Financial Accounting-II
Page-1-
Mashal University
Accounting-II
Source person: Kamran Khan
M.Com, B.Com…
Lecturer at Mashal University
Figure 1
Mashal University, Shar-e-new Park, Kabul
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
Financial Accounting-II
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
Page-2-
MU
Mashal University
Financial Accounting-II
Page-3-
CHAPTER 1
ACCOUNTING FOR
MERCHANDISING ACTIVITIES
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
Financial Accounting-II
Page-4-
Chapter 1 Accounting for Merchandising Activities
Merchandising business:
A merchandising company earns net income by buying and selling merchandise, which
consists of goods that the company acquires for the purpose of reselling them to customers. 1A
merchandising company can be either a wholesaler or a retailer. Wholesalers buy goods from
manufacturers and sell them to retailers or other wholesalers. Retailers buy goods from
wholesalers and sell them to individual customers. To achieve a net income, the revenue from
selling the merchandise needs to exceed not only the cost of the merchandise sold to
customers but also the company’s other operating expenses for the reporting period.
The accounting term for the revenues from selling merchandise is sales and the term
used to describe the expense of buying and preparing the merchandise is cost of goods sold.
The company’s other expenses are often called operating expenses.
Accounting treatments of Merchandising Activities:
Note: there are two systems to record merchandise. a) The perpetual inventory system and b)
The periodical inventory system.
First we learn that how the merchandises are recorded under the Perpetual Inventory System.
The following General Journal Entry is passed for the purchase of merchandise on cash.
a. Purchase of Merchandise
Merchandise can be purchased by any of the following two methods.
1. On cash
2. On credit
1. Purchase of Merchandise on Cash
Transaction January…., Purchased merchandise on cash $5000.
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
Financial Accounting-II
Page-5General Journal
Date
2010
Jan
Description
….
Ref. Dr.
Inventory
Cash
(purchased merchandise on cash)
Cr.
5000
5000
2. Purchase of merchandise on credit
Transaction- Purchased merchandise on account $ 1500 from MM Smith.
Date
Jan
2011
Description
…..
Ref. Dr.
Inventory
Accounts payable-MM Smith.
(purchased merchandise on
account)
Cr.
1500
1500
3. Return of merchandise
a. Those returned which were purchased on cash
Transaction- Purchases returned of $500 which were purchased on cash.
Date
Jan
2011
Description
Ref. Dr.
….
Cash
500
Inventory
(purchases return)
b. Those returned which were purchased on account.
Transaction-Purchases returned to MM Smith $ 500.
Date
Jan
2011
Cr.
Description
….
Ref. Dr.
Accounts payable-MM Smith
Inventory
(purchases return)
500
Cr.
500
500
4. Payment to account payable
a. Payment without discount.
Transaction- Paid cash to MM Smith from whom merchandise were purchased on credit $
1000.
Date
Jan
2011
Description
….
Accounts payable
Cash
(paid cash on account)
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
Ref.
Dr.
Cr.
1000
1000
MU
Mashal University
Financial Accounting-II
Page-6-
b. Payment with discount received.
Transaction-Paid cash to MM Smith from whom merchandise were purchased on account $900
and $100 was discount.
Date
Jan
2011
Description
….
Ref.
Accounts payable
Cash
Discount Received
(paid cash on account and
discount received)
Dr.
Cr.
1000
900
100
b. Sale of Merchandise
Merchandise can be purchased by any of the following two methods.
1. On cash
2. On credit
1. Sale of Merchandise on Cash
Transaction January…., sold merchandise on cash $2000 which cost $1000.
Note: there are two systems to record merchandise. a) The perpetual inventory system and b)
The periodical inventory system.
First we learn that how the merchandises are recorded under the Perpetual Inventory System.
The following General Journal Entry is passed for the sale of merchandise on cash.
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
Financial Accounting-II
Page-7General Journal
Date
2010
Jan
Description
….
Ref. Dr.
Cash
Sales
(sold merchandise on cash)
2000
Cost of goods sold
Inventory
(Cost of the goods sold recorded)
1000
Cr.
2000
1000
(Note: In case of perpetual inventory system, at the time of sales two Journal entries are passed
on for the sale and the second for the cost of the goods sold)
2. Sale of merchandise on credit
Transaction- Sold merchandise on account $ 3000 to TTC Co. which cost was $2000
Date
2010
Jan
Description
….
Ref. Dr.
Accounts Receivable-TTC Co.
Sales
(sold merchandise on cash)
3000
Cost of goods sold
Inventory
(Cost of the goods sold recorded)
2000
Cr.
3000
2000
3. Return of merchandise
a. Those returned which were sold on cash
Transaction- Sales returned of $1500 which were sold on cash and having cost of $1000.
Date
Jan
2011
Description
….
Sales Return
Cash
(sales return)
Inventory
Cost of goods sold
(Return of goods recorded)
Ref. Dr.
Cr.
1500
1500
1000
1000
b. Those returned which were Sold on account.
Transaction-Sales returned by TTC Co. of $ 1500 which cost was $1000
Date
Jan
2011
Description
….
Sales Return
Accounts Receivable-TTC Co.
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
Ref. Dr.
Cr.
1500
1500
MU
Mashal University
Financial Accounting-II
Page-8-
(sales return)
Inventory
Cost of goods sold
(Return of goods recorded)
1000
1000
4. Payment from Accounts Receivable
a. Payment without discount.
Transaction- Received cash from TTC Co. whom merchandise were sold on credit $ 3000.
Date
Jan
2011
Description
….
Ref.
Cash
Accounts Receivable
(Received cash on account)
Dr.
Cr.
3000
3000
b) Payment with discount
Transaction- Received cash from TTC Co. whom merchandise were sold on credit $ 2800.
Date
Jan
2011
Description
….
Cash
Discount Allowed
Accounts Receivable
(Received cash on account and
discount allowed)
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
Ref.
Dr.
Cr.
2800
200
3000
MU
Mashal University
Financial Accounting-II
Page-9-
Accounting treatments of Merchandising Activities:
b) The periodical inventory system.
Now we learn that how the merchandises are recorded under the Periodic Inventory System.
The following General Journal Entry is passed for the purchase of merchandise on cash.
c. Purchase of Merchandise
Merchandise can be purchased by any of the following two methods.
2. On cash
2. On credit
1. Purchase of Merchandise on Cash
Transaction January…., Purchased merchandise on cash $5000.
General Journal
Date
2010
Jan
Description
….
Ref. Dr.
Purchases
Cash
(purchased merchandise on cash)
Cr.
5000
5000
2. Purchase of merchandise on credit
Transaction- Purchased merchandise on account $ 1500 from MM Smith.
Date
Jan
2011
Description
…..
Ref. Dr.
Purchases
Accounts payable-MM Smith.
(purchased merchandise on
account)
Cr.
1500
1500
3. Return of merchandise
c. Those returned which were purchased on cash
Transaction- Purchases returned of $500 which were purchased on cash.
Date
Jan
2011
Description
Ref. Dr.
Cr.
….
Cash
500
Purchases return
(purchases return)
d. Those returned which were purchased on account.
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
500
MU
Mashal University
Financial Accounting-II
Page-10-
Transaction-Purchases returned to MM Smith $ 500.
Date
Jan
2011
Description
….
Ref. Dr.
Accounts payable-MM Smith
Purchases return
(purchases return)
Cr.
500
500
d. Sale of Merchandise
Merchandise can be purchased by any of the following two methods.
2. On cash
2. On credit
1. Sale of Merchandise on Cash
Transaction January…., sold merchandise on cash $2000 which cost $1000.
General Journal
Date
Description
2010
Jan
Cash
Sales
(sold merchandise on cash)
….
Ref. Dr.
Cr.
2000
2000
2. Sale of merchandise on credit
Transaction- Sold merchandise on account $ 3000 to TTC Co. which cost was $2000
Date
Description
2010
Jan
Accounts Receivable-TTC Co.
Sales
(sold merchandise on cash)
….
Ref. Dr.
Cr.
3000
3000
3. Return of merchandise
c. Those returned which were sold on cash
Transaction- Sales returned of $1500 which were sold on cash and having cost of $1000.
Date
Jan
2011
Description
….
Sales Return
Cash
Ref. Dr.
Cr.
1500
1500
(sales return)
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
Financial Accounting-II
Page-11-
d. Those returned which were Sold on account.
Transaction-Sales returned by TTC Co. of $ 1500 which cost was $1000
Date
Jan
2011
Description
….
Sales Return
Accounts Receivable-TTC Co.
Ref. Dr.
Cr.
1500
1500
(sales return)
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
Financial Accounting-II
Page-12-
CHAPTER NO: 02
SPECIAL JOURNALS
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
Financial Accounting-II
Page-13-
Special Journal or Sub-Division of Journal
When the business is small or the number of transactions are less, all the transactions are
recorded in one journal called General Journal but when the business becomes large or the
number of transactions are more it is not possible to record all of them in one journal, so this
situation several books are used for the recording of the business transactions, this division of
journal is called as special journal or sub-division of journal. Here separate book is used for
similar transactions.
Purposes and Advantages of the special journal
The main purpose of the special journal is to divide the work load among various officials when
it becomes impossible for one person to record all such transactions. This division gives the
following advantages.





Division of work is done
Efficiency of the staff and skill of the staff is improved
It is easy to check the record of similar nature
Posting in ledger becomes easy
Record of vouchers and documents can be easily maintained
Special Journals
Special journals are used by the business according to its size and needs. However, a business
may use the following special journals.
a. Special journals for purchase and sale of merchandise
 Purchases Journal
 Purchases Returns and Allowances Journal
 Sales Journal
 Sales Returns and Allowances Journal
b. Special journals for cash transactions
 Cash receipts Journal
 Cash payment Journal
 Petty cash book/ Journal
Note: special journals for cash transactions will be discussed in a separate chapter.
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
Financial Accounting-II
Page-14-
1. Purchases Journal
In this book all the purchases of merchandise are recorded. It is also called as Invoice Inward
Journal. From this journal entries are posted in Accounts Payable Ledger and General Ledger.
It should be remembered that only credit purchases are recorded in purchases journal. Cash
purchases are not recorded here; they are recorded in cash payment journal.
Format and example of Purchases Journal
Example:
Brevet Company received the following invoices for the month of January, 2011.
Jan 1st Merchandise purchased from Asad Company $30000 vide Invoice No.010
Jan 10th Invoice No. 0034 received from 3-D computers company for $35000
Jan 15thPurchased merchandise worth $15000 from Betalian Company Invoice No.0111
Jan 25th Purchased merchandise from Ahmad Company $10000 for cash.
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
Financial Accounting-II
Page-15Brevet Company
Purchases Journal
Date
Jan 01
10
15
Accounts Credited
Accounts Payable-Asad Company
Accounts Payable-3-D Company
Accounts Payable-Betalian Company
Inv.No.
010
0034
0111
Ref.
Amount
30000
35000
15000
Note: Transaction of 25th January is not recorded in the purchases Journal because it is cash
transaction. It is recorded in the cash payments journal.
2. Sales Journal
In this book all the sales of merchandise are recorded. It is also called as Invoice Outward
Journal. From this journal entries are posted in Accounts Receivable Ledger and General Ledger.
It should be remembered that only credit sales are recorded in sales journal. Cash sales are not
recorded here; they are recorded in cash Receipt journal.
Format and example of Sales Journal
Example:
Comsat Company had the following transactions for the month of January, 2011.
Jan 1st Merchandise sold to Akram Company $20000 vide Invoice No.A-10
Jan 10th sold merchandise to Baram Company Invoice No. B-012 for $25000
Jan 24th Sold merchandise to Ramz Company $10000 for cash.
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
Financial Accounting-II
Page-16-
Jan 30th sold merchandise for $350 on Maliam Company on account invoice No M-123.
Date
Jan 01
10
30
Comsat Company
Sales Journal
Accounts Debited
Inv.No.
Accounts Receivable-Akram Company
A-10
Accounts Receivable -Baram Company
B-012
Accounts Receivable -Maliam Company
M-123
Ref.
Amount
20000
25000
3500
Note: Transaction of 24th January is not recorded in the sales Journal because it is cash
transaction. It is recorded in the cash receipts journal.
3. Purchases Return & Allowances Journal
When merchandise is purchased is recorded in the purchases journal, but when the
merchandise is defective or not according to the buyer’s requirement, they are returned to the
seller called purchase return. Such purchases returns are recorded in a book called purchases
return & Allowances Journal. Sometimes the seller may grant an allowance and the
merchandise are not returned to the seller. This allowance is also recorded in the purchases
return & allowances journal.
Format and example of Purchases Return & Allowances Journal
Example:
February 1st Merchandise value $250 returned to Asad Company Inv.No.011.
5th Returned merchandise worth $300 returned to 3-D Company Inv.No.0035.
10th Betalian Company gave an allowance of $500 as the merchandise purchased was defective.
Brevet Company
Purchases Return & Allowances Journal
Date
Feb. 01
5
10
Accounts Debited
Accounts Payable-Asad Company
Accounts Payable-3-D Company
Accounts Payable-Betalian Company
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
Inv.No.
011
0035
_
Ref.
Amount
250
300
500
MU
Mashal University
Financial Accounting-II
Page-17-
4. Sales Return & Allowances Journal
When merchandise is sold is recorded in the sales journal, but when the merchandise is
defective or not according to the buyer’s requirement, they are returned to the seller called
sales return. Such sales returns are recorded in a book called sales return & Allowances Journal.
Sometimes the seller may grant an allowance and the merchandise are not returned to the
seller. This allowance is also recorded in the sales return & allowances journal.
Format and example of Sales Return & Allowances Journal
Example:
February 1st Merchandise value $700 returned by Akram Company Inv.No. A-11
5th Returned merchandise worth $630 returned by Baram Company Inv.No. B-013
10th Maliam Company gave an allowance of $150 for the defective merchandise M-124
Comsat Company
Sales Return & Allowances Journal
Date
Feb. 01
5
10
Accounts Credited
Accounts Receivable-Akram Company
Accounts Receivable -Baram Company
Accounts Receivable -Maliam Company
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
Inv.No.
A-11
B-013
M-124
Ref.
Amount
700
630
150
MU
Mashal University
Financial Accounting-II
Page-18-
Chapter No: 02
Special Journal
Chapter End Exercises
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
Financial Accounting-II
Page-19-
Exerciser No. 01
The following transactions were completed by 3- Stars Company during January 2011.
1st Purchased merchandise from Khan Company for $900invoice no KC-1
2nd Purchased merchandise from Bren Bore Company $2400. Invoice No. BBC-1
3rd Sold merchandise to X-Smith $1500 invoice no. XS-1
4th Purchased goods from Y-John & John for $4500 invoice no YJ-1
5th Sold merchandise to X-Smith $3400 invoice no. XS-2
6th Sales return by X-Smith $500 credit note no. XS-1
7th Returned merchandise to Bren Bore Company $300 being defective debit note no BB-1
8th Merchandise were sold on Amjad $ 19000 on account invoice no Am-1-2011
9th Amjad received an allowance for $200 for damaged merchandise credit note no Am-1-2011
10th Merchandise returned to Y-John & John for $500 debit note no YJ-1
Required: Record the above transactions into
a. Purchases Journal b. Purchases Return and Allowances Journal c. Sales Journal d. Sales
Return and Allowances Journal
Exerciser No. 02
1. Purchased merchandise from Jan for $1300 invoice no-1
2. Sold merchandise to Karim $2100 invoice no 01
3. Purchased merchandise from Naseem for cash $ 28999
4. Purchased merchandise from Naseem for $3500 invoice no 001
5. Sold merchandise to Kamal for $3590 invoice no 0001
6. Sold merchandise to Qamar for $56792 invoice no 0012
7. Returned merchandise to Jan $300 debit note no 1
8. Returned merchandise by Naseem $300 credit note no 1
9. Allowance given to Qamar for defective merchandise $92 credit note no 2
Required: Record the above transactions into
a. Purchases Journal b. Purchases Return and Allowances Journal c. Sales Journal d. Sales
Return and Allowances Journal
Exerciser No. 03
1. Sold merchandise on account to Mr. Tariq for $2000 invoice no-1
2. Purchased merchandise from Rizvi for $7000 subject to 10 trade discount invoice no-1
3. Sold merchandise to Akmal $4000 invoice no-01
4. Purchased merchandise from Idrees $12500 invoice no-ID1
5. Mr. Tariq returned merchandise $500 credit note no 1
6. Returned defective merchandise to Rizvi $1300 debit note no 1
7. Purchased merchandise from Naseem $9000 invoice no-N1
8. Sold merchandise to Mr. Barakatt for $15500 invoice no-B001
9. Returned inferior merchandise to Naseem $4500 debit note no 2
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
Financial Accounting-II
Page-20-
10. Granted an allowance of $50 to Mr. Akmal credit note no 2
Required: Record the above transactions into
a. Purchases Journal b. Purchases Return and Allowances Journal c. Sales Journal d. Sales
Return and Allowances Journal
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
Financial Accounting-II
Page-21-
CHAPTER NO: 03
CASH BOOK
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
Financial Accounting-II
Page-22-
Introduction
In this chapter we shall learn how to record cash receipts and cash payments transactions in to
the cash book.
Recording of cash transactions
Small businesses settle the receipts and payments through cash; while large businesses settle
the receipts and payments through checks. There are two methods of recording cash
transactions.
1. Cash Book, it is maintained by small businesses
2. Cash Journals, this is maintained by large businesses
Cash Book
In small businesses the volume of cash transactions is small; only one person is enough to
record the receipts and payments of cash. In such situation only one book is used for recording
of cash receipts and payments. This book is called as “Cash Book”. Every page of cash book is
divided into two sections. The left hand side for recording the receipts and the right hand side
for payments of cash.
A business concern may use any one of the following cash book.
1. Single Column Cash Book
This is the simplest form of cash book. It is also known as “Simple Cash Book” and used by those
businesses that neither have any bank account nor allows or receives any discount. It is used by
very small businesses.
Specimen and example of recording in single column
Jan 1st. Cash in hand $ 15000
06. Purchased merchandise for cash $ 2000
10. Received cash from Smith Company $3000
18. Paid cash to Glaxo Company $1000
20. Cash sales $4000
25. Paid salary $ 100
30. Paid cash for rent $50
30. Purchased Furniture $1500
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
Financial Accounting-II
Page-23-
Cash Book
Date
Jan 1st
10
20
Vr.No Description
Balance
A/R-Smith Co.
Sales
Ref
Total
Amount
15000
3000
4000
Date
Jan 06
18
25
30
30
Vr.No
22000
Description
Purchases
A/P-Glaxo Co.
Salary
Rent
Furniture
Balance
Total
Ref
Amount
2000
1000
100
50
1500
17350
22000
2. Two Column Cash Book
A cash book which contain two columns one for cash and the other for discount. It is used by
those organizations which receives allowed discount as custom of trade. Discount allowed is
recorded on the debit side and discount received is recorded on the credit side.
Specimen and example of recording in “Two column Cash Book”
Jan 1st Cash in hand $2000.
02. Received cash $1500 from Asad Company, discount allowed $100.
05. Cash sales $1000.
10. Paid kamal $485, discount received $15.
15. Purchased merchandise for cash $300.
20. Received from Amjad company cash less 5% discount in $2000.
25. Paid Hanif Company $450.
27. Bought furniture for cash $150.
29. Paid salary $700.
30. Received cash from sale $1500.
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
Financial Accounting-II
Receipts
Date
Jan 1
2
5
20
30
Vr.No Description
Page-24-
Two Column Cash Book
Ref
Balance
A/R-Asad Co.
Sales
A/R-Amjad Co.
Sales
Total
Amount
2000
1500
1000
1900
1500
7900
Disc
-nt
100
100
200
Date
10
15
25
27
30
Payment
Vr.N
o
Description
Ref
Amount
A/P-Kamal
Purchases
A/P-Hani
Furniture
Salary
485
300
450
150
700
Balance
Total
5815
7900
3. Three Column Cash Book
In today’s business world every business organization keeps a bank account. Three column cash
book is a cash book in which there are three columns for cash, bank and discount. The cash
deposited into the bank is recorded on the receipts side of the cash book. Any cash payment
from the bank account is recorded on the payments side. At the end of the month the cash
book is balanced.
In three column cash some transactions are recorded on the both sides of the cash book. Such
entries which are passed and are recorded on the both sides of the cash book are called as
contra entries.
Specimen and example of recording in ”Three column Cash Book”
On 1st March 2010 Stravo Company had cash $10000 and balance at bank $18900.
02. Purchased computers for cash $3000.
03. Cash Sales $1200.
4. Deposited cash into bank $300.
05. Received check from Hamza $ 3500 and deposited into the bank account, Discount $ 200.
06. Paid check for merchandise purchased $ 550.
07. Received check from Kamal & Bro. $ 770.
08. Paid cash for supplies $450.
09. Paid salary by check $ 2550.
10. Deposited check received from kamal.
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
Discnt
15
15
Financial Accounting-II
Page-25-
Receipts
Date
V.
Description Ref. Cash
No.
1/1/2010
Balance
3/1/2010
Sales
4/1/2010
cash
5/1/2010
A/R-Hamza
7/1/2010
A/R-Kamal
10/1/2010
Three Column Cash Book
Disct
10000 18900
1200
300
3500
200
770
cash
Total
Bank
770
11970 23470
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
200
Date
Payments
V.
Description Ref. Cash
No.
2/1/2010
Computers
4/1/2010
Bank
6/1/2010
Purchases
8/1/2010
Supplies
9/1/2010
Salary
10/1/2010
Bank
Balance
Total
MU
Mashal University
Bank
Disct.
3000
300
550
450
2550
770
7450 20370
11970 23470
0
Financial Accounting-II
Page-26-
Chapter No.03
Cash Book
Chapter End Exercises
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
Financial Accounting-II
Page-27-
Single-Column Cash Book Exercises
Requirement: Record the following transactions into “Single-Column Cash Book”
Exercise No. 01 See Dee has the given transactions for February, 2011
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
Started business with cash $50000.
Purchased merchandise from Jan for cash $1300.
Purchased machinery for cash $ 28999.
Paid rent for one month $2000.
Purchased office equipment for $3000.
Cash taken by the owner $3900.
Bought office furniture for cash $690.
Paid for tea and food expenses $1450.
Given cash as charity $10.
Paid cash on account $5900.
Received cash from commission $1250.
Exercise No. 02Opening balance of cash $17800. The following transactions were completed.
1. Sold merchandise to Mr. Tariq for cash $2000.
2. Purchased merchandise from Rizvi for cash $7000.
3. Paid cash for computers purchased $1200.
4. Sold merchandise to Akmalfor cash $4000.
5. Purchased merchandise from Idreesfor cash $12500.
6. Received cash from an accounts receivable $5600.
7. Paid salary for the month $5000.
8. Received commission for $13200.
9. Paid telephone bill $120.
10. Paid cash to an account payable $2300.
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
Financial Accounting-II
Page-28-
Exercise No. 03
1. Cash on hand $ 23500.
2. Received cash from See Jee company $35000 less 10% discount.
3. Received payment from Gee T Company $2500 .
4. Paid rent for one month $450.
5. Paid for supplies $300.
6. Cash sales $6700.
7. Paid cash on account $5800.
8. Received interest from Jan & Jan $3400
9. Cash taken by the owner $150.
Tow-Column Cash Book Exercises
Requirement: Record the following transactions into “Two-Column Cash Book”
Exercise No. 01Zahid and Wajid completed the following transactions in the month of
February, 2011.
1. Started business with cash $40000.
2. Purchased office equipment for $10000.
3. Received cash from an account receivable $2500 and discount allowed $100.
4. Purchased merchandise for $20000.
5. Sold merchandise for cash $13000 and allowed trade discount $100.
6. Received cash from interest $1340.
7. Paid cash on rent $590.
8. Paid cash on account $1500 and 5% was discount.
9. Cash withdrawn by the owner $500.
10. Paid salaries $5900.
11. Received cash on sale of merchandise $5800.
12. Utility bills were $380.
Exercise No.02 TT Company has the following transactions for the month of April,
2011.
1. Received cash from See Jee company $35000 less 10% discount.
2. Received payment from Gee T Company $4500 after deducting 5% discount.
3. Paid rent for one month $450.
4. Paid for supplies $300.
5. Cash sales for $6700.
6. Paid cash on account $5800 and 4% were the discount.
7. Received interest from Jan & Jan $3400.
8. Purchased shares of a corporation $580.
9. Sold shares for $670.
10. Received cash before due date $12500 less 50 discounts.
Exercise No. 03 GeeCee Company’s transactions are as follows.
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
Financial Accounting-II
Page-29-
1. Received cash from repair services $2400.
2. Received cash from Bashir Ahmad for $18000.
3. Purchased repair equipments for $1590 and trade discount were $10.
4. Repaired a motor car for $250 and received the amount in cash.
5. Paid wages to employees $1200.
6. Paid cash for food expenses $1400.
7. Paid rent for the month $600.
8. Repaired one motor cycle for $40 and the customer was charged.
9. Received commission for selling Z-Company’s repair parts $3500.
10. Paid utility bills $1000.
Three-Column Cash Book Exercises
Record the following transactions into “Three-Column Cash Book”
Exercise-1
Jan 1st 2011 Opening balance of Cash $12000 and Bank $15000.
1. Purchased furniture for cash $2000.
2. Purchased machinery by check $3000.
3. Purchased merchandise for cash $5000.
4. Sold merchandise on cash $10000.
5. Received cash from Amanullah $3400 and discount allowed $100.
6. Received check from Janzaib $5000 and deposited the check into the bank on the same
date.
7. Cash sales $ 5600 and trade discount %5.
8. Paid salary $ 1000.
9. Paid cash on account $4000.
Exercise-2
1.
2.
3.
4.
5.
6.
7.
8.
9.
Started business with cash $80000.
Deposited cash into bank $5000.
Purchased merchandise for cash $3000.
Received check from Qasim $2500 and discount allowed $50.
Sold merchandise for cash $6000.
Qasim’s check paid into the bank.
Withdrawn cash from bank for office use $6600.
Received cash from sales $12000.
Paid electricity bill $300.
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
Financial Accounting-II
Page-30-
10. Paid salary by check $1000.
11. Cash brought by the owner $4500.
12. Loan taken from Azizi Bank $6000.
13. Cash taken by the owner for personal expenses $1200.
14. Paid cash on credit $ 9800 less 200 discounts.
15. Sold old furniture for cash $1300.
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
Financial Accounting-II
Page-31-
Exercise-3
1. Cash in hand $15300 and balance at bank $20500.
2. Received from Kamal $5900 and discount allowed $100.
3. Paid salaries for the month of December $2000.
4. Purchased merchandise payment made by check $3200.
5. Paid Majid Khan by check $8000 discount received $50.
6. Withdrew from bank for office use $1000; paid rent for the month $1200.
7. Cash deposited into bank $1500.
8. Cash sales $9560 and $40 was trade discount.
9. Purchased a motor car for business use for $4000.
10. Paid wages $250.
11. Received check from Jan $8900 and discount was $100.
12. Sold old machinery parts $3500.
13. Paid Jan’s check into bank.
Exercise-4
On 1st December, 2011 3-Stars Company cash book shows a balance of cash $18900 and
balance of Bank $35000. The following transactions were completed.
1. Purchased office computers for cash $3400.
2. Cash sales $5000.
3. Purchased merchandise for cash $2750.
4. Paid salaries by check $5000.
5. Deposited cash into bank $3300.
6. Received cash from Azhar $8900 and 10% discount.
7. Purchased merchandise by check $6000.
8. Sold goods on cash for $12300and received a check for the amount, which was lodged
into the bank on the same day.
9. Sold old furniture for $6000, received 3000 in cash and for the balance a check, which
was deposited into the bank.
10. Received a check from an accounts receivable for $880 less 400 discounts.
11. Loan taken from a commercial bank for $13200 @10% monthly interests.
12. Loan given to a friend for $5000 @13% monthly interests.
13. Fresh investment made by the owner for $15400
14. Cash taken by owner for personal expenses $170.
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
Financial Accounting-II
Page-32-
Exercise-5
March 1st 2011. Opening balance of cash $12000 and bank overdraft was $2500.
1. Salaries paid to the staff $1500 by check.
2. Received from Ali $2800, discount was $200.
3. Cash paid into bank $6500.
4. Direct collection of cash into bank from Raza Company $10000.
5. Issued a check for $1000 for electricity bills.
6. Cash sales $5000.
7. Paid for salaries $1500.
8. Payment made from our bank account $3400.
9. Received cash from customers into bank account $13900 and discount was $250.
10. Purchased merchandise for cash $3000.
11. Cash sales made for $9890.
Exercise-6
March 1st 2011. Opening balance of cash $12000 and bank overdraft was $25000.
1. Salaries paid to the staff $3000 by check.
2. Paid rent by cash $200.
3. Received from Ali $2800, discount was $200.
4. Cash paid into bank $650.
5. Direct collection of cash into bank from Raza Company $10000.
6. Issued a check for $1000 for electricity bills.
7. Cash sales $5000 and the amount deposited into bank.
8. Paid a check for salaries $2500.
9. Direct payment made from our bank account $3400.
10. Received cash from customers into bank account $1900 and discount was $50.
11. Purchased merchandise for cash $3000.
12. Cash sales made for $9890.
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
Financial Accounting-II
Page-33-
CHAPTER NO: 04
CASH JOURNALS
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
Financial Accounting-II
Page-34-
Introduction
In large business concerns all the cash received is deposited into the bank on that or on next
day. Similarly all payments are made through checks. In such business concerns separate cash
books are maintained for deposits and withdrawals of cash which are called cash journals.
It should be noted that for all small payments a petty cash fund is maintained and all the small
payments are made through that fund. A petty cash book is maintained for the record.
The details of these cash journals are discussed as below:
1. Cash Receipt Journal (CRJ)
This is the cash journal where we record both the receipt of cash and checks. This book has two
sides, the debit side and the credit side. All the receipts of cash and checks are recorded on the
debit side and on the credit side there are several columns for sale, accounts receivable and
other items from whom the cash has been received.
Specimen and example of recording in Cash Receipt Journal (CRJ)
The following transactions were completed by First Star Computers for the month of October.
1st Cash received from the owner $25000.
02. Cash received from sale of merchandises $4500.
03. Received interest $1500.
04. Akname Computer Center paid its debt $3690.
05. Received cash from Saleem Computers $1580 and allowed discount $20.
06. Cash sales $1900.
07. Received cash from repair of computers $70.
08. Received cash from sale of old computer parts $835 and trade discount was $15.
09. Cash received from customer to whom 10 computers were sold on credit $7565 and cash
discount was allowed 10%.
10. Sold computers for cash $4980.
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
Financial Accounting-II
Page-35-
Cash Receipt Journal (CRJ)
Date
Oct
1st
2
3
4
5
6
7
8
9
10
Accounts Credited
Ref.
Owner Equity
Sales
Interest
A/R-Akname Com.
A/R-Saleem Com.
Sales
Computer Repair
Sale of Computers
A/RSales
Debit
Cash
25000
4500
1500
3690
1580
1900
70
835
6808.5
4980
50863.5
Credit
Discount Sales
A/R
Sundry
25000
4500
1500
3690
1600
20
1900
70
835
756.5
776.5
7565
4980
6400
17835
27405
2. Cash Payment Journal (CPJ)
In large business concerns all the payments are made through checks. These payments are
entered in a cash journal called Cash Payment Journal or Cash Disbursement Journal. Here all
the checks issued and paid are entered. These checks are issued for making payments to
creditors, payment for expenses, cash purchases, purchase of assets etc.
Specimen and example of recording in Cash Payment Journal (CPJ)
Record the following transactions into cash payment journal
01 Paid cash for merchandise purchased $1000, check no 000123456
02 Paid cash to Abdu Rahman $1867, check no 000123789
03 Purchased stationery $550, check no 000123454
04 Paid Amjad Khan $9865, discount was 15 check no 000321456
05 Purchased merchandise for cash $1730, check no 000123258
06 Paid rent for the month $850, check no 000128896
07 Cash paid to creditor $425, check no 007453456
08 Cash paid as salary $3560 and to owner $1000, check no 012365478
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
Financial Accounting-II
Page-36Cash Payment Journal
Date
Oct
1st
2
3
4
5
6
7
8
8
10
Accounts Debited
Purchases
A/P-Abdu Rahman
Stationery
A/P-Amjad
Purchases
Rent
A/P
Salary
Drawing
Total
Ref. Credit
Cash
Debit
Discount Purchases A/P
1000
1867
550
9865 15
1730
850
425
3560
1000
20847
Sundry
1000
1867
550
9880
1730
850
425
3560
1000
15
2730
12172
5960
3. Petty Cash Book
In large businesses all the cash and checks are deposited into the bank and all the large
payments are made through bank. For small type of expenses we cannot issue checks for which
the payments are made on the spot. For example, payment for travelling, entertainment,
envelops, internet expenses etc. For such payments we maintain a fund known as “Petty Cash
Fund” and a book in which the entries are recorded is called as “Petty Cash Book”.
Procedure of Petty Cash Fund
The following procedure is used for creating and using the petty cash fund.
a. An amount is fixed for petty cash expense, keeping in view of one month cash
requirements of the organization. This system is called “Imprest System”.
b. A check is drawn for petty expenses and is recorded in the petty cash book.
c. All the petty expenditures are recorded in the petty cash book.
d. At the end of the month the book is balanced and the fund is reimbursed at the
beginning of the next month.
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
Financial Accounting-II
Page-37-
Specimen and example of recording in Petty Cash Book
Jamal business maintained petty cash fund with an imprest system of Rs. 100, completed the
following transactions during the month of June.
1. Paid for postage charges $10.
2. Paid for telegram $5.
3. Paid for travelling $8.
4. Paid for stationery $9.
5. Paid for tips to peon $10.
6. Paid for tea offered to a customer $15.
7. Paid for postage $6.
8. Paid for Motor fare $4.
9. Paid for papers purchased $3.
10. Paid for postage charges $2.
11. Paid for printing $1.
12. Paid for taxi fare $2.
13. Paid $5 to owner.
Jamal business
Petty Cash Book
Date
1-Jun11
2
3
4
5
6
7
8
9
10
11
12
13
Description
Received in
Fund=100
Postage
Telegram
Travelling
stationery
Tips to Peon
Tea for Customer
Postage
Motor Fare
Papers
Printing pages
Texi Fare
Drawing
Total
Balance=
22
Received in Fund=
78
100
Total
Postage
10
5
8
9
10
15
6
4
3
1
2
5
78
10
5
Printing Stationery Travelling Entertianment Miscellaneous
8
9
10
15
6
4
3
1
2
21
0
13
14
15
100
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
5
15
Financial Accounting-II
Page-38-
CHAPTER NO: 04
CASH RECEIPT AND PAYMENT JOURNALS
Chapter End Exercises
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
Financial Accounting-II
Page-39-
Exercise No. 01
The following transactions were completed by Murry Repair Services, during January 2011.
11. Received cash from repair services $2400.
12. Received cash from Bashir Ahmad for $18000.
13. Purchased repair equipments for $1590 and trade discount were $10.
14. Repaired a motor car for $250 and received the amount in cash.
15. Paid wages to employees $1200.
16. Paid cash for food expenses $1400.
17. Paid rent for the month $600.
18. Repaired one motor cycle for $40 and the customer was charged.
19. Received commission for selling Z-Company’s repair parts $3500.
20. Paid utility bills $1000.
Required: Record the above transactions into “Cash Receipts Journal and Cash Payment Journal”
Exercise No. 02 See Dee has the given transactions for February, 2011
11. Purchased merchandise from Jan for cash $1300.
12. Purchased merchandise from Naseem for cash $ 28999
13. Purchased merchandise from Naseem for $3500 cash.
14. Paid rent for one month $2000.
15. Purchased office equipments for $3000.
16. Cash taken by the owner $3900.
17. Bought office furniture for cash $690.
18. Paid for tea and food expenses $1450.
19. Given cash as charity $10.
20. Paid cash on account $5900.
Required: Record the above transactions into “Cash Payment Journal”
Exercise No. 03
Opening balance of cash $17800. The following transactions were completed.
10. Sold merchandise to Mr. Tariq for cash $2000 .
11. Purchased merchandise from Rizvi for cash $7000, subject to 10% trade discount.
12. Paid cash for computers purchased $1200.
13. Sold merchandise to Akmal $4000.
14. Purchased merchandise from Idrees $12500.
15. Received cash from an accounts receivable $5600.
16. Paid salary for the month $5000.
17. Received commission for $13200.
18. Paid telephone bill $120.
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
Financial Accounting-II
Page-40-
19. Paid cash to an account payable $2300.
Required: Record the above transactions into “Cash Receipts Journal” and “Cash Payment Journal”
Exercise No. 04 Zahid and Wajid completed the following transactions in the month of
February, 2011.
13. Started business with cash $40000 and deposited the cash into Azizi Bank.
14. Purchased office equipments for $10000.
15. Purchased merchandise for $20000.
16. Sold merchandise for cash $13000 and allowed trade discount $100.
17. Received cash from interest $1340.
18. Paid cash on rent $590.
19. Cash withdrawn by the owner $500.
20. Paid salaries $5900.
21. Received cash on sale of merchandise $5800.
22. Utility bills were $380.
Required: Record the above transactions into “Cash Receipts Journal” and “Cash Payment Journal”
Exercise No. 05 Que Bee completed the following transactions in the month of July, 2011.
10. Received cash from See Jee company $35000 less 10% discount.
11. Received payment from Gee T Company $4500 after deducting 5% discount.
12. Paid rent for one month $450.
13. Paid for supplies $300.
14. Cash sales for $6700.
15. Paid cash on account $5800 and 4% were the discount.
16. Received interest from Jan & Jan $3400.
17. Purchased shares of a corporation $580.
18. Sold shares for $670.
19. A check was received from Ahmad for $3900 and paid into the bank on the next day
$3800.
Required: Record the above transactions into “Cash Receipts Journal” and “Cash Payment Journal”
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
Financial Accounting-II
Page-41-
Exercise No. 06 Wajid Compnay uses petty cash fund under the Imprest System by issuing a
check of $100 on 1st December, 2011. The following transactions were completed during the
month.
December01, Paid for Pean for Tea $10.
December 05, Paid for postage $10.
December 10, Paid for carbon papers $9.
December 12, Paid cash for registration of Parcels $ 12.
December 15, Paid for Taxi fare $10.
December 17, Cash taken by the owner $4.
December 19, Given cash as charity $3.
December 21, Paid for electricity bills 15.
December 25, Paid for cartage $5.
December 30, Paid for gums papers $5.
Required: Record the above transactions into “Petty Cash Journal”
Exercise No.07 Shahid Compnay uses petty cash fund under the Imprest System by issuing a
check of $400 on 1st January, 2012. The following transactions were completed during the
month.
Jan 01. Paid for refreshment of customer $20.
Jan 05, Paid for postage stamps $ 37.
Jan 10, Paid for stationery $30.
Jan 15, Paid for travelling expenses $50.
Jan 18, Paid for electricity bill $50.
Jan 23, Paid for registered parcels $12.
Jan 25, paid advance to sweeper $15.
Jan 28, Paid for tea of staff $ 25.
Jan 31, Paid for invitation cards and envelops $ 25.
Exercise No.08 A Company has cash for petty cash fund $200 for the month of February, 201.
A Company maintains Imprest system for petty cash fund.
Purchased typewriter ribbon and carbon paper $20.
Paid for rikshaw fee $15.
Paid for telegram $11.
Paid for cart hire $8.
Paid for tea to customer $10.
Paid for postage stamps $8
Paid for registration of parcel $6.
Paid for repair of typewriter $18.
Paid for cartage $5.
Advance to gatekeeper $15.
Cash given to the owner $12.
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
Financial Accounting-II
Page-42-
Chapter 05
Bank Reconciliation Statement
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
Financial Accounting-II
Page-43-
Introduction to Bank Reconciliation Statement
A business organization having regular cash transactions with the business want to know its
cash balance at the end of a specific time period says a month. When the balance as shown by
the bank record is equal to the balance as shown by the depositor’s record, there will be no
problem but in most of the cases it is not equal. In order to make it equal and correct, a
statement is prepared that is called Bank Reconciliation Statement.
Bank Balance
The balance as shown by the depositor’s record is called as bank balance.
How to ascertain Bank Balance?
Bank balance as per cash is ascertained in the following manner.
a. In case of Cash Book: All the deposits in the bank are shown in the bank column on the
receipt side of cash book. Similarly all the payments are shown in the bank column on
the payment side of the cash book.If the receipt side is heavier than the payment side it
represents balance as per cash book (Dr.) or a favorable balance. Similarly if the
payment side is heavier than the deposit side it represents balance as per cash book
(Cr.), unfavorable or bank overdraft.
b. In case of Cash Journal: Total of the cash receipt journal is posted to the Bank Account in
the General Ledger and the total of the cash payment journal is also posted. The debit
balance represents the balance as per cash book (Dr.) or a favorable balance. Similarly
the credit balance represents balance as per cash book (Cr.), unfavorable or bank
overdraft.
Pass Book
This is the copy of the depositor’s account in the bank ledger. All the deposits are recorded on
the credit side or deposits side and all the payments and charges are recorded on the debit side
or withdrawals side.
Bank Statement
A bank statement is a summary of the depositor’s record in the bank. It contains the opening
balance, if any, the deposits, withdrawals and bank charges, if any. A bank usually sends bank
summary to its customers after a specific time period.
Types of balances:
a. Balance as per cash book (Dr.) b. Balance as per cash book (Cr.)
c. Balance as per pass book (Dr.) d. Balance as per pass book (Cr.)
Reasons of disagreement between the balance of cash book and pass book
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
Financial Accounting-II
Page-44-
The following are the main reasons of disagreement between the balance of cash book and
pass book.
a. Un-presented checks
These are the check issued to the bank for payment but the payment is not yet made from the
bank. As the payment is not yet made from the bank, such checks are not included in the bank’s
record due to which a difference arise between the cash book and pass book balance.
b. Un-collected or un-credited checks
These are the checks which have been sent to the bank for deposit but are not deposited into
the bank. As such checks are not shown in the bank’s recorddue to which a difference arise
between the cash book and pass book balance.
c. Interest and bank service charges
Any interest or other service charges not recorded in the depositor’s cash book arises a
difference between the cash book and pass book balance.
d. Dishonored checks
Any check issued for deposit is immediately recorded in the cash book but such checks are not
accepted by the bank due to some reason (s), the information of dishonor may not have been
received by the customer, due to which a difference arise between the cash book and pass
book balance.
e. Interest credited by the bank not recorded in the cash book
Interest credited by the bank not recorded in the cash book arise a difference between the cash
book and pass book balance.
f. Standing orders
Any standing order regarding payment, if omitted by the depositor arise a difference between
the cash book and pass book balance.
g. Direct debit
A standing order for which the depositor changes payments date arise a difference between
the cash book and pass book balance.
h. Errors
To err is human. Any error on the part of the depositor or bank arise a difference between the
cash book and pass book balance.
Methods of Preparing Bank Reconciliation Statement
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
Financial Accounting-II
Page-45-
Following are the methods of preparing bank reconciliation statement
a. Finding the adjusted balance b. Reconciliation of the balance
A. Finding the adjusted balance Method
1. In case of Balance as Per Cash Book (Dr.)
First record all the transactions in cash book that not have been recorded in the Pass Book as
well as the errors made in the cash book and checks dishonored. Then record all the
transactions in the Pass Book that not have been recorded in the Cash Book and all the errors.
Now draw the Bank Reconciliation Statement format and follow the following formula.
Balance as Per Cash Book (Dr.)
(+) Cr. Side of pass book
(-) Dr. Side of pass book----from the balance of the cash book.
It will be the adjusted balance of cash book. Now write the balance of pass book. Assume it is
Balance as Per Pass Book (Cr.)
(+) Dr. Side of Cash book
(-) Cr. Side of Cash book ----from the balance of the pass book
It will be the adjusted balance of pass book.
2. In case of Balance as Per Cash Book (Cr.)
Draw the Bank Reconciliation Statement format and follow the following formula.
Balance as Per Cash Book (Cr.)
(+) Dr. Side of pass book
(-) Cr. Side of pass book ----from the balance of the cash book.
It will be the adjusted balance of cash book. Now write the balance of pass book. Assume it is
Balance as Per Pass Book (Dr.)
(+) Cr. Side of Cash book
(-) Dr. Side of Cash book ----from the balance of the pass book
It will be the adjusted balance of pass book.
Example of Bank Reconciliation Statement
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
Financial Accounting-II
Page-46-
We have four types of balances. Examples on all the four are given as under.
a. Balance as per Cash Book (Dr.)/ b. Balance as Per Pass Book (Cr.)
On January 31st, 2011, a trader has a balance of $4320 as shown by the cash book (Dr.), while
the pass book shows a balance of $4955 on the same date. On reconciling the balances we find
the following.
a.
b.
c.
d.
A check of $2000 issued to jamal has not been presented for payment into the bank.
A check of $1500 deposited into the bank has not yet been credited by the bank.
The bank has debited the amount of $80 as bank charges.
The bank has credited the amount of $215 as interest on deposit.
Required:PrepareBank Reconciliation Statement from the above data.
Dr.Cash Book
Cr.Dr.
Receipts
b. 1500
Pass Book
Cr.
Payments
a. 2000
Withdrawals Deposits
c. 80
d. 215
Bank Reconciliation Statement
Balance as per cash book (Dr.)
(+) d. interest credited by the bank
4320
215
(-) c. interest charged by the bank
4535
80
Adjusted balance
Balance as per pass book (Cr.)
(+) b. cash paid for deposit not yet deposited by bank
(-) a. check issued for payment, but not yet made by
4455
4955
1500
6455
2000
Adjusted balance
4455
c. Balance as per Cash Book (Cr.)/ d. Balance as Per Pass Book (Dr.)
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
Financial Accounting-II
Page-47-
On January 31st, 2011, a trader has a balance of $3254 as shown by the cash book (Cr.), while
the pass book shows a debit balance of $3170 on the same date. On reconciling the balances
we find the following.
a.
b.
c.
d.
A check of $584issued to jamal has not been presented for payment into the bank.
A check of $1085 deposited into the bank has not yet been credited by the bank.
The bank has debited the amount of $15 as bank charges.
The bank has credited the amount of $600 as interest on deposit.
Required: Prepare Bank Reconciliation Statement from the above data.
Dr.
Cash Book
Receipts
d. 1085
Cr.
Payments
a. 584
Dr.
Pass Book
Cr.
Withdrawals Deposits
c. 15
d. 600
Bank Reconciliation Statement
Balance as per cash book (Cr.)
(+)c. interest charged by the bank
3254
15
(-)d. interest credited by the bank
3269
600
Adjusted balance
Balance as per pass book (Dr.)
(+) b. cash paid for deposit not yet deposited by bank
(-) a. check issued for payment, but not yet made by
Adjusted balance
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
2669
3170
584
3754
1085
2669
MU
Mashal University
Financial Accounting-II
Page-48-
B. Reconciliation of the balance Method
In this method the balance of one book as well as reasons of difference is given and the balance
of the other book is to be finding out.
Procedure of Bank Reconciliation Statement
1. In case of Balance as Per Cash Book (Dr.)
First record all the transactions in cash book that not have been recorded in the Pass Book as
well as the errors made in the cash book and checks dishonored. Then record all the
transactions in the Pass Book that not have been recorded in the Cash Book and all the errors.
Now draw the Bank Reconciliation Statement format and follow the following formula.
Balance as Per Cash Book (Dr.)
(+) Cr. Side of pass book and cash book
(-) Dr. Side of pass book and cash book
It will give the balance as per Pass Book
Balance as Per Pass Book (Cr.)
(+) Dr. Side of Cash book and pass book
(-) Cr. Side of Cash book and pass book
It will give the balance as per cash book
1. In case of Balance as Per Cash Book (Cr.)
Draw the Bank Reconciliation Statement format and follow the following formula.
Balance as Per Cash Book (Cr.)
(+) Dr. Side of pass book and cash book
(-) Cr. Side of pass book and cash book
It will give the balance as per pass book
Balance as Per Pass Book (Dr.)
(+) Cr. Side of Cash book and pass book
(-) Dr. Side of Cash book and pass book
It will give balance as per cash book
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
Financial Accounting-II
Page-49-
a. When balance as per Pass Book (Cr.) is given and Balance of Cash Book is to find out.
Show the balance as per Cash Book from the following data.
1.
2.
3.
4.
5.
Balance as per pass book (Cr.) $11500 on January 31, 2011.
Checks of $500 and $1700 deposited into the bank, not yet credited by the bank.
Checks $400 and $950 issued for payment but the payment is not yet made by the bank.
A check has been dishonored $450.
Bank charges were $50.
Dr.
Receipts
Cash Book
Cr.
Payments
Dr.
Pass Book
Cr.
Withdrawals Deposits
2. 500
3. 4005. 501. 11500
1700 950
4 450
Check dishonored $450= - from cash book balance
Bank Reconciliation Statement
Balance as per Pass book (Cr.)
(+) 5 interest charged by the bank not recorded in Cash Book
2.Checks paid for deposited not collected by the bank
(500+1700)
Check dishonored
11500
50
2200
450
2700
4200
(-) 3. Checks issued for payment but the payment is not made
(400+950)
1350
Balance as per Cash Book (Dr.)
12850
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
Financial Accounting-II
Page-50-
b. When balance as per Cash Book (Dr.) is given and Balance of Pass Book is to find out
A limited company has balance as per cash book $2500, it was not agree with the balance of
pass book due to the following reasons.
a. A check for $600 was not presented to the bank for payment.
b. A check of $2000 was not deposited into the bank.
c. Bank charges were $20.
d. Interest not recorded in the cash book $150.
e. Dividend received by the Bank not recorded in the cash book $400.
f. Commission debited in the bank statement not recorded in cash book $300.
Prepare bank reconciliation statement.
Dr.
Receipts
B 2000
Cash Book
Cr.
Payments
A 600
Dr.
Pass Book
Cr.
Withdrawals Deposits
c 20
F 300
d 150
e 400
Bank Reconciliation Statement
Balance as per Cash book (Dr.)
(+) A Check issued but payment is not yet made by the bank
D Interest not recorded in cash book
E Dividend not recorded in cash book
2500
600
150
400
1150
3650
(-) b check paid into bank, not collected by the bank
C bank charges not recorded in cash book
F commission charged by the bank
Balance as per Pass Book (Cr.)
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
2000
20
300
2320
1330
MU
Mashal University
Financial Accounting-II
Page-51-
Chapter No.05
Bank Reconciliation Statement
Chapter End Exercises
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
Financial Accounting-II
Page-52-
Chapter End Exercises
Method-I
Exercise No. 01
From the following particulars, prepare a bank reconciliation statement on January 31, 2011.
Bank balance as per cash book ----------------Dr. $7500
Balance as per pass book ……………………….Cr. $8000
a)
b)
c)
d)
e)
Checks issued but not yet presented for payment before January 31 $1000
Checks paid for deposit but not yet deposited into the bank $1500
Interest charged by the bank $500
Commission received by the bank $500
Payment made to creditor $1000, not yet made from the bank.
Exercise No. 02
Ahmad business had the following data for the month of February, 2011.
Balance as per cash book (Cr.) $6508. And Balance as per pass book (Dr.) $6340.
a.
b.
c.
d.
Bank charges for all the above period was $30.
Checks issued but not presented for payment $1168.
Checks paid into the bank but not yet collected by the bank $2170.
Interest on Government shares collected by the bank $1200.
Instructions: You are required to prepare a Bank Reconciliation Statement!
Exercise No. 03
The cash book of Three Stars Company showed a debit balance of $1470 and the balance of
pass book was credit $2443. The reasons of difference are as under:
a.
b.
c.
d.
e.
Dividend collected by the bank $50 has not been entered in cash book.
A check has been dishonored but no entry was made in the cash book $220.
Bank charges $77 not recorded in the cash book.
Check paid into bank not recorded in the pass book $3120.
Check $4340 had been credited in the cash book but no entry existed in the pass book.
Instructions: You are required to prepare a Bank Reconciliation Statement!
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
Financial Accounting-II
Page-53-
Exercise No. 04
On June 30th, 2011 the cash book of Khalil enterprises showed an overdraft of $7600 while pass
book showed a debit balance of $6700. The reasons of differences are as under:
a.
b.
c.
d.
e.
Interest on overdraft not recorded in cash book $265.
Dividend collected by the bank $2450.
Checks paid in the bank but not cleared $2050.
Check issued but not yet cleared $1400.
A check received from a customer $635 was omitted to be paid into bank.
Requirements: You are required to prepare a bank reconciliation statement!
Exercise No. 05
From the following information prepare a bank reconciliation statement.
Balance as shown by Pass book Cr. $60.
a.
b.
c.
d.
e.
f.
g.
Checks issued but not presented prior to August 31st $750.
Interest on overdraft for 6 months $235.
Checks paid prior August 31st, not yet deposited into the bank $3250.
Bank charge debited in the pass book $65.
Interest and dividend collected by the bank $350.
A check received from a customer was omitted to paid into the bank $220.
A customer has directly paid cash into our bank account $350 but not recorded in cash
book.
Balance as shown by the Cash Book was Dr. $2380.
Instructions: You are required to prepare a Bank Reconciliation Statement.
Exercise No. 06
Bank overdraft as per cash book $7832.
Bank overdraft as per pass book $8942.
a. Interest on overdraft was $610.
b. Checks issued but not presented for payment.
Ahmad Company $1000
Akmal Company $1500
c. Checks deposited but not yet collected by the bank.
Z & Z Company $2500
X &X Company $1300
d. Interest on investments collected by the bank $800.
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
Financial Accounting-II
Page-54-
Instructions: You are required to prepare a Bank Reconciliation Statement!
Exercise No. 07
A Company received the bank statement on September 31, 2011 showing a credit balance of
$10500 while the balance of cash book was $9155. The reasons of differences are as under:
a. Checks amounting to $2750 were deposited into the bank but check amounting to $750
has not been cleared upto September 31, 2011.
b. Checks amounting to $3500 were given to the creditors but checks amounting to $1200
had not been presented for payment in the bank September 31, 2011.
c. The bank had debited the account $35 for service charges.
d. The bank has received an amount directly from a customer $800.
e. Interest credited by the bank $130.
Instructions: You are required to prepare a Bank Reconciliation Statement!
Exercise No. 08
Prepare bank reconciliation statement from the following particulars.
a. On 31st November, 2011, the bank account of Mr. Tariq showed an overdraft of $750
while the cash book showed a balance of $855.
b. Check for $250 on 25th November of which $200 were presented and paid by the bank.
c. A check of $25 was deposited but it was not credited in the bank account.
d. A check entered in the cash book was omitted $10.
e. Direct deposit made by a customer $30.
f. Interest amounting to $60 credited by the bank not recorded in the cash book.
Exercise No.09
The accountant of Dee See Company had the following data for the month of December, 2011.
a.
b.
c.
d.
e.
f.
The bank overdraft as per cash book $3254.
The bank overdraft as per pass book $3170.
Bank charges were $15.
Checks issued but not yet cleared $584.
Checks paid for deposit not yet deposited into the bank $1085.
Interest on bonds collected by the bank $600.
Instructions: You are required to prepare a Bank Reconciliation Statement!
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
Financial Accounting-II
Page-55-
Method-II
Exercise No.01
TT Company had the following data for the month of January, 2011.
Balance as per cash book………………. $1280
Bank charges………………………………..$10
Interest charged by the bank…………$20
Interest on bonds collected by the bank……. $300
Instructions: You are required to prepare a Bank Reconciliation Statement!
Exercise No.02
Balance as per cash book………………. $1630
Checks paid into the bank not yet collected $430
Checks issued for payment but the payment is not yet made $510
Instructions: You are required to prepare a Bank Reconciliation Statement!
Exercise No.03
Balance as per cash book $3400.
a. Debit in respect of bank charges $32 and credit in respect of bank interest $140 and
dividend received by the bank not recorded by the depositor.
b. A note receivable received by the bank $700 not recorded in the cash book.
c. Checks for $700 issued but not yet cleared.
d. Checks for $800 not yet collected by the bank.
e. A check for $10 was shown as dishonored in the pass book.
Instructions: You are required to prepare a Bank Reconciliation Statement!
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
Financial Accounting-II
Page-56-
Chapter No: 06
Adjustments in Financial Statements
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
Financial Accounting-II
Page-57-
Adjusting Entries
Entries made at the end of an accounting period to up-to-date the record are called adjusting
entries. At the end of an accounting period normally, we pass the following adjusting entries.
1. Outstanding Expenses
The expense the benefit of which has been received but the payment is not yet made.
Treatment:
a. Income statement: add with the expense
b. Balance sheet: show as a liability
Example:
At the end of December 31, 2011 salary amounting to $1000 is unpaid. And salary paid in trail
balance is $11000.
Income statement
Amount
Amount Amount
Operative Expense:
Salary
11000
+ outstanding salary
1000
12000
Balance sheet
Assets
$
$
Liabilities + O.E
$
Outstanding Salary
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
$
1000
Financial Accounting-II
Page-58-
2. Prepaid Expense
Expense for which the payment is made in advance is called prepaid expense.
Treatment:
a. Income statement: deduct from the expense
b. Balance sheet: show as an asset
Example:
Salary $1000 prepaid and salary in Trail Balance $13000
Income statement
Amount
Amount Amount
Operative Expense:
Salary
13000
- Prepaid salary
1000
12000
Balance sheet
Assets
Prepaid Salary
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
$
$
Liabilities + O.E
$
1000
MU
Mashal University
$
Financial Accounting-II
Page-59-
3. Accrued Revenue
Revenue earned but not yet received is called accrued revenue.
Treatment:
a. Income statement: add with the revenue
b. Balance sheet: show as an asset
Example:
Rent $1000 earned but not yet received and in Trail Balance rent is $11000
Income statement
Amount
Amount Amount
Other Income:
Rent
11000
+Accrued Rent
1000
12000
Balance sheet
Assets
Accrued Rent
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
$
$
Liabilities + O.E
$
1000
MU
Mashal University
$
Financial Accounting-II
Page-60-
4. Unearned Revenue
Revenue receive but not yet earned is called accrued revenue.
Treatment:
c. Income statement: deduct from the revenue
d. Balance sheet: show as a liability
Example:
Rent $1000 received but not yet earned and in Trail Balance rent is $13000
Income statement
Amount
Amount Amount
Other Income:
Rent
13000
-unearned Rent
1000
12000
Balance sheet
Assets
$
$
Liabilities + O.E
$
Unearned Rent
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
$
1000
Financial Accounting-II
Page-61-
5. Ending Inventory
The unsold goods at the end of an accounting period are called ending inventory.
Treatment:
a. Income statement: deduct from the cost of goods available for sale
b. Balance sheet: show as an asset
Example:
Inventory $1000 remand unsold.
Income statement
Amount Amount
cost of goods available for sale
15000
-closing inventory
1000
Amount
14000
Balance sheet
Assets
$
Closing stock
1000
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
$
Liabilities + O.E
$
MU
Mashal University
$
Financial Accounting-II
Page-62-
6. Depreciation
Decrease in the value of an asset or the process of allocating the value of an asset over its
expected life.
Treatment:
a. Income statement: show as an expense
b. Balance sheet: deduct from the value of the asset
Example:
Furniture in trail balance $40000 and $10000 is depreciation.
Income statement
Amount Amount
Amount
Operative Expense:
Depreciation-Furniture
10000
Balance sheet
Assets
Furniture
-depreciation
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
$
$
Liabilities + O.E
$
40000
10000 39000
MU
Mashal University
$
Financial Accounting-II
Page-63-
CHAPTER NO: 06
Adjustments in FINANCIAL STATEMENTS
Chapter End Exercises
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
Financial Accounting-II
Page-64-
Exercise No. 01
Following is the trial balance; prepare Income statements and Balance sheets.
Trial Balance
S.NO
1
2
3
4
5
6
7
8
9
10
11
12
13
14
Accounts
Machinery
Cash
Furniture
Accounts receivable
Advertisement
Postal expense
Office supplies expense
Salaries
Rent
Equipments
Accounts payable
Notes payable
Sales
Owner’s equity
Ref.
Total
Dr.
4400
120
340
240
172
140
226
500
122
300
Cr.
1280
500
1970
6560
6560
Adjustments for Exercise No. 01
a. Salary accrued $60
b. Advertisement paid in advance $22
c. Depreciation on furniture was $120
Exercise No. 02
Adjustments for Exercise No. 02
For exercise no. 02, the following are the adjustments.
a. Merchandise inventory at the end of year $1000
b. Outstanding rent $190
c. Prepaid insurance $200
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
Financial Accounting-II
Page-65-
Trial Balance
S.NO
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Accounts
Purchases
Accounts receivable
Building
Rent
Insurance
Carriage in
Advertisement
Opening inventory
Office Salaries
Selling salaries
Cash in hand
Machinery
Owner’s equity
Accounts payable
Sales
Ref.
Dr.
6480
5490
2440
310
400
700
330
1500
1800
2400
3000
10000
Cr.
10000
7200
17650
Total
34850
34850
Dr.
Cr.
4338
Exercise No. 03
S.NO
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Accounts
Accounts payable
Wages
Notes receivable
Discount received
Discount allowed
Rent
Taxes
Sales
Machinery
Accounts receivable
Salaries
Advertisement
Cash
Purchases
General expense
Loan taken form bank
Notes payable
Owner’s equity
Drawings
Motor car
Total
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
Ref.
4683
361
130
260
380
1000
25360
5360
8175
1940
600
2860
10944
2560
725
2500
42348
1000
1520
10000
42348
MU
Mashal University
Financial Accounting-II
Page-66-
Adjustments for Exercise No. 03
a. Closing stock $5350
b. Depreciate machinery @10%
c. Rent paid in advance $100
d. Outstanding salaries $950
e. Interest on owner’s equity was @ 6%
Exercise No. 04
Trial Balance
S.NO
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Accounts
Cash
Building
Drawing
Furniture
Interest paid
Purchases
Rent
Opening stock
Salaries
Advertisements
Food expenses
Accounts receivable
Owner’s equity
Accounts payable
sales
Ref.
Total
Dr.
12500
40000
750
1000
500
30000
10000
4000
1000
100
600
7500
Cr.
12950
20000
75000
107950
107950
Adjustments for Exercise No. 04
a.
b.
c.
d.
Closing stock $4500
Salaries outstanding $150
Prepaid food expense $100
Depreciation on building and furniture @5%
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
Financial Accounting-II
Page-67-
Exercise No. 05
Trial Balance
S.NO
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
Accounts
Cash
Accounts receivable
Notes receivable
Carriage
Supplies
Furniture
Equipment
Sales return
Wages
Insurance
General expenses
Purchases
Accounts payable
Bank overdraft
Owner’s equity
Sales
Purchases return
Rent received
Total
Ref.
Dr.
2125
3700
5500
2300
250
550
1500
875
2400
2650
375
24000
Cr.
3000
625
9350
32375
625
250
46225
46225
Adjustments for Exercise No. 05
a.
b.
c.
d.
Outstanding wages $100
Prepaid insurance $50
Rent receive but not yet earned $100
Depreciation on equipments $25
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University
Financial Accounting-II
Page-68-
Exercise No. 06
Trial Balance
S.NO
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
Accounts
Purchases
Accounts receivable
Audit fee
Cash in hand
Salaries
Carriage in
Supplies expense
Machinery
Rent
Sales return
Furniture
Sales
Accounts payable
Interest received
Purchases return
Owner’s equity
Ref.
Total
Dr.
7500
1500
150
200
380
220
450
1150
180
140
130
Cr.
7400
700
100
500
3300
12000
12000
Adjustments for Exercise No. 06
a.
b.
c.
d.
e.
Interest earned but not yet received $250
Audit fee not yet paid and outstanding $50
Some interest of $10 received in advance
Depreciation on machinery @5%
Salary $20 paid in advance
Lecturer: Mr. Kamran Khan
M.Com (Accounting), B.Com…
MU
Mashal University