Accountancy

Chapter
1
BASIC CONCEPTS OF ACCOUNTING
1.1 Introduction
1.2 Accounting- An Overview
1.2.1 Definition of Accounting
1.2.2 Process of Accounting/ Accounting Activities
1.2.3 Objectives of Accounting
1.2.4 Book Keeping, Accounting and Accountancy
1.2.5 Parties Interested in Accounting Information
1.2.6 Branches of Accounting
1.2.7 Advantages of Accounting
1.2.8 Limitations of Accounting
1.3 Accounting Principles: Concepts and Conventions
1.3.1 Accounting Concepts
1.3.2 Accounting Conventions
1.4 System of Book Keeping
1.4.1 Double Entry System
1.4.2 Single Entry System
1.5 Meaning of Account
1.5.1 Classification of Accounts
1.6 Rules of Debit and Credit
LEARNING OBJECTIVES
l To state the concepts and appreciate the needs for
accounting
l To explain the basic terminology used in accounting
l To discuss the importance of accounting as source of
information to various parties
l To explain the system of book keeping, accounting
and accountancy
l To analyze the transactions and identify the
accounts to be debited and credited
(1)
2 Fundamentals of Accountancy
1.1 INTRODUCTION
In business numerous transactions take place every day.
It is humanly impossible to remember all the transactions.
Hence there is a need to record them. The recording of
business transactions is the one of the major functions of
Accounting. With the help of accounting records the
businessman is able to ascertain the operating performance
and the financial performance of business enterprise at the
end of a given period and communicate such information
interested parties i. e. shareholders, creditors, customer,
government, society etc. In this chapter attempt has been
made to understand the basic concepts of accounting related
to the recording, rules of debit credit.
1.2 ACCOUNTING- AN OVERVIEW

There is always a limit to human memory. One cannot
remember every transaction one incurred. For Example: if
someone is given Rs. 25,000 and asked to buy a number of
items then it becomes difficult to remember the detail of
various items purchased. Therefore, it is necessary for
everyone to write transactions on a piece of paper or a note
book. In case of business enterprise, it is more difficult
because of frequent transactions like buying, selling,
payments and receipts. It becomes almost impossible to get
data of all these transactions unless these are recorded
properly. For example, business enterprise cannot easily
ascertain the amounts to be received from various customers
to whom the goods were sold on credit. Business enterprise
will not know the detail of how much it owes to its suppliers.
It may also become difficult to work out the profit earned or
loss incurred during a particular period. It is, therefore,
necessary to maintain a proper record of all the transactions
which take place from time to time.
The recording of business transactions in a systematic
manner is one of the primary functions of accounting.
Whichever the form of business organization - a sole
Basic Concepts of Accounting 3
proprietorship, partnership, a company, or a co-operative

society, it has to maintain proper books accounts because
the accounting information is useful both for the
management and the outside agencies like tax authorities,
banks, creditors etc. The management requires accounting
information for purposes assessing resource allocation,
solvency, and profitability and to decide upon the course of
action to be taken. The banks and creditors require it for
assessing the credit worthiness of the business and the tax
authorities use it for determining the amount of income tax,
sales tax, etc. In fact, accounting is necessary not only for
business organizations but also for non-business
organizations like schools, colleges, hospitals, clubs etc.
1.2.1 Definition of Accounting

The subject of ‘Accounting’ has been defined in different
ways by different authors. So, it is very difficult to define the
subject through a single definition. However, the following
definitions would give a general understanding of the subject.
According to the American Accounting Association,
“Accounting is the process of identifying, measuring and
communicating economic information to permit informed
judgments and decisions by users of the information”. This
definition stresses three aspects viz., identifying, measuring,
and communicating economic information. In the words of
the American Institute of Certified Public Accountants,
“Accounting is the art of recording, classifying and
summarizing in a significant manner and in terms of money,
transactions and events which are, in part at least, of a
financial character and interpreting the results thereof’.
These are the popular definitions of accounting which
outlines the nature and scope of accounting activity.
A business is generally started with the proprietor’s
funds known as capital. The proprietor may also borrow some
funds from other agencies. These funds are utilized to acquire
the assets needed for the business and also to carry out
various business activities. In the process a number of

transactions take place. The accountant has to identify the
transactions to be recorded, measure them in terms of money,
and record them in appropriate books of account. Then
account has to classify them under separate heads of account,
prepare a summary in the form of Profit and Loss Account
and Balance Sheet, and analyse, interpret and communicate
the results to the interested parties. This is the sum and
substance of accounting.
1.2.2 Process of Accounting/ Accounting Activities

The process of accounting or activities involved in
accounting can be outlined as follows:
(i) Identifying the transactions and events:
Accounting is concerned with the transactions and
events which are of a financial character. Such
transactions have to be identified by the accountant
with the help of various bills and receipts.
(ii) Measuring the identified items: Having
identified the transactions, they should be measured
in money term (currency of the country). In
accounting, only those transactions are recorded
which can be expressed in terms of money.
(iii) Recording and Classifying transactions: The
transactions which are identified and measured are
to be recorded in a book called ‘Journal’ or in one of its
sub-divisions. The recorded transactions have to be
classified with a view to group transactions of
similar nature at one place. This work is done in a
separate book called ‘Ledger’. In the ledger, a
separate account is opened for each item so that all
transactions relating to it can be brought at one
place. For example, Rent paid at different times is
brought under ‘Rent Account’.
(iv) Summarizing: The transactions which are
recorded and classified will result in a mass of
financial data. It is therefore necessary to

summarize such data periodically (at least once a
year) in a significant and meaningful form. This is
done in the form of a Profit and Loss Account which
reveals profit or loss, and a Balance Sheet which
indicates the financial position of the business.
(v) Analyzing, interpreting and communicating
accounting information: The summarized results
have to be analyzed and interpreted with the help of
statistical tools like ratios, averages, etc., and
examined critically. Later on, this data will be
communicated in the form of reports to the
interested parties.
Look at Figure 1.1 and note the activities involved in
accounting which starts with identifying the transactions to
be recorded and ends with communicating the results to
various interested parties for decision making.
Transactions Is there Yes Measure in
and accounting term
Events record required of money
No
No Recording
Record and
classify the
transactions
Internal
Users Analysis and Summarize
Decisions Interpretation
External Users
Decisions
Figure 1.1: Accounting Activities

1.2.3 Objectives of Accounting

The objectives of accounting can be stated as follows:
(i) To maintain systematic record of business
transactions: Accounting is used to maintain
proper record of all financial transactions, assets
and liabilities like purchase and sale of goods, cash
receipts and cash payments, etc.
(ii) To ascertain operating performance of
business: A business organization would be
interested in finding the net result of its business
operations periodically i. e., whether the business has
net profit or incurred net loss. A proper record of al1
income and expenses helps in preparing Profit and
Loss Account and ascertain the net result of business
operations during a particular period.
(iii) To ascertain the financial position of the
business: The business enterprise is also interested
in ascertaining the financial position of its business
at the end of a particular period i.e., how much it
owns and how much it owes to others. Business
would like to know its capital position, assets and
liabilities whether they have increased or decreased
or remained constant. A systematic record of capital,
assets and liabilities facilitates the preparation of
Balance Sheet of business enterprise.
(iv) To communicate accounting information:
Apart from owners there are various parties who are
interested in the accounting information. These are:
bankers, creditors, tax authorities, prospective
investors, customers, employees etc. They are
interested in financial information to assess the
profitability and the financial soundness of the
business enterprise. The accounting information is
communicated to them in the form of an annual
report.
(v) To comply with legal requirements: Business

needs to maintain proper financial records for
meeting the various requirements of The Companies
Act, The Income Tax Act, Sales Tax Act, Custom and
Excise Laws etc.
1.2.4 Book Keeping, Accounting and Accountancy

Book Keeping is basically concerned with maintaining
routine records of all events and transactions of financial
character in prescribed form and according to set of rules and
regulation. So it is basically deals with identifying the events,
measuring them in common measurement unit, recording the
transactions in proper books of account and classifying the
recorded transaction in form of ledger.
Accounting in addition to book keeping involves the
summarization from time to time of the information
contained in the records, its presentation in a significant form
to interested parties, and its interpretation as an aid to
decision making by these parties.
Book-keeping is thus a narrow term concerned primarily
with the maintenance of the books of account and covers the
first four activities listed in the scope of accounting viz.,
identifying the transactions and events to be recorded,
measuring them in monetary term, recording in journal, and
posting into ledger. Accounting, on the other hand, is
concerned with summarizing the recorded data, interpreting
the results and communicating them to stakeholders. In
other words, accounting starts where book-keeping ends. But
in practice, the accountants also direct and review the work of
book-keepers and therefore the term accounting is generally
used in a broader sense covering all the accounting activities,
Thus, Book-keeping is regarded as a part of Accounting.
‘Accountancy’ refers to a systematic knowledge of
accounting and is regarded as an academic subject like
Economics, Statistics, Physics, Chemistry, etc. It tells us ‘why
to do’ and ‘how to do’ of various aspects of accounting. In other
words, Accounting refers to the actual process of preparing

and communicate the accounting records, Accountancy
explains why and how to prepare the records and how to
summarize the accounting information and communicate it
to stakeholders. Thus, Accountancy is a body of systematized
knowledge whereas Accounting is the art of putting such
knowledge into practice.
1.2.5 Parties Interested in Accounting Information

There are many peoples who are interested in examining
the accounting information available in the form of profit and
loss statement, balance sheet and cash flow statement. These
can be external users and internal users. Internal users are
partners, directors, owners and sole traders who are running
and managing their business enterprise. External users are
persons, individuals and organizations who have some
interest in economic activities of business organizations.
They generally rely on the published data in profit and loss
statement, balance sheet and cash flow statement.
Accounting information helps them in analyzing the present
position of business, and comparing its present performance
over the years and with that of similar enterprises. The
following are some users of accounting information:
(i) Owners: Owners contribute the funds and assume
the risk of business. Therefore, they are interested
in knowing the financial position of the business and
rate of return to ensure proper utilization of
resources. The owners also require accounting
information to assess the performance of the
managers.
(ii) Managers: Managers are responsible for planning,
controlling and evaluating all business activities of
an enterprise. They also need such information for
setting the targets, measure the performance and
take necessary actions if there are deviations from
the target. In addition, managers also use
accounting information to measure long term and

solvency of business enterprise, profitability in term
of sales and rate of return in relation to capital
employed.
(iii) Lenders: When the business requires large amount
of funds in long term, it generally approaches money
lenders, industrial banks and non-banking financial
companies etc. These parties need accounting
information to assure themselves about interest
payment and repayment of the principle amount.
The specific interest lies in evaluating the
profitability, liquidity and solvency.
(iv) Creditors: Creditors are generally the suppliers of
goods and service on credit. They need accounting
information to assess credit worthiness of the
enterprise and limits up to which credit can be
granted.
(v) Investors: Investors can be present investors and
potential investors. Present investors are the
existing shareholders or lenders of the money. A
person who wants to be the member of the firm by
purchasing the shares or lending the money is called
potential investors. The present investors are
interested in accounting information to assure about
the rate of return and make decision on buying,
holding or selling of shares/investments. Potential
investors require accounting information to get some
indication of future progress of the firm and take
decision on buying the shares of the firm.
(vi) Tax Authorities: Tax authorities are interested in
accounting information to assess the tax liabilities of
the business enterprise. It is helpful in collection of
income tax, Goods and Service Tax (GST), custom
duties, excise duties and so on.
(vii) Employees: The employees are interested in
information to assess the ability of enterprise to pay
salaries, overtime, bonus, medical facilities,

retirement benefits etc. Accounting information
provides facts and figures on the earning capacity of
business enterprise.
1.2.6 Branches of Accounting

Changing economic, social and technological scenarios
have resulted in an increase in the scale of operations of
business. Economic development and technological
improvements has made management function more and
more complex and increased the importance of accounting
information. This gave rise to different branches of
accounting. Some of the divisions of accounting are given
below:
Financial accounting: This is basically concerned with
recording of all financial transactions so that operating
performance of the business enterprise during an accounting
period can be determined, financial performance at the end of
the accounting period can be work out and financial
information to management and other interested parties can
be communicated. So financial accounting is mainly confined
with preparation of various financial statements and their
communication to stakeholders.
Cost Accounting: The purpose of cost accounting is to
ascertain the cost, control the cost and communicate costing
information to interested parties for decision making. This
aspect of accounting is mainly deals with the cost of
production, operation and function.
Management Accounting: Management accounting is
the application of various accounting information to assist
the management in future planning, decision making,
controlling. Management accounting helps the management
in policy decision and evaluates the impact of these decisions
on business. For Examples: pricing decision, make or buy
decision, capital expenditure decision, dividend decision etc.
Human Resource Accounting: Accounting basically

deals with the quantitative phenomena. But with the
changing business environment, there is need of new form of
accounting to record qualitative information. One of them is
human resource accounting wherein accounting methods are
applied to evaluate human resource in monetary terms. So it
is the accounting of the people in a business organization.
Social Accounting: It is related to social responsibility
aspect of business. It records the social benefits and social
costs of business operations. Social benefits includes the
medical, housing, education, infrastructure etc. provided by
business enterprise to the society while social cost may
include pollution, stress, degradation of moral values,
depletion of natural resources etc.
1.2.7 Advantages of Accounting

(i) Replaces memory: A business organization
involves a large number of business transactions
which are not possible to remember. Accounting
facilitates the recording of financial transactions in
the books account in a systematized manner that can
be easily and readily accessible for the users of
accounting information.
(ii) Optimum utilization of resources: Accounting
provides information regarding various assets i.e.,
cash in hand, cash at bank, the stock of goods, the
amounts receivable, land, building, machinery etc.
and the amounts invested in various other assets.
Information about such matters help the owners and
the management to make optimal utilization of
resources.
(iii) Depiction of performance of business:
Accounting facilitates the preparation of various
financial statements i. e. Profit and Loss account and
Balance Sheet. These financial statements help the
business to know the net result of business
operations during the accounting period and the

financial position of the business as at the end of the
accounting period.
(iv) Provide Accounting information to users:
Accounting information is communicated to
interested parties in form of reports, statements,
graphs and charts which help them in making
decision such as investment in securities, grant of
loans, remuneration to employees, mobilization of
resources etc.
(v) Facilitates a comparative study: With the help of
accounting information one can compare the present
performance of the business enterprise with that of
its past performance and with that of similar
organizations. This enables the management to
reach to a conclusion about the business and take
efforts to improve the performance.
(vi) Tax matters: The government levies various taxes
such as GST, customs duty, excise duty, sales tax,
and income tax. Accounting will help in the
settlement of tax liabilities with the tax authorities
by maintaining proper books of account.
(vii) Ascertaining value of business: In the event of
sale of a business entity, the accounting records will
help in ascertaining the correct value of business.
(viii) Prevention of error and fraud: Accounting
prevents the occurrence of errors and fraud because
books of account are subject to auditing in most of the
cases. Auditing detects the various errors and frauds
that have taken place during an accounting year and
suggest the necessary steps to avoid them.
(ix) Acts as a reliable evidence: Systematic record of
business transactions is generally treated by courts
as good evidence in case of dispute between business
and various stakeholders. For example: dispute
regarding amount owing to creditors, payment of

money by debtors etc.
1.2.8 Limitations of Accounting

(i) Records only quantitative phenomena:
Financial accounting only records benefits and cost
of the transactions and events which are expressed
in financial terms. Non-monetary transactions do
not find any place in books of account though these
events and transactions also important for smooth
functioning of business enterprise. Non-monetary
benefits such as quality of human resources, licenses
possessed, locational advantage, competitive
advantage, business contacts as well as
non-monetary costs such as pollution, employees
stress, and work culture do not find any place in
accounting records. Hence, Accounting records do
not reveal a complete picture of business.
(ii) No consideration of present value of the
business: Accounting is based on the cost concepts.
It means, for the recording purpose, assets are
shown on book value (original cost minus
depreciation) and market values of assets are
ignored. For example: land and buildings may have
much more or less value than what is recorded in the
balance sheet. The effect of price level changes does
not reflect in the balance sheet of the enterprise.
Hence, balance sheet does not present a true and fair
view of business.
(iii) Bases on estimates and personal judgments:
Accounting records are influenced by the personal
judgment and estimates of accountants. For
example: categorization of debtor, method of
depreciation, valuation of stocks, and treatment of
deferred revenue expenditure is based on the
integrity and credibility of the accountant which
may affect the results of financial statement.
(iv) Window dressing: Sometimes accountants may

indulge in presenting impressive but not the real
position of item in balance sheet like debtors, stocks
and machinery without their provisions. In such
cases financial statements do not reflect fair view of
(v) Unrealistic facts and figures: Even though the
books of account are prepared on the basis of various
accounting principles, they fail to present a realistic
picture of business. For example: according to going
concern concept, business entity will have perpetual
life and thus assets are recorded at book value which
may be actually realizable at high or low market
value.
(vi) Ignorance of some useful items: According to
materiality principle, only material items are
disclose in financial statement in detail, less
important items are need not to be shown. In this
manner, some insignificant items are ignored which
may have some important influence on the
functioning of business.
TEST YOUR UNDERSTANDING-I

1. Which stakeholder group would be interested in
(a) VAT and other tax liabilities. (________________)
(b) Profitability and Share price. (_________________)
(c) Potential to pay rewards and bonus. (__________________)
2. State whether each of the following statement is True and False.
(a) Accounting is concerned only with the recording of transactions.
(b) Accounting records only those transactions which are of a
financial character.
(c) Book-keeping and accounting are synonymous terms.
(d) Cost accounting helps in ascertaining and controlling costs.
(e) Management Accounting provides necessary information to
management which helps them in planning, controlling and
decision making.
(f) The main objective of financial accounting is to ascertain the
profit or loss and the financial position of the business.
1.3 ACCOUNTING PRINCIPLES: CONCEPTS AND

CONVENTIONS
Accounting is a system evolved over a period of several
centuries to achieve a set of objectives by maintaining
systematic records of all business transactions and prepare
annual reports for providing meaningful information to the
interested parties. For making the accounting information
useful to its internal and external stakeholders, accounting
information should be reliable and comparable. This becomes
possible only if the information provided in financial
statements is relying on accounting policies, principles and
practices. Several rules and conventions have been adopted
in identifying the events and transactions, measuring them,
recording them in books of account, summarizing them, and
reporting them to the interested parties. These’ are the
fundamental ideas or basic assumptions and practice of
financial accounting accepted by the accounting profession.
This brings uniformity in the practice of accounting.
1.3.1Accounting Concepts
Accounting concepts refer to the assumptions and ideas
which are accepted as true without any proof. In other words,
accounting concepts are basic assumptions or opinions for
recording transactions which ultimately lead to
communication of information to various users. Accounting
concepts have gradually developed over a period of time
because of new inventions, improvement in technology,
globalization of business activities, introduction of new types
of business transactions, and changing legal, economic and
social environment.
i. Accounting Entity Concept
This concept assumes that, for accounting purposes, the
business organization and its owners are two distinct
entities. Thus, the business transactions and personal
transactions are separate. For example, when the owner
contributes money in the business, it is recorded as capital of
the business or liability of business towards the owner.

Similarly, when the owner withdraw cash or goods for
personal use, it is treated as personal expense or drawing.
Thus, the accounting entries are made from business point of
view and not the person owning the business. For example:
Mr. A started business with Rs.10,00,000, bought goods for
Rs. 3,00,000, purchased furniture for Rs 3,00,000, plant &
machinery of Rs. 2,50,000 and Rs. 1,50,000 remains in hand.
These are the assets of the business and not of the owner.
According to the business entity concept Rs.10,00,000 will be
treated as capital i.e. a liability of business towards the owner
of the business.
Now suppose, Mr. A takes away cash of Rs. 70,000 and
goods of Rs. 20,000 for his domestic use. This withdrawal of
cash/goods by Mr. A is his personal expense and is termed as
Drawings. The business entity concept states that business
and the owner are two separate entities. Therefore, personal
assets and liabilities of owner are not considered in recording
assets and liabilities of business. This concept becomes
helpful in ascertaining true financial performance of the
business as only the business expenses and revenues are
recorded and all personal expenses are ignored.
Note : Business entity concept is most suitable for companies with
limited liability because its entity is separated from its shareholders
and it can sue and be sued in its own name. In case of partnership and
sole proprietorship, it is difficult to apply business entity concept
because the owner is the business and his personal property can be used
for business loss.
ii. Money Measurement Concept

According to this concept all business transactions must
be expressed in terms of monetary units. Monetary units
means currency of country e.g.in India transactions should be
expressed in rupees. In the money measurement concept,
only those transactions are recorded in the books of account
which can be expressed in terms of money. Non-monetary
transactions such as retirement of manager, good quality of
product and strike cannot be recorded because these
transactions cannot be expressed in term of money. For

example, sale of goods of Rs. 15,00,000, purchase of raw
materials Rs. 7,00,000, dividend received Rs. 20,000 etc. are
recorded in books of account. But the transactions such as
sincerity, loyalty, honesty of employees are not recorded in
books of accounts they affect the profits and losses of the
Note : For accounting purposes, transactions should be recorded in
money terms and not in terms of the quantity. For example, at the end of
the year 2018, an business organization may have 100 personal
computers, 500 office chairs and tables, 10000 kg of raw materials etc.
These are expressed in different units. But for accounting purposes they
should be expressed in money terms. In this case, computers Rs. 10
lakhs, office chairs tables Rs.2 lakhs, raw material Rs. 30 lakhs. Thus,
the total assets of the organisation are valued at Rs. 42 lakhs.
iii. Going Concern Concept

This concept assumes that a business entity will carry on
its activities for an indefinite period of time and would not be
dissolved in future. According to this concept every year some
amount should be charged as expenses in profit and loss
account and the balance amount should be shown as an asset
in balance sheet. For example, a company purchases a plant
and machinery of Rs. 50,00,000 and its life span is 30 years. It
will not be good practice to charge whole amount of Rs.
50,00,000 from the revenues of the year in which the plant
and machinery is purchased because it bring down the profit
of business. This will communicate the message of poor
operating performance of business enterprise while it is an
investment of business.
Note : Going concern does not mean permanent continuance of business
enterprise. It means that the firm will continue for long enough to meet
future obligation and carry out present plan.
iv. Accounting Period Concept

This concept presumes that life of the business
enterprise should be divided in regular intervals to ascertain
profit and loss and financial position of business enterprise.
This is done by preparing a balance sheet and profit and loss
account at the end of each accounting period. This is

necessary for decision making by owners on performance of
business, tax computation by tax authorities, investment
decision by investors, lending decisions by banks or creditors
etc.
Note : Accounting period may be of one year, six months, three months,
one month, etc. But usually one year is taken as one accounting period
which may be a calender year or a financial year.
v. Historical Cost Concept

The cost concept states that all the fixed assets like land,
building, machinery etc., are recorded in the books of
accounts at their purchase price i.e., cost of acquisition,
transportation and installation For example, a machine was
purchased by ABC Limited for Rs.10,00,000. An amount of
Rs.10,000 were spent on transporting the machine to the
factory and its installation. The total amount at which the
machine will be recorded in the books of accounts would be
Rs.10,10,000. This concept is applicable only to fixed assets
and not for current assets.
Note : In this concept, cost means acquisition cost of assets only in the
year of its purchase. In the subsequent years, assets are shown at book
value (cost price less depreciation).
vi. Accounting Equation Concept

This concept states that every business transaction has
dual effect. Business transaction has two fold effects in the
following ways:
(i) An effect on asset and equal effect on liability or
capital. For example: Mr. A purchases goods of Rs.
10,000 on credit. This transaction has two fold effect
(i) increase in one asset (stock) and (ii) increase in
liability (Creditor).
(ii) An effect on some asset and equal effect on some
other asset. For example, Mr. A purchases furniture
for Rs. 15,000. This transaction has two fold effect (i)
increase in one asset (furniture) and (ii) decrease in

another asset (Cash).
(iii) An effect on some liability and equal effect on some
other liability. For example, Mr. A borrow Rs. 50,000
from bank to pay creditors. This transaction has two
fold effect (i) increase in liability (Loan) and (ii)
decrease in other liability (creditors).
Note : Each business transactions will always result in equality of
assets and liabilities plus capital. This equality also called balance sheet
equation which can be presented in three ways:
Assets = Capital + Liabilities
Capital = Assets – Liabilities
Liabilities = Assets – Capital
vii. Objectivity Concept

Objectivity concepts states that accounting of business
transaction should not be affected by the judgment and
personal bias of accountant. Books of account should be
supported by business documents i.e. vouchers, cash memos,
purchase and sales invoices etc.
Note : There should not be any evidence of bias and fraud even in those
cases where personal judgment is requires such as calculation of
depreciation.
viii. Accrual Concept

Accrual concept means revenue and expenses must be
recorded as they earned or incurred For example: XYZ
Limited sold goods for Rs. 42,000 on 21st march 2018 and
payment was received until 31st April 2018, the accrual
principle requires that revenue must be recorded for year
ending 31st March 2018 although no payment was received
until 31st March 2018.
Note : Revenue are recognizes when they becomes receivable and
expenses are recognized when they become payable.
viii. Matching Concept

According to this concept, expenses incurred in one
accounting period should be matched with the revenue
recognized in that period. So once the revenue realized, it

should be allocated to the relevant accounting period. This
could be done with the help of accrual concept.
1.3.1 Accounting Conventions

Accounting conventions are the customs or traditions
which are adopted either by general agreement or common
consent. In other words, accounting conventions are rule,
accepted method, procedure or practice which have been in
use for a long period of time and guide accountants in
recording transactions and preparing the various financial
statement.
i. Consistency
This convention emphasizes that accounting practice
followed for particular assets in one year should be followed
for that asset in subsequent years. For example: if
depreciation is charged on building at straight line method,
the same method should be followed for all the years. This
facilitates the comparison of accounting information with
same firm for few years and between two or more firms for the
same year.
Note : It should be clarified that consistency principle does not mean
that particular method once adopted can never be changed. There is
scope for changes in response to changing circumstances of business.
ii. Conservatism
According to this convention, prospective profit should
not be recorded while prospective risk and loss should be
considered and are to be provided in books of account by
making provision. For example: If there is increase in market
price of stock, it should not be recorded until the stock is
actually sold. But, if market price of stock is less than its cost
price then stock in hand should be recorded at market value.
Note : Golden rule is: anticipate no gain but provide for all possible
losses by making provision e.g., provisions for doubtful debts, provision
for premium on redemption of debentures etc.
iii. Materiality
As per this convention, only important and material
information should be provided to the users of financial
information. Any information should be regarded as material
if knowledge of that information would affect the decision of
users of financial information. Efforts should not be wasted in
recording and reporting immaterial items.
Note : It should be noted that an item may be significant for one user
while it may be insignificant for other user. So, materiality is relative
phenomenon.
iv. Full disclosure

According to this convention, financial statements
should disclose all the significant information. Full disclosure
means that there should be full, fair and adequate disclosure
of financial information in financial statement and their
accompanying foot notes. For example: if income statement
shows sales of Rs. 70,00,000, it is important to show that
amount of gross sale is Rs. 71,00,000 and the sales return is
Rs. 1,00,000.
TEST YOUR UNDERSTANDING-II

1. Fill in Blanks
(i) ....................... concept state that business and its owners are
two separate independent entities.
(ii) The goods/cash drawn from business by owner for personal use
are called ......................
(iii) Every business transaction has a dual effect on assets and
.................of the business.
(iv) An asset is recorded in books of account at ........................
(v) ........................... concept states that business will not be
dissolved in near future.
(vi) Goods of Rs. 60000 are sold on 25th March 2017 but payment is
received on 10th April 2017. It will be a revenue for the year
ending ....................
2. State whether the following statements are true or false :
(i) Accounting principles are rules of action or conduct which are
adopted by the accountants universally while recording
accounting transactions.
(ii) The ‘separate entity concept’ of accounting is not applicable to

companies.
(iii) The ‘dual aspect’ concept result in the accounting equation:
Capital + Liabilities = Assets.
(iv) The ‘conservatism concept’ leads to the exclusion of all
unrealized profits.
3. Mr. A has a shoe factory. State the transactions which will be
recorded in books of account
(i) Purchased a machine for the factory.
(ii) A pair of shoes taken home for his ‘son.
(iii) Borrowed Rs. 8,000 from Saraf for the business.
(iv) Paid salary to his domestic servant.
(v) The production manager went on medical leave.
(vi) Paid wages for the month of May to factory workers.
(vii) Appointed Ballu Shoe & Co. as dealers for the town.
(viii) Purchase of factory building Rs.10 crore
(ix) Delay in supply of raw materials
4. Show the dual effect of the following transactions on assets and
liabilities of the business.
(i) Purchased goods for cash for Rs. 19,000.
(ii) Purchased a Truck on credit for Rs. 4,00,000.
(iii) Paid Rs. 55,000 to a creditor.
(iv) The proprietor took Rs. 10,000 from the business for personal
expenses.
5. Find out missing amount on the basis of accounting equation:
(a) Capital Rs. 60,000 + Liabilities Rs. 25000 = Assets Rs. ……..
(b) Capital Rs. 1,00,000 + Liabilities Rs…….. = Assets Rs. 1,75,000
(c) Capital Rs. ……….. + Liabilities Rs. 3,00,000 = Assets Rs.
5,00,000
1.4. SYSTEM OF BOOK KEEPING

Booking keeping is concerned with recording business
transaction in systematic manner. Broadly there are two
system of book keeping: (i) Double Entry System, and (ii)
Single Entry System.
1.4.1 Double Entry System

Double Entry System is a set of rules by which for every
debit there will be an equivalent credit. This system
highlights that every financial transaction has two aspects.
For example, when business purchase goods for cash, goods
will increase and cash will decrease. This involves two

entries, one in Goods Account and the other in Cash Account
Thus, a transaction affects two items (also called accounts) at
the same time. When accountant record the transactions in
the books of account of a business, it would be better if the
effects relating to both the items are recorded. This method of
recording transactions/events is called ‘Double Entry
System’. Double entry system provides complete and reliable
records of business transaction. The arithmetical accuracy of
the books of account can be easily verified by preparing a trial
balance. Moreover, Profit and losses and financial position of
business can be accurately ascertained.
1.4.2 Single Entry System

Single Entry System does not mean that only one aspect
of a transaction is recorded. It simply refers to incomplete
records or the defective double entry system. The accounts
maintained by organization according to this system are
incomplete, unsystematic and unreliable. Under this system,
arithmetical accuracy of the books of account cannot be
checked, because a trial balance cannot be prepared. It also
becomes difficult to ascertain the correct amount of profit or
Loss.
1.5. MEANING OF ACCOUNT

An account is a summary of the relevant transactions
relating to a particular head. Account is prepared for each
business transactions relating to a person, property, expense
or income. It records not only the amount of transaction but
also their effect and direction. For example: bank account
would show the receipts, payments and balance of amount in
bank.
1.5.1 Classification of Accounts

There are three types of accounts for recording all
business transactions. They are: (i) Personal Accounts (ii)
Real Accounts, and (iii) Nominal Accounts. Real and Nominal

Accounts taken together are called Impersonal Accounts.
(i) Personal Account
‘Personal Accounts’ shows the transactions between
business enterprise and the persons. Items are recorded in
personal account when transaction is not settled in cash
immediately. Therefore, a separate account is kept in the
name of each person for recording the amount received from,
or given to, the person in the course of business. Personal
account may be classified into three categories:
Accounts
Impersonal Account Personal Account
Loan from Mr. X

Real Account Nominal Account Salaries outstanding
Prepaid insurance
Land Salaries Capital Account
Machinery Interest Drawing
Furniture Rent
Inventories Dividend
Building Commission
Natural Personal account: An account relates to

natural person or individuals. For example: Mr. Q’s Account,
Loan from Mr. Y’s Account, etc.
Artificial Personal account: Personal accounts also
related to artificial person (firms, companies or institutions).
For example: ABC Ltd. Account, The XYZ Bank Account, etc.
Representative Personal Account: These are the
accounts of different persons of same nature but more than
one in number. If there are number of similar nature, it is
better to club them like salary outstanding, insurance
prepaid, capital account, drawing account, debtors account,
creditors account etc.
(ii) Real Account

Accounts relating to properties or assets which can be
real, tangible and intangibles are known as ‘Real Accounts’.
Every business needs assets/properties/possession such as
machinery, furniture, etc. for running its activities. A
separate account is maintained for each asset owned by the
business. For example: Cash Account, Furniture Account,
Machinery Account, Building Account, etc. All transactions
relating to a particular asset are recorded in the concerned
asset account. Thus, asset account is called a Real account.
There are basically two types of assets:
l Tangible assets are concrete things or properties
which can be felt, touched and measured such as
plant, machinery, furniture, stock, cash, etc.
l Intangible assets are such things which cannot be
seen, touch and measure such as goodwill, patent,
copyrights, etc.
(iii) Nominal Account
Accounts relating to expenses, losses, incomes and gains
are known as 'Nominal Accounts’. A separate account is
maintained for each item of expense, loss, income or gain. For
example: Salaries Account, Commission Received Account,
and Interest Received Account, Dividend Received Account,
Rent Account etc. These accounts are prepared temporarily
because they are transferred to profit and loss account.
1.6.RULES OF DEBIT AND CREDIT

According to Double Entry System, every business
transaction affects at least two accounts. Therefore, entries
have to be made in both the accounts. Before recording a
transaction, it is necessary to find out accounts to be debited
and to be credited. The general rule in this regard is to debit
the account which receives value and benefit and credit the
account which gives value and benefit. Dr. is symbol for
Debit and Cr. is the symbol for credit. Moreover, there are
three different rules have been laid down for the three classes
of accounts.
(i) Personal Accounts: The account of the person
receiving benefit of the transaction is debited and
the account of the person giving the benefit of the
transaction is credited.
Golden Rule:
Debit: The Receiver

Credit: The Giver
(ii) Real Accounts: When an asset is coming into the

business by means of purchase, the account of that
asset is debited. When an asset is going out of the
business by the means of sale, the account of that
asset is credited.
Golden Rule:
Debit: What Comes in

Credit: What goes out
(iii) Nominal Accounts: When expenses are incurred or

losses suffered, the account representing the
expenses or the losses is debited. When any income is
earned or gain made, the account representing the
income or the gain is credited.
Golden Rule:
Debit: Expenses and Losses

Credit: Incomes and Gains
TEST YOUR UNDERSTANDING-III

1. State whether each of the following statement is True and False.
(i) Account which represents an item of asset is called
representative personal account..........
(ii) Accounts relating to assets held in the name of the firm are
called nominal accounts. .......
(iii) Capital Account is a personal account...........

(iv) Goodwill Account is a personal account
2. Names of some accounts are given blow. Classify them into Personal,
Real or Nominal account
Item Name of Account Class of Reason
No. Account
1. Salaries a/c
2. Outstanding rent a/c
3. AVG College of Management
4. Stationery a/c
5. Cash a/c
6. Bank a/c
7. Machinery a/c
8. Sales a/c
9. Loan a/c
10. Freight a/c
11. Bill Receivable a/c
12. Provision for discount on debtors a/c
13. Loss of assets by fire
14. Rent paid in advance a/c
15. Purchase return a/c
16. Drawing a/c
17. Accrued interest a/c
18. Bank Overdraft a/c
3. From the following transactions identify the account involved, nature
of account involved and what to be debited or credited.
(i) Mr. Q started business with cash.
(ii) Borrowed from Mr. X.
(iii) Purchase Furniture.
(iv) Purchase Furniture from Mr. Q on credit
(v) Sold good for cash
(vi) Paid cash to Mr. Q
(vii) Paid salary
(viii) Cash withdrawn for personal use.
(ix) Paid interest on loan.
EXERCISE
Questions for Practice

1. What is Accounting? List the activities involved in Accounting.
2. What do you understand by Dual aspect Concept? Explain its
Accounting implication.
3. Why is it necessary for accountant to assume that business entity will
remain going concern?
4. Why accounting concepts are referred as the essence of financial
accounting?
5. Show the Accounting equation on the basis of the following
transactions.
(i) Started business with Rs. 10,00,000
(ii) Borrowed Rs. 2,00,000 from Mr. Gyanesh
(iii) Purchased goods for cash Rs. 7,00,000
(iv) Purchased goods from Mr. Abhinav on credit for Rs. 70,000
(v) Sold goods costing Rs. 50,000 for cash Rs. 57,000
(vi) Sold goods to Amrita on credit costing Rs. 50,000
(vii) Received cash from Amrita Rs. 47,000 and allowed her discount
of Rs. 3,000
(viii) Received Interest Rs. 6,000
(ix) Interest Accrued but not received Rs. 12,000
(x) Withdraw cash for personal use 17,000
(xi) Goods destroy by fire Rs. 34,000
6. Names of some accounts are given blow. Classify them into Personal,
Real or Nominal account.
ANSWERS TO TEST YOUR UNDERSTANDING
Test Your Understanding-I

1. (a) Tax Authorities (b) Investors (c) Employees
2. (a) False (b) True (c) False
(d) True (e) True (f) False
Test Your Understanding-II

1. (i) Accounting Entity Concept
(ii) Drawing (iii) Liabilities & Capital
(iv) Book Value (v) Going Concern concept
(vi) 31-03-2017
2. (i) True (ii) False (iii) True
(iv) True
3. (i), (ii), (iii), (vi), (viii)
4. (i) Stock of goods increases, cash decreases

(ii) Asset increases, creditor increases
(iii) Creditor decreases, cash decreases
(iv) Capital decreases, cash decreases
5. (i) Rs. 85,000 (ii) Rs. 75,000 (iii) Rs. 2,00,000
Test Your Understanding-III

1. (i) False (ii) False (iii) True
(iv) False
2.
Item Name of Account Class of Reason
No. Account
1. Salaries a/c Nominal A/c Account of an expense

2. Outstanding rent a/c Personal A/c Account representing
landlord
3. AVG College of Personal A/c An artificial person
Management
4. Stationery a/c Nominal A/c Account of an expense
5. Cash a/c Real A/c Account of an asset
6. Bank a/c Personal A/c Account of banker
(artificial person)
7. Machinery a/c Real A/c Account of an asset
8. Sales a/c Nominal A/c (it Account of sales as
can also be income (or account of
taken as real goods that is an
account) account of asset)
9. Loan a/c Personal A/c Account of person to
whom a loan is given
or received
10. Freight A/c Nominal A/c Account of an expense
11. Provision for discount Personal A/c Account of a person in
on debtors A/c respect of whom
provision for discount
is made
12. Loss of assets by fire Nominal A/c Account of loss
13. Rent paid in advance Personal A/c Account representing
A/c a landlord
14. Purchase return a/c Nominal A/c (it Account which saving
can also be an expense (account of
taken as real goods that is an
account) account of asset)
15. Drawing a/c Personal A/c Account of person, the
owner
16. Accrued interest A/c Personal A/c Amount of interest

due from a person
17. Bank Overdraft A/c Personal A/c Account of a person
(banker) from whom
money is borrowed
3.
Transaction Account Involved Nature of What to be
No. account debited or
involved credited.
i. Cash A/c Real Debit
Capital A/c Personal Credit
ii. Cash A/c Real Debit
Mr. X A/c Personal Credit
iii. Furniture A/c Real Debit
Cash A/c Real Credit
iv. Furniture A/c Real Debit
Mr. Q A/c Personal Credit
v. Cash A/c Real Debit
Sales A/c Nominal Credit
vi. Mr. Q A/c Personal Debit
vii. Salary A/c Nominal Debit
viii. Drawing A/c Personal Debit
ix. Interest on Loan Nominal Debit
qqq
Chapter
2
THE ACCOUNTING PROCESS
2.1 Introduction
2.2 Journal
2.2.1 Journalizing
2.2.2 Types of Entries
2.3 Ledger
2.3.1 Utility of a Ledger
2.3.2 Posting into Ledger
2.4 Balancing of Accounts
2.4.1 Procedure for Balancing Ledger Account
2.4.2 Balancing of Personal Account
2.4.3 Balancing of Real Account
2.4.4 Balancing of Nominal Account
2.5 Trial Balance
LEARNING OBJECTIVES
l To describe how different types of transactions will
be recorded in the journal.
l To post journal entries in the concerned ledger
accounts
l To balance a ledger account and explain the
significance of balances in different types of accounts
l To prepare a trial balance to test the arithmetical
accuracy of recording in the books of account
l To explain what an opening entry is and how it is
posted into ledger
(31)
2.1 INTRODUCTION
As discussed in Chapter 1, the accounting process
involves 5 stages: (i) Identifying the transactions and events,
(ii) Measuring the identified items, (iii) Recording and
Classifying transactions, (iii) summarizing the transactions,
and (iv) Analyzing, interpreting and communicating
accounting information. Thus, all transactions after
identifying and measuring are recorded first time in Journal
or the books of original entry and thereafter posted into the
concerned accounts in the ledger. With the help of various
basic accounting concepts and the rules of debit and credit, an
attempt has been made to discuss how various business
transactions are recorded in the Journal and how they will be
posted into the concerned ledger accounts, how to balance
different accounts and prepare a Trial Balance in order to test
the arithmetical accuracy of the books of account.
2.2 JOURNAL
Journal is simply a day book which keeps the daily
records all business transaction in the order of their
occurrence. Journal is also termed as the book of prime
entry/original entry because all transactions are recorded
first time from various source documents. Journal presents
the complete picture of each business transactions at one
place in form of debit & credit and gives the explanations
thereof. The proforma of Journal is shown as:
Date Particulars L.F Debit Credit
(Rs.) (Rs.)
The journal is divided into five columns as shown in

proforma.
(a) Date Column: This column is used for noting the
date of transactions. This column recorded the date on which
the transactions are undertaken. Generally, the year is
written once at the top of column and then in next line months
and dates are written.
The Accounting Process 33
(b) Particular Column: Under this column, names

of two or more accounts affected by transactions are recorded.
Firstly, the names of the accounts to be debited are written,
then the names of the accounts to be credited are recorded. At
last, a brief explanation of the transaction in form of
narrations is entered within brackets.
(c) L.F., i.e. Ledger Folio Column: Under this
column, page number of ledger containing the relevant
account is entered at the time of posting.
(d) Debit amount Column: Under this column, the
amount to be debited is entered against the name of account.
(e) Credit amount Column: Under this column, the
amount to be credited is entered against the name of account.
Note : All columns are recorded at the time of journalizing except
Ledger Folio column. Ledger Folio column is recorded at the time of
posting.
2.2.1 Journalizing
The process of recording a transaction in the journal is
called Journalizing. The various steps to be followed in
journalizing business transactions are given below:
Step 1: Ascertain accounts involved in a transaction.
Step 2: Ascertain the nature of the accounts involved in a
transaction.
Step 3: Ascertain the rules of debit and credit applicable
to each of the accounts involved.
Step 4: Ascertain the account is to be debited and is to be
credited.
Step 5: Record the date of transaction in the ‘Date
column’.
Step 6: Write the name of the account to be debited along
with the abbreviation ‘Dr’ and note down the amount to be
debited in the ‘Debit Amount column’ against the name of the
account.
Step 7: Write the name of the account to be credited in the

next line preceded by the word ‘To’ and note down the amount
to be credited in the ‘Credit Amount column’ against the
name of the account.
Step 8: Write ‘Narration’ (i.e. a brief description of the
transaction) within brackets in the next line in the
‘Particulars column’.
Step 9: Draw a line across the entire ‘Particulars column’
to separate one Journal entry from the other.
2.2.2 Types of Entries

(a) Single Entry: In this type of entry, only two
accounts are affected by transactions i.e., only one account is
to be debited with some amount and another account to be
credited with equal amount. For Example: On 1st April 2017,
TQS Limited purchased good worth Rs. 35,000 from Mr. B.
(Rs.) (Rs.)
2017, Purchase A/c Dr. 35,000 35,000
April 1 To Mr. B’s A/c
(Being goods bought from Mr.
B’s on Credit)
(b) Single Compound Entry: If there are two or

more transactions of similar nature are recorded on the same
date, a compound or combine entry is advisable in place of
separate entry for each transaction. For Example: On 31st
March 2018, MQC Limited pays salaries- Rs. 23,300, Rent-
Rs. 7,230, Carriage-Rs. 5,670, Freight- Rs. 3,480.
(Rs.) (Rs.)
2017, Salaries A/c Dr. 23,300
April 1 Rent A/c Dr. 7,230
Carriage A/c Dr. 5,670
Freight A/c Dr. 3,480
To Cash A/c 39680
(Being the expenses paid in
Cash)
(c) Double Compound Entry: If there are two or

more transactions of similar nature are recorded on the same
date contains several debit accounts and several credit
accounts, a double compound entry is preferred in place of
separate entry for each transaction. For example: On 23th
January 2018, TMC Limited received a cash of Rs. 35,000 and
Cheque of Rs. 64,000 in return of second hand machinery
worth Rs. 75,000 and sale of goods for Rs. 24,000.
(Rs.) (Rs.)
2017, Cash A/c Dr. 35,000
April 1 Bank A/c Dr. 64,000
To Machinery A/c 75,000
To Sales A/c 24,000
(Sale of goods and Machinery for
Cash)
(d) Opening Entry : In an opening journal entry,

the real and personal accounts with the balances of previous
year are brought forward in the books of current accounting
period. While passing an opening entry, assets accounts are
debited and liabilities accounts are credited and the
difference between these two accounts is credited to
Proprietor’s Capital Account or Partners’ Capital Accounts.
For example: On 1st April 2018, the assets and liabilities of
Blue Bird Limited are as follows:
Cash Rs. 35,000, Machinery Rs. 22,000, Furniture Rs.
12,000, Stock Rs. 29,000, Bill receivable Rs. 7,500, Bill
payable 17,000 and Creditors 24,030.
Date Particulars L. Debit Credit
F (Rs.) (Rs.)
2017, Cash A/c Dr. 35,000
April 1 Machinery A/c Dr. 22,000
Furniture A/c Dr. 12,000
Stock A/c Dr. 29000
Bill Receivable A/c Dr. 7500
To Bill Payable A/c 17,000
To Creditors A/c 24,030
To Capital A/c 64,470
(Being recording the opening

balances of assets, liabilities and
capital)
Illustration 1: Journalize the following in the book of

Mr. Shrinath.
Date Transactions Amount (Rs.)
2018 Mr. Shrinath Started Business with Cash 5,00,000
April 1
April 2 Purchase goods for cash 35,000
April 3 Purchase good from Mr. Junaid on credit 30,000
April 5 Purchase good from Ms. Suman for Cash 25,000
April 9 Purchase good from Mr. Kazim on credit 20,000
April 12 Sold goods for Cash 23,300
April 13 Sold goods to Mr. Raman on credit 40,000
April 15 Sold good to Ms. Charu for cash 31,500
April 17 Sold goods to Mr. Rahul on credit 10,000
April 18 Return goods to Mr. Junaid 5,000
April 20 Mr. Raman return the goods 4,000
April 21 Purchased goods of list price Rs. 10,000
at 15% trade discount from Mr. Sumit.
April 25 Sold goods of list price Rs. 20,000 at 15%
trade discount to Mr. Anant.
May 1 Received cash from Mr. Rahul and 9,500
allowed him discount 500
May 2 Paid cash to Mr. Kazim and 19,300
Received discount 700
May 5 Paid salary to Mr. Jatin, an employee 15,000
May 7 Paid rent of office Building 22,000
(Note: These are the entries related to sales and

purchase of goods, sales return and purchase return, trade
discount, cash discount)
Solution:
(Rs.) (Rs.)
2017, Cash A/c Dr. 5,00,000
April 1 To Capital A/c 5,00,000
(Being capital brought in by
Mr. Shrinath)
April 2 Purchase A/c Dr. 35,000
To Cash A/c 35,000
(Being Goods purchased for
cash)
To Junaid’s A/c 30,000
(Being goods purchase on
credit from Mr. Junaid)
To Cash A/c 25,000
(Being Goods purchased for
cash)
To Kazim’s A/c 20,000
credit from Mr. Kazim)
April 12 Cash A/c Dr. 23,300
To Sales A/c 23,300
(Being Goods sold for cash)
April 13 Raman’s A/c Dr. 40,000
To Sales A/c 40,000
(Being goods sold on credit
to Mr. Raman)
To Sales A/c 31,500
(Being Goods sold for cash)
April 17 Rahul’s A/c Dr. 10,000
To Sales A/c 10,000
to Mr. Rahul)
April 18 Junaid’s A/c Dr. 5,000
To Purchase Return A/c 5,000
(Being goods returned to Mr.
Junaid)
April 20 Sales Return A/c Dr. 4,000

To Raman’s A/c 4,000
(Being goods returned by
Mr. Raman)
To Cash A/c 8,500
(Being goods purchased from
Mr. Sumit @ trade discount
of 15%)
To Sales A/c 17,000
(Being goods sold to Mr.
Anant @ trade discount of
15%)
May 1 Cash A/c Dr. 9,500
Discount Allowed A/c Dr. 500
To Rahul’s A/c 10,000
(Being cash received from
Mr. Rahul and allowed him
discount of Rs. 500)
May 2 Kazim’s A/C Dr. 20,000
To Cash A/C 19,300
To Discount Received A/C 700
(Being cash paid to Mr.
Rahul and received discount
of Rs. 700)
May 5 Salary A/c Dr. 15,000
To Cash A/c 15,000
(Being salary paid to Mr.
Jatin)
May 7 Rent A/c Dr. 2,000
To Cash A/c 2,000
(Being rent paid)

Mr. Tahir.
2018 Purchase good from Mr. Aftab on credit 35,000
Sep. 2
,, 5 Purchase good from Ms. Anam 23,000

,, 26 Paid Rs. 33,000 to Mr. Aftab in full
settlement.
,, 28 Paid Rs. 22,000 to Ms. Anam of his

account.
,, 29 Sold goods to Mr. Tushar on credit 42,300
,, 30 Sold good to Mr. Ashish 23,800
Oct. Received Rs. 41,200 from Mr. Tushar in
15 full settlement.
,, 16 Received Rs. 21,000 from Mr. Ashish of his
account.
,, 19 Received 60% of the amount from official
receiver of Mr. Akhil who owed us 1,00,000
,, 20 Goods costing Rs. 3,000 given as charity
,, 21 Goods costing Rs. 5,000 stolen by employee
,, 22 Goods costing Rs. 6,400 stolen in transit
,, 23 Deposit in to Bank 70,000
,, 25 Purchase machinery from Mr. Keshav for
Rs. 24,000 and Paid him by means of bank
draft purchased from Bank for Rs. 24,700.
,, 28 Withdraw from Bank 50,000
,, 29 Withdraw from bank for private use 12,000
,, 30 Bank Charge 3,000
(Note: These are the entries related to Payments in full settlement, Bed
debts, Banking Transactions and special cases of goods)
Solution:
F (Rs.) (Rs.)
2018 Purchase A/c Dr. 35,000
September To Mr. Aftab A/c 35,000
2 (Being goods purchase on
credit from Mr. Aftab)
September Purchase A/c Dr. 23,000
5 To Anam A/c 23,000
credit from Mr. Anam)
September Aftab A/c Dr. 35,000

26 To Cash A/c 33,000
To Discount Received A/c 2,000
(Being Cash paid to Mr. Aftab
after receiving discount of Rs.
2,000)
September Anam A/c Dr. 22,000
28 To Cash A/c 22,000
(Being Cash paid to Mr.
Anam on his account)
September Tushar A/c Dr. 42,300
29 To Sales A/c 42,300
(Being goods sold on credit to
Mr. Tushar)
September Ashish A/c Dr. 23,800
30 To Sales A/c 23,800
Mr. Ashish)
October 15 Cash A/c Dr. 41,200
Discount Allowed A/c Dr. 1,100
To Tushar A/c 42,300
(Being cash received from Mr.
Tushar after allowing him
discount of Rs. 1,100)
To Ashish A/c 21,000
(Being Cash received from
Mr. Ashish on his account)
Bad Debt A/c Dr. 40,000
To Akhil A/c 1,00,000
(Being 60% received from Mr.
Akhil who owed Rs. 1,00,000)
October 20 Charity A/c Dr. 3,000
To Purchase A/c 3,000
(Being goods given as
Charity)
October 21 Loss by embezzlement A/c Dr. 5,000
(Being goods stolen by
employee)
October 22 Loss in Transit A/c Dr. 6,400
(Being goods lost in transit)
October 23 Bank A/c Dr. 70,000

To Cash A/c 70,000
(Being Cash deposited into
Bank)
October 25 Machinery A/c Dr. 24,000
Draft Commission A/c Dr. 700
To Bank A/c 24,700
(Being machinery purchased
by means of bank draft &
draft commission paid)
To Bank A/c 50,000
(Being Cash withdrew from
Bank)
October 29 Drawing A/c Dr. 12,000
To Bank A/c 12,000
Bank for personal use)
October 30 Bank Charge A/c Dr. 3,000
To Bank A/c 3,000
(Being the bank charged)

Ms. Asha.
Date Transactions
2018 Purchased goods of list price Rs. 1,00,000 at 15%
September 2 trade discount from Mr. X.
Sept. 3 Mr. Kamal who owed us 50,000 becomes insolvent.
Received 90% of the amount from his official
receiver.
Sept. 5 Paid Rs. 80,000 to X in full settlement against the
amount due.
October 27 Goods costing Rs. 10,000 were distributed as free
sample
October 29 Provide Rs. 60,000 as interest on capital.
October 30 Charged Rs. 12,000 as interest on Drawings.
October 31 Charged Rs. 10,000 as depreciation on Machinery.
October 20 Paid Income Tax Rs. 9,000
October 21 Bank charges Rs. 500 for its services
October 22 Withdraw Rs. 7,000 for person use
October 23 Sale of Machinery for cash Rs. 25,000

October 24 Purchase Machinery of Cost Rs. 35,000 and Paid Rs.
3,500 as installation charges for erection of
machinery
October 30 Recovered Rs. 10,000 from Mr. Tahir an old amount
written off as bad debts in 2017.
Solution:
F (Rs.) (Rs.)
2018 Purchase A/c Dr. 85000
September To Mr. X A/c 85000
2 (Being goods purchased at
15% trade discount less
list price)
Sept. 3 Cash A/c Dr. 45,000
Bad debt Dr. 5,000
To Mr. Kamal A/c 50,000
(Being 90% received from
Mr. Kamal who owed Rs.
50,000)
Sept. 5 Mr. X A/c Dr. 80,000
To Cash A/c 80,000
To Discount Received A/c 5,000
(Being Cash paid to Mr.
Aftab after receiving
discount of Rs. 5,000)
October Free Sample A/c Dr. 10,000
27 To Purchase A/c 10,000
(Being goods distributes as
free sample)
October Interest on Capital A/c Dr. 60,000
29 To Capital A/c 60,000
(Being interest on capital
provided)
October Capital A/c Dr. 12,000
30 To Interest on Drawing A/c 12,000
(Being interest on drawing
charged)
October Depreciation A/c Dr. 10,000
31 To Machinery A/c 10,000
(Being Depreciation on
machinery provided)
October Drawing A/c Dr. 9,000

20 To Cash A/c 9,000
(Being income tax paid)
October Bank Charges A/c Dr. 500
21 To Bank A/c 500
(Being bank charges paid)
October Drawing A/c Dr. 7,000
22 To Cash A/c 7,000
Bank for personal use)
October Cash A/c Dr. 25,000
23 To Machinery A/c 25,000
(Being machinery sold)
October Machinery A/c Dr. 38,500
24 To Cash A/c 38,500
(Being machinery
purchased &installation
charges for erection of
machinery)
October Cash A/c Dr. 10,000
30 To Bad Debt Recovered A/c 10,000
(Being bad debt recovered)
1. Indicate the correct alternative in the following cases by

putting a tick at the number:
a) Sale of goods to Ramesh for cash should be debited to
i) Ramesh’s Account ii) Cash Account iii) Sales Account
b) Purchase of machinery should be debited to
i) Machinery Account
ii) Goods Account
iii) Equipment Account
c) Goods returned by Devesh should be debited to
i) Goods Account ii) Devesh’s Account
iii) Returns Inwards Account
d) Wages paid to Ramlal should be debited to
i) Ramlal’s Account
ii) Wages Account
iii) Repairs Account
e) Loan taken from Vimal should be credited to
i) Vimal’s Account ii) Cash Account
iii) Loan from Vikas Account

f) Cash discount allowed by a creditor should be credited to
i) Creditors Account
ii) Discount Received Account
iii) Allowance Account
g) The amount of bad debts should be debited to
i) Debtor’s Account
ii) Bad Debts Account
iii) Discount Account
h) Rs. 15,000 received from Mr. Nitin whose account was previously
written off as bad debts should be credited to
i) Gopal’s Account
ii) Bad Debts Account
iii) Bad Debts Recovered Account
2.3 LEDGER
Ledger provides all information regarding a particular
item at one place. This makes easy to know the net effect of
various transactions affecting a particular item.
For example, if firm wants to get information on:
l The amount due to a particular supplier of goods
l The amount due from a particular customer
l Total amount of purchase made during a particular
period
l Total amount of goods sold during a particular period
l Cash received/cash paid during a particular period
Then firm can go to the separate account of each item
such as supplier, customer, purchase, sales and cash. In
ledger, separate accounts are opened for each item and all
transactions related to a particular item as recorded in
journal are posted in the concerned account. For example, all
transactions related to a particular supplier, says Krishna,
are posted to Krishna’s Account. Similarly, all cash payments
and cash receipts can be posted to Cash Account. Thus, there
will be no problem in ascertaining the amount due to Krishna
or the balance in Cash Account, and so on.
Thus, ledger is a set of accounts where all accounts

pertaining to different items are maintained and all journal
entries are posted. In fact, ledger is the book of entry which
provides complete data about various transactions relating to
all parties and all items of asset, incomes and expenses.
Some persons have even suggested that all transactions
should be recorded directly into ledger and do away with
Journal. But, it is not advisable because in that case,
date-wise record of the transactions and the details thereof is
not possible. Such record is considered necessary for future
reference. Ledger contains the secondary record of
transactions because here entries are derived from the book
of original entry or special purpose subsidiary books.
Generally, ‘T’ form of an account is followed. The left
hand side is called the debit side and the right hand side the
credit side. The proper form of a ledger account is given below:
Name of the Account

Dr. Cr.
Date Particulars J.F Amount Date Particulars J.F Amount
You will notice that both sides of the account have date,
particulars, folio and amount columns. Now, let us see how
postings are made into the ledger accounts.
2.3.1 Utility of a Ledger

The main utilities of a ledger are summarized as under:
(a) It provides complete information about all accounts
in one book.
(b) It shows the details of personal account, real account
and nominal account.
(c) It facilitates the preparation of trial balance.

(d) It facilitates the preparation of final Accounts.
(e) It enables the ascertainment of the main items of
revenues and expenses.
(f) It enables the ascertainment of the value of assets
and liabilities.
(g) It is a permanent record of all business transactions.
2.3.2 Posting into Ledger

The journal entries form the basis for recording in the
ledger accounts, and the process of entering transaction in
the ledger is called ‘Posting’. When a journal entry has to be
posted in the concerned ledger accounts, the following
procedure is adopted.
1. Separate account are opened in the ledger with their
respective names. For example: Tanusha’s Capital
A/c, Building A/c, Furniture A/c and so on.
2. Every journal entry will have to be posted into all
those accounts which have been affected by
transaction. For example, in case of cash purchase,
Cash Account is credited and Purchase Account is
debited in the journal. So, this entry must be posted
in Cash Account as well as in Sales Account.
3. Posting will have to be made on the debit side of the
account which has been debited in the journal, and
the credit side of the account which has been credited
in the journal. In case of the above example of cash
purchase, posting will be made on the credit side of
Cash Account, as it has been credited in journal and
the debit side of purchase Account, as it had been
debited in the journal.
4. Whether the posting is made on the debit side or the
credit side, first of all the date of the transaction (as
given in the journal) will be entered in the date
column. The method of recording the date in the
ledger account is the same as in the journal.
5. While posting on the debit side of an account in the

particulars column, the name of the account which
had been credited in the journal should be noted and
add the word ‘To’ before the name. Similarly, while
posting on the credit side of an account, name of the
account which has been debited in the journal should
be written and add the word ‘By’ before the name. In
case of the above example, on the debit side of
Purchase A/c in particular column, it should be
written as “To Cash A/c” and “By Purchase A/c” in
particular column on credit side of Cash Account.
6. Narration is not required in the ledger accounts as is
done in the journal. Similarly, there is no need to
draw a line between the two entries in an account as
is required in case of journal entries. But, posting in
the ledger account is complete only when both the
debit and the credit sides of all journal entries have
been posted.
7. In the folio column, it is required to mention the page
number of the journal where concerned journal entry
is recorded. At the same time, the page number of the
ledger accounts will be entered in the ‘Ledger Folio’
column in the journal so as to complete the cross
reference.
8. The amount involved in the journal entry shall be
entered in amount columns of both the accounts.
Illustration 4: (Single Entry) Goods sold to Kavish for
Rs. 10,000 on credit on 1st April 2018. Record this transaction
in the journal and the ledger.
Solution : Journal Entries
(Rs.) (Rs.)
2018, Kavish A/c Dr. 10,000
April 1 To Sales A/c 10,000
(Being goods bought from Mr.
B’s on Credit)
Kavish A/c
Dr. Cr.
2018, To Sales 10,000
April A/c
1
Sales A/c
Dr. Cr.
2018, By Ravi’s 10,000
April A/c
1
Illustration 5: (Compound Entry) On 31st July 2017,

ABC Limited paid Salaries- Rs. 11,000, Wages- Rs. 6000,
Rent- Rs. 9,000.
Solution :
F (Rs.) (Rs.)
2017, Salaries A/c Dr. 11,000
July Wages A/c Dr. 6,000
31 Rent A/c Dr. 9,000
To Cash A/c 26,000
(Being expenses paid in Cash)
Salaries A/c
Dr. Cr.
2017, To Cash 11,000
July A/c
31
Wages A/c
Dr. Cr.
2017, To Cash 6,000
July A/c
31
Rent A/c
Dr. Cr.
2017, To Cash 9,000
July 31 A/c
Cash A/c
Dr. Cr.
Date Particulars J. Amount Date Particulars J. Amount
F F
2017, By Salaries A/c 11,000
July By Wages A/c 6,000
31 By Rent A/c 9,000
Illustration 6: (Opening Entry) : On 1st September

2018, the assets and liabilities of Blue bird limited are as
follows: Assets: Cash Rs. 55,000; Machinery Rs. 20,000;
Furniture Rs. 20,000; Stock Rs. 30,000; Kamal Rs. 15,000
Liabilities: Kaleem Rs. 40,000; Neelu Rs. 44,000
Solution : Journal Entries
F (Rs.) (Rs.)
2018, Cash A/c Dr. 55,000
Sep. 1 Machinery A/c Dr. 20,000
Stock A/c Dr. 30,000
Kamal A/c Dr. 15,000
To Kaleem A/c 40,000
To Neelu A/c 44,000
To Capital A/c 56,000
(Being recording the opening
balances of assets, liabilities
and capital)
Cash A/c
Dr. Cr.
2018, To Balance 55,000
Sep. b/d
1
Machinery A/c
Dr. Cr.
2018, To Balance 20,000
Sep. b/d
1
Stock A/c
Dr. Cr.
2018, To Balance 30,000
Sep. b/d
1
Kamal A/c
Dr. Cr.
2018, To Balance 15,000
Sep. b/d
1
Kaleem A/c
Dr. Cr.
2018, By Balance 40,000
Sep. b/d
1
Neelu A/c
Dr. Cr.
2018, By Balance 44,000
Sep. b/d
1
Capital A/c
Dr. Cr.
2018, By Balance 56,000
Sep. b/d
1
Illustration 7: Journalize the following transactions in

the book of Ashish and post them to ledger:
2017
Date Particulars Amount (Rs.)
January 1 Started Business with cash by Ashish 1,50,000
January 2 Bought goods for cash 10,000
January 3 Bought goods from Aman 30,000
January 4 Sold to Tarim 40,000
January 5 Paid Aman on account 20,000
January 6 Bought goods from Apoorva for cash 70,000
January 7 Received from Tarim cash in full 38,800
settlement
January 8 Returned to Apoorva goods worth 2,000
January 9 Paid salaries 7,000
January 10 Commission received on sales of other 5,000
goods
January 11 Deposited with the bank 20,000
January 12 Paid rent by cheque 1,000
January 13 Withdrawn for personal use goods Rs. 5,000
3000; Cash Rs. 2,000
Solution: Journal Entries

F (Rs.) (Rs.)
2017 Cash A/c Dr. 1 1,50,000
January To Capital A/c 13 1,50,000
1 (Being capital introduced by
Ashish)
January Purchases A/c Dr. 2 10,000
2 To Cash A/c 1 10,000
(Being goods purchased for
cash)
3 To Aman A/c 3 30,000
(Being goods purchased on
credit from Aman)
January Tarim A/c Dr. 4 40,000

4 To Sales A/c 5 40,000
to Tarim
January Aman A/c Dr. 3 20,000
5 To Cash A/c 1 20,000
to Tarim
6 To Cash A/c 1 70,000
(Being goods purchased for
cash)
January Cash A/c Dr. 1 38,800
7 Discount allowed A/c Dr. 7 1,200
To Tarim A/c 4 40,000
(Being the amount received
from Tarim in full
settlement)
January Apoorva A/c Dr. 7 2,000
8 To Purchase return A/c 9 2,000
(Being goods return to
Apoorva)
January Salaries A/c Dr. 10 7,000
9 To Cash A/c 1 7,000
(Being salaries paid)
January Cash A/c Dr. 1 5,000
10 To Commission received 11 5,000
A/c
(Being commission received
in cash)
January Bank A/c Dr. 12 20,000
11 To Cash A/c 1 20,000
(Cash deposited with Bank)
January Rent A/c Dr. 8 1,000
12 To Bank A/c 12 1,000
(Being rent paid by cheque)
January Drawing A/c Dr. 14 5,000
13 To Purchase A/c 2 3,000
To Cash A/c 1 2,000
(Being the goods and cash
withdrawn by proprietor for
personal use)
Posting to Ledger
Cash A/c
Dr. Cr.
F F
Sep. To Capital 1 1,50,000 Sep. By 1 10,000
1 A/c 2 Purchase
A/c
Sep. To Tarim 3,88,00 Sep. By Aman 1 20,000
7 A/c 1 5 A/c
Sep. To 5,000 Sep. By 1 70,000
10 Commissi- 6 Purchase
on received A/c
A/c 1 Sep. By Salaries 1 7,000
9 A/c
Sep. By Bank 1 20,000
11 A/c
Sep. By Drawing 1 2,000
13 A/c
Purchase A/c
Dr. Cr.
F F
Sep. To Cash 2 10,000 Sep. By Drawing 2 3,000
2 A/c 14 A/c
Sep. To Aman 2 30,000
3 A/c
Sep. To Cash 2 70,000
6 A/c
Aman A/c
Dr. Cr.
F F
Sep. To Cash 3 20,000 Sep. By Purchase 3 30,000
5 A/c 3 A/c
Tarim A/c
Dr. Cr.
F F
Sep. To Sales 4 40,000 Sep. By Cash 3 30,000

4 A/c 7 A/c
Sep. By 4 1,200
7 Discount
A/c
Sales A/c
Dr. Cr.
F F
Sep. By Tarim 5 40,000
4 A/c
Discount Allowed A/c

Dr. Cr.
Sep. To Tarim 6 1,200
7 A/c
Apoorva A/c
Dr. Cr.
Sep. To 7 2,000
8 Purchase
Return
A/c
Rent A/c
Dr. Cr.
Sep. To Bank 8 1,000
12 A/c
Purchase Return A/c

Dr. Cr.
Sep. By 9 2,000
8 Apoorva
A/c
Salaries A/c
Dr. Cr.
Sep. To Cash 10 7,000
9 A/c
Commission Received A/c

Dr. Cr.
Sep. By Cash 11 5,000
10 A/c
Bank A/c
Dr. Cr.
Sep. By Cash 12 20,000 Sep. By Cash 12 1,000
11 A/c 12 A/c
Capital A/c
Dr. Cr.
Sep. By Cash 13 1,50,000
12 A/c
Drawing A/c
Dr. Cr.
Sep. By 14 3,000
13 Purchase
A/c
Sep. By Cash 2,000
13 A/c
2.4 BALANCING OF ACCOUNTS

Balancing of account simply meant to ascertain the net
effect of various transactions in a particular account. The
accounts may have entries on both sides of the accounts.
Balance is the difference between the totals of the debit side
and the credit side of an account. The process of finding out

the difference between the totals of the two sides of a ledger
account is known as balancing. Debit balance indicates that
the amount on debit side is more than the total amount on
credit side. An account is called to have credit balance if the
total of the credit side is greater than the total of the debit
side. If, total amount on debit side equals the total amount on
credit side, the account is not having any balance and it is a
closed account.
2.4.1 Procedure for Balancing Ledger Account

(i) Total the debit and credit sides of an account.
(ii) Find out the difference between the totals of the two
sides.
(iii) Put the difference in the amount column of the side
showing less total.
(iv) If the difference is entered on the debit side, write
against it in the particulars column 'To Balance c/d’.
It means account is having credit balance.
(v) In case the difference is entered on the credit side,
write against it in the particulars column ‘By
Balance c/d’. It means account is having debit
balance.
(vi) Now, total both the sides and you will find that both
the totals are equal,
(vii) The closing balance (balance c/d) is going to be the
opening balance for the subsequent period, The
opening balance is shown on the next date in the
account by writing ‘To Balance b/d’ (b/d stands for
brought down) or ‘By Balance b/d’ as the case may be.
Note : that if the closing balance was on the debit sides, the opening
balance would be shown on the credit side and if the closing balance was
shown on the credit side, the opening balance would be shown on the
debit side.Thus, the opening balance is shown according to the nature of
the balance i.e., the debit balance on the debit side and the credit
balance on the credit side.
2.4.2 Balancing of Personal Account

Personal accounts are balanced regularly to determine
the amounts due to the persons or due from the persons. A
debit balance of this account shows that the person concerned
is a debtor of the business enterprise and a credit balance
reflects that the person is a creditor of the business
enterprise. Let’s take the example from illustration 7:
Tarim A/c
Dr. Cr.
Sep. To Sales 4 40,000 Sep. By Cash 4 20,000
4 A/c 7 A/c
By 4 2,000
Discount
A/c
By Balance 18,800
c/d
40,000 40,000
Oct. To Balance 18,800
1 b/d
In this account, debit side is more than credit side by

18,800. The account is balanced by writing difference of Rs.
18,800 on credit side as By Balance c/d. The same balance is
shown on the next date on debit side as To Balance b/d. This
personal account of Tarim represents the account of debtor.
2.3.3 Balancing of Real Account

The real account represents the account of assets of
enterprise. This account can never be show credit balance.
Cash A/c
Dr. Cr.
Sep. To Capital 1 1,50,000 Sep. By 1 10,000
1 A/c 2 Purchase
Sep. To Tarim 1 38,800 A/c
7 A/c
Sep. To 1 5,000 Sep. By Aman 1 20,000

10 commiss- 2 A/c
ion By 1 70,000
received Sep. Purchase
A/c 5 A/c
Sep. By 1 7,000
6 Salaries
Sep. A/c
9 By Bank 1 20,000
Sep. A/c
11 By 1 2,000
Drawing
A/c
By Balance 64,800
c/d
1,93,800 1,93,800
Oct. To Balance 64,800
1 b/d
2.3.4 Balancing of Nominal Account

The nominal accounts represent the expenses incurred or
income earned. These accounts are not balanced; they are
transferred to the income statement at the end of trading
period.
Illustration 8 : Journalize the following transactions,
post them into ledger and balance the accounts.

2018 Mr. Amit commenced business with 2,00,000
August 1 cash
August 3 Purchased goods from Ms. Pragti 15,000
August 4 Purchased furniture for cash 6,000
August 7 Goods sold to Mr. Shubham 25,000
August 12 Sold goods to Mr. Nitin 22,000
August 13 Goods purchased from Mr. Animesh for 12,000
Cash
August 14 Paid wages 8,000
August 16 Received from Mr. Nitinin full 21,500
settlement
August 17 Withdrew for personal use 7,000
August 19 Paid to Ms. Pragti 15,000

August 22 Paid rent 6,500
August 25 Stationery purchased for cash 3,000
Solution:
Journal Entries
F (Rs.) (Rs.)
2018 Cash A/c Dr. 1 2,00,000
Aug. To Capital A/c 2 2,00,000
1 (Being capital introduced by
Ashish)
Aug. Purchases A/c Dr. 3 15,000
3 To Pragti A/c 4 15,000
(Being goods purchased on credit
from pragti)
Aug. Furniture A/c Dr. 5 6,000
4 To Cash A/c 1 6,000
(Being Furniture purchased for
cash)
Aug. Shubham A/c Dr. 6 25,000
7 To Sales A/c 8 25,000
Shubham)
Aug. Nitin A/c Dr. 7 22,000
12 To Sales A/c 8 22,000
Nitin)
Aug. Purchases A/c Dr. 3 12,000
13 To Cash A/c 1 12,000
(Being goods purchased for cash)
Aug. Wages A/c Dr. 9 8,000
14 To Cash A/c 1 8,000
(Being wages paid)
Aug. Cash A/c Dr. 1 21,500
16 Discount allowed A/c Dr. 10 500
To Nitin A/c 7 22,000
(Being the amount received from
Tarim in full settlement)
Aug. Drawing A/c Dr. 11 7,000

17 To Cash A/c 1 7,000
(Being the withdrawn by
proprietor for personal use)
Aug. Pragti A/c Dr. 4 15,000
19 To Cash A/c 1 15,000
(Being amount paid to Pragti)
Aug. Rent A/c Dr. 12 6,500
22 To Cash A/c 1 6,500
(Being rent paid by cheque)
Aug. Stationery A/c Dr. 13 3,000
25 To Cash A/c 1 3,000
(Being salaries paid)
Cash A/c
Dr. Cr.
Aug. To Capital 1 2,00,000 Aug. By 1 10,000
1 A/c 4 Furniture
Aug. To Nitin 1 21,500 A/c
16 A/c Aug. By 1 20,000
13 Purchase
A/c 1 70,000
Aug. By Wages
14 A/c
Aug. By 1 7,000
17 Drawing
A/c
Aug. By Pragati 1 20,000
19 A/c
Aug. By Rent 1 6,500
22 A/c
Aug. By 1 3,000
25 Stationery
A/c
Aug. By 1 1,64,000
31 Balanace
c/d
2,21,500 2,21,500
Sep. To Balance 1,64,000
1 b/d
Capital A/c
Dr. Cr.
Aug. To Balance 2,00,000 Aug. By Cash 2 2,00,000
31 c/d 1 A/c
2,00,000 2,00,000
Sep. By Balance 2,00,000
1 b/d
Purchase A/c
Dr. Cr.
Aug. To Pragti 3 15,000 Aug. By Balance 27,000
3 A/c 31 c/d
Aug. To Cash 3 12,000
A/c
27,000 27,000
Sep. To Balance 27,000
1 b/d
Pragti A/c
Dr. Cr.
Aug. To Cash 4 15,000 Aug. By 4 15,000
19 A/c 3 Purchase
A/c
15,000 15,000
Furniture A/c
Dr. Cr.
Aug. To Cash 5 6,000 Aug. By Balance 5 6,000
19 A/c 31 c/d
6,000 6,000
1 b/d
Shubham A/c
Dr. Cr.
Aug. To Sales 6 25,000 Aug. By Balance 5 25,000
7 A/c 31 c/d
25,000 25,000
1 b/d
Nitin A/c
Dr. Cr.
Aug. To Sales 7 22,000 Aug. By Cash 21,500
12 A/c 16 A/c
Aug. By 500
16 Discount
Allowed
A/c
22,000 22,000
Sales A/c
Dr. Cr.
Aug. To Balance 47,000 Aug. By 8 25,000
31 c/d 7 Shubham
A/c
Aug. By Nitin 8 22,000
12 A/c
47,000 47,000
Sep. By Balance 47,000
1 b/d
Wages A/c
Dr. Cr.
14 A/c 31 c/d
8,000 8,000
1 b/d
Discount Allowed Account

Dr. Cr.
Aug. To Nitin 10 500 Aug. By Balance 500
16 A/c 31 c/d
500 500
Sep. To Balance 500
1 b/d
Drawing Account
Dr. Cr.
Aug. To Cash 11 7,000 Aug. By Balance 7,000
17 A/c 31 c/d
7,000 7,000
1 b/d
Rent Account
Dr. Cr.
Aug. To Cash 12 6,500 Aug. By Balance 6,500
17 A/c 31 c/d
6,500 6,500
1 b/d
Stationery Account
Dr. Cr.
17 A/c 31 c/d
3,000 3,000
1 b/d
1. State whether each of the following statements is True or

False
i) Ledger is the principal book of entry.
ii) Process of jounalizing is called posting.
(iii) Posting will be made on the debit side of the account that had been
debited in the Journal.
iv) The word ‘By’ is written before the name of an account in the
particulars column while posting on the credit side of an account.
v) Writing narration is necessary while posting into ledger accounts.
vi) Real accounts always show debit balances.
2.5. TRIAL BALANCE

Trial Balance is prepared after posting the journal
entries into the ledger and balancing all accounts. It is
prepared to know the arithmetical accuracy of the books of
account. This statement shows the balances of all the
accounts which appear in the ledger. The debit balances are
shown in one column and the credit balances in the other.
Double Entry System hold that every debit is having an
equal and corresponding credit. So, the total of debits balance
of different accounts must be equal to the total of credits
balance of different accounts. Tallied trial balance shows that
both the aspects of each transaction have been correctly &
corded in the ledger. If the total of its debit balances column is
not equal to the total of its credit balances column, it would
mean that some errors have been committed while posting
the transactions into ledger.
There are two methods of preparing the Trial Balance:
(i) Totals Method: Totals of each side of an account in
the Trial Balance are shown in this method. The
debit side total of an account is shown in the debit
column of the Trial Balance and the credit side total
of the account in the credit column.
(ii) Balances Method: Balances of each account are

shown in the Trial Balance. This method is more
convenient and commonly used because it
eliminates all those accounts which have nil balance.
Now, let us prepare the Trial Balance from the ledger
accounts prepared under Illustration 8:
Trial Balance as on 31st August 2018

S.No Name of Account Dr. Cr
Balance Balances
(Rs.) (Rs.)
1 Cash A/c 1,64,000 -
2 Capital A/c - 2,00,000
3 Purchase A/c 27,000 -
4 Furniture A/c 6,000 -
5 Shubham A/c 25,000 -
6 Sales A/c - 47,000
7 Wages 8,000 -
8 Discount Allowed A/c 500 -
9 Drawing A/c 7,000 -
10 Rent A/c 6,500 -
11 Stationery A/c 3,000 -
2,47,000 2,47,000
Illustration 9: From the following Trial Balance

(containing obvious errors) prepare a correct Trial Balance:
S.No Name of Accounts Debit (Rs.) Credit (Rs.)
1 Purchases 60,000 -
2 Reserve fund 20,000 -
3 Sales - 1,00,000
4 Purchase return 1,000 -
5 Sales return - 2,000
6 Opening stock 30,000 -
7 Closing stock - 40,000
8 Expenses - 20,000
9 Outstanding expenses 2,000 -
10 Bank balance 5,000 -
11 Assets 50,000 -
12 Debtors - 80,000
13 Creditors - 30,000
14 Capital 94,000 -
15 Suspense A/c 10,000
2,72,000 2,72,000
Solution:
S.No Name of Accounts Debit (Rs.) Credit (Rs.)
1 Purchases 60,000 -
2 Reserve fund 20,000
3 Sales - 1,00,000
4 Purchase return 1,000
5 Sales return 2,000
6 Opening stock 30,000 -
7 Closing stock -
8 Expenses 20,000
9 Outstanding expenses 2,000
10 Bank balance 5,000 -
11 Assets 50,000 -
12 Debtors 80,000
13 Creditors - 30,000
14 Capital 94,000
2,47,000 2,47,000
EXERCISE

1. What is Journal?
2. Distinguish between trade discount and cash discount.
3. What is the purpose of writing narration?
4. What do you mean by opening entry?

5. Define ledger. Explain the procedure for balancing a ledger account.
6. Define Trial Balance and explain the methods of preparation of Trial
Balance.
Numerical Questions
1. Journalise the following transactions:
2017, January 1: Krishna started business with cash 7,50,000
January 6: Purchased goods from Aditya on credit 55,000
January 8: Sold goods on cash 25,000
January 15: Bought Furniture from Naman for cash 12,000
January 18: Paid Salary to manager 13,000
January 20: Paid Rent to land lord in cash 10,000
(Hint: Single entry)
2. Journalise the followings:
2017
November 1: Paid to Aman Rs. 9,250 discount allowed by him Rs. 250
November 6: Received from Sachin Rs. 8,700 and from Shubham Rs. 5,000
November 8: Goods purchased for cash Rs. 14,000
Furniture purchased for cash Rs. 15,000
Paid cash to Raman Rs. 5,070
Paid salary in cash Rs. 12,500
Paid rent in cash Rs. 7,530
(Hint: Compound entry)
3. On Ist April 2017, Goyal’s assets and liabilities stood as
follows:
Assets: Cash Rs. 34,300; Bank Rs. 74,035; Stock Rs. 32,590; Bills
Receivable Rs. 8,765; Debtors Rs. 10,520; Building Rs.70,000;
Investments Rs. 35,000; Furniture Rs. 19,460
Liabilities: Bills payable Rs. 8,240, Creditors Rs. 21,050, Singh’s Loan
Rs. 33,500
(Hint: Opening Journal entry)
4. Journalize the following in the book of Mr. Ramesh.
Date Transactions Amount

(Rs.)
2018 Mr. Ramesh Started Business with Cash 3,50,000
October 1
October 2 Paid into Bank 8,000
October 4 Purchase goods 10,000
October 6 Purchase good from Mr. Tanay 17,000
October 9 Return goods to Mr. Tanay 2,000

October 11 Purchase good from Mr. Tanish for cash 9,000
October 12 Purchase good from Mr. Kanav on credit 32,000
October 14 Sold goods 4,000
October 15 Sold goods to Ms. Rakhi 33,000
October 17 Ms. Rakhi return goods 3,000
October 18 Sold good to Mr. Abhishek for cash 23,500
October 19 Sold goods to Mr. Tavish on credit 50,000
October 21 Purchased goods of list price Rs. 60,000 at
15% trade discount from Mr. Kartik.
October 25 Paid cash to Mr. Kartik and
received discount 3% cash discount
October 26 Sold goods of list price Rs. 34,000 at 15%
trade discount to Mr. Anand.
October 30 Received cash from Mr. Anand and
paid discount 2% cash discount
(Hint: Sales and purchase of goods, sales return and purchase return,
trade discount, cash discount)
5. Journalize the following in the book of Mr. Priyang.
Date Transactions
2018 Paid Rs. 19,600 to Mr. Ashutosh in full settlement of his
June 23 account for Rs. 20,000.
June 25 Paid Rs. 24,700 to Mr. Ahil of his account for Rs. 25,000
June 26 Received Rs. 29,200 from Ms. Kanishka in full settlement
of his account for Rs. 30,000.
June 28 Received Rs. 25,500 from Ms. Huma of his account for Rs
26000.
June 29 Received 80% of the amount from official receiver of Mr.
Kalim who owed us 80,000
(Hint: Payments on account and Payment in full settlement)
6. Journalize the following in the book of Ms. Tarang
Date Transactions
2018 Goods costing Rs. 21,000 given as charity
August 14
August 16 Goods costing Rs. 35,000 destroyed by fire
August 17 Goods costing Rs. 7,100 stolen in transit
August 22 Goods costing Rs. 2,500 withdrawn for personal use

August 25 Goods costing Rs. 10,000 distributed as free sample
August 26 Goods costing Rs. 5,900 stolen by employee
(Hint: Special cases of goods)
7. Journalize the following in the book of Mr. Deepanshu.

2018 Deposit in to Bank 35,500
August 2
August 12 Withdraw from bank for private use 7,000
August 13 Withdraw from bank 2,000
August 20 Bank charge 700
August 21 Received from Mr. Kaleem a cheque 15,300
August 23 Purchased furniture from Mr. Tapish
for Rs. 12,000 and paid him by means
of bank draft purchased from bank for
Rs. 12,400.
(Hint: Banking Transactions)
8. Journalize the following in the book of Mr. Arihant.
Date Transactions
2018 Purchased goods of list price Rs. 90,000 at 10% trade
July 2 discount from Ms. Kashish.
July 3 Ms. Nishtha who owed us 1,00,000 becomes insolvent.
Received 85% of the amount from her official receiver.
July 5 Paid Rs. 78,000 to Ms. Kashish in full settlement
against the amount due.
October 27 Goods costing Rs. 7,000 were distributed as free sample
October 29 Provide Rs. 45,000 as interest on capital.
October 30 Charged Rs. 11,000 as interest on drawings.
October 31 Charged Rs. 7,000 as depreciation on machinery.
October 20 Paid Income Tax Rs. 7,500
October 21 Bank charges Rs. 1,000 for its services
October 22 Withdraw Rs. 9,300 for person use
October 23 Sale of furniture for cash Rs. 10,000
October 24 Purchase machinery of Cost Rs. 25,000 and paid Rs.
1,500 as installation charges for erection of machinery
October 30 Recovered Rs. 16,000 from Mr. Narang an old amount

written off as bad debts in 2017.
8. Enter the following transactions in the Journal of Rakesh,
and post them to the Ledger.
2017
October 1- Assets in hand: Cash Rs. 7,500; Cash at Bank Rs. 21,900; Stock
of goods; no semi column Rs. 36,300; Mahesh & Co. Rs. 8,750.
Liabilities- Kamlesh & Co. Rs. 4,990; Shyam & Co. Rs. 21,000.
October 2- Received a cheque from Mahesh & Co. in full settlement Rs.
8,000
October 4- Sold goods to Tanya on credit Rs. 14,400
Carriage paid Rs. 3,500
Sold goods Devesh for cash Rs. 30,120
October 5- Brought goods from Shyam& Co. on credit Rs. 20,000
Paid Kamlesh & Co. by cheque in full settlement Rs. 4,800
October 6- Bought goods from Rakhi Rs. 10,300
October 13- Returned goods to Rakhi (not being up to specifications) Rs.
300
October 16- Goods used personally by proprietor Rs. 5,000
October 17- Sold goods to Mahesh & Co. Rs. 50,000
October 20- Cheque received from Tanya Rs. 14,400
October 24- Cash deposited with bank Rs. 20,000
October 31- Paid salaries Rs. 16,000
Paid rent Rs. 12,000
Drew for personal use out of bank Rs. 5,000
9. Prepare a Trial Balance from the following balances appear
in various accounts on 31.12.2017.
S. No. Name of Accounts Amount (Rs.)

1 Capital 2,00,000
2 Machinery 80,000
3 Building 90,000
4 Rates and taxes 5,000
5 Debtors 60,000
6 Stationery 9,000
7 Bills payable 19,500
8 Loan from Raju and Co. 80,000
9 Opening stock 5,000
10 Cash 15,000
11 Bank 5,000
12 Drawing 20,000
13 Apprentice premium 3,000
14 Insurance premium 2,000
15 Interest on Investment 6,000
16 Investment 60,000
17 Bank Charges 1,000
18 Printing 3,000
19 Creditors 30,000
20 Office expenses 6,500
21 Wages 12,000
22 Sales 90,000
23 Purchases 35,000
24 Furniture 20,000

1. (a) (ii) (b) (i) (c) (ii)
(d) (ii) (e) (iii) (f) (ii)
(g) (ii) (h) (iii)

(i) True (ii) False (iii) True
(iv) True (v) False (vi) True
qqq
Chapter
3 CASH BOOK AND

BANK RECONCILIATION
3.1 Introduction
3.2 Cash Book
3.2.1 Types of Cash Book
l Single-Column Cash Book
l Two-Column Cash Book
l Three-Column Cash Book
l Petty Cash Book
3.3 Bank Reconciliation Statement
3.3.1 Reasons of Differences
3.3.2 Meaning of Bank Reconciliation Statement
LEARNING OBJECTIVES
l To explain the need for sub-division of journal
l To prepare different types of cash books and post
cash book entries into ledger
l To ascertain the causes of difference between the
cash book and pass book balances
l To prepare a bank reconciliation statement
l To prepare petty cash book and post it into ledger.
(72)
Cash Book and Bank Reconciliation 73
3.1 INTRODUCTION
In real life, a business organization is incurred a large
number of transaction, so it becomes difficult to record all of
those transaction in one book of entry. Hence, the journal is
sub-divided into a number of special journals called
Subsidiary Books. Each subsidiary book is used for recording
transactions of one account only. For example, Cash Book is
used for recording all cash transactions. Purchases Book is
used for recording all credit purchases of goods, Sales Book is
used for recording all credit sales of goods, and so on. This
enables us to divide the work among different persons and
ensure prompt recording of transactions. The sub-division is
done in such a way that a separate book is used for each type
of transactions which are repetitive in nature and are
sufficiently large in number. In any large business
organization, the subsidiary books generally used are as
follows:
Serial Name of Subsidiary Book Transactions to be
No. Recorded
I Cash Journal/Cash Book
a) Single Column Cash Book Cash transactions
b) Double Column Cash Book Cash and discount
transactions
c) Triple Column Cash Book Cash, bank and discount
transactions
d) Petty Cash Book Petty cash transactions
II Goods Journal/Goods Book
a) Purchase Book Credit purchase of goods
b) Sales Book Credit sales of goods
c) Sales Returns Book (or Goods returned by those
Return Inwards Book) customers to whom goods
were sold on credit
d)Purchase Returns Book Goods returned to those
(or Return Outwards suppliers from whom goods
Book) were purchased on credit
III Bills journal

a) Bill Receivable book Bills receivable drawn
b) Bill Payable book Bills payable accepted
IV Journal Proper Transactions not covered
elsewhere
3.2 CASH BOOK

Business enterprise incurs large number of transactions
which involve either cash receipts or cash payment. For
example: cash sales, receipts of cash from debtors, cash
purchases, payment of cash to creditors, payment of salaries,
wages, rent, taxes, etc. So cash book is a special journal which
records all these types of cash transactions. The rules of cash
book are same as the rules of ledger account. All cash receipts
are recorded on the debit side and all cash payments on the
credit side. So, it can be generalized that cash book is a cash
account. However, transactions are recorded directly from
the source documents in cash book as in case of journal. Cash
book plays the role of book of prime entry as well as ledger
account. When cash book is maintained there is no need to
have cash account in the ledger.
3.2.1 Types of Cash Book

There are basically four types of cash book. These are:
l Single-Column Cash Book
l Two or Double Column Cash Book
l Three or Triple Column Cash Book.
l Petty Cash Book
Single-column cash book: This cash book has one
amount column on each side. On the debit side of cash book all
cash receipts are recorded and all cash payments are recorded
on the credit side. This book is nothing but a cash account.
Hence, there is no need to open this account in the ledger
because when a cash transaction is recorded in the cash book
the posting of cash aspect of the transactions duly covered.
But posting to the other concerned accounts in the ledger is

required to complete the double entry. All transactions posted
on the debit side of the cash book are to be posted on the credit
side of the concerned accounts and those appearing on the
credit side of the cash book are to be posted on the debit side of
the concerned accounts.
Balancing of cash book is similar to the balancing of cash
account. The cash book always shows debit balance because
cash payments can never exceed the amount of cash
available. Hence, the total of the debit side of cash book is
always more than the total of the credit side. The difference
between the two indicates the cash in hand.
The format of single column cash book is shown below:
Single Column Cash Book

Receipts Payments
Date Particulars L. Amount Date Particulars L. Amount

F (Rs.) F (Rs.)
Illustration 1:
From the following particulars of M/s Shrinath Limited,
prepare a Simple Cash Book, balance it and post it into ledger.
2018
Feb 1 Started business with cash 30,000
Feb 2 Deposited in bank account 10,000
Feb 4 Purchased goods for cash 8,000
Feb 9 Cash sales 6,000
Feb 12 Cash received from Siddharth 5,000
Feb 15 Paid for wages 500
Feb 20 Cash paid to Satish 2,000
Feb 25 Drew for personal use 3,000

Feb 26 Paid Rent 4,000
Srinath Account
Dr. Cr.
Receipts Payments
Date Particulars L. Amount Date Particulars L. Amount
F F
2018 2018
Feb. To Capital 30,000 Feb. By Bank A/c 10,000
1 A/c 2
Feb. To Sales 6,000 Feb. By Purchases 8,000
9 A/c 4 A/c
Feb. To 5,000 Feb. By Waves A/c 500
12 Siddharth 15
A.c Feb. By Satish 2,000
20
Feb. By Drawings 3,000
25 A/c
Feb. By Rent A/c 4,000
26
Feb. By Balance 13,500
28 c/d
41,000 41,000
Mar. To Balance 13,500
1 b/d
Posting to Ledger
Capital Account
Dr. Cr.
F F
Feb. To Balance 30,000 Feb. By Cash A/c 30,000
28 c/d 1
30,000 30,000
Mar. By Balance 30,000
1 b/d
Solution : Sales A/c

Dr. Cr.
F F
28 c/d 9
6,000 6,000

1 b/d
Siddharth Account
Dr. Cr.
F F
28 c/d 12
5,000 5,000
1 b/d
Bank Account
Dr. Cr.
F F
Feb. To Cash A/c 1,000 Feb. By Balance 1,000
2 1 c/d
1,000 1,000
1 b/d
Purchase Account
Dr. Cr.
F F
4 1 c/d
8,000 8,000
1 b/d
Wages Account
Dr. Cr.
F F
Feb. To Cash A/c 500 Feb. By Balance 500
15 28 c/d
500 500
Mar. To Balance 500

1 b/d
Satish Account
Dr. Cr.
F F
20 28 c/d
2,000 2,000
1 b/d
Drawing Account
Dr. Cr.
F F
25 28 c/d
2,000 2,000
1 b/d
Rent Account
Dr. Cr.
F F
26 28 c/d
4,000 4,000
1 b/d
Two-Column Cash Book: This cash book has two amount

columns (cash column and discount column) one each side. All
cash receipts and discount allowed are recorded on the debit side
and all cash payments and discount received are recorded on the
credit side.
Sometime, business enterprise can give discount to the
debtor on the cash received. Similarly, when payment is made
to creditor, some discount can be received by the business
enterprise. Cash and discount would go together in the form
of a compound entry in journal while recording cash receipts
from debtors and cash payments to creditors with discount.

So, it is considered as good practice to record cash discount in
cash book with cash receipts and cash payments. For this
purpose, an additional amount column (discount column) is
provided on both sides of the Cash Book.
The format of two column cash book is shown below:
Cash Book with Discount Column
Receipts Payments
Date Particulars L.F Discount Cash Date Particulars L.F Discount Cash
(Rs.) (Rs.) (Rs.) (Rs.)
Illustration 2:
From the following transactions of M/s Badrinath& Sons,
prepare a two column cash book and show the concerned
ledger accounts.
Date Particulars Amount
(Rs.)
2018
March 1 Cash in hand 50,000
March 6 Purchased furniture for cash 5,000
March 7 Bought goods for cash 20,000
March 10 Cash sales 30,000
March 13 Cash received from Kapil 14,500
Discount allowed 300
March 15 Paid for wages 1,000
March 19 Paid cash to Rajan 4800
Discount received 200
March 20 Bought an old Computer 20,000
March 22 Received cash from Manoharlal in full 9800
settlement of his debt of Rs. 10,000
March 24 Sold goods for cash to Ashish 4,000
March 27 Bought goods from Kunal for cash 5,000
March 30 Paid salary 3,000
March 30 Paid rent 8,000
March 30 Deposited into bank Account 30,000
Solution :
Posting to Ledger
Sales Account
Dr. Cr.
F F
Mar. To Balance 34,000 Mar. By Cash A/c 30,000
31 c/d 10
Mar. By Cash A/c 4,000
24
34,000 34,000
April By Balance 34,000
1 b/d
Kapil Account
Dr. Cr.
F F
31 c/d 13
Mar. By Discount 300
13 Allowed A/c
14,800 14,800
1 b/d
Manoharlal Account
Dr. Cr.
F F
31 c/d 22
Mar. By Discount 200
22 Allowed A/c
10,000 10,000
1 b/d
Furniture Account
Dr. Cr.
F F
Mar. To Balance 5,000 Mar. By Balance 5,000
31 c/d 31 c/d
5,000 5,000
April To Balance 5,000

1 b/d
Purchase Account
Dr. Cr.
F F
Mar. To Cash A/c 20,000 Mar. By Balance 25,000
7 31 c/d
Mar. To Cash A/c 5,000
27
34,000 25,000
April To balance 25,000
1 b/d
Wages Account
Dr. Cr.
F F
15 31 c/d
1,000 1,000
1 b/d
Rajan Account
Dr. Cr.
F F
19 31 c/d
Mar. To Discount 200
19 Received
A/c
34,000 5,000
1 b/d
Computer Account
Dr. Cr.
F F
31 31 c/d
20,000 20,000

1 b/d
Salaries Account
Dr. Cr.
F F
30 31 c/d
3,000 3,000
1 b/d
Rent Account
Dr. Cr.
F F
30 31 c/d
8,000 8,000
1 b/d
Bank Account
Dr. Cr.
F F
30 31 c/d
30,000 30,000
1 b/d

Dr. Cr.
F F
Mar. To 500 Mar. By Balance 500
31 Sundaries 31 c/d
as per cash
book A/c
500 500
April To Balance 500
1 b/d
Discount Received Account

Dr. Cr.
F F
Mar. To Balance 200 Mar. By Sundries 200
31 c/d 31 as per cash
book A/c
200 200
April By Balance 200
1 b/d
Three-Column Cash Book: This cash book has three

amount columns (one for cash, one for bank and one for
discount) on each side. All cash receipts, deposits into bank
and discount allowed are recorded on receipt side and all cash
payments, withdrawals from bank and discount received are
recorded on the payment side. In fact, a three-column cash
book serves the purpose of Cash Account as well as Bank
Account. Hence, there is no need to open these two accounts in
the ledger. In this case some additional transactions need to
be recorded. These are: (i) Depositing cash in bank (ii)
Withdrawing cash from banks (iii) Payments by cheques (iv)
Receiving cheques and depositing in the bank (v) Bank
Charges (vi) Periodic interest allowed by the bank.
Its format is shown below:
Three Column Cash Book

Receipts Payments
Discount (Rs.)
Discount (Rs.)
Particulars
Particulars
Bank (Rs.)
Bank (Rs.)
Cash (Rs.)
Cash (Rs.)
Date
Date
L .F
L .F
Illustration: 3
From the following transactions of M/s Priyang & Sons,
prepare a three column cash book and show the concerned
ledger accounts.
(Rs.)
2018 Cash in hand 1,00,000
July 11
July 11 Balance in bank account 4,00,000
July 13 Purchased goods for cash 50,000
July 15 Purchased goods furniture and paid by 70,000
cheque
July 17 Sold goods for cash 60,000
July 19 Bought goods and issued cheque 1,50,000
July 20 Deposited cash in bank 50,000
July 22 Received cash from Kavish 24,500
Discount allowed 500
July 23 Paid sundry expenses 5,000
July 24 Cash withdrawn from bank for office use 50,000
July 25 Paid for stationery 5,000
July 26 Received cheque from Sunil 5,400
Allowed him discount 100
July 26 Cheque received from Gaurav and 20,000
deposited in bank
July 27 Endorsed the cheque received from Sunil in 5400
favour of Shubham
July 27 Paid ManoharLal by cheque 49,600
Received discount 400
July 28 Cheque received from Priyank 10,000
July 29 Cheque of Priyank deposited in bank 10,000
July 30 Paid Rent by cheque 20,000
July 31 Paid Salary by cheque 50,000
July 31 Withdrew from bank for personal use 20,000
July 31 Cheque received from Priyank dishonoured 10,000
July 31 Purchased machinery from Vimal & Sons 1,00,000
for cash
Solution :
Posting to Ledger
Sales Account
Dr. Cr.
F F
July To Balance 60,000 Mar. By Cash A/c 60,000
31 c/d 31
60,000 60,000
Aug. By Balance 60,000
1 B/d
Kavish Account
Dr. Cr.
F F
July To Balance 25,000 July By Cash A/c 24,500
31 c/d 22
July By Discount 500
22 Allowed A/c
25,000 25,000
1 B/d
Sunil Account
Dr. Cr.
F F
July To Balance 5,500 July By Cash A/c 5,400
31 c/d 26
July By Discount 100
26 Allowed A/c
5,500 5,500
1 B/d
Gaurav Account
Dr. Cr.
F F
July To Balance 20,000 July By Bank A/c 20,000
31 c/d 26
20,000 20,000
1 B/d
Priyank Account
Dr. Cr.
F F
July To Bank A/c 10,000 July By Cash A/c 10,000
31 28
Purchase Account
Dr. Cr.
F F
July To Cash A/c 50,000 July By Balance 2,00,000
13 31 c/d
July To Bank A/c 1,50,000
19
2,00,000 2,00,000
April To Balance 2,00,000
1 b/d
Furniture Account
Dr. Cr.
F F
July To Bank A/c 70,000 July By Balance 70,000
15 31 c/d
70,000 70,000
Aug. To Balance 70,000
1 b/d
Sundry Expense Account

Dr. Cr.
F F
July To Cash A/c 5,000 July By Balance 5,000
23 31 c/d
5,000 5,000
1 b/d
Stationery Account
Dr. Cr.
F F
25 31 c/d
5,000 5,000
1 b/d
Shubham Account
Dr. Cr.
F F
27 31 c/d
5,400 5,400
1 b/d
Manoharlal Account
Dr. Cr.
F F
27 31 c/d
July To Discount 400
27 Received
A/c
50,000 50,000
1 b/d
Rent Account
Dr. Cr.
F F
30 31 c/d
20,000 20,000
1 b/d
Salary Account
Dr. Cr.
F F
July To Bank A/c 50,000 July By Balance c/d 50,000
27 31
50,000 50,000
1 b/d
Drawing Account
Dr. Cr.
F F
July To Bank A/c 20,000 July By Balance 20,000
31 31 c/d
20,000 20,000
1 b/d
Machinery Account
Dr. Cr.
F F
July To Bank A/c 1,00,000 July By Balance 1,00,000
27 31 c/d
1,00,000 1,00,000
Aug. To Balance 1,00,000
1 b/d

Dr. Cr.
F F
July To Sundries 600
31 as per cash
Book

Dr. Cr.
F F
July By Sundries 400
31 as per cash
Book
Petty Cash Book: This book is used for the purpose of

recording large number of cash payments of small amounts.
Such payments may be made on items like postage, printing,
stationery, conveyance, courier etc. These payments are
generally termed as petty cash expenses. The petty cash
book is used to relieve the main cash book from maintaining
the detailed records of these petty expenses. Normally, one
person called as petty cashier is handed over a small amount
(imprest) to meet the petty expenses of a given period (say,
week, fortnight or month) and is authorized to make
payments and to record them in a separate cash book.
The Petty Cash Book can be maintained on Imprest
system or Non-imprest system. However, petty cashier
generally work on imprest system. Under both the systems,
the petty cashier handover the petty cash book to the main
cashier who examines the petty cash book. In imprest system,
the main cashier makes the reimbursement of the amount
spent by the petty cashier while in case of non-imprest system
the head cashier may provide the cash equal to/more than less
than the amount spent by petty cashier. The format of petty
cash book can be constructed according to the requirements of
the business.
Imprest System:
Petty cash book is maintained on imprest system. Under
this system, an estimated amount required for small
payments is paid for a certain period (a week or month) to the
petty cashier in advance. This amount is called imprest
money. The petty cashier makes the small payments out of
the imprest money and records them in the petty cash book.
All such payments are supported by some documentary
evidence say vouchers or receipts. At the end of the period, the
petty cashier handover the account to the main who will
reimburse the amount spent by the petty cashier so that at
the beginning of the next period, petty cashier has the same
amount in the petty cash book. For example: on April 1, 2018,
Rs. 5000 is given as advance to the petty cashier. Amount of
Rs. 4750 was spend during the month and submits the
account along with the vouchers to the main cashier. After
examining the account, the main cashier paid Rs. 4750. Thus,
on May 1, the petty cashier again got Rs. 5,000 in cash book.
The imprest money should be carefully determined. It should

be sufficient to make small payments for the fixed period.
The simple format of petty cash book is given below:
Analysis of Payments
Voucher No.
Particulars
received
Conveyance
Amount
Amount
Stationery
Telephone
Miscella-
Paid
Postage
neous
Date (Rs.) Expenses
Illustration 4:
Mr. Abhinav the Petty Cashier of M/s Yatrika India
received Rs 20000 on March 1, 2018 from the Head Cashier.
Prepare Petty Cash Book on Imprest System from the petty
payments during the month of March 2018 for the following
items:
March 2 2018 Auto fare 2,000
March 3 Courier services 500
March 4 Postage stamps 950
March 5 Pencils/Pads 650
March 6 Speed Post Charges 400
March 8 Taxi fare 2950
March 9 Refreshments 3100
March 11 Auto fare 600
March 13 Courier 640
March 16 Computer stationery 165
March 19 Bus fare 400
March 21 Internet Charges 2050
March 23 Refreshment 800
March 25 Photostat Charges 450
March 28 Courier services 400
March 30 Bus fare 400
Solution :

a) A separate journal is kept for
(i) Each transaction
(ii) Each type of transactions
(iii) Each type of transactions which are repetitive in nature and
sufficiently large in number
b) Cash Book contains
(i) All receipts and payments of cash
(ii) All receipts only
(iii) All payments only
c) Journal Proper is meant for recording
(i) Credit purchase of fixed assets only
(ii) Returns of goods
(iii) All such transactions for which no special journal has been kept
by the business
d) Purchases Journal is kept to record
(i) All purchases of goods
(ii) All credit purchases of goods
(iii) All credit purchases
e) Sales Journal is used to record
(i) Cash sales
(ii) Credit sales
(iii) Credit sales of goods
2. Fill in the blanks

(i) Cash Book also serves the purpose of a ..............Account.
(ii) Transactions entered on the debit side of the cash book are to be
posted on the ......... side of the concerned accounts in the ledger.
(iii) Cash column of the cash book always shows ....... balance.
(iv) The total of a cash discount received column is posted to the
......... side of the Discount Received Account.
(v) If there is a credit balance in the bank column of the cash book
it reflects an...... in the bank.
(vi) If debit as well as credit aspects of a transaction are recorded in
the cash book itself, it is called a ..........
(vii) When a cheque is returned dishonored, it is recorded on the
........side of the Cash Book in the bank column.
(viii) When a cheque received on a particular date is not deposited on
the same day into the bank, it is entered in .......column on the
debit side of the cash book.
3.3 BANK RECONCILIATION STATEMENT

Nowadays, all business entities record banking
transactions in their cash book by means of three column cash
book. On the debit side of the cash book, all deposits into the
bank are recorded and all withdrawals from the bank are
recorded on credit side. The bank also maintains the record of
all transactions of the firm in its books. All deposit by the
customer are recorded on the credit side of customer’s account
and bank debits customer’s account with all withdrawals
made by him. The bank provides a copy of this account to the
customer in the form of a bank statement or a pass book. The
format of bank statement or the pass book is given below:
Date Particulars Dr. Cr. Dr. or Balance Initial
Withdrawals Deposits Cr.
On receiving of pass book from bank, businessman

generally compares pass book with the cash book. All the
entries in the pass book should be tally with those of cash
book and balances in both the books should be same. But in
reality, they generally differ. This happens in those cases
when some entries have been recorded in cash book but they
do not appear in pass book. Similarly, there could be some
entries which have been recorded in pass book but they do not
shown in cash book. So, the differences can arise because of
the errors committed by bank or firm in recording the
transactions.
3.3.1 Reasons of Differences

There are some reasons for disagreement in the balances
of the cash book and bank statement. These are as follows:
1. Cheque issued but not yet presented for

payment: Whenever a cheque is issued by the firm to any
party for making payment, it will immediately records in the
cash book of the firm. But the bank will record the transaction
(debit the firm’s account) only when the cheque is presented
for payment. Generally, there are some time lag between the
issue of cheque and its presentation for payment. So, the date
on which it will be recorded in pass book is always later than
the date of its recording in the cash book. Therefore, it would
be possible that when the bank provides the passbook to the
firm on a particular date, there are some cheques which have
been issued but not presented for payment. Consequently
balance shown by cash book is less than the balance shown by
pass book. For example: ABC Ltd. issued a cheque for Rs.
25,000 in favour of Mr. X (creditor) on March 29, 2018 which
is presented to the bank for payment on April 3, 2018. The
firm would record it in the cash book on March 29, 2018
whereas the bank would record it on April 3, 2018. When the
firm would receive the pass book completed upto March 31,
2018, they would find the balance shown by the pass book is
different from the balance shown by the cash book. The pass
book balance would be higher by Rs. 25,000.
2. Cheques deposited into the bank but not
yet collected: When, firms receive payment in form of
cheque, they sent cheque to the bank for collection and record
it on the debit side of cash book on the same date. But bank
will not credit the firm’s account until the amount of cheque is
collected. Thus, when bank provides the passbook to the firm
on a particular date, it would be possible that certain cheques
which were sent for collection might not have collected and do
not shown in pass book. All such cheques pending collection
would cause increase in the balance as per cash book while
balance as per pass book is lower. For example, ABC Ltd
sends a cheque of Rs. 30,000 on June 28, 2018 to the bank for
collection. The cheque is collected on July 6, 2018. Now, if the
balances as on June 30, 2018 are compared, they will be
different because the credit of Rs. 30,000 will not appear in

the pass book.
3. Interest allowed by the bank: The banks
usually do not allow any interest on the current account
balances. But if interest is allowed, the bank credits it to the
customer’s account immediately. This increases the balance
in the pass book. But the firm would record such transaction
only when it receives the pass book and intimated by the
bank. Hence, the cash book balance will be lower till such
transaction is recorded.
4. Bank Charges: The banks generally charge
some amount from their customers for various services
provided by them. Charges could be for collection of
outstation cheques for making or collecting payments and so
on. The bank debits the customer’s account with specific
amount for such services provided from time to time.
However, the firm would pass the corresponding entry in the
cash book only when it receives the intimation from the bank
or when it receive the pass book. So, on the date of
reconciliation the cash book balance may differ from the
balance as per pass book.
5. Interest on overdraft: Firms may request
bank for overdraft facility when they require more funds.
Overdraft facility permits the firms to draw more than the
amount available in the account. Whenever, a firm actually
withdraws more than the available amount, it is said to have
utilized the overdraft facility. The bank charges interest on
the amount overdrawn by the firm and debits the interest
amount to its account periodically. The firm records interest
on overdraft only when the pass book is received. Hence, the
balance in the cash book and pass book would differ till the
entry is passed in the cash book.
6. Payment made by the bank as per the
standing instructions: The firm often issue instructions
authorizing its bank to make certain payments on its behalf
such as insurance premium, rent, bills etc. When the bank
makes such payments, it would immediately get debited in

the firm’s account. But it will not record in the cash book till
pass book is received. So, the balance in the pass book would
get reduced while the balance as per cash book would remain
unchanged.
7. Amount collected by bank on standing
instruction: The firm often issues instructions to its bank to
collect certain amount on its behalf such as interest,
dividends, etc. The bank credits the firm’s account as and
when it collects such amounts. The firm will pass the
corresponding entry in the cash book only when it receives
intimation from bank or when pass book is received. Thus, on
the date of reconciliation, the balance as per pass book may be
higher than the balances as per cash book.
8. Direct payments into the bank made by
firm’s customers: Nowadays, customers directly make
payments of amounts into the firm’s account. In such cases,
pass book would show the entry immediately while the firm
shall record it in the cash book only when it informs about
such deposit. So if on the date of reconciliation, such entry has
not been shown in the cash book, the balance as per cash book
will be lower than the balance as per cash book.
9. Dishonour of cheques or bills: As mentioned
earlier, whenever cheques are sent to the bank for collection,
they are recorded immediately in the cash book. But, no entry
would be made in the pass book till cheques are actually
collected by the bank. Sometimes, the cheques are
dishonoured due to some reasons. In such cases, the bank will
not pass entry in firm’s account and returns such cheques to
the firm. The same will be applied to the bills receivable sent
to the bank for collection. The firm will pass reverse entry in
the cash book on receiving of the dishonoured cheques or bills.
On the date of reconciliation, such entry might not be passes
which lead to the disagreement in the balances shown by the
cash book and the pass book.
10. Errors: It is quite possible that firm may

commit some errors while recording the entries in the cash
book. For example, a cheque deposited in the bank may not be
recorded, or is recorded on the wrong side in the cash book.
Similarly, while recording the transactions in firm’s account,
some errors might have been committed by the bank. For
example, a cheque collected on behalf of a firm is entered in
some other account. Hence, the balance in the cash book and
pass book would differ due to such errors.
3.3.2 Meaning of Bank Reconciliation Statement

The exact causes of difference in the balance as per pass
book and the balance as per cash book can be identify by
comparing the entries in the cash book with those of pass
book. In order to reconcile the balances of two books, firms
usually prepare a statement which shows all the causes of
difference and pass necessary correcting entries in the books.
This statement is called bank reconciliation statement.
In other words, Bank Reconciliation Statement
reconciles the balance as per pass book and balance as per
cash book and shows all causes of difference between two.
The Bank Reconciliation Statement can be prepared
quarterly, half yearly or yearly as per the requirement and
convenience of firm. It can be prepared in two ways:
(i) Arrive at the balance as per pass book, by taking the
balance as per cash book as the starting point and
adjust the effect of each item causing the difference.
(ii) Arrive at the balance as per cash book by taking the
balance as per pass book as the starting point, adjust
the effect of each item causing the difference.
Whatever be the method, the effect of each item on the
balance of the book which is taking as the starting point must
be analyzed. This will help to decide whether a particular
item is to be added to or subtracted from such balance. For
example: Let’s take balance as per cash book as the starting

point and bank charge of Rs. 500 appears in the pass book but
not in the cash book which is the reason for difference. The
bank charges would appear in withdrawal column of pass
book which decrease pass book balance by Rs. 500. But, it has
not been recorded in cash book which lead to higher balance of
Rs. 500 in cash book. In this case, amount of Rs. 500 can be
subtracted from the cash book to reconcile it with the pass
book.
By taking this example again, if balance as per pass book
is taken as base then bank charge of Rs. 500 can be added to
pass book balance because it lead to lower balance in pass
book.
Usually, the firms adopt first method by taking the
balance as per cash book as base because Bank Reconciliation
Statement is prepared basically for verifying bank balance as
shown by cash book.
If Bank Reconciliation Statement is prepared by taking
cash book balance, all those items which have been
responsible for lower balance in the cash book should be
added and those which have been responsible for a higher
balance should be subtracted.
Particulars Plus Minus
Column Column
Balance as per Cash book (Favourable or xxxxx
Debit Balance)
Or
Overdraft as per Cash Book (Unfavourable or xxxxx
Credit Balance)
Add:
1. Cheques issued but not yet presented xxx
2. Interest allowed by the bank xxx
3. Interest and dividends collected but not xxx
recorded in the cash book
4. Direct deposits by customers in the firm’s xxx
bank account.
Less:
1. Cheques deposited but not yet collected xxx
2. Bank charges xxx
3. Interest on overdraft xxx
4. Amounts paid by the bank xxx
understanding instructions but not
5. Cheques dishonoured but no entry made xxx
in the cash book for the dishonour
xxxxx xxxxx
Balance as per Pass Book
In case Bank Reconciliation Statement is prepared by

taking pass book balance, all those items which have been
responsible for lower balance in the pass book should be
added and those which have been responsible for a higher
balance should be subtracted.
Column Column
Balance as per Pass Book (Favourable or xxxxx
Credit Balance)
Or
Overdraft as per Pass Book (Unfavourable or xxxxx
Debit Balance)
Add:
1. Cheques deposited but not yet collected xxx
2. Bank charges xxx
3. Interest on overdraft xxx
4. Amounts paid by the bank xxx
understanding instructions but not
5. Cheques dishonoured but no entry made xxx
in the cash book for the dishonor
Less:
1. Cheques issued but not yet presented xxx
2. Interest allowed by the bank xxx
3. Interest and dividends collected but not xxx
4. Direct deposits by customers in the xxx
firm’s bank account.
xxxxx xxxxx
Balance as per Cash Book
Illustration 5: When Balance as per Cash Book is given

From the following particulars, prepare a Bank
Reconciliation Statement as on October 31, 2018:
On October 31, 2018 Krishna‘s cash book showed a debit
balance of Rs. 78,000. The balance as per pass book was Rs.
1,03,000. On comparing the cash book with the pass book, the
following discrepancies were found:
1. Two cheques for Rs. 16,000 and Rs. 20,000 issued on
October 23 have not been presented to the bank for
payment.
2. A cheque for Rs. 12,000 was deposited in the bank on
October 29, but it was credited by the bank on
January 5, 2018.
3. There was a credit entry in the pass book for
Rs. 5,200 in respect of dividend received by the bank
on behalf of Krishna. This had not been recorded in
the cash book.
4. Rs. 3,000 was deposited by a customer directly into
the bank.
5. The bank charged Rs. 600 as their commission for
collecting an outstanding cheques entry for this
appeared in the cash book. .
6. A cheque for Rs. 5,000 received from Manan and
deposited in the bank was dishonor but no entry was
recorded in the cash book for the dishonour.
7. A cheque for Rs. 1,600 was entered in the cash book
but it was not sent to the bank for collection.
Solution : Bank Reconciliation Statement as on
October 31, 2018
Column Column
Balance as per Cash Book 78,000
Add:
Cheques issued but not yet presented for payment 36,000
Dividends collected by bank but not yet recorded in 5200

the cash book
Amount deposited by a customer directly in the bank 3,000
Less:
Cheque deposited but not yet collected by bank 12,000
Bank charges debited by bank but not yet recorded in 600
the cash book
Cheque dishonoured but no entry made in cash book 5000
for the dishonor
Cheque received from a customer entered in the cash 1600
book but not sent to the bank for collection
122200 19,200
Balance as per Pass Book 1,03,000
Illustration 6: When Balance as per Pass Book is given

From the following, prepare a Bank Reconciliation
Statement of Kirori Mal as on January 31, 2018. Balance as
per pass book as on January 31, 2018 was Rs. 2,20,000.
1. Cheques amounting to Rs. 90,000 were deposited in
the bank during January, but credit was given only
for Rs. 70,000.
2. The bank paid insurance premium of Rs. 3,000 on
January 20, but it was not entered in the cash book.
3. A discounted bill receivable for Rs.15,000 was
returned dishonoured to the bank on January 27, but
the corresponding entry in the cash book was made
in February.
4. A cheque for Rs, 8,000 received on January 30 was
entered in the cash book, but it was sent to the bank
on February 3.
5. Cheques amounting to Rs. 30,000 were issued to
creditors but the cheques for Rs. 18,000 only were
presented for payment.
6. The bank charges debited in the pass book amounted
to Rs, 500.
7. Interest on securities collected and credited by the

bank amounting to Rs. 10,000 was not entered in the
cash book.
January 31, 2018
Column Column
Balance as per Pass Book 2,20000
Add:
Cheques deposited but not yet collected 20,000
Insurance premium paid by bank but not 3,000
yet recorded in the cash book
Bill Receivable dishonoured but not yet 15,000
Cheque received from a customer entered 8,000
in the cash book but not yet sent to the
bank for collection
Bank charges debited by bank not yet 500
Less:
Cheques issued but not yet presented for 12,000
payment
Interest on securities collected by bank but 10,000
not yet recorded in the cash book
2,66,500 22,000
Balance as per Cash Book 2,44,500
Illustration 7: When Overdraft as per Cash book is given

From the following particulars ascertain the balance as
would appear in the bank pass book of Badrinath on June 30,
2018. The cash hook showed a credit balance of Rs. 82,000.
1. Cheques amounting to Rs. 23,000 were issued but
not cashed by June 30, 2018.
2. Cheques of Rs. 30,000 paid into bank but not cleared
by June 30, 2018.
3. Interest charged on overdraft appeared in the pass
book only Rs. 1,200.
4. Bank charges debited by bank but not recorded in

the cash book amounted to Rs. 500.
5. Interest on debentures amounted to Rs. 6,000 was
collected by bank but not recorded in the cash book.
6. Bank paid insurance premium of Rs. 2,200 as per
standing instructions.
7. A customer paid Rs. 10,000 into firm’s bank account
directly.
June 30, 2018
Column Column
Overdraft as per Cash Book 82,000
Add:
payment
Interest on debentures collected by bank not 6,000
yet recorded in the cash book
Amount deposited by a customer directly 10,000
into bank
Less:
Cheques deposited into bank but not yet 30,000
credited
Interest on overdraft not yet recorded in the 1200
cash book
Bank charges not yet recmded in the cash 500
book 2200
Insurance premium paid by bank but not yet
39,000 1,15,900
Overdraft as per Pass Book 76,900
Illustration 8: When Overdraft as per Pass book is given

From the following particulars, ascertain the bank
balance as it would appear in cash book of Shrinath on March
31,2018. His Pass Book showed an overdraft of Rs. 75,000.
1. Cheques amounting to Rs. 10,000 were issued but

not presented for payment till March 31, 2018.
2. Cheques amounting to Rs. 25,000 were deposited in
bank on March 29,2018 but not credited till March
31, 2018.
3. Bank charges of Rs. 400 recorded in pass book.
4. Bank collected Rs. 12000 as dividend on shares on
behalf of Shrinath.
Bank Reconciliation Statement as on March 31, 2018

Column Column
Overdraft as per Pass Book 75,000
Add:
Cheques deposited in bank but not yet 25,000
collected
Bank charges not yet recorded in the cash 400
book
Less:
payment
Dividend collected by bank not yet recorded 12,000
in the cash book
25,400 97,000
Overdraft as per Cash Book 71,600

a) Bank Reconciliation Statement is
(i) A part of the cash book
(ii) A statement showing the causes of difference between the cash
book and the pass book balances
(iii) Ledger account
b) Bank Reconciliation Statement is prepared by
(i) Business
(ii) Bank
(iii) RBI
c) Debit balance in the cash book means
(i) Overdraft
(ii) Favourable balance
(iii) Neither of the two
d) Debit balance in the pass book means
(i) Overdraft
(ii) Favourable balance
e) Overdraft as per cash book means
(i) Debit balance in the cash book
(ii) Credit balance in the cash book
(iii) Nil balance in the cash book
f) When balance as per cash book is the starting point, unpresented
cheques are
(i) Added
(ii) Subtracted
g) When balance as per pass book is the starting point, uncollected
cheques are
(i) Added
(ii) Subtracted
h) When balance as per pass book is the starting point, direct deposits by
customers are
(i) Added
(ii) Subtracted
EXERCISE

1. Why discount columns in the cash book are not balanced?
2. Cash book is a journal as well as a ledger account. Explain.
3. Give two examples of contra entry.
4. What is petty cash book? Explain the imprest system of petty cash
book.
5. What is Bank Reconciliation Statement?
6. Give two examples of items which are usually recorded first in the
cash book arid later in the pass book.
7. Give two examples of items which are usually recorded first in the
pass book and later in the cash book.
8. State various causes of disagreement between the balances shown by

the cash book and the pass book.
Numerical Questions
1. From the following particulars, prepare a Simple Cash Book:

2018 Commenced business with cash 2,00,000
October 1
October 2 Deposited in Bank Account 1,00,000
October 3 Purchased furniture for cash 5,000
October 3 Paid cartage 700
October 4 Purchased goods for cash 50,000
October 8 Sold goods for cash 40,000
October 10 Received from Manoharlal 10,000
October 18 Withdrew from bank 50,000
October 20 Received cash from Kamal 15,000
October 25 Purchased a Computer 70,000
October 28 Wages paid 5,000
October 30 Deposited into bank 50,000
October 31 Paid rent for the month 10,000
2. Enter the following transactions in Two Column Cash Book:

2018 Cash in hand 1,00,000
June 1
June 2 Bought goods 40,000
June 3 Paid to Kaleem 5,000
June 4 Cash sales 20,000
June 5 Cash sales 30,000
June 6 Bought goods on credit from Suman 30,000
June 6 Paid cartage 600
June 8 Purchased stationery 1,000
June 10 Paid to Suman 29,500
Discount allowed by her 500
June 15 Paid travelling expenses 1,000

June 16 Sold goods on credit to Shakeel 16,000
June 18 Purchased furniture 25,000
June 20 Received from Shakeel 15,500
Discount allowed to him 500
June 25 Purchased computer 50,000
June 27 Paid to Shahnazar Rs. 1,9000 in full
settlement of his account of Rs. 20,000.
June 29 Received from Nayyer 24,700
June 30 Paid wages 5,000
June 30 Withdrew for personal use 7,000
3. Prepare a Three Column Cash Book from the following transactions:

2018 Cash in hand 20,000
August 1 Cash at bank 1,00,000
August 3 Bought goods and paid by cheque 40,000
August 5 Purchased furniture for cash 10,000
August 7 Paid wages by cash 6,000
August 10 Sold goods to Ramesh for cash 20,000
August 12 Received cheque from Shubham 20,000
August 15 Paid to Akhil by cheque 24,500
Discount received from him 500
August 17 Received cheque from Rahul 5,000
August 18 Cheque received from Shubham 20,000
deposited in the bank
August 19 Paid to Tavish by cheque 30,000
August 20 Cheque of Rahul endorsed to Ram 5,000
August 22 Deposited into bank 20,000
August 24 Sold goods and received a cheque 40,000
August 25 Withdrew from bank for personal use 6,000
August 26 Received from Kamal 24,800
August 31 Paid rent by cheque 10,000
August 31 Paid salaries by cheques 30,000
August 31 Withdrew from bank for office use 20,000
4. Prepare Petty Cash Book on imprest system for the month of

September 2018 from the following items of petty payments:

2018 September 2 Postage 1,300
September 4 Stationery 500
September 6 Auto fare 600
September 8 Refreshments 2,100
September 10 Courier services 600
September 12 Speed post charges 900
September 15 Telephone charges 200
September 18 Bus fare 300
September 19 Postage 200
September 21 Photostat charges 300
September 23 Bus fare 200
September 25 Call charges 350
September 27 Taxi fare 1,100
September 29 Cartage 350
September 30 Computer stationery 1,200
The petty cashier received Rs 12000 from the Head cashier on
September 01, 2018.
5. From the following particulars, prepare Bank Reconciliation
Statement by taking Balance as per Cash Book as base to arrive at
Balance as per Pass Book.
Particulars Amount (Rs.)

Debit Balance as shown by the cash book 2,60,150
Cheque issued but not presented for payment 25,000
Interest credited by the bank but not entered in the 5,500
cash book
Bank charges debited in the pass book but not 350
entered in the cash book
Ans. (Credit balance as shown by pass book 3,55,300)

6. From the following particulars prepare a Bank Reconciliation
Statement of Govind as on 31st December 2018:
(a) Balance as per pass book as on 31st December 2017 is 85,000
(b) Cheque for Rs. 51,000 were issue on 25th December 2017, but of
these cheques for Rs. 12,000 were presented for payment on
15th January 2018 and one cheque of Rs. 2,000 was not
presented for payment.
(c) Cheques and cash amounting to Rs. 48,000 were deposited in
bank on 15th December 2017 but credit was given for Rs. 38,000
only.
(d) A customer has deposited Rs. 8000 into bank directly.
(e) The bank has credited Rs. 2,000 as interest and has debited Rs.
300 as bank charges, for which there is no entry in cash book.
Ans. (Balance as per cash book Rs. 71,300)
7. Prepare a Bank Reconciliation Statement as on March 31, 2018.
Particulars Amount
(Rs.)
Overdraft as per cash book 1,02,100
Interest and bank charges appeared in pass book only 3,050
A cheque debited in cash book but not credited by bank 3,000
Cheques issued but not cashed by customers up to March 23,200
31, 2018
Cheques paid into bank but not yet cleared 15,500
A Bill Receivable discounted with the bank on February, 8,000
2018, dishonoured on March 31, 2018. No entry was made
in the cash book.
Ans. (Overdraft as per Pass Book Rs. 1,08,450)

8. Prepare a Bank Reconciliation Statement from the following
particulars and find out the balance as per pass book on December 31,
2017. The bank balance as per cash book was Rs. 56,000.
1. Cheques amounted to Rs. 1,01,800 were received from the
customers were paid into the bank in December 2017 but were
credited by the bank in January 2018.
2. Cheques of Rs. 21,500 were issued by the firm in December
2017, were cashed in January 2018.
3. The pass book showed a credit of Rs. 1000 for interest.
4. A debit of Rs. 200 for bank charges appeared twice in the pass
book. However, it did not appear in cash book at aI1.
5. Shivam, a customer, deposited a cheque of Rs. 1,000 directly
into firm’s bank account for which there was no entry in the
cash book.
6. A cheque for Rs. 1,000 received from Ritika and deposited into
the bank was returneddishonoured.
7. A cheque received from Nandisha for Rs. 6,900 was entered
twice in the cash book.
Ans. (Overdraft as per Pass Book Rs. 30,600)
Test your Understanding-I

1. (a) (iii) (b) (i) (c) (iii)
(d) (ii) (e) (iii)
2. (i) Cash (ii) Credit (iii) Debit
(iv) Credit (v) Overdraft (vi) Contra Entry
(vii) Credit (viii) Cash

1. (a) (ii) (b) (i) (c) (iii)
(d) (i) (e) (ii) (f) (iii)
(g) (i) (h) (ii)
qqq
Chapter
4
OTHER SUBSIDIARY BOOKS
4.1 Introduction
4.2 Special Purpose Subsidiary Book
4.2.1 Purchases Book
4.2.2 Purchases Return Book
4.2.3 Sales Book
4.2.4 Sales Return Book
4.3 Journal Proper
LEARNING OBJECTIVES
l To prepare purchases and purchases returns
journals and post them into ledger
l To prepare sales and sales returns journals and post
them into ledger
l To identify transactions to be recorded in journal
proper and explain the journal entries to be passed
(113)
114 Fundamentals of Accounting
4.1 INTRODUCTION
In Chapter 3, the significance of sub-division of journal
and various types of subsidiary books which are generally
used in business have been discussed. It was also focused on
the preparation of different types of cash books and their
posting into ledger. In this chapter, the remaining subsidiary
books including Journal Proper will be discussed.
4.2 SPECIAL PURPOSE SUBSIDIARY BOOKS

Number of transactions relating to purchase and sale of
goods are quite large and they occur too frequently. Hence, it
is required to maintain separate books for purchases and
sales of goods. However, cash purchases and cash sales of
goods are recorded in the Cash Book. Therefore, purchase
book and sales book will be prepared for recording credit
purchases and credit sales of goods. The business firms
generally maintain four separate books for recording credit
transactions relating to goods. These are: (i) Purchases
Books, (ii) Purchases Returns Books, ii) Sales Books, and (iv)
Sales Returns Books.
4.2.1 Purchases Book

The Purchases Book is used for recording purchases of
goods and raw-materials on credit. However, all transactions
relating to the credit purchases of fixed assets like machinery
furniture, vehicles, etc. are not recorded in purchase book.
These transactions are to be recorded in journal proper. The
Purchases book is also called ‘Purchases Journal‘, ‘Purchases
Day Book, and ‘Invoice Book’. The proforma of Purchases
Journal is given below.
Purchases Book
Date Name of the Supplier Invoice L.F. Amount Remarks
No.
Other Subsidiary Books 115
When goods are purchased on credit, buyer will get a bill

from the seller which is called ‘Invoice’. Invoice contains the
details regarding the quantity purchased, description of
items, price, trade discount, total amount, etc. Generally, two
copies of invoice are prepared. The original is provided to the
buyer and the duplicate is held by the seller. Recording of
transactions in the purchase book are taken place on the basis
of the invoices received. Although, the purchase invoice
contains a number, the buyer gives own serial number to all
invoices for easy reference which will be entered in the invoice
number column of the purchases book. All entries made in the
purchase book needs to be posted to their respective accounts
in the ledger. The supplier from whom the goods are
purchased on credit becomes creditor of the firm. Hence,
every credit purchase is posted on the credit side of the
supplier by writing ‘By Purchases A/c’ in particulars column.
The Purchases Book is totalled periodically (weekly or
monthly). This total is posted to the debit side of purchases
account in the ledger by writing ‘To Sundries-as per
purchases book‘. Thus, posting of purchase books involves
two steps:
(i) posting each purchase to the credit of the respective
accounts of suppliers, and
(ii) posting the total purchases to the debit of the
purchases account.
4.2.2 Purchases Returns Book

In any business, goods purchased by customers may have
to be returned to the supplier of goods either partly or fully.
This generally happens when goods are found to be defective,
damaged in transit, short weight, received too late, inferior
quality, or not in conformity with the order placed. If the
number of outward returns is few, they can be recorded in the
journal itself. But, if outward returns are large in number, a
separate book called ‘Purchases Returns Book’ should be used
for recording the transactions. This book is also called

‘Returns Outwards Book’ or ‘Purchases Returns Journal‘.
The proforma of a Purchases Returns Book is given
below:
Purchases Returns Book

Date Name of the Supplier Debit L.F. Amount Remarks
Note
No.
When firm returns goods to the supplier, it issues a

statement called ‘Debit note’ to intimate him that his account
has been debited on account of the return outward. The debit
note also contains all the particulars regarding goods and the
value of goods returned. It is generally prepared in duplicate.
The original is sent to the supplier and the duplicate is
retained by the firm. The recording of transactions in the
purchases returns book is made on the basis of debit notes
issued. The debit notes contains a serial number which is duly
noted in the debit note number column of purchases returns
book. While recording the amount of return outwards, firm
should adjust the trade discount, if any, in the value of goods
returned. The transactions recorded in the purchases returns
book should be posted to the respective accounts of suppliers
in the ledger. Separate account of each supplier already
opened at the time of purchase in the ledger. The entries
made in the purchases returns book will be posted to the debit
of each supplier’s account by writing ‘To Purchases Returns
A/c’. The total of the purchases returns book is posted to the
credit side of the purchases returns account in the ledger by
writing ‘By Sundries-as per purchase return book.
4.2.3 Sales Book

The Sales Book is used for recording sale of goods on
credit. It is not supposed to record credit sale of any fixed
assets or any other items which does not constitute goods. The
sales book also called ‘Sales Journal‘ or ‘Sales Day Book’.
The recording of transactions in sales book is similar to
that of the purchases book. The difference is only with regard
to the particulars column. In purchase book, particulars
column is used for recording the name of the supplier. But, in
case of the sales book, it is used for writing the name of the
customer.
Sales Book
Date Name of the Supplier Invoice L.F. Amount Remarks
No.
When goods are sold on credit, customer is provided with

an original invoice which is containing the details on quantity
sold, price, discount, etc. While, seller has an invoice book
which contains consecutively numbered invoices in duplicate.
Recording of transactions in the sales book are taken place on
the basis of duplicate copies of invoices issued. In case of
credit sales, the customer of goods becomes the debtor to the
firm. Hence, each sale recorded in the sales book is posted to
the debit side of the customer’s account by writing ‘To Sales
A/c’ in particulars column. The total of the sales book is posted
on the credit side of the sales account by writing ‘By
Sundries-as per sales book’
4.2.4 Sales Returns Book

If the number of inward returns is few, they can be
entered in the journal itself. But, if inward returns are large
in number, a separate book called sales returns book should
be used for recording the transactions. This book is also called

‘Returns Inward Book’ or ‘Sales Returns Journal‘.
Sales Returns Book

Date Name of the Supplier Debit L.F. Amount Remarks
Note
No.
Its ruling is similar to that of purchases returns book.

The second column of the sales returns journal is used for
recording the name of the customer and the third column for
credit note number. When a customer returns goods to the
firm, a statement called ‘Credit Note’ is issued which contains
particulars and the value of goods returned by him. The
entries in sales returns book are made on the basis of credit
notes issued. While recording the account of sales returns,
firm should adjust trade discount in the value of goods
returned. The transactions recorded in the sales returns book
are to be posted to the respective accounts of the customer in
the ledger. Separate accounts in the name of each customer
already opened at the time of sale. The entries made in the
sales return book will be posted to the credit of each customer
account by writing ‘By Sales Returns A/c’ and then post the
total of sales return book to the debit side of the sales return
A/c by writing ‘To Sundries as per sales return book’.
Illustration 1:
Enter the following transactions in proper subsidiary
books of Chekra Enterprises and show their postings into
ledger.
2018 Sold goods to Ram Singh 25500
July 1
July 2 Bought goods from Dhillon 12000
July 3 Sold goods to Gopinath 25000
July 4 Purchased goods from Habeeb 36,000

July 5 Ram Singh returned goods 3,500
July 6 Goods returned to Dhillon 2,000
July 9 Gopinath returned goods 1,500
July 10 Returned goods to Habeeb 2,600
July 12 Bought goods from Sanyal 47,500
July 13 Sold goods to Sailo 62,000
July 14 Sold goods to Michael 48,500
July 15 Purchased goods from Anthony 39,400
July 18 Returned goods to Sanyal 3,200
July 19 Sailo returned goods 2,300
July 22 Michael returned goods 1,500
July 25 Returned goods to Anthony 2,500
July 27 Sold goods to Solanki 53,400
July 28 Purchased goods from Gopalan 46,700
July 29 Sold goods to Harbinder Singh subject to a 20,000
trade discount of 5%
July 30 Purchased goods from Bhandari subject to 10,000
a trade discount of 10%
Solution:
Purchases Book
Date Name of Invoice L. Amount Remarks
Supplier No. F.
2018
July 2 Muskan 12,000
July 4 Siddharth 36,000
July 12 Gopal 47,500
July 15 Akash 39,400
July 28 Kunal 46,700
July 30 Ritika 9,000
July 31 Total 1,90,600
Purchases Returns Book

Supplier No. F.
2018
July 6 Muskan 2,000
July 10 Siddharth 2,600

July 18 Gopal 3,200
July 25 Akash 2,500
July 31 Total 10,300
Sales Book
Supplier No. F.
2018
July 1 Kashish 25,500
July 3 Tanu pal 25,000
July 13 Uversh 62,000
July 14 Naman 48,500
July 27 Taruna 53,400
July 29 Shivam 19,000
July 31 Total 2,33,400
Sales Returns Book
Date Name of Debit L. Amount Remarks
Supplier Note F.
No.
2018
July 5 Kashish 3,500
July 9 Tanu pal 1,500
July 19 Uvesh 2,300
July 22 Naman 1,500
July 31 Total 8,800
Purchases Account
Dr. Cr.
Date Particulars Amount Date Particulars Amount
2018
July To 1,90,600
31 Sundries-as
per Purchase
Book
Muskan Account
Dr. Cr.
2018 2018
July To Purchase 2,000 July By 12,000
6 Return A/c 2 Purchases
A/c
Siddharth Account
Dr. Cr.
2018 2018
A/c
Gopal Account
Dr. Cr.
2018 2018
A/c
Akash Account
Dr. Cr.
2018 2018
A/c
Kunal Account
Dr. Cr.
2018
July By 46,700
28 Purchases
A/c
Ritika Account
Dr. Cr.
2018
July By 9,000
30 Purchases
A/c
Purchases Returns Account

Dr. Cr.
2018
July By Sundries 10,300
31 -as per
Purchases
Returns
Book
Sales Account
Dr. Cr.
2018
July By Sundries 2,33,400
31 -as per Sales
Book
Kashish Account
Dr. Cr.
2018 2018
July To Sales A/c 25,500 July By Sales 3,500
1 28 Returns A/c
Tanu Pal Account

Dr. Cr.
2018 2018
1 9 Returns A/c
Uvesh Account
Dr. Cr.
2018 2018
13 19 Returns A/c
Naman Account
Dr. Cr.
2018 2018
14 22 Returns A/c
Taruna Account
Dr. Cr.
2018
July To Sales A/c 53,400
27
Shivam Account
Dr. Cr.
2018
July To Sales A/c 19,000
27
Sales Return Account

Dr. Cr.
2018
July To Sundries 8,800
27 -as per Sales
Return Book
1. Fill in the blanks.

(i) Purchases Book records credit purchases of ....................only.
(ii) Sales Book records all ....................sales of goods.
(iii) A ..................... is sent to a customer when he returns the goods.
(iv) Total purchases are posted to .........................Account at the end
of every month.
(v) Total of Sales Book is posted on the ........................side of Sales
Account at the end of every month.
(vi) Sales Returns are also called. ......................
(vii) Purchases Returns are also called .............. .. ......
(viii) Debit note is sent to the supplier when the goods are
..................... to him.
4.3 JOURNAL PROPER

The various transactions of repetitive nature which
cannot be recorded in special journals called subsidiary book
are to be recorded in journal proper.
In other words, all the transactions for which the firm
does not maintain a special journal shall be recorded in the
journal proper. The following are the examples of various
transactions which are to be recorded in journal proper.
1. Opening Entry: An opening entry is passed either
on commencement of new business or
commencement of new accounting year for opening
new set of accounts. If business started only with
cash, then it can simply record in cash book. But if
business brings with some other assets, an opening
entry will have to be passes in the journal. All
concerned assets account will debit while capital
account will credited. In case of existing business, an
opening entry is passed to brings forward balances of
various assets and liabilities from the previous year
to current year’s books of account.
2. Closing Entries: At the end of each accounting
year, the nominal accounts are closed by
transferring them to profit and loss statement. The

journal entries passed for this purpose are called
Closing Entries.
3. Transfer Entries: When an amount is to be
transferred from one account to another, an entry
has to be passed in journal proper which is called
transfer entry. For example: Proprietor wants to
transfer drawing appears in drawing account to his
capital account. This can be done by passing the
following entry in the journal proper:
Capital Account Dr.
To Drawings Account
(Being Transfer entry)
4. Adjustment Entries: Certain items are left to be
recorded into books of accounts. These are closing
stock, depreciation on fixed assets, interest on
capital, expenses incurred but not yet paid, income
earned but not yet received, etc. At the time of
preparing the final accounts, these items have to be
entered into books of account. Entries passed to
record these transactions in the journal proper are
called ‘Adjustment Entries’.
5. Rectification Entries: Errors may be occurred at
any stage such as recording the transactions in
various books of account, posting, totaling,
balancing, etc. Errors are generally corrected
through entries in journal proper which are known
as ‘Rectification Entries’.
6. Miscellaneous Entries: in addition to the entries
mentioned above, there are some other transactions
which will be entered in the journal proper.
Examples of such transactions are:
(a) Credit purchases of fixed assets, investments, etc.
(b) Credit sales of fixed assets, investments, etc.
(c) Withdrawal of goods by the owner for private use.
(d) Loss of goods by accident, fire, theft, etc.

(e) Writing off bad debts.
(f) Dishonour of bills.
Illustration 2
Enter the following transactions in Journal Proper of
Sharma Enterprises.
2018 Sold office van to Tavish. 1,50,000
July 3
July 8 The proprietor took away goods for personal 10,000
use.
July 15 Fire broke out in the premises and goods were 50,000
destroyed.
July 21 Purchased furniture on credit from Gupta & 20,000
Co. for the office.
July 25 Amount due from Manish is irrecoverable, as 5,000
he became insolvent.
July 28 Tanya, a customer, informed that some goods 500
were damaged in transit. An allowance was
granted to him for repairs
Solution:
Journal Proper
F. Amount Amount
(Rs.) (Rs.)
2018 Tavish A/c Dr. 1,00,000
July 3 To Office Van A/c 1,00,000
(Being office van sold on credit
to Tavish)
July 8 Drawing A/c Dr. 9,000
To Purchases A/c 9,000
(Being the withdrawal of goods
by the owner for his domestic
use)
July 15 Loss by Fire A/c Dr. 30,000

To Purchases A/c 30,000
(Being loss of goods by fire
accident)
July 21 Furniture A/c Dr. 13,000
To Gupta & Co. 13,000
(Being the furniture bought
from Gupta)
July 25 Bad debt A/c Dr. 3,000
To Manish A/c 3,000
(Being the amount
irrecoverable from Manish)
July 28 Allowance A/c Dr. 800
To Tanya A/c 800
(Being an allowance granted
for repairs of goods damaged
in transit)

1. State whether each of the following statements is True or False.
(i) Closing entries are passed for transferring the amount of one
account to another.
(ii) Rectification entries are passed for correction of errors in books
of account.
(iii) Credit purchases of fixed assets will be recorded in the
Purchases Book.
(iv) Special allowance granted to a customer is recorded in Sales
Returns Book.
(v) Journal Proper is meant for recording all such transactions
which cannot be recorded in any special journal.
(vi) Cash sale of fixed asset will be recorded in Journal Proper.
2. Name the book of original entry wherein each of the following will be
recorded:
(i) Goods sold for cash were returned by a customer but cash was
not given immediately.
(ii) Goods sold for cash were returned by a customer but cash was
given immediately.
(iii) Goods received from the manufacturer for distribution among
customer as free sample.
(iv) Empty crates charged earlier to a customer now received
backed from him
(v) Goods brought from Kashish, the payment for which is due
after a month.
Illustration 3 (Comprehensive)
On March 1, 2018, the balances of Tenali Traders stood
as follows :
l Cash in hand Rs. 20,000;
l Cash at bank Rs, 1,23,000;
l Stock in trade Rs. 5,17,000;
l Furniture Rs, 82,000;
l Debtors Rs. 66,000 (Madhur Rs. 35,000, Nishtha Rs,
26,000, Aman Rs. 5,000);
l Creditors Rs. 71,000 (Gupta & Co. Rs, 30,200,
Nandisha Rs. 40,800);
l Capital Rs. 7,37,000.
Their Transactions during the month of March were as
follows:
2018 Borrowed from Mittal & Co. 1,00,000
March 1
March 2 Purchased goods for cash 23,000
March 2 Purchased from Gupta & Co. 55,000
March 3 Paid into Bank 90,000
March 5 Received Cheque from Madhur 35,000
March 6 Sold goods for cash 12,000
March 7 Sold to Nishtha 87,000
March 8 Paid Nandisha by cheque 20,000

Discount received 1,000
March 9 Received Cheque from Nishtha on account 50,000
March 9 Sold to Gupta & Co. 3,800
March 10 Sold goods to Ritika 1,00,000
March 10 Drew cash from bank 10,000
March 12 Purchased postage stamps 3,000
March 14 Bought goods from Akshay & Co. 93,000
March 16 Paid Mittal & Co. by cheque in part 50,000

payment of loan
March 17 Received cash from Aman 5,000
March 21 Paid Gupta & Co. by cheque 60,000
March 23 Carriage paid 1,000
March 24 Withdrew cash for private expenses 15,000
March 28 Paid salaries in cash 8,000
March 30 Rent due to landlord 5,000
March 31 Purchased furniture on credit from Tushar . 6,000
March 31 Paid interest to Globe Mittal & Co. 1,000
Enter the above transactions in the appropriate books

post them into ledger, and prepare a Trial balance.
Solution:
Purchases Book
Date Name of the Invoice L. Amount Remarks
Supplier No. F. (Rs.)
2018 Gupta & Co. 55,000
March 2
March 14 Akshay & Co. 93,000
March 31 Total 1,48,000
Sales Book
Date Name of the Invoice L. Amount Remarks
Customer No. F. (Rs.)
2018 Nishtha 87,000
March 7
March 9 Gupta & Co. 3,800
March 10 Ritika 1,00,000
March 31 Total 1,90,800
Journal
F. Amount Amount
(Rs.) (Rs.)
2018
March 1 Cash A/c Dr. 20,000
Bank A/c Dr. 1,23,000
Stock A/c Dr. 5,17,000

Madhur A/c Dr. 35,000
Nishtha A/c Dr. 26,000
Aman A/c Dr. 5,000
To Gupta & Co. 30,200
To Nandisha 40,800
To Capital A/c 7,37,000
(Being an opening entry)
March 30 Rent A/c Dr. 5,000
To Rent Outstanding A/c 5,000
(Being rent due to landlord)
March 31 Furniture A/c Dr. 6,000
To Tushar A/c 6,000
(Being furniture bought on
credit)
March 31 Total 8,19,000 8,19,000
Solution :
Posting to Ledger
Mittal & Co. A/c
Dr. Cr.
2018 2018
Mar. To Bank A/c 50,000 July By Cash A/c 1,00,000
16 28
Mar. To Balance c/d 50,000
31
1,00,000 1,00,000
April By balance 50,000
1 b/d
Madhur Account
Dr. Cr.
2018 2018
Mar. To balance b/d 35,000 Mar. By Bank 35,000
1 5 A/c
Sales A/c
Dr. Cr.
2018 2018
Mar. To Balance c/d 2,02,800 Mar. By Cash A/c 12,000
31 6
Mar. By sundries 1,90,800
31 - as per
Sales Book
2,02,800 2,02,800
April By Balance 2,02,800
1 b/d
Nishtha A/c
Dr. Cr.
2018 2018
Mar. To Balance c/d 26,000 Mar. By Bank A/c 50,000
1 9
31 c/d
1,13,000 1,13,000

1 b/d
Aman A/c
Dr. Cr.
2018 2018
Mar. To Balance c/d 5,000 Mar. By Cash A/c 5,000
1 17
Purchases A/c
Dr. Cr.
2018 2018
Mar. To Cash A/c 23,000 Mar. By Balance 1,71,000
2 31 c/d
Mar. To Sundries - 1,48,000
31 as per
Purchases
Book
1,71,000 1,71,000
April To balanced 1,71,000
1 b/d
Nidisha A/c
Dr. Cr.
2018 2018
Mar. To Bank A/c 20,000 Mar. By balance 40,800
8 1 b/d
Mar. To Discount 1,000
10 Received A/c
Mar. To Balance c/d 19,800
31
40,800 40,800
1 b/d
Discount Received A/c

Dr. Cr.
2018 2018
Mar. To Balance c/d 1,000 Mar. By 1,000
1 8 Nandisha
1,000 1,000
1 b/d
Postage A/c
Dr. Cr.
2018 2018
Mar. To Cash A/c 3,000 Mar. By balance 3,000
12 31 c/d
3,000 3,000
1 b/d
Gupta & Co. A/c

Dr. Cr.
2018 2018
Mar. To Sales A/c 3,800 Mar. By Balance 30,200
9 1 b/d
Mar. To Bank A/c 60,000 By 55,000
21 Purchases
Mar. To Balance c/d 21,400 A/c
31
85,200 85,200
1 b/d
Carriage A/c
Dr. Cr.
2018 2018
23 31 c/d
1,000 1,000
1 b/d
Drawing A/c
Dr. Cr.
2018 2018
24 31 c/d
15,000 15,000
1 b/d
Salaries A/c
Dr. Cr.
2018 2018
28 31 c/d
8,000 8,000
1 b/d
Interest Paid A/c

Dr. Cr.
2018 2018
31 31 c/d
1,000 1,000
1 b/d
Stock A/c
Dr. Cr.
2018 2018
Mar. To Balance 5,17,000 Mar. By Balance 5,17,000
1 b/d 31 c/d
5,17,000 5,17,000
April To Balance 5,17,000
1 b/d
Furniture A/c
Dr. Cr.
2018 2018
Mar. To Balance 82,000 Mar. By Balance 88,000
1 b/d 31 c/d
Mar. To Tushar A/c 6,000
31
88,000 88,000
1 b/d
Capital A/c
Dr. Cr.
2018 2018
Mar. To Balance c/d 7,37,000 Mar. By Balance 7,37,000
31 31 c/d
7,37,000 7,37,000
April By balance 7,37,000
1 b/d
Rent A/c
Dr. Cr.
2018 2018
Mar. To Rent 5,000 Mar. By Balance 5,000
30 Outstanding 31 c/d
A/c
5,000 5,000

1 b/d
Rent Outstanding A/c

Dr. Cr.
2018 2018
Mar. To Balance c/d 5,000 Mar. By Rent A/c 5,000
31 31
5,000 5,000
April By balance 5,000
1 b/d
Tushar A/c
Dr. Cr.
2018 2018
Mar. To Balance c/d 6,000 Mar. By 6,000
31 31 Furniture
A/c
6,000 6,000
1 b/d
Akshay & Sons A/c

Dr. Cr.
2018 2018
Mar. To balance c/d 93,000 Mar. By Purchases 93,000
31 31 A/c
93,000 93,000
1 b/d
Ritika A/c
Dr. Cr.
2018 2018
Mar. To Sales A/c 10,000 Mar. By Balance 10,000
10 31 c/d
10,000 10,000
1 b/d
S.No. Name of Accounts L. Dr. Cr.

F. Balances Balances
1 Cash in hand 6,000 -
2 Cash at bank 1,58,000 -
3 Mittal &Co.A/c - 50,000
4 Sales A/c - 2,02,800
5 Nishtha A/c 63,000 -
6 Purchases A/c 1,71,000 -
7 Nandisha A/c - 19,800
8 Discount Received A/c - 1,000
9 Postage A/c 3,000 -
10 Gupta & Co. A/c - 21,400
11 Carriage A/c 1,000 -
12 Drawing A/c 15,000 -
13 Salaries A/c 8,000 -
14 Interest paid A/c 1,000 -
15 Stock A/c 5,17,000 -
16 Furniture A/c 88,000 -
17 Capital A/c - 7,37,000
18 Rent A/c 5,000 -
19 Rent outstanding A/c - 5,000
20 Tushar A/c - 6,000
21 Akshay& Sons A/c - 93,000
22 Ritika A/c 1,00,000 -

Total 11,36,000 11,36,000
EXERCISE

1. What is an invoice?
2. What is a debit note? Name the book in which entries are recorded on
the basis of debit note.
3. What is a credit note? Name the book in which entries are recorded on
the basis of credit note.
4. What is Journal Proper? What entries are usually recorded in the
Journal Proper?
5. Give the proforma of Purchases Journal. Explain the method of
recording the transactions in Purchases Journal and its posting into
ledger.
6. Name the special purpose subsidiary books used in large enterprises.
Numerical Questions
1. Prepare purchase book of Gupta & Company a saree dealer
and post the transactions recorded in purchase book to
ledger.

(Rs.)
2018 Purchased sarees from STM & Co. on credit 2,00,000
Jan 1
Jan 4 Purchased sarees for cash from Mittal Mills, 1,35,000
Surat
Jan 10 Purchased polyester sarees from Singhal & 75,000
Co. Kota
Jan 15 Purchased silk sarees from Tayal Mills 35,400
Received trade discount 600
Jan 20 Purchased computers on credit from B.S. 1,67,000
Electricals
Jan 24 Purchased furniture for cash from Tushar & 35,000
Co. for office
Jan 25 Purchased Polyester sarees from Kamal 35,600
Mills
Received trade discount 1,400
2. Prepare purchase book of Garg & Company a furniture

dealer and post the transactions recorded in purchase book
to ledger.

(Rs.)
2018 Bought Chairs on credit from T.S Trader 20,000
March 2
March 5 Purchased Tables from Shree enterprise on 10,000
credit
March 11 Purchased Almirah from Kaleem 35,700
furnitures on credit
March 17 Bought Steel Cabinets on credit from 25,400
Kohinoor furnitures
March 21 Purchased computers for office use on 15,000
credit from Taimur enterprise
March 23 Bought Chairs on credit from Tisca Limited 16000
March 24 Bought Tables on credit from Shubham 24000
Trader
3. Prepare sales book of Singhal & Company a saree dealer and
post the transactions recorded in sales book to ledger.

(Rs.)
2018 Sold sarees to Kaleem & Co. on credit 37,600
July 3
July 5 Sold sarees for cash to Sharma & Co. 55,500
July 11 Sold polyester sarees to Ashoka enterprise 23,750
on credit
July 14 Sold silk sarees to Parmpara boutique 27,800
Allowed trade discount 2,200
July 23 Sold Polyester sarees to Odhini & Co. 45,600
4. Prepare sales book of Kamal & Company a furniture dealer
and post the transactions recorded in sales book to ledger.

(Rs.)
2018 Sold Chairs on credit to Shyam 13,000
June 5
June 13 Sold Tables to Mohan on credit 15,000

June 17 Sold Almirah to Tanisha on credit 47,000
June 18 Sold Steel Cabinets on credit to Tushar 35,000
June 22 Sold Chairs on credit to Junaid 14,000
June 27 Sold Tables on credit to Rohit 12,000
5. Prepare purchase return book of Kashish& Company a
furniture dealer and post the transactions recorded in
purchase return book to ledger.
(Rs.)
2018 Return Chairs to Shyam shree 5,000
September 2 enterprise
September 5 Return Tables to Manoj traders 12,000
September 7 Return Almirah to Tushar & Co. 23,000
September 11 Return Steel Cabinets to Badrinath 12,000
Limited
September 15 Return Chairs to Sharma enterprises 45,00
September 22 Return Tables to Raman traders 9,000
6. Prepare sales return book of Madhur& Company a saree

dealer and post the transactions recorded in sales return
book to ledger.

(Rs.)
2018 Sarees returned by Manohar lal 9,000
June 3
June 5 Sarees returned by Tavish 11,000
June 11 Polyester sarees returned by Pulkit 16,700
enterprise
June 14 Silk sarees returned by Samara boutique 14,220
June 23 Polyester sarees returned by Dalmia 13,400
boutique
7. Enter the following transactions in the “Journal Proper” of
Jindal & Co.

(Rs.)
2018 Charged depreciation on furniture 1500
October 3
October 5 Charged interest on capital 1300
October 9 Bought old furniture from Lala & Co on 7,000
credit
October 10 Rent due to landlord 15,000
October 13 Salary due to clerk 8,000
October 16 Purchased computer from Sharma 75,000
enterprises
October 20 Returned computer to Sharma enterprise 25,000

1. (i) goods (ii) credit (iii) credit note
(iv) credit (v) returns inwards
(vi) returns outwards (vii) returned
Test your Understanding-II

1. (i) False (ii) True (iii) False
(iv) False (v) True (vi) False
2. (i) Journal proper (ii) Sales Return Book & Cash Book
(iii) Journal Proper (iv) Journal Proper
(v) Purchases Book
qqq
Chapter
5
BILLS OF EXCHANGE
5.1 Introduction
5.1.1 Bill of Exchange
5.1.2 Promissory Note
5.2 Terms Involved in a Bill
5.2.1 Maturity of Bill
5.2.2 Discounting of Bill
5.2.3 Endorsing the Bill
5.2.4 Dishonoring the Bill
5.2.5 Renewal of the Bill
5.2.6 Retiring of the Bill
5.3 Accounting Treatment
5.3.1 Treatment of Bill by the Drawer/Holder and Its Accounting
5.3.2 Treatment of Bill by the Acceptor/Drawee and Its Accounting
5.3.3 Treatment of Bill in case of Dishonor
5.3.4 Treatment in case of Renewal of Bill
5.3.5 Treatment in case of Retiring of Bill
5.3.6 Treatment of Bills Sent for Collection
5.4 Bill Books
5.4.1 Bills Receivable Book
5.4.2 Bills Payable Book
5.5 Accommodation Bills
LEARNING OBJECTIVES
l To explain the concepts bills of exchange and a
promissory note
l To distinguish between a bills of exchange and a
promissory note
l To state the meaning of different terms involved in
the bills transactions
l To explain recording of bill of exchange transactions
in journal
(143)
l To discuss the recording of various transactions

relating to dishonor, retirement, renewal of bills and
accommodation bills.
5.1 INTRODUCTION
Goods can be sold or bought for cash or on credit. When
goods are sold or bought for cash, payment is received
immediately. On the other hand, when goods are sold/ bought
on credit the payment is deferred to a future date. In such a
situation, normally the firm relies on the party to make
payment on the due date. But in some cases, to avoid any
possibility of delay or default, an instrument of credit is used
through which the buyer assures the seller that the payment
shall be made according to the agreed conditions. These
instruments of credit are called bills of exchange or
promissory notes. In India these instruments are governed by
the Indian Negotiable Instruments Act, 1881.
5.1.1 Bill of Exchange

According to the Negotiable Instruments Act 1881, a bill
of exchange is defined as an instrument in writing containing
an unconditional order, signed by the maker, directing a
certain person to pay a certain sum of money only to or to the
order of a certain person or to the bearer of the instrument.
The following features of a bill of exchange emerge out of this
definition –
l It must be in writing.
l It is an order to make payment.
l The order to make payment is unconditional.
l The maker of the bill of exchange must sign it.
l The payment to be made must be certain.
l The date on which payment is made must also be
certain.
l The bill of exchange must be payable to a certain
person.
Bill of Exchange 145
l The amount mentioned in the bill of exchange is

payable either on demand or on the expiry of a fixed
period of time.
l It must be stamped as per the requirement of law.
A bill of exchange is generally drawn by the creditor upon
his debtor. It has to be accepted by the drawee (debtor) or
someone on his behalf. It is just a draft till its acceptance is
made.
The above definition makes it clear that there are three
parties to a bill of exchange. They are –
(i) Drawer : a person who draws the bill
(ii) Drawee : a person who accepts the bill
(iii) Payee : a person who is to whom the payment is made
Note – The drawer of the bill himself will be the payee if he keeps the bill
with him till the date of its payment.
Example –Mr. A sells goods worth Rs. 10,000/- to Mr. B

and draws a bill of exchange for the amount payable after 3
months. In this example, Mr. A is the drawer, Mr. B is the
drawee and Mr. A himself is the payee as shown in the
specimen of a bill of exchange.
Jaipur
April 01, 2018
Revenue
Stamp
Rs. 10,000/
Three months after the date pay to me or my order, the
sum of rupees Ten Thousand only for value received.
Accepted & signed
Mr. B
Tonk Road, Jaipur Signed
Mr. A
111, Civil Lines, Jaipur
To
Mr. B
Tonk Road, Jaipur
Figure: Showing specimen of bill of exchange
According to the Negotiable Instruments Act 1881, a

promissory note is defined as an instrument in writing (not
being a bank note or a currency note), containing an
unconditional undertaking signed by the drawer, to pay a
certain sum of money only to or to the order of a certain
person, or to the bearer of the instrument. However,
according to the Reserve Bank of India Act, a promissory note
payable to bearer is illegal. Therefore, a promissory note
cannot be made payable to the bearer. This definition
suggests that when a person gives a promise in writing to pay
a certain sum of money unconditionally to a certain person or
according to his order the document is called is a promissory
note.
Thus, a promissory note has the following features –
l It must be in writing
l It must contain an unconditional promise to pay.
l The sum payable must be certain.
l It must be signed by the maker.
l The drawer must sign it.
l It must be payable to a certain person.
l It should be properly stamped.
A promissory note does not require any acceptance
because the drawer of the promissory note himself promises
to make the payment.
The above definition makes it clear that there are only 2
parties to a promissory note. They are –
i) Drawer : a person who makes the note and promises
to pay
ii) Payee : a person who is to receive the payment
Note – No acceptance is required in case of a promissory note because it
is made by the person who has to make the payment.
Example – Mr. X sells goods worth Rs. 10,000/- to Mr. Y

and Mr. Y writes a promissory note in favor of Mr. X. In this
example, Mr. Y is the maker, Mr. X is the payee as shown in

the specimen of a bill of exchange.
Jaipur
April 01, 2018
Revenue
Stamp
Rs. 10,000/
Three months after the date I promise to pay Mr. X or order,
the sum of rupees Ten Thousand only for value received.
Signed
Mr. A
Accepted & signed 111, Civil Lines, Jaipur
Mr. X
Tonk Road, Jaipur
Figure: Showing specimen of promissory note
Distinction between a Bill of Exchange and Promissory Note

S No. Basis Bill of Exchange Promissory Note
1. Drawer It is drawn by the It is drawn by the
creditor debtor
2. Order/ It is an unconditional It is an unconditional
Promise order to pay promise to pay
3. Parties There can be 3 Parties There are only 2
– Drawer, Drawee Parties – Drawer and
and Payee Payee
4. Acceptance It requires acceptance It does not require
by the drawee any acceptance
5. Notice In case of its dishonor No notice needs to be
due notice of dishonor given in case of its
is to be given by the dishonor
holder to the drawer
Advantages of Bill of Exchange and Promissory Notes

The bills of exchange as instruments of credit are used
frequently in business because of the following advantages:
(i) Framework for relationships: A bill of exchange
represents a device, which provides a framework for
enabling the credit transaction between the

seller/creditor and buyer/debtor on an agreed basis.
(ii) Certainty of terms and conditions: The creditor
knows the time when he would receive the money so
also debtor is fully aware of the date by which he has
to pay the money. This is due to the fact that terms
and conditions are clearly mentioned in the bill of
exchange.
(iii) Convenient means of credit: A bill of exchange
enables the buyer to buy the goods on credit and pay
after the period of credit.
(iv) Conclusive proof: The bill of exchange is a legal
evidence of a credit transaction implying thereby
that during the course of trade buyer has obtained
credit from the seller of the goods, therefore, he is
liable to pay to the seller.
(v) Easy transferability: A debt can be settled by
transferring a bill of exchange through endorsement
and delivery.
Test Your Understanding – I
A. State whether each of the following is ‘True’ or ‘False’;

(i) A bill of exchange must be accepted by the payee
(ii) A bill of exchange is drawn by the creditor
(iii)A bill of exchange is drawn for all cash transaction
(iv) A bill of exchange on demand is called Time Bill
(v) The person to whom payment is to be made is a bill of exchange
is called Payee
(vi) A bill of exchange is an unconditional promise to pay
B. Fill in the blanks with suitable words;

(i) The person to whom the amount mentioned in the promissory
note is payable is known as _____________ .
(ii) Transfer of negotiable instruments to another person by signing
on it, is known as ___________ .
(iii) In a promissory note, the person who makes the promise to pay
is called as ______________.
(iv) A person who endorses the promissory note in favor of another

is known as ______________.
5.2 TERMS INVOLVED IN A BILL
5.2.1 Maturity of Bill

Maturity refers the date on which a bill of exchange or a
promissory note becomes due for payment. In arriving at the
maturity date three days, known as days of grace or grace
period, must be added to the date on which the period of credit
expires instrument is payable. For example, if a bill dated
March 05, 2018 is payable 30 days after date it, falls due on
April 07, 2018, i.e. 33 days after March 05, 2018. If it were
payable one month after date, the due date would be April 08,
2018 i.e. one month and 3 days after March 05, 2018.
However, where the date of maturity is a public holiday,
the instrument will become due on the preceding business
day. In this case if April 08, 2018 falls on a public holiday then
the April 07, 2018 will be the maturity date.
5.2.2 Discounting of Bill

If the holder of the bill needs funds immediately or before
the maturity of the bill, he can approach the bank for
encashment of the bill before the due date. The bank shall
make the payment of the bill after deducting some interest
(called discount in this case). This process of encashing the
bill with the bank is called discounting the bill. The bank gets
the amount from the drawee on the due date.
5.2.3 Endorsing the Bill

When the holder of the bill endorses the bill to a third
party, the bill is said to be endorsed. The bill can be initially
endorsed by the drawer by putting his signatures at the back
of the bill along with the name of the party to whom it is being
transferred. The act of signing and transferring the bill is
called endorsement.
On the date of maturity, the payment will be received by

the person to whom the bill is endorsed. The holder of the bill
who endorses is called Endorser and the party to whom it is
endorsed is called Endorsee.
5.2.4 Dishonoring the Bill

A bill is said to have been dishonored when the drawee
fails to make the payment on the date of maturity. In this
situation, liability of the holder is restored. In such a
situation the holder of the bill gets an endorsement from the
Notary Public. The purpose of such notation is to establish
the facts of presentation of bill and dishonor. The
endorsement is done either on the bill or on a separate paper
attached to the bill called as ‘allonge’. The holder of the bill
has then to pay a petty charge for service of the Notary Public
which is called ‘Noting Charges’. These Noting Charges are to
be borne by the Drawee.
5.2.5 Renewal of the Bill

Sometimes when the drawee of the bill foresees that it
may be difficult to meet the obligation of the bill on maturity,
the drawee may therefore, approach the drawer with the
request for extension of the time for payment. If it is so, the
old bill is cancelled and the fresh bill with new terms of
payment is drawn and duly accepted and delivered. This is
called renewal of the bill.
The drawer may seek interest from the drawee for the
extended period of credit.
5.2.6 Retiring of the Bill

When the drawee of the bill has funds at his disposal and
makes a request to the drawer or holder to accept the
payment of the bill before its maturity and the holder agrees
to do so, the bill is said to have been retired. In this case, there
may be a possibility that the holder allows some discount
called Rebate on Bills which is nothing but interest for

unexpired period of the bill.
5.3 ACCOUNTING TREATMENT

When a bill or a promissory note is received by a person
who is entitled to receive its payment, he becomes the holder
of the bill and thus the bill is a Bill Receivable for him.
For the person who accepts the bill of exchange or makes
a promissory note, it is Bill Payable.
Bill Receivable is an asset and Bill Payable is a liability.
5.3.1 Treatment of Bill by the Drawer/Holder and its Accounting

The drawer/holder of the Bill shall pass the following
journal entry in his books at the time of receiving the bill or
the promissory note drawn in his favor –
Bill Receivable A/c Dr.
To Drawee/Debtor A/c
(Being acceptance received from the Drawee)
The holder of the bill can deal with it in the following
three ways –
(i) Drawer/holder may retain it till maturity
(ii) Drawer/holder may discount it with his banker and
receive the discounted amount
(iii) Drawer/holder may endorse it in favor of his own
creditor
Retaining the Bill

When the bill of exchange is retained by the receiver with
him till the date of maturity:
On receiving the bill
On maturity of the bill
Bank/Cash A/c Dr.

To Bill Receivable A/c
(Being payment received)
Discounting the Bill

When the bill of exchange is discounted from the bank:
On discounting the bill
Bank A/c Dr.
Discount A/c Dr.
(Being bill discounted and payment received)
On the date of maturity, payment of discounted bill shall
be received by the bank and not by the drawer. Hence, at the
time of payment, no entry will be passed by the holder)
Endorsing the Bill

When the bill of exchange is endorsed in favor of a
creditor:
On endorsing the bill
Creditor A/c Dr.
(Being bill endorsed in favor of the creditor)
On the date of maturity, the payment will be received by
the endorsee. Hence, at the time of payment, the endorser i.e
the drawer will not pass any entry in his books.
However, the following entries shall be passed in the
books of endorsee –

To Debtor A/c
(Being bill received from endorser)
On maturity of the bill
Bank/Cash A/c Dr.
(Being payment received against the endorsed bill)
5.3.2 Treatment of Bill by the Acceptor/Drawee and its

accounting
The acceptor/drawee of the Bill shall pass the following
journal entry in his books at the time when he accepts the bill
or makes a promissory note –
Drawer/Creditor A/c Dr.
To Bill Payable A/c
(Being bill accepted)
When the bill is discounted or endorsed by the holder of
the bill, the drawee is not required to pass any entry in his
books. When the drawee makes the payment on the due date,
drawee shall pass the following journal entry in the books
irrespective of the fact whether the bill is retained,
discounted or endorsed –
Bill Payable A/c Dr.
To Bank/Cash A/c
(Being bill paid)
SUMMARY
1. When the drawer retains the bill with him till the date of its
maturity and gets the same collected directly
Transactio Books of Books of
n Drawer/holder Drawee/Acceptor
Sale/ Debtor A/c Dr. Purchases A/c Dr.
Purchase of To Sales A/c To Creditor A/c
goods
Receiving/ Bill Rec. A/c Dr. Creditor A/c Dr.
Accepting To Debtor A/c To Bill Payable
the Bill A/c
Collection Cash/Bank A/c Dr. Bill Payable A/c Dr.

of the Bill To Bill To Cash/Bank A/c
ReceivableA/c
2. When the bill is discounted by the drawer from the bank

Transactio Books of Books of
n Drawer/holder Drawee/Acceptor
Sale/Purch Debtor A/c Dr. Purchases A/c Dr.
ase of goods To Sales A/c To Creditor A/c
Receiving/ Bill Rec. A/c Dr. Creditor A/c Dr.
Accepting To Debtor A/c To Bill Pay. A/c
the Bill
Discount- Bank A/c Dr. No Entry
ing the Bill Discount A/c Dr.
a few days To Bill
before ReceivableA/c
maturity
On No Entry Bill Pay. A/c Dr.
Maturity of To Bank A/c
the Bill
3. When the bill is endorsed by the drawer in favor of his creditor

Transac- Books of Books of Books of
tion Drawer/holder Drawee/Acceptor Endorsee/ creditor
Sale/ Debtor A/c Dr. Purchases A/c Dr. No Entry
Purchase of To Sales A/c To Creditor A/c
goods
Receiving/ Bill Rec. A/c Dr. Creditor A/c Dr. No Entry
Accepting To Debtor A/c To Bill Pay. A/c
the Bill
Endorsing Creditor A/c Dr. No Entry Bill Rec. A/c Dr.
the bill To Bill Rec. A/c To Endorser/
Drawer
On No Entry Bill Payable A/c Dr. Bank A/c Dr.
Maturity of To Bank A/c To Bill Rec. A/c
the Bill
ILLUSTRATIONS
Illustration 1
Ram sold goods for Rs.20,000 to Shyam on credit on Jan
01, 2018. Ram drew a bill of exchange upon Shyam for the
same amount for three months. Shyam accepted the bill and
returned it to Ram. Shyam met his acceptance on maturity.
Record the necessary journal entries under the following

circumstances:
1. Ram retained the bill till the date of its maturity and
collected directly
2. Ram discounted the bill @ 12% p.a from his bank
3. Ram endorsed the bill to his creditor Ankit
Solution
Books of Ram (Drawer)
Journal
1. When the bill is retained till its maturity
Date Particulars L.F. Debit Credit
(Amount) (Amount)
2018 Shyam A/c Dr. 20,000
Jan 01 To Sales A/c 20,000
(Being goods sold to Shyam on
credit)
Jan 01 Bill Receivable A/c Dr. 20,000
To Shyam A/c 20,000
(Being Shyam’s acceptance
received for bill)
Apr 05 Bank A/c Dr. 20,000
To Bill Receivable A/c 20,000
(Being bill matured and payment
received)
2. When the bill was discounted from the bank

(Amount) (Amount)
2018 Shyam A/c Dr. 20,000
credit)
To Shyam A/c 20,000
received for bill)
Jan 01 Bank A/c Dr. 19,400
Discount A/c Dr. 600
(Being bill discounted from the
bank)
3. When Ram endorsed the bill in favor of his creditor

Ankit
(Amount) (Amount)
2018 Shyam A/c Dr. 20,000
credit)
To Shyam A/c 20,000
received for bill)
Apr 05 Ankit A/c Dr. 20,000
(Being bill endorsed in favor of
Ankit)
The following Journal Entries shall be made in the books

of Shyam under all three circumstances :
Books of Shyam (Drawee)
Journal
(Amount) (Amount)
2018 Purchases A/c Dr. 20,000
Jan 01 To Ram A/c 20,000
Ram on credit)
Jan 01 Ram A/c Dr. 20,000
(Being bill accepted by Shyam)
Apr 05 Bill Payable A/c Dr. 20,000
To Bank A/c 20,000
(Being payment made on
maturity)
Illustration 2
On January 1, 2018 A sold to B goods worth Rs. 15,000.
On the same date he drew on B three bills for Rs. 6000, Rs.
5000 and Rs. 4000 for one month, two months and three
months respectively. B accepted all the three bills and sent
them back to A. A retained the first bill, discounted the second
bill with the bank for Rs. 4950 on January 5, 2018 and
endorsed the third bill to C on January 6, 2018. On the due
date B met his acceptances. Record the necessary journal

entries in the books of A, B and C.
Solution
Books of A (Drawer)
Journal
(Amount) (Amount)
2018 B A/c Dr. 15,000
(Being goods sold to B on credit)
To B A/c 6,000
(Being B’s acceptance received
for bill)
To B A/c 5,000
for bill)
To B A/c 4,000
for bill)
Discount A/c Dr. 50
(Being the second bill
discounted)
Jan 06 C A/c Dr. 4,000
(Being third bill endorsed in
favor of C)
Feb 04 Bank A/c Dr. 6,000
(Being first bill matured and
payment received)
Books of B (Drawee)
Journal
(Amount) (Amount)
Jan 01 To A A/c 15,000
(Being goods purchased from A
on credit)
Jan 01 A A/c Dr. 6,000

(Being first bill accepted by A)
Jan 01 A A/c Dr. 5,000
(Being second bill accepted by
A)
Jan 01 A A/c Dr. 4,000
(Being third bill accepted by A)
Feb 04 Bill Payable A/c Dr. 6,000
To Bank A/c 6,000
maturity)
Mar Bill Payable A/c Dr. 5,000
04 To Bank A/c 5,000
maturity)
To Bank A/c 4,000
maturity)
Books of C (Endorsee)
Journal
(Amount) (Amount)
2018 Bill Receivable A/c Dr. 4,000
Jan 06 To A A/c 4,000
(Being bill received from A)
Apr 04 Bank A/c Dr. 4,000
(Being bill honored and
payment received)
5.3.3 Treatment of Bill in Case of Dishonor

The Journal Entries for the dishonor of the bill and
noting charges in the books of drawer, Drawee and endorsee
shall be as under:
In the books of Drawer
(i) When the bill is retained by Drawer
Drawee A/c Dr.
To Cash A/c
(Being bill dishonored and noting charges paid)
(ii) When the bill is discounted

Drawee A/c Dr.
To Bank A/c
(Being discounted bill now dishonored)
Note – The amount in case of discounted bill being dishonored shall be

inclusive of Noting Charges.
(iii) When the bill is endorsed

Drawee A/c Dr.
To Endorsee A/c
(Being endorsed bill now dishonored)
Note – The amount in case of endorsed bill being dishonored shall also
be inclusive of Noting Charges.
In the books of Drawee

The drawee shall pass the following entry in his books
irrespective of the fact whether the bill is retained,
discounted or endorsed.
Bill Payable A/c Dr.
Noting Charges A/c Dr.
To Drawer A/c
(Being bill dishonored and Noting Charges involved)
In the books of Endorsee
Endorser A/c Dr.
To Cash A/c
(Being bill dishonored and noting charges paid)
Note – If the Drawee is declared insolvent on or before the maturity of
the bill, the bill is deemed to have been dishonored and all entries for
dishonor shall have to be passed in the books of the concerned parties as
given herein above.
Illustration 3
On Jan 01, 2018 Sheela sold goods to Vicky for Rs. 10,000
and drew upon him a bill of exchange for 2 months. Vicky
accepted the bill and returned it to Sheela. On the date of
maturity the bill was dishonored by Vicky. Holder of the bill
bears Rs. 50 as Noting Charges on the date of dishonor.

Record the necessary entries in all the cases listed below in
the books of Sheela and Vicky:
(i) When the bill is kept by Sheela till its maturity;
(ii) When the bill is discounted by Sheela for Rs. 200;
(iii) When the bill is endorsed to Preeti by Sheela.
Solution
In the books of Sheela
Journal
(i) When the bill is kept by Sheela till its maturity
(Amount) (Amount)
2018 Vicky A/c Dr. 10,000
(Being goods sold to Vicky on
credit)
To Vicky A/c 10,000
(Being Vicky’s acceptance
received for bill)
Mar Vicky A/c Dr. 10,050
04 To Bill Receivable A/c 10,000
To Cash A/c 50
(Being bill dishonored on the
date of maturity and Noting
Charges paid)
(ii) When the bill is discounted by Sheela for Rs. 200

(Amount) (Amount)
2018 Vicky A/c Dr. 10,000
credit)
To Vicky A/c 10,000
received for bill)
(Being bill discounted by
Sheela)
Mar 04 Vicky A/c Dr. 10,050

To Bank A/c 10,050
date of maturity and noting
charges paid)
(iv) When the bill is endorsed to Preeti by Sheela.

(Amount) (Amount)
2018 Vicky A/c Dr. 10,000
credit)
To Vicky A/c 10,000
received for bill)
Jan 01 Preeti A/c Dr. 10,000
(Being bill endorsed to Preeti)
Mar 04 Vicky A/c Dr. 10,050
To Preeti A/c 10,050
date of maturity and noting
charges paid by Preeti)
Illustration 4
On Jan 01, 2018 Q owes to P Rs. 24,000 and accepts three
bills as per the following details –
l For Rs. 10,000 for 2 months, it is retained by P
l For Rs. 8,000 for 3 months, it is endorsed to R
l For Rs. 6,000 for 4 months, it is discounted with the
bank for Rs. 5,800
Pass the necessary journal entries in the books of P, Q
and R if the bills are dishonored on the due dates and Rs. 80 as
noting charges are paid in all the three cases.
Solution
In the books of P (Drawer)

Journal
(Amount) (Amount)
Jan 01 To Q A/c 10,000
(Being first bill received)
To Q A/c 8,000
(Being second bill received)
To Q A/c 6,000
(Being third bill received)
Jan 01 R A/c Dr. 8,000
(Being second bill endorsed to R)
(Being the third bill discounted)
6 Mar Q A/c Dr. 10,080
04 To Bill Receivable A/c 10,000
To Cash A/c 80
(Being first bill dishonored on
the date of maturity and Noting
Charges paid)
Apr 04 Q A/c Dr. 8,080
To R A/c 8,080
(Being second bill dishonored
which was endorsed to R)
May Q A/c Dr. 6,080
(Being third bill dishonored
which was discounted from bank)
In the books of Q (Drawee)

Journal
(Amount) (Amount)
2018 P A/c Dr. 10,000
Jan 01 To Bill Payable A/c 10,000
(Being first bill accepted)
Jan 01 P A/c Dr. 8,000
(Being second bill accepted)
Jan 01 P A/c Dr. 6,000

(Being third bill accepted)
Mar Bill Payable A/c Dr. 10,000
04 Noting Charges A/c Dr. 80
To P A/c 10,080
(Being first bill dishonored and
noting charges involved)
Noting Charges A/c Dr. 80
To P A/c 8,080
(Being second bill dishonored
and noting charges involved)
May Bill Payable A/c Dr. 6,000
04 Noting Charges A/c Dr. 80
To P A/c 6,080
(Being third bill dishonored and
noting charges involved)
In the books of R (Endorsee)

Journal
(Amount) (Amount)
2018 Bill Receivable A/c Dr. 8,000 8,000
Jan 01 To P A/c
(Being bill received from P)
Apr 04 P A/c Dr. 8,080 8,000
To Bill Receivable A/c 80
To Cash A/c
(Being bill dishonored and noting
charges paid)
5.3.4 Treatment in Case of Renewal of Bill

The journal entries recorded in case of renewal for the
cancellation of the old bill, for interest and for the acceptance
of the new bill in the books of the drawer and drawee shall be
as under –
Illustration 5
On February 01, 2018 Ravi sold goods to Mohan for
Rs.18,000; Rs. 3,000 were paid by Mohan immediately and for
the balance he accepted three months bill drawn upon him by
Ravi. On the date of maturity of the bill Mohan requested
Ravi to cancel the old bill and a new bill upon him for a period
of 2 months. He further agreed to pay interest in cash to Ravi
@ 12% p.a. Ravi agreed to Mohan’s request and cancelled the
old bill and drew a new bill. The new bill was met on maturity
by Mohan. Pass the necessary journal entries in the books of
Ravi and Mohan.
Solution : In the Books of Ravi (Drawer)
Journal
F. (Amount) (Amount)
2018 Mohan A/c Dr. 18,000
Feb 01 To Sales A/c 18,000
(Being goods sold to Mohan)
Feb 01 Bill Receivable A/c Dr. 15,000
Cash A/c Dr. 3,000
To Mohan A/c 18,000
(Being Rs. 3000 received in cash
and balance accepted against bill)
May 01 Mohan A/c Dr. 15,300
To Interest Received A/c 300
(Being bill cancelled and Rs. 300
charges as Interest)
May 04 Bill Receivable A/c Dr. 15,000
Cash A/c Dr. 300
To Mohan A/c 15,300
(Being new bill accepted by
Mohan)
Jul 07 Bank A/c Dr. 15,000
(Being payment received on
maturity of new bill)
Books of Mohan (Drawee)
Journal
(Amount) (Amount)
Feb 01 To Ravi A/c 18,000
Ravi)
Feb 01 Ravi A/c Dr. 18,000
To Cash A/c 3,000
(Being Bill accepted for Rs. 15,000
and balance paid in cash)

04 Interest Paid A/c Dr. 300
To Ravi A/c 15,300
(Being old bill cancelled on the
date of maturity and Rs. 300
charges as Interest)
May Ravi A/c Dr. 15,300

04 To Bill Payable A/c 15,000
To Cash A/c 300
(Being new bill accepted and cash
paid for interest)
Jul 07 Bill Payable A/c Dr. 15,000

To Bank A/c 15,000
maturity for the new bill)
Illustration 6
Sohan drew on Mohan a bill for Rs. 15,000 for 3 months
on June 01, 2018. The bill was endorsed to Rohan. On July 15,
Mohan approaches Sohan to renew the bill for a period of
three months and charges Rs. 250 as interest. Sohan agrees
to renew the bill. Mohan pays the amount of interest in cash
and accepts the new bill for Rs. 15,000. The bill is honored on
the date of maturity. Please pass the necessary journal
entries in the books of Sohan, Mohan and Rohan.
Solution
In the Books of Sohan (Drawer) Journal
(Amount) (Amount)
Jun 01 To Mohan A/c 15,000
(Being bill received for three
months)
Jun 01 Rohan A/c Dr. 15,000
(Being bill endorsed to Rohan)
Jul 15 Mohan A/c Dr. 15,000
To Rohan A/c 15,000
(Being bill dishonored on account
of renewal)
Jul 15 Mohan A/c Dr. 250

charged as Interest)
Jul 15 Bill Receivable A/c Dr. 15,000
Cash A/c Dr. 250
To Mohan A/c 15,250
(Being new bill accepted by
Mohan and cash received for
interest)
Oct 18 Bank A/c Dr. 15,000
(Being payment received on
maturity of new bill)
In the Books of Mohan (Drawee)

Journal
(Amount) (Amount)
2018 Sohan A/c Dr. 15,000
Feb 01 To Bill Payable A/c 15,000
(Being Bill accepted for Rs.
15,000 )
Jul 15 Bill Payable A/c Dr. 15,000
Interest Paid A/c Dr. 250
To Ravi A/c 15,250
Jul 15 Sohan A/c Dr. 15,250
To Cash A/c 250
(Being new bill accepted and
cash paid for interest)
Oct 18 Bill Payable A/c Dr. 15,000
To Bank A/c 15,000
maturity for the new bill)
In the Books of Rohan (Endorsee)

Journal
(Amount) (Amount)
Jun 01 To Sohan A/c 15,000
(Being bill received from Sohan)
Jul 01 Sohan A/c Dr. 15,000

(Being bill dishonored)
Illustration 7
On January 01, 2018 B owes to A Rs. 10,000. A draws on
him a bill for Rs.10,000 for three months. The bill is
discounted from bank for Rs. 9,800. On the date of maturity B
requests A for renewal of the bill. A agrees to his request and
the following arrangement is made.
B pays Rs. 4,000 in cash and requests for the renewal of
the balance for two months, charging interest @ 6% p.a. to be
included in the bill.
B becomes insolvent on June 02, 2018 and only one third
of the amount could be recovered from his estate.
Please record the necessary journal entries in the books
of A and B.
Solution
In the Books of A (Drawer) Journal
(Amount) (Amount)
Jan 01 To B A/c 10,000
(Being bill received for three
months)
(Being bill discounted from bank)
Apr 04 B A/c Dr. 10,000
To Bank A/c 10,000
(Being bill dishonored on account
of renewal)
Apr 04 B A/c Dr. 60
Apr 04 Cash A/c Dr. 4,000
To B A/c 4,000
(Being part payment received in
cash in respect of the cancelled
bill)
Apr 04 Bill Receivable A/c Dr. 6,060

To B A/c 6,060
(Being bill received for two
months)
Jun 02 B A/c Dr. 6,060
(Being B became insolvent and
bill treated as dishonored)
Jun 02 Cash A/c Dr. 2,020
Bad Debts A/c Dr. 4,040
To B A/c 6,060
(Being one third amount
recovered from B and balance
becoming bad debts)
In the Books of B (Drawee)

Journal
(Amount) (Amount)
2018 A A/c Dr. 10,000
(Being Bill accepted for Rs.
10,000 )
Interest Paid A/c Dr. 60
To A A/c 10,060
Apr 04 A A/c Dr. 4,000
To Cash A/c 4,000
(Being part payment of Rs. 4,000
made)
Apr 04 A A/c Dr. 6,060
(Being new bill accepted for
balance amount along with
Interest)
Jun 02 Bill Payable A/c Dr. 6,060
To A A/c 6,060
(Being bill treated as dishonored
on account of insolvency of B)
Jun 02 A A/c Dr. 6,060
To Cash A/c 2,020
To Deficiency A/c 4,040
(Being one third payment made
of the due amount)
5.3.5 Treatment in Case of Retiring of Bill

The journal entries recorded in case of retiring of the bill
in the books of drawer and drawee shall be as under –
Transaction Books of Drawer Books of Drawee
When the bill Bank A/c Dr. The following journal entry
is retained Rebate A/c Dr. should be passed irrespective of
To Bill Receivable A/c the fact that the bill is
When the bill No Entry retained, discounted or
endorsed –
is discounted Bill Payable A/c Dr.
When the bill No Entry To Bank A/c
is endorsed To Rebate A/c
The accounting treatment on the retirement of the bill is

similar to the accounting treatment when a bill is honored by
the acceptor on the due in ordinary course. The only
difference between the two relates to the granting of rebate.
Note – Rebate is calculated for the period between the date of retirement
and date of maturity at a certain rate of interest.
For example of a bill of Rs. 10,000/- is retired one month before the due
date at an interest of 6% p.a., then the amount of Rebate shall be
6 1
10000 × × = Rs. 50
100 12
Illustration 8
On April 01, 2018 B owes to A Rs. 12,000. A draws on him
a bill for Rs. 8,000 and Rs. 4,000 for two months and three
months respectively. The first bill was endorsed to C on April
05 and the second bill was retained. Both the bills were
retired. On May 01, 2018, B got a rebate of 6% p.a. on both the
bills. Pass necessary journal entries in the books of A and B.
Solution : In the Books of A (Drawer) Journal
Apr 01 To B A/c 8,000
(Being first bill received for two
months)
Apr 01 Bill Receivable A/c Dr. 4,000

To B A/c 4,000
(Being second bill received for
three months)
Apr 05 C A/c Dr. 8,000
(Being first bill endorsed to C)
May Bank A/c Dr. 3,960
01 Rebate A/c Dr. 40
(Being second bill retired before
the due date)
In the Books of B (Drawee)

Journal
2018 A A/c Dr. 8,000 8,000
Apr 01 To Bill Payable A/c
(Being first Bill accepted for Rs.
8,000 )
Apr 01 A A/c Dr. 4,000 4,000
To Bill Payable A/c
(Being second Bill accepted for Rs.
4,000 )
May Bill Payable A/c Dr. 8,000 7,960
01 To Bank A/c 40
To Rebate A/c
(Being first bill retired one month
before the due date)
May Bill Payable A/c Dr. 4,000 3,960
01 To Bank A/c 40
To Rebate A/c
(Being second bill retired two
month before the due date)
5.3.6 Treatment of Bills sent for Collection

When a bill becomes due for payment, the holder of the
bill usually presents it to the drawee through a bank. The
bills are sent for collection to bank as and when it falls due on
the date of maturity. The bank credits the account of
holder/drawer when it receives the payment of the bill from
drawee. Generally no entries are passed when bills are sent
for collection. An entry is made in Cash/Bank Book when
intimation about the payment is received from the bank.
However, some accountants prefer to record the entries even

when the bills are sent for collection. In this case the following
journal entries shall be passed in the books of holder of the
bill–
When the bill is sent for collection
Bill sent for Collection A/c Dr.
(Being Bill sent for collection)
When intimation of payment has been received from the
bank
Bank A/c Dr.
To Bill sent for Collection A/c
(Being bill sent for collection honored)
When the bill is dishonored, the entries shall be –
To Bill sent for collection A/c
(Being bill sent for collection dishonored)
Drawee A/c Dr.
(Being bill dishonored)
Note – No entries shall be passed in the books of drawee for bill sent for
collection.
Test Your Understanding – II
A. Fill in the blanks with suitable words;

(i) No distinction is made between a bill of exchange and a
promissory note for ___________ purposes.
(ii) The holder of a bill can deal with the bill in any of the _______
ways.
(iii) When a bill is drawn ___________ Account is debited in the
books of the drawer.
(iv) Bill Payable is a ___________ for the drawee.
(v) When bill is endorsed or discounted, no entry is passed in the
books of the ___________.
(vi) When an endorsed bill is honored, no entry is passed in the
books of ___________.
B. State whether each of the following Statement is True or

False;
(i) When the bill is honored on the due date the drawee credits Bill
Payable A/c in his books.
(ii) When the bill is discounted or endorsed no entry for payment of
the bill is passed in the books of drawer.
(iii) In case of dishonor of a bill, noting charges are initially paid by
the drawee.
(iv) The bill is treated as dishonored in case of insolvency of the
drawee.
(v) When a bill is dishonored, the drawee will be debited in books of
drawer whether the bill is retained, endorsed or discounted.
5.4 BILL BOOKS

When large number of bills are drawn and accepted, their
recording by means of journal entry for every transaction
relating to the bills become a very difficult and time
consuming exercise. It is then advisable to record them
separately in special subsidiary books, the bills receivables in
the Bills Receivable Book and the bills payable in the Bills
Payable Book. The reason for the use of subsidiary books for
recording bill transactions is the same as that in the case of
other subsidiary books for cash, purchases, etc.
An important point in connection with bill receivables
and bills payable books is that they only record the
transactions relating to drawing and acceptance of bills, all
other transactions do not record the entire range of
transactions relating to the bills, e.g. relating to bills
discounted, endorsement, retirement, renewal etc.; simply
have a passing reference in these books and the entries
relating thereto are recorded as usual in the journal. It may
be noted that the entry relating to honoring of bills appear in
cash book.
From Whom Received
How disposed of
Date of Receipt
Where Payable
Date of Bill
No. of Bill
Due Date
Remarks
Acceptor
Amount
Drawer
Term
L .F
Figure: Specimen of Bills Receivable Book
To whom Given
Where Payable
Date of Bill
No. of Bill
Due Date
Remarks
Amount
Drawer
Payee
Term
Figure: Specimen of Bills Payable Book L .F
5.4.1 Bills Receivable Book

When a bill is received, the particulars are noted in Bill
Receivable Book. The journal entries in the Bill Receivable
Book are made only at the time of receiving the bills from the
drawee. The entries for their realization and discounting are
made in Cash Book. Similarly, the entries for endorsement
and dishonor of bills are made in Journal. However, if a
discounted bill is dishonored, the entry for dishonor shall be
made in the Cash Book and not in Journal.
All entries made in Bill Receivable Book are posted to the
credit of the individual accounts of the parties from whom the
bills are received. Periodic Totals of the Bill Receivable Books
are made is then debited to the “Bill Receivable Account”. Bill
Receivable Account is the account of Assets and would always
have a debit balance.
5.4.2 Bills Payable Book

As and when the bill is accepted, it is entered in the Bill
Payable Book. All entries made in Bill Payable Book is posted
to the debit side of the individual accounts of the parties at
whose request the acceptances are given. Periodic Totals of
Bill Payable Book is posted to the credit side of the Bill
Payable Account.
Example – Consider the following transactions and
observe how these are recorded in Bill Receivable and Bill
Payable Book along with postings in the ledger accounts;
i) Jan 07
Received from S. Mitra bill duly accepted for Rs. 1,32,500
dated January 04, payable three months after date.
ii) Jan 09
Accepted S. Warden’s draft for Rs. 9,70,000 at two
months.
iii) Jan 13
Pradhan drew on his trader at three months date and the
same was accepted for Rs. 39,000.
iv) Jan 14
Drew on R. Rakesh at one month for Rs. 25,000 and he
accepted the next day.
v) Jan 18
Gave acceptance at two months for Rs. 42,000 to S.
Parkar
vi) Jan 21
Received from G. Ghosh his acceptance for Rs. 31,000 at
two months.
vii) Jan 22
Received from D. Dhiman, A Vakil’s acceptance for Rs.
20,000 at three months from Jan 17.
viii) Jan 23
K. Kanga accepted my draft at one month for Rs. 30,000.
ix) Jan 27
Received from C. Shah bill for Rs. 35,000 dated January
20, accepted by P. Parson and drawn by M. Meyers, payable
after two months date.
x) Jan 31
Gave acceptance for Rs. 21,500 at one month to A.
Roberts.
Bills Receivable Book
The Bill Receivable and Bill Payable Book shall be as
Bills Payable Book
under –
Bill Payable Book
5.5 ACCOMMODATION BILLS

Normally, bills of exchange or promissory notes are
drawn to finance the actual transactions in goods, i.e., an
acceptance is made to settle a trade debt owing to the drawer

by the drawee in case of a bill of exchange and the bill is called
a trade bill. As it originates from genuine trade transaction it
is for value received and is enforceable. For example, Ankit
buys goods from Bishan, he may postpone the payment by
accepting a draft drawn by Bindu upon him. Bindu can if he
wants, get the money immediately by getting Ankit’s
acceptance discounted with his bank.
But, apart from financing transaction in goods, bills of
exchange or promissory notes may also be used for raising
funds temporarily. Sometimes, a bill is drawn even when no
debt is involved. Such a bill is called an ‘accommodation bill’
as it is accepted by the drawee to accommodate the drawer.
When such a bill is drawn and accepted, the drawer discounts
it with the bank and the money so raised is either fully
utilized by him or shared with the drawee. Before or on the
due date, the drawer remits the amount utilized by him to the
drawee and the drawee then meets the acceptance on the due
date by making payment to the bank with which the bill had
been discounted. The parties can also draw separate bills on
each other. In such a situation, each party discounts his own
bill with the bank and utilizes the amount. When the bills
become due for payment they meet their acceptances and
settle their accounts.
Hence, the drawee is called the ‘accommodating party’
and the drawer is called the‘accommodation party’.
From the above discussion it is clear that there can be
three types of arrangements in case of accommodation bills.
They are –
(i) A bill is drawn for accommodation of the drawer only.
(ii) A bill is drawn and the proceeds are shared by
drawer and drawee
(iii) One bill each is drawn by both the parties on each
other i.e two bills are drawn.
Illustration 9
On January 01, 2018 W draws a bill on S for Rs. 6,000 for
three months. S accepts the bill and returns it to W who
discounts it for Rs. 5,850 and remits one third of the proceeds
to S. On March 30, W sends the requisite amount to S who
meets the bill on the due date. Pass necessary journal entries
in the books of W and S.
Solution
In the books of W (Drawer)
Journal
(Amount) (Amount)
Jan 01 To S A/c 6,000
(Being bill received)
Jan 01 S A/c Dr. 2,000
To Bank A/c 1,950
To Discount A/c 50
(Being one third amount
remitted to S)
Mar S A/c Dr. 4,000
(Being amount utilized now
remitted to S)
In the Books of S (Drawee)

Journal
(Amount) (Amount)
2018 W A/c Dr. 6,000
(Being Bill accepted)
Discount A/c Dr. 50
To W A/c 2,000
(Being one third of the proceeds
received)
Mar Bank A/c Dr. 4,000
30 To W A/c 4,000
(Being money received from W)

To Bank A/c 6,000
(Being bill met at maturity)
Illustration 10
A drew on B a bill for Rs. 10,000 on January 01, 2018 for
four months for mutual accommodation. After receiving B’s
acceptance the same day, A discounted the bill with bank
@ 5% p.a. and remitted half the proceeds to B. On February
01, 2018 B drew a bill on A for Rs. 15,000 for three months and
after obtaining A’s acceptance, he discounted it @ 8% p.a. and
remitted one third of the proceeds to A. On April 30, 2018 B
became insolvent and only 50% was received from his estate.
Pass necessary journal entries in the books of A and B.
Solution
In the books of A
Journal
(Amount) (Amount)
Jan 01 To B A/c 10,000
(Being bill received)
Jan 04 B A/c Dr. 5,000
To Bank A/c 4,900
To Discount A/c 100
(Being half amount remitted to B)
Feb B A/c Dr. 15,000
01 To Bill Payable A/c 15,000
(Being Bill accepted)
Feb 04 Bank A/c Dr. 4,900
To B A/c 5,000
(Being one third proceeds received
from B)
Apr 30 B A/c Dr. 10,000

To Bank A/c 10,000
(Being bill dishonored on B
becoming insolvent)

04 To Bank A/c 15,000
(Being bill met on maturity)
May Bank A/c Dr. 7,500
04 Bad Debts A/c Dr. 7,500
To B A/c 15,000
(Being 50% of amount due
received from B’s estate)
In the Books of B
Journal
(Amount) (Amount)
2018 A A/c Dr. 10,000
Jan To Bill Payable A/c 10,000
01 (Being Bill accepted)
Jan Bank A/c Dr. 4,900
01 Discount A/c Dr. 100
To A A/c 5,000
(Being half of the proceeds
received)
Feb Bill Receivable A/c Dr. 15,000
01 To A A/c 15,000
(Being bill received from A)
Feb Bank A/c Dr. 14,700
04 Discount A/c Dr. 300
(Being bill discounted @ 5% with
the bank)
Feb A A/c Dr. 5,000
To Discount A/c 100
(Being one third proceeds remitted
to A)
Apr Bill Payable A/c Dr. 10,000
30 To A A/c 10,000
(Being bill dishonored due to
insolvency)
May A A/c Dr. 15,000
To Deficiency A/c 7,500
(Being payment of 50% made of the
amount due to A)
EXERCISE

1. Name the two types of commonly used negotiable instruments?
2. Write two points of distinction between bills of exchange and
promissory notes?
3. State any four essential features of bill of exchange?
4. State the three parties involved in a bill of exchange?
5. What is meant by maturity of a bill of exchange?
6. What is meant by dishonor of a bill of exchange?
7. Name the parties to a promissory note?
8. What is meant by acceptance of a bill of exchange?
9. What is Noting of a bill of exchange?
10. What is meant by renewal of a bill of exchange?
11. What is retirement of a bill of exchange?
12. Give the meaning of rebate?
13. A bill of exchange must contain “an unconditional promise to pay” Do
you agree with a statement?
14. Briefly explain the effects of dishonor and noting of a bill of exchange?
15. Distinguish between bill of exchange and promissory note?
16. Briefly explain the purpose and benefits of retiring a bill of exchange
to the debtor and the creditor?
17. Explain briefly the purpose and advantages of maintaining of a Bills
Receivable Book?
18. Briefly explain the benefits of maintaining Bills?
Numerical Questions
1. On Jan 01, 2015 Rao sold goods Rs.10,000 to Reddy. Half of the
payment was made immediately and for the remaining half Rao drew
a bill of exchange upon Reddy payable after 30 days. Reddy accepted
the bill and returned it to Rao. On the due date Rao presented the bill
to Reddy and received the payment.
Journalise the above transactions in the books Rao and Reddy.
2. Vishal sold goods for Rs.7,000 to Manju on Jan 05, 2015 and drew
upon her a bill of exchange payable after 2 months. Manju accepted
Vishal’s draft and handed over the same to Vishal after acceptance.
Vishal immediately discounted the bill with his bank@12% p.a. On
the due date Manju met her acceptance.
Journalise the above transactions in the books of Vishal and Manju.
3. On Jan 15, 2015, Kartar Sold goods for Rs.30,000 to Bhagwan and
drew upon him three bills of exchanges of Rs.10,000 each payable
after one month, two month, and three months respectively. The first
bill was retained by Kartar till its maturity. The second bill was
endorsed by him in favour of his creditor Ratna and the third bill was
discounted by him immediately @ 6% p.a. All the bills were met by
Bhagwan.
Journalise the above transactions in the books of Kartar and
Bhagwan. Also prepare ledger accounts in books of Kartar and
Bhagwan.
4. Raman owes to Suman Rs 48,000. The debt is discharged by Rama on
January 01, 2018 by accepting three bills of Rs. 16,000 for two
months, Rs. 14,000 for three months and Rs. 18,000 for four months.
First bill is endorsed to Aman, the second bill is retained and the
third bill is discounted for Rs. 13,500 with the Bank. On the due date
all the bills were dishonored, The Noting Charges paid in each case
were Rs. 150. On May 15, Raman accepted another bill for three
months for the total amount including interest @ 15% p.a. The new
bill was duly honored on the due date. Records the necessary entries
in the books of Raman, Suman and Aman.
5. On January 01,2018Rajive drew on Sanjeev, a bill for three months
for Rs. 10,000 for mutual and temporary accommodation. Sanjeev
sent his acceptance to Rajiv who discounted the bill with the bank for
Rs. 9,600 and remitted half the proceeds to Sanjeev. On the same
date, Sanjeev drew a bill for three months for Rs. 9,000 for similar
purpose. He discounted the bill for Rs. 8,700 with the bank and
remitted half the proceeds to Rajiv. Sanjeev became insolvent on
March 31 and failed to meet his acceptance. On June 30 25paise in
rupee was recovered from his estate. Journalize the above
transactions in the books of Rajiv and Sanjeev.
6. Nikhil sold goods for Rs.23,000 to Akhil on Dec. 01, 2015. He drew
upon Akhil a bill of exchange for the same amount payable after 2
months. Akhil accepted the bill and sent it back to Nikhil. Nikhil
discounted the bill immediately with his bank @12 p.a. On the due
date Akhil dishonoured the bill of exchange and the bank paid Rs.100
as noting charges. Akhil requested Nikhil to draw a new bill upon
him with interest@10% p.a. which he agreed. The new bill was
payable after two months.A week before the maturity of the second
bill Akhil requested Nikhil to cancel the second bill. He further
requested to accept Rs.10,000 in cash immediately and drew a third
bill upon him including interest of Rs.500.Nikhil agreed to Akhil’s
request. The third bill was payable after one month. Akhil met the
third bill on its maturity. record the necessary journal entries in the
books of Nikhil and Akhil and also prepare Akhil’s account in the
books of Nikhil and Nikhil’s account in the books of Akhil.
Test Your Understanding – I

A. (i) False (ii) True (iii) False
(iv) False (v) True (vi) True
B. (i) Promisee (ii) Endorsement (iii) Promissor
(iv) Endorser
Test Your Understanding – II

A. (i) accounting (ii) three (iii) Bill Receivable
(iv) liability (v) drawee (vi) drawer
B. (i) False (ii) True (iii) False
(iv) True (v) True
qqq

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Chapter

1.2 ACCOUNTING- AN OVERVIEW

proprietorship, partnership, a company, or a co-operative

1.2.1 Definition of Accounting

various business activities. In the process a number of

1.2.2 Process of Accounting/ Accounting Activities

financial data. It is therefore necessary to

Figure 1.1: Accounting Activities

1.2.3 Objectives of Accounting

(v) To comply with legal requirements: Business

1.2.4 Book Keeping, Accounting and Accountancy

words, Accounting refers to the actual process of preparing

1.2.5 Parties Interested in Accounting Information

accounting information to measure long term and

salaries, overtime, bonus, medical facilities,

1.2.6 Branches of Accounting

Human Resource Accounting: Accounting basically

1.2.7 Advantages of Accounting

operations during the accounting period and the

regarding amount owing to creditors, payment of

1.2.8 Limitations of Accounting

(iv) Window dressing: Sometimes accountants may

TEST YOUR UNDERSTANDING-I

1.3 ACCOUNTING PRINCIPLES: CONCEPTS AND

the business or liability of business towards the owner.

ii. Money Measurement Concept

transactions cannot be expressed in term of money. For

iii. Going Concern Concept

iv. Accounting Period Concept

account at the end of each accounting period. This is

v. Historical Cost Concept

vi. Accounting Equation Concept

increase in one asset (furniture) and (ii) decrease in

vii. Objectivity Concept

viii. Accrual Concept

viii. Matching Concept

recognized in that period. So once the revenue realized, it

1.3.1 Accounting Conventions

iv. Full disclosure

TEST YOUR UNDERSTANDING-II

(ii) The ‘separate entity concept’ of accounting is not applicable to

1.4. SYSTEM OF BOOK KEEPING

1.4.1 Double Entry System

will increase and cash will decrease. This involves two

1.4.2 Single Entry System

1.5. MEANING OF ACCOUNT

1.5.1 Classification of Accounts

Real Accounts, and (iii) Nominal Accounts. Real and Nominal

Impersonal Account Personal Account

Loan from Mr. X

Natural Personal account: An account relates to

(ii) Real Account

1.6.RULES OF DEBIT AND CREDIT

Debit: The Receiver

(ii) Real Accounts: When an asset is coming into the

Debit: What Comes in

(iii) Nominal Accounts: When expenses are incurred or

Debit: Expenses and Losses

TEST YOUR UNDERSTANDING-III

(iii) Capital Account is a personal account...........

Questions for Practice

ANSWERS TO TEST YOUR UNDERSTANDING

Test Your Understanding-I

Test Your Understanding-II