d J.F. Cr. Amount Rs. 20,000 20,000
Bimal Service Centres Account Dr. Date Particulars Sales J.F. Amount Rs. 10,000 10,000 Chopra Enterprises Account Dr. Date Particulars Sales J.F. Amount Rs. 5,000 5,000 Date Particulars Balance c/d J.F. Cr. Amount Rs. 5,000 5,000 Date Particulars Balance c/d J.F. Cr. Amount Rs. 10,000 10,000
Sales Account Cr. Date Particulars J.F. Amount Rs. Date Particulars Sundries J.F. Dr. Amount Rs. 50,000
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The trial balance when prepared on the basis of above balances will not tally. Its credit column total will amount to Rs. 50,000 and debit column total to Rs. 35,000. The trial balance would differ with Rs. 15,000. This difference will be temporarily put to suspense account and trial balance will be made to agree in the ledger. In the above case, difference in trial balance has arisen due to one sided error (omission of posting to Diwakar and sonss account). In a real situation, there can be many other such one-sided errors which cause a difference in trial balance and thus result in opening of the suspense account. Till the all errors affecting agreement of trial balance are not located it is not possible to rectify them and tally the trial balance in such a situation, is shown in the Suspense account, make the total of debit and credit columns and proceed further with the accounting process. When the errors are located and the specific accounts and amounts involved are identified, the amounts are transferred from suspense account to the relevant accounts thereby closing the suspense account. Thus, suspense account is not placed in any particular category of accounts and is just a temporary phenomenon. While rectifying one-sided errors using suspense account, the following steps are taken: (i) Identify the account affected due to error. (ii) Ascertain the amount of excess debit/credit or short debit/credit in the affected account. (iii) If the error has resulted in excess debit or short credit in the affected account, credit the account with the amount of excess debit or short credit. (iv) If the error has resulted in excess credit or short debit in the affected account, debit the account with the amount of excess credit or short debit. (v) Complete the journal entry by debiting or crediting the suspense account as another account affected otherwise. We will now discuss the process of rectification using suspense account: (a) Credit sales to Mohan Rs. 10,000 were not posted to his account. This is an error of partial omission comitted while posting entries of the sales book.
Wrong effect has been : Mohans A/c To Sales A/c Dr. Nil 10,000
Trial Balance and Rectification of Errors Correct effect should have been : Mohans A/c To Sales A/c The rectification entry will be : Mohans A/c To Suspense A/c (b) Dr. 10,000 10,000 Dr. 10,000 10,000
201
Credit sales to Mohan Rs. 10,000 were posted to his account as Rs. 7000. This is an error of commission. Mohans account has been debited with Rs. 7,000 instead of Rs. 10,000 resulting in short debit of Rs. 3,000. The wrong effect has been : Mohans A/c To Sales A/c Dr. 7,000 10,000
Correct effect should have been : Mohans A/c To Sales A/c Dr. 10,000 10,000
Hence, rectification entry will be: Mohans A/c To Suspens A/c (c) Dr. 3,000 3,000
Credit sales to Mohan Rs. 10,000 were posted to his account as Rs. 12,000. This is an error of commission. The wrong effect has been : Mohans A/c To Sales A/c Correct effect should have been Mohans A/c To Sales A/c The rectification entry will be : Suspense A/c To Mohans A/c Dr. 2,000 2,000 Dr. 10,000 10,000 Dr. 12,000 10,000
(d)
Purchases book overcast by Rs. 1,000. Errors in casting of subsidiary books affect only those accounts where totals of the subsidiary books involved are
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Accountancy posted. The accounts of individual parties are not af fected. Consider the following example. Purchases (Journal) Book Date Invoice No. Name of suppliers (Accounts to be credited) Dheru Chandraprakash Sachin Wrong total due to overcasting. Dherus Account L.F. Amount Rs. 8,000 7,000 6,000 21,000 22,000
Dr. Date Particulars J.F. Amount Rs. Date Particulars Purchases Chandraprakashs Account Dr. Date Particulars J.F. Amount Rs. Date Particulars Purchases Sachins Account Dr. Date Particulars J.F. Amount Rs. Date Particulars Purchases Purchases Account Dr. Date Particulars Sundries J.F. Amount Rs. 22,000 Date Particulars J.F. J.F. J.F. J.F.
Cr. Amount Rs.
As you can notice that there is no error in accounts of Dheeru, Chanderprakash and Sachin. Only purchases account has been debited with Rs. 1,000 extra. Hence, rectification entry will be :
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Suspense A/c To Purchases A/c
Dr.
1,000 1,000
6.6.3 Rectification of Errors in the Next Accounting Year If some errors committed during an accounting year are not located and rectified before the finalisation of financial statements, suspense account cannot be closed and its balance will be carried forward to the next accounting period. When the errors committed in one accounting year are located and rectified in the next accounting year, profit and loss adjustment account is debited or credited in place of accounts of expenses/losses and incomes/ gains in order to avoid impact on the income statement of next accounting period. You will learn about this aspect at an advanced stage of your studies in accounting.
Box 1 Guiding Principles of Rectification of Errors 1. If error is committed in books of original entry then assume all postings are done accordingly. 2. If error is at the posting stage then assume that recording in the subsidiary books has been correctly done. 3. If error is in posting to a wrong account (without mentioning side and amount of posting) then assume that posting has been done on the right side and with the right amount. 4. If posting is done to a correct account but with wrong amount (without mentioning side of posting) then assume that posting has been done on the correct side. 5. If error is posting to a wrong account on the wrong side (without mentioning amount of posting) then assume that posting has been done with the amount as per the original recording of the transaction. 6. If error is of posting to a wrong account with wrong amount (without mentioning the side of posting) then assume that posting has been done on the right side. 7. If posting is done to a correct account on the wrong side (without mentioning amount of posting) then assume that posting has been done with correct amount as per original recording. 8. Any error in posting of individual transactions in subsidiaries books relates to individual account only, the sales account, purchase account, sales return account or purchases return account are not involved.
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9. If a transaction is recorded in cash book, then the error in posting relates to the other affected account, not to cash account/bank account 10. If a transaction is recorded through journal proper, then the phrase transaction was not posted indicates error in both the accounts involved, unless stated otherwise. 11. Error in casting of subsidiary books will affect only that account where total of the particular book is posted leaving the individual personal accounts unaffected. Test Your Understanding - III Show the effect through Journal entries : 1. Credit sales to Mohan Rs. 10,000 were posted to his account as Rs. 12,000 This is an error of .................................. The wrong effect has been :
The correct effect should have been :
The rectification entry will be.
2. Cash paid to Neha Rs. 2,000 was not posted to her account. This is an error of .................................. The wrong effect has been :
The rectification entry will be :
205
3. Sales returns from Megha Rs. 1,600 were posted to her account as Rs. 1,000. This is an error of .................................. The wrong effect has been :
The rectification entry will be :
4. Depreciation written off on furniture Rs. 1,500 was not posted to depreciation account. This is an error of ................ The wrong effect has been :
The rectification entry :
Illustration 1 Rectify the following errors : Credit purchases from Raghu Rs. 20,000 (i) were not recorded. (ii) were recorded as Rs. 10,000. (iii) were recorded as Rs. 25,000. (iv) were not posted to his account. (v) were posted to his account as Rs. 2,000. (vi) were posted to Reghavs account. (vii) were posted to the debit of Raghus account. (viii) were posted to the debit of Raghav. (ix) were recorded through sales book.
206 Solution (i)
Accountancy
Purchases A/c Dr. 20,000 To Raghus A/c 20,000 (Credit purchases from Raghu omitted to be recorded, now corrected) (ii) Purchases A/c Dr. 10,000 To Raghus A/c 10,000 (Credit purchases from Raghu recorded as Rs. 10,000 instead of Rs 20,000, now corrected) (iii) Raghus A/c Dr. 5,000 To Purchases A/c 5,000 (Credit purchases from Raghu recorded as Rs. 25,000 instead of Rs. 20,000). (iv) Suspense A/c Dr. 20,000 To Raghus A/c 20,000 (Credit purchases from Raghu not posted to his account now corrected). (v) Suspense A/c Dr. 18,000 To Raghus A/c 18,000 (Credit purchases from Raghu Rs. 20,000 posted to his account as Rs. 2,000 (vi) Raghavs A/c Dr. 20,000 To Raghus A/c 20,000 (Credit purchases from Raghu wrongly credited to Raghav, now corrected) (vii) Suspense A/c Dr. 40,000 To Raghus A/c 40,000 (Credit purchases from Raghu Rs. 20,000 wrongly posted to the debit of his account, now corrected).
Trial Balance and Rectification of Errors (viii) Suspense A/c Dr. 40,000 To Raghavs A/c 20,000 To Raghus A/c 20,000 (Credited purchases from Raghu Rs. 20,000 wrongly debited to Raghav, now corrected). (ix) Sales A/c Dr. 20,000 Purchases A/c Dr. 20,000 To Raghus A/c 40,000 (Credit purchases from Raghu wrongly recorded through sales book, now corrected).
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Illustration 2 Rectify the following errors : Cash sales Rs. 16,000 (i) were not posted to sales account. (ii) were posted as Rs. 6,000 in sales account. (iii) were posted to commission account. Solution (i) Suspense A/c Dr. 16,000 To Sales A/c (Cash sales not posted to sales account now rectified)
(ii)
16,000
Suspense A/c Dr. 10,000 To Sales A/c 10,000 (Cash sales Rs. 16,000 were posted to sales account as Rs. 6,000, now rectified) (iii) Commission A/c Dr. 16,000 To Sales A/c 16,000 (Cash sales posted to commission account instead of sales account, now corrected)
208 Illustration 3 Depreciation written-off as the machinery Rs. 2,000 (i) was not posted (ii) was not posted to machinery account (iii) was not posted to depreciation account Solution (i)
Accountancy
It was recorded through journal proper. From journal proper posting to all the accounts are made individually. Hence, no posting was made to depreciation account and machinery account. Therefore, rectification entry will be : Depreciation A/c Dr. 2,000 To Machinery A/c (Depreciation on machinery not posted, now corrected)
2,000
(ii) In this case posting was not made to machinery account. It is to be assumed that depreciation account should have been correctly debited. Therefore, rectification entry shall be : Suspense A/c Dr. 2,000 To Machinery A/c 2,000 (Depreciation on machinery not posted to Machinery account, now corrected). (iii) In this case depreciation account was not been debited. However, machinery account must have been correctly credited. Therefore, rectification entry shall be : Depreciation A/c Dr. 2,000 To Suspense A/c 2,000 (Depreciation on machinery not posted to Depreciation account, now corrected).
Illustration 4 Trial balance of Anurag did not agree. It showed an excess credit Rs. 10,000. Anurag put the difference to suspense account. He located the following errors : (i) Sales return book over cast by Rs. 1,000. (ii) Purchases book was undercast by Rs. 600. (iii) In the sales book total of page no. 4 was carried forward to page 5 as Rs. 1,000 instead of Rs. 1,200 and total of page 8 was carried forward to page 9 as Rs. 5,600 instead of Rs. 5,000. (iv) Goods returned to Ram Rs. 1,000 were recorded through sales book. (v) Credit purchases from M & Co. Rs. 8,000 were recorded through sales book. (vi) Credit purchases from S & Co. Rs. 5,000 were recorded through sales book. However, S & Co. were correctly credited. (vii) Salary paid Rs. 2,000 was debited to employees personal account.
Trial Balance and Rectification of Errors Solution (i) Suspense A/c Dr. 1,000 To Sales Return A/c (Sales returns book overcast by Rs. 1,000, now corrected). (ii) Purchases A/c Dr. 600 To Suspense A/c (Purchases book undercast by Rs. 600, now corrected) (iii) Sales A/c Dr. 400 To Suspense A/c (Error in carry forward of sales book, now corrected).
209
1,000
600
400
Note : Errors in carry forward the total of one page to another during a period finally affects the total of that book resulting in error of under/overcastting. In this case, carry forward from page 4 to 5 resulted in undercasting of Rs. 200 and carry forward from page 8 to page 9 resulted in overcasting of Rs. 600. Overall overcastting being Rs. 600200 = Rs. 400. (iv) Sales A/c Dr. 1,000 To Return Outwards A/c 1,000 (Return Outwards wrongly recorded through sales book, now rectified). (v) Purchases A/c Dr. 8,000 Sales A/c Dr. 8,000 To M & Co.s A/c 16,000 (Credit purchases wrongly recorded through sales book, now rectified). (vi) Purchases A/c Dr. 5,000 Sales A/c Dr. 5,000 To Suspense A/c 10,000 (Credit purchases wrongly recorded through sales book, however suppliers account correctly credited, now rectified).
210 (vii)
Accountancy
Salary A/c Dr. 2,000 To Employees personal A/c 2,000 (Salary paid wrongly debited to employees personal account, now corrected)
Suspense Account Dr. Date Particulars Difference as per trial balance Sales return J.F. Amount Date Particulars Rs. 10,000 1,000 Purchases Sales Purchases Sales 600 400 5,000 5,000 11,000 J.F. Cr. Amount Rs.
11,000
Illustration 5 Trial balance of Rahul did not agree. Rahul put the difference to suspense account. Subsequently, he located the following errors : (i) Wages paid for installation of Machinery Rs. 600 was posted to wages account. (ii) Repairs to Machinery Rs. 400 debited to Machinery account. (iii) Repairs paid for the overhauling of second hand machinery purchased Rs. 1,000 was debited to Repairs account. (iv) Own business material Rs. 8,000 and wages Rs. 2,000 were used for construction of building. No adjustment was made in the books. (v) Furniture purchased for Rs. 5,000 was posted to purchase account as Rs. 500. (vi) Old machinery sold to Karim at its book value of Rs. 2,000 was recorded through sales book. (vii) Total of sales returns book Rs. 3,000 was not posted to the ledger. Rectify the above errors and prepare suspense account to ascertain the original difference in trial balance. (i) Machinery A/c Dr. 600 To Wages A/c 600 (Wages paid for installation of machinery wrongly debited to wages account, now rectified) (ii) Repairs A/c Dr. 400 To Machinery A/c 400 (Repairs paid wrongly debited to machinery account now rectified)
Trial Balance and Rectification of Errors (iii) Machinery A/c Dr. 1,000 To Repairs A/c 1,000 (Repairs for overhauling of second hand machinery purchased, wrongly debited to repairs account, now rectified). (iv) Building A/c Dr. 10,000 To Purchases A/c 8,000 To Wages A/c 2,000 (Material and wages used for construction of Building, not debited to building account). (v) Furniture A/c Dr. 5,000 To Purchases A/c 500 To Suspense A/c 4,500 (Furniture purchased for Rs. 5,000 wrongly debited to purchases account as Rs. 500, now rectified). (vi) Sales A/c Dr. 2,000 To Machinery 2,000 (Sale of machinery wrongly recorded in sales book, now rectified). (vii) Sales Return A/c Dr. 3,000 To Suspense A/c 3,000 (Total of sales returns book not posted to ledger, now rectified).
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Suspense Account Date Particulars Difference as per trial balance J.F. Amount Date Particulars Rs. 7,500 7,500 Hence, original difference in Trial Balance was Rs. 7,500 excess credited. Furniture Sales return J.F. Amount Rs. 4,500 3.000 7,500
212 Illustration 6
Accountancy
Trial balance of Anant Ram did not agree. It showed an excess credit of Rs. 16,000. He put the difference to suspense account. Subsequently the following errors were located: (i) Cash received from Mohit Rs. 4,000 was posted to Mahesh as Rs. 1,000. (ii) Cheque for Rs. 5,800 received from Arnav in full settlement of his account of Rs. 6,000, was dishonoured. No entry was passed in the books on dishonour of the cheque. (iii) Rs. 800 received from Khanna, whose account had previously been written off as bad, was credited to his account. (iv) Credit sales to Manav for Rs. 5,000 was recorded through the purchases book as Rs. 2,000. (v) Purchases book undercast by Rs. 1,000. (vi) Repairs on machinery Rs. 1,600 wrongly debited to Machinery account as Rs. 1,000. (vii) Goods returned by Nathu Rs. 3,000 were taken into stock. No entry was recorded in the books. Solution (i) Maheshs A/c Dr. 1,000 Suspense A/c Dr. 3,000 To Mohits A/c 4,000 (Cash received from Mohit Rs. 4,000 wrongly posted to Mahesh as Rs.1,000, now rectified) (ii) Arnavs A/c Dr. 6,000 To Bank A/c 5,800 To Discount Allowed A/c 200 (Cheque received from Arnav for Rs. 5,800 in full settlement of his account of Rs. 6,000, dishonoured but no entry made in books, now rectified) (iii) Khannas A/c Dr. 800 To Bad debts recovered A/c 800 (Bad debts recovered wrongly credited to Khannas account, now rectified)
Trial Balance and Rectification of Errors (iv) Manavs A/c Dr. 7,000 To Purchases A/c 2,000 To Sales A/c 5,000 (Credit sales to Manav Rs. 5,000 wrongly recorded through purchases book as Rs. 2,000, now rectified) (v) Purchases A/c Dr. To Suspense A/c (Purchases book undercast by Rs. 1,000) (vi) Repairs A/c Dr. 1,600 To Machinery A/c 1,000 To Suspense A/c 600 (Repairs on machinery Rs. 1,600 wrongly debited to machinery account as Rs. 1,000, now rectified) (vii) Sales Return A/c Dr. To Nathus A/c (Sales return from Nathu not recorded) 3,000 3,000 1,000 1,000
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Suspense Account Dr. Date Particulars Difference as per trial balance Mohit J.F. Amount Date Particulars Rs. 16,000 3,000 19,000 Purchases Repairs Balance c/d Cr. J.F. Amount Rs. 1,000 600 17,400 19,000
Note : Even after rectification of errors suspense account is showing a debit balance of Rs. 17,400. This is due to non-detection of errors affecting trial balance. Balance of suspense account will be carried forward to the next year and will be eliminated as and when all the remaining errors affecting trial balance are located.
214 Illustration 7
Accountancy
Trial balance of Kailash did not agree. He put the difference to suspense account. The following errors were discovered : Goods withdrawn by Kailash for personal use Rs. 500 were not recorded in the books. (ii) Discount allowed to Ramesh Rs.60 on receiving Rs. 2,040 from him was not recorded in the books. (iii) Discount received from Rohan Rs. 50 on paying Rs. 3,250 to him was not posted at all. (iv) Rs. 700 received from Khalil, a debtor, whose account had earlier been written-off as bad, were credited to his personal account. (v) Cash received from Govil, a debtor, Rs. 5,000 was posted to his account as Rs. 500. (vi) Goods returned to Mahesh Rs. 700 were posted to his account as Rs. 70. (vii) Bill receivable from Narayan Rs. 1,000 was dishonoured and wrongly debited to allowances account as Rs. 10,000. Give journal entries to rectify the above errors and prepare suspense account to ascertain the amount of difference in trial balance. Solution. (i) Drawings A/c Dr. 500 To Purchases A/c 500 (Goods withdrawn by proprietor for personal use not recorded, now rectified). (ii) Discount allowed A/c Dr. 60 To Rameshs A/c (Discount allowed to Ramesh not recorded, now rectified) (iii) Rohans A/c Dr. 50 To Discount received A/c (Discount received from Rohan not posted , now corrected) (iv) Khalils A/c Dr. 700 To Bad debts recovered A/c 700 (Bad debts recovered wrongly credited to debtors personal account, now corrected) (i)
60
50
Trial Balance and Rectification of Errors (v) Suspense A/c Dr. 4,500 To Govils A/c 4,500 (Cash received from Govil Rs. 5,000 wrongly posted to his account as Rs. 500) (vi) Maheshs A/c Dr. 630 To Suspense A/c 630 (Goods returned to Mahesh Rs. 700 wrongly posted to his account as Rs. 70, now corrected) (vii) Narayans A/c Dr. 1,000 Suspense A/c Dr. 9,000 To Allowances A/c 10,000 (Bill receivables from Narayan Rs. 1,000 wrongly debited to allowances account as Rs. 10,000).
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Suspense Account Dr. Date Particulars Govil Allowances J.F. Amount Date Particulars Rs. 4,500 Mahesh 9,000 Difference as per trial balance 13,500 Test Your Understanding - IV Tick the Correct Answer (1) Agreement of trial balance is affected by: (a) One sided errors only. (b) Two sided errors only. (c) Both a and b. (d) None of the above. (2) Which of the following is not an error of principle: (a) Purchase of furniture debited to purchases account. (b) Repairs on the overhauling of second hand machinery purchased debited to repairs account. Cr. J.F. Amount Rs. 630 12,870 13,500
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Accountancy (c) Cash received from Manoj posted to Saroj. (d) Sale of old car credited to sales account. Which of the following is not an error of commission: (a) Overcasting of sales book. (b) Credit sales to Ramesh Rs. 5,000 credited to his account. (c) Wrong balancing of machinery account. (d) Cash sales not recorded in cash book. Which of following errors will be rectified through suspense account: (a) Sales return book undercast by Rs. 1,000. (b) Sales return by Madhu Rs. 1,000 not recorded. (c) Sales return by Madhu Rs 1,000. recorded as Rs,100. (d) Sales return by Madhu Rs. 1,000 recorded through purchases returns book If the trial balance agrees, it implies that: (a) There is no error in the books. (b) There may be two sided errors in the book. (c) There may be one sided error in the books. (d) There may be both two sided and one sided errors in the books. If suspense account does not balance off even after rectification of errors it implies that: (a) There are some one sided errors only in the books yet to be located. (b) There are no more errors yet to be located. (c) There are some two sided errors only yet to be located. (d) There may be both one sided errors and two sided errors yet to be located. If wages paid for installation of new machinery is debited to wages Account, it is: (a) An error of commission. (b) An error of principle. (c) A compensating error. (d) An error of omission. Trial balance is: (a) An account. (b) A statement. (c) A subsidiary book. (d) A principal book. A Trial balance is prepared: (a) After preparation financial statement. (b) After recording transactions in subsidiary books. (c) After posting to ledger is complete. (d) After posting to ledger is complete and accounts have been balanced, Key Terms Introduced in the Chapter Trial Balance Error of Commission Error Omission Compensating Error Error of Principle Suspense Account
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Trial Balance and Rectification of Errors Summary with Reference to Learning Objectives 1. 2. Meaning of trial balance : A statement showing the abstract of the balance (debit/credit) of various accounts in the ledger. Objectives of trial balance : The main objectives of preparing the trial balance are : (i) to ascertain the arithmetical accuracy of the ledger accounts; (ii) to help in locating errors; and (iii) to help in the preparatioon of the final accounts. Preparation of trial balance by the balance method : In this method, the trial balance has three columns. The first column is for the head of the account, the second column for writing the debit balance and the third for the credit balance of each account in the ledger. Various types of errors : (i) Errors of commission : Errors caused due to wrong recording of a transaction, wrong totalling, wrong casting, wrong balancing, etc. (ii) Errors of Omission : Errors caused due to omission of recording a transaction entirely or party in the books of account. (iii) Errors of Principle : Errors arising due to wrong classificatrion of receipts and payments between revenue and capital receipts and revenue and capital expenditure. (iv) Compensating errors : Two or more errors committed in such a way that they nullify the effect of each other on the debits and credits. Rectification of errors : Errors affecting only one account can be rectified by giving an explanatory note or by passing a journal entry. Errors which affect two or more accounts are rectified by passing a journal entry. Meaning and utility of suspense account : An account in which the difference in the trial balance is put till such time that errors are located and rectified. It facilitates the preparation of financial statements even when the trial balance does not tally. Disposal of suspense account : When all the errors are located and rectified the suspense account stands disposed off. Questions for Practice Short Answers 1. 2. 3. 4. 5. State the meaning of a trial balance? Give two examples of errors of principle? Give two examples of errors of commission? What are the methods of preparing trial balance? What are the steps taken by an accountant to locate the errors in the trial balance? 6. What is a suspense account? Is it necessary that is suspense account will balance off after rectification of the errors detected by the accountant? If not, then what happens to the balance still remaining in suspense account? 7. What kinds of errors would cause difference in the trial balance. Also list examples that would not be revealed by a trial balance? 8. State the limitations of trial balance?
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3.
4.
5.
6.
7.
218 Long Answers
Accountancy
1. Describe the purpose for the preparation of trial balance. 2. Explain errors of principle and give two examples with measures to rectify them. 3. Explain the errors of commission and give two examples with measures to rectify them. 4. What are the different types of errors that are usually committed in recording business transaction. 5. As an accounts for a company, you are disappointed to learn that the totals in your new trial balance are not equal. After going through a careful analysis, you have discovered only one error. Specifically, the balance of the Office Equipment account has a debit balance of Rs. 15,600 on the trial balance. However, you have figured out that a correctly recorded credit purchase of pendrive for Rs 3,500 was posted from the journal to the ledger with a Rs. 3,500 debit to Office Equipment and another Rs. 3,500 debit to creditors accounrts. Answer each of the following questions and present the amount of any misstatement : (a) Is the balance of the office equipment account overstated, understated, or correctly stated in the trial balance? (b) Is the balance of the creditors account overstated, understated, or correctly stated in the trial balance? (c) Is the debit column total of the trial balance overstated, understated, or correclty stated? (d) Is the credit column total of the trial balance overstated, understated, or correctly stated? (e) If the debit column total of the trial balance is Rs. 2,40,000 before correcting the error, what is the total of credit column. Numerical Questions 1. Rectify the following errors : (i) Credit sales to Mohan Rs. 7,000 were not recorded. (ii) Credit purchases from Rohan Rs. 9,000 were not recorded. (iii) Goods returned to Rakesh Rs. 4,000 were not recorded. (iv) Goods returned from Mahesh Rs. 1,000 were not recorded. 2. Rectify the following errors : (i) Credit sales to Mohan Rs. 7,000 were recorded as Rs.700. (ii) Credit purchases from Rohan Rs. 9,000 were recorded. as Rs.900. (iii) Goods returned to Rakesh Rs. 4,000 were recorded as Rs 400. (iv) Goods returned from Mahesh Rs. 1,000 were recorded as Rs.100. 3. Rectify the following errors : (i) Credit sales to Mohan Rs. 7,000 were recorded as Rs.7,200. (ii) Credit purchases from Rohan Rs. 9,000 were recorded as Rs. 9,900. (iii) Goods returned to Rakesh Rs. 4,000 were recorded as Rs 4,040. (iv) Goods returned from Mahesh Rs. 1,000 were recorded as Rs.1,600.
Trial Balance and Rectification of Errors 4. Rectify the following errors : (a) Salary paid Rs. 5,000 was debited to employees personal account. (b) Rent Paid Rs. 4,000 was posted to landlords personal account. (c) Goods withdrawn by proprietor for personal use Rs. 1,000 were debited to sundry expenses account. (d) Cash received from Kohli Rs. 2,000 was posted to Kapurs account. (e) Cash paid to Babu Rs. 1,500 was posted to Sabus account. 5. Rectify the following errors : (a) Credit Sales to Mohan Rs. 7,000 were recorded in purchases book. (b) Credit Purchases from Rohan Rs. 9,00 were recorded in sales book. (c) Goods returned to Rakesh Rs. 4,000 were recorded in the sales return book. (d) Goods returned from Mahesh Rs. 1,000 were recorded in purchases return book. (e) Goods returned from Nahesh Rs. 2,000 were recorded in purchases book. 6. Rectify the following errors : (a) Sales book overcast by Rs. 700. (b) Purchases book overcast by Rs. 500. (c) Sales return book overcast by Rs. 300. (d) Purchase return book overcast by Rs. 200. 7. Rectify the following errors : (a) Sales book undercast by Rs.300. (b) Purchases book undercast by Rs.400. (c) Return Inwards book undercast by Rs.200. (d) Return outwards book undercast by Rs.100. 8. Rectify the following errors and ascertain the amount of difference in trial balance by preparing suspense account : (a) Credit sales to Mohan Rs. 7,000 were not posted. (b) Credit purchases from Rohan Rs. 9,000 were not posted. (c) Goods returned to Rakesh Rs. 4,000 were not posted. (d) Goods returned from Mahesh Rs. 1,000 were not posted. (e) Cash paid to Ganesh Rs. 3,000 was not posted. (f) Cash sales Rs. 2,000 were not posted. (Ans : Difference in trial balance Rs. 2,000 excess credit). 9. Rectify the following errors and ascertain the amount of difference in trial balance by preparing suspense account : (a) Credit sales to Mohan Rs. 7,000 were posted as Rs. 9,000. (b) Credit purchases from Rohan Rs. 9,000 were posted as Rs. 6,000. (c) Goods returned to Rakesh Rs. 4,000 were posted as Rs. 5,000. (d) Goods returned from Mahesh Rs. 1,000 were posted as Rs. 3,000. (e) Cash sales Rs. 2,000 were posted as Rs. 200. (Ans : Difference in trial balance Rs. 5,800 excess debit.)
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Accountancy 10. Rectify the following errors : (a) Credit sales to Mohan Rs. 7,000 were posted to Karan. (b) Credit purchases from Rohan Rs. 9,000 were posted to Gobind. (c) Goods returned to Rakesh Rs. 4,000 were posted to Naresh. (d) Goods returned from Mahesh Rs. 1,000 were posted to Manish. (e) Cash sales Rs. 2,000 were posted to commission account. 11. Rectify the following errors assuming that a suspense account was opened. Ascertain the difference in trial balance. (a) Credit sales to Mohan Rs. 7,000 were posted to the credit of his account. (b) Credit purchases from Rohan Rs. 9,000 were posted to the debit of his account as Rs. 6,000. (c) Goods returned to Rakesh Rs. 4,000 were posted to the credit of his account. (d) Goods returned from Mahesh Rs. 1,000 were posted to the debit of his account as Rs. 2,000. (e) Cash sales Rs. 2,000 were posted to the debit of sales account as Rs. 5,000. (Ans : Difference in trial balance Rs. 3,000 excess debit). 12. Rectify the following errors assuming that a suspense account was opened. Ascertain the difference in trial balance. (a) Credit sales to Mohan Rs. 7,000 were posted to Karan as Rs. 5,000. (b) Credit purchases from Rohan Rs. 9,000 were posted to the debit of Gobind as Rs 10,000. (c) Goods returned to Rakesh Rs. 4,000 were posted to the credit of Naresh as Rs 3,000. (d) Goods returned from Mahesh Rs. 1,000 were posted to the debit of Manish as Rs. 2,000. (e) Cash sales Rs. 2,000 were posted to commission account as Rs. 200. (Ans : Difference in trial balance Rs. 14, 800 excess debit). 13. Rectify the following errors assuming that suspense account was opened. Ascertain the difference in trial balance. (a) Credit sales to Mohan Rs. 7,000 were recorded in Purchase Book. However, Mohans account was correctly debited. (b) Credit purchases from Rohan Rs. 9,000 were recorded in sales book. However, Rohans account was correctly credited. (c) Goods returned to Rakesh Rs. 4,000 were recorded in sales return book. However, Rakeshs account was correctly debited. (d) Goods returned from Mahesh Rs. 1,000 were recorded through purchases return book. However, Maheshs account was correctly credited. (e) Goods returned to Naresh Rs. 2,000 were recorded through purchases book. However, Nareshs account was correctly debited. (Ans : Difference in trial balance Rs. 6,000 excess debit).
Trial Balance and Rectification of Errors 14. Rectify the following errors : (a) Furniture purchased for Rs. 10,000 wrongly debited to purchases account. (b) Machinery purchased on credit from Raman for Rs. 20,000 was recorded through purchases book. (c) Repairs on machinery Rs. 1,400 debited to machinery account. (d) Repairs on overhauling of secondhand machinery purchased Rs. 2,000 was debited to Repairs account. (e) Sale of old machinery at book value of Rs. 3,000 was credited to sales account. 15. Rectify the following errors assuming that suspension account was opened. Ascertain the difference in trial balance. (a) Furniture purchased for Rs. 10,000 wrongly debited to purchase account as Rs. 4,000. (b) Machinery purchased on credit from Raman for Rs. 20,000 recorded through Purchases Book as Rs. 6,000. (c) Repairs on machinery Rs. 1,400 debited to Machinery account as Rs. 2,400. (d) Repairs on overhauling of second hand machinery purchased Rs. 2,000 was debited to Repairs account as Rs. 200. (e) Sale of old machinery at book value Rs. 3,000 was credited to sales account as Rs. 5,000. (Ans : Difference in trial balance Rs. 8,800 excess credit). 16. Rectify the following errors : (a) Depreciation provided on machinery Rs. 4,000 was not posted. (b) Bad debts written off Rs. 5,000 were not posted. (c) Discount allowed to a debtor Rs. 100 on receiving cash from him was not posted. (d) Discount allowed to a debtor Rs. 100 on receiving cash from him was not posted to discount account. (e) Bill receivable for Rs. 2,000 received from a debtor was not posted. 17. Rectify the following errors : (a) Depreciation provided on machinery Rs. 4,000 was posted as Rs. 400. (b) Bad debts written off Rs. 5,000 were posted as Rs. 6,000. (c) Discount allowed to a debtor Rs. 100 on receiving cash from him was posted as Rs. 60. (d) Goods withdrawn by proprietor for personal use Rs. 800 were posted as Rs. 300. (e) Bill receivable for Rs. 2,000 received from a debtor was posted as Rs. 3,000. 18. Rectify the following errors assuming that suspense account was opened. Ascertain the difference in trial balance. (a) Depreciation provided on machinery Rs. 4,000 was not posted to Depreciation account.
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Accountancy (b) Bad debts written-off Rs. 5,000 were not posted to Debtors account. (c) Discount allowed to a debtor Rs. 100 on receiving cash from him was not posted to discount allowed account. (d) Goods withdrawn by proprietor for personal use Rs. 800 were not posted to Drawings account. (e) Bill receivable for Rs. 2,000 received from a debtor was not posted to Bills receivable account. (Ans : Difference in trial balance Rs. 1,900 excess credit). 19. Trial balance of Anuj did not agree. It showed an excess credit of Rs. 6,000. He put the difference to suspense account. He discovered the following errors. (a) Cash received from Ravish Rs. 8,000 posted to his account as Rs. 6,000. (b) Returns inwards book overcast by Rs. 1,000. (c) Total of sales book Rs. 10,000 was not posted to Sales account. (d) Credit purchases from Nanak Rs. 7,000 were recorded in sales Book. However, Nanaks account was correctly credited. (e) Machinery purchased for Rs. 10,000 was posted to purchases account as Rs. 5,000. Rectify the errors and prepare suspense account. (Ans : Total of suspense account Rs. 19,000). 20. Trial balance of Raju showed an excess debit of Rs. 10,000. He put the difference to suspense account and discovered the following errors : (a) Depreciation written-off the furniture Rs. 6,000 was not posted to Furniture account. (b) Credit sales to Rupam Rs. 10,000 were recorded as Rs. 7,000. (c) Purchases book undercast by Rs. 2,000. (d) Cash sales to Rana Rs. 5,000 were not posted. (e) Old Machinery sold for Rs. 7,000 was credited to sales account. (f) Discount received Rs. 800 from kanan on playing cash to him was not posted. Rectify the errors and prepare suspense account. (Ans : Balance carried forward in suspense account Rs. 1,000 (cr.)). 21. Trial balance of Madan did not agree and he put the difference to suspense account. He discovered the following errors: (a) Sales return book overcast by Rs. 800. (b) Purchases return to Sahu Rs. 2,000 were not posted. (c) Goods purchased on credit from Narula Rs. 4,000 though taken into stock, but no entry was passed in the books. (d) Installation charges on new machinery purchased Rs. 500 were debited to sundry expenses account as Rs. 50. (e) Rent paid for residential accommodation of madam (the proprietor) Rs. 1,400 was debited to Rent account as Rs. 1,000. Rectify the errors and prepare suspense account to ascertain the difference in trial balance. (Ans : Difference in trial balance Rs. 2,050 excess credit).
Trial Balance and Rectification of Errors 22. Trial balance of Kohli did not agree and showed an excess debit of Rs. 16,300. He put the difference to a suspense account and discovered the following errors: (a) Cash received from Rajat Rs. 5,000 was posted to the debit of Kamal as Rs. 6,000. (b) Salaries paid to an employee Rs. 2,000 were debited to his personal account as Rs. 1200. (c) Goods withdrawn by proprietor for personal use Rs. 1,000 were credited to sales account as Rs. 1,600. (d) Depreciation provided on machinery Rs. 3,000 was posted to Machinery account as Rs. 300. (e) Sale of old car for Rs. 10,000 was credited to sales account as Rs. 6,000. Rectify the errors and prepare suspense account. (Ans : total of suspense account : Rs. 17,700). 23. Give journal entries to rectify the following errors assuming that suspense account had been opened. (a) Goods distributed as free sample Rs. 5,000 were not recorded in the books. (b) Goods withdrawn for personal use by the proprietor Rs. 2,000 were not recorded in the books. (c) Bill receivable received from a debtor Rs. 6,000 was not posted to his account. (d) Total of Returns inwards book Rs. 1,200 was posted to Returns outwards account. (e) Discount allowed to Reema Rs. 700 on receiving cash from her was recorded in the books as Rs. 70. (Ans : Difference in trial balance Rs. 3,600 excess debit). 24. Trial balance of Khatau did not agree. He put the difference to suspense account and discovered the following errors : (a) Credit sales to Manas Rs. 16,000 were recorded in the purchases book as Rs. 10,000 and posted to the debit of Manas as Rs. 1,000. (b) Furniture purchased from Noor Rs. 6,000 was recorded through purchases book as Rs. 5,000 and posted to the debit of Noor Rs. 2,000. (c) Goods returned to Rai Rs. 3,000 recorded through the Sales book as Rs. 1,000. (d) Old machinery sold for Rs. 2,000 to Maneesh recorded through sales book as Rs. 1,800 and posted to the credit of Manish as Rs. 1,200. (e) Total of Returns inwards book Rs. 2,800 posted to Purchase account. Rectify the above errors and prepare suspense account to ascertain the difference in trial balance. (Ans : Difference in trial balance Rs. 15,000 excess debit). 25. Trial balance of John did not agree. He put the difference to suspense account and discovered the following errors : (a) In the sales book for the month of January total of page 2 was carried forward to page 3 as Rs. 1,000 instead of Rs. 1200 and total of page 6 was carried forward to page 7 as Rs. 5,600 instead of Rs. 5,000.
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Accountancy (b) Wages paid for installation of machinery Rs. 500 was posted to wages account as Rs. 50. (c) Machinery purchased from R & Co. for Rs. 10,000 on credit was entered in Purchase Book as Rs. 6,000 and posted there from to R & Co. as Rs. 1,000. (d) Credit sales to Mohan Rs. 5,000 were recorded in Purchases Book. (e) Goods returned to Ram Rs. 1,000 were recorded in Sales Book. (f) Credit purchases from S & Co. for Rs. 6,000 were recorded in sales book. However, S & Co. was correctly credited. (g) Credit purchases from M & Co. Rs. 6,000 were recorded in Sales Book as Rs. 2,000 and posted there from to the credit of M & Co. as Rs. 1,000. (h) Credit sales to Raman Rs. 4,000 posted to the credit of Raghvan as Rs. 1,000. (i) Bill receivable for Rs. 1,600 from Noor was dishonoured and posted to debit of Allowances account. (j) Cash paid to Mani Rs. 5,000 against our acceptance was debited to Manu. (k) Old furniture sold for Rs. 3,000 was posted to Sales account as Rs. 1,000. (l) Depreciation provided on furniture Rs. 800 was not posted. (m) Material Rs. 10,000 and wages Rs. 3,000 were used for construction of building. No adjustment was made in the books. Rectify the errors and prepare suspense to ascertain the difference in trial balance. (Ans : Difference in trial balance Rs. 13,850 excess credit). Checklist to Test Your Understanding Test your understanding - I Trial Balance Total Rs. 5,17,000 Test your understanding - II 1. Purchases A/c To Rajnis A/c Rajnis A/c To Sales A/c Rajnis A/c To Sales A/c To Purchases A/c 2. Purchases A/c To Raos A/c Dr. 5,000 5,000 Dr. 5,000 5,000 Dr. 10,000 5,000 5,000 Dr. 8,000 8,000
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Furniture A/c To Purchases A/c 3. Cash A/c To Commission A/c Cash A/c To Sales A/c Commission A/c To Sales A/c 4. Cash A/c To Nadeems A/c Cash A/c To Karims A/c
Dr.
8,000 8,000
Dr.
15,000 15,000
Dr.
15,000 15,000
Dr.
15,000 15,000 6, 000 6,000
Dr.
Dr.
6,000 6,000
Test Your Understanding - III 1. Error of Commission Mohans A/c To Sales A/c Mohans A/c To Sales A/c Suspense A/c To Mohans A/c 2. Error of Partial omission xxx A/c To Cash A/c Nehas A/c To Suspense A/c Nehas A/c To Suspense A/c Dr. 2,000 2,000 Dr. 2,000 2,000 Dr. 2,000 2,000 Dr. 12, 000 12,000 10,000 10,000 Dr. 2,000 2,000
Dr.
226 3. Error of Commission Sales Return A/c To Meghas A/c Dr. 1,600 1,600
Accountancy
Sales Returns A/c To Meghas A/c
Dr.
1,600 1,600
Suspense A/c To Meghas A/c
Dr.
600 600
4.
Error of Commission xxx To Furniture A/c
Dr.
1,500 1,500
Depreciation A/c To Furniture A/c
Dr.
1,500 1,500
Depreciation A/c To Suspense A/c
Dr.
1,500 1,500
Test Your Understanding - IV 1. (c) 2. (c) 3. (d) 4. (a) 5. (b) 6. (a) 7. (b) 8. (b) 9. (d)
Depreciation, Provisions and Reserves
M
LEARNING OBJECTIVES
After studying this chapter, you will be able to : explain the meaning of depreciation and distinguish it from amortisation and depletion; state the need for charging depreciation and identify its causes; compute depreciation using straight line and written down value methods; record transactions relating to depreciation and disposition of assets; explain the meaning and purpose of creating provisions and reserves; distinguish between reserves and provisions; explain the nature of various types of provisions and reserves including secret reserve.
atching principle requires that the revenue of a given period is matched against the expenses for the same period. This ensures ascertainment of the correct amount of profit or loss. If some cost is incurred whose benefits extend for more than one accounting period then it is not justified to charge the entire cost as expense in the year in which it is incurred. Rather such a cost must be spread over the periods in which it provides benefits. Depreciation, which is the main subject matter of the present chapter, deals with such a situation. Further, it may not always be possible to ascertain with certainty the amount of some particular expense. Recall that the principle of conservatism (prudence) requires that instead of ignoring such items of expenses, adequate provision must be made and charged against profits of the current period. Moreover, a part of profit may be retained in the business in the form of reserves to provide for growth, expansion or meeting certain specific needs of the business in future. This chapter deals with two distinct topics and hence is being presented in two different sections. First section deals with depreciation and second section deals with provisions and reserves. SECTION I 7.1 Depreciation Now you are aware that fixed assets are the assets which are used in business for more than one
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accounting year. Fixed assets (technically referred to as depreciable assets) tend to reduce their value once they are put to use. In general, the term Depreciation means decline in the value of a fixed assets due to use, passage of time or obsolescence. In other words, if a business enterprise procures a machine and uses it in production process then the value of machine declines with its usage. Even if the machine is not used in production process, we can not expect it to realise the same sales price due to the passage of time or arrival of a new model (obsolescence). It implies that fixed assets are subject to decline in value and this decline is technically referred to as depreciation. As an accounting term, depreciation is that part of the cost of a fixed asset which has expired on account of its usage and/or lapse of time. Hence, depreciation is an expired cost or expense, charged against the revenue of a given accounting period. For example, a machine is purchased for Rs.1,00,000 on April 01, 2005. The useful life of the machine is estimated to be 10 years. It implies that the machine can be used in the production process for next 10 years till March 31, 2015. You understand that by its very nature, Rs. 1,00,000 is a capital expenditure during the year 2005. However, when income statement (Profit and Loss account) is prepared, the entire amount of Rs.1,00,000 can not be charged against the revenue for the year 2005, because of the reason that the capital expenditure amounting to Rs.1,00,000 is expected to derive benefits (or revenue) for 10 years and not one year. Therefore, it is logical to charge only a part of the total cost say Rs.10,000 (one tenth of Rs. 1,00,000) against the revenue for the year 2005. This part represents, the expired cost or loss in the value of machine on account of its use or passage of time and is referred to as Depreciation. The amount of depreciation, being a charge against profit, is debited to the profit and loss account. 7.1.1 Meaning of Depreciation Depreciation may be described as a permanent, continuing and gradual shrinkage in the book value of fixed assets. It is based on the cost of assets consumed in a business and not on its market value. According to Institute of Cost and Management Accounting, London (ICMA) terminology The depreciation is the diminution in intrinsic value of the asset due to use and/or lapse of time. Accounting Standard-6 issued by The Institute of Chartered Accountants of India (ICAI) defines depreciation as a measure of the wearing out, consumption or other loss of value of depreciable asset arising from use, effluxion of time or obsolescence through technology and market-change. Depreciation is allocated so as to charge fair proportion of depreciable amount in each accounting period during the expected useful life of the asset. Depreciation includes amortisation of assets whose useful life is pre-determined.
Depreciation, Provisions and Reserves Box 1 AS-6 (Revised): Depreciation
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Depreciation is a measure of the wearing out, consumption or other loss of value of depreciable asset arising from use, effluxion of time or obsolescence through technology and market-change. Depreciation is allocated so as to charge fair proportion of depreciable amount in each accounting period during the expected useful life of the asset. Depreciation includes amortisation of assets whose useful life is pre-determined. Depreciation has a significant effect in determining and presenting the financial position and results of operations of an enterprise. Depreciation is charged in each accounting period by reference to the extent of the depreciable amount. The subject matter of depreciation, or its base, are depreciable assets which. are expected to be used during more than one accounting period. have a limited useful life; and are held by an enterprise for use in production or supply of goods and services, for rental to others, or for administrative purposes and not for the purpose of sale in the ordinary course of business. The amount of depreciation basically depends upon three factors, i.e. Cost, Useful life and Net realisable value. Cost of a fixed asset is the total cost spent in connection with its acquisition, installation and commissioning as well as for add item or improvement of the depreciable asset. Useful life of an asset is the period over which it is expected to be used by the enterprise. There are two main methods of calculating depreciation amount. straight line method written down value method Selection of appropriate method depends upon the following factors: type of the asset nature of the use of such asset circumstances prevailing in the business. The selected depreciation method should be applied consistently from period to period. Change in depreciation method may be allowed only under specific circumstances.
Depreciation has a significant effect in determining and presenting the financial position and results of operations of an enterprise. Depreciation is charged in each accounting period by reference to the extent of the depreciable amount. It should be noted that the subject matter of depreciation, or its base, are depreciable assets which: are expected to be used during more than one accounting period; have a limited useful life; and are held by an enterprise for use in production or supply of goods and services, for rental to others, or for administrative purposes and not for the purpose of sale in the ordinary course of business.
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Examples of depreciable assets are machines, plants, furnitures, buildings, computers, trucks, vans, equipments, etc. Moreover, depreciation is the allocation of depreciable amount, which is the historical cost, or other amount substituted for historical cost less estimated salvage value. Another point in the allocation of depreciable amount is the expected useful life of an asset. It has been described as either (i) the period over which a depreciable asset is expected to the used by the enterprise, or (ii) the number of production of similar units expected to be obtained from the use of the asset by the enterprise. 7.1.2 Features of Depreciation Above mentioned discussion on depreciation highlights the following features of depreciation: 1. It is decline in the book value of fixed assets. 2. It includes loss of value due to effluxion of time, usage or obsolescence. For example, a business firm buys a machine for Rs. 1,00,000 on April 01, 2000. In the year 2002, a new version of the machine arrives in the market. As a result, the machine bought by the business firm becomes outdated. The resultant decline in the value of old machine is caused by obsolescence. 3. It is a continuing process. 4. It is an expired cost and hence must be deducted before calculating taxable profits. For example, if profit before depreciation and tax is Rs. 50,000, and depreciation is Rs. 10,000; profit before tax will be:
Profit before depreciation & tax (-) Depreciation Profit before tax (Rs.) 50,000 (10,000) 40,000
5. It is a non-cash expense. It does not involve any cash outflow. It is the process of writing-off the capital expenditure already incurred.
Do it Yourself Look at your surroundings and identify at least five depreciable assets in your home, school, hospital, printing press and in a bakery.
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7.2 Depreciation and other Similar Terms There are some termslike depletion and amortisation, which are also used in connection with depreciation. This has been due to the similar treatment given to them in accounting on the basis of similarity of their outcome, since they represent the expiry of the usefulness of different assets. 7.2.1 Depletion The term depletion is used in the context of extraction of natural resources like mines, quarries, etc. that reduces the availability of the quantity of the material or asset. For example, if a business enterprise is into mining business and purchases a coal mine for Rs. 10,00,000. Then the value of coal mine declines with the extraction of coal out of the mine. This decline in the value of mine is termed as depletion. The main difference between depletion and depreciation is that the former is concerned with the exhaution of economic resources, but the latter relates to the usage of an asset. In spite of this, the result is erosion in the volume of natural resources and expiry of the service potential. Therefore, depletion and depreciation are given similar accounting treatment. 7.2.2 Amortisation Amortisation refers to writing-off the cost of intangible assets like patents, copyright, trade marks, franchises, leasehold mines which have entitlements to use for a specified period of time. The procedure for amortisation or periodic write-off of a portion of the cost of intangible assets is the same as that for the depreciation of fixed assets. For example, if a business firm buys a patent for Rs. 10,00,000 and estimates that its useful life will be 10 years then the business firm must write-off Rs. 10,00,000 over 10 years. The amount so written- off is technically referred to as amortisation. 7.3 Causes of Depreciation These have been very clearly spelt out as part of the definition of depreciation in the Accounting Standard 6 and are being elaborated here. 7.3.1 Wear and Tear due to Use or Passage of Time Wear and tear means deterioration, and the consequent diminution in an assets value, arising from its use in business operations for earning revenue. It reduces the assets technical capacities to serve the purpose for, which it has been meant. Another aspect of wear and tear is the physical deterioration. An asset deteriorates simply with the passage of time, even though they are not being put to any use. This happens especially when the assets are exposed to the rigours of nature like weather, winds, rains, etc.
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7.3.2 Expiration of Legal Rights Certain categories of assets lose their value after the agreement governing their use in business comes to an end after the expiry of pre-determined period. Examples of such assets are patents, copyrights, leases, etc. whose utility to business is extinguished immediately upon the removal of legal backing to them. 7.3.3 Obsolescence Obsolescence is another factor leading to depreciation of fixed assets. In ordinary language, obsolescence means the fact of being out-of-date. Obsolescence implies to an existing asset becoming out-of-date on account of the availability of better type of asset. It arises from such factors as: Technological changes; Improvements in production methods; Change in market demand for the product or service output of the asset; Legal or other description. 7.3.4 Abnormal Factors Decline in the usefulness of the asset may be caused by abnormal factors such as accidents due to fire, earthquake, floods, etc. Accidental loss is permanent but not continuing or gradual. For example, a car which has been repaired after an accident will not fetch the same price in the market even if it has not been used.
Test Your Understanding - I 1. You are looking at the profit and loss account of three business enterprises. You find the term depletion in first case and amortisation in third case. State the type of business of two enterprises are into. 2. A pharmaceutical manufacturer has just developed and registered a patent for a rare medicine. Which term will appear in its profit and loss account regarding the cost of patent written-off.
7.4 Need for Depreciation The need for providing depreciation in accounting records arises from conceptual, legal, and practical business consideration. These considerations provide depreciation a particular significance as a business expense. 7.4.1 Matching of Costs and Revenue The rationale of the acquisition of fixed assets in business operations is that these are used in the earning of revenue. Every asset is bound to undergo
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some wear and tear, and hence lose value, once it is put to use in business. Therefore, depreciation is as much the cost as any other expense incurred in the normal course of business like salary, carriage, postage and stationary, etc. It is a charge against the revenue of the corresponding period and must be deducted before arriving at net profit according to Generally Accepted Accounting Principles. 7.4.2 Consideration of Tax Depreciation is a deductible cost for tax purposes. However, tax rules for the calculation of depreciation amount need not necessarily be similar to current business practices, 7.4.3 True and Fair Financial Position If depreciation on assets is not provided for, then the assets will be over valued and the balance sheet will not depict the correct financial position of the business. Also, this is not permitted either by established accounting practices or by specific provisions of law. 7.4.4 Compliance with Law Apart from tax regulations, there are certain specific legislations that indirectly compel some business organisations like corporate enterprises to provide depreciation on fixed assets.
Test Your Understanding - II State whether the following statements are true or false: 1. Depreciation is a non-cash expense. 2. Depreciation is also charged on current assets. 3. Depreciation is decline in the market value of tangible fixed assets. 4. The main cause of depreciation is wear and tear caused by its usage. 5. Depreciation must be charged so as to ascertain true profit or loss of the business. 6. Depletion term is used in case of intangible assets. 7. Depreciation provides fund for replacement. 8. When market value of an asset is higher than book value, depreciation is not charged. 9. Depreciation is charged to reduce the value of asset to its market value. 10. If adequate maintenance expenditure is incurred, depreciation need not be charged.
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7.5 Factors Affecting the Amount of Depreciation The determination of depreciation depends on three parameters, viz. cost, estimated useful life and probable salvage value. 7.5.1 Cost of Asset Cost (also known as original cost or historical cost) of an asset includes invoice price and other costs, which are necessary to put the asset in use or working condition. Besides the purchase price, it includes freight and transportation cost, transit insurance, installation cost, registration cost, commission paid on purchase of asset add items such as software, etc. In case of purchase of a second hand asset it includes initial repair cost to put the asset in workable condition. According to Accounting Standand-6 of ICAI, cost of a fixed asset is the total cost spent in connection with its acquisition, installation and commissioning as well as for addition or improvement of the depreciable asset. For example, a photocopy machine is purchased for Rs. 50,000 and Rs. 5,000 is spent on its transportation and installation. In this case the original cost of the machine is Rs. 55,000 (i.e. Rs. 50,000 + Rs.5,000 ) which will be writtenoff as depreciation over the useful life of the machine. 7.5.2 Estimated Net Residual Value Net Residual value (also known as scrap value or salvage value for accounting purpose) is the estimated net realisable value (or sale value) of the asset at the end of its useful life. The net residual value is calculated after deducting the expenses necessary for the disposal of the asset. For example, a machine is purchased for Rs. 50,000 and is expected to have a useful life of 10 years. At the end of 10th year it is expected to have a sale value of Rs. 6,000 but expenses related to its disposal are estimated at Rs. 1,000. Then its net residual value shall be Rs. 5,000 (i.e. Rs. 6,000 Rs. 1,000). 7.5.3 Depreciable Cost Depreciable cost of an asset is equal to its cost (as calculated in point 7.5.1 above) less net residual value (as calculated in point 7.5.2,) Hence, in the above example, the depreciable cost of machine is Rs. 45,000 (i.e., Rs. 50,000 Rs. 5,000.) It is the depreciable cost, which is distributed and charged as depreciation expense over the estimated useful life of the asset. In the above example, Rs. 45,000 shall be charged as depreciation over a period of 10 years. It is important to mention here that total amount of depreciation charged over the useful life of the asset must be equal to the depreciable cost. If total amount of depreciation charged is less than the depreciable cost then the
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capital expenditure is under recovered. It violates the principle of proper matching of revenue and expense. 7.5.4 Estimated Useful Life Useful life of an asset is the estimated economic or commercial life of the asset. Physical life is not important for this purpose because an asset may still exist physically but may not be capable of commercially viable production. For example, a machine is purchased and it is estimated that it can be used in production process for 5 years. After 5 years the machine may still be in good physical condition but cant be used for production profitably, i.e., if it is still used the cost of production may be very high. Therefore, the useful life of the machine is considered as 5 years irrespective of its physical life. Estimation of useful life of an asset is difficult as it depends upon several factors such as usage level of asset, maintenance of the asset, technological changes, market changes, etc. As per Accounting Standard 6 useful life of an asset is normally the period over which it is expected to be used by the enterprise. Normally, useful life is shorter than the physical life. The useful life of an asset is expressed in number of years but it can also be expressed in other units, e.g., number of units of output (as in case of mines) or number of working hours. Useful life depends upon the following factors : Pre-determined by legal or contractual limits, e.g. in case of leasehold asset, the useful life is the period of lease. The number of shifts for which asset is to be used. Repair and maintenance policy of the business organisation. Technological obsolescence. Innovation/improvement in production method. Legal or other restrictions. 7.6 Methods of Calculating Depreciation Amount The depreciation amount to be charged for during an accounting year depends up on depreciable amount and the method of allocation. For this, two methods are mandated by law and enforced by professional accounting practice in India. These methods are straight line method and written down value method. Besides these two main methods there are other methods such as annuity method, depreciation fund method, insurance policy method, sum of years digit method, double declining method, etc. which may be used for determining the amount of depreciation. The selection of an appropriate method depends upon the following :
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Type of the asset; Nature of the use of such asset; Circumstances prevailing in the business;
As per Accounting Standard-6, the selected depreciation method should be applied consistently from period to period. Change in depreciation method may be allowed only under specific circumstances. 7.6.1 Straight Line Method This is the earliest and one of the widely used methods of providing depreciation. This method is based on the assumption of equal usage of the asset over its entire useful life. It is called straight line for a reason that if the amount of depreciation and corresponding time period is plotted on a graph, it will result in a straight line (figure 7.1). It is also called fixed installment method because the amount of depreciation remains constant from year to year over the useful life of the asset. According to this method, a fixed and an equal amount is charged as depreciation in every accounting period during the lifetime of an asset. The amount annually charged as depreciation is such that it reduces the original cost of the asset to its scrap value, at the end of its useful life. This method is also known as fixed percentage on original cost method because same percentage of the original cost (infact depreciable cost) is written off as depreciation from year to year. The depreciation amount to be provided under this method is computed by using the following formula:
Depreciation = Cost of asset Estimated net residential value Estimated useful life of the asset
Rate of depreciation under straight line method is the percentage of the total cost of the asset to be charged as deprecation during the useful lifetime of the asset. Rate of depreciation is calculated as follows:
Rate of Depreciation = Annual depreciation amount 100 Acquisition cost
Consider the following example, the original cost of the asset is Rs. 2,50,000. The useful life of the asset is 10 years and net residual value is estimated to be Rs. 50,000. Now, the amount of depreciation to be charged every year will be computed as given below:
Depreciation, Provisions and Reserves Annual Depreciation Amount

= Acqusition cost of asset Estimated net residential value Estimated life of asset Rs. 2,50,000 Rs. 50,000 = Rs. 20,000 10
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i.e. =
Fig. 7.1 : Depreciation amount under straight line method
The rate of depreciation will be calculated as : (i) Rate of Depreciation =

Annual depreciation amount 100 Acquisition cost
From point (i), the annual depreciation amounts to Rs. 20,000. Thus, the rate of depreciation will be =
Rs. 20,000 100 = 8% Rs. 2,50,000
7.6.1.1 Advantages of Straight Line Method Straight Line method has certain advantages which are stated below: It is very simple, easy to understand and apply. Simplicity makes it a popular method in practice; Asset can be depreciated upto the net scrap value or zero value. Therefore, this method makes it possible to distribute full depreciable cost over useful life of the asset; Every year, same amount is charged as depreciation in profit and loss account. This makes comparison of profits for different years easy; This method is suitable for those assets whose useful life can be estimated accurately and where the use of the asset is consistent from year to year such as leasehold buildings.
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7.6.1.2 Limitations of Straight Line Method Although straight line method is simple and easy to apply it suffers from certain limitations which are given below. This method is based on the faulty assumption of same utility of the asset in different accounting years; With the passage of time, work efficiency of the asset decreases and repair and maintenance expense increases. Hence, under this method total amount charged against profit on account of depreciation and repair taken together will not be uniform throughout the life of the asset, rather it will keep on increasing from year to year. 7.6.2 Written Down Value Method Under this method, depreciation is charged on the book value of the asset. Since book value keeps on reducing by the annual charge of depreciation, it is also known as reducing balance method. This method involves the application of a pre-determined proportion/percentage of the book value of the asset at the beginning of every accounting period, so as to calculate the amount of depreciation. The amount of depreciation reduces year after year. For example, the original cost of the asset is Rs. 2,00,000 and depreciation is charged @ 10% p.a. at written down value, then the amount of depreciation will be computed as follows:
10 = Rs. 20,000 100 (ii) Written down value = Rs. 2,00,000 20,000 = Rs.1,80,000 (at the end of the I year)
(i)
Depreciation (I year) = Rs. 20,00,000
10 = Rs. 18,000 100 (iv) Written down value = Rs. 1,80,000 Rs.18,000 = 1,62,000 (at the end of the II year)
(iii) Depreciation (II year) = Rs. 1,80,000
10 = Rs.16,200 100 (vi) Written down value = Rs. 1,62,000 Rs. 16,200 = Rs. 1,45,800 (at the end of III year)
(v) Depreciation (III year) = Rs. 1,62,000
As evident from the example, the amount of depreciation goes on reducing year after year. For this reason, it is also known reducing installment or diminishing value method. This method is based upon the assumption that the benefit accruing to business from assets keeps on diminishing as the asset becomes old (refer figure 7.2). This is due to the reason that a predetermined percentage is applied to a gradually shrinking balance on the
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asset account every year. Thus, large amount is recovered depreciation charge in the earlier years than in later years.
Fig. 7.2 : Depreciation amount using written down value method
Under written down value method, the rate of depreciation is computed by using the following formula:
s R = 1 n 100 c
Where, r = Rate of depreciation n = Expected useful life s = Scrap value c = Cost of an asset
For example, the original cost of a truck is Rs. 9,00,000 and its net salvage value after 16 years of useful life is Rs. 50,000 then the appropriate rate of depreciation will be computed as under:
50,000 R = 1 16 100 = (1 0.834) 100 = 16.6% 9,00,000
7.6.2.1 Advantages of Written Down Value Method Written down value method has the following advantages: This method is based on a more realistic assumption that the benefits from asset go on diminishing with the passage of time. Hence, it calls for proper allocation of cost because higher depreciation is charged in earlier years when assets utility is more as compared to later years when it becomes less useful; It results into almost equal burden on profit or loss account of depreciation and repair expenses taken together every year;
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Income Tax Act accept this method for tax purposes; As a large portion of cost is written-off in earlier years, loss due to obsolescence gets reduced; This method is suitable for fixed assets, which lasts for long and which require increased repair and maintenance expenses with passage of time. It can also be used where obsolescence rate is high.
7.6.2.2 Limitations of Written Down Value Method Although this method is based upon a more realistic assumption it suffers from the following limitations. As depreciation is calculated at fixed percentage of written down value, depreciable cost of the asset cannot be fully written-off. The value of the asset can never be zero; It is difficult to ascertain a suitable rate of depreciation. 7.7 Straight Line Method and Written Down Method: A Comparative Analysis Straight line and written down value methods are generally used for calculating depreciation amount in practice. Following are the points of differences between these two methods. 7.7.1 Basis of Charging Depreciation In straight line method, depreciation is charged on the basis of original cost or (historical cost). Whereas in written down value method, the basis of charging depreciation is net book value (i.e., original cost less depreciation till date) of the asset, in the beginning of the year. 7.7.2 Annual Charge of Depreciation The annual amount of depreciation charged every year remains fixed or constant under straight line method. Whereas in written down value method the annual amount of depreciation is highest in the first year and subsequently declines in later years. The reason for this difference, is the difference in the basis of charging depreciation under both methods. Under straight line method depreciation is calculated on original cost while under written down value method it is calculated on written down value. 7.7.3 Total Charge Against Profit and Loss Account on Account of Depreciation and Repair Expenses It is a well-accepted phenomenon that repair and maintenance expenses increase in later years of the useful life of the asset. Hence, total charge against
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profit and loss account in respect of depreciation and repair expenses increases in later years under straight line method. This happens because annual depreciation charge remains fixed while repair expenses increase. On the other hand, under written down value method, depreciation charge declines in later years, therefore total of depreciation and repair charge remains similar or equal year after year. 7.7.4 Recognition by Income Tax Law Straight line method is not recognised by Income Tax Law while written down value method is recognised by the Income Tax Law. 7.7.5 Suitability Straight line method is suitable for assets in which repair charges are less, the possibility of obsolescence is less and scrap value depends upon the time period involved. Such as freehold land and buildings, patents, trade marks, etc. Written down value method is suitable for assets, which are affected by technological changes and require more repair expenses with passage of time such as plant and machinery, vehicles, etc.
Basis of Difference Straight Line Method Written Down Value Method Book Value (i.e. original cost less depr eciation char ged till date) Declines year after year Almost equal every year.
1.
Basis of charging depreciation Annual depreciation charge Total charge against profit and loss account in respect of depreciation and repairs Recognition by income tax law Suitablity
Original cost
2. 3.
Fixed (Constant) year Unequal year after year. It increases in later years.
4. 5.
Not recognised It is suitable for assets in which repair charges are less, the possibility of and obsolescence is low scrap value depends upon the time period involved.
Recognised It is suitable for assets, which ar e af fected by technological changes and require more repair expenses with passage of time.
Fig. 7.3 : Comparison of straight line and written down value method
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Test Your Understanding - III There are two dentists Dr. Aggarwal and Dr. Mehta in your locality who are competitors. Both of them have recently bought an equipment for treatment of patients. Dr. Aggarwal has decided to write-off an equal amount of depreciation every year while Dr. Mehta wants to write-off a larger amount in earlier years. They do not know anything about the methods of depreciation. Can you inform them more about the methods of depreciation they are applying even without knowing anything about accounting in formal. Who is more wise in your opinion? Give reasons in support of your answer.
7.8 Methods of Recording Depreciation In the books of account, there are two types of arrangements for recording depreciation on fixed assets: Charging depreciation to asset account or Creating Provision for depreciation/Accumulated depreciation account. 7.8.1 Charging Depreciation to Asset account According to this arrangement, depreciation is deducted from the depreciable cost of the asset ( credited to the asset account) and charged (or debited) to profit and loss account. Journal entries under this recording method are as follows:
1. For recording purchase of asset Asset A/c Dr. (only in the year of purchase) (with the cost of asset including installation, freight, etc.)
To Bank/Vendor A/c 2. Following two entries are recorded at the end of every year (a) For deducting depreciation amount from the cost of the asset. Depreciation A/c Dr. (with the amount of depreciation) To Asset A/c (b) For charging depreciation to profit and loss account. Profit & Loss A/c Dr. (with the amount of depreciation) To Depreciation A/c 3. Balance Sheet Treatment When this method is used, the fixed asset appears at its net book value (i.e. cost less depreciation charged till date) on the asset side of the balance sheet and not at its original cost (also known as historical cost).
7.8.2 Creating Provision for Depreciation Account/Accumulated Depreciation Account This method is designed to accumulate the depreciation provided on an asset in a separate account generally called depreciation provision or accumulated
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depreciation. Such accumulation of depreciation enables that the asset account need not be disturbed in any way and it continues to be shown at its original cost over the successive years of its useful life. There are some basic characteristic of this method of recording depreciation, which are given below: Asset account continues to appear at its original cost year after year over its entire life; Depreciation is accumulated on a separate account instead of being adjusted into the asset account at the end of each accounting period. The following journal entries are recorded under this method:
1. For recording purchase of asset Asset A/c To Bank/Vendor A/c 2. (a) Dr. (only in the year of purchase) (with the cost of asset including installation, expenses etc.) (cash/credit purchase)
Following two journal entries are recorded at the end of each year: For crediting depreciation amount to provision for depreciation account Depreciation A/c Dr. (with the amount of depreciation) To Provision for depreciation A/c For charging depreciation to profit and loss account Profit & Loss A/c Dr. (with the amount of depreciation) To Depreciation A/c
(b)
3.
Balance sheet treatment
In the balance sheet, the fixed asset continues to appear at its original cost on the asset side. The depreciation charged till that date appears in the provision for depreciation account, which is shown either on the liabilities side of the balance sheet or by way of deduction from the original cost of the asset concerned on the asset side of the balance sheet. Illustration 1 M/s Singhania and Bros. purchased a plant for Rs. 5,00,000 on April, 01 2002, and spent Rs. 50,000 for its installation. The salvage value of the plant after its useful life of 10 years is estimated to be Rs. 10,000. Record journal entries for the year 2002-03 and draw up Plant Account and Depreciation Account for first three years given that the depreciation is charged using straight line method if : (i) (ii) The books of account close on March 31 every year; and The firm charges depreciation to the asset account.
244 Solution Books of Singhania and Bros. Journal Date Particulars L.F. Debit Amount Rs. 5,00,000
Accountancy
Credit Amount Rs.
2002 Apr. 01
Plant A/c Dr. To Bank A/c (Purchased plant for Rs. 5,00,000) Plant A/c Dr. To Bank A/c (Expenses incurred on installation) Depreciation A/c To Plant A/c (Depreciation charged on asset) Dr.
5,00,000 50,000 50,000
Apr. 01
2003 Mar. 31 54,000 54,000 54,000 54,000
Mar. 31
Profit and Loss A/c Dr. To Depreciation A/c (Depreciation debited to profit and loss account) Plant Account
Dr. Date 2002 Apr. 01 Particulars J.F. Amount Rs. 5,00,000 50,000 Date 2003 Mar. 31 Particulars J.F.
Cr. Amount Rs. 54,000 4,96,000
Bank Bank (Installation expenses)
Depreciation Balance c/d
5,50,000 2003 Apr. 01 Balance b/d 4,96,000 4,96,000 2004 Apr. 01 Balance b/d 4,42,000 4,42,000 2005 Apr. 01 Balance b/d 3,88,000 2005 Mar. 31 Depreciation Balance c/d 2004 Mar. 31 Depreciation Balance c/d
5,50,000 54,000 4,42,000 4,96,000 54,000 3,88,000 4,42,000
Depreciation, Provisions and Reserves Depreciation Account Dr. Date 2003 Mar. 31 2004 Mar. 31 2005 Mar. 31 Particulars J.F. Amount Rs. 54,000 54,000 54,000 Date 2003 Mar. 31 2004 Mar. 31 2005 Mar. 31 Particulars J.F.
245
Cr. Amounts Rs. 54,000 54,000 54,000
Plant Plant Plant
Profit and Loss Profit and Loss Profit & Loss
Workings Notes (1) Calculation of original cost Purchase cost Add: Installation cost Original cost Salvage value Useful life (2) Depreciation amount = (Rs.) 5,00,000 50,000 5,50,000 10,000 10 years
Rs. 5,50,000 Rs. 10,000 = Rs. 54,000 p.a. 10
Illustration 2 M/s Mehra and Sons acquired a machine for Rs. 1,80,000 on October 01, 2003, and spent Rs 20,000 for its installation. The firm writes-off depreciation at the rate of 10% on original cost every year. Record necessary journal entries for the year 2003 and draw up Machine Account and Depreciation Account for first three years given that: (i) The book of accounts closes on March 31 every year; and (ii) The firm charges depreciation to asset account. Solution Books of Mehra and Sons Journal Date 2003 Oct. 01 Particulars L.F. Debit Amount Rs. 1,80,000 1,80,000 20,000 20,000 Credit Amount Rs.
Machine A/c Dr. To Bank A/c (Purchased machine for Rs.1,80,000) Machine A/c Dr. To Bank A/c (Expenses incurred on installation)
Oct. 01
246 2004 Mar. 31
Accountancy
Mar. 31
Depreciation A/c Dr. To Machine A/c Depreciation charged on machine) Profit and Loss A/c Dr. To Depreciation A/c (Depreciation debited to profit and loss account) Depreciation A/c Dr. To Machine A/c (Depreciation charged on machine) Profit and Loss A/c Dr. To Depreciation A/c (Depreciation debited to profit and loss account) Depreciation A/c Dr. To Machine A/c (Depreciation charged on machine) Profit and Loss A/c Dr. To Depreciation A/c (Depreciation debited to profit and loss account) Books of M/s Mehra and Sons Machine Account
10,000 10,000 10,000 10,000
2005 Mar. 31
20,000 20,000 20,000 20,000
Mar. 31
2006 Mar. 31
20,000 20,000 20,000 20,000
Mar. 31
Dr. Date 2003 Oct. 01 Oct. 01 Particulars J.F. Amount Rs. 1,80,000 20,000 Date 2004 Mar. 31 Particulars J.F.
Cr. Amount Rs. 10,000 1,90,000 2,00,000 Mar. 31 Depreciation Balance c/d 1,90,000 1,90,000 2006 Mar. 31 Depreciation Balance c/d 20,000 1,50,000 1,70,000 20,000 1,70,000
Depreciation (for 6 months) Balance c/d
Mar. 31 2,00,000
2004 Apr. 01
Balance b/d
1,90,000
2005 Apr. 01
Balance b/d
1,70,000 1,70,000
Depreciation, Provisions and Reserves Depreciation Account Dr. Date 2004 Mar. 31 2005 Mar. 31 2006 Dec. 31 Machine 20,000 20,000 20,000 20,000 Working Notes (1) Calculation of original cost of the machine Rs. Purchase cost 1,80,000 Add Installation cost (20,000) Original cost (2) (3) 2,00,000 Mar. 31 2006 Dec. 31 Profit & Loss Particulars J.F. Amount Rs. 10,000 10,000 Date 2004 Mar. 31 Particulars J.F.
247
Cr. Amount Rs. 10,000 10,000 20,000 20,000 20,000 20,000
Machine
Profit & Loss
Machine
Profit & Loss
Depreciation expense = 10% of Rs. 2,00,000 every year = Rs. 20,000 p.a. During the year 2003, depreciation shall be charged only for 6 months, as acquisition date is October 01, 2003, i.e. the asset is used only for 6 months during the year 2003-04.
Depreciation (2003 4) = 20,000 6 = Rs. 10,000 12
(4)
Illustration 3 Based on data given in question number 2 record journal entries and prepare Machine account, Depreciation account and Provision for Depreciation account for the first 3 years if Provision for depreciation account is maintained by the firm. Solution Books of Mehra and Sons Machine Account Dr. Date 2003 Oct. 1 Oct. 1 Particulars J.F. Amount Rs. 1,80,000 20,000 2,00,000 2,00,000 Date 2004 Mar. 31 Particulars J.F. Cr. Amounts Rs. 2,00,000
Balance c/d
248 2004 Apr. 01 2005 Mar. 31
Accountancy
Balance b/d
2,00,000 2,00,000
Balance c/d
2,00,000 2,00,000
Provision for Depreciation Account Dr. Date 2004 Mar. 31 2005 Mar. 31 Particulars J.F. Amount Rs. 10,000 10,000 Balance c/d 30,000 30,000 2006 Mar. 31 Balance c/d 50,000 2005 Apr. 1 2006 Mar. 31 50,000 Depreciation Account Dr. Date 2004 Mar. 31 Particulars J.F. Amount Rs. 10,000 10,000 2005 Mar. 31 Provision for Depreciation 20,000 20,000 2006 Mar. 31 Provision for Depreciation 20,000 20,000 Illustration 4 M/s. Dalmia Textile Mills purchased machinery on April 01, 2001 for Rs. 2,00,000 on credit from M/s Ahuja and sons and spent Rs. 10,000 for its installation. Depreciation is 2006 Mar.31 Profit & Loss 2005 Mar.31 Profit & Loss Date 2004 Mar.31 Particulars J.F. Cr. Amount Rs. 10,000 10,000 20,000 20,000 20,000 20,000 Balance b/d Depreciation 30,000 20,000 50,000 2004 Apr. 01 Mar. 31 Balance b/d Depreciation Date 2004 Mar. 31 Particulars J.F. Cr. Amounts Rs. 10,000 10,000 10,000 20,000 30,000
Balance c/d
Depreciation
Provision for Deprection
Profit & Loss
249
provided @10% p.a. on written down value basis. Prepare Machinery Account for the first three years. Books are closed on March 31, every year. Solution Books of Dalmia Textiles mills Machinery Account Dr. Date 2001 Apr. 01 Particulars J.F. Amount Rs. 2,00,000 10,000 2,10,000 2002 Apr. 01 Balance b/d 1,89,000 1,89,000 2003 Apr. 01 Balance b/d 1,70,100 1,70,100 2004 Balance b/d 1,53,090 2004 Mar. 31 Depreciation Balance c/d 2003 Mar. 31 Depreciation Balance c/d Date 2002 Mar. 31 Particulars J.F. Cr. Amount Rs. 21,0001 1,89,000 2,10,000 18,9002 1,70,100 1,89,000 17,0103 1,53,090 1,70,100
Bank Bank
Working Notes 1. Calculation of the amount of depreciation Original cost on 01.01.2001 Less: Depreciation for the year 2001 (@10% of 2,10,000) WDV on 31.12.2001/01.01.2002 Less: Depreciation for the year 2002 (@10% of 1,89,000) WDV on 31.12.2002/01.01.2003 Less: Depreciation for the year 2003 (@10% of 1,70,100) WDV on 31.12.2003 Illustration 5 M/s Sahani Enterprises acquired a printing machine for Rs. 40,000 on July 01, 2001 and spent Rs. 5,000 on its transport and installation. Another machine for Rs. 35,000 was purchased on January 01, 2003. Depreciation is charged at the rate of 20% on written down value. Prepare Printing Machine account for the years ended on March, 31, 2002, 2003, 2004 and 2005. (Rs.) 2,10,000 (i.e. 2,00,000 + 10,000) (21,000)1 1,89,000 (18,900)2 1,70,100 (17,010)3 1,53,090
250 Solution Books of Sahani Enterprises Printing Machine Account Dr. Date 2001 Jul. 01 Particulars J.F. Amount Rs. 40,000 5,000 45,000 Date 2002 Mar. 31 Particulars J.F.
Accountancy
Cr. Amount Rs. 6,7501 38,250 45,000
Bank Bank
2002 Apr. 01 Jan. 01 2003 Apr. 01 Balance b/d Bank 38,250 35,000 73,250 63,850 63,850 2004 Apr. 01 Balance b/d 51,080
2003 Mar. 31 Depreciation Balance c/d 9,4002 63,850 73,250 12,7703 51,080 63,850
Balance b/d
2004 Mar.31
Working Notes Orignal cost machine purchased on July 01,2001 () Depreciation till Mar. 31, 2002 (for 9 months @ 20%) + Cost of new machine purchased on Jan. 01,2003 () Depreciation for the year 2002-2003 (20% of 38,250 + 20% of Rs. 35,000 for 3 month) WDV on Mar. 31, 2003 () Depreciation for the year 2003 04 (20% of Rs. 73,850) WDV on Mar. 31, 2004 Test Your Understanding - IV Basaria Confectioner bought a cold storage plant on July 01, 2003 for Rs.1,00,000. Compare the amount of depreciation charged for first three years using: 1. Rate of depreciation @ 10% on original cost basis; 2. Rate of depreciation @ on written down value basis; 3. Also, plot the computed amount of depreciation on a graph. (Rs.) 45,000 (6,750)1 38,250 (35,000) 73,250 (9,400)2 63,850 (12,770)3 51,080
251
7.9 Disposal of Asset Disposal of asset can take place either (a) at the end of its useful life or (b) during its useful life (due to obsolescence or any other abnormal factor). If it is sold at the end of its useful life, the amount realised on account of the sale of asset as scrap should be credited to the asset account and the balance is transferred to profit and loss account. In this regard the following journal entries are recorded.
1. For sale of asset as scrap Bank A/c To Asset A/c For transfer of balance in asset account (a) In case of profit Asset A/c To Profit and Loss A/c (b) In case of loss Profit and Loss A/c To Asset A/c Dr.
2.
Dr.
Dr.
In case, however, the provision for depreciation account has been in use for recording the depreciation, then before passing the above entries transfer the balance of the provision for depreciation account to the asset account by recording the following journal entry:
Provision for depreciation A/c To Asset A/c Dr.
For example, R.S. Limited purchased a vehicle for Rs. 4, 00,000. After 4 years its salvage value is estimated at Rs. 40,000. To find out the amount of depreciation to be charged every year based on straight line basis, and show as to how the vehicle account would appear for four years assuming it is sold for Rs. 50,000 at the end when (a) depreciation is charged to asset account; and (b) provision for depreciation account is maintained. Consider the following entries in the book of account of R.S. Limited
(a) When depreciation is charged to assets account Books of R.S. Limited Vehicle Account Dr. Date I year Particulars Bank J.F. Amount Rs. 4,00,000 4,00,000 Date End of the year Particulars Depreciation Balance c/d J.F. Cr. Amount Rs. 90,000 3,10,000 4,00,000
252 II year III year IV year Balance b/d 3,10,000 3,10,000 Balance b/d 2,20,000 2,20,000 1,30,000 10,000 End of the year Depreciation Balance c/d Depreciaton Bank End of the year Depreciation Balance c/d
Accountancy 90,000 2,20.000 3,10,000 90,000 1,30,000 2,20,000 99,000 50,000
Balance b/d Profit and loss (Profit on sale of vehicle)
1,40,000 (b) When Provision for depreciation account is maintained. Books of R.S. Limited Vehicle Account Dr. Date I year Particulars Bank J.F. Amount Rs. 4,00,000 4,00,000 II year Balance b/d 4,00,000 4,00,000 III year IV year Balance b/d 4,00,000 4,00,000 Balance b/d Profit and loss (Profit on Sale of Vehicle) 4,00,000 10,000 Provison for depreciation Bank End of the year Balance c/d End of the year Balance c/d Date End of the year Particulars Balance c/d J.F.
1,40,000
Cr. Amount Rs. 4,00,000 4,00,000 4,00,000 4,00,000 4,00,000 4,00,000 3,60,000 50,000 4,10,000
4,10,000 Provision for Depreciation Dr. Date Ist year Particulars Balance b/d J.F. Amount Rs. 90,000 90,000 Date End of year Particulars Depreciation J.F.
Cr. Amount Rs. 90,000 90,000
Depreciation, Provisions and Reserves II year III year IV year Balance b/d 1,80,000 1,80,000 Balance b/d 2,70,000 2,70,000 Machinery 3,60,000 End of the year Balance c/d Provison for Depreciation End of the year Balance c/d Depreciation End of the year Balance c/d Depreciation
253 90,000 90,000 1,80,000 1,80,000 90,000 2,70,000 2,70,000 90,000 3,60,000
3,60,000
7.9.1 Use of Asset Disposal Account Asset disposal account is designed to provide a complete and clear view of all the transactions involved in the sale of an asset under one account head. The concerned variables are the original cost of the asset, depreciation accumulated on the asset upto date, sale price of the asset, value of the parts of the asset retained for use, if any and the resultant profit or loss on disposal. The balance of this amount is transferred to the profit and loss account. This method is generally used when a part of the asset is sold and provision for depreciation account exists. Under this method, a new account titled Asset Disposal Account is opened. The original cost of the asset being sold is debited to the asset disposal account and accumulated depreciation amount appearing in provision for depreciation account relating to that asset till the date of disposal is credited to the asset disposal account. The net amount realised from the sale of the asset is also credited to this account. The balance of asset disposal account shows profit or loss which is transferred to profit and loss account. The advantage of this method is that it gives a full picture of all the transactions related to asset disposal at one place. The journal entries required for the preparation of asset disposal account is as follows:
1. 2. 3. Asset Disposal A/c To Asset A/c Dr. (with the original cost of asset, being sold)
Provision for Depreciation A/c Dr. (with the accumulated balance in To Asset Disposal A/c provision for depreciation account) Bank A/c To Asset Disposal A/c Dr. (with the net sales proceeds)
Asset Disposal Account may ultimately show a debit or credit balance. The debit balance on the account indicate loss on disposal and would be dealt with as follows:
254 Profit and Loss A/c To Asset Disposal A/c
Accountancy Dr. (with the amount of loss on sale)
The credit balance of the account, profit on disposal and would be closed by the following journal entry:
Asset Disposal A/c To Profit and Loss A/c Dr. (with the amount of profit on sale)
For example, Karan Enterprises has the following balances in its books as on March 31, 2005
Machinery (gross value): Provision for depreciation: Rs. 6,00,000 Rs. 2,50,000
A machine purchased for Rs. 1,00,000 on November 01, 2001, having accumulated depreciation amounting to Rs. 60,000 was sold on April 1, 2006 for Rs. 35,000. The Asset Disposal account will be prepared in the following manner:
Books of Karan Enterprises Machinery Disposal Account Dr. Date 2006 Apr. 01 Particulars J.F. Amount Rs. 1,00,000 Date 2006 Apr. 01 Apr. 01 2007 Mar. 31 1,00,000 Machinery Account Dr. Date 2005 Mar. 31 Particulars Amount Rs. 6,00,000 Date 2005 Apr. 01 2006 Mar. 31 6,00,000 Working Notes (1) Computation of loss on sale of machinery Original cost of the asset being sold Less: accumulated depreciation Rs. 1,00,000 (60,000) 40,000 6,00,000 Particulars Cr. Amount Rs. Particulars L.F. Cr. Amount Rs. 60,000 35,000
Machinery
Provision for depreciation Bank Profit & Loss (Loss on sale)
5,0001 1,00,000
Balance b/d
Machine Disposal
1,00,000
Depreciation, Provisions and Reserves (2) Sales value realised Loss on sale (i.e. Rs. 40,000 Rs. 35,000) (35,000) 5,0001
255
Illustration 6 On January 01 2001, Khosla Transport Co. purchased five trucks for Rs. 20,000 each. Depreciation has been provided at the rate of 10% p.a. using straight line method and accumulated in provision for depreciation acount. On January 01, 2002, one truck was sold for Rs. 15,000. On July 01, 2003, another truck (purchased for Rs. 20,000 on Jan 01, 2001) was sold for Rs. 18,000. A new truck costing Rs. 30,000 was purchased on October 01, 2003. You are required to prepare trucks account, Provision for depreciation account and Truck disposal account for the years ended on December 2001, 2002 and 2003 assuming that the firm closes its accounts in December every year. Solution Book of Khosla Transport Co. Trucks Account Dr. Date 2001 Jan. 01 Particulars J.F Amount Rs. 1,00,000 1,00,000 1,00,000 1,00,000 2003 Jan. 01 Oct. 01 Balance b/d Bank (Purchase of new truck) 80,000 30,000 1,10,000 2003 Jul. 01 Dec. 31 Truck disposal Balance c/d 2002 Jan. 01 Dec 31 Truck disposal Balance c/d Date 2001 Dec. 31 Particulars J.F Cr. Amount Rs. 1,00,000 1,00,000 20,000 80,000 1,00,000 20,000 90,000 1,10,000
Bank (Purchase of truck)
Balance c/d
2002 Jan. 01
Balance b/d
Truck Disposal Account Dr. Date 2002 Jan. 01 Particulars J.F Amount Rs. 20,000 Date 2002 Jan. 01 Jan. 01 Jan. 01 20,000 Particulars J.F Cr. Amount Rs. 2,000 15,000 3,0004 20,000
Machinery
Provision for Depreciation Bank (Sale) Profit & Loss (Loss on sale)
256 2003 Jul. 01 Jul. 01 2003 Jul. 01
Accountancy
Machinery Profit & Loss (Profit on sale)5
20,000 3,000
Jul. 01 23,000
Provision for Depreciation (Rs. 2,000 + 2,000 +1,000) Bank (Sale)
5,000 18,000 23,000
Provision for Depreciation Account Dr. Date Particulars J.F. Amount Rs. 10,000 10,000 2002 Jan. 01 Truck Disposal Dec. 31 Balance c/d 2003 Jan. 01 Truck Disposal Dec. 31 Balance c/d 2,000 16,000 18,000 5,000 18,750 2003 Jan. 1 Dec. 31 Balance b/d Depreciation (Rs. 6000+ 1000+750) 2002 Jan. 01 Dec. 31 Balance b/d Depreciation Date 2001 Dec. 31 Particulars J.F. Cr. Amount Rs. 10,0001 10,000 10,000 8,0002 18,000 16,000
2001 Dec. 31 Balance c/d
Depreciation
7,7503 23,750
23,750 Working Notes 1. Calculation of amount of depreciation Year - 2001 10% on Rs. 1,00,000 for one year Year - 2002 10% on Rs. 80,000 for one year Year 2003 10% on Rs. 60,000 for 1 year 10% on Rs. 20,000 for six months 10% on Rs. 30,000 for three months Loss on sale of first truck Original cost on January 01, 2001 Less depreciation at 10% Book value on January 1, 2002 Sales price realised on 01.01.2002 Loss on sale of first machine Rs. 10,0001 80002 6,000 1,000 7,50 7,7503 20,000 (2,000) 18,000 (15,000) 3,0004
2.
Depreciation, Provisions and Reserves 3. Profit on Sale of Second Truck Original cost on January 01, 2001 Less Depreciation at 10% for year 2001 Depreciation at 10% for 2002 Depreciation @10% for 6 months till July, 2003 Book value on 1.7.2003 Sale price Profit on sale 20,000 (2,000) (2,000) (1,000) 15,000 18,000 3,0005
257
Illustration 7 On April 01, 2004, following balances appeared in the books of M/s Kanishka Traders: Furniture account Rs. 50,000, Provision for depreciation on furniture Rs. 22,000. On October 01, 2004 a part of furniture purchased for Rupees 20,000 on April 01, 2000 was sold for Rs. 5,000. On the same date a new furniture costing Rs. 25,000 was purchased. The depreciation was provided @ 10% p.a. on original cost of the asset and no depreciation was charged on the asset in the year of sale. Prepare furniture account and provision for depreciation account for the year ending March 31, 2005. Solution Books of Kanishka Traders Furniture Account Dr. Date 2004 Apr. 01 Oct. 10 Particulars J.F. Amount Date Rs. 2004 50,000 Oct.01 25,000 Apr. 01 Particulars J.F Cr. Amount Rs. 5,000 8,000 7,0001
Balance b/d Bank
Bank Provision for depreciation Profit and Loss (Loss on sale) Balance c/d
55,000 75,000
75,000 Provision for Depreciation on Furniture Account Dr. Date 2004 Oct. 01 Particulars J.F. Amount Rs. 8,000 Date 2004 Apr. 01 Particular J.F.
Furniture (Accumulated depreciation on furniture sold) Balance c/d
Balance b/d
2005 Mar. 31
18,250 26,250
2005 Mar. 31
Depreciation (Rs. 3,000 + 1,250)
4,250 26,250
258 Working Notes 1. Calculation of amount of depreciation Calculation of loss on sale Original cost of furniture on 01.10.2004 Less: Depreciation for 4 year from 01.04.2000 to 31.04.2004 (no depreciation for the year of sale @10% p.a. on original cost Value as on 01.10.2004 Sale price Loss on sale Depreciation for the year 2004-05 10% of Rs. 30,000 (Rs. 50,000 Rs. 20,000) for full year 10% of Rs. 25,000 for 6 month
Accountancy
Rs. 20,000
8,000 12,000 5,000 7,0001 3,000 1,250 4,250
2.
Illustration 8 Solve illustration 07, if the firm maintains furniture disposal account prepared along with furniture account and provision for depreciation on furniture account. Books of Anil Traders Furniture Account Dr. Date 2004 Apr. 01 Oct.01 Particulars J.F. Amount Rs. 50,000 25,000 75,000 Date 2004 Apr. 01 2005 Mar. 31 Particulars J.F. Cr. Amount Rs. 20,000
Balance b/d Bank
Furniture disposal Balance c/d
55,000 75,000
Provision for Depreciation on Furniture Account Dr. Date 2004 Oct.01 2005 Mar. 31 Particulars J.F. Amount Rs. 8,000 Date 2004 Apr.01 2005 Mar.31 Particular J.F. Cr. Amount Rs. 22,000
Furniture disposal Balance c/d
Balance b/d
18,250 26,250
Depreciation
4,250 26,250
Depreciation, Provisions and Reserves Furniture Disposal Account Dr. Date 2004 Oct.01 Particulars J.F. Amount Rs. 20,000 Date 2004 Oct.01 Particular J.F.
259
Cr. Amount Rs.
Furniture
Provision for Depreciation Bank Profit & Loss (Loss on sale)
8,000 5,000 7,000 20, 000
On Jan 01, 2001 Jain & Sons purchased a second hand plant costing Rs. 2,00,000 and spent Rs. 10,000 on its overhauling. It also spent Rs. 5,000 on transportation and installation of the plant. It was decided to provide for depreciation @ of 20% on written down value. The plant was destroyed by fire on July 31, 2004 and an insurance claim of Rs. 50,000 was admitted by the insurance company. Prepare plant account, accumulated depreciation account and plant disposal account assuming that the company closes its books on December 31, every year. Solution Books of Jain & Sons. Plant Account Dr. Date 2001 Jan. 01 Particulars J.F. Amount Rs. 2,15,000 2,15,000 2002 Jan. 01 Balance b/d 2,15,000 2,15,000 2003 Jan. 01 Balance b/d 2,15,000 2,15,000 2004 Jan. 01 Balance b/d 2,15,000 2,15,000 2004 Jul. 31 Plant disposal 2003 Dec. 31 Balance c/d 2002 Dec. 31 Balance c/d Date 2001 Dec. 31 Particulars J.F. Cr. Amount Rs. 2,15,000 2,15,000 2,15,000 2,15,000 2,15,000 2,15,000 2,15,000 2,15,000
Bank
Balance c/d
260 Accumulated Depreciation Account Dr. Date 2001 Dec. 31 Particulars J.F. Amount Rs. 43,000 43,000 2002 Jan. 01 Balance c/d 77,400 77,400 2003 Dec. 31 Balance c/d 1,04,920 1,04,920 2004 Jul. 31 2004 Jan. 01 July 31 Balance b/d Depreciation 2003 Jan. 01 Dec. 31 Balance b/d Depreciation 2002 Jan. 01 Balance b/d Depreciation Date 2001 Dec. 31 Particulars J.F.
Accountancy
Cr. Amount Rs. 43,0001 43,000 43,000 34,4002 77,400 77,400 27,5203 1,04,920 1,04,920 12,8434 1,17,763
Balance c/d
Depreciation
Plant disposal
1,17,763 1,17,763
Plant Disposal Account Dr. Date 2004 Jul. 31 Particulars J.F. Amount Rs. 2,15,000 Date 2004 Jul. 31 Particulars J.F. Cr. Amount Rs. 1,17,763 50,000 47,2375 2,15,000
Plant
Accumulated depreciation Insurance Co. Profit & Loss (Loss on sale)
2,15,000 Working Notes: 1. Calculation of Depreciation Amount Original cost on 01.01.2001 (2,00,000 + 10,000+ 5,000) Depreciation for the year 2001 (@20% of Rs. 2,15,000)
(Rs.) 2,15,000
(43,0001) 1,72,000
Depreciation, Provisions and Reserves Depreciation for the year 2002 (@20% of Rs. 1,72,000) Depreciation for the year 2003 (@20% of Rs. 1,37,600) Depreciation till 31.07.04 (@20% of Rs. 1,10,080) Insurance claim Loss on disposal
261
(34,4002) 1,37,600 27,5203 1,10,080 (12,8434) 97,237 (50,000) 47,2375
7.10 Effect of any Addition or Extension to the Existing Asset An existing asset may require some additions or extensions for being suitable for operations. Such additions/extensions may or may not become an integral part of the asset. The amount incurred on such additions/extensions is capitalised and written off as depreciation over the life of the asset. It is important to mention here that the amount so incurred is in addition to usual repair and maintenance expenses. AS-6 (Revised) mentions that Any addition or extension, which becomes an integral part of the existing asset should be depreciated over the useful life of that asset; The depreciation on such addition or extension may also be provided at the rate applied to the existing asset; Where an addition or extension retains a separate identity and is capable of being used after the existing asset is disposed off, depreciation, should be provided independently on the basis of its own useful life.
Illustration 10 M/s Digital Studio bought a machine for Rs. 8,00,000 on April 01, 2000. Depreciation was provided on straight-line basis at the rate of 20% on original cost. On April 01,2002 a substantial modification was made in the machine to make it more efficient at a cost of Rs. 80,000. This amount is to be depreciated @ 20% on straight line basis. Routine maintenance expenses during the year 2003-04 were Rs. 2,000. Draw up the Machine account, Provision for depreciation account and charge to profit and loss account in respect of the accounting year ended on March 31,2003.
262 Solution Books of Digital Studio Machine Account Dr. Date 2002 Apr 01 Particulars J.F. Amount Rs. 800,000 80,000 8,80,000 Provision for Depreciation Account Dr. Date 2003 Mar 31 Particulars J.F Amount Rs. 4,96,000 Date 2003 April 01 2003 Mar 31 Particulars J.F Date 2003 Mar 31 Particulars J.F.
Accountancy
Cr. Amount Rs. 8,80,000 8,80,000
Balance b/d Bank
Balance c/d
Cr. Amount Rs. 3,20,0001 1,76,0002 4,96,000
Balance c/d
Balance b/d Depreciation
4,96,000 Working Notes 1. 2.
3.
4.
Cost of modification is capitalised but routine repair expenses are treated as revenue expenditure. Calculation of balance of provision for depreciation account on 01.04.2002. Original Cost on 01.04.2000 = Rs. 8,00,000 Depreciation for the years 2000-01 and 2001-02 = Rs 3,20,0001 (@ 20% of Rs. 8,00,000 ) Depreciation for the year 2002-03 is calculated as under: 20% of 8,00,000 = Rs. 1,60,000 20% of Rs. 80,000 = Rs. 16,000 Total Depreciation for 2002-03 = Rs. 1,76,0002 Amount to be charged to profit and loss account Depreciation Rs. 1,76,000 Repair and maintenance Rs. 2,000
Illustration 11 M/s Nishit Printing Press bought a printing machine for Rs. 6,80,000 on April 01, 2001. Depreciation was provided on straight line basis at the rate of 20% on original cost. On April 01,2003 a modification was made in the machine to increase its technical reliability, at a cost of Rs. 70,000. However this modification is not expected to increase the useful life of the machine. At the same time an important component of the machine was replaced
263
at a cost of Rs. 20,000 due to excessive wear and tear. Routine maintenance expenses during the year 2003-04 were Rs. 5,000. Show the Machinery account, Provision for depreciation account and charge to profit and loss account in respect of the accounting year ended on March 31, 2004. Solution Machinery Account Dr. Date 2003 Apr.01 Particulars J.F. Amount Rs. 6,80,000 70,000 20,000 7,70,000 Provision for Depreciation Account Dr. Date 2004 Mar.31 Particulars J.F. Amount Rs. 4,38,000 Date 2003 Apr.01 2004 Mar.31 Particulars J.F. Cr. Amount Rs. 2,72,0001 1,66,0002 4,38,000 Date 2004 Mar. 31 Particulars J.F. Cr. Amount Rs. 7,70,000
Balance b/d Bank Bank
Balance c/d
7,70,000
Balance c/d
Balance b/d Depreciation
4,38,000 Working Notes 1. 2.
Cost of modification and cost of component replaced are capitalised but routine repair expenses are revenue expenditure. Calculation of balance of Provision for depreciation account on 01. 04. 2003. Original cost on 01.04.2001 = Rs. 6,80,000 Depreciation for the years 2001-02 and 2002-03
2
20 100 6,80,000
= Rs 2,72,0001
3.
Depreciation for the year 2003-04 is calculated as under. 20% of Rs. 6,80,000 1/3 of Rs. 90,000* Total depreciation for 2003-04
= Rs. 1,36,000 = Rs. 30,000 = Rs. 1,66,0002
264 4. Amount to be charged to profit and loss account Rs. Depreciation 1,66,000 Repair and Maintenance 5,000 Computation of depreciation on addition
= (Rs. 70,000 + Rs. 20,000) 0 (5 2) years = Rs. 90,000 3
Accountancy
SECTION II
Provisions and Reserve 7.11 Provisions There are certain expenses/losses which are related to the current accounting period but amount of which is not known with certainty because they are not yet incurred. It is necessary to make provision for such items for ascertaining true net profit. For example, a trader who sells on credit basis knows that some of the debtors of the current period would default and would not pay or would pay only partially. It is necessary to take into account such an expected loss while calculating true and fair profit/loss according to the principle of Prudence or Conservatism. Therefore, the trader creates a Provision for Doubtful Debts to take care of expected loss at the time of realisation from debtors. In a similar way, Provision for repairs and renewals may also be created to provide for expected repair and renewal of the fixed assets. Examples of provisions are : Provision for depreciation; Provision for bad and doubtful debts; Provision for taxation; Provision for discount on debtors; and Provision for repairs and renewals. It must be noted that the amount of provision for expense and loss is a charge against the revenue of the current period. Creation of provision ensures proper matching of revenue and expenses and hence the calculation of true profits. Provisions are created by debiting the profit and loss account. In the balance sheet, the amount of provision may be shown either: By way of deduction from the concerned asset on the assets side. For example, provision for doubtful debts is shown as deduction from the amount of sundry debtors and provision for depreciation as a deduction from the concerned fixed assets;
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On the liabilities side of the balance sheet alongwith current liabilities, for example provision for taxes and provision for repairs and renewals.
7.11.1 Accounting Treatment for Provisions The accounting treatment of all types of provisions is almost similar. Therefore, the accounting treatment is explained here taking up the case of provision for doubtful debts. As already stated that when business transaction takes place on credit basis, debtors account is created and its balance is shown on the asset-side of the balance sheet. These debtors may be of three types: Good Debtors are those from where collection of debt is certain. Bad Debts are those debtors from where collection of money is not possible and the amount of credit given is a certain loss. Doubtful Debts are those debtors who may pay but business firm is not sure about the collection of full amount from them. In fact, as a matter of business experience, some percentage of such debtors are not likely to pay, hence treated as doubtful debts. To consider this possible loss on account of non-payment by some debtors, it is a common practice (and necessary also) to make a suitable provision for doubtful debts at the time of ascertaining true profit or loss. The provision for doubtful debts is usually calculated as a certain percentage of the total amount due from sundry debtors after deducting/writing-off all known bad debts. Provision for doubtful debts is also called Provision for bad and doubtful debts. It is created by debiting the amount of required provision to the profit and loss account and crediting it to provision for doubtful debts account. For creating a provision for doubtful debts the following journal entry is recorded:
Profit and Loss A/c Dr. (with the amount of provision) To Provision for doubtful debts A/c
This is explained with the help of the following example Observe an extract of the trial balance from the books of Trehan Traders on March 31, 2005 is given below:
Date Account title L.F. Debit Amount Rs. 68,000 Credit Amount Rs.
Sundry Debtors
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Additional Information Bad debts proved bad but not recorded amounted to Rs. 8,000 Provision is to be maintained at 10% of debtors. In order to create the provision for doubtful debts, the following journal entries will be recorded:
Journal Date 2005 Mar. 31 Particulars L. F. Amount Rs. 8,000 8,000 Dr. 8,000 8,000 Amount Rs.
Bad debts A/c To Sundry debtors A/c (Bad debts written off) Profit & Loss A/c To Bad debts A/c (Bad debts debited to profit and loss account)
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Mar. 31
Mar. 31
Profit and Loss A/c Dr. To Provision for doubtful debts a/c (For creating provision for doubtful debts)
6,0001 6,0001
Working Notes Provision for doubtful debts @10% of sundry debtors i.e. (Rs. 68,000 8000) = Rs. 60001
7.12 Reserves A part of the profit may be set aside and retained in the business to provide for certain future needs like growth and expansion or to meet future contingencies such as workmen compensation. Unlike provisions, reserves are the appropriations of profit to strengthen the financial position of the business. Reserve is not a charge against profit as it is not meant to cover any known liability or expected loss in future. However, retention of profits in the form of reserves reduces the amount of profits available for distribution among the owners of the business. It is shown under the head Reserves and Surpluses on the liabilities side of the balance sheet after capital.Examples of reserves are: General reserve; Workmen compensation fund; Investment fluctuation fund; Capital reserve;
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Dividend equalisation reserve; Reserve for redemption of debenture.
7.12.1 Difference between Reserve and Provision The points of difference between reserve and provision are explained below: 1. Basic nature : A provision is a charge against profit whereas reserve is an appropriation of profit. Hence, net profit cannot be calculated unless all provisions have been debited to profit and loss account, while a reserve is created after the calculation of net profit. 2. Purpose : Provision is made for a known liability or expense pertaining to current accounting period, the amount of which is not certain. On the other hand reserve is created for strengthening the financial position of the business. Some reserves are also mandatory under the law. 3. Presentation in balance sheet: Provision is shown either (i) by way of deduction from the item on the asset side for which it is created, or (ii) on the liabilities side along with current liabilities. On the other hand, reserve is shown on the liabilities side after capital. 4. Effect on taxable profits : Provision is deducted before calculating taxable profits. Hence, it reduces taxable profits. A reserve is created from profit after tax and therefore it has no effect on taxable profit. 5. Element of compulsion : Creation of provision is necessary to ascertain true and fair profit or loss in compliance with Prudence or Conservatism concept. It has to be made even if there are no profits. Whereas creation of a reserve is generally at the discretion of the management. However, in certain cases law has stipulated for the creation of specific reserves such as Debenture Redemption Reserve. Reserve cannot be created unless there are profits. 6. Use for the payment of dividend : Provision cannot be used for distribution as dividends while general reserve can be used for dividend distribution.
Basis of Difference 1. Basic nature 2. Purpose Provision Charge against profit. It is created for a known liability or expense pertaining to current accounting period, the amount of which is not certain. It reduces taxable profits. Reserve Appropriation of profit. It is made for strengthening the financial position of the business.Some reserves are also mandatory under law. It has no effect on taxable profit.
3. Effect on taxable profits.
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Accountancy It is shown either (i) by way It is shown on the liabilities. of deduction from the item on side after capital amount. the asset side for which it is created, or (ii) In the liabilities side along with current liabilities. Creation of provision is necessary to ascertain true and fair profit or loss in compliance Prudence or Conservatism concept. It must be made even if there are no profits. Generally, creation of a Reserve is at the discretion of the management. Reserve cannot be created unless there are profits. However, in certain cases law has stipulated for the creation of specific reserves such as Debenture Redemption reserve. It can be used for divided distribution.
5. Element of compulsion
6. Use for the payment It can not be used for of dividend dividend distribution.
Fig. 7.4 : Showing comparison between provisions and reserves
7.12.2 Types of Reserves A reserve is created by retention of profit of the business can be for either a general or a specific purpose. 1. General reserve : When the purpose for which reserve is created is not specified, it is called General Reserve . It is also termed as free reserve because the management can freely utilise it for any purpose. General reserve strengthens the financial position of the business. 2. Specific reserve : Specific reserve is the reserve, which is created for some specific purpose and can be utilised only for that purpose. Examples of specific reserves are given below : (i) Dividend equalisation reserve: This reserve is created to stabilise or maintain dividend rate. In the year of high profit, amount is transferred to Dividend Equalisation reserve. In the year of low profit, this reserve amount is used to maintain the rate of dividend. (ii) Workmen compensation fund: It is created to provide for claims of the workers due to accident, etc. (iii) Investment fluctuation fund: It is created to make for decline in the value of investment due to market fluctuations. (iv) Debenture redemption reserve: It is created to provide funds for redemption of debentures. Reserves are also classified as revenue and capital reserves according to the nature of the profit out of which they are created.
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(a) Revenue reserves : Revenue reserves are created from revenue profits which arise out of the normal operating activities of the business and are otherwise freely available for distribution as dividend. Examples of revenue reserves are: General reserve; Workmen compensation fund; Investment fluctuation fund; Dividend equalisation reserve; Debenture redemption reserve; (b) Capital reserves: Capital reserves are created out of capital profits which do not arise from the normal operating activities. Such reserves are not available for distribution as dividend. These reserves can be used for writing off capital losses or issue of bonus shares in case of a company. Examples of capital profits, which are treated as capital reserves, whether transferred as such or not, are : Premium on issue of shares or debenture. Profit on sale of fixed assets. Profit on redemption of debentures. Profit on revaluation of fixed asset & liabilities. Profits prior to incorporation. Profit on reissue of forfeited shares 7.12.3 Difference between Revenue and Capital Reserve Revenue reserves and capital reserves are differentiated on the following grounds: 1. Source of creation : Revenue reserve is created out of revenue profits, which arise out of the normal operating activities of the business and are otherwise available for dividend distribution. On the other hand capital reserve is created primarily out of capital profit, which do not arise from the normal operating activities of the business and are not available for distribution as dividend. But revenue profits may also be used for creation of capital reserves. 2. Purpose : Revenue reserve is created to strengthen the financial position, to meet unforeseen contingencies or for some specific purposes. Whereas capital reserve is created for compliance of legal requirements or accounting practices. 3. Usage : A specific revenue reserve can be utilised only for the earmarked purpose while a general reserve can be utilised for any purpose including distribution of dividend. Whereas a capital reserve can be utilised for specific purposes as provided in the law in force, e.g. to write off capital losses or issue of bonus shares.
270 Basic of Difference 1. Source of creation Revenue Reserve It is created out of revenue profits which arise out of normal operating activities of the business and are otherwise available for dividend distribution. It is created to strengthen the financial position, to meet unforeseen contingencies or for some specific purposes. A specific revenue reserve can be utilised only for the earmarked purpose while a general reserve can be utilised for any purpose including distribution of dividend. Capital Reserve
Accountancy
It is created primarily out of capital profit which do not arise out of the nor mal operating activities of the business and not available for dividend distribution. But revenue profits may also be used for this purpose. It is created for compliance of legal requirements or accounting practices.
2. Purpose
3. Usage
It can be utilised for specific purposes as provided in the law in force e.g. to write off capital losses or issue of bonus shares.
Fig. 7.5 : Difference between capital reserve and revenue reserve
7.12.4 Importance of Reserves A business firm may consider it proper to set up some mechanism to protect itself from the consequences of unknown expenses and losses, it may be required to bear in future. It may also regard it as more appropriate in certain cases to reduce the amount that can be drawn by the proprietors as profit in order to conserve business resource to meet certain significant demands in future. An example of such a demand is the much needed expansion in the scale of business operations. This is presented as the justification for reserves in business activities and in accounting. The amount so set aside may be meant for the purpose of : Meeting a future contingency Strengthening the general financial position of the business; Redeeming a long-term liability like debentures, etc.
7.13 Secret Reserve Secret reserve is a reserve which does not appear in the balance sheet. It may also help to reduce the disclosed profits and also the tax liability . The secret reserve can be merged with the profits during the lean periods to show improved
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profits. Management may resort to creation of secret reserve by charging higher depreciation than required. It is termed as Secret Reserve, as it is not known to outside stakeholders. Secret reserve can also be created by way of : Undervaluation of inventories/stock Charging capital expenditure to profit and loss account Making excessive provision for doubtful debts Showing contingent liabilities as actual liabilities Creation of secret reserves within reasonable limits is justifiable on grounds of expediency, prudence and preventing competition from other firms.
Test Your Understanding - V I State with reasons whether the following statements are True or False ; (i) Making excessive provision for doubtful debits builds up the secret reserve in the business. (ii) Capital reserves are normally created out of free or distributable profits. (iii) Dividend equalisation reserve is an example of general reserve. (iv) General reserve can be used only for some specific purposes. (v) Provision is a charge against profit. (vi) Reserves are created to meet future expenses or losses the amount of which is not certain. (vii) Creation of reserve reduces taxable profits of the business. II Fill in the correct words : (i) Depreciation is decline in the value of ........... (ii) Installation, freight and transport expenses are a part of ........... (iii) Provision is a ........... against profit. (iv) Reserve created for maintaining a stable rate of dividend is termed as...........
Key Terms Introduced in the Chapter Depreciation, Depreciable cost, original cost, useful life; Depletion, Obsolescence, Amortisation; Salvage value/Residual value/Scrap value; Written down value/Reducing balance value/Diminishing value; Straight Line/Fixed Installment Method; Asset Disposal Account; Accumulated Depreciation/Provision for Depreciation Account, Reserve, Provision, Capital Reserve, Revenue Reserve, General Reserve, Specific Reserve, Secret Reserve, Provision for Doubtful Debts. Summary With Reference to Learning Objectives 1. Meaning of depreciation : Depreciation is decline in the value of a tangible fixed asset. In accounting, depreciation is the process of allocating depreciable cost over useful life of a fixed asset.
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Accountancy Depreciation and similar terms : Depreciation term is used in the context of tangible fixed assts. Depletion (in the context of extractive industries), and amortisation (in the context of intangible assets) are other related terms. Factors Affecting Depreciation : Wear and Tear due to use and/or passage of time Expiration of Legal Rights Obsolescence Importance of depreciation : Depreciation must be charged to ascertain true and fair profit or loss. Depreciation is a non-cash operating expense. Methods of charging depreciation : Depreciation amount can be calculated using : Straight line method, or Written down value method Factors affecting the amount of depreciation : Depreciation amount is determined by Original cost Salvage value, and Useful life of the asset Provisions and Reserves : A provision is a charge against profit. It is created for a known current liability the amount of which is uncertain. Reserve on the other hand, is an appropriation of profit. It is created to strengthen the financial position of the business. Types of Reserves : Reserves may be General reserve and specific reserve; Revenue reserve and capital reserve. Secret Reserve : When total depreciation charged is higher than the total depreciable cost, Secret reserve is created. Secret reserve is not explicitly shown in the balance sheet. Questions for Practice Short Answers 1. 2. 3. 4. 5. 6. What is Depreciation? State briefly the need for providing depreciation. What are the causes of depreciation? Explain basic factors affecting the amount of depreciation. Distinguish between straight line method and written down value method of calculating depreciation. In case of a long term asset, repair and maintenance expenses are expected to rise in later years than in earlier year. Which method is suitable for charging depreciation if the management does not want to increase burden on profits and loss account on account of depreciation and repair. What are the effects of depreciation on profit and loss account and balance sheet? Distinguish between provision and reserve . Give four examples each of provision and reserves. Distinguish between revenue reserve and capital reserve.
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Depreciation, Provisions and Reserves 11. Give four examples each of revenue reserve and capital reserves. 12. Distinguish between general reserve and specific reserve. 13. Explain the concept of secret reserve. Long Answers 1. Explain the concept of depreciation. What is the need for charging depreciation and what are the causes of depreciation? 2. Discuss in detail the straight line method and written down value method of depreciation. Distinguish between the two and also give situations where they are useful. 3. Describe in detail two methods of recording depreciation. Also give the necessary journal entries. 4. Explain determinants of the amount of depreciation. 5. Name and explain different types of reserves in details. 6. What are provisions. How are they created? Give accounting treatment in case of provision for doubtful Debts. Numerical Problems 1. On April 01, 2000, Bajrang Marbles purchased a Machine for Rs. 2,80,000 and spent Rs. 10,000 on its carriage and Rs. 10,000 on its installation. It is estimated that its working life is 10 years and after 10 years its scrap value will be Rs. 20,000. (a) Prepare Machine account and Depreciation account for the first four years by providing depreciation on straight line method. Accounts are closed on March 31st every year. (b) Prepare Machine account, Depreciation account and Provision for depreciation account (or accumulated depreciation account) for the first four years by providing depreciation using straight line method accounts are closed on March 31 every year. (Ans:[a] Balance of Machine account on April 1, 2004 Rs.1,28,000. [b] Balance of Provision for depreciation account as on 1.04.2004 Rs.72,000.) On July 01, 2000, Ashok Ltd. Purchased a Machine for Rs. 1,08,000 and spent Rs. 12,000 on its installation. At the time of purchase it was estimated that the effective commercial life of the machine will be 12 years and after 12 years its salvage value will be Rs. 12,000. Prepare machine account and depreciation Account in the books of Ashok Ltd. For first three years, if depreciation is written off according to straight line method. The account are closed on December 31st, every year. (Ans: Balance of Machine account as on 1.01.2003 Rs.97,500). Reliance Ltd. Purchased a second hand machine for Rs. 56,000 on October 01, 2001 and spent Rs. 28,000 on its overhaul and installation before putting it to operation. It is expected that the machine can be sold for Rs. 6,000 at the end of its useful life of 15 years. Moreover an estimated cost of Rs. 1,000 is expected to be incurred to recover the salvage value of Rs. 6,000. Prepare machine account and Provision for depreciation account for the first three
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Accountancy years charging depreciation by fixed installment Method. Accounts are closed on December 31, every year. (Ans: Balance of provision for depreciation account as on 1.01.04 Rs.18,200). 4. Berlia Ltd. Purchased a second hand machine for Rs. 56,000 on July 01, 2001 and spent Rs. 24,000 on its repair and installation and Rs. 5,000 for its carriage. On September 01, 2002, it purchased another machine for Rs. 2,50,000 and spent Rs. 10,000 on its installation. (a) Depreciation is provided on machinery @10% p.a on original cost method annually on December 31. Prepare machinery account and depreciation account from the year 2001 to 2004. (b) Prepare machinery account and depreciation account from the year 2001 to 2004, if depreciation is provided on machinery @10% p.a. on written down value method annually on December 31. (Ans:[a] Balance of Machine account as on 1.01.05 Rs.2,54,583. [b] Balance of Machine account as on 1.01.05 Rs.2,62,448). Ganga Ltd. purchased a machinery on January 01, 2001 for Rs. 5,50,000 and spent Rs. 50,000 on its installation. On September 01, 2001 it purchased another machine for Rs. 3,70,000. On May 01, 2002 it purchased another machine for Rs. 8,40,000 (including installation expenses). Depreciation was provided on machinery @10% p.a. on original cost method annually on December 31. Prepare: (a) Machinery account and depreciation account for the years 2001, 2002, 2003 and 2004. (b) If depreciation is accumulated in provision for Depreciation account then prepare machine account and provision for depreciation account for the years 2001, 2002, 2003 and 2004. (Ans:[a] Balance of machine account as on 01.01.05 Rs. 12,22,666. [b] Balance of provision for dep. account as on 01.01.05 Rs. 5,87,334). Azad Ltd. purchased furniture on October 01, 2002 for Rs. 4,50,000. On March 01, 2003 it purchased another furniture for Rs. 3,00,000. On July 01, 2004 it sold off the first furniture purchased in 2002 for Rs. 2,25,000. Depreciation is provided at 15% p.a. on written down value method each year. Accounts are closed each year on March 31. Prepare furniture account, and accumulated depreciation account for the years ended on March 31,2003, March 31,2004 and March 31,2005. Also give the above two accounts if furniture disposal account is opened. (Ans.Loss on sale of furniture Rs.1,14,915, Balance of provision for depreciation account as on 31.03.05 Rs. 85,959.) M/s Lokesh Fabrics purchased a Textile Machine on April 01, 2001 for Rs. 1,00,000. On July 01, 2002 another machine costing Rs. 2,50,000 was purchased . The machine purchased on April 01, 2001 was sold for Rs. 25,000 on October 01, 2005. The company charges depreciation @15% p.a. on straight line method. Prepare machinery account and machinery disposal account for the year ended March 31, 2006. (Ans. Loss on sale of Machine account Rs.7,500. Balance of machine account as on 1.04.05 Rs.1,09,375).
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Depreciation, Provisions and Reserves 8. The following balances appear in the books of Crystal Ltd, on Jan 01, 2005 Rs. Machinery account on 15,00,000 Provision for depreciation account 5,50,000 On April 01, 2005 a machinery which was purchased on January 01, 2002 for Rs. 2,00,000 was sold for Rs. 75,000. A new machine was purchased on July 01, 2005 for Rs. 6,00,000. Depreciation is provided on machinery at 20% p.a. on Straight line method and books are closed on December 31 every year. Prepare the machinery account and provision for depreciation account for the year ending December 31, 2005. (Ans. Profit on sale of Machine Rs. 5,000. Balance of machine account as on 31.03.05 Rs. 19,00,000. Balance of Provision for depreciation account as on 31.03.05 Rs. 4,80,000). M/s. Excel Computers has a debit balance of Rs. 50,000 (original cost Rs. 1,20,000) in computers account on April 01, 2000. On July 01, 2000 it purchased another computer costing Rs. 2,50,000. One more computer was purchased on January 01, 2001 for Rs. 30,000. On April 01, 2004 the computer which has purchased on July 01, 2000 became obselete and was sold for Rs. 20,000. A new version of the IBM computer was purchased on August 01, 2004 for Rs. 80,000. Show Computers account in the books of Excel Computers for the years ended on March 31, 2001, 2002, 2003 ,2004 and 2005. The computer is depreciated @10 p.a. on straight line method basis. (Ans: Loss on sale of computer Rs. 1,36,250. Balance of computers account as on 31.03.05 Rs. 80,583).
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10. Carriage Transport Company purchased 5 trucks at the cost of Rs. 2,00,000 each on April 01, 2001. The company writes off depreciation @ 20% p.a. on original cost and closes its books on December 31, every year. On October 01, 2003, one of the trucks is involved in an accident and is completely destroyed. Insurance company has agreed to pay Rs. 70,000 in full settlement of the claim. On the same date the company purchased a second hand truck for Rs. 1,00,000 and spent Rs. 20,000 on its overhauling. Prepare truck account and provision for depreciation account for the three years ended on December 31, 2003. Also give truck account if truck disposal account is prepared. (Ans: Loss of settlement of Truck Insurance Rs.30,000. Balance of Provision for depreciation A/c as on 31.12.03 Rs.4,46,000. Balance of Trucks account as on 31.12.03 Rs.9,20,000). 11. Saraswati Ltd. purchased a machinery costing Rs. 10,00,000 on January 01, 2001. A new machinery was purchased on 01 May, 2002 for Rs. 15,00,000 and another on July 01, 2004 for Rs. 12,00,000. A part of the machinery which originally cost Rs. 2,00,000 in 2001 was sold for Rs. 75,000 on October 31, 2004. Show the machinery account, provision for depreciation account and machinery disposal account from 2001 to 2005 if depreciation is provided at 10% p.a. on original cost and account are closed on December 31, every year. (Ans: Loss on sale of Machine Rs.58,333. Balance of Provision for dep. A/c as on 31.12.05 Rs. 11,30,000. Balance of Machine A/c as on 31.12.05 Rs.35,00,000).
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Accountancy 12. On July 01, 2001 Ashwani purchased a machine for Rs. 2,00,000 on credit. Installation expenses Rs. 25,000 are paid by cheque. The estimated life is 5 years and its scrap value after 5 years will be Rs. 20,000. Depreciation is to be charged on straight line basis. Show the journal entry for the year 2001 and prepare necessary ledger accounts for first three years. (Ans: Balance of Machine A/c as on 31.12.03 Rs.1,22,500). 13. On October 01, 2000, a Truck was purchased for Rs. 8,00,000 by Laxmi Transport Ltd. Depreciation was provided at 15% p.a. on the diminishing balance basis on this truck. On December 31, 2003 this Truck was sold for Rs. 5,00,000. Accounts are closed on 31st March every year. Prepare a Truck Account for the four years. (Ans: Profit on Sale of Truck Rs.55,548). 14. Kapil Ltd. purchased a machinery on July 01, 2001 for Rs. 3,50,000. It purchased two additional machines, on April 01, 2002 costing Rs. 1,50,000 and on October 01, 2002 costing Rs. 1,00,000. Depreciation is provided @10% p.a. on straight line basis. On January 01, 2003, first machinery become useless due to technical changes. This machinery was sold for Rs. 1,00,000. prepare machinery account for 4 years on the basis of calendar year. (Ans: Loss on sale of machine Rs. 1,97,500. Balance of Machine account as on 1.01.05 Rs. 1,86,250). 15. On January 01, 2001, Satkar Transport Ltd, purchased 3 buses for Rs. 10,00,000 each. On July 01, 2003, one bus was involved in an accident and was completely destroyed and Rs. 7,00,000 were received from the Insurance Company in full settlement. Depreciation is writen off @15% p.a. on diminishing balance method. Prepare bus account from 2001 to 2004. Books are closed on December 31 every year. (Ans: Profit on insurance claim Rs. 31,687. Balance of Bus account as on 1.01.05 Rs. 10,44,013). 16. On October 01, 2001 Juneja Transport Company purchased 2 Trucks for Rs. 10,00,000 each. On July 01, 2003, One Truck was involved in an accident and was completely destroyed and Rs. 6,00,000 were received from the insurance company in full settlement. On December 31, 2003 another truck was involved in an accident and destroyed partially, which was not insured. It was sold off for Rs. 1,50,000. On January 31, 2004 company purchased a fresh truck for Rs. 12,00,000. Depreciation is to be provided at 10% p.a. on the written down value every year. The books are closed every year on March 31. Give the truck account from 2001 to 2004. (Ans: Loss on Ist Truck Insurance claim Rs. 1,41,000. Loss on IInd Truck Rs. 5,53,000. Balance of Truck account as on 31.03.04 Rs. 11,80,000). 17. A Noida based Construction Company owns 5 cranes and the value of this asset in its books on April 01, 2001 is Rs. 40,00,000. On October 01, 2001 it sold one of its cranes whose value was Rs. 5,00,000 on April 01, 2001 at a 10% profit. On the same day it purchased 2 cranes for Rs. 4,50,000 each.
Depreciation, Provisions and Reserves Prepare cranes account. It closes the books on December 31 and provides for depreciation on 10% written down value. (Ans: Profit on sale of crane Rs. 47,500. Balance of Cranes account as on 31.12.01 Rs. 41,15000). 18. Shri Krishan Manufacturing Company purchased 10 machines for Rs. 75,000 each on July 01, 2000. On October 01, 2002, one of the machines got destroyed by fire and an insurance claim of Rs. 45,000 was admitted by the company. On the same date another machine is purchased by the company for Rs. 1,25,000. The company writes off 15% p.a. depreciation on written down value basis. The company maintains the calendar year as its financial year. Prepare the machinery account from 2000 to 2003. (Ans: Loss on settle of insurance claim Rs. 7,735. Balance of Machine account as on 31.12.03 Rs. 6,30,393). 19. On January 01, 2000, a Limited Company purchased machinery for Rs. 20,00,000. Depreciation is provided @15% p.a. on diminishing balance method. On March 01, 2002, one fourth of machinery was damaged by fire and Rs. 40,000 were received from the insurance company in full settlement. On September 01, 2002 another machinery was purchased by the company for Rs. 15,00,000. Write up the machinery account from 2002 to 2003. Books are closed on December 31, every year. (Ans: Loss on settle of insurance claim Rs. 12,219. Balance of Machine account as on 01.01.04 Rs 19,94,260). 20. A Plant was purchased on 1st July, 2000 at a cost of Rs. 3,00,000 and Rs. 50,000 were spent on its installation. The depreciation is written off at 15% p.a. on the straight line method. The plant was sold for Rs. 1,50,000 on October 01, 2002 and on the same date a new Plant was installed at the cost of Rs. 4,00,000 including purchasing value. The accounts are closed on December 31 every year. Show the machinery account and provision for depreciation account for 3 years. (Ans: Loss on sale of Plant Rs. 81,875. Balance of Machine account as on 01.01.03 Rs. 15,000. Balance of Provision for Depreciation account as on 01.01.03 Rs. 15,000.). 21. An extract of Trial balance from the books of Tahiliani and Sons Enterprises on December 31 2005 is given below: Name of the Account Debit Amount Credit Amount Rs. Rs. Sundry debtors. Bad debts Provision for doubtful debts 50,000 6,000 4,000
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Additional Information: Bad Debts proved bad but not recorded amounted to Rs. 2,000. Provision is to be maintained at 8% of Debtors.
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Accountancy Give necessary accounting entries for writing off the bad debts and creating the provision for doubtful debts account. Also show the necessary accounts. (Ans: New provision for Bad debts Rs. 3,840, profit and loss account [Dr.] Rs. 7,840.) 22. The following information are extract from the Trial Balance of M/s Nisha traders on 31 December 2005. Sundry Debtors 80,500 Bad debts 1,000 Provision for bad debts 5,000 Additional Information Bad Debts Rs. 500 Provision is to be maintained at 2% of Debtors. Prepare bad debts accound, Provision for bad debts account and profit and loss account. (Ans: New provision Rs. 1,600 Profit and loss account [Cr.] Rs. 1,900). Checklist to Test Your Understanding Test Your Understanding - I 1. Fixed assets, exhaustion of natural resources, specific contracted business. 2. Amortisation Test Your Understanding - II 1. T, 2. F, 3. F. 4. T, 5. T 6. F, 7. T, (viii) F, 8. F, 9. F, Test Your Understanding - III Written down value method is more appropriate because this method is suitable for those assets which are affected by technological changes. Moreover, this method is recognised by income tax hand. Test Your Understanding - V 1. (i) (v) (i) (iii) T, T, Assets Charge (ii) (vi) (ii) (iv) F, F, (iii) (vii) F, F, (iv) F,
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Acquisition cost Dividend equilisation fund.
Bill of Exchange
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LEARNING OBJECTIVES
After studying this chapter, you will be able to : state the meaning of bill of exchange and a promissory note; distinguish between a bill of exchange and a promissory note; state the advantages of bill of exchange; explain the meaning of different terms involved in the bill transaction, record bill of exchange transactions in journal; record transactions relating to dishonour, retirement and renewal of bill; describe the uses of bill receivable and bill payable book; state the meaning and use of accommodation bill.
oods can be sold or bought for cash or on credit. When goods are sold or bought for cash, payment is received immediately. On the other hand, when goods are sold/bought on credit the payment is deferred to a future date. In such a situation, normally the firm relies on the party to make payment on the due date. But in some cases, to avoid any possibility of delay or default, an instrument of credit is used through which the buyer assures the seller that the payment shall be made according to the agreed conditions. In India, instruments of credit have been in use since time immemorial and are popularly known as Hundies. The hundies are written in Indian languages and have a large variety (refer box1).
Box 1 Hundies and its Types There are a variety of hundies used in our country. Let us discuss some of the most common ones. Shahjog Hundi: This is drawn by one merchant on another, asking the latter to pay the amount to a Shah. Shah is a respectable and responsible person, a man of worth and known in the bazaar. A shah-jog hundi passes from one hand to another till it reaches a shah, who, after reasonable enquiries, presents it to the drawee for acceptance of the payment. Darshani Hundi: This is hundi payable at sight. It must be presented for payment within a reasonable time after its receipt by the holder. It is similar to a demand bill.
Dev Prakash Sharma/VIII Proof/22/02/2006
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Accountancy
Muddati Hundi: A muddati or miadi hundi is payable after a specified period of time. This is similar to a time bill. There are few other varieties of hundies like Nam-jog hundi, Dhani-jog hundi, Jawabee hundi, Hokhami hundi, Firman-jog hundi, and so on.
Now a days these instruments of credit are called bills of exchange or promissory notes. The bill of exchange contains an unconditional order to pay a certain amount on an agreed date while the promissory note contains an unconditional promise to pay a certain sum of money on a certain date. In India these instruments are governed by the Indian Negotiable Instruments Act 1881. 8.1 Meaning of Bill of Exchange According to the Negotiable Instruments Act 1881, a bill of exchange is defined as an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument. The following features of a bill of exchange emerge out of this definition. A bill of exchange must be in writing. It is an order to make payment. The order to make payment is unconditional. The maker of the bill of exchange must sign it. The payment to be made must be certain. The date on which payment is made must also be certain. The bill of exchange must be payable to a certain person. The amount mentioned in the bill of exchange is payable either on demand or on the expiry of a fixed period of time. It must be stamped as per the requirement of law. A bill of exchange is generally drawn by the creditor upon his debtor. It has to be accepted by the drawee (debtor) or someone on his behalf. It is just a draft till its acceptance is made. For example, Amit sold goods to Rohit on credit for Rs. 10,000 for three months. To ensure payment on due date Amit draws a bill of exchange upon Rohit for Rs. 10,000 payable after three months. Before it is accepted by Rohit it will be called a draft. It will become a bill of exchange only when Rohit writes the word accepted on it and append his signature thereto communicate his acceptance.
Bill of Exchange
281
8.1.1 Parties to a Bill of Exchange There are three parties to a bill of exchange: (1) Drawer is the maker of the bill of exchange. A seller/creditor who is entitled to receive money from the debtor can draw a bill of exchange upon the buyer/debtor. The drawer after writing the bill of exchange has to sign it as maker of the bill of exchange. (2) Drawee is the person upon whom the bill of exchange is drawn. Drawee is the purchaser or debtor of the goods upon whom the bill of exchange is drawn. (3) Payee is the person to whom the payment is to be made. The drawer of the bill himself will be the payee if he keeps the bill with him till the date of its payment. The payee may change in the following situations: (a) In case the drawer has got the bill discounted, the person who has discounted the bill will become the payee; (b) In case the bill is endorsed in favour of a creditor of the drawer, the creditor will become the payee. Normally, the drawer and the payee is the same person. Similarly, the drawee and the acceptor is normally the person. For example, Mamta sold goods worth Rs.10,000 to Jyoti and drew a bill of exchange upon her for the same amount payable after three months. Here, Mamta is the drawer of the bill and Jyoti is the drawee. If the bill is retained by Mamta for three months and the amount of Rs. 10,000 is received by her on the due date then Mamta will be the payee. If Mamta gives away this bill to her creditor Ruchi, then Ruchi will be the payee. If Mamta gets this bill discounted from the bank then the bankers will become the payee. In the above mentioned bill of exchange, Mamta is the drawer and Jyoti is the drawee. Since Jyoti has accepted the bill, she is the acceptor. Suppose in place of Jyoti the bill is accepted by Ashok then Ashok will become the acceptor.
Mamta New Delhi Rs.10,000 April 01, 2006 Three months after date pay to me or my order, the sum of Rupees Ten Thousand only, for value received. Stamp Accepted (signed) Jyoti 1.4.2006 73-B, Mahipalpur New Delhi 110 037 To Jyoti 73-B, Mahipalpur New Delhi 110 037 Figure 8.1 : Showing specimen of bills of exchange (Signed) Mamta 196, Karol Bagh New Delhi
282 Test Your Understanding - I
Accountancy
Write Ture or False against each statement regarding a bill of exchange: (i) (ii) (iv) (v) (vi) A bill of exchange must be accepted by the payee. A bill of exchange is drawn by the creditor. A bill payable on demand is called Time bill; The person to whom payment is to be made in a bill or exchange is called payee. A negotiable instrument does not require the signature of its maker.
(iii) A bill of exchange is drawn for all cash transaction.
(vii) The hundi Payable at sight is called Darshani hundi. (viii) A negotiable instrument is not freely transferable. (ix) (x) Stamping of promissory note is not mandatory. The time of payment of a negotiable instrument need not be certain.
8.2 Promissory Note According to the Negotiable Instruments Act 1881, a promissory note is defined as an instrument in writing (not being a bank note or a currency note), containing an unconditional undertaking signed by the maker, to pay a certain sum of money only to or to the order of a certain person, or to the bearer of the instrument. However, according to the Reserve Bank of India Act, a promissory note payable to bearer is illegal. Therefore, a promissory note cannot be made payable to the bearer. This definition suggests that when a person gives a promise in writing to pay a certain sum of money unconditionally to a certain person or according to his order the document is called is a promissory note. Following features of a promissory note emerge out of the above definition: It must be in writing It must contain an unconditional promise to pay. The sum payable must be certain. It must be signed by the maker. The maker must sign it. It must be payable to a certain person. It should be properly stamped. A promissory note does not require any acceptance because the maker of the promissory note himself promises to make the payment.
Bill of Exchange Ashok Kumar Rs. 30,000
283 New Delhi 01 April, 2006
Three months after date I promise to pay Sh. Harish Chander or order a sum of Rupees Thirty Thousand only for value received. Stamp To Harish Chander 24, Ansari Road Darya Ganj New Delhi 110 002 Fig. 8.2 : Showing specimen of promissory note Ashok Kumar 2, Dariba Kalan Candani Chowk Delhi 110 006
8.2.1 Parties to a Promissory Note There are two parties to a promissory note. Maker or Drawer is the person who makes or draws the promissory note to pay a certain amount as specified in the promissory note. He is also called the promisor. Drawee or Payee is the person in whose favour the promissory note is drawn. He is called the promisee. Generally, the drawee is also the payee, unless, it is otherwise mentioned in the promissory note. In the specimen of promissory note(refer figure 8.2), Ashok Kumar is the drawer or maker who promises to pay Rs.30,000 and Harish Chander is the drawee or payee to whom payment is to made. If Harish Chander endorses this promissory note in favour of Rohit then Rohit will become the payee. Similarly, if Harish Chander gets this promissory note discounted from the bank then the bank will become the payee.
Box 2 Distinction between a Bill of Exchange and Promissory Note Both a bill of exchange and a promissory note are instruments of credit and are similar in many ways. However, there are certain basic differences between the two. S. No 1 2 Basis Drawer Bill of Exchange It is drawn by the creditor Promissory Note It is drawn by the debtor It contains a promise to make payment. There are only two parties to it, viz. the drawer and the payee.
Order or Promise It contains an order to make and Parties payment. There can be three parties to it, viz. the drawer, the drawee and the payee.
284 3 Acceptance It requires acceptance by the drawee or someone else on his behalf. Drawer and payee can be the same party.
Accountancy It does not require any acceptance. Drawer cannot be the payee of it.
4. 5.
Payee Notice
In case of its dishonour due No notice needs to be givenin notice of dishonour is to be case of its dishonour. given by the holder to the drawer
Fig. 8.3 Distinction between bills of exchange and promissory note
8.3 Advantages of Bill of Exchange The bills of exchange as instruments of credit are used frequently in business because of the following advantages: Framework for relationships: A bill of exchange represents a device, which provides a framework for enabling the credit transaction between the seller/ creditor and buyer/debtor on an agreed basis. Certainty of terms and conditions: The creditor knows the time when he would receive the money so also debtor is fully aware of the date by which he has to pay the money. This is due to the fact that terms and conditions of the relationships between debtor and creditor such as amount required to be paid; date of payment; interest to be paid, if any, place of payment are clearly mentioned in the bill of exchange. Convenient means of credit: A bill of exchange enables the buyer to buy the goods on credit and pay after the period of credit. However, the seller of goods even after extension of credit can get payment immediately either by discounting the bill with the bank or by endorsing it in favour of a third party. Conclusive proof: The bill of exchange is a legal evidence of a credit transaction implying thereby that during the course of trade buyer has obtained credit from the seller of the goods, therefore, he is liable to pay to the seller. In the event of refusal of making the payment, the law requires the creditor to obtain a certificate from the Notary to make it a conclusive evidence of the happening. Easy transferability: A debt can be settled by transferring a bill of exchange through endorsement and delivery.
Bill of Exchange Test Your Understanding - II Fill in the blanks with suitable word(s) (i) The person to whom the amount mentioned in the promissory note is payable is known as _____________. (ii) Transfer of a negotiable instrument to another person by signing on it, is known as _____________. (iii) In a promissory note, the person who makes the promise to pay is called as ____________. (iv) A person who endorses the promissory note in favour of another is known as____________.
285
8.4 Maturity of Bill The term maturity refers the date on which a bill of exchange or a promissory note becomes due for payment. In arriving at the maturity date three days, known as days of grace, must be added to the date on which the period of credit expires instrument is payable. Thus, if a bill dated March 05 is payable 30 days after date it, falls due on April 07, i.e. 33 days after March 05 If it were payable one month after date, the due date would be April 08, i.e. one month and 3 days after March 05. However, where the date of maturity is a public holiday, the instrument will become due on the preceding business day. In this case if April 08, falls on a public holiday then the April 07 will be the maturity date. But when an emergent holiday is declared under the Negotiable Instruments Act 1881, by the Government of India which may happen to be the date of maturity of a bill of exchange, then the date of maturity will be the next working day immediately after the holiday. For example, the Government declared a holiday on April 08 which happened to be the day on which a bill of exchange drawn by Gupta upon Verma for Rs.20,000 became due for payment, Since April 08, has been declared a holiday under the Negotiable Instruments Act, therefore, April 08, will be the date of maturity for this bill. 8.5 Discounting of Bill If the holder of the bill needs funds, he can approach the bank for encashment of the bill before the due date. The bank shall makes the payment of the bill after deducting some interest (called discount in this case). This process of encashing the bill with the bank is called discounting the bill. The bank gets the amount from the drawee on the due date.
286
Accountancy
8.6 Endorsement of Bill Any holder may transfer a bill unless its transfer is restricted, i.e. the bill has been negotiated containing words prohibiting its transfer. The bill can be initially endorsed by the drawer by putting his signatures at the back of the bill along with the name of the party to whom it is being transferred. The act of signing and transferring the bill is called endorsement. 8.7 Accounting Treatment For the person who draws the bill of exchange and gets it back after its due acceptance, it is a bill receivable. For the person who accepts the bill, same, it is a bills payable. In case of a promissory note for the maker it is a bills payable and for the person in whose favour the promissory note is drawn it is a bills receivable. Bills receivables are assets and Bills payable are liabilities. Bills and Notes are used interchangeably. 8.7.1 In the Books of Drawer/Promissor A bill receivable can be treated in the following four ways by its receiver. 1. He can retain it till the date of maturity, and (a) get it collected on date of maturity directly, or (b) get it collected through the banker. 2. 3. He can get the bill discounted from the bank. He can endorse the bill in favour of his Creditor.
The accounting treatment in the books of receiver under all the four alternatives is given below under the assumption that the bill is duly honoured on maturity by the acceptor. (1) When the bill of exchange is retained by the receiver with him till date of its maturity:
On receiving the bill Bills Receivable A/c To Debtors A/c On maturity of the bill Cash/Bank A/c To Bills Receivable A/c Dr.
Dr.
However, when the bill of exchange is retained by the receiver with him and sent to bank for collection a few days before maturity, the following two entries are recorded:
On sending the bill for collection Bills Sent for Collection A/c To Bills Receivable A/c Dr.
Bill of Exchange On receiving the advice from the bank that the bill has been collected Bank A/c Dr. To Bills Sent for Collection A/c
287
(2) When the receiver gets the bill discounted from the bank:
On receiving the bill Bills Receivable A/c To Debtors A/c On discounting the bill Bank A/c Discount A/c To Bills Receivable A/c Dr.
Dr. Dr.
On Maturity No entry is recorded because the bill becomes the property of the bank, therefore, the bank collects the amount of the bill from the acceptor and no journal entry is recorded in the books of the drawer. (3) When the bill is endorsed by the receiver in favour of his creditor:
On receiving the bill Bills Receivable A/c To Debtors A/c On endorsing the bill Creditors A/c To Bills Receivable A/c Dr.
Dr.
On Maturity No entry is recorded because the bill has been transferred in favour of the creditor, therefore the creditor becomes its owner and will receive the payment on maturity. Hence, no entry is recorded in the books of drawer or endorser. 8.7.2 In the Books of Acceptor/Promissor The following journal entries are recorded in the books of the acceptor or promisesor under all the four alternatives. It makes no difference whether the bill is retained discounted, endorsed or pledged.
On accepting the bill Creditors A/c To Bills Payable A/c On Maturity of the bill Bills Payable A/c To Bank A/c Dr.
Dr.
288 Box 3
Accountancy
1. When the drawer retains the bill with him till the date of its maturity and gets the same collected directly Transaction Books of Creditor/Drawer Books of Debtor/ Acceptor Sale/Purchase of goods Debtors A/c Dr. Purchases A/c Dr. To Sales A/c To Creditors A/c Receiving/Accepting the bill Collection of the bill Bills Receivable A/c Dr. To Debtors A/c Creditors A/c Dr. To Bills Payable A/c
Cash/Bank A/c Dr. Bills Payable A/c Dr. To Bills Receivable A/c To Cash/Bank A/c
2. When the bill is retained by the drawer with him and sent to bank for collection a few days before maturity Transaction Sale/Purchase of goods Receiving /Accepting the bill Sending the bill for collection Books of Creditor/Drawer Debtors A/c To Sales A/c Dr. Books of Debtor/ Acceptor Purchases A/c Dr. To Creditors A/c Creditors A/c Dr. To Bills Payable A/c No entry Bills Payable A/c Dr. To Bank A/c
Bills Receivable A/c Dr. To Debtors A/c Bills sent for collection A/c Dr. To Bill Receivable A/c Bank A/c Dr. To Bill Sent for Collection A/c
On Receiving from the bank advice that the bill has been collected
3. When the drawer gets the bill discounted from the bank Transaction Sale/Purchase of goods Receiving /Accepting the bill Discounting the bill Books of Creditor/Drawer Debtors A/c To Sales A/c Dr. Books of Debtor/ Acceptor Purchases A/c Dr. To Creditors A/c Creditors A/c Dr. To Bills payable A/c
Bills Receivable A/c Dr. To Debtors A/c
Bank A/c Dr. No entry Discount A/c Dr. To Bills Receivable A/c No entry Bills payable A/c Dr. To Bank A/c
On maturity of the bill
Bill of Exchange 4. When the bill is endorsed by the drawer in favour of his creditor Transaction Sale/Purchase of goods Receiving /Accepting the bill Endorsing the bill On maturity of the bill Books of Creditor/Drawer Debtors A/c To Sales A/c Dr. Books of Debtor/ Acceptor
289
Purchase A/c Dr. To Creditors A/c Creditors A/c Dr. To Bills payable A/c
Bills Receivable A/c Dr. To Debtors A/c
Creditors A/c Dr. No entry To Bills Receivable A/c No entry Bills payable A/c Dr. To Bank A/c
The journal entries to be recoded in the books of the drawer and the acceptor under all the four cases have been summarised below.
Illustration 1 Amit sold goods for Rs.20,000 to Sumit on credit on Jan 01, 2006. Amit drew a bill of exchange upon Sumit for the same amount for three months. Sumit accepted the bill and returned it to Amit. Sumit met his acceptance on maturity. Record the necessary journal entries under the following circumstances: (i) (ii) (iv) Amit retained the bill till the date of its maturity and collected directly Amit discounted the bill @ 12% p.a from his bank Amit retained the bill and on March, 31 2006 Amit sent the bill for collection to its bank. On April 05, 2006 bank advice was received.
(iii) Amit endorsed the bill to his creditor Ankit
Solution Books of Amit Journal (i) When the bill was retained till its maturity. Date Particulars L.F. Debit Amount Rs. 20,000 20,000 Dr. 20,000 20,000 Credit Amount Rs.
2006 Jan 01 Sumits A/c To Sales A/c (Sold goods to Sumits on credit) Jan 01 Bills Receivable A/c To Sumits A/c (Received Sumits acceptance payable after three months)
Dr.
290 Apr.05 Bank A/c To Bills Receivable A/c (Sumit met his acceptance on maturity) (ii) When the bill was discounted from the book. Journal Date Particulars L.F. Dr.
Accountancy 20,000 20,000
Debit Amount Rs. 20,000
Credit Amount Rs.
2006 Jan 01 Sumits A/c To Sales A/c (Sold goods to Sumits)
Dr.
20,000 20,000 20,000 19,400 600 20,000
Jan 01 Bills Receivable A/c Dr. To Sumits A/c (Received Sumits acceptance three months) Jan 01 Bank A/c Dr. Discount A/c Dr. To Bills Receivable A/c (Sumits acceptance discounted with the bank) (iii) When Amit endorsed the bill in favour of his creditor Ankit. Journal Date Particulars L.F.
Credit Amount Rs.
2006 Jan. 01 Sumits A/c To Sales A/c (Sold goods to Sumits on credit) Jan. 01 Bills Receivable A/c To Sumits A/c (Received Sumits acceptance for three months) Jan. 01
Dr.
20,000 Dr. 20,000 20,000
Ankits A/c Dr. To Bills Receivable A/c (Sumit acceptance endorsed in favour of Ankit)
20,000 20,000
Bill of Exchange (iv) When the bill was sent for collection by Amit to the bank. Journal Date Particulars L.F. Debit Amount Rs. 20,000
291
Credit Amount Rs.
2006 Jan. 01 Sumits A/c To Sales A/c (Sold goods to Sumits on credit) Jan. 02 Bills Receivable A/c To Sumits A/c (Received Sumits acceptance payable after three months) Mar. 31 Bills Sent for Collection A/c To Bills Receivable A/c (Bills sent for collection) Apr. 05
Dr.
20,000 Dr. 20,000 20,000
Dr.
20,000 20,000 20,000 20,000
Bank A/c Dr. To Bills sent for collection A/c (Bills sent for collection collected by the bank)
The following journal entries will be made in the books of Sumit under all the four circumstances: In the books of Sumit Journal Date Particulars L.F. Debit Amount Rs. Credit Amount Rs.
2006 Jan. 01 Purchases A/c To Amits A/c (Purchases goods from Amit on credit)
Dr.
20,000 20,000 20,000 20,000
Jan. 01 Amits A/c Dr. To Bills Payable A/c (Accepted bill drawn by Amit payable after three months) Apr. 04 Bills payable A/c To Bank A/c (Met acceptance maturity) Dr.
20,000 20,000
292 Illustration 2
Accountancy
On March 15, 2006 Ramesh sold goods for Rs. 8,000 to Deepak on credit. Deepak accepted a bill of exchange drawn upon him by Ramesh payable after three months. On April, 15 Ramesh endorsed the bill in favour of his creditor Poonam in full settlement of her debt of Rs. 8,250. On May 15, Poonam discounted the bill with her bank @ 12% p.a. On the due date Deepak met the bill. Record the necessary journal entries in the books of Ramesh, Deepak, Poonam. Books of Ramesh Journal Date Particulars L.F. Debit Amount Rs. 8,000 8,000 8,000 8,000 8,250 8,000 250 Credit Amount Rs.
2006 Mar.15
Deepak A/c To Sales A/c (Sold goods to Deepak on credit)
Dr.
Mar.15
Bills Receivable A/c Dr. To Deepak A/c (Received Deepaks acceptance for three months) Poonams A/c To Bills Receivable A/c To Discount Received A/c (Bill endorsed in favour of Poonam in full settlement of her debt of Rs. 8,250) Book of Deepak Journal Dr.
Apr.15
Date
Particulars
L.F.
Credit Amount Rs.
2006 Mar.05
Purchases A/c To Ramesh A/c (Sold goods to Deepak on credit) Rameshs A/c To Bills Payable A/c (Accepted Rameshs draft payable after three months) Bills Payable A/c To Bank A/c (Met the acceptance in favour of Ramesh on maturity)
Dr.
8,000 Dr. 8,000 8,000
Mar.05
Jun.18
Dr.
8,000 8,000
Bill of Exchange Books of Poonam Journal Date Particulars L.F. Debit Amount Rs. 8,000 250
293
Credit Amount Rs.
2006 Mar.15
Bills Receivable A/c Dr. Discount Allowed A/c Dr. To Rameshs A/c (Ramesh endorsed Deepaks acceptance in our favour for discharge his dept of Rs. 8,250 in full settlement) Bank A/c Discount Allowed A/c To Bills Receivable A/c (Biils receivable encashed on maturity) Dr. Dr.
8,250
Mar.15
7,920 80 8,000
8.8 Dishonour of a Bill A bill is said to have been dishonoured when the drawee fails to make the payment on the date of maturity. In this situation, liability of the acceptor is restored. Therefore, the entries made on the receipt of the bill should be reversed. For example, Anju received bill of exchange duly accepted by Manju, which was dishonoured. The entries of dishonour will be as follows in the books of Anju (receiver):
When the bill was kept by Anju with her till maturity Manjus A/c Dr. To Bill Receivables A/c When the bill had been endorsed by Anju in favour of Sandhya Manjus A/c Dr. To Sandhayas A/c When the bill was discounted by Anju with his bank Manjus A/c Dr. To Bank A/c When the bill was sent for collection by Anju Manjus A/c Dr. To Bill Sent for Collection A/c Illustration 3 On Jan 01,2006 Shieba sold goods to Vishal for Rs. 10,000 and drew upon him a bill of exchange for 2 months. Vishal accepted the bill and returned it to Shieba. On the date of maturity the bill was dishonoured by Vishal. Record the necessary entries in all the cases listed below in the books of Shieba and Vishal:
294 (i) When the bill kept by Shieba till its maturity; (ii) When the bill is discounted by Shieba for Rs. 200; (iii) When the bill is endorsed to Lal Chand by Shieba. Solution (i) When the bill was kept by Shieba till its maturity. Books of Shieba Journal Date Particulars L.F.
Accountancy
Credit Amount Rs.
2006 Jan.01
Vishals A/c To Sales A/c (Sold goods to Vishal)
Dr.
10,000 Dr. 10,000 10,000 Dr. 10,000 10,000
Jan. 01 Bills Receivable A/c To Vishals A/c (Received Vishals acceptance) Mar. 04 Vishals A/c To Bills Receivable A/c (Vishal dishonoured his acceptance) (ii) When the bill was discounted by shieba Journal Date Particulars
L.F.
Credit Amount Rs.
2006 Jan.01
Dr.
10,000 Dr. 10,000 10,000 9,800 200 10,000 10,000 10,000
Jan. 01 Bills Receivable A/c To Vishals A/c (Received Vishals acceptance)
Jan. 01 Bank A/c Dr. Discount A/c Dr. To Bills Receivable A/c (Vishals Bill dishonoured his acceptance) Mar.04 Vishals A/c To Bank A/c (Discounted bill dishonoured by Vishal) Dr.
Bill of Exchange (iii) When the bill was endorsed by Shieba to Lal Chand Journal Date Particulars L.F. Debit Amount Rs. 10,000
295
Credit Amount Rs.
2006 Jan.01
Dr.
10,000 Dr. 10,000 10,000 Dr. 10,000 10,000
Jan. 01 Bills Receivable A/c To Vishals A/c (Received Vishals acceptance) Jan. 01 Lal Chand A/c To Bills Receivable A/c (Vishals acceptance endorsed in favour of Lal Chand) Mar.04 Vishals A/c To Lal Chand A/c (Endorsed bill dishonoured by Vishal)
Dr.
10,000 10,000
Whereas, in the book of Vishal, the following entries will be recorded Books of Vishal Journal Date Particulars L.F. Debit Amount Rs. 10,000 10,000 Dr. 10,000 10,000 10,000 10,000 Credit Amount Rs.
2006 Jan.01
Purchases A/c To Shiebas A/c (Purchased good from shieba)
Dr.
Jan. 01 Shiebas A/c To Bills Payable A/c (Accepted Shiebas draft)
Jan. 04 Bills Payable A/c Dr. To Shiebas A/c (Acceptance in favour of shieba dishonoured)
8.8.1 Noting Charges A bill of exchange should be duly presented for payment on the date of its maturity. The drawee is absolved of his liability if the bill is not duly presented.
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Accountancy
Proper presentation of the bill means that it should be presented on the date of maturity to the acceptor during business working hours. To establish beyond doubt that the bill was dishonoured, despite its due presentation, it may preferably to be got noted by Notary Public. Noting authenticates the fact of dishonour. For providing this service, a fees is charged by the Notary Public which is called Noting Charges. The following facts are generally noted by the Notary: Date, fact and reasons of dishonour; If the bill is not expressly dishonoured, the reasons why he treats it as dishonoured and; The amount of noting charges. The entries recorded for noting charges in the drawers book are as follows:
When Drawer himself pays Drawees A/c To Cash A/c Where endorsee pays Drawees A/c To Endorsee A/c When the bank pays on discounted bill Drawees A/c To Bank A/c Dr.
Dr.
Dr.
When the bank pays in the event of sending the bill for collection to the bank Drawees A/c Dr. To Bank A/c
It may be noticed that whosoever pays the noting charges, ultimately these have to be borne by the drawee. That is why the drawee is invariably debited in the drawers books. This is because he is responsible for the dishonour of the bill and, hence, he has to bear these expenses. For recording the noting charges in his book the drawee opens Noting Charges Acccount. He debits the Noting Charges Account and credits the Drawers Account. For example, Azad sold goods for Rs. 15,000 to Bunty and immediately drew a bill upon him on Jan. 01, 2006 payable after 3 months. On maturity the bill was dishonoured and Rs. 50 were paid by the holder of the bill as noting charges. The journal entries will be recorded in the books of Azad and Bunty as given below under the following circumstances: (a) When the bill was kept by Azad till maturity. (b) When the bill was discounted by Azad with his bank immediately @ 12% p.a. (c) When the bill was endorsed by Azad in favour of his creditor Chitra. In the books of Azad, entries will be recorded as:
Bill of Exchange (i) When the bill was retained till its maturity Books of Azad Journal Date Particulars L.F. Debit Amount Rs. 15,000
297
Credit Amount Rs.
2006 Jan.01
Buntys A/c To Sales A/c (Sold goods to Bunty)
Dr.
15,000 Dr. 15,000 15,000 Dr. Dr. 15,050 15,000 50
Jan. 01 Bills Receivable A/c To Buntys A/c (Received Buntys acceptance) Apr. 04 Buntys A/c To Bills Receivable A/c To Cash A/c (Bunty dishonoured his acceptance and paid Rs. 50 as noting charges)
(ii)
When the bill was discounted with the bank. Journal Date Particulars L.F. Debit Amount Rs. 15,000 15,000 Dr. 15,000 15,000 Credit Amount Rs.
2006 Jan.01
Buntys A/c To Sales A/c (Sold goods to Bunty)
Dr.
Jan. 01 Bills Receivable A/c To Buntys A/c (Received Buntys acceptance payable after three months) Jan. 01 Bank A/c Discount A/c To Bills Receivable A/c (Buntys acceptance discounted) Apr. 04
Dr. Dr.
14,550 450 15,000 15,050 15,050
Buntys A/c Dr. To Bank A/c (Bunty dishonoured his acceptance on maturity and bank paid noting charges)
298 (iii) When the bill was endorsed to Chitra Journal Date Particulars L.F.
Accountancy
Credit Amount Rs.
2006 Jan. 01 Buntys A/c To Sales A/c (Sold goods to Bunty) Jan.01 Bills Receivable A/c To Buntys A/c (Received Buntys acceptance)
Dr.
15,000 Dr. 15,000 15,000 Dr. 15,000 15,000
Jan. 01 Chitras A/c To Bills Receivable A/c (Buntys acceptance endorsed in favour of Chitra) Apr. 04 Buntys A/c To Chitras A/c (Bunty dishonoured his acceptance on maturity and chitra paid Rs. 50 as noting charges)
Dr.
15,050 15,050
The following journal entries will be made in the books of Bunty in all the three cases. Book of Bunty Journal Date Particulars L.F. Debit Amount Rs. 15,000 15,000 Dr. 15,000 15,000 15,000 50 15,050 Credit Amount Rs.
2006 Jan.01
Purchases A/c To Azads A/c (Purchase goods from Azad) Jan. 01 Azads A/c To Bills Payable A/c (Accepted Azads draft) Apr. 04
Dr.
Bills Payable A/c Dr. Noting charges A/c Dr. To Azads A/c (Acceptance in favour of Azed dishonoured)
8.9 Renewal of the Bill Sometimes, the acceptor of the bill foresees that it may be difficult to meet the obligation of the bill on maturity and may, therefore, approach the drawer with the request for extension of time for payment. If it is so, the old bill is
Bill of Exchange
299
cancelled and the fresh bill with new terms of payment is drawn and duly accepted and delivered. This is called renewal of the bill. Since the cancellation of bill is mutually agreed upon noting of the bill is not required. The dreawee may have to pay interest to the drawer for the extended period of credit. The interest is paid in cash or may be included in the amount of the new bill. Sometimes, a part of the amount due may be paid and the new bill may be drawn only for the balance. For example, a bill of Rs. 10,000 is cancelled on a cash payment of Rs. 3,000 and acceptance of a new bill for the balance of Rs. 7,000 plus interest as agreed between the parties. The journal entries in the books of the drawer and the drawee will be the same as that of dishonour of bill. As for the interest invalued, if it is not paid in cash, the drawer debits the drawees account and credits the interest account, and the drawee debits the interest and credits the drawers account in his books. The journal entries recorded in case of renewal for the cancellation of the old bill, for interest and for the acceptance of the new bill in the books of the drawer and drawee are given below:
Transaction Cancellation of old bill Interest New bill Books of Drawer Drawees A/c Dr. To Bills Receivable A/c Drawees A/c To Interest A/c Bill Receivable A/c To Drawees A/c Dr. Dr. Books of Drawee Bills Payable A/c Dr. To Drawers A/c Interest A/c Dr. To Drawers A/c Drawers A/c Dr. To Bills Payable A/c
For example on February 01, 2006 Ravi sold goods to Mohan for Rs.18,000; Rs. 3,000 were paid by Mohan immediately and for the balance he accepted three months bill drawn upon him by Ravi. On the date of maturity of the bill Mohan requested Ravi to cancel the old bill and a new bill upon him for a period of 2 months. He further agreed to pay interest in cash to Ravi @ 12% p.a. Ravi agreed to Mohans request and cancelled the old bill and drew a new bill. The new bill was met on maturity by Mohan. In this case, the following entries will be recorded in the books of Ravi and Mohan.
Books of Ravi Journal Date Particulars L.F. Debit Amount Rs. 18,000 18,000 Credit Amount Rs.
2006 Feb. 01 Mohans A/c To Sales A/c (Sold goods to Mohan)
Dr.
300 Feb. 01 Cash A/c Dr. Bills Receivable A/c Dr. To Mohans A/c (Received Rs. 3,000 in cash from Ravi and an acceptance for the balance) May 01 Mohans Account To Bills Receivable A/c To Interest A/c (Cancelled old bill on renewal Rs. 300 as interest) May 04 Bills Receivable A/c Cash A/c To Mohans A/c (Received new acceptance from Mohan) Jul. 07 Bank A/c To Bills Receivable A/c (Mohan met his new acceptance) Book of Mohan Journal Date Particulars L.F. Dr.
Accountancy 3,000 15,000 18,000
15,300 15,000 300
Dr. Dr.
15,000 300 15,300
Dr.
15,000 15,000
Credit Amount Rs.
2006 Feb. 01 Purchases A/c To Ravi A/c (Purchased goods from Ravi) Feb.01
Dr.
18,000 18,000 3,000 15,000 15,000 300 15,300
Ravis A/c Dr. To Cashs A/c Bills Payable A/c (Received cash from Ravi and his acceptance)
May 04 Bill Payable A/c Dr. Interest A/c Dr. To Ravi A/c (Old bill cancelled on renewal, Rs. 300 charged as interest) May 04 Ravis A/c Dr. To Bills Payable A/c To Cash A/c (Accepted new bill and paid cash for interest) Jul. 07 Bill Payable A/c Dr. Bank A/c (Met acceptance of the new bill on maturity)
15,300 15,000 300 15,000 15,000
Bill of Exchange
301
8.10 Retiring of the Bill There are instances when a bill of exchange is arranged to be retired before the due date by mutual understanding between the drawer and the drawee. This happens when the drawee of the bill has funds at his disposal and makes a request to the drawer or holder to accept the payment of the bill before its maturity. If the holder agrees to do so, the bill is said to have been retired. The retiring of a bill draws a curtain on the bill transactions before the expiry of its normal term. To encourage the retirement of the bill, the holder allows some discount called Rebate on bills for the period between date of retirement and maturity. The rebate is calculated at a certain rate of interest. The accounting treatment on the retirement of a bill is similar to the accounting treatment when a bill is honoured by the acceptor on the due date in the ordinary course. The only difference between the two relates to the granting of rebate. The following journal entries are recorded: In the books of the holder
On retiring the acceptance and rebate allowed Cash A/c Dr. Rebate on bills A/c Dr. To Bills Receivables A/c In the books of the drawee Bills Payable A/c Cash A/c To Rebate on Bills A/c Dr. Dr.
Amit sold goods Rs. 10,000 to Babli on Jan. 01, 2006 and immediately drew a bill on Babli for three month for the same amount, Babli accepted the bill and returned it to Amit. On March 04, 2006 Babli retired her acceptance under rebate of 6% per annum.
In the books of Amit Journal Date Particulars L.F. Debit Amount Rs. 10,000 10,000 10,000 10,000 9,950 50 10,000 Credit Amount Rs.
2006 Jan. 01 Bablis A/c Dr. To Sales A/c (Sold goods to Babli) Jan. 01 Bills Receivable A/c Dr. To Bablis A/c (Received Bablis acceptance for three months) Mar. 04 Bank A/c Rebate on bills A/c To Bills Receivable A/c (Babli retired her acceptance and rebate allowed to him) Dr. Dr.
302 The recorded entries will be posted to the following ledger acounts Bablis Account Dr. Date 2006 Jan. 01 Particulars J. F. Amount Rs. 10,000 10,000 Date 2006 Jan 06 Particulars
Accountancy
Cr. J.F. Amount Rs. 10,000 10,000
Sales
Bills Receivable
Bill Receivable Account Dr. Date 2006 Jan. 01 Particulars J. F. Amount Rs. 10,000 10,000 Book of Babli Journal Date Particulars L.F. Debit Amount Rs. 10,000 10,000 Dr. 10,000 10,000 Credit Amount Rs. Date 2006 Mar 04 Particulars J.F. Cr. Amount Rs. 9,950 50 10,000
Sales
Cash Rebate on bill
2006 Jan. 01 Purchases A/c To Amit A/c (Purchased goods from Amit) Jan.01 Amits A/c To Bills Payable A/c (Accepted Amits draft payable after three months)
Dr.
Mar. 04 Bill Payable A/c To Cash A/c To Rebate on bills A/c (Acceptance in favour of Amit retired and rebate received) Amits Account Dr. Date 2006 Jan. 01 Particulars J. F. Amount Rs. 10,000 10,000 Date 2006 Jan. 04
Dr.
10,000 9,950 50
Cr. Particulars J.F. Amount Rs. 10,000 10,000
Bills Payable
Purchases
Bill of Exchange Bills Payable Account Dr. Date Particulars J. F. Amount Rs. 9950 50 10,000 Date 2006 Jan. 01 Particulars J.F.
303
Cr. Amount Rs. 10,000 10,000
2006 Jan. 01 Cash Rebate on bills
Amit
8.11 Bills Receivable and Bills Payable Books When large number of bills are drawn and accepted, their recording by means of journal entry for every transaction relating to the bills become a very cumbersome and time consuming exercise. It is then advisable to record them separately in special subsidiary books, the bills receivables in the Bills Receivable Book and the bills payable in the Bills Payable Book. The reason for the use of subsidiary books for recording bill transactions is the same as that in the case of other subsidiary books for cash, purchases, etc. An important point in connection with bill receivables and bills payable books is that they only record the transactions relating to drawing and acceptance of bills, all other transactions do not record the entire range of transactions relating to the bills, e.g. relating to bills discounted, endorsement, retirement, renewal etc.; simply have a passing reference in these books and the entries relating thereto are recorded as usual in the journal. It may be noted that the entry relating to honouring of bills appear in cash book. 8.11.1 Bills Receivable Book It has been designed as a summary of information regarding a duly accepted bill received by a drawer. All the details of the bill-date, acceptors name, amount, term, place of payment, etc. are entered in the bills receivable book for presentation and further reference. The performa of a bills receivable book is given in Figure 8.3:
BillsReceivable Book
No. Date Date of Received of Bill Bill From Whom received Drawer Acceptor Where Term Due payable Date Ledger Amount Cash Folio Book Folio Remarks
Fig. 8.3: Showing Format of Bills Receivable Book
304
Accountancy
The bills receivable book, like any other subsidiary book, is totaled periodically. This total is debited to the Bills Receivable Account whereas the account of every individual debtor whom the bills received is credited in the ledger. The Bills Receivable Account is the account of an asset and would always have a debit balance. This balance on any date would represent the amount of bills receivable unmatured and on hand. 8.11.2 Bills Payable Book It is maintained like a bills receivable book. It is meant to record all the details, relating to the bills accepted by a person or a party, which are retained for being use in the future, in case of need. The proforma of a bills payable book is given in Fig.8.4
Bills Payable Book
No. Date To Drawer of of Whom Bill Bill given Payee Where Term payable Due Ledger Amount Date Cash Remarks date Folio paid Book Folio
Fig. 8.4: Showing specimen Bills Payable Book
The posting from this books are made to the debit of the account of every creditor to whom acceptance has been given and the periodical total of the books is credited to the Bills Payable Account in the ledger. The bills payable account representing the liability of the acceptor in respect of bills accepted by him, always has a credit balance, if any. The credit balance of this account on any particular date must be the same as the total amount worth of bills payable yet to be presented for payment as ascertained from the bills payable book. For example, consider the following transactions and observe how these are recorded in bill receivable and bills payable book along with postings in the ledger accounts.
2006 (i) Jan. 07 Received from S. Mitra bill duly accepted for Rs. 1,32,500 dated January 04, payable three months after date. (ii) Jan. 09 Accepted S. Wardens draft for Rs. 9,70,000 at two months. (iii) Jan. 13 Pradhan drew on his trader at three months date and the same was accepted for Rs. 39,000.
Bill of Exchange
Bills Receivable Book
No. Date of Bill 2006 2006 S.Mitra R.Rakesh G.Ghosh D.Dhiman D.Kanga C.Shah
Total Rs.
Date Received
From Whom Drawer of Bill Whom received Self Do Do D.Dhiman Self M.Meyers P.Parson Madras 2 month Mar.23 K.Kanga Bangalore1 month Feb.26 A.vakil Bombay 3 month Apr.20 20,000 30,000 35,000
2,73,500
Acceptor
Where
Term payable
Due Date
Ledger Folio
Amount Cash Re-marks Rs. Book Folio 1,32,500 25,500 31,000
2006 S.Mitra R.Rakesh G.Ghosh Calcutta 2 month Mar.24 Amritsar 1 month Feb.17 Bombay 3 month Apr.17
01 Jan.07
Jan.04
02 Jan.15
Jan.14
03 Jan.21
Jan.21
04 Jan.22
Jan.17
05 Jan.23
Jan.23
06 Jan.27
Jan.20
Bills Payable Book
No. of Bill 2006 S.Warden Pradhan S.Parker A.Robert 1 month 2 month 3 month Apr.16 Mar.21 Mar.03
Total
Date of Bill
To Whom given
Drawer
Payee Where payable
Term
Due Date
Ledger
Amount
Date Paid
Cash Remarks Book Folio 97,000 39,000 42,000 21,000

Rs. 1,99,500
2006 2 month Mar.31
01
Jan.09
S.Warden
02
Jan.13
Pradhan
03
Jan.18
S.Parkar
04
Jan.31
A.Roberts
305
306 (iv)
Accountancy
Jan. 14 Drew on R. Rakesh at one month for Rs.25,000 and he accepted the next day. (v) Jan. 18 Gave acceptance at two months for Rs.42,000 to S. Parkar. (vi) Jan. 21 Received from G.Ghosh his acceptance for Rs.31,000 at two months. (vii) Jan. 22 Received from D.Dhiman, A.Vakils acceptance for Rs.20,000 at three months from Jan. 17. (viii) Jan. 23 K. Kanga accepted my draft at one month for Rs.30,000. (ix) Jan. 27 Received from C.Shah bill for Rs. 35,000 dated January 20, accepted by P. Parson and drawn by M.Meyers., payable two months after date. (x) Jan. 31 Gave acceptance for Rs. 21,500 at one month to A. Roberts.
Posting of recorded entries are as follow:

S. Mitras Account Dr. Date 2006 Jan. 01 Particulars J. F. Amount Rs. 1,32,500 1,32,500 Date 2006 Jan. 07 Particulars J.F. Cr. Amount Rs. 1,32,500 1,32,500
Sales
Bills Receovable
R. Rakeshs Account Dr. Date 2006 Jan. 14 Particulars J. F. Amount Rs. 25,000 25,000 G. Ghoshs Account Dr. Date 2006 Jan. 21 Particulars J. F. Amount Rs. 31,000 31,000 Date 2006 Jan. 21 Particulars J.F. Cr. Amount Rs. 31,000 31,000 Date 2006 Jan. 15 Particulars J.F. Cr. Amount Rs. 25,000 25,000
Sales
Bill Receivable
Sales
Bills Receivable
Bill of Exchange D. Dhimans Account Dr. Date 2006 Jan. 17 Particulars J. F. Amount Rs. 20,000 20,000 K. Kangas Account Dr. Date 2006 Jan. 23 Particulars J. F. Amount Rs. 30,000 30,000 Date 2006 Jan. 23 Particulars J.F. Date 2006 Jan. 22 Particulars J.F.
307
Cr. Amount Rs. 20,000 20,000
Sales
Bills Receivable
Cr. Amount Rs. 30,000 30,000
Sales
Bills Receivable
C. Shahs Account Dr. Date 2006 Jan. 20 Particulars J. F. Amount Rs. 35,000 35,000 Bill Receivables Account Dr. Date 2006 Jan. 31 Particulars J. F. Amount Rs. 2,73,500 2,73,500 Date 2006 Jan. 31 Particulars J.F. Cr. Amount Rs. 2,73,500 2,73,500 Date 2006 Jan. 27 Particulars J.F. Cr. Amount Rs. 35,000 35,000
Sales
Bill Receivable
Sundries
Balance c/f
S. Wardens Account Dr. Date 2006 Jan. 09 Particulars J. F. Amount Rs. 97,000 97,000 Date 2006 Jan. 09 Particulars J.F. Cr. Amount Rs. 97,000 97,000
Bills payable
Purchases
308 Pradhans Account Dr. Date 2006 Jan. 13 Particulars J. F. Amount Rs. 39,000 39,000 Date 2006 Jan. 13 Particulars
Accountancy
Cr. J.F. Amount Rs. 39,000 39,000
Bills payable
Purchases
S. Parkars Account Dr. Date 2006 Jan. 18 Particulars J. F. Amount Rs. 42,000 42,000 Date 2006 Jan. 18 Particulars J.F. Cr. Amount Rs. 42,000 42,000
Bills payable
Purchases
A. Roberts Account Dr. Date 2006 Jan. 31 Particulars J. F. Amount Rs. 21,500 21,500 Date 2006 Jan. 31 Particulars J.F. Cr. Amount Rs. 21,500 21,500
Bills payable
Purchases
Bill Payables Account Dr. Date 2006 Jan. 01 Particulars J. F. Amount Rs. 1,99,500 1,99,500 Date 2006 Jan. 04 Particulars J.F. Cr. Amount Rs.
Balance c/d
Sundries Receivable
1,99,500 1,99,5000
Note: The drawing and acceptance of a bill always pre-supposes some background of sale or purchase transaction. Therefore, in posting bill transactions from the two books to the accounts of debtors and creditors, it is supposed that the necessary sales and purchases entries have been duly recorded. Illustration 4 On Jan. 15, 2006 Sachin sold goods Rs.30,000 to Narain and drew upon the later a bill for the same amount payable after 3 months. The bill was accepted by Narain. The bill was discounted by Sachin from his bank for Rs.29,250 on Jan. 31, 2006. on maturity the bill was dishonoured. He further agreed to pay Rs.10,500 in cash including Rs. 500 interest and accept a new bill for two months for the remaining Rs.20,000. the new bill was
Bill of Exchange
309
creditor Kapil for settling a debt of Rs. 20,800. The new bill was endorsed by sachin in favour of his creditor Kapil for settling a debt of Rs. 20,800. The new bill was duly met by Narain on maturity. Record the necessary journal entries in the books of Sachin and Narain. Solution Books of Sachin Journal Date Particulars L.F. Debit Amount Rs. 30,000 30,000 Dr. 30,000 30,000 29,250 750 30,000 30,500 30,000 500 Dr. Dr. 10,500 20,000 30,500 Credit Amount Rs.
2006 Jan. 15 Narain A/c To Sales A/c (Sold goods to Narain) Jan.15 Bills Receivable A/c To Narains A/c (Received Buntys acceptance)
Dr.
Jan. 31 Bank A/c Dr. Discount A/c To Bill receivable A/c (Narains acceptance discounted with bank) Apr. 19 Narains A/c To Bank A/c To Interest A/c (Narains acceptance cancelled) Bank A/c Bills Receivavble A/c To Narain A/c (Received cash from Narain and a new acceptance for the balace) Dr.
Apr.19
Apr.19
Kapil A/c Dr. To Bill Receivable A/c To Discount Receivable A/c (Narains acceptance endorsed in favour of kapil and he allowed discount) Books of Narain Journal
20,800 20,000 800
Date
Particulars
L.F.
Credit Amount Rs.
2006 Jan. 15 Purchases A/c To Sachin A/c (Purchased goods from sachin)
Dr.
30,000
310 Jan.15 Sachin A/c To Bills Payable A/c (Accepted Sachins draft) Dr.
Accountancy 30,000 30,000 30,000 500 30,500 30,500 10,500 20,000
Jan.19
Bill Payable A/c Dr. Interest A/c To Sachin A/c (Cancelled old bill & Sachin charged interest) Sachins A/c To Bank A/c To Bill Payable A/c (Paid Sachin and accepted a new draft for the balance) Bills Receivavble A/c To Bank A/c (Met new acceptance on Maturity) Dr.
Apr. 19
Apr.22
Dr.
20,000 20,000
Illustration 5. Ashok sold goods Rs.14,000 to Bishan on October 30, 2005 and drew three bills for Rs.2,000, Rs.4,000 & Rs.8,000 payable after two, three, and four months respectively. The first bill was kept by Ashok with him till maturity. He endorsed the second bill in favour of his creditor Chetan. The third bill was discounted on December 03, 2005 at 12% p.a. The first and second bills were duly met on maturity but the third bill was dishonoured and the bank paid Rs.50 as noting charges. On March 03, 2006 Bishan paid Rs.4,000 and noting charges in cash and accepted a new bill at two months after date for the balance plus interest Rs.100. The new bill was met on maturity by Bishan. You are required to give the journal entries in the books of both Ashok ans Bishan and prepare Bishans account in Ashoks books and Ashoks account in Bishans books. Solution Books of Ashok Journal Date Particulars L.F. Debit Amount Rs. 14,000 14,000 14,000 14,000 Credit Amount Rs.
2005 Oct. 30
Oct. 30
Bishans A/c Dr. To Sales A/c (sold goods to Bishan on credit) Bills Receivable A/c Dr. To Bishans A/c (Received three acceptances from Bishan. First for Rs. 2,000 payable after two months, second for Rs. 4,000 payable after three months and the third for Rs. 8,000 payable after four months)
Bill of Exchange Oct. 30 Chetans A/c To Bills receivable A/c (Endorsed second bills in favour of creditor Chetan) Bank A/c Discount A/c To Bill receivable A/c (Third bill discounted at 12% p.a.) Dr. 4,000
311
4,000
Apr. 03
Dr.
7,760 240 8,000
2006 Apr.02
Bank A/c Dr. Bills receivable A/c (Bishan met his first acceptance on due date)
2,000 2,000 8,050 8,050
Mar. 03 Bishan A/c Dr. To Bank A/c (Bishan dishonoured his third acceptance and bank paid Rs.50 as noting charges) Mar. 03 Cash A/c To Bishans A/c (Cash received from Bishan) Mar. 03 Bishans A/c To Interest A/c (Interest charged from Bishan for the extended period) Dr.
4,050 4,050
Dr.
100 100
Mar. 03 Bills Receivable A/c Dr. To Bishans A/c (Received new acceptance from Bishan for two months) May 12 Bank A/c Dr. To bills Receivable A/c (Bishan met his new acceptance on maturity) Bishans Account Dr. Date 2005 Oct. 30 2006 Mar. 03 Mar. 09 Particulars J. F. Amount Rs. 14,000 8,050 100 22,150 Date 2005 Oct. 30 2006 Mar. 03 Mar. 03 Particulars
4,100 4,100
4,100 4,100
J.F.
Cr. Amount Rs. 14,000 4,050 4,100 22,150
Sales Bank Interest
Bills Cash Bills Receivable
312 Books of Bishan Journal Date Particulars L.F.
Accountancy
Credit Amount Rs.
2005 Jan. 30 Purchases A/c To Ashoks A/c (Purchases goods on credit from Ashok) Jan.30
Dr.
14,000 14,000 14,000
Ashoks A/c Dr. To Bills Payable A/c (Accepted three drafts of Ashok, the first for Rs. 2,000 payable after 2 months, second for Rs. 4,000 Payable after 3 months and the third for Rs. 8,000 Payable after 4 months) Dr.
2006 Jan. 02 Bills Payable A/c To Bank A/c (Met first acceptance for Rs. 2,000 in favour of Ashok.) Feb.02 Bill Payabale A/c To Bank A/c (Met second acceptance for Rs. 4,000 in favour of Ashok on maturity)
2,000 2,000
Dr.
4,000 4,000
Mar. 03 Bill Payable A/c Noting charges A/c To Ashok A/c (Third acceptance in favour of Ashok dishonoured and noting charges Rs. 50)
Dr. Dr.
8,050 50 8,050
Mar. 09 Ashoks A/c Dr. To Cash A/c (Paid to Ashok Rs. 4,000 plus noting charges) Mar. 09 Interest A/c Dr. To Ashoks A/c (Interest allowed to Ashok) Mar. 09 Ashoks A/c Dr. To Bills Payable A/c (New draft of Ashok for two months accepted) May 12 Bills Payable A/c Dr. To Bank A/c (Met new acceptance for Rs. 4,100 in favour of Ashok on maturity)
4,050 4,050 100 100 4,100 4,100 4,100 4,100
Bill of Exchange Ashoks Account Dr. Date 2005 Oct. 30 2006 Mar. 03 Mar. 09 Particulars J. F. Amount Rs. 14,000 4,050 4,100 22,150 Date 2005 Oct. 30 2006 Mar. 03 Mar. 09 Particulars J.F.
313
Cr. Amount Rs. 14,000 8,000 50 100 22,150
Bills payable Cash Bills Payable
Purchases Bills Payable Noting charges Interest
Illustration 6. Aashirwad draws on Aakarshak a Bill of exchange for 3 months for Rs.10,000 which Aakarshak accepts on January 01, 2006. Aashirwad endorses the bill in favour of Aakarti. Before maturity Aakarshak approaches Aashirwad with the request that the bill be renewed for a further period of 3 months at 18 per cent per annum interest. Aashirwad pays the sum to Prateek on the due date and agrees to the proposal of Aakarshak. Record journal entries in the books of Aashirwad, assuming that the second bill is duly met. Solution Book of Ashirwad Journal Date Particulars L.F. Debit Amount Rs. 10,000 10,000 10,000 10,000 Credit Amount Rs.
2006 Jan. 01 Bills Receivable A/c Dr. To Aakarshaks A/c (The Bill of exchange received from Aakarshak) Jan.01 Aakaratis A/c Dr. To Bills payable A/c (The bill of exchange received from Aakarshak, endorsed to Aakarati) Aakarshaks A/c Dr. To Aakaratis A/c (Cancellation of the bill of exchange received from Aakarshak now with Aakarati) Aakaratis A/c To Bank A/c (Payment of the amount due to Aakarati) Dr.
Apr. 04
10,000 10,000
Apr. 04
10,000 10,000 450 450
Apr. 04
Aakarshaks A/c Dr. To Interest A/c (Interest due from Aakarshak on Rs.10,000 for 3 months at 18% p.a.)
314 Apr. 04 Bills Receivable A/c Dr. To Aakarshaks A/c (The new bill received from Aakarshak for the amountdue for him) July 07 Bank A/c Dr. To Bills Receivable A/c (The amount received from Aakarshak in respect of the renewed bill)
10,450 10,450
Illustration 7. Ankit owes Nikita a sum of Rs.6,000. On April 01, 2006 Ankit gives a promissory note for the amount for 3 months to Nikita who gets it discounted with her bankers for Rs.5,760. on the due date the bill is dishonoured, the bank paid Rs.15 as noting charges. Ankit then pays Rs.2,000 in cash and accepts a bill of exchange drawn on him for the balance together with Rs.100 as interest. This bill of exchange is for 2 months and on the due date the bill is again dishonoured, Nikita paid Rs.15 as noting charges. Draft the journal entries to be recorded in Nikitas books. Solution Books of Nikita Journal Date Particulars L.F. Debit Amount Rs. 6,000 6,000 Credit Amount Rs.
2005 Apr. 01
Bills Receivable A/c To Ankits A/c (Ankits promissory note received in settlement of his account)
Dr.
Jan. 01 Bank A/c Dr. Discount A/c Dr. To Bills Payable A/c (Ankits Promissory note discounted for Rs.5,760) July 04 Ankit A/c Dr. To Bank A/c (The promissory note dishonoured by Ankit the amount of the bill and the noting charges recoverable from Ankit and payable to bank) July 04 Cash A/c To Ankits A/c (The amount received from Ankit) Dr.
5,760 240 6,000 6,015 6,015
2,000 2,000 100 100
July 04 Ankits A/c Dr. To Interest A/c (Interest due from Ankit for the second bill)
Bill of Exchange July 04 Bills Receivable A/c To Ankits A/c (Ankits acceptance for 2 monthsin settlement of amount due) Dr. 4,115
315
4,115
Sept.07 Ankits A/c Dr. To Bills Receivable A/c (The dishonour by Ankit of his acceptance) Sept.07 Ankits A/c To Cash A/c (Payment of noting charges, recoverable from Ankit) Illustraion 8. Dr.
4,115 4,115 15 15
On May 2005 Mohit sends his promissory note of Rs. 6000 for 3 months to Rohit. Rohit gets it discounted with his bankers at 18 percent per annum on May 04. On the due date the bill is dishonoured, the bank paying Rs.10 as noting charges. Rohit agrees to accept Rs.2,130 in cash (including Rs.130 for noting charges and interest) and another promissory note for Rs.4,000 at 2 months. On the due date, Mohit approaches Rohit again and asks for renewal of the bill for a further period of 3 months. Rohit agrees to the request, provided Mohit pays Rs.200 as interest in cash. This last bill is paid on maturity. Draft journal entries in the books of Mohit and Rohit. Solution Books of Mohit Journal Date Particulars L.F. Debit Amount Rs. 6,000 6,000 Credit Amount Rs.
2005 May 01
Rohits A/c To Bills Payable A/c (The amount of the promissory note sent to Rohit)
Dr.
Aug.04
Bills Payable A/c Dr. Noting charges A/c Dr. To Rohits A/c (The dishonour of the promissory note and Rs.10 being payable as noting charges to Rohit)
6,000 10 6,010
Aug. 04 Interest A/c Dr. Rohits A/c (Interest due to Rohit from part renewal of the promissory)
120 120
316 Aug.04 Rohits A/c Dr. To Bills Payable A/c To Cash A/c (Payment of Rs. 2,130 in cash and a new promissory note for Rs. 4,000 sent to Rohit to settle his account) Bill Payable A/c To Rohits A/c (Cancellation of the bill due today) Dr.
Accountancy 6,130 4,000 2,130
Oct.07
4,000 4,000 200 200
Oct.07
Interest A/c Dr. To Rohits A/c (The amount due as interest ot Rohit on the renewed bill) Rohits A/c Dr. To Cash A/c To Bills Payable A/c (The new acceptance and cash sent to Rohit) Bills Payable A/c Dr. To Cash A/c (Payment made to meet the bill due this day) Book of Rohit Journal
Oct.07
4,200 200 4,000
2001 Jan.09
4,000 4,000
Date
Particulars
L.F.
Debit Credit Amount Amount Rs. Rs. 6,000 6,000 5,730 270 6,000
2005 May 01
Bills Receivable A/c Dr. To Mohits A/c (Mohits promissory note received this day) Banks A/c Dr. Discount A/c Dr. To Bills Receivable A/c (The discounting of the promissory note by Mohit at 18% on Rs. 6,000 for 3 months) Mohits A/c Dr. To Bank A/c (The dishonour of the promissory not by Mohit Rs. 10 being charged by bank for noting charges) Mohits A/c Dr. Interest A/c (The amount agreed to be paid as interest by Mohit)
May 04
Aug.04
6,000 6,010
Aug.04
120 120
Bill of Exchange Aug.04 Cash A/c Bills Receivable A/c To Mohits A/c (Cash and promissory note received from Mohit for the amount due from him) Mohits A/c To Bills Receivable A/c (Cancellation of the bill due today) Mohits A/c To Interest A/c (The amount due from Mohit as interest) Cash A/c Bills Receivable A/c To Mohits A/c Dr. 2,130
317
4,000 6,130
Oct.07
Dr.
4,000 4,000
Oct.07
Dr.
200 200
Oct.07
Dr. Dr.
200 4,000 4,200
(Cash and promissory not received from Mohit) 2006 Jan. 10 Cash/Bank A/c Dr. To Bills Receivable A/c (Mohit met his acceptance on maturity)
4,000 4,000
Test Your Understanding - III Fill in the blanks: (i) (ii) (iii) (iv) (v) (vi) A bill of exchange is a ___________________________________instrument. A bill of exchange is drawn by the ________________upon his___________. A promissory note is drawn by ______________in favour of his__________. There are ____________________parties to a bill of exchange. There are ____________________parties to a promissory note. Drawer and ______________can not be the same parties in case of a bill of exchange. (vii) Bill of exchange in India languages is called _____________ (viii) __________days of grace are added in terms of the bill to calculate the date of its__________.
8.12 Accommodation Bills Normally, bills of exchange or promissory notes are drawn to finance the actual transactions in goods, i.e., an acceptance is made to settle a trade debt owing to the drawer by the drawee in case of a bill of exchange and the bill is called a trade bill. As it originates from genuine trade transaction it is for value received and is enforceable. For example, Ankit buys goods from Bishan, he may postpone the payment by accepting a draft drawn by Bindu upon him. Bindu can if he wants, get the money immediately by getting Ankits
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acceptance discounted with his bank. But, apart from financing transaction in goods, bills of exchange promissory notes may also be used for raising funds temporarily. Such a bill is called an accommodation bill as it is accepted by the drawee to accommodate the drawer. Hence, the drawee is called the accommodating party and the drawer is called the accommodation party. For example, Raj draws upon Pal a bill for Rs.10,000 on April 01, 2006 for three months and the latter accepts the same to accommodate Raj. Raj discounts it with his bank at 6% per annum on the same date. Raj remitted the amount one day before the maturity of the bill to Pal. Pal met the bill on the date of its maturity. The journal entries in the books of Raj and Pal will be recorded as follows:
Book of Raj Journal Date Particulars L.F. Debit Amount Rs. 10,000 10,000 Dr. Dr. 9,850 150 10,000 Dr. 10,000 10,010 Credit Amount Rs.
2006 Apr. 01 Bills Receivable A/c To Pals A/c (Received Pals acceptance) Apr. 01 Bank A/c Discount A/c To Bills Receivables A/c (Discount Pal acceptance) Jul. 03 Pals A/c To Bank A/c (Remittance to Pal for paying off accommodation bill) Books of Pal Journal Date Particulars
Dr.
L.F.
Credit Amount Rs.
2005 Apr.01 Rajs A/c Dr. To Bill Payable A/c (Acceptance of accommodation bill drawn by Raj) Jul.03 Bank A/c To Rajs A/c (Received Rajs remittance) Bill Payable A/c To Bank A/c (Discharge of accommodation) Dr.
10,000 10,000 10,000
Jul.03
Dr.
10,000 10,000
Bill of Exchange
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Sometimes, the accommodation parties agree to raise the funds through an accommodation bill for mutual benefits. It can be done in any of the following two ways: (a) The drawer and the drawee share the proceeds in an agreed ratio (b) Each draws a bill and each accepts a bill In the case (a) the discounting changes are shared by drawer and drewee in the ratio in which they share the proceeds. But in the case (b) the discount is not shared as each party retains the entire proceeds of the bill drawn and discounted by him. On maturity, each party meets his acceptance out of his own resources if everyone draws and accepts bills of the same denomination and tenure. But where they share the proceeds of the same bill, the drawer should remit, just before maturity, the balance due to the drawee, so that the latter could duly meet his acceptance. Based upon the above discussion, it can be stated that an accommodation bill helps both the parties to the instrument to temporarily raise the necessary funds from discounting institutions.
Illustaration 9 Ashu and Mudit were in need of funds. On October 01, 2005 Ashu drew upon a bill for Rs. 9,000 for 2 months. Mudit accepted the bill and returned to Ashu. Ashu got it discounted at 5% from Bank same day. Half of the amount were remitted to Mudit. On the due date Ashu sent the required sum to Mudit, who met the bill. Journalise the transactions in the books of Ashu and Mudit. Books of Ashu Journal Date Particulars L.F. Debit Amount Rs. 9,000 9,000 Credit Amount Rs.
2005 Oct. 01
Rajs A/c To Bills Payable A/c (Mutual accommodation bill receipts from Mudit) Bank A/c Discount A/c To Bill Receivable A/c (Bill discounted from bank) Mudits A/c To Cash A/c To Discount A/c (Half the proceeds remitted to Mudit) Mudits A/c To Cash A/c (Half amount of the bill sent to Mudit to enable him to meet it)
Dr.
Oct. 03
Dr. Dr.
8,925 75 9,000
Oct. 03
Dr.
4,500 4,462.50 37.50
Oct. 01
Dr.
4,500 4,500
320 Books of Mudit Journal Date Particulars L.F.
Accountancy
Debit Credit Amount Amount Rs. Rs. 9,000 9,000
2005 Oct. 01
Ashus A/c To Bills Payable A/c (Mutual Accommodation bill accepted) Cash A/c Discount A/c To Ashus A/c (half amount of Discounted Bill received from Ashu)
Dr.
Oct. 01
Dr. Dr.
4,462.50 37.50 4,500
Dec. 04 Cash A/c Dr. To Auhus A/c (Amount retained by Ashu now received from him) Dec. 05 Bill Payable A/c To Bank A/c (Acceptance honoured) Illustration 10 Dr.
4,500 4,500 9,000 9,000
Rohan and Rohit were both in need to temporary accommodation. On November 01, 2005, Rohan accepted Rohit draft for Rs. 5,000 for 3 months and Rohit accepted Rohan draft for Rs. 4,000 for 3 months. The both bills were discounted at the respected banks for Rs 4,800 and Rs. 3,850. Before maturity of the bill Rohit sent Rs. 1,000 to Rohan for difference in accommodation bill. Rohan and Rohit met his acceptance on the due date. Records the transaction in the journal of Rohan and Rohit. Books of Rohan Journal Date Particulars L.F. Debit Amount Rs. 5,000 5,000 Dr. 4,000 4,000 Dr. Dr. 3,850 150 4,000 Credit Amount Rs.
2005 Nov. 01 Rohits A/c To Bills Payable A/c (Rohan accepted bill accommodation) Nov. 01 Bill Receivable A/c To Rohits A/c (Accommodated bill received) Nov. 01 Bank A/c Discount A/c To Bill Receivable A/c (Bill discounted by bank)
Dr.
Bill of Exchange Feb. 04 Cash A/c To Rohits A/c (Cash received for meet the bill) Feb. 04 Bill Payable A/c To Bank A/c (Bill met on maturity) Books of Rohit Journal Date Particulars L.F. Debit Amount Rs. 4,000 Dr. 1,000
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1,000 Dr. 5,000 5,000
Credit Amount Rs.
2005 Nov. 01 Rohans A/c To Bills Payable A/c (Rohit accepted bill accommodation) Nov. 01 Bill Receivable A/c To Rohans A/c (Accommodated bill received) Nov. 01 Bank A/c Discount A/c To Bill Receivable A/c (Bill discounted by bank) Feb. 04 Rohans A/c To cash A/c (Sent cash to Rohan) Bill Payable A/c To Bank A/c (Bill met on due date)
Dr.
4,000 Dr. 5,000 5,000 Dr. Dr. 4,800 200 5,000 Dr. 1,000 1,000 Dr. 4,000 4,000
Feb. 04
Key Terms Introduced in the Chapter
(a) Drawer
(b) (c) (d) (e) (f) (g) (h) Drawee Payee Bill Receivable Bill Payable Drawing of a Bill Acceptance of a Bill Payment of a bill Summary with Reference to Learning Objectives 1. Bill of exchange as an Instrument : A bill of exchange is a device by which the purchaser or debtor in a credit transaction is not required to
322
Accountancy make immediate payment but satisfies the seller or creditor by accepting in writing the liability to pay the amount due from him. Meaning of bill of exchange and promissory note: A bill of exchange is an acknowledgement of debt given by one person to another, incorporating all the terms and conditions of payments. A promissory note is an undertaking in writing given by the debtor to the creditor to pay the latter a certain sum of money in accordance with the conditions stated therein. Difference between a bill and a note. (a) A bill is prepared by the creditor and accepted by the debtor; a note is prepared by the debtor. (b) There are three parties to a bill; there are only two parties to a note. (c) A bill requires acceptance to acquire financial status; a note in itself has financial status. Features and advantages of a bill : A bill is a written unconditional order; it is signed by the creditor and accepted by the debtor; the amount of the bill is payable either on demand or at a fixed or 5. Briefly explain the purpose and benefits of retiring a bill of exchange to the debtor and the creditor. Questions for Practice Short Answers 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. Name any two types of commonly used negotiable instruments. Write two points of distinction between bills of exchange and promissory note. State any four essential features of bill of exchange. State the three parties involved in a bill of exchange. What is meant by maturity of a bill of exchange? What is meant by dishonour of a bill of exchange? Name the parties to a promissory note What is meant by acceptance of a bill of exchange? What is Noting of a bill of exchange. What is meant by renewal of a bill of exchange? Give the performa of a Bills Receivable Book. Give the performa of a Bills Payable Book. What is retirement of a bill of exchange? What is meant by insolvency? Give the meaning of rebate. Give the performa of a Bill of Exchange.
2.
3.
4.
Long Answers 1. A bill of exchange must contain an unconditional promise to pay Do you agree with a statement?
Bill of Exchange 2. 3. 4. 5. 6. 7. Briefly explain the effects of dishonour and noting of a bill of exchange. Explain briefly the procedure of calculating the date of maturity of a bill of exchange? Give example. Distinguish between bill of exchange and promissory note. Briefly explain the purpose and benefits of retiring a bill of exchange to the debtor and the creditor. Explain briefly the purpose and advantages of maintaining of a Bills Receivable Book. Briefly explain the benefits of maintaining a Bills Payable Book and state how is its posting is done in the ledger?
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Numerical Questions 1. On Jan 01, 2006 Rao sold goods Rs.10,000 to Reddy. Half of the payment was made immediately and for the remaining half Rao drew a bill of exchange upon Reddy payable after 30 days. Reddy accepted the bill and returned it to Rao. On the due date Rao presented the bill to Reddy and received the payment. Journalise the above transactions in the books Rao and prepare of Raos account in the books of Reddy. On Jan 01,2006, Shankar purchased goods from Parvati for Rs.8,000 and immediately drew a promissory note in favour of Parvati payable after 3 months. On the date of maturity of the promissory note, the Government of India declared holiday under the Negotiable Instrument Act 1881. Since, Parvati was unaware about the provision of the law regarding the date of maturity of the bill, she handed over the bill to her lawyer, who duly presented the bill and received the payment. The amount of the bill was handed over by the lawyer to Parvati immediately. Recore the necessary Journal entries in the books of Parvati and Shankar. Vishal sold goods for Rs.7,000 to Manju on Jan 05, 2006 and drew upon her a bill of exchange payable after 2 months. Manju accepted Vishals draft and handed over the same to Vishal after acceptance. Vishal immediately discounted the bill with his bank@12% p.a. On the due date Manju met her acceptance. Journalise the above transactions in the books of Vishal and Manju. On Feb 01, 2006, John purchased goods for Rs.15,000 from Jimmi. He immediately made a payment of Rs.5,000 by cheque and for the balance accepted the bill of exchange drawn upon him by Jimmi. The bill of exchange was payable after 40 days. Five days before the maturity of the bill, Jimmi sent the same to his bank for collection. The bank duly presented the bill to John on the due date who met the bill. The bank informed the same to Jimmi. Prepare Johns account in the books of Jimmi and Jimmi account in the books of John.
2.
3.
4.
324 5.
Accountancy On Jan 15, 2006, Kartar Sold goods for Rs.30,000 to Bhagwan and drew upon him three bills of exchanges of Rs.10,000 each payable after one month, two month, and three months respectively. The first bill was retained by Kartar till its maturity. The second bill was endorsed by him in favour of his creditor Ratna and the third bill was discounted by him immediately @ 6% p.a. All the bills were met by Bhagwan. Journalise the above transactions in the books of Kartar and Bhagwan. Also prepare ledger accounts in books of Kartar and Bhagwan. On Jan. 01, 2006 Arun sold goods for Rs.30,000 to Sunil. 50% of the payment was made immediately by Sunil on which Arun allowed a cash discount of 2%. For the balance Sunil drew a promissory note in favour of Arun payable after 20 days. Since, the date of maturity of bill was a public holiday, Arun presented the bill on a day, as per the provisions of Negotiable Instrument Act which was met by Sunil. State the date on which the bill was presented by Arun for payment and Jounalise the above transactions in the books of Arun and Sunil. Darshan sold goods for Rs. 40,000 to Varun on 8.1.2006 and drew upon him a bill of exchange payable after two months. Varun accepted the bill and returned the same to Darshan. On the due date the bill was met by Varun. Record the necessary Journal entries in the books of Darshan and Varun in the following circumstances. When the bill was retained by Darshan till the date of its maturity. When Darshan immediately discounted the bill @ 6% p.a. with his bank. When the bill was endorsed immediately by Darshan in favour of his creditor Suresh. When three days before its maturity, the bill was sent by Darshan to his bank for collection. Bansal Traders allow a trade discount of 10% on the list price of the goods purchased from them. Mohan traders, who runs a retail shop made the following purchases from Bansal Traders. Date Amount (Rs.) Dec. 21, 2005 1,000 Dec. 26, 2005 1,200 Dec. 18, 2005 2,000 Dec. 31, 2005 5,000 For all the purchases Mohan Traders drew promissory note in favour of Bansal Traders payable after 30 days. The promissory note for the sale of Dec. 21, 2005 was retained by Bansal Traders with them till the date of its maturity. The promissory note drawn on 26.12.2005 was discounted by Bansal Traders from their bank at 12% p.a. The promissory note drawn on Dec. 28, 2005 was endorsed by Bansal Traders in favour of their creditor Dream Soaps in full settlement of a purchase amounting to Rs. 1,900. On 25.1.2006 Bansal Traders sent the promissory note drawn on Dec. 31, 2005 to their bank for collection.
6.
7.
8.
Bill of Exchange All the promissory notes were met by Mohan Traders. Record the necessary journal entries for the above transactions in the books of Bansal Traders and Mohan Traders and prepare Mohan Traders account in the books of Bansal Traders and Bansal Traders account in the books of Mohan Traders. 9. Narayanan purchased goods for Rs.25,000 from Ravinderan on Feb. 01, 2006. Ravinderan drew upon Narayanan a bill of exchange for the same amount payable after 30 days. On the due date Narayanan dishonoured his acceptance. Pass the necessary journal entries in the books of Ravinderan and Narayanan in following cases: When the bill was retained by Ravinderan with him till the date of its maturity. When the bill was discounted by Ravinderan immediately with his bank @ 6% p.a. When the bill was endorsed to his creditor Ganeshan. When the bill was sent by Ravinderan to his bank for collection a few days before it maturity. 10. Ravi sold goods for Rs.40,000 to Sudershan on Feb 13, 2006. He drew four bills of exchange upon Sudershan. The first bill was for Rs.5,000 payable after one month. The second bill was for Rs.10,000 payable after 40 days; the third bill was for Rs.12,000 payable after three months and fourth bill was for the balance amount payable after 19 days. Sudershan accepted all the bills and returned the same to Ravi. Ravi discounted the first bill with his bank at 6% p.a. He endorsed the second bill to his creditor Mustaq for the full settlement of a debt of Rs.10,200. The third bill was kept by Ravi with him till the date of maturity. Five days before the maturity of the fourth bill, Ravi sent the bill to his bank for collection. All the four bills were dishounoured by Sudarshan on maturity. Sudershan settled Ravis claim in cash three days after the dishonour of each bill along with interest @ 12% p.a. for the terms of the bills. You are requested to record the necessary journal entries in the books to Ravi, Sudershan, Mustaq and bank for the above transaction. Also prepare Sudershans account and Mustaqs account in the books of Ravi. 11. On Jan 01, 2006 Neha sold goods for Rs.20,000 to Muskan and drew upon her a bill of exchange payable after two months. One month before the maturity of the bill Muskan approached Neha to accept the payment against the bill at a rebate @ 12% p.a. Neha agreed to the request of Muskan and Muskan retired the bill under the agreed rate of rebate. Journalise the above transaction in the books of Neha and Muskan. 12. On Jan 15, 2006 Raghu sold goods worth Rs. 35,000 to Devendra and drew upto the latter three bills of exchanges. The first bill was for Rs.5,000 payable after one month, the second bill was for Rs.20,000 payable after three months and third bill for balance amount for 4 months. Raghu endorsed the first bill in favour of his creditor Dewan in full settlement of a debt of Rs.5,200. The second bill was discounted by
325
326
Accountancy Raghu @ 6 % p.a. and the third bill was retained by Raghu till the date of maturity. Devendra dishonoured the bill on maturity and the bank paid Rs. 30 as noting charges. Four days before the maturity of the third bill Raghu, sent the same for collection to his bank. The third bill was also dishonored by Devendra and the bank paid Rs.200 as noting charges. Five days after the dishonour of the bill Devendra paid the entire amount due to Raghu along with interest Rs.1,000 for this purpose Devendra obtained a short term loan from his bank. You are requested to record the necessary journal entries in the books of Raghu Devendra and Dewan and also prepare Devendras account in Raghus books and Raghus account in Devendras account. Viaml purchased goods Rs.25,000 from Kamal on Jan 15, 2006 and accepted a bill of exchange drawn upon him by Kamal payable after two months. On the date of the maturity the bill was duly presented for payment. Vimal dishonoured the bill. record the necessary journal entries in the books of Kamal and Vimal when. The bill was retained by Kamal till the date of its maturity. The bill was immediately discounted by Kamal with his bank @ 6% p.a. The bill was endorsed by Kamal in favour of his creditor Sharad. Five days before its maturity the bill was sent by Kamal to his bank for collection. Abdula sold goods to Tahir on Jan 17, 2006 for Rs.18,000. He drew a bill of exchange for the same amount on Tahir for 45 days. On the same date Tahir accepted the bill and returned it to Abdulla. On the due date Abdulla presented the bill to Tahir which was dishonoured. Abdulla paid Rs.40 as noting charges. Five days after the dishonour of his acceptance Tahir settled his debt by making a payment of Rs.18,700 including interest and noting charges. Record the necessary journal entries in the books of Abdulla and Tahir. Also prepare Tahirs account in the books of Abdulla and Abdullas account in the books of Tahir. Asha sold goods worth Rs.19,000 to Nisha on March 02, 2006. Rs.4,000 were paid by Nisha immediately and for the balance she accepted a bill of exchange drawn upon her by Asha payable after three months. Asha discounted the bill immediately with her bank. On the due date Nisha dishonoured the bill and the bank paid Rs.30 as noting charges. Record the necessary journal entries in the books of Asha and Nisha. On Feb. 02, 2006, Verma purchased from Sharma goods for Rs.17,500. Verma paid Rs.2,500 immediately and for the balance gave a promissory note to Sharma payable after 60 days. Sharma immediately endorsed the promissory note in favour of his creditor. Gupta for the full settlement of a debt of Rs.15,400. On the due date of the bill Gupta presented the bill to Verma which the latter dishonoured and Gupta paid Rs.5,000 noting charges. On the same date Gupta informed Sharma about the dishonour of the bill. Sharma settled his
13.
14.
15.
16.
Bill of Exchange debt to Gupta by cheque for Rs.15,500 which includes noting charges and interest. Verma settled Sharmas claim by cheque for the same amount. Record the necessary journal entries is the books of Sharma, Gupta and Verma for the above transaction and prepare Vermas and Guptas accounts in the books of Sharma. Sharmas account in the books of Verma. And also Sharmas account in the books of Gupta. Lilly sold goods to Methew on 1.3.2006 for Rs.12,000 and drew upon Methew a bill of exchange for the same amount payable after two months. Lilly immediately discounted the bill with her bank at 9% p.a. The maturity date of the bill was a non business day (holiday), therefore, Lilly had to present the bill as per the provisions of the Indian Instruments Act.1881. The bill was dishonoured by Methew and Lilly paid Rs.45 as noting charges. Methew settled the claim of Lilly five days after the disonour of the bill by a cheque, whch includes interest @ 12% for the term of the bill. Journalise the above transactions in the books of Lilly and Methew and prepare Mathews account in the books of Lilly and Lillys account in the books of Mathew. Kapil purchased goods for Rs.21,000 from Gaurav on 1.2.2006 and accepted a bill of exchange drawn by Gaurav for the same amount. The bill was payable after one month. On 25.2.2002 Gaurav sent the bill to his bank for collection. The bill was duly presented by the bank. Kapil dishonoured the bill and the bank paid Rs.100 as noting charges. Record the necessary journal entries for the above transactions in the books of Kapil and Gourav. On Feb. 14, 2006 Rashmi sold good Rs.7,500 to Alka. Alka paid Rs.500 in cash and for the bank balance accepted a bill of exchange drawn upon her by Rashmi payable after two months. On Apr.10, 2006 Alka approached Rashmi to cancel the bill since she was short of funds. She further requested Rashmi to accept Rs.2,000 in cash and draw a new bill for the balance including interest Rs.500. Rashmi accepted Alkas request and drew a new bill for the amount due payable after 2 months. The bill was accepted by Alka. The new bill was duly met by Alka on maturity. Record the necessary journal entries in the books of Rashmi and Alka and prepared Alkas account in the books of Rashmis and Rashmis account in the books of Alkas Nikhil sold goods for Rs.23,000 to Akhil on Dec. 01, 2005. He drew upon Akhil a bill of exchange for the same amount payable after 2 months. Akhil accepted the bill and sent it back to Nikhil. Nikhil discounted the bill immediately with his bank @12 p.a. On the due date Akhil dishonoured the bill of exchange and the bank paid Rs.100 as noting charges. Akhil requested Nikhil to draw a new bill upon him with interest @10% p.a. which he agreed. The new bill was payable after two months. A week before the maturity of the second bill Akhil
327
17.
18.
19.
20.
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Accountancy requested Nikhil to cancel the second bill. He further requested to accept Rs.10,000 in cash immediately and drew a third bill upon him including interest of Rs.500. Nikhil agreed to Akhils request. The third bill was payable after one month. Akhil met the third bill on its maturity. record the necessary journal entries in the books of Nikhil and Akhil and also prepare Akhils account in the books of Nikhil and Nikhils account in the books of Akhil. 21. On Jan 01, 2006 Vibha sold goods worth Rs.18,000 to Sudha and drew upon the latter a bill of exchange for the same amount payable after two months. Sudha accepted Vibhas draft and returned the same to Vibha after acceptance. Vibha endorsed the bill immediately in favour of her creditor Geeta. Five days before the maturity of the bill Sudha requested Vibha to cancel the bill since she was short of funds. She further requested to draw a new bill upon her including interest of Rs.200. Vibha accepted Sudhas request. Vibha took the bill from Geeta by making the payment to her in cash and cancelled the same. Then she drew a new bill upon Sudha as agreed. The new bill was payable after one month. The new bill was duly met by Sudha on maturity. Record the necessary journal entries in the books of Vibha. 22. Following was the position of debtor and creditor of Gautam as on 1.1.2006. Debtors Creditors Rs. Rs. Babu 5,000 Chanderkala 8,000 Kiran 13,500 Anita 14,000 Anju 5,000 Sheiba 12,000 Manju 6,000 The following transactions took place in the month of Jan 2006: Jan 2 Drew on Babu at two months after date at full settlement for Rs.4,800. Babu accepted the bill and returned it on 5.1.2006. Jan. 04 Babus bill discounted for Rs.4,750. Jan. 08 Chanderkala sent a promissory note for Rs.8,000 payable three months after date. Jan. 10 Promissory note received from Chanderkala discounted for Rs.7,900. Jan. 12 Accepted Sheiba draft for the amount due payable two months after date. Jan. 22
Bill of Exchange Anita sent his promissory note payable after two months. Jan. 23 Anitas promissory note endorsed in favour of Manju. Jan. 25 Accepted Anjus draft payable after three months. Jan. 29 Kiran sent Rs.2,000 in cash and a promissory note for the balance payable after three months. Record the above transactions in the proper subsidiary books. On Jan. 01, 2006 Harsh accepted a months bill for Rs. 10,000 drawn on him by tanu for latters benefit. Tanu discounted the bill on same day @ 8% p.a On the due date tanu sent a cheque to Harsh for honour the bill. Harsh duly honoured his acceptance. Record the journal entries in the Books of Tanu and Harsh. Ritesh and Naina were in need of funds temporarily. On August 01 2005 Ritesh drew upon Naina a bill for Rs. 12,000 for 4 months. Naina Accepted the bill and returned to Ritesh. Ritesh discounted the Bill @ 8% p.a. Half amount of the discounted bill remitted to Naina. On due date, Ritesh sent the required sum to Naina, who met the bill. Journalise the transaction in the books of both the parties. On Jan. 01, 2006, bhanu and Naman drew on each other a bill for Rs. 8,000 payable 3 months after the due date for their Mutual benefit. On January 02 they discounted with their bank each others bill at 5% p.a. on the due date each met his Owns acceptance. Give journal entry in the books of Bhanu and Naman. On Nov. 01, 2005 Sonia drawn a bill on sunny for Rs. 15,000 for 3 months for mutual accommodation. Sunny accepts the bill and return it to sonia. Sonia discounted the same with his bankers @ 6% p.a. The proceeds are shared between sonia and sunny in proportion of 2/3rd, 1/3rd respectively. On the due date sonia remits his proportion to sunny who fails to met the bill and as a result sonia has to meet it. Sunny Give a fresh acceptance for the amount due to sonia plus interest of Rs. 100 sunny meet his second acceptance on due date. Record the necessary journal entries in the books of sonia and sunny. Checklist to test Your Understanding Test your understanding-I (i) (vi) False False (ii) (vii) True True (iii) (viii) False False (iv) (ix) False False (v) (x) True False
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23.
24.
25.
26.
Test Your Understanding-II (i)Promise (ii) Endorsement (iii) Promissor (iv) Endorser (iv) Three (viii) Maturity Test Your Understanding-III (i) Negotiable, (ii) Drawer, Drawee (v) Two. (vi) Drawee (iii) Debtor, Creditor (vii) Hundi
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Financial Statements - I
Y
LEARNING OBJECTIVES
After studying this chapter, you will be able to : state the nature of the financial statements; identify the various stakeholders and their infor mation requirements; distinguish between the capital and revenue expenditure and receipts; explain the concept of trading and profit and loss account and its preparation; State the nature of gross profit, net profit and operating profit; describe the concept of balance sheet and its preparation; explain grouping and marshalling of assets and liabilities; prepare profit and loss account and balance sheet of a sole proprietory firm; and make an opening entry.
ou have learnt that financial accounting is a well-defined sequential activity which begins with Journal (Journalising), Ledger (Posting), and preparation of T rial Balance (Balancing and Summarisation at the first stage). In the present chapter, we will take up the next step, namely, preparation of financial statements, and discuss the types of information requirements of various stakeholders, the distinction between capital and revenue items and its importance and the nature of financial statements and the preparation thereof. 9.1 Stakeholders and Their Information Requirements
Recall from chapter I (Financial Accounting Part I) that the objective of business is to communicate the meaningful information to various stakeholders in the business so that they can make informed decisions. A stakeholder is any person associated with the business. The stakes of various stakeholders can be monetary or non-monetary. The stakes can be active or passive; or can be direct or indirect. The owner and persons advancing loan to the business would have monetary stake. The government, consumer or a researcher will have non-monetary stake in the business. The stakeholders are also called users who are normally classified as internal and external depending upon whether they are inside the business or outside the business. All users have different objectives for
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joining business and consequently different types of information requirements from it. In nutshell, the various users have diverse financial information requirements from the business. For example we have classified the following into the category of internal and external users specifying their objectives and consequent information requirements.
Name Internal/ Objective for participating External in business users Internal Accounting Information requirements
Current owners
To make investment in the Likes to know extent of profit in the business and wealth grow. last accounting period, current position of the assets/liabilities of the business. For a career. They essentially act as the agent of owners (their employers). Accounting information in the form of financial statements is like their report card and they are interested in information about both profits and financial position. Its concerns are that the rights of all stakeholders are protected. Since the gover nment levies taxes on the business, they are interested in information about profitability in particular besides lot of other information.
Manager
Internal
Government External
Its role is regulatory and tries to lay down the rules in the best public interest.
Prospective External owner
He is expecting to make He is interested in information about investments in the business past profits and financial position as with a view to make his indicative of likely future performance. investment and wealth grow. Bank is interested in safty of the principal as well as the periodic return (interest). Bank is interested in adequacy of profits only as an assurance of the return of principal and interest back in time. Bank is equally concerned about the form in which the assets are held by the business. When more assets are held in cash or near cash for m, the aspect is knnown as liquidity.
Bank
External
Fig. 9.1 : Analysis of various users of accounting information
Financial Statements - I Box 1
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Accounting Process (up to Trial balance) : 1. Identify the transactions, which that are recorded. 2. Record transactions in journal. Only those transactions are recorded which are measured in money terms. The system followed for recording is called double entry system whereby two aspects (debit and credit) of every transaction are recorded. Repeated transactions of same nature are recorded in subsidiary books, also called special journals. Instead of recording all transactions in journal, they are recorded in subsidiary books and the journal proper. For example, the business would record all credit sales in sales book and all credit purchases in purchases book. The other examples of subsidiary books are return inwards book, return outwards book. An other important special book is cash book, in which all cash and bank transactions are recorded. The entries, which are not recorded in any of these books, are recorded in a residual journal called journal proper. 3. The entries appearing in the above books are posted in the respective accounts in the ledger. 4. The accounts are balanced and listed in a statement called trial balance. If the total amounts of debit and credit balances agree, accounts are taken as free from arithmetical errors. 5. The trial balance forms the basis for making the financial statements, i.e. trading and profit and loss account and balance sheet.
9.2 Distinction between Capital and Revenue A very important distinction in accounting is between capital and revenue items. The distinction has important implications for making of the trading and profit and loss account and balance sheet. The revenue items form part of the trading and profit and loss account, the capital items help in the preparation of a balance sheet. 9.2.1 Expenditure Whenever payment and/or incurrence of an outlay are made for a purpose other than the settlement of an existing liability, it is called expenditure. The expenditures are incurred with a viewpoint they would give benefits to the business. The benefit of an expenditure may extend up to one accounting year or more than one year. If the benefit of expenditure extends up to one accounting period, it is termed as revenue expenditure. Normally, they are incurred for the day-to-day conduct of the business. An example can be payment of salaries, rent, etc. The salaries paid in the current period will not benefit the business in the next accounting period, as the workers have put in their efforts in the current accounting period. They will have to be paid the salaries in the next accounting period as well if they are made to work. If the benefit of expenditure extends to more than one accounting period, it is termed
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as capital expenditure. An example can be payment to acquire furniture for use in the business. Furniture acquired in the current accounting period will give benefits for many accounting periods to come. The usual examples of capital expenditure can be payment to acquire fixed assets and/or to make additions/extensions in the fixed assets. Following points of distinction between capital expenditure and revenue expenditure are worth noting : (a) Capital expenditure increases earning capacity of business whereas revenue expenditure is incurred to maintain the earning capacity. (b) Capital expenditure is incurred to acquire fixed assets for operation of business whereas revenue expenditure is incurred on day-to-day conduct of business. (c) Revenue expenditure is generally recurring expenditure and capital expenditure is non-recurring by nature. (d) Capital expenditure benefits more than one accounting year whereas revenue expenditure normally benefits one accounting year. (e) Capital expenditure (subject to depreciation) is recorded in balance sheet whereas revenue expenditure (subject to adjustment for outstanding and prepaid amount) is transferred to trading and profit and loss account. Sometimes, it becomes difficult to correctly demarcate the expenditures into revenue and capital category. In normal usage, the advertising expenditure is termed as revenue expenditure. However, a heavy expenditure on advertising on launching a product is likely to give benefit for more than one accounting period, as people are likely to remember the advertisement for a slightly longer period. Such revenue expenditures, which are likely to give benefit for more than one accounting period, are termed as deferred revenue expenditure. It must be understood that expenditure is a wider term and includes expenses as well as assets. There is a difference between expenditure and expense. Expenditure is any outlay made/incurred by the business firm. The part of the expenditure, which is perceived to have been used or consumed in the current year, is termed as expense of the current year. Revenue expenditure is treated as expenses of the current year and is shown in trading and profit and loss account. Hence, salary paid by the business firm is treated as an expense of the current year. Capital expenditures are also ultimately charged to income statement and are spread over to more than one accounting period. Hence, furniture of Rs. 50,000 if expected to be used for 5 years will be treated as expense @ Rs. 10,000 per year. The name given for the expense is depreciation. The treatment of deferred revenue expenditure is same as of capital expenditure. They are also written-off over their expected period of benefit.
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9.2.2 Receipts The similar treatment is given the receipts of the business. If the receipts imply an obligation to return the money, these are capital receipts. The example can be an additional capital brought in by the owner or a loan taken from the bank. Both receipts are leading to obligations, the first to the owner (called equity) and the other to the outsiders (called liabilities). Another example on a capital receipt can be the sale of a fixed asset like old machinery or furniture. However, if a receipt does not incur an obligation to return the money or is not in the form of a sale of fixed asset, it is termed as revenue receipt. The examples of such receipts sales made by the firm and interest on investment received by the firm. 9.2.3 Importance of Distinction between Capital and Revenue As stated earlier, the distinction between capital and revenue items has important implications for the preparation of trading and profit and loss account and the balance sheet as all items of revenue value are to the shown in the trading and profit and loss account and the items of capital nature in the balance sheet. If any item is wrongly classified, i.e. if any item of revenue nature is treated as capital item or vice-versa, the ascertainment of profit or loss will be incorrect. For example, the revenues earned during an accounting period are Rs. 10,00,000 and the expenses shown are Rs. 8,00,000, the profit shall work out as Rs. 2,00,000. On scrutiny of the details, you find that a revenue item of Rs. 20,000 (an expenditure on repairs of machinery) has been treated as capital expenditure (added to the cost of machinery and debited to machinery account, not to repairs account), and hence, does not form part of the expenses for the period. It means the actual expenses for the period are Rs. 8,20,000 and not Rs. 8,00,000. So, the correct profit is Rs. 1,80,000, not Rs. 2,00,000. In other words, the profit has been over stated. Similarly, if any capital expenditure is wrongly shown as revenue expenditure (for example, purchase of furniture shown as purchases), it will result in under statement of profits, and also an under statement of assets. Thus, the financial statements will not reflect the true and fair view of the affairs of the business. Hence, it is necessary to identify the correct nature of each item and treat it accordingly in the book of accounts. It is also important from taxation point of view because capital profits are taxed differently from revenue profits. 9.3 Financial Statements It has been emphasised that various users have diverse informational requirements. Instead of generating particular information useful for specific users, the business prepares a set of financial statements, which in general satisfies the informational needs of the users.
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The basic objectives of preparing financial statements are : (a) To present a true and fair view of the financial performance of the business; (b) To present a true and fair view of the financial position of the business; and For this purpose, the firm usually prepares the following financial statements: 1. Trading and Profit and Loss Account 2. Balance Sheet Trading and Profit and Loss account, also known as Income statement, shows the financial performance in the form of profit earned or loss sustained by the business. Balance Sheet shows financial position in the form of assets, liabilities and capital. These are prepared on the basis of trial balance and additional information, if any.
Example 1 Observe the following trial balance of Ankit and signify correctly the various elements of accounts and you will notice that the debit balances represent either assets or expenses/ losses and the credit balance represent either equity/liabilities or revenue/gains. [This trial balance of Ankit will be used throughout the chapter to understand the process of preparation of financial statements] Trial Balance of Ankit as on March 31, 2005 Account Title L.F. Debit Amount Rs. 1,000 12,000 5,000 1,25,000 8,000 15,000 25,000 5,000 15,000 5,000 13,000 15,500 4,500 75,000 1,62,000 1,62,000 Credit Amount Rs.
Cash Capital Bank Sales Wages Creditors Salaries 10% Long term loan (raised on April 01, 2004) Furniture Commission received Rent of building Debtors Bad debts Purchases
Financial Statements - I Analysis of Trial Balance of Ankit as on March 31, 2005 Account Title Elements L.F. Debit Amount Rs. 1,000 5,000
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Credit Amount Rs. 12,000 1,25,000
Cash Capital Bank Sales Wages Creditors Salaries 10% Long-term loan (raised on April 01, 2004) Furniture Commission received Rent of building Debtors Bad debts Purchases
Asset Equity Asset Revenue Expense Liability Expense Liability Asset Revenue Expense Asset Expense Expense
8,000 15,000 25,000 5,000 15,000 5,000 13,000 15,500 4,500 75,000 1,62,000 1,62,000
9.4 Trading and Profit and Loss Account Trading and Profit and Loss account is prepared to determine the profit earned or loss sustained by the business enterprise during the accounting period. It is basically a summary of revenues and expenses of the business and calculates the net figure termed as profit or loss. Profit is revenue less expenses. If expenses are more than revenues, the figure is termed as loss. Trading and Profit and Loss account summarises the performance for an accounting period. It is achieved by transferring the balances of revenues and expenses to the trading and profit and loss account from the trial balance. Trading and Profit and Loss account is also an account with Debit and Credit sides. It can be observed that debit balances (representing expenses) and losses are transferred to the debit side of the Trading and a Profit and Loss account and credit balance (representing revenues/gains) are transfered to its credit side. 9.4.1 Relevant Items in Trading and Profit and Loss Account The different items appearing in the trading and profit and loss account are explained hereunder: Items on the debit side (i) Opening stock : It is the stock of goods in hand at the beginning of the accounting year. This is the stock of goods which has been carried forward
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(ii)
(iii)
(iv)
(v) (vi)
(vii)
(viii)
(ix) (x)
from the previous year and remains unchanged during the year and appears in the trial balance. In the trading account it appears on the debit side because it forms the part of cost of goods sold for the current accounting year. Purchases less returns : Goods, which have been bought for resale appears as purchases on the debit side of the trading account. They include both cash as well as credit purchases. Goods which are returned to suppliers are termed as purchases return. It is shown by way of deduction from purchases and the computed amount is known as Net purchases. Wages : Wages refer to renumeration paid to workers who are directly engaged in factory for loading, unloading and production of goods and are debited to trading account. Carriage inwards/Freight inwards: These expenses are the items of transport expenses, which are incurred on bringing materials/goods purchased to the place of business. These items are paid in respect of purchases made during the year and are debited to the trading account. Fuel/Water/Power/Gas : These items are used in the production process and hence are part of expenses. Packaging material and Packing charges : Cost of packaging material used in the product are direct expenses as it refers to small containers which form part of goods sold. However, the packing refers to the big containers that are used for transporting the goods and is regarded as an indirect expense debited to profit and loss account. Salaries : These include salaries paid to the administration, godown and warehouse staff for the services rendered by them for running the business. If salaries are paid in kind by providing certain facilities (called perks) to the employees such as rent free accommodation, meals, uniform, medical facilities should also be regarded as salaries and debited to the profit and loss account. Rent paid : These include office and godown rent, municipal rates and taxes, factory rent, rates and taxes. The amount of rent paid is shown on the debit side of the profit and loss account. Interest paid : Interest paid on loans, bank overdraft, renewal of bills of exchange, etc. is an expense and is debited to profit and loss account. Commission paid: Commission paid or payable on business transactions undertaken through the agents is an item of expense and is debited to profit and loss account.
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(xi) Repairs : Repairs and small renewals/ replacements relating to plant and machinery, furniture, fixtures, fittings, etc. for keeping them in working condition are included under this head. Such expenditure is debited to profit and loss account. (xii) Miscellaneous expenses : Though expenses are classified and booked under different heads, but certain expenses being of small amount clubbed together and are called miscellaneous expenses. In normal usage these expenses are called Sundry expenses or Trade expenses. Items on the credit side (i) Sales less returns : Sales account in trial balance shows gross total sales(cash as well as credit) made during the year. It is shown on the credit side of the trading account. Goods returned by customers are called return inwards and are shown as deduction from total sales and the computed amount is known as net sales. (ii) Other incomes : Besides salaries and other gains and incomes are also recorded in the profit and loss account. Examples of such incomes are rent received, dividend received, interest received, discount received, commission received, etc. 9.4.2 Closing Entries The preparation of trading and profit and loss account requires that the balances of accounts of all concerned items are transferred to it for its compilation. Opening stock account, Purchases account, Wages account, Carriage inwards account and direct expenses account are closed by transferring to the debit side of the trading and profit and loss account. This is done by recording the following entry : Trading A/c Dr. To Opening stock A/c To Purchases A/c To Wages A/c To Carriage inwards A/c To All other direct expenses A/c The purchases returns or return outwards are closed by transferring its balance to the purchases account. The following entry is recorded for this purpose : Purchases return A/c Dr. Purchases A/c
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Similarly, the sales returns or returns inwards account is closed by transferring its balance to the sales account as : Sales A/c Dr. To Sales return A/c The sales account is closed by transferring its balance to the credit side of the trading and profit and loss account by recording the following entry: Sales A/c Dr. To Trading A/c Items of expenses, losses, etc. are closed by recording the following entries: Profit and Loss A/c Dr. To Expenses (individually) A/c To Losses (individually) A/c Items of incomes, gains, etc. are closed by recording the following entry: Incomes (individually) A/c Dr. Gains (individually) A/c Dr. To Profit and Loss A/c The posting for closing the seven accounts of expenses and revenues as they appear in the trial balance (in our example 1) are given below: (i) For closing the accounts of expenses Trading A/c Dr. 83,000 To Purchases A/c 75,000 To Wages A/c 8,000 (ii) Profit and Loss A/c Dr. 43,500 To Salaries 25,000 To Rent of building 13,000 To Bad debts 4,500 (i) For closing the accounts of revenues Sales A/c Dr. 1,25,000 To Trading A/c 1,25,000 (ii) Commission received A/c Dr. 5,000 To Profit and Loss A/c 5,000 The posting done in ledger will appear as follows :
Purchases Account Dr. Date Particulars Balance b/d J.F. Amount Rs. 75,000 75,000 Date Particulars Trading J.F. Cr. Amount Rs. 75,000 75,000
Financial Statements - I Wages Account Dr. Date Particulars Balance b/d J.F. Amount Rs. 8,000 8,000 Salaries Account Dr. Date Particulars Balance b/d J.F. Amount Rs. 25,000 25,000 Rent of Building Account Dr. Date Particulars Balance b/d J.F. Amount Rs. 13,000 13,000 Bad Debts Account Dr. Date Particulars Balance b/d J.F. Amount Rs. 4,500 4,500 Sales Account Dr. Date Particulars Trading J.F. Amount Rs. 1,25,000 1,25,000 Commission Received Account Dr. Date Particulars Profit and Loss J.F. Amount Rs. 5,000 5,000 Date Particulars Balance b/d J.F. Date Particulars Balance b/d J.F. Date Particulars Profit and Loss J.F. Date Particulars Profit and Loss J.F. Date Particulars Profit and Loss J.F. Date Particulars Trading J.F.
341
Cr. Amount Rs. 8,000 8,000 Cr. Amount Rs. 25,000 25,000 Cr. Amount Rs. 13,000 13,000 Cr. Amount Rs. 4,500 4,500 Cr. Amount Rs. 1,25,000 1,25,000 Cr. Amount Rs. 5,000 5,000
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Accountancy
As the result of the foregoing discussion, we will now learn how the trading and profit and loss account can be prepared from the trial balance, the format of which is shown in figure 9.2. However, this list is not exhaustive. In real sense, there can be many more of other items, which we will be dealing at the later stage and there you will notice how this format undergoes a change with respect to each one of them.
Trading and Profit and Loss Account of ABC for the year ended March 31, 2005 Dr. Expenses/Losses Opening stock Purchases Wages Carriage inwards/ Freight inwards/cartage Gross profit c/d1 Gross loss b/d2 Amount Rs. ..... ..... ..... ..... Revenues/Gains Sales Cr. Amount Rs. .....
xxx Gross loss c/d1 Gross profit b/d Inerest received Net loss2
xxx ..... ..... ..... .....
Rent/rates and taxes Salaries Repairs and renewals Bad debts Net profit2 (transfered to capital account)
..... ..... ..... ..... ..... xxx
xxx
1,2
only one item will be shown Fig. 9.2 : A format trading and profit and loss account
9.4.3 Concept of Gross Profit and Net Profit The trading and profit and loss can be seen as combination of two accounts, viz. Trading account and Profit and Loss account. The trading account or the first part ascertains the gross profit and profit and loss account or the second part ascertains net profit. Trading Account The trading account ascertains the result from basic operational activities of the business. The basic operational activity involves the manufacturing, purchasing and selling of goods. It is prepared to ascertain whether the selling
343
of goods and/or rendering of services to customers have proved profitable for the business or not. Purchases is one of the main constituents of expenses in business organisation. Besides purchases, the remaining expenses are divided into two categories, viz. direct expenses and indirect expenses. Direct expenses means all expenses directly connected with the manufacture, purchase of goods and bringing them to the point of sale. Direct expenses include carriage inwards, freight inwards, wages, factory lighting, coal, water and feul, royalty on production, etc. In our example-1, besides purchases, four more items of expenses are listed. These are wages, salaries, rent of building and bad debts. Out of these items, wages is treated as direct expense while the other three are treated as indirect expenses. Similarly, sales constitute the main item of revenue for the business. The excess of sales over purchases and direct expenses is called gross profit. If the amount of purchases including direct expenses is more than the sales revenue, the resultant figure is gross loss. The computation of gross profit can be shown in the form of equation as : Gross Profit = Sales (Purchases + Direct Expenses) The gross profit or the gross loss is transferred to profit and loss account. The indirect expenses are transferred to the debit side of the second part, viz. profit and loss account. All revenue/gains other than sales are transferred to the credit side of the profit and loss account. If the total of the credit side of the profit and loss account is more than the total of the debit side, the difference is the net profit for the period of which it is being prepared. On the other hand, if the total of the debit side is more than the total of the credit side, the difference is the net loss incurred by the business firm. In an equation form, it is shown as follows : Net Profit = Gross Profit + Other Incomes Indirect Expenses Net profit or net loss so computed is transferred to the capital account in the balance sheet by way of the following entry : (i) For transfer of net profit Profit and Loss A/c Dr. To Capital A/c (ii) For transfer of net loss Capital A/c Dr. To Profit and Loss A/c We are now redrafting the trading and profit and loss account to show gross profit and net profit of Ankit for the year ended March 31, 2005. The redrafted trading and profit and loss account will look like as shown is shown in figure 9.3.
344 Trading and Profit and Loss Account of Ankit for the year ended March 31, 2005 Dr. Expenses/Losses Purchases Wages Gross profit c/d Salaries Rent of building Bad debts Net Profit (transfered to capital account) Amount Rs. 75,000 8,000 42,000 1,25,000 25,000 13,000 4,500 4,500 47,000 Revenues/Gains Sales
Accountancy
1,25,000 Gross profit b/d Commission received 42,000 5,000
47,000
Fig. 9.3 : Showing the computation of gross profit and net profit of Ankit
Gross profit, which represents the basic operational activity of the business is computed as Rs. 42,000. The gross profit is transferred from trading account to profit and loss account. Besides gross profit, business has earned an income of Rs. 5,000 as commission received and has spent Rs. 42,500 (Rs. 25,000 + Rs.13,000 + Rs.4,500) on expenses/losses including salaries, rent and bad debts. Therefore, the net profit is calculated as Rs. 4,500.
Illustration 1 Prepare a trading account from the following particulars for the year ended March 31, 2006: Rs. Opening stock 37,500 Purchases 1, 05000 Sales 2,70,000 Wages 30,000
Solution
Trading Account for the year ended March 31, 2006 Dr. Expenses/Losses Opening stock Purchases Wages Gross profit Amount Rs. 37,500 1,05,000 30,000 97,500 2,70,000 Revenues/Gains Sales Cr. Amount Rs. 2,70,000
2,70,000
Financial Statements - I Illustration 2
345
Prepare a trading account of M/s Prime Products from the following particulars pertaining to the year 2005-06. Rs. Opening stock 50,000 Purchases 1,10,000 Return inwards 5,000 Sales 3,00,000 Return outwards 7,000 Factory rent 30,000 Wages 40,000 Solution Books of Prime Products Trading Account for the year ended March 31, 2006 Dr. Expenses/Losses Opening stock Purchases Less : Return outwards Factory rent Wages Gross profit Amount Rs. 50,000 1,10,000 (7,000) 1,03,000 30,000 40,000 72,000 2,95,000 Revenues/Gains Sales 3,00,000 Less : Return (5,000) inwards Cr. Amount Rs. 2,95,000
2,95,000
Illustration 3. Prepare a trading account of M/s Anjali from the following information related to 2005-06. Rs. Opening stock 60,000 Purchases 3, 00,000 Sales 7, 50,000 Purchases return 18,000 Sales return 30,000 Carriage on purchases 12,000 Carriage on sales 15,000 Factory rent 18,000 Office rent 18,000 Dock and Clearing charges 48,000 Freight and Octroi 6,500 Coal, Gas and Water 10,000
346 Solution Books of Anjali Trading Account for the year ended 2005-06 Dr. Expenses/Losses Opening stock Purchases 3,00,000 Less : Purchases return (18,000) Carriage on purchases Factory rent Dock and Clearing charges Freight and Octroi Coal, Gas and Water Gross profit Amount Rs. 60,000 2,82,000 12,000 18,000 48,000 6,500 10,000 2,83,500 7,20,000 Revenues/Gains
Accountancy
Cr. Amount Rs.
Sales 7,50,000 Less : Sales return (30,000) 7,20,000
7,20,000
Illustration 4 From the following information, prepare a profit and loss account for the year ending March 31, 2005. Rs. Gross profit 60,000 Rent 5,000 Salary 15,000 Commission paid 7,000 Interest paid on loan 5,000 Advertising 4,000 Discount received 3,000 Printing and stationery 2,000 Legal charges 5,000 Bad debts 1,000 Depreciation 2,000 Interest received 4,000 Loss by fire 3,000 Profit and Loss Account for the year ended March 31, 2005 Dr. Expenses/Losses Rent Salary Commission Interest paid on loan Advertising Printing and Stationery Legal charges Amount Rs. 5,000 15,000 7,000 5,000 4,000 2,000 5,000 Revenues/Gains Gross profit Discount received Interest received Cr. Amount Rs. 60,000 3,000 4,000
Financial Statements - I Bad debts Depreciation Loss by fire Net profit (transferred to the capital account) 1,000 2,000 3,000 18,000 67,000
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67,000
Test Your Understanding - I I State True or False : (i) Gross profit is total revenue. (ii) In trading and profit and loss account, opening stock appears on the debit side because it forms the part of the cost of sales for the current accounting year. (iii) Rent, rates and taxes is an example of direct expenses. (iv) If the total of the credit side of the profit and loss account is more than the total of the debit side, the difference is the net profit. II Match the items given under A with the correct items under B (i) (ii) (iii) (iv) (v) Closing stock is credited to Accuracy of book of account is tested by On returning the goods to seller, the buyer sends The financial position is determined by On receiving the returned goods from the buyer, the seller sends (a) (b) (c) (d) (e) Trial balance Trading account Credit note Balance sheet Debit note
9.4.4 Cost of Goods Sold and Closing StockTrading Account Revisited The trading and profit and loss account prepared in figure 9.3 presents useful information as to the profitability from the basic operations of the business enterprise. It is reproduced for further perusal.
Trading Account of Ankit for the year ended March 31, 2005 Dr. Expenses/Losses Purchases Wages Gross profit Amount Rs. 75,000 8,000 42,000 1,25,000 Fig. 9.4 : An illutrative trading account of Ankit Revenues/Gains Sales Cr. Amount Rs. 1,25,000
1,25,000
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Accountancy
If there is no opening or closing stock, the total of purchases and direct expenses is taken as Cost of goods sold. In our example, notice that purchases amount to Rs. 75,000 and wages amounts to Rs. 8,000. Hence, the cost of goods sold will be computed using the following formula : Cost of Goods Sold = Purchases + Direct Expenses = Rs.75, 000 + Rs. 8,000 = Rs. 83,000 As there is no unsold stock,the presumption here is that all the goods purchased have been sold. But in practice, there is some unsold goods at the end of the accounting period. In our example, let us assume that out of the goods purchased amounting to Rs. 75,000 in the current year, Ankit is able to sell goods costing Rs. 60,000 only. In such a situation, the business will have an unsold stock of goods costing Rs. 15,000 in hand, also called closing stock. The amount of cost of goods sold will be computed as per the following equation : Cost of Goods Sold = Purchases + Direct Expenses Closing Stock = Rs. 75,000 + Rs. 8,000 Rs. 15,000 As a result, the amount of gross profit will also change with the existence of closing stock in business from Rs. 42,000 (as computed in figure 9.4) to Rs. 57,000 ( refer figure 9.5).
Trading Account of Ankit for the year ended March 31, 2005 Expenses/Losses Purchases Wages Gross profit c/d Amount Rs. 75,000 8,000 57,000 1,40,000 Salaries Rent of building Bad debts Net Profit (transfered to capital account) 25,000 13,000 4,500 19,500 62,000 Fig. 9.5 : The trading account of Ankit Gross profit b/d Commission received Revenues/Gains Sales Closing stock Amount Rs. 1,25,000 15,000 1,40,000 57,000 5,000
62,000
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It may be noted that closing stock does not normally form part of trial balance, and is brought into books with the help of the following journal entry : Closing stock A/c To Trading A/c Dr.
This entry opens a new account of asset, i.e. closing stock Rs. 15,000 which is transferred to the balance sheet. The closing stock shall be an opening stock for the next year and shall be sold during the year. In most cases, therefore, the business shall have opening stock as well as closing stock every year, and the cost of goods sold should be worked as per the following equation: Cost of Goods Sold = Opening Stock+Purchases Direct ExpensesClosing Stock Look at Illustration 5 and see how it has been computed.
Illustration 5 Compute cost of goods sold for the years 2005 with the help of the following information and prepare trading account Rs. Sales Purchases Wages Stock (Apr. 01, 2004) Stock (March 31, 2005) Freight inwards Solution Computation of Cost of Goods Sold Particulars Opening stock Add Purchases Direct expenses : Freight inwards Wages Less Closing stock Cost of goods sold Amount Rs. 3,00,000 15,00,000 1,00,000 1,00,000 20,00,000 (4,00,000) 16,00,000 20, 00,000 15, 00,000 1, 00,000 3, 00,000 4,00,000 1,00,000
350 Trading Account for the year ended March 31, 2005 Dr. Expenses/Losses Opening stock Purchases Freight inwards Wages Gross profit Amount Rs. 3,00,000 15,00,000 1,00,000 1,00,000 4,00,000 24,00,000 Illustration 6 Revenues/Gains Sales Closing stock
Accountancy
Cr. Amount Rs. 20,00,000 4,00,000
24,00,000
From the following balances obtained from the few accounts of Mr. H. Balaram. Prepare the Trading and Profit and Loss Account. Rs. Rs. Stock on Apr. 01, 2004 8,000 Bad debts 1,200 Purchases for the year 22,000 Rent 1,200 Sales for the year 42,000 Discount allowed 600 Purchase expenses 2,500 Commission paid 1,100 Salaries and wages 3,500 Sales expenses 600 Advertisement 1,000 Repairs 600 Closing stock on March 31, 2005 is Rs. 4,500 Books of H. Balaram Trading Account for the year ended March 31, 2005 Dr. Expenses/Losses Opening stock Purchases Purchase expenses Gross profit c/d Salaries and Wages Rent Advertisement Commission Discount allowed Bad debts Sales expenses Repairs Net profit (transferred to capital account) Amount Rs. 8,000 22,000 2,500 14,000 46,500 3,500 1,200 1,000 1,100 600 1,200 600 600 4,200 14,000 Revenues/Gains Sales Closing stock Cr. Amount Rs. 42,000 4,500
Gross profit b/d
46,500 14,000
14,000
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9.5 Operating Profit (EBIT) It is the profit earned through the normal operations and activities of the business. Operating profit is the excess of operating revenue over operating expenses. While calculating operating profit, the incomes and expenses of a purely financial nature are not taken into account. Thus, operating profit is profit before interest and tax (EBIT). Similarly, abnormal items such as loss by fire, etc. are also not taken into account. It is calculated as follows : Operating profit = Net Profit + Non Operating Expenses Non Operating Incomes Refer to the trial balance of Ankit in example 1, you will notice that it depicts an item relating to 10 % interest on long-term loan raised on April 01, 2004. The amount of interest works out to Rs. 500 (Rs. 5,000 10/100), which has been shown on the debit side of the trading and profit and loss account (figure 9.6).
Trading and Profit and Loss Account of Ankit for the year ended March 31, 2005 Dr. Expenses/Losses Purchases Wages Gross profit c/d Amount Rs. 75,000 8,000 57,000 1,40,000 Salaries Rent of building Bad debts Interest Net Profit (transfered to capital account) 25,000 13,000 4,500 500 19,000 62,000 Fig. 9.6 : Showing the treatment of interest on profit Gross profit b/d Commission received Revenues/Gains Sales Closing stock Cr. Amount Rs. 1,25,000 15,000 1,40,000 57,000 5,000
62,000
The operating profit will be : Operating profit = Net profit + Non-operating expenses Non-operating incomes Operating profit = Rs. 19,000 + 500 nil = Rs. 19,500
352 Test Your Understanding - II
Accountancy
Choose the correct option in the following questions : 1. The financial statements consist of: (i) Trial balance (ii) Profit and loss account (iii) Balance sheet (iv) (i) & (iii) (v) (ii) & (iv) 2. Choose the correct chronological order of ascertainment of the following profits from the profit and loss account : (i) Operating Profit, Net Profit, Gross Profit (ii) Operating Profit, Gross Profit, Net Profit (iii) Gross Profit, Operating Profit, Net Profit (iv) Gross Profit, Net Profit, Operating Profit 3. While calculating operating profit, the following are not taken into account. (i) Normal transactions (ii) Abnormal items (iii) Expenses of a purely financial nature (iv) (ii) & (iii) (v) (i) & (iii) 4. Which of the following is correct : (i) Operating Profit = Operating profit Non-operating expenses Non-operating incomes (ii) Operating profit = Net profit + Non-operating Expenses + Non-operating incomes (iii) Operating profit = Net profit + Non-operating Expenses Non-operating incomes (iv) Operating profit = Net profit Non-operating Expenses + Non-operating incomes
Illustration 7 Following balance is extracted from the books of a trader ascertain gross profit, operating profit and net profit for the year ended March 31, 2005. Particulars Sales Purchases Opening stock Sales return Purchases return Rent Stationary and printing Salaries Misc. expenses Travelling expenses Advertisement Amount Rs. 75,250 32,250 7,600 1,250 250 300 250 3,000 200 500 1,800
Financial Statements - I Commission paid Office expenses Wages Profit on sale of investment Depreciation Dividend on investment Loss on sale of old furniture 150 1,600 2,600 500 800 2,500 300
353
Closing stock (March 31, 2005) valued at Rs. 8,000 Trading and Profit and Loss Account for the year ended March 31, 2005 Dr. Expenses/Losses Opening stock Purchases Less: Purchases return Wages Gross profit c/d Rent Stationary and printing Salaries Misc. expenses Travelling expenses Advertisement expenses Commission paid Office expenses Depreciation Operating profit c/d Amount Rs. 7,600 32,250 (250) 32,000 2,600 39,800 82,000 300 250 3,000 200 500 1,800 150 1,600 800 31,200 39,800 Loss on sale of old furniture Net Profit (transferred to capital account) 300 33,900 34,200 Operating profit b/d Profit on sale of investment Dividend on investment Gross profit b/d Revenues/Gains Sales Less : Sales return Closing stock 75,250 (1,250) Cr. Amount Rs. 74,000 8,000
82,000 39,800
39,800 31,200 500 2,500 34,200
9.6 Balance Sheet The balance sheet is a statement prepared for showing the financial position of the business summarising its assets and liabilities at a given date. The assets reflect debit balances and liabilities (including capital) reflect credit balances. It is prepared at the end of the accounting period after the trading
354
Accountancy
and profit and loss account have been prepared. It is called balance sheet because it is a statement of balances of ledger accounts that have not been transferred to trading and profit and loss account and are to be carried forward to the next year with the help of an opening entry made in the journal at the beginning of the next year. 9.6.1 Preparing Balance Sheet All the account of assets, liabilities and capital are shown in the balance sheet. Accounts of capital and liabilities are shown on the left hand side, known as Liabilities. Assets and other debit balances are shown on the right hand side, known as Assets. There is no prescribed form of Balance sheet, for a proprietary and partnership firms. However, Schedule VI Part I of the Companies Act 1956 prescribes the format and the order in which the assets and liabilities of a company should be shown. The normal format in which the balance sheet is prepared is shown in the figure 9.7.
Balance Sheet of ...........as at March 31, 2005 Liabilities Capital ..... Add Profit ..... Long-term loan Short-term loan Sundry creditors Bills payable Bank overdraft Amount Rs. ..... ..... ..... Assets Furniture Cash Bank Goodwill Sundry debtors Closing stock Land and Buildings Amount Rs. ..... ..... ..... ..... .....
xxxx Fig. 9.7 : Format of a balance sheet
xxxx
Refer to our example -1 you will observe that the trial balance of Ankit depicts 14 accounts, out of which 7 accounts have been transferred to the trading and profit and loss account (refer figure 9.3). These are the accounts of revenues and expenses. The analysis of figure 9.3 shows that the business has incurred total expenses of Rs. 1, 25,500 and revenues generated are Rs. 1, 30,000 making a profit of Rs. 4,500. The remaining seven items in the trial balance reflects the capital, assets and liabilities. We are reproducing the trial balance (example -1) to show how the accounts of assets and liabilities of Ankit would be presented in the balance sheet.
Financial Statements - I Trial Balance of Ankit as on March 31, 2005 Account Title L.F. Debit Amount Rs. 1,000 12,000 5,000 1,25,000 8,000 15,000 25,000 5,000 15,000 5,000 13,000 15,500 4,500 75,000 1,62,000 1,62,000 Credit Amount Rs.
355
Cash Capital Bank Sales Wages Creditors Salaries 10% Long-term loan (raised on April 01, 2004) Furniture Commission received Rent of building Debtors Bad debts Purchases
Fig. 9.8 : Showing the accounts of assets and liabilities in the trial balance of Ankit Balance Sheet of Ankit as at March 31, 2005 Liabilities Capital 12,000 Add Profit 4,500 10 % Long-term loan Creditors Amount Rs. 16,500 5,000 15,000 36,500 Fig. 9.9 : Showing the balance sheet of Ankit Assets Furniture Cash Bank Debtors Amount Rs. 15,000 1,000 5,000 15,500 36,500
9.6.2 Relevant Items in the Balance Sheet Items which are generally included in a balance sheet are explained below : (1) Current Assets: Current assets are those which are either in the form of cash or a can be converted into cash within a year. The examples of such assets are cash in hand/bank, bills receivable, stock of raw materials, semi-finished goods and finished goods, sundry debtors, short term investments, prepaid expenses, etc.
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Accountancy
(2) Current Liabilities: Current liabilities are those liabilities which are expected to be paid within a year and which are usually to be paid out of current assets. The examples of such liabilities are bank overdraft, bills payable, sundry creditors, short-term loans, outstanding expenses, etc. (3) Fixed Assets: Fixed assets are those assets, which are held on a long-term basis in the business. Such assets are not acquired for the purpose of resale, e.g. land, building, plant and machinery, furniture and fixtures, etc. Some times the term Fixed Block or Block Capital is also used for them. (4) Intangible Assets : These are such assets which cannot be seen or touched. Goodwill, Patents, Trademarks are some of the examples of intangible assets. (5) Investments: Investments represent the funds invested in government securities, shares of a company, etc. They are shown at cost price. If, on the date of preparation the balance sheet, the market price of investments is lower than the cost price, a footnote to that effect may be appended to the balance sheet. (6) Long-term Liabilities : All liabilities other than the current liabilities are known as long-term liabilities. Such liabilities are usually payable after one year of the date of the balance sheet. The important items of long term liabilities are long-term loans from bank and other financial institutions. (7) Capital: It is the excess of assets over liabilities due to outsiders. It represents the amount originally contributed by the proprietor/ partners as increased by profits and interest on capital and decreased by losses drawings and intrest on drawings. (8) Drawings : Amount withdrawn by the proprietor is termed as drawings and has the effect of reducing the balance on his capital account. Therefore, the drawings account is closed by transferring its balance to his capital account. However it is shown by way of deduction from capital in the balance sheet. 9.6.3 Marshalling and Grouping of Assets and Liabilities A major concern of accounting is about preparing and presenting the financial statement. The information so provided should be decision useful for the users. Therefore, it becomes necessary that the items appearing in the balance sheet should be properly grouped and presented in a particular order. Marshalling of Assets and Liabilities In a balance sheet, the assets and liabilities are arranged either in the order of liquidity or permanence. Arrangement of assets and liabilities in a particular order is known as Marshalling. In case of permanence, the most permanent asset or liability is put on the top in the balance sheet and thereafter the assets are arranged in their reducing level of permanence.
357
In the balance sheet of Ankit you will find that furniture is the most permanent of all the assets. Out of debtors, bank and cash, debtors will take maximum time to convert back into cash. Bank is less liquid than cash. Cash is the most liquid of all the assets. Similarly, on the liabilities side, the capital, being the most important source of finance will tend to remain in the business for a longer period than the long-term loan. Creditors being a liquid liability will be discharged in the near future. The balance sheet of Ankit in the order of permanence is shown in figure 9.10(a).
Balance Sheet of Ankit as on March 31, 2005 (in order of permanence) Liabilities Capital 12,000 Add Profit 4,500 10 % Long-term loan Creditors Amount Rs. 16,500 5,000 15,000 36,500 Assets Furniture Debtors Bank Cash Amount Rs. 15,000 15,500 5,000 1,000 36,500
Fig. 9.10 (a) : Items of balance sheet shown in the order of permanance
In case of liquidity, the order is reversed. The information presented in this manner would enable the user to have a good idea about the life of the various accounts. The assets account of the relatively permanent nature would continue in the business for a longer time whereas the less permanent or more liquid accounts will change their forms in the near future and are likely to become cash or cash equivalent. The balance sheet of Ankit in the order of liquidity is shown in figure 9.10(b)
Balance Sheet of Ankit as at March31,2005 (in order of liquidity) Liabilities Creditors 10 % Long-term loan Capital 12,000 Add Profit 4,500 Amount Rs. 15,000 5,000 16,500 36,500 Fig. 9.10 (b) : Items of balance sheet shown in the order of liquidity Assets Cash Bank Debtors Furniture Amount Rs. 1,000 5,000 15,500 15,000 36,500
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Accountancy
Grouping of Assets and Liabilities The items appearing in the balance sheet can also be properly grouped. The term grouping means putting together items of similar nature under a common heading. For example, the balance of accounts of cash, bank, debtors, etc. can be grouped and shown under the heading of current assets and the balances of all fixed assets and long-term investment under the heading of non-current assets.
Balance Sheet of Ankit as at March 31, 2005 (in order of permanence) Liabilities Owners Funds Capital 12,000 Add Profit 4,500 Non-Current Liabilities Long-term loan Current Liabilities Creditors Amount Rs. Assets Non Current Assets Furniture Current Assets Debtors Bank Cash Amount Rs. 15,000 15,500 5,000 1,000 36,500
16,500 5,000 15,000 36,500
Fig. 9.10 (c): Showing assets and liabilities arranged in logical groups
Do it Yourself Arrange the following items in the order of both permanence and liquidity. Also group them under logical heads : Liabilities Long-term loans Bank overdraft Bills payable Owners equity Short-term loans Sundry creditors Assets Building Cash in hand Cash at bank Bills receivable Sundry debtors Land Finished goods Work in progress Raw material
359
From the following balances prepare a trading and profit and loss account and balance sheet for the year ended March 31, 2006 Account Title Carriage on goods purchased Carriage on goods sold Manufacturing expenses Advertisement Excise duty Factory lighting Debtors Creditors Dock and Clearing charges Postage and Telegram Fire Insurance Premium Patents Income tax Office expenses Amount Rs. 8,000 3,500 42,000 7,000 6,000 4,400 80,000 61,000 5,200 800 3,600 12,000 24,000 7,200 Account Title Cash in hand Bank overdraft Motor car Drawings Audit fees Plant Repairs to plant Stock at the end Purchases less return Commission on purchases Incidental trade expenses Investment Interest on investment Capital Sales less return Salest tax paid Discount allowed Discount on purchases Amount Rs. 2,500 30,000 60,000 8,000 2,700 1,53,900 2,200 76,000 1,60,000 2,000 3,200 30,000 4,500 1,00,000 5,20,000 12,000 2,700 3,400
360 Trading and Profit and Loss Account for the year ended March 31, 2006 Dr. Expenses/Losses Amount Rs. Revenues/Gains Sales less return
Accountancy
Purchases less return 1,60,000 Commission on purchases 2,000 Carriage on goods purchasesd 8,000 Manufacturing expenses 42,000 Factory lighting 4,400 Dock and Clearing charges 5,200 Gross profit c/d 2,98,400 5,20,000 Carriage on sales Advertisement Excise duty Postage and telegram Fire Insurance premium Office expenses Audit fees Repairs to plant Incidental trading expenses Sales tax paid Discount allowed Net profit (transferred to capital account) 3,500 7,000 6,000 800 3,600 7,200 2,700 2,200 3,200 12,000 2,700 2,55,400
5,20,000 Gross profit b/d Interest on investment Discount on purchases 2,98,400 4,500 3,400
3,06,300
3,06,300
Balance Sheet as at March 31, 2006 Liabilities Bank overdraft Creditors Capital Add Net profit Less Drawings Less Income tax Amount Rs. 30,000 61,000 1,00,000 2,55,400 3,55,400 (8,000) 3,47400 (24,000) Assets Cash in hand Debtors Closing stock Investment Motor car Plant Patents Amount Rs. 2,500 80,000 76,000 30,000 60,000 1,53,900 12,000 4,14,400
3,23,400 4,14,400
361
From the following balances prepare trading and profit and loss account and balance sheet for the year ended March 31, 2006 Account Title Opening stock Purchases Sales Returns (Dr.) Returns (Cr.) Factory rent Custom duty Coal, gas & power Wages and salary Discount (Dr.) Commission (Cr.) Bad debts Bad debts recovered Apprenticeship premium Production expenses Adminstrative expenses Carriage Amount Rs. 15,310 82,400 256,000 4,000 2,400 18,000 11,500 6,000 36,600 7,500 1,200 5,850 2,000 4,800 2,600 5,000 8,700 Account Title Capital Drawings Sundry debtors Sundry creditors Depreciation Charity Cash balance Bank balance Bank charges Establishment expenses Plant Leasehold building Sales tax collected Goodwill Patents Trademark Loan (Cr.) Interest on loan Amount Rs. 2,50,000 48,000 57,000 12,000 4,200 500 4,460 4,000 180 3,600 42,000 1,50,000 2,000 20,000 10,000 5,000 25,000 3,000
The value of closing stock on March 31, 2006 was Rs. 25,400 Solution Trading and Profit and Loss Account for the year ended March 31, 2006 Dr. Expenses/Losses Opening stock Purchases: Less Returns : Factory rent Custom duty Coal, gas, power Wages and salary Production expenses Carriage Gross profit c/d Amount Rs. 15,310 82,400 (2,400) 80,000 18,000 11,500 6,000 36,600 2,600 8,700 98,690 2,77,400 Revenues/Gains Sales: Less Returns Closing stock Cr. Amount Rs. 2,56,000 (4,000) 2,52,000 25,400
2,77,400
362 Discount (Dr.) Bad debts Administrative expenses Depreciation Charity Bank charges Establishment expenses Interest on loan Net profit (transferred to capital account) 7,500 5,850 5,000 4,200 500 180 3,600 3,000 76,860 1,06,690 Balance Sheet as at March 31, 2006 Liabilities Sales tax collected Sundry creditors Loan Capital Add Net profit Amount Rs. 2,000 12,000 25,000 2,50,000 76,860 3,26,860 (48,000) 2,78,860 3,17,860 Assets Cash balance Bank balance Sundry debtors Closing stock Leasehold building Plant Patents Goodwill Trade mark Gross profit b/d Commission Bad debts recovered Apprenticeship premium
Accountancy 98,690 1,200 2,000 4,800
1,06,690
Amount Rs. 4,460 4,000 57,000 25,400 1,50,000 42,000 10,000 5,000 20,000 3,17,860
Less Drawings
9.7 Opening Entry The balances of various accounts in balance sheet are carried forward from one accounting period to another accounting period. In fact, the balance sheet of an accounting period becomes the opening trial balance of the next accounting period. Next year an opening entry is made which opens these accounts contained in the balance sheet. Refer the balance sheet shown in figure 9.10(c). The opening entry with regard to it will be recorded as follows : Furniture A/c Dr. 15,000 Debtors A/c Dr. 15,500 Banks A/c Dr. 5,000 Cash A/c Dr. 1,000 To Capital A/c 16,500 To 10 % Long-term loan A/c 5,000 To Creditors A/c 15,000
Financial Statements - I Key Terms Introduced in the Chapter Balance sheet Bills payable Capital Capital receipts Carriage outwards Closing entries Current assets Purchases return Return inwards Revenue expenditure Discount allowed Cash Factory expenses Fixed assets Gross Profit Income tax Interest on drawings Net profit Order of performance Revenue receipt Sales Grouping and Marshalling Bank overdraft Bills receivable Capital expenditure Carriage inwards Cash at bank Closing stock Currents liabilities Rent Return outwards Depreciation Discount received Trade expenses Financial statements Freight Gross Loss Interest on capital Net loss Order of liquidity Revenue expenditure Salaries Sales return
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Summary with Reference to Learning Objectives 1 Meaning, usefulness and types of financial statements : After the agreement of the trial balance, a business enterprise proceeds to prepare financial statements. Financial statements are the statements, which present periodic reports on the process of business enterprises and the results achieved during a given period. Financial statements includs trading and profit and loss account, balance sheet and other statements and explanatory notes, which form part thereof. Information provided by financial statements is useful to management to plan and control the business operations. Financial statement are also useful to creditors, shareholders and employees of the enterprise. Meaning need and preparation of trading and profit and loss account : The profit and loss account highlights the profit earned or loss sustained by the business entity in the course of business operation during a given period. The need for preparing the trading and profit and loss account is to ascertain the net result of business operations during a given period. The profit and loss account shows the items of revenue expenses and losses on the debit side, while items of gain and gross profit are shown on the credit side. For the preparation of the trading and profit and loss account, closing entries are recorded to transfer balances of account of items of expenses and revenues. Net profit or net loss shown by the profit and loss account is transferred to the capital account.
364 3
Accountancy Meaning, characteristic, need and structure of the balance sheet : The balance sheet is a statement of assets and liabilities of a business enterprise and shows the financial position at a given date Informations contained in a balance sheet is true only on that date. The balance sheet is a part of the final account. But it is not an account, it is only a statement. In a balance sheet the totals of assets and liabilities are always equal. It portrays the accounting equation. A balance sheet has to be prepared to know the financial position of the business, and the nature and values of its assets and liabilities. All the accounts which have not been closed till the preparation of the profit and loss account are shown in the balance sheet. Assets and liabilities shown in the balance sheet are marshalled in order of liquidity or in order of permanence. Questions for Practice Short Answers 1. 2. 3. 4. 5. What are the objectives of preparing financial statements ? What is the purpose of preparing trading and profit and loss account? Explain the concept of cost of goods sold? What is a balance sheet. What are its characteristics? Distinguish between capital and revenue expenditure and state whether the following statements are items of capital or revenue expenditure : (a) Expenditure incurred on repairs and whitewashing at the time of purchase of an old building in order to make it usable. (b) Expenditure incurred to provide one more exit in a cinema hall in compliance with a government order. (a) Registration fees paid at the time of purchase of a building (b) Expenditure incurred in the maintenance of a tea garden which will produce tea after four years. (c) Depreciation charged on a plant. (d) The expenditure incurred in erecting a platform on which a machine will be fixed. (e) Advertising expenditure, the benefits of which will last for four years. What is an operating profit?
6.
Long Answars 1. 2. 3. 4. What are financial statements? What information do they provide. What are closing entries? Give four examples of closing entries. Discuss the need of preparing a balance sheet. What is meant by Grouping and Marshalling of assets and liabilities. Explain the ways in which a balance sheet may be marshalled.
Numerical Questions 1. From the following balances taken from the books of Simmi and Vimmi Ltd. for the year ending March 31, 2003, calculate the gross profit. (Rs.) Closing stock 2,50,000 Net sales during the year 40,00,000 Net purchases during the year 15,00,000
Financial Statements - I Opening stock 15,00,000 Direct expenses 80,000 (Ans. Gross profit Rs.11,70,000) From the following balances extracted from the books of M/s Ahuja and Nanda. Calculate the amount of : (a) Cost of goods available for sale (b) Cost of goods sold during the year (c) Gross Profit Rs. Opening stock 25,000 Credit purchases 7,50,000 Cash purchases 3,00,000 Credit sales 12,00,000 Cash sales 4,00,000 Wages 1,00,000 Salaries 1,40,000 Closing stock 30,000 Sales return 50,000 Purchases return 10,000 (Ans. (a) Rs. 11,65,000 ; (b) Rs.11,35,000 ; (c) Rs.4,15,000 Calculate the amount of gross profit and operating profit on the basis of the following balances extracted from the books of M/s Rajiv & Sons for the year ended March 31, 2005. Rs. Opening stock 50,000 Net sales 11,00,000 Net purchases 6,00,000 Direct expenses 60,000 Administration expenses 45,000 Selling and distribution expenses 65,000 Loss due to fire 20,000 Closing stock 70,000 (Ans. Gross profit Rs.4,60,000, Operating profit Rs.3,50,000) Operating profit earned by M/s Arora & Sachdeva in 2005-06 was Rs.17,00,000. Its non-operating incomes were Rs.1,50,000 and non-operating expenses were Rs.3,75,000. Calculate the amount of net profit earned by the firm. (Ans. Net profit Rs.14,75,000) The following are the extracts from the trial balance of M/s Bhola & Sons as on March 31, 2005 Account title Opening stock Purchases Sales Debit Rs. 2,00,000 8,10,000 10,10,000 (only relevant items) Closing Stock as on date was valued at Rs.3,00,000. Credit Rs.
365
2.
3.
4.
5.
10,10,000 10,10,000
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Accountancy You are required to record the necessary journal entries and show how the above items will appear in the trading and profit and loss account and balance sheet of M/s Bhola & Sons. Prepare trading and profit and loss account and balance sheet as on March 31, 2005 : Account Title Machinery Sundry debtors Drawings Purchases Wages Sundry expenses Rent & taxes Carriage inwards Bank Openings stock Amount Rs. 27,000 21,600 2,700 58,500 15,000 600 1,350 450 4,500 6,000 Account Title Capital Bills payable Sundry creditors Sales Amount Rs. 60,000 2,800 1,400 73,500
6.
Closing stock as on March 31, 2005 Rs.22,400 [Ans. Gross profit Rs.15,950, Net profit Rs.14,000, Total balance sheet Rs.75,500] The following trial balance is extracted from the books of M/s Ram on March 31, 2005. You are required to prepare trading and profit and loss account and the balance sheet as on date : Account title Debtors Purchases Coal, gas and water Factory wages Salaries Rent Discount Advertisement Drawings Loan Petty cash Sales return Machinery Land and building Income tax Furniture Amount Rs. 12,000 50,000 6,000 11,000 9,000 4,000 3,000 500 1,000 6,000 500 1,000 5,000 10,000 100 9,900 Account title Apprenticeship premium Loan Bank overdraft Sales Creditors Capital Amount Rs. 5,000 10,000 1,000 80,000 13,000 20,000
7.
(Ans. Gross profit: Rs. 12,000, Net profit: Rs. 500, Total balance sheet: Rs. 43,400)
Financial Statements - I 8. The following is the trial balance of Manju Chawla on March 31, 2005. You are required to prepare trading and profit and loss account and a balance sheet as on date : Account title Debit Amount Rs. 10,000 40,000 200 6,000 4,000 600 6,000 500 600 6,000 2,000 4,000 40,000 2,000 6,0000 3,000 6,000 4,000 43,000 7,000 Credit Amount Rs. 80,000 600
367
Opening stock Purchases and sales Returns Productive wages Dock and Clearing charges Donation and charity Delivery van expenses Lighting Sales tax collected Bad debts Misc. incomes Rent from tenants Royalty Capital Drawings Debtors and Creditors Cash Investment Patents Land and Machinery
1,000
Closing stock Rs. 2,000. (Ans. Gross Profit: Rs. 18,400, Net profit: Rs. 18,700, Total balance sheet: Rs. 64,700) 9. The following is the trial balance of Mr. Deepak as on March 31, 2005. You are required to prepare trading account, profit and loss account and a balance sheet as on date : Account title Debit Amount Rs. 36,000 3,000 29,000 14,400 2,800 7,400 12,600 5,000 Account title Credit Amount Rs. 2,50000 3,600 50,000 10,400 8,000 4,40,000
Drawings Insurance General expenses Rent and taxes Lighting (factory) Travelling expenses Cash in hand Bills receivable
Capital Bills payable Creditors Discount recived Purchases return Sales
368 Sundry debtors Furniture Plant and Machinery Opening stock Purchases Sales return Carriage inwards Carriage outwards Wages Salaries 1,04,000 16,000 1,80,000 40,000 1,60,000 6,000 7,200 1,600 84,000 53,000
Accountancy
Closing stock Rs. 35,000. (Ans. Gross profit: Rs.1,83,000, Net profit : Rs. 85,000, Total balance sheet: Rs. 3,52,600) 10. Prepare trading and profit and loss account and balance sheet from the following particulars as on March 31, 2005. Account T itle Debit Amount Rs. 3,52,000 9,600 7,000 3,360 24,800 57,600 9,950 1,31,200 32,000 3,200 16,000 2,400 17,000 28,800 2,88,000 32,000 160 8,350 Credit Amount Rs. 5,60,000 12,000
Purchases and Sales Return inwards and Return outwards Carriage inwards Carriage outwards Fuel and power Opening stock Bad debts Debtors and Creditors Capital Investment Interest on investment Loan Repairs General expenses Wages and salaries Land and buildings Cash in hand Miscellaneous receipts Sales tax collected
48,000 3,48,000
Closing stock Rs. 30,000. (Ans. Gross profit: Rs. 1,22,200, Net profit : Rs.92,850, Total balance sheet: Rs.5,13,200) 11. From the following trial balance of Mr. A. Lal, prepare trading, profit and loss account and balance sheet as on March 31, 2005
Financial Statements - I Account T itle Debit Amount Rs. 16,000 67,600 4,600 1,400 2,400 600 Credit Amount Rs. 1,12,000 3,200
369
Stock as on April 01, 2005 Purchases and Sales Returns inwards and outwards Carriage inwards General expenses Bad debts Discount received Bank over draft Interest on bank overdraft Commission received Insurance and taxes Scooter expenses Salaries Cash in hand Scooter Furniture Building Debtors and Creditors Capital
1,400 10,000 600 1,800 4,000 200 8,800 4,000 8,000 5,200 65,000 6,000
16,000 50,000
Closing stock Rs. 15,000. (Ans. Gross profit : Rs. 40,600, Net profit: Rs. 27,200, Total balance sheet: Rs. 1,03,200) 12. Prepare trading and profit and loss account and balance sheet of M/s Royal Traders from the following balances as on March 31, 2005. Debit balances Stock Cash Bank Carriage on purchases Purchases Drawings Wages Machinery Debtors Postage Sundry expenses Rent Furniture Amount Rs. 20,000 5,000 10,000 1,500 1,90,000 9,000 55,000 1,00,000 27,000 300 1,700 4,500 35,000 Credit balances Sales Creditors Bills payable Capital Amount Rs. 2,45,000 10,000 4,000 2,00,000
Closing stock Rs.8,000 (Ans. Gross loss Rs. 13,500, Net loss Rs. 20,000, Rs. 1,85,000)
Total balance sheet
370
Accountancy 13. Prepare trading and profit and loss account from the following particulars of M/s Neema Traders as on March 31, 2005. Account Title Debit Amount Rs. 23,000 16,930 1,000 3,300 1,64,000 1,820 9,000 2,10,940 1,610 1,100 250 300 1,000 3,000 3,900 Account Title Credit Amount Rs. 1,80,000 8,000 2,520 4,720 8,000 2,36,000 1,910
Buildings Plant Carriage inwards Wages Purchases Sales return Opening stock Machinery Insurance Interest Bad debts Postage Discount Salaries Debtors
Sales Loan Bills payable Bank overdraft Creditors Capital Purchases return
Stock on March 31, 2005 Rs.16,000. (Ans. Gross profit Rs.17,850, Net profit Rs. 10,590, Total of balance sheet Rs.2,69,830) 14. From the following balances of M/s Nilu Sarees as on March 31, 2005. Prepare trading and profit and loss account and balance sheet as on date. Account Title Debit Amount Rs. 10,000 78,000 2,500 30,000 10,000 11,000 2,800 5,000 1,400 1,500 2,500 12,000 30,000 60,000 90,000 18,000 Account Title Credit Amount Rs. 2,28,000 70,000 7,000 8,000 28,000 2,370
Opening stock Purchases Carriage inwards Salaries Commission Wages Rent & taxes Repairs Telephone expenses Legal charges Sundry expenses cash in hand Debtors Machinery Investments Drawings
Sales Capital Interest Commission Creditors Bills payable
Financial Statements - I Closing stock as on March 31, 2005 Rs.22,000. (Ans. Gross profit Rs. 1,56,500, Net profit Rs. 1,10,300, Total balance sheet Rs.2,14,000) 15. Prepare trading and profit and loss account of M/s Sports Equipments for the year ended March 31, 2006 and balance sheet as on that date : Account T itle Debit Amount Rs. 50,000 3,50,000 5,000 Credit Amount Rs. 4,21,000 3,00,000 4,000 1,00,000 28,000 32,000 1,28,000 1,40,000 60,000 12,000 8,000 15,000 7,000 24,000 6,000 2,000 7,000 5,000 2,000
371
Opening stock Purchases and sales Sales returns Capital Commission Creditors Bank overdraft Cash in hand Furniture Debtors Plants Carriage on purchases Wages Rent Bad debts Drawings Stationery Travelling expenses Insurance Discount Office expenses Closing stock as on March 31, 2006 Rs.2,500
(Ans. Gross loss Rs. 1,500, Net loss Rs. 41,500 , Total balance sheet Rs.3,62,500) Checklist to Test Your Understanding 1. Test Your Understanding - I I (i) T II (i) b 2. (ii) T (ii) a (iii) F (iii) e (iv) T (iv) c (v) d
Test Your Understanding - II 1. (v) 2. (iii) 3. (iii) 4. (iii)
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Accountancy
Financial Statements - II
10
I
LEARNING OBJECTIVES
After studying this chapter, you will be able to : describe the need for adjustments while preparing the financial statements; explain the accounting treatment of adjustments for outstanding and prepaid expenses, accrued and advance receipts of incomes; discuss the adjustments to be made regarding depreciation, bad debts, provision for doubtful debts, provision for discount on debtors; explain the concepts and adjustment of managers commission and interest on capital; prepare profit and loss account and balance sheet with adjustments; and make vertical presentation of financial statements.
n chapter 9, you learnt about the preparation of simple final accounts in the format of trading and profit and loss account and balance sheet. The preparation of simple final accounts pre-supposes the absence of any accounting complexities which are nor mal to business operations. These complexities arise due to the fact that the process of determining income and financial position is based on the accrual basis of accounting. This emphasises that while ascertaining the profitability, the revenues be considered on earned basis and not on receipt basis, and the expenses be considered on incurred basis and not on paid basis. Hence, many items need some adjustment while preparing the financial statements. In this chapter we shall discuss all items which require adjustments and the way these are brought into the books of account and incorporated in the final accounts. 10.1 Need for Adjustments According to accrual concept of accounting, the profit or loss for an accounting year is not based on the revenues realised in cash and the expenses paid in cash during that year because there may be some receipts of incomes and payments of expenses during the current year which may partially relate to the previous year or to the next year. Also, there may be some incomes and expenses relating to the current year that are still to be brought into books of account. So, unless such items duly adjusted, the final accounts will not reflect the true and fair view of the state of affairs of the business.
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Let us take an example of an amount of Rs. 1,000 paid on July 01, 2005 towards insurance premium. You understand that any general insurance premium paid usually covers a period of 12 months. Suppose the accounting year ends on March 31, 2006, it would mean that one fourth of the insurance premium is paid on July 01, 2005 relate to the next accounting year 2006-07. Therefore, while preparing the financial statements for 2005-06, the expense on insurance premium that should be debited to the profit and loss account is Rs. 900 (Rs. 1,200 Rs. 300). Let us take another example. The salaries for the month of March, 2005 were paid on April 07, 2005. This means that the salaries account of 2004-05 does not include the salaries for the month of March 2005. Such unpaid salaries is termed as salaries outstanding which have to be brought into books of account and is debited to profit and loss account along with the salaries already paid for the month of April, 2004 up to Feburary, 2005. Similarly, adjustments may also become necessary in respect of certain incomes received in advance or those which have accrued but are still to be received. Apart from these, there are certain items which are not recorded on day-to-day basis such as depreciation on fixed assets, interest on capital, etc. These are adjusted at the time of preparing financial statements. The purpose of making various adjustments is to ensure that the final accounts reveal the true profit or loss and the true financial position of the business. The items which usually need adjustments are : 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. Closing stock Outstanding/expenses Prepaid/Unexpired expenses Accrued income Income received in advance Depreciation Bad debts Provision for doubtful debts Provision for discount on debtors Managers commission Interest on capital
It may be noted that when we prepare the financial statements, we are provided with the trial balance and some other additional information in respect of the adjustments to be made. All adjustments are reflected in the final accounts at two places to complete the double entry. Our earlier example in chapter 9 which represents the trial balance of Ankit is reproduced in figure 10.1:
374 Trial Balance of Ankit as on March 31, 2005 Account Title Elements L.F. Debit Amount Rs. 1,000 5,000 8,000 25,000 15,000 13,000 15,500 4,500 75,000
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Credit Amount Rs.
Cash Bank Wages Salaries Furniture Rent of building Debtors Bad debts Purchases Capital Equity Sales Creditors Long-term loan (raised on 1.4.2004) Commission received Total
Assets Assets Expense Expense Assets Expense Assets Expense Expense
12,000 Revenue Liabilities Liabilities Revenue 1,62,000 1,25,000 15,000 5,000 5,000 1,62,000
Additional Information : The stock on March 31, 2005 was Rs. 15,000. Figure 10.1 : Showing the trial balance of Ankit
We will now study about the items of adjustments and you will observe how these adjustments are helpful in the preparation of financial statements in order to reflect the true profit and loss and financial position of the firm. 10.2 Closing Stock As already discussed in chapter 9, the closing stock represents the cost of unsold goods lying in the stores at the end of the accounting period. The adjustment with regard to the closing stock is done by (i) by crediting it to the trading and profit and loss account, and (ii) by showing it on the asset side of the balance sheet. The adjustment entry to be recorded in this regard is : Closing stock A/c To Trading A/c Dr.
The closing stock of the year becomes the opening stock of the next year and is reflected in the trial balance of the next year. The trading and profit
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and loss account of Ankit for the year ended March 31, 2005 and his balance sheet as on that date shall appear as follows :
Trading and Profit and Loss Account of Ankit for the year ended March 31, 2005 Dr. Expenses/Losses Purchases Wages Gross profit c/d Salaries Rent of building Bad debts Net profit (transferred to Ankits capital account) Amount Rs. 75,000 8,000 57,000 1,40,000 25,000 13,000 4,500 19,500 62,000 Gross profit b/d Commission received Revenues/Gains Sales Closing stock Cr. Amount Rs. 1,25,000 15,000 1,40,000 57,000 5,000
62,000
Sometimes the opening and closing stock are adjusted through purchases account. In that case, the entry recorded is as follows : Closing stock A/c Dr. To Purchases A/c This entry reduces the amount in the purchases account and is also known as adjusted purchases which is shown on the debit side of the trading and profit and loss account. In this context, it may be noted, that the closing stock will not be shown on the credit side of the trading and profit and loss as it has been already been adjusted through the purchases account. Not only, in such a situation, even the opening stock will not be separately reflected in the trading and profit and loss account, as it is also adjusted in purchases by recording the following entry: Purchases A/c Dr. To Opening stock A/c Another important point to be noted in this context is that when the opening and closing stocks are adjusted through purchases, the trial balance does not show any opening stock. Instead, the closing stock shall appear in the trial balance (not as additional information or as an adjustment item) and so also the adjusted purchases. In such a situation, you should remember that the adjusted purchases shall be debited to the trading and profit and loss account.
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The closing stock shall be shown on the assets side of the balance sheet as shown below:
Balance Sheet of Ankit as at March 31, 2005 Liabilities Owners funds Capital Add Net profit Non-Current Liabilities Long-term loan Current Liabilities Creditors Amount Rs. 12,000 19,500 Assets Non-Current Assets Furniture Current Assets Debtors Bank Cash Closing stock Amount Rs. 15,000 15,500 5,000 1,000 15,000 51,500
31,500 5,000 15,000 51,500
10.3 Outstanding Expenses It is quite common for a business enterprise to have some unpaid expenses in the normal course of business operations at the end of an accounting year. Such items usually are wages, salaries, interest on loan, etc. When expenses of an accounting period remain unpaid at the end of an accounting period, they are termed as outstanding expenses. As they relate to the earning of revenue during the current accounting year, it is logical that they should be duly charged against revenue for computation of the correct amount of profit or loss. The entry to bring such expenses into account is : Concerned expense A/c To Outstanding expense A/c Dr.
The above entry opens a new account called Outstanding Expenses which is shown on the liabilities side of the balance sheet. The amount of outstanding expenses is added to the total of expenses under a particular head for the purpose of preparing trading and profit and loss account. For example, refer to Ankits trial balance (refer figure 10.1). You will notice that wages are shown at Rs. 8,000. Let us assume that Ankit owes Rs.500 as wages relating to the year 2004-05 to one of his employees. In that case, the correct expense on wages amounts to Rs. 8,500 instead of Rs. 8,000. Ankit must show Rs. 8,500 as expense on account of wages in the trading and profit and loss account and recognise a current liability of Rs. 500 towards the sum owed to his staff. It will be referred to as wages outstanding and it will be adjusted to wages account by recording the following journal entry: Wages A/c Dr. 500 To Wages outstanding A/c 500
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The amount of outstanding wages will be added to wages account for the preparation of the trading and profit and loss account as follows :
Trading and Profit and Loss Account of Ankit for the year ended March 31, 2005 Dr. Expenses/Losses Purchases Wages Add Outstanding wages Gross profit c/d Salaries Rent of building Bad debts Net profit (transferred to Ankits capital account) Amount Rs. 75,000 8,000 500 8,500 56,500 1,40,000 25,000 13,000 4,500 19,000 61,500 Gross profit b/d Commission received Revenues/Gains Sales Closing stock Cr. Amount Rs. 1,25,000 15,000 1,40,000 56,500 5,000
61,500
Observe carefully the trading and profit and loss account of Ankit. Did you notice the amount of net profit is reduced to Rs. 19,000 on account of outstanding wages. The item relating to outstanding wages will be shown in balance sheet as follows :
Balance Sheet of Ankit as at March 31, 2005 Liabilities Owners Funds Capital Add Profit Non-Current Liabilities Long-term loan Current Liabilities Creditors Outstanding wages Amount Rs. 12,000 19,000 Assets Non-Current Assets Furniture Current Assets Debtors Bank Cash Closing stock Amount Rs. 15,000 15,500 5,000 1,000 15,000 51,500
31,000 5,000 15,000 500 51,500
10.4 Prepaid Expenses There are several items of expense which are paid in advance in the normal course of business operations. At the end of the accounting year, it is found that the benefits of such expenses have not yet been fully received; a portion
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of its benefit would be received in the next accounting year. This portion of expense, is carried forward to the next year and is termed as prepaid expenses. The necessary adjustment in respect of prepaid expenses is made by recording the following entry: Prepaid expense A/c Dr. To concerned expense A/c The effect of the above adjustment entry is that the amount of prepaid part is deducted from the total of the particular expense, and the new account of prepaid expense is shown on the liabilities side of the balance sheet. For example, in Ankits trial balance, let us assume that the amount of salary paid by him to the employees includes an amount of Rs. 5,000 which was paid in advance to one of his employees upon his joining the office. This implies that Ankit has overpaid his staff by Rs. 5,000 on account of his salary. Hence, correct expense on account of salary during the current period will be Rs. 20,000 instead of Rs. 25,000. Ankit must show Rs. 20,000 expense on account of salary in the profit and loss account and recognise a current asset of Rs. 5,000 as an advance salary to the employee. It will be termed as prepaid salary account and will be recorded by the following journal entry : Prepaid salary A/c Dr. 5,000 To salary A/c 5,000 The account of prepaid salary will be shown in the trading and profit and loss account as follows:
Trading and Profit and Loss Account of Ankit for the year ended March 31, 2005 Dr. Expenses/Losses Purchases Wages Add Outstanding wages Gross profit c/d Amount Rs 75,000 8,000 500 8,500 56,500 1,40,000 Salaries 25,000 Less Prepaid salary (5,000) Rent of building Bad debts Net profit (transferred to Ankit capital account) Gross profit b/d 20,000 13,000 4,500 24,000 61,500 Commission received 1,40,000 56,500 5,000 Revenues/Gains Sales Closing stock Cr. Amount Rs. 1,25,000 15,000
61,500
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Observe how the prepaid salary has resulted in an increase of net profit by Rs. 5,000 making it as Rs. 24,000 Further, the item relating to prepaid salary will be shown in the balance sheet on the assets side as follows :
Balance Sheet of Ankit as at March 31,2005 Liabilities Owners Funds Capital Add Profit Non-Current Liabilities Long-term loan Current Liabilities Creditors Outstanding wages Amount Rs. Assets Non-Current Assets Furniture Current Assets Debtors Prepaid salary Bank Cash Closing stock Amount Rs.
12,000 24,000
15,000 15,500 5,000 5,000 1,000 15,000 56,500
36,000 5,000
15,000 500 56,500
10.5 Accrued Income It may also happen that certain items of income such as interest on loan, commission, rent, etc. are earned during the current accounting year but have not been actually received by the end of the same year. Such incomes are known as accrued income. The adjusting entry for accrued income is : Accrued income A/c Dr. To Concerned income A/c The amount of accrued income will be added to the related income in the profit and loss account and the new account of accrued income will appear on the asset side of the balance sheet. Let us, for example, assume that Ankit was giving a little help to a fellow businessman by introducing few parties to him on commission for this service. In the trial balance of Ankit you will notice an item of commission received amounting to Rs. 5,000. Assume that the commission amounting to Rs.1, 500 was still receivable from the fellow businessman. This implies that income from commission earned during 2004-05 is Rs. 6, 500 (Rs.5, 000 + Rs. 1,500) Ankit needs to record an adjustment entry to give effect to the accrued commission as follows : Accrued Commission A/c To Commission A/c Dr. 1,500 1,500
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The account of accrued income will be recorded in trading and profit and loss account as follows :
Trading and Profit and Loss Account of Ankit for the year ended March 31, 2005 Dr. Expenses/Losses Amount Rs. 75,000 8,000 500 8,500 56,500 1,40,000 Salaries Less Prepaid salary Rent of building Bad debts Net profit (transferred to Ankits capital account) 25,000 (5,000) Gross profit b/d 20,000 13,000 4,500 25,500 63,000 Commission received 5,000 1,500 Add Accrued commission 1,40,000 56,500 Revenues/Gains Cr. Amount Rs. 1,25,000 15,000
Purchases Wages Add Outstanding Gross profit c/d
Sales Closing stock
6,500
63,000
Observe that the accrued income has resulted in an increase in the net profit by Rs. 1,500 making it as Rs. 25,500. Further, it will be shown in the balance sheet of Ankit on the assets side under the head current asset.
Balance Sheet of Ankit as at March 31, 2005 Liabilities Owners Funds Capital Add Profit Non-Current Liabilities Long-term loan Current Liabilities Creditors Outstanding wages Amount Rs. 12,000 25,500 Assets Non-Current Assets Furniture Current Assets Debtors Prepaid salary Accrued commission Bank Cash Closing stock Amount Rs. 15,000 15,500 5,000 1,500 5,000 1,000 15,000 58,000
37,500 5,000 15,000 500 58,000
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10.6 Income Received in Advance Sometimes, a certain income is received but the whole amount of it does not belong to the current period. The portion of the income which belongs to the next accounting period is termed as income received in advance or an Unearned Income. Income received in advance is adjusted by recording the following entry: Concerned income A/c Dr. To Income received in advance A/c The effect of this entry will be that the balance in the income account will be equal to the amount of income earned for the current accounting period, and the new account of income received in advance will be shown as a liability in the balance sheet. For example, let us assume Ankit has agreed in March 31, 2005 to sublet a part of the building to a fellow shopkeeper @ Rs. 1,000 per month. The person gives him rent in advance for the next three months of April, May and June. The amount received had been credited to the profit and loss account. However, this income does not pertain to current year and hence will not be credited to profit and loss account. It is income received in advance and will be recognised as a liability amounting to Rs. 3,000. Ankit needs to record an adjustment entry to give effect to income received in advance by way of following journal entry: Rent received A/c Dr. To Rent received in advance A/c 3,000 3,000
This will lead a new account of rent received in advance of Rs. 3,000 which will appear as follows :
Balance Sheet of Ankit as at March 31, 2005 Liabilities Owners Funds Capital 12,000 Add Net profit 25,500 Non Current Liabilities Long-term loan Current Liabilities Creditors Outstanding wages Rent received in advance Amount Rs. Assets Non Current Assets Furniture Current Assets Debtors Prepaid salary Accrued commission Bank Cash Closing stock Amount Rs. 15,000 15,500 5,000 1,500 5,000 4,000 15,000 61,000
37,500 5,000 15,000 500 3,000 61,000
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10.7 Depreciation Recall from chapter 7, that depreciation is the decline in the value of assets on account of wear and tear and passage of time. It is treated as a business expense and is debited to profit and loss account. This, in effect, amounts to writing-off a portion of the cost of an asset which has been used in the business for the purpose of earning profits. The entry for providing depreciation is : Depreciation A/c Dr. To Concerned asset A/c In the balance sheet, the asset will be shown at cost minus the amount of depreciation. For example, the trial balance in our example shows that Ankit has a furniture account with a balance of Rs. 15,000. Let us assume that furniture is subject to a depreciation of 10% per annum. This implies that Ankit must recognise that at the end of the year the value attached to furniture is to be reduced by Rs. 1,500 (Rs. 15,000 10%). Ankit needs to record an adjustment entry to give effect to depreciation on furniture as follows : Depreciation A/c Dr. 1,500 To Furniture A/c 1,500 Depreciation will be shown in the profit and loss account and balance sheet as follows :
Trading and Profit and Loss Account of Ankit for the year ended March 31, 2005 Dr. Expenses/Losses Purchases Wages Add Outstanding wages Gross Profit c/d Amount Rs. 75,000 8,000 (500) 8,500 56,500 1,40,000 Salaries Less Prepaid salary Rent of building Depreciation-Furniture Bad debts Net profit (transferred to Ankits capital account) 25,000 (5,000) Gross profit b/d 20,000 13,000 1,500 4,500 24,000 63,000 Commission received 5,000 1,500 Add Accrued Commission 1,40,000 56,500 6,500 Revenues/Gains Sales Closing stock Cr. Amount Rs. 1,25,000 15,000
63,000
Notice that the amount of net profit declines with the adjustment of depreciation. Let us now see how depreciation as an expense will be shown in balance sheet.
Financial Statements - II Balance Sheet of Ankit as at March 31, 2005 Liabilities Owners Funds Capital 12,000 Add Profit 24,000 Non-Current Liabilities Long-term loan Current Liabilities Creditors Outstanding wages Rent received in advance Amount Rs. Assets Non-Current Assets Furniture 15,000 Less Depreciation (1,500) Current Assets Debtors Prepaid salary Accrued commission Bank Cash Closing stock
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Amount Rs.
36,000 5,000 15,000 500 3,000 59,500
13,500 15,500 5,000 1,500 5,000 4,000 15,000 59,500
10.8 Bad Debts Bad debts refer to the amount that the firm has not been able to realise from its debtors. It is regarded as a loss and is termed as bad debt. The entry for recording bad debt is: Bad debts A/c To Debtors A/c Dr.
You will notice in Ankits trial balance, that it contains bad debts amounting to Rs. 4,500. Whereas, the sundry debtors of Ankit are reported as Rs. 15,500. The existence of bad debts in the trial balance signifies that Ankit has incurred a loss arising out of bad debts during the year and which has been already recorded in the books of account. However, assuming one of his debtors who owed him Rs. 2,500 had become insolvent, and nothing is receivable from him. But the amount of bad debts related to the current year is still to be account for. This fact appears as additional information and is termed as further bad debts. The adjustment entry to be recorded for the amount will be as follows. For this purpose, Ankit needs to record an adjustment entry as under : Bad debts A/c To Debtors A/c Dr. 2,500 2,500
This entry will reduce the value of debtors to Rs. 13,000( Rs. 15,500 Rs. 2,500) and increases the amount of bad debts to Rs. 7,000 (Rs. 4,500 + Rs. 2,500).
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The treatment of further bad debts in profit and loss account and balance sheet is shown below :
Trading and Profit and Loss Account of Ankit for the year ended March 31, 2005 Dr. Expenses/Losses Purchases Wages Add Outstanding wages Gross profit c/d Salaries Less Prepaid salary Rent of building Amount Rs. 75,000 8,000 500 8,500 56,500 1,40,000 25,000 (5,000) Gross profit b/d 20,000 13,000 Commission received 5,000 Add Accrued 1,500 commission 1,40,000 56,500 Revenues/Gains Sales Closing stock Cr. Amount Rs. 1,25,000 15,000
6,500
Depreciation Furniture Bad Debts 4,500 Add Further bad debts 2,500 Net profit (transferred to Ankits capital account)
1,500 7,000 21,500 63,000 63,000
Balance Sheet of Ankit as at March 31, 2005 Liabilities Owners Funds Capital Add Profit Non-Current Liabilities Long-term loan Amount Assets Amount Rs. Rs. Non-Current Assets Furniture 15,000 33,500 Less Depreciation (1,500) 13,500 Current Assets 5,000 Debtors 15,500 Less Further bad debts (2,500) 13,000 Prepaid salary 5,000 15,000 Accrued commission 1,500 Bank 5,000 500 Cash 4,000 Closing stock 15,000 3,000 57,000 57,000
12,000 21,500
Current Liabilities and Provisions Creditors Outstanding Wages Rent received in advance
10.9 Provision for Bad and Doubtful Debts In the above balance sheet, debtors now appears at Rs. 13,000, which is their estimated realisable value during next year. It is quite possible that the whole
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of this amount may not be realised in future. However, it is not possible to accurately know the amount of such bad debts. Hence, we make a reasonable estimate of such loss and provide the same. Such provision is called provision for bad debts and is created by debiting profit and loss account. The following journal entry is recorded in this context : Profit and Loss A/c Dr. To Provision for doubtful debts A/c Provision for doubtful debts is also shown as a deduction from the debtors on the asset side of the balance sheet. Let us assume, Ankit feels that 5% of his debtors on March 31, 2005 are likely to default on their payments next year. This implies he expects bad debts of Rs. 650 (Rs. 13,000 5%). Ankit needs to record the adjustment entry as : Profit and loss A/c Dr. To Provision for doubtful debts A/c 650 650
This implies that Rs. 650 will reduce the current years profit on account of doubtful debts. In the balance sheet, it will be shown as a deduction from sundry debtors.
Trading and Profit and Loss Account of Ankit for the year ended March 31, 2005 Dr. Expenses/Losses Purchases Wages Add Outstanding Gross profit c/d Amount Rs. 75,000 8,000 500 8,500 56,500 1,40,000 Salaries 25,000 Less Prepaid salary (5,000) Rent of building Depreciation Furniture Bad debts 4,500 Add Further bad debts 2,500 Provision for doubtful debts Net profit (transferred to Ankits capital account) Gross profit b/d 20,000 13,000 1,500 7,000 650 20,850 63,000 63,000 Commission received 5,000 Add Accrued 1,500 commission 1,40,000 56,500 Revenues/Gains Sales Closing stock Cr. Amount Rs. 1,25,000 15,000
6,500
386 Balance Sheet of Ankit as at March 31, 2005 Liabilities Owners Funds Capital 12,000 Add Net profit 20,850 Non-Current Liabilities Long-term loan Amount Assets Rs. Non-Current Assets Furniture 15,000 Less Depreciation (1,500) Current Assets Debtors 15,500 Less Furtherbad debts 2,500 13,000 Less Provision for 650 doubtful debts Prepaid salary Accrued commission Bank Cash Closing stock
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Amount Rs.
32,850 5,000
13,500
12,350 5,000 1,500 5,000 4,000 15,000 56,350
Current Liabilities & Provisions Creditors Outstanding wages Rent received in advance
15,000 500 3,000 56,350
It may be noted that the provision created for doubtful debts at the end of a particular year will be carried forward to the next year and it will be used for meeting the loss due to bad debts incurred during the next year. The provision for doubtful debts brought forward from the previous year is called the opening provision or old provision. When such a provision already exists, the loss due to bad debts during the current year are adjusted against the same and while making provision for doubtful debts required at the end of the current year is called new provision. The balance of old provision as given in trial balance should also be taken into account. Let us take an example to understand how bad debts and provision for doubtful debts are recorded. An extract from a trial balance on March 31, 2005 is given below : Sundry debtors Bad debts Provision for doubtful debts Additional Information : Write-off further bad debts Rs. 1,000 and create a provision for doubtful debts @ 5% on debtors. Rs. 32,000 2,000 3,500
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In this case, the following journal entries will be recorded :

Date Particulars (a) Bad debts A/c To Sundry debtors (Futher bad debts) Dr. Debit L.F. Amount Rs. 1,000 1,000 3,000 3,000 1,050 1,050 Credit Amount Rs.
(b) Provision for doubtful debts A/c Dr. To Bad debts A/c (Bad debts adjusted against the provision) Profit and Loss A/c Dr. To Provision for doubtful debts A/c (Amount charges from profit and loss account) Profit and Loss Account for the year ended March 31, 2005 Rs. Provision for doubtful debts: Bad debts 2,000 Further bad debts 1,000 New provision 1,550 4,550 Less Old provision 3,500 *Only relevant items. Balance Sheet as at March 31, 2005
Rs.
1,050
Rs. Sundry debtors 32,000 Less Further (1,000) bad debts 31,000 Less Provision (1,550) for doubtful debts *Only relevant items. Note : The amount of new provision for doubtful debts has been calculated as follows: Rs. 31,000 1 5/100 = Rs. 1,550.
29,450
10.10 Provision for Discount on Debtors A business enterprise allows discount to its debtors to encourage prompt payments. Discount likely to be allowed to customers in an accounting year
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can be estimated and provided for by creating a provision for discount on debtors. Provision for discount is made on good debtors which are arrived at by deducting further bad debts and the provision for doubtful debts. The following journal entry is recorded to create provision for discount on debtors: Profit and loss A/c Dr. To Provision for discount on debtors A/c As stated above, the provision for discount on debtors will be created only on good debtors. It will be calculated on the amount of debtors arrived at after deducting the doubtful debts, i.e. Rs. 12,350 (Rs. 13,000 Rs. 650). Ankit needs to record the adjustment entry as : Profit and loss A/c Dr. To Provision for discount on debtors A/c 227 227
This will reduce the current year profit by Rs. 227 on account of probable discount on prompt payment. In the balance sheet, it will be shown as a deduction from the debtors account to portray correctly the expected realiable value of debtors as Rs. 12,123.
Trading and Profit and Loss Account of Ankit for the year ended March 31, 2005 Dr. Expenses/Losses Purchases Wages Add Outstanding wages Gross profit c/d Amount Rs. 75,000 8,000 (500) 8,500 56,500 1,40,000 Salaries Less Prepaid salary Rent of building 25,000 (5,000) Gross profit b/d 20,000 13,000 1,500 7,000 650 227 20,623 63,000 63,000 Commission received 5,000 Add Accrued 1,500 commission 1,40,000 56,500 Revenues/Gains Sales Closing stock Cr. Amount Rs. 1,25,000 15,000
6,500
DepreciationFurniture Bad debts 4,500 Add Further bad debts 2,500 Provision for doubtful debts Provision for discount on debtors Net profit (transferred to Ankits capital account)
Financial Statements - II Balance Sheet of Ankit as on March 31, 2005 Liabilities Owners Funds Capital Add Net profit Non-Current Liabilities Long-term loan Amount Rs. 12,000 20,623 Assets Non-Current Assets Furniture 15,000 Less Depreciation (1,500) Current Assets Debtors 15,500 2,500 Less Further bad debts 13,000 Less Provision for bad and 650 doubtful debts 12,350 Less Provision for discount (227) on debtors Prepaid salary Accrued commission Bank Cash Closing stock
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Amount Rs.
32,623 5,000
13,500
Current Liabilities & Provisions Creditors Outstanding wages Rent received in advance
15,000 500 3,000 56,123
12,123 5,000 1,500 5,000 4,000 15,000 56,123
In the subsequent year, the discount will be transferred to the provision for discount on debtors account. The account will be treated in the same manner as the provision for doubtful debts. 10.11 Managers Commission The manager of the business is sometimes given the commission on the net profit of the company. The percentage of the commission is applied on the profit either before charging such commission or after charging such commission. In the absence of any such information, it is assumed that commission is allowed as a percentage of the net profit before charging such commission. Suppose the net profit of a business is Rs. 110 before charging commission. If the manager is entitled to 10% of the profit before charging such commission, the commission will be calculated as : = Rs. 110 10/100 = Rs. 11
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In case the commission is 10% of the profit after charging such commission, it will be calculated as : = Profit before commission Rate of commission/ (100 + commission)
= Rs. 110 10 110 = Rs. 10.
The managers commission will be adjusted in the books of account by recording the following entry : Profit and loss A/c To Managers commission A/c Dr.
Let us recall our example and assume that Ankits manager is entitled to a commission @ 10%. Observe the following profit and loss account if it is based on : (i) amount of net profit before charging such commission (ii) amount of profit after charging such commission.
(i) Trading and Profit and Loss Account of Ankit for the year ended March 31, 2005 Dr. Expenses/Losses Purchases Wages Add Outstanding wages Gross profit c/d Amount Rs. 75,000 8,000 500 8,500 56,500 1,40,000 Salaries Less Prepaid salary Rent of building 25,000 (5,000) Gross profit 20,000 13,000 1,500 7,000 650 227 2,062 18,561 63,000 63,000 Commission received 5,000 1,500 Add Accrued commission 1,40,000 56,500 Revenues/Gains Sales Closing stock Cr. Amount Rs. 1,25,000 15,000
6,500
Depreciation Furniture Bad debts 4,500 Add Further bad debts 2,500 Provision for doubtful debts Provision for discount on debtors Managers commission Net profit (transferred to Ankits capital account)
Financial Statements - II Balance Sheet of Ankit as at March 31, 2005 Amount Assets Rs. Owners Funds Non-Current Assets Capital 12,000 Furniture 15,000 Add Net profit 18,561 30,561 Less Depreciation (1,500) Non-Current Liabilities Current Assets Long-term loan 5,000 Debtors 15,500 Less Further bad debts(2,500) 13,000 Less Provision for bad Current Liabilities and Provisions and doubtful (650) Creditors 15,000 debts 12,350 Less Provision for discount on debtors (227) Outstanding wages 500 Prepaid salary Rent received in advance 3,000 Accrued commission Bank Cash Managers commission 2,062 Closing stock outstanding 56,123 Liabilities (ii) Trading and Profit and Loss Account of Ankit for the year ended March 31, 2005 Dr. Expenses/Losses Purchases Wages Add Outstanding wages Gross profit c/d Salaries Less Prepaid salary Rent of building Amount Rs. 75,000 8,000 500 8,500 56,500 1,40,000 25,000 (5,000) Gross profit b/d 20,000 13,000 1,500 7,000 650 227 1,875 18,748 63,000 Commission received 5,000 1,500 Add Accrued commission Revenues/Gains Sales Closing stock
391 Amount Rs.
13,500
12,123 5,000 1,500 5,000 4,000 15,000 56,123
Cr. Amount Rs. 1,25,000 15,000
1,40,000 56,500
6,500
DepreciationFurniture Bad debts 4,500 Add Further bad debts 2,500 Provision for bad and doubtful debts Provision for discount on debtors Managers commission Net profit (transferred to Ankits capital account)
63,000
392 Balance Sheet of Ankit as at March 31, 2005 Liabilities Owners Funds Capital Add Net profit Non-Current Liabilities Long-term loan Amount Rs. 12,000 18,748 Assets Non-Current Assets Furniture Less Depreciation
Accountancy
Amount Rs. 15,000 (1,500) 13,500
30,748 5,000
Current Liabilities and Provisions Creditors Outstanding wages Rent received in advance Manager commission outstanding
15,000 500 3,000 1,875 56,123
Current Assets Debtors 15,500 Less Further bad debts (2,500) 13,000 Less Provision for bad & doubtful (650) debts 12,350 Less Provision for discount on debtors(227) 12,123 Prepaid salary 5,000 Accrued commission 1,500 Bank 5,000 Cash 4,000 Closing stock 15,000 56,123
10.12 Interest on Capital Sometimes, the proprietor may like to know the profit made by the business after providing for interest on capital. In such a situation, interest is calculated at a given rate of interest on capital as at the beginning of the accounting year. If however, any additional capital is brought during the year, the interest may also be computed on such amount from the date on which it was brought into the business. Such interest is treated as expense for the business and the following journal entry is recorded in the books of account: Interest on capital A/c Dr. To Capital A/c In the final accounts, it is shown as an expense on the debit side of the profit and loss account and added to capital in the balance sheet. Let us assume, Ankit decides to provide 5% interest on his capital. This shall amount to Rs. 600 for which the following journal entry will be recorded: Interest on capital A/c Dr. 600 To Capital A/c 600 This implies that net profit shall be reduced by Rs. 600. As a result, the reduced amount of profit shall be added to the capital in the balance sheet.
393
But, when interest on capital shall be added to the capital, this effect shall be neutralised. As shown below : Rs. Capital 12,000 Add Profit 17,961 29,961 600 Add Interest on capital 30,561
Test Your Understanding Tick the correct answer : 1. Rahuls trial balance provide you the following information : Debtors Rs. 80,000 Bad debts Rs. 2,000 Provision for bad debts Rs. 4,000 It is desired to maintain a provision for bad debts of Rs. 1,000 State the amount to be debited/credited in profit and loss account : (a) Rs. 5,000 (Debit) (b) Rs. 3,000 (Debit) (c) Rs. 1,000 (Credit) (d) none of these. 2. If the rent of one month is still to be paid the adjustment entry will be : (a) Debit outstanding rent account and Credit rent account (b) Debit profit and loss account and Credit rent account (c) Debit rent account and Credit profit and loss account (d) Debit rent account and Credit outstanding rent account. 3. If the rent received in advance Rs. 2,000. The adjustment entry will be : (a) Debit profit and loss account and Credit rent account (b) Debit rent account Credit rent received in advance account (c) Debit rent received in advance account and Credit rent account (d) None of these. 4. If the opening capital is Rs. 50,000 as on April 01, 2005 and additional capital introduced Rs. 10,000 on January 01, 2006. Interest charge on capital 10% p.a. The amount of interest on capital shown in profit and loss account as on March 31, 2005 will be : (a) Rs. 5,250 (b) Rs. 6,000 (c) Rs. 4,000 (d) Rs, 3,000. 5. If the insurance premium paid Rs. 1,000 and pre-paid insurance Rs. 300. The amount of insurance premium shown in profit and loss account will be : (a) Rs. 1,300 (b) Rs. 1,000 (c) Rs. 300 (d) Rs. 700.
394 Adjustment Adjustment Entry Treatment in Trading and Profit and Loss Account Dr.
Accountancy Treatment in Balance Sheet
1. Closing stock
Closing stock A/c To Trading A/c Expense A/c To outstanding expense A/c Prepaid expense A/c To Expenses A/c
Shown on the credit Shown on the assets side and profit assets side and loss account Added to the respective expense on the debit side Shown on the liabilities side
2. Outstanding expenses 3. Prepaid/ Unexpired expenses
Dr.
Dr.
Deducted from the Shown on the respective expense on assets side the debit side Added to the respective income on the credit side Deducted from the respective income on the credit side Shown on the debit side Shown on the debit side Shown on the debit side Shown on the debit side Shown on the assets side Shown on the liabilities sides Deducted from the value of asset Shown as deduction from debtors Shown as deductoin form debtors Shown on the liabilities side
4. Income earned Accured income A/c but not received To Income A/c 5. Income received Income A/c in advance To Income received in advence A/c 6. Depreciation Depreciaton A/c To Assets A/c
Dr.
Dr.
Dr.
7. Provision for Profit and Loss A/c bad and To Provision for doubtful debts doubtful debts 8. Provision for discount on debtors 9. Managers commission Profit and Loss A/c To Provision for discount debtors Managers commission A/c To outstanding commission A/c Interest on capital A/c To capital A/c
Dr.
Dr.
Dr.
10. Interest on capital 11. Further bad debts
Dr.
Shown on the debit side Shown on the debit side
Shown as addition to capital Deducted from debtors
Bad debts A/c Dr. To Sundry Debtors A/c
Fig. 10.2 : Showing treatment of various types of adjustments
Financial Statements - II Illustration 1
395
From the following balances, prepare the trading and profit and loss account and balance sheet as on March 31, 2005. Debit Balances Drawings Cash at bank Bills receivable Loan and Building Furniture Discount allowed Bank charges Salaries Purchases Stock (opening) Sales return Carriage Rent and Taxes General expenses Plant and Machinery Book debts Bad debts Insurance Amount Rs. 6,300 13,870 1,860 42,580 5,130 3,960 100 6,420 1,99,080 60,220 1,870 5,170 7,680 3,630 31,640 82,740 1,250 750 4,74,250 Adjustments 1. 2. 3. 4. 5. Closing stock Rs. 70,000 Create a reserve for bad and doubtful debts @ 10% on book debts Insurance prepaid Rs. 50 Rent outstanding Rs. 150 Interest on loan is due @ 6% p.a. Credit Balances Capital Discount received Loans Purchases return Sales Reserve for bad debts Creditors Amount Rs. 1,50,000 2,980 15,000 1,450 2,81,500 4,650 18,670
4,74,250
Solution Trading and Profit and Loss Account for the year ended March 31, 2005 Dr. Expenses/Losses Opening stock Purchase Less Purchases return Carriage Gross profit c/d Amount Rs. 60,220 1,99,080 (1,450) 1,97,630 5,170 86,610 3,49,630 Revenues/Gains Cr. Amount Rs.
Sales 2,81,500 Less : Sales return (1,870) 2,79,630 Closing stock 70,000
3,49,630
396 Discount allowed Bank charges Salaries Rent and Taxes 7,680 Add Rent outstanding 150 General expenses Insurance 750 Less Insurance prepaid (50) Bad debts 1,250 Add New provision 8,274 for bad debts 9,524 Less Old provision (4,650) for bad debts Interest on loan outstanding Net profit (transferred to capital account) 3,960 100 6,420 7,830 3,630 700 Gross profit b/d Discount received
4,874 900 61,176 89,590 89,590
Balance Sheet as at March 31, 2005
Liabilities Creditors Loan Add Interest on loan outstanding Rent outstanding Capital Add Net profit Less Drawings
Amount Rs. 18,670 15,000 900 15,900 150 1,50,000 61,176 2,11,176 (6,300)
Assets Cash at bank Book debts 82,740
Amount Rs. 13,870
2,04,876
Less Reserve (8,274) for bad debts Bills receivable Land and Building Furniture Plant and Machinery Insurance (prepaid) Closing stock
74,466 1,860 42,580 5,130 31,640 50 70,000 2,39,596
2,39,596
397
The following were the balances extracted from the books of Yogita as on March 31, 2005 : Debit Balances Cash in hand Cash at bank Purchases Return inwards Wages Fuel and Power Carriage on sales Carriage on purchases Opening stock Building Freehold land Machinery Salaries Patents General expenses Insurance Drawings Sundry debtors Amount Rs. 540 2,630 40,675 680 8,480 4,730 3200 2040 5,760 32,000 10,000 20,000 15,000 7,500 3,000 600 5,245 14,500 Credit Balances Sales Return outwards Capital Sundry creditors Rent Amount Rs. 98,780 500 62,000 6,300 9,000
Taking into account the following adjustments prepare trading and profit and loss account and balance sheet as on March 31, 2005 : (a) (b) (c) (d) Stock in hand on March 31, 2005,was Rs. 6,800. Machinery is to be depreciated at the rate of 10% and patents @ 20%. Salaries for the month of March, 2005 amounting to Rs. 1,500 were outstanding. Insurance includes a premium of Rs. 170 on a policy expiring on September 30, 2006. (e) Further bad debts are Rs. 725. Create a provision @ 5% on debtors.
398 (f) Rent receivable Rs. 1,000. Solution: Books of Yogita Trading and Profit and Loss Account for the year ended March 31, 2005 Dr. Expenses/Losses Opening stock Purchases Less Return outwards Wages Fuel and Power Carriage on purchases Gross profit c/d Amount Rs. 5,760 40,675 (500) 40,175 8,480 4,730 2,040 43,715 1,04,900 16,500 3,200 3,000 515 1,414 3,500 25,586 53,715 Balance Sheet as at March 31, 2005 Dr. Liabilities Sundry creditors Salaries outstanding Capital 62,000 Amount Rs. 6,300 1,500 Assets Cash in hand Cash in bank Sundry debtors Less Further bad debts Less Provision for bad debts Insurance prepaid Stock Rent accrued Freehold land Building Machinery Less Depreciation Patents Less Depreciation Revenues/Gains
Accountancy
Cr. Amount Rs.
Sales 98,780 Less Return inwards (680) Closing stock
98,100 6,800
Salaries 15,000 Add Outstanding salaries 1,500 Carriage General expenses Insurance 600 Less Prepaid insurance (85) Further bad debts 725 Add Provision for bad debts 689 Depreciation : machinery 2,000 Patent 1,500 Net profit (transferred to capital account)
Gross profit b/d Rent Add Accrued rent
1,04,900 43,715 9,000 1,000 10,000
53,715 Cr. Amount Rs. 540 2,630 14,500 (725) 13,775 (689)
13,086 85 6,800 1,000 10,000 32,000
Add Net profit Less Drawings
25,586 87,586 (5,245) 82,341
20,000 (2,000) 7,500 (1,500)
18,000 6,000 90,141
90,141
399
The following balances were extracted from the books of Shri R. Lal on March 31, 2005 Account Title Capital Drawings Purchases Sales Purchases return Stock on April 01, 2004 Bad debts Bad debts reserve April 01, 2004 Rates and Insurance Discount (Cr.) Bills receivable Sales returns Wages Buildings Amount Rs. 1,00,000 17,600 80,000 1,40,370 2,820 11,460 1,400 3,240 Account Title Rent (Cr.) Railway freight on sales Carriage inwards Office expenses Printing and Stationery Postage and Telegram Sundry debtors Sundry creditors Cash in bank Cash in hand Office furniture Salaries and Commission Addition to buildings Amount Rs. 2,100 16,940 2,310 1,340 660 820 62,070 18,920 12,400 2,210 3,500 9,870 7,000
1,300 190 1,240 4,240 6,280 25,000
Prepare the trading and profit and loss account and a balance sheet as on March 31, 2005 after keeping in view the following adjustments : (i) Depreciate old building by Rs. 625 and addition to building at 2% and office furniture at 5%. (ii) Write-off further bad debts Rs. 570. (iii) Increase the bad debts reserve to 6% of debtors. (iv) On March 31, 2005 Rs. 570 are outstanding for salary. (v) Rent receivable Rs. 200 on March 31, 2005. (vi) Interest on capital at 5% to be charged. (vii) Unexpired insurance Rs. 240. (viii) Stock was valued at Rs. 14,290 on March 31, 2005.
400 Solution Books of Shri R. Lal Trading and Profit and Loss Account for the year ended March 31, 2005 Dr. Expenses/Losses Opening stock Purchases Less Purchase return Carriage inwards Wages Gross profit c/d Amount Rs. 11,460 80,000 (2,820) 77,180 2,310 6,280 53,190 1,50,420 Railway freight on sales Office expenses Postage and Telegram Printing and Stationery Salary and Commission 9,870 Add Outstanding salary 570 Rates and Insurance 1,300 Less unexpired insurance (240) Bad debts 1,400 Add Further bad debts 570 Add New bad debts 3,690 provision 5660 Less Old provision (3,240) for bad debts Interest on capital Depreciation on building Depreciation on addition to building Depreciation on furniture Net profit (transferred to capital account) 16,940 1,340 820 660 10,440 1,060 Gross profit c/d Rent Add Accrued rent Discount 2,100 200 Revenues/Gains
Accountancy
Cr. Amount Rs.
Sales 1,40,370 Less Sales Return (4,240) 1,36,130
Closing stock
14,290 1,50,420 53,190 2,300 190
2,420 5,000 625 140 175 16,060 55,680 55,680
Financial Statements - II Balance Sheet as at March 31, 2005 Liabilities Sundry creditors Outstanding salaries Capital Add Net profit Add Interest on capital Amount Rs. 18,920 570 1,00,000 16,060 5,000 1,21,060 (17,600) 1,03,460 Assets Cash at bank Cash in hand Bills receivable
401
Amount Rs. 12,400 2,210 1,240
Less Drawings
Debtors 62,070 Less Further bad debts (570) 61,500 Less New provision (3,690) for bad debts Accrued rent Unexpired insurance Building 25,000 Less Depreciation (625) Addition to building 7,000 (140) Less Depreciation Office furniture 3,500 Less Depreciation (175) Closing stock
57,810 200 240 24,375 6,860 3,325 14,290 1,22,950
1,22,950
Illustration 4 Prepare the trading profit and loss account of M/s Mohit Traders as on 31 March 2006 and draw necessary Journal entries and balance sheet as on that date : Debit Balances Opening stock Purchases Cash in hand Cash at bank Return inwards Wages Fuel and Power Carriage inwards Insurance Buildings Plant Patents Salaries Furniture Drawings Rent Debtors Amount Rs. 24,000 1,60,000 16,000 32,000 4,000 22,000 18,000 6,000 8,000 1,00,000 80,000 30,000 28,000 12,000 18,000 2,000 80,000 6,40,000 Credit Balances Sales Return outwards Capital Creditors Bills payable Commission received Amount Rs. 4,00,000 2,000 1,50,000 64,000 20,000 4,000
6,40,000
402 Adjustments (a) (b) (c) (d) (e) (f) Solution Books of Mohit Traders Journal Date Particulars L.F. Debit Amount Rs. Salaries outstanding Wages outstanding Commission is accrued Depreciation on building 5% and plant 3% Insurance paid in advance Closing stock Rs. 12,000 6,000 2,400 700 12,000
Accountancy
Credit Amount Rs.
2005 March 31 Salary A/c Wages A/c To Salary outstanding A/c To Wages outstanding A/c (Amount of salary and wages outstanding as on March 31, 2006) March 31 Prepaid Insurance A/c To Insurance A/c (Insurance paid in advance] March 31 Commission accrued A/c To Commission A/c (Commission accrued but not received)
Dr. Dr.
12,000 6,000 12,000 6,000
Dr.
1,400 1,400
Dr.
2,400 2,400 7,400 5,000 2,400 1,23,700 1,23,700
March 31 Depreciation A/c Dr. To Building A/c To Plant A/c (Depreciation charged on plant and building) March 31 Profit and Loss A/c To Capital A/c (Profit transferred to capital account) Dr.
Financial Statements - II Books of Mohit Traders Trading and Profit and Loss Account for the year ended March 31, 2006 Dr. Expenses /Losses Opening stock Purchases 1,60,000 Less returns (2,000) Wages 22,000 Add Outstanding wages 6,000 Fuel and Power Carriage inwards Gross profit c/d Amount Rs. 24,000 1,58,000 28,000 18,000 6,000 1,74,000 4,08,000 Salary Add Outstanding salary Insurances Less Prepaid Rent Depreciation on building 28,000 12,000 8,000 (700) Revenue/Gains Sales Less Returns Closing stock
403
Cr. Amount Rs. 4,00,000 (4,000) 3,96,000 12,000
4,08,000 Gross Profit b/d 1,74,000 Commission received(4,000) Add Accrued 2,400 6,400 commission
40,000 7,300 2,000 5,000 2,400 1,23,700 1,80,400
Plants Net Profit (transferred to capital account)
1,80,400
Balance Sheet as at March 31, 2006 Liabilities Creditors Bills payable Capital Add Net profit Less Drawings Outstanding salaries Outstanding wages Amount Rs. 64,000 20,000 1,50.000 1,23,700 2,73,700 (18,000) Assets Cash in hand Cash at bank Building Plant Patents Debtors Insurance prepaid Commission accrued Furniture Closing stock Amount Rs. 16,000 32,000 95,000 77,600 30,000 80,000 700 2,400 12,000 12,000 3,57,700
2,55,700 12,000 6,000
3,57,700
404 Illustration 5
Accountancy
The following information has been extracted from the trial balance of M/s Randhir Transport Corporation. Debit balances Opening stock Rent Plant and Machinery Land and Buildings Power Purchases Sales return Telegram and Postage Wages Salary Insurance Discount Repair and Renewals Legal charges Trade taxes Debtors Investment Bad debts Trade expenses Commission Travelling expenses Drawings Amount Rs. 40,000 2,000 1,20,000 2,55,000 3,500 75,000 2,500 400 4,500 2,500 3,200 1,000 2,000 700 1,200 75,000 65,000 2,000 4,500 1,250 1,230 20,020 6,82,500 Credit balances Capital Creditors Bills payable Loan Discount Sales Provision for bad debts General reserves Amount Rs. 2,70,000 50,000 50,000 1,10,000 1,500 1,50,000 1,000 50,000
6,82,500
Adjustments 1. 2. 3. 4. 5. 6. 7. 8. 9. Closing stock for the year was Rs. 35,500. Depreciation charged on plant and machinery 5% and land and building 6%. Interest on drawing @ 6% and Interest on loan @ 5%. Interest on investments @ 4%. Further bad debts 2,500 and make provision for bad debts on debtors 5%. Discount on debtors @ 2%. Salary outstanding Rs. 200. Wages outstanding Rs. 100. Insurance prepaid Rs. 500.
You are required to make trading and profit and loss account and a balance sheet on March 31, 2005.
Financial Statements - II Solution Books of Randhir Transport Corporation Trading and Profit and Loss Account for the year ended March 31, 2005 Expenses/Losses Opening stock Purchases Wages Add Outstanding wages Power Gross profit c/d Amount Rs. 40,000 75,000 4,500 100 4,600 3,500 59,900 1,83,000 Rent Telegram and Postage Salary 2,500 Add Outstanding salary 200 Insurance 3,200 Less Prepaid (500) Discount Repair and Renewals Legal charges Trade taxes Trade expenses Outstanding interest on loan Commission Travelling expenses Discount on debtors Depreciation on Plant and Machinery Depreciation on Land and Building Bad debts 2,000 Add Further bad debts 2,500 Add New provision 3,553 8,053 Less Old provision (1,000) Net Profit (transferred to capital account) 2,000 400 Gross profit b/d Outstanding interest on investment Discount Interest on drawings Revenue/Gains Sales Less Sales return Closing stock 1,50,000 (2,500)
405
Amount Rs. 1,47,500 35,500
1,83,000 59,900 2,600 1,500 1,200
2,700 2,700 1,000 2,000 700 1,200 4,500 5,500 1,250 1,230 1,450 6,000 15,300
7,053 10,217 65,200 65,200
406 Balance Sheet as at March 31, 2005 Liabilities Creditors Bills payable Loan 1,10,000 Add Outstanding interest 5,500 General reserve Capital 2,70,000 Add Net Profit 10,217 2,80,217 Less Drawings (20,020) Amount Rs. 50,000 50,000 1,15,500 50,000 Assets 75,000 (2,500) 72,500 (1,450) 71,050 Less New Provision (3,553) Investment Outstanding interest on investment Insurance pre-paid Debtors Less Further bad debts Less Discount
Accountancy
Amount Rs.
67,497 65,000 2,600 500
2,60,197 Less Interest on drawings 1,200 Outstanding salary Outstanding wages
2,58,997 200 100 5,24,797
Plant and Machinery Land and Building Closing stock
1,14,000 2,39,700 35,500 5,24,797
Illustration 6 From the following balances of M/s Keshav Bros. You are required to prepare trading and profit and loss account and a balance sheet of March 31, 2005. Debit balances Plant and Machinery Debtors Interest Wages Salary Carriage inwards Carriage outwards Return inwards Factory rent Office rent Insurance Furniture Buildings Bills receivable Cash in hand Cash at bank Commission Opening stock Purchases Bad debts Amount Rs. 1,30,000 50,000 2,000 1,200 2,500 500 700 2,000 1,450 2,300 780 22,500 2,80,000 3,000 22,500 35,000 500 60,000 2,50,000 3,500 8,70,430 Credit balances Sales Return outwards Creditors Bills payable Provision for bad debts Capital Rent received Commission received Amount Rs. 3,00,000 2,500 2,50,000 70,000 1,550 2,20,000 10,380 16,000
8,70,430
Financial Statements - II Adjustment (i) (ii) (iii) (iv) Provision for bad debts @ 5% and further bad debts Rs. 2,000. Rent received in advance Rs. 6,000. Prepaid insurance Rs. 200. Depreciation on furniture @ 5%, plant and machinery @ 6%, building @ 7%.
407
Solution Books of Keshav Bros. Trading and Profit and Loss Account for the year ended March 31, 2005 Dr. Expenses/Losses Opening stock Purchases Less Returns Wages Carriage inwards Factory rent Gross profit c/d Amount Rs. 60,000 2,50,000 (2,500) 2,47,500 1,200 500 1,450 57,350 3,68,000 Interest Salary Carriage outwards Office Rent Insurance 780 Less Prepaid insurance (200) Depreciation on furniture Depreciation on Plant and Machinery Depreciation on building Commission Bad debts 3,500 Add Further bad debts 2,000 Add New provision 2,400 7,900 Less Old provision (1,550) Net Profit (transferred to capital account) 2,000 2,500 700 2,300 580 1,125 7,800 19,600 500 Gross profit b/d Rent received 10,380 Less Advance rent (6,000) Commission received Revenue/Gains Sales Less Return Closing stock 3,00,000 (2,000) Cr. Amount Rs. 2,98,000 70,000
3,68,000 57,350 4,380 16,000
6,350 34,275 77,730 77,730
408 Balance Sheet as at March 31, 2005 Liabilities Creditors Bills payable Advance rent Capital Add Net profit Amount Rs. 2,50,000 70,000 6,000 2,20,000 34,275 2,54,275 Liabilities Cash In hand Cash at bank Bills receivable
Accountancy
Amount Rs. 22,500 35,000 3,000
Prepaid insurance 200 Debtors 50,000 Less Further (2,000) bad debts 48,000 Less New provision (2400) 45,600 Plant and Machinery 1,22,200 Furniture 21,375 Buildings 2,60,400 Closing stock 70,000 5,80,275
5,80,275 Illustration 7
The following information have been taken from the trial balance of M/s Fair Brothers Ltd. You are required to prepare the trading and profit and loss account and a balance sheet as at March 31, 2006. Debit Balances Cash Wages Return outwards Bad debts Salaries Octroi Charity Machinery Debtors (Including a dishonoured bill of Rs.1,600) Stock Purchases Repairs Interest on loan Sales tax Insurance Rent Amount Rs. 20,000 45,050 4,800 4,620 16,000 1,000 250 32,000 60,000 81,600 2,60,590 3,350 1,200 1,600 2,000 4,000 5,38,060 5,38,060 Credit balances Sales Loan 12% (1.7.2005) Discount received Return (Purchase) Creditors Capital Amount Rs. 3,61,000 40,000 1,060 390 60,610 75,000
Financial Statements - II Adjustments 1. 2. 3. 4. 5. 6. 7. 8. Wages include Rs. 4,000 for erection of new machinery on April 01, 2005. Provide 5% depreciation on furniture. Salaried unpaid Rs.1,600. Closing stock Rs. 81,850. Create a provision at 5% on debtors. Half the amount of bill is recoverable. Rent is paid up to July 30, 2006. Insurance unexpired Rs. 600. Books of Fair Brothers Ltd. Trading and Profit and Loss Account for the year ended March 31, 2006 Dr. Expenses/Losses Opening stock Purchases Less Purchases return Wages Less Prepaid wages including erection of machines Octroi Gross profit c/d Amount Rs. 81,600 2,60,590 (390) 45,050 (4,000) 2,60,200 41,050 Revenue/Gains Sales Less Sales return Closing stock 3,61,000 (4,800)
409
Cr. Amount Rs. 3,56,200 81,850
1,000 54,200 4,38,050 4,38,050 Gross profit b/d Discount received 54,200 1,060
Salaries Add Outstanding salary
16,000 1,600 4,620 800 2,960 1,200 2,400 2,000 (600) 4,000 1,000
17,600 3,350
Repairs Bad debts Add Further bad debts Add New provision Interest on loan Add Outstanding interest Sales tax Insurance Less Prepaid insurance Charity Rent Less Prepaid rent Depreciation on machinery Net profit (transferred to capital account)
8,380 3,600 1,600 1,400 250 3,000 1,800 14,280 55,260 55,260
410 Balance Sheet as at March 31, 2006 Liabilities Creditors Outstanding salaries Loan Outstanding interest Capital Add Net profit Amount Rs. 60,610 1,600 40,000 2,400 75,000 14,280 89,280 Assets Cash Debtors 60,000 Less Bad debts (800) Less Provision 2,960 Prepaid rent Unexpired insurance Machinery 32,000 4,000 Add Erection Wages 36,000 Less Depreciation (1,800) Closing stock
Accountancy
Amount Rs. 20,000
56,240 1,000 600
1,93,890
34,200 81,850 1,93,890
Illustration 8 From the following balance extracted from the books of of M/s Hariharan Brother, you are require to prepare the trading and profit and loss account and a balance sheet as on December 31, 2005. Debit balance Opening stock Purchases Return inwards Carriage inwards Carriage outwards Wages Salaries Rent Freight and Dock Fire Insurance premium Bad debts Discount Printing and Stationery Rates and Taxes Travelling expenses Trade expenses Business premises Furniture Bills receivable Debtors Machine Loan Investment Cash in hand Cash at bank Proprietors withdrawals Amount Rs. 16,000 40,000 3,000 2,400 5,000 6,600 11,000 2,200 4,800 1,800 4,200 1,000 500 700 300 400 1,10,000 5,000 7,000 40,000 9,000 10,000 6,000 500 7,000 6,000 3,00,400 Credit balance Capital Sales Return outwards Apprenticeship premium Bills payable Creditors Amount Rs. 1,00,000 1,60,000 800 3,000 5,000 31,600
3,00,400
411
Adjustments 1. Closing stock Rs. 14,000. 2. Wages outstanding Rs. 600, Salaries Outstanding Rs. 1,000, Rent outstanding Rs. 200. 3. Fire Insurance premium includes Rs. 1,200 paid in July 01, 2005 to run for one year from July 01, 2005 to June 30, 2006. 4. Apprenticeship Premium is for three years paid in advance on January 01, 2005. 5. Stationery bill for Rs. 60 remain unpaid. 6. Depreciation on Premises @ 5%, furniture @ 10%, Machinery @ 10%. 7. Interest on loan given accrued for one year @ 7%. 8. Interest on investment @ 5% for half year to December 31, 2005 has accrued. 9. Interest on capital to be allowed at 5% for one year. 10. Interest on drawings to be charged to him ascertained for the year Rs. 160. Solution Books of Hariharan Bros. Trading and Profit and Loss Account for the year ended December 31, 2005 Dr. Expenses/Losses Opening stock Purchases Less purchases return Wages Add Outstanding Wages Carriage inwards Freight and Dock Gross profit c/d Amount Rs. 16,000 40,000 (800) 6,600 600 39,200 7,200 2,400 4,800 1,01,400 1,71,000 12,000 5,000 700 560 400 300 1,200 4,200 2,400 5,000 5,500 500 900 1,000 63,750 1,03,410 1,03,410 Gross profit b/d Apprenticeship 3,000 premium Less Advance premium (2,000) Accrued interest on loan Interest on drawings Accrued interest on investment Revenue/Gains Cr. Amount Rs.
Sales 1,60,000 Less Sales return (3,000) 1,57,000 Closing stock 14,000
Salaries 11,000 Add Outstanding salary 1,000 Carriage outwords Rates and Taxes Printing and Stationery 500 Add Outstanding bill 60 Trade expenses Travelling expenses Fire insurance 1,800 (600) Less Prepaid insurance Bad debts Rent 2,200 Add Outstanding rent 200 Interest on capital Depreciation on Premises Depreciation on furniture Depreciation on machinery Discount Net profit (transferred to capital account)
1,71,000 1,01,400
1,000 700 160 150
412 Liabilities
Accountancy
Balance Sheet as at December 31, 2005 Amount Assets Amount Rs. Rs. Capital 1,00,000 Premises 1,10,000 Add Interest on capital 5,000 Less Depreciation (5,500) 1,04,500 Add Net profit 63,750 1,68,750 Furniture 4,500 Less drawings (6,000) 1,62,750 Machinery 8,100 Less Interest on drawings (160) 1,62,590 Creditors 31,600 Debtors 40,000 Bills payable 5,000 Bills receivable 7,000 Outstanding wages 600 Cash in hand 500 Outstanding salaries 1,000 Cash at bank 7,000 Outstanding rent 200 Loan 10,000 Outstanding stationery 60 Add accrued interest 700 10,700 Apprenticeship premium (advance) 2,000 Investments 6,000 Add accrued interest 150 6,150 Pre-paid insurance 600 Closing stock 14,000 2,03,050 2,03,050
Illustration 9 The following balances have been extracted from the trial balance of M/s Kolkata Ltd. You are required to prepare the trading and profit and loss account on dated March 31, 2006. Also prepare balance sheet on that date.
Debit balances Opening stock Furniture Drawings Cash in hand Purchases Sales return Establishment expenses Bad debts Debtors Carriage Bills receivable Bank deposits Wages Trade expenses Bank charges General expenses Salaries Insurance Postage and Telegram Rent, Rates and Taxes Coal, Gas, Water Amount Rs. 6,000 1,200 2,800 3,000 24,000 2,000 4,400 1,000 10,000 1,000 6,000 8,000 1,000 500 400 1,000 2,000 1,500 500 2,000 2,000 80,300 Credit balances Capital Sales Purchases return Bank overdraft Bad debts provision Creditors Commission Bills payable Apprenticeship premium Amount Rs. 20,000 41,300 4,000 4,000 400 5,000 100 5,000 500
80,300
Financial Statements - II Adjustments 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Outstanding salaries Rs. 100. Rent and taxes Rs. 200, Wages Rs. 100. Unexpired insurance Rs. 500. Commission is received in advances Rs. 50. Interest Rs. 500 is to be received on bank deposits. Interest on bank overdraft Rs. 750. Depreciation on furniture @ 10%. Closing stock Rs. 9,000. Further bad debts Rs. 200 New provision @ 5% on debtors. Apprenticeship premium received in advance Rs. 100. Interest on drawings @ 6%.
413
Solution Books of Kolkata Ltd. Trading and Profit and Loss Account for the year ended as at March 31, 2006 Dr. Expenses /Losses Opening stock Purchases Less purchases return Wages Add Outstanding wages Coal, Gas, Water Gross profit c/d Establishment expenses Carriage Trade expenses Bank charges General expenses Salaries 2,000 Add Outstanding salary 100 Insurance 1,500 (500) Less Prepaid insurance Postage and Telegram Rent, rates and Taxes Interest on bank overdraft Bad debts 1,000 Add Further bad debts 200 Add New provision 490 1,690 Less Old provision (400) Depreciation on furniture Net profit (transferred to capital account) Amount Rs. 6,000 24,000 (4,000) 1,000 100 20,000 1,100 2,000 19,200 48,300 4,400 1,000 500 400 1,000 2,100 1,000 500 2,200 750 Gross profit b/d Commission 100 Less Advance commission (50) Accrued interest on deposits Apprenticeship premium 500 Less Advance received 100 Interest on drawings 48,300 19,200 50 500 Revenue/Gains Sales Less sales return Closing stock 41300 (2,000) Cr. Amount Rs. 39,300 9,000
400 168
1,290 120 5,058 20,318 20,318
414 Balance Sheet as at March 31, 2006 Liabilities 2,00,00 5,058 25,058 Less Drawings (2,800) 22,258 Less Interest on drawings (168) Creditors Commission received in advance Apprenticeship premium Outstanding wages Outstanding salaries Outstanding rent, rates, taxes Bank overdraft Add Outstanding interest Bills payable Capital Net profit Amount Rs. Assets Insurance prepaid Bank deposits
Accountancy
Amount Rs. 500 8,000 8,500 1,080 3,000 10,000 (200) 9,800 (490)
Add outstanding interest 500 22,090 5,000 50 100 100 100 200 Furniture Cash in hand Debtors Less Further bad debts Less Provision for bad debts Bills receivable Closing stock
9,310 6,000 9,000
4,000 750
4,750 5,000 37,390 37,390
Illustration 10 Prepare the trading and profit and loss account of M/s Roni Plastic Ltd. from the following trial balance and a balance sheet as at March 31, 2006. Debit balances Drawings Sundry debtors Carriage outwards Establishment expenses Interest on loan Cash in hand Stock Motor car Cash at bank Land and Buildings Bad debts Purchases Sales return Advertisement Carriage inward Rates, taxes, insurance General expenses Bills receivable Amount Rs. 6,000 38,200 2,808 16,194 400 6,100 11,678 18,000 9,110 24,000 1,250 1,34,916 15,642 4,528 7,858 7,782 8,978 13,764 3,27,208 Credit balances Creditors Capital Loan on mortgage Bad debts provision Sales Purchases return Discount Bills payable Rent received Amount Rs. 16,802 60,000 17,000 1,420 2,22,486 2,692 880 5,428 500
3,27,208
415
Adjustments 1. Depreciation on land and building at @ 5% and Motor vehicle at @ 15%. 2. Interest on loan is @ 5% taken on April 01, 2005. 3. Goods costing Rs1,200 were sent to a customer on sale on return basis for Rs. 1,400 on March 30, 2006 and has been recorded in the books as actual sales. 4. Salaries amounting to Rs. 1,400 and Rates amounting to Rs. 800 are due. 5. The bad debts provision is to be brought up to @ 5% on sundry debtors. 6. Closing stock was Rs. 13,700. 7. Goods costing Rs. 1,000 were taken away by the proprietor for his personal use but not entry has been made in the books of account. 8. Insurance pre-paid Rs. 350. 9. Provide the managers commission at @ 5% on Net profit after charging such commission. Solution Books of Ronis Plastic Ltd. Trading and Profit and Loss Account for the year ended March 31, 2006 Dr. Cr. Expenses/Losses Amount Revenue/Gains Amount Rs. Rs. Opening stock 11,678 Sales 2,22,486 Purchases 1,34,916 Less Sales 15,642 return 2,06,844 Less Purchases return 2,692 Less Return basis (1,400) 2,05,444 1,32,224 13,700 Less Goods withdrawn (1,000) 1,31,224 Closing stock Carriage inwards 7,858 Gross profit c/d 68,384 2,19,144 2,19,144 Outstanding salaries 1,400 Gross profit b/d 68,384 Carriage outwards 2,808 Discount 880 Establishment expenses 16,194 Rent 500 Bad debts 1,250 Add New provision 1,840 3,090 Less Old provision (1,420) 1,670 Rates and Taxes 7,782 (350) Less Prepaid 7,432 Add Outstanding 800 8,232 Advertisement 4,528 Interest on loan 400 Add Outstanding Interest 450 850 General expenses 8,978 Depreciation on : Land and Building 1,200 Motor car 2,700 3,900 Manager commission 1,010 Net profit (transferred to 20,194 capital account) 69,764 69,764
416 Balance Sheet as at March 31, 2006 Liabilities Capital Add Net profit Less Drawings Less Goods withdrawn loan Add interest Bills payable Creditors Outstanding Salaries Outstanding Rates Taxes Manager commission 60,000 20,194 80,194 (6,000) (74,194) 1,000 17,000 450 Amount Rs. Assets Cash in hand Cash at bank Bills receivable Debtors Less sales return basis Less New provisions Land and Building Less Depreciation Motor car Less Depreciation Prepaid insurance Closing stock
Accountancy
Amount Rs. 6,100 9,110 13,764 38,200 (1,400) 36,800 (1,840) 24,000 (1,200) 18,000 (2,700)
73,194
17,450 5,428 16,802 1,400 800 1,010 1,16,084
34,960 22,800 15,300 350 13,700 1,16,084
10.13 Methods of Presenting the Financial Statements The financial statements, i.e. trading and profit and loss account and balance sheet can be presented in two ways: (1) Horizontal form (2) Vertical form Under horizontal form of presentation, items are shown side by side in the trading and profit and loss account and also in the balance sheet as we are doing so far. This format is rather technical in nature and is not easily comprehensible for many users. Hence, now-a-days, most firms present them in a simpler and more intelligible form called a narrative style or vertical presentation. Under vertical presentation, the final accounts are prepared in a form of statement with different items being shown on below the other in a purposeful sequence. Under vertical presentation, the trading and profit and loss account will appear as shown in figure 10.3.
Financial Statements - II Income Statement for the period ended ...... Particulars Sales (Gross) Less Returns Net sales Cost of goods sold Opening stock Purchases ... Less Returns ... Carriage Inwards Wages Cost of goods available for sale Less Closing stock Gross Profit Operaing Expenses (a) Selling expenses Advertising Discount Allowances Bad debts and Provisions Carriage outwards Total selling expenses (b) General and Administration expenses Salaries Rent and Rates Insurance Depreciation Postage Repairs General expenses Total operating expenses Net Income from operations (Operating profit) Other Income (Non-operating gains) Interest earned Commission earned Profit on sale of fixed assets Less Deductions (Non-operating expenses) Interest paid Loss by fire Net non-operating gains Net income (Net profit) Amount
417
Amount Rs. ... ...
... ... ... ... ... ... ... ...
...
... ...
... ... ... ... ... ... ... ... ... ... ... ... ... ... ...
... ... ...
... ... ... ... ... ...
...
... ...
418 Under the vertical presentation, the Balance Sheet will appear as follows : Balance Sheet as on ........ Particulars Current Assets Cash in hand Cash at bank Bills receivable Accrued income Debtors Stock Prepaid expenses Total current assets Less Current Liabilities Bank overdraft Outstanding expenses Bills payable Trade creditors Income received in advance Total current liabilities Net working capital (Current assets and Current liabilities) Fixed Assets Furniture and Fixtures Patents Plants and Machhinery Building Land Goodwill Total fixed assets Total assets (After paying current liabilities) Capital Employed Long-term liabilities Loan Mortgage Total long-term liabilities Net assets (being the difference between total assets and long-term liabilities) Capital (Proprietor) Capital in the begining Add Capital introduced during the current year Interest on capital, salary, etc. Profit for the current year Less Drawings during the current year Interest on drawing Loss for the current year Total capital of the proprietor at the end of the year
Accountancy
Amount
Amount Rs.
... ... ... ... ... ... ... ... ... ... ... ... ...
... ...
... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ...
Fig. 10.3 : Showing vertical presentation of financial statements
419
From the following balances extracted from the books of M/s Rohit Traders, prepare the profit and loss account and balance sheet in the vertical form as on March 31, 2006. Debit Balances Opening stock Purchases Debtors Discounts Carriage outwards Drawings Insurance Salaries Investments Motor car Plants Land and Building Carriage inwards Legal charges Audit fee Fuel and Power Wages Return inwards Cash at bank Cash in hand Interest Bad debts Amount Rs. 11,520 81,000 28,000 2,000 6,000 10,500 1,200 30,000 20,000 15,000 40,000 80,000 4,080 3,200 3,200 9,460 10,960 1,360 5,200 2,000 2,000 1,320 3,68,000 Adjustments Closing stock Rs. 4,000 Depreciation on Plant and Buildings @ 10%. Credit Balances Capital Return outwards Creditors Commission Sales Long-terms loan Amount Rs. 1,40,000 400 12,600 5,000 1,98,000 12,000
3,68,000
420 Solution Books of Rohit Traders Profit and Loss Account for the year ended March 31, 2006 Particulars A Net Sales Less Sales return B Cost of goods sold Opening stock Purchase Less Purchases return Carriage Inwards Fuel and Power Wages Cost of goods available for sale Less Closing stock C D Gross Profit Amount Rs. 1,98,000 [1,360] 11,520 81,000 (400) 80,600 4,080 9,460 10,960 1,16,620 (4,000)
Accountancy
Amount Rs. 1,96,640
1,12,620 84,020
{A-B}
Operating expenses (a) Administrative Expenses Insurance Salaries Legal charges Audit fee Depreciation (Rs. 4,000 + Rs. 8,000)
1,200 30,000 3,200 3,200 12,000 49,600
(b)
Selling and Distribution Expenses Carriage outwards Discount Bad debts Total operating expenses [a+b] [C-D]
6,000 2,000 1,320 58,920 25,100 5,000 (2,000)
E F
Net operating profit Non-operating incomes Commission earned Less Interest paid
3,000 28,100
Net profit transferred to capital account
Financial Statements - II Balance sheet of Rohit Traders as at March 31,2006 Particulars Sources of firms funds a Proprietors fund Opening capital Add Net profit Less Drawings Long -term loan Amount Rs.
421
Amount Rs.
1,40,000 28,100 1,68100 (10,500)
1,57,600 12,000 1,69,600
Application of Funds (i) Cash In hand Cash at bank Closing stock Debtors (ii) Less Creditors (a) Investments (b) Fixed assets : Motor car Plants Land and Buildings 2,000 5,200 4,000 28,000
39,200 12,600
26,600 20,000
15,000 36,000 72,000
1,23,000 1,69,600
Key Terms Introduced in the Chapter Outstanding /Accrued expenses Accrued Incomes Depreciation Provision for doubtful debts Managers commission Horizontal form Prepaid/Unexpired expenses Income received in advance Bad Debts Provision for discount on debtors Interest on capital Vertical form
Summary with Reference to Learning Objectives 1 Need for adjustments : For the preparation of financial statements, it is necessary that all the adjustments arising out of the accrual basis of accounting are made at the end of the accounting period. Another important consideration in the preparation of final accounts with adjustments, is the distinction between capital and revenue items. Entries which are recorded to give effect to these adjustments are known as adjusting entries. Outstanding expenses : At the end of the accounting period sometimes a business enterprises is left with some unpaid expenses due to one reason or another. Such expenses are termed as outstanding expenses.
422 3.
Accountancy Prepaid expenses : At the end of the accounting year, it is found that the benefits of some expenses have not been fully received; a portion of total benefits would be received in the next accounting year. That portion of the expense, the benefit of which will be received during the next accounting period is known as prepaid expenses. Accrued Income : These are certain items is received by a business enterprise but the whole amount of it does not belong to the next period. Such portion of income which belongs to the next accounting period is income received in advance and is known as unearned income. Depreciation : Depreciation is the decline in the value of an asset an account of wear and tear or passage of time or with. It actually amounts to writing off a portion of the cost of an asset which has been used in the business for the purpose of earning profits. In the balance sheet, the asset is shown at loss minus the amount of depreciation. Provisions for bad and doubtful debts : It is a normal feature of business operations that some debts prove irrecoverable which means that the amount to the realised from them becomes had to view of this. An attempt is made to bring in a certain element of certainty in the amount in respect of bad debts charged every year against incomes. Questions for Practice Short Answers 1. 2. 3. Why is it necessary to record the adjusting entries in the preparation of final accounts? What is meant by closing stock? Show its treatment in final accounts? State the meaning of: (a) Outstanding expenses (b) Prepaid expenses (c) Income received in advance (d) Accrued income Give the Performa of income statement and balance in vertical form. Why is it necessary to create a provision for doubtful debts at the time of preparation of final accounts? What adjusting entries would you record for the following : (a) Depreciation (b) Discount on debtors (c) Interest on capital (d) Managers commission What is meant by provision for discount on debtors? Give the journal entries for the following adjustments : (a) Outstanding salary Rs. 3,500. (b) Rent unpaid for one month at Rs. 6,000 per annum. (c) Insurance prepaid for a quarter at Rs. 16,000 per annum. (d) Purchase of furniture costing Rs. 7,000 entered in the purchases book.
4.
5.
4. 5. 6.
7. 8.
Financial Statements - II Long Answers 1. 2. What are adjusting entries? Why are they necessary for preparing final accounts? What is meant by provision for doubtful debts? How are the relevant accounts prepared and what journal entries are recorded in final accounts? How is the amount for provision for doubtful debts calculated? Show the treatment of prepaid expenses depreciation, closing stock at the time of preparation of final accounts when: (a) When given inside the trial balance? (b) When given outside the trial balance?
423
3.
Numerical Questions 1. Prepare a trading and profit and loss account for the year ending December 31, 2005. from the balances extracted of M/s Rahul Sons. Also prepare a balance sheet at the end of the year. Amount Rs. 50,000 3,000 8,000 1,75,000 3,000 82,000 1,000 3,200 4,300 20,000 1,500 2,000 32,000 1,600 4,200 300 200 500 50,000 1,10,000 5,51,800 Adjustments 1. Commission received in advance Rs.1,000. 2. Rent receivable Rs. 2,000. 3. Salary outstanding Rs. 1,000 and insurance prepaid Rs. 800. Account Title Sales Purchases return Discount received Provision for bad debts Capital Bills payable Commission received Rent Loan Amount Rs. 1,80,000 2,000 500 2,500 3,00,000 22,000 4,000 6,000 34,800
Account Title Stock Wages Salary Purchases Sales return Sundry Debtors Discount allowed Insurance Rent Rates and Taxes Fixtures and fittings Trade expenses Bad debts Drawings Repair and renewals Travelling expenses Postage Telegram expenses Legal fees Bills receivable Building
5,51,800
424
Accountancy 4. Further bad debts Rs. 1,000 and provision for bad debts @ 5% on debtors and discount on debtors @ 2%. 5. Closing stock Rs. 32,000. 6. Depreciation on building @ 6% p.a. (Ans : Gross loss Rs.17,000 ; Net loss Rs.43,189 ; Total balance sheet Rs.2,83,611) Prepare a trading and profit and loss account of M/s Green Club Ltd. for the year ending December 31, 2005. from the following figures taken from his trial balance : Amount Rs. 35,000 1,25,000 25,000 600 12,300 3,000 1,000 500 400 4,000 50,000 20,000 40,000 20,000 5,000 3,500 3,500 23,100 3,71,900 Adjustments 1. Depreciation charged on machinery @ 5% p.a. 2. Further bad debts Rs.1,500, discount on debtors @ 5% and make a provision on debtors @ 6%. 3. Wages prepaid Rs.1,000. 4. Interest on investment @ 5% p.a. 5. Closing stock 10,000. (Ans. : Gross Profit Rs.79.000 ; Net Profit Rs.52,565 ; Total Balance Sheet Rs.1,57,565). Account Title Sales Purchase return Creditors Bills payable Discount Provision for bad debts Interest received Capital Amount Rs. 2,50,000 6,000 10,000 20,000 1,000 4,500 5,400 75,000
2.
Account Title Opening stock Purchases Return inwards Postage and Telegram Salary Wages Rent and Rates Packing and Transport General expense Insurance Debtors Cash in hand Cash at bank Machinery Lighting and Heating Discount Bad debts Investment
3,71,900
Financial Statements - II 3 The following balances has been extracted from the trial of M/s Runway Shine Ltd. Prepare a trading and profit and loss account and a balance sheet as on December 31, 2005. Account Title Purchases Opening stock Return inwards Carriage inwards Cash in hand Cash at bank Wages Printing and Stationery Discount Bad debts Insurance Investment Debtors Bills receivable Postage and Telegraph Commission Interest Repair Lighting Charges Telephone charges Carriage outward Motor car Amount Rs. 1,50,000 50,000 2,000 4,500 77,800 60,800 2,400 4,500 400 1,500 2,500 32,000 53,000 20,000 400 200 1,000 440 500 100 400 25,000 4,89,440 Adjustments 1. Further bad debts Rs. 1,000. Discount on debtors Rs. 500 and make a provision on debtors @ 5%. 2. Interest received on investment @ 5%. 3. Wages and interest outstanding Rs. 100 and Rs. 200 respectely. 4. Depreciation charged on motor car @ 5% p.a. 5. Closing Stock Rs. 32,500. (Ans. : Gross profit Rs. 78,000 ; Net profit Rs. 66,060, Total balance sheet Rs. 2,97,400) Account Title Sales Return outwards Interest received Discount received Creditors Bill payable Capital Amount Rs. 2,50,000 4,500 3,500 400 1,25,000 6,040 1,00,000
425
4,89,440
426 4.
Accountancy The following balances have been extracted from the trial of M/s Haryana Chemical Ltd. You are required to prepare a trading and profit and loss account and balance sheet as on December 31, 2005 from the given information. Amount Rs. 50,000 1,25,500 2,000 21,200 12,000 100 3,20,000 1,20,000 2,000 32,500 86,000 34,500 12,400 10,000 10,500 2,000 1,200 2,000 3,900 5,400 3,000 8,56,200 Adjustments 1. Closing stock was valued at the end of the year Rs. 40,000. 2. Salary amounting Rs. 500 and trade expense Rs. 300 are due. 3. Depreciation charged on building and machinery are @ 4% and @ 5% respectively. 4. Make a provision of @ 5% on sundry debtors. (Ans. : Gross profit Rs. 2,11,000 ; Net profit Rs.1,85,560 ; Total balance sheet Rs.6,73,060) Account Title Sales Purchases return Creditors Rent Interest Bills payable Capital Amount Rs. 3,50,000 2,500 25,000 5,000 2,000 1,71,700 3,00,000
Account Title Opening stock Purchases Sales return Cash in hand Cash at bank Carriage Free hold land Patents General Expenses Sundry Debtors Building Machinery Insurance Drawings Motor vehicle Bad debts Light and Water Trade expenses Power Salary and Wages Loan a 15% (01.09.2005)
8,56,200
Financial Statements - II 5. From the following information prepare trading and profit and loss account of M/s Indian sports house for the year ending December 31, 2005. Amount Rs. 20,000 80,000 1,000 2,400 2,000 5,000 4,000 7,000 25,000 1,80,000 20,000 1,00,000 14,000 10,000 6,000 2,000 40,000 51,000 5,69,400 Account Title Capital Return outwards Bank overdraft Provision for bad debts Sundry creditors Bills payable Sales Amount Rs. 2,00,000 2,000 12,000 4,000 60,000 15,400 2,76,000
427
Account Title Drawings Sundry debtors Bad debts Trade Expenses Printing and Stationery Rent Rates and Taxes Feright Return inwards Opening stock Purchases Furniture and Fixture Plant and Machinery Bills receivable Wages Cash in hand Discount allowed Investments Motor car
5,69,400
Adjustments 1. Closing stock was Rs.45,000. 2. Provision for bad debts is to be maintained @ 2% on debtors. 3. Depreciation charged on : furniture and fixture @ 5%, plant and Machinery @ 6% and motor car @ 10%. 4. A Machine of Rs.30,000 was purchased on July 01, 2005. 5. The manager is entitle to a commission of @ 10% of the net profit after charging such commission. (Ans. : Gross profit Rs.1,01,000 ; Net profit Rs.68,909 ; Total balance sheet Rs. 3,43,200 ; Managers commission Rs.6,891)
428 6.
Accountancy Prepare the trading and profit and loss account and a balance sheet of M/s Shine Ltd. from the following particulars. Amount Rs. 1,00,000 3,000 2,500 5,000 3,450 2,250 6,000 25,000 75,550 15,500 75,000 13,560 65,500 36,000 53,000 4,81,310 Adjustments 1. Closing stock was valued Rs. 35,000. 2. Depreciation charged on furniture and fixture @ 5%. 3. Further bad debts Rs. 1,000. Make a provision for bad debts @ 5% on sundry debtors. 4. Depreciation charged on motor car @ 10%. 5. Interest on drawing @ 6%. 6. Rent, rates and taxes was outstanding Rs.200. 7. Discount on debtors 2%. (Ans. : Gross loss Rs,17,050 ; Net loss Rs.27,344 ; Total balance sheet Rs. 3,19,032). Account Title Bills payable Sundry creditors Provision for bad debts Return outwards Capital Discount received Interest received Sales Amount Rs. 85,550 25,000 1,500 4,500 2,50,000 3,500 11,260 1,00,000
Account Title Sundry debtors Bad debts Trade expenses Printing and Stationary Rent, Rates and Taxes Freight Sales return Motor car Opening stock Furniture and Fixture Purchases Drawings Investments Cash in hand Cash in bank
4,81,310
Financial Statements - II 7. Following balances have been extracted from the trial balance of M/s Keshav Electronics Ltd. You are required to prepare the trading and profit and loss account and a balance sheet as on December 31, 2005. Amount Rs. 2,26,000 4,40,000 75,000 1,00,000 30,000 3,400 10,000 3,300 8,000 5,000 3,000 1,000 6,500 79,000 98,000 25,000 40,000 3,500 22,000 11,78,700 The following additional information is available : 1. Stock on December 31, 2005 was Rs. 30,000. 2. Depreciation is to be charged on building at 5% and motor van at 10%. 3. Provision for doubtful debts is to be maintained at 5% on Sundry Debtors. 4. Unexpired insurance was Rs. 600. 5. The Manager is entitled to a commissiion @ 5% on net profit before charging such commission. Account Title Sales Return outwards Creditors Bills payable Interest receivced Capital Amount Rs. 6,80,000 15,000 50,000 63,700 20,000 3,50,000
429
Account Title Opening stock Purchases Drawings Buildings Motor van Freight inwards Sales return Trade expense Heat and Power Salary and Wages Legal expense Postage and Telegram Bad debts Cash in hand Cash at bank Sundry debtors Investments Insurance Machinery
11,78,700
430
Accountancy (Ans. : Gross profit Rs,37,600 ; Net profit Rs.25,381 ; Total balance sheet Rs.4,15,350 ; Managers commission Rs.1,269) From the following balances extracted from the books of Raga Ltd. prepare a trading and profit and loss account for the year ended December 31, 2005 and a balance sheet as on that date. Amount Rs. 20,000 12,000 40,000 100 500 2,000 200 200 1,200 1,50,000 3,800 76,800 50,000 870 24,500 54,300 30,000 4,66,470 Account Title Sales Capital Discount Apprentice premium Bills payable Purchases return Amount Rs. 2,20,000 1,01,110 1,260 5,230 1,28,870 10,000
8.
Account Title Drawings Land and Buildings Plant and Machinery Carriage inwards Wages Salary Sales return Bank charges Coal, Gas and Water purchases Trade Expenses Stock (Opening) Cash at bank Rates and Taxes Bills receivable Sundry debtors Cash in hand
4,66,470
The additional information is as under : 1. Closing stock was valued at the end of the year Rs, 20,000. 2. Depreciation on plant and machinery charged at 5% and land and building at 10%. 3. Discount on debtors at 3%. 4. Make a provision at 5% on debtors for bad debts. 5. Salary outstanding was Rs.100 and Wages prepaid was Rs. 40. 6. The manager is entitled a commission of 5% on net profit after charging such commission.
Financial Statements - II (Ans. : Gross profit Rs,21,240 ; Net profit Rs.12,664 ; Total balance sheet Rs.2,23,377 ; Managers commission Rs.633) From the following balances of M/s Jyoti Exports, prepare trading and profit and loss account for the year ended March 31, 2006 and balance sheet as on this date. Account Title Debit Amount Rs. 9,600 22,800 34,800 450 1,770 820 1,440 390 940 1,590 24,000 3,600 2,160 240 60 20,540 10,000 1,35,200 Closing stock Rs.10,000. 1. 2. 3. 4. To provision for bad debts is to be maintained at 5 per cent on sundry debtors. Wages amounting to Rs.500 and salary amounting to Rs. 350 are outstanding. Factory rent prepaid Rs. 100. Depreciation charged on Plant and Machinery @ 5% and Building @ 10%. Account Title Credit Amount Rs. 2,500 72,670 2,430 15,600 42,000
431
9.
Sundry debtors Opening stock Purchases Carriage inwards Wages Office rent Insurance Factory rent Cleaning charges Salary Building Plant and Machinery Cash in hand Gas and Water Octroi Furniture Patents
Sundry creditors Sales Purchases returns Bills payable Capital
1,35,200
432 5. Outstanding insurance Rs.100.
Accountancy
(Ans : Gross profit Rs.23,250 ; Net profit Rs.16,370 ; Total balance Sheet 63,530) 10. The following balances have been extracted from the books of M/s Green House for the year ended December 31, 2005, prepare trading and profit and loss account and balance sheet as on this date. Account T itle Purchases Bank balance Wages Debtors Cash in hand Legal expenses Building Machinery Bills receivable Office expenses Opening stock Gas and fuel Freight and Carriage Factory lighting Office furniture Patent right Amount Rs. 80,000 11,000 34,000 70,300 1,200 4,000 60,000 120,000 7,000 3,000 45,000 2,700 3,500 5,000 5,000 18,800 4,70,500 adjustments : (a) (b) (c) (d) Machinery is depreciated at 10% and buildings depreciated at 6%. Interest on capital @ 4%. Outstanding wages Rs. 50. Closing stock Rs.50,000. Account Title Capital Bills payable Sales Creditors Return outwards Amount Rs. 2,10,000 6,500 2,00,000 50,000 4,000
4,70,500
Financial Statements - II (Ans : Gross profit Rs.83,750 ; Net Profit Rs.52,750 ; Total balance sheet Rs.3,19,250). 11. From the following balances extracted from the book of M/s Manju Chawla on March 31, 2005. You are requested to prepare the trading and profit and loss account and a balance sheet as on this date. Account Title Opening stock Purchases and Sales Returns Wages Dock and cleaning charges Lighting Misc. Income Rent Capital Drawings Debtors and Creditors Cash Investment Patent Land and Machinery Donations and Charity Sales tax collected Furniture Amount Rs. 10,000 40,000 200 6,000 4,000 500 Amount Rs. 80,000 600
433
6,000 2,000 40,000 2,000 6,000 3,000 6,000 4,000 43,000 600 11,300 1,36,600 1,36,600 7,000
1,000
Closing stock was Rs.2,000. (a) (b) (c) (d) (e) Interest on drawings @ 7% and interest on capital @ 5%. Land and Machinery is depreciated at 5%. Interest on investment @ 6%. Unexpired rent Rs.100. Charge 5% depreciation on furniture.
434
Accountancy (Ans. : Gross profit Rs.30,900 ; Net profit Rs.26,185 ; Total balance sheet Rs.71,185). The following balances were extracted from the books of M/s Panchsheel Garments on December 31, 2005. Debit Amount Rs. 16,000 67,600 4,600 1,400 2,400 4,000 200 8,800 4,000 8,000 5,200 65,000 6,000 1,200 1,94,400 Account Title Credit Amount Rs. 1,12,000 3,200 1,400 10,000 1,800 16,000 50,000
12.
Account Title
Opening stock Purchases Return Inwards Carriage inwards General expenses Insurance Scooter expenses Salary Cash in hand Scooter Furniture Buildings Debtors Wages
Sales Return outwards Discount Bank overdraft Commission Creditors Capital
1,94,400
Prepare the trading and profit and loss account for the year ended December, 31 and a balance sheet as on that date. (a) (b) (c) (d) (e) (f) Unexpired insurance Rs 1,000. Salary due but not paid Rs. 1800. Wages outstanding Rs. 200. Interest on capital 5%. Scooter is depreciated @ 5%. Furniture is depreciated Rs.@ 10%.
Financial Statements - II (Ans. : Gross profit Rs.39,200 ; Net profit Rs.22,780 ; Total balance sheet Rs.98,780}. 13. Prepare the trading and profit and loss account and balance sheet of M/s Control Device India on December 31, 2006 from the following balance as on that date. Account Title Debit Amount Rs. 19,530 45,000 25,470 2,700 27,000 6,750 42,300 2,700 Credit Amount Rs. 67,500 1,12,500 1,575
435
Drawings and Capital Purchase and Sales Salary and Commission Carriage Plant and Machinery Furniture Opening stock Insurnace premium Interest Bank overdraft Rent and Taxes Wages Returns Carriage outwards Debtors and Creditors General expenses Octroi Investment
7,425 24,660 2,160 11,215 2,385 1,485 36,000 6,975 530 41,400 2,73,600
1,440 58,500
2,73,600
Closing stock was valued Rs. 20,000. (a) (b) (c) (d) (e) Interest on capital @ 10%. Interest on drawings @ 5%. Wages outstanding Rs.50. Outstanding salary Rs.20. Provide a depreciation @ 5% on plant and machinery.
436
Accountancy (f) Make a 5% provision on debtors. (Ans. : Gross profit Rs.29,760 ; Net loss Rs.8,973 ; Total balance sheet Rs.1,28,000) 14. The following balances apperead in the trial balance of M/s Kapil Traders as on March 31, 2006 Sundry debtors Bad debts Provision for bad debts Rs. 30,500 500 2,000
The partners of the firm agreed to records the following adjustments in the books of the Firm: Further bad debts Rs.300. Maintain provision for bad debts 10%. Show the following adjustments in the bad debts account, provision account, debtors account, profit and loss account and balance sheet. (Ans ; Dr. Profit and Loss account Rs.1,820) 15. Prepare the bad debts account, provision for account, profit and loss account and balance sheet from the following information as on December 31, 2005 Debtors Bad debts Provision for bad debts Adjustments : Bad debts Rs.500 Provision on debtors @ 3%. (Ans : Credit Profit and Loss account Rs.115) Rs. 80,000 2,000 5,000
Checklist to Test Your Understanding 1. (c), 2. (d), 3. (b), 4. (a), 5. (d)
Accounts from Incomplete Records
11
LEARNING OBJECTIVES
After studying this chapter, you will be able to : state the meaning and features of incomplete records; calculate profit or loss using the statement of affairs method; distinguish between balance sheet and statement of affairs; prepare trading and profit and loss account and balance sheet from incomplete records; and detect the missing figures/information by preparing relevant accounts.
e have so far studied accounting records of firms, which follow the double entry system of book keeping. This gives us an impression that all business units follow this system. However, in practice, all firms do not maintain accounting records strictly as per the double entry system. Many small size enterprises keep incomplete records of their transactions. But, they also have to ascertain the profit or loss for the year and the financial position of the firm as at the end of the year. This chapter deals with the ascertainment of profit or loss and financial position of the firm that have not been maintaining records as per double entry bookkeeping or whose records are otherwise incomplete. 11.1 Meaning of Incomplete Records Accounting records, which are not strictly kept according to double entry system are known as incomplete records. Many authors describe it as single entry system. However, single entry system is a misnomer because there is no such system of maintaining accounting records. It is also not a short cut method as an alternative to double entry system. It is rather a mechanism of maintaining records whereby some transactions are recorded with proper debits and credits while in case of others, either one sided or no entry is made. Normally, under this system records of cash and personal accounts of debtors and creditors are properly maintained, while the information relating to assets, liabilities, expenses and revenues is partially recorded. Hence, these are usually referred as incomplete records.
438
Accountancy
11.1.1 Features of Incomplete Records In complete records may be due to partial recording of transactions as is the case with small shopkeepers such as grocers and vendors. In case of large sized organisations, the accounting records may be rendered to the state of incompleteness due to natural calamity, theft or fire. The features of incomplete records are as under : (a) It is an unsystematic method of recording transactions. (b) Generally, records for cash transactions and personal accounts are properly maintained and there is no information regarding revenue and/ or gains, expenses and/or losses, assets and liabilities. (c) Personal transactions of owners may also be recorded in the cash book. (d) Different organisations maintain records according to their convenience and needs, and their accounts are not comparable due to lack of uniformity. (e) To ascertain profit or loss or for obtaining any other information, necessary figures can be collected only from the original vouchers such as sales invoice or purchase invoice, etc. Thus, dependence on original vouchers is inevitable. (f) The profit or loss for the year cannot be ascertained under this system with high degree of accuracy as only an estimate of the profit earned or loss incurred can be made. The balance sheet also may not reflect the complete and true position of assets and liabilities. 11.2 Reasons of Incompleteness and its Limitations It is observed, that many businessmen keep incomplete records because of the following reasons : (a) This system can be adopted by people who do not have the proper knowledge of accounting principles; (b) It is an inexpensive mode of maintaining records. Cost involved is low as specialised accountants are not appointed by the organisations; (c) Time consumed in maintaining records is less as only a few books are maintained; (d) It is a convenient mode of maintaining records as the owner may record only important transactions according to the need of the business. However, the mechanism of incomplete records suffers from a number of limitations. This is due to the basic nature of this mechanism. Broadly speaking, unless a systematic approach to maintenance of records is followed, reliable financial statements cannot be prepared.
439
The limitations of incomplete records are as follows : (a) As double entry system is not followed, a trial balance cannot be prepared and accuracy of accounts cannot be ensured. (b) Correct ascertainment and evaluation of financial result of business operations can not be made. (c) Analysis of profitability, liquidity and solvency of the business cannot be done. This may cause a problem in raising funds from outsiders and planning future business activities. (d) The owners face great difficulty in filing an insurance claim with an insurance company in case of loss of inventory by fire or theft. (e) It becomes difficult to convince the income tax authorities about the reliability of the computed income. 11.3 Ascertainment of Profit and Loss Every business firm wishes to ascertain the results of its operations to assess its efficiency and success and failures. This gives rise to the need for preparing the financial statements to disclose: (a) the profit made or loss sustained by the firm during a given period; and (b) the amount of assets and liabilities as at the closing date of the accounting period. Therefore, the problem faced in this situation is how to use the available information in the incomplete records to ascertain the profit or loss for the particular accounting year and to determine the financial position of a entity as at the end of the year. This can be done in two ways : 1. Preparing the Statement of Affairs as at the beginning and as at the end of the accounting period, called statement of affairs or net worth method. 2. Preparing Trading and Profit and Loss Account and the Balance Sheet by putting the accounting records in proper order, called conversion method. 11.3.1 Preparing Statement of Affairs Under this method, statements of assets and liabilities as at the beginning and at the end of the relevant accounting period are prepared to ascertain the amount of change in the capital during the period. Such a statement is known as statement of affairs, shows assets on one side and the liabilities on the other just as in case of a balance sheet. The difference between the totals of the two sides (balancing figure) is the capital (refer figure 11.1). Though statement of affairs resembles balance sheet, it is not called a balance sheet because the data is not wholly based on ledger balances. The amounts of items like fixed assets, outstanding expenses, bank balances, etc. are ascertained from the relevant documents and physical count.
440 Statement of Affairs as at Liabilities Bills payable Creditors Outstanding expenses Capital (balancing figure)* Amount Rs. Assets Land and Building Machinery Furniture Stock Debtors Cash and Bank Prepaid expenses Capital (balancing figure)*
Accountancy
Amount Rs. xxxx
xxx x
Note: * where the total of liabilities side is more than total of assets side, capital would be shown in assets side and it represents debit balance of capital. Fig. 11.1 : Format of statement of affairs
Once the amount of capital, both at the beginning and at the end is computed with the help of statement of affairs, a statement of profit and loss is prepared to ascertain the exact amount of profit or loss made during the year. The difference between the opening and closing capital represents its increase or decrease which is to be adjusted for withdrawals made by the owner or any fresh capital introduced by him during the accounting period in order to arrive at the amount of profit or loss made during the period. The statement of profit and loss is prepared as shown in figure 11.2.
Statement of Profit or Loss for the year ended ........ Particulars Capital as at the end of year (computed from statement of affairs as at the end of year) Drawings during the year Additional capital introduced during the year Adjusted capital at the end of year Less Capital as at the beginning of year (computed from statement of affairs as at the beginning of year) Profit or Loss made during the year Fig. 11.2 : Format of statement of profit or loss Amount Rs. ..... ..... .....) ( ..... (.....) .....
Add Less
441
If the net result of above computation is a positive amount, it represents the profit earned during the year. In case the net result is a negative amount, it would represent the loss sustained during the year. The same computation can be done in the form of an equation as follows : Profit or Loss = Capital at end Capital at beginning + Drawings during the year Capital introduced during the year.
For example, consider the following information extracted from the records of Ms. Sheetu : Rs. Capital at the beginning of year, i.e. April 01,2004 1,20,000 Capital at the end of year, i.e. on March 31,2005 2,00,000 Capital brought in by the proprietor during the year 50,000 Withdrawals by the proprietor during the year 30,000 The profit for the year will be calculated as follows : The profit earned or loss incurred during a given period will be computed as follows : Particulars Capital as on March 31, 2005 Drawings during the year Additional capital introduced during the year Adjusted capital at the end, i.e. March 31, 2005 Capital in the beginning, i.e. April 01, 2004 Profit made during the year Illustration 1 Mr. Mehta started his readymade garments business on April 1, 2004 with a capital of Rs. 50,000. He did not maintain his books according to double entry system. During the year he introduced fresh capital of Rs. 15,000. He withdrew Rs. 10,000 for personal use. On March 31, 2005, his assets and liabilities were as follows : Total creditors Rs. 90,000 ; Total debtors Rs. 1,25,600 ; Stock Rs. 24,750 ; Cash at bank Rs. 24,980. Calculate profit or loss made by Mr. Mehta during the first year of his business using the statement of affairs method. Solution Books of Mr. Mehta Statement of Affairs as on March 31, 2005 Liabilities Creditors Capital (balancing figure) Amount Rs. 90,000 85,330 1,75,330 Assets Cash at bank Debtors Stock Amount Rs. 24,980 1,25,600 24,750 1,75,330 Amount Rs. 2,00,000 30,000 2,30,000 (50,000) 1,80,000 (1,20,000) 60,000
Add Less Less
442
Accountancy Statement of Profit or Loss for the year ended March 31,2005 Particulars Capital as March 31, 2005 Drawings during the year Amount Rs. 85,330 10,000 95,330
Add
Less Less
Additional capital introduced during the year Adjusted capital at end of the year, i.e. March 31,2005 Actual capital at the beginning of year, i.e. April 01, 2004 Profit made during the year
(15,000) 80,330 (50,000) 30,330
Illustration 2 Mrs. Vandana runs a small printing fir m. She was maintaining only some records, which she thought, were sufficient to run the business. On April 01, 2004, available information from her records indicated that she had the following assets and liabilities: Printing Press Rs. 5,00,000, Buildings Rs. 2,00,000, Stock Rs. 50,000, Cash at bank Rs. 65,600, Cash in hand Rs. 7,980, Dues from customers Rs. 20,350, Dues to creditors Rs. 75,340 and Outstanding wages Rs. 5,000. She withdrew Rs. 8,000 every month for meeting her personal expenses. She had also introduced Rs. 15,000 during the year as additional capital. On March 31, 2005 her position was as follows : Press Rs. 5, 25,000, Buildings Rs. 2,00,000, Stock Rs. 55,000, Cash at bank Rs. 40,380, Cash in hand Rs. 15,340, Dues from customers Rs. 17,210, Dues to creditors Rs. 65,680. Calculate the profit made by Mrs. Vandana during the year using statement of affairs method. Solution Books of Mrs. Vandana Statement of Affairs as on April 1, 2004 and as on March 31,2005 Liabilities Creditors Wages outstanding Capital (balancing figure) Apr. 01, 04 Rs. 75,340 5,000 7,63,590 Amount Rs. 65,680 7,87,250 Assets Printing press Buildings Debtors Stock Cash at bank Cash in hand Apr. 01, 04 Rs. Amount Rs.
5,00,000 5,25,000 2,00,000 2,00,000 20,350 17,210 50,000 55,000 65,600 40,380 7,980 15,340 8,43,930 8,52,930
8,43,930
8,52,930
Accounts from Incomplete Records Statement of Profit or Loss for the year ended on March 31, 2005 Particulars Capital as on March 31,2005 Drawings during the year Additional capital introduced during the year Adjusted capital at the end of the year (31.3.2005) Capital as on April 01, 2004 Profit made during the year
443
Add Less Less
Amount Rs. 7,87,250 96,000 8,83,250 (15,000) 8,68,250 (7,63,590) 1,04,660
11.3.2 Difference between Statement of Affairs and Balance Sheet Both statement of affairs and balance sheet show the assets and liabilities of a business entity on a particular date. However, there are some fundamental differences between the two. A statement of affairs is prepared from incomplete records where most of the assets are recorded on the basis of estimates as compared to a balance sheet which is prepared from records maintained on the basis of double entry book-keeping and all assets and liabilities can be verified from the ledger accounts. Hence, a balance sheet is more reliable than a statement of affairs. The objective of preparing a statement of affairs is to ascertain the amount of capital account as on that date whereas a balance sheet is prepared to know the financial position of the business at a particular date. In statement of affairs, an item of assets or liabilities may get omitted and this omission may remain unknown because the effect of this omission gets adjusted in the capital account balance and the total of both sides of statement match. However, in case of a balance sheet the possibility of omission of any item is remote because in case of an omission, the balance sheet will not agree and the accountant will trace the missing item from accounting records. These differences have been shown in a tabular form as under :
Basis of difference Statement of affairs Reliability Objective It is less reliable as it is prepared from incomplete records. The objective of preparing statement of affairs is to estimate the balance in capital account on a particular date. Omission of assets or liabilities cannot be discovered easily. Balance sheet It is more reliable as it is prepared from double entry records. The objective of preparing balance sheet is to show the true financial position of an entity on a particular date. Omissions of assets or liabilities can be discovered easily and can be traced from accounting records.
Omission
Fig. 11.3 : Showing comparison between statement of affairs and balance sheet
444 Do It Yourself
Accountancy
Identify a small shopkeeper in your locality, ask him about the accounting records maintained by him. If he is not maintaining the records as per double entry system, list the reasons thereof and ask him how does he compute profit or loss.
11.4 Preparing Trading and Profit and Loss Account and the Balance Sheet To prepare proper trading and profit and loss account and the balance sheet one needs complete information regarding expenses, incomes, assets and liabilities. In case of incomplete records, details of some items like creditors, cash purchases, debtors, cash sales, other cash payments and such receipts are easily available, but there are a number of items the details of which will have to be ascertained in an indirect manner by using the logic of double entry. The most common items that are missing and have to be worked out as such are : Opening capital Credit purchases Credit sales Bills payable accepted Bills receivable received Payments to creditors Payments to debtors Any other cash/bank related items. You know that opening capital can be worked out by preparing the statement of affairs at the beginning of the year. For other items we have explained as to how available information can be used to ascertain their missing figures with the help of total debtors and total creditors, total bills receivable and total bills payable accounts and summary of cash. 11.4.1 Ascertaining Credit Purchases The credit purchases figure is not usually available from the incomplete records. It is quite possible that some other information related to creditors may also be missing. Therefore, by preparing the total creditors account, a proforma of which is given in figure 11.4, credit purchases or any other missing figure related to creditors, as the case may be, can be ascertained as the balancing figure.
Accounts from Incomplete Records Total Creditors Account Dr. Date Particulars Cash paid Bank (cheques issued) Bills payable (bills accepted) Discount received Purchases return Balance c/d J.F. Amount Rs. .... .... .... .... .... .... xxxxxxx Fig. 11.4 : Showing format of creditors account Date Particulars Balance b/d Bank (cheques dishonoured) Bills payable (bills dishonoured) Credit purchases
445
Cr. J.F. Amount Rs. .... .... .... ....
xxxxxxx
For example, consider the following transactions relating to M/s Kisan Food Suppliers: Rs. Opening balance of creditors 40,000 Closing balance of creditors 50,000 Payment made in cash 85,000 Discount received 2,000 The total creditors account will be prepared as follows : Books of Kisan Food Suppliers Total Creditors Account Dr. Date Particulars Cash Discount Balance c/d J.F. Amount Rs. 85,000 2,000 50,000 1,37,000 1,37,000 Date Particulars Balance b/d Credit purchases (balancing figure) Cr. J.F. Amount Rs. 40,000 97,000
11.4.2 Ascertainment of Credit Sales The figure of credit sales is also not usually available from incomplete records. Some other information on related to debtors may also be missing. Therefore, if the total debtors account is prepared as shown in figure 11.5, credit sales or any other missing figure, as the case may be, can be traced out as the balancing figure.
446 Total Debtors Account Dr. Date Particulars Balance b/d J.F. Amount Rs. .... Date Particulars Cash (cash received) Bank (cheque received) Discount allowed Bad debts Sales return Bills receivable (bills received) Balance c/d xxx Fig. 11.5 : Showing format of debtors account
Accountancy
Cr. J.F. Amount Rs. ....
Bills receivable (bills dishonoured) Bank (cheque dishonoured) Credit sales (balancing figure)
.... .... ....
.... .... .... .... .... xxx
From the credit sales as ascertained from total debtors account, the sales returns should be deducted from gross credit sales to get net credit sales. For example, the following information is obtained from the books of Mohanlal Traders : Rs. Debtors on April 01, 2005 50,000 Debtors on March 31, 2005 70,000 Cash received from debtors 60,000 Discount allowed 1,000 Bills receivable 30,000 Bad debts 3,000 The total debtors account will be prepared as follows : Mohan Lal Traders Total Debtors Account Dr. Date 2005 Apr. 01 Particulars J.F. Amount Rs. 50,000 1,14,000 Date Particulars J.F. Cr Amount Rs. 60,000 1,000 30,000 3,000 70,000 1,64,000
Balance b/d Credit sales (balancing figure)
Cash Discount Bills receivable Bad debts Balance c/d
1,64,000
447
11.4.3 Ascertainment of Bills Receivable and Bills payable Quite often, while all details relating to bills receivable and bills payable are available but the figures of the bills received and bills accepted during the year are not given. In such a situation, total bills receivable account and total bills payable account can be prepared and the missing figures ascertained as the balancing figures. The proforma of total bills receivable account and total bills payable account is shown in figure 11.6 and figure 11.7.
Total Bills Receivable Account Dr. Date Particulars Balance b/d Sundry debtors (bills received) J.F. Amount Rs. .... .... Date Particulars Bank (bills honoured) Sundry debtors (bills dishonoured) Balance c/d Cr. J.F. Amount Rs. .... .... .... xxx
xxx Fig. 11.6 : Showing format of bills receivable account Total Bills Payable Account Dr. Date Particulars Bank (bills matured) Sundry creditors (bills dishonoured) Balance c/d J.F. Amount Rs. .... .... .... xxx Date Particulars Balance b/d Sundry creditors (bills accepted)
Cr. J.F. Amount Rs. .... ....
xxx
Fig. 11.7 : Showing format of bills payable account For example consider the following data available from the records of M/s S.S. Senapati Rs. Opening bills receivable 5,000 Opening bills payable 37,000 Bills receivable dishonoured 2,000 Bills payable dishonoured 66,750 Closing bills payable 52,000 Bills collected during the year 12,000 Closing bills receivable 4,000
448 The bills receivable and bills payable will be prepared as follows : Total Bills Receivable Account Dr. Date Particulars Balance b/d Sundry debtors (bills received) (balancing figure) J.F. Amount Rs. 5,000 13,000 Date Particulars Sundry debtors (bills dishonoured) Bank (bills collected) Balance c/d 18,000
Accountancy
Cr. J.F Amount Rs. 2,000 12,000
4,000 18,000
Total Bills Payable Account Dr. Date Particulars Bill dishonoured Balance c/d J.F. Amount Rs. 66,750 52,500 Date Particulars Balance b/d Sundry Creditors (bills accepted) (balancing figure) Cr. J.F. Amount Rs. 37,500 81,750
1,19,250
1,19,250
Test Your Understanding - I Tick the correct answer : 1. Incomplete record mechanism of book keeping is : (a) Scientific (b) Unscientific (c) Unsystematic (d) both (b) and (c) 2. Opening capital is ascertained by preparing : (a) Total debtors account (b) Total creditors account (c) Cash account (d) Opening statement of affairs 3. Credit purchase, during the year is ascertained by preparing : (a) Total creditors account (b) Total debtors account (c) Cash account (d) Opening statement of affairs 4. If opening capital is Rs. 60,000, drawings Rs. 5,000, capital introduced during the period Rs. 10,000, closing capital Rs. 90,000. The value of profit earned during the period will be : (a) Rs. 20,000 (b) Rs. 25,000 (c) Rs. 30,000 (d) Rs. 40,000
449
11.4.4 Ascertainment of Missing Information through Summary of Cash Sometimes, the amount paid to creditors or the amount received from debtors or the opening or closing cash or bank balance may be missing. To ascertain any missing item of receipt or payment, we may prepare a cash book summary showing all receipts and payments during the year and the balancing figure is taken as the amount of missing item. If however, both amount paid to creditors and that received from debtors are missing, then any one of these may be obtained first through the total creditors or total debtors account, as the case may be, and the other missing information ascertained from the cash book summary in the same way as stated earlier. After the missing figures have been traced out, the final accounts may be prepared straight away or after the preparation of the trial balance. The components of the trial balance and their sources of information are summarised below :
1. Closing assets (except stock) and Closing list liabilities 2. Opening assets (including opening Opening list stock) and liabilities 3. Purchases Credit purchases from total creditors account and cash purchases from summary of cash 4. Sales Credit sales from total debtors account and cash sales from summary of cash 5. Opening capital Opening statement of affairs 6. Expenses and Revenues As per cash summary of cash plus subsidiary informatioon 7. Losses and Gains From all the accounts and scattered information 8. Bills receivable received Total bills receivable account 9. Bills payable accepted Total bills payable account 10. Cash/Bank balance Summary of cash Fig. 11.7 : Detecting the missing information Illustration 3 Compute the amount of total purchases and total sales of Mr. Amit from the following information for the year ending on March 31,2005. Amount Rs. Total debtors as on April 01, 2004 40,000 Total creditors as on April 01, 2004 50,000 Bills receivable as on April 01, 2004 30,000 Bills payable as on April 01, 2004 45,000 Discount received 5,000 Bad debts 2,000 Return inwards 4,000 Discount allowed 3,000
450 Cash sales Cash purchases Total debtors as on March 31, 2005 Cash received from debtors Cash paid to creditors Cash received against bills receivable Payment made against bills receivable Total creditors as on March 31, 2005 Bills payable as on March 31, 2005 Bills receivable as on March 31, 2005 Solution Total Bills Receivable Account Dr. Date Particulars Balance b/d Total debtors (balancing figure) J.F. Amount Rs. 30,000 30,000 60,000 Total Bills Payable Account Dr. Date Particulars Cash Balance c/d J.F. Amount Rs. 40,000 50,000 90,000 Total Debtors Account Dr. Date Particulars Balance b/d Sales (balancing figure) J.F. Amount Rs. 40,000 1,79,000 Date Particulars Bad debts Return inwards Discount allowed Cash Bills receivable (Transfer from bills receivable account) Balance c/d 2,19,000 Date Particulars Balance b/d Total creditors (balancing figure) Date Particulars Cash Balance c/d
Accountancy 10,000 8,000 80,000 1,00,000 80,000 25,000 40,000 40,000 50,000 35,000
Cr. J.F. Amount Rs. 25,000 35,000 60,000
Cr. J.F. Amount Rs. 45,000 45,000 90,000
Cr. J.F. Amount Rs. 2,000 4,000 3,000 1,00,000 30,000
80,000 2,19,000
Accounts from Incomplete Records Total Creditors Account Dr. Date Particulars Discount received Cash Bills payable (transfer from bills payable account) Balance c/d J.F. Amount Rs. 5,000 80,000 45,000 Date Particulars Balance b/d Purchases (credit) (balancing figure)
451
Cr. J.F. Amount Rs. 50,000 1,20,0002
40,000 1,70,000
1,70,000
Working Notes (i) Credit purchases have been computed from total creditors account as Rs. 1,20,0002. Cash purchases given are Rs. 8,000. Total purchases will be Rs. 1,20,000 + Rs. 8,000 = Rs. 1,28,000. (ii) Credit sales have been computed from total debtors account as Rs. 1,79,000 and cash sales are given as Rs. 10,000. Total sales will be Rs. 1,79,000 + Rs. 10,000 = Rs. 1,89,000. Illustration 4 From the following information supplied by Ms. Sudha, calculate the amount of Net Sales Rs. Debtors on April 01, 2005 Debtors on March 31, 2006 Opening balance of bills receivable as on April 01, 2005 Closing balance of bills receivable as on March 03, 2006 Cash received from debtors Discount allowed Cash received against bills receivable Bad debts Bill receivalbes (dishonoured) Cash sales Sales return Total Bills Receivable Account Dr. Date Particulars Opening balance Debtors (Bills receivable ) (balancing figure) J.F. Amount Rs. 23,000 47,000 70,000 Date Particulars Cash (bills honoured) Bills receivable dishonoured Closing balance Cr. J.F. Amount Rs. 21,000 20,000 29,000 70,000 65,000 50,000 23,000 29,000 3,02,000 8,000 21,000 14,000 20,000 2,25,000 17,000
452 Total Debtors Account Dr. Date 2005 Apr. 01 Particulars J.F. Amount Rs. 65,000 20,000 3,53,000 Date 2005 Apr. 01 Particulars
Accountancy
Cr. J.F. Amount Rs. 3,02,000 8,000 17,000 14,000 47,000
Opening balance Bills receivable (dishonoured) Sales (balancing figure)
Cash received Discount allowed Sales return Bad debts Bills receivable (transferred from bills receivable account) Closing balance
50,000 4,38,000
4,38,000
(Working Notes) With the preparation of total debtors account and total bills receivable account, the net sales will be computed as follows : Net Sales = Cash Sales + Credit Sales Sales return = Rs. 2,25,000 + Rs. 3,53,000 Rs. 1,7000 = Rs. 5,61,000 Illustration 5 Mr. Om Prakash did not keep his books of accounts under double entry system. From the following information available from his records, prepare profit and loss account for the year ending on March 31, 2005 and a balance sheet as at that date, depreciating the washing equipment @ 10%. Summary of Cash Dr. Receipts Balance b/d Cash sales Received from debtors Amount Rs. 8,000 40,000 30,000 Payments Cash purchases Paid to creditors Sundry expenses Cartage Drawings Balance c/d Cr. Amount Rs. 14,000 20,000 6,000 2,000 8,000 28,000 78,000
78,000
Accounts from Incomplete Records Other information : March 31, 2004 March 31, 2004 Rs. 9,000 14,400 10,000 40,000 3,000 March 31, 2005 Rs. 12,000 6,800 16,000 40,000 3,000 1,400 1,700
453
Debtors Creditors Stock of materials Washing equipment Furniture Discount allowed during the year Discount received during the year Solution
Books of Om Prakash Trading and Profit and Loss Account for the year ended on March 31, 2005 Expenses/losses Opening stock Purchases Cartage Gross profit c/d Amount Rs. 10,000 28,100 2,000 50,300 90,400 Sundry expenses Discount allowed Depreciation Net profit (transfered to capital account) 6,000 1,400 4,000 40,600 52,000 Balance Sheet as at March 31, 2005 Liabilities Capital Add Profit Less Drawings Creditors 55,600 40,600 96,200 (8,000) Amount Rs. Assets Washing equipment 40,000 Less Depreciation (4,000) 88,200 6,800 Furniture Stock of materials Debtors Cash Amount Rs. 36,000 3,000 16,000 12,000 28,000 95,000 Gross profit b/d Discount received Revenues/gains Sales Closing stock Amount Rs. 74,400 16,000
90,400 50,300 1,700
52,000
95,000
454 Working Notes : Total Debtors Account Dr. Date Particulars Balance b/d Sales (credit) (balancing figure) J.F. Amount Rs. 9,000 34,400 Date Particulars Cash Discount allowed Balance c/d 43,400
Accountancy
Cr. J.F. Amount Rs. 30,000 1,400 12,000 43,400
Total Creditors Account Dr. Date Particulars Cash Discount received Balance c/d J.F. Amount Rs. 20,000 1,700 6,800 28,500 28,500 Date Particulars Balance b/d Purchases (credit) (balancing figure) Cr. J.F. Amount Rs. 14,400 14,100
Statement of Affairs as at March 31,2004 Liabilities Creditors Capital (balancing figure) Amount Rs. 14,400 55,600 Assets Washing equipment Furniture Stock of material Debtors Cash Amount Rs. 40,000 3,000 10,000 9,000 8,000 70,000
Mrs. Surabhi started business on Jan 01, 2005 with cash of Rs. 50,000, furniture of Rs. 10,000, goods of 2,000 and machinery worth 20,000. During the year she further introduced Rs. 20,000 in her business by opening a bank account. From the following information extracted from her books, you are required to prepare final accounts for the ended December 31, 2005.
455
Rs. Receipt from debtors 57,500 Cash sales 45,000 Cash purchases 25,000 Wages paid 5,000 Salaries to staff 17,500 Trade expanses 6,500 Electricity bill of factory 7,500 Drawings of Surabhi 3,000 Cash paid to creditors 42,000 Discount allowed 1,200 Discount received 3,000 Bad debts written-off 1,300 Cash balance at end of year 20,000 Mrs. Surabhi used goods worth 2,500 for private purposes, which is not recorded in the books. Charge depreciation on furniture 10% and machinery 20% p.a. on Dec. 31, 2005 her debtors were worth 70,000 and creditors Rs. 35,000, stock in trade was valued on that date at Rs. 25,000. Solution Books of Mrs. Surabhi Trading and Profit and Loss Account for the year ended December 31, 2005 Expenses/Losses Opening stock Purchases : Cash : Credit : Less Goods used for private use Wages Electricity bill of factory Gross profit c/d Salaries Trade expenses Discount allowed Bad debts Depreciation Furniture Machinery Net profit (transferred to capital account) Amount Rs. 20,000 25,000 80,0002 1,05,000 (2,500) Revenues/Gains Sales Credit Closing stock 1,02,500 5,000 7,500 65,000 2,00,000 17,500 6,500 1,200 1,300 1,000 4,000 Gross profit b/d Discount received 2,00,000 65,000 3,000 45,000 1,30,000 1,75,000 25,000 Amount Rs.
5,000 36,500 68,000 68,000
456 Balance Sheet of Mrs. Surabhi as at December 31, 2005 Liabilities Creditors Capital Add Net profit Add Additional capital 1,00,000 36,500 1,36,000 20,000 1,56,500 Amount Rs. 35,000 Assets Cash Bank Stock Debtors Furniture Less Depreciation Machinery Less Depreciation
Accountancy
Amount Rs. 20,000 13,000 25,000 70,000 10,000 (1,000) 20,000 (4,000) 9,000 16,000
Less Drawings Cash 36,000 Goods 2,500
(38,500)
1,18,000 1,53,000 1,53,000
Working Notes : (i) Total Debtors Account Dr. Date Particulars Balance b/d Sales (credit) (balancing figure) J.F. Amount Rs. NIL 1,30,000 Date Particulars Cash Discount allowed Bad debts Balance c/d 1,30,000 Cr. J.F. Amount Rs. 57,500 1,200 1,300 70,000 1,30,000
(ii) Total Creditors Account Dr. Date Particulars Cash Discount received Balance c/d J.F. Amount Rs. 42,000 3,000 35,000 80,000 80,000 Date Particulars Balance b/d Purchase credit (balancing figure) Cr. J.F. Amount Rs. NIL 80,000
Accounts from Incomplete Records (iii) Statement of Affair as on Jan. 01, 2005 Liabilities Amount Rs. 1,00,0003 Assets Cash Stock Furniture Machinery
457
Amounts Rs. 50,000 20,000 10,000 20,000 1,00,000
Capital (balancing figure)
1,00,000 (iv) Summary of Cash Dr. Receipts Balance b/d Capital(bank) Debtors Sales Amount Rs. 50,000 20,000 57,500 45,000 Payments Purchases Wages Salaries Trade expenses Electric bill Drawings Creditors Balance c/dcash Closing bank(balancing figure)
Cr. Amount Rs. 25,000 5,000 17,500 6,500 7,500 36,000 42,000 20,000 13,000 1,72,500
1,72,500
Test Your Understanding - II Write the correct word(s) : 1. 2. 3. 4. Credit sales can be ascertained as the balancing figure in the..........account. Excess of ..........over.........represents loss sustained during the period. To ascertain the profit, closing capital is to be adjusted by deducting ..........and adding .......... Incomplete records are generally used by ..........
Illustration 7 Mr. Bahadur does not know how to keep books of account. From his various records, the following particulars have been made available prepare the final Accounts, after providing for doubtful debts 5 per cent of debtors outstanding and depreciating the motor car @ 20 per cent.
458 (i) Balance Sheet as on April 1, 2005 Liabilities Capital Bills payable Creditors Amount Rs. 92,500 32,800 84,200 Assets Motor Car Stock Debtors Bills receivable Cash in hand
Accountancy
Amount Rs. 71,700 51,500 49,500 24,400 12,400 2,09,500
2,09,500 (ii) Cash Transactions during the year Particular Balance b/d Receipt from debtors Bills receivable Sales Amount Rs. 12,400 1,15,000 14,200 1,03,000 Particular Furniture Wages Purchases Drawings Bills payable General expenses Payment to creditors Balance c/d
Amount Rs. 30,000 9,400 40,500 24,000 30,700 20,700 80,800 8,500 2,44,600
2,44,600 (iii) Other Information Particulars Bills receivable drawn (received) Discount to customers Discount from suppliers Credit purchases Closing stock Closing balance of debtor Closing balance of bills payable Solution
Amount Rs. 6,300 2,300 700 29,600 41,700 55,000 10,200
Cash sales and cash purchases are available from cash transactions. Credit purchase is also given. But credit sale is to be ascertained by the opening debtors account. Though the credit purchase is available, the closing balance of creditors is not known. That is why the creditors account also has to be opened. As there are bills payable and bills receivable, those accounts also have to be opened, otherwise the creditors and debtors accounts will not be complete.
Accounts from Incomplete Records Books of Mr. Bahadur Trading and Profit and Loss Account for the year ended March 31, 2006 Expenses/Losses Opening stock purchases Cash Credit Wages Gross profit c/d General expenses Discount allowed Depreciation on motor car Reserve for bad debts Net profit Amount Rs. 51,500 40,500 29,600 Revenues/Gains Sales Cash Credit Closing stock
459
Amount Rs.
70,100 9,400 1,42,800 2,73,800 20,700 2,300 14,340 2,750 1,03,410 1,43,500
1,03,000 1,29,100 2,32,100 41,700 2,73,800
Gross profit b/d Discount received
1,42,800 700
1,43,500
Balance Sheet as March 31, 2006 Liabilities Capital Add Net profit Less Drawings Creditors Bills payable 92,500 1,03,410 1,95,910 (24,000) Amount Rs. Assets Motor car Less depreciation Furniture Stock Debtors Less Provision Bills receivable Cash 71,700 (14,340) Amount Rs. 57,360 30,000 41,700 52,250 16,500 8,500 2,06,310
1,71,910 24,200 10,200
55,000 (2,750)
2,06,310 Working Notes: (i) Total Bills Receivable Account Dr. Date Particulars Balance b/d Debtors (bills drawn) J.F. Amount Rs. 24,400 6,300 30,700 Date Particulars Cash (receipt) Balance c/d (balancing figure)
Cr. J.F. Amount Rs. 14,200 16,500 30,700
460 (ii) Total Debtors Account Dr. Date Particulars Balance b/d Credit sales (balancing figure) J.F. Amount Date Particulars Rs. 49,500 1,29,100 Cash (receipt) Bills (drawn) Discount allowed Balance c/d 1,78,600 (iii) Total Bills payable Account Dr. Date Particulars Cash (paid) Balance c/d J.F. Amount Rs. 30,700 10,200 Date Particulars Balance b/d Creditors (bills accepted) (balancing figure)
Accountancy
Cr. J.F. Amount Rs. 1,15,000 6,300 2,300 55,000 1,78,600
Cr. J.F. Amount Rs. 32,800
8,100 40,900
40,900 (iv) Total Creditors Account Dr. Date Particulars Cash Bills payable Discount received Balance c/d (balancing figure) J.F. Amount Date Particulars Rs. 80,800 8,100 700 24,200 1,13,800 Illustration 8 Balance b/d Credit purchases J.F.
Cr. Amount Rs. 84,200 29,600
1,13,800
Dinesh does not keep systematic books of account due to lack of Knowledge about the double entry system of accounting. He supplies you the following information : (i) Assets and Liabilities December 31, 2006 Rs. 45,000 24,000 4,500 Rs. 48,600 ? ?
Sundry debtors Sundry creditors Cash
Accounts from Incomplete Records Furniture and Fixtures Stock Motor Van 15,000 25,000 16,000 ? ? ?
461
(ii) Transaction during the year Cash received from debtors Discount allowed to debtors Bad debts written off Cash paid to creditors Discount allowed by creditors Sales return Purchases return Expenses paid Drawings Rent paid (iii) Other Information Outstanding expenses Rs. 1,200. Charge 10 per cent depreciation on furniture and 5 per cent on motor van.Dinesh informs that he sells goods at cost plus 40 per cent. A provision of 5 per cent on debtors is to be created. Prepare his trading and profit and loss account and balance sheet as on December 31, 2006 Books of Dinesh Trading and Profit and Loss Account for the year ending December 31, 2006 Dr. Expenses/Losses Opening stock Purchases Less Returns Gross profit c/d Amount Rs. 25,000 69,000 (2,000) 67,000 24,800 1,16,800 Discount allowed Bad debts Expenses paid 6,000 Add Outstanding expenses 1,200 Rent paid Depreciation on Furniture 1,500 Motor van 800 Provision for bad debts Net profit (transferred to capital account) 1,400 1,800 7,200 2,500 2,300 2,430 8,170 25,800 25,800 Gross profit b/d Discount received Revenues/Gains Sales Less Returns Closing stock 89,800 (3,000) Cr. Amount Rs. 86,800 30,000 1,16,800 24,800 1,000 Rs. 80,000 1,400 1,800 63,000 1,000 3,000 2,000 6,000 5,000 2,500
462 Balance Sheet as on December 31, 2006 Liabilities Outstanding expenses Creditors Capital Less Drawings Add Net profit Amount Rs. 1,200 27,000 81,500 (5,000) 76,500 8,170 Assets Cash Debtors 48,600 Less Provision (2,430) Closing stock Furniture & Fixtures 15,000 Less Depreciation (1,500) Motor van 16,000 Less Depreciation (800)
Accountancy
Amount Rs. 8,000 46,170 30,000 13,500 15,200 1,12,870
84,670
1,12,870 Working Notes : (i) Total Debtors Account Dr. Date Particulars Balance b/d Sales J.F. Amount Date Particulars Rs. 45,000 Cash received 89,800 Discount allowed Bad debts Sales return Balance c/d 1,34,800
Cr. J.F. Amount Rs. 80,000 1,400 1,800 3,000 48,600 1,34,800
(ii) Total Creditors Account Dr. Date Particulars Cash paid Discount received Purchases return Balance c/d J.F. Amount Rs. 63,000 1,000 2,000 27,000 93,000 Date Particulars Balance b/d Purchases Cr. J.F. Amount Rs. 24,000 69,000
93,000
(iii) Summary of Cash Dr. Receipts Balance b/d Debtors Amount Rs. 4,500 80,000 Payments Creditors Expenses paid Drawings Rent paid Balance c/d Cr. Amount Rs. 63,000 6,000 5,000 2,500 8,000 84,500
84,500
Accounts from Incomplete Records (iv) Statement of Affairs as on December 31, 2005 Liabilities Creditors Amount Rs. 24,000 Assets Debtors Cash Stock Furniture and Fixtures Motor Van 1,05,500 (v) Calculation of Closing Stock Total sales Less Sales return Net sales Total purchases Less Purchases returens Rate of gross profit on cost Suppose cost of goods sold is Then, Gross profit equals to Sales equals to Hence, Cost of goods sold will be Rs. 89,800 (3,000) 86,800 69,000 (2,000) (67,000) 40% 100 40 140
463
Amount Rs. 45,000 4,500 25,000 15,000 16,000 1,05,500
Capital in the beginning (Balancing figure)
81,500
Sale = Rs. 86,800 =
100 140
86, 800 = 62, 000
The amount of closing stock will be calculated as : Net Purchases Add Closing stock Cost of goods available for sale Less Cost of goods sold Closing stock Key Terms Introduced in the Chapter Incomplete records Statement of affairs
67,000 25,000 92,000 (62,000) 30,000
Summary with Reference to Learning Objectives 1. Incomplete records : Incomplete records refer to, lack of accounting records according to the double entry system. Degree of incompleteness may vary from highly disorganised records to organised, but still not complete. Difference between statement of affairs and balance sheet : A statement of affairs is a statement showing various assets and liabilities of a firm on date, with
2.
464
Accountancy difference between the two sides denoting capital. Since, the records are incomplete, the values of assets and liabilities are normally estimates based on information available. They are not the balances taken from properly maintained ledger like in case of balance sheet. The balance sheet is derived from a set of books maintained on the basis of double entry system. Computation of profit and loss from incomplete records : The statement of affairs is used to compute capital when a firm has a highly disorganised set of incomplete records. To the difference between the closing and opening capital, any sum withdrawn from business are added back and any additional capital introduced during the year are deducted to find out profit and loss made for the period. Preparation of profit and loss account and balance sheet : When cash summary of a firm is available along with information about personal accounts of creditors and customers, an attempt can be made to prepare the profit and loss account and balance sheet. Missing figures about purchases, sales, debtors and creditors can be obtained by preparing proforma accounts of debtors, creditors, bills receivable and bills payable using the logic of double entry system. Once a profit and loss account and balance sheet are prepared, it will be possible for the firm to start a complete accounting system for future. Questions for Practice Short Answers 1. 2. 3. 4. State the meaning of incomplete records? What are the possible reasons for keeping incomplete records? Distinguish between statement of affairs and balance sheet. What practical difficulties are encountered by a trader due to incompleteness of accounting records?
3.
4.
Long Answers 1. 2. 3. What is meant by a statement of affairs? How can the profit or loss of a trader be ascertained with the help of a statement of affairs? Is it possible to prepare the profit and loss account and the balance sheet from the incomplete book of accounts kept by a trader? Do you agree? Explain. Explain how the following may be ascertained from incomplete records: (a) Opening capital and closing capital (b) Credit sales and credit purchases (c) Payments to creditors and collection from debtors (d) Closing balance of cash.
Numerical Questions Ascertainment of profit or loss by statement of affairs method 1. Following information is given below prepare the statement of profit or loss: Rs. Capital at the end of the year 5,00,000 Capital in the beginning of the year 7,50,000
Accounts from Incomplete Records Drawings made during the period 3,75,000 Additional Capital introduced 50,000 [Ans : Profit : Rs. 75,000]. Manveer started his business on January 01, 2005 with a capital of Rs. 4,50,000. On December 31, 2005 his position was as under: Rs. Cash 99,000 Bills receivable 75,000 Plant 48,000 Land and Building 1,80,000 Furniture 50,000 He owned Rs. 45,000 from his friend Susheel on that date. He withdrew Rs. 8,000 per month for his household purposes. Ascertain his profit or loss for this year ended December 31, 2005 [Ans : Profit : Rs.53,000]. From the information given below ascertain the profit for the year : Rs. Capital at the beginning of the year 70,000 Additional capital introduced during the year 17,500 Stock 59,500 Sundry debtors 25,900 Business premises 8,600 Machinery 2,100 Sundry creditors 33,400 Drawings made during the year 26,400 [Ans : Profit : Rs.1,600]. From the following information, Calculate Capital at the beginning : Rs. Capital at the end of the year 4,00,000 Drawings made during the year 60,000 Fresh Capital introduce during the year 1,00,000 Profit of the current year 80,000 [Ans : Capital at th beginning of the year : Rs.2,60,000]. Following information is given below : calculate the closing capital Jan. 01, 2005 Dec. 31, 2005 Rs. Rs. Creditors 5,000 30,000 Bills payable 10,000 Loan 50,000 Bills receivable 30,000 50,000 Stock 5,000 30,000 Cash 2,000 20,000 [Ans : Closing capital : Rs.20,000]. Calculation of profit or loss and ascertainment of statement of affairs at the end of the year (Opening Balance is given) Mrs. Anu started firm with a capital of Rs. 4,00,000 on 1st July 2005. She borrowed from her friends a sum of Rs. 1,00,000 @ 10% per annum (interest
465
2.
3.
4.
5.
6.
466
Accountancy paid) for business and brought a further amount to capital Rs. 75,000 on Dec. 31, 2005, her position was : Rs. Cash 30,000 Stock 4,70,000 Debtors 3,50,000 Creditors 3,00,000 He withdrew Rs. 8,000 per month for the year. Calculate profit or loss for the year and show your working clearly. [Ans : Profit : Rs.23,000]. Mr. Arnav does not keep proper records of his business he provided following information, you are required to prepare a statement showing the profit or loss for the year. Rs. Capital at the beginning of the year 15,00,000 Bills receivable 60,000 Cash in hand 80,000 Furniture 9,00,000 Building 10,00,000 Creditors 6,00,000 Stock in trade 2,00,000 Further capital introduced 3,20,000 Drawings made during the period 80,000 [Ans : Loss : Rs. 1,00,000]. Ascertainment of statement of affairs at the beginning and at the end of the year and calculation of profit or loss. Mr. Akshat keeps his books on incomplete records following information is given below : April 01, 2004 March 31, 2005 Rs. Rs. Cash in hand 1,000 1,500 Cash at bank 15,000 10,000 Stock 1,00,000 95,000 Debtors 42,500 70,000 Business premises 75,000 1,35,000 Furniture 9,000 7,500 Creditors 66,000 87,000 Bills payable 44,000 58,000 During the year he withdrew Rs. 45,000 and introduced Rs. 25,000 as further capital in the business compute the profit or loss of the business. [Ans : Profit : Rs. 61,500]. Gopal does not keep proper books of account. Following information is given below: Jan. 01, 2005 Dec. 31, 2005 Rs. Rs. Cash in hand 18,000 12,000 Cash at bank 1,500 2,000
7.
8.
9.
Accounts from Incomplete Records Stock in trade 80,000 90,000 Sundry debtors 36,000 60,000 Sundry creditors 60,000 40,000 Loan 10,000 8,000 Office equipments 25,000 30,000 Land and Buildings 30,000 20,000 Furniture 10,000 10,000 During the year he introduced Rs. 20,000 and withdrew Rs. 12,000 from the business. Prepare the statement of profit or loss on the basis of given information [Ans : Profit : Rs. 53,500]. 10. Mr. Muneesh maintains his books of accounts from incomplete records. His books provide the information : Jan. 01, 2005 Dec. 31, 2005 Rs. Rs. Cash 1,200 1,600 Bills receivable 2,400 Debtors 16,800 27,200 Stock 22,400 24,400 Investment 8,000 Furniture 7,500 8,000 Creditors 14,000 15,200 He withdrew Rs. 300 per month for personal expenses. He sold his investment of Rs. 16,000 at 2% premium and introduced that amount into business. [Ans : Profit : Rs. 9,780]. 11. Mr. Girdhari Lal does not keep full double entry records. His balance as on January 01, 2006 is as. Liabilities Sundry creditors Bills payable Capital Amount Rs. 35,000 15,000 40,000 Assets Cash in hand Cash at bank Sundry debtors Stock Furniture Plant Amount Rs. 5,000 20,000 18,000 22,000 8,000 17,000 90,000
467
90,000
His position at the end of the year is : Rs. Cash in hand Stock Debtors Furniture 7,000 8,600 23,800 15,000
468
Accountancy Plant 20,350 Bills payable 20,200 Creditors 15,000 He withdrew Rs. 500 per month out of which to spent Rs. 1,500 for business purpose. Prepare the statement of profit or loss. [Ans : Profit : Rs. 4,050]. 12. Mr. Ashok does not keep his books properly. Following information is available from his books. Jan. 01, 2005 Dec. 31, 2005 Rs. Rs. Sundry creditors 45,000 93,000 Loan from wife 66,000 57,000 Sundry debtors 22,500 Land and Building 89,600 90,000 Cash in hand 7,500 8,700 Bank overdraft 25,000 Furniture 1,300 1,300 Stock 34,000 25,000 During the year Mr. Ashok sold his private car for Rs. 50,000 and invested this amount into the business. He withdrew from the business Rs. 1,500 per month upto July 31, 2005 and thereafter Rs. 4,500 per month as drawings. You are required to prepare the statement of profit or loss and statement of affair as on December 31, 2005. [Ans : Loss : Rs. 57,900]. 13. Krishna Kulkarni has not kept proper books of accounts prepare the statement of profit or loss for the year ending December 31, 2005 from the following information: Jan. 01, 2005 Dec. 31, 2005 (Rs.) (Rs.) Cash in hand 10,000 36,000 Debtors 20,000 80,000 Creditors 10,000 46,000 Bills receivable 20,000 24,000 Bills payable 4,000 42,000 Car 80,000 Stock 40,000 30,000 Furniture 8,000 48,000 Investment 40,000 50,000 Bank balance 1,00,000 90,000 The following adjustments were made : (a) Krishna withdrew cash Rs. 5,000 per month for private use. (b) Depreciation @ 5% on car and furniture @10% . (c) Outstanding Rent Rs. 6,000. (d) Fresh Capital introduced during the year Rs.30,000. [Ans : Profit : Rs. 1,41,200 ; Statement of affairs with adjusted : Rs. 4,29,200].
Accounts from Incomplete Records 14. M/s Saniya Sports Equipment does not keep proper records. From the following information find out profit or loss and also prepare balance sheet for the year ended December 31, 2005 Dec. 31, 2004 Dec. 31, 2005 Rs. Rs. Cash in hand 6,000 24,000 Bank overdraft 30,000 Stock 50,000 80,000 Sundry creditors 26,000 40,000 Sundry debtors 60,000 1,40,000 Bills payable 6,000 12,000 Furniture 40,000 60,000 Bills receivable 8,000 28,000 Machinery 50,000 1,00,000 Investment 30,000 80,000 Drawing Rs.10,000 p.m. for personal use, fresh capital introduce during the year Rs.2,00,000. A bad debts of Rs.2,000 and a provision of 5% is to be made on debtors. outstanding salary Rs.2,400, prepaid insurance Rs.700, depreciation charged on furniture and machine @ 10% p.a. [ Ans : Profit : Rs. 1,71,300 ; Statement of affairs with adjustment : Rs. 4,87,700]. Ascertainment of Missing Figures 15. From the following information calculate the amount to be paid to creditors: Rs. Sundry creditors as on March 31, 2005 1,80,425 Discount received 26,000 Discount allowed 24,000 Return outwards 37,200 Return inward 32,200 Bills accepted 1,99,000 Bills endorsed to creditors 26,000 Creditors as on April 01, 2006 2,09,050 Total purchases 8,97,000 Cash purchases 1,40,000 [Ans : Cash paid to creditors : Rs. 4,40,175]. 16. Find out the credit purchases from the following: Rs. Balance of creditors April 01, 2004 45,000 Balance of creditors March 31, 2005 36,000 Cash paid to creditors 1,80,000 Cheque issued to creditors 60,000 Cash purchases 75,000 Discount received from creditors 5,400 Discount allowed 5,000 Bills payable given to creditors 12,750 Return outwards 7,500 Bills payable dishonoured 3,000
469
470 Bills receivable endorsed to creditors Bills receivable endorsed to creditors dishonoured Return inwards [Ans : Credit purchases : Rs. 2, 56,350]. 17. From the following information calculate total purchases. Creditors Jan. 01, 2005 Creditors Dec. 31, 2005 Opening balance of Bills payable Closing balance of Bills payable Cash paid to creditors Bills discharged Cash purchases Return outwards [Ans : Total purchases : Rs. 3,30,500]. 18. The following information is given
Accountancy 4,500 1,800 3,700
Rs. 30,000 20,000 25,000 35,000 1,51,000 44,500 1,29,000 6,000
Rs. Opening creditors 60,000 Cash paid to creditors 30,000 Closing creditors 36,000 Returns Inward 13,000 Bill matured 27,000 Bill dishonoured 8,000 Purchases return 12,000 Discount allowed 5,000 Calculate credit purchases during the year [Ans : Credit purchases : Rs. 37,000]. 19. From the following, calculate the amount of bills accepted during the year. Rs. Bills payable as on April 01, 2005 1,80,000 Bills payable as on March 31, 2006 2,20,000 Bills payable dishonoured during the year 28,000 Bills payable honoured during the year 50,000 [Ans : Bills accepted : Rs. 1,18,000]. 20. Find out the amount of bills matured during the year on the basis of information given below ; Rs. Bills payable dishonoured 37,000 Closing balance of Bills payable 85,000 Opening balance of Bills payable 70,000 Bills payable accepted 90,000 Cheque dishonoured 23,000 [Ans : Bills matured : Rs. 38,000]. 21. Prepare the bills payable account from the following and find out missing figure if any :
Accounts from Incomplete Records Rs. 1,05,000 17,000 9,000 12,000 50,000 45,000 17,000 14,000 85,000 2,15,000
471
Bills accepted Discount received Purchases returns Return inwards Cash paid to accounts payable Bills receivable endorsed to creditor Bills dishonoured Bad debts Balance of accounts payable (closing) Credit purchases [Ans : Opening balance of creditors : Rs. 79,000]. 22. Calculate the amount of bills receivable during the year.
Opening balance of bills receivable Bill dishonoured Bills collected (honoured) Bills receivable endorsed to creditors Closing balance of bills receivable [Ans : Rs. 1,60,000]. 23. Calculate the amount of bills receivable dishonoured from the following information. Rs. Opening balance of bills receivable 1,20,000 Bills collected (honoured) 1,85,000 Bills receivable endorsed 22,800 Closing balance of bills receivable 50,700 Bills receivable received 1,50,000 [Ans : Rs. 11,500]. 24. From the details given below, find out the credit sales and total sales. Rs. Opening debtors 45,000 Closing debtors 56,000 Discount allowed 2,500 Sales returns 8,500 Irrecoverable amount 4,000 Bills receivables received 12,000 Bills receivable dishonoured 3,000 Cheque dishonoured 7,700 Cash sales 80,000 Cash received from debtors 2,30,000 Cheque received from debtors 25,000 [Ans : Total sales : Rs. 3,62,300]. 25. From the following information, prepare the bills receivable account and total debtors account for the year ended December 31, 2005.
Rs. 75,000 25,000 1,30,000 15,000 65,000
472
Accountancy Rs. Opening balance of debtors 1,80,000 Opening balance of bills receivable 55,000 Cash sales made during the year 95,000 Credit sales made during the year 14,50,000 Return inwards 78,000 Cash received from debtors 10,25,000 Discount allowed to debtors 55,000 Bills receivable endorsed to creditors 60,000 Cash received (bills matured) 80,500 Irrecoverable amount 10,000 Closing balance of bills receivable on Dec. 31, 2005 75,500 [Ans : Bills received : Rs. 1,61,000 ; Closing balance of debtors : Rs. 3,01,000]. 26. Prepare the suitable accounts and find out the missing figure if any. Rs. Opening balance of debtors 14,00,000 Opening balance of bills receivable 7,00,000 Closing balance of bills receivable 3,50,000 Cheque dishonoured 27,000 Cash received from debtors 10,75,000 Cheque received and deposited in the bank 8,25,000 Discount allowed 37,500 Irrecoverable amount 17,500 Returns inwards 28,000 Bills receivable received from customers 1,05,000 Bills receivable matured 2,80,000 Bills discounted 65,000 Bills endorsed to creditors 70,000 [Ans : Credit sales : Rs. 5,16,000]. 27. From the following information ascertain the opening balance of sundry debtors and closing balance of sundry creditors. Rs. Opening stock 30,000 Closing stock 25,000 Opening creditors 50,000 Closing debtors 75,000 Discount allowed by creditors 1,500 Discount allowed to customers 2,500 Cash paid to creditors 1,35,000 Bills payable accepted during the period 30,000 Bills receivable received during the period 75,000 Cash received from customers 2,20,000 Bills receivable dishonoured 3,500 Purchases 2,95,000
Accounts from Incomplete Records The rate of gross profit is 25% on selling price and out of the total sales Rs. 85,000 was for cash sales. ) 75 [Ans : Opening balance of debtors : Rs. 54,000 ; Closing balance of creditors: Rs. 1,78,500]. Mrs. Bhavana keeps his books by Single Entry System. Youre required to prepare final accounts of her business for the year ended December 31, 2005. Her records relating to cash receipts and cash payments for the above period showed the following particulars : Summary of Cash Dr. Receipts Opening balance of cash Further capital Received from debtors Amount Rs. 12,000 20,000 1,20,000 Payments Paid to creditors Business expenses Wage paid Bhavanas drawings Balance at bank on Dec. 31,2005 Cash in hand Cr. Amount Rs. 53,000 12,000 30,000 15,000 35,000 7,000 1,52,000 (Hint : Total sales = 4,00,000 = 3, 00, 000
100
473
28
1,52,000
The following information is also available : Jan. 01, 2005 Rs. Debtors Creditors Stock Plant Machinery Land & Building Investment 55,000 22,000 35,000 10,00,000 50,000 2,50,000 20,000 Dec. 31, 2005 Rs. 85,000 29,000 70,000 1,00,000 50,000 2,50,000 20,000
All her sales and purchases were on credit. Provide depreciation on plant and building by 10% and machinery by 5%, make a provision for bad debts by 5%. [Ans : Gross profit ; Rs. 95,000 ; Net profit : Rs. 41,250 ; Total of balance sheet : Rs. 5, 75,250].
474 Checklist to Test Your Understanding 1. Test Your Understanding - I 1. (a) 2. 2. (d) 3. (a) 4. (b)
Accountancy
Test Your Understanding - II 1. Total debtors 3. Fresh capital introduced, drawings 2. Opening capital, closing capital 4. Small traders
Applications of Computers in Accounting
12
LEARNING OBJECTIVES
After studying this chapter, you will be able to : state the meaning, elements and capabilities of computer system; explain the need for computers in accounting; describe the automation of accounting process; explain design of accounting reports from the accounting data; list the various Management Information System (MIS) reports and their uses; explain the data interface between information systems.
omputer technology and its usage have registered a significant development during the last three decades. Historically, computers have been used effectively in science and technology to solve the complex computational and logical problems. They have also been used for carrying out economic planning and forecasting processes. Recently, modern day computers have made their presence felt in business and industry. The most important impact of computers has been on the manner in which data is stored and processed within an organisation. Although manual data processing for Management Information System (MIS) has been quite common in the past, modern MIS would be nearly impossible without the use of computer systems. In this chapter we shall discuss the need for the use of computers in accounting, the nature of accounting information system and the types of accounting related MIS reports. 12.1 Meaning and Elements of Computer System A computer is an electronic device, which is capable of performing a variety of operations as directed by a set of instructions. This set of instructions is called a computer programme. A computer system is a combination of six elements: 12.1.1 Hardware Hardware of computer consists of physical components such as keyboard, mouse, monitor and processor. These are electronic and electromechanical components.
476
Accountancy
12.1.2 Software A set(s) of programmes, which is used to work with such hardware is called its software. A coded set of instructions stored in the form of circuits is called firmware. There are six types of software as follows: (a) Operating System : An integrated set of specialised programmes that are meant to manage the resources of a computer and also facilitate its operation is called operating system. It creates a necessary interface that is an interactive link, between the user and the computer hardware. (b) Utility Programmes : These are a set of computer programmes, which are designed to perform certain supporting operations: such as programme to format a disk, duplicate a disk, physically reorganise stored data and programmes. (c) Application Software : These are user oriented programmes designed and developed for performing certain specified tasks: such as payroll accounting, inventory accounting, financial accounting, etc. (d) Language Processors : These are the software, which check for language syntax and eventually translate (or interpret) the source programme (that is a programme written in a computer language) into machine language (that is the language which the computer understands). (e) System Software : These are a set of programmes which control such internal functions as reading data from input devices, transmitting processed data to output devices and also checking the system to ensure that its components are functioning properly. (f) Connectivity Software : These are a set of programmes which create and control a connection between a computer and a server so that the computer is able to communicate and share the resources of server and other connected computers. 12.1.3 People People interacting with the computers are also called live-ware of the computer system. They constitute the most important part of the computer system : System Analysts are the people who design data processing systems. Programmers are the people who write programmes to implement the data processing system design. Operators are the people who participate in operating the computers. People who respond to the procedures instituted for executing the computer programmes are also a part of live-ware. 12.1.4 Procedures The procedure means a series of operations in a certain order or manner to achieve desired results. There are three types of procedures which constitute
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part of computer system: hardware-oriented, software-oriented and internal procedure. Hardwareoriented procedure provide details about components and their method of operation. The software-oriented procedure provides a set of instructions required for using the software of computer system. Internal procedure is instituted to ensure smooth flow of data to computers by sequencing the operation of each sub-system of overall computer system. 12.1.5 Data These are facts and may consist of numbers, text, etc. These are gathered and entered into a computer system. The computer system in turn stores, retrieves, classifies, organises and synthesises the data to produce information according to a pre-determined set of instructions. The data is, therefore, processed and organised to create information that is relevant and can be used for decision-making. 12.1.6 Connectivity It is being acknowledged as a sixth element of the computer system. The manner in which a particular computer system is connected to others say through telephone lines, microwave transmission, satellite link, etc. is the element of connectivity. 12.2 Capabilities of Computer System A computer system possesses some characteristics, which, in comparison to human beings, turn out to be its capabilities. These are as follows ; Speed : It refers to the amount of time computers takes in accomplishing a task or completes an operation. Computers require far less time than human beings in performing a task. Normally, human beings take into account a second or minute as unit of time. But computers have such a fast operating capability that the relevant unit of time is fraction of a second. Most of the modern computers are capable of performing a 100 million calculations per second and that is why the industry has developed Million Instructions per Second (MIPS) as the criterion to classify different computers according to speed. Accuracy : It refers to the degree of exactness with which computations are made and operations are performed. One might spend years in detecting errors in computer calculations or updating a wrong record. Most of the errors in Computer Based Information System(CBIS) occur because of bad programming, erroneous data and deviation from procedures. These errors are caused by human beings. Errors attributable to hardware are normally detected and corrected by the computer system itself. The computers rarely commit errors and perform all types of complex operations accurately.
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Reliability : It refers to the ability with which the computers remain functional to serve the user. Computers systems are well-adapted to performing repetitive operations. They are immune to tiredness, boredom or fatigue. Therefore, they are more reliable than human beings. Yet there can be failures of computer system due to internal and external reasons. Any failure of the computer in a highly automated industry is unacceptable. Therefore, the companies in such situations provide for back-up facility to swiftly take over operations without loss of time. Versatility : It refers to the ability of computers to perform a variety of tasks: simple as well as complex. Computers are usually versatile unless designed for a specific application. A general purpose computer is capable of being used in any area of application: business, industry, scientific, statistical, technological, communications and so on. A general purpose computer, when installed in an organisation, can take over the jobs of several specialists because of its versatility. computer system when installed can take over the jobs of all these specialists because of being highly versatile. This further ensures fuller utilisation of its capability. Storage : It refers to the amount of data a computer system can store and access. The computer systems, besides having instant access to data, have huge capacity to store such data in a very small physical space. A CD-ROM with 4.7 of diameter is capable of storing a large number of books, each containing thousands of pages and yet leave enough space for storing more such material. A typical mainframe computer system is capable of storing and providing online billion of characters and thousands of graphic images. It is clear from the above discussion that computer capabilities outperform the human capabilities. As a result, a computer, when used properly, will improve the efficiency of an organisation. 12.3 Limitations of a Computer System In spite of possessing all the above capabilities, computers suffer from the following limitations : Lack of Commonsense : Computer systems as on date do not possess any common sense because no full-proof algorithm has been designed to programme common sense. Since computers work according to a stored programme(s), they simply lack of commonsense. Zero IQ : Computers are dumb devices with zero Intelligence Quotient (IQ). They cannot visualise and think what exactly to do under a particular situation, unless they have been programmed to tackle that situation. Computers must be directed to perform each and every action, however, minute it may be. Lack of Decision-making : Decision-making is a complex process involving information, knowledge, intelligence, wisdom and ability to judge. Computers cannot take decisions on their own because they do not possess all the essentials of decision-making. They can be programmed to take such decisions,
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which are purely procedure-oriented. If a computer has not been programmed for a particular decision situation, it will not take decision due to lack of wisdom and evaluating faculties. Human beings, on the other hand, possess this great power of decision-making. 12.4 Components of Computer The functional components of computer system consist of Input Unit, Central Processing System and Output Unit. The way these components are embedded in a computer may differ from one architectural design to another, yet all of them constitute the essential building blocks of a computer system. Diagrammatically, these components may be presented as follows:
Fig. 12.1 : Block diagram of main components of computer
12.4.1 Input Unit It controls various input devices which are used for entering data into the computer system. Keyboard and mouse, for instance, are the most commonly used input device. Other such devices are magnetic tape, magnetic disk, light pen, optical scanner, Magnetic Ink Character (MICR) Recognition, Optical Character Recognition (OCR), bar code reader, smart card reader, etc. Besides, there are other devices which respond to voice and physical touch. A menu layout is displayed on a touch sensitive screen. Whenever user touches a menu item on touch-screen, the computer senses which particular menu item has been touched and accordingly performs the operation associated with that menu item. Such touch screens have been installed at major railway stations for obtaining the online information about arrival and departure of trains.
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12.4.2 Central Processing Unit (CPU) This is the main part of computer hardware that actually processes data, according to the instructions it receives. It controls the flow of data by directing the data to enter the system, places the data into its memory, retrieves the same as and when needed and directs the output of data according to a set of stored instructions. It has three main units as described below : (a) Arithmetic and Logic Unit (ALU) : It is responsible for performing all the arithmetic computations such as addition, subtraction, division, multiplication and exponentiation. In addition to this, it also performs logical operations involving comparisons among variables and data items. (b) Memory Unit : In this unit, data is stored before being actually processed. The data so stored is accessed and processed according to a set of instructions which are also stored in the memory of the computer well before such data is transmitted to the memory from input devices. (c) Control Unit : This unit is entrusted with the responsibility of controlling and coordinating the activities of all other units of the computer system. Specifically, it performs the following functions : Read instructions out of memory unit; Decode such instructions; Set up the routing of data, through internal circuitry/wiring, to the desired place at right time; and Determine the input device from where to get next instruction after the instruction in hand has been executed. 12.4.3 Output Unit After processing the data, the information produced according to a set of instruction need to be made available to user in a human readable and understandable form. A computer system, therefore, needs an output device to communicate such information to the user. Essentially, the output device is assigned the task of translating the processed data from machine coded form to a human readable form. The commonly used output devices include: external devices like monitor also called Visual Display Unit (VDU), printer, graphic plotter for producing graphs, technical drawings and charts and internal devices like magnetic storage devices. Recently, a new device being perfected is the speech synthesiser, which is capable of producing verbal output that sounds like human speech. Information: 12.5 Evolution of Computerised Accounting Manual system of accounting has been traditionally the most popular method of keeping the records of financial transactions of an organisation.
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Conventionally, the bookkeeper (or accountant) used to maintain books of accounts such as cash book, journal and ledger so as to prepare a summary of transactions and final accounts manually. The technological innovations led to the development of various machines capable of performing a variety of accounting functions. For example, the popular billing machine was designed to typewrite description of the transaction along with names, addresses of customers. This machine was capable of computing discounts; adding the net total and posting the requisite data to the relevant accounts. The customers bill was generated automatically once the operator has entered the necessary information. These machines combined the features of a typewriter and various kinds of calculators. With substantial increase in the number of transactions, the technology advanced further. With exponential increase in speed, storage and processing capacity, newer versions of these machines evolved. A computer to which they were connected operated these machines. The success of a growing organisation with complexity of transactions tended to depend on resource optimisation, quick decision-making and control. As a result, the maintenance of accounting data on a real-time (or spontaneous) basis became almost essential. Such a system of maintaining accounting records became convenient with the computerised accounting system. 12.5.1 Information and Decisions An organisation is a collection of interdependent decision-making units that exist to pursue organisational objectives. As a system, every organisation accepts inputs and transforms them into outputs. All organisational systems pursue certain objectives through a process of resource allocation, which is accomplished through the process of managerial decision-making. Information facilitates decisions regarding allocation of resources and thereby assists an organisation in pursuit of its objectives. Therefore, the information is the most important organisational resource. Every medium sized to large organisation has a well-established information system that is meant to generate the information required for decision-making. With the increasing use of information systems in organisations, Transaction Processing Systems (TPS) have started playing a vital role in supporting business operations. Every transaction processing system has three components: Input, Processing and Output. Since Information Technology (IT) follows the GIGO principle (Garbage in-Garbage out), it is necessary that input to the IT-based information system is accurate, complete and authorised. This is achieved by automating the input. A large number of devices are now available to automate the input process for a TPS.
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12.5.2 Transaction Processing System Transaction Processing Systems (TPS) are among the earliest computerised systems catering to the requirements of large business enterprises. The purpose of a typical TPS is to record, process, validate and store transactions that occur in the various functional areas of a business for subsequent retrieval and usage. A transaction could be internal or external. When a department requisitions material supplies from stores, an internal transaction is said to have occurred. However, when the purchase department purchases materials from a supplier, an external transaction takes place. The scope of financial accounting is confined to external transactions only. TPS involves following steps in processing a transaction. In order to understand these steps, let us consider a case wherein a customer withdraws money using the Automated Teller Machine (ATM) facility, as described below : Data Entry : The action data must be entered into the system before it is processed. There are a number of input devices to enter data: Keyboard, mouse, etc. For example, a bank customer operates an ATM facility to make a withdrawal. The actions taken by the customer constitute data, which is processed after validation by the computerised personal banking system. Data Validation : It ensures the accuracy and reliability of input data by comparing the same with some predetermined standards or known data. This validation is performed by error detection and error correction procedures. The control mechanism, wherein actual input is compared with the standard, is meant to detect errors while error correction procedures make suggestions for entering correct data input. The Personal Identification Number (PIN) of the customer is validated with the known data. If it is incorrect, a suggestion is made to indicate that the PIN is invalid. After validating the PIN (which is also a part of processing by TPS), the amount of withdrawal being made by the customer is also checked to ensure that it does not exceed a certain limit. Processing and Revalidation : The processing of data, representing actions of the ATM user, occurs almost instantaneously in case of the Online Transaction Processing (OLTP) system provided a valid data representing actions of the user has been encountered. This is called check input validity. Revalidation occurs to ensure that the transaction in terms of delivery of money by ATM has been completed. This is called check output validity. Storage : Processed actions, as described above, culminate into financial transaction data, which describe the withdrawal of money by a particular customer, are stored in transaction database of Computerised personal banking system. This implies that only valid transactions are stored in the database. Information : The stored data is processed using the query facility to produce desired information. A database supported by DBMS is bound to have standard Structured Query Language (SQL) support.
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Reporting : Finally, reports can be prepared on the basis of the required information content according to decision usefulness of report. A simple computerised accounting system accepts the complete transaction data as input; stores such data in computer storage media (say hard disk) and retrieves the accounting data for processing as and when required for generating an accounting report, as output. The input-process-output diagram shown below indicates as to how accounting software translates data into information. This processing of data is accomplished either through Batch Processing or Real-time Processing. Batch Processing applies to large and voluminous data that is accumulated offline from various units: branches or departments. The entire accumulated data is processed in one shot to generate the desired reports according to decision requirement. Real-Time Processing provides online outcome in the form of information and reports without time lag between the transaction and its processing. The accounting reports are generated by query language popularly called Structured Query Language (SQL). It allows the user to retrieve report relevant information that is capable of being laid out in pre-designed accounting report. Accounting software may be structured with such components as provide for storage and processing of data pertaining to purchase, sales, inventory, payroll and other financial transactions (refer figure 12.2).
Do It Yourself Go to a departmental store and an ATM of a Bank and identify the accounting process there. Observe the Transaction Processing System (TPS).
12.6 Features of Computerised Accounting System Accounting software is used to implement a computerised accounting system. The computer accounting system is based on the concept of databases. It does away with the concept of creating and maintaining journals, ledger, etc. which are essential while working with manual accounting system. Typicaly computerised accounting system offers the following features : Online input and storage of accounting data. Printout of purchase and sales invoices. Logical scheme for codification of accounts and transactions. Every account and transaction is assigned a unique code. Grouping of accounts is done from the very beginning. Instant reports for management, for example Aging Statement, Stock Statement, Trial Balance, Trading and Profit and Loss Account, Balance Sheet, Stock Valuation, Value Added Tax (VAT), Returns, Payroll Report, etc.
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Fig. 12.2 : Components of computerised accounting software system
Test Your Understanding Fill in the correct words : 1. The user oriented programmes designed and developed for performing certain specific tasks are called as ........... 2. Language syntax is checked by software called as ........... 3. The people who write programmes to implement the data processing system design are called as ........... 4. ...........is the brain of the computer. 5. ...........and ...........are two of the important requirements of an accounting report. 6. An example of responsibility report is ...........
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12.7 Management Information System and Accounting Information System In order to remain competitive, organisations depend heavily on Information Systems. Management Information System (MIS) is used the most common form of information system. A management information system (MIS) is a system that provides the information necessary to take decisions and manage an organisation effectively. MIS is supportive of the institutions long-term strategic goals and objectives. MIS is viewed and used at many levels by management: Operational, Tactical and Strategic. Accounting Information System (AIS) identifies, collects, processes, and communicates economic information about an entity to a wide variety of users. Such information is organised in a manner that correct decisions can be based on it. Every accounting system is essentially a part of the Accounting Information System (AIS) which, in turn is a part of the broader system, viz. the organisations Management Information System. The following diagram shows the relationship of the Accounting System with the other functional management information systems.
Fig. 12.3 : Relationship of the accounting system with other functional management information system
The diagram shown above entails the four widely recognised functional areas of management. An organisation operates in a given environment surrounded by the suppliers and customers. The informational needs emerge from the business processes stratified into functional areas where accounting is one of them. The accounting information system (AIS) receives and provides information to the various sub-systems of the institutional/ integrated MIS.
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Accounting Information System (AIS) is a collection of resources (people and equipment), designed to transform financial and other data into information. This information is communicated to a wide variety of decisionmakers. Accepting information systems performs this transformation whether they are essentially manual systems or thoroughly computerised. Conventionally, MIS was also perceived as day-to-day financial accounting systems that are used to ensure basic control is maintained over financial record keeping activities, but now it is widely recognised as a broader concept and accounting system is a sub component. The reports generated by the accounting system are disseminated to the various users internal and external to the organisation. The external parties include the proprietors, investors, creditors, financiers, government suppliers and vendors and the society at large. The reports used by these parties are more of routine nature. However, the internal parties the employees, managers, etc. use the accounting information for decisionmaking and control.
Do It Yourself Go to a shoe manufacturing unit/chemical-processing unit. Observe the production process and the various selling activities. Visualise the need for a MIS. Identify the various sub components of the MIS.
12.7.1 Designing of Accounting Reports Data when processed becomes information. When the related information is summarised to meet a particular need, it is called as a report. The content and design of the report is expected to vary depending upon the level to which it is submitted and decision to made on the basis of the report. A report must be effective and efficient to the user and should substantiate the decisionmaking process. Akin to any report, every accounting report must be able to fulfil the following criterion : (a) Relevance (b) Timeliness (c) Accuracy (d) Completeness (e) Summarisation The accounting reports generated by the accounting software may be either routine reports or on the specific requirements of the user. For example, the ledger is a routine report while a report on supplies of a particular item by a given party is an on-demand report. However, from a broader perspective, the accounting related MIS reports may be of following reports :
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(a) Summary Reports : Summarises all activities of the organisation and present in the form of summary report. Profit and Loss account and Balance Sheet. (b) Demand Reports : This report will be prepared only when the management requests them, e.g. Bad Debts Report for a given product, Stock Valuation Report. (c) Customer/Supplier Reports : According to the specifications of the management it will be prepared. For example, Top 10 Customers report, Interest on Customer Account/Invoices, Statement of Account, Customer Reminder Letters Outstanding/Open Delivery Order, Purchase Analysis, Vendor Analysis report. (d) Exception Reports : According to the conditions or exceptions the report is prepared. For example, Inventory Report in short supplies, Stock Status Query, Over stocked Status, etc. (e) Responsibility Reports : The MIS structure specifies the premises of management responsibilities. For example, the report on Cash Position, to be submitted by the head of Finance and Accounts department. The various steps involved in designing accounting reports from accounting data are as follows : (1) Definition of objectives : the objectives of the report must be clearly defined, who are the users of the report and the decision to be taken on the basis of report. (2) Structure of the report : the information to be contained therein and the style of presentation. (3) Querying with the database : the accounting information queries must be clearly defined and the methodology to be adopted while interacting with the database. (4) Finalising the report. 12.7.2 Data Interface between the Information System Accounting information system is important component of the organisational MIS in an organisation. It receives information and provides information to the other functional MIS. The following examples illustrate the relationship and data interface between the various sub-components of MIS. I Accounting Information System, Manufacturing Information System and Human Resource Information System Look at figure 12.4. It depicts the relationship between the three information systems, viz. manufacturing information system, accounting information system and the human resource information system.
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The manufacturing department receives the list of workers from the Human Resource (HR) department. It sends the details of production achieved by the workers on the basis of which the HR department to the finance and accounts (F&A) department to pay the wages. The details of the wages paid and statutory dues are also send by the F & A department to the production department also to the HR department to monitor the performance of workers. The HR department communicates to the other departments about the good/bad performance on the basis decision on various operational matters may be taken.
Fig. 12.4 : Relationship between AIS, manufacturing information system and human resource information system
II AIS and Marketing Information System Consider the business process in the Marketing and Sales department involving the following activities : inquiry contact creation entry of orders dispatch of goods billing to customers The accounting sub-systems transaction cycle include the processing of sales orders, credit authorisation, custody of the goods, inventory position, shipping information, receivables, etc. It also keeps a track of the customer accounts, e.g. Aging Report, which should be generated by the system.
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III AIS and Manufacturing Information System Similarly, business process in the production department may involve the following activities : preparation of plans and schedules issue of material requisition forms and job cards issue of inventory issue of orders for procurement of raw materials handling of vendors invoices payments to vendors The accounting sub-system transaction cycle would therefore include the processing of purchase orders, advance to suppliers/vendors, inventory status updation, account payable, etc. All of this information has to share with the other MIS in the organisation. Hence, the computerised accounting system as a sub component of the accounting information system transforms the financial data into meaningful information and communicates the information to the decision-makers. The report demanded may be routine or specific ones.
Key Terms Introduced in the Chapter Operating system Analysts Utility programme Data Application software Management information system Transactions processing system Accounting information system Data interface Report
Summary with Reference to Learning Objectives 1 2 Meaning of a Computer : Computer is an electronic device capable of performing variety of operations as desired by a set of instructions. Elements of a Computer System : Hardware Software People Procedure Data Connectivity Capabilities of Computer : Speed Accuracy Reliability Versatility Storage
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Accountancy Need of Computers in Accounting : The advent of globalisation has resulted in the rise in business operations. Consequently, every medium and large sized organisations require well-established information system in order to generate information required for decision-making and achieving the organisational objectives. This made information technology to play vital role in supporting business operations. MIS and Accounting Information System : A management information system provides information necessary to take decisions and manage an organisation effectively. Accounting information system on the other hand identifies, collects, processes and communicates economic information about an entity to a wide variety of users. Accounting Reports : Information supplied to meet a particular need is called report. An accounting report must fulfil the following conditions : Relevance Timeliness Accuracy Completeness Summarisation Questions for Practice Short Answers 1. 2. 3. 4. 5. 6. 7. 8. 9. State the different elements of a computer system. List the distinctive advantages of a computer system over a manual system. Draw block diagram showing the main components of a computer. Give three examples of a transaction processing system. State the relationship between information and decision. What is Accounting Information System? State the various essential features of an accounting report. Name three components of a Transaction Processing System. Give example of the relationship between a Human Resource Information System and MIS.
Long Answers 1. An organisation is a collection of interdependent decision-making units that exists to pursue organisational objectives. In the light of this statement, explain the relationship between information and decisions. Also explain the role of Transaction Processing System in facilitating the decision-making process in business organisations. Explain, using examples, the relationship between the organisational MIS and the other functional information system in an organisation. Describe how AIS receives and provides information to other functional MIS. An accounting report is essential a report which must be able to fulfil certain basic criteria Explain? List the various types of accounting reports. Describe the various elements of a computer system and explain the distinctive features of a computer system and manual system.
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3. 4.
Applications of Computers in Accounting Checklist to Test Your Understanding 1. 2. 3. 4. 5. 6. Application software Language processor Programmer CPU Timliness, Relevance Cash position, Management responsibility
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Computerised Accounting System
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n chapter 12, you have learnt about the need for use of computers in accounting the nature and use of accounting information system. In this chapter, we shall discuss the nature of computrised accounting system, its advantages, limitations and sourcing. 13.1 Concept of Computerised Accounting System A computerised accounting system is an accounting information system that processes the financial transactions and events as per Generally Accepted Accounting Principles (GAAP) to produce reports as per user requirements. Every accounting system, manual or computerised, has two aspects. First, it has to work under a set of well-defined concepts called accounting principles. Another, that there is a user -defined framework for maintenance of records and generation of reports. In a computerised accounting system, the framework of storage and processing of data is called operating environment that consists of hardware as well as software in which the accounting system, works. The type of the accounting system used determines the operating environment. Both hardware and software are interdependent. The type of software determines the structure of the hardware. Further, the selection of hardware is dependent upon various factors such as the number of users, level of secrecy and the nature of various activities of functional departments in an organisation.
LEARNING OBJECTIVES
After studying this chapter, you will be able to : define a computerised accounting system; distinguish between a manual and computerised accounting system; highlight the advantages and limitations of computerised accounting system; and state the sourcing of a computerised accounting system.
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Take the case of a club, for example, where the number of transactions and their variety is relatively small, a Personal Computer with standardised software may be sufficient. However, for a large business organisation with a number of geographically scattered factories and offices, more powerful computer systems supported by sophisticated networks are required to handle the voluminous data and the complex reporting requirements. In order to handle such requirements, multi-user operating systems such as UNIX, Linux, etc. are used. Modern computerised accounting systems are based on the concept of database. A database is implemented using a database management system, which is define by a set of computer programmes (or software) that manage and organise data effectively and provide access to the stored data by the application programmes. The accounting database is well-organised with active interface that uses accounting application programs and reporting system. Every computerised accounting system has two basic requirements; Accounting Framework : It consists a set of principles, coding and grouping structure of accounting. Operating Procedure : It is a well-defined operating procedure blended suitably with the operating environment of the organisation. The use of computers in any database oriented application has four basic requirements as mentioned below ; Front-end Interface : It is an interactive link or a dialog between the user and database-oriented software through which the user communicates to the back-end database. For example, a transaction relating to purchase of goods may be dealt with the accounting system through a purchase voucher, which appears on the computers monitor of data entry operator and when entered into the system is stored in the database. The same data may be queried through reporting system say purchase analysis software programme. Back-end Database : It is the data storage system that is hidden from the user and responds to the requirement of the user to the extent the user is authorised to access. Data Processing : It is a sequence of actions that are taken to transform the data into decision useful information. Reporting System: It is an integrated set of objects that constitute the report. The computerised accounting is also one of the database-oriented applications wherein the transaction data is stored in well-organised database. The user operates on such database using the required and desired interface and also takes the desired reports by suitable transformations of stored data into information. Therefore, the fundamentals of computerised accounting
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embrace all the basic requirements of any database-oriented application in computers. Accordingly, the computerised accounting system has the above four additional requirements. 13.2 Comparison between Manual and Computerised Accounting Accounting, by definition, is the process of identifying, recording, classifying and summarising financial transactions to produce the financial reports for their ultimate analysis. Let us understand these activities in the context of manual and computerised accounting system. Identifying : The identification of transactions, based on application of accounting principles is, common to both manual and computerised accounting system. Recording : The recording of financial transactions, in manual accounting system is through books of original entries while the data content of such transactions is stored in a well-designed accounting database in computerised accounting system. Classification : In a manual accounting system, transactions recorded in the books of original entry are further classified by posting into ledger accounts. This results in transaction data duplicity. In computerised accounting, no such data duplication is made to cause classification of transactions. In order to produce ledger accounts, the stored transaction data is processed to appear as classified so that the same is presented in the form of a report. Different forms of the same transaction data are made available for being presented in various reports. Summarising : The transactions are summarised to produce trial balance in manual accounting system by ascertaining the balances of various accounts. As a result, preparation of ledger accounts becomes a prerequisite for preparing the trial balance. However, in computerised accounting, the originally stored transactions data are processed to churn out the list of balances of various accounts to be finally shown in the trial balance report. The generation of ledger accounts is not a necessary condition for producing trial balance in a computerised accounting system. Adjusting Entries : In a manual accounting system, these entries are made to adhere to the principle of cost matching revenue. These entries are recorded to match the expenses of the accounting period with the revenues generated by them. Some other adjusting entries may be made as part of errors and rectification. However, in computerised accounting, Journal vouchers are prepared and stored to follow the principle of cost matching revenue, but there is nothing like passing adjusting entries for errors and rectification, except for rectifying an error of principle by having recorded a wrong voucher such as using payment voucher for a receipt transaction.
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Financial Statements : In a manual system of accounting, the preparation of financial statements pre-supposes the availability of trial balance. However, in computerised accounting, there is no such requirement. The generation of financial statements is independent of producing the trial balance because such statements can be prepared by direct processing of originally stored transaction data.
Closing the Books : After the preparation of financial reports, the accountants make preparations for the next accounting period. This is achieved by posting of closing and reversing journal entries. In computerised accounting, there is year-end processing to create and store opening balances of accounts in database. It may be observed that conceptually, the accounting process is identical regardless of the technology used. 13.3 Advantages of Computerised Accounting System Computerised accounting offers several advantages vis-a-vis manual accounting, these are summarised as follows ; Speed : Accounting data is processed faster by using a computerised accounting system than it is achieved through manual efforts. This is because computers require far less time than human beings in performing a task. Accuracy : The possibility of error is eliminated in a computerised accounting system because the primary accounting data is entered once for all the subsequent usage and processes in preparing the accounting reports. Normally, accounting errors in a manual accounting system occur because of repeated posting of same set of original data by several times while preparing different types of accounting reports. Reliability : The computer system is well-adapted to performing repetitive operations. They are immune to tiredness, boredom or fatigue. As a result, computers are highly reliable compared to human beings. Since computerised accounting system relies heavily on computers, they are relatively more reliable than manual accounting systems. Up-to-Date Information : The accounting records, in a computerised accounting system are updated automatically as and when accounting data is entered and stored. Therefore, latest information pertaining to accounts get reflected when accounting reports are produced and printed. For example, when accounting data pertaining to a transaction regarding cash purchase of goods is entered and stored, the cash account, purchase account and also the final accounts (trading and profit and loss account) reflect the impact immediately.
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Real Time User Interface : Most of the automated accounting systems are inter-linked through a network of computers. This facilitates the availability of information to various users at the same time on a real time basis (that is spontaneously). Automated Document Production : Most of the computerised accounting systems have standardised, user defined format of accounting reports that are generated automatically. The accounting reports such as Cash book, Trial balance, Statement of accounts are obtained just by click of a mouse in a computerised accounting environment. Scalability : In a computerised accounting system, the requirement of additional manpower is confined to data entry operators for storing additional vouchers. The additional cost of processing additional transactions is almost negligible. As a result the computerised accounting systems are highly scalable. Legibility : The data displayed on computer monitor is legible. This is because the characters (alphabets, numerals, etc.) are type written using standard fonts. This helps in avoiding errors caused by untidy written figures in a manual accounting system. Efficiency : The computer based accounting systems ensure better use of resources and time. This brings about efficiency in generating decisions, useful informations and reports. Quality Reports : The inbuilt checks and untouchable features of data handling facilitate hygienic and true accounting reports that are highly objective and can be relied upon. MIS Reports : The computerised accounting system facilitates the real time production of management infor mation reports, which will help management to monitor and control the business effectively. Debtors analysis would indicate the possibilities of defaults (or bad debts) and also concentration of debt and its impact on the balance sheet. For example, if the company has a policy of restricting the credit sales by a fixed amount to a given party, the information is available on the computer system immediately when every voucher is entered through the data entry form. However, it takes time when it comes to a manual accounting system. Besides, the results may not be accurate. Storage and Retrieval : The computerised accounting system allows the users to store data in a manner that does not require a large amount of physical space. This is because the accounting data is stored in hard-disks, CD-ROMs, floppies that occupy a fraction of physical space compared to books of accounts in the form of ledger, journal and other accounting registers. Besides, the system permits fast and accurate retrieval of data and information.
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Motivation and Employees Interest : The computer system requires a specialised training of staff, which makes them feel more valued. This motivates them to develop interest in the job. However, it may also cause resistance when we switch over from a manual system to a computer system.
Test Your Understanding 1. 2. 3. 4. The framework of storage and processing of data is called as ........ Database is implemented using ........ A sequence of actions taken to transform the data into decision useful information is called....... An appropriate accounting software for a small business organisation having only one user and single office location would be ........
13.4 Limitations of Computerised Accounting System The main limitations emerge out of the environment in which the computerised accounting system is made to operate. These limitations are as given below ; Cost of Training : The sophisticated computerised accounting packages generally require specialised staff personnel. As a result, a huge training costs are incurred to understand the use of hardware and software on a continuous basis because newer types of hardware and software are acquired to ensure efficient and effective use of computerised accounting systems. Staff Opposition : Whenever the accounting system is computerised, there is a significant degree of resistance from the existing accounting staff, partly because of the fear that they shall be made redundant and largely because of the perception that they shall be less important to the organisation. Disruption : The accounting processes suffer a significant loss of work time when an organisation switches over to the computerised accounting system. This is due to changes in the working environment that requires accounting staff to adapt to new systems and procedures. System Failure : The danger of the system crashing due to hardware failures and the subsequent loss of work is a serious limitation of computerised accounting system. However, providing for back-up arrangements can obviate this limitation. Software damage and failure may occur due to attacks by viruses. This is of particular relevance to accounting systems that extensively use Internet facility for their online operations. No fullproof solutions are available as of now to tackle the menace of attacks on software by viruses.
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Inability to Check Unanticipated Errors : Since the computers lack capability to judge, they cannot detect unanticipated errors as human beings commit. This is because the software to detect and check errors is a set of programmes for known and anticipated errors. Breaches of Security : Computer related crimes are difficult to detect as any alteration of data may go unnoticed. The alteration of records in a manual accounting system is easily detected by first sight. Fraud and embezzlement are usually committed on a computerised accounting system by alteration of data or programmes. Hacking of passwords or user rights may change the accounting records. This is achieved by tapping telecommunications lines, wire-tapping or decoding of programmes. Also, the people responsible for tampering of data cannot be located which in a manual system is relatively easier to detect. Ill-effects on Health : The extensive use of computers systems may lead to development of various health problems: bad backs, eyestrain, muscular pains, etc. This affects adversely the working efficiency of accounting staff on one hand and increased medical expenditure on such staff on the other.
Do It Yourself Visit a commercial organisation where the accounting is performed manually. Observe the various accounting activities. Now list the advantages, which would have accrued, had the accounting being performed through computers.
13.5 Sourcing of Accounting Software Accounting software is an integral part of the computerised accounting system. An important factor to be considered before acquiring accounting software is the accounting expertise of people responsible in organisation for accounting work. People, not computers, are responsible for accounting. The need for accounting software arises in two situations : (a) when the computerised accounting system is implemented to replace the manual system or (b) when the current computerised system needs to be replaced with a new one in view of changing needs.
Computerised Accounting System Box 1 Accounting Software Variety of accounting software is available in the market. The most popular software used in India are Tally and Ex. The basic features of all accounting software are same on a global basis. The legal reporting requirements in a given country and the business needs affect the software contents. The other popular softwares are Sage, Wings 2000, Best Books, Cash Manager, and Ace Pays, etc.
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13.5.1 Accounting Packages Every Computerised Accounting System is implemented to perform the accounting activity (recording and storing of accounting data) and generate reports as per the requirements of the user. From this perspective. The accounting packages are classified into the following categories : (a) Ready to use (b) Customised (c) Tailored Each of these categories offers distinctive features. However, the choice of the accounting software would depend upon the suitability to the organisation especially in terms of accounting needs. 13.5.2 Ready-to-Use Ready-to-Use accounting software is suited to organisations running small/ conventional business where the frequency or volume of accounting transactions is very low. This is because the cost of installation is generally low and number of users is limited. Ready-to-use software is relatively easier to learn and people (accountant) adaptability is very high. This also implies that level of secrecy is relatively low and the software is prone to data frauds. The training needs are simple and sometimes the vendor (supplier of software) offers the training on the software free. However, these software offer little scope of linking to other information systems. 13.5.3 Customised Accounting software may be customised to meet the special requirement of the user. Standardised accounting software available in the market may not suit or fulfil the user requirements. For example, standardised accounting software may contain the sales voucher and inventory status as separate options. However, when the user requires that inventory status to be updated immediately upon entry of sales voucher and report be printed, the software needs to be customised.
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Customised software is suited large and medium businesses and can be linked to the other information systems. The cost of installation and maintenance is relatively high because the high cost is to be paid to the vendor for customisation. The customisation includes modification and addition to the software contents, provision for the specified number of users and their authentication, etc. Secrecy of data and software can be better maintained in customised software. Since the need to train the software users is important, the training costs are therefore high. 13.5.4 Tailored The accounting software is generally tailored in large business organisations with multi users and geographically scattered locations. These software requires specialised training to the users. The tailored software is designed to meet the specific requirements of the users and form an important part of the organisational MIS. The secrecy and authenticity checks are robust in such softwares and they offer high flexibility in terms of number of users. To summarise, the following table represents the comparison between the various categories of accounting software :
Basis Nature of business Cost of installation and maintenance Expected Level of secrecy (Software and Data) Number of users and their interface Linkage to other information system Adaptability Training requirements Ready to use Small, conventional business Low Low Limited Restricted High Low Customised Large, medium business Relatively high Relatively high As per specifications yes Relatively high Medium Tailored Large, typical business High Relatively high Unlimited Yes Specific High
Do It Yourself Visit a branch of a commercial bank and a big shopping complex. See the various activities performed there and analyse the accounting needs. Identify an appropriate type of accounting package for performing the accounting activities.
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13.6 Generic Considerations before Sourcing an Accounting Software The following factors are usually taken in considerations before sourcing an accounting software. 13.6.1 Flexibility An important consideration before sourcing an accounting software is flexibility, viz. data entry and the availability and design of various reports expected from it. Also, it should offer some flexibility between the users of the software, the switch over between the accountants (users), operating systems and the hardware. The user should be able to run the software on variety of platforms and machines, e.g. Windows 98/2000, Linux, etc. 13.6.2 Cost of Installation and Maintenance The choice of the software obviously requires consideration of organisation ability to afford the hardware and software. A simple guideline to take such a decision is the cost benefit analysis of the available options and the financing opportunities available to the firm. Some times, certain software which appears cheap to buy, involve heavy maintenance and alteration costs, e.g. cost of addition of modules, training of staff, updating of versions, data failure/restoring costs. Conversely, the accounting software which appear initially expensive to buyers, may require least maintenance and free upgrading and negligible alteration costs. 13.6.3 Size of Organisation The size of organisation and the volume of business transactions do affect the software choices. Small organisations, e.g. in non-profit organisations, where the number of accounting transactions is not so large, may opt for a simple, single user operated software. While, a large organisation may require sophisticated software to meet the multi-user requirements, geographically scattered and connected through complex networks. 13.6.4 Ease of Adaptation and Training needs Some accounting software is user friendly requiring a simple training to the users. However, some other complex software packages linked to other information systems require intensive training on a continuous basis. The software must be capable of attracting users and, if its requires simple training, should be able to motivate its potential users. 13.6.5 Utilities/MIS Reports The MIS reports and the degree to which they are used in the organisation also determine the acquisition of software. For example, software that requires
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simply producing the final accounts or cash flow/ratio analysis may be readyto-use software. However, the software, which is expected to produce cost records needs to be customised as per user requirements. 13.6.6 Expected Level of Secrecy (Software and Data) Another consideration before buying accounting software is the security features, which prevent unauthorised personnel from accessing and/or manipulating data in the accounting system. In tailored software for large businesses, the user rights may be restricted to purchase vouchers for the purchase department, sales vouchers to the billing accountants and petty cash module access with the cashier. The operating system also matters. Unix environment allows multi-users compared to Windows. In Unix, the user cannot make the computer system functional unless the user clicks with a password, which is not a restriction in Windows. 13.6.7 Exporting/Importing Data Facility The transfer of database to other systems or software is sometimes expected from the accounting software. Organisations may need to transfer information directly from the ledger into spreadsheet software such as Lotus or Excel for more flexible reporting. The software should allow the hygienic, untouched data transfer. Accounting software may be required to be linked to MIS software in the organisation. In some ready to use accounting softwares, the exporting, importing facility is available but is limited to MS Office modules only, e.g. MS Word, MS Excel, etc. However, tailored softwares are designed in manner that they can interact and share information with the various sub components of the organisational MIS. 13.6.8 Vendors Reputation and Capability Another important consideration is the reputation and capability of about the vendor. This depends upon how long has he been the vendor is in business of software development, whether there are other users of the software and extent of the availability of support mechanisms outside the premises of the vendor.
Key Terms Introduced in the Chapter Computerised Accounting System Generally Accepted Accounting Principles Accounting Software Mannual Accounting System Operating Environment Accounting Packages
Computerised Accounting System Summary with Reference to Learning Objectives 1 Computerised Accounting System : A computerised accounting system is an accounting information system that processes the financial transactions and events to produce reports as per user requirements. It is based on the concept of database and has two basic requirements: (a) Accounting framework and (b) Operating Procedure. Advantages of Computerised Accounting System : Speed Accuracy Reliability Up-to-date Scalability Legibility Efficiency Quality Report MIS Reports Real time user interface Storage and Retrieval Motivation and Employees interest Automated document production Limitations of Computerised Accounting System : Cost of training Staff Opposition Disruption System failure Breaches of security Ill-effects on health Inability to check unanticipated errors Categories of Accounting Packages : Ready-to-Use Customised Tailored Questions for Practice Short Answers 1. 2. 3. 4. 5. State the four basic requirements of a database applications. Name the various categories of accounting package. Give examples of two types of operating systems. List the various advantages of computerised accounting systems. Give two examples each of the organisations where ready-to-use, customised, and tailored accounting packages respectively suitable to perform the accounting activity. Distinguish between a ready-to-use and tailored accounting software. Define a computerised accounting system. Distinguish between a manual and computerised accounting system. Discuss the advantages of computerised accounting system over the manual accounting system. Describe the various types of accounting software along with their advantages and limitations. Accounting software is an integral part of the computerised accounting system Explain. Briefly list the generic considerations before sourcing an accounting software. Computerised Accounting Systems are best form of accounting system. Do you agree? Comment. Checklist to Test Your Understanding 1. Operating environment 2. DBMS 3. Data Processing 4. Ready to use
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Long Answers
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Structuring Database for Accounting
14
LEARNING OBJECTIVES
After studying this chapter, you will be able to : identify the resources of MS ACCESS as DBMS; explain basic concepts of database system; express accounting reality in the context of Entity Relationship (ER) Model; transform ER presentation of accounting reality into database; developdatabase design for computerised system using Relational Data Model; formulate basic queries for retrieving accounting data and information.
n the earlier chapters, you have already learnt that accounting of transactions are documented with vouchers. Let us consider a few accounting transaction to understand as to how these vouchers are used. On April 01, 05 M/s Kshipra Computers commences business with initial capital of Rs.5,00,000, which is deposited into bank. Recall the journal entry that is recorded using manual accounting system. This journal entry has data contents that are filled-up using a simple transaction voucher, which is prepared by Smith and authorised by Aditya.
M/s Kshipra Computers TRANSACTION VOUCHER Voucher No: 01 Date: Apr. 01, 2005
Debit Account: 642001 Bank Account Credit Account: 110001 Capital Account Amount in Rs. : 5,00,000 Narration: Commenced business by depositing initial capital into bank Authorised By: Aditya Prepared By Smith
Fig. 14.1 : A sample transaction voucher to document simple transactions involving one debit and one credit
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The same transaction can also be documented using a credit voucher that is capable of recording multiple credits against one debit, as shown below:
CREDIT VOUCHER Voucher No: 01 Debit Account: 642001 Bank Account Credit Accounts S.No 1 Code 110001 Name of Account Capital Account Amount 5,00,000 Narration Commenced Business Date: April 01,2005 M/s Kshipra Computers
Total Amount Authorised By: Aditya
5,00,000 Prepared By Smith
Fig. 14.2 : A sample voucher for multiple credits against one debit
Now consider the following transaction : On April 03-20005 M/s Kshipra Computers bought goods costing Rs.50,000 from M/s R.S. and Sons, paying Rs.2,000 as cartage to M/s Saini Transports. This transaction involves multiple debits of accounts with one account being credited. The debit voucher that is used to document this transaction appears as follows :
DEBIT VOUCHER Voucher No: 05 Credit Account: 642001 Bank Account Debit Accounts S.No 1 2. Code 711001 711003 Name of Account Purchases Carriage Inwards Total Amount Authorised By: Aditya Amount 50,000 2,000 52,000 Prepared By Smith Narration Purchases from R.S & Sons Paid to M/s Saini Transports Date: April 03, 2005 M/s Kshipra Computers
Fig. 14.3 : A sample vouchers for multiple debits against one credit
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The process of computerised accounting involves identifying, storing and retrieving the data content of an accounting transaction. This requires a mechanism to store such data content of vouchers in a manner that allows its easy and convenient retrieval as and when required. This is achieved by designing suitable database for accounting. Such a database consists of inter-related data tables that are structured in a manner that ensures data consistency and integrity. In this chapter we shall discuss the basic concepts of database system of accounting. 14.1 Data Processing Cycle In order to understand the dynamics of database design, let us understand the data processing cycle in the context of accounting. Data processing involves the technique of collecting, sorting, relating, interpreting and computing data items in such a manner as to provide meaningful and useful information for decisionmaking. The necessary steps involved in data processing cycle are data capturing, inputing, processing and generating information available to the user. Data processing cycle, when thought of in the context of accounting, requires a series of steps that have been described below briefly : (i) Source Documents : The first step is to capture accounting data from transaction(s) so as to prepare a document, called voucher (as already stated earlier), that expresses and documents an accounting transaction. The relevant accounting data is set out in the voucher, the sample of which is shown in figures 14.1 to 14.3. These documents are so designed as to permit the recording of accounting data in a systematic manner. (ii) Input of Data : The accounting data contained in vouchers is to be entered in a computers storage device. This is achieved by using a pre-designed Data Entry Form. This data entry form is designed in a manner that it is similar to physical voucher document. The data entry form is designed using software and it is made to appear on the computer monitor so that the data is entered. (iii) Data Storage : A suitable data storage structure is required to provide for a blank data record as shown below:
Code Name Type
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The above blank record that is used for storing the input of data pertaining code of account, name of account and the category type to which it belongs is shown below as :
Code 11001 711001 Name Capital Account Purchases Account Type 4 1
Hypothetically, the category type 4 above refers to Liabilities and the category type 1 indicates Expenses. The data storage structures (also called data tables) are created as a part of structuring database for accounting. (iv) Manipulation of Data : The stored data is manipulated for necessary transformation to generate final reports. Such transformed data may be stored separately and subsequently used for generating final reports. Alternatively, the transformed data can be directly presented in the form of a report. (v) Output of Data : The accounting reports such as ledger, trial balance, etc. are obtained in a pre-designed format by accessing the transformed data. Now that you have understood the way data content is stored in structured manner, we shall discuss how the data structures are designed in consonance with the data content that emerges from accounting transactions. 14.2 Designing Database for Accounting Both computerised and computer-based AIS require a definite data structure for storing the accounting data. As already mentioned, the databases are used for storing accounting data. The process of designing database (for accounting) begins with a reality (or accounting reality) that is expressed using elements of a conceptual data model. The process of designing a database for accounting is best described through a flow chart (Figure : 14.4). Reality : It refers to some aspect of real world situation, for which database is to be designed. In the context of accounting, it is accounting reality that is to be expressed with complete description. ER Design : This is a formal blue print, with a pictorial presentation, in which Entity Relationship (ER) Model concepts are used to represent description of reality. Relational Data Model : It is representational data model through which ER design is transformed into inter-related data tables along with the restriction in the form of rules that are specified to ensure the consistency and integrity of stored data.
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Fig. 14.4 : Flow Chart depicting the process of designing a database for accounting
Normalisation : This is process of refining a database design (that consists of inter-related data tables) through which the possibility of duplicate or redundant data items is reduced or eliminated. Refinement : This is the outcome of the process of normalisation as mentioned above. The final database design is arrived at after the process of normalisation is completed. 14.3 Entity Relationship (ER) Model It is a popular conceptual data model, which is mostly used in database-oriented applications. The major elements of ER Model are entities, attributes, identifiers and relationships that are used to express a reality for which a database is to be designed. The model is best depicted with the help of ER symbols, the list and description of which is shown in figure 14.5. While preparing an ER Diagram, the following symbols are used to represent different types of entities, attributes, identifiers and relationships :
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The elements of ER model that are meant to describe and display the reality are discussed in the context of an accounting reality given below :
Meaning Entity Type as Rectangular Box Symbols
Weak entity Type as double lined Rectangular Box
Relationship Type as diamond shaped Box
Identifying relationship Type as double lined diamond shaped Box
Attribute names enclosed in ovals and attached to their entity type by straight lines.
Key attribute names enclosed in ovals and attached to their entity type by straight lines.
Multi-valued attributes by double ovals.
Derived attributes by dashed line Ovals
Total participation of E2 in R E1 R E2
Cardinality Ratio 1 : N for E1 : E2 in R
E1
E2
Fig. 14.5 : Symbols used for constructing an ER diagram
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Using a hypothetical example of accounting system of an organisation, following statements of reality becomes the starting point of discussion in describing the ER Model concepts. Example Reality : Accounting Transactions of an organisation are documented using a voucher. Each vouchers is assigned a serial number, which begins with 01 indicating first vouchers of the accounting period. There is only one simple transaction voucher used for documenting the transactions (See Figure : 14.1). Each voucher documents date of transaction, account name along with its account code for debit as well as credit entry. Each voucher indicates the amount and narration with respect to accounting transaction. Support documents such as bills, receipts, contracts, etc. also may be attached to an accounting voucher. Each Voucher is prepared by a particular Employee and authorised by another employee. There is an exhaustive list of Accounts with respect to which the transactions are documented. Each Account carries a unique numeric code with its width equal to six digits. Each Account is classified as belonging to one of the Accounts Types: Expenditure, Income, Assets and Liabilities. Fig. 14.6 : Example reality on accounting system
14.3.1 Entities Anything in the real world with independent existence is called entity such as an object with physical existence (e.g. car, person, house) or conceptual existence (e.g. a company, job, university course, account, voucher). In the context of above accounting reality, there exist five entities: Accounts, Vouchers, Employees, AccountsType and SupportDocuments. The accounting data is captured through these entities. 14.3.2 Attributes Attributes are some properties of interest (or characteristics) that further describe the entity such as height, weight and date of birth in case of a person and code and name in case of accounts. An entity has a value for each of its attributes, which is the data stored in the database. There are several types of attributes of an entity that have been described as follows : (i) Composite vs. Simple (or atomic) attributes : The composite attributes can be divided into smaller sub-parts to represent some more basic
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(ii)
(iii)
(iv)
(v)
attributes with independent meanings. The simple attributes cannot be further sub-divided. For example, Name of a person that is normally subdivided into First Name, Middle Name and Last Name is a composite attribute. Height of a person is a simple attribute as it is devoid of further sub-division. Single-valued vs. Multi-valued Attributes : An attribute with a single value for an entity is single-valued as opposed to those which multiple values. For example, height of a person is single-valued attribute while qualifications of that person are a multi-valued attribute. Stored vs. Derived Attributes : Two or more attributes may be related in such a way that one or more becomes basic while the other becomes dependent on that basic attribute. For example, date of birth of a person is a stored attribute while age of that person is derived attribute. Null Values : Absence of a data item is represented by a special value called null value. There are three situation which may require the use of null values When a particular attribute does not apply to an entity; Value of an attribute is unknown, although it exists; Unknown because it does not exist. Complex Attributes : The composite and multi-valued attributes may be nested (or grouped) to constitute complex ones. The parenthesis () are used for showing grouping of components of composite attributes. The braces {} are used for showing the multi-valued attributes In the context of the example on accounting reality, the following attributes specific to each entity types have been stated below as :
Entity Type List of Attributes CatId, Category Code, Name, Type EmpId, Fname, Minit, Lname, SuperId Vno, Date, Debit, Credit, Amount, Narration, AuthBy, PrepBy Sno, dDate, Name
AccountsType Accounts Employees Vouchers SupportDocuments
AccountsType is a conceptual entity that is meant to express the various categories of accounts in accounting system. The CatId is an attribute of AccountType entity, the value of which is used to identify the category of accounts. Accounts is a conceptual entity that is meant to express various accounts, each one of which belongs to a particular category of accounts in Accounts Type Entity. Every account is assigned a unique code by which it is
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identified. The Name attribute specifies the name of account and Type refers to the type of account (or category of account) as mentioned above. Employees is a physical entity that is meant to express the various employees who are in some way connected with the accounting system. The EmpId (Employee ID) attribute is meant to identify an Employee; Fname, Minit and Lname are respectively the first, middle and Last names of an employee; and SuperId refers to EmpId of the immediate boss of an employee. Vouchers is an entity that expresses various transactions vouchers. It is attributes together provide the structure of transaction data. SupportDocuments is an entity, which expresses various support documents that may be attached with a particular voucher of a transaction. Sno attribute of this entity specifies the serial number of support document attached, dDate specifies the document date and Name specifies the name of document that is attached with the voucher. (vi) Entity Types and Entity Sets : An Entity Type is defined as a collection of entities, which share a common definition in terms of their attributes. Each entity type is assigned a name for its subsequent identification. The attributes of entity type are used to describe it in the database. The values of attributes of an entity belonging to entity type are known as Entity Instance. For example, (110001 Capital Account 4) is an entity instance of an account whose code = 110001, Name = Capital Account and Type = 4. An Entity Set is a collection of all entity instances of a particular entity type. An Entity Type is described by a set of attributes called schema. The set of entities pertaining to a particular entity type share the same set of attributes. The collection of entities of a particular entity type is grouped into entity set, called the extension of the entity type. For example,
Entity Type : Accounts Intension (or structure) of entity type Code Name Type
Entity Set: Collection of entity instances of an entity type Accounts Extension (or instances) of entity type 110001 221019 221020 Capital Account Jain & Co. Jayram Bros. Fig. 14.7 : Examples on entity type and entity set 4 4 4
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(vii) Value Sets of Attributes : Each simple attribute is associated with a value set, which specifies the set of possible values that may be assigned to a particular attribute. For example, the value set of voucher date is all those dates that fall within the dates valid for a given accounting period. Similarly, if accounting reality states that each code of an account is numeric with its width equal to six digits, its possible value set shall be 000001 to 999999. The value set as described above is called domain of values. 14.3.3 Identifier (or Key Attributes of an Entity Type) Almost every entity type has one of its attributes, which contains unique values for identifying the entity instance. For example, RollNo as attribute of Entity type students has unique values through which a student instance can be identified. Similarly, Code is a key attribute of entity type Accounts because its data values are required to be unique.
Fig. 14.8 : Diagrammatic presentation of an entity type accounts with code as key attribute
Some times two or more such attribute together (called composite key) may constitute such distinct values. For example, the student entity type that has entity instances across several sections of a class in a school shall require a composite key of attributes (Sections and RollNo). But in any case, it is a constraint that does not allow any two-entity instances from having the same value for the key attribute at a point of time. Some entities may have more than one Key attribute. The entity types, which do not have a key attribute at all are called weak entities. 14.3.4 Relationships Relationship among two or more entity types represents an interaction among their respective entities. Whenever an attribute (say Debit) of one entity type (say vouchers) refers to another entity type (say Accounts), there exists a relationship between these entities (Vouchers and Account).
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For example, vouchers and accounts are related in two ways: vouchers contain debit account(s) and vouchers contain credit account(s). In ER Model, these references are represented as explicit relationships rather than attributes. (i) Types of relationships : Whenever entities from different entity types are related to one another in a particular manner, they constitute a relationship type. The relationship prepared by between the two entity types vouchers and employees associates each voucher with the employee who prepared it. Similarly, the relationship authorised by between the two entity types vouchers and employees associates each voucher with the employee who authorises it. Each relationship instance of prepared by (short named as PrepBy) associates one voucher entity with one employee entity. In ER diagrams, relationship types are displayed as diamond shaped boxes, connected by straight lines to the rectangular boxes, which represent the participating entity types.
Fig. 14.9 : Diagram showing binary relationship between vouchers and employees
(ii) Degree : The degree of a relationship type is the number of participating entity types. A relationship type of degree two is called binary and that of degree three is called ternary. A VOUCHER (entity), Authorised_by (relationship) and EMPLOYEES (entity) together signify a binary relationship. A SUPPLIER (entity) SUPPLY (relationship) PARTS (entity) to PROJECT (entity) signify a ternary relationship because three entities, namely supplier, parts and projects are participating in supply relationship in any transaction.
Fig. 14.10 : Diagram showing ternary relationship between suppliers, parts and projects
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(iii) Role Names : Each entity type that participates in a relationship type plays a particular role in the relationship. The role name signifies the role that a participating entity of an entity type plays in each relationship instance. In PREPARED BY relationship type, EMPLOYEE plays the role of document creator and voucher plays the role of document created. (iv) Structural Constraints : The reality may impose certain constraints (or restrictions) that may limit the possible combinations of entities, participating in a given relationship set. These are of two types : Cardinality Ratio and participation. Cardinality Ratios for binary relationship specifies the number of relationship instances that an entity can participate in. In PREP_BY binary relationship type, VOUCHER:EMPLOYEE is of cardinality ratio N:1 implying thereby that a set of vouchers can be created by a particular employee. The possible cardinality ratios are one to one (1:1),one to many(1:N),many to one(N:1), and many to many(N:M). Participation constraint specifies as to whether the existence of an entity type depends on its being related to another entity via a relationship type or not. The two types of such constraints are: total and partial. Whenever semantics of reality require that every entity of an entity type must relate to another entity type, such an entity can exist only if it participates in that specific relationship. Such a participation is called total participation. For example, the participation of ACCOUNTS in CLASSIFY relationship is total participation. This is because every account must refer to at least one of the accounts type or a category of accounts. This participation is also called existence dependency. Since every employee is not expected to prepare at least one of the vouchers, the participation of employee in PREPARED BY relationship is partial, implying that some of employee entities are related to the voucher entity via PREPARED BY relationship. In ER diagram, total participation is displayed as double line connecting the participating entity type to the relationship, whereas partial participation is represented by a single line. 14.3.5 Weak Entity Types Entity Types, which do not have identifier (or key attributes) of their own are, called weak entity types. Such entity types are identified by being related to specific entities from another entity type in combination with some of their attribute values. These other entity types are called identifying or owner entity type. Accordingly, the relationship type that relates a weak entity type to its owner is called identifying relationship of the weak entity.
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A weak entity type always has a total participation constraint (existence dependency) with respect to its identifying relationship because it cannot be identified without its owner entity. For example, a voucher may be accompanied by a set of support documents such as bills, issued by other parties to the transaction, details of which need be stored. Such SUPPORT DOCUMENT entity type which is used to keep track of support documents attached to each voucher via 1:N relationship, is a weak entity. This is because they are identified as distinct entities only after determining the particular voucher. A weak entity type normally has a partial key, which is a set of attribute that can uniquely identify weak entities that are related to the same owner entity. Assuming that two support documents of a voucher do not have the same document Id, the said Id can be a good partial key. Otherwise a composite attribute of all the weak entitys attributes will be the partial key.
Initial Conceptual Design for an Example Reality : Using a hypothetical example of an accounting system, as already stated above in Fig: 14.6, following initial design based on ER Model concepts becomes the starting point of illustration. Conceptual Design : According to the requirements listed in example reality, there exist five entities: Vouchers, Accounts, Employees, SupportDocuments and AccountsType An entity type Vouchers with attributes Voucher No, Serial No, Voucher Date, Debit Account, Credit Account, Amount, Narration, authorised by, prepared by are used for storing accounting data of a transactions. Debit and amount are multi-valued attributes for debit vouchers and credit and amount are multi-valued for credit vouchers. Voucher No and Sno together constitutes the only key attribute of entity type vouchers. Therefore, it is specified to be unique. A Conceptual entity type Accounts with attributes Code, Name and Type is used for keeping and maintaining a record of all accounts. Both Code and Name qualify to be the key attributes because of being specified as unique. An Entity Type Employee with attributes Employee ID (EmpId), Name, Address, Phone, ID of immediate boss (SuperId) is used to maintain records of employees in the organisation. Name is a composite attribute with its simple attributes as: First Name (Fname), Middle Initial (Minit) and Last Name (Lname). The EmpId, specified to be unique, is the key attribute. SuperId indicates the EmpId of the controlling officer, the immediate boss. An entity type, Accounts Type with attributes CatId and Category is used to maintain records of various categories of accounts so that each of the accounts as stored in accounts entity are able to find their suitable place in financial accounting reports: profit and loss account and also the balance sheet. An entity type called Support with attributes Sno. and Name is used to maintain records of all the support documents, which are annexed to the accounting voucher.
Fig. 14.11 : Details of initial conceptual design based on example reality
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14.3.6 ER Presentation of Accounting Reality The example reality shown at Figure: 14.11 can be shown below diagrammatically by using the ER notations.:
Fig. 14.12 : ER Schema diagram for accounting database
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Fig.14.16 : Diagrammatic presentation of an entity type accounts with code as key attribute
14.4 Database Technology It refers to a set of techniques that are used to design a database. These techniques use certain concepts, which are crucial to the creation of structure and development of the design. These concepts are: Reality, data, database, information, DBMS and database system. A brief description of these concepts is given below: (a) Reality : It implies some aspect of the real world. It consists of an organisation, its different components and the environment in which the organisation exists and operates. Any organisation includes people, facilities and other resources that are organised to achieve certain goals. Each organisation operates within an environment. While operating, the organisation interacts, influences and gets influenced by the environment.
An organisation may be viewed as a system consisting of several components called its sub-systems. Each of these sub-systems follows certain procedures and continuously interacts with each other and their external environment to accomplish the goals of organisation. During the course of their interaction, events take place, which take the shape of data items. These sub-systems communicate continuously with AIS to provide data and seek information. A part of AIS is Financial Accounting System, which is designed for processing accounting transactions. For example,a firm uses a voucher to document an accounting transaction. The contents of voucher consist of accounting data, which need be stored in an organised manner.
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This continuous interaction results in real world transactions. These transactions are analysed with a view to identify the components called data items. A data item is the smallest named unit of data in an information system. In a transaction, the names of accounts (or their accounting codes), date of transaction, amount, etc. is all data items. (b) Data : Data are known facts that can be recorded and which have implicit meaning. Data represent facts concerning people, places, objects, entities, events or even concepts. Data can be quantitative and qualitative or they can be financial and non-financial in character. Consider the following transaction : April 01, 2005 Commenced business with Cash Rs. 5,00,000. This transaction, before being recorded through a Transaction Voucher, as shown in figure 14.1, need be split up into its data contents as 01, 01-Apr05, 642001, Bank Account, 110001,Capital Account, Rs.5,00,000. Data are not useful for decision-making unless they are processed to suit to the requirements of decision-making situation. (c) Database : The data, after being collected, has to be stored so that different people can use them. This requires the creation of a database. A database is a shared collection of interrelated data tables, files or structures, which are designed to meet the varied informational needs of an organisation (See Example database in figure 14.19. It has two important properties (or characteristics): one it is integrated and second it is shared. Integrated property implies that distinct data tables have been logically organised. The purpose is to reduce or eliminate redundancy (or duplicity) and also to facilitate better data access. The shared property means that all those who are authorised to use data/information have access to relevant data. Thus, a database is a collection of related data that represents some aspect of the real world (called mini-world or Reality). Accordingly, accounting database is a collection of related accounting data to represent some aspect of an accounting information system. Database is designed, built and populated (or loaded) with data for a specific purpose. (d) Information : refers to data that have been processed and organised in a form, which is suitable for decision-making. The raw data when processed in accordance with decision usefulness of a decision-maker becomes information. In other words, information is a data that have been processed and refined and then presented in a format that is convenient for decisionmaking or other organisational activities.
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Fig. 14.17 : The diagram showing the transaction data processing and information levels
However, information may be viewed as data at one level. But when it is processed keeping in view the requirements of decision situation, it becomes information at another level. For example, accounting data at transaction level is processed to produce balances of each account. The balances are summarised to prepare the trial balance. The amounts given in trial balance constitute data to produce profit and loss account and balance sheet. (e) Database management System (DBMS) is a collection of programs that enables users to create and maintain a database. Formally, it may be defined as a general-purpose software system that facilitates the processes of defining, constructing and manipulating (or processing) databases for various applications. General-purpose software is defined as a set of programs, which are designed and developed for a community of users and not for any particular application with respect to a particular user. 14.5 An Illustration of Accounting Database Consider an example of ACCOUNTING database for maintaining data pertaining to accounting transactions, support documents, accounts and employees with which the students of accounting are familiar. Figure 14.18 shows below the database structure and some sample data for this database, depicting the following transactions :
Date 2005 Apr. 01 Apr. 01 Apr. 02 Apr. 02 Apr. 03 Transactions Amount Rs. 5,00,000 4,00,000 1,50,000 9,000 50,000
Commenced business with cash Cash deposited Into bank Goods purchased and payment made by Cheque No. 765421 Rent for the month of April, 2001 paid by Cheque No. 765423 Goods purchased for cash from R.S. & Sons Fig. 14.18 : Accounting transactions of an organisation
Structuring Database for Accounting Employees Emp_Id A001 B001 S001 S002 Vouchers Fname Minit LName Address Aditya Bimal Smith Sunil K S K K Bharti Jalan John Sinha PhoneNo Super_Id A001 A001 B001
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amount vdate
Credit Narration 110001 Commenced business with cash 631001 Deposited into bank 632001 Purchases from R.S & Sons 632001 Paid rent for April, 2001 631001 Goods purchased from R.S. & Sons
vno Debit
auth. by prep. by A001 A001 A001 A001 A001 B001 S001 B001 B001 S001
2005 01 631001 500,000 Apr.01 02 03 04 05 632001 400,000 Apr. 01 711001 150,000 Apr. 02 712002 9,000 Apr. 02 711001 50,000 Apr. 03
Support Vno 02 03 03 04 05 Accounts Code 110001 631001 632001 711001 711003 712002 711011 Name Capital account Cash account Bank account Purchases Carriage inwards Rent Wages Sno 1 1 2 1 1 Name Cash deposit receipt Purchase invoice no: Dated: Delivery challan Rent receipt for the month April, 2005 Purchase invoice no: Dated:
Type 4 3 3 1 1 1 1
Account Type Cat_Id 1 2 3 4 Category Expenditure Income Assets Liabilities
Fig. 14.19 : An example of an accounting database that stores simple accounting transactions
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Employees Emp_Id A001 B001 S001 S002 Vouchers Fname Minit LName Address Aditya Bimal Smith Sunil K S K K Bharti Jalan John Sinha PhoneNo Super_Id A001 A001 B001
Amount Vdate
Credit Narration
auth. by A001 A001 A001 A001 A001 A001 A001
prep. by B001 S001 B001 B001 B00101 S001 S001
Vno Sno. Debit 01 02 03 03 04 05 05 1 1 1 2 1 1 2
2005 631001 5,00,000 Apr. 01 110001 Commenced business with Cash 632001 4,00,000 Apr. 01 631001 Deposited into bank 711001 1,50,000 Apr. 02 632001 Purchases from R.S & Sons 711003 3,000 Apr. 02 632001 Paid to Nahar Transports 712002 9,000 Apr. 02 632001 Paid rent for April, 2001 711001 50,000 Apr. 02 631001 Goods purchased from R.S. & Sons 711003 2,000 Apr. 03 631001 Paid for carriage to Saini Transports
Accounts Code 110001 631001 632001 711001 711003 712002 711011 Name Capital Account Cash Account Bank Account Purchases Carriage Inwards Rent Wages
Type 4 3 3 1 1 1 1
Account Type Cat_Id 1 2 3 4 Category Expenditure Income Assets Liabilities
Fig. 14.20 : An example of an accounting database to store accounting transactions according to debit and credit vouchers support table omitted
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Modified Version of Accounting Database : An attempt to accommodate Debit and Credit vouchers, as shown in Figure: 14.2 and 14.3, results in adding a new column Sno to Vouchers table of database, which is shown in modified database in figure 14.19. This results in data redundancy as shown in figure 14.20. ER Model, as already discussed above, is a conceptual model, which need be transformed into a representational data model so that a database design is formed for being implemented and operated upon by using DBMS. From among several representational models, Relational Data Model (RDM) is the most popular and widely used in actual practice. Let us understand some important concepts of RDM. 14.6 Relational Data Model The relational data model represents the database as collection of relations, which resembles a table of values (or data table). Each row of the table, therefore, represents a collection of related data values and hence typically corresponds to real world entity or relationship. The table name and column names are used to help in interpreting the meaning of values in each row. Each row of a table is called a data record. All values in a column, which belong to a particular domain, are of same data type Consider the following table of data items, named as Accounts. The table has rows and columns. The column arrow points to a column called Name. The Row arrow points to a data record consisting of (110001, Capital Account and 4) each of which corresponds to Code, Name and Type, which are three different columns of the table.
Name of Table : Accounts Code 110001 221019 221020 411001 Name Capital Account Jain & Co. Jayram Bros. Furniture Account Type 4 4 4 3
Fig. 14.21 : Example data table of accounts and their attribute values
Formally, a row is called a tuple, a column header is called an attribute and the table as such is called a relation. The data type describing the types of values (such as text value, numeric values, date values, currency value, etc.) that can appear in each column is called a domain. A domain is a set of indivisible values. Associated with every domain is a data type such as Number,
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Text, Currency, Date/Time, etc. Each domain must also be named so as to help in interpreting its values. Besides this, a domain must be given a format and any additional information to enable correct interpretation of values. For example, a numeric domain such as distance should have units of measurement: Miles or Kilometers (a) Relations : A relation schema is made up of a relation name and a list of its attributes. Each attribute is the name of role played by some domain in the relation schema. A relation is given an identity by its name and description by its schema. The degree of a relation is indicated by the number of attributes it contains. For example, the degree of a relation schema accounts is three as shown below : ACCOUNTS (Code, Name, Type) Relation with attributes ACCOUNTS is name of the relation which has three attributes; Code = Identity of Account; Name = Names of Account; Type = Category of Account A Relation represents an entity type. A relation (or relation state) is a set of tuples wherein each tuple is an ordered list of values corresponding to attributes of relation. Each of these values must belong to the domains of their respective attributes. Each tuple in this relation represents a particular entity. A relation schema may be interpreted as a declaration in the nature of an assertion. For example, the schema of accounts relation, as shown above, asserts that every account has a Code, Name and a Type. As a result, each tuple in accounts relation can be interpreted as a fact or an instance of assertion. Some relations represent facts about entities while others might represent facts about relationships. (b) Values in Tuples : Each value in a tuple is an indivisible value to imply that it is not divisible into components within the framework of the basic relational model. This implies that composite and multi-valued attributes are not allowed. Composite attributes are represented by their simple components. The multi-valued attributes are represented by separate relations. A special value called Null is used to represent unknown or not applicable values of attributes in a tuple. It is also possible to devise different types of code values for different types of null value situation. 14.7 Relational Databases and Schemas A relational database schema is a set of relation schemas and a set of integrity constraints. A relational database state is a set of relation states such that every relational database state satisfies the integrity constraints specified on relational database schema.
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In this context the following points merit a special consideration : (a) A particular attribute, which stands for the same real word concept, might appear in more than one relation with same or different name. For example, in vouchers relation, the account Number is represented as debit and credit whereas in accounts relation, it is represented as Code (figure 14.19). EmpId appearing in Employees relation is represented in Vouchers as Auth.By and Prep.By. (b) The particular real world concept appearing more than once in a relation must be represented by different names. For example, in employees relation, employee is represented as subordinate, by using EmpId and as superior by using SuperId. (c) The Integrity constraints, specified on database schema, must hold in every database state of that schema. 14.8 Constraints and Database Schemas There are four different constraints, which can be specified on relational databases. These are: domain constraint; key constraint; entity integrity constraint; referential integrity constraints. (a) Domain : The value of each attribute of a relation must be an indivisible value and drawn out of possible values associated with its domain. The value of an attribute, therefore, must conform to the data type associated with the domain. (b) Key Constraints and NULL Values : Each data record, which corresponds to a tuple of a relation, in a table must be distinct. That means no two tuples (or rows) in a relation ( or table) can have the same combination of values for all their data items. This is because that a relation, as set of tuples, has to have all its tuples distinct by definition. Every relation has at least one key by default, which is the combination of all its attributes. This is called super-key by default. Any such super-key, therefore, specifies uniqueness constraint. Such a combination, representing super-key, may have redundant attributes, implying thereby that a more useful concept is that of a key which has not redundancy. This can be shown diagrammatically as shown in figure 14.22. Therefore, minimal super-key (also called Key) is defined as that part of super-key from which any attribute cannot be removed without sacrificing the uniqueness constraint. The value of key attribute can be used to identify each tuple in a relation. A key is determined from the meaning of the attributes. The uniqueness feature of key must continue to hold when new tuple in a relation is added. Sometimes a relation may have more than one key in which case each of such keys is called a candidate key. One such key is termed as primary key of relation. The choice of which candidate key to be primary is generally subjective
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and may depend on circumstances of mini-world. For Example: Both PAN(Permanent Account Number) and EMPID are candidate keys in EMPLOYEES relation because of being unique. But EMPID should be selected in an organisation being native to the organisational environment.
Fig. 14.22 : Flow chart to reach a minimal super-key
(c) Entity integrity constraint : States that no primary key value can be null because it is used to identify individual tuple in a relation. Null value implies that we cannot identify such tuples or identify these as alike. A failure to distinguish them means they are duplicates. (d) Referential integrity constraint : While key and entity constraints are specified on individual relation, the referential integrity constraint is specified between two or more relations. This constraint is specified to maintain consistency among the tuples of such relations. Accordingly, a tuple in one relation that refers to another relation must refer to an existing tuple in that other relation. In referencing Accounts Type, Accounts relation uses its attribute Type, which acts as foreign key to reference the tuples of relation Accounts Type through its primary key CatId. The value of Type cannot be null because of total participation of Accounts in classify relationship. Similarly, consider another example in which the relation Vouchers
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(Vno, Sno, Vdate, Debit, Amount, Credit, Amount, Prep_by, Auth_by, Narration) references two other relations as shown in figure 14.19. First it references, Accounts (Code, Name, Type). In referencing Accounts, the Vouchers relation uses its attributes Debit and Credit, which act as Foreign Keys to reference the tuples of relation Accounts through its primary key, Code. The values of debit and credit cannot be null because of total participation of vouchers in debit and credit relationship. Second, it references Employees (EmpId, Fname, Minit, Lname, Address, PhoneNo, SuperId). While referencing Employees, the Vouchers relation makes use of its other attributes Prep.By and Auth.By. These attributes act as foreign keys to reference the tuples of relation Employees through its key attribute EmpId. The values of PrepBy and AuthBy cannot be null because of total participation of vouchers in PrepBy and Authby relationships. The referential integrity constraint stands violated in above example, if there is a debit or credit code in voucher relation, the tuple for which does not exist in Accounts relation. Similarly, referential integrity fails, if there exists a value corresponding to Auth.By or Prep.By attribute of vouchers, the tuple for which does not exist in employees relation. 14.9 Operations and Constraint Violations There are two categories of operations on relational model : updates and retrieval The three basic types of updates are as given below : (a) Insert : This operation is performed to add a new tuple in a relation. For example, an attempt to add another record of an account with data values corresponding to Code, Name and its Type to Accounts relation shall be made by performing Insert operation. The insert operation is capable of violating any of the four constraints discussed above. (b) Delete : This operation is carried out to remove a tuple from a relation. A particular data record from a table can be removed by performing such a operation. The delete operation can violate only referential integrity, if tuple being removed is referenced by foreign key from other tuples in the database. (c) Modify : The operation aims at causing a change in the values of some attributes in existing tuples. This is useful in modifying existing values of an accounting record in a data table. Usually, this operation does not cause problems provided the modification is directed on neither primary key nor foreign key. Whenever applied, these operations must enforce integrity constraints specified on relational database schema. Retrieval operation on Relational Data Model does not cause violation any integrity constraints.
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14.10 Designing Relational Database Schema The rules or guidelines required to design the relational database schema attempt to provide a step-by-step procedure that transforms ER design into Relational Data model design to constitute the desired database. In the context of ER model as shown in design figure14.12, the following specific steps are required to cause its transformation into relational data model : (i) Create a relation for every strong entity : For each strong entity type (which has primary key) in ER schema, a separate relation that includes all the simple attributes of that entity is created. Either choose one of the key attributes of such an entity as the primary key for this relation, or choose a set of simple attributes that uniquely identify this entity as the primary key of the relation so created. For example, employee entity is strong because it finds its primary key in EmpId which is one of its unique attribute. Therefore, a separate relation for Employee has been created as shown below : Employee (EmpId, Fname, Minit,Lname,Address, PhoneNo, SuperId) Similarly, separate relations need be created for the following strong entities whose Primary Key attribute have been underlined. Accounts (Code, Name, Type) Vouchers (VNo,vDate, amount, narration) Accounts Type (CatId, Category) (ii) Create a separate relation for each weak entity type : Every weak entity has an owner entity and an identifying relationship through which such weak entity type is identified. For every weak entity type, a separate relation is created by including its attributes. The primary key of this new relation is the combination of its unique attribute(s) for a particular tuple of the owner relation along with primary key attribute of such owner relation. Furthermore, the primary key of owner entity is included as foreign key in such a relation key of owner entity and the partial key of weak entity. For example, Support Entity, with Vouchers as its owner Entity, does not have a primary key of its own. It has partial key which is the Sno assigned to each document. Therefore, the Primary key of Vouchers, Vno along with Sno is designed as composite key for support entity and the relation so formed is shown below as : Support (vNo,Sno, dName,sDate) (iii) Identify entity types participating in binary 1:N relationship type : Identify the first relation on n-side of relationship and second on 1-side of such relationship. The primary key of second relation should be included in first relation as its foreign key. For Example, An employee can authorize a number of vouchers. It implies that Vouchers entity participates in Auth.By
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relationship on n-side while Employees entity participates in same relationship on 1-side. Therefore, the vouchers relation as already formed above in step 1, must also include as foreign key the primary key of Employees, which is EmpId. Similarly, we can deal with Prep.By relationship in which Employees and Vouchers again participate in binary 1:N relationship. The end result of mapping both these relationships is to include twice the EmpId, but in different roles. Since a relation cannot have same name (here EmpId twice to mean AuthBy and PrepBy), we use their role names as attributes in Vouchers relation as foreign keys to reference Employees relation. Accordingly, the modified Vouchers relation appears as given below: Vouchers (VNo, vDate, Amount, Narration, Auth.By, Prep.By) Similarly, there exist two relationships between the relations Vouchers and Accounts. The relation Vouchers as modified above shall further include as foreign key the primary key of Accounts relation, which is code. This code is to be included twice. One to represent debit and another to represent credit relationship. Since a relation cannot have same name (here Code is being included twice to mean Debit and Credit), we use their role names as attributes in Vouchers relation as foreign keys to reference Accounts relation. The modified vouchers relation shall appear as follows: Vouchers (Vno,Vdate, Debit, Credit, Amount, Narration, AuthBy, Prep.By) (iv) Identify entity types participating in binary M:N relationship type : For each binary M:N relationship type, create a new relation to represent such relationship. This new relation should include as foreign keys, the primary keys of the relations that represent the participating entity types. For example, consider the following entities and relationships in the context of credit voucher shown in figure 14.23, which has one debit with multiple credit accounts :
Fig. 14.23 : ER Diagram showing relationships between vouchers and accounts in the context of credit vouchers, with one debit and several credit entries
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In this case, relationship Credit has cardinality ratio of M:N between Vouchers and Accounts(many vouchers are related to many accounts), While relationship Debit has cardinality ratio of N:1 (many vouchers refer to one account). Further Credit relationship has Sno, amount and narration has its attributes. Accordingly, we create a new relation as follows : Credit (vNo, Sno, Code, Amount, Narration) In above relation credit Code is included as foreign key to represent primary key of accounts relation, Vno is included as foreign key to represent primary key of relation vouchers. (Vno,Code) constitute the primary key of this new relation credit. By analogy, we can arrive at the following relation for Debit voucher: Debit (vNo, Sno, Code, Amount, Narration) Finally, the following relations have been formed to constitute the relational data model for our example reality. Employee (EmpId, Fname, Minit,Lname,Address, PhoneNo, SuperId) Accounts (Code, Name, Type) Vouchers (VNo,Vdate, debit, credit, amount, narration, AuthBy, PrepBy) AccountsType (CatType, Category) Support (VNo,Sno,Dname,Sdate) If we adopt the additional semantics the vouchers relation shall appear in two different schemas : Situation A : The schema given below is compatible with Debit voucher as shown if figure 14.3. Vouchers (vNo,vDate, Credit, Auth.By, Prep.By) Debit (vNo, Sno, Code, Amount, Narration) Situation B : The schema given below is compatible with Credit voucher as shown if figure 14.2. Vouchers (vNo,vDate, debit, AuthBy, PrepBy) Credit (vNo, Sno, Code, Amount, Narration) A generalised Schema for the two schemas shall be Vouchers (vNo,vDate,Vtype, AccCode, vType, AuthBy, PrepBy) Details ( vno, Sno, Code, Amount, Narration) Where in another attribute vType has been introduced to indicate whether this generalised schema applies to Situation A(vType=0) or Situation B(vType=1). Debit and Credit attribute of vouchers relation have been renamed as AccCode to mean Debit and Credit, depending on the value of Vtype. Debit and Credit relations have been generalised into Details because both shared a set of common attributes.
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14.11 llustrating the Database Structure for Example Realities DBMS software is used to implement the data model by creating several tables, setting their interrelationships and imposing constraints as may be set out in database design. After, the design is implemented, it must also allow for retrieval of data and information. This is achieved by querying the database, for which purpose, SQL statements are put to use. These retrieval requests result in emergence of new virtual tables that may be formed out of one or more of existing tables. A clear understanding of these SQL statements is a first step towards the theoretical foundations for computerised reporting. This is because a report is an organised set of information, which is extracted on the basis of these retrieval requests. For a practical understanding of these operations, consider the following Models, herein referred to as Model-I and Model-II. Each of these models, which consist of a set of relations (or tables) and the integrity constraints, constitutes the database design for accounting. Model-I : This is based on initial conceptual design of example reality shown in Figure: 14.11
Fig. 14.24 : Schema diagram for the accounting system relational database schema
Model-II : The set relations given below are based on modified example reality that uses Credit and Debit vouchers shown in figures 14.2 and 14.3.
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Fig. 14.25 : Schema diagram for the accounting system relational database Schema Illustration No 1 Mr. Philips commenced business with cash and for that purpose opened a bank account on April, 1 2005. His transactions for the month are as given below : Date Transactions Amount Rs . 5,00,000 4,00,000 1,50,000 3,000 9,000 50,000 2,000 1,75,000 2,50,000 45,000 2,500
2005 Apr. 01 Commenced business with cash Apr. 01 Cash deposited Into bank Apr. 02 Goods purchased and payment made by Cheque No. 765421 Cheque No. 765422 issued to M/s Nahar Transports for carriage Apr. 02 Rent for the month April, 2001 paid by Cheque No. 765423 Apr. 03 Goods purchased for cash from M/s R.S. & Sons Paid for carriage to M/s Saini Transports Apr. 04 Goods sold to Kemp & Co. Apr. 05 Goods purchased from M/s Jayram Bros. Apr. 06 Sold goods for cash to M/s Kumbley & Co. Apr. 08 Paid for adverisement by Cheque No. 765424 to M/s ABN Cables
Structuring Database for Accounting Apr. 09 Received a bill of exchange from Kemp & Co.payable after 3 months Apr. 10 Bill of exchange received from Kemp & Co. discounted for Apr. 12 Goods returned to Jayram Bros. being defective Apr. 15 Advance cash payment to salesman for marketing tour Apr. 17 Paid for insurance of godown Cheque No. 765425 Apr. 18 Paid for fuel, power and electricity Apr. 18 Salary paid in advance to bimal Apr. 19 Accepted a bill of exchange payable after four months in favour of Jay Ram Bros. Apr. 21 Returns from M/s Kumbley & Co., settled by Cheque No. 765427 Apr. 23 Cash withdrawn by proprietor for household expenses Apr. 25 Advance to salesman adjusted for cash after recording expenses : Entertainment Travelling Boarding and Lodging Apr. 27 Goods taken from stock for personal use Apr. 28 Furniture purchase from M/s S.N. Furnitures by Cheque No. 765428 Apr. 29 A part of existing stock set a side for usage as office furniture Apr. 30 Salary for the month paid by Cheques Cheque No. 765429 to Aditya Cheque No. 765430 to Bimal ( one-fourth of advance adjusted) Cheque No. 765431 to Smith Cheque No. 765432 to Sunil Apr. 30 Payment of telephone bill by Cheque No. 765433 Apr. 30 Paid for wages by cash 1,75,000 1,71,500 15,000 10,000 5,500 1,000 10,000 2,35,000 5,000 20,000
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4,500 2,200 3,500 5,000 45,000 35,000
9,000 5,500 6,000 5,000 1,500 7,000
The database state pertaining to Accounts and Employees table is as given below : Accounts Code 110001 221019 221020 222001 411001 411002 412002 Name Capital Account Jain & Co. Jayram Bros. Bill Payables Furniture Account Office Fittings Plant and Machinery Account Type 4 4 4 4 3 3 3
534 621001 621002 631001 632001 641001 641002 642001 651001 711001 711002 711003 711004 711011 712001 712002 712003 712004 712005 712006 712007 712008 712009 712010 811001 811002 Kemp & Co. 3 Kumble & Sons Cash account Bank account Salary in advance account Advance to salesman Bills receivable Drawings Purchases Purchases returns Carriage inwards Fuel, power and electricity Wages General expenses Rent account Salaries account Discount account Adverisement Entertainment Travelling Boarding and Lodging Communication expenses Insurance Sales account Sales returns Account Type CatId 1 2 3 4 Category Expenditure Income Assets Liabilities Employees EmpId A001 B001 S001 S002 Fname Aditya Bimal Smith Sunil Minit K S K K LName Bharti Jalan John Sinha Address PhoneNo
Accountancy
1 3 3 3 3 3 4 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2
SuperId
A001 A001 B001
Structuring Database for Accounting Solution
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The solution based on Model-I which lends support to Transaction Voucher with one Debit and one Credit as shown in figure 14.19, shall appear as follows : Vouchers vNo Debit amount Rs. 5,00,000 4,00,000 1,50,000 3,000 9,000 50,000 2,000 1,75,000 2,50,000 45,000 2,500 1,75,000 15,000 3,500 10,000 5,500 1,000 10,000 2,35,000 5,000 20,000 4,500 vDate Credit narration AuthBy PrepBy
01 631001 02 632001 03 711001 04 711003 05 712002 06 711001 07 711003 08 621001 09 711001 10 631001 11 712005 12 642001 13 711002 14 712004 15 641002 16 712010 17 711004 18 641001 19 221020 20 811002 21 651001 22 712006
2005 Apr. 01 110001 Apr. 01 631001 Apr. 02 632001 Apr. 02 632001 Apr. 02 632001 Apr. 03 631001 Apr. 03 631001 Apr, 04 811001 Apr. 05 221020 Apr. 06 811001 Apr. 08 632001 Apr. 09 621001 Apr. 10 221020 Apr. 12 642001 Apr. 12 631001 Apr. 17 632001 Apr. 18 631001 Apr. 18 631001 Apr. 19 222001 Apr. 21 632001 Apr. 23 631001 Apr. 25 641002
Commenced business with cash Deposited into bank Purchases from R.S & Sons Paid to M/s Nahar Transports Paid rent for April, 2001 Goods purchased from R.S. & Sons Paid for carriage to M/s Saini Transports Goods sold Invoice no. dated : Goods sold to M/s Kumbley & Co. Paid to M/s ABN Cables Maturity Date : July 12, 2001 Goods returned Note No. dated : Discount on Bill of exchange from Kemp & Co. Advance payment to sales for marketing tour Insurance of godown Payment for fuel, power and electricity Salary paid in advance to Bimal Settlement by accepting a bill of exchange Goods returned by M/s Kumbley & Co. Withdrawal by proprietor for household expenses Expenses during tour : Support vouchers 1-4
A001 A001 A001 A001 A001 A001 A001 A001 B001 S001 A001 A001 A001 A001 B001 S001 S001 B001 B001 A001 A001 A001
B001 S001 B001 B001 B001 S001 S001 S002 S002 S002 S002 S002 S002 S002 S001 B001 B001 B001 S001 S001 S001 S001
536 23 712007 24 712008 25 641002 26 651001 27 411001 28 411001 29 712001 30 712001 31 712001 32 712001 33 712009 34 711011 Shortcomings 2,200 3,500 Apr. 25 641002 Apr. 25 641002 Expenses during tour : Support vouchers 5-7 Expenses during tour : Support vouchers 8-11 Final settlement of Refer to J.V No : 04/21 Goods taken for private use Furniture purchased from S.N. Furniture Goods purchased for trading put to office use Salary to AdityaApr,2001 Salary to Bimal-April, 2001 after adjustment Salary to SmithApril 2001 Salary to SunilApril, 2001 Telephone bill Payment of Wages
Accountancy A001 A001 A001 A001 A001 A001 A001 A001 A001 A001 A001 A001 S001 S001 S001 S002 S002 S002 S001 S001 S001 S001 B001 S001
200 Apr. 25 631001 5,000 45,000 35,000 9,000 5,500 6,000 5,000 1,500 7,000 Apr. 27 711001 Apr. 28 632001 Apr. 29 711001 Apr. 30 632001 Apr. 30 632001 Apr. 30 632001 Apr. 30 632001 Apr. 30 632001 Apr. 30 631001
The above solution, being based on transaction voucher with one debit and one credit in a transaction requires multiple vouchers for one real transaction. For example, a transaction dated April 30, 2005 Salary for the month paid by cheque requires four vouchers 29 to 32. One transaction should be recorded possibly through one voucher only. Solution The solution based on Model-II which lends support to Debit Voucher (with Multiple Debits and one Credit) and Credit voucher (with one Debit and multiple Credits) as shown in Figure: 14.2 and figure 14.3 shall appear as follows : Vouchers Vno 01 02 03 04 05 06 07 Vdate 2005 Apr. 01 Apr. 01 Apr. 02 Apr. 02 Apr. 03 Apr. 04 Apr. 05 Acc_code 631001 632001 632001 632001 631001 811001 221020 Vtype 1 1 0 0 0 0 0 PrepBy B001 S001 B001 B001 S001 S002 S002 AuthBy A001 A001 A001 A001 A001 A001 B001
Structuring Database for Accounting 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Apr. 06 Apr. 08 Apr. 09 Apr. 10 Apr. 10 Apr. 12 Apr. 12 Apr. 17 Apr. 18 Apr. 18 Apr. 19 Apr. 21 Apr. 23 Apr. 25 Apr. 25 Apr. 27 Apr. 28 Apr. 29 Apr. 30 Apr. 30 Apr. 30 631001 632001 621001 632001 221020 642001 631001 632001 631001 631001 222001 632001 631001 641002 631001 711001 632001 711001 632001 632001 631001 Details Vno 01 02 03 03 04 05 05 06 07 08 09 10 12 13 14 15 16 17 18 Sno 1 1 1 2 1 1 2 1 1 1 1 1 1 1 1 1 1 1 1 Code 110001 631001 711001 711003 712002 711001 711003 621001 711001 811001 712005 642001 711002 712004 641002 712010 711004 641001 221020 Amount 5,00,000 4,00,000 1,50,000 3,000 9,000 50,000 2,000 1,75,000 2,50,000 45,000 2,500 1,75,000 15,000 3,500 10,000 5,500 1,000 10,000 2,35,000 Narration Commenced business with cash Deposited into bank Purchases from R.S & Sons Paid to M/s Nahar Transports Paid rent for April, 2001 Goods purchased from R.S. & Sons Paid for carriage to M/s Saini Transports Goods sold Invoice No. dated: Goods sold to M/s Kumbley & Co. Paid to M/s ABN cables Maturity date July 12, 2001 Goods returned Note No. dated. Discount on bill of exchange from Kemp & Co. Advance payment to sales for marketing tour Insurance of godown Payment for fuel, power and electricity Salary paid in advance to Bimal Settlement by accepting a bill of exhange 1 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 S002 S002 S002 S002 S002 S002 S001 B001 B001 B001 S001 S001 S001 S001 S001 S002 S002 S002 S001 B001 S001 S001 A001 A001 A001 A001 A001 B001 S001 S001 B001 B001 A001 A001 A001 A001 A001 A001 A001 A001 A001 A001
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538 19 20 21 21 21 22 23 24 25 26 26 26 26 27 28 1 1 1 2 3 1 1 1 1 1 2 3 4 1 1 811002 651001 712006 712007 712008 641002 651001 411001 411001 712001 712001 712001 712001 712009 711011 5,000 20,000 4,500 2,200 3,500 200 5,000 45,000 35,000 9,000 5,500 6,000 5,000 1,500 7,000
Accountancy Goods Returned by M/s Kumbley & Co. Withdrawal by proprietor for household expenses Expenses during tour: Support Vouchers 1-4 Expenses during tour: Support Vouchers 5-7 Expenses during tour: Support Vouchers 8-11 Final settlement of Refer to J.V no. 04/21 Goods taken for private use Furniture purchased from S.N. Furniture Goods purchased for trading put to office use Salary to Aditya Apr. 2001 Salary to Bimal Apr. 2001after adjustment Salary to Smith Apr. 2001 Salary to Sunil Apr. 2001 Telephone bill Payment of Wages
Test Your Understanding A. Indicate against each of the following statements, True or False : (a) Every relation has at least one super key by default, which is the combination of all its attributes. (b) Data transformation is called Information. (c) Referential integrity constraint arises because of relationships between various entities. (d) The complete absence of WHERE clause in SELECT statement implies that no tuples of a relation shall be selected. (e) ER model is an example of representational data model. Fill in the blanks, an appropriate word(s) (a) A ........... does not have key attributes of its own. (b) The ........... for binary relationship specifies the number of relationship instances that an entity can participate in. (c) Each simple attribute of an entity type is associated with a value set called ........... of values. (d) When structure of AIS is based on both human and computer resources, it is called ........... AIS. (e) An ........... is a collection of all entities of a particular entity type. (f) A weak entity type always has a ........... constraint with respect to its identifying relationship. (g) When a relation has more than one attribute with unique values, each such attribute is called ............
B.
After appreciating the way accounting data is presented in above database models, let us understand as to how the queries on such databases are expressed as relational operations.
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14.12 Interacting with Databases One of the major reasons for the success of commercial databases is the SQL language support they enjoy. This is because SQL became standard for relational databases. As a result, users have become less concerned about migrating their database applications from one database to another database. Another advantage in using standard SQL is that users may write statements in a database application program that can access data stored in two or more relational DBMS without having to change the database sub-language (SQL) provided both the DBMS enjoy the support of a particular SQL standard. The name SQL stands for Structured Query Language, which was originally called SEQUEL (Structured English QUEry Language), designed and implemented at IBM Research as an interface for experimental relational database system called SYSTEM-R. Being a comprehensive database language, it has statements for data definition, query and update. Besides this, it has the capability to define useroriented views of database, specify security and authorisation, define integrity constraints and various other operations. Many computer-programming languages can act as good host languages to incorporate the statements of SQL. In this sense, it can be used as a sub-language in a database-programming context. Basic Queries in SQL : Data Query Language (DQL), which is a sub-set of SQL is widely used to answer most of the basic queries. The basic set of queries consists of those, for which the SELECT-FROM-WHERE Structure is put to use as described below : SELECT : This clause is used to specify the data or information that is desired to answer the query. FROM : This clause is used to specify the source of data for answering the query. It can be a data table, an existing query or both. WHERE : This clause is meant to specify the conditions that are used to narrow down the choice of data to extract the information desired in select clause. The following queries have been considered using the database design given in Model-I and Model-II. The solution to queries has been given using MS ACCESS implementation. I. Query to retrieve all columns of data records from a table, subject to a condition : To project all the attribute values of selected tuples, an asterisk (*) need be specified. This asterisk stands for all the attributes.
(1) To retrieve all columns of voucher records whose voucher has been authorised by an employee whose EmpId is equal to A001.
540 Solution (Model-I and Model-II) SELECT * FROM WHERE vouchers AuthBy=A001;
Accountancy
II. Query to retrieve selected columns of data records from a table, subject to a condition.
(2) To Retrieve vouchers with Vno, Vdate, AuthBy columns wherein the vouchers are dated 12/Apr/2005
Solution (Model-I and Model-II) SELECT FROM WHERE (3) Vno, Vdate, AuthBy vouchers Vdate = #04/12/2005#;
To retrieve vouchers with Vno, Vdate, Auth_by columns, which are dated 12/ Apr/2005. The columns of records retrieved by the query are to be renamed as Voucher, Date and Employee
Solution (Model-I and Model-II) SELECT FROM WHERE Vno As Voucher, Vdate As Date, Prep_by As Employee vouchers Vdate = # 04/12/2005#;
III. Unspecified WHERE Clause : Absence of WHERE clause in SELECT statement implies that the tuples from a relation are to be selected without applying any condition. This in turn means that all tuples of a relation specified in FROM clause qualify for being selected for the result of query. Consider the following query with reference to Model-I.
(4) Solution (Model-I) SELECT DISTINCT Debit As Code FROM vouchers; Find out the list of accounts which have been debited
Structuring Database for Accounting Solution (Model-II)
541
SELECT AccCode As Code FROM vouchers WHERE vType = 0; UNION SELECT Details.Code FROM vouchers, Details WHERE vType = 1 AND vouchers.vNo = Details.vNo; Save above query as DebitAccounts, and thereafter execute another query as given below to get the final results. SELECT DISINCT * FROM Debit Accounts ; (5) Solution (Model-I) SELECT DISTINCT Credit As Code FROM vouchers ; Solution (Model-II) SELECT AccCode As Code FROM vouchers WHERE Vtype = 1; UNION SELECT Details.Code FROM vouchers, Details WHERE vType = 0 AND vouchers.vNo = Details.vNo; Save above query as CreditAccounts, and thereafter execute another query as given below to get the final results. SELECT DISINCT * FROM CreditAccounts; (6) Solution (Model-I) SELECT DISTINCT Debit As Code FROM vouchers WHERE Debit IN (SELECT Credit As Code FROM vouchers); Find out the list of accounts which have been debited as well as credited Find out the list of accounts which have been credited
542 Solution (Model-II) SELECT * FROM WHERE FROM Save above Model-II (7) Solution (Model-I) SELECT FROM WHERE FROM Solution (Model-II) SELECT * FROM WHERE FROM (8) Find out Solution (Model-I) SELECT DISTINCT Credit As Code FROM vouchers WHERE Credit NOT IN (SELECT Code FROM DebitCredit); Solution (Model-II) SELECT * FROM WHERE FROM CreditAccounts Code NOT IN ( SELECT * DebitCredit) DISTINCT Debit As Code vouchers Debit NOT IN (SELECT Code DebitCredit);
Accountancy
DebitAccounts Code IN (SELECT * CreditAccounts); solution query as DebitCredit, both for Model-I and
Find out the list of accounts which have been debited but not credited
DebitAccounts Code NOT IN (SELECT * DebitCredit) the list of accounts which have been credited but not debited
IV. Ambiguous Attribute Names and Renaming (Aliasing) : SQL allows the use of homonyms (that is same name for two or more attributes) as long as such attributes are in different relations. If the use of a common attribute with a particular name across the relations prevails, it becomes necessary
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to qualify the attribute name with relation name in which it exits. This is achieved by prefixing the relation name to the attribute name and separating the two by a period symbol dot. In Model-II, the attribute Vno, referring to voucher number in vouchers relation, also exists in details relation. Whenever vouchers and details relations are used in a query, the use of Vno attribute must precede the name of relation or its alias name. For example,
(9) Retrieve a list of accounts and the amounts debited because of cash payments. The Cash Account code begins with 631.
Solution (Model-I) SELECT FROM WHERE Solution (Model-II) SELECT Narration,Acc_code AS Code, Amount FROM Vouchers AS V, Details AS D WHERE tType=1 AND V.vNo=D.vNo AND acc_code like 631* UNION SELECT Narration,Code, Amount FROM Vouchers AS V, Details AS D WHERE tType = 0 AND V.vNo = D.vNo AND code LIKE 631*; (10) Solution (Model-I and Model-II) SELECT Code, Name, Category FROM Accounts, AccountType WHERE CatId = Type (11) To retrieve a detailed list of all account, giving their code, Name and category, which have been debited Solution (Model-I) SELECT FROM WHERE DISTINCT Debit AS Code, Name, Category Vouchers AS V,Accounts AS A, AccountType V.Debit = A.Code AND CatId = type To retrieve a detailed list of all accounts, giving their code, Name and category. Narration, Debit As Code, Amount Vouchers Credit LIKE 631*;
544 Solution
Accountancy
(Model-II by using query solution saved as DebitAccounts in Q.No: 4) SELECT Code, Name, Category FROM DebitAccounts AS D, Accounts AS A, Category WHERE D.Code = A.Code AND Type = CatId (12) To retrieve Code, Name and Category of Expense accounts which have been debited
Solution (Model-I) SELECT FROM WHERE Debit AS Code, Name, Category Vouchers, Accounts, AccountType Debit = Code AND Type = CatId AND Category = Expenses
Solution (Model-II by using query solution saved as Debit Accounts in Q.No: 4) SELECT FROM WHERE (13) D.Code, Name, Category DebitAccounts AS D, Accounts AS A, AccountType D.Code = A.code AND Type = CatId AND Category = Expenses
To retrieve Narration and Amount of transactions where Expense head Carriage Inwards has been debited.
Solution (Model-I) SELECT FROM WHERE Narration, Amount Vouchers, Accounts Debit = Code AND Name LIKE Carriage Inw*;
Solution (Model-II by using query solution saved as DebitAccounts in Q.No: 4) SELECT FROM WHERE Narration, Amount Details AS T,DebitAccounts AS D, Accounts AS A T.Code = D.Code AND D.Code = A.Code AND Name LIKE Carriage Inw*
V. Sub-string Comparisons and Arithmetic Operators and Ordering and use of functions : SQL allows comparison on sub-strings (that are some parts of a character string). This can be achieved by use of LIKE Operator. This like operator instead of equal to (=) operator can be used when exact value
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of comparison is not known. Partial strings or sub-strings are specified by using * and range specification within rectangular brackets. For Example:
(14) To make a list of accounts pertaining to the assets of the company, given that each of the assets account code begins with 4, following query need be executed:
Solution (Model-I and Model-II) SELECT Code, Name FROM accounts WHERE Code like 4* (15) To make a list of employees whose names start from a to k, following query need be executed :
Solution (Model-I and Model-II) SELECT FROM WHERE Fname & & Minit & & Lname As Name of Employee Employees Fname like [a-e]*
VI. Another comparison operator used in SQL is BETWEEN ....AND ....operator. This operator facilitates numeric range tests for selection of tuples. For Example:
(16) To retrieve vouchers with amount ranging between 5,000 and 10,000, following query need be formulated.
Solution (Model-I) SELECT FROM WHERE Solution (Model-II) SELECT FROM WHERE. Vno, Amount Vouchers AS V, Details AS D V.vno = D.vno AND Amount BETWEEN 5,000 AND 10,000; Vno, Amount Vouchers Amount BETWEEN 5000 AND 10000 ;
VII. Another feature of SQL permits the use of standard arithmetic operators, which can be directly applied to numeric values appearing in a query statement. Consider the following query:
546 (17)
Accountancy To find various amounts of sales during the month of April, 2005 and the amounts of such sales if the prices of products are allowed to be raised by 16%.
Solution (Model-I) SELECT FROM WHERE Solution (Model-II) SELECT FROM WHERE UNION SELECT FROM WHERE Vdate, D.code, Amount, Amount*1.16 AS Expected Vouchers AS V, Details AS D, accounts AS A V.vNo = D.vNo AND D.code = A.Code AND A.Name LIKE Sales Account* AND tType = 1 Vdate, V.Acc_code, Amount, Amount*1.16 AS Expected Vouchers AS V, Details AS D, accounts AS A V.vno = D.vno AND V.acc_code = A.code AND A.name LIKE Sales Account* AND Ttype = 0; Vdate, Credit, Amount, Amount*1.16 AS Expected Vouchers, Accounts Credit = Code AND name LIKE Sales Account*
VIII. SQL also allows ordering of resultant tuples according to some specified attribute, which may or may not form part of the resultant relation. Consider the following example:
(18) Solution (Model-I and Model-II) SELECT * FROM Accounts ORDER BY Name To retrieve list of Accounts in dictionary order of their Names :
IX. SQL queries allow the use of supported functions within the query itself. List of these functions varies from one implementation to another depending on the specific RDBMS. Consider the following example :
(19) Solution (Model-I and Model-II) SELECT * FROM vouchers WHERE Month(vDate) = 4 To List details of vouchers released during April, 2005.
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To execute above query, month() function is used which accepts within parenthesis the data a parameter and returns the numeric value of one month varying from 1 through 12. In this case the relevant value to be compared for the month of April is 4.
X. Explicit Sets and NULL in SQL : Query results can be retrieved even for rows in which value of an attribute is missing. This is achieved by using NULL in Where clause while specifying the condition. If more than one value is to be compared with an attribute, the value set can be given in Where clause by specifying IN operator.
(20) Solution (Model-I and Model-II) SELECT * FROM Accounts WHERE Code IN(621001,632001,642002); (21) Solution (Model-I and Model-II) SELECT * FROM WHERE Employees SuperId = NULL; To retrieve name of all employees who do not have supervisors. To retrieve Details of Accounts with following Codes: relating to 621001, 632021 and 642002.
XI. Aggregate Functions and Grouping : The concept of aggregate functions as referred to in relational operations, is implemented by SQL. Five such functions commonly used for aggregate of data items are: COUNT,SUM, MAX, MIN and AVG. These functions when applied on a set of numeric values, return respectively number of rows, the sum , maximum, minimum and average of these values. The GROUP BY clause is used for providing the basis of creating collection of data items on which these functions are to be applied. Consider the following examples.
(22) Solution (Model-I) SELECT FROM WHERE GROUP BY Debit AS Code, SUM(Amount) AS Total, MIN(Amount) As Minimum, MAX(Amount) As Maximum Vouchers Debit like 631* Debit To find the sum, minimum and maximum of cash payment during April, 2005. The cash account code begins with 631
548 Solution (Model-II) SELECT FROM WHERE GROUP BY
Accountancy
Code, SUM(Amount) AS Total, MIN(Amount) As Minimum, MAX(Amount) As Maximum Vouchers AS V, Details AS D V.Vno=D.Vno, Ttype=0 and Code Like 631* D.Code Key Terms Introduced in the Chapter
Database System Entity Relationship (ER) Model Reality Database Rational Data Model Accounting Intermedia Transaction Voucher Credit Voucher Debit Voucher Attributes Interacting with Database Designing Database for Accounting Summary with Reference to Learning Objectives
(1) Database Concepts Reality : It consists of different components of an organisation such as people, facilities and other resources. Data : It represent data concerning people, places, objects entities, events, etc. and non-financial 14 nature. Database : It was a shared collection of inter-related data tables, tiles or structures which are designed to most varied information needs of all organisation. International : Processed data organisation in a form that is suitable for decisionmaking. DBMS : A collection of programmes that enable users to create and maintain a database. (2) Database System Concepts and Architecture Data model : Collection of concepts used to describe the structure of a database. Database Schemes : The description of a database is called its scheme. Data Base State and Instances : Data in a database at a particular movement is called database state. (3) Entity Relationship (ER) Model An important concept of data model mostly used in data base oriented application. The major elements of ER model are entities, Attributes, identities and relationship that are used to express reality for which a data base is to be designed.
Structuring Database for Accounting (4) Relation Data Model (RDM) It represent the database at collection of tables comprising different volumes. It consists of rows and columns. The table name and column name are used to help in interpreting the meaning of volumes of each row. Each row of table is called a data record. Questions for Practice Short Answers 1. 2. 3. State main categories of data models. How are computers useful in processing the accounting data? What do you understand by accounting data? Discuss the stages through which it is finally transformed for being presented as information in financial statements. What do you understand by database. How does it differ from DBMS? What is meant by entity type? How it is different from entity set? Illustrate by giving suitable example from accounting reality. What do you understand by relationship type? How is it different from relationship instance and relationship set? What do you understand by multi-valued attribute? How is it different from complex and composite attribute? Illustrate by giving suitable example. What do you understand by the concept of weak entity used in data modelling? Explain the relevance of owner entity type, partial key and identifying relationship in the context of such modelling. What is a participation role? State the circumstances under which the use of role names becomes necessary in description of relationship types. Define foreign key. How is this concept useful in relational data model? Illustrate with suitable example. What is meant by NULL value? What are the reasons that lead to their occurrence in database relations? Why are duplicate tuples not allowed in a relation? What do you understand union compatibility of relations? For which operations such compatibility is required and why? What is the need for database normalisation?
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4. 5. 6. 7. 8.
9. 10. 11. 12. 13. 14.
Long Answers 1. 2. 3. 4. Discuss the basic concepts of Entity Relationship (ER) Model. Illustrate as to how an ER model is diagrammed. What integrity constraints are specified on database schema? Why is each considered important? Discuss the different types of update operations in relation to the integrity constraints which must be satisfied in a relational database model. Discuss the steps you would take to transform an ER Model into various relations of Relational Data Model. Give suitable examples.
Project Work (i) Consider the following reality in a business enterprise, which is engaged in trading activity.
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Accountancy It buys and sells a given number of items each of which is uniquely identifiable. Each unit of item is expressed in numbers or Kilograms. It procures its supplies from a given number of suppliers who can supply any number of items at a time. Each transaction is on credit for a particular period of time expressed in days. It sells various items to its customers on credit for a definite period of time expressed in days. Each purchase is made through a regular invoice, which has its distinct number for the supplier. It is duly dated, mentions the items being transacted, their quantities and prices and total amount of invoice. Design an ER schema for a database application for purchase and sales accounting and also show as to how it shall be transformed into various relations of a relational data model. Following transactions of M/s Soumya Enterprises are given to you for the period ending March, 31 2002. Additional capital brought in cash by proprietor, Rs.5,00,000, out of which deposited into a bank account Rs.4,50,000 Received Cheque for Rs.56,000 from K & Co. on account Issued Cheque for Rs.75,000 in favour of Jain & Sons Payment of rent for the month Rs.15,000 Goods purchased Rs.34,000 by Cash Goods sold to R & Co Rs.45,000 Purchased furniture for office use Rs.25,000 Paid fire insurance premium by Cheque Rs. 12,000 Paid cash to Jayram Bros. Rs.29,000 in full settlement of their account standing at Rs.29,500 Payment of salary to staff Rs.20,000
(ii)
March 05 02 08 10 12 16 20 24 28 30
All these transactions have been stored in database tables as shown below under (Model-I of database design). Data in Accounts table appears as follows: Accounts Code 110001 221019 411001 411002 621001 631001 632001 641001 711001 711002 711003 711005 711006 811001 Name Capital Account Jain & Sons Furniture Account Fixtures & Fittings Account K & Co Cash Account Bank Account Salary in Advance Account Cartage Account Salaries Account Rent Account Insurance Premium Discount Account Sales Account
Structuring Database for Accounting Show how will these transactions appear as accounting data in following vouchers table.
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Vno Vdate Debit Amount Credit Narration (iii)
: : : : : :
Identity of a transaction stored through a voucher. to date of transaction to code of account being debited Amount of transaction Code of account being credited Narration of transaction.
M/s Soumya Exports set up a garments export business on March,1 2002. Their transactions for the month ending March, 31 2002 are given below : Capital brought in cash by proprietor, Rs.5,00,000, out of which deposited into a bank account Rs.4,50,000 Received Cheque for Rs.86,000 from Kailash Nath & Co. as advance account Issued Cheque for Rs.85,000 to Jackson Bros. as advance for supplies Payment of rent for the month Rs.18,000 Purchased Computer system for office use Rs.53,000, payment for which made by Cheque Goods purchased Rs.1,30,000 , payment made by Cheque. Goods purchased from Jackson and Bros. for Rs.97,500 Goods sold to Rajeshwar & Sons Rs.45,000 Purchased Furniture for office use Rs.25,000 Paid fire insurance premium by Cheque Rs. 12,000 Paid Cash To Jackson Bros. Rs.12,000 in full settlement of their outstanding balance of Rs.12,500 Payment of salary to staff Rs.20,000
March 01 03 04 11 14 14 16 19 22 25 29 30
All these transactions have been stored in database tables as shown below under (Model-I of database design). Data in Accounts table appears as follows: Accounts Code 110001 221019 411001 Name Capital Account Jackson Bros. Furniture Account
552 413001 621001 621002 631001 632001 641001 711001 711002 711003 711005 711006 811001 Office Equipment Kailash Nath & Co Rajeshwar & Sons Cash Account Bank Account Salary in Advance Account Cartage Account Salaries Account Rent Account Insurance Premium Discount Account Sales Account
Accountancy
Show how will these transactions appear as accounting data in following accounting data tables.
(iv)
Identity of a transaction stored through a voucher date of transaction code of account being debited or credited Codes of accounts being credited or debited, depending on value of Vtype( = 0, means codes being debited, 1 means codes being credited) Sno : Serial number of accounts being debited in debit voucher and those being credited in credit voucher Vtype : 0 = means debit voucher, 1 = credit voucher Amount : Amount of transaction Narration : Narration of transaction Write relational operation expressions and relevant SQL statements for following queries using Database Design Model-I and Model-II : (a) Retrieve the voucher details and type of voucher authorised by a particular employee. (b) Retrieve every bank payment voucher details, account name, amount. You are given that bank account code =632001. (c) Find details of cash vouchers pertaining to an expense account whose account code = 711003. You ar e given that cash account code=631001. (d) Make a list of accounts and amount with respect to which a voucher has been either prepared or authorised by a particular employee. (e) Retrieve details of vouchers without support documents.
Vno Vdate Acc_code Code
: : : :
Structuring Database for Accounting (f) List details of documents with at least one support document. (g) Find all vouchers with total amounts raised during a particular month. (h) Retrieve all vouchers prepared by an employee whose First name is Smith. Write relational operation expressions and relevant SQL statements for following queries using Database Design Model-I and Model-II. (a) Retrieve all vouchers pertaining to a particular account with amounts ranging between Rs. 10,000 to Rs. 20,000. (b) Retrieve details of each voucher whose support document has the same date as that of the voucher itself. (c) Retrieve details of voucher authorised by employees who do not have supervisors. (d) Find sum of cash payments, maximum payments, minimum payments and average. (e) Find sum of cash payment, maximum and minimum amount with respect to a particular account Code. (f) Retrieve every bank payment voucher details, account name, amount pertaining to a particular period ranging from Date1 to Date 2. (g) Find details of cash vouchers pertaining to a particular expense account. (h) Make a list of accounts and amount with respect to which a voucher has been either prepared or authorised by a particular employee. (i) Find all vouchers with total amounts raised during a particular month. (j) Retrieve all vouchers prepared by an employee whose last name is Dev. (k) Retrieve details of each voucher whose support document has the same date as that of the voucher itself. Checklist to Test Your Understanding A. (a) T (b) T (c) T (d) F (e) F
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(iv)
B. (a) Weak entity (b) Computer based (c) Timeware (d) Liveware (e) Total participation (f) Multi-valued (g) Full functional
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Accountancy
Accounting System Using Database Management System
15
LEARNING OBJECTIVES
After studying this chapter, you will be able to : identify the resources of MS ACCESS as DBMS; create data tables described in a database design and set relationship among these tables; explain the ACCESS basics and procedures to create forms using ACCESS; describe and create voucher for ms in consonance with different database designs; identify infor mation requirement of reports for querying databases; formulate and implement queries for retrieving data and information for presentation in accounting reports ; and implement the process in ACCESS for generating accounting reports by using accounting information queries.
n chapter 14, you have lear nt about the fundamentals of creating a database design in the context of accounting system. This chapter deals with the basics of MS Access for implementing the databases and specifically deals with implementation of accounting databases, the design of which has been shown, described and discussed in chapter 14 as Model-I and Model-II. The accounting database design has been discussed below in terms of its implementation modalities in the context of MS Access. 15.1 MS Access and its Components
It is one of the popularly used Database Management System (DBMS) to create, store and manage database. It is also popularly called ACCESS. Every component that is created using Access is an object and several such similar objects constitute a class. Access is functionally available with the following seven-object classes. Each of these object classes is capable of creating their respective object replicas. Tables : This object class allows a database designer to create the data tables with their respective fieldnames, data types and properties. Queries : This object class is meant to create the SQL compatible query statement with or without the help of Graphic User Interface (GUI) to define tables, store data and retrieve both data and information.
Accounting System using DBMS
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Forms : This object class allows the designer to create an appropriate user interface to formally interact with the back end database, defined by the tables and queries. Reports: This object class is used to create various reports, the source of information content of which is based on tables, queries or both. Such reports are designed in Access according to the requirement of end-user. Pages : This object class is meant to create Data Access Pages, which can be posted on a Web site of an organisation using Internet or sent via e-mail to someone of the organisations network. Macros : In macro programming, the objects using individual instructions called macro-oriented actions are manipulated. A Macro is a list of macrooriented actions that run as a unit. Access provides for such Macro programming.
Fig. 15.1 : An example of database window to work in Access
Modules : These are the foundations of any application and allow the designer to create a set of programming instructions, called functions or sub-routines that can be used throughout the application.
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The functions return a value while subroutines do not return any value. Access provides for creating such modules. Each of these object classes is contained in the named database file of Access with MDB extension. Whenever this file is opened, a database window, as shown on next page, opens with all the above object classes available on the left hand side. As and when the specific objects are created or designed, they get listed on right hand side of this window against each of these object classes.
Box 1 Capabilities of MS Access Access has certain capabilities, which bring it closer to an ideal Database Management System. These capabilities are : Storing the data in an organised manner. Enforcing data integrity constraints. Representing complex relationship among data. Providing for persistent storage of database objects. Restricting unauthorised access to database. Allowing fast retrieval of data with or without processing by using SQL. Flexibility to create multiple user interfaces. Providing for data sharing and multi-user transaction processing. Supporting multiple views of data and information.
15.1.1 Access Basics for Creating a Database When a new database is created from the scratch, there is complete control over the database objects, their properties and the relationships. In order to create a new database without the help of database wizard (that is an automated process in Access), the following steps are required : (i) Open Access Window to choose blank Access database and click OK button. (ii) Access responds by displaying File New Database dialog box, which prompts the designer to enter a file name and a location for the database. This must be followed by clicking Create button. (iii) If the task pane is not open, choose File from menu bar and click at new to open the task pane to create a new database. 15.1.2 Creating of Tables in Access The creation of tables in Access requires the following steps and understanding of the components of table object.
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Click at Tables object of Access, followed by double click at create table by design view. This results in providing a table window, the upper part of which has three columns: Field Name, Data Type and Description. It is meant to define the schema of a table being created. Each of its rows corresponds to a column of the table being created. Two primary properties of the column of a table are its field name and data type. (a) Field name : refers to column name of the table being created. The name of the column should be a string of contiguous characters. The Field name is meant to define the name of column to be created, followed by data type of such column. The designer can optionally provide description of the column also. Once the data type is defined, the designer can further specify the properties of each column in the lower part of the Table window. (b) Data Types : Access supports different data types, the details of which are as given below : Text : It is used for a string of characters: words or numbers that are not to be used in any arithmetic calculations. The maximum length for a text field is 255 characters. It is the default data type because of being used most frequently. Memo : It is used for storing comments and is capable of accommodating 65,536 characters. But a field with this data type is not amenable to sorting or filtering of data records. Number : It is meant to store numbers, which could be integers (-32768 to 32767), long integers (2,147,483,648 to 2,147,483,647), bytes ( 0 255), single (to store values with decimal point up to a certain limit), double (to store values in decimal point with greater magnitude and more precision) or decimal types. Date/Time : It is used to store dates, times or a combination of both. Currency : It is used for storing numbers in terms of Dollars, Rupees or other Currencies. AutoNumber : It is a numeric data automatically entered by Access. It is of particular importance in a situation where none of the fields individually or a set of fields as a combination in a table is unique. Yes/No : It is to declare a logical field which may have only one of the two opposite values alternatively given as: Yes or No, On or Off, True or False. OLE Object : OLE stands for Object Linking and Embedding. It refers to an object that could be a photograph, bar code image or another document created in another software application. Hyperlink : This data type is meant to store a Universal Resource Locator (URL) and e-mail addresses. (c) Properties : Once the data type of a column is specified, Access allows the designer to define the properties of each column. These properties are of two types General and Look up.
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(i) General : In the context of text data type the general properties are : Field Size : This property, in case of text fields, refers to the maximum number of characters allowed in the column. The same property, in case of numbers, refers to the type of numbers being stored as per requirements. Format : It is meant to indicate as to how the fields contents are displayed. There are standard types of formats to choose from. Decimal places property : It applies to single, double or decimal types of numbers. Input mask : Formats for data entry that include placeholders and punctuations are called input masks. It works only for text and date type of fields. It is of particular importance when the accounting codes being used in the system are formatted with hyphens. Caption : It is a label used for the field in datasheet view and on the Forms and reports. If the caption property is set to blank, the field name becomes the default caption and is used to label the field. Default Value : It is used for specifying a value for new entries of data records. While entering the data item, the operator can always over write the default value. The default value should be the most frequently entered value in the field. Validation Rule and Text : Validation means checking of data to eliminate incorrect entries. Validation criteria can be specified for this property. If the data so entered does not satisfy the validation criteria, the validation text gets displayed. Required and Indexed : The Required property must be provided a logical value Yes or No. When a fields required property is set to Yes, a user must enter data in the field before saving the record. A value of No implies that the data entry in the field is optional. In other words, a null value is also acceptable to the database. Indexing a field results in speeding up sorting, searching and filtering of records on that field. Primary key field is always indexed. For a single field primary key, Access sets the Required property to Yes and the Indexed property to Yes (No duplicates) because a primary key by definition must have unique values without null entries. Allow-Zero Length : This property is available only for text fields. Setting it to Yes/No determines whether a text string with zero length is a valid entry or not. (ii) Look up : The look up feature is used by a field to find its values in another table, query or from a fixed list of values. A list of valid values can be displayed using a list box or combo box. Text box is the default display control of look up. Look up is created in case of a field, which is foreign
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key (many side) into primary key (one side) between the tables that have one-to-many relationship. Its other display controls are list control and combo control. When list box or combo box is used as display control in look up, it is important to specify the row source type (that is table, query or list of values or field list). The list of values must be separated by comma. Some additional properties in case of list box or combo box are meant to specify the bound column whose values are copied to this field as references. Number of columns to appear in the list box or combo box is determined by column count property. The above steps for defining a column need be repeated for every column to be created for a particular table. After defining all the columns of the table, the primary key column of the table can be specified as any of the columns that are expected to have unique data values. This can be achieved by right clicking at the field to be specified as primary key followed by primary key item of right clicked window. If more than one field constitutes a primary key, select first field (of such composite primary key) by pressing and holding Ctrl key and clicking other fields (of the composite primary key) one by one in the same order in which they together constitute the primary key. This must be followed by right click at selected fields to mark the selected fields as primary key. Save the table design by clicking at File item of menu bar followed by click at Save option. Access responds by providing a generic default name of table. The table name provided by Access may be accepted by clicking at OK or changed by re-typing another name at the input dialog box. This must be followed by clicking OK. The table stands created and appears as listed to the right of table object. Every other table, which constitutes part of the database design, may also be created in the same manner as described above. The foregoing discussion in this chapter is divided into four sections: Creating tables and relationships for accounting databases; Vouchers and forms; information using queries and generating accounting reports. 15.2 Creating Tables and Relationships for Accounting Database The database designed in of this chapter is to be discussed in the context of database components as detailed above. This is because the implementation of each database design is conditioned by its particular table structure and interrelationships. Such implementation modalities have been discussed in detail for various types of transaction vouchers already described in the preceding chapter.
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15.2.1 Database Design for Simple Transaction Vouchers According to the design shown in figure 14.24 (Model-1) of preceding chapter, there are five data tables: Employees, Accounts, Vouchers, Support and AccountType. For the purpose of implementation, each table is described below in terms of their storage structure, i.e. column names, data types and properties: (a) AccountType : This table has two columns: CatId and Category. CatId : This column of the AccountType table is meant to specify the identification value of the category of accounts. Since there are limited number of accounts type and are being expressed as numeric only, the data type of this field can be safely taken as Number/byte because the storage space taken by the data type Number/byte is minimum. This field has been designated as primary key because it has unique values across a set of category records. Category : This field is meant to store the string of characters to express the category of account such as Expenses, Revenues, Assets and Liabilities. Its data type should be Text with suggested field size set to 15 characters. (b) Accounts : This table has three columns: Code, Name and Type. Code : A unique account number or code identifies an account. This column is meant to store this code. Its data type is chosen as Text because it is not to be subjected to any calculations. Its field size is required to have a length of six characters because every account is designed to have six digits at leaf level. Because of uniqueness in values, this field is a good primary key field. The Allow Zero Length property must be set to No. Indexed property of this field must be set to Yes (No duplicates) to imply that the database creates automatically an internal index on this field for fast retrieval of data records and No duplicates indicates that this index is based on unique values of code. Name : In a system of accounting, every account has a name. This column is meant to store the name of an account corresponding to the account code by which it is identified. Its data type is declared as Text because it is a string of characters not required for any calculations. Its field size need be set to 30 characters, which is considered to be long enough to accommodate the name of account. Type : Every account must belong to one of the accounts type as stored in AccountType table. This field is a foreign key to reference CatId field of AccountType table. Its data type and other properties must be the same as that of CatId field in AccountType table, except that its Index property can be set to YES (Duplicates OK). This is because Type value within accounts table cannot be unique as a number of accounts might belong to a particular AccountType and store a common CatId
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as data value in Type field. The relationship between the CatId column of AccountType table and type column of Accounts table must also be defined so as to maintain referential integrity. (c) Employees : This table stores the data pertaining to employees of the organisation and is designed to have following columns : EmpId : Each employee is identified by a unique data value called EmpId, which in turn gets reflected in employee table as a column to store for each employee record a unique identification value. The data type of this column is text with field size equal to 4. Being a column to store unique values and also because of its capability to identify an employee record, it is designated as primary key field. Its Required property is set to Yes and Zero length property is set to No with Indexed property as Yes (No Duplicates). Fname : This column refers to the first name of employee and its data type is declared as Text because it is meant to store string of alphabets. Its Field size is set to 10 on the assumption that first name of every employee can be completely accommodated within this field size. The Required property is set to Yes with Zero Length Property being No to imply that every employee has a first name and no employee record can be stored unless the first name is also stored. Mname : Mname column is meant to store the middle name of an employee. It data type is declared as text with field width equal to 10. The Required Property can be set to No and Zero Length property to Yes to imply that many employees may not have middle name. Therefore, the storing of value in this field becomes optional. Lname : Lname column has been included in the table structure to store the Last name of an employee. The data type of this column is Text with field size set to 10. The Required Property can be set to No and Allow Zero Length property to Yes for the reason which applies to Mname. PhoneNo : This column is meant to store the Phone number of the employee and its data type is set to Text with field size equal to 12. The Required property is set to No with Allow Zero Length property set to Yes to imply that null values are permitted for this field because many employees may not have phone numbers. SuperId : This column in the Employee table structure refers to EmpId of the supervisor or immediate superior of the employee. Its data type is set to Text with field width 4, the same as is for EmpId. Its Required property is set to No with Allow Zero Length property being Yes to imply that null values are also permitted. This is because the overall boss of the organisation, although an employee, does not have any
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boss and therefore a null value in this field is to be allowed to accommodate the situation. (d) Vouchers : This table has been designed to store the transaction data as contained in a voucher. It has nine columns, the details of each are given below : Vno : This column is meant to store voucher number, which indicates the distinct identity of a transaction. Its data type could be number if numeric digits are assigned to each of the vouchers. However, its data type is normally taken as text because it is amenable to any type of numbering, coding or ordering scheme: numeric, alpha-numeric or formatted reference. Its width may be set to 6 so that first 2 places to the left refer to numeric month of the date and next 4 places to numeric digits giving identity to each of the transactions that have occurred during the month under reference. This column is designed to have distinct values and therefore can be designated as primary key of the table. Accordingly, its value cannot be null and therefore its Allow Zero Length property must be set to No with Required property being Yes. However, its data type needs be taken as number (with Integer), when numeric function(s) such as Dmax() is applied to find maximum values for auto-generating the vouchers. Debit : This column is meant to store the code corresponding to an account, which has been debited in recording a transaction. Since it references the code column, which is the primary key of Accounts table as described above, it is a foreign key column in Vouchers table. The data type and properties of this column should be the same as that of code column of Accounts table, except that its Indexed property need be set to Yes Duplicates OK). The relationship between the code column of accounts table and debit column of Vouchers table must also be defined so as to maintain referential integrity. Amount : This column is meant to store the amount of transaction and is common to the accounts being debited and credited. Its data type can be Number with field size set to double; format set to standard; decimal places set to 2 and default value set to 0.00. Alternatively, its data type can be chosen as currency type, in that case its format can be either accepted as currency or set to standard with decimal places set to 2. Vdate : This column of the table stores the date of transaction. Its data type is set to Date/Time with format set to Medium Date (dd-MMMyy); Default value set to = Now() to imply current date in Real Time Clock (RTC) of computer system and caption property set to Date.
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Credit : This column is meant to store the code corresponding to the account being credited in recording a transaction. Like Debit column, this column too shares the same properties as code column of Accounts table and must also be dealt with in the same manner as Debit column described above. Narration : This column is meant to store the narration. Its data type can be set to text type with field size set to 100 characters; Required to No; Allow Zero Length to Yes and Indexed to No. If the narrations are very large beyond 255 characters, its data type can be set to Memo so as to accommodate the narrations up to 65,536 characters, almost equal to 64 pages. PrepBy : This column is meant to store the identity of an employee who has prepared the voucher. EmpId as defined and described in schema of Employees table identifies the employee. The data type of this field and other properties must be identical to that of EmpId, except that its Indexed property must be set to No. This column as per design is expected to refer to EmpId column of Employees table and therefore must be defined as foreign key. Its relationship with EmpId column of Employees table must also be specified to ensure referential integrity. AuthBy : This column is meant to store the identity of the employee who has authorised the vouchers. This column is similar to PrepBy column. Therefore, its data type, properties and relationship with EmpId are the same as those for PrepBy column. Support : This table is created to store the details of support documents annexed to a voucher. It is designed to have the following four columns: vNo : This column is meant to store the voucher number to which this document is annexed. Its data type should be the same as that of Vno in Vouchers table because this column refers to Vno column of Vouchers table to maintain referential integrity. Its value cannot be null and therefore its Allow Zero Length property must be set to No with Required Property being Yes. Since there may be more than one support documents annexed to a voucher, the values stored in this column cannot be unique and therefore this column alone cannot be a primary key field. sNo : This column has been included in the table structure to store serial numbers 1,2,3 to correspond to the serial number of documents being annexed. Duplicate values will occur in this field also because the serial number of documents across the vouchers shall be the same. However, both the columns: Svno and Sno together provide a unique value because the documents, for every voucher are serially numbered and therefore unique. Both the
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columns together need be declared as Primary key of this table. dName : This column refers to Document name. Its data type is Text with field size equal to 30 to mean that within this character limit the document name can be suitable accommodated. sDate : This column refers to any date reference given in the support document. Its data type is Date/Time. Its format can be declared as Medium Date with Required and Indexed property set to No.
15.2.2 Modified Design for Implementing Compound Vouchers There are two tables: VouchersMain and VouchersDetails (a) VouchersMain : This table has been created to store one record for every transaction. The rows of this table refer to those data items of the vouchers, which lie outside the voucher grid. It consists of Vno, AccCode, vdate, PrepBy, AuthBy and Type. AccCode : This column is meant to store the complementing account code, which in the context of debit voucher is credit account and in the context of credit voucher is a debit account. In debit voucher, the debit accounts are displayed in Debit Accounts Grid and therefore the complementing account is the account to be credited. Similarly, in Credit Voucher, the Credit Accounts Grid displays only the accounts, which are being credited in recording a transaction. Therefore, the complementing debit account need be stored in this column. This column is also the foreign key column because it references the primary key column of Accounts table. Its data type and properties must be the same as that of Code column of Accounts table, except that its Indexed property must be set to Yes (Duplicates OK) and the domain of its data values is confined to the code values stored in Accounts table. Type : This column has been created to store a value 0 (for debit voucher) or 1 (for credit voucher). Its data type therefore is set to Number with field size set to byte. This column is very important and therefore its values must be carefully stored and interpreted in preparing accounting reports. Improper handling of this column may cause the Errors of Principle in accounting. The data types and properties of Vno,Vdate, AuthBy and PrepBy continues to be same as have been defined and discussed in Vouchers table of Simple Vouchers Design. However, Vno column has acquired an added importance because of being referenced by Vno column of VouchersDetail table. (b) VouchersDetail : This table is meant to store those data items of the voucher, which appear in the grid of debit or credit vouchers. However, the Total
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amount of voucher is not stored because it is derived data. It consists of Vno, Sno, Code, Amount and Narration as its columns. Vno : This column is meant to store voucher number of Debit/ Credit record of VouchersMain table to which the Credit/Debit entries of vouchersDetails table are related. Its data type should be the same as that of Vno in VouchersMain table because this column refers to Vno column of vouchersMain table to maintain referential integrity. Its value cannot be null and therefore its Allow Zero Length property must be set to No with Required property being Yes. Since there can be more than one debit/credit Entry against each of the credit/debit entry of VoucherMain table, the values stored in this column cannot be unique and therefore this column alone cannot be a primary key field. Sno : This column has been included in the table structure to store serial numbers 1,2,3 to correspond to the serial number of debit/credit entries being referred to in the grid of an accounting Voucher: Debit or Credit. Duplicate values will occur in this field also because the serial numbers of entries across the vouchers are bound to be the same. However, both the columns: vno and Sno together provide a unique value because for every voucher the entries are serially numbered and therefore unique. Both the columns together need be declared as primary key of this table. Code : This column is meant to store the account codes, which in the context of debit voucher are debit accounts and in the context of credit voucher are credit accounts. This column is also the foreign key column because it references the primary key column of Accounts table. Its data type and properties must be the same as that of Code column of Accounts table, except that its Indexed property must be set to Yes (Duplicates OK). The domain of its data values gets confined to the Code values stored in Accounts table. The data type and properties of amount and narration column continue to be the same as already described and discussed for Vouchers table. 15.3 Vouchers Using Forms The scope of this section includes the basics of Access for creating a Form in Access; transforming the voucher designs in terms of Access objects and properties; and also the procedure for creating Forms for vouchers.
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15.3.1 Access Basics for Creating Forms A Form in Access may be designed, developed and used for the following purposes : Data Entry: Form is used for entering, editing and displaying data. Application flow : Form is used for navigating through an application. Custom Dialog Box : It can be used for providing messages to the user or getting parameters from the user for executing a parameter-based query. Printing information: It can be used for providing hard copies of data entry information. This is contrary to the belief that Forms in Access can be used only for data entry. The most common use of a Form in Access is to display and edit existing data and also for adding new data records. 15.3.2 Tool Box and Form Controls A tool box is a collection of visual objects (or controls) that are placed (or embedded) on the Form to provide some meaning or functionality. The Form is designed by placing several such controls, which have their own functionality and properties. 15.3.3 Properties of Controls Every form control is a complete object with its independent set of properties, which determine the shape, size, behaviour and functionality of the object. The properties of these objects are divided into three categories: Format, Data and Others. All these properties may not apply to all the controls. Some important properties of these objects are as described below : (a) Format Properties : Some of the important properties are as described as under: Format : It determines the manner in which the data in the control is displayed. This property is inherited from its underlying data source. It is set and used in three situations : one when the property is not set for the underlying field; second when the format setting of the underlying field is to be overridden; third when a control, which is not bound to any underlying data field, is to be displayed in a particular manner. Decimal Places : This property specifies the number of decimal places up to which the control should display a numeric data. It must be used in conjunction with format property to determine the final appearance of numeric data. Caption : The caption property applies to label, command button and toggle buttons. This property is used to specify what printed matter will appear on the face of the control. In the context of label control, the printed matter is made to appear using this caption property.
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Visible : This property specifies whether the control embedded on the Form should be visible or hidden when the Form is opened. The property can make a control appear conditionally when required. Layout Properties (Left, Top, Width, Height) : These properties are used to set the position and size of the control. Back Colour and Style: The back colour property specifies background colour, as opposed to text colour, for the control. This property, when set to transparent, shows the forms background colour through the control. The setting is preferred for an Option group. Special effects: This property provides the three dimensional effect to a control in its appearance. The options for this property are: Flat, Raised, Sunken, Etched, Shadowed and Chiseled. Each of these effects give a different look to the control. Border Properties(style, colour, and effect): The Border properties are capable of affecting the style, colour and thickness of the Border of a control. The Border style options are Transparent, Solid, Dashes, Dots, etc. The Border colour property specifies the colour of the Border and it is possible to select from a variety of colours. The Border width property can be set to one of several point sizes. When the Border style of a control is set to transparent, its colour and width properties are ignored. Fore Colour: This property can be used for assigning a colour of choice to the text being formatted. Font Properties (Name, Size, Weight, Italics, Underline): These properties are meant to control the appearance of text within a control. These are capable of affecting font, its point size, thickness and also whether the text is italicised or underlined. Text Align : The text-align property affects the manner in which data is aligned within the control. The available options are: General, Left, Centre, Right and Distribute. Margins (Top, Left, Right and Bottom) : These properties determine how far the text appears from top, left, right and bottom of a control. The margin properties are of particular importance while using Text box for memo field. Line Spacing: It is used to determine the spacing between the lines of a text with multiple lines. This is useful when a text control is used for displaying and storing data pertaining to Memo fields. Display When: This property is capable of deciding whether to send the data of a control to a Printer or to a Screen. For example, the labels containing instructions can be displayed on the screen but not on the printer.
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Scroll Bars: This property is capable of determining whether scroll bars appear when the data in the control does not fit within its size or not. The options are none or vertical. This property is normally set to vertical for text control to interact with data pertaining to Memo field. (b) Data Properties Control Source : This property specifies the field from a record source that is associated with particular control. By default, it is the record source that underlies the Form being designed. Input Mask : The input mask property affects the format used for data entry into the control as opposed to its appearance, which is affected by Format and Decimal places property. The input mask of the field underlying the control is automatically inherited by the control. However, the input mask property of control in the Form is used to further restrict what data is entered into the field. Default Value : This property determines the value assigned to the field while adding a new data record. It is inherited from the underlying field of record source to which the control is bound. The default value, when set for control, has an overriding effect over the default value set at the underlying field level. Validation (Rule and Text) : The function performed by Validation Rule and Validation Text for controls is the same as it applies to Fields of database tables, except that the validation is performed at Form level in case of control and database level in case of fields. In case of bound controls, the user cannot enter data into the control, if the validation rules for control and the underlying field are in conflict. Enabled and Locked : This property is meant to determine whether focus is allowed on the control or not. If it is set to No, the control appears dimmed and mouse action cannot be performed on such control. This property is useful for calculated controls meant only for display of data. Locked property determines whether the data in the control can be modified or not. This property, when set to Yes, deprives a user the facility to edit data, though the focus becomes available. The two properties interact with one another resulting in following behaviour of control :
Locked Yes No Yes No Enabled Yes Yes No No Effect : The control can get focus ; its data can be copied but not modified get focus and its data can be modified not get focus not get focus; its data is displayed dimmed
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(c) Other Properties Name : This property allows the designer to provide a customised name to a control. The names assigned by the designer should be purpose oriented so that the design structure of the Form becomes selfdocumenting. Status Bar Text : This control specifies the text message that is displayed in the status bar when the control acquires the focus. Enter Key Behaviour : This property is meant to determine whether the use of Enter key adds a new line in the current control or results in moving the cursor to next control. Its setting is useful for Text control bound to Memo field. Allow AutoCorrect : This property, when set to Yes, enables the auto correction feature to correct automatically common spelling errors and types. It is useful while using Text control for Memo field. Vertical: This property is meant to determine whether the text in a control appears horizontally or vertically. The default setting is No to mean the horizontal. When set to Yes, the text within the control is rotated at 90 degrees. Default : This property applies to command button and specifies whether the control is a default control on the form or not. Tab Stop : This property indicates whether the Tab key can be used to enter a control or not. It is desirable to set this property to No for those controls whose values are rarely changed. Tab Index : This property is used to set the tab order for the control. This property helps in setting the tab order manually as opposed to automatic setting at Form level. Short cut Menu : This control is capable of attaching a specific menu to a control and a bar/window gets displayed when the user right-clicks at the control. Control Tip Text : This property is meant to enter text that acts as a tool tip for the control. The tool tip appears automatically when the mouse pointer is placed over the control and left there for a moment. Help Context ID : This property indicates the Help topic attached to a particular control. 15.3.4 Common Controls in MS Access Access provides for a number of controls and more can be added using the add-in-manager in Tools of menu bar. There are three types of controls: Bound, unbound and calculated. Bound controls are used to display and modify data stored in a data table of database. These controls automatically appear in the Form specified in its display control property and inherit many of the properties
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assigned to the field to which such controls are bound. Unbound controls display information to the user or get data from user that is not going to be stored in the database. A Calculated control is a special type of control, which displays the derived results of an expression or query. The expression may consist of ready-to-use functions that are meant to make computations by using input values. Some commonly used functions have been discussed and described in Appendix given at the end of the chapter. Therefore, the data in calculated control cannot be modified because it is derived data or information. The value of these controls changes automatically as and when the data, to which the expression of the control is bound, changes. Some of the common controls important for designing a Form are discussed below : (a) Label : This control is used to write dark prints on the Form such as Transaction Voucher, Voucher No, S.No, Debit, Credit, Amount, Narration, Authorised By, Prepared By on the left hand side and Choose the Account to Debited and Choose the account to be Credited on the right hand side of Access voucher Form design of which is shown in Fig 15.4. The attached labels are automatically appended to the Form when other controls such as Text boxes, List boxes, Combo boxes, etc. are added because every such added control has to be labeled to inform the user as to what data to enter or edit through the control. The default caption of the label is the caption of the field that underlies the control to which it is bound. If the caption property of the field is kept blank, the label caption uses field name as its caption. (b) Text Box : This control is included in a Form to provide a blank area for entering the data with or without default values. Blank space next to Amount label, for example, is a text box control to receive the value of amount of voucher. Text box, when bound to a particular field of the table, retrieves and displays the data stored in field for a particular row and is capable of modifying and adding data to the table. The unbound text box is used to get the data from the user for its subsequent use in report for providing report criteria. (c) List Box : This control is used for allowing a user to make a limited choice from a given set of values. The domain of its values is predefined and therefore limited. List control may be used next to Debit and Credit labels in a simple transaction voucher, so as to locate the accounts to be debited or credited. (d) Combo Box : This control combines the features of a list box and text box by allowing a user to select an item from a list or enter a value using the keyboard. (e) Sub-form : Many Forms are based on more than one table with One-toMany relationship. The records of such tables can be displayed by creating
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form within a form, with tabular presentation of records. The Form within a Form (also referred to as Main Form) is called SubForm. The Main Form and SubForm have parent-child relationship. The Control used for creating such a child Form is called SubForm/SubReport. Data records appearing in a grid can be stored in database by using SubForm Control. The SubForm whenever created is listed as an independent object like main form in Database Window. However, the SubForm Control in main Form has three properties for creating a link : Source Object : It contains name of the Form that is being displayed in SubForm control. Link Child Fields : These are the fields from the Child form that link the this form to the Main form. These are also referred to as Foreign key of related table. Link Master Fields : These are the fields from the Main Form that link the Child form to the Main Form. These are also referred to as Primary key of primary table. Make sure the Control Wizards tool is selected before adding the SubForm/SubReport control to the Main form. (f) Option Groups : Control, when applied to Option button, allows the designer to select a particular option from out of a set of mutually exclusive options. This option is useful in designing a common Voucher Form for Debit and Credit Voucher for compound transactions. (g) Command Button : It is meant to execute a defined action on the Form. Access provides for six categories of command buttons as described below: Record Navigation : The record navigation set of command buttons are meant to facilitate pointer movement on data records. At a point of time, only one row of a table, called data record, is accessed. To access other rows, there has to be a pointer for causing record movement. Record Operation : There are several operations on data records. These are meant to facilitate such operations as add new record, delete record, undo record, save record, duplicate and print record. Form Operation : These operations are meant to be performed on the entire form as an object. These are Open form, Close form, Print form, Refresh form data and so on. Report Operation : These operations are related to the report object. Once a report is created, further actions, which can be taken on such report are Mail report, Preview report, Print report and Send report to file. Access provides separate command buttons for each of these actions. Application : There are five command buttons especially designed for possible operations pertaining to other application programs. Run application is meant to execute any existing program ; and Quit
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application is used to stop the execution of a running application; Run MS Excel command button is used for calling the MS Excel, spread sheet program which is part of MS Office package. Similarly, a command button to run MS Word results in calling the text processing program of MS Office package; Run Note Pad command button when executed calls the text writing program provided by the Operating SystemWindows. Miscellaneous : This category include four command buttons: Auto dialer; Run query, Run macro, Print table. Auto dialer button in a form when clicked is capable of dialing a telephone number, provided a modem is attached and configured in the computer system. Run query command button is meant to execute an existing query. Run macro command button is used to execute a specified Macro and Print table command button, when clicked is capable of printing contents of a specified data table from among available tables in database. In the example of Access Voucher Form shown in Fig 15.4, four command buttons have been embedded. First button when clicked adds a Record while a click action on the second button results in undoing the record. The third command button is meant to delete a record and the fourth button when clicked saves the record to back-end database tables while in this case it is Vouchers table as already described. (h) Control Wizard : If the selected controls (such as List box, combo box or SubForm) when added to the Form do not invoke the automated wizard, the control wizard need be selected by click action before selecting the control which is to be embedded on the Form for design purposes. 15.3.5 Creation of Form Access provides for creation of a Form either by Design or Wizard. This can be achieved by double clicking at the database file. Immediately the Database Window appears, which is vertically divided into two parts: left and right. The left side displays a list of database objects such as Tables, Queries, Forms, Reports, Pages, Macros and Modules. The right hand side of Database Window shows the various objects created under each of the classes of objects. At the top of Database Window and just below the title bar, there is a menu bar, which consists of three named menu items: Open, Design and New, and five Icons: one to delete an object, second and third to toggle between Large and Small (default) Icons and fourth and fifth to toggle between list (default) and details. Select Forms Object : This can achieved by a click at Forms listed as objectclass. By default, two items appear on the right side of window: Create Form in design view and Create Form by using wizard.
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Fig. 15.2 : Database window showing the methods to create forms
(a) Create Form by using wizard : The following procedure is followed for using the wizard to create a data entry Form : Double click at Create Form by using wizard. Immediately there is a window titled, Form Wizard which allows the designer to choose the data table along with the related available fields to choose from. The designer should choose only those fields, which pertain to the data content of Form being designed. But it must be ensured that every essential field (defined as one with Required property set to Yes and Allow Zero Length property set to No) must be included. In case of voucher, choose all the fields by clicking at >> button. Click at Next command button. Form wizard responds by providing six mutually exclusive choices with respect to layout of the Form. One of these choices is exercised by clicking at an option button from a group of six such buttons.
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Click at Next command button after exercising layout choice. The Form wizard responds by prompting the user to select from a list control one out of the ten options to specify the style of presentation of this Form. Click at Next to move forward. Access responds by asking for the Title of the Form. The designer can provide a useful title, which explains the purpose for which the Form is being created. Further, the designer may specify whether the Form is to be opened for entering data or for modifying the design. Finally click at Finish command button to get the initial design of the Form in run mode, if the option for entering data is exercised. If the option for modify design is exercised, the design of the Form is available along with tool box with various controls to facilitate modification of design. Modifying Form Design : The Forms created with wizard have limited visual appeal. However, Forms have a design view, just as table do, and Access includes many tools for modifying a Forms design. Some of the common modifications to the Form are listed below : Changing Properties of controls Re-sizing and moving controls Aligning and spacing controls Converting (or Morphing) controls Conditional formatting of controls Re-arranging Tab Order Adding New controls Deleting existing controls Each of these modifications has been briefly discussed after describing the procedure for creating a Form by Design view. (b) Create Form by Design view : Under this method, a data entry Form is created either as a data bound object or as an unbound object. A double click at Create Form in Design View provides a New Form dialog but the Form created in this manner is not bound to any back end database. However, a click at New to open New Form dialog results in creating the Form, which is bound to database. The use of drop down list in the new Form dialog box to select a table or query serves as the foundation of the Form being created. Fields can be easily added to a Form by using the Field List window, which contains all the fields that are part of the Forms record source. The record source for the Form is the table or query that underlies the Form. Make sure that the Field List window is visible. If it is not, click at the Field List button on the tool bar. Pick up from the field list every field, which is to be displayed in the Form for entering the data. It is important to ensure that every essential field must appear in the Form, if
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the Form is being designed to enter records rather than displaying just part of record contents. Select and drag the field from the field list to a place on the Form where it is desired to appear. The location selected becomes the upper left corner of the text box, and the attached label appears to the left of where the text control is dropped. Further, the following steps are taken to develop a data entry Form : (i) Click at New to open the New Form dialog. Two list controls appear in the dialog box : one provides for various options to create a Form such as Design view, Form Wizard, Auto Form; etc. and another to choose the table or query where objects data comes from (also called record source). From First List control choose Design view(default) by a click. (ii) Choose a table as the record source because the entire data is stored in the table record by record. Click OK after the table is selected. (iii) Access responds by providing three windows : one for new blank Form, second for tool box and third for Field list corresponding to the selected record source. The Form object henceforth shall act as a container for other controls to be used in designing Form. (iv) Select and drag a field from the Field list and place it in the blank Form by drag and drop method. Repeat this process for every field in succession. Alternatively, all the fields can be selected by clicking at every field in the field list while Ctrl Key is kept pressed. The selected fields can be dragged and dropped at the Voucher Form. (v) Adding a Title : The Form must be suitably titled for its identity, which should be self-descriptive. To add a title, use tool box by clicking at the label control. While the pointer is moved back into the design area, it changes to a large letter A with crosshairs. Move the pointer into the header area and click where the label is desired to be placed and then type the text of title. Once the text is entered, the focus from the label control can be freed by clicking anywhere in the Form. The label can be reselected by a click, followed by using the formatting tool bar to format the title. Alternatively and in addition to the above, more formatting options can be exercised by right clicking at the label control and clicking at Properties item of drop down window of right click action. (vi) Changing the Properties of Forms and Controls : Every Access object: Form or Controls is described by its properties. These properties, as already stated above, have been classified into three broad categories: Format, Data and Others. It is not essential to know every available property to work well in designing Forms in Access. But it is always good idea to check up the property values if the object is not behaving the way it is expected to. To view the properties
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for an object or control, right click at the control and select the properties. Access responds by providing all the properties listed under category tabs. The property sheet title bar includes names of objects contained in the Form. Once property sheet is opened for one object, it is easy to call for the properties of other objects by selecting the name of object from property sheet title bar. The values of such properties are changed as desired. The Forms property sheet can be opened by double-click at Form selector, which is located at the left most intersection of vertical and horizontal rulers. The property setting on multiple controls can be changed at the same time by selecting multiple objects, in which case only those properties become available for editing which are common to the selected objects. The multiple objects can be selected by keeping the Shift Key pressed, followed by clicking at desired objects. Moving and Resising controls : In order to move a control, first select it by a click action, then move the pointer to the edge of the selected control, ensuring that any of the re-sizing handles appearing as bold dot is not pointed at directly. The pointer turns its shape to a small hand. At this stage, hold mouse button pressed and drag the control to its new location. Movement of control beyond the bottom or right edge of the Form, leads to increasing the Form area automatically. Access also allows for combining of select and move step thereby making it easier and more efficient to reposition the control. A control can be re-sized by dragging the re-sizing handles at the corners and sides of the object. A change in the size of text control, however, does not result in changing the size of its underlying field because the size of the field is specified in tables design and can be changed only by modifying the properties of the field in table design. Aligning and Spacing Controls : Select two or more controls (click at control to be selected by holding the Shift Key pressed) to be aligned and choose Format-align or right click and choose Align from the shortcut menu to open the list of alignment options. Align-Left leads to aligning the left edges of all the selected controls; Align-Right aligns the right edges of the control. To adjust controls on the same horizontal line, Align-Top or Bottom options can be used. Spacing of controls allows to change (increase or decrease) the relative position of selected controls by one grid point horizontally or vertically. The spacing becomes important when the controls are to be spread out or move closer together for a neater visual layout. Spacing can also be used for ensuring that the controls are evenly spaced.
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Converting (or Morphing) Controls : Initially, when a Form is built, it is not always possible to choose the best type of controls to display each field on the Form. One might make a choice for the control only to find out later that it does not suit to the requirements. This is particularly important when the initial design of a Form is created using Form wizard. Access provides for conversion (or morphing) of such control into the desired ones. One of the most common types of morphing is from text to List box or combo box. This is achieved by right click on the text box, followed by choosing Change To and selecting the type of control to into which text box is to be morphed. Every control cannot be morphed into every other type of control. Text box, for instance, can be converted into a label, list box or combo box. After morphing, a text box to list box, for instance, it is important to modify the control properties such as row source, bound column, column count and column width so that the changed control behaves in a desired manner. Conditional formatting of text boxes : The conditional formatting is displayed in a text control when the value of text control meets a specified criteria or a set of specified criterion. For example, the colour of Amount entered should turn Red when it exceeds a certain limit say Rs. 20,000. In order to create conditional format, right click at text box to be conditionally formatted when in design mode, followed by conditional formatting item of right click window. Access responds by providing conditional formatting window which appears as follows : Conditional formatting window, as shown above, is divided into two parts: the default setting and condition-1. Since the formatting is to occur on the basis of a field value, the criteria list control can be used to select greater than and Rs. 20,000 is entered in the right most box of condtion-1. There are five icons: bold, Italics, underline, Back colour and Fore colour for formatting the data value. As and when the condition is satisfied, the formatting based on the selected icons applies to the data value. If there are multiple conditions for formatting, Add button can be clicked to call for additional formatting conditions. At the most three conditions can be set up for conditional formatting. Click OK to apply the conditions and click Delete to remove the conditional format. Re-arranging the Tab Order : The tab order of the Form (defined as a sequence of controls to move through when pressing a tab) is assigned while creating a Form. The tab order goes out of sequence when the controls in the Form are re-arranged. An inconsistent tab order leads to an erroneous data entry. To change the tab order, choose View-Tab order or right click and choose tab order to open
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Tab Order dialog box. Clicking Auto Order generally rearranges the fields in the correct order. It is preferable to try this option first. If the auto order is not correct, the tab order can be set manually by clicking the row selector for a control and then dragging the control up or down into position in the Tab Order.
Fig. 15.3 : Conditional formatting window
15.3.6 Procedure for Creating Voucher Forms On the basis of above discussion, the following procedure can be followed to create the different types of vouchers : (a) Simple Transaction Voucher : The transaction data of simple accounting vouchers is required to be stored in the Vouchers table of a database by using a data entry Form in Access. The format of such a form is shown in figure 15.4.
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Fig. 15.4 : Transaction voucher, using database design (model-I)
The above voucher form uses database design (Model-I) at the backend. A perusal of the this voucher Form reveals that there are two parts: Left and Right separated by a dark vertical line. Left part is dedicated to the data entry of transaction data while the right part has two list controls: one each giving the accounts to be debited and credited. The pre-printed contents of simple transaction voucher appear to the left of above Form as bold dark words. The access resource required to display such pre-printed matter is label control. The data entry spaces against Voucher Number, Dated, Amount and Narration are Text Controls. The list controls have been deployed against Debit Account, Credit Account, Prepared By and Authorised By. The Title of the Voucher Form has been written by using the Label Control. Four operation buttons called Command Buttons control the data entry into the voucher Form. On the Right hand side of above voucher Form, the list controls have been used in expanded Form to choose debit and credit accounts. The resources used in creation of above voucher
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Form, therefore, consist of Labels, Texts, List controls and Command Buttons. Once a blank Form is picked up like a container, it is capable of containing these controls including command buttons. The following steps are required for creating the Simple Transaction Voucher as per the Access design given above. (i) Once the Database Window is opened and Forms object is selected, click at New item of menu bar. Access responds by displaying a New Form window in which design view option among others appears by default along with a list control to select a table or query which is to act as underlying data source for the voucher being designed. In designing Simple voucher Form, it is fairly clear that the data entered using this voucher Form is to be stored only in the Vouchers table. (ii) Choose Vouchers table, which has been designed to include the transaction data in each row as a stand-alone record and click OK. (iii) Access responds by displaying a blank Form object in Form window, along with two other windows: Tool box and Field List of Vouchers table. Expand this Form towards the right and divide it into two parts left and right using line controls of tool box say in the ratio of 3:1. (iv) Keep the Ctrl Key pressed and click at every field in Field List Vouchers window. The colour of the list of fields turns blue. (v) Press at the selected fields area and drag all the fields to left side of blank Form on which data entry contents of voucher are to be located. It may be noted that every data entry control has been assigned to its left an attached label control whose caption is the caption of the fields in Vouchers table. (vi) Re-position all the controls to their desired location in the left part of the Form and set the font weight property of each to bold. The caption property of each label can be modified to match the preprinted layout of the voucher. (vii) Click at label control in tool box and add it to the centre top of lefthand side of the Form to add the title: Transaction Voucher. Its font size property need be set to 16 with font weight set to bold. Set the fore colour to Blue. (viii) Paste another text box anywhere in the Form and set its Control Source property as =Val(DMax(Vno,Voucher))+1 and Visible property to No. Further, Set Default value property of Text Box to the left of label Voucher No. as =Val(DMax(Vno,Voucher))+1. This ensures that the text control generates a new value one more than the preceding value of last voucher number entered in Vouchers table, as and when a new record is added. As a result, the voucher
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number is detected in Vouchers table and incremented by one to auto generate the voucher number sequentially. Further, set the Enabled property to No so that the auto generated value is not amenable to any changes by the user. Set Default value of Text box meant for entering the voucher date as = Now(). This results in giving current RTC date as the default date to voucher as and when a new voucher record is added. Alternatively, click at More Control button in tool box to select Microsoft Data and Time Picker Control, Version 6. This control provides a user-friendly and interactive method of selecting a date. Set the format property of this control to 3-dpt custom and custom-Format property to dd-MMM-yy by using DT Picker properties dialog. Control source of this control is set to vdate so that the selected date is stored directly into this field. Set the format property of Text box meant for Amount to Standard with decimal places to 2. This ensures the appearance of amount up to two decimal places with standard punctuation of numeric values. Provide for conditional formatting of amount so that its colour turns red as and when an expense voucher exceeding Rs. 20,000 is not authorised by an employee whose EmpId =A001. This can be achieved by a right click at text box for amount to click at conditional formatting. A conditional formatting dialog appears in which condition-1 is to be given as Field value greater than Rs. 20,000 interactively. Click Add button to provide condition-2 as Expression is [AuthBy]<>A001 and [Debit] like 71*. Click colour icon to select red colour in condition-2. Click OK to close the conditional formatting dialog. Control morphing from Text box to List box is to be applied on four-text control, each one meant to store Debit, Credit, AuthBy and PrepBy. This can be achieved by right click at each of these controls one by one and click at Change To item of right click window. To begin with, select List Box option for text box next to Label Debit. Height of text box is expanded. Re-size, it to its original shape and right click to select the property window. Select Data properties button to provide the Row Source as Account table. Click at format properties button to set the column count property to 2 and column width property to 0.5". Ensure that the width property of list control for debit is set to a minimum of 1.75 to accommodate the code as well as Name of Account in a row of list control. The process can be repeated for Text boxes next to Credit. Text controls meant for AuthBy and PrepBy can also be morphed into List Box
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controls in a similar way, except that the Row Source Property should be Set to Employees table and Column width be set to .33 only because Empl_Id occupies only four text spaces as opposed to Account code, which need six spaces. Width property of these list controls can be suitably adjusted to accommodate both EmpId and Fname of employees authorising or preparing a voucher. Paste List Controls for selecting debit and credit Accounts on the Right Hand Side (RHS) of Voucher Form. Following steps are taken to accomplish this : Click at list box control available in tool box and carry the mouse pointer to the right side of the Form. Its shape will turn into a cross with icon of list control. Place it at the top of right part of the Form. Access responds by invoking List Box Wizard, which provides for three options to choose the look up values. By default, the wizard provides for choosing look up values from table or query. Click at Next button to get the classified list of tables and queries to choose from. At this stage, choose the Accounts table because domain of accounts to be debited or credited remains confined to accounts available in Accounts table only. Click at Next button to get the available fields of Accounts table: Code, Name and Type. Select Code and Name by clicking at > button. Click at Next to get a list of accounts with key column hidden. Uncheck the already checked box to display the key column also in list control. Click at Next to get an option to select code to store in database. Clicking at Next provides two options: One to remember the value for later use and second to store that value in this field. Choose second option and select the debit field to the right of this option as the column against which the key value of accounts from list control is to be stored. Repeat the above process to provide for a list control for Account to be Credited. Once both the List box controls for debit and credit entries have been pasted, change the caption property of labels attached to such List boxes and write the text Choose the Account to be Debited for first list box and Choose the Account to be Credited for second. Set the Font weight property to bold, the fore colour to red and green respectively to distinguish between debit and credit list control and re-size the label control by increasing its width to accommodate the text to caption of label. Re-size the
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list boxes to adjust their width and height appropriately. This can be achieved by right clicking at each of the controls to get the property windows. (xiv) Click at Command button in Tool Box and carry the mouse pointer to Area at the bottom of Left most bottom corner of the Voucher Form. Its shape turns into a cross with command button icon. Paste it by horizontal and vertical dragging to give suitable width and height. Immediately, the Command Button wizard is invoked to seek information about category of operation and the action to be performed using this command button. Choose Record operation as category with Add New Record as the action. Click at Next to state whether the caption of the command button is to be a text value or an icon. A click at next after appropriate selection results in giving a suitable object name to the command button. Accept the default value and click at finish. This results in pasting an operational button on the Form with the capability to add a new record. (xv) Repeat this action to create various other command buttons to match the design of Transaction Voucher Form given above. (b) Compound Transaction Voucher : The transaction data of Debit or Credit vouchers, which have already been described as compound transaction vouchers, is required to be stored in VouchersMain and VouchersDetails tables of database. Its design, when transformed in Access Form layout, is expected to appear in the following format : A perusal of the above Access Form for Credit Voucher reveals that there are four labels: Voucher No, Date, Prepared By and Authorised By in Dark bold letters. These labels are meant to define the pre-printed content of the voucher as per design. Next to first two labels: Voucher No. and Date are text boxes displaying their respective data contents. To the right of labels Authorised By and Prepared By are List Box controls to get and display the first name of employees. Text Box displays the Title of the Voucher Form Credit Voucher as calculated control because the same voucher design is used for Debit vouchers also. Just below this dynamic title is the Option group control whereby the user can make a mutually exclusive choice for Debit or Credit Voucher. The title of Entries Grid and Text box to the left of a list control are used to select an account to be debited or credited (the complementing account) against the accounts being mentioned in the Entries Grid are also calculated text controls. The calculated text controls acquire the text value to display on the basis of what is selected in the Option groups. Next to calculated text box control is a label to print an instruction for refreshing the display in grid. The grid consists of five columns: S.No, Code, Name of Account, Amount and Narration. The grid appears in the voucher by using SubForm control. Besides this, there are five command buttons, each dedicated to Add
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Record, Undo Record, Delete Record, Save Record and Close. These command buttons operate on the data entry Form.
Fig. 15.5 : Credit voucher created as a form in access
To create this voucher Form, following steps are taken using design view : (i) Create a blank form in design view and ensure that its underlying data source is selected as VouchersMain table and Field List window along with tool box is also displayed. As already discussed in Section I of this chapter, the Compound Voucher Form requires another related data table, VouchersDetail, for storing the data contents of grid. (ii) Keep the Ctrl key pressed and click at Vno,Vdate, AuthBy and PrepBy fields in Field List window. (iii) Press at any of the selected fields area, drag and drop it to blank Form. It can be observed that all the selected fields are also dragged and dropped along with this field. (iv) Re-position all the controls to their desired location in the Form and set the font weight property of each to bold. The caption property of each label can be modified to match the pre-printed layout of the voucher.
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Paste Option group control just below the form space meant for dynamic title. Access responds by prompting the user to enter the label names for each option. Enter two options by writing Debit and Credit in different rows. This must be followed by a click at Next button. Option group wizard responds by prompting the designer to enter the default option. Select Debit so that by default, the compound voucher is a Debit Voucher. Click at Next button. Access responds by prompting the designer to enter the data values corresponding to each of the option labels. Enter against Debit and Credit 0 and 1 respectively. Click Next button. Access Responds by requiring the user to either opt for Save the value for Later Use or Save the value in this Field. Choose the second option for Save the value and select Vno as Type field. Click at Next button. Access responds by asking the designer to choose the appropriate control type. Choose Option buttons, along with any of the styles given below in wizard dialog. Click Finish button. Access assigns a default label to the Option group. Select the label by right clicks and remove it by clicking at Cut. Click at text control in tool box and add it to the centre top of the Form to provide a dynamic text for the title: Debit or Credit Voucher. The attached label control is removed by a right click on this label followed by a click on Cut. The font size property of Text need be set to 16 with font weight set to bold. Set the fore colour to Blue. Set its Control Source property as = IIF([Type] = 0,Debit,Credit) & & Voucher Re-size the width of this text control so that it can accommodate and display the dynamic title of voucher. By entering the above formulae in Control Source property, text control for title becomes dynamic. Whenever, the Type field is assigned 0 value, a text control for title displays Debit Voucher and when the value of Type is set to 1, the Credit Voucher is displayed by the this Text control. The title of simple Transaction Voucher is static. Therefore, a label control has been used for this purpose. Further, set the Enabled property to No so that the displayed text is not amendable to any changes by the user. This applies to other similar controls meant for dynamic texts in this Voucher Form. Paste another text box anywhere in the Form and set its Control Source Property as = Val(DMax(Vno,Voucher)) + 1 and Visible property to No. Further, Set Default value property of Text box to the left of label Voucher No. as =Val(DMax(Vno,Voucher))+1. This ensures that the text control generates a new value one more
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than the preceding value of the last voucher number entered in vouchers table as and when a new record is added. As a result, the voucher number is detected in Voucher table and incremented by one to auto generate the voucher number sequentially. Set its Enabled property to No for reasons already explained earlier. (xii) Set Default value of Text box meant for entering the voucher date as = Now(). This results in displaying RTC date as the default date to voucher as and when a new voucher record is added. (xiii) Paste another text control below, the label Voucher No: to indicate Debit in case of Credit voucher and Credit in case of Debit Voucher. Remove its attached label and set its Font size and font weight property appropriately. However, its Control Source property is set as = IIF([Type] = 0,Credit,Debit) so that this text box displays the desired text as stated above. Pick up a List control from tool box and place it next to this calculated text control to choose the account. Immediately, the List control wizard gets activated and displayed. Complete the list control creation process as already discussed while designing the simple transaction form. Ensure that its Control source property is assigned the Field name AccCode; Row Source to Accounts; Column Count set to 2; Bound Column set to 1 and Column width to 0.5". Re-size the control for proper display. Creating Grid for Debit/Credit Entries : The grid for entries is created by using SubForm Control. Following steps are taken to create SubForm to be linked to Main Voucher Form : (i) Pick and paste SubForm control for creating a grid to accommodate the Debit/Credit Entries. SubForm wizard gets activated and displayed. Choose existing Tables/Queries, followed by click at Next button. Subform wizard displays a dialog to giving fields classified by their respective tables. Choose Sno, Code from VouchersDetail table; Name from Accounts table; again Amount, narration and Vno from VouchersDetail table. Click Next button. (ii) Choose Show VoucherDetail for each record in VouchersMain using Vno and Click Next and provide the name for subform object as VouchersDetail SubForm Click at Finish. The SubForm stands created to accommodate the data contents in voucher grid. The attached label of SubForm is removed to pave the way for creating dynamic title. This is achieved by adding another text control (remove the attached label control) at the top of the SubForm in the same manner as applies to the title of voucher, except that the Control Source property is set to = IIF([Type] = 0,Debit,Credit) & & Entries. This calculated control is capable of showing the title of the grid as Debit Entries or Credit Entries, depending on choice of Option button at run time.
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The Voucher number column in grid can be hidden by merging its right most vertical line with vertical line separating narration and voucher number column by drag and drop method. (iii) Set the format property of Text box meant for Amount to Standard with decimal places to 2. This ensures the appearance of amount up to two decimal places with standard punctuation of numeric values. (iv) Provide conditional formatting of amount so that its colour turns ino red as and when an expense voucher exceeding Rs. 20,000 is not authorised by an employee whose EmpId =A001. This is achieved by a right click at text box for amount to get short-cut window so that conditional formatting item is selected. A conditional formatting dialog appears in which condition1 is to be given as Field value greater than Rs. 20,000 interactively. Click Add button to provide condition-2 as Expression is [AuthBy]<>A001 and [Debit] like 71*. Click colour icon to select Red colour in condition-2. Click OK to close the conditional formatting dialog. (v) Text control for entering Code in SubForm can be morphed to List control in the same manner as already explained for Debit/Credit Account in simple Transaction Voucher except that the Control source property is assigned the Field name Code of VouchersDetail Table. (vi) Control morphing from Text box to List box is also to be applied on text controls meant to store the data values for AuthBy and PrepBy respectively. This can be achieved in the manner as already described in the context of designing a simple Transaction Voucher. (vii) Paste a label control to the top right of SubForm for displaying the instruction Press F9 to Refresh Display. (viii) Command button at the bottom of Debit/Credit Voucher Form can be added in the same manner as described above in the context of Simple Transaction Form. An additional Command button with Caption Close Form can be added by choosing Form Operation as category with Close Form as the action. While operating on the above form in run mode, it must be ensured by the user that the entries in the grid are made only after saving the data contents of voucher outside the grid. This is because a data record for contents outside the grid belongs to VouchersMain table. Such record in primary table must exist before any data record is entered in grid to be finally stored in VouchersDetail table. 15.4 Information Using Queries Accounting information that is presented in an accounting report is generated by creating and executing various queries using DBMS. The basics of creating such queries in MS Access have been described below along with their usage in the context of Model-1.
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15.4.1 Basics of Creating Queries in Access Recall that one of the great advantages of relational databases is that the fragmented data is stored in different data tables so that there is no or minimum redundancy. But a complete view of data stored across various tables is achieved only by executing queries based on SQL. A query is capable of displaying records containing fields from across a number of data tables. 15.4.2 Types of Queries There are several types of queries in Access that are used to generate information. Such queries are called select queries because they are used to select records with a given set of fields: actual and computed and also for a given criteria. There are three important query types that are required for generating the accounting reports. These queries have been discussed as below: (a) Simple Query : A select query is a simple query if it does not involve use of any query function to produce a summary of data. The criteria, if any, used in such a query is based on some constant value or values, forming an integral part of the query. For example, a query, to find date and amount of transactions records in which an account, identified by code = 711001 is debited, is a simple query and is executed, using database design of Model-I by the following SQL statement :
SELECT vDate, Amount FROM Vouchers WHERE Debit = 711001
In the above SQL statement, the SELECT statement is meant to specify the fields to be selected, FROM clause specifies the source of data and WHERE clause filters the records matching the condition that Debit field has code = 711001 (b) Parameter Queries : A parameter query prompts the user to enter parameters, or criteria through an input box, for selecting a set of records. A parameter query is useful when there is a need to repeat the same query with different criteria. The criteria, this means, is not constant as in the case of the simple query. While extracting the transactions to prepare ledger accounts, the same set of queries need be executed for different account codes. Consider the following SQL statement :
PARAMETERS AccountName Text (255) SELECT Name FROM Accounts WHERE Code = AccountNo
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In the above query, the PARAMETERS clause is meant to declare the variable AccountNo. This SQL statement, when executed, prompts the user to provide the value of AccountNo. (c) Summary Queries : A summary query, as opposed to a simple query, is used to extract aggregate of data items for a group of records rather than a detailed set of records. This query type is of particular importance in accounting because the accounting reports are based on summarisation of transaction data. Consider the following SQL statement :
SELECT Code, Name, Sum(Amount) From Vouchers INNER JOIN Accounts ON (Accounts.Code=Vouchers.Debit) GROUP BY Code, Name
In the above query, the Vouchers table has been joined with Accounts table on the basis of Code field of Accounts and Debit field of Vouchers. The resultant record set has been grouped on the basis of Code and name of accounts. Accordingly, the sum of amount for each group (or set of records) has been ascertained and displayed. Finding the sum is the process of summarisation. 15.4.3 Adding Computed fields The computed fields, representing secondary data, do not form part of data stored in tables because such data items unnecessarily increase the size of database. The secondary data items can always be generated on the basis of primary (or stored) data. In order to find values of such secondary data items, the query is based on computed fields. The computed fields provide up-todate calculated results because they rely upon updated stored data values. For example, a data table, named Sales, which includes ItemCode, Quantity, Price, Dated and CustId, is maintained in a database to store sales transactions. In order to get list of sales transactions along with total sales relating to CustId=A051', the following simple query is executed by including Sales as computed field :
SELECT Dated, ItemCode, Quantity*Price AS Sales FROM Sales WHERE CustId= A051;
In the above query the expression Quantity*Price has been given the name Sales by using AS clause. 15.4.4 Using Functions in Queries A function in the Access environment is named and followed by parenthesis ( ). The function receives some inputs as its arguments and returns a value (also called its output). These functions also form a part of the expression for a computed field. Some commonly used functions have been described and discussed in Appendix given at the end of the chapter.
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15.4.5 Methods of Creating Query There are three ways in which any of the above queries can be created in Access. These methods are Wizard, Design and SQL View. A brief description of each is given below : (a) Wizard Method : In order to create a query using Wizard, the following steps are required : (i) Select Queries from Objects list given in LHS (Left Hand Side) of Database window. (ii) Double click at Create Query by Using Wizard given on the RHS (Right Hand Side). Immediately, there is a window titled Simple Query Wizard (Shown in figure: 14.6) that prompts the user to select a field from a table or an existing query that is to be included in the query being created. Many such fields may be selected according to the information requirement of the query. The tables (or queries)
Fig. 15.6 : Window to display simple query wizard
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being chosen represent the data source of the query being created. The fields being selected imply the data items to be displayed by the query. Use arrow buttons or double click at the list of fields on LHS of this window to select fields. (iii) Click at Next after the desired fields have been selected. If the selected fields include a number or currency field, the designer is prompted to choose an option button to specify whether the query to be created is a summary or detail query. If detail option is chosen, the execution of query results in displaying records from data source. If summary option is selected, the user is prompted to indicate the type of summarisation required: Sum, Average, Minimum and Maximum with respect to the field of summarisation. Clicking at check boxes against different types of summarisations specifies this. Click OK. (iv) Click at Next and specify the name of the query being created % Finish to save and execute the query. The results of the query are displayed in datasheet view. (b) Design Method : In order to create a query by design method, the following steps are required : (i) Select Queries from Objects list given in LHS of database window. Double click at Create Query by Using Design View given on the RHS. (ii) Access responds by displaying a Select Query and Show Tables Window. The Select query window is vertically divided into two panes: upper pane and lower pane, as shown in Figure: 15.7. The upper pane is meant to display data sources (Tables or Existing Queries) and the lower pane, which also called Query By Example (QBE) grid, has one column each for field to be included in query being created. The row of this grid shows field name, table (or query), sort order, whether the selected field is shown in the query results or not and also the criteria that have been applied to the field or fields to restrict the query results. The Show Table Window is meant to add tables, queries or both to the upper pane of Select Query Window. If closed, the Show Table Window can be recalled by a right click at upper pane % show table.
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Fig. 15.7 : Select query and show tables windows
(iii) Click at View item of Menu bar % Total and then % Table Names. (iv) Click at field row of first column of QBE grid to select the fields to be included in the query. The process is repeated for second and subsequent columns of grid to include more fields in the query. This process of selection constitutes the data items to be displayed by SELECT clause of SQL statement. (v) The name of table or query is displayed, in accordance with selection of fields. Such tables or queries constitute the data sources shown after FROM clause of SQL statement. However, the initial selection of a table/query in the second row of QBE grid restricts the choice of fields to the selected table/query only. (vi) Click at row of grid to specify the Group by clause and aggregate functions so that summary a query is created.
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(vii) Click at row of grid to specify the sort order (Ascending or descending) on field(s). The selected fields for sort order are shown after ORDER BY clause of SQL statement in which ascending order is the choice by default. (viii) Click at row to check for the selected field to be displayed in the query result. The field(s) may be selected only for the purpose of specifying the sort order or criteria. Click at row of the grid to specify the criteria to limit the records to be displayed by the query being created. The specified criteria result in a conditional expression, which is shown after the WHERE clause of SQL statement. Click File % Save (or Press Ctrl+S) to save a query. A dialog box prompts the user to specify the name of the query being created. By default a generic name appears which can be accepted or rewritten with a desired name. (c) SQL View Method : A query may be directly specified in Select Query Pane by a right click at table pane % SQL view. The upper and lower panes of selected query window are substituted by a pane to specify the SQL statement that is written by using keyboard. The desired SQL statement is directly okeyed in on this pane and saved in the same manner as described for design method. While forming the SQL statement, the following clauses are normally used for generating information (or Select) queries : (i) SELECT : This clause is used to specify the fields to display data or information. Consider the following SQL statement segment :
SELECT Code, Name, Amount
The fields Code, Name and Amount after SELECT clause indicate the data items to be displayed by the query statement. (ii) FROM : This clause is meant to indicate the source of data in terms of tables or queries or a combination of both. Two tables are joined by specifying a JOIN clause based on a condition of Join. There can be three types of Join: Inner, Left and right. (iii) INNER : This Join clause is meant to display only exactly matching records between two data sources. Consider the following SQL statement segment:
FROM Accounts INNER JOIN AccountType ON ( CatId=Type)
In the above statement, only those records of Accounts and AccountType table constitute the source of query data, which match exactly on CatId = Type.
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(iv) LEFT : With this Join, all the records in the primary table in the relationship are displayed irrespective whether there are matching records in the related table or not. Consider the following SQL statement segment :
FROM Accounts LEFT JOIN AccountType ON ( CatId=Type)
In the above statement, all records of Accounts along with matching records of AccountType table constitute the source of query data, The matching condition is CatId = Type. (v) RIGHT : With this Join, all the records of related table in the relationship are displayed irrespective whether there are matching records in the primary table or not. Consider the following SQL statement segment
FROM Accounts RIGHT JOIN AccountType ON ( CatId=Type)
In the above statement, all records of AccountType along with matching records of Accounts table constitute the source of query data. The matching condition is CatId=Type. (iv) WHERE : This clause in SQL statement is used to provide the condition to restrict the records to be returned by query. The resultant records of query must satisfy the condition which is specified after WHERE clause. This is meant to filter records returned by the query. (v) ORDER BY : This clause is meant to specify the order in which the resultant records of query are required to appear. The basis of ordering is determined by the list of fields specified after the order by clause. Consider the following SQL statement segment :
ORDER BY Type, Code
The above statement in the context of Accounts table implies that the resultant record set is ordered by the Type field of Accounts and within Type, by Code field of Accounts. (vi) GROUP BY : The group by clause is used in the SQL statement to enable grouping of records for creating summary query. The fields after GROUP BY clause constitute the basis of grouping for which summary results are obtained. Consider the following SQL statement:
SELECT Debit, Sum(Amount) FROM Vouchers GROUP BY Debit
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In the above SQL statement, the GROUP BY clause uses Debit account codes as the basis for computing the sum of amount of voucher. The total amount, by which every transacted account has been debited, is given by this SQL statement In this case, sum of amount is found for each group of records formed using GROUP BY clause. 15.5 Generating Accounting Reports An Accounting system without reporting capability is incomplete as reporting is one of the main purposes for which an accounting system is designed and operated upon. The output of accounting system takes the form of accounting reports. Access offers a great flexibility in designing and generating customised reports. 15.5.1 Accounting Reports Every report consists of information, which is different from data. Data processing leads to data transformation and when this processing is in accordance with decision usefulness, it is called information. Information generation is the process of compiling, arranging, formatting and presenting information to the users. A report is prepared with a definite objective. Every report is collection of related information for a particular need and purpose and must meet the twin objectives of reporting : one to reduce the level of uncertainty that is faced by a decision-maker; second to influence the behaviour (or positive actions) of the decision-maker. Accordingly, accounting information, generated by processing accounting data is gathered to generate an accounting report. An accounting report, therefore, is the physical form of accounting information. Useful accounting information, regardless of its physical form, must have five characteristics: relevance, timeliness, accuracy, completeness and summarisation. An accounting report, in order to be useful, must display information content in such a manner as to give confidence to the user, influence his behaviour and prompt him to take positive actions. Reports, which do not meet the above stated objectives, lack or do not have sufficient information content, have no value. There are two broad classes of accounting reports: Programmed and Casual (also called Adhoc or Pass through). (a) Programmed Reports : These reports contain information useful for decisionmaking situations that the users have anticipated to occur. There are two types of reports within this report type: Scheduled and On demand. Scheduled Reports : The reports, which are produced according to a given time frame, are called scheduled reports. The time frame may be daily, weekly, monthly, quarterly or yearly. Some examples of scheduled
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reports are: Trial Balance, Ledger, Statement of Cash Transactions (Cash Book), Statement of Ageing Accounts, Closing Stock Report, Profit and Loss Account and Balance Sheet, etc. On Demand Reports : The reports, which are generated only on the triggering of some event, are called On demand reports. Some examples of On demand reports are a Customers Statement of Account, Inventory Re-order Report, Stock in hand Report for a Selected Group of items, etc. Casual Reports : There are reports, the need for which is not anticipated, the information content of which may be useful but casually required. These are adhoc reports and are generated casually by executing some simple queries without requiring much of professional assistance. As opposed to programmed reports, casual reports are generated as and when required.
15.5.2 Process of Creating Reports The process of generating accounting reports in Access involves three steps: designing the report, identifying the accounting information queries, and finally creating an accounting report by using such queries. (i) Designing the Report : Every report is expected to meet certain objectives of reporting for which it is designed and developed. It should not be too big so as not to be read at all or too small so as to conceal certain vital information of importance that is expected to facilitate decision-making. Objective-oriented reporting means designing the report in such a manner as to meet the pre-conceived objectives in view. (ii) Identifying Accounting Information Queries : A number of SQL statements are written in such a manner that each successive SQL relies on the results of the preceding SQL statement and refines its results by using fresh data (or information) from existing data tables (or queries). (iii) Using the Record set of Final SQL : The record set of final SQL that relies upon preceding SQL statement, is collection of report-oriented information. This record set need be embedded in the report being produced. 15.5.3 Basics of Designing a Report in Access A report, in Access, is a static presentation of stored or transformed data in an organised manner. Access saves the design of the report, which consists of information structure along with various controls to display information content and its record source. When a saved report is opened, the information content is retrieved from the tables and displayed according to the design. As a result, a saved report design, when opened, displays the information content
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according to the current state of data. There are two types of formats of presenting information through a report: Columnar and Tabular. Columnar Report Format : A columnar format displays the caption of each field on a separate line in a single column down the page. The corresponding information contents of the fields are shown in another column next to their respective fields. If the caption property of a field is kept blank, the name of the field is used as its caption. This implies that there are two columns in this format: one for displaying the fields and another for showing the corresponding information content. A record set that consists of nine fields, when presented in such a format, requires nine lines of report. In columnar format, the total number of lines to be printed equals the number of fields multiplied by the number of record sets to be displayed. Tabular Report Format : A tabular format displays the caption of fields on the same line so that their respective information contents appear in the next line. The number of columns in tabular report is exactly equal to the number of fields to be displayed. It implies that the above mentioned record set, when presented in tabular format, requires one line for captions of fields and another line for information content. In tabular format, the total number of lines to be printed equals the number of record sets to be displayed plus one for captions of fields to constitute column headings. 15.5.4 Structure of Report in Access A report in Access is designed using seven sections which taken together constitutes the structure of report design. It is not necessary that every report designed in Access must have all the sections that have been described below: Report Header : Report header appears at the top of the report and may include title and other relevant information pertaining to the report. Page Header : Page header appears at the top of every page of the report. It may include a uniform title to indicate that the page belongs to a particular report. Group Header : The group header and footer are available in a report only if the sort order and grouping levels are also defined on the basis of a field of data source. This is because Group Header and Footers are properties of the field that are used for defining the sort order. Depending on grouping level, the group header appears at the top of each report group. A set of report pages constitutes a report group. Each group level of report contains a separate group header. Details : The details section, which is also called the main body of a report, contains data from tables or queries that provide the record source to a report. This section is most important as it consists of the main information content of a report.
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Group Footer : The group footer appears at the bottom of each grouping level and may contain summaries or sub-totals for the grouped data. Page Footer : The page footer appears at the bottom of each page of the report and is meant to include page numbers, date and time of report generation. Report Footer : The report footer appears once on the last page of the report to include summaries or totals for all data of the report.
It is not necessary to incorporate each and every section or component of report structure. Those report structure components, which are not required in a specific report being designed, are suppressed. To achieve this suppression, open the View Menu to hide or display the Report Header/Footer, Report Page Header/Footer. The size of every section or report structure component is increased or decreased by dragging section bars up or down using a mouse. 15.5.5 Methods of Creating a Report There are three ways in which a report can be created in Access. A brief description of each method is given below: (a) Auto Report: This is the easiest method of creating a report both with columnar and tabular formats. To begin with formulate, create and save a query, which is capable of providing a record set as the information source of report. Alternatively, the information content must be available in a single table of the database. If the information is generated by relying upon more than one table, query is the option to be exercise. After the information source becomes available in the database, the following procedure is adopted to create Auto Reports. (i) Select Reports from objects list given in LHS of Database window and click at New object button of tool bar. Access responds by displaying the following New Report Window. (ii) Choose AutoReport: Columnar or AutoReport: Tabular, followed by selecting the information source query or table. (iii) Click OK to generate the report. Access responds by creating and displaying the report in printpreview mode. (iv) To print the report, click at the print icon on tool bar. (v) To save the report design as object, close the print preview window, and provide a suitable name. Auto Reports are easy and fast to create. But these reports are less attractive. To prepare more professional report, report wizard is used.
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Fig. 15.8 : New report window to choose methods of report design
(b) Wizard : The Report wizard allows a designer to choose the fields from multiple tables along with specification for grouping, sorting and formatting of information content in report. This obviates the limitation of Auto Reports. In order to create reports by wizard, following steps are required. (i) After selecting Reports object, double click at Create Report by Using Wizard. Access responds by displaying Report Wizard window similar to the one displayed for query wizard (See Fig 14.10). (ii) Choose the table or query that includes information content of report, from Tables/Queries drop-down list on LHS. (iii) Use arrow buttons to select fields to provide the information source to report. Single right arrow button is used to select one field and double arrow button to select all fields. Alternatively, double click at the fields to be selected in the same order in which they are required to be displayed in the report. (iv) Another table or query can be chosen to select more fields for a report to provide a definite relationship between the tables is defined. Click Next when selection process of data source is complete.
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(v) Access responds by prompting the designer to add any grouping level(s) for displaying the information content of the report. The report is prepared by choosing any repeated data item to constitute a group. Click Next when the grouping level is added and defined. (vi) Access responds by requiring the designer to specify the sort order based on any of the fields contained in the report. The records may be sorted up to four fields by specifying either ascending or descending order for each field. After specifying the sort order, click Next or specify the summary values to calculate. The summary values are sum, average, minimum and maximum. Once summary values are specified, click OK, followed by click Next. (vii) Report wizard responds by requiring the designer to choose the report layout (stepped, block, outline and align left) and its orientation (portrait and landscape). Click Next after specifying the layout and orientation. (viii) Report wizard prompts the designer to choose a particular style of report from among six styles: bold, casual, compact, corporate, formal and soft-gray. After choosing a suitable style for report, click Next. (ix) Report wizard prompts the designer to specify the title of report being designed. Further, the designer is provided with two options: preview the report or modify its design. After exercising the option, click Finish. (x) Access presents the report in preview mode or design mode depending on which option is chosen in (i) above. (c) Design View : The design view method offers greatest flexibility to the designer in designing a report. In this method, the report is designed by assembling and embedding various components from report tool box. In order to design a report by using design view, following steps are required: (i) After selecting Reports object, double click Create report in Design view. Access responds by providing a blank report object with three sections: Report/Page header, Detail and Report/Page footer as shown in Figure : 15.9. (ii) Right click the mouse at the black spot appearing at the left of horizontal ruler of above report. Report object responds by displaying a drop down window. (iii) Click Properties and select Record Source from Data tab. The record source turns into a combo control giving a list of various tables and queries. Choose the appropriate source of information to be presented
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in the report being designed. Access responds by providing a list of fields of the selected record source. If this list does not appear or it is closed by mistake, it can be recalled by clicking at the field list icon appearing before the icon for tool box.
Fig.15.9 : Window displaying design view of report
(iv) Select the required fields from list of fields displayed as discussed in (c) above, by clicking at each of the fields to be selected while keeping the Ctrl key pressed. Drag and drop the selected fields to Detail section. (v) The label part of each field is moved to Report/Page header and text part is accordingly aligned below their respective labels column wise. The caption of each label giving headings can be suitably modified, if required. (vii) The vertical ruler controlling the distance between various report sections can be suitably adjusted to give a better look to the report.
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The Report/Page footer bar is brought close to the fields laid out in Detail section so that the gap between records of details section is minimized. (viii) Page headers and page footers may also be added by right click at title bar of report object, followed by click at Page header/footer. 15.5.6 Refining the Report Design The design of the report created by any of the methods described above may be improved upon by making the following additions and modifications to the report. For this purpose, an existing report is opened in design mode. Adding Dates and Page Numbers : When an existing report is opened in design mode, the page footer of the report contains two unbound controls: the current date and current page number of total number of pages. Both the controls may be customised according to the requirement of the designer. The date control uses = Now() function to retrieve the current date from RTC of computer. The format of date may be modified by selecting General date, Medium date, Short date or Long date from format property of this control. Further, when a report is created using design view method, the date and/ or time and also the page numbers may be added to any of its part. The date and time is added by clicking Insert % date and time from the menu bar to open the Date and Time dialog box. After selecting and specifying the desired preferences regarding date and time, click OK to find that a text control with chosen date and time preferences is added at the top of active report section. This added text control containing date and time may be dragged and dropped in any part of the report as per requirement. Similarly, the page number is added by clicking Insert % page numbers from the menu bar to open the Page numbers dialogue box. This dialogue allows the designer to specify the format, position and alignment. The two formats are: Page N (for example Page 1) and Page N of M ( for example Page 1 of 10). The position to specify is either Top of Page (header) or Bottom of Page (footer). Possible alignment, which may be specified are Centre, left, right, inside and outside. Adding and Deleting Report Controls : After a report has been designed, additional report controls may be added or deleted by the same procedure as applicable to forms. Clicking tool bar icon opens report design tool bar, which contains a set of useful controls. (a) After opening the report in design mode, click Field List button on report design tool bar. This results in opening the field list window.
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(b) Drag the field into an appropriate section of the report. The field appears with both label and text box control. The label part gives a constant field heading while the text part provid .es different values of the field. These two parts are accordingly placed at the appropriate sections of the report. (c) A field control may be deleted by selecting the control and pressing the Delete key. Conditionally Formatting Report Controls : The conditional formatting of text boxes and combo boxes in reports can be achieved in the same manner, as it applies to Forms. The conditional formatting allows the designer to apply special text formats that depend on the value of field. This facility is a useful tool to draw the attention of user or reader of report to some values of particular interest, such as amounts exceeding certain limit or unexpected balances in some accounts. In order to create a conditional formatting, following steps are required: (a) Open the report in design view. (b) Select a control and click at format on menu bar, followed by conditional formatting. (c) Provide the necessary conditions for formatting to occur in the same manner as already discussed while applying conditional formatting to design of Forms. (d) The conditional formatting is removed by re-opening the same dialog and clicking at delete button. Grouping Levels and Sorting Order : The purpose of grouping is to organise the information content of a report into categories. Sorting order is meant to arrange such information content into numerical or alphabetical order. With groupings the sorting applies to each individual group. The grouping and sorting of information, when applied together, make the report more meaningful and therefore useful to the user of the report. In order to specify the grouping and sorting order, following procedure is adopted. (i) Click at Sorting and Grouping icon of Report Design Tool bar (This icon is located next to icon for tool box). Immediately, Access responds by displaying the following Sorting and Grouping dialogue box. (ii) The LHS of this dialog box provides a list of fields or expressions that are to be used for grouping and sorting. In the above dialog box, Type field of Accounts has been chosen as the basis of grouping the information content of trial balance. The group header and footer property is set to Yes to indicate that there is separate header and footer for each group of accounts in trial balance.
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Fig. 15.10 : Window displaying sorting and grouping dialogue box
15.5.7 Saving and Exporting a Report After a report is designed, it may be generated to preview its final shape. Both the design and a generated report are saved for future use and reference. The generated report may also be exported for use by others, as described below: (a) Saving and Exporting Report Object in Access : The design of a report is saved in Access as report object by assigning a particular name. The report object, when opened in access by click action generates the desired report as per design specification. The design may also be exported to another database file of Access. This is achieved by clicking File % Export and then selecting and existing database into which the report design is to be exported. Access responds by providing a dialog box to give the name by which the exported report is saved in a selected database.
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(b) Saving as Snapshot : After a report is created, it may be saved in such a manner so as to be viewed by others without the help of Access. This becomes possible by saving the report as a snapshot file. As a result, a high quality picture image of each page of report is created with Adobe Acrobat software. Other users of the report can then view the report and print any of its pages without being able to modify its contents. It must be ensured that this feature of saving a report as snapshot is also installed while installing the MS Office 2000 package. In order to create a report Snapshot, following steps are required : Select and generate a report in Database Window. Click File % Export from menu bar. An Export Report dialog box appears. Choose the folder from combo box next to Save in; provide a file name; select snapshot from list control next to Save as type and click at Save button. While saving the report ensure that the auto start check box is enabled. The generated report is saved as a snapshot and can be supplied to others for printing and viewing without the help of the Access database environment. (c) Exporting to Excel : A generated report may be exported to Excel, which is a spreadsheet package. This software package is a part of MS Office product and is generally installed while installing MS Access. A report is exported to Excel by following the same steps as have been listed above while saving a report as snapshot, except that before clicking save button in (c) above, one has to select Microsoft Excel 2000/2002 from list control next to Save as type. (d) Exporting to MS Word : A report generated using Access can also be exported to MS word, which is a text processing package. This package is also installed while installing MS Access, as a part of MS Office. In order to export a report to MS Word, the following steps are required : (i) Select and generate a report in Database Window. (ii) If print preview tool bar is absent in Access window, Click View % Tool bars % Print preview from menu bar of Access. Access responds by providing print preview tool bar for reports. (iii) Click at right corner of icon for Official Links. There are three options in the list: Merge It with MS Word, Publish It with MS Word and Analyse It with MS Excel. (iv) Click Publish it with MS Word, which is also the default option. (v) The generated report is exported to MS Word package and can be dealt with like any other document created using MS Word.
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(e) Printing a Report : A generated report may also be printed by taking the following steps provided a printer attached to the computer is installed. (i) Choose File from menu bar % Print (ii) Access responds by providing a print window, which allows the user to select a printer, the number of copies to be printed and also the range of pages to be printed. (iii) Properties button is clicked to define print quality under set-up tab and orientation under paper tab. Two-sided printing may also be obtained if the printer supports this feature. (f) E-Mailing a Report : A report generated by Access may also be sent using E-Mail facility, provided the computer system has Internet facility and is connected to the Mail Server of the Internet Service Provider (ISP). In order to send a report using E-mail facility, following steps are required : (i) Select and generate a report in Database Window (ii) Click at File % Send-To % Mail recipient from Menu bar of Access. A Send dialog box appears with various options for choosing the Format: Microsoft Excel, HTML, Snapshot format, Rich Text format, etc. (iii) Choose an appropriate format and click OK. Access responds by providing an E-Mail composition window. (iv) Fill up the details regarding E-mail address of recipient and others to whom copy of report is to be sent; provide a subject to E-mail and click at Send button. The report gets dispatched to the mailbox of the recipient of E-mail.
Test Your Understanding Fill in the blanks (a) Reports, the need for which is not anticipated is called ........................reports. (b) ................query does not involve use of any query function to produce a summary of data. (c) ................ query prompts the user to enter criteria for selecting a set of records. (d) ................clause is used to specify the fields to display data or information. (e) .................. is meant to include page number, data and time of report. (f) The purpose of ................. is to organise the information of report into categories whereas ............ arranges information into numerical or alphabetical order. (g) When saved as ......................., the contents of reports can not be modified by the user.
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15.5.8 Designing Accounting Reports using Access Financial Accounting Reports such as Cash book, Bank book, Ledger Accounts and Trial Balance may be generated in Access by adhering to report generation process. The exact process in the context of each of these reports is described below : Trial Balance The Trial Balance is one of the accounting reports, which provides the net amount by which each account, during a given period of time, has been debited or credited. The format of a typical trial balance is as given below :
Trial Balance Account Title L.F. Debit Amout Rs. Credit Amount Rs.
Total
Fig. 15.11 : Format of trial balance
To produce a trial balance, it is necessary to retrieve a set of processed data records each of which provides information on Code (or Account Number), Name of Account (or Particulars), Debit balance and Credit balance with reference to a each account. In order to find net balance corresponding to every account along with its identity, following steps are taken : (i) To find the total amount by which every account has been debited; (ii) To find the total amount by which every account has been Credited; (iii) To find a collective record set of accounts with their debit and credit totals; (iv) To find the net amount with which every account has been debited or credited; and (vi) To find the record set which consists of Account code, name of Account, Debit and Credit Amount. Above steps to produce trial balance are transformed into a series of SQL statements, which vary according to the database design. The details of the above procedure along with the relevant SQL statements need be explained in the context of the three Models as given below : Model-I : The following series of SQL statements retrieve a record set for producing trial balance when database design for Model-I is used.
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(a) To find the total amount by which the accounts have been debited : In order to ascertain the total amount by which every transacted account has been debited, the SELECT clause need to have two fields: one code to identify the transacted account and another to generate the total by which such account has been debited. This is achieved by using Debit field of Vouchers table and finding the sum of amount corresponding to each of the transacted accounts. The FROM clause relies upon Vouchers table to get the data source. The GROUP BY clause specifies the field on the basis of which grouping of record set is formed. This grouping is necessary in SQL when aggregate query is used to generate summary information. The summing of amount is obtained by using aggregate function, Sum( ). This function, as already explained, uses a field with data type Number, as an input argument and returns its sum as output. Accordingly, the following SQL statement is formed :
SELECT Debit AS Code, Sum(amount) AS Total FROM vouchers GROUP BY debit;
In the above SQL statement, the GROUP BY clause retrieves the rows of vouchers table accounts-wise because the debit field refers to account code. As a result, the Sum( ) computes the sum of amount of a particular debit account and reports against Debit account of SELECT clause. This SQL statement is saved as Query 01for its subsequent use. The total of debit amount in this query is given by Total field with positive amounts. (b) To find the total amount by which the accounts have been credited : In order to ascertain the total amount by which every transacted account has been credited, a query similar to that in (a) need be formed, except that the Debit field in SELECT and GROUP BY clause is substituted by Credit field. The sum of amount generated by sum(Amount) is multiplied by -1 so that the final amount assigned to Total field is always negative. This is because the amount of credit must be a negative amount if amount of debit is taken as positive. The purpose of using negative values is to differentiate between debit and credit totals for each account and also to facilitate the simple arithmetic summation for obtaining the net amount. Accordingly, the following SQL statement is formed : SELECT Credit AS Code, Sum(Amount)*(-1) AS Total
FROM vouchers GROUP BY Credit;
This SQL statement is saved as Query 02 to be used as source by next query.
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(c) To generate a collective record set of accounts with their debit and credit totals : Every transacted account that has been debited (or credited) only appears once in this collective record set. However, those transacted accounts that have been debited as well as credited appear twice in this record set: once with a positive amount and thereafter with a negative amount. This collective record set is generated by executing a UNION query between Query 01 and Query 02.
SELECT* FROM Query 01 UNION SELECT* FROM Query 02 ;
This SQL statement is saved as Query 03 for further processing of its resultant record set. (d) To generate the net amount with which an account has been debited or credited : Once the records of account codes with debit and/or credit totals have been collected, the next logical step is to find out the net amount by which such accounts have been either debited or credited. This is accomplished by forming another aggregate query in which FROM clause uses Query 03 as the data source. The sum of Total for each Code of data source, provided by Query 03, results in computing net amount for every account. Accordingly, the following SQL statement is formed to generate a list of account codes with their respective balances: positive or negative.
SELECT Code, Sum(Total) AS Net FROM Query 03 GROUP BY Code;
A positive net amount implies a debit and negative amount means a credit balance corresponding to an account code. This is because in Query 02, the total of credit amount has been made to appear as negative. This query is saved as Query 04 for its subsequent use in generating record set for trial balance. (e) To find that record set which consists of account code, name of account, debit amount and credit amount : Every row of a trial balance report consists of Account Code, Name of Account, Debit Amount and Credit Amount. The Debit Amount and Credit Amount are mutually exclusive. Such rows are obtained by generating a record set based on the following SQL statement.
SELECT a.Code, b.name AS [Name of Account], IIF (a.Net>0,a.Net,null) AS Debit, IIF (a.Net<0,abs(a.Net) ,null) AS Credit FROM Query 04 AS a, Accounts AS b WHERE a.code = b.code ;
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In the above SQL statement, the results of Query 04 and data stored in Accounts table has been used. The SELECT clause of this SQL statement has two computed fields as explained below : IIF(a.Net>0,a.Net,null) AS Debit: According to IIF( ) function, if the net amount exceeds zero, it is displayed as Debit, otherwise nothing appears in Debit field. IIF(a.Net<0,abs(a.Net) ,null) AS Credit: According to IIF( ) function, if the net amount is less than zero (implying negative), it is displayed as Credit, otherwise nothing appears in Credit field. Besides, the other two fields: Code and Name, of SELECT clause are retrieved from Query 04 and Accounts table respectively. This SQL statement is saved as Query 05 for providing the necessary information content for Trial Balance Report. Model-II : The following series of SQL statements retrieve the record set for producing trial balance when database design for Model-II is used. In addition to this, the accounts have been categorised within the trial balance according to the Account Type: Expenses, Revenues, Assets and Liabilities. (a) To find the total amount by which the accounts have been debited : The transacted accounts in design of Model-II have been stored in AccCode of VouchersMain and Code of VouchersDetail. The following SQL statement is formed to generate the relevant information from VouchersDetails.
SELECT Code, Sum(amount) AS Total FROM vouchersMain INNER JOIN vouchersDetails ON VouchersMain.Vno = VouchersDetails.Vno WHERE Type = 0 GROUP BY Code ;
Similarly, the following SQL statement is formed to generate the required information from VouchersMain table.
SELECT AccCode As Code, sum(amount) AS Total FROM vouchersMain INNER JOIN vouchersDetails ON VouchersMain.Vno = VouchersDetails.Vno WHERE Type = 1 GROUP BY AccCode ;
Both the SQL statements are meant to extract similar sets of records, but from two different sources. Therefore, the resultant record set of these SQL statements have been horizontally merged using UNION clause as shown below:
SELECT Code, sum(amount) AS Total FROM vouchersMain INNER JOIN vouchersDetails ON VouchersMain.Vno = VouchersDetails.Vno WHERE Type = 0 GROUP BY Code
Accounting System using DBMS UNION ALL SELECT AccCode As Code, sum(amount) AS Total FROM vouchersMain INNER JOIN vouchersDetails ON VouchersMain.Vno = VouchersDetails.Vno WHERE Type = 1 GROUP BY AcCode ;
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The above SQL statement is saved as Query101for its subsequent use. The total of debit amount in this query represents the Total with positive amounts. (b) To find the total amount by which the accounts have been credited : In order to ascertain the total amount by which every transacted account has been credited, a query similar to that in (a) need be formed. This is achieved by substituting Debit field in SELECT and GROUP BY clause by Credit field and the sum of amount generated by sum(Amount) is multiplied by-1 so that the final amount assigned to Total field is always negative. Accordingly, the following SQL statement is formed :
SELECT Code, sum(amount)*-1 AS Total FROM vouchersMain INNER JOIN vouchersDetails ON VouchersMain.Vno=VouchersDetails.Vno WHERE Type=1 GROUP BY Code, Amount UNION SELECT AccCode As Code, sum(amount)*-1 AS Total FROM vouchersMain INNER JOIN vouchersDetails ON VouchersMain.Vno=VouchersDetails.Vno WHERE Type=0 GROUP BY AccCode, Amount;
In the above SQL statement, the sum of amount has been multiplied by -1 to ensure that the amount of credit is always negative just as amount of debit is taken as positive. This query is saved as Query102 for its subsequent use. (c) To find a collective record set of accounts with their debit and credit totals: A collective record set is generated by forming a union query between Query101 and Query102 to ensure that the debit and credit amount with respect to each account becomes available for generating the net amount. Accordingly, the following SQL statement is formed.
SELECT* FROM Query101 UNION Select* FROM Query102;
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The above SQL statement causes horizontal merger of record sets returned by Query101 and Query102. This SQL Statement is saved as Query103 for its subsequent use in next query. (d) To find the net amount with which an account has been debited or credited: To generate the net amount, an SQL statement similar to Query04 (designed for query (d) of Model-I) above, is formed as shown below, except that its source of data is Query103 instead of Query 03.
SELECT Code, Sum(Total) AS Net FROM Query103 GROUP BY Code;
This query is saved as Query104 for its subsequent use in generating a record set, giving details of information for trial balance. (e) To find the record set which consists of Account code, Name of Account, Debit Amount and Credit Amount : This query, which is meant to provide relevant information to the trial balance report, is similar to Query 05 (designed and discussed in (e) of Model-I). Accordingly, the following SQL statement is formed by changing the source of data from Query 05 to Query105 as shown below :
SELECT a.Code, b.name AS [Name of Account], IIF(a.Net>0,a.Net,null) AS Debit, IIF(a.Net<0,abs(a.Net) ,null) AS Credit FROM Query104 AS a, Accounts AS b/ WHERE a.code = b.code;
In above SQL statement, the results of Query104 and data stored in accounts table has been used. This SQL statement is saved as Query105 for providing source of information to Trial Balance Report. Trial Balance with Sorting and Grouping levels : In order to prepare a trial balance with all the account duly grouped by and sorted within category of accounts, two additional queries (f) and (g) are required. (f) To find the record set of accounts with their category and category ID : Accounts table is related to AccountType table vide Type field. The following SQL statement, using INNER JOIN clause, is formed to retrieve the relevant fields for various accounts.
SELECT Accounts.Code, Accounts.Name, Category, CatId FROM Accounts INNER JOIN AccountType ON Accounts.Type = Account type.CatId;
This SQL statement is saved as Query 106 for its subsequent use in next query. (g) To find the record set consisting of Account Code, Name of Account, Debit Amount and Credit Amount along with category details : This query, when compared with (e) above, reveals that two additional fields: Category and
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CatId are required. Accordingly, the SQL statement stored as Query105 is modified by substituting Accounts table with Query106 to form the following Statement.
SELECT a.Code, b.name AS [Name of Account], IIF(a.Net>0,a.Net,null) AS Debit, IIF(a.Net<0,abs(a.Net) ,null) AS Credit, Category, CatId FROM Query104 AS a, Query106 AS b WHERE a.code = b.code ;
This SQL statement is saved as Query107 to provide information details for designing trial balance with grouping and sorting of the accounts. 15.5.9 Procedure in Access for Designing a Simple Trial Balance The Trial Balance is generated using the Design View method by following the steps listed below : (i) Select Reports from objects list provided by LHS of Database Window and click at New object button of tool bar. Access responds by displaying the New Report Window as shown in figure 15.8 Choose Design View from list of methods and Query 05 from combo control meant to provide data source to the report. Click OK after choosing method and data source of report. (ii) Access responds by displaying a blank report design divided horizontally into three sections: Page Header, Detail and Page Footers. Besides, a list of available fields of Query 05 is also provided for embedding on to this blank design of report. (iii) Alternatively, double click at Create report in design view. Access respond by displaying a blank report design duly divided into three sections as stated above. Right Click at the left most corner point of report design where horizontal and vertical rulers converge. Click at Properties of report and select Data tab to define the record source as Query 05. Immediately, there appears as list of available fields of Query 05 so as to be placed on to blank design of report. (iv) Right click at any part of the report design and choose Report Page Header and Footer. Access responds by providing two more sections: Page Header and Page Footer. (v) Click at the icon for tool bar and pick up a label control to be placed at Page Header Section and assign set its caption property to Trial Balance, Font Size to 16, Font colour to Blue, Text align to Left and Font weight to Bold.
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(vi) Select all the fields of Query 05 by clicking at every field while keeping the Ctrl key pressed. Drag and drop the selected fields on Details section. It may be noted that each of the dropped fields has two controls: Label and Text. The former gives caption and the latter provides the data content. (vii) Select the label controls of all the four fields by clicking at each while keeping the Shift Key pressed. Right click at selected label controls and choose cut. Place the mouse at Page Header section and paste these controls. (viii) Re-arrange these label controls to appear as headings of columns for trial balance as: Code, Name of Account, Debit and Credit. Select all these label controls and right click to choose properties. Access provides Properties of these controls. Choose format tab and set the Font weight Property to Bold; Font Size to 10; Font colour to Blue and Text align to Centre. (ix) Align the Text controls in Detail section to appear just below each of the respective label controls appearing in Page Header section. (x) Select the Text controls and Debit and Credit field and modify their properties by setting Decimal Places to Zero and Format to Standard. (xi) Pick up a label control from tool box by click action and place at Report Footer section, at the area vertically below the column Name of Accounts and give the caption Total. Set its Text align property to Centre, Font weight property to Bold and Font Size to 10. (xii) Pick up a text control and place it at Report Footer section at the area vertically below Debit column. Set its Record source property as expression given below : = Sum ([Query 05]![Debit]) The expression is written by clicking at (...) to call the expression pane. The expression [Query 05]![Debit] within Sum( ) function refers to Debit field of Query 05. (xiii) Pick up another text control and place it at Report Footer section at the area vertically below Credit column. Set its Record source property as expression given below. =Sum ([Query 05]![Credit]) The expression is written in the manner as it applies to sum of debit column. The expression [Query 05]![Credit] within Sum( ) function refers to Credit field of Query 05. The report design prepared above is saved as Trial Balance by Design. The Trial Balance report design appears on the RHS of Database Window as object under Reports.
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15.5.10 Designing of Trial Balance with Sorting and Grouping To design a trial balance with grouping and sorting of accounts, the following additional steps are required. (i) Copy the trial balance design as created above and paste it with different name say Trial balance with Grouping. Open this copied report design for modification in design view to incorporate the grouping and sorting of accounts in trial balance report.
Fig 15.12 : Window displaying sorting and grouping dialog
(ii) Change the data source property of report design by right click at the top left corner of report design % click at properties % Choose Tab and set the Record source property as Query107. (iii) Modify the Record source of Text controls for sum of debit and credit columns to replace existing expressions by
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= Sum ([Query107]![Debit]) .......... for Debit = Sum ([Query107]![Credit]) .......... for Credit (iv) Right click at report design % click at sorting and grouping. Access responds by providing a window for sorting and grouping as shown in figure 15.12 (v) Define the basis of grouping as CatId in field/expression and its sort order set to ascending. Set the Group Header property to Yes. Access responds by inserting CatId Header section in report design. (vi) Click at field list icon and drag and drop category field in CatId Header section. Set its Font Size property to 10, Fore Colour property to Dark Green and Font Weight property as Bold. Save the modifications in the above report design. The trial balance report is generated by double click at this or the previous object. The generated trial balance may be saved or exported as desired.
Key Terms Introduced in the Chapter MS Access Accounting Report Compound Vouchers Database Management System Transaction Vouchers Queries
Summary with Reference to Learning Objectives 1. Accounting Reports : A report displays information that is acquired from data processing and transformation in an organised manner. Reports tend to reduce the level of uncertainty associated with decision-makers and also influence their positive actions. The output of the computerised accounting system are accounting reports. Financial accounting reports such as Cash book, Bank book, Ledger, and Trial Balance may be generated in Access by adhering to report generation process. Using Access for Producing Reports : In Access, the reports are created by designing a report, identifying its information requirement, creating the queries in SQL to generate such information so that the final SQL statement provides the record set of information to the report design. Different Models of database design require different sets of SQL statements to produce different types of reports. Queries Access : There are several types of queries in Access that may be used to generate information. Such queries are called select queries because they are used to select records from the given set of records. There are three ways in which these queries may be created in Access: Wizard, Design View and SQL View method. Designing Reports in Access : A report in Access may be designed in three ways: Auto Report, Wizard and Design View method. A SQL statement (or query) is capable of displaying records containing fields from across a number of data tables. A typical report in Access has the structure that consists of Report header, Page header, Group header, Details, Group footer, Page footer and Report footer.
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Accounting System using DBMS Questions for Practice Short Answers State what do you understand by accounting reports. What do you mean by programmed or casual reports? With the help of an example, briefly state the meaning of parameter queries. Briefly state the purpose of functions in SQL environment. Briefly explain in steps the method of creating a query, using wizard. List the structure of a good report created in Access. List the ways to refine the design of a report. Briefly explain the purpose of grouping and sorting of the data as a means to refine a report. 9. What do you understand by saving a report as snapshot? 10. State the procedure for creating ledger in MS Access. Long Answers Describe and discuss the procedure of creating the receipts side of a cash book. 2. Discuss the concept of accounting reports? Explain the three steps involved in creating such reports. 3. Discuss with a set of inter-related data tables, the basics of creating queries in MS Access? 4. Briefly explain the set of SQL statements to produce the receipts side of a cash book for Model-I. 5. Describe in steps the design view method to create a query in MS Access? 6. Discuss the SQL view method of creating a query? 7. Describe the ways to refine the design of a report. 8. Explain the data base design for Model-I for producing the receipts the series of SQL statements for producing the payment side of cash book for Model-II. 9. Describe the series of SQL statements to produce trial balance data base design for Model-II is used. 10. Using Model-III discuss the series of SQL statements to produce a trial balance up to a particular date. Project Work 1. Payroll Accounting: Using the database design given in Exercise of Chapter-IV, as Project No: 1, you are required to generate the portion of payroll according to the specified format under MS Access environment. Financial Accounting: Write the SQL statements for each of the following queries separately by using database design of accounting specified as ModelI, II and III in Chapter-IV. (a) List the transactions details of Accounts, which have been debited during the period April 01, 2001 to September 30, 2001. (b) List the transactions details of accounts which have been credited during the month of August 2001. (c) Find the total expenses incurred during the period September, 2001. (d) List all the transacted accounts with the amounts by which they have been debited and also the amount with which they have been credited. (e) List the amount of expenses authorised by each of the employees. 1. 1. 2. 3. 4. 5. 6. 7. 8.
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Accountancy Inventory Accounting: Using the database design developed in Exercise of Chapter-IV, for Project No: 2, you are required to generate Statement of closing stock in the following format by assuming that all goods are sold at a profit of 25% on purchase price. Statement of Closing Stock Particulars Code Item Name Qty Purchases Amount Qty Sales Amount Balance Qty Balance
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Inventory Accounting: Using the database design developed in Exercise of Chapter-IV, for Project No: 2, Write the SQL statements for each of the following queries : (a) List out the Invoice No, Date and amount of sales made during the month of October, 2002. (b) Make a list of Invoice No, Date and amount of Purchases during the period April 01, 2002 to October 31, 2002. (c) List items wise the quantity sold during the month of September 2002 (d) Find the Minimum and Maximum rate at which each item of goods has been purchased during the period April 01, 2002. (e) Make a list of physical quantity of each item in stock. Checklist to Test Your Understanding (a) (b) (c) (d) (e) (f) (g) Casual Simple Parameter SELECT Design view Sorting Snap shot
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APPENDIX
Description of Commonly Used Functions in Access

There are three types of functions that are used to set the Control Source property of calculated controls and/or to form part of calculated field expression in SQL statement. A brief description of the commonly used functions is below : A-1. Domain Aggregate Functions These functions are used to perform calculations based on values in a field of a table or query. Criteria to select the set of records in the table or query that is desired to be used for calculations may also be specified. The criteria, if not specified, imply that all the records of the table or query specific to the field are used for computation. All the domain aggregate functions use the same syntax as is given hereunder : DFunction (FldName, TblName or QryName, SrchCond) Wherein DFunction refers to a named domain aggregate function. A brief description of its input arguments is given below: FldName : It refers to the name of field that is to be searched in a table or query, which is specified as an argument. TblName (or QueryName) : It refers to the name of a table or query that contains the field specified as second input argument. SrchCond : It refers to the search condition on the basis of which the relevant record is searched. Some of the important domain aggregate functions have been described as below : (a) DLookup : This function is meant to look up information that is stored in a table or query, which is not the underlying source of Access Form or Report. It is used to set the Control Source property of a calculated control to display data from other table or query. Consider the following example: DLookup (Name, Accounts, Code = 110001) In the above example, this function has been applied to search the name of account (in Accounts table) whose code is 110001.
(b) DMax and DMin : These functions are used to retrieve respectively the maximum and minimum values in the specified field. Consider the following example : DMin (Amount, Vouchers, Debit = 711001) Dmax (Amount, Vouchers, Debit = 711001") In the above examples, the amount of minimum purchase transaction and maximum purchase transaction is retrieved and reported. It may also be noted that 711001 is the code of Purchase account in Accounts table (c) DSum : This function computes and returns the sum of the values in the specified field or expression. For Example, in a table : Sales that contains
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ItemCode, Price and Quantity as fields, the total amount of sales may be computed by using the DSum () function as follows : DSum (Price*Quantity, Sales) However, if the total sales is to computed for a particular item coded as 1678, the DSum () function shall be applied as follows : DSum (Price*Quantity, Sales, ItemCode = 1678) (d) DFirst and DLast : These functions are used to retrieve respectively the values in the specified field from first and last physical records. Consider the following application examples : DFirst (Name, Accounts) DLast (Name, Accounts) In the above examples, the name first and last account that physically exists in Accounts table is retrieved and reported. (e) DCount : This function is meant to compute the number of records with non-null values in the specified field. Consider the following application example : DCount (*, Accounts) In the above example, The number of records in accounts table are counted and reported by DCount () function. A-2. SQL Aggregate Functions The SQL aggregate functions have the functionality similar to that of domain aggregate function. However, unlike domain aggregate functions, these functions cannot be called directly into controls used in Forms and Reports of Access. These functions are used in SQL statements that provide the underlying record source of Forms and Reports. All these functions, when used require the GROUP BY clause in SQL statement : (a) Sum : This function is used to compute and return the sum of a set of values. For Example, consider the following SQL statement that has been used in Chapter-V to prepare the underlying information source of Trial Balance (Model-I.).
SELECT Debit As Code, Sum (Amount) As Total FROM VOUCHERS GROUP By Debit ;
In the above SQL statement, Sum () has been used to compute the total amount by which the transacted accounts have beeen debited. (b) Min and Max : These functions are used to retrieve respectively the minimum and maximum of value set with respect to field or query expression. For Example, the following SQL statement is capable of returning the amount of minimum and maximum sales transaction in Model-I :
SELECT Min (Amount) As MinSales, Max (Amount) As MaxSales FROM Vouchers WHERE Credit = 811001 ;
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It may be noted that the sales account that is coded as 811001 is credited as and when a sales transaction is recorded. (c) Count : This function counts the number of records returned by a query. The number of times a sales transaction has occurred and recorded in books of accounts can be known by executing the following SQL statement.
SQL statement. SELECT count (*) FROM Vouchers WHERE Credit = 811001
In the above SQL statement, the Credit field stores the account code of sales when a sales transaction occurs. The WHERE clause restricts the number of records returned by the above SQL to those in which credit field has the account code of sales. Accordingly, the count () function returns the count value of records returned by the above SQL statement. (d) First and Last : These functions are meant to retrieve the first and last record of a value set pertaining to a field or query expression. A-3. Other Functions (a) IIF : The purpose of this function is to provide a value to the field from a mutually exclusive set of values. Its syntax is as given below : IIIF (<Condition>, Value-1, Value-2) Wherein <Condition> refers to any logical expression in which a comparison is made by using following comparison operators : = equal to <less than >greater than <= less than or equal to >= greater than or equal to The condition formed by the above comparison operators is evaluated to result into TRUE or FALSE. <Value-1> This value is returned by IIF() function to the field, if the condition turns out to be TRUE <Value-2> This value is returned by IIF() function to the field, if the condition turns out to be FALSE Example : Suppose a field Type is to return the string of characters Debit when its value is 0 and Credit when its value is 1, IIF() function is used as shown below : IIF (Type = 0, Debit, Credit) (b) Abs : The purpose of this function is to return absolute value, This function receives a numeric value as its input argument and returns an absolute value. Consider the following examples on use of Abs ( ) function : When 84 is given as input argument to Abs( 84), it returns 84 When 84 is given as input argument to Abs(84), it returns 84
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(c) Val : The purpose of this function is to return the numbers contained in a string as a numeric value of appropriate type. Its Syntax is Val(string) The string argument of the above Val( ) function is any valid string expression. The Val( ) function stops reading the string at the first character that cannot be recognised as number. For example, Val(12431) returns the value 12431 by converting the enclosed string of numerals into value. However, Val (12,431) returns the numeric value 12 because comma after 12 in the enclosed string of characters in Val ( ) function is not recognised as number.

11th Accountancy

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11th Accountancy

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Contents

Chapter 12 12.1 12.2 12.3 12.4 12.5 12.6 12.7

Chapter 13 13.1 13.2 13.3 13.4 13.5 13.6

15.3 15.4 15.5

Vouchers Using Forms Information Using Queries Generating Accounting Reports

Fig. 1.1 : Showing the process of accounting

6 Box 2 Why do the Users Want Accounting Information?

Accounting as a Source of Information

Introduction to Accounting Qualitative Characteristic of Accounting Information

Decision Makers (Users of Accounting Information)

Timliness Dedicative Value Feedback Value Verifiability Faithfulness

Nutrality Comparability Fig. 1.3 : The qualitative characteristics of accounting information

14 Box 4 Different Roles of Accounting

Basic Terms in Accounting

Theory Base of Accounting

Theory base of Accounting

Theory base of Accounting

Theory base of Accounting Test Your Understanding - I

Theory base of Accounting

Theory base of Accounting

Theory base of Accounting

Theory base of Accounting

Accounting Standards (AS)

Fig. 3.1 : Showing specimen transaction voucher

Fig. 3.2 : Showing debit and credit vouchers

Fig. 3.3 : Showing specimen of complex transaction voucher

5,00,000 10,000 1,70,000 5,10,000

55,000 6,70,000 10,000 6,80,000

Ramjee Lals Account (4) 1,15,000

Paid Rs. 5,000 as salary to the office employees

52 Salary Account (8) 5,000 (1) 5,00,000 Cash Account

(2) 4,80,000 (4) 10,000 (7) 2,500 (8) 5,000

2,85,000 + 8,50,000 11,35,000

= 2,85,000 + 8,50,000 = 11,35,000

= 2,85,000 + 8,50,000 = 35,000 = 3,20,000 + 8,50,000 = 11,70,000

3,20,000 + 8,50,000 + 15,000 = 3,20,000 + 8,65,000 = 11,85,000

= 3,20,000 + 8,65,000 = + 45,000 = 3,20,000 + 9,10,000 = 12,30,000

= 2,85,000 + 9,10,000 = 11,95,000

Fig. 3.5 : Showing the format of journal

58 Journal Date Particulars L.F. Debit Amount Rs. 25,000

Credit Amount Rs.

Cash A/c To Capital A/c (Business started with cash)

1,25,000 10,000 1,15,000

35,000 35,000 12,55,000 12,55,000

11,200 11,200 5,000 5,000

2,300 2,300 3,32,400 3,32,400

61 3,32,400 3,000 Dr. 2,000 2,000 12,000 12,000 3,49,400 3,49,400

Accountancy 10,50,000 30,000 2,00,000

85,000 40,000 45,000

7 30,000 30,000 2,30,000 6,27,500 = 2,30,000 6,27,500 2,30,000 2,30,000

2,30,000 2,30,000 2,30,000 2,30,000 2,30,000

2,00,000 2,00,000 2,00,000 (2,00,000) -

45,000 45,000 45,000 45,000

Affected Accounts Increase/Decrease 1 2

Cr. Amount Rs.

Fig. 3.6 : Showing format of a ledger

66 (b) (c) (d) 4.

Cr. Amount Rs. 4,80,000 10,000

Cr. Amount Rs.

30,000 30,000 20,000 20,000

10,000 10,000 3,45,000 3,45,000

71 3,45,000 15,000 Dr. 30,000 30,000

6,000 6,000 4,06,000 4,06,000

Cr. Amount Rs. 80,000 30,000 6,000