SNDT Women’s University

Centre for Distance Education

Mumbai - 400 049

Master of Commerce

Part I

(New Course w.e.f. 2021-22)

Semester - I

Course Title: Basics of Accounting

Course Code: 110055

Course Writers

Dr. Ram Sable Dr. Shaili Gala

Dr. Jyoti Thakur Ms. Aarti Varma
Ms. Sumita Vora Ms. Yasmin Barodawala

1
Centre for Distance Education
SNDT Women’s University

Vice Chancellor
Prof. Ujwala Chakradeo

Director
Dr. Smriti Bhosle

Co-ordinator – Course Material Writing

Dr. Falguni Vahanwala
(Asst. Professor)

@Centre for Distance Education, S.N.D.T Women’s University.

All rights reserved. No part of this work may be reproduced in any other means without
written permission from Centre for Distance Education, S.N.D.T Women’s University.
Publishing year 2022.
Disclaimer:
Views expressed in the study material are of the individual authors.
The Center for Distance Education, SNDT Women’s University may or may not agree with
the same.

2
BASICS OF ACCOUNTING
Course Objectives: To facilitate the students to:

1. Provide basic knowledge of various disciplines of Accounting to the students.

2. Understand the principles, conventions and system of financial accounting.
3. Make the students to understand the Accounting process and procedure
4. Improve the ability to prepare the Job cost sheet and to analyze the financialstatements.
5. Understand the preparation of Trial balance and Bank Reconciliation Statement from business
transactions.
6. Analyze the types of cost and identify the elements of cost sheet.
7. Examine the preparation of Corporate Financial Statements.
8. Develop an insight of analysis of Financial Statements using Ratios.

Module Topic Marks

Objectives: This module will facilitate the students to: 25
1. Understand various disciplines of Accounting.
2. Examine Indian AS and IAS.
3. Develop insight on Application of accounting principles and
1. conventions in preparation of Financial Statements.
Financial Accounting: Meaning, Accounting Principles, Concepts,
Conventions, IND-AS, IAS
Accounting Equation, System of accounting: Cash system and
mercantile system, Accounting as information system, Users of
accounting information.
Objectives: This module will facilitate the students to:
1. To understand the basic concepts of GST calculation
2. To Prepare various types of vouchers, subsidiary books and
Ledger Accounts.
3. To prepare Trial Balance after journalization and posting into
the ledger.
4. Develop an insight to prepare Bank Reconciliation
Statement.
Accounting Process & Procedure
2. Transaction/Event, Voucher: Meaning, Types of Vouchers,
Receipt (Credit Voucher),
Payment (Debit Voucher), Journal (Accrual) Voucher, Journal,
Subsidiary Books
(Purchase/Sales Day book, Purchase Return/Sales Return Book,
Cash Book (double and
triple column), Ledger, Trial Balance. Including Simple GST
Calculation
Bank Reconciliation Statement:
Meaning, Need and Preparation of Bank Reconciliation Statement

3
Objectives: This module will facilitate the students to: 25
1. Understand the Provisions of Preparation of final
Accounts of sole trader and partnership firm in vertical
and horizontal form.
2. Identify the adjustments to prepare final accounts.
3. Develop an understanding of Corporate Financial
3. Statement.
4. Develop an insight to prepare final accounts of sole
trader and Partnership Firm.
Financial Statements:
Preparation of financial statements: Horizontal and Vertical
form. Horizontal Form (Trading A/c, Profit and Loss A/c,
Balance Sheet), Vertical form (Income statement and Balance
Sheet with and without schedules).
Objectives: This module will facilitate the students to: 25
1. Understand various elements of Cost.
2. Differentiate between Financial Accounting
Management Accounting and Cost Accounting.
3. Prepare Cost Sheet for assigned Job.
4. Apply ratios for analysis of Financial Statements.
4. Basic of Cost And Management Accounting: Cost Accounting,
Meaning, Elements of cost, Job Costing Preparation of Job Cost
Sheet.
Management Accounting: Meaning, Functions, Merits and
Demerits, Distinction Between Financial Accounting,
Management Accounting and Cost Accounting
Financial Statement Analysis: Ratio Analysis:
Calculation of Ratios
Total 100

Evaluation/ Assessment for all Modules:

• Each course will have 25% Internal Evaluation (i.e. written exam,
assignments, projects, seminar- papers, presentations, reports on field visits
etc.) and 75% External Evaluation.

• Minimum 40% marks are required in Internal & External assessment

Separately for passing in each Course.

• Student needs to clear internal assessment to be eligible to appear for

Semester end (external) examination.

4
Index

Unit 1 Financial Accounting………………………………………………………………………………………………………..……06

Unit 2 Accounting Process and Procedures………………………………………………..…………………………………….19

Unit 3 Financial Statements…………………………………………………………………………………..…………………….…..80

Unit 4 Basics of Cost and Management Accounting…………………………………………..………………………..…104

References…………………………………………………………………………………………………………………………………….154

Long and Short Questions for Self Study…………………………………………………………………………………….155

5
Unit 1
Financial Accounting
Unit Structure

1.0 Objectives
1.1 Introduction
1.2 Definitions of Accounting
1.3 Branches of Accounting
1.4 Basis of Accounting
1.5 Systems of Accounting
1.6 Principles of Financial Accounting
1.7 Accounting Principles
1.8 Accounting Concepts
1.9 Accounting Conventions
1.10 Accounting Standards
1.11 Accounting Equations
1.12 Accounting as Information System
1.13 Use of Information
1.14 Unit End Exercise

1.0 Objectives

This module will facilitate the students to:

1. Understand various disciplines of Accounting.

2. Examine Indian AS and IAS
3. Develop insight in application of accounting principles and conventions in preparation
of financial statements.
[

1.1 Introduction of Accounting

The process of recording transactions in the books of accounts is accounting. Accounting

is often called the language of business and the function of a language is to facilitate
communication among the individuals in a society. It is the language of communicating
financial information from one person to another in the world of business. Accounting is
the primary stage in Accountancy. Accountancy is related with recording, classifying,
summarizing, analyzing and interpreting the financial data. The objective of accounting is
to prepare the financial statement and further communicate the information to all the
stakeholders. The final outcome of Accountancy for any organization is Trading & Profit &
Loss Account & Balance-sheet. So, Accountancy gives details of the entire year. With
the help of the financial statements, the management can take critical business
decisions.

6
1.2 Definitions of Accounting

American Accounting Association states that essentially, accounting is an information

system. It is a system which converts inputs into outputs. Accounting is the process of
identifying, recording, summarising and reporting economic information to decision
makers.

“An act of recording, classifying and summarizing the business transactions, balancing of
accounts, drawing conclusions and interpreting the results thereof.”

“Accountancy refers to the entire body of the theory and process of accounting.” By
Kohler.

“Nearly every business enterprise has an accounting system. It is a means of collecting,

summarizing, analyzing and reporting in monetary terms information about the business
transactions” By Prof. Robert N Anthony.
[

1.3 Branches of Accounting

i) Government Accounting:

The Government departments and agencies receive and pay huge sums of money.
Indian Railways, Police, Defence Services, and public sector units are the government
organisations which are not established for profits. Government accounting systems are
run by Indian Audit and Accounts Service, Indian Civil Accounts Service, The Indian
Railways Accounts Service and Indian Defence Accounts Service. The Comptroller and
Auditor General of India audits the government accounts.

7
ii) Enterprise Accounting:
a) Financial Accounting: It involves recording, classifying and summarizing of past
events. The process of accounting leads to preparation of financial statements, i.e.,
Income Statement and balance Sheet.
b) Management Accounting: It analyses costing information in such a manner that
the management can take a wise decision about the managerial problems of the
organisation.
iii) Social Accounting:

Various social organisations such as educational institutions, hospitals, charitable trusts

and religious institutions are established for the purpose of providing services to the
society. Donations and endowments are the major sources of revenue for such
organisations. These organisations have to prepare financial reports to present to the
Regulatory Authority and the donors.

1.4 Basis of Accounting

[

i) Cash Basis:

In cash Basis accounting, income is recorded when cash is actually received and
expenses are recorded when cash is actually paid. So, under this system only cash
transactions are recorded.

ii) Accrual Basis:

Income is recorded when it accrues and expenses are recoded when they become
payable. Cash as well as credit transactions are recorded. Accrual basis records income
and expenses as they are earned or incurred and not as per amount received or paid.
This is also known as ‘Mercantile Basis of Accounting’.

1.5 Systems of Accounting

[

There are various methods of accounting. Businessman adopts any one of the following
methods for their accounts. Following are the different systems of accounting which are:

[[

8
i) Indian System:

Since time immemorial, the Indian traders have been keeping the accounts of their
business. The businessmen write their accounts in vernacular or Indian language like
Gujarati, Hindi, Marathi & so on. The accounts are written in the long account books
called ‘Bahis’ and the system is known as ‘Bahikhata’.

ii) English System:

The organisations which undertake large scale economic activities prefer to adopt the
English system for maintaining the accounts. The system is further classified as, a)
Single system b) Double Entry System.

A) Single Entry System:

In this system, only cash accounts and personal accounts are maintained. This is
incomplete way of recording.

B) Double Entry System:

The double entry system is the most satisfactory and a scientific system of maintaining
the accounts of the business. In this, every transaction has two aspects just as there are
two parties to every contact or agreement.

1.6 Principles of Financial Accounting

Financial accounting is based on several principles known as Generally Accepted

Accounting Principles (GAAP) (Williamson 2007). These include the business entity
principle, the objectivity principle, the cost principle and the going-concern principle.

• Business Entity Principle:

Every business requires to be accounted for separately by the proprietor. Personal and
business-related dealings should not be mixed.

• Objectivity Principle:

The information contained in financial statements should be treated objectively and

not shadowed by personal opinion.

• Cost Principle:

The information contained in financial statements requires it to be based on costs

incurred in business transactions.

• Going-Concern Principle:

The business will continue operating and will not close but will realise assets and
discharge liabilities in the normal course of operations

9
1.7 Accounting Principles

Financial accounting is information that must be processed and reported objectively.

Third parties, who must rely on such information, have a right to be assured that
the data is free from bias and inconsistency, whether deliberate or not. For this
reason, financial accounting relies on certain standards or guides that are called
'Generally Accepted Accounting Principles' (GAAP).

Principles derived from tradition, such as the concept of matching. In any report of
financial statements (audit, compilation, review, etc.), the preparer/auditor must indicate
to the reader whether or not the information contained within the statements
complies with GAAP.

• Principle of Regularity:

Regularity can be defined as conformity to enforced rules and laws.

• Principle of consistency:

This principle states that when a business has fixed a specific method for the
accounting treatment of an item, it will enter all similar items that follow, in exactly
the same way.

• Principle of Sincerity: According to this principle, the accounting unit

should reflect in good faith the reality of the company's financial status.

• Principle of the Permanence of Methods:

This principle aims at maintaining the coherence and comparison of the financial
information published by the company.

• Principle of Non-Compensation:

One should show the full details of the financial information and not seek to
compensate a debt with an asset, revenue withan expense etc.

• Principle of Prudence:

This principle aims at showing the reality 'as is': one should not try to make things
look rosier than they are. Typically, revenue should be recorded only when it is certain
and a provision should be entered for an expense, which is probable.

• Principle of Continuity:

When stating financial information, one assumes that business will not be
interrupted. This principle mitigates the principle of prudence: assets do not have to
be accounted at their disposable value, but it is accepted that they are at their
historical value.

• Principle of Periodicity:

Each accounting entry should be allocated to a given period and split accordingly if
it covers several periods. If a client pre-pays a subscription (or lease, etc.), the

10
given revenue should be split to the entire time-span and not accounted for entirely
on the date of the transaction.

• Principle of Full Disclosure/Materiality: All information and values pertaining to

the financial position of a business must be disclosed in the records.

1.8 Accounting Concepts

[

Accounting Concepts are general guidelines for sound accounting practices. Some
Important accounting concepts are:

i) Reliable financial statements

ii) Acceptable basis of measurement

iii) Uniformity in presentation

iv) Proper information for the stakeholders

v) Valid & appropriate assumptions

Some important concepts are:

1) Business Entity Concept:

Under this concept, the business unit is separate from its owner. For example, sole
trading concern and sole proprietor are treated as two different entity. According to this
concept, only business transactions are recorded in the books of accounts, Proprietor’s
personal transactions are not recorded in the business books of accounts.

2) Money Measurement Concept:

Every transaction is recorded in terms of money. In India all the transactions are
recorded in Indian Rupee.

3) Cost Concept:

An asset is recorded in the books on the basis of the historic cost, that is, the purchase
cost i.e. acquisition cost. Cost of acquisition will be the base for all further accounting.
Every year the value will decrease by the depreciation.

4) Going Concern Concept:

It is the basic assumption that business is a going concern and will continue its operations
for future. Promoters and directors will come and go but company will remain and grow.
All the policies and procedures will be decided keeping this aspect in the consideration.

5) Realization:

Income is recorded only when it is realized i.e. either it is received or earned. Revenues
are recorded only when sales are affected or the services are rendered.

6) Accrual Concept:
Income is recorded when it is earned and expenses are recorded when they accrue. All

11
the expenses and revenues related to the accounting period are to be considered
irrespective of the fact the revenues are received in cash or not or expenses are paid in
cash or not.

7) Dual Aspect:

According to this aspect, every transaction or event has two aspects, i.e. dual effect. This
is the concept which recognizes the fact that for every debit, there is a corresponding and
equal credit. From this concept the basic accounting equation, arises that is, Capital +
Liabilities= Assets.

8) Disclosure Concept:

The accounts must disclose all material information. The reports should be disclosed full
and fair. All the information disclosed should be

9) Materiality Concept:

According to this concept, financial statements should disclose all material items which
might influence the decisions of financial statements. Hence, any item which is not
significant and not relevant to the users need not be disclosed in the financial statements.

10) Matching Concept:

According to this concept, revenues during an accounting period are matched with
expenses incurred during that period to earn the revenue during that period. All the
income received or all expenses paid during the period are not considered, but only the
income and the expenses related to the accounting period are considered.
[

1.9 Accounting Conventions

[[

Accounting conventions states customs and usages of accounting which guide to prepare
accounting statements.

There are different types of Accounting Conventions:

1. Conservatism:

While recording the business transactions we have to anticipate no profit but provide for
all possible losses. This policy of recording is asking the accountant to play safe while
writing the accounts.

2. Consistency:

Any policy or procedure adopted for accounting should be continuous or consistent

throughout the business and it need not be change frequently without the genuine
demand. However, it does not stop any improvement of new techniques.

3. Materiality:

According to this convention, financial statements should disclose all material items
which might influence the decisions of financial statements. Hence, any item which is

12
not significant and not relevant to the users need not be disclosed in the financial
statements.

4. Full Disclosure Principle:

The accounts must disclose all material information. The reports should be disclosed full
and fair. All the information disclosed should be relevant, reliable, comparable and
understood by all the stakeholders.

Picture 1.1- Screenshot of Generally Accepted Accounting Principles

Source:https://www.civilserviceindia.com/subject/Management/notes/generally-
accepted-accounting-principles.html

1.10 Accounting Standards

[

Accounting standards provide the framework and norms to be followed in accounting so

that the financial statements of different enterprises become comparable. It is necessary
to standardize the accounting principles to ensure uniformity, comparability, competence
and reliability of financial reporting. Accounting Standards are written policy documents
issued by the expert accounting body or by government or the regulatory authority.

The International Accounting Standards (IAS) are specific set of norms for the
presentation of financial accounts, developed by the International Accounting Standards
Boards. Since 2001, those standards have been released under the name ‘International
Financial Reporting Standards’ (IFRS). The International Accounting Standards
Committee (IASC) was formed in 1973 as the first international standard – setting body

13
& they issued IAS. A reorganization in 2001 replaced this body with the IASB & IAS was
renamed as IFRS.

In India, Accounting standards is issued by the Institute of Chartered Accountants of

India (ICAI). The Council of the Institute of Chartered Accountants of India has so far
issued 31(Thirty-one) accounting standards. Some of these Accounting Standards are as
follow:

1. AS-1 Disclosure of Accounting Policies (1-4-1991 for companies and 1-4-

1993 for others):

The purpose of AS-1 is to state which accounting policies should be is closed in the final
accounts and in what manner.

The final accounts of a concern present a view of its financial position (balance sheet)
and of the profit or loss. Such view depends on the accounting policies followed while
preparing and presenting in the final accounts. The accounting policies followed change
from concern to concern.

2. AS-2 Valuation of Inventories (1-4-1999):

Accounting Standard 2-valuation of Inventories, issued by the Institute of Chartered

Accountant of India deals with valuation of Inventories. It lays down the rule that
inventories should be value at the lower of cost and net realizable value. Thus, normally
stocks are valued at cost.

3. AS-3 Cash Flow Statement (Date from which it becomes mandatory 1-4-
2001):

As per AS 3 the Cash Flow Statement should report cash flows during the period
classified by Operating, Investing and Financing activities.

4. AS-4 Contingencies & Events occurring after the Balance sheet Date (1-4-2016)

5. AS-5 (Revised) Net Profit or Loss for the period, Prior period Items an Changes in
Accounting Policies (1-4-1996)

6. AS-6 (Revised) Depreciation Accounting (1-4-1995): The Standard deals with

depreciation accounting and applies to all depreciable assets, except the items to
which special considerations.

7. AS-9 Revenue Recognition: Accounting Standard 9 deals with recognition of revenue

in the profit and loss account of a concern. The income may be from sale of goods or
fees from services or interest, royalty, dividends etc. The key issue handled in this
standard is the timing of recognition of revenue i.e. when the income should be
booked.

8. AS-10 Accounting for Fixed Assets (1-4-1991 for Companies & 1-4-1993 for others):
According to this standard, the cost of fixed assets should comprise of the original
cost and any other cost which brings the assets to its working conditions for its
intended use.

14
Lists of IAS/IFRS and corresponding Indian Accounting Standard notified by
MCA:

IAS NO. TITLE Corresponding

Converged
Indian AS
IAS 1 Presentation of Financial Statements AS 1
IAS 2 Inventories AS 2
IAS 7 Cash Flow Statements AS 7
IAS 8 Accounting policies, change in accounting estimates & AS 8
errors
IAS 10 Events after the Balance Sheet date AS 10
IAS 12 Income Taxes AS 12
IAS 16 Property, Plant & Equipment AS 16
IAS 17 Leases AS 17
IAS 20 Accounting for Government, Grants and Disclosure of AS 20
Government
IAS 21 The Effects of changes in the Foreign Exchange Rates AS 21
IAS 23 Borrowing Costs AS 23
IAS 24 Related party disclosures AS 24
IAS 26 Accounting & reporting by the Retirement Benefits plan AS 26
IAS 27 Consolidated & separate financial statements AS 27
IAS 28 Investments in associates and joint venture AS 28
IAS 29 Financial reporting in Hyper Inflationary economics AS 29
IAS 32 Financial instruments: Presentation AS 32
IAS 33 Earnings Per share AS 33
IAS 34 Interim Financial reporting AS 34
IAS 36 Impairment Assets AS 36
IAS 37 Provisions, Contingent liabilities and contingent Assets AS 37
IAS 38 Intangible assets AS 38
IAS 40 Investment property AS 40
IAS 41 Agriculture AS 41

1.11 Accounting Equation

The most basic tool of accounting is the accounting equation. The equation presents the
resources of the business and the claims to those resources. Assets are the basic
resources of a business which are expected to give benefits in the future whereas the
claims to these resources are called liabilities. These are the economic obligations of
business. The outside parties who have got claims are called creditors. Insider claims are
called as owner’s equity or capital. These are the claims held by the owners. The
relationship between assets, liabilities and owners equity is expressed in an equation
which is called as accounting equation.

Assets= Liabilities + owner’s equity

The fundamental equations which give the foundation to the double entry Book-keeping
are: Capital =Total Assets- Outsider’s Liabilities

Total Assets = Total Liabilities

15
Assets = Outsider’s liabilities + capital

Assets = Equities

Owner’s equity is the amount of assets that remain after deducting liabilities. Hence,
onwer’s equity is referred to as net assets. Purpose of an organisation is to increase
owner’s equity. Drawings are the goods or cash withdrawn by the owner for personal
purposes and expenses are the cost of doing business.

1.12 Accounting as Information System

Every segment of the society requires accounting information. Accounting as a system of

information is illustrated in Figure 1.2: Accounting Information
System:

1.13 Use of Information

Accounting information is used by many stake holders for taking number of decesions.
These decisions affect income, expenditure, waelth and profotability of an organisation.
Foloowing decisions are based on accounintg information:

1) Investment Decisions
2) Assessing accountability of management.
3) Assessing ability of an organisation to meet its commitments.
4) Determination of taxation policies.
5) Determination of distributable profits and dividend.
6) Regulation of activities of an organisation.

16
The various stakeholders interested in accounting information are as follows:

1) Managers:
Managers are responsible for the perforamce of an organisation. Managers use
accounting information for decision making.
2) Owners:
Owners of companies are interested in financial health of an organisation. Accounting
provides this valuable information.
3) Investors:
Investors are those who want to invest their hard earned money in shares of the
company. They get information from accounts about the return and safety of their
investments.
4) Government and Regulatory Agencies:
The government is also interested in knowing the company’s profits, sales etc for
determination of income tax, sales tax etc. it is the accounting information which helps
to decide national Income, GDP etc.
5) Banks & Financial Institutions:
Banking and financial institutions take decisions about sanction of loans of companies on
the basis of accounting information.
6) Employees:
Employees’ financial benefits depend upon financial health of a company. Hence, the
employees also must have knowledge of accounting information.
7) Supplier:
Suppliers take decision regarding creditworthiness of clients on the basis of accounting
information.
8) Researchers:
Researchers do research on the basis of information generated by financial statements.
Consultants guide investors, banks and brokers on the basis of accounting information
9) The Public:
The members of the public are interested in accounting information in number of ways
as the prosperity of the locality depends on the business prosperity. Members of the
public can understand whether the organisations are discharging their social
responsibilities.

1.14 Unit End Exercise

1) Define Accountancy and write its concepts and conventions.

2) What is an Indian Accounting standard? Explain with examples.

3) What is an Indian Accounting standard? What is an International Accounting

standard? Give the list of IAS/IFRS and corresponding Indian Accounting Standard
notified by MCA.

4) Who are the internal & external users of accounting information?

17
5) Discuss the Accounting Information system in detail.

6) Write the various branches of accounting?

7) Explain the different system of accounting.

8) Explain Accounting equation.

18
Unit 2

Accounting Process & Procedure

Unit Structure

2.0 Objectives

2.1 Accounting Process

2.2 Voucher

2.3 Classification of Accounts

2.4 Journal

2.5 Goods and Service Tax

2.6 Ledger

2.7 Posting

2.8 Subsidiary Books

2.9 Cash Book

2.10 Trial Balance

2.11 Bank Reconciliation Statement

2.12 Procedure and preparation of Bank Reconciliation Statement

2.13 Key Points to Remember

2.14 Unit End Exercise

2.0 Objectives

1. To understand the basic concepts of GST calculation

2. To prepare various types of vouchers, subsidiary books and Ledger Accounts.

3. To prepare Trial Balance after journalization and posting into the ledger.

4. Develop an insight to prepare Bank Reconciliation Statement.

2.1 Accounting Process

Traditionally, accounting is a method of collecting, recording, classifying, summarising,

presenting and interpreting financial data aspect of an economic activity. The series of
business transactions occurring 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 or stages:

19
1. Identification of Transaction

In accounting, only business transactions are recorded. A 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.

2. 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. It may
further be divided into sub-journals as well which are also known subsidiary books.

3. 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 together under appropriate heads of
accounts.

4. 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 fiscal year.

5. Analysis and Interpretation

The financial information or data as recorded in the books of account must further be
analysed and interpreted so to draw useful conclusions. Thus, analysis of accounting
information will help the management to assess in the performance of business
operation and forming future plans also.

6. 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 ‘stock holders’ and other one the stake
holders. Comparison of past and present statement and reports, use of ratio and trend
analysis are the different tools of analysis and interpretation.

Thus accounting is an art which starts and includes steps right from recording of
business transactions of monetary nature to the communicating or reporting the results
thereof to the various interested parties.

Illustration 1: State with reasons whether the following events are transactions or not.

(i) Started business with capital (brought in cash) Rs. 10,000.

(ii) Paid salaries to staff Rs. 1,000.

(iii) Purchased machinery for Rs. 5,000 in cash.

20
(iv) Placed an order with Sejal & Co. for goods for Rs. 5,000.

(v) Opened a Bank account by depositing Rs. 2,000.

(vi) Received pass book from bank.

(vii) Appointed Shlok as Manager on a salary of Rs. 4,000 per month.

(viii) Received interest from bank Rs. 400.

(ix) Received a price list from Lalit.

Solution:

(i) Transaction

It changes the financial position of Mr. Mondal’s business. Cash will increase by Rs.
10,000 and Capital will increase by Rs. 10,000.

(ii) Transaction,

It changes the financial position of Mr. Mondal’s business. Cash will decrease by Rs.
1,000and Salaries (expenses) will increase by Rs. 1,000

(iii) Transaction,

It changes the financial position of business. Machinery comes in and cash goes out.

(iv) Not a transaction

It does not change the financial position of the business.

(v) Transaction,

It changes the financial position of the business. Bank balance will increase by Rs. 2,000
and cash will decrease by Rs. 2,000.

(vi) Not a transaction,

It does not change the financial position of business

(vii) Not a transaction

It does not change the financial position of business

(viii) Transaction,

It changes the financial position of business. Bank interest will increase by Rs. 400 and
cash will increase by the same amount.

(ix) Not a transaction,

It does not change the financial position of the business.

2.2 Voucher

Each transaction is recorded in books of accounts providing all the required information
of the transaction. Since each transaction has an effect on the financial position of the

21
business, there should be documentary evidence to establish the monetary accounts at
which transactions are recorded and also the transactions are properly authorised. It is a
document which provides evidence of the transactions is called the Source Document or
a Voucher. There are two types of vouchers internal voucher and external voucher.

Internal Vouchers:

The internal vouchers are documents prepared internally by an organisation. The

voucher which is created by the business itself and signed by the payee is called as an
internal voucher. It is prepared when we cannot get receipt as proof for such a
transaction. e.g., Taxi fare, Bus fare, Auto fare etc.

External Voucher:

These vouchers are documents generated from outside the business. It is a document
received from an outside agency regarding the business transactions. e.g., Tax Invoice
received from the seller for the purchase of goods or stationery, Receipt of electricity
bills paid, Debit Note, Credit Note, Cash memo etc.

Journal Voucher:

Journal voucher is basic/original voucher on the basis of which the transactions should
be Journalised in journal book.

Accounting vouchers may be classified as transaction/journal vouchers, cash vouchers,

debit vouchers, credit vouchers, journal vouchers, etc.

The design of the accounting vouchers depends upon the nature, requirement and
convenience of the business. There is no set format of an accounting voucher. To
distinguish various vouchers, different colour papers and different fonts of printing are
used.

An accounting voucher must contain the following essential elements:

• It is written on a good quality paper

• Name of the firm must be printed on the top

• Date of transaction to be mentioned

• The number of the voucher in a serial order

• Name of the account to be debited or credited to be mentioned

• Debit and credit amount is to be written in words and figures

• Narration/description of the transaction is to be given account wise

• The person who prepares the voucher must mention his name along with signature

• The name and signature of the authorised person are mentioned on the voucher.

I) A transaction with one debit and one credit is a simple transaction and the accounting
vouchers prepared for such transaction is known as Journal/Transaction Voucher,

22
A specimen of a simple transaction voucher is used in practice is presented below

Fig.: Showing specimen journal/ transaction voucher

Name of firm:
_______________________________________________________________
______
Voucher No: _____________ Transaction no. _______ Date:
______________________________
Debit account:
_______________________________________________________________
_____
Credit account:
_______________________________________________________________
_____

Particulars Amount
(Rs.)

Narration:

Amount in words:
_______________________________________________________________
___

Authorised By: Prepared By:

II) Voucher which records a transaction that entails multiple debits/credits and one
credit/debit is called compound voucher. Compound voucher may be:

(a) Debit Voucher or (b) Credit Voucher

Debit / Payment voucher is a record of payment. When payment is made for an

expense, generally a bill is prepared to record full particulars of the claim by the person
or organisation receiving payment. From the bill, the accounting department prepares a
voucher for each payment to be made, no matter whether the amount that is paid for
the goods purchased, employee’s salaries paid, or for any other asset purchased.

Credit/Receipt voucher is a document which is issued against cash receipts. This

document shows that a certain sum of money was received from a person or
organisations. It also highlights the purpose for which the money is received.

Specimen of debit and credit vouchers

23
Debit Voucher

Name of Firm:
_________________________________________________________
Voucher No: ____________________________________ Date:
__________________
Credit Account:
_________________________________________________________
Amount in words:
______________________________________________________
Debit Accounts
S. Code Account Name Amount Narration (i.e.,
No. Explanation)

Authorised By: Prepared By:

Credit Voucher

Name of Firm:
_________________________________________________________
Voucher No: ____________________________________ Date:
__________________
Debit Account:
_________________________________________________________
Amount in words:
______________________________________________________
Credit Accounts
S. Code Account Name Amount Narration (i.e.,
No. Explanation)

Authorised By: Prepared By:

2.3 Classification of Accounts

1. Personal Accounts

Accounts which are related with accounts of individuals, firms, companies are known as
personal accounts. The personal accounts may further be classified into three categories:

(i) Natural Personal Accounts:

Accounts of individuals relating to natural persons such as Aayush’s A/c, Krishna’s A/c,
Sneha’s A/c are natural personal accounts.
(ii) Artificial Personal Accounts:
Accounts of companies, institutions such as Tata Industries Ltd, Rotary Club, M/s XYZ &

24
Sons, Bharat College account are artificial personal accounts. These exist only in the
eyes of law.

(iii) Representative Personal Accounts:

The accounts which represent some person such as outstanding wages account, prepaid
expenses account, accrued interest account are considered as representative personal
accounts.

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 relating to tangible
assets such as building, plant, machinery, cash, furniture etc. are classified as tangible
real accounts. Intangible real accounts are the accounts related to intangible assets such
as goodwill, trademarks, copyrights, franchisees, Patents etc.

3. Nominal Accounts

The accounts relating to income, expenses, losses and gains are classified as nominal
accounts. For example, Salary account, Wages account, Interest account, rent account,
Bad Debts Accounts.

Rules for Debit and Credit

Type of Accounts Rules for Debit / Credit

(a) Personal Account: Debit the receiver

Credit the giver

(b) Real Account: Debit what comes in

Credit what goes out

(c) Nominal Account: Debit all expenses and losses

Credit all incomes and gains

Illustration 1: Classify the following into personal, real and nominal accounts.

(i) Investments

(ii) Premises

(iii) Accrued Interest

(iv) XYZ Industries Corporation

(v) ABC Mechanical Works

(vi) Selling expenses Accounts

(vii) Patent Accounts

(viii) Purchases Account

(ix) Development credit Bank Ltd.

25
(x) Capital Account

(xi) Commission Account

(xii) GST Account

(xiii) Interest Received Account

(xiv) Stationery Account

(xv) Sales Account

Solution

Personal Account: (iii), (iv), (v), (ix), (x)

Real Account: (i), (ii), (vii), (viii), (xv).

Nominal Account: (vi), (xi), (xii), (xiii), (xiv)

2.4 Journal

Journal is a record of business transaction or events. The word journal comes from the
French word “Jour” meaning “day”. Journal is a primary book for recording the day-to-
day transactions in a chronological order i.e., the order in which they occur. The journal
is a form of diary for business transactions. This is called the book of first entry since
every transaction is recorded firstly in the journal.

Advantages of preparing Journal

• A journal contains a permanent record of all the business transactions.

• The journal provides a complete chronological (in order of the time of occurrence)
• Complete information relating to business transaction is available in one place with
all its aspects.
• The transaction is provided with an explanation called a narration.
• Journal reduces the possibility of an error.
• The use of journals avoids omission or duplication of transactions or parts of
transaction.

The proforma of journal is shown as follows:

JOURNAL

Date Particulars L.F. Debit Credit

(Amount) (Amount)
(1) (2) (3) (4) (5)

Column 1 (Date):

The date of the transaction on which it takes pale is written in this column.

26
Column 2 (Particulars):

In this column, the name of the accounts to the debited is written first, then the names
of the accounts to be credited and lastly, the narration (i.e., a brief explanation of
transaction) are entered.

Column 3 (L.F.):

L.F. stands for ledger folio which means page of the ledger. In this column are entered
the page numbers on which the various accounts appear in the ledger.

Column 4 (Dr. Amount):

In this column, the amount to be debited against the ‘Dr.’ Account is written along with
the nature of currency.

Column 5 (Cr. Amount):

In this column the amount to be credited against the ‘Cr.’ Account is written along with
the nature of currency.

Casting of Journal

At the end of each page of Journal, the total of debit amount and credit amount column
is taken to check arithmetical accuracy of the transaction. The totals of both the columns
must be equal.

In connection with the journal, the following points are to be remembered:

For each transaction, the exact accounts should be debited and credited. The two
accounts involved must be identified to pass a proper journal entry.

A Journal Entry which contains more than one debit or more than one credit or both is
called as a combined /compound Journal Entry.

Thus, in a combined Journal Entry.

(i) Several accounts are debited and one account is credited.

(ii) One account is debited and several accounts are credited.

(iii) More than one account is debited and more than one account is credited.

Journalizing

Journalizing is the process of recording business transactions/ journal entries in the

Journal. It is a systematic act of entering the transaction in a day book in order of their
occurrence i.e., date-wise or event-wise.

After analysing the business transactions, the following steps in journalising are
followed:

(i) Find which accounts are involved in business transaction.

(ii) Ascertain the nature of accounts involved?

27
(iii) Establish the golden rule of debit and credit is applicable for each of the accounts
involved.

(iv) Find out what account is to be debited / to be credited.

(v) Record the date of transaction in the “Date Column”.

(vi) Write the name of the account to be debited very near to the left-hand side in the
‘Particulars Column’ along with the word ‘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.

(vii) Record 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 be
credited in the ‘Credit Amount Column’ in front of the name of the account.

(viii) Record narration (i.e., a brief explanation of the transaction) within brackets in the
following line in ‘Particulars Column’.

(ix) A thin line is drawn all through the particulars column to separate one Journal entry
from the other and it shows that the entry of a transaction has been completed.

Illustration 1: Analyse the following transactions.

(a) Radha started his business with cash

(b) Borrowed from Niel

(c) Purchased furniture

(d) Purchased furniture from Mohit on credit

(e) Purchased goods for cash

(f) Purchased goods from Ranjan on credit

(g) Sold goods for cash

(h) Sold goods to Harish on credit

(i) Received cash from Harish

(j) Paid cash to Ranjan

(k) Deposited into bank

(l) Withdrew cash for personal use

(m) Withdrew from bank for office use

(n) Withdrew from bank for personal use

(o) Received cash from a customer, Shlok

(p) Paid salary by cheque

(q) Received donation in cash

28
(r) Paid to Ranjan by cheque

(s) Paid salary

(t) Paid rent by cheque

(u) Goods withdrawn for personal use

(v) Paid an advance to suppliers of goods

(w) Received an advance from customers

(x) Paid interest on loan

(y) Paid instalment of loan

(z) Interest allowed by bank.

Solution:

Analysis of Transactions

Transaction Accounts Nature of How affected Whether to be

involved accounts debited
/credited
(a) Cash A/c Real Cash is coming in Debit
Capital A/c Personal Radha is the giver Credit
(b) Cash A/c Real Cash is coming in Debit
Loan from Niel A/c Personal Niel is the giver Credit
(c) Furniture A/c Real Furniture is coming Debit
in
Cash A/c Real Cash is going out Credit
(d) Furniture A/c Real Furniture is coming Debit
in
Mohit’s A/c Personal Mohit is the giver Credit
(e) Purchases A/c Real Goods are coming in Debit
Cash A/c Real Cash is going out Credit
(f) Purchases A/c Real Goods are coming in Debit
Ranjan’s A/c Personal Ranjan is the giver Credit
(g) Cash A/c Real Cash is coming in Debit
Sales’s A/c Real Goods are going out Credit
(h) Harish’s A/c Personal Harish is the receiver Debit
Sales’s A/c Real Goods are going out Credit
(i) Cash A/c Real Cash is coming in Debit
Harish’s A/c Personal Harish is the giver Credit
(j) Ranjan’s A/c Personal Ranjan is the Debit
receiver
Cash A/c Real Cash is going out Credit
(k) Bank A/c Personal Bank is the receiver Debit
Cash A/c Real Cash is going out Credit
(l) Drawings Personal Radha is the receiver Debit
Cash A/c Real Cash is going out Credit
(m) Cash A/c Real Cash is coming in Debit
Bank A/c Personal Bank is the giver Credit
(n) Drawings Personal Radha is the receiver Debit
Bank A/c Personal Bank is the giver Credit

29
(o) Cash A/c Real Cash is coming in Debit
Shlok’s A/c Personal Shlok is the giver Credit
(p) Salary A/c Nominal Salary is an expense Debit
Bank A/c Personal Bank is the giver Credit
(q) Cash A/c Real Cash is coming in Debit
Donation A/c Nominal Donation is gain Credit
(r) Ranjan’s A/c Personal Ranjan is the Debit
receiver
Bank A/c Personal Bank is the giver Credit
(s) Salary A/c Nominal Salary is an expense Debit
Cash A/c Real Cash is going out Credit
(t) Rent A/c Nominal Rent is an expense Debit
Bank A/c Personal Bank is the giver Credit
(u) Drawings Personal Radha is the receiver Debit
Purchases A/c Real Goods are going Credit
(v) Advance to Personal Suppliers are the Debit
supplier’s A/c receiver
Cash A/c Real Cash is going out Credit
(w) Cash A/c Real Cash is coming in Debit
Advance from Personal Customers are the Credit
customers A/c givers
(x) Interest on loan Nominal Interest on loan is an Debit
A/c expense
Cash A/c Real Cash is going out Credit
(y) Loan A/c Personal Lender is the giver Debit
Cash A/c Real Cash is going out Credit
(z) Bank A/c Personal Bank is the receiver Debit
Bank interest A/c Nominal Bank interest is a Credit
gain
Illustration 2: Prepare Journal in the books of R.K. Co. from the following transactions:

Dec. 1 Started business with a capital of 50,000.

Dec. 6 Paid into bank 20,000

Dec. 8 Purchased goods for cash 4,000

Dec. 9 Paid to Ramesh 1,980

Dec. 9 Discount allowed by him 20

Dec. 10 Cash sales 3,000

Dec. 12 Sold to Harish for cash 2,000

Dec.15 Purchased goods from Ramesh 4,000

Dec.18 Paid wages to workers 300

Dec. 20 Received from Pankti 1,000 Allowed him discount Rs. 50

Dec. 22 Withdrawn from bank 3,000

Dec. 25 Paid Ram by cheque 500

Dec. 31 Withdrawn for personal use 200

30
Solution:

In the Books of R.K. Co.

Journal

Date Particulars L.F. Dr. Rs. Cr. Rs.

Dec. 1 Cash A/c Dr. 50,000

To Capital A/c 50,000
(Being business started with capital)
Dec. 6 Bank A/c Dr. 20,000
To Cash A/c 20,000
(Being cash paid into bank)
Dec. 8 Purchase A/c Dr. 4,000
To Cash A/c 4,000
(Being goods purchased for cash)
Dec. 9 Ramesh A/c Dr. 2,000
To Cash A/c 1,980
To Discount Received A/c 20
(Being cash paid to Ramesh and discount
received Rs. 20)
Dec. 10 Cash A/c Dr. 3,000
To Sales A/c 3,000
(Being goods sold for cash)
Dec. 12 Cash A/c Dr. 2,000
To Sales A/c 2,000
(Being goods sold for cash)
Dec. 15 Purchases A/c Dr. 4,000
To Ramesh A/c 4,000
(Being goods purchased from Ramesh)
Dec. 18 Wages A/c Dr. 300
To Cash A/c 300
(Being wages paid)
Dec. 20 Cash A/c Dr. 1,000
Discount Allowed A/c Dr. 50
To Pankti A/c 1,000
(Being cash received from Pankti and
allowed him discount Rs. 50)
Dec. 22 Cash A/c Dr. 3,000
To Bank A/c 3,000
(Being cash withdrawn from bank)
Dec. 25 Ramesh A/c Dr. 500
To Bank A/c 500
(Being paid by cheque)
Dec. 31 Drawings A/c Dr. 200
To Cash A/c 200
(Being withdrawn for personal use)
Grand Total 90,000 90,000

Opening Entry

In case of going concern at the beginning of the new year, new books of accounts are
opened and the balances relating to personal and real Accounts appearing in the books

31
at the close of the previous year are brought forward in new books. The entry for this
purpose in the books is called opening entry.

The opening entry is passed by debiting all assets and crediting all liabilities including
capital. If the amount of capital is not given then this can be found out with the help of
the accounting equation:

Assets = Liabilities + capital

Capital = Assets- Liabilities

Illustration 3: On 1st April 2021, Sejal’s assets and liabilities stood as follows:

Assets: Cash Rs. 12,000, Bank Rs. 34,000, Stock Rs. 6,000; Bills receivable 14,000;
Debtors 6,000; Building 1,40,000; Investments 60,000; Furniture 8,000

Liabilities: Bills payable 10,000, Creditors 18,000, Ram’s loan 26,000

Pass opening Journal entry.

Solution:

Journal

Date Particulars L.F. Dr. Rs. Cr. Rs.

(2021)
April. 1 Cash A/c Dr. 12,000
Bank A/c Dr. 34,000
Stock A/c Dr. 6,000
Bills receivable A/c Dr. 14,000
Debtors A/c Dr. 6,000
Building A/c Dr. 1,40,000
Investment A/c Dr. 60,000
Furniture A/c Dr. 8,000 10,000
To Bills payable A/c 18,000
To Creditor’s A/c 26,000
To Ram’s loan A/c 2,26,000
To Sejal’s capital A/c
(Being the opening balances of assets and
liabilities)
2,80,000 2,80,000
Goods Account

The term goods include every type of property such as Land, Building, Machinery,
Furniture, Cloth etc which is purchased and sold in the business.

Sub-Division of Goods Accounts

The goods account is not opened in accounting books and it is to be noted goods
includes purchases, sales, sales returns, purchases return of goods. However, purchase
account, sales account, sales return account and purchase return account are opened in
the books of account.

Purchases Account: This is opened for goods purchased on cash and credit.

Sales Account: This account is opened for the goods sold on cash and credit.

32
Purchase Returns Account or Return Outward Account: This account is opened for
the goods returned to suppliers.

Sales Returns Account or Return Inward Account: This account is opened for the
goods returned by customers.

Illustration 4: Journalise the following transactions for the month of January 2022:

1. Invested in shares of XYZ Ltd. and paid for the same in cash Rs. 2,000.

2. Placed on order with Mr. Sanghvi for Rs. 1,500.

3. Invoiced goods to Mr. Lope worth Rs. 1,000 and allowed a trade discount of 2 per
cent.

4. Carriage Rs. 25 and freight Rs. 70 were paid by the proprietor for the above goods but
are to be charged to Mr. Lope Account.

6. Goods valued at Rs. 700 were delivered to Nagpur Merchant under instructions from
Mr. Gaurav. They were to be charged to the latter’s Account.

7. Mr. Lope paid Rs. 500 due from him, and the same was spent on purchasing goods
from Mr. Deepak.

8. Sold old motor car belonging to the proprietor for Rs. 5,000 and the amount was
invested in the business.

9. The proprietor paid Rs. 180 in full settlement of Mr. Manjari for goods worth Rs. 200
purchased by him for personal use.

10. Mr. Gaurav was declared insolvent and paid Rs. 450 in full settlement. The balance
Rs. 250 was written off as a bad debt.

11. Mohan our debtors, on our advice, directly paid Naresh, our creditor Rs. 2,000.

Solution:

Journal

Date Particulars L.F. Dr. Rs. Cr. Rs.

Jan. 1 Investment A/c Dr. 2,000
To Cash A/c 2,000
(Being purchase of shares of XYZ Ltd. paid
in cash)
Jan. 2 No entry is passed as “placing of an order
is not a business transaction”
Jan. 3 Mr. Lope’s A/c Dr. 980
To Sales A/c 980
(Being the entry for credit sale of goods to
Mr. Lope at a trade discount of 2%)
Jan. 4 Mr. Lope’s A/c Dr. 95
To Cash A/c 95
(Being payment of freight and carriage on
behalf of Mr. Lope)
Jan. 6 Mr. Gaurav A/c Dr. 700

33
To Sales A/c 700
(Being goods sold to Mr. Govind but
delivered to Nagpur Merchants)
Jan. 7 Cash A/c Dr. 500
To Lope’s A/c 500
(Being in amount received in cash from
Lope)
Jan. 7 Purchases A/c Dr. 500
To Cash A/c 500
(Being entry for goods purchased from Mr.
Deepak from in cash received from Lope)
Jan. 8 Cash A/c Dr. 5,000
To Proprietor’s Capital A/c 5,000
(Being amount invested in business out of
the sale proceeds of the personal car)
Jan. 9 Drawing A/c Dr. 180
To Cash Account 180
(Being the amount paid to Manjari for
goods purchased for his personal use)
Jan. 10 Cash A/c Dr. 450
Bad Debts A/c Dr. 250
To Gaurav’s A/c 700
(Being the amount received from Gaurav
in full settlement of his debts)
Jan. 11 Naresh A/c Dr. 2,000
To Mohan A/c 2,000
(Being cash paid by Mohan to Naresh)
Grand Total 12,655 12,655

2.5 Goods and Service Tax

GST stands for Goods and Service Tax. Before GST every State had variety of taxes
levied at different stages of trading. Taxes that existed before were Excise Duty, Custom
Duty, VAT, Entertainment Tax, Central Sales Tax, Service Tax, Octroi etc. All these taxes
are included under GST, that is why GST is One nation, One tax, One market. GST is
started from 1st of July 2017.

In the tax invoice for Goods, there is HSN i.e., Harmonised System of Nomenclature
code while in service invoice there is SAC. Services are also classified and special code
numbers are given. These are called SAC or Service Accounting Code.

Sr. Types Rate of Goods and services items list

No. GST
1 Zero 0% Goods: Essential Commodities like food grains, fruits,
rated vegetables, milk, salt, earthen pots etc.
Services: Charitable trust activities, transport of
water use of roads and bridges, public library,
agriculture, related services, Education and Health
care services etc.
2 Low 5% Goods: Commonly used items- LPG cylinder, Tea,
rated coffee, oil, Honey, Frozen vegetables, spices, sweets
etc.
Services: Railway transport services, bus transport

34
services, taxi services.
3 Standard 12% Goods: consumer goods: butter, ghee, dry fruit, jam,
rated jelly, sauces, pickles, mobile phone etc.
(I slab) Services: Printing Job work, Guest house, Services,
related to construction business.
4 Standard 18% Goods: Marble, Granite, Perfumes, Metal items,
rated (Most of Computer, Printer, Monitor, CCTV etc.
(II slab) the goods Services: Courier services, Outdoor catering, Circus,
and Drama, Cinema, Exhibitions, Currency exchange,
services Broker Services in share trading etc.
are
included)
5 Highly 28% Goods: Luxury items, Motor Cycles and spare parts,
rated Luxury cars, Pan-masala, Vacuum cleaner, Dish
washer, AC, Washing machine, Fridge, Tobacco
products,
Aerated water etc.
Services: Five-star Hotel accommodation,
Amusement
parks, Water parks, Theme parks, Casino, Race
course,
IPL games, Air transport (business class) etc.
Note: The rates and types of GST are as prescribed by the government. GST rates are
subject to change. Electricity, petrol, diesel etc are not under purview of GST.

Illustration 1: Purchased Laptop from Jay and Company worth 50,000 at 18% GST and
amount paid by cheque

Cost of Laptop = 50,000

Add: CGST 9% = 4,500

SGST 9% = 4,500

Net value = 59,000

Journal Entry

Date Particulars L.F. Dr. Rs. Cr. Rs.

Laptop A/c Dr. 50,000
Input CGST A/c Dr. 4,500
Input SGST A/c Dr. 4,500
To Bank A/c 59,000
(Being purchased Laptop by cheque at 18%
GST)
Illustration 2: Sold Car for 1,00,000 at 28% GST and amount received by cheque

Cost of Car = 1,00,000

Add: CGST 14% = 14,000

SGST 14% = 14,000

Net value = 1,28,000

35
Journal Entry

Date Particulars L.F. Dr. Rs. Cr. Rs.

Bank A/c Dr. 50,000
To Car A/c 4,500
To Output CGST A/c 4,500
To Output SGSTA/c 59,000
(Being sold Car and amount received by
cheque at 28% GST)

Accounting Entries under Goods and Services Tax

Illustration 3: Record necessary Journal entries assuming CGST @ 5% and SGST @

5% and all transactions are occurred within Mumbai)

i. Shobha bought goods Rs.1,00,000 on credit

ii. She sold them for Rs.1,35,000 in the same state on credit

iii. She paid for Railway transport Rs.8,000

iv. She bought Printer for Rs. 10,000

v. Paid postage Rs. 2000

Solution:

Journal

Date Particulars L.F. Dr. Rs. Cr. Rs.

1 Purchases A/c Dr. 1,00,000
Input CGST A/c Dr. 5,000
Input SGST A/c Dr. 5,000
To Creditors A/c 1,10,000
(Being Goods bought on credit)
2 Debtors A/c Dr. 1,48,500
To Sales A/c 1,35,000
To Output CGST A/c 6,750
To Output SGST A/c 6,750
(Being Goods sold on credit)
3 Transport Charges A/c Dr. 8,000
Input CGST A/c Dr. 400
Input SGST A/c Dr. 400
To Bank A/c 8,000
(Being transport charges paid)
4 Printer A/c Dr. 10,000
Input CGST A/c Dr. 500
Input SGST A/c Dr. 500
To Bank A/c 11,000
(Being Printer bought)
5 Postage A/c Dr. 2,000
Input CGST A/c Dr. 100
Input SGST A/c Dr. 100
To Bank A/c 2,200
(Being Paid for Portage)
6 Output CGST A/c Dr. 6,750

36
Output SGST A/c Dr. 6,750
To Input CGST A/c 6,000
To Input SGST A/c 6,000
To Electronic Cash Ledger A/c 1,500
(Being GST set off and balance paid)
Working Notes: -

Total Input CGST = 5,000 + 400 + 500 + 100 = 6,000

Total Input SGST = 5,000 + 400 + 500 + 100 = 6,000

Total Output CGST = 6,750

Total Output SGST = 6,750

Net CGST Payable = 6,750 - 6,000 = 750

Net SGST Payable = 6,750 - 6,000 = 750

Illustration 4: Record necessary Journal entries in the books of Suman of Baroda

assuming CGST @ 9% and SGST @ 9%:

a. Bought goods Rs.3,50,000 from Goa.

b. Sold goods for Rs. 2,00,000 Madhya Pradesh.

c. Sold goods for Rs. 4,00,000 locally.

d. Paid Insurance premium Rs.30,000.

e. Bought furniture for office Rs. 50,000.

Solution:

Books of Suman

Journal

Date Particulars L.F. Dr. Rs. Cr. Rs.

1 Purchases A/c Dr. 3,50,000
Input IGST A/c Dr. 63,000
To Bank A/c 4,13,000
(Being goods bought)
2 Bank A/c Dr. 2,63,000
To Sales A/c 2,00,000
To Output IGST A/c 36,000
(Being goods sold outside the state)
3 Debtors A/c Dr. 4,72,000
To Sales A/c 4,00,000
To Output CGST A/c 36,000
To Output SGST A/c 36,000
(Being goods sold on credit locally)
4 Insurance Premium A/c Dr. 30,000

37
Input CGST A/c Dr. 2,700
Input SGST A/c Dr. 2,700
To Bank A/c 35,400
(Being insurance premium paid)
5 Furniture A/c Dr. 50,000
Input CGST A/c Dr. 4,500
Input SGST A/c Dr. 4,500
To Bank A/c 59,000
(Being furniture bought)
6 Output CGST A/c Dr. 34,200
To Input CGST A/c 7,200
To Input IGST A/c 27,000
(Being set off against CGST output made)
7 Output SGST A/c Dr. 7,200
To Input SGST A/c 7,200
(Being set off against SGST output made)
8 Output IGST A/c Dr. 36,000
To Input IGST A/c 36,000
(Being set off against SGST output made)
9 Output CGST A/c Dr. 1,800
Output SGST A/c 28,800
To Electronic Cash Ledger A/c 30,600
(Being final payment made)
Total 12,88,000 12,88,000

Working Notes:

Particulars CGST SGST IGST

Output liability 36,000 36,000 36,000
Loss : Input tax Credit
CGST 7,200
SGST 7,200
IGST 27,000
Amount Payable 36,000
1,800 28,800 NIL

• Any IGST credit will first be applied to set off IGST and then CGST. Balance, if any, will
be applied to set off SGST.

Illustration 5: Journalise the following transactions in the books of Shridhar Store for
August 2021

1 Shridhar started business with own Cash 90,000, Stock of goods worth 40,000

Machinery worth 70,000 and borrowed money 50,000 from her friend Kavita at 12% p.a.

4 Bought goods worth 50,000 from Madan @ 10% trade discount.

6 Returned goods worth 450 to Madan for not being as per sample

38
8 Sold goods worth 80,000 to Karan @ 10% trade discount and received cash after
allowing her 5% cash discount.

13 Paid for Rent 4,000.

17 Purchased a new Plant worth 1,00,000 from Balaji Ltd. at 28% GST and amount paid
by debit card.

20 Paid for Salary 27,000.

27 Purchased 4 Laptops of 1,20,000 @18% GST and amount paid by Debit Card.

31 Withdrew from Bank 10,000 for personal use.

Solution:

Journal of Shridhar Stores

Date Particulars L.F. Dr. Rs. Cr. Rs.

1 Cash A/c Dr. 1,40,000
Stock of Goods A/c Dr. 40,000
Machinery A/c Dr. 70,000
To Capital A/c 2,00,000
To Kavita's loan A/c 50,000
(Being started business with cash, goods,
machinery and loan from Konika)
4 Purchases A/c Dr. 45,000
To Madan's A/c 45,000
(Being bought goods from Madan on credit
at 10% discount)
6 Madan's A/c Dr. 450
To Purchase Return A/c 450
(Being goods returned to Madan)
8 Cash A/c Dr. 68,400
Discount allowed A/c Dr. 3,600
To Sales A/c 72,000
(Being goods sold for cash at 10% trade
discount and 5% cash discount)
13 Rent A/c Dr. 4,000
To Cash A/c 4,000
(Being paid for Rent)
17 Machinery A/c Dr. 1,00,000
Input CGST A/c Dr. 14,000
Input SGST A/c Dr. 14,000
To Bank A/c 1,28,000
(Being Plant purchase at 28% GST and
paid by Debit card)
20 Salaries A/c Dr. 27,000
To Cash A/c 27,000
(Being paid for Salary)
27 Laptops A/c Dr. 1,20,000
Input CGST A/c Dr. 10,800
Input SGST A/c Dr. 10,800
To Bank A/c 1,41,600
(Being purchased four Laptops at 18% GST
and paid by Debit card)

39
31 Drawings A/c Dr. 10,000
To Bank A/c 10,000
(Being cash withdrawn from bank for
personal use)
Total 6,78,050 6,78,050

2.6 Ledger

Ledger is the principal book or final book under double entry system of accounting in
which the transactions recorded in subsidiary books are classified in various accounts
chronologically with a view to knowing the position of business account-wise in a
particular period. The ledger is the principal book of accounting system. A ledger is the
collection of all the accounts, debited or credited, in the journal proper and various
special journal It includes all accounts whether Real, Nominal or Personal.

“A Ledger Account may be defined as a summary, statement of all the transactions

relating to persons, assets, expenses or incomes which have taken place during a given
period to time and shows their net effect”. - S. P. Jain, K. L. Narang –Advanced
Accountancy

Ledger is kept in any of the following two forms:

• Bound Ledger
• Loose Leaf Ledger

It is common to keep the ledger in the form of loose-leaf cards these days instead of
keeping them in bounded form. This helps in posting transactions particularly when
mechanised system of accounting is used.

Utility of Ledger

Knowledge of account

• Particulars of income and expenditure

• Test of accuracy
• Knowledge of profit and loss
• Economy of time
• Knowledge of assets and liabilities
• Assessment of overall position of business
• Evidence in business disputes

Difference between journal and Ledger

S. Basic of Journal Ledger

No. Differences
1 Nature of book It is the book of first or It is the book of final entry
original entry
2 Record It is the book for It is the book of analytical
chronological record record
3 Weight in legal It is the book of source entry It has a lesser weight us
evidence and has a greater weight as legal evidence as it is

40
legal evidence based on journal
4 Unit of The unit of classification of The unit of classification of
classification of data within the journal is data within the ledger is
data transaction account
5 Process of The process of recording in The process of recording in
recording the journal is called the ledger is called
‘journaling’ ’posting’
6 Place More than one transaction More than one transaction
regarding one account is regarding one account is
written at different places written at one place
date-wise
Format of Ledger Account

Name of the Account

Dr. Cr.

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

According to this format the columns will contain the information as given below:

An account is debited or credited according to the rules of debit and credit with respect
to category of account.

Name of the Account: The Name of the item is written at the top of the format as the
title of the account. The title of the account ends with suffix ‘Account’.

Dr. /Cr.: Dr. means Debit side of the account that is left side and Cr. Means Credit side
of the account, i.e., right side.

Date: Year, Month and Date of transactions are posted in chronological order in this
column.

Particulars: Name of the item with reference to the original book of entry is written on
debit/credit side of the account.

Journal Folio: It records the page number of the original book of entry on which
relevant transaction is recorded. This column is filled up at the time of posting.

Amount: This column records the amount in numerical figure, corresponding to what
has been entered in the amount column of the original book of entry.

2.7 Posting

Posting is the process transferring the debits and credits of journal entries to the ledger
account.

Procedure for Posting

1. Opening of separate account – Each transaction affect two accounts. separate ledger
for accounts is prepared such accounts may be personal, real and nominal.

41
2. Posting journal entry to the concerning side either to the debit side of the ledger
account or to the credit side of the ledger accounts as per journal entry.

3. use of word,” To” and “By” – The word “To” is prefixed to the posting of debit side and
the word “By” is prefixed to the credit side in each account.

Ledger posting of Opening Journal Entry

While making ledger accounts of assets and liabilities appearing in the opening journal
entry opening balance as represented in the journal entry must be shown in the
beginning of the ledger account as “To Balance b/d” at the debit side for assets and “by
balance b/d” at the credit side of liabilities. Remaining posting in the respective accounts
will be done as usual.

Balancing of ledger Accounts

Balancing of Ledger accounts means totalling both the sides of Ledger Account, finding
the difference between greater total and smaller total and recording the difference on
the smaller side

Steps for balancing the ledger accounts

1) Take the totals of both the sides i.e Debit and Credit.

2) Find out the difference between both the sides.

3) If the debit side total is more than the credit side then difference will be shown on
credit side as ‘By Balance c/d’ in particulars column and difference amount is shown in
amount column.

4) Same way if the credit side total is higher than the debit side total then the difference
amount is shown on debit side as ‘To Balance c/d’ in particulars column and difference
amount is shown in amount column.

5) These closing balances of different ledger accounts are shown as Opening Balances
for the next period. Closing balance shown on debit side of ledger account will be shown
as Opening Balance on the credit side at the beginning of the period as ‘By Balance b/d’

6) Closing Balance shown on credit side of ledger account will be shown on debit side of
the account as Opening Balance at the beginning of the period as ‘To Balance b/d’

Illustration 1: Journalise the following transactions, post them in the Ledger and
balance the accounts as on 31st March, 2021.

1. Ram started business with a capital of Rs. 10,000.

2. He purchased goods from Mohan on credit Rs. 2,000.

3. He paid cash to Mohan Rs. 1,000.

4. He sold goods to Suresh Rs. 2,000.

5. He received cash from Suresh Rs. 3,000.

6. He further purchased goods from Mohan Rs. 2,000.

42
7. He paid cash to Mohan Rs. 1,000.

8. He further sold goods to Suresh Rs. 2,000.

9. He received cash from Suresh Rs. 1,000

Solution

Journal

Date Particulars L.F. Dr. Rs. Cr. Rs.

1 Cash A/c Dr. 10,000
To Capital A/c 10,000
(Being commencement of business)
2 Purchase A/c Dr. 2,000
To Mohan A/c 2,000
(Being purchase of goods on credit)
3 Mohan A/c Dr. 1,000
To Cash A/c 1,000
(Being payment of cash to Mohan)
4 Suresh A/c Dr. 2,000
To Sales A/c 2,000
(Being good sold to Suresh)
5 Cash A/c Dr. 3,000
To Suresh A/c 3,000
(Being cash received from Suresh)
6 Purchases A/c Dr. 2,000
To Mohan A/c 2,000
(Being purchase of goods from Mohan)
7 Mohan A/c Dr. 1,000
To Cash A/c 1,000
(Being payment of cash to Mohan)
8 Suresh A/c Dr. 2,000
To Sales A/c 2,000
(Being goods sold to Suresh)
9 Cash A/c 1,000
Dr. 1,000
To Suresh A/c
(Being cash received from Suresh)
Total 24000 24000

43
Ledger

Cash Account

Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
To Capital A/c 10000 By Mohan 1000
To Suresh 3,000 By Mohan 1000
To Suresh 100
Mar. 31 By Balance c/d 12000
14000 14000
April 1 To Balance b/d 12000

Capital Account

Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
Mar. To Capital A/c 10000 By Cash A/c 10000
31
10000 10000
April 1 By Balance b/d 10000

Purchase Account

Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
To Mohan A/c 2000 Mar. 31 By Balance c/d 4000
To Mohan A/c 2000
4000 4000
April 1 To Balance b/d 4000

Mohan’s Account

Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
To Cash A/c 1000 By Purchase A/c 2000
To Cash A/c 1000 By Purchase A/c 2000
To Balance c/d 2000
4000 4000
April 1 By Balance b/d 2000

Suresh’s Account

Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
Mar. 31 To Sales 2000 By Cash A/c 3000
To Sales 2000 By Cash A/c 1000
4000 4000

44
Sales Account

Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
Mar. 31 To Balance c/d 4000 By Suresh A/c 2000
By Suresh A/c 2000
4000 4000
April 1 By Balance b/d 4000
It is to be noted that the balance of an account is always known by the side which is
greater. For example-

In the above sum Debit side of the Cash account is greater than the credit side by Rs.
12,000. It is interpreted that Cash account is showing a debit balance of Rs. 12,000.
Similarly, the credit side of the Capital account is greater than debit side by Rs. 10,000.
It will be, therefore, said that the Capital account is showing a credit balance of Rs.
10,000.

2.8 Subsidiary Books

All business transactions, at the first stage, are recorded in the book of original entry
i.e., Journal and then posted into the ledger under the double entry system of book-
keeping. This procedure is easy and practicable in small business houses where the
numbers of business transactions are less and when a single person can handle the
business transactions. But as the business expands the number of transactions becomes
so large, that the Journal is required to be sub-divided into Special Journals which are
called Subsidiary Books.

It is divided in such a way that a separate book is used for each category of business
transactions which are repetitive in nature, similar and are sufficiently large in number.
Special journals refer to the journals meant for recording specific business transactions
of similar nature.

These special journals are also known as “Subsidiary Books” or “Day Books”. The main
types of special journals are as follows:

(i) Cash Book:

It records all those transactions which are in cash or by cheques.

(ii) Purchases Book:

It records all transactions relating to goods purchased on credit.

(iii) Sales Book:

It records all transactions relating to goods sold on credit.

(iv) Purchases Return Book:

It records return of goods to suppliers.

45
(v) Sales Return Book:

It records return of goods by the customers.

(vi) Bills Receivable Book:

It records entries regarding bills receivables. The details of bills are given in this book.

(vi) Bills Payable Book:

All bills which are accepted and payable by a business house are recorded in this book.

(vii) Journal Proper:

Those transactions which are not recorded in any of the above-mentioned books are
recorded in the Journal Proper.

Following transactions are recorded in this Journal Proper

Opening entries

Adjustment entries

Rectification entries

Transfer entries

Purchase Book is prepared mainly to record credit purchases of goods. The term goods
refer to all such commodities and services in which business deals.

Date Particulars Invoice No. L.F. Amount Rs. Net Amount

(Names of Rs
suppliers)

Sales Book is prepared mainly to record credit sales of goods. The cash sales of goods
and assets sold are not entered in this book. Entries in this book are made from the
outward invoice of credit sales.

Date Particulars Invoice No. L.F. Amount Rs. Net Amount

(Names of Rs
Customer
/Party)

Each Customer’s personal account is debited in the ledger with its respective amount
with the words “to Sales a/c. The periodical total of this book is credited to sales a/c with
the words “By sundries as per sales book”.

Returns Outward of Purchase Return Book is prepared to record the return of goods
purchased earlier from the suppliers on credit. When goods are returned a debit note is
made out and sent to the supplier to whom goods are returned.

Date Name of the supplier Debit Note No. L.F. Amount Rs.

46
Each supplier’s account mentioned in the purchased earlier from the suppliers on credit.
When goods are returned a debit note is made our and sent to the supplier to whom
goods are returned

Return inward or Sales Return Book is prepared mainly to record the returns of
goods sold to customers on credit. On receipt of the goods the firm prepares a Credit
Note in the name of the customer and sends its original copy to the customer. Entries
are made from credit note book into the sales return books.

Date Name of the customer Credit Note No. L.F. Amount Rs.

Each customer’s personal account {as given in the sales returns book} is credited with
the amount of goods returned by him with the words” By Sales a/c’’. The sales return
A/c in the ledger gets the debit with the periodical total of Sales Returns Book with the
words “To sundries as per Sales returns Book”

Bills Receivables Book is prepared to keep a detailed record of the bill receivable
received by the firm. This book provides a medium for posting bills receivable
transactions. The ruling of this book is given below:

Date Drawer Acceptor Where Date Term Due I.F. Amount Remark
When Payable of date Rs.
received bill

The personal account of the person from whom the bill is received is credit with the
amount of that bill and the periodical total of the Bills Receivable Book is debit to Bills
Receivable a/c in the ledger.

Bills Payable Book is prepared to keep a detailed record of all bills payable accepted by
firm.

Date of To Payee Where Date Term Due L/F Amount Remark

Acceptance whom payable of date Rs.
given bill

The personal account of the person whose bill as accepted is debited with the amount of
that bill and the periodical total of the Bills Payables Book is credited to Bills Payables in
the ledger.

2.9 Cash Book

Cash book is the record of transactions related to cash receipts and cash payments. All
transactions concerning to receipts and payments of cash are recorded in cash book.
Cash Book is in the form of an account and has two sides-debit and credit side. On the
debit side, all cash receipts are recorded while on the credit side, all cash payments are
recorded.

47
Features of cash book:

a. Only cash transactions are recorded in the cash book.

b. It performs the functions of both journal and ledger at the same time.

c. All cash receipts are recorded in the debit side and all cash payments are recorded in
the credit side.

d. It records only one aspect of transactions i.e., cash.

e. All cash transactions are recorded chronologically in the cash book.

Types of Cash Book

(a) Single Column Cash Book- records cash transactions only.

(b) Double (Two) Column Cash Book- records cash transactions and account of discount.

(c) Triple (Three) Column Cash Book- records cash and bank transactions account of
discount.

(d) Petty Cash Book- For recording petty expenses.

1. Single column Cash Book has one amount column on each side. All cash receipts
are recorded on the debit side and all cash payments on the credit side.

Format of Single Column Cash Book:

Dr. Single Column Cash Book Cr.

Date Particulars L.F. Amount Date Particulars L.F. Amount

Rs Rs

2. Cash Book with Discount Column/Double column cash book Cash book with
discount Column has two amount columns (one for cash and another for discount) as
each side. All cash receipts and cash discount allowed are recorded on the debit side and
all cash payments and cash discount received are recorded on the credit side.

Format of Cash Book with Discount Column:

Dr. Cash Book with Discount Column Cr.

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

3. Three Column Cash Book has three amount columns (one for cash, one for Bank,
and one for Discount) on each side. All cash receipts, deposits into bank and discount
allowed are recorded on debit side and all cash payments, withdrawals from bank and
discount received are recorded on the credit side. In fact, a three-column cash book
serves the purposes of Cash Account and Bank Account.

48
Format of three column Cash book:

Dr. Three Column Cash Book Cr.

Date Particulars LF Dis Cash Bank Date Particulars LF Dis Cash Bank
Rs Rs Rs Rs

4. Petty Cash Book (Imprest system) is the book which is used for the purposes of
recording the payment of petty cash expenses. Petty Cashier is the person who is
authorized to make payments of petty cash expenses and to record them in petty cash
book.

Features of Petty Cash Book

1. The amount of cash received from the main cashier is recorded on the left-hand side
column.

2. The payments of petty cash expenses are recorded on the right-hand side in the
respective columns.

3. It can never show a credit balance the cash payments can never exceed the cash
receipts.

4. Its balance represents unspent petty cash in hand.

5. Recording is done on the basis of internal as well as external vouchers.

6. All the column of expenses are totalled periodically and such periodic totals are
individually posted.

7. Petty Cash Book is both a book of original entry as well as a book of final entry.

Advantages of Petty Cash Book

1. Economy of time

2. Saving of labour in posting

3. Lesser chance of mistakes due to regularly examination the petty cash book.

4. Control over petty expenses since the petty cashier can never spend more than the
available petty cash.

5. Control over fraud and Misappropriation if any

6. Benefits of specialization are available since recording of cash transactions is divided

between main cash book and petty cash book.

Petty cash book

Receipts Payment
Date Parti Cash To Date Parti Vouche Posta Convey Carta Printing Misc. Total
cular Book tal cula r No. ge ance Rs. ge & items Rs.
Folio Rs r Rs. Rs. Statione Rs
. ry Rs

49
Illustration 1: Enter the following transactions in the Cash Book of Mr. Nikky.

2021

March 1 Mr. Nikky commenced business with Cash 6,500

March 3 Bought goods for cash 685

March 4 Paid to Mohini 95

March 6 Deposited in the bank 4,000

March 6 Purchased office furniture on cash 465

March 9 Sold goods for cash 3,000

March 12 Paid wages in cash 120

March 13 Paid for stationary 40

March 15 Sold goods for cash 2,500

March 17 Paid for miscellaneous expenses 45

March 19 Received cash from Tabu 485

March 21 Withdrew for domestic use 250

March 22 Paid salary 400

March 25 Paid rent 90

March 28 Paid electricity bill 35

March 29 Paid for advertising 40

March 31 Paid into bank 2,500

Solution

Dr. Cash Book Cr.

Date Particulars L. Amt. Rs Date Particulars L. Amt.

(Receipts) F. (Payments) F. Rs
Mar.1 To Capital A/c 6500 Mar.3 By Purchases A/c 685
Mar.9 To Sales A/c 3000 Mar.4 By Mohini’s A/c 95
Mar.15 To Sales A/c 2500 Mar.6 By Bank A/c 4000
Mar.19 To Tabu’s A/c 485 Mar.6 By Furniture A/c 465
Mar.12 By Wages A/c 120
Mar.13 By Stationery A/c 40
Mar.17 By Misc. Exp A/c 45
Mar.21 By Drawings A/c 250
Mar.22 By Salaries A/c 400
Mar.25 By Rent A/c 90
Mar.28 By Electricity A/c 35
Mar.29 By Advertisement A/c 40
Mar.31 By Bank A/c 2500
Mar.31 By Balance c/d 3720
12485 12485

50
Illustration 3: From the following transactions, prepare the Two Column Cash Book.

2021.

Aug. 1 Cash in hand 25,500

Aug. 2 Received from Rakhi and 2,900 discount allowed to him 100

Aug. 5 Cash sales 6,000

Aug. 6 Purchased goods for cash 7,800

Aug. 8 Received from Neeta and 1,350 allowed her discount 50

Aug. 12 Paid to Ravi and 3,400 received discount 200

Aug. 20 Paid rent 1,000

Aug. 25 Interest received in cash 500

Aug. 26 Paid to Kamlesh and 1,760 received discount 40

Aug. 28 Machinery purchased 5,200

Aug. 30 Salaries paid 3,000

Solution:

Cash Book

Dr. Cr.

Date Particulars L. Dis Cash Date Particulars L. Dis Cash

Aug F. Aug F.
1 To Bal b/d 25500 6 By Purchases A/c 7800
2 To Rakhi A/c 100 2900 12 By Ravi A/c 200 3400
5 To Sales A/c 6000 20 By Rent A/c 1000
8 To Neeta A/c 50 1350 26 By Kamlesh’s A/c 40 1760
25 To Interest 500 28 By Machinery A/c 5200
A/c 30 By Salaries A/c 3000
31 By Bal. c/d 14090
150 36250 240 36250
Sep1 To bal b/d 14090
Note: The discount columns are not balanced but merely totalled. These totals are
posted to the respective Discount Allowed Account and Discount Received Account.

Illustration 4: Prepare a Triple Column Cash Book from the following particulars:

2021

Jan. 1. Cash in hand Rs. 50,000.

2. Paid into bank Rs. 10,000.

3. Bought goods from Harish for Rs. 200 for cash.

4. Bought goods for Rs. 2,000 paid cheques for them, discount allowed 1%

5. Sold goods to Mohini for cash Rs. 250.

51
6. Received a cheque from Shalu for goods sold for Rs. 800. Discount allowed 12.5%

8. Purchased an old typewriter for Rs. 200. Spent Rs. 50 on its repairs.

9. Bank notified that Shalu’s cheque has been dishonoured and bank charges debited Rs.
10.

10. Received a money order for Rs. 25 from Harish.

11. Shalu settled his account by means of a cheque for Rs. 820, Rs. 20 being for interest
charged.

12. Withdrew from bank Rs. 10,000.

18. Discounted a bill of exchange for Rs.1,000 at 1% through bank.

20. Honoured our own acceptance by cheque Rs. 5,000.

22. Withdrew for personal use Rs. 1,000.

24. Paid trade expenses Rs. 2,000.

25. Withdrew from bank for private expenses Rs. 1,500.

26. Purchased machinery from Raju for Rs. 5,000 and paid him by means of a bank draft
purchased for Rs. 5,005.

27. Issued cheque to Raman for cash purchase of furniture Rs. 1,575.

28. Received a cheque for commission Rs. 500 from S. & Co. and deposited into bank.

29. Ranju who owned us Rs. 500 became bankrupt and paid us 50 paisa in a rupee.

30. Received payment of a loan of Rs. 5,000 and deposited Rs. 3,000 out of it into bank.

31. Paid rent to landlord ‘Mohini’ by a cheque of Rs. 500.

31. Interest allowed by bank Rs. 30.

31. Half-yearly bank charges Rs. 50.

Solution

Triple Column Cash Book

Dr. Cr.

Date Particulars L Dis Cash Bank Date Particulars L Dis Cash Bank
F Rs Rs F Rs Rs
1 To Bal b/d 50000 2 By Bank A/c C 10000
2 To cash A/c C 10000 3 By Purchases A/c 200
5 To sales A/c 250 4 By Purchases A/c 20 1980
6 To Shalu 100 700 8 By Typewriter A/c 200
10 A/c 25 8 By Typewriter A/c 50
11 To Harish 800 9 By Shalu A/c 100 700
11 A/c 20 9 By Bank Ch. A/c 10
12 To Shalu C 10000 12 By Cash A/c C 10000
18 A/c 10 990 20 By B/P A/c 5000
28 To interest 500 22 By Drawings A/c 1000
29 A/c 250 24 By Trade Exp. A/c 2000
30 To bank A/c 5000 25 By Drawings 1500

52
30 To B/R A/c C 3000 26 By Machinery A/c 5000
31 To Comm. 30 26 By Bank Ch. A/c 5
31 A/c 10280 27 By Furniture A/c 1575
To Ranju 30 By Bank A/c 3000
A/c 31 By Rent A/c 500
To loan A/c 31 By Bank Ch. A/c 50
To Cash A/c 31 By Bal c/d 49075
To interest
A/c
To Bal c/d
(Bank O/D)

110 65525 26320 120 65525 26320

Note: In the Triple Column Cash Book there will be some cross or contra entries i.e.,
transfer of money from cash to bank (amount deposited) and vice-versa (amount
withdrawn from bank for office use). In all such cases both entries occur in the cash
book and no ledger entry is required. This is indicated by a contra sign (C) in the folio
column indicating thereby that the double entry aspect of this transaction is complete
and it requires no posting to the ledger.

Petty Cash Book

In every business organisation, there are a number of payments which involve small
amounts e.g., payments for postage, telegrams, cartage etc. If all these transactions are
recorded in the Cash Book, it will increase the head cashier’s workload and make the
Cash Book bulky. Usually, one person is handed over a small amount to meet the petty
expenses of a given period and is authorised to make such payments and to record them
in a separate Cash Book. Such person, amount and Cash Books are called as “Petty
Cashier”, ‘Imprest’ and ‘Petty Cash Book’ respectively. The Petty Cash Book may or may
not be maintained on ‘Imprest System’.

Under the Imprest system, the Head Cashier makes the reimbursement of the amount
spent by the Petty Cashier,

Under Non-imprest system, the Head Cashier may handover the Cash to the Petty
Cashier equal to/more than/less than the amount spent.

Usually, the Petty Cash Book is maintained on the basis of imprest system.

Illustration 5: From the following particulars, prepare Petty Cash Book on imprest
system of S.K. Sinhal & Co. for the month of January,2021

1 Opening Balance (on imprest system) 100

2 Paid for stamps 12

3 Paid cleaner’s wages 15

4 Paid for fare 16

5 Paid for office tea 15

6 Paid to proprietor for personal use 10

53
7 Paid for advertisement 30

8 Drew imprest from head cashier

9 Paid for cartage 10

10 Paid for travelling expenses 25

11 Paid for telegram sent 15

12 Paid for entertainment to travelling salesmen 20

13 Advance to peon 10

14 Paid for printing bill 5

15 Paid for stationery 3

16 Drew imprest from head cashier

Solution

Petty Cash Book

Date Partic Cas Tot Date Particu Vou Post Conv Staff Cart Print Misc Tota
Jan ulars h al Jan lars cher and & welfa age ing & l
boo Rs. No. tele traveli re Statio
k gra ng Exp. n
folio m ery
1 To Bal 10 2 Stamp 12 12
b/d 0 3 Cleane 15 15
4 r 16 16
5 Wages 15 15
6 Fare 10 10
7 Office 30 30
7 tea 2
Adverti
sement
Balanc
e c/d
10 12 16 15 - - 55 100
0
8 To Bal 2 9 Cartag 10 10
8 b/d 98 10 e 25 25
To 11 Travelli 15 15
cash 12 ng 20 20
from 13 Telegra 10 10
head 14 m 5 5
cashie 15 Enterta 3 3
r 15 inment 12
Advanc
e
Printin
g
Station
ery
Balanc
e c/d
10 15 25 20 10 8 100
0
16 To Bal 12
16 b/d

54
To 88
cash
from
head
cashie
r

2.10 TRIAL BALANCE

When all the ledger accounts are balanced, they are listed together, debit balances on
one side and credit balances on the other side. The list so prepared is called trial
balance. The total of the debit side of the trial balance must be equal to that of its credit
side. This is based on the principle of double entry system. For every debit there must be
a corresponding credit.

Characteristics and uses of a Trial Balance

1. It is a statement prepared in a tabular form. It has two columns- one for debit
balance and other for credit balances.

2. Closing balance as revealed by ledger accounts, are shown in the trial balance.

3. Trial balance is not an account. It is a statement of balance.

4. It can be prepared on any date provided accounts are balanced.

5. It is a consolidated list of all ledger balances at the end of a period at one place.

6. It is a method of verifying the arithmetical accuracy of all transactions recorded and

entries made in the ledger.

7. The agreement of the trial balance means that the total of the debit column agrees
with the total of the credit column.

8. It is base for preparing Trading A/c, Profit and Loss A/c and Balance Sheet at the end
of the period which exhibit the financial position of the firm.

Limitations of a Trial Balance A trial balance is not a conclusive proof of the absolute
accuracy of the account’s books. If the trial balance agrees, it does not mean that now
there are absolutely no errors in books. Even if trial balance agrees, there may be
possibility that some errors may remain undetected and it is not disclosed by the trial
balance.

Forms of a Trial Balance

A trial balance may be prepared in two forms, they are –

1. Journal Form

2. Ledger Form

The trial balance must tally irrespective of the form of a trial balance.

55
1. Journal Form:

This form of a Trial balance will have a format of Journal Folio. It will have a column for
serial number, name of the account, ledger folio, debit amount and credit amount
columns in this journal form. The ledger folio will show the page number on which such
account appears in the ledger.

Specimen of Journal Form of Trial Balance:

Trial Balance as on …………

Sr. Name of Accounts L.F. Debit Credit

No. Balance Balance Rs.
Rs.

2. Ledger Form:
This form of a trial balance has two sides i.e., debit side and credit side. In fact, the
ledger form of a trial balance is prepared in the form of an account. Each side of the trial
balance will have particulars (name of the account) column, folio column and the amount
column.

Specimen of ledger form of Trial Balance

Dr. Trial Balance as on …… Cr.

Date Name of the L.F Amount Date Name of the L.F Amount
Account Account

Summary of rules to prepare trial balance

Debit Balance — All Assets, Drawings, Debtors, Expenses and losses.

Credit Balance — All liabilities, Capital, Creditors, Gains and Incomes.

Methods of Preparation of Trial Balance –

1. Total Method –

Under this method debit and credit total of each account of ledger are recorded in trial
balance.

Trial Balance (As on …………….)

Title of Accounts L.F. Debit Total Rs. Credit Total Rs.

Total
2. Balance Method-

Under this method only balance of each account of ledger is recorded in trial balance.

Trial Balance (As on …………….)

Title of Accounts L.F. Debit Balance Rs. Credit Balance Rs.

Total

56
3. Total Cum Balance Method-

This method is a combination of Total method and Balances method.

Trial Balance (As on …………….)

Title of L.F. Debit Total Credit Total Debit Credit

Accounts Rs. Rs. Balance Rs. Balance Rs.

Total
Illustration 1: Mr. Rawat’s ledger shows the following accounts for his business. Help
him in preparing the trial balance using: (i) Totals method, (ii) Balances method, (iii)
Totals-cum-Balances method.

Rawat’s Capital Account

Dr. Cr.

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

2021 2021
Dec To Balance c/d 60,000 Jan 1 By Balance b/d 40,000
31 By Cash 20,000
60,000 60,000
2022
Jan 1 By Balance b/d 60,000

Rohan’s Account

Dr. Cr.

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

2021 2021
To cash 40,000 Jan 1 By Balance b/d 10,000
Dec To Balance c/d 20,000 By Purchases 50,000
31
60,000 60,000
2022
Jan 1 By Balance b/d 20,000

Machinery Account

Dr. Cr.

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

2021 2021
Dec To Balance b/d 20,000 By depreciation 3,000
31 Dec 31 By Balance c/d 17,000
20,000 20,000
2022
Jan 1 To Balance b/d 17,000

57
Rahul’s Account

Dr. Cr.

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

2021 2021
Jan To Balance b/d 15,000 By cash 55,000
1 To sales 60,000 Dec 31 By Balance c/d 20,000
75,000 75,000
2022
Jan To Balance b/d 20,000
1
Sales Account

Dr. Cr.

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

2021 2021
Dec 31 To Balance c/d 70,000 By Rahul 60,000
By cash 11,000
70,000 70,000
2022
Jan 1 By Balance b/d 70,000

Wages Account

Dr. Cr.

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

2021 2021
To cash 5,000 Dec 31 By Balance c/d 5,000
5,000 5,000
2022
Jan 1 To Balance 5,000
b/d

Cash Account

Dr. Cr.

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

2021 2021
Jan 1 To Balance 15,000 By Rohan 40,000
b/d 20,000 Dec 31 By wages 5,000
To capital 55,000 By Purchases 12,000
To Rahul 10,000 By Balance c/d 43,000
To sales
1,00,000 1,00,000
2022 To Balance
Jan 1 b/d 43,000

58
Depreciation Account

Dr. Cr.

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

2021 2021
To machinery 3,000 Dec 31 By Balance 3,000
c/d
3,000 3,000
2022
Jan 1 To Balance 3,000
b/d
Purchases Account

Dr. Cr.

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

2021 2021
To Rohan 50,000 Dec 31 By Balance c/d 62,000
To cash 12,000
62,000 62,000
2022
Jan 1 To Balance 62,000
b/d
Solution:

(i) Trial Balance as at …….. (Total Method)

Title of Accounts L.F. Debit Total Rs. Credit Total Rs.

Rawat Capital 60,000
Rohan Capital 40,000 60,000
Machinery 20,000 3,000
Rahul 75,000 55,000
Sales 70,000
Cash 1,00,000 57,000
Wages 5,000
Depreciation 3,000
Purchases 62,000
Total 3,05,000 3,05,000

(ii) Trial Balance as at ………. (Balances Method)

Title of Accounts L.F. Debit Balance Credit

Rs. Balance Rs.
Rawat Capital 60,000
Rohan Capital 20,000
Machinery 17,000
Rahul 20,000
Sales 70,000
Cash 43,000
Wages 5,000
Depreciation 3,000
Purchases 62,000
Total 1,50,000 1,50,000

59
(iii) Trial Balance as at ……… (Totals-cum-Balances Method)

Title of Accounts L.F. Debit Credit Debit Credit

Total Rs. Total Rs. Balance Balance
Rs. Rs.
Rawat Capital 60,000 60,000
Rohan Capital 40,000 60,000 20,000
Machinery 20,000 3,000 17,000
Rahul 75,000 55,000 20,000
Sales 70,000 70,000
Cash 1,00,000 57,000 43,000
Wages 5,000 5,000
Depreciation 3,000 3,000
Purchases 62,000 62,000
Total 3,05,000 3,05,000 1,50,000 1,50,000

2.11 Bank Reconciliation Statement

Now a days major business transactions is settled by cheques. Thus, every businessman
has to maintain current account with banks. Current account enables to handle business
transactions in a smoother way than cash. When a businessman opens a current account
in a bank, the bank issues him a cheque book and pass book. Businessman keeps the
records of all bank transactions by maintaining bank account column in his cash book.
The bank too maintains the businessman’s account in its ledgers and its copy is recorded
in the pass book.

Very often it happens that balance of the bank column of the cash book does not show
the same balance as that shown by the pass book. Both the balances may be correct,
yet they show a difference. Thus, in order to reconcile the balances of cash book and
pass book Bank Reconciliation Statement is prepared.

In other words, Bank Reconciliation Statement (BRS) is a statement that is prepared by

a firm to reconcile the balances as per cash book prepared by the firm and the balances
as per pass book recorded by the bank.

Bank Reconciliation Statement is a statement which contains a comprehensive and

reasonable explanation of the differences in the balances as per the cash book and the
pass book.

Features or characteristics of bank reconciliation statement

a) It is a statement not an account.

b) It is a periodical statement.

c) It is prepared on a particular day.

d) The causes which are responsible for the disagreement of the two balances can easily
be found out.

60
Benefits of Bank Reconciliation Statement:

• Tracking errors.
• Terminate the risks of fraud.
• Tracking transaction status periodically.
• Achieving accurate balance.

Causes of Differences in Balance:

The differences in balances in Cash Book and Pass Book may arise due to:

1] Difference in timings for recording the transaction

2] Errors made by bank or firm while recording the transaction.

Difference in Timings for Recording the Transaction

There may be a difference in balance caused by the timings gap both for payment as
well as for receipts. Some of the factors responsible for these gaps are:

• Cheques issued by banks not yet presented for payments.

• Cheques paid into the bank but not yet collected.
• Direct debits made by the bank on behalf of the customer.
• Amounts directly deposited in the bank account.
• Interest and dividends collected by the bank.
• Direct payments made by the bank on behalf of the customers.
• Cheques deposited/bills discounted dishonoured.

Errors Made by Bank or Firm While Recording the Transaction

Sometimes there may be an error while recording a transaction that can result in a
difference in balances. Such errors can be made both by banks or firms, hence they are
of two types:

Errors committed by firm:

(i) Wrong amount debited or credited in the cash book.

(ii) Omission of any transaction.

(iii) Error in totalling or balancing the bank column of the Cash book.

Errors committed by bank:

(i) Wrong amount debited or credited in the pass book.

(ii) Omission of any transaction.

(iii) Error in totalling or balancing the bank column of the Pass book.

2.12 Procedure for Preparation of Bank Reconciliation Statement

The bank reconciliation statement is prepared usually at the end of period, i.e., a month,
a quarter, a half year or year as may be found convenient and necessary by the firm
taking into account the number of transactions involved.

61
The following are the steps to be taken for preparing a bank reconciliation statement:

(a) Identify the balances and the character thereof. Remember, a debit balance in Cash
Book means asset whereas a credit balance means a Bank overdraft. In Bank passbook,
it’s reverse. A debit balance in Pass Book means overdraft and a credit balance is a
favourable balance. This must be carefully understood.

(b) Based on the above, start with the balance (or overdraft) as per one book and arrive
at the balance (or overdraft) as per the other book. The items of differences will be
added to or deducted from the balance (or overdraft) with which the reconciliation is
started.

(c) The end result should be the balance (or overdraft) as per the other book e. g. if you
start with balance as per Cash Book, then after adding or deducting items of differences,
you should arrive at the balance (or overdraft) as per the Pass Book.

(d) One has to make sure that all the items of differences from Cash Book as well as
Bank book are taken into account in the reconciliation statement.

(e) Whether the items of differences should be added or deducted will depend on the
sequence you follow.

This is shown in following table

Dr. balance as per Cr. Balance as per

Cash Book or pass Book or
Overdraft as per Overdraft as per
Pass Book Cash Book
I. Those items which affect the debit
side of Cash Book:
i) Cheques deposited but not collected by
- +
bank
ii) Cheque though entered in Cash Book but
omitted to be sent to the Bank.
II. Those items which affect the credit
side of Cash Book:
+ -
i) Cheques issued but not presented for
payment.
III. Those items which affect the
Credit side of pass Book:
i) Interest/Dividend credited by bank.
ii) Amount deposited direct by a customer + -
into bank account.
iii) Cheques sent to the bank but omitted to
be entered into the Cash Book.
IV. Those items which affect the debit
side of Pass Book:
i) Bank charges charged by bank.
- +
ii) Interest on overdraft.
iii) Payment made by bank on standing
instructions of customer.

62
Illustration 1:

From the following particulars prepare a Bank Reconciliation Statement as on 31st

December, 2021.

i) Balance as per Cash Book Rs.5,800.

ii) Cheques issued but not presented for payment Rs. 2,000.

iii) Cheques sent for collection but not collected upto 31st December, 2021 Rs. 1,500.

iv) The Bank had wrongly debited the account of the firm by Rs. 200 which was rectified
by them after 31st December.

Balance as per Pass Book is Rs. 6,100.

Solution

Bank Reconciliation Statement

Particulars (Rs.) (Rs.)

Balance as per Cash Book 5800
Add
i.Cheques issued but not presented for payment 2000
7800
Less
i.Cheques sent for collection but not yet collected 1500
ii.Amount wrongly debited by the Bank. 200 1700
Balance as per Bank Pass Book 6,100 6100
OR

BRS can be prepared as per the balance shown by Pass Book as the starting point.

Bank Reconciliation Statement

Particulars (Rs.) (Rs.)

Balance as per bank pass Book 6100
Add
i.Cheques sent for collection but not yet collected 1500
ii.Amount wrongly debited by the Bank. 200 1700
Less 7800
i.Cheques issued but not presented for payment 2000
Balance as per Cash Book 5800
Illustration 2: On 31st December, 2021, the Cash Book of a firm showed a bank
balance of Rs.3,000. From the following information, prepare a Bank Reconciliation
Statement, showing the balance as per Pass Book.

i) Cheques have been issued for Rs.2,500 out of which cheques worth Rs.2,000 only
were presented for payment.

ii) Cheques worth Rs.700 were paid on 28th December but had not been credited by the
Bank. One cheque for Rs.250 was entered in the Cash Book on 30th December but was
banked on 3rd January, 2022.

63
iii) A cheque from Mohan for Rs.200 was paid in on 26th December but was dishonoured
and the advice was received on 2nd January, 2022.

iv) Pass Book showed bank charges Rs.10 debited by the bank. It also showed Rs. 400
collected by the bank as interest.

v) One of the debtors deposited a sum of Rs.250 in the account of the firm on 20th
December. Intimation in this respect was received from the bank on 2nd January, 2022.

Solution

Bank Reconciliation Statement As On 31st December, 2021

Particulars (Rs.) (Rs.)

Dr. Balance as per Cash Book 3000
Add
i. Cheques issued but not yet presented for payment
(Rs.2,500-Rs.2,000). 500
ii. Interest collected by the bank not recorded in the Cash
Book 400
iii. Amount deposited by the Customer direct into the bank
not recorded in the Cash Book. 250 1150
4150
Less
i. Cheques paid into bank but not yet credited by the bank
700 700
ii. Cheque entered in the Cash Book but was omitted to be
banked upto 31st December. 250
iii. Cheque from Mohan paid into bank dishonoured but not
yet recorded in the Cash Book. 200
iv. Less Bank charges as per Pass Book 10 1160
Cr. Balance as per Pass Book 2990
Illustration 3: From the following entries in the Bank column of Cash Book and the
corresponding Pass Book, prepare Bank Reconciliation Statement as on 30th June, 2021.

Cash Book (Bank Column Only)

Dr. Cr.

Date Particulars Rs. Date Particulars Rs.

1 To Balance b/d 4600 3 By Cash (Self Cheque) 800
4 To Maninder 3200 5 By Drawings 1000
8 To Devinder 500 10 By Kailsash 2200
18 To Narinder 3700 15 By Shyam Lal 1300
21 To Dayal 1400 28 By Salaries 1800
28 To Amrinder 100 29 By Mohanto 1900
30 To Kashmiri Lal 450 30 By Des Raj 1700
30 By Commission 20
30 By Balance b/d 3230
13950 13950

64
Bank Pass Book

Date Particulars Dr. Cr. Balance Rs.

withdrawals Deposits Dr./Cr.
1 By Balance b/d - - Cr. 4600
3 To Cash (Self) 800 - Cr. 3800
5 To self (Drawings) 1000 - Cr. 2800
6 By Maninder - 3200 Cr. 6000
10 By Devinder - 500 Cr. 6500
14 To Kailash 2200 - Cr. 4300
16 By Narinder - 3700 Cr. 8000
20 To shyam lal 1300 - Cr. 6700
25 By dividend on shares - 700 Cr. 7400
28 To salaries 1800 - Cr. 5600
30 To collection charges 4 - Cr. 5596
30 To commission 20 - Cr. 5576
30 To electricity board 80 - Cr. 5496
Solution

Bank Reconciliation Statement As On 30th June, 2021

Particulars (Rs.) (Rs.)

Balance as per Cash Book 3230
Add
i. Cheques issued but not yet presented (Mohanto Rs.1,900 +Des
Raj Rs.1,700 +Dividend Rs.700). 4300
7530
Less
i. Cheques paid but not yet credited by Bank
(Dayal Rs.1,400 + Amrinder Rs.100 + Kashmiri Lal
Rs.450) 1950
ii. Collection charges charged by Bank 4
iii. Payment to Electricity Board 80 2034
Balance as per Bank Pass Book 6,100 5496

Illustration 4: From the following particulars, prepare the Bank Reconciliation

Statement:

i) Bank overdraft as per the Cash Book Rs.16,200

ii) A cheque deposited as per Bank Statement but not recorded in the Cash Book Rs.
700

iii) Debit side of the Bank Column cast short Rs.100

iv) A cheque for Rs.5,000 deposited but collection as per the Bank Statement only
Rs.4,996

v) A party’s cheque returned dishonoured as per the Bank Statement only Rs.530

vi) Bills collected directly by the bank Rs.3,500

vii) Bank charges recorded twice in the Cash Book Rs. 25

65
viii) A bill for Rs.8,000 discounted for Rs.7,960 returned dishonoured by the bank,
noting charges being Rs.15

ix) Cheques deposited but not yet collected by the bank Rs.2,320

x) Cheques issued but not yet presented for encashment Rs. 1,250

Solution

Bank Reconciliation Statement

Particulars (Rs.) (Rs.)

Bank Overdraft per the Cash Book 16200
Add
i. Cheque for Rs.5,000 deposited but collection as per Bank statement
Rs.4,996. 4
ii. Add Cheque returned dishonoured as per the Bank statement only.
iii. Bill for Rs.8,000 discounted for Rs.7,960 returned dishonoured by 530
the bank noting charges being Rs.15.
iv. Cheque deposited but not collected. 8015
2320 10869
Less 27069
i. Cheque deposited but not recorded in the Cash Book.
ii. Debit side of the bank column cast short. 700
iii. Bills collected directly by the bank. 100
iv. Bank charges recorded twice in the Cash Book. 3500
v. Cheques issued but not yet presented for encashment 25
1250 5575
Bank overdraft as per the Pass Book (Dr.) 21494

2.13 Key Points to Remember

Books of Original entry: The transactions are first recorded in these books in a
chronological order.

Journal: Basic book of original entry.

Journalising: The process of recording entries in the journal is called journalising.

Trade Discount: Reduction on print prices of goods.

Cash Discount: A reduction granted by a supplier from the invoiced price in

consideration of payment with in a stipulated period.

Cash book: A book used to record all cash receipts and payments.

Petty cash book: A book used to record small cash payments.

Purchase journal: A special journal in which only credit purchases are recorded

Sales journal: A special journal in which only credit sales are recorded

Purchases Return Book: A book in which return of merchandise purchased is recorded.

Sales Return Book: A special book in which returns of merchandise sold on credit are
recorded.

66
Posting: Posting is process of transferring entries from books of original entry to the
ledger.

Ledger: A book containing all accounts to which entries are transferred from the books
of original entry.

Casting: totalling

Balancing: to find the difference between debit side total and credit side total of an
account.

C/d: Carried down B/d: Brought down

C/o: Carried over B/o: Brought over

C/f: Carried forward B/f: Brought forward

Trial balance: A statement showing the abstract of the balance (debit/credit) of various
accounts in the ledger.

Reconciliation: Agreement of cash bank and pass book.

Bank Reconciliation Statement: A statement prepared to reconcile the bank balance

as per cash book with the balance as per passbook or bank statement, by showing the
items of difference between the two accounts.

Pass Book: Copy of firm’s account with bank.

Overdraft: Withdrawals in excess of bank deposits.

Favourable Balance: Debit balance of cash book.

2.14 Unit End Exercise

Journalising

1. Journalise the following transactions in the books of Himesh:

2021

Dec.01 Business started with cash Rs.75,000

Dec.07 Purchased goods for cash Rs.10,000

Dec.09 Sold goods to Swadesh Rs.5,000

Dec.12 Purchased furniture Rs.3,000

Dec.18 Cash received from Swadesh in full settlement Rs.4,000

Dec.25 Paid rent Rs.1,000

Dec.30 Paid salary Rs.1,500

67
2. Enter the following Transactions in the Journal of Manju:

2021

Jan.01 Commenced business with cash Rs.1,75,000

Jan.01 Building Rs.1,00,000

Jan.02 Goods purchased for cash Rs.75,000

Jan.03 Sold goods to Ram Rs. 30,000

Jan.04 Paid wages Rs.500

Jan.06 Sold goods for cash Rs.10,000

Jan.10 Paid for trade expenses Rs.700

Jan.12 Cash received from Ram Rs.29,500 Discount allowed Rs.500

Jan.14 Goods purchased for Sudha Rs.27,000

Jan.18 Cartage paid Rs. 1,000

Jan.20 Drew cash for personal use Rs. 5,000

Jan.22 Goods use for house hold Rs.2,000

Jan.25 Cash paid to Sudha Rs.26,700 Discount allowed Rs. 300

3. Journalise the following transactions:

2021

Dec. 01 Hetal started business with cash Rs.1,00,000

Dec. 02 Open a bank account with SBI Rs.30,000

Dec. 04 Purchased goods from Asha Rs.20,000

Dec.06 Sold goods to Rajat for cash Rs.15,000

Dec.10 Bought goods from Taj for cash Rs. 40,000

Dec.13 Sold goods to Sumati Rs.20,000

Dec.16 Received cheque from Sumati Rs.19,500, Discount allowed Rs.500

Dec.20 Cheque given to Asha on account Rs. 10,000

Dec.22 Rent paid by cheque Rs.2,000

Dec.23 Deposited into bank Rs.16,000

Dec.25 Machine purchased from Parchi Rs.10,000

Dec.26 Trade expenses Rs.2,000

Dec.28 Cheque issued to Parachi Rs.10,000

Dec.29 Paid telephone expenses by cheque Rs.1,200

68
Dec.31 Paid salary Rs.4,500

Posting

1. Journalise the following transactions, post to the ledger:

2021

Nov. 01 Business started with (i) Cash Rs.1,50,000 (ii) Goods Rs.50,000

Nov. 03 Purchased goods from Harish Rs.30,000

Nov. 05 Sold goods for cash Rs.12,000

Nov. 08 Purchase furniture for cash Rs.5,000

Nov. 10 Cash paid to Harish on account Rs.15,000

Nov. 13 Paid sundry expenses Rs.200

Nov. 15 Cash sales Rs. 15,000

Nov. 18 Deposited into bank Rs. 5,000

Nov. 20 Drew cash for personal use Rs.1,000

Nov. 22 Cash paid to Harish in full settlement of account Rs.14,700

Nov. 25 Good sold to Nitesh Rs.7,000

Nov. 26 Cartage paid Rs.200

Nov. 27 Rent paid Rs.1,500

Nov. 29 Received cash from Nitesh Rs.6,800 Discount allowed Rs.200

Nov. 30 Salary paid Rs.3,000

2. Journalise the following transactions is the journal of M/s Gita Co. and post
them to the ledger.

2021

Jan. 01 Started business with cash Rs.1,65,000

Jan. 02 Opened bank account in ICICI Rs.80,000

Jan. 04 Goods purchased from Lara Rs. 22,000

Jan. 05 Goods purchased for cash Rs.30,000

Jan. 08 Goods sold to Naira Rs.12,000

Jan. 10 Cash paid to Lara Rs.22,000

Jan. 15 Cash received from Naira Rs. 11,700 Discount allowed Rs.300

Jan. 16 Paid wages Rs.200

Jan. 18 Furniture purchased for office use Rs.5,000

69
Jan. 20 withdrawn from bank for personal use 4,000

Jan. 22 Issued cheque for rent Rs.3,000

Jan. 23 goods issued for house hold purpose Rs.2,000

Jan. 24 drawn cash from bank for office use Rs.6,000

Jan. 26 Commission received Rs.1,000

Jan. 27 Bank charges Rs.200

Jan. 28 Cheque given for insurance premium Rs.3,000

Jan. 29 Paid salary Rs.7,000

Jan. 30 Cash sales Rs.10,000

3. Give journal entries of M/s Rangoon traders, Post them to the Ledger from
the following transactions:

August 2021

1. Commenced business with cash Rs.1,10,000

2. Opened bank account with D.C.B. Rs.50,000

3. Purchased furniture Rs.20,000

7. Bought goods for cash from M/s Rupesh Traders Rs.30,000

8. Purchased good from M/s Himesh Traders Rs.42,000

10. Sold goods for cash Rs.30,000

14. Sold goods on credit to M/s. Girish Traders Rs.12,000

16. Rent paid Rs.4,000

18. Paid trade expenses Rs.1,000

20. Received cash from Girish Traders Rs.12,000

22. Goods return to Himesh Traders Rs.2,000

23. Cash paid to Himesh Traders Rs.40,000

25. Bought postage stamps Rs.100

30. Paid salary to Ricky Rs.4,000

Trial Balance

1. Journalise the following transaction in the Books of the M/s Bhavesh Traders
and Post them into the Ledger and prepare trial balance

December, 2021
1. Started business with cash Rs.92,000

2. Deposited into bank Rs.60,000

70
4. Bought goods on credit from Hema Rs.40,000

6. Purchased goods from cash Rs.20,000

8. Returned goods to Hema Rs.4,000

10. Sold goods for cash Rs.20,000

14. Cheque given to Hema Rs.36,000

17. Goods sold to M/s Karan Traders. Rs.3,50,000

19. Drew cash from bank for personal use Rs.2,000

21. Karan traders returned goods Rs.3,500

22. Cash deposited into bank Rs.20,000

26. Cheque received from Karan Traders Rs.31,500

28. Goods given as charity Rs.2,000

29. Rent paid Rs.3,000

30. Salary paid Rs.7,000

31. Office machine purchased for cash Rs.3,000

2. Journalize the following transactions in the books of Girish, post them into
ledger and prepare trial balance for June 2021:

June 1: Girish started business with Rs.10,00,000

June 4: Purchased goods from Anna worth Rs.40,000.

June 7: Cash purchases Rs.25,000.

June 10: Sold goods to Vicky Rs.30,000 at 30% TD and received 30% amount in cash.

June 12: Deposited cash into bank Rs.20,000.

June 15: Uninsured goods destroyed by fire Rs.5,500.

June 19: Received commission Rs.3,500.

June 22: Paid to Anna Rs.25,500 in full settlement of A/c.

June 27: Received from Vicky Rs.14,500 and discount allowed Rs.200.

June 30: Interest received Rs.2,400 directly added in our bank account.

3. Journalize the following transactions in the books of M/s Kirti & Sons, post
them into ledger and prepare trial balance for April 2021:

Apr. 1: Commenced business with Rs.40,000.

Apr. 4: Bought goods for cash Rs.4,000

Apr. 7: Sold goods Rs.700

Apr. 10: Bought goods from M/s Bhavana Bros. Rs.3,000 at 10% trade discount.

71
Apr. 14: Purchased machinery of Rs. 5,000 from M/s Kimaya Bros.

Apr. 16: Paid for transportation of machinery Rs.500 & installation charges Rs.300 on it.

Apr. 20: Paid quarterly interest on borrowed amount of Rs.5,000 at 12% p.a.

Apr. 24: Supplied goods to M/s Kimaya & Sons Rs.3,500.

Apr. 27: Paid to M/s Bhavana Bros. Rs.2600 in full settlement of account.

Apr. 28: M/s Kimaya & Sons returned goods worth Rs.300 & paid for Rs. 1,200 on
account.

Apr. 29: Received commission Rs. 250.

Apr. 30: Paid conveyance to manager Rs.450.

4. Prepare a trial balance as at March 31, 2021 based on the following balances:

Accounts Title Amount (Rs.)

Capital 1,00,000

Drawings 16,000

Machinery 20,000

Sales 2,00,000

Purchases 2,10,000

Sales return 20,000

Purchases return 30,000

Wages 40,000

Goodwill 60,000

Interest received 15,000

Discount allowed 6,000

Bank overdraft 22,000

Bank loan 90,000

Debtors:

Neetu 55,000

Reetu 20,000

Creditors:

Ravish 35,000

Gavish 25,000

Cash 54,000

72
Stock on April 01, 2013 16,000

5. From the following ledger account balances, prepare a Trial Balance of Mr.
Sujal for the year ended 31st March, 2021.

Capital Rs.80,000; Sales Rs.10,00,000; Adjusted Purchase Rs.8,00,000; Current A/c(cr)

Rs.10,000; Petty Cash Rs.10,000; Sales Ledger Balance Rs.1,20,000; Purchase Ledger
Balance Rs. 60,000; Salaries Rs.24,000; Carriage Inwards Rs.4,000; Carriage Outward

Rs.6,000; Discount Allowed Rs. 10,000; Building Rs. 80,000; Outstanding Expenses
Rs.10,000; Prepaid Insurance Rs.2,000; Depreciation Rs. 4,000; Cash at Bank
Rs.80,000; Loan A/c (cr) Rs.66,000; Profit & Loss A/c(cr) Rs.20,000; Bad Debts
Recovered Rs.2,000; Stock at 31.03.2015 Rs.1,20,000; Interest Received Rs.10,000;
Accrued Interest Rs.4,000; Investment Rs. 20,000; Provision for Bad Debts Rs. 6,000;
General Reserve Rs.20,000.

Simple Cash Book

1. Enter the following transactions in a simple cash book for December 2021:

01 Cash in hand Rs.12,000

05 Cash received from Bharti Rs.4,000

07 Rent Paid Rs.2,000

10 Purchased goods Murti for cash Rs.6,000

15 Sold goods for cash Rs.9,000

18 Purchase stationery Rs.300

22 Cash paid to Rahil on account Rs.2,000

28 Paid salary Rs.1,000

30 Paid rent Rs.500

2. Record the following transaction in simple cash book for November 2021:

01 Cash in hand Rs.12,500

04 Cash paid to Harish Rs.600

07 Purchased goods Rs.800

12 Cash received from Amita Rs. 1,960

16 Sold goods for cash Rs.800

20 Paid to Manisha Rs.590

25 Paid cartage Rs.100

31 Paid salary Rs.1,000

73
3. Enter the following transaction in Simple cash book for December 2021:

01 Cash in hand Rs.7,750

06 Paid to Shobia Rs.45

08 Purchased goods Rs.600

15 Received cash from Paranjal Rs. 960

20 Cash sales Rs.500

25 Paid to Sheetal Rs.1,200

30 Paid rent Rs. 600

Two Column Cash Book

1. Record the following transactions in a bank column cash book for December
2021:

01 Started business with cash Rs.80,000

04 Deposited in bank Rs.50,000

10 Received cash from Rohit Rs.1,000

15 Bought goods for cash Rs.8,000

22 Bought goods by cheque Rs.10,000

25 Paid to Sheetal by cash Rs.20,000

30 Drew from Bank for office use Rs.2,000

31 Rent paid by cheque Rs.1,000

2. Prepare a double column cash book with the help of following information for
December 2021:

01 Started business with cash Rs.1,20,000

03 Cash paid into bank Rs.50,000

05 Purchased goods from Sushma Rs.20,000

06 Sold goods to Dimple and received a cheque Rs.20,000

10 Paid to Sushma cash Rs.20,000

14 Cheque received on December 06, 2021 deposited into bank

18 Sold goods to Raju Rs.12,000

20 Cartage paid in cash Rs.500

22 Received cash from Raju Rs.12,000

27 Commission received Rs.5,000

30 Drew cash for personal use Rs.2,000

74
3. Enter the following transactions in double column cash book of M/s Amchur
Traders for July 2021:

01 Commenced business with cash Rs.50,000

03 Opened bank account with ICICI Rs.30,000

05 Purchased goods for cash Rs.10,000

10 Purchased office machines for cash Rs.5,000

15 Sales goods on credit from Rohit and received cheque Rs.7,000

18 Cash sales Rs.8,000

20 Rohit’s cheque deposited into bank received on 15th july21

22 Paid cartage by cheque Rs.500

25 Cash withdrawn for personal use Rs.2,000

30 Paid rent by cheque Rs.1,000

4. Prepare double column cash book from the following information for July
2021:

01 Cash in hand 7,500, Bank overdraft Rs.3,500

03 Paid wages Rs.200

05 Cash sales Rs.8,000

10 Cash deposited into bank Rs.4,000

15 Goods purchased and paid by cheque Rs.3,000

20 Paid rent Rs.700

25 Drew from bank for personal use Rs.400

30 Salary paid Rs.1,500

5. Enter the following transaction in a double column cash book of M/s. Mohan
Traders for January 2021:

01 Cash in hand Rs.3,500, Bank overdraft Rs.2,300

03 Goods purchased for cash Rs.1,200

05 Paid wages Rs.200

10 Cash sales Rs. 8,000

15 Deposited into bank Rs. 6,000

22 Sold goods for cheque which was deposited into Rs.2,000 bank same day

25 Paid Rent by cheque Rs.1,200

28 Drew from bank for personal use Rs.1,000

75
31 Bought goods by cheque Rs.1,000

Three Column Cash Book

1. Prepare triple column cash book from the following transactions for the year
August 2021:

01 Cash in hand Rs.17,500, Cash at bank Rs.5,000

03 Purchased goods for cash Rs. 3,000, discount received Rs. 50

05 Received cheque from Jasmine Rs.10,000

08 Sold goods for cash Rs.7,000

12 Purchased goods and paid by cheque Rs.20,000

15 Paid establishment expenses through bank 1,000

18 Cash sales Rs.7,000, discount allowed Rs.150

20 Deposited into bank Rs.10,000

24 Paid trade expenses Rs.500

27 Received commission by cheque Rs.6,000

29 Paid Rent Rs.2,000

30 Withdrew cash for personal use Rs.1,200

31 Salary paid Rs. 6,000

2. M/s Ruchi trader started their cash book with the following balances on July
2021:

Cash in hand Rs.1,354 and balance in bank Rs.7,560.

He had the following transaction in the month of July 2021:

03 Cash sales Rs.2,300 allowed discount Rs.100

05 Purchased goods, paid by cheque Rs.6,000

08 Cash sales Rs.10,000

12 Paid trade expenses Rs.700, received discount Rs.20

15 Sales goods, received cheque (deposited same day) Rs.20,000

18 Purchased motor car paid by cheque Rs.15,000

20 Cheque received from Mani (deposited same day) Rs.10,000

22 Cash Sales Rs.7,000

28 Paid Rent Rs.2,000

29 Paid telephone expenses by cheque Rs.500

31 Cash withdrawn for personal use Rs.2,000

76
Prepare a Three Column Cash Book

3. Prepare a Three Column Cash Book from following transactions and bring
down the balance for the start of April 21:

1 Cash in hand Rs.2,500

1 Cash at bank Rs.10,000

2 Paid into Bank 1,000

5 Bought furniture and issued cheque Rs.2,000

8 Purchased goods for cash Rs.500

12 Received from Mohini Rs.980

14 Cash sales Rs.4,000

16 Paid to Amar by cheque Rs.1,450

19 Paid into Bank Rs.400

23 Withdrew from Bank for private exp. Rs.600

24 Received cheque from Pankaj Rs.1,430, Allowed him discount Rs. 20

26 Deposited Pankaj’s cheque into bank

28 Withdrew cash from Bank for the office use Rs.2,000

30 Paid rent by cheque Rs.800 Discount allowed Rs.50

Petty Cash Book

1. Prepare petty cash book from the following transactions. The imprest
amount is Rs.4,000.

January 2021

01 Paid cartage Rs.100

02 STD call charges Rs.80

02 Bus fare Rs.40

03 Postage Rs.60

04 Refreshment for staff Rs.160

06 Courier charges Rs.60

08 Refreshment of client Rs.100

10 Cartage Rs.70

15 Taxi fare to manager Rs.140

18 Stationery Rs.130

20 Bus fare Rs.20

77
22 Fax charges Rs.60

25 Telegrams charges Rs.70

27 Postage stamps Rs.400

29 Repair on furniture Rs.210

30 Laundry expenses Rs.230

31 Miscellaneous expenses Rs. 200

2. Record the following transactions during the week ending Dec.31, 2021 with a weekly
imprest Rs. 1500

24 Stationery Rs.200

25 Bus fare Rs. 24

25 Cartage Rs.80

26 Taxi fare Rs.100

27 Wages to labour Rs.140

29 Postage Rs.90

Bank Reconciliation Statement

1. From the following particulars, prepare a bank reconciliation statement as at

March 31, 2021.

(i) Balance as per cash book Rs. 3,200

(ii) Cheque issued but not presented for payment Rs.1,800

(iii) Cheque deposited but not collected up to March 31, 2021 Rs.2,000

(iv) Bank charges debited by bank Rs.150

2. On March 31, 2021 the cash book showed a balance of Rs.3,700 as cash at bank,
but the bank passbook made up to same date showed that cheques for Rs.700, Rs.300
and Rs.180 respectively had not presented for payment, Also, a cheque amounting to
Rs.1,200 deposited into the account had not been credited. Prepare a bank reconciliation
statement.

3. The cash book shows a bank balance of Rs.7,800. On comparing the cash
book with passbook, the following discrepancies were noted:

(a) Cheque deposited in bank but not credited Rs. 3,000

(b) Cheque issued but not yet present for payment Rs.1,500

(c) Insurance premium paid by the bank Rs.2,000

(d) Bank interest credit by the bank Rs.400

(e) Bank charges Rs.100

78
(d) Directly deposited by a customer Rs.4,000

4. Bank balance of Rs.40,000 showed by the cash book of Atul on December 31,
2021.

It was found that three cheques of Rs.2,000, Rs.5,000 and Rs.8,000 deposited during
the month of December were not credited in the passbook till January 02, 2022. Two
cheques of Rs. 7,000 and Rs.8,000 issued on December 28, were not presented for
payment till January 03, 2022. In addition to it bank had credited Atul for Rs.325 as

interest and had debited him with Rs.50 as bank charges for which there were no
corresponding entries in the cash book. Prepare a bank reconciliation statement as on
December 31, 2021.

79
Unit 3

Financial Statements

Unit Structure

3.0 Objectives

3.1 Introduction

3.2 Specimen of Manufacturing Account for Sole Trading Concern

3.3 Specimen of Trading Account

3.4 Specimen of Profit and Loss Account

3.5 Partnership Final Accounts

3.6 Vertical Form of Financial Statement

3.7 Illustrations

3.8 Unit End Exercise

3.0 Objectives

This module will facilitate the students to:

1. Understand the Provisions of Preparation of final Accounts of sole trader and

partnership firm in vertical and horizontal form.

2. Identify the adjustments to prepare final accounts.

3. Develop an understanding of Corporate Financial Statement.

4. Develop an insight to prepare final accounts of sole trader and Partnership

Firm.

3.1 Introduction

The preparation of final accounts for sole trading concern involves preparation of
manufacturing Account, trading account, profit & Loss Account and Balance Sheet.
Before preparing final accounts, the Trial Balance is required to be prepared. The main
books of accounts maintained by the firm are a Journal inclusive of subsidiary books and
a ledger book. At the end of the financial period, the ledger accounts are closed, a list of
accounts is prepared showing debit and credit balances. The totals of debit and credit
balances should tally with each other. The purpose of preparing manufacturing Trading
and profit and loss accounts is to arrive at the profit earned or the loss sustained during
the financial period.

80
3.2 Specimen of Manufacturing Account for Sole Trading Concern

Manufacturing A/c for the year ended…………

Particulars Rs Particulars Rs
To Direct materials:
Opening stock of Materials xx By Sale of Scrap xx
By Closing Work in Process xx
Add: Purchases xx xx
Add: Carriage Inwards xx By Cost of Manufactured Goods
Less: Purchase returns xx xx (Transferred to Trading
xx Account)
Less: Closing stock xx
xx
To Direct Wages xx
To Salary of works managers
To Fuel xx
xx
To Depreciation on: xx
Plant & machinery xx
Factory Building xx
xx
To Power, Electricity & Water Rent xx
To Factory Rent
To Royalty on Production
To design Expenses
To Opening work in process

3.3 Specimen Trading Account

Trading Account for the year ended……..

Particulars Rs Particulars Rs
xx By sales
To Opening Stock of Finished Goods Less: Return inward xx
To purchases xx By closing stock of finished goods xx
Less: Purchase return xx By Gross loss transferred to Profit xx
To Manufacturing A/c and Loss A/c
Less: Cost of Goods manufactured
To Gross profit transferred to Profit
and Loss A/c

81
3.4 Specimen Profit and Loss Account

Dr. Profit and Loss Account for the year ending…. Cr.

Particulars Rs Particulars Rs
To Gross Loss transferred from Trading A/c xx By Gross profit transferred from xx
To Office salaries xx Trading A/c
To Rent & Rates xx By Commission received xx
To Printing & stationary Xx By Interest received xx
To Postage & Telegram Xx By Rent received xx
To Audit fees Xx By discount received xx
To Insurance Xx By Profit on sales of Investment/Fixed
To Entertainment Expenses xx Assets
To Repairs xx
To Interest on Loan xx
To Conveyance xx
To Trade expenses xx
To Office Lighting xx
To Loss by fire/theft xx xx
To Loss on sale of investment/Fixed assets xx By Net Loss transferred to Capital
To Commission xx Account
To Bad debts xx
To Depreciation on Assets xx
To Travelling expenses xx
To Discount allowed xx
To Carriage outward xx
To Net profit transferred to capital A/c xx

3.5 Partnership Final Accounts

In the books of M/s X and Y

Dr. Trading Account for the year ending….. Cr

Particulars Rs. Rs. Particulars Rs. Rs.

To Opening Stock xxxx By Sales xxx
To Purchase xxx Less: Return Inward xxx
Less: Return Outwards xxx xxxx By Goods Lost or Destroyed xxxx
To Carriage Inwards/ By Goods taken by partner xxxx
Import Duties xxxx By Goods given as
To Wages (manufacturing/ Free sample xxxx
Productive) xxxx By Closing stock xxxx
To Trade Manufacturing/
Factory Expenses xxxx
To Gross Profit c/d……OR xxxx By Gross loss c/d xxxx
xxxx xxxx

82
Specimen Profit & Loss Account:

Profit & Loss Account for the year ended

Dr. Cr.

Particulars Rs. Particulars Rs.

To Gross Loss b/d……..OR…….. XXX By Gross Profit b/d XXX
Administrative Expenses Unusual Income Or Gains
To Office Salaries XXX By Commission Received XXX
To Rent, Insurance & Repairs XXX By Discount Received XXX
To Postage, Telephones, Telex XXX By Provision for Discount from
To Printing & Stationery XXX Creditors XXX
To Fees (legal/audit, etc.) XXX By Interest on Loans Given to
To Sundry/General Expenses XXX Outsiders XXX
Selling & Distribution Expenses By Income (Dividend) On
To Salesmen’s Salaries, Commission, etc. XXX Investment XXX
To Travelling XXX By Profit on Sale of Fixed Assets XXX
To Carriage Outwards, Freight, Duties XXX By Interest on Drawings XXX
To Warehousing Charges XXX
To Packing Expenses XXX
To Royalties on Sale XXX
To Advertising & Sales Promotion Expenses XXX
To Goods given as Free Samples XXX
Financial Expenses
To Interest & Bank Charges XXX
To Bad Debts & Provision for Bad Debt XXX
To Discount Given & Provision for
Discount on Debtors XXX
Depreciation
To Depreciation on:
Plant and Machinery XXX
Building XXX
Motor Vehicles/Delivery Vans XXX
Office Equipments Xxx
Unusual Expenses Or Losses
To Goods Lost or Destroyed XXX
(Cost Less Insurance Claim)
To Loss On sale of Fixed Assets XXX
To Interest on capital or Current A/c XXX
To Salaries, Commission to partners XXX
To Transfer to Reserves XXX
To Net Profit Transferred to By Net Loss Transferred to
Capital A/CS XXX Capital A/CS XXX
XXX XXX

3.6 Vertical Form of Financial Statement

Vertical Form of presentation is more analytical than the traditional form. This form
shows sources and application of funds. It discloses funds provided by proprietors and
outsiders. It also discloses as how the funds are utilized in fixed assets and in financing
working capital. It shows at a glance working capital, current Assets, Current Liabilities
and total capital employed.

83
Balance Sheet

As on

Rs Rs

Sources of Funds
I. Shareholder’s Funds
Share Capital XX
Capital Reserve XX
General Reserve XX
Securities Premium XX
Forfeited Shares XX
Profit and Loss A/C XX
XX
Less Accumulated Losses:
Preliminary Expenses XX
Discount On issue of shares/Debenture XX
Underwriting Commission XX XX
XX
II. Loan Funds
Debenture XX
Other Long Term Loans XX XX
Total Sources XX
Applications of Funds
Fixed Assets
Goodwill XX
Land and Building XX
Plant and Machinery XX
Patents, Copyrights XX
Furniture XX XX
Investments XX
Working Capital
Current Assets
Cash XX
Bank XX
Debtors XX
Bills Receivable XX
Marketable Securities XX
Stock of Goods XX
Prepaid Expenses XX
XX
Less Current Liabilities and Provisions
Creditors XX
Bills Payable XX
Outstanding Expenses XX
Bank Overdraft XX
Provision for Taxation XX
Provision for Dividend XX
Other Provisions XX XX
Working Capital XX
Total Applications XX

84
(Vertical Multiple-Step Format)

Income Statement

For the year ending

Rs. Rs.
Gross Sales
Cash Sales XX
Credit Sales XX
XX
Less Sale Return XX
Sales tax XX
Net Sales (1) XX
Less Cost Sales (2)
Raw Materials consumed XX
Direct Wages XX
Manufacturing Expenses XX
Add Opening Stock:
Finished Goods XX
Work in progress XX
XX
Less Closing Stock:
Finished Goods XX
Work in Progress XX XX XX
Gross Profit (3) (1-2) XX
Less Operating Expenses (4)
Administrative Expenses XX
Selling and Distribution Expenses XX
Finance Expenses XX XX
XX
Add Operating Income
Commission on Purchase and Sale XX
Discount received XX XX
Net Operating Profit before (5) Interest XX
And Tax (NOPBIT) (3-4)
Add Non-Trading Income
Dividend received XX
Interest received XX
Profit on sale of Fixed Assets XX XX
XX
Less Non-trading Expenses & Losses
Discount on issue of Shares and Debentures XX
Loss on Sale of Fixed Assets XX XX
Net profit before Interest and Tax (6) XX
Less Interest on Debentures XX
Net Profit after Interest but before Tax XX
Less Tax XX
Net Profit after Tax XX

3.7 Illustrations

Illustration 1:

The Trail balance of Miss Smita is as below. Prepare Final Accounts for the year ended
31st march, 2021.

85
Debit balances Rs Credit balances Rs
Cash in Hand 1,000 Capital Account 41,860
Machinery 30,000 Sales 1,38,780
Drawings 2,500 RDD 560
Factory, Power and Fuel 450
Office salaries 6,225
Carriage Outwards 500
Manufacturing wages 9,300
Furniture and Fixture 3,400
Opening Stock:
Finished Goods 4,000
Work-in-Progress 7,250
Raw- Materials 2,800
Carriage Inwards 1,000
Rent (Factory ¾) 4,000
Debtors 21,600
Advertisements 775
Printing & Stationery 1,200
Factory Insurance 1,280
Purchase of raw Material 82,950
Balance at bank 8,530
Discount allowed 610
Miscellaneous Expenses 630 _______
1,90,000 1,90,000

Adjustments:

1. Closing Stock of finished goods Rs 6,500; Raw materials Rs 750, WIP Rs 4,750

2. A motor car purchased on 1st Jan, 2021 for Rs 10,000 has been included in
purchases.

3. Depreciate machinery at 15% p.a., Motor car at 20% p.a., Furniture and Fixture at
15% p.a.

4. Provision for RDD at 10% of the debtors.

5. Provision for unrealised Rent in respect of portion of the office sub-let at Rs120 p.m.
from 1st Jan, 2021 has to be made.

Solution:

86
In the Books of Miss Smita,

Manufacturing, Trading & Profit and Loss Account for the year ended 31st
March, 2021

Dr. Cr.

Particulars Rs Rs Particulars Rs
To Materials consumed:
Opening stock of Raw 2,800 By Cost of
materials 82,950 production 97,030
Purchases 10,000 72,950 (transferred to
Less: Motor Car purchases 75,750 Trading A/c)
750
Less: Closing stock of Raw 75,000
material 9,300
Manufacturing Wages
To Direct expenses: 1,000
Carriage Inwards 85,300
PRIME COST
To Factory Overheads: 450
Power & Fuel 3,000
Rent 1,280
Insurance 4,500 9,230
Dep on Machinery 94,530
7,250
To Opening stock of WIP 1,01,780
4,750
Less: Closing stock of WIP 97,030 97,030
4,000
To opening Stock of Finished
Goods 97,030_ By Sales 1,38,780
Add: Cost of Production 1,01,030

Less Closing Stock of Finished 6,500

goods 94,250
Cost of Goods sold 44,250
To gross profit c/d 1,38,780 1,38,780
6,225
To Office salaries 500 By Gross Profit b/d 44,250
To carriage Outwards 1,000
To Rent 775 By Rent Accrued 360
To Advertisement 1,200
To Printing and stationary 610
To discount allowed 630
To Miscellaneous Expenses
To Provision for bad &
Doubtful Debt: 2,160
New R.D.D 560 1,600
Less Old RDD
To Depreciation: 500
Motor car 20% 510 1,010
Furniture and Fixtures 15% 31,060
To Net Profit 44,610 44,610

87
Balance Sheet as on 31st March, 2021

Liabilities Rs Rs Assets Rs Rs
Sundry Creditors 8,800 Cash in hand 1,000
Capital balance Balance at bank 8,530
Less: Drawings 41,860 Rent Accrued 360
2,500 Sundry Debtors 21,600
Add: Net profit 39,360 Less: New RDD 2,160 19,440
31,060 70,420 Closing Stock:
Raw materials 750
WIP 4,750
Finished Goods 6,500
Furniture & Fixtures 3,400
Less: depreciation @15% 510 2,890
Machinery 30,000
Less: depreciation @15% 4,500 25,500
Motor Car 10,000
Less: depreciation @ 20% 500 9,500
79,220 79,220

Illustration 2:

Given below is the Balance sheet of T.V. Ltd.

Balance Sheet As on 31st December, 2020

Liabilities Rs Assets Rs
Share capital 3, 75,000 Advance Tax 13,675
Capital Reserve 4,000 Goodwill 62,500
General Reserve 60,205 Land 1, 14,500
Debenture Redemption fund 84000 Premises 1, 25,000
Profit and Loss A/C 37,554 Plant 95,758
5% Debentures 1, 57,500 Furniture 16,650
Sundry Creditors 36,950 3% B. P. Notes 76,400
Proposed Dividend 18,750 Stock 1, 17,815
Provision for taxation 10,000 Debtors 1, 01,971
Cash and Bank 60,140
Preliminary Expenses 1,550
7, 83,959 7, 83,959
Rearrange the Balance Sheet in vertical form and calculate the following:

a) Current Assets

b) Quick Assets

c) Intangible Assets

d) Fictitious Assets

e) Fixed Assets

f) Fixed Liabilities

88
g) Proprietor’s Funds

h) Working Capital

i) Total Fund Employed

j) Secured Loans

K) Owed Funds

Solution:

T.V. Ltd.

Balance Sheet As on 31st December, 2020

Rs. Rs.
SOURCES OF FUNDS
I. Shareholder’s Funds
Share Capital 3, 75,000
Capital Reserve 4,000
General Reserve 60,205
Debenture Redemption Funds 84,000
Profit and Loss A/C 37,554
5, 60,759
Less Preliminary Expenses 1,550 5, 59,209
II. Loans Funds
5% Debentures 1, 57,500
7, 16,709
APPLICATION OF FUNDS:
I. Fixed Assets
Goodwill 62,500
Land 1, 14,500
Premises 1, 25,000
Plant 93,758
Furniture 16,650 4, 12,408
II. Investments
3% Gross Profit Notes 76,400
III. Current Assets
Stock 1, 17,815
Debtors 1, 01,971
Cash and Bank 60,140
Advance Tax 13,675
2, 93,601
Less Current Liabilities
Creditors 36,950
Proposed Dividend 18,750
Provision for Taxation 10,000 65,700
Working Capital 2, 27,901
7,16,709
Rs.
a) Current Assets 2,93,601

b) Quick Assets 1,75,786

c) Intangible Assets 64,050

89
d) Fictitious Assets 1,550

e) Fixed Assets 4,12,408

f) Fixed Liabilities 1,57,500

g) Proprietor’s Funds 5,59,209

h) Working Capital 2,27,901

i) Total Funds 7,16,709

j) Secured Loan 1,57,500

K) Owed Funds 1,57,500

Illustration 3: The accountant of a company submits the following financial statements

for 2020:

Trading and Profit & Loss A/c for the year ended 31st December, 2020

Expenses Rs Income Rs
To Opening Stock 35,000 By Sales 8, 30,000
To Purchase 7, 50,000 By Closing Stock 80,000
To Gross Profit 1, 25,000
9, 10,000 9, 10,000
To Depreciation 18,000 By Gross Profit 1, 25,000
To Other Expenses 37,000 By Interest 5,000
To Tax Provision 20,000
To Proposed Dividend 8,000
To Net Profit 47,000
1, 30,000 1, 30,000

Balance Sheet as at 31St December, 2020

Liabilities Rs Assets Rs
Share Capital 1,50,000 Goodwill 10,000
Bank Overdraft 19,000 Cash 24,000
Creditors 13,000 Stock 80,000
Depreciation Provision 27,875 Debtors 69,250
Tax Provision 20,000 Land and Buildings 46,075
Proposed Dividend 8,000 Machinery/Equipment 64,300
Profit and Loss A/c 90,000 Prepaid Expenses 750
Preliminary Expenses 3,500
Loan 30,000
3, 27,875 3,27,875
Rearrange the above in a form suitable for analysis.

90
Solution:

Income Statement

For the year ended 31st December, 2020

Rs. Rs.
Sales 8, 30,000
Less: Cost of goods sold
Opening Stock 35,000
Add: Purchases 7, 50,000
7, 85,000
Less: Closing Stock 80,000 7, 05,000
Gross Margin 1, 25,000
Less: Operating Expenses
Depreciation 18,000
Other Expenses 37,000 55,000
Net Operating Profit 70,000
Add: Non-Operating Income
Interest received 5,000
Net Profit before tax 75,000
Less: Tax Provision 20,000
Net Profit after tax 55,000
Less: Proposed dividend 8,000
Retained Earnings 47,000

Balance Sheet

As on 31st December, 2020

Particulars Rs. Rs.

SOURCES OF FUNDS
I. Shareholder’s Funds
Share Capital 1, 50,000
Profit and Loss A/c 90,000
2, 40,000
Less Preliminary Expenses 3,500 2, 36,500
II. Loan Funds Nil
2, 36,500
APPLICATIONS OF FUNDS
I. Fixed Assets
Goodwill 10,000
Land and Building 46,075
Machinery and Equipments 64,300

91
1, 20,375
Less Provision for Depreciation 27,875 92,500
II. Current Assets, Loans and Advances
Cash 24,000
Stock 80,000
Debtors 69,250
Prepaid Expenses 750
Loans 30,000 2, 04,000
Less Current Liabilities and Provisions
Bank Overdraft 19,000
Creditors 13,000
Tax Provision 20,000
Proposed Dividend 8,000 60,000
Working Capital 1, 44,000
2, 36,500
Illustration 4:

Following balances are extracted from the books of Tax and Trouble Limited for the year
ended 31st March, 2021.

You are required to prepare vertical balance sheet after considering other information
provided

Particulars Rs
Premises 3,07,500
Machinery 3,60,000
Interim Dividend Paid 7,500
Purchases 1,80,000
Preliminary expenses 5,000
Carriage Inward 13,100
Directors Fees 5,740
Bad Debts 2,110
6% Debentures 3,00,000
Profit and Loss A/c (cash balance) 14,500
Creditors 40,000
Outstanding Expenses 10,000
General Reserve 25,000
4% Government Securities 60,000
Opening Stock 66,000
Furniture and fixtures 7,200

92
Debtors 87,000
Goodwill 25,000
Cash in hand and bank 30,000
Bills Receivable 10,650
Wages 84,800
Factory Expenses 9,000
General Expenses 7,900
Salaries 14,500
Debenture Interest 18,000
Equity Capital 3, 60,000
10% Preference Shares 1, 00,000
Bills Payable 38,000
Sales 4, 18,000
Sales Return 3,000
Interest Received 3,500
Advertising 5,000
Other Information:

1. Depreciate Machinery by 10% and furniture by 5%.

2. Provide final dividend on equity shares at 5% and Dividend on Preference Shares

3. Make provision for income tax at Rs.25, 000/-

4. Closing Stock on 31.03.2002 is Rs. 1, 01,000/-

5. General Expenses include Rs. 4,000/- as selling expenses.

6. Write off 50% of preliminary expenses.

Solution:

Tax and Trouble Ltd.

Income Statement For the year ended 31st March, 2021

Particulars Rs. Rs. Rs.

Sales 4, 18,000
Less: Sale Return 3,000
Net Sales 4, 15,000
Less: Cost of goods sold
Opening Stock 66,000
Purchases 1, 80,000
Carriage 13,100
Wages 84,800

93
Factory expenses 9,000
Depreciation on P & M 36,000 3, 88,900
Less: Closing Stock 1, 01,000 2, 87,900
Gross Profit 1, 27,100
Less: Operating Expenses:
Administrative Expenses:
Directors Fees 5,740
General Expenses (7,900-4,000) 3,900
Salaries 14,500
Depreciation on Furniture 360 24,500

Selling and Distribution Expenses:

Bad Debts 2,110
Selling Expenses 4,000
Advertising 5,000 11,110
Finance Expenses
Debenture interest 18,000 18,000 53,160
73,490
Add: Non-operating Income
Interest on govt. securities
Interest received 3,500 3,500
76,990
Less: Non-Operating Expenses
Preliminary Expenses w/off 2,500
Net Profit before tax 74,490
Less: Provision for tax 25,000
Net Profit after tax 49,490
Add: Profit & Loss A/c balance b/d 14,500
Profit available for appropriation 63,990
Less: Appropriations:
Provision for dividend18,000+10,000 28,000
Interim Dividend 7,500 35,500
Balance carried to balance sheet 28,490

94
Balance sheet as on 31st March, 2021

Particulars Rs. Rs. Rs.

SOURCES OF FUNDS
I. Shareholder’s funds
A. Share capital
Equity share capital 3, 60,000
10% preference share capital 1, 00,000 4, 60,000
B. Reserve and surplus
General Reserve 25,000
Profit and Loss A/c 28,490 53,490 5, 13,490
Less preliminary expenses 2,500
5, 10,990

II. Loan Funds

A. Secured Loans
6% Debentures 3, 00,000
B. Unsecured Loans Nil 3, 00,000
Total 8, 10,990
APPLICATIONS OF FUNDS
III. Fixed Assets
Goodwill 25,000
Premises 3, 07,500
Machinery 3, 60,000
Less depreciation 36,000 3, 24,000
Furniture and fixtures 7,200
Less depreciation 360 6,840 6, 63,340
IV. Investments
4% Govt. Securities 60,000
V. Current Assets, Loans and
Advances
A. Current Assets
Closing Stock 1, 01,000
Debtors 87,000
Cash/ bank 30,000 2, 18,000
B. Loans and advances
Bills Receivable 10,650 2, 28,650
Less:

95
VI. Current liabilities &
Provisions
A. Current liabilities
Creditors 40,000
Outstanding Expenses 10,000
Bills Payable 38,000 88,000
B. Provisions:
Provision for tax 25,000
Provision for dividend 28,000 53,000 1, 41,000
(18,000+10,000)
Total 8, 10,990
Illustration 5:

Trial balance as on 31st March, 2021 is furnished to you of M/s Pady Ltd.

Particulars Rs. Rs.

Debtors accounts 5, 00,000 20,000
Creditors accounts 12,000 4, 80,000
Cash and Bank Balance 38,000 -
Building and Provision for depreciation 1, 20,000 40,000
Machinery and Provision for depreciation 6, 00,000 2, 80,000
Vehicles and Provision for depreciation 50,000 30,000
Stock of finished goods (on 1.4.2004) 30,000 -
Cost of Production 20, 92,500 -
Sales - 25, 00,000
Office Expenses 20,000 -
Selling and distribution expenses 3, 10,000 -
Prepaid and Outstanding expenses 8,000 15,000
Advance Tax Paid 1, 50,000 -
Provision for Income Tax (on 1.4.2004) - 1, 40,000
Investment (at Cost) 8, 40,000 -
Profit on sale of investments - 15,000
Dividend received - 30,000
Interim Dividend 50,000 -
Equity Share Capital (Rs. 10 Each) - 8, 00,000
Reserve on 1.4.2004 - 5, 00,000
Profit and Loss A/c - 63,000
Closing Stock of Materials and Work-in-process 92,500 -
Total 49, 13,000 49, 13,000

96
On 31St March, 2021 stock of finished goods was Rs.50, 000. Provide for income tax at
30% of profits and proposed dividend at Re. 1 per share.

Prepare final accounts in suitable form for analysis

Solution:

M/s Pady Ltd.

Income Statement for the year ended 31st March, 2021

Particulars Rs. Rs.

Sales 25, 00,000
Opening Stock 30,000
Cost of production 20, 92,500
21, 22,500
Less: Closing Stock 50,000 20, 72,500
Gross Profit 4, 27,500
Less: Operating Expenses
Office and Administrative expenses 20,000
Selling Expenses 3, 10,000 3, 30,000
Operating Profit 97,500
Add: Non-operating Income
Profit on sale of investments 15,000
Dividend Received 30,000 45,000
Profit before Tax 1, 42,500
Less: Income Tax at 30% 42,750
Profit after Tax 99,750
Add: Opening balance of Profit and Loss A/c 63,000
1, 62,750
Less: Appreciation
Interim Dividend 50,000
Final Dividend 80,000 1, 30,000
Retained Earnings 32,750

97
M/s Pady Ltd.

Balance Sheet as at 31st December, 2021

Particulars Rs. Rs. Rs.

SOURCES OF FUNDS
A. Shareholder’s Funds
Equity Share Capital
80,000 Shares of Rs. 10 Each 8, 00,000
Reserves and Surplus
General Reserve 5, 00,000
Profit and Loss A/c 32,750 5, 32,750 13, 32,750
B. Borrowed Funds (debentures) -
Total Sources 13, 32,750
APPLICATION OF FUNDS
A. Fixed Assets
Building 1, 20,000
Less: Depreciation 40,000 80,000
Machinery 6, 00,000
Less: Depreciation 2, 80,000 3, 20,000
Vehicles 50,000
Less: Depreciation 30,000 20,000 4, 20,000
B. Investments 8, 40,000
C. Working Capital
Current Assets
Stock-Material & WIP 92,500
Stock-Finished Goods 50,000
Debtors 5, 00,000
Cash and Bank 38,000
Advance to Creditors 12,000
Prepaid Expenses 8,000
Advance Tax 1, 50,000 8, 50,000
Less: Current Liabilities
Advance from Debtor’s 20,000
Creditors 4, 80,000
Outstanding Expenses 15,000
Provision for Tax 1, 40,000
Provision for Tax (C.Y.) 42,750
Proposed Dividend 80,000 7, 77,750 72,750
Total Applications 13, 32,750

98
3.8 Unit End Exercise

Illustration 1:

From the following Trial Balance of Jyoti Ltd. as on 31st March, 2004, prepare vertical
Revenue statement for the year ended 31st March, 2004 and vertical Balance Sheet as on
that date after making the necessary adjustments:

Particulars Rs Rs

Equity Share Capital 11, 00,000

Plant and Machinery 12, 00,000

Sales 37, 00,000

Purchases 17, 00,000

Sundry Debtors 9, 00,000

Sundry Creditors 8, 50,000

Wages 3, 50,000

Opening Stock 1, 20,000

Salaries 1, 80,000

Advertisement 75,000

Telephone Charges 35,000

Furniture 2, 00,000

Investment (long term) 5, 00,000

Interest Received 40,000

Loss on sale of Furniture 20,000

Commission 60,000

Profit and Loss A/c 1, 20,000

Interim Dividend 50,000

General Reserve 1, 00,000

Cash at Bank 3, 20,000

Bills Receivable 2, 00,000

59, 10,000 59, 10,000

Adjustments:

1. Stock on 31st March, 2004 was valued at Rs.3, 00,000.

2. Make Provision of Rs.3, 00,000 for income tax.

3. Depreciate plant and machinery @ 20% and Furniture @ 10%.

99
Illustration 2:

Maza Ltd. Was formed and incorporated on 1st April, 2002. You are given following trial
balance as on 31St March 2003 and 31St March 2004. You are required to prepare vertical
statement for the both the years in columnar form.

31st March 2003 31st March 2004

Dr. Cr. Dr. Cr.
Rs. Rs. Rs. Rs.
Land and Building: 25, 50,000 25, 00,000
Machinery 5, 50,000 8, 00,000
Furniture 2, 00,000 3, 00,000
Sundry Debtors 3, 00,000 5, 00,000
Cash & Bank Balance 1, 00,000 1, 00,000
Sundry Creditors 2, 00,000 3, 00,000
Outstanding Expenses 20,000 20,000
Sales 20, 00,000 30, 00,000
Purchases 12, 00,000 12, 00,000
Opening Stock 3, 00,000
Admin.Exp. 80,000 1, 10,000
Share Capital 20, 00,000 20, 00,000
Unsecured Loan 10, 36,000 4, 66,000
52, 56,000 52, 56,000 65, 30,000 65,30,000
Adjustments:

1. Closing Stock as on 31st March, 2004 is Rs.4,00,000.

Illustration 3:

Ashok and sangmesh are in partnership sharing profit and losses in the ratio of 2:1.
From the following trial balance and adjustments given below, you are required to
prepare Trading and Profit and Loss Account for the year ended on 31st March, 2016 and
Balance sheet as on that date:

100
Trial Balance as on 31st March, 2016

Particulars Debit Amount Rs Credit Amount Rs

Prepaid Insurance 3,200

Insurance 8,000

R.D.D 4,000

Discount 3,200

Postage and telephone 12,800

Debtors and creditors 2,64,000 2,72,000

Salaries 2,24,000

Wages 96,000

Opening Stock 1,92,000

Carriage 4,000

Purchase and Sales 7,72,800 12,06,400

Return inwards/outwards 22,400 36,800

Bank overdraft 4,83,200

Plant and Machinery 96,000

Land and Building 7,04,000

Partner’s capital accounts:

Ashok 2,08,000

Sangmesh 1,92,000

Total 24,02,400 24,02,400

Adjustments:

(1) Write off Rs.8,000 for bad debts and provide R.D.D. @5% on debtors.

(2) Goods worth Rs.16,000 were distributed as free samples.

(3) Closing stock on 31st March,2016 was valued at the cost of Rs.2,24,000 while its
market price was Rs.2,40,000.

(4) Salaries were outstanding Rs.8,000.

(5) Depreciate: Land and Building @5% p.a. and plant and machinery @10% p.a.

101
Illustration 4:

Jaya and Maya are partners in a firm sharing profits and losses in the ratio of 2:3
respectively. With the help of the trial balance and adjustment given below, you are
required to prepare their Trading, Profit and Loss Account for the year ended 31st March,
2013 and the Balance sheet as on that date:

Trial Balance as on 31st March, 2013

Debit Balance Amount Credit Balance Amount

Purchases 1,09,000 Sundry Creditors 45,600

Insurance 3,700 Sales 1,94,000

Rent, rates and taxes 14,600 R.D.D 2,000

Office Expenses 7,300 Commission 5,500

Land and Buildings 3,00,000 Capital A/Cs :

Plant and Machinery 60,000 Jaya 2,00,000

Maya 2,50,000

Furniture 15,000 Current A/Cs:

Carriage Inwards 3,700 Jaya 3,400

Sundry Debtors 88,000 Maya 9,100

Stock (as on 01.04.2012) 32,800

Wages and salaries 28,600

Cash in hand 4,700

Cash at bank 40,200

Drawings A/cs:

Jaya 500

Maya 1,500

Total 7,09,600 7,09,600

Adjustments:

(1) Closing stock was valued at Rs.22,600.

(2) Purchases included purchase of furniture of Rs.10,000 made on 1st October,2012.

(3) Depreciate land buildings at 10% p.a., plant and machinery at 10%p.a. and furniture
at 20% p.a.

(4) Create R.D.D. at 5% on sundry debtors.

102
Illustration 5:

Given below is the Trial Balance od M/s. Shailesh and Nilesh as on 31stMarch, 2016.You
are required to prepare Trading and Profit and Loss Account for the year ended 31St
March,2016 and Balance Sheet as on that date:

Trial Balance as on 31.03.2016

Debit Balances Amount Credit Balances Amount

Opening Stock 88,000 Capital accounts:

Purchases 1,76,000 Shailesh 1,20,000

Wages 23,500 Nilesh 1,20,000

Salaries (10 Months) 18,000 Sundry Creditors 1,03,000

Office expenses 8,000 Bank overdraft 60,000

Bank Charges 2,600 Sales 3,08,000

Machinery 90,000 Current accounts:

Land and Buildings 1,30,000 Shailesh 5,000

Bad debts 4,000 Nilesh 4,000

Sundry Creditors 82,000

Electricity Charges 9,900

Furniture 43,000

8% Debentures(1.10.2015) 40,000

Drawings:

Shailesh 3,000

Nilesh 2,000

Total 7,20,000 7,20,000

Adjustments:

(1) Stock on 31St March,2016 was valued at market price of Rs.84,000, which was 20%
above its cost price.

(2) Depreciate machinery at 10%p.a.

(3) Create reserve for bad and doubtful debts at 5% on sundry debtors.

(4) Provide interest on capital at 8% p.a.

(5) Machinery includes purchase of Machinery for Rs.40,000 on 1St January,2016.

103
Unit 4

Basics of Cost and Management Accounting

Unit Structure

4.0 Objectives

4.1 Introduction

4.2 Meaning and Definition of Cost Accounting

4.3 Elements of Cost

4.4 Classification of Cost

4.5 Introduction of Job Costing

4.6 Characteristics of Job Costing

4.7 Essentials of Job Costing

4.8 Advantages of Job Costing

4.9 Limitations of Job Costing

4.10 Illustrations

4.11 Management Accounting

4.12 Nature of Management Accounting

4.13 Functions of Management Accounting

4.14 Scope of Management Accounting

4.15 Limitations of Management Accounting

4.16 Management Accounting and Financial Accounting

4.17 Difference between Management, Financial and Cost Accounting

4.18 Ratio Analysis

4.19 Interpretation through Ratios

4.20 Classification of Ratios

4.21 Advantages or Importance of Ratios

4.22 Limitations of Ratios

4.23 Illustrations

4.24 Unit End Exercise

4.0 Objectives

This module will facilitate the students to:

104
1. Understand various elements of Cost.

2. Differentiate between Financial Accounting Management Accounting and

Cost Accounting.

3. Prepare Cost Sheet for assigned Job.

4. Apply ratios for analysis of Financial Statements

4.1 Introduction

Costing is a branch of accounting which has developed because of limitation of

Financial Accounts. It is developed because of the need of Management, which
financial account could not meet. The information generated by financial
accountancy for several purposes is not sufficient for decision making in many
areas.

a) Determining Product Selection - addition or dropping or changing Product.

Combination in case of multi Product Company.

b) Determining output level.

c) Determining or revising prices of products.

d) Whether profit earned is optimum as compared with competitors as well as

earlier years.

e) Acquisition of plant and machinery or other assets or whether old machine

should be replaced by new one.

The need of data for such details led to development of Cost Accounting and it is
only cost accounts which make such information available to management. The
need for cost accounting arouse because of the requirements of Management to
know the cost of various activities in various circumstances this need is felt by
management everywhere thus cot accounting ascertain the cost of each activity
that it undertakes and weigh the cost against the expected benefit.

For example, the cost of producing a pair of shoes is Rs. 275/- it is necessary for
the management to know how much out of the total cost is due to material, labour
and other expenses which have to be incurred to keep a factory going. Only with
proper analysis of various elements of cost, this objective can be achieved. Such
analysis is the purpose of cost accounting.

4.2 Meaning and Definition of Cost Accounting

Cost accounting is the system of accounting which is concerned with determination of

costs of doing something which can be manufacturing or producing an article or
rendering some service or even conducting any activity or function.

The chartered Institute of Management Accountants defined the term cost as amount of

105
Expenditure (actual or notional) incurred on or attributable to, a Specified thing or
activity. Thus cost is the amount of Expenditure incurred on a Specified thing or
activity.

The Chartered Institute of Management Accountants in England (CIMA) has defined cost
Accounting as "The application of costing and cost Accounting Principles, methods and
techniques to the Science, Art and Practice of Cost Control and the ascertainment of
Profitability. It includes the Presentation of information derived there from for the
purpose of management decision making.

Weldon defines cost accounting as classifying recording and appropriate allocation of

Expenditure for determination of costs of product or services and for the presentation
of suitably arranged data for purpose of control and guidance to management.

It is a formal mechanism by means of which costs of product or services are ascertained

and controlled. It is concerned with accumulation, classification, analysis and
interpretation of Cost data for three major purposes.

a) Ascertainment of cost.

b) Operational Planning and Control.

c) Decision making.

Thus, cost accounting is the technique and process of ascertainment of cost, which begin
with recording of Expenses or the bases on which they are calculated and ends with
Preparation of Statistical data.

4.3 Elements of Cost

Cost is the Amount of Expenditure incurred on a Specified thing or activity. Elements

mean nature of items. A cost is composed of three elements: Material, labour and
expenses, each of these elements can be direct and indirect.

Elements of Cost

Material Labour Other Expenses

Direct Indirect Direct Indirect Direct Indirect

Material Material Labour Labour Expenses Expenses

Factory Administrative Selling & Distribution

Overheads Expenses Expenses

106
4.3.1 Direct Cost:

It is the cost which is directly chargeable to the product manufactured.

Direct Material:

It is the cost of basis raw material used for manufacturing a product. It becomes a part
of the product. No finished product can be manufactured without basic raw material. It
is easily identifiable and chargeable to the Product for example sugarcane for sugar,
steel in steel furniture, cloth in dress making, timber in furniture making etc.

Direct Labour or Direct Wages:

It is the amount of wages paid to those workers who are engaged on the manufacturing
line for conversion of raw material in to finished goods. The amount of wages can be
easily identified and directly charged to the product. These workers directly handle raw
material wages paid to carpenter manufacturing a particular piece of furniture is direct
wages.

Direct Expenses:

It is the Amount of Expenses which is directly chargeable to the product manufactured.

Direct expenses include residuary costs i.e. any Expenditure other than direct labour or
direct material which is directly incurred onSpecific unit or Production for example

a. Hire of Special Machinery or Equipment for a Control and maintenance cost of such
tools and equipment.

b. Cost of Special design, layout for a Specific Product.

4.3.2 Indirect Cost

It is that portion of the total cost which cannot be identified andchargeable direct to
the product.

Indirect Material:

All materials which is necessary for production but which cannot be directly charged to
the product. For example oil and grease required for cleaning machines, stores and
Spare parts fuel etc. It is a material which cannot be allocated to the products but which
can be apportioned to the cost units.

Indirect Labour:

It is the amount of wages paid to those workers who are not engaged on the
manufacturing line. Wages which cannot be allocated to different jobs or products are
treated as indirect labour for example, wages, paid to workers in Administration
Department, watch and word staff/ Supervisor

Indirect Expenses:

It is the amount of expenses which is not chargeable to the Product directly. It is the
cost of giving service to the Production Department. It includes factory expenses,

107
administrative expenses and selling & distribution expenses.

4.4 Classification of Cost

I On the Basis of Time:

(1) Historical Cost:

These are the costs which are ascertained after they are incurred. If refers to determination of
costs after they have been actually incurred. Thus, the cost of a product can be calculated only
after production.

(2) Predetermined Costs or Standard Costs:

These costs are decided in advance before they are incurred the basic purpose is to measure
variation between actual cost and standard cost and to control cost.

II On the Basis of Behaviour of Cost

(1) Fixed Costs:

It is that portion of the total cost which remains constant irrespective of output up to the capacity
limit. It is called as a period cost as it is concerned with period work manager's salary, Factory
Rent, Plant Depreciation, Constitutes fixed costs of administration of the enterprises.
Administrative costs include all costs which cannot be charged either to the production department
or sales department. it includes cost of planning and controlling the general policies and operation
of a business enterprises

(2) Variable Costs:

This cost varies according to the output this cost changes according to the changes in output it
tends to vary in direct proportion to output. If output increase by 20%, these

108
costs will also increase by 20% if output goes down by 10%, these costs will go down by 10% all
direct materials are variable costs, as the material consumed will directly depend upon level of
production. These costs are also called product cost.

(3) Semi-Variable Costs

These costs are partly fixed and partly variable. It remains constant up to certain level and
registers change afterward. These costs vary in same degree with volume but not in direct or
same proportion. The Telephone rent remains fixed irrespective of telephone calls made, while
the call charges. Vary with the number of telephones after the minimumlimit.

III On The Basis Of Functions

An organization performs many functions, costs, can be classified on the basis of functions.

(1) Manufacturing Cost:

It is the cost of operating the manufacturing department of an organization. It includes cost of

direct materials, direct labour, direct expenses, packing cost and overheads expenses relating to
production.

(2) Administration Cost:

It is the cost which is incurred for formulating the policy, directing the organization and controlling
the operation. These are the cost of Indirect materials, Indirect labour and Indirect Expenses,
which are incurred in the course.

Indirect materials like printing and stationery items.

Indirect wages like salaries to clerical staff, officers and executives in various administration
departments.

Indirect expenses like rent, rates, taxes, and insurance of office building, lighting and heating,
depreciation and repairs of fixed assets, audit fees, directors fees.

(3) Selling And Distribution Cost:

It is the cost of stimulating demand. It includes advertisement, marked research etc. distribution
cost is incurred of distribution of products. It includes warehousing, cartage etc.

These include:

Indirect materials like sales printing and stationary, advertising materials, catalogues, price-
lists, secondary packing materials like wooden boxes.

Indirect labour like salaries to salesmen, commission to salesmen, salaries to delivery- staff,
sales manager, sales and distribution department clerical staff, wages paid to drivers of delivery
vehicles.

Indirect expenses like advertising in newspapers, radio, rent, rates, taxes

and insurance of sales office, fixed assets, cost of after sales services, depreciation of
delivery vehicles, running expenses of delivery vehicles comes under selling and
distribution expenses.

(4) Research And Development Costs :

These costs are incurred to discover new ideas, processes and product by experiment. It includes

109
the cost of the process which begins with the Implementation of the decisions, to produce a new
product or improved product.

Following are examples of Administrative of selling & distribution costs.

IV On The Basis Of Controllability

(1) Controllable Cost:

It is the cost which can be influenced by the action of a Specified member of on organization.
This can be analyzed with reference to a particular person.

(2) Non- Controllable Cost:

It is the cost which cannot be influenced by the action of a Specified member of an organization.

4.5 Introduction of Job Costing

There are certain industries which produce one or more standard products, they carry
out production for stock on a continuous basis and supply goods to customers when
orders are received. Their manufacturing process is standardized and it passes through
fixed processes. Such industries adopt process costing as a method of determining cost
and the focus is on process, while there are some industries where production is carried
on according to customer’s specific requirement. Each order or job is different from the
other and their production processes are not identical. Hence, in such industries like
printers, machine tools manufacturing, job foundries, general engineering etc. cost is
determined for each job. Each job is treated as a cost unit and cost of each job is
determined separately. The method which they adopt for determining cost of each job is
called “job costing”

Definition

Job costing is the system of costing used to find out the cost of non-standard jobs
generally made according to customer’s specification. It takes into consideration the
direct and the indirect cost that goes into making of that product. Direct cost is further
broken into material, labour and overheads.

As per the definition given by ICMA, England,” Job costing is that form of specific order
costing which applies where work is undertaken to customer’s special requirements and
each order is of comparatively short duration (compared with those to which contract
costing applies).

Anthony and Reece defines as “A job order cost system collects cost for each physically
identified job or batch of work as it moves through the factory. The job in a job order
cost system may consist of a single unit (eg. A turbine or a house), or it may consist of
all units of identical or similar products covered by a single job or production order (e.g.
1,000 printed books or 100 pieces of style 501 shirts)”.

In simple words, job order costing is a method used in determining separate costs of
different jobs completed in the factory.

110
4.6 Characteristics of Job Costing

Job Costing Is Different than Contract Costing in a Way Production is undertaken

according to the specific order of customers and has following characteristics:

1. There is no uniformity in the flow of production

2. Production begins only after order is received
3. The work-in- process differs from one period to another.
4. Here, generally cost of the whole job is determined and then separate cost of each
unit of the job id determined.
5. Each job is of a short duration
6. A separate job cost card is used to record cost and progress of each job.
7. Time taken by each job in each department is recorded on job card.
8. When the job is completed and moved out of the factory, the total cost accumulated
on the job cost card is determined.

4.7 Essentials

To ensure effective use of job order costing system, the following pre-requisite are
necessary:

1. Production Planning:

It requires complete system of production planning and control, including routing,

scheduling and follow-up. This requires setting up of a production planning department.
A blue print would be prepared as the order is received form the customer.

2. Production Order:

A production order is the instruction issued to proceed with the manufacture of the job.
It includes instructions as when to start, which material to use, time schedule for each
department etc.

3. Job order No.:

Each job is allotted a number or a special symbol by the production planning

department. The job is then known by that number during production and the details
about costs are accumulated on the basis of this number.

4. Bills of Materials:

A complete list of material required for a job is called Bills of Materials. Due to this bill a
separate material requisition is not required. Four copies of this bill are prepared, one to
store-keeper, second to costing department, third along with production order and fourth
copy is kept with the production Planning Department.

5. Planning Board:
It is a statement showing time schedule of manufacturing. It also shows the details of

111
next job to be started and also about the third next job to be started. On the Planning
Board are hung the production order control cards showing the progress of each job.
6. Move Ticket:

This is a ticket which moves along with the job, as it moves from one department to
another department. It also authorizes the movement of work in progress from one
department to another.

4.8 Advantages of Job Costing

Job costing system determining total cost and profit obtained on each job had the
following advantages:

1. As the detailed analysis of cost of material, labour and other expenses for each job is
available, the management is able to judge the efficiency of various departments and
production centers.
2. As the jobs are completed, their cost are determined and can be compared with the
selling price. This enables management to determine the profitability of various jobs
and products.
3. Overhead absorption rates are determined in advance for allocating overheads to
various jobs. For this purpose, overheads are estimated very carefully, which can be
utilized for budgetary control purpose. This leads to increased efficiency and
reduction in costs.
4. Estimates for each job are prepared in advance, which would be very helpful in giving
quotations to the customers or in submitting tenders. This reduces the chances of
making loss due to quoting a lower price. Particularly, this very useful in government
contracts.
5. As it is used in standard costing too, it is possible to find out variance and know the
differences. The overhead variances present causes of over absorption and under-
absorption. This helps in taking steps to reduce idle capacity and idle time of
workers, leading to reduced costs.
6. Wastages, spoilage etc. can be identified for each job, enabling the management to
take corrective steps to reduce them in future.

4.9 Limitations of Job Costing

1. One of the disadvantages is that it is expensive, as it involves detailed clerical work.

Separate records for each element of cost like material, labour and overhead are
required, which increases the cost.
2. Pre-determined overhead recovery rates are determined in job costing, but it is not
much beneficial unless it is accompanied by the operation of budgetary control
system.
3. As the detailed clerical work is involved, there is a scope of errors being committed.
4. Job order costing system is used in such manufacturing units, where work is carried
on not for stock, nor for any standard work but according to the specific order of the

112
customer. Hence, it is difficult to establish uniform standard for production process.
In the absence of such pre-determined standards, cost control activity would be very
weak.

4.10 Illustrations

Illustration: 1

The following figures relate to three jobs of a manufacturing business unit:

Job. 1 Job. 2 Job. 3

Particulars Rs. Rs. Rs.
Direct Materials 600 800 1000
Direct Labour 400 600 700
Direct Expenses 60 80 100
Works overhead is recovered at 50% on Prime Cost and Office overhead is recovered at
10% on works cost.

Find out the total cost of each job.

Solution: 1

Statement showing Total Cost for Job No. 1, 2 and 3:

Job.1
Total Job.2 Job. 3
cost Total Total
Particulars Rs. cost Rs. cost Rs.
Direct Materials 400 800 1000
(+) Direct labour 400 600 700
(+) Direct Expenses 60 80 100
Prime cost 1060 1480 1800
Add : Factory Overheads:
50% on Prime cost 530 740 900
Words cost 1590 2220 2700
Add : Office Overheads:
50% on Works cost 159 222 270
Total Cost 1749 2442 2970

Illustration: 2

The following records are taken from Bharat Engineering Works Ltd.:

Rs. Rs.
Materials 5000 Fixed factory over head 2000
Wages 3500 Administration overheads 2600
Variable factory overheads 2500 Machine hours 3000
Factory overheads are absorbed on the basis of machine hours and administrative
overheads are absorbed as a percentage of work cost.

113
The company received an order of a job.

The following particulars are available in respect of the job:

Materials 750
Wages 350
Machine hours 300
Prepare job order cost sheet

Solution: 2

Steps to be followed:

(1) To find out machine hour rate for recovery of variable factory overhead
(2) Machine hour rate for recovery of fixed factory overheads and
(3) Percentage of recovery of administrative overheads on the basis of percentage of
Factory Cost.

Total Cost
Particulars Rs.
Materials 5000
(+) Direct Wages 3500
Prime Cost 8500
Add : Factory Overheads :
Variable 2500
Fixed 2000 4500
Works cost 13000
Add : Administrative
overheads 2600
Total Cost 15600
Machine hour rate for recovery of variable factory overhead = 2500 /3000= Rs.0.8333

Machine hour rate for recovery of fixed factory overhead = 2000 /3000=Rs0.6666

The percentage of Administrative overheads to works cost = 2600 x 100 /13000=20%

Cost Sheet for the job

Particulars Total Cost Rs.

Materials 750
(+) Wages 350
Prime Cost 1100
Add : Factory Overheads :
Variable:300hoursx Rs.0.8333= 250
Fixed: 300hoursx Rs.0.6666= 200 450
Works cost 1550

Add : Administrative overheads

20% on work cost=1550x20% 310
Total Cost for job 1860

114
Illustration 3:

The following information is received for job no. 139 of a company ltd:

Direct Materials Rs.3415

Direct Labour:
Department I 80 hours at Rs.2.50 per hour
Department II 60 hours at Rs.4.00 per hour
Overhead expenses were implemented as follows:
Variable Overheads:
Department I Rs.5,000 for 4000 direct labour hour
Department II Rs.6,000 for 3000 direct labour hour
Fixed Overhead : Estimated at Rs.7500 for 10,000 hour
You are required to calculate the cost of job No.139 and estimate the percentage of
profit earned if the selling price quoted was Rs.4750

Solution: 3

Cost sheet for job no.139

Particulars Rs. Rs.

Direct Materials 3415
Direct Wages :
Department I (80 x Rs. 2.50) 200
Department II (60 x Rs. 4.00) 240 440
Prime Cost 3855
Overheads :
Variable : Department I : 80 hours x 1.25 100
(For 4000 hours =Rs. 5000 so per hour Rs.1.25
Department II : 60 hours x 2 120
(For 3000 hours =Rs. 6000 so per hour Rs.2 220
4075
Fxed : 80+60 = 140 hours x Re. 0.75 = 105
(Rs. 7500 ÷ 10,000)
Total Cost 4180
(+) Profit 570
Selling price 4750

On Rs.4,750 selling Price= Rs.570 Profit

So therefore, 570 x100 = 12%

4,750

Rate of Profit on selling price = 12%.

Illustration 4:

As a cost accountant of a company, you find that the selling price of a product has been
calculated as follows:

115
Materials 70.00
Direct Wages : 18 hours at Rs 2.50 per hour 45.00
(Dept. A 8 hours , Dept B 6 hours, Dept C 4 hours)
Direct Expenses 5.00
Prime Cost 120.00
Add : Overheads ( 33 1/3 % on Price cost) 40.00
Total Cost 160.00
An analysis of the previous year's profit and loss account shows the following:

Rs Rs
Material 1,50,000 Factory Overheads
Direct Wages: Dept A 5,000
Dept A 10,000 Dept B 9,000
Dept B 12,000 Dept C 2,000 16,000
Dept C 8,000 30,000 Selling Overheads 20,000
Special Materials 4,000 Sales less returns 2,50,000
Net profit 30000
The average daily wage rate is identical in all the three departments

You are required to

(i) Draw up a job sheet

(ii) Calculate the revised cost using the previous year's figures as basis.

(iii) Add the total job cost 20% for profit and give the final selling price.

Solution: 4

First find out the rate of overhead per hour.

1) Dept A: wages is Rs. 10,000 at Rs. 2.50 per hour, hence the total hours= 4000
hours. The overhead of Dept A are Rs. 5000 and direct labour hours are 4,000 and
so the overhead rate per hour is Rs.1.25.
2) Dept B: Wages are Rs. 12,000 at Rs.2.50 per hour and so direct labour hours are
12,000/2.50= 4,800 hours. Overheads are Rs. 9,000 and so overhead rate per
hour= Rs. 9,000/4,800hours=Rs.1.875.
3) Dept C: Wages Rs. 8,000/2.50 per hour =3,200 hours. Overhead Rs.
2,000/3,200=Re.0.625

Now the factory cost was Rs.2, 00,000 last years and selling overheads were Rs. 20,000
which comes to 10% of factory cost (works cost). This percentage will be used in the job
sheet.

Cost Sheet for job

116
Particulars Rs.
Materials 70.00
Wages:
Dept A 8 hours x 2.50 20.00
Dept B 6 hours x 2.50 15.00
Dept C 4 hours x 2.50 10.00 45.00
Direct expense 5.00
Prime cost 120.00
Factory Overheads
Dept A 8 hours x 1.25 10.00
Dept B 6 hours x 1.875 11.25
Dept C 4 hours x 0.625 2.50 23.75
Works cost 143.75

Selling Overheads : (10% ON WORK COST) 14.375

Total cost 158.125
(+) Profit (20% on total cost) 31.625
Selling price 189.75
Illustration : 5

Soniya Ltd. undertakes to supply 1,000 units of a component per month for the months
of January, February and March. Every month a batch order is opened against which
materials and labour cost are booked at actuals. Overheads are levied at a rate per
labour hour. The selling price is contracted at Rs.15 per unit.

From the following data, present the cost and profit per unit of each batch order and the
overall position of the order for the 3000 units.

Month Batch Output Material Cost Labour Cost

(Nos.) Rs Rs.
January 1250 6250 2500
Febuary 1500 9000 3000
March 1000 5000 2000
Labour is paid at the rate of Rs. 2 per hour. The other details are :
Month Overheads Total Labour
Rs. hour
January 12000 4000
February 9000 4500
March 15000 5000

Solution: 5
First of all we will make necessary calculations:

(1) Labour Hours:

January: Labour Cost Rs. 2,500 ÷ per hour Rs.2 = 1250 hours

117
February: Labour Cost Rs. 3000 ÷ per hour Rs.2 = 1500 hours

March: Labour Cost Rs. 2,500 ÷ per hour Rs.2 = 1000 hours

(2) Overheads per Labour Hours :

January: Rs. 12000 ÷ 4000 hours = Rs. 3

February: Rs. 9000 ÷ 4500 hours = Rs. 2

March: Rs. 15000 ÷ 5000 hours = Rs. 3

(3) Overheads per Batch:

Labour hour x overheads per hour

January: 1250 x Rs. 3 = Rs. 3750

February: 1500 x Rs. 3 = Rs. 3000
March: 1000 x Rs. 3 = Rs. 3000

Statement showing Cost and Profit of each Batch

Particulars January February March Total
Output
(Nos.) 1,250 1,500 1,000 3,750
Costs: Rs. Rs. Rs. Rs.
Materials 6,250 9,000 5,000 20,250
Wages 2,500 3,000 2,000 7,500
Overheads 3,750 3,000 3,000 9,750
Total cost 12,500 15,000 10,000 37,500

Cost per
unit 12,500 15,000 10,000
1,250 1,500 1,000
Rs.10 Rs.10 Rs.10

Profit per unit = 15-10=Rs.5

Overall position of the order of 3,000 units:

Sales: 3,000 units x Rs.15 = Rs. 45,000

Less: Total cost 3,000 units x Rs.10 = Rs. 30,000

Profit = Rs. 15,000

4.11 Management Accounting

Management accounting is as accounting that is Managerial Oriented Accounting. It is

financial accounting with managerial aspect. It guides how the accounting activities can
be re-oriented to fit it within the framework of management activity. Management
accounting redesigns the entire accounting system in a way that it becomes useful in the

118
operational needs of the firm. Management Accountants play a prime role in managing
their financial and operational performance of the organization by helping key decision-
makers for their business activities.

All the required information of the present, past and future is presented which is useful
for the decision making. The financial data properly devised and systematically arranged
and developed that they become a unique tool for management decision. A detailed
report is created using quantitative and qualitative data which serves as a guide for
strategies related to investments, capital structure and achieving goals of the
organization.

Definition

According to Corporate Finance Institute. “Managerial accounting is the process of

“identification, measurement, analysis, and interpretation of accounting information”
that helps business leaders make sound financial decisions and efficiently manage their
daily operations.” There are other branches of accounting but the management
accounting defers as its role is more focused in gathering internal data and reporting in a
proper manner to the concerned authority.

It focuses on understanding the company’s cash flows, operating costs, financial

transactions and internal rate of return. This in turn assists in capital budgeting decisions
and investment decisions.

Another definition of management accounting is the provision of financial data and

advice to a company for using it in the organization and development of its business.

One simple definition of management accounting is providing of financial and non-

financial decision-making information to managers, according to Wikipedia

4.12 Nature of Management Accounting

Management and Accounting the two terms come together to make up the term
management accounting. All those personnel who are destined with duties and
responsibilities are all included in the word ‘Management’. It task is to provide
accounting information to the top management who finally take the organizational
decisions. But it is to be noted that only providing financial information cannot become
the sole basis for decision making. Along with these information, there are other factors
needed to be taken into consideration for arriving at a final and actual execution of the
decision. In addition to the information so given the management has to use it common
sense, judgement, experience, foresightedness and knowledge to arrive at a decision.

The term ‘Accounting’ used here shall not be taken literally as recording of business
transactions and book keeping process. It has a macro-economic approach as it is an
interdisciplinary subject which includes other disciplines like costing, mathematics,
statistics, financial accounting, etc. hence its scope is not clearly defined as well as
demarcated. Management accounting also covers other fields of study like political

119
science, management, economics, psychology, law, etc. As all these studies in one way
or the other helps in understanding the authority, relationship, behavior of individuals in
groups, mental make- up of employees. The knowledge of all these areas will assist a
manager in increasing motivation, extract more productivity, improve employee-
employer relationship, build high morale. It will enhance the art of managing, and
knowledge of economics will enable him to forecast sales, production and optimum
output and maximum utilization of the resources. Thus he will be well equipped to take
management actions for cost, revenue, profit, investment and growth. The statistical
study will take care of presenting the data in an assimilated manner and also forecasting
can be done using these data. Management accounting also covers the subject of law as
it is very crucial in judge whether any action of the management is ultra-vires or not.

Thus management accounting is diverse and wide subject and has a wide scope and
coverage. Generally, it is assumed that this subject has set of principles to be followed
but it is philosophy. A philosophy of cost and benefit analysis it at the core of this
subject. It professes that no accounting system is good or bad but as long as there are
incremental benefits, it is worth it. Also after applying the management accounting
principles, one may not arrive at a single and perfect solution. Therefore, it is said to be
as inexact science.
It uses its own conventions and not the standardized principles. Thus the inferences so
drawn can be interpreted differently by different persons depending on their skill,
judgement and common sense. Finally, Management Accounting is nothing but
management information system and is beneficial in the better management of any
business organization.

4.13 Functions of Management Accounting

To enable to perform its function effectively is the prime function of management

accounting. Planning, Organizing, Directing and controlling are the function of
management and the management accounting helps a manager to performance these
functions in the following way:
1. Providing Data:
Management Accounting is majorly concerned with collecting and providing data for
planning purpose. The document and the past records of accounts forms a vast
repository of data that becomes useful in forecasting of the future.
2. Modifying Data:
The data so collected in many a times in a raw form. It needs to be tabulated, complied
and classified. They may be arranged and categorized product-wise, state -wise or
region-wise
3. Analysis and interpretation of data:
It is important to analyze the data so collected. For analyzing the data needs to be
presented properly. Generally, the data is giving in comparative form which makes the
task of decision making easy and effective. With such a comparative statements ratio
calculation and trend projection becomes convenient and easy.

120
4. Communication tool:
In an organization, have a clear and concise communication is a must. Management
Accounting becomes a means to communicate the plans in all directions, upward,
downward as well as to the outward world.
5. Control:
The Objectives and the strategies needs to be converted into specified goals to be
achieved within the time frame already decided. Management Accounting assists in doing
this. The desired goals and objectives can be attained by employing standard costing
and budgetary control which is an integral part of management accounting.
6. Qualitative data:
Apart from using financial data also deploys qualitative data to decide on a certain
matter. Qualitative data are that information that cannot be measured in monetary
terms, but they are very crucial in matters of strategic importance.

4.14 Scope of Management Accounting

The main purpose of management accounting is to present the accounting information in

the most useful and accurate way to the concerned authority. It includes almost all the
aspects of business operation and thus its scope is very vast. Below areas have been
identified as those which falls in the reach of Management accounting.

1. Financial Accounting:
All the information as provided by the financial accounting is rearranged and made
presentable by management accounting. Thus management accounting is largely and
mainly dependent on the financial accounting system which should be properly designed
and properly maintained.
2. Cost Accounting:
There are various techniques of cost accounting like Differential costing, marginal
costing, standard costing, opportunity cost analysis, absorption costing, etc. These cost
techniques are useful for operation and control of business activities and they form a
base for management accounting.
3. Revaluation Accounting:
It deals with maintaining capital and ensuring that capital remains as it is in real terms.
Profit is calculated according to the capital structure and the cost of capital.
4. Budgetary Control:
Budgets are forecasting of the future course of action, comparing the actual performance
with those of the budgeted ones, calculating the variances if any and then finding out the
causes of the same.
5. Inventory Control:
Inventory holds the major portion of the current assets and hence a control over the
inventory is of utmost importance as huge amount of the liquid cash is locked up in the
inventories, it requires proper and efficient management.

121
6. Statistical Methods:
Management Accounting uses charts, graphs, pictorial presentation, and other statistical
tools to present the information in a lucid and impressive way.
7. Interim Reporting:
The prime task of management accounting is preparing statement and reports that will
help in decision making process. These reports can be prepared monthly, quarterly, and
half- yearly in order to take timely decisions.
8. Taxation:
It is necessary to compute income and file the returns and make tax payments in time.
Management Accounting covers tax planning and management as well.
9. Office Services:
The manager has to ensure that the data is properly maintained, processed and stored.
Using the best mechanical and electronic devices is the responsibility of management.
10.Internal Audit:
To ensure about the internal audit system that is required for internal control should be
suitable and well developed shall be taken care of by the management accounting.

4.15 Limitations of Management Accounting

Management Accounting has emerged as a new discipline and it suffers from few
limitations as enumerated below:

1. Dependency on basic records:

The records used to draw decisions and conclusions in management accounting from
financial accounting, cost accounting and other records. This limits its accuracy and
authencity. If the records so provided are weak, inaccurate the decision may be
misleading.
2. Persistent Efforts:
The decisions taken at the meeting by the management accountant is not executed
automatically. He has to depend and convince people at all levels to implement those
decisions. Hence he has to be pursuant and sometimes act like a salesman to sell his
ideas.
3. Management Accounting is only a tool:
This accounting cannot replace the management. The manager is only an adviser and
whether to implement that decision is in the discretion of the top management.
4. Wide Scope:
The scope of management is very wide which brings under its umbrella many disciplines.
Also it takes into consideration monetary and non-monetary facts and data. All this
results in inexactness and subjectivity in the decisions arrived.
5. Costly:
To install management accounting system demands huge costing and elaborate
organization. To follow number of rules and regulations and hence can be adopted by big
companies only.

122
6. Reluctant to change:
Management accounting is far away from traditional accounting and demands a break
away. Thus this accounting is generally not readily accepted by the people involved.
7. Evolutionary Stage:
Management Accounting is emerging and still in initial stage. Its concepts, techniques,
analytical tools are very much new and hence creates doubt in its utility and
effectiveness.

4.16 Management Accounting and Financial Accounting

Both these accounts are interrelated as management accounting is nothing but

rearranging the data which is provided by financial accounting. In fact, all account begins
from financial accounting since we record transactions which are in monetary terms. But
there still exists certain differences in spite of being so closely related.

The Major difference lies in their Objectives; in financial accounting records are kept for
all the economic and monetary transactions of the business actively in the form of profit
and loss account and balance sheet which are useful and referred by the outside parties
like the shareholder, banks, creditors, investors, tax department and the government.
This financial information is supplied periodically. However, management is not much
interested in such type of information. Management accounting processes, designs and
presents this financial information in a lucid form and thus becomes base for decision
making and is used internally by the management. Hence, financial accounting is
primarily for reporting to external parties whereas Management accounting is for internal
reporting process

4.17 Difference between Management, Financial and Cost Accounting

Basis Management Financial Cost Accounting

Accounting Accounting
Objective It main object is to Financial accounting To calculate and
enable the management main task and ascertain the
in making decisions and object is to record allocation,
policy formation the transactions and accumulation and
know the financial the cost of
position and profit production for the
or loss of the product and
organization services.
Nature It engages in forecasting It is related to It is concerned
and projection of data to historical data with both past as
decision making well as present
data and records
Data used It makes use of both Only quantitative Only quantitative
quantitative as well as and not qualitative data is recorded
qualitative aspects data or transactions
are recorded
Principle There is no set or It is governed by Cost accounting
Followed standard principles that GAAP has to follow

123
has to be followed certain principles
for recording
costs.
Publication Published in case of Not published Not published
companies
Reporting Generally is it prepared As and when desired As and when
Frequency and submitted at the by the required by the
end of the year. management. management.
Forms of They are voluntary in They are required They are
Accounts nature and kept and mandatory to generally kept
available for the be prepared by the voluntary and
management legal requirements prepared on the
direction of the
management.

4.18 Ratio Analysis

Introduction

There are various techniques to do financial analysis and one of the technique is Ratio
Analysis. It makes use of ratios to assess the financial performance of a business
concern. According to accountant’s hand book by Winson Kenn and Bed Ford “A ratio is
an expression of the quantitative relationship between two numbers”. It is important to
analyze and interpret the figures as disclosed by these financial statements to gauge
accurately the financial health of the enterprise.

Meaning

Financial statements, as prepared and presented annually are of little use for the
guidance of prospective investors, creditors or even management. If relationships
between various related items in these financial statements are established, they can
provide useful clue to gauge the financial health and ability of business to make profit.
This relationship between the two related items of financial statements is known as
ratios.

Thus a ratio is one number expressed in terms of another. It is a numerical yardstick

that measures the relationship between two figures. A ratio is customarily expressed in
three different ways:

1. Simple figure or Pure Ratio

2. Percentage
3. Proportion of numbers or fraction.

4.19 Interpretation through Ratios

Only calculating ratio is of no use unless it is interpreted so as to be useful to

management in making policy decisions. The following methods are used for this
purpose.

124
1. Comparison with Ideal Ratio:
No conclusion can be drawn from any individual ratio. It should be compared with some
generally accepted ideal ratios. E.G. the current ratio of a firm is found to be 1.5:1. This
ratio does not guide the management as regards its liquid position. But it is generally
believed that ideal current ratio should be 2:1. Hence here we can say that the
calculated ratio of 1.5:1 is not satisfactory.
2. Comparison with Past Ratio:
If the present ratio of a company is compared with its past ratio, they will indicate the
trend. It will show whether the financial position and performance of the firm has
improved, deteriorated or remained constant and accordingly take necessary actions.
3. Help of some Related Ratio:
The analysis and interpretation of some ratios may be made more meaningful, if some
related ratios are also considered. Suppose, the current ratio of a firm is 2:1 showing a
comfortable liquid position but if it is considered along with the liquid ratio and acid- test
ratio, it will give a very clear idea of the liquidity of business.
4. Comparison with Ratios of Other Firms:
This practice is useful and indicated strength and weaknesses of the firm’s position and
performance. The comparison is useful because the firms in the same industry face
similar problems e.g. if gross profit ratio of textile industry as a whole is 20% and if the
gross profit of a particular firm is say,15%, it reveals an unsatisfactory position.

4.20 Classification of Ratios

Basically there are two Ratios as follows:

1. Traditional Ratios

2. Functional Ratios

125
(A) Traditional Ratios
1. Balance Sheet Ratios
When two items or group of items appearing in the balance sheet are compared, the
ratio so obtained is a balance sheet ratio. E.g. a ratio establishing relationship between
current assets and current liabilities is a balance sheet ratio.
2. Revenue Statement Ratios
These are the ratios computed on the basis of items taken from the revenue statement,
i.e. Profit & Loss Account e.g. Net Profit Ratio, Gross profit ratio.
3. Composite Ratios:
A ratio showing relationship between one item taken from Profit and Loss Account and
another from the Balance Sheet is a composite ratio or a combined ratio. E.g. Return on
Capital Employed.
(B) Functional Ratios
1. Liquidity Ratios:
These ratios indicate the position of liquidity. They are computed to ascertain whether
the company is capable of meeting its short- term obligation form its short term
resources. Examples of these are (i) Current Ratio (ii) Liquid Ratio (iii) Acid- test Ratio.
2. Profitability Ratio:
There are number ratios to indicate the profitability of the business and are grouped into
the category of profitability ratio. (i) Gross Profit Ratio (ii) Net Profit Ratio (iii) Operating
Ratio (iv) Return on Total Assets (v) Return on Capital Employed (vi)Return on
Shareholders’ Equity (vii)Return on Equity Share Capital (viii) Earnings per share-EPS
(ix) Dividend Per Share (x) Dividend Payout Ratio.
3. Leverage Ratio:
The composition of capital of business and the proportion of owner’s capital and capital
provided by outsiders are reflected by leverage ratios. For example, (i) Proprietary Ratio
(ii) Debt-Equity Ratio (iii) Gearing Ratio (iv) Fixed Capital – Fixed Assets Ratio(v)
Coverage Ratio.
4. Activity Ratio:
These are the ratios showing the effectiveness with which the resources of the business
are employed. For example, (i) Stock Turnover (ii) Debtors Ratio (iii)Current Assets
Turnover (iv) Fixed-Assets Turnover, (v) Total Assets Turnover.
Formula of Ratios
(I) Liquidity Ratios
(1) Current Ratio = Current Assets

Current Liabilities

(2) Liquid Ratio = Liquid Assets

Liquid Liabilities

[Also known as Quick Ratio or Acid Test Ratio]

126
(II) Profitability Ratios
(1) Gross Profit Ratio = Gross Profit x100

Net Sales

(2) Net Profit Ratio = Net Profit (After Tax) x100

Net Sales

(3) Operating Ratio = Cost of goods sold+ Operating Expenses x100

Net Sales

(i) Administrative Expense Ratio = Administrative Expenses x100

Net Sales

(ii)Selling Expense Ratio = Selling Expenses x100

Net Sales

(iii)Financial Expense Ratio = Financial Expenses x100

Net Sales

(iv)Cost of Goods Sold Ratio = Cost of goods sold x100

Net Sales

(4) Return on Capital Employed (ROCE)

Capital Employed = Share Capital + Reserve and Surplus+ Long term Loans –
Fictitious Assets
OR
Capital Employed =Fixed Assets + Net Working Capital
(net working capital = Current assets- current Liabilities)

Return on Capital Employed (ROCE) = Net Profit before Interest and Tax x 100

Capital Employed
(5) Return on Shareholder’s Equity = Net Profit After Tax x 100
Shareholder’s Funds
(6) Return on Equity = Net Profit After Tax – Preference Dividend x 100
Equity Shareholder’s Funds
(7) Return on Total Assets = Net Profit After Tax x 100
Total Assets
(8) Earning Per Share = Net Profit After Tax – Preference Dividend
No. of Equity Shares
(9) Dividend Per Share (DPS) = Total Dividend Paid to Equity Shareholders
No. of Equity Shares
(10) Dividend Payout Ratio = Dividend Per Share (DPS)
Earning Per Share (EPS)
(11) Dividend Yield = Dividend Per Share (DPS) x 100
Market Value Per Share

127
(12) Price- Earning Ratio (P/E Ratio) = Market Value Per Share

EPS

(III) Leverage Ratios

(1) Debt-Equity Ratio = Long Term Liabilities x100

Shareholder’s Funds

(2) Total Debt –Equity Ratio = Total Debts x 100

Owners’ Funds

(3) Gearing Ratio = Fixed Interest Bearing Capital x 100

Ordinary Capital

(4) Proprietary Ratio = Proprietors’ Funds x 100

Total Assets

(5) Long Term Funds to Fixed Assets = Long Term Funds

Fixed Assets

*Long Term Fund is also known as Fixed Capital

(6) Interest Coverage Ratio = Profit Before Interest and Tax

Interest

(7) Dividend Coverage Ratio = Profit After Tax

Preference Dividend

(8) Total Coverage Ratio =EBIT__________________

Interest + Dividend+ instalment

4.21 Advantages or Importance of Ratios

1. It is assists in planning.
2. It is useful in firm comparison.
3. Comparison of intra firm.
4. It is a guiding tool to the management as it helps in planning, control, coordination,
forecasting and communication
5. To measure the efficiency
6. To ascertain the liquidity of the firm
7. To indicate Trend
8. Enables budgetary control
9. Assists in decision making
10. Useful to banks and financial institutions
11. Useful to investors

128
12. Useful in Credit Rating done by the organizations.

4.22 Limitations of Ratios

1. All the ratios are based on assumptions and sometimes may be misleading to the
decision makers.
2. They are having meaning only when they are studied along with other ratios.
3. To understand a ratio requires professional knowledge.
4. One cannot take all the decisions relying entirely on the ratio analysis. Alone it is
inadequate.
5. It only helps in arriving at a consensus and it cannot give decisions. It is capable of
given just information on the basis of which the manager will take decisions
according to his judgement.
6. It considers only the quantitative aspect and not the qualitative aspects
7. There does not exist any standardization in ratios
8. Ratios are entirely based on the financial information of the financial statements.

4.23 Illustrations

Illustration 1

The following are the summarized Balance Sheets

You are required to calculate:

Current Ratio, Liquid Ratios

Return on Total Assets, earning per share

Proprietary Ratio and Fixed Capital-Assets Ratio

Please give your comments

Balance Sheets

Particulars Note.No. 2018 (Rs.) 2019 (Rs.)

[A] Equity and Liabilities:
[1] Shareholder's Funds:
(A) Share Capital
Equity Share of Rs.100 each 1,00,000 1,50,000
10% Preferences Shares of Rs100 each 50,000 50,000
(B) Reserves and Surplus:
Reserves 2,00,000 1,50,000
[2]Non-Current Liabilities:
12%Debentures 1,00,000 1,00,000
[3] Current Liabilities:
Proposed Dividend 20,000 20,000

129
Other Current Liabilities 80,000 1,20,000
Total 5,50,000 5,90,000

[B] Assets:
[1] Non-Current Assets:
Fixed Assets
(Fixed Assets less Depreciation) 3,50,000 4,90,000
[2] Current Assets
Stock 1,50,000 60,000
Debtors 40,000 35,000
Cash 10,000 5,000
Total 5,50,000 5,90,000

Solution: 1

(A) Current Ratio = Current Assets

Current Liabilities

For 2018 = 2, 00,000 = 2:1

1, 00,000
For 2019 = 1, 00,000 = 0.71:1
1, 40,000
Comment:

Current Ratio indicates the working capital position; there has been considerable
deterioration in the current ratio. On one hand, current assets have been reduced to
almost half of what they were last year, whereas the current liabilities have increased by
nearly 40%, normally, this ratio should be 2:1i.e. the value of current assets should be
twice the current liabilities. The standard has been met last year, whereas the ratio
during the current year should cause anxiety. Current Assets are less than current
liabilities, meaning thereby that the company would not be able to meet its obligations
as and when they will fall due. If immediate steps are not taken to remedy the situation;
the company will be put to considerable trouble.

(B) Liquid Ratio = Liquid Assets

Liquid Liabilities
For 2018 = 50,000 = 0.5:1
1, 00,000

For 2019 = 40,000 = 0.28:1

1, 40,000

130
Comment:

The liquid ratio is a better indicator of liquid position of the company and shows whether
the company will be able to meet its current obligation due for immediate payments at a
short notice. No standard norm is available for this ratio. However, it is believed that
liquid assets should at least cover the liquid liabilities. i.e. the ratio should be 1:1. The
ratio for this company during 2018 was unsatisfactory and has deteriorated to such an
extent during 2019, that the company would be facing financial crisis, if immediate
corrective steps are not taken to improve this situation. It may be suggested that the
company should issue either shares or debentures to improve its liquid position.

(C) Return on Total Assets = Net Profit after Taxes x100

Total Assets

For 2018 = 30,000 X 100 = 5.45%

5, 50,000
For 2019 = 40,000 X 100 = 5.93%
1, 40,000

Comment:

There has been a slight improvement in this ratio as compared to previous year. But no
final opinion can be given as to whether the ratio is reasonable or not, unless this ratio is
compared to the ratios of similar companies in the industry.

(D) Earnings per Share = Net Profit after Tax- Preference Dividend
No .of. Equity Shares

For 2018 = 30,000 - 5,000 = Rs.25

1,000

For 2019 = 35,000 - 5,000 = Rs.20

1,500

Comment:

The EPS has declined during the current year as compared to the previous year, which is
not satisfactory. However, normally an EPS of Rs.20 may be considered to be
satisfactory.

(E) Proprietary Ratio = Proprietary Funds x 100

Total Assets

For 2018 = 3, 50,000 X 100 = 63.64%

5, 50,000
For 2019 = 3, 50,000 X 100 = 59.32 %
5, 90,000

131
Comment:

The ratio indicates the proportion of funds contributed by the proprietors. The higher the
ratio, the stronger is the financial position of business. The ratio during 2018 shows a
comfortable position which has gone down in 2019 showing deteriorating financial
position. The proprietor’s funds have remained stationary during these two years against
which total assets have increased by nearly Rs. 40,000. Such a declining trend must be
arrested as the existing position is not satisfactory.

(F) Fixed Capital – Assets Ratio = Fixed Capital x 100

Fixed Assets

For 2018 = 4, 50,000 x 100 = 128.57%

3, 50,000
For 2019 = 4, 50,000 x 100 = 91.84 %
4, 90,000

Comment:

The fixed assets should always be acquired out of long term funds, meaning thereby that
this ratio should not be less than 100 the ratio for this company during 2018 indicated a
satisfactory position as the fixed capital was more than adequate to the cover the fixed
assets. The situation in 2019is however, not comfortable as the ratio has not only
deteriorated but has even gone down below 100, suggesting that the company has
financed its purchases of fixed assets out of the short term funds which is a dangerous
financial policy,

Illustration 2

From the statements of Progressive ltd. calculate the following ratios:

1. Current Ratio
2. Acid-test Ratio (Liquid Ratio)
3. Operating Ratio
4. Stock turnover Ratio
5. Debtor’s Ratio and debtor’s Turnover

Balance Sheet as on 31/3/2019

Particulars (Rs.) (Rs.)

[A] Equity and Liabilities:
[1] Shareholder's Funds:
(A) Share Capital
50,000 Equity Share of Rs.1 each 50,000
(B) Reserves and Surplus:
General Reserves
Profit & Loss A/C 40,000
15,000 55,000
[2] Current Liabilities:

132
Creditors 20,000
Total 1,25,000
[B] Assets:
[1] Non-Current Assets:
Fixed Assets :
Land & Building
Plant & Machinery 50,000
20,000 70,000
[2] Current Assets
Stock 15,000
Debtors 25,000
Cash 15,000 55,000
Total 5,90,000

Dr. Profit and Loss Account for the year ended 31/3/2019 Cr.

Particulars Amount Particulars Amount

To Opening Stock 25,000 By Sales 1,80,000
To Purchases 1,05,000 By closing Stock 15,000
To Gross Profit 65,000

1,95,000 1,95,000
To Admin. Exp. 23,000 By Gross Profit 65,000
To Selling Exp. 10,000
To Finance Exp. 2,000
To Net Profit 30,000
65,000 65,000

Solution: 2

(1) Current Ratio = Current Assets = 55,000 = 2.75: 1

Current Liabilities 20,000

(2) Acid Test Ratio (Liquid Ratio) = Liquid Assets = 40,000 = 2:1
Liquid Liabilities 20,000

(3) Operating Ratio = Cost of goods sold+ Operating Expenses x100

Net Sales

= 1, 15,000 + 35,000 x100 = 83.33%

1, 80,000

(4) Stock Turnover = Cost of Goods Sold = 1,15,000 = 5.75

133
Average Stock 20,000

Average Stock = opening Stock + closing Stock = 25,000+15,000 = 20,000

2 2

(5) Debtors Ratio = Debtors + Bills Receivable = 25,000 = 50 days

Average Daily Sales 500

Alternative Method:

(A) Debtors Ratio = Debtors + Bills Receivable x 360 = 25,000 x 360 = 50 days
Credit Sales 1, 80,000

Debtors Turnover = 1, 80,000 = 7.2

25,000

So Debtors Ratio can be calculated as: 360 days = 50 days.

7.2

Illustration 3

Following is the balance sheet of A Ltd as on 31/3/2018 and 31/3/2019.

Particulars Note 31/3/2018 31/3/2019

No. (In Rs.) (In Rs)
[A] Equity and Liabilities:
[1] Shareholders` funds:
(A) Share Capital : 50,000 50,000
Equity share of Rs.10 each 1,50,000 1,50,000
7% preference Share of Rs.10 each
(B) Reserve & Surplus 5,000 7,500
Reserve Fund 8,000 5,000
Profit & Loss A/c
50,000 1,50,000
[2] Non-current Liab: Mortgage Loan
[3] Current Liabilities: 15,000 25,000
Bank Overdraft 7,500 15,000
Other Current liabilities and
Provisions
Total 2,85,500 4,02,500
[B] Assets:
[1] Non-Current Assets:
Fixed Assets 1,80,500 2,66,500
[2] Current Assets:
Stock 40,000 45,000
Sundry Debtors 60,000 87,000
Cash 5,000 4,000
Total 2,85,500 4,02,500

134
Dr. Cash and Bank Account Cr.

Particulars Amount Particulars Amount

To Balance b/f 7,10,000 By Equity Shareholders A/c 15,00,000
To Investments A/c 6,50,000 By Balance c/f 4,10,000
To 13% Debentures A/c 5,00,000
To Securities Premium 50,000
A/c 19,10,000 19,10,000

Dr. Profit & Loss Appropriation Account Cr.

Particulars 31/3/2018 31/3/2019 Particulars 31/3/2018 31/3/2019

To Reserve Fund 500 2,500 By Balance b/d 4,000 8,000
To Equity share 5,000 2,500 By Profit 20,000 12,500
Dividend
To Preference 10,500 10,500
Share Dividend
To Balance C/d 8,000 5,000

24,000 20,500 24,000 20,500

Sales for the year ending 31/3/2018 was Rs 12,00,0,00 and for the year ending
31/3/2019 was Rs9,00,000. After studying the financial statements, calculate the
Liquidity Ratio, Activity Ratios and Capital Structure Ratios.

Solution: 3
1) Current Ratio = Current Assets
Current Liabilities

For 2018 = 1, 05,000 = 4.7:1

22,500
For 2019 = 1, 36,000 = 3.4:1
40,000

2) Liquid Ratio = Liquid Assets

Liquid Liabilities

For 2018 = 65,000 = 8.67:1

7,500
For 2019 = 91,000 = 6.1:1
15,000

3) Stock Turnover = Cost of Goods Sold/ Sales

Average Stock

For 2018 = 12, 00,000 = 30

40,000

135
For 2019 = 9, 00,000 = 21
42,500

4) Fixed Assets Turnover = Sales

Fixed Assets

For 2018 = 12, 00,000 = 6.6:1

1, 80,500
For 2019 = 9, 00,000 = 3.38:1
2, 66,500

5) Debtors Ratio
We will first compute Average Daily sales

For 2018 = 12, 00,000 Rs. 3,333

360 days

So Debtors Ratio = 60,000 = Rs. 3,333

18 days

For 2019 = 9, 00,000 Rs. 2,500

360 days

So Debtors Ratio = 87,000 = Rs. 2,500

35 days

6) Return on Capital Employed (ROCE) = Net Profit before Interest and Tax x 100
Capital Employed

For 2018 = 20,000 x 100 = 7.6%

2, 63,000

For 2019 = 12,500 x100 = 3.5%

3, 62,500

7) Capital Structure:
The capital gearing is very high. The preference share capital during 2018 was three
times the ordinary share capital and even mortgage loan was equal to ordinary share
capital. The loan has increased three times the ordinary share capital. This signifies that
most of the profit is distributed by way of Interest and Preference Dividend.
The outside debts are in excess of shareholder’s funds. In 2019 the owner’s funds were
Rs.2, 12,500 while the outside liabilities were Rs.1, 90,000.

136
Illustration 4:

Information of a company is as follows: Rs.

Sales of 2017-18 (40% Cash Sales) 10, 00,000

Debtors (1-4-2017) 80,000

Sales Return 15,000

Bad Debts 7,000

Discount allowed 8,000

Cash Received from Debtors 5, 30,000

Take 360 days for the year.

Calculate Debtors Turnover and Debtors Ratio.

Solution: 4

In order to find out average debtors, closing balance of debtors is required which is
missing. Hence, it will be found out by preparing Total Debtors Account.

Dr. Total Debtors Account Cr.

Particulars Amount Particulars Amount

To Balance b/d 80,000 By Bank 5,30,000
To Credit Sales 6,00,000 By Discount 8,000
(60% of 10,00,000) By Bad Debts 7,000
By Sales Return 15,000
By Balance (closing Balance) 1,20,000
(?)

6,80,000 6,80,000

Average Debtors = Opening Debtors + Closing Debtors

2

= 80,000 + 1, 20,000 = Rs.1, 00,000

2

Debtors Turnover = Credit Sales = 6, 00,000 = 6 times

Average Debtors 1, 00,000

It means that collection of credit sales is made 6 times during the year.

Debtors Ratio = 360 days = 360 = 60 days

Debtors Turnover 6

137
Illustration 5:

Following is the summarized Balance Sheet of Mena. Ltd as on 2018.

Liabilities Rs. Assets Rs.

Equity share Capital of Rs Land 12,60,000
10 each. 10,00,000 Plant 7,00,000
10% Preference share Furniture 1,00,000
Capital of Rs.100 each 4,00,000 Closing Stock 2,00,000
Reserves and surplus 7,00,000 Investment (short term) 2,00,000
10% Debentures 5,00,000 Sundry Debtors 4,60,000
Sundry Creditors 2,40,000 Bills Receivable 60,000
Bank Overdraft 1,60,000 Cash at Bank 60,000
Bills Payable 40,000 Preliminary Expenses 20,000
Workmen’s Savings A/c 20,000

30,60,000 30,60,000
Summarized Profit &Loss Account for the year ended on 31/3/2018:

Particulars Rs.
Sales (25% Cash Sales) 80,00,000
Less: Cost of Goods Sold 56,00,000
Gross Profit 24,00,000
Net Profit (before Interest and Tax 50%) 9,00,000
Less: 10% Debenture Interest 50,000
Profit Before Tax 8,50,000
- 50% Tax 4,25,000
Profit after tax 4,25,000
Credit Purchases – Rs.55, 00,000

Opening Stock- Rs.3, 00,000

Calculate the following (360 days of the year)

1. Current Ratio
2. Liquid ratio
3. Gross Profit ratio
4. Net Profit ratio
5. Stock Turnover ratio
6. Debtors ratio
7. Creditor’s ratio.

Solution: 5

Current Assets Rs.

Closing Stock 2,00,000
Debtors 4,60,000
Cash 60,000
Bills Receivable 60,000
Short Term 2,00,000
Investments 9,80,000

138
Current Liabilities Rs.
Creditors 2,40,000
Bills Payable 40,000
Bank Overdraft 1,60,000
Workmen Saving A/c 20,000
4,60,000
1) Current Ratio = Current Assets

Current Liabilities

= 9, 80,000 = 2.13:1

4, 60,000

2) Liquid Ratio = Liquid Assets = Current Asset - Stock

Liquid Liabilities Current Liabilities – Bank Overdraft

= 7, 80,000 = 2.6:1

3, 00,000

3) Gross Profit Ratio = Gross Profit x100 = 24,00,000 x100 = 30%

Net Sales 80, 00,000

4) Net Profit Ratio = Net Profit (After Tax) x100 = 4,25,000 x100 = 5.31%

Net Sales 80, 00,000

5) Stock Turnover = Cost of Goods Sold

Average Stock

[Average stock = 3, 00,000 + 2, 00,000 = 2, 50,000]

So Stock Turnover = 56, 00,000 = 22.4 times.

2, 50,000

6) Debtors Ratio = Debtors + Bills Receivable x 360 = 4,60,000+ 60,000 x 360 =31 days

Credit Sales 60, 00,000

7) Creditors Ratio = Creditors + Bills Payablex360 = 2,40,000+ 40,000x360 = 18.33 days

Credit Purchases 55, 00,000

4.24 Unit End Exercise

1. The following information is for job No. 175 of Alvi Company Ltd :
Materials Rs.4500
Wages:
Department 1 160 hours at Rs. 3 per hour
Department 2 140 hours at Rs. 4 per hour

139
Department 2 140 hours at Rs. 4 per hour
Overheads were estimated as follows:
Department 1 RS.6, 000 for 3000 Direct Labour hours
Department 2 RS.8, 000 for 4000 Direct Labour hours
Fixed Overheads estimated at Rs. 8000 for 4000 hours.

You are required to calculate the cost of job no.175.

(ANS: Total cost for job no.175 Rs. 6,580)

JOB COST: (1) Materials Rs.4,500,

(2) Wages RS 960 [Dept 1 (160x30=480 + Dept II (120 x4) =480=960

(3) Overhead exp: Variable: Dept 1 (160x2) =320+ Dept II (120x4) =240=560+ Fixed
Exp. Rs.560 (160+120=280x2=560)= Total Cost Rs.6,580.

2. The following figures relate to three jobs of a manufacturing unit:

Particulars Job-1 Job-2 Job-3

RS. RS. RS.
Direct Materials 2100 2800 3500
Direct Wages 1400 2100 2450
Direct Expenses 210 280 350
Works overhead are recovered at 50% on prime cost and office overheads are
recovered at 10% on works cost.

Find out the total cost of each job

Ans:

Job-1 Job-2 Job-3

RS. RS. RS.
Prime
cost 3710 5180 6300
Works
cost 5565 7770 9450
Total
cost 6122 8147 10395

3. The information given below has been taken from the costing records of an
engineering work in respect of job no.207

Materials: Rs. 25,000

Wages:
Dept X 60 hours at Rs 25 per hour
Dept Y 40 hours at Rs 15 per hour
Dept Z 20 hours at Rs 40 per hour

140
Variable Overheads:
Dept X RS. 50,000 for 2500 labour hours
Dept Y RS. 30,000 for 1200 labour hours
Dept Z RS. 27,000 for 900 labour hours
Fixed oveheads:
Estimated Rs.1,00,000 for 10,000 normal working hours.
You are required to ascertain the cost of the job no. 207
[Ans: Total cost of job no.207 Rs 31,900(Materials Rs. 25,000+ wages Rs. 2,900
(1500+600+800) + variable overheads Rs.2800(1200+1000+600) + Fixed overheads
Rs. 1,200(120 hours xRs.10) =Rs. 31,900]

4. The information given below is from the costing records of a casting work in respect
of job no.555

Materials: RS. 24060

Wages:
Dept A 60 hours at Rs 18 per hour
Dept B 40 hours at Rs 12 per hour
Dept C 20 hours at Rs 30 per hour
Variable Overheads:
Dept A RS. 30,000 for 5000 labour hour
Dept B RS. 18,000 for 1500 labour hours
Dept C RS. 12,000 for 500 labour hours
Fixed overheads are Rs. 80,000 for 10,000 general
working hours.
Calculate the Total cost for job no.555
[Ans: Total cost for job No.555 Rs. 28,500]

5. B limited undertakes to supply 2000 computers components per month for the
months of April, May and June. Every month a batch order is opened against which
materials and labour cost are booked at actuals. Overheads are levied at a rate per
labour hour. The selling price is contracted Rs.15 per unit.
The following data, present the cost and profit per unit of each batch order and the
overall position of the order for 6,000 units.

Batch Labour
Month Materials Cost
Output Cost
Rs.
April 2500 units Rs. 12500
5000
Rs.
May 3000 units Rs. 18000
6000
Rs.
June 2000 unit Rs. 10000
4000
Labour is paid at the rate of Rs. 2 per
hour.
The other details are :

141
Month Overheads Total labour hours
April Rs. 24000 8000
May Rs. 18000 9000
June Rs. 30000 10000

[Ans: Overheads per labour hour: Rs.3, Rs.2 and Rs.3, Labour hours 2,500, 3,000 and
2,000. Overheads Rs.7500, Rs. 6,000 and Rs. 6,000. Total Cost RS. 25,000, Rs. 30,000
and Rs. 20,000. Profit Rs12,500, Rs. 15,000 and Rs. 10,000. Profit per unit Rs.5, Cost
per unit Rs.10.

Selling price of 6,000 units Rs. 90,000 less total cost Rs. 60,000= Profit Rs. 30,000].

6. Following details have been taken from the costing records of a factory for job no.
901

(1) Materials Rs.90,000

(2) Wages :
Department A 150 hours @ Rs. 6 per hour
Department B 90 hours @ Rs. 5 per hour
Department C 60 hours @ Rs. 3 per hour
Department D 30 hours @ Rs. 2 per hour
Variable overheads for these departments were estimated as follow :
Variable overheads A B C D
Factory overheads 12000 10000 6000 800
Office Overheads 12000 8000 4000 400
Selling Overheads 6000 4500 2000 300
(4) Labour hours for these four departments are as under :
A 5000 C 3000
B 4500 D 500
(5) Fixer overheads estimated Rs. 85000 for 17000 normal working hours.
(6) you are required to calculate the cost of the job and selling price of the job to get
25% profit on selling price.
[ Ans.: Total cost for job Rs. 13920, selling price Rs. 18560 (25% profit on sale = 33 1/3 %
profit on cost, so Rs. 4640 profit)

For preparing job cost sheet (i) Material cost Rs. 9000 (ii) Labour cost Rs. 1590 (A Rs.
900, B Rs. 450, C Rs. 180 and D Rs. 60 = Prime Cost Rs. 10,590 (3) Variable (total)
overheads: A (30,000 / 5000 = 6 x 150 = 900 + B (22500 /4500 = 5 x 90 = 450 + C
(12000 / 3000 = 4 x 60 = 240 = D (1500 / 500) 3 x 30 = 90 = 1680 (4) Fixed
Overheads Rs. 1650 (85000 ÷ 17000 = 5 x 330 = 1659) = Total Cost Rs. 1390 +
Profit Rs 4640 = Sale price Rs. 18560]

7. Raj limited undertakes to supply 5,000 units for the months of October, November
and December. Every month a batch order is opened against which materials and

142
labour cost are booked at actuals. Overhead are levied at the rate per labour hour.
The selling price is contracted at Rs. 15 per unit.
From the following data, present the cost and profit per unit of each batch order and
overall position of the order for the 15,000 units.

Batch Materials
Month Labour Cost
Output Cost
October 2300 units Rs. 12500 Rs. 7500
November 3420 units Rs. 18000 9000
December 1900 units Rs. 10000 6000

Labour is paid at the rate of Rs. 5 per hour.

The other details :

Month Overheads Rs. Total labour hours

October Rs. 6000 3000
November Rs. 7000 1750
December Rs. 9000 3600

[Ans.: Overhead per labour hours Rs. 2, Rs. 4 and Rs. 2.50, Labour hours 1500, 1800
and 1200, Overheads Rs.3000, Rs. 7200 and Rs. 3000 Total cost Rs. 23000, Rs.34200
and Rs. 19000, Cost per unit Rs. 10, sale price Rs. 225000 (15,000 x 15) less total cost
Rs. 1,50,000 (15000 x 10) = Profit Rs. 75000.]

8. Nirmi limited undertakes to supply 12,000 units for the months of April, May and
June. Every month a batch order is opened against which materials and labour cost
are booked at actuals. Overhead are levied at the rate per labour hour. The selling
price is contracted at Rs. 30 per unit.
From the following data, present the cost and profit per unit of each batch order and
overall position of the order for the 36,000 units.

Batch Materials
Month Labour Cost
Output Cost
October 15,000 units Rs. 75000 Rs. 30,000
November 18,000 units Rs. 1,08,000 Rs.36,000
December 12,000 units Rs. 60,000 Rs.24,000

Labour is paid at the rate of Rs. 12

per hour.

The other details are:

Overheads
Month Total labour hours
Rs.
April 1,44,000 48,000
May 1,08,000 27,000
June 1,80,000 30,000

143
[Ans: Overhaeads per Labour hour Rs.3, Rs.4 and Rs.6, Labour hours2,500, 3,000 and
2,000
Overheads Rs.7500, Rs. 12,000 and Rs. 12,000. Total Cost RS. 1,12,500, Rs. 1,56,000
and Rs.96,000
Total cost per unit Rs.7.50,Rs.8.67 and Rs8.00 , Profit per unit Rs.22.50, Rs.21.33 and
Rs.22.00]
9. The following is the Balance Sheet of Amar company Ltd. as on 31/3/2019

Particulars Note. Rs. Rs.

No.
[A] Equity and Liabilities:
[1] Shareholder's Funds:
(A) Share Capital
40,000 Equity Share of Rs.10 each 4,00,000
12% Preferences Shares of Rs100 6,50,000
each 2,50,000

(B) Reserves and Surplus: 2,10,000

Reserves 2,95,000
Profit & Loss A/c 85,000

[2]Non-Current Liabilities: 150,000

13.5 %Debentures

[3] Current Liabilities: 60,000

Creditors 30,000
Bank Overdraft 1,05,000
Outstanding Expenses 15,000
Total 12,00,000
[B] Assets:
[1] Non-Current Assets:
(A) Fixed assets: 6,00,000
1. Fixed assets 1,00,000
2. Goodwill
(B) Investments 80,000
Preliminary expenses 12,000

[2] Current assets

Stock 2,25,000
Debtors 1,68,000
Cash 15,000 4,08,000
Total 12,00,000

144
Details of Profit & Loss Account in brief:

Particulars Rs.

Total sales (75% on credit) 6,80,000

Less: Cost of sales 4,00,000

Gross Profit 2,80,000

Less: Depreciation and Managerial Expenses 90,000

Net profit (Before deducting tax at 50% ) 1,90,000

Stock on 31/3/20/2018 was Rs.1,75,000.

From the above particulars, compute the following Accounting Ratios and give in brief
their uses (The necessary calculations should be based on taking 360 days in a year.)

(1) Current ratio

(2) Debtors Ratio
(3) Return on Capital Employed
(4) Rate of return on equity Capital
(5) Stock ratio
(6) Net Profit
(7) Gearing Ratio.

[Ans : (1) Current ratio 3.89 shows sound liquid position. (2) Debtors Ratio 119 days
not satisfactory (3) Return on capital employed 19.41% (Profit before interest and tax)
(4) Rate of return on Equity capital 16.25% (5) stock Ratio 2 – unsatisfactory (6) Net
Profit (after tax ) Ratio 13.97% (7) Gearing Ratio 1 : 1]

10.From the following balance sheet calculate:

(1) Return on Shareholders’ Funds

(2) Debt-Equity Ratio:

Balance Sheet

Particulars (Rs.) (Rs.)

[A] Equity and Liabilities:
[1] Shareholder's Funds: 40,000
(B) Reserves and Surplus: 10,000
50,000
[2] Non-Current Liabilities:
Debentures
[3] Current Liabilities 10,000
Creditors 5,000
Total 65,000

145
[B] Assets:
[1] Non-Current Assets:
Fixed assets 50,000
[2] Current Assets 15,000

Total 65,000

Information:

1. Net Profit before Tax was Rs. 14,000

2. Tax Rate is 50%

[Ans.1) Return on Shareholder’s funds 14% (7,000 x100/50,000) 2) Debt Equity ratio
0.2 :1 (10,000/50,000)]

11.From the following particulars calculate:

1. Current Ratio
2. Liquid Ratio
3. Capital Gearing Ratio
4. Debtors Ratio
5. Creditors Velocity
6. Total Assets Turnover Ratio.

Particulars Note.No. 2018 (Rs.) 2019 (Rs.)

[A] Equity and Liabilities:
[1] Shareholder's Funds:
(A) Share Capital
Equity Capital 10,00,000 12,00,000
Preferences Shares Capital 5,00,000 5,00,000
(B) Reserves and Surplus:
General Reserves 5,00,000 6,00,000
Profit & Loss A/c 3,00,000 4,00,000
[2]Non-Current Liabilities:
Debentures 2,00,000
[3] Current Liabilities:
1,75,000 2,00,000
125,000 50,000
1,50,000
1,00,00 60,000
Total 29,00,000 31,60,000
[B] Assets:
[1] Non-Current Assets:
(A) Fixed Assets :
(i) Tangible Assets:

146
Buildings 7,00,000 6,50,000
Furniture 1,00,000 90,000
Plant 6,00,000 7,70,000
(ii) Intangible Assets :
Goodwill 5,00,000 5,00,000
[2] Current Assets
Stock 5,00,000 650,000
Bills receivable 130,000 1,00,000
Debtors 2,70,000 4,00,000
Bank 1,00,000
Total 29,00,000 31,60,000
Others Particulars:

Particulars 2017-18 2018-19

Sales: Cash 3,00,000 5,00,000
Credit 18,25,000 20,07,500
Purchases (Credit) 14,60,000 16,06,000
[Ans : Current ratio: 2.5 and 2.5; Liquid ratio: 1.25 and 1.61; Capital gearing ratio
0.70 & 0.42; Debtors’ ratio 80 days and 91 days; Creditors ratio 56 days & 25 days;
Total Assets Turnover ratio 0.73and 0.79. ]

12.The following are the summarized B/s of Anjali mills Co. Ltd.

particulars Note 31/3/2018 31/3/2019

No. (In Rs.) (In Rs)

[A] Equity and Liabilities:

[1] Shareholders` funds:

Share Capital 1,00,000 1,00,000

Reserve 90,000 1,00,000

[2] Non-current Liab: 9% 1,00,000 1,00,000

Debentures

[3] Current Liabilities:

40,000 60,000
Sundry Creditors
20,000 10,000
Provision for Taxation

Total 3,50,000 3,70,000

147
[B] Assets:

[1] Non-Current Assets:

Fixed Assets:

Land and Buildings 50,000 50,000

Plant and Machinary 2,00,000 1,80,000

[2] Current Assets:

Stock 50,000 65,000

Sundry Debtors 30,000 40,000

Cash 15,000 35,000

Total 3,50,000 3,70,000

Additional Information

Particulars 2017-18 2018-19

Sales 3,65,000 2,92,000

Gross Profit 90,000 52,000

Net Profit (befor interst and Tax) 58,000 30,000

The stock on 1/4 /2017 was valued at Rs. 45,000.

Calculate the following accounting ratios and comment in brief on each of them.

(1) Current Ratio (2) Stock Turnover (3) Debtor’s Ratio and Debtors Turnover (4) Return
on Capital Employed.

[Ans: (1) Current Ratio 1.67:1 and 2:1 (2) Stock Turnover 5.5 and 4 (3) Debtor’s Ratio
30 days and 50 days and Debtors Turnover 1.67 and 7.3 on basis of closing Debtors (4)
Return on Capital Employed 20% and 10%. There is an improvement only in current
Ratio. The position in 2018-19 as compared to 2017-18 shows deterioration as indicated
by other ratios]

13.From the following Actual Financial Ratios and Ideal Ratios give your observations
and critical comments on the working of Moon Ltd.

148
Particulars Actual Ideal
Net Profit Ratio 15% 18%
Debtors Ratio 30 days 40 days
Stock Ratio 5 8
Liquidity Ratio 1.5 102
Capital Assets Ratio 90% 100%
Financial Expense Ratio 2% 2.5%
Selling and Distribution Expenses Ratio 1.5% 1.2%
Gearing Ratio 0.3 0.45
[Ans: The Liquid Ratio of the company is very satisfactory, showing a very comfortable
liquid position of the company. The collection from customers is speedy but the stock
turnover is slow as compared to other firms. The company is not rapidly turning over its
sock. It may be due to speedy collections or strict credit terms. The Net Profit Ratio is
low. Financial expenses Ratio is satisfactory. Selling and Distribution Expenses Ratio
during the year is unsatisfactory. Gearing Ratio is low]

14.The following balances are extracted from the books of Ajay Ltd om 31/3/2019

Particulars Amount Particulars Amount

Total Sales 4,54,000 Salary 12,000

Debtors 64,000 Closing Stock 40,000

Creditors 30,000 Sales Return 4,000

Advertisement Exp. 3,000 Cash Balances 16,000

Rent 7,000 Bills Receivables 6,000

Depreciation 5,000 Cash Purchases 90,000

Stock (1/1/2019) 20,000 Salesman’s travelling Exp. 3,000

Cash Sales 30,000 Purchase Returns 10,000

Total Purchases 3,90,000 Bills Payable 31,000

Stationery 5,000 Unpaid Salary 3,000

Postage 2,000 Prepaid Rent 2,000

Salesman’s commission 8,000

From the above information you are required to calculate the following ratios:

1. Gross Profit Ratio

2. Stock Turnover Ratio
3. Operating Ratio
4. Debtors Ratio (300 days to be taken for the year)

149
5. Net Profit Ratio
6. Current Ratio
7. Creditors Velocity.

[ Ans: Gross Profit is not given for that by preparing Trading Account first find out
the Gross Profit = Rs 90,000. So Gross Profit Ratio = 20%. Stock Turnover Ratio is
12 times, Operating Ratio 90%, Debtors Ratio 50 days, Net Profit Ratio 10%, net
profit will be found out by preparing Profit & Loss A/c; Cost of Goods Sold is Rs
3,60,000, Current Ratio 2:1 and Creditors Velocity 63 days]

15. Prem company’s financial statements contain the following information.

Particulars 2018(Rs) 2019(Rs)

Current Assets:

Cash 2,00,000 1,60,000

Debtors (2017: Rs.2,80,000) 3,20,000 4,00,000

Short-Term Investments 2,00,000 3,20,000

Stock (2017: Rs.2,20,000) 5,80,000 6,20,000

Total Current Assets 13,00,000 15,00,000

Less: Current Liabilities 5,00,000 5,00,000

Working Capital 800,000 10,00,000

Equity Capital 20,00,000 20,00,000

Retained Earnings 4,00,000 8,00,000

Long-Term Loan 16,00,000 16,00,000

Capital Employed 40,00,000 44,00,000

Income Statement

Particulars 2018(Rs) 2019(Rs)

Sales 20,00,000 40,00,000

Less: Cost of goods sold 10,00,000 28,00,000

Gross profit 10,00,000 12,00,000

150
Less: Interest on long-Term Loan 1,60,000 1,60,000

Profit Before tax 8,40,000 10,40,000

Less: 50% Tax 4,20,000 5,20,000

Profit before tax 4,20,000 5,20,000

From the above information, calculate the following ratios of the year 2018 and 2019:

(1) Gross Profit Ratio, (2) Net Profit Ratio, (3) Current Ratio, (4) Long-Term Debt-Equity
Ratio, (5) Return on Capital Employed, (6) Debtors Turnover, (7) Stock Turnover

[Ans : (1) Goss profit Ratio: 50% (10,00,000/20,00,000 x100) and 30% (12,00,000
/40,00,00 x 100); (2) Net Profit Ratio: 21% (4,20,000 /20,00,00 x 100) and 13%
(5,20,000 /40,00,00 x 100); (3) Current Ratio:2.6 :1 (13,00,000 / 5,00,000) and 3 :1
(15,00,000 / 5,00,000); (4) Long-Term Debt-Equity Ratio: 66.67% (16,00,000 /
24,00,000 x100) and 57.14% 16,00,000 / 28,00,000 x 100); (5) Return on capital
Employed: 25%(1,00,000 /40,00,00 x 100) and 27.27% (12,00,000 / 44,00,000 x100);
(6) Debtors Turnover sales / Average Debtors: 6.67 Times (20,00,000/30,00,000) and
11.11 Times (40,00,000 / 3,60,000); (7) Stock Turnover: 2.5 times (10,00,000 /
4,00,000) and 4.67 times (28,00,000/6,00,000)]

16. The following information is taken from the financial records for Ravi Co. Ltd.:

Particulars Rs.
Total sales (of which 25% is Cash Sales) 9,00,000
Cost of goods sold 5,80,000
Net profit (after 50% Tax) 60,000
Equity share capital 3,00,000
Retained earnings 54,000
10% Debentures 1,80,000
Fixed assets 4,00,000
Stock 80,000
Debtors 96,000
Cash 32,000
Creditors 48,000
Bills payable 12,000
Bank overdraft 30,000
Preliminary expenses 5,000
From the above information, calculate the following ratios:

1. Current Ratio
2. Debtors Ratio (360 days in a year)
3. Operating Ratio
4. Stock Turnover Ratio
5. Return on Total Capital Employed

151
6. Return on Shareholder’s Funds
7. Interest Coverage Ratio.

[Ans: Current Ratio 2.3:1, Debtors Ratio 51.2 Days, Operating Ratio 86.67%, Stock
Turnover Ratio 7.25 times, Return on Total Capital Employed 23.43%, Return on
Shareholder’s Funds 14.67%, Interest Coverage Ratio 7.67 Times.]

17.The following is the Balance Sheet of Robin Ltd. as on 31 December 2018.

Particulars Note (Rs.) ( Rs)

No.
[A] Equity and Liabilities:
[1] Shareholders` funds:
(A) Share Capital: 3,00,000
Equity share of Rs.10 each 1,50,000 4,50,0000
10% preference Share of Rs.10
each 1,15,000
(B)Reserve & Surplus
2,00,000

[2] Non-current Liabilities: 8% 30,000

Debentures 1,10,000
[3] Current Liabilities: 20,000
Bank Overdraft 10,000 1,70,000
Creditors
Bills Payable
Outstanding Expenses.
Total 9,35,000
[B] Assets:
[1] Non-Current Assets:
(a) Fixed Assets 6,00,000
(b) Other Non- Current Assets
Preliminary Espenses 15,000
[2] Current Assets:
Stock 1,20,000
Sundry Debtors 1,00,000
Bills Receivables 30,000
Cash 50,000
Pre-paid Expenses 20,000 3,20,000
Total 9,35,000
Additional Information:

1. Total Sales (cash Sales are 20% of Credit Sales) Rs. 10,80,000

152
2. Cost of goods sold Rs. 5,40,000
3. Net Profit (Before Interest and tax Provision) (Tax rate 50%) Rs. 3,00,000
4. Stock on 1/1/2018 Rs.1,00,000.

From the above information calculate the following ratios. Take 360 days while
calculating Debtors Ratio.

1. Current Ratio
2. Debtors Ratio
3. Return on Capital Employed
4. Net Profit Ratio
5. Capital Gearing Ratio
6. Debt-Equity Ratio (on the basis of Long term)
7. Liquid Ratio
8. Operating Ratio.

[Ans: Current Ratio 1.88:1, Debtors Ratio 52 days, Return on Capital Employed 40%,
Net Profit Ratio13.15%, Capital Gearing Ratio 1.17 :1, Debt-Equity Ratio (on the basis of
Long term) 36.36% (2,00,000 x100/ 5,50,000), Liquid Ratio 1.43:1, Operating Ratio
73.70%]

18.From the following ratios calculated from the accounts of a company and standard
ratios of the industry, briefly comment on the financial position of the company with
respect to each ratio

Particulars Actual Standard

Current Ratio 4:1 2:1
Debtors Ratio 60 days 75 days
Gross Profit Ratio 40% 40%
Net Profit Ratio 20% 25%

[Ans: The Current ratio is very high as compared to the standard, showing a very
comfortable liquid position for creditors; The Debtors Ratio is much lower than the
standard which is very comfortable as the company is able to collect its book debtors
much earlier; The Gross Profit Ratio is on par with that of the standard prevailing in the
industry; The Net Profit Ratio however is very unsatisfactory when gross profit rate is
taken into account.]

153
References:

1. S.M. Shukla (1982), “Advanced Accountancy”, Sahitya Bhavan, Agra.

2. Aggarwal, M.P. (1981), “Analysis of Financial Statements”, National Publishing

House, New Delhi.

3. Michael Tones (2002), “Accounting for Non-Specialists”, John Wiley & Sons,
Singapore.

4. Ashok Banerjee (2005), “Financial Accounting”, Excel Book, New Delhi.

5. George Foster (2002), “Financial Statement Analysis”, Pearson Education.

6. S.P. Jain (2001), “Corporate Accounting”, Kalayani Publishers, New Delhi.

7. Ashish K. Bhattacharyya (2004), “Financial Accounting for Business Managers”,

Prentice Hall of India Pvt. Ltd., New Delhi.

8. R.L. Gupta (2001), “Advanced Accountancy”, Sultan Chand & Sons, New Delhi.

9. P.C. Tulsian (2000), “Financial Accounting”, Tata McGraw Hill, New Delhi.

10. Shashi K. Gupta (2002), “Contemporary Issues in Accounting”, Kalyani Publishers,

New Delhi.

11. S.N. Maheshwari (2004), “Management Accounting and Financial Control”, Sultan
Chand and Sons, New Delhi.

12. Anthony N. Robert (1998), “Accounting Principles”, AITBS Publishers, New Delhi.

13. R. Narayanaswamy (2003), “Financial Accounting”, Prentice Hall of India, New Delhi.

14. The Institute of Company secretaries of India – Company Account, Cost and
Management Accounting (Study material)

15. Chopade, Chaoudhari (2008), Management Accounting, Sheth Publication

16. Ainapure, Ainapure (2008), book-keeping and Accountancy, Manan Prakashan

17. Chopade, Chudhari (2008), Introduction to Financial Accounts, F.Y.B.M.S, Sheth

Prakasan

154
Long and Short Questions for Self Study

Long Questions

1. Explain Accounting Principles, Concepts and Conventions.

2. Explain in detail the Indian Accounting Standards (IAS)

3. Explain the meaning and types of Vouchers

4. Explain in detail the meaning and elements of Cost Accounting

5. Explain the meaning, functions, merits and demerits of Management Accounting

6. The following balances are taken from the books of George Anderson at the end of
his first year trading on 31st December 2021.

2021

155
The following additional information is available:

1. Inventory at 31st December 2021 was valued at $4500.

Required:

2. (a) Prepare income statement for the year ended 31 December 2014.

a) Prepare income statement for the year ended 31st December 2021.

b) Prepare a balance sheet as at 31st December 2021.

7. Following is the trial balance of Good Luck Ltd. as on 31.3.2021

Trial Balance

Particulars Amt. Particulars Amt.

Preliminary Expenses 20,000 Equity Shares Capital 7,00,000
(Not yet written off) (Rs.100)
Administrative Expenses 4,00,000 Gross Sales 20,40,000
Land And Building 8,00,000 General Reserve 3,20,000
Plant & Machinery 6,00,000 Profit and loss A/c (Cr.) 2,00,000
Selling Expenses 1,00,000 12.5% Debentures 4,00,000
Furniture 3,00,000 Cost of production 9,60,000
Return Inward 40,000 Provision for
Depreciation 2,00,000
On Land & Building 1,00,000
On Plant & Machinery 80,000
On Furniture
Finished Goods 2,40,000 Trade Expenses 4,00,000
Government Bonds 2,80,000
Advance Tax 2,00,000
Trade Receivable 5,00,000
44,40,000 44,40,000

Other Information:

1. Closing stock of Finished goods as on 31.3.2021 was Rs.1,60,000.

2. Provide Dividend on Equity Shares at 10%.

3. Make provision for Income Tax of Rs.2,00,000.

From the following information you are required to prepare Income Statement for the
year ended 31.3.2021 and balance sheet as on that date in vertical form suitable for
analysis.

156
Short Questions

1. On examining the Bank Statement of Green Ltd., it is found that the balance shown
on 31st March, 2021, differs from the bank balance of Rs.23,650 shown by the Cash
Book on that date. From a detailed comparison of the entries it is found that:
i. Rs.2,860 is entered in the Cash Book as paid into the bank on 31st March, 2021 but
not credited by the bank until the following day
.

ii. Bank charges of Rs.70 on 31st March, 2021 are not entered in the Cash Book.

iii. A bill for Rs.5,500 discounted with the bank is entered in the Cash Book without
recording the discount charges of Rs.270
.

iv. Cheques totaling Rs.16,720 were issued by the company and duly recorded in the
Cash Book before 31st March, 2021 but had not been presented at the Bank for payment
until after that date
.

v. On 25th March, 2021, a debtor paid Rs.1,000 into the Company’s Bank in settlement
of his account but no entry was made in the Cash Book of the company in respect of
this.
vi. No entry has been made in the Cash Book to record the dishonor on 15th March,
2021, of a cheque for Rs.550 received from Ram Babu. Prepare a Bank Reconciliation
Statement as on 31st March, 2021.

2. Prepare Bank Reconciliation Statement as on 30th September 2021 from the

following particulars

(i) Bank Balance as per Pass Book Rs.10,000

(ii) Cheque deposited into bank but no entry was passed in Cash Book Rs.500

(iii) Cheque received and entered in Cash book but not sent to Bank Rs.1,200

(iv) Insurance premium paid directly by the Bank Rs.800

(v) Bank charges entered twice in the Cash Book Rs.20

(vi) Cheque received entered twice in Cash Book Rs.1,000

(vii) Bill discounted dishonoured not recorded in the Cash Book Rs.5,000

1. Distinction between Financial Accounting, Management Accounting and Cost

Accounting

2. Explain the cash system and mercantile system.

157
3. Following information is available for the year 2014-15, calculate gross profit ratio:

Revenue from Operations: Cash 25,000

Credit 75,000
Purchases: Cash 15,000
Credit 60,000
Carriage Inwards 2,000
Salaries 25,000
Decrease in Inventory 10,000
Return Outwards 2,000
Wages 5,000

4. From the following information, calculate –

i.Trade receivables turnover ratio

ii.Average collection period

iii.Trade payable turnover ratio

Given:

Revenue from Operations 8,75,000

Creditors 90,000
Bills receivable 48,000
Bills payable 2,000
Purchases 4,20,000
Trade debtors

***************

158