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FI
NANCI
AL
ACCOUNTI
NG
Conce
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ndAppli
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(Te
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(ii)
(iii)
FI
NANCI
AL
ACCOUNTI
NG
Conce
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ndAppli
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tions
(TextandAssignments)
J. R. Monga
Formerly
Associate Professor of Commerce
Shri Ram College of Commerce
University of Delhi
Raj Bahadur
Assistant Professor
College of Vocational Studies
University of Delhi
Computerised Accounting Systems
Anuradha Aggarwal
Assistant Professor
Shri Ram College of Commerce
University of Delhi
Professional Advisor
CA Dr. Girish Ahuja
SCHOLAR
Tech Press
(iv)
All Rights Reserved : No part of this book, including its style and presentation, may by reproduced, stored in a retrieval system, or
transmitted in any form or by any means—electronic, mechanical photo-copying, recording or otherwise without the prior written
consent of the author.
Warning : The doing of an unauthorised act in relation to a copyright work may result in both civil claim for damages and criminal
prosecution.
Special Note : Photocopy or Xeroxing of educational books without the written permission of publisher is illegal and against Copyright
Act.
General : While every effort has been made to present authentic information and avoid errors, the author and the publisher are not
responsible for the consequences of any action taken on the basis of this book.
SCHOLAR
Tech Press
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MKM PUBLISHERS Pvt. Ltd.
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MKM Publishers Pvt. Ltd.
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Phones : 011- 40224951, Mob: 9810153571
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
© Publisher

First Edition : 1980
Thirty Sixth Revised and Updated Edition : 2020

Printed in India at :
Nisha Enterprises
Sahibabad, Ghaziabad, U.P.

ISBN: 978-81-933917-2-3
(v)
Dedicated at the Holy Feet of
Shirdi Sai Baba &
Parthi Sathya Sai Baba
(vi)
Preface to the First Edition (Extracts)
The ‘topic in financial accounting’, though not the only one, is not just another text book on accounting. It is intended to
impart knowledge about the conceptual aspects of accounting-some of them written by eminent authors-have discussed
the conceptual framework but the treatment is scanty because bulk of the material is devoted to mechanical aspects only.
in this book, howerver, an attempt has been made to integrate both the aspects in the best possible manner and to suit the
requirements of B. Com students whose courses of readings have undergone tremendous changes recently.
In this book, the functional approach to the subject has been followed and thus very important issues have ben explained
with the help of suitable example(s). Along with this, suitable graded comprehensive illustrations have been added
beginning from the easy to moderately difficult and complicated ones. in addition, the model questions on thory and
selected practial problems at the end of the book would give sufficient practice to the students on the topics that have
been discussed in the text.
The material in the book has been extensively drawn form the works of distinguished authors on the subject and thir
names have been given inthe bibliography appended at the end of the book. The arrangement and presentation has been
tailored to facilitate the students in the understanding of what accouning is and what accounting cna do for them. It is
sincerely hoped that the topics in the text would be fourn useful not onloy by the B.com students but even by those
preparing for post graduate and professional examinations specially those relating to flwo statemetns, inventory valuation, depreciation, price level changes etc.
An opportunity is afforded to gratefully acknowledge the assistance rendered by my colleagues and friends in completing
the book. I am particularly indebted to Sh. Balraj Gupta of Sri Venkateshwara College, Sh. G. K. Ahuja, F.C.A and Sh.
Ramesh Chand ACA, my colleagues in the Department of Commerce for sugesting many improvements from time to
tiem. S. Pirithi Pal Singh Chauhan. A.C.A., Senior Accounts Officer, India Tourism Development Corporation, was kind
enough to go through the manuscripts of some of the topics and made valuable suggestions. Mrs. Kuldip Rani Bhardwaj,
the first professional and qualified Librarian of Shri Ram College of commerce deserve special mention for having made
available to me the necessary boks at the time when my movements were resticted due to an accident.
I am thankful to my wife Mrs. Sashi Monga for having extended her fullest co-operation in completing the task in time
and Sh. Surinder Malik of National Publishing House who afforded me an opportunity for writing this book.
I would welcome and gratefully acknowledge any suggestions for the betterment of the book in subsequent editions.
J. R. Monga
(vii)
OM SHREE SAI RAM
Preface to the 36th Edition
We are glad to present, before the faculty and students, the new revised and updated edition of Financial Accounting:
Concepts and Applications.
As the syllabus has been revised by the university under LOCF scheme, new chapters namely: Conceptual Framework of
Accounting, Overview of Partnership Accounts (Fundamentals of Partnership, Admission of a New Partner and Retirement/
Death of a Partner) and Departmental Accounts have been included in the book. Accounting for leases has also been
updated.
As per suggestions received from teaching fraternity following alterations have been done in this new edition
of book:
Chapter 8: Final Accounts
 Theory of GST has been incorporated with journal entries of GST (regarding SGST, CGST and IGST).
 GST has been incorporated in practical problems (wherever necessary).
Chapter 10: Accounting for PPE & Depreciation
 Theory portion has been aligned in systematic manner.
 Problems on changes in method of charging depreciation have been revised as per requirements of AS-10.
 Problems and solutions have been modified as per prospective method only with conformity of AS-10.
Chapter 13: Accounting for Leases
 More theory and journal entries in the books of lessor and lessee have been incorporated.
Chapter 15: Departmental Accounting
 More illustrations have been added.
 Problems based on – only two or three departments have been retained/ modified as per requirement of syllabus
passed in guideline meeting of the Department of Commerce.
Chapter 16: Partnership (An Overview)
 Contents have been reduced and only main points of concern topics have been discussed.
 Chapter has been reduced from 110 pages to 53 pages only.
Chapter 17: Dissolution of Firm
 The whole chapter has been streamlined.
 More illustrations and problems in exercise have been incorporated on the topic “Maximum Possible Loss Method”.
It is hoped that the new edition of the book would meet the requirements of the students and teaching fraternity. The
language of the book continues to be simple and all the important aspects have been explained point wise as required by
the students. We have also received spontaneous help from the teaching community of various colleges and private
institutions as well as the students of the subject. It is hoped that they will continue to do the same in future too.
We are thankful to Dr. Inderjeet Singh (Principal), Sh. S.K Bhatia and Dr. Surender Singh, College of Vocational Studies,
Sh. Pradeep Aggarwal, Moti Lal Nehru College, Mrs. Madhu Jain, Maitreyi College, Amita Motwani, Jesus and Mary
College, Dr. Rajiv Kaur, Aditi Mahavidyalaya and Dr. Gurchan Sachdeva, P.G. D.A.V. College for encouraging us to
revise and upgrade the present edition of book.
For all queries relating to sale and specimen copies, you may contact Shri Atul Malik on his Mobile No. 9810153571.
J.R. Monga
Raj Bahadur
rajbahadur@cvs.du.ac.in
9873899846
(viii)
Acknowledgement
Sincere thanks to Sh. Ashok Gupta and Sh. Gurcharan Sachdeva, P.G.D.A.V. College and Mrs. Madhu Jain, Maitreyi College
and Jitender Chawala, Dayal Singh College (Morning) for pointing out glaring errors. I am also grateful to Sh. PD Saini,
Aryabhatta College, Sh. Ashok Paswan, Hindu College and Mrs. Veena Jain, Vivekanand College for valuable feedback about
the book.
I would also like to mention the name of Mrs. Rajiv Kaur, Aditi College for encouraging me to remain on the job of writing
work.
The unconditional support rendered by following teachers is praiseworthy:
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(x)
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The following owners of coaching centres always remain alert and active in pinpointing short comings in the text and practicals:
A.K. Dugglal
: Duggal College of Education, Rajouri Garden
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: Elite Academy Shastri Nagar
Gulab Singh
: S.S. Coaching Centres, Virender Nagar, Janakpuri
Sh. Chirag Sharma
: Sarswati Academy for Professionals, Tilak Nagar
Rajesh Sinha
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: Kalra Institute of Commerece, Hari Nagar
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: Shree Apartment, Rohini
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CMA Joshi
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Vimal Kumar
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Chandra Mohan Gupta
: Tutor, Rohini, Sector-13
DOWN MEMORY LANE
Dr. Balbir Singh, Sh. S.P. Jain, Sh. R.S. Aggarwal, Sh. S.K. Jain and Sh. G.R. Sahni, Mrs. Usha Jain, Sh. S. C. Malhotra,
Sh. Rajeshwar Sharma, Sh. S.C. Aggarwal.
(xi)
B.Com (Hons.) Semester - I (CBCS)
Paper BCH 1.2: Financial Accounting
Duration: 3Hrs.
Marks: 100
Credits: 6
Course Objective
This course provides conceptual knowledge of financial accounting and the techniques for preparing accounts in different types
of business organisations.
Course Learning Outcomes
After the successful completion of this course, the student will be able to:
CO1:
Understand the theoretical framework of accounting and to prepare financial statements
CO2:
Explain and determine depreciation and value of inventory
CO3:
Learn accounting for hire purchase transactions, leases, branches and departments
CO4:
Understand the concepts of partnership firm and prepare accounts for dissolution of a partnership firm
CO5:
Develop the skill of preparation of trading and profit and loss account and balance sheet using computerized accounting.
Course Contents
Unit-1: Introduction
Conceptual Framework: Accounting principle, Concepts and Conventions, Introduction to Accounting Standards and Indian
Accounting Standards (AS & Ind AS), Accounting Process: Journal, Ledger, Trial Balance, Financial Statements (overview),
Capital Expenditure (and Receipts), Revenue Expenditure (and Receipts) and Deferred Revenue Expenditure. Preparation of
Financial Statements of a Profit Making Sole Proprietorship Trading Firm with Additional Information, Preparation of Financial
Statements of a Not for Profit Organisations.
Unit-2: Depreciation Accounting and Inventory Valuation
Accounting for Plant Property and Equipment & Depreciation: Meaning of Depreciation, Depletion and Amortization, Objective
and Methods of Depreciation (Straight line, Diminishing Balance), Change of Method, Inventory Valuation: Meaning, Significance
of Inventory Valuation, Inventory Record System-Periodic and Perpetual, Methods of Inventory Valuation-FIFO, LIFO and
Weighted Average
(Relevant Accounting Standards as Applicable)
Unit-3: Special Types of Accounting
Hire Purchase Accounting: Calculation of Interest, Partial and Full Repossession, Profit Computation (Stock & Debtors System
only), Accounting for Leases: Concept, Classification of Leases (simple practical problems), Accounting for Branches (excluding
foreign branches): Dependent Branches (‘Debtors System’and ‘Stock & Debtors System’) and Overview of Independent Branches.
Departmental Accounting: Concept, Type of Departments, Basis of Allocation of Departmental Expenses, Methods of
Departmental Accounting (excluding memorandum stock and memorandum mark-up account method)
(Relevant Accounting Standards as Applicable)
Unit-4: Accounting for Partnership Firm
Partnership Accounts: Fundamentals, Admission, Retirement and Death of a Partner (only an overview), Accounting for
Dissolution of Partnership Firm: Dissolution of Partnership Firm including Insolvency of Partners (excluding sale to a limited
company), Gradual Realization of Assets and Piecemeal Payment of Liabilities
Unit-5: Computerized Accounting System
Computerized Accounting System: Computerized Accounts by using any Popular Accounting Software: Creating a Company;
Configure and Features Settings; Creating Accounting Ledgers and Groups, Creating Stock Items and Groups; Vouchers Entry;
Generating Reports – Cash Book, Ledger Accounts, Trail Balance, Profit and Loss Account, Balance Sheet, Funds Flow Statement,
Cash Flow Statement, Selecting and Shutting a Company; Backup and Restore of Data of a Company
Note: Latest Accounting Standards to be followed
(xii)
(xiii)
CONTENTS
UNIT – I : INTRODUCTION
1. INTRODUCTION
• Financial Accounting • Accounting as an Information System • The Users of Accounting Information
• Qualitative Characteristics of Accounting Information: 1. Understandability 2. Relevance
3. Reliability 4. Comparability • Functions of Accounting • Advantages of Accounting • Limitations
of Accounting • Branches or Divisions of Accounting • Bases of Accounting • Cash Basis of Accounting
• Accrual Basis of Accounting • Difference Between Cash Basis and Accrual Basis of Accounting
• Systems of Accounting
1.1 - 1.13
2. CONCEPTUAL FRAMEWORK
• Meaning • Levels of Conceptual Framework • How does the Framework Affect the Application of Accounting
Standards? • Who Benefits from a Framework and why is it Needed?
2.1 - 2.4
3. FINANCIAL ACCOUNTING PRINCIPLES
• Nature of Accounting Principles • Characteristics of Accounting Principles • Basic Concepts • The Entity
Concept • Money Measurement Concept • The Going Concern Concept • The Cost Concept • Periodicity
Concept (The Accounting Period Concept) • The Realisation Concept • The Accrual Concept • Accounting
Conventions • Accounting Concepts Vs. Accounting Conventions • Consistency Convention • The Prudence
Convention (Convention of Conservatism) The Materiality Convention • The Full Disclosure Convention
3.1 - 3.13
4. FINANCIAL ACCOUNTING STANDARDS
• Introduction • Concept of Accounting Standards • Accounting Concepts and Accounting Standards
• Benefits of Accounting Standards • Procedure for Issue of Accounting Standards in India
• Objectives of Accounting Standards • Salient Features of Accounting Standard (AS) - I: Disclosure of Accounting
Policies • Nature of Accounting Policies • Fundamental Accounting Assumptions • Difference Between
Fundamental Assumptions and Accounting Policies • Importance of Accounting Policies • Sources of Accounting
Policies • Selection of Accounting Policies • Changes in Accounting Policies • Disclosure of Accounting Policies
• Reasons for Disclosure in Accounting Policies • Appendix: Ind AS (Indian Accounting Standard)-8
4.1 - 4.14
5. INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRSs)/Ind-AS
• Background • Meaning and Features • Need for IFRSs • Some Clarifications • Benefits of Convergence to
IFRSs • Procedures • Difficulties or Challenges in Adopting IFRSs • Meaning of Indian Accounting Standard
(Ind-AS) • Distinction Between Indian Accounting Standards (Ind AS) and Accounting Standards (AS) • Roadmap
or Implementation of Ind-AS in India
5.1 - 5.10
6. ACCOUNTING PROCESS : AN OVERVIEW
• Concept of Accounting Process • The Journal (Or Journal Proper) • Journalising • Analysis and Journalising
of Some Business Transactions • Analysis of Business Transactions • Types of Entries • Opening Entry • Ledger:
Meaning and Features • Standard Form of a Ledger Account • Posting of Transactions From General Journal
• Interpretation of a Ledger Account • Balancing of Accounts • Balancing of Personal Accounts • Balancing of
Real Accounts • Balancing of Nominal Accounts • Subsidiary Books • Cash Book : A Journalised Ledger
• Single Column Cash Book • Cash Book with Discount Columns • Cash Book with Discount, Office Cash and
Bank Columns [The Record of Bank Transactions] • Posting of Cash-Book with Discount, Office Cash and
Bank Columns • Petty Cash Book • The Imprest System • Purchases Book • Posting of the Purchases Book
• Sales Book • Posting of the Sales Book • Purchases Returns Book • Posting of Purchases Returns Book • Sales
Returns Book • Posting of Sales Returns Book • Bills Receivable Book • Bills Payable Book • Posting of Bills
Receivable and Bills Payable Books• Nature and Features of a Trial Balance • Objects of a Trial Balance
• Limitations of a Trial Balance • Format of a Trial Balance • Preparation of a Trial Balance • Check List of Most
Frequent Debit and Credit Balances• Trial Balance : Not a Conclusive Proof of Accuracy • Errors Disclosed by
a Trial Balance
6.1 - 6.52
(xiv)
7. CAPITAL AND REVENUE ITEMS
7.1 - 7.8
• Capital Expenditures • Revenue Expenditures • Distinction Between Capital and Revenue Expenditures
• Revenue Expenditures Becoming or to be Treated as Capital Expenditures • Deferred Revenue Expenditures
• Distinction between Capital Expenditures and Deferred Revenue Expenditures • Capital and Revenue Receipts
• Capitalised Expenditure
8. FINAL ACCOUNTS OF NON-CORPORATE ENTITIES
8.1 - 8.114
• Trading Account • Direct Expenses on Goods • Profit and Loss Account • Preparation of Profit and Loss
Account • Difference Between Outstanding Income and Accrued Income • Meaning of Operating Profit • Meaning
of Non-operating Profit • Consideration of Some Individual Items • Manufacturing Account • Difference Between
Trading Account and Manufacturing Account • Balance Sheet • Classification of Assets • Classification of
Liabilities • Capital or Owner(s)’ Equity • Grouping and Marshalling • Advantages of Marshalling • Methods of
Marshalling • Adjustments • Most Frequent Adjustment Entries • Consideration of Some Important Points while
Preparing the Final Accounts of a Sole Trader • Adjustments at a Glance • Profit and Loss Appropriation Account
9. FINAL ACCOUNTS OF NOT-FOR-PROFIT ORGANISATIONS
•Meaning • Types or Forms • Characteristics or Features of NPOs • Need for Maintaining Accounts • Difference
Between Profit Making (Trading) and Not- For Profit (Non-trading) Organisations • Books of Account and
Registers • Final Accounts • Receipts and Payments Account • Features of Receipts and Payments Account
• Advantages of Receipts and Payments Account • Disadvantages or Limitations of Receipts and Payments
Account • Difference Between Cash Book and Receipts and Payments Account • Distinction Between Receipt
and Income • Difference Between Payment and Expenditure • Income and Expenditure Account • Features of
Income and Expenditure Account • What is Income • What is Expenditure or Expense • Distinction Between
Income and Expenditure Accouts and Receipts and Payments Account • Difference Between Income and
Expenditure Account and Profit and Loss Account • Balance Sheet • Difference Between Capital and Capital
Fund • Treatment of some Special Items in the Final Accounts of a NPO • Rules Regarding Income and Expenses
Related to a Particular Fund • Preparation of Income and Expenditure Account and Balance Sheet from the
given Receipts and Payments Account • Preparation of Receipts and Payments Account • When Balance Sheets
are to be Prepared • Receipts and Expenditure Account
9.1 - 9.119
UNIT – II : DEPRECIATION ACCOUNTING AND INVENTORY VALUATION
10. ACCOUNTING FOR PROPERTY, PLANT AND EQUIPMENT & DEPRECIATION
10.1 - 10.70
• Introduction • Property Plant and Equipment • Objectives of AS-10 PPE • Scope of AS-10 PPE • Definitions
• Subsequent Costs (Repairs and Maintenance) • Measurement at Recognition • Revaluation of Assets • Depletion,
Amortization and Obsolescence • Accounting Concept of Depreciation • Characteristics of Depreciation • Need
or Necessity for Depreciation • The Causes of Depreciation • Factors or Elements Affecting Depreciation • Is
Depreciation a Source of Funds? • Calculation of Depreciation for Assets Purchased During the Year • Accounting
Treatment • Methods of Providing Depreciation • Component Accounting • Example of Component Accounting
• Straight Line Method (Fixed or Equal Instalment Method) • Diminishing Balance Method • Difference between
Straight Line Method and Diminishing Balance Method • Units of Production Method • Sale or Disposal of
Fixed Assets • Provision for Depreciation Accounts • Change of Method (Prospectively) • Assets Disposal
(Scrapped) Account • Loss by Accident and Insurance Claim
11. INVENTORIES (AS - 2)
11.1 - 11.39
• Meaning of Inventory • Objectives of Inventory Valuation • Accounting Standard (AS)-2 (Revised) • Objective
and Scope of Ind. AS-2 • Definitions • Measurement • Cost of Inventories • Cost Formulas • Costs not Included
• Recognition as an Expense • Disclosure • Inventory Systems • Points of Difference (Periodic vs. Perpetual
Inventory System) • Methods of Valuation of Inventories • Valuation of Stock (FIFO) • Valuation of Stock
(Weighed Average)
UNIT – III : SPECIAL TYPES OF ACCOUNTING
12.
ACCOUNTING FOR HIRE PURCHASE
• Meaning of Hire Purchase System • Legal Position • Features of Hire Purchases System • Legal Position on
Default • Difference Between Hire Purchase System and Credit Sale • Instalment Purchase System • Features of
12.1 - 12.96
(xv)
Instalment Purchase System • Difference Between Hire Purchase System and Instlament System • Meaning of
Technical Terms used In the Hire Purchase Agreement • Calculation of Interest • Accounting Treatment in Hire
Purchaser’s Books • Accounting Treatment in the Books of Hire Vendor • Preparation of Necessary Accounts
• Accrual System of Hire Purchase • Default and Repossession • Full Repossession • Partial Repossession • Hire
Purchase Trading Account • Hire Purchase Trading Account at Cost Price • Hire Purchase Trading Account at
Selling Price • Repossession of Goods • Conservatism Principle and Profit on Revaluation • Calculation of
Missing Figure • Stock and Debtors System • Instalment System: Accounting Treatment
13. ACCOUNTING FOR LEASES
• Concept and Procedure • Purchasing and Leasing an Asset • Advantages of Leasing • Disadvantages of Leasing
• Main Types of Leasing • Operating or Non-Pay out Lease • Financial or Full Pay-Out Lease • Financial Lease
vs. Operating Lease • Accounting for Finance Leases (Books of Lessee) • Interest Rate Implicit on Lease
• Accounting for Finance Lease (Books of Lessor) • Accounting for Operating Lease • Difference between
AS-19 and Ind AS-116
13.1 - 13.17
14. ACCOUNTING FOR INLAND BRANCHES
14.1 - 14.70
• Nature of Branch Accounting • Features of Dependent Branches • Accounting For Dependent Branches
• Debtors System • Salient Features of Debtors System • Memorandum Branch Debtors Account • Transferred to
Branch at Loaded Price • Stock and Debtors System • Branch Stock Account • Branch Adjustment Account
• Branch Profit and Loss Account • Branch Expenses Account • Branch Assets Account • Accounting Treatment
for Stock-debtors System • Cash Losses at Branch • Treatment of Surplus or Small Gains • Loss of Branch Stock
• Branch Debtors Account • Branch Expenses Account • Branch Adjustment Account • Local Purchases by the
Branch • Independent Branches (An Overview): Branch Keeping Full System of Accounting • Goods-in-Transit
• Cash (Remittances) in-Transit • Accounts of Fixed Assets • Inter-Branch Transcations
15. DEPARTMENTAL ACCOUNTING
15.1 - 15.22
• Meaning and Purpose • Advantages of Departmental Accounting • Difference between Departmental Accounting
and Branch Accounting • Methods of Departmental Accounting • Allocation of Expenses • Types of Departments
• Inter-Department Transfers (Transfer from one Department to Another)
UNIT – IV : ACCOUNTING FOR PARTNERSHIP FIRM
16. PARTNERSHIP ACCOUNTS: AN OVERVIEW
16.1 - 16.53
Fundamentals of Partnership: • Definition and Essentials • Nature of Partnership • Minimum and Maximum
Numbers of Partners • Partnership Deed • Contents of Partnership Deed • Provisions of Partnership Act Affecting
Accounting Treatment • Capital Accounts • Fixed Capital Accounts • Fluctuating Capital Accounts • Distinction
between Fixed and Fluctuating Capital Accounts • Profit and Loss Appropriation Account • Interest on Capital
• Interest on Drawings • Partners' Salaries • Partners' Loan Accounts • Capital Accounts • Capital Ratio • Past
Adjustments • Guarantee of Profit to a Partner. Admission of a Partner: • Changes in Profit Sharing Ratio
• Meaning of Goodwill • Methods of Valuation of Goodwill • Accounting Treatment of Goodwill • No Goodwill
Account in the Books of Account • Revaluation of Assets and Liabilities • When the Revised Values are not to be
Recorded in the Books • Treatment of Undistributed Profits/Reserves • Adjustment Regarding Capitals
• Adjustment of Joint Life Policy. Retirement/Death of a Partner: • Effect of Retirement/Death • Calculation
of the amount to be paid • Mode of Payment • Calculation of Gaining or Benefit Ratio • Valuation of Goodwill
• Accounting Treatment of Goodwill • Revaluation of Assets and Liabilities • Reserves and Undistributed Profits
or Losses • Calculation of profit on the Date of Retirement/Death • Adjustment of Capitals • Repayment of the
Amount due • Accounting Implications
17. ACCOUNTING FOR DISSOLUTION OF PARTNERSHIP FIRM
• Meaning and Legal Position • Settlement of Accounts • Firm Debts Vs. Private Debts • Distinction Between
Private Debts and Firm’s Debts • Accounting Treatment • Distinction Between Realisation Account and
Revaluation Account • Journal Entries • Accumulated Reserves, Profits, Losses and Fund Accounts • Goodwill
on Dissolution • Unrecorded Assets and Liabilities • Insolvency of Partner(s) • Decision in Garner Vs. Murray
17.1 - 17.104
(xvi)
• Fixed Vs. Fluctuating Capitals • When All Partners Are Insolvent • Piecemeal Distribution • Order of Payment
• Proportionate or Surplus Capital Method • Maximum Possible Loss Method
UNIT – V : COMPUTERIZED ACCOUNTING SYSTEM
18. COMPUTERISED ACCOUNTING SYSTEM
18.1 –18.54
• Background • Advantages of Computers in Accounting • Disadvantages of Computers • Accounting Process (or
Cycle) • Gateway of Tally Screen • Steps for Creation of Final Accounts in Tally • Buttons at Gateway of Tally
Related to Company • General • Numeric Symbol • Accounts/Inventories Information • Groups formation (under
inventory Info.) • Types of Vouchers • Conversion of Voucher from one Type to Another • Generating Reports
• Trial Balance • Cash Flow Statement • Fund Flow Statement • Selecting and Shutting a Company • Backup and
Restore Data of the Company
Examination Paper with Solution (2019)
E.1 – E.16
1
I
ntroduction
FINANCIAL ACCOUNTING
In accounting literature, the two terms, namely: Accounting and Financial Accounting are used interchangeably.
But accounting is a tree while financial accounting is one of its branches. All accounting work in the
beginning was in the nature of financial accounting which was used to record business transactions for a
certain period usually called accounting period. Then, these transactions were classified and summarized
in the form of profit and loss account to calculate or find out profit or loss for the accounting period which
is generally of one year. Financial Accounting also helps to know the financial position of the business
enterprise as on the last date of the accounting period in the form of assets possessed or owned by it (the
enterprise) and the liabilities owing to others. The statement showing the Financial Position is technically
called the Balance Sheet.
ACCOUNTING AS AN INFORMATION SYSTEM
Accounting is often referred to as the language of business. The primary aim or purpose of a language is
to serve as a means of communication. Accounting is used to communicate financial and other information
to people, organisations, Governments etc., about various aspects of business and non-business enterprises.
Accounting information is used when Mr. A applies for a loan at a bank or when A submits his income-tax
returns. Business enterprises use accounting for their day-to-day activities and to report the results of these
activities to their owners, creditors, employees and Governmental agencies. The accounting is, therefore,
also an information system. In today’s society, many persons and agencies outside the management are
involved in the economic life of an organisation. These persons frequently require financial or accounting
information to make reasoned choices among alternative uses of scarce or limited resources in the conduct
of the business and economic activities. For example, shareholders must have financial information in order
to measure management’s performance and to evaluate their own investments. Potential investors need
financial data in order to compare prospective investments. Creditors must consider the financial strength
of the business before granting loans. Also labour unions, financial analysts and economists often expect
a considerable amount of financial data. Finally, many laws require that extensive financial information
be reported to the various Government departments or agencies such as income-tax, sales tax and excise
authorities, tribunals etc.
Simply stated, actual accounting is concerned with communicating the results of the operations of an organisation.
The term ‘system’ is well recognised. A system is a set of elements which operate together in order to
attain a goal. The following are examples of some systems and are analysed in this manner:
System
Elements
Basic Goals
College
Teachers, Students, Library, Office
Education
Hospital
Doctors, Medicines, Equipments, Building
Treatment of Patients
Police
Men, Equipment, Communication network, Building
Crime Control
[1.1]
1.2
Financial Accounting: Concepts and Applications
Simply stated accounting system converts inputs (financial transactions) into outputs (financial statements)
and it is given below:
Inputs
Business Transactions
and Events
(Collection of Data)
Process
Accounting Concepts
and
Conventions
Output
Profit and Loss Account
Balance Sheet
Cash-Flow Statement
THE USERS OF ACCOUNTING INFORMATION
There are various groups of people who use accounting information for their different needs. These users of
accounting information may be classified into two categories namely, (i) Internal users and (ii) External
users.
(i) Internal users: They are directly involved in running or managing the business enterprise such as officers,
and partners (directors in the case of joint stock companies) and owners or sole traders. They need
accounting information for the efficient running of the business enterprise. Their needs are met from
the use of income statement (Profit and Loss Account), Balance Sheet and Cash-Flow Statement.
Internal users have direct access to lot of private and confidential reports known as internal reports
which contain valuable information relating to manufacturing cost of a product, pricing of different
products for sale purpose; whether the product should be manufactured or purchased from outside; whether
a new product is to be launched (introduced) or a particular product should be discontinued.
(ii) External users: Persons, individuals or organisations, who have some present or future interest in the
economic activities of the business enterprise are external users. They are not part of management team.
They make use of published annual reports which contain income statement, balance sheet and cashflow statement. The annual reports also contain important information about the activities of the business
enterprise. The external users are: shareholders (investors) of a joint stock company, trade or labour
unions of employees, creditors (suppliers of goods and services on credit), customers, government,
researchers and so on.
Following table indicates some of the users of accounting information and their needs for specific information:
Users
(i)
Owners or Proprietors
or Partners
Need for information
Their need for accounting information is mainly concerned with the financial position
of the firm, rate of return on the capital employed and efficient utilisation of scarce resources.
(ii) Existing shareholders
(Present Investors)
They are interested in the profitability and solvency of the company. They also want to know
whether the profits of the company are increasing or decreasing, whether the company shall
pay more dividends in future. On the basis of trends in profitability, they decide whether
they should invest more money in the company or they should hold the present number of
shares or they should sell out their investments or shares etc..
(iii) Potential investors
(Those who intend
or want to invest)
Basically they will be interested not only in the dividends of the current year only but they are
also interested in the information about the dividends paid in the past few years. They can determine
that this progress or trend will be maintained in future as well. The statement of the chairman
of the company in the annual reports provides some indication about the future progress of the
company. So it is necessary that accounting information helps them whether they should buy the
shares of the company or not
(iv) Management
With the separation of management and ownership in the case of joint stock companies, the
managers are responsible for carrying on the business activities of an enterprise. They need
accounting information –
(a) To set targets for future periods;
(b) To observe and measure the performance of the various departments within a business
enterprise;
Introduction
1.3
(c)
To evaluate the performance against the targets highlighting the departures or deviations
from the targets and
(d) To take corrective steps if there are shortfalls.
In addition, the management also needs information (for all types of business organisations)
to review the firm’s:
(a) Short-term and long-term solvency.
(b) Profitability in relation to total sales;
(c)
Effective utilization of limited resources and
(d) Profitability in relation to capital employed so that management can take necessary action
to run the business smoothly.
(v)
Creditors and shortterm lenders
Creditors include suppliers of goods and services on credit. Short-term lenders are generally commercial
banks who lend money for short periods. They need accounting information to know whether
the borrowing business firm shall be able to pay interest periodically or regularly and also
pay back the principal amount on maturity date. Their specific interest lies in solvency, liquidity
and profitability of the business enterprise.
(vi)
Long-term lenders
This category includes debentureholders, industrial banks non-banking financial institutions etc.
They are interested in the regular interest payments on their loans and also the repayment of
principal amount when the same is due or repayable. They are, therefore, interested in profitability,
liquidity, solvency for payment of loan amount.
The availability of cash flow statement in addition to income statement and balance sheet has
considerably helped to judge the liquidity position of the enterprise.
(vii) Employees through
labour unions
Employees who are represented by labour unions are interested in more salaries, overtime payments,
bonus, medical facilities etc., and interested in the earning capacity of the firm. Accouting
information provides facts and figures about the earning capacity and thus increases their bargaining
power. Financial reports highlight what the management is doing for the welfare of the employees
and what they intend to do in future.
(viii) Government(s)
The economic activities of central, state and local governments are financed through collection
of tax. Thus, the accounting information about business activities is very helpful in the collection
of income tax, goods and services tax (GST), customs duties, excise duties and so on. Each
tax requires special accounting information of various business enterprises. Any distortion or
manipulation in the accounting information would adversely affect the welfare policies of the
government because of less collection of tax.
(ix)
Regulatory Agencies
A number of regulatory authorities or agencies like Securities Exchange Board of India (SEBI),
the Insurance Regulatory Authority, the Reserve Bank of India etc., need accounting information
for the efficient operations of the capital markets.
(x)
Individuals and Society
People are affected by the economic activities or operations of a business enterprise in their localities.
The accounting information discloses the well-being or prosperity of various business enterprises
and also the type of activities in their localities. Such information would be useful to know
the employment opportunities in a local area. Society as a whole is affected by water and
air pollution from industrial activities. The accounting information would disclose how much
money has been spent to control such pollution. This is known as social responsibility or
green accounting.
QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION
Qualitative characteristics are the attributes (or features) that make the accounting information given in financial
statements (income statement, balance sheet and cash-flow statement) useful to users. There are four principal
qualitative characteristics as follows:
1. Understandability; 2. Relevance; 3. Reliability; and 4. Comparability.
1. Understandability
An essential quality of the accounting information is that it must be readily understandable by users. The
accounting information must be presented in a manner that the users such as investors, creditors, employees
or even Government etc., understand the same. For this purpose, it is assumed that users have a reasonable
knowledge of economic and business activities and accounting and they devote time and energy to study the
1.4
Financial Accounting: Concepts and Applications
accounting information. Information about complex matters, that should be included in the financial statements
because of its relevance for decision making, should not be excluded on the ground that it is difficult
for certain users to understand.
2. Relevance
Accounting information has the quality of relevance when it influences the economic decisions of the
users by helping them to evaluate past, present or future events. For example, information in respect of
dividends paid by the companies in the previous years is relevant because it would help the investors to estimate
dividends for future years. Similarly, the information regarding past performance and financial position may
also be used for predicting wage payments, share price movements and ability of the enterprise to meet its
commitments as they fall due.
Materiality: The qualitative characteristic of relevance requires that no material information is omitted. Information
is material, if its misstatement (i.e., omission or erroneous statement) could influence the economic decisions
of the users taken on the basis of the financial information. For example, a business enterprise applies for
a bank loan. The manager of the bank finds, on the basis of the accounting or financial information, that the
firm is profitable and its financial position (i.e., assets are more than liabilities) is very sound. However,
the firm is facing a court case in respect of million of rupees payable to sales tax authorities. Now this information
is material vis-a-vis relevant and must be disclosed in the financial statements so that the banker can take a
decision to grant a loan to the firm.
3. Reliability
Accounting information is reliable when it is free from personal bias so that it can be independently
verified. For example, recording of a fixed asset, say machine, at the actual cost (price paid) and not at the
market price is most reliable because the actual cost can be independently verified in a contract of sale or
invoice. In other words, information must be factual. Reliability has the following characteristics, namely:
faithful representation ; substance over form ; neutrality ; prudence, completeness, timeliness and verifiability.
(i) Faithful representation: It means that accounting information is based on actual events. For example,
purchase of building is based on actual event and there is a proper business transaction in the books of
account. Furthermore, the balance sheet should represent faithfully the transactions resulting in
assets, liabilities and owner’s capital of the enterprise at the reporting date which meet the recognition
criteria.
(ii) Substance over form: The transactions and other events in the books of account must be presented in
accordance with their substance and economic reality and not merely their legal form. For example, a
firm purchases a piece of land after making full payment to the seller. However, the documents and
legal formalities are yet to be completed. Now according to the principle of substance over form, the
firm can record the purchase of the land transaction in its books of account even though the registration
process is yet to be completed.
(iii) Neutrality: Financial accounting information should be neutral in the sense that it should not favour
one group of users over another. It should not be designed for the benefit of single user or give one
user an advantage over other users. Neutrality is significant especially for the external users of the accounting
information. Within the enterprise, neutrality is less important for the simple reason that all the internal
users have access to the information. The financial statements must disclose the actual position in respect
of operating results and financial position. For example, if the goods purchased in the last week of the
accounting period, say, march end, are recorded in the next accounting period, it would obviously affect
the income statement by higher reported income (or less loss) for the current accounting period favouring
the management at the cost of other users like investors and creditors. All contingent liabilities must
be disclosed only as footnote to the financial statements so that users can easily find out what the actual
position is.
(iv) Prudence: The preparers of the financial statements have to make estimates in respect of certain events
and transactions such as the probable useful life of the fixed assets like plant and machinery for depreciation
purpose, collectability of debtors and bills receivable regarding provision for doubtful debts, the provision
for warranty claims and so on. While making the estimates about uncertainty of events, the accountant
must be prudent in preparing the financial statements. Prudence means playing safe and with caution
Introduction
1.5
in the exercise of judgements needed in making the estimates required under conditions of uncertainties
e.g. assets and income are not overstated and liabilities or expenses are not understated.
(v) Completeness: An omission may make information to be false or misleading and hence unreliable and
short of relevance. For example a loss of ` 50,000 by fire not covered by insurance is a material loss
for a small enterprise. Full disclosures must be made of all significant information in a manner that is
understandable and does not mislead creditors, investors, and other users of the financial statements
irrespective of the costs involved.
(vi) Timeliness: The utility of accounting information decreases with age. The more quickly the information
is communicated to the users, the more it is likely to influence their decisions. So the accounting information
must be available to the decision makers before it loses its capacity to influence their decisions.
For example, it is likely to be more useful to know the position of an enterprise for 2014 in early 2015
than to receive this information a year later.
(vii) Verifiability: Verifiability ensures the truthfulness of the recorded transactions which can be independently
checked by persons other than the accountant himself. For example, the information contained in the
purchase invoices, sales invoices, property deeds and other similar documents must be the same as reported
in the financial statements. This can be independently checked by anyone interested to ascertain the
true position.
4. Comparability
Users must be able to compare the financial statements of an enterprise over a period of time so as to enable
them study the trends in its financial position, operating results and cash flows. Users must also be able to
compare the financial statements of different enterprises in order to evaluate their relative financial position,
operating results and cash flows. Comparability is possible when different enterprises in the same industry
use the same accounting principles and methods from year to year. Consistency therefore, does not permit
the switching of accounting methods of inventory valuation and depreciation from year to year. The
consistency principle does not mean that a particular method of accounting once adopted cannot or should
not be changed. Accounting methods and principles change on account of changes in the legal, social and
economic environments. When change in an accounting method is needed because of proper reporting or
has been necessitated by statute such as the Companies Act or Income Tax Act, it should be changed.
FUNCTIONS OF ACCOUNTING
Financial accounting performs the following major functions:
(i) Maintaining systematic records: Business transactions are properly recorded, classified under appropriate
accounts and summarized into financial statements–income statement and the balance sheet.
(ii) Communicating the financial results: Accounting is used to communicate financial information in respect
of net profits (or loss), assets, financial liabilities etc., to the interested parties.
(iii) Meeting legal needs: The provisions of various laws such as Companies Act, Income Tax and Sales
Tax Acts require the submission of various statements, i.e., annual accounts, income tax returns, returns
for sales tax purposes and so on.
(iv) Protecting business assets: Accounting maintains proper records of various assets and thus enables
the management to exercise proper control over them with the help of following information regarding
them: (a) How much is the balance of cash in hand and cash at bank? (b) What is the position of inventories?
(c) How much money is owed by the customers? (d) How much money is owing to the creditors? (e)
What is the position of various fixed assets and how these are being used?
(v) Accounting assists the management in the task of planning, control and co-ordination of business
activities.
(vi) Stewardship or Trusteeship: In the case of limited companies, the management is entrusted with the
resources of the enterprise. The managers are expected to act true trustees of the funds and the accounting
helps them to achieve the same.
(vii) Fixing responsibility: Accounting helps in the computation or calculation of the profits of different
departments of an enterprise. This would help in fixing the responsibility of each departmental head.
1.6
Financial Accounting: Concepts and Applications
ADVANTAGES OF ACCOUNTING
There is some overlapping between the functions of accounting and advantages of accounting. Hence,
a repetition of some of the functions of accounting under the present heading, namely: advantages
of accounting which are summarised as under:
(i) Maintenance of records rather than memory: All business transactions are systematically recorded
in various books of accounts. It is not possible at all to do any type of business by just remembering
the transactions which have grown in size and have become complex or difficult. Human memory is
limited by its very nature. Hence, business transactions must be recorded early in the books of account
(i.e., General journal or special purpose subsidiary books, as the case may), so that necessary information
about them is available in time and free from bias.
(ii) Preparation of financial statements: When the business transactions are maintained in a proper manner,
it becomes possible to prepare two basic financial statements, namely:
(a) The income statement (i.e., profit and loss account) to ascertain the profit and or loss for an accounting
period.
(b) The balance sheet to ascertain the financial position of the business as on the last date of the accounting
period, that is, the position of assets, liabilities and owner(s)’ capital on that date.
(iii) Comparison of results: A properly recorded accounting information is very helpful to compare the
profit (or loss) amount and financial position of one year with those of previous years. It is called intrafirm comparison. Not only this, it is also possible to compare the financial results of one firm with
that of another. It is called inter-firm comparison.
(iv) Assistance to management: The accounting information helps the management to plan its future activities
by preparing budgets in respect of sales, production, expenses, cash, etc. Accounting helps in co-ordination
of various activities in different departments by providing financial details of each department. The
managerial control is achieved by analyzing in money terms the departures or deviations from the planned
activities and by taking corrective measures or steps to improve the situation in future.
(v) As legal evidence: Systematically recorded accounting information provides documentary evidence in
a court of law for disputes regarding the amount owing to the creditors and recovery of money from
debtors.
(vi) Helps in taxation matters: Income tax, sale tax or vat (value added tax) authorities could be convinced
about the amount of taxable income, or actual sales, as the case may be, with the help of written records.
(vii) Ascertainment of value of business: Accounting information can be used to determine the proper price
or value of business in case a sole trader, a partnership firm or when a company wish to sell its business
to any person or entity.
(viii) Raising loans: Accounting is of great help to lenders who want to give loans to any business enterprise.
(ix) Control over assets or properties: Accounting facilitates control over assets or properties of the business
enterprise by providing information as to cash and bank balances, stock in hand, sundry debtors, fixed
assets etc..
(x) Prevention of errors and frauds: Accounting records are subject to auditing in most of the cases. Auditing
helps detection of errors and frauds that have taken place during the year and takes steps to prevent
their recurrence (to occur again) in future.
LIMITATIONS OF ACCOUNTING
There is no disadvantage of the accounting. However it is not free from limitations which are outlined
as under:
(i) No recording of non-monetary transactions: Financial accounting records only those transactions which
are expressed or measured in money only. It means there is no place for non-monetary or non-financial
transactions though these events are important for the efficient or smooth running of the business enterprise
e.g., health of the salesmen, the hard work done by the owners or chairman of the company and so on.
Thus, accounting does not provide complete information about all the events of a firm.
Introduction
1.7
(ii) No information about the present value of the business: Assets are recorded on the basis of cost
concept. It means, for recording purpose, original cost is the basis for the new assets and book-value
(original cost minus depreciation) for the used assets. In this way market values of the assets are
ignored. So the effect of inflation (or deflation) on value of fixed assets is not taken into consideration.
The effect of this practice is that the balance sheet does not disclose the true financial position of
the business enterprise.
(iii) Use of estimates or personal judgement: Accounting records sometimes do not give exact information
since accounting information is based on estimates or personal judgement. For example it is not possible
to predict accurately the actual useful life of fixed assets for the purpose of depreciation expenses. Similarly
the accountant may select any method of depreciation, valuation of stock and treatment of deferred
revenue expenditure. Such judgement is based on the qualification and credibility of the accountant
and may affect the outcome or result of financial statements.
(iv) Window dressing: Sometimes the accountant may resort to (or indulge in) ‘window dressing’ (impressive
but not real or true) in the balance sheet by showing items like debtors or stock without provision for
doubtful debts or obsolescence. In such a case the balance sheet cannot give a true and fair view of
the financial position of the business enterprise.
(v) Unrealistic accounting information: Accounting information may not be realistic even when financial
statements are prepared on the basis of basic accounting concepts and conventions. According to going
concern concept, business entity will have indefinite life and thus assets are recorded at cost or book
value which may not be actually realisable because of low market value.
(vi) Accounting information is not natural or unbiased: Accountants calculate income as excess of revenues
over expenses recorded in monetary terms. Hence they do not include the costs of air pollution, water
pollution, employees’ accidental injuries and so on.
(vii) Lack of consistency: Accountants have to follow certain generally accepted accounting principles for
recording the business transactions. If these principles are not followed uniformly year after year, the
accounting information may become inconsistent. For example the stock of goods in hand is valued on
the basis of cost or market price whichever is less on the basis of conservatism or prudence convention.
Accordingly stock in hand may be valued on cost basis in one year and at market price in another year.
In this manner convention of consistency may be violated.
(viii) No basis for managerial efficiency: Accounting information cannot be used as the only test of managerial
efficiency or managerial performance on the basis of more profits. Profit or income for a period of
certain year can be inflated by omitting such expenses as advertisement expenses, cost of research and
development, depreciation expense and so on.
(ix) Disclosure of only material items: In the financial statements only material items are disclosed in detail.
In this manner the insignificant items, though important, are ignored.
(x) Historical information only: Accounting records only past or historical events. So they may not be of
much use in the present or current situation.
BRANCHES OR DIVISIONS OF ACCOUNTING
Accountants tend to specialise in various types of accounting work and this has resulted in the development
of different branches of accounting. Some of the divisions of accounting are given as:
(i) Financial accounting: Accounting designed or meant for outsiders (persons other than owners and
managers) is known as financial accounting. It is concerned with the recording of business transactions
and the periodic preparation of income statement, balance sheet and cash-flow statement from such records.
In this manner, the financial accounting is useful for ascertaining profit or loss made for a given period
and financial position at the end of the given period and also the sources and uses of cash for the given
period.
(ii) Management accounting: It is concerned with the interpretation of accounting information to guide
the management for future planning, decision-making, control, etc., Management accounting, therefore,
serves the information needs of the insiders, e.g., owners, managers and employees.
1.8
Financial Accounting: Concepts and Applications
(iii) Cost accounting: It has been developed to ascertain the costs incurred for carrying out various business
activities and to help the management to exercise strict cost control.
(iv) Tax accounting: This branch of accounting has grown in response to the difficult tax laws such as
relating to income tax, sales tax, excise duties, customs duties, etc.. An accountant is required to be
fully aware of various tax legislations.
(v) Social accounting: This branch of accounting is also known as social reporting or social responsibility
accounting. It discloses the social benefits created and the costs incurred by the enterprise. Social
benefits include such facilities as medical, housing, education, canteen, provident fund and so on
while the social costs may include such matters as extra hours worked by employees without payment,
environment pollution, unreasonable terminations, etc..
(vi) Human resources accounting: It is concerned with the human resources of an enterprise. Accounting
methods are applied to evaluate the human resources in money terms so that the society might judge
the total work of the business enterprises including its non-human net assets. It is, therefore, an
accounting for the people of the organisation. Unfortunately no objectively verifiable method has
been developed for universal application.
(vii) National accounting means the accounting for the resources of the nation as a whole. It is generally
not concerned with the accounting of individual business entities and is not based on generally accepted
accounting principles. It has been developed by the economists and the statisticians.
(viii) Green accounting: The concept of green accounting is related to the calculation of national income
in which standard measures of income and output are Gross National Product (GNP) Gross Domestic
Product (GDP) Gross National Income (GNP) etc. In simple words, Green Accounting is a kind of
accounting that tries to take into consideration the environmental costs in the calculation of operating
income of an enterprise.
(ix) Creative accounting: Creative accounting is nothing but the manipulation of the operating results
and financial position of the company, of course, within the confines (limits) of the accounting
standards. It means though accounting standards are followed yet the manipulation is done by adopting
such practices as recognition of premature or fictitious revenues (e.g. , showing stock at sale price),
reducing the rate of depreciation or artificially increasing the life of the fixed assets and so on. Investors
and other users of accounting information must educate themselves about the creative accounting and
fraud detection methods.
(x) Forensic accounting: The integration of accounting, auditing and investigative skills has opened
up a unique branch known as forensic accounting. It is defined an accounting method that deals
with the relation and application of a system that is used to record and summarise business and financial
transactions. Forensic accounting provides an accounting or financial analysis that is suitable to the
court of law which will form the basis for discussion or debate and ultimately to decision by the
court on scam or fraudulent matters.
It means forensic accountant is required to pay attention to the smallest datail, analyse accounting
or financial information thoroughly, think creatively, possess common business sense, computer
skills, excellent communication skills and puzzle solving ability that can be used to reconstruct
the details of past or historic accounting transactions and be able to tell the story.
BASIS OF ACCOUNTING
There are primarily two basis of accounting, namely: Cash basis and accrual basis explained below:
Cash Basis of Accounting
Under this basis, income is calculated on the basis of cash transactions only while the credit transactions
are ignored (or not considered at all). Similarly expenses are recorded only when they are paid in cash.
So the income or profit is the excess of cash receipts in respect of sale of goods, services and other income
resulting from the sale of properties in cash over actual cash payments in respect of purchase of goods,
Introduction
1.9
properties and expenses say, on rent, salaries, stationery, electricity etc. Thus, credit transactions are not
considered at all including adjustments for outstanding (unpaid) expenses or accrued (or unearned)
income items.
In short, under the cash basis of accounting income or profits is calculated with the help of Receipts and
Payments Account only. This method is useful for professional people like doctors, advocates, engineers,
chartered accountants, broker, and small traders where credit income is of doubtful nature.
Advantages
(i) This basis is simple to use and does not require technical knowledge of accountancy.
(ii) There is no scope for estimates or personal judgements because cash transactions are recorded only
when actual cash is received or paid.
(iii) This basis is suitable for business firms having most of the transactions in cash.
Disadvantages
(i) Cash basis does not give a true and fair view of profit or loss and the financial position of the
business enterprise. The reason is that it does not take into consideration outstanding expenses, prepaid
expenses, unearned income and income received in advance which may play more important role in
some cases in the calculation of actual profit or loss.
(ii) There is no scope for matching principle because the purchase of fixed asset is treated as complete
expense in the year of purchase rather than the periods which benefit from the use of fixed assets.
(iii) There is enough possibility of manipulating (or wrong calculation of) the profit figure. It may either
by delaying the payments or making payments earlier than the due date. Similarly receipts or income
may be postponed or collected early.
(iv) As capital and revenue items are treated at par (i.e., same), there is no consistency in the profit or
loss figure of different accounting periods.
(v) Cash basis of accounting is not recognised by the Companies Act.
Accrual Basis of Accounting
Under accrual basis of accounting, only revenue items are taken into account for income determination
and capital expenditures are ignored. Income (revenue) is recognized when it is earned and not when the
money is actually received later on. Similarly expenses are recognized when due or incurred and not when
actual payments are made for them. Thus, credit sales are part of total income and rent due to landlord or
salaries unpaid to the employees are part of total expenses. It means revenues and expenses for income
determination are considered on the basis of the accounting period to which they belong or relate. In simple
words, the income accrued or earned in the current accounting period becomes the income of the current
accounting year whether the actual cash for that item of income is received in the current year or it was
received in the previous year or it will be received in the next year. The same is true of expense items.
Advantages
(i) It is based on all business transactions of the year in respect of income and expense items and not
simply relating to cash transactions. Thus it discloses correct profit or loss.
(ii) This basis of accounting can be (and in fact is) used in all types of business enterprises.
(iii) It is more suitable for the application of matching principle i.e. matching of revenue and expense
items.
(iv) It is more scientific and rational basis of accounting.
(v) There is a consistency in the computation of profit or loss of different years because it makes distinction
between capital and revenue expenditures.
(vi) It is recognized by the Companies Act.
1.10
Financial Accounting: Concepts and Applications
DIFFERENCE BETWEEN CASH BASIS AND
ACCRUAL BASIS OF ACCOUNTING
Points of Difference
Cash Basis
Accrual Basis
1. Cash vs. Credit
transactions
There is no recording of outstanding and prepaid
income or expenses. The basis of records is only
cash transactions
It includes both cash and credit transactions. Hence
items like outstanding expenses and income and
prepaid income and expenses are to be found in
the balance sheet.
2. Effect of the prepaid
expenses and accrued income
Income statement or profit and loss account will show
lower income if there are items of prepaid expenses
and accrued (earned) income
Income statement will show relatively higher
income if there are items of prepaid expenses
and accrued incomes
3. Effect of outstanding
expenses and unearned income
Income statement will show higher income if there
are items of outstanding expenses and income received
in advance
Income statement will show lower income if there
are items of outstanding expenses and income
received in advance
4. Simple vs. Technical
Cash basis of accounting is simple to adopt since no
technical knowledge is required in recording cash
receipts and cash payments.
Accrual basis of accounting is technical in nature
since income is computed after taking into account
outstanding and accrued items in the calculation
of profit or loss account
5. Unreliable vs.
Reliable
It is unreliable basis of accounting for income determination because cash basis of accounting does not
make distinction between revenue and capital items
Accrual basis of accounting is reliable basis
because income determination is done on the basis
of revenue items only
6. Options regarding
valuation of Inventories and Depreciation technical method
An accountant has no option to value inventories
at cost or market, whichever is less. Also there
is no choice regarding the method of depreciation.
An accountant has the option to follow alternative
methods of inventory valuation like LIFO, FIFO
or Weighted average method and alternative
methods of depreciation like SLM, WDV etc..
7. Legal Position
It is not recognized under the
Act
Companies
Accrual basis of accounting is recognized under
the Companies Act
8. Preference
Enterprises with mostly cash transactions prefer
this basis of accounting
Enterprises with cash and credit transactions adopt
accrual basis of accounting.
Cash basis of accounting is suitable only for
professional people like doctors, advocates,
chartered accountants etc..
Accrual basis of accounting is appropriate for
enterprises with profit motive.
9. Suitability
SYSTEMS OF ACCOUNTING
Primarily there are two systems of accounting which are used as a basis for recording day-to-day business
transactions in a systematic manner. They are: single entry system and Double entry system.
In addition, there is the Indian system of book-keeping as a third system. However, the Indian system combines
the features of both - the single entry system and double entry system.
(i) Single Entry System
Also known as accounts from incomplete records, this system ignores the two-fold or dual aspect of recording
the transactions. According to Kohler (in Dictionary For Accountants), it is a system of book- keeping in
which, as a rule, only records of cash and personal accounts are maintained; it is always incomplete double
entry, varying with circumstances.
(ii) Double Entry or English System
Under this system every business transaction has a two-fold effect in the form of receiving some benefit as
against a loss or giving or sacrifice of some benefit simultaneously, that is, at the same time. When both
these aspects are properly or systematically recorded, it is known as double entry system.
Under this system, transactions can be recorded in two different ways, namely:
(a) Accounting Equation method;
(b) Application of double entry principles.
Introduction
1.11
(iii) Indian system
It is popularly known as Deshi: (indigenous) system of book-keeping which is followed throughout the country
for a long time. This system has no written rules like those debits and credits followed in english system of
double entry. Even then this deshi system enables the book-keeper to draw a trial balance and balance sheet.
Over a period of time, in its modern form, it is almost merged with the double entry system.
SPACE FOR REVISION
1.12
Financial Accounting: Concepts and Applications
Assignments
THEORY BASE ASSIGNMENTS
1.
2.
3.
Discuss the nature of accounting as an information system.
Write short note on purposes and limitations of accounting.
[B.Com. (Hons.) Delhi 1992, 2005]
Discuss the nature of accounting as an information system. In what way is accounting information useful
for : (i) owners, (ii) managers, (iii) creditors and (iv) employees of a business.
[B.Com. (Hons.) Delhi 1992]
Define relevance and reliability. What characteristics are needed for information to be relevant ? Reliable?
What are the main divisions of accounting ?
Distinguish between accrual and cash bases of accounting
[B.Com. (Hons.) Delhi 1998, 1999]
Write short note on mercantile system of accounting.
[B.Com. (Hons.) Delhi 1992]
4.
5.
6.
7.
OBJECTIVE ASSIGNMENTS WITH ANSWERS
True/False
1. State, giving reasons in brief, whether each of the following statement is ‘true’ or ‘false’ :
(i) Accounting, as a language, is used to communicate financial information by the Government only.
(ii) Accounting and book-keeping are two terms that have the same meaning.
(iii) Accounts help in determining the tax liability.
(iv) All assets owned by an enterprise are its goods.
(v) Accounting originated along with the origin of money.
(vi) Accounting is only an art and not a science.
(vii) Accounting information can be presented for non-monetary events also.
(viii) The traditional definition of accounting is still valid.
(ix) All the transactions in a business enterprise are recorded on cash basis.
(x) Short term creditors and long-term lenders require same type of accounting information.
Answers With Reasons
(i)
(ii)
(iii)
(iv)
(v)
(vi)
False : Accounting is done not only by the Government rather it is required for all entities—business
or non-business where finances are involved.
False : Book-keeping is the first stage of accounting work namely recording, classifying and summarising
of financial business transactions. The work of accountant begins from where the work of book-keeper
ends.
True : Accounting helps in the calculation of profits which are subject to tax liability.
False : Only those assets which are purchased for immediate sale are goods.
False : Accounting had been in existence since 3000 BC—much before the money was introduced.
Money facilitated proper recording of transactions as a common mode of measurement only.
False : Accounting is both an art as well as science. Actual recording of transactions is an art. It is a
science because it has to follow certain generally accepted accounting principles or rules while recording
the transactions.
Introduction
(vii)
1.13
False : Non-monetary events cannot be recorded because accounting is essentially money based discipline.
Non-monetary events are social in nature.
(viii) True : Traditional definition provides the first step in recording the transactions along with the classification
and summarisation functions of accounting.
(ix) False : In almost every business enterprise most of the transactions are credit transactions. They are
recorded on earning (accrual) basis rather than on cash basis.
(x) False : Short term creditors are more interested in immediate liquidity position while long term lenders
are primarily concerned with overall financial position and profitability of the business entity.
2
Conce
ptua
lFra
me
w ork
MEANING
A conceptual framework can be defined as a system of ideas and objectives that lead to the creation of a consistent
set of rules and standards. Specifically in accounting, the rules and standards set the nature, functions and limits
of financial accounting and financial statements.
The main reasons for developing an agreed conceptual framework are that it provides:
• a framework for setting accounting standards;
• a basis for resolving accounting disputes;
• fundamental principles which then do not have to be repeated in accounting standards.
The conceptual framework is composed of a basic objective, fundamental concepts, and recognition, measurement,
and disclosure concepts.
LEVELS OF CONCEPTUAL FRAMEWORK
The conceptual framework has the following 3 levels:
1. First level: The objective of financial reporting, the “why” or purpose of accounting.
2. Second level: The qualitative characteristics and the elements of financial statements, which form a bridge
between the 1st and 3rd levels.
3. Third level: Recognition, measurement, and disclosure concepts, the “how” or implementation.
First Level: Basic Objective
The basic objective of financial reporting is the foundation of the conceptual framework and requires that generalpurpose financial reporting provide information about the reporting entity that is useful to present and potential
equity investors, lenders, and other creditors in making decisions about providing resources to the entity. In order
to understand general-purpose financial reporting, users need reasonable knowledge of business and financial matters.
Second Level: Qualitative Characteristic of Accounting Information
Companies must decide what type of information to disclose and how to disclose it. These choices are determined
by which method or alternative provides the most decision-useful information. The qualitative characteristics of
accounting information distinguish better and more useful information from inferior and less useful information.
The fundamental qualities of accounting information are:
(a) Relevance – information that is capable of making a difference in a decision.
(b) Predictive value means that the information can help users form expectations about the future.
(c) Confirmatory value means that the information validates or refutes expectations based on previous evaluations.
2.2
Financial Accounting: Concepts and Applications
(d) Materiality means that information is material if omitting it or misstating it could influence decisions that
users make on the basis of the reported financial information.
Faithful representation – numbers and descriptions match what really happened or existed. Comprised of
Completeness means that all necessary information is provided. Neutrality means that the information is
unbiased. Free from error means that the information is accurate.
(e) Comparability means that companies record and report information in a similar manner. Consistency is another
type of comparability and means the company uses the same accounting methods from period to period.
(f) Verifiability means that independent people using the same methods arrive at similar conclusions.
(g) Timeliness means that information is available before it loses its relevance.
(h) Understandability means that reasonably informed users should be able to comprehend the information that
is clearly classified and presented.
Basic Elements (Also Consult Chapter on Final Accounts)
An important aspect of developing an accounting theoretical structure is the body of basic elements or definitions.
Ten basic elements that are most directly related to measuring the performance and financial status of a business
enterprise are formally defined below:
1. Assets: Probable future economic benefits obtained or controlled by a particular entity as a result of past
transactions or events.
2. Liabilities: Probable future sacrifices of economic benefits arising from present obligations of a particular
entity to transfer assets or provide services to other entities in the future as a result of past transactions or
events.
3. Equity: Residual interest in the assets of an entity that remains after deducting its liabilities. In a business
enterprise, the equity is the ownership interest.
4. Investments by Owners: Increases in net assets of a particular enterprise resulting from transfers to it
from other entities of something of value to obtain or increase ownership interests (or equity) in it. Assets
are most commonly received as investments by owners, but that which is received may include services or
satisfaction or conversion of liabilities of the enterprise.
5. Distributions to Owners: Decreases in net assets of a particular enterprise resulting from transferring
assets, rendering services, or incurring liabilities by the enterprise to owners. Distributions to owners decrease
ownership interests (or equity) in an enterprise.
6. Comprehensive Income: Change in equity (net assets) of an entity during a period from transactions and
other events and circumstances from nonowner sources. It includes all changes in equity during a period
except those resulting from investments by owners and distributions to owners.
7. Revenues: Inflows or other enhancements of assets of an entity or settlement of its liabilities (or a combination
of both) during a period from delivering or producing goods, rendering services, or other activities that constitute
the entity’s ongoing major or central operations.
8. Expenses: Outflows or other using up of assets or incurrences of liabilities (or a combination of both) during
a period from delivering or producing goods, rendering services, or carrying out other activities that constitute
the entity’s ongoing major or central operations.
9. Gains: Increases in equity (net assets) from peripheral or incidental transactions of an entity and from all
other transactions and other events and circumstances affecting the entity during a period except those that
result from revenues or investments by owners.
10. Losses: Decreases in equity (net assets) from peripheral or incidental transactions of an entity and from
all other transactions and other events and circumstances affecting the entity during a period except those
that result from expenses or distributions to owners.
Conceptual Framework
2.3
Basic Assumptions
In the practice of financial accounting, certain basic assumptions are important to an understanding of the manner
in which data are presented. The following four basic assumptions underlie the financial accounting structure:
Economic Entity Assumption: Economic activity can be identified with a particular unit of accountability in a
manner that assumes the company is separate and distinct from its owners or other business units.
Going Concern Assumption: In the absence of contrary information, a company is assumed to have a long life.
The current relevance of the historical cost principle is dependent on the going-concern assumption.
Monetary Unit Assumption: Money is the common denominator of economic activity and provides an appropriate
basis for accounting measurement and analysis. The monetary unit is assumed to remain relatively stable over the
years in terms of purchasing power. In essence, this assumption disregards any inflation or deflation in the economy
in which the company operates.
Periodicity Assumption: The economic activities of a company can be divided into artificial time periods for
the purpose of providing the company’s periodic reports.
Basic Principles
Certain basic principles are followed by accountants in recording and reporting the transactions of a business
entity. These principles relate to how assets, liabilities, revenues, and expenses are to be identified, measured,
and reported.
Measurement Principle: A ‘mixed-attribute’ system permits the use of various measurement bases.
Historical Cost Principle: Acquisition cost is considered a reliable basis upon which to account for assets and
liabilities of a company. Historical cost has an advantage over other valuations, as it is thought to be verifiable.
Fair Value Principle: Fair value is defined as the price that would be received to sell an asset or paid to transfer
a liability in on orderly transaction between market participants at the measurement date. Recently, GAAP has increasingly
called for the use of fair value measurements in the financial statements.
Revenue Recognition Principle: Revenue is recognized at the time in which the performance obligation is satisfied.
Expense Recognition Principle: Recognition of expenses is related to net changes in assets and earning revenues.
The expense recognition principle is implemented in accordance with the definition of expense by matching efforts
(expenses) with accom-plishment (revenues).
Product costs, such as material, labor, and overhead, attach to the product, and are recognized in the same period
the products are sold.
Period costs, such as officers’ salaries and other administrative expenses, attach to the period, and are recognized
in the period incurred.
Full Disclosure Principle: In the preparation of financial statements, the accountant should include sufficient
information to influence the judgment and decision of an informed user.
Cost Constraint
Although accounting theory is based upon certain assumptions and the application of basic principles, there are
some exceptions to these assumptions. One exception is often called a constraint, and sometimes justifies departures
from basic accounting theory.
Cost-benifit: Cost-benefit relationship relates to the notion that the benefits to be derived from providing certain
accounting information should exceed the costs of providing that information. The difficulty in cost-benefit analysis
is that the costs and especially the benefits are not always evident or measurable.
2.4
Financial Accounting: Concepts and Applications
HOW DOES THE FRAMEWORK AFFECT THE APPLICATION OF
ACCOUNTING STANDARDS?
Concepts Statements do not affect practice directly. They do not change existing generally accepted accounting
principles (GAAP). Certain aspects of existing GAAP conflict with the framework. For example, museum collections
meet the Concepts Statements definition of an asset, but existing GAAP does not require those assets to be recognized
in the financial statements. The framework affects practice over time because of its influence in the development
of new accounting standards.
WHO BENEFITS FROM A FRAMEWORK AND WHY IS IT NEEDED?
(i) The Accounting Standard Boards are the most direct beneficiary of the framework. The framework provides
the Boards with a foundation for setting standards and concepts to use as tools for resolving accounting and
reporting questions. The Boards staff is guided by pertinent concepts that might provide guidance in developing
its analysis of issues for consideration by theBoards, as well as in making its recommendations to the Boards
when developing accounting standards. Consequently, those concepts are an important aspect of the Board’s
discussions of issues and for making its decisions about a specific standard.
(ii) The framework provides a basic reasoning on which to consider the merits of alternative solutions to complex
financial accounting or reporting problems. Although it does not provide all the answers, the framework narrows
the range of alternative solutions by eliminating some that are inconsistent with it. It thereby contributes to
greater efficiency and consistency in the standard-setting process by avoiding the necessity of having to
redebate fundamental issues such as “what is an asset?” time and time again.
(iii) A guiding principle of the Board is to be objective in its decision making and to ensure, insofar as possible,
the neutrality of information resulting from its standards. The use of an agreed-upon framework reduces
the influence of personal bias on standard-setting decisions. Without the guidance provided by an agreedupon conceptual framework, standard-setting would be quite different because it would be based on the personal
frameworks of individual members of the Board. A framework also should reduce political pressures in making
accounting judgments.
(iv) The Accounting Standard Boards is not the only beneficiary of the framework. The credibility of financial
reporting is enhanced when objectives and concepts are used to provide direction and structure to financial
accounting and reporting. The framework helps by leading to the development of standards that are not only
internally consistent but also consistent with each other. As a result, both preparers and users of financial
statements benefit from financial statements that are based on a body of accounting requirements that are
more internally consistent.
(v) The framework further helps users of financial reporting information to better understand that information
and its limitations. It also provides a frame of reference for understanding the resulting standards. That frame
of reference is useful to preparers who apply those standards and to auditors who examine the resulting reports,
as well as to students who study accounting and the faculty who teach it.
3
Fina
nc
ia
lAccountingPrinc
iple
s
NATURE OF ACCOUNTING PRINCIPLES
The dictionary meaning of the word principle is : “a fundamental truth or law as the basis of action.”
The term principle generally suggests universal application of rules and a degree of permanence which is not
possible in accounting. Accounting is a social science and not a physical science. Thus, the essential feature
of accounting principles is that they are flexible rather than precise or rigid. They are not discovered
and there are no laboratory tests. Accounting principles are man-made and are derived from experience
and reason. Accounting principles are judged on their general acceptability rather than universal acceptability
to the makers and users of financial statements. Hence they are popularly called Generally Accepted Accounting
Principles (GAAP).
Accounting Principles Board (APB) in Statement No. 4 (1970) of the AICPA (USA) stated that : “generally
accepted accounting principles incorporate the consensus at any time as to which economic resources
and obligations should be recorded as assets and liabilities, which changes in them should be recorded,
how the recorded assets and liabilities and changes in them should be measured, what information should
be disclosed and how it should be disclosed and which financial statements should be prepared.”
CHARACTERISTICS OF ACCOUNTING PRINCIPLES
The main characteristics of accounting principles may be summarised as under :
(i) Accounting principles have been developed to ensure uniformity and easy understanding of the accounting
information.
(ii) Accounting principles are man-made in the sense that like that of principles of physical science such
as chemistry, physics etc. are not laboratory tested principles. They are simple guidelines based on usage,
reason and observations over a period of time.
(iii) Accounting principles are not final statements. They are subject to modifications depending upon the
changes in business practices, government policies and requirements of the users of accounting information.
(iv) The general acceptance of accounting principles depends upon how well these principles meet or satisfy
three conditions, namely : (a) Relevance, (b) Objectivity and (c) Feasibility.
(a) Relevance : A principle is relevant if it results in information that is meaningful and useful to the
users of the financial statements
(b) Objectivity : Similarly a principle is objective to the extent that accounting information is free
from personal bias or judgements of those who provide it. Objectivity means verifiability, that
is, there is some way of finding out the correctness of the information reported.
(c) Feasibility : A principle is feasible if it can be used without much complexity or cost. It applies to
time, labour and cost of providing accounting information and its accuracy in relation to probable use
and resulting benefits. For example it is easy to record an asset at cost price since it saves time and
labour in obtaining market price of the asset at different times.
3.2
Financial Accounting: Concepts and Applications
BASIC CONCEPTS
The literary meaning of a concept is a general idea or an opinion. An accounting concept is therefore
basically an opinion about the way the business transactions are to be recorded. It is an assumption and not
a fact and thus it is not subject to any proof or evidence.
Accounting concepts have gradually developed over a period of time because of following factors:
(a) Improvement in technology, globalization of business activities and introduction of new types of
business transactions.
(b) Changes in legal, economic and social environments. Existing laws are modified or amended and
new laws are introduced and this requires the new accounting concepts in the field of income tax, sales
tax, value added tax and so on. Economic data especially for planning purpose are created out of accounting
or financial data. Similarly social environment which deals with poverty, social security, pollution etc.,
has to take into consideration the accounting information and measurements.
Features of Accounting Concepts
(i) Accounting concepts are not static for all times : In fact they have been continuously changing and
evolving. Accounting would have been an easy subject to study if its concepts were fixed and well
established for all times to come like concepts of natural sciences. In that case accounting would become
less interesting and much less useful.
(ii) Different accounting concepts are not independent of each other : In fact they are closely interrelated
so much so that any change or modification in one accounting concept automatically results in change
or modification of other concepts. For example, there is close relationship between historical cost concept
and matching of cost and revenue items. (See Accrual Concept)
THE ENTITY CONCEPT
Meaning : The entity concept assumes that the firm or enterprise and its owner(s) are two separate entities
for accounting purposes. For example, when the owner invests or introduces money (the capital) in the business,
the business entity (or firm) receives the asset cash and the capital of the business is treated as a liability of
the business entity (or firm) towards its owner. Similarly when the owner withdraws the cash for his personal
use (e.g., payment of school fee) the accounts would show that cash in the business is reduced and so too
his capital though his personal cash has increased. In this way the business and personal transactions are not
mixed up. In other words, this concept requires that for accounting purposes only, a distinction should be
made between:
(a) personal transactions and business transactions, and
(b) transactions of one business entity with those of another business entity. It must be clearly noted that
concept of separate entity or business entity is applicable to all types of business organisations, namely:
sole proprietorship, partnership firm and a joint stock company only for accounting purpose and
not for legal purpose.
Entity concept can be easily applied in the case of a limited liability company because it is a legal entity
separate from its shareholders; it can sue and be sued in its own name instead of in the name of all its owners.
But it is very difficult to apply entity concept in the case of a traditional partnership (as against Limited
Liability Partnership) and even more so in the case of a sole trader or one-man business. Here in real
sense, the owner is the business and his private estate can be used legally for business losses. But the
accounting ignores this legal position and maintains the distinction between business and its owner(s)
Effects: The business entity has the following effects :
(i) Only the transactions of the business are recorded and not the personal transactions of the owner(s).
(ii) Income or profit is the property of the business entity unless it is distributed to the owner(s).
(iii) The personal assets of the owner(s) are not taken into consideration while calculating the value of the
assets of the business enterprise.
Financial Accounting Principles
3.3
(iv) The capital of the proprietor is considered as a liability of the business to its owner(s); the drawings
and losses are regarded as reductions of this liability while profits and additional capital introduced
are treated as an increase in this liability.
(v) The profit or loss of the business entity can be easily and correctly calculated.
(vi) The financial position of the firm can be easily and correctly calculated.
(vii) The entity concept has enabled the development of responsibility accounting. It is possible to know
not only the profit or loss of the business enterprise on the whole but also of its various departments.
This is helpful in fixing the responsibility of different heads or incharges of departments.
In conclusion, all transactions are recorded as they affect the business and not the owner(s) of the business
entity. The business and private transactions are not mixed up.
MONEY MEASUREMENT CONCEPT
Meaning : In accounting a record is made only of those transactions or events which can be expressed in
terms of money only. Money means currency of the country, e.g., Rupee in India. Dollar in U.S.A., Yen in
Japan, Pound in United Kingdom and so on. Non-monetary events such as the strike in the factory, retirement
of the general manager, the good quality of the products produced by the firm etc., cannot be recorded because
these events cannot be expressed in terms of money.
Money measurement concept also means that the business transactions are recorded in the books of account
in terms of nominal value of money at the time of recording the transactions. The changes in purchasing
power or value of money are ignored. In fact, it is assumed that purchasing power of money does not change
from time to time. This assumption assures objectivity of the accounting information.
Benefits : This concepts offers following benefits :
(i) Money is a common unit of recording the transactions relating to assets, liabilities, incomes, losses
and capital and therefore helpful in preparing the profit and loss account and the balance sheet.
In the absence of money, it is not possible to add or subtract or multiply or divide the items given in
different units like kilograms, gallons, square metres etc.. Similarly it is not possible to determine the
value of business in the form of one building, 10 tonnes of stock of goods, two computers, four tables,
10 chairs and so on because they cannot be added up to give any meaningful figure. But if these items
are expressed in terms of money (common rupee unit) as bank balance of ` 50,000, building of ` 50
lacs, four tables of ` 6,000,10 chairs of ` 10,000, 10 tonnes of stock of goods for ` 70,000, two computers
of ` 40,000, it is possible to add up the money values of all these items and state that the value of the
business is ` 51,76,000.
(ii) Since the business transactions are recorded on the assumption that value of money does not change
from time to time, assets purchased on different dates can be easily added up for the purpose of knowing
the value or worth of the business at any time on any date.
Limitations : This concept is subject to following limitations :
(a) As only monetary transactions are recorded and non-monetary transactions such as efficiency of the
employees, health of the chairman or owner of the firm, strike by the employees, goodwill or trade
mark resulting from successful running of the business etc., are completely ignored, this concept does
not give complete picture of all events or happenings in the business firm.
(b) As monetary concept ignores changes in purchasing power of money, it is not possible to know the
real worth of the business enterprise though the assets are expressed in terms of money. For example,
under inflationary conditions (period of increasing prices) the purchasing power of money decreases
with every increase in prices of goods and services. But this fact is not recorded in the books of account;
because it is assumed that money is a stable unit.
Assets are recorded at the actual prices paid for them from time to time for the sake of objectivity. For
example, a piece of land bought in 2001 for ` 5 lacs continues to be shown at this figure though its
present value may be ` 50 lacs. In this way the real worth of the business is adversely or badly affected.
3.4
Financial Accounting: Concepts and Applications
So under inflationary conditions the financial statements prepared on historical cost basis are thoroughly
unreliable and irrelevant for judging the profitability and financial position of the business enterprise.
THE GOING CONCERN CONCEPT
Meaning : Every business enterprise is assumed to be a going concern in the sense that it has a continuity
of life and there is a neither the intention nor the necessity to dissolve the firm in the near foreseeable
future. However, it must be made clear that going concern concept does not mean permanent continuance of
the business firm. All that it means is that the firm will continue long enough to carry out the present
plans and meet future obligations.
Benefits of the Going Concern Concept : The benefits of the going concern concept may be noted as
under :
(i) This concept enables the preparation of financial statements, namely: profit and loss account, balance
sheet and cash-flow statement on yearly basis because the firm is presumed to have longer life than
one year.
(ii) The going concern concept makes possible a clear distinction between revenue expenditures and capital
expenditures. Since the business enterprise is assumed to have long life, those expenditures whose use
or benefit will expire or end within year (e.g., stationery, rent, electricity, salaries etc..) are treated
as revenue expenditures and those expenditures whose benefit will be available for many years (e.g.,
building, machinery furniture and the like) are treated as capital expenditures. The yearly benefit
of capital expenditures is treated as depreciation.
(iii) Assets are classified as fixed assets to be used for more than one year and current assets to be
used only for one year. Similarly liabilities are also classified as long term liabilities and short
term liabilities.
(iv) The fixed assets are valued for the balance sheet purpose at their cost price on purchase and afterwards
at cost minus depreciation and not at their market or realizable values. If we value the assets at market
price, it would be difficult to compare the financial position of two or more years.
(v) Investors are assured that they will continue to get income, if any, on their investments in the near
future.
(vi) It is under this concept that useful life of the fixed asset is estimated for the purpose of calculating the
depreciation so that there is proper matching of the revenue of the current year with the cost of the
asset (i.e., depreciation).
(vii) It is because of this concept that outstanding expenses and accrued income, and prepaid income and
income received in advance are adjusted while preparing the final accounts of the business
enterprises.
(viii) The outsiders enter into long-term contracts with the firm to give long-term loans to the firm and invest
money in the debentures of the company because the investors feel that the business is a going concern.
(ix) The going concern concept is responsible for the accounting period concept since the life of the business
is dividend into accounting periods of one year.
The going concern concept is not valid when the business entity has been running at a loss for a number
of years and there is no hope for its revival. Moreover if the workers have not been paid their salaries
and interest payments are not made regularly to the lenders and the payment of principal amount is in
doubt, going concern concept can not be used.
THE COST CONCEPT
Meaning of cost concept: The cost concept means that a fixed asset like building or machine or furniture
etc., is recorded in the books of account at the price actually paid for it; it is called its acquisition cost which
includes purchase price, the amount spent in installing and all expenses paid in making the asset ready for
use.
Financial Accounting Principles
3.5
The market price of the fixed asset is ignored. It is the cost price which forms the basis for the calculation of
depreciation, profit or loss on the sale of fixed assets.
Historical cost : As the acquisition or original cost relates to the past, it is referred to as historical cost.
The cost concept is applicable only to fixed assets and not for current assets because only fixed assets
are shown in the balance sheet at their respective cost prices; current assets are generally shown at cost
price or market price whichever is lower or less.
It is clarified that cost concept does not mean that the fixed assets always appear at their respective cost
prices throughout their useful lives. It means that fixed assets should appear in the books of account at their
respectives cost prices only in the year of their purchases and in subsequent or future years they should appear
at their cost prices less depreciation written to date, that is, at book values or carrying values. The effect
of the cost concept is that if a firm does not pay anything for a fixed asset, that fixed asset would not be
recorded in the books of account. So the goodwill appears in the balance sheet only if the enterprise has
purchased this intangible asset for a price. This is also true of other intangible assets like trade marks, copyrights
and patents.
The Justifications for the Cost Concept are given as under:
(i) The main reason for the cost price is that it is objectively verifiable. The cost price is the actual price
agreed between the purchaser and seller who are parties to a contract and this fact can be verified by
anyone by going through the books of account.
(ii) The cost concept does not permit the enterprise to give arbitrary or imaginary price to a fixed asset.
(iii) A market value or current value of fixed assets is not stable. It undergoes frequent changes with the
result that financial statements will have to be changed every year and comparison becomes difficult.
Moreover, recording at market value is both costly and time consuming.
(iv) The cost concept is in line with the going concern concept which assumes that the business firm will
continue to carry on its business for an indefinite period and so there is no need to consider the market
or realizable value of the fixed assets.
Benefits : The benefits of the cost concept are summarized as under :
(i) Market values change every year when the financial statements are prepared. It would make the preparation
of financial statements difficult and time consuming because no easy record of market values can be
made.
(ii) The cost concept is objectively verifiable because the cost recorded in the books of account is based
on actual contract between the buyer and the seller.
(iii) The estimation of the amount of depreciation on fixed assets is very easy and simple because for
the calculation of depreciation, only the cost price and an estimate of useful life of the fixed asset are
required.
(iv) The cost concept recognizes the fact that depreciation is the process of allocation of the cost of an
asset over its useful life and not a process of valuation (i.e., based on market value of the fixed
asset.)
Limitations: The limitations or drawbacks of the cost concept are :
(i) Fixed assets for which nothing has been paid (or no cost incurred) are not recorded in the books of
account. For example, the knowledge and technological skill built inside the enterprise, a favourable
location, brand name and reputation of the business, (etc., goodwill) find no mention in accounting
records, though they are all valuable assets.
(ii) The cost concept ignores the effect of inflation with the result that depreciation based on historical
costs will be charged (or matched) with revenues earned at current prices. In this way the profit or
income figure would be distorted and cannot be relied on.
(iii) The actual information needed by management, investors, creditors, financial analysts, government etc.,
3.6
Financial Accounting: Concepts and Applications
may be the current values of the assets and therefore values based on historical cost may not be useful
for their purposes.
(iv) Both fixed assets and current assets are acquired at cost agreed upon by the buyer and the seller. But
under the cost concept, only fixed assets are shown at cost or book value (cost minus depreciation)
as the case may be. Current assets are shown at cost or marked price whichever is lower.
(v) Under the cost concept, the market values are ignored, with the result that the balance sheet does
not disclose the real worth of the business.
PERIODICITY CONCEPT
(THE ACCOUNTING PERIOD CONCEPT)
Reasons for accounting period concept: The accounting period concept is related to going concern concept
which presumes that a business is likely to continue for an indefinite period of time. The true income or
loss can be ascertained only on the closure of the business by comparing the capital at the end arrived
after adjustments for drawings in cash and goods and introduction of additional capital by the owner(s)
with the capital at the start of business. But the owners cannot wait until the business is closed to know
how much income has been earned or loss incurred. It will not serve any useful purpose. The owners or
investors want to know periodical progress or performance of the business enterprise because it will be
helpful to take corrective steps if the performance is not successful or upto the mark. The investors will be
discouraged to make investments. The Income Tax Act and the Companies Act require the preparation of
income statement (profit and loss account) on yearly basis. Moreover, for the purpose of reporting to creditors,
bankers and other lenders, the income is to be calculated and financial position ascertained yearly and reported
to various users of accounting information annually. This has necessitated the introduction of accounting
period concept.
Meaning of accounting period concept: Accounting period means that the working life of the business
firm should be split (or divided) into convenient short periods of time or regular intervals called accounting
periods and net profit (or loss) and the financial position should be ascertained at the end of each accounting
period by preparing profit and loss account and the balance sheet.
The length of the accounting period depends on the nature of the business and the needs or requirements of
the owners of the business. Thus, the accounting period may be three months, six months, a year or even more
than one year. However accounting period is normally of one year beginning on a specific date and ending
12 months later. For example, an accounting period for a calendar year begins on 1 January and ends on 31
December while a financial year begins on 1 April and ends on 31 March next year or any other year of 12
months, say, Dusherra year, Deepawali year, Vaisakhi year, Pongal year, and so on.
Benefits of accounting period concept: The benefits of the accounting period concept are summarized
as follows :
(i) The concept enables the preparation of financial statements — the profit and loss account and balance
sheet and cash-flow statement— of an enterprise annually.
(ii) This concept has enabled preparation of income statement on accrual basis in the sense that matching
of expenses and revenue is taken into consideration by making these items belong to the same accounting
period.
(iii) This concept enables the business firms to distribute their income at regular intervals
(iv) This concept facilitates the comparison of net income and financial position of one year with that of
another year. This is useful to management for planning and in improving the efficiency of the business.
(v) Inter-firm comparison, that is, comparison between other firms is also possible.
However the management prepares interim reports even for shorter periods, say for one quarter or even one
month. Such reports help the investors in deciding to buy, retain or sell their investments in shares or debentures.
Financial Accounting Principles
3.7
THE REALISATION CONCEPT
Meaning of realisation concept: In accounting, income or profit means excess of revenue over expenses.
The realization concept is related to revenues only and not to the expenses.
Revenues are gross inflow of cash or bills receivable or other considerations from the following activities
of the business enterprises :
(i) Sale of goods
(ii) Rendering of services such as repair job, consultancy, installation of machinery and so on.
(iii) The use by others of entity resources yielding interest, rent, royalty, dividends and the like.
Realisation means as to when a business transaction such as sale of goods or service etc., gives legal
right to the receipt of money or money’ worth. It means realization concept is related to the point of time
at which revenues is to be recognized. Thus, the essence of the realization concept is the timing of revenue
recognition. For example, Maruti-Suzuki Ltd. produces a Motor vehicle in 2013, keeps it throughout 2014
and sells it 2015 for ` 3,50,000 and collects cash in 2016. The problem is as to when revenue should be
recognized in the books of account. According to realization or revenue recognition concept, the revenue of
` 3,50,000 is realized in the year 2015. For this purpose three conditions must be fulfilled:
(a) The goods have been transferred to the customer or service has been performed, (e.g., repair job
is done), as the case may be, and the customer becomes legally liable to pay.
(b) The revenue can be objectively measured or determined in money.
(c) There is an independent transaction between the business enterprise and some third or unrelated party.
So when an order is received from a customer only, it does not amount to recognition of revenue unless other
conditions are fulfilled. Similarly even if an advance payment is received from a customer, the same does
not amount to revenue recognition.
Revenues from interest, rent, royalty, commission etc., are recognized on time-basis. For example, the interest
earned in March 2015 even when received in April 2015 will be treated as revenue for the financial year
ending 31 March 2015. Similarly rent received in advance in March 2015 will be treated as revenue for the
financial year beginning from 1 April 2015.
Exceptions : Concept of realisation is basically related to the timing of revenue recognition. There are few
exceptions to the sale, performance and use of firm’s resources by others criteria :
(i) Realised gain from disposal or unrealised gain from holding non-current assets like machinery, building
etc.
(ii) Unrealised gain from the change in the value of current assets i.e. from the holding of stock in trade
etc.
(iii) Realised or unrealised gain from the change in the value of foreign exchange rate.
(iv) Realised gain from payment or discharging an obligation (e.g. creditors) at less than the carrying or
book value.
(v) Unrealised gain resulting from revaluation or restatement of carrying amount of an obligation.
Benefits of realisation concept : The benefits of realisation concept are summarized as under:
(i) The realization concept ensures that there can be no profit without the sale of goods or performance
of service and use of firm’s resources by others. It is because of this concept that unrealized profits
resulting from valuation of assets are ignored. Thus, profit is not earned on the basis of an order just
received from a customer. Revenue is earned only when the order is executed and the customer becomes
legally liable to pay for the goods sold to him or service performed for him.
(ii) This concept ensures that an advance payment for goods received from a customer is not treated as
revenue.
3.8
Financial Accounting: Concepts and Applications
(iii) This concept is a check on the management intending to inflate the profit by recording the income
not realized (or earned)
(iv) The realization concept provides verifiable evidence for revenue recognition.
(v) This concept ensures the determination or calculation of correct profit or loss.
THE ACCRUAL CONCEPT
Meaning : The accrual concept is applicable to the recognition of both the revenues and expenses. The accrual
concept means that all transactions must be recorded whether they are settled in cash or not. According to this
concept, revenues are recognized when they simply become receivable though cash is not received, and the
expenses are recognized when they simply become payable though no cash is paid immediately and both are
recorded in the accounting period to which they are related. It means that a simple promise by a customer to
pay cash in future for sale of goods and services is considered as revenue and similarly a promise on the part of
the firm to make payments in future for goods and services acquired is regarded an expense. The accrual concept
therefore makes a distinction between the actual receipt of cash and the right to receive cash as regards
revenue and actual payments of cash and obligations to pay cash as regards expenses.
Revenues may be defined as the right to receive cash and when a firm sells goods for ` 45,000 on 25 March,
2015 and the payment not received until 10 April 2015, the amount is due and payable to the firm on the
date of sale, i.e., 25 March, 2015 and must be included in the revenue for the year ending 31 March, 2015
though not received on this date. Similar rules apply to expenses. For example, if the firm receives goods
costing ` 15,000 on 29 March, 2015 but the payment is made on 2 April 2015 the accrual concept requires
that expense must be recorded for the year ending 31 March, 2015 although no payment has been made until
31 march, 2015 and the person to whom the payment should have been made is shown as creditor. So the
accrual concept requires that revenue is recognized when realised and expenses are recognized when
they become due and payable without regard to the time of cash receipt or cash payment.
Accrual concept also implies that if some revenue is received but it is not earned (there is no legal right to
receive it), it should be recorded as revenue received in advance and should be treated as liability in the
balance sheet and not revenue of the current year.
Similarly if some payment is made but no expense is incurred (that is no legal obligation to pay) such payment
should be recorded as an asset in the balance sheet and not as an expense of the current year.
Benefits of the accrual concept : This concept offers the following benefits :
(i) This concept has been responsible for the application of accrual basis of accounting as against cash
basis of accounting.
(ii) This concept is of great help in the preparation of financial statements since all transactions are
recorded whether they are settled in cash or not.
(iii) This concept has given solid accounting principle regarding recognition of both revenues and expenses.
Accordingly revenues accrue in that year in which they are earned and not necessarily in the year in
which cash is actually received for them. And expenses accrue in the year in which they are incurred
and not in the year they are actually paid. This principle has made it possible to take into consideration
the total revenues earned as well as received in cash during the accounting period. Similarly, it is possible
to take into account both total expenses incurred and actually paid in cash during the accounting period.
Moreover it is accrual concept on the basis of which revenues received in the current accounting period
but belonging to next accounting periods are adjusted (or deducted) from the total revenues received
during the accounting period. Similarly expenses paid for the next accounting period(s) are adjusted
(or deducted) from the total expenses paid in the current year. Prepaid revenues and revenues received
in advance and expenses paid in advance and outstanding expenses are shown in the balance sheet. It
is technically referred to as matching process. In this manner the financial statements disclose true
and fair view of the operating results and financial position of the accounting period.
(iv) It is because of accrual concept (which has introduced into accounts accrual basis of accounting)
that interest on capital, interest on drawings, provision for depreciation, provision for doubtful debts
Financial Accounting Principles
3.9
etc., are recorded though no cash is received or paid for them, for preparing the financial statements of
the business firm
ACCOUNTING CONVENTIONS
An accounting convention is a rule or an accepted method or procedure or a statement of practice which
is adopted either by general agreement or common consent which may be in writing or implied. Accounting
conventions are in fact based on customs or practices which have been in use for a long period of time and
which guide the accountants while recording the business transactions and preparing the profit and loss account
and the balance sheet.
ACCOUNTING CONCEPTS VS. ACCOUNTING CONVENTIONS
Accounting concepts may be treated as necessary assumptions which form the foundation of the accounting
principles. On the other hand, accounting conventions are lamp posts or guidelines to procedures based on
custom, usage or general agreement. Although some authors on accounting do not make any distinction between
accounting concepts and accounting conventions and treat them synonymous (same or identical), yet there are
some differences between them. The main points of differences are given in the following table :
Points of Difference
Accounting Concepts
Accounting Conventions
(i)
Assumptions vs. customs
Accounting concepts are basic assumptions,
accepted true, on the basis of which business
transactions are recorded in the books of
account.
Accounting conventions are guidelines accepted
by general agreements or usage which are followed in the preparation of the profit and loss
account and balance sheet.
(ii)
Personal judgement or
Bias
There is no personal judgement or bias in the
adoption of accounting concepts.
Individuals bias may play an important role in
the adoption of accounting conventions.
(iii)
Importance
Accounting concepts are foundations of systematic and proper recording
Accounting conventions are not so important as
accounting concepts
(iv)
Maintenance of accounts
vs. Financial statements
Accounting concepts are concerned with the
maintenance of accounts
Accounting conventions are used for preparing
the profit and loss account and the balance sheet.
(v)
Uniformity in Use
There is a uniform use of accounting concepts
in different type of business organizations
There is no uniformity in the application of accounting conventions in different enterprises.
(vi)
Legal Position
Accounting concepts are established by law
Accounting conventions are established by
common accounting practices
(vii) Number
There are many accounting concepts
The number of accounting conventions are limited
to few.
(viii) Consistency
Accounting concepts are internally consistent
in the same organization
There is no internal consistency in the application of accounting conventions even in the
same organization.
Benefits of Accounting Conventions: The benefits of Accounting Conventions are given below :
(i) Accounting conventions ensure the truthfulness or authenticity of the financial statements.
(ii) Accounting conventions make the preparation and presentation of the financial statements easy.
(iii) Accounting conventions enable the inter-firm and intra-firm comparisons of the financial statements
because of the element of uniformity
(iv) Accounting conventions make the financial statements clear and meaningful.
Types : The major basic accounting conventions are listed below:
(i) Convention of Consistency
(ii) Convention of Conservatism or Prudence Convention
(iii) Convention of Materiality
(iv) Convention of Full Disclosure.
3.10
Financial Accounting: Concepts and Applications
CONSISTENCY CONVENTION
Consistency convention means that the same accounting practices will be used for similar items from
one accounting period to another. It means that accounting information is useful only if it can be compared
with the similar information within same firm for few years and with similar information between two or
more firms for the same period. But this is possible only when the business firms use the same methods in
respect of such important items as inventory valuation, depreciation of fixed assets, provision for doubtful
debts, treatment of deferred revenue expenditures and the like in the preparation of financial statements:
the income statement (Profit and Loss Account) and the balance sheet. For instance, if inventory valuation
is done at cost price or market price whichever is lower or First-in First out (FIFO) basis or Weighted Average
basis etc., the same methods should be continued for all the years. The same holds good for a particular method
of depreciation. A change in method of inventory valuation or depreciation may affect the income determination
as well as inventory cost and book values of fixed assets in the assets side of the balance sheet.
Consistency requires that same accounting methods will be used for similar items over period of time.
Further, consistency convention does not mean that the same method of valuation should be followed
for both the current assets and fixed assets. What it really means is that whatever accounting practice
is followed for a particular asset, the same should be followed for that asset from year to year.
Types : There are three types of consistencies, namely :
(i) Vertical consistency : It is to be found within an inter-related group of financial statements bearing
the same date. Vertical consistency would occur when fixed assets have been shown at cost price or
historical cost and in the interrelated income statement depreciation has also been charged on the historical
cost of the assets.
(ii) Horizontal consistency : This consistency is to be found between financial statements of one entity
from period to period and thus enabling the comparison of performance of the business entity in one
year to be made in the subsequent year.
(iii) Third dimensional consistency : This type of consistency assists in making comparison of the performance
of one business entity with the other business entity in the same trade and on the same date.
However, the consistency principle does not mean that a particular method of accounting once adopted
can never be changed. Accounting being social science, there is a scope for desirable changes as a result of
changes in the circumstances in which accounting operates. The only requirement is that when a change is
made, it should be fully disclosed in the financial statements along with its effect in terms of rupee amounts
on the reported income and financial position of the year in which the change is made.
Limitations : The limitations of convention of consistency are listed as under :
(i) The consistency convention may deliberately understate revenues and disclose pessimistic or gloomy
picture of financial position.
(ii) Financial statements may not show a true and fair view of the states of affairs of the business entity.
(iii) The convention of consistency may encourage the creation of secret reserves by making consistently
excess provision for future contingencies.
(iv) Convention of consistency goes against the convention of full disclosure
THE PRUDENCE CONVENTION
(Convention of Conservatism)
The prudence convention or convention of conservatism means policy of playing safe or caution. It means
that while recording the business transactions and preparing the financial statements, the accountant should
take into consideration all prospective or future losses and risks and make adequate provisions for them but
the prospective profits should not be taken into consideration, that is, they should be ignored. The working
rule is : anticipate no gains or profits but provide for all possible losses and in doubt write them off.
Financial Accounting Principles
3.11
Thus, the accountant should record not only actual losses like bad debts but also make provision for those
losses which are likely to occur like provision for doubtful debts. Thus, it is on account of this convention of
conservatism or prudence convention that the accountant makes provision for discount on debtors, provision
for fluctuations in market prices of investments, provision for premium on the redemption of debentures, writing
off intangible assets like goodwill, patent, trade marks etc.. Similarly, in the valuation of stock in hand if
the market price is less than its cost price, stock-in-hand would be recorded at the market value. But if the
market price of the inventory has increased, the unrealized gain should not be recorded unless the stock is
actually sold. The future is full of uncertain events and so something should be done to meet future uncertainties.
Hence the making of provision for future losses and no provision for unrealized future profits.
Effect : The effect of this convention is that the financial statements disclose the actual results and no artificial
gains through the techniques of window dressing which means any practice that attempts to make a situation
look better than what it really is.
It must be clearly noted that there should be no deliberate attempt to understate the values of assets
THE MATERIALITY CONVENTION
The convention of materiality means that in accounting only important and relevant information should be
provided to the users of financial information, that is, only material information should be supplied. Materiality
cannot be defined precisely. The general rule is that an item should be regarded as material (i.e., significant)
if there is reason to believe that knowledge of that item would influence or affect the decisions of the users
of the financial statements such as to invest or not to invest in the enterprise or to give loan or not to give
loan to the business firm.
It may be clarified that the term materiality is relative in the sense that an item may be material for one type
of user of acconting information while it may be insignificant for other users. For instance the long-term
creditors may be interested in the current value of, say, building or plant while bankers may not attach any
importance to it while advancing short term loans. Similarly, where amounts of expenditure involved are insignificant
they are not treated as capital expenditure and hence no need for depreciation. For example, a pair of scissors
in an office could be used for a number of years but still it is treated as an expense for the accounting period
in which they are purchased since the clerical cost of recording depreciation on such an item would exceed
the cost of the item. Similarly pencils, ball pens, sharpeners, waste paper baskets, etc., are treated expenses
when they are bought although technically they are assets of the company. The omission of paise in the financial
statements is simply due to their immaterial effect on the financial statements. It would not affect the important
decisions to be made by the statements users.
The rationale behind convention of materiality is that if material as well as insignificant business transactions
are recorded in the books of account, the accounting records will be burdened with unnecessary details.
THE FULL DISCLOSURE CONVENTION
The convention of full disclosure suggests that every financial statement should fully disclose all relevant
information that affects the average investor.
Full disclosure means that there should be full, fair and adequate disclosure of accounting information.Adequate
means minimum set of information to be disclosed; fair indicates an equitable treatment of users and full
refers to complete and detailed presentation of information. For example, if the income statement shows net
sales at ` 1,27,500, it is important for the reader to know the amount of gross sales which may be ` 1,50,000
and the sales returns ` 22,500. The disclosure of 15 per cent sales returns may help the users to find out the
actual sales position. But there will not be any investigation if only ` 1,27,500 is shown in the income statement.
No multipurpose statement has been devised as yet to serve the requirements of different users like creditors,
investors, government, etc. Therefore, whatever details are available, that must be honestly reported and additional
information must be appended to the financial statements. It would be more appropriate if a summary of
the accounting policies followed in the preparation of financial statements is appended. For example in
a balance sheet the basis of valuation of assets, such as investments, inventories, land and buildings etc. should
be clearly stated. Similarly any change in the method of depreciation must also be indicated.
3.12
Financial Accounting: Concepts and Applications
The rationale behind this convention is that the financial statements are used by external users who make
important decisions on the basis of information contained in then. Hence, the financial statements should state
all the material facts with as much information as possible. Exclusion of material facts makes the financial
statements, not only incomplete but also unreliable.
SPACE FOR REVISION
Financial Accounting Principles
3.13
Assignments
THEORY BASE ASSIGNMENTS
1.
2.
3.
What is the nature of financial accounting principles ? Enumerate briefly their main characteristics.
What is meant by generally accepted accounting principles ?
[B.Com. (Hons.) Delhi 1981, 2002]
Explain the meaning and significance of following :
(a) The Business Entity Concept.
[B.Com. (Hons.) Delhi 1981, 1982, 1992, 2004]
(b) The Going Concern Concept
[B.Com. (Hons.) Delhi 1980, 1981, 1989, 2004, 2005]
(c) The Money Measurement Concept. [B.Com. (Hons.) Delhi 1981, 1982, 1984, 1991, 1995, 2004]
4. Explain briefly :
(a) Cost Concept
[B.Com. (Hons.) Delhi 1986]
(b) Convention of Consistency
[B.Com. (Hons.) Delhi 1985, 1987]
(c) Dual Aspect Concept
[B.Com. (Hons.) Delhi 1980, 1983, 2004]
(d) Accrual Concept
[B.Com. (Hons.) Delhi 1983]
(e) Concept of Materiality
[B.Com. (Hons.) Delhi 1983, 1990]
5. Write short note on the convention of full disclosure
[B.Com. (Hons.) Delhi 1991, 2005, 2007]
6. Explain the Accounting Equation. Describe its role.
[B.Com. (Hons.) Delhi 1994]
7. Briefly explain the concept of Conservatism. Give examples.
[B.Com. (Hons.) Delhi 1981, 1997]
8. Explain the accounting concept of periodic matching of costs and revenues.
[B.Com. (Hons.) Delhi 1998, 2000]
9. “Revenue is recognised when a sales transaction is made or when services are rendered.” State three
exceptions to this general rule.
[B.Com. (Hons.) Delhi 2014]
10. Explain the convention of ‘Materiality’ giving examples. Does materiality contradict ‘Full disclosure’?
[B.Com. (Hons.) Delhi 2019]
4
Fina
nc
ia
lAccountingSta
nda
rds
INTRODUCTION
Accounting, as a language of business, has come to be regarded as an information system which communicates
or provides financial results or figures to the creditors, investors employees, owners, management, Government
and so on through financial statements like Balance Sheet and Profit and Loss Account for their respective
uses. It therefore becomes necessary that the financial statements should not simply focus on true and fair
view of the net worth and profitability of a particular business entity but they must be comparable with the
financial statements of other business enterprises.
It is possible only when financial transactions are recorded by adopting uniform accounting methods or practices
and policies. For example, it is possible to value the closing stock in more than one way, that is, by adopting
lower of cost or market (L.C.M.) price method or First-in first out (FIFO) method or Last-in-first out (LIFO)
method or Weighted Average Method and so on. Fixed assets may be valued on the basis of original cost
minus depreciation to date or replacement cost. Further depreciation may be charged on the basis of straight
line method or diminishing balance method or any other method.
Similarly an expenditure on a certain item may be treated as a capital expenditure or a revenue expenditure
e.g., large expenditures on the repairs of a machine or building.
If the financial accounting process is not properly regulated, there is a possibility of financial statements,
providing a misleading or distorted picture of the business rather than the true state of affairs.
Thus, there is always an urgent need to adopt uniform accounting methods and policies to record business
transactions of the same type to achieve comparability, consistency, and reliability of financial position and
operating results of various business enterprises. It is particularly important in an era of globalization if foreign
capital is to be attracted in local markets. The foreign investor must feel satisfied that the financial position
and operating results are based on internationally acceptable rules.
Accounting standards provide a framework of uniform accounting methods and policies to reduce or in certain
cases to eliminate altogether wide or large variations in accounting treatments of various items so that the
financial statements of different business enterprises become comparable. In practice this task is difficult at
the international level because accounting methods and policies in different countries are influenced by company
laws, taxation policies and economic conditions.
CONCEPTS OF ACCOUNTING STANDARDS
Accounting standards are defined as codified or written statements, or documents of accounting rules
and guidelines or practices for preparing the uniform and consistent financial statements relating to
recognition, measurement and disclosures of accounting transactions.
Accounting standards may also be defined as written policy documents issued by expert accounting body
(e.g., Institute of Chartered Accountants of India), or by Government (e.g., the Companies Act, Income
Tax Act) or its regulatory body (e.g., Securities and Exchange Board of India popularly known as SEBI)
covering such aspects as recognition of events, measurement, presentation and disclosure of accounting
transactions and events in the financial statements, namely: Balance Sheet and Profit and Loss Account.
4.2
Financial Accounting: Concepts and Applications
The focus of the accounting standards is to convey the same meaning of any accounting concept to all users
of accounting information in the same sense so that uniformity and comparability in financial statements is
achieved.
Accounting standards may also be termed as codified forms of generally accepted accounting principles.
The essence of the accounting standards is that they provide specific guidelines as to how the various items
which go to make up the financial statements should be dealt with in accounts and disclosed in the annual
reports relating to net income and financial position. For example, accounting standard may define the term
depreciation and prescribe a definite method of charging depreciation in respect of various items of fixed
assets with minor modifications in respect of special assets. In this way, the accounting standard would
reduce the options or methods of recording certain business transactions so that financial statements become
more meaningful and comparable under various heads.
ACCOUNTING CONCEPTS AND ACCOUNTING STANDARDS
The following are the points of difference between accounting concepts and accounting standards :
(i) Concepts are in the nature of general statements like entity concept, monetary concept etc., and do not
provide solutions to specific problems.
On the other, hand, accounting standard will aim at specific solutions to specific issues such as
inventory valuation, depreciation of fixed assets, valuation of fixed assets, revenue recognition etc..
(ii) A concept may allow alternative treatments for the same items. For example, according to cost concept,
fixed assets may be valued by using original cost or replacement cost or realizable cost etc.. Similarly
inventories may be valued by adopting cost or market price whichever is less or FIFO or LIFO or Weighted
Averge Method etc..
But the accounting standards on valuation of fixed assets and inventory valuation may limit the
number of methods of valuation for these items.
(iii) Accounting concepts are unwritten general statements about the rules or guidelines for recording business
transactions. On the other hand, accounting standards are written or codified statements issued
by institutions of professional accountants specifying uniform rules or practices for preparing financial
statements.
(iv) Accounting concepts do not have a legal status. But the accounting standards are legally recognized
by Government, (Companies Act) or regulatory agencies like Securities and Exchange Board of
India (SEBI).
(v) In the absence of universal concepts, the financial statements of different firms are not comparable.
But the accounting standards are mandatory in most of the cases. So the financial statements, being
uniform, are comparable.
(vi) Accounting concepts do not restrict the discretionary power of the accountant in the recording process
because there is no legal restriction. But the accounting standards limit the area within which the
accountant has to function and in this manner accounting standards are similar to some of the
laws.
BENEFITS OF ACCOUNTING STANDARDS
The significance or utility or benefits of accounting standards are given below:
(i) Easy intra-firm and inter-firm comparability : As the same accounting methods and policies are adopted
in the preparation and presentation of financial statements, accounting standards facilitate or help in
comparing the financial statements of various years of the same enterprise (intra-firm) and among various
enterprises in the same industry (inter-firm). Thus, accounting standards are helpful in intra-firm and
inter-firm comparisons of operating results and financial position.
Financial Accounting Standards
4.3
Accounting standards, to a limited extent, also facilitate comparison of financial statements of business
enterprises located or situated in different countries of the world. It is possible only by harmonizing
accounting standards of different countries.
(ii) Reliability and credibility : Accounting information is used by various groups of persons which include
investors, creditors, lenders, trade unions, management, Government officials etc.. The use of accounting
standards create a sense of confidence among the users of accounting information. The accounting standards
ensure the use of uniform or standardised rules and guidelines for accounting process of recording and
preparing the financial statements.
In this way, accounting information is presented in a transparent manner and it automatically enhances
or increases the reliability and credibility of financial statements.
(iii) True and fair view of the financial position : In order to present a true and fair view of the financial
position for users of accounting information, it is necessary to use accounting standards.
(iv) Improve the quality of financial reporting : Accounting standards improve the quality of financial
reporting in the sense that financial reports are prepared using not only standard formats but also easily
understandable common terms with same meanings attached to them. For example, the Companies Act
prescribes a common balance sheet format for all companies engaged in general business. The balance
sheet contains standard terms like share capital, reserves and surplus, Current and Non-current assets,
Non-current and current liabilities, and so on. All these increase the quality of the information contained
in the financial statements.
There are certain areas where important information is not required to be disclosed by law. But accounting
standards may call for disclosure beyond that required by law e.g., disclosure of cash flows in terms of
operating, investing and financial activities. And also disclosure of non-cash transactions as a footnote
to cash-flow statements.
(v) Reduction in alternative accounting practices : Accounting standards reduce or bring down the number
of alternative accounting practices for recording and presenting the business transactions. For example,
accounting standard on Depreciation Accounting (AS-6) limits the number of depreciation methods.
Similarly Accounting Standard (AS)-2: Valuation of Inventories limits the choices of inventory valuations.
(vi) Efficiency of management : Accounting standards are very helpful in assessing or evaluating the efficiency
of management in respect of liquidity, profitability, solvency, debtors turnover, sales turnover and so
on. In the absence of accounting standards the financial position and operating results (profitability)
cannot be compared and hence overall efficiency of management cannot be judged by way of such comparisons.
(vii) Value of accounting information : Accounting standard provides a definite structure of accounting
framework by giving definition of accounting terms or standard rules for valuation and measurements
etc.. In this manner use of accounting standards increases the value of accounting information.
(viii) Useful to accountants and auditors : The use of accounting standards reduce the work of the accountants
and auditors since they have to work within a definite accounting framework. It is the duty of the auditors
to ensure that financial statements have been prepared in accordance with the relevant accounting standards.
They will make adequate disclosures in their audit reports to enable the users of accounting information
to know if certain aspects of the accounting standards have not been followed such as valuation of
fixed assets or inventories. So the auditors can escape or avoid court cases and penalties under the
Companies Act due to insufficient disclosures and due to adoption of inappropriate accounting policies.
(ix) Reduction of manipulation and frauds : The use or adoption of accounting standards has minimized,
to a large extent, manipulations, frauds and use of inappropriate accounting policies in the preparation
of financial statements. This is true because accounting standards prescribe appropriate accounting policies
and adequate financial disclosures in recording accounting transactions and in preparing profit and loss
account and balance sheet.
(x) Resolving conflict of financial interest : In a number of cases, there is a conflict of interest amongst
various users of the financial information. For instance, the shareholders and creditors may have opposite
4.4
Financial Accounting: Concepts and Applications
or contrary interests in assessing or evaluating the profitability and net worth of the business enterprise.
Shareholders are interested in more profitability than the financial position while the creditors are concerned
equally with the profitability and financial position. Accounting standards are helpful in resolving such
a conflict of interests because financial statements prepared on the basis of accounting standards or
uniform accounting practices are acceptable to all groups of users of accounting information.
PROCEDURE FOR ISSUE OF ACCOUNTING STANDARDS IN INDIA
Recognising the need to harmonise or narrow down or reduce the number of alternative accounting policies
and practices, the Institute of Chartered Accountants of India (ICAI) constituted an Accounting Standard
Board (ASB) on April 21, 1977. The main function of ASB is to formulate the accounting standards from
time to time and then they are issued by the Council of ICAI. While formulating the accounting standards,
ASB will take into consideration the applicable laws, customs, usages and requirements of business enterprises.
ICAI is member of International Accounting Standards Board (IASB) and ASB gives due consideration to
International Accounting Standards and try to integrate them, to the extent possible, in the light of practices
prevailing in India. Broadly, the following procedure is adopted for issuing Accounting Standards:
(i) ASB determines the main areas or subjects in which accounting standards are required.
(ii) In the selection of specific subjects and preparation of accounting standards, ASB is assisted by study
groups. In the formation of study groups, provision is made for wide participation by the members of
ICAI and others concerned with the subject.
(iii) ASB will also hold dialogue or talk with representatives of Government, public sector undertakings,
industry and other organisations for knowing their views.
(iv) Based on the discussions with interested parties to the subject of the standard, an exposure draft of
the proposed standard will be prepared.
The draft would normally include:
(a) Objectives of the standard
(b) Scope of the standard
(c) Definitions of the terms used in the standard
(d) Recognition of the measurement principles, wherever applicable (e.g., valuation of inventories,
valuation of fixed assets etc.)
(e) Presentation and disclosure requirements. ASB will consider the preliminary draft and if any
revision is required, ASB will refer the same to the Study Group.
(v) ASB will circulate the Draft of the proposed standard to the Council members of ICAI and other specified
bodies such as Department of Corporate Affairs (DCA) Comptroller and Auditor General of India (CAG),
Central Board of DirectTaxes (CBDT), RBI, ICWA, ICSI, SEBI etc.
(vi) ASB will hold a meeting with the representatives of specified bodies [as Listed above (v)] to ascertain
their views on the draft of the proposed Accounting Standard. On the basis of the comments received,
ASB will finalise the Exposure Draft of the proposed accounting standard.
(vii) The Exposure Draft will be issued for comments by members of the ICAI and public. The Exposure
Draft will specifically be sent to specific bodies [as listed above (v)], stock exchanges and other interested
groups as appropriate.
(viii) After taking into consideration the comments received, the draft of the proposed standard will be finalized
by ASB and submitted to the Council of the ICAI.
(ix) The Council of the ICAI will consider the final draft of the proposed standard and if found necessary,
modify the same in consultation with ASB. The Accounting Standard on the relevant subject will then
be issued by the Council of ICAI in the latest issued of its journal, namely: The Chartered Accountant
Financial Accounting Standards
4.5
OBJECTIVES OF ACCOUNTING STANDARDS
The following are the main objective of accounting standards in India.
(i) To standardise the diverse (different) accounting policies and practices with a view to eliminate the
non-comparability of financial statements and provide reliability to the financial statements.
(ii) To facilitate the analysis of financial statements by bringing uniformity.
(iii) To help the users of financial statements in taking or making decisions.
SALIENT FEATURES OF ACCOUNTING STANDARD (AS) - I: DISCLOSURE OF
ACCOUNTING POLICIES
AS – 1 deals with the disclosure of significant accounting policies followed in preparing and presenting financial
statements. The main requirements of AS – 1 are :
(i) Disclosure of all significant policies followed in the preparation of profit and loss account and the balance
sheet.
(ii) The primary consideration in the selection of accounting policies by an enterprise is that the financial
statements prepared and presented on the basis of such accounting policies should represent a true and
fair view of the financial position as at balance sheet date and of the profit or loss for the period ended
on that date.
(iii) The major considerations governing the selection and application of accounting policies are : (a) prudence,
(b) substance over form and (c) materiality
(iv) Disclosure of fundamental assumptions, namely : going concern, consistency and accrual, is necessary
if they are not followed.
(v) Disclosure of accounting policies should form part of the financial statements i.e., they should be disclosed
at one place instead of being scattered over several statements, schedules and notes.
NATURE OF ACCOUNTING POLICIES
Accounting policies refer to specific accounting principles and methods of applying those principles by various
enterprises in the preparation and presentation of financial statements, namely, the Income Statement, the Balance
Sheet and the Cash-Flow Statement. Thus, accounting policies mean specific guidelines or rules which must
be taken into consideration while recording the business transactions in the books of account and their
ultimate presentation in the form of financial statements. There is no single list of accounting policies
which are applicable to all enterprises and in all circumstances. The differing circumstances in which enterprises
operate and the complex nature of economic activities necessitate the use of alternative accounting principles
and methods of applying those accounting principles which are most acceptable. The choice of the appropriate
accounting principles and the methods of applying those principles in the specific circumstances of each enterprise
requires considerable judgement and personal wisdom by the management of the enterprises.
The following examples would highlight the nature of different accounting policies adopted by different enterprises
particularly the corporate form of business enterprises :
Areas
(i) Methods of depreciation, depletion and amortisation
Differing Accounting Policies
(i) Straight Line Method; Written Down Value Method
(ii) Treatment of expenditure during construction
(ii) Capitalisation of expenses; treatment as deferred revenue
expenditure
(iii) Conversion or translation of foreign currency
transactions
(iii) Credit or debit to reserves or credit or debit direct to profit and
loss account
(iv) Valuation of inventories
(iv) FIFO, LIFO, Weighted Average Method etc
4.6
(v)
Financial Accounting: Concepts and Applications
Treatment of goodwill
(v)
(vi) Valuation of retirement benefits
(vi)
(vii) Treatment of investments
(vii)
(viii) Recognition of revenues in hire purchase
(ix) Recognition of profit on long-term contracts
(x)
Valuation of fixed assets
Make provision as per actuarial method or some rational consistent
basis
Cost, fair value, lower of cost and fair value
(viii)
At the time of receiving each instalment, or transactions when
all the instalments have been received
(ix)
Percentage of completion method, completed contract method,
different procedures for measuring percentage of completion
(x)
(xi) Treatment of contingent liabilities
Amortize immediately or over a number of years
(xi)
Cost less depreciation, fair value, replacement cost
Making of provision or a simple note to the accounts
The above list of examples is not intended to be exhaustive or complete in all respects. It simply provides
an insight into the adoption of different accounting policies by the enterprises in presenting the required
accounting information.
FUNDAMENTAL ACCOUNTING ASSUMPTIONS
Certain fundamental accounting assumption underline the preparation and presentation of financial statements.
They are usually not specifically stated because their acceptance and use are assumed. Disclosure is necessary
if they are not followed. The following have been generally accepted as fundamental accounting assumption
:
(a) Going concern : The enterprise is normally viewed as a going concern, that is, as continuing in operation
for the foreseeable future. It is assumed that the enterprise has neither the intention nor the necessity
of liquidation or curtailing materially the scale of the operations.
(b) Consistency : It is assumed that accounting policies are consistent from one period to another.
(c) Accrual : Revenues and costs are accrued, that is, recognised as they are earned or incurred (and not
as money is received or paid) and recorded in the financial statements of the periods to which they
relate.
ATTENTION PLEASE
(i) If nothing has been written about the fundamental assumptions in financial statements, it is assumed
that fundamental accounting assumptions have been followed in the preparation of the financial
statements.
(ii) If any fundamental assumption has not been followed, then this fact must be disclosed in financial
statements.
DIFFERENCE BETWEEN FUNDAMENTAL ASSUMPTIONS
AND ACCOUNTING POLICIES
The fundamental assumptions and the accounting policies differ in respect of following matters :
(i) AS regards number : AS – 1 provides for only three fundamental assumptions namely : going concern,
consistency and accrual, which are applied in all circumstances. But there may be different accounting
policies adopted by different enterprises
(ii) As regards disclosure : There is no need for any disclosure if all the fundamental assumptions have
been incorporated in the financial statements. Disclosure is necessary if a particular accounting policy
has been adopted.
(iii) Disclosure, when necessary : In case, an enterprise has not followed fundamental assumptions, it must
disclose this fact in the annual accounts along with the reasons for not doing so. In the case of accounting
Financial Accounting Standards
4.7
policies, disclosure is necessary only when there is a change in the subsequent year. The annual accounts
must disclose the reasons for change and the financial effects of such a change
(iv) Option : There is no option or choice available regarding the adoption of fundamental accounting assumptions.
However, the firm has an option to select a particular policy e.g. change in depreciation method or in
respect of valuation of inventories
IMPORTANCE OF ACCOUNTING POLICIES
It is clear from the various examples of accounting policies that they play a very significant role in shaping
the financial statements right from the stage of income measurement to the presentation and disclosure of
the information pertaining to assets and liabilities of a business enterprise. In order to appreciate or understand
the operating results and the financial position of a business enterprise, it is absolutely necessary to know as
to what accounting policies have been adopted in the preparation and presentation of annual accounts and
also the effect of departures, if any, of accounting policies on the financial results when compared to preceding
year(s). Thus, knowledge of accounting policies is of great help in the working out of inter-firm comparisons.
SOURCES OF ACCOUNTING POLICIES
Business enterprise is a part of the social system or society. Financial reporting is the responsibility of the
corporate form of business organisation. In this way, Accounting and Reporting are not separate from the
social system. The accounting policies adopted by a business enterprise in the financial reporting through
balance sheet, income statement and cash-flow statement, determine, the quality and truthfulness of the operating
results, financial position and the movement of cash over a given period of time. The accounting policies
have evolved over a period of time and owe their origin to the following environmental factors :
(i) Legal system : In order to protect the public interest (i.e., of investors, creditors, employees etc.)
and to resist the manipulation of accounting information, the Governments usually make specific laws
such as Companies Act, Income Tax Act, GST Act, Excise Laws etc. These Acts lay down guidelines
for the preparation of annual accounts so as to provide a uniformity in the presentation of accounting
information. For example, the Companies Act provides detailed instructions regarding the preparation
of profit and loss account, methods of depreciation and presentation of financial position etc. Similarly,
the Income tax Act provides guidelines for the calculation of taxable income.
(ii) Political system : Accounting policies of socialistic countries are different from countries under market
economy or capitalistic system.
(iii) Professional accounting bodies : The various statements (accounting standards, guidelines etc.) of
professional accounting bodies such as Institute of Chartered Accountants of India combined with
the efforts of Government and other regulatory agencies (Securities and Exchange Board of India)
and progressive management have provided a number of acceptable alternative accounting policies
particularly in the case of corporate enterprises.
(iv) Economic and educational developments : Higher socio-economic and educational developments have
also contributed to the development of accounting policies. Eminent authors of accounting books have
played an important role in the development of accounting principles to ensure a system of providing
uniform accounting information for the same type of business enterprises. Consumerism, as it is called,
is beginning to produce accounting changes.
SELECTION OF ACCOUNTING POLICIES
The major considerations governing the selection and application of accounting policies are :
(i) Prudence : In view of the uncertainty regarding future events, the working rule is : Anticipate no gains
but provide for all possible losses and if in doubt, write them off. It means that profits are not anticipated
but recognised only when realised though not necessarily in cash. Thus, provision is made for all known
liabilities and losses even though the amount cannot be determined with certainty and represents only
a best estimate in the light of available information.
4.8
Financial Accounting: Concepts and Applications
(ii) Substance over form : The accounting treatment and presentation in financial statements of transactions
and events should be governed by their substance and not by their legal form. It means that some business
transactions have legal form which is different from the fundamental commercial reality or substance.
For example, in hire purchase transactions, the legal position (or firm) is that the hire purchaser does
not become the (legal) owner of the asset until he has paid all the instalments. However, the substance
(or commercial reality) is that the asset is immediately acquired by the hire purchaser and he has a
loan to assist him in the purchase which he pays over a period of time. The substance of this transaction
is that it is a normal credit sale and reservation of title clause in the contract becomes important
only when the buyer becomes insolvent. So, for accounting purpose, the asset can be recorded at full
cost price by the purchaser. Similarly, substance over form would require that a large corporation (e.g.,
a multinational one) which owns several legally independent entities prepare consolidated profit and loss
account and a consolidated balance sheet for all entities though legally it is not required to do so.
(iii) Materiality: Financial statements should disclose all material items, i.e. items the knowledge of which
might influence the decisions of the users of the financial statements.
CHANGES IN ACCOUNTING POLICIES
It is emphasised that there is no single list of accounting policies which are applicable to all enterprises in
all circumstances. Accounting policies vary from enterprise to enterprise for obvious reasons. For example,
it is not possible to recommend the same accounting policies for paper mill and a textile mill. Not only this,
accounting policies may vary even from year to year in the same enterprise. An enterprise is at liberty to
change either all or some of these accounting policies in the future. But if a change in an accounting
policy has a material effect on the operating results or financial position in the current year or may
have material effect in the subsequent periods, the same must be disclosed together with reason. For
example, if the enterprise changes the method of depreciation in accordance with the provisions of Companies
Act or Income Tax Act and carrying cost of the assets, the same must be disclosed in the annual reports.
DISCLOSURE OF ACCOUNTING POLICIES
AS – 1, provides for the following matters regarding disclosure of accounting policies :
(a) It is necessary that all significant accounting policies adopted in the preparation and presentation of
financial statements should be disclosed. This is necessary for the proper understanding of the financial
statements;
(b) Such disclosures should form part of the financial statements;
(c) It would be helpful to the reader of financial statements if they are all disclosed at one place;
(d) Disclosure in the case of change in accounting policy : Any change in an accounting policy which
has a material effect should be disclosed. The amount by which any item in the financial statements is
affected by such change should also be disclosed to the extent ascertainable. Where such amount is not
ascertainable, wholly or in part, the fact should be indicated. If a change is made in an accounting policy
which has no material effect on the financial statements for the current period but which is reasonably
expected to have a material effect in later periods, the fact of such change should be appropriately disclosed
in the period in which the change is adopted. Disclosure of accounting policies or of changes therein
cannot remedy a wrong or inappropriate treatment of the item in the accounts.
REASONS FOR DISCLOSURE IN ACCOUNTING POLICIES
The need for disclosure of accounting policies arises because accounting policies may differ from enterprise
to enterprise and for different years within the same enterprise. Accounting policies means principles and
methods to apply principles adopted by an organisation in the preparation and presentation of financial statements.
For example, inventory valuation is principle while Last-in-First out (LIFO) or Weighted Average Method is
application of principle. Hence it becomes necessary to disclose accounting policies such as Depreciation on
fixed assets, Valuation of Inventories, Valuation of investments. Treatment of goodwill, Treatment of foreign
currency transactions, Treatment of Government grants and other such policies mentioned in this chapter.
Financial Accounting Standards
4.9
APPENDIX
IND.
A S (Indian A ccountingStandard)-8 :A ccountingPolicie
s,
Chang
e
s in A ccountingEstimate
s andErrors
OBJECTIVE AND SCOPE
The primary objective of Ind.As (Indian Accounting Standard) 8 is to prescribe the criteria for selecting
and changing accounting policies along or together with accounting treatment and disclosure of changes in
accounting policies, changes in accounting estimates and correction of errors.
Regarding scope this standard shall be applied in selecting and applying accounting policies and accounting
for changes in accounting policies, changes in accounting estimates and correction of prior-period accounting
errors.
DEFINITIONS
Accounting policies are specific principles, conventions, rules and practices applied by an entity or enterprise
in preparing and presenting financial statements.
A change in accounting estimate is an adjustment of carrying amount of an asset or a liability or related
expenses (e.g. consumption of an asset). Such changes result from new information or new development
resulting from reassessing the expected future benefits and obligations associated with the asset or liability.
Such new developments cannot be termed as correction of errors. Material omissions or misstatements of terms
should be regarded as material only if they can effect the decisions of the users.
Prior period errors are omissions from and misstatements in the financial statements of an entity for one or
more prior periods. Information that was available and should have been taken into account or misuse of
reliable information in the preparation and presentation of financial statements is termed or classified as an
error. Errors include calculation errors, incorrect application of accounting policies, misrepresentations or
fraud.
Retrospective application is applying new accounting policy to transactions and other events as if that policy
had always been applied.
Retrospective restatement means restating the amount of elements in the financial statements as if prior period
error had never occurred.
Prospective application means the application of a change in accounting policy to transactions and other
events occurring in the current and future periods affected by the change
Impracticable: Error correction may be impracticable when the—
(a) Effect cannot be determined
(b) Assumptions on management intent must be made
(c) Restatement requires evidence that is not available.
In short, applying a requirement is impracticable when the firm cannot apply it after making every reasonable
effort to do so.
4.10
Financial Accounting: Concepts and Applications
ACCOUNTING POLICIES
Selection and Application of Accounting Policies
Simply stated the entity should apply relevant accounting standard while determining the accounting policies.
If the entity prepares a cash-flow statement, it should follow the procedure laid down in Ind.AS 7: Statement
of Cash Flows.
If no Indian Accounting Standard is available Judgment should be applied by management by taking into
consideration relevant and reliable criterion. Judgement may be based on the publications of other Accounting
standard bodies such as IFRSs, other industry practices, accounting literature or interpretations.
Consistency of Accounting Policies
An entity should apply its accounting policies consistently for similar transactions or events or categories
unless differently required by Ind.AS. (Indian Accounting Standard). Moreover, accounting policies should
be consistent from period to period to allow comparisons to be made.
Changes in Accounting Policies
Accounting policies are changed only if following conditions are satisfied:
(i) If changes are required by Indian Accounting Standards or IFRSs and
(ii) Changes will result in better, reliable and more relevant information. For example, an entity has been
following LIFO method not permitted by Ind.AS 2. So the entity will have to change its policy to FIFO
or Weighted Average method.
One more example relating to consistency—If the entity is charging depreciation according to straight line
method, it must continue to follow the same method so as to allow the users to compare one period income
with that of another period.
Further, if an enterprise is using the Financial Statements for the first time and applies Ind.AS (IAS) 39:
Financial Instruments. This is not change in accounting policy.
Application of changes in accounting policies: It is to be noted that:
(a) transitional provisions may apply if there is specific transitional provision in Ind.AS (Indian Accounting
Standard)
(b) if there is no transitional provision, apply the accounting policy retrospectively
(c) for a voluntary change of policy, comparative figures must also be changed if standard has no transitional
provision.
(d) early application of standard is not a voluntary change in accounting policy. For example, a new standard
has been used which would come into force three years after the date of use. The entity introduces the
standard in the current year which is permitted but not compulsory. This is voluntary change in policy.
Hence, no change in comparative figures is necessary.
RETROSPECTIVE APPLICATION
If accounting policy is applied retrospectively, it requires adjustment of opening balance of each component
of the equity.
Limitations of retrospective application: A change in accounting policy will be applied only when from
when it is practicable.
However, it is impracticable to apply a change in accounting policy retrospectively then:
(a) apply the change to the earliest period that is practicable if it is impracticable to determine period specific
effect of change in policy;
Financial Accounting Standards
4.11
(b) if not possible to determine the cumulative effect of the change, then prospectively apply to the earliest
period that is practicable.
DISCLOSURE
The disclosure aspect can be explained in terms of:
(i) When change is required by Ind.AS
(ii) When change is voluntary
When change is required by Ind.AS.
(i) Nature of change in policy
(ii) Give reasons why new accounting policies provide reliable and relevant information
(iii) Amount of the adjustment relating to prior period not presented
(iv) If retrospective application is not practicable, explain how the change in policy was applied.
When change is voluntary
(i) The title of the Ind. AS.
(ii) Nature of change in policy
(iii) Description of the transitional provisions
(iv) Reasons for applying voluntary change
(v) Effective date for application of the standard or mandatory date
(vi) Discussion of the effect of the standard or a statement that the effect is not known.
CHANGES IN ACCOUNTING ESTIMATES
Estimates require personal Judgements based on the latest available information e.g. estimates are needed
for bad debts, useful life of the fixed assets, inventory obsolescence and warranty obligations. Estimates may
change on the availability of new information. Thus, a change in estimate does not involve a change in the
amounts of prior period item because it is not a correction of error.
For example, in the case of profit or loss I recognize the change in estimates from the subsequent dates or
prospectively if it only affects that period or future periods (if applicable). In the case of balance sheet, adjust
the carrying amount of the related asset, liability or equity item in the period of change.
In sum, no change in estimates retrospectively.
Disclosure
(i) Nature and amount of change that has an effect in the current period or expected to have in future.
(ii) Fact that the effect of future periods is not disclosed because of impracticability.
ERRORS
The Ind. As-I requires that all errors must be corrected retrospectively. Further, it is necessary to restate the
comparative amounts for periods in which error occurred and if the error occurred before that date. It means
restatement of opening balances of assets, liabilities and equity for earliest periods present.
Limitations of retrospective restatement: If it is impracticable to determine the period-specific effects of
error, restate the opening balance for earliest period practicable.
Disclosure of Prior-Period Items
(i) Nature of the prior-period error
4.12
Financial Accounting: Concepts and Applications
(ii) Amount of the correction at the beginning of earliest period presented.
(iii) If retrospective is impracticable explain how the error was corrected.
STATUS OF THE ACCOUNTING STANDARDS ISSUED BY THE INSTITUTE OF CHARTERED
ACCOUNTANTS OF INDIA
Number of the
Accounting
Standard (AS)
Title of the
Accounting
Standard
Date from which mandatory
(accounting periods
commencing on or after)
AS - 1
Disclosure of Accounting Policies
1-4-1993
AS - 2 (Revised)
Valuation of Inventories
1-4-1999
AS - 3 (Revised)
Cash-Flow Statement
1-4-2001
AS - 4 (Revised)
Contingencies and Events Occuring after the
Balance Sheet Date
1-4-1998
AS - 5 (Revised)
Net Profit or Loss for the Period, Prior Period
Items and Changes in Accounting Policies
1-4-1996
AS - 6 (Revised)
Withdrawn and included in AS-10 PPE
1-4-2016
AS - 7 (Revised)
Accounting for Construction Contracts
1-4-2003
AS - 8
Withdrawn and included in AS-26
AS - 9
Revenue Recognition
1-4-1993
AS - 10 (Revised)
Property Plant and Equipments
1-4-2016
AS - 11 (Revised)
The Effects of Changes in Foreign Exchange Rates
(Revised 2003)
1-4-2004
AS - 12
Accounting for Govt. Grants
1-4-1994
AS - 13
Accounting for Investments
1-4-1995
AS - 14
Accounting for Amalgamations
1-4-1995
AS - 15
Accounting for Retirement Benefits in the Financial
Statements of Employers
1-4-1995
AS - 16
Borrowing Costs
1-4-2000
AS - 17
Segment Reporting
1-4-2001
AS-18
Related Party Disclosures
1-4-2001
AS-19
Leases
1-4-2001
AS-20
Earning Per Shares
1-4-2001
AS -21
Consolidated Financial Statement
1-4-2001
AS -22
Accounting for Taxes on Income
1-4-2001
AS -23
Accounting for Investment in Associates in Consolidated
Financial Statements
1-4-2002
AS-24
Discontinuing operations
1-4-2004
AS -25
Interim Financial Reporting
1-4-2002
AS-26
Intangible Assets
1-4-2003
AS-27
Financial Reporting of Interests in Joint Venture
1-4-2002
—
Financial Accounting Standards
4.13
AS-28
Impairment of Assets
1-4-2004
AS-29
Provisions, Contingent liabilities and Contingent assets
1-4-2004
AS-30
Financial Instruments: Recognition and Measurement and
Limited Revision to AS-2, AS - 11 (Revised 2003), AS - 21.
AS - 23, AS - 26, AS - 27.
1-4-2011
AS-31
Financial Instruments – Presentation
1-4-2011
AS-32
Financial Instruments Disclosures
1-4-2011
4.14
Financial Accounting: Concepts and Applications
Assignments
THEORY BASE ASSIGNMENTS
1.
2.
3.
4.
5.
6.
What is meant by accounting standards ? State briefly the merits of issuing accounting standards.
[B.Com. (Hons.) Delhi 2011]
What are the main objectives of accounting standards ?
Give a brief description of the procedure for issuing accounting standards in India.
Mention any seven areas of disclosure as per AS - 1.
[B.Com. (Hons.) Delhi 2014]
Write a short note on significance of accounting standards in the changing global economic and business
environment.
[B.Com. (Hons.) Delhi 2013]
Explain the need and importance of Accounting Standards.
[B.Com. (Hons.) Delhi 2019]
5
I
nte
rna
tiona
lFina
nc
ia
l
Re
portingSta
nda
rds (I
FRSs)/I
ndAs
BACKGROUND
International Financial Reporting Standards (IFRSs) are the globally accepted accounting standards adopted
by International Accounting Standard Board (IASB) from International Accounting Standard Committee (IASC
1973-2000). IASC was established in 1973 to formulate or prepare and publicise in public interest, the standards
to be followed in the preparation of financial statements and to promote their acceptance and adoption by
different countries of the world. The standards issued by the Board of IASC are designated as International
Accounting Standards (IASs).
International Accounting Standards Committee was suspended in the year 2001 and International Accounting
Standard Board (IASB) was formed and given the responsibility of setting accounting standards. IASB adopted
all the standards issued by the Board of IASC and these accounting standards continue to be designated as
International Accounting Standards (IASs). IASB has replaced some IASs with new IFRSs and has adopted
new IFRS on topics for which there was no previous IAS.
MEANING AND FEATURES
Meaning : IFRSs is a set of accounting standards, that is, a series of pronouncements (opinions) issued by
International Accounting Standard Board explaining how different types of business transactions and events
should be reported in financial statements. It also includes guidelines and interpretations approved by IASB.
The main goal of IFRSs is to permit international comparisons possible.
Features : The main features of IFRSs are explained as under :
(i) IFRSs are principle-based accounting standards as compared to rule-based accounting standards. It
means that the companies have to report the essence of each small transaction which is to be finally
audited and approved. In this manner the transaction cannot be manipulated easily.
Note : Rule-based accounting standards like Indian Accounting Standards are long and complex which
attempt to deal with all types of situations.
(ii) IFRSs are drafted in a lucid (clear and simple) language and are easy to understand and apply.
(iii) IFRSs emphasise that the treatment of various transactions should be based on their economic substance
rather than their legal form. For instance, in a hire purchase transaction, the hire purchaser can record
the hire purchase asset at its total cost rather than its installments actually paid.
(iv) Under the IFRSs, the historical cost concept of recording the fixed assets has been replaced by current
cost system for a more accurate and realistic financial position of the business enterprise.
(v) Under IFRSs, the assets, liabilities, revenues and expenses are reported not in local currency but in its
functional currency; it means the currency of the place or environments where the entity operates which
may be different from the local currency of the country.
(vi) Under IFRSs the useful life of the assets has to be reassessed or computed again and again until the
asset is actually removed from the books of account.
5.2
Financial Accounting: Concepts and Applications
(vii) IFRSs make it compulsory or mandatory to adopt Component Accounting. The accountant has to maintain
a separate record of cost of a significant component of equipment in relation to its total cost and charge
depreciation separately. It means that the depreciation expense is not calculated simply on the total
value of an asset but on the cost of important parts of the equipment or asset. For example, in the case
of a Railway Coach, the depreciation may be calculated separatly for its wheels and the main body of
the coach respectively.
It may be clarified that the Schedule VI of the Companies Act is based on the IFRSs relating to the
Presentation of Financial Statements. According,
(a) the assets and liabilities have been divided into current and non-current groups as against the
earlier presentation on the liquidity basis.
(b) the statement of profit and Loss is also based on functional grouping of production expenses,
administrative expenses and selling and distribution expenses. So is the case with the classification
of revenue items.
NEED FOR IFRSs
The financial statements, compiled from financial information, are useful only if they are reliable, relevant
and comparable in respect of operating results (i.e., performance) in the form of profit or loss and also
financial position based on true or proper valuation of a business entity or enterprise. Due to globalization,
foreign capital has made inroads into domestic markets. This has led to failure in comparison of financial
statement of companies of different countries. In order to have one accounting language for business transactions,
many countries have switched to IFRSs. Such qualities would prove helpful to the users of the financial statements
or accounting information in making financial decisions as to whether to invest or not; whether to supply
goods on credit or not; whether to grant loan or not and so on. The financial statements, therefore, would be
informative too for the shareholders and the public. For the past few years the professional accounting bodies
or institutions have developed their own local Generally Accepted Accounting Principles (GAAPs) like US
GAAPs U.K. GAAPs or Accounting Standards (AS) in India The financial statements prepared on the basis
of local GAAPs or accounting standards fail to present a uniform picture of performance and financial position
of even the companies in the same industry. This has made the users confused. Such a situation is not conducive
for globalization process in which the funds or capital must come from outside the boundaries or borders of
individual countries.
Corporate sector needs urgently the convergence of Indian Accounting Standards with IFRSs because it brings
consistency to the field of accounting. A strong need for adoption of IFRSs is that it would bring uniformity,
comparability, transparency, rationalization and adaptability in financial statements besides the tough or rigid
rules for the preparation and presentation of the same (the financial statements)
The investors and creditors are not very happy and infact feel frustrated when companies prepare financial
statements or financial reports using different accounting standards. It must be made clear that high quality
accounting standards, like IFRSs can make the world’ capital markets more efficient. The process of convergence
will allow the investors and creditors to compare financial statements without adjusting for national
accounting differences.
Specifically the need for accounting standard convergence arises from the following genuine and pressing
reasons :
(i) Easy access to global or international capital markets : In order to mobilise or raise more capital
for growth or expansion, companies have to look beyond the boundaries of their respective countries.
Foreign investors rely on IFRSs compliance financial statements. In fact a financial reporting system
of global standards is a prerequisite (necessary condition) for attracting foreign investors in the country.
Hence the local or say Indian Financial Statements will be liked by the foreign investors and would
enable them to have more business collaborations or joint ventures because of greater transparency in
business deals.
(ii) Low cost of raising funds abroad : At present the companies have to prepare two sets of financial
statements – one set based on local GAAPs or standards and another set of financial statements on the
International Financial Reporting Standards (IFRSs)/Ind-As
5.3
basis of conversions to US GAAPs or U.K. GAAPs, as the case may be. The IFRSs based financial
statements would require less number of chartered accountants and the financial statements could be
prepared at lesser cost. Better access to and reduction in cost of capital raised from global capital markets
arises as IFRSs are now accepted as a standard financial reporting system for businesses seeking to
raise funds overseas or abroad.
(iii) Easy comparisons : The adoption of IFRSs brings companies or business entities on an international
common platform and would increase uniformity in accounting principles. The uniformity in accounting
and disclosure standards will enable all stakeholders or users of accounting information to understand
easily the performance of various business entities and make comparisons across industries and countries.
(iv) True or fair valuations : The term fair value is used to estimate the value at which the asset could be
sold in the market. Many multinational corporations or companies failed in the past e.g., Enron and
are still failing because of erroneous or incorrect valuation of their assets and liabilities. There is a
wide gap between Indian Accounting Standards and U.S. GAAPs in the valuation process. For example,
Accounting Standards (ASs) in India permit valuation of assets on the basis of historical cost. But in
U.S. fair value costing on market-to-market basis is practiced. IFRSs would create a common or uniform
procedure for the valuation of assets and liabilities.
(v) Better quality of financial reporting : The adoption of IFRSs would result in uniformity in accounting
information and it would automatically result in better quality of financial reporting. The rationale of
IFRSs is to improve the quality of financial reporting.
(vi) Increased trust and reliance : Adoption or implementation of IFRSs in different countries including
India would lead to increased trust and reliance placed by investors, financial analysts and other users
of accounting information in financial statements of the companies.The reason is that IFRS is treated
as standard reporting method or framework for the preparation of credible financial statements.
(vii) Difficult to commit fraud : Traditional rule-based system of accounting has many loopholes which
make it easy to commit frauds. The major example is that of U.S. multinational company, Enron wherein
it was possible to commit all frauds they wanted to by citing their own rules for recording the transactions
and by following minimum technical requirements. On the other hand, the IFRSs require the companies
to report the essence of each minute or smallest transaction which is to be finally audited and approved.
(viii) No multiple reporting : At present the companies located in different countries have to prepare a dual
or double set of financial statements for external reporting, i.e., one set of financial statements for use
in the home country and the other set for the foreign country where it has also business interest or
where it operates. But if IFRSs are implemented, it would eliminate this multiple reporting.
SOME CLARIFICATIONS
1. Whether the converged standards will be called as IFRSs in India?
The answer is No. The proposed name for converged standards in India is : Ind-AS. The financial
statements prepared under these converged standards will be called as India-AS Financial statements.
2. What is the status of existing accounting standards? What would happen to the already notified
accounting standards?
The existing set of Indian Accounting Standards (ASs) will continue to be in force. These accounting
standards will be applicable to those entities (enterprises) which are not required to migrate (shift)
to Indian equivalents to – IFRSs Ind-ASs
BENEFITS OF CONVERGENCE TO IFRSs
Convergence with IFRSs helps the economy in general and investors, industry as well as the accounting professionals
in particular.
The benefits of convergence are described below :
(i) Benefits to economy : Convergence will benefit the economy by increasing growth of its international
5.4
Financial Accounting: Concepts and Applications
business. It facilitates maintenance of orderly (well organised) and efficient capital markets and also
helps to increase the capital formation and hence the economic growth. It encourages international
investing and thereby leads to more foreign capital flows in the country.
(ii) Transparency and comparability : Convergence with IFRSs would provide transparency and comparability
to the companies’ activities and overall performance. Transparency is provided because of common
standards and comparability in each country, industry and company. Since the IFRSs have universal
or global application, relationship can be built across the world with suppliers, investors and companies
The nations will have to move along with others as their business relationships are also global or
international.
(iii) Benefits to the investors : Investors want accounting information that is more relevant, reliable, timely
and comparable across the world. Financial statements prepared on a common set of accounting standards
(IFRSs) would help the investors to better understand investment opportunities as against the financial
statements, prepared using a different set of national or local accounting standards.
(iv) Easy access to international capital markets : Convergence to IFRSs would definitely help the Indian
companies to have easy access to international capital markets. Several domestic companies are mobilising
globally huge financial resources to meet their funds or capital requirements. Today most of the stock
exchanges demand information as per IFRSs and convergence to IFRSs would enable Indian companies
to access the global financial markets easily.
(v) Lower cost of capital : Cost of raising capital or funds can be minimized under IFRSs as there is no
need to prepare a dual (double) set of financial statements.
(vi) Benefits to industry : The industry can raise capital from foreign markets if it can create confidence
in the minds of foreign investors that their financial statements are IFRSs complied. With the differences
in the accounting standards from country to country, the multinational companies face a multitude of
accounting requirements prevailing in different countries. The burden of financial reporting is lessened
with adoption or convergence of accounting standards because of low cost of preparing the financial
statements.
(vii) Eliminating the need for multiple reporting : The task of maintaining different set of financial reports
and statements can be eliminated by adopting the provisions under IFRSs by all group enterprises.
(viii) Benefits to companies : IFRSs provide improved management information which facilitates decision
making. On implementation by companies, it brings out better access to foreign capital and facilitates
the process of mergers and acquisitions.
(ix) Benefits to accounting professionals : Adoption or convergence with IFRSs also benefits the accounting
professionals in a way that they are able to sell their services as experts in different parts of the world.
It offers them more opportunities in any part of the world if uniform accounting practices prevail throughout
the world.
(x) New opportunities : Advantages of convergence with IFRSs will not be restricted to the Indian corporate
sector only. It will perhaps open up plethora or abundance of opportunities in services sector like banking
and insurance. With a wide pool of accounting professionals, India can emerge as an accounting services
hub (centre or focal point) for the world community. As fair price valuation is the central theme of
IFRSs, it can provide lot of new opportunities to the chartered accountants and cost accountants.
PROCEDURES
The dictionary meaning of the word ‘procedure’ is: the way of doing something.
In the context of IFRSs, it means how a particular country can implement or comply with the International
Financial Reporting Standards (IFRs)
There are two alternative procedures available to a country for compliance or implementation of IFRSs, namely:
(i) Adoption or (ii) Convergence.
International Financial Reporting Standards (IFRSs)/Ind-As
5.5
Meaning of IFRSs Adoption
Simply stated IFRSs adoption means accepting or endorsing an IFRS in its original form. It means adoption
does not permit any change in the language or format of IFRS framed by IASAB.
Meaning of Convergence with IFRSs
In general terms, convergence means to achieve harmoney or co-ordination with IFRSs and not complete adoption.
India has decided to go for convergence route. The Institute of Chartered Accountants of India (ICAI), has
clarified that the convergence with IFRSs does not mean adoption of IFRSs in full. ICAI has cited a statement
given in the International Accounting Standard (IAS): I Presentation of Financial Statement: “Financial
Statement shall not be described as complying with IFRSs unless they comply with the requirement of
IFRSs”.
Therefore, it does not mean or imply that financial statements prepared in accordance with the national accounting
standards draw unreserved statement of compliance with IFRSs only when IFRSs, are adopted word by word.
In other words the IAS - 1 has not used the words ‘unreserved statement of compliance’.
ICAI has further clarified the International Accounting Standard Board (IASB) accepted in its “Statement
of Best Practices: Working Relationships between the IASB and other Accounting Setters” that: “adding
disclosure requirement or removing optional treatment does not create non-compliance with IFRSs. Indeeded
the IASB aims to remove optional treatments from IFRSs.
The above mentioned statement makes it clear that if a country wants to add a disclosure that is considered
necessary in the local environment (or condition) or removes optional treatments, this will not amount
to non-compliance with IFRSs.
So in the Indian context convergence with IFRSs means adoption of IFRSs with modifications where necessary.
The procedure for issuing Ind-AS is similar to the procedure for issuing Financial Accounting Standards
(AS). The procedure may be summarised as under :
i) Accounting Standard Board issues exposure draft on converged accounting standard, that is, accounting
standard (AS) converged to Ind-AS/IFRS
ii) After approval these converged Ind- AS used to be sent to the National Advisory Committee on Accounting
Standards (NACAS) But after the formation of National Financial Reporting Authority (NFRA) as incorporated
in Companies Act 2013, these will be sent to NFRA.
iii) On approval from NFRA the same are notified in the official Gazette
iv) The date of implementation may be separately announced in an official Gazette at a later date.
Furthermore, it must be clearly noted the Accounting Standard Board has to take into consideration the following
points while adopting the International Financial Reporting Standards, namely :
a) Local legislation or regulation : Accounting Standard must ensure that IFRSs (Ind AS) are in accordance
with the provisions of local laws such as the Companies Act 2013 or Income tax Act etc.
b) Endorse the IFRS in the form of IFRS equivalent Indian Accounting Standards for the local regulatory
framework with changes, if necessary, in public interest or for removing optional treatments and adding
disclosure requirements.
c) Approval of NFRA : The Accounting Standard Board must present the adopted IFRS for approval of
National Financial Reporting Authority for the purpose of Government Notification.
Moreover if Accounting Standard Board is of the opinion that an issue requires interpretation of IFRSs, it
would request the International Financial Reporting Interpretation Committee (IFRIC) of International Financial
Accounting Standard Board to resolve or address the issue, On the other hand, if an issue relates to particular
5.6
Financial Accounting: Concepts and Applications
legislature or other local requirement. Accounting Standard Board may issue guidelines if it believes that it
is necessary to avoid incompatibility or collision with IFRSs.
DIFFICULTIES OR CHALLENGES IN ADOPTING IFRSs
India faces various difficulties or challenges in adopting IFRSs. because of variances or differences between
Indian Accounting Standards (ASs) and IFRSs. These include the following:
(i) Concept : IFRSs are more principle-based and allow more flexibility to the preparers of the financial
statements. Thus, there is a scope of subjective judgement with the result the information in the financial
statements is presented on the basis of substance rather than rule. In this way financial statements
provide more desired results to the satisfaction of the investors and creditors. For example under IFRSs,
the Redeemable Preference Shares are treated as liabilities because of their nature since the money
has to be returned to the preference shareholders after a certain period of time. Similarly, the convertible
debentures are treated as part of equity share capital as they will remain with the company for the
period equity share capital does.
On the other hand Indian Accounting Standards (ASs) are rigid because they are rules-based and
the choice of reasonable judgement is almost absent, As rules play the major role, flexibility or
subjective judgement is not permitted in Indian ASs. For example the Redeemable Preference
Shares are part of share capital though the money has to be returned after certain years. Similarly
debentures are treated liability in all cases whether the debentures are convertible or non-convertible.
(ii) Legal requirements : Application or use of IFRSs is purely based on the need and requirements of
investor’s whose interests are given priority over law. In fact law is made in accordance or conformity
with IFRSs.
In Indian Accounting Standards (ASs) the legal requirements get priority or preference over investor’s
needs. Different regulatory bodies along with Companies Act, Banking Companies Act etc. require
or demand the organisations governed by them to prepare and present their financial statements
as per their norms or rules. For example, the financial statements of joint stock companies must
be prepared as per schedule III of the companies Act 2013; the financial statements of banking
Companies Act as per Banking Companies Act and in the case of insurance companies financial
statements should be in accordance with the norms or rules prescribed by Insurance Regulatory
and Development Authority (IRDA)
(iii) Framework or structure : IFRSs provide a wide framework for financial reporting where a clear guidance
for setting standards has been provided. In the framework given by IFRSs, Assets, Liabilities and Equity
(share capital) are clearly defined.
But no such framework is present for Indian Accounting Standards where components of financial
statements are clearly defined.
(iv) True and fair view : In IFRSs based financial statements the valuation of assets is based on the concept
of fair value that is on market to market value basis. Thus, the ture and fair concept has no relevance
and IAS - I also ignores this concept.
In India accounting is done on historical cost basis. So there is an emphasis on the concept of
true and fair view.
(v) Presentation : International Accounting Standard – 1 : Presentation of financial statements clearly
provides guidelines and overall requirements in presenting financial statements of companies. It requires
certain information in respect of operating and investing activities, discontinued operations, financing
activities and equity.
Accounting Standard (AS) – I : Disclosure of Accounting Policies does not define clear requirements
for disclosure in the financial statements. Different regulatory bodies also provide a format for
International Financial Reporting Standards (IFRSs)/Ind-As
5.7
the organisations regulated by them. For companies, Schedule III of the Companies Act 2013
prescribes the format for the balance sheet and profit and loss account. For insurance companies,
Insurance Regulatory And Development Authority (IRDA) specifies how the financial statements
will be prepared.
In addition to the above, the following points must also be seriously considered for the proper implementation
of IFRSs :
(i) Training : For successful implementation of IFRSs there is urgent need to train teachers, students,
auditors, tax professionals etc. There is also a need for introducing IFRSs as full subject in universities
and chartered accountancy syllabi. There is an urgent need to build adequate IFRS skills among Indian
accounting professionals to manage the conversion projects for Indian Companies.
(ii) Taxes : The IFRS convergence will have significant effect on financial statements and consequently
on tax liability because of true and fair valuation process. So the tax authorities should ensure that
there is a clarity on the tax treatment of items arising out of convergence to IFRSs.
(iii) Communication : It is important to educate the financial analysts in managing market expectations
because IFRSs may considerably change reported earnings and various performance indicators or ratios.
(iv) Distributable profits : Unrealised profit or loss is another issue in the convergence with IFRSs. Since
IFRSs are based on fair value concept, it is difficult to ignore this concept. It will have to be ensured
that distribution of unrealized profit does not lead to the reduction in share capital.
(v) Information Systems : Under IFRSs converged accounting standards, information must be collected
from every section of the organization and used for disclosure purposes. In such situations, business
enterprises need to increase their Information Technology (IT) security, in order to minimize potential
fraud, cyber terrorism and data corruption.
INDIAN ACCOUNTING STANDARDS (IND-AS)
Each country has its own set of rules and regulations for accounting and financial reporting. When an enterprise
decide to raise funds from foreign market/investors, the rules and regulations of investor’s country will apply
and this in turn will require that the enterprise is in a position to understand the differences between the
rules governed by foreign country for financial reporting as compared to its own country of origin. Therefore
translation and re-instatements are of utmost importance in a world that in rapidly globalizing.
Internationally the investors and financial analysis prefer to compare financial statements based on similar
accounting standards and this has led the growing support for an internationally accepted set of accounting
standards. The harmonization of financial reporting all over the world will definitely help to raise faith and
confidence of investors, specially for making their decisions and assess their risks.
In Indian context it was also not possible to adopt globally accepted accounting standards i.e. IFRSs in its
original form due to deviations in various factors like economic environment, legal requirements, political
environment etc. Due to deviations in various factors global standards have been accepted in India but after
making some modifications as per the requirements of economic conditions and legal positions (Tax Laws).
Meaning of Indian Accounting Standard (Ind-AS)
Indian Accounting Standard (Ind-AS) are converged International Financial Reporting Standards (IFRSs) issued
by the government of India under the supervision and control of Accounting standards board (ASB) of ICAI
and in consultation with National Advisory Committee of Accounting Standard (NACAS). National Advisory
Committee on Accounting Standard (NACAS) recommend these standards to ministry of corporate affairs (MCA).
MCA has to spell out the accounting standards applicable for companies in India.
The Ind-AS are named and numbered in the same way as the corresponding IFRSs.
5.8
Financial Accounting: Concepts and Applications
List of Ind-AS
101
First Time Adoption of Indian Accounting Standards
102
Share Based Payment
103
Business Combinations
104
Insurance Contracts
105
Non-current Assets Held for Sale and Discontinued Operations
106
Exploration for and Evaluation of Mineral Resources
107
Financial Instruments: Disclosures
108
Operating Segments
109
Financial Instruments
110
Consolidated Financial Statements
111
Joint Arrangements
112
Disclosure of Interests in Other Entities
113
Fair Value Measurement
114
Regulatory Deferral Accounts
1
Presentation of Financial Statements
2
Inventories
7
Statement of Cash Flows
8
Accounting Policies, Changes in Accounting Estimates and Errors
10
Events after the Reporting Period
11
Construction Contracts
12
Income Taxes
16
Property, Plant and Equipment
17
Leases
18
Revenue
19
Employee Benefits
20
Accounting for Government Grants and Disclosure of Government Assistance
21
The Effects of Changes in Foreign Exchange Rates
23
Borrowing Costs
24
Related Party Disclosures
27
Separate Financial Statements
28
Investment in Associates and Joint Ventures
29
Financial Reporting in Hyperinflationary Economies
32
Financial Instruments: Presentation
33
Earnings per Share
34
Interim Financial Reporting
36
Impairment of Assets
37
Provisions, Contingent Liabilities and Contingent Assets
38
Intangible Assets
40
Investment Property
41
Agriculture
International Financial Reporting Standards (IFRSs)/Ind-As
5.9
DISTINCTION BETWEEN INDIAN ACCOUNTING STANDARDS (IND AS)
AND ACCOUNTING STANDARDS (AS)
India has followed the policy of convergence with the International Financial Reporting Standards and the
Indian Accounting Standards so formulated are called Ind As. The Institute of Chartered Accountants of India
(ICAI) examines and considers the legal or regulatory framework and economic environment in India while
formulating Ind As. The main points of distinction between Ind AS and AS are given below :
1. AS were based on International Accounting Standards (IAS) formulated by International Accounting
Standards Board (IASB). But the Ind AS are based on standards issued by International Financial Reporting Standards Board.
2. Accounting standards were mainly adopted on the basis of International Accounting Standards with
the result that those were primarily a reproduction of the relevant International Accounting Standards.
But the Ind As are based on the convergence with the International Financial Reporting Standards keeping
in mind the legal, economic and social environment in the country.
3. Accounting standards are rule based which are long, complex and with avoidable details. But Ind As
are principle based. Ind As report only the essence of each small transaction which is finally audited.
4. AS are drafted in in technical language with more than one option as in the case of Accounting Standard on inventory valuation. But Ind As are drafted in a lucid (simple and clear) language.
5. Accounting standards are issued under the authority of the Council of ICAI while the Ind As require
the notification from Ministry of Corporate Affairs for date of issue of various Ind As.
6. Ind As are based on the concept of fair value of fixed assets. The term fair value is used to estimate
the value at which the asset could be sold in the market. But the Accounting Standards follow the age
old concept of historical cost.
7. Ind As will ensure that there is no multiple reporting for companies located in different countries that
use one set of financial statements in the home country and the other set for the foreign country. The
multiple reporting has to be done when financial statements are based on Accounting Standards mainly
because of historical cost concept.
8. AS are rule based system of accounting and hence responsible for many frauds. But Ind AS are
principle based and require the companies to report the essence of each smallest transaction which is
finally audited and approved.
9. AS are not treated with trust and reliance by the international investors. But Ind As based on Internal
Financial Reporting Standards would lead to increased trust and reliance because IFRS is treated as
standard reporting method or framework for the preparation of credible financial statements.
10. AS do not ensure uniformity in accounting information. But Ind As would ensure the improvement
and quality of financial reporting.
ROADMAP OR IMPLEMENTATION OF IND-AS IN INDIA
The Ministry of Corporate Affairs issued a notification in the form of Companies (Indian Accounting Standards)
Rules, 2015 on 16 th February 2015. The Rules specify that Indian Accounting Standard (Ind-AS) are applicable
to certain class or types of companies and set out the dates for their applicability.
I. Voluntary Adoption
Companies may voluntarily adopt Ind-AS for financial statements for accounting periods beginning or after
1 st April 2015. If they do they will be required to prepare the comparative figures of the previous accounting
period as per Ind-AS. Once a company decides to follow the Ind-AS, it will be required to follow them in the
subsequent financial statements.
5.10
Financial Accounting: Concepts and Applications
II. Mandatory Adoption
1. The following companies must prepare the financial statements on the basis of Ind AS from the accounting
periods beginning on or after 1 st April, 2016:
(a) Companies whose equity and/or debt securities are listed or are in the process of listing on any
stock exchange in India or outside India and having a net worth of ` 500 crores or more.
(b) Unlisted companies having a net worth of ` 500 crores or more.
(c) Holding, subsidiary, joint venture or associate companies of the above stated listed and unlisted
companies.
These companies will be required to prepare comparative financial statements based on Ind AS for the periods
ending 31 st March, 2016 or thereafter.
2. The following companies will have to adopt Ind AS for financial statements based on Ind AS for the
periods on or after 1 st April, 2017
(a) Companies whose equity and /or net debt securities are listed or are in the process of being listed
within India or outside and having a net worth of less than ` 500 crore.
(b) Unlisted companies having a net worth of ` 250 crores or more but less than ` 500 crore.
(c) Holding, subsidiary, joint venture or associate companies of the above stated entities.
These companies will also be required to prepare comparatives for these financial statements for the period
ending 31 st March, 2017 thereafter.
3. The above stated roadmap is not applicable to :
(a) Companies whose securities are listed or in the process of listing on SME Exchanges.
(b) Insurance companies, banking companies and non-banking finance companies.
(c) Companies not covered by the road map in the mandatory categories as stated above.
These companies shall continue to comply with the existing accounting standards unless they voluntarily choose
otherwise.
Assignments
THEORY BASE ASSIGNMENTS
1.
2.
3.
4.
What is meant by International Financial Reporting Standards (IFRSs). What are the main features of
IFRSs.
Briefly explain any four needs of IFRs.
[B.Com. (Hons.) Delhi 2017]
What do you understand by convergence of IFRs? Is there any need for such convergence?
[B.Com. (Hons.) Delhi 2016]
What are the main requirements for the proper implementation of IFRSs.
6
AccountingProce
ss :An Ove
rvie
w
CONCEPT OF ACCOUNTING PROCESS
Accounting process is the complete sequence of accounting procedures which begin with the recording of
business transactions from source documents in the journal purpose or special purpose subsidiary books, as
the case may be, and end with the preparation of two basic financial statements, namely: the income statement
(or profit and loss account) and the balance sheet. In the case of Limited Liability Companies, the cash
flow statement is also prepared.
The essential steps in the Accounting Process are :
(i) To enter the transactions in the source documents such as purchase invoice, sales invoice, cash receipts,
bank pay-in-slips etc..
(ii) To record or enter the transactions in the general journal or special purpose subsidiary books, as
the case may be, datewise as and when they occur.
(iii) Classifying the transactions (i.e., the entries found in the general journal or subsidiary books) to
post or transfer those entries in the appropriate accounts in the ledger.
(iv) To enter the adjustments, if any, in the general journal
(v) To balance the various accounts in the ledger to prepare the trial balance in order to check the arithmetical
accuracy of the ledger accounts.
(vi) To prepare the final accounts or final statements in the form of trading and profit and loss account
(i.e., income statement) and balance sheet from the trial balance and the adjustments, if any, at
the end of the accounting period to ascertain profit or loss of the business for the accounting period
and the financial position of the business at the end of the accounting period.
THE JOURNAL (OR JOURNAL PROPER)
Meaning : The term ‘journal’ is derived from the French word ‘jour’ which means a day. Journal, therefore,
means a day book or daily record. And since business transactions are first (or originally) recorded chronologically
(in order of dates) in the journal from the ‘source documents’, journal is referred to as book of original or
prime entry.
Essential features : The followings are the essential features of Journal proper:
(i) It is a day book or day record because it records transactions the same day.
(ii) It is a chronological record book since transactions are recorded in order of their date of occurrence.
(iii) It is a book of original entry or first entry since all transactions are first recorded in journal proper.
(iv) It gives the complete picture of each transaction at one place in respect of debit and credit and also
the explanation of the transaction.
(v) As a legal evidence in a court of law, it has more weightage than ledger.
6.2
Financial Accounting: Concepts and Applications
(vi) The business transactions with their debits and credits can be easily posted (transferred) to ledgers.
Thus journal is gateway to ledger.
JOURNALISING
Recording business transactions in the journal with the help of debit-credit rules of the double entry system
is called the Journalising. The following procedure is followed for making each entry in the general journal :
(i) Each transaction is analysed in terms of number of accounts affected. As a rule, every transaction
has at least two accounts, corresponding to its giving and receiving aspects. The account of the
business enterprise recording the transaction is never taken into consideration.
(ii) Find out the types of the accounts affected in a transaction, that is, personal, real or nominal.
(iii) The next step is to apply the rules of debit and credit to each type of affected account.
For the sake of convenience the rules are repeated as under :
Types of Accounts
Debit
Credit
Personal Accounts
The Receiver
The Giver
Real Accounts
What Comes In
(Property acquired)
What Goes Out
(Property disposed off or sold)
Nominal Accounts
Losses and Expenses
Income and Gains
(iv) Finally, the equality of debit and credit amounts must be established.
The following is the typical form of a General Journal :
General Journal
Date
[Account Titles and
Explanation]
Year
(i) Account Debited
Month
Day
Particulars
Voucher
No.
Ledger
Folio
Debit
Amount
`
Credit
Amount
`
(ii) Account Credited
(iii) Narration (i.e., explanation of
the transaction).
ANALYSIS AND JOURNALISING OF SOME BUSINESS TRANSACTIONS
1. Shweta commences a business with a capital of ` 10,00,000 trading under the name of Sai General
Stores.
It must be stated at the outset that we are concerned only with the transactions of Sai General Stores
and not with that of its owner. It is simple to understand that for the purpose of accounting records,
the business, that is, Sai General Stores and its owner, Shweta, are two separate entities irrespective
of the fact that Shweta is the sole owner of her business. The transactions between Shweta and her
business will be recorded in the personal account of Shweta in the same way as transactions with the
customers of the business are recorded.
(i) The accounts affected in the transaction are : Account of the owner Shweta and Cash account.
(ii) The class or the nature of the accounts: Shweta’s Account—Personal Account and Cash Account—
Real Account, because cash is a property. (iii) Applying the rules of Debit and Credit: Cash has
come in—Debit: Cash Account. Shweta—a personal account, is the giver of money to the business
and therefore Credit: Shweta’s Account. (iv) Equality of debit and credit amounts is common to
all transactions and hence not repeated. The term Shweta’s Capital Account is used so as to distinguish
the introduction of cash by persons other than the owner.
Accounting Process : An Overview
6.3
2. Paid into Dena Bank ` 2,50,000.
(i) The two accounts affected are : Cash Account and Bank Account. (ii) They belong to : Real Account—
Cash. Personal Account—Bank. (iii) Apply the Debit-Credit rule: Cash is going out of business and
therefore Cash Account will be credited; Dena Bank Account is a personal account that receives the
benefit or receiver of cash. Hence Dena Bank Account will be debited.
3. Bought goods for ` 2,20,000.
In this case the goods have been bought for cash. This is implied from the transaction since the name
of the party or the words ‘on credit’ are missing. (i) The accounts affected are : Purchases Account
and Cash Account. (ii) Purchases Account is a nominal account because it is an expense of the business.
Hence, Debit: Expenses and Losses. Purchase account may also be treated as real account because
‘goods’ is a thing of value. Cash Account is also a real account. (iii) Purchases Account is debited
because of an expense or goods come into the business and cash account is credited since cash has
gone out of the business.
4. Bought goods from Shri Hari Chand for ` 1,10,000.
In this transaction, it is not clear whether the goods are purchased for cash or on credit. But when
supplier’s name is given and the word ‘paid’ or ‘for cash’ is missing, it can be safely presumed
that the purchases are made on credit. (i) Analysing the transaction, we find the two accounts affected
are : Purchases and Hari Chand’s Accounts. (ii) Purchases Account is a nominal account or real account
as stated in Transaction no. 3 and Hari Chand’s Account is a personal account. (iii) Since purchases
are an expense or goods come in, Debit : Purchases Account and as the benefit is given by Hari Chand,
Credit : Hari Chand’s account.
5. Bought office furniture from Goldage and Co. for ` 75,000.
(i) The two accounts in this business transaction are : Office Furniture and Goldage and Co. Accounts.
(ii) Office Furniture is a property and therefore a real account while Goldage and Co. is a personal
account, a firm made up of person(s) doing business. (iii) Since furniture is coming in, Office Furniture
account is debited and not the purchases account because it is not the goods meant for sale but it
would be retained in the business as an asset. Goldage and Co., being a personal account and the
giver of the benefit, will be credited.
6. Goods sold to Shri Hira Lal for ` 1,25,000.
This is a credit transaction for the reasons explained in connection with Transaction no. 4. Analysing
the transaction, we find that :(i) The two accounts affected are : Sales Account and Hira Lal’s Account.
(ii) Sales Account is a real account as the goods are affected and Hira Lal’s account is a personal account.
Since goods are going out, the sales account is credited (sales account may also be treated as an
income and hence a nominal account. Credit: Income and gains) and the account of Hira Lal would
be debited, being the receiver of the goods.
7. Bought building for cash ` 5,25,000.
(i) The two accounts affected are : Building and Cash. (ii) Building is a property and thus real account
and cash is also a property, a real account. (iii) Building comes into the business and thus Building
Account will be debited; cash goes out of the business, Cash Account will be credited.
8. Paid ` 1,50,000 for goods received from Arun Udyog.
(i) In this business transaction the accounts affected are : Purchases Account and Cash Account. It
may be noted that the account of Arun Udyog is not affected since the firm, the supplier, has received
the payment. (ii) Purchases Account is a nominal account. (iii) Purchases Account is debited and Cash
Account is credited since cash goes out of the business.
9. Received a sum of ` 50,000 being rent for the portion of a building let out.
(i) The two accounts are : Cash Account and Rent Account. (ii) Cash is a real account and rent is a
6.4
Financial Accounting: Concepts and Applications
nominal account. (iii) Applying the debit-credit rules for each, we find cash is coming in and Cash
Account will be debited while rent is received, it is an income and therefore Rent Account is credited.
10. Goods sold to Shyamji for cash ` 1,50,000
(i) The two accounts affected are : Cash Account and Sales Account. Shyamji’s account is not affected
since payment has been received for the sales. (ii) Sales is an income account and cash is a real account.
(iii) Cash Account will be debited as cash comes into the business and Sales Account is credited as it
is a nominal account. Sales account may also be treated as a real account. Credit: What goes out.
11. Shweta, the proprietor contracted with Jain Construction Co. for the renovation of the building
at an estimated cost of ` 1,25,000.
Although event has occurred but since it does not involve any transfer of money or money’ worth for the
time being, it would not be recorded in the account books. Hence no entry.
12. Paid a monthly salary to Mr. Balram, the manager ` 15,000.
In this transaction the two accounts affected are : Salary Account and Cash Account. Though Balram
receives salary as a manager, his personal account will not be affected. The reason is not difficult to
explain. The payment has been made to him by the business in return for his services rendered as a
manager and therefore he is not liable to return the corresponding value. The Salary is an expense and
hence a nominal account. It would be debited while Cash, being the real account, will be credited.
The rule is : The account of a party who receives a fresh benefit from the business will be debited
only if he has to return the corresponding value at a later date. Similarly the account of a party which
gives a fresh benefit to the business would be credited only if the business is to return him corresponding
value at a later date.
13. Received commission from Mr. Kishan Chand ` 5,000.
In this case the two accounts affected are : Commission Account and Cash Account. Kishan Chand’s
Account is not affected since he is paying the business the commission for the services rendered by
the business and therefore there is no obligation to refund the amount. Cash has come in and Cash
Account is debited and commission is a gain or income account and Commission Account is credited.
14. Bought shares in D.C.M. Ltd. for ` 45,000.
The purchase of shares is an investment. The two accounts affected are : Investment Account and
Cash Account. Investment Account is a real Account since shares represent the acquisition or purchase
of property. Investment account would be debited as shares come in and Cash Account is credited, as
cash goes out of the business.
15. Paid by cheque for fire insurance premium ` 20,000.
(i) The two accounts affected are : Bank Account and Fire Insurance Account. (ii) Bank Account is a
personal account because it is an account with a banker. Fire Insurance Account is a nominal account
since it is a business expense. Insurance Account will be debited and Bank Account is credited since
the banker is giving or paying the insurance premium.
16. Paid Shweta’s life insurance premium ` 9,000.
The two accounts affected are : Cash Account and Drawings Account. The life insurance premium
is a personal expense and not a business expense. Thus life insurance is not at all considered. Drawings
Account is personal account and Cash Account is real account. Debit: Drawings Account, the receiver
and Credit : Cash Account since it goes out of the business.
17. Paid for an insertion in the Times of India ` 20,000.
The concerned accounts are : Advertisement Account and Cash Account. Advertisement is a business
expense and thus a nominal account and Cash Account is a real account. Debit: Advertisement Account
and Credit: Cash Account.
18. Bank collected dividends on our investments ` 16,000.
Accounting Process : An Overview
6.5
The accounts affected are : Dividends Account and Bank Account. Since dividends are received on
investments made out of business funds, they are business income and hence nominal account. Bank
Account is a personal account. Debit: Bank Account (Receiver of benefit); Credit: Dividends Account
(business income).
19. Paid Shri Hari Chand on account ` 70,000.
The term ‘on account’ means that the business enterprise already owes some money to Shri Hari Chand
and the same is being paid now partly. In this transaction the account receiving the benefit is Hari Chand’s
Account and cash goes out of the business. Hence, Debit: Hari Chand’s account; Credit: Cash Account.
20. Withdrawn from Bank ` 55,000.
The treatment is simple as the cash has come in and the Bank has given the same. Debit: Cash Account
(i.e., real account — debit : what comes in) : Credit: Bank Account (i.e., personal account — credit:
the giver).
21. Borrowed from Bank ` 65,000.
This transaction involves two accounts, namely: Cash Account and Bank loan Account. Cash Account
is a real account and Bank Loan Account a personal account. Since cash comes in, Cash Account
would be debited while the giver is the bank, Bank Loan Account will be credited. The term Bank
loan (or Bank Overdraft) is used to distinguish the withdrawals from the bank : the money belonging
to the business as against the loan taken from the bank.
22. Received from Shri Hira Lal a bill at two months for ` 40,000.
In this transaction, the two accounts affected are : Bills Receivable Account (i.e., negotiable instrument
which is a sort of deferred payment device) and Hira Lal’s Account. Bills Receivable Account is a
real account and it will be debited while the personal account of Hira Lal is credited since he gives
the bill.
23. Accepted the Bill drawn by Shri Hari Chand ` 20,000.
In this transaction the bill on which the business is liable to make payment has gone out of business
and Hari Chand has received the same. The two accounts affected are: Bills Payable Account being
the real account and the Account of Hari Chand, the personal account. Hence, Debit: the receiver, i.e.,
Hari Chand; Credit: What goes out, i.e., Bills Payable.
24. Paid Shri Mohan Lal cash ` 1,250 in lieu of a cheque.
This item comprises of two transactions which must be recorded simultaneously. The two transactions
are : (i) Receipt of a cheque from Mohan Lal and (ii) Payment of cash to Mohan Lal. As regards the
first transaction Cash Account is debited on the assumption that the cheque is treated as cash. But if
the cheque is immediately paid into the bank, the Bank Account will be debited. Mohan Lal’s account,
however, will be credited since his is a personal account and he is the giver of the cheque. In the second
transaction, Debit: Mohan Lal’s Account since he receives the cash (i.e., a benefit) and Credit: Cash
Account since cash goes out.
25. Paid for repairing the office furniture ` 5,000.
The two accounts affected are : Repairs Account and Cash Account. It must be noted that the Furniture
Account is not affected at all since furniture neither comes in nor goes out. Repairs Account, being an
expense account, comes in the category of nominal accounts and it will be debited and cash account
being real account, is credited as cash goes out.
26 Gave loan to Rachna ` 1,60,000 @ 10%.
The two accounts affected are: Rachna’ Loan Account and Cash Account. Rachna ’s Loan Account is
personal Account and Cash Account which is real account. Debit : Rachna’ Loan Account, being receiver
of the benefit and Credit: Cash Account because cash is going out of business.
27. Returned Goods to Hari Chand ` 10,000.
The two accounts involved are : Hari Chand and Purchase Returns Account. Hari Chand Account is a
6.6
Financial Accounting: Concepts and Applications
personal account. Debit : the receiver of the benefit. Purchases returns account is real account Credit ;
What goes out. Hari Chand is the receiver of the benefit goods while goods are moving out of the firm.
Purchase Returns may also be treated as nominal account. Returns of goods is saving in expense
which is equivalent to income and hence Purchase Returns Account is credited. The latest trend is to
treat Purchases Returns Account as a nominal account.
28. Opened a Bank Account for ` 20,000.
The two accounts involved are : (i) Bank Account — the Personal Account. Debit: the receiver of the
benefit cash; (ii) Cash Account is Real Account. Credit: What goes out. Bank is receiving the benefit
and cash is going out of business firm.
29. Charged Renu ` 5,000 commission for services rendered.
The two accounts affected are : Renu and Commission. Renu’s account is personal account and
Debit: the Receiver of the benefit, that is Service. Commission Account is nominal account. Credit:
Incomes and gains. Renu is the receiver of the benefit service and commission earned is income
of the business.
30. Rachna agreed to pay interest of ` 16,000 on the amount (` 1,60,000) advanced to her.
The two accounts involved are Rachna’ loan account and not Rachna’ and Interest on loan Account.
Rachna’ loan account is a personal account. Debit: The receiver of the benefit (Loan). Interest on
Loan is the income on loan. It is a nominal account. Credit: The income and Gains. Rachna is getting
the benefit for using the loan while interest is income to the firm.
31. Paid income tax ` 1,50,000
The two accounts involved are : Drawings Account and Cash Account. Drawings account is a personal
account. Income tax paid is to be treated as personal expense of the owner. Debit: The Receiver of the
benefit; cash account is a real account. Credit: What goes out. When income tax is paid by firm it is
the personal expense of the owner who receives the benefit. Cash account is a real account. Credit:
What goes out, that is cash.
32. Allowed discount to Hira Lal ` 2,500
The two accounts affected are : Discount Allowed and Hira Lal. Discount Allowed account is a nominal
account and Hira Lal account is personal account. Debit: Discount Allowed Account (for expenses and
losses) and Credit: Hira Lal Account (for the benefit given to him for discount). Cash is not involved.
33. Discount received from Hari Chand ` 1,500
The two accounts affected are: Discount Received and Hari Chand Account. Discount Received Account
is a nominal account and Hari Chand’ Account is a personal account. Debit: Hari Chand Account (for
receiving the benefit of prompt payment). Credit: Discount Received Account (for income and gains)
34. Railways freight paid on furniture ` 1,200
The two accounts affected are: Furniture Account (Railway freight paid on furniture is to be treated
as a part of cost of furniture) and Cash Account. Both are real accounts. Debit : Furniture Account
(What comes in ); Credit: Cash Account (What goes out).
35. Hira Lal returns goods ` 4,500
The two accounts affected are : Sales Returns and Hira Lal. Sales Returns Account is real account or
nominal account. Hira Lal’ Account is personal account. Debit: Sales Returns Account (for goods comes
into business, if treated as real account or debit for loss of income, if treated as nominal account; Credit:
Hira Lal’ Account (for giving loss of income to the firms). At present sales Returns Account is treated
as nominal account.
36. Till taking for the month ` 15,000
Till taking means cash sales, Thus, two accounts involved in this transaction are:
Accounting Process : An Overview
6.7
(i) Cash Account and (ii) Sales Account. Cash Account is a real account and Sales Account may be
treated either as real account or nominal account.
Debit: Cash Account (for cash comes into the firms).
Credit: Sales Account (for goods go out of business if treated as real account or sales is income, if
treated as nominal account).
37. Bank charges ` 250
The bank charges are due on account of the banking service provided by the banker. So the two accounts
affected are : (a) Bank Charges Account and (b) Bank Account. Bank charges account is a nominal
account Debit : The Expenses and Losses; Credit: Bank Account (Giver of the service).
ANALYSIS OF BUSINESS TRANSACTIONS
Taking the transactions of Sai General Stores, given under the heading Analysis of Business transaction
above the journal entries are given below:
Sai General Stores
General Journal
S.No.
Particulars L.F.
Debit
(Accounts & Explanation)
1.
2.
3.
4.
5.
6.
7.
8.
9.
Credit
Amount (`)
Cash Account
To Shweta’s Capital Account
(Being capital introduced by the owner in cash)
Dr.
Bank Account
To Cash Account
(Being cash deposited with Dena Bank
Dr.
Purchases Account
To Cash Account
(Being goods bought for cash)
Dr.
Purchases Account
To Hari Chand’s Account
(Being goods bought on credit from Shri Hari Chand)
Dr.
Office Furniture Account
To Goldage & Co. Account
(Being furniture bought on credit)
Dr.
Hira Lal’s Account
To Sales Account
(Being goods sold to Hira Lal on credit)
Dr.
Building Account
To Cash Account
(Being Building bought for cash)
Dr.
Purchases Account
To Cash Account
(Being goods bought from Arun Udyog for cash)
Dr.
Cash Account
Dr.
10,00,000
10,00,000
2,50,000
2,50,000
2,20,000
2,20,000
1,10,000
1,10,000
75,000
75,000
1,25,000
1,25,000
5,25,000
5,25,000
1,50,000
1,50,000
50,000
To Rent Account
(Being rent received for letting
out a portion of the building)
10.
11.
Cash Account
To Sales Account
(Being goods sold for cash to Shyamji)
No Entry
Amount (`)
50,000
Dr.
1,50,000
1,50,000
6.8
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
Financial Accounting: Concepts and Applications
Salaries Account
To Cash Account
(Being salary paid to the manager)
Dr.
15,000
15,000
Cash Account
Dr.
To Commission Account
(Being commission received in cash from Kishan Chand)
Investments Account
To Cash Account
(Being the purchase of shares in DCM Ltd.)
Dr.
Insurance Account
To Bank Account
(Being premium on fire insurance
of the business paid by cheque)
Dr.
Drawings Account
To Cash Account
(Being premium on life insurance
of the owner paid in cash)
Dr.
Advertisement Account
To Cash Account
(Being payment made for an
insertion in the Times of India)
Dr.
Bank Account
To Dividends Account
(Being dividends collected by bank
on behalf of the firm)
Dr.
Hari Chand’s Account
To Cash Account
(Being payment made to Shri Hari
Chand for goods bought on credit previously)
Dr.
Cash Account
To Bank Account
(Being cash withdrawn from the bank for office use)
Dr.
Cash Account
To Bank Loan Account
(Being money borrowed from the bank)
Dr.
5,000
5,000
45,000
45,000
20,000
20,000
9,000
9,000
20,000
20,000
16,000
16,000
70,000
70,000
55,000
55,000
65,000
65,000
Bills Receivable Account
Dr.
To Hira Lal’s Account
(Being a bill of exchange received from Shri Hira Lal)
40,000
Hari Chand’s Account
To Bills Payable Account
(Being a bill accepted for Shri Hari Chand)
Dr.
20,000
(i) Bank Account
To Mohan Lal’s Account
(ii) Mohan Lal’s Account
To Cash Account
(Being cash paid to Mohan Lal in lieu of cheque)
Dr.
1,250
Dr.
1,250
40,000
20,000
1,250
1,250
Repairs Account
To Cash Account
(Being payment made for the repairs of furniture)
Dr.
Rachna’ Loan Account
To Cash Account
(Being loan given to Rachna)
Dr.
Hari Chand’ Account
To Purchases Returns Account
(Being goods returned to Hari Chand)
Dr.
5,000
5,000
1,60,000
1,60,000
10,000
10,000
Accounting Process : An Overview
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
6.9
Bank Account
To Cash Account
(Being opening of a bank account for ` 20,000)
Dr.
Renu’ Account
To Commission Account
(Being commission earned for service rendered)
Dr.
Rachna’ Loan Account
To Accrued interest Account
(Being interest accrued on the
amount advanced to Rachna)
Dr.
Drawings Account
To Cash Account
(Being income tax paid on behalf
of the owner, Shweta
Dr.
Discount Allowed Account
To Hira Lal’ Account
(Being discount allowed to
Hira Lal for prompt payment by customer)
Dr.
Hari Chand’ Account
To Discount Received Account
(Being discount earned for prompt payment to Hari
Chand, the supplier of Goods)
Dr.
Furniture Account
To Cash Account
(Being payment of railway
freight treated as a cost of furniture)
Dr.
Sales Returns Account
To Hira Lal’ Accounts
(Being goods returned by Hira Lal)
Dr.
Cash Account
To Sales Account
(Being cash sales made)
Dr.
Bank Charges Account
To Bank Account
Dr.
20,000
20,000
5,000
5,000
16,000
16,000
1,50,000
1,50,000
2,500
2,500
1,500
1,500
1,200
1,200
4,500
4,500
15,000
15,000
250
250
(Being bank charges by the Banker)
TYPES OF ENTRIES
Entries in the general journal may be divided into two classes : (i) Simple Entry. (ii) Compound Entry. A
simple entry is one in which only two accounts are affected viz., one account to be debited and another to
be credited with an equal amount. On the other hand, whenever a journal entry involves more than just
two accounts, it is called compound entry. In a compound entry, there may be: (a) Several accounts to be
debited and only one account to be credited; or (b) One account to be debited and several other accounts
to be credited; or (c) Several accounts to be debited and several other accounts to be credited. Journal
entries falling within classes (a) and (b) are generally termed as ‘single compound entries’ and those in
class (c) are generally termed as ‘double compound entries’. However in all cases the total of debit amounts
must be equal to the total of credit amounts.,
OPENING ENTRY
At the beginning of each accounting period, the business entity has to record transactions in a new set of
books of account. The accounts with the balances in the previous year, consisting of Real and Personal Accounts
are entered in the new books of account with the help of an Opening Entry. All the assets accounts are debited
and all the liabilities accounts are credited. The difference between assets and liabilities is to be credited to
capital account as shown below:
6.10
Financial Accounting: Concepts and Applications
Date
Particulars
Debit
April 1
Cash Account
Dr.
5,000
Machinery Account
Dr.
70,000
Furniture Account
Dr.
10,000
Stock Account
Dr.
30,000
Debtors Account
Dr.
50,000
To Bills Payable Account
Credit
2,000
To Creditors Account
22,000
To Capital Account
(Being recording of the opening balances
of assets, liabilities and capital)
1,41,000
LEDGER : MEANING AND FEATURES
The ledger is the principal book of account which contains detail information about the transactions connected
with any individual account at a glance. For instance all the transactions that have taken place with Manvi
are recorded in Manvi’s Account. Similarly all items relating to sales, purchases, bank, machine, building
etc. are recorded or entered in their respective accounts. Also all transactions relating to income and expenses
like interest, commission received, rent paid, stationery etc. are entered in their respective accounts. Hence
(i) All personal accounts would show how much money the business enterprise owes to his creditors and
the amounts it can recover from its debtors. (ii) The real accounts would show the values of the properties,
e.g., building, machinery, furniture, and also the position of stock, bills receivables etc. (iii) The nominal
accounts would show the sources of income, e.g., sales, commission, interest, discount etc., and also the
amount spent on various items or heads of expenses e.g. salaries, rent, etc..
STANDARD FORM OF A LEDGER ACCOUNT
The following is the specimen ruling of the standard form of a ledger account:
Name of the Account
(Account Title)
Page No................
Dr.
Debit side
Date
20...
Particulars
(Account
Credited)
Jan. 1
To
Credit side
Folio
Amount
`
Date
20...
Particulars
(Account
Debited)
Jan. 10
By
Folio
Cr.
Amount
`
POSTING OF TRANSACTIONS FROM GENERAL JOURNAL
Transactions are first entered in the subsidiary books or book(s) of original entry and then transferred to the
ledger. This process is called posting. So posting is another way of saying transferring. The aim of the
posting is to make classified and summarised record of an account in respect of various transactions that
affect it (account).
Illustration (Journal Entries And Their Posting)
Journalise the following transactions and post them to ledger :
`
January
1.
Started business with cash by T
2.
Bought goods for cash
15,000
1,000
Accounting Process : An Overview
6.11
3.
Bought goods from A
3,000
4.
Sold to B
4,000
5.
Paid A on account
2,000
6.
Bought goods from P for cash
7,000
7.
Received from B cash in full settlement
3,880
8.
Returned to P goods worth
200
9.
Paid salaries
700
10.
Received from ‘G’ a fifty rupee note and gave him the change for it
11.
Commission received on sale of other goods
12.
Deposited with the bank
13.
Paid rent by cheque
100
14.
Withdrawn for personal use goods ` 300; cash ` 200
500
500
2,000
Solution :
Journal Entries
Date
Particulars
L.F.
(Accounts & Explanation)
Jan. 1
Jan. 2
Jan. 3
Jan. 4
Jan. 5
Jan. 6
Jan. 7
Jan. 8
Jan. 9
Cash Account
To T’s Capital Account
(Being the capital introduced by T, the proprietor)
Dr.
Purchases Account
To Cash Account
(Being goods purchased for cash)
Dr.
Purchases Account
To A’s Account
(Being the goods bought on credit from A)
Dr.
B’s Account
To Sales Account
(Sales made to B on credit)
Dr.
A’s Account
To Cash Account
(Payment made to A for purchases made)
Dr.
Purchases Account
To Cash Account
(Goods bought from P for cash)
Dr.
Cash Account
Discount Allowed Account
To B’s Account
(Being the amount received from B for
credit sales to him in full settlement)
Dr.
Dr.
P’s Account
To Purchases Returns Account
(Being goods returned to P)
Dr.
Salaries Account
To Cash Account
(Being salaries paid)
Dr.
Jan. 10 No Entry
Debit
Credit
`
`
1
12
15,000
2
1
1,000
2
3
3,000
4
5
4,000
3
1
2,000
2
1
7,000
1
6
3,880
120
15,000
1,000
3,000
4,000
2,000
7,000
4,000
6
8
200
9
1
700
200
700
6.12
Financial Accounting: Concepts and Applications
Jan. 11
Cash Account
Dr.
1
500
To Commission Received Account
500
(Being commission received in cash)
Jan. 12
Bank Account
Dr.
To Cash Account
11
2,000
1
2,000
(Amount deposited with the Bank)
Jan. 13
Rent Account
Dr.
To Bank Account
7
100
11
100
(Being rent paid by cheque)
Jan. 14
Drawings Account
Dr.
13
500
To Purchases Account
2
300
To Cash Account
1
200
(Being the cash and goods withdrawn by the
proprietor for personal use)
Posting to Ledger
Page 1
Dr.
Cash Account
Date
Particulars
(Account credited)
J.F.
Jan. 1
T’s Capital Account
1
Jan. 7
B’s Account
Jan. 11
Commission Received
Amount
`
Cr.
Date
Particulars
(Account debited)
J.F.
15,000
Jan. 2
Purchases Account
1
1,000
1
3,880
Jan. 5
A’s Account
1
2,000
1
500
Jan. 6
Purchases Account
1
7,000
Jan. 9
Salaries Account
1
700
Jan. 12
Bank Account
1
2,000
Jan. 14
Drawings Account
1
2,000
Account
Dr.
Purchases Account
Date
Particulars
(Account credited)
J.F.
Amount
Date
Cr.
Particulars
(Account debited)
J.F.
`
Jan. 2
Cash Account
1
1,000
Jan. 3
A’s Account
1
3,000
Jan. 6
Cash Account
1
7,000
Amount
`
Amount
`
Jan. 14
Drawings Account
1
300
(i) J.F. mens journal folio that is, the page number of journal
(ii) The number given in the J.F. Columns are assumed numbers.
Page 3
Dr.
A’s Account
Date
Particulars
(Account credited)
Jan. 5
Cash Account
J.F.
1
Amount
`
2,000
Cr.
Date
Particulars
(Account debited)
J.F.
Jan. 3
Purchases Account
1
Amount
`
3,000
Accounting Process : An Overview
6.13
Page 4
Dr.
B’s Account
Date
Particulars
(Account
credited)
Jan. 4
Sales Account
J.F.
1
Amount
`
4,000
Cr.
Date
Particulars
(Account
debited)
J.F.
Amount
`
Jan. 7
Cash Account
1
3,880
Jan. 7
Discount Account
1
120
Page 5
Dr.
Date
Sales Account
Particulars
(Account
credited)
J.F.
Amount
`
Cr.
Date
Particulars
(Account
debited)
J.F.
Jan. 4
B’s Account
1
Amount
`
4,000
Page 6
Dr.
Discount Allowed Account
Date
Particulars
(Account
credited)
J.F.
Jan. 7
B’s Account
1
Amount
`
Date
Particulars
(Account
debited)
Cr.
J.F.
Amount
`
120
Page 6
Dr.
P’s Account
Date
Particulars
credited)
Jan. 8
Purchase Returns
Account
J.F.
1
Amount
`
Date
Cr.
Particulars
debited)
J.F.
Amount
`
200
Page 7
Dr.
Date
Jan. 13
Rent Account
Particulars
(Account
credited)
Bank Account
J.F.
Amount
Date
`
1
Cr.
Particulars
(Account
debited)
J.F.
Amount
`
100
Page 8
Dr.
Date
Purchase Returns Account
Particulars
(Account
credited)
J.F.
Amount
Date
`
Jan. 8
Cr.
Particulars
(Account
debited)
J.F.
P’s Account
1
Amount
`
200
Page 9
Dr.
Date
Salaries Account
Particulars
(Account
credited)
J.F.
Amount
Date
`
Jan. 9
Cr.
Particulars
(Account
debited)
Cash Account
J.F.
Amount
`
1
700
6.14
Financial Accounting: Concepts and Applications
Page 10
Dr.
Date
Commission Received Account
Particulars
(Account
credited)
J.F.
Amount
Date
Particulars
(Account
debited)
Jan. 11
Cash Account
`
Cr.
J.F.
Amount
`
1
500
Page 11
Dr.
Date
Jan. 12
Bank Account
Particulars
(Account
credited)
Cash Account
J.F.
Amount
Date
`
1
2,000
Cr.
Particulars
(Account
debited)
Jan. 13
J.F.
Amount
`
Rent Account
100
Page 12
Dr.
Date
T’s Capital Account
Particulars
(Account
credited)
J.F.
Amount
Date
`
Jan. 1
Particulars
(Account
debited)
Cash Account
Cr.
J.F.
Amount
`
1
15,000
Page 13
Dr.
Drawings Account
Date
Particulars
(Account
credited)
J.F.
Amount
Jan. 14
Purchases Account
300
Jan. 14
Cash Account
200
`
Date
Cr.
Particulars
(Account
debited)
J.F.
Amount
`
INTERPRETATION OF A LEDGER ACCOUNT
The interpretation of a particular account in the ledger would depend upon its nature, i.e., Personal,
Real or Nominal.
In this illustration, the first account is cash account. It is real account and the rule for this type of account is
- Debit: What comes in; Credit: What goes out. Thus, the ‘debit’ side of the cash account indicates the
amount of cash coming into business from different sources, e.g., T’s capital account, B’s account and
commission received account.
Regarding personal accounts, we find that the rule :
Debit: The receiver; Credit: The giver, has been complied with. For example in A’s account we have written
‘purchases’ in the credit side since, ‘A’ gives the goods to the business and when he receives cash, his account
has been debited with cash.
Similarly the nominal accounts have also been posted on the basis of the rules applicable to them. Debit:
All losses and expenses; Credit: All incomes and gains. Accordingly the salaries account has been debited
indicating the payment in cash. The commission received account on the other hand represents income to
the business and accordingly credited indicating the receipt of cash.
BALANCING OF ACCOUNTS
Balancing is the process of equalising the two sides of an account. Each account in the ledger receives
both debit and credit entries at some time or the other. Sometimes the debit and credit amount entries will
Accounting Process : An Overview
6.15
equal each other. But if one side has greater amount than the other side, we call the difference as the
Balance. A debit balance indicates that the total amount on the debit side is more than the total amount on
the credit side while a credit balance shows that the total amount of the credit side is more than the total
amount of the debit side. Obviously some amount will have to be added to the short side to make it equal to
or balance with the greater side. The balance of an account may be either debit or credit except in the
case of cash account where it will always be a debit balance. If the sum of debit amounts equals the
sum of credit amounts, it is a closed account and the account is said to have no balance.
BALANCING OF PERSONAL ACCOUNTS
A personal account may have a debit balance when the individual is regarded as the debtor or credit balance
indicating that he is creditor. But if both the sides of a personal account are equal, the person concerned is
neither debtor nor creditor and the account is said to have no balance.
BALANCING OF REAL ACCOUNTS
The real accounts represent the accounts of properties or assets owned by the business. All property accounts
will have either a debit balance or no balance but never a credit balance.
BALANCING OF NOMINAL ACCOUNTS
The nominal accounts represent the expenses incurred or incomes earned. These accounts are not balanced;
they are transferred, at the end of each accounting period, to trading account or profit and loss account,
as the case may be.
SUBSIDIARY BOOKS
A subsidiary book, other than general journal, is always a special subsidiary book or journal because it
is used to record only one type of business transactions. An analysis of the business transactions in a typical
trading business would show that the following transactions occur most frequently and therefore necessitate
the use of special purpose journals or subsidiary books :
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Specific Transactions
Cash receipts and cash payments
Petty cash payments
Credit purchases of goods
Credit sales of goods
Goods returned by the customers
Goods returned to suppliers
Bills receivables
Special Purpose Journal or Subsidiary Books
(1) Cash Book
(2) Petty Cash Book
(3) Purchases Book
(4) Sales Book
(5) Sales Returns Book
(6) Purchases Returns Book
(7) Bills Receivable Book
(8) Bills payables
(8) Bills Payable Book
CASH BOOK : A JOURNALISED LEDGER
It is desirable that the cash transactions must be recorded immediately as far as possible so as to avoid errors,
omissions or frauds. This would also help the trader to know at once the position of cash in time. Cash book
performs the functions of both journal and ledger at the same time. A journal is a book of original entry
while a ledger is a principal book of account. So cash book is also called a journalised ledger. The reason
is that a cash book is similar to journal (or subsidiary book) for the following reasons:
(i) All cash transactions are first recorded in the cash book as is the case with credit purchases and credit
sales transactions which are first recorded in the purchases book and sales book respectively.
(ii) Like journal, all transactions in the cash book are recorded chronologically that is date-wise.
(iii) Narration may also be given in the cash-book.
6.16
Financial Accounting: Concepts and Applications
Cash book is also a ledger account for the following reasons :
(i) Like a ledger account, cash book has also two sides namely Debit side and Credit side.
(ii) The recording of transactions in the cash book is on the pattern of a ledger account. There is no need
to open a separate cash or bank account in the ledger. Cash book is balanced like a ledger account.
(iii) Like a ledger account ‘To’ in the debit side and 'By' in the credit side may also be used.
(iv) Like a ledger, cash book is also a book of final entry.
Types of Cash Book: There are many types of cash book namely
(i) single column cash book for recording cash transactions only.
(ii) cash book with cash and discount columns involving loss or gain on account of discount.
(iii) cash book with cash, bank and discount columns for recording cash and bank transactions simultaneously
including loss or gain on discount allowed and discount received respectively.
(iv) cash book with discount and bank columns.
(v) Petty cash book for recording payment of small expenditures along with receipts of small amounts from
the head cashier.
SINGLE COLUMN CASH BOOK
This type of cash book contains one amount column on each side of the cash book. It is just like a cash account
in the ledger. All cash receipts are recorded on the debit side and all payments are entered on the credit side
respectively.
Posting : Though there is no need to open cash account in the ledger yet recording of cash transactions in
the cash book means recording only one aspect of each transaction in the cash account. The other aspect of a
transaction needs to be posted. When the accounts entered in the cash book are posted, the double entry will
be completed. The procedure for posting is :
(i) Debit the accounts mentioned in the credit (payments) side as :
To Cash Account, and
(ii) Credit the accounts mentioned or entered on the debit side as :
By Cash Account.
CASH BOOK WITH DISCOUNT COLUMNS
Treatment of cash discount : Where cash discounts are allowed and received respectively, additional columns
are provided on the debit side for discount allowed and on the credit side for discount received. It must be
stated that the discount columns in the cash book are not parts of the cash book but are memoranda
(provisional) columns because discount account is a nominal account while cash account is a real account.
On balancing the cash book, therefore, the discount columns are simply totalled but not balanced. Posting
of the cash book with discount columns is done as follows :
(i) Cash or amount columns : Debit the accounts entered on the credit side as : To Cash Account with
the amount written in the cash or amount column; Credit the accounts entered on the debit side as :
“By Cash Account” with the amount written in cash column.
(ii) Discount columns : Debit the particular personal account mentioned on the credit side as To Discount
Received Account with the amount mentioned in the Discount Received Column on the credit side of
the cash book and credit the concerned personal account mentioned on the debit side as By Discount
Allowed Account with the amount entered in Discount Allowed Column on the debit side of the cash
book
Accounting Process : An Overview
6.17
CASH BOOK WITH DISCOUNT, OFFICE CASH AND BANK
COLUMNS [THE RECORD OF BANK TRANSACTIONS]
As a result of the development of banking and consequently the increased use of the cheques, it is convenient
to adopt a combined cash book to record both office cash and bank transactions. The cash book is ruled
with three amount columns on either side of the cash book, namely, 'Discount, Office Cash and Bank'.
Cash columns or Office cash columns in such a case will record actual cash received (in the form of currency
notes and coins) in the debit side and payments in the office cash column in the credit side. Cheques received
should be entered on the debit side of the bank column on the assumption that cheques received are
immediately deposited with the bank. This is in fact the actual business practice. The same procedure
is adopted also when the cash is deposited with or paid into the bank. Payments by cheques should be
entered on the credit side in bank column and also when the cash is withdrawn from the bank. In fact, if
by a transaction the bank balance increases, the bank column is debited and if decreases, the bank
column is credited.
Illustration (Cash Book With Discount, Office Cash And Bank Columns)
Record the following transactions in the cash book with cash and bank columns:
`
Oct. 01
Cash balance
200
Oct. 01
Bank balance
500
Oct. 02
Cash received from sale of shares
12,000
Oct. 02
Paid into Bank
10,000
Oct. 03
Paid Amrit by cheque
2,400
Oct. 03
Received cheque from Amit
1,960
Oct. 03
Allowed him discount
Oct. 04
Paid wages by cash
Oct. 10
Paid Amit's cheque into Bank
Oct. 16
Bought goods for cash
Oct. 18
Paid for stationery cash
300
Oct. 19
Paid Hema by cheque
750
Oct. 19
Discount allowed by her
Oct. 19
Drawn from Bank
640
Oct. 20
Received from cash sales
340
Oct. 24
Cash withdrawn for personal use
400
Oct. 24
Received from Dev Anand
40
500
1,200
50
3,600
Allowed him discount
150
Oct. 25
Paid into bank
400
Oct. 26
Issued cheques for purchases
400
Paid salary by cash
650
Received cheque from Sanjay and paid into Bank
Drew cheque for office use
800
600
Oct. 27
Cash Account
Bank Account
Sales Account
Dev Anand's Account
Cash Account
Sanjay's Account
Bank Account
Balance b/d
Oct. 10
Oct. 19
Oct. 20
Oct. 24
Oct. 25
Oct. 27
Oct. 27
20 x ...
Nov. 1
(c)
(c)
(c)
(c)
19,340
190
3,930
600
—
—
3,600
340
640
—
1,960
—
—
—
150
—
—
—
40
—
8,870
13,660
800
400
1,960
10,000
Purchases Account
Salary Account
Cash Account
Balance c/d
Oct. 26
Oct. 27
Oct. 31
Bank Account
Drawings Account
Cash Account
Hema's Account
Stationery Account
Purchases Account
Bank Account
Wages Account
Amrit's Account
Bank Account
Particulars
(Accounts debited)
in the ledger)
Oct. 26
Oct. 25
Oct. 24
Oct. 19
Oct. 19
Oct. 18
Oct. 16
Oct. 10
Oct. 04
Oct. 03
Amit's Account
—
500
Oct. 03
(c)
12,000
200
Cash Account
—
—
Oct. 02
Date
Investment Account
`
Bank
Oct. 02
Office
Cash
`
Oct. 02
`
Discount
Balance b/d
L.F.
Oct. 01
Receipt
No.
20 x ...
Particulars
(Accounts Credited
in the ledger)
Cash Book with Discounts Office Cash And Bank Columns
20 x ...
Date
Dr.
Receipt
No.
(c)
(c)
(c)
(c)
(c)
L.F.
50
—
—
—
—
—
—
50
—
—
—
—
—
—
`
Discount
19,340
3,930
—
650
—
400
400
—
—
300
1,200
1,960
500
10,000
Office
Cash
`
13,660
8,870
600
—
400
—
—
640
750
—
—
—
—
2,400
`
Bank
Cr.
6.18
Financial Accounting: Concepts and Applications
Accounting Process : An Overview
6.19
Solution :
EXPLANATIONS
Oct. 02: Sale of shares means that the business entity has sold its investments in shares.
Oct. 02: Paid into bank means deposit of office cash into bank. In this way office cash goes out of business
(Credit : What Goes Out) and the bank receives the cash (Debit : The Receiver) because bank
means the banker, a personal account. So there is a contra entry.
Oct. 03: Cheque received from Amit is treated as cash because it has not been deposited immediately. It is
being deposited on October 10. Hence a contra entry is required on this date.
Credit: What Goes Out;
Debit : The Receiver.
Oct. 19: The amount is being withdrawn from the bank for office use. Hence cash is coming into the office
(Debit : What Comes In) and the bank is the giver of the cash (Credit : The Giver). Hence a contra
entry is required to show increase in office cash and decrease in bank balance.
Oct. 24: Cash withdrawn for personal use will not increase the office cash. Hence no contra entry. It is a
simple case in which one party gives the cash i.e. the banker (Credit : The Giver) and the another
party receives the cash, that is the proprietor. The name of the account is Drawings Account. It is a
personal account. Hence, Debit : The Receiver.
Oct. 27: Since a cheque received from Sanjay is paid into bank on the same day, the entry has been made
directly in the bank column on the debit side of the cash book because Debit : The Receiver.
POSTING OF CASH-BOOK WITH DISCOUNT, OFFICE CASH AND BANK COLUMNS
The posting is done as : Debit side or Receipts Side : Each account in the particulars column of the debit
side of the cash book (except Cash and Bank) is credited with amount(s) appearing against its name in the
cash or bank columns (or both cash and bank columns) as well as in the discount column. Debit: Discount
Allowed Account in the ledger with the total of discount column as : "Total discount allowed as per cash
book" (since discount allowed is a loss account) in the debit side. Credit Side or Payments Side : Each
account in particulars column of the credit side of the cash book (except Cash and Bank) is debited with
the amount(s) in the cash column or bank column (or both cash and bank columns) as well as in the discount
column. Discount Received Account is opened in the ledger and is credited with the total of the discount
column as : “Total discount received as per cash book” (since discount received is a gain account) in the
credit side. The opening balance of cash and bank is never posted including the contra accounts. The
balancing is done only for the cash and bank columns. The discounts columns in the debit and credit
sides are never balanced but simply totalled.
PETTY CASH BOOK
Meaning and need : In every business, there is the need to make provision for a large number of payments
in cash of small amounts. Such payments may be made on items like postage, carriage, printing and stationery,
travelling expenses, etc.. These are usually termed as petty cash payments. A proper record for such payments
is necessary because—
(i) In a big business the number of petty payments is large.
(ii) These payments occur at regular intervals.
(iii) It is usually not possible to issue a cheque in payment of any of them.
(iv) The person receiving payment may be an employee of the business.
(v) In the total they may amount, period by period, to small sum.
In a business where the policy is to deposit all cash receipts and make all payments by cheques, it will find
that petty payments can be made more conveniently with cash. From the standpoint of the business, it is most
desirable to separate the record of the petty cash payments from the main cash book. Such a necessity arises
6.20
Financial Accounting: Concepts and Applications
even in the case of a business which does not deposit all receipts in the bank. For this reason, a separate
subsidiary book or book of original entry called Petty Cash Book is used.
It has on the credit side, analysis columns with appropriate headings for the more usual classes of petty expenses.
The Petty Cashier, receives cash (or cheque) for the estimated amount of payments for a certain period of
time frequently. The petty cashier keeps the cash in the office and uses it to pay out only such expenses as he
is authorised to do against a proper receipt or voucher for each item of payment. In certain cases it is not
possible to obtain receipts or vouchers especially when the payment is made for items like postage stamps
or taxi charges. In such a case the printed vouchers, bearing the name of the business firm, are used
and the employee claiming cash for bus or taxi fare etc., has to fill up the same.
THE IMPREST SYSTEM
Meaning and advantages : The method of dealing with petty cash payments which is generally adopted nowa-days is known as the imprest system. In this system, a definite sum of money, say, ` 2,000 is allotted to
the petty cashier. This sum is handed over to the petty cashier for the first time and at regular intervals, say,
monthly or when he uses the whole amount(s), he is given a fresh cheque for the exact amount spent by him.
Therefore, the petty cashier has the same fixed amount at the beginning of each new period. In other words,
the balance of petty cash in hand is generally the fixed imprest amount unless more amount is required.
Illustration (Petty Cash Book)
On March 1, 20x..... a cheque of ` 20,000 was handed over to the petty cashier to pay petty cash expenses
for the month which were as follows :
`
March 1
4
5
6
7
8
9
10
12
13
14
15
16
25
26
27
28
29
30
Postage stamps
Carriage
Bus fare
Postal stamps
Fare to Ghaziabad
Short-hand note books
Envelopes
Advertisement charges for an insertion in the Times of India
Pencils and pins
Taxi fare to Supervisor
Cost of one bottle of ink
Telegram to branch
Registered notice to Shyam
Trunk calls
Files
Printer’ cartridges
Computer paper
Office cleaning
Window cleaner
2,000
500
540
210
215
1,200
412
2,570
415
610
415
520
420
1,530
1,284
2,040
3,500
1,000
500
Enter these transactions in analysis form of Petty Cash Book.
Bank Account
20,000
Postage and Telegrams Account
Printing and Stationery Account
Travelling Expenses Account
4,680
9,266
1,365
20,000
Particulars
(Details)
`
2,000
—
—
210
—
—
—
—
—
—
—
520
420
1,530
—
—
—
—
—
4,680
`
2,000
500
540
210
215
1,200
412
2,570
415
610
415
520
420
1,530
1,284
2,040
3,500
1,000
500
19,881
119
20,000
—
—
—
—
—
1,200
412
—
415
—
415
—
—
—
1,284
2,040
3,500
—
—
9,266
`
—
—
540
—
215
—
—
—
—
610
—
—
—
—
—
—
—
—
—
1,365
`
—
500
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
500
`
—
—
—
—
—
—
—
2,570
—
—
—
—
—
—
—
—
—
—
—
2,570
`
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,000
500
1,500
`
Voucher Total
Postage,
Printing Travelling Carriage AdverOffice
No.
amount Telephones
and
Expenses
tisement Expenses
paid
and
Stationery
(cleaning)
Telegrams
Apr 1
119
Balance b/d
19,881 Bank-Cheque received
Mar 31 balance c/d
Mar 1 Bank
(Cheque received)
Mar 1 Postage stamps
Mar 4 Carriage
Mar 5 Bus fare
Mar 6 Postal stamps
Mar 7 Fare to Ghaziabad
Mar 8 Note books
Mar 9 Envelopes
Mar 10 Advertisement
Mar 12 Pencils & Pens
Mar 13 Taxi fare
Mar 14 Bottle of ink
Mar 15 Telegram
Mar 16 Registered notice
Mar 25 Trunk calls
Mar 26 Files
Mar 27 Printer’s Cartridges
Mar 28 Computer paper
Mar 29 Office cleaning
Mar 30 Window cleaner
Amount Date
received
`
20.x....
Petty Cash Book
Ledger
FolioAccount
Accounting Process : An Overview
6.21
6.22
Financial Accounting: Concepts and Applications
PURCHASES BOOK
The purchases book is used to record the purchases of goods on credit only. If any property other than
goods is bought on credit, it should not be recorded in this book. Similarly the cash purchases are also not
recorded in this book. Thus, a business transaction must fulfill the following two conditions before it is
entered in the purchases book : (i) The credit purchases involving no payment of cash on the spot. (ii) The
articles, goods, or merchandise purchased, are those which are meant for sale and not as a property or asset
of the business.
POSTING OF THE PURCHASES BOOK
The posting of the purchases book in the ledger requires the opening of two types of accounts. One type
consists of only one account, namely: Purchases Account which is debited with totals of the amount column
of Purchases Book. Another type consists of the accounts of individual suppliers and these personal accounts
are credited with the relevant amount of purchases and words "By Purchases Account" are mentioned
in the Particulars column.
SALES BOOK
The sales book or sales day book is written up in the same way as the purchases book. It is used to record
only the sale of goods on credit. Thus, the following two points must be kept in mind before a sale is
entered in this book : (i) that the transaction involves sales on credit only with no immediate cash payment;
(ii) that the sale is of goods only in which the business enterprise deals.
POSTING OF THE SALES BOOK
The double entry in the ledger in respect of sales book is completed by opening two types of accounts:
(i) In one type Sales Account is credited with the total amount of the sales taken from the relevant amount
column of the sales book.
(ii) In another set, the account(s) of individual customer(s) are debited with the amount and words: To
Sales Account are mentioned in the Particulars column.
PURCHASES RETURNS BOOK
(RETURNS OUTWARDS BOOK)
It is very common for a business firm to return some of the goods bought to the suppliers (or vendors) because
the goods may not meet the requirement of the purchaser.
POSTING OF PURCHASES RETURNS BOOK
The posting of the purchases returns book is done as follows :
(i) A new account called Purchases Returns Account is opened in the ledger. The periodic (weekly
or fortnightly or monthly) total of the amount column is credited to the Purchases Returns Account.
It means that we use only the credit side of the Purchases Returns Account as follows: (a) In the
date column, we write the date of closing the Purchases Returns Book. (b) In the particulars column
we write : By Total Purchases Returns as per Purchases Returns Book (c) In the ledger folio column
we write the page number of the Purchases Returns Book. (d) In the amount column, we write the
total of the amount column of the Purchases Returns Book.
(ii) We now debit the accounts of the suppliers to whom the debit notes are sent with the respective
amounts of the goods returned. It means that we do not open the new accounts of the suppliers. In
fact we use the debit side of the already opened (existing accounts) of the suppliers : (a) In the
Date Column, we write the date of the goods returned (b) In the particulars column, we write : To
Purchases Returns Account (c) In the ledger folio column, we write the page number of Purchases
Returns Book (d) In the amount column we write the net amount of the goods returned. It must be
Accounting Process : An Overview
6.23
kept in mind that the posting in the accounts of suppliers is done date-wise, that is, as and when the
goods are returned.
SALES RETURNS BOOK
(RETURNS INWARDS BOOK)
Sales Returns Book is also a special purpose subsidiary book. It is used to record goods returned to the business
firm by the customers and since the goods are coming into the business, it is also called Returns Inward Book.
The specimen of Sales Returns Book is given below :
Date
Particulars
(Name of the customers)
L.F.
Credit
`
Year
Month
Amount
Day
(i) Name of the Customers
who have returned the goods.
(ii) When Credit Note No.
is not available, enter the
description of the goods returned.
POSTING OF SALES RETURNS BOOK
The posting of the Sales Returns Book is done as follows :
(i)
We open a new account called Sales Returns Account or Returns Inwards Account and debit it
with the total amount of the Sales Returns Book. It means that we use only the debit side of this
account and fill up the details as : (a) In the date column we write the last date of the Sales Returns
Book (b) In the particulars column we write : By Total Sales Returns As Per Sales Returns Book
(c) In the Journal folio column, we write the page number of the Sales Returns Book. (d) In the
Amount Column, we write the total net amount of the goods received from the customers. In this
way, the double entry in the ledger is completed.
(ii)
We now credit the accounts of the customers to whom the credit notes have been sent with the amount
of the goods returned by them. It means that we do not open the new accounts of the customers. In
fact, we use the credit side of the already opened (i.e. existing accounts) accounts of the customers:
(a) In the Date Column, we write the date of the Goods received from the customer (b) In the Particulars
Column, we write : Sales Returns Account; (c) In the Folio Column, we write the page number of
the Sales Returns Book: (d) In the Amount Column, we write the net amount of the goods received
from customers. Posting in the accounts of the customers is done date-wise, that is, as and when
the goods are received from them.
BILLS RECEIVABLE BOOK
This book is used to record the details of bills receivable on which the business enterprise will receive the
amounts from other parties in future. The entries to be made in this book include the name of the acceptor
(debtor), the terms, due date, the amount and other details.
BILLS PAYABLE BOOK
This is also a book of original entry and is used to record the particulars of all the 'bills payable's accepted
by the business enterprise for the purpose of paying at a future date the amounts due by it (the business
enterprise or trader) to its creditors. The entries to be made in this book relate to the name of the drawer,
the name of the payee, the period, the due date, and other particulars. Then the acceptance is duly returned
to the drawer.
POSTING OF BILLS RECEIVABLE AND BILLS PAYABLE BOOKS
The total of the amount column of the Bills Receivable Book is debited to the Bills Receivable Account
while the amount of each bill receivable is posted to the credit of the account of the party from whom it is
6.24
Financial Accounting: Concepts and Applications
received. Similarly, the amount of each bills payable is posted to the debit side of the drawer's account in
the ledger and the total of the amount column of the Bills Payable Book is posted to the credit side of Bills
Payable Account in the ledger.
NATURE AND FEATURE OF A TRIAL BALANCE
A trial balance is a schedule or list of the names and balances (both debit and credit) of all the accounts
appearing in the ledger including cash and bank balances from the cash book.
The main features of a trial balance may be noted as follows :
(i) It is not an account, and so double entry system of book-keeping has no role in its preparation.
(ii) It is simply a list or schedule of balances of all accounts, (personal, real and nominal) appearing in
ledger including the balances of cash book.
(iii) It can be prepared any time during the year i.e. on monthly or quarterly or yearly basis.
(iv) It is a method of checking or testing the accuracy of the transactions recorded in different books
of original entry and their posting to ledger.
(v) Some errors may not be revealed even by the trial balance such as errors of principle or compensatory
errors.
(vi) The abbreviations Dr. and Cr. are never written on the left-hand and right-hand corners respectively
of its top.
(vii) It is prepared on a particular date.
OBJECTS OF A TRIAL BALANCE
The objects of a trial balance are :
(i) it is a test of the arithmetical accuracy of the books;
(ii) it is a proof that double entry of each transaction has been recorded;
(iii) it provides the basis for the preparation of final accounts or financial statements—profit and loss
account and the balance sheet;
(iv) it provides a summary of all transactions of an accounting period so that management can use figures
for comparison purposes.
LIMITATIONS OF A TRIAL BALANCE
A trial balance suffers from the following limitations :
(a) It does not guarantee that all transactions have been currectly analysed and posted in proper accounts.
For example, if the wages paid for the installation of a machine have been debited to Wages Account
instead of Machine Account, the trial balance would still tally.
(b) It can be prepared only by those enterprises which make use of double entry system. So the small
firms cannot afford to adopt this system because of high costs.
(c) It does not ensure that all transactions have been actually recorded in the subsidiary books. For
example if purchases bills were to be completely omitted, that trial balance would still agree.
(d) If a trial balance has not been prepared accurately, the final accounts prepared from such a trial
balance would not be reliable. In fact such final accounts would not serve the specific requirements
of the various users of the accounting information.
FORMAT OF A TRIAL BALANCE
Trial balance is not an account. It is only a list of or schedule of balances of ledger accounts including
cash and bank balances. The abbreviations Dr. and Cr. are never written on the left hand and right
Accounting Process : An Overview
6.25
hand corners of its top. It is a prepared on a particular date. Trial balance is prepared on General Journal
Sheet with two amount columns for debit and credits balances. The accounts having debit balances are entered
in the debit amount column and credit balance accounts are entered in the credit amount column. The sums
of each column should be equal. The standard format of a trial balance is given below :
Trial Balance As on...........(Closing Date)
Name of the Account
L.F.
Debit
Balance
`
Credit
Balance
`
Illustration (Preparation of Trial Balance)
Arrange the following balances taken from the ledger of Sapna, Komal and Co. into a trial balance at 31
March.......
`
Cash
9,200
Trade debtors
15,000
Rent
4,800
Stores
18,000
Salaries payable
1,500
Insurance
3,600
Other expenses
5,500
Land
10,000
Depreciation
800
Accumulated depreciation
2,400
Salaries
20,400
Motor vehicle
4,000
Trade creditors
25,000
Cost of goods sold
54,000
Advance from a customer
1,400
Sales
90,000
Drawings
2,000
Capital
27,000
Solution:
Trial Balance of Sapna, Komal and Co. As on 31 March.....
L.F.
Debit
Balance
`
Credit
Balance
`
9,200
—
15,000
—
Rent
4,800
—
Stock
18,000
—
—
1,500
Insurance
3,600
—
Other expenses
5,500
—
10,000
—
Name of the Account
Cash
Trade debtors
Salaries payable
Land
6.26
Financial Accounting: Concepts and Applications
Depreciation
Accumulated depreciation
Salaries
Motor vehicle
—
—
2,400
20,400
—
4,000
—
—
25,000
54,000
—
Trade creditors
Cost of goods sold
800
Advance from customers
—
1,400
Sales
—
90,000
2,000
—
—
27,000
1,47,300
1,47,300
Drawings
Capital
PREPARATION OF A TRIAL BALANCE
There are three methods of preparing a trial balance, namely :
(i) Trial balance with net or ultimate debit and credit balances;
(ii) Trial balance with totals : Under this method, the trial balance is prepared by taking into consideration
the total of each side of various accounts without balancing them in the form of debit and credit balances
respectively.
(iii) Trial balance with balances and totals : As the name implies under this method, trial balance is prepared
by combining the first and second methods.
However, in practice the trial balance is prepared with debit and credit balances of various accounts in
the ledger along with balances in the cash book.
The students may be asked in an examination problem to prepare a trial balance from a given list of balances
extracted from the ledger. This involves the selection of debit and credit balances. The following rules may
be helpful in this regard :
Debit Balances : assets, drawings, sundry debtors, losses and expenses.
Credit Balances : liabilities, capital, sundry creditors, gains and incomes.
CHECK LIST OF MOST FREQUENT DEBIT AND CREDIT BALANCES
Debit Balances
Debit Balances
Credit Balances
Cash in hand
Interest paid
Capital
Cash at bank
Leasehold or Free-hold
Sundry creditors
Drawings
premises
Bank overdrafts
Purchases
Profit & loss account (Dr.)
Bills payable
Office furniture or
Freight & excise duty
Sales
furniture & fixtures
Loose tools
Purchases returns
Land and buildings
Motive power
Discount received
Machinery
Office equipment
Loans (credit)
Opening stock
Debit balances
Provision for bad and
Debit balances
Motor repairs &
doubtful debts
Closing stock
maintenance
Returns outwards
Sundry debtors
Stock of stationery
Profit & loss account (Cr.)
Postage and telegrams
Purchase of stationery
Outstanding salaries, rent etc.
Accounting Process : An Overview
6.27
Rent, rates, taxes
Post-dated cheques
Provision for discount on
Salaries
Accrued income
debtors
Wages
Goodwill
Income received in advance
Carriage – inwards
Patents
Provision for depreciation
Discount allowed
Trade marks
Reserve fund and other funds
Lighting and heating
Preliminary expenses
Mortgage payable
Printing & stationery
Unexpired expenses
Rent income
Gas, water, electricity
e.g. insurance
Interest income
Stable expenses
Work-in-progress
Accumulated depreciation
Repairs and renewals
Petty cash
Provision for discount
Cartage
Prepayments (payments
on creditors
Travelling expenses
in advance)
Insurance
Investments
Sundry expenses
Audit fees
General expenses
Legal charges
Loans (debit)
Maintenance
Bad debts
Employer's contribution
Bills receivable
to provident fund
Plant equipment
Import and export duties
and outwards
Depreciation expense
Plant & machinery
Returns inwards
Illustration (Correcting A Wrong Trial Balance)
The clerk of a firm wrongly prepared the trial balance. You are required to draw up a correct trial balance
stating reasons in brief :
Trial Balance For the Year Ending 31 March 20...
Debit Balance
Credit Balance
`
`
Capital
–
20,000
Drawings
–
5,000
Purchases
–
90,000
1,30,000
—
Returns inwards
700
—
Returns outwards
900
—
Carriage inwards
1,100
—
Carriage outwards
800
—
Duty on purchases
2,000
—
11,000
—
Motor Van
—
6,000
Salaries
—
5,000
Sales
Opening stock
6.28
Financial Accounting: Concepts and Applications
Rent
2,000
—
Taxes
300
—
Insurance
600
—
Sundry Debtors
8,000
—
Sundry Creditors
6,000
—
Cash in hand
500
—
Cash at bank
—
2,500
1,000
—
–
20,400
1,64,900
1,48,900
Furniture
Land
Solution :
(Correct) Trial Balance As On 31 March 20… (i)
Debit Balance
Credit Balance
`
`
—
20,000
Drawings (ii)
5,000
—
Purchases (iii)
90,000
—
—
1,30,000
700
—
—
900
1,100
—
800
—
2,000
—
Opening Stock
11,000
—
Motor Van (vii)
6,000
—
Salaries (viii)
5,000
—
Rent
2,000
—
Taxes
300
—
Insurance
600
—
—
6,000
8,000
—
500
—
Cash at bank (xi)
2,500
—
Furniture
1,000
—
Land (xii)
20,400
—
1,56,900
1,56,900
Capital
Sales (iv)
Returns Inwards
Returns Outwards (v)
Carriage Inwards
Carriage Outwards (vi)
Duty on purchases
Sundry Creditors (ix)
Sundry Debtors (x)
Cash in hand
FOR REASONS ATTENTION PLEASE
(i) Trial balance shows different balances on a particular date and not ‘for the year’. Hence it is headed
‘as on’ and ‘not for the year’.
(ii) Drawings are personal expenses made by the proprietor out of business cash. It has therefore a debit
balance.
Accounting Process : An Overview
6.29
(iii) Purchases represent an expense. Debit: All Expenses OR Purchases represent current asset goods (real
account) which come into the business.
(iv) Sales represent income or revenue, a nominal account, hence a credit balance.
(v) Returns outwards means saving in expenses. Hence a nominal account or Returns outwards means goods
moving out of the business; credit what goes out.
(vi) Carriage outwards is an expense on sale; hence it has a debit balance.
(vii) Motor Van is an asset—a real account i.e. debit what comes in; hence a debit balance.
(viii) Salaries are expenses—a nominal account and so has debit balance.
(ix) Sundry creditors are liabilities on the business; hence a credit balance.
(x) Sundry debtors are assets of the business; hence a debit balance.
(xi) Cash at bank is an asset representing the account of banker—a debtor; hence a debit balance.
(xii) Land is an asset —a real account—debit what comes in; hence a debit balance.
TRIAL BALANCE : NOT A CONCLUSIVE PROOF OF ACCURACY
The agreement of the two sides of the trial balance, though a prima facie test of arithmetical accuracy, is not
a conclusive or absolute proof of the accuracy of the entries in the books of original entry and their postings
to the ledger. In other words, the trial balance may agree without disclosing certain errors. The following
classes of errors are not disclosed by the trial balance :
1. Errors of omission : When a transaction is not recorded at all or partially recorded in the book of
original entry, both its debit and credit aspects would be omitted. The trial balance, therefore, is not
affected.
2. Errors in the book(s) of original entry : The trial balance would not be affected if an entry is in a
wrong book of original entry or entered in the proper subsidiary book but with a wrong amount.
3. Errors of commission: Such errors consist of entries of the transactions in a wrong account of the
same class. It means the posting of an item is made to the correct side (debit or credit) but of wrong
account e.g., debiting or crediting R.N. Tiwari's Account instead of A.N. Tiwari's Account.
4. Errors of principle : An item of nominal account entered into a real account or vice versa. For example
a sum of ` 50 paid on the repairs of furniture is debited to furniture account and not repairs account.
The errors of principle do not affect the agreement of the trial balance because they are correctly
recorded so far as the debit or credit side of the wrong class of account is concerned.
5. Compensatory errors : These errors, also called self-balancing or equalising errors, do not affect
the agreement of the trial balance because errors on one side of the ledger account are compensated
by errors of the same amounts on the other side e.g., Parveen's account debited with ` 150 instead of
` 120 and Bindiya's account with ` 200 instead of ` 230.
ERRORS DISCLOSED BY A TRIAL BALANCE
The foregoing discussion should not lead to the conclusion that the trial balance is a useless statement. It is
definitely a sure test of detecting most of the mechanical or clerical errors such as :
(i) Omission in postings : An item entered in the relevant subsidiary book like cash book but left out of
the ledger, e.g., ` 500 paid for rent, though entered in the cash book yet not posted to the Rent Account
in the ledger.
(ii) Posting on the wrong side of an account e.g., cash received from Amit wrongly posted to the debit
side of the Amit's account.
(iii) Posting of wrong amount : The examples are : ` 65 written as 56; mistakes made in postings such as
8 taken as 0; or 3 for 5 and vice versa.
(iv) Double postings : An item posted twice in a ledger account, e.g., a sum of ` 500 paid to Mohan posted
twice in his account.
6.30
Financial Accounting: Concepts and Applications
(v) Incorrect casting : The total of sales account undercast by ` 1,000, i.e., ` 5,000 instead of ` 6,000.
(vi) Errors in casting a book of original entry, e.g., the total of sales book ` 50,000 may be posted as
` 5,000.
(vii) Omission to write in trial balance the balance of an existing account, e.g., the balance of opening
stock account ` 2,500 not entered in the trial balance.
(viii) Errors in adding up columns of trial balance.
(ix) Missing of balances in extracting lists of debtors or creditors.
SPACE FOR REVISION
Accounting Process : An Overview
6.31
Assignments
THEORY BASE ASSIGNMENTS
1.
2.
3.
4.
5.
6.
7.
Enumerate the various steps in the Accounting Process.
Define a general journal; state its features.
Define a Ledger. Why is it known as the principal book of account ? Give its features.
Define the terms balance and balancing. What is the importance of balancing?
What are different types of subsidiary books ?
“Cash book is both a book of original entry and a book of final entry” Explain.
What are different types of cash book ? How do they differ from one another ? Give the ruling of a
columnar cash book.
8. Explain, in brief, the analytical petty cash book on imprest system.
9. What is a trial balance ? What are its uses ?
10. What are the mistakes that the trial balance shows and what mistakes does it not show ?
PRACTICAL ASSIGNMENTS
1.
2.
3.
4.
5.
6.
Journalise the following transactions in the books of Dilip :
(a) A cheque for ` 950 is sent to Anand and Co., a creditor in full settlement of the amount due ` 975
(b) A sum of ` 500 is received from B and Co. against a debt previously written off.
Study carefully the following transactions of Kalicharan and state with reasons the accounts to be debited and credited
in his books in each case :
(i) Kalicharan started his business with cash ` 20,000.
(ii) Purchased from Biswanath goods for cash 5,000.
(iii) Bought from Parasanna goods on credit for ` 2,000.
(iv) Bought office furniture for cash ` 5,000.
(v) Paid office rent ` 3,000.
Journalise the following transactions :
(i) Received on sale of investments ` 56,000.
(ii) Mr. Gopinath, a typist, was paid his salary by cheque ` 12,000.
Journalise the following transactions in the books Aasha Rani :
(i) Received from Keshav ` 950 and discount allowed to him @ 5%
(ii) Purchased furniture from Yashpal and Co. for ` 20,000, out of which ` 15,000 was paid to them by cheque
immediately.
Journalise the following transactions :
(i) Depreciate furniture purchased for ` 10,000 @ 10% per annum for 3 months.
(ii) Received from Murthy ` 1,950 in full settlement of his account for ` 2,000.
Journalise the following transactions in the books of Basu :
(a) Basu sold goods to Chowdhary for ` 750 against a cheque.
(b) Received as commission ` 400
6.32
7.
8.
9.
10.
11.
12.
13.
14.
15.
Financial Accounting: Concepts and Applications
(c) Bank paid ` 300 directly for insurance premium of Basu
(d) Cash deposited into bank ` 5,000
(e) Withdrawn cash from bank for personal expenses ` 850.
Pass the necessary journal entries for the following :
(i) A fire occurred on 15 March 2017 and stock of ` 25,000 was destroyed. The Insurance Company accepted a claim
for ` 22,000
(ii) Wages ` 450 were paid for erection of plant.
If the owner' equity is ` 98,765 and total assets ` 9,98,877 what will be the total liabilities.
Journalise the following :
(i) Machine with original cost of ` 3,000 was sold for ` 4,300. Depreciation provision to date was ` 300. ` 30 were
paid for removing the machine from the plant. ` 43 were paid commission to the selling agent.
(ii) Paid Mukund ` 325 for goods bought from him last month for 340 in full settlement.
Give journal entries for the following :
(i) Goods worth ` 5,000 given as charity
(ii) Received ` 975 from Hari Krishana in full settlement of his account ` 1,000
(iii) Received a first and final dividend of 60 paise in a rupee from the official receiver of Mr. Rajan who owed
` 10,000.
Journalised the following transactions in the books of Shri Muralidhar, a timber merchant, giving suitable
illustrations :
(a) Issued a cheque in favour of M/s Karanvir Timber Company on account of the purchase of timber of ` 75,000
(b) Paid ` 2,500 in cash for installation of a machinery
(c) Timber sold costing ` 60,000 to Kalu Ram at an invoice price 10% above cost less 5% trade discount.
(d) Paid ` 500 to repair second hand furniture.
Record the following transactions in the journal of Rose :
(i) Purchase of an accounting machine for ` 3,800 on credit from Aditi Ltd.
(ii) Goods were distributed from stock as free samples to the value of ` 250 as part of an advertising compaign.
(iii) A Rose drew a cheque for ` 550 on the business bank account to pay for a bicycle for his own private use.
(iv) Anand, a customer, returned goods invoiced at ` 120 because they were unsuitable.
Journalise the following transactions :
(i) Paid ` 25 as wages for installation of machine.
(ii) Sold goods to Kangli. List price ` 2,000. Sales subject to 10% trade discount and 5% cash discount; Payment
is made immediately. Kangli availed of cash discount.
(iii) Supplied goods costing ` 600 to Shalu. Issued invoice at 10% above cost less 5% trade discount.
(iv) Goods costing ` 1,000 distributed as samples.
(v) Goods costing ` 500 was stolen in transit.
(vi) Cash embezzled by Renu, an employee, ` 4,500.
Journalise the following transactions in the books of Mahavir.
(i) Bought goods on credit from A for ` 400
(ii) Goods returned by B ` 50.
(iii) Paid carriage inwards ` 100.
Journalise the following transactions.
(a) Drew goods for private use –` 500.
(b) Paid office rent to landlord –` 2000.
(c) ` 700, due from a customer Anmol was written off as bad.
Accounting Process : An Overview
6.33
(d) Bought stationery –` 300.
(e) Sold goods to Rakesh –` 5,000.
16. Record the following transactions completed during the month of June of the current year in the general journal:
`
1
Paid rent for the month
300
2
Paid cash for office stationery
30
8
Purchased office equipment on account
5,000
13
Paid advertising expenses
300
15
Received cash from customers on account
4,000
18
Paid creditors on account
2,000
25
Withdrew cash for personal use
1,000
29
Paid telephone bill
300
30
Fees earned and billed to customers
10,000
30
Paid for repairs to typewriter
150
30
Paid electricity bill for the month
200
17. Journalise the following transactions in the books of Nidhi :
Jan. 1
Commenced business with ` 15,000; of which ` 5,000 deposited in the bank.
Jan. 3
Bought furniture –` 2,000
Jan. 8
Purchased goods from Shyam ` 10,000
Jan. 10
Sold goods to Mani for ` 50,000 and accepted a cheque for ` 3,000 which was sent to bank.
Jan. 15
Returned goods to Shyam worth ` 500 as the goods were damaged in transit.
Jan. 20
Sold goods for cash ` 800 at a trade discount of 5%
Jan. 22
Purchased goods worth ` 600 by paying cheque at a trade discount of 10%
Jan. 25
Paid rent for the month – ` 550
Jan. 26
Paid Shyam ` 80,000 on account by cheque
Jan. 30
The above cheque was returned by Shyam since the signature on it did not tally. Payment was made
in cash immediately.
18. Enter the following transactions in the general journal of Shri Pankaj Kukreja :
`
Jan. 1
Commenced business with cash
1,50,000
Jan. 2
Deposited with the bank
1,00,000
Jan. 4
Bought goods from Reema
50,000
Jan. 6
Sold goods to Samita
10,000
Jan. 8
Bought goods for cash
30,000
Jan. 10 Received cash from Samita
4,900
Discount allowed
100
Jan. 12
Paid Reema by Cheque
35,000
Received discount
200
Jan. 15
Returned damaged goods to Reema
2,000
Jan. 19
Samita returns damaged goods
1,500
Jan. 25
Paid salaries
15,000
Jan. 28
Paid House Tax
2,000
Jan. 30
Paid for stationery
500
Jan. 31
Paid for carriage outwards
150
6.34
Financial Accounting: Concepts and Applications
19. Journalise the following :
`
(i) Paid by cheque insurance premium
400
(ii) Paid by cheque life insurance premium
500
(iii) Drew a cheque for petty cash
200
(iv) Sent out our acceptance at two months for 1,000 to Madhu
(v) Bills payable due this day met at bank
500
(vi) Received B’s acceptance for ` 700 from A in settlement of
latter’s account for
750
(vii) Sold goods for cash
1,000
(viii) Discounted Amit’s acceptance for
1,000 at 980
(ix) Sold goods to Malti and she endorsed Renu's bill to us for
500
(x) Bank collected interest on our investments
450
(xi) Received a cheque for cash sales
900
(xii) Received dividend on shares of D.C.M. Ltd.
530
(xiii) Paid into bank.
2,000
(xiv) Received a cheque for commission due to us
76
(xv) Bought Government bonds for
50,000
(xvi) Paid for postage
20
(xvii) Paid for general expenses ` 50, salaries ` 5,000, rent
` 2,500.
(xviii) Purchased machinery for
1,50,000
(xix) Bank charges made by bank
20
(xx) Paid for an advertisement in The Pioneer Newspaper
1,500
(xxi) Bought goods from R and Co. for ` 7,000, accepted their bill for
` 1,500 and gave them a cheque for the balance
(xxii) Sold goods to Rita Agencies for ` 6,000, received their acceptance for
` 2,000 and balance in cash
(xxiii) Returned goods to Sujata
500
(xxiv) Chandra returned goods to us
150
(xxv) Endorsed N's acceptance for ` 550 over to M on account for
500
(xxvi) Bought from Lata cosmetics for proprietor's wife
40
(xxvii) Bought National Savings Certificates
5,000
(xxviii) Received dividends on shares
6,000
(xxix) Paid by cheque Malhotra Enterprise's bill for repairs of machinery
100
(xxx) Received a cheque for ` 1,100 from Beena to be credited to Neena for
1,000
(xxxi) Received from Tara by cheque
800
(xxxii) Paid Tara's cheque into bank
(xxxiii) Bank returned Tara's cheque dishonoured.
(xxxiv) Borrowed from the bank
5,000
(xxxv) Repaid Anshu's loan of ` 2,000 with interest
150
(xxxvi) Paid professional tax to city corporation
500
20. Write up ledger accounts from the following transactions and balance the accounts :
20...
Jan. 1 I commence business with cash ` 41,200, stock-in-trade ` 21,700 and Machinery ` 67,000
Jan. 2 I buy goods for ` 80,000 from B. Sen on credit
Jan. 5 I pay wages ` 5,000
Accounting Process : An Overview
Jan.
6.35
9 I buy stationery for ` 200
Jan. 10 I sell goods for ` 51,000 to T. Das on credit
Jan. 15 I pay B. Sen ` 30,000
Jan. 16 I buy goods from B. Sen for ` 40,000 on credit
Jan. 20 T. Das pays me ` 40,000
Jan. 25 I pay B. Sen ` 35,000
Jan. 26 I buy goods for cash ` 5,000
Jan. 28 I withdraw cash from business ` 1,000 for fees of the school of my daughter
21. On 1 January 20... the following were the ledger balances of Shri Ram Chander :
Cash in hand –` 2,000; cash at bank –` 45,000; Bills payable –` 6,000; Zahir–` 5,000 (Dr.) Stock –` 25,000;
Gautam –` 14,000 (Cr.); Narayan –` 10,000 (Dr.); Ramneet –` 5,600 (Cr.).
Other transactions during the month were :
`
Jan.
2 Bought goods from Gautam
6,000
Jan.
4 Sold Goods to Narayan
7,000
Jan.
6 Bought goods from Ramneet
7,200
Jan. 10 Sold to Zahir
3,000
Jan. 15 Paid to Gautam by Cheque
8,000
Jan. 20 Received from Narayan
Allowed him discount
11,000
110
Jan. 20 Accepted Ramneet’ draft
(Bills Payable) at 3 Months
7,000
Jan 22 Sold goods to Narayan
3,000
Jan. 24 Paid rent by cheque
1,200
Jan. 28 Sold to Zahir
4,000
Jan. 31 Paid salaries by cheque
5,000
Make journal entries and post them to ledger
22. Prepare Salma' account as it would appear in the books of Anupama :
`
20…
Jan.
1 Sold goods to Salma
10,000
Jan.
3 Received from Salma
5,000
Jan.
5 Purchased goods from Salma
4,000
Jan.
7 Paid to Salma
3,000
Jan. 10 Sold goods to Salma
Allowed her discount
20,000
2,000
Jan. 15 Salma returns goods
3,000
Jan. 17 Received cash from Salma
10,000
Jan. 20 Sold goods for cash to Salma
5,000
Jan. 22 Purchased goods from Salma
Discount received from her
10,000
1,000
Jan. 27 Goods received from Salma
3,000
Jan. 31 Paid to Salma
Jan. 31 Jayanti returned goods to Rani Mukherjee ` 5,000
5,000
6.36
Financial Accounting: Concepts and Applications
23. Prepare Rajaram's Account in the ledger of Jayaram and Jayaram's account in the ledger of Rajaram :
`
Jan. 1 Jayaram sold goods to Rajaram
30,000
Jan. 6 Rajaram paid cash to Jayaram
20,000
Jan. 14 Rajaram returned goods to Jayaram
1,000
Jan. 20 Jayaram bought goods from Rajaram
12,500
Jan. 24 Jayaram paid cash to Rajaram
5,000
Jan. 30 Jayaram returned goods to Rajaram
500
24. Record the following transactions in the journal of Kapil and open only the personal accounts in the ledger
and balance them :
Jan. 1 Kapil started business with –` 85,000
Jan 5 Purchased goods from Manisha –` 19,000
Jan 7 Purchased a PC for ` 29,000 from M/s Electronics Ltd.
Jan 10 Goods returned to Manisha for ` 1,200
Jan 12 Paid for printing and stationery to New Delhi Stationery Store –` 6,000
Jan. 14 Goods sold to Ravi for ` 5,600
Jan. 20 Paid to Manisha ` 8,900 and discount received ` 100
Jan. 24 Goods retuned by Ravi –` 200
Jan. 26 Paid to Manisha –` 3,000
Jan 30 Cash received from Ravi –` 2,900
25. From the following transactions make journal entries and prepare only Purchases Account :
(i) Purchased goods for ` 30,000 at 20% trade discount
(ii) Goods taken away for personal use –` 500
(iii) Goods destroyed by fire –` 1,000
(iv) Goods given away as charity –` 800
(v) Goods distributed as free samples –` 400
(vi) Goods eaten by rats –` 300
(vii) Goods given to employees as part of their salary as a part of food for work programme ` 2,000.
(viii) Goods stolen for ` 1,200; Insurance claim admitted in full.
26. Write up the account of Madhvi from the following transactions :
March 20...
`
Jan. 1 Jayaram sold goods to Rajaram
30,000
Jan. 1 Bought goods from Madhvi
40,000
Jan. 5 Paid her on account
25,000
Jan. 10 Returned goods to her
2,000
Jan. 17 Sold goods to her
8,000
Jan. 20 Received goods returned by her
1,000
Jan. 25 Madhvi paid us cash
5,000
Jan. 30 Paid her cash
2,000
27. In which book, the following transactions would be recorded :
(i) Purchase of building for business on cash.
(ii) Purchase of patents on credit.
(iii) Purchase of inventories for cash.
(iv) Purchase of merchandise on credit.
Accounting Process : An Overview
6.37
(v) Sale of raw materials for cash.
(vi) Sale of finished goods on credit.
(vii) Sale of old typewriter for cash at a loss of ` 1,000.
(viii) Return of goods to supplier.
(ix) Purchase of goodwill for cash.
(x) Revaluation of machine by ` 10,000.
28. Enter the following transactions into a single column cash book of Mata Sundri and extract the balance at the
end of the month :
2017
`
Jan. 1 Cash in hand
50,000
Jna. 2 Introduced more capital
1,50,000
Jan. 3 Purchased goods for cash
40,000
Jan. 6 Sold Goods to Ameena Stores for cash
80,000
Jan. 8 Bought office furniture
10,000
Jan. 10 Paid for stationery purchased
5,000
Jan. 15 Received from Rati, a customer
2,500
Jan. 18 Paid to Neera, a creditor
7,500
Jan. 20 Paid to Bhargva on account
25,000
Jan. 25 Cash sales
20,000
Jan. 28 Paid Rent
3,000
Jan. 30 Paid Salaries
12,000
Jan. 31 Bought Goods
1,75,000
29. Enter the following transactions in cash book with cash and discount columns and balance the same :
2017
`
Feb. 1 Cash in hand
5,000
Feb. 3 Received from Sondhi (discount ` 2,000)
40,000
Feb. 5 Paid cash to Govinda
10,000
Feb. 7 Paid to Subash (discount ` 500)
14,500
Feb. 10 Purchased goods from Fardeen
15,000
Feb. 15 Cash sales
22,000
Feb. 17 Paid Malini
11,000
Feb. 18 Received from Sri Krishan on account (Discount ` 1,000)
21,000
Feb. 22 Paid cartage
250
Feb. 25 Paid rent
5,500
Feb. 26 Received commission
2,700
Feb.28 Paid to Fardeen on account (discount ` 500)
12,500
Feb.28 Received interest on bank account in cash
2,500
Feb. 28 Paid electricity bill
785
Feb.29 Purchased goods for cash
35,000
30. Maintain the cash book of Harish who deposits all receipts into the Bank and makes all payments through cheques:
Jan. 1 Started business by opening Bank Account with ` 1 Lakh.
Jan. 2 Purchased furniture ` 12,000 cheque No. 001
Jan. 3 Bought goods from Kareem ` 3,000 on credit
Jan. 5 Sold goods for cash ` 5,000 to Aswin.
6.38
Financial Accounting: Concepts and Applications
Jan. 6 Paid Kareem ` 2,975 in full settlement, cheque No. 002
Jan. 7 Abdullah sent an advance of ` 5,000 for goods to be supplied next week.
31. Mr. Rokadiya maintains cash book with bank columns. Enter the following transactions of 21 May 2004 in the
Cash Book and balance the same :
(i) Balance at the beginning of the day :
`
Cash
150
State Bank of India
25,000
Bank of India (overdraft)
3,000
(ii) Received a cheque of ` 5,350 from Merwan Bros, in full settlement of invoice for ` 5,500. The cheque
was deposited in Bank of India, who charged ` 3 as collection charges.
(iii) Cash purchases ` 10,000. Paid bearer cheque on State Bank of India.
(iv) Transferred ` 5,000 from State Bank of India to Bank of India.
(v) Withdrew ` 5,000 from State Bank of India –` 3,000 for office use and ` 2,000 for personal use.
(vi) Paid advance salary to manager ` 1,000 by bearer cheque on Bank of India.
32. Anand owed ` 2,800 to Bank and had cash ` 460 on hand on 1-4-17
April 2 he drew cash for office use ` 1,600; and paid wages ` 1,000.
April 7 he sold goods for ` 400 and bought goods for ` 300
April 9 he received cheque for ` 1,350, in full settlement for ` 1,400 from Ajit. Deposited the same in Bank.
April 11 he paid Ramvilas by cheque ` 890, in full settlement for ` 900.
April 15 he received ` 215 for sale of old newspapers.
April 17 he bought one bicyle by cheque for ` 1,150; he also paid municipal taxes ` 200 in cash.
April 18 he received back Ajit's cheque dishonoured from Bank. Bank charged ` 10 towards the same.
April 20 He received from Ajit a fresh cheque for the total amount. (Including bank charges)
April 21 He deposited Ajit's cheque into Bank.
Prepare his Three Columnar Cash Book.
33. Enter the following transactions in a Cash Book
Jan. 1 Cash in hand ` 5,374, Balance at bank ` 15,490
Jan. 3 Cash sales ` 6,400
Jan. 5 Paid into bank ` 7,000
Jan. 6 Received a cheque for ` 700 from Satyam
Jan. 8 Paid into bank Satyam's cheque
Jan. 10 Paid to Anurag by cheque ` 980 and discount allowed by him ` 20
Jan. 12 Cash purchases ` 2,500
Jan. 14 Withdrew from bank for office use ` 5,000
Jan. 15 Received cheque for ` 950 from Lakshman and allowed him discount ` 50
Jan. 18 Cash sales ` 7,500
Jan. 19 Paid into bank Lakshman's cheque and cash ` 4,000
Jan. 21 Cash paid for stationery ` 120
Jan. 23 Paid commission to Rakesh ` 500
Jan. 25 Received cheque for ` 1,000 from Mohan and paid the same into Bank.
Jan. 27 Lakshman's cheque dishonoured
Jan. 29 Drew a cheque for ` 800 for personal use
Jan. 31 Paid salaries by cheque ` 1,500 and by cash ` 500
Jan. 31 Bank charges ` 20 and insurance premium ` 520 as shown in Pass Book.
Accounting Process : An Overview
34.
35.
36.
6.39
Make out the three column cash book of M/s Ram and Mohan from the following particulars
`
April 1 Cash in hand
300
Bank Overdraft
450
Paid salaries for March
250
April 2 Purchased goods for cash
30
Cash sales
80
April 3 Issued cheque in favour of Krishna & Co. to
settle his account for ` 270
260
April 4 Received cash from Dhawan X Co. (discount allowed ` 15)
235
April 5 Received cheque from Ali Bros.
(in full settlement of their debt of ` 200)
190
April 5 Cash sent to bank
200
April 5 Cheque issued in favour of Ravi Bros. for purchase of furniture
150
April 6 Cheque of Ali Bros. dishonoured, Bank debits in respect of charges
2
April 6 Paid rent by cheque
100
April 6 Bank collects interest on securities
150
John Smith, a merchant, does not pay all cash received into his bank. He desires to record all cash received
and paid and all his bank transactions in one cash book. His transactions during the first few days of January
2017 were as under :
`
Jan. 1 Cash in hand.
1,500
Bank Overdraft.
720
Received cash from A.B. (after allowing him discount ` 10).
150
Jan. 2 Paid into Bank.
1,450
Jan. 3 Drew cheque for C.D. (after deducting discount ` 30).
270
Jan. 4 Received cheque from E.F. (after allowing him discount
` 300) and paid it in bank.
2,700
Jan. 5 Drew from Bank.
200
Jan. 6 Paid wages by cheque.
300
Jan. 7 E.F.'s cheque returned dishonoured.
Jan. 8 Received cash from, G.H. (after allowing discount ` 20).
480
Jan. 9 Paid into Bank.
250
Jan.10 Paid cash to J.K. (after deducting discount ` 40).
360
Jan.11 Bank charges.
10
You are required to record these transactions in a suitable form of cash book.
On 1 March 2017 Mohan had the following assets and liabilities :
Building ` 1,000; Y's acceptance ` 2,000; Due from David ` 2,000; Due from Krishan ` 2,500; Cash ` 500;
S.R. Mills' shares ` 2,000; Z's acceptance ` 1,000; Stock in hand ` 12,000. Overdraft at bank ` 2,000; Bills
payable ` 1,600; Due to James ` 3,000; Due to Abdul ` 1,025; Reserve for doubtful debts ` 225; Wages due
`150.
The following were his transactions for the month :
`
March 1 Paid wages due.
150
March 5 Sold goods to Raghavan less 5% for cash in ten days.
1,000
March 5 Sold goods to David less 10% trade discount.
3,000
6.40
37.
38.
Financial Accounting: Concepts and Applications
March 8 Cash takings paid into bank.
2,500
March 9 Paid Abdul by cheque in full settlement.
1,000
March 12 Sent David a credit note for ` 200 for an allowance
claimed by him for inferior goods.
March 13 Received from Raghavan a cheque for the amount due
and paid the same into bank.
March 18 Discounted Y's acceptance at bank for
1,980
March 19 Z became insolvent; received from him a first and
final dividend of twenty-five paise in the rupee.
March 20 Withdrew from bank for office use.
500
March 21 Raghavan's cheque was returned dishonoured and
the discount was disallowed.
March 25 Purchased goods from James.
1,000
March 29 Sold S.R. Mills' shares ` 1,000 at a premium
of 5% less brokerage 1%.
March 29 Paid into bank.
1,000
March30 Paid James by cheque in full settlement.
3,990
Record the above in Mohan's Journal and Cash Book and close the Cash Book. Prepare a suitable cash book
only.
Enter the following transactions in a suitable cash book of Bhaskar Reddy and strike the balance at the end of
the month :
`
Jan. 1 Cash in hand.
5,000
Jan. 2 Opened a Bank Account and deposited office cash therein
3,750
Jan. 3 Purchased office furniture and paid off by a cheque.
250
Jan. 6 Purchased stationery.
50
Jan. 8 Cash purchases.
200
Jan. 9 Paid to Mani Lal as price for goods by cheque.
1,000
Jan.10 Received from Kartar Singh payment for goods in cash
` 500 and by cheque ` 1,250 and deposited into bank.
1,750
Jan.12 Cash sales.
350
Jan.16 Kartar Singh's cheque returned dishonoured by the Bank
1,250
Jan.18 Cash purchases (in cash ` 500 and by cheque ` 450).
950
Jan.20 Withdrew cash from Bank for personal use.
100
Jan.22 Sold goods for cash and deposited the cash into Bank.
1,200
Jan.26 Kartar Singh paid cash in lieu of dishonoured cheque.
1,250
Jan.28 Paid office rent.
500
Jan.30 Paid salary to staff.
1,000
From the following particulars prepare three column cash book for January 2017. Balance the cash book on 31
January 2017 :
Jan. 1 Cash on hand ` 500; Credit balance with Canara Bank ` 1,000.
Jan. 5 Sale proceeds of household furniture ` 7,000 was deposited with the bank.
Jan. 9 A cheque of ` 10,000 was given to M. Patel on account.
Jan.12 Received a cheque of 3,000 in full settlement from Khanna & Co.
Jan.13 The above cheque was deposited in the bank.
Jan.16 The bank returned the cheque of Khanna & Co. as dishonoured.
Accounting Process : An Overview
39.
40.
41.
6.41
Jan.18 Cash sales ` 2,500.
Jan.20 Cash advance ` 1,000 for travelling given to the salesmen.
Jan.25 Received cash ` 2,500 from Rao Bros, in full settlement of ` 2,600 due from them.
Jan.28 Paid cash ` 1,500 to Cheri & Co. in full settlement of ` 1,650.
Jan.29 Drew for office use ` 3,000 from bank.
Jan.30 Paid salaries ` 2,300, rent ` 1,000 and sundry expenses ` 700 by cash.
Enter the following transactions in a Three-Column Cash Book :
`
Jan. 1 Cash in hand
410
Jan. 1 Balance at Bank
8,920
Jan. 2 Cash sales
4,500
Jan. 3 Paid into Bank
4,000
Jan. 5 Purchased stationery
100
Jan. 8 Paid Mahesh by cheque
280
discount received
20
Jan.12 Gave a cheque for cash purchases
1,500
Jan.15 Drew for personal use
500
Jan.18 Received from Suresh, a cheque for ` 1,970 in
full settlement of account of ` 2,000
Jan. 20 Drew from Bank
1,000
Jan. 21 Paid wages
100
Jan.25 Bank returns cheque of Suresh dishonoured
Jan.31 Bank charges as per Pass Book
10
Enter the following transactions in the three column cash book of Sunil and balance the same as on 31-10-2017.
`
Jan. 1 Cash in hand
5,400
Cash at bank
1,475
Jan. 2 Issued cheque to Sekhar
850
discount received
150
Jan. 3 Paid salaries
1,150
Jan. 5 Cash received from sale of investments
` 4,900 out of which ` 1,250 was deposited into bank
Jan. 6 Received from Vikram a cheque of ` 775 in settlement of his account for
950
Jan. 9 Received from Naidu ` 1,150, discount allowed
50
Jan.10 Withdrew for personal use by cheque
175
Jan.11 Bank charges as per pass book
10
Jan.14 Interest received from Manohar
140
Jan.16 Goods sold
7,000
Jan.18 Bank collected dividends on shares
360
Purchased from Wahed
2,400
Jan.20 Paid rent
400
Enter the following transactions in cash book with cash discount and bank columns :
April
1 Balance of cash in hand ` 400, overdraft at bank ` 5,000
4 Invested further capital ` 10,000 out of which ` 6,000 deposited in bank
6.42
42.
43.
44.
Financial Accounting: Concepts and Applications
5 Sold goods for cash ` 8,000
6 Collected from Sridhar, a debtor of last year ` 8,000 discount allowed ` 200
7 Paid Ramvilas, our creditor, ` 2,500 discount allowed by him ` 65
13 Commission paid to Robert our agent ` 530
14 Office furniture purchased from Keshav ` 200
17 Drew cheque for personal use ` 700
18 Collection from Atal ` 4,000; deposited in the bank on 20 April
20 Drew from bank for office use ` 500
21 Drew for petty cash ` 150
29 Drew from the bank and paid salary of office staff ` 1,500
30 Deposited cash in the bank ` 10,000
Write out an analytical petty cash book from the following transactions.
Aug.1 Issued a cheque of ` 100 to Petty Cashier.
2 Paid electricity ` 3.25
4 Paid Telephone charges ` 2.50
8 Paid for Printing ` 3.75
15 Paid for stationery ` 6
20 Purchased post cards ` 3
The Petty Cashier who maintains an imprest of ` 500 submitted on 31st March the list of expenses as follows :
Travelling Expenses ` 52; Carriage ` 25
Postage ` 78; Stationery ` 87
Show the entries to be made by the Main Cashier.
Prepare the columnar Petty Cash Book of Rajan Ltd., for the month of January, under the imprest system. The
petty cash limit fixed was ` 2,500 and the cashier draws money under the imprest petty cash system as and when
the balance available with him is below ` 500. The petty cash transactions for the month of January 2017 are
given below :
`
Jan.
1 Opening balance.
2,500
Jan.
1 Paid towards conveyance charges.
420
Jan.
3 Purchase of stationery.
830
Jan.
5 Wages to Sweeper.
210
Jan.
5 Paid towards conveyance charges.
620
Jan.
7 Postage stamps purchased.
1,100
Jan.
9 Wages to Sweeper.
420
Jan. 10 Telegram charges paid.
95
Jan. 16 Conveyance charges paid.
225
Jan. 16 Wages to Sweeper.
490
Jan. 19 Postage stamps purchased.
810
Jan. 19 Telegram charges.
140
Jan. 22 Entertainment expenses.
313
Jan. 25 Wages to Sweeper.
630
Jan. 25 Taxi charges paid.
276
Jan. 28 Postage stamps purchased.
360
Jan. 31 Entertainment expenses.
270
Jan. 31 Wages to Sweeper.
420
Accounting Process : An Overview
45.
46.
47.
48.
6.43
The following is the summary of the petty cash transactions of a business enterprise for May 20...
May 1 Received from Cashier ` 3,000 on petty cash float
`
May 2 Postages
180
`
May 3 Travelling
120 24 Delivery Van 5,000 km. service
440
May 4 Cleaning
150 26 Petrol
180
May 7 Petrol for Van
220 27 Cleaning
210
May 8 Travelling
250 29 Postage
50
May 9 Stationery
170 30 Petrol
140
May 11 Cleaning
180
May 14 Postage
50
May 15 Travelling
80
May 18 Stationery
90
May 18 Cleaning
230
May 20 Postage
130
Required :
(a) Rule up a suitable petty cash book with analysis columns for expenditure on cleaning, motor expenses,
postage, stationery, travelling;
(b) enter up month's transactions;
(c) enter the receipt of the amount necessary to restore the imprest and carry down the balance for the
commencement of the following month; and
(d) state how the double entry for the expenditure is completed.
Prepare the Purchases Book M/s Fancy Dress Mart :
June
2 Purchased from Gupta of Guntur :
100 T Shirts at ` 80 per Shirt
4 Sold to Burman of Bombay :
50 T Shirts at ` 120 per Shirt
6 Purchased from Vijay of Vijawada :
100 Bush shirts at ` 90 each
8 Bought from Bombay Furniture Mart, Bandar :
10 Chairs at ` 80 each
Enter the following transactions in the Purchases Book of Premdas and also show the Purchases Account.
Jan.
1 Purchased from Mohan on credit four reams of white paper at ` 65 per ream.
2 Purchased from Gopi 4 dozen ink bottles at ` 48 per dozen.
3 Purchased from Rao two dozen writing Pads at ` 96 per dozen
4 Returned two defective pads to Rao.
5 Purchased from Kishore 3 dozen balls pens at ` 15 per dozen.
The transactions of a business in January were as follows :
Jan.
4 Bought goods from B & Co., less 20% trade discount, ` 2,000.
Jan.
6 Returned goods to B & Co., (Gross) ` 400.
Jan.
9 Sold goods to A & Co., less 15% Trade discount ` 1,000.
Jan. 12 A & Co. returned goods (net) ` 100.
Jan. 15 Advised D & Co., to despatch goods worth ` 2,000 gross to C & Co., under advice to us.
6.44
49.
Financial Accounting: Concepts and Applications
Jan.
17
D & Co., advised us of the despatch of goods to C & Co., and sent their invoice for ` 2,000 off
20% trade discount.
Jan.
20
C & Co., returned to us goods invoiced to them at ` 200 which we promptly returned to D &
Co., with our debit note.
Jan.
23
Bought goods worth ` 3,000 from F & Co., and sent them to E & Co., with our invoice for ` 3,600.
Record the transactions in subsidiary books.
Enter the following transactions of Sachin, a dealer in electrical goods, in the purchases book for the month of
May :
May 03 Purchased from General Supplies Co. Ltd. :
12 Transistor Radio sets at ` 200 each.
10 Electric Toasters at ` 100 each.
3 Electronic Clocks at ` 200 each.
Less : Trade Discount 20 per cent on all items.
May 06 Purchased from Topaz Ltd. :
6 Electric Razors at ` 20 each.
24 Battery Torches at ` 20 each.
May 07
Purchased from Radio House :
5 Colour Televisions at ` 6,000 each.
2 Portable B/W Televisions at ` 1,500 each.
May 20
Purchased from Philps India Ltd. :
200 light bulbs at ` 5 each.
Less : Trade Discount at 20 per cent.
50.
Enter the following transactions in the sales day book. At the end of the month, total the day book and indicate
the amount to be posted to general ledger :
April 01
Sold office furniture to Ahmed, list price ` 4,800 allowing him 20 per cent trade discount. Invoice
No. 8152.
April 08
Sold 4 filing cabinets to Mohan Lal at list price of ` 1,000 each. Invoice No. 8264.
April 18
Sold 6 Typewriters to Anupum Commercial College at ` 1,800 each.
Trade Discount of 15 per cent was allowed.
Invocie No. 8267.
April 28
51.
Sold office furniture to Royal Industries Ltd. List price ` 6,000. Trade Discount of 20 per cent
was allowed. Invoice No. 8276.
Write up the appropriate journals of Ashwani for the month of March from the following information :
March 6
Received invoice from Sachin :
3 Dining Tables at ` 3,600 each.
3 Chairs at ` 1,600 each.
All subject to 25 per cent trade discount.
March 9
Sent invoice to Kapil :
2 Dining tables at ` 4,300 each.
2 Occasional Tables at ` 900 each.
All subject to 20 per cent discount.
March 14
Invoiced to Rashi :
5 Carpets at ` 600 each.
subject to 20 per cent trade discount.
Accounting Process : An Overview
March 21
6.45
Received an invoice from Shweta :
2 Dining Tables at ` 7,000 each.
4 Corner Tables at ` 360 each.
All subject to 20 per cent trade discount.
March 30
Received credit note from Shweta :
1 Corner table damaged as invoiced on 21 March.
52. Shri Suraj Bhan commenced business with ` 18,000 in cash on 1 March 2017. The following are his transactions
for the month. Enter them in proper books.
2017
`
March 1 Deposited in bank
15,000
March 2 Purchased office furniture for cash
700
March 3 Bought goods for cash
1,500
March 5 Sold goods to Roshan Lal :
20 metres nylon cloth @ ` 14 per metre
10 metres shirting @ ` 15 per metre
March 8 Received from Roshan Lal on account
200
March 9 Roshan Lal returned goods :
10 metres of nylon cloth @ ` 14 per metre
March 15 Drew from bank cash for office
1,000
March 18 Bought of Munshi Ram goods
60 metres shirting @ ` 12 per metre
45 pieces dril @ ` 30 per piece
March 19 Sold goods for cash
200
March 20 Paid cash for stationery
5
March 21 Paid cash for carriage
7
March 22 Received from Roshan Lal
50
Discount allowed
10
March 23 Goods returned to Munshi Ram
15 metres shirting @ ` 12 per metre
5 pieces dril @ ` 30 per piece
March 26 Paid Munshi Ram cash
1,550
Discount allowed
40
March 31 Paid salary by cash
150
March 31 Paid rent for the month
100
53. Mr. Problem is the owner of a business. From the following balances extracted from his ledger, prepare a trial balance
as on 31 March 2017 :
`
Purchases
4,06,750
Sales
9,82,000
Creditors
63,000
Debtors
1,45,000
Capital
7,10,000
Drawings
52,450
Insurance
6,000
General Expenses
30,000
6.46
Financial Accounting: Concepts and Applications
Salaries
1,50,000
8% Deposit with banks
75,000
Machinery
3,00,000
Building
3,00,000
Stock on 1-4-2016
57,600
Carriage on purchases
20,400
Carriage on sales
32,400
Fuel and power
47,300
Wages
1,04,800
Returns inwards
6,800
Returns outwards
5,000
Interest on bank deposit received
5,800
Cash at bank
29,300
Cash in hand
2,000
54. From the following information taken from the ledger of Raveena, prepare a trial balance :
`
Purchases
21,750
Discount allowed
1,300
Wages
6,500
Salaries
2,000
Sales
35,000
Travelling expenses
400
Commission (Dr.)
425
Carriage inward
275
Administration expenses
105
Trade expenses
600
Interest
250
Building
5,000
Furniture
200
Debtors
4,250
Capital
?
Creditors
2,100
Cash in hand
7,045
55. The following balances have been taken from theledger of Mr. Lakhpati as at 31 March 2017 :
`
(i) Stock (1-4-16)
30,000
(ii) Purchases (Adjusted)
60,000
(iii) Capital
45,000
(iv) Drawings
11,000
(v) Wages
3,700
(vi) Salary
6,800
(vii) Travelling expenses
600
(viii) Rent and insurance
2,000
(ix) Interest received
400
(x)
Sales
1,56,300
Accounting Process : An Overview
(xi)
(xii)
(xiii)
(xiv)
(xv)
(xvi)
(xvii)
(xviii)
(xix)
(xx)
(xxi)
(xxii)
(xxiii)
(xxiv)
6.47
Cash at bank
8,000
Sundry creditors
35,000
Bad debits
1,400
Provision for bad debts
2,500
Building
6,000
Plant and machinery
10,000
Furniture
5,000
Sundry Debtors
50,000
Sundry expenses
1,800
Stock (31-3-17)
40,000
Outstanding salary
700
Outstanding wages
500
Prepaid insurance
600
Depreciation on
Plant and Machinery
2,500
Building
500
Furniture
500
Hint. : Since the purchases are the adjusted one, stock at the end would also appear in the balance sheet.
56. From the following balances extracted from the books of Preeti Khanna, prepare Trial Balance as on 31 December
2016 :
`
`
Purchases
90,000 Returns outward
3,000
Wages
6,000 Salaries
12,000
Rent and taxes
2,400 Insurance
800
Travelling expenses
4,800 Discount
900
Interest
1,200 Sales
1,00,500
Returns inward
4,000 Bad debts
600
Bank
10,000 Sundry creditors
50,000
Cash
34,000 Buildings
10,000
Machinery
14,000 Sundry debtors
80,000
Furniture
1,000 Capital
1,10,000
Loan
45,800 Drawings
15,000
Trade expenses
200 Advertisements
2,400
Stock (1.1.2016)
20,000 Closing stock
37,500
57 . The following trial balance was drawn by a trainee book keeper but his superviser was not very pleased. Although
both sides were equal, he did not think that the statement was correct :
Trial Balance As At 31 March 2017
Debit (`)
Credit (`)
Capital
26,850
—
Insurance expenses
—
3,150
Stock 1.4.2016
11,175
—
Purchases during the year
69,300
—
Sales
—
1,18,275
Salaries expenses
18,615
—
Lighting and heating
930
—
6.48
Financial Accounting: Concepts and Applications
Plant and Machinery
Delivery expenses
Rates paid
Rent received
Accumulated depreciation
Rent paid
Delivery vehicle
Cash
Trade creditors
Trade debtors
Bank overdraft
Carriage outwards
Outstanding rent
58.
10,800
—
1,170
—
1,050
3,345
4,425
330
14,775
—
2,925
—
1,500
1,67,190
—
690
—
1,815
—
—
—
—
—
41,760
—
1,500
—
1,67,190
Prepare a correct trial balance.
The undermentioned Trial Balance was drafted by a senior secondary school student. But due to his defective
knowledge of the subject, it has been done incorrectly. You are now requested to redraft the Trial Balance correctly
stating your reasons for the correction :
Trial Balance For The Year Ended 31 March 2017
Debit (`)
Credit (`)
Capital
1,00,000
Opening stock
16,590
—
Closing stock
—
20,580
Sundry creditors
—
12,500
Sundry debtors
20,670
—
Fixed assets
79,000
—
Gross purchases
60,920
—
Gross sales
—
1,02,600
Returns inwards
2,400
—
Returns outwards
—
1,230
Carriage inwards
800
—
Carriage outwards
—
1,850
Import duty
1,200
—
Export duty
—
800
Wages and salaries
31,400
—
Bills receivable
15,000
—
Bills payable
—
8,000
Rent receivable
3,800
—
Interest paid
—
1,100
Bank overdraft
11,000
—
Cash in hand
380
—
Commission received
—
870
Rates and taxes
7,130
—
Discount allowed
—
760
2,50,290
2,50,290
Accounting Process : An Overview
59.
60.
6.49
Enter the following transactions in proper books, post them to ledger and extract a trial balance :
2017
`
Jan. 1 Chandrika Commenced business with cash
60,000
Jan. 2 Goods purchased for cash
9,000
Jan. 03 Goods purchased from Lala Ram
12,000
Jan. 4 Sold goods for cash
18,000
Jan. 5 Goods sold to Kanta
15,000
Jan. 7 Goods returned by Kanta
3,000
Jan. 7 Goods returned to Lala Ram
600
Jan. 8 Furniture bought for cash
1,200
Jan. 9 Paid cartage
300
Jan.10 Cash received from Kanta allowed her discount 5%
12,000
Jan.11 Cash paid to Lala Ram
11,100
and he allowed as discount
300
Jan.12 Paid for Shiv Ratri festival
600
Jan.13 Goods sold for cash
18,000
Jan. 14 Goods purchased for cash
9,000
Jan.15 Goods sold to Dharam Veer
15,000
Jan.16 Goods purchased from Hem Lata
6,000
Jan. 17 Goods returned by Dharam Veer
600
Jan.18 Cash paid by Dharam Veer
14,100
Discount allowed
300
Jan.19 Goods returned to Hem Lata
600
Jan.20 Cash paid to Hem Lata
4,500
Discount received
150
Jan.23 Old newspapers sold to Narender on credit
75
Jan.24 Paid for interest
300
Jan.30 Paid for salaries
1,500
Jan. 30 Deposited with bank
75,000
Record the following transactions of Shri Bala ji in proper books and post them to ledger and draw out a trial
balance.
2017
April 1 Assets : Cash in hand –` 1,000; Cash at bank –` 1,500; Luxmi ` 4,000, Sita Ram –2,500;
Furniture 5,000; Building–` 40,000; Stock –` 40,500.
Liabilities : Sundry Creditors : Atma Ram & Sons –` 2,300; Giani General Stores –` 4,500.
April 2 Cash sales
15,000
April 4 Employed Munnabhai, sales supervisor and
received from him security deposit
25,000
April 5 Purchased goods from Bhima
50,000
April 7 Sold goods to Tina
20,000
April 8 Luxmi Cleared her account less 5% discount
April 10 Payment made to Atma Ram & Sons less discount 8% in full settlement
April 12 Cash sales
22,000
April 15 Sita Ram clears his account
April 18 Sale of old newspapers
150
6.50
Financial Accounting: Concepts and Applications
April 20
April 22
April 24
April 25
April 25
April 26
April 27
April 27
April 28
April 28
April 29
April 30
Sold goods to Bihari Lal
11,000
Bought goods from Giani General Stores
22,000
Bought stationery
250
Paid Giani General Stores and availed a discount of 5%
20,000
Returned defective goods to Giani General Stores
500
Sold goods to Nidhi
15,000
Paid rent to Anand Sharma, the landlord
500
One old typewriter fully depreciated sold for
550
Paid insurance premium
450
Repairs to building
750
Cash sales
45,000
Paid Bhima
30,000
Discount received
1,500
April 30 Sales Returns from Nidhi
2,000
April 30 Paid school fees of Balaji’ daughter Ratna
1,500
April 30 Paid sales tax
2,500
61. On April 1, 2017, the account books of Shri Ratan Lal Arora disclosed the following position :
Bank ` 12,000; Cash ` 2,000; Stock of goods ` 6,000; Debtors : Ashok ` 600, Baldev ` 1,500; Creditors :
Jagdish ` 4,000. His transactions for the month of April were as under :
`
1 Bought goods for cash.
420
2 Sold goods to Ashok.
1,620
3 Bought from Jagdish.
512
3 Received cheque from Ashok for ` 1,600, allowed him discount.
100
3 Paid cash to Jagdish deducting discount ` 10.
200
3 Cash sales.
500
5 Paid trade expenses.
08
6 Furniture bought and paid for by cheque.
200
7 Purchased goods for cash.
380
7 Withdrew from bank.
200
8 Received commission.
44
9 Sold to Ashok.
600
10 Interest received.
20
10 Bought from Jagdish
2,200
10 Rent received from sub-tenant.
180
10 Paid cash into bank.
300
11 Sold for cash.
1,400
12 Paid to Jagdish on account.
400
12 Cash takings.
1,200
13 Withdrew from bank.
100
14 Cartage paid in cash.
10
15 Paid to Jagdish on account by cheque.
200
16 Bought from Kishan Lal.
6,412
17 Paid rent by cheque.
380
Accounting Process : An Overview
6.51
18
19
20
20
21
22
23
24
25
26
27
28
Sold to Baldev.
Paid for advertisements.
Cash sales.
Paid to Jagdish : Cheque ` 1,500; discount gained ` 100.
Bought for cash.
Sold to Ashok.
Sold to Baldev.
Paid into Bank.
Paid cash for commission.
Received by cheques from Baldev ` 4,610; discount allowed ` 80.
Bought of Kishan Lal.
Sold to Chander.
Allowed discount to Ashok ` 68 and received cash ` 3,000.
28 Sold to Deepa.
28 Drew for personal use (cash ` 20, cheque ` 150).
28 Bought from Rizvi.
31 Discount allowed by Kishan Lal in his invoice dated 27 January.
(balance paid in cash)
Salaries paid.
Prepare Cash Book, Sales Book, Purchases Book and the Trial Balance.
4,690
400
900
1,600
200
2,464
1,086
1,086
300
4,690
1,630
864
3,068
1,062
170
1,834
110
500
ANSWERS GUIDE
8.
20.
21.
22.
23.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
` 9,00,112
Total of Trial Balance ` 2,35,900
Capital of Shri Ram Chander ` 61,400
Balance of Salma’s account on 31st Jan 20... ` 2,000
Balance of Raja Ram’s account as on 31st Jan 20... ` 2,000
Balance of Jaya Ram’s account as on 31st Jan 20... ` 2,000
Balance in Purchases Account ` 19,900
Balance of Madhvi’s Account ` 9,000
(i) Cash Book; (ii) General Journal; (iii) Cash Book; (iv) Purchase Book; (v) Cash Book; (iv) Sales Book;
(vii) Cash Book and General Journal (viii) Purchase Returns Book; (ix) Cash Book; (x) General Journal.
Balance of Cash Book on 31st Jan, 2017 ` 25,000.
Balance of Cash Book on 28th Feb., 2017 ` 3,665.
Balance of Cash Book ` 95,025.
Balance of Cash Book: Cash Balance ` 3,150; Balance with SBI ` 5,000; Balance with BOI ` 6,347
Balance of Cash Book: Cash Balance ` 1,175; Bank Balance ` 5,040 (Cr.);
Balance of Cash Book: Cash Balance ` 9,654; Bank Balance ` 19,370
Cash Balance ` 135; Bank Balance ` 612 (Cr.)
Cash Balance ` 270; Bank Balance ` 200
Cash Balance ` 2,290; Bank Balance ` 8,440
Cash Balance ` 1,100; Bank Balance ` 3,150
Cash Balance ` 2,000; Bank Balance ` 7,000 (Cr.)
Cash Balance ` 1,710; Bank Balance ` 9,630
Cash Balance ` 13,390; Bank Balance ` 2,825
6.52
Financial Accounting: Concepts and Applications
41.
42.
43.
44.
45.
46.
47.
48.
Cash Balance ` 7,870; Bank Balance ` 12,150
Balance ` 81.50
Balance ` 258
Balance ` 1,450; Imprest Cash received ` 1,050
Balance ` 130; Imprest Cash received ` 2,870
` 17,000
` 689
Purchases Book ` 6,200; Purchases Returns Book ` 480
Sales Book ` 6,450; Sales Return Book ` 300.
` 38,200
` 21,820
Purchases Book ` 24,052; Sales Book ` 10,720
Cash Book Balances: Cash ` 438; Bank ` 14,000; Sales Book ` 430; Sales Return Book ` 140; Purchases
Book ` 2070; Purchases Return Book ` 330
` 17,65,800
` 50,100
2,40,400
3,09,300
1,67,190
2,40,000
Purchases Book ` 18,000; Purchases Return Book ` 1,200; Cash Book : Cash Balance ` 9,000; Bank
Balance ` 75,000; Sales Book ` 30,000; Sales Return Book ` 3,600; Trial Balance ` 1,28,475
Shri Balaji Capital ` 87,700; Cash Book: Cash Balance ` 56,934; Bank Balance ` 1,500; Trial Balance
` 2,68,084
Trial Balance ` 47,512; Cash Book: Cash Balance ` 3,810; Bank Balance ` 16,866
49.
50.
51.
52.
53.
54.
55.
56.
57.
58.
59.
60.
61.
7
Ca
pita
la
ndRe
ve
nueI
te
ms
CAPITAL EXPENDITURES
Capital expenditure is money spent on the purchase of permanent or fixed assets for use in the business for
long period and not for immediate resale or on the permanent improvement of or addition to or extension
of an existing asset with a view to increase the earning capacity of the business enterprise.
Examples of capital expenditures fall into four groups :
(i) Tangible fixed assets such as plant and machinery, land, building, furniture, fixtures and fittings, motor
vehicles, office equipments (e.g., typewriters, calculating machines, computers). Legal expenses
paid in connection with the purchase of property (e.g., registration charges), and expenses of delivering
or installing fixed assets like machinery are included in the cost of fixed assets.
(ii) Intangible fixed assets like goodwill, trade marks, patents, copyrights etc.
(iii) Investment in shares and debentures of other companies for a long period.
(iv) Cost of financing a fixed asset (i.e., interest paid on loans to purchase a fixed asset) is added to
its cost only for the period up to the time or before the asset is put to use.
REVENUE EXPENDITURES
Revenue expenditure is money spent on materials and services which are used by a business enterprise in
carrying out normal business activities and maintenance of fixed assets and to maintain productivity and earning
capacity (and not to increases) of firms. The direct benefit of such an expenditure is available in the
accounting period itself or one year at the most.
Examples are :
(a) The cost of finished goods or materials used in the manufacture of goods intended for resale.
(b) Establishment costs, that is, rent, rates, heat, light, repairs to property etc..
(c) Administrative costs, that is, wages, salaries, telephone, postage, stationery etc..
(d) The costs of selling and distributing the goods, that is, commission, advertising, carriage outwards
etc..
(e) Financial costs, that is, cash discount, interest on borrowings.
(f) All expenses incurred for maintaining the efficiency or upkeep of fixed assets by means of repairs,
replacement, renewable and insurance.
Revenue expenditure gives benefit for the current accounting period or at the most for one year only.
DISTINCTION BETWEEN CAPITAL AND REVENUE EXPENDITURES
(i) Nature of spending : Capital expenditure is the amount spent on acquiring a permanent asset while
revenue expenditure is incurred for carrying on business and maintaining the fixed assets efficiently.
7.2
Financial Accounting: Concepts and Applications
(ii) Earning capacity : Capital expenditure increases the revenue earning capacity of the business. But
revenue expenditure does not do so e.g., an expenditure incurred to increasing the seating capacity of
a cinema theatre is capital expenditure since it will increase the earning capacity. The replacement
of small screen with a wide screen is a revenue expenditure because it does not increase the earning
capacity.
(iii) Value addition : Capital expenditure may add to the value of an existing asset while the revenue
expenditure will not add any value to net assets.
(iv) Disclosure : Capital expenditure is shown in the balance sheet while the revenue expenditure is transferred
to trading or profit and loss account.
FOR YOUR ATTENTION
The facts and circumstances of each case would determine the nature of the expenditure. An expenditure
does not become capital because the amount involved is more. Similarly revenue expenditure does not
always mean small amount. For example, repair of a factory building for ` 2,50,000 is revenue expenditure
while purchase of a machine for only ` 5,000 is a capital expenditure.
REVENUE EXPENDITURES BECOMING OR TO BE TREATED
AS CAPITAL EXPENDITURES
There are certain types of revenue expenditures which become capital expenditures depending upon the nature
of the transactions as explained below :
(i) Wages : Normally “wages” constitute a revenue item. But when wages are paid to a workman to
install a new machine, they are added to the cost of the machine making is a capital expenditure.
Similarly wages paid to workers engaged in the construction of a fixed asset such as building, bridge
etc. are treated as a cost of the relevant fixed asset.
(ii) Repairs : The money spent on repairs of a second hand machine amounts to capital expenditure
since the repairs are necessary to put the machine to use. However repairs done later on for efficient
running of the machine are treated as revenue expenditure.
(iii) Legal expenses incurred in the purchase of fixed assets must be treated as part of the cost of the asset.
(iv) Transportation costs incurred in moving a new machine or a second hand machine from the place
of manufacturer to the business premises are added to the cost of machine or any other fixed asset.
(v) Raw materials and stores consumed in the construction or making of a fixed asset are also treated
as cost of the asset.
(vi) Interest on capital paid during the construction works or machine or building must be treated as capital
expenditures.
(vii) Development expenditures : In certain enterprises such as tea, coffee, rubber plantations and colleries
(mines), considerable money has to be spent on development work before production starts. All such
expenditures are called development expenditures and must be treated as capital expenditures.
DEFERRED REVENUE EXPENDITURES
There are certain expenditures which are primarily revenue in nature but the benefit from which is not
consumed in the year in which the expenditure is incurred. Such expenditures are called deferred revenue
expenditures. Such expenditures are carried forward or spread over a number of accounting periods during
which the business is expected to benefit from the same.
Types : Deferred revenue expenditures are of following types :
(i) Expenses which are wholly paid in advance and for which the benefit is received in future, e.g.,
prepaid insurance, prepaid salaries, prepaid rent, prepaid subscriptions and so on.
(ii) Expenses which provide part of the benefit during the current accounting period itself and the
Capital and Revenue Items
7.3
remaining benefit in the subsequent or future accounting periods. For example a business enterprise
spends ` 2,00,000 on advertisement campaign in 2014 and its benefit is estimated to be available for
five years. In this case only a proportionate amount, that is, ` 40,000 (one-fifth of ` 2,00,000) would
be charged against the profits of the year 2014 and the balance will be shown as a temporary asset in
the balance sheet to be written off in future accounting periods. It is termed as fictitious asset and
although it is shown on the assets side of the balance sheet, it is really not an asset at all.
(iii) Expenses which are incurred once a while or very rarely. Such expenses are not incurred in the
normal course of business but for a special purpose.
Examples are : expenses incurred on the formation of company called preliminary expenses; expenses
incurred on the issue of shares and debentures; development expenditures like market research and so
on. As a rule such expenses are in the nature of revenue expenditures and must be debited to the profit
and loss account immediately but it is not done and they are spread over a number of years.
DISTINCTION BETWEEN CAPITAL EXPENDITURE AND
DEFERRED REVENUE EXPENDITURE
The distinction between capital expenditure and revenue expenditure is quite difficult to make and one has
to do it not on any sound reasons but rather arbitrarily:
(i) The main characteristic of capital expenditure is that it results in a benefit which will accrue to the
business enterprise for a long time, e.g., purchase of a machine likely to be used for say 10 years.
Deferred revenue expenditure also results in a benefit which will accrue in future period but generally
for 3 to 5 years.
(ii) Furthermore, the capital expenditure is usually capable of being reconverted into cash though may be
at a loss. This is not possible in case of deferred revenue expenditure; for instance the benefit of a
heavy advertising campaign may be available for the next five years but the business enterprise cannot
sell the advertising results to another firm.
(iii) Sometimes heavy losses such as due to an earthquake are also treated as deferred revenue expenditure
in the sense that they are written off over 3 to 4 years. Such a loss cannot be termed as capital
expenditure.
Example 1
Classify the following between capital and revenue giving reasons for the same :
(i) ` 5,000 spent towards additions to the machinery.
(ii) Repairs for ` 1,000 necessitated by negligence.
(iii) ` 500 spent to remove a worn out part and replace it with a new one.
(iv) ` 100 wages paid in connection with the erection of a new machinery.
(v) Old machinery of book value ` 7,500 worn out, dismantled at a cost of ` 1,000 and scrap realised for
` 100.
(vi) Second hand motor car purchased for ` 10,000 and spent ` 1,000 for repairs immediately.
(vii) Employees State Insurance premium ` 600 paid.
(viii) Insurance claim of ` 5,000 received from the insurance company for loss of goods by fire of ` 6,000.
Solution :
(i) Capital expenditure since it will result in an increase in the earning capacity of the business.
(ii) Revenue expenditure since it is not going to improve the asset any way.
(iii) Revenue expenditure since the expenditure is in the nature of repairs and maintenance. It will only
maintain the existing capacity of the asset.
7.4
Financial Accounting: Concepts and Applications
(iv) Capital expenditure because the amount spent is upto the point an asset is ready for use.
(v) Old machinery with value of ` 7,500 less ` 100 realised on selling of scrap will be treated as revenue
alongwith dismantled charges of ` 1,000. The amount realised from sale of scrap is capital receipt.
(vi) Capital expenditure. Motor car purchased for ` 10,000 whether second hand or new will be treated
as capital expenditure, and also the amount spent for its repairs is a capital expenditure so as to make
it ready for use.
(vii) Revenue expenditure since it is purely a business expenditure.
(viii) Revenue expenditure i.e., ` 1,000.
Example 2
Show by giving reasons whether the following items of expenditure are capital or revenue :
(i) Damages paid on account of breach of contract to supply certain goods.
(ii) Cost of pulling down an old building preparatory to building a new one.
(iii) Cost of cleaning and levelling land purchased for business use.
(iv) Premium paid for a lease.
(v) Canal irrigation charges paid to Government.
(vi) A Tractor standing in the books at ` 15,000 was sold for ` 30,000.
(vii) ` 5,00,000 received from an issue of further shares, the expenses of issue being ` 5,000.
Solution :
(i) Damages paid on account of the breach of contract to supply certain goods are revenue expenditures
incurred in the ordinary course of business.
(ii) The cost of pulling down an old building preparatory to building a new one is capital expenditure
as it is a part of the cost of the new building.
(iii) The cost of cleaning and levelling land purchased for business use is capital expenditure as it has
been incurred for making the land ready for use.
(iv) Capital expenditure since leasehold property is a fixed asset.
(v) Revenue expenditure as it represents the cost of cultivation.
(vi) ` 30,000 received from the sale of a Tractor is a capital receipt, and ` 15,000 is a capital profit as it
results from the sale of a fixed asset.
(vii) ` 5,00,000 is a capital receipt and ` 5,000 being the cost of issue is a deferred revenue expenditure
because no asset is created.
Example 3
State with reasons whether the following expenditures of a limited company are capital or revenue :
(a) Legal expenses incurred in raising a debenture loan.
(b) Legal expenses incurred in an action for infringement of its trade mark.
(c) Legal expenses incurred in purchasing landed property.
(d) Legal expenses incurred in defending a suit for breach of contract to supply goods.
(e) Legal expenses incurred in an income tax appeal.
Solution :
(a) Capital expenditure because the expenses have been incurred for obtaining capital of the business.
More appropriately deferred revenue expenditure because no asset is created.
Capital and Revenue Items
7.5
(b) Revenue expenditure, as they have been incurred for maintaining a fixed asset.
(c) Capital expenditure as they constitute the cost of fixed asset.
(d) Revenue expenditure, as the expenses have been incurred for carrying on the business.
(e) Revenue expenditure since the expenses are incurred to carry on the business.
CAPITAL AND REVENUE RECEIPTS
Capital receipts are contributions into the business by the proprietor, partners or shareholders (in the case of a
joint stock company) towards the capital of the firm. And also any sums received from debentureholders, any
loans and the proceeds of sale of any fixed assets of a business enterprise (not being in the nature of a normal
sale).
Revenue receipts or incomes are the moneys received from firm's activity in the normal course of business
such as sales revenue, commissions and fees received for services rendered, interest on any investment, discounts
received etc..
The following guidelines are helpful in deciding about capital or revenue receipt :
(a) The nature of the receipt is to be decided from the point of the person receiving it and not the source
by which the payment was made. For example, the payment of interest out of capital by a company,
when it is yet to commence its business is a capital expenditure for the company but it is a revenue
receipt for the person (Shareholder) receiving it.
(b) The intention of the owner of the property is also material in deciding the nature of the receipt especially
in a single transaction. For example, the receipt from the sale of securities (e.g., shares) held on as
investment is a capital receipt but if the securities are held for speculative purpose, the sale proceed
constitutes revenue receipt.
(c) Sale of fixed assets like machinery, building or furniture is a capital receipt while the sale of inventories
is a revenue receipt.
(d) A receipt in lieu of source of income is capital receipt, e.g., compensation received on death or permanent
disability because such receipt is a substitution of source of income.
(e) When a sum is received for the surrender of certain right, it is a capital receipt e.g., compensation
paid by Municipal Corporation on acquisition of agricultural land for the construction of roads or bridges.
It is capital receipt since it is in lieu of the right to work on the farm. But where the sum received
is in the nature of compensation for the loss of future profit, it is a revenue receipt.
CAPITALISED EXPENDITURE
Where an expenditure is incurred as an important part of an asset such as in the construction or installation
of an asset or expenditure is required to increase the earning capacity, such expenditures are treated as part
of the asset and are added to the cost of the asset. This process is called capitalisation of the expenditure.
Some of the examples of capitalised expenditure may be noted as :
(i) Expenses on the formation of a joint stock company.
(ii) Cost of issuing shares and debentures such as legal expenses, underwriting commission etc.
(iii) Expenses on installation of assets.
Thus, capitalised expenditures are added to the cost of fixed assets to increase its total cost.
7.6
Financial Accounting: Concepts and Applications
Assignments
THEORY BASE ASSIGNMENTS
1.
2.
3.
Distinguish between Capital and Revenue Expenditures, giving examples of each.
[B.Com. (Hons.) Delhi 2002, 2004, 2009]
Explain the concept of deferred revenue expenditures by giving suitable examples. How is it different
from capital expenditures?
Explain the concept of Deferred Revenue Expenditure by giving suitable examples. How is it different
form capital expenditure ?
[B.Com. (Hons.) Delhi 2014]
PRACTICAL ASSIGNMENTS
1. Ms. Gopika, an accountant seeks your help on the classification of following transactions :
(i) ` 20,000 received from parents on birthday (Parents give gift every year)
(ii) One of the tenants who was paying only a nominal rent of ` 50 per month was tempted to vacate
by giving ` 1,00,000 as compensation. New tenant was immediately taken at ` 1,000 rent per month.
The compensation was for the cost of furniture etc. incurred by the old tenant
(iii) Imported goods worth ` 2,00,000 confiscated by customs authorities for contraventions of law.
(iv) Cost of improving the seating capacity of a cinema hall.
(v) Heavy legal expenses incurred by Times of India newspaper to defend defamation case.
2. State giving reasons whether the following items are to be considered as capital, revenue or deferred
revenue :
(i) Cost of acquisition of a copyright and brand mane
(ii) Cost of designing a new jewellery product which ultimately could not be produced on commercial
basis
(iii) Cost of alteration of a commercial building in accordance with the Master Plan issued by a State
Government.
(iv) Replacement of a wooden ceiling with a guarantee of 15 years
(v) Replacement of an open tempo body with a closed refrigerated body.
(vi) Contribution paid to Municipal Corporation for road development in the surrounding areas.
3. State with reasons whether you would classify the following items as capital or revenue or deferred
revenue :
(i) Carriage inward and freight for bringing the furniture from the dealer.
(ii) Expenditure incurred to provide an additional Exit to a PVR cinema on instructions from Municipal
Corporation of Delhi.
(iii) Compensation received from the Delhi Metro Rail Corporation for compulsory acquisition of land
for construction of railway station.
(iv) Compensation of ` 2,50,000 paid for termination of service indulging in illegal union activities
(v) Expenditure incurred on five MBA students for learning in new marketing techniques in China.
Expenditure includes their lodging boarding, travelling and training expenses.
(vi) Amount received from a relative staying in Germany.
(vii) Travelling expenses of a business executive for going to Japan to Purchase a new machinery
Capital and Revenue Items
7.7
4. Would you consider the following items chargeable to capital expenditure or revenue?
(i) Premium given for a lease
(ii) Costs attending a mortgage.
(iii) Commission on issue of debentures.
(v) Accrued dividend or interest included in the cost price of an investment.
5. The Swan Industries Ltd. removed their factory to a more suitable premises and given below are some
of their transactions :
(a) A sum of ` 4,750 was expended on dismantling, removing and reinstalling Plant, Machinery and
Fixtures.
(b) The removal of stock of the old factory to the new, cost ` 500.
(c) Plant and Machinery which stood in the books at ` 75,000 included a machine at a book value of
` 1,500. This being obsolete was sold off at ` 500 and was replaced by a new machine costing
` 2,400.
(d) The freight and carriage on new machine amounted to ` 150 and erection charges cost ` 275.
(e) A sum of ` 1,200 was spent on painting the new Factory.
State which items of expenditure would be charged to capital and which to revenue.
6. A newly set up manufacturing concern had incurred various types of expenses during the construction
period e.g.,
(i)
Travelling expenses of a director for trip abroad for purchasing capital goods.
(ii) Salaries and wages paid to non-technical staff.
(iii) Salaries and wages paid to technical staff for erection of machineries.
(iv) Miscellaneous expenses such as rent, stationery, postage and telegram etc.
7. State with reasons whether the following are Capital or Revenue Expenditures:
(i) Freight and cartage on the new machine ` 150 and eviction charges ` 200.
(ii) Fixtures of the book value of ` 1,500 was sold off at ` 600 and new fixtures of the value of ` 1,000
was acquired, cartage on purchase ` 50.
(iii) A sum of ` 100 was spent on painting the factory.
(iv) ` 5,150 spent on repairs before using a second hand car purchased recently to put it in usable condition.
8. State the nature (capital or revenue) of the following expenditures which were incurred by M/s. Surya
Brothers during the year ending 31 Mach 2008 :
(i)
` 2,050 were spent on reparing a second hand machine which was purchased on 8 April, 2007 and
` 500 were paid on carriage and freight in connection with its acquisition.
(ii) Sum of ` 30,000 was paid as compensation to the two employees who were retrenched.
(iii) ` 650 were paid in connection with carriage on goods purchased.
(iv) ` 10,000 customs duty paid on import of a machinery for modernisation of the factory production
during the current year and ` 5,000 paid on import duty for purchase of raw materials.
(v) ` 15,000 interest had accrued during the current year on term loans obtained and utilised for the
construction of factory building and purchase of machineries; however production has not commenced
till the last date of the accounting year.
9. State with reason whether the following items are to be considered as capital or revenue expenditure :
(i)
A sum of ` 2,50,000 is incurred in remodelling a showroom resulting in the increase of the value of
the show room by ` 1,75,000.
(ii) The cost of removing a machine from old factory to the new one amounts to ` 25,000.
(iii) A sum of ` 5,00,000 spent on research and development results in the increased utility of a certain
brand of refrigerator.
7.8
Financial Accounting: Concepts and Applications
(iv) Expenses incurred on research work for the promotion of a ‘X’ brand of detergent washing powder
does not produce any fruitful results.
(v) Cost of conversion of gas plant to oil fuel plant for generation of electricity amounted to ` 1,50,000.
(vi) Compensation paid to a retrenched employee for loss of employment ` 55,000.
10. State with Reasons, how would you classify the following expenditure :
(i)
Overhauling expenses of ` 25,000 for the engine of a Motor Car to get better fuel efficiency.
(ii) Inauguration expenses of ` 25 lakhs incurred on the opening of a new manufacturing unit in an
existing business.
(iii) Compensation of ` 2.5 crores paid to workers who opted for voluntary retirement.
ANSWERS GUIDE
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
(i) Capital receipt
(ii) Capital receipt
(iii) Revenue expenditure (iv) Capital expenditure
(v) Revenue expenditure.
(i) Capital Expenditure
(ii) Defeered Revenue Expenditure
(iii) Revenue Expenditure (iv) Revenue Expenditure
(v) Capital Expenditure (vi) Revenue Expenditure
(i) Capital expenditure
(ii) Revenue expenditure
(iii) Capital receipt
(iv) Revenue expenditure
(v) Capital Expenditure (vi) Capital receipt
(vii) Capital expenditure
(i) Capital
(ii) Capital
(iii) Capital
(iv) Revenue
Capital Expenditure : (a), (c), (d);
Revenue Expenditure : (b), (e).
(i) Capital
(ii) Capital
(iii) Capital
(iv) May be Capitalised.
(i) Capital
(ii) Loss of ` 900 being revenue expenses and ` 1,050 capital expenditure
(iii) Revenue and
(iv) Capital
Capital expenditure—(i), (iv)—import duty on Machinery, (v) Revenue expenditure—(ii), (iii), (iv)—
import duty on raw materials.
Capital expenditure—(iii)
Revenue expenditure—(i), (ii), (iv), (v), (vi).
(i) Capital Expenditure
(ii) Revenue Expenditure
(iii) Revenue Expenditure.
8
Fina
lAccounts ofNonCorpora
teEntitie
s
The term final accounts is used to include a package of accounts such as :
(i) trading account, (ii) profit and loss account and, (iii) a balance sheet. Although balance sheet is
not an account but only a statement, it is treated as a part of final accounts for all practical purposes.
TRADING ACCOUNT
Trading Account is prepared to know whether the firm has made gross profit or suffered gross loss. Gross
profit or gross margin is the excess of net sales revenue over cost of goods sold, that is : Gross Profit =
Net Sales Revenues–Cost of goods Sold; where :
Net Sales Revenues = Cash Sales plus Credit Sales minus Sales Returns (Returns Inwards). Goods sent
on sale or approval are not part of sales until approval is received. Cost of Goods Sold = Opening
Stock + Net Purchases – Stock at the end + Direct Expenses. Net purchases = Cash Purchases + Credit
Purchases – Purchases Returns (Returns Outwards).
Cost of the goods available for sale = Opening stock plus net purchases minus stock at the end.
Goods received on consignment basis are never treated as purchases. Similarly, goods received on sale or
return basis are never treated as purchases.
Reason: Trading account is prepared before the preparation of profit and loss account for the following
reasons :
(i) It shows the result of trading activities relating to purchases and sales of goods and services; (ii) It
enables to compare the position of opening stock with the closing stock; (iii) It is possible to justify the
value of purchases made and the direct expenses incurred during the accounting period; (iv) It is possible
to make comparative study of purchases, sales and direct expenses for different years; (v) It will be possible
to calculate different accounting ratios such as gross profit ratio, stock turnover ratio and so on; (vi) It
helps in the calculation of gross profit so that the management can find out the scope of absorbing the indirect
expenses.
DIRECT EXPENSES ON GOODS
Direct expenses are all those expenses incurred in bringing the goods to the place of business or trade until
the goods are placed in a saleable position. The direct expenses may include :
(i) railway freight, or lorry freight,
(ii) carriage or carriage inward or carriage on purchases,
(iii) transit-insurance,
(iv) packing and forwarding expenses by vendor,
(v) excise duty.
8.2
Financial Accounting: Concepts and Applications
A trader who imports goods, the direct expenses will cover:
(i) packing and forwarding charges by the exporters,
(ii) export duty if any,
(iii) loading charges,
(iv) import duty,
(v) shipping or air freight,
(vi) marine insurance,
(vii) custom duty,
(viii) clearing charges,
(ix) carriage from the docks to the trader's place of business,
(x) octroi,
(xi) dock dues.
A manufacturer incurs, in addition to these, manufacturing costs such as :
(i) wages and salaries,
(ii) factory rent,
(iii) factory insurance,
(iv) factory heating,
(v) foreman and supervisor's salary,
(vi) factory maintenance and cleaning,
(vii) fuel, coal, gas and water,
(viii) power,
(ix) factory lighting,
(x) royalty on production.
The trading account is debited with :
(a) opening stock,
(b) net purchases, and
(c) direct expenses
and credited with :
(a) net sales and
(b) stock at the end.
Closing stock : It is generally given at the foot of trial balance. But if it is given in the trial balance, it
will not be shown in the credit side of the trading account because it is already deducted from the net
purchases. It means purchases have already been adjusted. Hence, it will be shown only in the assets
side of the balance sheet.
Gross Profit : When the credit side of the trading account exceeds the debit side, the difference is gross
profit.
Gross loss : When the debit side exceeds the credit side, the difference is gross loss.
Gross profit or gross loss is transferred to the profit and loss account.
Final Accounts of Non-Corporate Entities
8.3
(Pro-Forma) Trading Account
For the Year Ending on (Closing Date of Accounting Period)
Dr.
Cr.
`
Particulars
Opening stock :
----------
Raw Materials
Particular
`
Sales
Less : Sales Returns or
Work in progress
Returns Inwards
Finished goods
Stock at the end or
Closing stock :
Purchases
----------
Raw materials
Less: Purchase Returns or Returns outwards
work in progress
Finished goods
Expenses incurred in acquiring and bringing
Profit and Loss Account
goods purchased to the business premises :
(Gross Loss)
Freight
cartage
ATTENTION PLEASE
carriage or carriage inwards or carriage
on purchase
Import Duty
Clearing Charges
(i)
(ii)
If the credit side total amount
exceeds debit side total amount
there is a gross profit
If debit side total amount exceeds
Dock Dues
the credit side total amount,
Excise Duty
there is gross loss
Octroi
The words ‘To’ and ‘By’ in the debit
and credit sides respectively are not
Factory expenes : Lighting, heating, rent and
rates insurance of factory
used these days.
(iii)
There can be either gross profit or
Fuel (coke, coal wood etc)
gross loss and not both in one
Wages (Direct or productive or manufacturing)
trading account
Motive power, Gas, electricity in factory
Consumption of stores (engine oil, soft soap,
cotton waste etc.)
Royality on production
Profit and Loss Account
(Gross profit)
PROFIT AND LOSS ACCOUNT
After the calculation of the gross profit or gross loss, the next step is to prepare the profit and loss account
to determine or find out the amount of net profit of the business enterprise. Profit and loss account whether
prepared separately or along with Trading Account is an account which shows the net profit or loss of a business
entity for a given or particular accounting period. The net profit or net loss is the profit earned or loss suffered
after deducting or adding, as the case may be, the indirect business expenses, namely: administrative, maintenance,
(Repairs and Depreciation) selling and distribution, financial and miscellaneous expenses, if any, from the
gross profit.
It is the ultimate or final profit or loss of a business firm.
8.4
Financial Accounting: Concepts and Applications
PREPARATION OF PROFIT AND LOSS ACCOUNT
In order to prepare the profit and loss account, gross profit or gross loss, as calculated in the trading account,
is transferred to the profit and loss account. If there is a gross profit, it is entered or written as the first
item on the credit side of profit and loss account. Other items of non-trading income such as rent receivable,
interest on investments, discount received, commission received, bad debts recovered and even the profit on
sale of fixed assets are also entered on the credit side of the profit and loss account.
If there is a gross loss transferred or brought forward from trading account, the profit and loss account begins
with gross loss as the first item on the debit side.
Other items on the debit side include indirect or running revenue expenses of the business such as establishment
or office expenses, selling and distribution expenses and financial expenses not entered in the trading account.
After all the items of incomes and expenses are entered, the profit and loss account is balanced. If the total
amount on the credit side of the profit and loss account exceeds the total amount of the debit side, the balance
or difference is called net profit. But if the total amount on the debit side exceeds the total amount on the
credit side the balance or difference is net loss.
The net profit is transferred to the credit side of the capital account of the owner while the net loss is transferred
to the debit side of the capital account of the owner. In this manner the profit and loss account is closed.
Now profit is added to the amount of capital and it thus, increases the capital in the balance sheet. Net loss
is deducted from the amount of capital and hence, decreases the capital in the balance sheet.
A summary of the foregoing procedure in respect of Profit and Loss Account is given as under :
Profit and loss account is credited with:
(i) Gross profit
(ii) Indirect incomes such as rent receivable, commission receivable, interest on drawings and other interest
receivable, discount earned or received, bad debts recovered etc.,
Profit and loss account is debited with:
(a) Gross Loss, if any
(b) Establishment Expenses: like rent, rates and taxes, office lighting and heating etc., general insurance.
(c) Administrative Expenses: like salaries, insurance, printing and stationery, postage and telegram, telephone
and fax charges, audit fees, legal expense etc..
(d) Selling and Distribution Expenses : such as advertisements, travelling expenses, carriage and freight
outwards or rates, commission paid, bad debts etc..
(e) Maintenance Expenses : such as repairs, depreciation of fixed assets.
(f) Financial expenses such as cash discount allowed, interest on loan taken, interest on capital etc..
(g) Miscellaneous expenses.
(PRO-FORMA) PROFIT AND LOSS ACCOUNT
For the Year Ended (Closing Date of the Accounting Period)
Dr.
Particulars
Trading Account (Gross Loss, if any)
Cr.
`
Particulars
Trading Account
Rent and Rates
(Gross Profit, if any)
Lighting and Heating
Incidental Income or Gains
Office Salaries
Rebates
Office Salaries and Wages
Cash Discount Received
Office Insurance
Commission Received
`
Final Accounts of Non-Corporate Entities
8.5
Sundry Expenses or
Bank Interest Received
General Expenses
Interest or Dividends on
Printing and Stationery
Investments
Repairs and Renewals
Rent Received
Telephone and Fax Expenses
Gain on the Sale of
Accountancy Fees
Fixed Assets, Investments etc.
Legal Charges
Bad Debts Recovered
Audit Fees
Special Bonuses Received
Staff Bonuses
from Suppliers
Bank Charges and Commission
Provision or Reserve for
Interest Paid (on mortgage loan, or bank loan)
Discount on Creditors
Motor Expenses
Capital Account
Advertising
(Transfer of net loss, if any.)
Traveller's Salaries and Commission
Cash Discount Allowed
Bad Debts
Free Samples
Loss on Sale of Fixed Assets
Brokerage
Carriage Outward
Warehouse Rent
Warehouse Insurance
Delivery Van Expenses
Packing Expenses
Depreciation on Different Assets
Provision or Reserve for Bad and
Doubtful Debts; Provision or Reserve for
Discount on Debtors;
Any other provisions for Expenses e.g.,
Loss by fire
Interest on loan; Cost of discounting the bill
Capital Account
(Transfer of net profit, if any)
The words ‘To’ and ‘By’ in the debit and credit sides respectively are generally not used these days.
DIFFERENCE BETWEEN OUTSTANDING INCOME
AND ACCRUED INCOME
Both these terms refer to the income receivable or income earned but not received by the business entity and
are added to income when accounts are finalised on accrual basis. Outstanding income means that amount
of income which is due and receivable but not yet received. There is a legal right to receive it immediately
from the other party.
Accrued income means that amount which has been earned but not yet due. The accrued income is calculated
on day-do-day basis and there is no legal right to force the other party to pay it immediately. Suppose a firm
has invested ` 50,000 in 12% Debentures on 1 January 2012. Interest is payable half yearly on 30 June and
31 December respectively. The firm closes its books on 31 March. Now if the interest has not been paid by
the company for the half year ending on 31 December even on 31 March, 2013, it is a case of outstanding
interest. But interest for three months—from 1 January to 31 March 2013—is accrued in the sense that it is
simply earned but not due or receivable.
8.6
Financial Accounting: Concepts and Applications
MEANING OF OPERATING PROFIT
It is described as the excess of gross profit over operating expenses. Operating expenses are incurred for
carrying on business activities. Examples of operating expenses are : rent of the building, repairs to the
machinery, electricity bill, salaries to the office staff, salesmen's commission and the like. The main criterion
in the calculation of operating profit is that the revenues are earned from and expenses are incurred on
the normal business activities involving sale and purchase of goods in which the business enterprise engages
itself. Obviously the operating profit will not include the profit resulting from the sale of fixed assets, interest
on investments etc., since these are not a part of normal business activities. Operating loss occurs when
operating expenses exceed the gross profit.
MEANING OF NON-OPERATING PROFIT
Non-operating profit results from sources other than the normal activities of the business enterprise. When a
trading concern gets rent from a piece of vacant land owned by it, it would be treated as a non-operating
profit. Similarly dividends or interest or both received on investments or interest on fixed deposit account
with bank or profit on the sale of fixed assets are all non-operating profits because they accrue to the business
enterprise not from normal activities which are but incidental to its main or normal activities. It is relevant
to state that non-operating expenses or deductions which are incidental to the main activities of the business
enterprise include the interest paid on the borrowings. In practice the non-operating profit is adjusted against
non-operating expenses or losses (i.e., loss on the sale of fixed assets). However, there is no restriction if
they are shown separately.
CONSIDERATION OF SOME INDIVIDUAL ITEMS
The following are some of the individual items which must be kept in mind while preparing Trading and
Profit and Loss Account :
Stock : Opening and closing balances of stocks should be included in the trading account on the debit side
and credit side respectively.
In case the closing stock is given in the trial balance, it must not be transferred to the credit side of the trading
account; it will then be shown in the assets side of the balance sheet only.
Purchases and purchases returns : Purchases and purchases returns balances need not be shown separately
in the trading account. Instead purchases returns should be deducted from purchases and only the net amount
should be shown in the debit side of the trading account.
In addition, the following points should be noted in respect of purchases :
(i) Purchases of fixed assets such as machinery, building, furniture, land etc. should not be included.
And if such items are wrongly included in purchases, the same must be deducted.
(ii) If the goods have been purchased for personal use of the proprietor and are included in the purchases,
the same must be deducted from the purchases.
(iii) Goods received on approval or on consignment basis should be excluded from purchases, if they are
included in the purchases.
Adjusted Purchases: When closing stock is given in the trial balance, it means closing stock is already
deducted from the purchases or the purchases are adjusted. In such a case, as mentioned above, closing
stock is not shown in the credit side of the trading account; it will then be shown in the assets side of the
balance sheet only.
Sales and sales returns : From the total sales of goods should be deducted sales returns and only net sales
should be shown in the credit side of the trading account. Goods sold on approval basis should not be included
in sales. They should be shown in the balance sheet as part of the closing stock at their cost price.
And if the goods sold on approval are included in the sales and approval has not been received in the
Final Accounts of Non-Corporate Entities
8.7
current accounting period, the same must be deducted from the sales as well as from debtors on the
other hand. The same must be adjusted by adding in closing stock at their cost price in Trading Account
as well as in Balance Sheet.
Carriage, carriage on purchases and carriage inward : These are transportation expenses incurred on purchases
of goods and are debited to trading account. Carriage outward or on sales however, should be included in
the profit and loss account.
Freight : Freight paid on the purchase of goods is a direct expense and therefore, should be included in the
trading account. Freight paid on any asset like furniture, plant and machinery etc., must be debited to the
relevant asset account itself.
Dock dues and clearing charges : These are paid on goods imported from foreign countries. These are direct
expenses and should be debited to trading account. Duties paid on exports and forwarding charges should
be included in the profit and loss account.
Work-in-progress: This item represents partly finished goods. Its opening balance should be debited to trading
account and the balance at end is first credited to trading account and then shown on the assets side of the
balance sheet.
Royalties : These are payments for acquiring the right to use patents in the production process. Royalties on
the production basis should be debited to trading account if there is no separate manufacturing account e.g.,
production of coal or medicines; otherwise they are debited to profit and loss account e.g., royalties on the
sale of books.
Motive power (or factory power): This item includes gas, electricity or water power used to operate the
machines and therefore, should be debited to trading account.
Fuel (coal, coke, wood etc.) and power: These items form part of manufacturing expenses and therefore,
should be debited to trading or manufacturing account, as the case may be.
Office lighting : It refers to lighting charges incurred in providing light in the office. It should be entered in
the debit side of the profit and loss account.
Lighting : This item means office lighting and should be entered in the debit side of profit and loss account.
Office heating : Enter in the debit side of profit and loss account.
Heating : It is presumed to be factory heating and so enter in the debit side of the trading account.
Repairs and renewals : It is a maintenance expense and should be entered in the debit side of profit and
loss account.
Stores : These include engine oil, soft soap, cotton waste etc. The quantity actually consumed should be debited
to trading account and the unused portion is shown as an asset in the balance sheet.
Turnover : This term is used to denote total sales, generally total annual sales of the firm.
Trade discount : It is never shown as a separate item in the trading account. Trade discount allowed on sales
is deducted from the amount of sales and that relating to purchases should be deducted from purchases.
Wages /wages and salaries : If this item appears in the trial balance simply as wages without being specifically
mentioned as productive or unproductive, it should be presumed to be productive and transferred to trading
account. But when this item is combined with any other unproductive items like salaries, the treatment
would be as follows :
(i) the combined item of wages and salaries would be debited to trading account,
(ii) the combined item of salaries and wages would be debited to profit and loss account.
However, if there is no production activity (i.e., the absence of plant and machinery item in the examination
problem), the distinction is meaningless and the item wages and salaries will be debited to profit and
loss account.
8.8
Financial Accounting: Concepts and Applications
Income tax : Advance payment of income tax is not related to business and represents a personal expense
of the proprietor and is therefore, added to his Drawings Account.
Loose tools : Its opening balance is given in the trial balance while balance at the end is indicated in the
form of an adjustment. Thus, the difference between the value of loose tools in the beginning and its value
at the end of the period represents the used part and should be written off as loss on revaluation (loose
tools consumed) in the debit side of the profit and loss account.
Octroi : It means a toll or tax levied at the gate of a city on articles brought in from other cities. As it is a
tax on purchases, it is direct expense and so debited to trading account.
Packing charges or packing materials : When the goods cannot be sold without a proper packing or
container, such packing or container forms part of the finished product. For example, fruit juice cannot be
sold without packing or ink without bottle. These types of packings constitute direct expenses and thus,
charged to trading account. But if the packing expenses are incurred to make the goods more attractive
(i.e. fancy packing) for sale or dispatch to customers, such expenses are charged to profit and loss
account. Unused stock of packing material is an asset.
Duty on purchases : Any duty paid on the purchases is a direct expense and so debited to trading account.
Charity : Charity is something given in kind or cash for helping others or for a cause. It is an indirect
expenditure and charged to profit and loss account irrespective of the amount or purpose of charity.
Life insurance premium is paid on the life policy of the owner(s) and should be charged to the drawings
account.
Employee's insurance scheme : Any contribution made by the proprietor is a part of the salary of the
employee and hence, is to be debited to profit and loss account.
Bonus in kind and cash is added to the salaries account to be ultimately charged to profit and loss account.
Interest on capital: It means interest allowed to the owner on his capital invested in the business. It is a
financial expense and should be debited to the profit and loss account of a sole trader.
In a partnership firm it is debited to profit and loss appropriation account.
Interest on drawings: It means interest charged on the amount withdrawn by the owner in cash or kind,
from the business. It is an income to the business and so it is entered in the credit side of the profit and
loss account of the sole trader. In a partnership firm, it is entered in the credit side of profit and loss
appropriation account.
Trade expenses: It means general expenses and should be debited to profit and loss account.
MANUFACTURING ACCOUNT
Many business entities engage in manufacturing activities and this involves the purchasing of raw materials
and incurring labour and other costs in converting the raw materials into finished goods. For this purpose,
a manufacturing account is prepared in order to ascertain the cost of producing the goods. This account is
also normally prepared at the end of the accounting period. Both direct and indirect expenses associated
with the manufacturing process are debited to the manufacturing account. The balance of this account representing
cost of the goods produced is then transferred to the Trading Account. The order of presentation of the
final accounts is as under : (a) Manufacturing Account (b) Trading Account (c) Profit and Loss Account
(d) Profit and Loss Appropriation Account (in a partnership or a limited company) (e) Balance Sheet.
Final Accounts of Non-Corporate Entities
Dr.
8.9
(PRO-FORMA) MANUFACTURING ACCOUNT
Direct Materials
`
`
Closing Stock:
Opening Stock :
Raw Materials
xx
Work-in-progress
Purchases :
xx
Raw materials
xx
Work-in-progress
xx
Carriage inwards
xx
Cr.
`
Raw materials
xx
Work in progress
xx
`
xx
Cost of the goods transferred to
Trading Account
xx
xx
xx
Direct Labour
Factory wages
xx
Direct Expenses
Factory rent
xx
Fuel, power, gas etc.
xx
Factory insurance
xx
xx
Depreciation on factory building etc.
Manufacturing over-heads
xx
xx
xx
xx
xx
DIFFERENCE BETWEEN TRADING ACCOUNT AND MANUFACTURING ACCOUNT
(i) Trading account is prepared to find out the gross profit (or loss) while manufacturing account shows
the cost of the goods produced.
(ii) When trading and manufacturing accounts are prepared separately, manufacturing account deals with
the raw materials, and work-in-progress while the trading account would deal with finished goods only.
Illustration 1 (Manufacturing account)
The following were some of the ledger balances in books of Shalu and Company on 31 March 2020.
`
Particulars
Particulars
`
Provision for depreciation:
Work-in-progress
34,000
Leasehold building
12,000
Plant and machinery
28,700
31,600
Fixtures and fittings
2,800
Repair to building
4,800
23,000
Carriage outwards
7,300
15,000
Materials purchases
Stock of finished
goods on 1.4.2019
Raw materials stock
on 1 April 2019
Bank overdraft
Direct wages
1,10,000
Factory rates
7,900
Sales
Leasehold buildings at cost
Factory Power
4,78,000
60,000
1,25,300
Direct fees
3,500
Returns inwards
2,000
Carriage inwards
Replacement costs of fixed assets
6,800
15,000
9,900
Plant and machinery at cost
75,200
Indirect wages
97,300
Additional Information:
(i) The factory buildings are held on a 30 years lease.
(ii) Stocks on 31 March 2020 were : Raw materials—` 26,000; Work-in-progress ` 36,000; Finished goods—
` 29,000.
8.10
Financial Accounting: Concepts and Applications
(iii) Depreciate plant and machinery at 12-1/2% using the straight line method and fixtures and fittings at
10% using written down value method.
(iv) The factory production was charged to finished goods at cost.
Prepare a manufacturing account for the year ending on 31 March 2020.
Solution :
Shalu
Manufacturing Account For The Year Ended 31 March 2020
`
Stock (1.4.2019) :
`
Stock at the end (31.3.2020)
Raw materials
23,000
Work-in-progress
34,000
Purchases
57,000
1,25,300
Carriage inwards
6,800
Direct wages
Raw materials
26,000
Work-in-progress
36,000
62,000
Cost of goods transferred
to Trading Account
3,68,400
1,10,000
Manufacturing overheads :
Building repairs
Factory rates
Factory power
Indirect wages
Depreciation on :
Factory building
Plant and machinery
4,800
7,900
9,900
97,300
2,000
9,400
1,31,300
4,30,400
4,30,400
BALANCE SHEET
The profit and loss account or trading and profit & loss account shows only the net profit or loss of a business
enterprise for a given accounting period. But the owner or proprietor(s) also wants to know the financial position
of his business firm on the closing or last date of the accounting period. For this purpose the owner(s) or
proprietor(s) prepares a statement of assets and liabilities of his firm as on the closing date of the given accounting
period including his capital. This statement of assets and liabilities on the closing date of the given accounting
period is known as balance sheet.
A few definitions of balance sheet may be noted as under:
(a) “The balance sheet is a statement at a particular date showing on one side, the trader’ property
and possessions and on the other side his liabilities” (Palmer)
(b) “A balance sheet is an item-wise list of assets, liabilities and proprietorship of a business at a
certain date.” (Freeman)
(c) “A balance sheet is a statement prepared with a view to measure the exact financial position of a
business on a particular date” (J.R. Batliboi)
Thus, a balance sheet is a statement of the total assets and liabilities (including capital) of the owner(s), of
an organization or a business enterprise at a particular date usually the last day of the accounting period.
CLASSIFICATION OF ASSETS
An asset is any object or thing, tangible or intangible that is of value to its possessor. Assets are thus,
all types of properties owned by a business firm and amounts of debts due to the business enterprises
from other persons.
Assets are generally classified as:
(i) Current Assets, or Floating Assets or Circulating Assets.
Final Accounts of Non-Corporate Entities
8.11
(ii) Liquid or Quick Assets.
(iii) Investments.
(iv) Fixed Assets
(v) Tangible Fixed Assets.
(vi) Intangible Fixed Asset.
(vii) Wasting Fixed Assets.
(viii) Fictitious Assets.
(ix) Contingent Assets.
Current assets : These assets consist of cash and other temporary held assets such as debtors, bills receivable,
stock of goods (inventories), raw materials, prepaid expenses etc., that are reasonably expected to be converted
into cash or be sold or be consumed within one year. The debtors and bills receivable are expected to be
realised in cash. The stock of goods (inventories) is expected to be sold either for cash or on credit (to
debtors), to be converted into cash. The raw materials or office supplies like stationery are to be consumed.
Prepaid expenses are treated as current assets not because that they will be converted into cash but no current
assets would be required for their purchase during the accounting period. The current assets are also known
as floating assets or circulating assets which are continually being turned over. For example, in the course
of business transactions cash is used to purchase goods for resale; goods are then sold for cash or on credit
in the form of debtors and bills receivable which are again realised in cash and cash is again used to purchase
goods for resale; goods are then sold for cash and this cycle repeats again and again in the accounting period.
Whether a particular item is a current asset or not would depend upon the nature of the business or the
purpose for which it is acquired. For example, furniture is a current asset for a firm of furniture and fixed
asset where it is to be retained and not sold immediately.
Liquid assets or quick assets and non-liquid assets : Current assets are again sub-divided into these two
categories.
Liquid or quick assets are in the form of cash in hand and at bank and other current assets which can be
converted into cash without much loss such as Government securities, bills receivable, debtors etc.
Non-liquid assets cannot be readily converted into cash and also not without much loss such as inventories.
Investments: This item refers to the money invested in shares and debentures of joint stock companies and
government bonds for the purpose of earning dividend and interest, as the case may be. Investments may be
short-term investments or long-term investments.
Short-term investments are held by the firm to make quick gains from their sale in the market. The purpose
is not to retain them but to sell when their prices rise.
Short-term investments may be grouped with current assets, while long-term investments are shown under
the heading investments.
Long-term investments : Investments in shares, debentures, bonds or even fixed deposits that will be retained
for more than one year appear under the heading : investments. Also such items as land held for future expansion
and not being used now in the business operations would be shown here.
Fixed assets : The term fixed assets is used for long-lived or permanent assets that are acquired for use in
operating or running the business rather than for resale as goods. In other words, these assets are not turned
over or sold at a profit but are retained for many accounting periods. Examples are : land, building, plant
and machinery, furniture etc., These assets are listed in the balance sheet not according to their liquidity but
from most permanent to less permanent.
Tangible fixed assets are those assets which have physical existence and are concrete items such as buildings,
machines, furniture, etc..
8.12
Financial Accounting: Concepts and Applications
Intangible fixed assets are assets having no physical existence but yield or give benefit to the owners. They
are non-visible and derive their value from the rights conferred upon their owner by possession. Examples
are : goodwill, patents, trade marks, copyrights etc..
Wasting fixed assets are assets which are used up or consumed in the course of working e.g., mines, quarries,
oil wells.
Fictitious assets are not assets at all since they are not represented by any tangible possessions. They appear
in the assets side simply because of a debit balance in a particular account not yet written off e.g., debit
balance in the profit and loss account or advertisement suspense account etc..
Contingent assets : Contingent assets are not assets proper but come into existence upon the happening of
a certain event(s) or the expiry of certain time. If that event(s) happens, the asset becomes available otherwise
not e.g., sale agreement to acquire some property, hire purchase contracts, uncalled share capital of a limited
company. In the absence of any legal right to the properties at that times, these properties are recognised
only as contingent assets and are not entered in the accounts. Example are : tax claims, insurance claims,
claims against creditors pending settlement. In practice, no reference is made to contingent assets in the
balance sheet. At the most, they may form part of notes below the balance sheet.
CLASSIFICATION OF LIABILITIES
The term liability refers to an obligation to transfer money as a result of past transactions e.g. purchase
of a fixed asset or a current asset on credit or repayment of loan or rendering of services by others. Liabilities
are therefore, amounts owed by a business firm to other parties either for purchase of assets or goods on
credit or services received on credit or for the loans taken. Capital is also a liability of the business firm to
the owner(s) or proprietor(s).
Current liabilities : Current liabilities are those debts at the balance sheet date that must be paid either immediately
or within one year. Common current liabilities are :
(i) Creditors (or Accounts payable) : This liability arises from the purchase of goods on credit or use of
services not yet paid or money borrowed (loan from a bank) for a short period (non-trade creditors).
The balance sheet simply shows the total amounts payable to trade or non-trade creditors and not the
names of individual creditors.
(ii) Bills payable (or Notes payable) : It is a written promise to pay money to a creditor for the purchase
of goods or services used in the business or the money borrowed.
(iii) Outstanding liabilities : They represent liabilities for expenses incurred but not yet paid as on the
balance sheet date e.g., outstanding wages, salaries, commission, interest, taxes etc...
(iv) Income received in advance (Unearned revenues) : This item of liability is to be found in the balance
sheet of firms dealing in the publication of newspapers and magazines.
Long-term liabilities : These liabilities are not to be paid within one year. Long-term liabilities may be
classified as secured loans or unsecured loans in the balance sheet. Secured loans :When a business obtains
a loan against the security of a specific fixed asset, it is secured or mortgage loan. If the payment is not
made to the creditor(s) in time in accordance with the terms of mortgage, the creditor can sell the asset to
satisfy his claim from the proceeds of sale and any shortage is paid to and surplus received from him. Unsecured
loans do not have any asset attached to them as security.
Contingent liabilities : A contingent liability arises on the happening of an unfavourable event in future.
There is no actual legal obligation to pay on the date of balance sheet.
(a) Contingent liability on bills discounted : If a bills receivable is discounted with the bank or endorsed
to a third party, there is a contingent liability to the bank or endorsee until the bill is paid by the
acceptor on the due date.
(b) Contingent liability as a surety for another person : If A stands surety for B in respect of a payment
of debt to C, this obligation is a contingent liability to the surety A until the payment is made by
principal debtor B since A will be called upon to pay C if B does not make the payment.
Final Accounts of Non-Corporate Entities
8.13
(c) Contingent liability in respect of pending law suit : A suit pending against the business enterprise is
a contingent liability since the suit may be decided against it and therefore, it may become liable to
pay compensation. When a contingent liability becomes a real liability on the happening of an event,
it will either result in a loss or it will give an asset of equal amount in exchange. For example, when
a bill of exchange endorsed or discounted is dishonoured by the acceptor, the business enterprise will
have to pay the amount to the endorsee or the bank as the case may be. It becomes an actual liability
on it. But after the money has been paid on behalf of the acceptor, he (the acceptor) becomes debtor
of the firm for the payment of liability. However, if the acceptor does not own any property, the contingent
liability will result in a loss to the business.
A contingent liability must be distinguished from an estimated or disputed liability; the latter is a definite
obligation but the amount is uncertain at the balance sheet date. As the contingent liability is not an actual
liability it is not recorded in the balance sheet. It is simply mentioned by way of footnote or explanation
to the balance sheet.
CAPITAL OR OWNER(S)’ EQUITY
Capital represents the amount invested by the owner(s) in the business enterprises. The capital is entered on
the liabilities side of the balance sheet because the business enterprise owes this amount to the owner(s) or
proprietor(s).
GROUPING AND MARSHALLING
The real and personal accounts in balance sheet should be arranged in such a way that anyone reading them
can immediately get a true and fair view of the firm's financial position. This is achieved by Grouping and
Marshalling of various items in the balance sheet.
The term ‘grouping’ means putting together, under the common heading, the items of the same nature. For
example, the term trade debtors should include the accounts of only debtors arising from the credit sale
of goods and not from lending of money.
The term ‘marshalling’ denotes the order or classes in which the assets and liabilities are stated in the balance
sheet. The items in the balance sheet are generally marshalled in the following two ways :
(i) in order of liquidity or according to time i.e., the assets being stated in the order in which they can
be converted into cash and the liabilities in the order in which they have to be paid off—current or
long-term according to whether they will be used or disposed off within one year or more than one
year, or
(ii) in order of permanence or according to purpose. It is generally found that a business firm has a
main purpose such as producing goods or services for sale. Most of the assets are held for use in this
main purpose e.g., plant, machinery, furniture. But assets may be acquired for a subsidiary purpose
as well. For example, shares or debentures may be purchased for speculative purposes. In this case, a
separate sub-classification may be used for shares held for investments. Although this criterion will
most often affect the assets but it can affect the classification of liabilities too. The typical example
is loan from a bank. Banks normally provide funds for short-term and therefore, bank loan is a shortterm liability. However, banks may grant loans to purchase property or to expand business. In such a
case the bank loan would be classified as a long-term liability.
ADVANTAGES OF MARSHALLING
The following advantages of grouping and marshalling may be noted as under:
(i) It is easy to know the financial position of the enterprises.
(ii) It is helpful to know whether the fixed and long-term borrowed capital is sufficient to purchase
fixed assets.
(iii) It is also helpful to know the position of the current assets in relation to current liabilities. It is easy
to know the amount of working capital.
8.14
Financial Accounting: Concepts and Applications
(iv) It is easy to know whether the liquid assets are sufficient to pay current liabilities.
METHODS OF MARSHALLING
There are generally two methods of arranging assets in the balance sheet, namely;
(i) In order of liquidity or reliability, and
(ii) In order of permanence
When the assets are arranged in order of liquidity, the assets which can be converted into cash early are
listed first and the assets which cannot be easily converted to cash or realized are listed next.
But when the assets are arranged in order of permanence, the most permanent assets are listed first and the
assets which change their form frequently are listed next.
The liabilities are also listed in two ways:
(i) In order of priority or urgency of payment.
(ii) In order of permanence.
In the first method, the liabilities which are payable either immediately or in the near future are listed first
and long-term liabilities are listed next.
According to second method, the liabilities are listed in order of permanence. The permanent (capital) or
long-term (Debentures or long-term loans) liabilities are listed first and liabilities payable soon are shown
next.
Mixed Method of Marshalling: Some authors suggest a third method of marshalling assets and liabilities
in which assets are arranged in order of permanence or performance while liabilities are shown in order of
payment and vice versa.
Balance Sheet As On ....
(i) In Order of Liquidity
Liabilities
(i)
`
Current Liabilities
———
Short-term loans
———
Assets
(i)
Bank loan
Current Assets
———
Cash in hand
———
Cash at Bank
Bank overdraft
———
Bills Receivable
———
Bills payable
———
Sundry Debtors
———
Sundry Creditors
———
Prepaid Expenses
———
Outstanding Expenses
———
Accrued Incomes
———
Income received in
(ii)
`
Short-term Investments
Advance
———
Fixed Liabilities
———
(ii)
Mortgage Loans
———
(iii)
Fixed Deposits
(iii) Capital
Current Account (s)
Capital Account (s)
Stock in hand
———
Long-term Investments
———
Fixed Assets
———
———
Loose tools
———
———
Furniture and fittings
———
———
Motor Vehicles
———
Plant and Machinery
———
Land and Buildings patents.
———
Trade marks copyrights
goodwill
Final Accounts of Non-Corporate Entities
8.15
Balance Sheet As On ....
(In Order of Permanence)
`
Liabilities
(i)
(ii)
Capital
`
Assets
(i)
Fixed Assets
Current Account(s)
———
Goodwill
———
Capital Account(s)
———
Patents
———
Fixed Liabilities
Trade Marks
Mortage loans
———
copyrights
———
Fixed Deposits
———
Land and Buildings
———
Plant and Machinery
———
(iii) Current Liabilities
Incomes Received in Advance
———
Motor Vehicles
———
Outstanding Expenses
———
Furniture and fittings
———
Sundry Creditors
———
Loose tools
———
Long-Term Investments
———
Bills Payable
———
(ii)
Bank loan or Overdraft
———
(iii)
Short-term Loans
———
Current Assets
Short-term investments
———
Accrued Income
———
Prepaid Expenses
———
Stock in hand
———
Sundry Debtors
———
Bills Receivable
———
Cash at Bank
———
Cash in hand
———
Illustration 2 (Final Accounts)
From the trial balance of Ashanti Devi given below, prepare final accounts for the period ending on 31 March,
20........
Trial Balance of Ashanti Devi As On 31 March 20......
Debit `
Credit `
—
1,01,500
Cash in hand
6,470
—
Cash in bank
17,190
—
Opening stock
40,000
—
6,600
—
Name of the Account
Capital account
Furniture account
Sundry Debtors:
Musica
18,500
Manohar electronics
4,000
Veer traders
3,400
Bills payable account
—
13,000
Advertising account
500
—
Trade expenses account
100
—
Salaries and wages account
2,000
—
Office stores account
1,200
—
50
—
Travelling charges account
8.16
Financial Accounting: Concepts and Applications
Telephone charges account
Rent account
250
—
1,500
—
Stationery account
150
—
Discount allowed account
170
—
Discount received account
—
320
3,000
—
Bad debts account
Trade Creditors:
—
Tony limited
—
16,000
Rhytham corner
—
28,000
Modern electronics
—
4,000
—
38,900
Sales account
Delite Safe Co.
Purchases account
Sales returns account
—
1,600
91,940
—
2,000
—
Purchases returns account
—
3,200
Post-dated-cheque account
5,000
—
Drawings account
2,500
—
2,06,520
2,06,520
Stock in hand at end : Goods ` 1,00,000; Office stores ` 500.
Solution :
Ashanti Devi
Dr.
Trading Account For The Year Ended On 31 March, 20×...
`
Particulars
To Opening stock
To Purchases
3,200
To Profit and Loss A/c
By Sales
88,740
By Closing stock
Less : Returns
38,900
2,000
36,900
1,00,000
8,160
(Gross Profit)
Dr
`
Particulars
40,000
91,940
Less : Returns
Cr.
1,36,900
1,36,900
Profit and Loss Account For The Year Ended On 31 March, 20×...
`
Particulars
To Advertisement
500
To Trade expenses
100
To Salaries and wages
2,000
To Travelling expenses
8,160
(Gross Profit)
By Discount received
320
1,500
To Stationery
To Discount allowed
150
170
To Bad debts
Less : Stock in hand
By Trading Account
250
To Rent
To Net profit transferred to Capital Account
`
Particulars
50
To Telephone expenses
To Office stores
Cr.
3,000
1,200
500
700
60
8,480
8,480
Final Accounts of Non-Corporate Entities
8.17
Balance Sheet As At 31 March, 20 ×...
`
Liabilities
Assets
`
Bills payable
13,000
Cash
6,470
Trade creditors
48,000
Bank
17,190
Debtors
25,900
Delite safe company
1,600
Capital
1,01,500
Less : Drawings
Add : Net Profit
Post-dated-cheque
2,500
Closing Stock
99,000
Office stores
60
99,060
Furniture
1,61,660
5,000
1,00,000
500
6,600
1,61,660
ADJUSTMENTS
The trial balance contains only those items which have been recorded in the books of account during the
accounting period and does not contain those items which are not recorded although such unrecorded items
belong to the current accounting period. The adjustments in final accounts simply mean bringing into record
all those items which have not yet been included in the trial balance with the help of adjustment entries.
The rationale or logic behind the adjustments is that the final accounts must be prepared on accrual basis. It
means that in the profit and loss account we should include all the expenses which belong to current accounting
period whether they are actually paid in cash or not and all the incomes of the current accounting period
whether they are actually received in cash or not. Thus, adjustments are necessary for correct matching
of revenues and expenses incurred to earn those revenues.
Adjustments are also made to record assets and liabilities at their correct values by taking into account
non-cash expenses and non-cash incomes such as depreciation of fixed assets, interest on capital and interest
on drawings.
Furthermore, the anticipated losses such as provision for bad debts and provision for discount on debtors
and anticipated income like provision for discount on creditors are also incorporated through adjustment entries.
MOST FREQUENT ADJUSTMENT ENTRIES
The most frequently made adjusting entries are listed in the following paragraphs:
(i) Stock at the end : The closing inventory after proper valuation is incorporated in the final accounts
with the help of following journal entry :
Stock at the end Account
To Trading Account
Dr.
Stock account is debited so that the asset on hand may appear in the balance sheet. The trading account
is credited so that cost of the goods available for sale (i.e., opening stock plus purchases made
during the year) already recorded in that account, may be reduced by the stock at the end, to give
the cost of the goods sold. The stock-on-hand which appears in the Trial balance is the opening stock
or stock on hand at the beginning of the period.
But if the closing stock also appears in the trial balance, it means that the double entry was completed
in the accounting period itself by already reducing the purchases by making the following entry:
Stock at the end Account
To Purchases Account
Dr.
Hence, Stock-at-the-end will then be shown only in the assets side of the balance sheet.
(ii) Outstanding expenses (Unpaid expenses) : Expenses are generally recorded only when they are paid
in cash. But certain expenses like salaries, wages, rent etc., are incurred during the accounting period
8.18
Financial Accounting: Concepts and Applications
but the payment for them might not have been made during that accounting period. Such expenses are
called oustanding (unpaid) expenses. The failure to record an unpaid expense in the accounts results
in an understatement of that expense and also an understatement of a liability. In order to avoid understatement
of these expenses and liabilities, an adjustment entry is passed to increase the expense and liability :
Relevant Expense Account
Dr. (It will go to Trading or
To Outstanding Expenses
Profit and Loss Account)
Account
(It will appear in the balance sheet as a liability)
But if outstanding expenses are given in the trial balance, the same will be shown only in the
liabilities side of the balance sheet because the above adjustment entry has already been made
in the accounting period itself.
Example 1
A firm pays salaries for any month on the seventh day of next month. The monthly bill is ` 2,000. The
accounting period ends on 31 March. How would you state the total amount of salaries for the year.
Answer :
In the trial balance, there must be salaries paid for 11 months only since the payment is made on the seventh
day of next month. The salaries for the month of March must be paid on 7th of April of the next accounting
period. The salaries account would be adjusted as :
Dr.
Salaries Account
Particulars
To Balance b/d
(As given in trial balance)
Cr.
`
22,000
Particulars
By Profit and Loss Account
`
24,000
To Oustanding Salaries
Account (For March)
2,000
24,000
Dr.
24,000
Outstanding Salaries Account
Particulars
To Balance c/d
`
2,000
Cr.
Particulars
`
By Salaries Account
2,000
By Balance b/d
2,000
(For Balance Sheet)
Balance Sheet As At 31 March, 20…
Labilities
Outstanding Salaries
`
Assets
`
2,000
Result : The adjusting procedure stated above enables the firm to record the salaries as expense of the
12 months rather than expense paid for 11 months. In addition, the balance sheet will show a liability
in the form of unpaid salaries at the end of the accounting period. Omitting such an adjustment would
mean an overstatement of net profit of ` 2,000 and an understatement of liability of `2,000 in the balance
sheet. Similar considerations apply to all outstanding expenses.
(iii) Accrued income : There is usually no record in the account books regarding items of income which
have not been received. Examples are interest on bank deposits, debentures, commission, dividends
on shares and services rendered but neither billed nor income received by the end of the accounting
period. Uncollectable income that has been earned but is not yet due and collectible and which
increases or accumulates with the passage of time is known as accrued income.
The failure to record income earned but not received results in : (i) understatement of income,
Final Accounts of Non-Corporate Entities
8.19
and (ii) understatement of assets (representing money to be collected at a later date). Thus, it becomes
necessary to make an adjustment entry which would increase the asset in the balance sheet and income
in the profit and loss account. The entry is :
Accrued Income Receivable
Account
Dr.
(will appear as an asset)
To Income Account
(will appear on the Credit side of Profit and Loss Account)
In case accrued income appears in the trial balance, it will be taken to the assets side of the balance
sheet only because adjustment entry has already been made.
Example 2
A business enterprise owns ` 10,000, 12% Debentures on which interest is receivable on 30 June and 31 December
and the accounting period ends on December 31. The interest has been received only on 30 June. What is
your reaction ?
Answer :
The interest has been accruing between June 30 and December 31 (for six months) for which an adjusting
entry is needed. The reason is simple: there has been an accumulation of income and good accounting on
accrual basis requires that income must be recorded in the period in which it is earned. The relevant entry is:
Accrued Interest Receivable Account
To Interest Account
Dr.
`
600
`
600
(Being six months's interest on ` 10,000 @ 12% accrued but not received)
Assume that before recording the above entry, the interest account has a credit balance of ` 600 representing
the interest received for six months during the year. The posting of the adjusting entry for accrued interest
would show the following position :
Dr.
Interest Account
Particulars
To Profit and Loss Account
Cr.
`
1,200
Particulars
By Balance b/d
600
By Accrued Interest
600
1,200
Dr.
1,200
Accrued Interest Receivable Account
Particulars
`
To Interest Account
600
To Balance b/d
600
`
Cr.
Particulars
By Balance c/d
`
600
(For Balance Sheet)
Balance Sheet As At 31 December 20…
Liabilities
`
Assets
`
Accrued Interest
600
Obviously the adjusting entry will have the effect of increasing the amount of income transferred to the
credit of profit and loss account while the debit balance in the accrued interest account will appear as
an asset in the balance sheet.
(iv) Prepaid expenses (Expenses paid in advance) : Sometimes the payments for certain expenses, have
to be made in advance with the result that there will be some unexpired portion of expenses at the
8.20
Financial Accounting: Concepts and Applications
end of the accounting period which relates to the future periods. The typical examples are insurance
premium, rent, rates, etc. An adjusting entry is made as :
Prepaid Expenses Account
(or Expenses paid in advance)
To Expenses Account
Dr.
The amount of prepaid expenses will appear as an asset in the balance sheet while amount of appropriate
expense account will be reduced with the amount of prepaid expenses. It is this reduced amount that
will be transferred to profit and loss account.
But if the prepaid expenses are given in the trial balance, the same will be shown only in the assets
side of the balance sheet because adjustment entry has already been made on the trial balance date.
Example 3
A firm pays yearly insurance premium ` 1,200 on July 1, every year. The accounting period ends on March
31. Make the adjustment for the purpose of preparing final accounts.
Answer :
`
Prepaid Insurance Account
Dr.
To Insurance Account
`
300
300
The ledger account will then be:
Dr.
Insurance Account
Cr.
`
Particulars
To Balance b/d
1,200
Particulars
By Prepaid Insurance Account
300
By Profit and Loss Account
900
1,200
Dr.
1,200
Prepaid Insurance Account
Particulars
`
To Insurance Account
300
To Balance b/d
(For Balance Sheet)
300
`
Cr.
Particulars
By Balance c/d
`
300
Balance Sheet As At 31 March 20.....
`
Labilities
Assets
Prepaid Insurance
`
300
(v) Income received in advance (unearned income) : Revenues are sometimes received in advance for
commodities to be supplied or for services to be rendered in future, e.g., subscriptions, apprentice
premium, or the insurance premium received by an insurance company. That portion of revenue received
in advance that is unearned at the end of the accounting period is known as income received in
advance or unearned income. Income received in advance or unearned income is in the nature of a
liability for the simple reason that it creates an obligation to refund the amount or provide goods/
services at some future date. The required adjusting entry is :
Income Account
Dr.
To Income Received in
Advance Account
(will be shown as a deduction from the relevant income account
in the Profit and Loss Account)
(will appear as a liability in the balance sheet)
If it is given in the trial balance, it will be shown only in the liabilities side of the balance sheet
because adjustment entry has already been made.
Final Accounts of Non-Corporate Entities
8.21
Example 4
A publication house receives subscriptions amounting to ` 20,000 during the current accounting period but
` 2,000 are in respect of subscriptions for next year. Show the necessary adjustments in different accounts.
Answer :
Dr.
Subscriptions Account
`
Particulars
To Subscriptions Received in Advance
2,000
To Profit & Loss Account
Cr.
Particulars
By Balance b/d
20,000
18,000
20,000
Dr.
`
20,000
Subscriptions Received in Advance Account
Particulars
By Balance c/d
`
2,000
Particulars
Cr.
`
By Subscriptions Account
2,000
By Balance b/d
(For Balance Sheet)
2,000
Balance Sheet As At....
Liabilities
Subscriptions received in advance
(vi)
`
Assets
`
2,000
Depreciation of PPE (Tangible) : The cost of a fixed asset is charged as an expense over a period of
its useful life. The expense is known as depreciation. Normally depreciation is provided after the trial
balance date. Fixed assets are presented in financial statement at historical cost basis, but, revaluation
model may be applied, which is optional (as per AS-10). It is not done during ordinary course of business
unless management feels that historical cost does not represent true and fair value.
If revaluation is done, obviously it will increase or decrease the value of concern assets. If there is
decrease in revaluation of assets it should directly charged to profit and loss account. While increase
in value of assets, should directly credited to owner’s interest by opening ‘Revaluation Reserve Account’
which is a restricted reserve. Revaluation reserve can be utilised to write off excess depreciation arising
on revaluation, to write off loss on sale of fixed assets and balance, if any, should be transfer to General
Reserve in owner’s interest. Thus, an adjustment is needed in the relevant accounts before the final
accounts are prepared. The required adjustment entries are :
(i) Depreciation Account
To Individual Asset Account
Dr.
But when the fixed asset is required to be maintained at its
original cost, the entry will be :
(ii) Depreciation Account
Dr.
To Provision For Depreciation Account
(iii) Profit and Loss Account
Dr.
To Depreciation Account
(iv) Revaluation Reserve Account
Dr.
To Depreciation Account (excess depreciation)
To Loss on Sale of Assets
To General Reserve (Balancing Figure)
8.22
Financial Accounting: Concepts and Applications
Example 5
The following balances were extracted at the end of the accounting period from the books of P :
`
Plant and Machinery
20,000
Furniture
5,000
Building
50,000
Depreciation is to be charged as : 20% on Plant and Machinery, 10% on Furniture and 5% on Building.
Outline the procedure and show how the financial statements are affected.
Answer :
The total amount of depreciation is : `
Plant and Machinery
(20% on ` 20,000)
4,000
Furniture
(10% on ` 5,000)
500
Building
( 5% on ` 50,000)
2,500
7,000
The adjusting entries are :
`
(i)
Depreciation Account
Dr.
To Plant and Machinery Account
4,000
To Furniture Account
500
To Buildings Account
(ii)
`
7,000
2,500
Profit and Loss Account
Dr.
To Depreciation Account
7,000
7,000
Effect On Financial Statements
Dr.
Particulars
To Balance b/d
Plant and Machinery Account
Cr.
`
`
20,000
Particulars
By Depreciation Account
By Balance c/d
20,000
To Balance b/d
Dr.
Particulars
To Balance b/d
16,000
Furniture Account
Cr.
`
`
5,000
Particulars
By Depreciation Account
By Balance c/d
Dr.
Particulars
To Balance b/d
500
4,500
5,000
4,500
Building Account
Cr.
`
`
50,000
Particulars
By Depreciation Account
By Balance c/d
50,000
To Balance b/d
16,000
20,000
5,000
To Balance b/d
4,000
47,500
2,500
47,500
50,000
Final Accounts of Non-Corporate Entities
Dr.
8.23
Depreciation Account
`
Particulars
To Plant and Machinery Account
4,000
To Furniture Account
500
To Building Account
2,500
Cr.
`
Particulars
By Profit and Loss Account
7,000
7,000
7,000
Balance Sheet (Assets Side)
`
Assets
`
Plant & Machinery
20,000
Less : Depreciation
4,000
Furniture
5,000
Less : Depreciation
Buildings
Less : Depreciation
500
16,000
4,500
50,000
2,500
47,500
Depreciation in the trial balance along with Revaluation Reserve: When the depreciation is given
in the trial balance, it means that the asset(s) has been credited with the amount of depreciation
and the necessary debit to depreciation account made. The Revaluation Reserve is kept for writing
off excess depreciation and loss on sale of assets. If there is any excess depreciation it must be
adjusted again Revaluation Reserve as per AS-10 PPE (revised). The only entry then would be to
transfer the depreciation account to Profit and Loss Account and excess depreciation to Revaluation
Reserve Account.
(vii) Bad Debts : Losses on account of uncollectable debts are called bad debts. Such a loss is recorded in
the books by making following adjusting entry:
Bad Debts Account
Dr.
To Debtors Account
The Profit and Loss Account is debited with the amount of bad debts in the balance sheet, the debtors'
balance will be reduced by the same amount in the assets side of the balance sheet.
Bad debts in the trial balance : When the amount of bad debts is given in the trial balance itself,
no adjusting entry is required. It simply means that the amount in the debtors account has already
been reduced by making entry for bad debts before the trial balance is extracted. Only the bad
debts account will be transferred to profit and loss account.
(viii) Provision for bad and doubtful debts : In addition to writing off bad debts known to be bad, provision
must be made for any debts, the recovery of which is doubtful. Such a treatment is based on the simple
logic that bad debts should be charged to profit and loss account in the period in which they are incurred.
The method for providing for doubtful debts is : the amount to be provided is debited direct to Profit
and Loss Account and credited to Provision for Bad and Doubtful Debts Account; the balance on the
bad debts actually written off is debited direct to Profit and Loss Account.
Example 6
The following figures have been extracted from the account books of a business house : Bad Debts written
off during the year : ` 1,000
Debtors on December 31, 20.... ` 10,000
It is desired to make a provision of 5% on debtors. Write up the relevant ledger accounts.
8.24
Financial Accounting: Concepts and Applications
Answer :
Dr.
Particulars
To Balance b/d
Bad Debts Account
Cr.
`
`
1,000
Dr.
Particulars
To Balance c/d
Particulars
By Profit and Loss Account
1,000
Bad Debts Account
Cr.
`
`
500
Particulars
By Profit and Loss Account
500
(5% on ` 10,000)
By Balance b/d
500
When there is already a provision for bad debts in existence (old), only the difference between the new
provision and old provision is debited to Profit and Loss Account provided the new provision is more
than the old provision.
Example 7
The following figures relate to a trader :
`
Bad and Doubtful Debts Provisions at January 1, 20.....
500 (Cr.)
Bad Debts written off during the year ending on December 31, 20..
700
The provision is to be maintained at 10% on sundry debtors
which stood at ` 10,000 on December 31, 20.....
Answer :
The problem can be dealt with as follows :
Dr.
Particulars
To Balance b/d
Dr.
Particulars
Bad Debts Account
Cr.
`
`
700
By Profit and Loss Account
700
Provision for Bad And Doubtful Debts
Cr.
`
`
To Balance c/d (Required
i.e., 10% on 10,000)
Particulars
1,000
Particulars
By Balance b/d (given)
500
By Profit and Loss Account
500
1,000
1,000
By Balance b/d
1,000
If the closing provision (new) is less than the opening provision (old), the profit and loss account would
be credited with the amount of the reduction.
(ix) Provision for discount on debtors : When the provision for bad and doubtful debts has been deducted
from the total debtors, the balance so arrived represents good or sound debtors, who might claim cash
discount by making prompt payments. The discount so allowed is an expense to the business. Provision
for discount is generally made with the object of charging against the current accounting period the
estimated cash discounts which will ordinarily be allowed to debtors on sales during the period for
making prompt payments. The entry is:
Profit and Loss Account
Dr.
To Provision for Discount On Debtors Account
Final Accounts of Non-Corporate Entities
8.25
Example 8
From the following data, make necessary adjustments for provision for discount on debtors :
`
Discounts allowed during the year on December 31, 20.....
1,000
Discount Provision as at January 1, 20.....
400
Debtors (good) as at December, 31, 20......
10,000
Provision for discount to be made at 8%
Answer :
Dr.
Discount Allowed Account
Cr.
`
`
Particulars
To Total Discount As Per Cash Book
1,000
Dr.
Particulars
By Profit and Loss Account
1,000
Provision for Discount on Debtors Account
Cr.
`
`
Particulars
To Balance c/d (8% on ` 10,000)
800
Particulars
By Balance b/d
400
By Profit and Loss Account
400
800
800
Example 9
The following figures appear in the books of Archana :
`
20......
Jan.1
Dec. 31
Provision for bad and doubtful debts
800
Provision for discount allowed
600
Discounts allowed during the year
800
Bad debts written off
400
Debtors (per ledger)
10,000
Write off further bad debts
200
Create 10% provision for bad and doubtful debts
Provide for discount on debtors at 10%
Answer :
Dr.
Particulars
Bad Debts Account
Cr.
`
`
To Balance b/d
400
To Debtors (written off)
200
Particulars
By Profit and Loss Account
600
Dr.
Particulars
To Balance c/d (See working notes)
600
600
Provision for Bad And Doubtful Debts Account
Cr.
`
`
980
Particulars
By Balance b/d
800
By Profit and Loss Account
180
980
980
By Balance b/d
980
8.26
Financial Accounting: Concepts and Applications
Dr.
Discount Allowed Account
Cr.
`
`
Particulars
To Sundries as per Cash Book
Dr.
800
Particulars
By Profit and Loss Account
800
Provision for Discount Allowed Account
Cr.
`
`
Particulars
To Balance c/d
882
(See working notes)
Particulars
By Balance b/d
600
By Profit and Loss Account
282
882
882
WORKING NOTES
(1)
Provision for bad and doubtful debts would be created as shown below :
`
Debtors (Given)
10,000
Less : Bad debts Additional
200
9,800
Less : Provision for bad and doubtful debts — 10% on 9,800
980
8,820
(2)
The discount provision : 10% on 8,820
(3)
Balance Sheet As on 31 December 20.....
882
`
Assets side
Sundry Debtors (10,000 – 200)
9,800
Less : Provision for bad and doubtful debts
980
8,820
Less : Provision for discount on debtors (10% on 8,820)
882
7,938
(x) Provision for discount on creditors : Provision for discounts which would be allowed by the creditors
are also made in a manner similar to those stated above. The prompt payments made to creditors result
in gains and it would be wrong to state the creditors at their gross values when the possibilities of
earning the discounts exist. The adjusting entry for this purpose is :
Provision for Discount On Creditors Account
Dr.
To Profit and Loss Account
In practice, the provision for discount receivable are often not made for reasons of conservatism.
(xi) Interest on capital : It is a common practice, especially in individual proprietorship and partnership
firms to charge interest on the capital employed by the proprietor/partners. The idea is to know whether
the profits of the business are more than what would be earned from simple investments outside the
business. The adjusting entries are :
Interest on Capital Account
Dr.
To Capital Account (s)
Profit and Loss Account
To Interest on Capital Account
Dr.
Final Accounts of Non-Corporate Entities
8.27
Alternatively
Profit and Loss Appropriation Account
Dr.
To Capital Account(s)
When interest on capital is given in the trial balance, it will be transferred to the debit side of
the Profit and Loss Appropriation Account only.
(xii) Interest on drawings : The purpose of charging interest on drawings is to create an awareness regarding
the interest which would have to be paid if money is borrowed from other sources. Further it may
be effective check on reckless withdrawals by the various partners in a partnership firm. The adjusting
entry (combined) is :
Capital Account
Dr.
To Profit and Loss Appropriation Account
If this item is given in the trial balance, it will be credited to Profit and Loss Appropriation Account
only.
(xiii) Expense stock : It is not uncommon to find in a business firm the stock of minor items like stationery
or advertising material in addition to the usual stock of goods for resale. The stock of these items
must be dealt within the account to which it relates. It will be included in the particular expense figure
in the profit and loss account and not in the stock of goods figures in the trading account. The entry
for recording closing expense stock will be.
Expense Stock Account
Dr.
To Expense Account
Example 10
The Trial Balance of a trader shows the following items in respect of stationery :
`
Opening Stock
2,000
Stationery purchased
5,000
A note to the Trial Balance disclosed that stationery on hand was valued at ` 1,000. How would you deal
with this item in the final accounts.
Answer :
The net debit to Profit and Loss Account shall be calculated as under :
Stationery
`
Opening stock
2,000
Add : Purchases
5,000
7,000
Less : Stock in hand
1,000
Stationery used
6,000
(Debit Profit and Loss Account)
If the closing stock of stationery is shown as a part of the Trial Balance, it implies that the Stationery
Account has already been adjusted. Using the figures given above the Trial Balance would then show :
Stationery Account
6,000 (Profit and Loss Account)
Stationery Stock (closing)
1,000 (Balance Sheet)
(xiv) Stock destroyed by fire or other calamity would be dealt with by making the following adjusting
journal entries :
(a) If not insured
8.28
Financial Accounting: Concepts and Applications
Profit and Loss Account
Dr.
To Trading Account
(b)
If fully insured
Insurance Company Account
Dr.
(to be shown in the assets side of balance sheet)
Dr.
(Balance sheet)
To Trading Account
(c)
If partly insured
Insurance Company Account
Profit and Loss Account
Dr.
To Trading Account
(Unrecovered amount)
(Total)
Example 11
Stock at the end of a business entity is ` 50,000. It is informed that goods amounting to ` 5,000 were destroyed
by fire during the accounting period. Make necessary adjusting entries when : (a) the stock is not insured.
(b) stock is fully insured; and (c) stock was partly insured and the insurance company has agreed to pay
` 2,500.
Answer :
In all the three situations stated in (a), (b) and (c) the closing stock in the trading account (credit side) and
balance sheet (assets side) would appear at ` 50,000 that is :
Stock Account
Dr.
` 50,000
` 50,000
To Trading Account
(a) When it is not insured: Now if the stock destroyed by fire is taken out of trading account the gross
profit would be reduced (or gross loss would be increased) and the management might be unnecessarily
prompted to investigate into the reasons for reduction in gross profits. Such loss therefore, is shown
in the profit and loss account on the assumption that nothing unusual has happened in so far as trading
account is concerned. The entry in case (a) is :
`
Profit and Loss Account
Dr.
5,000
To Trading Account
(b)
5,000
When the goods are fully insured
Insurance Company
Dr.
5,000
To Trading Account
(c)
`
5,000
When the goods are partly insured
Insurance Company Account
Dr.
2,500
Profit and Loss Account
Dr.
2,500
To Trading Account
5,000
But if the insurance company has paid ` 2,500 before the closing date, the entry would be:
Profit and Loss Account
To Trading Account
Dr.
` 2,500
` 2,500
(xv) Income tax and advance payment of income tax : The tax paid on the income in the case of a sole
trader is a personal expense and is therefore, deducted from his capital account.
Final Accounts of Non-Corporate Entities
8.29
Example 12
The trial balance of a proprietory concern shows the following balances :
Income tax
Dr.
` 5,000
Income tax paid in advance
Dr.
` 1,500
Interest on advance payment of tax
Cr.
` 50
Answer :
(a) Income tax paid, that is ` 5,000, is a personal expense (Drawings) and would be deducted from the
capital account.
(b) Advance payment of income tax is also an item of drawings and will be deducted from the capital
account.
(c) Interest on advance payment of tax is a part of proprietor's personal income (and not business income)
and thus, it would be added to his capital account.
(xvi) Withdrawals, samples (free gifts) etc. When the goods are withdrawn by the proprietor for his personal
use or for distribution as samples, they cannot be treated as part of the sales. Instead the purchases
must be adjusted for such items by giving a proper credit to the same.
Example 13
From a general store, washing soap was taken out for the following purposes: (i) personal use, ` 1,000; (ii)
distributed to staff ` 15,000; and (iii) distributed as samples, ` 10,000. Suggest proper accounting treatment.
Answer :
In all these three cases the soap taken out of the store cannot be included in the sales since the withdrawal is
at cost and therefore, no profit accrues to the business. Hence, only purchases would be adjusted as under :
`
Drawings Account
Dr.
1,000
Salaries Account
Dr.
15,000
Advertisement or Sales Promotion Account
Dr.
To Purchases Account
`
10,000
26,000
(xvii) Life insurance premium : Life insurance premium should also be treated as an item of drawings in
the sole proprietorship or partnership business.
(xviii) Salaries and wages : In such a case, the wages part is treated as non-productive and the combined
amount is taken to profit and loss account. But if 'wages and salaries' are grouped, the salaries part
is treated as non-productive and the combined account is transferred to trading account. And if there
is no manufacturing activity, wages and salaries are taken to Profit and Loss Account.
(xix) Insurance premium : In the absence of any information, this item in the trial balance indicates the
insurance of the office-cum-shop and is therefore, transferred to profit and loss account. But the insurance
premium (s) paid on factory building, factory machines, goods purchased etc., is treated as direct expense
and is transferred to trading account.
Example 14 (Debtors and dishonoured bills etc.)
Assume the following information :
Debtors given in the trial balance amounting to ` 50,000 include a sum of ` 10,000 in respect of a dishonoured
bill of Manish who has been found insolvent. A dividend of 75% would be received from his estate. Make a
provision for bad and doubtful debts at 10% on debtors.
8.30
Financial Accounting: Concepts and Applications
Answer :
Since Manish could pay only ` 7,500 (i.e., 75% of 10,000), the amount to be written off as bad debt was `
2,500 for which the entry is :
Bad Debts Account
Dr.
` 2,500
` 2,500
To Debtors Account
Provision for bad and doubtful debts would be calculated on ` 40,000 at 10% i.e. ` 4,000. This is explained
below:
`
Total Debtors
50,000
Less : Bad debts
2,500
47,500
Less : Amount of dividend to be recovered from the estate
of Manish (75% of ` 10,000)
7,500*
Remaining balance
40,000
* This amount represents definitely good debtors and hence, there is no need for provision.
In order to calculate provision for bad and doubtful debts on debtors, the deductions in respect
of bad debts and definitely good debts must be made.
(xx) Bad debts written off recovered : When the amount written off as bad is recovered in the near future,
it is treated an item of gain and is therefore, credited to profit and loss account. The following entry
is generally made:
Cash (or Bank) Account
Dr.
To Bad Debts Recovered Account
(Being the amount recovered previously written off as bad)
The ‘bad debts recovered’ account will be transferred to the credit side of the profit and loss account
by making following entry :
Bad Debts Recovered Account
Dr.
To Profit and Loss Account
It may be noted that ‘bad debt recovered’ account is a new title distinct from ‘bad debts’ account;
the former represents gain while latter records a loss. Alternatively, the following methods are also
suggested :
(a)
Debit cash and, Credit bad debts account so that the total amount to be written off as bad for
the period is reduced; or
(b)
(i) Debit customer, Credit bad debts account
(ii) Debit cash Credit customer.
It is maintained that the method (a) is more direct but method (b) provides in the personal account
concerned a record which may afford useful information at some future date.
However, in practice neither method (a) nor method (b) is adopted
(xxi) Calculation of commission : It is common practice to pay managers etc., commission on net profit.
There is no difficulty in its computation if the commission is payable as a percentage of net profit
before charging such commission. The simple calculation is done as under.
Manager's Commission = Rate × Profit before Commission/100
Final Accounts of Non-Corporate Entities
8.31
On the other hand if the commission is payable at a fixed percentage after charging such commission,
the formula used is :
Manager's Commission = (Rate/100 + Rate) × Profit before Commission
Example 15
Assume the following information is supplied to you :
`
Particulars
Gross Profit
`
50,000
Salaries
10,000
Rent
4,000
Office expenses
12,000
Selling expenses
5,000
Advertisement
8,000
Profit before commission
39,000
11,000
Calculate manager's commission at 10% of the net profit : (a) before charging such commission; (b) after
charging such commission.
Answer :
(a)
Commission before charging such commission
= (10 × 11,000 / 100) = ` 1,100
(b)
Commission payable after charging such commission
= (10 × 11,000 / 100 + 10) = (10 × 11,000/110) = ` 1,000
`
This can be verified as follows :
Profit before commission
11,000
Less: Amount of commission
1,000
Profit after commission
10,000
10% of ` 10,000 = ` 1,000
OR
Suppose. Profit after charging commission
100
Commission at 10%
10
Profit before charging commission
110
Commission on ` 110 is :
10
Commission on ` 11,000 :
(10/110) × 11,000
= ` 1,000
(xxii) Goods purchased included in closing stock but not recorded in the purchases book: When goods
purchased on credit have been physically received and are included in the stock at the end (closing
stock) but have not been entered in the purchases book, this is an error of omission. So an adjusting
entry has to be made to record this omitted entry at the time of preparing the final accounts. The entry
is:
Purchases Account
To Sundry Creditors Account
Dr.
8.32
Financial Accounting: Concepts and Applications
In the final accounts, the following treatment is done:
(a) Add the omitted amount to the other purchases in the trading account.
(b) The amount owing to the creditors must be added to the sundry creditors on the liabilities side of
the balance sheet.
(c) No change is made in the amount of closing stock.
(xxiii) Hidden or implied adjustments: Some of the adjustments are not specifically stated but have to be
inferred or understood from the indirect clue given in the trial balance itself. Such adjustments are
called hidden or latent or implied adjustments as are explained with the help of following examples:
Example – I6
10% loan ` 2, 00,000 taken on 1-4-2016 given in the credit column of the trial balance.
Interest paid ` 15,000 given the debit column of the trial balance.
Trial balance is as on 31-3-2017
Answer :
The total interest payable for the accounting period covering 1-4-2016 to 31-3-2017 is ` 2,00,000 
10
= ` 20,000.
100
But interest paid as per trial balance is ` 15,000; hence, interest outstanding (unpaid) is ` 20,000 – ` 15,000
= ` 5,000. Outstanding interest of ` 5,000 is a hidden adjustment because accounts are prepared on accrual
basis and the profit and loss account will be debited with ` 20,000 (15,000 + 5,000)
Example – 17
Salaries paid ` 2,00,000 given in the debit column of the trial balance (there are 12 employees with a monthly
salary of ` 20,000 each)
Answer :
Total salaries payable to 12 employees @ ` 20,000 each come to ` 2,40,000. Hence, outstanding salary
` 40,000 (2,40,000 – 2,00,000) is a hidden adjustment.
Example I8
Rent paid ` 1,20,000 given in the debit column of the trial balance (monthly rent is ` 9,000)
Answer :
Rent payable for the whole year is ` 1,08,000 (9,000 × 12) but actual rent paid is ` 1,20,000. Hence, ` 12,000
(1,20,000 – 1,08,000) is rent paid in advance and represents hidden adjustment.
(xxiv) GST: Goods and service Tax (GST) is a destination based tax and levied at a single point at the time of
consumption of goods or services by the end user or consumer. It is based on the concept of value added tax
(VAT). GST is a kind of tax which is levied on every value addition at each stage of life cycle of a product i.e.
on purchase of raw material, manufacturing and sale to consumers.
Section 366 of constitution of India defines GST as “any tax on supply of goods or services or both except
taxes on supply of the Alcoholic Liquor for human consumption”.
Composition of GST: Levy and collection of GST follows a dual structure, in which tax is administered,
collected and shared by both centre and state governments including Union Territory based on Intra-state and
Inter-state transactions.
Supply of goods or services provided, may divided into two parts namely:
(a) Intra State: When supplier of goods or service provider and their purchaser or receiver both are
Final Accounts of Non-Corporate Entities
8.33
in the same state or UT, then it is said intra state supply. In such transactions GST is levied by
both centre and State/UT. GST levied by centre is called CGST and by state/UT is called SGST/
UTGST as the case my be.
(b) Inter State: When supplier of goods or service provider and consumer/purchaser of goods or consumer
of services are in two different states or Union territory. In such transactions IGST (Integrated
Goods and Service Tax) is levied and collected by Central Government.
Input Tax Credit (ITC)
The credit available to a registered dealer for GST paid at the time of purchase of goods and services in the
normal course of business is termed as Input Tax Credit (ITC). Such purchases are called inward supplies.
Similarly, when goods and services are sold by a registered dealer are known as outward supplies.
The registered dealers can be set off Input Tax Credit against the tax collected on outward supplies (sales of
goods or services).
Input Tax Credit (ITC) is utilised as per section 49 of GST Act-2017, in the following manner:
(i) ITC of integrated tax (IGST) shall first be utilised towards payment of output integrated tax (IGST)
and the amount remaining, if any, may be utilised towards payment of output CGST and output SGST,
as the case may be.
(ii) ITC of CGST shall be first utilised against output CGST and the amount remaining, if any, may be
utilised towards payment of output IGST.
(iii) ITC of SGST shall be first utilised towards payment of output SGST and the amount remaining, if
any, may be utilised towards payment of output IGST.
(iv) ITC of UTGST shall be first utilised against output UTGST and balance, if any, may be utilised towards
payment of output IGST.
Accounting treatment for GST (Input GST/Output GST):
1. At the time of purchase of Goods or an item of PPE:
Purchases/PPE A/c
Dr.
Input IGST/CGST/SGST A/c
Dr.
To Vendors/Suppliers’ A/c [Amount Due]
To Bank A/c [Amount Paid]
2. For purchases returns:
Supplier’s A/c
Dr.
To Purchases Return A/c
To Input IGST/CGST/SGST A/c
3. At the time of sale of goods or services:
Bank A/c
Dr. [Amount Received]
Debtors A/c
Dr. [Amount Due]
To Sales A/c
To Output IGST/CGST/SGST A/c
4. For sales return:
Sales Return A/c
Dr.
Output IGST/CGST/SGST A/c
Dr.
To Debtors A/c
8.34
Financial Accounting: Concepts and Applications
5. For abnormal loss of goods/Drawings in goods/Goods distributed as free samples/Goods given as
Charity.
Charity/Abnormal loss/Drawings/Advertisement A/c Dr.
To Purchases A/c
To Input IGST/CGS/SGST Ac/
Accounting entries for setting off input GST against output GST
(i) For Input CGST against output CGST:
Output CGST A/c
Dr.
To Input CGST A/c
(ii) For Input CGST against output IGST:
Output IGST A/c
Dr.
To Input CGST A/c
(iii) For Input SGST against output SGST:
Output SGST A/c
Dr.
To Input SGST A/c
(iv) For Input SGST against output IGST:
Output IGST A/c
Dr.
To Input SGST A/c
(v) For Input IGST against output IGST:
Output IGST A/c
Dr.
To Input IGST A/c
(vi) For making payment of GST:
Input IGST A/c
Dr.
Input CGST A/c
Dr.
Input SGST A/c
Dr.
To Bank A/c
(Being the balance in Input IGST/CGST after setting-off, represents net tax liability and need to
be paid)
Example – 19
M/s Raj Enterprise has a sum of ` 1,15,000 on account of input tax credit of CGST in the Electronic Credit
Ledger. The output GST payable as per Electronic Liability Register are as under :
GST Payable/Output GST
`
Outward IGST
30,000
Outward CGST
70,000
Outward SGST
25,000
Determine the order of utilisation of ITC on account of CGST and prepare the statement showing the amount
due, adjusted and payable in cash.
Final Accounts of Non-Corporate Entities
8.35
Answer :
Statement showing amount due, adjusted and payable in cash
Particulars
Output GST (Tax Liability)
IGST
CGST
SGST
30,000
70,000
25,000
—
(70,000)
—
(30,000)
—
—
NIL
NIL
25,000
*Input tax credit of CGST as per e-record to the extent of CGST liability
from output CGST
*Input tax credit of CGST against IGST upto the liability of IGST
Net liability to be paid as per e-record
Remaining balance in ITC of CGST of ` 15,000 will be carried forward to next month and will reflect in
Electronic Credit Ledger (e-record):
Example – 20
Give journal entries for the following in the books of Mr. Singh of Punjab:
(i) Purchased goods from Raman of Allahabad for ` 70,000 and paid 18% as IGST. (Inter state
transaction).
(ii) Purchased goods from Shivani of Punjab for ` 1,00,000 and paid 12% as CGST and SGST for both.
Mr. Singh paid 40% of the amount by cheque.
(iii) Goods costing 10,000 were found defective and had to return to Shivani.
(iv) Sold goods to Suhail of Mumbai for ` 80,000 along with 18% IGST, received half payment in cash.
(Inter state transaction).
(v) Sold goods to Raja Ram of Punjab for ` 1,20,000 along with 12% CGST and 12% SGST. He paid
60% amount by cheque.
(vi) Out of the goods sold goods worth ` 20,000 return by Raja Ram.
(vii) Goods costing ` 5,000 which were purchased from Raman were distributed as free samples.
(viii) Goods costing ` 6,000 which were purchased from Shivani were destroyed by fire.
Mr. Singh’s Books
Journal Entries
S.No.
Particulars
L.f
Dr. (`)
(i)
Purchases A/c
Dr.
70,000
Input IGST A/c
Dr.
12,600
To Raman
(ii)
(iii)
Cr. (`)
82,600
Purchases A/c
Dr.
1,00,000
Input CGST A/c
Dr.
12,000
Input SGST A/c
Dr.
12,000
To Shivani
74,400
To Bank A/c
49,600
Shivani
To Purchases Return A/c
Dr.
12,400
10,000
To Input CGST A/c
1,200
To Input SGST A/c
1,200
8.36
Financial Accounting: Concepts and Applications
(iv)
(v)
Suhail
Dr.
47,200
Bank A/c
Dr.
47,200
To Sales A/c
80,000
To Output IGST A/c
14,400
Raja Ram
Dr.
59,520
Bank A/c
Dr.
89,280
To Sales A/c
(vi)
120,000
To Output CGST A/c
14,400
To Output SGST A/c
14,400
Sales Return A/c
Dr.
20,000
Output CGST A/c
Dr.
2,400
Output SGST A/c
Dr.
2,400
To Raja Ram
(vii)
Advertisement A/c
24,800
Dr.
5,900
To Purchases A/c
5,000
To Input IGST A/c
(viii)
Loss by fire A/c
900
Dr.
To Purchases A/c
7,440
6,000
To Input CGST A/c
720
To Input SGST A/c
720
CONSIDERATION OF SOME IMPORTANT POINTS WHILE
PREPARING THE FINAL ACCOUNTS OF A SOLE TRADER
(i) Items appearing in the trial balance: An item appearing in the trial balance would appear only in
one place: either in the trading account or in the profit and loss account or in the balance sheet.
Examples
(a) An item in the debit column may be an expenses or an asset.
An expense would be entered in the debit side of the trading account or the profit and loss account;
an asset would be shown on the assets side of the balance sheet.
(b) An item in the credit side is either an income item or a liability item.
Income item would be recorded in credit side of trading account (e.g., sales) or in the credit side of
profit and loss account (e.g., interest)
But if the item represents the amount payable, it is a liability and would be entered on the liabilities
side of the balance sheet.
(ii) Items given outside the trial balance or adjustment items: Adjustment items have to complete the
double entry aspect and have to appear twice in the final accounts e.g.,
(i)
(ii)
First, in the trading account or profit and loss account, as the case may be.
Second in the balance sheet
Final Accounts of Non-Corporate Entities
8.37
In some cases, first in the trading account, second in the profit and loss account and third in the
balance sheet e.g., goods lost by fire and there is an insurance claim.
(iii) Trade Expenses: Trade expenses generally represent office or sundry expenses. So these expenses
must be shown in the profit and loss account.
But if both trade expenses and office, general or sundry expenses in the same trial balance or
examination problem are given, the treatment is:
(a)
Enter trade expenses in the trading account.
(b)
Enter office, general or sundry expenses in the profit and loss account.
Note: The issue is debatable and suggestions with reasons are welcome.
(iv) Trade discount given in trial balance: Generally trade discount is not an item of the trial balance
because the same is deducted from the purchases or sales at the time of making entry in the purchase
book or invoice and only net amount is recorded in the books of account e.g. purchase account or
sales account as the case may be.
However, if the trade discount is deliberately given in the trial balance, it must be deducted from
the purchases (if trade discount is given in the credit column) or from the sales (if trade discount
is given in the debit column).
But in no case trade discount is to be entered in the profit and loss account.
(v) Discount on sales given in the trial balance: It is to be treated as cash discount allowed to customers
and must be entered on the debit side of the profit and loss account (suggestions are welcome in
writing)
(vi) Discount on purchases in the trial balance: It is to be treated cash discount received from suppliers
and must be entered on the credit side of the profit and loss account (suggestions are welcome in
writing)
(vii) Bank in the debit column of the trial balance or cash at bank is an asset. But bank in credit column
of the trial balance or bank overdraft is a liability.
Mere bank item without Debit or Credit is treated as cash at bank.
ADJUSTMENTS AT A GLANCE
(A) YEAR-END ADJUSTMENTS
Adjustment
Trading and Profit & Loss A/c
Balance sheet
1.
Closing Stock
Show.on Credit side of Tr. A/c
Show on Asset side
2.
Outstanding Expenses
Add to Expenses A/c
Show on Liability side
3.
Prepaid Expenses
Deduct from Expenses A/c
4.
Income Received in Advance
Deduct from IncomeA/c
Show on Liability side
5.
Accrued Income
Add to Income A/c
Show on Asset side
6.
Bad Debts
Show on Debit side of P & L A/c
Deduct from Debtors on Assets side
7.
Provision for Doubtful Debts
on Debtors
New Reserves
Less : Old Reserve
Final Figure
Deduct new reserve from
Debtors on Assets side
xx
xx
xx
Show on Asset side
Note : if final figure is positive (+) show on Debit side, if negative (–) show Credit side of P & L A/c
8.38
8.
Financial Accounting: Concepts and Applications
Provision for Discount on
Debtors
New Reserve
Less: Old Reserve
Final Figure
xx
xx
xx
Deduct new reserve from
Debtors on Assets side
Note : If final figure is positive (+) show on Debit side, if negative (–) show Credit side of P & L A/c
9.
Provision for Discount on
New Reserve
xx
Deduct new reserve from
Creditors
Less: Old Reserve
Final Figure
xx
xx
Creditors on Liability side
Note: If final figure is positive (+) show on credit side, if negative (-) showDebit side of Profit and Loss Account
10. Depreciation
Show on Debit side of P & L A/c
Deduct from Asset
11. Interest on Investment & Loans
Account
Show on Credit side of P & L
loan A/c on Assets side
Add to investment A/c or
12. Uninsured goods lost
(a) Show cost on Cr. of Trading A/c
—
(b) Show cost on Dr. of P & L A/c
—
13. Goods lost; Insurance Claim Due
(a) Show full cost on Cr. of
Trading Alc
(b) Show loss (cost–claim) on
Dr. of P & L A/c
Show Insurance Claim due on asset
side
14. Goods given away as Samples
(a) Deduct from Purchases A/c
—
(b) Show cost on Dr. of P & L A/c
15. Goods taken by Proprietor
Deduct from Purchase A/c
Debit to Capital A/c
16. Unrecorded Purchases
Add to Purchases as per T.B.
Add to creditors as per T.B.
17. Unrecorded Sales
Add to Sales as per T.B.
Add to Debtors as per T.B.
18. Capital expenditure treated
as revenue expenditure
Deduct from Expenses A/c
19. Bills Receivable Dishonoured
Deduct from B/R
Add to Asset A/c
Add to Debtors
20. Bills Payable Dishonoured
and deduct from B/P,
–
Add to Sundry creditors
both on liabilities side
21. Deferred Expenses
Show amount written off on
side of P & L A/c
Debit Show amount not
w/o on asset side
22. Capital Receipt treated as
Revenue Receipt
Add to Liability or deduct from
Asset A/c
Deduct from Income A/c
23. Profit on Sale of Asset
Show profit on Cr. of P & L A/c
Deduct W.D.V. from Assets A/c
24. Loss on Sale of Asset
Show Loss on Dr. of P & L A/c
Deduct W.D.V. from Assets A/c
Final Accounts of Non-Corporate Entities
8.39
(B) ADJUSTMENTS ALREADY MADE IN TRIAL BALANCE:
Account in Trial Balance
Profit & Loss Account
Balance Sheet
1.
Prepaid Expenses
—
Show on Asset side
2.
Outstanding Expenses
—
Show on Liability side
3.
Income Received in Advance A/c
—
Show on Liability side
4.
Income Due not Received A/c
Show on Asset side
5.
Depreciation A/c
Show on Debit side
6.
Closing Stock A/c
—
Show on Asset side
7.
Provision for Depreciation A/c
—
Deduct from Asset
Account in Balance
(C) HIDDEN ADJUSTMENTS MADE IN TRIAL BALANCE:
Trial Balance on 31 March
Trading, Profit & Loss A/c
Balance Sheet
1.
Rent Paid (including ` 500
for April)
Deduct ` 500 from Rent paid
A/c
Show ` 500 as Rent Prepaid
on Assets side.
2.
Rent paid (upto Feb.)
` 2,200
Add ` 200 to Rent Paid A/c
Show ` 200 as Outstanding
Rent on Liability side.
3.
Rent Received (upto Feb.)
` 3,300
Add ` 300 to Rent Received
A/c
Show ` 200 as Outstanding
Rent Due on Asset side.
4.
Rent Received (incl. ` 200 for
April)
Deduct ` 200 from Rent
Received A/c
Show ` 200 as Advance Rent
on Liabilities side.
5.
Leasehold Lands: ` 5,00,000
(For 5 years from 1-4-2013)
Write off ` 1,00,000 on Dr.
side of P and L A/c
Deduct ` 1,00,000 from
Leasehold Land on Asset side
6.
(a) Loan from ABC ` 10,000
Add ` 200 to Interest Paid A/c
Show ` 200 as Interest Due
(b) Interest paid to ABC @ 5%
p.a. ` 300
7.
on Liabilities side
(a) Machinery (W.D.V.) ` 4,000
Show Profit ` 1,400 on Cr.
Deduct ` 4,000 from Machinery
(b) Machinery sold : ` 5,400
side
Account in Balance Sheet
Illustration 3 (Prepaid Insurance And Provision For Bad Debts)
Saroj Khanna has been trading for some years in food grains. The following list of balances has been extracted
from her ledger as on 31 March 2020, the end of her most recent financial year :
`
Capital
Sales
83,887
2,59,870
Trade creditors
19,840
Returns out
13,407
Provision for bad debts
512
Discount Allowed
2,306
Discount Received
1,750
Purchases
1,35,680
8.40
Financial Accounting: Concepts and Applications
Return inwards
5,624
Carriage outwards
4,562
Drawings
18,440
Carriage inwards
11,830
Rent, Rates and Insurance
25,973
Electricity
11,010
Postage, Stationary and Telephone
2,410
Advertising
5,980
Salaries and Wages
38,521
Bad Debts
2,008
Cash in hand
534
Cash at Bank
4,440
Stock as at 1 April, 2019
15,654
Trade Debtors
24,500
Fixtures and Fittings at cost
1,02,990
Provision for depreciation on:
Fixtures and Fittings at 31 March, 2020
63,020
Depreciation
12,074
Stock as at 31 March, 2020
17,750
The following additional information as on 31 March 2020 is available :
(i) Insurances have been prepaid by ` 1,120
(ii) Electricity is accrued by ` 1,360
(iii) Rates have been prepaid by ` 5,435.
(iv) The provision for bad debts is to be adjusted so that it is 3% of trade debtors.
Prepare final accounts.
Solution :
Saroj Khanna
Trading And Profit and Loss Account
For The Year Ended 31 March, 2020
Dr.
`
Particualrs
Opening Stock
Purchases
Less : Returns
15,654
1,35,680
13,407
To Carriage inwards
Sales
Less : Returns
2,59,870
5,624
2,54,246
1,22,273
1,04,489
2,54,246
Salaries and Wages
2,54,246
38,521
Discount Allowed
2,306
Gross Profit b/d
Carriage Outwards
4,562
Discount Received
Less : Prepaid (1,120+5,435)
`
Particualrs
11,830
Gross Profit c/d
Rent, Rates and Insurance
Cr.
25,973
6,555
19,418
1,04,489
1,750
Final Accounts of Non-Corporate Entities
Electricity
8.41
11,010
Add : Outstanding
1,360
12,370
Postage, Stationery & Telephone
2,410
Advertising
5,980
Bad Debts
2,008
Depreciation
12,074
Provision for Doubtful
Debts
735
Less : Old Provision
512
Net Profit transferred
to Capital Account
223
6,367
1,06,239
1,06,239
Note: The words ‘To’ and ‘By’ need not be used
Balance Sheet of Saroj Khanna As On 31 March 2020
`
Liabilities
Capital
Add : Net Profit
Less : Drawings
Trade Creditors
Outstanding for Electricity
`
Assets
83,887
Cash in hand
534
6,367
Cash at Bank
4,440
90,254
Trade Debtors
18,440
24,500
71,814
Less : Provision
19,840
Stock in hand
1,360
735
23,765
17,750
Fixtures and Fittings
1,02,990
Less : Provision for
Depreciation
63,020
39,970
Prepaid Insurance
1,120
Prepaid Rates
5,435
93,014
93,014
Illustration 4 (Adjusted Purchases)
From the undermentioned trial balance of Banerjee, prepare the final accounts for the year ended 31st March,
2020 and the Balance Sheet as at that date:
Particulars
Debit
`
Credit
`
50,000
—
2,10,000
—
45,000
—
Returns
1,500
2,500
Wages
45,300
—
Salaries
39,000
—
Office Expenses
15,400
—
Carriage Inwards
1,200
—
Carriage Outwards
2,000
—
750
1,200
Land and Buildings
Purchases (Adjusted)
Stock (March 31, 2020)
Discounts
8.42
Financial Accounting: Concepts and Applications
Bad Debts
1,200
—
Sales
—
3,85,000
Capital Account
—
1,15,000
Chatterji’s Loan A/c (taken on 1-10-2019 @ 18% p.a.)
—
25,000
1,500
—
—
1,500
Plant and Machinery
50,000
—
Furniture and Fixtures
20,000
—
Bills Receivable
20,000
—
Sundry Debtors
40,000
—
—
25,000
Cash at Bank
16,000
—
Office Equipment
12,000
—
Bills Payable
—
12,350
Expenses Payable
—
3,300
5,70,850
5,70,850
Insurance
Commission
Sundry Creditors
The following adjustments be taken care of:
(i) Depreciate Land and Buildings @ 6%, Plant and Machinery @ 10%, Office equipment @ 20% and Furniture
and Fixtures @ 15%.
(ii) Create a provision for bad and doubtful debts at 2% on debtors.
(iii) Insurance premium includes ` 250 paid in advance.
(iv) Provide interest on capital @ 10% p.a. and salary to Banerjee ` 15,000 p.a.
(v) 10% of the final profit is to be kept in General Reserve.
Solution :
Mr. Banerjee
Trading and Profit & Loss Account
For The Year Ending on March 31, 2020
Particulars
Purchases (Adjusted)
Less: Returns
Amount
`
2,10,000
2,500
Wages
Particulars
Sales
2,07,500
Less: Sales Returns
Amount
`
3,85,000
1,500
3,83,500
45,300
Carriage inwards
1,200
Gross Profit c/d
1,29,500
3,83,500
3,83,500
Salaries
39,000
Gross Profit b/d
Office expenses
15,400
Discount Received
1,200
Commission
1,500
Carriage outwards
2,000
Discount Allowed
750
Insurance
Less: Prepaid
Bad Debts
1,500
250
1,250
1,200
Provision for
Doubtful Debts (2% of ` 40,000)
800
1,29,500
Final Accounts of Non-Corporate Entities
8.43
Interest on
Chatterji’s Loan outstanding
2,250
[` 25,000 @ 18% for 6 months]
Depreciation on:
Land & Buildings
3,000
Plant & Machinery
5,000
Office Equipments
2,400
Furniture & Fixtures
3,000
13,400
Interest on Capital
11,500
Salary to Banerjee
15,000
Transfer to General Reserve
2,965
Net Profit Transferred to Capital Account
26,685
1,32,200
1,32,200
WORKING NOTES
(i)
Profit ` 29,650 before transfer to General Reserve is arrived as follows :
` [1, 29, 500 + 1, 200 + 1, 500 – 39, 000 – 15, 400 – 2, 000 – 750 – 1, 250 –
1, 200 – 800 – 2, 250 – 13, 400 – 11, 500 – 15, 000) = ` 29, 650]
Transferred to General Reserve = ` 29, 650 ×
(ii)
10
100
= ` 2, 965
Net Profit = ` 29,650 – ` 2,965 = ` 26,685
Balance Sheet of Mr. Bannerji
As On March 31, 2020
`
Liabilities
`
Assets
Bills Payable
12,350
Land and Buildings
50,000
Sundry Creditors
25,000
Less : Depreciation
3,000
Expenses Payable
3,300
Plant and Machinery
50,000
25,000
Less : Depreciation
5,000
Chatterjee’ loan
Outstanding Interest
2,250
Furniture and Fixtures
General Reserve
2,965
Less : Depreciation
Capital
1,15,000
Office Equipment
Add : Interest on Capital
11,500
Less : Depreciation
Salary
15,000
Current Assets
Net Profit
26,685
1,68,185
Less : Provision
Bills Receivable
Prepaid Insurance
Cash at Bank
2,39,050
45,000
20,000
3,000
17,000
12,000
2400
Stock
Debtors
47,000
9,600
45,000
40000
800
39,200
20,000
250
16,000
2,39,050
8.44
Financial Accounting: Concepts and Applications
Illustration 5 (Application of Revaluation Model: AS-10 PPE)
The following is the trial balance extracted from the books of Akhilesh as on 30 September 2019 :
Particulars
Debit Amount
Credit Amount
`
`
—
1,00,000
78,000
—
Capital Account
Plant and Machinery
Furniture
2,000
—
60,000
1,27,000
1,000
750
30,000
—
425
800
45,000
25,000
7,550
—
10,000
—
1,200
—
—
525
10,000
—
Advertisements
2,000
—
Cash
6,900
—
2,54,075
2,54,075
Purchases and Sales
Returns
Opening stock
Discount
Sundry Debtors/Creditors
Salaries
Manufacturing wages
Carriage outwards
Provision for doubtful debts
Rent, rates and taxes
Prepare trading and profit and loss account for the year ended 30 September 2019 and a balance sheet on
that date after taking into account the following adjustments:
(a) Closing stock was valued at ` 34,220.
(b) Provision for doubtful debts is to be kept at ` 500
(c) Depreciate plant and machinery @ 10% p.a.
(d) The proprietor has taken goods worth ` 5,000 for personal use and additionally distributed goods worth
` 1,000 as samples.
(e) Purchase of furniture ` 920 has been passed through purchses book.
(f) On 30th September, 2019, it was decided by the management to revalue the machine at ` 75,000
before charging depreciation.
Solution :
Akhilesh
Trading And Profit and Loss Account
Dr.
For the Year Ended 30 September, 2019
`
Particulars
Opening Stock
Purchases
Less : Returns
30,000
Less : Drawings
Sales
Less : Returns
750
Stock at the end
5,000
54,250
`
Particulars
60,000
59,250
Cr.
1,27,000
1,000
1,26,000
34,220
Final Accounts of Non-Corporate Entities
8.45
Less : Samples
1,000
53,250
Less : Furniture purchased
920
52,330
Manufacturing wages
10,000
Gross Profit c/d
67,890
1,60,220
Salaries
7,550
Rent, rates and taxes
10,000
Carriage outwards
1,200
Advertisement
2,000
Depreciation on Plant and Machinery
(75,000 × 10 ÷ 100)
7,500
Discount Allowed
1,60,220
Gross Profit b/d
67,890
Discount Received
800
Provision for bad debts
25
(525–500)
425
Machinery (Loss on Revaluation)
3,000
Advertisements (Samples)
1,000
Net Profit transferred
to Capital Account
36,040
68,715
68,715
Balance Sheet of Akhilesh As On 30 September 2019
Liabilities
Capital
Add : Net Profit
`
1,00,000
36,040
1,36,040
`
Assets
Fixed Assets
Plant and Machinery
78,000
Less : Loss on Reveluation 3,000
Less : Drawings (Goods withdrawn for personal use)
75,000
5,000
Less : Depreciation
7,500
67,500
Furniture
Add : Purchased
2,000
920
2,920
1,31,040
Sundry Creditors
25,000
Current Assets
Cash in hand
6,900
Sundry Debtors
45,000
Less : Provision
500
Stock at the end
34,220
1,56,040
1,56,040
Illustration 6 (Application of Revaluation Model: AS-10 PPE)
The following is the schedule of balances on 31-3-2020 extracted from the books of Shri Gavaskar:
Particualrs
Debit
`
Credit
`
Cash in hand
1,400
—
Cash at bank
2,600
—
86,000
—
Sundry debtors
44,500
8.46
Financial Accounting: Concepts and Applications
Stock as on 1-4-2019
62,000
—
Furniture and fixtures
21,400
—
Office equipment
16,000
—
Buildings
60,000
—
Motor car
20,000
—
Sundry creditors
—
43,000
Loan
—
30,000
Reserve for bad debts
—
3,000
1,40,000
—
Purchase return
—
2,600
Sales
—
2,30,000
4,200
—
11,000
—
Rent for godown
5,500
—
Interest on loan
2,700
—
Rates and taxes
2,100
—
Discount allowed to debtors
2,400
—
—
1,600
Freight on purchases
1,200
—
Carriage outwards
2,000
—
12,000
—
Printing and stationery
1,800
—
Electric charges
2,200
—
Insurance premium
5,500
—
General office expenses
3,000
—
Bad debts
2,000
—
Bank charges
1,600
—
Motor car expenses
3,600
—
—
1,62,000
4,72,200
4,72,200
Purchases
Sales returns
Salaries
Discount received from creditors
Drawings
Capital Account
Prepare Trading and Profit & Loss Account for the year ended 31-3-2020 and the Balance Sheet as on that
date after making provision for the following:
(i) Depreciate:
(a)
Building by 5%;
(b)
Furniture and fixture by 10%;
(c)
Office equipments by 15%; and
(d)
Motor car by 20%.
(ii) Value of stock at the close of the year was ` 44,000.
(iii) Reserve for bad debts is to be maintained at 5% of sundry debtors.
(iv) Insurance premium includes ` 4,000 paid towards proprietor’s life insurance policy and the balance of
the insurance charges cover the period from 1-4-2019 to 30-6-2020.
Final Accounts of Non-Corporate Entities
8.47
(v) On 31st March, 2020 it was decided by the management to revalue the office equipments at ` 20,000
before charging current depreciation.
Solution :
Shri Gavaskar
Trading and Profit and Loss Account
For the Year Ending 31 March 2020
`
Particulars
Opening Stock
Purchases
Less: Returns
62,000
1,40,000
2,600
Freight on Purchases
`
Particulars
Sales
2,30,000
Less: Returns
1,37,400
Closing Stock
44,000
69,200
2,69,800
Salaries
11,000
Rent for godown
5,500
Interest on loan
2,700
Rates and Taxes
2,100
Discount allowed
2,400
Carriage outwards
2,000
Printing and stationery
1,800
Electric charges
2,200
Less: Drawings
2,25,800
1,200
Profit & Loss Account
(Gross Profit)
Insurance premium
4,200
2,69,800
Trading A/c (Gross Profit)
Discount Received
69,200
1,600
5,500
4,000
1,500
Less: Prepaid
300
1,200
Office expenses
3,000
Bank charges
1,600
Motor car expenses
3,600
Bad Debts
2,000
Provision for Doubtful Debts (New)
Less: Old provision
4,300
3,000
1,300
Depreciation on:
Buildings
3,000
Furniture & fixtures
2,140
Office Equipment (3,000 – 600)
2,400
Motor car
4,000
Net Profit transferred to Capital Account
11,540
16,860
70,800
70,800
8.48
Financial Accounting: Concepts and Applications
Balance Sheet As At 31st March, 2020
Liabilities
Amount
`
Assets
Amount
`
Sundry Creditors
43,000
Cash in hand
1,400
Loan
30,000
Cash at Bank
2,600
Capital
Add: Net Profit
1,62,000
16,860
1,78,860
Less: Drawings:
LIC Premium
Other Drawings
Revaluation Reserve
Sundry Debtors
86,000
Less: Provision
4,300
Stock at the end
(4,000)
(12,000)
44,000
Prepaid Insurance
1,62,860
4,000
Less: Excess Depreciation (3,000 – 2,400) (600)
3,400
Furniture and Fixtures
81,700
300
21,400
Less: Depreciation
2,140
Office Equipment
20,000
Less: Depreciation
3,000
17,000
Building
Less: Depreciation
60,000
3,000
57,000
Motor Car
20,000
Less: Depreciation
2,39,260
4,000
19,260
16,000
2,39,260
Note: As per AS-10 (PPE), any increase on revaluation should be credited to revaluation reserve and any excess depreciation
arising on that account should be charged against revaluation reserve account.
Illustration 7 (Calculation of Accrued Interest)
From the following balances taken from the Ledger of Ms. Angelina on 31 March, 2020, prepare the Trading
And Profit and Loss Account for the year ended 31 March, 2020 and the Balance Sheet on that date :
`
`
Sundry Creditors
19,000
Bad debts
100
Building
15,000
Loan from Victoria
2,500
Income Tax
1,025
Sundry Debtors
9,500
Loose Tools
1,000
Investments
6,500
Cash at Bank
16,200
Bad debts Reserve
1,600
Sundry Expenses
Bank Interest (credit)
Purchases
Wages
Carriage Inwards
Sales
Motor Van
Cash in hand
1,990
75
1,57,000
10,000
1,120
1,85,000
12,500
335
Rent and Rates
Furniture
850
3,000
Stock (1.4.2019)
27,350
Capital
47,390
Discount Allowed
630
Dividend Received
535
Drawings
Bills Payable
2,000
10,000
Adjustments :
(i) Write off further ` 300 as bad debts out of Sundry Debtors and create a reserve for bad debts at 20%
on Debtors.
(ii) Dividend accrued and due on Investments is ` 135. Rates paid in advance ` 100 and wages owing
` 450.
Final Accounts of Non-Corporate Entities
8.49
(iii) On 31.3.2020, Stock was valued at ` 15,000 and Loose Tools were valued at ` 800.
(iv) Write off 5% for depreciation on Building and 40% on Motor Van.
(v) Provide for interest at 12% p.a. due on loan taken on 1-6-2019.
(vi) Manager is entitled to a commission of 5% on net profits.
Solution
Ms. Angelina
Trading And Profit and Loss Account
Dr.
For The Year Ended 31 March, 2020
`
Particualrs
Opening Stock
27,350
Purchases
Wages
Add : Outstanding
1,57,000
Cr.
`
Particualrs
Sales
1,85,000
Closing stock
15,000
10,000
450
10,450
Carriage inwards
1,120
Gross Profit c/d
4,080
2,00,000
Rent and rates
Less : Prepaid
850
100
Sundry expenses
Gross Profit b/d
750
1,990
Interest on loan [note (i)]
250
Depreciation :
On Building @ 5%
On Motor van @ 40%
On Loose tools
2,00,000
4,080
Bank interest
75
Dividend on investment
535
Add : Accrued & due
135
Net Loss (transferred to Capital
750
670
5,385
Account)
5,000
200
5,950
Discount allowed
630
Bad debts (` 100 + ` 300)
400
Bad debts reserve :
New
1,840
Less : Bad debts reserve (Old)
1,600
240
10,210
10,210
Balance Sheet of Ms. Angelina As At 31 March, 2020
`
Liabilities
Capital :
Opening Balance
Less : Net Loss
Building
47,390
Less : Depreciation @ 5%
5,385
Motor van
42,005
Less : Drawings
Less : Depreciation @ 40%
2,000
Loan from Victoria
1,025
15,000
750
5,000
Investments
Add : Dividend accrued & due
7,500
800
Furniture
38,980
2,500
14,250
12,500
Loose tools
40,005
Less : Income tax
`
Assets
3,000
6,500
135
6,635
8.50
Financial Accounting: Concepts and Applications
Sundry creditors :
For Goods
19,000
For Outstanding wages
450
Interest accrued on loan
250
Bills Payable
Closing stock
Sundry debtors
15,000
9,500
19,700
Less : Bad debts
300
10,000
Less : Reserve for bad
9,200
debts @ 20%
1,840
7,360
Cash at bank
16,200
Cash in hand
335
Prepaid rates
100
71,180
71,180
WORKING NOTES
(i) Interest accrued on loan from Victoria on ` 2,500 @ 12% p.a. for 10 months = ` 250.
(ii) As there is net loss, the manager is not entitled to commission.
Illustration 8 (Adjustment of Purchases and Sales)
The following is the Trial Balance of Kanshi Ram on 31 March, 2020 :
Particulars
Debit
`
Credit
`
—
8,00,000
Drawings
60,000
—
Opening Stock
75,000
—
Capital
Purchases
15,95,000
—
Freight on Purchases
25,000
—
Wages (11 months upto 28-2-2020)
66,000
—
—
23,10,000
Sales
Salaries
1,40,000
—
Postage, Telegrams, Telephones
12,000
—
Printing and Stationery
18,000
—
Miscellaneous Expenses
30,000
—
Creditors
Investments
Discounts Received
Debtors
Bad Debts
—
3,00,000
1,00,000
—
—
15,000
2,50,000
—
15,000
—
—
8,000
Building
3,00,000
—
Machinery
5,00,000
—
Provision for Bad Debts
Furniture
40,000
—
Commission on Sales
45,000
—
—
12,000
24,000
—
1,50,000
—
34,45,000
34,45,000
Interest on Investments
Insurance (Year upto 31-7-2020)
Bank Balance
Final Accounts of Non-Corporate Entities
8.51
Adjustments :
(i) Closing Stock ` 2,25,000.
(ii) Machinery worth ` 45,000 purchased on 1-10-19 was shown as Purchases. Freight paid on the Machinery
was ` 5,000, which is included in Freight on Purchases.
(iii) Commission is payable at 2.5% on Sales.
(iv) Investments were sold at 10% profit, but the entire sales proceeds have been taken as Sales.
(v) Write off Bad Debts ` 10,000 and create a provision for Doubtful Debts at 5% of Debtors.
(vi) Depreciate Building by 2.5% p.a. and Machinery and Furniture at 10% p.a.
Prepare Trading And Profit and Loss Account for the year ending 31 March, 2020 and a Balance Sheet
as on that date.
Solution
Mr. Kanshi Ram
Trading And Profit and Loss Account
Dr.
For The Year Ended 31 March, 2020
`
Particualrs
Opening Stock
Purchases
75,000
15,95,000
Account
Freight on Purchases
Less : Transfer to Machinery Account
Wages
Add : Outstanding
Sales
Closing Stock
45,000
`
Particualrs
Less : Sale of Investments
Less : Transfer to Machinery
Cr.
23,10,000
1,10,000
22,00,000
2,25,000
15,50,000
25,000
5,000
20,000
66,000
6,000
Gross Profit c/d
72,000
7,08,000
24,25,000
Salaries
1,40,000
24,25,000
Gross Profit b/d
7,08,000
Postage, Telegrams, Telephones
12,000
Interest on Investments
12,000
Printing and Stationery
18,000
Profit on sale of Investments
10,000
30,000
Discounts received
15,000
Miscellaneous Expenses
Commission on Sales
45,000
Add : Outstanding
10,000
Insurance
Less : Prepaid
55,000
24,000
8,000
Bad Debts
15,000
Add : Further Written off
10,000
16,000
25,000
Provision for
Doubtful Debts (5% of ` 2,40,000)
Less : Old Provision
12,000
8,000
4,000
Depreciation on :
Building
Machinery (` 50,000 + ` 2,500)
Furniture
Net Profit
7,500
52,500
4,000
64,000
3,81,000
7,45,000
7,45,000
8.52
Financial Accounting: Concepts and Applications
Balance Sheet of Mr. Kanshi Ram As On 31 March, 2020
`
Liabilities
`
Assets
Capital
8,00,000
Building
3,00,000
Add : Profit
3,81,000
Less : Depreciation
7,500
2,92,500
11,81,000
Less : Drawings
60,000
11,21,000
Machinery
5,00,000
Additions
Creditors
50,000
3,00,000
Outstanding Expenses :
Wages
6,000
Commission
10,000
16,000
5,50,000
Less : Depreciation
52,500
Furniture
40,000
Less : Depreciation
4,000
Debtors
4,97,500
36,000
2,50,000
Less : Bad Debts
10,000
2,40,000
Less : Provision for
Doubtful Debts
12,000
Prepaid Insurance
2,28,000
8,000
Stock
2,25,000
Bank Balance
1,50,000
14,37,000
14,37,000
Illustration 9 (Notional Value of Rent of the Building)
From the following trial balance of Celina prepare Trading and Profit and Loss Account for the year ending
31 March, 2020 and a Balance Sheet as on that date after taking into consideration the adjustments given at
the end :
Trial Balance As On 31 March, 2020
Particulars
Purchases and Sales
Wages
Capital
National Insurance
Debit
`
Credit
`
6,99,200
7,40,000
900
—
—
48,500
300
—
Carriage Inwards
400
—
Carriage Outwards
500
—
Lighting
600
—
Rates and Insurance
400
—
Stock on 31-3-2020
61,250
—
1,750
—
100
600
30,000
—
Debtors and Creditors
6,000
20,000
Furniture
8,000
—
Dividend
—
300
8,09,400
8,09,400
Cash in hand
Discounts
Building
Final Accounts of Non-Corporate Entities
8.53
Adjustments :
(i) Rates and insurance include a premium of ` 300 per annum paid upto 30 September 2020.
(ii) National Insurance balance includes employees contribution of ` 150 also. Wages are shown "net" after
deducting the above employees contribution.
(iii) Owing to the nature of employment some employees are housed in the building of the business, the
rented value of which is ` 500 p.a.
(iv) Sales as shown in the Trial Balance include the sale of old furniture (on 30 September, 2019) realising
` 200. The book value of this furniture was ` 300 at the commencement and the rate of depreciation
on this asset has all along been 20% p.a.
(v) The manager is to get a commission of 1/10 of net profits after charging his commission.
(vi) Depreciate Building by 5%.
Solution
Celina
Trading And Profit and Loss Account
Dr.
For The Year Ended 31 March, 2020
`
Particualrs
Purchases
6,99,200
Wages :
Net paid
Add : Employees contribution to
National insurance
Add : rental value of building
Cr.
`
Particualrs
Sales
7,40,000
Less : Sale of furniture
7,39,800
900
150
500
Carriage inwards
1,550
400
Gross Profit c/d
38,650
7,39,800
National insurance
150
(Employer's contribution)
Carriage outwards
500
Rates and insurance
400
Less : Prepaid
150
250
Lighting
600
Discount
100
Loss on sale of furniture
200
7,39,800
Gross Profit b/d
38,650
Discount
600
Dividend
300
Rental value of building occupied by
500
employees
70
Depreciation
(i) Building
1,500
(ii) Furniture (1,540 + 30)
1,570
Manager's commission due
3,210
10 

 35, 310 ×

110 
Net Profit
32,100
40,050
40,050
8.54
Financial Accounting: Concepts and Applications
Balance Sheet of Celina As On 31 March, 2020
`
Liabilities
Sundry creditors
20,000
Manager's commission due
3,210
Capital
48,500
Add : Net profit
32,100
`
Assets
Cash in hand
1,750
Sundry Debtors
6,000
Closing stock
80,600
61,250
Prepaid insurance
150
Furniture
8,000
Less : Book value of furniture sold
300
7,700
Less : Depreciation
1,540
Buildings
6,160
30,000
Less : Depreciation
1,500
1,03,810
28,500
1,03,810
WORKING NOTES
(i) Employees contribution to national insurance and rental value of building occupied by workers are part of gross
wages.
(ii) Calculation of depreciation and loss on sale of furniture :
(a) Furniture sold : Book value at the beginning
300
Depreciation for 6 months
30
Book value on the date of sale
270
Sale price
200
Loss on sale
70
(b) Furniture in hand (Depreciation 20% on 7,700)
Depreciation ` 1,540 + ` 30
1,540
1,570
Illustration 10 (Provident Fund and Goods Lost in Fire)
The following is the Trial Balance of Mr. Mahesh as on 31.12.2019. Prepare a Trading and Profit and Loss
Account for the year 2019 from it and a Balance Sheet as on 31.12.2019 :
Particulars
Purchases
Opening Stock
Salaries
Dr.
`
Cr.
`
1,80,000
—
10,000
—
6,600
—
P.F. remittance including Proprietor's contribution 50%
Rent @ 250 p.m.
1,200
2,750
—
29,000
—
Wages
3,000
—
Furniture and fittings
5,000
—
550
—
1,500
—
10,500
—
900
—
Machinery
Electricity
Trade expenses
Debtors
Interest on loan
Final Accounts of Non-Corporate Entities
8.55
Commission
Building
200
—
30,000
—
Sales
2,05,000
Loan (10% Interest)
10,000
Creditors
15,000
Capital
55,000
Drawings
5,000
—
Cash
1,200
—
2,86,200
2,86,200
(i) On 1.1.2019, machinery worth ` 5,000 was sold for ` 4,000 and credited to machinery account. (ii)
Wages include ` 1,000 paid for machinery erection charges. (iii) Purchases include cost of Moped Scooter
for ` 5,000. (iv) Proprietor has taken goods costing ` 1,000 for which no entry has been made. (v) Sundry
debtors include ` 500 which have become bad. (vi) Provide 10% reserve for bad debts. (vii) Electricity
outstanding ` 50. (viii) Goods costing ` 5,000 were destroyed by fire, and insurance claim was received for
` 4,000. (ix) Provide depreciation at 10% on machinery, furniture and moped scooter. Provide depreciation
@ 5% on building. (x) Closing stock is ` 12,000.
Solution
Mr. Mahesh
Trading And Profit and Loss Account
Dr.
For The Year Ended 31 December, 2019
`
Particualrs
Opening stock
Purchases
Less : Cost of the scooter
10,000
1,80,000
Particualrs
Sales
Profit and Loss Account (Loss by fire)
5,000
Stock at the end
Cr.
`
2,05,000
5,000
12,000
1,75,000
Less : Drawings
1,000
Wages
3,000
Less : Erection charges of machinery
1,000
Profit and Loss Account (Gross Profit)
1,74,000
2,000
36,000
2,22,000
Salary paid in cash
5,400
Trading Account (Gross Profit)
Add : Provident fund contribution :
Insurance Company
Employee
600
Employer
600
Rent
6,600
2,750
Add : Outstanding
Electricity
Add : Outstanding
250
Add : Outstanding
3,000
550
50
Trade expenses
Interest
2,22,000
600
1,500
900
100
1,000
36,000
4,000
8.56
Financial Accounting: Concepts and Applications
Commission
200
Bad debts
500
Provision for bad debts
1,000
Trading Account (Loss by fire)
5,000
Machinery (Loss on sale)
1,000
Depreciation on :
Building
Machinery
1,500
2,900
Moped Scooter
500
Furniture
500
Net Profit
5,400
14,200
40,000
40,000
Balance Sheet of Mr. Mahesh As On 31 December, 2019
`
Liabilities
`
Assets
Capital
55,000
Building
Add : Net Profit
14,200
Less : Depreciation
30,000
1,500
28,500
69,200
Less : Drawings
63,200
Machinery
Creditors
6,000
15,000
Add : Erection charges
10% Loan
10,000
Outstanding expenses :
100
Rent
250
Electricity
50
400
Less : Depreciation
2,900
Moped Scooter
5,000
Less : Depreciation
600
Employer
600
1,000
29,000
P.F. Contribution :
Employee
1,000
30,000
Less : Loss on sales
Interest
29,000
Furniture
1,200
Less : Depreciation
500
26,100
4,500
5,000
500
4,500
Stock
12,000
Cash
1,200
Debtors
Less : Bad debts
10,500
500
10,000
Less : Provision for doubtful debts
Insurance Company
89,800
1,000
9,000
4,000
89,800
Illustration 11 (Commission on profit after charging such commission)
From the following balances extracted from the books of Mr. Yellow, prepare Trading and Profit and Loss
Account for the year ended 31.3.2020 and a Balance Sheet on that date :
`
`
Purchases
71,280
Capital account
60,000
Computer at cost
18,380
Creditors
13,000
Bills payable
10,220
(bought on 31.3.2020)
Cash at bank
4,000
Discount
22,000
Cash in hand
2,836
Sales
60,720
Final Accounts of Non-Corporate Entities
8.57
Furniture and fittings at cost
1,540
Rent
12,540
Bills receivable
Returns outwards
11,432
Rent due
320
6,720
Trade charges
920
Sundry debtors
34,156
Drawings
5,200
Discount
540
Wages
1,800
Salaries
16,780
Returns inwards
1,000
1,77,692
1,77,692
Adjustments :
(i) Stock at the end at cost ` 25,600 (market-value ` 26,200).
(ii) ` 6,000 paid to Mrs. Red against Bills payable were debited by mistake to Mr. Green's account and
included in the list of sundry debtors.
(iii) Travelling expenses paid to sales representatives ` 5,000 for the month of March 2020 were debited to
his personal account and included in the list of sundry debtors.
(iv) Depreciation on furniture and fittings shall be provided at 10% p.a.
(v) Provide for doubtful debts at 5% on sundry debtors.
(vi) Goods costing ` 1,500 were used by the proprietor.
(vii) Salaries included `12,000 paid to sales representative who is further entitled to a commission of 5%
on net sales.
(viii) Stationery charges ` 1,200 due on 31.3.2020.
(ix) Purchases included opening stock valued at cost ` 7,000.
(x) Sales representative further entitled to an extra commission of 5% on net profit after charging his extra
commission.
Solution
Mr. Yellow
Trading And Profit and Loss Account
Dr.
For The Year Ended 31 March, 2020
`
Particualrs
Opening stock
Purchases
Less : Returns
7,000
64,280
`
Particualrs
Sales
Less : Returns
11,432
Cr.
Stock at the end
60,720
1,000
59,720
25,600
52,848
Less : Drawings
Wages
Gross Profit c/d
1,500
51,348
1,800
25,172
85,320
Salaries
16,780
Travelling expenses
5,000
Salesman's commission
(5% on ` 59,720)
2,986
85,320
Gross Profit b/d
25,172
Discount
22,000
8.58
Financial Accounting: Concepts and Applications
Stationery charges due
1,200
Rent
12,540
Discount
540
Trade charges
920
Depreciation on furniture and fittings
154
Provision for doubtful debts
1,158
Additional commission to salesman
281
Net Profit transferred to Capital Account
5,613
47,172
47,172
Balance Sheet of Mr. Yellow As On 31 March, 2020
`
Liabilities
Yellow's capital
60,000
Less: Drawings
6,700
(5,200+1,500)
Add: Net Profit
Sundry Creditors
Bills Payable (10,220 – 6,000)
Computer at cost
18,380
Furniture and fittings
53,300
5,613
`
Assets
1,540
Less: Depreciation
58,913
Stock in hand
13,000
154
1,386
25,600
Sundry debtors
34,156
4,220
Less: Travelling expenses
(5,000)
3,267
Less: Payment against
Outstanding expenses :
Commission to salesman
Rent Due
Stationery
320
Bills Payable
(6,000)
1,200
23,156
Less: Provision for doubtful debts
1,158
21,998
Bills Receivable
6,720
Cash in hand
2,836
Cash at bank
4,000
80,920
80,920
Illustration 12 (Trade Expenses and Office Expenses Given Simultaneously)
The following trial balance has been extracted from the books of Ms. Naina. Prepare the final accounts for
the year ended 31 March 2020 and a Balance Sheet on that date:
Particulars
Debit
Credit
`
`
Drawings
35,000
—
Buildings
60,000
—
Debtors and creditors
50,000
80,000
3,500
2,900
3,00,000
4,65,000
7,100
5,100
3,000
—
Returns
Purchases and sales
Discount
Life insurance
Cash
30,000
—
Stock (opening)
12,000
—
Bad debts
Reserve for bad debts
Carriage inwards
Wages
Machinery
5,000
—
—
17,000
6,200
27,700
8,00,000
Furniture
60,000
Office Expenses
35,000
Final Accounts of Non-Corporate Entities
8.59
Bank commission
2,000
Bills receivable/payable
60,000
40,000
Trade expenses/Capital
13,500
9,00,000
15,10,000
15,10,000
Adjustments :
(i) Depreciate building by 5%; furniture and machinery by 10% p.a.
(ii) Trade expenses ` 2,500 and wages ` 3,500 have not been paid as yet.
(iii) Allow interest on capital at 5% p.a.
(iv) Make provision for doubtful debts at 5%.
(v) Machinery includes ` 2,00,000 of a machine purchased on 31 December 2019. Wages include ` 5,700
spent on the installation of machine.
(vi) Stock on 31 March 2020 was valued at ` 50,000.
Solution :
Ms. Naina
Trading and Profit and Loss Account
Dr.
For The Year Ending On 31 March, 2020
`
Particulars
Opening Stock
Purchases
Less : Returns
Wages
Less : for installation of machine
12,000
3,00,000
2,900
Cr.
`
Particulars
Sales
4,65,000
Less : Returns
2,97,100
Stock at the end
3,500
4,61,500
50,000
27,700
5,700
22,000
Add : Outstanding
3,500
Carriage inwards
Trade expenses
Add : Outstanding
Gross Profit c/d
25,500
6,200
13,500
2,500
16,000
1,54,700
5,11,500
Office Expenses
35,000
5,11,500
Gross Profit b/d
Discount
7,100
Discount
Bank commission
2,000
Reserve for bad and doubtful debts
Bad debts
5,000
(17,000 – 2,500)
1,54,700
5,100
14,500
Depreciation on :
Building
3,000
Machine
65,143
Furniture
6,000
Net Profit c/d
51,057
1,74,300
Interest on Capital
45,000
1,74,300
Net Profit b/d
51,057
Balance of Profit transferred to
Capital Account
6,057
51,057
51,057
8.60
Financial Accounting: Concepts and Applications
Balance Sheet As On 31 March, 2020
`
Liabilities
`
Assets
Creditors
80,000
Cash in hand
30,000
Bills Payable
40,000
Bills Receivable
60,000
Outstanding Wages
3,500
Debtors
Outstanding Trade Expenses
2,500
Less : Provision
Capital
9,00,000
Add : Interest on Capital
60,000
Less : Depreciation
9,51,057
6,000
Machinery
35,000
3,000
54,000
8,00,000
Add : Installation charges
5,700
9,16,057
Less : Life Insurance
47,500
50,000
Furniture
6,057
Less : Drawings
2,500
Stock in hand
45,000
Net Profit
50,000
8,05,700
9,13,057
Less : Depreciation
65,143
Building
60,000
Less : Depreciation
3,000
10,39,057
7,40,557
57,000
10,39,057
FOR YOUR ATTENTION
Depreciation on machinery has been calculated as under :
Book value of the machinery as per Trial Balance
8,00,000
Add : Installation charges
5,700
8,05,700
10% Depreciation on ` 6,00,000 for one year
60,000
10% Depreciation on ` 2,05,700 (2,00,000 + 5,700) for 3 months
5,143
65,143
Illustration 13 (Interest Received For Late Payment and Application of Revaluation Model: AS-10 PPE)
The following is the trial balance of a trader as on 31-3-2020 :
Particulars
Cash in hand
`
`
8,000
Land and Building
40,000
Plant and Machinery
20,000
Debtors and Creditors
25,000
Stock 1-4-19
10,000
15% Investment 1-4-19
20,000
Purchases and Sales
95,000
1,90,000
Bills Payable and Bills Receivable
15,000
21,000
Wages
8,000
Salaries
16,000
Rent and Rates
15,000
Drawings
5,000
Carriage outward
6,000
60,000
Final Accounts of Non-Corporate Entities
8.61
Customs duty on purchase
16,000
Customs duty payable
25,000
Fire Insurance Premium
15,000
Advertisement
20,000
Provision for bad debt
2,000
Bad debts
6,000
Interest
2,000
Furniture
20,000
Capital
60,000
3,60,000
3,60,000
Additional Information to be adjusted:
(i) Stock on 31st March 2020 was valued at ` 60,000.
(ii) Bill receivable includes a bill of ` 4,000 which has become bad.
(iii) Sale also includes sale of furniture on 1-4-19 for ` 10,000 (Book value ` 12,000)
(iv) Wages include ` 6,000 spent on erection of machine on 1-4-19.
(v) Depreciate machinery by 10%, furniture by 20%.
(vi) Appreciate building by 10%.
(vii) Interest includes ` 200 received from a debtor for late payment and balance for investment.
(viii) Bad debts recovered ` 500 were taken as receipt from debtors.
(ix) On 31st March, 2020, machinery was revalued at ` 25,000 (excluding wages and before charging current
year’s depreciation).
Prepare Trading and Profit and Loss Account for the year ending 31-3-20 and a Balance Sheet as on that
date.
Solution :
A Trader
Trading And Profit and Loss Account
Dr.
For the Year Ending 31 March 2020
`
Particulars
10,000
Sales
Purchases
95,000
Less: for furniture
8,000
Less: For machine
6,000
Custome duty
Stock at the end
1,90,000
10,000
1,80,000
60,000
2,000
16,000
Gross profit c/d
1,17,000
2,40,000
2,40,000
Salaries
16,000
Gross profit b/d
Rent and rates
15,000
Bad debts recovered
Carriage outward
6,000
Building Account
Fire Insurance
15,000
(10 % of ` 40,000)
Advertisement
20,000
Interest for late payment
Bad Debts
`
Particulars
Opening stock
Wages
Cr.
6,000
1,17,000
500
4,000
200
8.62
Financial Accounting: Concepts and Applications
Add: Bills receivable dishonoured
4,000
Less: Provision for Doubtful debts
10,000
2,000
8,000
Loss on sale of furniture
(12,000 – 10,000)
2,000
Depreciation on Machine
2,600
Depreciation on Furniture
1,600
Net profit transferred to capital account
Interest on investments
(2,000 – 200)
1,800
Add: Outstanding
1,200
3,000
38,500
1,24,700
1,24,700
Balance Sheet As On 31 March 2020
`
Liabilities
`
Assets
Capital
60,000
Cash in hand
Add: Net profit
38,500
Land and Building
98,500
Add: Appreciaton (10%)
Less: Drawings
93,500
Plant and Machinery
Creditors
60,000
Add: Wages
Bills payable
21,000
Customs duty payable
25,000
Revaluation Reserve
Less: Excess Depreciation
5,000
8,000
5,000
500
4,500
40,000
4,000
44,000
25,000
6,000
31,000
Less: Depreciation (10%)
3,100
Furniture
20,000
Less: Sale
12,000
27,900
8,000
Less: Depreciation (20%)
1,600
Debtors
6,400
25,000
Add: Bad debts recovered
wrongly deducted
500
Investments
25,500
20,000
Accrued interest on investments
1,200
Bills receivable
15,000
Less: Bad Debts
4,000
Stock at the end
11,000
60,000
2,04,000
2,04,000
FOR YOUR ATTENTION
Bad debts recovered have been treated as receipt from debtors. It means debtors have been wrongly reduced by
` 500. Hence, the debtors should be increased by making following rectifying entry:
Dr.
Cr.
Debtors Account
500
To Bad Debts Recovered Account
500
And Bad Debts Recovered Account would be Transfered to Profit and Loss Account.
Note: As per AS-10 (PPE), any increase on revaluation should be credited to revaluation reserve and any excess depreciation
arsing on that account should be charged against revaluation reserve account.
Final Accounts of Non-Corporate Entities
8.63
PROFIT AND LOSS APPROPRIATION ACCOUNT
The net profit calculated in the Profit and Loss Account is carried down to a new account to record the items
of appropriation as against charges against the profit. Such appropriations include interest on capitals, interest
on drawings, transfer to reserves, salaries to partners etc. This is achieved by preparing Profit and Loss Appropriation
Account.
Illustration 14 (Final accounts of a partnership firm)
An extract of the trial balance as at 31 Dec. 2019 of the firm of William and Moraes is available. The partners
share profits and losses in the proportion of 60% and 40% respectively, with following further stipulations :
(i) Each partner is entitled to be paid ` 2,000 p.m. by way of salary; and
(ii) Interest at the rate of 15% will be charged on drawings other than salary.
Trial Balance as at 31.12.2019
Dr.
`
Cr.
`
William
–
80,000
Moraes
–
80,000
Sundry creditors
–
35,000
1,82,000
–
Goodwill
20,000
–
Stock-in-trade (31.12.2019)
42,250
–
Sundry debtors
71,450
–
Cash in hand
13,300
–
3,000
–
Capital Accounts :
Fixed assets
Staff salary advance
Partners’s salaries
48,000
Office expenses outstanding
1,000
Depreciation
18,000
–
Staff salaries
20,000
–
–
2,40,000
18,000
–
4,36,000
4,36,000
Trading Account (Gross Profit)
Office expenses
Utilising the following additional information, you are required to prepare :
(i) Profit and Loss Account for the year 2019.
(ii) Balance Sheet as at 31 December 2019; and
(iii) Partners’s Capital Accounts.
Additional Information :
(a) A persual of the payment vouchers for January 2020 indicates payment of salaries of ` 2,000 and office
expenses of ` 8,000, relating to periods before 31.12.2019.
(b) Partners have drawings in their accounts as follows :
Moraes :
on 1.1.2019
` 20,000
William:
on 1.5.2019
` 20,000
(c) ` 1,000 out of staff salary advance account is to be carried forward to 2020.
8.64
Financial Accounting: Concepts and Applications
Solution
Dr.
M/s. William And Moraes
Profit and Loss Account For The Year Ending 31 December 2019
Particulars
Staff Salaries
Add : Outstanding
Office expenses
Add : Outstanding
`
`
22,000
2,000
Cr.
`
Particulars
Gross Profit b/d
2,40,000
24,000
18,000
8,000
Depreciation
26,000
18,000
Profit T/F to P/L Appropriation A/c
1,72,000
2,40,000
2,40,000
Net Profit for the Year
Partner’s salaries :
1,72,000
Interest on drawings :
Williams
24,000
Moraes
24,000
48,000
Williams
2,000
Moraes
3,000
5,000
Net profit transferred to Partners’s Capital
Accounts :
Williams
77,400
Moraes
51,600
1,29,000
1,77,000
1,77,000
Balance Sheet As On 31.12.2019
`
Liabilities
Capital Accounts :
Williams
Add : Net Profit
Goodwill
1,00,000
Fixed Assets
77,400
Less: Depreciation
1,77,400
Less : Drawings
20,000
1,57,400
Less : Interest on Drawings
Moraes
Add : Net profit
`
Assets
2,000
1,55,400
20,000
2,00,000
18,000
1,82,000
Stock in trade
42,250
Sundry debtors
71,450
Cash in hand
13,300
Prepaid salary
1,000
1,00,000
51,600
1,51,600
Less : Drawings
20,000
1,31,600
Less : Interest on Drawings
3,000
Sundry creditors
1,28,600
35,000
Outstanding
Office expenses
9,000
Salaries
2,000
11,000
3,30,000
3,30,000
Final Accounts of Non-Corporate Entities
8.65
Illustration 15
The following is the trial balance of MNS, a partnership firm as on 31 March 2020:
Debit (`)
Credit (`)
M
40,000
—
N
—
10,000
S
—
25,000
M
—
1,00,000
N
—
80,000
S
—
50,000
22,000
—
1,45,000
20,000
Sales and Returns
12,000
5,68,000
Wages and Salaries
15,000
—
1,12,000
—
11,000
—
Office Salaries
8,000
—
Rent and Rates
6,000
—
Insurance (including ` 5,000 for the year ending 30-9-2020)
7,500
—
Printing and Stationery
4,000
—
General Expenses
3,500
—
Cash in hand
17,000
—
Patents
22,000
—
—
2,000
Postage
9,000
—
Repair to Machinery
6,250
—
Plant and Machinery
1,30,000
—
Buildings
2,50,000
—
Computer Purchased on 1-1-2020
1,25,000
—
45,000
—
Sundry Creditors
—
80,000
Outstanding Expenses
—
15,000
4,750
—
—
45,000
9,95,000
9,95,000
Current Accounts:
Capital Accounts:
Opening Stock
Purchases and Returns
Bills Receivable
Power
Discount
Sundry Debtors
Electricity
Loan from Q
Adjustments
(i) Interest on Capitals at 5%.
(ii) Profits and Losses are to be shared in the ratio of 2:2:1.
(iii) Provision for doubtful debts is to be made at 6% on debtors.
8.66
Financial Accounting: Concepts and Applications
(iv) Of the bills receivables, a bill of ` 10,000 is dishonoured. No entry has been made in the books of
account; of the ` 10,000 only ` 5,000 is likely to be recovered.
(v) The firm received some stationery items on 31 March 2020 amounting to ` 2,000 but the bill for the
same is not recorded in the books of account.
(vi) Depreciate plant and machinery at 15% p.a., building at 10% p.a. and computer at 20% p.a.
(vii) Stock on 31 March 2020 was ` 80,000 at cost though the market value of the same was ` 70,000.
Prepare final accounts for the accounting period ending on 31 March 2020.
Solution:
Dr.
Trading and Profit and Loss Account for the year Ending on 31 March 2020
`
Particulars
Opening Stock
Purchases
Less: Returns
22,000
1,45,000
20,000
Wages and Salaries
15,000
Power
11,000
Gross Profit c/d
`
Particulars
Sales
Less: Returns
1,25,000
Cr.
Stock at the end
5,68,000
12,000
5,56,000
70,000
4,53,000
6,26,000
6,26,000
Office Salaries
8,000
Gross Profit b/d
Rates and taxes
6,000
Discount
Insurance
7,500
Less: Prepaid
2,500
Printing and Stationery
4,000
Add: Unrecorded Bills
2,000
4,53,000
2,000
5,000
6,000
General Expenses
3,500
Repair to Machinery
6,250
Postage and Telegrams
9,000
Electricity
4,750
Depreciation on:
Plant and Machinery
19,500
Building
25,000
Computer
6,250
Bad Debts written off
5,000
Provision for Doubtful Debts
2,700
Net Profit transferred to Profit and Loss
Appropriation Account
3,48,050
4,55,000
Dr.
4,55,000
Profit and Loss Appropriation Account
`
Particulars
Interest on Capital
Particulars
Profit and Loss Account
M
3,000
N
4,500
Cr.
`
3,48,050
Final Accounts of Non-Corporate Entities
S
8.67
3,750
11,250
Profit for Distribution
(3,48,050 – 11,250 = 3,36,800)
M
1,34,720
N
1,34,720
S
67,360
3,48,050
3,48,050
Balance Sheet As at 31 March 2020
`
Liabilities
Capital Accounts
`
Assets
Building
M
1,00,000
N
80,000
Plant and Machinery
S
50,000
Less: Depreciation
2,30,000
Current Accounts
M:
Interest on Capital
Net Profit
N:
Interest on Capital
Net Profit
S:
Interest on Capital
Net Profit
Less: Depreciation
Computer
Less: Depreciation
(40,000)
3,000
1,34,720
97,720
10,000
4,500
1,34,720
Loan from Q
1,30,000
19,500
1,10,500
1,25,000
6,250
1,18,750
Stock at the end
70,000
Prepaid Insurance
2,500
Sundry Debtors
45,000
Add:
10,000
Bills Dishonoured
55,000
Less: Bad Debts
5,000
50,000
96,110
Less: Provision on ` 45,000
2,700
47,300
45,000
Sundry Creditors:
For Goods
2,25,000
22,000
3,750
67,360
25,000
Patents
1,49,220
25,000
2,50,000
Bills Receivable
80,000
For Stationery
2,000
For Expenses
15,000
Less: Dishonoured
Cash in hand
7,15,050
1,12,000
10,000
1,02,000
17,000
7,15,050
Illustration 16 (Partners are allowed interest and salaries)
Shah, Rukh and Khan carried on a retail business in partnership. The partnership agreement provides that:
(1) The partners are to be credited at the end of each year with salaries of ` 10,000 to Shah and ` 5,000
each to Rukh and Khan, and with interest at the rate of 9% p.a. on the balance at the credit of their
respective accounts at the commencement of the year.
(2) No interest to be charged on drawings.
(3) After charging salaries and interest on capital, profits and losses are to be divided in the following
ratio : 5 : 3 : 2.
8.68
Financial Accounting: Concepts and Applications
The Trial Balance of the firm as at 31 March 2020, was as follows:
Particualrs
Dr.
`
Cr.
`
–
–
Shah
–
80,000
Rukh
–
50,000
Khan
–
30,000
Shah
–
16,000
Rukh
–
12,000
Khan
–
8,000
–
4,65,000
Capital Accounts: 1.4.2019:
Current Accounts: 1.4.2019
Sales
Trade Creditors
47,000
Furniture and Fittings
22,000
–
Freehold Premises (Purchased during the year)
60,000
–
Leasehold Premises
45,000
–
Addition & Alternation to Leasehold Premises (1-4-2019)
25,000
–
2,80,000
–
Stock as on 1.4.2019
42,000
–
Salaries and Wages
64,000
–
Office and Trade Expenses
45,200
–
Rent, Rates and Insurance
10,500
–
3,500
–
30,600
–
–
500
43,700
–
Purchases
Professional charges
Debtors
Provision for Doubtful Debts
Balance at Bank
Drawings:
–
Shah
17,000
–
Rukh
11,000
–
Khan
9,000
–
7,08,500
7,08,500
You are given the following additional information:
(1) Stock on 31st March, 2020 was valued at ` 36,000.
(2) A debtor of ` 600 is to be written off and provision against the remaining debtors should be 5%.
(3) Provide for the following: Salaries and Wages : ` 6,000; office and trade expenses ` 400.
(4) Prepaid rates etc. ` 2,500.
(5) Depreciate Furniture and Fittings by 10%.
(6) Professional charges include ` 2,500 fees paid in respect of the acquisition of the leasehold premises,
whose fees are to be capitalised.
(7) The cost and the additions and alternations to the leasehold premises are to be written off over twenty
five years, commencing on 1st January, in the year in which the premises were acquired.
Final Accounts of Non-Corporate Entities
8.69
You are required to prepare:
(a) The Trading and Profit & Loss Account for the year ended 31 March 2020.
(b) The Balance Sheet as on the date.
(c) Partner’s Current Accounts.
Solution:
Dr.
Trading and Profit and Loss Account For the Year Ended 31 March, 2020
`
Particulars
Opening Stock
42,000
Purchases
2,80,000
Gross Profit c/d
1,79,000
Particulars
Sales
Closing Stock
5,01,000
Salaries & Wages paid
64,000
Add: Outstanding
6,000
Office and Trade Expenses
Add: Outstanding
4,65,000
36,000
5,01,000
Gross Profit b/d
1,79,000
70,000
47,600
10,500
Less: Prepaid
2,500
Professional Charges
3,500
Less: Transferred to Leasehold Premises
2,500
Bad Debts
`
45,200
2,400
Rent, Rates & Insurance
Cr.
8,000
1,000
600
Add: New provision for Doubtful debts
Less: Old provision
1,500
500
1,600
Depreciation on:
Furniture & Fittings
2,200
Leasehold Premises
2,900
Net Profit c/d
5,100
45,700
1,79,000
1,79,000
Profit & Loss Appropria tion Account For the Year Ended 31 March 2020
`
Particulars
Salaries to Partners:
Particulars
Net Profit b/d
Shah
10,000
Rukh
5,000
Khan
5,000
20,000
Interest on Partners’ Capitals (including
Current A/c, Opening Balance at 9%):
Shah
8,640
Rukh
5,580
Khan
3,420
17,640
`
45,700
8.70
Financial Accounting: Concepts and Applications
Profit transferred to
Shah
4,030
Rukh
2,418
Khan
1,612
8,060
45,700
45,700
Shah’s Current Account
`
Particualrs
`
Drawings
17,000
Balance b/d
16,000
Balance c/d
21,670
Profit & Loss Appropriation Account:
Particualrs
Salaries
10,000
Interest
8,640
Profit
4,030
38,670
38,670
Rukh’s Current Account
`
Particulars
Particulars
`
12,000
Drawings
11,000
Balance b/d
Balance c/d
13,998
Profit & Loss Appropriation Account:
Salaries
5,000
Interest
5,580
Profit
2,418
24,998
24,998
Khan’s Current Account
`
Particulars
Particulars
`
8,000
Drawings
9,000
Balance b/d
Balance c/d
9,032
Profit & Loss Appropriation Account:
Salaries
5,000
Interest
3,420
Profit
1,612
18,032
18,032
Balance Sheet As On 31 March 2020
`
Liabilities
Capitals:
`
Assets
Bank
Shah
80,000
Rukh
50,000
Khan
30,000
Debtors
Less: Bad Debts
1,60,000
Current Accounts:
43,700
20,600
600
20,000
Less: Provision for Doubtful
Shah
21,670
Debts
Rukh
13,998
Stock
Khan
9,032
Trade creditors
44,700
Prepaid Rent & Rates
37,000
Furniture & Fittings
Outstanding Expenses:
Less: Depreciation
Office & Trade Exps.
2,400
Salaries & Wages
6,000
8,400
1,500
18,500
36,000
2,500
22,000
2,200
Leasehold
45,000
Add: Additions
27,500
19,800
72,500
Less: Depreciation
Freehold Premises
2,50,100
2,900
69,600
60,000
2,50,100
Final Accounts of Non-Corporate Entities
8.71
EXPLANATORY NOTES
(1)
Interest on each partner’s capital account is charged on the balances including the balances on current accounts.
(2)
An amount of ` 2,500 for fees paid in respect of the acquisition of the leasehold premises is capitalised. It
means it is to be added to the cost of leasehold premises.
(3)
Cost of leasehold premises will be 45,000 + 25,000 + 2,500 = ` 72,500
(4)
Amount to be written off every year will be:
72, 500
= 2, 900. It should be debited to Profit & Loss Account and deducted from cost of the leasehold premises
25
in the Balance Sheet.
(5)
Capital accounts are maintained as per fixed capital method.
Illustration 17 (Goods sent on Approval and GST)
Hemlata, the proprietor-cum-accountant of general store, has prepared the following trial balance as on 31
March 2020 :
Purchases
Sales
Stock of goods on 1.4.2019
Cash in hand
Cash at Bank
Hemlata’s Capital
Drawings
Rates and taxes
Salaries
Postages and telephones
Salesmen’s commission
Insurance
Advertising
Furniture and fittings
Printing and stationery
Motor car
Bad debts
Discounts
General expenses
Carriage inwards
Carriage outwards
Wages
Outstanding liability for expenses
Sundry creditors
Sundry debtors
Output CGST
Output SGST
Input CGST
Input SGST
Debit
`
Credit
`
3,10,000
–
50,000
2,100
12,000
–
4,000
5,000
32,000
11,500
35,000
9,000
17,000
22,000
3,000
48,000
2,000
4,000
14,000
10,000
22,000
20,000
11,000
–
1,00,000
–
4,15,000
–
–
–
2,88,600
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
40,000
–
2,000
4,000
3,000
3,000
7,49,600
7,49,600
Required: Prepare Trading and Profit and Loss Account for the year ended on March 31, 2020 and Balance
Sheet as on that date after taking into consideration the following information :
(i) Cost of goods in stocks as on 31 March 2020, ` 1,45,000.
(ii) Hemlata had withdrawn goods worth ` 5,000 during the year which were purchased on 5% CGST and
5% SGST each.
8.72
Financial Accounting: Concepts and Applications
(iii) Printing and stationery expenses of ` 11,000 relating to 2018-19 accounting year had not been provided
in that year but were paid in this year by debiting outstanding liabilities.
(iv) Purchases include purchase of furniture worth ` 10,000.
(v) Debtors include ` 5,000 bad debts.
(vi) Creditors include a balance of ` 4,000 to the credit of Zarina; it has been settled only for ` 1,000.
(vii) Sales include goods worth ` 15,000 sent to Kishore Kumar on approval and remaining unsold as on 31
March 2020. The cost of the goods was ` 10,000. These goods involve CGST and SGST @5% each.
(viii) Provision for bad debts is to be created at 5% on sundry debtors.
(ix) Depreciate furniture and fittings by 10%; motor car by 20%.
(x) The salesmen are entitled to a commission of 10% on total sales excluding GST.
Solution
Hemlata
Trading And Profit and Loss Account
For The Year Ended 31 March, 2020
Dr.
Cr.
`
Particulars
Opening stock
Purchases
Less : Furniture
50,000
3,10,000
5,000
4,15,000
Closing stock
15,000
2,95,000
20,000
Carriage inwards
10,000
approval
10,000
1,55,000
1,80,000
5,55,000
Salaries
32,000
Rent and taxes
5,000
Postages and telephone
5,55,000
Gross Profit b/d
Income from settlement of creditors
1,80,000
3,000
11,500
Insurance
9,000
Printing & stationery
3,000
General expenses
14,000
Carriage outwards
22,000
Discounts
Bad debts
4,00,000
1,45,000
Add : Cost of the goods sent on
Wages
Gross Profit c/d
Sales
Less : Goods sent on approval
10,000
3,00,000
Less : Drawings (on cost)
`
Particulars
4,000
2,000
Add : Further bad debts
5,000
Add : New Provision
3,925
Advertising
10,925
17,000
Salesmen’s commission
35,000
Add : Outstanding
5,000
40,000
Depreciation on :
Furniture
3,200
Machinery
9,600
Net Profit
12,800
1,775
1,83,000
1,83,000
Final Accounts of Non-Corporate Entities
8.73
Balance Sheet Of Hemlata
As On 31 March, 2020
`
Liabilities
Capital :
`
Assets
Input CGST
Opening balance
2,88,600
Add : Net Profit
1,775
1,500
Furniture & fittings
22,000
Addition during the year
10,000
2,90,375
32,000
Less : Outstanding liability for
Less : Depreciation
printing etc., of 2018-19
11,000
3,200
Motar car
Less : Drawings (4,000 + 5,500)
48,000
Less : Depreciation
including GST
9,500
2,69,875
28,800
9,600
Stock in trade at cost
38,400
1,55,000
Sundry debtors
Sundry creditors
37,000
Liability for expenses
5,000
As per trial balance
1,00,000
Less : Sales on approval
(Salesmen’s commission)
including GST
Output SGST (Payable)
16,500
500
83,500
Less: Bad debts
5,000
78,500
Less: Provision for doubtful debts
3,925
74,575
Cash at bank
12,000
Cash in hand
2,100
3,12,375
3,12,375
WORKING NOTES:
Journal Entries
(i) Sales (Approval) A/c
Dr.
15,000
Output CGST A/c
Dr.
750
Output SGST A/c
Dr.
750
To Debtors A/c
(ii) Drawings A/c
16,500
Dr.
5,500
To Purchases A/c
5,000
To Input CGST A/c
250
To Input SGST A/c
250
Statement Showing Adjustments of GST
Particulars
IGST
CGST
SGST
Output GST
—
2,000
4,000
Adjustments on account of sales on Approval
—
(750)
(750)
—
1,250
3,250
—
3,000
3,000
Output GST (Tax Liability)
(A)
Input GST
Adjustments on account of Drawing in goods
Input GST (Net Input Tax Credit)
(B)
—
(250)
(250)
—
2,750
2,750
—
1,500 (Dr.)
500 (Cr.)
(i) Surplus on account of input CGST can not be set-off against output SGST and remaining balance to be shown on Assets
side to take benefit in next accounting year.
(ii) There is shortfall in Input SGST while setting-off ouput SGST against Input SGST i.e. [2,750 – 3,250 = (500)] to be
recorded on liability side of balance sheet.
8.74
Financial Accounting: Concepts and Applications
Illustration 18
From the following trial balance of Mr. Pankaj, prepare final accounts for the year ended 31 March 2020
after giving effect to adjustments :
`
Opening stock
1,00,000
Debtors
40,000
Bank
2,000
Sundry assets
2,02,500
`
Capital
1,60,000
Creditors
35,100
Sales
3,02,000
Discount
4,000
Bad debts
1,000
Provision for
Accrued income
1,500
bad & doubtful debts
6,000
Salaries outstanding
2,000
Purchases
1,23,500
Depreciation
4,500
Income tax
Loan
10,000
10,500
Salaries
4,600
Wages
28,000
Interest on loan for six months
1,000
5,19,100
5,19,100
Adjustments :
(i) Closing stock on 31 March, 2020 amounted to ` 20,000.
(ii) There was a loss of stock by fire ` 25,000 on 20 March 2020. However a claim of ` 10,000 was admitted
by the insurance company.
(iii) Debtors include ` 5,000 due from Khushi and creditors include ` 10,000 due to Khushi.
(iv) Sales include ` 6,000 sent to a credit customer on approval on 25 March, 2020. Profit equal to 1/5 of
cost had been added to determine the sale price. However, customer has not given his approval till 31
March, 2020.
(v) Debtors include bad debts amounting to ` 3,000; create reserve for doubtful debts @ 5%.
(vi) ` 1,200 paid as rent was debited to landlord’s account and included in debtors.
(vii) Furniture of the book value of ` 6,000 on 31.3.2020 was sold off at ` 4,000 in part exchange for new
furniture costing ` 5,000. However, a net invoice of ` 1,000 was passed through the purchase day book.
(viii) A dishonoured cheque for ` 5,000 has not been recorded. It is expected that only 20% of the amount
will be recovered.
Solution
Pankaj
Dr.
Trading Account For The Year Ending On 31 March, 2020
`
Particulars
Opening Stock
Purchases
Less: Wrongly recorded (ii)
1,00,000
1,23,500
1,000
`
Particulars
Sales
Less : Sales on approval basis (iv)
1,22,500
Cr.
3,02,000
6,000
2,96,000
Loss of stock by fire
25,000
20,000
Wages
28,000
Stock-in-hand
Profit and Loss Account
95,500
Stock on approval (iv)
5,000
(Gross Profit)
3,46,000
3,46,000
Final Accounts of Non-Corporate Entities
8.75
Dr.
Cr.
Profit and Loss Account For The Year Ending On 31 March 2020
`
Particulars
`
Particulars
Salaries
4,600
Trading Account (Gross Profit)
Depreciation
4,500
Discount
Interest on loan
95,500
4,000
1,000
Add : Outstanding
1,000
Loss of stock by fire
2,000
15,000
Rent
1,200
Loss on sale of furniture
2,000
Provision for doubtful debts (i)
3,240
Capital Account (Net Profit)
66,960
99,500
99,500
Balance Sheet Of Mr. Pankaj As At 31 March, 2020
`
Liabilities
Capital
Less: Income Tax
1,60,000
Sundry Assets
10,500
66,960
Salaries outstanding
2,16,460
2,000
2,000
Less: Dishonoured cheque (iii)
5,000
3,000
10,000
Creditors
Less: Common debts
on approval
5,000
Accrued income
Debtors
1,000
11,000
35,100
5,000
2,01,500
20,000
1,500
Insurance Company
Bank balance
Add: Interest Outstanding
1,000
Closing Stock: in hand
Bank overdraft :
Loan
2,02,500
Less: Adjustment (ii)
1,49,500
Add: Profit
`
Assets
10,000
40,000
Less: Approval
(6,000)
Landlord
(1,200)
Bad debts
(3,000)
Common debts
(5,000)
30,100
24,800
Less: Provision
1,240
23,560
Add: Recoverable amount of
dishonoured cheque (iii)
2,62,560
1,000
24,560
2,62,560
(i) Provision For Doubtful Debts
Particulars
Bad Debts
`
Particulars
`
1,000
Balance b/d
6,000
Profit and Loss Account
3,240
(appearing in trial balance)
Bad Debts
3,000
(Balancing Figure)
(appearing in adjustments)
Bad Debts
4,000
(dishonoured cheque)
Balance c/d
1,240
9,240
9,240
8.76
Financial Accounting: Concepts and Applications
(ii) Net entry for adjustment relating to furniture account is :
Loss On Sale Of Furniture Account
Dr.
2,000
To Furniture Account
1,000
To Purchases Account
1,000
(iii) Adjustment entry for dishonoured cheque is :
Debtors Account
Dr.
1,000
Bad Debts Account
Dr.
4,000
To Bank Account
5,000
(iv) Journal entries for adjusting sale on approval basis are as follows :
(a) Sales Account
Dr.
6,000
To Debtors Account
(b) Stock on Approval Account
To Trading Account
6,000
Dr.
5,000
5,000
Illustration 19 (Overcasting of Stock)
On 31 March, 2020 the following Trial Balance was prepared from the books of Mr. Maneet:
Particulars
Debit
Credit
`
`
30,600
10,000
5,000
—
Plant and Machinery
75,000
—
Purchases (Adjusted)
1,90,000
—
—
70,000
Freehold Premises
50,000
—
Salaries
21,000
—
Wages
24,400
—
Postage and Stationery
1,750
—
Carriage in
1,750
—
Carriage out
1,000
—
950
—
—
350
Office charges
1,500
—
Cash at Bank
5,300
—
Cash in Hand
800
—
Bills Payable
—
7,000
General Reserve
—
20,000
Sales
—
3,31,700
30,000
—
4,39,050
4,39,050
Debtors and Creditors
Bills Receivables
Capital Account
Bad debts
Bad debts provision
Closing stock
Final Accounts of Non-Corporate Entities
8.77
The following adjustments are required:
(a) Maneet gets a salary of ` 12,000 p.a.
(b) Allows interest on capital @ 10% p.a.
(c) Bed debts provision is 2½% on Debtors.
(d) 10% of net profit to be carried to General Reserve.
(e) It was discovered in April 2019 that the stock as on 31st March, 2018 were overcast by ` 1,000. However,
no entry was passed in April 2019.
(f) Depreciate Plant and machinery @10% and Freehold Premises @ 2% p.a.
Prepare the Trading and Profit and Loss Account of the firm for the year ended 31 March, 2020 and a Balance
Sheet as at that date.
Solution :
Maneet
Trading And Profit and Loss Account
For The Year Ending 31 March, 2020
Dr.
`
Particulars
Purchases (adjusted)
Less: Overvalued Stock
1,90,000
1,000
Wages
Carriage Inwards
Gross Profit c/d
Particulars
Sales
`
3,31,700
1,89,000
24,400
1,750
1,16,550
3,31,700
Salary
21,000
Salary to Maneet
12,000
Interest on Capital
Cr.
3,31,700
Gross Profit b/d
1,16,550
6,900
10% of 69,000 (70, 000  1, 000)
Postage and Stationery
1,750
Carriage Outward
1,000
Bad Debts
950
Provision for Doubtful Debts (765  350)
415
Office Charges
1,500
Depreciation on:
Plant and Machinery
7,500
Furniture and Freehold Premises
1,000
General Reserve
6,254
(10% of ` 62,535)
Net Profit transferred to Maneet’ Capital Account
56,281
(62,535 – 6,254)
1,16,550
1,16,550
8.78
Financial Accounting: Concepts and Applications
Balance Sheet As At 31 March 2020
`
Liabilities
Capital
70,000
Less: Overvalued Stock
1,000
Add: Salaries
Add: Interest on Capital
Add: Net Profit
Addition
Creditors
Bills Payable
30,600
Less: Provision
765
Plant and Machinery
12,000
Less: Depreciation
7,500
6,900
Freehold Premises
50,000
56,281
Less: Depreciation
1,000
20,000
6,254
Debtors
69,000
1,44,181
General Reserve
`
Assets
29,835
75,000
Bills Receivable
67,500
49,000
5,000
Cash in hand
800
26,254
Cash at Bank
5,300
10,000
Stock at the end
30,000
7,000
1,87,435
1,87,435
Illustration 20 (Sales on Approval)
Given below is the Trial Balance of Mr. Alok, a trader, as on 31-3-2020 :
Particulars
Cash in hand
Debit
Credit
`
`
5,000
—
Land and Building
80,000
—
Plant and Machinery
50,000
—
Debtors & Creditors
25,000
40,000
Stock on 1-4-2019
10,000
—
15% Investments on 1-4-2019
20,000
—
Purchases and Sales
95,000
1,90,000
—
20,000
28,000
—
Bank Overdraft
Wages
Salaries
16,000
—
Rent, Rates and Taxes
15,000
—
6,000
—
Bad Debts
Drawings
Bills Receivable & Bills Payable
Carriage Inwards
Custom Duty on Purchases
Life Insurance Premium
Advertisement
5,000
—
15,000
46,000
6,000
—
16,000
—
4,000
—
30,000
—
Provision for Doubtful Debts
—
2,000
Interest on Investments
—
2,000
Sundry Expenses
11,000
—
Furniture
20,000
—
—
1,57,000
4,57,000
4,57,000
Capital
Final Accounts of Non-Corporate Entities
8.79
Additional information:
(i) Stock on 31-3-2020 was valued at ` 40,000.
(ii) Included in debtors are ` 8,000 due from Ram and included in creditors are ` 6,000 due to Ram.
(iii) Bills Receivables include a bill of ` 5,000 received from Varun, which has been dishonoured.
(iv) Sales include ` 5,000 for the goods sold on approval basis. Goods are sold at a profit of 25% on cost.
Approval was not received upto 31-3-2020.
(v) Wages include ` 5,000 spent on the erection of machinery.
(vi) Create a provision for doubtful debts at 5% on debtors.
(vii) Prepaid rates and taxes amounted to ` 2,000.
(viii) Depreciate machinery by 10%.
(ix) Advertisement includes ` 20,000 spent at the time of launching a new product. It is policy of the
business to write off such expense in 5 years
Prepare Trading and Profit and Loss Account for the year ended 31 March, 2020 and a Balance Sheet as on
that date.
Solution :
Alok
Dr.
Trading And Profit and Loss Account
For the Year Ending on 31 March 2020
`
Particulars
Opening Stock
Wages
Less: For Erection of Machinery
10,000
28,000
5,000
Cr.
`
Particulars
Sales
Less: Sale on approval
1,90,000
5,000
23,000
1,85,000
Stock at the end
(Capitalised)
40,000
Add: Cost of the
Purchases
95,000
Carriage inwards
goods sold on approval
4,000
6,000
Custom Duty on Purchases
16,000
Gross Profit c/d
79,000
2,29,000
Salaries
Rent, Rates and Taxes
Less: Prepaid
16,000
15,000
2,000
Bad Debts
30,000
Less: Carried Forward
16,000
Depreciation of Machines
Net Profit transferred to Capital Account
2,29,000
Gross Profit b/d
Interest on Investments
13,000
6,000
Advertisement
Trade Expenses
44,000
79,000
2,000
Add: Accrued Provision for
Doubtful
14,000
Debts (old)
11,000
Less: New Provision
3,000
1,000
2,000
950
1,050
5,500
17,550
83,050
83,050
8.80
Financial Accounting: Concepts and Applications
Balance Sheet As On 31 March 2020
`
Liabilities
Capital
1,57,000
Add: Net Profit
17,550
1,74,550
Less: Life Insurance Policy
(5,000)
1,65,550
Creditors
Less: Due to Ram
Land and Building
Plant and Machinery
Add: Wages
(4,000)
Drawings
40,000
6,000
34,000
`
Assets
80,000
50,000
5,000
55,000
Less: Depreciation
5,500
49,500
Furniture
20,000
Stock at the end (40, 000 + 4, 000)
44,000
15% Investments
Add: Interest accrued
Bank overdraft
20,000
Bills Receivable
Bills Payable
46,000
Less : Dishonoured
Debtors
Less : Sale on Approval
20,000
1,000
21,000
15,000
5,000
10,000
25,000
5,000
20,000
Less : Due from Ram
6,000
14,000
Add : Varun (for Bills Dishonoured) 5,000
19,000
Less: Provision
950
18,050
Cash in hand
5,000
Prepaid Tax etc.
2,000
Advertisement Suspense
Account (Deferred)
2,65,550
16,000
2,65,550
Illustration 21 (General Manager’s and Works Manager’s Commission)
From the following balances and information for the year ended 31 December 2019, prepare the final accounts
of Priyanka Jhoonjhoonwala:
Debit
Plant and Machinery
`
18,000
Depreciation on plant
Credit
Capital
Sales
and machinery
2,000
Bank overdraft
Repairs to plant
1,600
Salaries outstanding
Wages
Salaries
Income Tax
28,000
4,000
500
Cash
2,000
Land
24,500
Depreciation on building
Purchases less returns
2,500
1,23,500
Accrued income
1,500
Bills Receivable
30,000
Bad debts
1,000
`
60,000
2,49,000
13,800
2,000
Bills payable
3,000
Provision for bad debts
6,000
Discount on purchases
4,000
Creditors
23,300
Final Accounts of Non-Corporate Entities
8.81
Debtors
35,000
Opening stock
37,000
Building
50,000
3,61,100
3,61,100
Adjustments:
(i) Stock on 31-12-2019:
Market value ` 40,000; Cost price ` 30,000
(ii) Write off ` 3,000 bad debts and maintain a provision of 5% on debtors.
(iii) Goods costing ` 5,000 were sent to a customer on sale or return basis on 30 December 2019. These
were recorded as actual sale. The rate of gross profit was 1/6 of sale.
(iv) ` 1,200 paid as rent of the office were debited to Landlord account and were included in the list of
sundry debtors.
(v) General manager is to be given commission at 10% after charging the commission of works manager
and his own on net profits.
(vi) Works manager is to be given commission at 5% after charging the commission of general manager
and his own on net profits.
Solution :
Dr.
Priyanka Jhoonjhoonwala
Trading And Profit and Loss Account
For The Year Ending 31 December 2019
`
Particulars
Opening stock
37,000
Purchases less returns
Cr.
`
Particulars
Sales
1,23,500
Less: Goods sent on sale
Wages
28,000
or approval at sale price
Gross profit c/d
89,500
2,49,000
6,000
Stock in hand at cost
30,000
Stock with customers at cost
5,000
2,78,000
2,78,000
Depreciation on plant and machinery
2,000
Gross profit b/d
Repairs to plant
1,600
Provision for bad debts
6,000
Salaries
4,000
Less: New provision
1,240
Depreciation on building
2,500
Discount on purchases
Rent of office
1,200
Bad debts
1,000
Additional
3,000
2,43,000
89,500
4,760
4,000
4,000
General manage commission
7,214
Works manager’s commission
3,607
Net profit transferred
to capital account
72,139
98,260
98,260
8.82
Financial Accounting: Concepts and Applications
Balance Sheet As On 31 December 2019
`
Liabilities
`
Assets
Capital
60,000
Land
24,500
Add Net Profit
72,139
Plant and Machinery
18,000
Building
50,000
1,32,139
Less: Income Tax
500
1,31,639
Bank Overdraft
13,800
Creditors
23,300
Debtors
35,000
Less: Rent to Landlord
Wrongly included
1,200
33,800
Bills Payable
3,000
Less: Goods sent on approval
Outstanding Salaries
2,000
(5,000 + 1/5 of 5,000)
Outstanding Works Manager’s Commission
3,607
Less: Additional bad debts
Outstanding General Manager’s Commission
7,214
6,000
27,800
3,000
24,800
Less: Provision for bad debts
1,240
23,560
Bills Receivable
30,000
Accrued Income
1,500
Stock in hand
30,000
Stock with customers on approval
basis at cost
5,000
Cash in hand
2,000
1,84,560
1,84,560
FOR YOUR ATTENTION
Commission payable to general manager and works manager being 10% and 5% of net profits after charging their respective
share of commission of 15% (10%  and 5%) . Hence, out of 115%, General manager’s share is 10% and works manager’ss
share is 5% which can be shown as:
General Manager : 82, 960 ×
Works Manager
: 82,960 ×
10
115
= ` 7, 214
5
= ` 3, 607
115
ADDITIONAL ADJUSTMENTS
1. Stock used for personal use treated as sales
Effect:
(a)
Deduct from sales in the Trading Account
(b)
Deduct from Debtors in the Assets side in the Balance Sheet
(c)
Deduct from the purchase
(d)
Add to drawings or deduct from capital
(e)
The journal entries are :
(i) Sales Account
To Debtors Account
Dr.
Final Accounts of Non-Corporate Entities
8.83
(ii) Drawings Account
Dr.
To Purchases Account
2.
Stock used as stationery
The journal entry is
Stationery Account
Dr.
To Opening Stock
Or
To Purchase Account
Effect :
(i)
Deduct from the opening stock or Purchases Account in the Trading Account
(ii) Show in the debit side of the profit and Loss Account
3.
Purchases of next accounting period not recorded in the current year but included in the stock.
No Journal Entry
Effect : The closing stock must be reduced both in
(a) The Trading Account and
(b) In the Assets in the Balance Sheet
4. Purchases of Current Period neither recorded nor included in the stock
The adjustment entry is
Purchases Account
Dr.
To Sundry Creditors Account
Effect:
(i)
Add to purchases in the Trading Account
(ii) Add to sundry creditors in the Liabilities side in the Balance Sheet
(iii) Add to closing stock in the Trading Account
(iv) Add to closing stock in the Assets side
5. (a)Purchases of the current accounting period recorded but not included in the stock because of
goods received or delivered late
No Adjustment Entry
Effect : Increase the closing stock in the trading account and show it the Assets side in the Balance
Sheet.
(b) But if the above purchases relate to the next accounting period.
The Adjustment Entry :
Creditors Account
To Purchases Account
Effect :
(a) Deduct from purchases
(b) Deduct from creditors.
8.84
Financial Accounting: Concepts and Applications
6. Purchases of personal use not recorded in the books.
The Adjustment Entry
(a) When paid in cash
Drawings Account
Dr.
To Cash/Bank Account
(b) When payable
Drawings Account
Dr.
To Creditors Account
Effect :
(i)
Reduce the capital by the amount of drawings
(ii) Reduce the Cash/Bank paid or Increase in the creditors, if payable
Note: No entry is needed if paid by the owner himself.
7. Purchases of Assets included in the Purchases (of Goods)
The adjustment entry is :
Asset Account
Dr.
To Purchases Account
Effect :
(a) Add to particular asset in the balance sheet
(b) Reduce the purchases in the Trading Account
8. Revenue Expenses wrongly shown as capital expenditure e.g. painting of building charged to
Building Account
The adjustment entry is:
Painting of Building Account
Dr.
To Building Account
Effect :
(a) To be deducted from building in the Assets side in the Balance Sheet
(b) To be shown as painting expenses in the debit side of profit and Loss Account.
Illustration 22 (Omitted Purchases)
From the following, prepare the Trading and Profit & Loss Account for the year ended 31 March 2020 and
Balance Sheet of Mr. Z as on that date:
`
Capital
50,450
Trade Creditors
10,000
Bills Payable
1,000
General Reserve
5,000
Provision for Bad and Doubtful Debts
1,000
Sales
Discount Allowed
Stock at April 1, 2019
75,000
750
15,000
Final Accounts of Non-Corporate Entities
8.85
Purchases
48,000
Discount Received
400
Building
10,000
Machinery, Plant and Furniture (Cost ` 25,000)
15,000
Book Debts
16,400
Bank Balance (Dr.)
3,400
Investment, 4% Government Loan at par
10,000
Bills Receivable
5,050
Salaries and wages
13,000
Audit Fee
2,000
Office Expenses
2,000
Repairs and Renewals
1,800
Interest Paid
700
Bad Debts Recovered
250
Additional Information:
(a) The value of Stock on hand as at 31 March, 2020 was ` 18,000; it included goods costing ` 900 received
on 30 March, 2020 in respect of which supplier’s bill had not yet been received.
(b) Goods of the cost of ` 1,500 were sent to a customer on sale on approval basis but recorded in Sales
Book at Sales Price ` 2,000. Approval for the sales were not received till 31 March, 2020.
(c) Provisions were made for doubtful debts to the extent of ` 400 and for depreciation on Building at
2% per annum.
(d) Machinery, Plant and Furniture were depreciated at 20% on the diminishing value; Mr. Z however
considered that the proper method would be 8% on the original cost and wanted to adopt it from April
01, 2018.
WORKING NOTES
1.
Goods received but supplier’s bill not received.
The goods are related to current year (2019-20)
Purchases not recorded. The entry should be—
Purchases .................... Dr.
900
To Trade Creditors
900
Effects to be recorded
(a) Add ` 900 to Purchases and
(b) Add ` 900 to Trade Creditors
2.
3.
Goods sent on approval but not yet approved
(a)
The selling price ` 2,000 should be deducted from sales and from Debtors.
(b)
The cost price of the goods, that is `, 1,500 should be added to Closing Stock.
Plant, Machinery & Furniture — Change of Method of Depreciation. We should try to know the value on 1-12018.
`
W.D.V. on 1.4.2019 on
15,000
Add Back : Depreciation already charged
20
of ` 15,000
80
3,750
[as per Trial Balance]
8.86
Financial Accounting: Concepts and Applications
or
15,000 ×
100
80
18,750
W.D.V. on 1.4.2018
`
Depreciation for 2018-19 [Last year]:
Already provided
3,750
To be provided at 8% of ` 25,000
2,000
Excess Depreciation to be
Written back
1,750
Annual Depreciation for 2019-20 = 8% of ` 25,000 = ` 2,000
4.
Interest Received on Investment
4% of ` 10,000 = ` 400
Main Solution:
Mr. Z
Trading And Profit and Loss Account for the year ended 31 March, 2020
`
Particulars
Opening Stock
Purchase
Add : Purchae not recorded (WN1)
15,000
48,000
900
Gross Profit c/d
`
Particulars
Sales
75,000
Less : Selling Price of Goods
48,900
28,600
sent for Approval, but not
yet approved
2,000
Closing Stock
18,000
73,000
Add: Cost Price of Goods
sent on approval with
Customers
1,500
92,500
19,500
92,500
Salaries & Wages
13,000
Office Expenses
2,000
Discounts Received
400
Repairs & Renewals
1,800
Bad Debt Recovered
250
Discount Allowed
750
Audit Fees
2,000
Interest Paid
700
Deperciation:
Building
Machinery, Plant & Furniture
Gross Profit b/d
28,600
Provision for Doubtful Debts:
Opening Provision
Less: New Provision
1,000
400
Interest on Investment (accrued)
200
2,000
Net Profit transferred to Capital A/c
400
Excess Depreciation Written back
2,200
600
1,750
(WN3)
9,550
32,000
32,000
Balance Sheet As On 31 March 2020
`
Liabilities
Capital:
Opening Balance
Add: Net Profit
Building
50,450
9,550
Less: Depreciation
60,000
`
Assets
Machinery, Plant & Furniture
10,000
200
15,000
9,800
Final Accounts of Non-Corporate Entities
8.87
General Reserve
Trade Creditors
Add: Unrecorded amount for purchases
Bills Payable
5,000
10,000
900
Added Back—Excess
Depreciation Provided
10,900
1,000
1,750
16,750
Less: Current year’s depreciation
Stock
Add: Goods on Approval
lying unapproved
Book Debts
Less: Goods sent on Approval
2,000
14,750
18,000
1,500
19,500
16,400
2,000
14,400
Less: Provision for
Doubtful Debts
400
Bills Receivable
Investment in 4% Govt Loan
Add: Accrued Interest Receivable
Cash at Bank
76,900
14,000
5,050
10,000
400
10,400
3,400
76,900
Illustration 23 (Bad Debts Recovered Recorded As Cash Sales.)
From the following balances extracted from the books of a trader on December 31, 2019, prepare a Trading
and Profit and Loss Account for the year ended on that date and also a Balance Sheet as at that
date:
`
Credit Balances
`
Drawings Account
7,100
Capital Account
42,500
Plant and Machinery
9,500
Sales
Stock on 01-01-2019
14,600
Debit Balances
Purchases
1,03,620
Purchase Return
2,910
Bank Overdraft
1,200
Sales Return
2,100
Creditors
General Expenses
2,000
Provision for Doubtful Debts
Wages
2,400
Rent and Rates
3,200
Bad Debts
1,720
Debtors
Cash in Hand
1,19,060
10,000
1,050
30,000
480
1,76,720
Additional Information:
(i) Provide 10% depreciation on Plant and Machinery.
(ii) Provision for Doubtful Debts is to be increased to 5% of Debtors.
(iii) A credit sale of ` 2,000 has not been recorded in the books.
1,76,720
8.88
Financial Accounting: Concepts and Applications
(iv) Plant and Machinery worth ` 1,000 purchased during the year (on September 30, 2019) has been included
in Purchases.
(v) Stock on, 31-12-2019 has been valued at ` 17,300. This does not include the value of the Plant and
Machinery bought on 30-09-2019.
(vi) Wages includes ` 200 for installation of Plant.
(vii) Goods costing ` 600 have been stolen by a dishonest employee.
(viii) ` 510 received from a Debtor whose balance was written off as bad has been recorded as cash sale.
(ix) A sales Return of ` 500 was not entered in the accounts though it was duly taken in the stock.
(x) Goods (cost price ` 720; minimum sale price ` 900) was consigned to an agent. But those remain still
unsold.
[B.Com. Hons.]
Solution:
Dr.
Trading and Profit & Loss Account for the year ended 31st December, 2019
`
Particulars
Opening Stock
Purchases
14,600
1,03,620
Sales
1,19,060
Less: Sales Return
2,910
included in Sales
600
1,16,460
510
1,15,950
1,00,110
Add: Unrecorded Credit Sale
Less: Cost of Plant & Machinery
included in Purchases
2,600
Less : Bad Debts recovered
1,00,710
Less: Goods stolen (at cost)
`
Particulars
(Note 1)
Less: Purchases Return
Cr.
Closing Stock
2,000
1,17,950
17,300
1,000
99,110
Less: Cost of Goods Sent on
Consignment
Wages
Less: Installation Cost of Plant
720
98,390
2,400
200
Gross Profit c/d
2,200
20,060
1,35,250
1,35,250
General Expenses
2,000
Gross Profit b/d
Rent & Rates
3,200
Bad Debts Recovered
Bad Debts
1,720
Goods Stolen
20,060
510
600
Provision for Doubtful Debts:
New Provision
1,575
Less: Existing Provision
1,050
Depreciation on Plant & Machinery (Note)
Capital Account (Net Profit)
525
980
11,545
20,570
20,570
Final Accounts of Non-Corporate Entities
8.89
Balance Sheet as on 31st December, 2019
`
Liabilities
Bank Overdraft
1,200
Creditors
10,000
Capital:
`
Assets
Cash in Hand
480
Debtors
30,000
Add: Unrecorded Credit Sale
Opening Balance
42,500
Add: Net Profit
11,545
32,000
Less: Unrecorded Sales Return
54,045
Less: Drawings
7,100
2,000
500
31,500
46,945
Less: Provision for Doubtful Debts
1,575
Stock on Consignment (at Cost)
29,925
720
Stock
17,300
Plant & Machinery
9,500
Add: Purchase not included
1,000
Add: Installation charges
200
10,700
Less: Depreciation (Note)
58,145
980
9,720
58,145
WORKING NOTES
1.
`
Sales Return
As per Trial Balance
2,100
Add: Sales Return not recorded
500 (also deducted from Debtors)
2,600
2.
Depreciation on Plant & Machinery
On existing Plant and Machinery for full year 9,500 ×
10
= 950
100
On New Purchase (1000 + 200) for 3 months [30-9-19 to 31-12-19] 1,200 ×
10
3
30
×
=
100 12
980
Illustration 24 (GST)
From the following Trial Balance of Sri Narayan, you are required to prepare a Trading and Profit & Loss
Account for the year ended 31st March 2020 and a Balance Sheet as on that date:
Debit Balance
`
Credit Balances
Stock on 1 -4-2019
70,000
Capital
Plant and Machinery
50,000
Wages outstanding
`
2,00,000
4,000
Rent
3,000
Sales
5,00,000
Depreciation on Plant & Machinery
5,000
Creditors
45,000
Drawings
40,000
Bills Payable
16,000
Wages
20,000
Discount (Cr.)
12,000
2,000
Bank Overdraft
9,000
Commission (Cr.)
8,000
Income Tax
Salary for 11 months
11,000
8.90
Financial Accounting: Concepts and Applications
Cash
5,000
Buildings
Purchase returns
5,000
Output IGST
6,000
8,000
Output CGST
4,000
3,00,000
Output SGST
4,000
1,60,000
Depreciation on Buildings
Purchases
Debtors
80,000
Bills Receivable
30,000
Discount (Dr.)
2,000
Carriage Inwards
4,000
Bad debts
6,000
Sales returns
3,000
Input IGST
8,000
Input CGST
3,000
Input SGST
3,000
8,13,000
8,13,000
Adjustments:
(i) Stock on 31 March 2020 was ` 96,000.
(ii) Goods costing ` 6,000 plus IGST @12% were destroyed by fire and the Insurance company accepted a
claim for ` 3,600.
(iii) ` 1,600 paid as rent of the office was debited to Landlord account and was included in the list of Debtors.
(iv) Write off further bad debts ` 4,000; maintain ` 3,220 as provision for bad debts on debtors.
(v) One month’s salary was outstanding.
Solution:
Trading And Profit and Loss Account
for the year ended 31 March, 2020
Dr.
Cr.
`
Particulars
Opening Stock
Purchases
70,000
Sales
3,00,000
Less: Returns
Less: Loss by fire
6,000
Closing Stock
Less: Returns
5,000
Carriage Inwards
5,00,000
3,000
4,97,000
96,000
2,89,000
4,000
Wages
20,000
Gross Profit c/d
2,10,000
5,93,000
Salaries
`
Particulars
11,000
Add: Outstanding
1,000
Rent
3,000
Add: Debited to Landlord
1,600
Discount
Gross Profit b/d
12,000
6,000
Add: Further bad debts
4,000
10,000
Discount
Commission
4,600
2,000
Bad debts
5,93,000
2,10,000
12,000
8,000
Final Accounts of Non-Corporate Entities
8.91
Add: Net provision for Bad debts
3,220
13,220
Depreciation on:
Plant & Machinery
5,000
Buildings
8,000
Loss by fire
3,120
Net Profit transferred to Capital A/c
1,82,060
2,30,000
2,30,000
Balance Sheet As On 31 March, 2020
`
Liabilities
Bills Payable
16,000
Bank Overdraft
9,000
Creditors
45,000
Outstanding Expenses:
Cash
5,000
Bills Receivable
30,000
Debtors
80,000
Less: Rent included
Salary
1,000
Wages
4,000
Capital
`
Assets
1,600
78,400
5,000
Less: Bad debts
4,000
2,00,000
Less: Draw.ings
74,400
40,000
Less: Provision for B.D.
1,60,000
Less: Income tax
Insurance Company
2,000
1,58,000
Add: Net Profit
1,82,060
3,220
3,40,060
Output CGST (Payable)
360
Output SGST (Payable)
360
71,180
3,600
Stock
96,000
Plant & Machinery
50,000
Buildings
1,60,000
4,15,780
4,15,780
WORKING NOTES:
Journal entries for goods destroyed by fire:
(a) Loss by fire A/c
Dr.
6,720
To Purchases A/c
6,000
To Input IGST A/c
(b) Insurance company A/c
Profit & Loss (Loss) A/c
720
Dr.
3,600
Dr.
3,120
To Loss by fire A/c
6,720
Statement Showing Adjustment of GST
Particulars
`
IGST
`
CGST
`
SGST
Output GST (Tax Liability)
6,000
4,000
4,000
(7,280)
(3,000)
(3,000)
(1,280)
1,000
1,000
1,280
(640)
(640)
—
360
360
Input tax credit [IGST (8000 – 720)]
Surplus of IGST can be set-off against output CGST and output SGST
(assumed equally)
Output CGST/SGST to be shown as liability
8.92
Financial Accounting: Concepts and Applications
Illustration 25
From the following particulars presented by Virat, prepare a Trading Account, Profit & Loss Account for the
year ended 31 March, 2020 and Balance Sheet as on that date:
`
Debit Balance
Plant & Machinery
1,00,000
Drawings
36,000
Purchases
1,20,000
Sales (Net)
4,00,000
Capital
1,00,000
Creditors
40,000
20,000
Sundry Debtors
80,000
Bank Overdraft
Wages
20,000
Provision for Bad debts
Carriage
6,000
Salaries
14,000
Rent
12,000
Repairs
`
Credit Balances
4,000
Cash credit
20,000
Bills Payable
16,000
6,000
Insurance
10,000
Opening Stock
24,000
Land & Buildings
80,000
Furniture
20,000
Discount
40,000
Suspense A/c
32,000
6,00,000
6,00,000
Adjustment:
(i) Closing Stock ` 60,000.
(ii) Purchases include purchase of materials used for the construction of building ` 10,000.
(iii) Sales include sale of furniture at a selling price of ` 2,000 (book value ` 4,000).
(iv) Purchased a plant for ` 10,000, wrongly debited to purchase Account.
(v) A sale of goods to a customer not debited to customers account ` 32,000.
(vi) Stock destroyed by fire amounted ` 20,000. Insurance Company paid only ` 16,000.
(vii) Wages include ` 6,000 incurred for the erection of a machinery.
(viii) The proprietor Mr. S. Tendulkar took goods for his own use from the business amounted to ` 2,000.
(ix) Rent included ` 2,000 paid for Mrs. S. Tendulkar’s residential portion.
(x) Purchase of stationery for ` 200 was debited to repairs Account.
(xi) A customer’s cheque returned dishonoured wrongly debited to Discount Account ` 2,000.
Solution:
Dr.
Trading And Profit and Loss Account of Virat
for the year ended 31 March, 2020
`
Particulars
Opening Stock
Purchases
Less: Building
24,000
1,20,000
10,000
1,10,000
Cr.
`
Particulars
Sales
Less: Furniture
Closing Stock
4,00,000
2,000
3,98,000
60,000
Final Accounts of Non-Corporate Entities
Less: Drawings
8.93
2,000
Profit and Loss Account
1,08,000
Less: Plant & Machinery
10,000
Wages
20,000
Less: Plant & Machinery
6,000
Carriage
4,000
(Loss on Stock Destroyed by fire)
98,000
14,000
6,000
Gross profit c/d
3,20,000
4,62,000
Salaries
14,000
Rent
12,000
Less: Drawings
2,000
Repairs
6,000
Less: Stationery
200
Insurance
4,62,000
Gross Profit b/d
3,20,000
Provision for bad debts
4,000
10,000
5,800
10,000
Discount
40,000
Less: Cheque Dishonoured
2,000
Loss on sale of furniture
38,000
2,000
Stationery
200
Trading Account (Loss of stock by fire)
4,000
Net Profit transferred to Capital A/c
2,40,000
3,24,000
3,24,000
Balance Sheet of Mr. S. Tendulkar As On 31 March, 2020
`
Liabilities
Capital
1,00,000
Plant & Machinery
Add: Net Profit
2,40,000
Add: Wages
3,40,000
Less: Drawings
36,000
Purchase
2,000
Rent
2,000
40,000
`
Assests
1,00,000
6,000
1,06,000
3,00,000
Add: Additions
10,000
Land & Building
80,000
Add: Additions
10,000
20,000
Creditors
40,000
Furniture
Bank Overdraft
20,000
Less: Sale of furniture
Cash Credit
20,000
Stock
Bills Payable
16,000
Sundry Debtors
Add: Cheque Dishonoured
4,000
1,16,000
90,000
16,000
60,000
80,000
2,000
82,000
Add: Suspense
32,000
Suspense Account
32,000
Less: Debtors
32,000
3,96,000
Illustration 26 (Omitted Purchases and GST with inter state transaction)
The following is the Trial Balance of Mr. Lal as at 31st March 2020 :
1,14,000
Nil
3,96,000
8.94
Financial Accounting: Concepts and Applications
Particulars
Lal’s Capital
Opening Stock
Purchases and Sales
Returns
Freight and Carriage
Dr. Amount
Cr. Amount
`
`
—
86,690
46,800
—
3,21,700
3,89,600
8,600
5,800
18,600
—
Rent and Taxes
5,700
—
Salaries and wages
9,300
—
24,000
14,800
—
20,000
Sundry Debtors and Creditors
Bank Loan @ 6% p.a.
Bank Interest on Loan
Printing and Advertising
Miscellaneous Income
900
—
14,600
—
—
250
Cash at Bank
8.000
—
Discount
1.800
3,190
Furniture and Fittings
5,000
—
11,450
—
Insurance
1,300
—
Postage and Telegrams
2330
—
General Expenses
Cash in hand
380
—
Travelling Expenses
870
—
40,000
—
Drawings
Output IGST
5,000
Output CGST
2,000
Output SGST
2,000
Input IGST
3,800
Input CGST
2,100
Input SGST
2,100
5,29,330
5,29,330
The following adjustments should be made :
(i) Included amongst the Debtors is ` 3,000 due from Anand and included among the creditors ` 1,000
due to him.
(ii) Provision for Bad and Doubtful Debts to be created at 5% and Reserve for Discount 2% on Sundry
Debtors.
(iii) Depreciate Furniture and Fittings by 10%.
(iv) Personal Purchases amounting to ` 600 had been included in the Purchases Day Book. These goods
were purchased from supplier who’s business was situated outside the state of Mr. Lal. Therefore IGST
was applicable @ 9%
(v) Interest on Bank Loan shall be provided for the whole year.
(vi) One quarter of the amount of Printing and Advertising is to be carried forward to next year.
(vii) Credit purchase invoice amounting to ` 400 had been omitted from the books these goods involve 4%
CGST and 4% SGST.
(viii) Stock on 31st March, 2020 was ` 78,600.
Prepare Trading and Profit and Loss Account for the year ended 31st March, 2020 and Balance Sheet
as on that date.
[B.Com. (Hons.) Sem. I, 2014 Delhi, Modified]
Final Accounts of Non-Corporate Entities
8.95
Solution:
Trading And Profit and Loss Account of Mr. Lal
For The Year Ended 31 March, 2020
Dr.
`
Particulars
Opening Stock
Purchases
46,800
3,21,700
Less: Returns
`
Particulars
Sales
Returns
5,800
Cr.
Stock-at the end
3,89,600
8,600
3,81,000
(8)
78,600
3,15,900
Less: Drawings(4)
600
Add: Omitted
3,15,300
Invoice(7)
400
3,15,700
Freight and Carriage
18,600
Gross Profit
78,500
4,59,600
4,59,600
Rent and Taxes
5,700
Gross Profit
Salaries and Wages
9,300
Miscellaneous Income
Interest on Bank Loan
900
Add: Outstanding (5)
300
Printing and Advertising:
78,500
250
Discount
3,190
1,200
14,600
Less: Prepaid
3,650
Discount
10,950
1,800
General Expenses
11,450
Insurance
1,300
Postage and Telegrams
2,330
Travelling Expenses
870
Depreciation on furniture and fittings (3)
500
Provision for Bad Debts(2)
1,150
Provision for Discount(2)
437
Net profit transferred and to Capital Account
34,953
81,940
81,940
Balance Sheet As on 31 March 2020
`
Liabilities
Capital
86,690
Less: Drawings
40,000
Furniture and fittings
(10% of ` 5,000)
46,690
Sundry Debtors
Less: Depreciation
Less: Personal Purchases
654
Common Debt
46,036
Add: Net Profits
Sundry Creditiors
Less: Common Debts
Less: Provision for Bad Debts
80,989
(5% on ` 23,000)
14,800
500
4,500
24,000
1,000
1,150
21,850
1,000
432
5,000
23,000
34,953
Less: Provision for Discount
437
21,413
(2% on ` 21,850)
13,800
Add: Omitted Invoice
`
Assets
14,232
Stock in hand (8)
78,600
8.96
Financial Accounting: Concepts and Applications
6% Bank Loan
20,000
Interest outstanding on bank loan
300
Output IGST Payable
1,022
Prepaid printing and
Advertising (6)
3650
Cash in hand
380
Cost at Bank
8,000
1,16,543
1,16,543
Note: Numbers in brackets indicate the respective numbers of adjustments in the question.
WORKING NOTES:
Journal entries:
(i) Drawings A/c
Dr.
654
To Purchases A/c
600
To Input IGST A/c
54
(ii) Purchases A/c
Dr.
400
Input CGST A/c
Dr.
16
Input SGST A/c
Dr.
16
To Creditors A/c
432
Statement Showing Adjustment of GST
Particulars
Output GST (Tax Liability)
(A)
Input GST (Gross Tax Credit)
IGST
CGST
SGST
5,000
2,000
2,000
3,800
2,100
2,100
(54)
16
16
3,746
2,116
2,116
(1,254)
116
116
116
(116)
—
116
—
(116)
1,022
—
—
Adjustments on account of Drawings and omitted purchases
Net Input GST (Net input tax credit)
Balance
(B – A)
Surplus of CGST and SGST to be set-off against IGST (section 49 of GST Act 2017)
Output IGST Payable
Illustration 27
From the following particulars, prepare the Trading and Profit & Loss Account for the year ended 31st December,
2019 and the Balance Sheet as on that date :
Particulars
`
Particulars
`
Building
5,00,000
Loans (1-1-2019)
3,00,000
Machinery
2,20,000
Captial
5,20,000
Furniture
1,00,000
Creditors
4,00,000
Bank
90,000
Purchase Returns
1,00,000
Cash
10,000
Sales
Debtors
5,00,000
Provident Fund Deducted
Opening Stock
1,20,000
from Salaries
Purchases
Sales Return
Rent
25,00,000
1,20,000
60,000
Establishment
1,60,000
Interest (10%)
20,000
Electricity
10,000
Phone
10,000
32,20,000
10,000
Final Accounts of Non-Corporate Entities
8.97
Commission
60,000
Insurance Premium
10,000
Bad debts
20,000
Bills Receivable
40,000
45,50,000
45,50,000
Adjustments:
Provide depreciation on Building @ 5%, Machinery @ 15% and Furniture @ 10%. Stock was not taken
on 31st December, 2019 but only on 7/1/2020. The transactions from 1/1/2020 to 7/1/2020 are : Sales
` 2,50,000, Purchase ` 1,50,000. Stock on 7/1/2020 ` 1,80,000 and rate of Gross Profit being 20%. During
the year machinery of the value of ` 1,00,000 was destroyed by the fire and the insurance claim was
settled at ` 80,000 and credited to Machinery A/C. Also provide Employer's share of P.F. ` 10,000, Provision
for Bad debts 5%, Commission of the Manager @ 10% on net profit after providing such commission.
[B.Com. (Hons.) Sem. I, 2016 Delhi, Modified]
Solution:
Trading And Profit and Loss Account
for the Year ending 31 December 2019
Dr.
`
Particulars
Opening Stock
Purchases
Less: Returns
1,20,000
25,00,000
1,00,000
Gross Profit c/d
Sales
60,000
1,60,000
Interest
20,000
Add: Due
10,000
1,20,000
31,00,000
Stock at the end
(See Working Note)
2,30,000
33,30,000
Gross Profit b/d
Insurance Company
8,10,000
80,000
30,000
Electricity
10,000
Phone
10,000
Commission
60,000
Insurance Premium
10,000
Bad debts
20,000
Provision for Bad Debts
25,000
Loss by fire
32,20,000
24,00,000
33,30,000
Establishment
`
Particulars
Less: Returns
8,10,000
Rent
Cr.
1,00,000
Depreciation on:
Building
25,000
Machinery
30,000
Furniture
10,000
65,000
Employer contribution to Provident Fund
10,000
Manager Commission
30,000
Net Profit transferred to Capital Account
3,00,000
8,90,000
8,90,000
8.98
Financial Accounting: Concepts and Applications
Balance Sheet
As At 31 December 2019
`
Liabilities
Capital
5,20,000
Building
Add: Net Profit
3,00,000
Less: Depreciation
8,20,000
Machinery
3,00,000
Less: Depreciation
10% Loan
Outstanding Interest
10,000
Less: Depreciation
Provident Fund:
Debtors
10,000
Add: Outstanding
10,000
Outstanding Commission
Creditors
500,000
25,000
4,75,000
2,00,000
30,000
Furniture
Contribution to
Balance given
`
Assets
1,70,000
1,00,000
10,000
90,000
5,00,000
Less: Provision
25,000
4,75,000
20,000
Bills Receivable
40,000
30,000
Stock
2,30,000
4,00,000
Bank
90,000
Cash in Hand
10,000
15,80,000
15,80,000
WORKING NOTES
(i)
Value of Closing Stock As on 31 December 2019
`
Stock-taking on 7-1-2020
1,80,000
Less: Purchase (From 1-1-20 to 7-1-20)
1,50,000
30,000
Add: Cost of Goods sold during 1-1-20 to 7-1-20
Sale
2,50,000
Less: Profit Margin
50,000
2,00,000
2,30,000
(ii)
Provision for Doubtful Debts
`
Debtors As on 31-12-2019
5,00,000
Provision at 5% on ` 5,00,000
25,000
(iii) Depreciation on Machinery
`
Machine
2,20,000
Less: Loss by fire
1,00,000
1,20,000
Add: Insurance claim
80,000
2,00,000
Depreciation on ` 2,00,000 at 15%
30,000
The amount of insurance received should have been credited to insurance claim but wrongly credited to machinery account.
The rectification entry should be:
Machinery Account
To Insurance Co.
Dr.
80,000
80,000
Final Accounts of Non-Corporate Entities
8.99
(iv) Manager’s Commission
10% Net Commission after charging
Commission means
3,30,000 
10
of Net Profit
110
10
 30,000
110
(v) Interest on 10% Loan
`
10% Loan
3,00,000
Interest at 10%
30,000
Less: Given in Trial Balance
20,000
Accured /oustanding
10,000
Illustration 28
From the following Trial Balance of a trader on March 31st, 2020, prepare Trading and Profit and Loss Account
for the year ending 31st March, 2020 and Balance Sheet as at that date after giving effect to the undermentioned
adjustments:
Debit Balances
Amount
Credit Balances
`
Drawings
6,000
Amount
`
Bank Overdraft
25,000
Wages
15,500
Interest on Investment
5,800
Stock (1.4.2019)
12,800
Bills Payable
4,600
Loan to X
4,000
Interest on loan to X
Rent
5,000
Capital
General Expenses
1,480
Reserve for bad and
Investments
Purchases
Freight Charges
Goodwill
60,000
1,60,000
2,100
6,200
Rate and Taxes
1,800
Sales Return
2,100
3,700
Postage and Telegram
3,800
Land and Buildings
25,000
Plant and Machinery
10,000
Sundry Debtors
16,500
Bad Debts
Total
Sundry Creditors
250
2,30,000
12,590
900
Cash and Bank Balance
Packing Charges
Sales
1,00,000
40,000
Bills Receivable
Insurance
doubtful debts
320
400
1,280
3,78,560
3,78,560
8.100
Financial Accounting: Concepts and Applications
Adjustments:
(a) Closing Stock as on 31.3.2020 ` 16,000.
(b) Goods worth ` 700 were sent on 25.3.2020 as “Sale on Approval basis” for ` 800 and the approval
was not received before the end of the month.
(c) 20% of the Goodwill is to be written off.
(d) Further bad debts were estimated at ` 350. Increase reserve for bad debts to ` 1,500.
(e) Depreciate Land and Building by 3% and Plant and Machinery by 10%.
(f) Goods worth ` 800 were distributed as free samples.
[B.Com. (Hons.) Sem. I, 2017 Delhi, Modified]
Solution:
Dr.
Trading and Profit and Loss Account
For The Year Ending 31st March 2020
`
Particulars
Opening Stock
12,800
Less: Free Samples
Sales
1,60,000
800
Wages
1,59,200
2,100
Gross Profit c/d
Less: Goods sent for Approval
Stock at the end
Add: Returns from
Approval (cost)
2,100
800
2,27,100
16,000
700
16,700
54,200
2,43,800
2,43,800
Rent
5,000
Gross Profit b/d
General Expenses
1,480
Interest on Investment
Rates and Taxes
1,800
Interest on Loan to X
Insurance
54,200
5,800
320
900
Postage
3,800
Packing Charges
400
Bad Debts
1,280
Additional
350
Reserve for Bad Debts (1500 – 250)
2,30,000
2,27,900
15,500
Freight Charges
`
Particulars
Less: Sales Returns
Purchases
Cr.
1,630
1,250
Depreciation :
Land and Building
750
Plant and Machinery
1,000
Goodwill
8,000
Free Samples (costs)
Net Profit
800
33,510
60,320
60,320
Final Accounts of Non-Corporate Entities
8.101
Balance Sheet As At 31st March 2020
`
Liabilities
Capital
1,00,000
Add : Net Profit
33,510
1,33,510
Less : Drawings
6,000
1,27,510
Bank Overdraft
25,000
Bills Payable
4,600
Creditors
12,590
`
Assets
Land and Building
(25,000 – 750)
24,250
Plant and Machinery
(10,000 – 1,000)
9,000
Goodwill (40,000 – 8,000)
32,000
Stock at the end
(16,000 + 700)
16,700
Investment
60,000
Loan to ‘X’
4,000
Bills Receivables
6,200
Debtors
Less: Sale on Approval
16,500
800
15,700
Less: New Bad Debts
350
15,350
Less: Reserve for Doubtful
Debts
1,500
13,850
Cash in hand and at Bank
1,69,700
3,700
1,69,700
Illustration 29
From the following Trial Balance of Geeta, you are required to prepare:
(i) Trading and Profit and Loss Account for the year ended on 31st March, 2017, and
(ii) Balance Sheet as on that date.
`
Debit Balances
Stock on 1-4-2016
Plant and Machinery
70,000
3,50,000
`
Credit Balances
Capital
3,00,000
Wages Outstanding
4,000
Rent
30,000
Sales
Depreciation on Plant and Machinery
15,000
Creditors
45,000
Wages
20,000
Bills Payable
16,000
Salary for 11 months
11,000
Discount
12,000
27,000
Commission
Cash
Purchases
Debtors
5,00,000
8,000
2,70,000
80,000
Discount
2,000
Carriage Inwards
4,000
Bad debts
6,000
8,85,000
8,85,000
Adjustments :
(i) Stock on 31st March, 2017 was ` 96,000.
(ii) Stock destroyed by fire was ` 6,000 and the Insurance Company accepted a claim for ` 3,600.
8.102
Financial Accounting: Concepts and Applications
(iii) ` 1,600 paid as rent of the office was debited to Landlord account (included in Debtors).
(iv) Write off further bad debts ` 4,000.
Sales include sales on return basis. Approval for sale of ` 2,500 has not been received till 31-3-2017.
The rate of gross profit on this sale was 25% on cost.
[B.Com. (Hons.) 2019, Delhi]
Solution:
Books of Geeta
Trading and Profit & Loss Account
for the year ended 31st March, 2017
Dr.
`
Particulars
Cr.
`
Particulars
Opening Stock
70,000
Sales
5,00,00
Wages
20,000
Sales on approval
(2,500)
Closing Stock
96,000
Purchases
2,70,000
Loss by Fire
(6,000)
Carriage Inwards
2,64,000
Add: Stock on approval (at cost)
2,000
4,97,500
98,000
4,000
Gross Profit
2,37,500
5,95,500
Rent
30,000
Add: Adjusted to landlord
1,600
Depreciation on Plant & Machinery
Salary
5,95,500
Gross Profit
2,37,500
31,600
Discount Received
15,000
Commission
12,000
8,000
11,000
Add: Outstanding
1,000
Discount allowed
12,000
2,000
Bad Debts
6,000
Add: Further Bad Debts
4,000
Loss by Fire (Net)
10,000
2,400
Net Profit
1,84,500
2,57,500
2,57,500
Balance Sheet
as on 31st March, 2017
`
Liabilities
Capital
3,00,000
Add: Net Profit
1,84,500
`
Assets
Plant and Machinery
4,84,500
Debtors
3,50,000
80,000
Creditors
45,000
Less: Sales on Approval
2,500
Bills Payable
16,000
Less: Office Rent
1,600
4,000
Wages Outstanding
4,000
Less: Further Bad Debts
Salary Outstanding
1,000
Cash
27,000
Insurance Claim (Due)
Closing Stock
Add: Stock with Customers
5,50,500
71,900
3,600
96,000
2,000
98,000
5,50,500
Final Accounts of Non-Corporate Entities
8.103
Assignments
THEORY BASE ASSIGNMENTS
1.
2.
3.
4.
5.
6.
7.
What do you mean by final accounts ? What are its constituents ?
What are operating and non-operating profits.
[B.Com. (Hons.) Delhi 1988, 2005]
What are operating profits ? How will you calculate such profits ?
[B.Com. (Hons.) Delhi 1989]
Distinguish between :
(i) Marshalling in order of liquidity and Marshalling in order of permanence.
(ii) Profit and Loss Account and Profit and Loss Appropriation Account. [B.Com. (Hons.) Delhi 1989]
Write a short note on uses and limitations of financial statements.
[B.Com. (Hons.) Delhi 1991]
What are the circumstances when closing stock is given : (a) inside the trial balance and (b) outside the
trial balance ? Describe the treatment in final accounts under both the circumstances.
[B.Com. (Hons.) 1990]
What is a contingent liability? Give three examples of contingent liabilities.[B.Com. (Hons.) 2010, 2015]
PRACTICAL ASSIGNMENTS
1. Shri Patit Bansali submitted to you the following Trial Balance, which he has not been able to agree.
Rewrite the Trial Balance and prepare Trading and Profit and Loss Account for the year ended 31.12.2019
and a Balance Sheet as on that date after giving effect to the undermentioned adjustments :
Particulars
Captial
Opening Stock
Closing Stock
Drawings
Return inward
Carriage Inward
Dr.
`
Cr.
`
—
16,000
17,500
—
—
18,790
3,305
—
—
550
1,240
—
Deposit with X
—
1,400
Return outward
840
—
—
725
800
—
150
—
13,000
—
Carriage outward
Rent paid
Rent outstanding
Purchases
Sundry Debtors
Sundry Creditors
Furniture
Sales
Wages
5,000
—
—
4,000
1,500
—
—
29,000
850
—
Cash
1,370
—
Goodwill
1,800
—
Advertisement
950
—
48,305
70,465
8.104
Financial Accounting: Concepts and Applications
Adjustments :
(i) Write off ` 600 as Bad Debts and make Reserve for Bad Debts on Sundry Debtors at
5%.
(ii) Stock valued at ` 2,000 was destroyed by fire on 25 December, 2019, but Insurance Company admitted
a claim for ` 1,500 only and paid the sum in January 2020.
(iii) Depreciate Furniture by 10%.
[C.A. (Foundation) May 2001]
2. From the following Trial Balance of Shishir, you are required to prepare Final Accounts for the year
ended 31 March, 2020, after making the necessary adjustments :
Particulars
Dr.
`
Cr.
`
Capital and Drawings Account
10,000
2,00,000
Freehold Property
60,000
—
1,00,000
—
14,000
—
Printing and Stationery
2,000
—
Furniture and Fixtures
4,000
—
Discount
1,500
—
—
5,700
25,000
40,000
Insurance
3,000
—
Bad debts
600
—
Office Rent
2,600
—
Loose Tools
2,000
—
—
4,800
40,000
—
—
1,000
Cash at Bank
25,000
—
Cash in Hand
10,500
—
Stock–31 March 2020
74,000
—
Trading Profits
—
1,17,200
Outstanding Wages–31 March 2020
—
500
Insurance Claim Received For Loss of Goods
—
5,000
3,74,200
3,74,200
Plant and Machinery
Salaries
Bills Payable
Debtors and Creditors
Provision for Doubtful Debts
Loan to Sudhir at 10% on 1 October 2019
Interest on Loan to Sudhir
Adjustments :
(i) Outstanding salaries ` 700.
(ii) Prepaid Insurance ` 400.
(iii) Value of loose tools on 31 March 2020–` 1,500.
(iv) A new machinery was purchased on credit and installed on 28 February 2020 costing ` 15,000.
No entry for the same has yet been made in the books.
(v) Depreciate (on closing balance)–plant and machinery at 10 per cent, furniture and fixtures at 5 per
cent.
(vi) The provision for doubtful debts is to be maintained at 5 per cent.
Final Accounts of Non-Corporate Entities
8.105
3. Following is the Trial Balance as at 31.12.20 :
Particulars
Dr.
`
Cr.
`
Opening Stock
30,000
—
Drawings and Capital
10,000
1,00,000
1,50,000
2,75,000
6,000
—
20,000
—
Import Duty
5,000
—
Carriage Inwards
4,000
—
Insurance
5,000
—
Advertisement
10,000
—
Furniture
40,000
—
Bad Debts
5,000
—
Book Debts
50,000
—
Creditors
—
30,000
Reserve for Bad Debts
—
2,000
25,000
—
5,000
—
—
8,000
Depreciation of Furniture
5,000
—
Depreciation of Loose Tools
5,000
—
30,000
—
—
10,000
70,000
—
Purchases and Sales (Adjusted)
Wages
Salaries
Loose Tools
Rent
Discount Received
Closing Stock
Outstanding Import Duty
Premises
Commission Received
10,000
Cash Balance
20,000
—
Cash at Bank
5,000
65,000
5,00,000
5,00,000
Adjustments :
(i) A customer of ` 5,000 is also a creditor of ` 10,000 and create R.B.D. @ 5% p.a. after writing off
further bad debt of ` 5,000.
(ii) Depreciate Furniture and Loose Tools @ 25% and by ` 10,000 respectively and appreciate Premises
by ` 10,000.
(iii) Annual Payment are–Salaries ` 25,000 and Rent ` 10,000.
(iv) Unexpired Import Duty and Insurance are ` 1,000 each.
(v) Sale of Furniture (B.V. NIL) for ` 3,000 to be accounted for as omitted in the books.
(vi) Withdrawn from Bank by the owner for domestic use of ` 15,000.
Prepare the Final Accounts applying Marshalling of Balance Sheet as at 31.12.20.
[B.Com. (Punjab)]
4. A trader maintained Provision for Doubtful Debts @ 5%, Provision for Discount @ 2% on Debtors and
Reserve for Discount @ 2% on Creditors which on 1 January 2018 stood at ` 1,500, ` 500 and ` 400
respectively. His balances on 31.12.18 and on 31.12.19 were :
8.106
Financial Accounting: Concepts and Applications
31.12.18
Bad debts written off
Discount allowed
Sundry debtors
Discount received
Sundry Creditors
31.12.19
`
`
1,800
300
600
200
20,000
6,000
300
50
15,000
10,000
Show necessary accounts in the Ledger.
[I.C.W.A.]
5. From the following particulars prepare (1) Reserve for Doubtful Debts Account, (2) Reserve for Discount
on Debtors, and (3) Reserve for Discount on Creditors for both the years :
Balances as on 1 January 2018 :
Reserve for doubtful debts ` 1,000; Reserve for discount on debtors ` 500 and Reserve for discount on
creditors ` 400.
Total debtors as on 31 December 2018 were ` 25,000 after writing off bad debts ` 600 and allowing
discount ` 200.
Total debtors as on 31 December 2019 were ` 20,000 after writing off bad debts ` 600 and allowing
discount ` 50.
Total creditors as on 31 December 2018 and 2019 were ` 15,000 and ` 10,000 respectively.
Discounts received during the years were ` 300 and ` 50 respectively.
Provide 5% as Reserve for doubtful debts, 2-1/2% as Reserve for discount on debtors and 2% as Reserve
for discount on creditors
6. The following is the Trial Balance of M/s Pandit Brothers as at their financial year end viz., 31 March
2020 :
Particulars
Capitals :
Dr. (`)
Cr. (`)
—
—
H. Pandit
—
1,00,000
K. Pandit
—
1,00,000
—
—
16,000
—
Drawings :
H. Pandit
16,000
—
Buildings
K.Pandit
80,000
—
Furniture and Fittings
20,000
—
Purchases
2,00,000
—
—
3,00,000
Stock (1.4.19)
50,000
—
Wages and Salaries
44,000
—
Rates and Taxes
1,600
—
Office Expenses
60,000
—
Sundry Debtors
25,000
—
Sales
Sundry Creditors
Cash in hand
Bank Overdraft
Freight inward
—
12,000
400
—
—
29,000
28,000
—
5,41,000
5,41,000
The following further information relating to the firm is made available :
(i) Stock at the end of the year on 31 March, 2020, was ` 1,14,500 at cost.
(ii) There was a fire in the premises on 26 February, 2020, which damaged a portion of stock and the
loss was estimated at ` 17,500.
Final Accounts of Non-Corporate Entities
8.107
(iii) H. Pandit is in charge of purchases of stock items and is to be paid 2½% commission on such
purchases.
(iv) A steel table purchased on 1 February, 2020 for ` 3,000 was debited to purchases account.
(v) K. Pandit who looks after all aspects other than purchases is entitled to a commission of 5% on
net profits after charging such commission and the commission on purchases due to H. Pandit.
(vi) Depreciation is to be charged at 2-1/2% p.a. on value of building and at 10% p.a. on furniture
and fittings.
(vii) Profits/losses are to be shared equally by the partners
Prepare Final Accounts for the financial year 2020. Calculations are to be made to the nearest rupee.
7. Following is the trial balance of Ms. Viva as at 31.3.2020
Particulars
Dr.
`
Cr.
`
Drawings and capital
10,000
1,50,000
Purchase ledgers and sales ledgers
70,000
40,000
10% Investments and 15% bank loan
1,00,000
50,000
Purchases and sales
2,00,000
5,00,000
40,000
—
Opening stock
Outstanding commission
—
2,000
5,000
—
Wages
17,000
—
Salaries
30,000
—
Conveyance
10,000
—
Import duty
5,000
—
Carriage inwards
3,000
—
Pre-paid salary
Carriage outwards
7,000
—
Premises
60,000
—
Goodwill
20,000
—
Furniture
30,000
Outstanding advertisement
—
8,000
Insurance
3,000
—
Stationery
10,000
—
Preliminary expense
10,000
—
—
20,000
1,00,000
—
B/R and B/P
60,000
30,000
Trade Expenses
10,000
—
8,00,000
8,00,000
Commission Received
Machinery
Adjustments :
(a) Provide interest on Investments and on Loan for full year.
(b) Bank Loan was taken on hypothecation of stock in which bank maintained a margin of 33-1/3%.
(c) Closing Stock includes an amount of Sales Return of ` 10,000 and it is to be accounted for.
(d) Sales include an amount of approval sale of ` 15,000 and it remained unsold till date; cost price
being ` 10,000.
(e) Sales include sale proceeds of a furniture on 1.4.2019 for ` 10,000 (B.V. ` 15,000) and purchase
includes purchase of a Machinery of ` 40,000 on 1.10.2019 on credit.
(f) Depreciate Furniture and Machinery by 20% and 10% and write off goodwill by ` 5,000.
(g) A customer for ` 5,000 included in Sales Ledgers, returned 50% of the goods which were sold
20% profit on sales whereas credit sales to another customer of ` 18,000 was made. Both these
are to be effected in the books.
8.108
Financial Accounting: Concepts and Applications
(h) There was bad debt of ` 5,000 and create R.B.D. and R.D.D. @ 5% and 2% on Debtors.
(i) A Bills Receivable of ` 30,000 was relined by a cheque at a rebate of ` 1,000 and a Bills Payable
was discharged on due date for ` 10,000 by a cheque. None of them was given effect. Prepare
Trading Account; Profit and Loss Acccount and Balance Sheet as at 31.3.20.
Hint : Since Loan Contains 1/3rd as margin, stock is 2/3. Hence, stock [50,000 × (3/2)] or
` [(75,000 + 10,000 + 2,500) – (2,500 × 1/5)] or ` 87,000.
8. Mr. Himansu carries on the business as a Retailer. He extracted the following balances from his books
of accounts as on 31 December 2019 :
Particulars
Capital Account
Dr.
Cr.
`
`
—
7,50,000
Drawings
18,000
—
Buildings
5,00,000
—
Furniture and Fixtures
Opening Stock
Sales
Purchases
20,000
—
2,25,000
—
—
18,00,000
13,37,000
—
—
2,00,000
Sundry Debtors
5,00,000
—
Office Expenses
24,000
—
Salaries
Sundry Creditors
18,000
—
Rent
6,000
—
Travelling & Conveyance
4,000
—
Insurance
Motor Car Expenses
Postage & Telephones
Electricity Charges
1,000
—
15,000
—
3,600
—
2,400
—
50,000
—
Cash in Hand
1,000
—
Cash at Bank
10,000
—
—
25,000
40,000
—
Fixed Deposit with Banks @ 10% interest
Loan from HC @ 12% interest
Motor Car
Printing and Stationery
Provision for Bad and Doubtful Debts
5,000
—
—
5,000
27,80,000
27,80,000
You are required to prepare a Profit & Loss Account for the year ended 31 December 2019 and a Balance
Sheet as on that date after taking into consideration the following adjustments :
(i) Closing stock as on 31 December 2019 is valued at ` 64,800.
(ii) A customer returned goods on 31 December 2019 amounting to ` 4,000 which was not accounted
for but already included in the closing stock at selling price. The cost of the said goods was
` 3,200.
(iii) Annual Insurance Premium of ` 1,000 is valid upto 31 March 2020.
(iv) Provision for Bad and Doubtful Debts is to be kept at one per cent on Sundry Debtors.
(v) Interest on F.D. with Banks and payable on Loan from HC is to be provided.
(vi) Provide depreciation on Buildings at 2½%, furniture and fixtures @ 10% and Motor Car @ 20%.
(vii) Mr. Himansu has used goods for his personal use costing ` 2,000 for which adjustment is necessary.
Final Accounts of Non-Corporate Entities
8.109
9. From the following Trial Balance of Shri Goyal, prepare Trading and Profit and Loss Account for the
year ending 31 December 2019 and Balance Sheet on that date after taking into consideration the adjustments
given at the end of Trial Balance :
Trial Balance As On 31 December 2019
Particulars
Sales
Purchases (Adjusted)
Wages
Debit
Credit
`
`
—
3,70,000
3,49,600
—
10,450
—
—
34,250
National Insurance
150
—
Carriage Inwards
200
—
Carriage Outwards
250
—
Capital Account
Lighting
300
—
Rates and insurance (including premium of ` 150 p.a. paid upto 30 June 2020)
200
—
30,625
—
Stock at 31.12.2019
Cash in hand and Bank
875
—
—
300
15,000
—
50
—
Debtors and Creditors
3,000
10,000
Furniture
4,000
—
—
150
4,14,700
4,14,700
Discount earned
Plant and Machinery
Discount allowed
Dividends
Adjustments :
(i) National insurance also includes employee’s contribution of ` 75. Wages are shown ‘net’ after deducting
national insurance contribution borne by the employee.
(ii) Owing to the nature of the employment, some employees are housed in the building of the business.
The rented value of such portion is assessed at ` 250 p.a. The benefit to the employee’s is treated
as wages and rental as income for Shri Goyal.
(iii) Depreciate Plant and Machinery at 15% p.a. and Furniture at 10% p.a.
(iv) Goods worth ` 2,000 given by Shri Goyal to his son at cost.
(v) The manager is entitled to a commission of 20% of the net profits after charging his commission
(calculation may be made nearest to the multiple of a rupee).
10. (GST) Mr. Neel of Agra had prepared the following Trial Balance from his Ledger as on 31 March,
2020 :
Particulars
Stock as on 1 April, 2019
Purchases and Returns
Sales and Returns
Dr.
`
Cr.
`
5,00,000
31,00,000
45,000
55,000
39,50,000
Cash in hand
2,50,000
—
Cash at Bank
1,90,000
—
Trader’s Capital
—
22,59,200
Rates and Taxes
50,000
—
Drawings
45,000
—
Salaries
95,000
—
1,05,0000
—
90,000
—
Postage and Telegram
Insurance
8.110
Financial Accounting: Concepts and Applications
Salesman Commission
78,000
—
Output IGST
60,000
Output CGST
70,000
Output SGST
70,000
Printing and Stationery
95,500
—
Advertisement
1,70,000
—
Furniture and Fittings
5,50,000
—
Motor Car
48,000
—
Discounts
50,000
75,000
General Expenses
65,700
—
Carriage Inward
10,000
—
Carriage Outward
22,000
—
Wages
50,000
—
10,00,000
4,00,000
Sundry Debtors/Creditors
Input IGST
70,000
Input CGST
1,20,000
Input SGST
1,20,000
69,29,200
69,29,200
You are required to prepare Trading and Profit and Loss Account for the year ended on 31 March, 2020
and Balance Sheet as on that date after making the necessary adjustments.
You are provided with the following information :
(i)
Closing Stock as on 31 March, 2020 ` 1,45,000.
(ii) Neel had withdrawn goods worth ` 50,000 from Ram of Rohtak with IGST @12% during the
year.
(iii) Purchases include Purchase of furniture worth ` 1,00,000 plus 8% CGST and SGST each.
(iv) Debtors include ` 50,000 bad debts.
(v) Sales include goods worth ` 1,50,000 sent out to NN & Co. of Mumbai on approval and remained
unsold as on 31 March, 2020. The cost of the goods was ` 1,00,000. IGST of 12% was applicable
on these sales (Inter state transaction).
(vi) Provision for Bad debts is to be created ` 40,000 on Sundry Debtors.
(vii) Depreciate Furniture and Fittings by 10% and Motor Car by 20%.
(viii) The salesman is entitled to a commission of 10% on total sales.
11. The following is the Trial Balance of Shri Arihant as on 31 December, 2019.
Particulars
Capital
Drawings
Opening Stock
Purchases
Freight on Purchases
Wages
Sales
Salaries
Travelling Expenses
Miscellaneous Expenses
Printing and Stationery
Advertisement Expenses
Postage and Telegrams
Discounts
Debit
`
Credit
`
—
14,00,000
75,000
80,000
16,20,000
15,000
1,10,000
—
1,00,000
23,000
35,000
27,000
25,000
13,000
7,600
—
—
—
—
—
25,00,000
—
—
—
—
—
—
14,500
Final Accounts of Non-Corporate Entities
8.111
Bad Debts written off (after adjusting recovery of bad debts of ` 6,000 written off in 2017)
Building
Machinery
Furniture
Debtors
Provision for Doubtful Debts
Creditors
Investments (12% purchased on 1-10-19)
Bank Balance
14,000
10,00,000
75,000
40,000
1,50,000
—
—
—
—
—
—
—
19,000
1,60,000
6,00,000
—
83,900
—
40,93,500
40,93,500
Adjustments :
(i) Closing Stock ` 2,25,000.
(ii) Goods worth ` 5,000 were taken for personal use, but no entry was made in the books.
(iii) Machinery worth ` 35,000 purchased on 1/1/17 was wrongly written off against Profit and Loss
Account. This asset is to be brought into account on 1/1/19 taking depreciation at 10% per annum
on straight line basis upto 31/12/18.
(iv) Depreciate Building at 2½ % p.a., Machinery at 10% p.a. and Furniture at 10% p.a.
(v) Provision for Doubtful Debts should be 6% on Debtors.
(vi) The Manager is entitled to a commission of 5% of Net Profits after charging his commission.
Prepare Trading and Profit and Loss Account for the year ending 31 December, 2019 and a Balance
Sheet as at that date.
12. From the following trial balance and information, prepare Trading and Profit and Loss Account of Mr.
Rishabh for the year ended 31 March, 2020 and a Balance Sheet as on that date :
Particulars
Capital
Drawings
Land and Buildings
Plant and Machinery
Furniture
Sales
Returns Outward
Debtors
Loan from Gajanand on 1.7.19 @ 6% p.a.
Purchases
Returns Inward
Carriage
Sundry Expenses
Printing and Stationery
Insurance Expenses
Provision for Bad and Doubtful Debts
Provision for Discount on Debtors
Bad Debts
Profit of Textile Dept.
Stock of General Goods on 1.4.19
Salaries and Wages
Creditors
Trade Expenses
Stock of Textile Goods on 31.3.20
Cash at Bank
Cash in Hand
Dr.
`
Cr.
`
—
12,000
90,000
20,000
5,000
—
—
18,400
—
80,000
5,000
10,000
600
500
1,000
—
—
400
—
21,300
18,500
—
800
8,000
4,600
1,280
2,97,380
1,00,000
—
—
—
—
1,40,000
4,000
—
30,000
—
—
—
—
—
—
1,000
380
—
10,000
—
—
12,000
—
—
—
—
2,97,380
8.112
Financial Accounting: Concepts and Applications
Information :
(i) Stock of General goods on 31.3.20 valued at ` 27,300.
(ii) Fire occurred on 23 March, 2020 and ` 10,000 worth of general goods were destroyed. The Insurance
Company accepted claim for ` 6,000 only and paid the claim money on 10 April, 2020.
(iii) Bad Debts amounting to ` 400 are to be written off. Provision for Bad and Doubtful debts is to be
made at 5% and for discount at 2% on debtors. Make a provision of 2% on creditors for discount.
(iv) Received ` 6,000 worth of goods on 27 March, 2020 but the invoice of purchase was not recorded
in Purchases Book.
(v) Rishab took away goods worth ` 2,000 for personal use but no record was made thereof.
(vi) Charge depreciation at 2% on Land and Buildings, 20% on Plant and Machinery, and 5% on Furniture.
(vii) Insurance prepaid amounts to ` 200.
Preparation of Trading and Profit and Loss A/c and Balance Sheet
13. (GST) From the following balances and information, prepare Trading and Profit and Loss Account of
Mr. X of Agra for the year ended 31 March, 2020 and a Balance Sheet as on that date:
Particulars
Dr.
`
Cr.
`
X’s Capital Account
—
10,000
Plant and Machinery
3,600
—
400
—
Depreciation on Plant and Machinery
Repairs to Plant
520
—
Wages
5,400
—
Salaries
2,100
—
100
—
Income-tax of Mr. X
Cash in hand and at Bank
Land and Building
Depreciation on Building
Purchases
400
—
14,900
—
700
—
25,000
—
—
300
Sales
—
49,800
Bank Overdraft
—
760
Accrued Income
300
—
Purchases Return
Salaries Outstanding
—
400
3,000
—
Provision for Bad Debts
—
1,000
Bills Payable
—
1,600
200
—
Bills Receivable
Bad debts
Discount on Purchases
Debtors
Creditors
Opening Stock
—
708
7,000
—
—
6,252
7,400
—
Output IGST
Input IGST
700
500
71,520
71,520
Information :
(i) Stock on 31 March, 2020 was ` 6,000.
(ii) Write off further ` 600 for bad debt and maintain a provision for Bad Debts at 5% on Debtors.
Final Accounts of Non-Corporate Entities
8.113
(iii) Goods costing ` 1,000 were sent to customer in Nagpur for ` 1,200 plus IGST @ 10% on 30 March,
2020 on sale or return basis. This was recorded as actual sales.
(iv) ` 240 paid as rent of the office were debited to Landlord account and were included in the list of
debtors.
(v) General manager is to be given commission at 10% of net profit after charging the commission of
the works manager and his own.
(vi) Works manager is to be given commission at 12% of net profit before charging the commission of
General Manager and his own.
14. (GST) The following is the Trial Balance of Hari as at 31 December, 2019 :
Particulars
Hari’s Capital Account
Stock 1 January, 2016
Sales
Returns Inwards
Purchases
Dr.
`
Cr.
`
—
76,690
46,800
—
—
3,89,600
8,600
—
3,21,700
—
—
5,800
19,600
—
Rent & Taxes
4,700
—
Salaries & Wages
9,300
—
Returns Outwards
Carriage Inwards
Sundry Debtors
24,000
—
Sundry Creditors
—
14,800
Bank Loan @ 14% p.a.
—
20,000
Bank Interest
Printing and Stationery Expenses
Bank Balance
Discount Earned
1,100
—
14,400
—
8,000
—
—
3,440
Furniture & Fittings
5,000
—
Discount Allowed
1,800
—
General Expenses
11,450
—
Insurance
1,300
—
Postage & Telegram Expenses
2,330
—
Cash Balance
380
—
Travelling Expenses
870
—
30,000
—
Drawings
Output CGST
3,000
Output SGST
3,000
Input CGST
2,500
Input SGST
2,500
5,16,330
5,16,330
The following adjustments are to be made :
(i) Included amongst the Debtors is ` 3,000 due from Ram and included among the Creditors ` 1,000
due to him.
(ii) Provision for Bad and Doubtful Debts be created at 5% and for Discount @ 2% on Sundry Debtors.
(iii) Depreciation on Furniture & Fittings @ 10% shall be written off.
(iv) Personal purchases of Hari amounting to ` 600 plus 6% CGST and SGST both, had been recorded
in the Purchases Day Book.
(v) Interest on Bank Loan shall be provided for the whole year.
8.114
Financial Accounting: Concepts and Applications
(vi)
A quarter of the amount of Printing and Stationery Expenses is to be carried forward to the next
year.
(vii) Credit Purchase Invoice amounting to ` 400 had been omitted from the Books.
(viii) Stock on 31.12.2019 was ` 78,600.
Prepare (i) Trading & Profit and Loss Account for the year ended 31.12.2019 and (ii) Balance Sheet as
on 31 December, 2019.
ANSWERS GUIDE
1. Correct total of trial balance–` 49,990; Gross profit–` 17,490; Net Profit–` 13,545; Total of Balance
Sheet–` 30,390.
2. Net Profit–` 91,550; Balance Sheet Total–` 3,43,450.
3. Gross Profit–` 81,000; Net Profit–` 31,750 and Balance Sheet Total–` 2,31,750.
4. Debit Profit and Loss Account with ` 1,300 in 2018 for RDD and Credit Profit and Loss Account with
` 400 in 2019 for RDD. Debit Profit and Loss Account with ` 480 in 2018 and Credit Profit and Loss
Account with ` 66 in 2019 for Provision for discount on debtors.
5. For Reserve for Doubtful Debts : Profit and Loss Account is to be debited with ` 850 in 2018 and
` 350 in 2019; For Reserve for Discount to Debtors: Profit and Loss Account is to be debited with
` 293.75 in 2018 and credited with ` 68.75 in 2019. For Reserve for Discount on Creditors: Profit
and Loss Account is to be credited with ` 200 in 2018 and debited with ` 50 in 2019.
6. Gross Profit–` 1,08,075, Net Profit–` 23,738 Balance Sheet Total–` 2,38,850.
7. Gross Profit–3,42,500. Net Profit–` 2,50,170; Balance Sheet Toal–` 5,17,670.
8. Gross Profit–` 3,00,000; Net Profit–` 2,00,790, Balance Sheet Total ` 11,58,790.
9. Gross Profit–` 11,350; Net Profit–` 7,229; Balance Sheet Total–` 50,925; Manager’s Commission–
` 1,446 (i.e.
20
× 8,675).
120
10. Gross Profit–` 5,25,000; Net Loss–` 7,03,900; Balance Sheet Total–` 21,70,800.
11. Gross Profit–` 9,05,000; Net Profit–` 6,31,333; Total of Balance Sheet– ` 21,70,900.
12. Gross Profit–` 61,000; Net Profit–` 38,098; Total of Balance Sheet–` 1,73,088.
13. Gross Profit–` 18,100; Net Profit ` 11,845; Total of Balance Sheet–` 33,798.
14. Gross Profit–` 77,500; Net Profit–` 33,503; Total of Balance Sheet–` 1,16,493.
9
Fina
lAccounts of
NotForProf
itOrg
a
nisa
tions
MEANING
A not-for-profit or simply a non-profit organization (NPO) is formed for promoting a useful object such as
art, science, culture, sports, profession, education, charity, religion etc.. NPO is also known as a non-trading
organization.
NPOs also deal in monetary or financial transactions which are of charitable nature; the purchasing and
selling of goods activities are not done by NPOs. The primary aim of NPOs is to give social services to
their members or society at large. The social services are given either free of cost or at nominal price without
aiming at profit. The NPOs may raise funds to carry out or achieve their objectives.
TYPES OR FORMS
The NPOs include the following types or forms of institutions, namely:
(i) Educational institutions such as schools, colleges, universities etc..
(ii) Professional institutes or associations such as Medical Councils, Bar Councils. Accounting bodies
such as Institute of Chartered Accountants of India (ICAI), Institute of Company Secretaries of India
(ICSI) and so on.
(iii) Charitable institutions comprising of Dispensaries, Hospitals and other health care centres.
(iv) Welfare associations such as Residents Welfare Associations (RWAs), Teachers Organisations, Staff
Associations and the like.
(v) Cultural institutions like literary societies, art galleries, libraries and so on.
(vi) Clubs Like social clubs, sports clubs, entertainment or recreation clubs and so on.
(vii) Scholarship foundations for giving scholarships to needy and bright students.
(viii) Religious organizations to promote religions such as Janakpur Dharmik Sangh.
CHARACTERISTICS OR FEATURES OF NPOS
The main features of not-for-profit organisations are summed up as follows:
(i) The main aim of NPOs is to give different kinds of services such as education, health care, sports,
entertainment etc., to its members or society as a whole. NPOs give these services either free of cost
or at nominal cost.
(ii) The NPOs have no profit motive.
(iii) Normally the NPOs do not undertake business or trading such as purchase and sale of goods.
(iv) Their transactions are mainly cash transactions. Normally, they do not have credit transactions.
(v) As they do not undertake trading activities, the NPOs do not prepare trading and profit and loss
account.
9.2
Financial Accounting: Concepts and Applications
(vi) The NPOs are organized as charitable trusts or charitable societies and subscribers to such organizations
are called members and not owners.
(vii) The NPOs obtain their funds/income in the form of: (a) cash subscriptions from their members (b)
donations (c) legacies (d) grants from governments (e) income from investments.
(viii) The funds raised by NPOs from different sources are credited to capital fund or general fund or special
funds like sports funds, prize funds, tournament funds etc..
(ix) The affairs of NPOs are managed by a managing (or executive) committee elected by their members.
(x) The surplus generated by these NPOs by way of excess of income over expendituer is not distributed
amongst the members. It is simply added or credited to capital fund.
(xi) There is no question of individual or joint ownership of assets of NPOs, by any member or members.
(xii) The management of NPOs is entrusted or given to persons who are keen to render a particular type
of service without any kind of income in return. Their posts are honorary in nature.
(xiii) A NPO is also called a NTO (Non-trading Organisation) because its main activity is not trading in
goods. A professional body of chartered accountants or lawyers is also a NTOs.
NEED FOR MAINTAINING ACCOUNTS
NPOs collect considerable amount of money by way of subscriptions from their members and donations from
public at large. Hence it becomes necessary to maintain proper books of account to exercise control over
these large funds for the sake of public faith and confidence and to meet statutory requirements. In this way
the following objectives are automatically achieved:
(i) Misappropriation of funds is avoided
(ii) Income and expenditures for a particular accounting period can be easily ascertained.
(iii) Financial position at the end of the accounting period is also known.
DIFFERENCE BETWEEN PROFIT MAKING (TRADING) AND NOT- FOR PROFIT (NONTRADING) ORGANISATIONS
Serial No.
(i)
Profit Making Organisation
Not-For Profit Organisation
Formed or set up for trading activities i.e., buying
and selling of goods.
Formed or set up for the purpose of giving social
services.
(ii)
Main aim is to earn profit.
There is no profit motive or responsibility.
(iii)
Cash and credit transactions are equally important.
Most of the transactions are in cash and credit transactions
are either few or nil.
(iv)
Managed by owners.
Managed by members.
Owners can withdraw profit as return on their
capital
Members are not entitled to any surplus of a NPO
Owners' funds are known as capital
Members' funds are known as capital fund or general fund
or special funds.
(vii)
The final accounts of trading concerns consist
of trading account, profit and loss account and a
balance sheet
The final accounts of NPO consist of Receipts and Payments
Account, Income and Expenditure Account and a Balance
sheet.
(viii)
Results of trading activities are shown in the profit
and loss account
Results of social service activity is shown in the Income
and Expenditure Account.
(ix)
Trading concerns or organisations are more
concerned with profitability than cash position
Non-profit organisations are more concerned with their cash
position than with surplus or deficit.
(x)
Profit and loss account may be sub-divided into
trading account, profit and loss account etc.,
Income and expenditure account is not sub-divided.
(v)
(vi)
Final Accounts of Not-For-Profit Organisations
9.3
(xi)
Excess of revenue over expenses is known as net profit.
Excess of income over expenditure is called surplus.
(xii)
Excess of expenses over revenue is called net loss.
Excess of expenditure over income is known as deficit.
(xiii)
Net profit or loss is transferred to capital account
of the proprietor or owner.
Net surplus or deficit is transferred to capital fund.
(xiv)
Excess of assets over liabilities on a particular date
is called capital.
Excess of assets over liabilities is called capital fund.
(xv)
A trading concern maintains many subsidiary books.
NPOs maintain only cash book as, journal.
(xvi)
The final accounts of a trading concern are normally
prepared from the trial balance and the adjustments.
The Income and Expenditure Account and the Balance
Sheet are generally prepared from the receipts and payments
account and other information.
The ledger accounts are in large number.
The ledger accounts are very few.
(xvii)
BOOKS OF ACCOUNT AND REGISTERS
A not-for-profit organisation has limited or very few transactions relating to goods, debtors and creditors.
Thus, it keeps only the basic books of account, namely: (i) cash book (ii) general journal (or journal proper)
and ledger.
Cash Book: It is used to record only cash receipts and cash payments on different accounts. Cash receipts
include subscriptions received in cash, donations, life membership fees, sale of old assets, newspapers and
magazines etc.. The payments include purchase of fixed assets, investments, various types of establishment
expenses etc.
General Journal: It is required to record financial transactions in respect of credit transactions like credit
purchase of assets, credit sale of old assets, rectification of errors, opening entries, closing entries, transfer
entries etc., on the basis of double entry system of book-keeping.
General Ledger: It contains details of personal, real and nominal accounts in routine or usual manner.
In addition to the foregoing books of account, a NPO maintains the following registers which are technically
not books of account e.g.,
Membership Register: It contains detailed information about the:
(i) name of the member,
(ii) address, of the member,
(iii) membership number, date of admission to membership
(iv) date of termination of the membership.
Subscription Register: It is used to record the details of subscriptions received from each member. It shows
the name of the subscriber, membership number, amount of subscription, due date of the receipt of subscription,
period for which subscription is received, advance subscription, if any and the unpaid or the outstanding amount.
Donation Register: It shows the details in respect of the name of donor, address of the donor, amount of
donations, purpose of the donation-general or specific, ledger folio, remarks.
Property Register: It contains information about the nature of property, date of purchase, name of the vendor
or seller, cost of the property, ledger folio, depreciated value of property and so on.
Other registers may include entrance fees register, investment ledger, legacies register etc..
FINAL ACCOUNTS
The final accounts of a NPO consists of:
(i) Receipts and Payments Account
(ii) Income and Expenditure Account
(iii) Balance sheet at the end of the year.
9.4
Financial Accounting: Concepts and Applications
It must be noted that at the beginning of the first year, the NPO has neither any asset nor any liabilities.
The final accounts at the end of first year consists these three statements (two accounts and one balance
sheet) only. Thus, Income and Expenditure Account and Balance Sheet at the end of first year are prepared
with the help of Receipts and Payments Account only.
However, at the end of second and subsequent years, the closing balance sheet of the previous year or
the opening balance sheet of the current year may be prepared. Hence, the final accounts of a NPO consist
of:
(i) Opening Balance Sheet (which is closing balance sheet of the previous year)
(ii) Receipts and Payments Account
(iii) Income and Expenditure Account
(iv) Closing Balance sheet.
At the end of the year, all entries in the cash book (or cash receipts and cash payments journals) are summarized
in Receipts and Payments Account. The adjustments relating to depreciation, outstanding expenses and accrued
income are entered in the general journal.
Income and expenditure account (which is similar to profit and loss account of trading concern) and Balance
sheet are then prepared from Receipts and Payments Account and adjustments entries in the journal.
Sometimes the trial balance is prepared by a NPO. In this situation there is no Receipts and Payments
Account and the final accounts are prepared from the items given in the trial balance and year end adjustment.
The procedure may be show as under:
(A) At the end of first year
Receipts and Payments Account
Revenue Items
Capital Items
Balance Sheet
Income and Expenditure
Account
(B) At the end of second and subsequent years:
Opening Balance Sheet
Revenue Items
Income and Expenditure
Account
Receipts and Payments Account
Capital Items
Balance Sheet
Adjustment entries are incorporated to the items in the Receipts and Payments Account wherever they
are needed.
Final Accounts of Not-For-Profit Organisations
9.5
RECEIPTS AND PAYMENTS ACCOUNT
A receipts and payments account is a summary of all cash and bank transactions. It is prepared at the end of
the accounting period from the cash book (or the cash receipts journal and cash payments journal).
On the debit side, it begins with an opening cash or/and bank balance(s) and records all the items of revenue,
receipts and capital receipts in cash whether such cash receipts belong or pertain to current accounting period
or past accounting period(s) or future accounting period(s).
On the credit side, the first item may be bank overdraft (By Bank Account) and subsequent items include
all actual cash payments relating to revenue expenses and capital expenditures (purchases of fixed assets)
of current accounting period or previous accounting period(s) or future accounting period(s).
In short receipts and payments account records cash receipts and cash payments relating to current accounting
period, previous accounting period(s) and even future accounting period(s) and it also includes capital receipts
and capital payments in addition to revenue receipts and revenue payments.
This account does not record non-cash items
At the end of the current accounting period, this account is balanced to ascertain or find out the balance of
cash in hand or at the bank.
Procedure
The annual totals of various items of receipts and payments are found from their respective accounts in the
ledger and are then entered in the Receipts and Payments Account. For example, the subscription received
every month or quarter from the members is recorded first in the cash book or cash receipts journal and the
total of which would be found in the ledger under the heading 'subscriptions account'. It is this total amount
which will be recorded in the Receipts and Payments Account. Similarly the different items of payments such
as salaries, wages, rent, electricity etc., are first recorded in the cash book or cash payments journal on different
dates while the total of these payments is found in the ledger under suitable headings from which they would
be transferred to the payments side of the Receipts and Payments Account.
FEATURES OF RECEIPTS AND PAYMENTS ACCOUNT
The essential features of a receipts and payments account are summarised as under:
(i) It is a real account.
(ii) It is prepared on the cash basis of accounting.
(iii) Its form is similar to cash book (without discount and bank columns) with debit and credit sides.
(iv) It is prepared from the cash book or cash receipts journal and cash payments journal.
(v) It is prepared at the end of the accounting period.
(vi) It starts with opening cash and bank balances in hand on the debit side and bank overdraft, if any, on
the credit side (By Bank b/d).
(vii) Receipts are shown on the debit side and payments are shown in the credit side of this account.
(viii) It includes all receipts and payments made during the current accounting period whether these belong
to previous year(s), current year or future (subsequent) year(s).
(ix) All the receipts are shown irrespective of their nature, i.e. whether the receipt is revenue (e.g., subscriptions)
or capital (sale of a fixed asset) or for special fund (e.g., interest on tournament fund investments).
(x) All the payments are shown irrespective of their nature i.e., whether the payment is revenue (e.g.,
rent, salary, stationery etc. or capital e.g. purchase of furniture, computers etc.) or for special
fund (prizes given or paid out of prize fund).
(xi) Only actual receipts and payments, made during the accounting period, are recorded. Hence, outstanding
expenses and accrued income relating to current year are not recorded.
9.6
Financial Accounting: Concepts and Applications
(xii) It does not include non-cash items like bad debts and depreciation.
(xiii) The closing balances of cash in hand and bank are shown on the credit side. The closing balance of
bank overdraft, if any, is shown on the debit side.
(PRO-FORMA) RECEIPTS AND PAYMENTS ACCOUNT
Receipts
Capital and Revenue
(Past, Present And Future)
Balance b/d (opening balance)
Cash in hand, Cash at Bank
Capital Receipts (for past,
present and future periods)
Legacies
Sale of office furniture
Sale of sports equipment
Donations for special purposes e.g.,
building, prizes etc.
Life Membership fees
Sale of investments
Endowment fund receipts
Receipts on account of special funds e.g.,
Prize fund, tournament fund.
Interest on specific fund investments
Entrance fees
Revenue Receipts (for past, present
and future periods)
Subscriptions:
Previous year
Current year
Subsequent year
General donations
Grants from Government
Proceeds from entertainments
Interest or dividends on general investments
Annual dinner contribution
Sale of old newspapers, waste papers etc.
Hire or rent of hall
Receipts from annual sports
Sundry receipts
Tennis court receipts
Billiard receipts
Tennis fees
Sale of old sports materials like old bats,
old balls, old nets etc.
Miscellaneous receipts
Balance c/d* (Bank Overdraft)
`
Payments
Capital and Revenue
(Past, Present And Future)
`
Balance b/d (Bank Overdraft)
Capital Payments (for past,
present and future periods)
Building construction
Books
Sports equipment
Cost of leasehold
Cost of investments
Advnace for purchase of buildings
Government’s loan/bonds
Furniture
Revenue Payments (for past,
present and future periods)
Prizes paid
Office expenses
Purchase of sports materials
Entertainment expenses
Printing and stationery
Newspapers and periodicals
Postages
Doctor’s or Secretary
honorarium
Expenses on special food to patients
Repairs and maintenance
Tennis expenses
Billiard expenses
Purchase of medicines
Insurance, rent, salaries
Advertisement
Audit fees
Tennis balls
Telephone, electricity, fax charges
Gardening
Bar purchases
Bar expenses
Annual dinner expenses
Match expenses
Conveyance and travelling
Up-keep of lawns
Municipal taxes
Charity
Printing of year book or SOUVENIR
Bank charges
Miscellaneous expenses
Balance c/d (closing balance)
Cash in hand
Cash at Bank*
*There will be generally either of the two amounts i.e., bank overdraft or cash at bank and not both.
Final Accounts of Not-For-Profit Organisations
9.7
ADVANTAGES OF RECEIPTS AND PAYMENTS ACCOUNT
The main advantages of receipts and payments account are given as under:
(i) It serves as a summary of cash transactions so that it is possible to know at a glance receipts and
payments during a period under different heads or accounts titles.
(ii) It discloses the cash position of a NPO.
(iii) It is useful in the preparation of the income and expenditure account and the balances sheet.
DISADVANTAGES OR LIMITATIONS OF RECEIPTS AND PAYMENTS ACCOUNT
Receipts and Payments Account has the following disadvantages or limitations:
(i) It only shows the cash position because non-cash transactions are not recorded
(ii) It does not disclose the surplus or deficit resulting from the activities of a NPO.
(iii) It is prepared on cash basis of accounting with the result that outstanding expenses and accrued income
items in the form of adjustments are ignored.
(iv) Balance sheet cannot be prepared from the given receipts and payments account.
(v) It does not show expenses like depreciation of assets and losses like bad debts.
(vi) It does not disclose the debtors of many expenses and for this purpose the accountant or treasurer
prepares income and expenditure account and balance sheet.
DIFFERENCE BETWEEN CASH BOOK AND RECEIPTS AND PAYMENTS ACCOUNT
The difference between the two may be noted as under:
Cash Book
Receipts and Payments Account
1. A cash book is prepared on the basis summary of daily
cash transactions.
1. A receipt and payment account is a account of the cash
transactions that have occurred during the accounting period.
2. A cash book is a part of double entry book-keeping.
2. A receipt and payment account does not form part of double
entry system.
3. A cash book is prepared by every type organisation,
that is trading as well as non-trading.
3. A receipt and payment account is organisation, that of prepared
for NPO or non-trading concern.
4. A cash book of a trading concern is prepared is a columnar
form.
4. A receipt and payment account is not prepared in a columnar
form.
5. A cash book is a part of books of account.
5. A receipt and payment account is not part of the books of
account. It is only the basis of preparing the final accounts
of a NPO.
6. Each transaction is recorded in chronological order, that
is, datewise.
6. It is prepared at the end of the period and items are not recorded
chronologically, that is, in order of occurrence.
7. Preparation of cash book is essential.
7. Its preparation is not essential.
8. The purpose of the cash book is to indicate the cash
and bank balances at the end of every day, every week
or every month.
8. The purpose of this account is to help the preparation of final
accounts.
9. An item of cash receipt or cash time that item occurs.
For example, if salary or wages is paid twelve times
in a year, it will be recorded twelve times.
9. Every item of cash receipt and cash payment will be entered
in total only once a year.
10. A cash book is prepared from source documents like
vouchers and receipts.
10. A receipt and payment account is prepared from entries recorded
in the cash book or cash receipts and cash payments journals.
9.8
Financial Accounting: Concepts and Applications
DISTINCTION BETWEEN RECEIPT AND INCOME
Receipt means the actual cash received and the aggregate of all receipts means the total cash received in the
current year. Income means money earned during the year whether cash is actually received or not.
Example: Suppose there are 1,000 members of a residents welfare association and each member is to pay a
subscription of ` 150 per annum and 950 members pay their subscription for the current year. In that case
the receipt is ` = 1,42,000 (` 950 × ` 150) and income is ` = 1,50,000 (` 1,000 × ` 150).
However, if all the members pay their subscriptions, both receipt and income will be equal. Thus, income
may be either equal or less than the actual receipts. In brief, receipts and income may or may not be equal.
Receipts may be more than income in a certain accounting period if some members pay their subscriptions in
advance. Income can never be more than receipts. The points of difference between receipts and income
are summarised below:
Receipt
Income
1. Any cash received is receipt.
1.
Any cash received may or may not be income; only cash received
for the current year is income.
2. Receipt of cash may pertain to any accounting period,
that is, past, present or future period(s).
2.
Income is confined to only the current year.
3. Receipt may be both of revenue and capital nature.
3.
Income is only of revenue nature.
4. In the case of receipt, the cash increases corresponding
or equal to the amount of cash.
4.
Cash may not increase equal to the amount of income as
explained earlier.
5. It is entered on the debit side of the cash book.
5.
It is recorded on the credit side of income and expenditure account.
6. It is not included in the income statement for calculating
profit or loss.
6.
It is a part of income determination process.
DIFFERENCE BETWEEN PAYMENT AND EXPENDITURE
Payment means actual cash paid during the current accounting period. It includes both the payments for capital
items like purchase of fixed assets and payments for revenue items like salaries, rent etc. Further, payments
may belong to past, present or future periods. But expenditure means total expenses incurred for the current
year whether paid in cash or not.
Example: Rent for the building is ` 10,000 per annum. But rent for the month of December is not-paid and
accounting period ends on 31 December. In this case expenditure is ` 1,20,000 ( ` 10, 000  ` 12) while payment
is only ` 1,10,000 (` 10,000 × ` 11)
If no rent is outstanding i.e., rent has been paid for full 12 months, both expenditure and payment will
be equal. Thus, payment and expenditure may or may not be equal. But if rent is paid for 13 months,
payment will be more than expenditure.
The difference between the two is given as under:
Payment
Expenditures
1. Actual cash paid is payment treated as expenditure.
1. Any cash paid may or may not be treated as expenditure.
2. A payment may be for the current year, past year or future years.
2. It is confined to current year only.
3. A payment may be for the capital item(s) or revenue item(s)
3. Expenditure is of revenue nature only.
4. Cash decreases in proportion to payment.
4. Cash may or may not decrease equal to the amount of
expenditure.
5. An item cannot be called a payment unless cash is paid.
5. An item may be an expenditure whether cash is paid or not.
6. It is entered on the credit side of the cash book or receipts
and payments account.
6. It is recorded on the debit side of the income and expenditure
account.
7. It is not considered in the determination of income on accrual
basis and hence, not a part of final accounts.
7. It is included in the final accounts.
Final Accounts of Not-For-Profit Organisations
9.9
Illustration 1 : (Preparation of Receipts and Payments Account)
From the following particulars of residents welfare association CIA Block Janak Puri, prepare Receipts and
Payments Accounts for the year end 31 March 2020:
`
(i)
(ii)
Cash in hand on 1-4-2019
12,000
Cash at bank in fixed deposits
70,000
(iii)
Subscriptions received (including ` 5,000 for 2018-19 and ` 2000 for 2020-21)
(iv)
Subscription due for 2019-20
(v)
(vi)
(vii)
(viii)
(ix)
(x)
Donations
1,15,000
10,000
1,50,000
Entrance fees to be capitalised
19,000
Life membership fees
20,000
10% Investments purchased at cost (market value ` 1,20,000)
1,10,000
Legacies
2,50,000
Grant from civic body for garden maintenance
35,000
Contribution to annual dinner
55,000
Rent paid
10,000
(xiii)
General expenses
15,000
(xiv)
Printing, postage and stationery
46,000
(xi)
(xii)
(xv)
(xvi)
(xvii)
(xviii)
(xix)
(xx)
(xxi)
(xxii)
Newspapers and magazines
9,500
Sale of old newspapers.
2,400
Books purchased
12,800
Sports materials purchased
36,300
Interest on investments received
Honorarium to coaches
80,000
Receipts from sports meet
60,000
Sundry receipts
(xxiii)
Upkeep of grounds
(xxiv)
Salaries
(xxv)
9,000
Sports meet expenses
(xxvi)
Municipal taxes upto 30 June 2020
(xxvii)
Charity
(xxviii) Annual dinner expenses
1,14,000
45,000
1,42,000
45,000
6,500
10,200
42,000
Furniture purchased (total price ` 25,000) and paid
20,000
Audit fees
14,500
(xxxi)
Water and electricity charges
12,000
(xxxii)
Travelling expenses
(xxix)
(xxx)
(xxxiii) Bank charges
(xxxiv) Insurance (paid up to 30 June 2020)
(xxxv)
Cash at Bank
9,600
420
1,500
90,000
9.10
Financial Accounting: Concepts and Applications
Solution :
Receipts and Payments Account
For The Year Ending 31 March 2020
Receipts
`
Balance b/d:
Payments
10% Investments
`
1,10,000
Cash in hand
12,000
Rent
10,000
Cash at Bank
70,000
General Expenses
15,000
46,000
Subscriptions
1,15,000
Printing, postage and stationery
Donations
1,50,000
Newspapers and Magazines
9,500
Entrance fees
19,000
Books purchased
12,800
Life membership fees
20,000
sports materials
36,300
Honorarium to coaches
80,000
45,000
Legacies
2,50,000
Grants from civic body
35,000
Upkeep of ground
Contribution to Annual Dinner
55,000
Salaries
Sale of old newspapers
2,400
Sports meet expenses
Interest on Investments
9,000
Municipal taxes
Receipts from sports meet
Sundry receipts
60,000
1,14,000
1,42,000
45,000
6,500
Charity
10,200
Annual dinner expenses
42,000
Furniture
20,000
Audit fees
14,500
Water and electricity charges
12,000
Travelling expenses
Bank charges
Insurance
9,600
420
1,500
Balance c/d:
Cash at bank
Cash at hand (Balancing figure)
9,11,400
90,000
1,53,080
9,11,400
INCOME AND EXPENDITURE ACCOUNT
Receipts and Payments Account does not disclose the surplus or deficit. Accordingly not- for- profit (or nontrading) concerns have to prepare another account to find out surplus or deficit with the help of Income and
Expenditure Account.
An income and expenditure account is a revenue (or nominal) account of not-for-profit (non-trading)
organisations. It is a summary of incomes and expenses or expenditures for a given accounting period generally
of one year. It is equivalent to profit and loss account of business enterprises, that is, it serves the purpose
of profit and loss account. It is prepared on accrual basis. It does not include the revenue items of the previous
year(s) and of future year(s); only current year’ revenue items are included whether such items are received
(or paid) in cash or these are outstanding.
The term net profit is replaced or substituted by the words: Excess of income over expenditure (or surplus)
and the term net loss is replaced or substituted by the words: Excesses of Expenditures over income (or
deficit).
Final Accounts of Not-For-Profit Organisations
9.11
FEATURES OF INCOME AND EXPENDITURE ACCOUNT
(i) It is a revenue or nominal account
(ii) It is generally prepared from a given receipts and payments account (sometimes from trial balance
also) and other relevant information.
(iii) It is prepared on accrual basis of accounting.
(iv) It is prepared at the end of the accounting period.
(v) It is similar to profit and loss account as all incomes are shown on the credit side and all expenditures
are entered on the debit side.
(vi) All revenue items pertaining to the current accounting period only are considered revenue items which
appear on the debit side of the Receipts and Payments Account are entered on the credit side (i.e.
income side) of the Income and Expenditure Account.
Similarly all revenue items of current year appearing on the credit side of the Receipts and Payments
Account are recorded on the debit side (i.e. expenditure side) of Income and Expenditure Account.
The necessary adjustments are made for outstanding expenses and income and also for prepaid income
and expenses.
(vii) Items of capital nature such as purchases of investments, sports equipments, furniture etc., are ignored
for this account.
(viii) It also includes non-cash items like depreciation of fixed assets, bad debts etc..
(ix) It includes not only the incomes actually received in cash but also the outstanding or accrued incomes.
Similarly it includes outstanding expenditures in addition to the expenses paid in cash.
(x) It does not begin with any opening balance.
(xi) It has a closing balance in the form of either surplus or deficit. Surplus means excess of income over
expenditure and deficit means excess of expenditure over income.
(xii) The closing balance is carried forward to balance sheet whereas surplus is added to capital fund while
deficit, if any is deducted from capital fund.
WHAT IS INCOME
In order to become an income item, an item appearing in the debit side of the receipts and payment
account, must possess the following features:
(i) It is of recurring nature (i.e., a regular income) of not-for-profit (or non-trading) organisations.
(ii) It is not meant for a special purpose e.g., donations for building or donations for prize fund etc..
(iii) It must pertain to current period only.
WHAT IS EXPENDITURE OR EXPENSE
It must be clarified that the two terms expenditure and expense are used interchangeably (in the same sense)
for the purpose of income and expenditure account. These must possess the following features:
(i) An item of expenditure or expense must be of recurring nature (i.e., regular expense)
(ii) It must be useful for the current accounting period only.
(iii) It is not a capital expenditure.
9.12
Financial Accounting: Concepts and Applications
(PRO-FORMA) INCOME AND EXPENDITURE ACCOUNT
FOR THE YEAR ENDING ON ----------- (Last Date of Accounting Period)
`
Expenditure
`
Income
Salaries
Subscriptions
Printing and stationery
Interest on Investments (on
Rent, rates and taxes
general fund investments only)
Electricity and water
Newspapers, magazines or periodicals
Government grants
Telephone charges
General Donations
Insurance premium
Life membership fees (only that
Depreciation on:
portion which is to be treated as
Sale of old newspapers etc.
Furniture
revenue or income of the current year)
Sports equipments etc.
Books
Audit fees
Contribution from annual dinner
Less: Expenses on annual dinner
Profit from annual sports meet
Honorarium
Bank charges
(Receipts minus expenses)
Postage and fax charges
Bar receipts
Travelling or conveyance expenses
Rent from hire of hall
Sundry expenses
Dividend and interest
Repairs and maintenance
Tennis court receipts
Tennis court expenses
Billiard room receipts
Billiard room expenses
Tennis fees
Bar expenses
Proceeds from entertainment
Lecturers' fees
Less: Expenses
Bad debts
Drama receipts
Loss on sale of fixed assets
Proceeds from charity show
Sundry expenses
Less: Expenses
Excess of Income over
Sale of old fixed assets
Expenditures (Surplus)
Profit from consumable items:
(food, drinks etc.)
Sale price of consumable items
Less: Cost of consumable items
(opening stock + purchases –closing stock)
Excess of Expenditures over Income (Deficit).
Note : There will be either surplus or deficit.
DISTINCTION BETWEEN INCOME AND EXPENDITURE
ACCOUNT AND RECEIPTS AND PAYMENTS ACCOUNT
Points of Difference
Income and Expenditure Account
Receipts and Payments Account
1. Nature
It is another name for profit and loss account of
the non-trading concerns, i.e., clubs, societies,
hospitals, educational institutions etc. (Nominal
Account)
It is a statement of cash transactions for a
period (Real Account).
2. Commencement
It does not begin with any opening balance.
It commences with opening balances of cash
in hand and at bank.
3. Outstanding
It contains the whole of the expenditure and income
of the accounting period i.e., accrued and outstanding
items (i.e., based on mercantile system of
accounting).
It includes only income and expenditure
actully received and paid whether for the
period ‘covered or not (based on cash (i.e.,
based system of accounting).
Final Accounts of Not-For-Profit Organisations
9.13
4. Period
It contains income and expenditure of the current
accounting period only.
It may comprise not only receipts and payments
for the current year but also succeeding years.
5. Form
Income is shown on the credit side and the
expenses on the debit side.
Receipts are entered on the debit side and
payments on the credit side.
6. Contents
It contains only the items of revenue nature
of the current accounting period only.
It records both capital and revenue items of any
period: current, previous or succeeding years.
7. Object
It represents the net result of all the activities
during the year resulting in surplus or deficit,
as the case may be.
It shows merely the cash on hand/bank at the
close.
8. Balance Sheet
A balance sheet is usually accompanied with
this account.
No balance sheet is prepared
9. Non-cash items
It shows non-cash items like depreciation, bad
debts etc..
It does not show non-cash items like depreciation,
bad debts etc.,
10. Accrued and
outstanding items
It shows accrued income and outstanding
expenses.
It does not show accrued income and outstanding
expenses.
11. Closing balance of
cash and bank
It does not show closing balances of cash and
bank
It shows closing balances of bank.
12. Difference between
two sides
The balance of this account represents either
surplus or deficit, as the case may be and is
not carried to the account of next period-instead
the surplus is added to or deficit deducted from
capital fund.
The balance of this account shows only the cash
in hand, bank and nothing is done afterwards.
DIFFERENCE BETWEEN INCOME AND EXPENDITURE ACCOUNT
AND PROFIT AND LOSS ACCOUNT
Basis of Distinction
Income and Expenditure Account
Profit and Loss Account
1. Nature of the Enterprise
This account is prepared by the non-trading firms.
This account is prepared by trading enterprises.
2. Source of Information
This account is prepared from Receipts and
Payments Account in from most of the cases.
This account is prepared with the help of trial
balance.
3. Purpose
The purpose of this account is to calculate surplus
i.e. excess of income over expenditure or deficit
i.e., excess of expenditure over income.
This account is prepared to calculate profit or
loss of a business organisation.
4. Balance at the end
The surplus of this account is added to capital
fund and deficit is deducted from the capital fund.
The balance of this account is either profit
(to be added to capital) or loss (to be deducted
from the capital).
5. Use of Surplus
Surplus is not available for distribution amongst
members.
Profit is available for distribution.
BALANCE SHEET
Background: The Receipts and Payments Account shows only the balances of cash in hand and cash at bank
at the end of the accounting period.
The Income and Expenditure Account contains information only in respect of income and expense items. It
does not provide any information about capital receipts (liabilities) and capital expenditures (assets).
None of the foregoing two accounts give a complete picture of the state of affairs or financial position of the
not-for-profit (non-trading) enterprises.
Hence, in order to know the complete information about the statement of affairs, income and expenditure
account must be supplemented by a Balance Sheet.
Meaning: The balance sheet of a not-for profit (non-trading) enterprise shows its financial position that is,
assets and liabilities at the end of the accounting period.
9.14
Financial Accounting: Concepts and Applications
Procedure: The balance sheet of non-profit making entities is prepared in the usual way showing assets on
the 'right-hand side' and liabilities on the 'left hand side'. The term capital is not to be found. Instead
there will be a capital fund or a general fund or an accumulated fund. This fund represents the net assets
of the non-trading institutions and is calculated in the same manner as capital (i.e., excess of assets over
liabilities). It is necessary to calculate the value of fund at the start of the accounting period by deducting
the opening liabilities from the opening assets. The surplus of the year is added to it or the deficit is deducted
from it. It is not uncommon to add some of the capitalised items like legacies, endowment fund and entrance
fees to the capital fund. In addition to capital fund, there may be other funds created for specific purposes
e.g. Prize Fund. The special fund should be represented by specific asset in the balance sheet usually in the
form of special fund investments e.g., Prize Fund Investments.
PRO-FORMA BALANCE SHEET AS ON... (CLOSING DATE)
`
Liabilities
`
Assets
Capital Fund
Particular Assets
Opening balance (if any)
Last balance b/d:
Add: Excess of Income over Expenditure
Add: Purchases in the current year
Or
Less: Book value of the asset sold
Less: Excess of Expenditure over Income
Less: Depreciation
Capitalised income of the Current year on account of:
Closing Balance
Legacies
Stock of consumable materials
Entrance fees
(Balance as given in the question)
Life membership fees
Or
(These may be added to the Capital Fund too)
Last balance b/d
Add: Purchases during the year
Special Fund/Donation
Less: Value consumed during the year
Last balance (if any)
Closing balance
Add: Receipts for the item during the year
Cash in hand
Add: Income earned on fund Investment
Cash at bank in Current
Less: Expenses paid out of fund/donation
Account, Fixed Deposit Account etc.
Closing Balance
Pre-paid Expenses at the end e.g., insurance,
Creditors for Purchases of Supplies
rent etc.
Outstanding Income
Bank Overdraft (at the end)
Outstanding Expenses
Last balance b/d
Less: Paid during the year
Add: Outstanding at the end
Closing Balance
Income Received in Advance at the end
DIFFERENCE BETWEEN CAPITAL AND CAPITAL FUND
The two terms, namely: capital and capital fund are not the same or synonymous. The main differences
are outlined below:
Capital
(i)
It is associated with the business organisations
with profit motive.
Capital Fund
(i)
This term is to be found in the balance sheet of a not-for-profit or
non-trading organisation.
Final Accounts of Not-For-Profit Organisations
9.15
(ii) Capital is contributed by the owners of a business
to the business organisations.
(ii) Capital fund is not contributed by one single member of NPO. It is
calculated as excess of assets over the liabilities of a NPO. It is made
up of capitalised receipts like endowment receipts, legacies, special
donations, entrance fees and surplus (i.e., excess of income over
expenditure.)
(iii) Capital belongs to the owners because they are
its contributors.
(iii) Capital fund of a NPO doe not belong to members as they are not
its exclusive contributors.
(iv) Capital can be withdrawn by the owners of a
business entity.
(iv) Capital fund cannot be withdrawn by the members of a NPO or nontrading concern.
TREATMENT OF SOME SPECIAL ITEMS IN THE FINAL ACCOUNTS OF A NPO
The following items are peculiar or special to non-for-profit organisations (NPO):
(1) Legacies
Legacies are gifts or donations, received in cash or property or both under a will on the death of the
donor. Legal representatives give such gifts to the NPOs as per the will of the deceased (i.e., dead
person) Legacies are not of recurring nature because such receipts come very rarely. Hence, legacies
should be treated as capital receipts added to the capital fund and shown on the liabilities side of the
balance sheet.
FOR YOUR ATTENTION
(a)
If legacies or gifts are received for a specific purpose, it is a capital receipt and therefore, should be added as
contribution to the specific fund (e.g. Building Fund or Prize Fund) for which it is given and shown on the
liabilities side of the Balance Sheet.
(b)
If a legacy or gift is for general purpose, as per instructions in the examination problem, it should be treated
as income and shown on the credit side of the Income and Expenditure Account.
(2) Donations
It is also a type of gift in cash or in property received from some living person, firm or company.
Donations can be for specific purposes or for general purposes:
(a)
(b)
Specific Donations: If the amount received as donation is for a specific purpose such as donation
for building or books or other equipment, it is capitalized and is shown in the liabilities side of
the Balance Sheet.
General Donations: General donations are treated as revenue receipts or income because such
donations are generally received every year. It is therefore, shown in the credit side of the Income
and Expenditure Account.
FOR YOUR ATTENTION
The amount of the donations is not the deciding point; what is important is the purpose of donation.
A small amount for a specific purpose will not make it a general donation. Similarly a big donation
will not make it specific donation if the cash has been received for a general donation. However,
the students should follow instructions given in the examination problem, if any.
(3) Entrance Fees Or Admission Fees
This is the amount of fees received from the new members in addition to the amount of normal or
regular subscriptions.
(a) As a non-recurring item: Many accountants feel that since the entrance fee is paid only once,
it is of non-recurring nature and therefore, should be capitalized and taken directly to the ‘Liabilities’
side of the Balance Sheet. It is also pointed out that the entrance fee paid is in the nature of
premium paid by new member towards the capital costs to establish the club or any other charitable
institution.
(b) As a recurring item: However, there are some accountants who argue that though it is paid by
9.16
Financial Accounting: Concepts and Applications
each member only once, the club or institution receives it regularly because of frequent changes
in its membership for one reason or the other. Accordingly it should be treated as revenue income
and credited to Income and Expenditure Account.
In the absence of any specific instructions about entrance fees in the examination problem, entrance
fees should be capitalized [Appendix To Accounting Standard (AS) – 9, I.C.A.I].
(4) Life Membership Fees
Life membership fees are received once during the life time in one lump sum. So they are non-recurring
and should be treated as capital receipt. Such fees are added to the capital fund on the liabilities side
of the balance sheet.
FOR YOUR ATTENTION
Sometime life membership is indicated as for 10 years or 20 years. In such a case a proportion of
the life membership should be treated as revenue income and hence, transferred to Income and
Expenditure Account every year until written off completely.
(5) Endowment Fund
Eric Kohler, in Dictionary of Accountants writes that, “Endowment is a fund arising from bequest
or gift, the income of which is devoted for a specific purpose.” When a donor donates some cash
or property by way of endowment fund, he expects that NPO should not use this fund for its main
activities. Only the income earned from the investments of the endowment fund (called Endowment
Fund Investments) should be used for financing the main activities. It means that cash received as
endowment fund must be invested in some securities or deposited with the bank for regular income.
The accounting treatment of the money or property received as endowment is as follows:
(a) Endowment fund receipt is a capital receipt and should be shown separately on the liabilities
side of the balance sheet.
(b) Endowment fund investments, if any, should be shown on the assets side of the balance sheet.
(c) Income from the endowment fund investments can be treated as general income and should
be entered on the credit side of the Income and Expenditure Account.
In this way Endowment Fund would remain intact in the Balance Sheet.
(6) Sale of Old Fixed Assets And Investments
The amount received from the sale of old fixed assets of a NPO like furniture or computers, buildings
etc., or investments is a capital receipt and hence, it should not be entered in the income and expenditure
account. In the balance sheet the book value of the old fixed assets, investments sold (and not the
selling price of fixed assets or investments sold) should be deducted from the total book value of
fixed assets and investments on the assets side of the balance sheet.
Only the profit or loss on the sale of old fixed assets or investments has to be entered in the income
and expenditure account. For example if the furniture at book value of ` 10,000 is sold for ` 7,500,
there is a loss of ` 2,500 and it will be shown in the debit side of the income and expenditure account.
On the other hand, if there is a profit on the sale of old fixed assets or investments, it is entered on
the credit side of the income and expenditure account.
FOR YOUR ATTENTION
When the book value of the asset sold is not given in the examination problem, students can make
either of the following two assumptions:
(a) The book value of the old fixed asset sold is same as the selling price. There will not be any profit
or loss on the sale of old fixed asset. The income and expenditure account will not be affected or
(b) The book value of the old fixed asset is nil or zero. In this case the profit will be equal to the sale
price and should be recorded on the credit side of the income and expenditure account. The authors
prefer this (b) assumption.
Final Accounts of Not-For-Profit Organisations
9.17
Note for the paper setter: Please indicate the book value of the old fixed asset sold for the sake of
uniformity in answers.
Note for the students: Students should indicate their preference in the form of foot note at the end of
the answer. And the examiner must honour either of the two assumptions made by the students.
(7) Sale of Old Sports Equipments
Sale price of the old sports equipments like billiard table, tennis tables etc., are capital receipts. The
accounting treatment is similar to sale of old fixed assets and investments.
(8) Purchase of Sports Materials
The amount spent on the purchase of sports materials like tennis balls, cricket bats, balls, net etc. is a
revenue expenditure because sports materials are used up in the accounting period itself or at the most
within a year.
(9) Sale of Sports Materials
Sale of sports materials like old bats, old nets, etc., is the regular feature and of recurring nature.
The amount received is therefore, treated as an ordinary or revenue income on the assumption that
their book value is zero. It is therefore, shown in the credit side of the Income and Expenditure Account.
(10) Purchases or Subscriptions for and Sale of Newspapers, Periodicals or Magazines, Journals
Purchases or subscriptions for newspapers and periodicals are treated as an ordinary or revenue expenditure
and thus, debited to the Income and Expenditure Account. Sale of old newspapers, periodicals etc.,
are treated as an ordinary or revenue income and thus, credited to Income and Expenditure Account.
(11) Government Grants
In the absence of specific instructions in the examination problem about the treatment of Government
grants received, this item is treated as regular or recurring nature. So it is a revenue receipt or income
and the same should be entered in the credit side of the income and expenditure account.
But if the government grants are for specific purpose, say, for the construction of the building, the
same should not be shown in the income and expenditure account. They should be added to the special
fund, say, building fund on the liabilities side of the balance sheet. Such government grants should
never be added to the Capital Fund.
(12) Payment of Honorarium
It is a payment to a person for his specific services rendered by him or her but not as regular employee.
For example, the payment made to a Radio or Television artist for his or her specific performance is
regarded as honorarium. Similarly the office bearers of a NPO do not work as regular employees but
as honorary president, honorary secretary or honorary treasurer. Hence, they are also paid some honorarium
and not salary. The purpose is to reimburse their nominal expenses on tea, lunch, petrol or conveyance.
The payment of honorarium is a revenue expenditure or revenue payment and is shown in the debit or
expenditure side of the Income and Expenditure Account.
(13) Receipts from and Payments made for Consumable Items
When a social club like Recreation club or Entertainment club or Charitable hospital sells items of
regular consumption such as wines, cigarettes, playing cards or medicines, the amount received is a
revenue RECEIPT and is therefore, shown in the credit side of the Income and Expenditure Account
and the payments made for the purchase of consumable items is a revenue payment and must be shown
in the debit or expenditure side of the Income and Expenditure Account.
(14) Specific Collections from and their Expenses on Lectures, Dramas, Concerts etc.
Specific collections from above stated items and the expenses related to them are respectively revenue
receipts and revenue payments. Hence, they should be recorded in the Income and Expenditure
Account.
9.18
Financial Accounting: Concepts and Applications
There are two alternate accounting treatments stated below:
(i)
(ii)
The receipts from lectures, dramas etc., should be entered on the credit side of the Income and
Expenditure Account. And expenses on these items should be recorded on the debit side of the
Income and Expenditure Account.
Alternately, the expenses on lectures, dramas etc., may be adjusted with the proceeds or receipts
from these items. If there is a surplus (proceeds or receipts exceeding expenses) the surplus
should be recorded in the credit side of Income And Expenditure Account.
If there is deficit, (expenses exceeding proceeds or receipts), the deficit should be recorded
on the debit side of the Income and Expenditure Account.
(15) Additions, Extensions and Improvements to Fixed Assets
Any addition or extension or improvement to a fixed asset like building would increase the earning
capacity of the asset. Hence, it is as good as the acquisition or purchase of fixed asset. So it is to be
treated as capital expenditure.
(16) Other Capital Expenditures
The money spent on the purchase of office furniture, books, buildings, land, investments and so on
are in the nature of capital or non-recurring expenditures. They are assets proper and are taken to
Balance Sheet after deducting depreciation on them.
(17) Tax Deducted at Source (T.D.S.)
Sometimes interest income or dividend income may be received by the non-trading concern on its investments
net of tax from the paying agency which will issue a certificate of the amount of tax deducted at source.
The accounting treatment involves the following: (i) Find out the gross amount of interest or dividend
e.g., if the interest received is ` 2,400 net of tax at 20%, the gross amount of the interest is
[2,400  (100 80)]  ` 3,000.
This gross interest will be credited to income and expenditure account or the relevant Fund Account
as the case may be. (ii). Tax deducted at source would be shown in the Assets side of the Balance
Sheet. In case the income is not taxable the refund can be claimed from the income tax authorities.
(18) Other Revenue Expenses
All expenses which are incurred for day-to-day performance of activities or operations and are of recurring
nature are called revenue expenses. Examples are: salaries, wages, rent, printing and stationery, subscription
to newspapers and periodicals, insurance, advertisement, interest, refreshment etc.. Revenue expenses
also include expenses incurred on the maintenance of fixed assets e.g., repairs, depreciation etc., All
such expenses are debited to the Income and Expenditure Account.
(19)
Subscriptions
Subscriptions by members of a NPO is a regular source of income. They are of recurring nature received
at regular intervals of time, say, monthly, or quarterly or half-yearly or yearly, as the case may be.
Hence, they should be treated as revenue receipts or income and entered on the credit side of the
Income and Expenditure Account. However, special subscriptions (that is subscriptions for a specific
purpose) received should not be recorded in the income and expenditure account. Instead they should
be shown separately on the liabilities side of the balance sheet.
Examples of special subscriptions are given below:
(a) Subscriptions received for any specific programme, say, for some drama or play or specific exhibition
or prime minister party, chief minister party etc..
(b) Subscriptions received towards a specific fund like tournament fund, prize fund, building fund
and so on.
(c) Subscriptions for the construction of capital (fixed) asset like construction of pavilion, science
block in a school or college etc.
Final Accounts of Not-For-Profit Organisations
(d)
9.19
Subscriptions for the purchase of any fixed asset say, a machine, computers, laboratory equipments,
etc..
Subscriptions capitalized, when there is an instruction in the examination problem to capitalize
a part of the subscription received.
(e)
CALCULATION OF ACTUAL AMOUNT OF ANY INCOME ITEM
TO BE POSTED TO INCOME AND EXPENDITURE ACCOUNT
The actual amount of an income item, say, subscription or interest or fees or any other income item to be posted
(or entered) to the credit side of the Income and Expenditure Account may be calculated in the following manner:
(a) Preparing Worksheet or Statement
(b) Preparing Ledger Account.
(a)
Statement or Worksheet of Actual Amount of Subscriptions For the Current Year
(i)
Total subscriptions received in the current year. ————
(ii) Less: Last year’s outstanding subscriptions and included in the total————subscriptions
received during the current year.
(iii) Less: Subscriptions of the next or future year(s) received in ———— advance in the current
year and included in the total subscriptions received during the current year.
(iv) Add: Subscriptions received in advance in the previous year ————belonging to current
year.
(v) Add: Outstanding subscriptions for the current year.———
(vi) Actual amount of subscriptions for the current year to be posted to the credit side of Income
and Expenditure Account.
(b) Ledger Account
Subscription Account
Dr.
Cr.
Particulars
`
To Balance b/d (outstanding
subscriptions of last year) (ii)
Advance subscriptions of last years (iv)
———
By Cash/Bank Account
(balancing figure to be posted in the
(Total subscriptions received in the
———
To Balance c/d
current year) (i)
———
By Balance c/d
(Advance subscriptions for the next
year(s) (iii)
`
By Balance b/d
———
To Income and Expenditure Account
credit side) (vi)
Particulars
(Total amount of outstanding sub———
scriptions in the current year) (v)
———
EXPLANATIONS
(i) As per Receipts and Payments Account.
(ii) Will appear in the opening balance sheet.
(iii) Will appear in the closing balance sheet.
(iv) Will appear in the opening balance sheet.
(v) Will appear in the closing balance sheet.
(vi) Will be posted in the credit side of the income and expenditure account.
———
———
9.20
Financial Accounting: Concepts and Applications
CALCULATION OF ACTUAL AMOUNT
OF ANY EXPENSE ITEM
The actual amount of an expense item, say, salaries or rent or any other item to be posted to the debit side of
current year’s Income and Expenditure Account is calculated in the following manner:
(a) Preparing Work Sheet or Statement form
(b) Preparing Ledger Account
(a) Statement or Work Sheet of Actual Amount of Salary For the Current Year
(i) Total amount of salaries paid in the current year
————
(ii) Less: Last year’s outstanding salaries paid in the current year and included in the total salaries
paid during the current year.
————
(iii) Less: Salaries of the next or future year(s) paid in advance and included in the total salaries
paid during the current year.
————
(iv) Add: Current year’s salaries paid in advance in the
previous year(s).
(v) Add: Outstanding salaries for the current year
————
————
(vi) Actual amount of salaries for the current year to be posted or entered in the debit side
of Income and Expenditure Account.
————
(b) Ledger Account.
Salaries Account
Dr.
Cr.
Particulars
`
Particulars
To Balance b/d
(paid in advance last year) (iv)
———
By Balance b/d (ii)
(outstanding of last year)
Bank/Cash Account
(paid in the current year) (i)
———
By Income and Expenditure Account
(Balancing Figure) (vi)
To balance c/d (v)
(outstanding for the current year)
———
By Balance c/d
(advance paid for the next year) (iii)
`
———
———
EXPLANATIONS
(i) As per Receipts and Payments Account.
(ii) Will appear in the opening balance sheet on the liabilities side.
(iii) Will appear in the closing balance sheet on the liabilities side.
(iv) Will appear in the opening balance sheet on the assets side.
(v) Will appear in the closing balance sheet on the liabilities side.
(vi) Will be posted to the debit side of the income and expenditure account.
CALCULATION OF ACTUAL AMOUNT OF STATIONERY USED OR PROVISIONS USED OR
MEDICINES USED
The calculation of the actual amount of stationery used or provisions used or medicines used, as an expense
item in the current year, is done in the following manner:
(a) Preparing statement or worksheet
(b) Preparing Ledger Account
Final Accounts of Not-For-Profit Organisations
9.21
Statement or Worksheet Stationery Used in the Current Year
Opening stock of stationery
Add:
Payments for stationery in cash during the current year (ii)
————
Add:
Payments made in advance in the previous year(s) belonging
to the current year (iii)
————
Creditors for stationery at the end of current year (or
outstanding for stationery at the end of the current year)
————
Add:
Less: Creditors for stationery at the end of last year paid in the
current year included in the total payment for current year
————
Less: Advance payment for stationery at the end of current year
and included in the payments of the current year.
————
Less: Stock of stationery at the end of the current year.
————
Actual amount of stationery used in the current year
————
(b) Ledger Account
Stationery Account
Dr.
Cr.
Particiulars
`
To Balance b/d:
(Opening stock)
Advance paid last year
To Cash/Bank
(payments made in the current years)
To Balance c/d
(creditors for current years)
Particulars
`
By Balance b/d
(creditors of last year)
By Income and Expenditure Account
(Balancing Figure)
By Balance c/d:
Closing stock
(Advance in the current year)
Illustration 2 (Calculation of Current Year’s Subscriptions)
From the following details, ascertain the amount of subscription to be credited to income and epxenditure
account for the year 2020:
`
Subscriptions received in 2020 including ` 20,000 for 2019 and
` 15,000 for 2021
2,45,000
Subscriptions due but not received at the end of the year 2020 were
19,000
Subscriptions received in 2019 in advance for 2020 were
18,400
Solution :
`
Total Subscriptions received during 2020
Less: Outstanding subscriptions for 2019 but included in 2020
2,45,000
20,000
2,25,000
Less: Subscriptions paid in advance for 2021 included in 2020
15,000
2,10,000
Add:
Subscriptions outstanding for 2020
19,000
2,29,000
Add:
Subscriptions of 2020 received in advance in 2019
18,400
2,47,400
9.22
Financial Accounting: Concepts and Applications
Dr.
Subscriptions Account
Cr.
Particulars
`
Particulars
`
Balance b/d
20,000
Balance b/d
18,400
Income and Expenditure
Account (Balancing Figure)
Bank Account
2,47,400
Balance c/d
2,45,000
Balance c/d
19,000
15,000
2,82,400
2,82,400
Illustration 3 (Calculation of Current Year’s Subscriptions)
In 2020, the subscriptions received by Modern Club of Delhi were ` 20,450 including ` 250 for 2019 and
` 500 for 2021. At the end of 2020, subscriptions outstanding for 2020 were ` 750. The subscriptions due
but not received at the end of the previous year i.e., 31.12.2019 were ` 400 while subscriptions received in
advance on the same date were ` 900. Calculate the amount of subscriptions to be credited to Income and
Expenditure Account for the year ending 31.12.2020.
Solution :
`
Statement of Subscriptions for the Current Year i.e. 2020
Total subscriptions received during 2020
20,450
Add: Outstanding subscriptions for 2020
750
(i)
21,200
Less: Outstanding subscriptions of 2019 received in 2020
250
(ii)
20,950
Add: Subscriptions received in advance in 2019 (belonging to 2020)
900
21,850
Less: Subscriptions received in advance in 2020 (belonging to 2021)
Subscriptions for 2020 to be credited to Income and Expenditure Account
500
(iii)
21,350
(iv)
EXPLANATIONS
(i)
This amount i.e., ` 750 is also shown in the Assets side of the closing Balance Sheet.
(ii)
Since the amount received in 2019 (` 250) is less than what was outstanding (` 400), the difference of ` 150, will
be shown in the assets side of the closing Balance Sheet.
(iii)
This amount (` 500) is shown on the liabilities side of the current year’s Balance Sheet as : Subscriptions Received
in Advance.
(iv)
This amount of current subscriptions (income) is taken to the credit amount column of the Income and Expenditure
Account.
Dr.
Subscriptions Account
Cr.
Particulars
`
`
Balance b/d
400
Income and Expenditure Account
(Balancing Figure)
Balance c/d
Particulars
Balance b/d
Bank Account
21,350
Balance c/d
500
(750 + 150)
22,250
900
20,450
900
22,250
Illustrations 4 (Calculation of Current year’s Subscriptions)
From the following extracts of Receipts and Payments Account and additional information, you are required
to calculate the income from subscriptions for the year ending 31 December 2020 and show them in the Income
and Expenditure Account and the Balance Sheet of club:
Final Accounts of Not-For-Profit Organisations
9.23
Receipts and Payments Account
For the Year Ending December 31, 2020
`
Receipts
Payments
Years
2019
50,000
2020
3,00,000
2021
60,000
4,10,000
Additional Information
(i) Subscriptions outstanding on December 31, 2019
60,000
(ii) Subscriptions outstanding on December 31, 2020
50,000
(iii) Subscriptions received in advance on December 31, 2019
60,000
Solution :
Subscriptions to be posted to Income side of Income and Expenditure Account for the year ending on
December 31, 2020
`
Subscriptions received for 2020 (as per Receipts and Payments Account)
3,00,000
Add: Subscriptions received in advance on December 31, 2019
60,000
3,60,000
Add: Outstanding subscriptions for 2020 (50,000 – 10,000)
40,000
Amount to be transferred to Income and Expenditure Account
4,00,000
Balance Sheet As On 31 December 2020
Liabilities
Subscriptions received in advance
(See Receipts and Payments Account)
`
60,000
`
Assets
Subscriptions outstanding:
2019
2020
10,000
40,000
50,000
EXPLANATIONS
(i)
Of ` 60,000 subscriptions outstanding in 2019 only ` 50,000 were received in 2020. Hence, outstanding subscriptions
of ` 10,000 for 2019 is still outstanding and would be shown in the current year’s balance sheet.
(ii)
Total subscriptions outstanding on December 31, 2020 are ` 50,000 including ` 10,000 of 2019. So the outstanding
subscriptions for 2020 above are only ` 40,000 (i.e. ` 50, 000  ` 10, 000) .
Subscriptions Account (2016)
Particulars
`
Particulars
`
Balance b/d
60,000
Balance b/d
60,000
Income and Expenditure Account
Balnace c/d
4,00,000
60,000
5,20,000
Bank Account
4,10,000
Balance c/d :
2019
10,000
2020
40,000
50,000
5,20,000
9.24
Financial Accounting: Concepts and Applications
Illustration 5 (Calculation of Current Year’s Salaries)
In 2020, the actual salaries paid amounted to ` 1,02,000. Ascertain the amount chargeable to Income and
Expenditure Account for the year ending on December 31, 2020 from the following additional information:
`
Prepaid salaries on 31.12.2019
12,000
Prepaid salaries on 31.12.2020
6,000
Outstanding salaries on 31.12.2019
9,000
Outstanding salaries on 31.12.2020
7,500
Solution :
`
Total salaries paid in 2020
1,02,000
Add: Outstanding salaries on 31.12.2020
7,500
1,09,500
Less: Outstanding salaries on 31.12.2019
9,000
1,00,500
Add: Prepaid salaries on 31.12.2019
12,000
1,12,500
Less: Prepaid salaries on 31.12.2020
6,000
Current year’s salaries debited to Income and Expenditure Account
Dr.
1,06,500
Salaries Account
Cr.
Particulars
`
Particulars
`
Balance b/d
12,000
Balance b/d
9,000
Bank Account
1,02,000
Balance c/d
7,500
Income and Expenditure A/c
Balance c/d
1,06,500
6,000
1,21,500
1,21,500
Ilustration 6 (Consumption or Use of Stationery)
Calculate the amount of stationery consumed during the year 2020 from the following date:
`
Stock of stationery on January 1, 2020
30,000
Creditors for stationery on January 1, 2020
20,000
Advance paid for stationery carried forward from 2019
2,000
Amount paid for stationery during the year 2020
1,08,000
Stock of stationery on December 31, 2020
5,000
Creditors for stationery for December 31, 2020
13,000
Advance paid for stationery on December 31, 2020
3,000
Solution :
`
Stock of stationery on January 1, 2020
Add: Payments made for stationery in 2020
(i)
30,000
1,08,000
1,38,000
Final Accounts of Not-For-Profit Organisations
9.25
Less: Payments made for creditors of 2019
(ii)
20,000
1,18,000
Add: Payments made in 2019 but stationery received in 2020
(iii)
2,000
1,20,000
Add: Creditors at the end for stationery purchased on credit
(iv)
13,000
1,33,000
Less: Payments made in advance at the end of the year (for
stationery to be received in 2021)
(v)
3,000
1,30,000
Less: Stock of stationery in hand on 31 December 2020
(vi)
Amount of stationery actually used in 2020 (i.e. the amount
to be debited to Income and Expenditure Account for 2020)
5,000
1,25,000
Position Relating to Balance Sheet
(i) It will appear in the assets side of the opening balance sheet.
(ii) It will appear in the liabilities side of the opening balance sheet.
(iii) It will appear in the assets side of the opening balance sheet.
(iv) It will appear in the liabilities side of the closing balance sheet.
(v) It will appear in the assets side of the closing balance sheet.
(vi) It will appear in the assets side of the closing balance sheet.
Dr.
Particulars
Stationery Account
Cr.
`
`
Balance b/d
Opening stock
Advance Payment
Bank account
Balance c/d (creditors at the end)
Particulars
Balance b/d (creditors)
30,000
2,000
1,08,000
13,000
20,000
Income and Expenditure
Account (Balancing Figure)
1,25,000
Balance c/d
Closing stock
3,000
Payments made in advance
5,000
1,53,000
1,53,000
RULES REGARDING INCOME AND EXPENSES RELATED TO A PARTICULAR FUND
As a general rule all items of income and expenses are transferred to the respective credit and debit side of
the Income and Expenditure Account. However, there is a departure from this rule in respect of certain
items of income and expenses if these are related to a particular or specific fund.
Income: Where some income arises on a specific fund investment, the same is not credited to Income and
Expenditure Account but is added to that fund direct in the Balance Sheet. For example, if the amount credited
to a Tournament Fund is invested in some securities, say, Government Bonds; the interest received from such
investments is added to the Tournament Fund in the Balance Sheet and is not transferred to the credit side of
Income and Expenditure Account.
However, income on non-fund investments is credited to Income and Expenditure Account.
Expenses: Similarly, where some expenses are incurred on an item for which a fund exists, such expenses
are not taken to Income and Expenditure Account but are directly deducted from the concerned fund in the
9.26
Financial Accounting: Concepts and Applications
balance sheet. For example, tournament expenses paid are deducted from the Tournament Fund in the Balance
Sheet; prizes awarded from Prizes Fund, charity paid out of Charity Fund and so on. However, if there is no
fund in respect of these expenses they would be debited to Income and Expenditure Account only.
Illustration 7 (Fund Items)
How would you treat the following items in the case of a non-trading concern:
(i) Tournament Fund ` 10,000. Tournament Expenses ` 3,000. Receipts from Tournaments ` 4,000.
(ii) Billiard Match Expenses ` 1,500.
(iii) Prize Fund ` 5,000. Interest on Prize Fund Investment ` 500. Prize paid ` 1,000. Prizes Fund Investments
` 4,000.
(iv) Receipts from cinema show tickets ` 2,500. Expenses on cinema show ` 1,500.
Solution :
(i) There is a specific Tournament Fund. The treatment is done as under:
`
Liabilities Side
Tournament Fund
Add: Receipts from Tournaments
10,000
4,000
14,000
Less: Tournament Expenses
Balance to remain in the Liabilities side
3,000
11,000
(ii) There is no specific fund. Hence, ` 1,500 incurred as Billiard Match Expenses would be shown in
the debit side of Income and Expenditure Account.
(iii) There is a specific fund. The treatment will be as under:
`
Liabilities Side
Prize Fund
Add: Interest
5,000
500
5,500
Less: Prizes paid
1,000
Balance to remain in the Liabilities side
4,500
Interest on Fund Investments is never added to Fund Investment Account. It is in the form of cash when
received and the Assets side is already increased because of its effect on the Receipts side of the Receipts
and Payments Account. However, the investment would increase only when the amount of interest is
also invested.
(iv) There is no specific fund. Receipts from cinema show tickets would be shown on the credit side and
Expenses on cinema show would be shown on the debit side of Income and Expenditure Account the
two items would be adjusted in the same side.
Illustration 8 (Fund Items)
How will you deal with the following items while preparing for the Delhi Cricket Club’s income and expenditure
account for the year ending 31 December, 2020 and its Balance Sheet as on December 31, 2020:
`
(i) Donations received during the year for the constructions of a permanent pavilion
Expenditures incurred up to 31.12.2020 on its construction.
7,54,000
5,92,000
Final Accounts of Not-For-Profit Organisations
The construction work is continuing; the total estimated construction expenditure of Pavilion being
9.27
20,00,000
(ii) Tournament Fund:
Balance as on January 1, 2020
3,760
Subscriptions received during the year
18,400
Expenditure incurred during the year on conducting tournaments
20,200
(iii) Life Membership fees received during the year
Give reasons for your answers.
16,000
Solution :
(i) Since the donations have been received for a specific purpose, the amount cannot be credited to
income and expenditure account; instead ` 7,54,000 would appear in the ‘liabilities side’ of the
balance sheet. In other words, it would be capitalised.
The total amount spent on the construction of the building
is ` 5,92,000. Hence, the building would appear on the assets side at ` 5,92,000
(ii) Tournament Fund (Opening Balance)
Add: Subscriptions for tournament fund during the year
`
3,760
18,400
22,160
Less: Expenditure incurred during the year on conducting tournaments
Balance at the end in Tournament Fund
20,200
1,960
(iii) Since the Life Membership Fees received is of non-recurring type, it must be capitalised, that is,
shown in liabilities side of the balance sheet.
Illustration 9 (General)
Explain where and how will you treat the following items in the accounts of not-for-profit organizations for
the year 2020:
(a) (i) Subscriptions received ` 1,50,000 in 2020.
(ii) Subscriptions received ` 30,000 in 2019 for 2020.
(iii) Subscriptions due for 2020 ` 20,000.
(b) (i) Sundry expenses paid in 2020 ` 40,000 including ` 10,000 for 2019.
(ii) Sundry expenses payable for 2020 ` 5,000
(iii) Sundry expenses payable for 2019 ` 15,000
(c) (i) Amount received for Prize Fund on 1-1-2020 ` 1,00,000.
(ii) Interest on Prize Fund received on 31-12-2020 ` 12,000.
(iii) Prizes awarded on 31-12-2020 ` 10,000.
(d) (i) New Building purchased on 1-7-2020 ` 26,00,000
(ii) Additions made to buildings upto 31-12-2020 ` 1,40,000
(iii) Whitewashing expenses of building for 2020 ` 10,000.
Solution :
(a) (i) Subscriptions received in 2020 ` 1,50,000 would be entered on the credit side of the income and expenditure
account for the year 2020.
(ii) Subscriptions of ` 30,000 received in 2019 for 2020 should be added with subscriptions received for
2020 on the credit side of the income and expenditure account.
9.28
Financial Accounting: Concepts and Applications
` 30,000 would be in the opening balance sheet as subscriptions received in advance on the labilities
side.
(iii) Subscriptions of ` 20,000 due for 2020 would be added to the subscriptions received for 2020 in the
credit side of the income and expenditure account.
It would also appear as accrued subscriptions on the assets side of the balance sheet as on 31 December
2020.
(b) (i) Sundry expenses of ` 40,000 paid in 2020 would be entered on the debit side of the income and expenditure
account.
The sundry expenses of ` 10,000 paid for 2019 and included in sundry expenses paid for 2020 should
be deducted from sundry expenses on the debit side of income and expenditure account as shown below:
Sundry Expenses paid in 2020
40,000
Less: Paid for 2019
10,000
Net amount to be debited
30,000
(ii) Sundry expenses of ` 5,000 payable for 2020 should first be added with sundry expenses paid on the
debit side of income and expenditure account. ` 5,000 would also appear on the liabilities side of the
closing balance sheet as outstanding sundry expenses.
(iii) Sundry expenses of ` 15,000 payable for 2019 would appear on the liabilities side of the opening
balance sheet, if opening balance sheet is required since only ` 10,000 is paid for 2019 out of outstanding
sundry expenses of ` 15,000, the balance of ` 5,000 is yet to be paid. So it should be added with
outstanding liabilities for sundry expenses on the liabilities side of the closing balance sheet.
(c) (i) Amount received for Prize Fund on 1-1-2020 is a special fund. It would appear on the liabilities side
of the closing balance sheet as a special fund.
(ii) Interest of ` 12,000 received on prize fund (investments) should be added to the Prize Fund on the
liabilities side of the balance sheet since it is an income relating to special fund.
(iii) Prizes of ` 10,000 awarded on 21-12-2020 is an expense related to Prize fund. Hence, it should be
deducted from Prize Fund on the liabilities side of the closing balance sheet.
(d) (i) New building purchased on 1-7-2020 for ` 26,00,000 would appear on the assets side of the closing
balance sheet.
(ii) Addition of ` 1,40,000 made to building upto 31-12-2020 should be added with the building on the
assets side of the closing balance sheet.
(iii) The whitewashing expenses of building ` 10,000 have been incurred on the maintenance of the building
purchased. Hence, they are revenue expenditure and should be entered on the debit side of the income
and expenditure account.
Illustration 10 (Treatment of Special Funds)
Following information is available in respect of certain items of a sports club. You are required to show them
in the Income and Expenditure Account and Balance Sheet.
`
Sports fund 1-1-2020
4,00,000
10% sports fund Investments on 1-1-2020
4,00,000
Interest received on sports fund Investments
30,000
Donations for sports fund
50,000
Sports Prizes awarded
60,000
Expenses on sports events
10,000
General fund
3,00,000
8% General fund Investments on 1-1-2020
3,00,000
Interest on General fund Investments
18,000
Final Accounts of Not-For-Profit Organisations
9.29
Solution :
Income and Expenditure Account
For the Year Ending on 31 December 2020
`
Expenditure
`
Income
Interest on General Fund Investments 18,000
Add: Outstanding interest
6,000
24,000
Balance Sheet As On 31 December 2020 (Relevant Information Only)
`
Liabilities
Sports fund
Add:
Interest on Sports Fund
Investments received
Outstanding interest
4,00,000
40,000
4,40,000
Add:
Donations
50,000
4,90,000
Less:
Less:
Sports prizes awarded
Prizes on sports events
8% General Fund Investments
4,00,000
3,00,000
Investments
6,000
Note: If there are general fund
Investments, then there
4,30,000
must be a general fund
10,000
10,000
Outstanding interest on General Fund
60,000
4,20,000
General Fund
10% Sports Fund Investments
Outstanding Interest on sports fund
Investments
30,000
10,000
`
Assets
at least equal to fund
investment.
3,00,000
7,20,000
PREPARATION OF INCOME AND EXPENDITURE ACCOUNT AND BALANCE SHEET FROM
THE GIVEN RECEIPTS AND PAYMENTS ACCOUNT
The following steps should be considered:
Step I :Consider the Receipts side of the Receipts and Payments Account and proceed as follows:
(i) Write the opening balances of cash in hand and cash at bank on the assets side of the Opening Balance
Sheet.
(ii) Enter the receipts of previous year regarding subscriptions, rent etc. on the assets side of the Opening
Balance Sheet.
(iii) Enter the receipts relating to next year regarding subscriptions received in advance on the liabilities
side of the closing balance sheet.
(iv) Record the revenue receipts of the current year (after considering other information) on the income
side of the income and expenditure account.
(v) Enter the capital receipts of the current year on the liabilities side of the closing balance sheet.
(vi) In case there is a sale of fixed asset or investment, compare the sale price with the book value of the
fixed asset or investments sold and find out profit or loss on sale of fixed asset or investment. Any
profit on the sale should be shown in the income side and any loss on the sale of fixed asset or investment
on the expenditure side of the income and expenditure account.
Step II : Consider the items on the payment side of the Receipts and Payment Account and proceed as follows:
(i) Any opening balance of bank overdraft should be shown on the liabilities side of the opening balance
stock.
9.30
Financial Accounting: Concepts and Applications
(ii) Show payments of the previous year as outstanding liabilities in the opening balance sheet.
(iii) Cash in hand and cash at bank at the end should be shown on the assets side of the closing balance
sheet.
(iv) Enter the revenue payments for the current year (after considering other information) on the expenditure
side of income and expenditure account.
(v) Enter the capital payments like purchase of assets and investment on the assets side of the closing
balance sheet as an addition to the respective assets.
(vi) Any payments relating to the next year should be shown as an asset in the closing balance sheet.
Step III: Find out the difference between assets and liabilities in the opening balance sheet which is capital
fund.
Step IV:
Balance the Income and Expenditure
Account to find out surplus or deficit.
Surplus should be added to the capital
Fund while deficit should be deducted
from the capital fund in the closing
balance sheet.
Step V:
Total up the closing balance sheet.
Illustration 11 (General)
Calculate the amount to be posted to the Income and Expenditure Account in each of the following cases:
(i) There are 1,000 members of a NPO each paying a subscription of `100 p.a. Subscriptions received
during the year ` 90,500.
(ii) There are 1,000 members each paying ` 100 p.a. Subscriptions received during the year ` 90,000,
subscriptions in advance at the beginning of the year ` 9,000.
(iii) There are 1,000 members each paying a subscription of ` 150 p.a. Subscriptions outstanding at the
beginning of the year ` 15,000; subscriptions received at the beginning of the year ` 25,000; subscriptions
received during the year ` 80,000.
(iv) Amount paid for stationery during the year ` 50,000; stock of stationery at the beginning and end of
the year ` 5,000 and ` 6,000 respectively; creditors for stationery at the beginning and end of the
year respectively ` 2,000 and ` 4,000.
(v) There are 1,000 members; subscriptions for each member is ` 100 p.a. Subscriptions received during
the year ` 85,000; subscriptions received in advance at the end of the year ` 4,000.
Solution :
`
(i)
Subscriptions received
Add: Subscriptions outstanding (1,00,000 – 90,500)
Total subscriptions to be (1,000×100) posted to income and expenditure account
(ii)
Subscriptions received
Add: Subscriptions received in advance last year
90,500
9,500
1,00,000
90,000
9,000
99,000
Add: Subscriptions outstanding (1,00,000 – 99,000)
Total subscriptions to be posted to income and expenditure account (1,000×100)
1,000
1,00,000
Final Accounts of Not-For-Profit Organisations
(iii)
9.31
Subscriptions received
80,000
Less: Subscriptions outstanding in the beginning
15,000
65,000
Add: Subscriptions received in advance last year
25,000
90,000
Add: Subscriptions outstanding at the end (1,000×150 – 90,000)
To be posted to income and expenditure account
(iv)
60,000
1,50,000
Opening stock of stationery
5,000
Add: Payments made during the year
50,000
55,000
Less: Creditors in the beginning
2,000
53,000
Add: Creditors at the end
4,000
57,000
Less: Stock at the end
(v)
6,000
Stationery used and to be posted to Income and Expenditure Account
51,000
Subscriptions received during the year
85,000
Less: Received in advance at the end
4,000
81,000
Add: Subscriptions outstanding (1,000×100 – 81,000)
19,000
To be posted to income and expenditure account
1,00,000
Illustration 12 (Calculation of Subscription Income)
How will you deal with the following in the Income and Expenditure Account and Balance Sheet of a club as
at 31 March 2020:
Subscriptions received for 2019-20, `1,25,000, subscriptions outstanding on 31 March 2019, ` 25,000. Subscriptions
outstanding on 31 March 2020 ` 15,000. Subscriptions received in advance as on 31 March 2019 ` 20,000.
Subscriptions received in advance on 31 March 2020 `14,500.
Solution :
Income and Expenditure Account (Extract)
For the Year Ending 31 March 2020
Dr.
Cr.
`
`
Subscriptions income for 2019-20
1,20,500
Balance Sheet As on 31 March 2020 (Extract)
Liabilities
Subscriptions received in advance
`
14,500
Assets
Subscriptions Receivable
FOR YOUR ATTENTION
Subscription income for 2019-20 can be calculated by preparing either a statement or an account.
`
15,000
9.32
(i)
Financial Accounting: Concepts and Applications
Statement of Subscription Income for 2019-20
`
Subscriptions received in 2019-20
1,25,000
Less: Outstanding for 2018-19
25,000
1,00,000
Add: Outstanding for 2019-20
15,000
1,15,000
Less: Advance as on 31 March 2020
14,500
1,00,500
Add: Advance as on 31 March 2019
20,000
1,20,500
(ii)
Subscription Account (2019-20)
Dr.
Cr.
Particulars
`
Particulars
`
Balance b/d
25,000
Balance b/d
20,000
(Outstanding on 31-3-19)
(Advance on 31-3-19)
Income and Expenditure Account
Receipts and Payments Account
(Balancing Figure)
1,20,500
Balance c/d
14,500
1,25,000
(or Bank Account)
Balance c/d Outstanding on 31-3-20
1,60,000
15,000
1,60,000
Illustration 13 (Prize Endowment Fund with Prizes Below endowment Income)
How will you deal with the following while preparing the final accounts of a NPO for the year ending 31
March 2020:
(i) Prizes awarded ` 40,000
(ii) Prize Endowment Fund ` 5,00,000
(iii) 10% Prize Endowment Fund Investment ` 5,00,000
(iv) Donations towards Prize Endowment Fund Investment ` 50,000
(v) Interest received on Prize Endowment Fund Investments ` 50,000
Solution :
Balance Sheet As on 31 March 2020 (Extracts)
Liabilities
Prize Endowment Fund
Add: Donations
Add: Interest on Prize
Endowment Fund
Investments
Less: Prizes Awarded
`
5,00,000
50,000
Assets
10% Prize Endowment Fund
`
5,00,000
Investments
5,50,000
50,000
6,00,000
40,000
5,60,000
Amount of prizes upto the amount of endowment income from Endowment Fund Investments can be
debited or deducted from the Prize Endowment Fund. No entry to Prize Endowment Fund is made in
the Income and Expenditure Account.
Final Accounts of Not-For-Profit Organisations
9.33
Illustration 14 (Prize Endowment Fund with Prizes Exceeding Endowment Income)
How would you deal with the following items while preparing the final accounts of Modern Social Club for
the year ending 31 March 2020:
` 70,000
(i) Prizes awarded
` 7,00,000
(ii) Prize Endowment Fund
(iii) 8% Prize Endowment Fund Investments on 1 April 2019
` 7,00,000
(iv) Donations received for Prize Endowment Fund
` 1,00,000
` 42,000
(v) Interest received on Prize Endowment Fund Investments
Solution :
Income and Expenditure Account for the year ending 31 March 2020
Dr.
Cr.
`
Expenditure
Prize Awarded
`
Income
70,000
Less: Interest Received
(42,000)
Outstanding Interest
(14,000)
To be debited
14,000
Balance Sheet As At 31 March 2020 (Extracts)
`
Liabilities
Prize Endowment Fund
7,00,000
8% Prize Endowment Fund
Add: Donations
1,00,000
Investments
8,00,000
Accrued Interest
Add: Interest received
`
Income
7,00,000
14,000
42,000
Interest
Outstanding
14,000
56,000
Less: Prizes Awarded (to the extent
of interest received and accrued)
56,000
Nil
8,00,000
Note: The uncovered balance of 14,000 would be debited to Income and Expenditure Account
FOR YOUR ATTENTION
The amount of prizes awarded exceeding the income from endowment fund investments is debited to Income and
Expenditure Account, so that the Prize Endowment Fund must remain inact.
This is the only case where entries relating to special fund will be recorded in the Income and Expenditure Account
for extra amount; otherwise Income and Expenditure Account records only those entries which show charges in
General Fund or Capital Fund.
Illustration 15 (Scholarship Fund)
The following Balance Sheet, Receipts & Payments Account and adjustments relate to Sagar Academy. Prepare
the Income and Expenditure Account for 2020 and the Balance Sheet as on 31 December 2020.
9.34
Financial Accounting: Concepts and Applications
Balance Sheet As On 1 January, 2020
`
Liabilities
Capital Fund
`
Assets
1,80,000
Premises
1,20,000
Equipment Fund
20,000
Furniture
30,000
Scholarship Fund
4,000
Books
16,000
Creditors
6,000
Fixed Deposits
20,000
Prepaid Salaries
2,000
Bank
22,000
2,10,000
Dr.
2,10,000
Receipts and Payments Account For 2020
Cr.
`
`
Liabilities
Opening Bank Balance
22,000
Fees Received
1,20,000
Payments
Salaries
72,000
Scholarship Awarded
3,000
Interest
4,000
Purchase of Equipments
16,000
Sundry Receipts
2,000
Repayment to Creditors
6,000
Miscellaneous Expenses
25,000
Purchase of Books
6,000
Closing Bank Balance
20,000
1,48,000
1,48,000
Additional Information:
(i) Depreciate Furniture by 20 per cent and Books by ` 4,000.
(ii) Provide for Outstanding Salaries - ` 4,000.
Solution :
Dr.
Sagar Academy
Income and Expenditure Account
For the Year Ending 31 December, 2020
Cr.
`
`
Expenditure
Income
Salaries
78,000
Fees from members
Miscellaneous Expenses
25,000
Interest
4,000
Sundry Receipts
2,000
Depreciation:
Books
4,000
Furniture (30,000 × 20%)
6,000
Surplus transferred to Capital Fund
1,20,000
10,000
13,000
1,26,000
1,26,000
Balance Sheet As On 31 December, 2020
`
Liabilities
Capital Fund:
Opening Balance
Add: Surplus
Equipment Fund
`
Assets
Premises
1,80,000
13,000
1,20,000
Furniture:
1,93,000
20,000
Opening Balance
Less: Depreciation
30,000
6,000
24,000
Final Accounts of Not-For-Profit Organisations
9.35
Scholarship Fund:
Books:
Opening Balance
4,000
Less: Scholarship
Awarded
3,000
Creditors
6,000
Less: Payment
6,000
Opening Balance
16,000
Add: Purchases
6,000
1,000
22,000
Less: Depreciation
—
Outstanding Salaries
4,000
4,000
18,000
Fixed Deposits
20,000
Equipments
16,000
Bank Balance
20,000
2,18,000
2,18,000
WORKING NOTES
(i)
`
Advance / Outstanding Amounts : Salaries
As per Receipts & Payments Account
72,000
Add: Outstanding for the current year
4,000
Add: Advance in the previous year
2,000
Posting in Income and Expenditure Account
(ii)
78,000
Equipments purchased, being capital expenditure, is not deducted from Equipment Fund. It represents Investment
of fund in fixed assets.
Illustration 16 (Donations for Building Fund)
From the following Receipts and Payments Account of Cosmopolitan Club and the additional information
given below, prepare the Income & Expenditure Account for the year ended 31 March, 2020 and the Balance
Sheet as on that date:
Receipts and Payments Account [2019-20]
`
Receipts
Balance b/d:
Cash
4,000
Bank
30,000
Subscriptions
Sale Proceeds of Old Newspapers
34,000
Payments
`
Salaries to Staff
25,000
Miscellaneous Expenses
31,000
Balance c/d:
12,800
Cash
6,000
1,200
Bank
41,000
Donation for Building Fund
25,000
Other Donations
30,000
1,03,000
1,03,000
Balance Sheet As At 1 April, 2019
Liabilities
Capital Fund
Subscription received in Advance
`
Assets
`
1,05,600
Cash
4,000
400
Bank
30,000
Furniture
30,000
Building
40,000
Subscription Receivable
1,06,000
2,000
1,06,000
9.36
Financial Accounting: Concepts and Applications
Additional information is given below:
2019-2020
`
1,200
800
(i) Subscription receivable
(ii) Subscription received in advance
(iii) Charge 10% depreciation on Furniture only.
Solution :
Cosmopolitan Club
Income and Expenditure Account
For the Year Ending 31st March, 2020
`
Expenditure
`
Income
Salaries
25,000
Subscription
11,600
Miscellaneous Expenses
31,000
Other Donations
30,000
Depreciation - Furniture
3,000
Sale of Old News Papers
1,200
Deficit transferred to
Capital Fund
16,200
59,000
59,000
Balance Sheet As On 31st March, 2020
`
Liabilities
Capital Fund:
Opening Balance b/d
Less: Deficit
`
Assets
Building
1,05,600
40,000
Furniture
16,200
Building Fund
Subscription Received in Advance
89,400
Opening Balance b/d
25,000
Less: Depreciation
800
30,000
3,000
27,000
Cash in hand
6,000
Cash at Bank
41,000
Subscription receivable
1,200
1,15,200
1,15,200
WORKING NOTES
(i)
Subscriptions
As per Receipts and Payments Account
Add: Outstanding for the current year
Less: Outstanding for the previous year
Less: Advance during the current year
Add: Advance during the previous year
As per Income and Expenditure Account
(ii)
`
12,800
1,200
(2,000)
(800)
400
11,600
Other donations are assumed to be for revenue purposes.
Illustration 17 (Treatment of Postage Stamps)
Prepare an Income and Expenditure Account for the year ended 31 March 2020 and the Balance Sheet as at
that date of Modern College from the following:
Final Accounts of Not-For-Profit Organisations
Receipts
Cash on 1 April 2019
Postage Stamps on 1 April 2019
Tuition Fees
Fines
Grants from State Government
Interest on Securities
Rent from use of Hall
9.37
`
20,700
200
59,000
1,000
30,000
300
1,000
`
Payments
Pay and Allowances
70,500
Provident Fund Contribution
5,540
Books for Library
4,600
Postage and Telegram
700
Newspapers etc.
300
Science Equipment
480
Laboratory Expenses
500
Payments to Contractor for new building
4,700
Repairs and Maintenance
600
Audit Fees
300
General Charges
580
Cash in hand
22,000
Postage Stamps
700
Printing and Stationery
700
1,12,200
1,12,200
The college had the following assets on 31 March 2019: Furniture - ` 35,000; Land and Buildings - ` 1,60,000;
Library Books - ` 24,000; 10% Investments - ` 10,000 and Outstanding Tuition Fees - ` 2,200. Provide for
depreciation on the closing balances of the following assets : Land and Buildings @ 5% Furniture @ 15%
and Library Books @ 20%.
Solution :
Modern College
Income and Expenditure Account
For the Year Ending 31 March, 2020
Expenditure
Pay and Allowances
Provident Fund Contribution
`
70,500
5,540
`
Income
Tuition Fees (59,000  2,200)
56,800
Fines
1,000
30,000
Printing and Stationery
700
Grants
Postage and Telegrams
700
Interest on Securities
300
Newspapers
300
Add: Accrued
700
Laboratory Expenses
500
Rent
1,000
Repairs and Maintenance
600
Excess of Expenditure over Income
9,125
Audit Fees
300
General Charges
580
1,000
Depreciation on:
Building
8,235
Furniture
5,250
Books
5,720
98,925
98,925
9.38
Financial Accounting: Concepts and Applications
Balance Sheet As On 31March, 2019
`
Liabilities
Capital Fund (Balancing Figure)
2,52,100
`
Assets
Cash
20,700
Postage Stamps
200
Furniture
35,000
Land and Building
1,60,000
Library Books
24,000
10% Investments
10,000
Tuition Fees
2,200
2,52,100
2,52,100
Balance Sheet As On 31March, 2020
`
Liabilities
Capital Fund
2,52,100
Less: Deficit
9,125
2,42,975
`
Assets
10% Investments
10,000
Accrued Interest
700
Buildings (1,60,000 + 4,700  8,325)
Library Books
Additions
1,56,465
24,000
4,600
28,600
Less : Depriciation
Furniture
Less : Depriciation
5,720
22,880
35,000
5,250
Science Equipment
29,750
480
Cash in Hand
22,000
Postage Stamps
700
2,42,975
2,42,975
ATTENTION PLEASE
(i)
(ii)
(iii)
Payment to contractor for the construction of the new building is a capital expenditure; hence, it has been
made part of Building Account.
Postage and telegram expenses of ` 700 may be divided as : From stamps ` 200 and in Cash ` 500.
Interest on securities for full year ought to be `1,000 i.e., 10% of ` 10,000; Hence, accured interst is ` 700
(` 1,000 - ` 300).
Illustration 18 (Preliminary)
Prepare Income and Expenditure Account and Balance Sheet from the following Receipts and Payments Account
for 2020 and Balance Sheet as on 31 December 2019:
Dr.
Receipts and Payments Accounts for 2020
Cr.
`
`
Receipts
Balance 1.1.2020
Subscriptions
1,00,000
2019
2,000
2020
21,000
2021
1,000
Payments
Expenses
Land
Interest
2019
12,000
2020
20,000
40,000
4,000
Final Accounts of Not-For-Profit Organisations
9.39
Entrance Fees
8,000
Miscellaneous Expenses
20,000
Lockers’ Rent
7,000
Balance 31.12.2020
83,000
Miscellaneous Income
40,000
1,79,000
1,79,000
Balance Sheet As On 31 December 2019
`
Liabilities
Capital Fund
3,36,200
Subscriptions Received in Advance
`
Assets
Buildings
3,00,000
6,000
Outstanding Subscriptions
3,800
Outstanding Expenses
14,000
Outstanding Lockers’ Rent
2,400
Loan
50,000
Cash
1,00,000
4,06,200
4,06,200
Solution :
Dr.
Income and Expenditure Account
For the Year Ending 31 December, 2020
Cr.
`
`
Expenditure
Income
Expenses
20,000
Subscriptions
Miscellanceous Expenses
20,000
Add: Received in Advance for 2020
6,000
Lockers’ Rent
7,000
Less: Received for 2019
2,400
Interest
4,000
Excess of Income over expenditure
27,600
Miscellaneous Income
71,600
21,000
27,000
4,600
40,000
71,600
Balance Sheet As On 31 December, 2020
`
Liabilities
Outstanding Expenses
2,000
(14,000  12,000)
Assets
Buildings
40,000
83,000
1,000
Cash in hand
Entrance Fees
8,000
Subscriptions Receivable
50,000
Capital Fund
3,00,000
Land
Subscriptions Received in Advance
Loan
`
1,800
(3,800  2,000)
3,36,200
Add: Excess of Income over
Expenditure
27,600
3,63,800
4,24,800
4,24,800
ATTENTION PLEASE
Entrance fees have been capitalised as per Appendix to Accounting Standard - 9.
Illustration 19 (Reserve for Tournament Pavilion)
From the following information relating to Dadar Cricket Club, prepare Income and Expenditure Account for
the year ending 31 December 2020 and a Balance Sheet at that date. An abstract of the Cash Book for the
year is as follows:
9.40
Financial Accounting: Concepts and Applications
`
Receipts
Members’ Subscriptions
10,000
`
Payments
Upkeep of Field and Pavilion
4,000
Admission Fees
600
Expenses on tournament
1,400
Sale of old balls, bats etc.
100
Rates and Insurance
400
Hire of ground
600
Telephone
100
8,000
Stationery
200
2,000
General Charges
100
Secretary’s Honorarium
340
Bank Drawn
Subscriptions for tournament
Donations
20,000
Grass Seeds
60
Bats, Balls etc.
1,400
Bank Lodged
33,300
41,300
41,300
Assets with the Club as at 1 January 2020 were as under:
Cash at Bank ` 6,000; Stock of Balls etc. ` 3,000; Printing and Stationery ` 400; Subscriptions Due ` 1,000;
Liabilities at that date nil. Donations and Surplus on account of Tournament should be kept in Reserve for a
Permanent Pavilion. Subscriptions due at 31 December 2020 amount to ` 1,500. Write off 50% of Bats, Balls
Account and 25% off Printing and Stationery Account.
Solution :
Income and Expenditure Account
For the Year Ended 31 December 2020
Dr.
Cr.
`
Expenditure
Upkeep of Field and Pavilion
4,000
Rates and Insurance
400
Income
Subscriptions
`
10,000
Less: Due on 1.1.2020
1,000
1,500
Telephone
100
General Charges
100
Add: Due on 31.12.20
Honorarium of Secretary
340
Sale of Old Bats, Balls etc.
100
Hire of Ground
600
Grass Seeds
60
Depreciation of Bats, Balls etc.
9,000
10,500
2,200
Stationery
150
Excess of Income over Expenditure
3,850
11,200
11,200
Balance Sheet As On 31 December 2020
`
Liabilities
Capital Fund
10,400
Add: Surplus
3,850
Cash at Bank
14,250
Reserve for Permanent Pavilion:
Donations
Subscriptions for Tournament
Assets
20,000
`
31,300
Subscriptions Receivable
1,500
Stock of Bats and Balls
2,200
Stock of Stationery
450
2,000
22,000
Less: Expenses on Tournament
Admission Fees
1,400
20,600
600
35,450
Cash at Bank = Opening Balance ` 6,000 + Deposit ` 33,300 - withdrawls ` 8,000 = 31,300.
35,450
Final Accounts of Not-For-Profit Organisations
9.41
Balance Sheet As on 1 January, 2020
`
Liabilities
Capital Fund (Balancing Figure)
10,400
`
Assets
Cash at Bank
6,000
Stock of Bats, Ball etc.
3,000
Stock of Printing and Stationery
Subscriptions Receivable
400
1,000
10,400
10,400
Illustration 20 (Receipts and Payments Account and Income and Expenditure Account)
Prepare Receipts and Payments Account and Income & Expenditure Account of Western Club for the year 31
December, 2020 :
`
Particulars
(i)
(ii)
Subscription Received (including ` 4,000 for earlier years)
30,000
Donation Received
2,000
(iii)
Subscription outstanding
6,000
(iv)
Rent paid
1,800
Purchase of Furniture (life 10 years) at the beginning of the year
1,000
Purchase of Books
2,500
Purchase of Magazines & Newspapers
1,200
(v)
(vi)
(vii)
(viii)
(ix)
(x)
(xi)
(xii)
Sale of all old furniture at the beginning of the year (Book value ` 300)
500
Opening Cash and Bank Balance
6,800
Investments Purchased
4,000
Interest on Investment Received
1,000
Bank Charges
20
(xiii)
Postage, Telegram & Telephone
1,800
(xiv)
Printing & Stationery (one bill of ` 300 for last year)
1,000
(xv)
Printer’s Bill outstanding
500
(xvi)
Entrance Fees (50% to be capitalised)
1,400
(xvii)
Legacies Received (to be capitalised)
2,000
(xviii)
Allowances (including ` 200 for last year)
1,800
(xix)
Outstanding Allowances
300
Solution :
Western Club
Receipts and Payments Account
For the Year Ended 31 December 2020
Dr.
Receipts
Opening Cash & Bank Balance
Subscription
Cr.
`
6,800
30,000
Payments
`
Rent
1,800
Furniture
1,000
Donation
2,000
Books
2,500
Interest on Investment
1,000
Magazines and Newspapers
1,200
Entrance Fees
1,400
Investments
4,000
9.42
Financial Accounting: Concepts and Applications
Legacies
2,000
Sale of Old Furniture
500
Bank Charges
20
Postage, Telegram & Telephone
1,800
Printing and Stationery
1,000
Allowances
1,800
Closing Cash & Bank Balances
28,580
(Balancing figure)
43,700
Dr.
43,700
Income and Expenditure Account
For the Year Ended 31 December, 2020
Cr.
`
`
Expenditure
Income
Allowance (1,800  200 + 300)
1,900
Subscription (30,000  4,000 + 6,000)
Rent
1,800
Donation
Magazines and Newspapers
1,200
Entrance Fees (50%)
Postage, Telegram & Telephone
1,800
Interest on Investment
Printing and Stationery (1,000  300 + 500)
1,200
Profit on sale of Furniture (500  300)
Bank Charges
32,000
2,000
700
1,000
200
20
Depreciation on Furniture (10% of 1,000)
100
Excess of Income over Expenditure
27,880
35,900
35,900
Illustration 21 (Loss on Sale of Furniture)
Given below is the Receipts and Payments Account of ABC Club:
Dr.
Receipts and Payments Account
For the Year Ended 31 December, 2020
Cr.
`
`
Receipts
Balance b/d:
Salary of secretary
Cash
60
Bank
3,000
Sale of old furniture on 1 Jan 2020
Sale of old newspapers
3,600
Honorarium
3,060
Subscription (Including subscription
for 2019 ` 1,050)
Payments
9,000
750
450
Wages
2,400
Charities
2,000
Printing and stationery
300
Postage
100
50
Rent and taxes
Legacies
3,000
Upkeep of land
500
Interest of Investments (cost ` 20,000)
1,200
Sports material
2,500
Endowment Fund
Proceeds of concerts
Advertisement
10,000
1,200
Balance c/d
14,850
800
40
27,900
27,900
Assets and liabilities as on 31 December 2019 and 31 December 2020 are as follows:
31.12.2019
31.12.2020
Subscription in arrear
200
450
Subscription in advance
300
600
2,000
1,080
Furniture
Final Accounts of Not-For-Profit Organisations
9.43
Depreciation was 10% p.a. on the furniture left after selling a part of it. It was decided that half of legacies
may be capitalised.
Prepare Income and Expenditure Account for the year ending 31 December 2020 and a Balance Sheet as on
that date.
Solution :
AUTHOR’S NOTE
The question is poorly drafted. When we say, As on...., it means the said figure on that date. So when Subscriptions amounting
to ` 200 are in arrear as on 31.12.2019, how the club could receive ` 1,050 for that period. It should have been that ` 200
are still in arrears. The present question should never be set for an examination in future.
ABC Club
income and Expenditure Account
For the Year Ending on 31 December, 2020
Dr.
Expenditure
Salary
Honorarium
Cr.
`
3,600
450
Wages
2,400
Charities
2,000
Printing and Stationery
300
Postage
100
Rent and Taxes
Subscription
9,000
Less: For 2019
1,050
7,950
Less: Received in Advance in 2020
Add: Received in Advance in 2019
1,200
300
7,650
500
Add: Outstanding for 2020
Depreciation on Furniture
120
Sale of Old Newspapers
Loss on Sale of Furniture
50
2,500
600
7,350
Upkeep of Land
Sports Materials
`
Income
450
50
Legacies
3,000
Less: Capitalised
1,500
Proceeds of Concerts
Advertisement
8,100
1,500
800
40
Interest on Investments
1,200
Excess of Expenditure Over Income
1,530
13,220
13,220
Balance Sheet As At 31 December, 2019
Liabilities
Subscription Received in Advance
Capital Fund (Balancing Figure)
`
300
26,010
Assets
`
Furniture
2,000
Subscription Outstanding
1,250
(1,050+200)
26,310
Investments
20,000
Cash in hand
3,060
26,310
9.44
Financial Accounting: Concepts and Applications
Balance Sheet As At 31 December 2020
`
Liabilities
`
Assets
Capital Fund
26,010
Furniture
Less: Deficit
1,530
Less: Sold
2,000
800
24,480
Add: Legacies
1,500
25,980
Subscription Received in Advance
600
Endowment Fund
10,000
1,200
Less: Depreciation
120
Investments
20,000
Subscriptions Arrears:
For 2019
200
For 2020
450
Cash in hand
650
14,850
36,580
36,580
Calculation of Loss on Sale of Furniture
Value of Furniture at the end after depreciation
Gross value (Before Depreciation) :
1,080
`
1,080
1,080  100
90
1,200
Opening Balance
2,000
Balance at the end (before depreciation)
1,200
Book value of Furniture Sold
800
Less: Sale Price
750
Loss on Sale
50
Illustration 22 (Match Fund)
The following is the Receipts and Payments Account of Ruby Club for the year ended on March 31, 2020:
`
Receipts
Balance b/d
4,200
Donation
14,000
Subscriptions :
March 31, 2019
2,100
March 31, 2020
39,900
March 31, 2021
2,800
Rent
14,000
Salary:
March 31, 2016
2,800
March 31, 2017
8,400
Sports Material
44,800
`
Payments
11,200
12,600
Interest (6% loan)
1,050
Interest on Investment
2,800
Match Expenses
5,600
Entrance Fees
9,800
Newspapers
1,400
Balance
75,600
29,750
75,600
Other Information:
As on March 31, 2020, Subscription ` 2,800; Entrance Fees ` 1,400; Rent ` 1,400; Salary ` 2,800 and Repairs
` 700 were outstanding. Donations include ` 7,000 for Match Fund as special donations.
On April 1, 2019, the club had: Buildings ` 28,000; Sports Materials ` 14,000; Furniture ` 14,000; Match
Fund Investments ` 21,000 (Interest accrued on that ` 700 for the year ended March 31, 2020); Match Fund
` 21,000.
Final Accounts of Not-For-Profit Organisations
9.45
Depreciation on Sports Material for current year was charged ` 6,600.
Prepare Income and Expenditure Account for the year ended on March 31, 2020 and a Balance Sheet as at
that date.
Solution :
Ruby Club
Income and Expenditure Account
For the Year Ended 31 March, 2020
Dr.
Cr.
`
Expenditure
Rent
14,000
Add: Outstanding
1,400
Salaries
8,400
Add: Outstanding
2,800
Donations
15,400
Interest on Loan
1,050
Newspapers
1,400
Repair Expenses (Due)
14,000
Less : Received for
Match Fund
11,200
`
Income
Subscription
Add: Outstanding
7,000
7,000
39,900
2,800
42,700
700
Depreciation on Sports Materials
6,600
Surplus
13,350
49,700
49,700
Balance Sheet As On 31 March, 2020
`
Liabilities
Subscription Received in Advance
2,800
`
Assets
Match Fund Investments
21,000
Interest on Match Fund Investment Accrued
700
Match Fund:
As on 1.4.2019
21,000
Add: Donations
7,000
As on 1.4.2019
14,000
Add: Interest Received
2,800
Add: Purchased
12,600
Add: Interest due
Less: Expenses
Sports Materials:
700
(5,600)
26,600
25,900
Less: Depreciation
Cash in hand
Outstanding Expenses:
6,600
20,000
29,750
Subscription Due
2,800
1,400
Rent
1,400
Entrance Fees Due
Salaries
2,800
Building
28,000
Repairs
700
Furniture
14,000
Loan (1,050 × 100/6)
17,500
Entrance Fees (9,800 + 1,400)
11,200
Capital Fund
Opening Balance
42,000
Add: Surplus
13,350
55,350
1,17,650
1,17,650
9.46
Financial Accounting: Concepts and Applications
Balance Sheet As On 31 March, 2019
Liabilities
Salaries outstanding
`
2,800
`
Assets
Cash in hand
4,200
2,100
Match Fund
21,000
Subscription Due
Loan (1050 × 100/6)
17,500
Building
28,000
Capital Fund
42,000
Sports Materials
14,000
Furniture
14,000
Match Fund Investments
21,000
(Balancing Figure)
83,300
83,300
Illustration 23 (Calculation of Purchase and Consumption of Medicines)
Summary of Receipts and Payments of Kolkata Medical Aid Society for the year ended 31 March, 2019 are
as follows:
Opening Cash Balance in hand ` 8,000, Subscription ` 50,000, Donation ` 15,000, Interest on Investments
@ 9% p.a. ` 9,000, Payment for Medicine Supply ` 30,000. Honoararium to Doctors ` 10,000, Salaries `
28,000, Sundry Expenses ` 1,000, Equipment purchased ` 15,000, Charity Show expenses ` 1,500, Charity
Show collections ` 12,500.
Additional Information:
1.4.2019 (`)
31.3.2020 (`)
Subscription due
1,500
2,200
Subscription received in Advance
1,200
700
Stock of Medicine
10,000
15,000
Due for Medicine
9,000
13,000
Equipment
21,000
30,000
Building
50,000
48,000
Prepare Income and Expenditure Account for the year ended 31 March 2020 and also the Balance Sheet as
on that date.
Solution :
Kolkata Medical Aid Society
Receipts and Payments Account
For the Year Ended 31 March, 2020
Dr.
Receipts
Cash in hand (Opening)
Cr.
`
8,000
Payments
`
Medicine supply
30,000
Subscriptions
50,000
Honorarium to doctors
10,000
Donation
15,000
Salaries
28,000
Interest on investments
9,000
Charity show collection
12,500
94,500
Sundry expenses
1,000
Purchase of equipment
15,000
Charity show expenses
1,500
Cash in hand
9,000
94,500
Final Accounts of Not-For-Profit Organisations
Dr.
9.47
Income and Expenditure Account
For The Year Ended 31.3.2020
Cr.
`
`
Expenditure
Income
Medicine consumed (4)
29,000
Subscriptions
51,200
Honorarium to doctor
10,000
Donation
15,000
Salaries
28,000
Interest on investments
1,000
Profit on charity shows:
Sundry expenses
Depreciation on
Show collection
Equipment
6,000
Building
2,000
Excess of Income over expenditure (Surplus)
Less : Show expenses
9,000
12,500
1,500
11,000
8,000
10,200
86,200
86,200
Balance Sheet As On 31 March, 2020
`
Liabilities
Capital Fund:
Opening Balance
Add: Surplus
Subscription received in advance
Building
1,80,300
10,200
Less: Depreciation
1,90,500
700
`
Assets
50,000
2,000
Equipment
21,000
Add: Purchased
15,000
48,000
36,000
Amount due for medical supply
13,000
Less: Depreciation
Stock of Medicine
Investments
6,000
30,000
15,000
1,00,000
Subscription receivable
2,200
Cash in hand
9,000
2,04,200
2,04,200
Balance Sheet as on 31.3.2019
Liabilities
`
Assets
`
Subscription received in advance
1,200
Building
50,000
Due for medicine Supply
9,000
Equipment
21,000
Stock of Medicine
10,000
Capital Fund (Balancing Figure)
1,80,300
Investments
1,00,000
Subscription due
1,500
Cash in hand
8,000
1,90,500
1,90,500
Subscriptions for the Year
Particulars
`
Particulars
`
Balance b/d
1,500
Balance b/d
1,200
Income & Expenditure A/c
Balance c/d
51,200
700
53,400
Cash
Balance c/d
50,000
2,200
53,400
9.48
Financial Accounting: Concepts and Applications
Purchase of Medicine
` 30,000 + ` 13,000 – ` 9,000 = ` 34,000
Medicine Consumed
Opening stock
10,000
Add: Purchases
34,000
44,000
Less: Closing stock
15,000
29,000
Depreciation on Equipment
Opening Balance 1.04.2019
21,000
Add: Purchase
15,000
36,000
Less: Balance on 31.03.2020
30,000
6,000
Illustration 24 (General)
The Assets and Liabilities position of “WE CARE SPORTS CLUB” was as follows:
Particulars
31.03.2019
31.03.2020
`
`
96,224
86,601
(ii) Bank
10,220
14,470
(iii) Cash
450
650
(iv) Prepaid Insurance
200
—
4,500
3,000
125
—
10,000
—
Water
1,000
750
Electricity
1,250
1,000
3,000
4,500
(i) Fixed Assets
(v) Subscription received in Advance
(vi) Interest outstanding on Loan
(vii) Loan (Cr.)
(viii) Outstanding Expenses:
(ix) Subscription Receivable
Receipts and Payments Account
For the year ended 31.03.2020
Receipts
`
Opening Balance:
Payment
`
Loan Prepaid
10,000
Rent
11,000
Cash
450
Bank
10,220
Water
12,000
75,000
Electricity
15,000
2,500
Insurance
5,000
Repairs
6,000
Wages
6,000
Telephone
7,200
Subscription
Miscellaneous
Final Accounts of Not-For-Profit Organisations
9.49
Interest on Loan
250
Miscellaneous
600
Closing Balance:
Cash
650
Bank
14,470
88,170
88,170
Prepare the:
(i) Income and Expenditure Account for the year ended, and
(ii) Balance Sheet as on 31.03.2020.
Solution :
Dr.
“WE CARE SPORTS CLUB”
Income and Expenditure Account
For the Year Ended 31.03.2020
Cr.
`
`
Expenditure
Rent
11,000
Water:
Income
Subscription
75,000
Less: O/S as on 31.3.19
(3,000)
Paid during the year
12,000
Add: O/S as on 31.3.20
4,500
Less: O/S as on 31.3.19
(1,000)
Add: Prepaid as on 31.3.19
4,500
Add: O/S as on 31.3.20
750
Less: Prepaid as on 31.3.20
(3,000)
11,750
Electricity:
Miscellaneous
Paid during the year
15,000
Less: O/S as on 31.3.19
(1,250)
Add: O/S as on 31.3.20
1,000
Insurance
Add:
Prepaid as on 31.3.19
78,000
2,500
14,750
5,000
200
5,200
Repairs
6,000
Wages
6,000
Telephone
7,200
Interest on loan
250
Less: O/S as on 31.3.19
125
Miscellaneous
125
600
Depreciation (96,224 – 86,601)
9,623
Surplus
8,252
80,500
80,500
Balance Sheet As On 31.03.2020
`
Liabilities
Capital Fund
93,219
Add: Surplus
8,252
Subscription Received in Advance
Electricity
`
Fixed Assets
86,601
1,01,471
Bank
14,470
3,000
Cash
650
Outstanding Expenses:
Water
Assets
Subscription Receivable
4,500
750
1,000
1,750
1,06,221
1,06,221
9.50
Financial Accounting: Concepts and Applications
WORKING NOTE
Balance Sheet As On 31 March 2019
`
Liabilities
Assets
`
Capital Fund (Balancing Figure)
93,219
Fixed Assets
Loan
10,000
Cash
450
125
Bank
10,220
Interest on loan Outstanding
Subscription Received in Advance
4,500
Outstanding Expenses:
Subscription Received
Prepaid Insurance
Water
1,000
Electricity
1,250
96,224
3,000
200
2,250
1,10,094
1,10,094
Illustration 25 (Treatment of Postage Stamps)
From the following receipts and payments account of a club and the additional information, prepare income
and expenditure account for the year ended 31 December 2020 and the Balance Sheet at that date:
Receipts
Cash in hand
`
352
Payments
Crockery Purchased
`
265
Current Account with Bank
2,738
Sundries
2,312
6% Fixed Deposit
3,000
Salaries
1,100
Membership Subscription
4,000
Postage Stamps
105
Purchase of Cricket Goods
972
570
(including ` 600 for 2016)
Entrance Fees
275
Investments
Donations
501
Tournament Expenses
Interest on Fixed Deposit
90
Tournament Fund
2,000
Sale of Crockery
300
(Book value ` 120)
Upkeep of Lawn
Cash in hand
Fixed Deposit
Additional Information:
(i) Monthly salary is ` 100
(ii) The value of issued postage stamps is as follows:
31 December 2019 — ` 75
31 December 2020 — ` 90
(iii) Stock of Cricket Equipment is as follows:
31 December 2019 — ` 321
31 December 2020 — ` 280
(iv) Arrears of membership subscription
2019 — ` 660
2020 — ` 800
400
Balance:
Current Account
13,256
1,880
320
2,332
3,000
13,256
Final Accounts of Not-For-Profit Organisations
9.51
Solution:
Dr.
A Club
Income and Expenditure Account
For The Year Ending 31 December, 2020
Cr.
`
`
Expenditure
Sundries
Salaries
Add:
Outstanding for 12th Month
2,312
1,100
100
Income
Subscriptions
Less: For 2019
1200
Purchases in 2020
800
Donations
Opening Stock
Add:
600
3,400
Add: For 2020
Postage Stamps:
4,000
75
501
Interest on Fixed Depost
90
105
Add: Accrued
90
180
Profit on sale of crockery
Less: Stock at the end
90
Cricket goods
4,200
180
180
90
972
Depreciation on Cricket Equipment (321 – 280)
41
Upkeep of Lawns
400
Excess of Income Over Expenditure
46
5,061
5,061
Balance Sheet As On 31 December 2019
`
Liabilities
Capital Fund
7,266
(Balancing Figure)
`
Assets
Cash in hand
352
Cash at Bank:
Current Account
2,738
6% Fixed Deposit
3,000
Crockery
5,738
120
Postage Stamps Stock
75
Stock of Cricket Equipment
321
Subscriptions Receivable
660
7,266
7,266
Balance Sheet As At 31 December 2020
`
Liabilities
Outstanding Salary
Tournament Fund
100
2,000
Less: Expenses
1,880
Capital Fund
7,266
Add:
Surplus
Entrance Fees
46
`
Assets
Cash in hand
320
Cash at Bank:
120
7,312
275
Current Account
2,332
6% Fixed Deposit
3,000
Accrued Interest
Crockery
Postage Stamps Stock
Cricket Equipment Stock
7,807
5,332
90
265
90
280
Subscriptions Receivable (800 + 60)
860
Investments
570
7,807
9.52
Financial Accounting: Concepts and Applications
ATTENTION PLEASE
(i)
Subscriptions outstanding amounts are for 2019 and 2020 respectively and not on 31 December 2019 and 31
December 2020.
(ii)
Tournament Fund and Tournament Expenses have been adjusted in the Balance Sheet as on 31 December
2020.
(iii)
Total interest on Fixed Deposition should be:
6% of ` 3,000 = 180. But the interest received is only ` 90. Hence, ` 90 is yet to be received.
(iv)
Entrance fees have been capitalised for reasons given in the text.
Illustration 26 (Calculation of Subscriptions and Expenses)
From the following information supplied by Secretary of the Dahanu Youth Club, prepare the Income and
Expenditure Account for the year ending 31 st December, 2020 and the Balance Sheet as on the same date:
Cash Balance:
31.12.2019
8,225
31.12.2020
11,900
Investments (31.12-19)
10,750
Furniture & Fittings (31.12.19)
5,000
Purchases of investments during the year
3,850
Entrance Fees (to be capitalised)
8,750
Subscriptions received during the year
69,300
Further information about subscriptions:
Arrears of 2019
6,125
Arrears of 2020
5,725
Received in Advance in 2019
1,925
Received in Advance in 2020
1,575
Expenses paid during the year
1,00,625
Further information about expenses:
Expenses unpaid in 2020
7,645
Expenses unpaid in 2019
5,375
Expenses prepaid in 2020
2,500
Expenses prepaid in 2019
230
Surplus from Programmes
25,250
Miscellaneous income received in 2020
4,850
Solution:
Dr.
Dahanu Youth Club
Income and Expenditure Account
For the Year Ending 31 December, 2020
Cr.
`
`
Expenditure
Expenses
Add:
Outstanding in 2020
1,00,625
7,645
1,08,270
Income
Subscription
Less: Outstanding for 2019
69,300
6,125
63,175
Final Accounts of Not-For-Profit Organisations
Less: Outstanding in 2019
9.53
5,375
Add: Outstanding for 2020
5,725
1,02,895
Less: Prepaid in 2020
68,900
2,500
Add: Advance in 2019
1,925
1,00,395
Add:
Prepaid in 2019
230
70,825
1,00,625
Less: Advance in 2020
1,575
Surplus from Programmes
69,250
25,250
Miscellaneous Income
4,850
Excess of Expenditure over income
1,275
1,00,625
1,00,625
Balance Sheet As On 31 December 2020
`
Liabilities
Capital Fund
Add: Entrance Fees
23,030
Cash
8,750
1,275
11,900
Investments
31,780
Less: Deficit
`
Assets
10,750
Add: Purchases
30,505
3,850
14,600
Furniture & Fittings
5,000
Subscription received in advance
1,575
Outstanding Subscription
5,725
Outstanding Expenses
7,645
Prepaid Expenses
2,500
39,725
39,725
WORKING NOTE
Calculation of Capital Fund:
Balance Sheet As On 31 December, 2019
`
Liabilities
`
Assets
Subscription received in advance
1,925
Cash
Outstanding Expenses
5,375
Investments
Capital Fund
23,030
(Balancing Figure)
8,225
10,750
Furniture & Fittings
5,000
Outstanding Subscription
6,125
Prepaid Expenses
30,330
230
30,330
Illustration 27 (Incomes and Receipts; Expenditures and Payments)
The following information was obtained from the books of Young Bengal Club as on 31.3.2020 to the end of
the first year of the club. Prepare Receipts and Payments Account, Income and Expenditure Account for the
year ended 31 March 2020 and a Balance Sheet as on that date:
(i) Donations Received for Building and Library Book — ` 2,00,000.
(ii) Other revenue incomes and actual receipts:
Revenue Income (`)
Actual Receipt (`)
Entrance Fees
17,000
17,000
Subscription
20,000
19,000
600
600
1,600
1,060
—
16,000
Locker Rents
Sundry Income
Refreshment Account
9.54
(iii)
Financial Accounting: Concepts and Applications
Other revenue expenditure and actual payments:
Revenue Expenditure
(`)
Actual Payments
(`)
Land Cost (` 10,000)
—
10,000
Furniture (Cost ` 1,46,000)
—
1,30,000
Salaries
5,000
4,800
Maintenance of Playgrounds
2,000
1,000
Rent
8,000
8,000
—
8,000
Refreshment Account
(iv) Donation to the extent of ` 25,000 was utilised for the purchase of library books, balance was unutilised.
In order to keep it safe, 9% Government Bonds of ` 1,60,000 were purchased on 31.3.2020. Remaining
amount was put in the Bank on 31.3.2020 under term deposit. Depreciation at 10% p.a. was to be
provided for the whole year on Furniture and Library Books.
Solution:
Dr.
Young Bengal Club
Receipts and Payments Account
For the Year Ending 31 March 2020
Cr.
`
`
Receipts
Donations for Building and Library Books
2,00,000
Payments
Land
10,000
Entrance Fees
17,000
Furniture
Subscription
19,000
Salaries
4,800
Maintenance of Playgrounds
1,000
Rent
8,000
Refreshment Account
8,000
Lockers Rent
600
Sundry Income
1,060
Refreshment
16,000
Balance c/d (overdraft)
1,08,140
1,30,000
Library Books
25,000
9% Govt. Bonds
1,60,000
Bank Term Deposit
15,000
3,61,800
Dr.
Income and Expenditure Account
For the Year Ended 31 st March, 2020
Cr.
`
`
Expenditure
Salaries
Add:
4,800
Outstanding
200
Maintenance of Playgrounds
1,000
Add: Outstanding
1,000
Rent
Depreciation: Furniture
3,61,800
5,000
Surplus: Excess of Income Over Expenditure
2,500
Entrance Fees
17,000
Lockers rents
600
Subscription
19,000
2,000
Add: Accrued
1,000
8,000
Sundry income
1,060
14,600
Library Books
Income
Add: Outstanding
17,100
Refreshment A/c (16,000 – 8,000)
540
20,000
1,600
8,000
15,100
47,200
47,200
Final Accounts of Not-For-Profit Organisations
9.55
Balance Sheet As On 31 st March, 2020
`
Liabilities
Capital Fund (Surplus)
15,100
Building and Library
2,00,000
Creditor for furniture
16,000
Outstanding Expenses:
Maintenance of Play grounds
Land
1,46,000
Less: Depreciation
14,600
Library Books
25,000
Less: Depreciation
200
1,000
Bank overdraft
2,500
9% Govt. Bonds
1,200
1,08,140
`
10,000
Furniture
Room Fund
Salaries
`
Assets
1,31,400
22,500
1,60,000
Bank: Term Deposit
15,000
Accrued Subscription
1,000
Sundry Income Receivable
540
3,40,440
3,40,440
Illustration 28 (Consumption of Medicines)
From the following particulars relating to a Charitable Hospital, prepare Income and Expenditure Account
for the year ended 31 December 2020 and a Balance Sheet as at that date:
Dr.
Receipts and Payments Account
For the Year Ending 31 December, 2020
Cr.
`
`
Receipts
Balance b/d
Subscriptions
7,130
Debetor’s Honorarium
9,000
47,996
Suppliers of Medicines
30,590
Donations
4,500
Legacies
10,000
Interest on Investments
@ 10% for full year
7,000
Proceeds from Charity Show
Payment
10,450
Petty Expenses
461
Salaries
27,500
Equipment Purchased
15,000
Expenses on Charity Show
2,750
Balance c/d
1,775
87,076
87,076
Additional Information:
1.1.2020
31.12.2020
Subscriptions Due
650
800
Subscriptions Received in Advance
254
300
Stock of Medicines
8,910
9,800
Suppliers of Medicines
4,000
2,500
Outstanding Salaries
3,600
4,800
Equipment
21,200
31,600
Buildings (Cost less Depreciation)
90,000
81,000
Solution:
Dr.
Charitable Hospital
Income and Expenditure Account
For The Year Ending 31 December 2020
`
Expenditure
Doctors’ Honorarium
9,000
Medicines:
8,910
Add: Purchases
30,590
Add: Creditors for Medicines (31.12.2020) 2,500
42,000
`
Income
Subscriptions
Add: Due on 31.12.2020
Opening Stock
Cr.
47,996
800
48,796
Add: Received in Advance
on 1.1.2020
254
49,050
9.56
Financial Accounting: Concepts and Applications
Less: Stock at the end
Less: Creditors on 1.1.2020
Petty Expenses
Salaries
Add: Outstanding on 31.12.2020
Less: Outstanding on 1.1.2020
Depreciation on Equipment
(21,200 + 15,000 – 31,600)
Depreciation on Building
Expenses on Charity Show
9,800
32,200
4,000
27,500
4,800
32,300
3,600
Less: Due on 1.1.2020
28,200
461
28,700
4,600
Less: Received in Advance
in 2020
Donations
Interest on Investments
Proceeds from Charity Show
Excess of Expenditure Over Income
650
48,400
300
48,100
4,500
7,000
10,450
12,661
9,000
2,750
82,711
82,711
Balance Sheet As On 1 January 2020
`
Liabilities
Suppliers of Medicines
4,000
Subscriptions Received in Advance
254
Outstanding Salaries
3,600
Capital Fund
1,90,036
(Balancing Figure)
Assets
Cash in hand
Subscriptions Due
Stock of Medicines
Equipment
`
7,130
650
8,910
21,200
Investments [7,000 × (100/10)]
70,000
Building
90,000
1,97,890
1,97,890
Balance Sheet As On 31 December 2020
`
Liabilities
Subscriptions Received in Advance
Suppliers of Medicines
Outstanding Salaries
Capital Fund
Less: Deficit
Add:
Legacies
300
2,500
4,800
1,90,036
12,661
1,77,375
10,000
Assets
Cash in hand
Subscriptions Receivable
Stock of Medicines
Equipment
Building
Investments
`
1,775
800
9,800
31,600
81,000
70,000
1,87,375
1,94,975
1,94,975
Illustration 29 (Donations for Building)
The Receipts and Payments Account of Navkar Football Club for the year ending 31 March 2020 was as under:
Receipts
Balance b/d
Subscriptions received
Interest
Sale of furniture
(Book value 14,000)
Donations for club building
`
48,000
2,46,000
2,000
10,000
60,000
3,66,000
Payments
Purchase of balls
Tournament fees
Affiliation fees
Rent of playground
Refreshment expenses
Travelling expenses
Investments purchased at face value
Salary
Miscellaneous expenses
Balance c/d
`
80,000
10,000
2,000
5,000
4,000
30,000
1,00,000
12,000
8,000
1,15,000
3,66,000
Final Accounts of Not-For-Profit Organisations
9.57
Prepare club’s income and expenditure account for the year ended 31 March 2020 and the balance sheet as
on that date after taking the following information into account:
(i) The subscriptions received include ` 10,000 outstanding subscriptions of the year 2018-19. Subscriptions
for the year 2019-20 amounting to ` 16,000 are still outstanding from members. Some members have
paid subscriptions for the year 2020-21 amounting to ` 8,000 which is included in the subscriptions
received.
(ii) Interest accrued but not received ` 500.
(iii) The rent of the playground ` 6,000 and salary ` 5,000 of the year 2019-20 are still outstanding and
rent of playground of the year 2018-19 ` 1,000 has been paid during this year.
(iv) There is a stock of balls with the club ` 4,000 on 31 March 2020.
Solution :
Naukar Football Club
Income and Expenditure Account
For the Year Ended 31 March 2020
`
Expenditure
Cost of balls used:
Purchases
Less: Stock at the end
Subscriptions
80,000
4,000
Add: Outstanding for 2019-20
76,000
Tournament fees
10,000
Affiliation fees
2,000
Rent of playground
5,000
Add:
6,000
Outstanding
1,000
Refreshment to players
Add:
16,000
2,62,000
Less: Outstanding for 2018-19
10,000
2,52,000
for 2020-21
Interest
10,000
Add: Accrued
8,000
2,44,000
2,000
500
2,500
4,000
Travelling expenses
Salary
2,46,000
Less: Received in advance
11,000
Less: Outstanding for 2018-19
`
Income
30,000
12,000
Outstanding
5,000
17,000
Office expenses
8,000
Furniture-Loss on sale
4,000
Excess of Income over Expenditure
85,500
2,46,500
2,46,500
Balance Sheet As On 31 March 2019
Liabilities
Outstanding rent
`
1,000
Capital Fund
(Balancing Figure)
71,000
72,000
Assets
`
Cash
48,000
Subscriptions due
10,000
Furniture
14,000
72,000
9.58
Financial Accounting: Concepts and Applications
Balance Sheert As On 31 March 2020
`
Liabilities
`
Assets
Subscriptions received in advance
8,000
Cash
1,15,000
Outstanding rent
6,000
Investments
1,00,000
Outstanding salary
5,000
Accrued interest
60,000
Subscriptions due
Donations for Club Building
Capital Fund
71,000
Add: Surplus
85,500
500
16,000
Stock of balls
4,000
1,56,500
2,35,500
2,35,500
Illustration 30 (Prepaid Municipal Taxes)
Given below is the Receipts and Payments Account of the National Club for the year ended 31 March 2020.
Dr.
Cr.
`
Receipts
Balance b/d
10,250
Subscriptions:
`
Payment
Salaries
6,000
General expenses
2018-19
400
2019-20
20,500
2020-21
600
Donations
5,400
Investment (Govt. Bonds)
Proceeds of entertainment programme
9,500
Municipal taxes
Sale of waste papers
450
800
Entertainment programme expenses
4,500
Newspapers
1,500
Charity
3,500
20,000
500
Electricity charges
1,400
Balance c/d
8,900
47,100
47,100
Prepare the club’s income and expenditure account for the year ended 31 March 2020 and the balance sheet
as on that date, after taking the following information into account:
(i) There are 500 members paying an annual subscription of ` 50 each; ` 500 is still in arrear for
2018-19.
(ii) Municipal taxes amounting to ` 400 per annum have been paid up to 30 June 2020 and ` 500 for
salaries are outstanding.
(iii) Buildings stand in the books at ` 50,000 and it is required to write off depreciation at 5 per cent per
annum.
(iv) 6 per cent per annum interest is accrued on government bonds for 5 months.
Solution :
National Club
Income and Expenditure Account
For the Year Ended 31 March 2020
`
Expenditure
Salaries
Add:
Outstanding
General expenses
6,000
500
Subscriptions
6,500
800
`
Income
Add: Outstanding
Donations
20,500
4,500
25,000
5,400
Final Accounts of Not-For-Profit Organisations
Newspapers
9.59
1,500
Municipal taxes
500
Less: Prepaid
100
400
Entertainment expenses
4,500
Charity
3,500
Electiricity charges
1,400
Depreciation on building
2,500
Surplus
Proceeds of entertainment programme
9,500
Sale of waste paper
450
Interest on Govt. Bonds
500
19,750
40,850
40,850
Balance Sheet As On 31 March 2020
`
Liabilities
Capital Fund
61,150
Add:
19,750
Surplus
Buildings
80,900
Subscription received
`
Assets
Less: Depreciation
50,000
2,500
Investment in Govt. bonds
in advance for 2020-21
600
Interest accrued
Outstanding salaries
500
Subscriptions due:
47,500
20,000
500
2019-20
4,500
2018-19
500
5,000
Prepaid taxes
100
Cash in hand
8,900
82,000
82,000
Opening Balance Sheet
Liabilities
Capital Fund
`
61,150
(Balancing Figure)
Assets
`
Cash
10,250
Buildings
50,000
Subscriptions due
61,150
900
61,150
Illustration 31 (Hidden Adjustment)
Following is the Yuvaraj’s Library’s Cash Account for the year ending 31 December 2020:
Receipts
`
Payments
`
Balance b/d
9,000
Salaries and Wages
13,800
Admission Fees
8,000
Books
17,500
Subscriptions
Lecture Hall Hire Charges
40,000
6,000
Miscellaneous Receipts
600
Interest on Investments
1,000
Electric Charges
1,500
Outstanding Expenses
1,400
Rent
17,500
5% investments (Purchased on 1.7.2020)
20,000
Donations
10,000
Stationery
2,500
Book Fair Profit
12,000
Balance c/d
12,400
86,600
86,600
9.60
Financial Accounting: Concepts and Applications
You are required to prepare an Income and Expenditure Account for the year ended 31 December 2020 and a
Balance Sheet as at 31 December, 2020.
The following further informations are also made available to you:
(i) On 31 December, 2019 the library had the following assets also:
Furniture ` 11,000; Books valued at 1,00,000 and investments at a cost of ` 30,000 carrying interest
at 5% p.a.
(ii) Subscriptions realised in advance this year amounted to ` 5,000 and outstanding liabilities on 31 December,
2016 for salaries and wages ` 1,200 and for Rent ` 1,500.
(iii) 60% of the Admission Fees should be capitalised.
(iv) Furniture and Library Books are to be depreciated at 6% and 10% p.a. respectively.
Solution:
Dr.
Yuvraj Library
Income and Expenditure Account
For the Year Ending 31 December, 2020
Cr.
`
`
Expenditure
Salaries and Wages
13,800
Add: Outstanding
Electricity
1,200
Rent
15,000
1,500
17,500
Add: Outstanding
1,500
Stationery
Depreciation:
Furniture
Books
19,000
660
Surplus
Admission Fee
8,000
Less: Capitalised (60%)
Lecture Hall hire charges
4,800
Miscellaneous Receipts
2,500
11,750
Income
12,410
3,200
6,000
600
Interest on Investment
1,000
Add: Accrued (500 + 500)
Donations
1,000
2,000
10,000
Book Fair Profit
12,000
Subscriptions
35,000
18,390
68,800
68,800
Subscriptions Account
`
Particulars
Income and Expenditure Account
35,000
`
Particulars
Receipts & Payments Account
40,000
(Balancing Figure)
Balance c/d (Advance)
5,000
40,000
40,000
Balance Sheet As On 31 December, 2020
`
Liabilities
Capital Fund
Add:
Admission Fees
Add:
Surplus
1,48,600
Furniture
4,800
18,390
Subscription received
in Advance
Less: Depreciation (6%)
1,71,790
1,200
Rent
1,500
2,700
660
1,00,000
Add: Additions
17,500
1,17,500
10,340
Less: Depriciation (10%)
5% Investments
11,750
30,000
1,05,750
Add: Additions
20,000
50,000
(1.7.2020)
Accrued Interest on Investments
Cash Balance
1,79,490
11,000
Books
5,000
Expenses Payable:
Salaries
`
Assets
1,000
12,400
1,79,490
Final Accounts of Not-For-Profit Organisations
9.61
WORKING NOTES
Interest on Investments:
Due 30,000 × 5%
1,500
Due 20,000 × 5% × 6/12
500
2,000
Received
1,000
Accrued
1,000
Balance Sheet As On 31 December 2019
Liabilities
Expenses Payable
Capital Fund (Balancing Figure)
`
1,400
1,48,600
Assets
Furniture
Books
5% Investments
Cash
1,50,000
`
11,000
1,00,000
30,000
9,000
1,50,000
Illustration 32 (Hidden Adjustment)
Following is the Receipts and Payments Account of Diamond Literary Club for the year ended on 31 March
2020.
Receipts
`
Payments
`
Cash at Bank
12,500
Salaries
2,500
Subscriptions
52,500
Printing and Stationery
1,250
Annual Day Receipts
26,800
Annual Day expenses
2,500
Mushaira Receipts
22,000
Telephone Charges
2,500
Dividend Receipts
2,000
Sundry Expenses
2,000
1,15,800
Investments in Shares
75,000
Postage and Telegrams
2,250
Building Maintenance
6,000
Rent of Theatre
10,000
Cash at Bank
11,800
1,15,800
Additional Information Supplied:
(i) On 1 April 2019 Buildings stood in the books at ` 50,000 and Investments in Shares at ` 5,000. Buildings
are subject to depreciation @ 5% p.a.
(ii) There are 200 members paying subscription at the rate of ` 250 per annum each. Some members have
paid their annual subscription in advance during the year.
(iii) As on 1 April 2019, no subscription had been received but subscriptions were outstanding to the extent
of ` 1,000 as at 31 March 2019. Subscription accrued as on 31 March 2020 was ` 1,500.
(iv) Postage stamps worth ` 250 were in stock with Secretary as on 1 April 2019 and as on 31 March
2020, they were valued at ` 150.
(v) Telephone charges paid in advance were ` 300.
You are required to prepare Income and Expenditure Account for the year ended on 31 March 2020 and the
Balance Sheet as at that date.
9.62
Financial Accounting: Concepts and Applications
Solution :
Dr.
Diamaond Literary Club
Income and Expenditure Account
For The Year Ending 31 March 2020
Cr.
`
`
Expenditure
Income
Salaries
2,500
Subscriptions
Printing and Stationery
1,250
Less: Outstanding on 31 March 2019 1,000
Annual Day Expenses
2,500
51,500
Telephone
2,500
Less: Prepaid
300
Postage Stamps
2,250
Add:
Stamps on 1.4.2019
52,500
Add: Outstanding on 31 March 2020 1,500
2,200
53,000
Less: Received in Advance
250
(Balancing Figure)
2,500
Annual Day Income
26,800
2,350
Mushaira Receipts
22,000
Maintenance of Building
6,000
Dividends
Depreciation on Building
2,500
Less: Stamps on 31.3.2020
150
Rent of Theatre
3,000
50,000
2,000
10,000
Sundry Expenses
2,000
Excess of Income over Expenditure
69,500
1,00,800
1,00,800
Balance Sheet As On 31 March 2019
`
Liabilities
Capital Fund
68,750
(Balancing Figure)
`
Assets
Cash at Bank
12,500
Buildings
50,000
Subscription Receivable
1,000
Postage Stamp Stock
250
Investments in Shares
5,000
68,750
68,750
Balance Sheet As On 31 March 2020
`
Liabilities
Subscriptions Received
Buildings
in Advance
3,000
Capital Fund
68,750
Add:
69,500
Surplus
1,38,250
50,000
Less: Depreciation
2,500
Investment in Shares
5,000
Add: Purchases
75,000
47,500
80,000
Postage Stamps (Stock)
150
Prepaid Telephone Charges
300
Subscriptions Receivable
Cash at Bank
1,41,250
`
Assets
1,500
11,800
1,41,250
Final Accounts of Not-For-Profit Organisations
9.63
Illustration 33 (Stock of Stationery Given)
The following is the Receipts and Payments Account of Country Side Club for the year ended 31 December
2020.
Receipts and Payments Account
`
Receipts
Cash in Hand b/d
3,000
Subscriptions :
2019
600
2020
32,400
2021
300
33,300
`
Payments
Bank Overdraft
6,200
Investments
6,000
Furniture
2,900
Salaries
12,400
Stationery
1,780
Entrance Fees
1,340
Telephone and Fax
2,840
Dividend Income
1,200
Cash in hand
1,100
580
Cash at Bank
6,200
Sundry Receipts
39,420
39,420
Prepare Income and Expenditure Account of the Club for the year ended 31 December 2020 and a Balance
Sheet as at that date taking into account the following additional information:
(i) The Club has 3,600 members each paying an annual subscription of ` 10. Subscriptions amounting to
` 180 are still in arrears in respect of the year 2019.
(ii) Stock of Stationery on 31 December, 2019 was ` 250 and on 31 December 2020 ` 174.
(iii) Entrance fees are to be capitalised.
(iv) Salary of ` 1,100 for December 2020 is outstanding while ` 264 was outstanding for December 2019.
The Club paid ` 1,000 in the year 2019 towards Telephone Charges of which ` 250 relate to 2020.
(v) As on 31 December 2019 Premises stand in the books at ` 49,000 and investment at ` 13,000. Depreciate
Premises and Furniture by 10% p.a.
Solution:
Country Side Club
Income and Expenditure Account
For the Year Ended 31 December, 2020
`
Expenditure
Salaries
Add:
Outstanding for December 2020
12,400
Subscription
1,100
Add: Outstanding
13,500
Less: Outstanding for December 2019
Stationery
Add:
Opening Stock
264
Dividend Income
13,236
`
Income
Sundry Receipts
32,400
3,600
36,000
1,200
580
1,780
250
2,030
Less: Closing Stock
Telephone
Add:
Advance in 2019
174
1,856
2,840
250
3,090
Depreciation on :
Premises
4,900
Furniture
290
Surplus
14,408
37,780
37,780
9.64
Financial Accounting: Concepts and Applications
Balance Sheet As On 31 December 2020
`
Liabilities
Capital Fund:
Opening
Add:
Entrance Fees
Surplus
Outstanding Salaries
Subscription received in Advance
Premises
59,816
1,340
14,408
75,564
1,100
300
`
Assets
49,000
Less: Depreciation @ 10%
4,900
Furniture
2,900
Less: Depreciation @ 10%
Investments (13,000 + 6,000)
Outstanding Subscriptions
290
44,100
2,610
19,000
3,780
(3,600 + 180)
Stationery
174
Cash
1,100
Bank
6,200
76,964
76,964
WORKING NOTE
Balance Sheet As On 31 December 2019
Liabilities
Capital Fund (Balancing Figure)
Bank Overdraft
Outstanding Salaries
`
59,816
6,200
264
Assets
Cash
Outstanding Subscription
`
3,000
780
(600 + 180)
Investments
13,000
Premises
49,000
Stationery
250
Prepaid Telephone
250
66,280
66,280
Illustration 34
The following is the Receipts and Payments Account of a cultural society for the year ended 31 December
2020:
Receipts
Cash in hand, 1 Jan
`
1,500
Subscription:
2019
200
2020
16,200
2021
250
Entertainment Proceeds
2,000
Payments
Bank Overdraft, 1 Jan
3,100
Investments in Securities
3,000
Furniture
1,450
Salary
6,200
Printing and Stationery
1,710
1,420
670
Sundry Expenses
Interest of securities
480
Balance on 31.12.2020:
Sale of Old Chairs
120
21,420
890
Entertainment Expenses
Entrance Fees
(Book Value: Nil)
`
Cash
550
Bank
3,100
21,420
Final Accounts of Not-For-Profit Organisations
9.65
You are required to prepare income and expenditure account of cultural society for the year ended 31 December
2020 and a balance sheet as on that date after considering the following:
(i) The society has 1,800 members each paying annual fees of ` 10. Subscriptions amounting to ` 90
were still in arrears for the year 2019.
(ii) Stock of Stationery on 31 December 2019 was ` 125 and on 31 December 2020 was ` 87.
(iii) Entrance fees are to be capitalised.
(iv) Salary of ` 550 for December 2020 is outstanding. Expenses accrued on 31 December 2019 were `
132. The society had paid ` 500 in 2019 for telephone charges out of which ` 125 related to the year
2020.
(v) On 31 December 2019, premises stood in the books at ` 24,500 and investments at ` 6,500.
(vi) Depreciate fixed assets by 5%.
Solution :
Cultural Society
Dr.
Income and Expenditure Account
For the Year Ending 31 December, 2020
Cr.
`
`
Expenditure
Entertainment Expenses
Salaries
1,710
6,200
Add: Outstanding
550
125
Add:
890
Purchase in 2020
Subscriptions
Add: Outstanding
6,750
Printing and Stationery:
Opening Stock
Income
16,200
1,800
Entertainment Proceeds
18,000
2,000
Sale of Old Chairs
120
Interest on Securities
480
1,015
Less: Stock at the end
87
Telephone Charges (Prepaid in 2019)
Sundry Expenses
928
125
1,420
Less: Paid for 2019
132
1,288
Depreciation on :
Premises
1,225
Furniture
73
Excess of Income over Expenditure
1,298
8,501
20,600
20,600
Balance Sheet As On 31 December 2020
`
Liabilities
`
Assets
Outstanding Salaries
550
Cash in hand
550
Subscriptions received in Advance (For 2021)
250
Cash at Bank
3,100
Premises
Capital Fund
Add:
Surplus
Entrance Fees
29,808
8,501
38,309
670
24,500
Less: Depreciation
1,225
Furniture
1,450
Less: Depreciation
Investments
73
6,500
23,275
1,377
9.66
Financial Accounting: Concepts and Applications
Add: Purchased in 2020
3,000
9,500
Subscriptions Receivable
For 2019
90
For 2020
1,800
Stock of Stationery
39,779
1,890
87
39,779
Calculation of Capital Fund
Balance Sheet As On 31 December 2019
Liabilities
Outstanding Expenses
Bank Overdraft
Capital Fund
`
132
3,100
29,808
(Balancing Figure)
Assets
Cash in hand
Premises
Investments
`
1,500
24,500
6,500
Prepaid Telephone Expenses
125
Subscriptions receivable (200 + 90)
290
Stock of Stationery
125
33,040
33,040
Illustration 35 (Capital Fund Given)
From the following Receipt and Payment Account of Young Friends Mandal, Janak Puri for the year ending
31.12.2020 and the adjustments given below, prepare Income and Expenditure Account for the year ending
31 December 2020 and the Balance Sheet on 31.12.2020 :
Dr.
Receipts
Balance (01.01.2020)
Receipts and Payments Account
Cr.
`
`
Payments
23,000
Taxes
1,500
Donations
5,000
Rent
12,000
Entrance Fees
3,500
Stationery
2,500
Subscriptions
20,000
Wages
3,000
Locker Rent
1,000
Billiard Table
1,950
Income from Annual Programme
1,500
Electrical Fittings
1,150
Sale of Furniture (Cost price ` 20,000)
15,000
Investments
Repairs
12,000
800
Annual Programmer Expenses
1,100
Match expenses
3,000
Bank Balance
Cash
69,000
25,000
5,000
69,000
Adjustments:
(i) Locker rent includes ` 200 for the year 2019 and ` 50 is still outstanding for current year.
(ii) Subscriptions include ` 1,000 for the year 2019 and ` 800 are outstanding for this year while ` 200
are received in advance for the year 2021.
(iii) Rent ` 800 for the month of December 2020 is still outstanding.
Final Accounts of Not-For-Profit Organisations
9.67
(iv) 1/2 of the donations and 1/2 of entrance fees are to capitalised.
(v) Opening stock of stationery stood at ` 500 on 1.1.2020, while at the end of the year the stock of stationery
stood at ` 1,000.
(vi) The assets on 1.1.2020 were: Furniture ` 25,000, Sports Materials ` 5,000, while the Capital Fund on
1.1.2020 stood at ` 54,700.
Solution :
Dr.
Young Friends Mandal
Income and Expenditure Account
For the Year Ended 31 December, 2020
Cr.
`
`
Expenditure
Rent
12,000
Add:
Outstanding
800
Opening Stock of Stationery
500
Add:
Purchases
Less: Closing Stock
12,800
Income
Donations
5,000
Less: Capitalised
2,500
Entrance Fees
3,500
2,500
Less: Capitalised
3,000
Subscription
1,000
2,000
Less: Outstanding for 2019
3,000
Add: Outstanding for 2020
1,750
2,500
1,750
20,000
1,000
19,000
Wages
Repairs
800
19,800
Taxes
1,500
Less: Received in advance for 2021
Annual Programme Expenses
1,100
Locker Rent
Match Expenses
3,000
Less: Outstanding for 2019
Loss on Sale of Furniture
5,000
(20,000 – 15,000)
800
200
19,600
1,000
200
800
Add: Outstanding for 2020
50
850
Income from Annual Programme
1,500
Excess of Expenditure over Income
3,000
29,200
29,200
Balance Sheet As On 31 December 2020
`
Liabilities
Capital Fund
Add: Donations
Entrance Fees
Less: Deficit
`
Assets
54,700
Outstanding Subscription
800
2,500
Outstanding Locker Rent
50
1,750
Furniture
25,000
58,950
Less: Sold
20,000
3,000
55,950
5,000
Stock of Stationery
1,000
Subscription received in advance
200
Billiard Table
1,950
Outstanding Rent
800
Electrical Fittings
1,150
Investments
Sports Materials
56,950
12,000
5,000
Bank
25,000
Cash
5,000
56,950
9.68
Financial Accounting: Concepts and Applications
Illustration 36 (Trial Balance)
From the following Trial Balance prepare an Income and Expenditure Account of the Delhi Club for the year
ended 31.12.2020 and a Balance Sheet on that date.
Depreciate furniture by 10%, Billiard Tables and Accessories by 20% and China Glass etc. by 33-1/3%. Of
the subscriptions ` 400 is paid in advance and ` 250 in arrears. ` 300 is owing for salaries of staff.
`
Debit Balances
`
Credit Balances
Furniture
2,500
Members’ Subscriptions
10,560
Billiard tables and accessories
1,250
Sundry receipts, billiards etc.
1,743
China glass, cutlery etc.
333
Sale of tickets for entertainment
3,234
Repairs
734
Sundry creditors
2,600
Salaries and wages
2,262
Entrance fees (Revenue)
Rent and telephone
3,194
Accumulated fund
Fuel and light
1,618
Cost of entertainments
2,190
Sundry Expenses
1,600
Cost of annual dinner
448
4,000
760
Sundry debtors
1,170
Cash at Bank
4,800
Cash in hand
174
22,585
22,585
Solution :
Delhi Club
Income and Expenditure Account
For The Year Ending On 31 December 2020
`
Expenditure
Repairs
734
Salaries and wages
Add:
Salaries outstanding
2,262
300
Sale of Tickets for entertainment
3,234
Less: Cost of entertainment
2,190
2,562
Subscriptions
Rent and Telephone
3,194
Less: Received in advance
Fuel and Light
1,618
Sundry expenses
1,600
Cost of annual dinner
760
Depreciation on:
250
Billiard tables etc.
250
China Glass
111
Excess of Income over Expenditure
1,044
10,560
400
10,160
Add: Outstanding
250
10,410
Sundry receipts :
Billiards etc.
Furniture
`
Income
Entrance Fees
1,743
448
611
2,566
13,645
13,645
Final Accounts of Not-For-Profit Organisations
9.69
Balance Sheet As On 31 December 2020
`
Liabilities
Accumulated Fund
4,000
Add:
2,566
Surplus
Sundry Creditors
`
Assets
Cash at Bank
4,800
6,566
Cash in hand
174
2,600
Sundry debtors
Subscriptions received
1,170
Furniture
in Advance
Salaries outstanding
2,500
400
Less : Depreciation
250
300
Billiard tables and Accessories
1,250
Less: Depreciation
250
China Glass, cutlery etc.
333
Less: Depreciation
111
Subscriptions outstanding
9,866
2,250
1,000
222
250
9,866
PREPARATION OF RECEIPTS AND PAYMENTS ACCOUNT
Receipts and Payments Account includes the actual amount received and actual amount paid during the current
accounting period whether the amount belongs to the current or past or future periods and also whether the
amount received is on account of capital or revenue items.
The Income and Expenditure Account, records only the revenue income and revenue expenditures and that
also for the current accounting period only and also on earned (whether actually received in cash or not)
and incurred (whether actually paid in cash or not) basis.
The following procedure is adopted for preparing Receipts and Payments Account from the given Income
and Expenditure Account, additional information etc..
(i) Opening balances of cash in hand and cash at bank should be shown on the debit (receipt) side of the
Receipts and Payments Account.
(ii) Take into consideration the outstanding or accrued income in the opening balance sheet. If there
is no outstanding income at the end or closing balance sheet also, it means the actual receipt of income
during the current accounting period and the same should be shown in the receipts side of receipts
and payments account.
(iii) Consider the outstanding expenses in the opening balance sheet. If this item is not given in the
closing balance sheet, it means that such outstanding expenses were paid during the year and the same
should be shown in the payments side of receipt and payment account.
(iv) Compare closing assets with the opening assets. If the closing balance of assets is more than the opening
balance, the difference should be treated as purchase of the assets and the same should be shown in
the payments side of the receipts and payments account as shown below (with imaginary figures):
Balance of Sports Equipments at the end
Add:
Depreciation
1,50,000
50,000
2,00,000
Less:
Opening balance
Purchase of Sports Equipment
1,60,000
40,000
If closing balance of an asset is less than the opening balance, the difference is on account of depreciation
which can be verified from the Income and Expenditure Account.
9.70
Financial Accounting: Concepts and Applications
If there is a difference even after adjustment of depreciation, it represents sale, and the same should
be shown in the receipts side of the receipts and payments account.
(v) Deduct outstanding incomes and expenses for the current year from the respective items of incomes
and expenses given in the Income and Expenditure Account. The balance should be treated as actual
receipts and actual payments and the same should be shown in the Receipts and Payments Account.
(vi) Surplus or deficit in the Income and Expenditure Account should be ignored in Receipt and Payment
Account.
(vii) Any new fund appearing in closing balance sheet may be on account of donations or grants received
and the same should be shown on the receipts side of the Receipts and Payments Account.
(viii) Any addition to capital fund on account of legacies, entrance fees or life membership fees should
be treated as receipts.
(ix) Income received in advance appearing in the closing balance sheet is to be treated as receipts during
the year.
(x) Prepaid expenses appearing in the closing balance sheet should be treated as payments.
(xi) Balance the Receipts and Payments Account to find out the closing cash/bank balance.
(xii) If closing balances of cash in hand and cash at bank are given, the difference may indicate the opening
balance of cash in hand or cash at bank as the case may be.
In short, it may be stated that for the purpose of calculating the total receipts and total payments on different
terms, we have to adopt exactly the reverse procedure that is followed in calculating the current income or
current expenditure.
Example I
Calculation of Total Receipts e.g., Subscriptions
(Using imaginary figures)
`
Particulars
Subscriptions as per Income and Expenditure Account
2,00,000
Less:Outstanding at the end of the current year
10,000
1,90,000
Less:Received in advance in the previous year
8,000
1,82,000
Add: Received for the previous year
6,000
1,88,000
Add: Received in advance for next year(s) at the end of the current year
Total subscriptions received in the current year
2,000
1,90,000
Subscriptions Account
Particulars
`
Particulars
`
Balance b/d
6,000
Balance b/d
8,000
Income and Expenditure Account (Given)
2,00,000
Receipts and Payments Account
1,90,000
(Balancing Figure)
Balance c/d
2,000
2,08,000
Balance c/d
10,000
2,08,000
Final Accounts of Not-For-Profit Organisations
9.71
Example II
Calculation of Total Payments e.g., Salaries
(with imaginary figures)
`
Particulars
Salaries as per Income and Expenditure Account
1,50,000
Less:Outstanding at the end of the current year
30,000
1,20,000
Less:Paid in advance in the previous year
70,000
50,000
Add: Paid for the previous year
80,000
1,30,000
Add: Paid in advance at the end of the current accounting period
50,000
Total salaries paid in the current year
1,80,000
Salaries Account
Particulars
`
Particulars
`
Balance b/d
70,000
Balance b/d
80,000
Receipts and Payments Account (Balancing Figure) 1,80,000
Income and Expenditure Account (Given)
Balance c/d
Balance c/d
30,000
2,80,000
1,50,000
50,000
2,80,000
Example III
Calculation of Total Amount Spent on Consumable Item e.g., Stationery
(with imaginary figures)
Particulars
Amount of Stationery as per Income and Expenditure Account
Less: Stock of stationery in the beginning
`
12,500
3,000
9,500
Add: Paid to the creditors for stationery in the beginning
2,000
11,500
Less: Advance paid for stationery in the previous year
200
11,300
Add: Closing stock of stationery in the current year
500
11,800
Less: Creditors for stationery in the current year i.e., at the end
1,300
10,500
Add: Advance for stationery paid in the current year
Total amount paid for stationery in the current year
300
10,800
9.72
Financial Accounting: Concepts and Applications
Stationery Account
`
Particulars
Balance b/d
Opening stock
Balance b/d (Opening Creditors)
3,000
Paid in Advance
Receipts and Payment Account
`
Particulars
2,000
Income and Expenditure Account (Given)
200
10,800
Balance c/d :
(Balancing Figure)
Closing Stock
500
Balance c/d:
Paid in Advance
300
Closing Creditors
12,500
800
1,300
15,300
15,300
Illustration 37 (Receipts and Payments Account)
From the following Income and Expenditure Account of Daisy Social Club for the year ending on 31 December
2019, Balance Sheet as on 1 January 2020 and additional information:
Dr.
Expenditure
Income and Expenditure Account
Cr.
`
`
Income
Salaries
6,000
Subscription
Rent
1,320
Entrance Fees
Travelling Expenses
60
Printing and Stationery
120
General Expenses
180
Equipment used
3,000
Surplus
3,120
Donation
Interest
13,800
11,280
720
1,200
600
13,800
Balance Sheet As On 1 January 2020
Liabilities
Capital Fund
`
Assets
`
20,700
Furniture
4,000
Rent outstanding
120
Building
8,000
Salaries outstanding
780
Investment
6,000
Sports Equipment
1,200
Bank
1,680
Accrued Interest
120
Subscriptions due
600
21,600
21,600
Additional Information: Balances as on 31 December 2020
`
Subscription receivable was
960
Salary outstanding was
480
Rent outstanding was
240
Sports equipment was
3,000
Final Accounts of Not-For-Profit Organisations
9.73
Prepare Receipts and Payments Account for the year ending 31 December 2020 and a Balance Sheet as on 31
December 2020.
Solution :
Receipts and Payments Account
For the Year Ending on 31 December 2020
Dr.
`
Receipts
Balance b/d
Subscriptions
Add:
Outstanding for (2019)
1,680
11,280
Salaries
600
6,000
780
6,780
Less: Outstanding (2020)
Rent
960
`
Payments
Add: Outstanding (2019)
11,880
Less: Outstanding for (2020)
Cr.
10,920
Add: Outstanding (2019)
480
6,300
1,320
120
1,440
Entrance Fees
720
Donations
Interest
Add:
1,200
600
Outstanding for 2019
120
720
Less: Outstanding (2020)
240
Travelling Expenses
1,200
60
Printing and Stationery
120
General Expenses
180
Sports Equipment at the end
3,000
Add: Used
3,000
6,000
Less: Opening Balance
Bank c/d (Balancing Figure)
15,240
1,200
4,800
2,580
15,240
Balance Sheet As On 31 December 2020
`
Liabilities
Capital Fund
20,700
Add: Surplus
3,120
23,820
Assets
`
Furniture
4,000
Building
8,000
Outstanding Salaries
480
Investments
6,000
Outstanding Rent
240
Bank
2,580
Sports equipment
3,000
Subscriptions Due
24,540
960
24,540
Illustration 38 (Receipts and Payments Account)
The following is the Income and Expenditure Account of a Charity Hospital for the year ending 31.12.2020:
Expenditure
Salaries
`
2,35,000
Diet Expenses
20,000
Rent and Rates
Income
Subscriptions
`
2,20,000
Donations
40,000
5,000
Interest on Investment for full year
90,000
Insurance
2,000
@ 5% p.a.
Office Expenses
8,000
Miscellaneous Receipts
6,000
9.74
Financial Accounting: Concepts and Applications
Surgery and Dispensary Expenses
10,000
Depreciation :
Building
37,500
Furniture
1,200
Instruments
8,000
Surplus of Income over Expenditure
46,700
29,300
3,56,000
3,56,000
Other information supplied to you are as under:
31.12.2019 ( ` )
31.12.2020 ( ` )
2,000
1,500
Cash in Hand
Cash at Bank
54,000
?
Building
7,50,000
?
Furniture
20,000
?
Instruments
35,000
?
Subscription outstanding
15,000
45,000
6,000
8,000
18,000
20,000
Subscription received in Advance
Salaries outstanding
Instruments purchased during the year 2020 were ` 5,000.
You are required to prepare the Receipts and Payments Account of the Hospital for the year ended 31 December,
2020 and the Balance Sheet as on that date. Submit your working clearly.
Solution :
Charitable Hospital
Receipts and Payments Account
For the Year Ending on 31 December 2020
`
Receipts
Balance b/d
Salaries
Cash
2,000
Bank
54,000
Add: Outstanding (2019)
56,000
Add:
Outstanding (2019)
18,000
20,000
2,33,000
2,20,000
15,000
2,35,000
Less: Outstanding (2020)
2,35,000
2,53,000
Less: Outstanding (2020)
Subscription
`
Payments
45,000
1,90,000
Diet Expenses
20,000
Rent and Rates
5,000
Instruments
5,000
Insurance
2,000
Office Expenses
8,000
Surgery and Dispensary
Add:
Advance (2020)
8,000
Expenses
1,98,000
Less: Advance (2019)
6,000
10,000
Balance c/d:
1,92,000
Donations
40,000
Interest on investments
90,000
Miscellaneous Receipts
6,000
3,84,000
Cash
Bank (Balancing Figure)
1,500
99,500
1,01,000
3,84,000
Final Accounts of Not-For-Profit Organisations
9.75
Balance Sheet As At 31 December 2019
`
Liabilities
Capital Fund
26,52,000
Add: Surplus
29,300
Subscriptions Received in Advance
Building
26,81,300
8,000
Outstanding Salary
20,000
`
Assets
7,50,000
Less: Depreciation
37,500
Furniture
20,000
Less: Depreciation
Instruments
Add: Purchased
1,200
7,12,500
18,800
35,000
5,000
40,000
Less: Depreciation
Investments (90,000 ÷ 5%)
Subscription outstanding
8,000
32,000
18,00,000
45,000
Cash in hand
1,500
Cash at Bank
99,500
27,09,300
27,09,300
Illustration 39 (Receipts and Payments Accounts)
From the following Income and Expenditure Account of Diamond Club for the year ended on 31 March 2020
and its Balance Sheet as on 31 March 2019, prepare Receipts and Payments Account for the year ended on
31 March 2020 and a Balance Sheet as at that date :
Income and Expenditure Account For the Year Ending 31 March 2020
`
Expenditure
Income
`
Salaries
50,000
Subscriptions
94,000
Rent
11,000
Entrance Fees
6,000
Travelling Expenses
1,000
Donations
Printing and Stationery
1,000
Interest
General Charges
1,500
Periodicals
10,000
5,000
500
Surplus
50,000
1,15,000
1,15,000
Balance Sheet As At 31 March 2019
Liabilities
`
Outstandings:
Assets
Furniture
40,000
20,000
Rent
1,000
Sports Equipments
Salaries
6,500
Investments
Accumulated Fund
1,72,500
`
1,00,000
Subscription Receivable
5,000
Interest Receivable
1,000
Bank Balance
1,80,000
Other Information as on 31 March 2020:
Subscription Receivable ` 8,000; Salaries Outstanding ` 4,000; Rent Outstanding ` 2,000.
14,000
1,80,000
9.76
Financial Accounting: Concepts and Applications
Solution :
Diamond Club
Receipts and Payments Account
For the Year Ending 31 March 2020
`
Receipts
Balance b/d (Balance as per previous
14,000
Balance Sheet)
Subscription
Less: Outstanding for 2020
Salaries
Add: Paid for 2019
50,000
6,500
94,000
56,500
8,000
Less: Outstanding for 2020
86,000
Add: Receipts for 2019
`
Payments
5,000
Entrance Fees
Rent
91,000
Add: Paid for 2019
6,000
Donations
10,000
Interest
5,000
Add: Receipt for 2019
1,000
6,000
4,000
52,500
11,000
1,000
12,000
Less: Outstanding for 2020
2,000
10,000
Travelling Expenses
1,000
Printing and Stationery
1,000
General Charges
1,500
Periodicals
500
Balance c/d
60,500
1,27,000
1,27,000
Balance Sheet As On 31 March 2020
`
Liabilities
Accumulated Fund:
Opening Balance
Add: Surplus
1,72,500
50,000
2,22,500
Outstandings:
Assets
`
Furniture
40,000
Sports Equipments
20,000
Investments
Subscription Receivable
Rent
2,000
Bank Balance
Salaries
4,000
(Closing Balance as per
Receipts and Payments Account)
2,28,500
1,00,000
8,000
60,500
2,28,500
Illustration 40 (Prize Fund And Capitalised Entrance Fees)
From the following Income and Expenditure Account and Balance Sheet of a Club, prepare Receipts and Payments
Account for the year ending 31 March 2020.
Income and Expenditure Account
For the Year Ending 31 March 2020
Expenditure
Upkeep of Ground
`
10,000
Printing
1,000
Salaries
12,000
Income
Subscriptions
Sale of old Newspapers
`
17,320
160
Lectures
2,500
Depreciation
1,000
Entrance Fees
1,300
Rent
1,200
Miscellaneous Income
1,100
Deficit
2,820
25,200
25,200
Final Accounts of Not-For-Profit Organisations
9.77
Balance Sheet As On 31 March 2020
`
Liabilities
Subscriptions in Advance
Prize Fund
Add:
Less:
Interest
100
25,000
9,000
47,000
1,000
Prizes Fund Investments
20,000
26,000
Subscriptions Receivable
2,000
Accumulated Surplus
56,420
Entrance Fees
Furniture
Ground and Building
Prizes
Add:
`
Assets
24000
700
Cash in hand
2,300
1,300
57,720
Less:
Deficit
2,820
54,900
79,000
79,000
The other relevant information is given below:
(i) Upkeep of ground ` 600 and Printing ` 240 were paid for the year ending 31 March 2019.
(ii) Subscriptions outstanding for 2018-19 were ` 800 and that for 2019-20 were ` 700.
(iii) Subscriptions received in advance during 2018-19 were shown at ` 200 and that for 2019-20 at
` 100.
Solution :
A Club
Receipts and Payments Account
For the Year Ending 31 March 2020
`
Receipts
Balance b/d (Balancing Figure)
Subscriptions
Add:
Outstanding for 2018-19
4,660
17,320
Upkeep of Ground
Add: Paid for 2018-19
800
Printing
Add: Paid for 2018-19
Add:
Received in Advance in 2019-20
100
Salaries
18,220
Less: Outstanding for 2019-20
Less: Advance received in 2018-19
10,000
600
10,600
1,000
240
1,240
12,000
Rent
1,200
700
Prizes Paid
2,000
17,520
Balance c/d
2,300
200
Sale of old Newspapers
17,320
160
Lectures
2,500
Entrance Fees
1,300
Add:
1,300
Capitalised
`
Payments
2,600
Miscellaneous Income
1,100
Interest on Investments
1,000
29,340
29,340
9.78
Financial Accounting: Concepts and Applications
Illustration 41 (Stock of Stationery)
The Income and Expenditure Account of Youth Sports Club for the year ending 31 December 2020 is given
below:
Income and Expenditure Account
`
Expenditure
Rent
Stationery
Wages
1,200
Subscriptions
520
Locker’s Rent
1,365
Repairs
`
Income
10,460
350
Subscription for Annual Programme
2,000
475
Expenses of Annual Programme
1,690
Interest
636
Depreciation on Sports
Equipments
1,000
Salary
600
Surplus
5,324
12,810
12,810
Additional Information:
(i) Locker’s Rent ` 100 has been received for the previous year and ` 50 is still outstanding for the current
year
(ii) Entrance fee ` 300 have been capitalised.
(iii) Subscription ` 150 has been received for the previous year and ` 250 has been received for the next
year.
(iv) Amount spent on sports equipments ` 4,000 has been capitalised.
(v) Salary owing for the current year ` 600.
(vi) Closing stock of Stationery is ` 345.
(vii) Opening cash balance ` 500.
Prepare Receipts and Payments Account for the year ended 31 December 2020.
Solution :
Dr.
Youth Sports Club
Receipts and Payments Account
For the Year Ended 31 December 2020
Cr.
`
`
Receipts
Balance b/d
Subscription
500
10,460
Add:
For 2019
150
Add:
For 2021
250
10,860
Payments
Rent
Stationery
520
Add: Closing Stock
345
Wages
Locker’s Rent
350
Repairs
Add:
100
Expenses of Annual Programme
450
Interest
For 2019
Less: Outstanding for 2020
Subscription for Annual Programme
Entrance Fees
50
400
2,000
300
865
1,365
475
1,690
636
Sports Equipments
4,000
Salary
600
Less: Outstanding for 2019
600
Balance c/d (Balancing Figure)
14,060
1,200
—
3,829
14,060
Final Accounts of Not-For-Profit Organisations
9.79
Illustration 42 (Missing Capital Fund)
The Income and Expenditure Account of the Goa Club for the year 2020 as follows:
Income and Expenditure Account
For the Year Ended 31 December 2020
Expenditure
Salaries
`
`
Income
4,750
Subscriptions
7,500
General Expenses
500
Entrance Fees
250
Audit Fees
250
Contribution for Annual Dinner
Secretary’s Honorarium
1,000
Printing and Stationery
450
Annual Dinner Expenses
Profit on Annual Sports meet
1,000
750
1,500
Interest and Bank Charges
150
Depreciation
300
Surplus
600
9,500
9,500
The Account had been prepared after the following adjustments:
`
Subscriptions outstanding at the end of 2019
600
Subscriptions received in advance on 31 December 2019
450
Subscriptions received in advance on 31 December 2020
270
Subscriptions outstanding on 31 December 2020
750
Salaries outstanding at the beginning of 2020 and at the end of 2019 were respectively ` 400 and ` 450.
General expenses include insurance prepaid to the extent of ` 60. Audit fees for 2020 are yet unpaid ` 250.
During 2020 audit fees for 2019 were paid amounting to ` 200.
Club owned a freehold lease of ground valued at ` 10,000 the Club had sports equipments on 1 January 2020
valued ` 2,600. At the end of the year after depreciation, the equipment amounted to ` 2,700. In 2019 the
Club has raised a bank loan of ` 2,000. This was outstanding throughout 2020. On 31 December 2020 cash
on hand amounted ` 1,600.
Prepare Receipts and Payments Account for the year 2020 and Balance Sheet as at 31 December 2020.
Solution :
Notes: The problem is silent on two points namely, the opening cash balance on 1.1.2020 and also the
opening balance of Capital Fund as on 1.1.2020. These will have to be found out:
(i) The first of these two i.e. opening cash balance will be found out by putting the amounts actually
received and actually paid during the year 2020, in a Receipts and Payments Account, and the balancing
figure on the Receipt side being the opening balance of cash.
(ii) When the opening balance of cash is found out, the balance sheet for 2019 will be complied by inserting
the items of assets and liabilities in the same; the difference on two sides of the same being treated as
Capital Fund as on 31 December 2019, which will be the opening balance of Capital Fund for 2020.
On finding the opening balance of capital fund on 1.1.2020 and adding the surplus as shown by Income and
Expenditure Account for the year 2020 (which is ` 600) and by posting all the items supplied by the problem
into their respective places, we get the Balance Sheet as on 31 December 2020.
9.80
Financial Accounting: Concepts and Applications
Goa Club
Balance Sheet As On 31 December, 2019
`
Liabilities
Capital Fund (Balancing Figure)
11,540
Freehold Lease of Ground
Subscriptions Received in Advance
450
Sports Equipment
Outstanding Salaries
400
Outstanding Subscription
Outstanding Audit Fees
200
Cash in Hand
Bank Loan
2,000
`
Assets
10,000
2,600
600
1,390
(From Receipts and Payments Account)
14,590
14,590
Receipts and Payments Account
For the Year Ended 31 December 2020
`
Receipts
Opening Balance
1,390
(Balancing Figure)
Subscriptions
Add:
Outstanidng for 2019
7,500
Received in advance in 2020
600
450
450
General Expenses
500
Add: Prepaid
270
750
Entrance fees
Contribution for Annual Dinner
Profit on Annual Sports Meet
400
Less: Outstanding for 2020
60
Audit Fees
250
Less: Outstanding for 2020
250
7,920
Less: Outstanding for 2020
4,750
5,150
7,650
Add:
Salaries
Add: Paid for 2019
8,100
Less: Received in advance in 2019
`
Payments
4,700
560
—
7,170
Add: Paid for 2019
200
200
250
Secretary’s Honorarium
1,000
1,000
Printing and Stationery
450
750
Dinner Expenses
1,500
Interest and Bank Charges
150
Sports Equipment Purchased
(2,700 + 300 – 2,600)
400
Closing Balance
1,600
10,560
10,560
Balance Sheet As On 31 December 2020
`
Liabilities
Capital Fund
11,540
Add: Surplus
600
Freehold Lease of Ground
12,140
Subscription Received in Advance
270
Outstanding Audit Fees
250
Outstanding Salary
450
Loan from Bank
`
Assets
2,000
Sports Equipments
Add: Additions
2,600
400
3,000
Less: Depreciation
Outstanding Subscription
Prepaid Insurance
Cash in Hand
15,110
10,000
300
2,700
750
60
1,600
15,110
Final Accounts of Not-For-Profit Organisations
9.81
Sports Equipment Account
`
Particulars
Balance b/d (Opening)
2,600
Bank (Purchases)
(Balancing Figure)
400
`
Particulars
Depreciation
300
Balance c/d
2,700
3,000
3,000
Illustration 43
Prepare Receipts and Payments Account from the following Income and Expenditure Account for the year
ending 31 December 2020 and the supplementary notes supplied by a Rotary Club:
`
Expenditure
`
Income
Salaries
3,500
Donations
2,000
Rent
3,000
Entrance Fees (One third)
1,000
Sundry Expenses
750
Subscriptions
4,550
Depreciation
300
Interest
2,500
Supplies for the year
2,500
10,050
10,050
Additional Information:
(i) Salaries paid in advance : 2019 – ` 300; 2020 – ` 400.
(ii) Salaries outstanding : 2019 – ` 200; 2020 – ` 150.
(iii) Subscriptions for 2019 in arrear ` 350, ` 325 of which was received in 2020.
(iv) Subscriptions for 2020 unpaid ` 500.
(v) Subscriptions paid in advance in 2019 and 2020 amounted to ` 400 and ` 250 respectively.
(vi) Sundry assets at the end of 2019 and 2020 stood after depreciation at ` 3,500 and `7,800 respectively.
(vii) Balance of cash as on 1 January 2020 was ` 3,150.
(viii) Legacies at 1 January and 31 December were respectively ` 7,000 and ` 9,800.
Solution :
Rotary Club
Receipts and Payments Account
For the Year Ending 31 December 2020
`
Receipts
Balance b/d
Subscriptions
Add:
Outstanding (2019)
3,150
4,550
Salaries
Less: Advance (2019)
325
3,500
300
3,200
4,875
Less: Outstanding (2020)
`
Payments
Add: Advance (2020)
500
400
3,600
4,375
Add:
Received in Advance (2020)
250
Add: Outstanding (2019)
4,625
Less: Received in Advance (2019)
400
200
3,800
4,225
Less: Outstanding (2020)
150
3,650
9.82
Financial Accounting: Concepts and Applications
Assets Purchased (7,800 + 300 – 3,500)
4,600
3,000
Legacies
2,800
Rent
Donations
2,000
Sundry Expenses
Entrance Fees
3,000
Balance c/d
2,500
(Balancing Figure)
Interest
750
5,675
17,675
17,675
WORKING NOTES
(i)
`
Assets purchased may also be calculated as follows:
Balance in the assets account on 1 January 2020
3,500
Less: Depreciation
300
3,200
Add: Assets Purchased (7,800 – 3,200)
4,600
7,800
(ii)
Legacies at 31 December 2020
9,800
Less: Legacies on 1 January 2020
7,000
Received in cash in 2020
2,800
(iii) Entrance fees, treated as revenue income, is only ` 1,000 which is one third of the total. Hence, total Entrance
fees received must be ` 1,000 × 3 = ` 3,000 i.e.:
1/3 Entrance Fees
= 1,000
1 Entrance Fees
= 1,000 × 3 = 3,000
Illustration 44
The Lok Kalyan Dispensary had the following:
Dr.
Income and Expenditure Account For 2020
`
Expenditure
Salaries
23,500
Surgery and Dispensary
3,000
Cr.
`
Income
Subscriptions
25,000
Interest
9,000
4,000
Rent and taxes
500
Donations
Insurance
200
Miscellaneous Receipts
Office expenses
800
300
Depreciation:
Building
3,750
Furniture
120
Instruments
100
Surplus
3,970
6,330
38,300
38,300
Other Information:
Cash in hand and at bank
Government Securities (Face value ` 2,00,000)
Subscriptions outstanding
31.12.2015
31.12.2016
(` )
(` )
?
18,700
1,80,000
1,80,000
7,000
10,000
Final Accounts of Not-For-Profit Organisations
9.83
Subscriptions received in advance
200
600
Salaries unpaid
1,000
1,500
Furniture
2,000
1,980
2,00,000
1,96,250
Land and Buildings
Instruments
3,500
3,900
Surgery expenses due
200
300
Stock of medicines
300
100
Prepare Receipts and Payments Account for 2020 and also the Balance Sheet.
Solution:
Dr.
Lok Kalyan Dispensary
Receipts and Payments Account
For the Year Ending 31 December 2020
Cr.
`
`
Receipts
Cash in hand and at bank
10,800
Payments
Salaries:
(Balancing Figure)
As per Income and
Subscriptions:
Expenditure Account
As per Income and Expenditure
25,000
Add: Outstanding in 2019
10,000
Less: Outstanding in 2020
15,000
Surgery and Dispensary:
Account
Less: Outstanding for 2020
Add:
Outstanding for 2019
7,000
As per Income and Expenditure
Received in advance in 2020
200
600
Add: Closing Stock
23,000
3,000
100
3,100
22,400
Interest
9,000
Donations
4,000
Miscellaneous receipts
1,500
Account
21,800
Add:
1,000
24,500
22,000
Less: Received in advance in 2019
23,500
300
Less: Opening Stock
300
2,800
Add: Surgery Expenses due
in 2019
200
3,000
Less: Surgery Expenses due
in 2020
300
2,700
Rent and Taxes
500
Insurance
200
Office expenses
800
Instruments bought:
Closing Balance
Add: Depreciation
3,900
100
4,000
Less: Opening Balance
3,500
500
Furniture bought:
Closing balance
Add: Depreciation
1,980
120
2,100
Less: Opening balance
Cash in hand and at bank
46,500
2,000
100
18,700
46,500
9.84
Financial Accounting: Concepts and Applications
Balance Sheet, As At 31 December 2020
`
Liabilities
Capital Fund:
Opening Balance
Add:
4,02,200
Surplus
6,330
4,08,530
Subscriptions received in Advance
600
Salaries outstanding
1,500
Surgery expenses due
300
`
Assets
Land and buildings
2,00,000
Less: Depreciation
3750
1,96,250
Instruments
3900
Furniture
1,980
Government Securities
Stock of Medicines
1,80,000
100
Subscriptions outstanding
10,000
Cash in hand and at bank
18,700
4,10,930
4,10,930
Balance Sheet As At 31 December 2019
`
Liabilities
Subscriptions received in Advance
200
Salaries unpaid
1,000
Surgery expenses due
200
Capital Fund
4,02,200
(Balancing Figure)
Assets
Cash in hand and at bank
Government Securities
`
10,800
1,80,000
Subscriptions outstanding
7,000
Furniture
2,000
Land and Buildings
Instruments
Stock of Medicines
4,03,600
2,00,000
3500
300
4,03,600
WHEN BALANCE SHEETS ARE TO BE PREPARED?
Sometimes the examination problem requires the preparation of the Balance Sheet at the beginning of the
current accounting period (Opening Balance Sheet) and at the end of the current accounting period (Closing
Balance Sheet). The required material is available in the form of a Receipts and Payments Account, Income
and Expenditure Account and the Additional Informations.
The following procedure is generally adopted:
1. The opening balance sheet is constructed with the help of additional information and the opening balance
of cash in hand from the Receipts and Payments Account.
2. The items of ‘Debit’ or ‘Receipts’ side of the Receipts and Payments Account are compared with
the ‘Credit’ or ‘Income’ side of the Income and Expenditure Account. The idea is to find out:
(i)
(ii)
Subscriptions in arrears of the previous year (For the Opening Balance Sheet) and of the current
year (For the Closing Balance Sheet).
Income received in advance
(iii)
Sale of an asset during the year.
(iv)
The items which have been capitalised i.e. taken straight to the balance sheet e.g. donation for
buildings, endowment fund, legacies etc..
3. Similarly the ‘Credit’ or ‘Payments’ side of the Receipts and Payments Account is compared with
the ‘Expenditure’ or ‘Debit’ side of the Income and Expenditure Account in order to find out:
(i)
Outstanding expenses during the year.
Final Accounts of Not-For-Profit Organisations
(ii)
9.85
Prepaid expenses during the year.
(iii)
Stock of consumbale items e.g. stationery in hand.
(iv)
Purchase of an asset etc.
(v)
Depreciation of the assets etc.
Illustration 45 (Balance Sheets Only)
The Secretary of the Adult Education Society submitted to you the following receipts and payments account
and the income and expenditure account for the year ended 31 March 2020:
Receipts and Payments Account
For the Year Ending 31 March 2020
Dr.
`
Receipts
Balance b/d
450
Interest
Payments
Printing
Advertisement
2018-19
100
2019-20
150
Staff salary
250
Tuition fees
2019-20
1,000
2020-21
100
1,100
Cr.
`
75
141
1,300
Furniture purchased
670
Rent
520
Miscellaneous expenses
110
Balance c/d
1,374
Entrance Fees
2019-20
420
Membership Fees
2018–19
300
2019–20
1,150
2020–21
390
Miscellaneous income
1,840
130
4,190
4,190
Income and Expenditure Account
For the Year Ending 31 March 2020
`
Expenditure
Printing
80
Income
`
Tuition fees
1,100
1,150
Advertisement
150
Membership fees
Rent
600
Miscellaneous income
130
Interest
160
Staff salary
1,200
Miscellaneous expenses
110
Excess of Income over Expenditure
400
2,540
You are asked to give the Balance Sheet of the society as on 31 March 2019 and 31 March 2020.
You are further told that the society had the following assets on 31.3.2019:
`
Investments
4,000
Furniture
100
Reference books
500
2,540
9.86
Financial Accounting: Concepts and Applications
Solution :
Adult Education Society
Balance Sheet As On 31 March 2019
`
Liabilities
Capital Fund
6,350
(Balancing Figure)
`
Assets
Cash
Investments
450
4,000
Accrued interest
100
Membership Fees Accrued
300
Reference Books
500
Furniture
6,350
1,000
6,350
Balance Sheet As On 31 March 2020
`
Liabilities
Capital Fund (1.4.2019)
6,350
Add:
Entrance Fees (4)
420
Add:
Excess of income over expenditure
400
Printing payable
Rent Payable
Advertisement payable
7,170
5
80
9
Membership fees received in Advance
390
Tuition fees received in Advance (2)
100
`
Assets
Cash
1,374
Investments
4,000
Accrued Interest (1)
10
Tuition Fees accrued (2)
100
Staff Salary in Advance (3)
100
Reference books
500
Furniture
7,754
1,670
7,754
ATTENTION PLEASE
(i)
Interest received as per Receipts and Payments Account is ` 150 while Income and Expenditure Account shows
interest income at ` 160. Thus, the difference of ` 10 represents interest income accrued or due but not received.
(ii)
Tuition fees in the Income and Expenditure Account is shown at ` 1,110. Actual tuition fees received during
the year is also ` 1,110. But break up of the tuition fee received shows that ` 100 out of ` 1,110 is for 2020-21,
which is received in advance. Since the total amount due is ` 1,110 as against, ` 1,000 received for 2019-20, it
means ` 100 is still outstanding.
(iii)
Actual payments for salaries are ` 1,300 but expenditure is only ` 1,200. Excess amount may relate either to
previous year or next year. In this case, it is presumed to be ‘paid in advance’.
(iv)
Entrance fees has been capitalised since the item does not appear in the credit side of the Income and Expenditure
Account.
Illustration 46 (Balance Sheets Only)
From the following information relating to Delhi Sports Club, prepare the balance sheet as on 1.1.2020 and
on 31.12.2020:
(i) Assets on 1.1.2020 are — Club grounds and pavilion ` 50,000; Sports equipments ` 30,000; Furniture
` 7,000; Subscription in arrears on that date ` 1,000. Creditors for stationery ` 1,000.
Final Accounts of Not-For-Profit Organisations
(ii)
Receipts
Balance b/d
9.87
Receipts and Payments Account
For the Year Ending 31 December 2020
`
5,000
Subscriptions :
Payments
Printing and Stationery
Salaries
2019
900
2020
18,000
2021
`
3,000
11,000
Advertising
2,000
Fire insurance
1,500
500
Furniture
2,000
300
Investments
18,000
Rent received
2,200
Balance c/d
1,400
Entrance Fees
12,000
Sale of old newspapers
38,900
38,900
(iii)
Income and Expenditure Account
For the Year Ending on 31 December 2020
Expenditure
Salaries
Printing and Stationery
Audit fees
`
Income
`
12,000
Subscriptions
19,000
2,800
Entrance fees
12,000
500
Rent received
2,400
Advertising
2,000
Fire, insurance
1,200
Sale of old newspapers
300
Depreciation on:
Sports Equipments
Furniture
Excess of Income over Expenditure
6,000
800
8,400
33,700
33,700
Solution :
Delhi Sports Club
Balance Sheet As On 1 January 2020
Liabilities
Creditors for stationery
Capital Fund
`
1,000
92,000
(Balancing Figure)
93,000
Assets
Cash in hand
`
5,000
Grounds and Pavilion
50,000
Sports Equipments
30,000
Furniture
7,000
Subscription receivable
1,000
93,000
9.88
Financial Accounting: Concepts and Applications
Balance Sheet As On 31 December 2020
`
Liabilities
Creditors for Stationery
800
Outstanding Salary
1,000
Cash in hand
50,000
24,000
500
Sports Equipment (30,000 – 6,000)
Subscription received in Advance
500
Furniture (7,000 + 2,000 – 800)
Add:
92,000
Surplus
8,400
1,400
Grounds and Pavilion
Audit fees outstanding
Capital Fund
`
Assets
8,200
Investments
1,00,400
18,000
Prepaid insurance
300
Accrued Rent
200
Outstanding Subscriptions:
2019
100
2020
1,000
1,03,200
1,100
1,03,200
Illustration 47 (Balance Sheets Only)
The following are the items of Receipts and Payments of the All India Sports Club for 2020 summarised from
the books of accounts maintained by the Secretary :
`
Receipts
Opening Balance (1.1.2020)
4,200
Entrance Fees:
2019
1,000
2020
10,000
Subscriptions :
Payments
Manager’s Salary
1,000
Printing and Stationery
2,600
Advertising
1,200
Fire Insurance
1,800
Investments
2019
600
2020
15,000
2021
400
Interest on Investments
Closing Balance (31.12.2020)
Outstanding for 2020
Advertising
Audit Fees
`
`
1,500
2,000
400
2,400
Income
Entrance Fees
10,500
Subscriptions
15,600
Interest on Investments
4,000
1,600
500
Fire Insurance
1,000
Depreciation
4,940
Excess of Income over Expenditure
34,200
Cr.
Manager’s Salary
Add:
7,600
Income and Expenditure Account
For the Year Ending 31 December 2020
Expenditure
Printing and Stationery
20,000
3,000
34,200
Dr.
`
18,160
30,100
30,100
Final Accounts of Not-For-Profit Organisations
9.89
You are required to prepare the Balance Sheets of the Club on 1.1.2020 and 31.12.2020. The book values of
the assets on 1.1.2020 were as under:
Building — ` 44,000; Furniture — ` 4,000; Cricket Equipments — ` 25,000. The depreciation rate on Building
— 5%; on Cricket Equipment – 10% and Furniture – 6%)
Solution :
All India Sports Club
Balance Sheet As On 1.1.2020
`
Liabilities
Creditors for Stationery
Capital Fund (Balancing Figure)
`
Assets
600
Buildings
44,000
78,200
Furniture
4,000
Cricket Equipments
25,000
Cash in Hand
4,200
Entrance Fees Receivable
1,000
Subscriptions Receivable
600
78,800
78,800
Balance Sheet As on 31.12.2020
`
Liabilities
`
Assets
Subscriptions Received in Advance
400
Buildings
Creditors for Stationery
400
Less: Depreciation
2,200
Creditors for Advertising
400
Furniture
4,000
Outstanding Audit Fees
500
Less: Depreciation
Capital Fund
78,200
Add:
18,160
Surplus
Outstanding Salary
96,360
500
44,000
240
Cricket Equipments
25,000
Less: Depreciation
2,500
41,800
3,760
22,500
Entrance Fees Receivable
500
Subscriptions Receivable
600
Interest on Investments Accrued
Prepaid Fire Insurance
Investments
Cash in Hand
98,560
1,000
800
20,000
7,600
98,560
Illustration 48 (Balance Sheets Only)
The ABC Education Society supplies the following information:
(i)
Income and Expenditure Account
For the Year Ending 31 March 2020
Expenditure
Salaries
Scholarships
Rent
`
8,300
41,300
2,800
Income
Subscriptions
`
47,800
Government Grants
5,300
Proceeds of Tickets for Entertainment
8,300
9.90
Financial Accounting: Concepts and Applications
General Expenses
3,100
Audit Fees
600
Cost of Printing of Tickets and Souvenir
1,500
Cost of Entertainment
3,500
Loss on Sale of Furniture (Book Value ` 800)
300
Depreciation on Furniture
600
Surplus
Advertisement in Souvenir
5,100
Interest for full year @ 6% p.a.
1,500
6,000
68,000
68,000
(ii)
Receipts and Payments Account
For the Year Ending 31 March 2020
`
Liabilities
Balance b/d
3,800
Subscriptions
46,000
Assets
Salaries
Scholarships
`
9,400
40,100
Government Grant
5,300
Rent
2,600
Sale of Tickets
8,300
General Expenses
3,100
Advertisement in Souvenir
4,600
Printing of Tickets and Souvenir
1,200
Interest
1,000
Cost of Entertainment
3,500
Furniture
2,000
Balance c/d
7,600
Sale of Furniture
500
69,500
69,500
On 31 March 2019, Subscriptions due were ` 1,500; Furniture on that date was ` 6,000. Prepare Balance
Sheets as on 31 March 2019 and on 31 March 2020.
Solution :
ABC Education Society
Balance Sheet As On 31 March 2019
`
Liabilities
Capital Fund
36,300
(Balancing Figure)
Assets
`
Cash in hand
3,800
Subscription Receivable
1,500
Furniture
6,000
Investments (1,500× 100/6)
36,300
25,000
36,300
Balance Sheet As On 31 March 2020
`
Liabilities
Outstanding Expenses:
Assets
`
Cash in hand
7,600
Rent
200
Prepaid Salary (9,400 - 8,300)
1,100
Audit Fees
600
Subscriptions Receivable
3,300
Printing and Stationery
300
(47,800 – 44,500)
Scholarships
Capital Fund
1,200
36,300
2,300
Advertisement Suspense Account (Prepaid)
500
Final Accounts of Not-For-Profit Organisations
Add:
Surplus
9.91
6,000
42,300
Investments
25,000
Accrued Interest (1,500 – 1,000)
Furniture
Less: Sold
500
6,000
800
5,200
Less: Depreciation
600
4,600
Add: Purchased
44,600
2,000
6,600
44,600
Illustration 49 (Preparation of Balance Sheets)
From the following information relating to Dwarka Sports Club, prepare the Balance Sheet as on 1.1.2020
and on 31.12.2020:
(i) Assets on 1.1.2020 are – Club grounds and buildings ` 5,00,000; Sports Equipments ` 3,00,000; Furniture
` 70,000; Subscriptions in arrears on that date ` 10,000. Creditors for Stationery ` 5,000.
(ii) Receipts and Payments Account For the Year Ending 31 December 2020.
Dr.
Cr.
Receipts
Balance b/d
`
50,000
Subscriptions:
Payment
Printing and Stationery
Salaries
2019
9,000
2020
1,80,000
2021
`
30,000
1,10,000
Advertising
20,000
Fire Insurance
15,000
5,000
Furniture
20,000
3,000
Investments
1,80,000
Rent received
22,000
Balance c/d
14,000
Entrance Fees
1,20,000
Sale of old Newspapers
3,89,000
3,89,000
(iii)
Income and Expenditure Account
For the Year Ending 31 December 2020 .
Dr.
Cr.
Expenditure
Salaries
Printing and Stationery
Audit fees
`
Income
`
1,20,000
Subscriptions
1,90,000
28,000
Entrance Fees
1,20,000
5,000
Rent Received
24,000
Advertising
20,000
Fire Insurance
1,2000
Sale of old newspapers
3,000
Depreciation on:
Sports Equipment
Furniture
Excess of Income over expenditure
60,000
8,000
84,000
3,37,000
3,37,000
9.92
Financial Accounting: Concepts and Applications
Solution :
Dwarka Sport Club
Balance Sheet As on 1.1.2020
`
Liabilities
Creditors for Stationery
5,000
Capital Fund
9,25,000
(Balancing Figure)
`
Assets
Club Grounds and Buildings
5,00,000
Sports Equipment
3,00,000
Furniture
70,000
Subscriptions in Arrears
10,000
Cash in Hand
50,000
9,30,000
9,30,000
Balance Sheet As on 31.12.2020
`
Liabilities
Creditors for Stationery
3,000
Outstanding Salary
`
Assets
Club Grounds and Buildings
5,00,000
10,000
Sports Equipments
3,00,000
Outstanding Audit Fees
5,000
Less: Depreciation
60,000
Subscriptions Received in Advance
5,000
Furniture
70,000
Addition
20,000
Capital Fund
Add:
Surplus
9,25,000
84,000
10,09,000
2,40,000
90,000
Less: Depreciation
8,000
82,000
Subscription in Arrears
2019
1,000
2020
10,000
Cash in hand
11,000
14,000
Rent Receivable
2,000
Prepaid Fire Insurance
3,000
Investments
10,32,000
1,80,000
10,32,000
RECEIPTS AND EXPENDITURE ACCOUNT
The mercantile system may not be adopted by the professional men like doctors, solicitors, accountants, etc.,
because their number of credit transactions is very small or negligible, if not nil. Hence, they prepare their
final accounts on cash basis. As a result of this, they ignore outstanding income. However, they do take
into account outstanding expenses. In addition to the cash book, the professional men generally maintain
a Stock Register in which a record of the following items is kept:
(i) All articles purchased for use in the profession and not for resale e.g., stationery books, surgical instruments,
furniture, computers and so on.
(ii) All articles, which are purchased for resale such as medicines in the case of a doctor or stamp papers
in the case of a solicitor. When any item is consumed or sold or destroyed, it is noted in the stock
register itself so that the value of stock in hand on a particular date is easily ascertained and compared
with the physical stock.
Professional people prepare Receipts and Expenditure Accounts which is based on the information obtained
from the cash book and the stock register. Receipts and Expenditure Account is prepared on cash basis.
In case the outstanding income is shown, this account is debited with the outstanding income as reserve which
Final Accounts of Not-For-Profit Organisations
9.93
nullifies the addition of the outstanding income. However, outstanding expenses are properly recorded and
the net result in terms of surplus or deficit is correctly ascertained. Thus, this account is termed as Receipts
and Expenditure Account and is different from Receipts and Payments Account which indicates only actual
cash disbursements and not outstanding expenses. To sum up, in Receipts and Expenditure Account, income
is determined on cash basis and expenditure on accrual basis.
Illustration 50 (Receipts and Expenditure Account)
Dr. Magazine is a practising Orthopaedic Surgeon. The Receipts and Payments Account for the year ending
31 March 2020 is as follows:
Receipts
Balance b/d
Fees
`
Payment
`
10,000
Salaries
15,000
1,50,000
Miscellaneous Receipts
2,500
Sale of old equipments
10,000
(Cost of 15,000)
Rent
5,000
Journals etc.
2,000
Books for Library
8,000
Purchase of instruments
20,000
Stationery
200
Conveyance
1,500
Purchase of medicines
25,000
Furniture
2,500
Drawings
75,000
Cash in hand
18,300
1,72,500
1,72,500
His position stood on 1.4.2019 as : Equipments ` 75,000; Medicines ` 10,000. Fees outstanding ` 2,000.
Books ` 10,000. Depreciate equipments by 10% and books by 20%. Fees still outstanding ` 5,000. Salaries
to Compounders still payable ` 2,000. Stock of medicines ` 2,000.
Required: Receipts and Expenditure Account.
Solution :
Dr. Magazine
Receipts and Expenditure Account
For the Year Ending 31 March 2020
Dr.
`
Expenditure
Salaries
Add:
Outstanding
15,000
2,000
Rent
5,000
Stationery
`
Receipts
Fees received
17,000
Cr.
Add: Outstanding
Miscellaneous Receipts
1,50,000
5,000
1,55,000
2,500
200
Journals etc.
2,000
Conveyance
1,500
Loss on the sale of equipments
5,000
Medicines used
33,000
Depreciation on:
Equipments
8,000
Books
3,600
Reserve for outstanding fees
Surplus
11,600
5,000
77,200
1,57,500
1,57,500
9.94
Financial Accounting: Concepts and Applications
Balance Sheet As On 1 April 2019
`
Liabilities
Reserve for outstanding fees
2,000
Capital (Balancing Figure)
1,05,000
`
Assets
Cash in hand
10,000
Equipments
75,000
Medicines
10,000
Fees outstanding
2,000
Books
10,000
1,07,000
1,07,000
Balance Sheet As On 31 March 2020
`
Liabilities
Capital
Add:
1,05,000
Surplus
Cash in hand
77,200
1,82,200
Less: Drawings
Reserve outstanding for fees
75,000
`
Assets
75,000
Add: Purchases
20,000
1,07,200
5,000
18,300
Equipments
95,000
Less: Sale
15,000
80,000
Salaries outstanding
2,000
Less: Depreciation
Books
Add: Purchases
8,000
72,000
10,000
8,000
18,000
Less: Depreciation
3,600
14,400
Medicines
2,000
Fees outstanding
5,000
Furniture
2,500
114,200
114,200
Illustration 51 (Fund Items)
The following is the Receipts and Payments Account of a Charitable Trust for the year ending 31st March,
2020 :
Receipts
`
Balance b/d :
`
Capital Payments :
Cash
10,000
Bank
1,40,000
Capital Funds :
Donation for Clinic Fund
Payments
60,000
Revenue Receipts :
Investments
1,00,000
Furniture
40,000
Clinical Equipments
50,000
Revenue Payments:
Salaries
62,000
Interest
3,00,000
Medicines
1,40,000
Rent
1,20,000
Scholarships
1,00,000
30,000
Printing etc.
Sundries
Travelling
8,000
10,000
Balance c/d :
Cash
16,000
1,34,000
6,60,000
6,60,000
Final Accounts of Not-For-Profit Organisations
9.95
Trust fund originally consisted of :
Building valued at ` 15,00,000, 9% Govt. Securities ` 32,00,000 (Nominal value ` 35,00,000) and
Bank balance ` 1,00,000.
Bank interest receivable at the end of year was ` 25,000. Interest accrued on investments on 1-4-2019
was ` 35,000 and on 31-3-2020 ` 50,000. The Trust owed suppliers of medicines ` 12,000 and ` 8,000
on 1-4-2019 and 31-3-2020 respectively. Furniture stood in the books at ` 30,000 on 1-4-2019.
You are required to prepare final accounts of the Trust for the year ending 31st March, 2020 after
providing 2½ % depreciation on the book value of the building and 20% on other assets.
B.Com. (Hons.) Sem. I, 2014]
Solution :
Balance Sheet As At 31 March 2019
`
Liabilities
Trust Fund:
Building
15,00,000
9% Government
Securities
32,00,000
Bank
1,00,000
Suppliers for medicines
48,00,000
12,000
Clinic Fund (Balancing Figure)
1,03,000
Assets
`
Cash in hand
10,000
Cash at Bank
1,40,000
Building
15,00,000
9% Government Securities
32,00,000
(Nominal Value 35,00,000)
Accrued Interest on Investments
35,000
Furniture
30,000
49,15,000
49,15,000
Calculation of Medicines Consumed
Suppliers for Medicines Account
Particulars
Cash Account
Balance c/d
`
Particulars
`
1,40,000
Balance b/d
12,000
8,000
Medicines purchased and consumed
1,36,000
(Balancing figures)
1,48,000
1,48,000
Income and Expenditure Account for the year ending 31-3-2020
`
Income
`
Salary
62,000
Interest
3,00,000
Depreciation-Building
37,500
Bank Interest
Expenditure
Scholarship
Printing
Travelling Expenses
Surplus
1,00,000
8,000
3,25,000
Add: Interest accured
10,000
2,72,500
25,000
50,000
3,75,000
Less: Outstanding last year
35,000
3,40,000
Rent
Sundries
4,90,000
1,20,000
30,000
4,90,000
9.96
Financial Accounting: Concepts and Applications
Balance Sheet As At 31 March 2020
`
Liabilities
Trust Fund
Add:
Surplus
48,00,000
2,72,500
Suppliers for medicines
Building
50,72,500
8,000
Further contribution
Less: Depreciation on Clinic
1,03,000
9% Government Securities
14,62,500
32,00,000
1,00,000
60,000
Furniture
30,000
1,63,000
Addition
40,000
(10,000)
70,000
(1,36,000)
Less: Depreciation on clinic
furniture
(37,500)
New Investments
equipment
Less: Medicines consumed
Depreciation
15,00,000
(Face Value ` 35,00,000)
Clinic Fund:
Opening Balance
`
Assets
(14,000)
3,000
Less: Depreciation
14,000
Clinic Equipment
50,000
Less: Depreciation
10,000
56,000
40,000
Cash in hand
16,000
Cash at Bank
1,34,000
Accrued Bank Interest
25,000
Accrued Interest on 9%
Investment
50,83,500
50,000
50,83,500
ASSUMPTIONS
(i)
(ii)
Furniture is from Clinic Fund
Bank interest has not been divided into general trust income and clinic fund since the details of their balances
during the year are not given. This information was needed because part of the bank balance represents clinic
fund.
Illustration 52 (Revisionary)
From the following Receipts and Payments Account of a Cricket Club and additional information, prepare
Income and Expenditure Account for the year ended 31st March, 2020 and a Balance Sheet as on that date :
Receipts
`
Balance b/d :
Payments
`
Purchase of Balls
65,000
10,000
Cash
10,200
Tournament Fees
Bank
30,000
Affiliation Fee for five years
2,000
Rent of Playground
6,000
Travelling Expenses
20,000
Expenses of Variety Programme
15,000
Subscriptions
Interest on Investment
Sale of ticket for Variety Programme
Sale of furniture (30-09-2019)
2,45,000
1,800
20,000
9,000
Refreshment Expenses
4,000
Donation for Building
50,000
Furniture bought on (1-10-2019)
5,000
Legacy
11,000
Advance to Building Contractor
50,000
Repairs
5,000
Salary
15,000
Telephone bill
1,500
Final Accounts of Not-For-Profit Organisations
9.97
Miscellaneous Exps
8,000
12% Investments
(F.V. ` 1,70,000) 1-1-2020
1,50,000
By Balance :
Cash
8,500
Bank
12,000
3,77,000
3,77,000
Additional Information :
(a) Miscellaneous expenses include ` 3,000 for the honorarium.
(b) Subscriptions received include ` 9,000 outstanding subscription for the year 2018-19. Subscription
for the year 2019-20 amounting to ` 16,000 is still outstanding. Some members have paid subscription
for the 2020-21 amounting to ` 8,000 which is included in the subscription received.
(c) Face value of 12% investment on 31st March 2019 was ` 15,000 (Cost price ` 12,000).
(d) Book value of the furniture sold on 1-4-2019 was ` 12,000 depreciation being 20% p.a. Provide depreciation
on new furniture at the same rate.
(e) Telephone bill for one quarter is outstanding, the amount outstanding being ` 300. The charge for
each quarter is same both for 2018-19 and 2019-20.
(f) Unpresented cheques for repairs to building being ` 4,000 for 2018-19 and ` 12,000 for 2019-20.
(g) Bank balance, represents 'Balance as per Bank Pass Book'.
(h) Stock of balls with the club on 31st March, 2020 amounted to ` 6,000.
[B.Com. (Hons.) Sem. I, 2016 Delhi, Modified]
Solution :
Income and Expenditure Account
for the year ending on 31 March 2020
Expenditure
`
Miscellaneous Expenses
5,000
Subscriptions
Honorarium
3,000
Less: Received for 2018-19
Depreciation on Furniture
1,700
Loss on sale of Furniture
1,800
Add: Subscriptions Outstanding
Telephone Bill
1,200
(2019-20)
Consumption of Balls
59,000
Tournament Fees
10,000
Affiliation Fees
6,000
Travelling Expenses
20,000
4,000
Repairs
13,000
Salary
15,000
Excess of Income over Expenses
2,45,000
9,000
2,36,000
16,000
2,52,000
Less: Received in Advance (2020-21)
400
Rent of Playground
Refreshment Expenses
`
Income
8,000
2,44,000
Interest on Investements
6,900
Receipts from Variety Programmes 20,000
Less: Expenses
15,000
5,000
1,15,800
2,55,900
2,55,900
9.98
Financial Accounting: Concepts and Applications
Balance Sheet As at 31 March 2020
`
Liabilities
`
Assets
Legacy
11,000
Cash in Hand
Donation for Building
50,000
Cash at Bank (12,000–12,000)
Nil
Affiliation Fees for four years
1,600
Capital Fund
68,600
Add: Surplus
1,15,800
Outstanding Telephone Bills
1,84,400
300
Subscriptions Received in Advance
8,000
8,500
Advance to Building contractors
50,000
Stock of Balls
6,000
Investments
1,62,000
Accrued Interest
5,100
Furniture
5,000
Less: Depreciation
500
Subscriptions due
4,500
16,000
2,53,700
2,53,700
Balance Sheet As on 1 April 2019
`
Liabilities
Outstanding Telephone Bill
Capital Fund
600
68,600
(Balancing Figure)
`
Assets
Cash in Hand
10,200
Cash at Bank as per Cash Book
26,000
(30,000 – 4,000)
Investments
12,000
Furniture
12,000
Subscriptions Due
9,000
69,200
69,200
WORKING NOTES
(i)
`
Interest on Investments
12% on ` 15,000 for one year
Add: 12% on ` 1,70,000 for
3 months =
1,800
1,70,000  12  3
100  12
5,100
6,900
(ii)
`
Total Telephone bill for four
quarters (300 × 4)
1200
Less: Outstanding
300
900
But paid
1500
Hence ` 600 were paid for the previous year
600
`
(iii) Loss on Sale of Furniture
Book value on 30-9-2019
Book value on 1-4-2019
Less: Depreciation for six months at 20% p.a.
9,000
12,000
1,200
Final Accounts of Not-For-Profit Organisations
9.99
Less: Book value on 30-9-2019
(10,800)
Loss
(1,800)
`
(iv) Consumption of Balls
Purchases
65,000
Less: Stock in Hand on 31-03-2020
6,000
59,000
(v)
`
Depreciation on Furniture on
1-10-2019 at 20% on ` 5,000 for 6% months
500
Depreciation on Furniture sold (iii)
1,200
1,700
`
(vi) Affiliation Fees
For 5 years
2,000
Less: for current year 1/5 of 2,000
400
Balance in the Balance Sheet
1,600
Illustration 53
The following is the Receipts and Payments Account of a Cultural Society for the year ended on 31 December,
2020:
Receipts
`
Cash in hand on Jan 1
1,500
Subscription:
2019
200
2020
16,200
2021
250
Entertainment Proceeds
2,000
Payments
`
Bank Overdraft Jan
3,100
Investments in securities
3,000
Furniture
1,450
Salary
6,200
Printing and Stationery
890
Entertainment Expenses
1,710
1,420
Entrance Fees
670
Sundry Expenses
Interest of securities
480
Balance on 31.12.2020
Sale of Old Chairs
120
Cash
550
Bank
3,100
(Book value : Nil)
21,420
21,420
You are required to prepare income and expenditure account of cultural society for the year ended 31
December, 2020 and a Balance sheet as on the date after considering the following:
(i) The society has 1,800 members each paying annual fees of ` 10. Subscriptions amounting to
` 90 were still in arrears for the year 2019.
(ii) Stock of Stationery on 31 December, 2019 was ` 125 and on 31 December, 2020 was ` 87.
(iii) Entrance fees are to be capitalized.
(iv) Salary of ` 550 for December 2020 is outstanding.
(v) Expenses outstanding on 31 December, 2019 ` 132.
(vi) The society had paid ` 500 in 2019 for telephone charges, out of which ` 125 related to the year
2020.
(vii) On 31 December, 2019 premises stood in the books at ` 24,500 and investments at ` 6,500.
(viii) Depreciate fixed assets by 5% p.a.
[B.Com. (Hons.) Sem. I, 2017 Delhi. Modified]
9.100
Financial Accounting: Concepts and Applications
Solution :
Cultural Society
Income and Expenditure Account for the year Ending 31st March, 2020
`
Expenditure
Stationery Consumed :
Opening Stock
Purchased
Subscriptions (1,800 × 10)
Entertainment Proceeds
890
Interest on Securities
480
Profit on sale of old chairs
120
Less: Closing Stock
87
2,000
928
6,200
Add: Outstanding
550
Sundry Expenses
1,420
Less: Outstanding for 2019
18,000
125
1,015
Salaries
`
Income
132
Telephone Charges
6,750
1,288
125
Depreciation on :
Premises
1,225
Furniture (5% on 1,450 for 6 months)
37
1,262
Entertainment Expenses
1,710
Surplus (Excess of Income over Expenditure)
8,537
20,600
20,600
Balance Sheet As At 31st December 2020
Liabilities
`
Capital Fund:
Opening Balance
Add: Entrance Fees
Surplus
`
Assets
Premises
29,808
670
8,537
39,015
24,500
Less: Depreciation
1,225
Furniture
1,450
Depreciation for 6 months
37
23,275
1,413
Investments :
Advance Subscription for 2021
250
Opening Balance
6,500
Add: Purchases
3,000
Outstanding Salary
550
Stock of stationery
9,500
87
Outstanding Subscription for 2019
90
for 2020
1,800
1,890
Bank
3,100
Cash
550
39,815
39,815
Opening Balance Sheet
Balance Sheet As At 31st December 2019
Liabilities
Outstanding Sundry Expenses
Bank Overdraft
Capital Fund
`
132
3,100
29,808
(Balancing Figure)
Assets
Premises
Investments
24,500
6,500
Stock of Stationery
125
Telephone Charges Prepaid for 2020
125
Outstanding Subscription
290
Cash in hand
33,040
`
1,500
33,040
Final Accounts of Not-For-Profit Organisations
9.101
Subscription Account (2020)
`
Particulars
Balance b/d (200 + 90)
Income and Expenditure Account
(1,800 × 10)
290
18,000
Balance c/d (for 2021)
250
`
Particulars
Balance b/d :
Nil
Cash/Bank:
2019
200
2020
16,200
2021
250
16,650
Balance c/d:
for 2019
90
for 2020 (18,000 – 16,200)
1,800
1,890
18,540
18,540
Illustration 54
Prepare an Income and Expenditure Account for a College for the year ended 31st March, 2017 and a Balance
Sheet as on that date from the following information :
`
Receipts
Cash (1-4-2016)
Postage Stamps (1-4-2016)
Tuition Fees
50,000
Pay and Allowances
700
2,00,000
Fines
10,500
Annual Grant from Government
`
Payments
Books for Library
50,000
Postage and Stationery
12,000
Newspapers
30,00,000
2,000
Science Lab Equipment
22,000
18,000
Interest on Securities
28,000
Repairs and Maintenance
Rent from use of Hall
70,000
Audit Fees
Grant for Building Fund
22,00,000
20,00,000
8,000
Additions to college building
30,00,000
Cash in hand (31-3-2017)
46,600
Postage Stamps (31-3-2017)
600
53,59,200
53,59,200
The College had the following assets on 31st March, 2016 :
Furniture — ` 3,00,000; College Building — ` 4,00,00,000; Library Books — ` 80,000; Science Equipment
— ` 3,00,000; 10% Investments — ` 3,00,000 and outstanding Tuition fees — ` 22,000.
Provide for Depreciation on the closing balances of the following assets :
Land and Buildings @ 5%; Furniture @ 15% and Library Books and Science Equipment @ 20%.
[B.Com. (Hons.) 2019, Delhi]
Solution :
Income and Expenditure Account
Dr.
for the year ended 31st March, 2017
Expenditure
Pay and Allowances
Newspapers
Repairs and Maintenance
Audit Fees
`
22,00,000
2,000
18,000
8,000
Cr.
`
Income
Tuition Fees
2,00,000
Less: Outstanding Tuition Fees (PY) 22,000
Fines (collected)
Annual Grant from Government
1,78,000
10,500
30,00,000
9.102
Financial Accounting: Concepts and Applications
Depreciation:
Interest on Securities
28,000
21,50,000
Add: Accrued Interest
2,000
Furniture
45,000
Rent from use of Hall
Library Books
26,000
Excess of Expenditure over Income (Deficit)
Science Lab Equipments
64,400
College Building
30,000
70,000
12,24,900
22,85,400
45,13,400
45,13,400
Balance Sheet
as on 31st March, 2017
Liabilities
`
`
Assets
Opening Capital Fund
4,10,52,000
Cash
46,600
Deficit
(12,24,900)
Postage Stamp (12,000 + 600 – 700)
11,900
3,98,27,100
Furniture
3,00,000
Less: Depreciation
(45,000)
Grant for Building Fund
20,00,000
College Building
Addition
2,55,000
4,00,00,000
30,00,000
4,30,00,000
Less: Depreciation
(21,50,000)
Library Books
80,000
New Purchases
50,000
4,08,50,000
1,30,000
Less: Depreciation
(26,000)
Science Lab Equipments
3,00,000
Addition
1,04,000
22,000
3,22,000
Less: Depreciation
(64,400)
10% Investments
3,00,000
Add: Accrued Interest
4,18,27,100
2,000
2,57,600
3,02,000
4,18,27,100
WORKING NOTE:
Balance Sheet
as on 1st April, 2016
Liabilities
Capital Fund (Balancing Figure)
`
4,10,52,000
Assets
Cash
Furniture
College Building
Library Books
50,000
3,00,000
4,00,00,000
80,000
Science Lab Equipments
3,00,000
10% Investments
3,00,000
Outstanding Tuition Fees
4,10,52,000
`
22,000
4,10,52,000
Final Accounts of Not-For-Profit Organisations
9.103
Assignments
THEORY BASE ASSIGNMENTS
1.
Distinguish between Income and Expenditure Account and Receipts and Payments Account
[B.Com. (Hons.) Delhi 1982, 1985, 2003,2008]
2.
How will you deal with (i) specific donations and (ii) legacy in the final accounts of non-trading concerns?
[B.Com. (Hons.) Delhi 1985]
3.
4.
Differentiate between Income Outstanding and Income Accrued.
[B.Com. (Hons.) Delhi 1989]
How would you deal with (i) Donations-general and specific and (ii) Legacy, in the final accounts of a
non-trading organisation ?
[B.Com. (Hons.) Delhi 1990, 1998, 1999]
Explain the conversion of Receipts and Payments Account into an Income and Expenditure Account.
[B.Com. (Hons.) Delhi 1995]
5.
PRACTICAL ASSIGNMENTS
PREPARATION OF INCOME AND EXPENDITURE ACCOUNT
1. (General) Prepare the “Subscriptions Account” from the following items for the year ending on 31 March
2020 :
`
(i) Subscriptions in arrear on 31 March 2019
500
(ii) Subscriptions received in advance at 31 March 2019 for 2019-20
1,100
(iii)Total Subscriptions received during 2019-20
35,400
(including ` 400 for 2018-19, ` 1,200 for 2020-21 and ` 300 for 2021-22)
(iv) Subscriptions outstanding for 2019-20
400
2.
(General) From the following particulars, calculate the amount of subscriptions to be credited to the
income and expenditure account for the year ended 31 March 2020 :
Outstanding subscriptions
Subscriptions received in advance
31.3.2019 (`)
31.3.2020 (`)
1,500
1,200
900
540
A sum of ` 14,670 was received as subscriptions during the year ended 31 March, 2020. Also prepare
Subscriptions Account.
3. (General) On the basis of the following information, calculate the amount that will appear against the
item ‘stationery used’ in the income and expenditure account for the year ended 31 March, 2020 :
`
Stock of stationery as on 1 April, 2019
Creditors for stationery on 1 April, 2019
Amount paid for stationery during the year ended 31 March, 2020
12,000
25,600
1,40,000
Stock of stationery as on 31 March, 2020
23,200
Creditors for stationery as on 31 March, 2020
24,000
4. (General) Calculate the amount of stationery consumed during the calendar year 2020:
`
Stock of stationery as on January 1, 2020
3,000
Creditors for stationery on January 1, 2020
2,000
Advance paid for stationery carried from 2019
Amount paid for stationery during the year
200
10,800
9.104
Financial Accounting: Concepts and Applications
Stock of stationery on December 31, 2020
500
Creditors for stationery for December 31, 2020
1,300
Advance paid for stationery on December 31, 2020
1,300
[B.Com. (Hons.) Delhi]
5. (General) From the following information, calculate the amount of subscriptions received in advance
during 2019-20:
(i) Subscriptions received during the year 2019-20 ` 52,500.
(ii) There were 200 members paying subscription at the rate of ` 250 p.a. each.
(iii) Some members have paid their annual subscription in advance during the year.
(iv) As on 1 April 2019, no subscription had been received in advance but subscriptions were outstanding
to the extent of ` 1,000 as on 31 March 2019.
(v) Subscriptions accrued as on 31 March 2020 ` 1,500.
[B.Com. (Hons.) Delhi]
6. (General) The following is the Receipts and Payments Account of an Amusement Club:
Receipts And Payments Account For The Year Ended 31 December 2020
`
Receipts
Balance b/d :
`
Payments
Salary of Secretary
Cash
60
Bank
3,000
3,600
Honorarium
450
Wages
2,400
Subscriptions (including
Charities
2,000
Subscription for the year
Printing and Stationery
300
Postage
100
2019 ` 150)
3,060
9,000
Sale of Old Furniture
Rent and Taxes
on Jan. 1, 2020
750
Sale of Newspapers
50
Legacies
3,000
Interest on Investments
1,200
1,200
Upkeep of the Land
500
Sports Materials
2,500
Balance c/d
14,850
(Cost of Investments ` 20,000)
Endowment Fund
Receipts
10,000
Proceeds of Concerts
800
Advertisement in the Year Book
40
27,900
27,900
Current assets and liabilities as on December 31, 2019 and 2020 were as follows :
31.12.2019
31.12.2020
`
`
Subscriptions in Arrears
200
450
Subscriptions in Advance
300
600
2,000
1,080
Furniture
Depreciation was 10% p.a. on the furniture left after selling a part of it. It was decided that half of the
legacies may be capitalised.
Prepare Income and Expenditure Account and the Balance Sheet as on that date.
[B.Com. (Hons) Delhi]
7. (General) From the following Receipts and Payments Account of Excellent Recreation Club for the
year ended 31.3.2020 and additional information given, prepare an Income and Expenditure Account
for the year ended 31.3.2020 and Balance Sheet as on 31.3.2020:
Final Accounts of Not-For-Profit Organisations
Receipts
9.105
`
Opening Balance :
Cash in hand and
at Bank
Subscription
3,180
18,000
`
Payments
Secretary’s Salary
12,000
Salaries to Staff
25,000
Charities
1,000
Printing and Stationery
600
Sale of Old Newspapers
2,500
Postage Expenses
Legacies
4,000
Rates and Taxes
1,500
Interest on Investments
2,000
Upkeep of the Land
2,000
Endowment Fund
Receipts
120
Purchase of Sports
20,000
Materials
10,000
Proceeds of Sport
Telephone Expenses
3,480
Advertisement in the
and Concerts
4,020
Year Book
5,000
Closing Balance :
Cash in hand and at Bank
3,000
58,700
58,700
Assets and Liabilities as on 31.3.2019 and 31.3.2020 were as follows:
Subscription in arrears
Subscription received in advance
Furniture
Land
31.3.2019
31.3.2020
`
`
2,000
1,000
500
400
2,000
1,800
10,000
10,000
Depreciation shall be charged at 10% p.a. under the diminishing value method. Legacies received shall
be capitalised. Investments were made in Securities, the rate of interest being 12% p.a., the date of
investment was 1.6.2018 and the amount of investments was ` 20,000. Due date of interest 31 March
every year. Stock of sports materials on 31.3.2020 were useless and valued at nil price.
C.A. (Foundation)]
8. (General) The following is the receipts and payments account of Jyoti Charitable Hospital for the year
ended 31 March, 2020 :
Receipts
Balance b/d
Subscriptions
Donations
`
`
Payments
1,40,000
Payment for medicines
6,00,000
10,00,000
Honorarium to doctor
2,00,000
Salaries
5,50,000
2,90,000
Interest on investments
Sundry expenses
@ 7% per annum for
10,000
Equipment purchased
3,00,000
the year
1,40,000
Charity show expenses
20,000
Charity show collections
2,00,000
Balance c/d
90,000
17,70,000
17,70,000
Additional information:
Subscriptions due
Subscriptions received in advance
On 1.4.2019
(`)
On 31.3.2020
(`)
10,000
20,000
20,000
10,000
Stock of medicines
2,00,000
3,00,000
Creditors for medicines
1,60,000
2,40,000
Equipments
4,20,000
6,00,000
Buildings
8,00,000
7,60,000
9.106
Financial Accounting: Concepts and Applications
You are required to prepare income and expenditure account for the year ended 31 March, 2020 and
balance sheet as at that date.
9. The following is the Receipts and Payments Account of Delhi Football Association for the first year
ending 31 December 2020 :
Receipts and Payments Account
Receipts
Donations
`
50,000
Reserve Fund (Life
Locker Rents
with matches
Furniture
8,000
Revenue Receipts
Subscriptions
40,000
Expenses in connection
4,000
Receipts from football
matches
Pavilion Offices
`
(constructed)
membership fees and
entrance fees received)
Payments
Investment at cost
900
2,100
16,000
Revenue Payments
5,200
50
Salaries
1,800
Wages
600
Interest on Securities
240
Insurance
350
Sundries
350
Telephone
250
Electricity
110
Sundry expenses
210
Balance in hand
67,840
5,520
67,840
Additional Information
(i) Subscriptions outstanding for 2020 are ` 250.
(ii) Salaries unpaid for 2020 are ` 170.
(iii) Wages unpaid for 2020 are 90.
(iv) Outstanding bills for sundry expenses are ` 40.
(v) Donations received have to be capitalised.
Prepare from the details given above, an Income and Expenditure Account for the year ended 31.12.2020
and the Balance Sheet of the Association as on 31.12.2020.
Hint : As the revenue receipts and revenue payments have been separately given, match receipts and
expenses would be taken direct to the Balance Sheet.
10. A club gives you the following Receipts and Payments Account for the year ended 31 March, 2020 :
Receipts and Payments Account
Receipts
Balance b/d
Subscriptions
Miscellaneous income
Interest on fixed deposit
`
4,820
28,600
700
2,000
Payments
Salaries
12,000
Rent and electricity
7,220
Library books
1,000
Magazines and
newspapers
Sundry expenses
Sports equipments
Balance c/d
36,120
`
2,172
10,278
1,000
2,450
36,120
Final Accounts of Not-For-Profit Organisations
9.107
Figures of other assets and liabilities :
31.3.2019
Outstanding salaries
31.3.2020
`
`
710
170
Outstanding rent and electricity
864
973
Outstanding for magazines and newspapers
226
340
20,000
20,000
Fixed deposit (10%) with bank
Interest accrued thereon
500
500
Subscriptions receivable
1,263
1,575
417
620
Prepaid expenses
Furniture
9,600
—
Sports equipments
7,200
—
Library books
5,000
—
The closing values of furniture and sports equipments are to be determined after charging depreciation
at 10% and 20% p.a. respectively inclusive of additions, if any, during the year. The library books are
revalued at the end of every year and the value at the end of March 31, 2020 was ` 5,250.
Required : (i) Balance Sheet as at 31.3.2019
(ii) Income and Expenditure Account for the year ended on March 31, 2020.
(iii) Balance Sheet as at 31.3.2020.
11. The following is the Receipts and Payments Account of the Young Club in respect of the year to 31
December 2020:
Receipts and Payments Account for the year Ended 31 December 2020
`
Receipts
Balance b/d
20,500
Subscriptions :
1,600
2020
42,200
2019
800
Rates
Telephone
44,600
Investments
31,000
(In ` 25,000,4%
Dividends on
investments
Salaries
Stationery
2021
Sports meeting-Profit
Payments
`
41,600
8,000
12,000
2,000
25,000
Stock at par)
20,000
Sundry Expenses
Balance c/d
1,16,100
18,500
9,000
1,16,100
The following additional information is available:
(i) There are 450 members each paying an annual subscription of ` 100. ` 900 being in arrears for
2019 at the beginning of 2020.
(ii) Stock of stationery at 31 December 2019 was ` 1,000; at 31 December 2020 ` 1,800.
(iii) At 31 December 2020, the rates were prepaid to the following 31 March, the yearly charge being
` 12,000. A quarter’s charge for telephone is outstanding, the amount accrued being ` 700. Expenses
accruing at 31 December 2019 ` 1,400.
(iv) At 31 December 2019, the building stood in the books at ` 2,00,000 and it is required to write off
depreciation @ 5% p.a. Investments at 31 December 2019 were ` 4,00,000.
You are required to prepare an Income and Expenditure Account for the year ended 31 December 2020
and a Balance Sheet as at that date.
[I.C.W.A. (Inter)]
12. The following bank and cash summary has been prepared from the records of Evergreen Recreation
and Sports Club for the year ending 31 December 2020:
9.108
Financial Accounting: Concepts and Applications
Receipts
`
Balance b/d :
Bar Purchases
Cash at Bank
99,700
Cash in hand
2,100
Joining Fees
5,600
Subscriptions
41,200
Bar sales
5,20,000
Receipts from Cricket
Festival
31,000
4,12,900
74,100
Electricity
11,000
Rent and Rates
23,000
Postage and Stationery
Ground Expenses
New Mowing Machine
General Expenses
3,500
`
Wages
Expenses of Cricket Festival
Interest on Loan from Delhi State
Government Bonds
Payments
7,500
5,600
11,400
7,600
10,200
Purchase of ` 1,00,000
7% Delhi Government Bonds (1-7-20)
Balance at Bank
Cash in hand
7,03,100
1,00,000
36,200
3600
7,03,100
Additional Information:
(i) The bar stock at cost on 31 December 2020 amounted to 42,600 which was ` 2,900 higher than
the value of stock on 1 January 2020.
(ii) On 31 December 2020, amounts outstanding for rent and electricity amounted to ` 3,500 and 1,200
respectively whilst rates paid in advance amounted to ` 2,100. On 31 December 2019, the corresponding
amounts, had been : Rent ` 2,000, electricity ` 1,400 and rates paid in advance ` 1,900.
(iii) Fixtures and Fittings on 31 December 2019 were valued at ` 50,400. Depreciation is to be provided
at the rate of 12½% p.a.
(iv) The amount paid for the new Mowing Machine, purchared on 1 May 2020 represented the net payment
after taking into account a trade-in-allowance of ` 1,400 on the old machine. Machines and Equipment
were valued at ` 20,000 on 31 December 2019 including old Mowing Machines valued at ` 2,000.
Depreciation on machines and equipment is to be provided at 20% p.a.
Prepare an Income and Expenditure Account for the year ended 31 December 2020 including the net
receipts from the bar and cricket festival and a balance sheet on that date. Joining Fees are to be treated
as recurring item.
13. The following is the Receipts and Payments Account of South India Literary Mission for the year ending
31 March, 2020 :
Receipts
`
Payments
`
Cash at Bank
1,25,000
Salaries
25,000
Subscriptions
5,25,000
Printing and Stationery
12,500
Annual Day Receipts
2,68,000
Annual Day Expenses
15,000
Symposium Receipts
2,25,000
Symposium Expenses
1,00,000
Dividends on Shares etc.
25,000
Telephone Charges
20,000
Shares Purchased
7,50,000
Postage and Telegrams
22,000
Building Maintenance
63,400
Cash at Bank
11,68,000
25,000
Sundry Expenses
1,35,100
11,68,000
Following further information is furnished :
(i) The value of building owned by the mission stood at ` 5,00,000 on 1 April 2019. Depreciation at
5% is to be provided.
Final Accounts of Not-For-Profit Organisations
9.109
(ii) There were 200 members paying subscription of ` 2,500 each.
(iii) As on 1 April 2019, no subscription had been received in advance but subscriptions were outstanding
to the extent of ` 10,000. As at 31 March 2020 subscriptions outstanding were ` 15,000.
(iv) Postage stamps worth ` 2,500 were with the secretary at the beginning of the year and stamps at
the end of the year were of the value of ` 1,500.
(v) The investment in the shares at the beginning of the year were to the extent of ` 50,000.
(vi) An amount of ` 2,500 in respect of Annual Day Receipts was yet to be received.
(vii) The rent of the theatre hall, (amounting to ` 25,000) where symposium was held, is still to be
paid.
(viii) Hire of telephone to the extent of ` 3,000 is paid in advance.
Prepare Income and Expenditure Account for the year ended 31March 2020 and the Balance Sheet
on that date.
14. The following is the Receipts and Payments Account of the Gujrat Club for the year ended 31 March
2020 :
Receipts
`
Payments
`
Cash at Bank
14,000
Salaries
2,500
Subscriptions
52,500
Printing and Stationery
1,500
Annual day receipts
27,000
Annual day expenses
Mushaira receipts
23,000
Mushaira expenses
11,000
2,000
Telephone charges
2,500
Dividends on shares
Sundry expenses
2,500
Shares purchased
77,000
Postage & Telegrams
2,200
Building maintenance
6,540
Cash at bank
1,18,500
2,000
10,760
1,18,500
The following further information is furnished :
(i) The value of the building owned by the club stood at ` 50,000 as at 1 April 2019. Depreciation at
5% has to be provided.
(ii) There were 200 members paying subscriptions at the rate of ` 250 per annum each.
(iii) As on 1 April 2019 no subscription had been received in advance but subscriptions were outstanding
to the extent of ` 1,000. As at 31 March 2020, subscriptions outstanding were ` 1,500.
(iv) Postage stamps worth ` 350 were with the secretary at the beginning of the year and stamps at the
end of the year were of the value of ` 100.
(v) The investments in shares at the beginning of the year were to the extent of ` 7,000.
(vi) An amount of ` 200 in respect of the annual day receipts was yet to be received.
(vii) The rent of the theatre amounting to ` 3,000, where the Mushaira (poetic symposium) was held is
still to be paid.
(viii) Hire of telephone to the extent of ` 250 is paid in advance.
You are required to prepare the income and expenditure account for the year ended 31 March 2020 and
the Balance Sheet as at 1 April 2019 and 31 March 2020.
15. The following informations were obtained from the books of Delhi Club as on 31.3.2020, at the end of
the first year of the Club. You are required to prepare Receipts and Payments Account, Income and
Expenditure Account for the year ended 31.3.2020 and a balance Sheet as at 31.3.2020 on mercantile
basis :
(i) Donations received for Building and Library Room ` 2,00,000.
(ii) Other revenue income and actual receipts :
9.110
Financial Accounting: Concepts and Applications
Revenue Income
Actual Receipts
`
`
Entrance Fees
17,000
17,000
Subscription
20,000
19,000
600
600
Locker Rents
Sundry Income
Refreshment Account
1,600
1,060
—
16,000
(iii) Other revenue expendiure and actual payments :
Revenue Expenditure
Actual Payments
`
`
Land (cost ` 10,000)
—
10,000
Furniture (cost ` 1,46,000)
—
1,30,000
Salaries
5,000
4,800
Maintenance of Playgrounds
2,000
1,000
Rent
8,000
8,000
—
8,000
Refreshment Account
Donations to the extent of ` 25,000 were utilised for the purchase of Library Books, balance was
still unutilised. In order to keep it safe, 9% Govt. Bonds of ` 1,60,000 were purchased on 31.3.2020.
Remaining amount was put in the Bank on 31.3.2020 under the term deposit. Depreciation at 10%
p.a. was to be provided for the whole year on Furniture and Library Books.
Preparation of Receipts And Payments Account
16. The income and expenditure accounts of a Repose Club is as follows:
Income and Expenditure Account for 2020
Expenditure
Salaries
`
17,500
General expenses
5,000
Depreciation
3,000
Surplus
`
Income
Subscriptions
20,000
Donations
10,500
5,000
30,500
30,500
Adjustments were made in respect of following:
(i) Subscriptions for 2019 unpaid at 1 January 2020, ` 2,000; ` 1,800 of which was received in 2020.
(ii) Subscriptions paid in advance at 1.1.2020–` 500.
(iii) Subscriptions paid in advance at 31.12.2020–` 400.
(iv) Subscriptions for 2020 unpaid at 31.12.2020–` 700.
(v) Sundry assets at the beginning of period ` 26,000; sundry assets after depreciation, ` 27,000 at
the end of the period.
(vi) Cash balance on 1 January 2020–` 1,600.
Prepare Receipts and Payments Account and Subscriptions Account.
[I.C.W.A. (Inter) Adapted]
17. The Income and Expenditure Account of a Club for the year 2020 is as follows:
Expenditure
`
`
Income
Salaries and Wages
9,500
Subscriptions
15,000
Miscellaneous Expenses
1,000
Entrance Fees
500
Audit Fees
Honorarium
Printing and Stationery
Annual Day Celebration
500
2,000
900
Profit on Annual
Sports Meet :
Receipts
3,000
Expenses
1,500
1,500
Final Accounts of Not-For-Profit Organisations
9.111
Expenses
3,000
Less : Donations
2,000
Interest on Bank Loan
1,000
300
Depreciation on Sports
Equipment
Surplus
600
1,200
17,000
17,000
Prepare (i) Receipts and Payments Account for the year 2020 and (ii) Balance Sheet as at end of 2020
from the following information :
`
(i) Subscriptions
Outstanding as at 31.12.2019
1,200
Received in Advance as at 31.12.2019
900
Received in Advance as at 31.12.2020
540
Outstanding as at 31.12.2020
1,500
(ii) Salaries
Outstanding as at 31.12.2019
800
Outstanding as at 31.12.2020
900
(iii) Audit Fees
The fees for 2020 were outstanding on 31.12.2020
But during 2020, audit fees for 2019 were paid ` 400.
(iv) Prepaid insurance as at 31.12.2020 was ` 120.
(v) The club had owned grounds having a book value of ` 20,000. The Sports Equipment as on 31.12.2019
and on 31.12.2020 after depreciation amounted to ` 5,200 and ` 5,400 respectively.
(vi) In 2019 the club had raised a bank loan of ` 4,000 which was outstanding throughout 2020.
(vii) On 31 December, 2020 Cash in hand amounted to ` 3,200.
[I.C.W.A. Inter], [C.A. (Inter)]
18. The income and expenditure account of Bharat Club for the year ended 31 March, 2020 was as follows:
Expenditure
`
`
Income
Salaries
1,20,000
Subscriptions
1,70,000
Printing
6,000
Entrance fees
4,000
Postage
Telephone
General expenses
500
5,500
Audit fees
2,500
Annual dinner expenses
25,000
Depreciation on Sports
7,000
Surplus
36,000
12,000
Interest charges
Equipment
Contribution for dinner
1,500
30,000
2,10,000
2,10,000
The income and expenditure account has been prepared after taking into consideration the following
information:
As on
As on
31.12.2019
31.12.2020
`
`
Subscriptions outstanding
16,000
18,000
Subscriptions received in advance
13,000
8,400
9.112
Financial Accounting: Concepts and Applications
Salaries outstanding
6,000
8,000
Audit fees outstanding
2,000
2,500
1,90,000
1,90,000
52,000
63,000
Buildings
Sports Equipment
During the year 2019-20, the Bharat Club raised a bank loan of ` 30,000 which was outstanding on 31
March, 2020 also. Cash in hand on 31 March, 2020 was ` 28,500.
Prepare the receipts and payments account of the Bharat Club for the year ended 31 March, 2020 and
the balance sheet as on that date.
[C.S. (Foundation) Modified]
19. From the following particulars relating to Excel Hospital prepare :
(i) Receipts & Payments Account for the year ended 31 March, 2020; &
(ii) Balance Sheet as on March 31, 2020
Income and Expenditure Account for the year ended 31 March, 2020
`
Expenditure
`
Income
Medicines used
29,980
Subscriptions
Honorarium to visiting doctors
12,000
Donations
Salaries
27,500
Interest on Investments@ 11% p.a.
Printing & Stationery
1,100
Electricity and Water
6,000
9,500
11,000
Income from film show–
475
Rent
56,000
Proceeds 11,450
Less :
Expenses
780
10,670
Depreciation on :
Furniture and Fixtures
2,100
Equipment
3,250
Surplus
4,765
87,170
87,170
Additional Information:
31-3-2019
(i)
Subscriptions due
(ii)
Subscriptions Received in Advance
(iii)
Electricity and Water Bills unpaid
(iv)
Stock of Medicines
(v)
(vi)
31-3-2020
120
160
64
100
92
115
7,820
9,750
Estimated value of Equipment
11,600
13,900
Furniture & Fixtures (Cost Less Depreciation)
21,000
18,900
—
10,000
(vii) Land
(viii) Interest accrued on Investments in 11% Debentures
Costing ` 1,02,500.
3,750
3,750
(ix)
Cash in hand
340
160
(x)
Cash at Bank
9,000
?
[B.Com. (Hons.) Delhi Modified]
20. Prepare Receipts and Payments Account of Tina Social Club for the year ending 31 March 2020 and
also the Balance Sheet as on that dates from the following :
Income and Expenditure Account for the Year Ending 31 March 2020
Expenditure
Salaries
`
Income
`
29,500
Interest
10,000
Stationery
5,000
Donations
15,000
Taxes and Rent
2,500
Subscriptions
25,000
Insurance
1,200
Miscellaneous Receipts
Other Expenses
1,800
300
Final Accounts of Not-For-Profit Organisations
9.113
Depreciation :
Properties
3,750
Furniture
120
Books
100
Surplus
3,970
6,330
50,300
50,300
Other Informations
31.3.19
Cash in hand and at Bank
Investments in Share and Debentures (face value ` 3,00,000)
31.3.20
`
`
?
23,700
2,80,000
2,80,000
Subscriptions outstanding
7,000
10,000
Subscription received in advance
1,200
1,600
Salaries outstanding
Furniture
Properties
500
1,000
2,000
1,980
3,00,000
2,96,250
Interest on Investments accrued
1,000
1,000
Books
3,500
3,900
200
300
1,000
800
Stationery payment due
Stock of stationery
[B. Com. (Hons) Delhi Modified]
21. The following is the income and expenditure account of a club for the year ending 31 March, 2020 :
`
Expenditure
Provisions used :
Opening stock
Add : Purchases
Less : Closing stock
Salaries
General expenses
Depreciation on equipments
Surplus
10,000
1,40,000
1,50,000
5,000
Income
Subscriptions
Sale of provisions
`
1,45,000
18,000
5,000
1,000
28,000
1,97,000
34,000
1,63,000
1,97,000
The following balance sheets are also given to you :
Liabilities
On 31.3.19 (`)
On 31.3.20 (`)
8,000
10,000
47,000
75,000
55,000
85,000
Equipments (cost less depreciation)
10,000
25,000
Stock of provisions
Creditors for provisions
Capital fund
Assets
10,000
5,000
Subscriptions receivable
5,000
10,000
Cash at bank and in hand
30,000
45,000
55,000
85,000
9.114
Financial Accounting: Concepts and Applications
Prepare the receipts and payments account of the club for the year ended 31 March, 2020
PREPARATION OF BALANCE SHEETS
22. Given below is the Receipts and Payments Account and Income and Expenditure Account of Bharat
Club for the year ended 31 December 2020. Prepare Balance Sheets as on 1.1.2020 and 31.12.2020.
Receipts And Payments Account
Receipts
Opening Balance
Endowments
`
40,000
20,000
Subscriptions
1,02,000
Entrance Fees
8,000
Payments
`
Salaries
72,000
Provisions
68,000
Printing and Stationery
Bank
7,000
10,000
Donation for Books
13,000
Sports Materials
28,000
Entertainment
40,000
Creditors (2019)
13,000
Sale of old Furniture
7,000
(Book value ` 8,000)
Investments (Purchased
on 1 July, 2019)
at 4% ` 96)
Balance c/d
2,30,000
19,200
12,800
2,30,000
Income And Expenditure Account
Expenditure
Loss on sale of furniture
Salaries
`
1,000
Subscriptions
1,00,000
Entrance Fees
4,000
3,000
Provisions
60,000
Sports Materials
`
77,000
Audit Fees
Printing & Stationery
Income
7,500
20,000
Interest on Investments
800
(4% on ` 20,000)
Entertainment
40,000
Excess of Expenditure
over Income
1,68,500
23,700
1,68,500
Hint : The investments were purchased on 1 July 2019 and therefore, these were assets on 1 January
2020. As the payment for investments appears in the Receipts and Payments Account of 2020, it is clear
that investments were not paid in 2019. Hence, creditors for investments would be shown in the Balance
Sheet as at 1.1.2020.
23. The following particulars relate to Delhi Sports Club :
Income And Expenditure Account For the Year Ended 31 December, 2020
Expenditure
`
Income
`
Salaries
1,500
Entrance Fees
10,500
Stationery
2,200
Subscriptions
15,600
Advertising
1,600
Rent
Audit Fees
Fire Insurance
4,000
500
1,000
Depreciation on Sports
Equipment
9,000
Excess of Income over
Expenditure
14,300
30,100
30,100
Final Accounts of Not-For-Profit Organisations
9.115
Receipts And Payments Account For The Year Ended 31 December, 2020
`
Receipts
Balance b/d
4,200
Entrance Fees
10,500
Subscriptions
2019
600
2020
15,000
2021
400
Rents Received
16,000
3,500
`
Payments
Salaries
1,000
Stationery :
2019
400
2020
2,200
2,600
Advertising
1,600
Fire Insurance
1,200
Investments
20,000
Balance c/d
7,800
34,200
34,200
The assets on 1 January, 2020 included club grounds and pavilion ` 44,000; sports equipment ` 25,000
and furniture ` 4,000. Subscriptions in arrears on that date were ` 800.
Prepare :
(i)
Balance Sheet as on 31 December, 2019.
(ii) Balance Sheet as on 31 December, 2020.
Have you any suggestion regarding Club’s Furniture Account?
[B.Com. (Hons) Delhi]
24. You are given :
(i)
Income and Expenditure Account for 2020;
(ii) Receipts and Payments Account for 2020; and
(iii) Opening balances as on 1.1.2020.
(i) Income and Expenditure Account (2020)
`
Expenditure
Salaries
11,000
Add : Outstanding
1,000
Insurance
1,500
Less : Prepaid
130
12,000
Income
`
Subscriptions
8,000
Medical Fees
14,000
1,370
Medicines
6,000
Surplus
2,630
22,000
22,000
(ii) Receipts and Payments Account (2020)
Receipts
`
Payments
`
Balance b/d (1.1.20)
3,000
Salaries
Subscriptions
9,500
Insurance
1,500
Medical Fees
14,000
Medicines
6,000
Medical Equipment
5,000
Investment
5,000
Balance c/d
2,500
Donations
5,500
32,000
12,000
32,000
9.116
Financial Accounting: Concepts and Applications
(iii) Opening balances as on 1.1.2020 :
`
Medical equipment
32,500
Furniture
5,000
Cash
3,000
Outstanding subscriptions
1,000
Outstanding salary
1,000
Prepare opening and closing balance sheets of Rohan Medicare Club.
25. The following particulars relate to Uttam Nagar Sports Club :
Income and Expenditure Account for the Year Ended 31 March 2020
`
Expenditure
Income
`
Salaries
60,000
Admission Fees
1,50,000
Printing and Stationery
25,000
Subscriptions
2,50,000
Advertising
10,000
Rent
Insurance Charges
9,000
Electricity Charges
5,000
48,000
Depreciation on Sports
Equipment
1,20,000
Surplus
2,19,000
4,48,000
4,48,000
Receipts and Payments Account for the Year Ended 31 March 2020
`
Receipts
Balance b/d
50,000
Admission Fees :
2019-2020
25,000
2020-2021
1,35,000
1,60,000
Subscriptions :
10,000
2019-20
2,30,000
2020-21
20,000
`
Salary (including paid in advance)
75,000
Printing and Stationery
25,000
Advertising
10,000
Insurance (including prepaid)
12,000
Electricity Charges
2018-19
Rent
Payments
5,000
Sports Equipment
2,00,000
Balance c/d
1,79,000
2,60,000
36,000
5,06,000
5,06,000
Further on 1 April 2019, the Club had the following assets :
(i) Land and Building–` 6,00,000
(ii) Furniture–` 45,000
(iii) Sports Equipments–` 3,00,000
(iv) Subscriptions for 2018-19 ` 12,000
Subscriptions for 2019-20 received in advance were ` 8,000. Outstanding salary was ` 6,000. Admission
fees received in advance for 2019-20 were ` 1,25,000.
Prepare the opening and closing balance sheets.
26. The Receipts and Payments Account and Income and Expenditure Account of a Snatan Library for
the year ended 31 March 2020 was as follows :
Final Accounts of Not-For-Profit Organisations
9.117
Receipts and Payments Account for the Year Ended 31 March 2020
`
Receipts
Balance b/d
35,000
Subscriptions
Payments
Payment to Creditors
20,000
Books Purchased
55,000
Printing and Stationery
2018-19
20,000
2019-20
1,75,000
Donations for Reference Books
Salary
1,95,000
7,500
Rent
Advertisement
Miscellaneous Expenses
Balance c/d
2018-19
13,000
2019-20
6,500
Interest
`
7,500
62,500
5,000
16,000
1,11,000
19,500
20,000
2,77,000
2,77,000
Income and Expenditure Account for the Year Ended 31 March 2020
Expenditure
Audit Fees
`
Income
`
6,000
Interest
19,000
Salary
65,000
Subscriptions
Miscellaneous Expenses
16,000
Rent
Printing and Stationery
7,500
Advertisement
4,500
Depreciation (Building)
37,500
Loss on Revaluation of Books
15,000
Surplus
70,500
2,22,000
1,90,000
13,000
2,22,000
Additional Information:
Snatan library had following assets on 1-4-2019 : Building `10,00,000; Books 8,00,000; Furniture 40,000,
and Investments– `2,50,000. There were creditors for books– `25,000 on that date.
Prepare the balance sheets as on 31 March 2019 and 31 March 2020 respectively :
27. From the following information, prepare opening and closing balance sheets of Thakur Educational Society:
Receipt and Payment Account (31.3.20)
Receipts
Balance b/d
`
55,000
Payments
Salaries
Tuition Fees
2,15,000
Rent
Donations
1,65,000
Printing and Stationery
Entrance Fees
Government Grants
25,200
4,00,000
Sale of Furniture on
31.3.2020
Entertainments
Sports Equipment (31.3.20)
Purchase of Furniture (1.4.18)
Investments
35,000
1,04,800
10,00,000
`
2,20,000
35,000
1,15,000
65,000
45,000
1,25,000
Tea and Lunch
52,000
Newspapers and Magazines
15,000
Tours and Entertainments
75,000
Library Books (31.3.20)
1,50,000
Balance c/d
1,03,000
10,00,000
9.118
Financial Accounting: Concepts and Applications
Income and Expenditure Account 31.3.20
Expenditure
Loss on Sale of Furniture
Salaries
Rent
Printing and Stationery
`
5,000
2,35,000
Income
Tuition Fees
Donations
48,000
Government Grants
1,02,000
Interest Accrued on
Newspapers and Magazines
12,000
Investments
Tea and Lunch
65,000
Entertainments
Tours and Entertainments
75,000
Deficit
`
2,35,000
65,000
1,00,000
6,250
1,04,800
48,450
Depreciation on
Opening Balances :
Sports equipment @ 20%
3,000
Furniture @ 10%
4,500
Library Books @ 50%
10,000
5,59,500
5,59,500
ANSWERS GUIDE
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
Subscriptions credited to Income and Expenditure Account–` 35,000.
Subscription during the year –`14,730.
Stationery used–` 1,27,200.
` 11,500.
` 3,000.
Deficit–` 680; Capital Fund—` 24,960; Balance Sheet Total–` 36,380.
Deficit–` 24,880; Capital Fund–` 36,680; Balance Sheet Total at the end–` 36,200.
Excess of income over expenditure–` 1,30,000; Total of Balance Sheet as on 31 March, 2020 is ` 37,70,000.
Capital Fund - ` 33,90,000
Surplus–` 2,470; Balance Sheet total–` 63,870.
(i) Capital Fund–` 47,000 [9,600 + 5,000 + 7,200 + 20,000 + 4,820 + 417 + 1,263 + 500 – (710 +
864 + 226).
(ii) Deficit–` 2,888.
(iii) Balance Sheet Total (31.3.2008)–` 45,595.
Surplus–` 5,400; Capital Fund–` 6,24,000; Balance Sheet Total–` 6,31,700.
Capital Fund-` 2,10,400; Surplus–` 35,700; Balance Sheet Total–` 2,50,800.
Subscriptions received in advance–` 30,000; Surplus–` 6,89,600; Capital Fund on 1-4-20–` 6,87,500
Balance Sheet Total–` 14,32,100.
Surplus–` 65,960; Capital Fund–` 72,350; Balance Sheet Total–` 1,44,310.
Overdraft in Receipt & Payment A/c ` 1,08,140; Excess of Income over Expenditure ` 15,100; Total of
Balance Sheet ` 3,40,440.
Subscriptions Received–` 21,000; Total of Subscription Account–` 22,400 Total of Receipts and Payments
Account–` 33,100.
Cash in hand in 2019–` 2,780; Balance Sheet Total–` 30,220; Capital Fund– ` 23,080.
Cash in hand–` 13,600; Total of Balance Sheet–` 2,99,500. Capital Fund ` 2,20,600.
Cash at the Bank at the end–` 1,834; Capital Fund–` 1,55,974. Balance Sheet Total on 31 March 2020–
` 1,60,954.
Final Accounts of Not-For-Profit Organisations
20.
21.
22.
23.
24.
25.
26.
27.
9.119
Opening Balance of cash and bank–15,800; Balance Sheet Total–6,17,630. Capital fund ` 6,08,400
Total of Receipts and Payments Account–` 2,22,000.
Capital Fund–` 35,000; Balance Sheet Total–` 58,800.
Capital Fund–` 77,600; Balance Sheet Total as on 31.12.2020–` 93,300; Balance Sheet Total on 31.12.2019–
` 78,000.
Capital Fund : ` 40,500; Balance Sheet Total : Opening–` 41,500; Closing– ` 50,130.
Balance Sheet total–` 10,07,000 (Opening) and ` 12,42,000 (Closing). Capital fund – ` 8,68,000
Capital Fund as on 1-4-2019–` 21,34,000.
Balance Sheet total on 31-3-20–` 22,25,500.
Capital Fund–` 90,000.
Total of Opening Balance Sheet ` 90,000.
Total of Closing Balance Sheet ` 5,07,750.
10
Accountingf
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INTRODUCTION
The term Depreciation is concern with Property, plant and equipment. Many business enterprises require different
types of Property, plant and equipment for smooth functioning of their business such as land, building, machinery,
motor vehicles, furniture, computers air conditioners etc. depending upon their specific requirements. It must
be noted that Property, plant and equipment possess the following features such as: (i) long life (ii) held for
use in the business firm or for rental and (iii) are not meant for immediate resale.
It is true that Property, plant and equipment have a long life yet they cannot be used for ever. There is a
bound to be loss of value or quality of these Property, plant and equipment over a period of time whether in
use or not and the same to be written as an expense in the Statement of Profit and Loss or Profit & Loss
account as the case may be. This chargeable written off amount (loss of monitory value or quality) is technically
called depreciation of tangible fixed assets (PPE) or simply concept of depreciation. Thus, the primary or
general meaning or concept of depreciation is the loss of value or quality of PPE (tangible fixed assets) through
physical wear and tear in use or passage of time or from any other cause. Depreciation included amortization
of Property, plant and equipment whose useful life is predetermined.
AS-10 and Ind AS-16, ‘Property, Plant and Equipment’ deals with depreciation. According to AS-10: Property,
Plant and Equipment are tangible items that:
(a) are held for use in production or supply of goods or services for rental to others or for administrative
services; and
(b) are expected to be use for more than one accounting period.
PROPERTY PLANT AND EQUIPMENT
OBJECTIVES OF AS-10 PPE
The objective of this standard is to prescribe the accounting treatment for property, plant and equipment
so that the users of the financial statements can discuss (notice) information about investments made by an
enterprise in its property, plant and equipment and changes in its investment made by an enterprise in its
property, plant and equipment.
The principal or main issues are:
(i) the recognition of the assets,
(ii) the determination of their carrying amounts and
(iii) the depreciation charges and impairment losses in relation to them (i.e. Property, Plant and Equipment.)
SCOPE OF AS-10 PPE
AS-10 should be applied to accounting for property, plant and equipment except when another Accounting
Standard requires or permits a different accounting treatment.
10.2
Financial Accounting: Concepts and Applications
This Standard does not apply to :
(a) biological assets related to agricultural activity other than bearer plants. This Standard applies
to bearer plants but it does not apply to the produce on bearer plants; and
(b) wasting assets including mineral rights, expenditure on the exploration for and extraction of minerals,
oil, natural gas and similar non-regenerative resources.
However, this Standard applies to property, plant and equipment used to develop or maintain the assets
described in (a) and (b) above.
DEFINITIONS
(i) Recognition
The cost of an item of property, plant and equipment should be recognised as an asset if, and only if:
(a)
it is probable that future economic benefits associated with the item will flow to the enterprise;
and
(b)
the cost of the item can be measured reliably.
Items such as spare parts, stand-by equipment and servicing equipment are recognised in accordance
with this Standard when they meet the definition of property, plant and equipment. Otherwise, such
items are classified as inventory.
An enterprise evaluates under this recognition principle all its costs on property, plant and equipment
at the time they are incurred. These costs include costs incurred:
(a)
initially to acquire or construct an item of property, plant and equipment; and
(b)
subsequently to add to, replace part of, or service it.
(ii) Biological Asset is a living animal or plant.
(iii) Carrying amount is the amount at which an asset is recognised after deducting any accumulated
depreciation and accumulated impairment losses.
(iv) Cost is the amount of cash or cash equivalents paid or the fair value of the other consideration given
to acquire an asset at the time of its acquisition or construction or, where applicable, the amount
attributed to that asset when initially recognised in accordance with the specific requirements of other
Accounting Standards.
(v) Depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual
value. Depreciation is the systematic allocation of the depreciable amount of an asset over its useful
life.
(vi) Enterprise-specific value is the present value of the cash flows an enterprise expects to arise from
the continuing use of an asset and from its disposal at the end of its useful life or expects to incur
when settling a liability.
(vii) Fair value is the amount for which an asset could be exchanged between knowledgeable, willing
parties in an arm’s length transaction.
(viii) Gross carrying amount of an asset is its cost or other amount substituted for the cost in the books
of account, without making any deduction for accumulated depreciation and accumulated impairment
losses.
(ix) An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable
amount.
(x) Property, plant and equipment are tangible items that:
(a)
are held for use in the production or supply of goods or services, for rental to others, or for
administrative purposes; and
Accounting for Property, Plant and Equipment & Depreciation
(b)
10.3
are expected to be used during more than a period of twelve months.
(xi) Recoverable amount is the higher of an asset’s net selling price and its value in use.
The residual value of an asset is the estimated amount that an enterprise would currently obtain from
disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the
age and in the condition expected at the end of its useful life.
(xii) Useful life is :
(a)
the period over which an asset is expected to be available for use by an enterprise; or
(b)
the number of production or similar units expected to be obtained from the asset by an enterprise.
Initial Costs: Assets held for administrative purposes. The definition of ‘property, plant and equipment’
covers tangible items which are held for use or for administrative purposes. The term ‘administrative
purposes’ has been used in wider sense to include all business purposes other than production or
supply of goods or services or for rental for others. Thus, property, plant and equipment would include
assets used for selling and distribution, vehicle finance and accounting computers personnel and other
functions of an enterprise.
Items of property, plant and equipment may also be acquired for safety or environmental reasons.
The acquisition of such property, plant and equipment, although not directly increasing the future
economic benefits of any particular existing item of property, plant and equipment, may be necessary
for an enterprise to obtain the future economic benefits from its other assets. Such items of property,
plant and equipment qualify for recognition as assets because they enable an enterprise to derive future
economic benefits from related assets in excess of what could be derived had those items not been
acquired. For example, a chemical manufacturer may install new chemical handling processes to
comply with environmental requirements for the production and storage of dangerous chemicals; related
plant enhancements are recognised as an asset because without them the enterprise is unable to manufacture
and sell chemicals. The resulting carrying amount of such an asset and related assets is reviewed for
impairment in accordance with AS 28, Impairment of Assets.
Subsequent Costs (Repairs and Maintenance)
An enterprise does not recognise in the carrying amount of an item of property, plant and equipment
the costs of the day-to-day servicing of the item. Rather, these costs are recognised in the statement
of profit and loss as incurred. Costs of day-to-day servicing are primarily the costs of labour and
consumables, and may include the cost of small parts. The purpose of such expenditures is often described
as for the ‘repairs and maintenance’ of the item of property, plant and equipment.
Initial Costs : Assets held for administrative purpose which are part of tangible assets.
MEASUREMENT AT RECOGNITION
An items of property, plant and equipment that qualifies for recognition as an asset should be measured at
its cost.
Elements of Cost : The cost of an item of property, plant and equipment comprises:
(a) its purchase price, including import duties and non-refundable purchase taxes, after deducting trade
discounts and rebates.
(b) any costs directly attributable to bringing the asset to the location and condition necessary for it to
be capable of operating in the manner intended by management.
The initial estimate of costs of dismantling, removing the item and restoring the site on which it is located,
referred to as ‘decommissioning, restoration and similar liabilities’, the obligation for which an enterprise
10.4
Financial Accounting: Concepts and Applications
incurs either when the item is acquired or as a consequence of having used the item during a particular period
for purposes other than to produce inventories during that period.
Examples of directly attributable costs are :
(a) costs of employee benefits (as defined in AS 15, Employee Benefits) arising directly from the construction
or acquisition of the item of property, plant and equipment;
(b) costs of site preparation;
(c) initial delivery and handling costs;
(d) installation and assembly costs;
(e) costs of testing whether the asset is functioning properly, after deducting the net proceeds from selling
any items produced while bringing the asset to that location and condition (such as samples produced
when testing equipment); and
(f) professional fees.
Examples of costs that are not costs of an item of property, plant and equipment are:
(a) costs of opening a new facility or business, such as, inauguration costs;
(b) costs of introducing a new product or service (including costs of advertising and promotional activities);
(c) costs of conducting business in a new location or with a new class of customer (including costs of
staff training); and
(d) administration and the other general overhead costs.
Cost of Self-constructed Asset
The cost of a self-constructed asset is determined using the same principle as for an acquired asset. If an
enterprise makes similar assets for sale in the normal course of business, the cost of the asset is usually the
same as the cost of constructing an asset for sale. Therefore, any internal profits are eliminated in arriving
at such costs. Similarly, the cost of abnormal amounts of wasted material, labour, or other resources incurred
in self-constructing an asset is not included in the cost of the asset.
Measurement of Cost
The cost of an item of property, plant and equipment is the cash price equivalent at the recognition date. If
payment is deferred beyond normal credit terms, the difference between the cash price equivalent and the
total payment is recognised as interest over the period of credit unless such interest is capitalised.
Cost Model
After recognition as an asset, an item of property, plant and equipment should be carried at its cost less any
accumulated depreciation and any accumulated impairment losses.
Revaluation Model
After recognition as an asset, an item of property, plant and equipment whose fair value can be measured
reliably should be carried at a revalued amount, being its fair value at the date of the revaluation less any
subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluations should
be made with sufficient regularity to ensure that the carrying amount does not differ materially from that
which would be determined using fair value at the balance sheet date.
The fair value of items of property, plant and equipment is usually determined from market-based evidence
by appraisal that is normally undertaken by professionally qualified valuers.
If an item of property, plant and equipment is revalued, the entire class of property, plant and equipment to
which that asset belongs should be revalued.
Accounting for Property, Plant and Equipment & Depreciation
10.5
A class of property, plant and equipment is a grouping of assets of a similar nature and use in operations of
an enterprise. The following are examples of separate classes:
(a) land;
(b) land and buildings;
(c) machinery
(d) ships;
(e) aircraft;
(f) motor vehicles;
(g) furniture and fixtures
(h) office equipment
(i) bearer plants.
FOR YOUR ATTENTION
Bearer plant is a plant that
(a) is used in the production or supply of agricultural produce;
(b) is expected to bear produce for more than a period of twelve months; and
(c) has a remote likelihood of being sold as agricultural produce, expect for incidental scrap sales.
The following are not bearer plants:
(i) plants cultivated to be harvested as agricultural produce (for example, trees grown for use as lumber);
(ii) plants cultivated to produce agricultural produce when there is more than a remote likelihood that
the entity will also harvest and sell the plants as agricultural produce, other than as incidental scrap
sales (for example, trees that are cultivated both for their fruit and their lumber); and
(iii) annual crops (for example, maize and wheat).
When bearer plants are no longer used to bear produce they might be cut down and sold as scrap, for example,
for use as firewood. Such incidental scrap sales would not prevent the plant from satisfying the definition
of a bearer plant.
REVALUATION OF ASSETS
An increase in the carrying amount of an asset arising on revaluation should be credited directly to owners’
interests under the heading of revaluation surplus. However, the increase should be recognised in the statement
of profit and loss to the extent that it reverses a revaluation decrease of the same asset previously recognised
in the statement of profit and loss.
A decrease in the carrying amount of an asset arising on revaluation should be charged to the statement of
profit and loss. However, the decrease should be debited directly to owners’ interests under the heading of
revaluation surplus to the extent of any credit balance existing in the revaluation surplus in respect of that
asset.
The revaluation surplus included in owners’ interests in respect of an item of property, plant and equipment
may be transferred to the revenue reserves when the asset is recognised. This may involve transferring the
whole of the surplus when the asset is retired or disposed off. However, some of the surplus may be transferred
as the asset is used by an enterprise. In such a case, the amount of the surplus transferred would be the
difference between depreciation based on the revalued carrying amount of the asset and depreciation based
on its original cost. Transfers from revaluation surplus to the revenue reserves are not made through the
statement of profit and loss.
10.6
Financial Accounting: Concepts and Applications
Revaluation Reserve (Surplus) can be used for:
(a) to write off excess depreciation i.e. difference between depreciation charged on historical cost and
depreciation charged on revalued price.
(b) to write off loss on sale of Assets. Loss on sale of assets should be first adjusted against revaluation
reserve and balance if any should be adjusted against Profit and Loss account.
(c) after adjusting excess depreciation and loss on sale of assets, if there remains any balance i.e. unused
portion of revaluation reserve, should be transfer to General Reserve in owners interest.
Depreciation
(a) Each part of an item of property, plant and equipment with a cost that is significant in relation to the
total cost of the item should be depreciated separately.
(b) An enterprise allocates the amount initially recognised in respect of an item of property, plant and
equipment to its significant parts and depreciates each such part separately. For example, it may be
appropriate to depreciate separately the airframe and engines of an aircraft, whether owned or subject
to a finance lease.
(c) A significant part of an item of property, plant and equipment may have a useful life and a depreciation
method that are the same as the useful life and the depreciation method of another significant part of
that same item. Such parts may be grouped in determining the depreciation charge.
(d) To the extent that an enterprise depreciates separately some parts of an item of property, plant and
equipment, it also depreciates separately the remainder of the item. The remainder consists of the
parts of the item that are individually not significant. If an enterprise has varying expectations for
these parts, approximation techniques may be necessary to depreciate the remainder in a manner that
faithfully represents the consumption pattern and/or useful life of the asset.
(e) The depreciable amount of an asset should be allocated on a systematic basis over its useful life.
(f) The depreciable amount of an asset is determined after deducting its residual value.
(g) An enterprise may choose to depreciate separately the parts of an item that do not have a cost that is
significant in relation to the total cost of the item.
(h) In depreciation charge for each period should be recognised in the statement of profit and loss unless
it is included in the carrying amount of another asset. The useful life of an asset is defined in terms
of its expected utility to the enterprise. The asset management policy of the enterprise may involve
the disposal of assets after a specified time or after consumption of a specified proportion of the future
economic benefits embodied in the asset. Therefore, the useful life of an asset may be shorter than
its economic life. The estimation of the useful life of the asset is a matter of judgement based on the
experience of the enterprise with similar assets.
Retirements
Items of property, plant and equipment retired from active service and held for disposal should be stated at
the lower of their carrying amount and net realisable value. Any write down in this regard should be recognised
immediately in the statement of profit and loss.
Derecognisation
The carrying amount of an item of property, plant and equipment should be derecognised (removed from the
asset account):
(a) on disposal
(b) when no future economic benefits are expected from its use or disposal.
Accounting for Property, Plant and Equipment & Depreciation
10.7
Disclosure
The financial statements should disclose, for each class of property, plant and equipment:
(a) the measurement basis (i.e., cost model or revaluation model) used for determining the gross carrying
amount;
(b) the depreciation methods used;
(c) the useful lives or the depreciation rates used. In case the useful lives or the depreciation rates used
are different from those specified in the statute governing the enterprise, it should make a specific
mention of that fact;
(d) the gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment
losses) at the beginning and end of the period; and
(e) a reconciliation of the carrying amount at the beginning and end of the period showing:
(i)
(ii)
additions;
assets retired from active use and held for disposal;
(iii)
acquisitions through business combinations;
(iv)
increases or decreases resulting from revaluations and from impairment losses recognised or
reversed directly in revaluation reserve (surplus) account in accordance with AS 28;
(v)
(vi)
(vii)
(viii)
(ix)
impairment losses recognised in the statement of profit and loss in accordance with AS 28;
impairment losses reversed in the statement of profit and loss in accordance with AS 28;
depreciation;
the next exchange differences arising on the translation of the financial statements of a nonintegral foreign operation in accordance with AS 11, The Effects of Changes in Foreign Exchange
Rates; and
other changes.
The financial statements should also disclose:
(a) the existence and amounts of restrictions on title and property, plant and equipment pledged as security
for liabilities;
(b) the amount of expenditure recognised in the carrying amount of an item of property, plant and equipment
in the course of its construction;
(c) the amount of contractual commitments for the acquisition of property, plant and equipment;
(d) if it is not disclosed separately on the face of the statement of profit and loss, the amount of compensation
from third parties for items of property, plant and equipment that were impaired, lost or given up
that is included in the statement of profit and loss; and
(e) the amount of assets retired from active use and held for disposal.
Selection of the depreciation method and estimation of the useful life of assets are matters of judgement.
Therefore, disclosure of the methods adopted and the estimated useful lives or depreciation rates provides
users or financial statements with information that allows them to review the policies selected by management
and enables comparisons to be made with other enterprises. For similar reasons, it is necessary to disclose:
(a) depreciation, whether recognised in the statement of profit and loss or as a part of the cost of other
assets, during a period; and
(b) accumulated depreciation at the end of the period.
10.8
Financial Accounting: Concepts and Applications
Change in useful life of an asset and residual value
In accordance with AS-5, an enterprise discloses the nature and effect of a change in an accounting estimate
that has an effect in the current period or is expected to have an effect in subsequent periods. For property,
plant and equipment, such disclosure may arise from changes in estimates with respect to:
(a) residual values;
(b) the estimated costs of dismantling, removing or restoring items of property, plant and equipment;
(c) useful lives; and
(d) depreciation methods.
If items of property, plant and equipment are stated at revalued amounts, the following should be disclosed:
(a) the effective date of the revaluation;
(b) whether an independent valuer was involved;
(c) the methods and significant assumptions applied in estimating fair values of the items;
(d) the extent to which fair values of the items were determined directly by reference to observable prices
in an active market or recent market transactions on arm’s length terms or were estimated using other
valuation techniques; and
(e) the revaluation surplus, indicating the change for the period and any restrictions on the distribution
of the balance to shareholders.
EXAMPLES
Example-1 (Change in Useful Life)
Rachit enterprise owns an asset with original cost of ` 4,00,000 on 1st April, 2015. At the time of acquisition
of asset its life was estimated to be 10 years with a scrap value of ` 40,000. After 4 years, on 1st April 2019,
management feels to review the useful life and residual value of assets. It was found that after incurring a
maintenance expenses (capital nature) of ` 44,000, the life of asset can be extended for a further period of 3
years beyond remaining 6 years, after that it could be fetched for ` 30,000.
Calculate the amount of depreciation to be charged for each year, when enterprise follows straight line method
of charging depreciation.
Solution:

Annual depreciation for first 4 years
(4,00,000 – 40,000)/10 =

3,60,000
= ` 36,000 p.a
10
Carrying amount in the begining of 5th year
[Original cost – (Annual Depreciation × 4)]
= [4,00,000 – (36,000 × 4)] = 2,56,000 (Written Down Values as on 1.4.2019)

After review  remaining useful life = (10 – 4) + 3 = 9 years
Revised Depreciation = [(2,56,000 + 44,000) – 30,000] ÷ 9
= ` 30,000 p.a for next 9 years
Example-2 (Cost to be Capitalised)
Y Ltd., has installed a new plant as per its production requirement. It has incurred following costs:
Accounting for Property, Plant and Equipment & Depreciation
10.9
• Cost of the plant ` 3,40,000.
• Initial delivery and handling cost ` 27,000.
• Cost of site preparation ` 1,13,000.
• Consultancy charges at time of acquisition ` 40,000.
•
Interest expenses paid to supplier for deferred credit ` 36,000.
• Estimated dismantling cost to be incurred after 5 years ` 15,000.
• Operating losses before or at the time of commercial production ` 26,000.
Calculate costs to be capitalised as per Ind AS-16(PPE)?
Answer
Cost to be capitalised include:
• Cost of the plant ` 3,40,000.
• Initial delivery and handling cost ` 27,000.
• Cost of site preparation ` 1,13,000.
• Fees paid to Consultant at the time of acquisition ` 40,000.
• Estimated dismantling cost to be incurred after 5 years ` 15,000.
Total Cost = (3,40,000 + 27,000 + 1,13,000 + 40,000 + 15,000) = ` 5,35,000.
 Interest charges can be capitalised if Ind AS-23( Borrowing Cost) allows
 Operating losses can never be considered.
Example - 3 (Application of Revaluation Model)
X Ltd., having a plant with an initial cost of ` 3,50,000. At the date of revaluation accumulated depreciation
amounted to ` 1,70,000. The fair value of plant, by reference to transactions in similar assets, is assessed to
be ` 2,30,000. Give necessary journal entries for above ?
Answer
1. Accumulated depreciation A/c
Dr.
1,70,000
To Plant A/c
2. Plant
1,70,000
A/c
Dr.
50,000
To Other Comp. Income A/c
50,000
The net result is that the Plant has a carrying amount of ` 2,30,000 (3,50,000 – 1,70,000 + 50,000).
Other Comprehensive Income = Fair value – Revised value
= 2,30,000 – (3,50,000 – 1,70,000) = 50,000
DEPLETION, AMORTIZATION AND OBSOLESCENCE
In a broad sense, the term depreciation covers depletion, amortisation and obsolescence. However, these
terms are used in a particular context:
(i) The term depletion is used in relation to natural resources or wasting assets such as quarries, mines,
oil wells etc., indicating their physical deterioration or exhaustion of natural resources. As the resource
is extracted or removed from the land, its (land) asset value would be reduced or exhausted. This
reduction in the value of asset resulting from production is called depletion.
10.10
Financial Accounting: Concepts and Applications
(ii) The term amortization refers to loss of economic value of intangible assets like patents, trade marks,
goodwill, copyrights and the like. Some intangible assets have limited useful life and are therefore
written off and removed from the list of assets. The process of writing of intangible assets is called
amortization.
(iii) The term obsolescence refers to the decline in the economic value of the asset due to such factors as
the invention of new techniques or equipment, change in taste or fashion etc., or inadequacy of the
existing fixed asset to produce more for increased demand.
ACCOUNTING CONCEPT OF DEPRECIATION
The cost of fixed asset is a capital expenditure and it is recorded in the books of account at its original or
acquisition cost, that is, its purchase price. However, the fixed asset is used to earn revenues for a number
of accounting periods in future with the same acquisition cost until the fixed asset is sold or discarded.
It is therefore, necessary that a part of cost of fixed asset is allocated as an expense in each of the accounting
period in which the fixed asset is used up or utilised. We call this allocation of cost in the form of an expense
in the form of depreciation in accounting or simply accounting concept of depreciation. In brief, accounting
for depreciation is an attempt to spread the cost of long-lived asset as an expense to the statement of profit
and loss over the useful or economic life of the asset.
For example, a business enterprise or a trader purchases a motor vehicle for ` 5,00,000 and after using or
utilising it for five years, it is sold for ` 1,00,000. The utilised cost of the motor vehicle to the business is
thus, ` 4,00,000 (5,00,000 – 1,00,000). The business enterprise cannot ignore ` 4,00,000 cost of the vehicle.
Hence, this cost must be allocated as an expense of the business at the rate of ` 80,000 (4,00,000  5) for
each of five accounting periods in which the motor vehicle has been used to earn revenues. This ` 80,000
charge as expenses is called accounting concept of depreciation. In simple words, depreciation is part
of the cost of fixed asset utilised during its period of use by the business enterprise. It is the cost for
the services obtained from the use of the asset in the same manner as the cost for salaries, rent, electricity
etc.. Depreciation is therefore, an important business expense which must be charged to statement of
profit and loss before arriving at the net profit for the year. The cost of fixed assets in the form of
depreciation has to be matched against the revenues of different years earned from the use of the asset.
So in accounting, depreciation means allocation or distribution of the cost of the fixed asset to the years of
its use and charge the depreciable cost to Statement of Profit or Loss before arriving at the profits of each of
the accounting periods in which the fixed asset has been utilised.
According to Accounting Standard (AS) 10 (Revised) : Property, Plant and Equipment, Depreciation is
the systematic allocation of the depreciable amount of the asset over its useful life.
As stated in the beginning, tangible fixed assets are bought or held by the enterprise or business entity for
the purpose of producing goods or providing goods and services. They are not held for sale in the normal
course of business activities. In brief tangible fixed assets possess the following features, namely:
(i) they are expected to be held or used for long term, that is, generally for more than one accounting
period.
(ii) they have limited useful life unlike land and
(iii) they are held by the enterprise for use in the production or supply of goods and services, for rental to
others or for administrative purposes and not for purpose of sale in the ordinary course of business.
Depreciable assets are tangible assets:
(a) which are available for use during more than one accounting period of generally twelve months.
(b) which have limited useful life
(c) which are held for use in production or supply of goods and services, for rental to others or for administrative
purposes and not for purpose of sale in the ordinary course of business activities.
According to As 10 (Revised): Property, Plant and Equipment (PPE), PPE are tangible items that
(i) are held for use in production or supply of goods and services, or rental to others or for administrative
purposes.
Accounting for Property, Plant and Equipment & Depreciation
10.11
(ii) are expected to be used for more than one period of twelve months.
In short depreciation is the estimated loss or decline in the value of tangible fixed assets such as property,
plant and equipment. It means that property etc. that does not decline in value or whose decline or loss of value
cannot be reasonably estimated should not be considered or could not be considered for depreciation purpose.
For example, land is generally not subject to depreciation while the building is, though it (Land) may appreciate
in value over a period of time.
Explanation
The term administrative purposes has been used in a wider sense to include all business purposes. Thus, PPE would
include assets used for:
(a) selling and distribution e.g. Motor vehicles etc.,
(b) finance and accounting e.g. Computers etc.
(c) Personnel and other functions of an enterprise in office space etc.
Useful Life
According to AS - 10: Property, Plant and Equipment, useful life is either:
(a) the period over which an asset is expected to be available for use by an enterprise; or
(b) the number of production or similar units expected to be obtained from the asset by an enterprise.
CHARACTERISTICS OF DEPRECIATION
On the basis of the general meaning of depreciation and its accounting concept, we can outline the
characteristics of depreciation as under:
(i) Depreciation is a gradual but continuous fall in book value of fixed assets.
(ii) Depreciation in accounting is a process of allocating the depreciable cost (cost minus scrap value)
over the estimated useful life of the fixed assets. It is not a process of valuation of asset.
(iii) Depreciation arises directly through the deterioration because of use and indirectly through obsolescence.
(iv) Depreciation is not a substitute for repairs. In fact depreciation is provided along with repairs and
maintenance expenses.
(v) Depreciation charge is not an exact amount but based on estimate.
(vi) Depreciation is purely an internal transaction and so it has no outside connection.
(vii) Depreciation has nothing to do with the physical deterioration of fixed assets.
(viii) Depreciation is related to tangible fixed assets only and not to the current assets.
(ix) Depreciation is a charge against the profits.
(x) Depreciation is not a source of funds for the replacement of an asset.
(xi) Total depreciation cannot exceed its depreciable value (i.e. cost less scrap value) or original cost
where scrap value is nil.
(xii) Depreciation has no relationship with the market value of an asset.
(xiii) It is related to going concern concept.
NEED OR NECESSITY FOR DEPRECIATION
The need for charging a reasonable amount of depreciation over the estimated useful life of the asset
arises for following purposes or objectives:
(i) To calculate the true income : The calculation of income requires matching of costs with revenues.
Depreciation is a necessary cost of using the fixed assets. Hence, for calculation of true income, depreciation
cost must be matched with the revenues of the given accounting period.
10.12
Financial Accounting: Concepts and Applications
(ii) To show the true financial position : For this purpose, assets and liabilities must be stated at their
correct values. In the absence of depreciation charge, the asset will be shown at its original cost year
after year in the balance sheet. This is an unfair practice and the balance sheet would fail to show
the true financial position. Hence, the assets must be shown at cost minus depreciation.
(iii) To retain, out of profits, funds for replacement : All fixed assets become useless sooner or later and
therefore, must be replaced by the purchase of new assets. Provision for funds has to be made well in
advance so that assets are replaced without any financial problem. Provision for depreciation in the
statement of profit and loss does not involve the outflow of cash and hence, funds to the extent of
depreciation charge over the years will remain in the business and these funds can be easily used for
replacement of assets.
(iv) To calculate the proper cost of the product : Depreciation is important expense and forms part of
the cost of the production. Hence, the business enterprise must allocate the cost of the fixed assets
to the products it produces in order to find out their accurate cost of production.
(v) To compute tax liability of the owner : In such cases, the rate of depreciation would depend on the
relevant tax-laws.
(vi) To meet the legal requirements : In the case of joint stock companies, it is necessary to charge depreciation
on fixed assets before declaring dividends.
(vii) To allocate the cost of fixed assets : The basic objective of depreciation accounting is to allocate the
cost of fixed asset to accounting periods which benefit from the use of the asset so that the cost can be
charged to the statement of profit and loss of the said periods.
THE CAUSES OF DEPRECIATION
Depreciation occurs because of decline in the usefulness of the asset. The causes for the decline in the usefulness
of the asset may be divided into two categories namely: Physical and Functional.
(i) The physical loss of an asset may arise due to wear and tear, passage of time and other causes:
(a)
Wear and tear from use : It is common knowledge that most fixed assets suffer from wear
and tear in use which ultimately renders an asset unusable in course of time. Parts are worn
down by friction or they break. There may be other damage such as corrosion.
(b)
Passage of time : Many long-term assets lose their usefulness with the passage of time simply
because they are older–whether they are being used or not. For example, the structure of building
comprising of walls, roofs, flooring etc., is subject to automatic decay due to rainfall, heavy
storms etc.. Therefore, depreciation must be provided for building.
(c)
Other physical factors are fire, flood, earthquake or accident.
(ii) The functional factors are: inadequacy and obsolescence:
(a)
Inadequacy : A fixed asset becomes inadequate, if its capacity is not sufficient to meet the
demands for increased production e.g., when an old airport terminal building becomes inadequate,
it must be abandoned and a new larger one is built to meet the requirements of heavier air traffic.
(b)
Obsolescence : The most important functional cause is obsolescence which means the reduction
of utility of an asset that results from the development of a better machine or process. Thus,
new inventions, changes in manufacturing methods (automation), shifts in demand for products
or services or any other condition make the asset out of date.
(iii) Depletion : There are certain fixed assets of wasting nature due to extraction of minerals or oil from
them e.g. quarries, (mines), oil wells. When minerals are extracted, the asset gets depleted. This is
called depletion. The cost of such wasting assets has to be allocated in accordance with the quantity
of natural resources extracted or anticipated.
(iv) Time factor : For certain assets, the life is fixed legally such as leases, patents, copyrights. Providing
depreciation on them is called amortisation.
Accounting for Property, Plant and Equipment & Depreciation
10.13
FACTORS OR ELEMENTS AFFECTING DEPRECIATION
According to AS-10 : Property, Plant and Equipment (PPE), Depreciable amount is the cost of an asset
or other amount substituted for cost less residual value.
It means that the amount of depreciation to be determined and ultimately charged to statement of Profit and
Loss is based on the following elements or factors, namely:
1. Historical Cost : The cost of the asset (historical cost) includes all costs incurred in acquiring or
constructing an asset such as purchase price, legal charges, freight etc. necessary for making it ready
for bringing the asset to intended location or making ready for the intended purpose of the management.
According to Para 17 of AS 10: Property, Plant and Equipment, the cost of an item of Property,
Plant and Equipment comprises of:
(a) the purchase price including import duties and non-refundable purchase taxes after deducting
trade discounts and rebates.
(b) any costs directly attributable to bringing the asset to the location and condition necessary for it
to be capable of operating in the manner intended by the management.
(c) the initial estimates of the costs of dismantling, removing the item and restoring the site on which
it is located referred to as decommissioning, restoration and similar liabilities.
Note: Recognition of costs in the carrying amount of an asset ceases when the item is not in the location
and condition necessary for it to be capable of operating in the manner intended by the management.
Carrying amount is the figure at which the asset is shown in the books of account.
The following costs are not included in the carrying amount of an item of Property, Plant and Equipment
(PPE):
(a) costs incurred while an item capable of operating in the manner intended by management has yet to be
brought into use or is operated at less than full capacity.
(b) initial operating losses such as those incurred while demand for the output of an item builds up (increases)
and
(c) costs of relocating or recognising part or all of the operations of an enterprise.
Examples of directly attributable costs are as follows (Para 18 of AS-10):
(a) Costs of employee benefits arising directly from the construction or acquisition of the item of property,
plant and equipments.
(b) Costs of site preparations.
(c) Initial delivery and handling costs.
(d) Installation and assembly costs.
(e) Costs of testing whether the asset is functioning properly after deducting the net proceeds from selling
any items while bringing the asset to that location and condition (such as samples produced when
testing equipment)
(f) Professional fees
Examples of costs that are not costs of an item of Property, Plant and Equipment (PPE) i.e. tangible
fixed assets:
(i) Costs of opening a new facility or business, such as, inauguration costs.
(ii) Costs of introducing a new product or service (costs of advertising and promotional activities)
(iii) Costs of conducting business in a new location or with a new class of customers (including costs of
staff training)
(iv) Administration and other general overhead costs.
10.14
Financial Accounting: Concepts and Applications
Example: A building site may be used for Car Park before the construction starts but such incidental operations
are not necessary to bring an item to location and condition necessary for it to be capable of operating in the
manner intended by the management. The income and expenses of incidental operations are to be shown in
the statement of Profit and Loss.
2. Estimated Residual (Salvage or Scrap) value means the estimated amount which will be recovered
when the asset is sold or exchanged for a new asset at the end of its estimated or actual useful service
life. The net depreciable cost of the tangible fixed asset to the business (or other) enterprise is therefore,
arrived at by deducting the salvage value of the asset from its actual historical cost as described above
in point 1.
According AS-10 : Property, Plant and Equipment: the residual value of an asset is the estimated
amount that an entity would currently obtain from disposal of the asset, after deducting the estimated
costs of disposal if the assets were already of the age and in the condition expected at the end of
its useful life.
Note: Estimation of residual life is very difficult and cannot be determined objectively. It should be treated
nil or ignored if the amount is insignificant. The only way is to ascertain the residual value from the
junk market where it exists.
It must be remembered that since the residual value is recoverable there is no need to charge depreciation
on this value. It cannot be part of cost of the assets.
Thus, the amount of depreciation to be written off is equal to: Cost of the asset minus its Residual Value
3. Estimated useful life: The following points are generally recommended in estimating the useful life
of tangible fixed assets:
(a)
The intensity of use : The life of an asset ordinarily depends upon the way in which it is put
to use e.g., a truck used on a construction site may have relatively shorter life than a truck
used for transportation on National Highways due to good quality of roads.
(b)
The standard of maintenance, for example, the careful handling and frequent overhauling or
repairs usually tend to increase useful life.
(c)
The replacement policy of the management: Machinery, for example, with an expected physical
life of 15 years under normal conditions will have a useful life for depreciation purpose of 10
years if the policy of the management is to exchange or dispose of such asset after 10 years.
IS DEPRECIATION A SOURCE OF FUNDS
There is popular misconception that depreciation is a source of funds or working capital. In fact it is not so,
because funds are generated by the revenues or receipts from sales and other items of extraordinary income
(e.g. sale of fixed assets at profit) and not from depreciation. It is true that depreciation is non-cash expense
and unlike other operating expenses, does not require the use of funds or working capital but under no circumstances
depreciation is source of funds or cash for that matter.
The misconception can be cleared with the help of following journal entry that is usually passed or made for
depreciation accounting:
Depreciation Expense Account
Dr.
To Fixed Asset Account
The depreciation expense account is clearly an expense account while the credit account is contra fixed asset
account. How can it be presumed from the above journal entry that the depreciation is source of funds or
cash?
When the funds from operations are calculated for the purpose of funds flow statement, the depreciation expense
figure is added back to the given net profit or income figure. Such a procedure has led to a good deal of
confusion because it is often concluded that depreciation is a source of funds e.g.,
Accounting for Property, Plant and Equipment & Depreciation
10.15
Funds From Operations
`
Net Income as Per Income Statement
50,000
Add : Non-cash expense : Depreciation
10,000
60,000
Does it mean that out of total funds from operations (i.e. ` 60,000) the contribution of depreciation is ` 10,000.
The answer is ‘no’.
It may be explained in this manner. Suppose the firm charges depreciation of ` 40,000 instead of ` 10,000. It
would be found that working capital is still ` 60,000 regardless of the amount charged for depreciation. The
reason is that the profit or income with ` 40,000 as depreciation would be reduced to ` 20,000. The funds
provided by operations, however, would remain at ` 60,000 (20,000 + 40,000).
In brief, the depreciation is an expense and an expense can never be source of funds.
However, the depreciation indirectly affects the flow of funds which is explained in the following manner:
(i) Depreciation affects the cost of production and is considered for determining the price of the product.
Thus, it has direct relation to the flow of revenues.
(ii) Depreciation is a charge against the profit thus, reducing the profit and consequent tax liability affecting
the flow of funds (cash)
(iii) No profit can be distributed unless reduced by the amount of tax liability and thus, it reduces the
outflow of funds (cash).
CALCULATION OF DEPRECIATION FOR ASSETS
PURCHASED DURING THE YEAR
When an asset is purchased during the year, the following alternatives may be followed:
(a) If the rate of depreciation is expressed as 10% or 20% without a mention of per annum, the depreciation
would be simply calculated as percentage of the total cost of the asset for full year. This is especially
true when date of purchase or date of sale is not given. However, if the date of purchase or sale is
given and the rate of depreciation is expressed without per annum, the depreciation must be calculated
on the basis of time factor unless the examination problem requires otherwise.
(b) If the rate of depreciation is expressed as 10% or 20% per annum and the date of acquisition is also
given, the depreciation expense would be calculated with reference to the date of acquisition to the
end of accounting period.
(c) If the rate of depreciation is expressed per annum and the date of acquisition of the asset is not given,
it would be appropriate to calculate depreciation for 6 months on the assumption that it was acquired
half way through the year. It will be wrong in this case if the depreciation is charged for full year or
no depreciation is charged at all. The point must be clarified by giving specific note to this effect.
(d) The effective date for charging the depreciation is that date when the asset has been put to use or where
the asset is ready for use irrespective of fact whether it is being used or not.
ACCOUNTING TREATMENT
There are two alternative methods of accounting entries for recording the depreciation, namely:
(i) To reduce the value of asset by charging depreciation directly to the asset account every year i.e.,
to credit the asset account.
(ii) To create a separate provision for depreciation account and accumulate the depreciation amount
(year after year) in that account without disturbing the concerned asset account i.e., to credit the
provision for depreciation account.
10.16
Financial Accounting: Concepts and Applications
Depreciation Directly Charged to Asset Account
This accounting procedure is applicable for all the methods of depreciation except for sinking fund method.
The journal entry in the books of account is :
(i) Depreciation Account
Dr.
(with the amount of depreciation)
To Relevant Asset Account
In this manner, depreciation is directly credited to the asset account with the result that the asset account
is shown in the balance sheet at its cost or book value less depreciation for the accounting period.
Depreciation expense is then transferred to the statement of profit and loss with the help of following journal
entry:
(ii) Profit and Loss Account
Dr.
(with the same amount as in [i] above)
To Depreciation Account
Provision for Depreciation
Depreciation may also be recorded with the help of provision for depreciation account as well. The necessary
entries are:
(i) For charging depreciation
Depreciation Account
Dr.
(with the amount of depreciation)
To Provision for Depreciation Account
(ii) For closing depreciation account
Profit and Loss Account
Dr.
(same amount as in [i])
To Depreciation Account
Under this method, the asset account is not affected by the amount of depreciation and the asset appears
in the ledger and balance sheet at its original cost until sold or discarded. The amount in the credit
side of the provision for depreciation account shows the total amount of depreciation accumulated to
date. However, when the asset is sold or discarded or exchanged for a new asset, the total depreciation
for that asset in the provision for depreciation account is transferred to that asset account with the
help of following journal entry:
Provision for Depreciation Account
Dr.
To Relevant Asset Account
Thus, the balance in the provision for depreciation account always indicates the total depreciation on
the unsold assets.
In the balance sheet, the asset account is shown at its original cost less accumulated balance in the provision
for depreciation account; e.g.,
Assets Side
`
Cost of the Asset
Less: Provision for Depreciation
`
1,00,000
20,000
80,000
However, some accountants show the asset at the original cost and provision for depreciation in the liabilities
side until the depreciation provision is equal to the original cost of the asset.
Difference: It is relevant to highlight the points of difference in the two accounting procedures as given
below:
Accounting for Property, Plant and Equipment & Depreciation
When Depreciation Directly Affects The Asset Account
10.17
When Provision For Depreciation Account is Maintained
(i) The asset is shown in the balance sheet at cost/book value
less depreciation of the relevant accounting period only.
(i) The asset always appears at its original cost in the
ledger.
(ii) It is not possible to know the total amount of depreciation
written off from one balance sheet.
(ii) The balance in the provision account shows the total
amount of depreciation written off upto the latest
balance sheet date.
(iii) In the absence of details it is not possible to know whether
the asset is new or old.
(iii) It is easy to find out the age of the asset simply with
the help of cost of asset and accumulated depreciation.
METHODS OF PROVIDING DEPRECIATION
The total amount of depreciation for an asset is equal to the cost of the asset less its scrap or disposal value
at the end of its useful life. Though there is unanimity amongst the accountants regarding the total quantum
or measure of depreciation to be written off over the useful life of the asset yet there is difference of opinions
so far the apportionment of this total amount between different years is concerned. As a result, the annual
charge for depreciation against the statement of profit and loss for the same asset is not uniform for
various business enterprises. The reasons are:
(i) It is not possible to estimate accurately the useful life of the asset.
(ii) It is also not possible to determine accurately the extent of the use of the asset each year of its
useful life.
(iii) It is not possible to determine the scrap or disposal value at the end of its useful life.
(iv) The expenses on the repairs and maintenance of the fixed asset would determine the capacity of
the asset to provide useful service to the business enterprise over its life.
There are various methods of charging depreciation, (that is allocating cost of tangible fixed assets) each
year as given below:
(i) Straight Line Method
(ii) Diminishing Balance Method or Written Down Value Method.
(iii) Annuity Method
(iv) Depreciation Fund Method (or Sinking Fund Method)
(v) Insurance Policy Method
(vi) Machine Hour Rate Method
(vii) Units of Production or Output Method
(viii) Revaluation Method
(ix) Sum-of-the-Years’ Digits Method
(x) Group Depreciation Method
According to AS-10 : Property, Plant and Equipment, the depreciation method used should reflect the
pattern in which the future benefits of the assets are expected to be consumed by the enterprise.
A variety of depreciation methods can be used to allocate the depreciable amount of an asset on a systematic
basis over its useful life. These methods include:
(i) the straight line method
(ii) the diminishing balance method, and
(iii) the units of production method
The detailed discussion of the above three methods follows in the following pages:
10.18
Financial Accounting: Concepts and Applications
Some Important Points
While solving the problems on Depreciation, it is necessary to focus on the following significant points
given below:
(i) The depreciation is to be calculated from the date the asset is ready or available for use. It means
the date of acquisition or purchase of asset is not relevant when the date of using or availability for
its use is given in the examination problem.
(ii) When the date of disposal or discardment of asset is given, the date for the calculation of asset is
not the date of sale but the date on which the asset was discarded, that is, put out of use.
(iii) When the asset is purchased on hire purchase system, the depreciation will be calculated on its cash
price because interest is the revenue expenditure and must be transferred to Statement of Profit and
Loss. Students must calculate the cash price from the given hire purchase price before charging depreciation,
because Hire Purchase Price = Cash Price + Amount of interest included in each instalment
(iv) When the enterprise purchases a second hand tangible fixed asset, all expenditures incurred in
making the asset usable must be capitalised, that is, added to its cost or purchase price.
(v) When the Diminishing Value Method or Written Down Value Method is to be adopted and the
scrap or residual value is also given, ignore the scrap or residual value. When the expenses relating
to the sale of assets such as dismantling charges are given in the examination problem, the same
must be deducted from the sale price to calculate the real or effective sale price. The alternative journal
entries are:
First Alternative
Bank Account
Dr.
To Asset Account
(with sale price minus dismantling charges)
Second Alternative
Asset Account
Dr.
To Bank Account (with dismantling charges)
Now sale price will not be modified or diluted
All these points are to be found in the illustrations that follow.
COMPONENT ACCOUNTING
A fixed asset may consist of either one item or group of items held by the business enterprise to be used for
more than one accounting period. So, the asset may contain one component or more than one component i.e.
group of components making one physical unit with one cost.
For example when a firm purchases an Aircraft, it contains the following major components namely:
• Airframe that is the body of the aircraft
• the engines and
• the interiors in the form of seatings (chairs), furnishing etc.
But the firm records the Aeroplane in the books of account as one unit with one cost. Interestingly the major
components of the aeroplane can be physically separated from the principal asset and which have got significantly
different costs and different useful lives. Hence, each item should be depreciated separately. It is called component
accounting.
It means that if an asset has several components which can be physically separated from the main or principal
asset and which have got significantly different costs and different useful lives then these should be recognised
based on their respective useful lives and these should be depreciated separately.
Accounting for Property, Plant and Equipment & Depreciation
10.19
In short, component accounting requires that if an asset has several components which can be physically
separated from the principal asset and which have significantly different useful lives then these should
be recognised separately and should be depreciated based on their respective useful lives.
Para 45 of Accounting Standard (AS) - 10 makes the following reference to Component Accounting:
Each part of an item (fixed asset) with a cost that is significant in relation to the total cost of the item should
be depreciated separately.
A significant part of an asset may have a useful life and a depreciation method that are the same as the useful
life and the depreciation method of another significant part of that same item, such parts may be grouped in
determining the depreciation charge.
Schedule II of the Companies Act 2013 requires that useful life for significant components of tangible assets
should be determined separately. Companies need to identify and depreciate significant components with different
useful lives separately. The Ministry of Corporate Affairs vide its notification dated 29th August 2014,
has made Component Accounting mandatory for financial year commencing on or after 1st April, 2014.
It must be noted that determination of separate components, their individual costs and useful lives is
not a simple matter. It requires the involvement of technical experts, and objective judgement before
embarking on Component Accounting.
Example of Component Accounting
A firm purchases a Motor Vehicle for transporting the passengers from New Delhi to Amritsar. costing ` 8 lakhs
on 1st April, 2018. The major or significant components of the Motor Vehicle consists of its Main Body costing
` 2,50,000, Interiors, that is, seating arrangement and furnishings costing ` 3,50,000 and Engine ` 2,00,000.
The expected useful lives of these components is :
Main Body 5 years, Seating units 4 years and Engine 8 years. Calculate the depreciation for the financial
year 2018-19.
Answer
Annual depreciation charge on the basis of component accounting would be as shown below:
Depreciation on Component Body
= ` 2,50,000/5 = ` 50,000
Depreciation on Component Seating
= ` 3,50,000/4 = ` 87,500
Depreciation on Component Engine
= ` 2,00,000/8 = ` 25,000
Annual Depreciation of Motor Vehicle
= ` 50,000 + ` 87,500 + ` 25,000 = ` 1,62,500
STRAIGHT LINE METHOD
(Fixed or Equal Instalment Method)
This method assumes that each accounting period receives the same benefit from using the asset as every
other period. It is called straight line because it allocates an equal amount of depreciation in each of the
accounting periods of the service life of the asset. The depreciation charge for each accounting period is
therefore, not affected by the extent of use of the asset (i.e., asset productivity), its age or efficiency. The
formula for calculating depreciation charge for each accounting period is :
Annual Depreciation =
Original Cost – Estimated Salvage Value
Estimated useful Life in Years
For example, if a machine is purchased for ` 1,00,000 on January 1 and the installation
charges are ` 30,000 with an estimated scrap value of ` 10,000 and estimated life of 5 years, the annual
depreciation charge on 31 December would be found as under:
Depreciation =
` 1, 00, 000 + ` 30, 000 – ` 10, 000
` 1, 20, 000
=
= ` 24, 000
5
5
10.20
Financial Accounting: Concepts and Applications
However, if the asset is acquired during the year, the amount of depreciation would be proportionate to
the period of use.
Rate of Depreciation =
r =
Amount of Depreciation
Original Costs
24, 000
× 100 = 18.46% (App.)
1, 30, 000
The book value of the machine is found by deducting the total accumulated depreciation from the cost.
Advantages
(i) This method is easy to use. Mathematical calculations are not required.
(ii) This method realistically matches cost and revenues.
(iii) There is no change either in the rate or the amount of depreciation over the useful life of the asset.
Such a procedure provides sound basis for comparison.
(iv) This method is recognised by the Accounting Standard (AS)-10 issued by the Institute of Chartered
Accountants of India and also by the Companies Act 2013.
(v) The valuation of the asset each year in the balance sheet is reasonably fair.
Disadvantages
(i) It does not take into consideration the interest on the amount invested in the fixed asset.
(ii) It is illogical because depreciation is considered a function of time rather than a function of use.
(iii) It is based on the wrong assumption of equal utility of the asset during its useful life.
(iv) The maintenance of the asset is generally costly in the later years with the result that the total of
maintenance costs and depreciation would be greater in later years than in the earlier years.
(v) If an additional asset is purchased, the amount of depreciation on that asset has to be recalculated.
Hence, a separate calculation has to be made for each item because of difference in useful life and
scrap value.
Suitability
This method is suited in the following cases:
(i) Where the useful life of the asset can be estimated accurately;
(ii) When repairs/maintenance expenses are uniform for each accounting period;
(iii) Where use of the asset is consistent from period to period and therefore each period benefits equally
from the use of the asset e.g., furniture, leases, copyright, trade mark etc..
(iv) Where the asset is not likely to become obsolete.
Illustration 1 (Straight Line Method)
Soloman purchases a machine for ` 1,00,000 on 1 January 2016. Its estimated useful life is 5 years and scrap
value ` 10,000. It is decided to write off depreciation under straight line method. Pass necessary journal entries
for five years and open necessary accounts in the ledger for the same period. The accounting period ends on
31 March every year.
Solution :
Annual Depreciation = ` 1,00,000  ` 10,000  ` 18,000 per year
5
18,000
 100  18%
Rate of Depreciation =
1,00,000
Accounting for Property, Plant and Equipment & Depreciation
10.21
Journal Entries
Date
2016
Jan. 1
31 Mar.
2017
31 Mar.
2018
31 Mar.
2019
31 Mar.
2020
31 Mar.
31 Dec.
2021
31 Mar.
Particulars
Debit
`
Machinery Account
To Bank Account
(Purchase of machine)
Dr.
Depreciation Account
To Machinery Account
(Depreciation on machinery for 3 months)
Dr.
Profit and Loss Account
To Depreciation Account
(Depreciation charged to profit and loss A/c)
Dr.
Depreciation Account
To Machinery Account
(Depreciation of machinery for one year)
Dr.
Profit and Loss Account
To Depreciation Account
(Depreciation charge transferred to profit and loss A/c)
Dr.
Depreciation Account
To Machinery Account
(Annual depreciation charge)
Dr.
Profit and Loss Account
To Depreciation Account
(Depreciation charge transferred to profit and loss A/c)
Dr.
Depreciation Account
To Machinery Account
(Annual depreciation charge)
Dr.
Profit and Loss Account
To Depreciation Account
(Transfer of annual depreciation to profit and loss A/c)
Dr.
Depreciation Account
To Machinery Account
(Annual depreciation charge)
Dr.
Profit and Loss Account
To Depreciation Account
(Transfer of depreciation charge to profit and loss A/c)
Dr.
Bank Account
To Machinery Account
(Machinery sold for ` 10,000 as scrap)
Dr.
Depreciation Account
To Machinery Account
(Depreciation charge for 9 months on ` 90,000 @ 18%)
Dr.
Profit and Loss Account
To Depreciation Account
(Transfer of depreciation account to profit and loss A/c)
Dr.
Credit
`
1,00,000
1,00,000
4,500
4,500
4,500
4,500
18,000
18,000
18,000
18,000
18,000
18,000
18,000
18,000
18,000
18,000
18,000
18,000
18,000
18,000
18,000
18,000
10,000
10,000
13,500
13,500
13,500
13,500
10.22
Financial Accounting: Concepts and Applications
Dr.
1 Jan. 2016
Bank Account
Machinery Account
`
1,00,000
`
31 March 2016
Depreciation Account (3 Months)
Balance c/d
Balance b/d
1,00,000
31 March 2017
95,500
Depreciation Account
18,000
Balance c/d
77,500
95,500
1 April 2017
Balance b/d
95,500
31 March 2018
77,500
Depreciation Account
Balance c/d
1 April 2018
77,500
31 March 2019
59,500
Depreciation Account
18,000
Balance c/d
41,500
59,500
1 April 2019
Balance b/d
59,500
31 March 2020
41,500
Depreciation Account
18,000
Balance c/d
23,500
41,500
1 April 2020
Balance b/d
18,000
59,500
77,500
Balance b/d
4,500
95,500
1,00,000
1 April 2016
Cr.
41,500
31 December 2020
23,500
Bank Account (Scrap)
10,000
31 March 2021
Depreciation Account
23,500
(for 9 months)
13,500
23,500
DIMINISHING BALANCE METHOD
(Written Down Value or Reducing Balance Method)
Under this method, a fixed rate or percentage is applied to the original cost in the first year and to the book
values in subsequent years. The book value of the asset means the undepreciated balance of the asset
cost, i.e., balance of the asset cost not yet depreciated. In other words, the depreciation is calculated on
the reducing balance (asset cost minus depreciation) and not on the original cost. The procedure is that
depreciation is deducted from the cost of the asset and balance is known as the written down value. In the
next accounting period, the fixed percentage is applied to the written down value and not to the original
cost. The rate of depreciation remains the same while the amount of depreciation goes on decreasing. The
written down value (i.e., the unallocated cost) at the end of the estimated useful life of the asset should
equal the estimated salvage value. The rate of depreciation in the diminishing balance method is :
r = 1– n
S
× 100
C
where r = the rate of depreciation; n = number of years of asset’s life; s = salvage (or scrap) value and
c = cost of the asset. For example, Somesh buys a second hand motor car for ` 40,000 and its scrap
value is ` 10,480 and the useful life of the car is 6 years, the rate of depreciation under diminishing
balance method would be :
r = 1– 6
10, 480
× 100
40, 000
Accounting for Property, Plant and Equipment & Depreciation
10.23
r = 1– 6 0.262 × 100
= 1 – 0.8 × 100 = 20%
Illustration 2 (Diminishing Balance and Straight Line Methods)
A machine was acquired on 1 April 2019 for ` 15,000. The cost of installation being ` 1,000. It is expected
that its scrap value at the end of its working life will be ` 2,000. Write up the machine account for the first
two years under diminishing balance method and S.L.M. charging 10% depreciation. Assume that the financial
year is followed.
Solution:
Dr.
(i) Machinery Account (Diminishing Balance Method)
1-4-2019
Bank Account
`
16,000
Depreciation Account
Balance c/d
16,000
1-4-2020
Dr.
Depreciation Account
`
16,000
12,960
Cr.
`
31-3-2020
Depreciation Account (10 % of ` 16,000)
Balance c/d
16,000
1-4-2020
1,440
14,400
(ii) Machinery Account (S.L.M.)
Bank Account
14,400
31-3-2021
14,400
14,400
Bank Account
1,600
16,000
Balance c/d
1-4-2019
`
31-3-2020
(10 % of ` 16,000)
(15,000 + 1,000)
Balance b/d
Cr.
1,600
14,400
16,000
31-3-2021
14,600
Depreciation Account
14,400
Balance c/d
12,960
14,600
14,400
ATTENTION PLEASE
Under written down value method, scrap value is not deducted and depreciation is calculated on the
original cost.
Advantages
(i) The higher depreciation is charged in the earlier years when the machine is most efficient. This
matches higher cost with larger revenues resulting from the increased production.
(ii) The obsolescence problem is given due care because the major part of the depreciation is charged in
the earlier years and the management has no difficulty in replacing the asset.
(iii) The problem of higher maintenance or repair charges is solved since the depreciation expense in
later years is lower than the depreciation expense of early years.
(iv) The asset will never be completely written off with the result that management can keep a track of
the asset.
(v) All items including additions are added together and depreciated at the same rate. So no recalculation
is necessary when additional assets are purchased.
(vi) The method is recognised by AS-10 and Companies Act 2013 and is applicable for income tax purposes.
10.24
Financial Accounting: Concepts and Applications
Disadvantages
(i) This method requires much figure work.
(ii) Such a method involves the use of mathematical tables where the arithmetic is difficult.
(iii) It does not take into consideration the interest on the amount invested in the fixed assets.
(iv) It takes very long time to write off the asset unless a very high rate of depreciation is applied. The
result is that the asset cannot be replaced at the earliest.
(v) If the life of the asset is short, the depreciation charge in the earlier years is more having adverse
impact on the net profit. Hence, this method is not applied for assets with a very short life.
(vi) The depreciation is neither based on the use of the asset nor distributed evenly throughout the
useful life of the asset.
Suitability: In general this method is suitable to plant and machinery where repairs are heavy in the later
years and additions, extensions and substitution are frequent. And also where the possibilities of obsolescence
are frequent.
DIFFERENCE BETWEEN STRAIGHT LINE METHOD
AND DIMINISHING BALANCE METHOD
Points of Difference
Diminishing Balance Method
Straight Line Method
1. Computation Method
The depreciation is charged at a fixed rate
on the original cost in the first year and
on the written down value (cost-minus total
depreciation) in the subsequent years.
The depreciation is charged at a fixed rate on
the original cost of the asset
2. Amount of Depreciation
The amount of depreciation goes on
decreasing year after year.
The amount of depreciation remains the same
in all the years of useful life of the asset
3. Effect on Income
Statement
The total burden on the profit and loss
account is same in the early years as well
as is the later years because of more
depreciation plus repairs cost in the beginning
and less depreciation plus more repairs cost
in the later years.
The total burden on the profit and loss account
is more in the later years because the repair
charges increase while the amount of
depreciation is same.
4. Book Value
The book value never becomes zero.
The book value of the asset becomes zero or
equal to scrap value
5. Calculation
It requires the use of mathematical tables
It is easy to calculate the rate of depreciation
6. Suitability
Repair charges are more in later years and
also obsolescence.
Where repair charges are less and obsolescence
is not frequent
UNITS OF PRODUCTION METHOD
The units of production method results in a charge based on the expected use or output. In this method the
depreciation expense is allocated in proportion to the degree the asset is used for production because the
estimation of useful life is done in terms of units of output and not a calendar time period. A machine has the
capacity to produce limited number of items and therefore, as an item is produced, the total number of possible
units is reduced. As a result of this limitation, the depreciation is related to usage and not to time. In this
method an estimate of the capacity of the asset to produce units of a certain item is made. It may be clarified
that units-of-production capacity might be miles driven by vehicles, flying hours by aircraft engine, number
of stampings for stamping machine, tons of coal in a mine, number of operating hours a machine will provide
and so on. The depreciation expense for a particular accounting period is calculated as under:
Depreciation Expense Per Unit =
Cost minus Salvage Value
Total Estimated Units of Output or Service Hours
or Any Other Unit
Accounting for Property, Plant and Equipment & Depreciation
10.25
Depreciation expense for the accounting period = Depreciation expense per unit (as calculated above) multiplied
by the number of units (of output or service hours or any other unit used) pertaining to the accounting
period.
Example: (Units of Production Method)
Anjna Ltd. bought a machine, expected to run or render 36,000 hours of service, for ` 20,000. Its salvage
value was estimated at ` 2,000. Calculate the depreciation expense for an accounting period in which it was
used for 8,000 hours.
Answer:
First Step: Depreciation expense per hour :
20,000 – 2,000
36,000
= ` 0.5 or 50 paise per hour
Second Step: Depreciation expense for the accounting period :
8,000 × 50 p = ` 4000.
Advantages: The following points of merit are generally mentioned for this method:
(i) This method relates fixed asset cost to usage, Under the straight line method, the emphasis is on the
availability of the asset for use and the depreciation expenses is a measure of such availability whether
the asset has been used or not. But unit of production method allocates the cost in terms of use of the
asset.
(ii) If the actual units produced differ from the original estimate, it would mean that either the asset is not
completely depreciated or it produces more units than estimated. Either of the two situations could be
easily investigated.
(iii) It is further claimed that if the estimate regarding the capacity of the asset can be made with reasonable
accuracy, it gives a superior basis for depreciation; the depreciation expense is presumably written off
in proportion to the amount of usage and presumably in proportion to the revenue earned in a period.
In other words, this method properly matches depreciation cost to revenues.
The major disadvantages are :
(i)
It is difficult in practice to estimate the total number of units likely to be produced during the
total operating life of the machine. Instead the ‘time’ of useful life is easy to determine.
(ii) A separate record of output for each asset will have to be maintained necessitating extra recordkeeping. Moreover, the records may not be readily available without additional cost and efforts.
(iii) This method ignores obsolescence. It is explained as: Suppose the selling price of a product is `
40 and the cost other than depreciation expense is ` 30 per unit. Each unit requires 10 hours of
machine time and 100 units are produced and sold. The cost of the machine is ` 10,000 and the
estimated capacity 20,000 hours.
`
Sales:
100 units @ ` 40 per units
4,000
Less :
Cost other than depreciation (100 × 30)
3,000
1,000
Less :
Depreciation expense = `
10,000
= 50 paise per hour
20,000
100 units × 10 hours × 50 paise
500
Profit
500
Next year as a result of sophisticated machines there is an increase in the general production of the
commodity with the result that the selling price drops to ` 30. How can it be said that the machine is
making contribution towards revenue? The firm would definitely incur loss unless the machine is replaced.
10.26
Financial Accounting: Concepts and Applications
(iv) The balance sheet value would be a pure fiction.
Suitability: Units-of-production method is more appropriate for situations in which wear and tear is the major
cause of depreciation and the amount of use may vary from period to period. Furthermore, if the asset is
uniformly used throughout its useful life, the same allocation would result from either the straight line method
or units-of-production method. This method is also easier to apply in case the business is engaged in extracting
natural resources e.g. petroleum and other mining products.
Illustration 3 (Reducing Balance Method)
A machine is purchased for ` 20,000 on 1 April 2018. It is depreciated @ 5% p.a. on reducing balance method
for five years, when it becomes obsolete due to new methods of production and is scrapped. The scrap produces
` 5,385 there on and the accounting period ends on 31 March every year.
Show the plant account in the ledger for three years.
Solution :
Dr.
Plant Account
Date
Particulars
1.4.18
Bank
`
20,000
Cr.
Particulars
31.3.19
Depreciation
1,000
Balance c/d
19,000
(Purchase of Plant)
20,000
1.4.19
Balance b/d
19,000
20,000
31.3.20
Depreciation
Balance c/d
19,000
1.4.20
Balance b/d
18,050
`
Date
950
18,050
19,000
31.3.21
Depreciation
Balance c/d
18,050
902
17,148
18,050
SALE OR DISPOSAL OF FIXED ASSETS
Assets may be sold or discarded before or on the expiry of its estimated useful life. It would then be necessary
to calculate the profit or loss, if any, on such sale. For this purpose, we have to calculate the book value
of the asset on the date of sale. The book value is calculated by deducting the total depreciation from the
date of purchase of the asset to the date of sale of the asset from the original cost of the asset. It may be
noted that:
(i) If the sale price is more than book value, the difference is profit on sale.
(ii) If the book value is more than the sale price the difference is loss on sale.
The relevant journal entries are:
(i) On sale of assets
Cash/Bank Account
Dr.
(with the total sale price)
Dr.
(with the amount of profit)
To Asset Account
(ii) (a) Profit on sale of asset
Asset Account
To profit and Loss Account
(b) Loss on sale of asset
Profit and Loss Account
To Aseet Account
Dr.
(with the amount of loss)
Accounting for Property, Plant and Equipment & Depreciation
10.27
Illustration 4 (Diminishing Balance Method– Opening Cost Unknown – Loss on Sale)
Paro Ltd. depreciates its machinery at 10% p.a. under the reducing balance method. On 1.1.2020 it had ` 4,05,000
as balance of its Machinery Account. On 31.03.2020 it sold for ` 17,000, part of the machine which it purchased
on 1.1.2018 at ` 30,000. On 1.7.2020 it purchased a new machine at a cost of ` 46,500 and installed it on
the same day at a further cost of ` 3,500. The company’s policy is to charge depreciation proportionate to
actual use during a year made of an asset but to ignore depreciation for any period of less than 182 days. If
no further purchase/sale has been made between 2018 and 2020 except those mentioned above, show the Machinery
Account in the books of the company between 1.1.2018 and 31.12.2020.
[C.A. Inter Adapted]
Points to be noted:
1. Machinery Account is to be prepared from 1.1.2018, but its balance is given only on 1.1.2020. So, the original cost on
1.1.2018 should be found out.
2. No depreciation is to be provided on the asset sold in 2020 as it has been used for only 3 months (less than 182 days) in
this year. But depreciation should be charged on the machine purchased on 1.7.2020 as it has been used for 182 days or
more.
WORKING NOTES
1. Original Cost/Value on 1.1.2018
`
Written down value on 1.1.2020
 90

of 4, 05, 000 
Added Back : Depreciation in 2019 
100

W.D Value on 1.1.2019
 90

of 4, 05, 000 
Added Back : Depreciation in 2018 
100

Cost on 1.1.2018
4,05,000
45,000
4,50,000
50,000
5,00,000
2. Profit/Loss on sale on 31.3.2020
`
1.7.2018
Original Cost
31.12.2018
Less:
Depreciation @ 10% p.a.
1.1.2019
31.12.2019
30,000
W.D.Value
Less
Depreciation @ 10% p.a.
1.1.2020
W.D.Value
3,000
27,000
2,700
24,300
As no depreciation is to be charged for 2020
Book value on 31.3.2020
24,300
Less : Selling Price
17,000
Loss on Sale
7,300
3. Annual Depreciation for 2020
`
On machinery existing 10% of [ ` 4,05,000 – ` 24,300]
On new purchase for
1
1
year (1.7.2017 to 31.12.2017) [10% of 50,000 for
year]
2
2
38,070
2,500
40,570
10.28
Financial Accounting: Concepts and Applications
Solution :
Books of Paro Ltd.
Machinery Account
Dr.
`
Date
Particulars
1.1.18
Bank A/c (Purchase)
5,00,000
Cr.
Date
Particulars
31.12.18
Depreciation A/c
Balance c/d
5,00,000
1.1.19
Balance b/d
4,50,000
31.12.19
Depreciation A/c
4,50,000
Balance b/d
4,05,000
1.7.20
Bank A/c
[46,500 + 3,500]
50,000
4,50,000
5,00,000
Balance c/d
1.1.20
`
45,000
4,05,000
4,50,000
31.3.20
50,000
31.12.20
Bank A/c (Sale)
17,000
Profit & Loss A/c
(loss on sale)
7,300
Depreciation A/c
40,570
Balance c/f
4,55,000
3,90,130
4,55,000
Illustration 5 (Provision for Repairs and Depreciation)
Deba Printers Ltd. purchased a Printing Machine on 1.4.2016 for using it for 5 years only. Its cost was
` 86,000 but insurance paid on it and its carrying costs amounted to ` 7,000 and ` 2,000 respectively. Deba
Printers Ltd. also estimated a total expense of ` 25,000 on account of its repairs over its work life. The scrap
value of the machine was estimated to be ` 5,000.
The Annual repairs were:
2016 - 17
Nil
2017 - 18
4,000
2018 - 19
6,000
2019 - 20
7,000
2020 - 21
8,000
On 31.03. 2021 the machine was sold for ` 4,800. Show the necessary accounts in the books of Deba Printers
Ltd. over these years.
WORKING NOTES
Annual Provision for Repairs & Depreciation
Original Cost  Insurance  Carriage  Estimated Total Repairs – Residual Value
Estimated Years of Working Life
` 1,15, 000
` 86, 000  ` 7, 000  ` 2, 000  ` 25, 000 – ` 5, 000
=
5
5
= ` 23,000
Solution :
Books of Deba Printers Ltd.
Provision for Repairs and Depreciation Account
Dr.
Date
31.3.17
Particulars
Balance c/d
`
23,000
Cr.
`
Date
Particulars
31.3.17
Profit & Loss A/c
23,000
1.4.17
Balance b/d
23,000
Accounting for Property, Plant and Equipment & Depreciation
31.3.18
Repairs A/c
4,000
Balance c/d
42,000
10.29
31.3.18
Profit & Loss A/c
46,000
31.3.19
Repairs A/c
6,000
Balance c/d
59,000
46,000
1.4.18
Balance b/d
42,000
31.3.19
Profit & Loss A/c
23,000
65,000
31.3.20
Repairs A/c
7,000
Balance c/d
75,000
65,000
1.4.19
Balance b/d
59,000
31.3.20
Profit & Loss A/c
23,000
82,000
31.3.21
Repairs A/c
31.3.21
Machinery A/c
8,000
82,000
1.4.20
Balance b/d
75,000
31.3.21
Profit & Loss A/c
23,000
90,000
98,000
Dr.
98,000
Machinery Account
Date
Particulars
1.4.16
Bank A/c
Cost
23,000
`
Cr.
Date
Particulars
`
31.3.17
Balance c/d
95,000
86,000
Insurance
2,000
Carriage
7,000
95,000
95,000
95,000
1.4.17
Balance b/d
95,000
31.3.18
Balance c/d
95,000
1.4.18
Balance b/d
95,000
31.3.19
Balance c/d
95,000
1.4.19
Balance b/d
95,000
31.3.20
Balance c/d
95,000
1.4.20
Balance b/d
95,000
31.3.21
Provision for Repairs &
Dep. A/c
90,000
Bank (Sale)
Profit & Loss A/c (Loss)
95,000
Dr.
Particulars
31.3.18
Cash A/c
31.3.19
31.3.20
31.3.21
Cash A/c
Cash A/c
Cash A/c
`
4,000
6,000
7,000
8,000
200
95,000
Repairs Account
Date
4,800
Cr.
`
Date
Particulars
31.3.18
Provision for Repairs &
Depreciation A/c
4,000
Provision for Repairs &
Depreciation A/c
6,000
Provision for Repairs &
Depreciation A/c
7,000
Provision for Repairs &
Depreciation A/c
8,000
31.3.19
31.12.20
31.12.21
10.30
Financial Accounting: Concepts and Applications
Illustration 6 (Use of Provision for Depreciation Account and Asset Disposal Account)
The cost of machinery in use with a firm on 1st April, 2019, was ` 3,00,000 against which the depreciation
provision stood at ` 1,20,000 on that date. The firm provided depreciation at 10% p.a. on the diminishing
value.
On 31st December, 2019, two machines costing ` 30,000 and ` 20,000 respectively, both purchased on 1st
October, 2014, had to be discarded because of damage and had to be replaced by two new machines costing
` 45,000 and ` 35,000 respectively. One of the discarded machines was sold for ` 15,000; against the other
it was expected that ` 5,000 would be realised.
Show the relevant accounts in the ledger of the firm of the year ended 31st March, 2020.
[C.U. B.Com. (Hons.) 2001]
Solution :
Books of.....
Machinery Account
Dr.
Date
Particulars
`
1.4.19
Balance b/d
3,00,000
31.12.19
Bank Account
(Cost of Machines
purchased: 45,000 + 35,000)
Cr.
Date
Particulars
31.12.19
Machinery Disposal
(Cost of Machines discarded
= 30,000 + 20,000)
80,000
Balance c/d
3,80,000
Dr.
Particulars
31.12.19
Machinery Disposal A/c
`
14,411
(Accumulated Depreciation on
discarded machines—transferred)
[Note 1]
31.3.20
Balance c/d
Particulars
31.12.19
Machinery Disposal A/c
(Depreciation on discarded
machines) [Note 2]
31.3.20
Provision for Depreciation A/c (Current year’s
depreciation) [Note 3]
Cr.
Particulars
`
1.4.19
Balance b/d
1,20,000
31.12.19
31.3.20
Depreciation Account
Depreciation Account
(Current year’s depreciation)
[Note 3]
2,886
16,153
1,24,628
1,39,039
Depreciation Account
Date
3,30,000
Date
1,39,039
Dr.
50,000
3,80,000
Provision for Depreciation Account
Date
`
`
Cr.
Date
Particulars
31.3.20
Profit & Loss A/c
`
19,039
2,886
16,153
19,039
19,039
Accounting for Property, Plant and Equipment & Depreciation
Dr.
10.31
Machinery Disposal Account
Date
Particulars
(`)
31.12.19
Machinery Account
(Cost of discarded
machines)
Cr.
`
Date
Particulars
31.12.19
Provision for Depreciation
Account (Accumulated
Depreciation on discarded
machines)
50,000
11,525
Depreciation Account
2,886
Machines Scrapped
(Expected Value)
5,000
Bank Account (Sale)
15,000
Profit & Loss A/c (Loss)
15,589
50,000
50,000
WORKING NOTES
1. Accumulated Depreciation on discarded machines
`
1.10.16
31.3.17
Original Cost
Less:
Depreciation (`)
50,000
Depreciation @ 10% p.a. for 6 months
2,500
2,500
47,500
31.3.18
Less:
Depreciation @ 10% p.a.
4,750
4,750
42,750
31.3.19
Less:
Depreciation @ 10% p.a.
4,275
4,275
38,475
11,525
2. Depreiation on discarded machines in 2019-2020
+ 2,886
For 1.4.19 to 31.12.19 @ 10% p.a. on W.D.V.
= ` 38,475 ×
14,411
10 9

= ` 2885.63 or ` 2886
100 12
`
3. Depreciation on other machines in 2019-2020
Total Original Cost (of all machines)
3,00,000
Less: Provision for Depreciation (of all machines)
1,20,000
W.D.V. of all machines on 1.4.19
Less:
31.3.2020
1,80,000
W.D.V. of discarded machines on 1.4.19
38,475
W.D.V. of remaining machines on 1.4.19
1,41,525
Depreciation @ 10% (for full year)
Add:
14,153
Depreciation on new machines purchased on 31.12.19
[on ` 80,000 @ 10% for 3 months]
2,000
16,153
4. Out of the two machines discarded, one has been sold. The other is expected to realise ` 5,000. It has been shown
as machine scrapped. Loss on these machines.
`
W.D.V. on 1.4.19
Less:
38,475
Depreciation in 2019 - 20 Value on 31.12.19
2,886
35,589
Less:
Amount realised or expected to be realised [ ` 15,000 + ` 5,000]
Loss
20,000
15,589
10.32
Financial Accounting: Concepts and Applications
Illustration 7 (Depletion Units or Units of Production Method)
On 1.1.2018 Mining Corporation Ltd. obtained the lease of a mine for raising mineral ores for 12 years. For
this it had to pay ` 4 crore. It was expected that the deposit of ore in the mine would be 25,00,000 tonnes,
80% of which would be raised within the time period of the lease. Depreciation was decided to be provided
under the Depletion Unit Method. The working results of Mining Corporation for the first 5 years have been:
Year
Sales (Tonnes)
Closing Stock (Tonnes)
2016
9,000
1,000
2017
21,000
2,000
2018
1,07,000
5,000
2019
2,41,000
4,000
2020
3,07,000
7,000
Show the Lease Account for the first 5 years.
WORKING NOTES
1. Cost of Lease ` 4,00,00,000
Estimated Raisings within Lease Period = 80% of 25,00,000 = 20,00,000 tonnes
 Depreciation per tonne =
4, 00, 00, 000
= ` 20
20, 00, 000
2. Annual Raisings (tonnes) = Sales (tonnes) + Closing Stock (tonnes) – Opening Stock (tonnes)
2016
9,000 + 1,000 – Nil
or
10,000
tonnes
2017
21,000 + 2,000 – 1,000
or
22,000
tonnes
2018
1,07,000 + 5,000 – 2,000
or
1,10,000 tonnes
2019
2,41,000 + 4,000 – 5,000
or
2,40,000 tonnes
2020
3,07,000 + 7,000 – 4,000
or
3,10,000 tonnes
3. Annual Depeciation = Annual Raisings × ` 20
Solution :
Books of Mining Corporation Ltd.
Mining Lease Account
Dr.
Date
1.1.16
Particulars
Bank Account
`
4,00,00,000
Date
Particulars
31.12.16
Depreciation Account
[10,000 × ` 20 Balance c/d]
4,00,00,000
1.1.17
Balance b/d
3,98,00,000
31.12.17
Depreciation Account
[22,000 × ` 20]
3,98,00,000
Balance b/d
3,93,60,000
31.12.18
Depreciation Account
[1,10,000 × ` 20]
3,93,60,000
Balance b/d
3,71,60,000
3,98,00,000
4,40,000
3,93,60,000
22,00,000
3,71,60,000
3,93,60,000
31.12.19
Depreciation Account
[2,40,000 × ` 20]
Balance c/d
3,71,60,000
2,00,000
3,98,00,000
Balance c/d
1.1.19
`
4,00,00,000
Balance c/d
1.1.18
Cr.
48,00,000
3,23,60,000
3,71,60,000
Accounting for Property, Plant and Equipment & Depreciation
1.1.20
Balance b/d
3,23,60,000
10.33
31.12.20
Depreciation Account
[3,10,000 × ` 20]
62,00,000
Balance c/d
2,61,60,000
3,23,60,000
1.1.21
Balance b/d
3,23,60,000
2,61,60,000
Illustration 8 (Change from diminishing Balance Method to Straight Line Method – Exchange of Asset
– Purchase under hire purchase)
On 1.1.2020, the Machinery Account of Mama Ltd. consisted of the following machines:
Machine No.
Date of Purchase
Original Cost
Written Down
Value on 1.1.2020
1
1.1.2016
20,000
12,122
2
1.1.2017
15,000
10,935
3
1.1.2018
10,000
8,100
45,000
32,157
Its Machinery Account for the year ending on 31st December, 2020 was as follows:
Dr.
Machinery Account
Date
Particulars
`
1.1.20
Balance b/d
32,157
31.12.20
Bank A/c (for Machine
No. 4)
Bank A/c
Cr.
Date
Particulars
31.12.20
Depreciation A/c
`
3,216
Balance c/d
48,941
9,000
11,000
52,157
52,157
Additional Information available:
1. Machine No. 4 was purchased under hire purchase. Cash Price of this machine was ` 24,000. Payments
were to be made as ` 9,000 down and the balance by two equal instalments of ` 9,000 each payable on
31.12.2021 and on 31.12.2022.
2. Machine No. 5 was purchased in exchange of machine no. 3 whose exchange price was valued at
` 9,000. The balance was paid in cash on the date of its purchase.
3. The company decided that the rate of depreciation be kept at 10% p.a. but that from the end of 2021 it
should adopt the Straight Line Method as against Reducing Balance Method followed till 2020 with
retrospective effect from 1.1.2016.
Show the Machinery Account for the year 2021 and the effects on the Profit & Loss Account for the
year ended 31.12.2021.
Solution :
WORKING NOTES
1. Annual Depreciations on the Machines for 2018 under Straight Line Method
Machine No.
Original Cost
`
Depreciaton @ 10%
`
1
20,000
2,000
2
15,000
1,500
3
—
—
4
24,000
2,400
5
[11,000 + 9,000]
2,000
7,900
[(already sold]
10.34
Financial Accounting: Concepts and Applications
2. Short /Excess Depreciation on machines (other than sold up to 31.12.2020)
Machine
No
1
2
3
4 (2–3)
5
Used for
Original
Cost
W.D.V. on
31.12.20 (90%
of value on
1.1. 2020
Depreciation
provide so far
under Reducing
Balance Method
Depreciation
under Straight
Line Method
`
`
`
`
1
2016 to 2020
= 5 years
20,000
90% of 13,122
= 11,810
8,190
10% of
20,000 ×5
= 10,000
2.
2017 to 2020
= 4 years
15,000
90% of 10,935
= 9,842
5,158
10% of
15,000 × 4 = 6,000
3.
—
—
—
—
—
35,000
21,652
13,348
16,000
 Short Depreciation provided = ` 16,000 – ` 13,348 = ` 2,652
3. Profit/Loss on exchange of 3rd Machine
`
W.D.Value on 31.12.2020 [90% of 8,100]
7,290
Exchange Price
9,000
Profit on exchange
1,710
4. Payments under Hire Purchase
`
H.P. Price [9,000 × 3]
27,000
Exchange Price
24,000
Interests Included
3,000
As the rate of interests is not givin the total interest should be distributed over the two instalments in the ratio of diminishing
outstanding balances, that is ` 18,000 : 9,000 or 2 : 1.  Interest included in the instalments :
Principal Amount Paid
`
Paid on 31.12.2021
2
of ` 3,000 or ` 2,000
3
9,000 – 2,000 = 7,000
Paid on 31.12. 2022
1
of ` 3,000 or ` 1,000
3
9,000 – 1,000 = 8,000
Solution :
Books of Mama Ltd.
Machinery Account
Dr.
Date
1.1.21
31.12.21
Particulars
`
Cr.
`
Date
Particulars
48,941
31.12.21
Depreciation A/c
7,900
Profit & Loss A/c
(Profit on Exchange)
1,710
31.12.21
Profit & Loss A/c
(Short Depreciation Adjusted)
2,652
Bank A/c
(Bare Instalment Paid
for Machine No.4)
7,000
31.12.21
Balance c/d
Balance b/d
57,651
47,099
57,651
Accounting for Property, Plant and Equipment & Depreciation
Dr.
10.35
Profit & Loss Account for the year ended 31.12 2021 (includes)
`
Particulars
Machinery A/c
(Short Depreciation)
2,652
Depreciation on Machinery
7,900
Hire Purchase Interest
2,000
Particulars
Profit & Loss A/c
(Profit on Exchange)
Cr.
`
1,710
PROVISION FOR DEPRECIATION ACCOUNTS
When ‘provision for depreciation account’ is maintained and therefore, asset account appears at its original
cost price, the accounting treatment is different. In such a case, accounting entries are required for following
two purposes:
(a) to remove the sold or discarded asset from the Asset Account and
(b) to remove the accumulated depreciation on the asset sold from the provision for depreciation account.
This is achieved as follows:
(i) Transfer the accumulated depreciation including the depreciation created at the time of sale or
discardment to the Asset Account as under:
Provision for Depreciation Account
Dr.
To Asset Account
(ii) With the sale price of the asset, if any
Cash/Bank Account
Dr.
To Asset Account
(iii) If the amount of accumulated depreciation plus the sale price is less than the original cost of the
asset, the difference is a loss on sale and would be transferred to profit and loss account as :
Profit and Loss Account
Dr.
To Asset Account
And if there is a profit i.e., original cost of the asset is less than the accumulated depreciation plus the
sale price, the entry would be:
Asset Account
Dr.
To Profit and Loss Account
In this manner, the asset account and corresponding accumulated depreciation account would be removed
from the ledger and also the Balance Sheet.
Example
A company acquires a Motor Car on 1 January 2016 at a cost of ` 50,000. Depreciation is recorded on straight
line basis at the rate of ` 10,000 p.a. and is credited to provision for depreciation account. Assuming that
the—
(i) Motor Car is sold for ` 5,000 on 1 July 2020
(ii) Motor Car is sold for ` 6,000 on 1 July 2020
(iii) Motor Car is sold for ` 4,000 on 1 July 2020
10.36
Financial Accounting: Concepts and Applications
Answer
Case (i) : The first entry is to record the depreciation for the current year upto the date of sale:
Depreciation Account
Dr.
5,000
To Provision for Depreciation Account
5,000
(Recording of depreciation for 6 months from 1.1.2020 to 30.6.2020)
The Provision for Depreciation Account now has a credit balance of ` 45,000 accumulated as follows:
`
For 2016
10,000
For 2017
10,000
For 2018
10,000
Cost
50,000
For 2019
10,000
Less : Accumulated Depreciation
45,000
For 2020
5,000
(6 months)
The Book value of the Motor car is computed as :
`
Book Value at the time of sale
5,000
45,000
The second entry is to transfer the accumulated depreciation to Motor Car Account as follows:
Provision for Depreciation Account
Dr.
45,000
To Motor Car Account
45,000
(Accumulated depreciation transferred to motor car account)
The third entry is to record the sale as under:
Cash/Bank Account
Dr.
5,000
To Motor Car Account
5,000
There is no profit or loss on sale of machinery.
It would be noted that the purpose of the foregoing three entries is to : (i) remove the accumulated depreciation
on Motor Car from the Provision for Depreciation Account; (ii) record the receipt of cash and (iii) reduce
the asset account in the balance sheet.
Case (ii) : The entries to record the depreciation for the current year upto the date of sale and the transfer
of accumulated depreciation from ‘Provision for Depreciation Account’ to Motor Car Account
are the same as in case (i) and are assumed to have been made. The following entries are made
to record the sale:
Cash/Bank Account
Dr.
6,000
To Motor Car Account
6,000
(Receipt of sale price)
Motor Car Account
Dr.
1,000
To Profit and Loss Account
1,000
(Gain on sale of motor car [6,000 – 5,000])
Case: (iii): Again the entries to record the depreciation applicable to the year of sale and the transfer of accumulated
depreciation from ‘Provision for Depreciation Account’ to the ‘Motor Car Account’ are same as
in case (i) and are assumed to have been made. The entries to record the sale are:
Cash Account
To Motor Car Account
(Recording of sale price)
Dr.
4,000
4,000
Accounting for Property, Plant and Equipment & Depreciation
Profit and Loss Account
Dr.
10.37
1,000
To Motor Car Account
(Loss on sale of Motor car [5,000 – 4,000])
1,000
Illustration 9 (Sale of Asset)
R. Ltd bought a machinery for ` 30,000 on 1 April, 2018. One more machinery was purchased on 1 October,
2018 costing ` 20,000. On 1 July, 2019, a new machinery for ` 10,000 was added to the existing machinery.
On 1 January, 2020, one-third of the machinery which was installed on 1 April, 2018 was sold for ` 3,000.
Show the Machinery Account in the books of the company. The rate of depreciation is 10% on reducing balance
method. The accounting period ends on 31 December each year.
Solution :
Dr.
Machinery Account
Date
`
Particulars
2018
Date
Cr.
`
Particulars
2018
1 April
Cash Account
30,000
31 Dec.
Depreciation Account
1 Oct.
Cash Account
20,000
31 Dec.
Balance c/d
2,750
47,250
50,000
2019
50,000
2019
1 Jan.
Balance b/d
47,250
31 Dec.
Depreciation Account
1 July
Cash Account
10,000
31 Dec.
Balance c/d
5,225
52,025
57,250
2020
1 Jan.
57,250
2020
Balance b/d
52,025
1 Jan.
Bank (Sale Price)
3,000
1 Jan.
Profit & Loss Account
5,325
(Loss)
31 Dec.
Depreciation Account
31 Dec.
Balance c/d
4,370
39,330
52,025
52,025
2021
1 Jan.
Balance b/d
39,330
WORKING NOTES
`
(i)
Depreciation in 2018
On ` 30,000 for 9 months
2,250
On ` 20,000 for 3 months
500
2,750
(ii)
Depreciation in 2019
On ` 47,250 ( ` 50,000 – ` 2,750) for one year
On ` 10,000 (Machine No.3) for 6 months
4,725
500
5,225
10.38
(iii)
Financial Accounting: Concepts and Applications
Depreciation in 2020
Total reduced balance on 1 Jan. 2020
52,025
Less: Written down value of 1/3rd of Machinery sold
8,325
` 10,000 – ( ` 750 + ` 925)
43,700
Depreciation on ` 43,700 at 10% on reducing balance method
(iv)
4,370
Loss on Sale of Machine
Depreciated value at the time of sale
8,325
Less: Sale Price
3,000
5,325
Illustration 10 (Dismantling Charges)
X Company purchased a second hand machinery on 1-2-2018 for ` 50,000; paid 11,000 for its over-hauling
and ` 5,000 for its installation which was completed by 31-3-2018. The company provides depreciation on
its machinery at 15% on diminishing balance method from the date it was put to use and closes its books on
31st December every year. On 1-10-2019, a repair work was carried out on the machine and ` 5,000 were
paid for the same. The machine was sold on 31-10-2020, for a sum of ` 11,000 and an amount of ` 1,000
was paid as dismantling charges. Prepare machinery account from 2018 to 2020. The accounting period ends
on 31 December.
Solution :
Dr.
Machinery Account
Date
`
Particulars
2018
Feb. 1
Bank A/c
50,000
Mar. 31
Bank A/c (` 11,000 + ` 5,000)
16,000
(` 11,000 + ` 5,000)
66,000
2019
Jan. 1
Balance b/d
58,575
Cr.
Date
Particulars
2018
Depreciation Account
Dec. 31
Balance c/d
49,789
Jan. 1
58,575
66,000
2019
Depreciation Account
Dec. 31
(15% on ` 58,575)
58,575
Balance b/d
7,425
(15% on ` 66,000 for 9 months)
Balance c/d
2020
`
8,786
49,789
58,575
2020
Depreciation Account
Oct. 31
(15% on ` 49,789 for 10 months)
6,223
Bank Account (11,000 – 1,000)
10,000
Profit & Loss Account (Loss)
33,566
49,789
49,789
WORKING NOTES
(i)
(ii)
Repairs cost during the use is not capitalised since it is routine expense and it does not increase the capacity
of the machine.
Cost of dismantling has been deducted from the sale price for calculating loss on sale of machine.
Illustration 11 (Provision for Depreciation)
A machine is purchased for ` 1,60,000 on 16-6-2015. The company took delivery on 27-06-2015 incurring
` 2,500 for transportation. The machine was installed on 15-07-2015 spending ` 2,000 for wages and ` 1,000
Accounting for Property, Plant and Equipment & Depreciation
10.39
and consultancy fees. Trial run was conducted on 15-11-2015 spending ` 2,500. The machine was put to use
on 1-1-2016. Useful life of the machine was expected to be 5 years and scrap value at the end was expected
to be ` 12,000. The firm follows straight line method of depreciation.
Show Machinery Account and provision for Depreciation account assuming that machine realised ` l3,000 at
the end of 5 years. The accounts being closed on 31st December each year.
Dr.
Machine Account
Cr.
16-06-2015
Cash
1,60,000
27-06-2015
Cash
2,500
15-07-2015
Cash
3,000
15-11-2015
Cash
2,500
01-01-2016
Cost
1,68,000
31-12-2016
Balance c/d
1,68,000
01-01-2017
Balance b/d
1,68,000
31-12-2017
Balance c/d
1,68,000
01-01-2018
Balance b/d
1,68,000
31-12-2018
Balance c/d
1,68,000
01-01-2019
Balance b/d
1,68,000
31-12-2019
Balance c/d
1,68,000
01-01-2020
Balance b/d
1,68,000
31-12-2020
Provision for
31-12-2020
Profit and Loss
Depreciation
Account
1,000
Account
Bank Account
1,69,000
Dr.
1,56,000
13,000
1,69,000
Provision for Depreciation Account
`
Cr.
`
31-12-2016
Balance c/d
31,200
31-12-2016
Depreciation Account
31,200
31-12-2017
Balance c/d
62,400
01-01-2017
Balance b/d
31,200
31-12-2017
Depreciation Account
31,200
62,400
31-12-2018
Balance c/d
93,600
62,400
01-01-2018
Balance b/d
62,400
31-12-2018
Depreciation Account
31,200
93,600
31-12-2019
Balance c/d
1,24,800
93,600
01-01-2019
Balance b/d
93,600
31-12-2019
Depreciation Account
31,200
1,24,800
31-12-2020
Machine
1,56,000
Account
1,24,800
01-01-2020
Balance b/d
31-12-2020
Depreciation Account
1,56,000
1,24,800
31,200
1,56,000
Calculation of Annual Depreciation
Cost of machine including expenses
incurred before the machine is put to use
Less : Scrap Value
1,68,000
12,000
Depreciable Cost
1,56,000
Depreciation Per Year on Straight
Line Method Basis : 1,56,000
`
 5 = 31,200
10.40
Financial Accounting: Concepts and Applications
Illustration 12 (Provision Method)
X purchased a second-hand machinery on 1-2-2015 for ` 80,000; paid ` 12,000 for its overhauling and `
8,000 for its installation which was completed by 31-3-2015. The company provides depreciation on its machinery
at 20% p.a. on diminishing balance method from the date it was put to use and closes its books on 31 December
every year. On 1-10-2016, a repair work was carried out on the machine and ` 5,000 were paid for the same.
The machine was sold on 31-10-2017 for a sum of ` 21,000 and an amount of ` 2,000 was paid as dismantling
charges.
Prepare Machinery Account and Provision for Depreciation on Machinery Account from 2015 to 2017.
[B.Com. (Hons.) 2019, Delhi]
Solution:
Dr.
Date
Machinery Account
Particulars
`
1.2.2015
Bank
80,000
31.3.2015
Bank (Overhauling)
12,000
31.3.2015
Bank (Installation)
8,000
Cr.
Date
Particulars
`
31.12.2015
Balance c/d
1,00,000
1,00,000
1.1.2016
Balance b/d
1,00,000
1,00,000
31.12.2016
Balance c/d
1,00,000
1,00,000
1.1.2017
Balance b/d
1,00,000
1,00,000
31.10.2017
Bank (Sale) (21,000 – 2000)
19,000
Provision for Depreciation
43,333
Profit & Loss Account (Loss on sale)
37,667
1,00,000
Dr.
Date
31.12.2015
1,00,000
Provision for Depreciation Account
Particulars
`
Balance c/d
15,000
Cr.
`
Date
Particulars
31.12.2015
Depreciation (1,00,000 × 20% ×
15,000
31.12.2016
Balance c/d
32,000
Machinery Account
43,333
(Written off)
1.1.2016
Balance b/d
15,000
31.12.2016
Depreciation
[1,00,000 – 15,000) × 20%]
17,000
32,000
1.1.2017
Balance b/d
31.10.2017
Depreciation
[1,00,000–32000) × 20% ×
43,333
15,000
15,000
32,000
31.10.2017
9
)
12
32,000
10
]
12
11,333
43,333
Accounting for Property, Plant and Equipment & Depreciation
10.41
Illustration 13 (Sale of Asset)
Kavita purchased a machine for ` 80,000 on 1st April 2015. She charges depreciation on Straight Line Method
and closes her books on December 31st every year. The machine has a useful life of 8 years after which it
can be sold for ` 8,000. She purchased another machine on May 1st 2016 for ` 45,000 with 5 years useful
life and nil residual value. In 2017, the first machine was sold for ` 50,000 on June 30th when a new machine
was purchased for ` 30,000 with 3 years useful life and ` 3,000 as residual value. Prepare the machinery
account for the 3 years ending December 31, 2017.
[B.Com. (Hons.) 2019, Delhi]
Solution:
Dr.
Date
1.04.2015
Machinery Account
Particulars
`
Bank (M-I)
80,000
Cr.
Date
Particulars
31.12.2015
Depreciation (9 months)
31.12.2015
Balance c/d
`
6,750
73,250
80,000
1.01.2016
Balance b/d (M - I)
73,250
1.05.2016
Bank (M - II)
48,000
80,000
31.12.2016
31.12.2016
Depreciation:
M-I
9,000
M - II (8 months)
6,000
Balance c/d:
M-I
64,250
M - II
39,000
1,18,250
1.1.2017
30.6.2017
Balance b/d:
64,250
M - II
39,000
103,250
Bank (M - III)
30,000
31.12.2017
31.12.2017
Bank (Sale M - I)
4,500
Profit & Loss (Loss)
9,750
Depreciation:
M - II
9,000
M - III (6 months)
4,500
(ii) Depreciation on Second Machine (M-II) =
(iii) Depreciation on Third Machine (M-III) =
13,500
Balance c/d:
M - II
30,000
M - III
25,500
WORKING NOTE:
=
50,000
Depreciation (M - I) (6 months)
1,33,250
(i) Depreciation on First Machine (M-I)
103,250
1,18,250
30.6.2017
M-I
15,000
80,000  8,000
= ` 9,000 p.a.
8
45,000
= ` 9,000 p.a.
5
30,000  3,000
= ` 9,000 p.a.
3
55,500
1,33,250
10.42
Financial Accounting: Concepts and Applications
Illustration 14 (Rectification of Errors)
A company provides depreciation on plant and machinery at 20% per annum on reducing balance method.
On April 1, 2019, the balance of Plant and Machinery Account was ` 5,00,000. It was discovered in
2019-20 that:
(i) ` 25,000 being repairs to machinery incurred on June 30, 2017 had been capitalised.
(ii) ` 50,000 being cost of a machine purchased on October 1, 2016 had been treated as ordinary goods.
Management wants to correct the mistakes while preparing accounts for the year ending March 31, 2020. A
plant that costed ` 40,000 on September 30, 2018 was scrapped and replaced with a modern plant on 31 December,
2019 by spending ` 60,000. Calculate the amount of depreciation for the year ended March 31, 2020. Also
prepare machinery account upto March 31, 2020.
Solution:
WORKING NOTES
(1) Calculation of Book value of machine (purchased on October 1, 2016) as on April, 2019
`
Cost of machine on October 1, 2016 treated as revenue item
50,000
Less: Depreciation to be written off from 1.10.2016 to 31.3.2017
[ ` 50,000 × 20/100 × 6/12]
Book value on 1.4.2017
Less: Depreciation for 2017-18 [ ` 45,000 × 20/100]
Book value on 1.4.2018
Less: Depreciation for 2018-19 [ ` 36,000 × 20/100]
Book value or written down value (W.D.V.) on 1.4.2019
5,000
45,000
9,000
36,000
7,200
28,800
(2) Calculation of Book Value of repairs which has been wrongly capitalised as on April 1, 2019
`
Value wrongly capitalised on June 30, 2017
Less: Depreciation from June 30, 2017 to March 31, 2018 [ ` 25,000 × 20/100 × 9/12]
25,000
3,750
21,250
Less: Depreciation for 2018-19 [ ` 21,250 × 20/100]
Book value on 1st April, 2019
4,250
17,000
(3) Adjustment for mistake of past year
= ` 28,800 (Note–1) – ` 17,000 (Note–2) = ` 11,800.
` 11,800 will be transferred to Profit and Loss Account.
(4) Book Value of the plant scrapped
`
Book value of Plant Scrapped on Sep. 30, 2018
Less: Depreciation for 2018-19 [ ` 40,000 × 20/100 × 6/12]
W.D.V. on 1.4.2019
Less: Depreciation from 1.4.2019 to 31.12.2019
40,000
4,000
36,000
5,400
[ ` 36,000 × 20/100 × 9/12]
Book value of the plant scrapped on 31.12.2019
30,600
Accounting for Property, Plant and Equipment & Depreciation
10.43
(5) Depreciation to be charged on March 31, 2020 (excluding depreciation on plant scrapped)
`
Book value on 1.4.2019
5,00,000
Add: Adjustment (See Working Note–3)
11,800
5,11,800
Less: W.D.V. on 1.4.2019 of plant scrapped on 31.2.2019
36,000
W.D.V. on 1.4.2019 of Plant & Machinery used from 1.4.19 to 31.03.20
4,75,800
Depreciation on ` 4,75,800 @ 20% W.D.V.
95,160
Depreciation on new machinery 20% of ` 60,000
for 3 months (i.e. ` 60,000 × 20/100 × 3/12)
3,000
98,160
Dr.
Machinery Account
Date
Particulars
`
01-04-19
Balance b/d
5,00,000
31-12-19
Bank A/c
31-03-20
Profit & Loss A/c
Date
Particulars
31-12-19
Depreciation A/c
60,000
11,800
Cr.
`
5,400
Profit & Loss A/c
31-03-20
(Loss due to plant scrapped)
30,600
Depreciation A/c
98,160
[` 28,800 – 17000]
[95, 160 + 3,000]
– Adjustment for
(Note – 5)
mistake of Past Years
Balance c/d
4,37,640
[Notes – 1, 2 & 3]
5,71,800
5,71,800
Illustration 15 (Purchased on Hire Purchase Basis – S.L.M.)
On 1 July, 2017 Gopal Ltd. purchased second-hand machinery for ` 20,000 and spent ` 3,000 on re-conditioning
and installing it. On 1 January, 2018 the firm purchased machinery worth ` 12,000. On 30 June, 2019 the
machinery purchased on 1 January, 2018 was sold for ` 8,000. On 1 July, 2019 fresh machinery was purchased
on instalment basis, payment for the machinery was to be made as follows:
01
July, 2019
` 5,000
30
June, 2020
` 6,000
30
June, 2021
` 5,500
Payments in 2020 and 2021 include interest of ` 1,000 and ` 500 respectively.
The company writes off depreciation @ 10 p.a. on original cost. The accounts are closed every year on 31
March. Show the Machinery Account for three years ending 31 March, 2020.
Solution :
Dr.
Machinery Account
`
2017
1 July
Bank Account
20,000
Bank Account
3,000
Bank Account
12,000
2018
1 Jan.
`
2018
31 March
Depreciation Account
2,025
(1,725 + 300)
31 March
35,000
Cr.
Balance c/d
32,975
35,000
10.44
Financial Accounting: Concepts and Applications
2019
1 April
2019
Balance b/d
32,975
31 March
Depreciation Account (2,300 + 1,200)
Balance c/d
32,975
2019
3,500
29,475
32,975
2019
1 April
To Balance b/d
29,475
1 July
Hire Vendor
15,000
30 June
Depreciation Account (For 3 months)
300
Bank Account
8,000
Profit and Loss Account (Loss)
2,200
2020
Depreciation (2,300 + 1,125)
3,425
31 March
Balance c/d
44,475
30,550
44,475
2020
1 April
Balance b/d
30,550
Note: Payment for interest under hire purchase sale is not to be added to the cost of the asset for depreciation purpose
because depreciation is charged on cash price.
Illustration 16 (Straight Line Method)
On 1 January 2017, a machinery was purchased by Farzana for ` 20,000. On 1 July 2018 additions were
made to the extent of ` 4,000. On 1 April 2019 further additions were made to the extent of ` 2,560. On 30
June 2020, a machinery, the original value of which was ` 3,200 on 1 January 2017 was sold for ` 2,400.
Farzana closes her books on 31 December each year.
Show the machinery account for four years from 2017 to 2020 in the books of Farzana, If depreciation is
charged at 10% under original cost method.
Solution :
Dr.
1-1-2017
Bank Account
Machinery Account
`
20,000
31-12-2017
Depreciation Account
Balance c/d
20,000
1-1-2018
Balance b/d
Cr.
`
2,000
18,000
20,000
31-12-2018
18,000
Depreciation Account (2,000 + 200)
2,200
1-7-2018
Bank Account
4,000
Balance c/d
22,000
1-1-2019
Balance b/d
19,800
22,000
31-12-2019
19,800
Depreciation Account (2,000 + 400 + 192)
2,592
1-4-2019
Bank Account
2,560
Balance c/d
22,360
1-1-2020
Balance b/d
22,360
30-6-2020
19,768
30-6-2020
Profit and Loss Account
19,768
Depreciation Account
Bank Account
320
(Profit)
31-12-2020
Depreciation Account
Balance c/d
20,088
160
2,400
2,336
15,192
20,088
Accounting for Property, Plant and Equipment & Depreciation
10.45
WORKING NOTES
(i)
Calculation of Depreciation
For 2017
10% of ` 20,000 for one year
2,000
For 2018
10% of ` 20,000 for one year
2,000
10% of ` 4,000 for six months
2,00
2,200
For 2018
10% of ` 2,560 for nine months
10% of ` 20,000 for one year
10% of ` 4,000 for one year
192
2,000
400
2,592
For 2020
10% of ` 3,200 for 6 months
On the machine sold
10% of ` 16,800 (20,000 – 3,200) for one year
160
1,680
10% of 4,000 for one year
400
10% of 2,560 for one year
256
2,336
(ii)
`
Profit on sale of machinery
Cost of the machine sold
3,200
Less:
Depreciation for 2017 @ 10%
(320)
Depreciation for 2018 @ 10%
(320)
Depreciation for 2019 @ 10%
(320)
Depreciation for 6 months in 2020
(160)
Book value on the date of sale
Add: Profit on sale (2,400 – 2,080)
Sale Price
2,080
320
2,400
Illustration 17 (Diminishing Balance Method)
On 1-1-2018, machinery was purchased for ` 75,000 and ` 5,000 were spent immediately on its installation.
On 1-7-2019 additions were made to the amount of ` 40,000. On 31-3-2020, machinery purchased on 1-72019, costing ` 12,000 was sold for ` 11,000 and on 30-6-2020 machinery purchased on 1-1-2018 costing
` 32,000 was sold for ` 26,700. On 1-10- 2020, additions were made to the amount of ` 20,000. Depreciation
was provided at 10% p.a. on the diminishing value method. Show the machinery account for three years 2018
to 2020 (year ended 31 December).
Solution :
(i)
Calculation of loss on machinery sold on 31-3-2020
Cost of the machine on 1-7-2019
Less: Depreciation for 6 months @ 10%
`
12,000
600
11,400
Less: Depreciation for 3 months @ 10%
285
11,115
Less: Sale price
Loss on Sale
(ii)
Calculation of profit on sale of machinery on 30-6-2020
Cost of the machine on 1-1-2018
Less: Depreciation for 2018
11,000
115
`
32,000
3,200
28,800
10.46
Financial Accounting: Concepts and Applications
Less: Depreciation for 2019
2,880
Less: Depreciation in 2020
25,920
For 6 months on ` 25,920 at 10%
1,296
Book value on the date of sale
24,624
Sale Price
26,700
Less: Book Value
24,624
Profit on Sale
(iii)
(a)
2,076
Depreciation on 31-12-2020 has been calculated as under:
Machinery Purchased on 1-1-2019
80,000
Less Sold on 30-6-2020 (cost)
32,000
Less: Depreciation: 4,800 + 4,320 in
48,000
2018 and 2019 respectively
9,120
Book value on 1-1-2020
38,880
Hence, Depreciation for 2020: 10% of ` 38,880
(b)
3,888
Machinery purchased on 1-7-2019
40,000
Less Sold on 31-3-2020 (cost)
12,000
28,000
Less: Depreciation in 2019 for 6 months
1,400
Book Value on 1-1-2020
26,600
Hence, Depreciation for 2020: 10% of ` 26,600
(c)
2,660
Machinery purchased on 1-10-2020
20,000
Depreciation in 2020 for 3 Months
500
Total Depreciation for 2020 : ` 3,888 + ` 2,660 + ` 500 = ` 7,048
Dr.
Machinery Account
Date
Particulars
2018
Bank
Jan. 1
(75,000 + 5,000)
`
Date
Particulars
80,000
2018
Depreciation
Dec. 31
80,000
8,000
72,000
80,000
2019
Jan. 1
Balance b/d
72,000
July 1
Bank
40,000
Dec. 31
Depreciation (7,200 + 2,000)
Balance c/d
1,12,000
2020
9,200
1,02,800
1,12,000
2020
Jan 1
Balance b/d
June 30
Profit and Loss Account
1,02,800
Mar. 31
2,076
Bank
Depreciation
Bank (Sale)
(Profit on sale)
Oct. I
`
(10% on ` 80,000)
Balance c/d
2019
Cr.
Profit and Loss Account
20,000
(Additions)
11,000
115
(Loss on sale)
30 June
31 Dec.
1,24,876
285
Depreciation
1,296
Bank (Sale)
26,700
Depreciation
7,048
Balance c/d
78,432
1,24,876
Accounting for Property, Plant and Equipment & Depreciation
10.47
CHANGE OF METHOD
Depreciation is non-cash item and a change in method will not result in either cash inflow or cash outflow.
As a matter of fact the depreciation method used should reflect the pattern in which future economic
benefits of the assets are expected to be consumed by the enterprise. Depreciation thus, reflects the
consumption of future benefits by the enterprise, that is, how much the asset would be used in future
period(s).
Once a firm selects a certain method and rate of depreciation, the same are used consistently to provide
comparison of the results of operations (income or loss) of a business enterprise from period to period.
However, sometimes it may be decided to change the existing method of depreciation and/or the rate of
depreciation. The reasons may be:
(i) When the adoption of new method is required by the statute (i.e. law); or
(ii) When the adoption of a new method is required for compliance with an accounting standard
(iii) When there is a change in the expected pattern of consumption in future benefits
(iv) When it is considered that the change would result in a more appropriate preparation or presentation
of the financial statements. The same considerations apply to the change in the rate of depreciation.
As per AS-10 PPE, method applied to an asset should be reviewed at least at the end of each financial
year and if there has been a significant change in the expected pattern of consumption of the future
economic benefits from the asset, the method should be changed to reflected the changed pattern.
The change in the method of depreciation should be done with prospective effect.
PROSPECTIVE EFFECT
It means that new method would be given effect from the current accounting period and the depreciation
already charged in the previous years is completely or totally ignored. In simple words, the balance of
the written down value of the asset on the date of change would be written off during the remaining
useful or working life of the asset by applying new method and rate, as the case may be.
It may be noted that after the withdrawal of AS-6: Depreciation Accounting and the introduction
of AS-10: Property, Plant and Equipment the position has changed. A corporate must change the
method with prospective effect and not with retrospective effect which has become a part of the
history.
Illustration 18 (Change of method form SLM to WDV)
A firm purchased one machine for ` 5,00,000 on 1st January, 2017 with an estimated useful life of 5
years. The firm depreciated the machine on the basis of fixed instalment method. After two years, the
firm decided to change the method of depreciation to written down value method and the rate of depreciation
being 25% per annum.
Prepare the machine account for 2017, 2018, 2019 and 2020; the accounting year being January to
December.
Solution :
Machinery Account
Date
Particulars
`
2017
Jan. 1
Date
Particulars
`
2017
Bank Account
5,00,000
5,00,000
Dec. 31
Depreciation A/c
1,00,000
Balance c/d
4,00,000
5,00,000
10.48
Financial Accounting: Concepts and Applications
2018
2018
Jan. 1
Balance b/d
4,00,000
Dec. 31
Depreciation A/c
Balance c/d
4,00,000
2019
1,00,000
3,00,000
4,00,000
2019
Jan.1
Balance b/d
3,00,000
Dec. 31
Depreciation Account
Balance c/d
3,00,000
2020
75,000
2,25,000
3,00,000
2020
Jan.1
Balance b/d
2,25,000
Dec. 31
Depreciation Account
Balance c/d
2,25,000
56,250
1,68,750
2,25,000
WORKING NOTES
(i)
(ii)
In 2017 and 2018 the depreciation was charged on the original cost of ` 5,00,000.
From the year 2019, depreciation has been charged on the written value method as the chage of method and rate
of depreciation is to be effective on prospective basis as per the requirement of the question and also according
to AS-10: Property, Plant and Equipment.
Illustration 19 (Change of Method from SLM to WDV)
Goodluck Ltd. purchased on 1 January 2017, certain machinery for ` 1,94,000 and spent ` 6,000 on its erection.
On 1 July 2017 additional machinery costing ` 1,00,000 was purchased. On 1 July 2019, the machinery purchased
on 1 January 2017 has been auctioned for ` 1,00,000 and on the same date, new machinery was purchased at
a cost of ` 1,50,000. Depreciation was provided annually on 31 December at the rate of 10% p.a. on the
original cost. No depreciation need be charged during the year of sale of machinery for that part of the year
when the machine was used. In 2020, however, the company has changed the method of depreciation to written
down value method at the rate of 15% p.a. from the straight line method on the balance as appeared in Machinery
Account on 1-1-2020 prospectively. Show the machinery account for the period from 2017 to 2020.
Solution :
Dr.
Date
Machinery Account
Particulars
`
2017
Jan. 1
July 1
Date
Particulars
`
2017
Bank Account
1,94,000
Bank Account
6,000
Bank Account
1,00,000
Dec. 31
Depreciation A/c (20,000 + 5,000)
Balance c/d
3,00,000
2018
Jan. 1
Cr.
25,000
2,75,000
3,00,000
2018
Balance b/d
2,75,000
Dec. 31
Depreciation A/c (20,000 + 10,000)
Balance c/d
2,75,000
2019
30,000
2,45,000
2,75,000
2019
Jan. 1
Balance b/d
2,45,000
July 1
Bank Account
1,50,000
July 1
Bank Account
Profit and Loss Account
(Loss on sale of machine)
1,00,000
60,000
Accounting for Property, Plant and Equipment & Depreciation
Dec. 31
10.49
Depreciation A/c (10,000 + 7,500)
17,500
Balance c/d
2,17,500
3,95,000
2020
3,95,000
2020
Jan. 1
Balance b/d
2,17,500
Depreciation A/c (15% of ` 2,17,500)
Dec. 31
32,625
Balance c/d
1,84,875
2,17,500
2,17,500
Illustration 20 (Change of Method from WDV to SLM)
The Plant and Machinery Account of a Company had a debit balance of ` 1,47,390 on April 1, 2019. The
company was incorporated in April 2016 and has been following the practice of charging full year's depreciation
every year on Diminishing Balance system @ 15% p.a. In 2019 it was, however, decided to change the method
from Diminishing Balance to Straight Line with prospective effect and to give effect to the change while
preparing the final accounts for the year ending 31st March, 2020, the rate of depreciation remaining same
as before. In 2019-20, new machinery was purchased at cost of ` 50,000. All the other machines were acquired
in 2016-17. Show the Plant and Machinery Account from 2016-17 to 2019-20 as per the provision of AS-10.
[B.Com. (Hons.) Sem. I, 2017 Delhi, Modified]
Solution
WORKING NOTES
Calculation of Cost of Plant and Machinery on 1-4-2016
`
1-4-2016
Suppose the cost on 1-4-2016
100.000
Less: Depreciation 2016-17
15.000
85.000
Less: Depreciation 2017-18
12.7500
72.2500
Less: Depreciation 2018-19
10.8375
Cost on 1-4-2019
61.4125
Cost on 1-4-2016 :
Dr.
Date and Particulars
147390  100
=
61.412
` 2,40,000
Plant and Machinery Account
Cr.
`
`
1-4-2016
Bank Account
Date and Particulars
31-3-2017
2,40,000
Depreciation Account
Balance c/d
2,40,000
1-4-2017
Balance b/d
2,40,000
31-3-2018
2,04,000
Depreciation Account
Balance c/d
2,04,000
1-4-2018
Balance b/d
36,000
2,04,000
30,600
1,73,400
2,04,000
31-3-2019
1,73,400
Depreciation Account
Balance c/d
1,73,400
26,010
1,47,390
1,73,400
10.50
Financial Accounting: Concepts and Applications
1-4-2019
31-3-2020
Balance b/d
1,47,390
Bank Account
Depreciation Account
50,000
15% on 1,47,390
= 22,109
15% on 50,000
= 7,500
Balance c/d
1,97,390
29,609
1,67,781
1,97,390
Depreciation for 2019-2020
Based on AS-10 : Property Plant and Equipment (Prospectively)
`
Depreciation would be calculated prospectively as under:
Book Value on 1-4-2019 (old machinery)
1,47,390
15 

Depreciation at 15% 1, 47,390 

100 
22,109
Depreciation on New Machine
15% on ` 50,000
7,500
Total Depreciation
29,609
Illustration 21 (Straight Line Method and Change to Depletion Method)
Neetu Collieries Limited acquired a lease right for 20 years of a mine on January 1, 2015 on a lump sum
payment of ` 5,00,000 to the landlord. It was estimated by the expert that the coal deposit of the mine was
20,00,000 tons; 75 per cent of which could be raised within the time period. The company decided to write
off the lease account under straight line method of depreciation. The lease account was shown accordingly
for the first five years. On 31 December, 2020 the Board of Directors decided to depreciate the lease on ‘Depletion’
method with retrospective effect i.e., from January 1, 2015. The annual raisings were:
2015
20,000
tons
2016
30,000
tons
2017
1,00,000
tons
2018
2,00,000
tons
2019
2,00,000
tons
2020
2,00,000
tons
You are required to show the lease account from 1 January 2015 to 31 December 2020 showing your calculations.
Solution :
Dr.
Lease Account
Date
Particulars
Jan. 1, 2015
Bank Account
`
5,00,000
Cr.
Date
Particulars
Dec. 31, 2015
Depreciation Account
Balance c/d
5,00,000
Jan. 1, 2016
Balance b/d
4,75,000
25,000
4,75,000
5,00,000
Dec. 31, 2016
Depreciation Account
Balance c/d
4,75,000
`
25,00
4,50,000
4,75,000
Accounting for Property, Plant and Equipment & Depreciation
Jan. 1, 2017
10.51
Dec. 31, 2017
Balance b/d
4,50,000
Depreciation Account
Balance c/d
4,50,000
Jan. 1, 2018
25,000
4,25,000
4,50,000
Dec. 31, 2018
Balance b/d
4,25,000
Depreciation Account
Balance c/d
4,25,000
Jan. 1, 2019
25,000
4,00,000
4,25,000
Dec. 31, 2019
Balance b/d
4,00,000
Depreciation Account
Balance c/d
4,00,000
Jan. 1, 2020
25,000
3,75,000
4,00,000
Dec. 31, 2020
Balance b/d
3,75,000
Depreciation A/c
Balance c/d
3,75,000
66,667
3,08,333
3,75,000
WORKING NOTE
(i)
(ii)
Depreciation on Depletion Method =
5, 00, 000
= ` 1 / 3 per ton
15, 00, 000
Depreciation for 2020 on Depletion Method: 2,00,000
 3
66,667
Note: Since the method of Depreciation is changed in 2020, the depreciation would be calculated prospectively on this
date by Depletion Method or Units of Production Method on 2,00,000 units divided by 3.
Illustration 22 (Change in Method from SLM to WDV)
The book value of Plant and Machinery on 1-1-2018 was ` 2,00,000. New machinery for ` 10,000 was purchased
on 1-10-2018 and for ` 20,000 on 1-7-2019. On 1-4-2020, a machinery whose book value had been ` 30,000
on 1-1-2018 was sold for ` 16,000. Depreciation had been charged at 10% p.a. since 2018 on straight line
method. It was decided in 2020 that depreciation at the rate of 20% p.a. on diminishing balance method should
be charged with prospective effect. Show Plant and Machinery Account upto 31-12-2020 as per the provisions
of AS-10. Give your workings clearly.
Solution :
Dr.
Date
Plant and Machinery Account
Particulars
`
2018
Date
Particulars
Cr.
`
2018
Jan. 1
Balance b/d
Oct. 1
Cash Account
2,00,000
Dec. 31
10,000
Depreciation Account
(20,000 + 250)
Balance c/d
2,10,000
2019
20,250
1,89,750
2,10,000
2019
Jan. 1
Balance b/d
July 1
Cash Account
1,89,750
20,000
Dec. 31
Depreciation Account
(20,000 + 1,000 + 1,000)
22,000
10.52
Financial Accounting: Concepts and Applications
Balance c/d
1,87,750
2,09,750
2020
2,09,750
2020
Jan. 1
To Balance b/d
1,87,750
April 1
(1,63,750 + 24,000)
Depreciation Account
750
Cash Account
16,000
Profit and Loss Account (Loss)
Dec. 31
Depreciation Account
(20% of 1,63,750 + 24,000)
Balance c/d
32,750
1,31,000
1,87,750
(i)
7,250
1,87,750
`
Calculation of loss on machine sold
Cost of the machine
30,000
Less : Depreciation for 2018 and 2019 (3,000 × 2)
(6,000)
Depreciation for 3 months in 2020
(750)
Book value on1-4-2020
23,250
Less : Sale Price
16,000
Loss on Sale
7,250
Illustration 23 (Provision For Depreciation, Sale of Asset and Change in Method)
On 1 April, 2016 a new plant was purchased for ` 80,000 and a further sum of ` 4,000 was spent on its
installation. On 1 October, 2018 another plant was acquired for ` 50,000. Due to an accident on 31 January,
2019 the first plant was totally destroyed and was sold for ` 2,000 only. On 21.4.2019 a second hand plant
was purchased for ` 60,000 and a further sum of ` 10,000 was spent for bringing the same to use on and
from 15.5.2019, depreciation has been provided at 10 per cent on straight line basis. It was a practice to provide
depreciation for full year on all acquisitions made at anytime during any year and to ignore depreciation on
any item sold or disposed off during the year. None of the assets were insured. The accounts are closed annually
on 31 March. On 1st April 2016, it was decided to follow the rate of 20 per cent on diminishing balance
method with prospective effect in respect of the existing items of plant. Required: (i) Plant Account; (ii) Provision
for Depreciation Account upto 31st March, 2020.
Solution :
Dr.
Plant Account
`
2016
1 April
Cash Account
1 April
Cash Account
M1
80,000
Cr.
`
2017
31 March
Balance c/d
4,000
84,000
2017
1 April
84,000
84,000
2018
To Balance b/d
84,000
2018
31 March
Balance c/d
84,000
2019
1 April
Balance b/d
84,000
31 Jan.
Cash Account (sale of M1)
1 Oct.
Cash Account
50,000
31 March
Provision for Depreciation A/c
16,800
Profit & Loss Account (Loss)
65,200
Balance c/d
50,000
1,34,000
2,000
1,34,000
Accounting for Property, Plant and Equipment & Depreciation
2019
10.53
2020
1 April
Balance b/d (M2)
50,000
21 April
Cash Account
60,000
15 May
Cash Account
M3
31 March
Balance c/d
10,000
1,20,000
Dr.
1,20,000
Provision For Depreciation Account
Date
1,20,000
`
Particulars
2017
Date
Particulars
Cr.
`
2017
31 March
Balance c/d
8,400
2018
31 March
Depreciation A/c
8,400
Balance b/d
8,400
Depreciation A/c
8,400
2017
31 March
Balance c/d
16,800
1 April
2018
31 March
16,800
2019
16,800
2018
31 Jan.
Plant Account
31 Mar.
Balance c/d
16,800
5,000
1 April
Balance b/d
2019
31 March
Depreciation A/c
21,800
2020
16,800
5,000
21,800
2019
31 March
Balance c/d
28,000
1 April
Balance b/d
5,000
2020
31 March
Depreciation A/c
M2 (20% of 45,000) 9,000
M3 (20% of 70,000) 14,000
28,000
23,000
28,000
ASSETS DISPOSAL (SCRAPPED) ACCOUNT
Some accountants are of the view that on sale or disposal of a part of the asset, it is appropriate to introduce
a new account called Asset Disposal (Scrapped) Account. If the entries for depreciation have been made in
the main asset account itself, the book value of the sold or discarded asset should be transferred to Asset
Disposal Account as under:
Asset Disposal (or Scrapped) Account
Dr.
To (Main) Asset Account
For Sale of Asset
Cash/Bank Account
Dr.
To Asset Disposal Account
For Profit on sale
Asset Disposal Account
Dr.
To Profit and Loss Account
For Loss
Profit and Loss Account
To Asset Disposal Account
Dr.
10.54
Financial Accounting: Concepts and Applications
Illustration 24 (Asset Disposal Account)
One Lathe machine whose original value was ` 1,20,000 on 1.4.2018, being the date of installation, was sold
on 30.9.2020 for ` 1 ,00,000. Depreciation is charged @ 10% on reducing balance. Show Machinery account
and Assets Disposal account. (Year ending 31 March)
Solution :
Dr.
Machinery Account
Date
Particulars
`
1.4.18
Balance b/d
1,20,000
Cr.
Date
Particulars
31.3.19
Depreciation Account
`
12,000
Balance c/d Account
1,08,000
1,20,000
1.4.19
Balance b/d
1,08,000
1,20,000
31.3.20
Depreciation
10,800
Balance c/d
97,200
1,08,000
1.4.20
Balance b/d
97,200
Dr.
1,08,000
31.9.20
Asset Disposal Account
97,200
Asset Disposal Account
Date
Particulars
30.9.20
Machinery A/c
30.9.20
P & L. Account (Profit)
`
Cr.
Date
Particulars
97,200
30.9.20
Bank
7,660
30.9.20
Depreciation
`
1,00,000
4,860
1,04,860
1,04,860
Illustration 25 (Change of Method, Review of Useful Life and Machinery Disposal Account)
Machinery Account of Radhu Company Ltd., showed debit balance of ` 32,400 on 1 January 2020, depreciation
being provided at 10% p.a. On 1 July, 2020, a part of the machinery purchased for ` 10,000 on 1 January
2018 was sold for ` 7,000 and on the same date a new machinery which cost ` 20,000 was purchased. On 31
December 2020, the company decided to change the method of depreciation from WDV method to straight
line method with prospective effect. On the date of change of method of charging depreciation from WDV to
SLM, the management of company has decided to review the estimated life of machine and on experts advise
it was observed that first and second machine are expected to be work for a further period of 3 years and 10
years respectively. Show machinery Account and Machinery Disposal Account. (Year ending 31 December)
Solution :
WORKING NOTES
(i)
Cost price of machinery in hand on 1 January 2020 is arrived at as under:
`
Suppose the original cost on 1.1.2018 is :
100
Less: Depreciation at 10% for 2018
10
Written down value on 1.1.2019
90
Less: Depreciation at l0% for 2019
9
Written down value on 1.1.2020
81
If written down value is ` 81, original cost is:
100
If written down value is ` 1, original cost is:
If written down value is ` 32,400, original cost is:
100 /81
100
81
× 32, 400
40,000
Accounting for Property, Plant and Equipment & Depreciation
(ii)
10.55
`
Depreciation as per new method (SLM)
Machine-I
32,400
Less: Sold out portion (written down value on 1.1.2020)
(8,100)
24,300
useful life  3 years
 Depreciation would be
Machine-II
24,300
= ` 8,100 p.a. for next 3 years.
3
(new purchase) on 1st July, 2020
20,000
useful life  10 years
Depreciation =
(iii)
20,000 6

= 1,000
10
12
Written down value of machinery transferred to Machinery Disposal
Account is arrived at as under:
Original Cost
10,000
Less: Depreciation for 2018
1,000
9,000
Less: Depreciation for 2019
900
Written down value as on 1.1.2020
8,100
Less: Depreciation for six months up to 1 July 2020
405
7,695
In the absence of specific instructions, the changed method of depreciation is applicable at the end of
the accounting period only.
Dr.
Date
Machinery Account
Particulars
`
2020
1 Jan.
`
Particulars
2020
Balance b/d
32,400
(24,300 + 8,100)
1 July
Date
Cr.
Cash Account
1 July
Machinery Disposal Account
31 Dec.
Depreciation:
20,000
31 Dec.
8,100
Machine-I
8,100
Machine-II
1,000
Balance c/d
Machine-I
16,200
Machine-II
19,000
52,400
Dr.
Date
`
2020
1 July
35,200
52,400
Machinery Disposal Account
Particulars
9,100
Date
Particulars
Cr.
`
2020
Machinery Account
8,100
7,695
1 July
Depreciation
1 July
Cash Account
31 Dec.
Profit and Loss Account (Loss)
405
7,000
695
7,695
10.56
Financial Accounting: Concepts and Applications
LOSS BY ACCIDENT AND INSURANCE CLAIM
Sometimes the fixed asset may be destroyed by fire or accident and if such asset had been insured against
such loss, the firm will file a claim with the insurance company. The normal procedure is that the insurance
company first admits the claim and then makes the payment at a later date. The accounting treatment is as
under:
On admission of claim
Insurance Company’s Account
Dr.
To Asset Account
On receipt of money claimed
Bank Account
Dr.
To Insurance Company
(i) In case the amount of claim is received immediately, students may make the following entry:
Bank Account
Dr.
To Asset Account
(ii) The difference in the book value of the asset on the date of accident and the amount of claim
admitted by the insurance company would be transferred to profit and loss account.
Illustration 26 (Change of Method from SLM to WDV)
Neha Limited purchased a second hand machine on 1 January, 2017 for ` 1,60,000; overhauling charges amounted
to ` 40,000. Another machine was purchased on 1 July, 2017 for ` 80,000. On 1 July 2019, the machine
installed on 1 January 2017 was sold for ` 1,00,000. On the same date another machine was purchased for
` 30,000 and was installed on 30 September, 2019.
Under the existing practice, the company provides depreciation at 10% on original cost. However, from the
year 2020, it was decided to adopt written down value method and to charge depreciation at 15% per annum.
This change was to be made with retrospective as well as prospective effect. Prepare Machinery Account in
the books of Neha Limited from 2017 to 2020. (Year ending on 31 December)
Solution :
Dr.
1-1-17
In the Books of Neha Ltd.
Machinery Account
`
Bank Account
1,60,000
Bank Account
40,000
1-7-17
Bank Account
31-12-17
Depreciation Account
Balance c/d
31-12-18
2,56,000
Depreciation Account (20,000 + 8,000)
2,56,000
`
2,28,000
30-9-19
Bank Account
2,56,000
2,80,000
Balance c/d
Balance b/d
24,000
80,000
1-1-18
1-1-19
`
(20,000 + 4,000)
2,80,000
Balance b/d
Cr.
30,000
28,000
2,28,000
2,56,000
1-7-19
Bank Account
`
1,00,000
Depreciation Account
10,000
Profit and Loss Account (Loss)
50,000
Accounting for Property, Plant and Equipment & Depreciation
10.57
31-12-19
Depreciation Account (8,000 + 750)
8,750
Balance c/d
89,250
2,58,000
2,58,000
`
1-1-20
Balance b/d
`
31-12-20
89,250
Depreciation Account (15% on ` 89,250)
13,388
Balance c/d
75,862
89,250
89,250
Illustration 27 (Machinery Disposal Account and change of method from WDV to SLM)
Ahaan Ltd., which depreciates its machinery at 10% on Diminishing Balance Method, had on 1st April, 2019
` 9,72,000 to the debit of Machinery Account. During the year 2019-20, the machinery purchased on 1st April,
2017 for ` 80,000 was sold for ` 45,000 on 1st October, 2019 and a new machinery at a cost of ` 1,50,000
was purchased and installed on the same date, installation charges being ` 8,000. The company wants to change
its method of depreciation from Diminishing Balance Method to Straight Line Method with effect from 1st
April, 2019. During 2019-20, the company decided to change its method of charging depreciation from diminishing
balance method to straight line method with prospective effect. At the same time management of company
feels to review the estimated remaining useful life of machine and it was assessed that machine will probably
work for a further period of 6 years with scrap value of ` 7,200. While new machine purchased on 1.10.2019
will be depreciated at 10% p.a on straight line basis.
You are required to prepare Machinery account and Machinery disposal account for the year 2019-20.
Solution
Dr.
Machinery Account
Date
Particulars
`
1.4.19
Balance b/d
9,72,000
(9,07,200 + 64,800)
1.10.19
Bank A/c (1,50,000 + 8,000)
1,58,000
Cr.
Particulars
1.10.19
Machinery Disposal A/c
31.3.20
Depreciation A/c (1,50,000 + 7,900)
1,57,900
31.3.20
Balance c/d (7,57,200 + 1,50,100)
9,07,300
11,30,000
Dr.
Particulars
1-10-2019
Machinery Account
64,800
11,30,000
Machinery Disposal Account
`
`
Date
Particulars
Cr.
`
1-10-2019
64,800
Bank Account
Depreciation Account (for 6 months)
Profit and Loss Account (Loss on Sale)
64,800
45,000
3,240
16,560
64,800
WORKING NOTES
Calculation of Loss
`
Cost of Machine (1-4-2017)
Less: Depreciation (2017-18)
80,000
8,000
72,000
10.58
Financial Accounting: Concepts and Applications
Less: Depreciation (2018-19)
7,200
Written down value on 1.4.2019
64,800
Less: Depreciation for 6 months upto 30-9-2019
3,240
61,580
Less: Sale Price
45,000
Loss on Sale
16,560
`
Calculation of Book Value of Machine on 1-4-2019
Cost (1-4-2017)
100
Less: Depreciation (2017-18)
10
90
Less: Depreciation (2018-19)
9
81
Gross Value 9,72, 000 ×
100
=
81
12,00,000
Less: Sold (Gross Value)
80,000
11,20,000
Depreciation for 2019-20
Written down value of old machine as on 1.4.2019
9,72,000
Less: Sold out part (value on 1.4.2019)
64,800
Value of old machine in use (remaining)
9,07,200
Depreciation on SLM basis
When useful life is estimated at 6 years with scrap value of ` 7,200 =
9,07, 200  7, 200
6
=
` 1,50,000 p.a for next 6 years
=
1,58, 000 
=
` 7,900
New Machine
Cost of machine (1.10.2019) = ` 1,58,000
Depreciation @ 10% p.a on SLM basis
10 6

100 12
Illustration 28 (Change of Method & Revision of useful life from WDV to SLM)
A taxi company Duck and Duckling Ltd. was formed on 1 January, 2018. The Company depreciates its cars
on account @ 20% on Reducing Balance Method. On 1 Jaunary, 2020 the balance in Cars account was
` 90,00,000. On 1 July, 2020, a car purchased on 1 January, 2018, for ` 8,00,000 was sold for ` 4,00,000.
On the same day another car was purchased for ` 20,00,000. During 2020, the company decided to change
the method of depreciation to Straight Line method with prospective effect. On the occession of change of
method of charging depreciation on cars, management call a team of experts for assessing the expected remaining
effective life of old cars (excluding sold out car) and expert committee presented its report in which it was
concluded that old cars will run for a further period of 3 years with scrap value of ` 88,000 in all, while new
car will be expected to run for 10 years.
Prepare Cars Account with proper working notes for the year ending 31st December, 2020 as per Accounting
Standard 10.
Accounting for Property, Plant and Equipment & Depreciation
10.59
Solution
Cars Account
Date
Particulars
`
1.1.20
Balance b/d
90,00,000
Date
Particulars
1.7.20
Bank A/c
(84,88,000 + 5,12,000)
1.7.20
`
4,00,000
Dereciation on car sold @ 20% on
Bank A/c
20,00,000
31.12.20
31.12.20
` 8,00,000 for 6 months
80,000
Profit & Loss A/c (Loss on sale)
32,000
By Depreciation:
(I)
28,00,000
(II)
1,00,000
29,00,000
By Balance c/d
(I)
56,88,000
(II)
19,00,000
1,10,00,000
75,88,000
1,10,00,000
WORKING NOTES
(i)
`
Calculation of Loss on car sold
Original cost of the car
8,00,000
Less: Depreciation for 2018 @ 20% on WDV
1,60,000
6,40,000
Less: Depreciation for 2019 @ 20% on WDV
1,28,000
Written down value on 1.1.2020
5,12,000
Less: Depreciation upto 1.7.2020 for 6 month on ` 8,00,000
80,000
4,32,000
Sale Price of the car
4,00,000
Loss on sale of car
(ii)
32,000
Depreciation
Value of Cars on 1.1.2020
90,00,000
Less: Value of sold out car (1.1.2020) [see note (i)]
(5,12,000)
84,88,000
Life of old Cars (excluding sold out car) is 3 years with scrap value of ` 88,000
Depreciation =
84, 88, 000  88, 000
3
= ` 28,00,000 each year for 3 years
 (20, 00, 000  6
= ` 1,00,000

10

 12
Depreciation (New Car) = 
Illustration 29 (Change of Method from SLM to WDV)
ABC Ltd. purchased on 1 October, 2016, a machinery for ` 4,50,000 and spent ` 10,000 on freight and transit
insurance. On 25 December, 2016, it further spent ` 40,000 on its erection. The machinery was put to use on
1-1-2017. On 1 July 2017, it purchased another machinery for ` 1,00,000. During the year 2018, it spent
` 10,000 for repairs on 1-4-2018.
However, on 1-4-2019, a part of the machinery, put to use on 1-1-2017 costing ` 2,00,000 was sold for
` 1,50,000. On 1-10-2019 it purchased another machinery for ` 3,00,000.
10.60
Financial Accounting: Concepts and Applications
On 1 July, 2020, however, machinery purchased on 1 July, 2017 was sold for ` 65,000. Depreciation was
charged by the firm @ 10% p.a. by straight line method. During the year 2020, ABC Ltd. decided to change
the method of providing depreciation and adopted the Diminishing balance method of charging depreciation
@ 10% p.a. At the time of change management feels there is no need to review the useful life of machine.
Prepare Machinery Account as per the provisions of AS 10 upto 31-12-2020.
Solution
In the books of ABC Ltd.
Machinery Account
Particulars
`
1-1-2017
Balance b/d
5,00,000
1-7-2017
Particulars
`
31-12-2017
Depreciation:
55,000
(50,000 + 5,000)
Bank
1,00,000
Balance c/d (4,50,000 + 95,000)
5,45,000
6,00,000
1-1-2018
6,00,000
31-12-2018
Balance b/d
5,45,000
Depreciation (50,000 + 10,000)
60,000
Balance c/d (4,00,000 + 85,000)
4,85,000
5,45,000
1-1-2019
5,45,000
1-4-2019
Balance b/d
4,85,000
1-10-2019
Bank Account
3,00,000
Bank Account (sale price)
1,50,000
Depreciaton (for 3 months) (i)
5,000
Profit and Loss Account (i) (Loss on sale)
5,000
31-12-2019
Depreciation (ii) (30,000 + 10,000 + 7,500)
47,500
Balance c/d (2,10,000 + 75,000 + 2,92,500)
5,77,500
7,85,000
7,85,000
1-1-2020
1-7-2020
Balance b/d
Bank (sale price) M2
M1
2,10,000
M2
75,000
M3
2,92,500
5,77,500
65,000
Depreciation (for 6 months) (iii) M2
5,000
Profit and Loss Account (iii) (Loss on sale)
5,000
31-12-2020
Depreciation
M1
21,000
M3
29,250
50,250
Balance c/d
M1
1,89,000
M2
2,63,250
5,77,500
5,77,500
WORKING NOTES
(i) Cost of machine sale as on 1-1-2017
Less: Depreciation @ 10% for one year (2017)
4,52,250
2,00,000
20,000
1,80,000
Accounting for Property, Plant and Equipment & Depreciation
Less: Depreciation10% (2018)
10.61
20,000
Bank value on 1-1-19
1,60,000
Less: Depreciation for 3 months (1.1.19 – 31.3.19
5,000
Bank value on 1-4-2019
1,55,000
Less: Sale Price
1,50,000
Loss on sale
5,000
(ii) Depreciation for 2019
I
II
Book value of machine on 1-1-2019
4,00,000
85,000
Less: Book value of machine sold on 1-1-2019
1,60,000
—
2,40,000
85,000
30,000
10,000
Depreciation @ 10% on SLM basis on ` 3,00,000 and ` 1,00,000 respectively
(iii) Cost of machine sold on 1-7-2020
1,00,000
Less: Depreciation for 2017 @ 10% p.a. for 6 months
5,000
Book value on 1-1-2018
95,000
Less: Depreciation for 2018 @ 10%
10,000
Book value on 1-1-2019
85,000
Less: Depreciation for 2019
10,000
Book value on 1-1-2020
75,000
Less: Depreciation for 6 months @ 10% p.a.
5,000
Book value on 1-7-2020
70,000
Less: Sale Price
65,000
Loss on sale of Machinery
5,000
Illustration 30 (Exchange of Old Machine)
On 1st January 2017, Riddhi purchased machine ‘A’ for ` 30,000 and machine 'B' for ` 20,000. On 1st January
2018, she purchased a machine ‘C’ for ` 50,000. On 1st January 2019, machine ‘A’ got out of order and a
new machine ‘D’ was purchased costing ` 60,000 after surrendering the old one and paying cash ` 45,000.
On 1st January 2020, machine ‘C’ purchased on 1st January 2018, was destroyed by fire and insurance company
paid ` 30,000 only. Show the Machine account for 2017, 2018, 2019 and 2020. Charge depreciation @ 10%
p.a. on the W.D.V. method.
Solution
Machines Account
Particulars
`
1-1-2017
Bank Account (A)
`
31-12-2017
30,000
1-1-2017
Bank Account (B)
Particulars
Depreciation
5,000
Balance c/d
45,000
20,000
50,000
1-1-2018
50,000
31-12-2018
Balance b/d
45,000
Depreciation (4,500 + 5,000)
Bank Account (C)
50,000
Balance c/d
95,000
9,500
85,500
95,000
10.62
Financial Accounting: Concepts and Applications
1-1-2019
31-12-2019
Balance b/d
85,500
Depreciation
Bank Account (D)
45,000
Profit and Loss Account
Balance c/d
1,30,500
1-1-2020
12,120
9,300
1,09,080
1,30,500
1-1-2020
Balance b/d
1,09,080
Bank (Insurance Co.)
30,000
Profit and Loss Account
10,500
31-12-2020
Depreciation
6,858
Balance c/d
61,722
1,09,080
1,09,080
WORKING NOTES
`
Machine A
Cost
30,000
Less: Depreciation
(2017)
3,000
27,000
(2018)
2,700
24,300
Less: Exchange Value
15,000
Loss
9,300
Entry:
Machine Account
Dr.
60,000
Profit and Loss A/c
Dr.
9,300
To ‘A’ Machine Account
24,300
To Bank Account
45,000
(Exchange of ‘A’ Machine for Machine ‘D’ for ` 45,000 cash; Loss transferred to Profit and Loss Account)
Machine C
Cost
Less: Depreciation 2018
50,000
5,000
45,000
Less: Depreciation 2019
4,500
40,500
Less: Insurance Claim
30,000
Loss
10,500
Depreciation on Machine B
Cost
Less: Depreciation 2017
20,000
2,000
18,000
Less: Depreciation 2018
1,800
16,200
Accounting for Property, Plant and Equipment & Depreciation
10.63
Less: Depreciation 2019
1,620
14,580
Less: Depreciation 2020
1,458
Written Down Value
13,122
Depreciation on Machine D
Cost
60,000
Less: Depreciation (2019)
6,000
54,000
Depreciation (2020)
5,400
Written Down Value
48,600
Total Depreciation on 31 March 2020
Machine B
1,458
Machine D
5,400
6,858
Total Written Down Value on 31 March 2020
Machine B
13,122
Machine D
48,600
61,722
Illustration 31 [Revaluation Model]
Rachit Ltd. bought a machine for ` 50,000 on 1st April, 2016. One more machinery was purchased on 1st
October, 2016 costing ` 40,000. The rate of depreciation is 10% p.a. on SLM basis.
On 1st April 2018, the management of company feels that there is need to revalue the machines. The first
machine was revalued at 20% higher than the book value while second machine was revalued at 10% less
than the book value.
On 1st October 2019, the first machine became obsolete and sold by incurring a loss of ` 7,000. Any excess
depreciation arising on revaluation should be charged to revaluation reserve account as per AS-10. Show the
Machinery A/c, Depreciation A/c and Revaluation Reserve A/c from 1st April, 2016 to 31st March, 2020.
Solution
Books of Rachit Ltd.
Machinery Account
Dr.
`
Date
Particulars
1-4-2016
Bank (I)
50,000
1-10-2016
Bank (II)
40,000
Date
31-3-2017
Cr.
Particulars
Depreciation (5,000 + 2,000)
7,000
Balance c/d (45,000 + 38,000)
83,000
90,000
1-4-2017
Balance b/d (45,000 + 38,000)
83,000
90,000
31-3-2018
Depreciation (5,000 + 4,000)
9,000
Balance c/d (40,000 + 34,000)
74,000
83,000
1-4-2018
Balance b/d (40,000 + 34,000)
Revaluation Reserve
74,000
83,000
31-3-2019
4,600
Depreciation
9,460
Balance c/d
69,140
Bank (I)
32,300
78,600
1-4-2019
Balance b/d
69,140
78,600
1-10-2019
[42,200 (I) + 26,940 (II)]
Depreciation
2,900
31-3-2020
Profit & Loss (loss)
2,920
31-3-2020
Revaluation Reserve (maximum use)
4,080
31-3-2020
Depreciation (II)
3,660
Balance c/d
69,140
`
23,280
69,140
10.64
Financial Accounting: Concepts and Applications
Dr.
Depreciation Account
Date
Particulars
31-3-2017
Machinery
`
7,000
Cr.
Date
Particulars
31-3-2017
Profit & Loss
7,000
31-3-2018
Machinery
9,000
Machinery
31-3-2018
Profit & Loss
31-3-2019
Profit & Loss
Revaluation Reserve
(Excess Depreciation)
9,460
Machinery (I)
2,900
31-3-2020
Machinery (II)
3,660
1-10-2020
By Profit & Loss
Revaluation Reserve
(Excess Depreciation)
Particulars
31-3-2019
Depreciation
`
460
Balance c/d
Date
Particulars
1-4-2018
Machinery
31-3-2020
Depreciation
31-3-2020
Machinery (loss on sale)
60
1-4-2019
Balance b/d
`
4,600
=
4,140
4,140
`
Calculation of Revaluation Reserve
(I) ` 40,000 × 20%
=
8,000
(II) ` 34,000 × (10%)
=
(3,400)
Revaluation Reserve
4,600
New Depreciation
(I)
=
(50,000 × 10%) + (8,000 × 10%)
=
` 5,800
(II)
=
(40,000 × 10%) – (3,400 × 10%)
=
` 3,660
Total Depreciation (New)
=
` 9,460
Excess Depreciation
For 2019-20
Cr.
4,080
WORKING NOTES
For 2018-19
60
4,600
4,140
(1-4-2018)
6,500
4,140
4,600
Revaluation Effect
460
6,560
Revaluation Reserve Account
Date
9,000
9,460
6,560
Dr.
9,000
9,000
9,460
1-10-2019
7,000
7,000
9,000
31-3-2018
`
=
New Depreciation – Old Depreciation
=
` 9,460 – ` 9,000 = ` 460
=
[(`5,800 ×
=
` 6,560 – ` 6,500 = ` 60
6
) + ` 3,660] – (`2,500 + `4,000)
12
Accounting for Property, Plant and Equipment & Depreciation
10.65
Illustration 32 [Revaluation Model (AS–10 PPE)]
Z Ltd. purchased a machinery for ` 5,00,000 (including a boiler of ` 1,00,000) on 1st April, 2017. The company
charges decpreciation on Machinery @10% p.a. on WDV method.
On 1st April, 2019, the management decided to revalue the machine and on revaluation, boiler part was assessed
at ` 5,000 less than its net book value while remaining part of machine was revalued at 20% higher than the
book value.
The machine was ultimately sold on 1st April, 2020 for ` 2,70,000. Any excess depreciation arising on revaluation
should be adjusted against Revaluation Reserve Account.
Required:
(i)
Machinery Account
(ii)
Depreciation Account
(iii) Revaluation Reserve Account
Solution
Books of Z Ltd.
Machinery Account
Dr.
Date
Particulars
1-4-2017
Bank
`
Machine
4,00,000
Boiler
1,00,000
Cr.
Date
Particulars
31-3-2018
Depreciation
5,00,000
`
M
40,000
B
10,000
50,000
Balance c/d
M
3,60,000
B
90,000
5,00,000
1-4-2018
Balance b/d
5,00,000
31-3-2019
M
3,60,000
B
90,000
4,50,000
4,50,000
Depreciation
M
36,000
B
9,000
45,000
Balance c/d
M
3,24,000
B
81,000
4,50,000
1-4-2019
1-4-2019
Balance b/d
M
3,24,000
B
81,000
Revaluation Reserve
4,50,000
31-3-2020
Depreciation
31-3-2020
Balance c/d
Balance b/d
46,480
4,18,320
4,05,000
59,800
4,64,800
1-4-2020
4,05,000
4,18,320
4,18,320
4,64,800
1-4-2020
Bank (sale)
2,70,000
Revaluation Reserve (loss)
53,820
Profit & Loss (loss)
94,500
4,18,320
10.66
Financial Accounting: Concepts and Applications
Dr.
Depreciation Account
Date
Particulars
31-3-2018
Machinery
`
50,000
Cr.
Date
Particulars
31-3-2018
Profit & Loss
`
50,000
50,000
31-3-2019
Machinery
45,000
50,000
31-3-2019
Profit & Loss
45,000
45,000
31-3-2020
Machinery
46,480
45,000
31-3-2020
Profit & Loss
40,500
Revaluation Reserve
(Excess Depreciation)
5,980
46,480
Dr.
46,480
Revaluation Reserve Account
`
Date
Particulars
31-3-2020
Depreciation
5,980
Balance c/d
53,820
Date
Particulars
1-4-2019
Machinery
Cr.
`
59,800
59,800
1-4-2020
Machinery (loss on sale)
53,820
59,800
1-4-2020
Balance b/d
53,820
53,820
53,820
WORKING NOTES
`
Calculation of Revaluation Reserve
Revaluation Effect :
(1-4-2019)
= Machine ` 3,24,000 × 20%
Boiler
Revaluation Reserve
New Depreciation for (2019-20)
= (4,05,000 + 59,800) × 10%
Excess Depreciation
= New Depreciation – Old Depreciation
= ` 46,480 – ` 40,500 = ` 5,980
=
64,800
=
(5,000)
59,800
= ` 46,480
Accounting for Property, Plant and Equipment & Depreciation
10.67
Assignments
THEORY BASE ASSIGNMENTS
1.
2.
3.
4.
What is depreciation ? Why is it needed ?
[B.Com. (Hons.) Delhi 1988]
Define Depreciation, Depletion and Amortization.
[B.Com. (Hons.) Delhi 1989]
Explain the nature and need for depreciation.
[B.Com. (Hons.) Delhi 1994, 2005]
Distinguish between Straight Line Method and Diminishing Balance Method of providing depreciation.
[B.Com. (Hons.) Delhi 1997]
5. Explain the disclosure requirement of Accounting Standard - 10 PPE regarding depreciation.
6. Depreciation accounting is a process of allocation and not of valuation. Explain.
[B.Com. (Hons.) Delhi Sem.- II, 2011]
7. Define depreciation, depletion, fluctuation, obsolescence and amortization.
[B.Com. (Hons.) Delhi 2000]
8. Accumulated depreciation is a sum of cash being accumulated for the replacement of fixed assets. Explain
the statement giving reasons
[B.Com. (Hons.) Delhi 2001]
9. Specify causes of depreciation.
[B.Com. (Hons.) Delhi 2007]
10. Define depreciation. What are the contributory factors for decline in fixed assets?
[B.Com. (Hons.) Delhi 2010]
11. Explain: (i) The depreciable cost and (ii) Two reasons for charging depreciation on tangible fixed assets.
[B.Com. (Hons.) Delhi 2015]
PRACTICAL ASSIGNMENTS
1. (General) Calculate the amount of annual depreciation for three years by :
(a) Reducing Balance Method and
(b) Straight Line Method
(i) Cost of Machinery–` 2,00,000;(ii) Expected Life : 3 Years;
(iii) Rate of depreciation : 33
1
3
%;(iv) Scrap Value–` 20,000.
2. (General) X purchased a second-hand machinery on 1.2.2018 for ` 50,000; paid ` 11,000 for its overhauling
and ` 5,000 for its installation which was completed by 31.3.2018. The company provides depreciation
on its machinery at 15% p.a. on diminishing balance method from the date it was put to use and closes
its books on 31 December every year. On 1.10.2019, a repair work was carried out on the machine and
` 5,000 were paid for the same. The machine was sold on 31.10.2020 for a sum of ` 11,000 and an
amount of ` 1,000 was paid as dismantling charges. Prepare Machinery Account from 2018 to 2020.
[B. Com. (Hons.) Delhi]
3. (General) A transport company purchases 5 Trucks at ` 2,00,000 each on 1 April 2018. The company
writes off depreciation @ 20% per annum on original cost and observes calendar year as its accounting
year. On 1 October 2020 one of the trucks is involved in an accident and is completely destroyed. Insurance
company pays ` 90,000 in full settlement of the claim. On the same day the company purchases a truck
for ` 1,00,000 and spends ` 20,000 on its overhauling. Prepare Truck Account for three years ending
on 31 December 2020.
[B. Com. (Hons.) Delhi]
10.68
Financial Accounting: Concepts and Applications
4. (General) On 1 January 2019 the balance in plant and machinery account was ` 9,00,000 (including
` 1,00,000 which was purchased on 1 January 2018). On 30 January 2019 additional plant was purchased
for ` 1,00,000. On 31 December 2019 part of the plant which had cost ` 20,000 on 1 January 2018 was
sold for ` 21,000.
On 31 December 2019, again a part of the plant was sold for ` 40,000. This was purchased on 1 January
2018 for ` 60,000.
Prepare plant and machinery account for two years, that is 2019 and 2020 by providing depreciation at
10% p.a. assuming reducing balance method.
[B. Com. (Mumbai University) Adapted]
5. (Change of Method from WDV to SLM) Deva Ltd. charged depreciation on its plant and machinery
@ 10% per annum on the diminishing balance method. On 31 March, 2019, the company decided to
adopt straight line method of charging depreciation with prospective effect as per AS-10. At the time
of change of charging method of depreciation, it was decided by management to review the useful life
of Machines and after review, it was found that old machine is expected to run for a further period of
5 years with scrap value of ` 5,990, while new is expected to work for 10 years. On 1 April, 2018,
the plant and machinery account stood in the books at ` 2,91,600. On 1 July, 2018 a sum of ` 65,000
was realised by selling a machine cost of which on 1 April, 2016 was ` 90,000. On 1 January, 2019, a
new machine was acquired at a cost of ` 1,50,000.
Show the plant and machinery account in the books of company for the year ending 31 March, 2020.
6. (Change of Method from WDV to SLM) Hanuman Enterprises purchased on 1.4.2017 certain machinery
for ` 72,800 and paid ` 2,200 on its installation. On 1.10.2017 another machinery for ` 25,000 was acquired.
On 1.4.2018, the first machinery was sold at ` 50,000 and on the same date a fresh machinery was purchased
at a cost of ` 45,000. Depreciation was annually provided on 31 March @10% p.a. on written down value.
On 1.4.2019 however, the firm decided to change the method of providing depreciation and adopted the
method of providing depreciation on the original cost with prospective effect. On the occasion of change
of method the useful life of machines were reviewed and it was found that the Machine which was purchased
on 1.10.2017 will expected to run for a further period of 4 years while other machine purchased on 1.4.2018
will expected to run for a further period of 8 years. The scrap value of these machines were estimated at
` 1,375 and ` 500 respectively. Ascertain the value of machinery as on 31.3.2020.
7. (Change of Method from WDV to SLM) Chandrika Ltd. which depreciate its machinery at 10% on
diminishing balance method had on 1 January 2020 ` 19,72,000 to the debit of machinery account.
During the year 2020, part of the machinery purchased on 1 January 2018 for ` 10,80,000 was sold
for ` 10,45,000 on 1 July 2020 and a new machinery at a cost of ` 11,50,000 was purchased and installed
on the same date, installation charges being ` 80,000. During 2019-20, the company decided to change
its method of charging depreciation from diminishing balance method to straight line method and further
decided to review the useful life of Machine. On review, it was found that machine having book value
on 1.1.2020 ` 10,97,200 (excluding sold our portion) will run for a further period of 6 years with a scrap
value of ` 1,97,200 and on the other hand new machine purchased on 1.7.2020 will expected to run for
10 years with a scrap value of ` 30,000.
Show the Machinery Account and ascertain the amount chargeable to Profit and Loss Account and depreciation
or obsolescence loss in the year.
8. (Change of Method from SLM to WDV) A purchased on 1 January, 2017 certain machinery for ` 1,94,000
and spent ` 6,000 on its erection. On 1 July, 2017 additional machinery costing ` 1,00,000 was purchased.
On 1 July, 2019, the machinery purchased on 1 January, 2017 having become obsolete was auctioned
for ` 1,00,000 and on the same date new machinery was purchased at a cost of ` 1,50,000. Depreciation
was provided for annually on 31 December at the rate of 10% per annum on the original cost of the
machinery. No depreciation need be provided when a machinery is sold or auctioned, for that part of
the year in which sale or auction took place. But for the above, depreciation shall be provided on time
basis. In 2020, however, A changed this method of providing depreciation and adopted the method of
writing off 15% p.a. on the written down value on the balance as appeared in machinery account on
1.1.2020. Show the machinery account for the calendar years 2017 to 2020.
[C.A. (Foundation) May 1997 Adapted]
Accounting for Property, Plant and Equipment & Depreciation
10.69
9. (Change of Method from WDV to SLM) Ahaan Ltd., which depreciates its machinery at 10% on Diminishing
Balance Method, had on 1st April, 2019 ` 9,72,000 to the debit of Machinery Account. During the year
2019-20, the machinery purchased on 1st April, 2017 for ` 80,000 was sold for ` 45,000 on 1st October,
2019 and a new machinery at a cost of ` 1,50,000 was purchased and installed on the same date, installation
charges being ` 8,000. The company wants to change its method of depreciation from Diminishing Balance
Method to Straight Line Method with effect from 1st April, 2019. During 2019-20, the company decided
to change in method of charging depreciation from diminishing balance method to straight line method
with prospective effect. At the same time management of company feels to review the estimated remaining
useful life of machine and it was assessed that machine will probably work for a further period of 6
years with scrap value of ` 7,200. While new machine purchased on 1.10.2019 will be depreciated at
10% p.a on straight line basis.
You are required to prepare Machinery account and Machinery disposal account for the year 2019-20.
10. (Change of Method from SLM to WDV) A firm purchased. on 1 January, 2016, certain machinery
for ` 19,40,000 and spent ` 60,000 on its erection. On 1 July in the same year additional machinery
costing ` 10,00,000 was acquired. On 1 July, 2018 the machinery purchased on 1 January, 2016 having
become obsolete was auctioned for ` 8,00,000 and on the same date fresh machine was purchased at a
cost of ` 15,00,000.
Depreciation was provided for annually on 31 December at the rate of 10% per annum on the original
cost of the asset. In 2019 however, the firm changed this method of providing depreciation and adopted
the method of writing off 20% on the written down value. There is no need to review the useful life of
machinery.
Give the Machinery Account as it would stand at the end of each year from 2016 to 2020.
[C.A. (Foundation)]
11. (Change of Method from SLM to WDV) Green Channel Co. purchased a second hand machine on 1
January, 2017 for ` 1,60,000. Overhauling and erection charges amounted to ` 40,000. Another machine
was purchased for ` 80,000 on 1 July, 2017. On 1 July, 2019, the machinery installed on 1 January,
2017 was sold for ` 1,00,000. On the same date another machine was purchased for ` 30,000 and was
installed on 30 September 2019.
Under the existing practice the company provides depreciation @ 10% p.a. on original cost. However,
from the year 2020 it decided to adopt WDV method and to charge depreciation @ 15% p.a. This change
was to be made with prospective effect and management do not want to review the useful life of machine.
Prepare Machinery Account in the books of Green Channel Co. for the years 2017 to 2020.
[PE (Examination I)]
12. (Typical) A firm writes off depreciation 95% of the cost of machinery acquired over a period of 10
years by straight line method leaving 5% as estimated scrap value. Full depreciation is written off even
if the machinery is in use only for a part of the year. On 31 December 2019, the original cost of machinery
in use was as follows :
`
Purchased in 2009 or earlier
1,20,000
Purchased in 2011
40,000
Purchased in 2015
30,000
On 30 June 2020 a machine which had cost ` 10,000 in 2008, was disposed off for ` 900 and on 30
November 2020 a machine acquired in 2015 at a cost of ` 15,000 was sold for ` 5,000. On the same
date new machinery was acquired for ` 45,000. Prepare machinery account for 2020 the accounts being
closed on 31 December each year.
13. [Revaluation Model/Fair Value Method]
X Ltd. purchased a machinery for ` 36,00,000 on 1st April, 2014. The life of machine is ten years and
it is to be depreciated on straight line basis.
10.70
Financial Accounting: Concepts and Applications
The machine was revalued on 1st April, 2016. When half of the machine was assessed at 10% less than
the book value and the remaining part was valued at 15% higher than the book value.
The machine was ultimately sold on 1st April, 2018 for ` 21,90,000. Excess depreciation on revaluation,
if any, should be charge to the revaluation reserve account.
Show Machinery A/c, Depreciation A/c and Revaluation Reserve A/c for the above period.
14. [Revaluation Model – AS 10 (PPE)]
Vanshika Ltd. purchased fixed assets for ` 4,00,000 on 1st October, 2013. It is the policy of company
to charge depreciation @10% p.a. on Written Down Value Method.
It was decided by the management to revalue the assets on 1st April, 2015, when 60% of the assets were
revalued at 15% higher than the book value and remaining part revalued at 10% less than the book value.
On 1st October, 2016, the assets were disposed off for ` 2,10,000. Excess decpreciation on revaluation,
if any, should be adjusted against revaluation reserve account.
Prepare Fixed Assets A/c, Depreciation A/c and Revaluation Reserve A/c
ANSWERS GUIDE
1. Depreciation under Reducing Balance Method :
First Year– ` 66,667; Second Year– ` 44,444; Third Year– ` 29,630
Depreciation Under Straight Line Method : ` 60,000 per year.
Hints:
(i) Under diminishing balance method, scrap value is not deducted while applying the rate of depreciation.
(ii) Under straight line method, the rate of depreciation is applied to depreciable cost, i.e. cost – scrap value
1
3
which is in this case 2,00,000 – 20,000 = 1,80,000. Accordingly 33 % of ` 1,80,000 = ` 60,000, the
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
yearly depreciation.
Loss on sale–` 33,566.
Hints:
(i) Repair cost is not to be capitalised since there is no improvement in the capacity of the machine.
(ii) Cost of dismantling is to be deducted from the sale price for ascertaining the profit or loss on the
disposal or sale of machine.
Loss on the truck destroyed ` 10,000. Balance in the Truck Account ` 4,74,000.
Profit on sale of first machinery–` 4,800; Loss on sale of second machine–` 8,600 Balance in Plant and
Machinery Account–7,52,430 (App.).
Loss on sale of machine– ` 1,970; Depreciation on 31 March 2020 for 2019–2020– ` 47,750 (44,000 +
3,750); Balance at the end– ` 3,28,240.
Depreciation for 2019–2020– ` 10,000 (5,000 + 5,000); Balance in the machinery account on 31 March
2020– ` 51,875; Loss on sale of machinery–` 17,500.
Profit on sale ` 2,13,940; Balance in Machinery Account–` 21,17,200.
Balance in Machinery Account on 31 December 2020– ` 1,84,875; Loss on sale of machinery– ` 60,000.
Depreciation for 2020– ` 32,625.
Loss on sale–16,560; Balance in Machinery Account 9,07,300.
Value of machinery as on 31.12.2020 ` 12,32,640 (3,68,640 + 8,64,000)
Value of machinery as on 31.12.2020 ` 75,862.
Balance in Machinery Account on 31 December 2020 – ` 54,675. Loss – ` 1,450, Profit– ` 400
Loss on sale of machinery (adjusted against revaluation reserve): ` 24,000; Amount transfer to General
reserve: ` 30,000; Excess depreciation p.a.: ` 9,000.
Loss on sale of machinery (adjusted against revaluation reserve): ` 14,620; Loss adjusted against profit
and loss account: ` 82,410; Excess depreciation (2015-16): ` 1,710; (2016-17): ` 770.
11
I
nve
ntorie
s :AS 2
MEANING OF INVENTORY
The terms ‘inventory’ or ‘merchandise’ or 'stock-in-trade' means a complete list of goods that a business
has for sale at a given time. But in accounting, the inventory (or inventories) includes even those goods that
are in various stages of production, that is, work-in-process or work-in-progress. According to Accounting
Standard (AS)-2 (Revised), issued by ICAI, Inventories are assets : (a) held for sale in the ordinary course
of business; (b) in the process of production for such sale; or (c) in the form of materials or supplies to
be consumed in the production process or in the rendering of services. Inventories include goods purchased
and held for resale, for example, merchandise (goods) purchased by a retailer and held for resale, computer
software held for resale or land and other property held for resale. Inventories also include finished goods
produced or work-in-progress being produced by the enterprises and include materials, maintenance supplies,
consumable and loose tools awaiting use in the production process. The types of inventories are related to
the nature of the business. The inventories of a trading concern consist primarily of products purchased
for resale in their existing form. It may also have an inventory of supplies such as wrapping paper, cartons,
and stationery. The inventories of a manufacturing concern consist of several types of inventories : raw
materials (which will become part of goods to be produced); parts and factory supplies; work-in-process (partially
completed products in the factory) and, of course, finished products. Tools are inventory in the hands of a
tool manufacturer or hardware store but not in the hands of a carpenter. Marketable securities are inventories
in the hands of a stock broker or a dealer but not in the hands of a manufacturer or retailers. Inventory items
are purchased and sold regularly in a trading concern or purchased, put into production, converted into a
finished product and sold in a manufacturing business. However, inventories do not include machinery spares
which can be used only in connection with an item of fixed assets and whose use is expected to be irregular;
such machinery spares are accounted for in accordance with Accounting Standard-10 (Revised) : Property,
Plant and Equipment.
OBJECTIVES OF INVENTORY VALUATION
Inventory is generally the largest of the current assets held by a trading or manufacturing enterprise. In some
cases it may account for 75% or even more of the total current assets. It is widely recognised that the major
asset that affects efficiency of operations is inventory. Both, excess of inventory and its shortage affects the
productive activity, and the profitability of the enterprise whether it is manufacturing, trading or service business.
Unwise investment in inventories in the first instance and its proper valuation later on also affects the liquidity
of the firm and hampers the cash flow management. Thus, the significance of inventory valuation arises from
more than one reason as explained in the subsequent paragraphs.
Effect on Liquidity : Short-term creditors are interested in the liquidity position of the business enterprise
and the general test for liquidity is the aggregated amount of current assets in relation to current liabilities.
The proper valuation of inventories which constitute a major proportion of current assets is essential so that
this item of current asset is not overstated so as to misstate liquid position of the business.
11.2
Financial Accounting: Concepts and Applications
Effect on income statement : The proper determination of income depends on the proper valuation of all
assets–fixed and current. Since inventories are generally large and fluctuating in amount, the net income is
influenced by the allocation of cost of fixed assets (i.e., depreciation accounting) and valuation method used
in determining the ending inventory. Income is affected because an error in inventory valuation will affect
the major elements of the income statement such as cost of goods sold, gross profit and ultimatley the net
income. The gross profit is directly affected by the stock valuation. The gross profit is the excess of sales
revenue over the cost of goods sold. And if the ending inventory is overvalued, gross profit is overstated and
an undervaluation of ending inventory understates the gross profit earned. The reason is to be found in the
following relationship:
Cost of Goods Sold = Opening Stock + Purchases – Closing Stock + Direct Expenses.
Thus, higher the amount of ending inventory, the lower the cost of the goods sold and vice versa. Cost of
goods sold ultimately affects the gross profit. It is important to note that the ending inventory for one year is
also the beginning inventory (or opening stock) of the next accounting period. Any error in ending inventory,
therefore, produces an identical error in the opening inventory of the next accounting period. Therefore, the
income statement of the second year will also be affected to the full extent of the inventory error made in
year one. The resulting overstatement of beginning inventory, because ending inventory of last year was overstated,
will result in an understatement of net income in that year. This counter balancing effect of an error in inventory
valuation will result in a correct total net income for the two-years period. But it will definitely fail to produce
correct income for the individual accounting periods respectively. The effect of any over-or understatement
of inventory may be summarised as follows :
When ending inventory is overstated, net income for the accounting period will be overstated.
When beginning inventory is overstated, net income for the accounting period will be understated.
When ending inventory is understated, net income for the accounting period will be understated.
When beginning inventory is understated, net income for the accounting period will be overstated.
The effect of misstatement of inventory figure on the net income is always through cost of goods sold and
gross profit.
Effect on balance sheet : As inventory is generally the largest of the current assets owned by a business
entity, an error in the valuation of inventories may cause a misrepresentation of its financial position. The
balance sheet will not give a true and fair view of the affairs of the business. An under-or-overstatment of
stock will result in other mistake in the balance sheet such as the total current assets, total assets, owner(s)’
equity and, the total of liabilities and owner(s)' equity.
ACCOUNTING STANDARD (AS)-2 (REVISED)
The Institute of Chartered Accountants of India had revised Accounting Standard (AS) – 2 : Valuation of
Inventories in March 2016. The revised standard supersedes AS-2 issued in July 1999, and AS – 2 (Revised)
comes into effect in respect of accounting period commencing on or after 1 April 2016 and it is mandatory
in nature. It is claimed that the revised AS-2 would bring Indian accounting practices relating to inventory
valuation at par with best international practices.
The standard begins with the definitions of inventories and net realisable value. Inventories are defined as
assets
(a) held for sale in the ordinary course of business;
(b) in the process of production for such sale; or
(c) in the form of materials or supplies to be consumed in the production process or in the rendering of
services.
Inventories : AS - 2
11.3
Inventories are then classified as :
(i) goods purchased and held for resale e.g. merchandise, computer software or land and other property
held for resale or
(ii) finished goods produced or
(iii) work-in-progress being produced by the enterprise and include materials, maintenance supplies, consumables
and loose tools to be used in the production process.
Net releasable value is defined as the estimated selling price in the ordinary course of the business less the
estimated costs of completion and estimated costs necessary to make the sale.
The standard provides that the acceptable basis for inventory valuation or measurement of inventories is
cost or net realisable value whichever is lower or less.
Cost: The cost impliedly means historical cost and comprises
(i) all costs of purchase,
(ii)
costs of conversion and
(iii) other costs incurred to bring the inventories to their present location and condition.
Interest and other borrowing costs are usually not related to bringing the inventories to their present location
and condition and hence, usually not included in the cost of inventories.
The following costs are expenses and are excluded from the costs of inventories :
(i) abnormal amounts of wasted materials, labour or other production costs;
(ii) storage costs;
(iii) administrative overheads that do not contribute to bringing the inventories to their present location
and condition and selling and distribution costs.
Cost formulas : AS-2 (Revised) then mentions various formulas for determining the historical cost such as
(i) Specific identification of cost, (ii) First-in-First-out (FIFO) and (iii) Weighted average cost. The standard
emphasises that the formula used should reflect the fairest possible approximation to the cost incurred in bringing
the items of inventory to their present location and condition.
Techniques for the measurement of costs : Standard cost method or the retail method may be used for convenience
if the results approximate the actual cost.
Inventory valuation below cost : Net realisable value should be used for inventories that are damaged or
they have become wholly or partially obsolete or if their selling price has declined. Estimates of net realisable
value must be based on the most reliable evidence available at the time the estimates are made as to the amount
of inventories are expected to realise. However, materials and other supplies held for use in the production
of inventories are not written down below cost if the finished products in which they will be used are expected
to be sold at or above cost. But when there has been a decline in the price of the materials and it is estimated
that the cost of the finished products will exceed net realisable value, the materials are written down to net
realisable value. In such cases, the replacement cost of materials may be the best available measure of their
net realisable value.
When an enterprise purchases the inventories in instalments, the difference between the purchase price for
normal credit terms and amount paid is to be treated as interest expense over the period of financing as the
procedure or arrangement consists of financial element (Amendment in As-2).
Nature of the standard : AS – 2 (Revised) is mandatory in nature. It implies that it is the duty of the
auditor to examine whether this accounting standard is complied with in the presentation of financial statements
11.4
Financial Accounting: Concepts and Applications
covered by their audit. In the event of any deviation from this accounting standard, it will be their duty to
make adequate disclosures in their audit reports so that the users of financial statements may be aware of
such deviations.
Disclosure requirements : The financial statements should disclose :
(a) the accounting policies adopted in measuring inventories, including cost formula used and
(b) the total carrying amount of inventories and its classification appropriate to the enterprise. Common
classifications of inventories are raw materials components, work-in-progress, finished goods, stores
and spares and loose tools.
Non-applicability : This standard does not apply to or does not include following items of inventory :
(a) work-in-progress arising under construction contracts including directly related service contracts (See
AS-7 : Accounting for Construction Contracts);
(b) work-in-progress arising in the ordinary course of business of service providers;
(c) shares, debentures and other financial instruments held as stock-in-trade;
(d) producers’s inventories of livestock, agriculture and forest products and mineral oils, ores and gases
to the extent they are measured at net realisable value.
OBJECTIVE AND SCOPE OF IND. AS-2
The standard lays down the accounting treatment of inventories. The main issue relating to the accounting
for inventories is the determination of cost to be recognised as asset until related revenue is recognised. The
standard also provides guidance on cost formula used to assign cost.
Ind.AS (IAS)-2 applies to all inventories except the following:
(i) Work-in-progress arising from construction contracts.
(ii) Financial instruments (Refer to Ind.AS 32)
and Ind.AS 109: Financial Instruments : Presentation
(iii) Biological assets relating to agricultural activity and agricultural produce at the point of harvest (Ind.AS
41 : Agriculture)
(iv) Producers of agricultural and forest products, agricultural produce after harvest and minerals and mineral
products measured at net realisable value in accordence with well-establised practices followed in the
industries.
(v) Commodity Broker-traders who measure Inventories at Fair Value less cost to sell. The reason is that
when Inventories are measured at fair value less costs to sell, changes in fair value less cost to sell are
automatically recognised in the income statement (Profit and Loss Statement) in the year of change.
DEFINITIONS
(i) Inventories are assets that are:
•
held for sale in ordinary course of business
•
in the process of production for such sale
•
in the form of materials or supplies to be consumad or used in the production process or in rendering
or provision of services.
(ii) Fair value: The price that would be received on sale of an asset or a liability extinguisted (or paid to
transfer a liability) in an orderly transaction between willing independent traders (or market participants)
at measurement date.
Inventories : AS - 2
11.5
(iii) Net realisable value: Net realisable value is the estimated selling price (or net amount that an entity
expects to realise from sale of inventories) in ordinary course of business less costs of completion
and costs (estimated) of sale.
Notes:
(i)
Net realisable value relies on specific business of the firm
(ii) Net realisable value may not be related to market price when the firm is supplying goods to clients
at contract prices
(iii) Fair value is concerned with the market rather than to individual contract.
MEASUREMENT
Inventories are measured at the lower of cost and net realisable value.
COST OF INVENTORIES
The cost of inventories includes all costs of production or purchase, costs of conversion and other costs
incurred in bringing the inventories to their present location and condition.
Costs of purchase : The costs of purchase include purchase price plus non recoverable taxes and duties
(Import) plus transport and handling costs and other directly attributable costs minus trade discount and
rebates
Costs of Conversion : It includes costs such as direct labour costs, allocation of fixed and variable production
overheads incurred in converting materials into finished goods.
Other costs are costs that are incurred to bring inventories to present condition and location. These include
inward transportation and storage prior to completion of production and specific design work required for
a special client. Borrowing costs can be included in cost of inventories if goods are bought on instalment
basis and price includes a financing element. Financing element is an interest expense over the period of
credit.
COST FORMULAS
The cost of inventories should be measured as follows:
(a) for interchangeable itam:
(i)
FIFO (First-in-first-out)
(ii) Weighted Average Cost Method
(b) For non-interchangeable item
Use Specific Identification Method
Notes : Use of LIFO (Last-in-first-out) is not allowed.
COSTS NOT INCLUDED
The following elements of cost are not included in the calculation of cost of inventory:
(i) Administrative overheads
(ii) Storage costs unless these are necessary in the productive process before the finished product stage
(iii) Abnormal waste
(iv) Selling and marketing costs
11.6
Financial Accounting: Concepts and Applications
RECOGNITION AS AN EXPENSE
When inventories are sold, the carrying amount of these inventories shall be recognised as an expense in the
period in which the related revenue is recognised.
DISCLOSURE
The financial statements shall disclose the following information:
(i) Accounting policies adopted in measuring inventories including the cost formula used
(ii) Total carrying amount of inventories and classification of carrying amount
(iii) The carrying amount of inventory carried at fair value less costs to sell
(iv) Amount of inventories recognised as expense in the accounting period.
(v) Amount of any written down of inventories recognised as an expense in the accounting period
(vi) Amount of any reversal of any write down that is recognised as a reduction in the amount of inventories
recognised as an expense and circumstances that led to reversal of write down
(vii) Carrying amount of inventories pledged as security for liabilities.
INVENTORY SYSTEMS
There are two principal systems of determining the physical quantities and rupee value of inventories sold
and in hand. One is known as the periodic inventory system and the other as the perpetual inventory system.
(i) Periodic Inventory System
This system requires a physical count of all the inventory items on hand at specific times. The calculation of
ending inventory on hand is done by taking an actual physical count (or measure or weight) at the end of an
accounting period and then quantity on hand is multiplied by the cost per unit.
The benefits of annual count are :
(a) Where the physical counting is done on the accounting date, all corrections made will ensure the accuracy
of the inventory figure shown in the accounts. In fact, where continuous stock-taking regularly shows
significant differences, it is essential to make a year-end physical count to ensure the accuracy of the
accounts.
(b) It is less expensive than a continuous inventory system.
The following drawbacks of this method may be noted :
(i) Periodic inventory method is based on the assumption that all goods not accounted or traceable by
physical inventory count have been either sold or used. In this manner the losses due to theft, waste,
evaporation etc. are included improperly in the cost of the goods sold.
(ii) Physical counting at the end of accounting period would adversely affect normal business operations
for a number of days. The business units, using this method, often suspend their sales and employ
practically the entire staff on the physical count and measurement of the items on hand.
(iii) In case income statements are required more frequently than once a year, it would be very expensive if
the inventory figures are obtained only by physical count.
(ii) Perpetual Inventory System
In contrast to the periodic system, the perpetual inventory system requires continuous updating with each
purchase or sale transaction. A separate account for each type of inventory is maintained in a card or sheet to
Inventories : AS - 2
11.7
record the purchase and sale of each inventory item throughout the year. The system is integrated in accounting
records by maintaining usual ledger accounts for each inventory item. The detailed inventory records for
each different item must show : (a) Receipts (Purchases); (b) Issues (Sales), and (c) Balance on hand,
usually in both quantities and rupee amounts. When goods are purchased or sold, the inventories must be
adjusted immediately. In accounting terminology, the increases in inventory items are recorded as debits
(or receipts) to the appropriate accounts and decreases (sales) are recorded as credits; the balances of the
inventory items accounts are called the book inventories of the items on hand. The quantities of goods on
hand as shown by the records must be in agreement with the actual quantity on hand. It is relevant to
state that the use of perpetual inventory method does not eliminate the need for a physcial count and
valuation.
The benefits of a perpetual inventory system may be noted as :
(i) The normal business operations are not interrupted and there is no need to put' closed for inventory
taking' signs either in departments or in entire business.
(ii) It obviates the need for stock taking by actual count at the end of financial period.
(iii) In some cases the volume of inventory items may be such as to make a complete count in one day
impossible.
(iv) In a large business, special staff may be employed for stock taking so that a greater degree of skill
in performing the job is built up.
(v) Controlling losses is easier under a perpetual system because inventory records continuously indicate
the goods that must be on hand.
(vi) There is no sudden 'out of stock.' situation leading to customer dissatisfaction or need to shut down
production lines.
(vii) In case there are irregularities or changes in procedures by storekeepers, it may lead to thorough
enquiry and investigation into the same.
Perpetual inventory system is costly to maintain especially for those business firms which deal with
numerous items of small value but the benefits as noted above are not less significant.
POINTS OF DIFFERENCE
(i) Periodic inventory system requires a physical count of all the inventory items on hand whereas perpetual
inventory system is based on continuous record keeping of various items of inventories.
(ii) Periodic system of inventory valuation provides a periodic stewardship of the inventory and little
is known about the exact composition and amount of inventory items between actual counts in the
beginning and at the end. Perpetual system provides a continuous stewardship of the inventory.
Inventory records are continuously updated so that financial statements can be prepared at shorter
intervals.
(iii) Perpetual system provides a basis for inventory control so that physical stocks can be compared
with book records and discrepancies, if any, investigated. This is not feasible under the periodic
system.
(iv) Periodic system is comparatively simple and less expensive while detailed records and high cost of
maintaining them are must for perpetual system.
(v) Under periodic system, inventory is directly determined and cost of sales is taken as residual figure.
In perpetual system, cost of sales is directly determined and inventory is taken as residual figure.
11.8
Financial Accounting: Concepts and Applications
(vi) Under periodic system, cost of sales includes lost goods. In perpetual system, inventory includes lost
goods.
METHODS OF VALUATION OF INVENTORIES
The following methods of inventory valuation are in use : (i) Specific identification of costs; (ii) First-in,
First-out (FIFO); (iii) Last-in, First-out (LIFO); (iv) Weighted average method
(i) Specific Identification of Costs
The essential feature of the specific identification method is that the cost is marked on the unit or on its
container or the unit can be located to its purchase invoice or cost record. This method of valuing inventory
and cost of goods sold is feasible in those situations where purchases are not frequent and old items do not
easily mix up with the new ones e.g., automobiles, the fine diamonds, furniture goods and so on. Thus, this
method is appropriate for enterprises that sell relatively few items of high unit cost. This is an appropriate
treatment for items that are segregated for a specific project regardless of the fact whatever they have
been purchased or produced [AS-2 (Revised) Paragraph 15). The specific identification method is rational
and highly satisfactory in matching cost with revenue because of its objectivity since actual costs are
attached to the cost of goods and ending inventory.
Difficulties
In most situations, however, it is neither feasible nor practicable to identify each item of inventory and, therefore,
the practice of specific identification of cost may be difficult or impossible to apply or may be considered
inadequate because of special existing conditions. New items are mixed up with old units in common storage
facilities, that is, on shelves or in bins or in other ways. Physical identification is, therefore, impossible or
impracticable. The complications also arise when identical units of a particular inventory item have been bought
at different prices and at different times. In such a circumstance, specific identification of costs procedures
may prove to be slow, burdensome and costly. For example, a dealer buys different quantities of wheat at
different times and at different prices. The 'additions' to the current stock is a continuing proces, while he is
selling his stocks to his customers. It would be impossible to identify the wheat stocks in continuing process,
while he is selling his stocks to his customers. It would be impossible to identify the wheat sold at the time
of purchase and its related purchase price. Furthermore, when units are identical and interchangeable, this
method opens the doors to possible profit manipulation through the choice of particular units for delivery.
For example, if the management wants to report a higher income, it would simply make sure that the units
sold were taken from a lot of lower cost. Finally frequent changes in the acquisition costs during the accounting
period may force to charging of inventory expenses to revenue on a basis other than past identifiable costs.
(ii) First-In, First-Out (FIFO)
This method is based on the assumption that cost should be charged to revenue in the order in which they are
incurred, that is, first units received are the first ones to be sold or the units sold in the order in which they
were acquired. The ending-inventory is therefore, assumed to be consisting of goods most recently purchased.
In sum, FIFO assigns the cost of the earliest units acquired to the withdrawals (issues) and the cost of the
most recent acquisition to the ending inventory. The FIFO formula assumes that the items of inventories which
were purchased or produced first are consumed or sold first and consequently items remaining in inventory
at the end of the period are those most recently purchased or produced. It must be kept in mind that this
assumption of cost flow or goods flow need not be true as a physical fact. It relates only to the method
of accounting and not to the actual physical movement of the goods.
Evaluation of FIFO Method
FIFO method of inventory valuation has the following advantages :
(i) The assumption that goods purchased first are sold first is in accord with the good and efficient management
practice that minimises losses from spoilage and deterioration.
Inventories : AS - 2
11.9
(ii) FIFO eliminates the opportunities for income manipulations that are possible if costs are identified
with specific units. The reason is that for accounting purpose, assignment of costs against revenue is
determined by the order in which costs are incurred regardless of which items are actually sold.
(iii) The cost of goods sold closely follows the price trend in market as the goods purchased are assumed to
have been sold first, provided there is rapid turnover of inventories; the faster the turnover, the more
recent are the historic costs.
(iv) FIFO provides a more useful valuation of ending inventory than other methods. The most recent purchases
are more indicative of current replacement costs than those purchased earlier.
(v) FIFO is simple to operate especially when price level changes are minimum.
(vi) FIFO is systematic and objective.
The major weakness of the FIFO is that where production cycle is lengthy, it can result in unrealistic
measurement of profit in times of changing prices. FIFO does not then match current costs of goods sold
with current revenues. Instead, the old units costs are matched with the current sales revenue. So in a period
of inflation, income will tend to be overstated and when prices are falling, reported net income will tend to
be understated. Other things being equal, users of FIFO method pay more taxes currently when prices are
rising. There are also serious practical disadvantages of FIFO method when many lots are purchased
during the period at different prices or when goods are returned to stock after subsequent lots have
been sold.
Illustration 1 (FIFO : Perpetual Inventory System)
From the following transactions calculate the cost of ending inventory and cost of goods sold by applying
FIFO method under perpetual and periodic inventory systems respectively :
Date
January
1
February
March
March
April
May
June
10
13
20
6
12
30
Transactions
Units
Price Per Unit
Opening balance
brought forward
Purchases
Purchases
Sold
Sold
Purchases
Sold
1,000
500
400
1,200
500
400
500
20
25
22
....
....
25
....
Solution
FIFO (Perpetual)
Date
Receipts (Purchases)
Units
Unit
Price
`
Issues (Sales)
Amount
Units
Unit
Price
`
`
Balance (Stock-in hand)
Amount
—
500
—
25
—
12,500
—
—
—
—
—
—
Mar. 13
400
22
8,800
—
—
—
Mar. 20
—
—
—
April 6
—
—
—
1,000
200
300
200
May 12
400
25
10,000
—
June. 30
—
—
—
200
300
20
25
25
22
]
]
—
]
22
25
20,000
5,000
7,500
4,400
]
]
—
]
Unit
Price
`
1,000
1,000
500
1,000
500
400
300
400
20
20
25
20
25
22
25
22
`
Jan. 1
Feb. 10
]
]
Units
4,400
7,500
]
]
]
]
200
200
400
100
]
]
]
22
]
22
25
25
Amount
20,000
20,000
12,500
20,000
12,500
8,800
7,500
8,800
]
]
]
4,400
]
4,4,00
10,000
2,500
]
11.10
Financial Accounting: Concepts and Applications
Answer : Perpetual System: Ending Inventory = 100 × ` 25 = ` 2,500
Cost of Goods Sold ` 25,000 + ` 11,900 + 11,900 = ` 48,800
Periodic System : The ending inventory is 100 units and it would be assumed to be part of the most recent purchases because
goods of old costs are assumed to be sold first under FIFO. The cost of the ending inventory is : 100 × 25 = 2,500 and therefore
the cost of the goods sold is ` 48,800 (i.e., ` 51,300–` 2,500)
(iii) Last-In, First-Out (LIFO)
As its name implies, the last-in, first-out assigns, to goods sold, the cost of those goods that have been purchased
last. Hence, the stock-in-hand (ending inventory) is valued at earlier cost. It is based on the assumption that,
irrespective of actual physical flow of goods, the goods-sold are those that have been acquired last and the
goods that remain unsold (ending inventory) are those that have been acquired first. So cost of goods sold
is based on the price of recently purchased goods and the ending inventory represents the cost of earlier
purchases.
Advantages
(i) Matching current costs with current revenues : The main purpose of inventory valuation is to match
costs of goods sold or produced with the revenues they generate. LIFO method aims to match the current
costs of acquiring or producing the goods with the current revenues from the sales. The cost of goods
sold under this method represents the cost of recent purchases with the result that there is better matching
of current costs with current revenues.
(ii) In periods of inflation, the higher costs of goods sold are charged against the sales revenues because
the basis is the most recent purchases. The ending inventory is valued at lower cost of old purchases.
The net result is the reduction in the net income for tax purposes. The saving in tax creates additional
working capital because of less cash outflows.
(iii) It reflects the usual pricing policy of the business enterprise i.e., increased selling price when replacement
cost increases even though ending inventory is still at old lower cost.
(iv) It is systematic.
Disadvantages
(a) It understates the assets because inventory on the assets side of the balance sheet is valued at old
and out of date unit costs.
(b) It is true that LIFO provides a better matching of current costs with current revenues but it does not
correctly match total replacement cost with revenue. Cost of only the most recent purchases are charged
against sales revenues rather than the total costs of replacing all the items sold.
(c) Cost flows do not correspond to the physical flows of goods.
(d) It confuses two distinct processes : (i) the measurement of income and (ii) utilisation of income.
(e) It is comparatively difficult to apply.
Illustration 2 (LIFO : Perpetual Inventory System)
Using the data given in Illustration 1, show the application of LIFO under perpetual and periodic
methods respectively.
Solution
LIFO (Perpetual)
Purchases
Date
Quantity
Unit
Cost
`
1
—
Feb. 10
500
Jan.
Sales
Total
Cost
`
Quantity
—
—
25
12,500
Balance
Unit
Cost
`
Total
Cost
`
Quantity
—
—
—
1,000
—
—
—
1,000
500
Unit
Cost
`
]
Total
Cost
`
20
20,000
20
20,000
25
12,500
]
Inventories : AS - 2
March 13
400
11.11
22
8,800
—
—
—
1,000
500
March 20
—
—
—
400
500
300
] ]
22
8,800
25
12,500
20
6,000
400
]
]
20
20,000
25
12,500
22
8,800
700
20
14,000
April
6
—
—
—
500
20
10,000
200
20
4,000
May
12
400
25
10,000
—
—
—
200
400
20
25
4,000
10,000
June
30
—
—
—
400
20
2,000
100
]
25
20
]
10,000
2,000
]
]
100
]
]
Answer : Perpetual Ending Inventory = 100 × 20 = ` 2,000
Cost of Goods Sold = ` 27,300 + ` 10,000 + ` 12,000 = ` 49,300.
Periodic System
Ending Inventory = 100 × 20 = ` 2,000
So the cost of goods sold is = ` 49,300 (i.e., 51,300 – 2,000)
We find that the cost of ending inventory and cost of goods sold respectively are the same under perpetual and periodic systems
because the ending inventory is much lower than the beginning inventory, However, under LIFO assumptions, it is possible to
have different inventory values under perpetual and periodic systems.
Illustration 3 (LIFO : Perpetual Inventory System)
From the following information calculate the cost of goods sold and ending inventory respectively applying
the LIFO :
Date
Transactions
Units
Opening Stock
200
10
Purchases
400
12
February 12
Withdrawls
500
—
March
16
Purchases
300
11
May
19
Sales
200
—
June
30
Receipts
100
15
January
1
January
10
Unit Cost
`
Solution
LIFO (Perpetual)
Received
Date
Units
Unit
`
1
10
—
400
Feb. 12
Issued
Balance
Amount
`
Units
—
12
—
4,800
—
—
—
—
—
March 16
300
11
3,300
400
100
—
May 19
—
—
—
200
11
2,200
June 30
100
15
1,500
—
—
—
Jan.
Jan.
Unit
`
—
—
]
12
10
—
]
Amount
`
Units
—
—
200
200
400
4,800
1,000
—
]
100
100
300
100
100
100
100
100
Units
`
]
]
]
10
10
12
10
10
11
10
11
10
11
15
]
]
]
] ]
Amount
`
2,000
2,000
4,800
1,000
1,000
3,300
1,000
1,100
1,000
1,100
1,500
]
]
]
]
11.12
Financial Accounting: Concepts and Applications
Answer : Perpetual System
Cost of goods sold is : ` 8,000 (` 5,800 + ` 2,200)
Ending Inventory : ` 3,600 (1,500 + 1,100 + 1000)
Periodic System
Under periodic method the cost of ending inventory would be calculated as follows :
`
Earliest cost relating to goods
January 1 : 200 Units @ ` 10
2,000
Next earliest cost January 10 : 100 units @ ` 12
1,200
3,200
Cost of Goods Sold = ` 8,400 (` 11,600 – ` 3,200)
(iv) Weighted Average Method
The weighted average method of inventory valuation is based on the assumption that all costs can be aggregated
and that the cost to be assigned to cost of goods sold and ending inventory should be the weighted average
of the cost of the units held for the accounting period. The weighted average unit cost is calculated by dividing
the total cost (i.e., Quantity × Cost Per Unit) of similar units of each commodity available for sale during
the given period by the the related number of units (aggregate quantity) of that commodity. This is the procedure
under periodic method.
The weighted average assumes no particular flow of goods.
Moving average cost : When a perpetual inventory system is used, the weighted average cannot be applied
because weighted average unit cost cannot be calculated until the end of the accounting period. To overcome
this difficulty, a moving weighted average unit cost is used because it provides a new unit cost after each
purchase. The procedure is : prices for units in the beginning inventory (i.e., opening stock) and in each
purchases are multiplied (weighted) by the number of units in the beginning inventory and in each purchase
and are then averaged (divided by total number of units) to find out the weighted average cost per unit.
Thus, when goods are sold or issued, the moving average unit cost existing at that time is used. It may be
added that a new weighted average unit cost is calculated after each purchase at a different price and this
unit cost figure is used to price all issue of goods until the next purchase is made. Application of the moving
average concept in a perpetual inventory system is explained in Illustration 4 given below:
Illustration 4 (Weighted Average Method)
Using the information given in Illustration 1, explain the weighted average method under : (a) perpetual
inventory system and (b) periodic system for calculating cost of ending inventory and cost of goods sold.
Weighted Average (Perpetual)
Date
Received
Quanitity
Unit
Cost
`
Issued
Total
Cost
`
Quantity
Unit
Cost
`
Balance
Total
Cost
`
Quantity
Weight
Average
`
Total
Cost
`
Jan.
1
—
—
—
—
—
—
1,000
20.00
20,000
Feb.
10
500
25
12,500
—
—
—
1,500
21.67
32,500
March 13
400
22
8,800
—
—
—
1,900
21.74
41,300
March 20
—
—
—
1,200
21.74
26,088
700
21.74
15,218
April
6
—
—
—
500
21.74
10,870
200
21.74
4,348
May
12
400
25
10,000
—
—
—
600
23.91
14,346
June
30
—
—
—
500
23.91
11,955
100
23.90
2,390
Inventories : AS - 2
11.13
A comparative study of two systems, under FIFO, LIFO and Weighted Average Based on Illustrations 1, 2 and 4
Perpetual Inventory System
Methods
Periodic Inventory System
Cost of
Ending
Inventory
`
Cost of
Goods
Sold
`
Cost of
Ending
Inventory
`
Cost of
Goods
Sold
`
FIFO
2,500
48,800
2,500
48,800
LIFO
2,000
49,300
2,000
49,300
2,390
48,910
2,230
49,070
Weighted
Average (Moving)
In order to apply weighted average method on a periodic basis, a cost is assigned to all goods, that is, to
those that were sold and those in inventory at the end. That represents the weighted average of the cost of all
goods available for sale during the period. The cost of the goods on hand at the beginning of the year as well
as those purchased during the year would be taken into consideration in the calculation of the weighted average
as shown below by using the data in the foregoing Illustration. Ending inventory and cost of goods sold calculated
on Periodic Inventory System and a Weighted Average Cost Flow Assumption is as follows:
Date
Units
Unit Cost
`
Total Cost
`
Jan.
1
1,000
×
20
20,000
Feb.
10
500
×
25
12,500
March
13
400
×
22
8,800
May
12
400
×
25
10,000
2,300
51,300
Weighted Average : ` 51,300 ÷ 2,300 = ` 22.30.
Ending Inventory = ` 2,230 (100 × 22.30)
Cost of Goods Sold = ` 49,070 (Balancing Figure)
Weighted Average Method – An Evaluation
The weigthed average method is realistic in the sense that it represents the physical flow of goods when all
goods available for sale (i.e., beginning inventory plus all the purchases) are mixed together with one another.
This method is objective, consistent and does not permit profit manipulation. The weighted average approach
provides the same cost for similar items of equal utility. “In its general effect, the weighted average method
gives a middle course between the effects of FIFO periodic and LIFO periodic methods. So this method has
neither the strong advantages nor the disadvantages of those methods.” (Charles J Woelfel : Financial Accounting)
Illustration 5 (Calculation of Gross Profit)
A dress shop has the following transactions during September :
September 1
bought
1,200
blouses at ` 20 each
September 10
bought
400
blouses at ` 24 each
September 12
sold
400
blouses at ` 30 each
September 14
bought
600
blouses at ` 30 each
September 16
sold
800
blouses at ` 40 each
September 20
bought
600
blouses at ` 40 each
September 25
sold
700
blouses at ` 50 each
Compute : (i) the gross profit earned during September and
11.14
Financial Accounting: Concepts and Applications
(ii) the value of stock held on 30 September; using each of the following alternative basis of
valuation : FIFO, LIFO, and Weighted Average Cost.
Solution
Sales = (400 × 30) + (800 × 40) + (700 × 50) = ` 79,000
FIFO :
September 12 :
Sold
400
Stock
Cost of Sales
`
`
@ ` 20 (Cost)
800 × 20
400 × 24
September 16 :
Sold
800
@ ` 20 (Cost)
400 × 24
600 × 30
September 25 :
Sold
]
]
8,000
16,000
400
@ ` 24 (Cost)
9,600
300
@ ` 30 (Cost)
9,000
300 × 30
600 × 40
Cost of Sales
]
42,600
Gross Profit
36,400
Sales
79,000
Closing Stock : ` 9,000 + ` 24,000 = ` 33,000
LIFO :
September 12 :
Sold
Stock
Cost of Sales
`
`
400 × 24 (Cost)
9,600
1,200 × 20
September 16 :
Sold
600 × 30 (Cost)
18,000
200 × 20 (Cost)
4,000
1,000 × 20
September 25 :
Sold
600 × 40 (Cost)
24,000
100 × 20 (Cost)
2,000
900 × 20
Cost of Sales
57,600
Gross Profit
21,400
Sales (12,000 + 32,000 + 35,000)
79,000
Closing Stock : = ` 18,000
Weighted Average :
Stock
`
September 12 :
Sold 400 × 21
Cost of Sales
`
8,400
1,200 × 21
September 16 :
Sold 800 × 24
19,200
1,000 × 24
September 25 :
Sold 700 × 30
21,000
900 × 30
Cost of Sales
48,600
Gross Profit
30,400
Sales
79,000
Closing Stock : = ` 27,000
Students are adviced to use tables for details.
]
]
Inventories : AS - 2
11.15
Illustration 6 (Periodic Inventory System)
A company, started on 1 January 2020, purchased raw materials during 2017 as stated below:
January
2
800
kg.
@ ` 62 per kg.
February
26
1,200
kg.
@ ` 57 per kg.
April
13
2,500
kg.
@ ` 59 per kg.
July
10
3,000
kg.
@ ` 56 per kg.
September 18
1,500
kg.
@ ` 60 per kg.
November 29
1,000
kg.
@ ` 65 per kg.
While preparing its final accounts on 31 December 2020, the company had 1,300 kg. of raw materials in its
godown. Calculate the values of closing stock of raw materials and the cost of sales according to :
(i) First-In-First-Out (FIFO) basis,
(ii) Last-In-First-Out (LIFO) basis, and
(iii) Weighted Average basis.
Solution
Total Purchases : From January to November
10,000 kg.
Less : Closing Stock
1,300 kg.
Sales
8,700 kg.
`
FIFO
Cost of Ending Inventory
300 × 60 =
18,000
1,000 × 65 =
65,000
83,000
Cost of Sales
800 × 62 =
49,600
1,200 × 57 =
68,400
2,500 × 59 =
1,47,500
3,000 × 56 =
1,68,000
1,200 × 60 =
72,000
5,05,500
LIFO
Cost of Ending Inventory
500 × 57 =
28,500
800 × 62 =
49,600
78,100
Cost of Sales
1,000 × 65 =
65,000
1,500 × 60 =
90,000
3,000 × 56 =
1,68,000
2,500 × 59 =
1,47,500
700 × 57 =
39,900
5,10,400
Weighted Average
800 × 62 =
49,600
1,200 × 57 =
68,400
2,500 × 59 =
1,47,500
11.16
Financial Accounting: Concepts and Applications
3,000 × 56 =
1,68,000
1,500 × 60 =
90,000
1,000 × 65 =
65,000
Total Cost of Purchase
5,88,500
5,88,500
10,000
` 58.85
Cost of Ending Inventory
1,300 × 58.85 =
76,505
Cost of Sales
8,700 × 58.85 =
5,11,995
Weighted Average
Illustration 7
A company started its business on 1st January, 2020. It purchased and used raw material during the year 2017
as stated below:
@ ` 62 per kg.
January 10
Purchased 800 Kgs
February 28
Purchased 1,200 kgs @ ` 57 per kg.
March
10
Issued 1,000 kgs.
March
26
Issued 500 kgs.
May
20
Purchased 900 kgs @ ` 65 per kg.
June
28
Issued 600 kgs.
Calculate the value of closing stock of raw materials on June 30 according to
(i)
Last in First out basis, and
(ii) Weighted average basis, using perpetual inventory system.
Solution
Valuation of Inventories (LIFO)
Receipts
Date
2020
Issues
Balance
Units
kgs
Rate
`
Value
`
Units
Kgs
Rate
`
Value
`
Units
Kgs
Rate
`
Value
`
Jan.
10
800
62
49,600
–
–
–
800
62
49,600
Feb.
28
1,200
57
68,400
–
–
–
800
62
49,600
1,200
57
68,400
800
62
49,600
200
57
11,400
Mar.
Mar.
May
10
26
20
June 28
–
–
900
–
–
–
65
–
–
–
58,500
–
1,000
57
57,000
200
57
11,400
300
62
18600
500
62
31,000
–
–
–
500
62
31,000
900
65
58,500
500
62
31,000
300
65
19,500
600
65
39,000
Value of Closing Stock 31,000 + 19,500 =` 50,500
Inventories : AS - 2
11.17
Valuation of Inventories (Weighted Average Basis)
Receipts
Date
2020
Units
kgs
Rate
`
Issues
Value
`
Units
Kgs
Rate
`
Balance
Value
`
Units
Kgs
Rate
`
Value
`
(W.A)
Jan.
10
800
62
49,600
–
–
–
800
62
49,600
Feb.
28
1,200
57
68,400
–
–
–
2,000
59
1,18,000
Mar.
10
–
–
–
1,000
59
59,000
1,000
59
59,000
Mar.
26
–
–
–
500
59
29,500
500
59
29,500
May
20
900
65
58,500
–
–
–
1,400
62.86
88,000
Jan.
29
–
–
–
600
62.86
37,714
800
62.86
50,286
Value of Closing Stock ` 50,286
Illustration 8
From the following information find out the value of stock as on 31-3-2020 according to AS - 2 :
(i) Cost of Physical stock on 31-3-2020 was ` 2,00,000.
(ii) Cost of stock held as consignee was ` 40,000.
(iii) Stock was expected to realise the normal selling price of 150% of cost except for the following goods:
(a) goods costing ` 10,000 were damaged and an expenditure of 10% of normal selling price was
necessary to realise the cost.
(b) goods costing ` 20,000 were damaged beyond repair and were expected to realise ` 5,000 only.
Solution:
Cost of physical stock
Less :
2,00,000
Held as consignee
40,000
1,60,000
Less :
Expenditure to realise the cost :
Cost Price
Add :
10,000
Profit 50% of cost
5,000
Sale Price 150% of cost
15,000
Expenditure : 10% of ` 15,000
1,500
1,58,500
Less :
Loss on damaged goods ( 20,000 – 5,000)
15,000
1,43,500
Illustration 9
The following are the details of material of Sai Mills :
01-01-2020
Opening Stock
100 units @ ` 25 per unit
01-01-2020
Purchases
200 units @ ` 30 per unit
15-01-2020
Issued for consumption
100 units
01-02-2020
Purchases
400 units @ ` 40 per unit
15-02-2020
Issued for consumption
200 units
11.18
Financial Accounting: Concepts and Applications
20-02-2020
Issued for consumption
200 units
01-03-2020
Purchases
300 units @ ` 50 per unit
15-03-2020
Issued for consumption
200 units
Find out the cost of closing stock as on 31-3-2020 according to :
(i) First in first out basis, and
(ii) Weighted average price basis,
using perpetual inventory system. Also calculate cost of closing inventory on LIFO basis under periodic system.
Solutions
VALUATION OF STOCK (FIFO)
Purchases
Issues
Balance
Qty
Rate
Values
Qty
Rate
Value
Qty
Rate
Value
Units
`
`
Units
`
`
Units
`
`
—
—
—
—
—
—
100
25
2,500
100
25
2,500
01-10-20
01-10-20
200
30
6,000
15-10-20
—
—
—
100
25
01-02-20
400
40
16,000
—
—
15-02-20
—
—
2,500
200
30
6,000
200
30
6,000
200
30
6,000
400
40
16,000
—
200
30
6,000
400
40
16,000
20-02-20
—
—
—
200
40
8,000
200
40
8,000
01-03-20
300
50
15,000
—
—
—
200
40
8,000
300
50
15,000
300
50
15,000
15-03-20
—
—
—
200
40
8,000
Value of Closing Stock (FIFO) = ` 15,000
VALUATION OF STOCK (WEIGHED AVERAGE)
Date
Purchases
Qty
Units
Rate
`
01-01-20
—
—
01-01-20
200
30
Issues
Value
`
Balance
Qty
Units
Rate
`
Value
`
Qty
Units
Rate
`
Value
`
W.A
—
—
—
100
25
2,500
25
—
—
—
100
25
2,500
200
30
6,000
28.33
5,667
28.33
6,000
01-01-20
—
—
—
100
28.33
2,833
200
28.33
01-02-20
400
40
16,000
—
—
—
200
28.33
5,667
400
40
16,000
36.11
15-02-20
—
—
—
20-02-20
—
01-03-20
300
50
15,000
15-03-20
—
—
—
Value of Closing Stock (W.A) = ` 13,337
200
36.11
7,222
400
36.11
14.445
36.11
200
36.11
7,222
200
36.11
7,222
36.11
—
—
200
36.11
7,222
44.45
300
50
15,000
300
44.45
13,337
200
44.45
8,890
44.45
Inventories : AS - 2
11.19
Value of Closing stock as per LIFO basis under Periodic System.
No. of unsold units : (100 + 200 + 400 + 300) – (100 + 200 + 200 + 200)
= 1,000 – 700 = 300 units
Value of stock (LIFO):
100 units @ ` 25
2,500
200 units @ ` 30
6,000
8,500
Illustration 10
From the following information calculate cost of sales, gross profit, and value of closing stock for the month
of January, 2020 according to FIFO, LIFO and weighted average method.
Date
Particulars
No. of Units
Rate per Unit
(`)
01-01-2020
Opening Stock
500
8
05-01-2020
Purchased
800
9
14-01-2020
Purchased
700
9
21-01-2020
Purchased
1,000
10
23-01-2020
Purchased
During January 2020
Sold
500
9
2,900
17
Solution
Opening Stock of Material
Add:
500 units
Purchase of Material
3,000 units
[800 + 700 + 1000 + 500]
3,500 units
Less: Quantity of Material sold
2,900 units
Closing Stock of Material
600 units
(i) FIFO Method
Cost of Closing Stock
= (500  ` 9) + (100  `10)
= ` 4,500 + ` 1,000 = ` 5,500
Cost of Goods sold
= (500 ` 8) + (800 ` 9) + (700 ` 9) + (900 ` 10)
= ` 4,000 + ` 7,200 + ` 6,300 + ` 9,000 = ` 26,500
Sales Value
= ` 2,900 ` 17 = ` 49,300
Gross Profit
= ` 49,300 – ` 26,500 = ` 22,800
(ii) LIFO Method
Cost of Closing Stock
= (500  ` 8) + (100  ` 9)
= ` 4,000 + ` 900 = ` 4,900
Cost of Goods sold
= (500 `9) + (1,000  ` 10) + (700  ` 9) + (700  ` 9)
= ` 4,500 + ` 10,000 + ` 6,300 + ` 6,300 = ` 27,100
Sales Value
= 2,900 ` 17 = ` 49,300
Gross Profit
= ` 49,300 – ` 27,100 = ` 22,200
(iii) Weighted Average Method
Cost of total Goods
= [(500 ` 8) + (800 ` 9) + (700 ` 9) + (1,000 ` 10) + (500 `9)]
= ` 4,000 + ` 7,200 + ` 6,300 + ` 10,000 + ` 4,500 = `32,000
11.20
Financial Accounting: Concepts and Applications
Total Quantity of Material
= [500 + 800 + 700 + 1,000 + 500] = 3,500 units
Weighted Average price
=
Cost of Closing Stock
= 600  ` 9.14 = ` 5,484
Cost of Goods sold
= 2,900  ` 9.14 = ` 26,506
Sales Value
= 2,900  ` 17 = ` 49,300
 Gross Profit
= ` 49,300 – ` 26,506
` 32,000
 ` 9.14 per unit
3,500
= ` 22,794
Alternately
Cost of the Goods Sold:
(500 × 8) + (800 × 9) + (700 × 9) + (1,000 × 10)
= 4,000 + 7,200 + 6,300 + 10,000 = 27,500
Total Quantity of Material = 3,000 units
Weighted Average = 27,500 ÷ 3000 = 9.17
Balance of Quantity after issue : 3,000 – 2,900 = 100
Rate of Receipt on Last purchase:


Closing Stock
(100  9.17)  (500  9)
100  500
917  4500
600

5417
 9.03
600
= 600 × 9.03 = 5,418
Cost of Goods sold:
(500 × 8) + (800 × 9) + (700 × 9) + (1,000 × 10) + (500 × 9)
= 4000 + 7200 + 6300 + 10,000 + 4,500 = 32,000
Less: Closing stock
5,418
26,582
FOR YOUR COMMENTS
Please send your comments in writing on the above treatment. This procedure is usually adopted where the final
accounts are yet to be prepared.
lllustration 11
The following are the details of material in respect of a certain item of M/s. Ajay & Company.
01-01-2020
Purchases
600 units @ ` 20 each
01-02-2020
Purchases
200 units @ ` 24 each
15-02-2020
Sales
200 units @ ` 30 each
01-04-2020
Purchases
300 units @ ` 30 each
15-04-2020
Sales
400 units @ ` 40 each
01-06-2020
Purchases
300 units @ ` 40 each
15-06-2020
Sales
350 units @ ` 50 each
Inventories : AS - 2
11.21
Find out the cost of closing stock as on 30-6-2020 according to:
(i) First-in-first out basis; and
(ii) Weighted average basis, using perpetual inventory system.
Solution
Dr.
Store Ledger FIFO Basis
Purchases (In)
Date
Units
Cr.
Cost of Sales (Out)
Units
Stock
Rate
Amount
Rate
Amount
`
`
`
`
Units
Rate
Amount
`
`
01-01-20
600
20
12,000
—
600
20
12,000
01-02-20
200
24
4,800
—
600
20
12,000
200
24
4,800
400
20
8,000
200
24
4,800
400
20
8,000
200
24
4,800
15-02-20
01-04-20
15-04-20
01-06-20
—
300
30
200
9,000
—
40
15-06-20
4,000
—
400
300
20
20
8,000
12,000
—
300
30
9,000
200
24
4,800
300
30
9,000
200
24
4,800
300
30
9,000
300
40
12,000
200
24
4,800
150
30
4,500
150
30
4,500
300
40
12,000
16,500*
Dr.
Weighted Average Cost Basis
Purchases (In)
Date
Units
Cr.
Cost of Sales (Out)
Units
Stock
Rate
Amount
Rate
Amount
`
`
`
`
Units
Rate
Amount
`
`
01-01-20
600
20
12,000
—
600
20
12,000
01-02-20
200
24
4,800
—
600
20
12,000
200
24
4,800
800
21
16,800
600
21
12,600
600
21
12,600
300
30
9,000
15-02-20
01-04-20
—
300
15-04-20
01-06-20
30
200
9,000
—
300
15-06-20
*Value of Closing Stock
40
—
21
4,200
—
400
12,000
24
9,600
—
350
30
10,500
900
24
21,600
500
24
12,000
500
24
12,000
300
40
12,000
800
30
24,000
450
30
13,500*
11.22
Financial Accounting: Concepts and Applications
Illustration 12
Following information is extracted from the books of Satyam India for the month of April 2020:
` 10,00,000
Sales
` 30,000
General Administration Cost
Opening Stock:
95,000 units @ ` 5 each
` 4,75,000
Purchases:
April
7
2,00,000 units @ ` 3.00 per unit
29
75,000 units @ ` 4.00 per unit
30
Closing Stock 1,20,000 units
Compute the following by FIFO and Weighted Average Method of inventory valuation:
(a) Value of stock on April, 30.
(b) Cost of goods sold for April.
(c) Profit or Loss for April.
Solution
(a)
FIFO Method
(i)
Inventory on April, 30
Units
Rate
Amount
`
`
45,000
3
1,35,000
75,000
4
3,00,000
1,20,000
Closing Stock
4,35,000
(ii) Cost of goods sold for April
`
Opening Stock
4,75,000
Add: Purchases April 7
6,00,000
April 29
3,00,000
9,00,000
13,75,000
Less : Closing Stock
Cost of goods sold
4,35,000
9,40,0000
(iii) Profit or Loss for April
Cost of goods sold
Add : General Administration cost
Total Cost
(+) Profit [Balancing Figure]
Sales
(b)
30,000
9,70,000
30,000
10,00,000
Weighted Average Method
(i) Inventory on April 30 :
Rate on Receipt of 1 st Purchase :

9,40,000
(95, 000  5)  (2,00, 000  3)
2,95, 000
Inventories : AS - 2

11.23
10,75,000
2,95,000
= 3.644
Balance of units after issue of 2,50,000 units = 2,95,000 – 2,50,000
= 45,000 units
Rate after Receipt of last Purchase 

4,63, 980
1,20,000
(45,000  3.644)  (75,000  4)
45,000  75,000
 3.867
Closing Stock = 1,20,000 units × 3.867 = 4,64,040
or
` 4,63,980
The difference of ` 60 is on account of Rounding up
(ii)
Cost of goods sold
`
Opening Stock
Add :
4,75,000
Purchase April 01
6,00,000
April 29
3,00,000
9,00,000
13,75,000
Less :
Closing Stock
4,64,040
9,10,960
(iii) Profit or Loss for April
Cost of Goods Sold
9,10,960
Add : General Administration cost
30,000
Total Cost
9,40,960
Profit
59,040
Sales
10,00,000
Illustration 13 (Damaged Stock)
From the following details, find out closing stock as per FIFO Method:
Purchase :
2020
February
March
4
20 units
@ ` 15 per unit
17
30 units
@ ` 14 per unit
2
40 units
@ ` 14.50 per unit
30
50 units
@ ` 13.00 per unit
20
25 units
@ ` 20 per unit
5
40 units
@ ` 21 per unit
10
10 units
@ ` 18 per unit
31
45 units
@ ` 15 per unit
Sales:
2020
February
March
On 20 th March, 2020: two units sold on 10 th March, 2020 were returned by the customers. On 29 th March,
2020 : one unit was damaged and it had to be discarded. Also calculate profit.
Rate
`
Units
20
30
—
40
—
—
2
(Returned)
—
50
—
2020
Feb.4
Feb. 17
Feb. 20
March 2
March 5
March 10
March 20
March 29
March 30
March 31
Less : Returned
Cost of Goods sold
—
13.00
—
14.50
—
—
14.50
—
14.00
15.00
Receipt
Date
Solution
—
650
29
—
—
580
—
420
300
Amount
`
14.50
15.40
13.00
16
29
2
—
—
—
14.50
14.00
14.50
—
15.00
14.00
—
—
Rate
`
—
1 (Damaged)
—
10
25
15
—
20
5
Units
Issues
(Stores Ledger : FIFO)
1,706
29
1,677
246.50
377.00
—
—
—
145.00
350.00
217.50
—
300
70
—
—
Amount
`
21
16
50
–1
16
15
+2
17
15
25
25
40
25
20
30
20
Units
Rate
`
13
15.40
13.00
—
15.40
(App.)
14.50
14.50
14.50
14.50
14.50
14.00
14.50
14.00
15.00
14.00
15.00
Balance
273
246.50
650
—
246.50
217.50
29.00
246.50
217.50
362.50
350
580
350
300
420
300
Amount
`
11.24
Financial Accounting: Concepts and Applications
Inventories : AS - 2
11.25
Calculation of Profit
`
Sales
[(25 × 20) + (40 × 21) + (10 × 18) + (45 × 15)]
2,195
Less: Cost of Goods Sold
1,677
Profit
518
Alternately
Sales (Including Opening Stock)
2,195
Less: Purchases
[(20 × 15) + (30 × 14 )+ (40 × 14.50) + (50 + 13)]
1,950
245
Add:
Stock at the end
273
518
ASSUMPTION
It is assumed that the unit discarded is normal loss and hence, absorbed by good units and separately
not shown in Profit and Loss Statement.
Illustration 14
M/s Desai & Co. a trader of Plastic Toys had 12,000 toys valued at ` 3 per toy. His Purchases and Sales
during six months ending 31 st March, 2020 were as under
March 2020
Toys
` Per Toy
5,000
3.00
10,000
15.10
22
Sales
23
Purchased (Carriage Inward ` 1,000)
25
Sales
26
Purchased (Carriage Inward ` 1,200)
12,000
31
Sales
13,000
8,000
18.10
You are required to ascertain Cost of Stock on hand as on 31st March 2020 under each of the following methods:
(1) FIFO (2) Weighted Average
Solution
1. FIFO Method:
(Stores Ledger : FIFO Method)
Date
Purchases
March’ 20
No. of
Toys
Rate
(`)
Issue
Amount
(`)
No. of
Toys
Balance (Stock)
Rate
(`)
Amount
(`)
No. of
Toys
Rate
(`)
Amount
(`)
1
–
–
–
–
–
–
12,000
3.00
36,000
22
–
–
–
5,000
3.00
15,000
7,000
3.00
21,000
23
10,000
15.10
1,51,000
–
–
–
7,000
3.00
21,000
10,000
15.10
1,51,000
25
26
31
Total
–
12,000
–
22,000
–
18.10
–
–
2,17,200
–
3,68,200
7,000
3.00
21,000
–
–
–
1,000
15.10
15,100
9,000
15.10
1,35,900
–
–
–
9,000
15.10
1,35,900
12,000
18.10
2,17,200
18.10
1,44,800
9,000
15.10
1,35,900
4,000
18.10
72,400
8,000
2,59,400
8,000
26,000
1,44,800
11.26
Financial Accounting: Concepts and Applications
2. Weighted Average Method:
(Stores Ledger A/c)
Date
Purchases
Issue
Balance (Stock)
March 20
No. of
Toys
Rate
`
Amount
`
No. of
Toys
Rate
`
Amount
`
No. of
Toys
Rate
`
Amount
`
1
–
–
–
–
–
–
12,000
3
36,000
22
–
–
–
(5,000)
3.00
(15,000)
7,000
3
21,000
23
10,000
15.10
1,51,000
–
–
–
17,000
10.12
1,72,000
25
–
–
–
(8,000)
10.12
(80,941)
9,000
10.12
91,059
26
12,000
18.10
2,17,200
–
–
–
21,000
14.68
3,08,259
31
–
–
–
(13,000)
14.68
(1,90,827)
8,000
14.68
1,17,432
Value of Closing Stock as on 31st March 2020
As per FIFO Method
: 8,000 Units @ ` 18.10 = ` 1,44,800
As per Weighted Average Method
: 8,000 Units @ ` 14.68 = ` 1,17,432
EXPLANATIONS
(i) As per AS-2 Cost of Stock should include all costs of bringing the goods to their present condition. Hence, the
Carriage Inward is added to Purchase/Stock Cost.
(ii) The minor difference in figures is on account of rounding up of Weighted Average Rate.
Cross Check
FIFO Method
Weighted Avg. Method
Qty.
`
Qty.
`
Opening Stock
12,000
36,000
12,000
36,000
Add : Purchases / Receipts
22,000
3,68,200
22,000
3,68,200
(26,000)
(2,59,400)
(26,000)
(2,86,768)
8,000
1,44,800
8,000
1,17,432
Less : Sales / Issues
= Closing Stock
Illustration 15 (Returns Given)
Enter following transactions in Stores Ledgers using the FIFO Method.
2020
January
1
Balance 250 units @ ` 10 per unit
3
Issued 50 units on M.R. No. 61
6
Received 800 units vide G.R. No. 13 @ ` 11 per unit
7
Issued 300 units on M.R. No. 63
8
Returned to Stores 20 units on M.R. No. 61
12
Received 300 units vide G.R. No. 26 @ ` 12 per unit
15
Issued 320 units M.R. No. 83
18
Received 100 units vide G.R. Note No. 77 @ ` 12 per unit
20
Issued 120 units M.R. No. 102
23
Returned to vendors 40 units from G.R. No. 77 received on 18 th 
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