CHAPTER -1

Book Keeping and Accounting

BASIC ACCOUNTING TERMS
The understanding of the following terms of accounting is required to follow the accounting
process. Some of them are explained below:
[Link]: A formal record of a particular type of transaction expressed in money or other
unit of measurement and kept in a ledger (Kohler). In other words, Account is a summary of
relevant business transactions at one place relating to a person, asset, expense revenue
named in the heading. An account is a brief history of financial transactions of a particular
person or item. It is a 'T' shaped proforma, which has two sides called debit side (left hand
side) and credit side (righthand side).
[Link] Entry: A record of financial transaction in the books of accounts, eg. journal,
cash book etc.
[Link]: Transactions are those activities of a business, which involve transfer of
money or goods or services between two persons or two accounts. For example, purchase of
goods, sale of goods, borrowing from bank, lending of money, salaries paid, rent paid,
commission received and dividend received. Transactions are of two types, namely, cash and
credit transactions. Every transaction brings about change in the financial position of
Business.
[Link] Period: The period of time, for which an operating statement is prepared.
[Link]: A person who owns a business is called as a proprietor. He contributes initial
money to commence business called capital with an intention of earning profit.
[Link]: It is the amount invested in the business by the proprietor This amount is
increased by the amount of profits earned and the amount of additional capital introduced.
It is decreased by the amount of losses incurred and the amounts withdrawn by proprietor
for personal use.
[Link]: Assets are the properties or resources owned by the business. Cash in hand, plant
and machinery, furniture and fittings, bank balance, debtors, bills receivable, stock of goods,
investments, goodwill are some examples of assets. Assets can be classified into tangible and
intangible.
Tangible Assets: These are the assets having physical existence, which can be seen
and touched, e.g.: plant & machinery, cash etc.

Intangible Assets: These are the assets having no physical existence, but their
possession give rise to some rights and benefits to the owner. It cannot be seen and
touched. Example: Goodwill, patents, trademarks
[Link]: Liabilities refer to the financial obligations of a business. These denote the
amounts which a business owes to others e.g., loans from banks or other persons, creditors
for goods supplied, bills payable, outstanding expenses, bank overdraft etc.
[Link]: It is the amount of cash or value of goods withdrawn from the business by the
proprietor for his personal use. It is deducted from the capital.
[Link]: A person (individual or firm), who receives a benefit without giving money or
money's worth immediately, but liable to pay in future or in due course of time is a debtor.
Debtors may be a trade debtor or general debtor. Trade debtor is one to whom goods are
sold on credit and general debtor is one from whom some amount is receivable eg. rent
receivable from Ravi. Debtors are shown as an asset in the Balance Sheet.
[Link]: A person who gives a benefit without receiving money or money's worth
immediately but claim in future, is a creditor. Creditors may be trade creditors or general
creditors. A trade creditor is one who supplied goods on credit to the business and a general
creditor is one to whom business owes. e.g: loan taken from bank, salaries payable to
employees etc. The creditors are shown as a liability in the Balance Sheet.
[Link]: Purchases refer to the amount of goods bought by a business for resale or for
use in the production. Goods purchased for cash are called cash purchases. If it is purchased
on credit, it is called as credit purchases. Total purchases include both cash and credit
purchases.
[Link]: Sales refer to the amount of goods sold that are already bought or manufactured
by the business. When goods are sold for cash, they are called cash sales, if goods are sold
and payment is not received at the time of sale, it is called credit sales. Total sales include
both cash and credit sales.
[Link]: Stock includes goods unsold on a particular date. Stock may be opening and
closing stock. The term opening stock means goods unsold in the beginning of the
accounting period. Whereas, the term closing stock includes goods unsold at the end of the
accounting period.
[Link]: Revenue means the amount receivable or realised from sale of goods and
earnings from interest, dividend, commission etc.
16. Expense: It is the amount spent in order to produce and sell the goods and services. e.g:
purchase of raw materials, payment of salaries, wages etc
17. Income: Income is the difference between revenue and expense.
18. Voucher: It is a written document in support of a transaction. It is a proof that a
particular transaction has taken place for the value stated in the voucher. It may be in the
form of cash receipt, invoice, cash memo, bank pay-in-slip etc. Voucher is necessary to audit
the accounts.
19. Receipt: Receipt is an acknowledgement for cash received. It is issued to the party
paying cash. Receipts form the basis for entries in cash book.
[Link]: Merchandise purchased in order to sell. It is a commodity which a trader buys
and sells.

1.6 ACCOUNTING PRINCIPLES

The accounting principles are the general accounting procedures, practices which
guide the accountant in the preparation of accounting records. Accounting Principles
can be broadly classified into accounting concepts and accounting conventions.
1.6.1 ACCOUNTING CONCEPTS
The Accounting Concepts and Accounting Conventions have been developed over the years
from experience, usage and necessity and are generally accepted for recording of
transactions and preparation of Financial Statements.
Accounting Concepts are the necessary assumptions, conditions or postulates which the
accounting is based. They are developed to facilitate communication of the accounting and
financial information to all the users of the financial statements that enables them to
interpret the statements in the same meaning and context.
The Accounting Concepts are as follows:
[Link] Entity Concept
2. Dual Aspect Concept
3 Going Concern Concept
4. Money Measurement Concept
[Link] Concept
6. Accounting Period Concept
7. Accrual Concept
8. Matching Concept; and
[Link] Concept.
[Link] Entity Concept: As per this concept, Business organizations are treated as a
separate entity which can be distinguished from the "owners" or stakeholders who provide
capital to the business. This concept helps in keeping private affairs of the owners and
stakeholders separate from the business affairs.
[Link] Aspect Concept: Dual aspect concept is the basis for Double Entry System of book-
keeping. All business transactions recorded in accounts have two aspects: receiving benefit
and giving benefit. For example, when a business acquires an asset (receiving of benefit) it
must pay cash (giving of benefit). The value of benefit received is equal to benefit given.
[Link] Concern Concept: As per this concept it is assumed that the organizations will
continue for a long time, unless it is closed as per the law to which it is subject. The financial
statements are prepared at the end of each financial year to measure the performance of
the entity during that period and not on the assumption of closure or liquidation of the
entity,
[Link] Measurement Concept: In accounting, all the transactions are recorded in terms of
money. In other words, events or transactions that cannot be expressed in terms of money
are not recorded in the books of accounts. Receipt of income, payment of expenses,
purchase and sale of assets etc., are monetary transactions that are recorded in the books of
accounts. Whereas, the event of machinery breakdown is not recorded as it does not have a
monetary value. However, the expenditure incurred for the repair of the machinery can be
measured in monetary value and hence is recorded.
[Link] Concept: As per this concept, an asset is ordinarily recorded at the price actually paid
or incurred to acquire it, i.e., at its cost and this cost becomes the basis for all subsequent
accounting treatment for the asset. The assets recorded at cost at the time of purchase may
systematically be reduced through depreciation.
[Link] Period Concept: An accounting period is the interval of time, at the end of
which the financial statements are prepared to ascertain the financial performance of the
business. The preparation of financial statements at periodic intervals helps in taking timely
corrective action and developing appropriate strategies. The accounting period is normally
considered to be a period of twelve months and the accounting books are closed at the end
of every year either at the end of March or December. As per the Income Tax Act every
business unit should prepare financial statements and pay tax on profits every year.
7. Accrual Concept: Under the cash system of accounting, the revenues and expenses are
recorded only if they are actually received or paid in cash, irrespective of the accounting
period to which they belong. But under the accrual concept, occurrence of claims and
obligations in respect of incomes or expenditures, assets or liabilities based on happening of
any event, passage of time, rendering of services, are recorded even though actual receipts
or payments of money may not have taken place. In respect of an accounting period, the
outstanding expenses and the prepaid expenses and similarly the income receivable and the
income received in advance are shown separately in the books of accounts under the accrual
method.
[Link] Concept: Matching the revenues earned during an accounting period with the
cost associated with the period to ascertain the result of the business concern is called the
Matching concept. It is the basis for finding accurate profit for a period which can be safely
distributed to the owners. For example, goods costing 50,000 purchased, of which goods
costing 30,000 sold for Rs. 42,000. Profit is 12,000. It means business lost goods costing
42,000. The remaining unsold stock 30,000 to generate a income of 20,000 is unexpired cost
appear in balance sheet as an asset. Therefore, according to this concept, incomes are to be
identified with their corresponding expenses or vice versa in a given period of time.
[Link] Concept: According to this concept, revenue should be accounted for only
when it is actually realized or it has become certain that the revenue will be realized. This
signifies that revenue should be recognized only when the services are rendered or the sale
is affected. However, in order to recognize revenue, actual receipt of cash is not necessary,
but the organization should be legally entitled to receive the amount for the services
rendered or the sale affected is to be taken into considerations.
Capital expenditure
Capital expenditure yields benefit which extend beyond the current accounting period.
According to Kohler, "Capital expenditure is an expenditure intended to benefit future
period, in contrast to a revenue expenditure, which benefits a current period; an addition to
a capital asset. The term is generally restricted to expenditure that add fixed asset units or
that have the effect of increasing the capacity, efficiency, life span, or economy of operation
of an existing asset". 10-50From the above definition, capital expenditure is one which
results in,
I. Increase in the quantity of fixed assets;
II. Increase the quality of fixed assets and
III. Replacement of fixed assets
Revenue expenditure:
Revenue expenditure is one the benefits of which are limited to one accounting/financial
year. It is generally recurring in nature. This expenditure is incurred in normal course of
business operations. According to Kohler, "it is an expenditure charged against operations: a
term used to contrast with capital expenditure" While the capital expenditure is any
expenditure benefiting future period, whereas revenue expenditure is intended to benefit
the current period. In other words, the benefits of revenue expenditure are received in the
current year only e.g.: salaries, wages to employees and workers etc.
Revenue expenditure includes the following:
I. Expenditure incurred in the normal course of business operations. Cost of raw
materials, expenses of manufacturing, office and administrative expenses,
selling, distribution expenses of goods and services etc.,
II. [Link] and maintenance of assets of business, eg, repairs to buildings, oil,
consumable stores used for maintenance of machinery etc.
III. Cost of goods purchased for resale.
IV. Deprecation or amortization on fixed assets, interest on loans taken,
V. Loss on sale of assets, and loss due to obsolescence of assets etc.

Revenue expenditure is directly charged (debited) to profit and loss account except,
to the extent it is prepaid or unexpired e.g.: prepaid insurance, rent and taxes paid in
advance etc. c. Deferred Revenue expenditure

DOUBLE ENTRY BOOK – KEEPING SYSTEM

Meaning: -
There are numerous transactions which are to be recorded in a business concern.
Each transaction, reveals two important aspects: One aspect is "receiving aspect" or
"incoming aspect" or "expenses/loss aspect", termed as the "Debit Aspect". The
other aspect is "giving aspect" or "outgoing aspect" or "income/gain aspect", termed
as the "Credit Aspect". These two aspects, namely "Debit aspect" and "Credit
aspect", forms the basis of Double Entry System. Hence, the double entry system
involves the recording of both of the aspects of a transaction i.e., debit and credit.
The fundamental rule under Double Entry Book Keeping system is that, 'for every
debit there must be corresponding equal value for the credit'.
According to J.R. Batliboi "Every business transaction has a two-fold effect and that it
affects two accounts in opposite directions and if a complete record were to be made
of each such transaction, it would be necessary to debit one account and credit
another account. This recording of the two-fold effect of every transaction has given
rise to the term Double Entry System".

Features:
1. Every business transaction affects two accounts.
2. Each transaction has two aspects, i.e., debit and credit.
3. It is based upon accounting assumptions, principles, concepts and conventions.
4. It helps in preparing trial balance which is a test of arithmetical accuracy in
accounting.
5. Finally, it helps in preparation of final accounts with the help of trial balance.
CHAPTER-2
Recording of Business Transactions
1) Cash System of Accounting:
Under this system, entries made in the records only for transactions which involve receipt
and payment of cash. Outstanding aspects such as, expenses payable, incomes receivable or
accrued have no place in cash system of accounting. Usually, Government accounts are
prepared on cash system. Some professionals and professional bodies also follow this system
of accounting with little variation. They record only the actual income received but, while
recording the expenses, they take into account the expenses actually paid and outstanding
as well. To some extent they follow the principle of conservatism. In such case, their income
statement is shown as receipts and expenditure account.
2) Mercantile or Accrual System of Accounting: -
Under the Mercantile or accrual system, the whole effect of business transactions are
recorded, i.e., the amount received and receivable, the expenses paid and outstanding are
recorded. In other words,
this system, takes in to account, while preparing financial statements, all expenses whether
paid or due, all incomes earned whether received in cash or accrued/receivable if they are
pertaining the financial year for which final accounts are prepared, eg. salaries due, rent
receivable etc.
The difference between cash system and accrual system of accounting can be explained with
the help of the following transaction.
For example, a firm closes its books of accounts on 31 March every year. Suppose, salaries of
25,000 for the month of March 2019 are paid in April 2019.
In case of firms following cash system of accounting, no entry will be made for the salaries
due in the accounting year ending 31 March 2019. Instead, the entry is made in April 2019
which falls in the next financial year.
But, in case of firms following accrual system of accounting, the entry for salaries due for the
month of March 2019 will be made in the same accounting year as,
Salaries a/c Dr 25,000
 To outstanding salaries, a/c 25,000
The following entry is passed in the next year i.e., April 2019 when salaries due are actually
paid:
To outstanding salaries, a/c Dr 25,000
To Cash a/c 25,000
Thus, under accrual system of accounting all expenses incurred and all incomes accrued for a
given financial year are accounted in the same financial year irrespective of their actual
receipt or payment, by passing necessary journal entries in the books of accounts.
CLASSIFICATION OF ACCOUNTS
Transactions can be divided into three categories as,
1. Transactions relating to individuals and firms.
[Link] relating to properties or cash.
[Link] relating to expenses or losses and incomes or gains.
Therefore, accounts can also be classified into Personal and impersonal. Whereas,
Impersonal accounts are further divided into Real accounts and Nominal accounts. The
classification may be illustrated as follows:

[Link] Accounts: Personal accounts may relate to natural persons, artificial persons and
repersentiative persons. They are expalined as under with example:
a. Natural Persons: Accounts which relate to individual human beings. For example, Ram,
Ramesh, Suresh, Robert, Akbar, Laxmi etc. They are natural persons.
b. Artificial Persons: They relate to a group of persons or firms or institutions. For example,
Infosys Ltd., Andhra Bank, Life Insurance Corporation of India, Lions Club, L & T Ltd.,
Wipro Ltd. etc.
c. Representative persons: These accounts are also personal in nature. e.g., salaries payable
(to employees) account, rent receivable (from tenant) account, Insurance premium paid in
advance (to a insurance company) account. These accounts represent or refers to a
particular person or group of persons.
2. Impersonal accounts: Other than personal accounts are grouped as impersonal accounts.
Impersonal accounts are further divided into real accounts and nominal accounts.
1. Real accounts: Real accounts relate to assets. Assets are the things of value which helps
the business to generate revenues. The assets may be tangible or intangible. Buildings,
Machinery, Furniture etc are tangible assets. Assets such as goodwill, copy rights, patents,
lease etc are intangible assets.
2. Nominal accounts: Nominal accounts relate to expenses, losses, incomes and gains. For
example, Salaries, Wages, rent paid, commission received, Discount allowed, Discount
received, Sale of goods, Purchase of goods etc.,
Personal Accounts: Ram account, Rahim account, Akbar account L&T Ltd account, State
Bank account. TSC Ltd account Outstanding salaries account, rent receivable account,
Insurance prepaid account, Commission received in advance account etc.
Real Accounts: Land & Buildings account, Machinery account, Furniture account, Motor Van
account, Goodwill account, Patents account, Copy Rights account etc.
Nominal Accounts: Wages account, Salaries account, Printing & stationery account,
Advertising exp-account, Discount allowed, Discount received, Bad Debts account, Bad debts
recovered account, Sale of goods account, Purchase of goods account etc.
ILLUSTRATIONS: -(1)
Date
2019
March 1 Mr. Ganesh commenced business with cash of ₹90,000
2 Purchased a computer for office use for cash ₹10,000
4 Bought goods from Sankar for ₹8,000
5 Sold goods to Naresh for cash ₹12,000
8 Purchased goods for cash ₹5,000 from Suresh.
9 Sold goods on credit to Mahesh ₹15,000
11 Paid for printing expenses ₹900
13 Goods returned to Sankar on account ₹600
14 Cash sales ₹18,000
15 Wages paid ₹3,000
17 Mahesh returned goods ₹2,000
 18 Paid to Sankar ₹3,400 on account
20 Received from Mahesh on account ₹ 7,000
23 Rent paid ₹1500
25 Commission received ₹1200
28 Paid salaries ₹5,000
30 Ganesh (proprietor) taken ₹1,000 for personal expenses
31 Goods taken for personal use ₹800
2. Journalise the following transaction
2019
Jan 01 Mr. Ram Commenced business with ₹98,000
02 Cash deposited into State Bank of India ₹50,000
04 Purchased office furniture for ₹10,000 paid through bank
05 Purchased goods from Amar ₹ 12,000
07 Purchased good for cash ₹ 5,000 from Ramesh
08 Cash sales ₹11,000
10 Goods sold to Akbar for ₹10,000
12 Paid rent by cheque ₹4,000
14 Paid to Amar ₹6,000 on account
15 Goods returned by Akbar ₹1,000
16 Goods returned to Amar ₹1,500
18 Paid for advertising ₹1,200
19 Received from Akbar by cheque ₹3,000
21 Loan taken/borrowed from Raju ₹9,000
25 Goods purchased for ₹15,000 paid by cheque
28 Drawings from Bank by Ram ₹1,500
31 Salaries paid by cheque ₹12,000
3. Journalize the following transactions:
2019
Jan5 Received cash from Ramesh ₹2800, discount allowed ₹200
Jan 10 Mohan Rs. 8500 infill satisfaction of his account ₹9000
Jan 18 Rahim is a customer from whom ₹5000 due, he became insolvent, only ₹3000
received as final dividend from his estate.
Jan 24 Interest received on investments by cheque (our Banker is Canara bank) ₹1200
Jan 28 Commission paid ₹1200
Jan 30 Interest paid on Loan ₹3000

4. Journalise the following transactions and post them into ledger and balance the
accounts.:
2019
January 1 Mr. Ganesh commenced business with ₹40,000
2nd Purchased a computer for office use ₹ 5000
4th Purchased Furniture from Godrej Co. for ₹ 15,000
5th Goods purchased from Srinivas ₹ 6,000
7th Goods Sold for Cash ₹ 8,000
9th Purchased goods for Cash ₹ 2,000
10th Paid to Godrej Co.₹15,000
12th Paid for stationery ₹ 500
13th Wages paid ₹ 800
15th Goods purchased from Naresh ₹ 10,000
16th Paid to Srinivas on account ₹ 4,000
17th Goods sold to Ramesh ₹12,000
18th Rent received ₹ 1,800
19th Ganesh (owner) taken cash for personal expenses ₹ 600
20th Goods returned to Srinivas ₹ 700
23rd Received cash from Ramesh on account ₹ 8,000
25th Paid for printing ₹ 900
27th Goods returned by Ramesh ₹ 1,000
28th Paid Salaries ₹3,500
29th Purchased goods from Sunder ₹4,000
30th Sold goods to Ravi ₹5,000
5. Anil started business with cash Rs. 75,000 on 1st January 2018. The details of business
transactions for the month of January are as follows. Prepare Journal.
2019
Jan02 Cash Sales ₹10,000
05 Goods Purchases for Cash ₹12,000
07 Goods sold on credit to Rahim ₹20,000
08 Sale of Goods ₹20,000
09 Wages Paid ₹5,000
10 Cash Deposited into bank ₹8,000
13 Cash paid to Mahesh ₹6,000
15 Machinery purchased for cash ₹12,000
18 Purchased goods from Anitha ₹5,000
20 Cash received from Mrs. Ramya ₹3,000
22 Paid commission ₹1,500
24 Paid for Postage and Stationery ₹500
27 Cash drawn from Bank for personal use ₹ 7,000
30 Received rent ₹1,200

[Link] journal entries in the books of Mr. Ram

2019
March 01 Ram Commenced business with cash ₹1,00,000
02 Cash deposited into Canara Bank ₹60,000
04 Purchased from Rama ₹4,000
06 Purchased computer and paid by cheque ₹15,000
09 Ram withdrew cash for his personal expense ₹5,000
13 Furniture purchased ₹10,000
15 Returned goods to Rama ₹500
18 Amir returned goods ₹1,000
20 Advertisement Expenses paid ₹1,000
23 Deposited cash in to Canara Bank ₹3,000
25 Goods withdrawn for personal work ₹2,000
27 Cash paid to Ramesh Rs. 3,900 and discount received ₹100
28 Cash received from Ramu Rs. 2,800 and discount allowed ₹200
29 Cash withdrawn from bank for office use ₹6,000
31 Salaries paid by cheque ₹8,000

[Link] the following transactions in the books of Akbar.

2019
March1 Akbar Started business with cash ₹50,000
02 Cash Sales ₹30,000
04 Cash Purchases ₹40,000
06 Sold goods to Mahesh ₹35,000
09 Bought goods from Radhika ₹25,000
11 Sold goods to Swathi for cash ₹10,000
15 Mahesh returned goods ₹5,000
18 Commission Received ₹1,000
19 Office Expenses paid ₹500
20 Cash paid to Pramod ₹6,000
22 Returned goods to Radhika ₹2,000
25 Goods withdrawn for domestic use ₹5,000
27 Cash received from Anand ₹3800 and discount allowed ₹200
28 Interests received ₹500
29 Cash paid to Raman ₹4,900 discount allowed by him ₹100
31 Commission paid ₹300
8. Journalise the following transactions of Mr. Prahlad and post them in the ledger and
balance the same.
2019
February 1 Prahalad invested Rs.50,000 cash in the business
 3 Paid into Bank ₹6000
5 Purchased Furniture for ₹2000
7 Purchased goods for ₹5,000
10 Sold goods for ₹10,000
15 With drew cash from bank ₹2,000
25 Paid interest ₹800
30 Paid Salary ₹8,000
[Ans: Bank Balance ₹ 4,000 Dr.; Cash balance 40,200 Dr.]
9. Prepare Pavan account from the following:
2018
March1 Goods purchased from Pavan ₹38,000
6 Cash paid to Pavan ₹5,000
10 Goods returned to Pavan ₹1500
14 Paid to Pavan by Cheque ₹6,800
20 Discount allowed by Pavan ₹500
26 Goods purchased from Pavan for Cash ₹2,500
28 Furniture purchased from Pavan₹ 8,000
[Ans: 32,200 Cr.]
10. Prepare the Ledger accounts from the following particulars in the Books of Rani
2018
June1 Received cash from Shiva ₹75,000
4 Bought goods for cash ₹40,000
6 Sold to Suresh ₹40,000
12 Bought goods from Praveen ₹50,000
16 Sold goods to Ganesh ₹35,000
20 Withdrew cash for personal use ₹20,000
26 Received commission ₹2000
30 Paid rent ₹5,000
31 Paid salary ₹10,000
 Ans: [Cash balance ₹2,000 Dr.]
11. From the following information prepare Praveen's Account as on 31-03-2014
2018
March7 Balance due from Praveen ₹3,500
7 Sold goods to Praveen ₹1,500
10 Purchased goods from Praveen ₹1,000
15 Paid cash to Praveen ₹800
23 Received cash from Praveen ₹500
25 Returned goods to Praveen ₹200
Praveen settled account with 10% discount
[Ans: Cash received ₹ 4,050; Discount allowed ₹450]
CHAPTER-3
Trail Balance
INTRODUCTION: Preparation of trial balance is the third stage in the accounting process.
After passing journal entries in the first stage and posting them into concern ledgers in the
second stage, a statement is prepared to show the sum of each ledger balance of debit and
credit separately. Such statement is called the 'Trial Balance'. This trial balance is the list of
all accounts with their balances. While preparing this trial balance the fundamental principle
of double entry system i.e., the debit balances must be equal to their corresponding credit
balances is followed.
OBJECTIVES OF TRIAL BALANCE:
[Link] Cheak the arithmetical accuracy of various ledger accounts
[Link] help in preparation of final accounts
[Link] act as important tool for auditing work
[Link] generate match between ledger balances and final accounts
[Link] identify errors and mistakes crept in preparation of accounts
PROBLEMS: 1. Prepare a trial balance from the following balances of Mr. Vinod Kumar as on
31st December 2018

Name of the Account Amount (Rs) Name of the Account Amount (Rs)
 Opening stock 25,000 Furniture 16,000
Purchases 95,000 Machinery 62,000
Purchase Returns 6,000 Debtors 36,000
Sales 1,80,000 Creditors 12,750
Sales Returns 6,200 Bills receivable 4,600
Rent 4,000 Bills payable 5,500
Salaries 5,700 Cash in hand 5,220
Advertisements 2,880 Bank overdraft 10,000
Commission received 3,440 Interest on overdraft 1,800
Discount Cr. 710 Capital 55,000
Drawings 9,000

[Link] the following balances, prepare a trial balance of [Link] as on 31 December, 2016

Particulars (Rs) Particulars (Rs)

Opening Stock 80,000 Bad Debts Provision Capital 15,300

Creditors 30,000 Capital 2,30,000
Debtors 80,000 Commission received 10,000
Bills Receivable 40,000 Discount received 4,100
Carriage inwards 33,000 Purchases 1,70,000
Salaries 32,000 Cash at Bank 34,000
Bills Payable 28,000 lant & Machinery 1,46,000
Telephone 2,000 Furniture 18,000
Repairs 3,700 Rent paid 2,700
Depreciation 10,400 Sales 3,34,400

3. The following are the balances extracted from the books of Pullanna on 31-12-2017.
Prepare the trial balance.

Particulars (Rs) Particulars (Rs)

 Capital 1,30,000 Debtors 18,000
Drawings 12,000 Rent received 8,000
Furniture 42,600 Purchases 2,00,000
Bank Overdraft 14,200 Sales 1,50,000
Creditors 11,000 Return inwards 2,000
Premises 20,000 Discount (Dr) 1,600
Opening Stock 22,000 Discount (Cr) 2,000
Wages 2,000 General expenses 4,000
Salaries 9,000 Carriage 1,800
Commission paid 2,200 Reserve for bad debts 22,000

[Link] following are the balances extracted from the books of Manohar, prepare a trial
balance as on 31-03-2018.

Particulars (Rs) Particulars (Rs)

Purchases 50,000 Commission paid 150

Buildings 95,000 Sundry Debtor 29,500
Wages 34,000 Bad Debts 4,400
Fuel 2,400 Salaries 12,500
Creditor 19,000 Carriage 2,800
Bills Payable 5,350 Printing 1,000
Discount received 1,035 Postage & Stationary 1,500
Sales 96,500 Trade Expenses 3,200
Insurance 2,400 Bills Receivable 3,450
Freight 1,250 Cash in Hand 7,500
Opening Stock 1,850 Cash at Bank 16,000
Drawings 9,000 Capital 75,000
Interest Received 1,105 General Reserve 80,000
[Link] following trial balance has been prepared by an inexperienced accountant. Redraft it
in a correct

Particulars L.F Balances Dr (Rs) Balances Dr (Rs)

Land and Building 1,20,000

Plant and Machinery 92,000
Wages 18,200
Discount allowed 1,620
Discount received 730
-Purchases 1,26,000
Sales 2,40,000
Return Inwards 6,500
Return Outwards 3,370
Opening Stock 15,000
Debtors 30,000
Creditors 20,000
Carriage on sales 3,280
Carriage on purchases 2,800
Insurance 1,500
General Expenses 6,100
Cash in Hand 2,400
Bank Overdraft 12,100
Capital 1,54,000
Drawings 4,800

Total 4,30,200 4,30,200

[Link] the following list of balances extracted from the books of Smt. Shobha Rani, prepare
a trial balance as on 31 December, 2017
 Name of the Account Amount (Rs) Name of the Account Amount
(Rs)

Stock on 1-1-2017 2,00,000 Investments 3,00,000

Purchases 25,75,000 Interest on Investments 27,000
Sales 35,63,000 Cash and Bank balance 12,400
Carriage Inwards 3,000 Premises 5,70,000
Carriage Outwards 1,200 Fixtures 1,70,000
[Link]
Return Inwards 85,000 Miscellaneous Expenditures 5,200
Return Outwards 20,000 Miscellaneous Income 1,400
Debtors 2,90,000 Loan from ICICI bank 2,30,000
Creditors 1,74,000 Interest on above 30,000
Bad debts 6,000 Capital 6,80,000
Stationery 4,200 Proprietor's withdrawals 40,000
Insurance 3,400 Computers 90,000
Wages and Salaries 1,60,000 Goodwill 1,50,000
General Reserve 2,70,000 Plant & Machinery 3,10,000
Bank O.D 40,000

following trial balance has been prepared by an inexperienced accountant. Redraft it in a

correct from

Name of the Account L.F Debit Balances Credit Balances

 Cash in hand 4,100
Machinery 25,000
Purchases 66,200
Sundry Debtors 24,300
Carriage Inward 1,800
Carriage Outward 700
Wages 17,500
Rent and Taxes 5,300
Sundry Creditors 17,000
Discount Allowed 1,200
Returns Outwards 2,400
Returns Inwards 9,600
Capital 30,000
Drawings 6,300
Bank loan 10,000
Interest on loan 1,500
Opening Stock 26,200
Sales 1,28,700
Discount received 1,600

Total 1,89,700 1,89,700

CHAPTER-4
Final Accounts of Sole Trading Concerns
a) Debit side of the Trading A/c
1. Opening stock
The opening stock is the first item to be shown on the debit side of trading account. The
closing stock of the preceding year is the opening stock of the current year.
2. Purchases
Only net purchases are recorded (Cash Purchases + Credit Purchases-Purchase Returns)
Purchase returns are also termed as Return Outwards. Returns (Credit balance) can also be
treated as purchase returns.
3. Wages
The amount paid to the workers who work in the factory is called wages. These wages paid
to manufacture the goods (Productive Wages) and appears on the debit side of trading
account. If the combined amount of wages and salaries are given, it should be recorded only
on the debit side of trading account.
4. Carriage
It is the expenditure on the transport to carry the purchased goods to the business premises.
These are also termed as carriage inwards or cartage or purchase transport.
5. Clearing Charges, Freight, Customs Duty
All these expenses related to purchases appears in trading account on debit side.
6. Factory and Production Expenses
All factory expenses such as oil, fuel, water, gas, coal, factory rent and factory insurance etc,
should be recorded in trading account on debit side.
b) Credit side of Trading Account
1. Sales
Sales include cash sales and credit sales of goods. From the sales, deduct the sales returns if
any and record only net sales at credit side of the trading account. Sales Returns also termed
as Returns Inwards. Returns (debit balance) can also be treated as Sales Returns.

2. Closing Stock
It is the unsold stock left with the organization on the last day of the accounting year. The
closing stock of the current year becomes the opening stock of the next year.
If the closing stock is given in the adjustments, record it in the trading account on credit side
PORFORMA: There are Two different ways to present the Profit & Loss A/c which are shown
as below Horizontal For

Particulars Amoun Amount Particulars Amount Amount

t
 To Gross Loss b/d XXX By Gross Profit b/d XXX
To Administrative By Discount received XXX
Expenses:
By Commission XXX
To Salaries XXX received
To Rent XXX By Interest received XXX

To Rates & Taxes XXX By Commission XXX

received
To Insurance XXX
By Interest received XXX
To Printing & Stationary XXX
By Interest on XXX
To Audit Expenses XXX
Drawings
To Legal Expenses XXX
By Apprentice XXX
To General Expenses XXX Premium

To Repairs XXX By Bad Debt. XXX

Recovered
To Selling &
XXX
Distribution Expenses:
To Carriage Outwards XXX

To Advertisements XXX

To Bank Charges to XXX

Commission
To Bad Debts XXX

To Travelling Expenses XXX

To Packing Expenses XXX XXX

Profit & Loss A/c of XXX for the year ending xx, xx, xxxx

PROBLEMS:
1. From the following particulars, prepare Profit & Loss A/c of Sathwika for the year ending
31.12.2018:
 Salaries 3,500 Gross Profit b/d 12,000
Rent & Taxes 1,500 Discount received 2000
Insurance 1,000 Commission received 1600
Repairs 900
Trade Expenses 600
Carriage Outwards 600
Printing &Stationery 1,200
Internet charges 800
Bad debts 800

2. Prepare Profit & Loss A/c of Naveen Kumar as on 31-03-2018

Particulars ₹ ₹

Rent 1,500 Discount paid 3,500

2,000
Printing Stationary Telephone charges 1,500
8,000
Salaries & Wages Interest 2,000
3,000
Interest received Insurance 1,800

Bad Debts recovered 2,000 Repairs 8,00

Advertisements Postage 1,200

5,000
Gross profit 39,500 Bad debts 3,200

3. Prepare Trading account and Profit & Loss A/c from the following particulars
 Opening Stock 1500 Commission received 625
Purchases Sales 6800 Customs Duty 500
Sales 13200 Interest received 700
Rent & Taxes 500 Clearing Charges 250
Discount Allowed 350 Travelling Expenses 400
Sales Returns 200 Factory Insurance 200
Purchase Returns 500 Closing Stock 2700
Wages 475
Salaries 825
Bad Debts 500

Classification of assets and Liabilities:

While preparing the balance sheet, in order to have easy understanding, the assets and
liabilities are classified and presented as explained below:
A) Assets: Property of any description belonging to a person or business organization can be
named as an asset. Assets are the 'ownings' of a business and they may be classified as
follows:
1. Fixed Assets
The assets permanent in nature and not intended for the re-sale, but are used to carry the
business continuously are called fixed assets. They earn profit or gain to the business. e.g.
Land and buildings, machinery, furniture etc. These assets are recorded in the balance sheet
after deducting depreciation if any.
Fixed Assets can be further classified as:
a. Tangible Assets: which can be seen and touched, e.g., Furniture, Machinery etc.
b. Intangible assets: which can neither be seen nor touched, e.g., Patents, Goodwill etc.

2. Current Assets
These assets are held for resale or can be converted into cash on a later date. These are also
known as floating or circulating assets. Cash, Stock, Debtors, Bank balance etc. are the
examples of these assets.
B. Liabilities
Liabilities may be defined as financial obligations or payment responsibilities of a business
organization other than owner funds. The division of Liabilities are:
1. Current Liabilities
These liabilities payable by the organization within one accounting period (short term
liabilities) not more than 12 months from the date of Balance Sheet. e.g. Bills Payable, Trade
Creditors, Bank Overdraft etc.
2. Long term Liabilities
This type of liabilities can be payable over a longer period. e.g., Debentures, Loans from
Financial Institutions. etc.
3. Capital and Drawings
a. Capital: Capital is the excess of assets over liabilities. It is the amount invested by the
proprietor in the business.
Capital Assets-Liabilities
Capital appears in the balance sheet on the liabilities side.
a. drawings: Drawings may be defined as the amount withdrawn by the proprietor from
the business either in cash or in kind for his personal or domestic use. Drawings
should be deducted from capital in the balance sheet on liabilities side.

4. Prepare balance sheet of Srinivas from the following particulars as on 31-12-2017:

Capital 48,000 Machinery 10,000

Debtors 12,000 Cash 13,000
Creditors 28,000 Investments 19,000
Furniture 12,000 Closing Stock 3,000
Net Profit 4000 Fixed Deposits 11,000

5. Prepare balance sheet of Abdul Moiz from the following particulars as on 31-12-2019:
Capital 66,000 Bills Receivable 10,000
Drawings 4,000 Bills Payable 7,000
Debtors 25,000 Investments 16,000
Machinery 33,000 Loose Tools 5,000
Creditors 17,000 Net Profit 9,000
Closing Stock 6,000

[Link] the following Trail Balance Chendra Shekar Reddy, prepare Trading account,
Profit& Loss A/c and Balance sheet on 31-12-2018

Debit Balance Amount Amount Credit Balance Amount Amount

(Rs) (Rs) (Rs) (Rs)

Opening Stock 12,000 Sales 1,15,000

Purchases 48,500 Purchase Returns 5,000
Sales Returns 7,000 Capital 65,000
Wage 6,800 Creditors 20,000
Carriage 2,500 Discount Received 5,150
Salaries 14,000
Rent 4,500
Discount Allowed 2,350
Drawings 6,000
Cash 8,500
Machinery 57,000
Furniture 16,000
Debtors 25,000
TOTAL 2,10,150 2,10,150
Closing Stock 12,500
Value
[Link] the following trial balance, prepare Trading A/c, and Profit & Loss A/c of Ms. Veena
Reddy for the year ended 31.12.2018:

Balance Amount Credit Balance Amount

(Rs) (Rs)

Opening stock 7,800 Capital 38,000

Purchases 35,000 Discount Received 2,850
Carriage 2,000 Rent Received 3,750
Wages 1,650 Sales 26,800
Salaries 4,000 Return Outwards 2,000
Clearing Charges 4,00 Dividends on Shares 1,225
Furniture 9,000
Discount Allowed 525
Bad Debts 475
Sales Expenses 350
Machinery 10,000
Import Duty 650
Sales Returns 500
Advertisement 3,700
Interest Paid 500
Trade Expense 325
Oil & Fuel 250
Rent 2,650
Carriage 450
TOTAL 80,225 80,225
Closing stock 7,200
CHAPTER-5
Preparation of Final Accounts

[Link] the following trial balance, prepare Mahesh Trader's final accounts for the year
ended 31.03.2018:
Trail Balance

Debit Balances Amount (₹) Credit Balances Amount (₹)

Opening stock 5,000 Capital 22,000

Purchases 4,700 creditors 3,000
Wages 800 Bills payable 5,400
Carriage 500 Discount 2,400
Rent 1,000 Sales 9,000
Salaries 1,200 Overdraft 2,000
Discount 400
Advertisement Expenses 800
Customs Duty 600
Factory Insurance 300
Machinery 12,000
Debtors 6,000
Furniture 9,000
Speed post charges 700
Bad Debts 800

43,800 43,800

Adjustments
[Link] of Closing Stock: 5400
[Link] Wages:300
[Link] Rent:400
[Link] on Machinery: 5%, Depreciation on Furniture: 10%
[Link] the following trial balance of Mahindra Traders, prepare final accounts for the year
ended 31.12.2018:
Trial Balance

Particulars Debit Bal. ₹ Credit Bal. ₹

Capital 32,000
Salaries 1,000
Purchases 20,000
Purchase Returns 400
Sales 25,000
Cash 5,000
Wages 1,200
Factory Rent 200
Insurance 750
Carriage 400
Office Expenses 800
Carriage Outwards 200
Machinery 10,000
Furniture 7,000
Discount allowed 450
Discount received 1,600
Goodwill 5,000
Opening stock 2,000
Debtors 9,000
Creditors 4,000
Total 63,000 63,000

Adjustments:(1) Value of Closing Stock 2500

(2) Prepaid Insurance 250
(3) Outstanding Salaries 300
[Link] Final Accounts of Telangana Traders for the year ended 31.12.2018.
Trial Balance

Debit Balances Amount (₹) Credit Balances Amount (₹)

Opening Stock 7,000 Capital 1,00,000

Purchases 9,000 Interest 1,500
Rent 1,200 Return Outwards 500
Salaries 1,500 Sales 16,000
Wages 1,000 Commission 1,000
Carriage Inwards 1,050 Creditors 6,000
Carriage Outwards 450
Land & Buildings 50,000
Investments 20,000
Loose Tools 12,000
Discount 1,500
Interest 500
Telephone Charges 700
Printing & Stationary 900
Furniture 18,000
Return Inwards 200

1,25,000 1,25,000

Adjustments: -
Closing Stock: 12000
Outstanding Wages: 500
Interest Received in Advance: 600
Commission Receivable: 400.
[Link] the following Trial Balance of Warangal Trader's, prepare final accounts for the year
ended 31-12-2018
Trial Balance

Debit Balances Amount (₹) Credit Balances Amount (₹)

Purchases 60,000 Sales 1,20,000

Salaries 4,500 Purchase Returns 2,000
Opening Stock 16,000 Sundry Creditors 20,000
Sales Returns 1,500 Bills Payable 12,000
Carriage 800 Bank Overdraft 9,000
Commission paid 300 Capital 70,000
Advertisement 1,800 Discount 3,000
Bad Debts 600 Interest Received 4,000
Discount 400 Provision for Bad & 1,000
Doubtful Debts
investments 25,000
Plant & Machinery 30,000
Buildings 50,000
Factory Expenses 500
Wages 1,000
Insurance 700
Sundry Debtors 40,000
Cash in Hand 2,000
Drawings 2,500
General Expenses 3,400

2,41,000 2,41,000

Adjustments
1. Closing Stock ₹15000
2. Outstanding Wages 600: Accrued Interest ₹1000
3. Unexpired Insurance ₹200.
4. Depreciation on Plant & Machinery is 10%.
5. Bad Debts to be written off ₹1000 and provide 5% for Bad and Doubtful Debts.
6. Create 2% Provision for Discount on Debtors and on Creditors.

[Link] the following trial balance, and adjustments, prepare final accounts of Revanth
Traders as on 31.03.2019

Debit Balances Amount (₹) Credit Balances Amount (₹)

Opening Stock 10,000 Capital 40,000

Purchases 12,000 Reserve for Bad Debts 400
Sales Returns 500 Sales 16,000
Carriage Inwards 800 Creditors 3,000
Wages 1,600 Rent Received 300
Debtors 15,000 Bills Payable 2000
Interest 600
Trade expenses 700
Salaries 2,000
Bad Debts 500
Buildings 10,000
Bills Receivable 8,000

61,700 61,700

Adjustments
(1) Closing Stock: 15000.
(2) Reserve for Bad Debts: 5%.
(3) Goods worth of ₹1000 withdrawn by owner for his personal use.
(4) Stock destroyed by fire ₹6000 and Insurance company admitted a claim to the extent of
4500.
(5) Manager's Commission is 5% on net profit after charging such commission.
(6) Goods worth of ₹300 distributed as free samples.
CHAPTER-6
Bank Reconciliation Statement
PROBLEMS: -
[Link] the following details, prepare a bank reconciliation statement for M/s. Kakatiya
Fertilizers as on December 31, 2018.
A. Balance as per cash book ₹200
B. Cheques deposited but not yet collected by the bank ₹1,500
C. Cheque issued to Mr. Arjun has not yet been presented for payment ₹2,500
D. Bank charges debited in the pass book ₹200
E. Interest allowed by the bank ₹100
F. Insurance premium directly paid by the bank as per standing instructions ₹500

[Link] a Bank Reconciliation Statement of M/s. Madhavi Traders and find out the balance
as per Pass Book as on 31-12-2018
A. Cash book balance as on 31-12-18 is ₹58000/-
B. Cheques amounting to ₹25,000 issued on 25-12-18 were presented for payment on
5-1-19
C. A cheque for ₹20,000 deposited on 21-12-18 was returned dishonoured on 8-1-19
D. Interest on investments ₹1500 was collected and credited by bank but no entry is
in the cash book
E. Bank charges debited in Pass book only ₹120.

[Link] a Bank Reconciliation Statement of New Indian Stores as on 30th June, 2017 from
the following particulars:
A. Balance as per Pass Book ₹1,50,000
B. Two cheques for ₹4,530 and ₹1,520 issued on 25th June were presented for
payment at the Bank in July
C. C.A cheque for ₹1,150 sent to the bank for collection, was not entered in the pass
book till 30th June
D. The Bank allowed Rs. 100 as interest and charged ₹460 as bank commission but
both of them were not entered in the cash book.

[Link] 30th April 2018, the Pass Book of M/s Paramesh Brothers showed a credit balance of
₹45000.
A. Cheques amounting to ₹10,500 were deposited in the Bank but only cheques of
₹4500 were cleared up to 30th April.
 B. Cheques amounting to ₹10500 were deposited in the Bank but only cheques of
₹4500 were cleared up to 30th April.
C. In the Pass Book there was a credit of Rs.300 for interest on investments and debit
of ₹75 for bank charges.
Prepare a Bank Reconciliation Statement showing the balance as per Cash Book.

[Link] the following particulars ascertain the balance that would appear in the pass book of
Mr. Pavan on 31st December, 2018
A. The bank overdraft as per cash book on 31st December, 2018 ₹ 6,340
B. Interest on overdraft for 6 month ending 31st December, 2018 ₹ 160 is entered
in pass book
C. Bank Charges of ₹ 30 are debited in the pass book only
D. Cheques issued but not cashed prior to 31st December, 2018 amounted to ₹
1,168
E. Cheques paid into bank but not cleared before 31st December, 2018 were for ₹
2,170
F. Interest on investments collected by the bank and credited in the pass book ₹
1,200 Solution

[Link] a Bank Reconciliation Statement as at June 30, 2018 for M/s. XYZ Private Limited
from the information given below
A. Bank overdraft as per cash book ₹ 1,10,450
B. Cheques issued on June 20, 2018 but not yet presented for payment ₹ 15,000
C. Cheques deposited but not yet credited by bank ₹ 22,750
D. Bills receivable directly collected by bank ₹ 47,200
E. Interest on overdraft debited by bank ₹ 12,115
F. Amount wrongly debited by bank ₹ 2,400
8. Prepare a bank reconciliation statement of Mr. Vasudev from the following particulars.
A. Balance as per cash book ₹ 1,500.
B. Cheques deposited but not cleared ₹ 100.
C. Cheques issued but not presented for payment 150.
D. Interest allowed by bank ₹ 20.
(Answer: Balance as per pass book ₹ 1,570)

[Link] a Bank reconciliation statement of S.V Traders and find the balance as per Pass
book as on 31-12-2018
A. Cash book balance as on 31-12-2018 is ₹ 62,000
B. Cheques amounting to ₹ 18,000 issued but not presented for payment.
 C. A cheque for ₹ 16,000 deposited and was returned dishonoured.
D. Interest on investments ₹ 2,200 was collected by bank but no entry is made in the
cash boo
E. Bank charges debited in the pass book only ₹ 150

[Link] Book of a trader shows a balance of ₹12,600. On comparing the Pass Book with the
Cash Book, the following discrepancies were noted.
A. Cheques deposited in bank but not collected ₹2,100
B. Cheques issued but not presented for payment ₹1,800
C. Bank Charges ₹175
D. Bank paid insurance premium ₹1500
E. The Debtor paid directly into bank account ₹1200
(Ans. Bank balance as per Cash Book 12775)
CHAPTER-7
Rectification of Errors

TYPES OF ERRORS
On the basis of the impact of the errors on trial balance, errors may be classified into two
categories-Errors disclosed by trial balance, and Errors not disclosed by trial balance. Types
of Errors
1. Errors not disclosed by Trial Balance
2. Errors disclosed by Trial Balance.
ERROR

1. Errors of posting to the wrong side of 1. Errors of principle

an account
2. Errors of casting 2. Error of omission
3. Error in totalling 3. Errors of commission
[Link] of carrying forward 4. Compensating errors
[Link] of partial omission 5. Errors of posting to wrong heads of
6. Error of double posting in the same account account
I. Errors not disclosed by Trial Balance
This type of Errors cannot be traced out in the preparation of Trial Balance, because these
errors cannot affect the agreement of Trial Balance.
[Link] of Principle
Transactions are recorded as per generally accepted accounting principles. If any of these
principles are violated or ignored, errors resulting from such violation are known as errors of
principle. For example, Purchase of machinery recorded in the purchases book. It is an error
of principle, because the purchases book is meant for recording credit purchases of goods
meant for resale and not fixed assets. A trial balance will not disclose errors of principle.
These errors may arise, when the distinction is not made between the Capital and Revenue
nature items.
e.g., 1) Purchase of Machinery, debited to purchases a/c
Machinery a/c is - Capital nature
Purchase a/c is - Revenue nature
Instead of debiting capital nature A/c (Machinery A/c), debiting a Revenue nature
a/c (Purchases A/c) is an error of principle.
2)Rent paid to land lord, debited to his personal A/c
Rent A/c is - Nominal Account
Land lord A/c is - Personal Account
If Land lord A/c is debited instead of Rent A/c, it becomes an error of principle
2. Error of Omission
When a transaction is completely or partly omitted from the books of accounts such error is
known as Error of Omission.
i. Error of Complete Omission: This error arises when a transaction is totally omitted in the
books of accounts. For example, Furniture purchased from Saketh & Co. completely not
recorded. This error does not affect the trial balance.
ii. Error of Partial Omission: This error arises when only one aspect of the transaction either
debit or credit is recorded. For example, a credit sale of goods to Sunder is recorded in sales
book but not posted
in Sunder's account. This error affects the trial balance.
[Link] of Commission
This error arises due to wrong recording, wrong posting, wrong casting, wrong balancing,
wrong carrying forward etc. Errors of commission may be classified as follows:
i. Error of Recording: This error arises when a transaction is wrongly recorded in the books
of original entry. For example, goods of 8,500, purchased on credit from Praveen, is recorded
in the book as ₹5,800. This error does not affect the trial balance.
ii. Error of Posting: This error arises when information recorded in the books of original
entry are wrongly entered in the ledger. Error of posting may be
a) Right amount in the right side of wrong account
b) Right amount in the wrong side of correct account
c)Wrong amount in the right side of correct account
d)Wrong amount in the wrong side of correct account
e) Wrong amount in the wrong side of wrong account
f) Wrong amount in the right side of wrong account etc.
These errors may or may not affect the trial balance.
[Link] Errors
The errors arising from excess debits or under debits of accounts being neutralized by the
excess credits or under credits to the same extent of some other account is compensating
error. Since the errors in one direction are compensated by errors in another direction,
arithmetical accuracy of the trial balance is not at all affected. In other words, If two or more
errors are committed and one error nullifieds another error, the net effect is unchanged.
eg: Amount paid to Ram ₹5000 recorded as ₹4500, and amount received from Syam ₹10,000
recorded as ₹9,500.
5. Error of posting to wrong head of A/c
Instead of recording in one account, recording in another account is known as error of to
wrong head of a/c
eg. Paid to Mahesh ₹1000 is debited to Suresh A/c.
II. Errors disclosed by Trial Balance
The errors which are revealed by the trial balance are known as errors disclosed by trial
Balance
The following are the errors disclosed by trial balance:
[Link] of Posting of transaction to the wrong side of an account
e.g.: Discount allowed posted to the credit side of discount account
[Link] of Posting of wrong amount
e.g.: Sales of ₹25,000 posted as ₹2,500 to Sales account
[Link] in totaling:
Wrong totaling made either in subsidiary books or in ledgers affects the agreement of Trial
eg.:
[Link] Returns Book over cast by ₹100
[Link] account totaled as ₹1,750 instead of ₹1,500
[Link] of Carrying Forward
If a mistake is committed in Carrying forward a total of one page to the next page. This error
affects the agreement of Trial Balance.
eg.: Purchase Book total is carried forward ₹1,500 instead of ₹150.
[Link] of partial omission
Sometimes accountant may post only one aspect of the entry to the ledger account.
eg: Purchase of goods from Ramesh ₹2,000 posted to Purchases account only
[Link] of double posting
An account may be recorded twice in the journal.
eg.: Paid Salaries 600 debited twice to Salaries account.
SUSPENSE ACCOUNT: - Sometimes, despite of an accountant's best efforts, the trial balance
may not agree. In such circumstances, the difference between the debit and credit totals
should be transferred to an account called Suspense Account. By doing so, the trial balance
is made to agree and delay in the preparation of final accounts can be avoided.
Suspense account is an imaginary account, opened and used as a temporary measure to
make two sides of the trial balance agree. As and when the errors which caused the
disagreement in trial balance are detected, rectification entries should be passed through
suspense account. Detection and rectification of all the errors will result in the automatic
closure of 'Suspense Account'.
If the debit total in the trial balance is in excess of credit total, suspense account should be
credited with the difference. Similarly, suspense account should be debited with the
difference when credit side total is more than the debit side total. In other words, suspense
account will appear on that side of the trial balance whose total is less than the total of
other side.
Following points should be kept in mind while passing rectification entries through
'Suspense Account'.
i)Suspense account is used to rectify those errors which affect the trial balance.
ii) a) If the account which is to be rectified is credited in the rectifying entry, suspense
account will be debited to complete the double entry.
b) If the account which is to be rectified is debited in the rectifying entry, suspense account
will be credited to complete the double entry.
PROBLEMS:
[Link] the following errors.
a. Salary paid to Pavan ₹1200 has been debited to his account.
b. Paid rent to owner of the house Mr. Murali ₹5,000, has been debited to his account.
C. ₹2,000 paid for the repairs of building was debited to building a/c.
d. ₹850 used by proprietor for his personal use has been debited to Trade Expenses a/c.
e. Goods amounting to ₹235 returned by Ramesh were taken into stock, but no entry was
made in the books.
2. Rectify the following through passing Journal Entries:
a. Office Furniture bought for ₹7200 wrongly debited to Office Expenses A/c.
b. A credit sale ₹1500 to Pradeep has been passed through purchases book.
 c. Received cheque for amount ₹1600 from Venkat is dishonoured and wrongly entered
in Sales Return Book.
d. Goods sold to Sudha ₹4000, not recorded in the Books.
e. ₹2000 received from Sudheer has been wrongly credited to Sandeep's A/c.
[Link] following errors were found in the books of Laxminarayan & Sons. Give the entries to
correct them.
a. 500 paid for furniture purchased has been charged to ordinary purchases a/c. b)
b. Repairs made to building were debited to Building a/c for ₹50.
c. ₹1000 paid for rent debited to Landlord's a/c.
d. ₹100 received from Shah & Co., has been wrongly entered as from Shan & Co.,
e. An amount of ₹1150 withdrawn by the proprietor for his personal use had been
debited to Travelling expenses a/c.
f. ₹1500 paid for the purchase of a typewriter was charged to office expenses a/c.
4. Pass journal entries to rectify the following errors discovered while preparing the trial
balance:
a. Commission of ₹200 received was wrongly credited to Interest account.
b. Return outwards book was undercast by ₹500
c. Furniture worth ₹600 purchased was debited to Purchases a/c.
d. An amount of ₹300 received from Sri Bhima Raju was wrongly credited to the account
of Sri Rama Raju.
[Link] following errors, affecting the accounts were detected in the books of Varun Bros.,
Warangal.
a. Sale of Old Furniture ₹1500 treated as sale of goods.
b. Receipt of ₹500 from Ram credited to Shyam.
c. Goods worth ₹1000 bought of Mohan have remained unrecorded.
d. A return of goods ₹120 from Mukesh posted to debit of his account.
e. Rent of proprietor's residence ₹600 debited to Rent A/c.
f. A payment of ₹215 to Rafi posted to his credit as 125.
g. Sales book added ₹400 shorts.
h. The total of bills receivable book ₹1500 left un posted.