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Banking transactions, Bank reconciliation statements

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Financial Accounting (Mgt-101)
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Vehicle Account
Vehicle
Account Code 05
Date
No.
Narration
Dr. Rs.
Date
No.
Narration
Cr. Rs.
03-01---
04 Furniture purch.
50,000
0
50,000
Balance
50,000
50,000
50,000
Name Of The Organization (Ali Traders)
Trial Balance As On ( January 31, 20--)
Title of Account
Code
Dr. Rs.
Cr. Rs.
Cash Account
01
35,000
Bank Account
02
130,000
Capital Account
03
200,000
Furniture Account
04
15,000
Vehicle Account
05
50,000
Total
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Financial Accounting (Mgt-101)
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Purchases Account
Purchases
Account Code 06
No.
Narration
Cr. Rs.
Date  No.
Narration
Dr. Rs.
Date
05-01---  05 Goods purch.
50,000 10-01---
10,000
08 Purchase return
20,000
08-01---
07 Goods purch.
70,000
10,000
Balance
60,000
70,000
70,000
Name Of The Organization (Ali Traders)
Trial Balance As On ( January 31, 20--)
Title of Account
Code
Dr. Rs.
Cr. Rs.
Cash Account
01
35,000
Bank Account
02
130,000
Capital Account
03
200,000
Furniture Account
04
15,000
Vehicle Account
05
50,000
Purchases Account
06
60,000
Total
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Financial Accounting (Mgt-101)
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Mr. A (Supplier)
Mr. A (Creditor)
Account Code 07
No.
Narration
Cr. Rs.
Date
No.
Narration
Dr. Rs.
Date
10,000 05-01---
05 Goods purch.
50,000
10-01---
08 Purchase return
25,000
21-01---
11 Paid to Mr. A
35,000
50,000
Balance
15,000
50,000
50,000
Name Of The Organization (Ali Traders)
Trial Balance As On ( January 31, 20--)
Title of Account
Code
Dr. Rs.
Cr. Rs.
Cash Account
01
35,000
Bank Account
02
130,000
Capital Account
03
200,000
Furniture Account
04
15,000
Vehicle Account
05
50,000
Purchases Account
06
60,000
Mr. A (Creditor)
07
15,000
Total
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Financial Accounting (Mgt-101)
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Sales
Sales Account Code 08
No.
Narration
Cr. Rs.
Date
No.
Narration
Dr. Rs.
Date
18-01---
10 Sales return
5,000 06-01---
06 Goods sold
60,000
40,000
12-01---
09 Goods sold
5,000
100,000
Balance
95,000
100,000
100,000
Name Of The Organization (Ali Traders)
Trial Balance As On ( January 31, 20--)
Title of Account
Code
Dr. Rs.
Cr. Rs.
Cash Account
01
35,000
Bank Account
02
130,000
Capital Account
03
200,000
Furniture Account
04
15,000
Vehicle Account
05
50,000
Purchases Account
06
60,000
Mr. A (Creditor)
07
15,000
Sales
08
95,000
Total
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Financial Accounting (Mgt-101)
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Mr. B (Customer)
Mr. B (Debtor) Account Code 09
Date
No.
Narration
Dr. Rs.
Date
No.
Narration
Cr. Rs.
12-01---
09 Goods sold
40,000 18-01---
10 Sales return
5,000
20,000
25-01---
12 Received from B
40,000
25,000
Balance
15,000
40,000
40,000
Name Of The Organization (Ali Traders)
Trial Balance As On ( January 31, 20--)
Title of Account
Code
Dr. Rs.
Cr. Rs.
Cash Account
01
35,000
Bank Account
02
130,000
Capital Account
03
200,000
Furniture Account
04
15,000
Vehicle Account
05
50,000
Purchases Account
06
60,000
Mr. A (Creditor)
07
15,000
Sales
08
95,000
Mr. B (Debtor)
09
15,000
Total
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Financial Accounting (Mgt-101)
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Salaries
Salaries
Account Code 10
No.
Narration
Cr. Rs.
Date
No.
Narration
Dr. Rs.
Date
31-01---
13 Salaries paid
5,000
0
5,000
Balance
5,000
5,000
5,000
Name Of The Organization (Ali Traders)
Trial Balance As On ( January 31, 20--)
Title of Account
Code
Dr. Rs.
Cr. Rs.
Cash Account
01
35,000
Bank Account
02
130,000
Capital Account
03
200,000
Furniture Account
04
15,000
Vehicle Account
05
50,000
Purchases Account
06
60,000
Mr. A (Creditor)
07
15,000
Sales
08
95,000
Mr. B (Debtor)
09
15,000
Salaries
10
5,000
Total
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Financial Accounting (Mgt-101)
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Expenses
Expenses
Account Code 11
No.
Narration
Cr. Rs.
Date
No.
Narration
Dr. Rs.
Date
31-01---
14 Exp. accrued
20,000
20,000
0
Balance
20,000
20,000
20,000
Name Of The Organization (Ali Traders)
Trial Balance As On ( January 31, 20--)
Title of Account
Code
Dr. Rs.
Cr. Rs.
Cash Account
01
35,000
Bank Account
02
130,000
Capital Account
03
200,000
Furniture Account
04
15,000
Vehicle Account
05
50,000
Purchases Account
06
60,000
Mr. A (Creditor)
07
15,000
Sales
08
95,000
Mr. B (Debtor)
09
15,000
Salaries
10
5,000
Expenses
11
20,000
Total
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Financial Accounting (Mgt-101)
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Expenses Payable
Expenses Payable
Account Code 12
No.
Narration
Cr. Rs.
Date
No.
Narration
Dr. Rs.
Date
31-01---
14 Exp. accrued
20,000
0
20,000
Balance
20,000
20,000
20,000
Name Of The Organization (Ali Traders)
Trial Balance As On ( January 31, 20--)
Title of Account
Code
Dr. Rs.
Cr. Rs.
Cash Account
01
35,000
Bank Account
02
130,000
Capital Account
03
200,000
Furniture Account
04
15,000
Vehicle Account
05
50,000
Purchases Account
06
60,000
Mr. A (Creditor)
07
15,000
Sales
08
95,000
Mr. B (Debtor)
09
15,000
Salaries
10
5,000
Expenses
11
20,000
Expenses Payable
12
20,000
Total
330,000
330,000
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Financial Accounting (Mgt-101)
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PROFIT AND LOSS ACCOUNT (ACCOUNT FORM)
Name of the Entity (Ali Traders)
Profit and Loss Account for the Month Ending January 31, 20--
Debit
Credit
Particulars
Rs.
Particulars
Rs.
Cost of Sale (Purchases)
60,000
Income
95,000
Gross Profit
35,000
(income ­ Cost of Sale)
Total
95,000
Total
95,000
Admin Expenses
25,000
Gross Profit
35,000
Salaries
5,000
Expenses
20,000
Net Profit
10,000
(gross Profit ­ expenses)
Total
35,000
Total
35,000
PROFIT AND LOSS ACCOUNT (EPORT FORM)
Name of the Entity (Ali Traders)
Profit and Loss Account for the Month Ending January 31, 20--
Particulars
Amount
Amount
Rs.
Rs.
Income / Sales / Revenue
95,000
Less: Cost of Goods Sold
(60,000)
Gross Profit
35,000
Less: Administrative Expenses
(25,000)
(25,000)
Net Profit
10,000
Rules of debit & credit
·
Any account that obtains a benefit is Debit and
·
Anything that will provide benefit to the business is Credit.
·
Both these statements may look different but in fact if we consider that whenever an account
benefits as a result of a transaction it will have to return that benefit to the business then both the
statements will look like different sides of the same picture.
Rules of debit & credits can also be explained like:
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Financial Accounting (Mgt-101)
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·
EXPENDITURE
o  Increase in Expenditure is Debit
o  Decrease in Expenditure is Credit
·
INCOME
o  Increase in Income is Credit
o  Decrease in Income is Debit
·
ASSETS
o  Increase in Asset is Debit
o  Decrease in Asset is Credit
·
LIABILITY
o  Increase in Liability is Credit
o  Decrease in Liability is Debit
Now we will explain these rules with the help of the following illustration:
No.
Date
Particulars
01
Jan 01
Mr. Rizwan invests Rs. 100,000 to commence his business.
02
Jan 03
He opened an account with bank & deposited Rs. 30,000.
03
Jan 05
He borrows Rs. 50,000 from Mr. Saleem at 12% per annum.
04
Jan 07
He purchased furniture worth Rs. 20,000 for cash.
05
Jan 09
He purchased goods (for resale) worth of Rs. 10,000 from Mr. Afzal
on credit.
06
Jan 10
He sold goods for cash Rs. 5,000
07
Jan 12
He sold goods for Rs. 5,000 to Mr. Naeem on credit basis.
08
Jan 15
Cash deposited in bank Rs. 5,000
09
Jan 16
He purchased stationery fore Rs. 3,000.
10
Jan 18
He purchased office equipment for Rs. 10,000 and paid by cheque.
11
Jan 19
He returned defective goods to Mr. Afzal worth Rs. 1,000.
12
Jan 25
Goods are returned by Mr. Naeem Rs. 500 to the business.
13
Jan 30
Cash paid to Mr. Afzal Rs. 9,000 in full settlement of his claim.
14
Jan 31
Cash received from Mr. Naeem Rs. 4,500 in full settlement of his
account.
15
Jan 31
Cash withdrawn from the bank Rs. 500.
Now first document that we prepare in accounting is the voucher. We will book first entry in voucher, i.e.
Name Of Company
Type Of Voucher
Date: 1-1-02--
No:
01
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Financial Accounting (Mgt-101)
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Description
Code
Debit
Credit Amount
#
Amount
Cash
01
100,000
Capital
02
100,000
Total:
100,000
100,000
Narration:
Capital Introduced in Cash by Mr. Rizwan.
Prepared By:
Checked by:
Same entry is presented in simpler form:
Date
Particulars
Code #
Amount(Dr.)
Amount(Cr.)
Rs.
Rs.
01-01-2002
Cash A/c
01
100,000
Capital A/c
02
100,000
Capital Introduced in Cash by Mr.
Rizwan
In this case, cash account is debited because cash account has obtained benefit and Capital account is
credited because business has obtained benefit because of capital account.
This statement can also be interpreted like this:
As cash is an asset and it is increased in this case, so cash is debited. Capital is a liability and increase in
liability is credit. In this case capital is increased, hence it is credited.
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Financial Accounting (Mgt-101)
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ENTRY # 2
First, we will book this entry in voucher.
Name Of Company
Type Of Voucher
Date: 3-1-02--
No:
01
Description
Code
Debit
Credit Amount
#
Amount
Bank
03
30,000
Cash
01
30,000
Total:
30,000
30,000
Narration:
Deposited cash in bank.
Prepared By:
Checked by:
Again, the same entry in simple form
Date
Particulars
Code #
Amount(Dr.)
Amount(Cr.)
Rs.
Rs.
03-01-2002
Bank A/c
03
30,000
Cash A/c
01
30,000
Deposited cash in bank.
Again, bank account is debited because bank account has obtained benefit and Cash account is credited
because business has obtained benefit because of cash account.
This statement can also be interpreted like this:
As bank is an asset and it is increased in this case, so bank is debited. Cash is an asset and decrease in asset is
credit. In this case cash is decreased, hence it is credited
From now onward, we will present entry in simple form.
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Financial Accounting (Mgt-101)
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ENTRY # 3
Date
Particulars
Code #
Amount(Dr.)
Amount(Cr.)
Rs.
Rs.
05-01-2002
Cash A/c
01
50,000
Loan A/c
04
50,000
Obtained loan from Mr. Saleem.
Cash account is debited because cash account has obtained benefit and Loan account is credited because
business has obtained benefit because of Loan account.
This statement can also be interpreted like this:
As cash is an asset and it is increased in this case, so cash is debited. Loan is a liability and increase in liability
is credit. In this case Loan is increased, hence it is credited
ENTRY # 4
Date
Particulars
Code #
Amount(Dr.)
Amount(Cr.)
Rs.
Rs.
07-01-2002
Furniture A/c
05
20,000
20,000
Cash A/c
01
Purchased furniture for cash
Again, furniture account is debited because furniture account has obtained benefit and Cash account is
credited because business has obtained benefit because of cash account.
This statement can also be interpreted like this:
As furniture is an asset and it is increased in this case, so furniture is debited. Cash is an asset and decrease in
asset is credit. In this case cash is decreased, hence it is credited.
ENTRY # 5
Date
Particulars
Code #
Amount(Dr.)
Amount(Cr.)
Rs.
Rs.
09-01-2002
Purchases A/c
06
10,000
Mr. Afzal(Creditors) A/c
07
10,000
Purchased goods from Mr. Afzal on
credit
Purchase account is debited because purchase account has obtained benefit and Creditors account is credited
because business has obtained benefit because of Creditors account.
This statement can also be interpreted like this:
As purchase is an expense and it is increased in this case, so purchase is debited. Creditors are liabilities and
increase in liability is credit. In this case Creditors are increased, hence it is credited.
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Financial Accounting (Mgt-101)
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Creditor is any third person or organization, to whom business has to pay in future.
ENTRY # 6
Date
Particulars
Code #
Amount(Dr.)
Amount(Cr.)
Rs.
Rs.
10-01-2002
Cash A/c
01
5,000
Sale A/c
08
5,000
Sold goods for cash
Cash account is debited because cash account has obtained benefit and Sale account is credited because
business has obtained benefit because of Sale account.
This statement can also be interpreted like this:
As cash is an asset and it is increased in this case, so cash is debited. Sale is an income and increase in income
is credit. In this case income is increased, hence it is credited
ENTRY # 7
Date
Particulars
Code #
Amount(Dr.)
Amount(Cr.)
Rs.
Rs.
12-01-2002
Mr. Naeem(Debtors) A/c
09
5,000
Sale A/c
08
5,000
Sold goods to Mr. Naeem on credit
Debtors account is debited because Debtors account has obtained benefit and Sale account is credited
because business has obtained benefit because of Sale account.
This statement can also be interpreted like this:
As Debtors is an asset and it is increased in this case, so debtors account is debited. Sale is an income and
increase in income is credit. In this case income is increased, hence it is credited
Debtor is any third person or organization, from whom cash is receivable by the business.
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Financial Accounting (Mgt-101)
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ENTRY # 8
Date
Particulars
Code #
Amount(Dr.)
Amount(Cr.)
Rs.
Rs.
15-01-2002
Bank A/c
03
5,000
Cash A/c
01
5,000
Cash deposited in bank
ENTRY # 9
Date
Particulars
Code #
Amount(Dr.)
Amount(Cr.)
Rs.
Rs.
16-01-2002
Stationery A/c
10
3,000
Cash A/c
01
3,000
Stationery purchased for cash
Stationery account is debited because stationery account has obtained benefit and Cash account is credited
because business has obtained benefit because of Cash account.
This statement can also be interpreted like this:
As stationery is an expense and it is increased in this case, so stationery is debited. Cash is an asset and
decrease in asset is credit. In this case Cash is decreased, hence it is credited
ENTRY # 10
Date
Particulars
Code #
Amount(Dr.)
Amount(Cr.)
Rs.
Rs.
18-01-2002
Office Equipment A/c
11
10,000
Bank A/c
03
10,000
Office equipment purchased by
cheque
Office Equipment account is debited because Office Equipment account has obtained benefit and Bank
account is credited because business has obtained benefit because of Bank account.
This statement can also be interpreted like this:
As Office Equipment is an asset and it is increased in this case, so Office Equipment is debited. Bank is an
asset and decrease in asset is credit. In this case bank account is decreased, hence it is credited
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Financial Accounting (Mgt-101)
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ENTRY # 11
Date
Particulars
Code #
Amount(Dr.)
Amount(Cr.)
Rs.
Rs.
19-01-2002
Mr. Afzal(Creditors) A/C
07
1,000
Purchase return A/C
12
1,000
Creditors account is debited because Creditors account has obtained benefit and Purchase return account is
credited because business has obtained benefit because of Purchase return account.
This statement can also be interpreted like this:
As Creditors is a liability and it is decreased in this case, so Creditors is debited. Purchase return is an
expense and decrease in expense is credit, So it is credited.
ENTRY # 12
Date
Particulars
Code #
Amount(Dr.)
Amount(Cr.)
Rs.
Rs.
25-01-2002
Sales return A/C
13
500
09
500
Mr. Naeem(Debtors) A/C
Goods returned by Mr.
Naeem(Debtors)
Sales return account is debited because Sales return account has obtained benefit and Debtors is credited
because business has obtained benefit because of Debtors account.
This statement can also be interpreted like this:
As sales return is decrease in income and decrease in income is debit, so it is debited. Debtors account is
decreased and decrease in asset is credit, so it is credited.
ENTRY # 13
Date
Particulars
Code #
Amount(Dr.)
Amount(Cr.)
Rs.
Rs.
30-01-2002
Mr. Afzal(Creditors) A/C
07
9,000
Cash A/C
01
9,000
Cash paid to Mr. Afzal(Creditors)
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Financial Accounting (Mgt-101)
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ENTRY # 14
Date
Particulars
Code #
Amount(Dr.)
Amount(Cr.)
Rs.
Rs.
31-01-2002
Cash A/C
01
4,500
Mr. Naeem(Debtors) A/C
09
4,500
Cash received from Mr.
Naeem(Debtors)
ENTRY # 15
Date
Particulars
Code #
Amount(Dr.)
Amount(Cr.)
Rs.
Rs.
31-01-2002
Cash A/C
01
500
Bank A/C
03
500
Cash withdrawn from bank
CASH AND BANK BOOK
·
Ledger is a book that keeps separate record for each account;
·
The Account or Head of Account is a systematic record of transactions of one type; and
·
Like other things, a separate account is also required to record the movements in cash (usually called
cash in hand) and bank account (usually called cash at bank).
·
If the volume of transactions is high then we can separate books for cash and bank account.
·
These separate books for cash and bank account are called cash book and bank book respectively.
·
The Cash Book records all the movements in the cash account.
·
A cash book would look like one of the two samples shown here
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Financial Accounting (Mgt-101)
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Cash Book
Account Code 01
Receipt Side
Payment Side
Date No. Narration / Ledger
Receipt  Date No. Narration / Ledger Payment
Particulars Code
Amount
Particulars  Code  Amount
OR
Cash Book
Account Code 01
Date Voucher
Narration /
Ledger
Receipt  Payment
Balance
Number
Particulars
Code
Amount Amount
Dr/(Cr)
THE CASH BOOK
·
In the first format / presentation, receipts (Debits) are written on left hand side of the page and
payments (Credits) on the right hand side.
·
In the second presentation, instead of using two pages, we use two columns on the same page.
·
Both these presentations are correct.
·
In the second format, we have an additional facility of knowing the balance of the account after
every transaction.
·
Whereas in the first one, we have to add up the receipts and payments every time we need to know
the balance.
·
Moreover, the second format utilizes less space, therefore, we will use this format in our future
discussions
THE BANK BOOK
·
The Bank book records all the movements in the bank account.
·
The format of the bank book is the same as that of cash book axcept for an additional column for
Cheque Number.
·
Again, we can use either two pages OR two columns to present the bank book.
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Bank Book (Bank Account Number)
Account Code 02
Date
Voucher
Chq.
Narration /
Ledger
Receipt
Payment
Balance
Number
No.
Particulars
Code
Amount
Amount
Dr/(Cr)
·
As you can see that except for a few minor differences, the formats of Cash and Bank book are
almost similar to that of the General Ledger.
·
The differences are explained here:
·
The title of debit and credit columns has been changed to receipt and payment respectively. It is not
necessary to make this change. But, it is done to simplify things as we know that in case of cash and
bank, debit side would signify receipt and credit side would represent payment.
·
There is an additional column titled ledger code. In this column, we write the code of the other head
of account that is affected by the transaction. This helps in understanding the complete transaction
at a glance.
·
There may be a column for cheque number in the bank book.
·
It may be noted that in case the organization operates more than one bank account, separate ledger
accounts will be opened in bank book for each account.
Now we will summarize all cash transactions in both two page cash book & one page cash book for the
convenience of the reader.
Two page cash book will be presented asunder:
Cash Account
Account Code 01
Receipt Side
Payment Side
Date
No.
Narration /
Ledger Receipt
Date
No.
Narration /
Ledger
Payment
Particulars
Code  Amount
Particulars
Code
Amount
Jan-1
Capital introduced
02
100,000 Jan-3
Deposited in bank
03
30,000
Jan-5
Loan received
04
50,000 Jan-7
Furniture purchased
05
20,000
Jan-10
Goods sold
08
5,000 Jan-15
Deposited in bank
03
5,000
Jan-31
Received
from
09
4,500 Jan-16
Stationery purchased
10
3,000
debtors
Jan-31
Cash drawn from
03
500 Jan-30
Paid to creditors
07
9,000
bank
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Financial Accounting (Mgt-101)
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Same record will be presented in two column cash book now
Date
Voucher
Narration /
Ledger
Receipt
Payment
Balance
Number
Particulars
Code
Amount
Amount
Dr/(Cr)
Jan-1
Capital introduced
02
100,000
100,000
Jan-3
Deposited in bank
03
(30,000)
70,000
Jan-5
Loan received
04
50,000
120,000
(20,000)
Jan-7
Furniture purchased
05
100,000
Goods soGoods sold
ld
08
5,000
105,000 0
Jan-10
5,00
(5,000)
Jan-15
Deposited in bank
03
100,000
(3,000)
Jan-16
Stationery purchased
10
97,000
(9,000)
Jan-30
Paid to creditors
07
88,000
Jan-31
Received from debtors
09
4,500
92,500
Jan-31
Cash drawn from bank
03
500
93,000
Now, we will present Bank entries in bank book.
Bank Book (Bank Account # xxx) Account Code 02
Date
Voucher
Chq.
Narration /
Ledger
Receipt
Payment
Balance
Number
No.
Particulars
Code
Amount
Amount
Dr/(Cr)
Jan-3
Cash deposited
01
30,000
30,000
Jan-15
Cash deposited
01
5,000
35,000
Jan-18
Off. Equip.
11
(10,000)
25,000
purchased
Jan-31
Cash drawn
01
(500)
24,500
RECOMMENDED READING
After reading this lecture, you will be able to read
·  Chapter # 2 of business accounting by Frank Woods
·  Chapter # 2, 3 of accounting by M. Arif & Sohail Afzal
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ILLUSTRATION
Nawab Sons started their business in the month of March, 2002. Following are their transactions for the
month. Pass journal entries, prepare ledger accounts, and make their profitability analyses.
No.
Date
Particulars
01
Mar. 01
Started business with Rs. 150,000
02
Mar. 05
Purchased office furniture for cash Rs. 2,000
03
Mar. 07
Purchased goods for cash Rs. 9,000
04
Mar. 10
Paid carriage on purchases Rs. 250
05
Mar. 12
Purchased goods from Saleem &co. Rs. 7,000
06
Mar. 13
Sold goods for cash Rs. 12,000
07
Mar. 15
Sold goods to Usman & Sons Rs. 25,000
08
Mar. 21
Received cash From Usman & Sons Rs. 25,000
09
Mar. 21
Paid cash to Saleem &co Rs. 7,000
10
Mar. 23
Paid salaries for the month Rs. 2,500
11
Mar. 25
Paid rent Rs. 3,000
12
Mar. 29
Purchased stationery Rs.2,000
13
Mar. 31
Utility bills are accrued Rs. 5,000
JOURNAL ENTRIES
ENTRY # 1
Date
Particulars
Code #
Amount(Dr.)
Amount(Cr.)
Rs.
Rs.
03-01-2002
Cash A/c
01
150,000
Capital A/c
02
150,000
Started business with cash.
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ENTRY # 2
Date
Particulars
Code #
Amount(Dr.)
Amount(Cr.)
Rs.
Rs.
01-05-2002
Office Furniture A/c
03
2,000
Cash A/c
01
2,000
Purchased office furniture
ENTRY # 3
Date
Particulars
Code #
Amount(Dr.)
Amount(Cr.)
Rs.
Rs.
03-07-2002
Purchases A/c
04
9,000
Cash A/c
01
9,000
Purchased goods for cash.
ENTRY # 4
Date
Particulars
Code #
Amount(Dr.)
Amount(Cr.)
Rs.
Rs.
03-10-2002
Carriage on purchase A/c
05
250
Cash A/c
01
250
Paid carriage on purchase.
ENTRY # 5
Date
Particulars
Code #
Amount(Dr.)
Amount(Cr.)
Rs.
Rs.
03-12-2002
Purchases A/c
04
7,000
Salim & co.(Creditors)
06
7,000
Purchased goods on credit
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ENTRY # 6
Date
Particulars
Code #
Amount(Dr.)
Amount(Cr.)
Rs.
Rs.
03-13-2002
Cash A/c
01
12,000
Sale A/c
07
12,000
Goods sold for cash.
ENTRY # 7
Date
Particulars
Code #
Amount(Dr.)
Amount(Cr.)
Rs.
Rs.
03-15-2002
Usman & Sons(Debtors) A/c
08
25,000
25,000
Sale A/c
07
Goods sold on credit.
ENTRY # 8
Date
Particulars
Code #
Amount(Dr.)
Amount(Cr.)
Rs.
Rs.
03-21-2002
Cash A/c
01
25,000
Usman & Sons(Debtors A/c
08
25,000
Cash received from Usman & Sons
ENTRY # 9
Date
Particulars
Code #
Amount(Dr.)
Amount(Cr.)
Rs.
Rs.
03-21-2002
Salim & co.(Creditors) A/c
06
7,000
Cash A/c
01
7,000
Paid cash to Salim & co.
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ENTRY # 10
Date
Particulars
Code #
Amount(Dr.)
Amount(Cr.)
Rs.
Rs.
03-23-2002
Salaries A/c
09
2,500
Cash A/c
01
2,500
Started business with cash.
ENTRY # 11
Date
Particulars
Code #
Amount(Dr.)
Amount(Cr.)
Rs.
Rs.
03-25-2002
Rent A/c
10
3,000
Cash A/c
01
3,000
Paid rent..
ENTRY # 12
Date
Particulars
Code #
Amount(Dr.)
Amount(Cr.)
Rs.
Rs.
03-29-2002
Stationery A/c
11
2,000
2,000
Cash A/c
01
Stationery purchased.
ENTRY # 13
Date
Particulars
Code #
Amount(Dr.)
Amount(Cr.)
Rs.
Rs.
03-31-2002
Utility Bills A/c
12
5,000
Accrued Expenses A/c
13
5,000
Accrual of utility bills for the month..
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LEDGER ACCOUNTS
Cash Account
Account code # 1
Date
Particulars
Code  Amount
Date
Particulars
Code
Amount
#
Rs. (Dr.)
#
Rs. (Cr.)
1-3-02
Commenced
02
150,000 5-3-02
Office furniture
03
2,000
business
purchased
13-3-02
Goods sold
07
12,000 7-3-02
Goods purchased
04
9,000
21-3-02
Received from
10-3-02
Carriage paid
05
250
debtors
08
25,000 21-3-02
Paid to creditors
06
7,000
23-3-02
Paid salaries
09
2,500
25-3-02
Paid rent
10
3,000
29-3-02
Paid for stationery
11
2,000
BALANCE
161,250
Total
187,000
Total
187,000
Capital Account
Account code # 2
Date
Particulars
Code  Amount
Date
Particulars
Code
Amount
#
Rs. (Dr.)
#
Rs. (Cr.)
1-3-02
Cash introduced
01
150,000
BALANCE
150,000
Total
150,000
Total
150,000
Office furniture Account
Account code # 3
Date
Particulars
Code  Amount
Date
Particulars
Code
Amount
#
Rs. (Dr.)
#
Rs. (Cr.)
5-3-02
Office furniture
01
2,000
purchased
BALANCE
2,000
Total
2,000
Total
2,000
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Purchases Account
Account code # 4
Date
Particulars
Code  Amount
Date
Particulars
Code
Amount
#
Rs. (Dr.)
#
Rs. (Cr.)
7-3-02
Purchased
01
9,000
goods
12-3-02
Purchased
7,000
goods on credit
BALANCE
16,000
Total
16,000
Total
16,000
Carriage on purchase Account Account code # 5
Date
Particulars
Code  Amount
Date
Particulars
Code
Amount
#
Rs. (Dr.)
#
Rs. (Cr.)
10-3-02
Paid carriage on
01
250
purchase
BALANCE
250
Total
250
Total
250
Salim & co.(Creditors) Account
Account code # 6
Date
Particulars
Code  Amount
Date
Particulars
Code
Amount
#
Rs. (Dr.)
#
Rs. (Cr.)
12-3-02
Purchased
04
7,000 21-3-02
Paid cash
01
7,000
goods
BALANCE
0
Total
7,000
Total
7,000
Sale Account  Account code # 7
Date
Particulars
Code  Amount
Date
Particulars
Code
Amount
#
Rs. (Dr.)
#
Rs. (Cr.)
13-3-02
Goods sold
01
12,000
15-3-02
Goods sold on
08
credit
25,000
BALANCE
37,000
Total
37,000
Total
37,000
Usman & sons(Debtors) Account
Account code # 8
Date
Particulars
Code  Amount
Date
Particulars
Code
Amount
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#
Rs. (Dr.)
#
Rs. (Cr.)
15-3-02
Goods sold
07
25,000 21-3-02
Received cash
01
25,000
BALANCE
0
Total
25,000
Total
25,000
Salaries Account
Account code # 9
Date
Particulars
Code  Amount
Date
Particulars
Code
Amount
#
Rs. (Dr.)
#
Rs. (Cr.)
23-3-02
Salaries paid
01
2,500
BALANCE
2,500
Total
2,500
Total
2,500
Rent Account Account code # 10
Date
Particulars
Code  Amount
Date
Particulars
Code
Amount
#
Rs. (Dr.)
#
Rs. (Cr.)
Rent paid
01
3,000
25-3-02
BALANCE
3,000
Total
3,000
Total
3,000
Stationery Account
Account code # 11
Date
Particulars
Code  Amount
Date
Particulars
Code
Amount
#
Rs. (Dr.)
#
Rs. (Cr.)
29-3-02
Stationery
01
2,000
purchased
BALANCE
2,000
Total
2,000
Total
2,000
Utility Bills Account
Account code # 12
Date
Particulars
Code  Amount
Date
Particulars
Code
Amount
#
Rs. (Dr.)
#
Rs. (Cr.)
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31-3-02
Accrued utility
13
5,000
bills
BALANCE
5,000
Total
5,000
Total
5,000
Accrued Expenses Account  Account code # 13
Date
Particulars
Code  Amount
Date
Particulars
Code
Amount
#
Rs. (Dr.)
#
Rs. (Cr.)
31-3-02
Accrued utility
12
5,000
bills
BALANCE
5,000
Total
5,000
Total
5,000
TRIAL BALANCE
Saeed & co.
Trial Balance As On ( January 31, 2002)
Title of Account
Code
Dr. Rs.
Cr. Rs.
Cash Account
01
161,250
Capital Account
02
150,000
Furniture Account
03
2,000
Purchases Account
04
16,000
Carriage on purchase account
05
250
Salim& co. (Creditor)
06
0
Sales
07
37,000
Usman & co. (Debtor)
08
0
Salaries
09
2,500
Rent
10
3,000
Stationery
11
2,000
Utility billst
12
5,000
Accrued expenses
13
5,000
Total
192,000
192,000
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Saeed & Co.
Profit & Loss Account for the period ended January 31, 2002
Particulars
Amount
Amount
Rs.
Rs.
37,000.
Income / Sales / Revenue (See Note #1)
Less: Cost of Goods Sold
(16,250)
(See Note # 1)
Gross Profit
20,750.
Less: Admin. Expenses
(12,500)
(See Note # 2)
Net Profit/ (Loss)
8,250
Note # 1 Cost of goods sold
Purchases
16,000
Add: carriage on purchase
250
Cost of goods sold
16,250
Note # 2 Admin. Expenses
Salaries
2,500
Rent
3,000
Stationery
2,000
Utility bills
5,000
Total Admin. Expenses
12,500
RECOMMENDED READING
After reading this lecture, you will be able to read
·  Chapter # 3 of business accounting by Frank Woods
·  Chapter # 5 of accounting by M. Arif & Sohail Afzal.
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Lesson-12
THE ACCOUNTING EQUATION
Resources in the business = Resources supplied by the owner
In accounting, terms are used to describe things. The amount of resources supplied by the owner is called
capital. The actual resources which are in the business are called assets. This means that the accounting
equation above, when the owner has supplied all the resources, can be shown as:
Assets=Capital
Usually, people, other than the owner has supplied some of the assets. Liabilities are the name given to the
amounts owing to these people for these assets. The equation has now changed to:
Assets=Capital + Liabilities
It can be seen that two sides of the equation will have the same totals. This is because we are dealing with
the same thing with two different points of view. It is:
Resources in the business = Resources: who supplied them
Assets = Capital + Liabilities
It is a fact that total of each side will always equal one another, and this will always be true no matter how
many transactions there may be. The actual assets, capital and liabilities may change, but the total of the
assets will always equal to the total of capital and liabilities.
Assets consist of property of all kinds, such as buildings, machinery, stocks of goods and motor vehicles.
Also benefits such as debts owned by customers and the amount of money in the bank accounts are
included.
Liabilities consist of money owing for goods supplied to the business and for expenses. Also loans made to
the firm are included.
Capital is often called the owner's net worth.
Working capital
Working capital of the business is the net value of current assets & current liabilities.
Current assets are the resources of the business that are expected to be received within 12 months in an
accounting period.
Current liabilities are the amount owing to the business that is expected to be paid within one year in a
financial year.
So, working capital is the net of what is receivable in an accounting year & what is payable in that year or:
Working Capital = Current Assets ­ Current Liabilities
For instance, current assets of the business worth Rs.100,000 & current liabilities of the business has the
value of Rs. 75,000. Then working capital is Rs. 25,000.
i.e., (100,000-75,000).
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STOCK
Stock is termed as "value of goods available to the business that are ready for sale". For accounting
purposes, stock is of two types:
·  Opening stock
·  Closing stock
Opening stock is the value of goods available for sale in the beginning of an accounting year. For purpose
of financial reporting, opening stock is added to the purchases for the year to become a part of cost of
goods sold. As this is available in the beginning of the year, it is assumed that it will be consumed in the
accounting year. That is why; it becomes a part of cost of goods sold. Stock of previous year is the opening
stock in present year.
Closing stock is the value of goods unsold at the end of accounting year. For purposes of making financial
statements, it is deducted from cost of goods sold & is shown as an asset in the balance sheet. As this is the
value of goods that are yet to be sold, so it cannot be included in cost of goods sold. That is why it is
deducted from cost of good sold. On the other hand, its benefit will be received in the next accounting year,
so it is shown as an asset in the balance sheet.
Now, the contents of cost of goods sold are:
Opening stock
Plus: purchases
Plus: Freight/ carriage paid on purchases
Less: closing stock
For instance, opening stock of a business worth Rs. 15,000, business purchased goods of Rs. 12,000 for the
year & also paid Rs. 1,500 as carriage on purchases. The value of closing stock at the end of the year is Rs.
10,000. Then, value of closing stock is calculated as under:
Opening stock
15,000
Add: purchases
12,000
Add: carriage on purchase
1,500
Less: closing stock
(10,000)
Cost of goods sold
18,500
Ali Traders
Trial Balance As On January 31, 20--
Title of Account
Code
Dr. Rs.
Cr. Rs.
Cash Account
01
35,000
Bank Account
02
130,000
Capital Account
03
200,000
Furniture Account
04
15,000
Vehicle Account
05
50,000
Purchases Account
06
60,000
Mr. A (Creditor)
07
15,000
Sales
08
95,000
Mr. B (Debtor)
09
15,000
Salaries
10
5,000
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Expenses
11
20,000
Expenses Payable
12
20,000
Total
330,000
330,000
The Accounting Equation.
Assets = Capital + Liabilities
Assets = 35,000+130,000+15,000+50,000+15,000= 245,000
Capital = 200,000
Liabilities = 15,000 + 20,000 = 35,000
Capital + Liabilities = 235,000
We ignore the Net Profit Rs.10000 (Net profit is added in capital account)
When we added Net profit in capital then;
Assets = Capital + Liabilities
245000 = 210000+35000
245000 = 245000
Account form Balance Sheet
Name of the Entity (Ali traders)
Balance Sheet As At (January 31, 20--)
Liabilities
Assets
Particulars
Amount Rs.
Particulars
Amount
Rs.
Capital
200.000 Fixed Assets
65,000
Profit and Loss Account
10,000
Furniture
15,000
50000
210,000 Vehicle
Current Liabilities
Current Assets
Mr. A
15,000
Mr. B
15,000
Exp. payable
20,000
35,000
Bank  130,000
180,000
Cash
35,000
Total
245,000 Total
245,000
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Report form Balance Sheet
Ali traders
Balance Sheet As At January 31, 20--
Particulars
Amount Rs.
Amount Rs.
Assets
Fixed Assets
65,000
Current Assets
180,000
Total
245,000
Liabilities
Capital
200,000
Profit and Loss Account
10,000
210,000
Current Liabilities
35,000
Total
245,000
Treatment of closing stock
If closing stock is Rs.10000 then;
Name of the Entity (Ali Traders)
Profit and Loss Account for the Month Ending January 31, 20--
Particulars
Amount
Amount
Rs.
Rs.
Income / Sales / Revenue
95,000
Less: Cost of Goods Sold ( 60,000 - 1,000 )
(59,000)
(59,000)
Gross Profit
36,000
Less: Administrative Expenses
(25,000)
(25,000)
Net Profit
11,000
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Ali traders
Balance Sheet As At January 31, 20--
Particulars
Amount Rs.
Amount Rs.
Assets
Fixed Assets
65,000
Current Assets (180,000 + 1,000)
181,000
Total
246,000
Liabilities
Capital
200,000
Profit and Loss Account
11,000
210,000
Current Liabilities
35,000
Total
246,000
Treatment of Depreciation
In Profit and Loss Account it is considered as expense and in Balance Sheet it is deducted from the
concerned asset.
If useful life of an asset is 50 month and considered that there is no residual value then,
·
Dividing total cost by life of the asset.
·
Rs.65,000 / 50 months = Rs.1,300 monthly charge
Name of the Entity (Ali Traders)
Profit and Loss Account for the Month Ending January 31, 20--
Particulars
Amount
Amount
Rs.
Rs.
Income / Sales / Revenue
95,000
Less: Cost of Goods Sold ( 60,000-1,000 )
59,000
(59,000)
Gross Profit
36,000
Less: Administrative Expenses
25,000
Depreciation
1,300
(26,300)
Net Profit
9,700
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Ali traders
Balance Sheet As At January 31, 20--
Particulars
Amount Rs.
Amount Rs.
Assets
Fixed Assets (65,000 ­ 1,300)
63,700
Current Assets (180,000 + 1,000)
181,000
Total
244,700
Liabilities
Capital
200,000
Profit and Loss Account
9,700
209,700
Current Liabilities
35,000
Total
244,700
Distribution of Profits / Drawing
Ali traders
Balance Sheet As At January 31, 20--
Particulars
Amount Rs.
Amount Rs.
Assets
Fixed Assets (65,000 ­ 1300)
63,700
Current Assets (181,000 - 5,000)
176,000
Total
239,700
Liabilities
Capital
200,000
Profit and Loss Account
9,700
Drawing
(5,000)
204,700
Current Liabilities
35,000
Total
239,700
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Illustration
Consider the trial balance given hereunder:
Saeed & co.
Trial Balance As On ( January 31, 2002)
Title of Account
Code
Dr. Rs.
Cr. Rs.
Cash Account
01
161,250
Capital Account
02
150,000
Furniture Account
03
2,000
Purchases Account
04
16,000
Carriage on purchase account
05
250
Salim& co. (Creditor)
06
0
Sales
07
37,000
Usman & co. (Debtor)
08
0
Salaries
09
2,500
sRent
10
3,000
Stationery
11
2,000
Utility billst
12
5,000
Accrued expenses
13
5,000
Total
192,000
192,000
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(This trial balance is extracted from the solved illustration, in lecture 11)
Let's say, the value of closing stock at the end of the period is Rs. 2,000. Then profit & loss account will bear
the following change.
Saeed & Co.
Profit & Loss Account for the period ended January 31, 2002
Particulars
Amount
Amount
Rs.
Rs.
37,000.
Income / Sales / Revenue (See Note
16,250 ­ 2,000
(14,250)
#1)
Less: Cost of Goods Sold ­ Closing
stock
Gross Profit
22,750.
Less: Admin. Expenses
(12,500)
(See Note # 2)
Net Profit/ (Loss)
10,250
Its effect in the balance sheet is as follows:
Saeed & Co.
Balance Sheet As At January 31, 2002
Liabilities
Assets
Particulars
Amount
Particulars
Amount
Rs.
Rs.
Capital
150,000 Fixed Assets
Profit and Loss Account
10,250 Furniture Account
2,000
160,250
Current Liabilities
Current Assets
Accrued Expenses
5,000 Cash
161,250
Closing Stock
2,000
Total
165,250 Total
165,250
This is a practical demonstration of the treatment of closing stock. But, we are not mentioning the journal
entry of closing stock at this stage. It will be discussed in detail, when we will study the topic of fixed assets.
DEPRECIATION
Depreciation is the method of charging cost of fixed assets to the profit & loss account as an expense.
Fixed Assets are those assets which are:
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·  Of long life
·  To be used in the business
·  Not bought with the main purpose of resale.
When an expense is incurred, it is charged to profit & loss account of the same accounting period in which it
has incurred. Fixed assets are used for longer period of time. Now, the question is how to charge a fixed
asset to profit & loss account. For this purpose, estimated life of the asset is determined. Estimated life is the
number of years in which a fixed asset is expected to be used. Then, total cost of the asset is divided by total
number of estimated years. The value, so determined, is called `depreciation for that year' and is charged to
profit & loss account. The same amount is deducted from total cost of fixed asset. The net amount (after
deducting depreciation) is called ``Written Down Value''.
For instance, an asset has a cost of Rs. 150,000. It is expected to be used for ten years. Depreciation to be
charged to profit & loss account is Rs. 15,000, i-e. cost of asset/estimated life. In this case, it will be
150,000/10 = 15,000.
That is why depreciation is called an accounting estimate.
To understand its accounting treatment, consider the above mentioned illustration
Let's suppose the useful life of furniture is five years. Then, depreciation for the year will be (2,000/5 = 400).
Now, the profit & loss account will show the following picture:
Saeed & Co.
Profit & Loss Account for the year ended January 31, 2002
Particulars
Amount
Amount
Rs.
Rs.
37,000.
Income / Sales / Revenue (See Note #1)
Less: Cost of Goods Sold
(16,250)
Gross Profit
20,750.
Less: Admin. Expenses + Depreciation
12,500 + 400
(12,900)
Net Profit/ (Loss)
9,850
Balance sheet will look like this:
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Saeed & Sons
Balance Sheet As At January 31, 2002
Liabilities
Assets
Particulars
Amount
Particulars
Amount
Rs.
Rs.
Capital
150,000 Fixed Assets
Profit and Loss Account
9,850 Furniture Account
2,000
Less: depreciation
(400)
159,850
1,600
Current Liabilities
Current Assets
Accrued Expenses
5,000 Cash
161,250
Closing Stock
2,000
Total
164,850 Total
164,850
Treatment of depreciation is practically demonstrated at this point. Its journal entry will be discussed in
detail, when we cover the topic `Fixed Assets'.
DRAWING
Capital is the cash or kind invested by the owner of the business. Sometimes, the owner wants to take cash
or kind out of the business for personal use. This is known as drawing. Any money taken out as
drawings will reduce capital.
The capital account is very important account. To stop it getting full of small details, cash items of drawings
are not entered in the capital account. Instead, a drawing account is opened, and all transactions are entered
there.
Sometimes goods are also taken by the owner of the business. These are also known as drawings.
To understand the accounting treatment of drawings, look into the following trial balance:
Saeed & co.
Trial Balance As On ( January 31, 2002)
Title of Account
Code
Dr. Rs.
Cr. Rs.
Cash Account
01
161,250
Capital Account
02
160,000
Furniture Account
03
2,000
Drawings
04
10,000
Profit & loss account
05
8,250
Salim& co. (Creditor)
06
0
Usman & co. (Debtor)
07
0
Accrued expenses
08
5,000
Total
173,250
173,250
BALANCE SHEET
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Saeed & Sons
Balance Sheet As At January 31, 2002
Liabilities
Assets
Particulars
Amount
Particulars
Amount
Rs.
Rs.
Capital
160,000 Fixed Assets
Profit and Loss
8,250 Furniture
2,000
Account
(10,000) Account
Less: Drawings
158,250
Current
Current
Liabilities
5,000 Assets
161,250
Accrued Expenses
Cash
Total
163,250 Total
163,250
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Lesson-13
LEARNING OBJECTIVE
After studying this lecture, you should be able to:
·  Understand different types of vouchers.
·  How to book entry in voucher.
·  Carrying forward the balance of an account.
VOUCHER
In book keeping, voucher is the first document to record an entry. Normally three types of vouchers are
used. i-e.:
·  Receipt voucher
·  Payment voucher
·  Journal voucher
RECEIPT VOUCHER
Receipt voucher is used to record cash or bank receipt. Receipt vouchers are of two types. i-e.
·  Cash receipt voucher
·  Bank receipt voucher
Cash receipt voucher denotes receipt of cash; bank receipt voucher indicates receipt of cheque or demand
draft. Standard format of cash receipt voucher is given below:
Name of the Organization
Bank Receipt / Cash Receipt OR Receipt Voucher
Date:
No:
Description / Title:
Cash / Bank code:
Description /
Code
Credit
Title of Account
#
Amount
Total:
Narration:
Prepared By:
Checked By:
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PAYMENT VOUCHER
Payment voucher is used to record a payment of cash or cheque. Payment vouchers are of two types. i.e.
·  Cash Payment voucher
·  Bank Payment voucher
Cash Payment voucher denotes Payment of cash, bank Payment voucher indicates payment by cheque or
demand draft. Standard format of cash Payment voucher is given below:
Name of the Organization
Bank Payment / Cash Payment OR Payment Voucher
No:
Date:
Description / Title:
Cash / Bank code:
Description /
Code
Credit
Title of Account
#
Amount
Total:
Naration
Prepared By:
Checked By:
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JOURNAL VOUCHER
Journal voucher is used to record transactions that do not affect cash or bank. Standard format of journal
voucher is given hereunder:
Name Of Organization
Journal Voucher
Date:
No:
Description
Code
Debit
Credit Amount
#
Amount
Total:
Narration:
Prepared By:
Checked by:
HOW TO CARRY FORWARD A BALANCE
It is already mentioned that in `T' account, at the end of accounting period, if one side is greater than the
other side, balancing figure will be written on the lesser side as balance. For instance, if amount on debit side
is greater than the amount on credit side, the balancing figure is written on the credit side as balance & it is
known as Debit Balance. On the other hand, if amount on the credit side is greater than that of amount on
the debit side, the balance is shown on the debit side. It is called the Credit Balance.
At the start of next accounting period, these balances are carried forward. Debit balance is written on the
credit side, but it is the excess of debit side over the credit side, when it is carried forward, it is written on the
debit side. For example, ledger account of cash is given below:
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Cash Account
Account code # 1
Date
Particulars
Code  Amount
Date
Particulars
Code
Amount
#
Rs. (Dr.)
#
Rs. (Cr.)
1-3-02
Commenced
02
150,000
5-3-02
Office furniture
03
2,000
business
purchased
13-3-02
Goods sold
07
12,000
7-3-02
Goods purchased
04
9,000
250
21-3-02
Received from
10-3-02
Carriage paid
05
7,000
debtors
08
25,000
21-3-02
Paid to creditors
06
2,500
23-3-02
Paid salaries
09
3,000
25-3-02
Paid rent
10
29-3-02
Paid for stationery
11
2,000
BALANCE
161,250
Total
187,000
Total
187,000
This cash account is showing the balance of Rs. 161,250 on the credit side. This balance is excess of debit
side over the credit side and, therefore, is called the debit balance. When it is carried forward it is written
on the debit side because debit side of the cash account is greater & Rs. 161,250 is the balancing amount of
the debit side of cash account. So, it is an asset & it will be used for further expenses in the forth coming
period.
This is another example of accrued expenses:
Accrued Expenses Account
Account code # 13
Date
Particulars
Code  Amount
Date
Particulars
Code
Amount
#
Rs. (Dr.)
#
Rs. (Cr.)
31-3-02
Accrued utility
12
5,000
bills
BALANCE
5,000
Total
5,000
Total
5,000
In this account, balance is written on the debit side & it is called the credit balance. As this balance
represents excess of credit side over debit side, when it is carried forward it is again written on the credit
side.
It can also be explained like this:
·  Debit balance when carried forward, is written on the debit side
·  Credit balance when carried forward, is written on the credit side
This is further explained with the help of the following solved illustration:
ILLUSTRATION
Following is the trial balance of Saeed & sons for the month ended January 31, 2002
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Saeed & Sons.
Trial Balance As On ( January 31, 2002)
Title of Account
Code
Dr. Rs.
Cr. Rs.
Cash Account
01
55,000
Accrued expense Account
02
10,000
Bank Account
03
25,000
Loan Account
04
100,000
Furniture Account
05
20,000
Office Equipment
06
10,000
Total
110,000
110,000
In the month of February, following transactions took place:
No.
Date
Particulars
01
Feb 07
They purchased stationery worth of Rs. 5,000
02
Feb 10
They paid their first installment of loan Rs. 10,000
03
Feb 12
They received a cheque from a customer of Rs. 5,000
04
Feb 17
Accrued expenses of Rs. 5,000 are paid.
05
Feb 20
They purchased furniture of Rs. 1,000
06
Feb 23
Office equipment of Rs. 2,000 is sold
07
Feb 25
Staff salaries are paid by cheque Rs. 10,000
08
Feb 28
Sold goods for cash Rs.2,000
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SOLUTION
The ledger accounts of Saeed & Sons will bear the following changes:
Cash Account
Account code # 1
Date
Particulars
Code  Amount
Date
Particulars
Code
Amount
#
Rs. (Dr.)
#
Rs. (Cr.)
1-2-02
Balance c/f
55,000 7-2-02
Stationery
10
5,000
23-2-02
Sold office
06
2,000
purchased
equipment
10-2-02
Loan paid
04
10,000
28-2-02
Sold goods
01
2,000 17-2-02
Accrued expenses
02
paid
5,000
Furniture
05
purchased
1,000
Balance c/d
38,000
Total
59,000
Total
59,000
Accrued Expenses
Account code # 2
Date
Particulars
Code  Amount
Date
Particulars
Code
Amount
#
Rs. (Dr.)
#
Rs. (Cr.)
17-2-02
Accrued
01
5,000 1-1-02
Balance c/f
10,000
expenses paid
Balance c/d
5,000
Total
10,000
Total
10,000
Bank Account
Account code # 3
Date
Particulars
Code  Amount
Date
Particulars
Code
Amount
#
Rs. (Dr.)
#
Rs. (Cr.)
17-2-02
Balance c/f
01
25,000 25-2-02
Salaries paid
10,000
12-2-02
Cheque received
07
5,000
Balance c/d
20,000
Total
30,000
Total
30,000
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Loan Account
Account code # 4
Date
Particulars
Code  Amount
Date
Particulars
Code
Amount
#
Rs. (Dr.)
#
Rs. (Cr.)
10-2-02
Installment paid
01
10,000
Balance c/f
100,000
Balance c/d
90,000
Total
100,000
Total
100,000
Furniture Account
Account code # 5
Date
Particulars
Code  Amount
Date
Particulars
Code
Amount
#
Rs. (Dr.)
#
Rs. (Cr.)
10-2-02
Balance c/f
20,000
23-2-02
20-2-02
Furniture
01
1,000
purchased
Balance c/d
21,000
Total
21,000
Total
21,000
Office Equipment Account
Account code # 6
Date
Particulars
Code  Amount
Date
Particulars
Code
Amount
#
Rs. (Dr.)
#
Rs. (Cr.)
10-2-02
Balance c/f
10,000
Office Equipment
01
2,000
sold
Balance c/d
8,000
Total
10,000
Total
10,000
Balance c/f is balance carried forward & balance c/d is balance Carried down.
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Lesson-14
We have demonstrated the carrying forward of balances in lecture-13. Another solved example is given
below:
ILLUSTRATION
Following is the trial balance of Rahil & co. for the month ended January 31, 2002.
Rahil & co..
Trial Balance As On ( January 31, 2002)
Title of Account
Code
Dr. Rs.
Cr. Rs.
Cash Account
01
30,000
Accrued expense Account
02
10,000
Bank Account
03
50,000
Loan Account
04
100,000
Furniture Account
05
20,000
Office Equipment
06
10,000
Debtors account
07
12,000
Creditors account
08
10,000
Sales account
09
20,000
Purchase account
10
18,000
Total
140,000
140,000
During the month, following entries took place:
No.
Date
Particulars
01
Feb 07
They purchased stationery worth of Rs. 3,000
02
Feb 10
They paid their first installment of loan Rs. 12,000
03
Feb 12
They received a cheque from a customer of Rs. 5,000
04
Feb 13
They paid a cheque of Rs. 8,000 to a creditor
05
Feb 15
Purchased goods of Rs 6,000 & paid through cheque
06
Feb 17
Accrued expenses of Rs. 5,000 are paid.
07
Feb 20
They purchased furniture of Rs. 2,000
08
Feb 21
Sold goods for cash Rs.5,000
09
Feb 22
Purchased goods on credit Rs. 5,000
10
Feb 23
Office equipment of Rs. 5,000 is Purchased
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11
Feb 25
Staff salaries are paid by cheque Rs. 15,000
12
Feb 28
Utility expenses of Rs. 3,000 are accrued.
Leger accounts of Rahil & co. during the month will show following picture:
Cash Account
Account code # 1
Date
Particulars
Code  Amount
Date
Particulars
Code
Amount
#
Rs. (Dr.)
#
Rs. (Cr.)
1-2-02
Balance c/f
01
30,000 7-2-02
Stationery
10
3,000
21-2-02
Sold goods
09
5,000
purchased
10-2-02
Loan paid
04
12,000
17-2-02
Accrued expenses
02
paid
5,000
Furniture
05
2,000
purchased
23-2-02
Office equipment
06
5,000
purchased
Balance c/d
8,000
Total
35,000
Total
35,000
Accrued Expenses Account
Account code # 2
Date
Particulars
Code  Amount
Date
Particulars
Code
Amount
#
Rs. (Dr.)
#
Rs. (Cr.)
17-2-02
Accrued
01
5,000 1-1-02
Balance c/f
10,000
expenses paid
Expenses accrued
3,000
Balance c/d
8,000
Total
13,000
Total
13,000
Bank Account Account code # 3
Date
Particulars
Code  Amount
Date
Particulars
Code
Amount
#
Rs. (Dr.)
#
Rs. (Cr.)
Balance c/f
50,000 13-2-02
Paid to creditors
08
8,000
12-2-02
Cheque received
15-2-02
Goods purchased
10
6,000
07
5,000 25-2-02
Salaries paid
11
15,000
Balance c/d
26,000
Total
55,000
Total
55,000
Loan Account Account code # 4
Date
Particulars
Code  Amount
Date
Particulars
Code
Amount
#
Rs. (Dr.)
#
Rs. (Cr.)
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10-2-02
Installment paid
01
12,000
Balance c/f
100,000
Balance c/d
88,000
Total
100,000
Total
100,000
Furniture Account
Account code # 5
Date
Particulars
Code  Amount
Date
Particulars
Code
Amount
#
Rs. (Dr.)
#
Rs. (Cr.)
10-2-02
Balance c/f
20,000
23-2-02
20-2-02
Furniture
01
2,000
purchased
Balance c/d
22,000
Total
22,000
Total
22,000
Office Equipment Account
Account code # 6
Date
Particulars
Code  Amount
Date
Particulars
Code
Amount
#
Rs. (Dr.)
#
Rs. (Cr.)
Balance c/f
10,000
23-2-02
Office
01
5,000
Equipment
purchased
Balance c/d
15,000
Total
15,000
Total
15,000
Debtors Account
Account code # 7
Date
Particulars
Code  Amount
Date
Particulars
Code
Amount
#
Rs. (Dr.)
#
Rs. (Cr.)
Balance c/f
12,000
12-2-02 Cheque received
03
5,000
Balance c/d
7,000
Total
12,000
Total
12,000
Creditors Account
Account code # 8
Date
Particulars
Code  Amount
Date
Particulars
Code
Amount
#
Rs. (Dr.)
#
Rs. (Cr.)
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13-2-02
Paid to creditors
03
8,000
Balance c/f
10,000
22-2-02
Goods purchased
10
5,000
Balance c/d
7,000
Total
15,000
Total
15,000
Sales Account Account code # 9
Date
Particulars
Code  Amount
Date
Particulars
Code
Amount
#
Rs. (Dr.)
#
Rs. (Cr.)
Balance c/f
20,000
21-2-02
Goods sold
01
5,000
Balance c/d
25,000
Total
25,000
Total
25,000
Purchases Account
Account code # 10
Date
Particulars
Code
Amount
Date
Particulars
Code
Amount
#
Rs. (Dr.)
#
Rs. (Cr.)
Balance c/f
18,000
15-2-02
Goods
03
6,000
purchased
07
5,000
22-2-02
Goods
purchased
Balance c/d
29,000
Total
29,000
Total
29,000
Salaries Account
Account code # 11
Date
Particulars
Code
Amount
Date
Particulars
Code
Amount
#
Rs. (Dr.)
#
Rs. (Cr.)
25-2-02
Salaries paid
03
15,000
Balance c/d
15,000
Total
15,000
Total
15,000
Stationery Account
Account code # 12
Date
Particulars
Code
Amount
Date
Particulars
Code
Amount
#
Rs. (Dr.)
#
Rs. (Cr.)
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25-2-02
Stationery
01
3,000
purchased
Balance c/d
3,000
Total
3,000
Total
3,000
Utility Expenses Account
Account code # 13
Date
Particulars
Code
Amount
Date
Particulars
Code
Amount
#
Rs. (Dr.)
#
Rs. (Cr.)
Accrued utility
02
3,000
28-2-02
expenses
Balance c/d
3,000
Total
3,000
Total
3,000
The trial balance at the end of the month is as follows:
Rahil & co..
Trial Balance As On ( January 31, 2002)
Title of Account
Code
Dr. Rs.
Cr. Rs.
Cash Account
01
8,000
Accrued expense Account
02
8,000
Bank Account
03
26,000
Loan Account
04
88,000
Furniture Account
05
22,000
Office Equipment
06
15,000
Debtors account
07
7,000
Creditors account
08
7,000
Sales account
09
25,000
Purchase account
10
29,000
Salaries Account
11
15,000
Stationery Account
12
3,000
Utility Expenses Account
13
3,000
Total
128,000
128,000
Difference between expenses & Purchases
·  If business purchases items for its own use (items that are not meant to be resold) are charged to
expense account.
·  If business purchases items for resale purposes are charged to purchases account.
STOCK
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·
Stock is the quantity of unutilized or unsold goods lying with the organization.
·
Stock is termed as "the value of goods available to the business that are ready for sale". For
accounting purposes, stock is of two types
Type of Stock
·
In trading concern, Stock consists of goods that are purchased for the purpose of resale, but not
sold in that accounting period. Trading concern is that organization, which purchases items for
resale purposes.
·
In manufacturing concern(an organization that converts raw material into finished product by
putting it in a process), stock consists of:
o  Raw material
o  Work in process
o  Finished goods
Raw material
Raw material is the basic part of an item, which is processed to make a complete item.
Work in process
In manufacturing concern, raw material is put in a process to convert it into finished goods. At the end of
the year, some part of raw material remains under process. i-e. it is neither in shape of raw material nor in
shape of finished goods. Such items are taken in stock as work in process.
Finished goods
Finished goods contain items that are ready for sale, but could not be sold in that accounting period.
Stock Account
·
Stock Account is Debited with the Value of the Goods Purchased
·
Stock account is Credited with the Purchase Price of the Goods Sold / Issued for Production.
·
Stock Account shows the cost / purchase value of unsold goods.
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In manufacturing concern, entries for stock are:
Purchase of stock
Debit:
Stock Account
Credit:
Cash/Supplier /Creditors Account
When the stock is purchased, stock account gets the benefit, so it is debited & cash or supplier account
provides the benefit, so it is credited.
Payment to creditors
Debit: `
Supplier / Creditors account
Credit:
Cash account
Consumption of goods
Debit:
Cost of goods sold
Credit:
Stock Account
Cost of goods sold
Cost of goods sold is different in both form of organization
·  In trading concern, cost of goods sold is the value of goods unsold(goods stands for the items
purchased for resale purpose)
·  In manufacturing concern, cost of goods sold is the value of raw material consumed plus any other
manufacturing cost. e.g., salaries of labour cost of machinery etc.
Stock and cost of goods sold in manufacturing concern
Raw Material Stock
Other Costs Accounts
Work in Process Account
Finished Goods Account
Cost of Goods Sold Account
In manufacturing concern, Raw material stock is put into process. For accounting purposes, all value of
stock and other manufacturing costs are charged to work in process account. When the process is completed
and the goods are prepared, all the value of work in process is charged to finished goods account. The
business sells finished goods for the whole accounting year. At the end of the year, goods that are unsold are
deducted from cost of goods sold account.
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Lesson-15
STOCK
Stock is termed as "the value of goods available to the business that are ready for sale". For accounting
purposes, stock is of two types:
·  Opening stock
·  Closing stock
Opening stock is the value of goods available for sale in the beginning of an accounting period.
Closing stock is the value of goods unsold at the end of the accounting period.
Journal Entries
(In Case of Trading Concern)
Journal entries for those goods which are bought for resale purposes are as follows:
Purchase of goods:
Debit:
Stock/Material Account
Credit:
Cash/Bank/Creditor
Consumption of goods
Debit:
Cost of goods sold
Credit:
Stock
Payment in case of credit purchase
Debit:
Creditors Account
Credit:
Cash/Bank
( In Case of Manufacturing Concern)
·
In case of manufacturer there are at least two types of Stock Accounts:
o  Raw Material Stock Account
o  Finished Goods Stock Account
Raw material
Raw material is the basic part of an item, which is processed to make a complete item
Finished goods
Finished goods contain the items that are ready for sale, but could not be sold in that accounting period.
Work in process
In manufacturing concern, raw material is put in a process to convert it into finished goods. At the end of
accounting period, some part of raw material remains under process. i-e. it is neither in shape of raw material
nor in shape of finished goods. Such items are taken in stock as work in process.
Flow of costs
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Raw Material Stock
Other Costs Accounts
Work in Process Account
Finished Goods Account
Cost of Goods Sold Account
In manufacturing concern, Raw material stock is put into process. For accounting purposes, all value of
stock and other manufacturing costs are charged to work in process account. When the process is completed
and the goods are prepared, all the value of work in process is charged to finished goods account. The
business sells finished goods for the whole accounting year. At the end of the year, goods that are unsold are
deducted from cost of goods sold account.
Journal Entries (Manufacturing Concern)
Purchase of raw material
Debit:
Stock/Material Account
Credit:
Cash/Bank/Creditors
Other direct costs incurred
Debit:
Relevant cost/Expense Head
Credit:
Cash/Bank/Payables
Raw material issued and other costs allocated to production of units
Debit:
Work in process
Credit:
Stock Material Account
Debit:
Work in process
Credit:
Relevant Expense Head Account
When production is completed
Debit:
Finished Goods Stock Account
Credit:
Work in process account
Entry for Cost of sale
Debit:
Cost of Goods Sold Account
Credit:
Finished Goods Stock Account
Entry for sale of goods
Debit:
Cash/Account receivable Account
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Credit:
Sales Account
Return of purchased material
There are two options for recording purchase material return
·  Option 1
Debit:
Goods Return Account
Credit:
Stock Material Account
AND
Debit:
Cash/Bank Account
Credit:
Goods Return Account
OR
If our supplier supplies us some other material in exchange of material returned. Then:
Debit
Raw Material Stock Account
Credit:
Goods Return Account
In the first case above, cash is received in return of goods. In the second case, defective goods are
exchanged with quality goods. That is why, we debited our stock account. Both entries are correct for
return of purchased items.
Option 2
Debit:
Cash/Creditor Account
Credit:
Stock Account
Example 1
·  Record the following transactions:
1. Purchased goods for cash Rs. 10,000
2. Purchased goods on credit from ABC Co. Rs. 25,000
3. Sold goods whose cost was Rs. 20,000
4. Returned goods to ABC Co. that originally cost Rs. 5,000
5. Paid to ABC Co. Rs. 15,000 through cheque
6. Sold goods whose cost was Rs. 5,000
·
Answer following questions.
1. What is the cost of goods sold?
2. What is the value of closing stock?
3. What amount is payable to ABC Co.?
1 ­ Purchased goods for cash Rs. 10,000
Cash Account
Code --
Date No.
Narration
Dr. Rs.
Cr. Rs.
Bal. Dr/(Cr)
1
Purchased goods for cash
10,000
(10,000)
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Stock Account Code --
Date
No.
Narration
Dr. Rs.
Cr. Rs.
Bal. Dr/(Cr)
1
Purchased goods for cash
10,000
10,000
2 ­ Purchased goods on credit from ABC Co. Rs. 25,000
ABC Co.
Code --
Date No.
Narration
Dr. Rs.
Cr. Rs.
Bal. Dr/(Cr)
2
Purchased goods from ABC
25,000
(25,000)
Stock Account Code --
Date
No.
Narration
Dr. Rs.
Cr. Rs.
Bal. Dr/(Cr)
1
Purchased goods for cash
10,000
10,000
2
Purchased goods from ABC
25,000
35,000
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3 ­ Sold goods whose cost was Rs. 20,000
Cost of Goods Sold
Code --
Date
No.
Narration
Dr. Rs.
Cr. Rs.
Bal. Dr/(Cr)
3
Goods sold
20,000
20,000
Stock Account Code --
Date
No.
Narration
Dr. Rs.
Cr. Rs.
Bal. Dr/(Cr)
1
Purchased goods for cash
10,000
10,000
2
Purchased goods from ABC
25,000
35,000
3
Goods sold
20,000
15,000
4 ­ Returned goods to ABC Co. cost Rs. 5,000
ABC Co.
Code --
Date No.
Narration
Dr. Rs.
Cr. Rs.
Bal. Dr/(Cr)
2
Purchased goods from ABC
25,000
(25,000)
4
Returned goods to ABC
5,000
(20,000)
Stock Account Code --
Date
No.
Narration
Dr. Rs.
Cr. Rs.
Bal. Dr/(Cr)
1
Purchased goods for cash
10,000
10,000
2
Purchased goods from ABC
25,000
35,000
3
Goods sold
20,000
15,000
4
Returned goods to ABC
5,000
10,000
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5 ­ Paid to ABC Co. Rs. 15,000 through cheque
ABC Co.
Code --
Date
No.
Narration
Dr. Rs.
Cr. Rs.
Bal. Dr/(Cr)
2
Purchased goods from ABC
25,000
(25,000)
4
Returned goods to ABC
5,000
(20,000)
5
Paid to ABC
15,000
(5,000)
Bank Account Code --
Date
No.
Narration
Dr. Rs.
Cr. Rs.
Bal. Dr/(Cr)
5
Paid to ABC
15,000
6 ­ Sold goods whose cost was Rs. 5,000
Cost of Goods Sold
Code --
Date No.
Narration
Dr. Rs.
Cr. Rs.
Bal. Dr/(Cr)
3
Goods sold
20,000
20,000
6
Goods sold
5,000
25,000
Stock Account Code --
Date
No.
Narration
Dr. Rs.
Cr. Rs.
Bal. Dr/(Cr)
1
Purchased goods for cash
10,000
10,000
2
Purchased goods from ABC
25,000
35,000
3
Goods sold
20,000
15,000
4
Returned goods to ABC
5,000
10,000
6
Goods sold
5,000
5,000
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Q1 ­ What is the cost of goods sold?
Cost of Goods Sold
Code --
Date
No.
Narration
Dr. Rs.
Cr. Rs.
Bal. Dr/(Cr)
3
Goods sold
20,000
20,000
6
Goods sold
5,000
25,000
Q2 ­ What is the value of closing stock?
Stock Account Code --
Date
No.
Narration
Dr. Rs.
Cr. Rs.
Bal. Dr/(Cr)
1
Purchased goods for cash
10,000
10,000
2
Purchased goods from ABC
25,000
35,000
3
Goods sold
20,000
15,000
4
Returned goods to ABC
5,000
10,000
6
Goods sold
5,000
5,000
Q3 ­ What amount is payable to ABC Co.?
ABC Co.
Code --
Date
No.
Narration
Dr. Rs.
Cr. Rs.
Bal. Dr/(Cr)
2
Purchased goods from ABC
25,000
(25,000)
4
Returned goods to ABC
5,000
(20,000)
5
Paid to ABC
15,000
(5,000)
Example 2
·
Using the following data calculate the Cost of Goods Sold of XYZ Co.
Stock levels
Opening Rs.
Closing Rs.
Raw material
100,000
85,000
Work in process
90,000
95,000
Finished goods
150,000
140,000
Purchase of raw material during the period Rs. 200,000
Paid to labour Rs. 180,000 out of which Rs. 150,000 used on production.
Other production costs Rs. 50,000
O/S
100,000
Raw Material Account
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Purch.
200,000
WIP
215,000
Labour Account
C/S
85,000
Cost
180,000
Charge
150,000
Total
300,000
Total
300,000
Total
180,000
Total
180,000
Work in Process Account
Other Costs Account
O/B
90,000
Paid
50,000
Charge
50,000
Raw M
215,000
Labour
150,000
F/G
410,000
O/H
50,000
C/B
95,000
Total
505,000
Total
505,000
Total
50,000
Total
50,000
Cost of goods sold
Finished Goods Stock Account
F/G
420000
O/S
150,000
COS
420,000
WIP
410,000
C/S
140,000
Total
560,000
Total
460,000
ILLUSTRATION # 1
Record the following transactions
·  Purchased goods for cash Rs, 10,000
·  Purchased goods from Ali Brothers. worth of Rs. 20,000
·  Sold goods having cost of Rs.15,000
·  Returned goods to Ali Brothers. worth of Rs. 4,000
·  Sold goods having cost of Rs. 5,000
·  Paid to Ali Brothers. Rs. 10,000.
Also ascertain
·  Cost of goods sold.
·  Value of closing stock.
·  Payable to Ali Brothers.
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SOLUTION
First, we will pass journal entries
Particulars
Amount(Dr.)
Amount(Cr.)
Rs.
Rs.
Stock Account
10,000
Cash Account
10,000
Goods purchased for cash
Particulars
Amount(Dr.)
Amount(Cr.)
Rs.
Rs.
Stock Account
20,000
Ali Brothers.
20,000
Goods purchased from Ali Brothers.
Particulars
Amount(Dr.)
Amount(Cr.)
Rs.
Rs.
Cost of goods sold
15,000
Stock Account
15,000
Goods sold whose cost was Rs. 15,000
Particulars
Amount(Dr.)
Amount(Cr.)
Rs.
Rs.
Ali Brothers.
4,000
Stock Account
4,000
Goods returned to Ali Brothers.
Particulars
Amount(Dr.)
Amount(Cr.)
Rs.
Rs.
Cost of goods sold
5,000
Stock Account
5,000
Goods sold whose cost was Rs. 5,000
Particulars
Amount(Dr.)
Amount(Cr.)
Rs.
Rs.
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Ali Brothers. Account
10,000
Cash Account
10,000
Paid to Ali Brothers.
PAYABLE TO ALI BROTHERS
Ali Brothers Account
Date
Particulars
Code
Amount  Date
Particulars
Code
Amount
#
Rs. (Dr.)
#
Rs. (Cr.)
Goods returned
4,000
Purchased goods
20,000
Paid cash
10,000
BALANCE
6,000
Total
20,000
Total
20,000
COST OF GOODS SOLD
Cost of goods sold Account
Date
Particulars
Code  Amount  Date
Particulars
Code
Amount
#
Rs. (Dr.)
#
Rs. (Cr.)
Goods sold
15,000
Goods sold
5,000
BALANCE
20,000
Total
20,000
Total
20,000
VALUE OF CLOSING STOCK
Stock Account
Date
Particulars
Code
Amount  Date
Particulars
Code
Amount
#
Rs. (Dr.)
#
Rs. (Cr.)
Purchased
10,000
Goods sold
15,000
goods for cash
Returned  to
Ali
4,000
Purchased
20,000
Brothers
goods from Ali
Goods sold
5,000
Brothers.
BALANCE
6,000
Total
30,000
Total
30,000
ILLUSTRATION # 2
·
Using the following data calculate the Cost of Goods Sold of XYZ Co.
Stock levels
Opening Rs.
Closing Rs.
Raw material
100,000
85,000
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Work in process
90,000
95,000
Finished goods
150,000
140,000
o  Purchase of raw material during the period Rs. 200,000
o  Paid to labour Rs. 180,000 out of which Rs. 150,000 used on production.
o  Other production costs Rs. 50,000
SOLUTION
Labour Account
Raw Material Stock Account
Debit
Credit
Debit
Credit
O/S
100,000
Cost
180,000Charged
150,000
Purchases
200,000 WIP
215,000
C/S
85,000
300,000 Total
180,000Total
180,000
Total
300,000 Total
Other Costs Account
Debit
Credit
Paid
50,000 Charge
50,000
Total
50,000 Total
50,000
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Work in Process Account
Debit
Credit
O/B
90,000
Raw M
215,000
Labor
150,000 F/G
410,000
O/H
50,000 C/B
95,000
Total
505,000 Total
505,000
Finished Goods Stock Account
Debit
Credit
O/S
150,000 COS
420,000
WIP
410,000 C/S
140,000
Total
560,000 Total
560,000
Cost of Goods Sold Account
Debit
Credit
F/G
420,000
·
In the Raw Material Account, the debit side contains:
o  Opening balance
100,000
o  Purchases
200,000
·
On the credit side, closing balance of Rs. 85,000 is shown along with the balancing figure of Rs. 215,000
which is charged to work in process OR WIP account through the following entry:
Debit:
Work in process OR WIP Account
Credit:
Raw Material Account
·
Labour cost of Rs. 180,000 is given, out of which Rs. 150,000 is charged to production. (Remaining cost
of Rs. 30,000 will be explained in some later stage). That means Rs. 150,000 are charged to work in
process OR WIP account through the following entry:
Debit:
Work in process OR WIP Account
Credit:
Labour Cost Account
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·
Other costs of Rs. 50,000 is also charged to work in process OR WIP account through the following
entry:
Debit:
Work in process OR WIP Account
Credit:
Other Costs Account
·
Work in process account has the opening balance of Rs. 90,000 and closing balance of Rs. 95,000. After
charging all the above mentioned accounts to WIP. Balancing figure of work in process of Rs. 410,000 is
charged to finished goods account through the following entry:
Debit:
Finished Goods Account
Credit:
Work in process Account
·
Finished goods account has the opening balance of Rs. 150,000 and closing balance of Rs. 140,000.
After charging WIP account to Finished goods, the balancing figure of Rs. 420,000, is charged to cost of
goods sold account through the following entry:
Debit:
Cost of Goods Sold Account
Credit:
Finished Goods Account
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Lesson-16
COST OF GOODS SOLD STATEMENT
In manufacturing concern, separate books are maintained to keep the record of every single work done in
manufacturing process to ascertain cost incurred on production of goods. This record gives information
about total cost incurred on manufacturing process and per unit cost of goods manufactured. When goods
are produced, these are sold to the customers of the business and goods unsold are taken into stock. At the
end of the financial year, manufacturing concern prepares a statement which gives the brief summary of the
whole process.
This statement shows the value of raw material consumed, amount spent on labour and other factory
expenses, finished goods produced and goods unsold (in stock). Such statement is called `cost of goods
sold statement'. Manufacturing concerns, while presenting financial statements, also present cost of goods
sold statement.
Standard format of cost of goods sold statement is given below:
Raw Material:
O/S Raw Material
+ Purchases
+ Cost Incurred to Purchase RM
- C/S Raw Material
Cost of Material Consumed
Conversion Cost:
+ Direct Labour Cost
+ Factory Overheads
Total Factory Cost
Work in Process
+ O/S of WIP
- C/S of WIP
Cost of Goods Manufactured
Finished Goods
+ O/S of Finished Goods
- C/S of Finished Goods
Cost of Good Sold
Cost of material consumed ­ is the cost of material used for consumption that has been put in the
production process. This head shows the raw material left unused from the previous year(opening stock),
raw material purchased in the current year, expenses incurred in bringing the purchased material into the
business premises and raw material that is not used in the current year(closing stock).
Over Heads are the other costs incurred in relation of manufacturing of goods.
Examples are factory utilities, supervisor salaries, equipment repairs etc.
Total factory cost ­ is the cost of material consumed plus labour and over heads. In other words it is the
total cost incurred in the factory.
Cost of goods manufactured ­ is total factory cost plus opening stock of work in process less closing stock
of work in process.
Cost of goods sold ­ is the cost of goods manufactured plus opening stock of finished goods less closing
stock of finished goods.
Prime/Basic Cost = Cost of Direct Material Consumed + Direct Labour cost
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Conversion cost
it is the cost incurred to convert raw material to finished goods.
Conversion cost = Labour cost + factory overhead
Example
·
Using the following data calculate the Cost of Goods Sold of XYZ Co.
Stock levels
O/S Rs.
C/S Rs.
Raw material
100,000
85,000
Work in process
90,000
95,000
Finished goods
150,000
140,000
Purchase of raw material during the period Rs. 200,000
Paid to labour Rs. 180,000 out of which Rs. 150,000 used on production.
Other production costs Rs. 50,000
Solution
XYZ Co.
Cost of Goods Sols Statement
For the period ended-------
Raw Material:
Opening Stock Raw Material
100000
+ Purchases
200000
+ Cost Incurred to Purchase RM
0
- Closing Stock Raw Material
(85000)
Cost of Material Consumed
215000
Conversion Cost
+ Labour Cost
150000
+Factory overhead
50000
200000
Total Factory Costs
415000
Work in process
+ O/S of WIP
90000
+ C/S of WIP
(95000)
Cost of Goods Manufactured
410000
Finished Goods
+ O/S of Finished Goods
150000
+ C/S of Finished Goods
(140000)
Cost of Goods Sold
420000
ILLUSTRATION
Following information of Ahmad & Company is given. Prepare a cost of goods sold statement.
Stock levels
O/S Rs.
C/S Rs.
Raw material
150,000
115,000
Work in process
50,000
55,000
Finished goods
120,000
100,000
Purchase of raw material during the period Rs. 100,000
Transportation charges of items purchased Rs. 5,000
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Paid to labour Rs. 100,000.
Other production costs(FOH) Rs. 80,000
SOLUTION
Raw Material:
Opening Stock Raw Material
150,000
+ Purchases
100,000
+ Cost Incurred to Purchase RM
5,000
- Closing Stock Raw Material
(115,000)
Cost of Material Consumed
140,000
Conversion Cost:
+ Labour
100,000
+ Factory Overheads
80,000
Total Factory Cost
320,000
Work in Process:
+ O/S of WIP
50,000
- C/S of WIP
(55,000)
Cost of Goods Manufactured
315,000
Finished Goods:
+ O/S of Finished Goods
120,000
- C/S of Finished Goods
(100,000)
Cost of Good Sold
335,000
STOCK CARD
Stock card is used to keep the record of what has come in stock and what has gone out of it. Standard
format of stock card is given below:
Stock Account Item 01
Date
Receipts
Qty
Rate
Amount
Date
Issues
Qty
Rate
Amount
Stock card has two parts.
·  Receipt side
·  Issue side
Both sides have similar columns that include:
·  Nature of item to be kept in stock
·  Quantity of items
·  Rate at which it was purchased
·  Total value of items
Receipt side is used to record data of items coming in the stock and issue side is used to record information
of goods issued for manufacturing process.
VALUATION OF STOCK
Any manufacturing organization purchases different material through out the year. The prices of purchases
may be different due to inflationary conditions of the economy. The question is, what item should be issued
first & what item should be issued later for manufacturing. For this purpose, the organization has to make a
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policy for issue of stock. All the issues for manufacturing and valuation of stock are recorded according to
the policy of the organization. Mostly these three methods are used for the valuation of stock:
·  First in first out (FIFO)
·  Last in first out (LIFO)
·  Weighted average
FIRST IN FIRST OUT (FIFO)
The FIFO method is based on the assumption that the first merchandise purchased is the first merchandised
issued. The FIFO uses actual purchase cost. Thus, if merchandise has been purchased at several different
costs, the inventory (stock) will have several different cost prices. The cost of goods sold for a given sales
transaction may involve several different cost prices.
CHARACTERISTICS
·
This is widely used method for determining values of cost of goods sold and closing stock.
·
In the FIFO method, oldest available purchase costs are transferred to cost of goods sold. That
means the cost if goods sold has a lower value and the profitability of the organization becomes
higher.
·
As the current stock is valued at recent most prices, the current assets of the company have the
latest assessed values.
LAST IN FIRST OUT (LIFO)
As the name suggests, the LIFO method is based on the assumption that the recently purchased
merchandise is issued first. The LIFO uses actual purchase cost. Thus, if merchandise has been purchased at
several different costs, the inventory (stock) will have several different cost prices. The cost of goods sold for
a given sales transaction may involve several different cost prices.
CHARACTERISTICS
·
This is alternatively used method for determining values of cost of goods sold and closing stock.
·
In the LIFO method recent available purchase costs are transferred to cost of goods sold. That
means the cost of goods sold has a higher value and the profitability of the organization becomes
lower.
·
As the current stock is valued at oldest prices, the current assets of the company have the oldest
assessed values.
WEIGHTED AVERAGE METHOD
When weighted average method is in use, the average cost of all units in inventory, is computed after every
purchase. This average cost is computed by dividing the total cost of goods available for sale by the number
of units in inventory. Under the average cost assumption, all items in inventory are assigned the same per
unit cost. Hence, it does not matter which units are sold; the cost of goods sold is always based on current
average unit cost.
CHARACTERISTICS
·
Under the average cost assumption, all items in inventory are assigned same per unit cost (the
average cost). Hence it does not matter which units are sold first. The cost of goods sold is always
on the current average unit cost.
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·
Since all inventories are assigned same cost, this method does not make any effect on the
profitability and does not increase/decrease any asset in the financial statements.
·  This is the alternatively used method for determining values of cost of goods sold and closing stock.
Example
·  Receipts:
01 Jan 20--,
10 units @ Rs. 150 per unit
02 Jan 20--,
15 units @ Rs. 200 per unit
10 Jan 20--,
20 units @ Rs. 210 per unit
·  Issues:
05 Jan 20--,
05 units
06 Jan 20--,
10 units
15 Jan 20--,
15
FIFO Method of Stock Valuation
Date
Receipts
Issues
Value of Stock
01-01-20--
10 @ Rs. 150
10 x 150 = 1500 1500
02-01-20--
15 @ Rs. 200
10 x 150 = 1500
15 x 200 = 3000 4500
05-01-20--
5 @ 150 = 750
750
5 x 150 = 750
15 x 200 = 3000 3750
06-01-20--
5 @ 150 = 750
0 x 150 =
0
5 @ 200 = 1000 1750
10 x 200 = 2000 2000
10-01-20--
20 @ Rs. 210
10 x 200 = 2000
20 x 210 = 4200 6200
15-01-20--
10 @ 200 = 2000
0 x 200 =
0
5 @ 210 = 1050 3050
15 x 210 = 3150 3150
Weighted Average Method of Stock Valuation
Date
Receipts
Issues
Value of Stock
Average Cost
01-01-20--
10x150 = 1500
1500
1500/10=150
02-01-20--
15x200 = 3000
1500 + 3000 = 4500
4500/25=180
05-01-20--
5x180 = 900
4500 ­ 900 = 3600
3600/20=180
06-01-20--
10x180 = 1800
3600 ­ 1800 = 1800
1800/10=180
10-01-20--
20x210 = 4200
1800 + 4200 = 6000
6000/30=200
15-01-20--
15x200 = 3000
6000 ­ 3000 = 3000
3000/15=200
Effects of Valuation Method on Profit
FIFO Method
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·
Cost of Sales
= 750 + 1750 + 3050  = 5,550
Gross Profit
= 7500 ­ 5550
= 1,950
Weighted Average Method
·  Cost of Sales
= 900 + 1800 + 3000  = 5,700
Gross Profit
= 7500 ­ 5700
= 1,300
ILLUSTRATION
Hamid & company is a manufacturing concern. Following is the receipts & issues record for the month of
May, 2002
Date
Receipts
Issues
May 7
200 units @ Rs. 50/unit
May 9
60 units
May 13
150 units @ Rs. 75/unit
May 18
100 units @ Rs. 60/unit
May 22
150 units
May 24
100 units
May 27
100 units @ Rs. 50/unit
May 30
200 units
Calculate the value of closing stock by
·  FIFO Method
·  Average Method
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SOLUTION
Valuation of stock by FIFO method
Date
Receipts
Issues
Value of Stock
Total  Remaining  Net
Amount  No. of
Balance
units
May 7
200 units @ Rs.
200 x 50 = 10,000
10,000  200
10,000
50/unit
May 9
60  units
@
Rs.
60 x 50 = 3,000
(3,000)
140
7,000
50/unit
May 13
150 units @ Rs.
75 x 150 = 11,250
11,250
290
18,250
75/unit
May 18
100 units @ Rs.
60 x 100 = 6,000
6,000
390
24,250
60/unit
May 22
140 units @ Rs.
50 x 140 = 7,000
(7,750)
240
16,500
50/unit
10  units  @  Rs.
10 x 75 = 750
75/unit
May 24
100 units @ Rs.
75 x 100 =7,500
(7,500)
140
9,000
75/unit
May 27
100 units @ Rs.
50 x 100 = 5,000
5,000
240
14,000
50/unit
May 30
40  units  @  Rs.
75 x 40 = 3,000
(12,000)
40
2,000
75/unit
100 units @ Rs.
60 x 100 = 6,000
60/unit
60  units  @  Rs.
50 x 60 = 3,000
50/unit
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Valuation of stock by weighted average method:
Date Receipts Issues
Value of
Total
Total Units
Average
Net
Stock
Amount(Rs.)
Cost(Rs.)/unit Balance(
Rs.)
May 200 units
200 x 50
10,000
200
50
10,000
7 @
Rs.
=
50/unit
10,000
May
60 units  60 x 50
(3,000)
140
7,000
9
=
3,000
May 150 units
150 x 75
7,000+11250
140+150
18250/290
18,250
13 @
Rs.
=
=
=
=
75/unit
11,250
18250
290
62.9
May 100 units
100 x 60
18250+6000
290+100
24250/390
24,250
18 @
Rs.
=
=
=
=
60/unit
6,000
24250
390
62.2
May
150
150 x 62.2
(9,330)
390-150
14,920
22
units
=
=
9330
240
May
100
100 x 62.2
(6,220)
240-100
8,700
24
units
=
=
6220
140
May 100 units
100 x 50
8,700+5,000
140+100
13700/240
13,700
27 @
Rs.
=
=
=
=
50/unit
5,000
13,700
240
57.1
May
200
200 x 57.1
(11,420)
240-200
2,280
30
units
=
=
11,420
40
LIFO METHOD WILL BE DISCUSSED AT SOME LATER STAGE
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Lesson-17
DEPRECIATION
Depreciation is a systematic allocation of the cost of a depreciable asset to expense over its useful life. It is a
process of charging the cost of fixed asset to profit & loss account.
Fixed Assets are those assets which are:
·  Of long life
·  To be used in the business to generate revenue
·  Not bought with the main purpose of resale.
Fixed assets are also called "Depreciable Assets"
When an expense is incurred, it is charged to profit & loss account of the same accounting period in which it
has incurred. Fixed assets are used for longer period of time. Now, the question is how to charge a fixed
asset to profit & loss account. For this purpose, estimated life of the asset is determined. Estimated useful
life is the number of years in which a fixed asset is expected to be used efficiently. It is the life for which a
machine is estimated to provide more benefit than the cost to run it. Then, total cost of the asset is divided
by total number of estimated years. The value, so determined, is called `depreciation for the year' and is
charged to profit & loss account. The same amount is deducted from total cost of fixed asset in the financial
year in which depreciation is charged. The net amount (after deducting depreciation) is called `Written down
Value'.
WDV = Original cost of fixed asset ­ Accumulated Depreciation
Accumulated Depreciation is the depreciation that has been charged on a particular asset from the time of
purchase of the asset to the present time. This is the amount that has been charged to profit and loss
account from the year of purchase to the present year.
Depreciation accumulated over the years is called accumulated depreciation.
Useful life
·  Useful Life / Economic Life is the time period for machine is expected to operate efficiently.
·  It is the life for which a machine is estimated to provide more benefit than the cost to run it.
GROUPINGS OF FIXED ASSETS
Major groups of Fixed Assets:
·  Land
·  Building
·  Plant and Machinery
·  Furniture and Fixtures
·  Office Equipment
·  Vehicles
No depreciation is charged for `Land'. In case of `Leased Asset/Lease Hold Land' the amount paid for it is
charged over the life of the lease and is called Amortization.
RECORDING OF JOURNAL ENTRIES
Purchase of fixed asset:
Debit:
Relevant asset account
Credit:
Cash, Bank or Payable Account
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For recording of depreciation, following two heads of accounts are used:
·  Depreciation Expense Account
·  Accumulated Depreciation Account
Depreciation expense account contains the depreciation of the current year. Accumulated depreciation
contains the depreciation of the asset from the financial year in which it was bought up to the present
financial year. . Depreciation of the following years in which asset was used is added up in this account. In
other words, this head of account shows the cost of usage of the asset up to the current year. Depreciation
account is charged to profit & loss account under the heading of Administrative Expenses. In the balance
sheet, fixed assets are presented at written down value. i-e.
WDV = Actual cost of fixed asset ­ Accumulated Depreciation.
Journal entry for the depreciation is given below:
Debit: Depreciation Expenses Account
Credit:
Accumulated Depreciation Account
PRESENTATION OF DEPRECIATION
Charging depreciation to any head in profit & loss account depends upon the nature of work performed by
the asset. Consider an organization has purchased computers. If computers are being used by the
management, this means that administrative work is done by computers. So, depreciation of computers will
be charged to Administrative Expenses. On the other hand, if machines working in the factory are
computerized. The value of depreciation of the computers attached with the machines will be charged to
cost of goods sold. The reason being, the computers are the part of manufacturing process & depreciation of
computers will be charged to the cost of production. Again consider the selling department of the business is
very large. Depreciation of computers used in selling department will be charged to selling expenses.
You can see that computer is a single asset and its depreciation is charged in three different heads depending
upon the nature of work done by the computer.
Depreciation for the year is charged to:
i.
Cost of Goods Sold
ii.
Administrative Expenses
iii.
Selling Expenses
·
In balance sheet Fixed Assets are shown at Cost less Accumulated Depreciation i.e. Written Down
Value (WDV)
METHODS OF CALCULATING DEPRECIATION
There are several methods for calculating depreciation. At this stage, we will discuss only two of them
namely:
·  Straight line method or Original cost method or Fixed installment method
·  Reducing balance method or Diminishing balance method or written down method.
STRAIGHT LINE METHOD
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Under this method, a fixed amount is calculated by a formula. That fixed amount is charged every year
irrespective of the written down value of the asset. The formula for calculating the depreciation is given
below:
Depreciation = (cost ­ Residual value) / Expected useful life of the asset
Residual value is the cost of the asset after the expiry of its useful life.
Under this method, at the expiry of asset's useful life, its written down value will become zero. Consider the
following example:
·
Cost of the Asset
= Rs.100,000
·
Life of the Asset
= 5 years
·
Annual Depreciation
= 20 % of cost or Rs.20,000
Written down value method
·
Cost of the Asset
= Rs. 100,000
·
Annual Depreciation
= 20%
Year 1 Depreciation
= 20 % of 100,000
= 20,000
Year 1 WDV
= 100,000 ­ 20,000
= 80,000
Year 2 Depreciation
= 20 % of 80,000
= 16,000
Year 2 WDV
= 80,000 ­ 16,000
= 64,000
Example
Cost of an asset: Rs. 120,000
Residual value: Rs. 20,000
Expected life:
Rs. 5 years
Calculate depreciation and the written down value of the asset for five years.
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SOLUTION
Straight line method
Depreciation = (120,000 ­ 20,000) / 5 = Rs. 20,000
Particulars
Depreciation
Written
(Rs)
Down
Value (Rs.)
100,000
Depreciable cost
(20,000)
80,000
Dep. Of the 1st year
Dep. Of the 2nd year
(20,000)
60,000
Dep. Of the 3rd year
(20,000)
40,000
(20,000)
20,000
Dep. Of the 4th year
Dep. Of the 5th year
(20,000)
0
REDUCING BALANCE METHOD
Under this method, depreciation is calculated on written down value. In the first year, depreciation is
calculated on cost. Afterwards written down value is calculated by deducting accumulated depreciation from
the cost of that asset(cost ­ accumulated depreciation) and depreciation is charged on that value. In this
method, the value of asset never becomes zero. Consider the following example:
Cost of an asset: Rs. 100,000
Expected life:
Rs. 5 years
Depreciation rate:
20%
SOLUTION
Particulars
Depreciation
Accumulated
Written
(Rs)
Depreciation
Down
(Rs.)
Value (Rs.)
Depreciable cost
100,000
Dep. Of the 1st year
20,000
20,000
80,000
100,000 x 20%
Dep. Of the 2nd year
80,000 x 20%
16,000
36,000
64,000
Dep. Of the 3rd year
12,800
48,800
51,200
64,000 x 20%
Dep. Of the 4th year
51,200 x 20%
10,240
59,040
40,960
Dep. Of the 5th year
40,960 x 20%
8,192
67,232
32,768
You see, at the end of five years, WDV of the asset is Rs. 32,768, not zero. But in case of straight line
method, the WDV, after five years was zero. So, in the opinion of some people, reducing balance method is
better than that of straight line method, but both methods are effective. It is the management that has to
decide, which method is best suited to their business.
Once an asset has been fully depreciated, no more depreciation should be recorded on it, even though the
property may be in good condition and may be in use. The objective of depreciation is to spread the cost of
an asset over the periods of its usefulness; in no case can depreciation be greater than the amount paid for
the asset. When a fully depreciated asset is in use beyond the original estimate of useful life, the asset account
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and the accumulated depreciation account should remain in the accounting records without further entries
until the asset is retired.
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Lesson-18
DEPRECIATION
It is a systematic allocation of the cost of a depreciable asset to expense over its useful life".
GROUPINGS OF FIXED ASSETS
Major groups of Fixed Assets:
·  Land
·  Building
·  Plant and Machinery
·  Furniture and Fixtures
·  Office Equipment
·  Vehicles
No depreciation is charged for `Land'. In case of `Leased Asset/Lease Hold Land' the amount paid for it is
charged over the life of the lease and is called Amortization.
RECORDING OF JOURNAL ENTRIES
Purchase of fixed asset:
Debit:
Relevant asset account
Credit:
Cash, Bank or Payable Account
For recording of depreciation, following two heads of accounts are used:
·  Depreciation Expense Account
·  Accumulated Depreciation Account
Depreciation expense account contains the depreciation of the current year. Accumulated depreciation
contains the depreciation of the asset from the financial year in which it was bought. Depreciation of the
following years in which asset was used, is added up in this account. In other words, this head of account
shows the cost of usage of the asset up to the current year. Depreciation account is charged to profit & loss
account under the heading of Administrative Expenses. In the balance sheet, fixed assets are presented at
written down value. i-e.
WDV = Actual cost of fixed asset ­ Accumulated Depreciation.
Journal entry for the depreciation is given below:
Debit:
Depreciation Account
Credit:
Accumulated Depreciation Account
METHODS OF CALCULATING DEPRECIATION
There are several methods of calculating depreciation. At this stage, we will discuss only two of them
namely:
·  Straight line method
·  Reducing balance method
STRAIGHT LINE METHOD
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In this method, a fixed amount is calculated by a formula. That fixed amount is charged every year
irrespective of the written down value of the asset. The formula for calculating the depreciation is given
below:
Depreciation = (cost ­ Residual value) / Expected useful life of the asset
Residual value is the cost of the asset after the expiry of its useful life.
REDUCING BALANCE METHOD
In this method, depreciation is calculated on written down value. In the first year, depreciation is calculated
on cost. Afterwards written down value is calculated by deducting accumulated depreciation from the cost of
that asset(cost ­ accumulated depreciation) and depreciation is charged on that value.
·
Cost of Asset ­ Price at which the asset was initially recorded.
·
Written Down Value / Book Value ­ Cost minus Accumulated Depreciation.
In reducing balance method, a formula is used for calculation of depreciation rate. i e.
·
Rate = 1 ­
n RV / C
Where:
"RV" = Residual Value
"C" = Cost
"n" = Life of Asset
Calculate the rate if:
·
Cost
= 100,000
·
Residual Value (RV)
= 20,000
·
Life
= 3 years
·
Rate = 1 ­ 3 20000/100000
= 42%
Year 1
Cost
100,000
Depreciation
100,000 x 42%
(42,000)
WDV  (Closing Balance)
58,000
Year 2
WDV  (Opening Balance)
58,000
Depreciation
58,000 x 42%
(24,360)
WDV  (Closing Balance)
33,640
Year 3
WDV  (Opening Balance)
33,640
Depreciation
33,640 x 42%
(14,128)
WDV  (Closing Balance)
19,511
Disposal of Asset
Cost of Asset
= 100,000
Life of the Asset
= 5 Years
Depreciation Method
= Straight Line
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Residual Value
= Rs.10000
Sale Price after Five Years
= Rs.15000
Depreciation per year = (100000-10000) / 5
= Rs.5000 per year
Total Depreciation in Five Years
= 18,000 x 5
= 90,000
Book Value after Five Years
= 100,000- 90,000
= 10,000
Profit on Disposal
= 15,000 ­ 10,000
= Rs.5000
Recording of Disposal
Debit
Fixed Asset Disposal A/c
100,000
Credit
Fixed Asset Cost A/c
100,000
(With the cost of asset)
Debit
Accumulated Dep. A/c
90,000
Credit
Fixed Asset Disposal A/c
90,000
(With the depreciation accumulated to date)
Debit
Cash / Bank / Receivable A/c  15,000
Credit
Fixed Asset Disposal A/c
15,000
(With the price at which asset is sold)
[Note: one group to appear at a time]
Disposal of Asset Account
Fixed Asset Disposal Account
DEBIT
CREDIT
Cost Account
100,000
Acc. Dep. Account
90,000
Cash / Bank
15,000
P & L Account
5000
( Balancing Figure)
Total
105000
Total
105000
POLICY FOR DEPRECIATION
The management of the business selects the policy for charging depreciation. There is no law binding on the
management. The management is free to choose method of depreciation and policy of charging
depreciation. Normally two policies are commonly used:
·  Depreciation on the basis of use
·  In the year of purchase, full year's depreciation is charged; where as, in the year of sale no
depreciation is charged.
Now it is up to the management to decide, what method and what policy is better and effective for their
business.
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DISPOSAL OF FIXED ASSET
When depreciable asset is disposed off at any time during the financial year, an entry should be made to give
effect of the disposal. Since, the residual value of asset is only estimated, it is common for asset to be sold at
price that differs from its book value at the date of disposal. When asset is sold, any profit or loss is
computed by comparing book value with the amount received from sale. As you know, book value is
obtained by deducting accumulated depreciation from original cost of the asset. A sale price in excess of the
book value produces profit; a sale price below the book value produces loss. This profit or loss should be
shown in the profit & loss account.
ENTRIES FOR RECORDING DISPOSAL
Debit
Fixed Asset Disposal A/c
Credit
Fixed Asset Cost A/c
(With the cost of asset)
Debit
Accumulated Dep. A/c
Credit
Fixed Asset Disposal A/c
(With the depreciation accumulated to date)
Debit
Cash / Bank / Receivable A/c
Credit
Fixed Asset Disposal A/c
(With the price at which asset is sold)
Example
·
An asset is purchased for Rs. 500,000 on Nov. 01, 2001.
·
Depreciation rate is 10% p.a.
·
The Asset is sold on Apr. 30, 2004.
·
Financial Year is July 1 to June 30
Question
·  Calculate the WDV For both policies
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Depreciation is Charged on the Basis of USe
Year
On the Basis of Use
Rs.
1-11-2001
Cost
500,000
2001-2002
Dep. 500,000 x 10% x 8 / 12
(33,333)
30-6-2002
WDV
466,667
2002-2003
Dep. 466,666 x 10%
(46,667)
30-6-2003
WDV
420,000
2003-2004
Dep. 420,000 x 10% x 10 / 12
(35,000)
30-4-2004
WDV
385,000
Full Dep. In the Year of Purchase
Year
Full Dep. in year of Purchase
Rs.
1-11-2001
Cost
500,000
2001-2002
Dep. 500,000 x 10%
(50,000)
30-6-2002
WDV
450,000
2002-2003
Dep. 450,000 x 10%
(45,000)
30-6-2003
WDV
405,000
2003-2004
Dep. 00 in the year of sale
00
30-6-2004
WDV
405,000
Contents of Fixed Assets Register
·  Different record for each class of assets
·  Date of purchase
·  Detailed particulars of asset
·  Location of asset
·  Record of depreciation
ILLUSTRATION
Cost of asset
Rs. 200,000
Life of the asset
5 years
Depreciation method
Straight line
Residual value
Rs. 20,000
Sale price after 5 years
30,000
Calculate profit/Loss on the sale of the asset?
SOLUTION
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Written down value = 200,000 ­ 20,000 = 180,000
Depreciation/year = 180,000/5 = 36,000 (Straight line method)
Particulars
Depreciation
Written
(Rs)
Down
Value (Rs.)
200,000
Depreciable cost
st year
(36,000)
164,000
Dep. Of the 1
Dep. Of the 2nd year
(36,000)
128,000
Dep. Of the 3
(36,000)
92,000
rd year
(36,000)
56,000
Dep. Of the 4th year
Dep. Of the 5th year
(36,000)
20,000
Book value after five years
Rs. 20,000
Sale price
Rs. 30,000
Profit on sale
Rs. 10,000 (30,000 ­ 20,000)
Same illustration is solved by reducing balance method
Cost of asset
Rs. 200,000
Residual value
Rs. 20,000
Estimated useful life
5 years
Calculation of depreciation rate
____
Depreciation Rate = 1 ­ nRv/c
_____________
=1-
520,000/200,000
= 37%
Allocation of depreciation is given below:
Particulars
Depreciation
Accumulated
Written
(Rs)
Depreciation
Down
(Rs.)
Value (Rs.)
200,000
Depreciable cost
Dep. Of the 1st year
200,000 x 37%
74,000
74,000
126,000
Dep. Of the 2nd year
126,000 x 37%
46,620
120,620
79,380
Dep. Of the 3rd year
29,371
149,991
50,009
79,380 x 37%
Dep. Of the 4th year
50,009 x 37%
18,503
168,494
31,506
Dep. Of the 5th year
31,506 x 37%
11,657
180,151
19,849
Book value after five years
Rs. 19,849
Sale price
Rs. 30,000
Profit on sale
Rs. 10,151 (30,000 ­ 19,849)
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Lesson-19
CAPITAL WORK IN PROGRESS
If an asset is not completed at that time when balance sheet is prepared, all costs incurred on that asset up to
the balance sheet date are transferred to an account called Capital Work in Progress Account. This
account is shown separately in the balance sheet below the fixed asset. Capital work in progress account
contains all expenses incurred on the asset until it is converted into working condition. All these expenses
will become part of the cost of that asset. When an asset is completed and it is ready to work, all costs in the
capital work in progress account will transfer to the relevant asset account through the following entry:
Debit:
Relevant asset account
Credit:
Capital work in progress account
ILLUSTRATION # 1
A machine is purchased for Rs. 400,000. Its useful life is estimated to be five years. Its residual value is Rs.
25,000. After four years, it was sold for Rs. 40,000. For the purpose of WDV, its depreciation rate is 40%.
You are required to show calculation of depreciation for four years. Also calculate profit or loss on disposal.
SOLUTION
Calculation of depreciation and profit & loss on the basis of straight line method:
Depreciation/year = (400,000 ­ 25,000)/5 = 75,000 (Straight line method)
As, machine was sold after four years but its useful life was estimated for five years, when we calculate
depreciation of the asset under straight line method, we will divide its WDV over five years, not on four
years.
Particulars
Depreciation
Written
(Rs)
Down
Value (Rs.)
375,000
Depreciable cost
Dep. Of the 1st year
(75,000)
300,000
Dep. Of the 2nd year
(75,000)
225,000
(75,000)
150,000
Dep. Of the 3rd year
Dep. Of the 4th year
(75,000)
75,000
Book value after four years
Rs. 75,000
Sale price
Rs. 40,000
Profit/(loss) on sale
Rs. (35,000) i-e.(40,000 ­ 75,000)
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Calculation of depreciation and profit & loss on the basis of reducing balance method:
Depreciation rate = 40%
Particulars
Depreciation
Accumulated
Written
(Rs)
Depreciation
Down
(Rs.)
Value (Rs.)
Depreciable cost
400,000
Dep. Of the 1st year
400,000 x 40%
160,000
160,000
240,000
Dep. Of the 2nd year
96,000
256,000
144,000
240,000 x 40%
Dep. Of the 3rd year
144,000 x 40%
57,600
313,600
86,400
Dep. Of the 4th year
86,400 x 40%
34,560
348,160
51,840
Book value after four years
Rs. 51,840
Sale price
Rs. 40,000
Profit/(loss) on sale
Rs. (11,840) i-e.(40,000 ­ 51,840)
ILLUSTRATION # 2
Following information of machinery account is available in Year 2004:
·  Machine # 1 is purchased on September 1, 2000 for Rs. 100,000
·  Machine # 2 is purchased on January 31, 2002 for Rs. 200,000
·  Machine # 3 is purchased on July 1, 2003 for Rs. 50,000
·  Machine # 1 is disposed on March 31, 2004
Depreciation is charged @ 25% reducing balance method. Financial year is closed on June 30 every year.
Show the calculation of depreciation on machinery for four years using the following policies:
·  Depreciation is charged on the basis of use
·  Full depreciation is charged in the year of purchase and no depreciation is charged in the year of
disposal.
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SOLUTION
Depreciation on the basis of use
Date
Purchase
Depreciation
Accumulated
Total
Written
Total
of
(Rs.)
depreciation
Accum.
Down Value
Written
machine
(Rs.)
Dep.
(Rs.)
Down
(Rs.)
Value
(Rs.)
01-09-2000
100,000 Machine # 1
Machine # 1
20,833
Machine # 1
79,167
100,000 x 25%
20,833
79,167
x10/12=20,833
2001-2002
Machine # 1
Machine # 1
61,458
Machine # 1
238,542
79,167x25%
40,625
59,375
= 19,792
31-01-2002
200,000 Machine # 2
Machine # 2
Machine # 2
200,000x25%x5/
20,833
179,167
12=20,833
2002-2003
Machine # 1
Machine # 1
121,094
Machine # 1
178,906
59,375x25%
55,469
44,531
= 14,844
Machine # 2
Machine # 2
Machine # 2
179,167x25%
65,625
134,375
=44,792
2003-2004
Machine # 1
Machine # 1
175,538
Machine # 1
138,281
44,531x25%x
63,819
(36,181)
9/12= 8,350
(sold)
Machine # 2
Machine # 2
Machine # 2
134,375x25%
99,219
100,781
= 33,594
01-07-2003
50,000 Machine # 3
Machine # 3
Machine # 3
50,000x25%
12,500
37,500
= 12,500
Figure in blue color is the written down value of machine # 1, which is disposed of by the management.
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Full year depreciation in the year of purchase and no depreciation in the year of sale:
Date
Purchase
Depreciation
Accumulated
Total
Written
Total
of
(Rs.)
depreciation
Accum.
Down Value
Written
machine
(Rs.)
Dep.
(Rs.)
Down
(Rs.)
Value
(Rs.)
01-09-2000
100,000 Machine # 1
Machine # 1
25,000
Machine # 1
75,000
100,000 x 25%
25,000
75,000
=25,000
2001-2002
Machine # 1
Machine # 1
93,750
Machine # 1
206,250
75,000x25%
43,750
56,250
= 18,750
31-01-2002
200,000 Machine # 2
Machine # 2
Machine # 2
200,000x25%
50,000
150,000
=50,000
2002-2003
Machine # 1
Machine # 1
145,313
Machine # 1
154,687
56,250x25%
57,813
42,187
= 14,063
Machine # 2
Machine # 2
Machine # 2
112,500
150,000x25%
87,500
=37,500
Machine # 1 185,935
2003-2004
Machine # 1
Machine # 1
121,875
57,813
0
42,187
Machine sold
(sold)
(sold)
Machine # 2
Machine # 2
Machine # 2
112,500x25%
115,625
84,375
= 28,125
50,000 Machine # 3
Machine # 3
01-07-2003
Machine # 3
50,000x25%
12,500
37,500
= 12,500
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Lesson-20
CAPITAL WORK IN PROGRESS
If an asset is not completed at that time when balance sheet is prepared, all costs incurred on that asset up to
the balance sheet date are transferred to an account called Capital Work in Progress Account. This
account is shown separately in the balance sheet below the fixed asset. Capital work in progress account
contains all expenses incurred on the asset until it is converted into working condition. All these expenses
will become part of the cost of that asset. When any expense is incurred or paid, it is included in the Capital
Work in Progress Account through the following entry:
Debit:
Work in Progress Account
Credit:
Cash/Bank/Payable Account
When an asset is completed and it is ready to work, all costs will transfer to the relevant asset account
through the following entry:
Debit:
Relevant asset account
Credit:
Capital work in progress account
PRESENTATION
It is already mentioned that Work in Progress Account is shown separately in the balance sheet below the
fixed asset. i-e.
Name of the Entity
Balance Sheet As At
Particulars
Amount
Amount Rs.
Rs.
Assets
Fixed Assets
xyz
Capital Work in Progress
xyz
Other Long Term Assets
xyz
Current Assets
Total
Xyz
Liabilities
Capital
xyz
Profit
xyz
Xyz
Long Term Liabilities
Xyz
Current Liabilities
Total
Xyz
Consider the solved illustration in the previous lecture:
Depreciation on the basis of use
Date
Purchase
Depreciation
Accumulated
Total
Written
Total
of
(Rs.)
depreciation
Accum.
Down Value
Written
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machine
(Rs.)
Dep.
(Rs.)
Down
(Rs.)
Value
(Rs.)
01-09-2000
100,000 Machine # 1
Machine # 1
20,833 Machine # 1
79,167
100,000 x 25%
20,833
79,167
x10/12=20,833
2001-2002
Machine # 1
Machine # 1
61,458 Machine # 1
238,542
79,167x25%
40,625
59,375
= 19,792
31-01-2002
200,000 Machine # 2
Machine # 2
Machine # 2
200,000x25%x5/
20,833
179,167
12=20,833
2002-2003
Machine # 1
Machine # 1
121,094 Machine # 1
178,906
59,375x25%
55,469
44,531
= 14,844
Machine # 2
Machine # 2
Machine # 2
179,167x25%
65,625
134,375
=44,792
2003-2004
Machine # 1
Machine # 1
175,538 Machine # 1
138,281
44,531x25%x
63,819
(36,181)
9/12= 8,350
(sold)
Machine # 2
Machine # 2
Machine # 2
134,375x25%
99,219
100,781
= 33,594
01-07-2003
50,000 Machine # 3
Machine # 3
Machine # 3
50,000x25%
12,500
37,500
= 12,500
PRESENTATION IN THE BALANCE SHEET
Year
Cost of Machinery
Accumulated
Written Down
Depreciation
Value
2000-2001
100,000
20,833
79,167
2001-2002
300,000
61,458
238,542
2002-2003
300,000
121,094
178,906
Written Down Value of the year 2003-2004
Opening Written Down Value:
Rs. 178,906
Add: Cost of machine purchased:
Rs. 50,000
Less: Depreciation of Machine # 1 in 2003-2004:
(8,350)
Less: Depreciation of other assets:
(46,094)
Less: Written Down Value of machine disposed:
(36,181)
Closing Written Down Value:
Rs. 138,281
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Full year depreciation in the year of purchase and no depreciation in the year of sale:
Date
Purchase
Depreciation
Accumulated
Total
Written
Total
of
(Rs.)
depreciation
Accum.
Down Value
Written
machine
(Rs.)
Dep.
(Rs.)
Down
(Rs.)
Value
(Rs.)
01-09-2000
100,000 Machine # 1
Machine # 1
25,000 Machine # 1
75,000
100,000 x 25%
25,000
75,000
=25,000
2001-2002
Machine # 1
Machine # 1
93,750 Machine # 1
206,250
75,000x25%
43,750
56,250
= 18,750
31-01-2002
200,000 Machine # 2
Machine # 2
Machine # 2
200,000x25%
50,000
150,000
=50,000
2002-2003
Machine # 1
Machine # 1
145,313 Machine # 1
154,687
56,250x25%
57,813
42,187
= 14,063
Machine # 2
Machine # 2
Machine # 2
150,000x25%
87,500
112,500
=37,500
2003-2004
Machine # 1
Machine # 1
185,935 Machine # 1
121,875
0
57,813
42,187
Machine sold
(sold)
(sold)
Machine # 2
Machine # 2
Machine # 2
112,500x25%
115,625
84,375
= 28,125
01-07-2003
50,000 Machine # 3
Machine # 3
Machine # 3
50,000x25%
12,500
37,500
= 12,500
PRESENTATION IN THE BALANCE SHEET
Year
Cost of Machinery
Accumulated
Written Down
Depreciation
Value
2000-2001
100,000
25,000
75,000
2001-2002
300,000
93,750
206,250
2002-2003
300,000
145,313
154,687
Written Down Value of the year 2003-2004
Opening Written Down Value:
Rs. 154,687
Add: Cost of machine purchased:
Rs. 50,000
Less: Depreciation of Machine # 1 in 2003-2004:
0
Less: Depreciation of other assets:
(40,625)
Less: Written Down Value of machine disposed:
(42,187)
Closing Written Down Value:
Rs. 121,875
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ILLUSTRATION # 2
Following information of machinery account is available in Year 2004:
·  Machine # 1 is purchased on
August 1, 2000 for Rs. 50,000
·  Machine # 2 is purchased on April 1, 2002 for Rs. 100,000
·  Machine # 3 is purchased on March 1, 2004 for Rs. 150,000
·  Machine # 1 is disposed on May 31, 2004
Depreciation is charged @ 20% reducing balance method. Financial year is closed on June 30 every year.
Show the calculation of depreciation on machinery for four years using the following policies:
·  Depreciation is charged on the basis of use
·  Full depreciation is charged in the year of purchase and no depreciation is charged in the year of
disposal,
SOLUTION
Depreciation on the basis of use
Date
Purchase
Total
Depreciation
Accumulated
Total
Written
of
Down Value
Written
(Rs.)
depreciation
Accum.
machine
(Rs.)
Down
Dep.
(Rs.)
(Rs.)
Value
(Rs.)
01-08-2000
50,000 Machine # 1
Machine # 1
9,167 Machine # 1
40,833
50,000  x  20%
9,167
9,167
x11/12=9,167
2001-2002
Machine # 1
Machine # 1
22,334 Machine # 1
127,666
40,833x20%
17,334
32,666
= 8,167
Machine # 2
01-04-2002
100,000 Machine # 2
5,000
Machine # 2
100,000x20%x3/
95,000
12=5,000
2002-2003
Machine # 1
Machine # 1
47,867 Machine # 1
102,133
32,666x20%
23,867
26,133
= 6,533
Machine # 2
Machine # 2
Machine # 2
95,000x20%
24,000
76,000
=19,000
2003-2004
Machine # 1
Machine # 1
77,858 Machine # 1
200,800
26,133x20%x
28,658
(21,342)
11/12= 4,791
(sold)
Machine # 2
Machine # 2
Machine # 2
76,000x20%
39,200
60,800
= 15,200
01-03-2004
150,000 Machine # 3
Machine # 3
Machine # 3
150,000x20%x
10,000
140,000
4/12= 10,000
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PRESENTATION IN THE BALANCE SHEET
Year
Cost of Machinery
Accumulated
Written Down
Depreciation
Value
2000-2001
50,000
9,167
40,833
2001-2002
150,000
22,334
127,666
2002-2003
150,000
47,867
102,133
Written Down Value of the year 2003-2004
Opening Written Down Value:
Rs. 102,133
Add: Cost of machine purchased:
Rs. 150,000
Less: Depreciation of Machine # 1 in 2003-2004:
(4,791)
Less: Depreciation of other assets:
(25,200)
Less: Written Down Value of machine disposed:
(21,342)
Closing Written Down Value:
Rs. 200,800
Full year depreciation in the year of purchase and no depreciation in the year of sale:
Date
Purchase
Depreciation
Accumulated
Total
Written
Total
of
(Rs.)
depreciation
Accum.
Down Value
Written
machine
(Rs.)
Dep.
(Rs.)
Down
(Rs.)
Value
(Rs.)
01-08-2000
50,000 Machine # 1
Machine # 1
10,000 Machine # 1
40,000
50,000  x  20%
10,000
40,000
=10,000
2001-2002
Machine # 1
Machine # 1
38,000 Machine # 1
112,000
40,000x20%
18,000
32,000
= 8,000
01-04-2002
100,000 Machine # 2
Machine # 2
Machine # 2
100,000x20%
20,000
80,000
=20,000
2002-2003
Machine # 1
Machine # 1
60,400 Machine # 1
89,600
32,000x20%
24,400
25,600
= 6,400
Machine # 2
Machine # 2
Machine # 2
80,000x20%
36,000
64,000
=16,000
2003-2004
Machine # 1
Machine # 1
103,200 Machine # 1
171,200
0
24,400
(25,600)
Machine sold
(sold)
(sold)
Machine # 2
Machine # 2
Machine # 2
64,000x20%
48,800
51,200
= 12,800
01-03-2004
150,000 Machine # 3
Machine # 3
Machine # 3
150,000x20%
30,000
120,000
= 30,000
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PRESENTATION IN THE BALANCE SHEET
Year
Cost of Machinery
Accumulated
Written Down
Depreciation
Value
2000-2001
50,000
10,000
40,000
2001-2002
150,000
38,000
112,000
2002-2003
150,000
60,400
89,600
Written Down Value of the year 2003-2004
Opening Written Down Value:
Rs. 89,600
Add: Cost of machine purchased:
Rs. 150,000
Less: Depreciation of Machine # 1 in 2003-2004:
0
Less: Depreciation of other assets:
(42,800)
Less: Written Down Value of machine disposed:
(25,600)
Closing Written Down Value:
Rs. 171,200
REVALUATION OF FIXED ASSETS
Fixed assets are purchased to be used for longer period. In the subsequent years, the value of asset could be
higher or lower than its present book value due to inflationary condition of the economy. Assets are valued
at Historical Cost in the books of accounts. Historical Cost is the original cost of the asset at which it was
purchased plus additional costs incurred on the asset to bring it in working condition. Sometimes, the
management of the business, if it thinks fit, revalues the asset to present it on current market value. Once the
asset is revalued to its market value, then its value has to be constantly monitored to reflect the changes in
the market value.
If an asset is revalued at higher cost than its original cost, the excess amount will be treated as profit on
revaluation of fixed assets and it is credited to Revaluation Reserve Account.
On the other hand, if an asset is revalued at lower cost than its original cost, the balance amount will be
treated as loss on revaluation of fixed assets and it is shown in the profit & loss account of that year in which
asset was revalued.
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Lesson-21
REVALUATION OF FIXED ASSETS
Fixed assets are purchased to be used for longer period. In the subsequent years, the value of asset could be
higher or lower than its present book value due to inflationary condition of the economy. Assets are valued
at Historical Cost in the books of accounts. Historical Cost is the original cost of the asset at which it was
purchased plus additional costs incurred on the asset to bring it in working condition. Sometimes, the
management of the business, if it thinks fit, revalues the asset to present it at current market value. Once the
asset is revalued to its market value, then its value has to be constantly monitored to reflect the changes in
the market value.
If an asset is revalued at higher cost than its original cost, the excess amount will be treated as profit on
revaluation of fixed assets and it is credited to Revaluation Reserve Account.
On the other hand, if an asset is revalued at lower cost than its original value, the balance amount will be
treated as loss on revaluation of fixed assets and it is shown in the profit & loss account of that year in which
asset was revalued.
FAIR VALUE
It is the value, which an asset would bring to the management, when sold to a knowledgeable party in a fair
deal.
RULES FOR REVALUATION
·  Revaluation has to be carried out at regular intervals.
·  The change in the value should be permanent.
·  Whole class of asset has to be revalued.
ILLUSTRATION
An asset is purchased at the cost of Rs. 300,000. It was decided by the management that depreciation would
be charged @ 20 % on the basis of straight line method. At the end of third year, following information is
given:
·
Accumulated Depreciation
Rs. 180,000
·
Written Down Value
Rs. 120,000
·
The management has decided to revalue it to the current market value. The current market value of
the asset is 180,000. You are required to make the necessary adjustments.
SOLUTION
There are two options for making adjustments for the above mentioned changes:
·  Charge the accumulated depreciation to the cost of asset and increase the value of asset with the
difference of current market value and WDV.
·  Calculate the proportion of increase and increase the cost of asset and accumulated depreciation
with that proportion.
Option # 1
The accumulated depreciation is charged off against the cost of asset with the help of following entry:
Debit:
Accumulated Depreciation
180,000
Credit:
Cost of asset A/c
180,000
Cost of asset is increased to current market value, i-e., Rs.180000. The difference between current market
value and WDV is Rs. 60,000(180,000 ­ 120,000). The credit is given to Revaluation Reserve Account.
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Debit:
Cost of asset A/c
60,000
Credit:
Revaluation Reserve A/c
60,000
Option # 2
Both Cost and Accumulated Depreciation are increased in a proportionate manner so that the resulting
Book Value is equal to the revalued amount.
Desired increase in WDV
180,000 ­ 120,000 = 60,000
Rs.60000 is 50% of 120,000. Therefore desired increase in Cost and Accumulated Depreciation is 50%.
Cost is increased by 50% by following entry:
Debit:
Cost of asset A/c
150,000
Credit:
Revaluation Reserve A/c
150,000
Accumulated depreciation is increased by 50% with the help of the following entry:
Debit:
Revaluation Reserve A/c
90,000
Credit:
Accumulated Depreciation A/c 90,000
CAPITAL AND REVENUE EXPENSES
Capital Expenses are those expenses for which benefit is enjoyed for more than one accounting period.
For example, the business has bought a car. Now, car will be used for many years. So, it is a capital expense.
Capital Expenditure generally adds Fixed Asset Units or increases Economic Life, Capacity or Efficiency of
existing fixed assets. The term used for Capital expenditures is `Capitalized'.
Revenue Expenses are those expenses for which, the benefit is enjoyed within one accounting period. For
example, the business has purchased stationery for office use. Now, the stationery is used within one year in
the office. So, this is a revenue expense. The term u1sed for Revenue Expenditures is `Charged Off'.
Revenue Expenses are those expenses that are:
·  Incurred in day to day running of the business.
·  Incurred to maintain fixed assets in their original / useable condition.
All Capital Expenses are grouped in balance sheet & all Revenue expenses are grouped in Profit & Loss
account.
TYPES OF CAPITAL EXPENDITURE
Capital Expenditure is of two types:
·  When an asset is acquired, and
·  When an improvement is made in an existing asset.
All the expenditure incurred up to the point of bringing the asset to its intended use is capitalized as the
initial cost of asset.
An expenditure that improves the performance of an asset from its originally assessed performance is capital
expenditure. However, the expenditure incurred on the maintenance of an asset is treated as Revenue
Expense.
DISTINCTION BETWEEN CAPITAL EXPENDITURE & REVENUE EXPENDITURE
Capital Expenditure
Revenue Expenditure
Its effect is long term, i-e. It is not exhausted Its effect is short term, i-e. The benefit is received
within the current accounting period. Its benefit is within one accounting period.
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received for a number of years in future.
Expenditure is said to be capital expenditure when
Neither an asset is acquired nor is the performance
an asset is acquired or performance of an existing
of any asset increased.
asset is increased.
It does not occur again and again. It is
It is recurring and regular and it occurs repeatedly.
non- recurring and irregular.
This expenditure improves the financial position of
This expenditure helps to maintain the business.
the business.
A portion of this expenditure (Depreciation on
The whole amount of this expenditure is shown in
asset) is shown in the profit & loss account and the
the profit & loss account or income statement.
balance is shown in the balance sheet on asset side.
It appears in the balance sheet until its benefit is
It does not appear in the balance sheet.
fully exhausted.
It does not reduce the profit of the concern.
It reduces the profit of the concern.
DEFERRED EXPENDITURE
The revenue expenditure that provides benefit for more than one year is called deferred expenditure. It is
initially shown in balance sheet. Subsequently, it is charged to profit and loss account over the period in
which benefit is derived from it.
THE GENERAL RULE
The general rule for distinguishing between capital and revenue expenditure:
·  The expense whose benefit lasts for a period longer than an accounting period is called capital
expenditure, and
·  The expense whose benefit is obtained within an accounting period is termed as a revenue expense.
EXCEPTIONS
·
Depending upon the size of expenditure and policy of the organization expenditure can be
"Charged to Profit and Loss" instead of "Capitalizing".
·
Legal Charges ­ are as per rule charged to P & L but when these are incurred to acquire an asset
these should be capitalized with the asset.
·
Repairs ­ are also charged to P&L but when it is of such nature that it enhances the performance
of an asset from its original performance than it should be capitalized.
·
Wages ­ are normally revenue expense but when these are paid to men employed to create an asset
these should be capitalized as the cost of asset.
·
Freight and Carriage ­ normally a revenue expense, but when paid to bring an asset to its intended
use then it is treated as capital.
·
Interest on Loan ­ is normally revenue expenditure but when the loan is taken to purchase an asset
its interest is treated as Capital and is added to cost of the asset.
CAPITAL AND REVENUE RECEIPTS
CAPITAL RECEIPTS
Receipts which are non-recurring and whose benefit is enjoyed over a long period are called `Capital
Receipts'. For instance, Capital invested, Loan from bank, Sale proceed of fixed assets etc. Capital receipts
are shown on the liability side of the balance sheet.
REVENUE RECEIPTS
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Receipts which are recurring by nature and which are available for meeting all day to day expenses of a
business concern are known as `Revenue Receipts'. For example, sale proceeds of goods, interest received,
rent received etc.
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Lesson-22
AREAS COVERED IN THIS LECTURE
In this lecture we will learn about:
·  Banking transactions, and
·  Bank reconciliation statements.
BANK BOOK AND BANK STATEMENT
Bank statement is the detail of transactions in one's account provided by the bank. We should understand
one thing that our money lying in the bank is an asset for us. But for bank, it is a liability as the bank has a
responsibility to return that money to us.
Therefore, when we see a bank statement, it looks like a mirror image of our bank book.
That is, when we pay money into bank account, our asset increases. So we Debit our account whereas for
bank, its liability to pay us increases. So our account is credited in its books.
Standard format of Bank book is given hereunder:
XYZ Traders
Bank Book (Bank Account Number)
Account Code --
Date
Vr.
Chq.
Narration /
Ledger  Receipt  Payment Balance
20--
#
No.
Particulars
Code  Amount  Amount Dr/(Cr)
Jul 01
Opening Balance
50,000
50,000
Jul 02
12345
Paid to Mr. Umer
10,000
40,000
Jul 03
Cash Deposit in Bank
5,000
45,000
Jul 03
12346
Paid to Mr. Ali
12,000
33,000
Standard format of Bank Statement is given hereunder:
ABC Bank
Bank Statement Account No. xxxxx
Date
Narration /
Withdrawals
Deposits
Balance
20--
Particulars
Amount
Amount
Dr/(Cr)
Jul 01
Opening Balance as on Jul 01
50,000
(50,000)
Jul 02
Chq # 12345
10,000
(40,000)
Jul 03
Cash paid in
5,000
(45,000)
Jul 03
Chq # 12346
12,000
(33,000)
At times, banks show the amount in balance column against our General Rule (a credit figure is shown in
brackets), just to facilitate the customers. The rule, then becomes, a balance favorable to the customer is
shown without brackets.
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Our bank statement of previous example will look like as follows.
ABC Bank
Bank Statement Account No. xxxxx
Date
Narration /
Withdrawals Deposits
Balance
20--
Particulars
Amount
Amount
Jul 01
Opening Balance as on Jul 01
50,000
50,000
Jul 02
Chq # 12345
10,000
40,000
Jul 03
Cash paid in
5,000
45,000
Jul 03
Chq # 12346
12,000
33,000
At times, banks record transactions in our account without our knowledge. e.g. bank charges, profit, tax.
Sometimes, someone deposits money directly in our account that escapes recording in our books.
This problem is solved by tracing figures from bank book to bank statement on periodic basis in order to
update our record.
EXAMPLE # 1
The Bank book of Ali Traders shows the following picture for the month of July, 2002:
Ali Traders
Bank Book (Bank Account Number)
Account Code --
Date
Vr.
Chq.
Narration /
Ledger
Receipt  Payment Balance
20--
#
No.
Particulars
Code
Amount  Amount Dr/(Cr)
Jul 01
Opening Balance
150,000
150,000
Jul 05
0001
Paid to XYZ
20,000
130,000
Jul 10
Cash Deposit in Bank
5,000
135,000
Jul 15
0002
Paid to ABC
25,000
110,000
Jul 20
0003
Paid to creditors
50,000
60,000
Balance as per bank book on Jul 31, is Rs. 60,000
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The Bank Statement of Ali Traders shows the following record for the month of July, 2002:
ABC Bank
Bank Statement Account No. xxxxx
Date
Narration /
Withdrawals
Deposits
Balance
20--
Particulars
Amount
Amount
Jul 01
Opening Balance
150,000
150,000
Jul 05
Chq # 0001
20,000
130,000
Jul 10
Cash Deposit in Bank
5,000
135,000
Jul 15
Chq # 0001
25,000
110,000
Jul 20
Chq # 0001
50,000
60,000
Jul 31
Bank charges
500
59,500
Jul 31
Profit
700
60,200
Balance as per bank statement on Jul 31, is Rs. 60,200
When we trace the figures, we come to know that there are two transactions that have not been recorded in
our books. i-e. Transactions of `Bank charges' and `Profit'.
After recording these two transactions, the bank book of Ali Traders looks like as follows:
Ali Traders
Bank Book (Bank Account Number)
Account Code --
Date
Vr. Chq.
Narration /
Ledger Receipt
Payment Balance
20--
#
No.
Particulars
Code  Amount
Amount Dr/(Cr)
Jul 01
Opening Balance
150,000
150,000
Jul 05
0001
Paid to XYZ
20,000
130,000
Jul 10
Cash Deposit in Bank
5,000
135,000
Jul 15
0002
Paid to ABC
25,000
110,000
Jul 20
0003
Paid to creditors
50,000
60,000
Jul 31
Bank charges
500
59,500
Jul 31
Profit
700
60,200
After recording the missing transactions, Balance as per bank book on Jul 31, is Rs. 60,200, which is the
same as bank statement balance.
In the above example, dates of payments in bank book and bank statement are taken to be the same. In
actual life, this is not always the case. We write out cheque to our creditor today, he will deposit in his bank
tomorrow. The cheque will be presented in our bank, by the bank of the creditor, on the day after
tomorrow. We have recorded the transaction today but the payment in our statement will appear at least 2
days later. This period can even be greater.
Similarly, we receive a cheque from our debtor today and record it in our books. The cheque will be
deposited in bank tomorrow and it will take a few days to clear. Again, there will be a difference in date of
our receipt and that of our bank.
BANK RECONCILIATION STATEMENT
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In the above example, it is assumed that a payment of Rs. 10,000 is made on 31 Jul, and it appears in the
bank on Aug, 02. When figures will be traced from bank book to bank statement, this amount will remain
un-ticked in the bank book in the month of July. No recording will be made in the books as they are already
correct.
In circumstances like these, a statement is made called Bank Reconciliation Statement. This reconciles
those differences in Bank Book and Bank Statement that cannot be adjusted by an accounting entry at that
date on which balances are being reconciled.
The event discussed above, where a cheque is issued but it has not been presented in the account is called
Un-presented Cheques. When this cheque is recorded, the bank book is credited with Rs. 10,000.
Therefore, the balance as per Bank Book is Rs. 50,200 (60,200 - 10,000), whereas, the bank is still showing a
balance of Rs. 60,200.
So, if we want to reconcile these balances, we will remove the effect of this entry (not in actual books but in
the statement only). So the Statement Would:
·
Balance As Per Bank Book
Dr.
50,200
·
Un-presented Cheques
Dr.
10,000
·
Balance as Per Bank Statement
Cr.
60,200
Note following things in this statement.
·  We have started with the balance of Bank Book
·  To reverse the effect of Cr. entry in bank book, we have written Dr. with the figure.
·  Since both figures (50,200 and 10,000) are Dr. therefore, they are added.
·  We also know that balances in bank book and bank statement are exactly opposite to each
other, therefore, Cr. has been written with the resulting figure (60,200)
UN-CREDITED CHEQUES
The other event discussed was of a receipt of a cheque that has not been cleared in the bank account as yet.
To record a receipt, bank book should have been debited. Therefore, to reverse the effect Credit will be
written with the figure in the statement.
Assume, the above Rs. 10,000 was a receipt rather than a payment. Then, the balance in the bank book
would be Rs. 70,200 (60,200 + 10,000).
The bank reconciliation will be as follows:
·
Balance As Per Bank Book
Dr.
70,200
·
Un-credited Cheques
Cr.
(10,000)
·
Balance As Per Bank Statement Cr.
60,200
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EXAMPLE # 2
The Bank book of Usman Traders gives the following record for the month of December, 2002:
Usman Traders
Bank Book (Bank Account Number)
Account Code --
Date
Vr.
Chq.
Narration /
Ledger  Receipt  Payment Balance
20--
#
No.
Particulars
Code  Amount  Amount Dr/(Cr)
Dec 01
Opening Balance
150,000
150,000
Dec 07
Received form Anwer
10,000
160,000
Dec 08
57000
Paid to Tariq
19,500
140,500
Dec 15
57001
Paid to Shabbir
4,000
136,500
Dec 22
Received from Javed
9,700
146,200
Dec 28
57002
Paid to Salim
9,100
137,100
Dec 31
Received from Javed
20,000
157,100
Dec 31
Received form Rashid
17,800
174,900
Dec 31
The Bank Statement of Usman Traders shows the following picture:
ABC Bank
Bank Statement Account No. xxxxx
Date
Narration /
Withdrawals Deposits
Balance
20--
Particulars
Amount
Amount
Dec 1
Balance B/f
150,000
Dec 7
deposits
10,000
160,000
Dec 11
57000
19,500
140,500
Dec 20
57001
4,000
136,500
Dec 22
deposits
9,700
146,200
Dec 31
Charges
2,200
144,000
You are required to reconcile Bank book with Bank Statement and prepare Bank Reconciliation Statement.
SOLUTION
While tracing figures from bank book to bank reconciliation statement, it is noticed that bank charges
deducted by bank are not booked in bank book. So, bank charges will be booked through the following
entry:
Debit:
Bank charges
2,200
Credit:
Bank A/c
2,200
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The corrected bank book is hereunder:
Usman Traders
Bank Book (Bank Account Number)
Account Code --
Date
Vr. Chq.
Narration /
Ledger Receipt
Payment Balance
20--
#  No.
Particulars
Code  Amount
Amount Dr/(Cr)
Dec 01
Opening Balance
150,000
150,000
Dec 07
Received form Anwer
10,000
160,000
Dec 08
57000
Paid to Tariq
19,500
140,500
Dec 15
57001
Paid to Shabbir
4,000
136,500
Dec 22
Received from Javed
9,700
146,200
Dec 28
57002
Paid to Salim
9,100
137,100
Dec 31
Received from Javed
20,000
157,100
Dec 31
Received form Rashid
17,800
174,900
Dec 31
Bank charges
2,200
172,700
It was also noticed that a cheques of Rs. 9,100 given to Salim on December 28 was not paid by bank as yet.
So, it is an un-presented cheque. Cheques received from Javed and Rashid worth of Rs. 20,000 and 17,800
respectively are not credited by bank till December 31,2002. These are un-credited cheques of Usman
Traders.
Bank Reconciliation Statement of Usman Traders shows the following picture:
Bank Reconciliation Statement
Usman Traders
Bank Reconciliation Statement as at Dec. 31, 2002.
(Rs.)
Balance as per bank book
Dr.
172,700
Un-presented cheques
Dr.
9,100
Un-credit cheques
(20,000)
(17,800) Cr.
(37,800)
Balance as per bank statement
Cr.
144,000
159
Table of Contents:
  1. Introduction to Financial Accounting
  2. Basic Concepts of Business: capital, profit, budget
  3. Cash Accounting and Accrual Accounting
  4. Business entity, Single and double entry book-keeping, Debit and Credit
  5. Rules of Debit and Credit for Assets, Liabilities, Income and Expenses
  6. flow of transactions, books of accounts, General Ledger balance
  7. Cash book and bank book, Accounting Period, Trial Balance and its limitations
  8. Profit & Loss account from trial balance, Receipt & Payment, Income & Expenditure and Profit & Loss account
  9. Assets and Liabilities, Balance Sheet from trial balance
  10. Sample Transactions of a Company
  11. Sample Accounts of a Company
  12. THE ACCOUNTING EQUATION
  13. types of vouchers, Carrying forward the balance of an account
  14. ILLUSTRATIONS: Ccarrying Forward of Balances
  15. Opening Stock, Closing Stock
  16. COST OF GOODS SOLD STATEMENT
  17. DEPRECIATION
  18. GROUPINGS OF FIXED ASSETS
  19. CAPITAL WORK IN PROGRESS 1
  20. CAPITAL WORK IN PROGRESS 2
  21. REVALUATION OF FIXED ASSETS
  22. Banking transactions, Bank reconciliation statements
  23. RECAP
  24. Accounting Examples with Solutions
  25. RECORDING OF PROVISION FOR BAD DEBTS
  26. SUBSIDIARY BOOKS
  27. A PERSON IS BOTH DEBTOR AND CREDITOR
  28. RECTIFICATION OF ERROR
  29. STANDARD FORMAT OF PROFIT & LOSS ACCOUNT
  30. STANDARD FORMAT OF BALANCE SHEET
  31. DIFFERENT BUSINESS ENTITIES: Commercial, Non-commercial organizations
  32. SOLE PROPRIETORSHIP
  33. Financial Statements Of Manufacturing Concern
  34. Financial Statements of Partnership firms
  35. INTEREST ON CAPITAL AND DRAWINGS
  36. DISADVANTAGES OF A PARTNERSHIP FIRM
  37. SHARE CAPITAL
  38. STATEMENT OF CHANGES IN EQUITY
  39. Financial Statements of Limited Companies
  40. Financial Statements of Limited Companies
  41. CASH FLOW STATEMENT 1
  42. CASH FLOW STATEMENT 2
  43. FINANCIAL STATEMENTS OF LISTED, QUOTED COMPANIES
  44. FINANCIAL STATEMENTS OF LISTED COMPANIES
  45. FINANCIAL STATEMENTS OF LISTED COMPANIES