UNIT – I INTRODUCTION TO ACCOUNTINGMEANING OF ACCOUNTING:Practice and body of knowledge concerned primarily with methods for recording transactions, keeping financial records, performing internal audits, reporting and analyzing financial information to the management, and advising on taxation matters.It is a systematic process of identifying, recording, measuring, classifying, verifying, summarizing, interpreting and communicating financial information. It reveals profit or loss for a given period, and the value and nature of a firm's assets, liabilities and owners' equity.

TYPES OF ACCOUNTS:Real, Personal and Nominal AccountsThere are mainly three types of accounts in accounting: Real, Personal and Nominal accounts, personal accounts are classified into three subcategories: Artificial, Natural, and Representative.

If you fail to identify an account correctly as either a real, personal or nominal account, in most cases, you will get end up recording incorrect journal entries.

Three Types of Accounts1. Real AccountsAll assets of a firm, which are tangible or intangible, fall under the category “Real Accounts“.

Tangible real accounts are related to things that can be touched and felt physically. Few examples of tangible real accounts are building, machinery, stock, land, etc.

Intangible real accounts are related to things that can’t be touched and felt physically. Few examples of such real accounts are goodwill, patents, trademarks, etc.

Golden rule for real accounts

 Debit what comes in

 Credit what goes out

Example

The transaction below shows the interaction of two different real accounts: one is furniture and the other is cash, both of them are assets of the company and hence classified as real accounts.

Purchased furniture for 10,000 in cash 

Accounts Involved Debit/Credit Rule Applied

Furniture A/C Debit Real A/C – Dr. what comes in

To Cash A/C Credit Real A/C – Cr. what goes out

*Amount will be 10,000 in both debit and credit.

2. Personal AccountsThese accounts are related to individuals, firms, companies, etc. A few examples of personal accounts include debtors, creditors, banks, outstanding/prepaid accounts, accounts of credit customers, accounts of goods suppliers, capital, drawings, etc.

Natural personal accounts:  This type of personal accounts is the simplest to understand out of all and includes all of God’s creations who have the ability to deal, who, in most cases, are people. E.g. Kumar’s A/C, Adam’s A/C, etc.

Artificial   personal accounts:  Personal accounts which are created artificially by law, such as corporate bodies and institutions, are called Artificial personal accounts. E.g. Pvt Ltd companies, LLCs, LLPs, clubs, schools, etc.

Representative personal accounts: Accounts which represent a certain person or a group directly or indirectly. E.g. Let’s say that wages are paid in advance to an employee – a wage prepaid account will be opened in the books of accounts. This wages prepaid account is a representative personal account indirectly linked to the person.

Golden rule for personal accounts

 Debit the receiver

 Credit the giver

 

Example

The transaction below demonstrates the interaction between two different personal accounts, oneof which is a private limited company and the other one is a bank.

Paid Unreal Pvt Ltd. 24,000 by check

Accounts Involved Debit/Credit Rule Applied

Unreal Pvt Ltd. A/C  Debit Artificial Personal – Dr. the receiver

To Bank A/C  Credit Artificial Personal – Cr. the giver

*Amount will be 24,000 in both debit and credit.3. Nominal AccountsAccounts which are related to expenses, losses, incomes or gains are called Nominal accounts. The dictionary meaning of the word “nominal” is “existing in name only” and the meaning remains absolutely true in accounting sense too, because nominal accounts do not really exist in physical form, but behind every nominal account money is involved. E.g. Purchase A/C, Salary A/C, Sales A/C, Commission received A/C, etc.The final result of all nominal accounts is either profit or loss which is then transferred to the capital account.

Golden rule for nominal accounts

 Debit all expenses & losses

 Credit all incomes & gains

 

Example

The following example shows a transaction where a nominal account deals with a real a/c.

Purchased good for 15,000 in cash

Accounts Involved Debit/Credit Rule Applied

Purchase A/C Debit  Nominal A/C – Dr. all expenses

To Cash A/C Credit  Real A/C – Cr. what goes out

The amount will be 15,000 in both debit and credit

The Golden Rules of Accounting

1. Debit The Receiver, Credit The Giver

This principle is used in the case of personal accounts. When a person gives something to the organization, it becomes an inflow and therefore the person must be credit in the books of accounts. The converse of this is also true, which is why the receiver needs to be debited.

2. Debit What Comes In, Credit What Goes Out

This principle is applied in case of real accounts. Real accounts involve machinery, land and building etc. They have a debit balance by default. Thus when you debit what comes in, you are adding to the existing account balance. This is exactly what needs to be done. Similarly when you credit what goes out, you are reducing the account balance when a tangible asset goes out of the organization.

3. Debit All Expenses And Losses, Credit All Incomes And Gains

This rule is applied when the account in question is a nominal account. The capital of the company is a liability. Therefore it has a default credit balance. When you credit all incomes and gains, you increase the capital and by debiting expenses and losses, you decrease the capital. This is exactly what needs to be done for the system to stay in balance.

The golden rules of accounting allow anyone to be a bookkeeper. They only need to understand the types of accounts and then diligently apply the rules.

Bookkeeping

Bookkeeping is the activities concerned with the systematic recording and classification of financial data of an organization in an orderly manner. It is essentially a record-keeping function done to assist in the process of accounting. It is a key component in forming the financial statements of the organization at the end of the financial year.

Bookkeeping also concerns itself with the classification of financial transactions and events. Such classification of transactions is essential to maintain proper financial accounts. It also involves preparing source documents for the financial transactions and other business operations being carried out.

There are many methods of book-keeping. The most common ones are the double-entry system and the single-entry system. But even methods other than these, which involves the process of recording financial transactions in any manner are acceptable book-keeping systems or processes.

Objectives of Bookkeeping

The main objective of book-keeping is to keep a complete and accurate record of all the financial transactions in a systematic orderly, logical manner. This ensures that the financial effects of these transactions are reflected in the books of accounts.

Then the second main objective is to ascertain the overall effect of all recorded transactions on the final statement of the company. Book-keeping will eventually ascertain the final accounts of the company, namely the Profit and Loss Account and the Balance Sheet.

Need for Bookkeeping

One of the main reasons for bookkeeping is so records can be maintained to show the financial position of each and every head/account of income and expenditure. Through book-keeping, detailed information about each expense or income could be obtained instantaneously.

Say for example a company makes sales in both cash and credit. Each of these sale transactions will be recorded. When a credit sale is made, the creditor’s account will be recorded. So at any time, the management of the company can determine which creditors owe them how much money by just looking at the records/accounts.

Also, the maintenance of books of accounts and financial statements is a legal requirement in many cases. In the case of companies or banks or insurance companies, there are acts that require such firms to keep and maintain financial records. In such a case, book-keeping becomes mandatory.

Activities of Bookkeeping

Book-keeping comprises of a lot of functions and activities bundled together. Some such activities are

Recording all financial transactions

Posting debit and credits in the respective ledgers

Producing and organizing all source documents such as invoices

Payroll accounting and upkeep may also be clubbed in with book-keeping

Accounting Conventions

The most commonly encountered convention is the "historical cost convention". This requires transactions to be recorded at the price ruling at the time, and for assets to be valued at their original cost.

Under the "historical cost convention", therefore, no account is taken of changing prices in the economy.

The other conventions you will encounter in a set of accounts can be summarised as follows:

Monetary measurement

Accountants do not account for items unless they can be quantified in monetary terms. Items that are not accounted for (unless someone is prepared to pay something for them) include things like workforce skill, morale, market leadership, brand recognition, quality of management etc.

Separate Entity

This convention seeks to ensure that private transactions and matters relating to the owners of a business are segregated from transactions that relate to the business.

Realisation

With this convention, accounts recognise transactions (and any profits arising from them) at the point of sale or transfer of legal ownership - rather than just when cash actually changes hands. For example, a company that makes a sale to a customer can recognise that sale when the transaction is legal - at the point of contract. The actual payment due from the customer may not arise until several weeks (or months) later - if the customer has been granted some credit terms.

Materiality

An important convention. As we can see from the application of accounting standards and accounting policies, the preparation of accounts involves a high degree of judgement. Where decisions are required about the appropriateness of a particular accounting judgement, the "materiality" convention suggests that this should

only be an issue if the judgement is "significant" or "material" to a user of the accounts. The concept of "materiality" is an important issue for auditors of financial accounts.

Accounting Concepts

Four important accounting concepts underpin the preparation of any set of accounts:

Going Concern

Accountants assume, unless there is evidence to the contrary, that a company is not going broke. This has important implications for the valuation of assets and liabilities.

Consistency

Transactions and valuation methods are treated the same way from year to year, or period to period. Users of accounts can, therefore, make more meaningful comparisons of financial performance from year to year. Where accounting policies are changed, companies are required to disclose this fact and explain the impact of any change.

Prudence

Profits are not recognised until a sale has been completed. In addition, a cautious view is taken for future problems and costs of the business (the are "provided for" in the accounts" as soon as their is a reasonable chance that such costs will be incurred in the future.

Matching (or "Accruals")

Income should be properly "matched" with the expenses of a given accounting period.

Key Characteristics of Accounting Information

There is general agreement that, before it can be regarded as useful in satisfying the needs of various user groups, accounting information should satisfy the following criteria:

Understandability

This implies the expression, with clarity, of accounting information in such a way that it will be understandable to users - who are generally assumed to have a reasonable knowledge of business and economic activities

Relevance

This implies that, to be useful, accounting information must assist a user to form, confirm or maybe revise a view - usually in the context of making a decision (e.g. should I invest, should I lend money to this business? Should I work for this business?)

Consistency

This implies consistent treatment of similar items and application of accounting policies

Comparability

This implies the ability for users to be able to compare similar companies in the same industry group and to make comparisons of performance over time. Much of the work that goes into setting accounting standards is based around the need for comparability.

Reliability

This implies that the accounting information that is presented is truthful, accurate, complete (nothing significant missed out) and capable of being verified (e.g. by a potential investor).

ObjectivityThis implies that accounting information is prepared and reported in a "neutral" way. In other words, it is not biased towards a particular user group or vested interest

JOURNAL

1) On April 01, 2016 Anees started business with Rs. 100,000 and other transactions for the month are:2. Purchase Furniture for Cash Rs. 7,000.8. Purchase Goods for Cash Rs. 2,000 and for Credit Rs. 1,000 from Khalid Retail Store.14. Sold Goods to Khan Brothers Rs. 12,000 and Cash Sales Rs. 5,000.18. Owner withdrew of worth Rs. 2,000 for personal use.22. Paid Khalid Retail Store Rs. 500.26. Received Rs. 10,000 from Khan Brothers.30. Paid Salaries Expense Rs. 2,000  

Solution:

 2)Prepare general journal entries for the following transactions of a business called Pose for Pics in 2016:Aug. 1: Hashim Khan, the owner, invested Rs. 57,500 cash and Rs. 32,500 of photography equipment in the business.      04: Paid Rs. 3,000 cash for an insurance policy covering the next 24 months.      07: Services are performed and clients are billed for Rs. 10,000.

      13: Purchased office supplies for Rs. 1,400. Cash paid Rs. 400 and remaining outstanding.      20: Received Rs. 2,000 cash in photography fees earned previously.      24: The client immediately pays Rs. 15,000 for services to be performed at a later date.       29: The business acquires photography equipment. The purchase price is Rs. 100,000, pays Rs. 25,000 cash and signs a note for the balance.

 

3)On March 2017, Farhan Rahim, starts wholesaling business. Following transactions as follows:1. He started business with capital of Rs. 15,000 and Land worth Rs. 10,000.8. Bought goods from Bilal and Friends Rs. 1,000 and by cash from XYZ Co. Rs 2,000.13. Sold goods to Rehman & sons Rs. 1,500 and sale by cash Rs. 5,000.17. Gave away charity of cash Rs. 50 and merchandising worth Rs. 30.21. Paid Bilal and Friends cash Rs. 975; discount received Rs. 25.28. Received cash from Rehman & Sons Rs. 1,450; allowed him discount of Rs. 50.

 

4)Shah Sauood Marine is a boat repair yard. During August 2016, its transactions included the following:03. Loan taken from Habib Bank Ltd. of Rs. 25,000. Rs. 20,000 withdrawn for business and remaining in the bank a/c.06. Paid rent for the month of August Rs. 4,400 and accrued rent expenses was Rs. 600.12. At request of Kiwi Insurance, Inc, made repairs on boat of Jon Seaways. Sent bill for Rs. 5,620 for services rendered to Kiwi Insurance Inc. (credit Repair Service Revenue).

18. Made repairs to boat of Dennis Copper and collected in full the charge of Rs. 2,830.20. Placed Advertisement in The Dawn of Rs. 165, payment to be made within 30 days.25. Received a check for 5,620 from Kiwi Insurance Inc representing collection of the receivable of August 12.30. Sent check to The Dawn in payment of the liability incurred on August 20. Solution: 

LEDGER:

1)Mr. Ramu has the following transactions in the month of July.

Record them into the journal and show postings in the ledger and balance the accounts.

July 1st : Ramu started business with a capital of 75,000

1st : Purchased goods from Manu on credit 25,000

2nd : Sold goods to Sonu 20,000

3rd : Purchased goods from Meenu 15,000

4th : Sold goods to Tanu for cash 16,000

5th : Goods retuned to Manu 2,000

6th : Bought furniture for 15,000

7th : Bought goods from Zenu 12,000

8th : Cash paid to Manu 10,000

9th : Sold goods to Jane 13,500

10th : Goods returned from Sonu 3,000

11th : Cash received from Jane 5,500

12th : Goods taken by Ramu for domestic use 3,000

13th : Returned Goods to Zenu 1,000

14th : Cash received from Sonu 12,000

15th : Bought machinery for 18,000

16th : Sold part of the furniture for 1,000

17th : Cash paid for the purchase of bicycle for Ramu's son 1,500

19th : Cash sales 15,000

20th : Cash purchases 13,500

Solution 

Journal in the books of M/s Rama & Sons

for the period from July 1st, _5 to July 31st, _5

DateV/R

No.Particulars L/F

Amount

(Dr)

Amount

(Cr)

July

1st

– Cash a/c

To Capital a/c

Dr –

–

75,000

75,000

[Being the amount received from Mr. Ramu, the

proprietor as his capital contribution vide receipt

no:___ dated:__]

July

1st

– Goods/stock a/c

To Manu a/c

Dr –

–

25,000

25,000

[Being the value of stock purchased from Mr.

Manu vide bill no:___ dated:__]

July

2nd

– Sonu a/c

To Goods/stock a/c

Dr –

–

20,000

20,000

[Being the value of stock sold to Mr.Sonu vide bill

no:___ dated:__]

July

3rd

– Goods/stock a/c

To Meenu a/c

Dr –

–

15,000

15,000

[Being the value of stock purchased from

Mr.Meenu on credit vide bill no:___ dated:__]

July

4th

– Cash a/c

To Goods/stock a/c

Dr –

–

16,000

16,000

[Being the value of stock sold to Mr. Tanu for cash

vide receipt no:___ dated:__]

Journal in the books of M/s Rama & Sons

for the period from July 1st, _5 to July 31st, _5

DateV/R

No.Particulars L/F

Amount

(Dr)

Amount

(Cr)

July

5th

– Manu a/c

To Goods/stock a/c

Dr –

–

2,000

2,000

[Being the value of stock returned to Mr. Manu

vide bill no:___ dated:__]

July

6th

– Furniture a/c

To Cash a/c

Dr –

–

15,000

15,000

[Being the value of furniture purchased from M/s

___vide bill no:___ dated:__]

July

7th

– Goods/stock a/c

To Zenu a/c

Dr –

–

12,000

12,000

[Being the value of stock Purchased from Mr. Zenu

vide bill no:___ dated:__]

July

8th

– Manu a/c

To Cash a/c

Dr –

–

10,000

10,000

[Being the amount paid to Mr. Manu vide voucher

no:___ dated:__]

July

9th

– Jane a/c

To Goods/stock a/c

Dr –

–

13,500

13,500

[Being the value of stock Sold to Ms.Zane vide bill

no:___ dated:__]

Journal in the books of M/s Rama & Sons

for the period from July 1st, _5 to July 31st, _5

DateV/R

No.Particulars L/F

Amount

(Dr)

Amount

(Cr)

July

10th

– Goods/stock a/c

To Sonu a/c

Dr –

–

3,000

3,000

[Being the value of stock returned from Mr. Sonu

vide bill no:___ dated:__]

July

11th

– Cash a/c

To Jane a/c

Dr –

–

5,500

5,500

[Being the amount of cash received from Ms. Jane

vide cash receipt no:___ dated:__]

July

12th

– Drawings a/c

To Goods/stock a/c

Dr –

–

3,000

3,000

[Being the amount of stock taken by Ramu for

domestic use vide bill no:___ dated:__]

July

13th

– Zenu a/c

To Goods/stock a/c

Dr –

–

1,000

1,000

[Being the amount of stock returned to Mr. Zenu

vide bill no:___ dated:__]

July

14th

– Cash a/c

To Sonu a/c

Dr –

–

12,000

12,000

[Being the amount of cash received from Mr. Sonu

vide cash receipt no:___ dated:_]

Journal in the books of M/s Rama & Sons

for the period from July 1st, _5 to July 31st, _5

DateV/R

No.Particulars L/F

Amount

(Dr)

Amount

(Cr)

July

15th

– Machinery a/c

To Cash a/c

Dr –

–

18,000

18,000

[Being the amount paid for machinery purchased

to M/s ____vide voucher no:___ dated:__]

July

16th

– Cash a/c

To Furniture a/c

Dr –

–

1,000

1,000

[Being the amount received on sale of furniture

vide cash receipt no:___ dated:__]

July

17th

– Drawings a/c

To Cash a/c

Dr –

–

15,000

15,000

[Being the amount of cash paid for bicycle

purchases for proprietor's son vide voucher

no:___ dated:__]

July

19th

– Cash a/c

To Goods/stock a/c

Dr –

–

15,000

15,000

[Being the value of stock sold for cash vide receipt

no:___ dated:__]

July

20th

– Goods/stock a/c

To Cash a/c

Dr –

–

13,500

13,500

[Being the value of stock Purchased for vide

voucher no:___ dated:__]

General Ledger [Books of Mr. Ramu]

Cash a/c

DrCr

Date Particulars J/F Amount Date Particulars J/F Amount

01/10/_5

04/10/_5

11/10/_5

14/10/_5

16/10/_5

19/10/_5

To Capital a/c

To Goods/stock

a/c

To Jane a/c

To Sonu a/c

To Furniture a/c

To Goods/stock

a/c

–

–

–

–

–

–

75,000

16,000

5,500

12,000

1,000

15,000

06/10/_5

08/10/_5

15/10/_5

17/10/_5

20/10/_5

30/07/_5

By Furniture a/c

By Manu a/c

By Machinery a/c

By Drawings a/c

By Goods/stock

a/c

By Balance c/d

–

–

–

–

–

–

15,000

10,000

18,000

15,000

13,500

53,000

tl 1,24,500 tl 1,24,500

31/07/_5 To Balance b/d – 53,000

Capital a/c

DrCr

Date ParticularsJ/

FAmount Date Particulars

J/

FAmount

30/07/_5 To Balance c/d – 75,000 01/10/_5 By Cash a/c – 75,000

tl 75,000 tl 75,000

31/07/_5 By Balance b/d – 75,000

Goods/stock a/c

DrCr

Date Particulars J/F Amount Date Particulars J/F Amount

01/10/_5

03/10/_5

07/10/_5

10/10/_5

20/10/_5

30/07/_5

To Manu a/c

To Meenu a/c

To Zenu a/c

To Sonu a/c

To Cash a/c

To Balance c/d

–

–

–

–

–

–

25,000

15,000

12,000

3,000

13,500

2,000

02/10/_5

04/10/_5

05/10/_5

09/10/_5

12/10/_5

13/10/_5

19/10/_5

By Sonu a/c

By Cash a/c

By Manu a/c

By Jane a/c

By Drawings

a/c

By Zenu a/c

By Cash a/c

–

–

–

–

–

–

–

20,000

16,000

2,000

13,500

3,000

1,000

15,000

tl 70,500 tl 70,500

31/07/_5 By Balance b/d – 2,000

Manu a/c

DrCr

Date Particulars J/F Amount Date Particulars J/F Amount

05/10/_5

08/10/_5

30/07/_5

To Goods/stock

a/c

To Cash a/c

To Balance c/d

–

–

–

2,000

10,000

13,000

01/10/_5 By Goods/stock

a/c

– 25,000

tl 25,000 tl 25,000

31/07/_5 By Balance b/d – 13,000

Sonu a/c

DrCr

Date Particulars J/F Amount Date Particulars J/F Amount

02/10/_5 To Goods/stock – 20,000 10/10/_5 By Goods/stock – 3,000

Sonu a/c

DrCr

Date Particulars J/F Amount Date Particulars J/F Amount

a/c 14/10/_5

30/07/_5

a/c

By Cash a/c

By Balance c/d

–

–

12,000

5,000

tl 20,000 tl 20,000

31/07/_5 To Balance b/d – 5,000

Meenu a/c

DrCr

Date Particulars J/F Amount Date Particulars J/F Amount

30/07/_5 To Balance

c/d

– 15,000 03/10/_5 By Goods/stock a/c – 15,000

tl 15,000 tl 15,000

31/07/_5 By Balance b/d – 15,000

Furniture a/c

DrCr

Date Particulars J/F Amount Date ParticularsJ/

FAmount

06/10/_5 To Cash a/c – 15,000 16/10/_5

30/07/_5

By Cash a/c

By Balance c/d

–

–

1,000

14,000

tl 15,000 tl 15,000

31/07/_5 To Balance

b/d

– 14,000

Zenu a/c

DrCr

Date Particulars J/F Amount Date Particulars J/F Amount

13/10/_5

30/07/_5

To Goods/stock

a/c

To Balance c/d

–

–

1,000

11,000

07/10/_5 By Goods/stock

a/c

– 12,000

tl 12,000 tl 12,000

31/07/_5 By Balance b/d – 11,000

Jane a/c

DrCr

Date Particulars J/FAmoun

tDate Particulars J/F Amount

09/10/_5 To Goods/stock a/c – 13,500 11/10/_5

30/07/_5

By Cash a/c

By Balance

c/d

–

–

5,500

8,000

tl 13,500 tl 13,500

31/07/_5 To Balance b/d – 8,000

Drawings a/c

DrCr

Date Particulars J/FAmoun

tDate Particulars J/F Amount

12/10/_5

17/10/_5

To Goods/stock a/c

To Cash a/c

–

–

3,000

15,000

30/07/_5 By Balance

c/d

– 18,000

tl 18,000 tl 18,000

Drawings a/c

DrCr

Date Particulars J/FAmoun

tDate Particulars J/F Amount

31/07/_5 To Balance b/d – 18,000

Machinery a/c

DrCr

Date Particulars J/F Amount Date ParticularsJ/

FAmount

15/10/_5 To Cash a/c – 18,000 30/07/_5 By Balance c/d – 18,000

tl 18,000 tl 18,000

31/07/_5 To Balance

b/d

– 18,000

2)Journalise the following transactions in the books of Moon and post them into the ledger for the month of August

Aug 10th : Moon commenced business with a capital of 1,50,000

11th : Cash deposited into bank 50,000

12th : Bought equipment for 15,000

13th : Bought goods worth 20,000 from Star and payment made by cheque

14th : Sold goods to Sun for 15,000 and payment received through cheque

16th : Paid rent by cheque 5,000

17th : Took loan from Mr. Storm 25,000

18th : Received commission from Mr. Air by cheque 5,000

19th : Wages paid 15,000

20th : Withdrew from bank for personal use 3,000

21st : Withdrew from bank for office use 10,000

22nd : Bought goods for 25,000

23rd : Cash paid into bank 30,000

24th : Interest paid through cheque 2,000

25th : Gave loan to Mr.Wind 10,000

26th : Amount paid to Mr. Storm on loan account 15,000

27th : Salary paid to Manager Mr. Liquid 5,000

28th : Postage paid 1,000

29th : Received cheque from Mr. Wind on loan account 3,000

30th : Sold part of the equipment for 2,000

Journal in the books of M/s Rama & Sons

for the period from August 10th, _5 to August 30th, _5

DateV/R

No.Particulars L/F

Amount

(Dr)

Amount

(Cr)

August

10th

– Cash a/c

To Capital a/c

Dr –

–

1,50,000

1,50,000

[Being the amount received from Mr. Moon,

the proprietor as his capital contribution vide

receipt no:__ dated:__]

11th – Bank a/c

To Cash a/c

Dr –

–

50,000

50,000

[Being the amount of cash deposited into bank

vide bill no:___ dated:__]

12th – Equipment a/c

To Cash a/c

Dr –

–

15,000

15,000

[Being the value of equipment purchased from

M/s___ for cash vide bill no:___ dated:__]

13th – Goods/stock a/c

To Bank a/c

Dr –

–

20,000

20,000

[Being the payment made for stock purchased

vide Cheque no:__ dated:__]

14th – Bank a/c

To Goods/stock a/c

Dr –

–

15,000

15,000

[Being the amount received for stock sold to

Mr. Sun vide Cheque no:__ dated:__]

16th – Rent a/c

To Bank a/c

Dr –

–

5,000

5,000

[Being the amount paid for rent vide voucher

no:___ dated:__]

17th – Cash a/c

To Loan from Storm a/c

Dr –

–

25,000

25,000

[Being the cash received from Mr. Storm as

loan vide receipt no:___ dated:__]

18th – Bank a/c

To Commission a/c

Dr –

–

5,000

5,000

[Being the amount received for commission

vide cheque no:__ dated:__]

19th – Wages a/c

To Cash a/c

Dr –

–

15,000

15,000

[Being the amount paid for wages vide

voucher no:___ dated:__]

20th – Drawings a/c

To Bank a/c

Dr –

–

3,000

3,000

[Being the amount withdrawn from bank for

personal use vide cheque no:___ dated:__]

21st – Cash a/c

To Bank a/c

Dr –

–

10,000

10,000

[Being the amount withdrawn from bank for

office purpose vide cheque no:___ dated:__]

22nd – Goods/stock a/c

To Cash a/c

Dr –

–

25,000

25,000

[Being the amount of cash paid for stock

purchases vide voucher no:___ dated:__]

23rd – Bank a/c

To Cash a/c

Dr –

–

30,000

30,000

[Being the amount deposited into bank vide

voucher no:___ dated:__]

24th – Interest a/c

To Bank a/c

Dr –

–

2,000

2,000

[Being the amount of interest paid vide

cheque no:___ dated:__]

25th – Loan to Mr. Wind a/c

To Cash a/c

Dr –

–

10,000

10,000

[Being the amount of cash given to Mr. Wind

as loan vide voucher no:___ dated:__]

26th – Loan from Strom a/c

To Cash a/c

Dr –

–

15,000

15,000

[Being the amount paid to Mr. Storm for

repayment of loan vide voucher no:___

dated:__]

27th – Salary a/c

To Cash a/c

Dr –

–

5,000

5,000

[Being the amount paid for salary to Mr. Liquid

vide voucher no:___ dated:__]

28th – Postage a/c

To Cash a/c

Dr –

–

1,000

1,000

[Being the amount paid for purchase of

postage vide voucher no:___ dated:__]

29th – Bank a/c

To Loan to Mr. wind a/c

Dr –

–

3,000

3,000

[Being the Cheque no:___ date___ received

from Mr. Wind for repayment of loan]

30th – Cash a/c Dr – 2,000

To Equipment a/c – 2,000

[Being the amount received on sale of

equipment vide receipt no:___ dated:__]

General Ledger [Books of M/s Rama & Sons]

Cash a/c

DrCr

Date ParticularsJ/

FAmount Date Particulars J/F Amount

10/10/_5

17/10/_5

21/10/_5

30/10/_5

To Capital a/c

To Loan from

Storm a/c

To Bank a/c

To Equipment a/c

–

–

–

–

1,50,000

25,000

10,000

2,000

11/10/_5

12/10/_5

19/10/_5

22/10/_5

23/10/_5

25/10/_5

26/10/_5

27/10/_5

28/10/_5

31/08/_5

By Bank a/c

By Equipment a/c

By Wages a/c

By Goods/stock a/c

By Bank a/c

By Loan to Mr.

Wind a/c

By Loan from

Strom a/c

By Salary a/c

By Postage a/c

By Balance c/d

–

–

–

–

–

–

–

–

–

–

50,000

15,000

15,000

25,000

30,000

10,000

15,000

5,000

1,000

21,000

tl 1,87,000 tl 1,87,000

01/09/_5 To Balance b/d – 21,000

Capital a/c

DrCr

Date ParticularsJ/

FAmount Date Particulars

J/

FAmount

31/08/_5 To Balance c/d – 1,50,000 10/10/_5 By Cash a/c – 1,50,000

tl 1,50,000 tl 1,50,000

01/09/_5 By Balance b/d – 1,50,000

Bank a/c

DrCr

Date Particulars J/F Amount Date Particulars J/F Amount

11/10/_5

14/10/_5

18/10/_5

23/10/_5

29/10/_5

To Cash a/c

To Goods/stock a/c

To Commission a/c

To Cash a/c

To Loan to Mr. wind

a/c

–

–

–

–

–

50,000

15,000

5,000

30,000

3,000

13/10/_5

16/10/_5

20/10/_5

21/10/_5

24/10/_5

31/08/_5

By Goods/stock

a/c

By Rent a/c

By Drawings a/c

By Cash a/c

By Interest a/c

By Balance c/d

–

–

–

–

–

–

20,000

5,000

3,000

10,000

2,000

63,000

tl 1,03,000 tl 1,03,000

01/09/_5 To Balance b/d – 63,000

Equipment a/c

DrCr

Date Particulars J/F Amount Date ParticularsJ/

FAmount

12/10/_5 To Cash a/c – 15,000 30/10/_5

31/08/_5

By Cash a/c

By Balance c/d

–

–

2,000

13,000

Equipment a/c

DrCr

Date Particulars J/F Amount Date ParticularsJ/

FAmount

tl 15,000 tl 15,000

01/09/_5 To Balance

b/d

– 13,000

Goods/stock a/c

DrCr

Date Particulars J/F Amount Date ParticularsJ/

FAmount

13/10/_5

22/10/_5

To Bank a/c

To Cash a/c

–

–

20,000

25,000

14/10/_5

31/08/_5

By Bank a/c

By Balance c/d

–

–

15,000

30,000

tl 45,000 tl 45,000

01/09/_5 To Balance

b/d

– 30,000

Rent a/c

DrCr

Date Particulars J/F Amount Date ParticularsJ/

FAmount

16/10/_5 To Bank a/c – 5,000 31/08/_5 By Balance c/d – 5,000

tl 5,000 tl 5,000

01/09/_5 To Balance

b/d

– 5,000

Loan from Storm a/c

DrCr

Date ParticularsJ/

FAmount Date Particulars

J/

FAmount

31/08/_5 To Balance c/d – 25,000 17/10/_5 By Cash a/c – 25,000

tl 25,000 tl 25,000

01/09/_5 By Balance b/d – 25,000

Commission a/c

DrCr

Date ParticularsJ/

FAmount Date Particulars

J/

FAmount

31/08/_5 To Balance c/d – 5,000 18/10/_5 By Bank a/c – 5,000

tl 5,000 tl 5,000

01/09/_5 By Balance b/d – 5,000

Wages a/c

DrCr

Date Particulars J/F Amount Date ParticularsJ/

FAmount

19/10/_5 To Cash a/c – 15,000 31/08/_5 By Balance c/d – 15,000

tl 15,000 tl 15,000

01/09/_5 To Balance

b/d

– 15,000

Drawings a/c

DrCr

Date Particulars J/F Amount Date ParticularsJ/

FAmount

20/10/_5 To Bank a/c – 3,000 31/08/_5 By Balance c/d – 3,000

tl 3,000 tl 3,000

01/09/_5 To Balance

b/d

– 3,000

Interest a/c

DrCr

Date Particulars J/F Amount Date ParticularsJ/

FAmount

24/10/_5 To Bank a/c – 2,000 31/08/_5 By Balance c/d – 2,000

tl 2,000 tl 2,000

01/09/_5 To Balance

b/d

– 2,000

Loan to Mr. Wind a/c

DrCr

Date Particulars J/F Amount Date ParticularsJ/

FAmount

25/10/_5 To Cash a/c – 10,000 31/08/_5 By Balance c/d – 10,000

tl 10,000 tl 10,000

01/09/_5 To Balance

b/d

– 10,000

Loan from Strom a/c

DrCr

Date Particulars J/F Amount Date ParticularsJ/

FAmount

26/10/_5 To Cash a/c – 15,000 31/08/_5 By Balance c/d – 15,000

tl 15,000 tl 15,000

01/09/_5 To Balance

b/d

– 15,000

Salary a/c

DrCr

Date Particulars J/F Amount Date ParticularsJ/

FAmount

27/10/_5 To Cash a/c – 5,000 31/08/_5 By Balance c/d – 5,000

tl 5,000 tl 5,000

01/09/_5 To Balance

b/d

– 5,000

Postage a/c

DrCr

Date Particulars J/F Amount Date ParticularsJ/

FAmount

28/10/_5 To Cash a/c – 1,000 31/08/_5 By Balance c/d – 1,000

tl 1,000 tl 1,000

01/09/_5 To Balance

b/d

– 1,000

Loan to Mr. wind a/c

DrCr

Date ParticularsJ/

FAmount Date Particulars

J/

FAmount

31/08/_5 To Balance c/d – 3,000 29/10/_5 By Bank a/c – 3,000

tl 3,000 tl 3,000

01/09/_5 By Balance b/d – 3,000

TRIAL BALANCE1) Creative Advertising, owned by Miss Abida Masood, provides

advertising consulting services. During January 2011, the following events occurred:

Jan. 2     Owner contributed Rs. 50,000 and a new computer costing Rs. 20,500 to start her business.Jan. 4     Office supplies were purchased on account for Rs. 4,000.Jan. 10   Creative Advertising obtained 12% 5-year loan of Rs. 20,000 from the bank.Jan. 12   Creative Advertising paid the utility bills for Rs. 2,750.Jan. 15   Paid the Rs. 3,000 in Accounts Payable from the purchase of office supplies on Jan. 4.Jan. 24   Advertising services completed in January were billed to clients Annies’ Flowers at Rs. 18,300.Jan. 27   Creative Advertising received Rs. 5,500 from Annies’ Flowers, a client, as payment on account.Jan. 30   Miss Abida Masood withdrew Rs. 6,000 of cash for personal use. 

 2) Shah Garden Center is retail garden supplier. Record the transactions needed

to journalize, post to respective ledger account and prepare Trial Balance of the following for October, 2011 of the current year:

Oct. 2     Purchased inventory on credit terms of 1/10 net 30. FOB shipping point, for Rs. 3,000. Freight charges on the purchase were Rs. 150.Oct. 9     Sold garden supplies on credit terms 3/20 net 30, FOB shipping point, for Rs. 4,000. The cost of the supplies sold was Rs. 2,500.Oct. 10   Paid the amount owed on account for the Oct. 2 inventory purchase.Oct. 15   Received merchandise that was returned as defective, originally sold for Rs. 500 on Oct. 9. The original cost of the supplies returned was Rs. 275.Oct. 25  Received payment on account for the Oct. 9 sale less the appropriate sales discount.Oct. 28   Inventory lost by fire of cost Rs. 350.

3) Prepare a Trial Balance for Shining Brothers Pvt. Ltd. at March 31st, 2017?

 Solution:

4) Prepare Trial Balance as on 31.03.2012 from the following balances of Ms. Maliha Afzal:

Drawings Rs. 74,800                    Purchases Rs. 295,700                  Stock (1.04.2011) Rs. 30,000Bills receivable Rs. 52,500          Capital Rs. 250,000                       Furniture Rs. 33,000             

Discount allowed Rs. 950            Sales Rs. 335,350                           Rent Rs. 72,500                  Freight Rs. 3,500                           Printing charges Rs. 1,500           Sundry creditors 75,000Insurance Rs. 2,700                      Sundry expenses Rs. 21,000      Discount received Rs. 1,000Bank loan Rs. 120,000                 Stock (31.03.2012) Rs. 17,000    Income tax Rs. 9,500Machinery Rs. 215,400                 Bills payable Rs. 31,700Solution:

SUBSIDIARY BOOKS:

Subsidiary Books are those books of original entry in which transactions of similar nature are recorded at one place and in chronological order. In a big concern, recording of all transactions in one Journal and posting them into various ledger accounts will be very difficult and involve a lot of clerical work.

1) Enter the following transactions in sales (journal) book of M/s.Bansal electronics:

2014September

01 Sold to Amit Traders as per bill no.432120 Pocket Radio @ 70 per Radio2, T.V. set, B&W.(6”) @ 800 Per T.V.

 

10 Sold to Arun Electronics as per bill no.43515 T.V. sets (20”) B&W @ ₹ 3,000 per T.V.2 T.V. sets (21”) Colour @ ₹ 4,800 per T.V.

 

22 Sold to Handa Electronics as per bill no.4,39910 Tape recorders @ ₹ 600 each5 Walkman @ ₹ 300 each

 

28 Sold to Harish Trader as per bill no.443010 Mixer Juicer Grinder @ ₹ 800 each.

Books of M/s Bansal ElectronicsSales Book

Date Bill No.

Name of the Customer(Account to be debited) L.F.

Details₹

Amount₹

2014          

Sep 01

4321 Amit Traders      

    20 Pocket Radio @ ₹ 70 Per Radio   1,400  

    2 T.V Set, B&W (6″) @ ₹ 800 Per T.V.   1,600 3,000

Sep 10

4351 Arun Electronics      

    5 T.V. sets (20″) B&W @ ₹ 3,000 per T.V.

  15,000

 

    2 T.V. sets (21″) Colour @ ₹ 4,800 per T.V

  9,600 24,600

Sep 22

4399 Handa Electronics      

    10 Tape Recorders @ ₹ 600 each   6,000  

    5 Walkman @ ₹ 300 each   1,500 7,500

Sep 28

4430 Harish Traders      

    10 Mixer Juicer Grider @ ₹ 800 each   8,000 8,000

           

    Sales Account     43,100

 

2) Prepare a purchases return (journal) book from the following transactions for January 2014:

2014January

05 Returned goods to M/s Karthik Traders 1,200

10 Goods returned to Sahil Pvt. Ltd. 2,500

17 Goods returned to M/s Kohinoor Traders. for list price ₹ 2,000 less 10% trade discount.

 

28 Return outwards to M/s Handa Traders 550

Purchases Returns Book

Date Debit NoteNo.

Name of the Supplier

(Account to be

L.F. Details₹

Amount₹

debited)

2014          

Sep 05   M/s Kartik Traders     1,200

Jan. 10   Sahil Pvt. Ltd.     2,500

Jan. 17   M/s Kohinoor Traders

     

    List Price   2,000  

      Less: 10% Trade discount

  (200) 1,800

Jan. 28   M/s Handa Traders     550

           

    Purchases Return Account

    6,050

3). Prepare Return Inward Journal (Book) from the following transactions of M/s Bansal Electronics for November 2014:

2014November

04 M/s Gupta Traders returned the goods 1,500

10 Goods returned from M/s Harish Traders 800

18 M/s Rahul Traders returned the goods not as per specifications

1,200

28 Goods returned from Sushil Traders 1,000

Sales Returns Book

DateCredit NoteNo.

Name of the Customer

(Account to be credited)

L.F.Amoun

t₹

2014        

Nov. 04

  M/s Gupta Traders   1,200

Nov. 10

  M/s Harish Traders

  800

Nov. 18

  M/s Rahul Traders   1,200

Nov. 28

  Sushil Traders   1,000

         

    Sales Return Account

  4,500

 

RECTIFICATION OF ERRORS:

On the basis of rectification of errors, we can classify the errors into the following two broad categories:

1. Errors not affecting the Trial Balance

2. Errors affecting the Trial Balance

The errors need to be categorized in these categories because we can usually rectify the errors not affecting the trial balance by passing a rectification journal entry. While the errors affecting the trial balance affect only one account and for these, we cannot pass a journal entry. However, we can pass a journal entry only by opening a Suspense A/c.

Q: Trial Balance of M/s Shinde Enterprises did not agree. It puts the difference to the Suspense A/c. Rectify the following errors and prepare the Suspense A/c to ascertain the original difference in the trial balance.

1. Amount paid for the installation of the machinery 10000 was posted to the₹ Repairs and maintenance A/c.

2. Total of Purchases book 50000 was not posted to the ledger.₹

3. Goods returned to John 3000 were recorded in Sales Book.₹

4. Salary paid to Ram 6000 was debited to his personal account.₹

5. Depreciation written-off on furniture 500 was not posted to the furniture account.₹Ans: In the books of M/s Shinde Enterprises.

Date Particulars Amount (Dr.) Amount (Cr.)

1. Machinery A/c Dr. 10000

To Repairs and Maintenance A/c 10000

(Being rectification of the wrong journal entry in the Repairs and maintenance A/c)

2. Purchases A/c Dr. 50000

To Suspense A/c 50000

(Being rectification of the omission to post the total of purchases book in the ledger)

3. Sales A/c Dr. 3000

To Purchases Return A/c 3000

(Being rectification of wrong recording of the purchases return in the sales book)

4. Salary A/c Dr. 6000

To Ram’s A/c 6000

(Being rectification of wrong debit to the personal account of an employee)

5. Suspense A/c Dr. 500

To Furniture A/c 500

(Being rectification of omission of posting in the furniture account)

Suspense A/c

Date Particulars Amount Date Particulars Amount

Difference as per Trial balance 49500 2. By Purchases

A/c 50000

5. To Furniture A/c 500

50000 50000

 

UNIT – II

ACCOUNTING STANDARDS

What Is an Accounting Standard?An accounting standard is a common set of principles, standards and procedures that define the basis of financial accounting policies and practices. Accounting standards improve the transparency of financial reporting in all countries. In the United States, the Generally Accepted Accounting Principles form the set of accounting standards widely accepted for preparing financial statements. International companies follow the International Financial Reporting Standards, which are set by the International Accounting Standards Board and serve as the guideline for non-U.S. GAAP companies reporting financial statements.

History of Accounting Standards and PurposeThe American Institute of Accountants, which is now known as the American Institute of Certified Public Accountants, and the New York Stock Exchange attempted to launch the first accounting standards in the 1930s. Following this attempt came the Securities Act of 1933 and the Securities Exchange Act of 1934, which created the Securities and Exchange Commission. Accounting standards have also been

established by the Governmental Accounting Standards Board for accounting principles for all state and local governments.

Accounting standards specify when and how economic events are to be recognized, measured and displayed. External entities, such as banks, investors and regulatory agencies, rely on accounting standards to ensure relevant and accurate information is provided about the entity. These technical pronouncements have ensured transparency in reporting and set the boundaries for financial reporting measures.

U.S. GAAP Accounting StandardsThe American Institute of Certified Public Accountants developed, managed and enacted the first set of accounting standards. In 1973, these responsibilities were given to the newly created Financial Accounting Standards Board. The Securities and Exchange Commission requires all listed companies to adhere to U.S. GAAP accounting standards in the preparation of their financial statements to be listed on a U.S. securities exchange. Accounting standards ensure the financial statements from multiple companies are comparable. Because all entities follow the same rules, accounting standards make the financial statements credible and allow for more economic decisions based on accurate and consistent information.

Financial Accounting Standards Board (FASB)An independent nonprofit organization, the Financial Accounting Standards Board (FASB) has the authority to establish and interpret generally accepted accounting principles (GAAP) in the United States for public and private companies and nonprofit organizations. GAAP refers to a set of standards for how companies, nonprofits, and governments should prepare and present their financial statements.

International Financial Reporting Standards Accounting StandardsGenerally Accepted Accounting Principles are heavily used among public and private entities in the United States. The rest of the world primarily uses IFRS. Multinational entities are required to use these standards. The IASB establishes and interprets the international communities' accounting standards when preparing financial statements.

AS-2:

Valuation of Inventories

This Standard should be applied in accounting for all inventories except the following :

(a) work in progress in the construction business, including directly related service contracts

(b) work in progress of service business (consulting, banking etc)

(c) shares, debentures and other financial instruments held as stock in trade

(d) Inventories like livestock, agricultural and forest products,  mineral oils etc These inventories are valued at net realizable value

Definition

I. Definition of the Inventory includes the following:

A. Held for sale in the normal course of business i.e finished goods

B. Goods which are in the production process i.e work in progress

C. Raw materials which are consumed during production process or rendering of services (including consumable stores item)

II. Net Realisable Value (NRV):

“Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale”

Valuation of Inventories

Inventories should be valued at lower of cost and net realizable value. Following are the steps for valuation of inventories:

A. Determine the cost of inventories

B. Determine the net realizable value of inventories

C. On Comparison between the cost and net realizable value, the lower of the two is considered as the value of inventory. A comparison can be made the item by item or by the group of items.

(Refer Case studies given at the end of the article)

Let’s discuss the important items of Inventory valuation in detail:

A. Cost of Inventories

The cost of inventories includes the following

i) Purchase cost

ii) Conversion cost

iii) Other costs which are incurred in bringing the inventories to their present location and condition.

B. Cost of Purchase

While determining the purchase cost, the following should be considered:

i) Purchase cost of the inventory includes duties and taxes (except those which are subsequently recoverable from the taxing authorities)

ii) Freight inwards

iii) Other expenditure which is directly attributable to the purchase

iv) Trade discounts, rebates, duty drawbacks and other similar items are deducted in determining the costs of purchase

C. Cost of Conversion

Cost of conversion includes all cost incurred during the production process to complete the raw materials into finished goods.

Cost of conversion also includes a systematic allocation of fixed and variable overheads incurred by the enterprise during the production process.

Following are the categories of conversion cost:

I. Direct Cost

All the cost directly related to the unit of production such as direct labor

II. Fixed Overhead Cost

Fixed overheads are those indirect costs which are incurred by the enterprise irrespective of production volume. These are the cost that remains relatively constant regardless of the volume of production, such as depreciation, building maintenance cost, administration cost etc.

The allocation of fixed production overheads is based on the normal capacity of the production facilities. In case of low production or idle plant allocation of these fixed overheads are not increased consequently.

III. Variable Overhead Cost

Variable overheads are those indirect costs of production that vary directly with the volume of production. These are the cost that will be incurred based on the actual production volume such as packing materials and indirect labor.

D. Other Cost

All the other cost which are incurred in bringing the inventories to the current location and condition. For (eg) design cost which is incurred for the specific customer order.

If there are by-products during the production of main products, their cost has to be separately identified. If they are not separately identifiable, then allocation can be made on the relative sale value of the main product and the by-product.

Some of the cost which should not be included are:

a. Cost of any abnormal waste materials cost

b. Selling and distribution cost unless those costs are necessary for the production process

c. A normal loss which occurs during the production process is apportioned over the remaining no of units and abnormal loss is treated as an expense

 (Refer Case studies given at the end of the article)

Methods of Inventory Valuation

The cost of inventories of items which can be segregated for specific projects should be assigned by specific identification of their individual costs (Specific identification method).

All other items cost should be assigned by using the first-in, first-out (FIFO), or weighted average cost (WAC) formula. 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.

However, when it is difficult to calculate the cost using above methods, Standard cost and Retail cost can be used if the results approximate the actual cost.

Accounting Disclosure

The following should be disclosed in the financial statements:

1. Accounting policy adopted in inventory measurement2. Cost formula used3. Classification of the of inventory such as finished goods, raw material & WIP

and stores and spares etc4. Carrying amount of inventories carried at fair value less sale cost5. Amount of inventories recognized as expense during the period6. Amount of any write-down of inventories recognized as an expense and its

subsequent reversal if any.

PRACTICAL QUESTIONS ON AS-2:

 1.      The company deals in three products, A, B and C, which are neither similar nor interchangeable. At the time of closing of its account for the year 2002-03. The Historical Cost and Net Realizable Value of the items of closing stock are determined as follows:

What will be the value of Closing Stock?

Answer:

As per para 5 of AS 2 on Valuation of Inventories, inventories should be valued at the lower of cost and net realizable value. Inventories should be written down to net realizable value on an item-by-item basis in the given case.

Hence, closing stock will be valued at Rs. 76 lakhs.

  2) X Co. Limited purchased goods at the cost of Rs.40 lakhs in October, 2005. Till March, 2006, 75% of the stocks were sold. The company wants to disclose closing stock at Rs.10 lakhs. The expected sale value is Rs.11 lakhs and a commission at 10% on sale is payable to the agent. Advise, what is the correct closing stock to be disclosed as at 31.3.2006.

Answer:

As per Para 5 of Accounting Standard 2 “Valuation of Inventories”, the inventories are to be valued at lower of cost and net realizable value.

In this case, the cost of inventory is Rs. 10 lakhs. The net realizable value is 11,00,000 × 90% = Rs. 9,90,000. So, the stock should be valued at Rs. 9,90,000.

3)     Items that are to be excluded in determination of the cost of inventories as per AS2.

Answer:

Items that are to be excluded in determination of the cost of inventories as per para 13 of AS 2 on ‘Valuation of Inventories’ are:

         Abnormal amounts of wasted materials, labour or other production costs.

         Storage costs unless those costs are necessary in the production process prior to a further

         Administrative overheads that do not contribute to bringing the inventories to their present location and condition; and

         Selling and distribution costs.

AS-4

Applicability of AS 4 Contingencies and Events Occurring After the Balance Sheet DateAS 4 deals with treatment in the financial statements of:

(A) contingencies

(B) events which occur after balance sheet date

The followings that might result in the contingencies are excluded from the scope of AS 4 bearing in mind special considerations which are applicable to them:

(a) liabilities of general insurance enterprises and life assurance which arises from the insurance policies issued

(b) commitments which arise from a long-term lease contract

(c) obligations under a retirement benefit plan

Definitions

 1. Contingency

Contingencies are situations or conditions, the eventual outcome of which, profit or loss, would be determined or known only on happening, or non- happening, of an uncertain future event(s).

 2. Events occurring after the balance sheet date

These are those noteworthy events, favorable as well as unfavorable, which occurs between balance sheet date and date on which such financial statements are considered and approved by the BoD (Board of  Directors) in case of companies, and, by equivalent approving authorities in the of other entities.

There are two kinds of events that could be identified:

i. Events that gives further evidence of situations which subsisted at balance sheet date

ii. Events that are indicative of situations which occurred following balance sheet date.

Accounting Treatment of Contingent Losses

For a contingent loss, the accounting treatment is determined by likely outcome of such contingency. In case it’s likely that such contingency would result in the loss of the business, then it’s prudent to account for such loss in the enterprise’s financial statements.

In case there is insufficient or conflicting evidence for assessing the value of the contingent loss, then the disclosure in financial statements is provided for the nature and existence of the contingency. Obligations which might arise from the discounted bills of exchange and such similar obligations which are undertaken by the enterprise are usually disclosed in the financial statements by way of notes, even if the possibility of loss is remote.

Accounting Treatment of Contingent Gains

A Contingent gain isn’t recognized in the financial statements as their recognition could result in recognition of revenue that might never be realized. When the realization of gain is certain and not contingent anymore, the gain can be accounted in the books of accounts.

Determination of the amount of contingency

The value at which contingencies are stated in financial statements depends on the information that is available on a date when the financial statements are considered and approved.

Events which occurs after balance sheet date which suggest that the asset might have been impaired, or a liability might have existed, at balance sheet date are, hence, taken into consideration in recognizing the contingencies and determining the value at which the contingencies are included in the financial statements

Events Occurring after the Balance Sheet Date

Events that occur between balance sheet date and date on which these are approved, might suggest the requirement for an adjustment(s) to the assets and the liabilities as at balance sheet date or might need disclosure.

(a) Adjusting Events: Adjustments are required to assets and liabilities for events which occur after balance sheet date which offer added information substantially affecting the determination of the amounts which relates to the conditions that existed at balance sheet date.

(b) Non-Adjusting Events: Adjustments aren’t required to assets and liabilities for events which occur after balance sheet date, in case such events don’t relate to the conditions which existed at balance sheet date.

There’re events which, though occurring after balance sheet date, are sometimes presented in financial statements because of their special nature or due to statutory requirements.

Disclosure

According to AS 4, disclosure requirements would be applicable only with respect to such contingency or event that affect financial position to a substantial extent.

A. In case the contingent loss isn’t provided for, an estimate of the financial impact and nature of such loss are usually disclosed through notes unless the probability of such loss is remote

B. In case a reliable estimation of financial impact cannot be arrived at, this fact needs to be disclosed

C. When events that occur after the balance sheet date are disclosed in the report of approving authority, information provided includes nature of events and the estimate of their financial impacts or the statement that such estimates cannot be arrived at

AS-9

Introduction of AS 9 Revenue Recognition

Revenue has to be measured by the amount charged to the clients for the sale of goods and services.

However, in the case of the agency relationship, the revenue has to be measured by the amount charged for commission and not on the gross inflow of the cash, receivables or other consideration.

There are few exceptions to the above-mentioned statement where the special consideration applies: –

1. Revenue arising from Construction Contracts2. Revenue arising from hire-purchase, lease agreements3. Revenue arising from government grants and other similar subsidies4. Revenue of Insurance companies arising from insurance contracts

Applicability of AS 9 Revenue Recognition

This standard was issued by ICAI in the year 1985 and in the initial years, it was re-commendatory for only Level I enterprises and but was made mandatory for all other enterprises from April 01, 1993.

As per ICAI, “Enterprise means a company as defined in section 3 of the Companies Act, 1956”.

Level I enterprises are those enterprises whose turnover for the immediately preceding accounting year exceeds 50 crores. The turnover here does not include other income and is applicable for holding as well as subsidiary companies.

Explanation

1. Revenue recognition emphasizes on the timing of recognition of revenue in the statement of profit and loss of an enterprise

2. The amount of revenue arising from a transaction is usually determined by an agreement between the parties involved in the transaction

3. When uncertainties arise regarding the determination of the amount or its associated costs, these uncertainties may influence the timing of the revenue

A. Sale of Goods

One key element for determining the recognition of revenue of a transaction involving the sale of goods is that the seller has transferred the property in the goods to the buyer for a consideration. In most cases, the transfer of property in the goods results in the transfer of the significant risks and rewards in ownership of the goods.

However, there are situations where the transfer of significant risks doesn’t coincide with the transfer of goods to the buyer, in such cases revenue has to be recognized at the time of transfer of significant risks and rewards to the buyer. Example: Goods sent to the consignee on approval basis.

There are certain cases in the specific industry where the performance may be substantially complete prior to the execution of the transaction generating revenue.

In such cases, when the sale is assured under government guarantee or a forward contract or where the market exists and there is a negligible risk of failure to sell, the goods involved are often valued at the net realizable value (NRV).

Such amounts are not defined in the definition of the revenue but are still sometimes recognized in the statement of profit and loss. Example: Harvesting of Agricultural Crops or extraction of mineral ores.

B. Rendering of Services

Revenue recognition of services depends as the service is performed. This is further divided into two ways:

(a) Proportionate Completion Method: This method of accounting recognizes revenue in the statement of profit & loss proportionately with the degree of completion of each service.

Here the service completion consists of the execution of more than one act. Revenue is recognized with the completion of each such act.

(b) Completed Service Contract Method: This method of accounting recognizes revenue in the statement of profit & loss only when the rendering of services under a contract is completed or substantially completed.

C. Interest, royalties & dividends

The use by others of such enterprise resources gives rise to:

(i) Interest: Revenue is recognized on the time proportion basis after taking into account the amount outstanding and the rate applicable.

For Example: If the interest on FD is due on 30th June and 31st Dec. On 31st March when the books will be closed, though the interest for the period of Jan-March will be received in June, still we have to recognize the revenue in March itself.

(ii) Royalties: Royalty includes the charge for the use of patents, know-how, trademarks, and copyrights. Revenue has to be recognized on the basis of accrual basis and in accordance with the relevant agreement.

For Example: If the royalty is payable based on the number of copies of the book, then it has to be recognized on that basis only.

(iii) Dividends: Revenue has to be recognized when the owner’s right to receive payment is established. It is only certain when the company declare the dividends on the shares and the directors actually decide to pay the dividends to their shareholders.  

PRACTICAL QUESTIONS ON AS-9:

1. Arjun Ltd. sold farm equipments through its dealers. One of the conditions at the time of sale is, payment of consideration in 14 days and in the event of delay interest is chargeable @ 15% per annum. The Company has not realized interest from the dealers in the past. However, for the year ended 31.3.2006, it wants to recognise interest due on the balances due from dealers. The amount is ascertained at Rs. 9 lakhs. Decide whether the income by way of interest from dealers is eligible for recognition as per AS 9.

Answer :

As per AS 9 “Revenue Recognition”, where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim, the revenue recognition is postponed to the extent of uncertainty inverted. In such cases, the revenue is recognized only when it is reasonably certain that the ultimate collection will be made.In this case, the company never realized interest for the delayed payments make by the dealers. Hence, it has to recognize the interest only if the ultimate collection is certain. The interest income hence is not to be recognized.

2. Y Ltd. used certain resources of X Ltd. In return X Ltd. receives Rs. 10 lakhs and Rs. 15 lakhs as interest and royalties respectively, from Y Ltd. during the year 2007 –2008. State on what basis X Ltd. should recognize their revenue, as per AS 9.

Answer :

As per AS 9 on ‘Revenue Recognition’, interest of Rs.10 lakhs received in the year 2007-2008 should be recognized on the time basis, whereas royalty of Rs. 15 lakhs received in the same year should be recognized on accrual basis as per the terms of relevant agreement.

3. According to Accounting Standard 9, when revenue from sales should be recognised?

Answer :

As per para 11 of AS 9 ‘Revenue Recognition’, revenue from sales should be recognized only when requirements as to performance are satisfied provided that at the time of performance it is not unreasonable to expect ultimate collection. These requirements can be given as follows: The seller of goods has transferred to the buyer the property in the goods for a price or all significant risks and rewards of ownership have been transferred to the buyer and the seller retains no effective control of the goods transferred to a degree usually associated with ownership; and

No significant uncertainty exists regarding the amount of the consideration that will be derived from the sale of the goods.

AS – 10:

Accounting Standard -10 Property, Plant and Equipment (Revised)

This is revised accounting standard 10  Property,Plant and Equipment(PPE),which has replaced AS 6Depreciation and AS 10 Accounting for fixed assets. This revision of AS 10 has been made to be as par withIndAS and IFRS. 

 Accounting Standard 10 : Property, Plant And Equipment.

1.Property, plant and equipment are tangible  items that:

Are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and Are expected to be used during more than a period of twelve months.

*Bearer plant is a plant thato Is used in the production or supply of agricultural produce; o Is expected to bear produce for more than a period of twelve months; ando Has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales.

* Biological Asset is a living animal or plant.*Agricultural Produce is the harvested product of biological assets of the enterprise.

2. The cost of an item of property, plant and equipment should be recognized as an asset if, and only if:

It is probable that future economic benefits associated with the item will flow to the enterprise; and The cost of the item can be measured reliably.

3. Items such as spare parts, stand-by equipment and servicing equipment are recognized in accordance with this Standard when they meet the definition of property, plant and equipment. Otherwise, such items are classified as inventory.

4. This Standard does not prescribe the unit of measure for recognition, i.e., what constitutes an item of property, plant and equipment.Thus, judgment is required in applying the recognition criteria to specific circumstances of an enterprise. An example of a ‘unit of measure’ can be a ‘project’ of construction of a manufacturing plant rather than individual assets comprising the project in appropriate cases for the purpose of capitalization of expenditure incurred during construction period. Similarly, it may be appropriate to aggregate individually insignificant items, such as moulds, tools and dies and to apply the criteria to the aggregate value. An enterprise may decide to expense an item which could otherwise have been included as property, plant and equipment, because the amount of the expenditure is not material.

5. 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:

Initially to acquire or construct an item of property, plant and equipment; and Subsequently to add to, replace part of, or service it.

Initial Costs

The acquisition of property, plant and equipment which does not, directly increases the future economic benefits but 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 recognized as an asset because without them the enterprise is unable to manufacture and sell chemicals.

Subsequent CostsRepairs and Maintenance

An enterprise does not recognize 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 recognized in the statement of profit and loss as incurred.

Costs of day-to-day servicing are primarily the costs of labor 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.

ReplacementsParts of some items of property, plant and equipment may require replacement at regular intervals.

For example, an aircraft interiors such as seats and galleys may require replacement several times during the life of the aircraft.

An enterprise recognizes in the carrying amount of an item of property, plant and equipment the cost of replacing part of such an item when that cost is incurred if the recognition criteria are met. The carrying amount of those parts that are replaced is derecognized.

InspectionA condition of continuing to operate an item of property, plant and equipment (for example, an aircraft) may be performing regular major inspections for faults regardless of whether parts of the item are replaced.

When each major inspection is performed, its cost is recognized in the carrying amount of the item of property, plant and equipment as a replacement if the recognition criteria are satisfied.

Any remaining carrying amount of the cost of the previous inspection is derecognized.

Measurement at Recognition

6. An item of property, plant and equipment that qualifies for recognition as an asset should be measured at its cost.

The cost of an item of property, plant and equipment comprises: It's purchase price, including import duties and non –refundable purchase taxes,, after deducting trade discounts and rebate . 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 the 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 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.

The amount recognized as provision should be the best estimates of the expenditure required to settle the present obligation at the balance sheet date. The discount rate should be a pre-tax rate that reflects current market assessment of the time value of money and the risks specific to the liability.

7. Recognition of costs in the carrying amount of an item of property, plant and equipment ceases when the item is in the location and condition necessary for it to be capable of operating in the manner intended by management.

Therefore the following costs are not included in the carrying amount of an item of property, plant and equipment:

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; Initial operating losses, such as those incurred while demand for the output of an item builds up; and Costs of relocating or reorganizing part or all of the operations of an enterprise.

8. Some operations occur in connection with the construction or development of an item of property, plant and equipment, but are not necessary to bring the item to the location and condition necessary for it to be capable of operating in the manner intended by management.

These incidental operations may occur before or during the construction or development activities.

For example, income may be earned through using a building site as a car park until construction starts. Because incidental operations are not necessary to bring an item to the location and condition necessary for it to be capable of operating in the manner intended by management, the income and related expenses of incidental operations are recognized in the statement of profit and loss and included in their respective classifications of income and expense.

9. The cost of a self-constructed asset is determined using the same principles 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 (see AS 2).

Therefore, any internal profits are eliminated in arriving at such costs. Similarly, the cost of abnormal amounts of wasted material,labor, or other resources incurred in self-constructing an asset is not included in the cost of the asset.

AS 16, Borrowing Costs, establishes criteria for the recognition of interest as a component of the carrying amount of a self-constructed item of property, plant and equipment.

10. Bearer plants are accounted for in the same way as self-constructed items of property, plant and equipment before they are in the location and condition necessary to be capable of operating in the manner intended by management. Consequently, references to ‘construction’ in this Standard should be read as covering activities that

are necessary to cultivate the bearer plants before they are in the location and condition necessary to be capable of operating in the manner intended by management.

Measurement of Cost

11. 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 recognized as interest over the period of credit unless such interest is capitalized in accordance with AS 16.

12. The cost of an item acquired in exchange of another asset of property, plant and equipment is measured at fair value. If the acquired item(s) is/are not measured at fair value, Its /their cost is measured at the carrying amount of the asset(s) given up.

13. Where several items of property, plant and equipment are purchased for a consolidated price, the consideration is apportioned to the various items on the basis of their respective fair values at the date of acquisition. In case the fair values of the items acquired cannot be measured reliably, these values are estimated on a fair basis as determined by competent valuer.

Measurement after Recognition14. An enterprise should choose either the cost model or the revaluation model as its accounting policy and should apply that policy to an entire class of property, plant and equipment.

Cost Model15. 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 Model16. 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.

17. 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 there is no market-based evidence of fair value, an enterprise may need to estimate fair value using an income approach (for example, based on discounted cash flow projections) or a depreciated replacement cost approach.

18. The frequency of revaluations depends upon the changes in fair values of the items of property, plant and equipment being revalued. Some items of property, plant and

equipment experience significant and volatile changes in fair value, thus necessitating annual revaluation.

Such frequent revaluations are unnecessary for items of property, plant and equipment with only insignificant changes in fair value. Instead, it may be necessary to revalue the item only every three or five years.

19. When an item of property, plant and equipment is revalued, the carrying amount of that asset is adjusted to their valued amount. At the date of the revaluation, the asset is treated in one of the following ways:

The gross carrying amount is restated proportionately to the change in the carrying amount. The accumulated depreciation at the date of the revaluation is adjusted to equal the difference between the gross carrying amount and the carrying amount of the asset after taking into account accumulated impairment losses; or The accumulated depreciation is eliminated against the gross carrying amount of the asset.

20. 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.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:

land; land and buildings; machinery; ships; aircraft; motor vehicles; furniture and fixtures; office equipment; and bearer plants.

AS – 16

AS 16 – Borrowing CostsThe main objective of this Accounting Standard is only to prescribe accounting principles for the accounting of borrowing cost.

Contents:

1.   Nature & Scope2.   Borrowing Cost3.   Qualifying Assets4.   Capitalization of Borrowing Cost5.   Types of Borrowing6.   Commencement of Capitalization7.   Suspension of Capitalization

8.   Cessation of Capitalization9.   Disclosures10.  Examples

1. Nature & Scope

This Notified accounting standard is mandatorily applicable to all enterprises. It is specifically stated that this accounting standard is only related to External Borrowings and does not deal with the cost of raising Equity or Convertible Preference Shares.Effective date: This standard came into effect from Financial Year starting on or after 1st April 2000

2. Borrowing Cost

As per ICAI “Borrowing Costs are interest and other costs incurred by an enterprise in connection with the borrowing of funds”

The following points should be taken into consideration for borrowing costs:

a. Interest on short term loans or long-term debts should be included as part of borrowing cost. Ex: Interest paid to financial institutions for loan taken to acquire the asset.

b. If an enterprise has incurred any discounts or premiums related to the borrowing cost, then it will also be amortised. Ex: Amount paid to the financial institutions as loan processing cost

c. If an enterprise has incurred any finance/ancillary cost in connection with the borrowings, then it will also be amortised. Ex: Amount to the professionals for preparation of project reports, etc.

d. If an enterprise has acquired any asset under finance lease or any other similar arrangement, then those finance cost will also be amortised. Ex: Leasing cost paid to the lessor every year.

If an enterprise has taken any borrowing in foreign currency, then the exchange rate fluctuation will also be amortised to the extent they are regarded as an adjustment of interest costs. Ex: An enterprise has taken a loan from foreign financial institutions when the rate of US $ was 64, while at the end of the financial year the rate of US $ was 65. The rate difference of US $ 1 will be treated as Borrowing Cost.

3. Qualifying Assets

Qualifying Assets are those assets which take substantial time to be ready for the intent of sale or use.

Substantial period primarily depends on the facts and circumstances of the case. Generally, a period of 12 months is considered as a substantial period unless a shorter or longer period can be justified based on facts and circumstances of the case.

Borrowing costs are capitalized in the books of accounts with the qualifying assets when it is certain that it will have future economic benefits. Any other borrowing costs must be treated as an expense in the period in which they are incurred.

4. Capitalization of Borrowing Cost

The following conditions should be satisfied for capitalization of borrowing costs:

a. Those borrowings costs which are directly attributable to the acquisition, construction or production of qualifying asset, are eligible for capitalization. Directly attributable costs are those costs which would have been avoided if the expenditure on the qualifying assets has not been made.

b. Qualifying assets will give future benefit to the enterprises and the cost can be measured reliably

5. Types of Borrowings

The two types of borrowings which are detailed below in the table are:a. Specific borrowingsb. General borrowings

Amount of borrowing cost to be capitalized is:

Type of Borrowing

Amount to be Capitalized

Specific Borrowing

 

The amount to be capitalized is:Actual Borrowing Cost incurred during the periodMinusAny income on temporary investment of borrowed funds(Ex: The excess money invested in Fixed Deposit will have interest gain)

General Borrowing

The amount to be capitalized involves few steps:a. Calculate Capitalization Rate. It will be weighted average of borrowing cost.b. Cost to be Capitalized = Capitalization rate * Amount spent on qualifying asset out of general borrowingNote: Amount of borrowing cost capitalized during a period should not exceed the amount of borrowing cost incurred during the period.

6. Commencement of Capitalization

The Commencement of Capitalization of borrowing cost should commence when all the conditions below are fulfilled:

a. Expenditure for the acquisition, construction or production of a qualifying asset is being incurred. Here expenditure includes those expenditure in the nature of cash or transfer of any asset or the assumption of interest bearing liabilities

b. Borrowing Costs are being incurred.

c. Activities that are necessary to prepare the asset for its intended use or sale are in progress. The activities here need not be the physical activities, but the technical and administrative work related to the assets is also taken into consideration

7. Suspension of Capitalization

Capitalization of Borrowing cost are commenced when the above mentioned 3 points are satisfied. However, if there is a temporary delay in which the active necessary developments are interrupted then then there will be a suspension of capitalization.

However, if the temporary delay is necessary part of the process of getting an asset ready for its intended use or sale, then there will be no suspension of capitalization.

8. Cessation of Capitalization

Capitalization of borrowing cost ceases when all the activities necessary to prepare the qualifying assets are complete. If an asset has been completed in parts and a completed part is capable of being used while the construction for the other part continues then the capitalization for that completed part will cease.

Example: A business park consists of several buildings and each building can be treated as an individual part.

9. Disclosures

The Financial Statements should disclose the following:a. The accounting policy adopted for borrowing costsb. The amount of borrowing costs capitalized during the year

10. Example 

ABC Ltd. obtained a loan from a bank for Rs. 50 lakhs on 30 th April 2017. ABC Ltd utilized the money:

Construction of Shed: Rs 50 Lakhs

Purchase of Machinery: Rs 40 Lakhs

Working Capital: Rs 20 lakhs

Advance for purchase of truck: Rs. 10 Lakhs

Construction of shed was completed in March 2018. The Machinery was installed on the same day. Truck was not yet received. Total interest charged by the bank for the year ending 31-03-2018 was Rs 18 lakhs.

The treatment will be:

Qualifying Asset as per AS 16 = Rs 50 Lakhs (Construction of Shed)

Borrowing Cost to be capitalized = 18 * 50/120 = Rs. 7.5 Lakhs

Interest to be debited to profit or loss account = (18-7.5) Lakhs = Rs. 10.50 Lakhs

 

UNIT – III

FINAL ACCOUNTS

1) Prepare a Trading Account for the year ended 31st December 2010 from the following balances:

  Rs.   Rs.

Opening Stock 4,00,000 Purchases Return 1,20,000

Purchases 20,00,000 Sales Return 2,00,000

Sales 50,00,000 Carriage on Purchase 80,000

Freight and Octroi 65,000 Carriage on sales 1,00,000

Wages 3,00,000 Factory Rent 1,20,000

Factory Lighting 1,08,000 Office Rent 75,000

Coal, Gas and Water 22,000 Import Duty 3,20,000

 

Closing Stock is valued at Rs. 6,00,000. 

Solution:

TRADING A/C

(for the year ended……………..)

Dr.                                                                                                                                            Cr.

Particular   Amount Particulars   Amount    Rs.     Rs.To Opening Stock   4,00,000 By Sales 50,00,000  To Purchases 20,00,000   Less: Sales Returns 2,00,000 48,00,000Less:Purchases       Return

 1,20,000

 18,80,000

By Closing Stock   6,00,000

To Freight and Octroi   65,000      To Wages   3,00,000      To Factory Lighting   1,08,000      To Coal, Gas and     Water

   22,000

     

To Carriage on      Purchase

   80,000

     

To Factory Rent   1,20,000      To Import Duty   3,20,000      To Gross Profit      transferred to      Profit & Loss A/c

    21,05,000

     

    54,00,000     54,00,000           

 

2)From the following particulars, prepare a Profit & Loss Account for the year ending 31st December, 2010.

  Rs.   Rs.

Gross Profit 21,05,000 Discount allowed 30,000

Trade Expenses 20,000 Lighting 7,800

Carriage on Sales 1,00,000 Commission Received 8,400

Office Salaries 1,58,000 Bad-debts 12,000

Postage and Telegram 7,200 Discount (Cr.) 6,000

Office Rent 75,00 Interest on Loan 22,000

Legal Charges 4,000 Stable Expenses 14,000

Audit Fee 16,000 Export Duty 23,000

Donation 11,000 Miscellaneous Receipts 5,000

Sundry Expenses 3,600 Unproductive Expenses 41,000

Selling Expenses 53,200 Travelling Expenses 25,000

Solution:

PROFIT AND LOSS ACCOUNT

for the year ending on 31st December, 2010

Dr.                                                                                                                                            Cr.

Particulars Amount Particulars Amount

  Rs.   Rs.

To Trade Expenses 20,000 By Gross Profit 21,05,000

To Carriage on Sales 1,00,000 By Commission Received 8,400

To Office Salaries 1,58,000 By Discount 6,000

To Postage & Telegram 7,200 By Miscellaneous Receipts 5,000

To Office Rent 75,000    

To Legal Charges 4,000    

To Audit Fee 16,000    

To Donation 11,000    

To Sundry Expenses 3,600    

To Selling Expenses 53,200    

To Discount Allowed 30,000    

To Lighting 7,800    

To Bad-Debts 12,000    

To Interest on Loan 22,000    

To Stable Expenses 14,000    

To Export Duty 23,000    

To Unproductive Expenses 41,000    

To Travelling Expenses 25,000    

To Net Profit transferred to       Capital Account

 

15,01,600

   

  21,24,400   21,24,400

       

 

3)From the following balances of Siya Ram, Prepare a Balance Sheet as on 31 st December, 2010. 

Particulars Amount (Dr.) Amount (Cr.)

Plant and machinery 8,00,000  

Land and Building 6,00,000  

Furniture 1,50,000  

Cash in Hand 20,000  

Bank Overdraft   1,80,000

Debtors and Creditors 3,20,000 2,40,000

Bills Receivable and Bill Payable 1,00,000 60,000

Closing Stock 4,00,000  

Investments (Short-term) 80,000  

Capital   15,00,000

Drawings 1,30,000  

Net Profit   6,20,000

  26,00,0000 26,00,0000

     

 

Solution:

BALANCE SHEET

as on 31st December, 2010

Liabilities   Amount Assets   Amount

    Rs.     Rs.

Bank overdraft   1,80,000 Cash in Hand   20,000

B/P   60,000 B/R   1,00,000

Creditors   2,40,000 Investments (Short-term)   80,000

Capital     Debtors   3,20,000

Add: Net Profit 15,00,000   Closing Stock   4,00,000

  6,20,000   Furniture   1,50,000

  21,20,000   Plant & Machinery   8,00,000

Less:Drawings 1,30,000 19,90,000 Land & Building   6,00,000

    24,70,000     24,70,000

           

 

4)From the following Trial Balance of Radhe Shyam Trading and Profit and Loss A/c for the year ending 31st December, 2010 and Balance Sheet as on that date. The Closing Stock on 31st December, 2010 was valued at Rs. 2,50,000. 

Debit Balances Amount (Rs.)

Credit Balance Amount (Rs.)

Stock (1-1-2010) 2,00,000 Sundry Creditors 1,50,000

Purchases 7,50,000 Purchases Return 30,000

Sales Return 80,000 Sales 25,00,000

Freight and Carriage 75,000 Commission 33,000

Wages 3,65,000 Capital 17,00,000

Salaries 1,20,000 Interest on Bank Deposit 20,000

Repairs 12,000 B/P 62,000

Trade Expenses 40,000    

Rent and Taxes 2,40,000    

Cash in Hand 57,000    

B/R 40,000    

  5,50,000    

Plant and Machinery 16,00,000    

Withdrawals (Drawings) 1,66,000    

Bank Deposit 2,00,000    

  44,95,000   44,95,000

       

 

 Solution:

TRADING AND PROFIT & LOSS ACCOUNT

for the year ending 31st December, 2010

Liabilities   Amount Assets   Amount

    Rs.     Rs.

To Opening Stock   2,00,000 By Sales 25,00,000  

To Purchases 7,50,000   Less: Sales Return 80,000 24,20,000

Less:Purchases       Return

 

30,000

 

7,20,000

By Closing Stock   2,50,000

To Freight &        Carriage

  75,000      

To Wages   3,65,000      

To Gross Profit c/d   13,10,000      

    26,70,000     26,70,000

To Salaries   1,20,000 By Gross Profit b/d   13,10,000

To  Repairs   12,000 By Commission   33,000

To Trade Expenses   40,000 By Interest on Bank   

      Deposit

  20,000

To Rent & Taxes   2,40,000      

To Net profit       transferred to       Capital A/c

   

 

9,51,000

     

    13,63,000     13,63,000

           

 

BALANCE SHEET

as on 31st December, 2010

Liabilities   Amount Assets   Amount

    Rs.     Rs.

B/P   62,000 Cash in Hand   57,000

Sundry Creditors   1,50,000 B/R   40,000

Capital 17,00,000   Sundry Debtors   5,50,000

Add: Net Profit 9,50,000   Closing Stock   2,50,000

  26,51,000   Bank Deposit   2,00,000

Less:Drawings 1,66,000 24,85,000 Plant & Machinery   16,00,000

    26,97,000     26,97,000

           

 

Note:   The heading of Trading A/c and Profit & Loss A/c is put collectively as ‘Trading and Profit & Loss A/c’. The first part of this Account is Trading A/c, whereas the second part is Profit & Loss A/c. Trading Account, in fact, is apart of Profit & Loss Account. 

AVERAGE DUE DATE:

1) From the following amounts, calculate Average Due Date.

Amount Due Date

100016002000

3rd April2nd July11th September

Ans: Considering 3rd April as the starting day the following table is prepared:

Due Dates Amount No. of Days from 3rd July Products

3rd April 1000 0 0

2nd July 1600 90 144000

11th September 2000 161 322000

4600 466000

Average Due Date = 3rd April+ (466000/4600)

= 3rd April+ 102 days = 14th July

ACCOUNT CURRENT:

1) On 2nd April 2016 Dharmesh opened a current account with the Corporation Bank Limited, and deposited a sum of 50000.

His further deposits are:

15 April 6000

12 June 9000

10 Aug 14000

His withdrawals are:

15th May 20000

10th July 55000

15th September 12000

Show Dharmesh’s a/c in the ledger of the Corporation Bank. Calculate interest at 6% on the debit balance and 3% on credit balance. Prepare the account as on 30thSeptember 2016. Make the calculation to the nearest rupee.

Ans:

Dharmesh’s Current Account with Allahabad Bank Ltd.                                                                     

Date Particular Dr. Cr.Dr. or Cr.

Balance Days Dr. Product

Cr. Product

2016

Apr 2 By Cash A/c 50000 Cr. 50000 13 650000

Apr 15 By Cash A/c 6000 Cr. 56000 30 1680000

May 15 To Self 20000 Cr. 36000 28 1008000

Jun 12 By Cash A/c 9000 Cr. 45000 28 1260000

Jul 10 To Self 55000 Dr. 10000 31 310000

Aug 10 By Cash A/c 14000 Cr. 4000 36 144000

Sep 15 To Self 12000 Dr. 8000 16 128000

Sep 31

By Interest A/c 237 Dr. 7763

Sep 31

By Balance C/d 7763

87000 87000       438000 4742000

BILL OF EXCHANGE:

Bill of exchange in India

According to the  Negotiable Instruments   Act 1881, a bill of exchange is defined as an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument. In India these instruments are governed by the Indian Negotiable Instruments Act 1881.

Types of bill of exchange:

 Bills of exchange can be classified into two categories. They are as follows:

Bills of exchange payable on sight: These types of bills are payable on demand and the drawee has to pay the amount when the bill is presented to him for payment.

Bills of exchange payable after a certain period of time: These bills become payable after a certain period of time. These types of bills are also called Term Bills.

Features of Bills of Exchange

The following are the features of bills of exchange:

A bill of exchange an instrument in writing.

It is drawn and signed by the maker i.e. drawer of the bill.

It is drawn on a specific person i.e. drawee, to pay the specified amount.

Contains an unconditional order to a person i.e. drawee.

To make an instrument of value the drawee must accept it.

The specified amount is payable to the person whose name is mentioned in the bill or to his order or to the bearer.

It specifies the date by which amount should be paid.

Payment of the bill must be in the legal currency of the country.

It must be properly stamped.

It must bear a revenue stamp

1) A receives three promissory notes from B, dated 1st January, 2012 for 3

months. One bill is for Rs 3,000, the second is for Rs 4,000 and the third is for

Rs 5,000. The second bill is immediately endorsed in favour of C and on 4th

January, 2012 the third bill is discounted with the bank for Rs 4,700. Pass the

entries in A’s journal assuming (i) the bills are met on maturity and (ii) they

are dishonoured.

2)  B owes C a sum of Rs 6,000. On 1st April, 2011 he gives a promissory note

for the amount for 3 months to C who gets it discounted with his bankers for

Rs 5,760. On the due date the bill is dishonoured, the bank paying Rs 15 as

noting charges. B then pays Rs 2,000 in cash and accepts a bill of exchange

drawn on him for the balance together with Rs 100 as interest. This bill of

exchange is for 2 months and on the due date the bill is again dishonoured, C

paying Rs 15 for noting charges draft the journal entries to be passed in C’s

books.

3)  On 1st January, 2011, X drew and Y accepted a bill of exchange at three months for Rs 16,000. On 4th January, 2011, X got the bill discounted at 12% per annum and remitted half of the proceeds to Y. On 1st February, 2011, Y drew and X accepted a bill at four months for Rs 12,000. On 4th February, 2011, Y got the bill discounted at 12% per annum and remitted half of the proceeds to X. They both agreed to share the discount equally.

On maturity, X met his acceptance but Y dishonoured his acceptance and X had to pay for it. X drew and Y accepted a new bill at three months for the original bill plus interest at 16% per annum for three months. On 1st July, 2011, Y became insolvent. On 21st September, 2011, a final dividend of 50 paise in a rupee was received from Y’s estate.

ACCOMMODATION BILLS:

Meaning of Accommodation Bill:

As contrasted with the Trade Bill, Accommodation Bills are drawn and accepted with

no consideration passed or received. The Bill, which is drawn just to oblige a friend,

who is in need of money, of course without any trading activities, with sole intention

of raising funds required for ready cash is known as Accommodation Bill.

The accommodating party, i.e., the drawee accepts the Bill drawn by the

accommodated party (drawer). That is the Drawer of the accommodation bill can be

called accommodated party and drawee can be called accommodating party. After the

Bill is accepted, the drawer discounts it with a bank and obtains the cash.

Before the due date of the Bill, Drawer provides funds to the Acceptor, who honours

the Bill. Since the acceptance is given without consideration and to help the

accommodated party to raise the funds, the accommodated party has to discharge the

Bill by himself or provide funds to accommodating party.

Thus, there is always a mutual understanding between the parties and hence, these

bills are called Accommodation Bills. The language of an Accommodation Bill is the

same as that of an ordinary Trade Bill. The modes of drawing, accepting, discounting,

honoring etc. are similar to that of any Trade Bills. A banker cannot make distinction

between a genuine Trade Bill and Accommodation bill. These Bills are also called

“Kites” or “Finance Bills”.

1) Mr. A accepted a bill for Rs 20,000 drawn by B to enable the latter to raise funds at

three months on 1st October 2004. The bill was duly discounted by B at their Bank at

6% per annum. On the due date B remitted the amount to the acceptor and the Bill was

duly met. Pass journal entries in the books of both the parties.

Discount: 20,000 x 6/100 x 3/12 = Rs 300

2)Mr. Ram draws a Bill for Rs 15,000 on Mr. Gopal on 1st January payable three

months after the date at Canada Bank, Ernakulum. The Bill after acceptance is

discounted by Ram at 6% p.a. and he remits 1/3 of the proceeds to Gopal. On the due

date, Ram sends the necessary amount to Gopal who meets the Bill.

Record these transactions in the journal of both the parties.

3)Mr. A drew a Bill on B on November 1st, 2004 for an amount Rs 4,000 payable

three months after that date. On the very same date Mr. A accepted a Bill for Rs 4,000

drawn by B for a period of three months. Both the parties discounted their Bills at

12% p.a. On the due date both the Bills were honoured. Make journal entries in the

books of both the parties.

UNIT – IV

DEPRECIATION

Definition: The monetary value of an asset decreases over time due to use, wear and tear or obsolescence. This decrease is measured as depreciation.

Description: Depreciation, i.e. a decrease in an asset's value, may be caused by a number of other factors as well such as unfavorable market conditions, etc. Machinery, equipment, currency are some examples of assets that are likely to depreciate over a specific period of time. Opposite of depreciation is appreciation which is increase in the value of an asset over a period of time.

Accounting estimates the decrease in value using the information regarding the useful life of the asset. This is useful for estimation of property value for taxation purposes like property tax etc. For such assets like real estate, market and economic conditions are likely to be crucial such as in cases of economic downturn.

Causes of Depreciation

The most important cause of depreciation is regular wear and tear, but it is certainly not the only one. The following causes can reduce the value of an asset:

Wearing out

Consumption or other loss of value arising from usage

Effluxion of time

Obsolescence through technology

Market changes

Straight Line Method

Depreciation means the decrease in the value of fixed assets due to normal wear and tear, efflux of time or obsolescence due to technology. Thus, it is important to measure the decrease in value of an asset and also account for it. There are various methods of providing depreciation. The most common method is the Straight line method (SLM).

Formulae:

Amount of Depreciation = (Cost of Asset – Net Residual Value) / Useful Life

The rate of Depreciation = (Annual Depreciation x 100) / cost of asset

1)Anil purchased a machine on 1 Apr 2015 for 400000. The useful life of the machine₹ is 3 years and its estimated residual value is 40000. At the end of its useful life, the₹ machine is sold for 50000. Prepare the necessary ledger accounts in the books of Anil for the year ending 31st December every year. Use SLM.

Ans: In the books of Anil

Machinery A/c

Date Particulars Amount Date Particulars Amount

2015 2015

1 Apr To Cash A/c 400000 31 Dec By Depreciation A/c 90000

31 Dec By balance c/d 310000

400000 400000

2016 2016

1 Jan To balance b/d 310000 31 Dec By Depreciation A/c 120000

31 Dec By balance c/d 190000

310000 310000

2017 2017

1 Jan To balance b/d 190000 31 Dec By Depreciation A/c 120000

31 Dec By balance c/d 70000

190000 190000

2018 2018

1 Jan To balance b/d 70000 31Mar By Depreciation A/c 30000

31 Mar By Cash A/c 40000

70000 70000

Depreciation A/c

Date Particulars Amount Date Particulars Amount

2015 2015

31 Dec To Machinery A/c 90000 31 Dec By Profit & Loss A/c 90000

90000 90000

2016 2016

31 Dec To Machinery A/c 120000 31 Dec By Profit & Loss A/c 120000

120000 120000

2017 2017

31 Dec To Machinery A/c 120000 31 Dec By Profit & Loss A/c 120000

120000 120000

2018 2018

31 Mar To Machinery A/c 30000 31 Dec By Profit & Loss A/c 30000

30000 30000

Working Notes:

Calculation of amount of depreciation

Depreciation =  (Cost of Asset – Net Residual Value )/Useful life

= (400000 – 40000)/3 = 120000 p.a.

II. WRITTEN DOWN VALUE METHOD/ DIMINISHING BALANCE METHOD:

Diminishing Balance Method

According to the Diminishing Balance Method, depreciation is charged at a fixed percentage on the book value of the asset. As the book value reduces every year, it is also known as the Reducing Balance Method or Written-down Value Method.

Since the book value reduces every year, hence the amount of depreciation also reduces every year. Under this method, the value of the asset never reduces to zero.

When the amount of depreciation charged under this method and the corresponding period are plotted on a graph it results in a line moving downwards.

This method is based on the assumption that in the earlier years the cost of repairs to the assets is low and hence more amount of depreciation should be charged. Also, in the later

years, the cost of repairs will increase and therefore less amount of depreciation shall be provided. Hence, this method results in an equal burden on the profit every year during the life of the asset.

However, under this method, if the rate of depreciation applied is not appropriate it may happen that at the end of the useful life of the asset full depreciation is not provided.

Amount of depreciation=Book Value × Rate of Depreciation 100

1. M/s. Bharat and sons purchased a machine on 1 Apr 2015 for 400000 from ABC &₹ Co. and paid 100000 on its installation. The useful life of the machine is 3 years and its₹ estimated residual value is 40000. On 31₹ st March 2018, M/s. Bharat and sons sell the machinery for 250000.

Charge depreciation as per the W.D.V. method @10 % p. a. Prepare the necessary ledger accounts in the books of Anil for the year ending 31st December every year.

Ans: In the books of M/s. Bharat and sons

Machinery A/c

Date Particulars Amount Date Particulars Amount

2015 2015

1 Apr To ABC & Co. A/c 400000 31 Dec By Depreciation A/c 37500

To Cash A/c (installation exp.) 100000 31 Dec By balance c/d 462500

500000 500000

2016 2016

1 Jan To balance b/d 462500 31 Dec By Depreciation A/c 46250

31 Dec By balance c/d 416250

462500 462500

2017 2017

1 Jan To balance b/d 416250 31 Dec By Depreciation A/c 41625

31 Dec By balance c/d 374625

416250 416250

2018 2018

1 Jan To balance b/d 374625 31Mar By Depreciation A/c 9366

31 Mar By Cash A/c 250000

By Profit & Loss A/c ( loss on sale)

115259

401625 401625

Depreciation A/cDate Particulars Amount Date Particulars Amount

2015 2015

31 Dec To Machinery A/c 37500 31 Dec By Profit & Loss A/c 37500

2016 2016

31 Dec To Machinery A/c 46250 31 Dec By Profit & Loss A/c 46250

2017 2017

31 Dec To Machinery A/c 41625 31 Dec By Profit & Loss A/c 41625

2018 2018

31 Mar To Machinery A/c 9366 31 Dec By Profit & Loss A/c 9366

Working Notes:Calculation of amount of depreciationAmount of depreciation=Book Value×Rate of Depreciation1002015: Depreciation =  500000 x 10/100  x 9/12 =  375002016: Depreciation =  462500 x 10/100 = 462502017: Depreciation =  416250 x 10/100 = 416252018: Depreciation =   374625 x 10/100 x 3/12 =  9366Calculation of loss on sale of machineryLoss = Book Value on 1 Jan 2018 – depreciation for 3 months – cash received

=  374625 – 9366- 250000 = 115259

III. Sinking Fund Method Under this method, the amount of depreciation charged every year is transferred to the sinking fund account. This amount is then invested in Government securities. Also, the interest earned on these securities is reinvested.The amount of depreciation to be charged every year is calculated after considering the element of interest. The interest will be earned on the amount which is invested every year and will remain invested till the useful life of the asset.

At the time of the replacement of the asset, the investment is sold and the new asset is purchased from the sale proceeds. At this time, the book value of the old asset that needs to be replaced is transferred to the Sinking Fund Account.

Also, the sale proceeds of the old asset and any profit or loss from the sale of investments are transferred to the Sinking Fund Account. The balance in the Sinking Fund Account is then transferred to the Profit and Loss A/c or General Reserve.

The annual amount of depreciation to be charged is calculated with the help of Sinking Fund Tables. These tables show that at a given rate of interest and for a certain period how much amount needs to be set aside so that it accumulates to 1.₹

However, this method is a complex method of accounting. As the rates of interest keep fluctuating, therefore, the amount accumulated in the sinking fund may not match the original cost of the asset.

Also, the cost of replacement of the old asset may also change over the period. This method is mostly used by large-scale industries that have long-term assets and for real estate assets and leases.

1. On 1st April 2015, R&P enterprises purchased a lease property for 2000000. The ₹lease will expire on 31st March 2018. It was decided to provide depreciation on lease using the Sinking Fund Method. Following transactions took place during the period. Prepare the required accounts.

i. 31st March 2016: Depreciation was 640000 and this sum was invested.₹

ii. 15th November 2016: Investments costing 100000 was sold for 120000 and the ₹ ₹proceeds were re-invested.

iii. 31st March 2017: Depreciation was 640000 and the interest on investments was ₹32000. These sums were re-invested.₹

iv. 31st August 2017: Investments costing 200000 was sold for 225000 and the ₹ ₹proceeds were re-invested.

v. 31st March 2018: All investments were sold for 950000. Interest earned was 64000. Depreciation was 640000.₹

Ans: In the books of R&P enterprises

Lease A/c

Date Particulars Amount Date Particulars Amount

2015-16 2015-16

1 Apr To Bank A/c 2000000 31 Mar By Balance c/d 2000000

2000000 2000000

2016-17 2016-17

1 Apr To Balance b/d 2000000 31 Mar By Balance c/d 2000000

2000000 2000000

2017-18 2017-18

1 Apr To Balance b/d 2000000 31 Mar By Sinking Fund A/c 2000000

2000000 2000000

Sinking Fund A/c

Date Particulars Amount   Date Particulars Amount

2015-16 2015-16

31 Mar To Balance c/d 640000 31 Mar By Depreciation A/c 640000

640000 640000

2016-17 2016-17

31 Mar To Balance c/d 1332000 1 Apr By Balance b/d 640000

15 Nov By Sinking Fund Investment A/c 20000

31 MarBy Interest on Sinking Fund Investment A/c

32000

31 Mar By Depreciation A/c 640000

1332000 1332000

2017-18 2017-18

31 Mar To Sinking Fund Investment A/c 407000 1 Apr By Balance b/d 1332000

31 Mar To Lease A/c 2000000 31 Aug By Sinking Fund 25000

Investment A/c

31 MarBy Interest on Sinking Fund Investment A/c

64000

31 Mar By Depreciation A/c 640000

31 Mar By Profit and Loss A/c 346000

(deficit)

2407000 2407000

Sinking Fund Investment A/c

Date Particulars Amount   Date Particulars Amount

2015-16 2015-16

31 Mar To Bank A/c 640000 31 Mar By Balance c/d 640000

640000 640000

2016-17 2016-17

1 Apr To Balance b/d 640000 15 Nov By Bank A/c (sale) 120000

15 Nov To Sinking Fund A/c 20000 31 Mar By Balance c/d 1332000

(profit on sale)

15 Nov To Bank A/c 120000

(sale proceeds reinvested)

31 Mar To Bank A/c 672000

(Depreciation and interest amt. reinvested)

1452000 1452000

2017-18 2017-18

1 Apr To Balance b/d 1332000 31 Aug By Bank A/c (sale) 225000

31 Aug To Sinking Fund A/c 25000 31 Mar By Bank A/c (sale) 950000

(profit on sale) 31 Mar By Sinking Fund A/c 407000

31 Aug To Bank A/c 225000 (loss on sale)

(sale proceeds reinvested)

1582000 1582000

IV.INSURANCE POLICY METHOD:1)A & Co. purchased a machine for Rs.5, 000, which is expected to last for three years only. They are informed that its scrap value will be Rs.625.They decide to purchase an endowment policy for three years for a sum of Rs.4, 375 the annual premium is Rs.1, 375 and the rate of interest works out at 3% compound interest.The scrap of machine actually realized for Rs.550. Show the Depreciation Fund account, Depreciation Policy account and Machine Account for all three years. Calculations may be made nearest to rupee only.

Solution:

V. DEPLETION METHOD: (Depreciation under Depletion Method)In 2003, a Company acquired a mine at a cost of Rs 3, 00,000. The estimated reserve of minerals in tons is 30, 00,000 of which 80% is expected to be raised.The first three years raisings are:ADVERTISEMENTS:2003- 1, 60,000 tons,2004- 2, 24,000 tons,2005- 2, 00,000 tons.Show the Mines Account charging depreciation under the Depletion method.

Solution:

VI. MACHINE HOUR RATE METHOD::

A Machine was purchased on 1st January 2004 at a cost, of Rs 50.000 and the cost of

installation Rs 8 000 his expected that its total working life will be 1, 00,000 hours.

The scrap value may be Rs 3,000. During the year 2004, the machine worked for

K200 hours and in 2005 for 1,350 hours. Calculate the deprecation for 2004 and 2005.

Solution:

VII. ANNUITY METHOD:

1. A Ltd. purchased a 5 years lease on 1 April 2013 for 500000. It is decided to write₹ off depreciation on lease using the Annuity Method. The rate of interest is presumed to be 6% p.a. The annuity for 1 for 5 years at 6% interest is 0.237396. Prepare the Lease₹ A/c and the Profit & Loss A/c for 5 years.

Ans: Amount of depreciation to be written off every year = 0.237396 x 500000 = 118698₹

Lease A/c

Date Particulars Amount   Date Particulars Amount

2013-14 2013-14

1 Apr To Bank A/c 500000 31 Mar By Depreciation A/c 118698

31 Mar To Interest A/c 30000 31 Mar By balance c/d 411302

(6% on 500000)

530000 530000

2014-15 2014-15

1 Apr To Balance b/d 411302 31 Mar By Depreciation A/c 118698

31 Mar To Interest A/c 24678 31 Mar By balance c/d 317282

(6% on 411302)

435980 435980

2015-16 2015-16

1 Apr To Balance b/d 317282 31 Mar By Depreciation A/c 118698

31 Mar To Interest A/c 19037 31 Mar By balance c/d 217621

(6% on 317282)

336319 336319

2016-17 2016-17

1 Apr To Balance b/d 217621 31 Mar By Depreciation A/c 118698

31 Mar To Interest A/c 13057 31 Mar By balance c/d 111980

(6% on 217621)

230678 230678

2017-18 2017-18

1 Apr To Balance b/d 111980 31 Mar By Depreciation A/c 118698

31 Mar To Interest A/c 6718

(6% on 111980)

118698 118698

Profit & Loss A/c

Date Particulars Amount   Date Particulars Amount

2013-14 2013-14

31 Mar To Depreciation A/c 118698 31 Mar By Interest A/c 30000

2014-15 2014-15

31 Mar To Depreciation A/c 118698 31 Mar By Interest A/c 24678

2015-16 2015-16

31 Mar To Depreciation A/c 118698 31 Mar By Interest A/c 19037

2016-17 2016-17

31 Mar To Depreciation A/c 118698 31 Mar By Interest A/c 13057

2017-18 2017-18

31 Mar To Depreciation A/c 118698 31 Mar By Interest A/c 6718

 

UNIT – V

BANK RECONCILIATION STATEMENT

What is Bank Reconciliation?A bank reconciliation statement is a document that matches the cash balance on a company’s balance sheet to the corresponding amount on its bank statement. Reconciling the two accounts helps determine if accounting changes are needed. Bank reconciliations are completed at regular intervals to ensure that the company’s cash records are correct. They also help detect fraud and any cash manipulations. 1) From the following particulars prepare a Bank Reconciliation Statement to find out the causes of difference in two balances as on August 31st, 2016 for Four Star (Pvt.) Ltd.(i) Bank Overdraft as per Bank Statement ……………………………………….………. 17,000(ii) Check issued but not encashed during the August ………………………………….. 2,200(iii) Dividends on shares collected by banker …………………………….…………….… 2,300(iv) Interest charged by the bank recorded twice in the Cash Book ……………..……. 500(v) Check deposited as per Bank Statement not entered in Cash Book ……….…..… 3,400(vi) Credit side of the Bank column in Cash Book cast short ……………….…………… 1,000(vii) Clubs dues paid by bank as per standing instruction not recorded in Cash Book … 1,200(viii) Uncredited check due to outstation ………………………………………………….   3,900 Solution:

 2) From the following particulars, you are required to find out the errors in cash book and bank statement by using missing method and prepare Bank Reconciliation Statement as on 31-12-2016, for Chand Bibi Ltd:(i) Bank balance overdraft as per cash book …………………………………………………….. 80,000(ii) Check recorded for collection but not sent to the bank   ………………..………………… 10,000(iii) Credit side of the cash book cast short ………………………………………………………… 1,000(iv) Premium on proprietor’s Life Insurance Policy (LIP) paid on standing order ……………..…5,000(v) Bank Charges recorded twice in the cash book …………………………………………………… 100(vi) Customer’s check returned by the bank as dishonored ………………………………………. 4,000(vii) Bill Receivable collected by the bank directly on the behalf of company ……………………. 20,000(viii) Check received entered twice in the cash book ………………………………………………….. 6,000

(ix) Check issued but dishonored on technical grounds ………………………………………………. 3,000(x) A checks deposited into the bank of worth Rs. 45,000 but Rs. 8,000 check was not collected by bank Solution:

 3)From the following particulars, find out the errors in cash book and bank statement and prepare Bank Reconciliation Statement as on 31-05-2016 for Ammar Ahmed Sugar Mill Ltd:i. Balance as per bank statement overdraft of Rs. 2,118.ii. The debit side of the cash book had been undercast by Rs. 300.iii. A check for Rs. 182 drawn for the payment of telephone bill had been entered in the cash book as Rs. 281 but was shown correctly in the bank statement.iv. A check for Rs. 210 by the customer having been deposited into bank was dishonored by the bankA check was credited twice in Cash Book for worth Rs. 3,000.v. A Dividend of worth Rs. 90 had been collected by the bank but not recorded in the cash book.

vi. Checks Rs. 3,000 drawn in December but only 1,200 presented for payment.vii. Interest amounting 228 had been debited by the bank but not entered in the cash book.viii. A check for Rs. 2,077 was issued by the company for purchase of merchandise and was paid by the bank but not recorded in company’s book.ix. A check for Rs. 10,500 issued to Salman & Co. for purchase of Equipment was not encashed. Solution:

 RECEIPTS AND PAYMENTS:

Accounting Problems on Receipts and Payments Account1)The following is the income and expenditure account of a club for the year ended 31st March, 2011:

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2)The Income and Expenditure Account of the Nonesuch Club for the year ended 31st March, 2012 is as follows:

The following is the income and expenditure account of a club for the year ended

31st March, 2011:

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3)The Income and Expenditure Account of the Nonesuch Club for the year ended

31st March, 2012 is as follows:

The account has been prepared after the following adjustments:

Subscriptions Outstanding on 31st March, 2011 Rs 600;

Subscriptions Received in Advance on 31st March, 2011 Rs 450;Subscriptions Received in Advance on 31st March, 2012 Rs 270; andSubscriptions Outstanding on 31st March, 2012 Rs 750.Salaries Outstanding on 31st March, 2011 and 31st March, 2012 were respectively Rs 2,000 and Rs 2,250. General Expenses include insurance prepaid to the extent of Rs 60. Audit fees for 2011-2012 are as yet unpaid; during 2011-2012, audit fees for 2011-2012 were paid amounting to Rs 1,000.The club owned freehold lease of ground valued at Rs 10,000. The club had sports equipment on 1st April, 2011 valued at Rs 12,600. At the end of the year, after depreciation, this equipment amounted to Rs 13,700. In 2009-10 the club had raised a bank loan of Rs 2,000. This was outstanding throughout 2011-2012. Or. 31st March, 2012 cash in hand amounted to Rs 1,600.Prepare Receipts and Payments Account for the year ended 31st March, 2012 and the Balance Sheet at the end of the year.

4)The following is the Income and Expenditure Account of Youngmen Sports

Club/or the year ended 31st March. 2011:

5)Prepare Receipts and Payments Account for the year ending 31st March, 2011, and

the Balance Sheet as on that date.

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6)The following balances have been obtained from the books of Kanpur Cricket

Club as on 31st March, 2010 and 31st March, 2011:

(viii) During the year, a sum of Rs 10,000 was spent on extension of the building. You are

required to prepare the Receipts and Payments Account and the Income and Expenditure

Account for the year ended 31st March, 2011. Also, draw the Balance Sheet of the club as at

that date.

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INCOME AND EXPENDITURE

1)From the following trial balance and other information pertaining to the year

ended 31st March, 2012 for the Delhi School, prepare the Income and

Expenditure Account for the year and the Balance Sheet at its end:

Fees still receivable are Rs 6,000 and Salaries still payable are Rs 14,000. New

furniture costing Rs 20,000 was purchased on 1st October, 2011 but no entry has been

passed for it yet. Furniture sold was of the book value of Rs 10,000 on 1st April, 2011.

Depreciation is to be charged as under:

Solution:

Income and Expenditure Account of the Delhi School for the year ended March

31, 2012:

2)From the following, prepare an Income and Expenditure Account for the vear

ended 31st March, 2011:

Subscriptions include Rs 1,200 for 2009-10. Also rent includes Rs 500 paid for

March, 2010. Subscriptions amounting to Rs 1,500 have still to be collected for the

year 2010-2011. Rent for March, 2011 is still to be paid and Rs 250 is outstanding

against a stationery bill. The book value of the scooter was Rs 8,200.

3)The following is the statement of receipts and payments of the Charity Eye

Hospital for the year ending March 31, 2012:

You are asked to prepare the Income and Expenditure Account for the year and the Balance Sheet as on 31st March, 2012. The other assets on 1st April 2011 were—Furniture, Rs 2,000; Land, Rs 50,000; Buildings Rs 1,50,000; Instruments, Rs 3,500. Write off depreciation at 2 1/2% on Buildings, 6% on Furniture, and 20% on Instruments (including new).The Government Securities of the face value of Rs 2 00 000 (cost Rs 1.80,000) represent investments of the Endowment Fund. Subscriptions received include Rs 10,000 for the year 2010 – 11 but Rs 7,000 is outstanding for 2011-2012 Safaries paid include Rs 4,000 for 2010-11 but Rs 4,5000 is payable for 2011-2.012. Interest received includes Rs 5,000 for 2010-2011 but Rs 5.300 is outstanding for 2011-2012.

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