COURSE PACK FOR

Business Accounting
COURSE CODE: 104
COURSE: BBA
SEMESTER: I
YEAR: 2024-25

Course Leader: Dr. Aarushi Kataria

Course Instructor: Dr. Aarushi Kataria
Mr. Rahul Gupta
Ms. Ekta Garg
Mr. Sourabh Bansal

Dr. Minakshi Sati & Dr. Bhawna Dhawan Dr. Yamini Agarwal
Dr. Swati Rohtagi
(PC-BBA 1st Morning & HOD (Director)
Afternoon)

Bharati Vidyapeeth (Deemed to be University)

Institute of Management & Research, New Delhi
An ISO 9001;2008 &14001:2004 Certified Institute
A-4, Paschim Vihar, ND-110063 (Ph; 01125284396, 25285808,
Fax No. 01125286442)
 BVIMR SNAPSHOT

Established in 1992, Bharati Vidyapeeth (Deemed to be University) Institute of

Management and Research (BVIMR), New Delhi focuses on imbibing the said values
across various stakeholders through adequate creation, inclusion and dissemination of
knowledge in management education.

The institute has over the past few years emerged in the lead with a vision of
Leadership in professional education through innovation and excellence. This
excellence is sustained by consistent value enhancement and initiation of value-added
academic processes in institutue's academic sytems.

Based on the fabulous architecture and layout on the lines of Nalanda Vishwa
Vidyalaya, the institute is a scenic marvel of lush green landscape with modern
interiors. The Institute which is ISO 9001:2015 certified is under the ambit of Bharati
Vidyapeeth University (BVU), Pune as approved by Govt. of India on the
recommendation of UGC under Section 3 of UGC Act vide its letter notification No.
F. 9 – 16 / 2004 – U3 dated 25th February, 2005.

Strategically located in West Delhi on the main Rohtak Road, BVIMR, New Delhi has
splendid layout on sprawling four acres of plot with 'state-of-art' facilities with all class
rooms, Library Labs, Auditorium etc., that are fully air-conditioned. The Institute that has
an adjacent Metro station ―PaschimVihar (East)‖, connects the entire Delhi and NCR.

We nurture our learners to be job providers rather than job seekers. This is resorted to
by fostering the skill and enhancement of knowledge base of our students through
various extracurricular, co- curricular and curricular activities by our faculty, who
keep themselves abreast by various research and FDPs and attending
Seminars/Conferences. The Alumni has a key role here by inception of SAARTHI
Mentorship program who update and create professional environment for learners
centric academic ambiance and bridging industry-acdemia gap.

Our faculty make distinctive contribution not only to students but to Academia
through publications, seminars, conferences apart from quality education. We also
believe in enhancing corporate level interaction including industrial projects,
undertaken by our students under continuous guidance of our faculty. These form the
core of our efforts which has resulted in being one of the premier institutes of
management.

At BVIMR, we are imparting quality education in management at Doctorate, Post

Graduate and Under Graduate level
 PROFILE OF COURSE INSTRUCTORS

Dr. Aarushi Kataria is working as an Assistant Professor at BVIMR, New Delhi

since last 11 years till date. She has enriched experience in the field of finance and
marketing. She has been qualified UGC-NET and completed her Ph.D. in
Management in 2016. She has one book and 11 research papers to her credit in the
renowned journals. She has attended many Conferences and FDPs at National and
International level.

Mr. Rahul Gupta is working as Assistant professor (Finance) in BVIMR from last
seven years. He is graduated from Delhi University in commerce stream. He has done
post- graduation from Guru Gobind Singh Indraprastha University in finance
specialization. He has cleared National Eligibility Test conducted by University
Grants Commission two times, not only this he has also been awarded with JRF from
University Grants Commission. He has attended many conferences and earned best
presenter award in two conferences. He has published more than 10 research papers in
various journals, which includes UGC care journals as well. He has also attended
many webinars and FDPs to enhance his knowledge.

Mr. Sourabh Bansal is working as Assistant Professor at BVIMR, New Delhi having
a experience of 6 years in education industry. He is pursuing his PhD from Jamia
Millia Islamia University in field of Finance. His education background includes
MBA (Finance), UGC NET, BBA along with he is certified in Financial Modelling
from IMS Pro School. He has good number of publication in Scopus and ABDC
journals and hands on experience in organizing National and International
Conference. He is an enthusiastic researcher learning different statistical tools like
Eviews, SmartPLS and Python to gain insights about research world and can explore
to education industry extensively.

Ms. Ekta Garg holds [Link] (Hons), [Link] and [Link] degree and pursuing her PhD
in the field of Marketing from The Northcap University, Gurugram. . She has
qualified UGC-NET in 2020. She is a visiting faculty in Bharati Vidyapeeth (Deemed
to be University), Institute of Management and Research, New Delhi. Her interest
areas are Marketing, Human Resource Management, Statistics and Finance.
 TABLE OF CONTENTS

S. No Particulars Page No
1 Course Outline 5-18
2 UNIT 1: Introduction to Financial Accounting 19-24
3 Accounting principles and accounting standards 25-34
4 UNIT 2: Journal and subsidiary books 35-51
5 UNIT 3: Ledger posting and trial balance 52-65
6 UNIT 4: Depreciation 66-77
7 UNIT 5: Meaning and Preparation of final accounts 77-126
8 Question Paper (Internal/External) 127-141
 BHARATI VIDYAPEETH DEEMED UNIVERSITY INSTITUTE
OF MANAGEMENT AND RESEARCH BBA
SEMESTER I; ACADEMIC YEAR 2024-25

1. Course Code: 104

2. Course Title: BUSINESS ACCOUNTING

3. Course Overview:

This course will provide students with a firm foundation in both theoretical and
Practical concepts and applications to meet the various needs of business
organizations at a global level. Also, to provide students with an in-depth
knowledge of management and business concepts.

This course seeks to give an understanding of the ways in which management

accountants can provide relevant information for a variety of decisions to be made
in managing any organisation. On completion of this course, students should be
able to identify, use and interpret the results of costing techniques appropriate to
different activities and decisions; formulate and use standards and budgets for
planning and control purposes; understand the role of responsibility accounting and
performance measurement; understand the behavioural implications of
performance measurement divisionalised businesses; appreciate the need to relate
management accounting systems to contemporary thinking about organisational
planning and control.

Course Objectives:

1. To impart basic business accounting knowledge

2. To train in the Accounting process from entering the business transactions to

journal to preparation of final accounts of sole proprietor
The students are expected to review the course readings and the indicated portion of
the prescribed text for class discussions prior to attending each session.

Program Outcomes (POs)

i) On the successful completion of this program the students will be able to

Demonstrate an understanding of management concepts, theories, models and
key business terms.

i) Communicate effectively with various stakeholders of business

ii) Apply Information Technology applications for managing the business

effectively

iii) Provide optimum solutions to problems in the field of Business Management

iv) Make sound business decisions.

v) Identify entrepreneurial opportunities and leverage the knowledge in starting and

managing a business enterprise.

vi) Collaborate with others in the organizational context, manage resources and lead
them in the pursuit of organizational goals

vii) Investigate the multidimensional business problems using research based

knowledge, methods and in turn make data driven decisions

viii) Understand the contemporary issues and changes in the macro environment that
may have an impact on the business

ix) Identify the need for and engage in lifelong learning in the field of business
management

x) Develop effective and diverse teams

xi) Create sustainable and ethical business policies

Learning Outcomes

After undergoing this course, the student will be able to:

1. Importance and utility of financial accounting
2. Accounting process from entering the business transactions to journal to
preparation of final accounts of sole proprietor.

3. The student will be able to understand the accounting principles and standards.
4. The student will be able to understand the journal entry concept, and
recording of transactions in the books of accounts.

5. The student will be able to align the concept of ledger and trial balance.
6. The student will be able to understand the concept of depreciation.

CO-PO Mapping

CO/PO PO 1 PO 2 PO 3 PO 4 PO 5 PO 6 PO 7 PO 8 PO 9 PO10 PO11 PO12

CO 1 2 1 2
CO 2 1 3 2 2 3
CO 3 1 2 3
CO 4 2 3
CO 5 1 2 2 2
CO 6 3 2 1

5. List of Topics/ Modules

Topic/ Module Contents/ Concepts

Module I: Introduction to Financial • Definition, nature and scope of Financial accounting
Accounting
• Definition, Objectives and Scope of Financial
Accounting
• Branches of Accounting, Users of financial
Accounting and Limitations of Financial Accounting
Accounting Principles and Accounting • Accounting Concepts
Standards - concept,
• Accounting Conventions
• Accounting Standards
objectives and benefits
Module II: Journal & subsidiary books • Types of Accounts, Rules of accounts
• Accounting Process
• Preparation of journal & ledger, trial balance of
various concepts
• Subsidiary Books

• Cash Book
Module III: Ledger Posting and Trial • Meaning and Utility of Ledger, Format of Ledger
Balance Account
• Procedure of posting journal entries to ledger
Accounts
• Balancing of ledger Accounts, Preparation of Trial
balance
Module IV: Depreciation • Meaning, need and importance of depreciation,
Methods of charging Depreciation (WDV, SLM)
• Depreciation- Practice (SLM)
• Depreciation - Practice (WDV)
Module V: Meaning and Preparation of final accounts • Trading Account and its content
• P&L Account and its content
• Balance Sheet and its content
• Practice - Final Account
• Adjustments

6. Evaluation Criteria

Component Description Weight

End Term Exams It will be based on conceptual questions, situation specific 50 %
application oriented questions and short case studies, End
term exam will cover both pre mid-term and post mid-term
course coverage. Course readings are an integral
component of learning in this course.
Component Description Weight Objective
First Internal First internal would be of Marks 15 To evaluate student‘s cognitive skills (Think,
Marks 40 for first three units read, learn, remember, reason, and pay attention)
1, 2 & 3. for first half of the course.
Second Second internal will be of Marks 15 To evaluate student‘s cognitive skills (Think,
Internal Marks 40 for rest of the read, learn, remember, reason, and pay attention)
units. for rest half of the course.
CES A case study will be Marks 10 To recall their subject learning.
activities given. Students will be (Best of two
1- Class required to brief the given will be
Test data by using statistical considered
tools. for 5
2-Quiz It will be based on multiple marks each
choice, open ended and fill CES)
in the blanks type of
questions.
3- Case There would be a class test
Analysis for which individual
assessment will be done to
recall their subject learning.
Class Class notes and involvement Marks 10 To encourage and enhance class participation.
participation & of students will be checked
75% by faculty during semester.
attendance
Note:
1. All CES activities are mandatory. If any students misses any one CES in that case the weightage of
each CES would be 3.33 marks and if a student attempts all 3 CES then his/her best 2 CES will be
considered in that case weightage would be 5 marks each.
2. The passing marks for Internal is 20 (40%). You need to pass separately in internal and External both.

7. Recommended/ Reference Text Books and Resources:

Journal/ 1. Journal of Finance. ...

Article
2. The Review of Financial Studies. ...
3. Journal of Financial Economics. ...
4. Journal of Accounting and Economics. ..
5. Azmi, Fitriati and Sri, Mulyani (2020) Factors that affect accounting information system
success and its implication on accounting information quality. Similiarity.
6. Neha Puri & Harjit Singh (2020), Indian GAAPs, IFRS, and Its Comparison: An Empirical
Critique
7. Akpoveta Onajite Alexandra, eku, Ochuko Joy (2020), Budgeting as an Instrument for
Planning and Control in a Manufacturing Industry.
Text Books S.N. Maheshwari, S.K. Maheshwari, Financial Accounting 4th Ed, Vikas Publishing House.

8. Session Plan

Course 1. Robert Anthony, David Hawkins, Business Accounting. (Tata McGraw- Hill)
Reading
2. Jane Reimers, Financial Accounting (Pearson Education).1.
Internet 1. [Link]
Resource:
2. [Link]
3. [Link]
4. [Link]
5. [Link]
6. [Link]
7. [Link]
 Course Outline and Schedule
Schedule Lecture Topic to be ReadingDue by the
Learning Requirements:
No. discussed students outcome Readings/ assignments/
before coming cases
to the class
1 Relevance of To make https://
financial students [Link]
accounting, need understand [Link]/
of studying this subject the themes/case-
importance of studies/accounting- and-
financial business- management/
accounting
incurrent
scenario.
Unit 1: 2 Definition, nature Financial To understand
Introduction Accounting by aspects related to financial accounting.L O1
toFinancial and Dr.S.N.
Accounting, scope ofMaheshwari
Accounting Financial Vikas
principles and accounting publishing
standards House
3 Definition, Financial To analyse and
Objectives and Accounting by synthesis
Scope ofDr.
Financial
S.N. Accounting
knowledge
Maheshwari regarding
Vikas accounting.
publishing https://
House LO1 [Link]
Financial /advantages-and-
Accounting by To analyse and disadvantages-of-
Dr. S.N. synthesis corporate- accounting/
4 Branches ofMaheshwari
Accounting knowledge
Vikas regarding
publishing accounting.L https://
House O1,LO6 [Link]
Financial [Link]/corporate-
Accounting by To know & accounting- advantages-
Dr. S.N. understand limitations/
Users of aspects related to accounting.
5 financial Maheshwari
Vikas LO1
Accounting
ublishing House
Financial
Accounting by To Know &
Dr. S.N. understand
Limitations of Financial Accounting
aspects related to accounts.LO1
6 Maheshwari
Vikas , LO6
publishing
House
Financial
Accounting by To Know &
Dr. S.N. understand
7 Revision ofMaheshwari
whole unit aspects related to accounting.
Vikas LO1, LO6
publishing
House
Reading Page http:// Azmi, Fitriati and Sri, Mulyani (2020) Factors that affect
4- [Link] accounting information system success and its implication
14 .[Link]/637/1/ on accounting information quality. Similiarity.
FACTORS_THAT
 _AFFECT_ACCO
UNTING_INFOR
MATION_SYSTE
M_.pdf
8 Accounting Assignment:
Concepts Financial Student will 1. Write a note on
Accounting learn& types of assets
by Dr. S.N.
understand the
Maheshwari Accounting
2. Distinguish
between laws and
Vikas Concepts LO1,
expense
publishing LO6
House

Financial Student will Assignment:

9 Accounting Accounting learn & 1 ‗Accounting
Conventions by Dr. S.N. understand Standards have
Maheshwari the been evolved to
Vikas Accounting improve the
publishing Conventions reliability and
House LO1, LO6 credibility of
Financial
Statements.
Accounting
Standards provide
the solution in
case of conflicts
among various
groups‘. In the
light of
this statements,
enumerate the
objectives of Accounting Stand
10 Accounting Financial Student will Assignment:
Standards - concept, objectivesLearn & and benefits1. Which Financial
Accounting
by Dr. [Link] Statements are
Maheshwari the prepared under
Vikas Accounting Ind- AS?
publishing Standards
House LO6

Reading Page https:// Neha Puri & Harjit Singh (2020), Indian GAAPs, IFRS,
No. [Link] and Its Comparison: An Empirical Critique
314-324 m/content/pdf/
10.1007/
s42979-020-
[Link]
11 Types of Accounts, Rules ofTo Know https://
Unit 2: accounts Financial & understand [Link]/
Journal & subsidiary books Accounting aspects guides/
by Dr. [Link] to Topics.
fundamentals-of-
LO2
Maheshwari accounting/
Vikas accounting-
publishing process/ types-of-
House accounts/
12 Accounting Financial student
Process Accounting
by will
learn

the
Dr.S.N. preparation
 Maheshwari of journal &
Vikas ledger LO2
publishing
House
13 Preparation of Financial student will Assignment:
journal & Accounting learn the 1. Why are the
ledger, trial by Dr. S.N. preparation rules of debit and
balance Maheshwari
of various concepts of journal & credit same for
Vikas ledger LO2 liability and capital
publishing ?
House
14 Preparation of journal
Financial
& student will Assignment:
ledger, trial Accounting learn the 1. What is an
balance by Dr. S.N.
of various concepts preparation opening entry ?
Maheshwari of ledger
Vikas LO2
publishing
House
15 Preparation of journal
Financial
& student will Assignment:
ledger, trial Accounting learn the
by Dr. concepts
[Link]
1. Trial Balance is
balance of various the only prima
Maheshwari of journal & facie evidence
Vikas trial balance of the
publishing LO2 arithmetical
House accuracy of records. Do you a
2. Trial balance
facilitates
the
preparation of
final accounts
is it correct ?,
give reasons.
16 Preparation of journal
Financial
& student will Assignment:
ledger, Accounting learn the 1. Is the agreement
t by Dr. [Link] of a trial balance
rial Maheshwari of journal absolute proof of the
balance Vikas concepts LO2
of various accuracy of the
publishing books ? If not, what
House are the errors Which
remain even after
agreement ?
2. What do you
mean by suspense
account when it is
opened ?

Case study discussion in class

17
18 Subsidiary Books Financial Assignment:
Accounting by To Know & Why is it necessary to pass the
Dr. S.N. understand adjustment entries ?
Maheshwari aspects
Vikas related to Topics.(LO6, LO3)
publishing
House
Financial https:// [Link]/
Accounting by Student will cash-book
Dr. S.N. learn the Cash
19 Cash Book Maheshwari analysis along https:// [Link]
 Vikas with its .com/cash-book/
publishing uses.(LO6,
House LO3)
Cash Book Financial
Accounting by To Know &
Dr. S.N. understand
20 Maheshwari aspects
Vikas related to
publishing Topics. . (LO6, LO3)
House
Reading Page https:// [Link]
No. [Link]/[Link]/ Dr. S. Amutha, Dr. S. Shankari (2021), FORENSIC AUDIT - A
4796- jae/article/ view/ Quick fix for Fraudulent Accounting Practices
4800 7497/7082
Unit-3:- Meaning and Financial Student will https:// [Link]/
Ledger Utility of Accounting by practice . difference-between- journal-
Posting and Trial Balance
Ledger, Dr. S.N. (LO6, LO3) and-ledger
Maheshwari
21 Vikas
publishing
House
22 Format of Financial Studentwill
Ledger Account Accounting by practice.
Dr. S.N. (LO6, LO3)
Maheshwari
Vikas
publishing https:// [Link].c
House om/ask/answers/ 030915/whats-
23 Procedure of Financial To Know & difference-between- general-
posting journal entries Accounting by understand ledger-and- [Link]
to Dr. S.N. aspects
ledger Accounts Maheshwari related to
Vikas Topics. . (LO1, LO4)
publishing
House
24 Procedure of Financial To Know &
posting journal entries Accounting by understand
to Dr. S.N. aspects
ledger Accounts Maheshwari related to
Vikas Topics. . (LO1, LO4)
publishing
House
25 Balancing of Financial To Know & https:// [Link]
ledger Accounts, Accounting by understand [Link]/sac- finaccounting/
Preparation of Dr. S.N. aspects chapter/ledgers- journals-and-
Trial balance Maheshwari related accounts/
to Topic. .(LO1, LO4)
Vikas
publishing
House
26 Balancing of Financial To Know &
ledger Accounts, Accounting by understand
Preparation of Dr. S.N. aspects
Trial balance Maheshwari related to Topic. .(LO4, LO5)
Vikas
publishing
House
Reading Page https:// onlinelibrary.w Freeman Brobbey,Owusu,Abdul Latif Alhassan (2020), Asset-
No. [Link]/doi/ Liability Management and bank profitability: Statistical cost
1488- epdf/10.1002/ ijfe.1860 accounting analysis from an emerging market
1502
Unit-4 27 Meaning, need and Financial To Know & https:// [Link]/
Depreciation importance of Accounting by understand activities/books/c+
depreciation, Methods Dr. S.N. aspects +/intro/3e/ WebItems/Ch07-
of Maheshwari related to Topic.
Web/ .(LO4, LO5)
[Link]
charging Depreciation Vikas
(WDV, SLM) publishing
House
28 Meaning, need and Financial To Know &
importance of Accounting by understand
depreciation, Methods Dr. S.N. aspects
of Maheshwari related to Topic. .(LO4, LO5)
charging Depreciation Vikas http:// [Link]/
(WDV, SLM) publishing gowthorpefa2/ students/
House answers_case/
e09_depreciation.pdf
29 Depreciation- Practice Financial Student will
(SLM) Accounting by practice &
Dr. S.N. analyse.(LO1,
Maheshwari LO4) https:// [Link].c
Vikas [Link]/ [Link]
publishing
House
30 Financial Student will practice depreciation( LO4, LO5)
Depreciation- Practice Accounting by
(SLM) Dr. S.N.
Maheshwari
Vikas
publishing
House
31 Depreciation - Financial Student will https:// [Link]
Practice (WDV) Accounting by practice & [Link]/depreciation- policies-
Dr. S.N. analyse.(LO4, 37608
Maheshwari LO5)
Vikas
publishing
House
32 Depreciation - Financial Student will https:// [Link].c
Practice (WDV) Accounting by practice & [Link]/ [Link]
Dr. S.N. analyse.(LO4,
Maheshwari LO5)
Vikas
publishing
House
Reading Page [Link] Users/ Akpoveta Onajite Alexandra, eku, Ochuko Joy (2020), Budgeting
No. [Link]/ as an Instrument for Planning and Control in a Manufacturing
24 Downloads/24- Article Industry
%20Text-54-1- 10-
[Link]
Unit-5 33 Trading Account and its Financial Student will
Meaning and content Accounting by practice &
Preparation of Dr. S.N. analyse.(LO4,
final accounts Maheshwari LO5)
Vikas
publishing
House
34 Trading Account and its Financial Student will http:// [Link]/
content Accounting by practice & article/preparation- of-final-
Dr. S.N. analyse.(LO4, accounts--- case-analysis-35/
Maheshwari LO5)
Vikas
publishing
House
35 P&LAccount and its Financial Student will
content Accounting by practice &
Dr. S.N. analyse.(LO4,
Maheshwari LO5) https:// [Link]
Vikas [Link]/final- accounts-
publishing problems- and-solutions/
House
36 P&LAccount and its Financial To Know &
content Accounting by understand
Dr. S.N. aspects
Maheshwari related to Topic. .(LO1, LO5,LO6)
Vikas
publishing
House
37 Balance Sheet Financial To Know & https://
and its content Accounting by understand [Link]/
Dr. S.N. aspects related cgi/[Link]?
Maheshwari to Topic. article=1836&contex
Vikas .(LO1, t=hon_thesis
publishing LO5,LO6)
House
38 Practice - Final Account Financial To Know & Assignment:
Accounting by understand 2. What is meant by grouping
Dr.S.N. aspects related or
Maheshwari to Topic.
.(LO1, Marshaling of balance sheet ?
Vikas What is the use of financial
publishing LO5,LO6)
statements for potential
House investors ?
39 Practice - Final Account Financial To Know & Assignment:
Adjustments Accounting by understand Why is it necessary to pass the
Dr. S.N. aspects related adjustment entries ?
Maheshwari to Topic.
Vikas .(LO1, b
publishing O5,LO6)
House
 40 Practice - Final Account Financial To Know & https:// [Link].c
Adjustments Accounting by understand om/ financial_ accounting
Dr. S.N. aspects related / financial_final_acco [Link]
Maheshwari to Topic.
.(LO1, https:// [Link]/
Vikas ebook/files/Ebook/
publishing LO5,LO6)
Accounting/
House Accounting%20and
%20Financial
%20Management
%20(2006)/
4.%20Chapter
%203%20-%20Final
%[Link]
Tristano Sainati; Fiona Zakaria; Giorgio Locatelli; P.
Andrew Sleigh;Barbara Evans (2020), Understanding
Reading Page https:// [Link] the costs of urban sanitation: towards a standard costing
No. model
642-659
m/washdev/
article/
10/4/642/77908
/
Understanding-
the-costs-of-
urban-
sanitation
 UNIT-1
INTRODUCTION TO FINANCIAL ACCOUNTING,
ACCOUNTING PRINCIPLES AND ACCOUNTING
STANDARDS DEFINITION

Definition of Financial Accounting:

Financial Accounting is concerned with providing information to external users. It

refers to the preparation of general purpose reports for use by persons outside a
business enterprise, such as shareholders (existing and potential), creditors, financial
analysts, labour unions, government authorities, and the like. Financial accounting is
oriented towards the preparation of financial statements which summarize the results
of operations for selected periods of time and show the financial position of the
business at particular dates.

Objectives of Accounting:

The following are the main objectives of accounting:

To maintain full and systematic records of business transactions: Accounting is the

language of business transactions. Given the limitations of human memory, the main
objective of accounting is to maintain ‗a full and systematic record of all business
transactions.

To ascertain profit or loss of the business:

Business is run to earn profits. Whether the business earned profit or incurred loss is
ascertained by accounting by preparing Profit & Loss Account or Income Statement.
A comparison of income and expenditure gives either profit or loss.

To depict financial position of the business:

A businessman is also interested in ascertaining his financial position at the end of a

given period. For this purpose, a position statement called Balance Sheet is prepared
in which assets and liabilities are shown.

Just as a doctor will feel the pulse of his patient and know whether he is enjoying

1
good health or not, in the same way by looking at the Balance Sheet one will know
the financial health of an enterprise. If the assets exceed liabilities, it is financially
healthy, i.e., solvent. In the other case, it would be insolvent, i.e., financially weak.

To provide accounting information to the interested parties:

Apart from owner of the business enterprise, there are various parties who are
interested in accounting information. These are bankers, creditors, tax authorities,
prospective investors, researchers, etc. Hence, one of the objectives of accounting is
to make the accounting information available to these interested parties to enable
them to take sound and realistic decisions. The accounting information is made
available to them in the form of annual report.

The following points are important to understand the scope and nature of
financial accounting:

Contents:

The end product of the financial accounting process are the financial statements that
communicate useful information to decision-makers. The financial statements reflect
a combination of recorded facts, accounting conventions and personal judgments of
the preparers.

There are three primary financial statements for a profit making entity in India, viz.,
the Income Statement (statement of revenues, expenses and profit), and the Balance
Sheet (statement of assets, liabilities and owner‘s equity) and cash flow statement.
The accounting information generated by financial accounting is quantitative, formal,
structured, numerical and past-oriented material.

Accounting System:

The accounting system includes the various techniques and procedures used by the
accountant (preparer) in measuring, describing and communicating financial data to
users. Journals, ledgers and other accounting techniques used in processing financial
accounting information depend upon the concept of the double-entry system. This
technique includes generally accepted accounting principles (GAAP). The standard of
generally accepted accounting principles includes not only broad guidelines of general

2
application but also detailed practices and procedures.

Measurement Unit:

Financial accounting is primarily concerned with measurement of economic resources

and obligations and changes in them. Financial accounting measures in terms of
monetary units of a society in which it operates. For example, the common
denominator or yardstick used for accounting measurement is the rupee in India and
dollar in the U.S.A. The assumption is that the rupee or the dollar is a useful
measuring unit.

Users of Financial Accounting Information:

Financial accounting information is intended primarily to serve external users. Some

users have direct interest in reported information. Examples of such users are owners,
creditors, potential owners, suppliers, management, tax authorities, employees,
customers. Some users need financial accounting information to help those who have
direct interest in a business enterprise.

Examples of such users are financial analysts and advisers, stock exchanges, financial
press and reporting agencies, trade associations, labour unions. These user groups
having direct/indirect interest have different objectives and diverse informational
needs. The emphasis in financial accounting has been on generals-purpose
information which, obviously, is not intended to satisfy any specialised needs of
individual users or specific user groups.

Users of accounting:-

(i) Shareholders:

In the case of companies, shareholders come to know of the results of operations and
financial position of the company only through the annual statements showing the
profit earned (or loss suffered) and the assets and liabilities.

(ii) Investors:

Those who are interested in buying the shares in a company or in advancing money to

3
the company are also naturally interested in the financial statements to know how safe
the investment already made is and how safe the proposed investment will be.

(iii) Creditors:

A number of suppliers supply goods and services on credit; they also would like to be
satisfied that they will be paid on time. The financial statements greatly help them in
properly assessing the capability of the firm or the institution to do so.

(iv) Labour:

In India, workers are entitled to payment of bonus which depends on the size of the
profit earned. Naturally, they would like to be satisfied that the bonus being paid to
them is correct; they are much interested in knowing the profit earned or loss suffered
by the firm. This knowledge also helps them in conducting negotiations for wages.

(v) Government:

Governments all over the world are using financial statements for compiling statistics
concerning business which, in turn, help in compiling national accounts. The
statements are of obvious importance also for ascertaining the income- tax payable

(vi) Researchers:

The financial statements, being a mirror of business conditions, are of inestimable

value to research into business affairs. These statements are, therefore, of great
interest to scholars undertaking Vs Accounting:-research in accounting theory as well
as business affairs and practices.

Difference between Book Keeping and Accounting:-

Accounting includes budgeting, strategic planning, cost analysis, auditing, income-tax

preparation, performance measurement, evaluation, control, preparing managerial
reports for decision making etc.

The persons who are engaged with these works are known as Accountants. That is

4
why it is rightly said that when book-keeping ends, accounting starts.

Accounting is the language of business because it is through accounting that various

monetary matters related with business are communicated. In the words of Smith,
―Accounting is the science of recording and classifying business transactions and
events, primarily of a financial character, and the art of making significant summaries,
analysis and interpretation of those transactions and events and communicating the
results to persons who must make decisions or form judgement.‖

Book-keeping is concerned with the recording aspect, while accounting, being

comprehensive, includes not only book-keeping but also the activities involved in
analysis and reporting of the recorded information, apart from designing a proper and
suitable system for recording.

Book-Keeping:

1. It is the basis of Accounting

2. Persons, do book-keeping, are called Book- keepers.

3. No Financial Statements can be prepared from book-keeping records.

4. It has no branch.

5. It is the recording phase.

6. A complete picture of financial condition of a business cannot be known.

7. It need not require any special skill or knowledge.

8. Personal judgement of the book-keeper is not required.

9. It provides no information for taking managerial decisions.

10. It does not guide in complying with any legal formality.

Accounting:

1. It is the basis for Business Language.

2. Persons, responsible for accounting, are called Accountants.

3. Financial Statements can be prepared from the accounting records.

4. It has many branches—Cost Accounting, Management accounting etc.

5
5. It is the summarizing phase.

6. A complete picture of the financial condition of a business unit can be known.

7. It requires special skill and knowledge.

8. Personal judgement of the Accountant is essential.

9. It provides information for taking managerial decisions.

10. Legal formalities can be complied with the help of accounting records.

Limitations of Financial Accounting:

Financial accounting is significant for management as it helps them to direct and

control the firm activities. It also helps business managements in determining
appropriate managerial policies in different areas, such as production, sales,
administration and finance.

Financial accounting suffers from the following limitations which have been
responsible for the emergence of cost and management accounting:

(1) Financial accounting does not provide detailed cost information for different
departments, processes, products, jobs in the production divisions. Management may
need information about different products, sales territories and sales activities which
are also not available in financial accounting.

(2) Financial accounting does not set up a proper system of controlling materials and
supplies. Undoubtedly, if material and supplies are not controlled in a manufacturing
concern, they will lead to losses on account of misappropriation, misutilisation, scrap,
defectives, etc.

(3) The recording and accounting for wages and labour is not done for different jobs,
processes, products, departments. This creates problems in analysing the costs
associated with different activities.

(4) It is difficult to know the behaviour of costs in financial accounting as expenses

are not classified into direct and indirect and therefore cannot be classified as
controllable and uncontrollable. Cost management which is the most important
objective of all business enterprises, cannot be achieved with the aid of financial
accounting alone.

6
(5) Financial accounting does not possess an adequate system of standards to
evaluate the performance of departments and employees working in departments.
Standards need to be developed for materials, labour and overheads so that a firm can
compare the work of workers, supervisors and executives with what should have been
done in an allotted period of time.

(6) Financial accounting contains historical cost information which is accumulated at

the end of the accounting period. The historical cost is not a reliable basis for
predicting future earnings, solvency, or overall managerial effectiveness. Historical
cost information is relevant but not adequate for all purposes.

(7) Financial accounting does not provide information to analyse the losses due to
various factors, such as idle plant and equipment, seasonal fluctuations in volume of
business, etc. It does not help management in taking important decisions about
expansion of business, dropping of a product, alternative methods of production,
improvement in product, etc.

(8) Financial accounting does not provide necessary cost data to determine the price
of the product being manufactured or the service being rendered to the consumers.

In spite of the above limitations, financial accounting has utility and is an important
and conceptually rich area. Because of growing business complexities and advances
in knowledge of human behaviour and decision processes, the scope and methods of
financial accounting are changing. Financial accounting theory and practice will
probably be broadened and improved considerably in the future.

andy Bozarth loosened his grip on the tiller of his sail boat and let the bow turn slowly
into the breeze. Soon the craft nosed into the wind and was virtually dead in the water
giving Randy time to think about what had been troubling him for days now. If only
he had taken an international finance course rather than wasting his time on ―fun‖
electives when in college. But that was in the past and if he had learned anything so
far in life it was you cannot change the past.

7
The Case of the Drifting
Exchange Rate

8
Randy had relocated from the Chesapeake Bay area to the west coast of Mexico a
couple of years earlier to be able to sail more and also to experience a different
culture. So far he was quite happy with his decision although life ‗south of the border‘
did present some unique challenges. Most of the challenges came from his housing
arrangements. Upon moving south he decided he would forgo living in a single family
dwelling and instead opt for a condominium. There were several condo complexes to
choose from and most were owned predominately by Canadians, U.S. citizens, and
Europeans. Randy chose Bahia Mar Condominiums as his home and in general was
very satisfied with his choice.

Given Randy‘s educational background (B.S. in accounting) and years spent as a

hospital controller it was no surprise that he was called upon by his neighbors to assist
in the governance of the homeowners association (HOA). With some reluctance he
had allowed himself to be elected treasurer of the Bahia Mar HOA‘s Board of
Directors last year. This means that he is obligated to review the quarterly financial
statements prepared by the management of the HOA. Additionally he is responsible
for presenting the proposed budget for the upcoming year to the annual meeting of all
150 condo owners. It is the budget that is troubling him.

The HOA is responsible for building and grounds maintenance, security, maid service
(if desired), as well as general administration of the HOA which includes paying
taxes, utilities, billing owners, etc. Virtually all costs incurred are denominated in
pesos. The current year‘s budgeted expenditures are 5,250,000 pesos. Approximately
two-thirds of the budget is comprised of salaries for various HOA employees.

The budgeting process is largely driven by the expenditures requested by

management. Once those have been justified and agreed upon by the Board of
Directors of the HOA, management converts the budget into U.S. dollars. The
budgeted expenditures amount is then divided by 150, the number of condominiums,
to determine the annual condominium fees. The resulting annual fee is then divided
by four as homeowner fees are paid quarterly on the first day of each quarter. Since
most condo owners‘ primary residences are in the U.S. it was decided that condo fees
would be denominated in U.S. dollars rather than the local currency.

9
During the last few years management used an exchange rate of 10.5 pesos to the U.S.
dollar to convert the peso denominated budget into dollars. Actual exchange rates
fluctuated between 9.9 and 13.9 pesos per U.S. dollar during that period. The manager
of the HOA is insisting on utilizing the same conversion factor as in the past years.
His arguments range from ―consistency‖ to ―no one can predict the future‖. Randy is
uncomfortable with this approach. He takes his fiduciary responsibilities seriously and
while on his watch as treasurer he wants the budgeting process accomplished in a
professional manner.

As the budgeting process moves forward Randy knows he must decide how he wants
the currency translation to be handled. He will also need to provide a coherent
argument for his position and draft a memo for the HOA‘s Board and manager. As
Randy contemplates these exchange rate issues he notices a squall building rapidly a
few miles to the west and moving his way. Apparently it‘s time to make some
decisions both financial and navigational.

Questions

1. Assuming Mr. Bozarth would prefer to use external sources for an exchange rate,
how would you suggest a rate for converting next year‘s budget from pesos to
U.S. dollars be determined?

2. What alternate methods might Mr. Bozarth propose to the Board for dealing with
foreign currency fluctuations?

3. How might Mr. Bozarth go about formulating an estimate of the exchange rate
for the upcoming year rather than relying on external quotes?

4. What are the implications for the owners and the HOA manager of using the actual
foreign exchange rate as compared to the 10.5 pesos per U.S. dollar rate used in prior
years‘ budgeting process? How might this influence the owners‘ and managers
preferences regarding the choice of exchange rate for next year‘s budget

Accounting Principles and Accounting Standard

Accounting is an ancient art, certainly as old as money itself even though the art must
have been rudimentary in the beginning. Chanakya in India clearly indicates, in his

10
Arthshastra, the existence and the need of proper accounting and audit. The Indian
system of accounting is as scientific and systematic as the one developed in the West
and is certainly older.

However, the modern system of accounting, as we know it, owes its origin to Pacioli
who lived in Italy in the 15th century. The art of accounting has been practiced for
long but it was only in the late thirties of the last century, that the study of the theory
of accounting was taken up seriously. In this task, the American Institute of Certified
Public Accountants played a notable part.

This Institute once defined accounting as ―the art of recording, classifying and
summarizing in a significant manner and in terms of money transactions and events
which are, in part at least, of a financial character, and interpreting the results
thereof.‖

This definition brings out the following as the attributes of accounting:

(1) Events and transactions of a financial nature, even though only partly of this type,
are recorded— events of a non-financial nature, say the passing of control from
one person to another, cannot be recorded.

(2) The record must be in such a way as to be able to portray the significance of all
transactions and events individually and collectively, class by class and as a
whole— this involves both analysis and summarization.

(3) The parties concerned must be able to gather the true message of the results as
embodied in the statements finally prepared. Accounting knowledge should also
help a person understand the meaning of the financial statements of any firm or
institution placed before him. It is worth nothing that besides the people at the
helm of affairs of the concerned firm or institution, there are numerous other
parties interested in the financial statements.

Accounting Concepts:

Accounting is the language of business; affairs of a business unit are communicated to

others as well as to those who own or manage it through accounting information

11
which has to be suitably recorded, classified, summarized and presented. To make the
language convey the same meaning to all people, as far as practicable, and to make it
full of meaning, accountants have agreed on a number of concepts which they try to
follow.

These are given below:

(i) Business Entity Concept:

Accountants treat a business as distinct from the persons who own it; then it becomes
possible to record transactions of the business with the proprietor also. Without such a
distinction, the affairs of the firm will be all mixed up with the private affairs of the
proprietor and the true picture of the firm will not be available.

This concept has now been extended to accounting separately for various divisions of
a firm in order to ascertain the results for each division separately. It has been of
immense value in determining results by each responsibility centre—Responsibility
Accounting.

(ii) Money Measurement Concept:

Accounting records only those transactions which are expressed in monetary terms,
though quantitative records are also kept. An event, even though important, like a
quarrel between the production manager and the sales manager, will not be recorded
unless its monetary effect can be measured with a fair degree of accuracy. It should be
remembered that money enables various things of diverse nature to be added up
together and dealt with. The use of a building and the use of clerical services can be
added up only through money values and not otherwise.

(iii) Cost Concept:

Transactions are entered in the books of account at the amounts actually involved.
Suppose a firm purchases a piece of land for Rs 15 lakhs but considers it as worth Rs
20 lakhs. The purchase will be recorded at Rs 15 lakhs and not any more. This is one
of the most important concepts—it prevents arbitrary values being put on transactions,
chiefly those resulting in acquisition of assets.

12
Another way of saying the same thing would be that the amount to be recorded is
objec tively arrived at—as a result of the mutual agreement of the two parties
involved. Of course, sometimes accountants have necessarily to be satisfied with an
estimate only—the amount of depreciation to be charged each year in respect of
machinery is an example; the amount has to be an estimate since the future life of the
machinery cannot be known precisely.

(iv) Going Concern Concept:

It is assumed that the business will exist for a long time and transactions are recorded
from this point of view. It is this that necessities distinction between expenditure that
will render benefit over a long period and that whose benefit will be exhausted
quickly, say, within the year. Of course, if it is certain that the concerned venture will
exist only for a limited time; the accounting record will be kept accordingly.

(v) Dual-Aspect Concept:

Each transaction has two aspects; if a business has acquired an asset, it must
have resulted in one of the following:

(a) Some other asset has been given up; or

(b) The obligation to pay for it has arisen; or, rather,

(c) There has been a profit, leading to an increase in the amount that the business
owes to the proprietor; or

(d) The proprietor has contributed money for the acquisition of the asset. Further, if
there is an increase in the money owed to others, there must have been an
increase in assets or a loss. At any time:

Assets = Liabilities + Capital; or, rather, Capital = Assets – Liabilities.

In other words, capital, i.e., the owner‘s share of the assets of the firm is always what
is left out of assets after paying off outsiders. This is called the Accounting Equation.
It is self-evident but very useful.

13
(vi) Realisation Concept:

Accounting is a historical record of transactions; it records what has happened. It does

not anticipate events though anticipated adverse effects of events that have already
occurred are usually recorded. This is of great importance in stopping business firms
from inflating their profits by recording sales and incomes that are likely to accrue.
Unless money has been realized either cash has been received or a legal obligation to
pay has been assumed by the customer no sale can be said to have taken place and no
profit or income can be said to have arisen.

(vii) Accrual Concept:

If an event has occurred or a transaction has been entered into, its consequences will
follow. Normally, all transactions are settled in cash but even if cash settlement has
not yet taken place, it is proper to bring the transaction or the event concerned into the
books.

Income or profit arises only out of business operations—when there has been an
increase in the owner‘s share of the assets of the firm (called owner‘s equity) but not
if the increase has resulted from money contributed by the owner [Link]
increase in the owner‘s equity is called revenue and anything that reduces the owner‘s
equity is expense (or loss); profit results only when the total of revenues exceeds the
total of expenses or losses.

In addition to the above mentioned concepts, the following should also be noted:

(i) Transactions should be recorded in such a manner as to reflect the true legal
position. For instance, it is not proper to treat sales on hire-purchase basis as
ordinary sales and the hire-purchase customer as an ordinary debtor since he can
always return the goods and put an end to his liability.

(ii) Even though it is assumed that business will continue for a long time, it is
necessary to keep accounts in such a manner as to permit results being
ascertained and presented for each financial period, usually a year.

14
The International Accounting Standards Committee (IASC), of which the Institute of
Chartered Accountants of India (ICAI) is an associate member, treats Going Concern,
Consistency and Accrual as the fundamental accounting assumptions. The Indian
Institute, in its own standard (AST) has affirmed the three fundamental accounting
assumptions.

Conventions Regarding Financial Statements:

In order to make the message contained in the financial statements—the income

statement (Profit and Loss Account) and the statement showing the financial
position (Balance Sheet)— clear and meaningful, these are drawn up according
to the under mentioned conventions:

(i) Consistency:

The accounting practices should remain the same from one year to another for
instance, it would not be proper to value stock-in-trade according to one method one
year and according to another method next year. If a change becomes necessary, the
change and its effect should be stated clearly.

(ii) Disclosure:

Apart from legal requirements, good accounting practice also demands that all
significant information should be disclosed. Not only various assets, for example,
have to be stated but also the mode of valuation should be disclosed.

Various types of revenues and expenses properly grouped must also be disclosed.
Whether something should be disclosed or not will depend on whether it is material or
not. Materiality depends on the amounts involved in relation to the asset or transaction
group involved or to profits.

(iii) Conservatism:

Financial statements are usually drawn up on rather a conservative basis. Window-

dressing, i.e., showing a position better than what it is, is not permitted. In other
words, secret reserves are not permitted. It is also not proper to show a position

15
substantially worse than what it is

Accounting Standards

Accounting Standards are employed as one of the main compulsory regulatory

mechanisms for preparation of general-purpose financial reports and subsequent audit
of the same, in almost all states of the globe. Accounting standards are concerned with
the scheme of measurement and disclosure principles for the provision and
demonstration of financial statements. They come out with a set of important
statements of how particular types of proceedings, events and other costs should be
known and reported in the financial [Link] standards are devised to
supply useful

information to different users of the financial statements, to such as shareholders,

creditors, lenders, management, investors, suppliers, competitors, researchers,
regulatory bodies and social club at large and so [Link] fact, such assertions are
planned and prescribed so as to improve & benchmark the quality of financial
coverage.

Accounting Standards are the policy documents (authoritative statements of best

accounting practice) issued by recognizing expert accountancy bodies relating to
diverse aspects of measurement, handling and disclosure of accounting transactions
and issues. As relate to the codification of Generally Accepted Accounting Principles
(GAAP). These are expressed to be norms of accounting policies and patterns by
means of codes or guidelines to direct as to how the items, which go to establish up
the financial statements should be dispensed with in the accounts and presented in the
annual [Link] purpose of setting standards is to bring about uniformity in
financial reporting and to ensure consistency and comparability in the information
published by enterprises. Accounting Standards (ASs) are sweeping up the aspects of
presentation, measurement, treatment, recognition, and revelation of accounting
transactions in the financial statements which are written policy documents issued by
an expert accounting body or by the government or other regulatory body.

16
ROLE AND IMPORTANCE OF ACCOUNTING STANDARDS

Operating a line of work is not simply to make profits, deposit money in the money
box, paying employees, and lure more customers and clients. It is whether the
commercial enterprise is booming or if the owner is simply investing in something
that will not win them all. Accounting standards in the United States appear in the
conformation of the generally accepted accounting principles, a set of measures,
guidelines and operations that are used when accounting for the affairs of most
governmental and non- governmental [Link] reading of numbers and the
wherewithal to put them in the proper context are at the essence of
[Link] exist to assure that accounting decisions are reached in a
unified and reasonable manner.

Comparison

Paramount to the purpose of accounting standards is the universality that it brings to

financial record [Link] organizations must to accounting procedures
that are the same as their counterparts, and non-governmental organizations must
execute the [Link] answer is that it is easy to compare the fiscal standing of similar
entities. All comparisons within groups are a matter of comparing "apples to apples."
This helps both external and internal observers weigh the state of an entity in the
context of other comparable entities. For example, the financial standing of a town
can

be appraised against a neighboring town with the presumption that the pertinent
numbers have been achieved in a standardized style.

Transparency

Accounting standards are planned to implement transparency in governing [Link]

rules, procedures and standards that form up the generally accepted accounting
principles were selected with the intention of assuring that organizations lean in the
focal point of openness when deciding how to provide data to [Link] sort of
transparency is particularly significant in the event of public entities, such as
governments or publicly traded [Link] limit the freedom and flexibility

17
of entities to use clever accounting to move points around or even to obscure them.

Relevance

Standards exercise to help entities provide the most relevant information in the most
sensible manner [Link] this way, an organization run by accounting standards
will get the kind of financial information that observers are most concerned in
[Link] ultimately should provide information in a manner that more fairly
and clearly represents the current financial standing of the surgical procedure. The
standards make it more hard for organizations to misdirect observers and to fool them
with information that does not have sufficient relevancy.

Hearings

Finally, the importance of accounting standards lies in the value that it brings to
financial documents for the various audiences that view and make vital decisions
based on it. An absence of accounting standards would cause the work of investors,
regulators, taxpayers, reporters and others more difficult and more speculative. For
example, without banners, an investor who has examined the financial statements of a
large publicly traded company would not know whether to trust the findings on those
instructions. Standards mean that taxpayers can understand how their tax dollars are
being dropped, and regulators can see to it that laws are observed. Other reasons for
which accounting standards are important for whole businesses.

Protecting Investors

Using the accounting standards, the interests of investors are ensured that the
documents they examine are certainly accurate and sincere. As investors, they are
interested to know that their money will eventually pull ahead and come back to them.
Accounting standards increase the confidence of investors in the company.

Regulatory Compliance

Government regulators set of accounting standards that must be met by all [Link] is
both beneficial for the investor or business proprietor as well as for customers or clients,
because it manufactures more than 400 brands focused on health and wellbeing. Many

18
Unilever Brands, Dove, Axe, Ben and Jerry‘s, Lipton, are respected around the world
and have become household names. The finance team developed a financial planning
process to support their role in driving the success of these brands and others.

Unilever achieved a strong set of financial results in 2011. Underlying sales growth in
2011 was 6.5%, up from 3.5% in 2009, while 60% of Unilever categories are growing
share despite challenging market conditions and a difficult economic climate. Its
strategy is to focus on volume growth and strengthening the competitive position of
the company‘s brands. Commenting on the company‘s performance, CEO Paul
Polman said: ―In 2011 we have made significant progress in the transformation of
Unilever to a sustainable growth protects against fraud in companies. It also promotes
transparency between business transactions that will eventually lead to improved market
efficiency. Accounting standards issued by the FASB and the IASB will help prevent a
company or business expenses relating to legal proceedings instituted against him by the
government.

Case Study: Integrating a New Business into the Financial Planning Process at
Unilever

A new Controller in this case was recently hired by Unilever, a global 200 consumer
products organization, to integrate a newly acquired business into Unilever‘s financial
planning process. The newly acquired organization was a publically held company
and had its own existing financial processes and procedures. Financial planning and
reporting are major company activities and finance and accounting professionals are
expected to ―get it right.‖ The purpose of this case study is to get students to think
about the difficulties and challenges of revamping existing financial processes and
procedures and alert them to areas where other financial professionals have
encountered difficulties so they can benefit from their experience.

Keywords: Acquisitions, Capital Planning, Financial Planning, Inventory Valuation,

Key Performance Measures

Background Information about Unilever

Unilever is well known around the world for its brands. On any given day, two billion

19
people use Unilever products to look good, feel good and get more out of life. The
company

company despite difficult markets and an unusual number of significant external

challenges. Our overall performance was driven by our growth in emerging markets
and the Home Care and Personal Care categories. We invested heavily in our brands
and exit the year with positive momentum. In Foods, whilst price increases have
impacted volumes, we have grown in line with our markets and gained share in many
of our key businesses.‖

In the past several years Unilever also enhanced their position in attractive, high-
growth categories and purchased a portfolio of desirable brands through company
acquisitions, joint ventures or Greenfield investments.

Case Context

You have been recently appointed to a start up project as a result of one of the
activities mentioned above. You are facing demands on your tine from your
colleagues, boss and subordinates. At the same time you are receiving requests from
headquarters and specialized support functions including Tax, Treasury, and
Insurance. You constantly have to prioritize and there is danger that important tasks
get delayed, or worse, never get done. Since Financial Planning and Reporting are one
of the major activities you are responsible for you must quickly familiarize yourself
with these Unilever financial processes. You are given nine areas of importance to
focus your activities. The areas are:

1. Global Standard Chart of Accounts (SCOA)

2. Local Company Chart of Accounts

3. Financial Reporting Routine

4. Key Performance Measurements

5. Financial Budgeting System

6. Capital Planning Process

20
7. Inventory Valuation and Cost of Goods Sold

8. Sarbanes Oxley Considerations

For each of the activities above you are given the objectives and the rules. You must
identify the list of actions required and identify any potential obstacles or challenges
you may face.

Global Standard Chart of Accounts (SCOA) Objective

Unilever‘s global chart of accounts is a general ledger accounting system that allows
for the accumulation globally and regionally of financial information. This global
chart of accounts

is a global mandate. Migration to this global chart of accounts is only recommended

once you have a fully understanding of your current systems.

Questions for Discussion

1. What reference documents should you obtain?

2. What are the key elements of your plan to implement the SCOA?

3. What are some obstacles or challenges you may face in trying to impose a global
SCOA?

4. How do you identify if additional resources are needed?

21
 UNIT-2
JOURNAL AND SUBSIDIARY BOOKS
ACCOUNTING PROCESS

Any economic transaction or event of a business which can be expressed in monetary

terms should be recorded. Traditionally, accounting is a method of collecting,
recording, classifying, summarizing, presenting, and interpreting financial data of an
economic activity. The series of business transactions occurs during the accounting
period and its recording is referred to an accounting process/ mechanism. An
accounting process is a complete sequence of accounting procedures which are
repeated in the same order during each accounting period. Therefore, accounting
process involves the following steps:

i) Identification of Transaction: In accounting, only financial transactions are

recorded. A financial transaction is an event which can be expressed in terms of
money, and which brings change in the financial position of a business enterprise. An
event is an incident or a happening which may or may not bring any change in the
financial position of a business enterprise. Therefore, all transactions are events, but
all events are not transactions. A transaction is a complete action, to an expected or
possible future action. In every transaction, there is movement of value from one
source to another. For example, when goods are purchased for cash, there is a
movement of goods from the seller to the buyer and a movement of cash from buyer
to the seller. Transactions may be external (between a business entity and a second
party, e.g., goods sold on credit to Hari or internal (do not involve second party, e.g.,
depreciation charged on the machinery).

ii) Recording the transaction: Journal is the first book of original entry in which
all transactions are recorded event-wise and date-wise and presents a historical record
of all monetary transactions. Journal may further be divided into sub-journals as well.

iii) Classifying: Accounting is the art of classifying business transactions.

Classification means statement setting out for a period where all the similar
transactions relating to a person, a thing, expense, or any other subject are grouped

22
together under appropriate heads of accounts.

iv) Summarising: Summarising is the art of making the activities of the business
enterprise as classified in the ledger for the use of management or other user groups
i.e., sundry debtors, sundry creditors etc. Summarisation helps in the preparation of
Profit and Loss Account and Balance sheet for a particular financial year.

v) Analysis and Interpretation: The financial information or data is recorded in

the books of account must further be analysed and interpreted so to draw meaningful

conclusions. Thus, analysis of accounting information will help the management to

assess in the performance of business operation and forming future plans also.

vi) Presentation or reporting of financial information: The end users of

accounting statements must be benefited from analysis and interpretation of data as
some of them are the "shareholders" and other one the "stake holders". Comparison of
past and present statements and reports, use of ratios and trend analysis are the
different tools of analysis and interpretation.

TYPES OF ACCOUNTS

The object of business accounting is to keep a complete record of all the transactions
that take place in the business. To achieve this object, business transactions have been
classified into three categories:

1. Transactions relating to persons.

2. Transactions relating to properties and assets.

3. Transactions relating to incomes and expenses.

The accounts falling under first category are known as ―personal accounts‖. The
accounts falling under second head are known as ‗real accounts and the accounts
falling under the third category are called ‗nominal accounts. The accounts can be
classified as personal and impersonal. The following chart will show the various types
of accounts:

23
1. Personal Accounts: Accounts which are related to individuals, firms,
companies, co- operative societies, banks, financial institutions are known as personal
accounts. The personal accounts may further be classified into three categories:

(i) Natural Personal Accounts: Accounts of individuals (natural persons) such as

Akhils' A/c, Rajesh's A/c, Sohan's A/c are natural personal accounts.

(ii) Artificial Personal Accounts: Accounts of firms, companies, banks, financial

institutions such as Reliance Industries Ltd., Lions Club, M/s Sham & Sons, Punjab
National Bank, National College are artificial personal accounts.

iii) Representative Personal Accounts: The accounts recording transactions relating to

limited expenses and incomes are classified as nominal accounts. But in certain cases
(due to the matching concept of accounting) the amount on a particular date, is
payable to the individuals or recoverable from individuals. Such amount

(a) relates to the particular head of expenditure or income and

(b) represents persons to whom it is payable or from whom it is recoverable.

Such accounts are classified as representative personal account e.g., Wages

outstanding account, pre-paid insurance account etc.

2. Real Accounts: Real accounts are the accounts related to assets/properties. These
may be classified into tangible real account and intangible real account. The accounts

24
relating to tangible assets (which can be touched, purchased, and sold) such as
building, plant, machinery, cash, furniture etc. are classified as tangible real accounts.
Intangible real accounts (which do not have physical shape) are the accounts related to
intangible assets such as goodwill, trademarks, copyrights, patents etc.

3. Nominal Accounts: The accounts relating to income, expenses, losses, and gains
are classified as nominal accounts. For example, Wages Account, Rent Account,
Interest Account, Salary Account, Bad Debts Accounts, Purchases; Account etc. fall
in the category of nominal accounts.

RULES FOR ACCOUNTS

 Personal account- debit (dr.) The receiver

 Credit(cr.) The giver

 Real account- debit(dr.) What comes in

 Credit(cr.) What goes out

 Nominal account- debit(dr.) All expenses and losses

 Credit(cr.) All incomes and gains

JOURNAL- MEANING AND FORMAT

Journal is a historical record of business transactions or events. The word journal

comes from the French word "Jour" meaning "day". It is a book of original or prime
entry written up from the various source documents. Journal is a primary book for
recording the day-to-day transactions in a chronological order i.e. in the order in
which they occur. The journal is a form of diary for business transactions. This is also
called the book of first entry since every transaction is recorded firstly in the journal.
The format of a journal is shown as follows:

Date Particulars L.F. Debit Credit

1 2 3 4 5

25
(a) Date Column: This column shows the date on which the transaction is recorded.
The year and month is written once, till they change.

(b) Particular Column: Under this column, first the names of the accounts to be
debited, then the names of the accounts to be credited and lastly, the narration (i.e. a
brief explanation of the transaction) are entered.

(c) L.F., i.e., Ledger Folio Column: Under this column, the ledger page number
containing the relevant account is entered at the time of posting.

(d) Debit amount Column: Under this column, the amount to be debited is entered.

(e) Credit amount Column: Under this column, the amount to be credited is
entered.

PREPARATION OF JOURNAL

The process of recording a transaction in the journal is called journalising. The

various steps to be followed in journalising business transactions are given below:

Step 1 Ascertain what accounts are involved in a transaction.

Step 2 Ascertain what is the nature of the accounts involved.

Step 3 Ascertain which rule of debit and credit is applicable for each of the accounts
involved.

Step 4 Ascertain which account is to be debited and which is to be credited.

Step 5 Record the date of transaction in the 'Date column'.

Step 6 Write the name of the account to be debited, very close to the left-hand side
i.e., the line demarcating the 'Date column' and the 'Particulars 13 column') along with
the abbreviation 'Dr.' on the same line against the name of the account in the
'Particulars column' and the amount to be debited in the 'Debit Amount column'
against the name of the account.

Step 7 Write the name of the account to be credited in the next line preceded by the
word 'To' at a few spaces towards right in the 'Particulars column' and the amount to

26
be credited in the 'Credit Amount column' against the name of the account.

Step 8 Write 'Narration' (i.e., a brief description of the transaction) within brackets in
the next line in the 'Particulars column'.

Step 9 Draw a line across the entire 'Particulars column' to separate one Journal Entry
from the other.

Advantages of Journal

1. The transactions are recorded in journal as and when they occur, so the chance of
error is minimized.

2. It help in preparation of ledger.

3. Any transfer from one account to another account is made through Journal.

4. The entry recorded in journal are self-explanatory as it includes narration also.

5. It can record any such transaction which cannot be entered in any other books of
account.

6. Every transaction is recorded in chronological order (date wise) so the chances of

manipulations are reduced.

7. Journal shows all information in respect of a transaction at one place.

8. The closing balances of previous year of accounts related to assets and liabilities
can be brought forward to the next year by passing journal entry in journal.

ILLUSTRATION 1

From the following transactions of Nikhil, find out the nature of accounts and also
state which account should be debited and which should be credited:

i) Rent paid

ii) Interest received

iii) Purchased furniture for cash

27
iv) Machinery sold in cash

v) Outstanding salaries

vi) Paid to Surinder

SOLUTION:

TRANSACTION ACCOUNTS NATURE OF DEBIT/CREDIT

INVOLVED ACCOUNTS
i. Rent paid Rent account Cash Nominal account Debit Credit
account Real account

ii. Interest received Cash account Real account Debit Credit

Interest account Nominal account

iii. Purchased furniture Furniture account Real account Debit Credit

for cash Cash account Real account

iv. Machinery sold in Cash account Real account Debit Credit

cash Machinery account Real account

v. Outstanding salary Salary account Nominal account Debit Credit

Outstanding salary Personal account
account

vi. Paid to surinder Surinder‘s account Personal account Debit Credit

Cash account Real account

ANALYSIS OF TRANSACTIONS

Illustration 2

Journalise the following transactions:

2005

Jan. 1 Mohan started business with cash 80,000 Jan. 6 Purchased goods from Ram on
credit 30,000 Jan. 8 Sold goods on cash 6,000

Jan.15 Bought Furniture from Yash for cash 8,000 Jan.18 Paid Salary to manager
6,500

28
Jan. 20 Paid Rent to landlord in cash 1,000 SOLUTION:

DATE PARTICULARS L.F. DEBIT CREDIT

2005
Jan 1 Cash Account Dr. To Mohan's 80,000 80,000
Capital Account (Being business
started with cash)
30,000
“6 Purchases account Dr. 30,000
To Ram‘s account
(being purchase on credit)

“8 Cash account Dr. 6,000

To Sales account 6,000
(being goods sold for cash)
Furniture account Dr.
“15 To Cash account 8,000
8,000
(being furniture bought for cash)
Salary account Dr.
To Cash account
“18 6,500
(being salary paid to manager) 6,500
Rent account Dr.
To Cash account
“20 (being rent paid to landlord) 1,000
1,000

Compound Journal Entries

When more than two accounts are involved in a transaction and the transaction is
recorded by means of a single journal entry instead of passing several journal entries,
such single journal entry is termed as 'Compound Journal Entry'.

Illustration 3:

Journalise the following:

2005

Nov. 1 Paid to Arun Rs. 5,250 discount allowed by him Rs.50 Nov.6. Received from
Somesh Rs. 1,900 and from Komesh Rs. 400 Nov.8. Goods purchased for cash Rs.
4,000

29
Furniture purchased for cash Rs. 3,000 Paid cash to Raman Rs. 2,090

Paid Salary in cash Rs. 7,600 Paid Rent in cash Rs. 1,400

SOLUTION:

DATE PARTICULARS L.F. DEBIT(₹) CREDIT(₹)

2005
Nov.1 Arun‘s Account Dr. 5,300
To cash account 5,250
To discount received account 50
(being cash paid to arun and
discount received)
Nov 6 Cash account Dr. 2,300
To Somesh‘s account 1,900
To komesh‘s account 400
(being cash received)
Nov.8 Purchases account Dr. 4,000
Furniture account Dr. 3,000
Raman‘s account Dr. 2,090
Salary account Dr. 7,600
Rent account Dr. 1,400
To cash account 18,090
(being cash paid)

Opening Entry

A journal entry by means of which the balances of various assets, liabilities and
capital appearing in the balance sheet of previous accounting period are brought
forward in the books of the current accounting period, is known as 'Opening Entry'.
While passing an opening entry, all assets accounts (individually) are debited and all
liabilities accounts (individually) are credited and the Net worth (i.e. excess of assets
over liabilities) is credited to Proprietor's Capital Account (in case of a proprietary
concern) or Partners' Capital Accounts (in case of a partnership concern).

Illustration.4.

On Ist April 2006, Singh's assets and liabilities stood as follows :

Assets: Cash Rs. 6,000; Bank Rs. 17,000; Stock Rs. 3,000; Bills Receivable Rs.7,000;

30
Debtors Rs. 3,000; Building Rs.70,000; Investments Rs. 30,000; Furniture Rs. 4,000
Liabilities: Bills payable Rs. 5000, Creditors Rs. 9000, Ram's Loan Rs. 13000 Pass
an opening Journal entry.

SOLUTION:

DATE PARTICULARS L.F. DEBIT(₹) CREDIT₹

2006
APRIL1 Cash Account Dr. 6,000
Bank Account Dr. 17,000
Stock Account Dr. 3,000
Bills receivable Account Dr. 7,000
Debtors Account Dr. 3,000
Building Account Dr. 70,000
Investment Account Dr. 30,000
Furniture Account Dr. To 4,000 5,000
Bills payable account To Creditor‘s 9,000
Account To Ram‘s loan Account To
13,000
Singh‘s capital
1,13,000
(being the opening balances of assets
and liabilities)

IMPORTANT CONSIDERATIONS FOR RECORDING THE BUSINESS

TRANSACTIONS

1. Trade Discount- Trade discount is usually allowed on the list price of the goods.
It may be allowed by producer to wholesaler and by wholesaler to retailer for
purchase of goods in large quantity. It is not recorded in the books of account and
entry is made only with the net amount paid or received.

For example, purchased goods of list price Rs. 8,000 at 15% trade discount from X.
In this case the following entry will be passed:

Rs. Rs.

Purchases Account Dr. 6,800

To X 6,800

(Being goods purchased at 15% trade discount less list price)

31
2. Cash Discount -Cash discount is a concession allowed by seller

to buyer to encourage him to make early cash payment. It is a Nominal Account. The
person who allows discount, treat it as an expense and debits in his books and it is
called discount allowed and the person who receives discount, treat it as an income
and it is called discount received and credited in his books of account as "Discount
Received Account."

For example, X owes Rs. 6,000 to Y. He pays Rs. 5,950 in full settlement against the
amount due. In the books of X, the journal entry will be:

Rs. Rs.

Y Dr. 6,000

To Cash Account 5,950

To Discount Received account 50

(Being Cash paid and discount received)

In the books of Y

Rs. Rs.

\Cash Account Dr. 5,950

Discount Allowed Account Dr. 50

To X 6,000

(Being cash received and discount allowed)

3. Goods distributed as free samples Sometimes business distribute goods as free

samples for the purpose of advertisement. In this case, Advertisement Account is
debited, and Purchases Account is credited.

For example, goods costing Rs. 8000 were distributed as free sample. To record this
transaction following entry will be passed:

32
Rs. Rs.

Advertisement Account Dr. 8,000

To Purchases Account 8,000

4. Interest on capital Interest paid on capital is an expense. Therefore, interest

account should be debited. On the other hand, the capital of the business increases.
So, the capital account should be credited. The entry will be as follows:

Interest on Capital Account Dr.

To Capital Account

5. Interest charged on Drawings If the interest is charged on drawings, then it will

be an increase in the income of business, so interest on drawings will be credited. On
the other hand, there will be increase in drawings or decrease in Capital. So, Drawings
Account will be debited. To record this, following entry will be passed:

Drawing Account/Capital Account Dr.

To Interest on Drawing Account

6. Depreciation charged on Fixed Assets- Depreciation is the gradual, permanent

decrease in the value of an asset due to wear and tear and many other causes.
Depreciation is an expense so the following entry will be passed:

Depreciation Account Dr.

To Asset Account

7. Bad Debts Sometimes a debtor of business fails to pay the amount due from him.
Reasons may be many e.g., he may become insolvent, or he may die. Such
irrecoverable amount is a loss to the business. To record this following entry will be
passed:

Bad Debts Account Dr.

To Debtor's Account

33
8. Bad Debts Recovered When any amount becomes irrecoverable from any
costumer or debtor his account is closed in the books. If in future any amount is
recovered from him then his personal account will not be credited because that does
not exist in the books. So, the following entry is passed:

Cash Account Dr.

To Bad Debts Recovered Account

9. Purchase and Sale of investment When business has some surplus money it
may invest this amount is shares, debentures or other types of securities. When these
securities are purchased, these are recorded at the purchase price paid. At the time of
sale of investment, the sale price of an investment is recorded in the books of
accounts. The following entry is passed to record the purchase of investment:
Investment Account Dr.

To Cash Account

In case of sale of these securities the entry will be:

Cash Account Dr.

To Investment Account

10. Loss of Goods by Fire/Accident/theft A business may suffer loss of goods on

account of fire, theft, or accident. It is a business loss and a nominal account. It also
reduces the goods at cost price and increases the loss/expenses of the business. The
entry will be passed as:

Loss by fire/Accident/theft Account Dr. (for loss)

Insurance Company Account Dr. (for insurance claim

admitted) To Purchases Account

11. Income Tax Paid Income Tax paid should be debited to Capital Account or
Drawings Account and credited to Cash Account in case of sole proprietorship and
partnership firms. The reason behind this is that income tax is a personal expense for

34
the sole trader and partners because it is paid on income of proprietor. The entry will
be as follows:

Capital Account/Drawings Account Dr.

To Cash Account

12. Bank Charges Bank provide various services to their customers. Bank deducts
some charges by debiting the account of customers. It is an expense for the business.
To record this, Bank charges account is debited, and bank account is credited in the
books of customer.

13. Drawings Account It is a personal account of the proprietor. When the

businessman withdraws cash or goods from the business for his personal/domestic use
it is called as 'drawings'. Drawings reduce the capital as well as goods/cash balance of
the business. The journal entry is:

Drawings Account Dr.

To Cash Account

To Purchases Account

14. Personal expenses of the proprietor When the private expenses such as life
insurance premium, income tax, home telephone bill, tuition fees of the son of the
proprietor etc. are paid out of the cash or bank account of business it should be
debited to the Drawings Account of the proprietor.

15. Sale of Asset/Property When the asset of a business is sold, there may occur a
profit or loss on its sale. Its journal entry is:

(i) In case there is a profit on sale of Property/Assets Cash/Bank Account Dr.

To Asset/Property Account

To Profit on sale of Asset Account

35
(ii) In case of a loss on sale of asset Cash/Bank Account

Dr. Loss on sale of Asset Account

Dr. To Asset Account

16. Amount paid or received on behalf of customer

(i) When the business entity pays the amount on behalf of old reputed customers
such as carriage in anticipation of recovering the same later on, carriage account

should not be opened because carriage is not the expense of the seller. It should be
debited/charged to customer's Personal account.

(ii) When the business entity receives the amount on behalf of customers from the
third party as mutually settled between the third party and the customer, the account
of the third party/person making the payment should not be opened in the books of the
receiving entity. The journal entry in the books of the entity is:

Cash/Bank Account Dr. To Customer/Debtor's Account

17. Amount paid on behalf of creditors When the creditors/supplier instructs the
business entity to make payment on their behalf, the amount so paid should be debited
to creditors account and liability of the business will decrease accordingly.

18. The events affecting business, but they do not involve any transfer/exchange of
money for the time being, they would not be recorded in the financial books.

19. Paid wages/installation charges for erection of machinery Wages and installation
charges are the expenses of nominal nature. But for erection of machinery no separate
account should be opened for such expenses because these expenses are of capital
nature and it will be merged/debited to the cost of assets i.e. machinery. The journal
entry is:

Machinery Account Dr.

To Cash/Bank Account (Being wages/installation charges paid for the erection of

machinery)

36
Subsidiary books

Subsidiary Books are the books that record the transactions which are similar in
nature in an orderly manner. They are also known as special journals or Daybooks. In
big organizations, it is not easy to record all the transactions in one journal and post
them into various accounts. So, for the easy and accurate recording of all the
transactions, the journal is subdivided into many subsidiary books. For every type of
transaction, there is a separate book.

Types of Subsidiary Books

There are basically 5 types of subsidiary books that are used for recording different
types of transactions.

The 5 Subsidiary books are as follows:

• Purchase Book

• Sales Book

• Purchase Return Book

• Sales Return book

• Cash book Purchase Book

Purchase Book is a subsidiary book that is used to record all the transactions related to
credit purchases. The purchases of the asset are never recorded in the purchase book.

Format of Purchase Book:

PURCHASE BOOK

INWARD INVOICE
DATE PARTICULARS L.F. AMOUNT ₹
NUMBER

37
Sales Book

The Sales Book records all the transactions related to credit sales. The sales book
cannot record the sale of assets. The sales book format is given below.

SALES BOOK

OUTWARD INVOICE
DATE PARTICULARS L.F. AMOUNT ₹
NUMBER

Purchase Return Book

The purchase return book, also known as the return outward book, is used to record
transactions of all the returns made to the supplier. A debit note is issued against
every return and is recorded in the Purchase Return Book.

Format of Purchase Return Book:

PURCHASE RETURN BOOK

PARTICULA DEBIT
DATE L.F. DETAILS AMOUNT
RS NOTE NO.

\Sales Return Book

The sales return book records all the transactions related to inward returns. It is also
known as a return inward book. When the customer returns goods, a credit note is
issued to the customer for every return, and it is recorded in the Sales Return Book.

Sales Return Book Format:

SALES RETURN BOOK

38
 PARTICULA CREDIT
DATE L.F. DETAILS AMOUNT
RS NOTE NO.

Cash Book

The first and most important subsidiary book is the cash book. It records all the
transactions related to cash and bank receipts and payments. There are 3 types of cash
books which are maintained by an organization. They are:

• Single Column Cash Book: A single column cash book is like a ledger account.
It contains a debit side and a credit side. All Cash receipts are recorded in the

debit side, and all the cash payments are recorded in the credit side of the cash book.

Format of Single Column Cash Book:

CASH BOOK (SINGLE COLUMN)

Dr. Cr.

Date Particulars L.F. Cash Date Particulars L.F. Cash

• Double Column Cash Book: Double Column Cash Book is the same as that of
Single Column Cash Book; only an extra column of discount is added on both the
debit and credit side of the cash book. It records discounts allowed on the debit side
and discounts received on the credit side of the cash book.

Format of double column cash book is given below.

39
CASH BOOK (DOUBLE COLUMN)

Dr. Cr.

Dat Particular L.F Disc. Cas Dat Particular L.F Disc cas
e s . Allowe h e s . Receive h
d d

• Triple Column Cash Book: Triple Column Cash Book contains all the columns
of double column cash book and also has an extra column for the bank. The format of
the triple column cash book is given below:

CASH BOOK (TRIPLE COLUMN)

Disc. Disc
Date Particulars L.F. Cash Bank Date Particulars L.F. Cash Bank
Allowed received

Contra entry: An accounting transaction involves two accounts and there may be a
transaction where both cash account and bank account are involved. Since in the
ledger there is no separate cash account and bank account, therefore, no posting will
be done from the cash book to the ledger in case of such a transaction. The transaction
will be recorded on both the side of the cash book. Such an accounting entry, which is
recorded on the both the sides of the cash book, is known as contra entry. To give hint
for the purpose the word ‗C‘ is written in the ledger folio.

PRACTICE QUESTIONS

1. Journalise the following transactions in the books of Shankar & co. 2020

June 1 Started business with a capital of60,000

June.2. paid into bank 30,000

June 4. Purchased goods from Kamal on credit 10,000

40
June 6. Paid to shiram 4,920

June 6 discount allowed by him 80

June 8. Cash sales 20,000

June 12 sold to Hameed 5,000

June 15 purchased goods from Bharat on credit 7,500

June 18 paid salaries 4,000

June 20 received from prem 2,480

June 20 allowed him a discount 20

June 25 withdrew from bank for office use 5,000

June 28 withdrew for personal use 1,000

June 30 paid hanif by cheque 3,000

2. : Enter the following transactions in the Journal of Ramesh. 2020

Jan. 1 Assets in hand: Cash Rs. 630; Cash at Bank Rs. 23,100; Stock of goods; Rs.
26,400; M. & Co., Rs. 6,750.

Liabilities: Marathi & Co. Rs. 3,880; Ram & Sons Rs. 3000. " 2 Received a cheque
from M. & Co. in full settlement 6,650 " 4 Sold goods to Chand & Sons on credit
1,440

Carriage paid 35

Sold goods to G. & Co. for cash 3,120

" 5 Brought goods from Ram & Sons on credit 4,000

Paid Marathi & Co. by cheque in full settlement 3,800 " 6 Bought goods from
Chatterjee 6,300

" 13 Returned goods to Chatterjee (not being up to specifications) 300 " 16 Goods

41
used personally by proprietor 50

" 17 Sold goods to M. & Co 5,000

" 20 Cheque received from Chand & Sons 1,440

" 22 Bank advises Chand & Sons cheque returned unpaid " 24 Cash deposited with
bank 2,000

" 27 Cheque sent to Chatterjee (Discount allowed Rs. 150) 5,850 " 31 Paid salaries
600 Paid rent 300

Drew for personal use out of bank 500

42
 UNIT 3

LEDGER POSTING AND TRIAL BALANCE

MEANING OF LEDGER

Ledger is a main book of accounts in which various accounts of personal, real and
nominal nature are opened and maintained. In journal, as all the business transactions
are recorded chronologically, it is very difficult to obtain all the transactions
pertaining to one head of account together at one place. But, the preparation of
different ledger accounts helps to get a consolidated picture of the transactions
pertaining to on ahead of account together at one time. It is thus of dire need to get a
summarised/grouped record of all the transactions relating to a particular person, or a
thing or an expenditure to take managerial decisions. The mechanics of collecting,
assembling and summarising all transactions of similar nature at one place can better
be served by a book known as 'ledger' i.e. a classified head of accounts. Ledger is a
principal book of accounts of the enterprise. It is rightly called as the 'King of Books'.
Ledger is a set of accounts. Ledger contains the

various personal, real and nominal accounts in which all business transactions of the
entity are recorded. The main function of the ledger is to classify and summarize all
the items appearing in Journal and other books of original entry under appropriate
head/set of accounts so that at the end of the accounting period, each account contains
the complete information of all transaction relating to it. A ledger therefore is a
collection of accounts and may be defined as a summary statement of all the
transactions relating to a person, asset, expense or income which have taken place
during a given period of time and shows their net effect.

UTILITY OF A LEDGER

The main utilities of a ledger are summarised as under:

(a) It provides complete information about all accounts in one book.

(b) It enables the ascertainment of the main items of revenues and expenses

43
(c) It enables the ascertainment of the value of assets and liabilities.

(d) It facilitates the preparation of Final Accounts.

FORMAT OF LEDGER ACCOUNT

TYPE-1

DATE PARTICULARS J.F. ₹ DATE PARTICULARS J.F. ₹

TYPE-2

DATE PARTICULARS J.F. Dr. Cr. Dr./Cr. Balance

Posting

Posting refers to the process of transferring debit and credit amounts from the Journal
or subsidiary books to the respective heads of accounts in the ledger. Journal will
have at a minimum of one debit and one credit for each transaction. The ledger will
have either a debit or a credit for each account used in the Journal. Posting may be
done daily, weekly fort nightly or monthly according to the convenience and
requirements of the business, but care should be taken to complete it before the
preparation of annual financial statements.

Rules of Posting

The following rules should be followed while posting business transactions to

respective accounts in the ledger from the journal:

i) Enter the date and year of the transaction in the date column.

ii) Open separate account in the ledger for each person, asset, revenue, liability,

44
expense, income, and loss appearing in the Journal.

iii) The appropriate/relevant account debited in the Journal will be debited in the
ledger, but the reference should be given of the other account which has been
credited.

iv) Similarly, the account credited in the Journal should be credited in the ledger, but
the reference must be given of the other account which has been debited in the
Journal.

v) The debit posting should be prefixed by the word 'To‘, and credit posting should
be prefixed by the word 'By'.

vi) In the Journal Folio (J.F.) column the page number of the book of original entry
(Journal) is entered.

Balancing of an Account

After transferring the entries from Journal to the ledger, the next stage is to ascertain
the net effect of all the transactions posted to relevant account. When the posting is
completed, most of the accounts may have entries on both sides of the accounts i.e.,
debit entries and credits entries. The process of finding out the difference between the
totals of the two sides of a Ledger account is known as balancing and the difference of
the total debits and the total credits of accounts is known as balance. If the total of the
credit side is bigger than the total of the debit side, the difference is known as credit
balance. In the reverse case, it is called debit balance.

Steps for Balancing Ledger Account Ledger accounts may be balanced as and when it
is required. The balances of various accounts are ascertained as under:

1. Make the total of both sides of an account in a worksheet.

2. Write down the higher amount on the side obtained e.g., if the total of the debit
side is 6,000 and the credit side is 5,500, the amount Rs. 6,000 is first inserted in the
total on the debit side.

3. Also write down the same total on the other side of the account i.e., the total of

45
Rs. 6,000 is written against the total on the credit side also.

4. Find out the difference between the two sides of the account. In this example
debit side is more than credit side; therefore, there is a debit balance of Rs. 500.

5. This debit balance of Rs. 500 is to be shown as "By Balance c/d" in the account
on the credit side.

6. Finally, the amount of the closing balance should be brought down as the
opening balance at the beginning of the next day. Remember that if the opening
balance is not written on the next day, the balancing is incomplete.

Balancing of different accounts

Balancing is done either weekly, monthly, quarterly, biannually, or annually,

depending on the requirements of the business concern.

Personal Accounts : Personal accounts are balanced regularly to know the amounts
due to the persons or due from the persons. A debit balance of this account indicate
that the person concerned is a debtor of the business concern and a credit balance
indicates that he is a creditor of the business concern. If a personal account shows no
balance at all, it means that the amount due to him or due from him is settled in full.

Real Accounts: Real accounts are generally balanced at the end of the accounting
year when final accounts are prepared and always shows debit balances. But, bank
account may show either a debit balance or a credit balance.

Nominal Accounts: In fact, nominal accounts are not balanced, as they are to be
closed by transferring them to the final accounts i.e. Trading and Profit and Loss
Account.

Illustration 1 :

Goods sold to Ravi for Rs. 1000 on credit on Ist April 2006. Record this transaction in
the journal and the ledger.

Solution : The journal entry will be

46
 PARTICULARS
DATE 2006 Ravi‘s A/c Dr. To sales A/c.
L.F. DEBIT 1,000 CREDIT 1,000
April 1 (being credit sales of goods
to Ravi)

Ledger
Ravi‘s Account

Date Particulars J.F. Amount Date Particulars J.F. Amount

2006 To sales a/c. 1,000

Sales A/c.

Date Particulars J.F. Amount Date Particulars J.F. Amount

2006
By Ravi‘s
April 1
a/c.
1,000

Illustration 2

Rs. 2020 March 31 Purchased stationary 1,000 Paid salary 7,000 Paid wages 600 Paid
rent 1,200 Pass the necessary journal entry and prepare ledger accounts.

Solution : The Journal entry will be

DATE PARTICULARS Dr. Cr.

2020 Stationary A/c. Dr.
Salary A/c. Dr.
March 31 1,000
Wages A/c. Dr.
7,000
Rent A/c. Dr.
To cash A/c. (being cash 600
paid) 1,200
9,800

47
Ledger

Stationary account

DATE PARTICULARS J.F. ₹ DATE PARTICULARS J.F. ₹

2020
MARCH
To cash Account 1,000
31

Salary Account

DATE PARTICULARS J.F. ₹ DATE PARTICULARS J.F. ₹

2020

MARCH31 To cash account 7,000

Rent Account

DATE PARTICULARS J.F. ₹ DATE PARTICULARS J.F. ₹

2020

MARCH31 To cash account 1,200

Wages Account

DATE PARTICULARS J.F. ₹ DATE PARTICULARS J.F. ₹

2020
To cash account 600
MARCH31

Cash Account

DATE PARTICULARS J.F. ₹ DATE PARTICULARS J.F. ₹

2020
MARCH31 By stationary A/c 1,000
By salary A/c 7,000
By rent A/c 1,200
By wages A/c 600

48
TRIAL BALANCE-MEANING

A Trial Balance is a two-column schedule listing the titles and balances of all the
accounts in the order in which they appear in the ledger. The debit balances are listed
in the left-hand column and the credit balances in the right-hand column. In the case
of the General Ledger, the totals of the two columns should agree. We, now, know the
fundamental principle of double entry system of accounting where for every debit,
there must be a corresponding credit. Therefore, for every debit or a series of debits
given to one or several accounts, there is a corresponding credit or a series of credits
of an equal amount given to some other account or accounts and vice versa. Hence,
according to this principle, the sum total of debit amounts must equal the credit
amounts of the ledger at any date. If the various accounts in the ledger are balanced,
then the total of all debit balances must be equal to the total of all credit balances. If
the same is not true then the books of accounts are arithmetically inaccurate. It is,
therefore, at the end of the financial year or at any other time, the balances of all the
ledger accounts are extracted and are recorded in a statement known as Trial Balance
and finally totalled up to see whether the total of debit balances is equal to the total of
credit balances. A Trial Balance may thus be defined as a statement of debit and credit
totals or balances extracted from the various accounts in the ledger books with a view
to test the

arithmetical accuracy of the books. The agreement of the Trial Balance reveals that
both the aspects of each transaction have been recorded and that the books are
arithmetically accurate. If both the sides of Trial Balance do not agree 2 to each other,
it shows that there are some errors, which must be detected and rectified if the correct
final accounts are to be prepared. Thus, Trial Balance forms a connecting link
between the ledger accounts and the final accounts.

PREPARATION OF TRIAL BALANCE

A trial balance can be prepared by the following two methods:

1. Total method: In this method, the debit and credit totals of each account are shown in
the two amount columns (one for the debit total and the other for the credit total).

49
2. Balance Method: In this method, the difference of each amount is extracted. If
debit side of an account is bigger in amount than the credit side, the difference is put
in the debit column of the Trial Balance and if the credit side is bigger, the difference
is written in the credit column of the Trial Balance.

A specimen of the Trial balance is given as follows:

TRIAL BALANCE OF …………………..AS ON ………………………….

[Link]. Name of Account Dr. Balance ₹ Cr. Balance ₹

ACCOUNTING ERRORS

If the two sides of a trial balance agree it is prima facie evidence of the arithmetical
accuracy of the entries made in the Ledger. But even if the trial balance agrees, it does
not necessarily mean that the accounting records are free from all errors, because
there are certain types of errors, which are not revealed by a Trial Balance. Therefore,
a Trial Balance should not be regarded as a conclusive proof of accuracy of accounts.
In

accounting an error is a mistake committed by the bookkeeper (Accountant/Accounts

Clerk) while recording or maintaining the books of accounts. An error is an innocent
and non-deliberate act or lapse on the part of the persons involved in recording
business transactions. It may occur while the transactions are originally recorded in
the books of original entries i.e., Journal, Purchase Book, Sales Book, Purchase
Return Book, Sales Return Book, Bills Receivable Book, Bills Payable Book, and
Cash Book, or while the ledger accounts are posted or balanced or even when the trial
balance is prepared. These errors may affect the arithmetical accuracy of the trial
balance or may defeat the very purpose of accounting.

These errors can be classified as follows:

1. Clerical errors

50
2. Errors of Principle

A brief description of the above errors is given below:

(a) Clerical errors -Clerical errors are those errors, which are committed by the
clerical staff during the course of recording business transactions in the books of
accounts. These errors are:

1. Errors of omission

2. Errors of commission

3. Compensating errors

4. Errors of duplication

1. Errors of omission: When business transaction is either completely or partly

omitted to be recorded in the books of prime entry it is called an ‗error of omission‘.
When a business transaction is omitted completely, it is called a ‗complete error of
omission‖, and when a business transaction is partly omitted, it is called a ―partial
error of omission‖. A complete error of omission does not affect the agreement of trial
balance whereas a partial error of omission may or may not affect the agreement of
trial balance. Omission of recording a business transaction either completely or partly,
omission of ledger posting, omission of casting and balancing of an account and
omission of carrying forward are some examples of the errors of omission.

2. Error of commission: Such errors are generally committed by the clerical staff
due to their negligence during recording business transactions in the books of
accounts. Though, the rules of debit and credit are followed properly yet some
mistakes are committed. These mistakes may be due to wrong posting of a business
transaction either to a wrong account or on the wrong side of an account, or due to
wrong casting (addition) i.e. over-casting or under-casting or due to wrong balancing
of the accounts in the ledger.

3. Compensating errors: Compensating errors are those errors, which cancel or

compensate themselves. These errors arise when an error is either compensated or

51
counter-balanced by another error or errors so that of the other on the debit or credit
side neutralizes the adverse effect of one on credit side or debit side. For example,
overposting on one side may be compensated by under posting of an equal amount on
the same side of the same account or over posting of one side of an account may be
compensated by an equal overprinting on the opposite side of some other account. But
these errors do not affect the trial balance.

4. Errors of duplication: When a business transaction is recorded twice in the

prime books and posted in the Ledger in the respective accounts twice, the error is
known as the ‗Error of Duplication‘. These errors do not affect the trial balance.

(b) Errors of principle When a business transaction is recorded in the books of

original entries by violating the basic/fundamental principles of accountancy it is
called an error of principle. Some examples of these errors are:

(i) When revenue expenditure is treated as capital expenditure or vice-versa, e.g.

building purchased is debited to the purchase account instead of the building account.

(ii) Revenue expenses debited to the personal account instead of the expenses
account, e.g., salary paid to Mr. Ashok, a clerk, for the month of June, debited to
Ashok‘s account instead of salary account. These errors do not affect the Trial
Balance.

Illustration 3: The following Trial Balance has been prepared wrongly. You are
asked to prepare the Trial Balance correctly.

PARTICULARS DEBIT CREDIT

Cash in hand 7,000
Purchase returns 8,000
Wages 8,000
Establishment expenses 12,000
Sales returns 7,000
Capital 22,000
Carriage outwards 9,000
Discount received 1,200
Commission earned 800
Machinery 20,000
Stock 10,000
debtors 8,000

52
Creditors 12,000
Sales 44,080
Bank overdraft 1,14,000
Purchases 1,28,000
Manufacturing expenses 14,000
Loan from Ashok 14,000
Carriage inward 1,000
Interest on investment 1,000
TOTAL 2,17,000 2,17,000

SOLUTION

PARTICULARS DEBIT CREDIT

Cash in hand 7,000
Purchase returns 8,000
Wages 8,000
Establishment expenses 12,000
Sales returns 7,000
Capital 22,000
Carriage outwards 2,000
Discount received 1,200
Commission earned 800
Machinery 20,000
Stock 10,000
debtors 8,000
creditors 12,000
Sales 44,000
Bank overdraft 1,14,000
Purchases 1,28,000
Manufacturing expenses 14,000
Loan from Ashok 14,000
Carriage inward 1,000
Interest on investment 1,000
TOTAL 2,17,000 2,17,000

53
PRACTICE QUESTIONS

1. From the following transactions of Mr. Kamal Mahajan write up journal

entries and post them into ledger. Also, prepare a trial balance.

2006 Jan.1 Assets-Cash in hand Rs. 2,000, Cash at bank Rs. 5,000,

Stock of goods Rs. 4,000, Machinery Rs. 9000,

Furniture Rs. 2,000 Sham owes Rs. 500, Ram owes Rs. 3,500.

Liabilities - Loan Rs. 4,000; sum owing to Y Rs. 3,000.

Jan.2 Sold goods to Pawan Rs. 3,000.

Jan. 5 Received Rs. 2,950 from Pawan in full settlement of his accounts.

Jan. 6 Payment made to Y Rs. 1,975 by cheque, he allowed discount of Rs. 25. Jan. 8
Old furniture sold for Rs. 200.

Jan. 10 Ram pays Rs. 3,400 by cheque and discount allowed to him Rs. 100, cheque
deposited in bank.

Jan. 13 Paid for repairs to machinery Rs. 250

Jan. 15 Bank intimates the cheque of Ram has been returned dishonoured. Jan. 18
Paid municipal taxes Rs. 200.

Jan. 22 Bought goods from Sita & Co. Rs. 1,000. Jan. 25 Goods worth Rs. 600 given
away as charity. Jan. 31 Returned goods to Sita & Co. Rs. 1,000.

Jan. 31 An amount which was written off as bad debts in 1998 recovered Rs. 1,000

2. Pass necessary Journal entries in the books of Narender for the month of
March 2020, post into relevant ledger accounts and prepare trial balance.

i) An old machinery appearing in books exchanged for a new machinery of Rs.

5,000.

ii) Issued a cheque for Rs. 1,000 in favour of landlord for a rent for the month of

54
March.

iii) Paid electricity bill of Rs. 450 by cheque.

iv) The goods destroyed by theft Rs. 3,000.

v) Paid wages for the installation of machinery Rs. 5,000.

vi) Accrued interest Rs. 1100.

vii) Goods worth Rs. 4,000 given away by way of charity.

viii) Goods taken by Proprietor worth Rs. 10,000 for personal use.

3. Journalise the following transactions, post the same into relevant ledger
account and prepare the trial balance.

2021

June 1 karthik commenced business with Rs.20,000 June 2 paid into bank Rs. 5,000

June 3 purchased plant worth 10,000 from Modi & co. June 4 purchased goods worth
5,000 from Anwar June 6 goods worth 4,000 sold to Abu

June 8 sold goods worth 2000 for cash June 10 goods returned by Abu 50 June 15
paid rent 250

June 18 withdrawn from bank for office use 2,500 June 20 paid salaries 1,800

June 25 withdrawn for personal use 250 June 26 goods returned to Anwar 100

June 27 paid for office furniture 1,500 by cheque

June 28 received 3,900 cash from Abu and discount allowed 50

June 29 paid Anwar on account 4,800 and discount allowed by him 100.

CASE STUDY

Mr. Tushar decided to start a business (computer café). For this purpose, he built the
first floor of his house at a cost of Rs.2,00,000 and invested a further sum of

55
Rs.3,50,000. In his business.

He wanted to start with 12 computers costing ₹40,000 each. He approached ICICI

bank and secured a loan to the extent of 75% of the cost of the computers. It was
agreed that the loan will be paid back in four annual instalments as follows:

At the end of first year: ₹90,000+₹36,000 for interest At the end of second year:
₹90,000+₹27,000 for interest

At the end of the third year: ₹90,000+₹18,000 for interest At the end of the fourth
year: ₹90,000+₹9,000 for interest

He started the business on 1st April 2020. On the same date he deposited₹3,30,000 in
the bank. He purchased computers and paid 25% of the value of the computers from
his bank and ₹3,60,000 from the bank loan availed. He deposited ₹10,000 to
electricity board for internet connection and also paid

₹1,50,000 with VSNL for internet and telephone connection.

He spent ₹40,000 for getting the computer café furnished and also spent ₹6,000 in
getting the pamphlets printed and distributed.

All payments were to be made by cheque and all the receipts were to be deposited in
the bank on the same day.

At the end of the year, the results were:

Purchase of computers 92,000

Revenue from fees received from students 2,70,000
Revenue on account of internet facility 2,20,000
Revenue from sale of computer stationary 1,60,000 Wages
paid to servant 12,000
Electricity charges 8,000
Telephone charges 73,000
Entertainment expenses 7,000
General expenses 5,200

56
He withdrew ₹5,000 by cheque each month for his personal use and duly paid the
bank loan.

You are required to journalise the above transactions, post them to ledger and prepare
a trial balance.

57
 UNIT 4

DEPRECIATION, PROVISIONS AND RESERVES

DEPRECIATION CONCEPT: Fixed assets are held on a long term basis and used
to generate periodic revenue. That portion of assets, which is believed to have been
consumed or expired to earn the revenue, needs to be charged as cost. Such an
appropriate proportion of the cost of fixed assets is called Depreciation.

Business enterprises require fixed assets for their business operations such as furniture
and fixtures, office equipments, plant and machinery, motor vehicles, land and
building etc. In the process of converting Raw material into finished products, the
fixed assets depreciate in value over a period of time, i.e. its useful life.

In other words, the process of allocation of the cost of a fixed asset over its useful life
is known as depreciation.

According to accounting standard- 6 (Revised) issued by the ICA "Depreciation is

a measure of wearing out, consumption or other loss of value of a depreciable asset
arising from use, effusion of time or obsolescence through technology and market
changes. Depreciation is allocated so as to charge a fair proportion of the depreciable
in each accounting period during the expected useful life of the asset. Depreciation
includes amortization of assets whose useful life is predetermined. Some Important
Terms

1. Obsolescence- When a fixed tangible assets become useless or unwanted due to

new invention.

2. Amortization- The term amortization is used for writing off intangible assets
such as goodwill, copyright, patents, etc.

3. Depletion- The term depletion is used in relation to decreasing the value of

wasting assets or natural resources such as mines, oil wells, timber trees & fishing etc.
due to the continue removal or extraction of things.

58
NEED OR OBJECTIVES OF PROVIDING DEPRECIATION

1. Ascertaining true profit or loss:

(i) The true profit of an enterprise can be ascertained when all cost; incurred for the
purpose of earning revenues have been debited to the profit and loss account.

(ii) Fall in the value of assets used in business operations is a part of the cost and
should be shown in the profit and loss account of concerned accounting period.

(iii) Keeping this in view, depreciation must be debited to profit & loss account, since
loss in value of fixed assets is also an expenses like other expenses.

2. Presentation of True and Fair value of assets: If depreciation is not provided,

the value of assets shown in Balance sheet will not present the true and fair value of
assets because assets are shown at the cost price but actual value is less than cost price
of the assets.

3. To ascertain the accurate cost of the Production: Depreciation is an item of

expense, the correct cost of production cannot be calculated unless it is also taken into
consideration. Hence, depreciation must be provided to ascertain the correct cost of
production.

4. Computation of correct income tax:

(i) Income tax of an enterprise is determined after charging all the costs of
production.

(ii) If depreciation is not charged, the profits will be higher and the income tax will
also be higher.

(iii) If depreciation is charged, Tax liability is reduced.

5. Provision of funds and replacement of assets: Depreciation is a non-cash

expense. So that amount of depreciation charged to profit and loss accounts is retained
in business every year. These funds are available for replacement of the assets when
its useful life is over.

59
METHODS OF PROVIDING DEPRECIATION

1. Straight line method

(i) This method is also known as 'original cost method'

(ii) Under this method, depreciation is charged at fixed percentage on the original
cost of the asset, throughout its estimated life.

(iii) Under this method, the amount of depreciation is uniform from year to year. That
is why this method is also known as 'Fixed Installment Method' or 'Equal installment
method'.

(iv) The annual amount of depreciation can be easily calculated by the following
formula :

Annual Depreciation =

For example: A firm purchases a machine for Rs. 2,25,000 on April 1,2013. The
expected life of this machine is 5 years. After 5 years the scrap of this machine would
be realized Rs. 25.000. Under straight line method, the amount of depreciation can be
calculated as under:

Annual Depreciable =

= Rs.40,000

Hence Rs. 40,000 will be charged every year as depreciation on this machine.

2. Diminishing balance method : Under this method, depreciation is charged as a

fixed percentage on the book value of the asset every year. In first year the
depreciation will be charged at the end of the year, on the total cost the asset.
Example: A machine is purchase for Rs.2,00,000 on April 1.2009. It is decided to
charge depreciation on this machine @ 10% p.a. The amounts of depreciation for first

60
four years by using both the methods (Straight line method and Diminishing balance
method) are shown as under:

Hence, in Straight Line method, amount of depreciation is same but in Diminishing

Balance Method amount of depreciation goes on decreasing every year. Depreciation
can be recorded by crediting it to the Assets account.

ASSET DISPOSAL ACCOUNT

Asset Disposal A/C is opened when an asset (partially or fully) is sold or disposed off.
All entries related to sold asset are recorded in the asset disposal A/C. Methods of
recording the entries in Asset Disposal A/C will depend on a fact whether a provision
for depreciation a/c is maintained or not.

Format of Assets Disposal Account

When provision for Depreciation Account is maintained

When provision for Depreciation Account is not maintained

Provisions

Provisions is to be made in respect of a liability which is certain to be incurred, but its

accurate amount is not known. It is charged in the profit and loss Account on

61
estimate basis. It should be clearly understood that if the amount of a known liability
can be determined with reasonable accuracy, it can not be a provision.

Notes: Provision is a charge against profits, it means provision has to be made

irrespective of business enterprise is earning enough profits or Incurring losses.

Examples of provisions : Provisions for Depreciation on assets, Provision for Repairs

and Renewals of assets.

Provision for Taxation. Provision for Discount on Debtors , Provision for Bad and
Doubtful Debts.

Reserves

• Reserves are the amount set aside out of profits. It is an appropriation of profits
and not a charge on the profits.

• The amount of profit retained is used in the business when difficult time comes.
Since reserves are neither expenses nor losses, so these are not charged to profit &
loss Account rather these are debited to Profit & Loss Appropriation Account which
is prepared after Profit and Loss Account.

• Reserves are also known as 'Ploughing Back of Profits'.

• Reserves are created to strengthening the financial positions of the business

enterprise. Examples are General Reserves, Divided Equalization Reserves etc.

• If the amount of reserve is invested outside the business then, it is called 'Reserve
Fund'. Creation of reserve does not reduce the net profit but only reduced the divisible
profits.

DIFFERENCE BETWEEN PROVISIONS AND RESERVE

Parameter Provision Reserve

It is a share of the money that It is a share of profits that is kept
Definition is kept aside to account for anticipated aside to meet unforeseen financial liabilities in
financial liabilities. a business setup.
Appropriation Charged against profits. Share of profit.

62
Creation By debiting the P&L Account. By debiting P&L Appropriation
Account
Safeguards business against expected Aids to continue business
Purpose financial obligations. operations and further safeguards it
against unforeseen liabilities.
Allocation Profit is not mandatory for Profit is mandatory for allocation.
allocation.
Impact on PL A/C It lowers the share of profits meant for It lowers the share of the
distribution as dividend. organisation's net profit.
Treatment in For assets: It is recorded as a deduction
books from the designated asset.
For liabilities: It is recorded in
the liability side. It is recorded on the liability side.
Investment Cannot be invested beyond It can be invested beyond one‘s
business venture. business venture.
Usage Must be used for the purpose it The company can use it for any
has been allocated for. purpose.
Importance As per law, its creation is Its creation is not mandatory.
mandatory.

Revenue Reserves

Revenue Reserves are those reserves which are created by setting aside a part of the
net profit of business. Since reserves represent undistributed profit of the company so
they are available for declaration of dividend and distribution among shareholders.

Revenue reserves are of two types namely. (1) General Reserves (2) Specific
Reserves.

(1) General Reserves : Those reserves which are created out of profit to meet out
the unforseen contigencies is called general reserves. They are termed as 'Free
Reserves' or 'Contingency Reserves'. Creation of general reserve is optional. It is an
appropriation of profit so it is made only if adequate profit is earned by the company.
They are shown on liability side of the balance sheet under the head,"Reserve and
surplus".

(2) Specific Reserves:- These reserves are created for specific purpose and can be
utilised for that purpose only.

63
Examples:-Divindend Equalization Reserves, Debentures Redemption Reserve,
workman Compensation fund, Investment Reserves etc.

Reserve fund: If reserves are invested in outside securities, it is known as Reserve

fund.

Capital Reserves: The reserves created out of capital profits are known as capital
Reserve. Such reserves, generally are not available for distribution as cash dividend
among the share holders of a company.

Examples:-i) Profit on sale of fixed assets.

ii) Profit on revaluation of assets and liabilities.

iii) Securities premium earned on issue of share or debentures.

iv) Profit on the purchase of running business.

v) Profit earned on forfeiture of shares.

vi) Profit on redemption of debentures.

vii) Profit prior to the incorporation of a company

Capital profits can be used to write off capital losses and to issue fully paid up bonus
shares among the equity share holders. However, company can declare dividend out
of capital profits on the fulfilment of the following conditions.

i) Articles of Associations of a company permits the declaration of dividend out of

such profile.

ii) Capital profits realised in cash.

Profile remains after revaluation of assets and liabilities.

Case study on

Depreciation at delta airlines and Singapore airlines

64
Depreciation in airline industry

The airline industry is capital intensive and the accounting for aircraft assets has a
significant impact on the financial results of airlines. Aircraft are high-cost, long-life
assets and contain many individual components. Orders for aircraft are often made
several years in advance of delivery at prices that may include complex mechanisms
for discounting the list price, including ‗credits‘. Payments to aircraft manufacturers
may include payments for options (amounts paid in advance to secure an aircraft
purchase), purchase rights, deposits and progress payments. These payments in
advance of delivery can give rise to significant financing costs. In the aircraft
industry, transactions are typically denominated in US Dollar and can therefore
expose non-US airlines to currency risk.

For the above reasons the accounting for aircraft acquisition and subsequent
depreciation is complex. IAS 16 Property, Plant and Equipment provides clear
accounting principles, but the application of these principles to aircraft and aircraft
related assets often requires judgement by airlines. Judgements relating to useful
economic life and residual value must be revisited each reporting period. The high
value of aircraft assets carried on balance sheet coupled with earnings volatility in the
industry has historically exposed airlines to potential asset impairments. This creates
further

accounting complexity and requires judgement in estimating the recoverable value of

assets. Scope The disclosures made by airlines in their Annual Reports provide insight
into the relevant accounting judgements made including the determination of
acquisition cost and the identification of individual components, their useful
economic lives and their residual values. Airlines also disclose their approach to asset
impairment testing. This ADG details the accounting guidance and examples of
observed practice under International Financial Reporting Standards (IFRS) in
relation to:

Initial recognition of aircraft costs Identification of individual components

Recognition of other associated assets

65
 Depreciation policies for individual components Aircraft asset impairment and
accelerated depreciation

Case background

Delta Airlines One of the major airlines in the U.S. with almost $12 billion in annual
revenues.

average of Delta‘s aircraft was 8.8 years, which was relatively young by industry
standards.

1993, its total operating revenues, $3.1 billion would have

5.1 years, which was the youngest of any major airline in the world.

Calculate the annual depreciation expense that Delta Airlines and Singapore Airlines
would record for each $100 gross value of aircraft.

Depreciation=(Asset value –Residual Value)/Asset Life Delta Airlines

Before 1 July 1986 1 July 1986 to 31 March 1993 After 1 April 1993

Residual Value 10% 10% 5%

Asset Life 10 15 20
Depreciation $9 $6 $4.75

Singapore Airlines
Before 1 April 1989 After 1 April 1989
Residual Value 10% 20%
Asset Life 8 10
Depreciation $11.25 $8

66
1. Are the difference in the ways that two airlines account for depreciation expense
significant?

2. Why would companies depreciate aircraft using different depreciable lives and
salvage value?

3. Assuming av. value of flight equipment that delta had in 1993, how much
depreciation assumption it adopted on April 1,1993 make ?

4. Singapore airlines maintain depreciation assumptions that are very from delta‘s.
what does it gain or lose doing so?

5. Does the difference in the av. age of the Delta‘s & Singapore‘s aircrafts‘ fleets
have any impact on its amount of depreciation expenses?

6. Comparable study between the 2 airlines on assets, long term debt and
depreciation expenses in the year 1993

Assignment unit 5

Question 1: On January 1, 2013, a firm bought a machine for Rs.90,000 and spend
Rs.6,000 on its installation and Rs.4,000 on its carriage. It is decided to charge
depreciation @ 10% on straight line method. Books are closed on December 31st
each year. Show Machinery Account for the year 2013 to 2015.

Question 2 : On the basis of information given in Illustration 1, Prepare machinery

Account for the year 2013 to 2015 if depreciation is charged @ 10% on diminishing
balance method.

Question 3 : On April 1, 2013 Kannu bought Machinery costing Rs.80,000. On July 1,

2015 Machinery was sold for Rs.40,000. Prepare Machinery Account from April, 1
2013 till July 1. 2015 assuming depreciation was charged @10% per annum on March
31, every year on the basis of Original cost method.

Question 4 : On the basis of information given in Illustration 3, prepare Machinery

Account assuming depreciation was charged @ 15% per annum on reducing
installment method.

67
Question 5: Vinod limited purchased a machine for Rs.2,50,000 including installation
cost on January 1, 2012. On October 1, 2014, machine was sold for Rs.1,50,000.
Depreciation was provided @ 10% p.a. on Fixed Installment method and accounts are
closed on December 31, each year.

Question 6: On the basis of information given in Illustration 5, show the Machinery

Account and Provision for Depreciation is provided @ 20 % p.a. on Written Down
Value Method.

Question 7: A Company purchased a machine for Rs. 40,000 on April 1, 2014. On

October 1, 2015 it was sold for Rs. 13,000. The company charges depreciation @
10% p.a. on straight line method.

Question 8: Afirm purchased on 1 st January, 2012 certain Machinery for Rs.5,82,000

and spent Rs.18,000 on its erection. On 1st July, 2012, additional machinery costing
Rs.2,00,000 was purchased. On 1st July, 2014, the machinery purchased on 1st
January, 2012 was auctioned for Rs.2,86,000 and a fresh machinery for Rs.4,00,000
was purchased on same date. Depreciation was provided annually on 31st December
at the rate of 10% on written down

Working Notes: Cost of 1st Machine = Rs. 5,82,000 + Rs. 18,000 = Rs. 6,00,000
Profit/Loss on sale of 1st Loss on Sale of 1 st Machine = Book Value on- Sale Value
(Rs. 4,86,000-Rs. 24,300) Rs. 4,61,700 - Rs. 2,86,000 Loss on Sale of Machine = Rs.
1,75,700

9 On 1 st April, 2013 Ashok & Brothers bought a second hand machine for Rs.
6,00,000 and spent Rs.100000 for its repair and installation. On Oct 1,2015 the
machine was sold for Rs.5,00,000. Prepare Machine Account after charging
depreciation @ 10% p.a. by Written down value Method, assuming that the books are
called on 31st March every year.

10 Vijay Ltd. purchased a plant on 1 st April 2012 for Rs.2,50,000. On 1 st 2013, it

purchased a new plant for Rs.1,50,000. The part of the machine which was purchased
on 1st April 2012 costing Rs.50,000 was sold for Rs.18000 on 30th

68
September 2015. Prepare the plant A/C for four years. Depreciation is charged @
10% p.a. on 31st March every year on the Diminishing Balance Method.

Loss on sale of plant 16627, Balance 31 March, 2015 Rs.2,46,645

11: On 1st April 2012 a firm purchased a machinery for Rs. 8,00,000. On 1st Oct in
the same accounting year, an additional machinery costing Rs.4,00,000 was
purchased. On 1st 2013, the machinery purchased on 1st April 2012 was sold off for
Rs.3,60,000. On October 2014, a new machinery was purchased for Rs.10,00,000
while the machinery purchased on 1st October 2012 was sold for Rs.3,40,000 on the
same date. The firm provides depreciation on its machinery @ 10% p.a. on original
cost 31st March every year.

Prepare Machinery Account (ii) Provision for Depreciation Account (iii) Machinery
Disposal Account

Ans:- Balance of Machinery Account Rs.9,50,000 Loss on Sale of 1st Machinery

Rs.3,20,000 Profit on sale of second Machinery Rs.20,000.

12 You are given the following balances as on 1st April 2010 Plant Account

=Rs.10,00,000 Provision for Depreciation on Account = Rs.2,32,000 Depreciation is

charged on plant at 10% p.a by the Diminishing Balance Method. A piece of plant
purchased on 1st April 2008 for Rs.2,00,000 was sold on 1st October 2010 for
Rs.1,20,000.

Prepare the Plant Account and provision for the Depreciation Account for the year
ended 31st March 2011 and also prepare the plant Disposal Account.

Loss on sale Plant Rs. 233,900 Balance of provision for Depreciation on A/C on
April, 2011 Rs.2,54,000.

69
 UNIT 5
FINANCIAL STATEMENTS
DISTINCTION BETWEEN CAPITAL AND REVENUE

A very important distinction in accounting is between capital and revenue items. The
distinction has important implications for making of the trading and profit and loss
account and balance sheet. The revenue items form part of the trading and profit and
loss account, the capital items help in the preparation of a balance sheet.

Expenditure

Whenever payment and/or incurrence of an outlay are made for a purpose other than
the settlement of an existing liability, it is called expenditure. The expenditures are
incurred with a viewpoint they would give benefits to the business. The benefit of an
expenditure may extend up to one accounting year or more than one year. If the
benefit of expenditure extends up to one accounting period, it is termed as revenue
expenditure. Normally, they are incurred for the day-to-day conduct of the business.
An example can be payment of salaries, rent, etc. The salaries paid in the current
period will not benefit the business in the next accounting period, as the workers have
put in their efforts in the current

accounting period. They will have to be paid the salaries in the next accounting period
as well if they are made to work. If the benefit of expenditure extends to more than
one accounting period, it is termed

as capital expenditure. An example can be payment to acquire furniture for use in the
business. Furniture acquired in the current accounting period will give benefits for
many accounting periods to come. The usual examples of capital expenditure can be
payment to acquire fixed assets and/or to make additions/extensions in the fixed
assets.

Following points of distinction between capital expenditure and revenue expenditure

are worth noting :

(a) Capital expenditure increases earning capacity of business whereas revenue

70
expenditure is incurred to maintain the earning capacity.

(b) Capital expenditure is incurred to acquire fixed assets for operation of business
whereas revenue expenditure is incurred on day-to-day conduct of business.

(c) Revenue expenditure is generally recurring expenditure and capital expenditure is

non-recurring by nature.

(d) Capital expenditure benefits more than one accounting year whereas revenue
expenditure normally benefits one accounting year.

(e) Capital expenditure (subject to depreciation) is recorded in balance sheet whereas

revenue expenditure (subject to adjustment for outstanding and prepaid amount) is
transferred to trading and profit and loss account.

Sometimes, it becomes difficult to correctly demarcate the expenditures into revenue

and capital category. In normal usage, the advertising expenditure is termed as
revenue expenditure. However, a heavy expenditure on advertising on launching a
product is likely to give benefit for more than one accounting period, as people are
likely to remember the advertisement for a slightly longer period. Such revenue
expenditures, which are likely to give benefit for more than one accounting period,
are termed as deferred revenue expenditure.

Receipts

The similar treatment is given the receipts of the business. If the receipts imply an
obligation to return the money, these are capital receipts. The example can be an
additional capital brought in by the owner or a loan taken from the bank. Both receipts
are leading to obligations, the first to the owner (called equity) and the other to the
outsiders (called liabilities). Another example on a capital receipt can be the sale of a
fixed asset like old machinery or furniture. However, if a receipt

does not incur an obligation to return the money or is not in the form of a sale of fixed
asset, it is termed as revenue receipt. The examples of such receipts sales made by the
firm and interest on investment received by the firm.

71
Financial Statements

It has been emphasised that various users have diverse informational requirements.
Instead of generating particular information useful for specific users, the business
prepares a set of financial statements, which in general satisfies the informational
needs of the users.

The basic objectives of preparing financial statements are :

(a) To present a true and fair view of the financial performance of the business;

(b) To present a true and fair view of the financial position of the business; and For
this purpose, the firm usually prepares the following financial statements:

1. Trading and Profit and Loss Account

2. Balance Sheet

Account Title L.F Debit Amount Credit

. Rs. Amount Rs.
Cash 1,000
Capital 12,000
Bank 5,000
Sales 1,25,000
Wages 8,000
Creditors 15,000
Salaries 25,000
10% Long term loan (raised on April 01, 5,000
2004)
Furniture 15,000
Commission received 5,000
Rent of building 13,000
Debtors 15,500
Bad debts 4,500
Purchases 75,000
1,62,000 1,62,000

72
Trading and Profit and Loss account, also known as Income statement, shows the
financial performance in the form of profit earned or loss sustained by the business.
Balance Sheet shows financial position in the form of assets, liabilities

Example 1

Observe the following trial balance of Ankit and signify correctly the various
elements of accounts and you will notice that the debit balances represent either assets
or expenses/ losses and the credit balance represent either equity/liabilities or
revenue/gains.

[This trial balance of Ankit will be used throughout the chapter to understand the
process of preparation of financial statements]

Trial Balance of Ankit as on March 31, 2005

Analysis of Trial Balance of Ankit as on March 31, 2005

Account Title Elements L.F Debit Amount Credit Amount

. Rs. Rs.
Cash Asset 1,000
Capital Equity 12,000
Bank Asset 5,000
Sales Revenue 1,25,000
Wages Expense 8,000
Creditors Liability 15,000
Salaries Expense 25,000
10% Long-term loan Liability 5,000
(raised on April
01,
2004)
Furniture Asset 15,000
Commission received Revenue 5,000
Rent of building Expense 13,000
Debtors Asset 15,500
Bad debts Expense 4,500
Purchases Expense 75,000

73
 1,62,000 1,62,000

Trading and Profit and Loss Account

Trading and Profit and Loss account is prepared to determine the profit earned or loss
sustained by the business enterprise during the accounting period. It is basically a
summary of revenues and expenses of the business and calculates the net figure
termed as profit or loss. Profit is revenue less expenses. If expenses are more than
revenues, the figure is termed as loss. Trading and Profit and Loss account
summarises the performance for an accounting period. It is achieved by transferring
the balances of revenues and expenses to the trading and profit and loss account from
the trial balance. Trading and Profit and Loss account is also an account with Debit
and Credit sides. It can be observed that debit balances (representing expenses) and
losses are transferred to the debit side of the Trading and a Profit and Loss account
and credit balance (representing revenues/gains) are transfered to its credit side.

RELEVANT ITEMS IN TRADING AND PROFIT AND LOSS ACCOUNT

The different items appearing in the trading and profit and loss account are explained
hereunder:

Items on the debit side

(i) Opening stock : It is the stock of goods in hand at the beginning of the
accounting year. This is the stock of goods which has been carried forward

from the previous year and remains unchanged during the year and appears in the trial
balance. In the trading account it appears on the debit side because it forms the part of
cost of goods sold for the current accounting year.

(ii) Purchases less returns : Goods, which have been bought for resale appears as
purchases on the debit side of the trading account. They include both cash as well as
credit purchases. Goods which are returned to suppliers are termed as purchases
return. It is shown by way of deduction from purchases and the computed amount is
known as Net purchases.

74
(iii) Wages : Wages refer to renumeration paid to workers who are directly engaged
in factory for loading, unloading and production of goods and are debited to trading
account.

(iv) Carriage inwards/Freight inwards: These expenses are the items of transport
expenses, which are incurred on bringing materials/goods purchased to the place of
business. These items are paid in respect of purchases made during the year and are
debited to the trading account.

(v) Fuel/Water/Power/Gas : These items are used in the production process and
hence are part of expenses.

(vi) Packaging material and Packing charges : Cost of packaging material used in
the product are direct expenses as it refers to small containers which form part of
goods sold. However, the packing refers to the big containers that are used for
transporting the goods and is regarded as an indirect expense debited to profit and loss
account.

(vii) Salaries : These include salaries paid to the administration, godown and
warehouse staff for the services rendered by them for running the business. If salaries
are paid in kind by providing certain facilities (called perks) to the employees such as
rent free accommodation, meals, uniform, medical facilities should also be regarded
as salaries and debited to the profit and loss account.

(viii) Rent paid : These include office and godown rent, municipal rates and taxes,
factory rent, rates and taxes. The amount of rent paid is shown on the debit side of the
profit and loss account.

(ix) Interest paid : Interest paid on loans, bank overdraft, renewal of bills of
exchange, etc. is an expense and is debited to profit and loss account.

(x) Commission paid: Commission paid or payable on business transactions

undertaken through the agents is an item of expense and is debited to profit and loss
account.

(xi) Repairs : Repairs and small renewals/ replacements relating to plant and

75
machinery, furniture, fixtures, fittings, etc. for keeping them in working condition are
included under this head. Such expenditure is debited to profit and loss account.

(xii) Miscellaneous expenses : Though expenses are classified and booked under
different heads, but certain expenses being of small amount clubbed together and are
called miscellaneous expenses. In normal usage these expenses are called Sundry
expenses or Trade expenses.

Items on the credit side

(i) Sales less returns : Sales account in trial balance shows gross total sales(cash as
well as credit) made during the year. It is shown on the credit side of the trading
account. Goods returned by customers are called return inwards and are shown as
deduction from total sales and the computed amount is known as net sales.

(ii) Other incomes : Besides salaries and other gains and incomes are also recorded in
the profit and loss account. Examples of such incomes are rent received, dividend
received, interest received, discount received, commission received, etc.

Closing Entries

The preparation of trading and profit and loss account requires that the balances of
accounts of all concerned items are transferred to it for its compilation.

• Opening stock account, Purchases account, Wages account, Carriage inwards

account and direct expenses account are closed by transferring to the debit side of the
trading and profit and loss account.

This is done by recording the following entry : Trading A/c Dr.

To Opening stock A/c To Purchases A/c To Wages A/c

To Carriage inwards A/c

To All other direct expenses A/c

• The purchases returns or return outwards are closed by transferring its balance to
the purchases account. The following entry is recorded for this purpose :

76
Purchases return A/c Dr.

Purchases A/c

• Similarly, the sales returns or returns inwards account is closed by transferring its
balance to the sales account as :

Sales A/c Dr.

To Sales return A/c

• The sales account is closed by transferring its balance to the credit side of the
trading and profit and loss account by recording the following entry:

Sales A/c Dr.

To Trading A/c

Items of expenses, losses, etc. are closed by recording the following entries: Profit and
Loss A/c Dr.

To Expenses (individually) A/c To Losses (individually) A/c

Items of incomes, gains, etc. are closed by recording the following entry: Incomes
(individually) A/c Dr.

Gains (individually) A/c Dr.

To Profit and Loss A/c

The posting for closing the seven accounts of expenses and revenues as they
appear in the trial balance (in our example 1) are given below:

(i) For closing the accounts of expenses

Trading A/c Dr. 83,000

To Purchases A/c 75,000
To Wages A/c 8,000
(ii) Profit and Loss A/c Dr. 43,500

77
To Salaries 25,000
To Rent of building 13,000
To Bad debts 4,500
(i) For closing the accounts of revenues
Sales A/c Dr. 1,25,000

To Trading A/c 1,25,000

(ii) Commission received A/c Dr. 5,000
To Profit and Loss A/c 5,000
The posting done in ledger will appear as follows : Purchases Account

Dr. Cr.

Amount Amount
Date Particulars J.F. Date Particulars J.F.
Rs. Rs.

75,000 75,000
Balance b/d 75,000 Trading 75,000

Wages Account
Dr. Cr.

Amount Amount
Date Particulars J.F Date Particulars J.F
Rs. Rs.

8,000 8,000

Balance b/d 8,000 Trading 8,000

Salaries Account

Dr. Cr.

Amount Amount
Date Particulars J.F Date Particulars J.F
Rs. Rs.

25,000 Profit 25,000

Balance b/d
and Loss
25,000 25,000

78
Rent of Building Account

Dr. Cr.

Date Particulars J.F. Amount Date Particulars J.F Amount

Rs. . Rs.

Balance b/d 13,000 Profit and Loss 13,000

13,000 13,000

Bad Debts Account

Dr. Cr.

Amount Amount
Date Particulars J.F. Date Particulars J.F.
Rs. Rs.

4,500 4,500
Profit
Balance b/d
and Loss
4,500 4,500
Sales Account

Dr. Cr.

Date Particulars J.F. Amount Rs. Date Particulars J.F. Amount Rs.

1,25,000 1,25,000
Trading Balance b/d
1,25,000 1,25,000

Commission Received Account

Dr. Cr.

Amount Amount
Date Particulars J.F Date Particulars J.F
Rs. Rs.
Profit 5,000 5,000
Balance b/d
and Loss 5,000 5,000

79
As the result of the foregoing discussion, we will now learn how the trading and profit
and loss account can be prepared from the trial balance, the format of which is shown
in figure 9.2. However, this list is not exhaustive. In real sense, there can be many
more of other items, which we will be dealing at the later stage and there you will
notice how this format undergoes a change with respect to each one of them.

Trading and Profit and Loss Account of ABC for the year ended March 31, 2005

Dr. Cr.

Expenses/Losses Amount Revenues/Gains Amount

Rs. Rs.
Opening stock Purchases Wages ..... Sales .....
Carriage inwards/ Freight .....
inwards/cartage Gross profit .....
c/d1 Gross loss b/d2
.....
xxx xxx
Rent/rates and taxes Salaries Gross loss c/d1 Gross profit b/d .....
Repairs and renewals Bad debts Inerest received .....
Net profit2 (transfered to ..... .....
capital account) ..... Net loss2 .....
.....
.....
.....
xxx xxx
1,2
only one item will be shown

Fig. 9.2 : A format trading and profit and loss account

CONCEPT OF GROSS PROFIT AND NET PROFIT

The trading and profit and loss can be seen as combination of two accounts, viz.
Trading account and Profit and Loss account. The trading account or the first part
ascertains the gross profit and profit and loss account or the second part ascertains net
profit.

Trading Account

The trading account ascertains the result from basic operational activities of the
business. The basic operational activity involves the manufacturing, purchasing and

80
seling of goods. It is prepared to ascertain whether the selling goods and/or rendering
of services to customers have proved profitable for the business or not. Purchases is
one of the main constituents of expenses in business organisation. Besides purchases,
the remaining expenses are divided into two categories, viz. direct expenses and
indirect expenses.

Direct expenses means all expenses directly connected with the manufacture,
purchase of goods and bringing them to the point of sale. Direct expenses include
carriage inwards, freight inwards, wages, factory lighting, coal, water and feul,
royalty on production, etc. In our example-1, besides purchases, four more items of
expenses are listed. These are wages, salaries, rent of building and bad debts. Out of
these items, wages is treated as direct expense while the other three are treated as
indirect expenses.

Similarly, sales constitute the main item of revenue for the business. The excess of
sales over purchases and direct expenses is called gross profit. If the amount of
purchases including direct expenses is more than the sales revenue, the resultant
figure is gross loss. The computation of gross profit can be shown in the form of
equation as :

Gross Profit = Sales – (Purchases + Direct Expenses)

The gross profit or the gross loss is transferred to profit and loss account.

The indirect expenses are transferred to the debit side of the second part, viz. profit
and loss account. All revenue/gains other than sales are transferred to the credit side
of the profit and loss account. If the total of the credit side of the profit and loss
account is more than the total of the debit side, the difference is the net profit for the
period of which it is being prepared. On the other hand, if the total of the debit side is
more than the total of the credit side, the difference is the net loss incurred by the
business firm. In an equation form, it is shown as follows :

Net Profit = Gross Profit + Other Incomes – Indirect Expenses

Net profit or net loss so computed is transferred to the capital account in the balance

81
sheet by way of the following entry :

(i) For transfer of net profit

Profit and Loss A/c Dr.

To Capital A/c

(ii) For transfer of net loss

Capital A/c Dr.

To Profit and Loss A/c

We are now redrafting the trading and profit and loss account to show gross profit and
net profit of Ankit for the year ended March 31, 2005.

Trading and Profit and Loss Account of Ankit for the year ended March 31, 2005

Dr. Cr.

Amount Amount
Expenses/Losses Revenues/Gains
Rs. Rs.
Purchases 75,000 Sales 1,25,000
Wages 8,000
Gross profit c/d 42,000
1,25,000 1,25,000
Salaries 25,000 Gross profit b/d 42,000
Rent of building 13,000 Commission received 5,000
Bad debts 4,500
Net Profit (transfered to 4,500
capital account)
47,000 47,000

Fig. 9.3 : Showing the computation of gross profit and net profit of Ankit

Gross profit, which represents the basic operational activity of the business is
computed as Rs. 42,000. The gross profit is transferred from trading account to profit

82
and loss account. Besides gross profit, business has earned an income of Rs. 5,000 as
commission received and has spent Rs. 42,500 (Rs. 25,000 + Rs.13,000+ Rs.4,500)
on expenses/losses including salaries, rent and bad debts. Therefore, the net profit is
calculated as Rs. 4,500.

Amount Amount
Expenses/Losses Revenues/Gains
Rs. Rs.
Opening stock 37,500 Sales 2,70,000
Purchases 1,05,000
Wages 30,000
Gross profit 97,500
2,70,000 2,70,000

Illustration 1

Prepare a trading account from the following particulars for the year ended March 31,
2006:

Rs.

Opening stock 37,500

Purchases 1, 05000

Sales 2,70,000

Wages 30,000

Solution

Trading Account

for the year ended March 31, 2006

Dr. Cr.

83
Illustration 2

Prepare a trading account of M/s Prime Products from the following particulars
pertaining to the year 2005-06.

Rs.

Opening stock 50,000

Purchases 1,10,000
Return inwards 5,000
Sales 3,00,000
Return outwards 7,000
Factory rent 30,000
Wages 40,000
Solution

Books of Prime
Products Trading
Account
for the year ended March 31, 2006

Dr. Cr.

Amount Amount
Expenses/Losses Revenues/Gains
Rs. Rs.
Opening stock 50,000
Purchases 1,10,000 2,95,000
Less : Return (7,000) 1,03,000
outwards
Sales 3,00,000
Factory rent 30,000
Less : Return (5,000) inwards
Wages 40,000
Gross profit 72,000
2,95,000 2,95,000

84
Illustration 3.

Prepare a trading account of M/s Anjali from the following information related to
2005-06.

Rs.

Opening stock 60,000

Purchases 3,

00,000

Sales 7,

50,000

Purchases return 18,000

Sales return 30,000

Carriage on purchases 12,000

Carriage on sales 15,000

Factory rent 18,000

Office rent 18,000

Dock and Clearing48,000 charges

Freight and Octroi 6,500 Coal, Gas and Water 10,000

Solution

for the year ended 2005-06

85
Books of Anjali Trading Account

Dr. Cr.

Amount Amount
Expenses/Losses Revenues/Gains
Rs. Rs.
Opening stock 60,000 Sales 7,50,000
Purchases Less : Sales return 7,20,000
(30,000)
3,00,000
Less : Purchases return 2,82,000
(18,000)
Carriage on purchases 12,000
Factory rent 18,000
Dock and Clearing charges 48,000
Freight and Octroi 6,500
Coal, Gas and Water 10,000
Gross profit 2,83,500
7,20,000 7,20,000

Illustration 4

From the following information, prepare a profit and loss account for the year ending
March 31, 2005.

Rs.

Gross profit 60,000

Rent 5,000

Salary 15,000

Commission paid 7,000

Interest paid on loan 5,000

86
 Advertising 4,000

Discount received 3,000

Printing and stationery 2,000

Legal charges 5,000

Bad debts 1,000

Depreciation 2,000

Interest received 4,000

Loss by fire 3,000

Profit and Loss Account for the year ended March 31, 2005

Dr. Cr.

Amount Amount
Expenses/Losses Revenues/Gains
Rs. Rs.
Rent 5,000 Gross profit 60,000
Salary 15,000 Discount received 3,000
Commission 7,000 Interest received 4,000
Interest paid on loan 5,000
Advertising 4,000
Printing and Stationery 2,000
Legal charges 5,000
Bad debts 1,000
Depreciation 2,000
Loss by fire 3,000
Net profit (transferred to the 18,000
capital account)
67,000 67,000

87
Cost of Goods Sold and Closing Stock–Trading Account Revisited

The trading and profit and loss account prepared in figure 9.3 presents useful
information as to the profitability from the basic operations of the business enterprise.
It is reproduced for further perusal.

Trading Account of Ankit for the year ended March 31, 2005

Dr. Cr.

Amount Amount
Expenses/Losses Revenues/Gains
Rs. Rs.
Purchases 75,000 Sales 1,25,000
Wages 8,000
Gross 42,000

profit
1,25,000 1,25,000

Fig. 9.4 : An illutrative trading account of Ankit

If there is no opening or closing stock, the total of purchases and direct expenses is
taken as Cost of goods sold. In our example, notice that purchases amount to Rs.
75,000 and wages amounts to Rs. 8,000. Hence, the cost of goods sold will be
computed using the following formula :

Cost of Goods Sold = Purchases + Direct Expenses

= Rs.75, 000 + Rs. 8,000

= Rs. 83,000

As there is no unsold stock,the presumption here is that all the goods purchased have
been sold. But in practice, there is some unsold goods at the end of the accounting
period.

In our example, let us assume that out of the goods purchased amounting to Rs.
75,000 in the current year, Ankit is able to sell goods costing Rs. 60,000 only. In such
a situation, the business will have an unsold stock of goods costing Rs. 15,000 in

88
hand, also called closing stock. The amount of cost of goods sold will be computed as
per the following equation :

Cost of Goods Sold = Purchases + Direct Expenses – Closing Stock

= Rs. 75,000 + Rs. 8,000 – Rs. 15,000

As a result, the amount of gross profit will also change with the existence of closing
stock in business from Rs. 42,000 (as computed in figure 9.4) to Rs. 57,000 ( refer
figure 9.5).

Trading Account of Ankit for the year ended March 31, 2005

Amount
Expenses/Losses Revenues/Gains Amount Rs.
Rs.
Purchases 75,000 Sales 1,25,000
Wages 8,000 Closing stock 15,000
Gross profit c/d 57,000
1,40,000 1,40,000
Salaries 25,000 Gross profit b/d 57,000
Rent of building 13,000 Commission received 5,000
Bad debts 4,500
Net Profit (transfered to 19,500
capital account)
62,000 62,000

Fig. 9.5 : The trading account of Ankit

It may be noted that closing stock does not normally form part of trial balance, and is
brought into books with the help of the following journal entry :

Closing stock A/c Dr.

To Trading A/c

This entry opens a new account of asset, i.e. closing stock Rs. 15,000 which is
transferred to the balance sheet. The closing stock shall be an opening stock for the
next year and shall be sold during the year. In most cases, therefore, the business shall

89
have opening stock as well as closing stock every year, and the cost of goods sold
should be worked as per the following equation:

Cost of Goods Sold = Opening Stock+Purchases Direct Expenses–Closing Stock

Look at Illustration 5 and see how it has been computed.

Illustration 5

Compute cost of goods sold for the years 2005 with the help of the following
information and prepare trading account

Rs.

Sales 20, 00,000

Purchases 15, 00,000

Wages 1, 00,000

Stock (Apr. 01, 2004) 3, 00,000

Stock (March 31,4,00,000 2005)

Freight inwards 1,00,000

Solution

Computation of Cost of Goods Sold

Particulars Amount Rs.

Opening stock 3,00,000
Add Purchases 15,00,000
Direct expenses :
Freight inwards 1,00,000
Wages 1,00,000
20,00,000
Less Closing stock (4,00,000)
Cost of goods sold 16,00,000
Trading Account for the year ended March 31, 2005

90
Dr. Cr.

Expenses/Losses Amount Rs. Revenues/Gains Amount Rs.

Opening stock 3,00,000 Sales 20,00,000
Purchases 15,00,000 Closing stock 4,00,000
Freight inwards 1,00,000
Wages 1,00,000
Gross profit 4,00,000
24,00,000 24,00,000

Illustration 6

From the following balances obtained from the few accounts of Mr. H. Balaram.
Prepare the Trading and Profit and Loss Account.

Rs. Rs.
Stock on Apr. 01, 2004 8,000 Bad debts 1,200
Purchases for the year 22,000 Rent 1,200
Sales for the year 42,000 Discount allowed 600
Purchase expenses 2,500 Commission paid 1,100
Salaries and wages 3,500 Sales expenses 600
Advertisement 1,000 Repairs 600

Closing stock on March 31, 2005 is Rs. 4,500

Books of H. Balaram Trading Account for the year ended March 31, 2005

Dr. Cr.

Amount Amount
Expenses/Losses Revenues/Gains
Rs. Rs.
Opening stock 8,000 Sales 42,000
Purchases 22,000 Closing stock 4,500
Purchase expenses 2,500
Gross profit c/d 14,000
46,500 46,500

91
 Salaries and Wages 3,500 Gross profit b/d 14,000
Rent 1,200
Advertisement 1,000
Commission 1,100
Discount allowed 600
Bad debts 1,200
Sales expenses 600
Repairs 600
Net profit 4,200
(transferred to capital
account)
14,000 14,000

Operating Profit (EBIT)

It is the profit earned through the normal operations and activities of the business.
Operating profit is the excess of operating revenue over operating expenses. While
calculating operating profit, the incomes and expenses of a purely financial nature are
not taken into account. Thus, operating profit is profit before interest and tax (EBIT).
Similarly, abnormal items such as loss by fire, etc. are also not taken into account. It
is calculated as follows :

Operating profit = Net Profit + Non Operating Expenses – Non Operating Incomes
Refer to the trial balance of Ankit in example 1, you will notice that it depicts an item
relating to 10 % interest on long-term loan raised on April 01, 2004. The amount of
interest works out to Rs. 500 (Rs. 5,000 10/100), which has been shown on the debit
side of the trading and profit and loss account (figure 9.6).

Trading and Profit and Loss Account of Ankit for the year ended March 31, 2005

Dr. Cr.

Expenses/Losses Amount Rs. Revenues/Gains Amount Rs.

Purchases 75,000 Sales 1,25,000
Wages 8,000 Closing stock 15,000
Gross profit c/d 57,000
1,40,000 1,40,000
Salaries 25,000 Gross profit b/d 57,000

92
 Rent of building 13,000 Commission received 5,000
Bad debts 4,500
Interest 500
Net Profit (transfered to 19,000
capital account)
62,000 62,000
Fig. 9.6 : Showing the treatment of interest on profit

The operating profit will be :

Operating profit = Net profit + Non-operating expenses – Non-operating incomes

Operating profit = Rs. 19,000 + 500 – nil = Rs. 19,500

lustration 7

Following balance is extracted from the books of a trader ascertain gross profit,
operating profit and net profit for the year ended March 31, 2005.

Particulars Amoun
t
Rs.
Sales 75,250
Purchases 32,250
Opening stock 7,600
Sales return 1,250
Purchases return 250
Rent 300
Stationary and printing 250
Salaries 3,000
Misc. expenses 200
Travelling expenses 500
Advertisement 1,800
Commission paid 150

93
 Office expenses 1,600
Wages 2,600
Profit on sale of investment 500 Depreciation 800

Dividend on investment 2,500 Loss on sale of old furniture 300

Closing stock (March 31, 2005) valued at Rs. 8,000

Trading and Profit and Loss Account for the year ended March 31, 2005

Dr. Cr.

Expenses/Losses Amount Rs. Revenues/Gains Amount Rs.

Opening stock 7,600 Sales 75,250
Purchases 32,250 Less : Sales return (1,250) Closing 74,000
stock
Less: Purchases return (250) 32,000 8,000
Wages 2,600
39,800
Gross profit c/d
82,000 82,000
Rent 300 Gross profit b/d 39,800
Stationary and printing 250
Salaries 3,000
Misc. expenses 200
Travelling expenses 500
Advertisement expenses 1,800
Commission paid 150
Office expenses 1,600
Depreciation 800
31,200
Operating profit c/d
39,800 39,800
Loss on sale of old furniture 300 31,200
Net Profit (transferred to capital 33,900 500
account) 2,500
Operating profit b/d
34,200 Profit on sale of investment 34,200
Dividend on investment

BALANCE SHEET

94
The balance sheet is a statement prepared for showing the financial position of the
business summarising its assets and liabilities at a given date. The assets reflect debit
balances and liabilities (including capital) reflect credit balances. It is

prepared at the end of the accounting period after the tradingand profit and loss
account have been prepared. It is called balance sheet because it is a statement of
balances of ledger accounts that have not been transferred to trading and profit and
loss account and are to be carried forward to the next year with the help of an opening
entry made in the journal at the beginning of the next year.

Preparing Balance Sheet

All the account of assets, liabilities and capital are shown in the balance sheet.
Accounts of capital and liabilities are shown on the left hand side, known as
Liabilities. Assets and other debit balances are shown on the right hand side, known
as Assets. There is no prescribed form of Balance sheet, for a proprietary and
partnership firms. However, Schedule VI Part I of the Companies Act 1956 prescribes
the format and the order in which the assets and liabilities of a company should be
shown. The normal format in which the balance sheet is prepared is shown in the
figure 9.7.

Balance Sheet of ................................................................ as at March 31, 2005

Liabilities Amount Assets Amount

Rs. Rs.
Capital ..... Furniture Cash Bank Goodwill .....
Add Profit ..... ..... Sundry debtors Closing stock .....
Long-term loan Short-term ..... Land and Buildings .....
loan Sundry creditors Bills .....
payable
..... .....
Bank overdraft
xxxx xxxx

Fig. 9.7 : Format of a balance sheet

Refer to our example -1 you will observe that the trial balance of Ankit depicts 14
accounts, out of which 7 accounts have been transferred to the trading and profit and
loss account (refer figure 9.3). These are the accounts of revenues and expenses. The

95
analysis of figure 9.3 shows that the business has incurred total expenses of Rs. 1,
25,500 and revenues generated are Rs. 1, 30,000 making a profit of Rs. 4,500. The
remaining seven items in the trial balance reflects the capital, assets and liabilities. We
are reproducing the trial balance (example -1) to show how the accounts of assets and
liabilities of Ankit would be presented in the balance sheet.

Trial Balance of Ankit as on March 31, 2005

Account Title L.F Debi t Amount Rs. Credit Amount Rs.

Cash 1,000
Capital 12,000
Bank 5,000
Sales 1,25,000
Wages 8,000
Creditors 15,000
Salaries 25,000
10% Long-term loan 5,000
(raised on April 01, 2004)
Furniture 15,000
Commission received 5,000
Rent of building 13,000
Debtors 15,500
Bad debts 4,500
Purchases 75,000
1,62,000 1,62,000

Fig. 9.8 : Showing the accounts of assets and liabilities in the trial balance of Ankit

Balance Sheet of Ankit as at March 31, 2005

Liabilities Amount Rs. Assets Amount Rs.

Capital 12,000 Furniture 15,000
Add Profit 4,500 16,500 Cash 1,000
10 % Long-term loan 5,000 Bank 5,000
Creditors 15,000 Debtors 15,500
36,500 36,500
Fig. 9.9 : Showing the balance sheet of Ankit

96
Relevant Items in the Balance Sheet

Items which are generally included in a balance sheet are explained below :

(1) Current Assets: Current assets are those which are either in the form of cash or a
can be converted into cash within a year. The examples of such assets are cash in
hand/bank, bills receivable, stock of raw materials, semi- finished goods and finished
goods, sundry debtors, short term investments, prepaid expenses, etc.

(2) Current Liabilities: Current liabilities are those liabilities which are expected to
be paid within a year and which are usually to be paid out of current assets. The
examples of such liabilities are bank overdraft, bills payable, sundry creditors, short-
term loans, outstanding expenses, etc.

(3) Fixed Assets: Fixed assets are those assets, which are held on a long-term basis in
the business. Such assets are not acquired for the purpose of resale,

e.g. land, building, plant and machinery, furniture and fixtures, etc. Some times the
term ‗Fixed Block‘ or ‗Block Capital‘ is also used for them.

(4) Intangible Assets : These are such assets which cannot be seen or touched.
Goodwill, Patents, Trademarks are some of the examples of intangible assets.

(5) Investments: Investments represent the funds invested in government securities,

shares of a company, etc. They are shown at cost price. If, on the date of preparation
the balance sheet, the market price of investments is lower than the cost price, a
footnote to that effect may be appended to the balance sheet.

(6) Long-term Liabilities : All liabilities other than the current liabilities are known
as long-term liabilities. Such liabilities are usually payable after one year of the date
of the balance sheet. The important items of long term liabilities are long-term loans
from bank and other financial institutions.

(7) Capital: It is the excess of assets over liabilities due to outsiders. It represents the
amount originally contributed by the proprietor/ partners as increased by profits and
interest on capital and decreased by losses drawings and intrest on drawings.

97
(8) Drawings : Amount withdrawn by the proprietor is termed as drawings and has
the effect of reducing the balance on his capital account. Therefore, the drawings
account is closed by transferring its balance to his capital account. However it is
shown by way of deduction from capital in the balance sheet.

Marshalling and Grouping of Assets and Liabilities

A major concern of accounting is about preparing and presenting the financial

statement. The information so provided should be decision useful for the users.
Therefore, it becomes necessary that the items appearing in the balance sheet should
be properly grouped and presented in a particular order.

Marshalling of Assets and Liabilities

In a balance sheet, the assets and liabilities are arranged either in the order of liquidity
or permanence. Arrangement of assets and liabilities in a particular order is known as
Marshalling.

In case of permanence, the most permanent asset or liability is put on the top in the
balance sheet and thereafter the assets are arranged in their reducing level of
permanence.

In the balance sheet of Ankit you will find that furniture is the most permanent of all
the assets. Out of debtors, bank and cash, debtors will take maximum time to convert
back into cash. Bank is less liquid than cash. Cash is the most liquid of all the assets.
Similarly, on the liabilities side, the capital, being the most important source of
finance will tend to remain in the business for a longer period than the long-term loan.
Creditors being a liquid liability will be discharged in the near future. The balance
sheet of Ankit in the order of permanence is shown in figure 9.10(a).

Balance Sheet of Ankit as on March 31, 2005 (in order of permanence)

Liabilities Amount Rs. Assets Amount Rs.
Capital 12,000 Furniture 15,000
Add Profit 4,500 16,500 Debtors 15,500
10 % Long-term loan 5,000 Bank 5,000
Creditors 15,000 Cash 1,000
36,500 36,500

Fig. 9.10 (a) : Items of balance sheet shown in the order of permanance

98
In case of liquidity, the order is reversed. The information presented in this manner
would enable the user to have a good idea about the life of the various accounts. The
assets account of the relatively permanent nature would continue in the business for a
longer time whereas the less permanent or more liquid accounts will change their
forms in the near future and are likely to become cash or cash equivalent.

The balance sheet of Ankit in the order of liquidity is shown in figure 9.10(b)

Balance Sheet of Ankit as at March31,2005 (in order of liquidity)

Amount Amount
Liabilities Assets
Rs. Rs.
1,000
15,000
5,000
Creditors 5,000
15,500
10 % Long-term loan Capital 16,500
Cash Bank Debtors Furniture 15,000
12,000
Add Profit 4,500 36,500 36,500

Fig. 9.10 (b) : Items of balance sheet shown in the order of liquidity

Grouping of Assets and Liabilities

The items appearing in the balance sheet can also be properly grouped. The term
grouping means putting together items of similar nature under a common heading. For
example, the balance of accounts of cash, bank, debtors, etc. can be grouped and
shown under the heading of ‗current assets‘ and the balances of all fixed assets and
long-term investment under the heading of ‗non-current assets‘.

Balance Sheet of Ankit as at March 31, 2005 (in order of permanence)

Liabilities Amount Rs. Assets Amount Rs.

Owners Funds 16,500 Non Current Assets 15,000
Capital 12,000 Furniture Current Assets Debtors 15,500
Add Profit 4,500 5,000 Bank Cash 5,000
Non-Current Liabilities 1,000
Long- term loan Current 15,000
Liabilities Creditors
36,500 36,500

Fig. 9.10 (c): Showing assets and liabilities arranged in logical groups lustration 8

99
From the following balances prepare a trading and profit and loss account and balance
sheet for the year ended March 31, 2006

Account Title Amount Account Title Amount

Rs. Rs.
Carriage on goods 8,000 Cash in hand 2,500
purchased Bank overdraft 30,000
Carriage on goods sold 3,500 Motor car 60,000
Manufacturing expenses 42,000 Drawings 8,000
Advertisement 7,000 Audit fees 2,700
Excise duty 6,000 Plant 1,53,900
Factory lighting 4,400 Repairs to plant 2,200
Debtors 80,000 Stock at the end 76,000
Creditors 61,000 Purchases less return 1,60,000
Dock and Clearing 5,200 Commission on purchases 2,000
charges
Postage and Telegram 800 Incidental trade expenses 3,200
Fire Insurance Premium 3,600 Investment 30,000
Patents 12,000 Interest on investment 4,500
Income tax 24,000 Capital 1,00,000
Office expenses 7,200 Sales less return 5,20,000
Salest tax paid 12,000
Discount allowed 2,700
Discount on purchases 3,400

Trading and Profit and Loss Account for the year ended March 31, 2006

Dr. Cr.

Expenses/Losses Amount Revenues/Gains Amount

Rs. Rs.
Purchases less return 1,60,000 Sales less return 5,20,000
Commission on purchases 2,000
Carriageongoods 8,000
purchasesd
Manufacturing expenses 42,000
Factory lighting 4,400

100
 Dock and Clearing 5,200
charges
Gross profit c/d 2,98,400
5,20,000 Gross profit b/d
5,20,000
Carriage on sales Interest on
Advertisement 3,500 investment Discount on purchases 2,98,400
Excise duty 7,000 4,500
6,000 3,400
Postage and telegram 800
Fire Insurance premium 3,600
Office expenses 7,200
Audit fees 2,700
Repairs to plant 2,200
Incidental 3,200
trading
expenses
Sales tax paid 12,000
Discount allowed 2,700
Net profit 2,55,400
(transferred to capital
account)
3,06,300 3,06,300

Balance Sheet as at March 31, 2006

Liabilities Amount Rs. Assets Amount Rs.

Bank overdraft 30,000 Cash in hand 2,500
Creditors 61,000 Debtors 80,000
Capital 1,00,000 Closing stock 76,000
Add Net profit 2,55,400 Investment 30,000
3,55,400 Motor car 60,000
Less Drawings (8,000) Plant 1,53,900
3,47400 Patents 12,000
Less Income tax (24,000) 3,23,400
4,14,400 4,14,400

101
Illustration 9

From the following balances prepare trading and profit and loss account and balance
sheet for the year ended March 31, 2006

Account Title Amount Account Title Amount

Rs. Rs.
Opening stock 15,310 Capital 2,50,000
Purchases 82,400 Drawings 48,000
Sales 256,000 Sundry debtors 57,000
Returns (Dr.) 4,000 Sundry creditors 12,000
Returns (Cr.) 2,400 Depreciation 4,200
Factory rent 18,000 Charity 500
Custom duty 11,500 Cash balance 4,460
Coal, gas & power 6,000 Bank balance 4,000
Wages and salary 36,600 Bank charges 180
Discount (Dr.) 7,500 Establishment expenses 3,600
Commission (Cr.) 1,200 Plant 42,000
Bad debts 5,850 Leasehold building 1,50,000
Bad debts recovered 2,000 Sales tax collected 2,000
Apprenticeship premium 4,800 Goodwill 20,000
Production expenses 2,600 Patents 10,000
Adminstrative expenses 5,000 Trademark 5,000
Carriage 8,700 Loan (Cr.) 25,000
Interest on loan 3,000

The value of closing stock on March 31, 2006 was Rs. 25,400

102
Dr. Cr.

Expenses/Losses Amount Rs. Revenues/Gains Amount Rs.

Opening stock 15,310 Sales: 2,56,000
Purchases: 82,400 Less Returns(4,000) 2,52,000
Less Returns : (2,400) 80,000 Closing stock
Factory rent 18,000 25,400
Custom duty 11,500
Coal, gas, power 6,000
Wages and salary 36,600
Production expenses 2,600
Carriage 8,700
Gross profit c/d 98,690
2,77,400 2,77,400
Discount (Dr.) 7,500 Gross profit 98,690
Bad debts 5,850 b/d 1,200
Administrative expenses 5,000 Commission 2,000
Depreciation 4,200 Bad debts recovered 4,800
Charity 500 Apprenticeship
Bank charges 180 premium
Establishment expenses 3,600
Interest on loan 3,000
Net profit 76,860
(transferred to capital account) 1,06,690 1,06,690

Balance Sheet as at March 31, 2006

Amount Amount
Liabilities Assets
Rs. Rs.

Sales tax collected 2,000 Cash balance 4,460

Sundry creditors 12,000 Bank balance 4,000

Loan 25,000 Sundry debtors 57,000

Capital 2,50,000 Closing stock 25,400

Add Net profit 76,860 Leasehold building 1,50,000

3,26,860 Plant 42,000
 Patents 10,000
Less Drawings (48,000) 2,78,860 Goodwill 5,000
Trade mark 20,000
3,17,860 3,17,860

Opening Entry

The balances of various accounts in balance sheet are carried forward from one
accounting period to another accounting period. In fact, the balance sheet of an
accounting period becomes the opening trial balance of the next accounting period.
Next year an opening entry is made which opens these accounts contained in the
balance sheet.

Refer the balance sheet shown in figure 9.10(c). The opening entry with regard to it
will be recorded as follows :

Furniture A/c Dr. 15,000

Debtors A/c Dr. 15,500

Bank‘s A/c Dr. 5,000

Cash A/c Dr. 1,000

To Capital A/c 16,500

To 10 % Long-term loan A/c 5,000

To Creditors A/c 15,000

Case study

Vinod Kumar a highly motivated commerce student from Delhi, very much interested
in the field of commerce. At school level he had decided to become an entrepreneur as
he was very much interested in Business Studies, Accountancy and Entrepreneurship
subjects. He pursued B. Com for under graduation and did his Masters (MBA) in
Business Administration from Delhi University. After completing his masters, he
decided to start his own business (Sole Proprietorship). For this purpose he carried out
a market survey , the results of which convinced him to target the young generation.

After doing a lot of market research and survey, he decided to manufacture the
following products:

1. Smartphones (Product Line)

2. Digital Cameras (Product Line)

3. Tablets (Product Line)

4. Home Theater System (Product Line) 5.

He has also decided to open a school to provide free education to the children
belonging to remote areas and economically backward section of the society. For this
purpose he has decided to spend some amount of profit every year.

He told his parents about his business ideas (He had decided to start), parents were
very supportive and gave him Rs.30,00,000 as an addition to his own savings of
Rs.5,00,000.

He started business with Rs.35,00,000

He opened a Bank Account with ICICI bank in the name of business and deposited
Rs.50,000.

He found that his investment amount (Capital) is not enough to run the business. So
he decided to obtain a loan from IDBI (Bank) of Rs.15,00,000 @ 10% p.a.

Goods purchased for cash Rs.5,00,000 Goods purchased on credit Rs.7,00,000

He also purchased a laptop for office use for Rs.40,000 and four computers for staff
for Rs.60,000

Goods sold (Cash) Rs.11,00,000 Goods sold (Credit) Rs.9,00,000

Purchase return during the year Rs.50,000 Sales return during the year Rs.30,000

Cash received from debtors Rs.5,00,000 Cash paid to creditors Rs.6,00,000

Expenses incurred include 50,000 for salaries paid , 30000 rent paid , 40000
advertisement

You are required to prepare trading, profit and loss and balance sheet

CASE STUDY

On 1July 2013 David Ltd acquired all of the share capital {cum div}of Goliath
Limited for a consideration of $600,000 cash and a brand that was held in their
accounts

at a book value of $10,000 but now had a fair value of $24,[Link] the date of
acquisition on Goliath's accounts showed a dividend payable of $10,000.

At that date all the identifiable assets and liabilities were recorded at fair value with
the exception of:

ASSET Inventory 16,000 Book Value Market Value 18,000

Land 65,000 68,000

Plant 17,000

(less depreciation) (2000)

15,000 19,000

Accounts Receivable 15,000 14,000

The inventory was all sold by 30/6/[Link] remaining useful life of the plant is 5
years. The accounts receivable were collected by 30/6/14 for $14,000

The land was sold on 30/12/16 for $[Link] plant was on hand still at 30/6/17. At
the date of acquisition the equity of David Ltd consisted of:

Share Capital 380,000

General Reserve 70,000

Retained Earnings 62,000

Information from the tri al balances of Goliath Ltd and David Ltd at 30 June 2017 is
presented overleaf.

Additional Information

1. On Jan 2017 Dave d Ltd sold inventory to Goliath Ltd costing $70,000 for
$80,[Link] of this inventory was sold to outside parties by 30/6/17.

2. On Jan 2016 Dave d Ltd sold inventory costing $12000 to Goliath Ltd
for$15,000. Goliath Ltd treats the item as equipment and depreciates it at 10% per
annum.

3. On July 2016 David sold plant to Goliath for $21,[Link] plant had cost David
$24,000 on 1July 2014 and it was being depreciated at 10% per annum .Goliath regards
the plant asinventol" The inventory was all sold by 30th July 2016.

4. At 1July 2016 Dave d Ltd held inventory that it had purchased from Goliath Ltd
on 1June 2016 at a profit of $[Link] was sold by 30 June 2017

5. Goliath ltd accrues dividends from David ltd once they are declared.

6. Goliath ltd has earned $1600ininterest revenue in the 2017 finance ial year from
Dav d ltd.

7. Goliath ltd has earned $3500inservice revenue in the 2017 financial year from
Dav d ltd. [Link] a tax rate of 30%.

1. From the following balances taken from the books of Simmi and Vimmi Ltd. for
the year ending March 31, 2003, calculate the gross profit.

(Rs.)

Closing stock 2,50,000

Net sales during the year 40,00,000

Net purchases during the year 15,00,000

Opening stock 15,00,000

Direct expenses 80,000

(Ans. Gross profit Rs.11,70,000)

2. From the following balances extracted from the books of M/s Ahuja and Nanda.
Calculate the amount of :

(a) Cost of goods available for sale

(b) Cost of goods sold during the year

(c) Gross Profit

Rs.

Opening stock 25,000

Credit purchases 7,50,000

Cash purchases 3,00,000

Credit sales 12,00,000

Cash sales 4,00,000

Wages 1,00,000

Salaries 1,40,000

Closing stock 30,000

Sales return 50,000

Purchases return 10,000

(Ans. (a) Rs. 11,65,000 ; (b) Rs.11,35,000 ; (c) Rs.4,15,000

3. Calculate the amount of gross profit and operating profit on the basis of the
following balances extracted from the books of M/s Rajiv & Sons for the year ended
March 31, 2005.
Rs.

Opening stock 50,000

Net sales 11,00,000

Net purchases 6,00,000

Direct expenses 60,000

Administration expenses 45,000

Selling and distribution65,000 expenses

Loss due to fire 20,000

Closing stock 70,000

(Ans. Gross profit Rs.4,60,000, Operating profit Rs.3,50,000)

4. Operating profit earned by M/s Arora & Sachdeva in 2005-06 was Rs.17,00,000.
Its non-operating incomes were Rs.1,50,000 and non-operating expenses were
Rs.3,75,000. Calculate the amount of net profit earned by the firm.

(Ans. Net profit Rs.14,75,000)

5. The following are the extracts from the trial balance of M/s Bhola & Sons as on
March 31, 2005

Account title Debit Rs. Credit Rs.

Opening 2,00,000
stock 8,10,000
Purchases 10,10,000
Sales 10,10,000 10,10,000
(only relevant items)
Closing Stock as on date was valued at Rs.3,00,000.

You are required to record the necessary journal entries and show how the above
items will appear in the trading and profit and loss account and balance sheet of M/s
Bhola & Sons.

6. Prepare trading and profit and loss account and balance sheet as on March 31,
2005 :

Account Title Amount Account Title Amount

Rs. Rs.
Machinery 27,000 Capital 60,000
Sundry debtors 21,600 Bills payable 2,800
Drawings 2,700 Sundry creditors 1,400
Purchases 58,500 Sales 73,500
Wages 15,000
Sundry expenses 600
Rent & taxes 1,350
Carriage inwards 450
Bank 4,500
Openings stock 6,000
Closing stock as on March 31, 2005 Rs.22,400

[Ans. Gross profit Rs.15,950, Net profit Rs.14,000, Total balance sheet Rs.75,500]

7. The following trial balance is extracted from the books of M/s Ram on March 31,
2005. You are required to prepare trading and profit and loss account and the balance
sheet as on date :

Account title Amount Account title Amount

Rs. Rs.
Debtors 12,000 Apprenticeship 5,000
premium
Purchases 50,000 Loan 10,000
Coal, gas and water 6,000 Bank overdraft 1,000
Factory wages 11,000 Sales 80,000
Salaries 9,000 Creditors 13,000
Rent 4,000 Capital 20,000
Discount 3,000
Advertisement 500
Drawings 1,000
Loan 6,000
Petty cash 500
Sales return 1,000
Machinery 5,000
Land and building 10,000
Income tax 100
Furniture 9,900
(Ans. Gross profit: Rs. 12,000, Net profit: Rs. 500, Total balance sheet: Rs. 43,400)

8. The following is the trial balance of Manju Chawla on March 31, 2005. You are
required to prepare trading and profit and loss account and a balance sheet as on date :

Account title Debit Amount Rs. Credit Amount Rs.

Opening stock 10,000
Purchases and sales 40,000 80,000
Returns 200 600
Productive wages 6,000
Dock and Clearing charges 4,000
Donation and charity 600
Delivery van expenses 6,000
Lighting 500
Sales tax collected 1,000
Bad debts 600
Misc. incomes 6,000
Rent from tenants 2,000
Royalty 4,000
Capital 40,000
Drawings 2,000
Debtors and Creditors 6,0000 7,000
Cash 3,000
Investment 6,000
Patents 4,000
Land and Machinery 43,000
Closing stock Rs. 2,000.

(Ans. Gross Profit: Rs. 18,400, Net profit: Rs. 18,700, Total balance sheet: Rs.
64,700)
9. The following is the trial balance of Mr. Deepak as on March 31, 2005. You are
required to prepare trading account, profit and loss account and a balance sheet as on
date :

Account title Debit Amount Rs. Account title Credit Amount Rs.
Drawings 36,000 Capital 2,50000
Insurance 3,000 Bills payable 3,600
General expenses 29,000 Creditors 50,000
Rent and taxes 14,400 Discount recived 10,400
Lighting (factory) 2,800 Purchases return 8,000
Travelling expenses 7,400 Sales 4,40,000
Cash in hand 12,600
Bills receivable 5,000
Sundry debtors 1,04,000
Furniture 16,000
Plant and Machinery 1,80,000
Opening stock 40,000
Purchases 1,60,000
Sales return 6,000
Carriage inwards 7,200
Carriage outwards 1,600
Wages 84,000
Salaries 53,000

Closing stock Rs. 35,000.

(Ans. Gross profit: Rs.1,83,000, Net profit : Rs. 85,000, Total balance sheet: Rs.
3,52,600)

10. Prepare trading and profit and loss account and balance sheet from the following
particulars as on March 31, 2005.

Account Title Debit Amount Rs. Credit Amount Rs.

Purchases and Sales 3,52,000 5,60,000
Return inwards and Return 9,600 12,000
outwards
 Carriage inwards 7,000
Carriage outwards 3,360
Fuel and power 24,800
Opening stock 57,600
Bad debts 9,950
Debtors and Creditors 1,31,200 48,000
Capital 3,48,000
Investment 32,000
Interest on investment 3,200
Loan 16,000
Repairs 2,400
General expenses 17,000
Wages and salaries 28,800
Land and buildings 2,88,000
Cash in hand 32,000
Miscellaneous receipts 160
Sales tax collected 8,350

Closing stock Rs. 30,000.

(Ans. Gross profit: Rs. 1,22,200, Net profit : Rs.92,850, Total balance sheet:
Rs.5,13,200)

11. From the following trial balance of Mr. A. Lal, prepare trading, profit and loss
account and balance sheet as on March 31, 2005

Account Title Debit Amount Rs. Credit Amount Rs.

Stock as on April 01, 2005 16,000
Purchases and Sales 67,600 1,12,000
Returns inwards and outwards 4,600 3,200
Carriage inwards 1,400
General expenses 2,400
Bad debts 600
Discount received 1,400
Bank over draft 10,000
Interest on bank overdraft 600
Commission received 1,800
Insurance and taxes 4,000
Scooter expenses 200
Salaries 8,800
Cash in hand 4,000
Scooter 8,000
Furniture 5,200
Building 65,000
Debtors and Creditors 6,000 16,000
Capital 50,000
Closing stock Rs. 15,000.

(Ans. Gross profit : Rs. 40,600, Net profit: Rs. 27,200, Total balance sheet: Rs.
1,03,200)

12. Prepare trading and profit and loss account and balance sheet of M/s Royal
Traders from the following balances as on March 31, 2005.

Debit balances Amount Rs. Credit balances Amount Rs.

Stock 20,000 Sales Creditors 2,45,000
Cash 5,000 Bills payable 10,000
Capital
Bank 10,000 4,000
Carriage on 1,500 2,00,000
purchases
Purchases 1,90,000
Drawings 9,000
Wages 55,000
Machinery 1,00,000
Debtors 27,000
Postage 300
Sundry expenses 1,700
Rent 4,500
Furniture 35,000

Closing stock Rs.8,000

(Ans. Gross loss Rs. 13,500, Net loss Rs. 20,000, Total balance sheet Rs. 1,85,000)
13. Prepare trading and profit and loss account from the following particulars of M/s
Neema Traders as on March 31, 2005.

Debit Credit Amount

Account Title Account Title
Amount Rs. Rs.
Buildings 23,000 Sales 1,80,000
16,930 8,000
Plant Loan
1,000 2,520
Carriage inwards Bills payable
3,300 4,720
Wages Bank overdraft
1,64,000 8,000
Purchases Creditors
1,820 2,36,000
Sales return Capital
9,000 1,910
Opening stock Purchases return
2,10,940
Machinery
1,610
Insurance
1,100
Interest
250
Bad debts
300
Postage
1,000
Discount
3,000
Salaries
3,900
Debtors
Stock on March 31, 2005 Rs.16,000.

(Ans. Gross profit Rs.17,850, Net profit Rs. 10,590, Total of balance sheet
Rs.2,69,830)

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14. From the following balances of M/s Nilu Sarees as on March 31, 2005. Prepare
trading and profit and loss account and balance sheet as on date.

Account Title Debit Amount Account Title Credit Amount

Rs. Rs.
Opening stock 10,000 Sales 2,28,000
Purchases 78,000 Capital 70,000
Carriage inwards 2,500 Interest 7,000
Salaries 30,000 Commission 8,000
Commission 10,000 Creditors 28,000
Wages 11,000 Bills payable 2,370
Rent & taxes 2,800
Repairs 5,000
Telephone expenses 1,400
Legal charges 1,500
Sundry expenses 2,500
cash in hand 12,000
Debtors 30,000
Machinery 60,000
Investments 90,000
Drawings 18,000

Closing stock as on March 31, 2005 Rs.22,000.

(Ans. Gross profit Rs. 1,56,500, Net profit Rs. 1,10,300, Total balance sheet
Rs.2,14,000)

15. Prepare trading and profit and loss account of M/s Sports Equipments for the year
ended March 31, 2006 and balance sheet as on that date :

Account Title Debit Amount Rs. Credit Amount Rs.

Opening stock 50,000
Purchases and sales 3,50,000 4,21,000
Sales returns 5,000
Capital 3,00,000
Commission 4,000

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Creditors 1,00,000
Bank overdraft 28,000
Cash in hand 32,000
Furniture 1,28,000
Debtors 1,40,000
Plants 60,000
Carriage on purchases 12,000
Wages 8,000
Rent 15,000
Bad debts 7,000
Drawings 24,000
Stationery 6,000
Travelling expenses 2,000
Insurance 7,000
Discount 5,000
Office expenses 2,000
Closing stock as on March 31, 2006 Rs.2,500

(Ans. Gross loss Rs. 1,500, Net loss Rs. 41,500 , Total balance sheet Rs.3,62,500

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Bharati Vidyapeeth (Deemed to be University) Institute of Management and
Research (BVIMR), New

Delhi

1st Internal Examination (February 2020)

Course: Semester:

Subject: Course Code:

Max. Marks: 40 Max. Time: 2 Hours

Instructions (if any) :- (Calculator is allowed)

Question No. 1 is compulsory. Attempt any two questions from Q2 to Q5. And
attempt any two question from section 2.

Section 1

Answer in 400 words. Each question carry 06 marks.

Q. 1

Q. 2

Q. 3

Q. 4

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Q. 5 Write Short Note on any two. Answer in 300 words. Each carry 03 marks.

a)

b)

c)

Section 2

Attempt any 2 questions. Each question carry 11 marks

Q 6.

Q 7.

Q 8.

119
Bharati Vidyapeeth (Deemed to be University) Institute of Management and
Research (BVIMR), New Delhi
2nd Internal Examination (March 2020)
Course: Semester:
Subject: Course Code:
Max. Marks: 40 Max. Time: 2 Hours
Instructions (if any) :- (Calculator is allowed)
Question No. 1 is compulsory. Attempt any two questions from Q2 to Q5. And
attempt any two question from section 2.
Sec tion 1 Answer in 400 words. Each question
carry 06 marks.
Q. 1
Q. 2
Q. 3
Q. 4
Q. 5 Write Short Note on any two. Answer in 300 words. Each carry 03 marks.
a)
b)
c)
Q 6.
Q 7.
Q 8.

120
1st Internal Examination (Sep-2022)
Course: BBA Semester: 1st
Subject: Financial Accounting Course Code:
104
Max. Marks: 40 Max. Time: 1.5 Hours
Instructions (if any):- Use of calculator for subjects like Financial Mgt. Operation
etc. allowed if required. (Scientific calculator is not allowed).

Use of unfair means will lead to cancellation of paper followed by disciplinary action.

Attempt any two questions from section 1 Attempt any two question from section
2.

Section 1

(Theoretical Concept and Practical/Application oriented)

Answer in 500 words. Each question carry 08 marks.

Q.1 Define Financial Accounting. Explain its advantages and disadvantages.

Q.2 Who are the users of the accounting information? Explain any three internal and
three external users .

Q.3 What is the difference between Book-Keeping and Accounting?

Q.4 Write Short Note on any two. Answer in 300 words. Each carry 04 marks.

a) Entity Concept

b) Accounting Period Concept

121
Date Particulars Amount
2004 (Rs.)
Jan 1 Balances as on date:
Cash in hand 5,000
Machinery 1,00,000
Leasehold Premises 50,000
Due from Ritu 1,500
Loan 25,000
Due to Rachna 2,000
Jan 2 Purchased goods from Kamal 10,000
Jan 11 Ritu paid by cheque in full settlement 1,000
Jan 21 Goods distributed as charity 2,500
Jan 22 Madan is declared insolvent & 50 p in a rupee is received 3,000
Jan 24 Sold goods for Rs 10,000 less trade discount @5% & cash discount @ 2%

122
Section 2

(Analytical Question / Case Study / Essay Type Question to test analytical and
Comprehensive Skills)

Answer in 700 words. Attempt any 2 questions. Each question carry 12 marks

Q5. On April 01, 2018 Sahil started business with Rs. 100,000 and other transactions
for the month are:

April 2. Purchase Furniture for Cash Rs. 7,000.

April 8. Purchase Goods for Cash Rs. 2,000 and for Credit Rs. 1,000 from Khalid
Retail Store.

April 14. Sold Goods to Khan Brothers Rs. 12,000 and Cash Sales Rs. 5,000.

April 18. Owner withdrew of worth Rs. 2,000 for personal use.

April 22. Paid Khalid Retail Store Rs. 500.

April 26. Received Rs. 10,000 from Khan Brothers.

April 30. Paid Salaries Expense Rs. 2,000

April 28 Paid wages Rs.3,000

April 29 Goods distributed as free sample 2,00.

April 29 Cash withdrawn from bank for personal use 5,000.

April 30 Goods worth 5000 were destroyed by fire , out of which 3000 will be
recovered from insurance Pass journal entries in the books of Sahil

Q6. Journalize the following transactions in the books of Ramesh:

Q7. Enter the following transactions in Kapur‘s Cash Book and calculate the balance
at the end of the period:

123
2003
1 July Cash Balance Rs. 13,600
Bank Balance Rs.36,800
4 July Paid Kumar by cheque Rs.12,500
7 July Goods sold for cash Rs.5,300
10 July Paid into bank Rs.4,200
15 July Goods purchased and paid by cheque less 8% cash discount Rs.24,000
20 July Received Rs.6300 from Kunal in settlement of his debt for Rs.6500
25 July Bought Furniture for cash Rs.18,00
31 July Withdrawn Rs.2,200 from bank and paid for purchases Rs.2000

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Checklist for Course packs

Title page should be standardized bearing title of subject, course, course code,
semester, year of batch

o Name of the instructor teaching the course

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Forwarding by HOD bearing his/her signature for approval by Director Sir Logo of
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Warning ―strictly for internal use‖ must be printed on the front title page Table of
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134
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Contact details of instructor along with profile

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Declaration by Faculty

I, [Link] Kataria , Teaching Business Accounting subject in BBA -I have

incorporated all the necessary pages/ sections/ question papers mentioned in this
check list above.

135