FA1 Handout

160 Accountancy
Bank Reconciliation Statement 5
I n chapter 4, you have learnt that

the business organisations keep a record of their
cash and bank transactions in a cash book. The
cash book also serves the purpose of both the cash
account and the bank account and shows the
balance of both at the end of the period.
Once the cash book has been balanced, it is
usual to check its details with the records of the
firm’s bank transactions as recorded by the bank.
To enable this check, the cashier needs to ensure
that the cash book is completely up to date and a
recent bank statement (or a bank passbook) has
been obtained from the bank. A bank statement
or a bank passbook is a copy of a bank account as
LEARNING OBJECTIVES shown by the bank records. This enable the bank
After studying this customers to check their funds in the bank
chapter, you will be able regularly and update their own records of
to : transactions that have occurred. An illustrative
• state the meaning and bank passbook of a current account is shown in
need for the preparation figure 5.1.
of bank reconciliation
statement; The amount of balance shown in the passbook
• identify causes of or the bank statement must tally with the balance
difference between as shown in the cash book. But in practice, these
bank balance as per are usually found to be different. Hence, we have
cash book and pass to ascertain the causes for such difference. It will
book;
be observed that a bank statement/passbook
• prepare the bank
reconciliation statement;
shows all deposits in the credit column and
• ascertain the correct withdrawals in the debit column. Thus, if deposits
bank balance as per exceed withdrawals it shows a credit balance and
cash book; if withdrawals exceed deposits it will show a debit
balance (overdraft).
Rationalised 2023-24
5.1 Need for Reconciliation

It is generally experienced that when a comparison is made between the bank
balance as shown in the firm’s cash book, the two balances do not tally.
Hence, we have to first ascertain the causes of difference thereof and then
reflect them in a statement called Bank Reconciliation Statement to reconcile
(tally) the two balances.
In order to prepare a bank reconciliation statement we need to have a
bank balance as per the cash book and a bank statement as on a particular
day along with details of both the books. If the two balances differ, the entries
in both the books are compared and the items on account of which the
difference has arisen are ascertained with the respective amounts involved so
that the bank reconciliation statement may be prepared. Its format shown in
figure 5.5.
Particulars Amount
`
Balance as per cash book .......
Add: Cheques issued but not presented .......
Interest credited by the bank .......
.......
Less: Cheques deposited but not credited by the bank .......
Bank charges not recorded in the cash book .......
Balance as per the passbook xxxx
Fig. 5.2 : Proforma of bank reconciliation statement
It can also be prepared with two amount columns one showing additions (+
column) and another showing deductions (-column). For convenience, we usually
adopt this treatment.
Particulars Amount Amount

` `
(+) (–)
Balance as per cash book ......
Cheques issued but not presented ` ......
Interest credited by the bank ......
Cheque deposited but not credited by the bank ......
Bank charges not recorded in the cash book ......
Balance as per the passbook. xxxx
Fig. 5.3 : Proforma of bank reconcitiation statement (table form)
162
DHERENDRA NATIONAL BANK MULTI-MODULE PACKAGE DATE : 30/09/2016
CONNAUGHT PLACE STATEMENT OF ACCOUNT OP.ID : GK
FROM 01/08/2016 TO 30/09/2016 PAGE NO. : 1
ACCOUNT NO. 03355
NAME : DEV PANDIT
KHADWAI, RUNAKUTA, DELHI-34
DATE PARTICULARS CHEQUE DEBIT CREDIT BALANCE + REMARKS

No. ` P. ` P. ` P.
Opening 50,782.30 +
Balance :
04/08/2016 DELHI PLA 356376 35,000.00 15,782.30 +
07/08/2016 TO SELF 356377 10,000.00 5,782.30 +
13/08/2016 BY CLG 10,673,00 16,455,30 +
13/08/2016 BY CLG 9,143.00 25,598.30 +
17/08/2016 TO SELF 356378 20,000.00 5,598.30 +
21/08/2016 BY CLG 25,808.00 31,406.30 +
26/08/2016 BY CLG 32,949.00 64,355,30 +
02/09/2016 To SELF 356381 30,000.00 34,355.30 +
04/09/2016 DELHI PLASTIC 356382 10,000.00 24,355.30 +
08/09/2016 ICICI 657755 6,074.00 18,281.30 +
09/09/2016 BY CLG 3,146.00 21,427.30 +
13/09/2016 TO SELF 356380 9,500,00 11,927.30 +
15/09/2016 BY CLG 5,320.00 17,247.30 +
15/09/2016 BY CLG 18,564.00 35,811.30 +
16/09/2016 TO SERVICE CHARGES 120.00 35,691.30 +
21/09/2016 TO SELF 356383 20,000.00 15,691.30 +
25/09/2016 TO SELF 356385 10,000.00 5,691.30 +
27/09/2016 BY CLG 16,198.00 21,889.30 +
FOR DHERENDRA NATIONAL BANK

ACCOUNTANT/MANAGER
Accountancy
Fig. 5.1 : Specimen of bank statement (current account)
Reconciliation of the cash book and the bank passbook balances amounts
to an explanation of differences between them. The differences between the
cash book and the bank passbook is caused by:
• timing differences on recording of the transactions.
• errors made by the business or by the bank.
5.1.1 Timing Differences

When a business compares the balance of its cash book with the balance
shown by the bank passbook, there is often a difference, which is caused
by the time gap in recording the transactions relating either to payments
or receipts. The factors affecting time gap includes :
5.1.1(a) Cheques issued by the bank but not yet presented for payment
When cheques are issued by the firm to suppliers or creditors of the firm,
these are immediately entered on the credit side of the cash book. However,
the receiving party may not present the cheque to the bank for payment
immediately. The bank will debit the firm’s account only when these cheques
are actually paid by the bank. Hence, there is a time lag between the issue of
a cheque and its presentation to the bank which may cause the difference
between the two balances.
5.1.1(b) Cheques paid into the bank but not yet collected
When firm receives cheques from its customers (debtors), they are
immediately recorded in the debit side of the cash book. This increases
the bank balance as per the cash book. However, the bank credits the
customer account only when the amount of cheques are actually realised.
The clearing of cheques generally takes few days especially in case of
outstation cheques or when the cheques are paid-in at a bank branch
other than the one at which the account of the firm is maintained. This
leads to a cause of difference between the bank balance shown by the
cash book and the balance shown by the bank passbook.
5.1.1(c) Direct debits made by the bank on behalf of the customer

Sometimes, the bank deducts amount for various services from the account
without the firm’s knowledge. The firm comes to know about it only when
the bank statement arrives. Examples of such deductions include: cheque
collection charges, incidental charges, interest on overdraft, unpaid cheques
deducted by the bank – i.e., stopped or bounced, etc. As a result, the balance
as per passbook will be less than the balance as per cash book.
164 Accountancy
5.1.1(d) Amounts directly deposited in the bank account

There are instances when debtors (customers) directly deposits money into firm’s
bank account. But, the firm does not receive the intimation from any source till
it receives the bank statement. In this case, the bank records the receipts in the
firm’s account at the bank but the same is not recorded in the firm’s cash book.
As a result, the balance shown in the bank passbook will be more than the
balance shown in the firm’s cash book.
5.1.1(e) Interest and dividends collected by the bank

When the bank collects interest and dividend on behalf of the customer, then these
are immediately credited to the customers account. But the firm will know about
these transactions and record the same in the cash book only when it receives a
bank statement. Till then the balances as per the cash book and passbook will
differ.
5.1.1(f) Direct payments made by the bank on behalf of the customers

Sometimes the customers give standing instructions to the bank to make some
payment regularly on stated days to the third parties. For example, telephone
bills, insurance premium, rent, taxes, etc. are directly paid by the bank on behalf
of the customer and debited to the account. As a result, the balance as per the
bank passbook would be less than the one shown in the cash book.
5.1.1(g) Cheques deposited/bills discounted dishonoured

If a cheque deposited by the firm is dishonoured or a bill of exchange drawn by
the business firm is discounted with the bank is dishonoured on the date of
maturity, the same is debited to customer’s account by the bank. As this
information is not available to the firm immediately, there will be no entry in
the firm’s cash book regarding the above items. This will be known to the firm
when it receives a statement from the bank. As a result, the balance as per
the passbook would be less than the cash book balance.
5.1.2 Differences Caused by Errors

Sometimes the difference between the two balances may be accounted for by
an error on the part of the bank or an error in the cash book of the business.
This causes difference between the bank balance shown by the cash book
and the balance shown by the bank statement.
5.1.2(a) Errors committed in recording transaction by the firm

Omission or wrong recording of transactions relating to cheques issued, cheques
deposited and wrong totalling, etc., committed by the firm while recording entries
in the cash book cause difference between cash book and passbook balance.
5.1.2(b) Errors committed in recording transactions by the bank

Omission or wrong recording of transactions relating to cheques deposited
and wrong totalling, etc., committed by the bank while posting entries in the
passbook also cause differences between passbook and cash book balance.
Test Your Understanding - I

I. Read the following transactions and identify the cause of difference on the basis of
time gap or errors made by business firm/bank. Put a sign (ü ) for the correct
cause.
S.No. Transactions Time Gap Errors

made by
business/
bank
1. Cheques issued to customers but not
presented for payment.
2. Cheque amounting to ` 5,000 issued
to M/s. XYZ but recorded as ` 500
in the cash book.
3. Interest credited by the bank but yet
not recorded in the cash book.
4. Cheque deposited into the bank but
not yet collected by the bank.
5. Bank charges debited to firm’s current
account by the bank.
II. Fill in the blanks :

(i) Passbook is a copy of.............as it appears in the ledger of the bank.
(ii) When money is with drawn from the bank, the bank ............. the account of
the customer.
(iii) Normally, the cash book shows a debit balance, passbook shows
.............balance.
(iv) Favourable balance as per the cash book means .............balance in the bank
column of the cash book.
166 Accountancy
(v) If the cash book balance is taken as starting point the items which make the
cash book balance smaller than the passbook must be .............for the purpose
of reconciliation.
(vi) If the passbook shows a favourable balance and if it is taken as the starting
point for the purpose of bank reconciliation statement then cheques issued
but not presented for payment should be .............to find out cash balance.
(vii) When the cheques are not presented for payment, favourable balance as per
the cash book is .............than that of the passbook.
(viii) When a banker collects the bills and credits the account passbook overdraft
shows .............balance.
(ix) If the overdraft as per the passbook is taken as the starting point, the cheques
issued but not presented are to be .............in the bank reconciliation
statement.
(x) When the passbook balance is taken as the starting point items which makes
the passbook balance .............than the balance in the cash book must be
deducted for the purpose of reconciliation.
5.2 Preparation of Bank Reconciliation Statement

After identifying the causes of difference, the reconciliation may be done in
the following two ways:
(a) Preparation of bank reconciliation statement without adjusting cash book
balance.
(b) Preparation of bank reconciliation statement after adjusting cash book
balance.
It may be noted that in practice, the bank reconciliation statement is
prepared after adjusting the cash book balance, about which you will study
later in the chapter.
5.2.1 Preparation of Bank Reconciliation Statement without adjusting Cash

Book Balance
To prepare bank reconciliation statement, under this approach, the balance
as per cash book or as per passbook is the starting item. The debit balance as
per the cash book means the balance of deposits held at the bank. Such a
balance will be a credit balance as per the passbook. Such a balance exists
when the deposits made by the firm are more than its withdrawals. It indicates
the favourable balance as per cash book or favourable balance as per the
passbook. On the other hand, the credit balance as per the cash book indicates
bank overdraft. In other words, the excess amount withdrawn over the amount
deposited in the bank. It is also known as unfavourable balance as per cash
book or unfavourable balance as per passbook.
We may have four different situations while preparing the bank reconciliation
statement. These are :
1. When debit balance (favourable balance) as per cash book is given and
the balance as per passbook is to be ascertained.
2. When credit balance (favourable balance) as per passbook is given and
the balance as per cash book is to be ascertained.
3. When credit balance as per cash book (unfavourable balance/overdraft
balance) is given and the balance as per passbook is to ascertained.
4. When debit balance as per passbook (unfavourable balance/overdraft
balance) is given and the cash book balance as per is to ascertained.
5.2.1(a) Dealing with favourable balances

The following steps may be initiated to prepare the bank reconciliation
statement:
(i) The date on which the statement is prepared is written at the top, as
part of the heading.
(ii) The first item in the statement is generally the balance as shown by the
cash book. Alternatively, the starting point can also be the balance as
per passbook.
(iii) The cheques deposited but not yet collected are deducted.
(iv) All the cheques issued but not yet presented for payment, amounts
directly deposited in the bank account are added.
(v) All the items of charges such as interest on overdraft, payment by bank
on standing instructions and debited by the bank in the passbook but
not entered in cash book, bills and cheques dishonoured etc. are
deducted.
(vi) All the credits given by the bank such as interest on dividends collected,
etc. and direct deposits in the bank are added.
(vii) Adjustment for errors are made according to the principles of rectification
of errors. (The rectification of errors has been discussed in detail in
chapter 6.)
(viii) Now the net balance shown by the statement should be same as shown
by the passbook.
It may be noted that treatment of all items shall be the reverse of the above
if we adjust passbook balance as the starting point. (see illustration 3)
The following solved illustrations will help you understand dealing with
favourable balance as per cash book and passbook.
168 Accountancy
Illustration 1
From the following particulars of Mr. Vinod, prepare bank reconciliation statement as on
March 31, 2017.
1. Bank balance as per cash book ` 50,000.
2. Cheques issued but not presented for payment ` 6,000.
3. The bank had directly collected dividend of ` 8,000 and credited to bank account
but was not entered in the cash book.
4. Bank charges of ` 400 were not entered in the cash book.
5. A cheques for ` 6,000 was deposited but not collected by the bank.
Solution
Bank Reconciliation Statement of Mr. Vinod as on March 31, 2017
Particulars + –
` `
1. Balance as per cash book 50,000

2. Cheques issued but not presented for payment 6,000
3. Dividends collected by the bank 8,000
4. Cheque deposited but not credited by the bank 6,000
5. Bank charges debited by the bank 400
6. Balance as per passbook. 57,600
64,000 64,000
Illustration 2
From the following particulars of Anil & Co. prepare a bank reconciliation statement as
on August 31, 2017.
1. Balance as per the cash book ` 54,000.
2. ` 100 bank incidental charges debited to Anil & Co. account, which is not recorded
in cash book.
3. Cheques for ` 5,400 is deposited in the bank but not yet collected by the bank.
4. A cheque for ` 20,000 is issued by Anil & Co. not presented for payment.
Solution
Bank Reconciliation Statement of Anil & Co. as on August 31, 2017
Particulars (+) (–)
Amount Amount
` `
1. Balance as per cash book 54,000 -
2. Cheqeus issued but not presented for payment 20,000 -
3. Cheques deposited but not credited by the bank - 5,400
4. Bank incidental charges debited by the bank - 100
5. Balance as per passbook - 68,500
74,000 74,000
Illustration 3
The bank passbook of M/s. Boss & Co. showed a balance of ` 45,000 on May 31, 2017.
1. Cheques issued before May 31, 2017, amounting to ` 25,940 had not been presented
for encashment.
2. Two cheques of ` 3,900 and ` 2,350 were deposited into the bank on May 31 but the
bank gave credit for the same in June, 2017.
3. There was also a debit in the passbook of ` 2,500 in respect of a cheque dishonoured
on 31.5.2017. Prepare a bank reconciliation statement as on
May 31, 2017.
Solution
Bank Reconciliation Statement of Bose & Co as on May 31, 2017
Amount Amount
` `
1. Balance as per passbook 45,000
2. Cheques deposited but not collected by the bank 6,250
(` 3,900+ ` 2,350)
3. Cheque dishonoured recorded only in passbook 2,500
4. Cheques issued but not presented for payment 25,940
5. Balance as per cash book 27,810
53,750 53,750
5.2.1(b) Dealing with overdrafts

So far we have dealt with bank reconciliation statement where bank balances
has been positive – i.e., there has been money in the bank account. However,
businesses sometimes have overdrafts at the bank. Overdrafts are where the
bank account becomes negative and the businesses in effect have borrowed
from the bank. This is shown in the cash book as a credit balance. In the
bank statement, where the balance is followed by Dr. (or sometimes OD) means
that there is an overdraft and called debit balance as per passbook.
An overdraft is treated as negative figure on a bank reconciliation statement.
The following solved illustration will help you understand the preparation of
bank reconciliation statement when there is an overdraft.
Illustration 4
On March 31, 2017, Rakesh had on overdraft of ` 8,000 as shown by his cash book.
Cheques amounting to ` 2,000 had been paid in by him but were not collected by the bank.
He issued cheques of ` 800 which were not presented to the bank for payment. There was
a debit in his passbook of ` 60 for interest and ` 100 for bank charges. Prepare bank
reconciliation statement.
170 Accountancy
Solution
Bank Reconciliation Statement of Rakesh as on April 01, 2017

Amount Amount
` `
1. Overdraft as per cash book 8,000
2. Cheques deposited but not yet collectedcharged by the bank 2,000
3. Bank charges 60
4. Cheques issued but not presented for payment 800 100
5. Balance as per bank passbook (overdraft) 9,360
10,160 10,160
Illustration 5
On March 31, 2017 the bank column of the cash book of Agrawal Traders showed a credit
balance of ` 1,18,100 (Overdraft). On examining of the cash book and the bank statement,
it was found that :
1. Cheques received and recorded in the cash book but not sent to the bank of collection
` 12,400.
2. Payment received from a customer directly by the bank ` 27,300 but no entry was
made in the cash book.
3. Cheques issued for ` 1,75,200 not presented for payment.
Interest of ` 8,800 charged by the bank was not entered in the cash book. Prepare
bank reconciliation statement.
Solution
Bank Reconciliation Statement of Agarwal Traders as on March 31, 2017
Amount Amount
` `
1. Overdraft as per cash book 1,18,100
2. Cheques received and recorded in the cash book but not 12,400
sent to the bank for collection
3. Interest on bank overdraft debited by the bank but not 8,800
entered in the cash book
4. Payment received from the customer directly 27,300
5. Credited in the bank a/c but not entered in the cash book 1,75,200
6. Cheques issued but not presented for payment
7. Balance as per the passbook (favourable balance) 63,200
2,02,500 2,02,500
Illustration 6
From the following particulars of Asha & Co. prepare a bank reconciliation statement on
December 31, 2017.
`
Overdraft as per passbook 20,000
Interest on overdraft 2,000
Insurance Premium paid by the bank 200
Cheque issued but not presented for payment 6,500
Cheque deposited but not yet cleared 6,000
Wrongly debited by the bank 500
Solution
Bank Reconciliation Statement of Asha & Co as on December 31, 2017
Amount Amount
` `
1. Overdraft as per passbook 20,000
2. Interest on overdraft 2,000
3. Insurance premium paid by the bank 200
4. Cheque issued but not presented for payment 6,500
5. Cheques deposited but not yet cleared 6,000
6. Wrongly debited by the bank 500
7. Balance as per the cash book (overdraft) 17,800
26,500 26,500
Illustration 7
From the following particulars, prepare a bank reconciliation statement as on
March 31, 2017.
(a) Debit balance as per cash book is ` 10,000.
(b) A cheque for ` 1,000 deposited but not recorded in the cash book.
(c) A cash deposit of ` 200 was recorded in the cash book as if there is not bank,
column therein.
(d) A cheque issued for ` 250 was recorded as ` 205 in the cash column.
(e) The debit balance of ` 1,500 as on the previous day was brought forward as a credit
balance.
(f) The payment side of the cash book was under cast by ` 100.
(g) A cash discount allowed of ` 112 was recorded as ` 121 in the bank column.
(h) A cheque of ` 500 received from a debtor was recorded in the cash book but not
deposited in the bank for collection.
(i) One outgoing cheque of ` 300 was recorded twice in the cash book.
172 Accountancy
Solution
Bank Reconciliation statement as on September 30, 2017
Amount Amount
` `
1. Debit balance as per cash book 10,000
2. Error in carrying forward 3,000
3. Cheque recorded twice in cash book 300
4. Cheque deposit not record in bank column 200
5. Cheque deposit but not recorded 1,000
6, Under casting of payment side 100
7. Cheque issued but not entered 250
8. A cash discount wrongly recorded in bank column 121
9. Cheque recorded but not deposited 500
10. Credit balance as per passbook 13,529
14,500 14,500
Illustration 8
From the following particulars, prepare the bank reconciliation statement of Shri Krishan
as on March 31, 2017.
(a) Balance as per passbook is ` 10,000.
(b) Bank collected a cheque of ` 500 on behalf of Shri Krishan but wrongly credited it
to Shri Kishan’s account.
(c) Bank recorded a cash book deposit of ` 1,589 as ` 1,598.
(d) Withdrawal column of the passbook under cast by ` 100.
(e) The credit balance of ` 1,500 as on the pass-book was recorded in the debit balance.
(f) The payment of a cheque of ` 350 was recorded twice in the passbook.
(g) The pass-book showed a credit balance for a cheque of ` 1,000 deposited by Shri
Kishan.
Solution
Bank Reconciliation Statement as on March 31, 2017
Amount Amount
` `
1. Credit balance as per passbook 10,000
2. Cheque wrongly credited to another customer account 500
3. Error in carrying forward 3,000
4. Cheque recorded twice 350
5. Excess credit for cash deposit 9
6. Under casting of withdrawal column 100
7. Wrong credit 1,000
8. Debit balance as per cash book 12,741
13,850 13,850
Test Your Understanding - II

Select the Correct Answer:
1. A bank reconciliation statement is prepared by:
(a) Creditors (b) Bank
(c) Account holder in a bank (d) Debtors
2. A bank reconciliation statement is prepared with the balance:
(a) Passbook (b) Cash book
(c) Both passbook and cash book (d) None of these
3. Passbook is a copy of:
(a) Copy of customer Account (b) Bank column of cash book
(c) Cash column of cash book (d) Copy of receipts and payments
4. Unfavourable bank balance means:
(a) Credit balance in passbook (b) Credit balance in cash book
(c) Debit balance in cash book (d) None of these
5. Favourable bank balance means:
(a) Credit balance in the cash book (b) Credit balance in passbook
(c) Debit balance in the cash book (d) Both (b) and (c)
6. A bank reconciliation statement is mainly prepared for:
(a) Reconcile the cash balance of the cash book.
(b) Reconcile the difference between the bank balance shown
by the cash book and bank passbook
(c) Both (a) and (b)
(d) None of these
Test your Understanding - III

State whether each of the following statements is True or False
1. Passbook is the statement of account of the customer maintained by the bank.
2. A business firm periodically prepares a bank reconciliation statement to reconcile
the bank balance as per the cash book with the passbook as these two show
different balances for various reasons.
3. Cheques issued but not presented for payment will reduce the balance as per
the passbook.
4. Cheques deposited but not collected will result in increasing the balance of the
cash book when compared to passbook.
5. Overdraft as per the passbook is less than the overdraft as per cash book when
there are cheques deposited but not collected by the banker.
6. The debit balance of the bank account as per the cash book should be equal to
the credit balance of the account of the business in the books of the bank.
7. Favourable bank balance as per the cash book will be less than the bank passbook
balance when there are unpresented cheques for payment.
8. Direct collections received by the bank on behalf of the customers would increase
the balance as per the bank passbook when compared to the balance as per the
cash book.
9. When payments made by the bank as per the standing instructions of the customer,
the balance in the passbook will be more when compared to the cash book.
174 Accountancy
Key Terms Introduced in the Chapter

1. Bank Reconciliation Statement
2. Cash book and Passbook
Summary with Reference to Learning Objectives

1. Bank Reconciliation Statement: A statement prepared to reconcile the bank balance
as per cash book with the balance as per passbook or bank statement, by showing the
items of difference between the two accounts.
2. Causes of difference:
– timing of recoding the transaction.
– error made by business or by the bank.
3. Correct cash balance: It may happen that some of the receipts or payments are missing
from either of the books and errors, if any, need to be rectified. This arise the need to
look at the entries/errors recorded in both statements and other information available
and compute the correct cash balance before reconciling the statements.
Questions for Practice

Short Answers
1. State the need for the preparation of bank reconciliation statement?
2. What is a bank overdraft?
3. Briefly explain the statement ‘wrongly debited by the bank’ with the help of an example.
4. State the causes of difference occurred due to time lag.
5. Briefly explain the term ‘favourable balance as per cash book’.
6. Enumerate the steps to ascertain the correct cash book balance.
Long Answers
1. What is a bank reconciliation statement. Why is it prepared?
2. Explain the reasons where the balance shown by the bank passbook does not agree
with the balance as shown by the bank column of the cash book.
3. Explain the process of preparing bank reconciliation statement with amended
cash balance.
Numerical Questions
Favourable balance of cash book and passbook –
1. From the following particulars, prepare a bank reconciliation statement as at March
31, 2017.
(i) Balance as per cash book ` 3,200
(ii) Cheque issued but not presented for payment ` 1,800
(iii) Cheque deposited but not collected upto March 31, 2014 ` 2,000
(iv) Bank charges debited by bank ` 150
(Ans: Balance as per passbook ` 2,850)
2. On March 31, 2017 the cash book showed a balance of ` 3,700 as cash at
bank, but the bank passbook made up to same date showed that cheques
for ` 700, ` 300 and ` 180 respectively had not presented for payment, Also,
a cheque amounting to ` 1,200 deposited into the account had not been
credited. Prepare a bank reconciliation statement.
(Ans : Balance as per passbook ` 3,680)
3. The cash book shows a bank balance of ` 7,800. On comparing the cash
book with passbook the following discrepancies were noted:
(a) Cheque deposited in bank but not credited ` 3,000
(b) Cheque issued but not yet present for payment ` 1,500
(c) Insurance premium paid by the bank ` 2,000
(d) Bank interest credit by the bank ` 400
(e) Bank charges ` 100
(d) Directly deposited by a customer ` 4,000
4. Bank balance of ` 40,000 showed by the cash book of Atul on December 31,
2016. It was found that three cheques of ` 2,000, ` 5,000 and
` 8,000 deposited during the month of December were not credited in the
passbook till January 02, 2017. Two cheques of ` 7,000 and ` 8,000 issued
on December 28, were not presented for payment till January 03, 2017. In
addition to it bank had credited Atul for ` 325 as interest and had debited
him with ` 50 as bank charges for which there were no corresponding entries
in the cash book.
Prepare a bank reconciliation statement as on December 31, 2016.
5. On comparing the cash book with passbook of Naman it is found that on
March 31, 2014, bank balance of ` 40,960 showed by the cash book differs
from the bank balance with regard to the following:
(a) Bank charges ` 100 on March 31, 2017, are not entered in the cash book.
(b) On March 21, 2017, a debtor paid ` 2,000 into the company’s bank in
settlement of his account, but no entry was made in the cash book of
the company in respect of this.
(c) Cheques totaling ` 12,980 were issued by the company and duly recorded
in the cash book before March 31, 2017, but had not been presented at
the bank for payment until after that date.
(d) A bill for ` 6,900 discounted with the bank is entered in the cash book
without recording the discount charge of ` 800.
(e) ` 3,520 is entered in the cash book as paid into bank on March 31st,
2017, but not credited by the bank until the following day.
(f) No entry has been made in the cash book to record the dishon or on
March 15, 2017 of a cheque for ` 650 received from Bhanu.
Prepare a reconciliation statement as on March 31, 201.
176 Accountancy
6. Prepare bank reconciliation statement as on December 31, 2017. This day

the passbook of Mr. Himanshu showed a balance of ` 7,000.
(a) Cheques of ` 1,000 directly deposited by a customer.
(b) The bank has credited Mr. Himanshu for ` 700 as interest.
(c) Cheques for ` 3000 were issued during the month of December but of
these cheques for ` 1,000 were not presented during the month of
December.
(Ans: Balance as per cash book ` 3,300).
7. From the following particulars prepare a bank reconciliation statement
showing the balance as per cash book on December 31, 2016.
(a) Two cheques of ` 2,000 and ` 5,000 were paid into bank in October,
2016 but were not credited by the bank in the month of December.
(b) A cheque of ` 800 which was received from a customer was entered in
the bank column of the cash book in December 2016 but was omitted
to be banked in December, 2016.
(c) Cheques for ` 10,000 were issued into bank in November 2016 but not
credited by the bank on December 31, 2016.
(d) Interest on investment ` 1,000 collected by bank appeared in the
passbook.
Balance as per Passbook was ` 50,000
(Ans: Balance as per cash book ` 47,800)
8. Balance as per passbook of Mr. Kumar is 3,000.
(a) Cheque paid into bank but not yet cleared
Ram Kumar ` 1,000
Kishore Kumar ` 500
(b) Bank Charges ` 300
(c) Cheque issued but not presented
Hameed ` 2,000
Kapoor ` 500
(d) Interest entered in the passbook but not entered in the cash book ` 100
Prepare a bank reconciliation statement.
9. The passbook of Mr. Mohit current account showed a credit Balance of
` 20,000 on dated December 31, 2016. Prepare a Bank Reconciliation
Statement with the following information.
(i) A cheque of ` 400 drawn on his saving account has been shown on
current account.
(ii) He issued two cheques of ` 300 and ` 500 on of December 25, but only
the Ist cheque was presented for payment.
(iii) One cheque issued by Mr. Mohit of ` 500 on December 25, but it was
not presented for payment whereas it was recorded twice in the cash
book.
Unfavourable balance of cash book

10. On Ist January 2017, Rakesh had an overdraft of ` 8,000 as showed by his
cash book. Cheques amounting to ` 2,000 had been paid in by him but were
not collected by the bank by January 01, 2017. He issued cheques of ` 800
which were not presented to the bank for payment up to that day. There
was a debit in his passbook of ` 60 for interest and ` 100 for bank charges.
Prepare bank reconciliation statement for comparing both the balance.
(Ans: Overdraft as per passbook ` 9,360)
11. Prepare bank reconciliation statement.
(i) Overdraft shown as per cash book on December 31, 2017 ` 10,000.
(ii) Bank charges for the above period also debited in the passbook
` 100.
(iii) Interest on overdraft for six months ending December 31, 2017
` 380 debited in the passbook.
(iv) Cheques issued but not incashed prior to December 31, 2017
amounted to ` 2,150.
(v) Interest on Investment collected by the bank and credited in the
passbook ` 600.
(vi) Cheques paid into bank but not cleared before December, 31, 2017
were ` 1,100.
(Ans: overdraft as per passbook ` 8,830).
12. Kumar find that the bank balance shown by his cash book on December
31, 2017 is ` 90,600 (Credit) but the passbook shows a difference due to
the following reason:
A cheque (post dated) for ` 1,000 has been debited in the bank column of
the cash book but not presented for payment. Also, a cheque for
` 8,000 drawn in favour of Manohar has not yet been presented for
payment. Cheques totaling ` 1,500 deposited in the bank have not yet
been collected and cheque for ` 5,000 has been dishonoured.
(Ans: overdraft as per passbook ` 90,100).
13. On December 31, 2017, the cash book of Mittal Bros. Showed an overdraft
of ` 6,920. From the following particulars prepare a Bank Reconciliation
Statement and ascertain the balance as per passbook.
(1) Debited by bank for ` 200 on account of Interest on overdraft and
` 50 on account of charges for collecting bills.
(2) Cheques drawn but not encashed before December, 31, 2017 for
` 4,000.
(3) The bank has collected interest and has credited ` 600 in passbook.
(4) A bill receivable for ` 700 previously discounted with the bank had
been dishonoured and debited in the passbook.
(5) Cheques paid into bank but not collected and credited before
December 31, 2017 amounted ` 6,000.
(Ans: Overdraft as per passbook ` 9,170).
178 Accountancy
Unfavourable balance of the passbook

14. Prepare bank reconciliation statement of Shri Bhandari as on March
31, 2017
(i) The Payment of a cheque for ` 550 was recorded twice in the passbook.
(ii) Withdrawal column of the passbook under cast by ` 200
(iii) A Cheque of ` 200 has been debited in the bank column of the Cash
Book but it was not sent to bank at all.
(iv) A Cheque of ` 300 debited to Bank column of the cash book was not
sent to the bank.
(v) ` 500 in respect of dishonoured cheque were entered in the passbook
but not in the cash book.
Overdraft as per passbook is ` 20,000.
(Ans: Overdraft as per cash book ` 21,350).
15. Overdraft shown by the passbook of Mr. Murli is ` 20,000. Prepare bank
reconciliation statement on dated March 31, 2017.
(i) Bank charges debited as per passbook ` 500.
(ii) Cheques recorded in the cash book but not sent to the bank for
collection ` 2,500.
(iii) Received a payment directly from customer ` 4,600.
(iv) Cheque issued but not presented for payment ` 6,980.
(v) Interest credited by the bank ` 100.
(vi) LIC paid by bank ` 2,500.
(vii) Cheques deposited with the bank but not collected ` 3,500.
16. Raghav & Co. have two bank accounts. Account No. I and Account No. II.
From the following particulars relating to Account No. I, find out the balance
on that account of March 31, 2017 according to the cash book of
the firm.
(i) Cheques paid into bank prior to March 31, 2017, but not credited for
` 10,000.
(ii) Transfer of funds from account No. II to account no. I recorded by
the bank on March 31, 2017 but entered in the cash book after that
date for ` 8,000.
(iii) Cheques issued prior to March 31, 2017 but not presented until after
that date for ` 7,429.
(iv) Bank charges debited by bank not entered in the cash book for
` 200.
(v) Interest Debited by the bank not entered in the cash book ` 580.
(vi) Overdraft as per Passbook ` 18,990.
17. Prepare a bank reconciliation statement from the following particulars
and show the balance as per cash book.
(i) B a l a n c e a s p e r p a s s b o o k o n March 3 1 , 2 0 1 7 o v e r d r a w n
` 20,000.
(ii) Interest on bank overdraft not entered in the cash book ` 2,000.
(iii) ` 200 insurance premium paid by bank has not been entered in the
cash book.
(iv) Cheques drawn in the last week of March 2017, but not cleared till
date for ` 3,000 and ` 3,500.
(v) Cheques deposited into bank on February 2017, but yet to be credited
on dated March 31, 2017 ` 6,000.
(vii) Wrongly debited by bank ` 500.
18. The passbook of Mr. Randhir showed an overdraft of ` 40,950 on March 31,
2017.
Prepare bank reconciliation statement on March 31, 2017.
(i) Out of cheques amounting to ` 8,000 drawn by Mr. Randhir on March
27 a cheque for ` 3,000 was encashed on April 2017.
(ii) Credited by bank with ` 3,800 for interest collected by them, but the
amount is not entered in the cash book.
(iii) ` 10,900 paid in by Mr. Randhir in cash and by cheques on March,
31 cheques amounting to ` 3,800 were collected on April, 07.
(iv) A Cheque of ` 780 credited in the passbook on March 28 being
dishonoured is debited again in the passbook on April 01, 2017. There
was no entry in the cash book about the dishonour of the cheque until
April 15.
(Ans: Overdraft as per cash book ` 43,170)
Checklist to Test Your Understanding
Test Your Understanding - I

(I) 1. Time gap 2. Error 3. Time gap
4. Time gap 5. Time gap
(II) (i) Customer account (ii) Debit (iii) Credit
(iv) Debit (v) Added (vi) Deducted
(vii) loss (viii) Loss (ix) Added
(x) Higher
Test Your Understanding - II

1. (b) 2. (c) 3. (a) 4. (a) 5. (c) 6. (b)
Test Your Understanding - III

1. (T) 2. (T) 3. (F) 4. (T) 5. (F) 6. (T) 7. (T) 8. (T) 9. (F)
ACCOUNTANCY Accounting for Not-for-Profit Organisation
Accounting for Not-for-Profit Organisation

Introduction to Not-for-Profit Organisation
Meaning, Features and Financial Statements of a Not-for-Profit Organisation:
 Meaning and Concept of Not-for-Profit Organisations:

i. These are the institutions/organisations that are set-up with general or specific objectives
for rendering services and providing other social activities to enhance the welfare of general
or a particular group of people.
ii. The aim of such institutions is not to earn profit, however, the organisations are capable of
earning profit.
iii. A separate legal entity not owned by any individual or an enterprise.
iv. Examples of such organisations are schools, colleges, public hospitals, literacy societies for
promoting sports, arts, culture, etc.
 Characteristics or Features of Not-for-Profit Organisations:

i. Formed by Promoters: These organisations are formed by the promoters who can be
either individual or groups of individuals and enterprises.
ii. Separate Existence: These organisations have separate existence from its members, i.e.
the life of an NPO is unaffected by the life of its members.
iii. Purpose: Its purpose is to further cultural, educational, religious, professional or public
service objectives.
iv. Form: It is set-up as a charitable society or trust.
v. No Profit Motive: Its aim is not to earn profit, however, the organisation is capable of
earning profit. Any surplus is used by the organisation for its prescribed objectives rather
than distributing it among the members.
vi. Management: It is managed by a group of individuals known as Trustees or Managing
Committee.
vii. Funding: The main source of their income is subscription, donations, government grants
and other receipts
viii. Accounts: Unlike profit-seeking organisations, NPOs do not prepare Profit and Loss
Account; rather they prepare Income and Expenditure Account to show a summary of
revenue incomes and revenue expenses. The NPOs prepare final accounts every year
which comprises of Receipt and Payment Account, Income and Expenditure Account and
Balance Sheet.
 Difference between Not-for-Profit Organisation and Profit Earning Organisation:
Sr. Basis Not-for-Profit Organisation Profit Earning Organisation

no. (Business Firm)
1 Purpose To render services Its purpose is to earn profits.
2 Formation & Formed by Promoters and managed Formed by Entrepreneur(s) and
Management by Trustees managed by Owners or Managers
2 Funds It raises funds by way of Membership It receives funds from the
Fee, Donations, and Surplus from proprietor, partners in the form of
Operations which are shown in the capital (in case of proprietorship
www.topperlearning.com 2
books as General or Capital or and partnership) and from

Corpus funds. shareholders in the form of Share
Capital (in case of Companies).
Profits which are not distributed to
partners and shareholders are
shown as reserves.
3 Financial Final accounts are prepared every Final accounts prepared
Statements year that comprises of Receipt and comprises of Trading, Profit and
Payment Account, Income and Loss Account and Balance Sheet.
Expenditure Account and Balance
Sheet.
4 Surplus/Profit Excess of income over expenditure Excess of credit side over the
in the Income and Expenditure debit side of the Profit and Loss
Account is termed as Surplus/Profit. Account is termed as Net Profit.
 Financial Statements of a Not-for-Profit Organisation:

i. It prepares annual or final accounts every year showing the financial transactions of the
organisation.
ii. These annual or final accounts are prepared for its members and to comply with statutory
requirements.
iii. Financial Statements of an NPO comprise of the following:
a. Receipts and Payments Account,
b. Income and Expenditure Account and
c. Balance Sheet.
Understanding Receipts and Payments Account
Meaning, Features, Format and Limitations of Receipts and Payments Account:
 Meaning: It is an account that shows the summary of all cash and bank transactions occurred
during an accounting period. It starts with the opening balances of cash and bank and ends with
the closing balances of cash and bank. This account is a Real Account and lays the basis for the
preparation of Income and Expenditure Account and the Balance Sheet.
 Features: Following are the features of Receipts and Payments Account:

i. Nature: It is a summary of cash receipts and payments and hence, it an Asset
Account/Real Account
ii. Recording: It provides the summary of all cash and bank transactions in a chronological
order.
iii. Basis of Preparing: It is prepared on cash basis, i.e., it records only cash inflow and
outflow. Accrued and outstanding transactions are not recorded in this account.
iv. Capital and Revenue: It records all the transactions whether capital or revenue.
v. Period: It records all the cash and bank transactions irrespective of whether they relate to
current, previous or succeeding accounting periods.
vi. Opening and Closing Balances: Opening balance of this account is the cash in hand/
bank at the beginning of the accounting year and the closing balance shows cash in
hand/bank at the end of the accounting period.
vii. Adjustment: Adjustments for accrued, outstanding items and depreciation is not required to
be made in this account.
viii. Purpose: The purpose of preparing this account is to show amount received and paid
under various heads during the accounting year and also to know the cash position of the
entity.
 Format:
Dr. Receipts and Payments Account for the year ended … Cr

Receipts Amount Payments Amount
To Balance b/d(Opening Balance): By Balance b/d (Opening Balance)(in
Cash in Hand … case of Bank Overdraft)
Cash at Banks … By Salaries …
To Subscriptions: By Rent …
For Previous Year … By Postage Expenses …
For Current Year … By Newspapers and Magazines, etc. …
For Next Year … … By Repairs …
To General Donations … By Audit Fee
To Entrance/Admission Fees … By Maintenance Expenses …
To General Grants … By Insurance …
To Sale of Newspaper, Grass, etc. … By Secretary’s Honorarium …
To Sale of Old Used Sports … By Honorarium …
Materials … By Municipal Tax …
To Interest on Investments … By Prize Distributed …
To Income from Concerts/Lectures … By Office Expenses …
To Dividends … By Expenses on Show …
To Rent Received … By Miscellaneous Payments …
To Interest Received … By Purchase of Fixed Assets (e.g., …
To Miscellaneous Receipts … Furniture) …
To Life Membership Fees … By Sports Equipment …
To Subscriptions for Specific … By Investments
Purpose … By Books …
To Donation for Specific Purpose … By Loan (Repayment) …
To Legacies … By Building …
To Endowment Fund … By Balance c/d (Closing Balance): …
To Sale of Fixed Assets Cash in Hand …
To Receipts on Account of Special Cash at Bank*
Fund, i.e., Match Fund, Prize Fund, …
etc. …
To Balance c/d (Bank Overdraft)* …
… …
*Either of the two will appear.
# If the receipts side is more than the payments side then, Closing balance of cash and bank will appear
on the credit side of this account.
If the payments side is more than the receipts side then, Closing balance of bank will appear (as Bank
overdraft) on the debit side of this account.
 Limitations of Receipts and Payments Account:

i. It follows cash basis of accounting and therefore, does not show incomes and expenses on
accrual basis.
ii. It is not capable of showing whether the NPO is able to meet its day-to-day expenses out of
its income or not as the credit transactions are ignored.
iii. It is not a perfect substitute of Trial Balance as this account fails to reveal the closing
balances of all accounts.
 Difference between Receipts and Payments Account and Cash Book:

Following are the points of differences between Receipts and Payments Account and Cash Book
Sr. Basis Receipts and Payments Cash Book
No. Account
1 Statement It can be regarded as It can be regarded as an
vs. Account statement rather than an account as it works both as
account. Unlike ordinary Journal as well as ledger and its
accounts, it does not show balances are directly shown in
Date and Ledger Folio the Balance Sheet.
columns.
2 Period It is prepared at the end of the It is written on daily basis.
accounting period.
3 Date It does not require the It requires the date-wise
transactions to be written date- recording of the transactions.
wise. Even date column is not
present in the R&P A/c
4 Institutions It is prepared by the Not-for- It is prepared by all types of
Profit Organisation. organisation be it a commercial
or Not-for-Profit organisation.
5 Side It has receipts and payments It is divided into debit and credit
side instead of debit and credit. sides.
6 Ledger It does not have column for It has a separate column for
Folio ledger folio. Ledger Folio.
Understanding Income and Expenditure Account
Meaning, Features, Format and Important Terms of Income and Expenditure

Account:
 Meaning:
i. It is like Profit and Loss Account of an enterprise or business firm.
ii. It shows all revenue income earned and revenue expenses incurred during an accounting
period.
iii. It is prepared at the end of the accounting period on accrual basis of accounting.
iv. It determines the result of the organisation’s operations, whether it has surplus or deficit.
v. It has 2 sides namely, debit and side. All the incomes and gains are recorded on the credit
side and all the expenses and losses are recorded on the debit side.
vi. Excess of credit side over the debit side is termed as surplus, whereas, excess of debit side
over the credit side is termed as deficit.
vii. Such surplus or deficit, as the case maybe, is either added to or deducted from the Capital
Fund in the Balance Sheet.
 Features:
i. Nature: It is a Nominal Account and therefore, all revenue expenses and losses incurred
are recorded on the debit side and all revenue incomes and gains earned are recorded on
the credit side of this account.
ii. Basis of Recording: It follows the accrual basis of accounting to ascertain Surplus or
Deficit arising after meeting all revenue expenses against all revenue incomes at the end of
an accounting period
iii. Period: It records only those expenses and incomes which relate to the current accounting
period.
iv. Opening and Closing Balances: It has no opening balance, however, balance at the end
is either surplus or deficit which is then transferred to Capital Fund in the Balance Sheet.
v. Adjustments: Since, it follows accrual basis of accounting, all the adjustments are to be
given effect which are necessary to record the incomes, gains, expenses and losses
relating to the current accounting period.
 Format:
Dr. Income and Expenditure Account for the period ended… Cr.
Expenditure Amount Income Amount
To Salaries … By Subscriptions …
Add: Outstanding at the end … Add: Outstanding at the end …
… Advance in the beginning …
Less: Outstanding at the beginning … … …
To Rent … Less: Outstanding at the beginning …
To Insurance Premium … …
Less: Prepaid … … Less: Advance at the end … …
To Audit Fees … By Entrance Fees …
To Printing and Stationery … By Donations …
To Honorarium … By Sale of Old Newspapers …
To Telephone Expenses … By Hall Rent …
To Repairs … By Sundry Receipts …
To Depreciation … By Deficit …
To Sports Material Used … (excess of expenditure over income)*
To Surplus
(excess of income over expenditure)*
… …
*Either of the two will appear
Expenditure side to record: All revenue expenses for current period (after making adjustment for
outstanding and prepaid expenses)
Income side to record: All revenue income for current period (after making adjustments for outstanding
and advance income)
 Some important terms:

o Capital Expenditure:
i. It is an expenditure, which benefits the organisations for more than one accounting
period.
ii. It results in the acquisition of assets which are used for the furtherance of activities
carried on by the NPO.
iii. Examples include cost of land, building, furniture and any addition thereto.
o Revenue Expenditure:
i. It is an expenditure, the benefits of which expire within the accounting period.
ii. In case of an NPO, such expenditure means expenditure incurred for social or charitable
activities carried on by the NPO.
iii. Examples include Materials used, rent, insurance, salaries, honorariums paid, etc.
o Revenue Receipts:
i. Any income received from the activities carried out by organisation is termed as revenue
receipts.
ii. Examples include Subscription from members, General Donations, Rent Received, etc.
o Capital Receipts:
i. Receipts other than revenue receipts are termed as Capital Receipts.
ii. Receipts from donor for the specified purpose are also termed as Capital Receipts.
iii. Examples include Life Membership Fee, Corpus Donations, Furniture Fund, etc.
 Difference between Income and Expenditure Account and Profit and Loss Account:
Sr. Basis Income and Expenditure Account Profit and Loss Account
no.
1 Object Its main object is to determine surplus, Its main object is to determine net
i.e., excess of income over expenditure profit or net loss.
or deficit i.e., excess of expenditure
over income.
2 Prepared It is prepared by Not-for-Profit It is prepared by business
by Organisations. enterprises.
3 Method If an organisation maintains a complete It is prepared from Trial Balance and
set of books, this account is prepared other information.
from Trial Balance. If complete set of
books is not maintained, it is prepared
from Receipt and Payment Account
and the additional information
available.
4 Balance Balance in this account is termed as Balance in this account is termed as
either a surplus or a deficit. either net profit or net loss.
 Difference between Receipts and Payments Account and Income and Expenditure Account:
Sr. Basis Receipts and Payments Account Income and Expenditure Account
no.
1 Purpose It is prepared to show difference It shows net result of activities
between two sides showing Cash/Bank undertaken during the year resulting
balance at the end. in surplus or deficit.
2 Nature It is a classified summary of cash It is like a Profit and Loss Account
transactions showing receipts and and therefore is a nominal account.
payments under different heads for the
period, hence is a real account in
nature.
3 Form It records receipts on the debit side and It records all the expenses and
payments on the credit side. losses on the debit side and all the
incomes and gains on the credit side
of the account.
4 Balance Opening balance means cash in hand Opening balance does not exist in
and bank balance in the beginning and this Account. Any closing balance at
closing balance means cash in hand the end is either a surplus or deficit.
and bank balance at the end.
5 Capital It records receipt and payment items of It records incomes and expenses
and capital as well as revenue nature. during the accounting period which
Revenu are of revenue nature only. Items of
e Items capital nature are not recorded in
this account.
6 Content It records receipts and payments during It records incomes and expenditures
s the year whether they relate to past, of the current year only.
current or succeeding year.
7 Adjustm It follows cash system of accounting It follows accrual system of
ents and therefore, no adjustments are accounting and therefore,
made. adjustments are to be made for
prepaid and outstanding incomes
and expenses.
8 Depreci It records only cash items and non-cash It records non-cash items and
ation items like depreciation are ignored. therefore, non-cash items
depreciation can be recorded in this
account.
Understanding Balance Sheet
Meaning, Format and Important Points to prepare Balance Sheet:

 Meaning:
i. It is a statement that reveals the financial position of an organisation at a particular date.
ii. It shows assets, liabilities and Capital Fund.
iii. It is prepared in the same manner as that for a business firm.
iv. It is prepared after the Income and Expenditure Account.
v. Any surplus or deficit in the Income and Expenditure Account is transferred to Capital Fund,
where, Capital Fund = Total Assets – Total Liabilities.
Opening Balance Sheet- It shows the balances of all the assets, liabilities, funds and reserves in
the beginning of an accounting period. It is usually prepared to ascertain the capital fund in the
beginning or any other missing item.
Need for Preparing Opening Balance Sheet

In case, the Capital Fund is not mentioned in the question, then in order to ascertain the Capital
Fund we need to prepare the Opening Balance Sheet. All the opening balances of assets such as,
building, furniture, outstanding subscription (at the beginning), etc. and all the opening balances of
liabilities such as, creditors, advance subscription (at the beginning), outstanding expenses etc. are
recorded in this balance sheet. The excess of the total of the Assets over the total of the Liabilities
is regarded as Capital Fund.
Closing Balance Sheet- It is prepared to assess the true and fair financial position of an
organisation at the end of an accounting period.
 Following points should be kept in mind while preparing the Balance Sheet: In order to
prepare Balance Sheet, following are the points that are required to be kept in mind:
i. Expenses and Incomes: Expenses that are outstanding or prepaid and Incomes that are
receivable or received in advance will appear in the Balance Sheet as Assets or Liabilities
based on the nature of the respective items.
ii. Special Receipts: Special items like specific donations for building, sports, etc. will not
appear in the Income and Expenditure Account. Instead they are shown as liabilities in the
Balance Sheet.
iii. Surplus and deficit: Balancing of Income and Expenditure Account will either give a
surplus or a deficit. This surplus/deficit is then added to or reduced from the Capital Fund
Balance and only the net amount is shown in Balance Sheet.
iv. Assets: Amounts of assets that are shown in the opening Balance Sheet are to be adjusted
for all current year transactions related to the respective assets which includes purchase of
asset, sale of asset and depreciation. Such adjusted amount will then appear in the closing
Balance Sheet.
v. Liabilities: Amounts of liabilities that are shown in the opening Balance Sheet are to be
adjusted for all current year transactions related to the respective liability which shall include
payments made against them or additional liability being created. Such adjusted amount will
then appear in the closing Balance Sheet.
vi. Loans and Advances: Opening amount of loan taken should be adjusted for all
repayments made during the year against it and only the net amount should be shown as a
liability. In case of advances, opening balance should be adjusted for all the amounts
recovered during the year and only the net amount should be shown as an asset.
 Format of Opening Balance Sheet of a Not-for-Profit Organisation.
Opening Balance Sheet as at …

Liabilities Amount Assets Amount
Bank Overdraft, if any … Cash in Hand …
Outstanding Expenses … Cash at Bank …
Advance Subscription … Fixed Assets, if any …
Capital Fund*(balancing … Investments, if any …
figure) Outstanding Subscriptions …
Prepaid Expenses …
… …
 Format of Balance Sheet of a Not-for-Profit Organisation.
Name of the Organisation

Balance Sheet as at …
Liabilities Amo Assets Amo
unt unt
Capital Fund or General Fund or Corpus Fund: Fixed Assets:
Opening Balance … Building:
Add: Surplus (or Less: Deficit) … … Opening Balance …
Building Fund: Add: Additions …
Opening Balance … …
Add: Donation for Building … Less: Depreciation … …
Income from Building Fund Investment … … Furniture:
Sports Fund: Opening Balance …
Opening Balance … Add: Additions …
Add: Donation for Sports Fund … ...
Income on Sports Fund Investment … Less: Depreciation …
… Sale … …
Less: Sports Prize Awarded … … Current Assets:
Current Liabilities: Cash in Hand …
Outstanding Expenses: Cash at Bank …
Rent … Subscriptions in Arrear …
Salaries … Accrued Interest ...
Electricity/Water Charges … … Investments:
Subscriptions Received in Advance … Building Fund Investments …
Sport Fund Investments …
Prepaid Expenses:
Insurance …
Rent …
… …
Fund Based Accounting
Meaning and Categories in Fund Based Accounting:

 Meaning of Fund Based Accounting:
i. It is an accounting method or practice that is followed for preparation of accounts in which
amount (funds) available for specific purpose is shown under Specific Fund Account.
ii. It means the accounting whereby receipts of donations and incomes relating to a particular
fund are credited to that particular fund and payments and expenses are debited to it.
iii. A Not-for-Profit Organisation maintains a separate Bank Account for each fund. Donations
and income received towards that funds are credited to the Fund Account while the
expenses are debited to such Fund Account.
iv. Credit balance in the Fund Account is shown on the liabilities side of the Balance Sheet.
v. Debit balance in the Fund Account is debited to the Income and Expenditure Account.
 Categories/Types of Funds in case of an NPO:
i. Unrestricted Fund or General Fund:

 These funds are used to carry out general operations of a business.
 These funds do not carry any restriction with respect to its use.
 In simple words, management can use the amounts as it deems appropriate, but to
carry out purpose for which the organisation exists.
 It is also known as General Fund or Capital Fund to which surplus or deficit is added
or deducted respectively.
ii. Restricted Funds:

 These are the funds, the use of which is restricted either by the management or by the
donor for specific purpose.
 Examples of such funds include, Endowment fund, Annuity fund, Loan Fund, Prize
Fund, Sports Fund, etc.
 Restricted Funds are further categorized into:
(i) Specific Revenue Funds: These funds are created and maintained to show the
incomes and expenses related to the specific operation separately from the general
revenue incomes and expenses. Amount available in these funds (after meeting the
expenses attributing to the fund) are shown on the Liabilities side of the Balance
Sheet.
The treatment of receipts and expenditures related to the specific fund can be better
understood with the help of the following example.
Example: Treatment of Tournament Fund

Rs Rs
Tournament Fund 50,000

Sale of Ticket for 20,000
Tournament
Donation for Tournament 4,000
Less: Tournament Expenses (10,000) 64,000
(ii) Capital Project Funds: These funds are also shown on the Liabilities side of the
Balance Sheet. Donation and other receipts to acquire or construct specific fixed
assets (such as, donation for construction of pavilion) or to carry out a specific
project of capital nature are shown in the separate fund account.
Treatment of receipts and expenditure relating to the fund can be understood with
help of following example.
Example: Donation for Building Fund

Rs Rs
Capital Fund 8,00,000 Construction of Building 2,00,000

in progress
Add: Construction of 2,00,000 10,00,000
Building in progress
Building Fund 7,00,000

Donation 1,00,000
Less: Construction of (2,00,000) 6,00,000
Building in progress
(iii) Government Grant: It is a grant which is received from Government for specific
purpose. Such specific grant is to be used only for the purpose for which it is
granted. Examples of such grant includes grant for ‘Polio Eradication Programme’
which is restricted to Polio Eradication purposes.
(iv) Endowment Fund: These funds arises from the gift or bequest. It is created with the
condition that income arising from the investment of such funds will be used for a
specific purpose, i.e. may be to provide the benefit to the specified beneficiary or to
meet specific expenses. Thus, the principal amount of these funds remains
unchanged. These funds may be permanent or temporary for a specific period.
(v) Annuity Fund: It is established when a Not-for-Profit Organisation receives assets

from a donor with a condition to pay specified amount periodically to designated
beneficiary or beneficiaries. Annuity is a fixed annual payment and usually continue
only during the lifetime of the named beneficiary or for the period specified by the
donor. After the death of the beneficiary or termination of the agreement, the funds
become the property of the organisation.
(vi) Loan Fund: These funds are maintained to grant loan for specific purposes. These
loans are subject to repayment, interest and fines. Its purpose is not to earn profits
but to assist the person who is in need. For example, Education Loan to the
students for higher studies, etc.
Accounting Treatment of Special Items in Income and

Expenditure Account
 Entrance or Admission Fee: It is an amount that is paid by a person to become a member of a

Not-for-Profit organisation. Since, it is received by the NPO from its potential members, it is treated
as a revenue receipt which is shown on the credit side of the Income and Expenditure Account.
 Life Membership Fee: It is not accounted as an income because a life member makes a one-time
payment and avails life time services. Therefore, it is accounted as a Capital Receipt and added to
Capital Fund on the liabilities side of the Balance Sheet.
 Special Receipts in case of an NPO:

I. It means receipts of amount for special occasions.
II. The amount received for special receipt is a credited to a separate account.
III. All the expenses against these receipts are debited to the same account.
IV. The balance of such separate account is transferred to the Income and Expenditure
Account.
V. Examples include, amount received for annual dinner, annual function, annual conference,
meetings, etc.
 Donation and Types of Donation received by an NPO: A charitable institution is a type of Not-
for-Profit Organisation. One of the source of incomes for a charitable institution is the donation that
is received. Donations are a kind of gift which are received by an organisation either in cash or in
any other form. Donations can be both general as well as specific donations.
General Donation- These donations are received as gifts from the donor without any specific
condition. These donations can be use for carry out the general operations of an organisation.
Accounting Treatment: General Donation can be either treated as General Revenue Receipt or
General Capital receipt.
If it is treated a general revenue receipt, then it is shown on the Income side of the Income and
Expenditure Account.
If it is treated as general capital receipt for general, then it is directly added to the Capital Fund on
the Liabilities side of the closing Balance Sheet.
Specific Donations- These are the donations that are received as gifts with specific conditions
attached. These donations can only be used to carry out the specific operation as per the condition
attached with the donation. These donations are used to accomplish a particular objective. For
example, donations for building cannot be used for any other purpose other than constructing
building.
Accounting Treatment- These donations are transferred to respective Fund Account and are
shown on the Liabilities side of the Balance Sheet.
 Legacy: The amount which is received as donation by a Not-for-Profit Organisation under WILL of
a deceased person is known as Legacy. The accounting treatment of legacy depends upon the
nature of receipt and conditions specified with that receipt.
i. In case there are any specific conditions, they are to be classified as ‘Specific Donation’.
Such amounts are recorded as Capital Receipt and therefore credited to a ‘Specific Fund
Account’ else Capital Fund Account when received in nature of capital receipt without any
specific condition.
ii. In case there are no specific conditions, it is accounted as ‘General Donation’. Such
amounts are recorded as revenue receipt and therefore credited to Income and Expenditure
Account.
 Sale of Used Sports Materials: Amount of Sports Materials available or used in the organisation
are to be recorded in the books in different statements. Stock of such materials is shown as an
asset in the Balance Sheet and any amount of sports material consumed is shown on the debit
side of the Income and Expenditure Account. This concept explains us the treatment to be given if
materials shown in the Balance Sheet or Income and Expenditure Account are sold during the
year:
i. If old sports materials shown as consumed are sold: The amount received as sale
consideration is credited to Income and Expenditure Account to show it as an income.
ii. If old sports materials shown as stock are sold: Any amount of gain/profit on sale of
such old material is credited to Income and Expenditure Account to show it as an income.
iii. If sale of such old sports materials results into loss: Such amount of loss will be debited
to the Income and Expenditure Account.
 Proceeds from Sale of Old Assets: Sale of an asset may result into profit or loss or neither profit
nor loss. In such cases, actual profit/loss is calculated as follows:
1. Determine the book value of the assets by charging depreciation on the same up to the date
of sale.
2. Determine the sale value of the asset being sold.
3. Such sale value is credited to the Asset Account.
4. If the sale value is in excess of the book value of the asset, it is a gain on sale and such
gain is credited to the Income and Expenditure Account.
5. If the sale value is less than the book value of the asset, it is a loss and is debited to the
Income and Expenditure Account.
 Sale of Old Newspapers: The sale of items such as, magazines, newspapers, etc. are of
recurring nature, thereby the income received from their sale is considered as revenue income.
Accounting Treatment: As the income received from the sale of such items is considered as
revenue income, so the sale of old newspapers, etc. is shown on the Income side of the Income
and Expenditure Account.
 Subscriptions:
i. It is a source of income for an NPO.
ii. It is paid by the members periodically which can be quarterly or half yearly so that their
membership remains alive.
iii. The total amount of subscription relating to the current year, whether received or not are to
be shown on the credit side of the Income and Expenditure Account.
iv. Amount relating to the current year, not received till the end of the year is to be shown as an
asset in the Balance Sheet as outstanding income.
v. Amount received in advance for future years is also shown as a liability in the Balance
Sheet as advance income.
vi. Subscription can be Ordinary or Special based on purpose, if specified.
Special Subscription: It is a type of subscription that is received for accomplishing a specific task
or organising specific activities from the participants. For example, subscription for tournament,
subscription for governor’s party, etc.
Accounting Treatment: Special Subscription are shown separately on the Liabilities side of the
Balance Sheet and the expenses attributing to the subscription is deducted from such subscription.
Situation 1: After completing the specific task, if any surplus remains, then it will be added to the
capital fund.
Situation 2: If expenses are more than the subscription amount, then the expenses that remain
after adjusting all the expenses from the subscription amount will be shown on the Expenditure
side of the Income and Expenditure Account.
Ordinary Subscriptions: It is the main source of revenue income which is received from the
members of an NPO. The members pay their amount of subscription periodically to keep their
membership alive with the organisation.
Format of the table showing calculation of Subscriptions is given as follows:
Particulars Amount
Subscription received during year as shown in Receipts and Payments Account …
Add: Outstanding at the end of the year …
Received in advance in the beginning of the year … …
…
Less: Outstanding at the beginning of the year …
Received in advance at the end of the year … …
Subscriptions to be shown in the Income and Expenditure A/c …
Accounting Format
Subscription Account
Dr. Cr.
Particulars Amount Particulars Amount
Rs Rs
Outstanding Subscription A/c ××× Advance Subscription A/c (in the ×××
(in the beginning) beginning)
Advance Subscription A/c ×××
(at the end) Bank A/c ×××
Income and Expenditure A/c ××× (Subscription received during the
year)
(Balancing Figure) Outstanding subscription A/c ×××
(at the end)
 Honorarium: An amount or token of payment made to a person who has voluntarily undertaken a
service which would normally command a fee is termed as Honorarium. It is more of an expression
of gratitude rather than a consideration for service.
Accounting Treatment: It is shown on the Expenditure side of the Income and Expenditure
Account.
 Capital Expenditure:
i. It is an expenditure, which benefits the organisations for more than one accounting period.
ii. It results in the acquisition of assets which are used for the furtherance of activities carried on
by the NPO.
iii. Examples include cost of land, building, furniture and any addition thereto.
iv. It is shown on Assets side of the Balance Sheet.
 Revenue Expenses:
i. It is an expenditure, the benefits of which expire within the accounting period.
ii. In case of an NPO, such expenditure means expenditure incurred for social or charitable
activities carried on by the NPO.
iii. Examples include materials used, rent, insurance, salaries, honorariums paid, etc.
iv. They are shown on the debit side of the Income and Expenditure Account.
 Capital Receipt:
i. Receipts from donor for the specified purpose are also termed as Capital Receipts.
ii. Examples include Life Membership Fee, Corpus Donations, and Furniture Fund etc.
 Revenue Receipt:
i. Any income received from the activities carried out by organisation is termed as revenue
receipts.
ii. Examples include Subscription from members, General Donations, Rent Received, etc.
iii. They are shown on the credit side of the Income and Expenditure Account.
 Cost of Goods Consumed: This head helps in determining the total amount of consumables
consumed during a particular year. Consumables for an NPO includes stationery, sports materials,
etc. To identify the amount consumed for each of these consumables, separate Stock Account is
maintained for each of these consumables. If the closing stock is shown in the Balance Sheet and
the amount of goods consumed are debited to the Income and Expenditure Account, only then it is
possible to determine the ‘Surplus or Deficit’ from the Income and Expenditure Account.
Goods Consumed During the Year Amount

Opening Stock of Consumable Items …
Add: Purchases during the year …
Less: Closing Stock (…)
Balance to be shown in the Income and Expenditure A/c …
Notes:
(i) Opening Stock appears in Opening Balance Sheet
(ii) Closing Stock appears in Closing Balance Sheet
(iii) In case if credit purchases of consumables not provided, prepare creditors for consumables
goods account.
(iv) Receipts from sale of consumables, if any are accounted as revenue receipts.
Preparation of Income and Expenditure Account and Balance Sheet

from Receipts and Payments Account with additional information
Following are the steps which are to be followed to prepare necessary statements for an NPO based on
Receipts and Payments Account with additional information:
i. Step 1: Determine Opening Capital Fund: This is required to be computed in case where no
information is given with respect to opening capital fund. Such opening capital fund is therefore
computed taking opening cash and bank balance as given in Receipts and Payments Account and
all other assets and liabilities given in the additional information. Once this is done, capital fund is
determined by taking difference between the total assets and liabilities.
ii. Step 2: Identify Incomes from Receipts and Payments Account: Since, Receipts and
Payments Account shows all the amounts received during the year whether they relate to current,
previous or future years, it is necessary to identify revenue receipts of current accounting period
only which are actually required to be shown in the Income and Expenditure Account. Capital
receipts are shown in the Balance Sheet.
iii. Step 3: Identify Expenses from Receipts and Payments Account: Since, Receipts and
Payments Account shows all the amounts spent during the year whether they relate to current,
previous or future years, it is necessary to identify revenue payment of current accounting period
only which are actually required to be shown in the Income and Expenditure Account. Capital
payments are shown in the Balance Sheet.
iv. Step 4: Identify the items not in Receipts and Payments Account but are to be shown in the
Income and Expenditure Account: These amounts are mostly non-cash items and therefore not
recorded in the Receipts and Payments Account but are to be shown in the Income and
Expenditure Account. Example of items are as follows:
a. Depreciation on fixed assets;
b. Gain or loss on sale of fixed assets.
v. Step 5: Compute Surplus or Deficit in Income and Expenditure Account: Surplus or deficit in
the Income and Expenditure Account is to be computed by comparing the credit side and debit
side of the Account. Excess of credit over debit side indicates surplus and excess of debit side
over credit side indicates deficit.
vi. Step 6: Preparation of Closing Balance Sheet: Closing balance sheet is prepared at the end of
the year by taking into consideration opening balances of assets, liabilities and capital fund,
surplus or deficit during the year and depreciation charged on the assets.
Problems
1.
2. From the following particulars taken from the Cash Book ofa health
club, prepare a Receipts and Payments Account.
Particulars Rs
Opening balance:
Cash in Hand 5,000
Cash at Bank 25,000
Subscriptions 1,65,000
Donations 35,000
Investment Purchased 80,000
Rent Paid 20,000
General Expenses 21,500
Postage and stationery 2,000
Courier charges 1,000
Sundry Expenses 2,500
Closing Cash in Hand 12,000
Ans: Closing bank balance : ₹91000
3.
Ans: Bank balance (Dr) ₹6600
4.The Receipt and Payment Account of Harimohan charitableinstitution is

given:
Receipt and Payment Account for the year ending March 31,2015
Receipts AmountRs Payments AmountRs
Balance b/d: Furniture 3,000
Cash at Bank 22,000 Investments 55,000

Cash in Hand 8,800 Advance for 20,000
building
Donations 32,000 Charities 60,000

Subscriptions 50,200 Salaries 10,400
Endowment Fund 60,000 Rent and Taxes 4,000
Legacies 24,000 Printing 1,000
Interest on 3,800 Postage 300
Investment
Interest on 800 Advertisements 1,100
Deposits
Sale of old 500 Insurance 4,800

newspapers
Balance c/d:
Cash at Bank 32,000

Cash in Hand 10,500
2,02,100 2,02,100
Prepare the Income and Expenditure Account for the Yearended on March 31, 2015 after
considering the following
(i) It was decided to treat Fifty per cent of the amount
received on account of Legacies and Donations asincome.
(ii) Liabilities to be provided for are:

Rent Rs 800; Salaries Rs 1,200; advertisement Rs 200.
(iii) Rs 2,000 due for interest on investment was not actually

received.
Ans: Surplus: ₹1500
5. From the following particulars, prepare Income andExpenditure account:
Details Amount
Rs
5,20,000
Fees collected, including Rs 80,000 on accountof
the previous year
Fees for the year outstanding 30,000
Salary paid, including Rs 5,000 on account of the 68,000
previous year
Salary outstanding at the end of the year 3,000
Entertainment expenses 8,000
Tournament expenses 25,000
Meeting Expenses 18,000
Traveling Expenses 7,000
Purchase of Books and Periodicals, including Rs 40,000
31,000 for purchase of Books
Rent 15,000
Postage, telegrams and telephones 6,000
Printing and Stationery 18,000
Donations received 25,000
Ans: Surplus ₹ 3,23,000
6. From the Receipt and Payment Account given below, prepare the Income and
Expenditure Account of Clean Delhi Club for the year ended March 31, 2014.
Ans: Surplus ₹18200
7. From the following Receipt and Payment Account for the year ending March 31,
2015 of Negi's Club, prepare Income and Expenditure Account for the same
period:
The following additional information is available:
(i) Salaries outstanding – Rs. 1,500;
(ii) Entertainment expenses outstanding – Rs. 500;
(iii) Bank interest receivable – Rs. 150;
(iv) Subscriptions accrued – Rs. 400;
(v) 50 per cent of entrance fees is to be capitalised;
(vi) Furniture is to be depreciated at 10 per cent per annum.
Ans: Surplus ₹ 7075
8. Following is the Receipt and Payment Account of Women’sWelfare

Club for the year ended December 31, 2017:
Receipt and Payment Account
for the year ending December 31, 2017
Balance b/d 7,250 Salary 12,500

Subscriptions 81,750 Stationery 1,700
Donations 3,000 Electricity 9,550
charges
Grant from 15,000 Insurance 7,500
Government
Sale of newspapers 300 Equipments 30,000
Proceeds of charity 16,500 Petty expenses 500
show
Expenses oncharity
Interest on 7,000 12,900
show
investments @ 10% for full
year
Sundries income 400 Newspapers 1,000
Lectures fee 16,500
Honorarium to 12,000
Secretary
Balance c/d 27,050
1,31,200
1,31,200
Additional Information:
01.01.2017 31.12.2017
Rs Rs
Outstanding salaries 1,200 1,800

Insurance prepaid 700 300
Subscription outstanding 3,750 2,500
Subscription received in 1,750 1,000
advanced
Electricity charges outstanding — 1,250
Stock of stationery 2,250 700
Equipments 25,600 50,200
Building 1,20,000 1,14,000
Ans: Surplus ₹34100, B/s total ₹229550
9. Following is the Receipt and Payment accountof

Rohatgi Trust :
Cash in hand 14,000 Rent 6,000

Cash at Bank 60,000 Salary 12,000
5,000
Subscriptions: Postage 300
83,000
3,000 Electricity charges
2016 6,000
Purchase of
2017 furniture 20,000
2018 3,000
91,000 Books
90,000 Defence Bonds 1,50,000

Sale of
Investment
Interest on 2,000 Help to needy 22,000
investment students
Sale of furniture 3,200 Cash in hand 10,900
(book value Rs 3,000) Cash at bank 30,000
2,60,200 2,60,200
Prepare Income and expenditure account for the year ended December 31, 2017, and a
balance sheet as on that date afterthe following adjustments: Subscription for 2017, still
owingwere Rs 7,000. Interest due on defence bonds was Rs7,000, Rent still owing was Rs
1,000. The Book value of investment sold was Rs 80,000, Rs 30,000 of the investmentwere
still in hand. Subscription received in 2017 included Rs400 from a life member. The total
furniture on January 1, 2017 was worth Rs 12,000. Salary paid for the year 2018 is Rs 2,000.
Ans: Surplus ₹63500 B/S Total ₹ 2,01,000
Following Receipt and Payment Account was prepared fromthe cash book of
Delhi Charitable Trust for the year ending December 31, 2017
Balance b/d Charity 11,500

Cash in hand 11,500 Rent and taxes 3,200
Cash at bank 12,600 Salary 6,000
Donation 9,000 Printing 600
Subscription 42,800 Postage 300
Legacies 18,000 Advertisements 4,500
Interest on 4,500 Insurances 2,000
investment
Sale of old
200 Furniture 21,600
newspapers
Investment 23,000
Balance c/d:
Cash in hand 9,900
Cash at bank 16,000
98,600 98,600
Prepare Income and expenditure account for the year ended December 31, 2017, and a
balance sheet as on that date afterthe following adjustments:
(a) It was decided to treat one-third of the amount
received on account of donation as income.
(b) Insurance premium was paid in advance for three
months.
(c) Interest on investment Rs1,100 accrued was not
received.
(d) Rent Rs600: salary Rs900 and advertisement expenses
Rs1,000 outstanding as on December 31, 2017.
Ans: Surplus ₹ 21400, B/S Total ₹ 72000
Ans: Sports material purchases(credit basis) ₹10,100, Sports material to be shown in I/E
A/c ₹ 12600
Ans: Stock of Sports Material (credit purchase) 1,11,400, Income and Expenditure A/c-
Sports Material Consumed ₹ 1,07,800
Chapter 1
HIRE PURCHASE SYSTEM AND INSTALLMENT PURCHASE SYSTEM
Introduction:
Hire purchase is a method of selling goods. In a hire purchase transaction the goods are let
out on hire by a creditor to the hire purchase customer (hirer). The buyer is required to pay an agreed
amount in periodical installments during a given period. The ownership of the property remains with
creditor and passes on to hirer on the payment of last installment.
Meaning:
The goods are sold on credit, for which payment is made by the buyer in installments over a
period of time; it is called hire purchase system.
In other words in the H P system the seller of goods delivers the goods to the buyer without
transferring the ownership of goods. The payment for the goods will be made by the buyer in
installments. If the buyer pays all installments, the ownership of the goods will be transferred, on
payment of the last installment. However, if the buyer does not pay for any installment, the goods will
be repossessed by the seller and the money paid on earlier installments will be treated as hire
charges for using the goods.
Features of Hire Purchase System

1. Agreement: it is an agreement between hire vendor and hire purchaser.
2. Possession of Asset: The buyer takes possession of goods immediately and agrees to pay
the total hire purchase price in installments.
3. Transfer of Ownership: if the hire purchaser pays all installments, the ownership of the
goods will be transferred on payment of last installment.(purchase)
4. Repossession of Asset: if the hire purchaser stops paying the installments, the hire vendor
repossess the goods.
5. Hire Charges: at the time of repossession each earlier installments paid will be treated as
hire charges.(hiring)
6. Instalment Amount: each installment paid will be inclusive of cash price installment and
interest of cash price balance.
Difference Between Sale And Hire Purchase

Sale Hire purchase
1 It is governed by sale of goods act It is governed by the hire purchase act
The ownership of goods is transferred to
The ownership of goods is transferred to
2 the buyer on payment of all the
the buyer immediately.
installments.
The buyer makes the payment in lump
3 The payment is made in installments.
sum.
The hire purchaser pays for the price of
4 The buyer pays only for the price of goods.
goods and also some amount of interest.
On non payment of consideration the
On non payment of any installment, the
5 seller cannot take back the goods, but
seller can re-possess the goods.
can only take legal action on buyer.
Once a sale has taken place cannot be
6 Can terminate the contract.
terminate the contract.
7 When buyer becomes insolvent the seller When hire purchaser becomes insolvent
Dr Aruna P, Associate Professor, Dept of Commerce Page 1

has to under take the risk of loss. the seller can re-possess the goods.
A sale is subject to levy of sales tax at the Sales tax will be levied at the time of
8
time of contract of sale. transfer of ownership.
Difference between agreement to sell and hire purchase agreement

The transfer of property is to take place at a feature date subject some condition is called agreement
to sell. Howe ever the hire purchase agreement is differ from agreement to sell the following are the
differences
Agreement to sell Hire purchase agreement
1 It is regulated by sale of goods act, 1930 It is regulated by hire purchase act,1972
The possession of goods cannot takes place The possession of goods is transferred
2
immediately immediately.
In this case the buyer can sell or pledge the The hire purchaser cannot sell or pledge
3
goods. the goods.
The buyer can take the advantage of The hirer cannot so claim the benefit of
4 implied conditions and warranties under implied and warranties un less it become a
the act. sale.
It becomes a sale only after the payment is
5 It is the step to the contract of sale.
made in full.
Important terms and provisions

1. Hire purchaser: A hire purchaser is a person who possesses the goods under hire purchase
agreement for use within an option to either purchase it or return after use.
2. Hire vendor: a hire vendor is a person who sells the goods under hire purchase agreement.
3. Cash price: it is the price of goods which is sold under „contract of sale‟
4. Hire purchase price: it is the price at which the goods are sold under „hire purchase system‟ it
includes cash price of the goods and interest.
5. Installment money: it is the part of the hire purchase price paid by hire purchaser, in periodic
intervals.
6. Deposit: it refers any sum payable by the hirer under the hire purchase agreement by way of
initial payment or credited or to be credited to him under the agreement on account of any deposit.
7. Net cash price: it refers to the difference between cash price of the goods and deposit (cash
price-down payment=net cash price).
8. Net hire purchase price: it is the net amount after deducting the delivery charges, registration
charges, insurance charges from hire purchase price.
9. Hire charges: it is an amount refers to the difference between hire purchase price and cash price
(H P - C P = H C) it also referred to as interest.
10. Statutory hire charges: it is a hire charges according to the hire purchase act of, 1972.
11. Hire purchase agreement: it is an agreement between hire purchaser and hire vendor
according to section 2(c) of the hire purchase act, 1972 for purchasing of goods according to
agreement.
12. Rebate: it is an amount which is claimed by the hire purchaser from the hire vendor in case if he
decides to remit the balance of the purchase price (future installments) in lumsum without continuing
the hire purchasing agreement.
The rebate is calculated as follows
Rebate = 2/3 X hire charges X (no. of installments due/total no. of installments)

Termination of hire purchase agreement
The hirer can terminate the agreement at any time by giving the 14 days‟ notice to the owner.
However whatever the amount is already paid by the hirer is considered as a hire charges.
Rights of the Hire Purchaser upon repossession by the Owner

In case the owner repossesses the goods owing to failure of the hire purchaser to pay any instalment
on the due date, he will have to refund to the hire purchaser, any excess of amount paid by the hire
purchaser plus the value of the goods on the date of repossession over their hire purchase price of
such goods.
Rights of the Owner to Termination

Where the hire purchase agreement has been terminated, the owner is entitled to retain the hire which
has already been paid and to recover any arrears of hire which has become due. He will further be
entitled to repossess the goods. These rights will, however, be subject to the provision of Sec.17 and
20 of the Act.
Permission of the Court Required to Repossess the Goods in Certain Cases

(Sec.20)
In the following cases, the owner can repossess the goods from the hirer only with the permission of
the appropriate court.
i) When the hire price is less than Rs. 15,000 and one-half of the price has been paid.
ii) In any other case when three fourth of the hire purchase price has been paid.
iii) But the right of repossession will lapse in case of Motor Vehicles, if the hire purchase
price is less than Rs.5000 and ½ of the amount has been paid, or ¾ of the hire
purchase price has been paid in other cases. (The Central Government has the power
of raising the limit to 9/10 where hire purchase price is Rs.15,000 or more)
Accounting treatment in the books of hire purchaser

There are three methods to maintain the accounts in the books of hire purchaser they are.
A. Outright property method: under this method the asset is recorded at full cash price.
B. Asset accrual method: under this method the asset is recorded at the cash price actually paid
(asset accrued is recorded)
C. Interest suspense method: under this method the total interest is first debited to interest
suspense account at the beginning subsequently the interest due at the end of the period is credited
to interest suspense account.
Installment Purchase System:

Meaning: installment payment system is a system where the buyer is given the ownership as well as
the possession of the goods at the time of signing the contract. The buyer has the facility to pay the
price in installments.
Difference between hire purchase system and installment purchase system

Installment purchase system
Hire-purchase system
1 It is a hiring contract It is a contract of sale
The ownership is transferred only after The ownership is transferred by seller to buyer,
2 payment of all installments. immediately on signing the contract.
3 The position of buyer is like bailee The position of buyer is not a bailee.
The risk of loss or damaged goods The risk of loss or damaged goods must bear by
4
must bear by the seller. the buyer.
The default of payment of any
The default of payment of any installment by the
5 installment by the buyer, the seller
buyer, the seller cannot re-possess the goods.
can re-possess the goods.
The buyer can exercise the option of The buyer cannot exercise the option of return
6
return the goods. the goods.
The buyer cannot dispose the goods The buyer has the right to dispose the goods, if all
7
until the payment of all installments. installments are not yet paid.
Journal Entries to be Passed in the Books of Hire Purchaser

Sl.
Circumstances Outright property Asset accrual Interest suspense
No.
At the time of asset purchased.
Asset a/c Dr
Asset a/c ……….Dr Interest suspense a/c
01 When the asset is purchased No entry
To hire vendor a/c Dr
To vendor a/c
When the down payment is Hire vendor a/c Dr Asset a/c Dr Vendors a/c Dr
02
made To bank a/c To bank a/c To bank a/c
At the end of every year.
When the installment interest Interest a/c Dr Asset a/c Dr Interest a/c Dr
03 becomes due To hire vendor a/c Interest a/c Dr To interest suspense
To hire vendor a/c a/c
When the installment is paid Hire vendor a/c Dr Hire vendor a/c Dr Vendors a/c Dr
04
To bank a/c To bank a/c To bank a/c
When the depreciation is Depreciation a/c Dr Depreciation a/c Dr Depreciation a/c Dr
05
charged To asset a/c To asset a/c To asset a/c
When the depreciation and Profit / loss a/c Dr Profit / loss a/c Dr Profit / loss a/c Dr
interest is transferred to p/l To interest a/c To interest a/c To interest a/c
06
a/c To depreciation To depreciation To depreciation a/c
a/c a/c
JOURNAL ENTRIES IN THE BOOKS OF HIRE-VENDOR
Sl.
Circumstances Outright property Asset accrual Interest suspense
No.
At the time of asset purchased.
01 When the asset is sold Hire-purchaser a/c Dr No entry Purchaser a/c Dr
To sales a/c To sales a/c
To interest suspense a/c
02 When the down payment is Bank a/c Dr Asset a/c Dr Bank a/c Dr
received To hire-purchaser a/c To bank a/c To purchaser a/c
At the end of every year.
03 When the installment Hire-purchaser a/c Dr Asset a/c Dr interest suspense a/c Dr
interest becomes due To Interest a/c Interest a/c Dr To Interest a/c
To hire vendor a/c
04 When the installment is Bank a/c Dr Hire vendor a/c Dr Bank a/c Dr
received To hire-purchaser a/c To bank a/c To purchaser a/c
05 When the interest is Interest a/c Dr Profit / loss a/c Dr Interest a/c Dr
transferred to p/l a/c To Profit / loss a/c To interest a/c To Profit / loss a/c
To depreciation a/c

Note: Depreciation for concerned asset must be provided once in a year and also Interest as well as
Depreciation must be transferred to P & L A/c once in a year.
Case 1: When Cash Price, Rate of Interest, and Installment amount including Interest is given;
Mr. Ganesh purchased two cars on the Hire Purchase System on 1.1.2008, the cash price of being
Rs. 1,12,000. The payment is to be made as follows:
On signing the agreement Rs. 30,000 and thereafter Rs. 30,000 being paid annually for 3 years.
Interest was charged at 5% p.a. Depreciation was written off at 20% p.a. on the reducing balance
method.
Prepare necessary ledger Account in the books of Mr. Ganesh.

Solution:
Calculation of Interest included in Each Installment
Particulars Rs.
Cash price of the asset 1,12,000
Less: Down payment (30,000)
Outstanding balance in the beginning of 1st Year 82,000
Add: Interest for the 1st Year (82,000 5%) 4,100
86,100
Less: 1st Year installment (30,000)
Outstanding balance in the beginning of 2nd Year 56,100
Add: Interest for the 2nd Year (56,100 5%) 2,805
58,905
Less: 2nd Year installment (30,000)
Outstanding balance in the beginning of 3rd Year 28,905
Add: Interest for the 3rd Year (Bal. Fig) 1,095
30,000
rd
Less: 3 Year installment (30,000)
Nil
Calculation of Cash Price Included in Each Installment

Cash price in each installment = Installment Amount – Interest included in such
installment
For 1st Year (30,000 – 4,100) 25,900
For 2nd Year (30,000 – 2,805) 27,195
For 3rd Year (30,000 – 1,095) 28,905
Calculation of Depreciation (On Reducing Balance Method) for each year

Year Opening Balance Depreciation @ 20% p.a. Closing Balance
2008 1,12,000 22,400 89,600
2009 89,600 17,920 71,680
2010 71,680 14,336 57,344
Case 2: When Cash Price, Rate of Interest, and Installment Excluding Interest amount is
given;
Mr. Sunil purchased a Plant costing Rs. 4,00,000 on 1.4.2008 under Hire Purchase System, the
terms being a payment of Rs. 1,00,000 down payment and the balance in 3 equal annual
installments together with interest at 20% p.a. on the outstanding cash price.
Depreciation is to be charged at 15% p.a. under diminishing balance method.
Prepare necessary ledger account on the books of Mr. Sunil under Asset Accrual Method.
(Bangalore University B.Com Nov. 2004 and BBM Jun. 2007)
Solution:
Calculation of Interest for Each Installment
Particulars Rs.
Cash price of the asset 4,00,000
Less: Down payment (1,00,000)
Outstanding Cash Price balance in the beginning of 1st Year 3,00,000
Interest for the 1st Year (3,00,000 20%) = Rs. 60,000
st
Less: 1 Year Cash Price for Installment (1,00,000)

Outstanding Cash Price balance in the beginning of 2nd Year 2,00,000
Interest for the 2nd Year (2,00,000 20%) = Rs. 40,000
Less: 2nd Year Cash Price for Installment (1,00,000)
Outstanding Cash Price balance in the beginning of 3rd Year 1,00,000
Interest for the 1st Year (1,00,000 20%) = Rs. 20,000
rd
Less: 3 Year Cash Price for Installment (1,00,000
Nil
Case 3: When Rate of Interest, Installment Including Interest amount is given, but Cash Price
is Not Given:
Down payment 1,500
1st installment payable at the end of first year 10,800
2nd installment payable at the end of second year 10,350
3rd installment payable at the end of third year 9,900
th
4 installment payable at the end of fourth year 9,450
Rate of interest 5% p.a.
Rate of depreciation 20% p.a. under straight line method.
Solution:
Calculation of Cash Price and Interest Included in Each Installment
Hire purchase price due Interest due at the end of Cash price due at the
Year
at the end of the year the year @ 5% end of the year
(a) (b) (c) = (a) – (b)
4th Year 9,450 9,450 105 5 = 450 9,000
3rd Year 9,000 + 9,900 = 18,900 18,900 105 5 = 900 18,000
2nd Year 18,000 + 10,350 = 28,350 28,350 105 5 = 1,350 27,000
1st Year 27,000 + 10,800 = 37,800 37,800 105 5 = 1,800 36,000
Cash Price Outstanding in the beginning of 1st Year 36,000

Add: Down Payment made 1,500
Total Cash Price of the Asset 37,500
Case 4: When Cash Price, Installment Including Interest amount is given, but Rate of Interest, is
Not Given:
On 1.1.2006 ABC Co. Ltd took delivery from XYZ Ltd of a Machine under Hire Purchase System.
Rs. 1,500 being paid on delivery and balance in 5 annual installments of Rs. 3,000 each payable
on 31st December of each year.
The cash price of the Machine was Rs. 15,000. Calculate interest for each year, and also pass
necessary journal entries in the books of ABC Co. Ltd.
(Tumkur University BBM Apr. 2007)
Solution:
Calculation of Total Hire Purchase Price
Hire Purchase Price = Down Payment + Total Installment (Including Interest)
= 1,500 + (3,000 x 5)
= 16,500.
Calculation of Total Interest

Total Interest = Total Hire Purchase Price - Total Cash Price
= 16,500 – 15,000
= 1,500.
Calculation of Outstanding H.P Price in the beginning of each installment
Particulars Rs.

Total Hire Purchase Price Payable 16,500
Less: Down Payment made (1,500)
H.P Price outstanding in the beginning of 1st Year 15,000
Less: 1st Year Installment (3,000)
H.P Price outstanding in the beginning of 2nd Year 12,000
Less: 2nd Year Installment (3,000)
H.P Price outstanding in the beginning of 3rd Year 9,000
Less: 3rd Year Installment (3,000)
H.P Price outstanding in the beginning of 4th Year 6,000
Less: 4th Year Installment (3,000)
H.P Price outstanding in the beginning of 5th Year 3,000
Less: 5th Year Installment (3,000)
Nil
Calculation of Ratio’s for the Outstanding H.P price in the beginning of each year
Year 1 2 3 4 5
O/s H.P Price 15,000 12,000 9,000 6,000 3,000
Ratio 5 4 3 2 1
Therefore the total interest must be allocated to each year based on the
Ratio as
calculated above.
Interest for the 1st Year = 1,500 15 5 = Rs. 500
Interest for the 2nd Year = 1,500 15 4 = Rs. 400
Interest for the 3rd Year = 1,500 15 3 = Rs. 300
Interest for the 4th Year = 1,500 15 2 = Rs. 200
Interest for the 5th Year = 1,500 15 1 = Rs. 100 Rs.
39,927
Case 5: When Each Installment, Rate of Interest, and Annuity Table Value is Nil
given and Cash
39,927
Price Not Given:
3,194
0n 1st April 2012 Mr. Rajesh purchased a LED Television set from Charith and 43,121
Co. on Hire Purchase System and agreed to pay Rs. 10,000 each in 5 annual (10,000)
installments. The rate of interest involved is 8% p.a. from the annuity tables it is 33,121
ascertained that the present cash value of Rs. 1 for five years at 8% is Rs.
2,649
3.9927.
35,770
Calculate the cash price of the TV set and also calculate the interest involved in
each (10,000)
installment. 25,770
Solution: 2,062
Computation of Cash Price 27,832
Cash Price = Annual Installment x Annuity Table Value (10,000)
= 10,000 x 3.9927 17,832
= Rs. 39,927. 1,426
Computation of Interest Included in Each Installment 19,258
Particulars (10,000)
Cash price of the asset 9,258
Less: Down payment 742
Outstanding balance in the beginning of 1st Year 10,000
(10,000)
Add: Interest for the 1st Year (39,927 8%)
Less: 1st Year installment

Outstanding balance in the beginning of 2nd Year
Add: Interest for the 2nd Year (33,121 8%)
Less: 2nd Year installment

Outstanding balance in the beginning of 3rd Year
Add: Interest for the 3rd Year (25,770 8%)
Less: 3rd Year installment

Add: Interest for the 4th Year (17,832 8%)
Less: 4th Year installment

Add: Interest for the 5th Year (Bal. fig)
Less: 5th Year installment
Nil
Case 6: When only Installment amount is given and Cash Price and Rate of Interest are not given:
Mr. Raju has purchased a Car under Hire Purchase System with the following terms of payment;
Rs. 40,000 at the time of entering into the agreement Rs.

20,000 at the end of first year
Rs. 18,000 at the end of second year
Rs. 15,000 at the end of third year
Calculate the Cash price and interest included in each installment.
Solution:
Let us assume that cash price paid in each installment be as „C‟ and interest included as „i‟
In that case as per the given information we can frame the following 4 equations i.e., C + 3i =
Rs. 20,000…………………… (1)
C + 2i = Rs. 18,000…………………… (2)
C + 1i = Rs. 15,000…………………… (3)
Adding the (2) and (3) equations will get
2C + 3i = Rs. 33,000.…………………. (4)
Therefore to find out the value of „C‟ Deduct the 1st equation from 4th equation i.e.,
2C + 3i = Rs. 33,000
Less: C + 3i = Rs. 20,000
C = Rs. 13,000
Therefore cash paid in each installment is Rs. 13,000
Calculation of Interest in each installment

Interest = Installment amount – Cash Price included
For the 1st Year = 20,000 – 13,000 = Rs. 7,000
For the 2nd Year = 18,000 – 13,000 = Rs. 5,000
For the 3rd Year = 15,000 – 13,000 = Rs. 2,000

Calculation of Total Cash Price
Cash Price = Down payment + Cash Price in all the installment
= 40,000 + (13,000 x 3)
= Rs. 79,000
Problems Under Hire Purchase System

1 A Motor Company purchased a truck on 1st January 1996, the cash price being Rs.56,000. The
purchase is on hire purchase basis, Rs.15,000 being paid on signing the contract and thereafter
Rs.15,000 being paid annually for 3 years. Interest was charged at 5%. Depreciation was
written off at the rate of 20% per annum on the reducing balance system. Prepare Motor truck
account and Vendor‟s account in the books of the Motor Company.
2 On 1st January, 2001 Sharda purchased a machine from Kusum on hire-purchase basis. The
particulars are as follows:
x Cash Price Rs.10,000

x Rs.4,000 to be paid on signing the contract
x Balance in three installments of Rs.2,000 plus interest
x Interest charged on outstanding balance at 5%
x Depreciation at 10% p.a. on Written Down Value Method.
Prepare the necessary ledger accounts in the books of Sharda.
3 X purchased a Machine on hire-purchase system. The total cash price of the machine is
Rs.31,960, payable Rs.8,000 down, and three intalments of Rs.12,000, Rs.10,000 and Rs.4,000
payable at the end of the first, second and third year respectively. Interest is charged at 5% p.a.
Charge depreciation at 10% on straight line method. Prepare Ledger Accounts in the books of
X.
4 Mr. Suresh purchased a motor cycle on the hire purchase system on 1-1-2010. Total cash price
of the motor cycle is Rs.31,960 payable Rs.7,960 down and three installments of Rs.8,000 each
plus interest at 6% per annum payable at the end of the year. Depreciation is to be charged at
10% per annum on diminishing balance.

Prepare Motor cycle account and Hire vendor‟s account in the books of Mr. Suresh.
5 Calculate the amount of each installment from the following details.

Cash price is Rs.12,00; Down payment is 20% of cash price, balance of cash price is payable in
3 equal installments together with interest @10% on outstanding cash price.
6 On 1st January, 2006 Sunil purchased a machine from Kusum on hire-purchase basis. The
particulars are as follows:
x Cash Price Rs.20,000

x Rs.8,000 to be paid on signing the contract
x Balance in three installments of Rs.4,000 plus interest
x Interest charged on outstanding balance at 5%
x Depreciation at 10% p.a. on Written Down Value Method.
Prepare the necessary ledger accounts in the books of Sunil.
7 Mr. Ganesh purchased machinery on hire purchase system on 1 st July 2002 and agreed to pay
in five installments as follows:
x On 30th June 2003, Rs.4,500

x On 30th June 2004, Rs.4,200
x On 30th June 2005, Rs.3,900
x On 30th June 2006, Rs.3,600
x On 30th June 2007, Rs.3,300
He has also agreed to pay 10% per annum interest on unpaid balance of cash price. The
purchaser writes off depreciation at 8% on diminishing balance of the asset. Compute the cash
price and show the following ledger accounts: a. Machinery account; b. Vendor‟s account.
8 On 1.1.2010 XYZ Co. Ltd. took delivery from ABC co. Ltd a machine on hire purchase system.
Rs.1,500 being paid on delivery and the balance in 5 annual installments of Rs.3,000 each
payable annually on 31st Dec. The cash price of machine was Rs.15,000. Show the amount of
interest included in each installment.
9 P purchased a T.V. on hire purchase system. The cash price of the T.V. was Rs.7100.
He agrees to pay down payment of Rs. 2000 and three annual installments of Rs.2000 each.
Calculate interest for each year.
10 Paresh purchased a bike on hire purchase system. The cash price of the bike was
Rs.7,200. He agrees to pay four quarterly installments of Rs.2,000 each. Calculate interest for
each quarter.
11 Y purchased a Machine on hire-purchase system. The total cash price of the machine is
Rs.63,920, payable Rs.16,000 downpayment, and three installments of Rs.24,000, Rs.20,000
and Rs.8,000 payable at the end of the first, second and third year respectively. Interest is
charged at 5% p.a. Charge depreciation at 10% on straight line method. Prepare Ledger
Accounts in the books of Y.

12 On 1st January 2004, Rakesh and Co. acquired a machine on hire purchase. The terms of the
contract were as follows:
x Cash price of the machine was Rs.20,000

x Rs.8,000 were to be paid on the signing of the contract.
x The balance was to be paid in annual installments of Rs.4,000 plus interest.
x Interest chargeable on outstanding balance was at the rate of 6% per annum.
x Depreciation at the rate of 10% per annum is to be written off on the straight line
method.
You are required to show Machinery account and Hire vendor‟s account in the books of
Rakesh and Co. from 1stJanuary 2004 to 31st December 2005.
13 Calculate the cash price of the asset. Down payment Rs.1500, first installment
Rs.10,800; second installment Rs.10,350; third installment Rs.9,900 and fourth installment
Rs.9,450 payable at the end of the each year. Rate of Interest is 5% per annum. Rate of
depreciation is 20% per annum (Straight line method). Also prepare Interest account in the
books of the hire purchaser.
M.Com., MBA., NET., KSET., JRF., (CA)
Installment Purchase System

Meaning: installment payment system is a system where the buyer is given the ownership as
well as the possession of the goods at the time of signing the contract. The buyer has the facility
to pay the price in installments.
Features:
1. Under this system, there will be an outright sale of goods.
2. The possession as well as ownership is transferred to the buyer at the time of signing the
contract agreement.
3. The buyer can make the payment in installments.
4. In case of default in payment the seller cannot repossess the goods, but he can sue the
buyer for the recovery of unpaid amount.
5. The buyer cannot option of returning the goods and terminate the contract.
Difference between Hire Purchase System and Installment Purchase System

Sl. Basis of
No. Difference Hire-Purchase System Installment Purchase
Nature of
1 Contract It is a contract of hiring It is a contract of sale
It is transferred by seller to It is transferred by seller to buyer,
2 Ownership buyer only after payment of immediately on signing the
all installments contract.
In this case, the buyer is like In this case, the buyer is not in the
3 Position of Buyer a bailee position of a bailee
Risk of loss or
4 damage to goods Such risk is on the seller Such risk is on the buyer
On default and payment of any
On default of payment of installment by the buyer, seller
Repossession and any installment by the cannot repossess the goods, but
5 goods by seller buyer, the seller can can file a suit in the court of law
repossess the goods against the buyer for the recovery

of unpaid price.
The buyer can exercise the The buyer cannot exercise the
6 Return of goods option of return of goods option of return of goods
The buyer cannot dispose
the goods, until the payment
The buyer has the right to dispose
Right of disposal of last installment. If
7 the goods, even if all installments
to the buyer disposed, the third party
buyer does not get a better are not yet paid.
title
Preparation of ledger accounts: -
In the books of purchaser: -
1. Asset a/c
2. Vendor a/c
3. Interest suspense a/c
4. Interest a/c
5. Depreciation a/c
In the books of vendor: -
1. Purchaser
2. Bank a/c
3. Interest a/c
4. Profit and loss a/c
Problems Under Installment Purchase System

1 Mahaveer purchased a car on installment system on 1-1-2001. The total cash price of the car is
Rs.15,980 payable Rs.4,000 as down payment and the balance in three installments of
Rs.6,000, Rs.5,000 and Rs.2,000 payable at the end of the first, second and third year
respectively. Interest is charged at 5% per annum, Give journal entries in the books of
Mahaveer. Rate of depreciation is 10% on the diminishing balance method.
2 The rate of interest is 5% per annum, payment including interest is to be made in four annual
installments of Rs.5,000; the first one being made on signing the agreement. Calculate the cash
price and the total interest. also prepare seller's account in the books of buyer.
3 Vijay purchased a motor-car from Mysore Motors on 1st January 1996 on installment system.
The payment is to be made as follows: Rs.40,000 on delivery, Rs.76,000 at the end of the first
year, Rs.60,000 at the end of the second year and Rs.55,000 at the end of the third year.
Interest at 10 percent per annum is included in these installments. Vijay charges depreciation on
the motor car at 20% per annum on the diminishing balance. You are required to prepare
necessary accounts in the books of Vijay and show the interest calculation.
4 Mr. James purchased a colour TV costing Rs.20,000 on 1-4-2005 from Uday

Electronics under installment system, the terms being Rs.5,000 down and the balance in three
equal annual installments together with interest at the rate of 20% per annum on the
outstanding cash price. Depreciation was charged at the rate of 15% per annum under straight
line method. Prepare James‟ account and interest suspense account in the books of Uday
Electronics.
5 Mr. X bought on 1st January 2005 an Ambassador car from Bengal Distributors limited. The

agreement provided payment of Rs.60,000 on delivery and 3 installments of Rs.60,000 each to
be paid on 31st December every year. The cash price of the car was Rs.2,23,500. The vendor
charges interest at 5% per annum on yearly balance. Show Bengal Distributors Ltd. A/c in the
books of X using installment purchase system.
6 Osaka Company purchased a truck under installment system for a cash price of
Rs.46,500 on 1-1-99, Rs.1,500 is to be paid on signing the agreement, the balance is payable in
three installments of Rs.15,000 each annually together with 5% interest. Depreciation is to be
charged at the rate of 10% per annum on the reducing balance method. Prepare the truck
account for the first 3 years and calculate the total interest.
7 Mr. Arun purchased a machine costing Rs.40,000 on 1-4-96 from Maruti Enterprises under
installment system, on the following terms: Rs.10,000 down payment and the balance in three
equal annual installments payable at the end of each year together with interest at the rate of
12% per annum on the outstanding cash price. Depreciation is to be charged at 20% per annum
under diminishing balance method. Prepare the following ledger accounts in the books of Mr.
Arun up to 31-3-99: Asset account, Vendor‟s account, Interest Suspense account.
8 Calculate the ratio of amount due from the following information:

Cash price Rs.2,00,000, Down payment Rs.50,000, 3 installment of Rs.60,000 each payable at
the end of the year.
9 On 1st January 2006, Shakti Oil Company purchased an oil machine from Oilers Ltd. on the
installment system. The cash price of the machine was Rs.1,11,750 and the payment was to be
made as follows: Rs.30,000 was to be made on signing of the agreement and the balance in
three installments Rs.30,000 each at the end of each year. 5% interest is charged by the Delhi
Company per annum. Shakti Oil Company has decided to write off the oil machine at 10% per
annum on the diminishing balance of the cash price. Prepare Journal entries in the books of
both Shakti Oil Company and Oilers Ltd. Calculations are to be made to the nearest rupee.
10 On 1st Jan 2010 a company purchased wagons on the Installment system. The cash price of
the wagons was Rs.59,600 and the payment was to be made as follows:
Rs.16,000 was to be paid on signing the agreement and the balance in 3 installments of
Rs.16,000 each at the end of each year. 5% interest is charged by the Wagon Company.
Calculate Interest for each year.
11 On 1st January 1991 a company “A Ltd.” purchased a wagon from “B Ltd” on installment
system. The cash price of the wagon was Rs.59,600 and the payment was to be made as
follows; Rs.16,000 was to be paid on the agreement and the balance in three installments of
Rs.16,000 each at the end of each year. 5% interest per annum is charged by the wagon
company. The buyer has decided to write off 10% annually on diminishing balance of cash
value. Prepare necessary ledger accounts in the books of the buyer.
12 Calculate the interest amount from the following information:

Cash price Rs.1,00,000; Down payment Rs.25,000; 3 installment of Rs.30,000 each payable at
the end of the year.

ROYALTY ACCOUNTS
Introduction
The owner of an asset (e.g. mines, quarries, patent, copyright, etc), as a business
arrangement, may allow other party (lessee, licensee, publisher, etc) the right to use that
asset against some consideration Such consideration is calculated with reference to the
quantity produced or sold. This payment to the owner by the user of the asset is termed as
Royalty. Royalty is an amount payable for utilizing the benefit of certain rights vested with
some other person. For example a landlord possesses right over the mine in his land, the
author of book possesses right over his book. When the rights are leased the owner receives
a consideration for the same which is called royalty.
Meaning:
Royalty: royalty is a periodical sum based on the out put payable by the lessee to the
lessor for having utilized the rights of the lessor.
In other words Royalty is the periodical payment made by the tenant to the landlord for
using his tangible or intangible assets royalty is calculated on the gross output or sales
made by the tenant. Royalty is just like a rent .rent is paid monthly but it is paid annually.
It is paid by lessee to the lesser. A minimum rent must be paid by the lessee to the lesser
According to J.R Batliboi “the royalty expresses an amount of payment by one, in return
for some special rights or privilege conceded to him by another person such as the rights
for publishing a book, or work a mine etc.
Lessee: is a person who makes the payment to the owner for utilizing the rights.
Lessor: is a person to who the payment is made, is also the owner of the property.
Minimum rent or dead rent: minimum rent or dead rent is a minimum amount payable
by the lessee to the lessor according to agreement irrespective of the volume of output. It is
payable only when the royalty is less then minimum rent.
Short workings: the excess of minimum rent over actual royalty is called short working.
This excess is called short working for lessee and it is called short working suspense for the
lessor.
Recoupment or recovery of short workings: Recoupment of short working refers to

recovering the short working of any year, from surplus royalty of the succeeding years.
In other words its refers to the recovery of short working s of the previous years out o f
surplus royalty of subsequent years.
There are 3 types of recoupment. There are:

a. Fixed Recoupment: When Recoupment is permitted only over a fixed or stipulated
period from the date of commencement is called Fixed Recoupment.
b. Floating Recoupment: When Recoupment is permitted over a subsequent period
following the year of short workings. Fixed period is allowed from the year on which
short workings are arises is known as Floating Recoupment.
c. Recoupment within the life of lease: When Recoupment is permitted over the life
time of lease, no restriction of time for Recoupment of short workings.
Dr.Aruna P, Associate Professor, Dept. of Commerce Page 1

Sub-lease: If the lessee leases out to some other person the property taken on lease (either
part or full) it is known as sub-lease. In such a case the status of the lessee will be two-fold,
as a lessee paying royalty to the landlord and as a sub-lesser receiving royalty from the sub-
lessee.
Lapse of Short Working: Lapse of S/W means the excess rent over royalty paid earlier to
the lessor cannot be recouped by the lessee. Such lapse of S/W is a loss to the tenant
because he cannot recover excess payment to the landlord.
Such recoupment of S/W is neither a loss nor gain to the tenant because he recovers what
he has paid excess earlier to the landlord.
Difference between Rent and Royalty

Basis of difference Rent Royalty
In this case the payment
It is the consideration
payable for only special
payable for the use of only
1. Nature of assets rights for both tangible and
tangible assets such as
intangible assets such as
machinery, building etc
books, songs etc
The payment made On the
Here payment paid on the
basis of time as weekly,
2. Basis of payment basis of production yield or
monthly or yearly
sale
The amount of royalty is
The amount of rent is
variable and is calculated in
3. Fixed or variable generally fixed with regard to
accordance with production
time.
or sales
It generally contains a clause
There is no concept of
4. Minimum Rent in the agreement to pay
minimum rent
minimum rent.
Here tenant and Landlord Here lessee ,patentee, lessor
5. Parties
are the parties author are the parties
ACCOUNTING TREATMENT
Accounting entries in the books of LESSEE

Without Minimum Rent Account
Sl. Royalties are less then the Royalties are more then the
Circumstances
No. minimum rent minimum rent
Royalties A/c………………….Dr Royalties A/c…………………..Dr

01 For Royalty payable Short working A/c……………Dr To Short working a/c
To Land lord a/c To Land lord a/c
Land lord A/c…………………………………….Dr
02 For payment of royalty
To Bank a/c
Profit and loss a/c / Production A/c………………….Dr
03 For transfer of royalty
To Royalty a/c
In case short working is not completely recovered (non-recovery of short working)
For transfer of short- Profit and loss A/c………………………Dr
04
working To Short working a/c

With Minimum Rent Account
Sl. Circumstances Royalties are less than the Royalties are more than the
For minimum rent Minimum rent A/c…………….Dr
01 No entry
payable To land lord a/c
Royalty A/c…………….Dr Royalty A/c…………….Dr
02 For Royalty payable Shortworking A/c………. Dr To Shortworking A/c
To Land lord A/c To Land lord A/c
Land lord A/c…………………..Dr

03 For payment of royalty
To Bank a/c
Profit and loss A/c / Production A/c………………..Dr
04 For transfer of royalty
To Royalty a/c
For transfer of short- Profit and loss A/c…………………………………Dr
05
working To Short working a/c
Accounting entries in the books of LESSOR

Sl. Circumstances Royalties are less than the Royalties are more than the
Lessee’s A/c………………..……….Dr Lessee’s A/c………………………Dr
For Royalty
01 To Short working suspense A/c Short working suspense A/c….Dr
receivable
To Royalties receivable A/c To Royalties receivable A/c
For receipt of Bank A/c……………………….Dr
02
royalty To Lessee’s a/c
For transfer of Royalty receivable A/c…………………….Dr
03
royalty To Profit and loss a/c
For transfer of short- Short working suspense A/c………………………………. Dr
04
working to P&L a/c To Profit and loss A/c
PROBLEMS UNDER ROYALTY ACCOUNTS

1. Prepare an Analytical Table from the following;
Royalty Rs. 5 per ton of output, Dead Rent Rs. 20,000 p.a. Power to re-coup short workings
during the first four years of the lease. Output during the first five years: 2000, 3000, 4000,
4500 and 5000 tons respectively.
(Bangalore University BBM., 2011 & 2008)
[Ans: S/w 1 Year 10,000, 2
st nd Year 5,000, S/w Recovered 4th Year 2,500 and
Irrecoverable 12,500]
2. Prepare an analytical table of- royalty from the following details

i) Minimum rent Rs. 30,000
ii) Royalty Rs. 2 per ton Coal raised.
iii) Short workings are recoverable during first 3 years lease only.
iv) The output for the 1st four years was
2001 - 4,000 tons, 2002 - 8,000 tons.
2003 - 16,000 tons, 2004 - 4,000 tons.
(Bangalore University B.Com Dec 2007)

[Ans: S/w 2001:22,000, 2002:14,000, S/w Recovered 2003:2,000 and Irrecoverable
34,000]
3. Prepare an analysis table from the following details.

Minimum rent Rs. 15,000 p.a,
Royalty payable 75 paise per ton of output
Short workings can be recouped in the next two years out of excess royalty Output for the
first four years - 10,000 tons, 12,000 tons, 28,000 tons and 25,000 tons respectively.
(Bangalore University., B. Com 2009)
[Ans: S/w 1st Year 7,500, 2nd Year 6,000, S/w Recovered 3rd Year 6,000 and
Irrecoverable 1,500, 4th Year Recovered 3,750 and Irrecoverable 2,250]
4. On 1-1-03 X Collieries leased out some land for a minimum rent of Rs. 3,000 for the 1 st
year, Rs. 5,000 for the 2nd year and there after Rs. 10,000 p.a. merging Into a Royalty of 50
paise per tonne with a power to recoup short workings over two years after occurring of the
short workings. The annual output for the 4 years were.
2003 - 3,000 tonnes 2004 - 8,600 tonnes 2005 - 22,000 tonnes 2006 -21,000 tonnes
Prepare an analysis table.
(Bangalore University.BBM. 2010)
[Ans: S/w 1st Year 1,500, 2nd Year 700, S/w Recovered 3rd Year 1,000 and
Irrecoverable 500, 4th Year Recovered 500 and Irrecoverable 200]
5. The Bangalore Mine Company obtained a mine on lease for a period of 30 years
beginning from 1.1.2000 on the following terms:
(i) To pay minimum’ rent of Rs. 24,000 per year.
(ii) Each year’s excess of minimum rent over the actual royalties i.e., shortworkings
can be recovered during the subsequent two years.
(iii) Due to accident or strike minimum rent is to be reduced by 25% for that year.
(iv) Royalty was to be calculated at 50 paise per ton.
Production during four years from 2000 to 2003 was as follows:
Year Production In Tons
2000 - 28,000
2001 - 36,000
2002 - 60,000
2003 (Strike for 3 months) 44,000
Prepare analytical table.
(Bangalore University. BBM. 2006)
[Ans: S/w 2000:10,000, 2001:6,000, S/w Recovered 2002:6,000 and Irrecoverable
4,000, S/w Recovered 2003:4,000 and Irrecoverable 2,000]
6. Prepare an analysis table from the following details assuming that short workings are
recouped in the first three years.
Royalty payable Rs. 2 per ton of output.
Minimum Rent Rs. 35,000 p.a The details are
Year Output
2000 10,000 tons
2001 17,500 tons
2002 25,000 tons
2003 30,000 tons
(Bangalore University., BBM. 2005)

[Ans: S/w 2000:15,000, S/w Recovered 2002:15,000 and Irrecoverable 15,000, S/w
Recovered 2003:25,000]
7. Govinda Ltd. took a lease of land at Bangalore from Kubera on 1st January 2009. The
Minimum Rent being Rs. 1,00,000 with a right to recoup the short workings during the next
two years. Royalty during the first five years was as follows.
Year Royalty
2009 60,000
2010 90,000
2011 97,500
2012 1,20,000
2013 1,42,500
Prepare Analytical Table.
[Ans: S/w 2009:40,000, 2010:10,000, 2011:2,500 S/w Recovered 2012:12,500,
2013:2,500]
8. X owned certain patent rights. He granted a License to Y to use such rights on Royalty
basis. The following are the relevant particulars:
Year Minimum Rent Output Royal Earned
1995 3,750 2,500
1996 5,000 4,500
1997 6,250 4,500
The deficiency of any one year is to be set off against excess payable within next two years.
Give journal entries in the books of Y.
(Bangalore University., B.Com 1998)
[Ans: S/w Irrecovered 1997:1,250]
9. Mr, Ranmanujan patented an automatic door closer and granted to Mr, Raju the license
to manufacture and sell the closers for 10 years on the following terms.
a. Raju to pay a Royalty of Rs. 5 for every closer sold with a minimum rent of Rs.
2,500 p.a.
b. Raju could set off the shortworkings arising in any year against surplus royalties
payable in the next 2 years.
c. From the second year onwards, the dead rent is agreed upon at Rs. 2,000 instead of
Rs. 2,500 and all the other terms being unchanged.
The other details are:
Year Production(units) Closing stock (units)
1 125 25
2 225 50
3 285 35
4 515 50
Show ledger accounts in the books of Raju and company, including minimum rent
accounts.
(Bangalore University, B.com 2006)
[Ans: S/w 1st Year 2,000, 2nd Year 1,000, 3rd Year 500, S/w Recovered 4th Year 500
and Irrecoverable 500]
10. Karnataka Mines Ltd., Chickmagalur, gave a lease to Maharastra Co. Ltd., of a mine for
a period of 25 years from 1 st January, 1991 on a royalty of Rs. 5per ton of minerals
extracted

with a Dead Rent of Rs. 40.000 and power to recoup shortworkings during the entire period
of the lease. The annual output was as under:
1991 - 4,000 tons 1994 - 9,000 tons
1992 - 6,000 tons 1995 - 10,000 tons
1993 - 8,000 tons 1996 - 10,500 tons
Prepare the necessary ledger accounts In the books of Maharastra Co. Ltd. to record the
above transactions for the first six years of the lease period. Also show how these items will
appear In the annual Profit and Loss Account and Balance Sheet of me Maharastra Co. Ltd.
(Adapted from Mysore University)
[Ans: S/w 1991:20,000, 1992:10,000, S/w Recovered 1994:5,000, 1995:10,000,
1996:12,500]
11. The Bihar Coal Co. Ltd. holds a lease of coal mines for a period of twelve years,
commencing from 1st April 2002. According to the lease, the company is to pay Rs. 7.50 as
royalty per ton with a minimum rent of Rs. 150,000 per year Short workings can, however,
be recovered out of the royalty in excess of the minimum rent of the next two years only. For
the year of a strike the minimum rent is to be reduced to 60%. The output in tons for the 6
years ending 31st March, 2008 is as under:
2002-03: 10,000; 2003-04: 12,000; 2004-05: 25,000; 2005-06: 20,000; 2006-07: 50,000;
and 2007-08: 15,000 (strike). Write up the necessary Ledger Accounts in the books of
Bengal Coal Co. Ltd.
(Adapted from Company Secretarial)
[Ans: S/w 2002-03:75,000, 2003-04:60,000, S/w Recovered 2004-05:37,500, and
Irrecoverable 37,500, 2005-06:60,000]
12. Mr. David wrote a book and got it published with M/s Popular Publishers on the terms
that royalty will be paid at Rs. 5 per copy sold subject to a minimum payment of Rs. 15,000
with a right to recoupment of short workings over the first three years of the royalty
agreement.
From the following details write up:
a) Minimum Rent A/c
b) Royalty A/c
c) Short, workings A/c and
d) Mr. David’s A/c
Year No. of copies printed Closing Stock

2007 2000 100
2008 3000 200
2009 4000 400
2010 5000 500
[Ans: S/w 2007:5,500, 2008:500, S/w Recovered 2009:4,000 and Irrecoverable 2,000]
13. The Jharia Coal Co. Ltd., leased a land from landlord for 10 years from 1st January,
1992 on the following terms:
The Jharia Coal Co, Ltd., shall pay a minimum rent of Rs. 1,400 per year for the first year
with an annual increase of Rs. 140 in every subsequent year in the minimum rent merging
into a royalty of 25 paise per ton of coal taken out with the power to recoup shortworkings
in the first three years only.
The annual output for the first five years was as follows:
Year Tons

1992 1,400
1993 4,200
1994 8,400
1995 11.200
1996 3,920
Record the above transactions in the books of the Jharia Coal Co. Ltd. Only journal entries
are required.
(Adapted from Mysore University, B.Com.,)
[Ans: S/w 1992:1,050, 1993:490, S/w Recovered 1994:420 and Irrecoverable 1,120]
14. X Ltd. took certain lands on lease from Y Ltd. for a period of 15 years, for mining
limestone with a stipulated royalty of Rs. 6 per ton and a minimum rent of Rs. 84,000 with a
clause to recoup short workings over three subsequent years.
The actual working results were:
Year Output (tonnes) Actual-Royalty
(Rs.)
1998 32,000 48,000
1999 64,000 96,000
2000 52,000 78,000
2001 68,000 1,02,000
2002 1,75,200 2,62,800
You are required to show the Royalties account, Short-working account, Y Co. account and
all calculations in the books of X Ltd.
(ICWA Inter 2003)
[Ans: S/w 1998:36,000, S/w Recovered 1999:12,000, S/w 2000:6,000, S/w Recovered
2001:18,000 and Irrecoverable 6,000, S/w Recovered 2002: 6,000]
15. On 1st January. 1993, the Mysore Collieries Ltd, leased a piece of land for a minimum
rent of Rs. 2,000 in the first year, Rs. 4,000 in the second year and thereafter Rs. 6.000 per
annum merging into a royalty of 25 paise per ton with power to recoup shortworkings over
the first three years only. The annual output for the four years ending with 31 st December,
1996 was 2,000, 12,000; 32,000 and 48,000 tons respectively.
Show how these accounts would appear in the books of Mysore Collieries Ltd.
(Adapted from Mysore University, B.Com.)
[Ans: S/w 1993:1,500, 1994:1,000, S/w Recovered 1995:2,000 and Irrecoverable 500]
16. Mr. Sharma took a lease of Mines from Mr. Singhania with effect from 1st January 1990
for a period of 20 years. The terms of agreement provided for the payment of royalty @
Rs.
0.60 per ton raised, subject to a minimum rent of Rs. 12.000 per annum, with a right to
recoup short workings, within a period of 3 years immediately succeeding the year in which
the short working arises, It was further agreed that the minimum rent should be reduced
proportionately, in case of strikes or lock - outs in any year.
You are furnished with the following details:
Year Tons raised
1996 23,000
1997 18,700
1998 15,400 (there was a strike period of 3 months from October to December)
1999 19,000
2000 20,600
2001 22,600
The balance in short working account as on January 1, 1996 was Rs. 4,900 of which Rs.

2,200 arose in 1993 and the balance in 1994.

You are required to show the Royalty Account, Short Working A/c and Mr. Singhania’s A/c
in the Books of Mr. Sharma for all the above 6 years.
(ICWA inter 2002)
[Ans: S/w 1997:780, S/w Recovered 1998:240, S/w 1999:600, S/w Recovered
2000:360 and Irrecoverable 180, S/w Recovered 2001: 600]
17. A mining company leased a property from P at a royalty of Rs. 5 per ton with a minimum
rent of Rs. 12,000 p.a. Each year excess of minimum rent over royalty is recoverable out of
the royalties of the next three years. The results of the workings are as follows :
Years Output (tons)
2004 1,000
2005 1,500
2006 2,000
2007 2,800
2008 3,000
Prepare necessary ledger accounts in the books of the company for five years.
[Ans: S/w 2004:7,000, 2005:4,500, 2006:2,000, S/w Recovered 2007:2,000, and
Irrecoverable 5,000, S/w Recovered 2008: 3,000 and Irrecoverable 1,500]
18. On 1 -1 -1997. Basu obtained a mining lease and from that date he sub-leased a part of
the mine to Ganeshan. Show ledger accounts In Basu’s books from the following data:
Year Lease Sub-lease
1997 tonnes-raised 1,000 1,000
1998 tonnes raised 3,000 2,000
1999 tonnes raised 12,000 5,000
2000 tonnes raised 9,000 2,000 (due to strike]
2001 tonnes raised 5,000 12,000
Royalty per tonne Rs. 2 Rs. 3
Dead rent per annum Rs. 15,000 Rs.
10,000 Shortworking recoverable 3 years
2 years
In case of strike, royalty earned will discharge all liabilities for the year only.
(I.C.W.A., Final)
[Ans: OWNER and LESSEE S/w 1997:11,000, 1998:5,000, S/w Recovered 1999:16,000, LESSEE
and SUB LEASE S/w 1997:7,000, 1998:4,000 and Irrecoverable 11,000]
19. Dhanabad Coal Company Ltd., took a lease of a mine on a royalty of Rs. 1 per ton of
coal raised, dead rent being Rs. 60,000 p.a. Right to recoup shortworkings within a
period of 5 years The output for First 5 years was as follows:
Year Output
I 20,000 Tons
II 68,000 Tons
III 1,60,000 Tons
IV 2,40,000 Tons
V 2,40,000 Tons
Pass necessary journal entries in the books of Dhanabad Coal Company.
(Bangalore University , B.com 2001)
[Ans: S/w 1st Year 40,000, S/w Recovered 2nd Year 8,000 3rd Year 32,000]
20, Raj took lease of on oil-well from Gopal oil Ltd on 1,1,2000, The minimum rent was Rs.
2,00,000 and royalty was Rs. 20 per ton of crude oil raised, The shortworkings were
recoverable in the succeeding two years of such short workings, but on the condition that If

during the next year of any shortworkings, the lessee is unable to recover the same (either
fully or partly), he will lose the right to recover 50% of such uncovered amount of short
workings. The output during the first 4 years respectively were 5,500; 8,000; 11,250;12,500
tons.
Prepare minimum rent a/c, royalty a/c, shortworkings a/c and Gopal Oil Ltd,'s a/c in the
books of Raj,
(Bangalore University, BBM, 2007)
[Ans: S/w 1st Year 90,000, 2nd Year 40,000 and irrecoverable 45,000, S/w Recovered
3rd Year 25,000 and Irrecoverable 40,000, S/w Recovered 4th Year 20,000]
21. Prestige Ltd,, the patentee of a new type of gas burner issued a license on 1-1-02 to VIP
Ltd, for manufacture and sale of gas burner for five years on the following terms,
a) To pay Royalty of Rs. 100 for every burner manufactured,
b) To recover short workings in the next year only,
c) To make payment on 31 Dec, each year,
d) The minimum rent is Rs. 55,000,
Sales and closing stock of gas burner for the five years were as follows:
Year Sales Stock on 31 Dec,
2002 200 units 50 units
You are required to prepare Royalty a/c, Short workings a/c, Prestige Ltd. a/ c in the books
of VIP Ltd.
[Ans: S/w 2002:30,000, 2003:10,000 and Irrecoverable 30,000, S/w Recovered
2004:8,000, and Irrecoverable 8,000, S/w 2006: 20,000 and Irrecoverable 20,000]
22. Mr,Shukla wrote a book and got it published with Chand & Co Ltd on terms that
royalties will be paid @ Rs. 5 per copy sold subject to a minimum rent of Rs. 15,000 with a
right of recoupment of shortworkings over the first three years of the royalty agreement,
From the following details write up (i) Minimum Rent (ii) Royalties A/c (iii) Shortworking
A/c
(iv) Mr,Shukla's A/c.
Year No. of copies printed Closing Stock

2000 2,000 100
2001 3,000 200
2002 4,000 400
2003 5,000 500
(Bangalore University, B.Com 2005)
[Ans: S/w 2000:5,500, 2001:500, S/w Recovered 2002:4,000, and Irrecoverable 2,000]
23. Mr. Sreeram patented an automatic door closer and granted to Mr. Ram the license to
manufacture and sell the closers for 10 years on the following terms:
a) Ram to pay a Royalty of Rs. 5 for every closer sold with a minimum rent of Rs.
2,500 p.a.
b) Ram could set off the short workings arising in any year against surplus royalties
payable in the next 2 years.
c) From the second year onwards the dead rent is agreed up on at Rs. 2,000 instead of
Rs. 2,500 and all the other terms beings unchanged, The other details are:

Year Production [Units] Closing Stock (Units)

1 125 250
2 225 50
3 285 35
4 515 50
Show:
a) Minimum Rent Account
b) Royalty Account
c) Sreeram Account
d) Short Working Account in the books of Mr. Ram
[Ans: S/w 1st
Year 2,000, 2nd
Year 1,000, 3rd
Year 500 and irrecoverable 2,000, S/w
Recovered 4th Year 500 and Irrecoverable 1,000]
24. Raman wrote a book on accountancy and got published by United Publishers on the
following terms:
The publishers were to pay royalty at 15% of the sale proceeds of each year, subject to a
minimum of Rs. 10,000 a year, The deficiency in sales, if any, of one year could be recouped
out of the excess in the immediate next year, The publishers had the right to ask for a
revision of the book which the author was obliged to complete in six months, Delay was
subject to fi ne of Rs. 500 per month, Also the rule of minimum rent was not to apply in the
that year, the details of sales were given below:
Year Number of copies sold Price per copy Rs.
1992 2,000 20
1993 4,000 20
1994 5,000 25
1995 2,000 25
1996 6,000 30
The publishers sent in a request for revision on 1st January 1995 The author sent the
revised manuscript on 1st November, 1995.
Give the journal entries and the important ledger accounts in the books of both United
Publishers and Raman
[Ans: S/w 1992:2,000, S/w Recovered 1993:2,000, and Irrecoverable 2,000]
25. Dharwar Coal Company acquired on lease a coal mine on a royalty of 50 paise per ton
of coal brought on the surface with minimum rent of Rs. 56,000 a year with no right to
recover shortworkings except the shortworkings of the strike period which can be recovered
in the next year, 10% of the coal taken out from the mine is lost in weight in bringing the
coal on the surface.
Dharwar Coal Company took out coal from the mine as under: 1st year 20,000 tons, 2nd
year 80,000 tons, 3rd year 1,20,000 tons, 4th year, 1,70,000 tons and 5th year 80,000 tons
(strike) Show Minimum Rent Account, Royalty Account and Shortworkings Account for the
five years.
(Adapted from Karnataka University, Dharwar.)
[Ans: S/w 1st Year 47,000, 2nd Year 20,000, 3rd Year 2,000 and irrecoverable 1st Year
47,000, 2nd Year 20,000, 3rd Year 2,000]
26. Tata Auto Ltd, Obtained patent right from Mr Ratan Tata to manufacture and sell NANO
cars for a period of 20 years starting from 1st January 2006 on the following terms:
i. Mr Ratan Tata to get Royalty of Rs. 1,000 per car
ii. Minimum Rent Rs. 1,20,000 p,a
iii. Short workings to be recouped during the subsequent two years

iv. In the event of strike Minimum rent to be reduced to 70% Production during four
years from 2006 to 2009 was as follows:
Year No of cars manufactured
2006 70
2007 90
2008 150
2009 110 (Strike for 3 months)
Prepare the following ledger accounts in/the books of Tata Auto Ltd,
a) Royalty account
b) Minimum Rent account
c) Short workings account
d) Mr. Ratan Tata's account
[Ans: S/w 2006:50,000, 2007:30,000, S/w Recovered 2008:30,000, and Irrecoverable
20,000, S/w Recovered 2009:26,000, and Irrecoverable 4,000]
27. Tile Company leased land in 2002 at a royalty of 10 paise per ton on all the clay raised.
Dead rent was Rs. 10,000. Short working was to be recouped during the first 4 years. The
clay raised in the fi rst 4 years was as follows :
Tons Tons
2002 75,000
2003 90,000
2004 60,000 (strike for 3 months)
2005 1,20,000
There was a provision for proportionate reduction in dead rent in case of stoppage of work
by strike, lock-out, accident etc.
Show Ledger Accounts in the books of Tile Company.
(ICWA inter 2006)
[Ans: S/w 2002:2,500, 2003:1,000, 2004:1,500, S/w Recovered 2005:2,000]
28. Hindustan Steel Ltd. obtained a lease from Gondwana Coal Ltd. for a coal mine on 1 st
January 1994 on the following terms, and conditions:
(1) Royalty at Rs. 1 per tonne raised.

(2) Minimum rent Rs. 12,000 p.a.
(3) Recoupment of shortworking on each year during three years following subject to
a maximum of Rs. 2,500 p.a.
(4) In the event of the strike, the minimum rent would be taken pro rata on the basis
of actual working days, but in the event of lock-out the lessee would enjoy a
concession in respect of minimum rent for 50% of the period of lock-out.
Besides the above. Hindustan Steel Ltd. have been granted a cash subsidy equal to 25% of
the unrecoupable shortworkings by the Central Government up to the first 5 years of the
lease.
(5) Working up to first 6 years is as follows ;
1994 Actual Royalty Rs. 7,000
1998 Actual Royalty Rs. 10,800 (Strike 73 days)
1999 Actual Royalty Rs. 9,700 (Cock-out for 4 months)
Show the ledger accounts in the books of Hindustan Steel Ltd.
(Adapted from CA)

29. Mr. Ishwar of Belgaum, a professional author of Managerial Technique, has entered into
an agreement with India Publishing House, Delhi on 1st January, 1992 for publication and
sale of book. The terms agreed were as follows:
1. Royalty payable is 20% on sale price of book, the book is priced at Rs. 75 per copy.
2. The author is to be paid the minimum amount of Rs. 50,000 p.a.
3. Each year's excess of minimum amount over royalties earned is recoverable out of
surplus royalties, during the next three year's period, subject to the maximum amount, of Rs.
6,000 in that particular year of recovery Following are particulars of sales:
Year ending Number of copies sold
1992 2,000
1993 2,800
1994 4,500
1995 6,000
1996 4,000
Prepare:
(1) Royalty Account
(2) Author's Account and
(3) Shortworkings Account in the books of Indian Publishing House.
(B.Com., Karnataka University)
[Ans: S/w 1992:20,000, 1993:8,000, S/w Recovered 1994:6,000, 1995:6,000 and
Irrecoverable 8,000, S/w Recovered 1996:6,000]
30. Jaishree obtained a lease of some granite bearing land on 1st Jan.2004, the terms being
a royalty of Rs. 700 per meter granite raised, subject to minimum rent of Rs. 20,00,000 per
annum with a right of recoupment of short workings over the 1st three years of the lease.
The following are the particulars.
Year Sales in meter Closing stock/meter
2004 2200" 300
2005 3300" 500
2006 4800" 600
2007 6000" 700
You are required to prepare royalty account, short workings A/c, landlord A/c to record the
above transactions.
[Ans: S/w 2004:2,50,000, S/w Recovered 2005:2,50,000]
31. On 1 st January 1996, Sindhur Collieries Limited leased some land for a minimum rent
of Rs. 3,000 for the first year, Rs. 5,000 in the second year and thereafter Rs. 10,000 per
annum merged into a royalty of 50 paise per ton with power to recoup short-workings
over two years after the occurring of shortworkings. The annual outputs for the 5 years
ending with 31st December, 1996 were:
1992 3,000 Tons
1993 8,600"
1994 22,000 "
1995 18,000" (Strike for 3 months)
1996 30,000 "
There was a provision in the lease that in the event of a strike and the minimum rental
not being reached, the actual royalties earned for the year discharged all rental obligations
for that year.
Show how the accounts would appear in the books of Sindhur Collieries Limited.

[Ans: S/w 1992:1,500, 1993:700, S/w Recovered 1994:1,000 and Irrecoverable 500,
S/w Irrecoverable 1995:700]
32. On 1.1.1993 Basu obtained a mining lease from Murthy and from that date, he
subleased a part of the mine to Ganesh.
Output raised (Tons)
Year Lease Sub-lease
1993 2,000 2,000
1994 6,000 4,000
1995 24,000 10,000
1996 18,000 4,000 (due to strike)
1997 10,000 24,000
Royalty per ton Rs. 2 Rs. 3
Dead Rent p.a. Rs. 30,000 Rs.
20,000 Shortworking recoverable in next 3 years 2 years
In case of strike, royalty earned will discharge all liabilities for the year only.
Prepare:
(i) Royalty Payable Account
(ii) Shortworking Account
(iii) Royalty Receivable Account
(iv) Shortworking Suspense Account
(Bangalore UniversityB.Com 1998)
[Ans: OWNER and LESSEE S/w 1993:22,000, 1994:10,000, S/w Recovered 1995:32,000,
LESSEE and SUB LEASE S/w 1993:14,000, 1994:8,000, S/w Recovered 1995:10,000 and
Irrecoverable 4,000, S/w Irrecoverable 1996:8,000]

SALE OF PARTNERSHIP FIRM TO A LIMITED COMPANY
Introduction:
"Partnership" is the relation between persons who have agreed to share the profits of a business
carried on by all or any of them acting for all. Persons who have entered into partnership with one
another are called individually "partners" and collectively a "firm", and the name under which their
business is carried on is called the "firm name".
With the objective of limiting the personal liabilities of the partners, an existing partnership firm may
sell its entire business to an existing limited company, or may convert itself into a limited company.
The former is the case of absorption of a partnership firm by the joint stock company whereas, the
latter is the case of flotation of a new joint stock company so as to take over the business of the
partnership firm.
In both of these cases, the existing partnership firm is dissolved and all the books of accounts are
closed. Thus when a partnership firm is sold or converted into a company, the same accounting
procedure is followed as for simple dissolution of a firm.
Meaning: it refers to transforming the legal existence of a partnership firm into a limited company.
Objectives Or Need for Conversion

1. For perpetual succession
2. To form a separate legal entity
3. To generate huge capital
4. Increasing size of operations
5. To sharpen technological edge
6. Obtaining benefits of economies of scale
7. Limiting risks through limited liability
8. To enjoy managerial efficiency
9. To obtain tax concessions
10. To maximize the Profit & Value of the company
Purchase consideration: it is the consideration or price payable by the purchasing company to the
vendor firm for taking over (business) assets and liabilities of the vendor firm is called purchase
consideration.
Methods of calculating purchase consideration

The purchase consideration may be calculated under any of the following methods
Page 1 of 15
Dr. Aruna P, Assistant Professor, Dept. of Commerce Page 1

1. Lump sum method.
2. Net asset method.
3. Net payment method.
1. Lump sum method: under this method a fixed amount is paid by the purchasing company for the
assets and liabilities taken over from the vendor firm.
2. Net asset method: under this method purchase consideration is calculated as follows
Total assets taken over at agreed value by the purchasing company XXX
Total liabilities taken over at agreed value by the purchasing company XXX
Purchase consideration XXX
3. Net payment method: under this method, actual payment made by the company against each
liability would be specified. I.e. net payment of cash, shares, and debentures made by the purchasing
company to vendor firm.
Form of discharging the purchase consideration: the purchase consideration may be

discharged by the purchasing company in any of the following ways
a) Completely in cash b) Completely in shares c) Completely in debentures

d) Partly in cash & partly in shares e) Partly in cash & partly in debentures
f) Partly in shares & partly in debentures g) Combination of cash& shares& debentures
Realization account: realization a/c is prepared to realize the assets and liabilities of the firm. The
main object of preparation of this account is to find out the profit or loss on realization of assets and
liabilities of the firm. This account is debited with all assets at book value and credited with all liabilities at
book value (except partner’s capital and loan).
If the purchasing company does not taken over some assets, then they are sold away in the market or
it may be taken over by the partners through realization a/c in the same way, if the purchasing
company does not taken over some liabilities, they are paid off or taken over by the partners through
realization a/c.
Final claim ratio: it is the ratio finally claimed by the partners. The shares and debentures received
from purchasing company as purchase consideration are divided amongst the partners according to final
claim ratio. (It is used for the purpose of distributing the shares and debenture which is received from the
purchasing company as purchase consideration)
Entries in the books of Vendor firm/Converting firm
Step 1: Transfer all recorded assets and liabilities(whether or not taken over by the
purchasing company) to the Realization account, except cash and bank balance if not taken
over by the purchasing company.
1.1 For transferring recorded assets:
Realisation A/c …………………………………………………….……………Dr.
To Sundry Assets A/c
1.2 For transferring recorded liabilities

......................................................................SundryliabilitiesA/c Dr.
To Realization A/c
Step 2: Make purchase consideration(price) due.

2.1 For purchase price due:
Purchasing company A/c ……………………………………………...........Dr.

To Realization A/c
Page 2 of 15

Step 3: If, there remain any assets (whether or not recorded) not taken over by the purchasing
company, it may be sold, or may be taken by one of the partners or may be shared among the
partners.
3.1 On sale of assets not taken over by the purchasing company and sold by vendor firm:
Bank A/c…………………………………………………………….................Dr.
To Realization A/c
3.2 Such assets taken over by any one of the partners:
Partner's capital A/c………………………………………………….............Dr.
To Realization A/c
3.3 On sharing such assets among the partners:

...................................................Partners'capitalA/c(capitalratio) Dr.
To Realization A/c
Note: If such unsold assets are considered worthless, they should be shared among
the partners in profit sharing ratio.
Step 4: The liabilities (whether or not recorded) by the purchasing company may be
discharged or may be assumed by any one of the partners, or must be shared by the
partners in their capital ratio.
4.1 On discharge of any liability not taken over by the purchasing company:
Realization A/c ………………………………………………………..............Dr.
To Bank A/c
4.2 If such liability assumed by one of the partners:

Realization A/c………………………………………………………...............Dr.
To Partner's capital A/c
4.3 If such liability has to be assumed by all partners:

Realization A/c …………………………………………………….................Dr.
To Partners' capital A/c (capital ratio)
Step 5: When the realization expenses is paid, Realization account is debited.

5.1 For payment of realization expenses:
Realization A/c………………………………………………………...............Dr.
To Bank A/c
Step 6: Close the realization account by transferring the balance (profit or loss) to the capital
of the partners in profit sharing ratio.
6.1 For profit on realization account:
Realization A/c ………………………………………………………..............Dr.
To Partners' capital A/c (profit sharing ratio)
6.2 For loss on realization account:

Partners' capital A/c………………………………………………….............Dr.
To Realization A/c
Step 7: On the receipt of purchase consideration (price), cash/bank account, equity shares
in purchasing company or preference shares in purchasing company at their issue prices are
debited and purchasing company's account is credited.
7.1 For the receipt of purchase price:
Cash/bank A/c………………………………….....................................Dr.

Equity share in purchasing Co. A/c ……………………………............Dr.
Preference share in purchasing Co A/c ………………………………....Dr.
Page 3 of 15

Debentures share in purchasing Co A/c………………………………...Dr.
To Purchasing Co. A/c
Step 8: Transfer all accumulated reserves/profits/losses to the capital accounts of partners

in profit sharing ratio.
8.1 For accumulated reserves, profits:
Reserve A/c ………………………………………………………...................Dr.
Profit and loss A/c............................................................................Dr.
To Partners' capital A/c
8.2 For accumulated losses:

Partners' capital A/c ………………………………………………...............Dr.
To Profit and loss A/c
Step 9: Transfer the current account, if any, in the books, to the capital accounts of the
partners.
9.1 For transferring current account to the capital account:
Partners' current A/c …………………………………………….................Dr.
To Partners' capital A/c
Step 10: Pay off the partner's loan if any.

10.1 For the payment of partner's loan account:
...........................................................................Partner'sloanA/c Dr.
To Bank A/c
Step 11: Make final settlement by paying off balances in capital accounts. In the absence of
an agreement as to the division of shares (from purchasing company) among partners, such
shares are distributed in the ratio of their final claims (i.e. in the ratio of capitals after all the
adjustments).
11.1 For final settlement:
.......................................................................Partners'capitalA/c Dr.
To Equity shares in purchasing Co. A/c
To Preference shares in purchasing Co. A/c
To Bank A/c
Entries in the books of purchasing company

1. For Purchase Consideration Due
Business Purchase A/c …………………………………………………….…Dr.
To Vendor firm A/c
2. For Discharge of Purchase Consideration

Vendor firm A/c ………………………………………………………………...Dr.
To Cash A/c
To Share capital A/c
To Securities premium A/c To
Debentures A/c
3. For Assets and Liabilities taken over

Individual Assets A/c …….………......................................................Dr.
Goodwill Account (Bal. fig.)……………………………….........................Dr.
To Individual Liabilities A/c
To Business Purchase A/c
To Capital Reserve A/c (Bal. fig.)

Page 4 of 15

Problems Under Sale of Partnership Firm into a Limited
Company
Problem 1
Soumya ltd purchased the business of X, Y and Z and agreed to settle the purchase consideration in
the following forms.
(i) 60,000, Equity shares of Rs. 10 each at 10% premium to partners.
(ii) 3,000, 12% debentures of Rs. 100 each at par for loan credit and
(iii) Rs. 2,00,000 in cash to the partners.
(Ans: PC Rs. 11,60,000)
Problem 2
Balaram ltd took over the business carried by Raghuram and firm and agreed to pay the purchase
price as under:
(i) Rs. 1,50,000 in 8% preference shares of Rs. 100 each issued at a premium of 25%.
(ii) 10,000 Equity Shares of Rs. 100 each fully paid at Rs. 120 per share.
(iii) Cash payment of Rs. 2,00,000.
(iv) Liquidation Expenses of Rs. 5,000.
(Ans: PC Rs. 15,50,000)
Problem 3
Raj ltd has taken over the business of a sole trader and agreed to pay the purchase price as follows:
a) Issue 2,800 Equity shares of Rs. 100 each at an agreed value of Rs. 105 Per share.
b) Issue 12,500, 10% preference shares of Rs. 100 each at a discount of 10%.
c) Issue 1,000, 7% Debentures of Rs. 100 each at par.
d) Pay Cash Equal to 20% of Total purchase consideration.
(Ans: Rs. 18,98,750)
Problem 4
The purchasing company has agreed to issue 8,000 equity shares of Rs. 10 each at par, 500 8%
preference shares of Rs. 100 each at 10% premium, 1,000 debentures of Rs. 50 each at 10%
discount and pay cash equal to 10% of total purchase consideration.
Calculate purchase consideration amount.
(Ans: PC Rs. 2,00,000)
Problem 5
Following is the Balance Sheet of A & B (who carries a small business) as on 31.12.2014:
Liabilities Rs. Assets Rs.
Capital A/c’s Buildings 2,00,000
A 1,00,000 Plant 83,000
B 1,00,000 Stock 39,500
Bills Payable 1,00,000 Debtors 77,000
Sundry creditors 30,000 Cash 500
Profit for the year 70,000
4,00,000 4,00,000
On the above date 'Y' company took over all the assets and bills payable of A & B firm.
The purchase price is payable as Rs. 2,60,000 in shares of Rs. 10 each and the balance is cash.
Calculate purchase consideration and its discharge.
(Ans: PC Rs. 3,00,000)

Page 5 of 15

Problem 6
Ram ltd was registered with an authorised capital of 2,000 equity shares of Rs. 20 each. It acquired
the business of Mr. X & Y on 31.3.2015 on which date the balance sheet of Mr. X and Y was as under:

Capital A/c’s Premises 1,00,000
X 1,20,000Machinery 80,000
Y 80,00Stock 20,000
Reserves 20,000Debtors 25,000
Sundry creditors 50,000Cash in hand 75,000
Bills payable 30,000
3,00,000 3,00,000
Ram ltd agreed to take over all the Asset with an condition that fixed assets at 10% more and current
assets at 5% less then the book values except cash which is agreed to be at book value and also
agreed to take over the liabilities and also agreed to give a goodwill at Rs. 40,000.
Calculate purchase consideration.

(Ans: PC Rs. 2,75,750)
Problem 7
Following is the Balance sheet of P & Q who carries small firm, as on 31.3.2015:
Capital A/c’s Land and Buildings 80,000
P 2,00,000 Plant and Machinery 45,000
Q 1,00,000 Furniture 40,000
Reserves 50,000 Stock 20,000
Loan from Bank 1,00,000 Debtors 1,00,000
Sundry creditors 40,000 Bills receivable 1,10,000
Bills payable 20,000 Cash at bank 1,20,000
Outstanding Expenses 5,000
5,15,000 5,15,000
On the above date RK ltd acquired the business with the following terms and conditions. Assets
are agreed to taken over at the following values
Land and buildings Rs. 95,000
Plant and Machinery Rs. 40,000
Furniture Rs. 42,000
Stock Rs. 30,000
Bills receivable Rs. 1,00,000
Cash at book value and create a provision for Bad debts on Debtors at 5%.
RK ltd also agreed to repay the sundry creditor and outstanding expenses at 10% discount.
Calculate the purchase consideration payable by RK ltd.
(Ans: PC Rs. 4,81,500)
Problem 8
Pass incorporation entries in the books of the company from the following particulars: Purchase
consideration Rs. 2,50,000; value of sundry assets taken over Rs. 3,00,000; current liabilities taken
over Rs. 30,000; Settlement of purchase consideration 60% in equity shares of Rs. 10 each at face
value and the balance in 6% debentures of Rs. 100 each at face value.
Problem 9
Ram, Rahim and Robert are in partnership sharing and losses in ratio of 4:3:1 respectively. On 31 st
March 2015 they agreed to sell their business to be limited company. Their position on that date was

as follows:
Page 6 of 15

Capital Accounts: Freehold property 36,000
Ram 40,000 Machinery 24,000
Rahim 30,000 Book debts 30,000
Robert 26,000 Stock 26,000
Loan from Bank 8,000 Cash 4,000
Sundry Creditors 16,000
1,20,000 1,20,000
The company took the following assets at the valuation shown below:
Rs.
Freehold property 44,000
Machinery 22,000
Book debts 28,000
Stock 24,000
Goodwill 8,000
The company also agreed to pay the creditors which were agreed at Rs. 15,400. The company paid
3,300 shares of Rs. 10 each fully paid and the balance in Cash. The expenses of realisation
amounted to Rs. 1,000.
Calculate the Purchase Consideration, show the discharge of Purchase Consideration and also
prepare the Realization A/c, Purchasing Co. A/c, Partners Capital A/c and Cash A/c.
(Ans: PC Rs. 1,10,600, Realisation Profit Rs. 9,600, Partners Capital A/c Cash bal. Ram Rs. 30,800,
Rahim Rs. 23,100, Robert Rs. 18,700, and Cash A/c Rs. 81,600, Final Claim Ratio 448 : 336 : 272)
Problem 10
A and B are partners sharing profits in the ratio of 2:1 and their Balance Sheet on 31.12.2014 was as
follows:
Creditors 20,000 Cash in Hand 150
Bills payable 5,000 Bills Receivable 2,500
A’s Loan 10,000 Debtors 30,000
Capitals: Less: RBD 1,500 28,500
A 15,000 Stock 21,850
B 10,000 Machinery 10,000
Reserve Fund 3,000
63,000 63,000
They agree to sell the business to a limited company. The company is to take over the assets and
liabilities as follows:
Machinery at Rs. 8,000, Stock at Rs. 17,500, Debtors at Rs. 25,350, Bills receivable at Rs. 2,500 and
Goodwill at Rs. 3,000. The company agreed to take over Creditors at Rs. 19,500. The expenses of
realization amounted to Rs. 150. The firm received Rs. 20,000 of the purchase price in Rs. 10 fully
paid shares and the balance in cash.
Prepare the necessary ledger accounts in the books of the firm.
(Ans: PC Rs. 32,000, Realisation Loss Rs. 6,150, Partners Capital A/c Cash bal. A Rs. 1,090, B Rs.
760, and Cash A/c Rs. 12,150, Final Claim Ratio 258 : 179)

Page 7 of 15

Problem 11
Santosh and Vicky were sharing profits as to 2:1 respectively. They agreed to convert their business
into a company on 31st December 2014 on which date their Balance Sheet was as follows:

Creditors 60,000 Cash 14,000
Mortgage on freehold premises 20,000 Debtors 52,000
Capitals: Stock 32,000
Santosh 40,000 Freehold premises 32,000
Vicky 20,000 Plant 10,000
1,40,000 1,40,000
The company took over all the assets and liabilities with the exception of mortgage on freehold
premises. The purchase price was fixed at Rs. 1,20,000, payable as Rs. 24,000 in cash, Rs. 48,000 in
debentures and the balance in equity shares of Rs. 100 each.
Close the books of the firm (Prepare ledger accounts) after the above transitions have been carried
out, mortgage loan has been paid and the partners agree to share debentures and shares in
proportion to their capitals, and also pass opening entries and prepare new balance sheet.
(Ans: PC Rs. 1,20,000, Realisation Profit Rs. 40,000, Partners Capital A/c Cash bal. S Rs. 2,667, V
Rs. 1,333, and Cash A/c Rs. 38,000, Final Claim Ratio 2 : 1, G/w Rs. 40,000, and B/s Rs. 1,66,000)
Problem 12
A, B and C carry on a business in partnership sharing profits and losses in the ratio 4:3:1. On
31.12.2014, they agreed to sell their business to a joint stock company. The position was as follows:

Capitals: Buildings 18,000
A 20,000 Machinery 12,000
B 15,000 Book Debts 15,000
C 13,000 Stock 13,000
Sundry Creditors 12,000 Cash at Bank 2,000
60,000 60,000
The company took up the following assets at the valuation shown below:
Building Rs. 22,000, Book debts Rs. 14,000, Goodwill Rs. 4,000, Machinery Rs. 11,000, and Stock
Rs. 12,000.
The company in its shares of Rs. 10 each paid the purchase price of building and machinery for Rs.
33,000, and book debts, stock and goodwill were paid for in cash.
The firm paid off its sundry creditors at a discount of 2 ½ % and the expenses of realisation amounted
to Rs. 500. Shares are to be distributed in the profit sharing ratio.
Show the necessary ledger accounts to close the books of the firm.
(Ans: PC Rs. 63,000, Realisation Profit Rs. 4,800, Partners Capital A/c Bank bal. A Rs. 5,900, B Rs.
4,420, C Rs. 9,480, and Bank A/c Rs. 32,0 00)

Page 8 of 15

Problem 13
Following was the Balance Sheet of M/s. A and B as on 31.3.2015.
Current Liabilities 30,000 Fixed Assets 1,00,000
General Reserve 36,000 Stock 60,000
Capitals: A 1,00,000 Debtors 25,000
B 64,000 Less: RBD 1,000 24,000
Bills Receivable 20,000
Bank 26,000
2,30,000 2,30,000
P Ltd. acquired this business on the above date and the terms were:
1) Fixed assets to be valued at 20% more than the book value.
2) Stock to be valued at 90% of book value.
3) RBD to be 10% on debtors.
4) The purchase consideration was to be settled by the issue of 20,000 equity shares of Rs. 10
each valued at Rs. 12 each.
Pass journal entries in the books of P ltd. and prepare the opening balance sheet of P ltd. (Ans: PC
Rs. 2,40,000, Realisation Profit Rs. 36,000, Partners Capital A/c Bank bal. A Rs. 2,310, B Rs. 1,690,
and Bank A/c Rs. 30,000, Final Claim Ratio 34 : 25, G/w Rs. 23,500, and B/s Rs. 2,40,000)
Problem 14
Set out below is the Balance sheet as on 30th Sep 2014 of M/S. A and B who share profits in the ratio
of their capitals:
Creditors 55,000 Cash 4,500
Reserve fund 7,000 Debtors 40,000
A 75,000 Plant 85,000
B 50,000 Investment 20,500
1,87,000 1,87,000
The firm was sold to a limited company on the following terms:
1) The company was to purchase the whole concern excepting cash and investments at 10%
less than the book value.
2) The creditors were taken over at the book figure.
3) The company agreed to pay Rs. 5,000 for goodwill.
4) The purchase price was paid half in cash and half in fully paid shares of the company.
5) The firm realized all its investment including shares received from company at 5% less.
Prepare ledger accounts to close the books of the firm.

(Ans: PC Rs. 95,800, Realisation Loss Rs. 14,620, Partners Capital A/c Cash bal. A Rs. 70,428, B
Rs. 46,952, and Cash A/c Rs. 1,17,380)
Problem 15
Following is the balance sheet of A, B and C who share profits and losses in the ratio 2:2:1.
Trade creditors 1,00,000 Land and building 10,00,000
Reserve fund 1,00,000 Plant and machinery 5,00,000

Capitals: A 10,00,000 Investments 5,10,000
Page 9 of 15

B 10,00,000 Trade debtors 6,00,000
C 5,00,000 25,00,000 Cash 90,000
27,00,000 27,00,000
The firm was sold to a private limited company for Rs. 17,50,000. The company took all the assets
(except debtors and investment) and assumed liabilities. A is to take over 60% of Debtors at 70% and
B is to take over the balance of debtors at 75%. Investments were taken over by B at 2% less than its
book value. Realisation expenses amounted to Rs. 10,000 borne by A and C equally. The purchase
consideration was settled by issuing equity shares at face value.
Prepare Ledger Accounts to close the books the firm.
(Ans: PC Rs. 17,50,000, Realisation Profit Rs. 71,800, Partners Capital A/c Shares bal. A Rs.
8,21,720, B Rs. 3,88,920, C Rs. 5,39,360)
Problem 16
Rocket, Rani and Raja were partners in a firm sharing profits and losses in the ration of 3:2:1
respectively. They decided to sell their firm to ABC Pvt. Ltd. On 31 st March 2015. Their balance sheet
as at that date was as follows:
Sundry creditors 24,000 Machinery 34,200
Rocket 52,200 Debtors 30,000
Rani 24,000 Less: Provision 3,000 27,000
Raja 18,000 Cash 18,000
Profit and Loss A/c 9,000
1,18,200 1,18,200
ABC Pvt. Ltd. was registered on 31st march 2015 with an authorized capital of Rs. 1,50,000 (shares of
Rs. 100 each) for the purpose of purchasing the partnership business. The purchase price was
agreed at Rs. 98,700. The company paid the purchase price by the issue of 540 fully paid shares of
Rs. 100 each and the balance in cash.
Prepare the necessary ledger accounts to close the books of the firm.
(Ans: PC Rs. 98,700, Realisation Profit Rs. 13,500, Partners Capital A/c Cash bal. X Rs. 24,650, Y
Rs. 11,600, Z Rs. 8,450, Cash A/c Rs. 62,700, Final Claim Ratio 363 : 170 : 125)
Problem 17
Ajay and Vijay sharing profits and losses equally decided to convert their business into a limited
company.
Balance Sheet as on 31.12.2014
Sundry Creditors 24,000 Bank 33,000
Mrs. Ajay’s Loan 20,000 Book Debts 12,000
Bank Overdraft 8,000 Stock 8,000
Reserve Fund 3,000 Trade Marks 4,000
Capitals: Plant 8,000
Ajay 20,000 Buildings 30,000
Vijay 20,000
95,000 95,000
The company has agreed to take over the assets as follows:

Buildings at Rs. 52,000, plant at Rs. 6,000 and goodwill at Rs. 36,000. The Company will not take
over Mrs. Ajay’s loan and bank overdraft. Other assets (except cash) are taken over at book
Page 10 of 15

value. Vendors were allotted ordinary shares of Rs. 10 each to the amount equivalent to purchase
consideration.
Prepare Realization account, Capital accounts of partners and Bank account.
(Ans: PC Rs. 94,000, Realisation Profit Rs. 56,000, Partners Capital A/c Bank bal. A Rs. 2,500, V
Rs. 2,500, and Bank A/c Rs. 33,000, Final Claim Ratio 1 : 1)
Problem 18
Asha and Usha were partners sharing profits and losses equally. Their Balance Sheet on 31.3.2015
was as follows:
Creditors 12,000 Land and Buildings 50,000
Bills Payable 3,000 Plant and Machinery 20,000
Reserves 15,000 Stock 15,000
Capitals: Debtors 20,000
Asha 50,000 Less: Provision 1,000 19,000
Usha 35,000 Bills Receivable 6,000
Cash at Bank 5,000
1,15,000 1,15,000
They decided to sell their business to Latha Co. Ltd on the following terms:
1) The purchase consideration was to be settled by issuing 4,000 equity shares of Rs. 20 each,
valued at Rs. 25 each and by issuing 2,000, 5% preference shares of Rs. 10 each valued at
Rs. 12 each.
2) The company valued land and buildings at 110% of book value, plant and machinery at 90%
of book value and stock at Rs. 25,000.
Pass acquisition entries in the books of Latha Co. Ltd. and prepare the opening balance sheet of
Latha Co.
(Ans: PC Rs. 1,24,000)
Problem 19
Ram Kumar and Prem Kumar are partners sharing profits and losses in the ratio of 2:1 and their
Balance Sheet as on 31.12.2014 was as follows:
Creditors 40,000 Cash in Hand 300
Bills payable 10,000 Bills Receivable 5,000
Ram Kumar’s Loan 20,000 Debtors 60,000
Ram Kumar’s Capital 30,000 Less: RBD 3,000 57,000
Prem Kumar’s Capital 20,000 Stock 43,700
Reserve Fund 6,000 Machinery 20,000
1,26,000 1,26,000
They agreed to sell the business to a limited company to take over the assets and liabilities as
follows:
Machinery at Rs. 16,000, Stock at Rs. 35,000, Debtors at Rs. 50,700, Bills receivable Rs. 5000 and
Goodwill at Rs. 6,000. The company agreed to take over Creditors at Rs. 38,000 and Bills payable at
Rs. 10,000. The expenses of realization amounted to Rs. 300. The firm received Rs. 40,000 of the
purchase price in Rs. 10 fully paid equity shares and the balance in cash. Distribute the shares as per
original capital ratio. Prepare the necessary ledger accounts in the books of the firm.

(Ans: PC Rs. 64,700, Realisation Loss Rs. 11,300, Partners Capital A/c Bank bal. R Rs. 2,467, P
Rs. 2,233, and Bank A/c Rs. 25,000)
Page 11 of 15

Problem 20
X, Y & Z were partners carrying on partnership business and sharing profits and losses in the ratio of
1:2:3 on 1st Jan 2015. Their balance sheet was as under:
Creditors 15,000 Buildings 20,000
Bills payable 5,000 Machinery 30,000
Y’s Loan 20,000 Vehicles 5,000
X 10,000 Debtors 20,000
Y 20,000 Cash 9,000
Z 30,000 Investment 1,000
1,00,000 1,00,000
On the above date a Private Ltd Co. called ABC Co. Ltd was incorporated to takeover the above
business on the following terms and conditions:
1) All assets (except cash and investments) and liabilities except Y’s Loan to be taken over by
the company for which all assets are valued at par except buildings, which is considered
worth Rs. 27,000 and stock as worth Rs. 14,000, Goodwill is valued at Rs. 30,000.
2) Y’s Loan A/c to be partly liquidated by his taking over the firm’s cash and investment at par.
For the balance he is given 10% Debentures received from the company in part payment of
purchase consideration.
3) The balance of the purchase consideration is to be discharged by the company by issue of
equity shares of Rs. 10 each fully paid.
Show the necessary ledger accounts to close the books of the firm.
(Ans: PC Rs. 1,06,000, Realisation Profit Rs. 36,000, Partners Capital A/c Shares bal. X Rs. 16,000,
Y Rs. 32,000, Z Rs. 48,000 and Cash A/c Rs. 9,000, Final Claim Ratio 1 : 2 : 3)
Problem 21
Ravindra and Surendra sharing Profits and Loss equally decided to convert their business into a
limited company on 31st December 2014, when their balance sheet stood as follows:
Sundry Creditors 48,000 Cash 66,000
Loan Creditors 40,000 Debtors 14,000
Bank overdraft 16,000 Bills receivable 10,000
Reserve fund 6,000 Stock 16,000
Capitals: Patents 8,000
Ravindra 40,000 Machinery 16,000
Surendra 40,000 Land and Building 60,000
1,90,000 1,90,000
The company has agreed to base the purchase consideration on the following:
1) The goodwill of the firm will be valued at two year-purchase of the average profits of the
previous three years. Profits for 2012: Rs. 30,000, in 2013 Rs. 36,000 and in 2014 Rs.
42,000.
2) The company will take over the loan creditors by offering 9% preference shares; the company
will not take the sundry creditors and over draft.
3) Land and Building will be valued at Rs. 1,04,000 and Machinery at Rs. 24,000 and all other
assets taken (except cash) valued at their book value.
4) The vendor to be allotted ordinary shares of Rs. 10 each to the amount equivalent to the
purchase consideration.

You are required to show the realization account and capital accounts of partners in the books of the
firm, and also show opening balance sheet.
Page 12 of 15

(Ans: G/w Rs. 72,000, PC Rs. 1,96,000, Realisation Profit Rs. 1,12,000, Partners Capital A/c Bank
bal. R Rs. 1,000, S Rs. 1,000, and Bank A/c Rs. 66,000, Final Claim Ratio 1 : 1, B/s Rs. 2,36,000)
Problem 22
Ajay and Vijay sharing profits and losses equally, decided to convert their business into a Limited
company on 31st Dec 2014 when their Balance Sheet stood as follows:
Sundry creditors 48,000 Sundry debtors 60,000
Loan creditors 40,000 Bills receivables 10,000
Bank overdraft 16,000 Stock 36,000
Reserve fund 6,000 Patents 8,000
Capitals: Machinery 16,000
Ajay 40,000 Land and buildings 60,000
Vijay 40,000
1,90,000 1,90,000
1) The goodwill of the firm was to be valued at 2 years purchase of the average profits of the
previous three years.
2) The Loan creditors have agreed to accept 7½% Redeemable preference shares in settlement
of his claim.
3) Land and Building and Machinery were to be valued at Rs. 1,00,000 and Rs. 24,000
respectively.
4) The Vendors were to be allotted Equity shares of the value of Rs. 2,10,000.
5) The past working results of the firm showed that they had made profits of Rs. 30,000 in 2012,
Rs. 36,000 in 2013 and Rs. 42,000 in 2014 after setting aside Rs. 2,000 to Reserve fund each
year.
You are required to show Realisation A/c and Capital Accounts in the books of the firm and opening
Journal entries in the books of the New Company and also show the Balance sheet. (Ans: G/w Rs.
76,000, PC Rs. 2,10,000, Realisation Profit Rs. 1,24,000, Partners Capital A/c Shares bal. A Rs.
1,05,000, V Rs. 1,05,000, B/s Rs. 2,50,000)
Problem 23
Venkat and Suresh are equal partners and desire to convert their partnership into a Limited Company.
Their Balance Sheet as on 31.12.2014 is as under:
Balance Sheet as on 31.12.2014
Sundry Creditors 37,000 Stock 20,000
Loans 25,000 Debtors 47,000
General Reserve 15,000 Machinery 15,000
Capitals: Buildings 35,000
Venkat 20,000
Suresh 20,000
1,17,000 1,17,000
The following terms were agreed upon:
1) The loan creditors have agreed to take preference shares in the new company.
2) The creditors were to be paid in cash
3) Machinery and Buildings were to be taken at the agreed values of Rs. 20,000 and Rs. 55,000

respectively.
4) 9% debentures were to be issued for cash to the extent of Rs. 1,00,000.
5) The goodwill of the firm is to be valued at Rs. 20,000.
Page 13 of 15

6) The company is to allot equity shares to the vendors for the purchase consideration.
You are required to give the realization account, partner’s capital accounts and the opening
Balance Sheet of the new company.
(Ans: PC Rs. 1,00,000, Realisation Profit Rs. 45,000, Partners Capital A/c Shares bal. V Rs. 50,000,
S Rs. 50,000, Bank A/c 63,000, and B/s Rs. 2,25,000)
Problem 24
X, Y and Z are equal partners in M/s. XYZ. The Balance Sheet of the firm as at 31 st Dec 2014 was as
follows:
Loan from Bank 5,00,000 Land and Building 1,20,000
Creditors 1,00,000 Plant and Machinery 2,00,000
Capital account: Stock 3,00,000
X 50,000 Debtors 1,00,000
Y 1,00,000 Z’s Capital 30,000
7,50,000 7,50,000
On that date it was decided that the firm would be converted into a Limited Company on the following
terms:
1) Land and building be valued at Rs. 2,00,000.
2) Plant and Machinery be valued at Rs. 2,50,000.
3) 10% of book value to be written off for obsolete stock.
4) A reserve for bad debts to be made at 10% of debtors.
5) A reserve for discount on creditors at 6% to be made.
6) The new co. would issue 12,000 equity shares of Rs. 10 each fully paid, such shares to be
valued at Rs. 1,50,000 and 660, 8% debentures of Rs. 100 each.
7) Shares and debentures are to be distributed according to profit sharing ratio.
8) Additional and excess capitals are to be adjusted accordingly by bringing cash or by paying
off the same.
Close the books of the firm and open the accounts in the books of the company, by passing opening
journal entries and new balance sheet.
(Ans: PC Rs. 2,16,000, Realisation Profit Rs. 96,000, Partners Capital A/c Bank bal. X Rs. 10,000, Y
Rs. 60,000, Z (Dr) Rs. 70,000, Bank A/c 70,000, and B/s Rs. 7,16,000)
Problem 25
Lion and Tiger were in partnership sharing profits and losses in the ratio of 3:1. Following is the
balance sheet of partnership as at 31st March 2015.
Capital accounts: Fixed assets 21,000
Lion 24,000 Stock 11,200
Tiger 8,000 32,000 Debtors 19,600
Current accounts: Cash at Bank 3,720
Lion 4,200
Tiger 2,000 6,200
Loan of Tiger 3,000
Creditors 14,320
55,520 55,520
Elephant Ltd. agreed to take over stock and fixed assets, excluding motor car having a book value of
Rs. 4,100 (the value of which is included in the fixed assets). The consideration that Elephant Ltd.
agreed to was for Rs. 48,000 which is to be satisfied by payment of cash Rs. 16,000, allotment of 160

Preference shares of Rs. 100 each valued at Rs. 75 per share, and the
Page 14 of 15

balance by allotment of 1,600 Equity shares of the face value of Rs. 10 each. The debtors realized
Rs. 19,200 and the creditors were settled for Rs. 14,000.
Following were agreed between the partners:

a) The Equity shares should be allotted in the ratio of partners’ capital accounts as per
Balance sheet.
b) Lion to take over the motor car at an agreed value of Rs. 4,200.
c) The Preference shares to be allotted to Tiger to the value of his loan and the remaining to be
allotted equally between the partners.
d) Balance remaining to be settled in cash.
You are required to show: The Realisation Account, Partners’ Capital Accounts, Bank account.
(Ans: PC Rs. 48,000, Realisation Profit Rs. 19,920, Partners Current A/c L Rs. 14,940, T Rs. 6,980
and Capital A/c Cash bal. L Rs. 19,440, T Rs. 5,480, Cash A/c 38,920)

Page 15 of 15

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160 Accountancy

Bank Reconciliation Statement 5

I n chapter 4, you have learnt that

5.1 Need for Reconciliation

Fig. 5.2 : Proforma of bank reconciliation statement

Particulars Amount Amount

Fig. 5.3 : Proforma of bank reconcitiation statement (table form)

DATE PARTICULARS CHEQUE DEBIT CREDIT BALANCE + REMARKS

FOR DHERENDRA NATIONAL BANK

5.1.1 Timing Differences

5.1.1(c) Direct debits made by the bank on behalf of the customer

5.1.1(d) Amounts directly deposited in the bank account

5.1.1(e) Interest and dividends collected by the bank

5.1.1(f) Direct payments made by the bank on behalf of the customers

5.1.1(g) Cheques deposited/bills discounted dishonoured

5.1.2 Differences Caused by Errors

5.1.2(a) Errors committed in recording transaction by the firm

5.1.2(b) Errors committed in recording transactions by the bank

Test Your Understanding - I

S.No. Transactions Time Gap Errors

II. Fill in the blanks :

5.2 Preparation of Bank Reconciliation Statement

5.2.1 Preparation of Bank Reconciliation Statement without adjusting Cash

5.2.1(a) Dealing with favourable balances

1. Balance as per cash book 50,000

5.2.1(b) Dealing with overdrafts

Particulars (+) (–)

Test Your Understanding - II

Test your Understanding - III

Key Terms Introduced in the Chapter

Summary with Reference to Learning Objectives

Questions for Practice

6. Prepare bank reconciliation statement as on December 31, 2017. This day

Unfavourable balance of cash book

Unfavourable balance of the passbook

Checklist to Test Your Understanding

Test Your Understanding - I

Test Your Understanding - II

Test Your Understanding - III

Accounting for Not-for-Profit Organisation

Meaning, Features and Financial Statements of a Not-for-Profit Organisation:

 Meaning and Concept of Not-for-Profit Organisations:

 Characteristics or Features of Not-for-Profit Organisations:

 Difference between Not-for-Profit Organisation and Profit Earning Organisation:

Sr. Basis Not-for-Profit Organisation Profit Earning Organisation

books as General or Capital or and partnership) and from

 Financial Statements of a Not-for-Profit Organisation:

Understanding Receipts and Payments Account

Meaning, Features, Format and Limitations of Receipts and Payments Account:

 Features: Following are the features of Receipts and Payments Account:

Dr. Receipts and Payments Account for the year ended … Cr

 Limitations of Receipts and Payments Account:

 Difference between Receipts and Payments Account and Cash Book:

Understanding Income and Expenditure Account

Meaning, Features, Format and Important Terms of Income and Expenditure

 Some important terms:

Understanding Balance Sheet

Meaning, Format and Important Points to prepare Balance Sheet:

Need for Preparing Opening Balance Sheet

 Format of Opening Balance Sheet of a Not-for-Profit Organisation.

Opening Balance Sheet as at …

 Format of Balance Sheet of a Not-for-Profit Organisation.

Name of the Organisation