Financial Accounting - I

MGT101 - FINANCIAL ACCOUNTING I
Lesson No. TOPICS Page No.

1 Basic Concepts of Accounting ... 1
2 Record Keeping and Some Basic Concepts 4
3 Systems of Accounting and Some Basic Terminologies .
4 Single and !ou"le #ntry Record Keeping .. $
% Classification of Account ... 13
& 'lo( of Transactions ..... 1&
Basic Boo)s of Accounts .. 21
$ *ntroduction to 'inancial Statements .. 2%
+ *ntroduction to 'inancial Statements ,Continued- .. 2+
1. #/ercises0 Recording of Transactions . 3$
11 #/ercises0 Recording of Transactions ,Continued- . 4
12 Accounting #1uation . 4
13 2ouc3ers and 4osting to 5edger Accounts . $2
14 4osting to 5edgers 6 Recording of Stoc) ... $
1% Recording of Stoc) ,Continued- . +3
1& Cost of goods Sold Statement 6 2aluation of Stoc) ... 1.4
1 'i/ed Assets and !epreciation ... 111
1$ 7et3ods of C3arging !epreciation 11%
1+ 7et3ods for C3arging !epreciation ,Continued- ... 121
2. !epreciation on 4urc3ase and !isposal of 'i/ed Assets 12%
21 Re8aluation of 'i/ed Assets ... 131
22 Ban) Reconciliation Statement .. 13%
23 Ban) Reconciliation Statement ,Contd.-. 14.
24 !e"tors9 Creditors9 Accruals and 4ro8ision for Bad !e"ts 14%
2% 4ro8ision for Bad !e"ts and Control Accounts 1%.
2& Control Accounts ,Contd.- 1%&
2 Control Accounts ,Contd.- 1&%
2$ Rectification of #rrors 1&+
2+ 4resentation of 'inancial Statements .. 14
3. 4resentation of 'inancial Statements ,Continued- .. 1$
31 Types of Business #ntities .. 1$1
32 'inancial Statements of Sole 4roprietors3ip .... 1$%
33 'inancial Statements of 7anufacturing Concern 1+4
34 'inancial Statements of 4artners3ip .... 2..
3% 7ar) :p on Capital and !ra(ings . 21.
3& *ntroduction to Companies 214
3 Components of 'inancial Statements . 21
3$ 'inancial Statements of 5imited Companies .. 22.
3+ 'inancial Statements of 5imited Companies ,Contd.-.. 22%
4. 'inancial Statements of 5imited Companies ,Contd.-.. 23.
41 Cas3 'lo( Statement ...... 23%
42 Cas3 'lo( Statement ,Contd.- 23+
43 'inancial Statements of 5isted;<uoted Companies ... 244
44 'inancial Statements of 5isted Companies ,Contd.- ... 2%1
4% 'inancial Statements of 5isted Companies ,Contd.- 6 'inancial Ratios... 2%$

'inancial Accounting = * > 7?T1.1 VU
@ Copyrig3t 2irtual :ni8ersity of 4a)istan
1
Lesson-1
BASIC CONCEPTS OF ACCOUNTING

Learning Obe!"i#e

T3e o"Aecti8e of t3is lecture is to introduce t3e su"Aect of B'inancial AccountingC to t3e students and
gi8e t3em an idea as to 3o( did accounting de8elopD

$%a" is Finan!ia& A!!o'n"ing(

*t is t3e maintenance of daily record of All financial transactions in suc3 a manner t3at it (ould 3elp in
t3e preparation of suita"le information regarding t3e financial affairs of a "usiness or an indi8idual.

$%) is Finan!ia& A!!o'n"ing nee*e*(

T3e need for recording financial transactions arises "ecause t3e indi8idual or "usiness (ants to )no( t3e
performance of t3e "usiness and to assist t3e person in ma)ing decisions related to t3e "usiness.

$%a" are Transa!"ions(

*n accounting or "usiness terms9 any dealing "et(een t(o persons in8ol8ing money or a 8alua"le t3ing is
called "ransa!"ion.

Euman "eings are social animals and are "ound to adopt a community li8ing style. 5i8ing in a
community9 essentially means t3at people interact (it3 ot3er people and are dependant on eac3 ot3er to
fulfil t3eir needs. #8ery person cannot fulfil all 3is needs li)e food9 clot3ing9 3ousing etc. on 3is o(n. Ee9
t3erefore9 depends on ot3er people for 3is needs9 in return to t3is pro8iding ot3ers (it3 some of
t3eirs. *t means t3at one (ill fulfil 3is needs from ot3ers and (ill pro8ide ot3ers t3e t3ings of t3eir need
in return. #8ery instance (3ere one Fgi8es somet3ingG to Fget somet3ingG is called a "ransa!"ion.

+o, *i* i" *e#e&o-(

Hearly all de8elopments 3appen "ecause of 3uman "eingGs need for t3e same. Accountancy is no
different.
T3ere (as times (3en goods (ere "artered or e/c3anged. But (3en t3e concept of money (as
introduced9 it "ecame a little more difficult.

$%a" is a B'*ge"(

Budget is a plan of income9 e/penses 6 ot3er financial operation for a future period.

Con!e-" o. Cos"ing

A person ma)ing or producing any t3ing must not only )no( 3o( muc3 it costs to ma)e "ut also to 3elp
in determining t3e selling price. *t is necessary t3at t3e person not only )no(s t3e cost of (3at is "eing
produced "ut also t3e cost of eac3 component (3ic3 3as gone into production. T3e control of t3e costs
"eing incurred is also necessary ot3er(ise t3e same can e/ceed t3e estimates. All t3is is only possi"le if
t3e costs and data relating to production is properly recorded and analysed. *t is an e/ercise t3at only
carries out "y t3e Accountant.

I/-a!" o. IT on A!!o'n"ing

T3e old Munshi, (3o )ept record of t3e financial dealings (as t3e original accountant. But 3e is no( of
no use9 as 3e lac)s t3e capa"ility for analysing t3e information recorded and forecasting financial
information.
2
*n fact9 t3ere is no need for any e/pert in (riting of "oo)s. *nformation Tec3nology 3as ta)en o8er. But
some one 3as to tell t3e Soft(are de8eloper 3o( "oo)s are (rittenD
T3e need for an Accountant (3o is (ell 8ersed in t3e art of (riting up "oo)s still remains. T3e role 3as
c3anged. *nformation Tec3nology soft(are can no( produce t3e reports and analysis "ut need t3e e/pert
to interpret all of t3is remains.
T3e need for t3e professional to descri"e t3is 3as not yet "een o8erta)en "y *nformation Tec3nology.

Bar"er Tra*ing an* Bar"er Transa!"ions

Trading one commodity or ser8ice for anot3er commodity or ser8ice is called FBar"er "ra*ing0.
IR
#8ery transaction (3ere goods are e/c3anged for goods is called a FBar"er Transa!"ion0.

Since e8ery person cannot produce e8ery t3ing t3at 3e needs. T3erefore9 3e needs to gi8e ; sell (3at 3e
produces in order to get ; "uy (3at 3e (antsD

*n early days (3en FmoneyG (as not introduced9 people used to e/c3ange goods for goods. T3is )ind of
trade9 (3ere goods are e/c3anged for goods9 is called bar"er "ra*e.

*n fact9 in "arter trade9 8alue of one commodity is 1uoted in terms of ot3er commodity9 for e/ample t3e
price of 1. )g of (3eat may "e e1ual to 2 meters of clot3 or % litres of mil). Alt3oug39 t3ere is no
in8ol8ement of money "ut still e8ery commodity 3as a 8alue9 (3ic3 means t3at you 3a8e to gi8e a
specific 1uantity of one commodity to "uy a specific 1uantity of anot3er commodity.

Mone) Meas're/en" Con!e-"

Jit3 t3e passage of time9 t3e trading 8olumes and types of commodities a8aila"le in t3e mar)et are
increased and it "ecame difficult to e/c3ange commodity (it3 ot3er commodity. T3at is (3y t3e concept
of cas3 ; money is introduced and people started 8aluing all goods ; ser8ices in terms of a common
commodity called money. Ho( t3e price of 1. )g (3eat (ould "e Rupees &. instead of 2 meters of
clot3. Similarly9 t3e price of 2 meters of clot3 and % litres of mil) (ould also "e Rupees &..
*n accounting9 e8ery transaction t3at is (ort3 recording is recorded in terms of money. *n ot3er (ords
any e8ent or item t3at cannot "e translated in terms of money is not recorded in "oo)s of accounts.

Cas% an* Cre*i" Transa!"ions

Translating e8ery transaction in terms of money does not al(ays mean t3at t3e money c3anges 3ands9 t3e
same time at (3ic3 t3e transaction ta)es place. *t may "e paid "efore or after t3e goods are e/c3anged.

J3en t3e money 8alue of an item "eing purc3ased is paid9 at t3e same time (3en t3e item is e/c3anged.
T3e transaction is said to "e a !as% "ransa!"ion or in ot3er (ords9 if t3e 8alue of transaction is met in
cas3 at t3e time of t3e transaction suc3 )ind of transaction is said to "e cas3 transaction.

In t3e ot3er 3and9 if t3e payment is delayed to a future date9 t3e transaction is termed as a !re*i"
"ransa!"ion.

1i..eren" T)-es o. B'siness Organi2a"ions

1. So&e Pro-rie"ors%i-

According to !.J.T. Stafford9 B*t is t3e simplest form of "usiness organiKation9 (3ic3 is o(ned and
controlled "y one manC

3
Sole proprietors3ip is t3e oldest form of "usiness organiKation (3ic3 is o(ned and controlled "y one
person. *n t3is "usiness9 one man in8ests 3is capital 3imself. Ee is all in all in doing 3is "usiness. Ee
enAoys t3e (3ole of t3e profit. T3e features of sole proprietors3ip are0

#asy 'ormation
:nlimited 5ia"ility
I(ners3ip
4rofit
7anagement
#asy !issolution

3. Par"ners%i-

According to 4artners3ip Act9 1+329 B4artners3ip is t3e relation "et(een persons (3o 3a8e agreed to
s3are t3e profits of a "usiness carried on "y all or any of t3em acting for all.C

4artners3ip means a la(ful "usiness o(ned "y t(o or more persons. T3e profit of t3e "usiness s3ared "y
t3e partners in agreed ratio. T3e lia"ility of eac3 partner is unlimited. Small and medium siKe "usiness
acti8ities are performed under t3is organiKation. *t 3as t3e follo(ing features0

5egal #ntity
4rofit and 5oss !istri"ution
:nlimited 5ia"ility
Transfer of Rig3ts
7anagement
Hum"er of 4artners

4. 5oin" S"o!6 Co/-an)

According to S. #. T3omas9 BA company is an incorporated association of persons formed usually for t3e
pursuit of some commercial purposesC

A Aoint stoc) company is a 8oluntary association of persons created "y la(. *t 3as a separate legal entity
apart from its mem"ers. *t can sue and "e sued in its name. *n t3e Aoint stoc) company9 t3e (or) of
organiKation "egins "efore its incorporation "y promoters and it continues after incorporation. T3e Aoint
stoc) company 3as t3e follo(ing feature0

Creation of 5a(
Separate 5egal #ntity
5imited 5ia"ility
Transfera"ility of s3ares
Hum"er of 7em"ers
Common Seal
4
Lesson-2
7ECO71 8EEPING AN1 SOME BASIC CONCEPTS

Learning Obe!"i#e

T3e e8olution of accounting stated in t3e pre8ious lecture continues (it3 a slig3t emp3asis on 3o( actual
record )eeping startedD *n addition9 some "asic concepts li)e capital9 profit9 and "udget are also
introduced.

1i..eren" T)-es o. B'siness En"i"ies

Co//er!ia& Organi2a"ions 9Pro.i" Orien"e*:
o Sole proprietor
o 4artners3ip
o 5imited companies
Non-Co//er!ia& Organi2a"ions 9Non-Pro.i" Orien"e*:
o H?IGs ,Hon=go8ernment IrganiKations-
o Trusts
o Societies

T%e Basi! Con!e-" o. 7e!or* 8ee-ing

Je can maintain a diary of transactions and note t3e daily transactions li)e sale9 purc3ase etc. in it.

Prob&e/s Fa!e* in Main"aining 1iar) o. Transa!"ions

Eo( (ill (e come to )no( t3e income and e/penses from 8arious sourcesD
Je only 3a8e a s3eet ; page on (3ic3 daily transactions are listed.
Je do not )no( (3ic3 product is selling "etter and (3ic3 is not.

1iar) o. Transa!"ions

Transa!"ions o. 5an 30--
P a r " i ! ' & a r s 7s.
Sold % nos. of *tem A 19...
4urc3ased 1. nos. of *tem B
,1%9...-
Sold 1 no. of *tem C 29...
#lectricity "ill paid ,19%..-
Sold 1 no. of *tem A %..
Sold 2 nos. of *tem B 49...
Sold % nos. of *tem A 19...
4urc3ased 1. nos. of *tem B ,1%9...-
Sold 1 no. of *tem C 29...
Telep3one "ill paid ,19...-
Salary paid ,19%..-

5

A#ai&ab&e A&"erna"e

Ine can go t3roug3 all t3e transactions at t3e end of t3e mont3 and note different types of transactions
on different pages. So t3at e8ery page gi8es complete detail for a different type of transaction li)e sales of
different products and e/penses of different types
Ho( try to go t3roug3 t3ese transactions and separate transactions of different types.

B'" ,%a" i. "%e n'/ber o. "ransa!"ions is &arge(

*s it really possi"le to go t3roug3 3undreds or t3ousands of transactions at t3e mont3 end and analyse
t3em to o"tain re1uired results.

Cas% an* Cre*i" Transa!"ions

Sales and purc3ase are not al(ays for cas3. Some times t3e payment ; receipt is delayed to a future date
,Sale;purc3ase for B:!EARC-. T3e diary t3at (e 3a8e discussed a"o8e9 records cas3 transactions only.
T3e :!EAR ,credit- transactions may "e noted in separate diary. Ho( (e 3a8e t(o diaries one for
cas3 and one for credit. Je need to )no( total sales and purc3ases ,"ot3 cas3 and credit- and ot3er
information li)e t3e amount t3at is paya"le and recei8a"le.

+o, ,i&& ,e ge" o'r re;'ire* res'&"s no,(

!o (e need anot3er diary to com"ine information from "ot3 t3ese diariesD
But (3en (e recei8e or pay cas3 for t3e credit transactions (ill (e again record t3e transactions on t3e
day9

J3en cas3 is recei8ed or paidD *f so9 (3ere to recordD

So t3e pro"lems )eep on increasing (it3 t3e siKe or 8olume of "usiness. But one t3ing is "ecoming
certain and t3at is t3at an accurate reflection of "usiness transacted can only "e o"tained if "ot3 cas3 and
credit transactions are recorded in suc3 a manner t3at t3ere is no duplication and yet t3e transactions are
completely recorded. T3is is possi"le only under Commercial Accounting.

Co//er!ia& A!!o'n"ing

Commercial Accounting is done t3roug3 a system t3at is )no(n as !ou"le entry "oo) )eeping.

Sing&e En"r) an* 1o'b&e En"r) A!!o'n"ing

Sing&e en"r) a!!o'n"ing<Cas% a!!o'n"ing.

T3is system records only cas3 mo8ement of transactions and t3at too up to t3e e/tent of recording one
aspect of t3e transactions.
T3is means t3at only receipt or payment of cas3 is recorded and no separate record is maintained ,a"out
t3e source of receipt and payment- as to from (3om t3e cas3 (as recei8ed or to (3om it (as paid.

1o'b&e en"r) boo6 6ee-ing<Co//er!ia& a!!o'n"ing.

!ou"le entry or commercial accounting system records "ot3 aspects of transaction i.e. receipt or
payment and source of receipt or payment. *t also records credit transactions i.e. recording of #lectricity
Bill or accruals of Salary payment etc.
.
T3is concept (ill "e e/plained in detail in t3e ne/t lectures "ut for t3e time "eing it s3ould "e noted t3at
in cas3 accounting date of receipt ; payment of actual cas3 is important (3ile in commercial accounting
6
t3e date on (3ic3 t3e e/pense is caused ,(3et3er paid or not- as (ell as t3e spreading of t3e cost of
certain items o8er t3eir useful life "ecomes important.
Ca-i"a&

Ho "usiness can run (it3out money or resources "eing in8ested t3erein.

J3ate8er money or resources from onesG o(n poc)et are put in a "usiness is referred to as CAPITAL.
Capital is t3e in8estment of t3e I(ner in t3e "usiness.
T3is capital or in8estment must earn a return or profit on its use e8en if it is coming out of onesG poc)et.
T3is return is also )no(n as P7OFIT. So no capital s3ould "e (it3out a profit or a return.
Also9 no Capital e8en if coming from t3e "usiness o(ner can "e (it3out cost. J3yD Because if t3e same
sum t3at (as used in a "usiness (as put in t3e "an) or used to "uy !efence Sa8ings or Hational Sa8ings
Certificates9 a certain amount of profit (ould 3a8e "een earned. By putting t3is money in "usiness9 a
return must "e e/pected.

Mone) Va&'e o. Ti/e

Anot3er important concept to remem"er in all "usinesses is t3at of MONE= VALUE OF TIME.
Time spend "y t3e o(ner also 3as 8alueL 3e s3ould "e remunerated for it. ,T3e time of t3e proprietor or
"usiness persons spent on t3e "usiness is also a "usiness cost and must "e paid for "y t3e "usiness in
addition to t3e profit-. J3y "ecause9 if t3e "usiness person 3ad employed some"ody else in 3is place9 t3e
person (ould "e paid a salary. T3erefore9 a "usiness personGs "i/e an* /one) "ot3 3a8e costs attac3ed
to t3em. Hot3ing is free nor s3ould "e e/pected to "e free of cost.

Goo*,i&&

T3is is simply t3e 8alue attac3ed to t3e good reputation earned t3roug3 good and clean conduct of
"usiness o8er a num"er of years. T3is good reputation also 3as a 8alue and "ecomes part of in8estment
in "usiness

Is Cas% in +an* o'r Pro.i"(

Hot unless (e 3a8e deducted from cas3 sales it is t3e total amount of e/penses t3at are accrued or are on
credit and added to it to t3e sales made on credit for (3ic3 cas3 is to "e recei8ed at a later date. T3e
simple e1uation for calculation of profit (ould t3us "e0

Cas3 Sale=Cas3 4ayment M ,Credit Sale=Credit #/pense-

Also remem"er t3at certain items 3a8e a long life and (ill "e used during t3at time to earn more money
for "usiness. T3e cost of suc3 items (ill as "e spread o8er t3eir life and also accounted for accordingly in
t3e a"o8e e1uation. .

B'*ge"

Budgeting is anot3er important aspect of "usiness planning. T3e "udget is made to ensure t3at t3ere is at
least a "alance "et(een *ncome earned and t3e e/penses incurred on earning t3is income in t3e first
instance9 and to pro8ide a reasona"le return on t3e capital used in t3e "usiness. Eo(e8er9 if t3ere is a
s3ortfall "et(een of *ncome as against e/pense9 it means t3at more is "eing spent and less earned.
!ecisions (ill "e re1uired to "ring t3e situation to "alance or if it cannot "e so t3en to arrange for loans
or more capital to ensure "usiness continues. But "usiness cannot "e run on loans and t3ese must "e
repaid.

Budget *s an IrganiKationGs 4lan of a 'uture 4eriod #/pressed in 7oney Terms.
7
Lesson-3
S=STEMS OF ACCOUNTING AN1 SOME BASIC TE7MINOLOGIES

Learning Obe!"i#e

After studying t3is lecture9 t3e students s3ould "e a"le to0
!istinguis3 "et(een Cas% A!!o'n"ing and A!!r'a& A!!o'n"ingL
:nderstand (3at is
o In!o/e
o E>-enses
o Pro.i" or Ne" Pro.i"
!istinguis3 "et(een Cas% in +an* and Pro.i".
!istinguis3 "et(een Ca-i"a& E>-enses and 7e#en'e E>-ensesL and
:nderstand (3at is 5ia"ilityD

Cas% A!!o'n"ing an* A!!r'a& A!!o'n"ing

Cas% A!!o'n"ing

*t is t3e accounting system in (3ic3 e8ents are recorded (3en actual cas3 ; c3e1ue is recei8ed or paid.

5etGs ta)e t3e e/ample of utility "ills li)e electricity9 telep3one etc. T3e "ill of Nanuary is recei8ed on 1%t3
'e"ruary and paid on 2%t3 'e"ruary. *f t3e organiKation is follo(ing cas3 accounting practice it (ill
record t3e e/pense of electricity ; telep3one on 2%t3 'e"ruary "ecause t3e actual payment is made on
t3at day. T3e same principle applies for income and ot3er transactions as (ell i.e. income is recorded
(3en cas3 is actually recei8ed instead recording (3en it is earned.

A!!r'a& A!!o'n"ing

*t is t3e accounting system in (3ic3 e8ents are re!or*e* as an* ,%en "%e) o!!'r.

T3is means t3at income is recorded (3en it is earned and e/pense is recorded (3en incurred i.e. t3e
organiKation 3as o"tained t3e "enefit from it. Consider t3e a"o8e e/ample. T3e electricity is utiliKed in
t3e mont3 of Nanuary so t3e e/pense s3ould "e recorded in t3e mont3 of Nanuary. Similarly t3e company
t3at is pro8iding t3e electricity s3ould record t3e income in t3e mont3 of Nanuary.

In!o/e

*ncome is "%e #a&'e o. goo*s or ser#i!es t3at a "usiness c3arges from its customers.

Businesses can "e distri"uted in t(o maAor categories. Ine t3at pro8ides ; sells goods and t3e ot3er t3at
pro8ides ser8ices. *f t3e organiKation is commercial t3en t3ese goods or ser8ices (ill al(ays "e pro8ided
at some price. T3is price at (3ic3 t3ese goods ; ser8ices are pro8ided is t3e income of t3e organiKation9
pro8iding t3e goods ; ser8ices.

E>-enses

#/penses are t3e !os"s in!'rre* "o earn re#en'e.

*n order to earn re8enue9 one 3as to spend some money suc3 as t3e cost of goods t3at are sold or t3e
money paid to t3e indi8iduals (3o are pro8iding ser8ices plus ot3er costs. T3ese costs t3at are incurred ;
spent "y t3e "usiness to earn t3e re8enue are t3e e/penses of t3e "usiness.

Pro.i" or Ne" Pro.i"

Het income or Het 4rofit is t3e amount "y (3ic3 t3e income e/ceeds e/penses in a specific time period.
8
IR
4rofit is (3at is left of t3e income after all e/penses ,paid and incurred- 3a8e "een deducted from it.

Ne" Pro.i" ? In!o/e E>-enses

Cas% in +an* an* Pro.i"

Je 3a8e said t3at profit is (3at is left of income after deducting t3e e/penses. *s it t3e income recei8ed
in cas3 less t3e e/penses paid in cas3D Ir do (e 3a8e to consider ot3er t3ings as (ellD *t can "e
e/plained (it3 t3e 3elp of follo(ing e/ample.
A trader purc3ases some goods from a supplier for Rs. 19%.. and promises to pay in t(o (ee)s time.
,Remem"er credit transactions from lecture .2-. T3e same day 3e sells t3ese to a customer for Rs. 29...
(3o pays Rs. 19... and promises to pay t3e "alance amount after one (ee). Ho( at t3e end of t3e day9
t3e trader 3as Rs. 19... in 3is 3and. After one (ee)9 3e (ill 3a8e anot3er Rs. 19... and 3e (ill pay Rs.
19%.. after t(o (ee)s.

J3at is profitD *s Rs. 19... t3at 3e 3as in 3is 3and on day one is 3is profit.

T3e ans(er is Ho. Ee still 3as to recei8e Rs. 19... and pay Rs. 19%.. to t3e supplier plus any ot3er
e/penses t3at 3e may 3a8e incurred in t3e process of t3is trade. Eis actual profit is Rs. %.. less any ot3er
e/penses t3at 3e incurs9 (3ic3 is t3e difference of t3e total amount t3at 3e recei8es from customer and
t3e amount t3at 3e pays to t3e supplier less ot3er e/penses.
J3at (e understand form t3is e/ample is t3at cas3 in 3and is not al(ays t3e profit. To (or) out t3e
profit (e 3a8e to consider t3e total income and total e/penses irrespecti8e of t3e fact t3at actual payment
3as "een made or not.

Ca-i"a& an* 7e#en'e E>-enses

Je 3a8e esta"lis3ed9 to calculate t3e profit9 all e/penses are deducted from income. Are all payments t3at
(e ma)e are e/penses and 3a8e to "e deducted from t3e incomeD
Consider t3e different types of payments t3at could "e made "y a "usiness organiKation. T3e payments
could "e for utility "ills9 salaries9 fuel "ills or purc3ase of 8e3icle9 furniture etc. Iut of t3e types discussed
a"o8e utility "ills9 salaries and fuel "ill are t3e payments for (3ic3 t3e organisation 3as already enAoyed
t3e "enefit. J3ereas 8e3icle and furniture are t3e types from (3ic3 t3e company (ill deri8e t3e "enefit
for a long time. *f t3e payment made for 8e3icles and furniture is su"tracted from t3e income of t3e
period in (3ic3 payment (as made9 t3e profit for t3at period (ill "e too lo(. J3ereas9 in t3e future
period (3en t3e item (ill still "e pro8iding "enefit to t3e company t3ere (ill "e no e/pense to matc3 t3e
"enefit of t3at e/pense. T3is means t3at (e 3a8e to distinguis3 "et(een t3e payments ; e/penses t3at
pro8ide "enefit to t3e company immediately and t3ose t3at last for a longer period.

*n accounting t3e e>-enses "%a" -ro#i*e bene.i" i//e*ia"e&) are !a&&e* @7e#en'e E>-ensesA an*
"%ose e>-enses ,%ose bene.i" &as" .or a &onger -erio* are !a&&e* @Ca-i"a& E>-ensesC.

Liabi&i"ies

5ia"ilities are t3e *eb"s and ob&iga"ions of t3e "usiness.

5ia"ility is t3e o"ligation of t3e "usiness to pro8ide a "enefit or asset on a future date. Je 3a8e discussed
credit transactions. J3ene8er a person purc3ases somet3ing on credit 3e promises to pay for t3e goods
on a future date. T3is is 3is o"ligation to pay cas3 at a future date and t3us it "ecomes 3is lia"ility.
9
Lesson-4
SINGLE AN1 1OUBLE ENT7= 7ECO71 8EEPING
Learning Obe!"i#e

T3e o"Aecti8e of t3is lecture is to de8elop an understanding in t3e students a"out t3e "asic
concepts li)e0
o T3e separate "usiness entity
o Single and dou"le entry "oo)=)eeping
o !e"it and Credit
o T3e dual aspect of a transaction
o Accounting e1uation

Se-ara"e En"i") Con!e-"

*n accounting9 BT%e B'siness0 is "rea"e* in*e-en*en"&) from t3e persons (3o o(n it. T3is means9
alt3oug3 anyt3ing o(ned "y t3e "usiness "elongs to t3e o(ners of t3e "usiness and anyt3ing o(ed "y
t3e "usiness is paya"le "y t3e o(ners "ut for accounting purposes9 (e assume t3at t3e "usiness is
independent from its o(ners. T3is means9 if t3e "usiness purc3ases a mac3ine or piece of e1uipment9
"usiness (ill o(n and o"tain "enefit from t3at mac3ine or e1uipment. 5i)e(ise9 if t3e "usiness "orro(s
money from FsomeoneG it (ill 3a8e to repay t3e money. T3is FsomeoneG includes e8en t3e o(ner of t3e
"usiness.

T%is "rea"/en" o. "%e b'siness in*e-en*en"&) .ro/ i"s o,ners is !a&&e* "%e BSe-ara"e En"i")
Con!e-"0.

Sing&e En"r) Boo6-6ee-ing

T3is is t3e con8entional style of )eeping records of financial transactions. *n single entry "oo) )eeping
system9 as it is clear from t3e name9 on&) one as-e!" o. "%e "ransa!"ion is re!or*e*.
T3is actually is not a system "ut is a procedure "y (3ic3 small "usiness concerns9 li)e retailers and small
s3op)eepers9 )eep record of t3eir sale ; income. *n t3is system9 t3ere are usually ",o "o "%ree regis"ers
@8%a"aA. *n one register cas3 recei8ed from customers is recorded9 (3ereas t3e ot3er one is a person=
(ise record of goods sold on credit Udhar Khata. T3ere may or may not "e a register of suppliers to
(3om money is paya"le. T3at means9 only one aspect of transaction i.e. eit3er cas3 receipt or t3e fact
t3at money is recei8a"le from someone is recorded.

1o'b&e En"r) Boo6-6ee-ing

T3e concept of dou"le entry is "ased on t3e fact t3at e8ery transaction 3as t(o aspects i.e. recei8ing a
"enefit and gi8ing a "enefit. T%e a!!o'n"ing s)s"e/ "%a" re!or*s bo"% "%e as-e!"s o. "ransa!"ion in
boo6s o. a!!o'n"s is !a&&e* *o'b&e en"r) s)s"e/.
T3e account t3at recei8es t3e "enefit is de"ited and t3e account t3at pro8ides t3e "enefit is credited.
F!e"itG and FCreditG are denoted "y F!rG and FCrG respecti8ely. T3e ultimate result of t3e system is t3at for
e8ery !e"it ,!r- t3ere is an e1ual Credit ,Cr-.

Sing&e C 1o'b&e En"r) Boo6-6ee-ing 1is"ing'is%e*

T3e dou"le entry system is a more sop3isticated9 compre3ensi8e and relia"le form of single entry "oo)
)eeping system.
Single entry system records only one aspect of t3e transaction suc3 as0
o Cas3 recei8ed from sale is recorded in cas3 register only9
o ?oods sold on credit are recorded in t3e indi8idualGs account only9
o J3en cas3 is recei8ed from t3e customer9 to (3om somet3ing (as sold on credit9 t3e
receipt may Aust "e recorded in t3e account of indi8idual only.
!ou"le entry system records "ot3 t3e aspects of t3e transactionL
10
o J3en good are sold on cas3 t3e t(o aspects of t3e transaction are > t3e seller 3as sold
goods and recei8ed cas3 against t3em. T3e goods sold are "enefit transferred to t3e
purc3aser ,Credit- (3ereas t3e cas3 recei8ed if t3e "enefit against t3e goods sold
,!e"it-.
o J3en t3e goods are sold on credit t3e "enefit gi8en is t3e same i.e. goods sold "ut t3e
"enefit recei8ed is not cas3 "ut a rig3t to recei8e cas3 from t3e customer. T3erefore9 in
t3is case !e"it is gi8en to customerGs account ,account recei8a"le- instead of cas3.
o J3en cas3 is recei8ed from t3e customer t3e rig3t to recei8e cas3 ceases. So9 t3e "enefit
recei8ed is cas3 and "enefit transferred is t3e rig3t to recei8e cas3. Eere cas3 (ill "e
de"ited and customer (ill "e credited.

Adopting t3e dou"le entry accounting system can9 t3erefore9 3a8e follo(ing "enefits0

o #8ery transaction 3as e1ual !e"it and CreditL 3ence t3e total of all !e"it accounts (ill
"e e1ual to t3e total of all Credit accounts at any gi8en time. T3is ser8es as a 1uic) test
of mat3ematical accuracy of "oo) )eeping.
o Since all aspects of transactions are recorded9 t3erefore9 t3e "oo)s are more informati8e.
*n t3e a"o8e e/ample of trader9 if 3e )eeps records under dou"le entry system (ill )no(
t3e e/act figure of total sale9 cas3 in 3and and recei8a"le from customers from t3eir
respecti8e accounts at any desired time.

1ebi" an* Cre*i"

!e"it and Credit are t(o 5atin (ords and as suc3 it is difficult to say (3at do t3ese mean. But (e can
de8elop an understanding as to (3at does t3ese terms stand for.

1ebi"

I" signi.ies "%e re!ei#ing o. bene.i". In si/-&e ,or*s i" is "%e &e." %an* si*e. !#B*T is a record of
an inde"tednessL specifically an entry on t3e left=3and side of an account constituting an addition to an
e/pense or asset account or a deduction from a re8enue9 net (ort39 or lia"ility account.

Cre*i"

I" signi.ies "%e -ro#i*ing o. a bene.i". In si/-&e ,or*s i" is "%e rig%" %an* si*e. CR#!*T9 in
accounting9 is an accounting entry system t3at eit3er decreases assets or increases lia"ilitiesL in general9 it
is an arrangement for deferred payment for goods and ser8ices.

1'a& As-e!" o. Transa!"ions

'or e8ery de"it t3ere is an e1ual credit. T3is is also called t3e *'a& as-e!" o. "%e "ransa!"ion i.e. e8ery
transaction 3as t(o aspects9 de"it and credit and t3ey are al(ays e1ual. T3is means t3at e8ery transaction
s3ould 3a8e t(o=sided effect. 'or e/ample 7r. A starts 3is "usiness and 3e initially in8ests Rupees
1..9...;= in cas3 for 3is "usiness. Iut of t3is cas3 follo(ing items are purc3ased in cas3L

o A "uilding for Rupees %.9...;=L
o 'urniture for Rupees 1.9...;=L and
o A 8e3icle for Rupees 1%9...;=

T3is means t3at 3e 3as spent a total of Rupees %9...;= and 3as left (it3 Rupees 2%9... cas3. Je (ill
apply t3e !ual Aspect Concept on t3ese e8ents from t3e 8ie(point of "usiness.

J3en 7r. A in8ested Rupees 1..9...;=9 t3e cas3 account "enefited from 3im. T3e e8ent (ill "e
recorded in t3e "oo)s of "usiness as9

11

1ebi" Cas3 Rs.1..9 ...
Cre*i" 7r. A Rs.1..9 ...

Analyse t3e transaction. T3e account t3at recei8ed t3e "enefit9 in t3is case is t3e cas3 account9
and t3e account t3at pro8ided t3e "enefit is t3at of 7r. A.

Building purc3ased > T3e "uilding account "enefited from cas3 account

1ebi" Building Rs.%.9 ...
Cre*i" Cas3 Rs.%.9 ...

'urniture purc3ased > T3e furniture account "enefited from cas3 account

1ebi" 'urniture Rs.1.9 ...
Cre*i" Cas3 Rs.1.9 ...

2e3icle purc3ased > T3e 8e3icle account "enefited from cas3 account

1ebi" 2e3icle Rs.1%9 ...
Cre*i" Cas3 Rs.1%9 ...

Basi! Prin!i-&e o. 1o'b&e En"r)

Je can de8ise t3e "asic principle of dou"le entry "oo)=)eeping from our discussion to t3is point B#8ery
!e"it 3as a CreditC (3ic3 means t3at BAll !e"its are al(ays e1ual to All CreditsC.

Asse"s

Assets are t3e -ro-er"ies an* -ossessions o. "%e b'siness.

4roperties and possessions can "e of t(o types0
o Tangib&e Asse"s t3at 3a8e p3ysical e/istence , are furt3er di8ided into 'i/ed Assets and
Current Assets-
o In"angib&e Asse"s t3at 3a8e no p3ysical e/istence

#/amples of "ot3 are as follo(s0
o Tangi"le Assets > 'urniture9 2e3icle etc.
o *ntangi"le Assets > 4atents9 Copyrig3ts9 ?ood(ill etc.

A!!o'n"ing E;'a"ion

'rom t3e a"o8e e/ample9 if t3e de"its and credits are added up9 t3e situation (ill "e as follo(s0

1ebi"s
Cas3 Rs.1..9...;=
Building %.9...;=
'urniture 1.9...;=
2e3icle 1%9...;=

Cre*i"s
7r. A Rs.1..9 ...;=
Cas3 %9...;=

12

T%e "o"a& E;'a"ion be!o/esD

1EBITS ? C7E1ITS

Cas3 M Building M 'urniture M 2e3icle O Cas3 M 7r. A
1..... M %.... M 1.... M 1%... O %... M 1..9...

Cas3 on 5eft Eand Side is Rupees 1..9...;= and on Rig3t Eand Side it is Rs.%9 ...;=. *f it is gat3ered
on t3e 5eft Eand Side it (ill gi8e a positi8e figure of Rupees 2%9...;= ,(3ic3 you (ill notice is our
"alance of cas3 in 3and-. Ho( t3e e1uation "ecomes0

1EBITS O C7E1ITS

Cas3 M Building M 'urnitureM 2e3icle O 7r. A
2%9... M %.9... M 1.9... M 1%9... O 1..9...

Keeping t3e entity concept in mind (e can see t3at t3e "usiness o(ns t3e "uilding9 furniture9 8e3icle and
cas3 and (ill o"tain "enefit from t3ese t3ings in future. Any t3ing t3at pro8ides "enefit to t3e "usiness in
future is called BAsse"0. Similarly t3e "usiness 3ad o"tained t3e money from 7r. A and t3is money (ill
3a8e to "e returned in form of eit3er cas3 or "enefits. Any t3ing for (3ic3 t3e "usiness 3as to repay in
any form is called BLiabi&i")0. So cas39 "uilding9 furniture and 8e3icle are t3e assets of t3e "usiness and
t3e amount recei8ed from 7r. A for (3ic3 t3e "usiness (ill 3a8e to pro8ide a return or "enefit is t3e
lia"ility of t3e "usiness. T3erefore9 our e1uation "ecomes0

Assets O 5ia"ilities

T3e lia"ilities of t3e "usiness can "e classified into t(o maAor classes i.e. t3e amounts paya"le to
FoutsidersG and t3ose paya"le to t3e Fo(nersG. T3e lia"ility of t3e "usiness to(ards its o(ners is called
BCa-i"a&0 and amount paya"le to outsiders is called &iabi&i"). T3erefore9 our accounting e1uation finally
"ecomes0

Asse"s ? Ca-i"a& E Liabi&i"ies
13
Lesson-5
CLASSIFICATION OF ACCOUNTS
Learning Obe!"i#e

T3is lecture (ill co8er
o Classification of accounts into Assets9 5ia"ilities9 *ncome and #/penses9 and
o Rules of !e"it and Credit for t3ese classes.
A!!o'n"

An accounting system )eeps separate record of eac3 item li)e assets9 lia"ilities9 etc. 'or e/ample9 a
separate record is )ept for cas3 t3at s3o(s increase and decrease in it.
T3is re!or* "%a" s'//ari2es /o#e/en" in an in*i#i*'a& i"e/ is !a&&e* an A!!o'n".

C&assi.i!a"ion o. A!!o'n"s
T3e accounts are classified into follo(ing 3eads0
o Assets
o 5ia"ilities
o *ncome
o #/penses ,furt3er di8ided into capital and re8enue e/penses-
Asse"s

Assets are t3e -ro-er"ies an* -ossessions o. "%e b'siness "o -a) in .'"'re. Can be a/o'n" -a)ab&e
.or /a"eria& -'r!%ase*F e>-enses e"!.

4roperties and possessions can "e of t(o types0
o Tangib&e Asse"s t3at 3a8e p3ysical e/istence ,are furt3er di8ided into 'i/ed Assets and
Current Assets-.
o In"angib&e Asse"s t3at 3a8e no p3ysical e/istence

#/amples of "ot3 are as follo(s0
o Tangi"le Assets > 'urniture9 2e3icle etc.
o *ntangi"le Assets > Rig3t to recei8e money9 ?ood (ill etc.
Liabi&i"ies

5ia"ilities are t3e *eb"s and ob&iga"ions of t3e "usiness. 5ia"ility is t3e o"ligation of t3e "usiness to
pro8ide a "enefit or asset on a future date.

Asset is a rig3t to recei8e and lia"ility is an o"ligation to pay9 t3erefore9 t3ese are opposite to eac3 ot3er.

A!!o'n"ing E;'a"ion

Assets are created out of capital in8ested plus lia"ility to t3ird party.

Asse"s ? Liabi&i"ies E O,ner0s e;'i")
In!o/e

*ncome ; Re8enue is "%e #a&'e o. goo*s or ser#i!es t3at a "usiness c3arges from its customers Ir t3e
re(ard ; return recei8ed from t3e resources committed in t3e "usiness.

E>-enses

#/penses are t3e !os"s in!'rre* "o earn "%e re#en'e. T3e resources spent and t3e efforts made to earn
t3e income9 (3en translated in money terms are t3e e/penses of t3e "usiness
Pro.i"

4rofit is t3e e/cess of income o8er e/penses in a specific period.
14
Loss

5oss is t3e e/cess of e/penses o8er income in a specific period.

Ca-i"a& E>-en*i"'re

*t is t3e e/penditure to create an asset t3at 3elps in generating future income and its life is more t3an 12
mont3. 'or e/ample mac3inery purc3ases9 furniture purc3ases etc.
IR
Capital #/penditure is t3e amount used during a particular period to ac1uire or impro8e long=term assets
suc3 as property9 plant or e1uipment.

7e#en'e E>-en*i"'re
*t is t3e day to day e/penses (3ose "enefit is dra(n immediately. 'or e/ample9 salary of t3e employee9
rent of t3e "uilding9 etc.
IR
Re8enue #/penditure is t3e cost of resources consumed or used up in t3e process of generating re8enue9
generally referred to as e/penses.

7'&es o. 1ebi" an* Cre*i"
'rom our discussion up to t3is point9 (e 3a8e esta"lis3ed follo(ing rules for !e"it and Credit0

Any account t3at o"tains a "enefit is !e"it.
IR
Anyt3ing t3at (ill pro8ide "enefit to t3e "usiness is !e"it.

Bot3 t3ese statements may loo) different "ut in fact if (e consider t3at (3ene8er an account "enefits as
a result of a transaction9 it (ill 3a8e to return t3at "enefit to t3e "usiness t3en "ot3 t3e statements (ill
loo) li)e different sides of t3e same picture.
'or credit9
Any account t3at pro8ides a "enefit is Cre*i".
IR
Anyt3ing to (3ic3 t3e "usiness 3as a responsi"ility to return a "enefit in future is Cre*i".

As e/plained in t3e case of !e"it9 (3ene8er an account pro8ides "enefit to t3e "usiness t3e "usiness (ill
3a8e a responsi"ility to return t3at "enefit at some time in future and so it is Credit.

7'&es o. 1ebi" an* Cre*i" .or Asse"s

Similarly (e 3a8e esta"lis3ed t3at (3ene8er a "usiness transfers a 8alue ; "enefit to an account and as a
result creates some t3ing t3at (ill pro8ide future "enefitL t3e Ft3ingG is termed as Asse". By com"ining
"ot3 t3ese rules (e can de8ise follo(ing rules of !e"it and Credit for Assets0
o J3en an asset is created or purc3ased9 8alue ; "enefit is transferred to t3at account9 so
it is !e"ited

i. In!rease in Asse" is 1ebi"

o Re8ersing t3e a"o8e situation if t3e asset is sold9 (3ic3 is termed as disposing off9 for
say cas39 t3e asset account pro8ides "enefit to t3e cas3 account. T3erefore9 t3e asset
account is Credited

ii. 1e!rease in Asse" is Cre*i"

7'&es o. 1ebi" an* Cre*i" .or Liabi&i"ies
15

Anyt3ing t3at transfers 8alue to t3e "usiness9 and in turn creates a responsi"ility on part of t3e "usiness
to return a "enefit9 is a Liabi&i"). T3erefore9 lia"ilities are t3e e/act opposite of t3e assets.

o J3en a lia"ility is created t3e "enefit is pro8ided to "usiness "y t3at account so it is
Credited
iii. In!rease in Liabi&i") is Cre*i"

o J3en t3e "usiness returns t3e "enefit or repays t3e lia"ility9 t3e lia"ility account "enefits
from t3e "usiness. So it is !e"ited
i#. 1e!rease in Liabi&i") is 1ebi"

7'&es o. 1ebi" an* Cre*i" .or E>-enses

Nust li)e assets9 (e 3a8e to pay for e/penses. 'rom assets9 (e dra( "enefit for a long time (3ereas t3e
"enefit from e/penses is for a s3ort run. T3erefore9 #/penditure is Aust li)e Asset "ut for a s3ort run.
:sing our rule for !e"it and Credit9 (3en (e pay cas3 for any e/pense t3at e/pense account "enefits
from cas39 t3erefore9 it is de"ited.

o Ho( (e can lay do(n our rule for #/penditure0
#. In!rease in E>-en*i"'re is 1ebi"

o Re8ersing t3e a"o8e situation9 if (e return any item t3at (e 3ad purc3ased9 (e (ill
recei8e cas3 in return. Cas3 account (ill recei8e "enefit from t3at #/penditure account.
T3erefore9 #/penditure account (ill "e credited
#i. 1e!rease in E>-en*i"'re is Cre*i"

7'&es o. 1ebi" an* Cre*i" .or In!o/e

*ncome accounts are e/actly opposite to e/pense accounts Aust as lia"ilities are opposite to t3at of assets.
T3erefore9 using t3e same principle (e can dra( our rules of !e"it and Credit for *ncome

#ii. In!rease in In!o/e is Cre*i"
#iii. 1e!rease in In!o/e is 1ebi"

16
Lesson-6
FLO$ OF T7ANSACTIONS
Learning Obe!"i#e

T3is lecture (ill co8er follo(ing areas0
o An o8er8ie( of t3e flo( of transactions.
o An introduction to t3e "asic "oo)s of accounts.
o T3e ?eneral 5edger9 and
o T3e ledger "alance

E#en"
#8ent is t3e 3appening of any t3ing "ut in accounting (e discuss monetary e8ents

Mone"ar) E#en"s
*f t3e financial position of a "usiness is c3ange due to t3e 3appening of e8ent t3at #8ent is called
7onetary #8ent

T%e Vo'!%er

2ouc3er is documentary e8idence in a specific format t3at records t3e details of a transaction. *t is
accompanied "y t3e e8idence of transaction.

General Journal
General Ledger
Cash/Bank Book
Trial Balance Profit & Loss Account Balance Sheet
The Voucher
Occurrence of an Event
The Flow of Transactions
17
A Sa/-&e Vo'!%er

Na/e O. Co/-an)
T)-e O. Vo'!%er
1a"eD 1-1-30-- NoD 01
1es!ri-"ion Co*e
G
1ebi"
A/o'n"
Cre*i"
A/o'n"
Cas% 01 100F000
Ca-i"a& 03 100F000

To"a&D 100F000 100F000
Narra"ionD Ca-i"a& In"ro*'!e* in Cas% b) O,ner
Pre-are* B)D C%e!6e* b)D

T%e Genera& 5o'rna&

T3e Nournal is used to record financial transactions in c3ronological ,day=to=day- order. All 8ouc3ers (ere
first recorded in "oo)s of accounts. *t (as also called t3e Boo) of Iriginal #ntry or !ay Boo). But in
present day accounting and especially (it3 t3e introduction of computers for accounting9 t3is "oo) is not
in use any more.

Genera& Le*ger T%e BT0 A!!o'n"

5edger > is a "oo) t3at )eeps separate record for eac3 account ,Boo) of Accounts-. T3e Account or
Eead of Account is systematic record of transactions of one type.

An account in its simplest form is a T=s3ape and loo)s li)e t3is0

A S"an*ar* Genera& Le*ger

Since t3e ledger )eeps record of transactions t3at affect one 3ead of account9 t3erefore9 it s3ould pro8ide
all t3e information t3at a user may need.
:sually t3e ledger is re1uired to pro8ide follo(ing information0
o Title of account
o 5edger page num"er9 called 5edger 'olio ; Account Code
o !ate of transaction
o 2ouc3er num"er
o Harration ; particulars of transaction
o Amount of transaction

Title of Account
Left hand side.
The Debit side.
Right hand side.
The Credit side.
18
A S"an*ar* Genera& Le*ger

Capital Account ,Title of Account- Account Code .2
!ate 2ouc3er
Hum"er
4articulars ;
Harration
!e"it
Amount
Credit
Amount
2.==
Nan .1 .1 Capital Account 1..9...

Capital *ntroduced in cas3 "y I(ner

7e!or*ing Fro/ Vo'!%er "o Genera& Le*ger

2ouc3er
!ate0 1=1=2.== Ho0 .1
!escription Code
P
!e"it
Amount
Credit
Amount
Cas3 account .1 1..9...
Capital account .2 1..9...
Harration0 Capital *ntroduced in Cas3 "y I(ner

Capital Account ,Title of Account- Account code .2
!ate 2ouc3er
Hum"er
4articulars ;
Harration
!e"it
Amount
Credit
Amount
2.==
Nan .1 .1 Cas3 account 1..9...

Co/-&e"ing "%e 7e!or*ing Bo"% E..e!"s

!escription Code
P
!e"it
Amount
Credit
Amount
Cas3 account .1 1..9...
Capital account .2 1..9...
Harration0 Capital *ntroduced in Cas3 "y I(ner

Capital Account Account Code .2
!ate 2ouc3er
Hum"er
4articulars ; Harration !e"it
Amount
Credit
Amount
2.==
Nan .1 .1 Cas3 account 1..9...

19
Cas3 Account Account Code .1
!ate 2ouc3er
Hum"er
4articulars ; Harration !e"it
Amount
Credit
Amount
2.==
Nan .1 .1 Capital account 1..9...

T%e Le*ger Ba&an!e

*n t3e earlier lecture9 (e 3a8e discussed t3at in order to 3a8e t3e total figure in respect of eac3 3ead of
e/pense;income9 asset;lia"ility9 (e need to maintain different accounts. Je 3ad also said t3at eac3
account may 3a8e figures on t3e de"it as (ell as on t3e credit side. T3erefore9 t3e difference "et(een t3e
de"it and t3e credit sides9 )no(n as t3e BALANCE9 (ould represent t3e re1uired total of t3e particular
account.

T3e total of all "alances on t3e !e"it side is A5JAQS e1ual to t3e total of all "alances on t3e Credit
side. T3is is called t3e "alancing of "oo)s of accounts. Je (ill study a"out t3is concept at a later stage.
T3e "alance may "e (ritten out after e8ery transaction in a t3ird column or calculated at t3e end of a
specific time period ,an accounting period-.

A !e"it "alance is s3o(n (it3out "rac)ets and a Credit "alance is s3o(n in "rac)ets ,RQS-.

!ate 2ouc3er
Hum"er
Harration ;
4articulars
!e"it
Amount
Credit
Amount
Balance
!r;,Cr-
2.==
Nan .1 .1 Capital account 1..9... 1..9...
Nan .1 .2 Building account %.9... %.9...
A Simple Presentation of a Recorded Transaction is as under:

Cash Account Code 01
Capital
100,000
Capital Account Code 02
Cash 100,000
20
Nan .2 .3 'urniture account 1.9... 4.9...
Capital Account Account Code .2
!ate 2ouc3er
Hum"er
Harration ;
4articulars
!e"it
Amount
Credit
Amount
Balance
!r;,Cr-
2.==
Nan .1 .1 Cas3 account 1..9... ,1..9...-

21
Lesson-7
BASIC BOO8S OF ACCOUNTS
Areas Co#ere* in "%is &e!"'reD
Cas3 "oo) and "an) "oo).
Accounting 4eriod.
Trial Balance and its limitations.

F&o, o. Transa!"ionsD

*n 'inancial Accounting9 any "usiness transaction flo(s as follo(s0

1. T3e "usiness transaction is recorded in a #o'!%er. T3e 8ouc3er is t3e first document prepared
in t3e financial accounting.
2. All financial transactions are t3en posted in t3e o'rna& .ro/ #o'!%ers.
3. *n t3ese days9 8ouc3er is directly fed in t3e "oo)s of accounts "y means of computers.
It3er(ise ledgers are prepared for eac3 account from t3e Nournal.
4. 'rom t3e "oo)s of accounts9 "ria& ba&an!e is prepared9 (3ic3 s3o(s t3e arit3metic accuracy of
t3e accounting system.
%. 'inally9 .inan!ia& s"a"e/en"s. i.e.9 4rofit 6 5oss Account and Balance S3eet is prepared from
trial "alance.

Cas% Boo6 C Ban6 Boo6

Cas3 "oo) and "an) "oo) are part of general ledger. All entries including paya"les and recei8a"les are
recorded in t3e general ledger. #/penses9 income9 assets and lia"ilities are recorded in different 3ead of
accounts to analyKe t3e e/penses incurred in different 3ead of accounts. !ue to large 8olume of
transactions9 entries related to cas3 and "an)s are recorded in t3e separate "oo)s.

Cas% Boo6

All cas3 transactions ,receipts and payments- are recorded in t3e cas3 "oo). Cas3 "oo) "alance s3o(s
t3e amount of cas3 in 3and at a particular time.

'ormat of cas3 "oo) is 3ere under0

Cas% Boo6 A!!o'n" Co*e 01
Receipt Side 4ayment Side
!ate Ho. Harration ;
4articulars
5edger
Code
Receipt
Amount
4articulars
5edger
Code
4ayment
Amount

O7

Cas% Boo6 A!!o'n" Co*e 01
!ate 2ouc3er
Hum"er
Harration ;
4articulars
5edger
Code
Receipt
Amount
4ayment
Amount
Balance
!r;,Cr-

22
T(o formats of cas3 "oo) are s3o(n a"o8e. *n t3e first format9 receipt side and payment side are s3o(n
separately. *n t3e second format9 t(o columns are s3o(n for receipt and payment (it3 an e/tra column
of "alance. T3e "alance column s3o(s t3e net "alance of cas3 a8aila"le for use. T3e ledger code s3o(s
t3e code of t3at 3ead of account (3ic3 contains t3e second effect of t3e cas3 transactions "ecause de"its
and credits are al(ays e1ual in financial accounting.
Bo"% o. "%ese .or/a"s are !orre!". A b'siness !an 'se an) .or/a" !onsi*ering i"s -o&i!ies an*
re;'ire/en"s.

Ban6 Boo6

All "an) transactions ,receipts 6 payments- are recorded in t3e "an) "oo). T3e "alance of "an) "oo)
reflects t3e cas3 a8aila"le at "an) at a particular time.

'ormat of "an) "oo) is 3ereunder0

Ban6 Boo6 9Ban6 A!!o'n" N'/ber: A!!o'n" Co*e 03
!ate 2ouc3er
Hum"er
C31.
Ho.
Harration ;
4articulars
5edger
Code
Receipt
Amount
4ayment
Amount
Balance
!r;,Cr-

T3e format of "an) "oo) is same as t3at of cas3 "oo) e/cept t3e column of c3e1ue no. T3is column is
added in t3e format "ecause all payments are made "y c3e1ue and t3e num"er of c3e1ue is (ritten in
t3at column in order to )eep t3e accounting record updated.

A!!o'n"ing Perio*
Accounting period is any period for (3ic3 a 'inancial Statements are prepared. T3e lengt3 of t3e
accounting period can "e anyt3ing "et(een one day to one year. T3e legal or statutory definition of
accounting year is a ma/imum of one year. T3e only e/ception in t3is case is t3e formation of a ne(
company (3ic3 is formed "efore t3e start of accounting period.

Finan!ia& )ear 9A -erio* o. 13 /on"% *'ra"ion:

*n 4a)istan9 financial year starts from 1
st
of Nuly and ends on 3.
t3
of Nune. #/ceptions are for specialiKed
"usiness suc3 as te/tile mills9 "an)s9 Sugar mills etc. 'inancial reports can "e made for a (ee) or a
mont39 depending upon t3e re1uirements of t3e company.
1ebi" C Cre*i" Ba&an!es
*t 3as already "een mentioned t3at "ot3 sides i.e. !e"it and credit side of a ledger must "e e1ual. *f de"it
side of a ledger is greater t3an credit side9 t3e "alance (ill "e (ritten on t3e credit side and it (ill "e
called

1ebi" Ba&an!e. T3e reason "eing9 t3e "alance is (ritten on t3e credit side "ecause of e/cessi8e de"it
"alance. T3erefore9 it is called !e"it Balance. 'or e/ample0

10,000 Balance
110,000 120,000

4
3
20,000
100,000
30,000 2
1 80,000
Title of Account Account Code 01
No. Narration /
Particulars
Date
Credit Side
Receipt
Amount
No. Narration /
Particulars
Payment
Amount
Date
Debit Side
A Debit Balance
23

Similarly9 if credit side is greater t3an de"it side9 t3e "alance (ill "e (ritten on t3e de"it side. T3is "alance
is called. Cre*i" Ba&an!e. 'or #/ample0

Tria& Ba&an!e

At t3e end of accounting period9 a list of all ledger "alances is prepared. T3is list is called trial Balance.

Trial "alance is a listing of t3e accounts in your general ledger and t3eir "alances as of a specified date. A
trial "alance is usually prepared at t3e end of an accounting period and is used to see if additional
adAustments are re1uired to any of t3e "alances. Since t3e "asic accounting system relies on dou"le=entry
"oo))eeping9 a trial "alance (ill 3a8e t3e same total de"it amount as it 3as total credit amounts. Bot3
sides of trial "alance i.e. !e"it side and credit side must "e e1ual. *f "ot3 sides are not e1ual9 t3ere are
some errors in t3e "oo)s of accounts. Trial "alance s3o(s t3e mat3ematical accuracy of t3e "oo)s of
accounts.

Li/i"a"ions o. Tria& Ba&an!e

1. Trial "alance only s3o(s t3e mat3ematical accuracy of t3e accounts.
2. *f "ot3 sides of trial "alance are e1ual9 "oo)s of accounts are considered to "e correct. But t3is
mig3t not "e true in all t3e cases.
3. *f any transaction is not recorded at all9 trial "alance can not detect t3e omitted transaction.
4. *f any transaction is recorded in t3e (rong 3ead e.g. if an e/pense is de"ited to an assets account.
Trial "alance (ill not "e a"le to detect t3at mista)e too.

10,000 Balance
120,000 110,000

4
3
30,000
80,000
20,000 2
1 100,000
Title of Account Account Code 01
No. Narration /
Particulars
Date
Credit Side
Receipt
Amount
No. Narration /
Particulars
Payment
Amount
Date
Debit Side
A Credit Balance
24

A Sa/-&e Tria& Ba&an!e

Title Balance
Trial Balance
As on 31
st
!ec. 2..======
Title of Account Account
Code
!e"it
Amount
Credit
Amount
Cas3 in Eand
Cas3 at "an)
Capital
Assets
5ia"ilities
*ncome
#/penses
.1
.2
.3
.4
.%
.&
.
/y
/y

/y

/y

/y

/y
/y
Total /yK /yK

25
Lesson-8
INT7O1UCTION TO FINANCIAL STATEMENTS
Learning Obe!"i#e
After studying t3is c3apter9 you (ill "e a"le to0
o !ra( up 4rofit 6 5oss account from t3e information gi8en in trial "alance.
o !ifferentiate t3e term9 Receipt 6 4ayment9 *ncome 6 #/penditure and 4rofit 6 5oss
account.

Finan!ia& S"a"e/en"s
!ifferent reports generated from t3e "oo)s of accounts to pro8ide information to t3e rele8ant persons.
#8ery "usiness is carried out to ma)e profit. *f it is not run successfully9 it (ill sustain loss. T3e
calculation of suc3 profit 6 loss is pro"a"ly t3e most important o"Aecti8e of t3e accounting function.
Suc3 information is ac1uired from B'inancial StatementsC. 'inancial Statements are t3e end product of
t3e (3ole accounting process. T3ese s3o( us t3e profita"ility of t3e "usiness concern and t3e financial
position of t3e entity at a specified date. T3e most commonly used 'inancial Statements are Fprofit 6 loss
accountG F"alance s3eetG 6 Fcas3 flo( statementG.

Pro.i" C Loss A!!o'n"

4rofit 6 5oss account is an account t3at summariKes t3e profita"ility of t3e organiKation for a specific
accounting period.
4rofit 6 5oss account 3as t(o parts0
o 'irst part is called Tra*ing a!!o'n" in (3ic3 ?ross 4rofit is calculated. ?ross profit is t3e
e/cess of sales o8er cost of goods sold in an accounting period. *n trading concern9 cost of
goods sold is t3e cost of goods consumed plus any ot3er c3arge paid in "ringing t3e goods in
sala"le condition. For e>a/-&e9 if "usiness purc3ased certain items for resale purpose and any
e/pense is paid in respect of carriage or "ringing t3e goods in store ,transportation c3arges-.
T3ese (ill also "e grouped under t3e 3eading of Fcost of goods soldG and (ill "ecome part of its
price. *n /an'.a!"'ring !on!ern9 cost of goods sold comprises of purc3ase of ra( material
plus (ages paid to staff employed for con8erting t3is ra( material into finis3ed goods plus any
ot3er e/pense in t3is connection.
o 2
nd
part is called Pro.i" C Loss a!!o'n" in (3ic3 Het 4rofit is calculated. Ne" Pro.i" is (3at is
left of t3e gross profit after deducting all ot3er e/penses of t3e organiKation in a specific time
period.

+o, "o -re-are Pro.i" C Loss A!!o'n"(

Ine (ay is to (rite do(n all t3e !e"it and Credit entries of *ncome and #/pense accounts in t3e 4rofit
and 5oss Account. But it is not sensi"le to do so.
T3e ot3er (ay is t3at (e calculate t3e net "alance or (e can say Closing Balance of eac3 income and
e/pense account. T3en (e note all t3e credit "alances on t3e credit side and all t3e de"it "alances on t3e
de"it of profit and loss account.
*f t3e net "alance of profit and loss is Credit ,credit side is greater t3an de"it side- it is 4rofit and if t3e
net "alance is !e"it ,!e"it side is greater t3an credit side- it is a loss.

In!o/eF E>-en*i"'reF Pro.i" C Loss

In!o/e is t3e 8alue of goods and ser8ices earned from t3e operation of t3e "usiness. *t includes "ot3
cas3 6 credit. For e>a/-&e9 if a "usiness entity deals in garments. J3at it earns from t3e sale of
garments9 is its income. *f some"ody is rendering ser8ices9 (3at 3e earned from rendering ser8ices is 3is
income.
E>-enses are t3e resources and t3e efforts made to earn t3e income9 translated in monetary terms. *t
includes "ot3 e/penses9 i.e.9 paid and to "e paid ,paya"le-. Consider t3e a"o8e mentioned e/ample9 if any
sum is spent in running t3e garments "usiness effecti8ely or in pro8ision of ser8ices9 is termed as
e/pense.
26
Pro.i" is t3e e/cess of income o8er e/penses in a specified accounting period.

Pro.i"? In!o/e - e>-enses

*n t3e a"o8e mentioned e/ample9 if t3e "usiness or t3e ser8ices pro8ider earn Rs. 1..9... 6 t3eir
e/penses are Rs. %9.... T3eir profit (ill "e Rs. 2%9... ,1..9...=%9...-.
Loss is t3e e/cess of e/penses o8er income in a specified period of time. *n t3e a"o8e e/ample9 if t3eir
e/penses are Rs. 1..9... 6 t3eir income is Rs. %9.... T3eir loss (ill "e Rs. 2%9....

7'&es o. 1ebi" C Cre*i"

*ncrease in e/pense is !e"it ,!r.-
!ecrease in e/pense is credit ,Cr.-
*ncrease in income is credit ,Cr.-
!ecrease in income is !e"it ,!r.-

C&assi.i!a"ion o. E>-enses

*t 3as already "een mentioned t3at a separate account is opened for eac3 type of e/pense. T3erefore9 in
large "usiness concerns9 t3ere may "e a large num"er of accounts in organiKationGs "oo)s. As profit 6
loss account is a summariKed record of t3e profita"ility of t3e organiKation. So9 similar accounts s3ould
"e grouped for reporting purposes.

T3e most commonly used groupings of e/penses are as follo(s0
o Cost of goods sold
o Administration e/penses
o Selling e/penses
o 'inancial e/penses

Cos" o. goo*s so&* is t3e cost incurred in purc3asing or manufacturing t3e product9 (3ic3 an
organiKation is selling plus any ot3er e/pense incurred in "ringing t3e product in salea"le condition. Cost
of goods sold contains t3e follo(ing 3eads of accounts0
o 4urc3ase of ra( material;goods
o Jages paid to employees for manufacturing of goods
o Any ta/;freig3t is paid on purc3ases
o Any e/pense incurred on carriage;transportation of purc3ased items.

A*/inis"ra"i#e e>-enses are t3e e/penses incurred in running a "usiness effecti8ely. 7ain components
of t3is group are0
o 4ayment of utility "ills
o 4ayment of rent
o Salaries of employees
o ?eneral office e/penses
o Repair 6 maintenance of office e1uipment 6 8e3icles.

Se&&ing e>-enses are t3e e/penses incurred directly in connection (it3 t3e sale of goods. T3is 3ead
contains0
o Transportation;carriage of goods sold
o Ta/;freig3t paid on sale
*f t3e e/pense 3ead FsalariesG includes salaries of sales staff t3en it (ill "e e/cluded from salaries 6 appear
under t3e 3eading of Fselling e/pensesG.

Finan!ia& e>-enses are t3e interest paid on "an) loan 6 c3arges deducted "y "an) on entityGs "an)
accounts. *t includes0
o 7ar) up on loan
27
o Ban) c3arges

7e!ei-" C Pa)/en" A!!o'n"

A receipt 6 payment account is t3e summariKed record of actual cas3 receipts and actual cas3 payment
of t3e organiKation for a gi8en period of time. T3is is a report t3at pro8ides cas3 mo8ement during t3e
reported period. *n ot3er (ords9 it can "e defined as t3e summariKed record of t3e cas3 "oo) for a
specific period.

7e!ei-" C Pa)/en" Vs Pro.i" C Loss A!!o'n"

Receipt 6 payment account is t3e summariKed record of actual cas3 receipts and actual cas3 payment
during t3e period (3ile profit 6 loss account also includes Recei8a"le and 4aya"le.

In!o/e C E>-en*i"'re Vs Pro.i" C Loss A!!o'n"

T3ese are t(o similar terms. Inly difference "et(een t3ese t(o terms is t3at income 6 e/penditure
account is prepared for non profit oriented organiKations9 e.g. Trusts9 H?IGs9 (3ereas profit 6 loss
account is prepared in profit oriented organiKations9 e.g. 5imited companies9 4artners3ip firms etc.
*n case of *ncome and #/penditure account9 Surplus;!eficit is to "e find and in case of 4rofit and loss
account9 profit or loss is to "e found.

A sa/-&e o. Pro.i" an* Loss A!!o'n"

Ca&!'&a"ions o. Gross -ro.i" an* Ne" -ro.i"

?ross profit O *ncome > cost of sales
O 1.....=&....
O 4....
Het profit O ?ross profit > #/penses
O 4.... > ,1%...M %...M%...-
O 1%...

Na/e o. "%e En"i")
Pro.i" an* Loss A!!o'n"
For "%e -erio* En*ing ----
1EBIT C7E1IT
PA7TICULA7S AMOUNT
7s.
PA7TICULA7S AMOUNT
7s.
Cost of sale &.9... *ncome 1..9...
?ross profit c;d
,*ncome > cost of sales-
4.9...
To"a& 100F000 To"a& 100F000
Admin e/penses 1%9... ?ross profit ";d 4.9...
Selling e/penses %9...
'inancial e/penses %9...
Het profit
,?ross profit > e/penses-
1%9...
To"a& H0F000 To"a& H0F000
28
A sa/-&e o. In!o/e S"a"e/en"

Na/e o. "%e En"i")
In!o/e s"a"e/en"
For "%e -erio* En*ing ----
PA7TICULA7S AMOUNT
7s.
AMOUNT
7s
1.....
,&....-
H0000
*ncome;Sales;Re8enue
5ess0 Cost of sales
Gross -ro.i"
5ess0 Administration e/penses
Selling e/penses
'inancial e/penses

1%...
%...
%...

,2%...-
Ne" -ro.i" 1I000

7e!ogni"ion o. In!o/e an* E>-en*i"'re A!!o'n"D

*ncome > s3ould "e recogniKed ; recorded at t3e time (3en goods are sold or ser8ices are rendered.
#/penses > s3ould "e recogniKed ; recorded (3en "enefit relating to t3at e/pense 3as "een dra(n.
29
Lesson-9
INT7O1UCTION TO FINANCIAL STATEMENTS 9CONTINUE1:
Learning Obe!"i#e
After studying t3is c3apter9 you s3ould "e a"le to0
o #/plain (3at are Assets and 5ia"ilities and
o !ra( up simple Balance S3eet from gi8en information in trial "alance

Asse"s are economic resources t3at are o(ned "y a "usiness and are e/pected to "enefit future
operations. *n most cases9 t3e "enefit to future operations comes in t3e form of positi8e future cas3
flo(s. T3e positi8e future cas3 flo(s may come directly as t3e asset is con8erted into cas3 ,collection of a
recei8a"les- or indirectly as t3e asset is used in operating t3e "usiness to create ot3er assets t3at result in
positi8e future cas3 flo(s ,"uilding 6 land used to manufacture a product for sale-. Assets may 3a8e
definite p3ysical form suc3 as "uilding9 mac3inery or stoc). In t3e ot3er 3and9 some assets e/ist not in
p3ysical or tangi"le form9 "ut in t3e form of 8alua"le legal claims or rig3t. #/amples are accounts
recei8a"les9 in8estment in go8t. "onds and patent rig3ts etc.

Liabi&i"ies are de"ts and o"ligations of t3e "usiness. T3e person or organiKation to (3ic3 t3e de"t is
o(ed is called !re*i"ors. All "usinesses 3a8e lia"ilitiesL e8en t3e most successful companiesG purc3ase
stoc)s9 supplies and recei8e ser8ices on credit. T3e lia"ilities arising from suc3 purc3ases are called
A!!o'n"s -a)ab&e.

7'&e o. 1ebi" an* Cre*i" .or Asse"s an* Liabi&i"ies

Assets ,increase in assets is de"it and decrease in asset is credit-
5ia"ilities ,*ncrease in lia"ility is credit and decrease in lia"ility is de"it-

C&assi.i!a"ion o. Asse"sD

T3ere are t(o types of assets0

1. Tangib&e Asse"s (3ic3 3a8e p3ysical e/istence and can "e seen or touc3ed. *t includes 'i/ed as (ell
as Current assets.

3. In"angib&e asse"s (3ic3 3a8e no p3ysical e/istence li)e good(ill9 patents and copyrig3ts etc.

Fi>e* Asse"s Are t3e assets of permanent nature t3at a "usiness ac1uires9 suc3 as plant9
mac3inery9 "uilding9 furniture9 8e3icles etc. 'i/ed assets are su"Aect to depreciation.

Long Ter/ Asse"s T3ese are t3e assets of t3e "usiness t3at are recei8a"le after t(el8e
mont3s of t3e "alance s3eet date. 'or e/ample9 if "usiness 3as in8ested some money for t(o
years in any sa8ing sc3eme or 3as purc3ased sa8ing certificates for more t3an one year9 it is a
long term asset.

C'rren" Asse"s Are t3e recei8a"les t3at are e/pected to "e recei8ed (it3in one year of t3e
"alance s3eet date. !e"tors9 closing stoc) 6 all accrued incomes are t3e e/amples of Current
Assets "ecause t3ese are e/pected to "e recei8ed (it3in one accounting period from t3e
"alance s3eet date.
T%e )earF in ,%i!% &ong "er/ asse" is e>-e!"e* "o be re!ei#e*F &ong "er/ asse" is "rans.erre* "o
!'rren" asse"s in "%a" )ear.

C&assi.i!a"ion o. Liabi&i"ies

Ca-i"a& is t3e funds in8ested "y t3e o(ners of t3e "usiness. Business 3as a lia"ility to return t3ese
funds to t3e o(ner. Je )no( t3at for t3e purpose of accounting9 "usiness is treated separately from its
o(ners. T3is is )no(n as Separate #ntity Concept i.e. Business is a separate entity. T3erefore9 if t3e
30
o(ner gi8es somet3ing ,can "e in form of Cas3 or Some ot3er Asset- to t3e "usiness t3en t3e "usiness9
not only 3as to return t3e amount to t3e o(ner "ut it also 3as to gi8e some return on t3at money. T3at is
(3y (e treat Capital ,I(ners 'unds- as a 5ia"ility.

Pro.i" C Loss A!!o'n" T3e net "alance of t3e profit and loss account i.e. eit3er profit or loss also
"elongs to t3e o(ners.
J3ile e/plaining capital (e said t3at t3e "usiness 3as to gi8e return to t3e o(ners. Ho( if t3e "usiness is
managed successfully9 t3en t3is return (ould "e a 'a8ora"le figure ,4rofit-. T3is return (ill9 t3erefore9 "e
added to t3e I(nersG in8estment.
In t3e ot3er 3and9 if t3e "usiness is not managed successfully t3en t3is return (ould "e an un=fa8ora"le
figure ,5oss-. *t (ill9 t3erefore9 "e deducted from t3e I(nersG *n8estment.

Long Ter/ Liabi&i"ies T3ese are t3e lia"ilities t3at (ill "ecome paya"le after a period of
more t3an one year of t3e "alance s3eet date. 'or e/ample9 if "usiness 3as ta)en a loan from
"an) or any t3ird person and it is paya"le after ten years9 it (ill "e treated as a long term
lia"ility for t3e "usiness.

C'rren" Liabi&i"ies T3ese are t3e o"ligations of t3e "usiness t3at are paya"le (it3in t(el8e
mont3s of t3e "alance s3eet date. Creditors and all accrued e/penses are t3e e/amples of
current lia"ilities of t3e "usiness "ecause "usiness is e/pected to pay t3ese "ac) (it3in one
accounting period.
T%e )ear in ,%i!% &ong "er/ &iabi&i") is "o be -ai* ba!6F &ong "er/ &iabi&i") is "rans.erre* "o
!'rren" &iabi&i") in "%a" )ear.

Ba&an!e S%ee"

*t is a position statement t3at s3o(s t3e standing of t3e organiKation in 7onetary Terms at a Specific
Time.
:nli)e 4rofit and 5oss t3at s3o(s t3e performance of t3e entity o8er a period of time9 t3e Balance S3eet
s3o(s t3e 'inancial State of Affairs of t3e entity at a gi8en date. Balance s3eet is t3e summariKed analysis
in a FTG form of all assets and lia"ilities of t3e entity9 (it3 lia"ilities listed on left 3and side and assets on
rig3t 3and side. Asset is any o(ned p3ysical o"Aect ,tangi"le asset- or a rig3t ,intangi"le asset- 3a8ing
economic 8alue to t3e o(ner. 5ia"ility is an o"ligation of t3e "usiness to deli8er goods or to pro8ide a
"enefit in future.

For/a" o. Ba&an!e S%ee" 9A!!o'n" For/:

Na/e o. "%e En"i")
Ba&an!e S%ee"
As A"-------
Liabi&i"ies A/o'n"
7s.
Asse"s A/o'n"
7s.
Capital 1..9...

Add Het 4rofit 1%9...

5ong Term 5ia"ilities

Current lia"ilities

11%9...

%.9...

1.9...
'i/es Assets

5ong Term Assets

Current assets
%9...

2.9...

$.9...
Total 1%9... Total 1%9...

31

For/a" o. Ba&an!e S%ee" 97e-or" For/:

Na/e o. "%e En"i")
Ba&an!e S%ee"
As A"-------
4ART*C:5ARS Amount
Rs.
Amount
Rs.
ASS#TS

'i/es Assets
5ong Term Assets
Current Assets

%9...
2.9...
$.9...
To"a& 1JIF000

1..9...
1%9...
5*AB*5*T*#S

Capital
Add0 Het 4rofit

Current 5ia"ilities

11%9...

%.9...
1.9...
To"a& 1JIF000

I&&'s"ra"ion G 1

T3e follo(ing is t3e Trial Balance e/tracted from t3e "oo)s of Haeem 6 Sons as on 3.;.&;2..2.
4repare a 4rofit 6 5oss account 6 Balance S3eet for t3e year ended Nune 3.9 2..2.

Par"i!'&ars 1r. Cr.
Sales 1..9...
4urc3ases 4%9...
purc3ase return 39...
Salaries 129...
Rent %9...
!e"tors 2%9...
Creditors 1&9...
Capital 3&$9...
4lant 6 mac3inery 4..9...
?rand Total

4$9...

4$9...

32

So&'"ion

Naee/ C Sons
For "%e )ear en*e* 5'ne 40F 3003

Rs. Rs.
Sales 1..9...
Cost of goods sold0
4urc3ases 4%9...
Less0 4urc3ase return 39... 429...
?ross 4rofit IKF000
1..9... 1..9...
Salaries 129... ?ross 4rofit %$9...
Rent %9...
Het 4rofit H1F000

IKF000 IKF000

T3is is a presentation of 4rofit 6 5oss Account in FTG account form. Ho( same illustration is presented
in statement form.

Naee/ C sons
Pro.i" C Loss A!!o'n" .or "%e )ear en*e* 5'ne 40F 3003
Par"i!'&ars A/o'n"
7s.
A/o'n"
7s.
In *ncome ; Sales ; Re8enue
LessD Cost of ?oods Sold
4urc3ases
5ess0 4urc3ase Return

4%9...
,39...-

1..9...

9H3F000:

Gross Pro.i"
LessD Administrati8e e/penses
Salaries
Rent

,129...-
,%9...-
IKF000

,19...-
Ne" Pro.i" H1F000

T3is is not a correct (ay to present 4rofit 6 5oss Account in statement form. *n actual practice only
main 3eads of e/penses are presented in 4rofit 6 5oss Account along (it3 foot note num"er. !etail of
t3at 3ead of e/pense is gi8en in t3e note.

33
Correct presentation of 4rofit 6 5oss Account is 3ereunder0

Naee/ C Sons
Pro.i" C Loss A!!o'n" .or "%e )ear en*e* 5'ne 40F 3003
Par"i!'&ars A/o'n"
7s.
A/o'n"
7s.
LessD Cost of ?oods Sold
,See Hote P 1-
1..9...
,429...-
Gross Pro.i"
LessD Administrati8e e/penses
,See Hote P 2-
IKF000
,19...-
Ne" Pro.i" H1F000

No"e G 1
Cos" o. goo*s so&*

4urc3ases HIF000
5ess0 4urc3ase Return 94F000:
Het 4urc3ases H3F000
No"e G 3
A*/inis"ra"i#e e>-enses
Salaries 129...
Rent %9...
Total Administrati8e e/penses 19...

*t is recommended t3at 4rofit 6 5oss Account s3ould "e prepared in a"o8e mentioned format.
34
Ba&an!e S%ee"

Naee/ C Sons
Ba&an!e S%ee" As A" 5'ne 40F 3003
Liabi&i"ies Asse"s
Par"i!'&ars A/o'n"
7s.
Par"i!'&ars A/o'n"
7s.
Capital 3&$9...
Het 4rofit 419...

4.+9... Fi>e* Asse"s
4lant 6 7ac3inery

4..9...
C'rren" Liabi&i"ies
Creditors

1&9...
C'rren" Asse"s
!e"tors

2%9...
To"a& H3IF000 To"a& H3IF000

Balance S3eet in statement form is presented 3ereunder0

Naee/ C Sons
Par"i!'&ars A/o'n" 7s. A/o'n" 7s.
Asse"s
Fi>e* Asse"s
4lant 6 mac3inery
C'rren" Asse"s
!e"tors

4..9...

2%9...
To"a& H3IF000
Liabi&i"ies
Capital
A**D Het 4rofit

3&$9...
419...

H0LF000
C'rren" Liabi&i"ies
Creditors

2%9...
To"a& H3IF000 H3IF000

35
I&&'s"ra"ion G 3

T3e follo(ing Trial Balance 3as "een e/tracted from t3e "oo)s of Saeed 6 Co. on 3.=.&=2..2. 'rom
t3is9 prepare an *ncome Statement and Balance S3eet for t3e year ended 3.=.&=2..2.

So&'"ion

Saee* C Co.
Pro.i" C Loss A!!o'n" .or "%e )ear en*e* 5'ne 40F 3003.

Rs. Rs.
Sales 2..9...
4urc3ases 1$.9... 4urc3ase return 29%..
'reig3t9 custom duty on purc3ases &9...
?ross 4rofit 1&9%..
303FI00 303FI00
Salaries 39%.. ?ross 4rofit 1&9%..
Rent %9...
Repair of office e1uipment 29...
Sales salaries 39...
'reig3t on sales 19...
*nterest on loan %9...
Ban) c3arges %..
Het loss 39%..
To"a& 30F000 30F000

Par"i!'&ars 1r. ,Rs.- Cr.,Rs.-
Sales 2..9...
4urc3ases 1$.9...
purc3ase return 29%..
Iffice salaries 39%..
'urniture 6 'i/ture 1&9...
Iffice #1uipment 119...
Rent %9...
Accounts 4aya"le,creditors- 2$9...
Sales Salaries 39...
'reig3t 6 custom duty on purc3ases &...
Accounts Recei8a"le,de"tors- %29...
Capital 419%..
Cas3 in 3and 39...
5oan from "an),for t3ree years- %.9...
Ban) c3arges %..
To"a& 433F000 433F000
36

Pro.i" C Loss A!!o'n" in s"a"e/en" .or/D

Par"i!'&ars A/o'n"
7s.
In!o/e < Sa&es < 7e#en'e
LessD Cos" o. Goo*s So&*
,See Hote P 1-
2..9...
,1$39%..-
Gross Pro.i"
LessD A*/inis"ra"i#e e>-enses
,See Hote P 2-
LessD Se&&ing e>-enses
,See Hote P 3-
LessD Finan!ia& E>-enses
,See Hote P 4-
1&9%..
,1.9%..-

,49...-

,%9%..-
Ne" Pro.i"<9Loss: ,39%..-

No"e G 1
Cos" o. Goo*s So&*

4urc3ases 1$.9...
5ess0 purc3ase return ,29%..-
Add0 'reig3t9 custom duty on purc3ases &9...
To"a& 1K4FI00

No"e G 3
A*/inis"ra"i#e e>-enses
Salaries 39%..
Rent %9...
To"a& 10FI00

No"e G 4
Se&&ing e>-enses
Sales salaries 39...
To"a& HF000

No"e G H
Finan!ia& e>-enses
Ban) c3arges %..
To"a& IFI00

37
Ba&an!e S%ee"

Saee* C !o.
Liabi&i"ies Asse"s
Par"i!'&ars A/o'n"
7s.
Par"i!'&ars A/o'n"
7s.
Capital
A**D Het 4rofit

H1FI00
94FI00:
Fi>e* Asse"s
'urniture 6 'i/ture

1&9...
4KF000
Long Ter/ Liabi&i"ies
5oan from "an)
C'rren" Liabi&i"ies
Creditors

%.9...

2$9...
C'rren" Asse"s
!e"tors
Iffice e1uipment
Cas3

%29...
119...
39...
To"a& 11MF000 To"a& 11MF000

Ba&an!e S%ee" in s"a"e/en" .or/

Saee* C Co.
Asse"s
Fi>e* Asse"s
'urniture 6 'i/ture
C'rren" Asse"s
!e"tors
Iffice #1uipment
Cas3

1&9...

%29...
119...
39...
To"a& 11MF000
Liabi&i"ies
Capital
4rofit;,5oss-

H1FI00

94FI00:

4KFF000
Long Ter/ Liabi&i"ies
5oan from "an)
C'rren" Liabi&i"ies
Creditors

%.9...

2$9...
To"a& 11MF000

38
Lesson-10
ENE7CISES- 7ECO71ING OF T7ANSACTIONS

Transa!"ions o. A&i Tra*ers .or "%e /on"% o. 5an'ar)D

No. 1a"e Par"i!'&ars
.1 Nan .1 Started "usiness (it3 Rs. 2..9... in cas3.
.2 Nan .1 Ipened a "an) account and deposited Rs. 1+%9... in it.
.3 Nan .2 4aid for furniture Rs. 1%9... t3roug3 c3e1ue.
.4 Nan .3 4aid for 8e3icle Rs. %.9... t3roug3 c3e1ue.
.% Nan .% Boug3t goods on credit from 7r. A for Rs. %.9....
.& Nan .& Sold goods for cas3 Rs. &.9....
. Nan .$ 4urc3ased goods for cas3 Rs. 2.9....
.$ Nan 1. Returned goods of Rs. 1.9... to 7r. A.
.+ Nan 12 Sold goods on credit to 7r. B for Rs. 4.9....
1. Nan 1$ 7r. B returned goods of Rs. %9....
11 Nan 21 4aid t3roug3 c3e1ue to 7r. A Rs. 2%9....
12 Nan 2% 7r. B 4aid t3roug3 c3e1ue Rs. 2.9....
13 Nan 31 4aid Salaries t3roug3 c3e1ue Rs. %9....
14 Nan 31 Accrued e/penses for t3e mont3 Rs. 2.9....
1% Nan 31 !eposited in "an) Rs. 1.9....
01 Started business with Rs. 200,000 in cash.

200,000 Capital a/c 01 01-01---

Cr. Rs. Narration No. Date Dr. Rs. Narration No. Date

200,000 Cash a/c 01 01-01---
01 Started business with Rs. 200,000 in cash. 01 Started business with Rs. 200,000 in cash
39

02 Deposited Rs. 195,000 in bank.
195,000 Cash a/c 02 01-01---

Bank Account Code 02

195,000 Bank a/c 02 01-01---
03 aid !or !urniture Rs. 15,000 throu"h che#ue.

15,000 Bank a/c 03 02-01---

Furniture Account Code 04

15,000 Furniture a/c 03
02-01---

40

Cre*i"or

A person or organiKation to (3om money is paya"le "y t3e "usiness is called a creditor.

0$ aid !or %ehic&e Rs. 50,000 throu"h che#ue.
50,000 Bank a/c 04 03-01---

Vehicle Account Code 05

50,000 Vehicle a/c 04 03-01---
05 'ou"ht "oods on credit !ro( )r. * Rs. 50,000.
50,000 r! A 05 05-01---

"urchases Account Code 0#

r! A $Creditor% Account Code 0&
50,000 "urchases a/c 05 05-01---
41

0+ So&d "oods !or cash Rs. +0,000.
#0,000 'ales a/c 0# 0#-01---


'ales Account Code 0(
#0,000 Cash a/c 0# 0#-01---
0, urchased "oods !or cash Rs. 20,000.
20,000 Cash a/c 0& 0(-01---


20,000 "urchases a/c 0& 0(-01---
42

1eb"or

A person or organiKation from (3om money is recei8a"le "y t3e "usiness is called a de"tor.

0- Returned "oods o! Rs. 10,000 to )r. *.
10,000 "urchase return 0( 10-01---


"urchases return Account Code 0#
10,000 r!A 0( 10-01---
09 So&d "oods on credit to )r. ' !or Rs. $0,000.
40,000 'ales a/c 09 12-01---
r! B $)e*tor% Account Code 09

40,000 r! B 09 12-01---
43

10 )r. ' returned "oods o! Rs. 5,000.
5,000 r! B 10 1(-01---

'ales return Account Code 0(

5,000 'ales return 10 1(-01---
11 aid throu"h che#ue to )r. * Rs. 25,000.
25,000 Bank a/c 11 21-01---


25,000 r! A 11 21-01---
44

12 )r. ' aid throu"h che#ue Rs. 20,000.
20,000 r! B 12 25-01---


20,000 Bank a/c 12 25-01---
13 aid Sa&aries throu"h che#ue Rs. 5,000.
5,000 Bank a/c 13 31-01---

'alaries Account Code 10

5,000 'alaries a/c 13 31-01---
45

1$ *ccrued e.penses !or the (onth Rs. 20,000.
20,000 Accrued e+p a/c 14 31-01---

,+penses Account Code 11

Accrued ,+penses / ,+penses "a-a*le Account Code 12
20,000 ,+pense e+p
,+p!
14 31-01---
15 Deposited in bank Rs. 10,000.
10,000 Cash a/c 15 31-01---


10,000 Bank a/c 15 31-01---
46

140F000 Ba&an!e

Ban6 A!!o'n"
1+%9... Cas3 a;c .2 .1=.1===
2.9... 7r. B 12 2%=.1===
1.9... Cas3 a;c 1% 31=.1===
1%9... 'urniture a;c .3 .2=.1===
%.9... 2e3icle a;c .4 .3=.1===
%9... Salaries a;c 13 31=.1===
2%9... 7r. A 11 21=.1===
Ban) Account Code .2
Cr. 7s. Narra"ion No. 1a"e 1r. 7s. Narra"ion No. 1a"e
47
Lesson-11
ENE7CISES- 7ECO71ING OF T7ANSACTIONS 9Con"in'e*:

Na/e O. "%e Organi2a"ion 9A&i Tra*ers:
Tria& Ba&an!e As On
As on 5an'ar) 41F 30--
Ti"&e o. A!!o'n" Co*e 1r. 7s. Cr. 7s.
Cas3 Account .1 3%9...

To"a&

35,000 Balance

225,000

Cash *ccount
200,000 Capital a/c 01 01-01---
#0,000 'ales a/c 0# 0#-01---
195,000 Cash a/c 02 01-01---
10,000 Cash a/c 15 31-01---
20,000 "urchases a/c 0& 0(-01---
2+0,000 2+0,000
130,000 Balance

95,000

'ank *ccount
195,000 Cash a/c 02 01-01---
20,000 r! B 12 25-01---
10,000 Cash a/c 15 31-01---
15,000 Furniture a/c 03 02-01---
50,000 Vehicle a/c 04 03-01---
5,000 'alaries a/c 13 31-01---
25,000 r! A 11 21-01---
225,000 225,000

48
Tria& Ba&an!e
As On 5an'ar) 41F 30--
Ban) Account .2 13.9...

To"a&

Tria& Ba&an!e
Capital Account .3 2..9...

To"a&

200,000 Balance

0

Capita& *ccount
200,000 Capital a/c 01 01-01---
200,000 200,000
49

Tria& Ba&an!e
'urniture Account .4 1%9...

To"a&

15,000 Balance

Furniture Account Code 04
/urniture *ccount
15,000 Furniture a/c 03 02-01---
15,000 15,000
50,000 Balance

Vehicle Account Code 05
0ehic&e *ccount
50,000 Furniture a/c 04 03-01---
50,000 50,000
50

Tria& Ba&an!e
2e3icle Account .% %.9...

To"a&

Tria& Ba&an!e
4urc3ases Account .& &.9...

To"a&

+0,000 Balance

urchases *ccount
50,000 "urchases a/c 05 05-01---
20,000 "urchases a/c 0& 0(-01---
10,000 "urchase return 0( 10-01---
&0,000
&0,000
51

Tria& Ba&an!e
7r. A ,Creditor- . 1%9...

To"a&

15,000 Balance

)r. * 1Supp&ier2
10,000 "urchase return 0( 10-01---
25,000 Bank a/c 11 21-01---
50,000 "urchases a/c 05 05-01---
50,000 50,000
95,000 Balance

Sa&es
#0,000 Cash a/c
'a sold
0# 0#-01---
40,000 r! B a/c

09 12-01---
5,000 'ales return 10 1(-01---
100,000 100,000
52

Tria& Ba&an!e
Sales .$ +%9...

To"a&

Tria& Ba&an!e
15,000 Balance

40,000 'ales a/c

09 12-01--- 5,000 'ales return 10 1(-01---
20,000 Bank a/c 12 25-01---
40,000 40,000
)r. ' 1Custo(er2
53
Sales .$ +%9...
7r. B ,!e"tor- .+ 1%9...
To"a&

Na/e O. T%e Organi2a"ion 9A&i Tra*ers:
Tria& Ba&an!e
Sales .$ +%9...
7r. B ,!e"tor- .+ 1%9...
Salaries 1. %9...

To"a&

5,000 Balance

'alaries Account Code 10
Sa&aries
5,000 Cash a/c 13 31-01---
5,000
5,000

54

Na/e O. T%e Organi2a"ion 9A&i Tra*ers:
Tria& Ba&an!e
Sales .$ +%9...
7r. B ,!e"tor- .+ 1%9...
Salaries 1. %9...
#/penses 11 2.9...

To"a&

20,000 Balance

,+penses Account Code 11
3.penses
20,000 ,+p! accrued 14 31-01---
20,000 20,000
55

Tria& Ba&an!e
Sales .$ +%9...
7r. B ,!e"tor- .+ 1%9...
Salaries 1. %9...
#/penses 11 2.9...
#/penses 4aya"le 12 2.9...
To"a& 33.9... 33.9...

20,000 Balance

,+penses "a-a*le Account Code 12
3.penses a4ab&e
20,000 ,+p! accrued 14 31-01---
20,000 20,000
56
Pro.i" C Loss A!!o'n" 9A!!o'n" For/:

Na/e o. "%e En"i") 9A&i Tra*ers:
For "%e Mon"% En*ing 5an'ar) 41F 30--
1ebi" Cre*i"
Par"i!'&ars 7s. Par"i!'&ars 7s.
Cost of Sale ,4urc3ases- &.9... *ncome +%9...
?ross 4rofit
,income > Cost of Sale-
3%9...
Total +%9... Total +%9...
A*/in E>-enses
Salaries %9...
#/penses 2.9...
2%9... ?ross 4rofit 3%9...
Het 4rofit
,gross 4rofit > e/penses-
1.9...

Pro.i" C Loss A!!o'n" 97e-or" For/:

Par"i!'&ars A/o'n"
7s.
A/o'n"
7s.
*ncome ; Sales ; Re8enue
5ess0 Cost of ?oods Sold
+%9...
,&.9...-
?ross 4rofit

5ess0 Administrati8e #/penses

,2%9...-
3%9...

,2%9...-
Ne" Pro.i" 10F000

7'&es o. 1ebi" C Cre*i"

Any account t3at o"tains a "enefit is !e"it.
Anyt3ing t3at (ill pro8ide "enefit to t3e "usiness is Credit.
Bot3 t3ese statements may loo) different "ut in fact if (e consider t3at (3ene8er an account
"enefits as a result of a transaction it (ill 3a8e to return t3at "enefit to t3e "usiness t3en "ot3
t3e statements (ill loo) li)e different sides of t3e same picture.

Rules of de"it 6 credits can also "e e/plained li)e0

57
E>-en*i"'re
o *ncrease in #/penditure is !e"it
o !ecrease in #/penditure is Credit

In!o/e
o *ncrease in *ncome is Credit
o !ecrease in *ncome is !e"it

Asse"s
o *ncrease in Asset is !e"it
o !ecrease in Asset is Credit

Liabi&i")
o *ncrease in 5ia"ility is Credit
o !ecrease in 5ia"ility is !e"it

Ho( (e (ill e/plain t3ese rules (it3 t3e 3elp of t3e follo(ing illustration0

Sr.
G
1a"e Par"i!'&ars
.1 Nan .1 7r. RiK(an in8ests Rs. 1..9... to commence 3is "usiness.
.2 Nan .3 Ee opened an account (it3 "an) 6 deposited Rs. 3.9....
.3 Nan .% Ee "orro(s Rs. %.9... from 7r. Saleem at 12T per annum.
.4 Nan . Ee purc3ased furniture (ort3 Rs. 2.9... for cas3.
.% Nan .+ Ee purc3ased goods ,for resale- (ort3 of Rs. 1.9... from 7r. AfKal on credit.
.& Nan 1. Ee sold goods for cas3 Rs. %9...
. Nan 12 Ee sold goods for Rs. %9... to 7r. Haeem on credit "asis.
.$ Nan 1% Cas3 deposited in "an) Rs. %9...
.+ Nan 1& Ee purc3ased stationery for Rs. 39....
1. Nan 1$ Ee purc3ased office e1uipment for Rs. 1.9... and paid "y c3e1ue.
11 Nan 1+ Ee returned defecti8e goods to 7r. AfKal (ort3 Rs. 19....
12 Nan 2% ?oods are returned "y 7r. Haeem Rs. %.. to t3e "usiness.
13 Nan 3. Cas3 paid to 7r. AfKal Rs. +9... in full settlement of 3is claim.
14 Nan 31 Cas3 recei8ed from 7r. Haeem Rs. 49%.. in full settlement of 3is account.
1% Nan 31 Cas3 (it3dra(n from t3e "an) Rs. %...

58
Ho( first document t3at (e prepare in accounting is t3e 8ouc3er. Je (ill record first entry in 8ouc3er9
i.e.

Hame If Company
Type If 2ouc3er
!ate0 1=1=.2== Ho0 .1
!escription Code
P
!e"it
Amount
Credit
Amount
Cas3 a;c .1 1..9...
To Capital a;c .2 1..9...

Total0 1..9... 1..9...
Harration0 Capital *ntroduced in Cas3 "y 7r. RiK(an.
4repared By0 C3ec)ed "y0

Same entry is presented in simpler form0

1a"e 4articulars Code P Amount,!r.-
Rs.
Amount,Cr.-
Rs.
.1=.1=2..2
Cas3 A;c

Capital A;c

Capital *ntroduced in Cas3 "y 7r.
RiK(an

.1

.2

1..9...

1..9...

*n t3is case9 cas3 account is de"ited "ecause cas3 account 3as o"tained "enefit and Capital account is
credited "ecause "usiness 3as o"tained "enefit "ecause of capital account.

T3is statement can also "e interpreted li)e t3is0
As cas3 is an asset and it is increased in t3is case9 so cas3 is de"ited. Capital is a lia"ility and increase in
lia"ility is credit. *n t3is case capital is increased9 3ence it is credited.

En"r) G 3

'irst9 (e (ill "oo) t3is entry in 8ouc3er.

59

Hame If Company
Type If 2ouc3er
!ate0 3=1=.2== Ho0 .1
!escription Code
P
!e"it
Amount
Credit
Amount
Ban) a;c .3 3.9...
To Cas3 a;c .1 3.9...

Total0 3.9... 3.9...
Harration0 !eposited cas3 in "an).

Again9 t3e same entry in simple form

Rs.
Amount,Cr.-
Rs.
.3=.1=2..2
Ban) A;c

Cas3 A;c

!eposited cas3 in "an).

.3

.1

3.9...

3.9...

Again9 "an) account is de"ited "ecause "an) account 3as o"tained "enefit and Cas3 account is credited
"ecause "usiness 3as o"tained "enefit "ecause of cas3 account.
As "an) is an asset and it is increased in t3is case9 so "an) is de"ited. Cas3 is an asset and decrease in
asset is credit. *n t3is case cas3 is decreased9 3ence it is credited

'rom no( on(ard9 (e (ill present entry in simple form

En"r) G 4

1a"e 4articulars Code P Amount ,!r.-
Rs.
Amount ,Cr.-
Rs.
.%=.1=2..2
Cas3 A;c

5oan A;c

I"tained loan from 7r. Saleem.

.1

.4

%.9...

%.9...

Cas3 account is de"ited "ecause cas3 account 3as o"tained "enefit and 5oan account is credited "ecause
"usiness 3as o"tained "enefit "ecause of 5oan account.
60
As cas3 is an asset and it is increased in t3is case9 so cas3 is de"ited. 5oan is a lia"ility and increase in
lia"ility is credit. *n t3is case 5oan is increased9 3ence it is credited

En"r) G H

Rs.
Amount ,Cr.-
Rs.
.=.1=2..2
'urniture A;c

Cas3 A;c

4urc3ased furniture for cas3

.%

.1

2.9...

2.9...

Again9 furniture account is de"ited "ecause furniture account 3as o"tained "enefit and Cas3 account is
credited "ecause "usiness 3as o"tained "enefit "ecause of cas3 account.
As furniture is an asset and it is increased in t3is case9 so furniture is de"ited. Cas3 is an asset and
decrease in asset is credit. *n t3is case cas3 is decreased9 3ence it is credited.

En"r) G I

Rs.
Amount ,Cr.-
Rs.
.+=.1=2..2
4urc3ases A;c

7r. AfKal,Creditors- A;c

4urc3ased goods from 7r. AfKal on
credit

.&

.

1.9...

1.9...

4urc3ase account is de"ited "ecause purc3ase account 3as o"tained "enefit and Creditors account is
credited "ecause "usiness 3as o"tained "enefit "ecause of Creditors account.
As purc3ase is an e/pense and it is increased in t3is case9 so purc3ase is de"ited. Creditors are lia"ilities
and increase in lia"ility is credit. *n t3is case Creditors are increased9 3ence it is credited.

Cre*i"or is an) "%ir* -erson or organi2a"ionF "o ,%o/ b'siness %as "o -a) in .'"'re.

En"r) G M

Rs.
Amount,Cr.-
Rs.
1.=.1=2..2
Cas3 A;c

Sale A;c

Sold goods for cas3

.1

.$

%9...

%9...

61
Cas3 account is de"ited "ecause cas3 account 3as o"tained "enefit and Sale account is credited "ecause
"usiness 3as o"tained "enefit "ecause of Sale account.
As cas3 is an asset and it is increased in t3is case9 so cas3 is de"ited. Sale is an income and increase in
income is credit. *n t3is case income is increased9 3ence it is credited

En"r) G J

Rs.
Amount,Cr.-
Rs.
12=.1=2..2
7r. Haeem ,!e"tors- A;c

Sale A;c

Sold goods to 7r. Haeem on credit

.+

.$

%9...

%9...

!e"tors account is de"ited "ecause !e"tors account 3as o"tained "enefit and Sale account is credited
"ecause "usiness 3as o"tained "enefit "ecause of Sale account.
As !e"tors is an asset and it is increased in t3is case9 so de"tors account is de"ited. Sale is an income and
increase in income is credit. *n t3is case income is increased9 3ence it is credited
1eb"or is an) "%ir* -erson or organi2a"ionF .ro/ ,%o/ !as% is re!ei#ab&e b) "%e b'siness.

En"r) G K

Rs.
Amount,Cr.-
Rs.
1%=.1=2..2
Ban) A;c

Cas3 A;c

Cas3 deposited in "an)

.3

.1

%9...

%9...

En"r) G L

Rs.
Amount,Cr.-
Rs.
1&=.1=2..2
Stationery e/pense A;c

Cas3 A;c

Stationery purc3ased for cas3

1.

.1

39...

39...

Stationery account is de"ited "ecause stationery account 3as o"tained "enefit and Cas3 account is
credited "ecause "usiness 3as o"tained "enefit "ecause of Cas3 account.
As stationery is an e/pense and it is increased in t3is case9 so stationery is de"ited. Cas3 is an asset and
decrease in asset is credit. *n t3is case Cas3 is decreased9 3ence it is credited
62

En"r) G 10

Rs.
Amount,Cr.-
Rs.
1$=.1=2..2
Iffice #1uipment A;c

Ban) A;c

Iffice e1uipment purc3ased "y
c3e1ue

11

.3

1.9...

1.9...

Iffice #1uipment account is de"ited "ecause Iffice #1uipment account 3as o"tained "enefit and Ban)
account is credited "ecause "usiness 3as o"tained "enefit "ecause of Ban) account.
As Iffice #1uipment is an asset and it is increased in t3is case9 so Iffice #1uipment is de"ited. Ban) is
an asset and decrease in asset is credit. *n t3is case "an) account is decreased9 3ence it is credited

En"r) G 11

Rs.
Amount,Cr.-
Rs.
1+=.1=2..2
7r. AfKal ,Creditors- A;C

4urc3ase return A;C

?oods returned to 7r. AfKal
,creditor-

.

12

19...

19...

Creditors account is de"ited "ecause Creditors account 3as o"tained "enefit and 4urc3ase return account
is credited "ecause "usiness 3as o"tained "enefit "ecause of 4urc3ase return account.
As Creditors is a lia"ility and it is decreased in t3is case9 so Creditors is de"ited. 4urc3ase return is an
e/pense and decrease in e/pense is credit9 so it is credited.

En"r) G 13

Rs.
Amount,Cr.-
Rs.
2%=.1=2..2
Sales return A;C

7r. Haeem,!e"tors- A;C

?oods returned "y 7r. Haeem
,!e"tors-

13

.+

%..

%..

Sales return account is de"ited "ecause Sales return account 3as o"tained "enefit and !e"tors is credited
"ecause "usiness 3as o"tained "enefit "ecause of !e"tors account.
As sales return is decrease in income and decrease in income is de"it9 so it is de"ited. !e"tors account is
decreased and decrease in asset is credit9 so it is credited.
63

En"r) G 14

Rs.
Amount,Cr.-
Rs.
3.=.1=2..2
7r. AfKal,Creditors- A;C

Cas3 A;C

Cas3 paid to 7r. AfKal,Creditors-

.

.1

+9...

+9...

En"r) G 1H

Rs.
Amount,Cr.-
Rs.
31=.1=2..2
Cas3 A;C

7r. Haeem,!e"tors- A;C

Cas3 recei8ed from 7r.
Haeem,!e"tors-

.1

.+

49%..

49%..

En"r) G 1I

Rs.
Amount,Cr.-
Rs.
31=.1=2..2
Cas3 A;C

Ban) A;C

Cas3 (it3dra(n from "an)

.1

.3

%..

%..

Cas% Boo6 an* Ban6 Boo6

5edger is a "oo) t3at )eeps separate record for eac3 accountL t3e Account or Eead of Account is a
systematic record of transactions of one typeL and 5i)e ot3er t3ings9 a separate account is also re1uired to
record t3e mo8ements in cas3 ,usually called cas3 in 3and- and "an) account ,usually called cas3 at
"an)-. *f t3e 8olume of transactions is 3ig3 t3en (e can separate "oo)s for cas3 and "an) account. T3ese
separate "oo)s for cas3 and "an) account are called cas3 "oo) and "an) "oo) respecti8ely. T3e Cas3
Boo) records all t3e mo8ements in t3e cas3 account.
A Cas3 Boo) (ould loo) li)e one of t3e t(o samples s3o(n "elo(0

Cas3 Boo) Account Code .1
4articulars
5edger
Code
Receipt
Amount
4articulars
5edger
Code
4ayment
Amount

64

O7

Cas3 Boo) Account Code .1
!ate 2ouc3er
Hum"er
Harration ;
4articulars
5edger
Code
Receipt
Amount
4ayment
Amount
Balance
!r;,Cr-

T%e Cas% Boo6

*n t3e first format ; presentation9 receipts ,!e"its- are (ritten on left 3and side of t3e page and
payments ,Credits- on t3e rig3t 3and side. *n t3e second presentation9 instead of using t(o pages9 (e use
t(o columns on t3e same page. Bot3 t3ese presentations are correct. *n t3e second format9 (e 3a8e an
additional facility of )no(ing t3e "alance of t3e account after e8ery transaction. J3ereas in t3e first one9
(e 3a8e to add up t3e receipts and payments e8ery time (e need to )no( t3e "alance. 7oreo8er9 t3e
second format utiliKes less space9 t3erefore9 ,e ,i&& 'se "%is .or/a" in o'r .'"'re *is!'ssions

T%e Ban6 Boo6

T3e Ban) "oo) records all t3e mo8ements in t3e "an) account. T3e format of t3e "an) "oo) is t3e same
as t3at of cas3 "oo) e/cept for an additional column for C3e1ue Hum"er. Again9 (e can use eit3er t(o
pages IR t(o columns to present t3e "an) "oo).

Ban6 Boo6 9Ban6 A!!o'n" N'/ber: A!!o'n" Co*e 03
1a"e Vo'!%er
N'/ber
C%;.
No.
Narra"ion <
Par"i!'&ars
Le*ger
Co*e
7e!ei-"
A/o'n"
Pa)/en"
A/o'n"
Ba&an!e
1r<9Cr:

As you can see t3at e/cept for a fe( minor differences9 t3e format of Cas3 and Ban) "oo) are almost
similar to t3at of t3e ?eneral 5edger.

T3e differences are e/plained 3ere0
T3e title of de"it and credit columns 3as "een c3anged to receipt and payment respecti8ely. *t is
not necessary to ma)e t3is c3ange. But9 it is done to simplify t3ings as (e )no( t3at in case of
cas3 and "an)9 de"it side (ould signify receipt and credit side (ould represent payment.
T3ere is an additional column titled ledger code. *n t3is column9 (e (rite t3e code of t3e ot3er
3ead of account t3at is affected "y t3e transaction. T3is 3elps in understanding t3e complete
transaction at a glance.
T3ere may "e a column for c3e1ue num"er in t3e "an) "oo).
*t may "e noted t3at in case t3e organiKation operates more t3an one "an) account9 separate
ledger accounts (ill "e opened in "an) "oo) for eac3 account.

Ho( (e (ill summariKe all cas3 transactions in "ot3 t(o page cas3 "oo) 6 one page cas3 "oo) for t3e
con8enience of t3e reader.

T(o page cas3 "oo) (ill "e presented as under0

65

4articulars
5edger
Code
Receipt
Amount
4articulars
5edger
Code
4ayment
Amount
Nan=1 Capital
introduced
.2 1..9... Nan=3 !eposited in
"an)
.3 3.9...
Nan=% 5oan recei8ed .4 %.9... Nan= 'urniture
purc3ased
.% 2.9...
Nan=1. ?oods sold .$ %9... Nan=1% !eposited in
"an)
.3 %9...
Nan=31 Recei8ed from
de"tors
.+ 49%.. Nan=1& Stationery
purc3ased
1. 39...
Nan=31 Cas3 dra(n
from "an)
.3 %.. Nan=3. 4aid to
creditors
. +9...

Same record (ill "e presented in t(o column cas3 "oo) no(

1a"e Vo'!%er
N'/ber
Narra"ion <
Par"i!'&ars
Le*ger
Co*e
7e!ei-"
A/o'n"
Pa)/en"
A/o'n"
Ba&an!e
1r<9Cr:
Nan=1 Capital introduced .2 1..9... 1..9...
Nan=3 !eposited in "an) .3 ,3.9...- .9...
Nan=% 5oan recei8ed .4 %.9... 12.9...

Nan=

'urniture purc3ased

.%

,2.9...-

1..9...
Nan=1. ?oods sold .$
%9...

1.%9...

Nan=1%

!eposited in "an)

.3

,%9...-

1..9...

Nan=1&

Stationery purc3ased

1.

,39...-

+9...

Nan=3.

4aid to creditors

.

,+9...-

$$9...
Nan=31 Recei8ed from de"tors .+ 49%..

+29%..
Nan=31 Cas3 dra(n from "an) .3 %..

+39...

Ho(9 (e (ill present Ban) entries in "an) "oo).

Ban6 Boo6 9Ban6 A!!o'n" G >>>: A!!o'n" Co*e 03
1a"e Vo'!%er
N'/ber
C%;.
No.
Narra"ion <
Par"i!'&ars
Le*ger
Co*e
7e!ei-"
A/o'n"
Pa)/en"
A/o'n"
Ba&an!e
1r<9Cr:
Nan=3 Cas3 deposited .1 3.9... 3.9...
Nan=1% Cas3 deposited .1 %9... 3%9...
Nan=1$ Iff. #1uip.
purc3ased
11 ,1.9...- 2%9...
Nan=31 Cas3 dra(n .1 ,%..- 249%..

66
7e!o//en*e* rea*ingsD
C3apter P 2 of Business Accounting "y 'ran) Joods
C3apter P 29 3 of Accounting "y 7. Arif 6 So3ail AfKal

I&&'s"ra"ion

Ha(a" Sons started t3eir "usiness in t3e mont3 of 7arc39 2..2. 'ollo(ing are t3eir transactions for t3e
mont3. 4ass Aournal entries9 prepare 5edger Accounts9 and ma)e t3eir profita"ility analyses.

Sr. G 1a"e Par"i!'&ars
.1 7ar. .1 Started "usiness (it3 Rs. 1%.9...
.2 7ar. .% 4urc3ased office furniture for cas3 Rs. 29...
.3 7ar. . 4urc3ased goods for cas3 Rs. +9...
.4 7ar. 1. 4aid carriage on purc3ases Rs. 2%.
.% 7ar. 12 4urc3ased goods from Saleem 6 co. Rs. 9...
.& 7ar. 13 Sold goods for cas3 Rs. 129...
. 7ar. 1% Sold goods to :sman 6 Sons Rs. 2%9...
.$ 7ar. 21 Recei8ed cas3 'rom :sman 6 Sons Rs. 2%9...
.+ 7ar. 21 4aid cas3 to Saleem 6 co Rs. 9...
1. 7ar. 23 4aid salaries for t3e mont3 Rs. 29%..
11 7ar. 2% 4aid rent Rs. 39...
12 7ar. 2+ 4urc3ased stationery Rs.29...
13 7ar. 31 :tility "ills are accrued Rs. %9...

5o'rna& En"ries

En"r) G 1

Rs.
Amount,Cr.-
Rs.
.3=.1=2..2
Cas3 A;c

Capital A;c

Started "usiness (it3 cas3.

.1

.2

1%.9...

1%.9...

67
En"r) G 3

Rs.
Amount,Cr.-
Rs.
.3=.%=2..2
Iffice 'urniture A;c

Cas3 A;c

4urc3ased office furniture

.3

.1

29...

29...

En"r) G 4

Rs.
Amount,Cr.-
Rs.
.3=.=2..2
4urc3ases A;c

Cas3 A;c

4urc3ased goods for cas3.

.4

.1

+9...

+9...

En"r) G H

Rs.
Amount,Cr.-
Rs.
.3=1.=2..2
Carriage on purc3ase A;c

Cas3 A;c

4aid carriage on purc3ase.

.%

.1

2%.

2%.

En"r) G I

Rs.
Amount,Cr.-
Rs.
.3=12=2..2
4urc3ases A;c

Salim 6 co.,Creditors-

4urc3ased goods on credit

.4

.&

9...

9...

68
En"r) G M

Rs.
Amount,Cr.-
Rs.
.3=13=2..2
Cas3 A;c

Sale A;c

?oods sold for cas3.

.1

.

129...

129...

En"r) G J

Rs.
Amount,Cr.-
Rs.
.3=1%=2..2
:sman 6 Sons ,!e"tors- A;c

Sale A;c

?oods sold on credit.

.$

.

2%9...

2%9...

En"r) G K

Rs.
Amount ,Cr.-
Rs.
.3=21=2..2
Cas3 A;c

:sman 6 Sons ,!e"tors A;c

Cas3 recei8ed from :sman 6 Sons

.1

.$

2%9...

2%9...

En"r) G L

Rs.
Amount,Cr.-
Rs.
.3=21=2..2
Salim 6 co.,Creditors- A;c

Cas3 A;c

4aid cas3 to Salim 6 co.

.&

.1

9...

9...

69
En"r) G 10

Rs.
Amount,Cr.-
Rs.
.3=23=2..2
Salaries A;c

Cas3 A;c

Started "usiness (it3 cas3.

.+

.1

29%..

29%..

En"r) G 11

Rs.
Amount,Cr.-
Rs.
.3=2%=2..2
Rent A;c

Cas3 A;c

4aid rent.

1.

.1

39...

39...

En"r) G 13

Rs.
Amount,Cr.-
Rs.
.3=2+=2..2
Stationery A;c

Cas3 A;c

Stationery purc3ased.

11

.1

29...

29...

En"r) G 14

Rs.
Amount,Cr.-
Rs.
.3=31=2..2
:tility Bills A;c

Accrued #/penses A;c

Accrual of utility "ills for t3e mont3..

12

13

%9...

%9...

70
Le*ger A!!o'n"s

Cas% A!!o'n" 9A!!o'n" !o*e G 1:
!ate 4articulars Code
P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-
1=3=.2

13=3=.2
21=3=.2
Capital a;c
?oods sold
Recei8ed from
de"tors
.2

.

.$
1%.9...

129...

2%9...
%=3=.2

=3=.2
1.=3=.2
21=3=.2
23=3=.2
2%=3=.2
2+=3=.2
Iffice furniture a;c

4urc3ases a;c
Carriage
4aid to creditors
Salaries a;c
Rent a;c
Stationery a;c

Ba&an!e
.3

.4
.%
.&
.+
1.

11
29...

+9...
2%.
9...
29%..
39...

29...

1&192%.

Total 1$9... Total 1$9...

Ca-i"a& A!!o'n" 9A!!o'n" !o*e G 3:
Amount Amount !ate 4articulars Code P
Rs.
,!r.-
P
Rs. ,Cr.-

Ba&an!e

1%.9...
1;3;2..2 Cas3 a;c 1 1%.9...

Total

1%.9...

Total

1%.9...

O..i!e .'rni"'re A!!o'n" 9A!!o'n" !o*e G 4:
Amount Amount !ate 4articulars Code P
Rs.
,!r.-
!ate 4articulars Code P
Rs. ,Cr.-

Ba&an!e 29...

Iffice furniture 1 29...

Total 29... Total 29...

P'r!%ases A!!o'n" 9A!!o'n" !o*e G H:
P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-
=3=.2

12=3=.2
Cas3

Slim 6 Co,A;4-
.1 +9...

9...

Ba&an!e

1&9...

Total 1&9... Total 1&9...
71

Carriage on -'r!%ase A!!o'n" 9A!!o'n" !o*e G I:
P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-
1.=3=.2 Cas3 .1 2%.

Ba&an!e

2%.

Total 2%. Total 2%.

Sa&i/ C !o.9Cre*i"ors: A!!o'n" 9A!!o'n" !o*e G M:
P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-
12=3=.2 Cas3 a;c

.4 9... 21=3=.2 4urc3ases a;c

Ba&an!e
.1 9...

.

Sa&e A!!o'n" 9A!!o'n" !o*e G J:
P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-

Ba&an!e

39...
13=3=.2

1%=3=.2
Cas3 a;c

:sman 6 Sons
,!e"tors- a;c

.1

.$

129...

2%9...

Us/an C sons91eb"ors: A!!o'n" 9A!!o'n" !o*e G K:
P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-
1%=3=.2 Sales a;c

. 2%9... 21=3=.2 Cas3 a;c

Ba&an!e
.1 2%9...

.

72

Sa&aries A!!o'n" 9A!!o'n" !o*e G L:
P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-
23=3=.2 Cas3 a;c .1 29%..

Ba&an!e

29%..
Total 29%.. Total 29%..

7en" A!!o'n" 9A!!o'n" !o*e G 10:
P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-

2%=3=.2
Cas3 a;c .1 39...

Ba&an!e

39...

S"a"ioner) A!!o'n" 9A!!o'n" !o*e G 11:
!ate 4articulars Code P Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-
2+=3=.2 Cas3 a;c .1 29...

Ba&an!e

29...
U"i&i") Bi&&s A!!o'n" 9A!!o'n" !o*e G 13:
P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-
31=3=.2 A;4 13 %9...

Ba&an!e

%9...
Total %9... Total %9...

A!!r'e* E>-enses A!!o'n" 9A!!o'n" !o*e G 14:
P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-
31=3=.2

Ba&an!e

%9...
A;4 12 %9...

Tria& Ba&an!e

73
Saee* C !o.
Tria& Ba&an!e
As On 5an'ar) 41F 3003
Cas3 Account .1 1&192%.
Capital Account .2 1%.9...
'urniture Account .3 29...
4urc3ases Account .4 1&9...
Carriage on purc3ase account .% 2%.
Salim6 co. ,Creditor- .& .
Sales . 39...
:sman 6 co. ,!e"tor- .$ .
Salaries .+ 29%..
Rent 1. 39...
Stationery 11 29...
:tility "ills 12 %9...
Accrued e/penses 13 %9...
To"a& 1L3F000 1L3F000

Saee* C Co.
Pro.i" C Loss A!!o'n" .or "%e -erio* en*e* 5an'ar) 41F 3003
Par"i!'&ars A/o'n"
7s.
A/o'n"
7s.
*n *ncome ; Sales ; Re8enue 9See No"e G1:
LessD Cost of ?oods Sold ,See Hote P 1-
39...
,1&92%.-
Gross Pro.i"
LessD Admin. #/penses 9See No"e G 3-

2.9%.
,129%..-
Ne" Pro.i"< 9Loss: $92%.
No"e G 1 Cos" o. goo*s so&*

4urc3ases 1&9...
Add0 carriage on purc3ase 2%.
Cost of goods sold 1&92%.

No"e G 3 A*/in. E>-enses

Salaries 29%..
Rent 39...
Stationery 29...
:tility "ills %9...
Total Administrati8e #/penses 129%..

7e!o//en*e* rea*ingsD
C3apter P 3 of "usiness accounting "y 'ran) Joods
C3apter P % of accounting "y 7. Arif 6 So3ail AfKal.
74

Lesson-12
T+E ACCOUNTING EOUATION

7eso'r!es in "%e b'siness ? 7eso'r!es s'--&ie* b) "%e o,ner

*n accounting9 terms are used to descri"e t3ings. T3e amount of resources supplied "y t3e o(ner is called
!a-i"a&. T3e actual resources (3ic3 are in t3e "usiness are called asse"s. T3is means t3at t3e accounting
e1uation a"o8e9 (3en t3e o(ner 3as supplied all t3e resources9 can "e s3o(n as0
Asse"s ? Ca-i"a&

:sually9 people9 ot3er t3an t3e o(ner 3as supplied some of t3e assets. Liabi&i"ies are t3e name gi8en to
t3e amounts o(ing to t3ese people for t3ese assets. T3e e1uation 3as no( c3anged to0

*t can "e seen t3at t(o sides of t3e e1uation (ill 3a8e t3e same totals. T3is is "ecause (e are dealing (it3
t3e same t3ing (it3 t(o different points of 8ie(. *t is0

7eso'r!es in "%e b'siness ? 7eso'r!esD ,%o s'--&ie* "%e/

*t is a fact t3at total of eac3 side (ill al(ays e1ual one anot3er9 and t3is (ill al(ays "e true no matter 3o(
many transactions t3ere may "e. T3e actual assets9 capital and lia"ilities may c3ange9 "ut t3e total of t3e
assets (ill al(ays e1ual to t3e total of capital and lia"ilities.
Assets consist of property of all )inds9 suc3 as "uildings9 mac3inery9 stoc)s of goods and motor 8e3icles.
Also "enefits suc3 as de"ts o(ned "y customers and t3e amount of money in t3e "an) accounts are
included.
5ia"ilities consist of money o(ing for goods supplied to t3e "usiness and for e/penses. Also loans made
to t3e firm are included.
Capital is often called t3e o(nerGs net (ort3.

$or6ing !a-i"a&

Jor)ing capital of t3e "usiness is t3e net 8alue of current assets 6 current lia"ilities.

C'rren" asse"s are t3e resources of t3e "usiness t3at are e/pected to "e recei8ed (it3in 12 mont3s in an
accounting period.

C'rren" &iabi&i"ies are t3e amount o(ing to t3e "usiness t3at is e/pected to "e paid (it3in one year in a
financial year.
So9 (or)ing capital is t3e net of (3at is recei8a"le in an accounting year 6 (3at is paya"le in t3at year.

$or6ing Ca-i"a& ? C'rren" Asse"s C'rren" Liabi&i"ies

E>a/-&e0 current assets of t3e "usiness (ort3 Rs.1..9 ... 6 current lia"ilities of t3e "usiness 3as t3e
8alue of Rs. %9.... T3en (or)ing capital (ill "e Rs. 2%9... ,1..9...=%9...-.

S"o!6

Stoc) is termed as B8alue of goods a8aila"le to t3e "usiness t3at are ready for saleC. 'or accounting
purposes9 stoc) is of t(o types0
Ipening stoc)
Closing stoc)
O-ening s"o!6 is t3e 8alue of goods a8aila"le for sale in t3e "eginning of an accounting year. 'or
purpose of financial reporting9 opening stoc) is added to t3e purc3ases for t3e year to "ecome a part of
75
!os" o. goo*s so&*. As t3is is a8aila"le in t3e "eginning of t3e year9 it is assumed t3at it (ill "e
consumed in t3e accounting year. T3at is (3yL it "ecomes a part of !os" o. goo*s so&*. Closing Stoc) of
pre8ious year is t3e opening stoc) in present year ,current year-.

C&osing s"o!6 is t3e 8alue of goods unsold at t3e end of accounting year. 'or purposes of ma)ing
financial statements9 it is deducted from cost of goods sold 6 is s3o(n as an asset in t3e Ba&an!e S%ee".
As t3is is t3e 8alue of goods t3at are yet to "e sold9 so it cannot "e included in cost of goods sold. T3at is
(3y it is deducted from cost of good sold. In t3e ot3er 3and9 its "enefit (ill "e recei8ed in t3e ne/t
accounting year9 so it is s3o(n as an asset in t3e "alance s3eet.

T%e !on"en"s o. !os" o. goo*s so&* are0
Ipening stoc)
4lus0 purc3ases
4lus0 'reig3t; carriage paid on purc3ases
5ess0 closing stoc)
E>a/-&eD opening stoc) of a "usiness (ort3 Rs. 1%9...9 "usiness purc3ased goods of Rs. 129... for t3e
year 6 also paid Rs. 19%.. as carriage on purc3ases. T3e 8alue of closing stoc) at t3e end of t3e year is
Rs. 1.9.... T3en9 8alue of closing stoc) (ill "e calculated as under0

Ipening stoc) 1%9...
Add0 purc3ases 129...
Add0 carriage on purc3ase 19%..
5ess0 closing stoc) ,1.9...-
Cost of goods sold 1$9%..

A&i Tra*ers
Tria& Ba&an!e
Sales .$ +%9...
7r. B ,!e"tor- .+ 1%9...
Salaries 1. %9...
#/penses 11 2.9...
#/penses 4aya"le 12 2.9...
Total 33.9... 33.9...

According to t3e Accounting e1uation9

Assets O Capital M 5ia"ilities
Assets O 3%9...M13.9...M1%9...M%.9...M1%9...O 3HIF000
Capital O 300F000
5ia"ilities O 1%9... M 2.9... O 4IF000
Capital M 5ia"ilities O 34IF000

76
Je 3a8e ignored t3e Het 4rofit Rs.1.... ,Het profit is a part of t3e capital and (ill "e added in capital
account-
J3en (e added Het profit in capital t3enL
Assets O Capital M 5ia"ilities
24%... O 21....M3%...
3HI000 ? 3HI000

A!!o'n" .or/ Ba&an!e S%ee"D

Ba&an!e S%ee"
As a" 5an'ar) 41F 30--
Liabi&i"ies C E;'i") Asse"s
Par"i!'&ars A/o'n"
7s.
Par"i!'&ars A/o'n" 7s.
Capital 2..9... 'i/ed Assets
4rofit and 5oss Account 1.9... 'urniture 1%9...

Current 5ia"ilities
7r. A 1%9...
#/p. paya"le 2.9...
21.9...

3%9...
2e3icle
Current Assets
7r. B
1%9...
Ban)
13.9...
Cas3
3%9...
%.9...

1$.9...
Total 24%9... Total 24%9...

7e-or" .or/ Ba&an!e S%ee"D

A&i Tra*ers
Ba&an!e S%ee"
As A" 5an'ar) 41F 30--
4articulars Amount
Rs.
Amount
Rs.
Asse"s
'i/ed Assets
Current Assets

&%9...
1$.9...
Total 24%9...
Liabi&i"ies
Capital
4rofit and 5oss Account

2..9...
1.9...

21.9...
Current 5ia"ilities 3%9...
Total 24%9...

Treatment of closing stoc)0 *f closing stoc) is Rs.19... t3en0

77

5ess0 Cost of ?oods Sold 9 M0F000 - 1F000 -

,%+9...-
+%9...
,%+9...-
?ross 4rofit

,2%9...-
3&9...
,2%9...-
Ne" Pro.i" 11F000

Trea"/en" o.
1e-re!ia"ionD

*n 4rofit and 5oss Account9 it is considered as e/pense and in Balance S3eet it is deducted from t3e
concerned fi/ed asset.

*f useful life of an asset is %. mont3 and considered t3at t3ere is no residual 8alue t3en9

By di8iding total cost "y life of t3e asset.
Rs.&%9... ; %. mont3s O Rs.193.. mont3ly c3arge ,!epreciation-


5ess0 Cost of ?oods Sold , &.9...=19... -

%+9...
+%9...

,%+9...-
?ross 4rofit
!epreciation

2%9...
1F400
3&9...

,2&93..-
Ne" Pro.i" LFJ00

A&i Tra*ers
Ba&an!e S%ee"
As A" 5an'ar) 41F 30--
Par"i!'&ars A/o'n"
7s.
A/o'n"
7s.
Asse"s
'i/ed Assets
Current Assets 91K0F000 E 1F000:

&%9...
1$19...
Total 24&9...
Liabi&i"ies
Capital

2..9...
119...

2119...
To"a& 3HMF000
78

A&i Tra*ers
Ba&an!e S%ee"
As A" 5an'ar) 41F 30--
Par"i!'&ars A/o'n"
7s.
A/o'n"
7s.
Asse"s
'i/ed Assets 9MIF000 1F400:
Current Assets ,1$.9... M 19...-

&39..
1$19...
Total 2449..
Liabi&i"ies
Capital

2..9...
+9..

2.+9..
Total 2449..

1is"rib'"ion o. Pro.i"s < 1ra,ing

A&i "ra*ers
Ba&an!e S%ee"
As A" 5an'ar) 41F 30--
Par"i!'&ars A/o'n"
7s.
A/o'n"
7s.
Asse"s
'i/ed Assets ,&%9... > 13..-
Current Assets ,1K1F000 - IF000:

&39..
1&9...
Total 23+9..
Liabi&i"ies
Capital
!ra(ing

2..9...
+9..
9IF000:

2.49..
To"a& 34LFJ00

I&&'s"ra"ionD
Consider t3e Trial Balance gi8en 3ereunder0

Saee* C !o.
Tria& Ba&an!e
As on 5an'ar) 41F 3003
Capital Account .2 1%.9...
4urc3ases Account .4 1&9...
Carriage on purc3ase account .% 2%.
Sales . 39...
79
:sman 6 co. ,!e"tor- .$ .
Salaries .+ 29%..
Rent 1. 39...
Stationery 11 29...
:tility "ills 12 %9...
Accrued e/penses 13 %9...
To"a& 1L3F000 1L3F000

T3is Trial Balance is e/tracted from t3e sol8ed illustration9 in lecture 11.
5etGs say9 t3e 8alue of closing stoc) at t3e end of t3e period is Rs. 29.... T3en 4rofit 6 5oss Account (ill
"ear t3e follo(ing c3ange.

Saee* C Co.
For "%e -erio* en*e* 5an'ar) 41F 3003
Par"i!'&ars A/o'n"
7s.
A/o'n"
7s.
9See No"e G1:
LessD ,Cost of ?oods Sold = Closing
stoc)-

O1&92%. >
29...
39...
,1492%.-
Gross Pro.i"
LessD Admin. #/penses
9See Hote P 2-

229%.
,129%..-
Ne" Pro.i"< 9Loss: 1.92%.

*ts effect in t3e Balance S3eet is as follo(s0

Saee* C Co.
Ba&an!e S%ee"
As A" 5an'ar) 41F 3003
Liabi&i"ies Asse"s
Par"i!'&ars A/o'n"
7s.
Par"i!'&ars A/o'n"
7s.
Capital
A**D Het 4rofit

1%.9...
1.92%.
Fi>e* Asse"s
'urniture Account

29...
1M0F3I0
C'rren" Liabi&i"ies
Accrued #/penses

%9...
C'rren" Asse"s
Cas3
Closing Stoc)

1&192%.
29...
To"a& 1MIF3I0 To"a& 1MIF3I0

T3is is a practical demonstration of t3e treatment of closing stoc). But9 (e are not mentioning t3e
Aournal entry of closing stoc) at t3is stage. *t (ill "e discussed in detail9 (3en (e (ill study t3e topic of
fi/ed assets.
80

1e-re!ia"ion

!epreciation is t3e met3od of c3arging cost of fi/ed assets to t3e profit 6 loss account as an e/pense.
'i/ed Assets are t3ose assets (3ic3 are0
If long life
To "e used in t3e "usiness
Hot "oug3t (it3 t3e main purpose of resale.
J3en an e/pense is incurred9 it is c3arged to profit 6 loss account of t3e same accounting period in
(3ic3 it 3as incurred. 'i/ed assets are used for longer period of time. Ho(9 t3e 1uestion is 3o( to c3arge
a fi/ed asset to profit 6 loss account. 'or t3is purpose9 estimated life of t3e asset is determined.
Es"i/a"e* &i.e is t3e num"er of years in (3ic3 a fi/ed asset is e/pected to "e used. T3en9 total cost of
t3e asset is di8ided "y total num"er of estimated years. T3e 8alue9 so determined9 is called Fdepreciation
for t3at yearG and is c3arged to profit 6 loss account. T3e same amount is deducted from total cost of
fi/ed asset. T3e net amount ,after deducting depreciation- is called FFJritten do(n 2alueGG.
E>a/-&eD An asset 3as a cost of Rs. 1%.9.... *t is e/pected to "e used for ten years. !epreciation to "e
c3arged to profit 6 loss account is Rs. 1%9... ,Cost of asset;estimated life-. *n t3is case9 it (ill "e
1%.9...;1. O 1%9....
T3at is (3y depreciation is called an accounting estimate.

To understand its accounting treatment9 consider t3e a"o8e mentioned illustration0

5etGs suppose t3e useful life of furniture is fi8e years. T3en9 depreciation for t3e year (ill "e ,29...;% O
4..-. Ho(9 t3e profit 6 loss account (ill s3o( t3e follo(ing picture0

Saee* C Co.
For "%e )ear en*e* 5an'ar) 41F 3003
Par"i!'&ars A/o'n"
7s.
A/o'n"
7s.
In *ncome ; Sales ; Re8enue 9See No"e G1:
LessD Cost of ?oods Sold ,1&92%. > 29...-

39....
,1492%.-
Gross Pro.i"
LessD Admin. #/penses M !epreciation

129%.. M
4..
229%.
,129+..-
Het 4rofit; ,5oss- +9$%.

Balance s3eet (ill loo) li)e t3is0
Saee* C Sons Ba&an!e S%ee"
As A" 5an'ar) 41F 3003
Liabi&i"ies Asse"s
Par"i!'&ars A/o'n"
7s.
Par"i!'&ars A/o'n"
7s.
Capital
Add0 Het 4rofit
1%.9...
+9$%.
Fi>e* Asse"s
'urniture Account
5ess0 depreciation

29...
,4..-
1ILFKI0 1FM00
C'rren" Liabi&i"ies
Accrued #/penses

%9...
C'rren" Asse"s
Cas3
Closing Stoc)

1&192%.
29...
To"a& 1MHFKI0 To"a& 1MHFKI0
81
Treatment of depreciation is practically demonstrated at t3is point. *ts Aournal entry (ill "e discussed in
detail9 (3en (e co8er t3e topic F'i/ed AssetsG.
1ra,ing

Capital is t3e cas3 or )ind in8ested "y t3e o(ner of t3e "usiness. Sometimes9 t3e o(ner (ants to ta)e
cas3 or goods out of t3e "usiness for personal use. T3is is )no(n as *ra,ing.
An) /one) "a6en o'" as *ra,ings ,i&& re*'!e !a-i"a&.
T3e capital account is 8ery important account. To stop it getting full of small details9 cas3 items of
dra(ings are not entered in t3e capital account. *nstead9 a dra(ing account is opened9 and all transactions
are entered t3ere.

Sometimes goods are also ta)en "y t3e o(ner of t3e "usiness. T3ese are also )no(n as dra(ings.
To understand t3e accounting treatment of dra(ings9 loo) into t3e follo(ing trial "alance0

Saee* C !o.
Tria& Ba&an!e
Capital Account .2 1&.9...
!ra(ings .4 1.9...
4rofit 6 loss account .% $92%.
:sman 6 co. ,!e"tor- . .
Accrued e/penses .$ %9...
To"a& 1J4F3I0 1J4F3I0

Ba&an!e S%ee"

Saee* C Sons
Ba&an!e S%ee" As A" 5an'ar) 41F 3003

Liabi&i"ies Asse"s
Par"i!'&ars A/o'n"
7s.
Par"i!'&ars A/o'n"
7s.
Capital
A**D Het 4rofit
LessD !ra(ings

1&.9...
$92%.
,1.9...-
Fi>e* Asse"s
'urniture Account

29...

1IKF3I0
C'rren" Liabi&i"ies
Accrued #/penses
%9... C'rren" Asse"s
Cas3

1&192%.

To"a& 1M4F3I0 To"a& 1M4F3I0

82
Lesson-13
VOUC+E7S AN1 POSTING TO LE1GE7S ACCOUNTS
Learning Obe!"i#esD

After studying t3is lecture9 you s3ould "e a"le to0
:nderstand different types of 8ouc3ers.
Eo( to "oo) entry in 8ouc3erD
Carrying for(ard t3e "alance of an account.

Vo'!%er

*n "oo) )eeping9 8ouc3er is t3e first document to record an entry. 2ouc3ers are t3e documentary
e8idence of eac3 financial transaction. Hormally t3ree types of 8ouc3ers are used0
Receipt 8ouc3er
4ayment 8ouc3er
Nournal 8ouc3er

7e!ei-" Vo'!%er
Receipt 8ouc3er is used to record cas3 or "an) receipt. Receipt 8ouc3ers are of t(o types0
Cas3 receipt 8ouc3er
Ban) receipt 8ouc3er
Cas3 receipt 8ouc3er denotes receipt of cas3. Ban) receipt 8ouc3er indicates receipt of c3e1ue or
demand draft. Standard format of cas3 receipt 8ouc3er is gi8en "elo(0

Pa)/en" Vo'!%er

4ayment 8ouc3er is used to record a payment of cas3 or c3e1ue. 4ayment 8ouc3ers are of t(o types0
Cas3 4ayment 8ouc3er
Ban) 4ayment 8ouc3er
Cas3 4ayment 8ouc3er denotes 4ayment of cas3. Ban) 4ayment 8ouc3er indicates payment "y c3e1ue or
demand draft. Standard format of cas3 4ayment 8ouc3er is gi8en "elo(0
Hame of t3e IrganiKation
Ban) Receipt ; Cas3 Receipt O7 Receipt 2ouc3er
!ate0

Ho0
Cas3 ; Ban) code0 !escription ; Title0 UUUUUUUU
!escription ;
Title of Account
Code
P
Cre*i"
A/o'n"

Total0
Harration0
4repared By0 C3ec)ed By0
83

5o'rna& Vo'!%er

Nournal 8ouc3er is used to record transactions t3at do not affect cas3 or "an). Standard format of Aournal
8ouc3er is gi8en 3ereunder0

Hame If IrganiKation
Nournal 2ouc3er
!ate0 Ho0

!escription Code
P
1ebi"
A/o'n"
Cre*i" A/o'n"

Total0
Harration0

+o, "o Carr) For,ar* a Ba&an!e(

*t is already mentioned t3at in FTG account9 at t3e end of accounting period9 if one side is greater t3an t3e
ot3er side9 "alancing figure (ill "e (ritten on t3e lesser side as "alance. 'or instance9 if amount on de"it
side is greater t3an t3e amount on credit side9 t3e "alancing figure is (ritten on t3e credit side as "alance
6 it is )no(n as 1ebi" Ba&an!e. In t3e ot3er 3and9 if amount on t3e credit side is greater t3an t3at of
amount on t3e de"it side9 t3e "alance is s3o(n on t3e de"it side. *t is called t3e Cre*i" Ba&an!e.
Hame of t3e IrganiKation
Ban) 4ayment ; Cas3 4ayment O7 4ayment 2ouc3er
!ate0

Ho0
Cas3 ; Ban) code0

!escription ; Title0

!escription ;
Title of Account
Code
P
1ebi"
A/o'n"

Total0
Haration
4repared By0

C3ec)ed By0
84
At t3e start of ne/t accounting period9 t3ese "alances are carried for(ard. !e"it "alance is (ritten on t3e
credit side9 "ut it is t3e e/cess of de"it side o8er t3e credit side9 (3en it is carried for(ard9 it is (ritten on
t3e de"it side. 'or e/ample9 ledger account of cas3 is gi8en "elo(0

Cas% A!!o'n" A!!o'n" !o*e G 1
1a"e Par"i!'&ars Co*e
G
1r.
97s.:
1a"e Par"i!'&ars Co*e
G
Cr.
97s.:
1=3=.2

13=3=.2

21=3=.2
Capital a;c

Sales a;c

Recei8ed from
de"tors

.2

.

.$
1%.9...

129...

2%9...
%=3=.2

=3=.2
1.=3=.2
21=3=.2
23=3=.2
2%=3=.2
2+=3=.2
Iffice furniture

4urc3ases a;c
Carriage a;c
4aid to creditors
Salaries a;c
Rent a;c
Stationery a;c

Ba&an!e
.3

.4
.%
.&
.+
1.
11
29...

+9...
2%.
9...
29%..
39...
29...

1&192%.

Total 1$9... Total 1$9...

T3is cas3 account is s3o(ing t3e "alance of Rs. 1&192%. on t3e credit side. T3is "alance is e/cess of de"it
side o8er t3e credit side and9 t3erefore9 is called t3e *ebi" ba&an!e.
J3en it is !arrie* .or,ar* it is (ritten on t3e de"it side "ecause de"it side of t3e cas3 account is greater
6 Rs. 1&192%. is t3e "alancing amount of t3e de"it side of cas3 account. So9 it is an asset 6 it (ill "e used
for furt3er e/penses in t3e fort3 coming period.

5etGs ta)e anot3er e/ample0

A!!r'e* E>-enses A!!o'n" A!!o'n" !o*e G 14
P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-
31=3=.2

Ba&an!e

%9...
Accrued "ills

12 %9...

*n t3is account9 "alance is (ritten on t3e de"it side 6 it is called t3e credit "alance. As t3is "alance
represents e/cess of credit side o8er de"it side9 (3en it is !arrie* .or,ar* it is again (ritten on t3e credit
side.
*t can also "e e/plained li)e t3is0
1ebi" ba&an!e ,%en !arrie* .or,ar*F is ,ri""en on "%e *ebi" si*e
Cre*i" ba&an!e ,%en !arrie* .or,ar*F is ,ri""en on "%e !re*i" si*e

T3is is furt3er e/plained (it3 t3e 3elp of t3e follo(ing sol8ed illustration0

85
I&&'s"ra"ion

'ollo(ing is t3e Trial Balance of Saeed 6 Sons for t3e mont3 ended Nanuary 319 2..2

Saeed 6 Sons.
Trial Balance As on Nanuary 319 2..2

Cas3 Account .1 %%9...
Accrued e/pense Account .2 1.9...
Ban) Account .3 2%9...
5oan Account .4 1..9...
'urniture Account .% 2.9...
Iffice #1uipment .& 1.9...
To"a& 110F000 110F000

*n t3e mont3 of 'e"ruary9 follo(ing transactions too) place0

.1 'e" . T3ey purc3ased stationery (ort3 of Rs. %9...
.2 'e" 1. T3ey paid t3eir first installment of loan Rs. 1.9...
.3 'e" 12 T3ey recei8ed a c3e1ue from a customer of Rs. %9...
.4 'e" 1 Accrued e/penses of Rs. %9... are paid.
.% 'e" 2. T3ey purc3ased furniture of Rs. 19...
.& 'e" 23 Iffice e1uipment of Rs. 29... is sold
. 'e" 2% Staff salaries are paid "y c3e1ue Rs. 1.9...
.$ 'e" 2$ Sold goods for cas3 Rs.29...

So&'"ionD T3e ledger accounts of Saeed 6 Sons (ill "ear t3e follo(ing c3anges0

P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-
1=2=.2
23=2=.2

2$=2=.2
Ba&an!e !<.
Iffice
e1uipment.

Sales a;c

.&

.1
%%9...
29...

29...
=2=.2

1.=2=.2
1=2=.2
Stationery

5oan a;c

Accrued e/penses

'urniture a;c

Ba&an!e !<*
1.

.4

.2

.%
%9...

1.9...

%9...

19...

3$9...
Total %+9... Total %+9...

86

A!!r'e* E>-enses A!!o'n" !o*e G 3
P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-
1=2=.2 Accrued e/penses

Ba&an!e !<*
.1 %9...

%9...
1=1=.2 Ba&an!e !<.

1.9...
Total 1.9... Total 1.9...

Ban6 A!!o'n" A!!o'n" !o*e G 4
P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-
1=2=.2
12=2=.2
Ba&an!e !<.
C3e1ue recei8ed

.1

.
2%9...

%9...

2%=2=.2 Salaries a;c

Ba&an!e !<*
1.9...

2.9...

Loan A!!o'n" A!!o'n" !o*e G H
P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-
1.=2=.2 *nstallment paid

Ba&an!e !<*
.1

1.9...

+.9...
Ba&an!e !<.

1..9...

Total 1..9... Total 1..9...

F'rni"'re A!!o'n" A!!o'n" !o*e G I
P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-
1.=2=.2

2.=2=.2
Ba&an!e !<.

'urniture a;c

.1

2.9...

19...

23=2=.2

Ba&an!e !<*

219...

O..i!e E;'i-/en" A!!o'n" A!!o'n" !o*e G M
P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-
1.=2=.2

Ba&an!e !<.

1.9...

Iffice #1uipment

Ba&an!e !<*
.1 29...

$9...

Ba&an!e C<F is ba&an!e !arrie* .or,ar* C Ba&an!e C<1 is ba&an!e Carrie* *o,n.
87
Lesson-14
POSTING TO LE1GE7S AN1 7ECO71ING OF STOC8
Je 3a8e demonstrated t3e carrying for(ard of "alances in lecture=13. Anot3er sol8ed e/ample is gi8en
"elo(0

I&&'s"ra"ion

'ollo(ing is t3e Trial Balance of Ra3il 6 Co. for t3e mont3 ended Nanuary 319 2..2.

7a%i& C Co..
Tria& Ba&an!e
Ti"&e o. A!!o'n" Co*e 1r.
7s.
Cr.
7s.
Cas3 Account .1 3.9...
Accrued e/pense Account .2 1.9...
Ban) Account .3 %.9...
5oan Account .4 1..9...
'urniture Account .% 2.9...
Iffice #1uipment .& 1.9...
!e"tors account . 129...
Creditors account .$ 1.9...
Sales account .+ 2.9...
4urc3ase account 1. 1$9...
To"a& 1H0F000 1H0F000

!uring t3e mont39 follo(ing entries too) place0

.1 'e" . T3ey purc3ased stationery (ort3 of Rs. 39...
.2 'e" 1. T3ey paid t3eir first installment of loan Rs. 129...
.3 'e" 12 T3ey recei8ed a c3e1ue from a customer of Rs. %9...
.4 'e" 13 T3ey paid a c3e1ue of Rs. $9... to a creditor
.% 'e" 1% 4urc3ased goods of Rs &9... 6 paid t3roug3 c3e1ue
.& 'e" 1 Accrued e/penses of Rs. %9... are paid.
. 'e" 2. T3ey purc3ased furniture of Rs. 29...
.$ 'e" 21 Sold goods for cas3 Rs.%9...
.+ 'e" 22 4urc3ased goods on credit Rs. %9...
1. 'e" 23 Iffice e1uipment of Rs. %9... is 4urc3ased
11 'e" 2% Staff salaries are paid "y c3e1ue Rs. 1%9...
12 'e" 2$ :tility e/penses of Rs. 39... are accrued.

5edger accounts of Ra3il 6 Co. during t3e mont3 (ill s3o( follo(ing picture0

88

Rs. ,!r.-
Rs. ,Cr.-
1=2=.2
21=2=.2

Ba&an!e !<.
Sold a;c

.1
.+
3.9...
%9...
=2=.2

1.=2=.2
1=2=.2

23=2=.2

Stationery a;c

5oan a;c
Accrued e/penses

'urniture a;c

Iffice e1uipment

Ba&an!e !<*
1.

.4
.2

.%

.&
39...

129...

%9...
29...

%9...

$9...

A!!r'e* E>-enses A!!o'n" A!!o'n" !o*e G 3
P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-
1=2=.2 Accrued e/penses

Ba&an!e !<*
.1 %9...

$9...
1=1=.2 Ba&an!e !<.
#/penses accrued
1.9...
39...

Ban6 A!!o'n" A!!o'n" !o*e G 4
P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-

12=2=.2
Ba&an!e !<.
C3e1ue recei8ed

.
%.9...

%9...

13=2=.2
1%=2=.2
2%=2=.2
4aid to creditors
4urc3ases
Salaries a;c
Ba&an!e !<*
.$
1.
11
$9...
&9...
1%9...
2&9...
Total %%9... Total %%9...

Loan A!!o'n" A!!o'n" !o*e G H
P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-
1.=2=.2 *nstallment paid

Ba&an!e !<*
.1

129...

$$9...
Ba&an!e !<.

1..9...

Total 1..9... Total 1..9...

F'rni"'re A!!o'n" A!!o'n" !o*e G I
P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-
1.=2=.2
2.=2=.2
Ba&an!e !<.
'urniture a;c

.1

2.9...
29...

23=2=.2

Ba&an!e !<*

229...

89

O..i!e E;'i-/en" A!!o'n" A!!o'n" !o*e G M
P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-

23=2=.2
Ba&an!e !<.
Iffice
#1uipment a;c

.1
1.9...
%9...

Ba&an!e !<*

1%9...

1eb"ors A!!o'n" A!!o'n" !o*e G J
P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-

Ba&an!e !<.

129...

12=2=.2 C3e1ue recei8ed

Ba&an!e !<*
.3 %9...

9...

Cre*i"ors A!!o'n" A!!o'n" !o*e G K
P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-
13=2=.2

4aid to creditors

Ba&an!e !<*
.3

$9...

9...

22=2=.2
Ba&an!e !<.
4urc3ases a;c

1.
1.9...
%9...


Sa&es A!!o'n" A!!o'n" !o*e G L
P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-

Ba&an!e !<*

2%9...

21=2=.2
Ba&an!e !<.
Sales a;c

.1
2.9...
%9...


P'r!%ases A!!o'n" A!!o'n" !o*e G 10
P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-

1%=2=.2

22=2=.2
Ba&an!e !<.
4urc3ases a;c

4urc3ases a;c

.3

.
1$9...
&9...

%9...

Ba&an!e !<*

2+9...
Total 2+9... Total 2+9...
90
Sa&aries A!!o'n" A!!o'n" !o*e G 11
P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-
2%=2=.2

Salaries a;c .3

1%9...

Ba&an!e !<*

1%9...

S"a"ioner) A!!o'n" A!!o'n" !o*e G 13
P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-
2%=2=.2

Stationery a;c .1

39...

Ba&an!e !<*

39...

U"i&i") E>-enses A!!o'n" A!!o'n" !o*e G 14
P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-
2$=2=.2

Accrued utility
e/penses
.2

39...

Ba&an!e !<*

39...

T3e Trial Balance at t3e end of t3e mont3 is as follo(s0

7a%i& C Co.
Tria& Ba&an!e
Cas3 Account .1 $9...
Accrued e/pense Account .2 $9...
Ban) Account .3 2&9...
5oan Account .4 $$9...
'urniture Account .% 229...
Iffice #1uipment .& 1%9...
!e"tors account . 9...
Creditors account .$ 9...
Sales account .+ 2%9...
4urc3ase account 1. 2+9...
Salaries Account 11 1%9...
Stationery Account 12 39...
:tility #/penses Account 13 39...
To"a& 13KF000 13KF000

91
1i..eren!e be",een e>-enses C P'r!%ases
*f "usiness purc3ases items for its o(n use ,items t3at are not meant to "e resold- suc3 items are
c3arged to e/pense account.
*f "usiness purc3ases items for resale purposes9 suc3 items are c3arged to purc3ases account.

S"o!6D Stoc) is t3e 1uantity of unsold goods lying (it3 t3e organiKation.

S"o!6 is termed as Bt3e 8alue of goods a8aila"le to t3e "usiness t3at are ready for saleC. 'or accounting

1. *n trading concern9 Stoc) consists of goods t3at are purc3ased for t3e purpose of resale9 "ut not
sold in t3at accounting period. Trading concern is t3at organiKation9 (3ic3 purc3ases items for
resale purposes.
2. *n manufacturing concern9 ,an organiKation t3at con8erts ra( material into finis3ed product "y
putting it in a process- stoc) consists of0
o Ra( material
o Jor) in process
o 'inis3ed goods

7a, Ma"eria&
Ra( material is t3e "asic part of an item9 (3ic3 is processed to ma)e a complete item.

$or6 in Pro!ess
*n manufacturing concern9 ra( material is put into process to con8ert it into finis3ed goods. At t3e end
of t3e year9 some part of ra( material remains under process. *t is neit3er in s3ape of ra( material nor in
s3ape of finis3ed goods. Suc3 items are ta)en in stoc) as (or) in process.

Finis%e* Goo*s
'inis3ed goods contain items t3at are ready for sale9 "ut could not "e sold at t3e end of accounting
period.

7e!or*ing o. S"o!6 A!!o'n"

Stoc) Account is 1ebi"e* (it3 t3e Va&'e o. "%e Goo*s P'r!%ase*
Stoc) account is !re*i"e* (it3 t3e P'r!%ase Pri!e o. "%e Goo*s So&* < Iss'e* .or
Pro*'!"ion.
Stoc) Account s3o(s t3e cost ; purc3ase 8alue of unsold goods.

In /an'.a!"'ring !on!ernF en"ries .or s"o!6 are0

For P'r!%ase o. S"o!6

1ebi"D Stoc) Account
Cre*i"D Cas3;Supplier ;Creditors Account
J3en t3e stoc) is purc3ased9 stoc) account gets t3e "enefit9 so it is de"ited 6 cas3 or supplier account
pro8ides t3e "enefit9 so it is credited.

For Pa)/en" "o Cre*i"ors

1ebi"D P Supplier ; Creditors account
Cre*i"D Cas3 account

92
For Cons'/-"ion o. goo*s

1ebi"D Cost of goods sold
Cre*i"D Stoc) Account

Cos" o. goo*s so&*

Cost of goods sold is different in "ot3 forms of organiKations0
*n trading concern9 cost of goods sold is t3e 8alue of goods unsold ,goods stands for t3e items
purc3ased for resale purpose-
*n manufacturing concern9 cost of goods sold is t3e 8alue of ra( material consumed plus any
ot3er manufacturing cost. e.g.9 salaries of la"or cost of mac3inery etc.

S"o!6 an* !os" o. goo*s so&* in /an'.a!"'ring !on!ern

7a, Ma"eria& S"o!6 O"%er Cos"s A!!o'n"s

$or6 in Pro!ess A!!o'n"

Finis%e* Goo*s A!!o'n"

Cos" o. Goo*s So&* A!!o'n"

*n manufacturing concern9 Ra( material stoc) is put into process. 'or accounting purposes9 all 8alue of
stoc) and ot3er manufacturing costs are c3arged to (or) in process account. J3en t3e process is
completed and t3e goods are prepared9 all t3e 8alue of (or) in process is c3arged to finis3ed goods
account. T3e "usiness sells finis3ed goods for t3e (3ole accounting year. At t3e end of t3e year9 goods
t3at are unsold are deducted from cost of goods sold account.
93
Lesson-15
7ECO71ING OF STOC8 9Con"in'e*:
Stoc) is termed as Bt3e 8alue of goods a8aila"le to t3e "usiness t3at are ready for saleC. 'or accounting
Ipening stoc)
Closing stoc)
O-ening s"o!6 is t3e 8alue of goods a8aila"le for sale in t3e "eginning of an accounting period.
C&osing s"o!6 is t3e 8alue of goods unsold at t3e end of t3e accounting period.

5o'rna& En"ries "o 7e!or* S"o!6

In Case o. Tra*ing Con!ernD

Nournal entries for t3ose goods (3ic3 are "oug3t for resale purposes are as follo(s0

4urc3ase of goods0

1ebi"D Stoc);7aterial Account
Cre*i"D Cas3;Ban);Creditor

Consumption of goods

1ebi"D Cost of goods sold
Cre*i"D Stoc)

4ayment in case of credit purc3ase

1ebi"D Creditors Account
Cre*i"D Cas3;Ban)

In Case o. Man'.a!"'ring Con!ernD

*n case of manufacturer t3ere are at least t(o types of Stoc) Accounts0
o Ra( 7aterial Stoc) Account
o 'inis3ed ?oods Stoc) Account

7a, Ma"eria&
Ra( material is t3e "asic part of an item9 (3ic3 is processed to ma)e a complete item

Finis%e* Goo*s
'inis3ed goods contain t3e items t3at are ready for sale9 "ut could not "e sold in t3at accounting period.

$or6 in Pro!ess
*n manufacturing concern9 ra( material is put in a process to con8ert it into finis3ed goods. At t3e end of
accounting period9 some part of ra( material remains under process. i.e. it is neit3er in s3ape of ra(
material nor in s3ape of finis3ed goods. Suc3 items are ta)en in stoc) as (or) in process.
94
F&o, o. Cos"s

7a, Ma"eria& S"o!6 O"%er Cos"s A!!o'n"s


Finis%e* Goo*s A!!o'n"


*n manufacturing concern9 Ra( material stoc) is put into process. 'or accounting purposes9 all 8alue of
stoc) and ot3er manufacturing costs are c3arged to (or) in process account. J3en t3e process is
completed and t3e goods are prepared9 all t3e 8alue of (or) in process is c3arged to finis3ed goods
account. T3e "usiness sells finis3ed goods for t3e (3ole accounting year. At t3e end of t3e year9 goods
t3at are unsold are deducted from cost of goods sold account.

5o'rna& En"ries

For Man'.a!"'ring Con!ern

4urc3ase of ra( material

1ebi"D Stoc);7aterial Account
Cre*i"D Cas3;Ban);Creditors

It3er direct costs incurred

1ebi"D Rele8ant cost;#/pense Eead
Cre*i"D Cas3;Ban);4aya"les

Ra( material issued and ot3er costs allocated to production of units

1ebi"D Jor) in process
Cre*i"D Stoc) 7aterial Account

1ebi"D Jor) in process
Cre*i"D Rele8ant #/pense Eead Account

J3en production is completed

1ebi"D 'inis3ed ?oods Stoc) Account
Cre*i"D Jor) in process account

95
#ntry for Cost of sale

1ebi"D Cost of ?oods Sold Account
Cre*i"D 'inis3ed ?oods Stoc) Account

#ntry for sale of goods

1ebi"D Cas3;Account recei8a"le Account
Cre*i"D Sales Account

Return of material purc3ased

T3ere are t(o options for recording purc3ase material return
O-"ion 1

1ebi"D ?oods Return Account
Cre*i"D Stoc) 7aterial Account

AN1

1ebi"D Cas3;Ban) Account
Cre*i"D ?oods Return Account

O7

*f our supplier suppliers use some ot3er material in e/c3ange of material returned. T3en0

1ebi" Ra( 7aterial Stoc) Account
Cre*i"D ?oods Return Account

*n t3e first case a"o8e9 cas3 is recei8ed in return of goods. *n t3e second case9 defecti8e goods are
e/c3anged (it3 1uality goods. T3at is (3y9 (e de"ited our stoc) account. Bot3 entries are correct for
return of purc3ased items.

o O-"ion 3

1ebi"D Cas3;Creditor Account
Cre*i"D Stoc) Account

E>a/-&e 1
Record t3e follo(ing transactions0
1. 4urc3ased goods for cas3 Rs. 1.9...
2. 4urc3ased goods on credit from ABC Co. Rs. 2%9...
3. Sold goods (3ic3 cost (as Rs. 2.9...
4. Returned goods to ABC Co. t3at originally cost Rs. %9...
%. 4aid to ABC Co. Rs. 1%9... t3roug3 c3e1ue
&. Sold goods (3ose cost (as Rs. %9...

Re1uired0
1. Cost of goods sold
2. 2alue of closing stoc)
3. Amount paya"le to ABC Co.

96
1 > 4urc3ased goods for cas3 Rs. 1.9...

Cas3 Account Code ==
!ate Ho. Harration !r. Rs. Cr. Rs. Bal. !r;,Cr-
1 4urc3ased goods for cas3 1.9... ,1.9...-

Stoc) Account Code ==
1 4urc3ased goods for cas3 1.9... 1.9...

2 > 4urc3ased goods on credit from ABC Co. Rs. 2%9...

ABC Co. Code ==
2 4urc3ased goods from ABC 2%9... ,2%9...-

2 4urc3ased goods from ABC 2%9... 3%9...

3 > Sold goods (3ose cost (as Rs. 2.9...

Cost of ?oods Sold Code ==
3 ?oods sold 2.9... 2.9...

3 ?oods sold 2.9... 1%9...

4 > Returned goods to ABC Co. cost Rs. %9...

ABC Co. Code ==
4 Returned goods to ABC %9... ,2.9...-

97

3 ?oods sold 2.9... 1%9...
4 Returned goods to ABC %9... 1.9...

% > 4aid to ABC Co. Rs. 1%9... t3roug3 c3e1ue

ABC Co. Code ==
% 4aid to ABC 1%9... ,%9...-

Ban) Account Code ==
% 4aid to ABC 1%9...

& > Sold goods (3ose cost (as Rs. %9...

3 ?oods sold 2.9... 2.9...
& ?oods sold %9... 2%9...

3 ?oods sold 2.9... 1%9...
& ?oods sold %9... %9...

98
Cos" o. Goo*s So&*

3 ?oods sold 2.9... 2.9...
& ?oods sold %9... 2%9...

Va&'e o. C&osing S"o!6

3 ?oods sold 2.9... 1%9...
& ?oods sold %9... IF000

A/o'n" Pa)ab&e "o ABC Co.

ABC Co. Code ==
% 4aid to ABC 1%9... 9IF000:

#/ample 2

:sing t3e follo(ing data calculate t3e Cost of ?oods Sold of RQS Co.
Stoc) le8els Ipening Rs. Closing Rs.
Ra( material 1..9... $%9...
Jor) in process +.9... +%9...
'inis3ed goods 1%.9... 14.9...
4urc3ase of ra( material during t3e period Rs. 2..9...
4aid to la"or Rs. 1$.9... out of (3ic3 Rs. 1%.9... used on production.
It3er production costs Rs. %.9...

99

Cost of goods sold
';? 42....

I&&'s"ra"ion G 1

Record t3e follo(ing transactions
4urc3ased goods for cas3 Rs9 1.9...
4urc3ased goods from Ali Brot3ers. (ort3 of Rs. 2.9...
Sold goods 3a8ing cost of Rs.1%9...
Returned goods to Ali Brot3ers. (ort3 of Rs. 49...
Sold goods 3a8ing cost of Rs. %9...
4aid to Ali Brot3ers. Rs. 1.9....

Also ascertain
Cost of goods sold.
2alue of closing stoc).
4aya"le to Ali Brot3ers.

Ra( 7aterial Account
I;S 1..9...
4urc3ases 2..9... J*4 21%9...
C;S $%9...
Total 3..9... Total 3..9...
5a"or Account
Cost 1$.9... C3arge 1%.9...

Total 1$.9... Total 1$.9...
Jor) in 4rocess Account
I;B +.9...
Ra( 7 21%9...
5a"or 1%.9... ';? 41.9...
I;E %.9... C;B +%9...
Total %.%9... Total %.%9...
It3er Costs Account
4aid %.9... C3arge %.9...

Total %.9... Total %.9...
'inis3ed ?oods Stoc) Account
I;S 1%.9... CIS 42.9...
J*4 41.9... C;S 14.9...
Total %&.9... Total 4&.9...
100
So&'"ion

'irst9 (e (ill pass Aournal entries

4articulars Amount,!r.- Rs. Amount,Cr.- Rs.

Stoc) Account

Cas3 Account

?oods purc3ased for cas3

1.9...

1.9...


Stoc) Account

Ali Brot3ers.

?oods purc3ased from Ali Brot3ers.

2.9...

2.9...


Cost of goods sold

Stoc) Account

?oods sold (3ose cost (as Rs. 1%9...

1%9...

1%9...


Ali Brot3ers.

Stoc) Account

?oods returned to Ali Brot3ers.

49...

49...


Cost of goods sold

Stoc) Account

?oods sold (3ose cost (as Rs. %9...

%9...

%9...

Ali Brot3ers. Account

Cas3 Account

4aid to Ali Brot3ers.

1.9...

1.9...

101
Pa)ab&e "o A&i Bro"%ers

A&i Bro"%ers A!!o'n"
P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-
?oods returned
4aid cas3

Ba&an!e
49...

1.9...

&9...
4urc3ased goods

2.9...

Cos" o. Goo*s So&*

Cos" o. goo*s so&* A!!o'n"
P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-
?oods sold
?oods sold
1%9...
%9...

Ba&an!e

2.9...

Va&'e o. C&osing S"o!6

S"o!6 A!!o'n"
P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-
4urc3ased
goods for cas3
4urc3ased
goods from Ali
Brot3ers.
1.9...

2.9...
?oods sold
Returned to Ali
Brot3ers
?oods sold

Ba&an!e
1%9...
49...

%9...

&9...

I&&'s"ra"ion G 3

S"o!6 &e#e&s O-ening 7s. C&osing 7s.
Ra( material 1..9... $%9...
'inis3ed goods 1%.9... 14.9...
o 4urc3ase of ra( material during t3e period Rs. 2..9...
o 4aid to la"or Rs. 1$.9... out of (3ic3 Rs. 1%.9... used on production.
o It3er production costs Rs. %.9...

102
So&'"ion

Labor A!!o'n"
1ebi" Cre*i"
Cost 1$.9... C3arged 1%.9...

To"a& 1K0F000 To"a& 1K0F000

1ebi" Cre*i"
I;B +.9...
Ra( 7 21%9...
5a"or 1%.9... ';? 41.9...
I;E %.9... C;B +%9...
To"a& I0IF000 To"a& I0IF000

1ebi" Cre*i"
';? 42.9...

*n Ra( 7aterial Account9 t3e de"it side contains0
o Ipening "alance 1..9...
o 4urc3ases 2..9...

In t3e credit side9 closing "alance of Rs. $%9... is s3o(n along (it3 t3e "alancing figure of Rs. 21%9...
(3ic3 is c3arged to (or) in process IR J*4 account t3roug3 t3e follo(ing entry0

1ebi"D Jor) in process IR J*4 Account
Cre*i"D Ra( 7aterial Account

7a, Ma"eria& S"o!6 A!!o'n"
1ebi" Cre*i"
I;S 1..9...
4urc3ases 2..9... J*4 21%9...
C;S $%9...
To"a& 400F000 To"a& 400F000
O"%er Cos"s A!!o'n"
1ebi" Cre*i"
4aid %.9... C3arge %.9...

To"a& I0F000 To"a& I0F000
Finis%e* Goo*s S"o!6 A!!o'n"
1ebi" Cre*i"
I;S 1%.9... CIS 42.9...
J*4 41.9... C;S 14.9...
To"a& IM0F000 To"a& IM0F000
103
5a"or cost of Rs. 1$.9... is gi8en9 out of (3ic3 Rs. 1%.9... is c3arged to production. ,Remaining cost of
Rs. 3.9... (ill "e e/plained in some later stage-. T3at means Rs. 1%.9... is c3arged to (or) in process
IR J*4 account t3roug3 t3e follo(ing entry0

Cre*i"D 5a"or Cost Account

It3er costs of Rs. %.9... are also c3arged to (or) in process IR J*4 account t3roug3 t3e follo(ing
entry0

Cre*i"D It3er Costs Account

Jor) in process account 3as t3e opening "alance of Rs. +.9... and closing "alance of Rs. +%9.... After
c3arging all t3e a"o8e mentioned accounts to J*49 "alancing figure of (or) in process of Rs. 41.9... is
c3arged to finis3ed goods account t3roug3 t3e follo(ing entry0

1ebi"D 'inis3ed ?oods Account
Cre*i"D Jor) in process Account

'inis3ed goods account 3as t3e opening "alance of Rs. 1%.9... and closing "alance of Rs. 14.9.... After
c3arging J*4 account to finis3ed goods9 t3e "alancing figure of Rs. 42.9...9 is c3arged to cost of goods
sold account t3roug3 t3e follo(ing entry0

1ebi"D Cost of ?oods Sold Account
Cre*i"D 'inis3ed ?oods Account
104
Lesson-16
COST OF GOO1S SOL1 STATEMENT AN1 VALUATION OF STOC8

*n manufacturing concern9 separate "oo)s are maintained to )eep t3e record of e8ery single (or) done in
manufacturing process to ascertain cost incurred on production of goods. T3is record gi8es information
a"out total cost incurred on manufacturing process and per unit cost of goods manufactured. J3en
goods are produced9 t3ese are sold to t3e customers of t3e "usiness and goods unsold are ta)en into
stoc). At t3e end of t3e financial year9 manufacturing concern prepares a statement (3ic3 gi8es t3e "rief
summary of t3e (3ole process.

T3is statement s3o(s t3e 8alue of ra( material consumed9 amount spent on la"or and ot3er factory
e/penses9 finis3ed goods produced and goods unsold ,in stoc)-. Suc3 statement is called F!os" o. goo*s
so&* s"a"e/en"0. 7anufacturing concerns9 (3ile presenting financial statements9 also present cost of
goods sold statement.

Standard format of cost of goods sold statement is gi8en "elo(0

Ra( 7aterial0 I;S Ra( 7aterial
M 4urc3ases
M Cost *ncurred to 4urc3ase R7
= C;S Ra( 7aterial
Cos" o. Ma"eria& Cons'/e*
Con8ersion Cost0 M !irect 5a"or Cost
M 'actory I8er3eads
To"a& Fa!"or) Cos"
Jor) in 4rocess M I;S of J*4
= C;S of J*4
Cos" o. Goo*s Man'.a!"'re*
'inis3ed ?oods M I;S of 'inis3ed ?oods
= C;S of 'inis3ed ?oods
Cos" o. Goo* So&*

Cos" o. /a"eria& !ons'/e* > is t3e cost of material used for consumption t3at 3as "een put in t3e
production process. T3is 3ead s3o(s t3e ra( material left unused from t3e pre8ious year,opening stoc)-9
ra( material purc3ased in t3e current year9 e/penses incurred in "ringing t3e purc3ased material into t3e
"usiness premises and ra( material t3at is not used in t3e current year ,closing stoc)-.

O#er +ea*s Cos"s====are t3e ot3er costs incurred in relation of manufacturing of goods.
#/amples are factory utilities9 super8isor salaries9 e1uipment repairs etc.

To"a& .a!"or) !os" > is t3e cost of material consumed plus la"or and o8er 3eads. *n ot3er (ords it is t3e
total cost incurred in t3e factory.

Cos" o. goo*s /an'.a!"'re* > is total factory cost plus opening stoc) of (or) in process less closing
stoc) of (or) in process.

Cos" o. goo*s so&* > is t3e cost of goods manufactured plus opening stoc) of finis3ed goods less
closing stoc) of finis3ed goods.

Pri/e<Basi! Cos" O Cost of !irect 7aterial Consumed M !irect 5a"or cost

Con#ersion !os" it is t3e cost incurred to con8ert ra( material to finis3ed goods.

Con#ersion !os" O 5a"or cost M factory o8er3ead

105
E>a/-&e

Stoc) le8els I;S Rs. C;S Rs.
Ra( material 1..9... $%9...
'inis3ed goods 1%.9... 14.9...
4aid to la"or Rs. 1$.9... out of (3ic3 Rs. 1%.9... used on production.
It3er production costs Rs. %.9...

So&'"ion
N=Q Co.
Cos" o. Goo*s So&s S"a"e/en"
For "%e -erio* en*e*-------

Ra( 7aterial0 Ipening Stoc) Ra( 7aterial 1..9...
M 4urc3ases 2..9...
M Cost *ncurred to 4urc3ase R7 .
= Closing Stoc) Ra( 7aterial ,$%9...-
Cost of 7aterial Consumed 21%9...

Con8ersion Cost M 5a"or Cost 1%.9...
M'actory o8er3ead %.9...
2..9...
To"a& Fa!"or) Cos"s H1IF000

Jor) in process M I;S of J*4 +....
= C;S of J*4 ,+%...-

Cos" o. Goo*s Man'.a!"'re* H10F000

'inis3ed ?oods M I;S of 'inis3ed ?oods 1%.9...
= C;S of 'inis3ed ?oods ,14.9...-

Cos" o. Goo*s So&* H30F000

I&&'s"ra"ion

'ollo(ing information of A3mad 6 Company is gi8en. 4repare a cost of goods sold statement.
S"o!6 &e#e&s O<S 7s. C<S 7s.
Ra( material 1%.9... 11%9...
Jor) in process %.9... %%9...
'inis3ed goods 12.9... 1..9...
Transportation c3arges of items purc3ased Rs. %9...
4aid to la"or Rs. 1..9....
It3er production costs,'IE- Rs. $.9...

So&'"ion

7a, Ma"eria&D Ipening Stoc) Ra( 7aterial 1%.9...
M 4urc3ases 1..9...
M Cost *ncurred to 4urc3ase R7 %9...
= Closing Stoc) Ra( 7aterial ,11%9...-
106
Cos" o. Ma"eria& Cons'/e* 1H0F000
Con#ersion Cos"D M 5a"or 1..9...
M 'actory I8er3eads $.9...
To"a& Fa!"or) Cos" 430F000
$or6 in Pro!essD M I;S of J*4 %.9...
= C;S of J*4 ,%%9...-
Cos" o. Goo*s Man'.a!"'re* 41IF000
Finis%e* Goo*sD M I;S of 'inis3ed ?oods 12.9...
= C;S of 'inis3ed ?oods ,1..9...-
Cos" o. Goo* So&* 44IF000

S"o!6 Car*

Stoc) card is used to )eep t3e record of (3at 3as come in stoc) and (3at 3as gone out of it. Standard
format of stoc) card is gi8en "elo(0

S"o!6 A!!o'n" I"e/ 01
!ate Receipts <ty Rate Amount !ate *ssues <ty Rate Amount

Stoc) card 3as t(o parts0
Receipt side
*ssue side

Bot3 sides 3a8e similar columns t3at include0
Hature of item to "e )ept in stoc)
<uantity of items
Rate at (3ic3 it (as purc3ased
Total 8alue of items

Receipt side is used to record data of items coming in t3e stoc) and issue side is used to record
information of goods issued for manufacturing process.

Va&'a"ion o. S"o!6

Any manufacturing organiKation purc3ases different material t3roug3 out t3e year. T3e prices of
purc3ases may "e different due to inflationary conditions of t3e economy. T3e 1uestion is9 (3at item
s3ould "e issued first 6 (3at item s3ould "e issued later for manufacturing. 'or t3is purpose9 t3e
organiKation 3as to ma)e a policy for issue of stoc). All t3e issues for manufacturing and 8aluation of
stoc) are recorded according to t3e policy of t3e organiKation. 7ostly t3ese t3ree met3ods are used for
t3e 8aluation of stoc)0
Me"%o*s o. S"o!6 #a&'a"ion
'irst in first out ,'*'I-
5ast in first out ,5*'I-
Jeig3ted a8erage

Firs" in .irs" o'" 9FIFO:
T3e '*'I met3od is "ased on t3e assumption t3at t3e first merc3andise purc3ased is t3e first
merc3andised issued. T3e '*'I uses actual purc3ase cost. T3us9 if merc3andise 3as "een purc3ased at
se8eral different costs9 t3e in8entory ,stoc)- (ill 3a8e se8eral different cost prices. T3e cost of goods sold
for a gi8en sales transaction may in8ol8e se8eral different cost prices.

107
C%ara!"eris"i!s

T3is is (idely used met3od for determining 8alues of cost of goods sold and closing stoc).
*n t3e '*'I met3od9 oldest a8aila"le purc3ase costs are transferred to cost of goods sold. T3at
means t3e cost if goods sold 3as a lo(er 8alue and t3e profita"ility of t3e organiKation "ecomes
3ig3er.
As t3e current stoc) is 8alued at recent most prices9 t3e current assets of t3e company 3a8e t3e
latest assessed 8alues.

Las" in .irs" o'" 9LIFO:

As t3e name suggests9 t3e 5*'I met3od is "ased on t3e assumption t3at t3e recently purc3ased
merc3andise is issued first. T3e 5*'I uses actual purc3ase cost. T3us9 if merc3andise 3as "een
purc3ased at se8eral different costs9 t3e in8entory ,stoc)- (ill 3a8e se8eral different cost prices. T3e cost
of goods sold for a gi8en sales transaction may in8ol8e se8eral different cost prices.

C%ara!"eris"i!s

T3is is alternati8ely used met3od for determining 8alues of cost of goods sold and closing stoc).

*n t3e 5*'I met3od recent a8aila"le purc3ase costs are transferred to cost of goods sold. T3at
means t3e cost of goods sold 3as a 3ig3er 8alue and t3e profita"ility of t3e organiKation "ecomes
lo(er.
As t3e current stoc) is 8alued at oldest prices9 t3e current assets of t3e company 3a8e t3e oldest
assessed 8alues.

$eig%"e* a#erage /e"%o*

J3en (eig3ted a8erage met3od is in use9 t3e a8erage cost of all units in in8entory9 is computed after
e8ery purc3ase. T3is a8erage cost is computed "y di8iding t3e total cost of goods a8aila"le for sale "y t3e
num"er of units in in8entory. :nder t3e a8erage cost assumption9 all items in in8entory are assigned t3e
same per unit cost. Eence9 it does not matter (3ic3 units are soldL t3e cost of goods sold is al(ays "ased
on current a8erage unit cost.

C%ara!"eris"i!s

:nder t3e a8erage cost assumption9 all items in in8entory are assigned same per unit cost ,t3e
a8erage cost-. Eence it does not matter (3ic3 units are sold first. T3e cost of goods sold is
al(ays on t3e current a8erage unit cost.
Since all in8entories are assigned same cost9 t3is met3od does not ma)e any effect on t3e
profita"ility and does not increase;decrease any asset in t3e financial statements.
T3is is t3e alternati8ely used met3od for determining 8alues of cost of goods sold and closing
stoc).
E>a/-&e
Receipts0
.1 Nan 2.==9 1. units V Rs. 1%. per unit
.2 Nan 2.==9 1% units V Rs. 2.. per unit
1. Nan 2.==9 2. units V Rs. 21. per unit
*ssues0
.% Nan 2.==9 .% units
.& Nan 2.==9 1. units
1% Nan 2.==9 1% units

108
FIFO Me"%o* o. S"o!6 Va&'a"ion

1a"e 7e!ei-"s Iss'es Va&'e o. S"o!6
.1=.1=2.== 1. V Rs. 1%. O19%.. 1. / 1%. O 1%..
.2=.1=2.== 1% V Rs. 2.. O 39... 1. / 1%. O 1%..
1% / 2.. O 3... 4%..
.%=.1=2.== % V 1%. O %. %. % / 1%. O %.
1% / 2.. O 3... 3%.
.&=.1=2.== % V 1%. O %.
% V 2.. O 1... 1%.
. / 1%. O .
1. / 2.. O 2... 2...
1.=.1=2.== 2. V Rs. 21.O42.. 1. / 2.. O 2...
2. / 21. O 42.. &2..
1%=.1=2.== 1. V 2.. O 2...
% V 21. O 1.%. 3.%.
. / 2.. O .
1% / 21. O 31%. 31%.

$eig%"e* A#erage Me"%o* o. S"o!6 Va&'a"ion

1a"e 7e!ei-"s Iss'es Va&'e o. S"o!6 A#erage
Cos"
.1=.1=2.== 1./1%. O 1%.. 1%.. 1%..;1.O1%.
.2=.1=2.== 1%/2.. O 3... 1%.. M 3... O 4%.. 4%..;2%O1$.
.%=.1=2.== %/1$. O +.. 4%.. > +.. O 3&.. 3&..;2.O1$.
.&=.1=2.== 1./1$. O 1$.. 3&.. > 1$.. O 1$.. 1$..;1.O1$.
1.=.1=2.== 2./21. O 42.. 1$.. M 42.. O &... &...;3.O2..

1%=.1=2.==

1%/2.. O 3...

&... > 3... O 3...

3...;1%O2..

E..e!"s o. #a&'a"ion /e"%o* on -ro.i"

'*'I 7et3od
Cost of Sales O %. M 1%. M 3.%. O %9%%.
?ross 4rofit O %.. > %%%. O 19+%.

Jeig3ted A8erage 7et3od
Cost of Sales O +.. M 1$.. M 3... O %9..
?ross 4rofit O %.. > %.. O 193..

NOTED Rs. 9%.. is assumed 8alue.

I&&'s"ra"ion

Eamid 6 company is a manufacturing concern. 'ollo(ing is t3e receipts 6 issues record for t3e mont3
of 7ay9 2..2

1a"e 7e!ei-"s Iss'es
7ay 2.. units V Rs. %.;unit
7ay + &. units
7ay 13 1%. units V Rs. %;unit
7ay 1$ 1.. units V Rs. &.;unit
7ay 22 1%. units
7ay 24 1.. units
7ay 2 1.. units V Rs. %.;unit
109
7ay 3. 2.. units

Calculate t3e 8alue of closing stoc) "y
'*'I 7et3od
A8erage 7et3od

So&'"ion
Va&'a"ion o. S"o!6 b) FIFO Me"%o*

1a"e 7e!ei-"s Iss'es Va&'e o.
S"o!6
To"a&
A/o'n"
7e/aining
No. o.
'ni"s
Ne"
Ba&an!e
7ay 2.. units V Rs. %.;unit 2.. / %. O
1.9...
1.9... 2.. 1.9...
7ay + &. units V
Rs. %.;unit
&. / %. O
39...
,39...- 14. 9...
7ay 13 1%. units V Rs. %;unit % / 1%. O
1192%.
1192%. 2+. 1$92%.
7ay 1$ 1.. units V Rs. &.;unit &. / 1.. O
&9...
&9... 3+. 2492%.
7ay 22 14. units V
Rs. %.;unit
1. units V
Rs. %;unit
%. / 14. O
9...

1. / % O
%.
,9%.- 24. 1&9%..
7ay 24 1.. units V
Rs. %;unit
% / 1..
O9%..
,9%..- 14. +9...
7ay 2 1.. units V Rs. %.;unit %. / 1.. O
%9...
%9... 24. 149...
7ay 3.

4. units V
Rs. %;unit
1.. units V
Rs. &.;unit
&. units V
Rs. %.;unit

% / 4. O
39...

&. / 1.. O
&9...

%. / &. O
39...
,129...- 4. 29...

110
Va&'a"ion o. S"o!6 b) $eig%"e* A#erage Me"%o*D

1a"e 7e!ei-"s Iss'es Va&'e o.
S"o!6
To"a&
A/o'n"97s.:
To"a&
Uni"s
A#erage
Cos"97s.:<'ni"
Ne" Ba&an!e
97s.:
7ay 2.. units
V Rs.
%.;unit
2.. / %.
O
1.9...
1.9... 2.. %. 1.9...
7ay + &.
units
&. / %.
O
39...
,39...- 14. 9...
7ay 13 1%. units
V Rs.
%;unit
1%. / %
O
1192%.
9...M112%.
O
1$2%.
14.M1%.
O
2+.
1$2%.;2+.
O
&2.+
1$92%.
7ay 1$ 1.. units
V Rs.
&.;unit
1.. / &.
O
&9...
1$2%.M&...
O
242%.
2+.M1..
O
3+.
242%.;3+.
O
&2.2
2492%.
7ay 22 1%.
units
1%. / &2.2
O
+33.
,+933.- 3+.=1%.
O
24.
149+2.
7ay 24 1..
units
1.. / &2.2
O
&22.
,&922.- 24.=1..
O
14.
$9..
7ay 2 1.. units
V Rs.
%.;unit
1.. / %.
O
%9...
$9..M%9...
O
139..
14.M1..
O
24.
13..;24.
O
%.1
139..
7ay 3.

2..
units

2.. / %.1
O
11942.
,11942.- 24.=2..
O
4.
292$.

111
Lesson-17
FINE1 ASSETS C 1EP7ECIATION
!epreciation is a systematic allocation of t3e cost of a deprecia"le asset to e/pense o8er its useful life. *t
is a process of c3arging t3e cost of fi/ed asset to profit 6 loss account.

Fi>e* Asse"s are t3ose assets (3ic3 are0
If long life
To "e used in t3e "usiness to generate re8enue
Hot "oug3t (it3 t3e main purpose of resale.

'i/ed assets are also called B!eprecia"le AssetsC

J3en an e/pense is incurred9 it is c3arged to profit 6 loss account of t3e same accounting period in
(3ic3 it 3as incurred. 'i/ed assets are used for longer period of time. Ho(9 t3e 1uestion is 3o( to c3arge
a fi/ed asset to profit 6 loss account. 'or t3is purpose9 estimated life of t3e asset is determined.
#stimated useful life is t3e num"er of years in (3ic3 a fi/ed asset is e/pected to "e used efficiently. *t is
t3e life for (3ic3 a mac3ine is estimated to pro8ide more "enefit t3an t3e cost to run it. T3en9 total cost
of t3e asset is di8ided "y total num"er of estimated years. T3e 8alue9 so determined9 is called
Fdepreciation for t3e yearG and is c3arged to profit 6 loss account. T3e same amount is deducted from
total cost of fi/ed asset in t3e financial year in (3ic3 depreciation is c3arged. T3e net amount ,after
deducting depreciation- is called FJritten do(n 2alueG.

J!2 O Iriginal cost of fi/ed asset > Accumulated !epreciation

Accumulated !epreciation is t3e depreciation t3at 3as "een c3arged on a particular asset from t3e time
of purc3ase of t3e asset to t3e present time. T3is is t3e amount t3at 3as "een c3arged to profit and loss
account from t3e year of purc3ase to t3e present year.

!epreciation accumulated o8er t3e years is called a!!'/'&a"e* *e-re!ia"ion.

Use.'& Li.e
:seful 5ife or #conomic 5ife is t3e time period for mac3ine is e/pected to operate efficiently.
*t is t3e life for (3ic3 a mac3ine is estimated to pro8ide more "enefit t3an t3e cost to run it.

Gro'-ing o. Fi>e* Asse"s

7aAor groups of 'i/ed Assets0
5and
Building
4lant and 7ac3inery
'urniture and 'i/tures
Iffice #1uipment
2e3icles

Ho depreciation is c3arged for F5andG. *n case of F5eased Asset;5ease Eold 5andG t3e amount paid for it
is c3arged o8er t3e life of t3e lease and is called A/or"i2a"ion.

5o'rna& en"ries .or re!or*ing 1e-re!ia"ion

4urc3ase of fi/ed asset0

1ebi"D Rele8ant asset account
Cre*i"D Cas39 Ban) or 4aya"le Account
'or recording of depreciation9 follo(ing t(o 3eads of accounts are used0
112
!epreciation #/pense Account
Accumulated !epreciation Account

!epreciation e/pense account contains t3e depreciation of t3e current year. Accumulated depreciation
contains t3e depreciation of t3e asset from t3e financial year in (3ic3 it (as "oug3t up to t3e present
financial year. . !epreciation of t3e follo(ing years in (3ic3 asset (as used is added up in t3is account.
*n ot3er (ords9 t3is 3ead of account s3o(s t3e cost of usage of t3e asset up to t3e current year.
!epreciation account is c3arged to profit 6 loss account under t3e 3eading of Administrati8e #/penses.
*n t3e "alance s3eet9 fi/ed assets are presented at (ritten do(n 8alue i.e.

J!2 O Actual cost of fi/ed asset > Accumulated !epreciation.
Nournal entry for t3e depreciation is gi8en "elo(0

1ebi"D !epreciation #/penses Account
Cre*i"D Accumulated !epreciation Account

Presen"a"ion o. 1e-re!ia"ion

C3arging depreciation to any 3ead in profit 6 loss account depends upon t3e nature of (or) performed
"y t3e asset. Consider an organiKation 3as purc3ased computers. *f computers are "eing used "y t3e
management9 t3is means t3at administrati8e (or) is done "y computers. So9 depreciation of computers
(ill "e c3arged to Administrati8e #/penses. In t3e ot3er 3and9 if mac3ines (or)ing in t3e factory are
computeriKed. T3e 8alue of depreciation of t3e computers attac3ed (it3 t3e mac3ines (ill "e c3arged to
cost of goods sold. T3e reason "eing9 t3e computers are t3e part of manufacturing process 6
depreciation of computers (ill "e c3arged to t3e cost of production. Again consider t3e selling
department of t3e "usiness is 8ery large. !epreciation of computers used in selling department (ill "e
c3arged to selling e/penses.
Qou can see t3at computer is a single asset and its depreciation is c3arged in t3ree different 3eads
depending upon t3e nature of (or) done "y t3e computer.
!epreciation for t3e year is c3arged to0
i. Cost of ?oods Sold
ii. Administrati8e #/penses
iii. Selling #/penses
*n "alance s3eet 'i/ed Assets are s3o(n at Cost less Accumulated !epreciation i.e. (ritten !o(n 2alue
,J!2-.

Me"%o*s o. !a&!'&a"ing 1e-re!ia"ion

T%ere are se8eral met3ods for calculating depreciation. At t3is stage9 (e (ill discuss only t(o of t3em
namely0
Straig3t line met3od or Iriginal cost met3od or 'i/ed installment met3od
Reducing "alance met3od or !iminis3ing "alance met3od or (ritten do(n met3od.

S"raig%" Line Me"%o*

:nder t3is met3od9 a fi/ed amount is calculated "y a formula. T3at fi/ed amount is c3arged e8ery year
irrespecti8e of t3e (ritten do(n 8alue of t3e asset. T3e formula for calculating t3e depreciation is gi8en
"elo(0
!epreciation O ,cost > Residual 8alue- ; #/pected useful life of t3e asset

7esi*'a& #a&'e is t3e cost of t3e asset after t3e e/piry of its useful life.
:nder t3is met3od9 at t3e e/piry of assetGs useful life9 its (ritten do(n 8alue (ill "ecome Kero. Consider
t3e follo(ing e/ample0

Cost of t3e Asset O Rs.1..9...
5ife of t3e Asset O % years
Annual !epreciation O 2. T of cost or Rs.2.9...
113
$ri""en *o,n #a&'e /e"%o*

Cost of t3e Asset O Rs. 1..9...
Annual !epreciation O 2.T
Qear 1 !epreciation O 2. T of 1..9... O 2.9...
Qear 1 J!2 O 1..9... > 2.9... O $.9...
Qear 2 !epreciation O 2. T of $.9... O 1&9...
Qear 2 J!2 O $.9... > 1&9... O &49...
I&&'s"ra"ionD
Cost of an asset0 Rs. 12.9...
Residual 8alue0 Rs. 2.9...
#/pected life0 Rs. % years
Calculate depreciation and t3e (ritten do(n 8alue of t3e asset for fi8e years.
So&'"ion

S"raig%" &ine /e"%o*

!epreciation O ,12.9... > 2.9...- ; % O Rs. 2.9...

Par"i!'&ars 1e-re!ia"ion 97s: $ri""en 1o,n Va&'e 97s.:
!eprecia"le cost
!ep. If t3e 1
st
year
!ep. If t3e 2
nd
year
!ep. If t3e 3
rd
year
!ep. If t3e 4
t3
year
!ep. If t3e %
t3
year

,2.9...-
,2.9...-
,2.9...-
,2.9...-
,2.9...-
1..9...
$.9...
&.9...
4.9...
2.9...
.

7e*'!ing Ba&an!e Me"%o*

:nder t3is met3od9 depreciation is calculated on (ritten do(n 8alue. *n t3e first year9 depreciation is
calculated on cost. After(ards (ritten do(n 8alue is calculated "y deducting accumulated depreciation
from t3e cost of t3at asset,cost > accumulated depreciation- and depreciation is c3arged on t3at 8alue. *n
t3is met3od9 t3e 8alue of asset ne8er "ecomes Kero. Consider t3e follo(ing e/ample0
Cost of an asset Rs. 1..9...
#/pected life Rs. % years
!epreciation rate 2.T

So&'"ion

Par"i!'&ars 1e-re!ia"ion
97s:
A!!'/'&a"e*
1e-re!ia"ion
97s.:
$ri""en 1o,n Va&'e 97s.:
!eprecia"le cost
!ep. If t3e 1
st
year
1..9... / 2.T
!ep. If t3e 2
nd
year
$.9... / 2.T
!ep. If t3e 3
rd
year
&49... / 2.T
!ep. If t3e 4
t3
year
%192.. / 2.T
!ep. If t3e %
t3
year
4.9+&. / 2.T

2.9...

1&9...

129$..

1.924.

$91+2

2.9...

3&9...

4$9$..

%+9.4.

&9232
1..9...

$.9...

&49...

%192..

4.9+&.

329&$

114
Qou see9 at t3e end of fi8e years9 J!2 of t3e asset is Rs. 329&$9 not Kero. But in case of straig3t line
met3od9 t3e J!29 after fi8e years (as Kero. So9 in t3e opinion of some people9 reducing "alance met3od
is "etter t3an t3at of straig3t line met3od9 "ut "ot3 met3ods are effecti8e. *t is t3e management t3at 3as
to decide9 (3ic3 met3od is "est suited to t3eir "usiness.

Ince an asset 3as "een fully depreciated9 no more depreciation s3ould "e recorded on it9 e8en t3oug3
t3e property may "e in good condition and may "e in use. T3e o"Aecti8e of depreciation is to spread t3e
cost of an asset o8er t3e periods of its usefulnessL in no case can depreciation "e greater t3an t3e amount
paid for t3e asset. J3en a fully depreciated asset is in use "eyond t3e original estimate of useful life9 t3e
asset account and t3e accumulated depreciation account s3ould remain in t3e accounting records (it3out
furt3er entries until t3e asset is retired.
115
Lesson-18
MET+O1S OF C+A7GING 1EP7ECIATION 9Con"in'e*:

I" is a s)s"e/a"i! a&&o!a"ion o. "%e !os" o. a *e-re!iab&e asse" "o e>-ense o#er i"s 'se.'& &i.eA.

Gro'-ing o. Fi>e* Asse"s

7aAor groups of 'i/ed Assets0
5and
Building
4lant and 7ac3inery
'urniture and 'i/tures
Iffice #1uipment
2e3icles
Ho depreciation is c3arged for F5andG. *n case of F5eased Asset;5ease Eold 5andG t3e amount paid for it
is c3arged o8er t3e life of t3e lease and is called A/or"i2a"ion.

7e!or*ing o. 5o'rna& En"ries

4urc3ase of fi/ed asset0

Cre*i"D Cas39 Ban) or 4aya"le Account

'or recording of depreciation9 follo(ing t(o 3eads of accounts are used0
!epreciation #/pense Account
Accumulated !epreciation Account

!epreciation e/pense account contains t3e depreciation of t3e current year. Accumulated depreciation
contains t3e depreciation of t3e asset from t3e financial year in (3ic3 it (as "oug3t. !epreciation of t3e
follo(ing years in (3ic3 asset (as used is added up in t3is account. *n ot3er (ords9 t3is 3ead of account
s3o(s t3e cost of usage of t3e asset up to t3e current year. !epreciation account is c3arged to profit 6
loss account under t3e 3eading of Administrati8e #/penses. *n t3e "alance s3eet9 fi/ed assets are
presented at (ritten do(n 8alue i.e.
J!2 O Actual cost of fi/ed asset > Accumulated !epreciation.

Nournal entry for t3e depreciation is gi8en "elo(0

1ebi"D !epreciation Account
Cre*i"D Accumulated !epreciation Account

Me"%o*s o. Ca&!'&a"ing 1e-re!ia"ion

T%ere are se8eral met3ods of calculating depreciation. At t3is stage9 (e (ill discuss only t(o of t3em
namely0
Straig3t line met3od
Reducing "alance met3od

S"raig%" Line Me"%o*

*n t3is met3od9 a fi/ed amount is calculated "y a formula. T3at fi/ed amount is c3arged e8ery year
irrespecti8e of t3e (ritten do(n 8alue of t3e asset. T3e formula for calculating t3e depreciation is gi8en
"elo(0
116
!epreciation O ,cost > Residual 8alue- ; #/pected useful life of t3e asset

7esi*'a& #a&'e is t3e cost of t3e asset after t3e e/piry of its useful life.

7e*'!ing Ba&an!e Me"%o*

*n t3is met3od9 depreciation is calculated on (ritten do(n 8alue. *n t3e first year9 depreciation is
calculated on cost. After(ards (ritten do(n 8alue is calculated "y deducting accumulated depreciation
from t3e cost of t3at asset ,cost > accumulated depreciation- and depreciation is c3arged on t3at 8alue.

Cos" o. Asse" Pri!e a" ,%i!% "%e asse" ,as ini"ia&&) re!or*e*

$ri""en 1o,n Va&'e < Boo6 Va&'e Cos" /in's A!!'/'&a"e* 1e-re!ia"ion.

*n re*'!ing ba&an!e /e"%o*9 a formula is used for calculation t3e depreciation rate i.e.

Rate O 1 > n R2 ; C

J3ere0
BR2C O Residual 2alue
BCC O Cost
BnC O 5ife of Asset

Ca&!'&a"e "%e ra"e i.D
Cost O 1..9...
Residual 2alue ,R2- O 2.9...
5ife O 3 years

Rate O 1 > 3 2....;1.....

O H3R
=ear 1
Cost 1..9...
!epreciation 1..9... / 42T ,429...-
J!2 ,Closing Balance- %$9...
=ear 3
J!2 ,Ipening Balance-
%$9...
!epreciation %$9... / 42T ,2493&.-
J!2 ,Closing Balance- 339&4.
=ear 4
J!2 ,Ipening Balance- 339&4.
!epreciation 339&4. / 42T ,14912$-
J!2 ,Closing Balance- 1+9%11

1is-osa& o. Asse"

Cost of Asset O 1..9...
5ife of t3e Asset O % Qears
!epreciation 7et3od O Straig3t 5ine
Residual 2alue O Rs.1....
Sale 4rice after 'i8e Qears O Rs.1%...

!epreciation per year O ,1.....=1....- ; %
O Rs. 1$9... per year
117
Total !epreciation in 'i8e Qears O 1$9... / %
O +.9...

Boo) 2alue after 'i8e Qears O 1..9...= +.9...
O 1.9...

4rofit on !isposal O 1%9... > 1.9...
O Rs.%...
Recording of !isposal
!e"it 'i/ed Asset !isposal A;c 1..9...
Credit 'i/ed Asset Cost A;c 1..9...
,Jit3 t3e cost of asset-

!e"it Accumulated !ep. A;c +.9...
Credit 'i/ed Asset !isposal A;c +.9...
,Jit3 t3e depreciation accumulated to date-

!e"it Cas3 ; Ban) ; Recei8a"le A;c 1%9...
Credit 'i/ed Asset !isposal A;c 1%9...
,Jit3 t3e price at (3ic3 asset is sold-
WHote0 one group to appear at a timeX

1is-osa& o. Asse" A!!o'n"

Fi>e* Asse" 1is-osa& A!!o'n"
!e"it Credit
Cost Account 1..9... Acc. !ep. Account +.9...
Cas3 ; Ban) 1%9...
4 6 5 Account
, Balancing 'igure-
%...
Total 1.%... Total 1.%...

Po&i!) .or 1e-re!ia"ion
T3e management of t3e "usiness selects t3e policy for c3arging depreciation. T3ere is no la( "inding on
t3e management. T3e management is free to c3oose met3od of depreciation and policy of c3arging
depreciation. Hormally t(o policies are commonly used0
!epreciation on t3e "asis of use
*n t3e year of purc3ase9 full yearGs depreciation is c3argedL (3ere as9 in t3e year of sale no
depreciation is c3arged.
Ho( it is up to t3e management to decide9 (3at met3od and (3at policy is "etter and effecti8e for t3eir
"usiness.

1is-osa& o. Fi>e* Asse"

J3en deprecia"le asset is disposed off at any time during t3e financial year9 an entry s3ould "e made to
gi8e effect of t3e disposal. Since9 t3e residual 8alue of asset is only estimatedL it is common for asset to "e
sold at price t3at differs from its "oo) 8alue at t3e date of disposal. J3en asset is sold9 any profit or loss
is computed "y comparing "oo) 8alue (it3 t3e amount recei8ed from sale. As you )no(9 "oo) 8alue is
o"tained "y deducting accumulated depreciation from original cost of t3e asset. A sale price in e/cess of
t3e "oo) 8alue produces profitL a sale price "elo( t3e "oo) 8alue produces loss. T3is profit or loss
s3ould "e s3o(n in t3e profit 6 loss account.

En"ries .or 7e!or*ing 1is-osa&
1ebi" 'i/ed Asset !isposal A;c
Cre*i" 'i/ed Asset Cost A;c
,Jit3 t3e cost of asset:
118
1ebi" Accumulated !ep. A;c
Cre*i" 'i/ed Asset !isposal A;c
,Jit3 t3e depreciation accumulated to date-

1ebi" Cas3 ; Ban) ; Recei8a"le A;c
Cre*i" 'i/ed Asset !isposal A;c
,Jit3 t3e price at (3ic3 asset is sold-
E>a/-&e

An asset is purc3ased for Rs. %..9... on Ho8. .19 2..1.
!epreciation rate is 1.T p.a.
T3e Asset is sold on Apr. 3.9 2..4.
'inancial Qear is Nuly 1 to Nune 3.

7e;'ire*D
Calculate t3e J!2 'or "ot3 policies

1e-re!ia"ion is !%arge* on "%e Basis o. Use

=ear On "%e Basis o. Use 7s.
1=11=2..1 Cost %..9...
2..1=2..2 !ep. %..9... / 1.T / $ ; 12 ,339333-
3.=&=2..2 J!2 4&&9&&
2..2=2..3 !ep. 4&&9&&& / 1.T ,4&9&&-
3.=&=2..3 J!2 42.9...
2..3=2..4 !ep. 42.9... / 1.T / 1. ; 12 ,3%9...-
3.=4=2..4 J!2 3$%9...

F'&& 1e-re!ia"ion in "%e =ear o. P'r!%ase

=ear F'&& 1e-. in )ear o. P'r!%ase 7s.
1=11=2..1 Cost %..9...
2..1=2..2 !ep. %..9... / 1.T ,%.9...-
3.=&=2..2 J!2 4%.9...
2..2=2..3 !ep. 4%.9... / 1.T ,4%9...-
3.=&=2..3 J!2 4.%9...
2..3=2..4 !ep. .. in t3e year of sale ..
3.=&=2..4 J!2 4.%9...

Con"en"s o. Fi>e* Asse"s 7egis"er
!ifferent record for eac3 class of assets
!ate of purc3ase
!etailed particulars of asset
5ocation of asset
Record of depreciation
119

I&&'s"ra"ion
Cost of asset Rs. 2..9...
5ife of t3e asset % years
!epreciation met3od Straig3t line
Residual 8alue Rs. 2.9...
Sale price after % years Rs.3.9...

Calculate profit;5oss on t3e sale of t3e assetD

So&'"ion

Jritten do(n 8alue O 2..9... > 2.9... O 1$.9...
!epreciation;year O 1$.9...;% O 3&9... ,Straig3t line met3od-

4articulars !epreciation
,Rs-
Jritten
!o(n
2alue ,Rs.-
Cost
!ep. If t3e 1
st
year
!ep. If t3e 2
nd
year
!ep. If t3e 3
rd
year
!ep. If t3e 4
t3
year
!ep. If t3e %
t3
year

,3&9...-
,3&9...-
,3&9...-
,3&9...-
,3&9...-
2..9...
1&49...
12$9...
+29...
%&9...
2.9...

Boo) 8alue after fi8e years Rs. 2.9...
Sale price Rs. 3.9...
4rofit on sale Rs. 1.9... ,3.9... > 2.9...-

Sa/e i&&'s"ra"ion is so&#e* b) re*'!ing ba&an!e /e"%o*

Cost of asset Rs. 2..9...
Residual 8alue Rs. 2.9...
#stimated useful life % years

Ca&!'&a"ion o. *e-re!ia"ion ra"e
SSSS
!epreciation Rate O 1 >
n
YR8;c
UUUUUUUUUUUUU
O 1 =
%
Y2.9...;2..9...
O 3T
Allocation of depreciation is gi8en "elo(0

120

Par"i!'&ars 1e-re!ia"ion
97s:
A!!'/'&a"e*
1e-re!ia"ion
97s.:
$ri""en 1o,n Va&'e
97s.:
Cost
!ep. If t3e 1
st
year
2..9... / 3T
!ep. If t3e 2
nd
year
12&9... / 3T
!ep. If t3e 3
rd
year
+93$. / 3T
!ep. If t3e 4
t3
year
%.9..+ / 3T
!ep. If t3e %
t3
year
319%.& / 3T

49...

4&9&2.

2+931

1$9%.3

119&%

49...

12.9&2.

14+9++1

1&$94+4

1$.91%1
2..9...

12&9...

+93$.

%.9..+

319%.&

1+9$4+

Boo) 8alue after fi8e years Rs. 1+9$4+

4rofit on sale Rs. 1.91%1 ,3.9... > 1+9$4+-
121
Lesson-19
MET+O1S OF C+A7GING 1EP7ECIATION 9Con"in'e*:
*f an asset is not completed at t3at time (3en "alance s3eet is prepared9 all costs incurred on t3at asset
up to t3e "alance s3eet date are transferred to an account called Ca-i"a& $or6 in Progress A!!o'n".
T3is account is s3o(n separately in t3e "alance s3eet "elo( t3e fi/ed asset. Capital (or) in progress
account contains all e/penses incurred on t3e asset until it is con8erted into (or)ing condition. All t3ese
e/penses (ill "ecome part of t3e cost of t3at asset. J3en an asset is completed and it is ready to (or)9 all
costs in t3e capital (or) in progress account (ill transfer to t3e rele8ant asset account t3roug3 t3e
follo(ing entry0

Cre*i"D Capital (or) in progress account

I&&'s"ra"ion G 1

A mac3ine is purc3ased for Rs. 4..9.... *ts useful life is estimated to "e fi8e years. *ts residual 8alue is
Rs. 2%9.... After four years9 it (as sold for Rs. 4.9.... 'or t3e purpose of J!29 its depreciation rate is
4.T.
Qou are re1uired to s3o( calculation of depreciation for four years. Also calculate profit or loss on
disposal.

So&'"ion

Ca&!'&a"ion o. *e-re!ia"ion an* -ro.i" C &oss on "%e basis o. s"raig%" &ine /e"%o*0

!epreciation;year O ,4..9... > 2%9...-;% O %9... ,Straig3t line met3od-

As9 mac3ine (as sold after four years "ut its useful life (as estimated for fi8e years9 (3en (e calculate
depreciation of t3e asset under straig3t line met3od9 (e (ill di8ide its J!2 o8er fi8e years9 not on four
years.
4articulars !epreciation ,Rs- Jritten !o(n 2alue ,Rs.-
!eprecia"le cost
!ep. If t3e 1
st
year
!ep. If t3e 2
nd
year
!ep. If t3e 3
rd
year
!ep. If t3e 4
t3
year

,%9...-
,%9...-
,%9...-
,%9...-
4..9...
32%9...
2%.9...
1%9...
1..9...

Boo) 8alue after four years Rs. 1..9...
4rofit;,loss- on sale Rs. ,&.9...- i=e.,4.9... >1..9...-

122
Ca&!'&a"ion o. *e-re!ia"ion an* -ro.i" C &oss on "%e basis o. re*'!ing ba&an!e /e"%o*D

!epreciation rate O 4.T

4articulars !epreciation
,Rs-
Accumulated
!epreciation
,Rs.-
Jritten !o(n
2alue ,Rs.-
!eprecia"le cost
!ep. If t3e 1
st
year
4..9... / 4.T
!ep. If t3e 2
nd
year
24.9... / 4.T
!ep. If t3e 3
rd
year
1449... / 4.T
!ep. If t3e 4
t3
year
$&94.. / 4.T

1&.9...

+&9...

%9&..

349%&.

1&.9...

2%&9...

3139&..

34$91&.

4..9...

24.9...

1449...

$&94..

%19$4.

Boo) 8alue after four years Rs. %19$4.
4rofit; ,loss- on sale Rs. ,119$4.- i=e. ,4.9... > %19$4.-

I&&'s"ra"ion G 3

'ollo(ing information of mac3inery account is a8aila"le in Qear 2..40
7ac3ine P 1 is purc3ased on Septem"er 19 2... for Rs. 1..9...
7ac3ine P 2 is purc3ased on Nanuary 319 2..2 for Rs. 2..9...
7ac3ine P 3 is purc3ased on Nuly 19 2..3 for Rs. %.9...
7ac3ine P 1 is disposed on 7arc3 319 2..4
!epreciation is c3arged V 2%T reducing "alance met3od. 'inancial year is closed on Nune 3. e8ery year.

S3o( t3e calculation of depreciation on mac3inery for four years using t3e follo(ing policies0
!epreciation is c3arged on t3e "asis of use
'ull depreciation is c3arged in t3e year of purc3ase and no depreciation is c3arged in t3e year of
disposal.
123
So&'"ion

1e-re!ia"ion on "%e basis o. 'se

1a"e P'r!%ase
o.
/a!%ine
97s.:
1e-re!ia"ion
97s.:
A!!'/'&a"e
*
*e-re!ia"io
n 97s.:
To"a&
A!!'/.
1e-.
$ri""en
1o,n
Va&'e 97s.:
To"a&
$ri""en
1o,n
Va&'e
97s.:
.1=.+=2... 1..9... 7ac3ine P 1
1..9... / 2%T
/1.;12O30FK44
7ac3ine P 1
2.9$33
2.9$33 7ac3ine P 1
+91&
+91&
2..1=2..2

31=.1=2..2

2..9...
7ac3ine P 1
+91&/2%T
O 1LFJL3
7ac3ine P 2
2..9.../2%T/%;1
2O30FK44

7ac3ine P 1
4.9&2%

7ac3ine P 2
2.9$33
&194%$ 7ac3ine P 1
%+93%

7ac3ine P 2
1+91&
23$9%42
2..2=2..3 7ac3ine P 1
%+93%/2%T
O 1HFKHH
7ac3ine P 2
1+91&/2%T
OHHFJL3
7ac3ine P 1
%%94&+

7ac3ine P 2
&%9&2%
1219.+4 7ac3ine P 1
449%31

7ac3ine P 2
13493%
1$9+.&
2..3=2..4

.1=.=2..3

%.9...
7ac3ine P 1
449%31/2%T/
+;12O KF4I0
7ac3ine P 2
13493%/2%T
O 44FILH
7ac3ine P 3
%.9.../2%T
O 13FI00
7ac3ine P 1
&39$1+

7ac3ine P 2
++921+

7ac3ine P 3
129%..
1%9%3$ 7ac3ine P 1
94MF1K1:
9so&*:
7ac3ine P 2
1..9$1

7ac3ine P 3
39%..
13$92$1

124

F'&& )ear *e-re!ia"ion in "%e )ear o. -'r!%ase an* no *e-re!ia"ion in "%e )ear o. sa&eD

1a"e P'r!%ase
o.
/a!%ine
97s.:
1e-re!ia"ion
97s.:
A!!'/'&a"e*
*e-re!ia"ion
97s.:
To"a&
A!!'/.
1e-.
$ri""en
1o,n Va&'e
97s.:
To"a&
$ri""en
1o,n
Va&'e
97s.:
.1=.+=
2...
1..9... 7ac3ine P 1
1..9... / 2%T
O3IF000
7ac3ine P 1
2%9...
2%9... 7ac3ine P 1
%9...
%9...
2..1=
2..2

31=.1=
2..2

2..9...
7ac3ine P 1
%9.../2%T
O 1KFJI0
7ac3ine P 2
2..9.../2%T
OI0F000

7ac3ine P 1
439%.

7ac3ine P 2
%.9...
+39%. 7ac3ine P 1
%&92%.

7ac3ine P 2
1%.9...
2.&92%.
2..2=
2..3
7ac3ine P 1
%&92%./2%T
O 1HF0M4
7ac3ine P 2
1%.9.../2%T
O4JFI00
7ac3ine P 1
%9$13

7ac3ine P 2
$9%..
14%9313 7ac3ine P 1
4291$

7ac3ine P 2
1129%..
1%49&$
2..3=
2..4

.1=.=
2..3

%.9...
7ac3ine P 1
.
7ac3ine sold
7ac3ine P 2
1129%../2%T
O 3KF13I
7ac3ine P 3
%.9.../2%T
O 13FI00
7ac3ine P 1
%9$13
,sold-
7ac3ine P 2
11%9&2%

7ac3ine P 3
129%..
1$%9+3% 7ac3ine P 1
4291$
,sold-
7ac3ine P 2
$493%

7ac3ine P 3
39%..
1219$%

125
Lesson-20
1EP7ECIATION ON PU7C+ASE AN1 1ISPOSAL OF FINE1 ASSETS

T3is account is s3o(n separately in t3e "alance s3eet "elo( t3e fi/ed asset. Capital (or) in progress
e/penses (ill "ecome part of t3e cost of t3at asset. J3en any e/pense is incurred or paid9 it is included in
t3e Capital Jor) in 4rogress Account t3roug3 t3e follo(ing entry0

1ebi"D Jor) in 4rogress Account
Cre*i"D Cas3;Ban);4aya"le Account

J3en an asset is completed and it is ready to (or)9 all costs (ill transfer to t3e rele8ant asset account
t3roug3 t3e follo(ing entry0

Cre*i"D Capital (or) in progress account

Presen"a"ion

*t is already mentioned t3at Jor) in 4rogress Account is s3o(n separately in t3e "alance s3eet "elo( t3e
fi/ed asset. i=e.

Hame of t3e #ntity
Balance S3eet
As At.
4articulars Amount
Rs.
Amount
Rs.
Asse"s
'i/ed Assets
Capital Jor) in 4rogress
It3er 5ong Term Assets
Current Assets

/yK
/yK
/yK
Total /yK
Liabi&i"ies
Capital
4rofit

/yK
/yK

/yK
Current 5ia"ilities
/yK
Total /yK

126
Consider t3e sol8ed illustration in t3e pre8ious lecture0

1a"e P'r!%ase
o.
/a!%ine
97s.:
1e-re!ia"ion
97s.:
A!!'/'&a"e*
*e-re!ia"ion
97s.:
To"a&
A!!'/.
1e-.
$ri""en
1o,n Va&'e
97s.:
To"a&
$ri""en
1o,n
Va&'e
97s.:
.1=.+=2... 1..9... 7ac3ine P 1
1..9... / 2%T
/1.;12O30FK44
7ac3ine P 1
2.9$33
2.9$33 7ac3ine P 1
+91&
+91&
2..1=2..2

31=.1=2..2

2..9...
7ac3ine P 1
+91&/2%T
O 1LFJL3
7ac3ine P 2
2..9.../2%T/%;
12O30FK44

7ac3ine P 1
4.9&2%

7ac3ine P 2
2.9$33
&194%$ 7ac3ine P 1
%+93%

7ac3ine P 2
1+91&
23$9%42
2..2=2..3 7ac3ine P 1
%+93%/2%T
O 1HFKHH
7ac3ine P 2
1+91&/2%T
OHHFJL3
7ac3ine P 1
%%94&+

7ac3ine P 2
&%9&2%
1219.+4 7ac3ine P 1
449%31

7ac3ine P 2
13493%
1$9+.&
2..3=2..4

.1=.=2..3

%.9...
7ac3ine P 1
449%31/2%T/
+;12O KF4I0
7ac3ine P 2
13493%/2%T
O 44FILH
7ac3ine P 3
%.9.../2%T
O 13FI00
7ac3ine P 1
&39$1+

7ac3ine P 2
++921+

7ac3ine P 3
129%..
1%9%3$ 7ac3ine P 1
,3&91$1-
,sold-
7ac3ine P 2
1..9$1

7ac3ine P 3
39%..
13$92$1

Presen"a"ion in Ba&an!e S%ee"

=ear Cos" o. Ma!%iner)
7s.
A!!'/'&a"e*
1e-re!ia"ion 7s.
$ri""en 1o,n
Va&'e 7s.
2...=2..1 1..9... 2.9$33 +91&
2..1=2..2 3..9... &194%$ 23$9%42
2..2=2..3 3..9... 1219.+4 1$9+.&

Jritten do(n 2alue of t3e year 2..3=2..4

Ipening Jritten !o(n 2alueD 1$9+.&
Add0 Cost of mac3ine purc3ased0 %.9...
5ess0 !epreciation of 7ac3ine P 1 in 2..3=2..40 ,$93%.-
5ess0 !epreciation of ot3er assets0 ,4&9.+4-
5ess0 Jritten !o(n 2alue of mac3ine disposed0 ,3&91$1-

Closing Jritten !o(n 2alueD 13$92$1
127

1a"e P'r!%ase
o.
/a!%ine
97s.:
1e-re!ia"ion
97s.:
A!!'/'&a"e*
*e-re!ia"ion
97s.:
To"a&
A!!'/.
1e-.
$ri""en
1o,n Va&'e
97s.:
To"a&
$ri""en
1o,n
Va&'e
97s.:
.1=.+=2... 1..9... 7ac3ine P 1
1..9... / 2%T
O3IF000
7ac3ine P 1
2%9...
2%9... 7ac3ine P 1
%9...
%9...
2..1=2..2

31=.1=2..2

2..9...
7ac3ine P 1
%9.../2%T
O 1KFJI0
7ac3ine P 2
2..9.../2%T
OI0F000
7ac3ine P 1
439%.

7ac3ine P 2
%.9...
+39%. 7ac3ine P 1
%&92%.

7ac3ine P 2
1%.9...
2.&92%.
2..2=2..3 7ac3ine P 1
%&92%./2%T
O 1HF0M4
7ac3ine P 2
1%.9.../2%T
O4JFI00
7ac3ine P 1
%9$13

7ac3ine P 2
$9%..
14%9313 7ac3ine P 1
4291$

7ac3ine P 2
1129%..
1%49&$
2..3=2..4

.1=.=2..3

%.9...
7ac3ine P 1
.
7ac3ine sold
7ac3ine P 2
1129%../2%T
O 3KF13I
7ac3ine P 3
%.9.../2%T
O 13FI00
7ac3ine P 1
%9$13
,sold-
7ac3ine P 2
11%9&2%

7ac3ine P 3
129%..
1$%9+3% 7ac3ine P 1
4291$
,sold-
7ac3ine P 2
$493%

7ac3ine P 3
39%..
1219$%

Presen"a"ion in "%e Ba&an!e S%ee"

7s.
A!!'/'&a"e*
1e-re!ia"ion 7s.
$ri""en 1o,n
Va&'e 7s.
2...=2..1 1..9... 2%9... %9...
2..1=2..2 3..9... +39%. 2.&92%.
2..2=2..3 3..9... 14%9313 1%49&$

Jritten do(n 2alue of t3e year 2..3=2..4

Ipening Jritten !o(n 2alueD Rs. 1%49&$
Add0 Cost of mac3ine purc3ased0 Rs. %.9...
5ess0 !epreciation of 7ac3ine P 1 in 2..3=2..40 .
5ess0 !epreciation of ot3er assets0 ,4.9&2%-
5ess0 Jritten !o(n 2alue of mac3ine disposed0 ,4291$-

Closing Jritten !o(n 2alueD Rs. 1219$%
128
I&&'s"ra"ion G 3

'ollo(ing information of mac3inery account is a8aila"le in Qear 2..40
7ac3ine P 1 is purc3ased on August 19 2... for Rs. %.9...
7ac3ine P 2 is purc3ased on April 19 2..2 for Rs. 1..9...
7ac3ine P 3 is purc3ased on 7arc3 19 2..4 for Rs. 1%.9...
7ac3ine P 1 is disposed on 7ay 319 2..4
!epreciation is c3arged V 2.T reducing "alance met3od. 'inancial year is closed on Nune 3. e8ery year.

S3o( t3e calculation of depreciation on mac3inery for four years using t3e follo(ing policies0
!epreciation is c3arged on t3e "asis of use
'ull depreciation is c3arged in t3e year of purc3ase and no depreciation is c3arged in t3e year of
disposal9

So&'"ion


1a"e P'r!%ase
o.
/a!%ine
97s.:
1e-re!ia"ion
97s.:
A!!'/'&a"e*
*e-re!ia"ion
97s.:
To"a&
A!!'/.
1e-.
$ri""en
1o,n Va&'e
97s.:
To"a&
$ri""en
1o,n
Va&'e
97s.:
.1=.$=2... %.9... 7ac3ine P 1
%.9... / 2.T
/11;12OLF1MJ
7ac3ine P 1
+91&
+91& 7ac3ine P 1
+91&
4.9$33
2..1=2..2

.1=.4=2..2

1..9...
7ac3ine P 1
4.9$33/2.T
O KF1MJ
7ac3ine P 2
1..9.../2.T/3;
12OIF000

7ac3ine P 1
19334
7ac3ine P 2
%9...
229334 7ac3ine P 1
329&&&

7ac3ine P 2
+%9...
129&&&
2..2=2..3 7ac3ine P 1
329&&&/2.T
O MFI44
7ac3ine P 2
+%9.../2.T
O1LF000
7ac3ine P 1
239$&

7ac3ine P 2
249...
49$& 7ac3ine P 1
2&9133

7ac3ine P 2
&9...
1.29133
2..3=2..4

.1=.3=2..4

1%.9...
7ac3ine P 1
2&9133/2.T/
11;12O HFJL1
7ac3ine P 2
&9.../2.T
O 1IF300
7ac3ine P 3
1%.9.../2.T/
4;12O 10F000
7ac3ine P 1
2$9&%$

7ac3ine P 2
3+92..

7ac3ine P 3
1.9...
9$%$ 7ac3ine P 1
,219342-
,sold-
7ac3ine P 2
&.9$..

7ac3ine P 3
14.9...
2..9$..

129

7s.
A!!'/'&a"e*
1e-re!ia"ion 7s.
$ri""en 1o,n
Va&'e 7s.
2...=2..1 %.9... +91& 4.9$33
2..1=2..2 1%.9... 229334 129&&&
2..2=2..3 1%.9... 49$& 1.29133

Jritten !o(n 2alue of t3e year 2..3=2..4

Ipening Jritten !o(n 2alueD Rs. 1.29133
Add0 Cost of mac3ine purc3ased0 Rs. 1%.9...
5ess0 !epreciation of 7ac3ine P 1 in 2..3=2..40 ,49+1-
5ess0 !epreciation of ot3er assets0 ,2%92..-
5ess0 Jritten !o(n 2alue of mac3ine disposed0 ,219342-

Closing Jritten !o(n 2alueD Rs. 2..9$..


1a"e P'r!%ase
o.
/a!%ine
97s.:
1e-re!ia"ion
97s.:
A!!'/'&a"e*
*e-re!ia"ion
97s.:
To"a&
A!!'/.
1e-.
$ri""en
1o,n Va&'e
97s.:
To"a&
$ri""en
1o,n
Va&'e
97s.:
.1=.$=2... %.9... 7ac3ine P 1
%.9... / 2.T
O10F000
7ac3ine P 1
1.9...
1.9... 7ac3ine P 1
4.9...
4.9...
2..1=2..2

.1=.4=2..2

1..9...
7ac3ine P 1
4.9.../2.T
O KF000
7ac3ine P 2
1..9.../2.T
O30F000
7ac3ine P 1
1$9...

7ac3ine P 2
2.9...
3$9... 7ac3ine P 1
329...

7ac3ine P 2
$.9...
1129...
2..2=2..3 7ac3ine P 1
329.../2.T
O MFH00
7ac3ine P 2
$.9.../2.T
O1MF000
7ac3ine P 1
2494..

7ac3ine P 2
3&9...
&.94.. 7ac3ine P 1
2%9&..

7ac3ine P 2
&49...
$+9&..
2..3=2..4

.1=.3=2..4

1%.9...
7ac3ine P 1
.
7ac3ine sold
7ac3ine P 2
&49.../2.T
O 13FK00
7ac3ine P 3
1%.9.../2.T
O 40F000
7ac3ine P 1
2494..
,sold-
7ac3ine P 2
4$9$..

7ac3ine P 3
3.9...
1.392.. 7ac3ine P 1
,2%9&..-
,sold-
7ac3ine P 2
%192..

7ac3ine P 3
12.9...
1192..


7s.
A!!'/'&a"e*
1e-re!ia"ion 7s.
$ri""en 1o,n
Va&'e 7s.
2...=2..1 %.9... 1.9... 4.9...
2..1=2..2 1%.9... 3$9... 1129...
2..2=2..3 1%.9... &.94.. $+9&..
130
Jritten !o(n 2alue of t3e year 2..3=2..4

Ipening Jritten !o(n 2alueD Rs. $+9&..
Add0 Cost of mac3ine purc3ased0 Rs. 1%.9...
5ess0 !epreciation of 7ac3ine P 1 in 2..3=2..40 .
5ess0 !epreciation of ot3er assets0 ,429$..-
5ess0 Jritten !o(n 2alue of mac3ine disposed0 ,2%9&..-

Closing Jritten !o(n 2alueD Rs. 1192..

7e#a&'a"ion o. Fi>e* Asse"s

'i/ed assets are purc3ased to "e used for longer period. *n t3e su"se1uent years9 t3e 8alue of asset could
"e 3ig3er or lo(er t3an its present "oo) 8alue due to inflationary condition of t3e economy. Assets are
8alued at Eistorical Cost in t3e "oo)s of accounts. Eistorical Cost is t3e original cost of t3e asset at
(3ic3 it (as purc3ased plus additional costs incurred on t3e asset to "ring it in (or)ing condition.
Sometimes9 t3e management of t3e "usiness9 if it t3in)s fit9 re8alues t3e asset to present it on current
mar)et 8alue. Ince t3e asset is re8alued to its mar)et 8alue9 t3en its 8alue 3as to "e constantly monitored
to reflect t3e c3anges in t3e mar)et 8alue.
*f an asset is re8alued at 3ig3er cost t3an its original cost9 t3e e/cess amount (ill "e treated as profit on
re8aluation of fi/ed assets and it is credited to Re8aluation Reser8e Account.
In t3e ot3er 3and9 if an asset is re8alued at lo(er cost t3an its original cost9 t3e "alance amount (ill "e
treated as loss on re8aluation of fi/ed assets and it is s3o(n in t3e profit 6 loss account of t3at year in
(3ic3 asset (as re8alued.

131
Lesson-21
7EVALUATION OF FINE1 ASSETS

'i/ed assets are purc3ased to "e used for longer period. *n t3e su"se1uent years9 t3e 8alue of asset could
"e 3ig3er or lo(er t3an its present "oo) 8alue due to inflationary condition of t3e economy. Assets are
8alued at Eistorical Cost in t3e "oo)s of accounts.

+is"ori!a& Cos"

Eistorical cost is t3e original cost of t3e asset at (3ic3 it (as purc3ased plus additional costs incurred on
t3e asset to "ring it in (or)ing condition. Sometimes9 t3e management of t3e "usiness9 if it t3in)s fit9
re8alues t3e asset to present it at current mar)et 8alue. Ince t3e asset is re8alued to its mar)et 8alue9 t3en
its 8alue 3as to "e constantly monitored to reflect t3e c3anges in t3e mar)et 8alue.

7e!or*ing "%e e..e!"s o. 7e#a&'a"ion o. an Asse"s

*f an asset is re8alued at 3ig3er cost t3an its original cost9 t3e e/cess amount (ill "e treated as profit on
re8aluation of fi/ed assets and it is credited to Re8aluation Reser8e Account.
In t3e ot3er 3and9 if an asset is re8alued at lo(er cost t3an its original 8alue9 t3e "alance amount (ill "e
treated as loss on re8aluation of fi/ed assets and it is s3o(n in t3e profit 6 loss account of t3at year in
(3ic3 asset (as re8alued.

Fair Va&'e

*t is t3e 8alue9 at (3ic3 an asset (ould "ring to t3e management9 (3en sold to a )no(ledgea"le party in a
fair deal.

7'&es .or 7e#a&'a"ion
Re8aluation 3as to "e carried out at regular inter8als
T3e c3ange in t3e 8alue s3ould "e permanent
J3ole class of asset 3as to "e re8alued

I&&'s"ra"ion

An asset is purc3ased at t3e cost of Rs. 3..9.... *t (as decided "y t3e management t3at depreciation
(ould "e c3arged V 2. T on t3e "asis of straig3t line met3od. At t3e end of t3ird year9 follo(ing
information is gi8en0

Accumulated !epreciation Rs. 1$.9...
Jritten !o(n 2alue Rs. 12.9...

T3e management 3as decided to re8alue it to t3e current mar)et 8alue. T3e current mar)et 8alue of t3e
asset is 1$.9.... Qou are re1uired to ma)e t3e necessary adAustments.

So&'"ion

T3ere are t(o options for ma)ing adAustments for t3e a"o8e mentioned c3anges0

1. C3arge t3e accumulated depreciation to t3e cost of asset and increase t3e 8alue of asset (it3 t3e
difference of current mar)et 8alue and J!2.
2. Calculate t3e proportion of increase and increase t3e cost of asset and accumulated depreciation
(it3 t3at proportion.

132
O-"ion G 1
T3e accumulated depreciation is c3arged off against t3e cost of asset (it3 t3e 3elp of follo(ing entry0

1ebi"D Accumulated !epreciation 1$.9...
Cre*i"D Cost of asset A;c 1$.9...
Cost of asset is increased to current mar)et 8alue9 i=e.9 Rs.1$.9.... T3e difference "et(een current
mar)et 8alue and J!2 is Rs. &.9... ,1$.9... > 12.9...-. T3e credit is gi8en to Re8aluation Reser8e
Account.

1ebi"D Cost of asset A;c &.9...
Cre*i"D Re8aluation Reser8e A;c &.9...

O-"ion G 3

Bot3 Cost and Accumulated !epreciation are increased in a proportionate manner so t3at t3e resulting
Boo) 2alue is e1ual to t3e re8alued amount.

!esired increase in J!20
1$.9... > 12.9... O &.9...

Rs.&.9... is %.T of 12.9.... T3erefore desired increase in Cost and Accumulated !epreciation is %.T.

Cost is increased "y %.T "y follo(ing entry0

1ebi"D Cost of asset A;c 1%.9...
Cre*i"D Re8aluation Reser8e A;c 1%.9...

Accumulated depreciation is increased "y %.T (it3 t3e 3elp of t3e follo(ing entry0

1ebi"D Re8aluation Reser8e A;c +.9...
Cre*i"D Accumulated !epreciation A;c +.9...

Ca-i"a& an* 7e#en'e E>-enses

Ca-i"a& E>-enses are t3ose e/penses for (3ic3 "enefit is enAoyed for more t3an one accounting period.
'or e/ample9 t3e "usiness 3as "oug3t a car. Ho(9 car (ill "e used for many years. So9 it is a capital
e/pense. Capital #/penditure generally adds 'i/ed Asset :nits or increases economic life9 capacity or
efficiency of e/isting fi/ed assets. T3e term used for Capital e/penditures is FCapitaliKedG.
Capital #/penditures are incurred in t(o (ays0
J3en an asset is ac1uired9 and
J3en an impro8ement is made in an e/isting asset.
All t3e e/penditure incurred up to t3e point of "ringing t3e asset to its intended use is capitaliKed as t3e
initial cost of asset.
An e/penditure t3at impro8es t3e performance of an asset from its originally assessed performance is
termed as capital e/penditure. Eo(e8er9 t3e e/penditure incurred on t3e maintenance of an asset is
treated as Re8enue #/pense.

7e#en'e E>-enses are t3ose e/penses for (3ic39 t3e "enefit is enAoyed (it3in one accounting period.
'or e/ample9 t3e "usiness 3as purc3ased stationery for office use. Ho(9 t3e stationery is used (it3in one
year in t3e office. So9 t3is (ill "e a re8enue e/pense. T3e term used for Re8enue #/penditures is
FC3arged IffG.
Re8enue #/penses are t3ose e/penses t3at are0
*ncurred in day to day running of t3e "usiness.
*ncurred to maintain fi/ed assets in t3eir original ; usea"le condition.

133
All Capital #/penses are grouped in "alance s3eet 6 all Re8enue e/penses are grouped in 4rofit 6 5oss
account.

1is"in!"ion be",een Ca-i"a& E>-en*i"'re C 7e#en'e E>-en*i"'re

Ca-i"a& E>-en*i"'re 7e#en'e E>-en*i"'re
*ts effect is long term9 i=e. *t is not e/3austed
(it3in t3e current accounting period. *ts "enefit is
recei8ed for a num"er of years in future.
*ts effect is s3ort term9 i=e. T3e "enefit is recei8ed
(it3in one accounting period.
#/penditure is said to "e capital e/penditure (3en
an asset is ac1uired or performance of an e/isting
asset is increased.
Heit3er an asset is ac1uired nor is t3e performance
of any asset increased.
*t does not occur again and again. *t is
non= recurring and irregular.
*t is recurring and regular and it occurs repeatedly.
T3is e/penditure impro8es t3e financial position of
t3e "usiness.
T3is e/penditure 3elps to maintain t3e "usiness.
A portion of t3is e/penditure ,!epreciation on
asset- is s3o(n in t3e profit 6 loss account and t3e
"alance is s3o(n in t3e "alance s3eet on asset side.
T3e (3ole amount of t3is e/penditure is s3o(n in
t3e profit 6 loss account or income statement.
*t appears in t3e "alance s3eet until its "enefit is
fully e/3austed.
*t does not appear in t3e "alance s3eet.
*t does not reduce t3e profit of t3e concern. *t reduces t3e profit of t3e concern.

1e..ere* E>-en*i"'re

T3e re8enue e/penditure t3at pro8ides "enefit for more t3an one year is called deferred e/penditure. *t is
initially s3o(n in "alance s3eet. Su"se1uently9 it is c3arged to profit and loss account o8er t3e period in
(3ic3 "enefit is deri8ed from it.

Pre-ai* E>-enses are amounts t3at are paid in ad8ance to a 8ender or creditor for goods and ser8ices.
Typically9 insurance premiums are paid in ad8ance of t3e co8erage contained in t3e policy. 4repaid
#/penses is a Current Asset for our "usiness. T3is is "ecause (e 3a8e paid for somet3ing and someone
o(es us t3e ser8ice or t3e goods for (3ic3 (e prepaid.

T%e Genera& 7'&e

T3e general rule for distinguis3ing "et(een capital and re8enue e/penditure is as follo(s0
T3e e/pense (3ose "enefit lasts for a period longer t3an an accounting period is called capital
e/penditure9 and
T3e e/pense (3ose "enefit is o"tained (it3in an accounting period is termed as a re8enue
e/pense.

E>!e-"ions

!epending upon t3e siKe of e/penditure and policy of t3e organiKation9 follo(ing e/penditures can "e
BC3arged to 4rofit and 5ossC instead of BCapitaliKingC.

Lega& C%arges > are as per rule c3arged to 4 6 5 "ut (3en t3ese are incurred to ac1uire an
asset t3ese s3ould "e capitaliKed (it3 t3e asset.
7e-airs > are also c3arged to 465 "ut (3en it is of suc3 nature t3at it en3ances t3e
performance of an asset from its original performance t3an it s3ould "e capitaliKed.
$ages > are normally re8enue e/pense "ut (3en t3ese are paid to men employed to create an
asset t3ese s3ould "e capitaliKed as t3e cost of asset.
134
Freig%" an* Carriage > normally a re8enue e/pense9 "ut (3en paid to "ring an asset to its
intended use t3en it is treated as capital.
In"eres" on Loan > is normally re8enue e/penditure "ut (3en t3e loan is ta)en to purc3ase an
asset its interest is treated as Capital and is added to cost of t3e asset.
Ca-i"a& an* 7e#en'e 7e!ei-"s

Ca-i"a& 7e!ei-"s

Receipts (3ic3 are non=recurring and (3ose "enefits are enAoyed o8er a long period are called FCapital
ReceiptsG. 'or instance9 Capital in8ested9 5oan from "an)9 Sale proceed of fi/ed assets etc. Capital
receipts are s3o(n on t3e lia"ility side of t3e "alance s3eet.

7e#en'e 7e!ei-"s

Receipts (3ic3 are recurring "y nature and (3ic3 are a8aila"le for meeting all day to day e/penses of a
"usiness concern are )no(n as FRe8enue ReceiptsG. 'or e/ample9 sale proceeds of goods9 interest
recei8ed9 rent recei8ed etc.
135
Lesson-22
BAN8 7ECONCILIATION STATEMENTS

After reading t3is lecture9 you (ill "e a"le to understand t3at0
J3at are Ban)ing transactions9 and
Eo( a Ban) reconciliation statement is madeD

Ban6 Boo6 an* Ban6 S"a"e/en"

Ban) statement is t3e detail of transactions in oneGs account pro8ided "y t3e "an).
Je s3ould understand one t3ing t3at our money lying in t3e "an) is an asset for us. But for "an)9 it is a
lia"ility as t3e "an) 3as a responsi"ility to return t3at money to us.
T3erefore9 (3en (e see a "an) statement9 it loo)s li)e a mirror image of our "an) "oo). T3at is9 (3en
(e ,customer- in8est money into "an) account9 our asset ,Ban) account- increases. So (e !e"it our
account. J3ereas "an)Gs lia"ility increases. As t3e customer account is t3e lia"ility for t3e "an) "ecause it
3as to pay t3e in8ested money "ac) to t3e customer. So our account is credited in its "oo)s.

Standard format of Ban) "oo) is gi8en 3ereunder0

N=Q Tra*ers Ban6 Boo6 9Ban6 A!!o'n" N'/ber: A!!o'n" Co*e --
!ate
2.==
2r.
P
C31.
Ho.
Harration;4articulars 5edger
Code
Receipt
Amount
4ayment
Amount
Balance
!r;,Cr-
Nul .1 Ipening Balance %.9... %.9...
Nul .2 1234% 4aid to 7r. :mer 1.9... 4.9...
Nul .3 Cas3 !eposit in Ban) %9... 4%9...
Nul .3 1234& 4aid to 7r. Ali 129... 339...

Standard format of Ban) Statement is gi8en 3ereunder0

ABC Ban6 Ban6 S"a"e/en" A!!o'n" No. >>>>>
!ate
2.==
Harration ;
4articulars
Jit3dra(als
Amount
!eposits
Amount
Balance
!r;,Cr-
Nul .1 Ipening Balance as on Nul .1 %.9... ,%.9...-
Nul .2 C31 P 1234% 1.9... ,4.9...-
Nul .3 Cas3 paid in %9... ,4%9...-
Nul .3 C31 P 1234& 129... ,339...-

At times9 "an)s s3o( t3e amount in "alance column against our ?eneral Rule ,a credit "alance is s3o(n
in "rac)ets-9 Aust to facilitate t3e customers. T3e rule t3en "ecomes0
1. A "alance fa8ora"le to t3e customer is s3o(n (it3out "rac)ets
2. A "alance fa8ora"le to "an) is s3o(n (it3in "rac)ets

136

Iur "an) statement of pre8ious e/ample (ill loo) li)e as follo(s.

ABC Ban6 Ban6 S"a"e/en" A!!o'n" No. >>>>>
!ate
2.==
Harration ; 4articulars
Jit3dra(als
Amount
!eposits
Amount
Balance
Nul .1 Ipening Balance as on Nul .1 %.9... %.9...
Nul .2 C31 P 1234% 1.9... 4.9...
Nul .3 Cas3 paid in %9... 4%9...
Nul .3 C31 P 1234& 129... 339...

At times9 "an)s record transactions in our account (it3out our )no(ledge. e.g. "an) c3arges9 profit9 ta/.
Sometimes9 someone deposits money directly in our account t3at escapes recording in our "oo)s. T3is
pro"lem is sol8ed "y tracing figures from "an) "oo) to "an) statement on periodic "asis in order to
update our record.

E>a/-&e G 1

T3e Ban) "oo) of Ali Traders s3o(s t3e follo(ing picture for t3e mont3 of Nuly9 2..20

Ali Traders Ban) Boo) ,Ban) Account Hum"er- Account Code ==
!ate
2.==
2r.
P
C31.
Ho.
Harration ;4articulars 5edger
Code
Receipt
Amount
4ayment
Amount
Balance
!r;,Cr-
Nul .1 Ipening Balance 1%.9... 1%.9...
Nul .% ...1 4aid to RQS 2.9... 13.9...
Nul 1. Cas3 !eposit in Ban) %9... 13%9...
Nul 1% ...2 4aid to ABC 2%9... 11.9...
Nul 2. ...3 4aid to creditors %.9... &.9...

Balance as per "an) "oo) on Nuly 319 is Rs. &.9....

T3e Ban) Statement of Ali Traders s3o(s t3e follo(ing record for t3e mont3 of Nuly9 2..20

ABC Ban)
Ban) Statement Account Ho. /////
'or t3e period ofUUUUUUUUUUUUUUU
!ate
2.==
Harration ;
4articulars
Jit3dra(als
Amount
!eposits
Amount
Balance
Nul .% C31 P ...1 2.9... 13.9...
Nul 1% C31 P ...1 2%9... 11.9...
Nul 2. C31 P ...1 %.9... &.9...
Nul 31 Ban) c3arges %.. %+9%..
Nul 31 4rofit .. &.92..
137

Balance as per "an) statement on Nul 319 is Rs. &.92..

J3en (e trace t3e figures9 (e come to )no( t3at t3ere are t(o transactions t3at 3a8e not "een recorded
in our "oo)s. i=e. Transactions of FBan) c3argesG and F4rofitG

After recording t3ese t(o transactions9 t3e "an) "oo) of Ali Traders loo)s li)e as follo(s0

A&i Tra*ers Ban6 Boo6 9Ban6 A!!o'n" N'/ber: A!!o'n" Co*e --
!ate
2.==
2r.
P
C31.
Ho.
Harration ;
4articulars
5edger
Code
Receipt
Amount
4ayment
Amount
Balance
!r;,Cr-
Nul .% ...1 4aid to RQS 2.9... 13.9...
Nul 1% ...2 4aid to ABC 2%9... 11.9...
Nul 2. ...3 4aid to creditors %.9... &.9...
Nul 31 Ban) c3arges %.. %+9%..
Nul 31 4rofit .. &.92..

After recording t3e missing transactions9 Balance as per "an) "oo) on Nul 319 is Rs. &.92..9 (3ic3 is t3e
same as "an) statement "alance.

*n t3e a"o8e e/ample9 dates of payments in "an) "oo) and "an) statement are ta)en to "e t3e same. *n
actual life9 t3is is not al(ays t3e case. Je (rite out c3e1ue to our creditor today9 3e (ill deposit in 3is
"an) tomorro(. T3e c3e1ue (ill "e presented in our "an) "y t3e creditor on t3e day after tomorro(. Je
3a8e recorded t3e transaction today "ut t3e payment in our statement (ill appear at least 2 days later.
T3is period can e8en "e greater.

Similarly9 (e recei8e a c3e1ue from our de"tor today and record it in our "oo)s. T3e c3e1ue (ill "e
deposited in "an) tomorro( and it (ill ta)e a fe( days to clear. Again9 t3ere (ill "e a difference in date
of our receipt and t3at of our "an).

Ban6 7e!on!i&ia"ion S"a"e/en"

*n t3e a"o8e e/ample9 it is assumed t3at a payment of Rs. 1.9... is made on 31 Nul9 and it appears in t3e
"an) on Aug9 .2. J3en figures (ill "e traced from "an) "oo) to "an) statement9 t3is amount (ill remain
un=tic)ed in t3e "an) "oo) in t3e mont3 of Nuly. Ho recording (ill "e made in t3e "oo)s as t3ey are
already correct.

:nder suc3 circumstances9 a statement called Ban6 7e!on!i&ia"ion S"a"e/en" is made. T3is reconciles
t3ose differences in Ban) Boo) and Ban) Statement t3at cannot "e adAusted "y an accounting entry at
t3at date on (3ic3 "alances are "eing reconciled.

Un-resen"e* C%e;'es

T3e e8ents discussed in a"o8e e/ample9 (3ere a c3e1ue is issued "ut it 3as not "een presented in t3e
account9 suc3 )ind of c3e1ues are called Un--resen"e* C%e;'es. J3en t3is c3e1ue is recorded9 t3e
"an) "oo) is credited (it3 Rs. 1.9.... T3erefore9 t3e "alance as per Ban) Boo) is Rs. %.92.. ,&.92.. =
1.9...-9 (3ereas9 t3e "an) is still s3o(ing a "alance of Rs. &.92...

So9 if (e (ant to reconcile t3ese "alances9 (e (ill remo8e t3e effect of t3is entry ,not in actual "oo)s "ut
in t3e statement only-. So t3e Statement Jould0
138
Balance As 4er Ban) Boo) !r. %.92..
:n=presented C3e1ues !r. 1.9...
Balance as 4er Ban) Statement Cr. &.92..

Hote t3e follo(ing t3ings in t3e a"o8e statement0
Je 3a8e started (it3 t3e "alance of Ban) Boo)
To re8erse t3e effect of Cr. entry in "an) "oo)9 (e 3a8e (ritten !r. (it3 t3e figure.
Since "ot3 figures ,%.92.. and 1.9...- are !r. t3erefore9 t3ey are added.
Je also )no( t3at "alances in "an) "oo) and "an) statement are e/actly opposite to eac3
ot3er9 t3erefore9 Cr. 3as "een (ritten (it3 t3e resulting figure ,&.92..-

Un-Cre*i"e* C%e;'es
T3e ot3er e8ent discussed (as of a receipt of a c3e1ue t3at 3as not "een cleared in t3e "an) account as
yet. To record a receipt9 "an) "oo) s3ould 3a8e "een de"ited. T3erefore9 to re8erse t3e effect of Credit
(ill "e (ritten (it3 t3e figure in t3e statement.

Assume t3at t3e a"o8e Rs. 1.9... (as a receipt rat3er t3an a payment. T3en9 t3e "alance in t3e "an)
"oo) (ould "e Rs. .92.. ,&.92.. M 1.9...-.

T3e "an) reconciliation (ill "e as follo(s0

Balance As 4er Ban) Boo) !r. .92..
:n=credited C3e1ues Cr. ,1.9...-
Balance As 4er Ban) Statement Cr. &.92..

E>a/-&e G 3

T3e Ban) "oo) of :sman Traders gi8es t3e follo(ing record for t3e mont3 of !ecem"er9 2..20

Us/an Tra*ers Ban6 Boo6 9Ban6 A!!o'n" N'/ber: A!!o'n" Co*e --
!ate
2.==
2r.
P
C31.
Ho.
Harration ;
4articulars
5edger
Code
Receipt
Amount
4ayment
Amount
Balance
!r;,Cr-
!ec .1 Ipening Balance 1%.9... 1%.9...
!ec . Recei8ed form An(er 1.9... 1&.9...
!ec .$ %... 4aid to Tari1 1+9%.. 14.9%..
!ec 1% %..1 4aid to S3a""ir 49... 13&9%..
!ec 22 Recei8ed from Na8ed +9.. 14&92..
!ec 2$ %..2 4aid to Salim +91.. 1391..
!ec 31 Recei8ed from Na8ed 2.9... 1%91..
!ec 31 Recei8ed form Ras3id 19$.. 149+..
!ec 31

139
T3e Ban) Statement of :sman Traders s3o(s t3e follo(ing picture0

ABC Ban) Ban) Statement Account Ho. /////
!ate
2.==
Harration ;
4articulars

Jit3dra(als
Amount
!eposits
Amount
Balance
!ec 1 Balance B;f 1%.9...
!ec deposits 1.9... 1&.9...
!ec 11 %... 1+9%.. 14.9%..
!ec 2. %..1 49... 13&9%..
!ec 22 deposits +9.. 14&92..
!ec 31 C3arges 292.. 1449...

Qou are re1uired to reconcile Ban) "oo) (it3 Ban) Statement and prepare Ban) Reconciliation
Statement.

So&'"ion
J3ile tracing figures from "an) "oo) to "an) reconciliation statement9 it is noticed t3at "an) c3arges
deducted "y "an) are not "oo)ed in "an) "oo). So9 "an) c3arges (ill "e "oo)ed t3roug3 t3e follo(ing
adAusting entry0

1ebi"D Ban) c3arges 292..
Cre*i"D Ban) A;c 292..
T3e corrected "an) "oo) is 3ereunder0
Us/an Tra*ers Ban6 Boo6 9Ban6 A!!o'n" N'/ber: A!!o'n" Co*e --
!ate
2.==
2r.
P
C31.
Ho.
Harration ;
4articulars
5edger
Code
Receipt
Amount
4ayment
Amount
Balance
!r;,Cr-
!ec .1 Ipening Balance 1%.9... 1%.9...
!ec . Recei8ed form An(er 1.9... 1&.9...
!ec .$ %... 4aid to Tari1 1+9%.. 14.9%..
!ec 1% %..1 4aid to S3a""ir 49... 13&9%..
!ec 22 Recei8ed from Na8ed +9.. 14&92..
!ec 2$ %..2 4aid to Salim +91.. 1391..
!ec 31 Recei8ed from Na8ed 2.9... 1%91..
!ec 31 Recei8ed form Ras3id 19$.. 149+..
!ec 31 Ban) c3arges 292.. 129..

*t (as also noticed t3at a c3e1ues of Rs. +91.. gi8en to Salim on !ecem"er 2$ (as not paid "y "an) as
yet. So9 it is an un=presented c3e1ue. C3e1ues recei8ed from Na8ed and Ras3id (ort3 of Rs. 2.9... and
19$.. respecti8ely are not credited "y "an) till !ecem"er 319 2..2. T3ese are un=credited c3e1ues of
:sman Traders.
Ban) Reconciliation Statement of :sman Traders s3o(s t3e follo(ing picture0
Us/an Tra*ers
As a" 1e!. 41F 3003
,Rs.-
Balance as per "an) "oo) !r.129..
:n=presented c3e1ues !r. +91..
:n=credit c3e1ues ,2.9...-
,19$..- Cr.,39$..-
Balance as per "an) statement Cr. 1449...

140
Lesson-23
BAN8 7ECONCILIATION STATEMENTS 9Con"*.:

*n t3e last lecture9 (e studied (3at is Ban) Statement and 3o( does it differ from our Ban) Boo). Je
told you t3at money lying in our "an) account is our asset. T3erefore9 it usually 3as a !#B*T
BA5AHC#. Also9 (3en (e deposit cas3 in our Ban)9 (e !#B*T t3e Ban) Boo) ; Ban) Account.
J3ereas9 for Ban)9 t3e money lying in our Ban) Account is a lia"ility t3at "an) 3as to return to us.
T3erefore9 in Ban) Statement (3ic3 is a ledger account for "an) normally 3as a CR#!*T BA5AHC#.
J3en (e deposit cas3 in our "an) account t3e lia"ility of t3e "an) to pay us increases. T3erefore9 our
account in t3e Boo)s of Ban) is CR#!*T#!. Ban) Statement is9 t3erefore9 a 7*RRIR *7A?# of our
"an) "oo).

T3en9 (e studied a"out t3e reasons t3at create differences "et(een our "an) "oo) and "an) statement.
Suc3 as0
Ban) C3arges de"ited to our "an) account "y t3e "an) (it3out our )no(ledge
4rofit credited to our "an) account
4ayments made on our "e3alf "y t3e "an)9 t3roug3 our standing instructions9 t3at (e did not
record in our "oo)s
7oney paid in our account "y our customers9 dealers9 agents9 etc. (it3out our )no(ledge
:n=presented c3e1ues
:n=cleared c3e1ues

T3e last t(o reasons arise "ecause (e record payments or receipts in our "oo)s (3en (e recei8e ; issue
a c3e1ue. But t3e "an) records t3e transaction in our account at t3e time of actual receipts or payments.
T3ese differences are included in t3e "an) reconciliation statement.

T3e first four items are eit3er adAusted in t3e "an) "oo) or s3o(n in t3e reconciliation statement9
depending upon (3et3er (e 3a8e closed our "oo)s for t3e period or not. *f (e 3a8e closed our "oo)s of
accounts9 t3ese differences (ill "e presented in t3e "an) reconciliation statement. *f our "oo)s of
accounts are not closed as yet9 (e (ill adAust our "an) "oo) and gi8e effect of all t3ese adAustments in t3e
"an) "oo).

T3e main idea "e3ind "an) reconciliation is t3at (e adAust our "an) "oo) for t3e transactions9 t3at
remain untraced9 eit3er t3roug3 a 2ouc3er ,c3arges9 profit9 standing instruction- or t3roug3 a
Reconciliation Statement ,un=presented9 un=credited c3e1ues-.

E>a/-&e G 1

'rom t3e follo(ing particulars9 prepare Ban) reconciliation statement of 7r. Ha8eed as on Nune 3.9
2..2.

Balance as per "an) "oo) !r. 329...
C3e1ues deposited "ut not yet collected "y "an) 2.92..
C3e1ues issued "ut not yet paid "y "an) 139...
!i8idend credited "y "an) on Nune 3.9 "ut t3e intimation
(as recei8ed later 29...
*nterest credited "y "an) 2%.
Ban) c3arges de"ited "y "an) %.

*t is assumed t3at "oo)s of accounts are not closed yet.

141

So&'"ion

As "oo)s of accounts are not closed9 (e (ill find out t3e adAusted "alance first0
Rs.
Balance as per "an) "oo) !r. 329...
Add;!e"it !i8idend credited "y "an) !r. 29...
Add;!e"it *nterest credited "y "an) !r. 2%.
5ess;Credit Ban) c3arges Cr. ,%.-

AdAusted "alance as per "an) "oo) !r. 3492..

T3ese adAustments in t3e ledger account of "an) (ill loo) li)e as follo(s0

7r. Ha8eed Ban) Boo) ,Ban) Account Hum"er- Account Code ==
!ate
2.==
2r.
P
C31.
Ho.
Harration ;
4articulars
5edger
Code
Receipt
Amount
4ayment
Amount
Balance
!r;,Cr-
Nun3. Balance B;f 329... 329...
Nun3. !i8idend recei8ed 29... 349...
Nun3. *nterest recei8ed 2%. 3492%.
Nun3. Ban) c3arges %. 3492..

7s.
Balance as per "an) "oo) !r. 3492..
Add0 :n=presented c3e1ues !r. 139...
5ess0 :n=credited c3e1ues ,Cr.- ,2.92..-

Balance as per "an) statement Cr. 29...

*n t3is e/ample9 "oo)s of accounts are not closed9 all ot3er transactions e/cept un=presented c3e1ues and
un=credited c3e1ues9 (ill "e recorded in t3e "an) "oo) "y passing Aournal entries and adAusted "alance of
"an) "oo) (ill "e presented in t3e "an) reconciliation statement.

To t3is point9 (e 3a8e considered a fa8oura"le "alance i.e. !e"it in "an) "oo) and Credit in "an)
statement. But t3ere is a possi"ility t3at (e may 3a8e an unfa8oura"le "alance.

T3is can 3appen if (e 3a8e ta)en a loan from our "an).Je can also call it an o#er*ra." i.e. (e 3a8e
dra(n more money from our "an) t3an (e 3ad deposited in it. T3e reconciliation procedure (ould "e
t3e same as "efore.

T3e solution of a"o8e e/ample (ill s3o( t3e follo(ing picture0

So&'"ion
As "oo)s of accounts are not closed9 (e (ill find out t3e adAusted "alance first0
Rs.
Balance as per "an) "oo) Cr. ,329...-
Add;!e"it !i8idend credited "y "an) !r. 29...
Add;!e"it *nterest credited "y "an) !r. 2%.
5ess;Credit Ban) c3arges Cr. ,%.-

AdAusted "alance as per "an) "oo) !r. ,3492..-
142

T3ese adAustments in t3e ledger account of "an) (ill loo) li)e as follo(s0

Mr. Na#ee* Ban6 Boo6 9Ban6 A!!o'n" N'/ber: A!!o'n" Co*e --
!ate
2.==
2r.
P
C31.
Ho.
Harration ;
4articulars
5edger
Code
Receipt
Amount
4ayment
Amount
Balance
!r;,Cr-
Nun3. Balance B;f 329... ,329...-
Nun3. !i8idend
recei8ed
29... ,349...-
Nun3. *nterest recei8ed 2%. ,3492%.-
Nun3. Ban) c3arges %. ,3492..-

7s.
Balance as per "an) "oo) Cr. ,3492..-
Add0 :n=presented c3e1ues !r. 139...
5ess0 :n=credited c3e1ues ,Cr.- ,2.92..-

Balance as per "an) statement !r. ,4194..-

*n t3is case t3e "alance of "an) statement is de"it "ecause t3is amount is recei8a"le "y "an)L it is an asset
of t3e "an). In t3e ot3er 3and9 t3is "alance is a credit "alance in "an) "oo)9 it is paya"le to "an) "y t3e
"usiness. So9 it is a lia"ility of t3e "usiness.

Balance of "an) statement in t3e first case does not matc3 (it3 t3e "alance calculated a"o8e. T3e reason
"eing9 t3e "alance in t3e first solution (as de"it9 i=e. Balance (as our asset and dra(ing more money
from "an) reduced our asset. In t3e ot3er 3and9 "alance in t3is case is credit9 i=e. Je 3a8e already dra(n
more t3an (3at (e 3a8e deposited in t3e "an). So9 it is our lia"ility. T3is "alance is s3o(n (it3 negati8e
sign. So9 (3en (e add;de"it any amount9 it (ill reduce our lia"ility and (3en (e less;credit any amount
from "an)9 it (ill en3ance our lia"ility. T3is difference in treatment (ill result in a different "alance of
"an) statement.

E>a/-&e G 3

'rom t3e follo(ing data ascertain t3e "alance as per "an) statement of Ras3id 6 Co on 7arc3 319 2.==
Balance as per "an) "oo) Rs. +9...
C3e1ues issued "ut not presented for payment Rs. 249....
C3e1ues deposited "ut not cleared Rs. 3%9...
*nterest on deposit (as credited "y "an) "ut not de"ited in "an) "oo) Rs. 19....
A customer paid into "an) directly Rs. 139... "ut t3e same (as not recorded in "an) "oo).
It3er receipts in "an) t3at (ere not recorded in "an) "oo) Rs. 2.9....

So&'"ion

*n suc3 an e/ample9 (3ere "an) reconciliation statement is not re1uired t3e ans(er (ill s3o( only (3at
is re1uired i.e. t3e "alance t3at s3ould appear in Ban) Statement. J3ereas9 t3e reconciliation statement is
prepared in Jor)ing ; Roug3 Jor)

143

5etGs see t3e solution no(0
Ras3id 6 Co.
Balance as per Ban) Statement
As on 7arc3 219 2.UUUUUUUU
$or6ing

Balance as per Ban) Boo) +9...
Add :n presented c3e1ues 249...
5ess :n credited c3e1ues ,3%9...-
Add *nterest recei8ed 19...
Add amount deposited "y customer 139...
Add ot3er receipts in "an) 2.9...
Ba&an!e as -er ban6 s"a"e/en" 103F000

As t3is is a (or)ing9 t3erefore9 (e 3a8e put all t3e items in t3e statement. *f t3e 1uestion 3ad re1uired t3e
adAusted "an) "oo) "alance9 t3en9 (e (ould 3a8e adAusted items 39 4 and % first and t3en prepared t3e
reconciliation statement.
Similarly9 t3e 1uestion could 3a8e gi8en us t3e "alance as per "an) statement and re1uired us to calculate
"an) "oo) "alance.
5etGs see 3o( (e (ill (or) out t3e "alance of "an) "oo)0

Ras3id 6 Co.
Balance as per Ban) Statement
As on 7arc3 219 2.UUUUUUUU

Balance as per Ban) Statement 1.29...
5ess :n presented c3e1ues ,249...-
Add :n credited c3e1ues 3%9...
5ess *nterest recei8ed ,19...-
5ess amount deposited "y customer ,139...-
5ess ot3er receipts in "an) ,2.9...-
Ba&an!e as -er ban6 boo6 JLF000

7e!"i.i!a"ion o. Error

*n t3e "eginning of t3is lecture9 (e also said t3at one reason for a difference "et(een "alance of "an)
"oo) and "an) statement could "e a mista)e made "y us in recording transactions. Suc3 differences are
remo8ed "y ma)ing an adAusting entry t3roug3 Nournal 2ouc3er9 (3ic3 is also called re!"i.i!a"ion o.
error.

Any ot3er error (3en rectified ; corrected (ould also "e termed as Rectification of #rror.

'or #/ample9 assume t3at (e recei8ed cas3 Rs. %.9... from a de"tor and instead of !e"iting t3e Cas3
Boo) ; Cas3 Account9 (e de"ited t3e Ban) Boo)9 (3ereas t3e credit (as gi8en to t3e correct account.
Ho( (e 3a8e o8erstated "an) "oo) "y Rs. %.9... and understated t3e cas3 "oo) "y t3e same amount.
To correct t3is9 (e (ill 3a8e to reduce credit "an) and increase de"it cas3 "y Rs. %.9....
So t3e entry (ill "e0

!e"it Cas3 Account %.9...
Credit Ban) Account %.9...

After posting t3is transaction9 our "an) "oo) (ill "e reconciled if all ot3er items 3a8e "een ta)en into
account.
144
Je can prepare a general procedure for rectification of errors.

Step 1 Hote do(n t3e correct entry
!e"it0 Cas3 %.9...
Credit0 Creditors %.9...

Step 2 Hote do(n t3e incorrect entry
!e"it0 Ban) %.9...
Credit0 Creditors %.9...

Step 3 See t3at Credit effect is correct. *n case of !e"it9 effect 3as "een gi8en to Ban)9 instead
of cas3. T3erefore9 (e (ill gi8e t3e due effect to Cas3 "y de"iting it and Remo8e t3e
incorrect effect from "an) "y crediting it.
!e"it0 Cas3 Account %.9...
Credit0 Ban) Account %.9...

T3is is one type of error (3ere entry 3as "een posted in incorrect account "ut (it3 t3e correct amount.

It3er errors t3at may occur (3ile recording are as follo(s0
A transaction is completely omitted. 'or e/ample9 in our a"o8e e/amples9 (e 3ad not recorded
t3e "an) c3arges or t3e payment made "y our customers directly in our "an).
T3is type of errors is simple to rectify. T3e entry t3at (as re1uired at t3e time (3en e8ent is
recorded and comes to our )no(ledge.
T3e entry is recorded in correct account "ut (it3 incorrect amount. 'or e/ample9 #lectricity "ill
of Rs. 19... paid in cas3 is recorded as Rs. 1.. in correct 3ead. *n t3is case9 rectification (ill "e
done "y follo(ing entry0

!e"it #lectricity +..
Credit Cas3 +..

,T3is (ill increase t3e e/pense to Rs. 19... and decrease t3e cas3 to t3e correct amount.-

In t3e ot3er 3and9 if t3e entry (as recorded at 1.9.... T3en a re8ersal entry (ill "e posted to
correct t3e effect.
!e"it0 Cas3 +9...
Credit0 #lectricity +9...

Anot3er type of error could "e Jrong Eead of Account (it3 (rong amount. 'or e/ample9
4urc3ase of 8e3icle (ort3 Rs. %..9... t3roug3 c3e1ue is recorded as 8e3icle repair Rs. %.9....

T3e Correct #ntry (ould 3a8e "een0
!e"it0 2e3icle %..9...
Credit0 Ban) %..9...

T3e (rong entry t3at (e posted is0
!e"it0 2e3icle repair %.9...
Credit0 Ban) %.9...

Rectification (ill "e as follo(s0
!e"it0 2e3icle %..9...
Credit0 Ban) 4%.9...
Credit0 2e3icle Repair %.9...

Je can9 t3erefore9 use t3is met3od to rectify any mista)e.

145
Lesson- 24
1EBTO7SF C7E1ITO7SF ACC7UALS AN1 P7OVISION FO7 BA1 1EBTS
Cre*i"ors

Creditors are t3e t3ird persons;parties9 (3o o(e money from t3e "usiness. T3ese are paya"les of t3e
"usiness against purc3ase of goods for resale purposes. *t is lia"ility of t3e "usiness and is s3o(n in
"alance s3eet under t3e 3eading of Fcurrent lia"ilitiesG.

J3ile studying FAccounting for Stoc)sG9 (e studied a"out t3e accounting for Creditors and studied
follo(ing transactions0

4urc3ase of ?oods on credit
!e"it0 Stoc)s Account
Credit0 Creditors Account
?oods Returned
!e"it0 Creditors Account
Credit0 Stoc)s Account
At t3e time of 4ayment
!e"it0 Creditors Account
Credit0 Cas3 ; Ban) Account

1is!o'n" 7e!ei#e*

At times9 (e recei8e discounts from our creditors. T3is discount is eit3er treated as income of t3e
"usiness or as a reduction in t3e cost of stoc).
!e"it0 Creditors
Credit0 !iscount Recei8ed IR Stoc)

A!!r'e* E>-enses

J3en an e/pense or ot3er paya"le is accrued9 it also creates a current lia"ility "ut it is not recorded as
Creditors. *t is s3o(n separately as accrued e/penses or e/penses paya"le. T3e recording of t3ese is as
follo(s0

At t3e time of recording Accrual
!e"it0 Rele8ant #/pense Account
Credit0 Accrued #/penses ; #/penses 4aya"le
*n case of any su"se1uent reduction in t3e e/pense
!e"it0 Accrued #/penses ; #/penses 4aya"le
Credit0 Rele8ant #/pense Account
At t3e time of ma)ing payment
!e"it0 Accrued #/penses ; #/penses 4aya"le
Credit0 Cas3 ; Ban)

1i..eren!e Be",een A!!r'a& C Pro#ision

Bot3 t3ese terms are used to record an e/pense "ut (it3 a minor difference0
Accrual is recorded9 (3en e/act amount of e/pense is )no(n at t3e time of recording. 'or
e/ample9 (3en salaries are accrued at t3e end of mont39 a definite amount is )no(n. *t is9
t3erefore9 treated as Accrual.
4ro8ision is made9 (3en it is )no(n t3at an e/pense (ill arise "ut t3e e/act amount is not
)no(n. 'or e/ample9 at t3e end of t3e mont39 (3en (e record t3e e/pense of utilities9 t3e e/act
amount is not )no(n. T3erefore9 a pro8ision for t3ese e/penses is made.

146
A!!o'n"ing Trea"/en" o. Pro#ision
Recording of 4ro8isions is done Aust li)e Accruals.

At t3e time of recording 4ro8ision0
!e"it0 Rele8ant #/pense Account
Credit0 4ro8isions

At t3e time (3en e/act amount is )no(n9 t3e pro8ision is adAusted "y !e"iting or Crediting9 to "ring it
to t3e e/act amount of e/pense. It3er effect is gi8en to t3e account t3at (as originally de"ited in a"o8e
transaction.

At t3e time of ma)ing payment
!e"it0 4ro8isions
Credit0 Cas3 ; Ban)

Creditors9 Accruals and pro8isions are s3o(n under current lia"ilities in t3e "alance s3eet.

1eb"ors
!e"tors are t3e t3ird persons;parties9 from (3om "usiness o(es money. T3ese are recei8a"les of t3e
"usiness against sale of goods. *t is an asset of t3e "usiness and is s3o(n in t3e "alance s3eet under t3e
3eading of Fcurrent assetsG.

A!!o'n"ing Trea"/en"

Je studied at t3e time of sale of ?oods t3at Cost of goods sold is de"ited and 'inis3ed ?oods Stoc) is
credited.

T3e ot3er entry t3at is "oo)ed is as follo(s0
!e"it0 Cas3 ; Ban) ; !e"tors
Credit0 Sales ; Re8enue
At t3e time of receipt
!e"it0 Cas3 ; Ban)
Credit0 !e"tors

J3en goods sold to de"tors are returned follo(ing entries are "oo)ed0
!e"it0 Sales
Credit0 !e"tors
,Jit3 t3e sale 8alue of goods returned-
!e"it0 'inis3ed ?oods Stoc)
Credit0 Cost of ?oods Sold
,Jit3 t3e cost of goods returned-
T3is essentially re8erses t3e effect of transactions recorded at t3e time of sale of goods

Ba* 1eb"s

J3en goods are sold on credit t3e "usiness ta)es t3e ris) t3at some of t3e customers may ne8er pay for
t3e goods sold to t3em. J3en a de"tor does not pay t3e amount due to 3im9 it is said to "e a "ad de"t.
T3is is a loss sustained as a result of a ris) ta)en in t3e normal course of "usiness. *t is c3arged to 4rofit
and 5oss Account in t3e period in (3ic3 it is sustained.

7e!or*ing o. Ba* 1eb"s
*n case of sales return9 t3ere (ere t(o entries to record9 one to record a reduction of de"tors and t3e
ot3er to record receipt of stoc). *n case of "ad de"ts9 de"tors are reduced "ut no stoc) is returned.
147
T3erefore9 only one entry is passed9 (3ere"y !e"tors are reduced and an e/pense is created titled BBad
!e"tsC
!e"it0 Bad !e"ts
Credit0 !e"tors a;c

At t3e time of preparing financial statements (e 3a8e follo(ing o"Aecti8es0
To c3arge all t3e e/penses for t3e period against t3e income.
To s3o( t3e figures in t3e "alance s3eet t3at present a true picture of financial position of t3e
"usiness as at t3at date.

T3erefore9 if it "ecomes o"8ious t3at some of t3e de"tors may not pay t3e amount due to t3em9 (e need
to c3arge t3at recei8a"le to profit and loss. 5i)e (e said earlier9 an accrual or e/pense is recorded (3en
t3e definite amount is )no(n9 ot3er(ise9 a pro8ision is made. Same is t3e case (it3 de"tors. J3en t3ere
is an indication t3at some de"tors may not pay9 a pro8ision is created.

7e!or*ing o. Pro#ision

!e"it0 4ro8ision for Bad !e"ts ,465-
Credit0 4ro8ision for Bad !e"ts
T3e de"it account is c3arged against current years profit and t3e credit 3ead is s3o(n as a deduction
from de"tors in t3e "alance s3eet.

Presen"a"ion o. Pro#ision .or Ba* 1eb"s

E>"ra!" o. P C L "o s%o, "%e Pro#ision

4rofit and 5oss Account for t3e year ended Nune 3.9 2.Z

?ross 4rofit /////
5ess0 Admin #/penses
4ro8ision for "ad de"ts ,%9...-

E>"ra!" o. Ba&an!e S%ee" "o s%o, "%e Pro#ision

C'rren" Asse"s

!e"tors 1..9...
4ro8ision for Bad !e"ts ,%9...- +%9...

Ba* 1eb"s C Pro#ision For Ba* 1eb"s

J3en t3e "ad de"t for (3ic3 pro8ision is already made is confirmed9 follo(ing entry is passed0

!e"it0 4ro8ision for Bad !e"ts
Credit0 !e"tors

As e/pense 3as already "een c3arged9 t3erefore9 no effect is gi8en to 465 at t3is point.

Reducing t3e pro8ision

!e"it0 4ro8ision for Bad !e"ts ,Balance S3eet-
Credit0 4ro8ision for Bad !e"ts ,465-
*ncreasing t3e pro8ision

148
E>a/-&e G 1

'ollo(ing information is a8aila"le for A""as 5td. for t3e year ended Nune 3.9 2..2.
Bad !e"ts !uring t3e year
Ho8em"er 1..
Nanuary $.
April 3%.
At t3e year end total de"tors amounted to Rs. 3%9... out (3ic3 Rs. 19$.. is considered to "e "ad.
S3o( t3e "ad rele8ant accounts and e/tracts from 465 and Balance S3eet.

So&'"ion

Abbas L"*. Ba* 1eb"s A!!o'n" A!!o'n" Co*e --
!ate
2..2
2r.
P
Harration ; 4articulars 5edger
Code
!R.
Amount
CR.
Amount
Balance
!r;,Cr-
Ho8 Bad !e"ts 1.. 1..
Nan Bad !e"ts $. $$.
Apr Bad !e"ts 3%. 1923.

Abbas L"*. Pro#ision .or Ba* 1eb"s A!!o'n" 9B<S: A!!o'n" Co*e --
!ate
2..2
2r.
P
Code
!R.
Amount
CR.
Amount
Balance
!r;,Cr-
Nune 4ro8ision for Bad !e"ts 19$.. ,19$..-

A""as 5td. 4ro8ision for Bad !e"ts Account ,465- Account Code ==
!ate
2.==
2r.
P
Code
!R.
Amount
CR.
Amount
Balance
!r;,Cr-
Nun 4ro8ision for Bad !e"ts 19$.. 19$..

Presen"a"ion in Pro.i" C Loss A!!o'n"

Abbas L"*.
For "%e )ear en*e* 5'ne 40F 3003.

?ross 4rofit /////
Bad !e"ts ,1923.-
4ro8ision for "ad de"ts ,19$..-

149
Presen"a"ion in Ba&an!e S%ee"
Abbas L"*.
Ba&an!e S%ee"
As On 5'ne 40F 3003
C'rren" Asse"s

!e"tors 3%9...
4ro8ision for Bad !e"ts ,19$..- 44F300

E>a/-&e G 3

A "usiness creates a pro8ision for "ad de"ts V %T of its de"tors on "alance s3eet date.
In Nuly .19 2..1 t3e "alance of 4ro8ision (as 394...
!uring t3e year de"ts (ritten off amounted to Rs. %9....
In Nune 3.9 2..29 de"tors totaled Rs. %9....
S3o( Bad de"ts Account and pro8ision for "ad de"ts account.

So&'"ion

T3e re1uired closing "alance of 4ro8ision is Rs. 39%. ,%... / %T-. T3erefore a furt3er pro8ision of Rs.
3%. ,39%. > 394..- (ill 3a8e to "e created.

Ba* 1eb"s A!!o'n" A!!o'n" Co*e --
!ate
2..2
2r.
P
Code
!R.
Amount
CR.
Amount
Balance
!r;,Cr-
Nune
3.
Bad !e"ts %9... %9...

Pro#ision .or Ba* 1eb"s A!!o'n" 9B<S: A!!o'n" Co*e --
!ate 2r.
P
Harration ;
4articulars
5edger
Code
!R.
Amount
CR.
Amount
Balance
!r;,Cr-
Nuly.19
2..1
I;B 394.. ,394..-
Nune3.9
2..2
4ro8ision for "ad
de"ts
3%. ,39%.-

Pro#ision .or Ba* 1eb"s A!!o'n" 9PCL: A!!o'n" Co*e --
!ate
2..2
2r.
P
Harration ;
4articulars
5edger
Code
!R.
Amount
CR.
Amount
Balance
!r;,Cr-
Nune3. 4ro8ision for Bad
!e"ts
3%. 3%.

150
Lesson-25
P7OVISION FO7 BA1 1EBTS AN1 CONT7OL ACCOUNTS


T3e de"it account is c3arged against current years profit and t3e credit 3ead is s3o(n as a deduction
from de"tors in t3e "alance s3eet.

Presen"a"ion o. Pro#ision .or Ba* 1eb"s

E>"ra!" o. P C L "o s%o, "%e Pro#isionD

'or t3e year ended Nune 3.9 2.Z

?ross 4rofit /////
4ro8ision for "ad de"ts ,%9...-

E>"ra!" o. Ba&an!e S%ee" "o s%o, "%e Pro#ision

C'rren" Asse"sD

!e"tors 1..9...
4ro8ision for Bad !e"ts ,%9...- +%9...

7e!or*ing O. Ba* 1eb"s C Pro#ision .or Ba* 1eb"s

J3en t3e "ad de"t for (3ic3 pro8ision is already made is confirmed9 follo(ing entry is passed0

!e"it0 4ro8ision for Bad !e"ts
Credit0 !e"tors a;c

As e/pense 3as already "een c3arged9 t3erefore9 no affect is gi8en to 465 account at t3is point.

7e*'!ing "%e -ro#ision

!e"it0 4ro8ision for Bad !e"ts ,Balance S3eet-
Credit0 4ro8ision for Bad !e"ts ,465-

In!reasing "%e -ro#ision

Credit0 4ro8ision for "ad de"ts

E>a/-&e G 1

'ollo(ing information is a8aila"le for A 5td. 'or t3e year ended Nune 3.9 2..2.
Bad !e"ts !uring t3e year0
Ho8em"er 191..
Nanuary &4.
April 12.

151
At t3e year end total de"tors amounted to Rs. &$9... out (3ic3 Rs. 292.. is considered to "e dou"tful ;
"ad. S3o( t3e rele8ant accounts and e/tracts from 4rofit and 5oss and Balance S3eet.

So&'"ion

A L"*. Ba* 1eb"s A!!o'n" A!!o'n" Co*e --
!ate
2..2
2r.
P
Harration ;
4articulars
5edger
Code
!R.
Amount
CR.
Amount
Balance
!r;,Cr-
Ho8 .1 Bad !e"ts 191.. 191..
Nan Bad !e"ts &4. 194.
Apr Bad !e"ts 12. 19$&.
Nune 3. Transfer to
465
19$&. .

A 5td.4ro8ision for Bad and !ou"tful !e"ts,4 6 5-Account Code ==
!ate
2..2
2r.
P
Harration ;
4articulars
5edger
Code
!R.
Amount
CR.
Amount
Balance
!r;,Cr-
Nun 3. 4ro8ision for t3e
Qear
292.. 292..
Nun 3. Transfer to 465 292.. .

A 5td. 4ro8ision for Bad and !ou"tful !e"ts ,B;S- Account Code ==
!ate
2..2
2r.
P
Harration ;
4articulars
5edger
Code
!R.
Amount
CR.
Amount
Balance
!r;,Cr-
Nun 3. 4ro8ision for t3e
Qear
292.. ,292..-

Presen"a"ion in Pro.i" C Loss a!!o'n"D
A L"*.
?ross 4rofit =======

5ess0 Administration #/penses0
Bad !e"ts ,19$&.-
4ro8ision for "ad de"ts ,292..-

Presen"a"ion in Ba&an!e s%ee"D
A L"*.
Ba&an!e S%ee"
As On 5'ne 40F 3003

Current Assets0
!e"tors &$9...
4ro8ision for Bad !e"ts ,292..- &%9$..

E>a/-&e G 3

A "usiness creates a pro8ision for "ad de"ts V %T of its de"tors on "alance s3eet date.
In Nan .19 2..2 t3e "alance of 4ro8ision (as &9&...
!uring t3e year de"ts (ritten off amounted to Rs. %94...
152
In !ecem"er 319 2..29 de"tors totaled Rs. &29....
S3o( Bad de"ts Account and pro8ision for "ad de"ts account.
So&'"ion

Re1uired closing "alance of 4ro8ision O&2... / %T O 391..

4ro8ision for Bad and !ou"tful !e"ts Account ,B;S- Account Code ==
!ate
2..2
2r.
P
Harration ;
4articulars
5edger
Code
!R.
Amount
CR.
Amount
Balance
!r;,Cr-
Nan .1 Ipening Balance &9&.. ,&9&..-
Bad !e"ts %94.. ,192..-
!ec 31 4ro8ision for "ad
de"ts
19+.. ,391..-

Presen"a"ion in ba&an!e s%ee"D
N=QF
Ba&an!e S%ee"F
As on SSSSSSSSS

Current Assets0
!e"tors &29...
4ro8ision for Bad !e"ts ,391..- %$9+..

Con"ro& A!!o'n"s

Je 3a8e studied a"out 4urc3ases9 Sales9 !e"tors and Creditors in our pre8ious lectures. Je 3a8e also
studied t3at trial "alance (or)s as a c3ec) of mat3ematical accuracy of t3e "oo) )eeping. *f t3e trial
"alance is not "alanced9 t3en it indicates an error in recording of transactions. To detect t3is error one
3as to go t3roug3 all t3e transactions during t3e year to detect t3e error. Ho(9 if t3e siKe of t3e "usiness
is small9 it (ould "e easier to detect t3e difference. But if t3e "usiness is large9 t3en it "ecomes difficult to
detect t3e difference. To sol8e t3is pro"lem9 a system of c3ec)s is de8ised so t3at t3e ledger accounts are
distri"uted in smaller groups and a trial is prepared for e8ery group.

:sually (it3 t3e gro(t3 of "usiness9 t3e num"er of suppliers ,creditors- and customers ,de"tors- gro(.
So9 if (e open a separate ledger account for e8ery creditor and de"tor9 t3en t3e general ledger and trial
"alance (ould "ecome too 8oluminous to manage. T3erefore9 in order to simplify t3ings9 one ledger eac3
is maintained for !e"tors and Creditors. T3e !e"tors 5edger is called Total !e"tors 5edger or Sa&es
Le*ger Con"ro& A!!o'n" ,as Credit sales are recorded in t3is account-. T3e Creditors 5edger is called
Total Creditors 5edger or P'r!%ase Le*ger Con"ro& A!!o'n" ,as Credit purc3ases are recorded in t3is
ledger-. *n ?eneral 5edger one account is )ept for all t3e !e"tors9 called 1eb"ors Con"ro& A!!o'n"9 and
one for Creditors9 called Cre*i"ors Con"ro& A!!o'n".

T3e principle on (3ic3 control accounts are "ased is simple and as follo(s0
*f t3e opening "alance of an account is )no(n9 toget3er (it3 t3e total of deductions and
additions entered in t3e account9 t3e closing "alance can "e calculated.
T3e same met3od is applied to t3e (3ole ledger9 t3e total of opening "alances toget3er (it3 t3e
additions and deductions during t3e period s3ould gi8e t3e total of closing "alances.
T3erefore9 indi8idual creditorGs and de"torGs accounts are opened in t3e total creditorsG ledger
and total de"tors ledger and t3eir summariKed figures are posted in t3e respecti8e Control
Accounts in t3e ?eneral 5edger.
T3e principle descri"ed a"o8e can "e illustrated as follo(s0

153
Ta)e t3e e/ample of Total !e"tors Account0
Total of Ipening Balances !r. Rs. 2..9...
Add. Total of !e"it entries Rs. &%.9...
$%.9...
5ess Total of Credit entries Rs. ,3..9...-
MI0F000
T3e "alance of !e"tors control account in t3e general ledger s3ould "e Rs. &%.9.... *f t3is is not so9
t3en t3ere is an error in t3e procedure of recording9 (3ic3 s3ould "e traced out.

In.or/a"ion .or Con"ro& A!!o'n"s 1eb"ors

*n t3e a"o8e illustration9 (e used some information. Ho( (e (ill study t3e sources from (3ic3 t3e
information is o"tained.

T)-e o. In.or/a"ion So'r!e o. In.or/a"ion
Ipening "alance of
de"tors
5ist of de"tors "alances dra(n up to t3e end of pre8ious period.
Credit Sales A separate "oo) is maintained to record indi8idual transactions. Totals are
dra(n from t3is "oo)
Sales Return A separate "oo) is maintained to record indi8idual transactions. Totals are
dra(n from t3is "oo)
C3e1ues;Cas3 Recei8ed 5ist of receipts is e/tracted from cas3 and "an) "oo).
Closing Balance T3is is t3e "alancing figure t3at can also "e c3ec)ed from t3e list of
indi8idual "alance of de"tors.

Consider t3e follo(ing data0

Sa&es 5o'rna&
!ate *n8oice P Hame Amount
Nan9 2.== A 1.9...
Nan9 2.== B 129%..
Nan9 2.== C 1%9...
Total 39%..

Total of sales Aournal (ill "e recorded in t3e !e"tors Control Account t3roug3 t3e follo(ing entry0

!e"it0 !e"tors Control Account 39%..
Credit0 Sales Account 39%..

Hote t3at cas3 sales are not included in t3is (3ole process. T3ey are directly recorded in t3e general
ledger.

In.or/a"ion .or Con"ro& A!!o'n"s Cre*i"ors

T3e information flo( in case of creditors is similar to de"tors9 (3ic3 is listed 3ere0

154

Ipening "alance of de"tors 5ist of creditors "alances dra(n up to t3e end of pre8ious period.
Credit 4urc3ases A separate "oo) is ,purc3ase Aournal- is maintained to record
indi8idual transaction. Totals are dra(n from t3is "oo)
4urc3ase Return A separate "oo) is ,purc3ase return Aournal- is maintained to record
indi8idual transaction. Totals are dra(n from t3is "oo)
C3e1ues;Cas3 4aid 5ist of payments is e/tracted from cas3 and "an) "oo). Ir a separate
column is maintained in cas3 and "an) "oo)s for t3is purpose.
Closing Balance T3is is t3e "alancing figure t3at can also "e c3ec)ed from t3e list of
indi8idual "alance of de"tors.

Consider t3e follo(ing data0

P'r!%ase 5o'rna&
!ate *n8oice P Hame Amount
Nan9 2.== R %9%..
Nan9 2.== Q +9...
Nan9 2.== S $9%..
Total 239...

Total of purc3ase Aournal (ill "e recorded in t3e Creditors Control Account t3roug3 t3e follo(ing entry0

!e"it0 4urc3ases Account 239%..
Credit0 Creditors Control Account 239%..

Hote t3at cas3 purc3ases are not included in t3is (3ole process. T3ey are directly recorded in t3e general
ledger.

E>a/-&e G 1

4repare a Creditors Control Account from t3e follo(ing data and (or) out t3e closing "alance on April
3.9 of creditors.
Apr. 1 Ipening Balance 449%..

To"a&s .or "%e /on"% o. Ma)D
Total Credit 4urc3ases 329...
4urc3ase Return &92..
C3e1ues and Cas3 paid 2$9$..
!iscounts recei8ed 29%..

155
So&'"ion

Cre*i"ors Con"ro& A!!o'n" A!!o'n" Co*e --
!e"it Side Credit Side
!ate Ho. Harration !r. Rs. !ate Ho. Harration Cr. Rs.
April 3. 4urc3ase return &92.. April
.1
Ba&an!e B<F 449%..
April 3. 4ayments 2$9$.. April
3.
Total
4urc3ases
[329...
April 3. !iscounts
recei8ed
29%..

Ba&an!e C<F 3+9...
To"a& JMFI00 To"a& JMFI00

E>a/-&e G 3

4repare a !e"tors control Account from t3e follo(ing data and (or) out t3e closing "alance on 7ay 319
of de"tors.
7ay 1 Ipening Balance .9...

To"a&s .or Ma)D
Total Credit Sales ,Sales Nournal- 2&9...
Returns *n(ard ,Sales *n(ard Nournal- 394..
C3e1ues and Cas3 recei8ed 4&9...
!iscounts allo(ed 39..
So&'"ion

1eb"ors Con"ro& A!!o'n" A!!o'n" Co*e --
!e"it Side Credit Side
1a"e No. Narra"ion 1r. 7s. 1a"e No. Narra"ion Cr. 7s.
7ay1 Ba& B<F .9... 7ay31 Returns 394..
7ay31 Total sales 2&9... 7ay31 Receipts 4&9...
7ay31 !iscounts 39..

7ay31 Ba& C<F 429+..
To"a& LMF000 To"a& LMF000

156
Lesson-26
CONT7OL ACCOUNTS 9Con"in'e*:
A num"er of "oo)s are opened in connection (it3 control accounts to reduce t3e 8olume of general
ledger. T3ese "oo)s are called FSu"sidiary Boo)sG.

*t is important to note t3at only credit sales;purc3ases "ecome part of control accounts. Cas3
sales;purc3ases are not included in t3e control accounts.

S'bsi*iar) Boo6s .or Sa&es<1eb"ors

T3ree su"sidiary "oo)s are maintained in case of sales ; de"tors.
Sales Nournal ; Sales !ay Boo) > indi8idual in8oice (ise sales are recorded in t3is Nournal. T3is
"oo) ser8es as source for all t3e recording of Credit sales.
Sales Return ; Return *n(ard Nournal if 8olume of returns is also 3ig3 t3en9 t3ese are also
recorded in a separate register.
!e"tors 5edger > t3is ledger maintains record of indi8idual de"tor.

T3e information flo(s to t3e de"tors control account in t3e general ledger as follo(s0

Ipening "alance of de"tors 5ist of de"tors "alances dra(n up to t3e end of pre8ious period.
T3is also confirms (it3 t3e aggregate "alance of t3e de"tors ledger.
Credit Sales *ndi8idual credit sale is recorded in t3e sales Aournal. 4eriodical total
of t3is Aournal is posted into t3e de"tors control account.
Sales Return *n case9 t3e transaction 8olume of sales return is 3ig39 t3en t3ese are
recorded in t3e sales return Aournal. T3e total is posted in t3e
de"tors control account periodically.
C3e1ues ; Cas3 Recei8ed 5ist of receipts is e/tracted from cas3 and "an) "oo). Ir a separate
column is maintained in cas3 and "an) "oo)s for t3is purpose.
Closing Balance T3is is t3e "alancing figure. *t can also "e c3ec)ed (it3 t3e total of
"alances in de"torsG ledger.

E>a/-&e G 1
5etGs suppose t3at t3e sales Aournal pro8ides t3e follo(ing record for t3e mont3 of 7arc39 2..20

Sa&es 5o'rna&
!ate *n8oice P Hame ; !e"tor Amount
7ar .19 2..2 .1 A 1.9...
7ar 1%9 2..2 .2 B 1%9...
7ar 319 2..2 .3 C 2.9...
Total 4%9...
T3e a"o8e mentioned record (ill "e posted in t3e personal ledger accounts of A9 B 6 C ,!e"tors ledger
account- in t3e follo(ing manner0

A0s A!!o'n" A!!o'n" !o*e----
P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-
.1;.3

1.9...

Ba&an!e b<*

1.9...
157
B0s A!!o'n" A!!o'n" !o*e----
P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-
1%;.3

1%9...

Ba&an!e b<*

1%9...

C0s A!!o'n" A!!o'n" !o*e----
P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-
31;.3

2.9...

Ba&an!e b<*

2.9...

*n t3e general ledger9 t3e amount of total sales (ill "e "oo)ed in t3e follo(ing manner0

Sa&es A!!o'n" A!!o'n" !o*e----
P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-

Ba&an!e b<*

4%9...
31;.3 Total sales for t3e
mont3 of marc39
2..2

4%9...


1eb"ors Con"ro& A!!o'n" A!!o'n" !o*e----
P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-
31;.3 Total sales for
t3e mont3 of
marc39 2..2

4%9...

Ba&an!e b<*

4%9...

Ho( if (e total t3e "alance of t3ree accounts of t3e de"torsG ledger on 7ar 319 2..20

A 1.9...
B 1%9...
C 2.9...
To"a& HIF000
158

*t (ill "e t3e same as t3e "alance in t3e de"tors control account of t3e general ledger.

7e!or*ing o. Sa&es 7e"'rn

5etGs say t3at sales return Aournal for t3e mont3 of 7arc39 2..2 gi8e t3e follo(ing record0

Sales Nournal
!ate Hame ; !e"tor Amount
Nan 1%9 2.== A 19...
Nan 2.9 2.== B 29...
Nan 2%9 2.== C 39...
Total &9...

T3e a"o8e mentioned record (ill "e posted in t3e personal ledger accounts of A9 B 6 C ,!e"tors ledger
account- in t3e follo(ing manner0

A0s A!!o'n" A!!o'n" !o*e----
P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-
.1;.3

1.9...

1%;.3

Ba&an!e b<*
19...

+9...

B0s A!!o'n" A!!o'n" !o*e----
P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-
1%;.3

1%9...

2.;.3

Ba&an!e b<*
29...

139...

C0s A!!o'n" A!!o'n" !o*e----
P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-
31;.3

2.9...

2%;.3

Ba&an!e b<*
39...

19...
159

*n t3e general ledger9 t3e amount of total sales return (ill "e "oo)ed in t3e follo(ing manner0

Sa&es A!!o'n" A!!o'n" !o*e----
P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-
Total sales
return for t3e
mont3 of
marc39 2..2

Ba&an!e b<*

&9...

3+9...
31;.3 Total sales for t3e
mont3 of marc39
2..2

4%9...


1eb"ors Con"ro& A!!o'n" A!!o'n" !o*e----
P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-
31;.3 Total sales for
t3e mont3 of
marc39 2..2

4%9...

Total sales return
for t3e mont3 of
marc39 2..2

Ba&an!e b<*
&9...

3+9...

Again if (e total t3e "alance of t3ree accounts of t3e de"torsG ledger on 7ar 319 2..20
A +9...
B 139...
C 19...
To"a& 4LF000

*t (ill "e t3e same as t3e "alance in t3e de"tors control account of t3e general ledger.

7e!ei-"s Fro/ 1eb"ors

Eere9 (e need a total figure of receipts from de"tors. T3erefore9 (3en control accounts are used9 (e
maintain cas3 and "an) "oo)s (it3 separate pages for receipts and payments i.e. t(o column cas3;"an)
"oo)s are not used. In t3e receipts side of t3e cas3 and "an) "oo)9 a column is added in (3ic3 receipts
from de"tors are separately noted. T3is type of cas3 ; "an) "oo) is also called multi column cas3 ; "an)
"oo).

A sample of t3e receipt side of cas3 ; "an) "oo) is gi8en 3ereunder0

Cas3 ; Ban) Boo)
Receipt Side
1a"e No Narra"ion <
Par"i!'&ars
Le*ger
Co*e
7e!ei-"
A/o'n"
7e!ei-"
.ro/
1eb"ors
1.9...
%..
Recei8ed from A %9... %9...
160
3..
Recei8ed from B 29%.. 29%..
Recei8ed from A 19... 19...
Recei8ed from C 19%.. 19%..
+%.
19...
Total 229%. +9...

S'bsi*iar) Boo6s .or P'r!%ases<Cre*i"ors

Recording of creditors is similar to de"tors. T3e su"sidiary "oo)s maintained in case of purc3ases ;
creditors are0
4urc3ase Nournal ; 4urc3ase !ay Boo) > indi8idual purc3ases are recorded in t3is Nournal.
4urc3ase Return ; Return out(ard Nournal > *f t3e 8olume of returns is also 3ig39 t3en t3ese
are also recorded in a separate register.
Creditors 5edger > t3is ledger maintains record of indi8idual creditors.

T3e information flo(s to t3e creditor control account in t3e general ledger as follo(s0

Ipening "alance of
creditors
5ist of creditor "alances dra(n up to t3e end of pre8ious period.
T3is also confirms (it3 t3e aggregate "alance of t3e creditors
ledger.
Credit 4urc3ases *ndi8idual credit purc3ase is recorded in t3e purc3ase Aournal.
Total of t3is Aournal is posted into t3e creditors control account
periodically.
4urc3ase Return *n case t3e transaction 8olume of purc3ase return is 3ig39 t3en9
t3ese are recorded in t3e purc3ase return Aournal. 4eriodically9 t3e
total is posted in t3e creditors control a;c.
C3e1ues ; Cas3
4aid
5ist of payments is e/tracted from cas3 and "an) "oo). Ir a
separate column is maintained in cas3 and "an) "oo)s for t3is
purpose.
Closing Balance T3is is t3e "alancing figure. *t can also "e c3ec)ed (it3 t3e total
of "alances in creditorsG ledger.

E>a/-&e G 3

5etGs consider t3e follo(ing data for t3e mont3 of 7arc39 2..20

4urc3ase Nournal
7ar .19 2..2 R %9...
7ar 1.9 2..2 Q 1.9...
7ar 2%9 2..2 S 1%9...
Total 3.9...

T3e a"o8e mentioned record (ill "e posted in t3e personal ledger accounts of R9 Q 6 S ,Creditors
ledger account- in t3e follo(ing manner0
161

N0s A!!o'n" A!!o'n" !o*e----
P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-

Ba&an!e b<*

%9...
.1;.3

%9...


=0s A!!o'n" A!!o'n" !o*e----
P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-

Ba&an!e b<*

1.9...
1.;.3

1.9...

Q0s A!!o'n" A!!o'n" !o*e----
P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-

Ba&an!e b<*

1%9...
2%;.3

1%9...

*n t3e general ledger9 t3e amount of total purc3ases (ill "e "oo)ed in t3e follo(ing manner0

P'r!%ases A!!o'n" A!!o'n" !o*e----
P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-
31;.3 Total purc3ases
for t3e mont3
of marc39 2..2

3.9...

Ba&an!e b<*

3.9...


162

Cre*i"ors Con"ro& A!!o'n" A!!o'n" !o*e----
P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-
31;.3

Ba&an!e b<*

3.9...

Total purc3ases for
t3e mont3 of
marc39 2..2

3.9...

Ho(9 if (e total t3e "alance of t3ree accounts of t3e creditorGs ledger on 7ar 319 2..20
R %9...
Q 1.9...
S 1%9...
To"a& 40F000

*t (ill "e t3e same as t3e "alance in t3e creditors control account of t3e general ledger.

7e!or*ing o. P'r!%ase 7e"'rn

5etGs say t3at t3e purc3ase return Aournal s3o( t3e follo(ing picture for t3e mont3 of 7arc39 2..20

7ar .19 2..2 R %..
7ar 1.9 2..2 Q 19...
7ar 2%9 2..2 S 19%..
Total 39...

T3e a"o8e mentioned record (ill "e posted in t3e personal ledger accounts of R9 Q 6 S ,Creditors
ledger account- in t3e follo(ing manner0

N0s A!!o'n" A!!o'n" !o*e----
P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-
.1;.3

Ba&an!e b<*

%..

49%..
.1;.3

%9...


=0s A!!o'n" A!!o'n" !o*e----
P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-
1.;.3

Ba&an!e b<*

19...

+9...
1.;.3

1.9...
163
Q0s A!!o'n" A!!o'n" !o*e----
P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-
2%;.3

Ba&an!e b<*

19%..

139%..
2%;.3

1%9...

*n t3e general ledger9 t3e amount of total purc3ases (ill "e "oo)ed in t3e follo(ing manner0

P'r!%ases A!!o'n" A!!o'n" !o*e----
P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-
for t3e mont3
of marc39 2..2

3.9... 31;.3 Total purc3ases
return for t3e
mont3 of marc39
2..2

Ba&an!e b<*
39...

29...


Cre*i"ors Con"ro& A!!o'n" A!!o'n" !o*e----
P
Amount
Rs. ,!r.-
P
Amount
Rs. ,Cr.-
return for t3e
mont3 of
marc39 2..2
Ba&an!e b<*

39...

29...
31;.3 Total purc3ases for
t3e mont3 of
marc39 2..2

3.9...

Ho(9 if (e total t3e "alance of t3ree accounts of t3e creditorGs ledger on 7ar 319 2..20

R 49%..
Q +9...
S 139%..
To"a& 3JF000

*t (ill "e t3e same as t3e "alance in t3e creditors control account of t3e general ledger.

164

Pa)/en" "o Cre*i"ors

Eere9 (e need a total figure of payment to creditors. T3erefore9 (3en control accounts are used9 (e
maintain cas3 and "an) "oo)s (it3 separate pages for receipts and payments i.e. t(o column cas3;"an)
"oo)s are not used. In t3e payment side of t3e cas3 and "an) "oo)9 a column is added in (3ic3
payments to creditors are separately noted. T3is type of cas3 ; "an) "oo) is also called multi column
cas3 ; "an) "oo).

A sample of t3e payment side of cas3 ; "an) "oo) is gi8en 3ereunder0

Cas% < Ban6 Boo6
Pa)/en" Si*e
1a"e No Narra"ion <
Par"i!'&ars
Le*ger
Co*e
Pa)/en"
A/o'n"
Pa)/en" "o
Cre*i"ors
%..
%9...
Recei8ed from A 29%.. 29%..
39...
Recei8ed from B 19%.. 19%..
19...
Recei8ed from C 19%.. 19%..
19+%.
19%..
Total 1$94%. %9%..

165
Lesson-27
CONT7OL ACCOUNT 9Con"in'e*:

A -erson is bo"% *eb"or an* !re*i"orD

T3is 3appens so many times in "usiness t3at a person is "ot3 your de"tor and creditor. T3is means t3at
you are purc3asing one t3ing from 3im. So9 you 3a8e to pay 3im against t3at purc3ase and at t3e same
time you are selling 3im anot3er t3ing for (3ic3 3e 3as to pay you. 'or e/ample9 you purc3ase item R
from 7r. A for Rs. %.9... and sell 3im item Q for Rs. 2%9.... Ho(9 one (ay of settling t3e paya"le and
recei8a"le is t3at you can pay 7r. R %.9... and as) 3im to pay you Rs. 2%9.... T3e ot3er and may "e t3e
(iser met3od is t3at you pay 3im Rs. 2%9... and "ot3 transactions are settled. T3is is 3o( suc3
transactions are 3andled in real life.

5o'rna& En"ries

Hormally (3ere no control accounts are maintained9 follo(ing entries (ill "e recorded0

!e"it0 A ,paya"le;creditor- account 2%9...
Credit0 A ,recei8a"le;de"tor- account 2%9...

o T3is (ill "ring do(n t3e "alance of A ,recei8a"le;de"tor- account to . and t3at of A
,paya"le;creditor- account to 2%9.... T3e ot3er entry (ill "e0

Credit0 Cas3 ; Ban) 2%9...

o T3is (ill settle t3e paya"le account fully.

J3ere control accounts are "eing maintained t3e a"o8e t(o entries are still recorded "ut (it3 slig3t
modification0

!e"it0 Creditors Control account 2%9...
Credit0 !e"tors Control account 2%9...
At t3e same time AGs account in CreditorGs ledger is de"ited (it3 2%9... and Credited in !e"torsG ledger
(it3 t3e same amount.

Credit0 Cas3 ; Ban) 2%9...

T3is entry comes from t3e creditorGs column of cas3 ; "an) "oo) payment side as usual.

Ba* 1eb"s

4ro8ision does not affect de"tors account in simple "oo)s. *t (ill9 t3erefore9 3a8e no effect eit3er on
de"tor control account or de"tors ledger.

At t3e time of actual "ad de"t9 t3e Aournal entry

!e"it 4ro8ision ; Bad !e"ts
Credit *ndi8idual !e"tors Account
*f control account system is in operation9 t3e de"it entry (ill "e same "ut t3e credit effect (ill go to
!e"tors control account (it3 a credit effect to *ndi8idual !e"tors Account in !e"tors 5edger.

Similar treatment is gi8en to discounts recei8ed and allo(ed.

166
7e!or*ing O. Ba* 1eb"s in Con"ro& A!!o'n"s

To record "ad de"ts in control accounts9 follo(ing entries are recorded0
*n case no pro8ision (as created for dou"tful de"ts0
!e"it0 Bad !e"ts
Credit0 !e"tors Control Account

*n case pro8ision (as created for dou"tful de"ts0
!e"it0 4ro8ision for !ou"tful !e"ts

Recording is also made in t3e respecti8e accounts of t3e de"tor in su"sidiary ledger.

7e!or*ing o. 1is!o'n"s 7e!ei#e* In Con"ro& A!!o'n"s

To record discount recei8ed in control accounts9 follo(ing entry is recorded0
!e"it0 Creditors Control Account
Credit0 !iscount Recei8ed Account

Recording is also made in respecti8e accounts of t3e creditors in su"sidiary ledger.

7e!or*ing o. 1is!o'n"s A&&o,e* In Con"ro& A!!o'n"s

To record discount allo(ed in control accounts9 follo(ing entry is recorded0

!e"it0 !iscount Allo(ed Account

Recording is also made in t3e respecti8e account of t3e de"tors in su"sidiary ledger.

I&&'s"ra"ion G 1

'ollo(ing information is gi8en from t3e "oo)s of 7r. A,!e"tor- for t3e mont3 of Nune9 2..2. Qou are
re1uired to prepare !e"tors Control Account and (or) out t3e closing "alance of de"tors control
account of 7r. A.

Ipening Balance !r. $%9%..
Transactions during t3e mont30
Sales for t3e mont3 +.9...
Sales return for t3e mont3 29%..
4ayments recei8ed 14.9...
!iscount allo(ed %9...
Bad de"ts (ritten off 49...

167
So&'"ion

1eb"ors Con"ro& A!!o'n"
1ebi" Si*e Cre*i" Si*e
Nun .1 Bal B;' $%9%.. Nun Returns 29%..
Nun Sales +.9... Nun Receipts 14.9...
Nun !iscount allo(ed %9...
Bad !e"ts 49...

Nun 31 Bal C;' 249...
To"a& 1JIFI00 To"a& 1JIFI00

I&&'s"ra"ion G 3

'ollo(ing information is gi8en from t3e "oo)s of 7r. B,Creditor- for t3e mont3 of Nune9 2..2. Qou are
re1uired to prepare Creditors Control Account and (or) out t3e closing "alance of Creditors control
account of 7r. B.

Ipening Balance Cr. &%9...
Transactions during t3e mont30
4urc3ases for t3e mont3 .9...
4urc3ases return for t3e mont3 %9...
4ayments made +.9...
!iscount recei8ed 39...
So&'"ion

Cre*i"ors Con"ro& A!!o'n"
Nun Returns %9... Nun .1 Bal B;' &%9...
Nun 4ayments +.9... Nun Total purc3ases .9...
Nun !iscounts
recei8ed
39...

Nun 31 Bal C;' 39...
To"a& 14IF000 To"a& 14IF000

I&&'s"ra"ion G 4

T3e financial year of Atif Brot3ers is closed on Nune 3.9 2..2. Qou are re1uired to prepare !e"tors
control account and Creditor control account from t3e data gi8en "elo(0

O-ening ba&an!es
!e"tors 1%.9...
Creditors 2%.9...
Sa&es
Cas3 Hote 1 1$.9...
Credit 2&.9...
P'r!%ases
Cas3 Hote 1 12.9...
Credit 2..9...
Total receipts Hote 2 3%.9...
Total payments Hote 2 2%.9...
!iscount allo(ed 1%9...
168
!iscount recei8ed 1.9...
Bad de"ts (ritten off 2%9...
*ncrease in pro8ision for dou"tful de"ts Hote 3 %9...

So&'"ion

1eb"ors Con"ro& A!!o'n"
Nun .1 Bal B;' 1%.9... Nun Receipts,H2- 1.9...
Nun Sales,H1- 2&.9... Nun !iscount allo(ed 1%9...
Bad !e"ts 2%9...

Nun 31 Bal C;' 2..9...
To"a& H10F000 To"a& H10F000

Cre*i"ors Con"ro& A!!o'n"
Nun 4ayments 13.9... Nun .1 Bal B;' 2%.9...
Nun !iscounts
recei8ed
1.9... Nun Total purc3ases 2..9...

Nun 31 Bal C;' 31.9...
To"a& HI0F000 To"a& HI0F000

No"es "o "%e a!!o'n"sD

1. *n control accounts9 only cas3 sales;purc3ases are dealt (it3. Credit sales;purc3ases are not
included in control accounts9
3. Receipts;4ayments include "ot3 cas3 and credit receipts;payments. So9 (e enter t3e figures in
control accounts9 after deducting cas3 sales;purc3ases from total receipts;payments. i. e.

Receipts O 3%.9... > 1$.9... O 1.9...
4ayments O 2%.9... > 12.9... O 13.9...
3. 4ro8ision for dou"tful de"ts 3as no effect on control accounts. So9 any c3ange in pro8ision (ill
not affect actual "ad de"ts.

Bene.i"s o. S'bsi*iar) Le*gers

Su"sidiary ledgers contain t3e record of all indi8iduals !e"tors and Creditors.
Su"sidiary ledgers gi8e information a"out t3e main clients and slo( mo8ing clients
(3ic3 is 3elpful for t3e management in decision ma)ing.
*f t3e "usiness 3as distri"utors in different areas9 su"sidiary ledger gi8es information
a"out sale of different distri"utors in different areas (3ic3 are 3elpful for t3e
management in decision ma)ing.
169
Lesson-28
7ECTIFICATION OF E77O7

*n financial accounting9 e8ery single e8ent occurring in monetary terms is recorded. Sometimes9 it Aust so
3appens t3at some e8ents are eit3er not recorded or it is recorded in t3e (rong 3ead of account or
(rong figure is recorded in t3e correct 3ead of account.

J3ate8er t3e reason may "e9 t3ere is al(ays a c3ance of error in t3e "oo)s of accounts. T3ese errors in
accounting re1uire rectification. T3e procedure adopted to rectify errors in financial accounting is called
B7e!"i.i!a"ion o. errorC.

+o, "o re!"i.) "%ese errors(

Ine (ay of rectification is t3at (e can simply erase or o8er(rite t3e incorrect entry and replace it (it3
t3e correct one. But t3is practice is not allo(ed in accounting. Je 3a8e to Rectify ; correct t3e mista)e
"y recording anot3er entry.

T)-es o. Errors

Before going to t3e rectification process9 letGs first see t3e different )inds of errors t3at can appear in our
"oo)s of accounts0

Error o. O/ission

Ine of t3e most common errors is t3at an e8ent escapes recording. T3is means t3at an e8ent occurred
"ut (e did not record it. 'or e/ample9 (e discussed a"out "an) c3arges "eing deducted "y "an)s (it3out
our )no(ledge or our payments made "y "an)s on our standing orders etc. T3ere can "e ot3er reasons as
(ell. Suc3 errors are called #RRIRS I' I7*SS*IH.

Error o. Co//ission

T3en9 t3ere is a c3ance t3at t3e e8ent is classified and recorded correctly "ut (it3in (rong classification
of account. 'or e/ample9 a payment to 7r. A9 (3o is a de"tor9 is recorded in t3e account of 7r. B9 (3o
is also a de"tor. Ho( t3e classification is correct "ut entry is posted in t3e (rong account. Suc3 errors
are called #RRIRS I' CI77*SS*IH.

Error o. Prin!i-&e

T3en t3ere are errors in (3ic3 an entry is recorded in t3e (rong class of account. 'or e/ample a
purc3ase of fi/ed asset9 say9 a 8e3icle is recorded in an e/pense account. T3ese errors are called #RRIRS
I' 4R*HC*45#.

Error o. Origina& En"r)

T3e errors in (3ic3 recording is in correct account "ut t3e figure is incorrect are called #RRIRS I'
IR*?*HA5 #HTRQ. 'or e/ample9 a receipt of Rs. %.9... from a de"tor is recorded as Rs. %9... in 3is
account.

7e#ersa& o. En"r)

T3en9 t3ere are errors in (3ic3 t3e entry is re8ersed "y mista)e. T3is means t3at t3e account t3at s3ould
3a8e "een de"ited is credited and 8ice 8ersa. T3ese errors are called R#2#RSA5 I' #HTRQ.

170
7e!"i.)ing "%e Errors

Ho(9 (e (ill rectify all t3ese types of entries0

Error o. O/ission

T3is is t3e easiest error to rectify. Qou 3a8e to record t3e entry t3at (as omitted "y mista)e. *t is
important to note 3ere t3at t3e rectifying entry (ill "e posted on t3e date on (3ic3 t3e error (as
disco8ered. But (e (ill gi8e a note in t3e narration of t3e 8ouc3er t3at t3e e8ent too) place on suc3 date.

E>a/-&eD
A purc3ase of Rs. %9... from ABC on April 1% (as omitted "y mista)e.

Rectifying #ntry on t3e date of disco8ery0

!e"it0 4urc3ase Account 1%9...
Credit0 ABC Account 1%9...

Harration0 Rectification of omission of recording purc3ase to ABC on April 1%.

Errors o. Co//ission < Error o. Prin!i-&e

*n "ot3 t3ese cases9 t3e effect gi8en to incorrect account is re8ersed and effect is gi8en to t3e correct
account.

E>a/-&eD
4urc3ase of an asset for Rs. %.9... is recorded in t3e e/pense account.

Rectification0
!e"it0 Asset Account %.9...
Credit0 Rele8ant #/pense Account %.9...

Harration0 Rectification of purc3ase of asset incorrectly recorded as e/pense.

Error o. Origina& En"r)

*f t3e entry recorded is of lesser amount t3an t3e re1uired amount9 t3en an entry of t3e "alance amount
is passed. In t3e ot3er 3and9 if t3e entry recorded is of a greater amount t3an t3e re1uired amount9 a
re8erse entry is passed of t3e "alance amount t3at cancels t3e effect of t3e error.

E>a/-&e
1- A receipt of cas3 Rs. %9... from B is recorded as Rs. %..
2- A receipt of cas3 Rs. %9... from B is recorded as Rs. %.9...

7e!"i.i!a"ion
*n t3e first instance9 t3e recorded figure is less "y Rs. 49%... T3e rectification entry (ill9 t3erefore9 "e0
!e"it0 Cas3 Account 49%..
Credit0 B Account 49%..

*n t3e second instance9 t3e recorded figure e/ceeds "y Rs. 4%9... from t3e desired figure. T3e
rectification (ill9 t3erefore9 "e a re8erse entry of Rs. 4%9...0
!e"it0 B Account 4%9...
Credit0 Cas3 Account 4%9...

171
7e#ersa& o. En"r)

*f a re8erse entry is recorded "y mista)e9 t3en t(o entries are re1uired to rectify it9 one to re8erse t3e
effect of mista)e and t3e ot3er to record correct entry or (e can pass one entry (it3 dou"le amount t3at
ser8es t3e purpose of "ot3 t3e entries.

E>a/-&eD
A payment of Rs. 1.9... made to 7r. ! is recorded on t3e receipt side of t3e cas3 "oo) and credit is
gi8en to !Gs account.

7e!"i.i!a"ion
Je can correct t3is mista)e "y t(o entries0
!e"it0 7r. ! Account 1.9...
Credit0 Cas3 Account 1.9...

T3is (ill re8erse t3e effect of mista)e0
And t3is (ill record t3e transaction correctly0

Ir

Je can record it t3roug3 one entry0

Based on our a"o8e discussion9 (e can de8ise a general procedure for rectification of errors.
Ta)e anot3er e/ample9 assume t3at (e recei8ed cas3 Rs. of %.9... from a de"tor and instead of !e"iting
t3e Cas3 Boo) ; Cas3 Account9 (e de"ited t3e Ban) Boo) (3ereas t3e credit (as gi8en to t3e correct
account.

S"e- 10 Hote do(n t3e correct entry
!e"it Cas3 %.9...
Credit Creditors %.9...

S"e- 30 Hote do(n t3e incorrect entry
!e"it Ban) %.9...
Credit Creditors %.9...

S"e- 40 See t3at Credit affect is correct. *n case of !e"it9 affect 3as "een gi8en to Ban) instead of cas3.
T3erefore (e (ill gi8e t3e due affect to Cas3 "y de"iting it and Remo8e t3e incorrect affect from "an)
"y crediting it.
!e"it Cas3 Account %.9...
Credit Ban) Account %.9...

I&&'s"ra"ion

Rectify t3e follo(ing errors0
1. A c3e1ue issued of Rs. %.9... to 7r. A ,Creditor-9 "ut t3e credit (as gi8en to cas3 account.
2. 4urc3ase of goods from 7r. B (ort3 of Rs. %9%.. (as recorded at Rs. 49%...
3. Cas3 sale to 7r. C (ort3 of Rs. 1.9... (as de"ited to sale account and credited to cas3
account.
4. Repair of 8e3icle (ort3 of Rs. %9... (as c3arged to asset account.
%. A c3e1ue of Rs. 1%9... recei8ed and deposited in "an) from 7r. !9 "ut no entry (as
passed.
172

So&'"ion

En"r) G 1

Correct #ntry
!e"it0 7r. A ,Creditor- A;C %.9...
Credit0 Ban) A;C %.9...

*ncorrect #ntry passed
!e"it0 7r. A ,Creditor- A;C %.9...
Credit0 Cas3 A;C %.9...

Rectifying #ntry
!e"it0 Cas3 A;C %.9...
Credit0 Ban) A;C %.9...

En"r) G 3

Correct #ntry
!e"it0 4urc3ase A;C %9%..
Credit0 7r. BGs A;C %9%..

!e"it0 4urc3ase A;C 49%..
Credit0 7r. BGs A;C 49%..

Rectifying #ntry
!e"it0 4urc3ase A;C 19...
Credit0 7r. BGs A;C 19...

En"r) G 4

Correct #ntry
!e"it0 Cas3 1.9...
Credit0 Sale A;C 1.9...

!e"it0 Sale A;C 1.9...
Credit0 Cas3 1.9...

Rectifying #ntry
!e"it0 Cas3 2.9...
Credit0 Sale A;C 2.9...

En"r) G H

Correct #ntry
!e"it0 Repair A;C %9...
Credit0 Cas3 A;C %9...

!e"it0 Asset ,8e3icle- A;C %9...
Credit0 Cas3 A;C %9...

173

Rectifying #ntry
!e"it0 Repair A;C %9...
Credit0 Asset ,8e3icle- A;C %9...

En"r) G I

Correct #ntry
!e"it0 Ban) A;C 1%9...
Credit0 7r. !Gs A;C 1%9...


Ho entry (as passed

Rectifying #ntry
!e"it0 Ban) A;C 1%9...
Credit0 7r. !Gs A;C 1%9...
174
Lesson-29
P7ESENTATION OF FINANCIAL STATEMENTS


Standard format of profit 6 loss account is s3o(n as follo(s0

Par"i!'&ars A/o'n"
7s.
A/o'n"
7s.
Sales
R
,/-
Gross Pro.i"
Selling #/penses

R
R
N

,/-
Iperating 4rofit
5ess0 'inancial #/penses
Add 0 It3er income

R
,/-

4rofit Before Ta/
5ess0 Ta/
R
,/-
Ne" Pro.i" A."er Ta> .or "%e =ear
It3er income
N

Sa&es
Sales as (e )no( are t3e re8enue against t3e sale of t3e product in (3ic3 t3e organiKation deals. *n case
of a ser8ice organiKation9 t3ere (ill "e *ncome against Ser8ices Rendered instead of Sales and t3ere (ill
"e no Cost of Sales or ?ross 4rofit.

Cos" o. Goo*s So&*<Gross Pro.i"

Cost of goods sold is t3e cost incurred in purc3asing or manufacturing t3e product9 (3ic3 an
organiKation is selling plus any ot3er e/pense incurred in "ringing t3e product in sala"le condition. Cost
of goods sold contains t3e follo(ing 3eads of accounts0
o 4urc3ase of ra( material;goods
o Jages paid to employees for manufacturing of goods
o Any ta/;freig3t is paid on purc3ases
o Any e/pense incurred on carriage;transportation of purc3ased items.

?ross 4rofit O Sales > Cost of goods sold
O"%er In!o/e
It3er income includes re8enue from indirect source of income9 suc3 as return on in8estment9 profit on
45S account etc.

A*/inis"ra"i#e E>-enses
Administrati8e e/penses are t3e e/penses incurred in running a "usiness effecti8ely. 7ain components of
t3is group are0
o 4ayment of utility "ills
o 4ayment of rent
o Salaries of employees
o ?eneral office e/penses
o Repair 6 maintenance of office e1uipment 6 8e3icles.
*t is important to distri"ute e/penses properly among t3e t3ree classifications i.e. Cost of ?oods Sold9
Administrati8e #/penses and Selling #/penses to present t3e financial statements fairly. Ta)e t3e
e/ample of follo(ing costs0
175
o Sa&aries an* $ages
Alt3oug3 "ot3 t3ese terms mean remuneration paid to la"or and employee
against ser8ices.
Jages usually denotes remuneration paid to daily (ages la"or. J3ereas salary
denotes payments to permanent employees.
Salaries can "e classified in any of t3e classifications mentioned "elo(.
Salaries ; (ages paid to la"or and super8isors;officers (or)ing for t3e
manufacturing of goods "ecome a part of Cost of ?oods Sold.
Salaries and "enefits of general administrati8e staff "ecomes part of
Administrati8e #/penses
Salaries and "enefits of sales and mar)eting staff "ecome part of selling
e/penses.
It3er e/penses li)e !epreciation9 :tilities and 7aintenance can also "e classified in all t3ree9 depending
upon t3e e/act nature of t3e e/penditure.

Se&&ing E>-enses

Selling e/penses are t3e e/penses incurred directly in connection (it3 t3e sale of goods. T3is 3ead
contains0
o Transportation;carriage of goods sold
o Ta/;freig3t paid on sale

*f t3e e/pense 3ead FsalariesG includes salaries of sales staff9 it (ill "e e/cluded from salaries 6 appear
under t3e 3eading of Fselling e/pensesG.

Finan!ia& E>-enses

'inancial e/penses are t3e interest paid on "an) loan 6 c3arges deducted "y "an) on entityGs "an)
accounts. T3ese are s3o(n separately in t3e 4rofit and 5oss Account. T3ese include0
o *nterest on loan
o Ban) c3arges

T3ere is9 3o(e8er9 one e/ception and t3at is t3e interest paid on loan ta)en to "uild an asset is capitaliKed
as cost of t3e asset up to t3e time t3at asset is completed.

In!o/e Ta>

!ifferent types of entities 3a8e to pay income ta/ at different rates. At t3e time of preparing annual
financial statements9 an estimate of e/pected ta/ lia"ility is made. A pro8ision is t3en9 created e1ual to
t3at estimate.
Qou s3ould remem"er t3e treatment of 4ro8ision for !ou"tful de"ts. Same is t3e case (it3 income ta/
i.e. pro8ision is made at t3e time of preparing accounts (3ic3 is t3en adAusted accordingly at t3e time
(3en actual ta/ e/pense is )no(n.

176

Ba&an!e S%ee" 9Asse" Si*e:

Standard format of t3e "alance s3eet is gi8en as follo(s0

4articulars Amount Rs. Amount Rs.
Asse"s
Non C'rren" Asse"s
'i/ed Assets
Capital Jor) *n 4rogress
!eferred Costs
5ong Term *n8estments

R
R
R
R

C'rren" Asse"s
Stoc)s
Trade de"tors and It3er Recei8a"les
4repayments
S3ort Term *n8estments
Cas3 and Ban)

R
R
R
R
R

Total R R

Fi>e* Asse"s

'i/ed assets are t3e assets of permanent nature t3at a "usiness ac1uires9 suc3 as plant9 mac3inery9
"uilding9 furniture9 8e3icles etc.
'i/ed assets are presented at cost less accumulated depreciation IR re8alued amount.

Ca-i"a& $or6 In Progress

T3is account is s3o(n separately in t3e "alance s3eet "elo( t3e fi/ed assets. Capital (or) in progress
e/penses (ill "ecome part of t3e cost of t3at asset. J3en an asset is completed and it is ready to (or)9 all
costs (ill transfer to t3e rele8ant asset account.

1e.erre* Cos"s

An e/pense t3at 3as a future "enefit in e/cess of one year and recorded in a capital asset account

Long Ter/ an* S%or" Ter/ In#es"/en"s

J3ere a "usiness 3as surplus funds9 it is "etter to in8est t3ose funds (3ere t3ese can generate a return
greater t3an 45S accounts. T3ese in8estments can "e of different types e.g. s3ares of ot3er companies9
fi/ed deposits (it3 "an)s9 go8ernment securities9 national sa8ings etc. or presentation purposes9 t3ese
*n8estments are classified in t(o categories9 long term and s3ort term in8estments. *n8estments made
(it3 t3e intention t3at t3ey (ill "e 3eld for a period longer t3an t(el8e mont3s are classified as long term
and t3ose made for a period e1ual to or s3orter t3an 12 mont3s are classified as s3ort term.

'ollo(ing t3ings are important to note 3ere0

Classification is to "e made e8ery time a "alance s3eet is prepared and t3e period is to "e
calculated from t3e date of "alance s3eet.
177
T3is means t3at an in8estment made for 2 years on 7ay 2... (ill "e classified as long term
in8estment in accounts prepared on Nun 3.9 2... and t3e same in8estment (ill "e classified as
current in8estment in t3e accounts prepared on Nune 3.9 2..1.
An in8estment may initially "e made as current in8estment. Su"se1uently9 if it is decided to 3old
it for a longer period9 t3en its classification (ill 3a8e to "e c3anged accordingly and 8ice 8ersa.
T3erefore9 in8estments are c3ec)ed for classification e8ery time a "alance s3eet is prepared and
presented accordingly.

C'rren" Asse"s

C'rren" Asse"s are t3e recei8a"les t3at are e/pected to "e recei8ed (it3in one year of t3e "alance s3eet
date. !e"tors9 closing stoc) 6 all accrued incomes are t3e e/amples of Current Assets "ecause t3ese are
e/pected to "e recei8ed (it3in one accounting period from t3e "alance s3eet date.

*t is important to note t3at assets and lia"ilities are presented in t3e "alance s3eet in t3e order of t3eir
maturity i.e. assets ; lia"ilities 3a8ing longer life are presented first and assets ; lia"ilities 3a8ing s3orter
life are presented later.
178
Lesson-30
P7ESENTATION OF FINANCIAL STATEMENTS 9Con"in'e*:

S"an*ar* For/a" o. Ba&an!e S%ee" 9Liabi&i") Si*e:

Par"i!'&ars A/o'n"
7s.
A/o'n"
7s.
Liabi&i"ies
Ca-i"a& an* 7eser#es
Capital
Reser8es

R
R
R

R
Non C'rren" < Long Ter/ Liabi&i"ies
5ong term loans
It3er long term lia"ilities

R
R

R
C'rren" Liabi&i"ies
Trade creditors and ot3er paya"les
S3ort term "orro(ings
Current portion of long term "orro(ings

R
R
R

R
To"a& N

Ca-i"a&

Capital is t3e first item s3o(n on t3e lia"ility side of t3e "alance s3eet of an organiKation. Ca-i"al is t3e
7oney in8ested in t3e "usiness "y t3e o(ners. Capital is a lia"ility for t3e "usiness as t3e "usiness 3as to
pay return against t3is money and in case t3e "usiness is closed9 t3en it 3as to return t3e amount. Capital
is also termed as BS3are CapitalC.

7e!or*ing o. Ca-i"a&

Recording of Capital is Simple.
At t3e time of receipt
!e"it Cas3 ; Ban)
Credit Capital
*f t3e o(ner contri"utes an asset instead of cas39 t3en
!e"it Asset Account
Credit Capital
J3en t3e capital is repaid ,t3is does not 3appen in normal course of "usiness9 "ut Aust in case-
!e"it Capital
Credit Cas3 ; Ban)

7eser#es

T3e portion of profit (3ic3 is not paid to proprietor9 "ut is )ept apart for meeting some )no(n or
un)no(n losses is called Reser8e9 e.g. Reser8e fund9 contingencies reser8e etc.
.
T3ere are t(o maAor types of reser8es0

7e#en'e 7eser#es

'rom t3e 8ie( point of its creation re8enue reser8e may again "e classified into0
179
a. Genera& reser#e

Reser8e (3ic3 is not created for any specific purpose9 "ut for strengt3ening t3e financial position of t3e
"usiness is )no(n as ?eneral Reser8e9 e.g. Reser8e fund9 contingencies reser8e etc.

b. S-e!i.i! 7eser#e

Reser8e created for any special purpose is )no(n as Specific Reser8e. e.g.9 !i8idend #1ualiKation fund9
!e"enture sin)ing fund etc.

Ca-i"a& 7eser#es

Capital reser8es9 in most of t3e cases9 are created due to legal re1uirements. 4rofit may arise from
sources9 ot3er t3an normal "usiness acti8ity. 'or e/ample9 profit on sale of fi/ed assets or profit on
re8aluation of fi/ed assets. J3en a reser8e is created out of t3ese profits9 it is termed as capital reser8e.
Ine capital reser8e a"out (3ic3 (e already )no( is B'i/ed Assets Re8aluation Reser8eC. Capital reser8es
can "e used for specific purposes only.

1i..eren!e be",een 7eser#e An* Pro#ision

Bot3 reser8es and pro8isions are created out of re8enues of t3e "usiness9 "ut t3ey differ from eac3 ot3er.
Creating a pro8ision is necessary to s3o( a true profit for t3e period9 (3ereas t3e reser8e is
created on t3e discretion of t3e o(ner9 out of profits.
4ro8ision is to "e made9 e8en9 if t3ere is a lossL Reser8es are created out of profits only.
Reser8e is s3o(n as lia"ility in t3e "alance s3eet9 4ro8ision is s3o(n as a reduction from t3e
asset against (3ic3 it is created.
4ro8ision is used specifically for t3e purpose for (3ic3 it is made9 Reser8es are usually general
and can "e used for any purpose.

Pro.i" An* Loss A!!o'n"

4rofit and 5oss Account or Accumulated 4rofit and 5oss Account s3o(s t3e "alance of un=distri"uted
profit accumulated o8er t3e periods. *n t3e first year of "usiness9 t3is account s3o(s follo(ing figure0

4rofits for t3e year R
5ess0 Transferred to Reser8e ,R-
5ess0 4rofit distri"uted ,R-
Balance carried to Balance S3eet R
*n Su"se1uent years9 "alance "roug3t for(ard from pre8ious years and profit for t3e year is added and
distri"uted as a"o8e and t3e "alance is carried to ne/t year. T3is is (3yL it is termed as Accumulated
4rofit and 5oss Account.

Long Ter/ Loans

T3e o(ners of t3e "usiness may feel t3at t3eir "usiness can flouris39 if t3ere are more funds. T3ese funds
can "e arranged from t3eir o(n resources9 if possi"le9 or t3ey can as) a "an) or financial institution for
funds. T3is loan9 if e/tended "y "an) for a period of more t3an one year is termed as a long term loan.
T3ere can "e ot3er sources of long term loans as (ell9 e.g. Term 'inance Certificates and !e"entures9
(3ere money is "orro(ed from general pu"lic under certain legal restrictions.

O"%er Long Ter/ Liabi&i"ies

T3ese include all ot3er lia"ilities t3at are paya"le after a period of one year of "alance s3eet date. 'or
e/ample9 staff gratuity and ot3er "enefits9 ta/es and lia"ilities t3at "ecome paya"le after a period of one
year.
180
C'rren" Liabi&i"ies

Current 5ia"ilities are t3e o"ligations of t3e "usiness t3at are paya"le (it3in t(el8e mont3s of t3e
"alance s3eet date. Creditors9 all accrued e/penses are t3e e/amples of current lia"ilities of t3e "usiness
"ecause "usiness is e/pected to pay t3ese "ac) (it3in one accounting period.

C'rren" Por"ion o. Long Ter/ Liabi&i"ies

5ong term loans are usually paya"le in installments. T3erefore9 at t3e end of e8ery year9 some portion of
t3e loan "ecomes paya"le (it3in one year of t3e "alance s3eet date. T3e portion t3at "ecomes paya"le
(it3in t3e ne/t accounting period is transferred to current lia"ilities and classified under current portion
of long term lia"ilities.

'ormat of current lia"ilities s3o(n in t3e "alance s3eet is as follo(s0

C'rren" Liabi&i"ies

Trade Creditors
S3ort Term Borro(ings
It3er S3ort Term 5ia"ilities
Salaries 4aya"le
Accrued #/penses
Bills paya"le
Ad8ances from Customers
181
Lesson-31
T=PE OF BUSINESS ENTITIES
T3ere are t(o types of entities0
Commercial organiKations
Hon=commercial organiKations

Co//er!ia& Organi2a"ion

Commercial organiKation is t3e entity t3at is (or)ing to earn profit. At t3e end of t3e financial year9 t3e
profit is distri"uted among t3e o(ners of t3e "usiness. Hormally9 commercial organiKations include0
Sole proprietors3ip
4artners3ip9 and
5imited Company

Non Co//er!ia& Organi2a"ion

Hon Commercial organiKation is t3e entity t3at is not (or)ing to earn profit. At t3e end of t3e financial
year9 t3e profit is not distri"uted among t3e o(ners9 "ut is used for t3e o"Aecti8e of t3e organiKation.
Hormally9 commercial organiKations include0
Co=Iperati8e institutions
H?IGs
Trusts

T)-es o. Co//er!ia& Organi2a"ion

So&e -ro-rie"ors%i- b'siness

*t is a "usiness t3at is o(ned "y an indi8idual. Ee may 3a8e employed any num"er of persons to (or)
for 3im9 "ut 3e is t3e sole o(ner of t3e "usiness.

Par"ners%i-

4artners3ip is t3e type of "usiness (3ere more t3an one person ,called partners- enters into a legal
agreement to run a "usiness on a profit and loss s3aring "asis.

Li/i"e* Co/-an)

5imited company is a legal entity9 separate from its o(ners ,called s3are3olders-. T3e "asic difference
"et(een a partners3ip and a limited company is t3e concept of limited lia"ility.
*f a partners3ip "usiness runs into losses and is una"le to pay its lia"ilities9 its partners (ill 3a8e
to pay t3e lia"ilities from t3eir o(n (ealt3.
J3ereas9 in case of limited company9 t3e s3are3olders donGt lose anyt3ing more t3an t3e amount
of capital t3ey 3a8e contri"uted in t3e company. i.e.9 t3eir personal (ealt3 is not at sta)e and
t3eir lia"ility is limited to t3e amount of s3are capital t3ey 3a8e contri"uted.

T3e concept of limited company is to mo"iliKe t3e resources of a large num"er of people for a proAect9
(3ic3 t3ey (ould not "e a"le to afford independently and t3en9 get it managed "y e/perts.

A!!o'n"ing 7e;'ire/en"s

So&e Pro-rie"ors%i-
*n case of sole proprietor9 o(ner is t3e sole o(ner of t3e "usiness. So9 t3ere is no restriction on 3im for
dra(ing money for 3is personal use.

182
'or accounting purposes9 an account titled 4roprietorGs !ra(ings is opened in t3e ?eneral 5edger and all
payments and receipts9 if any9 from t3e proprietor are recorded in t3is account.

A!!o'n"ing En"ries
Cas3 !ra(n "y 4roprietor0
!e"it 4roprietorGs dra(ing
Credit Cas3
Amount paid in "y proprietor t3roug3 c3e1ue0
!e"it Ban)
Credit 4roprietorGs dra(ing

T3e "alance in dra(ings account is transferred to Capital Account at t3e year end.

T3e sample of general ledger of Capital account9 in case of profit earned "y t3e "usiness9 is as follo(s0

Ca-i"a& A!!o'n"
1a"e No Narra"ion 1r. 7s. 1a"e No Narra"ion Cr. 7s.
Nun
3.
!ra(ings
a;c
4%9... Nul .1 Balance B;' 1..9...
Nun 3. 4 6 5
Account
%.9...

Nun
3.
Balance
C;'
1.%9...
To"a& 1I0F000 To"a& 1I0F000

T3e sample of general ledger of Capital account9 in case of loss sustained "y t3e "usiness9 is as follo(s0

Ca-i"a& A!!o'n"
1a"e No Narra"ion 1r. 7s. 1a"e No Narra"ion Cr. 7s.
Nun 3. 4 6 5 Account 1.9... Nul .1 Balance B;' 1..9...
Nun 3. !ra(ings 4%9...

Nun 3. Balance C;' 4%9...
To"a& 100F000 To"a& 100F000

183
T3e "alance s3eet of sole proprietor is as follo(s0

Na/e o. B'siness
Ba&an!e S%ee"
As A" ----
Asse"s
'i/ed Assets
5ong Term Assets
Current Assets

R
R
R
To"a& N
Liabi&i"ies
Capital
Add0 4rofit ; 5oss 'or T3e Qear
5ess0 !ra(ings

R
R
,R-

R
5ong Term 5ia"ilities R
Current 5ia"ilities R
To"a& N

Par"ners%i-

T3ere are t(o types of capital accounts in partners3ip0
'i/ed capital
'luctuating capital

Fi>e* Ca-i"a&

*n t3is case9 capital account s3o(s mo8ement in capital account only i.e. actual increase or decrease in
capital9 "y partners and all ot3er transactions9 suc3 as !ra(ings and 4rofit etc. are not recorded in capital
account.

F&'!"'a"ing !a-i"a&

*n fluctuating capital account9 all transactions relating to partners9 suc3 as dra(ings9 salaries etc. are
recorded in capital account9 in addition to entries relating to capital account.

C'rren" A!!o'n"

*n case of fi/ed capital accounts9 ot3er transactions suc3 as !ra(ings and 4rofit etc. are recorded in a
separate account called Current Account.

5o'rna& En"ries

Capital *ntroduced "y 4artner0
!e"it Cas3 ; Ban)
Credit 4artnerGs Capital Account

Separate capital account is opened in general ledger for eac3 partner.

!ra(ing "y 4artner0
!e"it *ndi8idual 4artnerGs Current Account
Credit Cas3 ; Ban)

#/cess !ra(n Amount Returned "y 4artner0
!e"it Ban) ; cas3
Credit *ndi8idual 4artnerGs Current Account
4rofit !istri"ution0
184
!e"it 4rofit and 5oss Appropriation Account
Credit 4artner AGs Current Account
Credit 4artner BGs Current Account
Credit 4artner CGs Current Account

Ba&an!e S%ee" o. Par"ners%i- A!!o'n"s

Na/e o. B'siness
Ba&an!e S%ee"
As A" ----
ASS#TS
'i/ed Assets
5ong Term Assets
Current Assets

R
R
R
To"a& N
Liabi&i"ies
Capital A
B
C

R
R
R

R
Current Account A
B
C
R
R
R

R
Long Ter/ Liabi&i"ies R
C'rren" Liabi&i"ies R
To"a& N

Li/i"e* Co/-anies

T3ere are t(o types of companies0
4u"lic 5imited Companies
4ri8ate 5imited Companies

P'b&i! Li/i"e* Co/-anies

*n pu"lic limited companies9 t3ere is no restriction on num"er of persons to "e its mem"ers. T3ere is
one restriction. i.e.9 t3ere s3ould "e a minimum o. "%ree mem"ers to form a pu"lic limited company.

Pri#a"e Li/i"e* Co/-anies

T(o to fifty persons can form a pri8ate limited company. 7inimum t(o mem"ers are elected to form a
"oard of directors. T3is "oard is gi8en t3e responsi"ility to run day to day "usiness of t3e company.

S%are Ca-i"a&

Capital of t3e company is di8ided into small units ; denominations. T3ese units ; denominations are
called s3ares and t3e capital is called s3are capital. I(ners purc3ase t3ese s3ares and are9 t3erefore9
called s3are3olders. As9 t3ere are so many s3are3olders in a company9 profit is distri"uted among t3e
mem"ers;s3are3olders of t3e company on t3e "asis of num"er of s3ares 3eld "y eac3 s3are3older. T3e
profit distri"uted among s3are3olders is called 1IVI1EN1.
185
Lesson-32
FINANCIAL STATEMENTS OF SOLE P7OP7IETO7S+IP
I&&'s"ra"ion G 1

4repare profit 6 loss account and "alance s3eet for t3e year ending Nune 3.9 2..2 from t3e follo(ing trial
"alance of Haseem Trading Company.

Par"i!'&ars 1ebi"
7s.
Cre*i"
7s.
Ipening Stoc) 11%92..
Cas3 in 3and 1.9$..
Cas3 at "an) %29&..
4urc3ases $139%..
Returns in(ard ,Sales return- 139&..
Jages 1&+9&..
'uel 6 po(er +49&..
Carriage on sales &49...
Carriage on purc3ases 4.9$..
Building &4.9...
5and 2..9...
7ac3inery 4..9...
Salaries 3..9...
?eneral e/penses &.9...
!ra(ings 129...
*nsurance 1.49+..
Sundry !e"tors 2+.9...
Sales 19+%9&..
Returns out(ards ,4urc3ase returns- 1.9...
Capital 19.+.9...
Sundry Creditors 12&9...
Rent recei8ed 1$.9...
Total 4F4K1FM00 4F4K1FM00

'ollo(ing additional information is supplied to you0
Closing stoc) is 8alued at Rs. 13&9...
7ac3inery 6 Building are to "e depreciated V 1.T
Salaries for t3e mont3 of Nune9 2..2 amounting to Rs. 3.9... are unpaid
*nsurance is paid in ad8ance to t3e e/tent of Rs. 139...
Rent recei8a"le is Rs. 2.9...
So&'"ion

J3en additional information is gi8en at t3e end of t3e 1uestion9 (3ic3 means t3ese entries are still to "e
recorded in t3e "oo)s of accounts. So9 (e s3all pass t3e entries first0
En"r) G 1

Par"i!'&ars Co*e G A/o'n"91r.:
7s.
A/o'n"9Cr.:
7s.

Closing stoc) account

4rofit 6 5oss account

Closing stoc) is recorded

13&9...

13&9...
186
Closing stoc) is presented in t3e profit 6 loss account9 credited in t3e cost of goods sold and is s3o(n in
t3e "alance s3eet under t3e 3eading of Current Assets.

T3e ledger account of closing stoc) (ill "e as follo(s0

S"o!6 A!!o'n" A!!o'n" Co*e --------
4articulars Amount
!r. ,Rs.-
4articulars Amount
Cr. ,Rs.-
Closing Stoc)

13&9...

Balance ";d

13&9...
To"a& 13&9... To"a& 13&9...

En"r) G 3

7s.
A/o'n"9Cr.:
7s.

!epreciation account

7ac3inery account

!epreciation on mac3inery is
c3arged.

4.9...

4.9...

!epreciation of mac3inery (ill "e s3o(n in t3e profit 6 loss account under t3e 3eading of
Administrati8e #/penses and (ill "e deducted from t3e 8alue of mac3inery account in t3e "alance s3eet.

En"r) G 3

7s.
A/o'n"9Cr.:
7s.

!epreciation account

Building account

!epreciation on "uilding is c3arged.

&49...

&49...

!epreciation of "uilding (ill "e s3o(n in t3e profit 6 loss account under t3e 3eading of Administrati8e
#/penses and (ill "e deducted from t3e 8alue of "uilding account in t3e "alance s3eet.

T3e ledger account of depreciation (ill "e as follo(s0

1e-re!ia"ion A!!o'n" A!!o'n" Co*e --------
4articulars Amount
!r. ,Rs.-
4articulars Amount
Cr. ,Rs.-
!ep. of 7ac3inery
!ep. of "uilding
4.9...
&49...

Balance ";d

1.49...
To"a& 1.49... To"a& 1.49...
187
En"r) G 4

7s.
A/o'n"9Cr.:
7s.

Salaries account

Salaries paya"le account

Salaries for t3e mont3 of Nune are
unpaid.

3.9...

3.9...

Salaries account (ill "e presented in t3e profit 6 loss account under t3e 3eading of Administrati8e
#/penses and salaries paya"le (ill "e presented in t3e "alance s3eet under t3e 3eading of Current
5ia"ilities.

T3e ledger account of salaries (ill "e as follo(s0

Sa&aries A!!o'n" A!!o'n" Co*e --------
4articulars Amount
!r. ,Rs.-
4articulars Amount
Cr. ,Rs.-
Balance c;d
Salaries paya"le
3..9...
3.9...

Balance ";d

33.9...
To"a& 33.9... To"a& 33.9...

En"r) G H

7s.
A/o'n"9Cr.:
7s.

Ad8ance *nsurance

*nsurance Account

*nsurance is paid in ad8ance

139...

139...

Ad8ance insurance is our asset and it (ill "e s3o(n in t3e "alance s3eet under t3e 3eading of current
assets and ad8ance insurance (ill "e deducted from t3e insurance e/penses.
T3e ledger account of insurance (ill "e as follo(s0

Ins'ran!e A!!o'n" A!!o'n" Co*e --------
4articulars Amount
!r. ,Rs.-
4articulars Amount
Cr. ,Rs.-
Balance c;d

1.49+..

Ad8ance insurance

Balance ";d
139...

+19+..
To"a& 1.49+.. To"a& 1.49+..

188
En"r) G I

7s.
A/o'n"9Cr.:
7s.

Rent Recei8a"les

Rental *ncome

Rental *ncome recei8a"le

2.9...

2.9...

Rent recei8a"les is our income and it (ill "e s3o(n in t3e "alance s3eet under t3e 3eading of current
assets and rent (ill "e s3o(n as income in t3e profit 6 loss account

T3e ledger account of rent (ill "e as follo(s0

7en" A!!o'n" A!!o'n" Co*e --------
4articulars Amount
!r. ,Rs.-
4articulars Amount
Cr. (Rs.)

Balance ";d

2..9...
Balance c;d
Recei8a"le

180,000
20,000

To"a& 200,000 To"a& 200,000

Nasee/ Tra*ing Co/-an)
Par"i!'&ars A/o'n"
7s.
A/o'n"
7s.
In In!o/e < Sa&es < 7e#en'e
5ess0 Sales Return
LessD Cos" o. Goo*s So&*
,See note P 1-
19+%9&..
,139&..-

19+&29...

19.$9..

Gross Pro.i"

LessD A*/inis"ra"i#e e>-enses
,See note P 2-

LessD Se&&ing E>-enses
Carriage on sales

KJHF400

%$%9+..

&49...

O-era"ing -ro.i" 33HH00
Add0 It3er *ncome ,Rent recei8ed- 2..9...
Ne" In!o/e H3HFH00
189
No"e G 1 Cos" o. Goo*s So&*
Rs.
Ipening stoc) 11%92..
Add0 4urc3ases $139%..
5ess0 purc3ase return ,1.9...-
Add0 Carriage on purc3ases 4.9$..
Add0 Jages 1&+9&..
Add0 'uel and po(er +4&..
5ess0 Closing stoc) ,13&9...-
Cos" o. goo*s so&* 1F0KJFJ00

No"e G 3 A*/inis"ra"i#e E>-enses

?eneral e/penses &.9...
*nsurance +19+..
!epreciation on 7ac3inery 4.9...
!epreciation on Building &49...
Salaries 33.9...
To"a& A*/inis"ra"i#e E>-enses IKIFL00

Ba&an!e S%ee"
Nasee/ Tra*ing Co/-an)
Ba&an!e S%ee"
As A" 5'ne 40F 3003
Liabi&i"ies Asse"s
Par"i!'&ars A/o'n"
7s.
Par"i!'&ars A/o'n"
7s.
Capital
A**0 4rofit and 5oss
Account
LessD !ra(ings

19.+.9...
42494..
,129...-
Fi>e* Asse"s
land
7ac3inery
4..9...
5ess0 !ep. ,4.9...-
Building &4.9...
5ess0 !ep. ,&49...-

2..9...

3&.9...

%&9...
1FI03FH00 1F14MF000
C'rren" Liabi&i"ies
Creditors
Salaries paya"le

12&9...
3.9...
C'rren" Asse"s
!e"tors
Cas3 in 3and
Cas3 at "an)
Closing stoc)
Rant recei8a"le
Ad8ance insurance

2+.9...
1.9$..
%29&..
13&9...
2.9...
139...
To"a& 1FMIKFH00 To"a& 1FMIKFH00

190

I&&'s"ra"ion G 3
'ollo(ing trial "alance 3as "een e/tracted from t3e "oo)s of Arif Traders on Nune 3.9 2..2

Ari. Tra*ers
Tria& ba&an!e
As on 5'ne 40F 3003
4articulars Amount
!r. ,Rs.-
Amount
Cr. ,Rs.-
Sales +$9...
Stoc) on Nune 3.92..2 1%9%..
7aterial Consumed %39...
Cas3 in Eand 1.9%..
Cas3 at Ban) %9...
Capital Account Nuly .19 2..1 4+%9...
!ra(ings 1429%..
'urniture 29...
Rent 4aid %19...
Jages 4aid 12+9...
!iscounts Allo(ed 349%..
!iscounts Recei8ed 1$9...
!e"tors 24&9...
Creditors 1249%..
4ro8ision for !ou"tful !e"ts Nul. .1 2..1 139%..
2e3icles 12.9...
2e3icle Running Costs 229%..
Bad !e"ts Jritten off 4.9%..

To"a& 1FM4KF000 1FM4KF000
F'r"%er in.or/a"ion a#ai&ab&eD
Jages and salaries paya"le on Nune 3.9 2..2 Rs. 49%..
Rent prepaid on Nune 3.9 2..2 Rs. 9...
2e3icle running costs paya"le on Nune 3. Rs. 39...
*ncrease in pro8ision for dou"tful de"ts Rs. 39...
!epreciation rate is 12.%T for furniture and 2.T for 8e3icle.

Qou are re1uired to prepare 4rofit and 5oss Account for t3e year and Balance S3eet as on Nune 3.9 2..2

191

So&'"ion

Ari. Tra*ersF
Pro.i" an* Loss A!!o'n"F
For "%e =ear En*ing 5'ne 40F 3003
Par"i!'&ars 7s. 7s.
Sales
LessD Cost of ?oods Sold ,material consumed-
+$9...
,%39...-
Gross Pro.i"

LessD E>-enses
Jages and Salaries Hote 1
Rent Hote 2
!iscount Allo(ed
2e3icle Running Cost Hote 3
4ro8ision for !ou"tful !e"t Hote 4
!epreciation Hote %

,1339%..-
,449...-
,349%..-
,2%9%..-
,439%..-
,339...-
HI0F000

941HF000:
Iperating profit 14M000
A**D It3er income, !iscount recei8e-
1$9...
Ne" In!o/e
1IHF000

*n t3e profit 6 loss account prepared a"o8e9 t3e amount of "ad de"ts (ritten off are grouped (it3 t3e
pro8ision for dou"tful de"ts ,see note P 4-
*n t3e follo(ing presentation9 "ad de"ts are s3o(n separately and (or)ing of pro8ision of "ad de"ts is
s3o(n in Hote P 4,a-.

Ari. Tra*ersF
Pro.i" an* Loss A!!o'n"F
For "%e =ear En*ing 5'ne 40F 3003.
Par"i!'&ars 7s. 7s.
Sales
+$9...
,%39...-
Gross Pro.i"

LessD E>-enses
Jages and Salaries Hote 1
Rent Hote 2
!iscount Allo(ed
2e3icle Running Cost Hote 3
Bad !e"ts
4ro8ision for !ou"tful !e"t Hote 4,a-
!epreciation Hote %

,1339%..-
,449...-
,349%..-
,2%9%..-
,4.9%..-
,39...-
,339...-
HI0F000

,3149...-
Iperating 4rofit 14M000
A**D It3er income, !iscount recei8e: 1$...
Ne" In!o/e 1IH000
192
Ari. Tra*ers
Ba&an!e S%ee"
As A" 5'ne 40F 3003
4articulars Amount Rs. Amount Rs.
Asse"s
Fi>e* Asse"s Hote %
C'rren" Asse"s
Stoc)s
!e"tors Hote &
4repaid #/penses
Cas3 at Ban)
Cas3 in Eand

1%9%..
22+9%..
9...
%9...
1.9%..

1ILF000

HJLFI00
Total M4KFI00
Liabi&i"ies
Capital
4rofit
5ess0 !ra(ings

4+%9...
1%49...
,1429%..-

I0MFI00
C'rren" Liabi&i"ies
Creditors
#/penses 4aya"le Hote

1249%..
9%..

143F000
Total M4KFI00

No"e G 1 Sa&aries C $ages a!!o'n"

Sa&aries C $ages A!!o'n" Co*e --------
4articulars Amount
!r. ,Rs.-
4articulars Amount
Cr. ,Rs.-
Salaries 6 Jages 4aid
Salaries 6 Jages 4aya"le
12+9...
49%..

Transfer to 4rofit 6 5oss
Account

1339%..
To"a& 1339%.. To"a& 1339%..

No"e G 3 7en" a!!o'n"

Sa&aries C $ages A!!o'n" Co*e --------
4articulars Amount
!r. ,Rs.-
4articulars Amount
Cr. ,Rs.-
Rent 4aid

%19...

Rent 4aya"le

Account
9...

449...
To"a& %19... To"a& %19...
No"e G 4 Ve%i!&e r'nning !os" a!!o'n"

Ve%i!&e 7'nning !os" A!!o'n" Co*e --------
4articulars Amount
!r. ,Rs.-
4articulars Amount
Cr. ,Rs.-
Cost 4aid
Cost 4aya"le
229%..
39...

Account

2%9%..
To"a& 2%9%.. To"a& 1339%..

193
No"e G H Pro#isions .or *o'b".'& *eb"s a!!o'n"

Pro#ision .or *o'b".'& *eb"s A!!o'n" Co*e --------
4articulars Amount
!r. ,Rs.-
4articulars Amount
Cr. ,Rs.-
Bad !e"ts

Balance C;'
4.9%..

1&9%..
Balance B;'

Account
139%..

439%..
To"a& %9... To"a& %9...

No"e G H 9a: Pro#ision .or *o'b".'& *eb"s a!!o'n"

Pro#ision .or *o'b".'& *eb"s A!!o'n" Co*e --------
4articulars Amount
!r. ,Rs.-
4articulars Amount
Cr. ,Rs.-

Balance C;'

1&9%..
Balance B;'

Account
139%..

39...
To"a& 1&9%.. To"a& 1&9%..

No"e G I Fi>e* Asse"s a" $1V
Cos" 7a"e 1e-. $1V
'urniture 29... 12.%T +9... &39...

2e3icle 12.9... 2.T 249... +&9...
339... 1%+9...
No"e G M 1eb"ors a!!o'n"

!e"tors 24&9...
5ess0 4ro8ision for !ou"tful
!e"ts ,note 4- ,1&9%..-
33LFI00
No"e G J E>-enses Pa)ab&e

E>-enses Pa)ab&e A!!o'n" Co*e --------
4articulars Amount
!r. ,Rs.-
4articulars Amount
Cr. ,Rs.-

Balance C;'

9%..
Salaries
2e3icle running cost

49%..
39...

To"a& 9%.. To"a& 9%..

194
Lesson-33
FINANCIAL STATEMENTS OF MANUFACTU7ING CONCE7N

*n t3is lecture9 (e (ill discuss financial statements of manufacturing concern. *n manufacturing concern9
cost of goods sold statement is also prepared.

I&&'s"ra"ion G1

'ollo(ing trial "alance 3as "een e/tracted from t3e "oo)s of Eassan 7anufacturing Concern on Nune 3.9
2..2.

+assan Man'.a!"'ring Con!ern
Tria& ba&an!e
As on 5'ne 40F 3003
Par"i!'&ars A/o'n"
1r. 97s.:
A/o'n"
Cr. 97s.:
Ra( 7aterial stoc) Nul. .19 2..1 3%9%..
Jor) in process Nul. .19 2..1 429...
'inis3ed goods stoc) Nul. .19 2..1 $%9...
Ra( material purc3ased 2%.9...
Jages 1$.9...
'reig3t in(ard 129...
4lant and mac3inery 4..9...
Iffice e1uipment 4%9...
2e3icles 2..9...
Acc. depreciation 4lant 1+%92..
Acc. depreciation Iffice e1uipment 1291+%
Acc. depreciation 2e3icles +9&..
'actory o8er3eads 12%9...
#lectricity $.9...
Salaries 14.9...
Salesman commission 12.9...
Rent 2..9...
*nsurance 1%.9...
?eneral #/pense &.9...
Ban) C3arges $9%..
!iscounts Allo(ed 2.9...
Carriage out(ard 3%9...
Sales 19%..9...
Trade !e"tors 2%.9...
Trade Creditors 22.9...
Ban) 1&%9...
Cas3 11.9...
!ra(ings 1%9...
Capital Nuly .19 2..1 $&39..%
To"a& 3FKKKF000 3FKKKF000

No"esD
Stoc) on Nune 3.9 2..2.
o Ra( 7aterial 429...
o Jor) in 4rocess %&9%..
o 'inis3ed ?oods &.9...
195
%.T of electricity9 insurance and salaries are c3arged to factory and "alance to office.
!epreciation to "e c3arged on 4lant 6 7ac3inery at 2.T9 Iffice #1uipment at 1.T and
2e3icles at 2.Ton J!2.
Jrite off "ad de"ts Rs. 3.9....
All t3e (ages are direct e/pense.

7e;'ire*D
Qou are re1uired to prepare profit and loss account for t3e year and "alance s3eet as on Aune3.9 2..2.

So&'"ion


+assan Man'.a!"'rer Con!ern
4articulars Hote Amount Rs.
Sales
5ess0 Cost of ?oods Sold 1
19%..9...
+&9+&.
Gross Pro.i"
5ess0 Administrati8e #/penses 2
5ess0 Selling #/penses 3
J04F0H0
%1$9&1
1%%9...
O-era"ing Pro.i" 3LF3JL
5ess0 Ban) C3arges $9%..
Ne" Pro.i" Be.ore Ta> 30FJJL

Ba&an!e S%ee"

+assan Man'.a!"'rer Con!ern
Fi>e* Asse"s a" $1V 4 3JIF3KH
Current Assets % &%39%..
Current 5ia"ilities & ,22.9...-
$or6ing Ca-i"a& H44FI00
To"a& Asse"s E/-&o)e* J0KFJKH
Finan!e* b)D
Capital $&39..%
Add0 4rofit for t3e year 2.9+
5ess0 !ra(ings ,1%9...-
To"a& Liabi&i"ies J0KFJKH

No"es "o "%e A!!o'n"s

Stoc) of Ra( 7aterial Nul .19 2..1 3%9%..
Add. 4urc3ases 2%.9...
Add. 'reig3t *n(ard 129...
2+9%..
5ess0 Closing Stoc) of Ra( 7aterial ,429...-
7a, Ma"eria& Cons'/e* 3IIFI00
!irect la"or 1$.9...
'actory I8er3eads
'actory I8er3eads 12%9...
#lectricity ,%.T of $.9...- 4.9...
196
Salaries ,%.T of 14.9...- .9...
*nsurance ,%.T of 1%.9...- %9...
4lant !epreciation ,Hote %- 4.9+&. 3%.9+&.
To"a& Fa!"or) Cos" JKMFHM0
Add0 Jor) in 4rocess Nul .19 2..1 429...
5ess0 Jor) in 4rocess Nun 3.9 2..2 ,%&9%..-
Cos" o. Goo*s Man'.a!"'re* JJ1FLM0
Add0 'inis3ed ?oods Stoc) Nul .19 2..1 $%9...
5ess0 'inis3ed ?oods Stoc) Nun 3.9 2..2 ,&.9...-
Cos" o. Goo*s So&* JLMFLM0


Salaries ,%.T of 14.9...- .9...
?eneral #/penses &.9...
Rent 2..9...
*nsurance ,%.T of 1%.9...- %9...
!iscount Allo(ed 2.9...
Bad !e"ts 3.9...
Iffice #lectricity ,%.T of $.9...- 4.9...
!epreciation 2e3icles ,Hote %- 2.94$.
!epreciation Iffice #1uip. ,Hote%- 392$1
A*/inis"ra"i#e E>-enses I1KFJM1

No"e G 4 Se&&ing E>-enses

Salesman Commission 12.9...
Carriage Iut(ard 3%9...
Se&&ing E>-enses 1IIF000

No"e G H Fi>e* Asse"s a" $1V

A!!. 1e-re!ia"ion J!2
Cost Rate Ipening 'or t3e year Closing

4lant 6 7ac3. 4..9... 2.T 1+%92.. 4.9+&. 23&91&. 1&39$4.
2e3icles 2..9... 2.T +9&.. 2.94$. 11$9.$. $19+2.
Iffice #1uipment 4%9... 1.T 1291+% 392$1 1%94& 2+9%24
MHFJ31 3JIF3KH
No"e G I C'rren" Asse"s
Stoc)
Ra( 7aterial 429...
Jor) in 4rocess %&9%..
'inis3ed ?oods &.9... 1%$9%..
!e"tors 2%.9...
5ess0 Bad !e"ts ,3.9...-
Ban) 1&%9...
Cas3 11.9...
C'rren" Asse"s MI4FI00
No"e G M C'rren" Liabi&i"ies

Trade Creditors 22.9...

197
I&&'s"ra"ion G 3

'ollo(ing trial "alance 3as "een e/tracted from t3e "oo)s of Na8ed 'urniture 7anufacturers on Nune 3.9
2..2.

5a#e* F'rni"'re Man'.a!"'rers
Tria& ba&an!e
As on 5'ne 40F 3003
4articulars Amount
!r. ,Rs.-
Amount
Cr. ,Rs.-
Ra( 7aterial stoc) Nul. .19 2..1 %29%..
Jor) in process Nul. .19 2..1 +92%.
'inis3ed goods stoc) Nul. .19 2..1 339%.
Ra( material purc3ased +2%9...
Jages $129%..
'reig3t in(ard $9%.
4lant and mac3inery ..9...
Iffice e1uipment %.9...
Acc. depreciation 4lant 12%9...
Acc. depreciation Iffice e1uipment 2.9...
?eneral factory o8er3eads 9%..
Iffice electricity 1$9%.
'actory po(er 3492%.
Salaries administrati8e staff 11.9...
Salaries sales staff %9...
Salesman commission 2$9%.
Rent 3.9...
*nsurance 1.9%..
?eneral Admin. #/pense 339%..
Ban) C3arges %9%.
!iscounts Allo(ed 129...
Carriage out(ard 149%.
Sales 29%..9...
Trade !e"tors 3%%9%.
Trade Creditors 3129%..
Ban) 1429...
Cas3 2192%.
!ra(ings %.9...
Capital Nuly .19 2..1 429...
To"a& 4FMLLFI00 4FMLLFI00

No"esD
Stoc)s on Nune 3.9 2..2
o Ra( 7aterial Rs. &.9...
o 'inis3ed ?oods Rs. 1..9...
o Jor) in 4rocess Rs. 39%...
Iut of total (ages Rs. 4%.9... is direct and "alance indirect.
$.T of Rent and *nsurance are to "e apportioned to factory and "alance to administrati8e office.
!epreciation to "e c3arged on 7ac3inery at 2.T and Iffice #1uipment at 1.T on cost.

Qou are re1uired to prepare profit and loss account for t3e year and "alance s3eet as on Aune3.9 2..2.

198
So&'"ion

5a#e* F'rni"'re Man'.a!"'rer
Par"i!'&ars No"e A/o'n" 7s.
Sales
29%..9...
29.1&94..
?ross 4rofit
4$39&..
1%93%.
11$9%..
Iperating 4rofit 1$+9%.
5ess0 'inancial C3arges 4 19%.
Ne" Pro.i" Be.ore Ta> 1J3F000

5a#e* F'rni"'re Man'.a!"'rers
Ba&an!e s%ee"
Par"i!'&ars No"e A/o'n"
7s.
Fi>e* Asse"s a" $1V % HM0F000
Current Assets & 1&9%..
Current 5ia"ilities ,3129%..-
$or6ing Ca-i"a& H0HF000
To"a& Asse"s E/-&o)e* KMHF000
Finan!e* b)D
Capital 429...
Add0 4rofit for t3e year 129...
5ess0 !ra(ings ,%.9...-
To"a& Liabi&i"ies KMHF000

$or6ing 1 Cos" o. Goo*s So&*

Stoc) of Ra( 7aterial Nul .19 2..1 %29%..
Add. 4urc3ases +2%9...
Add. Carriage *n(ard $9%.
+$&92%.
5ess0 Closing Stoc) of Ra( 7aterial ,&.9...-
Ra( 7aterial Consumed +2&92%.
!irect la"or 4%.9...
'actory I8er3eads
?eneral 'actory I8er3eads 9%..
4o(er 3492%.
Rent ,$.T of 3.9...- 249...
*nsurance ,$.T of 1.9%..- $94..
4lant dep. In cost ,Hote %- 14.9...
*ndirect 5a"or 3&29%.. &4&9&%.
Total 'actory Cost 29.229+..
Add0 Jor) in 4rocess Nul .19 2..1 +92%.
5ess0 Jor) in 4rocess Nun 3.9 2..2 ,39%..-
Cost of ?oods 7anufactured 29.$29&%.
Add0 'inis3ed ?oods Stoc) Nul .19 2..1 339%.
5ess0 'inis3ed ?oods Stoc) Nun 3.9 2..2 ,1..9...-
Cos" o. Goo*s So&* 3F01MFH00
199

$or6ing 3 A*/inis"ra"i#e E>-enses

Administrati8e Salaries 11.9...
Rent ,2.T of 3.9...- &9...
*nsurance ,2.T of 1.9%..- 291..
?eneral Admin #/penses 339%..
Iffice #lectricity 1$9%.
!epreciation Iffice #1uip. ,Hote%- %9...
A*/inis"ra"i#e E>-enses 1JIF4I0

$or6ing 4 Se&&ing E>-enses

SalesmanGs Salary %9...
Commission on Sales 2$9%.
Carriage Iut(ard 149%.
Se&&ing E>-enses 11KFI00

$or6ing H Finan!ia& E>-enses

Ban) C3arges %9%.
!iscount Allo(ed 129...
Finan!ia& E>-enses 1JFJI0

$or6ing I Fi>e* Asse"s a" $1V

A!!. 1e-re!ia"ion J!2
Cost Rate Ipening 'or t3e year closing

4lant and 7ac3. ..9... 2.T 12%9... 14.9... 2&%9... 43%9...
Iffice e1uipment. %.9... 1.T 2.9... %9... 2%9... 2%9...
1HIF000 HM0F000

$or6ing M C'rren" Asse"s

Stoc)
Ra( 7aterial &.9...
Jor) in 4rocess 39%..
'inis3ed ?oods 1..9...
!e"tors 3%%9%.
Ban) 1429...
Cas3 2192%.
C'rren" Asse"s J1MFI00

$or6ing J C'rren" Liabi&i"ies

Creditors 3129%..

200
Lesson-34
FINANCIAL STATEMENTS OF PA7TNE7S+IP
E>a/-&e G 1

T3e follo(ing trial "alance (as e/tracted from A9 B 6 Co. "oo)s on Nune 3.9 2..2.

A B C !o/-an)
Tria& ba&an!e
As on 5'ne 40F 3003
4articulars Amount
!r. ,Rs.-
Amount
Cr. ,Rs.-
Building Cost %.9...
'urniture and 'i/tures Cost 11.9...
Accumulated !ep. Building 2%.9...
Accumulated !ep. 'urniture 339...
!e"tors 1&2943.
Creditors 1119%..
Cas3 at Ban) &9.
Stoc) on Nun 3.9 2..2 %&394..
Sales 1923&9%..
Cost of goods Sold 1.9%%.
Carriage out(ard 129$$.
!iscounts Allo(ed 191%.
7ar)up on Ban) 5oan 4.9...
Iffice #/penses 2491&.
Salaries and Jages 1$+91.
Bad !e"ts %9.3.
4ro8ision for Bad !e"ts 49...
Ban) 5oan ,5ong Term- 4..9...
Capital > A 3%.9...
B 2+%9...
Current Account > A 139.&.
B 29+$.
!ra(ings > A &49...
B %&9%..

To"a& 3FMLMF0H0 3FMLMF0H0

No"esD
#/penses to "e accrued9 Iffice #/penses Rs. +&.9 Jages Rs.29....
!epreciate 'i/tures 1.T and Building %T on straig3t line.
Reduce pro8ision for dou"tful de"ts to Rs. 392..
4artners3ip salary of A Rs. $9... is to "e accrued.
A and B s3are profit and loss e1ually.

Qou are re1uired to prepare profit 6 loss account and t3e "alance s3eet as at Nune 3.9 2..2.
.

201
So&'"ion


AF BF C Co
For "%e =ear En*ing 5'ne 40F 30-SSSSS
7s.
A/o'n"
7s
Sales
5ess0 Cost of ?oods Sold ,material consumed-
1923&9%..
,1.9%%.-
Gross Pro.i"
5ess0 #/penses
Jages and Salaries 1
Iffice #/penses 2
Carriage Iut
!iscount Allo(ed
7ar)up on 5oan
4ro8ision for !ou"tful !e"t 3
!epreciation 4

1+191.
2%912.
129$$.
191%.
4.9...
4923.
4$9%..
I3IFLI0

,3239.%.-
Ne" Pro.i" 303FL00

*n a"o8e solution9 "ad de"ts are grouped (it3 pro8ision for dou"tful de"ts. *n t3e follo(ing solution9
"ad de"ts and pro8ision for dou"tful de"ts are s3o(n separately.

AF BF C Co
For "%e =ear En*ing 5'ne 40F 30-SSSSSSS
7s.
A/o'n"
7s.
Sales
5ess0 Cost of ?oods Sold ,material consumed-
1923&9%..
,1.9%%.-
?ross 4rofit
5ess0 #/penses
Jages and Salaries 1
Iffice #/penses 2
Carriage Iut
!iscount Allo(ed
7ar)up on 5oan
.Bad !e"ts
4ro8ision for !ou"tful !e"ts not re1uired 3,a-
!epreciation 4

1+191.
2%912.
129$$.
191%.
4.9...
%9.3.
,$..-
4$9%..
%2%9+%.

,3239.%.-
Ne" Pro.i" 303FL00

202

Pro.i" C Loss A--ro-ria"ion A!!o'n"

AF BF C Co
Pro.i" 1is"rib'"ion A!!o'n"
7s.
A/o'n"
7s.
Het 4rofit
5ess0 4artnerGs Salary > A
2.29+..
,$9...-
!istri"uta"le 4rofit
5ess0 4artnerGs S3are in 4rofit
A ,%.T of 1+49+..-
B ,%.T of 1+49+..-

+94%.
+94%.
1+49+..

,1+49+..-
0

Ba&an!e S%ee"

AF BF C Co
Ba&an!e S%ee"
As A" 5'ne 40F 3003
7s.
A/o'n"
7s.
'i/ed Assets at J!2 4
Current Assets %
Current 5ia"ilities &
%2$9%..
2+94..
,11494&.-
Jor)ing Capital &149+4.
To"a& 1F1H4FHH0
'inanced By0
Capital > A
B

3%.9...
2+%9...

&4%9...
Current Account > A
B $
%49%1.
439+3.

+$944.
5ong Term 5oan 4..9...
To"a& 1F1H4FHH0

No"es "o "%e A!!o'n"sD

No"e G 1 Sa&aries a!!o'n"

Sa&aries A!!o'n" A!!o'n" Co*e --------
4articulars Amount
!r. ,Rs.-
4articulars Amount
Cr. ,Rs.-
Salaries paid
Salaries paya"le

1$+91.
29...

Balance ";d

1+191.
To"a& 1L1F1J0 To"a& 1L1F1J0

203
No"e G 3 O..i!e E>-enses

O..i!e E>-enses A!!o'n" A!!o'n" Co*e --------

No"e G 4 Pro#isions .or 1o'b".'& 1eb"s

Pro#ision .or 1o'b".'& 1eb"s A!!o'n" A!!o'n" Co*e --------
4articulars Amount
!r. ,Rs.-
4articulars Amount
Cr. ,Rs.-
Bad !e"ts
Balance c;d

%9.3.
392..
Ipening Balance

Account
49...

4923.
To"a& KF340 To"a& KF340

No"e G 49a: Pro#ision .or 1o'b".'& 1eb"s

4articulars Amount
!r. ,Rs.-
4articulars Amount
Cr. ,Rs.-
4ro8ision not re1uired
Balance c;d

$..
392..
Ipening Balance

49...

To"a& HF000 To"a& HF000

No"e G H Fi>es Asse"s a" $1V
A!!. 1e-. J!2
Cost Rate Ipening 'or t3e Qr. Closing
Building %.9... %T 2%.9... 39%.. 2$9%.. 4&29%..
'urniture 11.9... 1.T 339... 119... 449... &&9...
HKFI00 I3KFI00
No"e G I C'rren" Asse"s

Stoc)s %&394..
!e"tors 1&2943.
5ess0 4ro8ision ,note3- 392.. 1%+923.
Ban) &9.
To"a& J3LFH00

No"e G M C'rren" Liabi&i"ies

Creditors 1119%..
#/p. 4aya"le0
Salaries 29...
Iff. #/p 29+&.
To"a& 11HFHM0
4articulars Amount
!r. ,Rs.-
4articulars Amount Cr.
,Rs.-
Iffice #/penses paid
Iffice #/penses paya"le

2491&.
+&.

Balance ";d

2%912.
To"a& 3IF130 To"a& 3IF130
204
No"e G J A0s C'rren" A!!o'n"

A0s C'rren" A!!o'n" A!!o'n" Co*e --------
4articulars Amount
!r. ,Rs.-
4articulars Amount
Cr. ,Rs.-
!ra(ings

Balance c;d
&49...

%49%1.
Ipening Balance
4rofit for t3e year
Salary
139.&.
+94%.
$9...

To"a& 11KFI10 To"a& 11KFI10

No"e G K B0s C'rren" A!!o'n"

B0s C'rren" A!!o'n" A!!o'n" Co*e --------
4articulars Amount
!r. ,Rs.-
4articulars Amount
Cr. ,Rs.-
!ra(ings

Balance c;d
%&9%..

439+3.
Ipening Balance
4rofit for t3e year

29+$.
+94%.

To"a& 100FH40 To"a& 100FH40

205
E>a/-&e G 3

Atif9 Amir and Ba"ar are partners in a firm. T3ey s3are profit and losses in t3e ratio %0 30 2 respecti8ely.
T3eir trial "alance as on Nune 3.9 2..2 is as follo(s0

A"i.F A/irF Babar C !o/-an)
Tria& ba&an!e
As on 5'ne 40F 3003
4articulars Amount
!r. ,Rs.-
Amount
Cr. ,Rs.-
Sales 21.9%..
Returns in(ard &9$..
4urc3ases 1391+.
Carriage in(ard 19%..
Ipening stoc) 429$%.
!iscount allo(ed 11.
Salaries and Jages 1$92+&
Bad de"ts 19234
4ro8ision for "ad de"ts $..
?eneral e/penses +4%
Rent and rates 29%&%
4ostages 294%.
7otor e/penses 39+4.
7otor 8an at cost 129%..
Iffice e1uipment at cost $94..
Accumulated depreciation 7otor 8an 492..
Accumulated depreciation Iffice e1uipment 29..
Creditors 2493%&
!e"tors 391$
Cas3 at "an) &&&
!ra(ings0 Atif 129&1.
Amir $941
Ba"ar &921&
Current accounts0 Atif 193+.
Amir 1%3
Ba"ar 29.4
Capital accounts0 Atif 3.9...
Amir 1&9...
Ba"ar 129...
To"a& 40HF030 40HF030

T3e follo(ing notes are rele8ant to Nune 3.9 2..2

Stoc) on Nune 3.92..2 is Rs. %19.&..
Rent in ad8ance Rs. 12..
*ncrease pro8ision for "ad de"ts to Rs. $..
Salaries0 Amir Rs.192..9 Ba"ar Rs. ...
*nterest on capital V 1.T.
!epreciate 7otor 8an Rs. 29%.. and office e1uipment Rs. 19&$..

Qou are re1uired to dra( up a set of final accounts as on Nune 3.9 2..2.

206
So&'"ion


For "%e =ear En*ing 5'ne 40F 30-3
Par"i!'&ars No"e A/o'n" 7s. A/o'n"
7s
Sales 1
2.39..
,13.94$.-
?ross 4rofit
5ess0 #/penses
Jages and Salaries
?eneral #/penses
Rent and Rates 3
4ostages
7otor #/penses
!iscount Allo(ed
4ro8ision for !ou"tful !e"t 4
!epreciation %

1$92+&
+4%
2944%
294%.
39+4.
11.
193.4
491$.
3922.

,339&.-
Ne" Pro.i" 4LFII0

Pro.i" C Loss A--ro-ria"e A!!o'n"

7s.
A/o'n"
7s.
Het 4rofit
5ess0 4artnerGs Salary > Amir
Ba"ar
5ess0 *nterest on capital > Atif ,1.T of 3.9...-
Amir ,1.T of 1&9...-
Ba"ar ,1.T of 129...-
3+9%%.
,192..-
,..-
,39...-
,19&..-
,192..-
!istri"uta"le 4rofit
Atif ,%;1. of 319$%.-
Amir ,3;1. of 319$%.-
Ba"ar ,2;1. of 319$%.-

1%9+2%
+9%%%
&93.
319$%.

,319$%.-
0

207
Ba&an!e S%ee"

Ba&an!e S%ee"
As A" 5'ne 40F 3003
7s.
A/o'n" 7s.
'i/ed Assets at J!2 %
Current Assets &
Current 5ia"ilities
+9$2.
$$91%4
,2493%&-
Jor)ing Capital &39+$
To"a& J4FM1K
'inanced By0
Capital > Atif
Amir
Ba"ar

3.9...
1&9...
129...

%$9...
Current Account > Atif $
Amir +
Ba"ar 1.

9.%
39$%
4912$

1%9&1$
To"a& J4FM1K


No"e G 1 Sa&es
7s.
Sales 21.9%..
5ess0 Return in(ard ,&9$..-
Het Sales 2.39..


Ipening Stoc) 429$%.
Add0 4urc3ases 1391+.
Add0 Carriage in(ard 19%..
5ess0 Closing Stoc) ,%19.&.-
13.94$.
No"e G 4 7en" an* 7a"es

7en" an* 7a"es A!!o'n" A!!o'n" Co*e --------
4articulars Amount
!r. ,Rs.-
4articulars Amount
Cr. ,Rs.-
Iffice #/penses paid

29%&%

Ad8ance Rent

Balance ";d
12.

2944%
To"a& 3FIMI To"a& 3FIMI

208

No"e G H Pro#isions .or 1o'b".'& 1eb"s

4articulars Amount
!r. ,Rs.-
4articulars Amount
Cr. ,Rs.-
Bad !e"ts
Balance c;d

19234
$.
Ipening Balance

Account
$..

193.4
To"a& 3F10H To"a& 3F10H

No"e G I Fi>e* Asse"s a" $1V

A!! *e-. J!2
Cost Ipening 'or t3e Qr. Closing
7otor 2an 129%.. 492.. 29%.. &9.. %9$..
Iffice #1uipment $94.. 29.. 19&$. 493$. 49.2.
HF1K0 LFK30

No"e G M C'rren" Asse"s

Stoc) %19.&.
!e"tors 391$
5ess0 4ro8ision for dou"tful de"ts ,$.-
Cas3 at "an) &&&
Ad8ance rent 12.
$$91%4

No"e G J C'rren" Liabi&i"ies

Creditors 2493%&

No"e G K A"i.0s C'rren" A!!o'n"

A"i.0s C'rren" A!!o'n" A!!o'n" Co*e --------
4articulars Amount
!r. ,Rs.-
4articulars Amount
Cr. ,Rs.-
!ra(ings

Balance c;d
129&1.

9.%
Ipening Balance
*nterest on Capital
4rofit for t3e year

193+.
39...
1%9+2%

To"a& 30F41I To"a& 30F41I

209

No"e G L A/ir0s C'rren" A!!o'n"

A/ir0s C'rren" A!!o'n" A!!o'n" Co*e --------
4articulars Amount
!r. ,Rs.-
4articulars Amount
Cr. ,Rs.-
Ipening Balance
!ra(ings

Balance c;d
1%3
$941

39$%
Salary
*nterest on Capital
4rofit for t3e year

192..
19&..
+9%%%

To"a& 13F4II To"a& 13F4II

NOTE G 10 Babar0s C'rren" A!!o'n"

Babar0s C'rren" A!!o'n" A!!o'n" Co*e --------
4articulars Amount
!r. ,Rs.-
4articulars Amount
Cr. ,Rs.-
!ra(ings

Balance c;d
&921&

4912$
Ipening Balance
Salary
*nterest on Capital
4rofit for t3e year

29.4
..
192..
&93.

To"a& 10F4HH To"a& 10F4HH

210
Lesson-35
MA78 UP ON CAPITAL AN1 17A$INGS

T3e partners3ip agreement may include one or "ot3 of t3e follo(ing clauses0
o 4artners are c3arged interest on dra(ings ,t3is may "e on t3e total amount of t3e
current account "alance or on t3e amount e/ceeding a specific limit9 depending upon
t3e terms of agreement-.
o 4artners are gi8en interest on t3eir capital ,again t3is can "e on t3e total amount of t3e
capital or t3e amount e/ceeding a specific figure-.

7easons .or In"eres" On Ca-i"a&

T3e profit;loss s3aring ratio may not "e e1ual despite of t3e fact t3at partners 3a8e contri"uted e1ual
amount of capital9 depending upon t3e partners3ip agreement. Ta)e t3e follo(ing e/ample0
T(o partners start a "usiness and contri"ute e1ual capital and decide to s3are e1ual profits. But t3ey also
realiKe t3at in future t3e "usiness may need furt3er capital and at t3at time "ot3 partners may not "e a"le
to contri"ute e1ually. So9 instead of re8ising t3e contract e8ery time9 t3ey include a clause in t3e
agreement9 (3ere"y9 t3e partners are allo(ed an interest on t3e capital contri"uted. T3is interest can "e
on t3e (3ole amount of "ot3 partners or only of one partner on t3e amount contri"uted in e/cess of t3e
ot3er partner. T3is (ay a partner9 (3o pro8ides capital in e/cess of 3is profit s3aring ratio9 can "e
compensated. Ine may say t3at t3e same results can "e ac3ie8ed "y saying t3at profit and loss s3aring
(ill "e proportionate to t3e amount of capital in8ested. But9 as (e 3a8e said t3at in partners3ip
e8eryt3ing depends on t3e 4artners3ip Agreement.

7easons .or In"eres" On 1ra,ings

!ra(ings are opposite to capital in8ested i.e. t3ese are t3e funds dra(n "y partners from t3e "usiness.
T3erefore9 in order to )eep t3e distri"ution of profit fair9 a clause may "e inserted in t3e agreement9
(3ere an interest is c3arged on t3e dra(ings of t3e partners. Again9 t3is can "e on t3e total amount or on
an amount e/ceeding a specific limit. Bot3 of t3e a"o8e t3ings depend upon t3e agreement "et(een
partners.

A!!o'n"ing Trea"/en"

Ine may t3in) t3at as *nterest on Capital is paid to t3e partners9 so it s3ould "e treated as "usiness
e/pense and *nterest on !ra(ings is c3arged from t3e partners9 t3erefore9 it s3ould "e treated as income.
But t3is is not t3e case.
Nust li)e partners salaries9 "ot3 t3ese items (ill "e included in t3e 4rofit and 5oss Appropriation
Account. 4artnersG salaries9 interests etc. are ne8er treated as e/pense or income of t3e "usiness. T3ey are
a part of !*STR*B:T*IH I' 4RI'*T.

E>!e-"ions

Rent paid to partner for use of 3is premises9 purc3ase of stoc)s9 assets or ot3er items for use in "usiness9
7ar)up on loan from partner are t3e e/ceptions. All t3ese e/penses are c3arged to profit 6 loss account
of t3e partners3ip firm.

A!!o'n"ing En"ries

o In"eres" on Ca-i"a&

!e"it0 4rofit and 5oss Appropriation Account
Credit0 4artner AGs Current Account
Credit0 4artner BGs Current Account
Credit0 4artner CGs Current Account

211

o In"eres" on 1ra,ings

!e"it0 4artner AGs Current Account
!e"it0 4artner BGs Current Account
!e"it0 4artner CGs Current Account
Credit0 4rofit and 5oss Appropriation Account

E>a/-&e G 1

7r. A"id is a partner in a partners3ip firm. Eis capital on Nuly 19 2..1 (as Rs. 2..9.... Ee in8ested
furt3er capital of Rs. 1..9... on 7arc3 19 2..2.

Qou are re1uired to calculate 3is mar) up. 7ar) up rate is %T. T3e financial year is from Nuly to Nune.

So&'"ion

Rs. 2..9... (as in8ested in t3e "eginning of t3e year and e/tra capital (as in8ested on 1
st
7arc3. So9
from 7arc3 on(ard9 t3e capital is Rs. 3..9... ,2..9... M 1..9...-. Je (ill calculate mar) up on Rs.
2..9... for 12 mont3s9 i.e.9 from Nuly to Nune. 7ar) up on 1..9... (ill "e for 4 mont3s9 i.e.9 from 7arc3
to Nune.

7ar) up is calculated as follo(s0

2..9... / %T O 1.9... O 1.9......
1..9... / %T O 1%9... / 4;12 O 1&&&.&
Total 7ar) :p 119&&&.&

E>a/-&e G 3

7r. Haeem is a partner in a partners3ip firm. Ee dre( follo(ing amount during t3e financial year0
Rs.
Septem"er 1 39...
Ho8em"er 1 %9...
Nanuary 1 49...
7arc3 1 %9...
Nune 1 29...

Qou are re1uired to calculate 7ar) up on 3is dra(ings9 if t3e rate of mar) up is %T. T3e financial year is
from Nuly to Nune9

So&'"ion

39... / %T O 1%. / 1.;12 O 12%...
%9... / %T O 2%. / $;12 O 1&&.&
49... / %T O 2.. / &;12 O 1.....
%9... / %T O 2%. / 4;12 O $3.33
29... / %T O 1.. / 1;12 O $.33
To"a& Mar6 U- HK4.44

212

E>a/-&e G 4

Atif9 Ba"ar and !a(ar are t3ree partners s3aring profits e1ually.
Qou are re1uired to prepare profit and loss appropriation account and e/tract from "alance s3eet9
s3o(ing partners capital and current accounts from t3e follo(ing information0

Het profit for t3e year Rs. %%$9...
Ipening "alance of Capital accounts Atif Rs. %..9...9 Ba"ar Rs. &..9...9 !a(ar Rs. 4..9...
Ipening "alance of Current Account Atif Rs. %%9$..9 Ba"ar Rs. &39$2.9 !a(ar Rs. 2.9%%%.
Salaries to "e paid to Ba"ar Rs. 1.9...9 !a(ar Rs. 129....
!ra(ings during t3e year Atif Rs. 1$.9...9 Ba"ar Rs. 22.9... !a(ar Rs. 1%19...
7ar) up on Capital V %T and 7ar) up on dra(ings are0 Atif Rs. +9...9 Ba"ar Rs. 119... and
!a(ar Rs. 9%%..

So&'"ion

Pro.i" C Loss A--ro-ria"ion A!!o'n"

A"i.F BabarF 1a,ar C Co
7s.
A/o'n"
7s.
Het 4rofit
5ess0 4artnerGs Salary > Ba"ar
!a(ar

5ess0 *nterest on capital > Atif ,%T of %..9...-
Ba"ar ,%T of &..9...-
!a(ar,%T of 4..9...-

Add0 *nterest on !ra(ings > Atif
Ba"ar
!a(ar

1.9...
129...

2%9...
3.9...

2.9...

+9...
119...
9%%.
%%$9...

,229...-

,%9...-

29%%.
1is"rib'"ab&e Pro.i"
Atif ,1;3of 4$$9%%.-
Amir ,1;3 of 4$$9%%.-
Ba"ar ,1;3 of 4$$9%%.-

1&29$%.
1&29$%.
1&29$%.
HKKFII0

,4$$9%%.-
0

A"i.0s C'rren" A!!o'n" A!!o'n" Co*e --------
4articulars Amount
!r. ,Rs.-
4articulars Amount
Cr. ,Rs.-
!ra(ings
*nterest on !ra(ings

Balance c;d
1$.9...
+9...

%49&%.
Ipening Balance
*nterest on Capital
4rofit for t3e year

%%9$..
2%9...
1&29$%.

To"a& 3H4FMI0 To"a& 3H4FMI0
213

Babar0s C'rren" A!!o'n" A!!o'n" Co*e --------
4articulars Amount
!r. ,Rs.-
4articulars Amount
Cr. ,Rs.-
!ra(ings

Balance c;d
22.9...
119...

3%9&.
Ipening Balance
Salary
*nterest on Capital
4rofit for t3e year

&39$2.
1.9...
3.9...
1&29$%.

To"a& 3MMFMJ0 To"a& 3MMFMJ0

1a,ar0s C'rren" A!!o'n" A!!o'n" Co*e --------
4articulars Amount
!r. ,Rs.-
4articulars Amount
Cr. ,Rs.-
!ra(ings

Balance c;d
1%19...
9%%.

%&9$%%
Ipening Balance
Salary
*nterest on Capital
4rofit for t3e year

2.9%%%
129...
2.9...
1&29$%.

To"a& 31IFH0I To"a& 31IFH0I

A*/ission o. A Par"ner

J3en a ne( partner Aoin t3e "usiness9 old agreement of partners3ip is modified or a ne( agreement is
prepared. T3is ne( agreement contains ne( ratios in (3ic3 partners s3are profit and loss in ne( set up.
At t3e admission of a ne( partner9 all t3e assets and lia"ilities of t3e old "usiness are re8alued in order to
)no( t3e e/act (ort3 of t3e "usiness. ?ood(ill of t3e "usiness is also re8alued. T3e 8alue ,in monetary
terms- of t3e reputation of t3e "usiness is called ?II!J*55. *t is an intangi"le asset.

1isso&'"ion o. A Fir/

J3en a partners3ip is dissol8ed9 all t3e lia"ilities of t3e firm are paid9 out of t3e assets of t3e firm9
a8aila"le at t3e time of dissolution. T3e remaining amount after paying all t3e lia"ilities9 if a8aila"le9 (ill
"e distri"uted among t3e partners in t3eir profit loss s3aring ratios. *f assets of t3e firm are not sufficient
to pay all t3e lia"ilities of t3e firm9 t3e partners (ill contri"ute t3e "alance amount in t3eir profit;loss
s3aring ratios to meet t3e lia"ilities of t3e firm.
214
Lesson-36
INT7O1UCTION TO COMPANIES

1isa*#an"ages o. Par"ners%i- Fir/

T3e 5ocal 5a( restricts t3e num"er of partners in a partners3ip firm to t(enty. *f t3e firm needs more
capital for its "usiness9 t3e partners may not "e in a position to in8est more money in t3e "usiness.

Secondly9 if t3e "usiness of t3e partners3ip firm is 8ery large and t(enty persons can not manage it9 t3ey
cannot admit ne( partners in t3e "usiness. Eo(e8er9 t3ere is one e/ception. T3e partners3ip firm of
professionals can 3a8e more t3an t(enty partners.

At t3is point9 need for forming a CI74AHQ arises.

A*#an"ages o. Li/i"e* Co/-an)

A 5imited company enAoys t3e follo(ing "enefits0
*t can 3a8e more t3an t(enty partners9 so pro"lem of e/tra capital is reduced to minimum.
T3e lia"ilities of t3e mem"ers of a company is limited to t3e e/tent of capital in8ested "y t3em
in t3e company
T3ere are certain ta/ "enefits to t3e company9 (3ic3 a partners3ip firm can not enAoy.
*n 4a)istan9 affairs of limited companies are controlled "y CI74AH*#S IR!*HAHC# issued
in 1+$4.
T3e formation of a company and ot3er matters related to companies are go8erned "y
S#C:R*T*#S AH! #RCEAH?# CI77*SS*IH I' 4AK*STAH ,S#C4-.

T)-es o. Co/-anies

T3ere are t(o maAor types of t3e companies0
4ri8ate limited companies
4u"lic limited companies

Pri#a"e Li/i"e* Co/-anies

'ollo(ing are t3e main c3aracteristics of pri8ate limited companies0
Hum"er of mem"ers in a pri8ate limited company ranges from t(o to fifty.
Jords and parent3eses B,4ri8ate- 5imitedC are added at t3e end of t3e name of a pri8ate limited
company. #/ample0 ABC ,4ri8ate- 5imited.
4ri8ate limited company can not offer its s3ares to general pu"lic at large.
*n case a s3are3older decides to sell 3is s3ares9 3is s3ares are first offered to e/isting
s3are3olders. *f all e/isting s3are3olders decide not to purc3ase t3ese s3ares9 only t3en9 an
outsider can "uy t3em.
T3e s3are3olders of t3e pri8ate limited company elect t(o mem"ers of t3e company as
!irectors.
T3ese directors form a "oard of directors to run t3e affairs of t3e company.
T3e 3ead of "oard of directors is called Bc3ief e/ecuti8eC.

P'b&i! Li/i"e* Co/-an)

'ollo(ing are t3e main c3aracteristics of pu"lic limited companies0
7inimum num"er of mem"ers in a pu"lic limited company is se#en
T3ere is no restriction on t3e ma/imum num"er of mem"ers in a pu"lic limited company.
Jord B5imitedC is added at t3e end of t3e name of a pu"lic limited company. #/ample0 ABC
5imited.
215
4u"lic limited company can offer its s3ares to general pu"lic at large.
T3e s3are3olders of t3e pu"lic limited company elect se8en mem"ers of t3e company as
!irectors.
T3ese directors form a "oard of directors to run t3e affairs of t3e company.
T3e 3ead of "oard of directors is called Bc3ief e/ecuti8eC.

T3ere are t(o types of pu"lic limited company0
5isted Company
Hon 5isted Company

Lis"e* Co/-an)

5isted company is t3at company (3ose s3ares are 1uoted on stoc) e/c3ange. i.e. (3ose s3ares are traded
in stoc) e/c3ange. *t is also called 1uoted company.

Non Lis"e* Co/-an)

Hon listed company is t3at company (3ose s3ares are not 1uoted on stoc) e/c3ange. i.e. (3ose s3ares
are not traded in stoc) e/c3ange.

For/a"ion o. Co/-an)

*n case of pri8ate limited company9 any t(o mem"ers and in case of pu"lic limited company9 any se8en
mem"ers can su"scri"e t3eir names in 7emorandum and Articles of association along (it3 ot3er
re1uirements of t3e Companies Irdinance 1+$4L can apply to Security and #/c3ange Commission for
registration of t3e company.

Me/oran*'/ o. asso!ia"ionD

7emorandum of association contains t3e follo(ing clauses0
Hame of t3e company (it3 t3e (ord B5imitedC as t3e last (ord of t3e name9 in case of pu"lic
limited and t3e parent3esis and t3e (ord B,4ri8ate 5imited-C as t3e last (ord of t3e name9 in
case of pri8ate limited company.
4lace of registered office of t3e company.
I"Aecti8e of t3e company.
Amount of s3are capital (it3 (3ic3 company proposes to "e registered and di8ision in to
num"er of s3ares.
Ho su"scri"er of t3e company s3all ta)e less t3an one s3are.
#ac3 su"scri"er of t3e memorandum s3all (rite opposite to 3is name9 t3e num"er of s3ares 3eld
"y 3im.
Ar"i!&es o. Asso!ia"ion

Article of association is a document t3at contains all t3e policies and ot3er matters (3ic3 are
necessary to run t3e "usiness of t3e company.
T3is is also signed "y all t3e mem"ers of t3e company.

J3en Security and #/c3ange Commission is satisfied t3at all t3e re1uirements of t3e Companies
Irdinance 3a8e "een complied (it39 it issued certificate of incorporation to t3e company. T3is certificate
is e8idence t3at a separate legal entity 3as come in to e/istence.

216

A'"%ori2e* S%are Ca-i"a&

T3e ma/imum amount (it3 (3ic3 a company gets registration;incorporation is called aut3oriKed s3are
capital of t3at company.
T3is capital can "e increased (it3 t3e prior appro8al of security and e/c3ange commission. T3is capital is
furt3er di8ided in to smaller denominations called s3ares. #ac3 s3are usually 3as a face 8alue e1ual to Rs.
1.. According to Companies Irdinance9 t3is face 8alue can "e increased "ut can not "e decreased. T3e
8alue of s3are (ritten on its face is called face 8alue or par 8alue or nominal 8alue

Iss'e* S%are Ca-i"a&

J3en a company issues its s3ares to general pu"lic at large9 t3e amount raised "y t3e company (it3 suc3
an issue is called issued s3are capital. T3is is also called 4aid up S3are Capital., total amount recei8ed "y
t3e company-. Accounting entry is recorded for issued s3are capitalL no suc3 entry is recorded for
aut3oriKed s3are capital.

Pre&i/inar) E>-enses

All e/penses incurred up to t3e stage of incorporation of t3e company are called 4reliminary #/penses.
All t3ese e/penses are incurred "y su"scri"ers of t3e company.
217
Lesson-37
COMPONENTS OF FINANCIAL STATEMENTS

T3e ma/imum amount (it3 (3ic3 a company gets registration;incorporation is called aut3oriKed s3are
capital of t3at company. T3is capital can "e increased (it3 t3e prior appro8al of security and e/c3ange
commission. T3is capital is furt3er di8ided in to smaller denominations called s%ares. #ac3 s3are usually
3as a face 8alue e1ual to Rs. 1.. According to Companies Irdinance9 t3is face 8alue can "e increased "ut
can not "e decreased. T3e 8alue of s3are (ritten on its face is called .a!e #a&'e.
S3ares are issued for cas3 as (ell as for any asset. 'or e/ample9 if any mem"er of t3e company sell
3is;3er land to t3e company. *n return9 company issue 3im;3er fully paid s3ares instead of paying cas3.
T3ose s3ares are also part of paid up capital "ecause company 3as recei8ed t3e "enefit of t3at amount.

S%are Cer"i.i!a"e

S3are Certificate is t3e e8idence of o(ners3ip of t3e num"er of s3ares 3eld "y a mem"er of t3e
company. J3en a company issue more t3an one s3are to its mem"er9 it does not issue t3at num"er of
s3ares to 3im;3er. *nstead9 it issues a certificate under t3e stamp of t3e company t3at a particular
num"er of s3ares are issued to mem"ers of t3e company.

S%ares Iss'e* A" Pre/i'/

J3en a company 3as a good reputation and earns 3uge profits9 t3e demand of its s3ares increases in t3e
mar)et. *n t3at case9 t3e company is allo(ed "y t3e Companies Irdinance 1+$49 to issue s3ares at a
3ig3er price t3an t3eir face 8alue. Suc3 an issue is called S3ares *ssued at 4remium. T3e amount recei8ed
in e/cess of t3e face 8alue of t3e s3ares is transferred to an account called BS3are 4remium AccountC.
T3is account is used to0
Jrite off 4reliminary #/penses of t3e company.
Jrite off t3e "alance amount9 in issuing s3ares on discount.
*ssue fully paid Bonus S3ares.

S%ares Iss'e* On 1is!o'n"

J3en a company is not ma)ing 3uge profits9 rat3er it is sustaining loss9 t3e demand of its s3ares
decreases in t3e mar)et. *f t3e company needs e/tra funds9 t3en it is allo(ed "y t3e Companies
Irdinance 1+$49 to issue s3ares at lesser price t3an t3eir face 8alue. Suc3 an issue is called S3ares *ssued
on discount.

T3e difference of face 8alue and t3e amount recei8ed is met "y s3are premium account9 if a8aila"le. *f
t3ere is no s3are premium account a8aila"le9 t3is difference is s3o(n in t3e profit and loss account of
t3at period9 in (3ic3 s3ares are issued as loss on issue of s3ares at discount.

Cer"i.i!a"e o. In!or-ora"ion<7egis"ra"ion

J3en Security and #/c3ange Commission of 4a)istan recei8es application for registration of a company9
t3e registrar of S#C4 ma)es in8estigation in respect of compliance (it3 legal re1uirements. J3en 3e is
satisfied t3at all legal re1uirements are complied (it3. Ee issues a Certificate of
*ncorporation;registration to t3e company. T3is certificate is e8idence t3at a separate legal entity 3as
formed. T3e company9 after incorporation;Registration 3as t3e rig3t to sue and to "e sued in its o(n
name.

1i#i*en*

4rofit distri"uted to t3e s3are 3olders for t3eir in8estment in t3e company is called !i8idend. !i8idend is
appro8ed "y t3e s3are 3olders in t3e annual general meeting at t3e recommendation of t3e directors.
!i8idend is paid out of profits. *f9 in any year9 company could not ma)e any profit. Ho di8idend (ill "e
218
paid to s3are 3olders. !i8idend is paid to registered s3are 3olders of t3e company. Registered s3are
3olders are t3ose mem"ers of t3e company9 (3o are enlisted in t3e register of s3are 3olders of t3e
company.
S'bs!ribers < S-onsors o. "%e Co/-an)

Su"scri"ers ; Sponsors are t3e persons (3o sign articles and memorandum of t3e company and
contri"ute in t3e initial s3are capital of t3e company.

Iss'an!e o. F'r"%er Ca-i"a&

J3ere a company (ants to issue furt3er capital ,called raising t3e capital-9 s3ares are first offered to
current s3are3olders. T3e issuance of furt3er capital to 4resent S3are3olders is called 7ig%" Iss'e. T3is
issue is in proportion to current s3ares 3eld "y t3e s3are3olders. T3e s3are3olders can accept or reAect
t3e offer. *f s3are3olders refuse to accept t3ese s3ares t3en t3ese are offered to ot3er people.

5o'rna& En"ries

S3ares issued against cas3

!e"it0 Cas3 ; Ban) Account
Credit0 S3are Capital Account
S3ares issued against transfer of asset0

!e"it0 Asset Account
Credit0 S3are Capital Account
T3is is called issuance of asset in )ind.

Bon's S%ares
T3is is anot3er (ay of distri"uting di8idend. J3en a company decides9 not to gi8e cas3 to t3e s3are
3olders as di8idend9 it issued s3ares called "onus s3ares9 to t3e s3are 3olders for (3ic3 it recei8es no
cas3. T3ese are fully paid s3ares.

Finan!ia& S"a"e/en"s o. Li/i"e* Co/-anies

*n 4a)istan9 'inancial Statements of limited companies are prepared in accordance (it30
*nternational accounting standards adopted in 4a)istan.
Companies Irdinance 1+$4.
*n case of conflict t3e re1uirements of Companies Irdinance (ould pre8ail o8er Accounting Standards.

Co/-onen"s o. Finan!ia& S"a"e/en"s

Components of companiesG financial statements are as follo(s0
Balance S3eet
Cas3 'lo( Statement
Statement of C3anges in #1uity
Hotes to t3e Accounts
Comparati8e figures of 4re8ious 4eriod

E;'i")

#1uity is t3e total of capital9 reser8es and undistri"uted profit. T3at means t3e amount contri"uted "y
s3are 3olders plus accumulated profits of t3e company. #1uity9 t3erefore9 represents t3e total of
s3are3olders fund in t3e company.
219

S"a"e/en" o. C%anges in E;'i")

T3e statement of c3anges in e1uity s3o(s t3e mo8ement in t3e s3are3olders e1uity ,capital and reser8es-
during t3e year. Je can say t3at it replaces profit and loss appropriation account of partners3ip "usiness.

For/a" o. S"a"e/en" o. C%anges in E;'i")

Na/e o. "%e Co/-an)
For =ear En*e* 5'ne 40F 3003
S%are
Ca-i"a&
S%are
Pre/i'
/
A!!o'n"
7eser#es Pro.i"
C Loss
A<!
To"a&
Balance In Nun 3.9 2... R R R R R
7o8ements !uring t3e Qear R R
Balance In Nun 3.9 2..1 R R R R R
7o8ements !uring t3e Qear R R
Balance In Nune 3.9 2..2 R R R R R

220
Lesson-38
FINANCIAL STATEMENTS OF LIMITE1 COMPANIES


Statement of c3anges in e1uity s3o(s t3e mo8ement in0
o S3are Capital ,issued s3are capital-
o S3are 4remium
o Hature of Reser8es created
o :n=appropriated 4rofit ; 5oss
o !i8idend !istri"uted

S%are Pre/i'/

S3are 4remium is t3e amount recei8ed in e/cess of t3e face 8alue of t3e s3are. #/ample0 if a Rs. 1. s3are
is sold for Rs9 12 t3en Rs. 2 is s3are premium. S3are 4remium can not "e distri"uted among t3e s3are
3olders.
*t can "e utiliKed0
o To issue Bonus S3ares
o To (rite off 4reliminary #/penses
o To meet t3e difference of face 8alue and cas3 recei8ed in case of s3ares issued at
discount
o To meet t3e e/penses of issue of s3ares
o 'or payment of premium on redemption of de"entures.

7eser#es

Capital Reser8e and 'i/ed Asset Replacement Reser8e are used for specific purpose. T3ese are not
distri"uted among s3are 3olders. ?eneral Reser8e and undistri"uted profit[ can "e distri"uted among
s3are 3olders. Re8aluation Reser8e is created (3en an asset is re=8alued from cost to mar)et 8alue.
Re8aluation Reser8e can not "e distri"uted among t3e s3are 3olders. *t can "e utiliKed for0
o Setting off any loss on re8aluation
o At t3e time of disposal of asset9 t3e reser8e relating to t3at asset is transferred to profit
6 loss account.

Cas% F&o, S"a"e/en"

Cas3 'lo( Statement s3o(s t3e mo8ement of cas3 resources during t3e year. *t gi8es information a"out
sources of income and account 3eads on (3ic3 t3is amount is spent. *t is an integral part of financial
statements.


Hotes to t3e accounts are t3e e/planatory notes of all t3e items s3o(n in t3e profit and loss account and
t3e "alance s3eet. *t is t3e re1uirement of t3e Companies Irdinance and t3e *nternational Accounting
Standards. 'ollo(ing are e/plained in Hotes to t3e accounts0
o Hature of "usiness of t3e company
o Accounting 4olicies of t3e company
o !etails and e/planation of items gi8en in t3e 4rofit and 5oss Account and Balance
S3eet.

1eben"'res

!e"entures are ac)no(ledgement of de"t9 o(ed "y t3e company to t3e pu"lic at large for a defined
period of time9 and 3as a mar) up ,profit- rate attac3ed to it. !e"entures are issued under t3e common
221
seal ,Stamp- of t3e company. !e"enture is an instrument for o"taining loan from general pu"lic. 7ar)
up is paid on !e"entures (3ic3 is generally e1ual to t3e mar)et rate.
Ter/ Finan!e Cer"i.i!a"e
Term 'inance Certificates are issued for a defined period. T3ese are also issued to o"tain loan from
pu"lic at large. Bot3 !e"entures and Term 'inance Certificates are usually issued "y 4u"lic Companies.

I&&'s"ra"ion

ABC Li/i"e*
Tria& ba&an!e
As on 5'ne 40F 3003
Par"i!'&ars A/o'n"
1r. 97s.:
A/o'n"
Cr. 97s.:
Aut3oriKed S3are Capital ,'ace 8alue Rs. 1. eac3- 19%..9...
4aid up Capital 19...9...
S3are 4remium 12.9...
?eneral Reser8e 4$9...
Accumulated profit "roug3t for(ard 13+9%.
Ipening Stoc) 33&92.
Sales 491%93.
4urc3ases 294%9+1.
Return out(ard 121922.
Return in(ard 13&92..
Carriage in(ard &934.
Carriage out(ard 439+.
Jages 41.924.
Salesmen Salaries 3.%911.
Admin. Jages 6 salaries 291+.
4lant And 7ac3inery &1.9...
7otor 8e3icle 3ire $49.
4ro8ision for !epreciation0 4lant 6 7ac3inery 21&92+.
?eneral Selling #/penses 2913.
?eneral admin. e/penses 49++.
!irectorsG Remuneration 1+%914.
Rent recei8ed 391%.
Trade !e"tors 19&239%.
Cas3 and Ban) "alances 1+92%.
Trade Creditors 3.49%.
Bills 4aya"le %9...
To"a& MFJILF4I0 MFJILF4I0

A**i"iona& In.or/a"ion
Closing stoc) is 8alued at Rs. 4129$..
Accrue AuditorsG remuneration Rs. 19....
!i8idend is proposed V3.%T for t3e year.
!epreciate plant 6 mac3inery V2.T on cost.
If t3e motor 3ire9 Rs. %%9... is for selling purposes.
!irectorsG remuneration 3as "een as follo(s0
o C3airman 4&9&4.
o 7anaging !irector %19%..
o 'inance !irector 4&9...
o 7ar)eting !irector %19...
1LIF1H0
222

Qou are re1uired to prepare profit 6 loss account as on Nune 3.9 2..2 and "alance s3eet for t3e reported
period.

So&'"ion

J3ile presenting t3e financial Statements of t3e company9 "alance s3eet is presented first and profit 6
loss account is presented later9 "ut (e cannot prepare "alance s3eet (it3out preparing profit and loss
account. So (e (ill prepare profit and loss account first.

Ba&an!e S%ee"

ABC Li/i"e*
Ba&an!e S%ee"
As A" 5'ne 40F 3003
4articulars Hote
'i/ed Assets at J!2 3=a 2191.
C'rren" Asse"s
!e"tors
Stoc) in Trade
Cas3 6 Ban) Balance

19&239%.
4129$.
1+92%.
2921%9&..
C'rren" Liabi&i"ies
Creditors
Bills 4aya"le
Auditors Remuneration 4aya"le
4roposed !i8idend

3.49%.
%9...
19...
3%9...
$.9%.
Jor)ing Capital 19$39.3.
Ne" Asse"s E/-&o)e* 1FMJLFJH0
'inanced By0
Aut3oriKed Capital
%.9... S3ares of Rs. 1. eac3

19%..9...
4aid :p Capital
3.9... S3ares of Rs. 1. eac3
S3are 4remium
?eneral Reser8e
Accumulated 4rofit and 5oss Account

19...9...
12.9...
4$9...
%1194.
To"a& 1FMJLFJH0

223

ABC Li/i"e*
For "%e =ear En*ing 5'ne 40F 30-3
Par"i!'&ars No"e A/o'n" 7s. A/o'n" 7s
Sales 1
49%+91.
,29&+%921.-
?ross 4rofit
Add0 ot3er income ,rent recei8ed-
4rofit "efore ta/
5ess0 Ta/ for t3e year
4rofit after ta/
Add0 Accumulated 4rofit ";f

5ess0 4roposed !i8idend V 3.%T %

&+29.+.
4$29.3.
19$$39+&.
391%.

,1914912.-
4&9++.
.
4&9++.
13+9%.
$$&94.
3%9...
Ne" Pro.i" Carrie* For,ar* I11FJH0


No"e G 1 Sa&e a!!o'n"

Sales 491%93.
5ess0 Return in ,13&92..-
Ne" Sa&es HFIJLF1J0


Ipening Stoc) 33&92.
Add0 4urc3ases 294%9+1.
Jages 41.924.
5ess0 Returns out ,121922.-
Add0 Carriage in &934.
5ess0 Closing Stoc) ,4129$.-
To"a& 3FMLIF310


Jages 6 salaries 291+.
7otor Eire 2+9.
?eneral #/penses 49++.
!irectors Remuneration0
C3airman 4&9&4.
7anaging !irector %19%..
!irector 'inance 4&9... 144914.
Auditors Remuneration 19...
!epreciation 4lant 6 7ac3inery ,Hote P 3=a- 1229...
To"a& ML3F0L0

224

No"e G 4-Fi>e* Asse"s

A!!. 1e-. J!2

4lant 6 7ac3inery &1.9... 2.T 21&92+. 1229... 33$92+. 2191.

No"e G H Se&&ing E>-enses

Salesmen salaries 3.%911.
Carriage out 439+.
?eneral #/penses 2913.
7otor Eire %%9...
7ar)eting !irectorGs Remuneration %19...
To"a& HK3F040

No"e G I Pro-ose* 1i#i*en*s

3.%T of 19...9... ,issued capital- 3%9...

225
Lesson-39
FINANCIAL STATEMENTS OF LIMITE1 COMPANIES 9Con"in'e*:
O'es"ion G 1

KKB ,4ri8ate- 5imited is a manufacturing company. 'ollo(ing list of "alances 3as "een e/tracted from
its "oo)s as on Nune 3.9 2..2.

88B 9Pri#a"e: Li/i"e*
Tria& Ba&an!e
As A" 5'ne 40F 3003
4articulars Rs. Rs.
Aut3oriKed S3are Capital %..9...
4aid up Capital 3..9...
!e"entures 24.9...
Accumulated 4rofit and 5oss Account 4+94$+
?eneral Reser8e $9...
Creditors 293&.
Accumulated !epreciation
7otor 2e3icles 4&9.%.
Building &&9...
'urniture and 'i/tures 1192%.
4roposed !i8idend 1%9...
5and 12.9...
Building 31%9...
7otor 2e3icles 1$9%..
'urniture and 'i/ture 349%..
Stoc) in Trade 4$9&3.
!e"tors 429%2%
Ban) Balance 149++4
TOTAL &3914+ &3914+

No"eD

All items of profit and loss 3a8e "een accounted for in calculating t3e "alance of accumulated profit and
loss account9 e/cept for !epreciation (3ic3 is to "e c3arged at 1.T on J!2 on all deprecia"le assets.

7e;'ire*

4repare t3e "alance s3eet of Beta ,4ri8ate- 5imited As on Nune 3.9 2..2.

226
So&'"ion
Ba&an!e S%ee"

88B 9Pri#a"e: Li/i"e*
Ba&an!e S%ee"
As A" 5'ne 40F 3003
'i/ed Assets at J!2 1
Current Assets
4+2933.
!e"tors
Stoc) in Trade
Ban) Balance
429%2%
4$9&3.
149++4
Current 5ia"ilities 1.&914+
Creditors
4roposed !i8idend
293&.
1%9...
4293&.
Jor)ing Capital &39$+
Ne" Asse"s E/-&o)e* IIMF11L
'inanced By0
Aut3oriKed Capital

%..9...
4aid :p Capital
?eneral Reser8e
Accumulated 4rofit and 5oss Account 2

3..9...
$9...
$911+
S3are Eolders #1uity
!e"entures
31&911+
24.9...
To"a& IIMF11L

No"e 1 Fi>e* Asse"s a" $1V

Cos" 7a"e A!!'/'&a"e* 1e-re!ia"ion $1V Par"i!'&ars
As At
1==.1
Addition;
!eletion
As At
3.=&=.2
As At
1==.1
'or
T3e
Qear
As At
3.=&=.2
As At
3.=&=.2
5and 12.9... . 12.9... . . . . 12.9...
Building 31%9... . 31%9... 1. &&9... 249+.. +.9+.. 22491..
'urniture
6 'i/tures
349%.. . 349%.. 1. 1192%. 2932% 139%% 2.9+2%
2e3icles 1$9%.. . 1$9%.. 1. 4&9.%. 14914% &.91+% 1293.%
TITA5 &%9... . &%9... 12393.. 4193. 1&49&. 4+2933.

No"e 3 A!!'/'&a"e* Pro.i" an* Loss A!!o'n"

Balance As 4er Trial Balance 4+94$+
5ess0 !epreciation for t3e Qear ,note 1- ,4193.-
$911+
227
As depreciation is c3arged in profit 6 loss account and (e did not prepare profit 6 loss account9 in t3is
case9 so depreciation (ill "e deducted from accumulated profit 6 loss account.

O'es"ion G 3

ABC Li/i"e*
Tria& ba&an!e
As on 5'ne 40F 3003
4articulars Amount
,Rs.-
Amount
,Rs.-
A'"%ori2e* S%are Ca-i"a& 9Fa!e #a&'e 7s. 10 ea!%: 1FI00F000
4aid up Capital 192..9...
S3are 4remium %9...
?eneral Reser8e 1%.9...
Accumulated profit "roug3t for(ard 21%9...
Ipening Stoc) +.29...
Sales 49%%9...
4urc3ases 291+&9...
7otor #/penses 1&49...
Bad de"ts 319...
Carriage in(ard 3$9...
!e"enture 7ar) :p 4.9...
7ar) up on "an) o8erdraft 1+9...
Jages $329...
!irectorsG Remuneration 21.9...
?eneral #/penses 1%49...
5ong Term *n8estments 34.9...
*ncome from s3ares in related companies 3&9...
!iscount allo(ed 6 recei8ed %%9... 3+9...
4rofit on property sale 1..9...
Building at cost 192..9...
4lant And 7ac3inery at cost 33.9...
7otor 2e3icles at cost 4$.9...
4ro8ision for !epreciation0 Building 3%9...
4lant 6 7ac3inery 1+%9...
7otor 2e3icles 1&.9...
?ood(ill 4.9...
4atents 6 Trade 7ar)s 3$9...
Trade !e"tors 6 Creditors $&49... 3+29...
Ban) I8erdraft 219...
!e"enture 1.T 4..9...
To"a& JFL44F000 JFL44F000
No"esD
Closing stoc) is 8alued at Rs. 1.39....
!epreciate "uilding V 1.T9 4lant 6 7ac3inery V 2.T and 2e3icles V 2%T.
4ro8ision for ta/ to "e created Rs. 23&9....

Qou are re1uired to prepare 'inancial Statements of ABC 5imited as on Nune 3.9 2..2.

228
So&'"ion
ABC Li/i"e*
Ba&an!e S%ee"
As A" 5'ne 40F 3003
4articulars Hote
'i/ed Assets at J!2 3=a
19.+.9%..
34.9...

C'rren" Asse"s
!e"tors
Stoc) in Trade
?ood(ill
4atents 6 Trade 7ar)s
1943.9%..

$&49...
1.39...
4.9...
3$9...
19.4%9...
C'rren" Liabi&i"ies
Creditors
4ro8ision 'or Ta/
Ban) I8erdraft

3+29...
23&9...
219...
&4+9...
Jor)ing Capital 3+&9...
Ne" Asse"s E/-&o)e* 1FK3MFI00
'inanced By0
Aut3oriKed Capital

19%..9...
4aid :p Capital
S3are 4remium
?eneral Reser8e
!e"entures

192..9...
%9...
1%.9...
19%..
4..9...
To"a& 1FK3MFI00


ABC Li/i"e*
Par"i!'&ars No"e A/o'n" 7s. A/o'n"
7s
Sales
49%%9...
,39$&%9...-
?ross 4rofit
Add0 ot3er income 2
5ess0 'inancial #/penses 4
4rofit "efore ta/
5ess0 4ro8ision for Ta/
4rofit after ta/
Add0 Accumulated 4rofit ";f

$.39%..
%+9...
1.9...
1%9...

,$&29%..-
229%..
,23&9...-
,2139%..-
21%9...

Ne" Pro.i" Carrie* For,ar* 1FI00
229
No"es


Ipening Stoc) +.29...
Add0 4urc3ases 291+&9...
Jages $329...
Add0 Carriage in 3$9...
5ess0 Closing Stoc) ,1.39...-
To"a& 4FKMIF000

No"e G 3 O"%er In!o/es

*ncome from s3ares in related companies 3&9...
!iscount recei8ed 3+9...
4rofit on property sale 1..9...
To"a& 1JIF000


7otor #/penses 1&49...
Bad !e"ts 319...
!irectorsG Remuneration 21.9...
?eneral #/penses 1%49...
!epreciation ,Hote P 3=a- 1$+9%..
!iscount allo(ed %%9...
To"a& K04FI00

No"e G H Fi>e* Asse"s a" $1V

A!!. 1e-eri!ia"ion
J!2
Building 192..9... 1.T 3%9... $29%.. 4%9%.. 429%..
4lant 6 7ac3inery 33.9... 2.T 1+%9... 29... 222 ... 1.$9...
7otor 2e3icles 4$.9... 2%T 1&.9... $.9... 24.9... 24.9...
1KLFI00 1F0L0FI00

No"e G I Finan!ia& E>-enses

!e"enture 7ar) up 4.9...
7ar) up on Ban) I8erdraft 1+9...
To"a& ILF000
230
Lesson-40
FINANCIAL STATEMENTS OF LIMITE1 COMPANIES 9Con"in'e*:
O'es"ion

'ollo(ing trial "alance 3as "een e/tracted from t3e "oo)s of Alp3a 5td. as on Nune 3.9 2..2.

Qou are re1uired to prepare t3e profit and loss account for t3e year and t3e Balance S3eet as at Nune 3.9
2..2.

A&-%a Li/i"e*
Tria& Ba&an!e
As a" 5'ne 40F 3003
Ti"&e o. A!!o'n" 1r. 7s. Cr. 7s.
4aid up capital 1%9...
1. T !e"entures %9...
Building at Cost 239%..
#1uipment at Cost 2.9...
2e3icles at Cost 439...
Accumulated !ep. > Building 1192%.
#1uipment &9...
2e3icles 129+..
Stoc) Ipening Balance %&92%
Sales 24%9%..
4urc3ases 1349%
Carriage *n(ard 49.%.
Salaries and Jages 2391..
!irectors Remuneration 1%9%.
2e3icle Running #/penses 2.93..
*nsurance 932%
7iscellaneous #/penses 194..
7ar)up on !e"entures 39%.
!e"tors 4&9%2%
Creditors 2$942%
Ban) 2.9+%
?eneral Reser8e 129%..
S3are 4remium Account 3%9...
*nterim !i8idend 4aid $9%.
Accumulated 4rofit and 5oss account 4293%.
TOTAL MH4FL3I MH4FL3I

A**i"iona& In.or/a"ion0
Closing stoc) Rs. &$9.%..
!epreciation Building %9...9 2e3icles Rs 9%..9 #1uipment 39....
Si/ mont3s !e"enture mar)up is to "e accrued.
1.T final di8idend is to "e paid in addition to interim di8idend.
Transfer Rs. %9... to general reser8e.
Aut3oriKed s3are capital is Rs. 2%.9... di8ided in to 2%9... s3ares of Rs. 1. eac3.
4ro8ision for *ncome Ta/ to "e made Rs. 129%...

231
So&'"ionD

Ba&an!e S%ee"

A&-%a L"*.
Ba&an!e S%ee"
As A" 5'ne 40F 3003
Par"i!'&ars No"e A/o'n" 7s.
'i/ed Assets at J!2 1 2%49$%.
C'rren" Asse"s
!e"tors
Stoc) in Trade
Ban) Balance

4&9%2%
&$9.%.
2.9+%
13%9%%.
C'rren" Liabi&i"ies
Creditors
4roposed !i8idend
!e"enture 7ar)up 4aya"le
4ro8ision for Ta/

2$942%
19%..
39%.
129%..
&291%
Jor)ing Capital 393%
Ne" Asse"s E/-&o)e* 43KF33I
Finan!e* B)D
Aut3oriKed Capital
2%9... S3ares of Rs. 1. eac3

2%.9...
4aid :p Capital
19%.. s3ares of Rs. 1. eac3
S3are 4remium
?eneral Reser8e ,129%.. M %9... transferred from 4 6 5-

1%9...
3%9...
19%..
2%92%
S3are EoldersG #1uity
!e"entures
2%3922%
%9...
To"a& 43KF33I

232

A&-%a L"*
For "%e =ear En*e* 5'ne 40 3003
Par"i!'&ars No"e 7s.
Sales 24%9%..
5ess0 Cost of ?oods Sold 2 129%..
Gross Pro.i" 11KF000
!irectors Remuneration 1%9%.
Salaries and Jages 2391..
2e3icle Running #/penses 2.93..
*nsurance 932%
!epreciation 1 1%9%..
7iscellaneous #/penses 194..
$393%
Iperating 4rofit 349&2%
5ess0 !e"enture 7ar)up 3 9%..
Het 4rofit Before Ta/ 2912%
5ess0 4ro8ision for Ta/ 129%..
Het 4rofit after ta/ 149&2%
Add0 Accumulated 4rofit Broug3t 'or(ard 4293%.
%&9+%
5ess0 Appropriation
?eneral Reser8e %9...
*nterim di8idend $9%.
4roposed 'inal !i8idend ,1.T of 1%9...- 19%..
3192%.
A!!'/'&a"e* Pro.i" Carrie* For,ar* 3IFJ3I

233
No"e G 1 Fi>e* Asse" a" $1V

Par"i!'&ars Cos" A!!. 1e-. $1V
As At
1==.1
Addition;
!eletion
As At
3.=&=.2
7
A
T
E
As At
1==.1
'or T3e
Qear
As At
3.=&=.2
As At
3.=&=.2
Building 239%.. . 239%.. 1192%. %9... 1&92%. 22192%.
#1uipment 2.9... . 2.9... &9... 39... +9... 119...
2e3icles 439... . 439... 129+.. 9%.. 2.94.. 229&..
TOTAL 400FI00 0 400FI00 40F1I0 1IFI00 HIFMI0 3IHFKI0


Ipening Stoc) %&92%
Add0 4urc3ases 1349%
Add0 Carriage in(ard 49.%.
5ess0 Closing Stoc) ,&$9.%.-
13JFI00

No"e G 4 Mar6 '- on 1eben"'res

7ar) up gi8en in trial 39%.
Add0 Accrued 7ar) up for si/ mont3s ,%9... / 1.T / &;12- 39%.
To"a& Mar6 U- JFI00


Statement of c3anges in e1uity s3o(s mo8ement in s3are 3oldersG e1uity during t3e reported period.
S3are 3olders e1uity includes0
o S3are Capital
o S3are 4remium Reser8e
o ?eneral Reser8e
o Accumulated 4rofit 6 5oss Account

T)-es o. 7eser#es

Reser8es are of t(o types0
!istri"uta"le Reser8e
Hon !istri"uta"le Reser8e

1is"rib'"ab&e 7eser#e

!istri"uta"le reser8es are t3ose reser8es (3ic3 are distri"uta"le among t3e s3are 3olders of t3e
company9 for #/ample9 ?eneral Reser8e9 Accumulated 4rofit 6 loss etc.

Non 1is"rib'"ab&e 7eser#e

Hon !istri"uta"le reser8es are t3ose reser8es (3ic3 are created for a specific purpose. T3ese can not "e
distri"uted among s3are 3olders. T3ese can "e utiliKed for t3at particular purpose9 for (3ic39 t3ese are
created. 'or e/ample9 S3are 4remium Reser8e9 Re8aluation Reser8e.

234
Pro!e*'re .or Pre-aring S"a"e/en" o. C%ange in E;'i")

All t3e opening "alances of s3are 3oldersG e1uity are listed do(n first. 7o8ement during t3e year in s3are
3oldersG e1uity is recorded. After adding;reducing t3e s3are 3oldersG e1uity9 closing "alances are
calculated. All information regarding s3are 3oldersG e1uity is collected from "alance s3eet of t3e
company. According to *nternational Accounting Standards9 fi/ed assets re8aluation reser8e is included
in t3e statement of c3anges in e1uity. But T3e Companies Irdinance does not allo( re8aluation reser8e
to "ecome a part of statement of c3anges in e1uity. As Companies Irdinance pre8ails o8er *nternational
Accounting Standards9 so (e do not s3o( Re8aluation reser8e in t3e statement of c3anges in e1uity.

S"a"e/en" o. C%ange in E;'i")

A&-%a L"*
For =ear En*e* 5'ne 40F 3003
S%are
Ca-i"a
&
S%are
Pre/i'
/
A!!o'n"
Genera&
7eser#
e
Pro.i"
C Loss
A<!
To"a&
Balance In Nun 3.9
2..1
1%9... 3%9... 129%.. 4293%. 2&49$%.
Het 4rofit for t3e
4eriod
149&2% 149&2%
Transfer to ?eneral
Reser8e
%9... ,%9...- .
!i8idend ,2&92%.- ,2&92%.-
Ba&an!e On 5'ne 40F
3003
1JIF000 4IF000 1JFI00 3IFJ3I 3I4F33I


Hotes to t3e accounts are e/planatory notes on financial statements of t3e company. T3ese include all
t3e information9 from formation of company to t3e calculation of figures9 arri8ed at9 during t3e
preparation of financial statements.

No"es o. A&-%a L"*. are as .o&&o,sD
Co/-an) an* I"s o-era"ions
o Company (as formed in t3e year ========
o T3e company trades in electronic consumer items.

Signi.i!an" A!!o'n"ing Po&i!iesD

Eistorical Cost Con8ention
o T3ese accounts 3a8e "een prepared under t3e 3istorical cost con8ention.
Re8enue Recognition
o Sales are recorded on dispatc3 of goods to customers.
'i/ed Assets
o 'i/ed Assets are recorded at cost less accumulated depreciation.
Stoc) 2aluation
o 7et3od of stoc) 8aluation is ========
Ta/ation
o 4ro8ision for Ta/ation is calculated on t3e "asis of =======
235
Lesson-41
CAS+ FLO$ STATEMENT

Cas3 flo( statement s3o(s9 3o( cas3 (as generated and 3o( it (as used during t3e period. T3ese days9
it is re1uired "y la( to include t3is statement in financial statements9 especially in case of financial
statements of limited companies.

Nee* For Cas% F&o, S"a"e/en"

'or any "usiness9 it is important to ensure t3at0
Sufficient profits are made to compensate o(ners for t3e in8estment made9 efforts put in and
t3e ris) ta)en for t3e "usiness9
Sufficient funds are a8aila"le to meet t3e o"ligations of t3e "usiness as and (3en re1uired.
T3e information as to profita"ility is pro8ided "y t3e 4rofit and 5oss Account. T3e information as to
a8aila"ility of funds or financial 3ealt3 is pro8ided "y t3e "alance s3eet. But t3e "alance s3eet is prepared
on a specific date and can pro8ide information of financial position as on t3at date only. Cas3 flo(9 on
t3e ot3er 3and pro8ides more detailed information a"out t3e mo8ement of funds during t3e period. Jit3
t3e 3elp of cas3 flo(9 (e can determine t3e amount of cas3 generated form different sources and t3e
areas on (3ic3 it is utiliKed.

1i..eren!e be",een Pro.i"abi&i") an* Li;'i*i")

Li;'i*i")

*t is t3e a"ility of a "usiness to pay its de"ts in time. By 3a8ing good li1uidity9 (e mean t3at a "usiness
3as sufficient li1uid funds ,cas3 and cas3 e1ui8alents- so t3at it can repay lia"ilities.

Cas%

Cas3 includes cas3 in 3and and demand deposits.

Cas% E;'i#a&en"s

Cas3 e1ui8alents are t3ose s3ort term in8estments t3at can "e con8erted into a )no(n amount of cas3 at
any time. :sually9 in8estments up to t3ree mont3s maturity are included in cas3 e1ui8alents.

4eople generally mi/ up profita"ility (it3 li1uidity. Ine mig3t t3in) t3at if a "usiness 3as earned9 say9
Ine 7illion Rupees of profit t3an it s3ould 3a8e appro/imately t3e same amount of cas3 in it.
But mostly t3is is not t3e case. Consider t3e follo(ing e/ample0
A person starts a small "usiness (it3 Rs. 1.9....
Ee purc3ases goods (ort3 Rs. 2.9.... Rs. 1.9... is paid in cas3 and remaining is paya"le at t3e
end of t3e mont3.
T3e same day9 all t3e goods are sold on credit of t(o mont3s for Rs. 3.9....
Ho( if (e dra( a profit and loss account at t3e end of t3e mont39 t3e "usiness 3as earned a
profit of Rs. 1.9...9 considering no e/penses.
But at t3e same time9 it is time to pay to t3e Creditors9 (3ereas payment from de"tor is not due
yet.
T3is means t3at alt3oug3 t3e "usiness earned a profit of Rs. 1.9... "ut it 3as no cas3 to pay to
its creditors.
T3is simple e/ample 3elps us to understand t3at li1uidity is different from profita"ility
But it is as important as profita"ility.

236

Co/-onen"s o. Cas% F&o, S"a"e/en"

Cas3 flo( statement is di8ided into t3ree components
Cas3 'lo( from Iperating Acti8ities
Cas3 'lo( from *n8esting Acti8ities
Cas3 'lo( from 'inancing Acti8ities

Cas% F&o, .ro/ O-era"ing A!"i#i"ies

Cas3 flo( from operating acti8ities is generally deri8ed from t3e principal re8enue producing acti8ities of
t3e "usiness.

Cas3 'lo( from Iperating Acti8ities is t3e indicator of success or failure of a "usinessGs operations. *f
t3e cas3 flo( from operations is continuously negati8e9 t3is means t3at t3e "usiness re8enue is not
enoug3 to reco8er t3e costs t3at are incurred to earn it. T3erefore9 in t3e long run Cas3 flo( from
operations must "e positi8e.

#/amples of cas3 flo(s from operating acti8ities are0
Cas3 receipt from sale of goods and rendering of ser8ices.
Cas3 receipts from fees9 commission and ot3er re8enues.
Cas3 payments to suppliers for goods and ser8ices.
Cas3 payments to and on "e3alf of t3e employees.
Cas3 payments or refunds of income ta/es.

E>a/-&e

Ne" Pro.i" be.ore Ta> 1MFI1H
Add0 AdAustment for Hon=Cas3 *tems
!epreciation for t3e Qear %9%..
4ro8ision for !ou"tful !e"ts $1.
#/c3ange ?ain ; 5oss =
?ain ; 5oss on !isposal of Assets =
Return on *n8estments 49...
7ar)=up on 5oans 39%..

O-era"ing Pro.i" Be.ore $or6ing Ca-i"a& C%anges 40F43H
Jor)ing Capital C3anges
Add0 !ecrease in Current Assets 4.9...
5ess0 *ncrease in Current Assets ,%.9...-
Add0 *ncrease in Current 5ia"ilities =
5ess0 !ecrease in Current 5ia"ilities =

Cas% Genera"e* Fro/ O-era"ions 30F43H
5ess0 7ar)up paid on loans ,39...-
5ess0 Ta/es 4aid ,%9...-
Ne" Cas% F&o, .ro/ O-era"ing A!"i#i"ies 13F43H

Cas% F&o, .ro/ In#es"ing A!"i#i"ies

Cas3 flo( from in8esting acti8ities includes cas3 receipts and payments t3at arise from 'i/ed and 5ong
Term assets of t3e organiKation.

237
Cas3 'lo(s from *n8esting Acti8ities s3o(s t3e in8estment trend of t3e "usiness. *f it is negati8e
,Iutflo(- t3is means t3at t3e company is in8esting in long term assets and is e/panding. In t3e ot3er
3and if it is positi8e ,*nflo(- o8er t3e years9 t3is means t3at t3e company is selling its long term
in8estments.

#/amples of cas3 flo(s from in8esting acti8ities are0
Cas3 payments to ac1uire property plant and e1uipment. T3ese also include payments made for
self=constructed assets.
Cas3 receipts from sale of property plant and e1uipment.
Cas3 payments and receipts from ac1uisition and disposal of ot3er t3an long term assets e.g.
S3ares9 de"entures9 T'C9 long term loans gi8en etc.

*f assets are 3eld for trading purposes or in normal course of "usiness e.g. car ; property dealers and
loans gi8en "y "an)s9 t3en cas3 flo( from t3ese are included in Iperating Cas3 'lo(.

E>a/-&e

Cas% F&o, .ro/ In#es"ing A!"i#i"ies

Add0 !isposal of 'i/ed Asset and 5ong Term *n8estments 1..9...
5ess0 Ac1uisition of 'i/ed Assets and 5ong Term *n8estments ,$.9...-
Add0 !i8idend Recei8ed ; Returns on *n8estment Recei8ed =
Ne" Cas% F&o, .ro/ In#es"ing A!"i#i"ies 30F000

Cas% F&o, .ro/ Finan!ing A!"i#i"ies

Cas3 flo( from financing acti8ities includes cas3 receipts and payments t3at arise from I(ners of t3e
"usiness and ot3er long term lia"ilities of t3e organiKation.

Cas3 'lo(s from 'inancing Acti8ities s3o(s t3e "e3a8ior of in8estors ,"ot3 e1uity capital and de"t
capital-. A positi8e figure ,inflo(- s3o(s t3at funds are "eing in8ested in t3e company and 8ice 8ersa.

#/amples of cas3 flo(s from financing acti8ities are0
Cas3 recei8ed from o(ners i.e. s3are issue in case of company and capital in8ested "y sole
proprietor or partners.
Cas3 payments to o(ners i.e. di8idend9 dra(ings etc.
Cas3 receipts and payments for ot3er long term loans and "orro(ings.

E>a/-&e

Cas% F&o, .ro/ Finan!ing A!"i#i"ies

Add0 S3ares *ssued ; Capital *n8ested 19...9...
5ess0 !i8idend 4aid ; !ra(ings ,4..9...-
Add0 *ncrease in 5ong Term Borro(ings 1%.9...
Ne" Cas% F&o, .ro/ Finan!ing A!"i#i"ies JI0F000

Pro!e*'re o. Pre-aring Cas% F&o,

Cas3 'lo( Statement is prepared as follo(s0
Je start from t3e 4rofit ; 5oss for t3e period "efore ta/ation.
AdAustments are made for non=cas3 items t3at are included in t3e profit and loss account suc3 as
!epreciation9 4ro8isions and ot3er items t3at relate to in8esting and financing acti8ities.
T3is gi8es us Iperating 4rofit "efore Jor)ing Capital C3anges.
238
T3en Jor)ing Capital C3anges9 i.e. increase or decrease in items of current assets and lia"ilities9
are added ; su"tracted ,Cas3 and Cas3 #1ui8alents are not included 3ere-
T3is gi8es t3e Cas3 'lo( from Iperations.
To t3is figure9 (e add ; su"tract cas3 flo(s from in8esting and financing acti8ities.
T3is gi8es us Het *ncrease ; !ecrease in Cas3 and Cas3 #1ui8alents.
To t3is figure (e add Ipening Balance of Cas3 and Cas3 #1ui8alents ,t3at (e e/cluded from
current assets-
T3is gi8es us t3e Closing Balance of Cas3 and Cas3 #1ui8alents.

*ncrease or !ecrease is generally ta)en as difference in opening and closing "alances of accounts
reported in "alance s3eets.

For/ o. Cas% F&o, S"a"e/en"

Na/e o. "%e En"i")
Cas% F&o, S"a"e/en" .or "%e Perio* En*ing -----

Ne" Pro.i" be.ore Ta> N=Q
Add0 AdAustment for Hon=Cas3 *tems
!epreciation for t3e Qear RQS
4ro8ision for !ou"tful !e"ts RQS
#/c3ange ?ain ; 5oss RQS
?ain ; 5oss on !isposal of Assets RQS
Return on *n8estments RQS
7ar)=up on 5oans RQS

O-era"ing Pro.i" be.ore $or6ing Ca-i"a& C%anges N=Q
Add0 !ecrease in Current Assets RQS
5ess0 *ncrease in Current Assets ,RQS-
Add0 *ncrease in Current 5ia"ilities RQS
5ess0 !ecrease in Current 5ia"ilities ,RQS-
[
Cas% Genera"e* Fro/ O-era"ions N=Q
5ess0 7ar)up paid on loans ,RQS-
5ess0 Ta/es 4aid ,RQS-
Ne" Cas% F&o, .ro/ O-era"ing A!"i#i"ies N=Q
Cas3 'lo( from *n8esting Acti8ities
Add0 !isposal of 'i/ed Asset and 5ong Term *n8estments RQS
5ess0 Ac1uisition of 'i/ed Assets and 5ong Term *n8estments ,RQS-
Add0 !i8idend Recei8ed ; Returns on *n8estment Recei8ed RQS
Ne" Cas% F&o, .ro/ In#es"ing A!"i#i"ies N=Q
Cas3 'lo( from 'inancing Acti8ities
Add0 S3ares *ssued ; Capital *n8ested RQS
5ess0 !i8idend 4aid ; !ra(ings ,RQS-
Add0 *ncrease in 5ong Term Borro(ings RQS
Ne" Cas% F&o, .ro/ Finan!ing A!"i#i"ies N=Q
Het *ncrease ; !ecrease in Cas3 and Cas3 #1ui8alents RQS
Add0 Ipening Balance of Cas3 and Cas3 #1ui8alents RQS
C&osing Ba&an!e o. Cas% an* Cas% E;'i#a&en"s N=Q
239
Lesson-42
CAS+ FLO$ STATEMENT 9Con"in'e*:
O'es"ion G 1

Qou are gi8en t3e Balance S3eet of ABC 5imited as at Nune 3.9 2..1 and Nune 3.9 2..2 and its 4rofit and
5oss Account for t3e year ended Nune 3. 2..2.

Re1uired

Qou are re1uired to prepare Cas3 'lo( Statement for t3e gi8en period.

ABC L"*
Ba&an!e S%ee" As A" 5'ne 40 3003

2..2 Rs. 2..1 Rs.
Rs. F... Rs. F...
Building at Cost 1$19... 14.9...
Accumulated !epreciation 3&9... 3.9...
Jritten !o(n 2alue 14%9... 11.9...
4lant and 7ac3inery cost $39... +.9...
Accumulated !epreciation 3&9... 3%9...
Jritten !o(n 2alue 49... %%9...
To"a& Fi>e* Asse"s a" $1V 1L3F000 1MIF000
5ong Term *n8estment 19... 1.9...
C'rren" Asse"s
!e"tors 3.9... 219...
Stoc) 2%9... 4.9...
S3ort Term !eposits 1$9... 1%9...
Cas3 and Ban) 3.9... 249...
104F000 100F000
C'rren" Liabi&i"ies

Creditors 1%9... 129...
4roposed !i8idend 1$9... 1&9...
Ta/ 4aya"le +9... $9...
429... 3&9...
$or6ing Ca-i"a& M1F000 MHF000
Ne" Asse"s E/-&o)e* 3J0F000 34LF000
'inanced By

S3are Capital 1$.9... 1&.9...
S3are 4remium Account 19... 129...
?eneral Reser8e 239... 2.9...
Accumulated 4rofit and 5oss 349... 29...
S%are +o&*ers0 E;'i") 3IHF000 31LF000
Term 'inance Certificates 1&9... 2.9...
To"a& 3J0F000 34LF000

240

ABC L"*
Pro.i" an* Loss A!!o'n" For "%e =ear En*e* 5'ne 40 3003
7s. B000
Sales
Cost of Sales
?ross 4rofit
It3er *ncome

!irectorGs Remuneration
!epreciation on Building
5oss on Sale of 7ac3inery
It3er Administrati8e #/penses

5ess0 Selling #/penses
5ess0 7ar) up on T'C

Pro.i" .or "%e =ear Be.ore Ta>
4ro8ision for ta/
4rofit after ta/
Acc. 4rofit Broug3t 'or(ard

Appropriation
Transfer to Reser8e
4roposed !i8idend

A!!'/'&a"e* Pro.i" Carrie* For,ar*
3..9...
,2319...-
&+9...
49...
39...

49...
&9...
29...
129...
249...
1.9...
29...
3&9...
4JF000
+9...
2$9...
29...
%%9...

39...
1$9...
219...
4HF000
A**i"iona& In.or/a"ion

1. It3er income include di8idend on 5ong Term *n8estment
2. Cost of goods sold includes depreciation for t3e year on mac3inery Rs. %9....
3. Accumulated !epreciation on t3e mac3ine disposed off amounts to Rs. 49....

241
So&'"ion

ABC L"*
Cas% F&o, S"a"e/en" For "%e =ear En*e* 5'ne 40 3003
No"e 7s. B000
Het 4rofit Before Ta/ 39...
AdAustment of Hon Cas3 *tems
!epreciation 119...
5oss on Sale of 7ac3inery 29...
7ar)up on T'C 29...
%29...
5ess0 It3er *ncome ,49...-
Iperating 4rofit Before Jor)ing
Capital C3anges

4$9...
Reduction in Stoc) 1%9...
*ncrease in Creditors 39...
*ncrease in !e"tors ,+9...-
+9...
Cas3 'lo( from Iperations %9...
7ar)up on T'C 4aid ,29...-
Ta/ 4aid 1 ,$9...-
Het Cas3 'lo( 'rom Iperating Acti8ities 49...
Cas3 'lo( 'rom *n8esting Acti8ities
!i8idend Recei8ed 49...
4ayment to Ac1uire *n8estments 2 ,9...-
4urc3ase of 'i/ed Assets ,Building- 3 ,419...-
Receipt from Sale of Assets 4 19...
Het Cas3 'lo( 'rom *n8esting Acti8ities ,439...-
Cas3 'lo( 'rom 'inancing Acti8ities
*ssue of Irdinary S3ares 2.9...
S3are 4remium Account %9...
!i8idend 4aid % ,1&9...-
Repayment of T'C & ,49...-
Het Cas3 'lo( 'rom 'inancing Acti8ities %9...
Het *ncrease ; ,!ecrease- in Cas3 and
Cas3 #1ui8alents !uring T3e Qear +9...
I;B of Cas3 and Cas3 #1ui8alents 3+9...
C<B o. Cas% an* Cas% E;'i#a&en"s HKF000

242
No"e G 1 Ta> Pai*

Pro#ision .or Ta> A!!o'n" Co*e --------
4articulars Amount
!r. ,Rs.-
4articulars Amount
Cr. ,Rs.-
Cas3
Balance c;f

$9...
+9...

Bal. B;'

'or t3e year

$9...

+9...

To"a& 1JF000 To"a& 1JF000

No"e G 3 Pa)/en"s "o A!;'ire In#es"/en"s
In#es"/en" A!!o'n" Co*e --------
4articulars Amount
!r. ,Rs.-
4articulars Amount
Cr. ,Rs.-
Bal. B;'

Cas3

1.9...

9...

Bal. C;'

19...

To"a& 1JF000 To"a& 1JF000

No"e G 4 P'r!%ases o. Fi>e* Asse"s

B'i&*ing Cos" A!!o'n" Co*e --------
4articulars Amount
!r. ,Rs.-
4articulars Amount
Cr. ,Rs.-
Bal. B;'
Cas3

14.9...
419...

Bal. C;'

1$19...

To"a& 1K1F000 To"a& 1K1F000

No"e G H Sa&e Pro!ee* o. Ma!%iner)
Ma!%iner) a" Cos" A!!o'n" Co*e --------
4articulars Amount
!r. ,Rs.-
4articulars Amount
Cr. ,Rs.-
Bal. B;'

+.9...

!isposal A;c

Bal. C;'

9...

$39...
To"a& L0F000 To"a& L0F000

243

1is-osa& o. asse" A!!o'n" Co*e --------
4articulars Amount
!r. ,Rs.-
4articulars Amount
Cr. ,Rs.-
Cost

9...

Accumulated !ep.
5oss on Sale
Sale 4roceed

49...
29...
19...

To"a& JF000 To"a& JF000

No"e G I 1i#i*en* Pa)ab&e

1i#i*en* Pa)ab&e A!!o'n" Co*e --------
4articulars Amount
!r. ,Rs.-
4articulars Amount
Cr. ,Rs.-
Cas3

C;B
1&9...

1$9...
I;B
'or t3e Qear

1&9...
1$9...
To"a& 4HF000 To"a& 4HF000

No"e G M 7e-a)/en" o. TFC

TFC A!!o'n" A!!o'n" Co*e --------
4articulars Amount
!r. ,Rs.-
4articulars Amount
Cr. ,Rs.-
Cas3

C;B

49...

1&9...

I;B

2.9...

To"a& 30F000 To"a& 30F000

244
Lesson-43
FINANCIAL STATEMENTS OF LISTE1<OUOTE1 COMPANIES

According to Companies Irdinance 1+$49 t3e contents of financial statements are as follo(s0
Balance S3eet
Cas3 'lo( Statement
Statement of c3anges in #1uity
Hotes to t3e Accounts

'or t3e sa)e of presentation same order s3ould "e follo(ed (3ile sol8ing t3e 1uestions. But (e cannot
complete t3e "alance s3eet (it3out first preparing t3e 4rofit and 5oss Account. To sol8e t3e pro"lem in
e/am situation (e usually prepare t3e forms of Balance S3eet and 4rofit and 5oss Account first. T3at is
(ay (e can also plan t3e Serial Hum"ers of Hotes to t3e Accounts "efore3and. It3er(ise a s3eet of
1uestion paper can "e left "lan) for preparation of Balance S3eet.

Comparati8e figures are also included in t3e financial statements for e8ery figure9 e/cept (3ere first set of
financial statements is "eing prepared. *n e/amination situation comparati8e figures s3ould "e s3o(n
pro8ided t3ese are pro8ided in t3e 1uestion.

O'es"ion

'ollo(ing is t3e trial "alance of Alfa 5td. 'or t3e year ended Nune 3.9 2..2. Qou are also gi8en t3e
"alance s3eet of Nune 3.9 2..1.

7e;'ire*

Qou are re1uired to prepare a set of financial statements of t3e Alfa 5td.

A&.a L"*.
Tria& Ba&an!e
For "%e =ear 5'ne 40F 3003

1ebi" Cre*i"
7s. 7s.

Fi>e* Asse"s a" Cos"
'ree3old 5and %..9...
Building &..9...
'urniture and 'i/ture 4..9...
2e3icles +3.9...
A!!'/'&a"e* 1e-re!ia"ion
Building 1%.9...
'urniture and 'i/ture 1%.9...
2e3icles 3..9...
Sundry !e"tors $.9...
Ad8ances9 !eposits and 4repayments 2&9...
*n8estments ,5ong Term- 1.%9...
Cas3 in 3and 29...
Cas3 at "an) %9%..
4urc3ases %..9...
Sales Return 1.9...
Stoc) Nuly .19 2..1 $%9...
Salaries ,Admin. Staff- &%9...
Rent9 Rates and Ta/es 129%..
245
Carriage in(ard $9...
5egal C3arges 9%..
Salaries ,Sales Staff- 4%9...
Selling #/penses 239...
'inancial C3arges 4%9...
Sundry Creditors %.9%..
S3ort Term Running 'inance 1%9...
Ad8ances from Customers 2$9%..
?eneral Reser8e 2%.9...
Ta/ 4aya"le 3%9%..
Accumulated 4rofit Broug3t 'or(ard +.9...
Sales $%92..
7ar)up on *n8estments 1%9...
4urc3ase Return 129$..
5oan from Ban) ,5ong Term- &%%9...
*ssued S3are Capital %.9...

To"a& 4FI1LFI00 4FI1LFI00

A**i"iona& in.or/a"ionD
T3e aut3oriKed capital of t3e company is Rs. 19...9... di8ided into 1..9... s3ares of Rs. 1.
eac3.
Additions made in 'i/ed Assets include Building Rs. %9... and 'urniture and 'i/ture Rs.
%.9.... T3ese 3a8e already "een recorded in t3e "oo)s of accounts.
!epreciation is to "e c3arged on Building %T9 'urniture and 'i/ture V 1.T and 2e3icles 2.T
on (ritten do(n 8alue. 'ull yearGs depreciation is c3arged in t3e year of purc3ase (3ilst no
depreciation is c3arged in t3e year of disposal.
4ro8ision for dou"tful de"ts to "e created Rs. %9....
Stoc) on Nune 3.9 2..2 Rs. &%9...
4ro8ide Rs. +9$.. for income ta/.

A&.a L"*.
Ba&an!e S%ee"
As a" 5'ne 40F 3001.
No"e 3001
O-era"ing Fi>e* Asse"s 19.%9...
In#es"/en"s %%9...
1FJM0F000
C'rren" Asse"s
Sundry !e"tors &%9+..
Stoc) in Trade $%9...
Ad8ances9 !eposits and 4repayments 219%..
Cas3 in 3and 19%..
Cas3 at "an) %$9&..
343FI00
C'rren" Liabi&i"ies
Sundry Creditors &%92..
S3ort Term Running 'inance 12%9%..
Ta/ 4aya"le 429...
246
Ad8ances from Customers 1+9$..
3I3FI00
Jor)ing Capital 930F000:

Ne" Ca-i"a& E/-&o)e* 1FJH0F000

'inanced "y
S3are Capital and Reser8es
Aut3oriKed Capital
1..9... s3ares of Rs. 1. eac3. 19...9...

S3are Capital

%9... ,2..10 &.9...- s3ares of Rs. 1. eac3 &..9...
?eneral reser8e 2%.9...
:n=appropriated 4rofit +.9...
To"a& S%are %o&*ers E;'i") LH0F000

5ong Term 5oans
$..9...

To"a& 1FJH0F000

So&'"ion

A&.a L"*.
Ba&an!e S%ee"
As a" 5'ne 40F 3003.
No"e 3003 3001
O-era"ing Fi>e* Asse"s 1 19&%&9%.. 19.%9...
In#es"/en"s 1.%9... %%9...
1FJM1FI00 1FJM0F000
C'rren" Asse"s
Sundry !e"tors
$.9...
&%9+..
Stoc) in Trade &%9... $%9...
Ad8ances9 !eposits and 4repayments 2&9... 219%..
Cas3 in 3and 29... 19%..
Cas3 at "an) %9%.. %$9&..
3HKFI00 343FI00
C'rren" Liabi&i"ies
Sundry Creditors %.9%.. &%92..
S3ort Term Running 'inance 1%9... 12%9%..
Ta/ 4aya"le 3 4%93.. 429...
Ad8ances from Customers 2$9%.. 1+9$..
247
3LLF400 3I3FI00
Jor)ing Capital 9I0FK00: 930F000:

Ne" Ca-i"a& E/-&o)e* 1FJ10FJ00 1FJH0F000

'inanced "y
Aut3oriKed Capital
1..9... s3ares of Rs. 1. eac3. 19...9... 19...9...

S3are Capital
%9... ,2..10 &.9...- s3ares of Rs. 1. eac3 %.9... &..9...
?eneral reser8e 2%.9... 2%.9...
:n=appropriated 4rofit %%9.. +.9...
To"a& S%are %o&*ers E;'i") 1F0IIFJ00 LH0F000

5ong Term 5oans &%%9... $..9...

To"a& 1FJ10FJ00 1FJH0F000


A&.a L"*.
For "%e )ear en*e* 5'ne 40F 3003.
No"e 3003 3001
7s. 7s.
Het Sales 4 $492.. /
5ess0 Cost of ?oods Sold H %1%92.. /
Gross Pro.i" 443F000 >
A**D O"%er In!o/e 1%9... /
4HJF000 >
LessD
Administrati8e #/penses I 2%$9%.. /
Selling #/penses M &$9... /
43MFI00 >
O-era"ing Pro.i" 30FI00 /
5ess0 'inancial C3arges 4%9... /
Het 4rofit ; ,5oss- Before Ta/ 93HFI00: >
5ess0 4ro8ision for Ta/ +9$.. /
Het 4rofit ; ,5oss- After Ta/ 94HF400: >
Accumulated 4rofit ; ,5oss- Broug3t 'or(ard +.9... /
A!!'/'&a"e* Pro.i" < 9Loss: Carrie* For,ar* IIFJ00 >

248

A&.a L"*.
Cas% F&o, S"a"e/en"
No"e 3003 3001

Cas3 'lo( 'rom Iperating Acti8ities

4rofit ; ,5oss- Before Ta/ ,249%..-
AdAustment for0 !epreciation 139%..
Iperating 4rofit Before Jor)ing Capital
c3anges 1HLF000
,*ncrease- ; !ecrease in C. Assets
Sundry !e"tors ,1491..-
Stoc) in Trade 2.9...
Ad8ances9 !eposits and 4repayments ,49%..-
1FH00
*ncrease ; ,!ecrease- in C. 5ia"ilities
Sundry Creditors ,149..-
S3ort Term Running 'inance 4+9%..
Ad8ances from Customers $9..
H4FI00
Cas3 ?enerated 'rom Iperations 1L4FL00
*ncome Ta/ 4aid ,&9%..-
Het Cas3 'lo( from Iperations 1KJFH00
Building ,%9...-
'urniture and 'i/ture ,%.9...-
*n8estments ,5ong Term- ,%.9...-
Het Cas3 'lo( 'rom *n8esting Acti8ities 91JIF000:
Cas3 'lo( from financing Acti8ities
S3are Capital *ssued 1%.9...
5ong Term 5oan Repaid ,14%9...-
IF000
Het *ncrease in Cas3 6 Cas3 #1ui8alents 1JFH00
I;B of Cas3 and Cas3 #1. &.91..
C;B of Cas3 and Cas3 #1. JJFI00

249

A&.a L"*.
For "%e =ear En*e* 5'ne 40F 3003

S%are Genera& Un-a--. To"a&
Par"i!'&ars Ca-i"a& 7eser#e Pro.i"
Balance as on Nune 3.9 2... / / / /
4rofit after ta/ for t3e year / /
!i8idend ,/- ,/-
Balance as on Nune 3.9 2..1 &..9... 2%.9... +.9... +4.9...
S3ares *ssued

1%.9... 1%.9...
4rofit after ta/ for t3e year ,3493..- 3493..
JI0F000 3I0F000 IIFJ00 1F0IIFJ00


No"e G 1 Fi>e* Asse"s a" $1V

Cos" 7 A!!'/'&a"e* 1e-re!ia"ion $1V
Par"i!'&ars As On As On A As On On For As On As On
5'& 01 A**. 1is-osa&. 5'n 01 T 5'& 01 1is-osa&. T%e 5'n 01 5'n 01
3001 3003 E 3001 =ear 3003 3003

'ree3old
5and %..9...

= =

%..9...

=

= =

=

=

%..9...
Building
%2%9...

%9... =

&..9...

%

1%.9... =

229%..

129%..

429%..
'urniture
and 'i/ture 3%.9...

%.9... =

4..9...

1.

1%.9... =

2%9...

1%9...

22%9...
2e3icles
+3.9...

= =

+3.9...

2.

3..9... =

12&9...

42&9...

%.49...

To"a& 3003 3F40IF000

13IF000

-

3FH40F000

M00F000 -

1J4FI00

JJ4FI00

1FMIMFI00
To"a& 3001 > > >

3F40IF000 > > >

M00F000

1FJ0IF000

No"e G 3 Ta> Pa)ab&e
Ta/ 4aya"le as 4er Trial Balance 3%9%..
Current Qear\s 4ro8ision +9$..
HIF400

250
No"e G 4 Ne" Sa&es
?ross Sales $%92..
5ess0 Returns 1.9...
KHJF300

No"e G H Cos" o. Goo*s So&*
Ipening Stoc) $%9...
Add0 Cost of 7aterial 4urc3ased
?ross 4urc3ases %..9...
5ess0 Returns 129$..
Add0 Carriage *n(ard $9...
4+%92..
5ess0 Closing Stoc) &%9...
Cos" o. goo*s so&* I1IF300

No"e G I A*/inis"ra"i#e E>-enses

Salaries ,Admin. Staff-

&%9...
Rent9 Rates and Ta/es

129%..
5egal C3arges

9%..
!epreciation

139%..
To"a& 3IKFI00

No"e G M Se&&ing E>-enses

Salaries ,Sales Staff- 4%9...
Selling #/penses
239...
To"a& MKF000

251
Lesson-44
FINANCIAL STATEMENTS OF LISTE1 COMPANIES

I&&'s"ra"ionD
Be"a L"*.
Tria& Ba&an!e
For "%e =ear 5'ne 40F 3003
1ebi" 97s.: Cre*i" 97s.:
Fi>e* Asse"s a" Cos"D
Building %..9...
'urniture and 'i/ture $%9...
2e3icles 4&.9...
A!!'/'&a"e* 1e-0Building 1+.9%..
'urniture and 'i/ture 439%..
2e3icles 21.9...
Sundry !e"tors 1&%9...

5ong Term in8estments 3..9...

?ood(ill 1..9...

Cas3 in 3and 339...

Cas3 at "an) 14&9...

4urc3ases %%9...

S"o!6 5'&) 01F 3001

Ra( 7aterial 1+9...

Jor) in 4rocess 149%..

'inis3ed ?oods 3%9...

Salaries 12%9...

7isc. #/pense &9&..

Carriage in(ard 493..

'uel 6 4o(er 1%94..

Jages 1439%..

Salaries Sales Staff $&9...

'inancial C3arges 293..

Sundry Creditors 1.%9...
S3are 4remium Reser8e 3..9...
4ro8ision for ta/ paya"le. 2+9%..
Accumulated 4rofit Broug3t 'or(ard +393..
Sales 193&39$..
?ain on sale of 8e3icle 3.9...
Return on *n8estments 3.9...
5oan from Ban) ,5ong Term- 1..9...
*ssued S3are Capital %..9...
To"a& 3FLLIFM00 3FLLIFM00

252
A**i"iona& In.or/a"ionD

T3e aut3oriKed capital of t3e company is Rs. $..9... di8ided into $.9... s3ares of Rs. 1. eac3.
!uring t3e year9 a 8e3icle (3ose cost and accumulated depreciation (ere Rs. 1%.9... and Rs.
$.9... respecti8ely (as sold for Rs. 1..9.... T3e entry 3as already "een recorded in t3e "oo)s

!epreciation is to "e c3arged on Building %T9 'urniture and 'i/ture V 1.T and 2e3icles 2.T
on (ritten do(n 8alue. 'ull yearGs depreciation is c3arged in t3e year of purc3ase (3ilst no
depreciation is c3arged in t3e year of disposal.
Stoc) on Nune 3.9 2..2
o Ra( 7aterial 229...
o Jor) in 4rocess 1%9...
o 'inis3ed ?oods 4.9...
!istri"ution of fuel and po(er0
o Administrati8e #/penses 4.T9 Cost of ?oods Sold &.T
T3e management of t3e company 3as decided to maintain a pro8ision for dou"tful de"ts at %T
of de"tors from t3is year.
5ong term loan of Rs. 2%9... is paya"le in t3e ne/t financial year.
4ro8ision for current year\s ta/ Rs. 2.9....

Qou are re1uired to prepare a set of financial statements for t3e year ended Nune 3.9 2..2.

So&'"ion

Be"a L"*.
Ba&an!e S%ee"
As a" 5'ne 40F 3003.
No"e 3003 3001
O-era"ing Fi>e* Asse"s 4 %3193% &19...
In#es"/en"s 3..9... %.9...
K41F4JI J31F000
In"angib&e Asse"s
?ood(ill 100F000 100F000

C'rren" Asse"s
Sundry !e"tors H
1%&9%.

1%9...
Stoc) in Trade I
9...

$493..
Cas3 in 3and 339... 2%9$..
Cas3 at "an) 14&9... 1..9..
H13FJI0 4KIFK00
C'rren" Liabi&i"ies
Sundry Creditors 1.%9... 1%.9%..
Current 7aturity of 5ong Term 5oan 2%9... 2%9...
Ta/ 4aya"le M 4+9%.. 3$9...
1JLFI00 314FI00
$or6ing Ca-i"a& 344F3I0 1J3F400

253
Ne" Ca-i"a& E/-&o)e* 1F1MHFM3I LL4F400

'inanced "y
Aut3oriKed Capital
$.9... s3are of Rs. 1. eac3 $..9... $..9...

S3are Capital
%..9...
%..9...
S3are premium reser8e 3..9... 3..9...
:n=appropriated 4rofit 2$+9&2% +393..
To"a& S%are %o&*ers E;'i") 1F0KLFM3I KL4F400

5ong Term 5oans J
%9...

1..9...
To"a& 1F1MHFM3I LL4F400

Be"a L"*.
For "%e )ear en*e* 5'ne 40F 3003.
No"e 3003 3001
7s. 7s.
Het Sales 193&39$.. /
5ess0 Cost of ?oods Sold K +.39%4. /
Gross Pro.i" HM0F3M0 >
A**D O"%er In!o/e L &.9... /
I30F3M0 >
LessD
Administrati8e #/penses 10 21%9&3% /
Selling #/penses 11 $&9... /
401FM4I >
O-era"ing Pro.i" 31KFM3I /
5ess0 'inancial C3arges 293.. /
Het 4rofit ; ,5oss- Before Ta/ 31MF43I >
5ees0 4ro8ision for Ta/ 2.9... /
Het 4rofit ; ,5oss- After Ta/ 1LMF43I >
Accumulated 4rofit ; ,5oss- Broug3t 'or(ard +393.. /
A!!'/'&a"e* Pro.i" < 9Loss: Carrie* For,ar* 3KLFM3I >

254

A&.a L"*.
Cas% F&o, S"a"e/en"
No"e 3003


4rofit ; ,5oss- Before Ta/ 21&932%
AdAustment for0
!epreciation &+9&2%
4ro8ision for !ou"tful !e"ts $92%.
?ain on !isposal of 'i/ed Asset ,3.9...-
Iperating 4rofit Before Jor)ing Capital c3anges 3MHF300
Sundry !e"tors
1.9...
Stoc) in Trade
93..

1JF400
Sundry Creditors
,4%9%..-

9HIFI00:

Cas3 ?enerated 'rom Iperations 34MF000
*ncome Ta/ 4aid ,$9%..-

Het Cas3 'lo( from Iperations 33JFI00

2e3icles
1..9...
*n8estments ,5ong Term-
,2%.9...-
Het Cas3 'lo( 'rom *n8esting Acti8ities 91I0F000:
5ong Term 5oan Repaid ,2%9...-
93IF000:
Het *ncrease in Cas3 6 Cas3 #1ui8alents I3FI00
I;B of Cas3 and Cas3 #1ui8alents 12&9%..
C;B of Cas3 and Cas3 #1ui8alents 1JLF000

255

Be"a L"*.

S%are
S%are
Pre/i'/ Un-a--. To"a&
Par"i!'&ars Ca-i"a& 7eser#e Pro.i"
Balance as on Nune 3.9 2... / / / /
4rofit after ta/ for t3e year / /
!i8idend ,/- ,/-
Balance as on Nune 3.9 2..1 %..9... 3..9... +393.. $+393..
S3ares *ssued / /
4rofit after ta/ for t3e year 1+&932% 1+&932%
JI0F000 3I0F000 3KLFM3I 1F0KLFM3I


1. Co/-an) an* i"s o-era"ions
o T3e company is a pu"lic limited company incorporated in 4a)istan and manufacture
============
3. Signi.i!an" a!!o'n"ing -o&i!ies
o T3ese accounts 3a8e "een prepared in accordance (it3 t3e re1uirements of t3e
Companies Irdinance 1+$4 and *nternational accounting standards as applica"le in
4a)istan.
o +is"ori!a& !os"s
Eistorical costs are used as a "asis for 8aluing transactions.
o 7e#en'e 7e!ogni"ion
Sales are recorded upon deli8ery of goods to t3e customers.
o O"%er Po&i!ies
*ncome from "an) deposits9 loans and ad8ances are recogniKed on accrual "asis.
Jor)ing of all figures and 'i/ed assets sc3edule are included in t3e notes to t3e
accounts
256
No"e G 4 Fi>e* Asse"s a" $1V

7sT 000
Cos" 7 A!!'/'&a"e* 1e-re!ia"ion $1V
Par"i!'&ars As On As On A As On On For As On As On
5'& 01 A**. 1is-osa&. 5'n 40 T 5'& 01 1is-osa&. T%e 5'n 40 5'n 40
3001 3003 E 3001 =ear 3003 3003

Building %..9...

=
=

%..9...

%

1+.9%..
=

1%94%

2.%9+%

2+49.2%
'urniture
and 'i/ture

$%9...

= =

$%9...

1.

439%.. =

491%.

49&%.

393%.
2e3icles
&1.9...

= 1%.9...

4&.9...

2.

2+.9... $.9...

%.9...

2&.9...

2..9...

To"a& 3003

1F1LIF000

- 1I0F000

1F0HIF000

I3HF000 K0F000

MLFM3I

I14FM3I

I41F4JI
To"a& 3001 > > >

1F1LIF000 > > >

I3HF000

MJ1F000

No"e G H S'n*r) 1eb"ors
3003 3001

!e"tors 1&%9... 1%9...
5ess0 4ro8ision for !ou"tful !e"ts ,$92%.- =

1%&9%. 1%9...

No"e G I S"o!6 in Tra*e

Ra( 7aterial
229... 2%9...
Jor) in 4rocess
1%9... 1&9$..
'inis3ed ?oods
4.9... 429%..

9... $493..

No"e G M Ta> Pa)ab&e

Ta/ 4aya"le as 4er Trial Balance 2+9%.. 2.9...
Current Qear\s 4ro8ision 2.9... 1$9...
HLFI00 4KF000

257
No"e G J Long Ter/ Loans

5ong Term 5oan 1..9... 12%9...
5ess0 Current 7aturity of 5ong Term 5oan 2%9... 2%9...
JIF000 100F000

No"e G K Cos" o. Goo*s So&*

Ipening Stoc) = Ra( 7aterial 1+9...
Add0 Cost of 7aterial 4urc3ased
4urc3ases %%9...
Add0 Carriage *n(ard 493..
%+93..
5ess0 Closing Stoc) = Ra( 7aterial 229...
Ra( 7aterial Consumed %&93..
Jages 1439%..
'uel and 4o(er +924.
+.+9.4.
Add0 Ipening Stoc) = Jor) in 4rocess 149%..
5ess0 Closing Stoc) = Jor) in 4rocess 1%9...
+.$9%4.
Add0 Ipening Stoc) = 'inis3ed ?oods 3%9...
5ess0 Closing Stoc) = 'inis3ed ?oods 4.9...
L04FIH0

No"e G L O"%er In!o/e

?ain on sale of 8e3icle 3.9...
Return on in8estments 3.9...
M0F000


Salaries

12%9...
'uel and 4o(er
&91&.
7isc. #/pense

&9&..
4ro8ision for !ou"tful !e"ts

$92%.
!epreciation

&+9&2%
31IFM4I

No"e G 11 Se&&ing E>-enses

Salaries ,Sales Staff-
$&9...

258
Lesson-45
FINANCIAL STATEMENTS OF LISTE1 COMPANIES AN1 FINANCIAL 7ATIOS
Question # 1

Following is the trial balance and balance sheet of Sheraz Ltd. as on June 30, 2002.

S%era2 L"*.
Tria& Ba&an!e
As On 5'ne 40 3003
1EBIT C7E1IT
7sT000 7sT000
Tangib&e Fi>e* Asse"s
Fi>e* Ass"s A" Cos"
'ree3old 5and +9%%.
Building 1%9$1%
4lant and 7ac3inery %49&3&
'urniture and 'i/ture 29&+$
7otor 2e3icles 249111
5eased 2e3icles 229123
A!!'/'&a"e* 1e-.
Building 1.9%
4lant and 7ac3inery 4931%
'urniture and 'i/ture 2944
7otor 2e3icles 12934
5eased 2e3icles 1291$&
Capital Jor) in 4rogress 49.%
*n8estment in S3ares of Co. A 2.9...
*n8estment in S3ares of Co. B 29%..
4ro8. 'or !iminution in 2alue Co. B 192%.
5ong Term !eposits
5ong Term !eposits 39.&+
C'rren" Asse"s
Stores and Spares 19114
Stoc) in Trade Nul .1 2..1 =
Ra( 7aterial 1392&4
4ac)ing 7aterial 4291$+
'inis3ed goods $%92+&
Trade !e"ts
Trade !e"ts 1$91$%
4ro8ision for !ou"tful !e"ts 223
Ad8. !ep. 6 4repayments =
Ad8ances 29434
!eposits $1&
4repayments 19&3
259
Accrued 4rofit on Ban) !ep 3$$
Ad8ance #/cise !uty 29&.1
Sales Ta/ Refunda"le $94+2
It3er Recei8a"les 3%
!i8idend Recei8a"le 2%9...
Cas3 and Ban) =
Cas3 in Eand 3933.
Cas3 at Ban) = Current 2%9.24
Cas3 at Ban) = Sa8ings 1&9%21
C'rren" Liabi&i"ies
S3ort Term Running 'inance %92%
Creditors9 Accrued 6 It3er 5. =
Creditors &39.1&
Customers !eposits 229%1
Accrued #/p. 22944$
It3er 5ia"ilities 19$2&
Ta/ 4aya"le 39$%$
!i8idends 2..
5ong Term and !effered. 5ia
!effered. Ta/ 39...
I"lig. :nder 5ease 'inance 1%92$2
S%are Ca-i"a& I0F000
?eneral Reser8e 1.49...
Sa&es -
?ross Sale = !omestic %19244
?ross Sale = #/port +393.%
Sales Ta/ 1.&91%$
Cos" o. Sa&es
4urc3ases. !uring t3e Qear Ra( 7 2+19%&+
4urc3ases. !uring t3e Qear 4ac)ing 7 1+.92+%
I8er3eads
Jages 2391%%
Stores Consumed 9+22
Tra8eling and Con8eyance. 1%$
Repairs and 7aintenance. 1.92&
*nsurance 34%
'uel and 4o(er 23933+
Bottle Brea)age &9%%2
#/cise !uty 4+9&1
7isc. #/penses 9412
A*/in. E>-enses -
Salaries and Jages 3&911
4ostage and Telegram 19&%2
Tra8eling and Con8eyance 19.%
260
Repairs and 7aintenance. 1922
*nsurance 191+
4rinting and Stationery 19121
Rent9 Rates and Ta/es 191%%
Auditors\ Remuneration 1&1
5egal and 4rofessional &$
!onations $1
?eneral #/penses 4..
Se&&ing an* 1is"rib'"ion E>-enses -
Salaries and Jages 23922
4ostage and Telegram 19%$
Tra8eling and Con8eyance 29&1&
Repairs and 7aintenance. &91&$
2e3icle Running $%+
4rinting and Stationery 4+
Rent9 Rates and Ta/es 19+%4
Ad8ertising 1+92%4
Iut(ard 'reig3t +9&2$
Sales Staff *ncenti8es 19&42
4etrol9 Iil etc. $9%&1
7isc. #/penses 193+2
Finan!ia& C%arges -
7ar)up on 5oans 2$2
'inance 5ease C3arges 19%.
Ban) C3arges $2%
O"%er E>-enses an* Pro#isions -
It3er *ncome =
4rofit on Ban) !eposits +4
!i8idends *ncome 2%91..
'oreign #/c3ange ?ain %932
?ain on !isposal of '. Assts. &+2
Sale of Scrap 194.
*ncome Ta/ for t3e year 149$..
:nappropriated 4rofit B;' %9%%%

1F3M3F100 1F3M3F100

A*'s"/en"s
1. 4ro8ision for diminution in t3e 8alue of in8estments to "e increased to Rs. 19$%.
2. 5ong term deposits maturing during t3e year Rs. 2+1
3. 4ro8ision for dou"tful de"ts to "e increased "y Rs. +$
4. &.T !i8idend declared.
%. 5ia"ility against lease finance paya"le in current year Rs. &9&43
&. Aut3oriKed capital of 1.9...9... s3ares of Rs. 1. eac3.
. Transfer to general reser8e 219...
$. Addition in 'i/ed Assets9 4lant and 7ac3. 292&2
261
+. 'urniture +$+9 I(ned 8e3icles 1%$
1.. Cas3 recei8ed on disposal of 8e3icles Rs. 1931&
11. !ep. Building 1.T 4lant and 'urniture 1%T and 2e3icles 2.T on (ritten do(n 8alue
12. Ho depreciation on year of sale and full depericiation in t3e year of purc3ase.
13. !istri"ution of !epreciation
o Building and 4lant to Cost of Sales
o 'urniture and I(ned 2e3icles to Admin #/penses
o 5eased 2e3icles to Selling #/penses
14. Closing Stoc)s
Ra( 7aterial 29%4%
4ac)ing 7aterial 4931
'inis3ed ?oods $9%%.

S%era2 L"*.
Ba&an!e S%ee"
As A" 5'ne 40F 3001
3001
No"e 7sT000
Iperating 'i/ed Assets 3+94%1
Capital Jor) in 4rogress =
5ong Term *n8estments 2192%.
5ong Term !eposits 29..4
&29.%
C'rren" Asse"s
Stores and Spares 194.%
Stoc) in Trade 1$$9&3+
Trade !e"ts 249+$4
Ad8. !ep. And 4repayments $9$2&
Cas3 and Ban) Balances 24943
24$92+1
C'rren" Liabi&i"ies
S3ort Term Running 'inances 39111
Current 7aturity of I"ligation
:nder lease finance 3942%
Creditors9 Accrued and It3er
5ia"ilities ++91.+
Ta/ 4aya"le %942
!i8ided 4aya"le 3.91&4
14192$1
$or6ing Ca-i"a& 1.9.1.
Total Capital #mployed 1MLFJ1I
'inanced By
S%are Ca-i"a& an* 7eser#es
S3are Capital %.9...
?eneral Reser8e 1.49...
:n appropriated 4rofit %9%%%
S%are%o&*ers E;'i") 1%+9%%%
262
!eferred Ta/ation 39...
I"ligation under 5ease 'inance 91&.
1.91&.
TOTAL 1MLFJ1I

7e;'ire*D
4repare a set of financial statements as on Nune 3.9 2..2.

So&'"ion

S%era2 L"*.
Ba&an!e S%ee"
As A" 5'ne 40F 3003
3003 3001
No"e 7sT000 7sT000
Iperating 'i/ed Assets 3 39$%+ 3+94%1
Capital Jor) in 4rogress 49.% =
5ong Term *n8estments 4 2.9&2% 2192%.
5ong Term !eposits % 29$ 29..4
&%933 &29.%
C'rren" Asse"s
Stores and Spares 19114 194.%
Stoc) in Trade & 1$.9$2& 1$$9&3+
Trade !e"ts 1&9+% 249+$4
Ad8. !ep. And 4repayments $ 429.34 $9$2&
Cas3 and Ban) Balances + 449$% 24943
2$%9$24 24$92+1
C'rren" Liabi&i"ies
S3ort Term Running 'inances %92% 39111
Current 7aturity of I"ligation
under lease finance 13 &9&43 3942%
lia"ilities 1. 1.+9$&1 ++91.+
Ta/ 4aya"le 39$%$ %942
!i8ided 4aya"le 11 3.92.. 3.91&4
1%%9$1+ 14192$1
$or6ing Ca-i"a& 140F00I 10JF010
Total Capital #mployed 1+%9342 1&+91%
'inanced By
S%are Ca-i"a& an* 7eser#es
S3are Capital 12 %.9... %.9...
?eneral Reser8e 12%9... 1.49...
:n=appropriated 4rofit $9.3 %9%%%
S%are%o&*ers E;'i") 1K4FJ04 1ILFIII
263
!eferred Ta/ation 39... 39...
I"ligation under 5ease 'inance 13 $9&3+ 91&.
119&3+ 1.91&.
1LIF4H3 1MLFJ1I

S%era2 L"*.
3003 3001
No"e 7sT000 7sT000

Sales 14 3$93+1 R
Cost of Sales 1% %2921. R
?ross 4rofit 1&&91$1 R
It3er *ncome 1& 339+&$ R

5ess0 Administrati8e #/penses 1 4$9+$. R
Selling and !istri"ution #/penses 1$ +93&4 R
12$9344 R
4rofit 'rom Iperations 19$.% R
5ess0 'inancial C3arges 1+ 29$% R

Het 4rofit Before Ta/ation &$9+4$ R
*ncome Ta/ for t3e Qear 149$.. R

4rofit After Ta/ation %4914$ R
:n=appropriated 4rofit Broug3t 'or(ard %9%%% R

%+9.3 R
Appropriation
Transfer to Reser8e 219... R
4roposed di8idend V &.T 3.9... R
%19... R
:n=appropriated 4rofit Carried 'or(ard $9.3 R

264

S%era2 L"*.
Cas% F&o, S"a"e/en"F
3003
No"e 7sT000


4rofit Before Ta/ &$9+4$
AdAustment for0
!epreciation %9+
4ro8ision for !ou"tful !e"ts +$
4ro8ision for !iminutions in 2alue of
*n8estment &2%
4rofit on Ban) !eposits ,+4-
!i8idends *ncome ,2%91..-
?ain on !isposal of '. Assts. ,&+2-
,1+91-
Iperating 4rofit Before Jor)ing Capital
c3anges 4+91
Stores and Spares 2+1
Stoc) in Trade 9$13
Trade !e"ts 9122
Ad8. !ep. And 4repayments ,9+$+-
923

S3ort Term Running 'inances 2914&
lia"ilities 1.9%2
129$+$
Cas3 ?enerated 'rom Iperations &+9+.&
4rofit on Ban) !eposits ,+4-
*ncome Ta/ 4aid ,%91..-
Het Cas3 'lo( from Iperations &39$32

265

4urc3ase of 'i/ed Assets ,%9..+-
Capital Jor) in 4rogress ,49.%-
Sale 4roceeds If 'i/ed Assets 1931&
!i8idend Recei8ed 1..
5ong Term !eposits ,19.&%-
,$933-

Repayment of 5ease 5ia"ility ,49&+-
di8idend 4aid ,2+9+&4-
,349&&1-

Het *ncrease in Cas3 6 Cas3 #1ui8alents 2.943$

I;B of Cas3 and Cas3 #1ui8alents 24943

C<B o. Cas% an* Cas% E;'i#a&en"s HHFKJI

S%era2 L"*.

S%are Genera& Un-a--. To"a&
Ca-i"a& 7eser#e Pro.i"

Balance as on Nune 3.9 2...

%.9...

1.49...

4911+ 1%$911+

4rofit after ta/ for t3e year

31943& 31943&

!i8idend

,3.9...- ,3.9...-

Balance as on Nune 3.9 2..1

%.9...

1.49...

%9%%% 1%+9%%%

4rofit after ta/ for t3e year

%4914$ %4914$
Transfer to reser8e

219...

,219...- =
!i8idend

,3.9...- ,3.9...-
Ba&an!e as on 5'ne 40F 3003

I0F000

13IF000

KFJ04 1K4FJ04

266

1. Co/-an) an* i"s o-era"ions
T3e company is a pu"lic limited company incorporated in 4a)istan and manufacture =========
===
3. Signi.i!an" a!!o'n"ing -o&i!ies
T3ese accounts 3a8e "een prepared in accordance (it3 t3e re1uirements of t3e Companies
Irdinance 1+$4 and *nternational accounting standards as applica"le in 4a)istan.
+is"ori!a& !os"s
Eistorical costs are used as a "asis for 8aluing transactions.
7e#en'e 7e!ogni"ion
Sales are recorded upon deli8ery of goods to t3e customers. Eo(e8er #/ported goods are
considered sold (3en s3ipped on "oard.
O"%er Po&i!ies
*ncome from "an) deposits9 loans and ad8ances are recogniKed on accrual "asis.
!i8idend income is recogniKed (3en rig3t to recei8e is esta"lis3ed.
Researc3 and de8elopment casts are e/pensed as and (3en incurred.
Jor)ing of all figures9 fi/ed assets sc3edule and all agreements. *.e. 5ease agreements
and agreements for o"taining loan from "an)s are included in t3e notes to t3e accounts.
267
Fi>e* Asse"s S!%e*'&e

Cos" A!!'/'&a"e* 1e-re!ia"ion $1V

Par"i!'&ars

As On
5'& 01
3001
A**.

1is-osa&.

As On
5'n 40
3003

7
A
T
E
As On
5'& 01
3001
On

1is-osa&.

For
T%e
=ear
As On
5'n 01
3003
As On
5'n 01
3003
Co/-an) O,ne*
Asse"s
'ree3old
5and

+9%%.

+9%%. = =

= = +9%%.
Building

1%9$1%

1%9$1%

1. 1.9% =

%.4 1192+ 49%3&
4lant and
7ac3inery

%2934 292&2

%49&3&

1% 4931% =

19.+$ 4$9413 &9223
'urniture
and 'i/ture

19.+

+$+

29&+$

1% 2944 =

34

29%.$

1+.
2e3icles

249$$1 19%$ ,29%2$-

249111

2. 1492%1 ,19+.4-

293%3 149.. +9411

10HF43L IF00L 93FI3K:

10MFK10 JHFK1I 91FL0H:

4FLKL JMFL00 3LFL10

Lease* Asse"s
2e3icles

229123

229123

2. 1291$&

19+$$ 14914 9+4+

33F134 - -

33F134 13F1KM -

1FLKK 1HF1JH

JFLHL
To"a& 3003

13MFHI3 IF00L 93FI3K:

13KFL44 KJF001 91FL0H:

IFLJJ L1F0JH 4JFKIL
To"a& 3001 > > > > > > > > 4LFHI1

1is"rib'"ion o. 1e-re!ia"ion

Jor)ing
3003 3001 5and O .
Rs\... Rs\... Building O 1%9$1$ = 1.9% O %9.4. / 1.T O %.4
Cost of
?oods Sold 19&.2 4lant O %49&3& = 4931% O 9321 / 1%T O 19.+$
Admin
#/penses 293$ 'urnitureO 29&+$ = 2944 O 224 / 1%T O 34
Selling
#/penses 19+$$ 2e3icles O 249111 = 1492%1 M 1+.4 O 119&4 / 2.T O 293%3
IFLJJ > 2e3icles O 229123 = 1291$& O +9+3 / 2.T O 19+$$
No"e 3003 3001
7sT000 7sT000
Long Ter/ In#es"/en"
*n8estment in S3ares of Co. A 2.9... 2.9...
*n8estment in S3ares of Co. B 29%.. 29%..
5ess0 4ro8. 'or !iminution in 2alue Co. B 19$% 192%.
&2%
2.9&2% 2.9...
268
Long Ter/ 1e-osi"s
5ong Term !eposits 39.&+ 29..4
5ess0 Current 7aturity 2+1
29$ 29..4

S"o!6 in Tra*e
Ra( 7aterial 29%4% 319++
4ac)ing 7aterial 4931 &9%4.
'inis3ed ?oods $9%%. $.93..
1$.9$2& 1$$9&3+

Tra*e 1eb"ors
Trade !e"ts 1$91$% 2%93.
5ess0 4ro8ision for !ou"tful !e"ts 1921. 323
1&9+% 249+$4

A*#an!es 1e-osi"s an* Pre-a)/en"s
Ad8ances 29434 193+
!eposits $1& 193.
4repayments 19&3 193.%
Ad8ance #/cise !uty 29&.1 291+2
Sales Ta/ Refunda"le $94+2 193&&
It3er Recei8a"les 3% 3+4
!i8idend Recei8a"le 2%9... =
Accrued 4rofit on Ban) !epericiation 3$$ 4&.
Current 7aturity of 5ong Term !ep. 2+1 =
429.34 $93&&

Cas% an* Ban6
Cas3 in Eand 3933.
Cas3 at Ban) = Current Accounts 2%9.24
Cas3 at Ban) = Sa8ings Accounts 1&9%21
449$%
Cre*i"orsF A!!r'e* C O"%er Liabi&i"ies
Creditors &39.1& %$9++
Customers !eposits 229%1 1+9$&&
Accrued #/p. 22944$ 19%34
It3er 5ia"ilities 19$2& 2912
1.+9$&1 ++91.+

1i#i*en* Pa)ab&e
4aya"le from 4re8ious Qear 2.. 1&4
Accrued !uring t3e Qear 3.9... 3.9...
3.92.. 3.91&4

269

S%are Ca-i"a&
Aut3oriKed Capital
1.9...9... ,2...0 1.9...9...-
ordinary s3ares of Rs. 1. eac3 1..9... 1..9...
4aid :p Capital
%9...9... ,2...0 %9...9...-
ordinary s3ares of Rs. 1. eac3 %..9... %..9...

Ob&iga"ion Un*er Lease Finan!e
I"ligation. :nder 5ease 'inance 1%92$2 1.9%$%
5ess0 Current 7aturity &9&43 3942%
$9&3+ 91&.

Sa&es
?ross Sale = !omestic %19244
?ross Sale = #/port +393.%
5ess0 Sales Ta/ 1.&91%$
3$93+1

Cos" o. Sa&es
Ra( 7aterial = Ipening Stoc) 1392&4
Ra( 7aterial = 4urc3ases 2+19%&+
5ess 0 Ra( 7aterial = Closing Stoc) 29%4%
Ra( 7aterial Consumed 292$$

4ac)ing 7aterial = Ipening Stoc) 4291$+
4ac)ing 7aterial = 4urc3ases 1+.92+%
5ess0 4ac)ing 7aterial = Closing Stoc) 4931
4ac)ing 7aterial consumed 1%9%3

I8er3eads
Jages 2391%%
Stores Consumed 9+22
Tra8eling and Con8eyance. 1%$
Repairs and 7aintenance. 1.92&
*nsurance 34%
'uel and 4o(er 23933+
Bottle Brea)age &9%%2
#/cise !uty 4+9&1
7isc. #/penses 9412
!epreciation 3.1 19&.2
13.9423
Cost of 4roduction %&%94&4
270

'inis3ed ?oods = Ipening Stoc) $%92+&
5ess0 'inis3ed ?oods = Closing Stoc) $9%%.
Cost of ?oods Sold %2921.

O"%er In!o/e
4rofit on Ban) !eposits +4
!i8idends *ncome 2%91..
'oreign #/c3ange ?ain %932
?ain on !isposal of '. Assts. &+2
Sale of Scrap 194.
339+&$

A*/inis"ra"i#e E>-enses
Salaries and Jages 3&911
4ostage and Telegram 19&%2
Tra8eling and Con8eyance 19.%
Repairs and 7aintenance. 1922
*nsurance 191+
4rinting and Stationery 19121
Rent9 Rates and Ta/es 191%%
Auditors\ Remuneration 1&1
5egal and 4rofessional &$
!onations $1
?eneral #/penses 4..
!epreciation 3.1 293$
4ro8ision for !ou"tful !e"ts +$
4ro8ision for !iminution in 2alue of
*n8estment &2%
4$9+$.

Se&&ing an* 1is"rib'"ion E>-enses
Salaries and Jages 23922
4ostage and Telegram 19%$
Tra8eling and Con8eyance 29&1&
Repairs and 7aintenance. &91&$
2e3icle Running $%+
4rinting and Stationery 4+
Rent9 Rates and Ta/es 19+%4
Ad8ertising 1+92%4
Iut(ard 'reig3t +9&2$
Sales Staff *ncenti8es 19&42
4etrol9 Iil etc. $9%&1
7isc. #/penses 193+2
271
!epreciation 3.1 19+$$
+93&4

Finan!ia& C%arges
7ar)up on 5oans 2$2
'inance 5ease C3arges 19%.
Ban) C3arges $2%
29$%

Finan!ia& 7a"io Ana&)sis

T3e management of t3e "usiness 3as to analyKe se8eral t3ings to (or) out performance of t3e "usiness.
T3ese analysis 3elp t3e management in decision ma)ing. T3e management (or)s out t3e performance of
t3e "usiness "y calculating some ratios. 'ollo(ing are some of t3e important ratios9 a management may
calculate to get first 3and )no(ledge a"out "usinessGs performance0

Pro.i"abi&i") 7a"ios

4rofita"ility ratios contain t3e follo(ing ratios0

?ross 4rofit Ratio
Het 4rofit Ratio

Gross Pro.i" 7a"io

T3e ?ross 4rofit ratio tells t3e management of t3e company a"out profita"ility of t3e company. *t 3elps
t3e management of t3e company to )no( a"out cost of production of t3e company. J3en management
compares it (it3 pre8ious yearGs ratios9 it came to )no(9 3o( (ell t3e "usiness 3as performed and 3o(
to impro8e its efficiency furt3erD ?ross 4rofit ratio also gi8es information a"out sales. *t tells t3e
management (3et3er sales 3as increased or decreased. T3e management ta)es appropriate steps
accordingly. T3e formula for calculating t3is ratio is as follo(s0

?ross 4rofit Ratio O ,?ross 4rofit ; Sales- / 1..

Ne" Pro.i" 7a"io

T3e "enefit of net profit ratio is same as t3at of gross profit ratio. *t 3elps t3e management to )no(
a"out net profit. *f gross profit ratio is greater as compared to last year and net profit ratio is lesser9 it
means t3at administrati8e and selling e/penses of t3e company 3a8e increased. T3e management ta)es
appropriate steps to control t3e e/penses. T3e formula for t3is ratio is as follo(s0

Het 4rofit Ratio O ,Het 4rofit ; Sales- / 1..

S"o!6 T'rno#er 7a"io

T3is ratio tells us a"out sale of stoc). *t can "e calculated in days as (ell as in num"er of times. *t tells us
3o( many times in a year or in a mont39 t3e stoc) is sold or in 3o( many days9 t3e stoc) is sold. *f it is
calculated in days and t3e result is 3ig3er t3an t3at of pre8ious years. T3is means t3at t3e stoc) ta)es
more days to "e sold. T3at means demand of t3e product of t3e company is decreasing and 8ice 8ersa.
T3e formula to calculate stoc) turno8er in num"er of days is as follo(s0

272
Stoc) Turno8er in days O ,A8erage Stoc) ; Cost of goods sold- / 3&%
J3ere9
A8erage stoc) O ,Ipening Stoc) M Closing Stoc)- ; 2

T3is opening and closing stoc) may "e for a year or for a mont3 depending upon t3e policy for
calculating t3is ratio.

*f t3is ratio is calculated for num"er of times9 it means t3at 3o( many times in a gi8en period ,(3et3er a
year or a mont3- t3e stoc) is sold. T3e formula for calculating t3is ratio is as follo(s0

Stoc) Turno8er ,Hum"er of times- O ,Cost of goods sold ; A8erage stoc)-

1eb"ors T'rno#er 7a"io

T3is ratio is used to get first 3and )no(ledge a"out payment recei8ed from de"tors. *t is e8ident t3at a
company cannot meet its e/penses (it3out recei8ing cas3 from its customers. *f de"tors do not pay in
time9 3o( (ould a company pay its lia"ilitiesD Conse1uently its reputation (ill go do(n and no"ody (ill
place 3is trust on t3at company. T3is ratio 3elps management to identify de"tors (3o do not pay in time
and to pursue t3em to pay. T3is ratio is also calculated for num"er of days and num"er of times. T3e
formulae for t3is ratio are as follo(s0

!e"tor Turno8er ,Hum"er of days- O ,A8erage !e"tors ; Credit Sales- / 3&%

!e"tor Turno8er ,Hum"er of times- O Credit Sales ; A8erage !e"tors

Cre*i"ors T'rno#er 7a"io

CreditorsG turno8er means 3o( many times or in 3o( many days a company pays to its creditors. As
mentioned a"o8e9 if a company does not collect its payment in time9 3o( (ould it "e a"le to pay its
creditors on timeD *f it does not pay its de"tors on time9 t3is situation (ill ma)e "ad impression on its
reputation. 5i)e de"tors turno8er9 creditorsG turno8er is also calculated for num"er of days and num"er
of times. T3e formulae for t3is ratio are as follo(s0

Creditor Turno8er ,Hum"er of days- O ,A8erage Creditors ; Credit 4urc3ases- / 3&%

Creditor Turno8er ,Hum"er of times- O Credit 4urc3ases ; A8erage Creditors

7e"'rn on Ca-i"a& E/-&o)e* 7a"io 97OCE:

T3is ratio is calculated for t3e s3are 3olders of t3e company. As s3are 3olders are concerned (it3 profit
paid "y companies to its s3are 3olders. T3is ratio gi8es us t3e proportion of net profit "efore ta/ to
a8erage capital employed "y t3e company. T3e return rate of profit gi8en to its mem"ers s3ould "e
3ig3er t3an current mar)et rate. *f return rate is less t3an current mar)et rate t3an t3e s3are 3olders (ill
in8est t3eir money in t3e mar)et instead of in8esting in t3e company. T3e formula for calculating t3is
ratio is as follo(s0

Return on Capital #mployed Ratio ,RIC#- O Het profit after ta/ "efore appropriation ; A8erage
Capital #mployed

273
Earning Per S%are 7a"io

#arning per s3are ratio indicates t3e proportion of net profitL a company is getting per s3are. S3are
3olders are al(ays interested to )no( t3e proportionate rateL a company is getting per s3are. As price is
numerator and earning in denominator9 t3erefore lo(er 8alue means "etter return.

T3e formula for calculating t3is ratio is as follo(s0

#arning per s3are ratio O Het profit after ta/ "efore appropriation ; Hum"er of s3ares

Pri!e Earning 7a"io

T3is ratio is calculated for t3ose s3ares (3ic3 3a8e mar)et 8alue. T3is ratio compares earning per s3are
(it3 mar)et 8alue of t3at s3are. T3e formula for calculating t3is ratio is as follo(s0

4rice #arning Ratio O 7ar)et 8alue per s3are ; #arning per s3are

1eb" E;'i") 7a"io

T3is ratio s3o(s t3e composition of finance t3at 3as funded t3e asset of t3e company. T3is ratio 8aries
for different proAects. *n 4a)istan9 ma/imum ad8ised ratio is &.0 4.. i.e. 4.T of t3e assets s3ould "e
"oug3t (it3 company9 s in8estment and &.T s3ould "e "oug3t (it3 t3e loan ta)en "y t3e company. T3is
standard is accepta"le in 4a)istan. *f a companyGs li1uidity ratio is more t3an t3e a"o8e mentioned
standard9 (3ic3 means condition of t3e company is not 8ery good. *f it 3as to pat its lia"ilities9 its assets
(ould not support it to pay its lia"ilities. T3e formula for calculating t3is ratio is as follo(s0

!e"t #1uity Ratio O 5ong term 5ia"ilities ; #1uity

C'rren" 7a"io

Current ratio s3o(s t3e proportion of current assets and current lia"ilities. T3is ratio s3ould "e 101. i=e..
'or e8ery lia"ility of one rupee9 t3ere s3ould "e an asset of one rupee to pay it. T3e formula for
calculating t3is ratio is as follo(s0

Current Ratio O Current Assets ; Current 5ia"ilities

A!i* Tes" 7a"io

Acid test ratio is t3e proportion of current assets (3ic3 are con8erti"le into cas3 and current lia"ilities.
T3e formula for calculating t3is ratio is as follo(s0

Acid Test Ratio O ,Current Assets > Stoc)- ; Current 5ia"ilities

Mar6 U- Co#er 7a"io

T3is ratio s3o(s t3e proportion of operating profit ,Iperating 4rofit "efore financial c3arges- and
financial c3arges. T3is ratio is useful for "an)ers. *f a company 3as ta)en loan and its financial c3arges
are so large t3at all or a "ig part of profit is a"sor"ed "y financial c3arges9 t3en 3o( (ould a company
repay its loans. T3e formula for calculating t3is ratio is as follo(s0

7ar) up Co8er Ratio O Iperating 4rofit "efore financial c3arges ; 'inancial c3arges

================TE# #H!===============

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MGT101 - FINANCIAL ACCOUNTING I

Lesson No. TOPICS Page No.

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