University of South Asia Lahore
Layyah Campus
Financial Accounting
Course Outline
BEFORE MID
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Capital and Revenue
Rectifying the Errors
Partnership Accounts
Accounting for Bills of Exchange
AFTER MID
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FINAL ACCOUNT
NON TRADING CONCERN
CONSIGNMENT ACCOUNT
UNCOMPLETE RECORD ACCOUNT (SINGLE ENTRY SYSTEM)
Capital and Revenue
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Introduction
What is Capital and Revenue Expenditure
List of Capital and Revenue Expenditure
Distinction between Capital and Revenue Expenditure
Deferred revenue expenditure with example
Differentiate between revenue expenditures and deferred revenue
expenditure
 What is capital receipts, revenue receipts, capital profit, capital loss,
revenue loss, revenue profit and revenue payment with example.
 Differentiate between capital receipts and revenue receipts.
Introduction
As we know, in every business transaction either there is an inflow of money or an outflow of money. In
order to know the true and fair result and financial condition of a business for a year, the nature of the
transaction taking place during the year has to be analysed. Transaction may be divided into two classes
according to their character-capital and revenue transactions. Some transactions have Long –term
effect, while some others have short-term effect. Transactions having long-term effect are known as “
capital transaction” and those having short-term effect are known as “revenue transactions”
Business Transactions
It contain two types
Short –term
Long-term
Short –term
Revenue Transactions
Revenue receipts ( inflows)
Revenue Expenditure ( out flows)
Long-term
Capital transactions
Capital receipts ( inflows0
Capital expenditure ( outflows)
 What is Capital and Revenue Expenditure
Capital expenditure
“An outflow of funds to acquire an asset that will benefit the business more than one
accounting period is capital expenditure”
Examples:
 Purchase of fixed assets
 Expenses paid on bringing the asset into its work condition
Revenue Expenditure
“An outflow of funds to meet running expenses of a business that will benefit the business for the
current period only are called revenue expenditure”
Examples:
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Running expenses like salaries
Wages and purchase of raw material .
List of Capital and Revenue Expenditure
List of Capital Expenditure
The following is a list of the usual items of capital expenditure
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Cost of good will
Cost of freehold land and buildings and the legal charges incurred in this connection
Cost of lease
Cost of Machineries ,plants tools, fixture etc
Cost of trade marks, patents, copy rights, designed, etc
Cost of car , lorry etc
Cost of installation of lights and fans
Cost of any other assets acquired by way of equipment.
Erection of cost of plant and machinery,
Cost of addition to existing assets
Structural improvement and alterations in the existing assets.
Expenses for development in case of mines and plantations
Expenses for administration incurred during construction and equipment of any industrial
enterprise
Expenses incurred in experimenting which finally result in the acquisition of a patent or other
rights.
List of Revenue Expenditure
The following is a list of the usual items of Revenue expenditure
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Expenses incurred for the ordinary administration and carrying on the business
Expenses for repairs, renewals and replacement of permanent assets
Cost of goods for re-sale
Cost of raw materials and stores acquired for consumption in course of manufacture
Wages paid for manufacture of products for sale.
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Expenses and obsolescence of assets
Depreciation of lease
Interest on loans borrowed for business
Loss from sale of fixed assets
Fees for renewal of patent rights
Up-keep and maintenance of motor car and van
Maintenance of fan and lights
Book value of assets discarded or totally damaged or destroyed by fire
Distinction between Capital and Revenue Expenditure
S No
01
Revenue Expenditure
Its effect is temporary i.e. the benefit is received within the
current accounting year
Capital Expenditure
Its effect is long-term i.e. it is not exhausted
within the current accounting year. Its
benefit is received for a number of years in
future
02
04
Neither an asset is acquired nor the value of an asset is
increased
It has no physical existence because it is incurred on items
which are used by the business .it can not be seen with eyes
It is recurring and regular and it occurs repeatedly
05
This expenditure helps to maintain the business.
06
The whole amount of this expenditure is shown in trading P
and L a/c or income statement
07
It does not appear in the balance sheet
08
It reduces revenue ( profit) of the business.
An asset is acquired or the value of an
existing asset is increased
Generally it has physical existence except
intangible assets
It does not occur again and again. It is nonrecurring and irregular
This expenditure improves the position of
the business
A portion of this expenditure ( depreciation
on assets) is shown in trading and p and L
a/c and the balance is shown in the balance
sheet on asset side.
It appears in the balance sheet until its
benefit is fully exhausted
It does not reduce the revenue of the
concern purchase of fixed asset does not
affect revenue
03
 Deferred revenue expenditure with example
Deferred revenue expenditure
“An expenditure the impact of which is likely to last for more than one accounting periods are deferred
revenue expenditure”
Examples:
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Heavy expenditures incurred on advertisement
Differentiate between revenue expenditures and deferred revenue
expenditure
S.No Revenue expenditure
01
They effect only one accounting period
02
They normally consist on small amounts
Deferred revenue expenditure
They effect more than one accounting
periods
They must be in heavy amounts
What is capital receipts, revenue receipts, capital profit, capital loss,
revenue loss, revenue profit and revenue payment with example.
Capital Receipts
“ The receipts which are of non-recurring nature and benefits of which are available for a long period of
time are called Capital Receipts “
Examples:
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Additional capital introduced by the owner
Receipts from sale of fixed assets
Receipts on account of capital profit
Long term loans.
Revenue Receipts
“All those receipts which are of recurring nature and which are usually of small amount for meeting day
today expenses are called revenue receipts “
Examples:
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Receipts from sale of goods.
Receipts on account of other income
Capital Profit
“ A profit on sale of asset or on the raising capital funds is called capital profit “
Examples:
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Profit on sale of fixed assets
Capital Loss
“A Loss which is incurred on sale of asset or through on the raising capital funds is called capital loss“
Examples:
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Loss on sale of fixed assets
Discount on issue of shares
Revenue Loss
“ A loss which is incurred during the regular activities of business is called revenue loss”
Examples:
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Loss on sale of goods
Revenue Profit
“A profit which is earned during ordinary activities of the business is called revenue profit “
Examples:
Revenue Payment
“An amount which is paid on behalf of revenue expenditure is called revenue payment “
Examples:
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Payment made for purchase of merchandise
Wages paid to factory workers.
Capital Payment
“A amount which is paid on behalf of capital expenditure is called capital payment”
Examples:
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Payment made for purchase of machinery
Installation charges paid on machinery
Differentiate between capital receipts and revenue receipts.
S.No
01
02
Capital Receipts
They represent irregular activities of business
The effect more than one accounting periods
Revenue Receipts
They represent regular activities of business
They effect only current accounting period
QUESTION NO.01
Show by given reason, whether the following items of expenditures are capital or revenue
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Cost of air-conditioning the office of the general manage
Cost of overhauling and painting a second hand truck newly purchased
Cost of the annual taxes paid and the annual insurance premium paid on the truck mentioned
above
Wages paid to workers for installation of machinery
Cost of re-decorating a cinema hall
Cost of acquiring the goodwill of an old firm
Cost of heavy advertisement for a new product and removal of works to a new and better site
Temporary rooms constructed for storing raw material for the construction of big building.
QUESTION NO.02
State with reasons whether the following should be considered as deferred revenue expenditure or
capital expenditure
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Preliminary expenses paid in the formation of a company
Heavy advertisement expenses paid to introduce a new product in the market
Wages paid for the installation of a machinery
Carriage paid on the purchase of a machinery
Cost of overhauling and painting as second-hand truck newly-purchased
Research and experimental expenses to introduce a new product.
Rectifying the Errors
 Introduction of Rectifying the Errors
 Types of Errors
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How rectify these errors
Book –keeping errors
Trail balance errors
Location of these errors
Correcting the errors
First method ( correction before balance books)
Second method ( double sided errors)
Third method ( one sided errors)
What is suspense account?
Effect of errors on net profit
Effect of errors on the final accounts or the financial statement
Effect of errors on balance sheet
Introduction of Rectifying the Errors
In financial accounting, every single event occurring in monetary terms is recorded. Sometimes, it just so
happens that some events are either not recorded or it is recorded in the wrong head of account or
wrong figure is recorded in the correct head of account.
Whatever the reason may be, there is always a chance of error in the books of accounts. These errors in
accounting require rectification. The procedure adopted to rectify errors in financial accounting is called
“Rectification of error”.
Types of Errors
Before going to the rectification process, let’s first see the different kinds of errors that can appear in
our
books of accounts:
Error of Omission
One of the most common errors is that an event escapes recording. This means that an event occurred
but we did not record it. For example, we discussed about bank charges being deducted by banks
withoutour knowledge or our payments made by banks on our standing orders etc. There can be other
reasons aswell. Such errors are called ERRORS OF OMISSION.
Error of Commission
Then, there is a chance that the event is classified and recorded correctly but within wrong classification
of account. For example, a payment to Mr. A, who is a debtor, is recorded in the account of Mr. B, who
is also a debtor. Now the classification is correct but entry is posted in the wrong account. Such errors
are called ERRORS OF COMMISSION.
EXAMPLES : examples of such errors are
 Posting a wrong amount to the ledger
 Posting an amount on the wrong side of an account
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Making a wrong entry in a book of original record
Errors in additions and carry-forwards in books of original entry
An item for which the double entry is not completed
A mistake in taking out balance of ledger accounts
Error of Principle
Then there are errors in which an entry is recorded in the wrong class of account. For example a
purchase of fixed asset, say, a vehicle is recorded in an expense account. These errors are called ERRORS
OF PRINCIPLE.it may consist of
 Wrong allocation of expenditure as between capital and revenue
 Inadequate provision for bad and doubtful debts
 Insufficient depreciation
Error of Original Entry
The errors in which recording is in correct account but the figure is incorrect are called ERRORS OF
ORIGINAL ENTRY. For example, a receipt of Rs. 50,000 from a debtor is recorded as Rs. 5,000 in his
account.
Reversal of Entry
Then, there are errors in which the entry is reversed by mistake. This means that the account that
shouldhave been debited is credited and vice versa. These errors are called REVERSAL OF ENTRY.
Rectifying the Errors
Now, we will rectify all these types of entries:
Error of Omission
This is the easiest error to rectify. You have to record the entry that was omitted by mistake. It is
important to note here that the rectifying entry will be posted on the date on which the error was
discovered. But we will give a note in the narration of the voucher that the event took place on such
date.
Example:
A purchase of Rs. 5,000 from ABC on April 15 was omitted by mistake.
Rectifying Entry on the date of discovery:
Debit: Purchase Account 15,000
Credit: ABC Account 15,000
Narration: Rectification of omission of recording purchase to ABC on April 15.
Errors of Commission / Error of Principle
In both these cases, the effect given to incorrect account is reversed and effect is given to the correct
account.
Example:
Purchase of an asset for Rs. 50,000 is recorded in the expense account.
Rectification:
Debit: Asset Account 50,000
Credit: Relevant Expense Account 50,000
Narration: Rectification of purchase of asset incorrectly recorded as expense.
Error of Original Entry
If the entry recorded is of lesser amount than the required amount, then an entry of the balance
amount
is passed. On the other hand, if the entry recorded is of a greater amount than the required amount, a
reverse entry is passed of the balance amount that cancels the effect of the error.
Example
1) A receipt of cash Rs. 5,000 from B is recorded as Rs. 500
2) A receipt of cash Rs. 5,000 from B is recorded as Rs. 50,000
Rectification
In the first instance, the recorded figure is less by Rs. 4,500. The rectification entry will, therefore, be:
Debit: Cash Account 4,500
Credit: B Account 4,500
In the second instance, the recorded figure exceeds by Rs. 45,000 from the desired figure. The
rectification will, therefore, be a reverse entry of Rs. 45,000:
Debit: B Account 45,000
Credit: Cash Account 45,000
Reversal of Entry
If a reverse entry is recorded by mistake, then two entries are required to rectify it, one to reverse the
effect of mistake and the other to record correct entry or we can pass one entry with double amount
thatserves the purpose of both the entries.
Example:
A payment of Rs. 10,000 made to Mr. D is recorded on the receipt side of the cash book and credit is
given to D’s account.
Rectification
We can correct this mistake by two entries:
Debit: Mr. D Account 10,000
Credit: Cash Account 10,000
This will reverse the effect of mistake:
Debit: Mr. D Account 10,000
Credit: Cash Account 10,000
And this will record the transaction correctly:
Or
We can record it through one entry:
Debit: Mr. D Account 20,000
Credit: Cash Account 20,000
Based on our above discussion, we can devise a general procedure for rectification of errors.
Take another example, assume that we received cash Rs. of 50,000 from a debtor and instead of
Debitingthe Cash Book / Cash Account, we debited the Bank Book whereas the credit was given to the
correctaccount.
Step 1: Note down the correct entry
Debit Cash 50,000
Credit Creditors 50,000
Step 2: Note down the incorrect entry
Debit Bank 50,000
Credit Creditors 50,000
Step 3: See that Credit affect is correct. In case of Debit, affect has been given to Bank instead of cash.
Therefore we will give the due affect to Cash by debiting it and Remove the incorrect affect from bank
by crediting it.
Debit Cash Account 50,000
Credit Bank Account 50,000
Illustration
Rectify the following errors:
1. A cheque issued of Rs. 50,000 to Mr. A (Creditor), but the credit was given to cash account.
2. Purchase of goods from Mr. B worth of Rs. 5,500 was recorded at Rs. 4,500.
3. Cash sale to Mr. C worth of Rs. 10,000 was debited to sale account and credited to cash
account.
4. Repair of vehicle worth of Rs. 5,000 was charged to asset account.
5. A cheque of Rs. 15,000 received and deposited in bank from Mr. D, but no entry was
passed.
Solution
Entry # 1
Correct Entry
Debit: Mr. A (Creditor) A/C 50,000
Credit: Bank A/C 50,000
Incorrect Entry passed
Debit: Mr. A (Creditor) A/C 50,000
Credit: Cash A/C 50,000
Rectifying Entry
Debit: Cash A/C 50,000
Credit: Bank A/C 50,000
Entry # 2
Correct Entry
Debit: Purchase A/C 5,500
Credit: Mr. B’s A/C 5,500
Incorrect Entry passed
Debit: Purchase A/C 4,500
Credit: Mr. B’s A/C 4,500
Rectifying Entry
Debit: Purchase A/C 1,000
Credit: Mr. B’s A/C 1,000
Entry # 3
Correct Entry
Debit: Cash 10,000
Credit: Sale A/C 10,000
Incorrect Entry passed
Debit: Sale A/C 10,000
Credit: Cash 10,000
Rectifying Entry
Debit: Cash 20,000
Credit: Sale A/C 20,000
Entry # 4
Correct Entry
Debit: Repair A/C 5,000
Credit: Cash A/C 5,000
Incorrect Entry passed
Debit: Asset (vehicle) A/C 5,000
Credit: Cash A/C 5,000
Rectifying Entry
Debit: Repair A/C 5,000
Credit: Asset (vehicle) A/C 5,000
Entry # 5
Correct Entry
Debit: Bank A/C 15,000
Credit: Mr. D’s A/C 15,000
Incorrect Entry passed
No entry was passed
Rectifying Entry
Debit: Bank A/C 15,000
Credit: Mr. D’s A/C 15,000
How rectify these errors
One way of rectification is that we can simply erase or overwrite the incorrect entry and replace it with
the correct one. But this practice is not allowed in accounting. We have to Rectify / correct the mistake
by recording another entry. The errors which we may find in the books of account may be classified as
follows
Book –keeping errors
Book –keeping are those errors which may be made in the original documents. In the original entry
books and in the posting from the books of original entry into the ledger. Taking balances of the ledger
accounts etc. book keeping errors are of four kinds.
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Errors of commission
Errors of principle
Compensation errors
Errors of commission
Compensation errors
These are errors which cancel themselves out. Thus an error of Rs 200 on the debit side of an
account may be compensated by an error of the same amount on the credit side of another
account .these errors are very difficult to discover.
Trail balance errors
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Errors which are made in the preparation of the trial balance are called trial balance errors.
These are.
Omission of balance from the trial balance
Transfer of balance to the wrong column of the trial balance
The amount of the balance wrongly entered in the trial balance
Wrong additions of the trial balance columns
Location of these errors
When the trial balance does not agree, the accountant must try to locate the errors and correct them.
There is no set procedure which can be followed for locating errors in every case. The following steps ,
however, can be suggested for speedy location of errors.
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Re-check the totals of the trial balance
Re-check that the items appearing in the trial balance are on their correct side.
See that the balance of all accounts have been written in the trial balance
See that there4 is no mistake in the balance of the various accounts
Find out the exact difference in the trial balance look for such accounts as show the same
amount
Posting of all amounts corresponding to the difference or half the difference should be checked
Errors due to transposition of figures i.e. Rs 60 taken as Rs 78 are also easily made. In the case
the difference in the trial balance is always divisible by 18. If that is so, bear this fact in mind and
recheck your work
If the difference is not located , in spite of the fact that all the above tests have been applied
then all the accounts have to be checked thoroughly
Correcting the errors
There are three ways of correcting the errors which have been committed
a. By striking off the wrong figure and replacing it by the correct one
b. By passing a correcting journal entry which neutralizes the effect of the wrong entry and
same time results in making the correct entry
c. By making a further debit or credit entry in the account in which the mistake has been
committed as may be necessary
1. First method (correction before balancing books)
In accounting correction of errors should not be done by erasing entries. In such a case books will not be
considered reliable in the court of law. There should be no over-writing of figures. Students sometimes
try to convert figure 3 into 8 and figure 9 into 12. This is bad. Whenever any correction is made it should
be done by drawing a straight line through the wrong figure and writing the correct figure above it.
Every correction must be initialed by the person making the correction. This method of correcting
errors may resorted to only in cases when the books has not been added up and the ledger accounts to
which has not been balanced.
2. Second method (double sided errors)
The second method of passing a correcting journal entry to rectify an error is more frequently used
because it avoids the necessity of cancelling figures and the mistakes which are discovered after a long
time can be rectified without correcting several other wrong entries. This method of rectification of
errors can be applied only to mistakes which are double sided. Double sided error is one which exists
simultaneously in two accounts. If the error is double sided. The following three points may be kept in
mind while correcting it.
I.
II.
III.
What should have been the correct entry?
Compare it with the entry actually made.
How the correct position can be restored.?
3. Third method ( one sided errors)
The third method of making a further debit or credit entry in the account in which the mistake has been
committed is applicable only to one sided errors. One sided error is one which affects only one aspect of
the transaction or which exists only in one ledger account. If an error is one sided it can be rectified by
making a journal entry debiting or crediting the ledger account which is wrong with suspense account
which may be opened for the purpose if it does not already appear in the books. For example , suppose
the sales book has been added Rs. 50 too short. This is one sided error . it affect only sales account in
the ledger. When the sales book has been added Rs.50 too short. it means that the entries in the sales
book are correct and therefore , correct amounts have been posted to the debit of individual customers
in the ledger. The sales account has been credited with Rs.50 too short. Therefore to rectify this mistake
the following entry should be made. Debit the suspense account and credit the sales account with Rs.50.
it may also be corrected by making an adjusted credit entry in the sales account.
Suspense Account
THE WORD SUSPENS MEANS UNCERTAINTY . A suspense account , therefore is an account in which are
entered transaction which cannot be placed to their proper accounts for want of sufficient information.
Suspense money was received from a person but the cashier forgot to note down the name of the
person who paid it. The amount received will be entered in the cash book To Suspense account. Thus
suspense account will be opened in the ledger and it I credited with the amount received. When the
name of the person is known an entry will be passed to transfer the amount from the suspense account
to the account of the person who paid it .
Further sometimes a trail balance may not agree, under such circumstances, the difference may be
placed to a suspense account and the trail balance thus made to tally. If credits exceed the debits, the
suspense account would appear among debit balance and vice versa. When the mistakes are discovered
subsequently, they are rectified through the suspenseaccount. as soon as all the mistakes are discovered
the suspense account is automatically closed.
Effect of errors on net profit
In order to calculate the effect of errors on net profit it is essential to understand that only those
accounts which are taken to trading or profit and loss account affect profits. For example purchase
account, sales account, salaries account, wages account, rent commission , depreciation, stock account
etc. affect the net profit because they are shown either in trading account or profit and loss account. If
any of these accounts is debited in the rectification entry. It reduces the profit and if any of these
accounts is credit the it increase profit. Accounts which are shown in the balance sheet do not affect
net profit.
Effect of errors on the final accounts or the financial statement
It has already been discussed that best efforts should be made to locate and rectify the errors before
preparation of final accounts for the years. But in certain cases when an accountant fails to locate and
rectify the errors, and he is in a hurry to prepare the final account of the business for filling the returns
to income tax department for income tax or sales tax purposes, he prepares the final accounts by
placing the difference in the trial balance to suspense account. in the nest accounting period. The errors
are located and rectified and profit of the previous year is adjusted.
Effect of errors on balance sheet
if the error is committed in assets account , liabilities account or capital it will have its impact on the
cash balance sheet only, because all these items are shown in the balance sheet and the balance sheet is
prepared after the profit and loss account has been prepared. So if there is any error in cash account
furniture account, machinery account debtor’s account, bank account etc. it will affect only the balance
sheet.
Q.No 1:
Rectify the following errors
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Paid wages for the construction of office debited to wages account Res. 3,000.
Paid cartage for the newly purchased furniture Res 30, posted to cartage account
Paid Rs. 400 for the purchase of a table posted to purchase account
Paid Rs 300, for the installation of machinery debited to wages account
Purchased machinery for Rs. 20,000 was passed through the invoice book
Sold old furniture for Rs.500, passed through the day book .
Q.No.2:
Give journal entries to rectify these errors
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The sales book has been under –cast by Rs .400
A cheque drawn for wages for Rs.1020 was wrongly posted to wages A/c as Rs. 1002
Furniture purchased for Rs.1040 has been debited to purchase A/c as Rs.1640
Rs 550 received from Rahim debited to his account
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Discount received Rs 100 was posted to the wrong side of Discount A/c
BEFORE MID
FINAL ACCOUNTS
Account which are finally prepared to show the profit and loss and financial position of a business are
called Final Account
TRADING ACCOUNT
The account which is prepared to determine the gross profit or loss for a particular period is called
Trading account
PROFIT AND LOSS A/C
The account which is prepared to determine the net profit or loss for a particular period is called profit
and loss account
GROSS PROFIT
If direct income is more than the direct expenses the difference represents gross profit
NET PROFIT
If gross profit and indirect incomes are greater than indirect expenses, the difference represent net
profit .
CURRENT OR LIQUID ASSETS
Assets which represent cash or which can be easily converted into cash after some time are called
current assets
For example: cash at bank , debtors
FIXED ASSETS
Assets which are purchased for permanent use in the business are called fixed assets
For example: Building etc
CURRENT LIABILITES
A Debts which are payable after a short period of time normal within one year are called current liability
For example: creditors
LONG TERM LIABILITIES
The Debts which are payable after a long period of time is called long term liabilities.
For example: Bank Loan
INTERNAL LIABILITES
The capital of business is called internal liabilities of business
EXTERNAL LIABILITES
Debts which are payable to outsiders are called external liabilities
DEBT
The amount due from debtor is called debt
BAD DEBT
The amount which cannot be recovered from debtors called bad debt
DOUBTFUL DEBTS
The recovery of which is uncertain are called doubtful debt
PROVISION
A liability of uncertain timing or amount is called provision
NORMAL LOSS
A loss which is unavoidable represents normal loss
For example: leakage wastage, uncontrollable
ABNORMAL LOSS
A loss which can be avoided through precautionary measures is called abnormal loss, is called abnormal
loss
For example: Controllable, loss by fire and loss by accident
TREATMENT OF BADT DEBTS
OLD BAD DEBTS: given in trail balance
FURTHER/NEW BAD DABTS: Not given trial balance but given in adjustment
NEW PROVISION: A provision which is allowed after preparing trial balance is called new provision
Assets
Definition
Asset is a resource controlled by the entity as a result of past events and from which future
economic benefits are expected to flow to the entity (IASB Framework).
Explanation
In simple words, asset is something which a business owns or controls to benefit from its use in
some way. It may be something which directly generates revenue for the entity (e.g. a machine,
inventory) or it may be something which supports the primary operations of the organization
(e.g. office building).
Classification
Assets may be classified into Current and Non-Current. The distinction is made on the basis of
time period in which the economic benefits from the asset will flow to the entity.
Current Assets are ones that an entity expects to use within one-year time from the reporting
date.
Non Current Assets are those whose benefits are expected to last more than one year from the
reporting date.
Types and Examples
Following are the most common types of Assets and their Classification along with the economic
benefits derived from those assets.
Asset
Classification Economic Benefit
Machine
Non-current
Used for the production of goods for sale to customer.
Office
Building
Non-current
Provides space to employees for administering company affairs.
Vehicle
Non-current
Used in the transportation of company products and also for
commuting.
Inventory
Current
Cash is generated from the sale of inventory.
Cash
Current
Cash!
Receivables
Current
Will eventually result in inflow of cash.
Q No# 1 the following is the trial balance of a trader on 31st december 1991
Opening stock
Advertising
Wages
Factory rent
Carriage inward
Return inward
Salaries O/E
Office rent
Plant
Purchase
B/R
Cash
Furniture
Debtors
General Expences
Drawing
Insurance
30,000
Capital
40,000
7000
Bad debts resence (old) 500
1500
Discount (cr)
800
1000
Bill Payable
4200
500
Sales
159100
550
Return outwards
350
3300
Creditors
4600
700
10,000
135000
1500
3500
2000
9000
800
3000
200
______
209550
209550
You are required to prepare trading and profit and loss account / income statement and balance sheet
the following adjustment





Closing stock was valued at, 42000
Salaries outstanding 300, and wages outstanding 500
Unexpired insurance 50
Depriciate plant by 10% and furniture by 15%
Write off 1000 as bad debts and creat reserve for doubt full debts (NPBD) at 5% and for discount
on debts at 2%.
Balance Sheet
Assets
Current assets
Cash in hand, cash at bank, A/Receiveable,
note Receivable debtors, closing stock
Prepaid expence
Unexpired insurance intrest on commission
Liabilities
Current liabilities
Account P/A
Bill P/A, note P/A, bank overdraft , creditor
unpaid salery etc unearned commission
outstanding
Stationary in hand
Accured expence
Non current assets
Investment
Fixed assets
Tangible assets
Furniture, fixture, building, plant, machinary,
land
Intangible assets
Good will, patents, copy right, trade mark,
equipment, loose tools
Contra assets
Accomulated depriciation
Wasting asset or Fictious assets
Forest
Mine
Differred Liabilities
Short term loan
Long term liabilities
Debentures
Bank loan, loan on mortgage
Internal liabilities
Capital owner equity
Capital
Intrest on capital
Profit/loss/net income/ loss
Drawing
Type of assets
There are two types of assets
Real assets
Ficticious /wasting assets
Real assets
Fixed assets
Tangible assets
Intagible assets
Current assets
liquid assets
Quick Assets
Current assets
noncurrent asset
floating assets
Circulating assets
Ficticious/ wasting assets
Ficticious assets
Assets which cannot be used and have no market value
Example: preliminary expences discount on uses of shares
Wasting assets
Assets whose value gradually decreased due to use and final exhausts completely forest etc.
Types of liabilities
Internal liabilities
External liabilities
Internal liabilities
Capital or owner equity
External liabilities
Fixed or long term liabilities
Current liabilities
Short term liabilities
Liquid liabilities
Quick liabilities
Deffered liabilities
NTC
Income and Expenditure
Income Receipts
Entrance fee
Subcription
Locker rent
Special subcription annual dinner
Donation , intrest on G,S
Legacies
Intrest on investment
Proceeds of lectures and entertainment
Intrest on deposit
Advertisement in magzine
Sale of magzine
Intrest received
Sundry income
Life membe fee
Misc…revenue, receipts
Intrest, teniss fee billared
Profit on entertainment
Misc.. income/receipts
Receipts from patients
Member admission fee
Grant rent, sale of newspaper
Sale of old sports material
Direct material used
Opening balance
Purchase
-purchase return
-outward
Net purchase
Direct Expence
Wages
Carriage inward
Cartage
Fright inward
Transport inward
Import duty
Custom duty
Excise duty
Store supply
Oil and gas
Gross profit
Expenditure (Payment)
Rent, Stationary wages
Repair reannual
Interest
Office expence
Commission
Printing to exp
Postage interest
Wages to guardner
Ground to rent
Telegram
Magzine exp
Secratery honarirum
Sports and games charity
Advertisement
Tournament exp
Misc revenue payment
Sundary exp
Telephone teniss
Entertainment
Electricity charges
Store insurance
Food, general exp
Up keep ground
Trading profit and loss account
Sales
- Sales return
- Or
- Return inward
Net sale
Closing balance
Other Exp
Sales salary and commission
Advertisement exp
Delivery exp
Baddebt
Depriciation
Carriage out
Discount allowed
Rent and rates
Interest (Dr)
Repair telephone
Electricity charges
Misceleneous exp
Net profit
Gross profit
Other income
Intrest received
Discount received
Rent received
Interest (cr)
Interest on investment
Interest on security
Q No # 1
The following is the receipts and payment Account of a club for the year ended 31-12-2005
RECEIPTS AND PAYMENT ACCOUNT
Receipts
Rs
Payments
Rs
Balance
5,000
Sports equipments
7,000
Subscription
Salaries & wages
3,000
2004
2,000
Office Expenses
400
2005
10,000
Electric Charges
600
Donation
Telephone Charges
600
2,000
Entrance Fee (to be capitalized)
Balance c/d
8,400
20,000
20,000
 In 2004 subscription for 2005 was received Rs 1,000
 Outstanding subscription Rs 1,500
 Outstanding salaries & wages Rs 1,000
 Description to be charged @ 20% on sports equipments.
Prepare from the above particulars the income & Expenditure Account of the club
Q No # 2
From the following Receipts & payment Account of Nice Club during the year 2004
and further particulars given below prepare an income and Expenditure Account of
the Club for the year ended 31st December, 2004 and also a Balance sheet as on that
date.
RECEPTS AND PAYMENTS ACCOUNT
For the year ended at 31st December, 2004
Dr
Cr
Receipts
Rs
Payments
Rs
Subscription
5,200
Salaries
1,400
Donation
Admission Fees
Sale of old newspapers
300
100
60
5,660
Rent
Printing and Stationery
Postage
News papers
Furniture
Balance c/d
Cash
150
Bank
1,560
______
1,300
100
80
70
1,000
1,710
5,660
Subscription includes Rs 250 collected in advance for the year 2005. A sum of Rs 400 is
due by members on account of subscription on 31.12.2004.the following expenses are
outstanding on 31.12.2004--- salaries Rs. 300 and rent Rs. 200.
Non- Trading Concerns
Q No #1 Define Non trading organization?
A legal and accounting entity that is operated for the benefit of the society as a whole
rather than for the benefit of a sole proprietor or group of partner or share holders.In other
words, its main purpose is to serve its members rather than earning profit.
Q No# 2 Give any three characteristics of non-trading concern?
Non-profit making
They provide services to their members.
Their sources of income is subscription donations etc
Q No# 3 Difference between trading and non-trading concerns?
Trading
Non-trading
It’s main purpose is to profit
It’s main purpose is to serve it’s member
The source of income of these
Conerces is the sale of
goods & services
The main source of such institution’s income is
subscription
Q No# 4 What is Receipts & Payments account?
A summary of the cash book is called receipts and payments account. This is the
primary report prepared by treasurers of non-trading concerns to present the result of
years cash position.
Q No# 5 Give any three characteristics of receipts and payments account?
No distinction is made between capital and revenue items.
It usually stars with the opening balance of cash.
It is a duplicate of cash book is concise form.
Q No# 6 Define Income & Expenditures account?
The account through which surplus or deficit of a particular period is determine of
non-trading concerns is called in and expenditure account.
Q No # 7 Give any three characteristics of income & expenditure account?
It is revenue account prepared at the end of financial period.
Both cash & noncash items are recorded in it.
All capital expenditure are excluded.
Q No# 8 Name major statements which are prepared by non-trading concerns?
Receipts & payments account.
Income & expenditure account.
Balance sheet.
Q No# 10 What is meant by Legacy?
The amount or property received as per the will of deceased person by non-trading concerns
is called legacy.
Q No# 11 What is the accounting of legacy?
Normally, legacy is treated as capital item, however, its some part may be considered as
income according to instruction.
Q No# !12 What do you know about honorarium?
The amount paid to the person who is not the employee of non-trading organization and such
payment is made as gift against some services rendered by him to such institution is called
honorarium.
Q No# 13 What is the accounting treatment of honorarium?
Honorarium is expenditure so it is written on the debit side of income & expenditure account
Q No# 14 Define capital fund?
The difference between receipts and payment Account and incomes and expenditure account.
Q No# 15 Difference between receipts and payment A/c and income & expenditure A/c?
Receipts & Payment A/c
Income & Expenditure A/c
it included both capital and revenue items
It includes revenue items only
It does not consider non cash item
It normally beings with opening balance of cash
it considers both non-cash and cah items
it does not commence with any previous
balance
Q No# 16 Define Subscription?
The contribution made by the members annually to non-trading concerns is called
subscription.
Q No# 17 What do you know about donation?
Amount received in the shape of gifts to non-trading concerns is called donation.
Q No# 18 what do you mean by Special Subscription?
A subscription collected by non-trading concerns from the member who participate in a
particular activity is called Special subscription.
Q No# 19 what is accounting treatment of sale of news paper periodicals, magazines?
It is written on the income side of incomes and expenditures account.
Q No# 20 What is the treatment of sale of sports material?
It is written on the income side of incomes and expenditure account.
Q No# 21 Define life membership fee?
A subscription paid in lump sum by any member of non-trading concern for all period of
membership is known as life membership fee.
Q No# 22 Define Entrance fee?
A fee received by Non-trading concerns from new member as a result of his/her admission is
called entrance fee or admission fee.
Q No # 23 What is the accounting treatment of admission fee or Entrance fee?
If amount is large, so it is treated as liability, if amount is small, it is treated as income.
Q No# 24 What is the accounting treatment of General fund /Capital fund/ Accumulated fund?
It is treated as liability in the balance sheet
Q No# 25 What is the accounting treatment of deficit in the non-trading concerns accounts?
It is treated as liability in the balance sheet.
Q No# 26 what do you mean by deficit in Non-trading concerns?
If the expenditure of non-trading concerns exceeds the incomes of these institutions such difference is
called deficit.
Q No what do you mean by surplus in Non-trading concerns?
If the income of non-trading concerns exceeds the expenditure of these institution, such
difference is called surplus
Q No# 27 What is accounting treatment, of surplus in non-trading concern accounts?
It is directly added to capital fund in the balance sheet.