Accounting & Finance for Bankers

MODULE B

PRESENTATION
BY
Cma Sunil Kumar Mohan

cmaskmohan@gmail.com
9839736168

5/13/2018 S K MOHAN 1
 JAIIB-Accounting & Finance for Bankers
MODULE – B
Book-Keeping

1. Definition & scope of Book-keeping

2. Basic Accountancy procedures
3. Maintenance of cash / subsidiary Books and Ledger
4. BANK RECONCILIATION
5. TRIAL BALANCE
6. CAPITAL & REVENUE EXPENDITURE
7. BILLS OF EXCHANGE
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• Accounting is the process of measuring, interpreting,
and communicating financial information to support
internal and external business decision making.
• The main objectives of accounting are
– i. to maintain accounting records.
– ii. to calculate the result of operations.
– iii. to ascertain the financial position.
– iv. to communicate the information to users.

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 Transaction and Events

• Transaction:
• Transaction is exchange of an asset and
discharge of liabilities with consideration of
monetary value.
• Events:
• While event is anything in general purpose
which occur at specific time and particular
place

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 Definition & scope of Book-keeping-1
Accounting is often called the language of business.
Book-keeping and Accounting not one and the
same –
Book-keeping means recording the business
Transactions.
Accountancy means compilation of accounts in
such a way that one is in a position to know the
state of affairs of the business.

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Definition & scope of Book-keeping-2
• Purpose:
• - To know the Profit & Loss
• - To know the Financial position & Liabilities
position
• - To interpret the Financial Position
• Objectives:
• - To keep a systematic record
• - To ascertain the results of the operations
• - To ascertain the financial position of business
• - To facilitate rational decision-making
• - To satisfy the requirements of law
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 Financial Statements:
- Manufacturing Accounting.
- Trading Account
- Profit & Loss Account
- Balance Sheet
- Funds Flow (Changes in Financial
Position)
- Cash Flow Statement

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 Main Users of the Accounting

• I. Internal users
• Owners.
• Management
• Employees and Trade unions
• II. External users
– Creditors, banks and lending institutions
– Present investors
– Potential investors .
– Government and Tax
– Regulatory agencies
– Researchers

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 Main Users of the Accounting
• Basic objective of Accountancy- to provide
information to various users.
• I. Internal users: Internal users are those individuals
or groups who are within the organisation like
owners, management, employees and trade unions.
• II. External users: External users are those
individuals or groups who are outside the
organisation like creditors, investors, banks and other
lending institutions, present and potential investors,
Government, tax authorities, regulatory agencies and
researchers

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 Users Need for Information---Internal
• Owners To know the profitability and
financial soundness of the business.
• Management To take prompt decisions to
manage the business efficiently.
• Employees and Trade unions To form
judgement about the earning capacity of the
business since their remuneration and bonus
depend on it.

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 Users Need for Information-External
• Creditors, banks and other To determine whether
the principal and lending institutions the interest
thereof will be paid in when due.
• Present investors

• Potential investors To decide whether to invest in

the business or not.
• Government and Tax To know the earnings in order
to assess authorities the tax liabilities of the
business.
• Regulatory agencies To evaluate the business
operation under the regulatory legislation.
• Researchers To use in their research work.
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 Generally Accepted Accounting Practices (GAAP

• Indian GAAP
• US GAAP
• IFRS
• Indian Accounting Standards

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 Generally Accepted Accounting Practices (GAAP
• Indian GAAP: Balance sheet, Profit and loss account and
Cash flows statement* (*only in case of listed companies).
Comparative financial statements of previous period
necessary
• US GAAP: Balance sheet, Income statement, Statement of
stockholders’ equity and statement of cash flows. Balance
sheet for two years and Income statement, Statement of
stockholders’ equity and Cash flows statement for three
years* (*two years for non-listed companies)
• IFRS: International Financial Reporting Standards
Balance sheet, Income statement, Statement of changes
in equity, cash flows statement and accounting policies
and notes. Comparative information for previous period
necessary

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1. US-GAAP is issued by which of the following ?
• American Institute of Certified Public Accountants
• Financial Accounting Standard Board
• US Securities and Exchange Commission
• Govt. Accounting Standards Board
2. State government and local government financial reporting
issues in US are addressed by which of the following:
• American Institute of Certified Public Accountants
• Financial Accounting Standard Board
• US Securities and Exchange Commission
• Govt. Accounting Standards Board
3. The _______ means pricing of goods and services within a
multidivisional organization, particularly with regard to the
cross border transactions:
– US GAAP
– Transfer pricing
– International transfer price
– Arm’s length price

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1. The unified version of cost plus method and resale price method under
transfer pricing is called:
– a comparable uncontrolled price method
– b cost plus method
– c resale price method
– d Transactional net margin method
2. The unified version of cost plus method and resale price method under
transfer pricing is called:
I. comparable uncontrolled price method
II. cost plus method
III. resale price method
IV. Transactional net margin method
3. The transfer price in the context of banking means”
– interest charged by the surplus funds branch to the deficit fund branch on
transfer of funds
– interest charged by the surplus funds branch to the deficit fund branch on
transfer of funds + or – HO commission
– interest paid by the surplus funds branch to the deficit fund branch on
transfer of funds

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 ACCOUNTING STANDARD
• Indian Accounting Standards,, abbreviated as Ind
AS are
• A set of accounting standards notified by the
Ministry off Corporate Affairs
• Converged with International Financial Reporting
Standards (IFRS)..
• These accounting standards are formulated by
Accounting Standards Board (ASB) of Institute
• of Chartered Accountants of India

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• AS 01. Disclosure of Accounting Policies
• AS 02. Valuation of Inventories
• AS 03. Cash Flow Statements
• AS 04. Contingencies and Events Occurring After
the Balance Sheet Date
• AS 05. Net Profit or Loss for the Period, Prior Period
Items and Changes in Accounting Policies
• AS 06. Depreciation Accounting
• AS 07. Construction Contracts
• AS 08. Accounting for Research and Development
(Not Applicable now)
• AS 09. Revenue Recognition
• AS 10. Accounting for Fixed Assets

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• AS 11. Accounting for the Effects of Changes in Foreign
Exchange Rates
• AS 12. Accounting for Government Grants
• AS 13. Accounting for Investments
• AS 14. Accounting for Amalgamation
• AS 15. Accounting for Retirement Benefits in the
financial Statements of Employers
• AS 16. Borrowing Costs
• AS 17. Segment Reporting
• AS 18. Related Party Disclosure
• AS 19. Leases
• AS 20. Earning Per Share

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 International Financial Reporting Standards --IFRS

• The IFRS Standards

• Two sets of IFRS standards have been issued
• IFRS
• IFRS for SMEs ( Small and Medium Enterprises)
• --released on 9th July 2009
• TOTAL NUMBER OF IFRS
• Total number of IFRS(w e f 1st January 2013)) = 65
• IFRS = 13
• IAS = 41
• IFRIC= 15
• SIC = 9

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• Accounting Standard AS-1 relates to :
– a. disclosure of accounting policies
– b. valuation of inventories
– c. segment reporting
– d. impairment of assets
– e. revenue recognition
•
• Segment Reporting is mandatory disclosure under which of the following
accounting standards:
– a. AS 1
– b. AS 12
– c. AS 17
– d. AS 22
– e. AS 28
•
• Which Accounting Standard relates to interim financial reporting:
– a. AS 1
– b. AS 12
– c. AS 17
– d. AS 22
– e. AS 25

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• Taxable income, According to Accounting Standard 22 (Income tax), is
determined in accordance with the:
– a. tax laws in general
– b. tax laws based on which income tax is payable
– c. business law under which the entity is regulated
– d. A to C all
– e b and c

• Deferred tax, according to Accounting Standard 22 is:

– a. tax liability that remains unpaid
– b. tax liability that is contingent
– c. tax liability that may arise or may not arise
– d. tax effect of timing difference
– e. none of the above
• According to AS 22, the income tax determined to be payable in respect of
taxable income for a period is called:
– a. tax expense
– b. taxable income
– c. deferred tax
– d. future tax
– e. current tax
•
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• Generally accepted accounting principles (GAAP) of US are the
accounting rules to prepare financial statements for (a) publicly traded
companies (b) private companies (c) state governments.
– a a to c all
– b a and b only
– c b and c only
– d a and c only
• The fundamental quality of financial statements includes which of the
following (a) these should be relevant (b) these should be reliable (c)
these should be comparable (d) these should be consistent:
– a a to d all
– b b and c only
– c a, c, and d only
– d b, c and d only
• US-GAAP is issued by which of the following ?
– a American Institute of Certified Public Accountants
– b Financial Accounting Standard Board
– c US Securities and Exchange Commission
– d Govt. Accounting Standards Board

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• The unified version of cost plus method and resale price
method under transfer pricing is called:
– a comparable uncontrolled price method
– b cost plus method
– c resale price method
– d Transactional net margin method
•
• The transfer price in the context of banking means”
– a interest charged by the surplus funds branch to the deficit
fund branch on transfer of funds
– b interest charged by the surplus funds branch to the deficit
fund branch on transfer of funds + or – HO commission
– c interest paid by the surplus funds branch to the deficit fund
branch on transfer of funds
– d interest and other expenses charged by the surplus funds
branch to the deficit fund branch on transfer of funds

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 Basic Accountancy procedures

At the recording stage:

Business entity concept

Money measurement concept

Objective evidence concept

Historical record concept

Cost concept

Dual aspect concept

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• Cost Concept:
• Business transactions are recorded in books at cost price.
• Fixed assets are kept at cost of purchase and not at their market price.
• Every transaction is recorded with present value and not any future value.
• Unrealized gains are ignored.
• Cost of an asset that has long but limited life is systematically reduced by
a process called depreciation. But such depreciation has no relation to
market value of asset.
• Money Measurement Concept:
• Every transaction is measured in terms of money. Viz
production/sales/wages etc all converted to money.
• Inflation or deflation not included in value of any asset.
• Business Entity Concept
• This concept separates the entity of proprietor from the business
transaction.
• Capital contributed by the owner is liability for business because business
is different from owner.
• Any money withdrawn by prop. Is drawings.
• Profit is liability and loss is an asset.
• All entries are kept from the point of view of business and not from owner.
• An enterprise is economic unit separate from owner.
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• Realization Concept
– This concept tells us when revenue is treated as realised or
earned. It is treated as realized on the date when property in goods
passes to buyer and he becomes legally liable to pay.
– No future income is considered.
– Goods sold on approval will be included in sales but on cost only.
• Going Concern Concept
– Business is a going concern and transactions are recorded
accordingly.
– If an expense is incurred and utility is consumed during the year,
then it is treated as an expense otherwise it is recorded as an asset.
– Reserves and provisions are created for any future liability.
– Deferred revenue expenditure is written off over number of years.
– Why loss is shown under assets side ?
• Dual Aspect Concept
– Every transaction has double effect.
– Accounting equation: assets= cap+ liability.

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• Accounting Period Concept
– Business will run through long period. Hence accounts of each period is
recorded.
– Results of operations can be known precisely only after business ceases to
operate and entire assets are sold and entire liabilities paid.
– But one is interested in knowing periodically operating results of business say
yearly or half yearly or quarterly.
– Hence all the expenses or income during this accounting period has to be
taken into consideration irrespective of whether they are realised in cash or
paid in cash.
• Accounting for full disclosure
– Disclosure of material facts.( material and immaterial fact is matter of
judgment)
– Contingent liability
– Market value of investments.
• Convention or Principles of Conservatism
– All possible losses to be taken into consideration and anticipated profits to be
ignored.
– Creation of provision for doubtful debts.
– Value of stock
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– Convention of consistency: method of depreciation
 Basic Accountancy procedures
At the reporting:

Going Concern concept

Accounting period concept

Matching concept

Conservatism concept

Full disclosure concept

Materiality concept

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 Main principle of Accounting

Accounting of full disclosure

Principle of Materiality

Principle of Conservatism

Principle of Consistency

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• Full Disclosure :
• This concept requires that all material and relevant facts
concerning financial performance of an enterprise must be fully
and completely disclosed in the financial statements and their
accompanying footnotes.
• Consistency :
• This concepts states that accounting policies and practices
followed by enterprises should be uniform and consistent one the
period of time so that results are composable. Comparability
results when the same accounting principles are consistently
being applied by different enterprises for the period under
comparison, or the same firm for a number of periods.
• Conservatism :
• This concept requires that business transactions should be
recorded in such a manner that profits are not overstated. All
anticipated losses should be accounted for but all unrealized gains
should be ignored
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• Materiality : This concept states that accounting should focus on
material facts. If the item is likely to influence the decision of a
reasonably prudent investor or creditor, it should be regarded as
material, and shown in the financial statements.
• Objectivity : According to this concept, accounting transactions should
be recorded in the manner so that it is free from the bias of accountants
and others.
• Systems of Accounting : There are two systems of recording business
transactions, viz. double entry system and single entry system. Under
double entry system every transaction has two-fold effects where as
single entry system is known as incomplete records.
• Basis of Accounting : The two broad approach of accounting are cash
basis and accrual basis. Under cash basis transactions are recorded only
when cash are received or paid. Whereas under accrual basis, revenues
or costs are recognises when they occur rather than when they are paid.
• Accounting Standards : Accounting standards are written statements of
uniform accounting rules and guidelines in practice for preparing the
uniform and consistent financial statements. These standards cannot
over ride the provisions of applicable laws, customs, usages and
business environment in the country.
•
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 Fill in the Blanks
• 1. Stock in trade are to be recorded at cost or market price
whichever is less is based on prudence, principle.
• 2. The assets are recorded in books of accounts in the cost
of acquisition is based on historical cost, concept.
• 3. The benefits to be derived from the accounting
information should exceed its cost is based on cost benefit
principle.
• 4. Transactions between owner and business are recorded
separately due to business entity, assumption.
• 5. Business concern must prepare financial statements at
least once in a year is based on accounting period,
assumption.
• 6. Consistency principle requires that the same accounting
methods should be followed from one accounting period
to the next.
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 Choose the correct answer
1. As per the business entity assumption, the business is
different from the
• a) Owners b) banker c) government
2. Going concern assumption tell us the life of the business
is
• a) very short b) very long c) none
3. Cost incurred should be matched with the revenues of
the particular period is based on
• a) Matching concept b) historical cost concept
• c) full disclosure concept
4. As per dual aspect concept, every business transaction
has
• a) three aspects b) one aspect c) two aspects

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 SYSTEM OF
ACCOUNTING

- Recording - Classifying - Summarizing

 Accounts

• An accounts is defined as a summarized record

of transactions related to a person or a thing
e.g. when the business deals with customers
and suppliers, each of the customers and
supplier will be a separate account
• Three types of Accounts:
• Personal Accounts
• Real Accounts
• Nominal Accounts

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 Debit and Credit
• In double entry book-keeping, debits and credits (abbreviated Dr
and Cr, respectively) are entries made in account ledgers to record
changes in value due to business transactions.
• The source account for the transaction is credited (an entry is
made on the right side of the account's ledger) and the
destination account is debited (an entry is made on the left).
• Each transaction's debit entries must equal its credit entries.
• The difference between the total debits and total credits in a
single account is the account's balance.
• If debits exceed credits, the account has a debit balance;
• if credits exceed debits, the account has a credit balance.

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 Voucher

• A voucher is a document that shows goods have

bought or services have been rendered,
authorizes payment, and indicates the ledger
account(s) in which these transactions have to
be recorded
• Types of Voucher
– Receipt Voucher
– Payment Voucher
– Non-Cash or Transfer Voucher
– Supporting Voucher
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Two systems of keeping records
- Single entry system
- Double entry system
Journal / Subsidiary Books and
Ledger

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 The Golden Rule
Personal Accounts

Receiver or who owes to business is debit

Giver or to whom business owes is credit

Real Accounts

What comes into business is debit

What goes out of business is credit

Nominal Accounts
All expenses or losses are debit
5/13/2018 All incomeSKor gains are credit
MOHAN 40
 Types of Accounting

Accounting

Accrual
Cash Basis
Basis
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 Liability and Assets
• Net worth-Paid up • Fixed assets land building ,Plant
capital General reserve and machinery , Capital work in
other reserve surplus progress
from P&L account • Miscellaneous assets
• Deferred liabilities – Investment is associates , deposit
Term Loan Un secured with Government Securities ,Non
Loan , DPG consumable stores & spares ,
Slow moving current assets
• Current assets cash & Bank
• Current Liabilities CC balance , RM , Packing material ,
/Overdraft creditor for WIP ,Finished Goods debtors ,
purchases Creditor for Prepaid expenses
expenses Provision for
taxation provision for • Intangible assets Deferred
dividend Advance revenue Expenses , Prem ,
received from supplier preoperative expenses, Promoters
etc current account , debit P&L loss
only,, goodwill, Patent , Royalty ,
R&D expenses
May 13, 2018 42
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• 1.The amount which the proprietor has invested in the business is __

• 2. Book-keeping is an art of recording ___________ in the book of

accounts.
• 3. ___________ is a written document in support of a transaction.
• 4. Accounting begins where _______ ends.
• 5. Liabilities refer to the ___________ obligations of a business.
• 6. Owner of the business is called __________.
• 7. An account is a _________ of relevant business transactions at one
place relating to a person, assets, expense or revenue named in the
heading.
• 8. Receipt is an acknowledgement for __________.
• 9. Income is the difference between revenue and ________.

• Answers: 1. capital; 2. business transactions; 3. voucher; 4.bookkeeping;

[

• 5. financial; 6. Proprietor; 7. summary; 8. Cash received; 9. expense

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• As per the business entity assumption, the business is
different from the
a) owners b) banker c) government
• 2. Going concern assumption tell us the life of the business is
a) very short b) very long c) none
• 3. Cost incurred should be matched with the revenues of the
particular period is based on
a) matching concept b) historical cost concept
c) full disclosure concept

• 4. As per dual aspect concept, every business transaction has

a) three aspects b) one aspect c) two aspects

[Answers : 1 (a), 2. (b), 3. (a), 4. (c)]

•
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• 1. The receiving aspect in a transaction is called as a) debit aspect b)
credit aspect c) neither of the two
2. The giving aspect in a transaction is called as a) debit aspect b) credit
aspect c) neither of the two
3. Murali account is an example for a) personal A/c b) real A/c c)
nominal A/c
4. Capital account is classified under a) personal A/c b) real A/c c)
nominal A/c
5. Goodwill is an example of a) tangible real A/c b) intangible real A/c
c) nominal A/c
6. Commission received is an example of a) real A/c b) personal A/c c)
nominal A/c
7. Outstanding rent A/c is an example for a) nominal account b)
personal account c) representative personal account
8. Nominal Account is classified under a) personal A/c b) impersonal
A/c c) neither of the two
9. Drawings account is classified under a) real A/c. b) personal
A/c. c) nominal A/c.

[Answers : 1. (a), 2. (b), 3. (a), 4. (a), 5. (b), 6. (c), 7. (c),8.(b), 9. (b)].

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• Classify the following items into real, personal and
nominal accounts
• a. Capital f. State Bank of India
• b. Purchases g. Electricity Charges
• c. Goodwill h. Dividend
• d. Copyright i. Ramesh
• e. Latha j. Outstanding rent

• [Answers : Personal account – (a), (e), (f), (i), (j)

• Real account – (b), (c), (d)
• Nominal account – (g), (h)]

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 Book of Prime Entry/ Journal

• A journal is often referred to as Book of Prime

Entry or the book of original entry.

• In this book transactions are recorded in their

chronological order.

• The process of recording transaction in a journal

is called as „Journalisation‟.

• The entry made in this book is called „journal

Entry‟.
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 Steps in Journalising
• Step 1 Determine the two accounts which are involved in the
transaction.
• Step 2 Classify the above two accounts under Personal, Real or
Nominal.
• Step 3 Find out the rules of debit and credit for the above two
accounts.
• Step 4 Identify which account is to be debited and which
account is to be credited.
• Step 5 Record the date of transaction in the date column. The
year and month is written once, till they change. The sequence
of the dates and months should be strictly maintained.
• Step 6 Enter the name of the account to be debited in the
particulars column very close to the left hand side of the
particulars column followed by the abbreviation Dr. in the same
line. Against this, the amount to be debited is written in the
debit amount column in the same line.
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 Steps in Journalising
• Step 7 Write the name of the account to be
credited in the second line starts with the word ‘To’
a few space away from the margin in the
particulars column. Against this, the amount to be
credited is written in the credit amount column in
the same line.
• Step 8 Write the narration 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

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• The rules of debit and credit in relation to some accounts
are stated as under:
• For Capital Account:
– Debit means decrease
– Credit means increase
• For any Liability Account:
– Debit means decrease
– Credit means increase
• For any Asset Account:
– Debit means increase
– Credit means decrease
• For any Expense Account:
– Debit means increase
– Credit means decrease
• For any Revenue Account:
– Debit means decrease
– Credit means increase
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• Mr. Vikas and Mrs. Vaibhavi who are husband and wife started
offering consultancy services, by investing cash of Rs 5,00,000
and Rs. 2,50,000 respectively.
– Debit Cash 7,50,000
• Credit Vikas’s Capital 5,00,000
• Credit Vaibhavi’s capital 2,50,000

• Buy office furniture of Rs. 25,000 for cash.

• Debit Furniture 25,000
• Credit Cash 25,000
• They open a current account with Bank by depositing Rs
1,00,000
• Debit Bank 1,00,000
• Credit Cash 1,00,000

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• They pay office rent of Rs.15,000 for the month by cheque drawn
on their Bank to M/s Realtors Properties.
• Debit Rent 15,000
• Credit Bank 15,000
• They buy a motor car worth Rs. 4,50,000 from Millennium Motors
by making a down payment of Rs. 50,000 by cheque drawn on
Bank and the balance by taking a loan from HDFC Bank
» Debit Motor Car Rs. 4,50,000
• Credit Bank 50,000
• Credit Loan from HDFC Bank 4,00,000
• They have employed a receptionist on a salary of Rs. 5,000
per month and one officer at a salary Rs. 10,000 per month.
The salary for the current month is payable to them.
» Debit Salary ` 15,000
• Credit Salary payable ` 15,000
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• Journalize the following transactions in the books of Mr. Roy
2013 April
• 1 He started business with a capital of – Plant Rs. 10,000, Bank
Rs 8,000, Stock Rs 12,000
• 2 Bought furniture for resale Rs 5,000
• Bought furniture for Office decoration Rs 3,000
• 3 Paid rent out of personal cash for Rs 2,000
• 8 Sold furniture out of those for resale Rs 6,000
• 12 Paid Salary to Mr. X for Rs 1,200
• 15 Purchased goods from Mr. Mukherjee for cash Rs 3,000
• 18 Sold goods to Mr. Sen on credit for Rs 8,000
• 20 Mr. Sen returned goods valued Rs 1,000
• 22 Received cash from Mr. Sen of Rs 6,500 in full settlement
• 28 Bought goods from Mr. Bose on credit for Rs 5,000
• 30 Returned goods to Mr. Bose of Rs 500 and paid to Mr. Bose Rs
4,000 in full settlement
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 Example 1
• Journalise the following transactions in the books
of Amar and post them in the Ledger:-
• 2004 March
• 1 Bought goods for cash Rs. 25,000
• 2 Sold goods for cash Rs. 50,000
• 3 Bought goods for credit from Gopi Rs.19,000
• 5 Sold goods on credit to Robert Rs.8,000
• 7 Received from Robert Rs. 6,000
• 9 Paid to Gopi Rs.5,000
• 20 Bought furniture for cash Rs. 7,000
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 Balancing of accounts

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 Distinction between Journal and Ledger :

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 What is Ledger
• A ledger contains summarized financial information that is
classified by assignment to a specific account number using a
Chart of Accounts.

• A ledger can be a physical book or also refer to software or

spreadsheets where the financial information is recorded.

• A General Ledger contains a summary of all the information

recorded in subsidiary ledgers, which are ledgers that break
down and show more information according to classifications.

• Financial information for ledgers is taken from the company's

journal.

• Also Known as Book of Final Entry.

5/13/2018 SK MOHAN 67
 Kinds of Subsidiary Books
• The number of subsidiary books may vary according to the
Requirements of each business. The following are the special purpose
Subsidiary books.
• i. Purchases Book records only credit purchases of goods by the trader.
• ii. Sales Book is meant for entering only credit sales of goods by the
trader.
• iii. Purchases Return Book records the goods returned by the trader to
suppliers.
• iv. Sales Return Book deals with goods returned (out of previous sales)
by the customers.
• v. Bills Receivable Book records the receipts of bills (Bills Receivable).
• vi. Bills Payable Book records the issue of bills (Bills Payable).
• vii.Cash Book is used for recording only cash transactions i.e., receipts
and payments of cash.
• viii. Journal Proper is the journal which records the entries which
cannot be entered in any of the above listed subsidiary

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5/13/2018 SK MOHAN 69
 Illustration 1

• : From the following transactions of Ram for July,

2003 prepare the Purchases Book and ledger
accounts connected with this book. 2003
• July 5 Purchased on credit from Kannan & Co.
– 50 Iron boxes @ Rs. 500
– 10 Grinders @ Rs. 3,000
• 6 Purchased for cash from Siva & Bros.
• 25 Fans @ Rs. 1,250
• 10 Purchased from Balan & Sons on credit
• 20 Grinders @ Rs. 2,500
• 10 Mixie @ Rs. 3,000
• 20 Purchased, on credit, one Computer from Kumar
for Rs. 35,000.

5/13/2018 S K MOHAN 70
5/13/2018 S K MOHAN 71
 Illustration 2
• From the transactions given below prepare the Sales Book
of Ram for July 2003.
• 2003
• July 5 Sold on credit to S.S. Traders
• 10 Chairs @ Rs. 250 Less 10%
• 10 Tables @ Rs. 850 Discount
• 8 Sold to Raja for cash
• 15 Chairs @ Rs. 250
• 20 Sold to Mohan & Co.
• 5 Almirah @ Rs. 2,200
• 10 Tables @ Rs. 850
• 23 Sold on credit to Narayanan old computer for Rs. 5,000
• 28 Sold to Kumaran for cash 15 Chairs @ Rs. 250
5/13/2018 S K MOHAN 72
5/13/2018 S K MOHAN 73
 Types of Cash Book

Cash Book

Triple Column Single Column

Cash Book Cash Book

Double Column
Cash Book

5/13/2018 SK MOHAN 74
 Kinds of Cash Book

• Single column cash book

• Double column cash book
– .With cash and bank/ discount columns

• Triple column cash book

• with discount, cash and bank columns
• Petty cashbook

5/13/2018 S K MOHAN 75
5/13/2018 S K MOHAN 76
 Illustration 1
• Enter the following transactions in a single column cash
book of Mr.Kumaran. 2004
• Jan 1 Started business with cash ... Rs. 1,000
• 3 Purchased goods for cash ... Rs. 500
• 4 Sold goods ... Rs. 1,700
• 5 Cash received from Siva ... Rs. 200
• 12 Paid Balan ... Rs. 150
• 14 Bought furniture ... Rs. 200
• 15 Purchased goods from Kala on credit ... Rs. 2,000
• 20 Paid electric charges ... Rs. 225
• 24 Paid salaries ... Rs. 250
• 28 Received commission ... Rs. 75
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 Transactions in the Books of Abhishek

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 Petty cash book

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 Sub-Division of Ledger

Sub-Division of
Ledger

LEDGER

Personal Ledger Impersonal Ledger

Debtors' Creditors' General

Cash Book
Ledger Ledger Ledger

Nominal Private
Ledger Ledger
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• Personal Ledger: The ledger where the details
of all transactions about the persons who are
related to the accounting unit, are recorded, is
called the Personal Ledger.
• Impersonal Ledger: The Ledger where details of
all transactions about assets, incomes &
expenses etc. are recorded, is called Impersonal
Ledger.

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• (a) Debtors’ Ledger: The ledger where the
details of transactions about the persons to
whom goods are sold, cash is received, etc.
are recorded, is called Debtors’ Ledger.
• (b) Creditors’ Ledger: The ledger where the
details of transactions about the persons
from whom are purchase goods on credit, pay
to them etc. are recorded, is called Creditors’
Ledger

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• Impersonal Ledger may, again be divided into
two group, viz,
• (a) Cash Book; The Book where all cash &
bank transactions are recorded, is called Cash
Book.
• (b) General Ledger. General Ledger: The
ledger where all transactions relating to real
accounts, nominal accounts, details of
Debtors’ Ledger and Creditors’ Ledger are
recorded, is called General Ledger

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• General Ledger may, again, be divided into two
groups. Viz, Nominal Ledger; & Private Ledger.
• (a) Nominal Ledger: The ledger where all
transactions relating to incomes and expenses
are recorded, is called Nominal Ledger.
• (b) Private Ledger: The Ledger where all
transactions relating to assets and liabilities are
recorded, is called Private Ledger.

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 Advantages of sub-division of Ledger
• Easy to Divide work : As a result of sub-division, the division of
work is possible and records can be maintained efficiently by
the concerned employee.
• Easy to handle : As a result of sub-division, the size and
volume of ledger is reduced.
• Easy to collect information: From the different classes of
Ledger a particular type of transactions can easily be found
out.
• Minimizations of mistakes : As a result of sub-division chances
of mistakes are minimized.
• Easy to compute : As a result of sub-division, the accounting
work may be computed quickly which is very helpful to the
management.
• Fixation of responsibility: Due to sub-division, allotment of
different types of work to different employees is done for
which concerned employee will be responsible.
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1. Sub division of the journals into various books for
recording transactions of similar nature are called
________.

2. The total of the ________ book is posted to the debit of

purchases account.

3. The person who prepares a bill is called the ________.

4. Days of grace are ________ in number.

• [Answers : 1. subsidiary books, 2. purchases, 3. drawer, 4.

three]

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1. Discount allowed column appears in _______ side
of the cash book.
2. In the triple column cash book, when a cheque is
received the amount is entered in the _______
column.
3. Discount received column appears in _____ side
of the cash book.
4. A cheque received and paid into the bank on the
same day is recorded in the ______ column of the
three column cash book.
5. When a cheque received from a customer is
dishonoured, his account is ________.
6. Cash Book is one of the _______ books.
• [Answers : 1. debit, 2. cash, 3. credit, 4. bank, 5. debited,6. subsidiary]
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 Fill in the blanks ( petty cash )
• 1. The book that records all small payments is called
__________.
• 2. The person who maintains book is known as
__________.
• 3. Analytical petty cash book is just like the
__________.
• 4. The periodic total of each column in the analytical
petty cash book is posted to the concerned
__________ accounts.
• 5. The petty cashier generally works on __________
system.
• [Answers: 1. Petty cash book, 2. Petty cashier, 3.
Cash book, 4. Nominal, 5. Imprest]
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 Bank Reconciliation Statement
• Features
• It is a statement.
• It is not a part of the process of Accounts.
• It is prepared to reconcile the causes of difference
between the Bank Balance as per Cash Book and
the Bank balance as per Pass Book.
• It can be prepared at any time during the financial
year, as and when it is required.
• Reasons for Differences
• (A) Items appear in Cash Book but not appearing in
Pass Book.
• (B) Items appear in Pass Book but not appearing in
Cash Book.
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 Reasons for Differences

Items appear in Cash Book but not Items appear in Pass Book but not
appearing in Pass Book appearing in Cash Book

Cheque issued by organization Bank Interest, Bank Charges etc

not debited by Bank
Cheque deposited but not credited by Direct deposits in Bank account
Bank

Standing Instruction

Bills for Collection

Errors- The Bank may by mistake miss out Errors- The records may be missed out by
entering the debit or credit which results in the book- keeper of the Business Entity
the difference.

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 BANK RECONCILIATION STATEMENT-1

• Meaning

• BANK RECONCILIATION( B. R. ) IS BASED ON THE PRINCIPLE OF

DOUBLE ENTRY.

• DEBIT THE RECEIVER AND CREDIT THE GIVER

• B. R. SHOWS CAUSES OF DIFFERENCES BETWEEN CASH BOOK

AND PASS BOOK BALANCE

• DEBIT BALANCE AS PER CASH BOOK IS CREDIT BALANCE AS

PER PASS BOOK = POSITIVE BALANCE

• CREDIT BALANCE IN CASH BOOK IS DEBIT BALANCE IN PASS

BOOK = NEGATIVE BALANCE/OVERDRAFT
 Bank Reconciliation statement-2
• Causes of differences
» Cheque issued but not presented for payment
» Cheque deposited but not yet realized
» Bank charges
» Interest on saving bank
» Int. on overdraft
» Amount directly collected by bank
» Amount directly paid by bank on Std.
Instructions
» Dishonor of a Cheque
» Direct payment into bank by customer
» Errors
» Under casting and over casting of books
 Preparation of Bank Reconciliation
• We may have four different situations while preparing the
bank reconciliation statement. These are :
1. When debit balance (favorable balance) as per cash
book is given and the balance as per passbook is to be
ascertained.
2. When credit balance (favorable balance) as per
passbook is given and the balance as per cash book is to
be ascertained.
3. When credit balance as per cash book (unfavorable
balance/overdraft balance) is given and the balance as
per passbook is to ascertained.
4. When debit balance as per passbook (unfavorable
balance/overdraft balance) is given and the cash book
balance as per is to ascertained.
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 BANK RECONCILIATION STATEMENT

ADVANTAGES OF BANK RECONCILIATION

. VERIFICATION OF ACCURACY OF ENTRIES

. TIMELY CORRECTIVE ACTION

. PREVENTS FRAUDS

. CONTROL TOOL FOR MANAGEMENT

5/13/2018 S K MOHAN 109
 Difference between Cash Book and Pass Book-1

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 Difference between Cash Book and Pass Book-2

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 Procedure for preparing bank Reconciliation statement

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 Format

5/13/2018 S K MOHAN 117

 EXAMPLES
• M/s Mohan and company.was maintaining account with
XYZ Bank Ltd. On 31st December,2012, Bank column
of cash book of company showed a debit balance of Rs.
26000.
Cheques deposited into the bank but not credited before
31st December,2012 amounted to Rs.4000
Bank charges of Rs. 500 were debited by the bank but no
entry was made by the accountant of the company.
From the above particulars, find out the balance as per XYZ Bank’s
books.
• Rs.30500
• Rs.25500
• Rs.21500
• Rs.22500
 EXAMPLES
When overdraft as per cash book and a Cheque of Rs.1000
directly deposited in the bank, but not recorded in cash
book----
a) Add Rs.1000 in CB
b) Deduct Rs.1000 in CB
c) Add Rs.2000 in cash book
d) Deduct Rs.2000 in CB
Under casting of the credit side of Cash Book has the same effect
as over casting of the–
a) Debit side of the pass book.
b) Credit side of the pass book.
c) There is no relevance between the two
• If a trader enjoys an overdraft facility , then
a) His passbook will show debit balance.
b) His cash book will show credit balance .
c) Both a) & b).
d) Neither a) nor b).

• Credit balance in a passbook indicates

a) excess of deposits over withdrawals.
b) excess of withdrawals over deposits.
c) debit balance in cash book.
d) b) & c).
e) a) & c).
 Choose the correct answer

1. Bank Reconciliation statement is prepared by the

– a) bank b) creditor of a business c) customer of a bank
2. Debit balance in the Cash Book means
– a) overdraft as per Pass Book b) credit balance as per Pass
Book c) overdraft as per Cash Book
3 When balance as per Cash Book is the starting point,
to ascertain balance as per pass book interest
allowed by Bank is
– a) subtracted b) added c) not adjusted
4. When balance as per Cash Book is the starting point,
to ascertain the balance as per pass book interest
charged by Bank is:
– a) added b) subtracted c) not adjusted

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5. When the balance as per Cash Book is the starting point to
ascertain balance as per pass book, direct deposits by customers
are:
– a) added b) subtracted c) not adjusted
6. When the balance as per Cash Book is the starting point to
ascertain balance as per pass book, direct payment by bank are:
– a) added b) subtracted c) not adjusted

7.A bank pass book is a copy of

– a) the cash column of a customer’s cash book.
– b) the bank column of a customer’s cash book.
– c) the customer’s account in the bank’s ledger.

8. The bank statement shows an overdrawn balance of Rs.2,000. A

cheque for Rs.500 drawn in favour of a creditor has not yet been
presented for payment. When the creditor presents the cheque
for payment, the bank balance will be
– a) Rs. 1,500 b) Rs. 2,500 (overdrawn) c) Rs.2,500

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 Trial Balance
• After the transactions are posted to various
ledger accounts and they are balanced, the
next stage is to draw up the list of all
balances on a specific date. It ensures that
the total debit equal total credit balances.
• Why does this happen?

• As per the double entry system every debit

has equal credit.

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 Format of Trial Balance

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 Trial Balance(TB)- Rectification entries
• Trial balance – meaning
• Types- gross TB, Net TB
• Disagreement of TB
• Classification of errors
• Clerical errors
– Errors of omission
– Errors of commission
» Posting of correct amount at wrong side
» Posting wrong amount at wrong side
» Totaling error in subsidiary book
» Mistake while balancing of ledger
– Compensating errors
• Errors of principles
• An account has a debit balance when its debit total exceeds its
credit total.
• An account has a credit balance when its credit total exceeds its
debit total.
• Asset, expenses and drawings accounts have debit balances.
• Liability, capital and revenue accounts have credit balances.
• A Trial Balance is a list of debit and credit balances extracted from
the accounts in the ledger at a particular date.
• The Trial Balance is prepared for the purpose of checking the
arithmetical accuracy of the entries made in the ledger.
• The total debit balances will equal the total credit balances in
the Trial Balance if the double entry
• Principles of recording have been strictly adhered to. Errors that
effect the agreement of the Trial Balance totals are wrong
calculation of balances, omission of either a debit or credit entry
of a transaction, entry on the wrong side of an account, and errors
in amount.

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 Purpose of a Trial Balance

• To check the arithmetical accuracy of the

recorded transactions.
• To ascertain the balance of any ledger Account.
• To serve as an evidence of fact that the double
entry has been completed in respect of every
transaction.
• To facilitate the preparation of final accounts
promptly.

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 Feature’s of a Trial Balance
• It is a list of debit and credit balances which are extracted
from various ledger accounts.
• It is a statement of debit and credit balances.
• The purpose is to establish arithmetical accuracy of the
transactions recorded in the Books of Accounts.
• It does not prove arithmetical accuracy which can be
determined by audit.
• It is not an account. It is only a statement of account.
• It is not a part of the final statements.
• It is usually prepared at the end of the accounting year
but it can also be prepared anytime as and when required
like weekly, monthly, quarterly or half-yearly.
• It is a link between books of accounts and the Profit and
Loss Account and Balance sheet.
5/13/2018 SK MOHAN 128
 Preparation of Trial Balance:

• It may be prepared on a loose sheet of paper.

• The ledger accounts are balanced at first.
• They will have either “debit-balance” or
“credit balance” or “nil-balance”.
• The accounts having debit-balance is written
on the debit column and those having credit-
balance are written on the credit column.
• The sum total of both the balances must be
equal, for “Every debit has its corresponding
and equal credit”
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• Method of Preparation
• 1. Total Method or Gross Trial Balance.
• 2. Balance Method or Net Trial Balance.
• 3. Compound Method

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 Sundry Debtors and Sundry Creditors

• In the ledger there are many personal accounts,

some of them may show debit balances, some
others may show credit balances.
• If all the names are to be written in the trial balance
it will be unduly long.
• Therefore, a list of names with the debit balances is
prepared. This list is known as ‘ Sundry Debtors’
(Sundry means ‘many’).
• Similarly, a list of names with the credit balances is
prepared. This list is known as ‘ Sundry Creditors’.
•

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 TRIAL BALANCE

TYPICAL TRIAL BALANCE

NAME DEBIT CREDIT
• CAPITAL X
• DRAWINGS X
• PURCHASES X
• SALES X
• EXPENSES X
• DEBTORS(CUSTOMRES) X
• CREDITORS(SUPPLIERS) X
• CASH X
• SALES RETURN X
• From the following ledger account balances, prepare a
Trial Balance of Mr. Sen for the year ended 31st
March,2013.
• Capital ` 80,000 ; Sales `10,00,000; Adjusted Purchase `
8,00,000; Current A/c(cr) ` 10,000; Petty Cash
• ` 10,000; Sales Ledger Balance ` 1,20,000; Purchase
Ledger Balance ` 60,000; Salaries `24,000; Carriage
• Inwards ` 4,000; Carriage Outward ` 6,000; Discount
Allowed ` 10,000; Building ` 80,000; Outstanding
• Expenses ` 10,000; Prepaid Insurance ` 2,000 ;
Depreciation ` 4,000 ; Cash at Bank ` 80,000 ; Loan
• A/c (cr) ` 66,000; Profit & Loss A/c(cr) ` 20,000; Bad
Debts Recovered ` 2,000 ; Stock at 31.03.2013`
1,20,000; Interest Received ` 10,000; Accrued Interest `
4,000; Investment ` 20,000; Provision for Bad
• Debts (01.04.2012) ` 6,000 ; General Reserve ` 20,000

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 Rectification of Errors
• These entries are passed when errors or mistakes are
discovered in accounting records. These entries are
also known as correction Entries. These entries are
also passed in Journal Proper.

• Before Preparing Trial Balance

– Double Sided Errors
– Single Sided Errors
• After Preparing Trial Balance
– Double Sided Errors
– Single Sided Errors
• After Preparing Final Accounts
– Double Sided Errors
– Single Sided Errors
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 Stages of Rectification
Rectification before the preparation errors are located before
of trial balance transferring the difference in the
trial balance to Suspense Account.
Rectification after the preparation difference in the trial balance would
of trial balance have been transferred to Suspense
Account
Stage at which the errors are . Manner in which the errors are
rectified rectified
When the errors are rectified before By debiting or crediting the
transferring the difference in the respective account with the required
trial balance to the suspense amount by giving an explanatory
account note in the particulars column

ii. When the errors are rectified By writing a journal entry with the
after transferring the difference in respective account or accounts
the trial balance to the suspense affected by the errors and suspense
account
5/13/2018 account
S K MOHAN 145
 -- CLERICAL ERROR
• TYPICAL ERRORS:
• :
• A) SALARY PAID 1000/- BUT POSTED AS 10, 000/-.
• RECTIFICATION: CREDIT SALARY WITH 9000/-.

• B) SALARY PAID 1000/- BUT POSTED IN RENT A/C.

• RECTIFICATION: DEBIT SALARY AND CREDIT RENT WITH
1000/-.

• C) GOODS WORTH 100/- SOLD TO VIJAY WRONGLY

RECORDED IN PURCHASE REGISTER.
• RECTIFICATION: CREDIT SALES AND PURCHASE A/Cs
WITH 100/- EACH AND DEBIT VIJAY WITH 200/-.
 Basic Principles for Rectification of Errors

• All errors, whatever may be their kind or nature, result in one of the
following four positions in one or more accounts.
•
• Excess debit in one or more accounts: This must be rectified by
‘crediting’ the excess amount to the respective account or accounts.
•
• Short debit in one or more accounts: This must be rectified by a ‘
further debit’ to the respective account or accounts involved.
•
• Excess credit in one or more accounts: This can be rectified by
‘debiting’ the respective account with the excess amount involved.
•
• Short credit in one or more accounts: This can be rectified by a ‘
further credit’ to the respective account or accounts involved.

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Keeping in view the nature of errors, all the errors committed in the
accounting process can be classified into two

5/13/2018 SK MOHAN 148

• Errors of Commission
• This error arises due to wrong recording, wrong
posting, wrong casting, wrong balancing, wrong
carrying forward etc. Errors of commission may be
classified as follows:
– Error of Recording:
– This error arises when a transaction is wrongly recorded
in the books of original entry. For example, Goods of
Rs.5,000, purchased on credit from Shyam , is recorded in
the book for Rs.5,500. This error does not affect the trial
balance.
– Error of Casting (Totaling) :
– This error arises when a mistake is committed while
totaling the subsidiary book. For example, instead of
Rs.12,000 it may be wrongly totaled as Rs.13,000. This is
called overcastting. If it is wrongly totaled as Rs.11,000, it is
called under casting.
5/13/2018 SK MOHAN 149
• Error of Posting: This error arises when information recorded
in the books of original entry are wrongly entered in the ledger.
Error of posting may be
• Right amount in the right side of wrong account.
• Right amount in the wrong side of correct account
• Wrong amount in the right side of correct account
• Wrong amount in the wrong side of correct account
• Wrong amount in the wrong side of wrong account
• Wrong amount in the right side of wrong account, etc.
•

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 Steps to Locate the Errors

• Step 1 Check the total of the trial balance and

ascertain the exact amount of difference in
the trial balance.
•
• Step 2 The difference is halved to find out
whether there is any balance of the same
amount in the trial balance. It is because, such
a balance might have been recorded on the
wrong side of the trial balance and hence, the
difference is double the amount.

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 Errors disclosed and not disclosed by trial balance

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• Errors that do not affect the agreement of the
Trial Balance
– totals are complete omission of entries of a
transaction,
– errors of commission,
– errors in principle,
– compensating errors, and
– errors in original entry.
• Asset and liability accounts are balanced and
their balances brought down to the next
accounting period.
• Personal accounts record transactions with
persons who have dealings with the business, e.g.
debtors and creditors accounts.

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• Illustration 1:
• Rectify the following:
• (i) An entry for the goods sold to Madhav for ` 1,020
was posted to his account as ` 1,200.
• (ii) ` 1,000 being the monthly total of discount allowed
to customers was credited to discount account in
• the ledger.
• (iii) ` 2,750 received from Sohan was credited to Mohan
as ` 3,750.
• (iv) Total of Purchases Book was ` 10,000 short.
• (v) Sales of old furniture for ` 1,750 to Old Wares Stores
was recorded in sales book. Book value of the
• furniture was ` 2,500.

5/13/2018 SK MOHAN 155

• Solution:
• (i) Credit Madhav with Rs. 180 saying “By Excess debit
for sales on ..... Rs 180".
• (ii) Debit the Discount Account with Rs 2,000 saying “To
Rectification of wrong credit of Rs 1,000 for discount
• allowed.... Rs 2,000.
• (iii) Credit Sohan with Rs 2,750 and debit Mohan with Rs
3,750.
• (iv) Debit Purchases Account with Rs 10,000 saying “To
Short total of Purchases Book..... Rs 10,000".
• (v) Debit Sales Account with Rs 1,750 and Loss on Sale of
Furniture Account with Rs 750 and credit
• Furniture Account with Rs 2,500.
5/13/2018 SK MOHAN 156
• Illustration 2:
• Pass journal entries necessary to rectify the following errors:
• 1. An amount of ` 2,000 withdrawn by the proprietor for his personal
use has been debited to Trade Expenses Account.
• 2. A purchase of goods from Nathan amounting to ` 3,000 has been
wrongly entered in the Sales Book.
• 3. A credit sale of ` 1,000 to Santhanam has been wrongly passed
through the Purchases Book.
• 4. ` 1,500 received from Malhotra have been credited to Mehrotra.
• 5. ` 3,750 paid on account of salary to the cashier Dhawan stands
debited to his personal account.
• 6. A contractor’s bill for extension of premises amounting to ` 2,75,000
has been debited to Building Repairs Account.
• 7. On 25th March, goods of the value of ` 5,000 were returned by
Akash Deep and were taken into stock but the returns were entered in
the books under date 3rd April, i.e.; after the expiration of the financial
year on 31st March.
• 8. A bill of ` 2,000 for old office furniture sold to Sethi was entered in
the Sales Day Book.
• 9. An amount of ` 800 received on account of interest was credited to
Commission Account.
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 Suspense Account
• When it is difficult to locate the mistakes before
preparing the final accounts, the difference in the
trial balance is transferred to newly opened
imaginary and temporary account called ‘Suspense
Account’. Suspense account is prepared to avoid the
delay in the preparation of final accounts

5/13/2018 SK MOHAN 164

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5/13/2018 SK MOHAN 166
Illustration 4
Rectify the following errors:
Purchases book overcast by Rs.1,300 Sales book undercast by Rs.2,500. Purchases return
book overcast by Rs.750.Sales return book undercast by Rs.600

5/13/2018 SK MOHAN 167

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• Suspense a/c is not used in which of the following
cases.
• before trial balance.
• after trial balance.
– before final accounts.
– none of the above.
•
• Which of the following is true
• Trial balance ensures arithmetical accuracy.
• Trial balance errors are not located then the difference is
sent to suspense a/c.
– Trial balance is base for final accounts.
• All of the above
 Rectification of Errors-Examples
(1) Rs. 5000 paid as wages for installing the machinery should be
debited to-----
• Wages A/c
• Machinery a/c
• Capital A/c
• None of the above
(2) Sales to Navin of Rs.1000 is debited to Ravin A/c. this will be
rectified by-----
• Debiting Navin a/c and Crediting Ravin A/c
• Debiting both Accounts
• Debiting Ravin a/c and Crediting Navin A/c
• Debiting Navin A/c and crediting Sales A/C
 Rectification of Errors-Examples
(1) Rs. 5000 paid as wages for installing the machinery should be
debited to-----
• Wages A/c
• Machinery a/c
• Capital A/c
• None of the above
(2) Sales to Navin of Rs.1000 is debited to Ravin A/c. this will be
rectified by-----
• Debiting Navin a/c and Crediting Ravin A/c
• Debiting both Accounts
• Debiting Ravin a/c and Crediting Navin A/c
• Debiting Navin A/c and crediting Sales A/C
 Rectification of Errors-Examples

• Credit sale of Rs.5000 to Suresh is posted to his credit,

then rectification is
i. Credit Suresh to the extent of Rs.10,000
i. Credit Suresh to the extent of Rs.5,000
ii. Debit Suresh to the extent of Rs.10,000
iii. Debit Suresh to the extent of Rs.5000
• Freight expenses for carrying New Machinery is carried to
Traveling Exp. a/c. Choose the correct rectification entry
i. Debit machinery a/c and credit Traveling Exp a/c.
ii. Credit machinery a/c and debit Freight Exp a/c
iii. Credit profit and loss account and debit Freight Exp a/c.
iv. Debit profit and loss a/c( P&L a/c) and credit Traveling Exp a/c.
• Rectify the following errors:
• i. Purchases book overcast by Rs.1,300
• ii. Sales book undercast by Rs.2,500.
• iii. Purchases return book overcast by Rs.750.
• iv. Sales return book undercast by Rs.600.
• To rectify the errors:
• i. Credit – Purchases A/c with Rs.1,300.
• ii. Credit – Sales A/c with Rs.2,500.
• iii. Debit – Purchases return A/c with Rs.750.
• iv. Debit – Sales return A/c with Rs.600.

5/13/2018 S K MOHAN 179

5/13/2018 S K MOHAN 180
• Rectify the following errors:
• i. Purchases book is carried forward Rs.850 less.
• ii. Sales book total is carried forward Rs.2,500 more.
• iii. A total of Rs.7,580 in the purchases book has been carried
forward as Rs.8,570.
• iv. The total of the sales book Rs.7,550 on page 20 was carried
forward to page 21 as Rs.5,570.
• v. Purchases return book was carried forward as Rs.1,520 instead
of Rs.5,120.
• Rectification:
• i. Debit – Purchases A/c with Rs.850.
• ii. Debit – Sales A/c with Rs.2,500.
• iii. Credit – Purchases A/c with Rs.990.
• iv. Credit – Sales A/c with Rs.1,980.
• v. Credit – Purchases return A/c with Rs.3,600
5/13/2018 S K MOHAN 181
5/13/2018 S K MOHAN 182
 Choose the correct answer
1. Trial balance is prepared to find out the
– a) profit or loss b) financial position c) arithmetical accuracy of
the accounts
• 2. Suspense account in the trial balance is entered in the
– a) Trading A/c b) Profit and loss A/c c) Balance sheet
• 3. Suspense account having credit balance will be shown
on the
– a) Credit side of the profit and loss A/c
– b) Liabilities side of the balance sheet
– c) Assets side of the balance sheet
• 4. State which of the following errors will not be revealed
by the Trial Balance.
– a) Errors of complete omission.
– b) Error of carrying forward.
– c) Wrong totalling of the purchases book
5/13/2018 S K MOHAN 183
• 5. Errors which affect one side of an account are
called
– a) Single sided errors b) Double sided errors c) None of the
above.
• 6. Amount spent on servicing office Typewriter
should be debited to:
– a) Miscellaneous Expenses Account. b) Typewriter
Account. c) Repairs Account.
• 7. Wages paid to workers for the installation of a new
Machinery should be debited to:
– a) Wages Account b) Machinery Account c) Factory
Expenses Account
• 8. Salary paid to Manager must be debited to
– a) Manager’s Account b) Office Expenses Account
– c) Salary Account

5/13/2018 S K MOHAN 184

9. Goods taken by the proprietor for domestic use
should be credited to
– a) Proprietor’s Drawings Account.
– b) Sales Account.
– c) Purchases Account.
10. Cash received from Mani whose account was
previously written off as a Bad Debt should be
credited to:
– a) Mani’s Account.
– b) Miscellaneous Income Account.
– c) Bad Debts Recovered Account.

5/13/2018 S K MOHAN 185

• Closing Entries
• Closing consolidated journal entries are normally passed for Transfer of
all manufacturing and purchase expense to the debit side of trading a/c
• Transfer of Purchases and Sales return to the debit side of Trading a/c
• Transfer of Sales and Purchases return to the credit side of Trading a/c
• Transfer of closing stock to the credit of trading account by an
adjustment entry
• Transfer of Gross profit to the credit side of Profit & Loss a/c
• Transfer of Gross loss to the debit side of Profit & Loss a/c
• Transfer of all administrative, selling and financial expenses to the debit
of P & L A/c
• Transfer of all operational and non-operational incomes to the credit of
P & L A/c
• Transfer of Net profit to the credit of Capital a/c
• Transfer of net loss to the debit of Capital a/c

5/13/2018 S K MOHAN 186

 Adjustments
• According to accrual concept of accounting, the
profit or loss for an accounting year is not based on
the revenues realised in cash and the expenses paid
in cash during that year.
• There may exist some receipts and expenses in the
current year which partially relate to the previous
year or to the next year.
• There may exist incomes and expenses relating to
the current year that still need to be brought into
books of account.
• Such items duly adjusted, the final accounts will not
reflect the true and fair view of the state of affairs of
the business.
5/13/2018 SK MOHAN 187
• Adjustments may also become necessary in
respect of certain incomes received in advance
or those which have accrued but are still to be
received.
• Apart from these, there are certain items which
are not recorded on day-to-day basis such as
depreciation on fixed assets, interest on capital,
etc. These are adjusted at the time of preparing
financial statements.
• The purpose of making various adjustments is to
ensure that the final accounts reveal the true
profit or loss and the true financial position of
the business.
5/13/2018 SK MOHAN 188
Liability AMT Assets AMT

Capital Fixed Assets:

(separate fi gures are shown Land less depreciation
for Building less depreciation
each owner)
Long term Liabilities: Plant and Machinery
Loans from banks or financial less depreciation
Institutions Vehicles less depreciation
Current Liabilities: Computer systems less depreciation
Sundry creditors Office equipments less Depreciation
Bills payable Current Assets:
Advances from customers Stocks
Outstanding expenses Sundry debtors less provisions
Bills receivables
Cash in hand
Cash at bank
Prepaid expenses

Advances to suppliers
Total Total
5/13/2018 SK MOHAN 189
• What are adjusting entries? Why are they necessary for preparing final
accounts?
•
As we know, basic accounting records are on the basis of Going
Concern Assumption.
• But the Final Accounts are prepared every year on the basis of
‘Accounting Period Assumption’, ‘Revenue Recognition Assumption’
and ‘Matching Principle’ besides others.
• The purpose is to make a continuous assessment of the final affairs of
the firm. It is necessary that all expenses and incomes for the year for
which accounts are being prepared be taken.
• It, therefore, necessitates that:
• Expenditure whether paid or not to be included Income whether
received or not be included Expenditure relating to the succeeding
years be excluded and
Income relating to the succeeding years be also excluded.
•

5/13/2018 SK MOHAN 190

• Let us understand with the help of examples.
• Suppose, a firm closes its books on 31st March and rent for the month of
March has not yet been paid.
• This amount has to be paid in any case because the expense has been
incurred.
• Therefore, it would be proper to include the rent for this month along
with other expenses for the year.
• Take another example. Insurance premium has been paid for twelve
months beginning 1st October. It is apparent that insurance protection
will be available for six months this year and six months next year.
• Half the premium, therefore, should be treated as the next year’s
expense.
• In a firm there are a number of transactions related to expenses and
incomes, which have to be adjusted.
• If such items are not adjusted or brought into the current year’s books of
account, the Final Accounts will not reveal a true and fair picture of the
results.
• All such items which need to be brought into books of accounts at the
time of preparing Final Accounts are called ‘adjustments’.
• Journal entries are passed to effect the required adjustments. These
entries are known as Adjusting Entries.
5/13/2018 SK MOHAN 191
 Adjustment
• Why is it necessary to record the adjusting entries in the
preparation of final accounts?
– The purpose is to make a continuous assessment of the final
affairs of the firm. It is necessary that all expenses and incomes
for the year for which accounts are being prepared be taken.
• What is meant by closing stock? Show its treatment in final
accounts?
– All goods purchased or produced during the accounting year are
not completely sold out by the end of the year.
– The goods remaining unsold constitute the ‘Closing Stock’.
– In order to ascertain the gross profit or gross loss, closing stock
has to be brought into the Final Account.
– Closing stock is valued at cost or market price whichever is lower
and then incorporated in the accounts by passing the following
adjustment entry:
– Closing Stock A/c Dr.
» To Trading A/c

5/13/2018 SK MOHAN 192

• (a) Outstanding expenses
– Expenses which have been incurred during the year and whose benefit has
been derived during the year, but not paid for yet are called outstanding
expenses.
• (b) Prepaid expenses
– In some cases, the benefit of the amount already spent will be available in
the next accounting year also. Such a part of the expense is called a ‘
prepaid expense’.
• (c) Income received in advance
– Sometimes an amount is received during a year in respect of an income
that relates partially to the next year. The income which has been received
during the current accounting year but relates to the next accounting year
is called ‘Unearned Income’ or ‘Income Received in Advance’.
• (d) Accrued income
– accrued incomes are those incomes which have been earned during the
accounting period but have not been received till the end of the
accounting period. Such incomes are called ‘Outstanding incomes’ or
‘Incomes earned but not yet received’.

5/13/2018 SK MOHAN 193

 provision for doubtful debts
• Why is it necessary to create a provision for doubtful
debts at the time of preparation of final accounts?
•
We make provisions for expected losses but we do
not take credit for expected profit.
• A firm, therefore, make provision at the end of the
accounting year for likely bad debts in the next year.
• This is for the simple reason that out of the credit
sales made during the particular year, some debts
are likely to become bad in the next year due to non
– payments.
• The correct accounting is to make provision for such
likely bad debts every year.
5/13/2018 SK MOHAN 194
• (a) Depreciation
• When provision for depreciation account is not maintained:
– Depreciation A/c Dr.
• To Asset A/c

– Profit and Loss A/c Dr.

• To Depreciation
• (b) Discount on debtors Accounting Treatment
• For Discount Allowed:
– Discount Allowed A/c Dr.
• To Debtors
– (Being discount allowed on debtors)
• (c) Interest on capital
– Interest on Capital A/c Dr.
– To Capital A/c

– Profit and Loss A/c Dr

• To Interest on Capital A/c
• (d) Manager’s commission
– Profit and Loss A/c Dr.
• To Commission Payable or Outstanding commission A/c

5/13/2018 SK MOHAN 195

• What is meant by provision for discount on
debtors?
•
Debtors outstanding at the end of the year make
payment in the next year and they may be
entitled to cash discount if they make the
payment by the due date.
• Because, the debt has arisen during the year, the
discount is to be taken as expense for the year.
• Thus, a provision for discount on debtors is
made.
5/13/2018 SK MOHAN 196
• Indicate where the following items will be shown in the balance
sheet.
• (1) Credit balance in the bank column of the cash book
• (2) Debit balance to the account of A who is a customer
• (3) Credit balance in A/c of B who is supplier
• (4) Debit balance in A/c of C who is a supplier
• (5) Credit balance in A/c of D who is a customer
• (6) Outstanding rent
• (7) Insurance paid for the next year
• (8) Loan from HDFC bank for 7 years
• (9) Interest due on loan
• (10) Provision for doubtful debtors
• (11) Net Profit t for the year
• (12) Machinery
• (13) Accumulated depreciation on vehicle
• (14) Cash at Bangalore office
• 5/13/2018
(15) Balance with Citi Bank SK MOHAN 197
• Answer:
• (1) Credit balance in the bank column of cash book indicates a
liability towards bank. This is actually a bank overdraft. Hence,
it should be shown as Current Liability.
• (2) Debit balance in A’s A/c means amount due from him as a
customer. To be shown as Sundry Debtors.
• (3) Credit balance in supplier’s A/c is a liability, hence will be
shown under Current Liabilities.
• (4) Debit balance in supplier’s A/c refl ects an advance given to
supplier, hence will be shown under Current Asset.
• (5) Credit balance in customer’s A/c means advance from
customer, hence will be shown as Current Liability.
• (6) Outstanding rent will be shown under Current Liability.
• (7) Insurance paid for next year is ‘prepaid’ for current year,
hence will be taken as Current Asset
• (8) Loan from HDFC is for 7 years which is a long term loan,
hence will be shown as Long Term Liability.

5/13/2018 SK MOHAN 198

• (9) Interest due on loan is Current Liability.
• (10) Provision for doubtful debts will be reduced from the
sundry debtor’s amount under Current Assets
• as it denotes chances of not receiving the money from
customers.
• (11) Net Profit for the year will be added to the Capital or
to Reserves and Surplus in Balance Sheet.
• (12) Machinery is a Fixed Asset.
• (13) Accumulated depreciation on vehicle is reduction in
its value, so will be shown as deduction from
• vehicle under Fixed Assets.
• (14) Cash at Bangalore office is a Current Asset.
• (15) Balance with Citi Bank is Current Asset

5/13/2018 SK MOHAN 199

• Illustration 4.
• From the following particulars prepare a Balance Sheet of Mr. X, for the
year ended 31st March, 2013.
• Capital : ` 2,00,000: Drawings : ` 40,000 ; Cash In Hand : ` 20,000 ; Loan
from Bank : ` 60,000; Bank balance 40000
• Sundry Creditors : ` 40,000; Bills Payable : ` 20,000; Bank Overdraft : `
20,000; Goodwill : ` 60,000; Sundry Debtors : ` 80,000; Land and
Building : ` 50,000; Plant and Machinery : ` 80,000; Investment : `
20,000; Bills Receivable : ` 10,000.
• The following adjustments are made at the time of preparing final
accounts:
• I. Outstanding Liabilities for : Salaries ` 10,000; wages ` 20,000; Interest
on Bank Overdraft ` 3,000; and Interest on Bank Loan ` 6,000.
• II. Provide Interest on Capital @ 10% p.a.
• III. Depreciation on Plant and Machinery by 10% p.a.
• IV. Bad Debts amounted to ` 10,000 and make a provision for Bad Debts
@ 10% on Sundry Debtors.
• V. Closing stock amounted to ` 1,20,000.
• Net profit for the year amounted to ` 96,000 after considering all the
above adjustments
5/13/2018 SK MOHAN 200
 The items which usually need adjustments are

• 1. Closing stock
• 2. Outstanding/expenses
• 3. Prepaid/Unexpired expenses
• 4. Accrued income
• 5. Income received in advance
• 6. Depreciation
• 7. Bad debts
• 8. Provision for doubtful debts
• 9. Provision for discount on debtors
• 10. Manager’s commission
• 11. Interest on capital

5/13/2018 SK MOHAN 201

5/13/2018 SK MOHAN 202
5/13/2018 SK MOHAN 203
 CAPITAL AND REVENUE EXPENDITURE
BASIC PRINCIPLE:

. ALL EXPENSES AND RECEIPTS OF

REVENUE NATURE ARE TAKEN TO
TRADING AND PROFIT & LOSS
ACCOUNT

. ALL EXPENDITURES AND RECEIPTS OF

CAPITAL NATURE ARE TAKEN TO
BALANCE SHEET
 CAPITAL AND REVENUE EXPENDITURE

REVENUE RECEIPTS/PAYMENTS :

. ARE SMALLER IN SIZE(RELATIVELY)

. ARE RECURRING IN NATURE

. THE BENEFITS ARE OVER A SHORTER PERIOD (1 YEAR)

. THE PURPOSE IS TO RUN THE BUSINESS ON A DAY TO

DAY BASIS

. MAINTAIN ASSETS IN WORKING CONDITION

 CAPITAL & REVENUE EXPENDITURE

• CAPITAL RECEIPTS/PAYMENTS:

• ARE USUALLY LARGE(RELATIVELY)

• ARE NON-RECURRING IN NATURE

• THE BENEFITS ARE OVER LONGER DURATION

• THE PURPOSE IS TO ENHANCE PRODUCTIVITY

OF THE ASSETS
 CAPITAL AND REVENUE EXPENDITURE

• THERE ARE CERTAIN EXPENDITURES WHICH ARE

OTHERWISE REVENUE IN NATURE BUT SOMETIMES

UNUSUALLY LARGE AND WHOSE BENEFIT TO THE

ORGANISATION MAY ACCRUE AFTER FEW YEARS.THESE

MAY BE TREATED AS DEFERRED REVENUE EXPENDITURE ,

CARRIED TO THE BALANCE SHEET , AND WRITTEN OFF TO

THE PROFIT & LOSS ACCOUNT OVER A PERIOD OF TIME.

 CAPITAL AND REVENUE EXPENDITURE

SAME IS THE CASE WITH CERTAIN RECEIPTS SUCH AS

SALE OF ASSETS, WHERE THE RECEIPTS UPTO BOOK

VALUE IS DEDUCTED FROM THE ASSET, AND , IF

BETWEEN BOOK VALUE & COST AS REVENUE

RECEIPT & ABOVE COST AS CAPITAL RECEIPT.

. THERE IS A THIN LINE BETWEEN CAPITAL & REVENUE

CLASSIFICATION. FOR INSTANCE REPAIRS TO
MACHINERY WHICH KEEPS THE ASSET IN WORKING
CONDITION IS CHARGED TO THE P & L A/C WHILE
BETTERMENT EXPENSE IS CAPITALISED.
 CAPITAL & REVENUE EXPENDITURE

• EXAMPLES OF EACH TYPE OF CLASSIFICATION:

• CAPITAL NATURE:

-- PURCHASE OF ASSETS SUCH AS BUILDING,

MACHINERY, VEHICLES.
-- EXPENDITURE IN PURCHASE /SETTING UP OF
CAPITAL GOODS/ASSETS
-- EXCESS OF SALE PRICE OF ASSET OVER ITS COST
PRICE
-- FUNDS RAISED THRU BANKS/INSTITUTIONS
-- FUNDS RAISED THRU ISSUE OF SHARES, &
DEBENTURES
 CAPITAL AND REVENUE EXPENDITURE

• REVENUE NATURE:

• ALL TRANSACTIONS RELATING TO NOMINAL

ACCOUNTS

• EVEN CERTAIN EXPENSES OF NON-RECURRING

NATURE BASED ON MATERIALITY CONCEPT

• EXCESS OF SALE VALUE OF ASSET OVER W D VALUE

UPTO COST OF ASSET
 DEFERRED REVENUE EXPENDITURE

• LARGE ADVERTISING EXPENDITURE FOR(SAY)

LAUNCH OF A PRODUCT
• EXPENDITURE FOR RAISING OF FUNDS
INCLUDING PREPARATION OF PROJECT
REPORT
• INITIAL EXPENSES FOR SETTING UP OF A
COMPANY
– Expenses incurred on research and development
– Abnormal loss arising out of fire or lightning (in case the
asset has not been insured).
– Huge amount spent on advertisement
 Capital profit and Revenue profit
• In order to find out the correct profit and the true
financial position, there must be a clear distinction
between capital profit and revenue profit
• Capital profits
• Capital profit is the profit which arises not from the
normal course of the business. Profit on sale of fixed
asset is an example for capital profit.
• Revenue profits
• Revenue profit is the profit which arises from the
normal course of the business. i.e, Net Profit – the
excess of revenue receipts over revenue expenditures
 Capital loss and Revenue loss
• In order to ascertain the loss incurred by a firm it
is important to distinguish between capital losses
and revenue losses.
• Capital Losses
– Capital losses are the losses which arise not from the
normal course of business. Loss on sale of fixed asset
is an example for capital loss.
• Revenue Losses
– Revenue losses are the losses that arise from the
normal course of the business. In other words, ‘net
loss’ – i.e., excess of revenue expenditures over
revenue receipts
 Capital & Revenue Expenditure
CAPITAL REVENUE

Large amount Relatively small

Improve or enhance earning Maintain asset

capacity
Long duration benefit Short duration

Non- recurring recurring

Balance sheet item Trading /P & L A/c item

5/13/2018 SK MOHAN 215
5/13/2018 SK MOHAN 216
• State with the reason whether the following
are capital or Revenue expenditure
• Cartage paid to bring the machinery debited
to plant a/c
• Rs.10000/- spent on repairing the factory gate
• Heavy amount spent on research of new
model
• Exp. On Foreign tour for purchasing new
machinery
• Repair of machinery
 Cap. & Rev. Expenditure-Examples
(1)Cost of replacement of defective parts of the machinery is -----
a. Capital expenditure
b. Revenue expenditure
c. Deferred revenue expenditure
(2) Loss of goods due to fire Rs.8000 is a revenue expenditure
because----
a. It is recurring
b. Amount involved is small
c. Loss is arising out of business operations
 Cap. & Rev. Expenditure-Examples
(3) Expenditure incurred in acquiring the patents rights for the
business is an example of ----
a. Capital expenditure
b. Deferred revenue expenditure
c. Revenue expenditure

(4) Professional fees paid in connection with acquisition of

leasehold premises is----
a. Capital expenditure
b. Deferred revenue expenditure
c. Revenue expenditure
 Examples
(5)Preliminary expenses , discount allowed on issue of
shares are the examples of
a. Capital expenditure
b. Deferred revenue expenditure
c. Revenue expenditure
(6) Machinery costing Rs.10,000, whose current book
value is Rs.7000 is sold for Rs.12000 what is the
amount of capital & revenue receipt
a. Capital receipt of Rs. 2000 & Rev. Receipt of Rs.10000
b. Capital receipt of Rs. 9000 & Rev. Receipt of Rs.3000
c. Capital receipt of Rs. 12000 & Rev. Receipt of Rs.Nil
• Which of the following is not a deferred
revenue expenditure
» Preliminary expenses for setting up a company.
• Rights issue amount.
» Huge sales promotion expenditure in launch of new
product
– Cost of preparing project report

• For an expense to be classified as revenue or

capital depends on
• a) Kind of expense
» b) Duration of the benefit of the expenditure
• c) Effect on revenue earning capacity
» d) All of the above
• Shyam & Co., incurred the following expenses during the year
2009.Classify the following items under capital or revenue
– i. Purchase of furniture Rs.1,000.
– ii. Purchase of second hand machinery Rs.4,000.
– iii. Rs.50 paid for carriage on goods purchased
– iv. Rs.175 paid for repairs on second hand machinery as soon as it
was purchased.
– v. Rs.600 wages paid for installation of plant.
• Solution
• i. Capital expenditure – as it results in the acquisition of fixed asset.
• ii. Capital expenditure – as it results in the acquisition of fixed asset.
• iii. Revenue expenditure – expenses incurred on purchases of goods
for sale.
• iv. Capital expenditure – as it is spent for bringing the asset into
working condition.
• v. Capital expenditure – as it is spent for bringing the asset into
working condition.
 Bill of Exchange
Bill of Exchange Promissory Note

Unconditional order Unconditional promise

Made by creditor Made by debtor

Acceptance by debtor must No acceptance as such

Three parties to a bill Two parties to a bill

Noting is not necessary On dishonor, noting is

necessary by notary public
 Bill of Exchange
• BILL OF EXCHANGE IS THE VEHICLE FOR CREDIT

TRANSACTIONS IN BUSINESS; HAS 3 PARTIES

• Honoring on due date

• Retirement
• Discounting of bill
• Sent for collection to bank
• Endorsed to creditor
• Renewal of the bill
• Accommodation bill
 BILL OF EXCHANGE
• Bill of Exchange is defined in section 5 of N.I. Act.
• It is an instrument
– In writing
– Signed by the maker
– Containing an unconditional order
– Directing a certain person to pay
– A certain sum of money only
– To or to the order of a certain person or to the bearer of the
instrument.
 PARTIES TO BILL OF EXCHANGE
• There are three parties to a Bill of Exchange.
– Drawer (I.e. the person who orders to pay)
– Drawee ( I.e. the person who is directed to pay.)
– Payee ( I.e. the person to whom the payment is to
be made.)

SOMETIMES DRAWER & PAYEE ARE THE SAME.

ACCEPTANCE TO PAY BY THE DRAWEE IS ESSENTIAL

 BILLS OF EXCHANGE

• :

DRAWER – WHO MAKES THE BILL/ CREDITOR;

DRAWEE – ON WHOM THE BILL IS DRAWN;

PAYEE -- WHO RECEIVES THE MONEY;

.
 BILLS OF EXCHANGE

. PROMISSORY NOTE IS SIMILAR ; HAS ONLY 2 PARTIES

BUT SIGNED BY DEBTOR; NOTING NECESSARY.

. ACCOMODATION BILL :
THERE IS NO TRANSACTION; THE BILL IS DISCOUNTED
TO RAISE MONEYS FOR BOTH PARTIES, WHO SHARE
THE AMOUNT.
 STAGES OF PASSING Journal entries

• When the drawer retains the bill with him till

the date of its maturity and gets the same
collected directly
• When the bill is retained by the drawer with him
and sent to bank for collection a few days before
maturity
• When the drawer gets the bill discounted from
the bank
• When the bill is endorsed by the drawer in
favour of his creditor
5/13/2018 S K MOHAN 229
 BILLS OF EXCHANGE

• TYPICAL ENTRIES:
. THE ENTRIES IN THE BOOKS OF DRAWER ‘A’
ARE:
• DIRECT BILL TRANSACTION
• BILLS RECEIVABLE a/c DR.
TO DRAWEE ‘B’

. CASH a/c DR.

TO BILLS RECEIVABLE
( BILL IS MET ON DUE DATE)
 BILLS OF EXCHANGE
BILL ENDORSED TO C
. C’s a/c DR.
TO BILLS RECEIVABLE

( NO ENTRY WHEN BILL IS MET)

BILL SENT FOR COLLECTION

. BANK FOR BILL COLLECTION a/c DR.

TO BILLS RECEIVABLE

. CASH a/c DR.

TO BANK FOR BILL COLLECTION
( BILL SENT FOR COLLECTION IS MET)
.
.
 BILLS OF EXCHANGE
IN CASE OF DISCOUNTING
CASH a/c DR.
DISCOUNT a/c DR.
TO BILLS RECEIVABLE
( NO ENTRY WHEN BILL IS MET)

THE ENTRIES IN THE BOOKS OF DRAWEE ‘B’:

.. A’s a/c DR.
TO BILLS PAYABLE

. BILLS PAYABLE a/c DR.

TO CASH
( BILL IS PAID)
 BILLS OF EXCHANGE
• THERE ARE CASES WHEN BILLS ARE DISHONOURED.
• IN THAT CASE THE ENTRIES ARE AS FOLLOWS:
IN A’s BOOKS:
BILL DIRECTLY SENT FOR PAYMENT
B’s A/C DR.
TO BILLS RECEIVABLE
TO CASH
( CASH IS THE NOTING CHARGE)

DISHONOUR OF DISCOUNTED BILL

. BILLS RECEIVABLE A/C DR.

NOTING CHARGES A/C DR.
TO CASH
(CASH (notary charges) IS PAID TO THE BANK)
 BILLS OF EXCHANGE
• -- B’s a/c DR.
• TO BILLS RECEIVABLE
• TO NOTING CHARGES
• (BILL RETURNED TO ‘A’)

DISHONOUR OF BILL SENT BY BANK FOR PAYMENT

• BILL RECEIVABLE a/c DR.

• NOTING CHARGE a/c DR.
• TO CASH
• TO BANK FOR BILL COLLECTION
( DISHONOUR OF BILL FOR COLLECTION)

. B’s a/c DR.

TO BILLS RECEIVABLE
TO NOTING CHARGES
(BILL RETURNED TO B)
 BILLS OF EXCHANGE
• DISHONOUR OF ENDORSED BILL

. BILLS RECEIVABLE a/c DR.

• NOTING CHARGES a/c DR.
• TO C

• B’s a/c DR.

• TO BILLS RECEIVABLE
• TO NOTING CHARGES
(BILL RETURNED TO B)
 Question

• Amit sold goods for Rs.20,000 to Sumit on credit on Jan

01, 2015. Amit drew a bill of exchange upon Sumit for
the same amount for three months. Sumit accepted the
bill and returned it to Amit. Sumit met his acceptance
on maturity. Record the necessary journal entries under
the following circumstances:
• (i) Amit retained the bill till the date of its maturity and
collected directly
• (ii) Amit discounted the bill @ 12% p.a from his bank
• (iii) Amit endorsed the bill to his creditor Ankit
• (iv) Amit retained the bill and on March, 31 2015 Amit
sent the bill for collection to its bank. On April 05, 2015
bank advice was received
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 Examples
Q. A bill of exchange is a negotiable instrument
• True
• False
Q. Negotiable instruments can be ________from one person to
another
Q. A bill of exchange must be in writing
• True
• False
Q: A bill of exchange is not to be dated
• True
• False
• Read the following and answer :
• Drawer is ‘A’
• Drawee is ‘B’
• Endorsee is ‘C’
• In the books of ‘A’
• Bills receivable a/c dr.
• to B
• a) Bill accepted by ‘A’
• b) Bill accepted by ‘ B’
• c) Bill retired by ‘B’
• d) None of the above
• In the books of ‘B’
• Bills payable a/c dr.
• to bank
» Bill accepted by ‘B’
– Bill retired by ‘B’
– Bill dishonoured by ‘B’
» Bill sent by ‘A’ for payment
 Examples-conted
Q.: The date on which the bill is payable is called its __ due date
_______
Q. The due date is calculated after adding __ Three days of grace
________ to the actual period of the bill.
Q. If the due date falls on a public holiday, then it becomes due
on the Previous working day
Q.A bill was drawn on 23rd Dec. 2005 for one month maturity.
What will be its due date. 25th January
Q. When a Bill of exchange or promissory note has been
dishonoured for non acceptance or non payment, the holder
may, within a reasonable period, cause such dishonour to be
noted and certified by a notary public, such a certificate is
called____ protest ____
• Ans.: due date, Three days of grace, Previous working day, 25th January, protest
• Write ‘True’ or ‘False’ against each statement regarding a bill of
exchange:
• (i) A bill of exchange must be accepted by the payee. F
• (ii) A bill of exchange is drawn by the creditor. T
• (iii) A bill of exchange is drawn for all cash transaction. F
• (iv) A bill payable on demand is called Time bill; F
• (v) The person to whom payment is to be made in a bill or
exchange is called payee. T
• (vi) A negotiable instrument does not require the signature of its
maker. F
• (vii) The hundi Payable at sight is called Darshani hundi. T
• (viii) A negotiable instrument is not freely transferable. F
• (ix) Stamping of promissory note is not mandatory. F
• (x) The time of payment of a negotiable instrument need not be
certain. F
• (i) False (ii) True (iii) False (iv) False (v) True (vi) False (vii) True
(viii) False (ix) False (x) False
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cmaskmohan@gmail.com

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