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Financial Accounting

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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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Financial Accounting (Mgt-101)
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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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Financial Accounting (Mgt-101)
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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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Financial Accounting (Mgt-101)
VU
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
114
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Financial Accounting (Mgt-101)
VU
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