CHAPTER 6

Mcounting Pr~cedures-
iutes of Debit and Credi~ ~---·
LEARNING OBJECTIVES
rt,is chapter would enable students to understand:
·ng of an Account
O Meanr
·ng of Debit and Credit
IJ Meanr .
f Debit and Credrt
n Rues
I O
'I" 'fication of Accounts
IJ cassr
1
ealandng an Account
O Si ,•ficance of Debit and Credit Balance in Accounts
0 gn .

Transactions are rec?rde~ in the books of acc_oun~ on the basis of evidences, i.e. , source
documents, sue~ as mvoic~s for purc~ases, mvo1ces for sales, debit and credit notes,
Rules of debit and credit are apphed to each transaction and recorded in the book
:f~riginal entry, i.e. , ~ournal or Special Purpose Books in a chronological order. The
t nsactions recorded m the books of account are transferred (posted) to the specific
:C~ount maintained in the Ledger. At this stage, it is appropriate to define and
understand the term 'account'.
ACCOUNT
Account is a record of transactions under a particular head. It records not only the
amount of transactions but also their effect and direction.
An account is divided into two parts, i.e., debit and credit. It is usually in a 'T' form
and the commonly used layout of an account is as follows:
Dr. NAME OF THE ACCOUNT, e.g., WAGES ACCOUNT Cr.

Date Particulars J.F. Amount(~ Date Particulars J.F. Amountrn

l

Date of Name of the Page or Amount of Date of Name of the Page or Amount of
the other account Reference the the other account Reference the
transaction Number of transaction transaction Number of transaction
the Subsidiary the Subsidiary
Book, Book,
where where
the entry the entry
was first was first
recorded, recorded,
e.g., Cash e.g., Cash
Book
- Book
 IJU~1v•-
'""Jg...._\;
6..2 Id be noted: . g Procedures-Rules of Debit and Credit 63
,-ccauntin
ceount shou
L~ 1t of a · h' k ·
c ollO\viug pomts nbout 1.he la)-O' J1c tOP· ,tt,d by ll t ic ver tica.1 1:. • 0 f Double Entry or Ru les of Debit a nd Credit a re formed on tho bnAiM of t.l w s111wi,
• K . . rten at I
n me of the ncrount 1s ,,ri . I haJ\res. •
,cp11r> d
b vinte as r . ·
·o ') «tie Jlule\ in each of t he bus iness tra nsactions. There a re two a pproaches f'or duclrllnu wlwn
•denncn . . •• ab re nsP~~. s on t he debit side of account and when to write on the credi t s ide of nn lll'l'IHHJI ,
• Ac:-count is dinded into two 1 . .d cdebtl 1• . bbreviated as 'Cr.').
debt! "1 e dit · 1" 11 to wtl,~ ich account is to be debited a nd which account is to be cred ited . Thu m lt•A,,n
• Left hand s ide 1s called th e d ' t side ('ere ·D!lte'. i.e
. ed he ere I n for . the.. ~~sis of wh ich such.. decision is taken are called R ules of D e b it a n d Credit,.
• R1gh1 ha nd side 1s coll 1 . the c0tu n1 involved m t h e tr
. "red in !ceoun1 all
Dnte of the transact.ion 1s enk fthe othef t s~!!t,
he non1eo
In the ' Pa rticulars· column. 1 . •eferenci n g system "·h t ca n be classified in two ways:
·
1s e ntered .
ed · 8 I
is us 11 "
.,.
et~ Accound 1.: iona l Classification; a nd
. F l coluntn . \ Tra ·
A d r n Classification .
1
• The 'folio· or J ournal Foho (J. · J urnal Bo<>k· 13 Moe
. . rded I·n the o . ed is wnt. ten ·
ongma] entry was reco · aditional Classification
tronsact
• in the last column. the a mount . , amounts: p.. Tr this classification, accounts
. . k. · ginan l]nder .. a re classified into two groups as shown below:
It 1s 1llustrnted below bv ta ·mg I 018 uNT
• CASH ACCO Trad1t1onal Classification of Accounts
Dr
0.. ,c ! f
O,Jt•
I
I
tncr,,- + t
~,,
Payments for Purchases Personal Accounts
21121
,\pril 1,00,000 Payments to Creditors Impersonal Accounts
Operung lo.
S0,000
Aprll Ca<h S.ales ol Goods
Ap,1 10 Receipts from o.btM 70,000
7
28

wages and Salaries

Rent 1/"· + t 7 f t
20.000 101%. Natural Personal Artificial Personal Representative
Ap,t 14 R«i!,pi. from (omm>SSIO(l 29 Postage Accounts Accounts Real Nominal
~ 2 1 Saieo/ fixed "'-sell 30.000 Cartage Personal Accounts Accounts
29 Accounts
Aprtl 27 UJmmis5lon 5,000 personal Accounts
Apn1 30 I Oosing Balance \ \ l~
1,70.
J. Personal Accounts . .
Accounts which rela te to persons, i.e., mdividuals, firm s, companies , debtors or
creditors, etc., are P ersonal Accounts. Exa mples of Personal Accounts are the accoun t
of Ra nt & Co. , a customer (Debtor), or t he .account of Jhaveri & Co., a supplier of
side
\Vhatorhas
I) been done 1s. place the increases in cash on the left h and si de (i goods (Creditor). Capital Account and Drawings Account of the proprietor. The main
tTf•d1t ; 1Ht side, and the decreases on the right hand side (i.e .. Paym~
pU rpose of preparmg a' Personal
. Account 1s to determine the balance due to or due
f 1.05.000
81 ""/' ThC' dosing balance ts ascertained by deducting the total of from persons or orga111sat1ons .
rom th<- total of the left' __ A
2.75.000.
,; ,fo f
Personal Accounts ca n be classified into three categories:
(i) Natural Personal Accounts
The term ·Natural Persons'means persons who are creations of God. Therefore, these
Dehn refer& lo th--!
e e,t s1d e o f an accoun
- t and credit refers to the right. s ide .of an u~
-u1tc: will include accounts 111 mdividual name. For example, Ram's Account, Asha's Account, etc.
In the abbreviated form Dr. stands for debit and Cr. sta nd s for credit. An H,em recor~ (ii) Artificial Person al Accounts
on the debit bide- of an account is said w be debit.ed to the account. An item recollk( These nccou nt s include accounts of corporate bodies or institutions which are recognised
on lhe Cl'E-dll s1dp of an accoun t 11, sa id to be credit.eel to th e nccou nt · 8 8 persons in business dealings. For example, the account of a lim.ited company, the account
Both dE-bll and crc-tht mu) n•pn·•t•nt either increase ur decrpn,;e de1wndi ng up0 0 th, of II club or 11 ,·oopcrntive society. etc.
nature of an au·c,unt 11w rules of debit and credll depend on th l' nature of IICCOUnt (iii) l/l'pr<"sc11tati1•e Personal Accounts
Tlwse nrr nrrou nt s which represent n certain person or a group of persons. For example,
if rrn t i, due to t he lnndlorcl. Rn Out.standing Rent Account will be opened in the books.
Th " Out,Hnnding Rent Account represents the a mount of rent payable to the landlord.
{Jn,1,., I J,,ul,Jp Entrv S\'hlt•m of a,1,,unun~ ..ac·h trun,acuon ha,; two llhJll"-'t n. 01w nspi,.11 Oth,,r exnm ples of the Representative Personal Accounts are Pre paid Rent Account,
,1,,,!,11 I I', or.1nc·o m111 g llti()("-l Anotlll'r UhJll'Ct lh r·ri·<lll , I, •., i:1vi ng or 0UtkOlt!
n,1•1v111g Acnu od Commission Account. Unearned Interest Account, etc.
ar.p,:;<t lklJII and crnJ,t aspec I• uf a tru11sa1 tum form the basis of IJ011b/e 1~·11tr)1 Sy.r, Rule of Debit and Credit-Debit the receiver, Credit the giver.
 !,(C"unting procedures- Rules of Debit and Credit
6 .4 6.5
I 2 . Imp.,
Accountsraonal . Accounts
Account w1uch a.re not personal such as Mac me
h. ry Accou nt, Cash Ace
se can be furthe ount, ll-
S0 J o t ~ 0 u
,___-- nal A«::u
Real Accounu
m~
Nominal Acco1tnu
::"=------t---;;;~:;:--------+-'"7:'":--::-:--------- M~
in to 'etc.. are termed as Impersonal Accounts- The r s ub.di :.,,_
(iii sank Salaries Ml Leasehold Property (..,, Olscount Rtcelvtd
two accounts· Vi~
(/ii) outstan~:!rest (Id/) Plant •nd Mochlne,y llad Dtbts Written off
(i) Real Accounts . M p.ccrued (xviii) GoodwlD i., Purthases
Rea! Acco ·
. unts are the accounts which relate to tangible or mtangi "bl e assets ofth
e II~' 1;r11 orawln9' • (icl) 11ac1 Dtbts Ak-..d
(e xc1uding. deb tor s). Examples of tangible assets are: land, bu•·1d·mg, investments
and ·
:--~- caplt•I
(.di) k overdraft
Patenmach1nery, stock or cash in hand. Examples of intangible assets are: ' Ill~ (/dli) Interest (Paid)
ts a nd trademarks. good~
~) p,epa
(/r'i) san Id Rent 1 ! ("111~ Qirriage Inwards
Ii (
.) [ W ~~ ~ ~ ~ e s fn,Credltwh•t·g oesoq t;< Each tran
involved, Jts~

ction involves two or more accounts. After ascertaining the account s

is decided which account is to be debited and which account is to be credited.
" Nominal (R
Accounts L, h euenue or Expense) Accounts . tration 2.
ccountsWw Thc r elate to expenses, losses, gams,
. revenue, etc., are termed as '"
A . ese are S I "- Oil) '
J]los
State the d. d (Per sonal, Real or Nominal) and show which will be debited
na ture of account
Aceount and C . . a ary Account, Purchases Account, Interest Paid Accou •~ . h will be er e 1te :
nd w h ,c
/J is wh . . n Rece1ved
. Profit or lossomm1ss10 . Account. The net result ofall the Nominal.A.nt ' Salei
a Rent received (vi) Interest received
ich is transferred to the Capital Account. ccoun~
(i) Machinery purchased (vii) Building sold
Rule of a.bit and Cred'!_-Oebit all expenses and losses, Credit all Incomes and !lalns. .. , Goods purch ase d
(u) (um,
.. " n·1scount a llowed
I 8
_If Prefix or suffix (Outstanding Prepaid or Accrued) is added to a Nominal Acco».
1t becollles a Per~onal Account. The
' · the a bove: ""(

(ui,
(iv) Capita l introduced
(v) Rent paid

:
(ix) Goods sold
table given below explains
Nomtn•I Account
I. Interest Ne
Personal Account
Out,tandlng Interest Ale. Interest Received in Advance Ale. Pre~d Interest Ale r
Solution:
Accounb Natllre of Accounts Debltld/Credltld
,
I
I 2. RentA/c
3. S.laryAfc
of, Commtss,on Ale

Outstanding Rent Ale. Prepaid Rent Ale

Outstanding Salaries Ale. Prepaid Salaries Ale
- (i) Rent Received Ne
(ii) Machinery Ne
(Iii) Purchases Ale ••

~-1
. '
Nominal
Real
Nominal

Credited
Deblll!d
Deblad
Outstanding Commission Ale. Prepaid Commission Ale (iv) Capital Ale Personal Cieclted
I, I Rules of C1eb/t and ~redlt (Traditional Classlficatlon) at a Glance
(v) Rent Paid Ne
(vi) Interest Received Ne
,,~ fb:nlnar,
Nominal
Debited
Credhed
---- Typ,, ofAccounr
I. ~rsona/ Account
I Account to be Debited
Receiver
.i t Account to be Credited
(vi/) Building Ne
(viii) Discount Allowed Ne
Real
Nominal
Credited
Debited
2. Rea/ Account Giver Ii (Ix) Sales Ale Nominal Credited
What comes In
J. Nom/nal Aceounr What goes out
I
Expense and Loss Illustration 3.
Income and Gain
Illustration 1. From the following transactions, state the nature of accounts and state which account
Classify the following accounts into Personal, Real and Nominal Accounts:
will be debited and which account will be credited: °'
1. Mohan started business with cash
(i) Cash (vii) Drawings (xiii) Capital 5,00,000
2. Purchased goods for cash
(i1) Bank (viii) Discount Received (xiv) Interest (Paid) 1,00,000
3. Sold goods for cash "
(iii) Outstan ding Salaries (ix) Bad Debts Written off (xu) Bank Overdraft 1,50,000
4. Received interest from Ram in cash
(o) ASales
(iv) ccrued In terest (x) Purchases (xu1) Prepaid Rent
5. Sold goods to Ashok 500
(v1) L easehold Property (xi) Bad Debts RecQvered (xui1) Carriage Inwards 60,000
6. Purchased furniture for cash
(xii) Plant and Maohinery (xuii1) Goodwill 50,000
7. Paid wages
20,000
 {)oUble Entry Book Keeping~~
6.6
procedures - Rules of Debit and Credit 6.7
µ,ountin9
Sotuc•on• Acco1111 ts
Transtctlons
. ANALYSIS Of TRANSACTIONS Credit
Accounts Naturt of 0tbit t 5 £xperise th , accounts of expenses_ or losses incurred in carrym!( t he business.
Involved Account (
1. - ,-
· c•e
'fh · Jes
areare.·ePurch ases. Wages. sa lan es, Depreciation. Discount allowed and Rent. etc.
Mohan started business Cash I Real I I 5,00,000
With ' 5,00,000 In mh. Capital £~ai11P Debit
Ruleof ::,:_and
__ Credit- _ _tht
_ _Dtblt _lnaeases
_ _ _and_Credit
_ _tht _dtcnasts.
_ _ _ _ ___,
2. I Nommd, I
Purchased 900ds for cash Purchases I 1,00,000
1,00,000. ebit and Credit (Modern Classification) at a Glance
Cash 1es for D
3.
Sold 900ds for cash ~ 1,50,000. Cash 1,50,000 flU nt AaountstobtDtbittd ~count1robtCrrdittd
\ ~.ea1._. i I I T"""ofAc.-(O(l
,,-- - =-----t- - - ~:;::::;:--- --t--
4.
Received Interest from Ram in
cash~ 500.

Sales
Cash
Interest
tlt'.'d l
Nominal
I 500 r,.sse -
. . Accounts

Increase
t Accou ..nts,:'......--t-- - - ~;;::::::
Decrease °"''~
1
naease
i
5. [iabilttY Deer
Sold 900ds to Ashok fort 60,000. Personal 60,000
Ashok 60,000 rtal Accounts ease I~
Sales Nominal I
6. J. CaP nts Decrease lnatase , I
Purchased fu rniture for cash
t 50,000. Furniture Real 5-0,000
I 50,000 4.
RevenueAc::cou::_:__- - - t - - - - -7==: - - - - - ,
se Accounts Increase
•
Cash Real - Deer-
7,
Paid wages t 20,000. 20,000 s. wen . . .f
Wages Nominal d be noted th at a n m crease m ass~ts 1s avourable to the firm but an increa se
I 20,000
Cash Real It shoul may not be so, even t hough m both t he cases , increase will be recorded
xpenses 1 . . 1· bili' . . f
B. Modern Classification in e.
th bit side. Similar y, mcr ease m ia ties 1s, o course. not favourable but a n
nd on e de1 revenue is fa vourable. Nonetheless, both will be recorded on the credit side.
U er th is classification, all the accounts are classified into the following five categarjl:!:
increas~ ~erms 'debit' and 'credit' should not be taken to mean respectively favourable
Modem Classifiution of Accounts Thus~~
nd :vourable-they merely describe the_ two sides of an account. In _other words,
aboth deb't
i and credit may represent either increase or decrease ckpendmg upon the
Asset Accounts Liability Accounts Revenue Accounts
nawre of an account.
Capital Accounts Expense~
I. Asset Accounts Another " ,a)' to understand the rules of debit and credit is as follows:
: _ _ - - - - - - - -~ R ;;:u:;:le:::s-::o~fD;:;-e:;b:;:it~a:n;d;::
Cred
~ it:-- -
Asset accounts ar e those accounts which relate to the economic resources of an Assets Liabilities + Capital + Profits - losses
en terpri se such as Land a nd Building, Plant and Machinery, Furniture, Patents, (1) Assets
~nventory, Bank a nd Cash , etc. (2) Liabilities
Debit Credit Debit Credit
Rule of Debit and Credit-Debit the increases and Credit the decreases. Increase {+) Decrease (-) Decrease (-) Increase (+)
II 2· Liability Accounts
Lia bility accounts are accounts of lenders, creditors for goods, outstanding expenses, ete,
Debit
(3) Capital
Credit
Decrease (-) Increase(+)
Rule of Debit and Credit-Debit the decreases and Credit the increases. (4) Expense (l oss) (5) Revenue
3. Capital Accounts Debit
Increase (+)
Credit
Decrease (-)
Debit
Decrease (-)
I Credit
Increase (+)
These a r e t he account s of proprietors/partners who have invested a mou nt in the Study the following Illustrations and observe how increase and decrease in various
bu siness. It includes both Capi tal a nd Drawings Account.
accounts are debited and credited.
Rule of Debit and Credit-Debit the decreases and Credit the Increases. Illustration 4.
4. Reven ue Accounts On which side will the increase in following accounts be recorded'? Also, mention the
nature of the account on the basis of Modern Classification of Accounts:
Th ese are accou nts of incomes and gains. Examples are: Sales, Discount received, (i) Buildings Ale (i i) Creditor's Ale (iii) Abhishek (Proprietor)
Inte rest received, commiss ion received. bad debts recovered, etc.
(iv) Purchases Ale (u) Carriage Inwards Ale (u1) Cash Ale
Rule of Debit and Credit-Debit the decreases and Credit the increases. (vii) Rent Received Ale (viii) Interest Payable Ale (ix) Bills Payable Ale
(x) Debtors Ale (n ) Accrued Commission Ale (xii) Bills Receivable Ale
Iii
 6.8
oouble Entry Book Keep/r,g
..._Celt
,. . g procedures- Rules of Debit ond Credit
.unt1n
6.9
S olution: ·on 6. .
(ii i) Credit-Ca pital 11
(t) Debi t- Asset . L"ability
(ir) Credit- 1 strntl fo llowing t ransactions, stn~e the nnture of accoun ts and sta te which
(vi) Debit- Asset t
(iv) Debit- Expense (u) Debit- Expense n1yse
1
the be debited and .wh ich nccount wi ll be credi ted:
will
· b"lity (ix) Credi t-Liability .ceo111 t
. 5 tarte d business wit h cash
(ui.i) Credi t-Revenue (um.
. "") Credit-Lin I
(xii) Debit-Asset j\n\lJosited ens h into ba nk for opening an account 1,00.000
(.,:) Debit- Asset (xi) Debit- Asset
pep 50,000
. drew ens h for personal use
Illus tration 5. of accounts and state h. 5,000
Ana lyse the following tra nsactions,
. \\' icti With
11drew cas h from bank for office use
state the. nature
be credited on t h e b asis
. of ?-.fod
accoun t will be debited and which account WI 11 t eti) Wit eived a cheque from debtor Shyam 10,000
Classifi ca tion of Accounts: 5,00 . RCC 1.ted Shyam's cheque next day . 5,000
1. Dinesh star ted business with cash 1 o •00o 05
. pep'd to a ereditor Mahesh by cheque
2 • Borrowed from Nar esh H ' 200,OOQ pa1 10,000
3 · p urchased furnit ure for cash from RaJ· Furn iture ouse 'OOQ . sa lary to staff
4 paid 20,000
. Purchased furn iture fro m Delhi Safe 4l O,Ooo 8. t by cheque
paid ren 6,000
5. Purch ased goods for cash 5,0oo 9. . . terest on loan
6. Purchased goods from Mahesh 30'000 o. paid in 5,000
7 . Sold goods for cash to Karim 25 ,0oo
S. Sold goods to Shya m on credit 3o,00o Solution: ANALYSIS OF TRANSACTIONS
9
. Cash received from Shya m 20,00Q -
Transactions
I
I Accounts I Narureot . I How
I
Debit Cm11t
IO. Cash paid to Mahesh
Solution:
ANALYSIS OF TRANSACTIONS

lO,OQo
l. AnUi started business Cash
Involved Account
Asset
Affected
Increased
f I f
1,00,000
Transactions with cash t 1.00,000. Capi_tai Capital
How Debit Increased
Accounts NalUreaf
Affected f
Credit I 1,00,000
Involved Accounl f l. Deposited cash in_to bank Bank Asset
-
1. Dinesh started business
with cash f 5,00,000.
Cash
Capital
Asset
Capital
Increased
Increased
5,00,000
5,00,00Q
-- f S0,000 for opening an
account. Cash Asset

Increased S0,000
-
Decreased
2. Borrowed from Naresh Cash Asset Increased 1,00,000 Drawings
I 50,000
f 1,00,000. J~ thdrew cash for Capital Decreased 5,000
Loan from Naresh Liability Increased 1,00,00Q Cash
3 . Purchased furniture for personal use f S,000. Asset
f 20,000 in cash from
Furniture
Cash
Asset
Asset
Increased
Decreased
20,000
20,00()
- 4_Withdrewcash from bank Cash Asset
Decreased
Increased 10,000
I 5.000
- Raj Furniture House. Bank
4 - Purchased furn iture from
for office use f 10,000. Asset Decreased L_ 10,000
Delhi Safe for f 40,000.
Furniture
Delhi Safe
Asset
Liability
Increased
Increased
40,000
40,000
5. Received a cheque from Cash/Cheques in Hand
Shyam
Asset Increased 5,000
debtor Shyam f S,000. Asset
5. Purchased goods for
cash t 15,000.
Purchases Expense Increased 15,000
Decreased
I 5,000
Cash Asset 6. Deposited Shyam's Bank Asset Increased S,000
Decreased 15,000
6. Purchased goods from cheque next day. Cash/Cheques in Hand Asset Decreased
Ma hesh 30.000.
Purchases Expense Increased 30,000 I 5,000
Mahesh Liablllty Increased 7. Paid to a creditor Mahesh Mahesh
7. Sold goods for cash 30,000 Liability Decreased 10,000
Cash Asset Increased 25,000 by cheque f 10,000. Bank Asset Decreased I 10,000
to Karim f 25,000.
8. Sold gOOds to Shyam
Sales Revenue Increased 25,000 - I Paid salary to staff
8. Salary Expense Increased 20,000
Shyam Asset Increased
on credit f 30,000. 30,000 {20,000. Cash Asset Decreased I 20,000
Sales Revenue Increased I
9 Cash received from
Cash Asset Increased
30,000 1-;9. Paid rent bycheque Rent Expense Increased 6,000
Shyam f 20.000. 20,000
Shyam Asset f 6,000. Bank Asset Decreased I 6,000
Decreased 20,000
10. C.,sh paid to Mahesh Mahesh Llablllty
- 5,000
f 10,000. Decreased 10,000 11 Paid interest on loan
10. Interest Expense Increased
Cash Asset Decreased Decreased I 5,000
10,000 ,_ f S,000. Cash Asset
le~
 ()OIID'" !loo
6.10
If"""t;ng p,ocedu~s- Rules of Debit and Credit
6.11
l A ~ ~~MA@li\11'1f'/1:11f·)ri·liili·i••:@iJj/!jj/tiU,!,\iM
t t hnce
bala e e nd
in~ o a period (say tl day. month or a year). .. it maY be necessary to k.n_ count s show debit bulnnces nnd so me credit bnlnnces. Thesu bnlnnccs nrc
debit and a n account. A balance of an account is the difference betwee11 th s,,11,e ar .
credii "d h e Lot 11., 0 5
aecount • . es. If the total of debit side is more than t e total of cred · 8Ol or" 1 1,ce in the Capi.ta/ Account. menns .nmount due to tho owner of the
dit · ban
3·• foll "'
said sthaue a debit balance. [I has a credit. balance when total of tt
It'
• ¼,
1<4,
erect- .,
h
18 I0 J. ere 1
15iness. n other words. the amount invested .111 the business by the ow ner.
is more than the total of debit side. bt . b 1 nee in Bank Loan
· 1·iaAccount, Suppliers
· Account, etc., mea n~ amount
2 ered1t ab a the business, . i.e., b"l•
1 1ty of t he busrness.
The Process of balancing is as follows: . f the account. · l'able Y B kA
· and Credit) 'des. The difference
0 pa bI·t ba Ia nce in Cash Account, an . ccount, Debtor's
. Account, mea ns Cash in
(i) Total t he two sides (i.e .. Debit · ·
1s the baJ. 3
· [)e d. Cash at Ba nk,. and amount. receivable again st sale respectively.
.
• Calcul ate the difference m . totals Of the two s1 tal Now the total of t vv ' .
Hand1t. baIa nee in Discount Received
(u)
1 b . Account, Interest Received Account, etc.,
( ..11)
Enter the difference in the side . WI·th shorter to · O sld. 4. Cre ns mco
. me earned by the usmess.
1 ce in Discount Allowed Account, Salary Account, Rent Account, Interest
will match . d on the credit side by ,,.,,., . 5. niea_
[Jebit ba an t , etc ., means expenses incurred by the business.
paid Accoun
1f credit side is shorter, then the amount is. entere . . 1n
. d forward by writrng . the,
·· <tti,"I
•By Balance clef in the Particulars column. It 1s carne ,...,
-~ briefly say that:
side •ro Balance bid', it being a debit balance. d on the debit side by "'Ii . So, we can_ ba Ia nee is either an asset (cash, bank, etc.) or an expense (salary, rent,
A debit
(a ) d
If d b. · · h nt 1s entere . . ti,.
e 1t side IS shorter, then t e amou . . d forward by wr1tmg on the c 'i 1 nee shows the income earned or liability or the amount invested by
"ro Balance clef in the Particulars column. It is carne tel!it A credit
etc.); a~ baa
(b) he proprietor. .
side 'By Bala nce bid', it being a credit balance. . . mounts:
.
As an illustration, • gwen
following account 1s · with 1magmary a t cing an accoun t is necessary
. .to ascertain the net effect of all transact10ns posted
Dr. Balan
to that accoun
t during a given period.
RANJAN'S ACCOUNT
Date C,
t ation 7.
Particulars
t I Particulars 11 · ·
2021
Date
i' Illus r a 'T'sh ape account of furniture
Prepare
. and enter the fo owmg transactions:
Apnl 5 To Cash A/c 2021
Apnf 20 10,000 I April 7 I By Purchases Ale I
12.
To Returns Outward A/c '10.IXIJ
April 27 To Bank N c 1,500 1. Furniture purchased 50,000 Furniture sold-<:osting
20,000 10,000
April 30 To
Balance d d I 8,500 3_Furniture purchased 15,000 4. Old furniture discarded 5,000
5_Depreciation on furniture 3,000
May 1 I By Balance bid
'IO~
8,~
Solution:
Furniture is an Asset Account, an increase in the amount of furniture is recorded on
Th e accoun t show s t hat the firm has a liability towards Ranjan for~ B,5oo. the debit side, while a decrease on the credit side.
It is to be noted t hat Revenue a nd Expense Accounts are not balanced, they are totalled FURNITURE ACCOUNT
"'· Cr.
Increase (+) { Decrease (-) t
and closed by transferring them to Tradi ng or Profit and Loss Account. Bala nces in Asset,
Lia bil ity a nd Ca pital Accounts are transferred to the Balance Sheet. Cash-Furniture Purchased 50,000 2. Cash-Saleof Furniture 10,000
3. Cash-Furniture Purchased 15,000 4. Furniture Discarded 5,000
In other words, at the end of the year all the Nominal Accounts are closed by transferring 5. Depreciation on Furniture* 3,000
6. Balance
t h eir ba la nces to Tra ding or Profi t and Loss Account. The Personal and Real Accounts I
65,000 65,000
are balanced a nd their balances are can·ied forward to next year.
Bala nci n g of accounts is a lso discussed in the chapter on Ledger. *Depreciation is a permanent and continuous decrease in the book
due to use, effluxion of time, obsolescence, etc.
 6 .12 Double Entry Book K~Pin9~1
e<Jures- Rules of Debit and Credi t
·ngPrOC 6.13
flt<°"nt•
illustration 8. 10.
=·
Open a , s h ape account o f a ere d 1"tor . Mohan. and write the follow in g ...._
••·~ . . 1.,•at1°
• 11
. ng t.rnns nctions in D ebtor's Account, Creditor's Account nnd Cush Account:
J\IU - Il C• fo\\oWl
I \tt'l \
on the proper side:
\\ r 50,000 2. Sold goods l.o X on c r e dit B0 ,000
1. Purchased goods from Mohan on credit 1:,;} 5
Ca.sh s 11le,1vec1 from X 56,000 4. Pttrchnsed goods from Y on cr e dit •14 ,000
2 . Paid to Mohan , •~
~o.!k..
\. c11 sh r ec~
s. ,,,,id to )
3 0,000 6 . Cash p urch a ses from Y \ 6,000
3 . Good s returne d to Mohan a~ 5. tion: CASH ACCOUNT
4 . Again purchased goods from Mohan on credit 1.o•~ 50\ll c,.
'( I Particulars '(
Solution: •~ part• 50,000 5. Y (Creditor)
Mohan's Account (Creditor) is a Liability Account, an increase is recorded on th~ 56,000 6. Purchases
1. (()ebtor) Balance
s ide while a decrease is recorded on the debit side. c~ 3. X 1,06,000
Dr.
MOHAN'S (CREDITOR) ACCOUNT
X'5 (~BTOR) A~OUNT
{ \naease (+l I Parltlculars
2. Cash Paid 1. Purchases
30,000 B0,000 3. Cash Received
3. Goods Returned (Returns Outward) 3,000 4. Purchases
s. Balance
27,000
Balance
B0,000
60,000
Y'5 (CREDITOR) ACCOUNT
Illustration 9 .
particulars '( \ Particulars
44 000
Write up a T shape Account of Gaurav, a deb tor , from the following tra n sactions: s. cash paid 30,000 \ 4. Purchases \
r salance 14,000
44,000 I
,
l. Goods sold to Gaurav so,ooo
2. Cash receive d from Gaurav n1ustration 11. ' .~
30,000 from the following particulars, prepare the account of Devender, the proprietor of a
3. Discount allowed to Gaurav 2,000
4. Goods sold for Cash to Gaurav business:
10,000 (i) Capital introduced . 30,000
5 . C h e qu e received from Gaurav
20,000 (ii) Drawings made by h1m 6 500
6. Sales R eturn by G aur av (iii) Further Capita\ introduced 22,000
5,000 (iv) Profit for the penod 7 ,500
Solution: Balance the s ame and explain what the closing balance indicates.
Gaurav's A ccount (Debtor) is an Asset Account, an incr ease is recorded on the debit
Solution:
Devender's Capital Account is a Capital Account, an increase is recorded on the Credit
sid e, while a decreas e is recorded on the credit s ide.
Dr. side, while a d ecr ease is recorded on the debit side.
GAURAV'S ACCOUNT C,, Dr. DEVENDER'S CAPITAL ACCOUNT Cr.
Rartlculars
J. Sales
Particulars { J Particulars ' Particulars \
80,000 2. cash 30,0001 To Drawings A/c 6,500 By Cash Ale-capital \ 30,000
3. Discount Allowed 2,000 To Balance dd 53,000 By cash Ale-Capital 22,000
5. Bank (Chequ e Received) 20,000
By Profit and Loss A/c I 7,500
s9,soo
6. Sa les Return s,000 1
7. Balance By Balance b/d \ 53,000
23,oool . ...... that the bus\ness owes h,m
80,000 so,0001 Proprietor's Capital Account has a credit balance oH 53,000 which indica,~,
Note:
Note: 4th t ransactio n will not be recorded In Gaurav's Account as goods have b een sold In cash. this amount.
 Double Entry Boole K,
6. 14 ce<Jures- Rules of Debit ond Credit
, .,,pro 6.15
((O"nW••
I- of goods to Rnm for cnsh is debited lo
··;) 511 1c
1" (a) ({ a nt. (b) Caoh N e.
(c) Snles N e. . (cl) Nono or th ose.
Order Th.Inking Skills !HOTS) Question!J ,,· J rnwol of cash from business by tho propriotor · .
. ) \-, ,t 1"' · ts ere(11tcc1 t.o
Q t why Asset Account is debited? (ti' (a ) Drowin gs N e. (b) Ca pital Ne .
. I. To record a purchase of an asse · . d an increase in asset is debite-'
. e m asset an .._ (c) Cnsh N e. . (cl) Profit nnd Loss N e.
Ans. Purchase of an asset means mcreas . be credited. Why?
. . . bif Account, it must k nccount 1s n
Q. 2. To record an mcrease m a Lia ity . d h benefi t for which paYln . (Ji ) Bnn
personal Account. (b) Renl Account.
Ans. Increase in liability means the firm has receive t e ent }
14
(a )
11 (c) Nominnl Acco~nt. (cl) None of these.
to be made, th us, liabili ty is credi ted. . h h . -·"
is incurred m cas , cas IS c.cuiteQ. tin. wings Account 1s a
I Q. 8. When an asset is purchased in cash or an expense t · cash cash b · ")? vi) DrH
( · (a) p ersonal Account. (b) Ren! Account.
Ans. Cash is a n asset. On purchase of an asset aga inst paymen m , as g011 e
I . , cash has decreased. Thus, Cas h Account is credited.
.
(c) Nominal Account. (cl) None of these.
1.e. .
ill account 1s a
Q. 4. A liability is met by issuing a cheque. Whic .h ace ount will you credit and fwhy?
b . h ") Goo dw
An (v ii (a.) Personal Account. (b) Real Account.
s. Ba nk Acco unt will be credited because paymen th as been made .y issue d 'to dc eque· A. ·"'ij (c) Nominal Account. (cl) None of these.
res ul t, ba la nce in bank is reduced. Bank Account being an asset is ere I e ·
I Q 5
· · AJay,
· a dea ler in furni ture, received advance agams · of tables and chairs. In Yo~t
· t s ales
.. . Which of the following accounts has a credit balance?
(v111) . I
(a) Carnage nwar
d (b)
.
Discount Received
opinion how should this adva nce be treated and why?
(c) Carriage Outward (cl) Discount Allowed
An s . Th e advance received should be treated as a liability because Ajay has not yet made the sales.
6 (i.X) Balance of Capital Account is shown as
Q. • Profi t ea rned by the business means an increase in the proprietor's capital. Is it correct? (a) Capital Account. (b) Liability Account.
Ans. Yes, it is correct beca use the net profit earned by the proprietor's business is added to (cl) None of these.
th e capita /. (c) Revenue Account.
dry Creditors Account is a
Q. 7. A debit balance always signifies a ba la nce in the Assets Account. Is it correct? (x) S u n
(a) Revenue Account. (b) Capital Account.
An s . No, it is not correct. A debit bala nce may signify a balance in Assets Account or an expense. (c) Liability Ac~ount. . . . . (cl) None of these.
8
I Q. · A credi t ba la nce a /ways signifies a balance in the Liabilities Account. Is it correct? [Ans.: (1) (a); (u) (b); (m) (b); (tu) (c); (v) (a); (vi) (a); (vii) (b); (viii) (b) ; (ix) (a); (x) (c) .]
-
Ans . No, it is not correct. A credit balance may signify a balance in Liabilities Account or an income.
9
Q. · NA me the s ide on which increase in Capital Account is recorded. (MSE Chandigarh) Objective Type Questions
Ans. Cr e di t s ide.
II Q.
10
· Why a re th e rules of debit a nd credit sam e for lia bility and capital? (Delhi)
!. State whether the following statements are True or False:
(i) It is not necessary that for every credit there should be debit of equal amount
under Double Entry system of Accounting.
Ans. Rules of debit a nd credit for lia bility and capital are same because of Business Entity Concept.
rd (ii) Sales Account is Revenue Account and has a credit balance.
Acco ;ng to th e concept, business is a separate and distinct entity from its owner.
(iii) Salaries Account is an Expense Account and has a debit balance.
Multiple Cho{ce Questions (MCQs) (iv) Capital Account is a Representative Personal Account.
Select the correct alternative: (v) In an Asset Account, increase is shown in the debit side.
(i) Debit mea n s (vi) In a Liabilities Account, increase is shown in the debit side.
(a) (vii) Outstanding Salaries Account has a credit balance and is a Representative Personal
a n in crease in asse t.
(b) an increase in liability. Account.
(c) a n increase in the propr ietor 's equity.
(d) a decrease in asset. (viii) Carriage Inwards and Carriage Outwards have debit balances.
(ii) Credi t m ea n s
(ix) Goodwill Account is an Asset Account.
(a) a n incr ease in asse t. (x) Sundry Debtors Account has a debit balance and is a Liability Account.
(b) a n increase in liability.
(r') a d ecr ease in liability ._ [Ans.: (i) False; (ii) True; (iii) True; (iv) True; (v) True; (vi) False; (vii) True;
(d) a decrease in proprietor's equity. (viii) True; (ix) True; (x) Fa!se.1
 Entry Book Keep;ng--c,._
6 . 16
[)OUble ~~--
proeet1u,~-- - Rules of Debit and Credit
nt1n9 6.17
2 . Fi.I[. . . . ,-cc"" \/hilt is. th e objective .of preparing an Account?
'"-· lh e blanks w ith appropnatt! words- . .
o f equal a mount.
(,) F o r every d e bi t., there is cor responding - Q 9. \ O b1·ective ofprepanngan aeoount
18 tosummansenlJ trnnanctions relnting ton pnrtic ulur
a nd righ t s ide is
L e f t s id e o f a n a ccoun t is calle d • ~s 'fhe . n e account. Balance of nll the neoounts leads to preparntion of Trial
'
{i,) tv·- . d in o - Balance .
hea . the rul e for Expenses A ccount?
(ii i) s ide. Wha l 1S . .
ln crea se in liability is r ecorded on the . Q- 10- 18
ruJe for £.xperu;es Account 1ncreases in expenses are debited and decreases are credited '.
(iv)
A ccord ing to Modern Classification, Sales Account is a A.en-... !P \\fhat
'}1te . the rule for Revenue or Incom e Account?
{u) · d a particular head . ~"lit. JS
- -- - -- - is a record of transactlons un e r Q- ti- -
(v,) u]e for Reve nue or Income Account is 'Increcues in revenue or income is credited
D e bit a nd credit a s pects of a transaction form th e basis of - - i;: ,.
µ,•· Thed dr ecre ases are debited'.
I foit)
System.
p e r Mode rn Classification of accounts, Drawings Account is

111
'1
an
What does debit in an Asset Account signify?
--------
{ CCOunt. Q- 12- . lil
debit . an Asset Account means further assets purchase d by th e firm .
(v iii) µ,s- A credit in an Asset Account signify?
A s P e r Mod e rn Cl assification of accounts , Outs tanding Expe nse A ce \\fhat does
ount it
Q- 13- . in
. an Asset Account means the assets sold or discarded by the firm .
( ix) - - - -- - - - Account. aid in advance is A credit
A s P e r Mode rn Cla ssification of accounts, S a lary P ------- ,V,S·
A ccount. What does d ebit in an Expense Account signify?
Q. 14- Adeb1tm
. . an Expense Account means the amount of expense incurred by the firm under
' (x ) As P e r M o d e rn Classifica tion of accounts, Accrue d Income is _ _ _ _ _ _ _ Aceount
,MJS- h d of account .
(x t) P atent Righ t is a/an _ _ _ _ _ _ _ Asset Account. · that ea
at does credit in an Income Account signify?
(xi,) G ood s sold o n c r e dit is cre dited to - - - - - - - Account.
Wh
Q. 15- A . m
credit . an Income Account means the amount of income earned by the firm under
!Ans.: (,) C redit; (ii) Debit , Credit ; (iit) Credit; (iv ) Revenue; (v) Account; (vt) Doub/e- .MJS· head of account.
(vi i) Capital; (v ii,) Liability; ( ix) Asset ; (x) Asset; (xi) Intangible; (xii) Sa/es_j that . C . 1A . ify?
d r edit balance l i l a ap1ta ccount sign .
6 What oes c .
C},ery Short Answer Type Questions ) ." b a Janee in a Capital Account signifies the amount invested by the propnetor
Q. 1 · A credit
.Ml•·
Q. I. What is a n A ccount? as on date.
An s . An accou t · J · · uJa - •gnified by a debit cash balance?
n is a s ummarised r ecord of transa ctions at one place re atlng to a Partic r head_ 1 7 What ,s s, . .
Q. 2. What are t h e two s ides of a n Account calle d ? Q. · . h balance signifies Cash 1n Hand.
AnS- A debit cas
Ans. Th e two s ides of a n accoun t a re D e bit and Cre dit. · •gnifi,ed by a debit bank balance?
Q. 18- What 1s s, . . .
Q. 3 . Wh e n is Ca pi ta l A ccoun t d e bite d ? - b an k balance signifies balance lylllg deposited lil the bank.
Ans- A debit
Ans. C api ta l A ceount is d e bi ted whe n the proprie tor makes a dra wings or with the amount of loss. · s1·gnified by a credit bank balance?
19 _ What ,s
Q. 4. Wh e n is Ca pita l Account c r e dite d ?
Q. d"t b k balance signifies amount payable to the bank by the firm.
1
An s . aCa pi ta lt oAfcco untt. is c r e dite d wh e n the proprie tor introduces further capital or with the Ans- A ere an SE Chandi arh)
moun profi zo Is Cap,·ta I Account a Personal Account or a Real Account? (M - g
Q. 5 . Wh a t is a n A sset A ccount? • I A cc aunt is a Personal Account because it represents owner of the bus1I1ess.
Q.Ans.· Capita
An s . Asset A cco un t is th e acco unt whic h r e lates to ta ngible or intangibl e asset.
Q . 6 . Wh at is t h e rul e fo r a n Asse t A cco unt?
[ short Answer Type Questions )
1. What is the objective behind preparing an Account? What is meant by recording on debit
An s . Ru l e for a n A sset A cco un t is "Increases in a ssets are d ebits and d ecreases credit'.
Q . 7 . Wh at is Li a b i li ty A ccoun t? and credit sides of any Account? Explain with examples .
An s. Liab il ity Acco un t is a n acco un t whic h s h o ws t h e a moun ts p a y a bl e by th e e nte rprise. 2. Give the rules of debit and credit and explain them with imaginary examples .
Q . 8 . What is t h e rul e for Li a bili ty Account? 3. Write a short note on 'balancing an account'. Explain by balancing a Cash Account.
Ans . Rul e for Liah ili ty A ccount is 'Increases are credits and decreases are d ebits'. 4. What do you understand by 'debit' and 'credit'? Do you think debit always stands for decrease
...
in amount and credit for increase?
 ..,....
Double Entry Book keept - Rules of Debit and Credit
6 .18 edures
-
. proC 6.19
1 9
_,,,,fl t "
~ (I-" uccoun t will b e d ebited or c r e dite d to record
L"" 8 titer un . . o nue . (ii) decrease in expe n se.
\lh
11
115 0 I JI l ov (. h f . '
. . d . the books of Shri Ashok . C lassify thellt . 6- \ (,). ,- cre 1·n gs . IV) t e resh cnp1tu l Introduce d by the own e r . .
Following accounts are being m a m tame in
. . c1r11W (Do//11)
Pers ona l, Real a nd Nominal Accounts:
(i) Land and Building (viii) Salary
(xv) Interest Receiveq (ill) o ered·t· (ii) Credit; (iii) Debit i11 Capital Account; (iv) Credit in. Caplta/Acco1ml.l
1
1· ,
(ii) Excise Du ty (ix) D ebtors
(xvi) Bank Overdraft I foJloWll1g
. .
transactions , stnte tho nnturo of nccou nt nncl s tnte which acco unt will
ll'l the d which account credited: '{
(xvii) Purchase Returns
(iii) Cred itors (x) Bad D ebts
1- be
fr"debitedstarte
an d business with cash
. 1.00,000
(xviii) Drawings
(i v) Capita l (xi) Depreciation
(xix) Freight (1.) j'Ja t1U rchase d furniture for business
(v) Motor Vehicles (xii) Wages ..) J-{e pu ds on credit from Anshul 20,000
(xx) Return Inwards. (II h asod goo
(vi) Goodwill (xiii) Repairs 6 ,000
(iii) pu~; to his creditor, Anshul
2,000
(v ii) Investm e n ts . Rames h ' a debtor .. .) R eal Account-(·)· , ( v, )· (vi); (u· (;v) pai y to his clerk
) pa1·d sa Ia r
(xw) 1 1,000
. __(xw
[Personal Account-(iir) ; (iv); (ix); . )·•....
(xvi);
x.(xvm ,
(xi); (xii); . . . (xv,
(xm); ) · (xvu,
. ") · (xix);
. <:t.t).'
<1) (v ·d rent
500
Nominal Account-(u); (um), ( ),_ E enses and Revenue: I (vi) pa, . d interest
200
2. C lassify t~e following into_Assets, _L ia · bil·t·
. 1 ies, Capital, xp
est R eceived;(v)S_alary;_ ( ut_.)_B an k O Verdi-a~; ( R
ce1ve · h ·d ·
(i)_L and; (u.) Investments; (m) Building; (w) Inter . l· (xi) Depreciation, (xu) Motor Vehicles. vii) e '1" shape accoun t for machinery and put tho following transactions on t e proper '{s1 e.
(vu) Debtors; (viii) Creditors; (ix) B a d D ebts; (x) Capita ' • opens
8-
(xiii) Freight; (xiv) Wages; (xv) Ciood"."ill; (~~i) llepairs. Liabilities-(vi), (~iii); Capital---{~); ,, h1·nery purchase d 40 000
[Assets-(i); (u); (!!!); (v u) , (xu), (xv), i)· (xiii); (xiv); (xvi); R even u e-(iu).j
ro-~ .
Expenses-(v); (ix), (x ' Machinery sold 10,000
(ii)
. . . . . 1 Revenue, and Expe nses: Machine ry purchase d 8,000
3 . C l assify t h e following into Assets, Lia b1ht1es,_ Capita ~- iv) Rent; (v) Dis".ount Received; (iii)
Machinery discarded 14,000
(1) Plant and M ach ine r y; (ii) Bank Loan; (!!!) Sale '.. < Purchases; (ix) Bills Payable• (iv)
Depreciation on machinery 1,000
(v i) Carriage Inwards ; (vii) Carriage Outwa rds; (um)__ . G dwill· (xiv) Furniture and (v)
(x) Wages; (xi) Advance Income; (xii) Accrued Income; (xiu) 00 ' [(i) D ebit side; (ii) Credit side; (iii) Debit side; (iv) Credit side; (v) Credit side;
Fixtures; (xv) Outstanding Expenses; (xvi) Capital. . . . ( .) (xv)· Capital-(x ,. Balance of Machinery Account-f 23,000.]
. .. . .. . . b Tl° -(u) (ix), xi '
[Assets-(,) , (xu), (x!!!), (xw); Lia ' L ,es ' C ) (vi) ' (vii) (viii) (x) I v,,, gOpena 'T ' shape Cash Account . . with the following transactions: f
Revenue- (iii), (v); Expenses- LV ' ' ' ' · · (i) Moha n started busmess w,th cash 40,000
4. On which s ide will t h e increase in the followmg. accounts be re corded? Also, state the nature (ii) Purchased goods 20,000
of the accou n t:
(i) Furniture Ale (iii) Sold goods 24,000
(iii) Sa lary Ale (ii) M ohan (Proprietor) (iv) Paid rent 400
( v) Sales Ale (iv) Purchases Ale (v) Paid sala ries 600
(vii) Sohan (Creditor) (vi) Inter est Paid Ale (vi) Drew for p e r son a l u se 1,000
(v iii) Ram (Debtor) [(i) Debit side; (ii) Credit side; (iii) Debit side; (iv) Credit side;
[(i) Debit (Asset); (ii) Credit (Capital); (iii) Debit (Expenses);
(v) Credit side; (vi) Credit side; Balance of Cash Account-'{ 42,000.]
(iv) Debit (Expen ses); (v) Credit (Reven ues); (vi) Debit (Expenses);
10. Open a 'T' s h a p e account of creditor, 'Rakesh', and write the following transactions on the
5 (vii) Credit (Liability); (viii) Debit (Asset) .]
proper side: '{
. On w hi c h s ide will the decre ase in the following accoun ts be r ecorded? Also, state the n ature
o f th e account: (i) Goods purchase d from Rakesh on credit 50,000
( i) C a s h 5,000
(ii) Bank Overdraft (ii) Goods r eturne d to R a k esh for
(iii) Outs tanding Sa lary paid 20,000
(iv) Outstanding Rent (iii) P a id to Rakesh
(v) Pre paid In s urance
(vi) Mohan, Proprietor of the business (iv) Purchased goods from Rakesh on credit 10,000
f(i) C redit (Asset); (ii) Debit (Liability); (iii) Debit (Liability); [Debit side: (ii) and (iii); Credit side: (i) and (iv);
(iv) Debit (Liability); (v) Credit (Asset); (vi) Debit (Capital).] Balance of Rakesh 's Account-f 35,000.]
iii
 -
7
Double Entry Book Keeping_ c S€
8
I l l. Op,,, , T .,,,,. - ~<of"""" 'BnJ.., rnd write the following
. transactions on the Pl'llPer
, "siri_
'"-
CHAPTER
(i) Said goods to Brij on credit ' lO,~
(ii) Cash received from Bn1 ,
Discount allowed to him t S,~ . in of Transactions-Source Documents
'°"""-•
ord!gpreparation of Vouchers
(U,) Goodrnlorn,d by B,ij .. Bolo= of B,ij', 9,SC,]
(Debit (i); Credit (it) and (ui) , , Account and a Credito,
· of a Cash Account, a Debtor s i ~,
12, Put the following an the proper side
Account: 50,ilrJo
atl -
(i) Said goods to Sanjay on credit 20,00Q LEARNING OBJECTIVES
(ii)Said goods to Mohan for cash . 25,00() uld enable students to understand:
(iii)
(iv)
(v)

Purchased goods from Ram on credit

Cash received from Sanjay
Goads returned by Sanjay

19,00Q
2,00Q
50() IO ,, ~
O "'e

apterwo
cl~~
an1ng
vouchers:
__.-,J
.
I
~- ,
.I
I
(vii) Cash paid to Ram . . (Debtor) Dr. (i), Cr. (iv), (~)·•
I0 rypesurceVouc
of hers or Supporting Vouchers
,. So nting Vouchers
,.
Accou
. of Vouchers

-- "
. . ) C ( , (vii)· SanJay .. • prepara 1100
(Cash Ale Dr. (1i), (w ; r. Vl1, ' Ram (Creditor) Dr. (vu), Cr. (iii).] 0
I T• tions a re r ecorded in the books of account on the basis of evidences which are
13. Fram the following particulars, prepare the proprietors
. , Capital Account: 2,00,00() 'fransac
1st April, 2020-Commenced business with cash 18 00() . Of purehase , invoices for sale, debit and credit notes , etc. These evidences
. being
bills . of recording entry, are known as Source Documents. Rules of debit and credit
31st March, 2021-Net Loss as per Profit and Loss Accou 15,00()
•
the basi~ d to each transaction and a voucher is prepared before recording it in the books
31st March, 2021-Drawings during the period . . [Balance-'{ 1,67, 000.]
Balance the same and explain what the closing balance indicates. areaPP~:l entry, i. e. , Journal or Special Purpose Books in a chronological order. The
14. From the following particulars, prepare the proprietors
. , Capital Account: of ongi recorded in these books of account are transferred to the specific Ledger accounts.
entries
2013
. hapter Source Documents and Vouchers shall be discussed.
April
May
July

1
10
15
Started business with
Withdrew from business for personal use
'
45,000
10,oOO

Inthisc ' .
Further Capital introduced
Nov. 30 Income tax paid 55,000
2014 5,oOO An evidence of a trans~tion ~~:!_n event.
II Mar. 31 Profit for the year S; rce -document is an evidence of transaction or event having taken place. It is of
30,000 prime importance in accounting because accounting is based on factual financial
(MSE Chandigarh) information, i.e., evidence. For example, a cash memo showing cash sales, an invoice
[Credit Balance of Capital Acco1mt-'{ 1,15,000.j
showing sales of goods on credit, bills of purchases showing purchases of goods on
credit, a receipt made out by the receiver for cash received, etc. These documents are
-~
Source Documents and evidence in support of a transaction. They are also sometimes
, ~ Scan QR Code for Additional Practical Problem called supporting documents.
Let 4s now discuss the most common source documents.
1. Cash Memo
Cash Memo is prepared by the seller when goods are sold against cash. It has details
of goods sold, quantity, rate of each item and the total amount received, besides the
Scan QR Code for Key Terms and Chapter Summary date of transaction and other terms and conditions, if any. It is an evidence for thi
purchaser for, goods purchased against cash, and for the seller, it is an evidence o
sales for cash.
 I~ D
oub/efnt
'YBook mil "'111111
2. Jn the following Macliinery Account, determine the missing va lues if l('epfrig
charged @ 10% p.a. ns per Diminishing Bala nce M ethod. On I s t Oct be '"Qr10
' depr~-
the machinery valu ed in the books of th e firm at f J 6,000 on 1st Jul r ' 2o2o n ;. ° CHAPTER16 /J
I~ I I
f 10,000. Y, 20ts •a~
"'aa 8o/q i I
isions an d Reserves
MACHINERY ACCOUNT
o,
Date Particulars I
Particulars
2019
ftOV' --- - - - - - - - - - - - '.
2018 LEARNING OBJECTIVES I • /
By Depreciation Ale
July
I
By Balance C/d would enable students to understand:
• pter
I _(3/,- ,.;s (r• 11 nd concept
1'' ,n9 •
0 Mean ,ves of Prov1s1ons
2019 obJect d Types of Reserves
April
... (5/ ... 0 0
,tance an I~ ,
0 1,r1P eRese r"e v
and Capital Reserve
Revenu b tween Revenue Reserve and Capital Reserve
0 nee e
O o,lfere rve and Speofic Reserve
020
t
2020 General Rese
11By 0 Reserve
I
01... I 0
l
Bank Ale-Sale
April ,/ To Balance bid a secret e between Reserve and Provision
1 By Depreciation Ale ../l11 0 o,fferenc - ~-
11
By Loss on Sale of Machinery Ale ../1~ { business are prepared following the Going Concern Concept, i.e., assuming
..,..., 0 ntso . . . . .
8
(Profit and Loss Ale/ ../llJ.
JI,,. b siness will continue for a foreseeable future and there 1s no mtent10n to
Bv DeorD th
at the uor scale down its . .
operat10ns s1gm 1cant Iy. Hence, to determine t h e net profit
. 'fi /Ir[
Bv Ba 1Ose down ar not only the current contmgenc1es. . . .
but future contmgenc1es should a lso
../1-0 1 c
ireachYe
0
• ..
nsidered. In fact, ProV1s10ns and Reserves are such considerations which actually
I
11.- f 6,000,-2- f 74, 000.- 3: r s o,ooo.· 4: f 80,000,· 5· f 74,ooo,- 6: f 7,400,- 7: f 66,600· 8: ~ ~ ,
be co the future needs for which a part of the current earnings is set aside.
relate to
9: f 74,000,· JO: f 66,600; JJ: f 10,000,· / 2· f 666,· 13: f 2,654; 14: f 5,328; 15· f 47, 9
74
~2.i
•/.llr, i.i.LlilbUm
,'leaning of Provision
Expenses or loss.es or liabilities ac::!..unted_on t~! b°:;}s of e!l_i':!:..ate. '. L1
fliip.,fil Scan QR Code for Key Terms and Chapter Summary
Provision is an amount set aside, by charging it to the Profit and Loss Account or Statement
of Profit and Loss (in case of companies), to provide for a known liability the amount of l
which cannot be determined with accuracy. It is charged in the Profit and Loss Account
on the basis of best estimate. In other words, a provision is a charge against profit for
I 1·
the purpose ofproviding for any Uability or loss. Provision for Depreciation, Provision for
Doubtful Debts, Provision for Repairs and Provision for Tax are few examples of provisions.
Provision differs from liability to the extent that provision is an estimated amount
I .' j1
while liability is determined amount. For example, providing for wages of '{ 50,000
payable for the month of March is a liability.
Thus, Provision is an estimated amount set aside .to meet an uncertain loss or expense
in future.
 Double Entry 8 16.3
- I
I
16.2 ook~ fep/~ d fieserves
9 son
. {{ or retained by way of prouid· " .,o1siol' • tlle Capital Intact ·
"A Provision is the amount written{asosets or retained by way ofProv id ~Ilg dell~ • ,.. ·,itaill
. . • m
renewals or d1m1.n11.t10n. · thevalueo be determine. d wit• 1I substantial L1tgr,o~Q~eci,.,
""it.. f ,,,o' letion in the value of an nsset or any liability ns mny not hnve beo n
,, I
-
liability of which the amount canno -Penguin Dictiona,-.~ccu~Q,,/ ,k11o." I, 55 or d_e P t income or profit would effec tively erode th e capital of a bus iness.
0 111
-., Of C~.r. 7C\ Apf -~cd 0!! : isions is an attempt to maintain the capital of bus in ess intact.
I
Concept of Provision ccounting assumption. It '¾~t~ tc''''
p tiOJl
of pro
. . funda menta I a rnean I RESERVES
Accrunl Assumption is a
losses and expenses. whe er
th
d termined or not, should be accounted 8. al Iiab' .
0
s for the accounting period. Liabi!i
account to determine profit or ~ed in the books of account on best es~es a111
the !n ¼i~\ dConcept
0
which are not determined, are recor se The amount so set aside is know ate<llidll~~~
n as Pr ~I..~
~e,,,1119ve'is." the a~unt set aside out of profits for a specific purpose or to strengthe11
i I be near to actual liability or expen ·
•
Objectives of Prov Is,on
ov18~
10,,
[leser
, ·flaflCI
1/le1
1

..
•al position.
ppropriation of profits or accumulated profits to strengthen the financi a l
. . e to account all expenses and losses
The objectives of provision ar t values. Where the amounts of 1· ba~~ th11 5er"e h business to mee t a 1·10 b'l'
I·s an a
1 1ty as and when it arises. Reserves are not
I. b T . d sets near to correc ia Ilit 8 sh. Fe jtioJ1 oft eeet an existing liability or depreciation in the value of assets but is set
10 1 ,ties an as . d they are estimated and accounted by rn k' Y, e~,. ''II\ ,<JS ·d to J!I .
iI and losses are not determme • ) fi . a 1ng r·t gs1 e t known or unknown contmgency that may arise in future. Examples are
.. rect (or near to correct pro 1t or 1oss 1s ascerta· 5
e·de to mee rve Asset Replacement Reserve, Workmen Compensation Reserve, etc.
As a result of proV1s10n, cor inect, Qa . ,
a nd assets a re shown at correct values. bdttj~ ss1 l Rese •
Genera t O[reserve when invested in outside securities, the reserve is termed as Reserve
/' Features of Provision
. a n a mount se t as,'de out of income or profits. It is a retention 0 f Profit
I. It 1s
,..,eaJl)Ou!l hen specific investment is not made, it is termed as Reserve.
,,. d 13ut w
full · R serve , Workmen Compensation Reserve and Investment Fluctuation
temporarily, for a specific purpose. • llt<de al e . . f fi
oener b ing appropr1at10n o pro it are not shown in the Profit a nd Loss Account
2. The purposes for creating provision a re Feser"\h~wn in Profit and Loss Appropriation Account.
(a) to account anticipated losses; . . but are
(b) to account depletion or diminut10n m
the value of an asset; and ortan
ce of Reserves
. .
.
(c) to account liabilities which may ar1se. f1'1P are important m a busmess to strengthen the financial position of the
Feservese The creation of Reserves enables the enterprise to sail through difficult
3. The a mount of anticipated loss or the depletion in the value of the asset terpflS .
liability is estima ted, at the time of accountmg. · 'or the en . period in future. The purpose of transferring profit to Reserves can be:
onanc1a1 .
ansion of busmess,
4. It is a charge agai nst profits, hence is debited to Profit and Loss Account. (I/ exp f fi . I ..
. rovement o mancrn pos1tion,
Importance of Provision (ii) 1mP . .. . ·
.. demption of hab1ht!es,
(ill) re . .
1. To Determine Correct Profit or Loss . ) eeting unforeseen contmgenc1es, and
(JV JI)
I t is necessa ry to determin e correct profit or loss for the year. Correct profit (v) meeting legal requirements such as Debentures Redemption Reserve under the
ca nnot be determined unl ess expenses for t!ie . or 1oss
year whether pmd or not are account~ Companies Act, 2013 required by the Income-Tax Law.
~;x-penses, when amount is not known, are estimated and proVJd_ed. For example, electrici~
bill 1s received up to February, 2021. Bill for _M arch, 2021 1s yet to be received. The Types of Reserves
electri city expense for March, 2021 will be esti mated and accounted as expense. To have a better understa nding of the nature and purpose of Reserves, let us classify
them into different types. Reserves are generally classified into:
2. To Ascertain True and Fair Financial Position .
1. Revenue Reserves
Balance Sheet will not give a true and fair view of the financial position unless
anticipated losses and expenses are provided. 2. Capital Reserves.
3. Prudence Concept I.Revenue Reserves are set aside out of revenue profits which are available for
distribution as dividend.
Provis ion is mad e foll owing the Prudence Concept of accounting which holds "provid1 Revenue reserve·s can be classified into:
(or all anticipated rxpen.ses and losses but do not provide for anticipated incomes and (1) General Reserve
ga ins." By making a provis ion , a part of the profits a nd corresponding assets are
(ii) Specific Reserve.
n :W in ed, which otherwise co uld have been distributed as profits.
...::.L. -
r . ; 16A Double En11y Boo,,
16.S ,
(,) General Reserve is the amount s et a s ide· out of·d profita not r_' +
purpose . lt ca n b e u .sed for any. purpose
. f ab s ts. cons 1 ered a PPro ""I'
. '4 · • SECRET RESERVE
the e ven t of ~o'.'tinge ncy or e xpans ion o u s m ess. Such reserv:t'ta4, ) '-". h i s n ot d1 t1clol'c d
financrnl pos ition of t h e bu s iness. •trl!t\~~ •c is O r eserve the e xi11t.ence ond/or the a m o un t of whi c . t h nt t h e r e it1 n
(ii) Sp eciric Reserve is t h at reserve which is set a sid e out of profits for , ,, .,t r<'~el" S h eet. It is o.l so coile d Hidden Rese rve . It c on he s n ,d b y t.h c
a nd can be utilised o nly for that purpose_. ~or ~ mple, Workrn a ~ \; . 1o n ce
5'' · f' , !31\ b · t· . d . I c d o r s h o wn o unt
t s ove r l io 1 1t1es nnd thnt the s urplus is not 1sc os ·
Reserve i s a specific reserve beca':s e it 1s mamtained to p en
to workmen . D ebenture s R edemption R e serve , Capital R e d ay
Investme nt Fluctuation Reserve, etc., are other exa mple s of Sp::ttionPer..._ "'\
Colli'"
Corri~~ iJI
s11
tll• O fn sse
,,s • t Suc h r eserves a r e c r eated by s howinr;i: th e n ssc t H n t n
,P1 511ee ·
11 cc
!JI'\/.\ . biJittCS
. nt 8 hi gh e r a mount.
lo w e r nrn
·
rd !JO secret Reserve
I t should be kept in mind that both General R eserve and Specific Re IC ~ ~ & fa .
,eaitl0 11
0
d as appropriation of profits.
2 . Ca_pit~l ~eserves are set aside out of capital profits and are norn:i
se'1Je Ote t
let'\
C
So
fl"\ e o
f the
w ays in which Secret Reserve can come into exis tence are:
11a rgt 11
. d . .
. g excessive e prectatton,
:~ts
•
for d1stnbut1on. In oth e r words, reserve created o ut of capital pr fi ally noi b)' c rvaluing stock-m -trade and goodwill,
l· unde . . ·
r eadily available for distribution is C apital R eserve. Examples 0 _and "'li~va~ 0 bY . g e xcess ive proV1s 1on for bad d ebts a nd oth e r continge n c ies.
•· r eaun .
(i) Profit prior to incorporation , apita1~cliit"' 3 _ b)' c •n g capital e xpenditure to Profit and Loss Account,
I' chargt . 1· bil.
(ii) Profit on sale of fixed assets, 1\,1:g ~ 4· bY 110w111 . g a c ontinge nt 1a 1ty as a real liability a nd
5 . · •
(iii) Premium on issue of s hares or d eb e ntures, 5 _ b)' s vPPr ession of accrue d incomes and prepaid e xpe n ses.
1· (iu) Profit on r e d e mption of debe ntures, 6- bY es of a secret Reserve
(u) Profit on forfeiture of s hares,
11d11' 11~ag ses the workin g capital of t h e concern and also stren gth e n s its financia l
(ui) Capita l R e d e mption R eserve, and It Jllcrea
1·
(uii) Profit o n r evaluatio n of fixed assets and liabilities. 05 ition. .
A ll capital profits s h ould, the r efore, b e r egarded as Capital Res erves. p b\es the directors to tide over unfavourable time. As a nd w h en p rofit reduces.
2- It enda ectors can maintain the rate of dividend by utilising it.
D ifference between Revenue Reserve and Capital Reserve . .
\asses of an exceptional nature can be met without disclosing the fact 1n the
Basis Revenue Reserve Capital Reserve 3. Ilebalvyh e d statements and without disturbing the normal business profit.
pll IS
1. Source It is created out of business or revenue profits. It is created out of capital p rofits. ntages of a Secret Reserve
It can be used for distribution of dividends .
oisad11a . . .
2. U sag e It can be used for distribution of dividends
. d·t · 001Y~lhe,- The Balance Sheet will not disclose true and fair position of the affairs of the bus1I1ess.
without any precondition. satisfies certain con I ions prescribed by the Cornpa'"':"r~
L It maY negatively affect market value of company's s hare .
3. Pu rpose It is created for strengthening the financial
position and meeting the unfore seen
It is created for meeting c~pital losses or to beu5edf0fl'llf:s'ct
specified by the Companies Act.
!·. The shareholders do not get their due share of profit from the business.
--
e between Reser ve and Provision
conti ngencies or some specific purpose. Oiff ere ne
Basis Reserve Provision
Nature of Reserves
It is an appropriation of profit. It is a charge against profit.
R ese rve i s an appropriation of profit a nd thu s , b e longs to the proprietors . 1. Nature
. . ]USt~
i Purpose It is created to strengthen the financial position It is made to meet knovm liability or contingency,
c apital does, it b e ing appropri ation of profit. R e s erves re d u ce d 1s tr1butab\e profit
ca n b e invested in outs ide securiti es. R e serves are s hown o n the li abilit ies side
B a l a nce Shee t .
or: 3. Effect on Profit
and to meet unforeseen liabilities or losses.
It is de bited to the Profit and Loss Appropriation
when amount is not determined.
It is debITed to the Profit and Loss Account.
Account. Hence, profit is not affected. Hence, profit is reduced.
R ese rve Fund 4. Investment It may be invested outside the business. It is not invested.
Tf R eserves a r e invest e d in outs ide securiti es and s u ch securiti es are earmarked fort s. Distribution Unutilised part can be distributed as dividend. It It cannot be used fo r distribution as profit/
reduces divisible profits. dividend. It reduces net profits.
p arti c ul ar purpose d e note d by th e r ese rve, the r eserve is known as R ese rve Fund.! It is made because of accounting princi ples
6. Compulsion/ It is created out of profits as a matter of prudence
b u s in ess will inves t the fund s outs id e onl y if: and due to legal requirements. (Prudence}.
Prudence
(a) rea d y cash i s n ecessa r y on a ce rtain date , or 7. Presentation A reserve is shown on the liabilities side of Balance It is shown either as a liability under the head
Sheet under the head 'Reserves and Surplus'. 'Current Liabilities' Of as qeduction from the asset.
(b) t h e fund s ca nnot b e profitab ly invest e d in the bu s in ess i t self.
,,y\1
"'ll
Doubt, Entry Book
16.6 16.7
dfleservei
,i<" son
1 I' b'\'
Illustration. . l of 11 ny known m I tty cnn bo dolormlnod with nccurocy
Which of the following should be a 'charge' against profit and Whj ' ..,,, 11 otll' 'd d I
• I r- , 111 ihl . )' 81,ould bo prov, , e . (b) n provi~lon Rhould bu mnc o.
t 11
I
0 1
appropriation' of profit? ch ah 1 tf 11 ti1h
\I (Ol rc~crvo
should bu sot ns,do, (cl) Nono of theeo.
\1~'. i\ (a) Provision for Doubtful Debts;
(b) Provisi.on for Depreciation; and
11.lit
,
(()
11
, is II
11
,,is•0 , r. Reserve. (b) Gonornl Rc~crvo ,
1 1 11
(c) General Reserve. (I
.,1 1 r<) SP",c1 c1 Reserve.
(Cl illl ,
(l)
t
Nono of t h oso.
Solution: C11P of lixcd nsscl 1s used lo crontc
(() 1 Sil 1C
(a) Provision for Doubtful Debts is a charge against profit.
..,,fit '' i,1c
l'•·
0
r. Reserve. (b) Gonornl Reserve.
(b) Provision for Depreciation is a charge against profit.
l'i1l SP"~ Reserve. , (cl) Nonij of these, ,,
(c) General Reserve is an appropriation of profit. l (Ol) CoP'wl [Ans.: (1) (a); (ii) (b); (iii) (b); (io) (b); (o) (a); (vi) (cl); (ou) (c) .I
~\
((
i, \1 e Questions
I. . Higher Order Thinking Skills (HOTS) Questions
ol!Je
,ti~e TY P
v1ieth er
the following statements are True or False: '\~
51ate 1 •• n cannot be used for distribution .
\. prov1s10
11 Q. 1. Do you think that a Provision is a charge against profit? (D ·w\ Reserves are created out of capital profits.
Ans . Yes ' a Provision is a charge against profit for the purpose of provid'ing fo
(iD CoPi ral Reserve strengthens the financi al position of the business.
or loss . r ann . ' Gene . . , D b fuJ D ,
\' (i1 1,
i
Q. 2. If the a mount of a known Liability can be ascertained with accuracy, it
as a Liability or a Provision , Comment .
Ans. It should be treated as a liability and not a Provision .
shou]d bet
'ah~
te;~
(1V

. excessive provision ,or ou t

. l MaJuilg
1nves
. R
ebts builds up the secret reserve in the busmess.
.
tment Fluctuation eserve ts an example of general reserve. I
Q. 3. A provision ca n be specific or general. Do you agree?
Ans. A Provision can be specific, e.g., provision against a particular debtor or

(v)
') secre
t Reserves are disclosed in the Balance Sheet.
. . -the blanks with appropriate .words:
II\
expressed as a percentage of total debtors. gen,,al 111
Q. 4. Reserve is not a liability in the real sense. Do you agree with this stat ''-t, Z• fill-, provi'sion is a _ _ _ _ _ agamst the profits.
Ans. Yes, Reserve is not a liability in the real sense. It represents accumulate:lll~nt? (i, rve means ______ profits.
•') Rese
whid1 .belongs to the shareholde~s or partners just like capital and has not b dtvtsible~ (11 ·sion is shown on the debit side of _ _ _ _ _ .
as dJV1dend as yet; that is why 1t 1s shown on th e habihties side of the Been disl.tih~ (11"f''' provierve such as Workmen Compensation Reserve is a _ _ _ __
Q. 5. Capital Reserves are freely distributed as prpfits. Comment. alal\ce Sh~ 1 Res
(v)
Reserves are shown on th e _ _ _ _ _ side of Balance Sheet.
Ans. No. Capital Reserves are not freely distributed as profits. (v) [Ans,: (i) Charge; (ii) Accumulated or Undistributed; (iii) Profit and Loss Account;
Q. 6. Capital Reserve may or may not involve any receipts of cash. Do you (iv) Specific Reserue; (o) Liabilities.] I
Ans. Yes. Capital Reserve may or may not involve any receipts of cash. agree?
11
( Multiple Choice Questions (MCQs) )
Select the correct alternative:
1, What is meant by Provision?
I 11
!ns, Provision is an anwunt set aside by charging it in the Profit and Loss Account to provide
(i) Reserves a ri sing from capital receipts are known as for a known h ab1ltty the amount of which cannot be determined with accuracy.
(a) Capito l Reserve. (b) Reserve Fund .
. . (c) Any of (a) a nd (b). (d) None of these . Q, 2. Give two .examples of Provi~ions.
Ans. (i) Provision for Deprec1at1on (ii) Provision for Repairs.
( 11) Provisions are
(a) extema I trn nsactions. (b) internal transactions. Q, 3. What is meant by Reserves?
(c) Ca n be (a) or (b). (d) None of these. Ans. Reserve is an a mount set aside out of profits. It is an appropriation of Profits.
(ii.i) A Provision is Q. 4. What are major types of Reserves?
(a) ,111 a ppropriation of profits. (/J) n ch arge against profit, Ans. (i) Revenue Reserve (ii) Capital Reserve.
(c) Can be (a) or (b). (d) None of these, Q. 5. What is meant by General Reserve?
(iv) If the a mount of a ny known liability cannot be determined with accuracy Ans, General Reserve is the amount set aside out of profits for no specific purpose.
(a) a liability should be provided. (b) a provision should be made. Q. 6. What is meant by Capital Reserve?
(c) a reserve should be set aside. (d) None of these.
Ans. Capital Reserve means reserve created out of Capital Profits.
 n7/
16.8 Double fnrry 60ok Ire
'1>1"'1
' ' Q . 7. Give two c xomp1es of Ca pitol Reserv~.
Ans. (i) Profit earne d prior to incorporation .
(ir) Premium on issu e of s hares or debe ntures (Securities Prc ,niurn @[JJ@(;)ll@ID
. ~,:it,f:};..~.~ :t~•-•.' ... ;
Q .8. What is m eant by Re ve nue Reserve'? ).
I t·: Ans.
Re ve nue Reserves o r e the r eserves be in ~ th e a m o unt set ns idc 0
. d . .b . fd Ut of
for Bills of Exchange
Q.9 .
Name the r eserve that con be u se d 1n 1s tr1 uuon o ivid e nd.
Ans. Re ve nue Reserve.
r cve:))
~"
~ ,,01111 ting
Q . 10. Wha t is mea nt by Specific Reserve"/ _ I/~
Ans. Specific Reserve is the reserve creat e d for a sp ecific purpose and '\ LEARNING OBJECTIVES
for that purpose. can bQ "11·,, 1.
would enable students to understand:
Q. 11. What is mea nt by Reserve Fund? '""1
Ans. The te rm ·Reserve Fund' m e ans r ese rve th e amount of which ha s b ecn 1. " ·s c/l opter,d f eatures of a Bi ll or Exc hange
th e bus iness. l1Vcst f~ 1 e•nln9 •• Bill of Exchange
Q. 12. Give one example e a ch of 'provision' a nd ·reserve '. "<1 0\it,;, 0 r/o ti•' to a f Bill of Exchange
0 par antages °F atures of a Promissory Not e
Ans. Provision : Provi s ion for Tax '""\ Ad" and e
() N'eanlf19 promi ssory Note
Re se rve : Ge ne ral Reserve.
O ties to a een Bill o f Exchange and Promissory Note
Q. 13 . Diffe re ntiate between Revenue Reserve a n d Capital Reserve on th 0 par nee bet'-"
e basis of p1ffere Terms
CJ portant 2. Drawee 3. Payee
'• I" . s erve is created out of business profits whe reas Ca •t
Ans. Reve nue Re
out of capital profits.
SO\tr~.
eserve i8 (O,IJ,,
0 irn prawer
1.
B
of a , 11
4, -rerrl'l of Maturity
5. Due Date
8. Bill at Sight or on Demand
6. Days of Grace
9. Discounting of a BIii
Q . 14 . Give one diffe rence betwee n provision and r eserve. ¾~ 7- pat e rse rnent of Bill 11 . 81II Sent for Collecti on 12. Dishonour of a Bill
of Cho~d·
An s. Provision is a ch arge on profit wher eas Reserve is an a ppropriat·ion(MSE; 10 . fnd_
o of a Bill 14. Notary Public 15. Noting Charges
r -::-::-- - - - - - - - - - - - ~ Ptofit. 'eo,;I Noting
13. Retiremen t of a Bill 17, Renewal of a Bill 18. Accommodation Bill
~ ort Answer Type Questions ) 16- egotiation
19- N . Treatment of Trade Bills in the Journal of Drawer, Drawee and Endorsee
1. Explain t h e te rm s 'Re serve' and 'Provi s ion' w ith exa mples. ,ount1n9
(Mse Chond;.
1,0 A' can b e sold for cash or on cr e dit. In cash transaction , a seller gets the pay m e nt
2 . De fin e th e Provision. What is th e importance of creating a Provision?
'''II
3 . Explain th e types of Res erves. (D,1;i Go0d 5 . But, whe n goods a r e sold on credit, the buyer promises to make payment
4. Expl a in th e Ca pita l Reserve and give a ny two e xamples. d1ate 1y. . .
ifllrne eed credit period. The buyer may m a k e writte n promise. In that case 1t
5. Dis tingui s h be tween ' Revenue Re s erve' a nd 'Cap ita l Reserv e'. (ll,1;;) . .
8f1er e e ither Bill of Exchange or a Promissory Note. Both of these m strume n ts are
6. Di s tin g uis h between 'Re ve nue Rese rv e' a nd 'Capital Reserve' on the basi 8 0 f· (D,1¼1
(i) So urce of cr e ation . (ii) Purpose. fll•Y b m e nts unde r the Negotiable Instrume nt Act, 188 1.
· instru
(iii) Us age. 1,ga1
7. Is Reserve a charge again s t profit or an a ppropriat ion of profit? Disc uss. (D,1~1
8. Di s tinguis h be tween Rese rve a nd Provision on the basi s of:
(i) Appropri a tion or ch arge . (ii) Fin a ncia l Pos itio n .
( iii) Di s tribution . r,1eanin9
9 - Dis tingui s h b e twe e n Reserve and Provi s ion o n th e basis of: (/(\,~ Bill of Exchange is an acceptance to pay the stated amount to another party on
_(i) 13nsic Nature . (ii) Effect on tuxu ble Profits. demand or on the due date.
(ut) U se for paym e nt of Dividend .
10. Di~fe r e nt iate b e tw ee n Provis ion and Reserve o n t he bueis of t he following · (D,11,1 "A Bill of Exchange is an instrument in writing containing an unconditional order
_(, ) Na ture. (ii) Purpose; u nd . · signed by the maker, directing a certain person to pay a certain sum of money only to,
(ut) U se for th e pa y m e nt of dividend . or to the order of, a certain p erson or to the bearer of the instrument."
(f% -Section 5 of the Negotiable Instruments Act, 1881
It means that the Bill of Exchange is drawn by a person directing another person to pay the
• Scan QR Cod e for Key Terms and Chapter Summary specified sum of m on ey to the bearer of the instrume nt or to a specified pe rson on his/her
order. The person so directed or ordered must accept it so that it b ecom es a bill of exchange.