Mechanics of Accounting

Classification of Accounts – Is of 2 types namely English & American System

a) English System –
Accounts

Personal Impersonal
Accounts Accounts

Natural Artificial
Representative Real Nominal
(legal)

• Personal Accounts – relate to persons, debtors or creditors. Examples would be account

of Ram & Co a credit customer or account of Jhaveri & Co a supplier of goods. The capital
account is the account of the proprietor & therefore it is also personal but adjustment on
account of profits & losses are made in it. This account is further classified into:
• Natural personal accounts relates to transactions of human beings like Ram, Rita etc
• Artificial (legal) personal account- examples Government (central & state), Companies
(private or limited), clubs, cooperative societies, banks, partnership firms, associations,
Institutions, undertakings, Municipality etc
• Representative personal accounts – these are not in the name of any person or
organization but are represented as personal accounts examples outstanding liabilities, prepaid
account, Income receivable, Income received in advance, Capital account, drawings account
• Impersonal Accounts – Accounts which are not personal such as machinery account,
cash account, rent account etc. These can be further sub divided as follows
• Real Accounts – Accounts which relates to tangible & intangible assets of a firm
example accounts relating to Land, building, machinery, investment, fixed deposits, cash in hand
& at bank are tangible, goodwill is intangible
• Nominal accounts – Accounts which relate to expenses, losses, gains, revenue etc like
salary account, interest paid account, commission received account. The net result of all nominal
accounts is reflected as profit or loss which is transferred to Capital account. Nominal accounts
are temporary

b) American System – identifies 5 types of accounts

 • Capital Account – An amount invested by proprietor for commencement of business is
called capital.
• Asset Accounts – Account maintained for properties like Land, building, Machinery
(popularly called as fixed assets), stock in trade, sundry debtors, bills receivable, cash at bank
(popularly called as current assets) etc
• Liability Accounts – These are accounts for loans borrowed, bank overdraft, creditors,
bills payable, incomes received in advance etc
• Incomes & gains – Income is the money or other assets received especially periodically
from ones business or investments or lands. Gain is an increment in wealth that results either
from operations or from holding assets or liabilities
• Expenses or losses – Expenditure refers to the amount spent on or cost of acquiring a
service or using up an asset. Loss refers to the act of losing. A businessman loses when he
allows commission or discount

Illustration 1- Classify the following accounts based on above

1. Capital a/c 2. Drawings a/c 3. Building purchased 4. Purchases a/c
5. Sales a/c 6. Carriage inward 7. Carriage outward 8. Cash received
9. Cash paid 10.Interest paid 11. Interest received 12.Commission paid
13. Commission recd 14. Discount allowed 15. Conveyance 16. Sales Promotion
17. Entertainment 18. Subscription paid 19. Subscription recd 20. Power & light
21. Telephone/ gram 22. Repairs 23. Insurance paid 24. Bad debts w/o
25. Bad debts recov 26. Discount received 27. Stationery 28. Furniture
29.Bank a/c 30. Salary & wages 31. Traveling charges 32. Partner current a/c
33. Partner loan a/c 34. Sales returns 35. Bank overdraft 36. Purchase returns
37. Outstanding Salary 38. Prepaid rent 39. Interest accrued 40. Int recd in advance

Solution 1-
According to traditional approach ( English system):
Personal Accounts- 1, 2, 29, 32, 33, 35, 37, 38, 39 & 40
Real Accounts- 3, 8, 9, 27, 28
Nominal Accounts- 4, 5, 6, 7, 10 to 26, 30,31,34,36
According to Modern approach (American system):
Assets Accounts- 3, 8, 9, 27, 28, 29, 38, 39
Liabilities Account- 33, 35, 37, 40
Capital Accounts- 1, 2, 32
Revenue Accounts- 5, 11, 13, 19, 25, 26, 34
Expenses Account- 4,6, 7, 10, 12, 14 to 18, 20 to 24, 30, 31, 36

Rules of Debit & Credit –

a) Under the English System (traditional approach) –
Types of Accounts Rules for Debit Rules for Credit
Personal Accounts Debit the receiver Credit the giver
Real Accounts Debit what comes in Credit what goes out
Nominal Accounts Debit all expenses & losses Credit all gains & profits
 b) Under the American System (Accounting equation approach) –
Types of Accounts Rules for Debit Rules for Credit
Assets Accounts Debit the increase Credit the decrease
Liabilities Accounts Debit the decrease Credit the increase
Capital Accounts Debit the decrease Credit the increase
Revenue Accounts Debit the decrease Credit the increase
Expenses Accounts Debit the increase Credit the decrease
Accounting Equation –
ASSETS = CAPITAL + LIABILITIES
CAPITAL = ASSETS – LIABILITIES
LIABILITIES = ASSETS – CAPITAL
Steps involved in developing an Accounting Equation-
• Ascertain the variables ( Assets, Liabilities or Capital) of an equation affected by a
transaction
• Find out the effect ( in terms of increase or decrease) of a transaction on the variables of
an equation
• Show the effect on the appropriate side of an equation & ensure that the total of right
hand side is equal to the total of left hand side
Example 1 - Bhaskar introduces Rs.100000 as capital & also borrows Rs.30000 as loan
A = L + C 130000 = 30000 + 100000
C = A – L 100000 = 130000 – 30000
L=A–C 30000 = 130000 – 100000
Example 2 -
Transactions Total Assets = Liabilities + Capital
Started business with cash Rs.10000 +10000 +10000
Borrowed Rs.5000 + 5000 +5000
Withdrew cash from business Rs.2000 - 2000 - 2000
Loan repaid to extent of Rs.1000 - 1000 - 1000
Balance 12000 4000 8000
Example 3 –
Transactions Total Assets = Liabilities + Capital
Started business with cash Rs.100000 100000 100000
Bought goods on credit from M Rs.80000 80000 80000
Bought furniture for cash Rs.10000 +10000
- 10000
Sold goods for cash Rs.40000 +40000
- 40000
Paid M on account Rs.40000 - 40000 -40000
Paid shop rent Rs.10000 - 10000 - 10000
Paid salaries Rs.5000 - 5000 - 5000
Sold goods on credit to V for Rs.5000 - 5000
+ 5000
New Equation 125000 40000 85000
Illustration 2- Analyze transactions of Sam & Co for month of March 2009 on basis of double
entry system by adopting following 2 approaches- Accounting equation & traditional approach
transactions were as follows:-
Sam introduced cash Rs.40000; Cash deposited in the HDFC Bank Rs.20000 ; Cash loan of
Rs.5000 taken from Rajesh ; Salaries paid for March’09 Rs.3000 & Rs.1000 is still payable for
the month ; Furniture purchased Rs.5000

Solution 2:
Analysis of transactions-Accounting Equation approach
Transaction Analysis Account affected Rule Entry
and nature of a/c
Cash introduced by Cash received Cash – Asset Debit increase in Debit Cash
proprietor Rs.40000 Investment by Capital- Capital asset Credit Capital
owner Credit increase in
capital
Cash deposited in Bank balance Bank – Asset Debit increase in Debit Bank
bank Rs.20000 increases & cash Cash- Asset asset Credit Cash
balance decreases Credit decrease in
asset
Loan from Rajesh Cash balance Cash – Asset Debit increase in Debit Cash
Rs.5000 increases, creates Rajesh loan- asset Credit Rajesh loan
an obligation to liability Credit increase in
repay Rajesh liabilities
Salaries pd Rs.3000 Salaries Rs.4000 Salary – TemporaryDebit increase in ex Debit salary 4000
and outstanding paid Rs.3000 and capital expenses expenses Credit cash 3000
Rs.1000 obligation to pay Cash- Asset Credit increase in credit outstanding
Rs.1000 Outstanding salary-liabilities salaries 1000
liability Credit decrease in
asset
Furniture purchased Increases furniture Furniture – Asset Debit increase in Debit Furniture
Rs.5000 cash decreases Cash- Asset asset Credit Cash
Credit decrease in
asset

Analysis of transactions-Accounting Equation approach

Transaction Analysis Account affected Rule Entry
and nature of a/c
Cash introduced by Cash is received Cash – Real Debit what comes Debit Cash
proprietor Rs.40000 Owner has given Capital- Personal in Credit Capital
cash Credit the giver
Cash deposited in Bank receive cash Bank – Personal Debit the receiver Debit Bank
bank Rs.20000 Cash goes out Cash- Real Credit what goes Credit Cash
out
Loan from Rajesh Business receives sCash – Real Debit what comes Debit Cash
Rs.5000 Cash Rajesh loan- in Credit Rajesh loan
Rajesh pays cash Personal Credit the giver
Salaries pd Rs.3000 Cost of services Salary – Nominal Debit expenses Debit salary 4000
and still payable used Rs.4000 Cash- Real Credit what goes Credit cash 3000
Rs.1000 Cash goes out Outstanding salary-out credit outstanding
Rs.3000 still Personal Credit the giver salaries 1000
payable Rs.1000
Furniture purchased Furniture purchasedFurniture – Real Debit what comes Debit Furniture
Rs.5000 Cash is paid Cash- Real in Credit Cash
Credit what goes
out

Journal & Subsidiary Books-

Journal-
• Word journal is derived from French word ‘jour’ meaning a day. Hence Journal means a
daily record of transactions
• Is a book in which transactions are recorded in the order in which they occur
• It is called book of prime entry( also called book of original entry)
• Process of recording a transaction in journal is called Journalizing & an entry made in
journal is called Journal entry.
• Format of Journal is as follows:
Journal
Date Particulars LF Debit Amount Credit Amount

• Steps in Journalizing:
• Ascertain what accounts are involved in a transaction
• Ascertain what is nature of the accounts involved
• Ascertain which rule of debit & credit is applicable for each of the accounts involved
• Ascertain which account is to be debited & which is to be credited
• Record the date of transaction in date column
• Write name of account to be debited in Particulars column along with abbreviation ‘Dr’
on the same line & amount to be debited in Debit amount column
• Write the name of account to be credited on next line preceded by word ‘To’ in the
particulars column & amount to be credited in credit amount column
• Write narration (brief description of transaction) within brackets on next line in
Particulars column
• Draw a line across the entire particulars column to separate one journal entry from other

Illustration 1- Journalise following transactions in books of Srinath:

Date Particulars
2009
April 1 Srinath commenced business with Rs.20000
2 Opened current account with Karnataka Bank Ltd Rs.12000
4 Purchased goods from Kapil Dev Rs.4000
5 Sold goods to Srikanth Rs.3000
6 Bought 2 tables Rs.500
7 Returned goods to Kapil Dev Rs.500
11 Purchased stationery(paper ink etc) Rs.50
12 Paid Kapil Dev Rs.3500 by cheque
14 Srikanth returned goods worth Rs.200
15 Srikanth paid Srinath Rs.2800
18 Cash sales Rs.150
19 Bought of Sanjay Rs.1000
20 Sales to BCCI Enterprises Rs.600
21 Cash purchases Rs.300
23 Goods returned to Sanjay Rs.200
25 Paid Sanjay by cheque Rs.800
26 Received cheque from BCCI Enterprises Rs.600
27 Drawings Rs.250
28 Sold goods to Sachin & cash received Rs.300
29 Paid rent Rs.150 by cheque
30 Paid salary Rs.400
Srinath’s Journal
Date Particulars LF Debit Amount Credit Amount
2009 C 20
Apr 1 ash Account Dr 000
To Capital Account 20000
(Being the cash invested in business)
Apr 2 Bank Account Dr 12000
To Cash Account 12000
(Being the cash deposited into Bank)
Apr 4 Purchases Account Dr 4000
To Kapil Dev’s Account 4000
(Being the credit purchase of goods from
Kapil Dev)
Apr 5 Srikanth’s Account Dr 3000
To Sales Account 3000
(Being credit sale of goods to Srikanth)
Apr 6 Office Furniture Account Dr 500
To Cash Account 500
(Being the purchase of office furniture
for cash )
Apr 7 Kapil Dev’s Account Dr 500
To Return Outwards Account 500
(For goods being returned to Kapil Dev)
Apr 11 Stationery Account Dr 50
To Cash Account 50
(Being purchase of paper, ink etc for
cash )
Apr 12 Kapil Dev’s Account Dr 3500
To Bank Account 3500
(Being the amount due to Kapil Dev paid
by cheque)
Apr 14 Return Inwards Account Dr 200
To Srikanth’s Account 200
(Being the goods returned by Srikanth)
Apr 15 Cash Account Dr 2800
To Srikanth’s Account 2800
(Being the amount due from Srikanth
received)
Apr 18 Cash Account Dr 150
To Sales Account 150
(Being the cash sale of goods)
Apr 19 Purchases Account Dr 1000
To Sanjay’s Account 1000
(Being the credit purchase of goods from
Sanjay)
Apr 20 BCCI Enterprise’s Account Dr 600
To Sales Account 600
(Being the credit sale of goods to BCCI
Enterprises)
Apr 21 Purchases Account Dr 300
To Cash Account 300
(Being the cash purchase of goods)
Apr 23 Sanjay’s Account Dr 200
To Return Outwards Account 200
(Being part of the goods purchased from
Sanjay returned to him)
Apr 25 Sanjay’s Account Dr 800
To Bank Account 800
(Being the amount due to Sanjay paid by
cheque)
Apr 26 Cash Account Dr 600
To BCCI Enterprise’s Account 600
(Being cheque received from BCCI
Enterprises for the amount due)
Apr 27 Drawings Account Dr 250
To Cash Account 250
(Being the withdrawal of cash for personal
use)
Apr 28 Cash Account Dr 300
To Sales Account 300
(Being cash sale of goods)
Apr 29 Rent Account Dr 150
To Bank Account 150
(Being payment of rent by cheque)
Apr 30 Salaries Account Dr 400
To Cash Account 400
(Being the payment of salaries)
Illustration 2- Journalize the following transactions in books of Border:
Date Particulars
2009
May 1 Started business with cash Rs.90000
2 Paid into bank Rs.25000
3 Goods purchased for cash Rs.30000
4 Bought furniture & issued a cheque Rs.10000
6 Sold goods for cash Rs.10000
7 Sold goods to Moody Rs.8000
10 Purchased goods from Taylor Rs.15000
11 Returned goods to Taylor Rs.2000
14 Goods returned by Moody Rs.800
16 Cash received from Moody Rs.7000 & discount allowed to him Rs.200
20 Withdrew cash for personal use from the bank Rs.1500
22 Withdrew cash from bank for office use Rs.5000
23 Paid Telephone rent Rs.800
26 Cash due to Taylor paid
31 Paid for stationery Rs.200, Rent Rs.1500 & salaries Rs.2000
31 Cash sale of goods to Boon Rs.2000

Border’s Journal
Date Particulars LF Debit Amount Credit Amount
2009 C 90
May 1 ash Account Dr 000
To Capital Account 90000
(Being business commenced with cash)
May 2 Bank Account Dr 25000
To Cash Account 25000
(Being cash paid into Bank)
May 3 Purchases Account Dr 30000
To Cash Account 30000
(Being cash purchase of goods)
May 4 Furniture Account Dr 10000
To Bank Account 10000
(Being goods purchased and paid by
cheque)
May 6 Cash Account Dr 10000
To Sales Account 10000
(Being cash sale of goods)
May 7 Moody’s Account Dr 8000
To Sales Account 8000
(Being sale of goods to Moody on credit)
May 10 Purchases Account Dr 15000
To Taylor’s Account 15000
(Being credit purchase of goods from
Taylor)
May 11 Taylor’s Account Dr 2000
To Return outward Account 2000
(Goods purchased fro Taylor partially
returned to him)
May 14 Return Inwards Account Dr 800
To Moody’s Account 800
(Being the goods returned by Moody)
May 16 Cash Account Dr 7000
Discount Account Dr 200
To Moody’s Account 7200
(Being the amount due from Moody
received)
May 20 Drawings Account Dr 1500
To Bank Account 1500
(Cash withdrawn from bank for personal
use)
May 22 Cash Account Dr 5000
To Bank Account 5000
(Being cash withdrawn from the bank for
office use)
May 23 Telephone Rent Account Dr 800
To Cash Account 800
(Being telephone rent paid)
May 26 Taylor’s Account Dr 13000
To Cash Account 13000
(Being the amount due to Taylor paid)
May 31 Stationery Account Dr 200
Rent Account Dr 1500
Salaries Account Dr 2000
To Cash Account 3700
(Being stationery charges, rent & salaries
paid)
May 31 Cash Account Dr 2000
To Sales Account 2000
(Being cash sale of goods to Boon)

Illustration 3- Journalize the following transactions in the books of Imran Khan:

2009
Jun 1 Imran started his business with the following assets & liabilities-
Cash in Hand Rs.1500; Goods in Hand Rs.2500; Furniture Rs.600; Buildings Rs.2000;
Due by Miandad Rs.600; Due to Inzamam Rs.800; Due to Moin Rs.1200
His transactions for the month are :
Jun 1 Purchased goods from Moin subject to a Trade discount of 5% Rs.1000
Jun 2 Sold goods to Qadir subject to a trade discount of 2% Rs.500
Jun 5 Received from Miandad Rs.580, discount allowed Rs.20
Jun 10 Received from Qadir in full settlement of his account Rs.450
Jun 15 Paid Inzamam in full settlement of his account Rs.775
Jun 20 Paid Moin Rs.1000,discount allowed Rs.50

Journal of Imran Khan

Date Particulars LF Debit Amount Credit Amount
2009 C 15
Jun 1 ash Account Dr 00
Stock Account Dr 2500
Furniture Account Dr 600
Building Account Dr 2000
Miandad’s Account Dr 600
To Inzamam’s Account 800
To Moin’s Account 1200
To Capital Account 5200
(Being the assets & liabilities introduced by
Imran into the business)
Jun 1 Purchases Account Dr 950
To Moin’s Account 950
(Being the purchase of goods worth
Rs.1000 at a trade discount of 5%)
Jun 2 Qadir’s Account Dr 490
To Sales Account 490
(Being the sale of goods to Qadir worth
Rs.500 subject to a trade discount of 2%)
Jun 5 Cash Account Dr 580
Discount Account Dr 20
To Miandad’s Account 600
(Being cash received from Miandad &
discount allowed to him)
Jun 10 Cash Account Dr 450
Discount Account Dr 40
To Qadir’s Account 490
(Being cash sale of goods)
Jun 15 Inzamam’s Dr 800
To Cash Account 775
To Discount Account 25
(Being the payment of Rs.775 to Inzamam
in full settlement of his a/c for Rs.800)
Jun 20 Moin’s Account Dr 1050
To Cash Account 1000
To Discount Account 50
(Being the amount due to Mohan paid & a
discount of Rs.50 allowed by him)
Illustration 4- Show how the following transactions would appear in the Journal of Ram &
Rahim:
1. Ram bought goods from Rahim Rs.100
2. Rahim bought goods from Ram for cash Rs.800
3. Rahim received from Ram Rs.500 & allowed him discount of Rs.25
4. Ram sold goods to Rahim Rs.700
5. Rahim supplied goods worth Rs.250 for Ram’s domestic use
6. Ram received Rs.500 from Rahim for repairing the private car of Rahim
Ram’s Journal
Sl No Particulars LF Debit Amount Credit Amount
1 Purchases Account Dr 100
To Rahim’s Account 100
(Being credit purchase of goods from
Rahim)
2 Cash Account Dr 800
To Sales Account 800
(Being cash sale of goods to Rahim)
3 Rahim’s Account Dr 525
To Cash Account 500
To Discount Account 25
(Being cash paid to Rahim & discount
allowed by him)
4 Rahim’s Account Dr 700
To Sales Account 700
(Being credit sale of goods to Rahim)
5 Drawings Account Dr 250
To Rahim’s Account 250
(Being credit purchases of goods from
Rahim for personal use)
6 Cash Account Dr 500
To Repairs Account 500
(Cash received for repairing Rahim’s car)
Rahim’s Journal
Sl No Particulars LF Debit Amount Credit Amount
1 Ram’s Account Dr 100
To Sales Account 100
(Being sales on credit to Ram)
2 Purchases Account Dr 800
To Cash Account 800
(Being cash purchase of goods)
3 Cash Account Dr 500
Discount Account Dr 25
To Ram’s Account 525
(Being cash received from Ram and
discount allowed to him)
4 Purchases Account Dr 700
To Ram’s Account 700
(Being credit purchase of goods from
Ram)
5 Ram’s Account Dr 250
To Sales Account 250
(Being credit sale of goods to Ram)
6 Drawings Account Dr 500
To Cash Account 500
(Being the repair charges of car used for
private purposes)

Subsidiary Books –
• When transactions are large it is impossible to record all transactions through one
Journal. Involving repetitive journalizing & posting labour thus Journal becomes bulky &
voluminous
• To overcome the shortcomings of use of journal as book of original entry, it is subdivided
into special Journals which are known as subsidiary or day books.
• Specific transactions are recorded in following Special Journals
Name of the Special Journal Specific transactions to be Recorded
I. Cash Journals
Simple Cash Book Cash Transactions
b) Cash Book with Bank Column Cash & Bank Transactions
c) Cash Book with Bank & DiscountCash, Bank & Discount transactions
Column Petty Cash Transactions
d) Petty Cash Book
II Goods Journals
a) Purchases Book Credit Purchases of goods
b) Sales Book Credit Sales of goods
c) Sales Returns / Return Inwards Book Goods returned by customers to whom supplied
on credit
d) Purchase Returns/ Return Outwards Book Goods returned to those suppliers from whom
purchased on credit
III Bills Journal
a) Bills receivable Book Bills receivable Drawn
b) Bills Payable Book Bills Payable Accepted
IV Journal Proper Transactions not covered elsewhere
• Advantages of special Journal or Subsidiary Books-
• Facilitates division of work- work can be divided among many persons
• Permits installation of Internal check system- work of one is automatically checked by
another person. Occurrence of errors/ frauds may be avoided.
• Permits the use of specialized skill- Persons possessing required skills are assigned work
thus prompt, economical & accurate accounting information may be obtained
• Time & labour saving in journalizing & posting- Time of accounting process is reduced
Cash Book –
• Is a special journal used for recording all cash receipts & cash payments
• Is a book of original entry or (prime entry) since transactions are recorded for first time
from the source documents
• Is a ledger in the sense that it is designed in the form of a cash account & records
receipts on Debit side & payments on Credit side. Thus it is both a journal & a Ledger.

Format of a Single Column Cash Book-

Dr Single – column Cash Book Cr
Date Particulars LF Amount Date Particulars LF Amount

Format of Cash Book with Discount Column-

Dr Cash Book with Discount Column Cr
Date Particulars LF Discount Cash Date Particulars LF Discount Cash

Format of Three Column Cash Book -

Dr Three Column Cash Book Cr
Date Particulars LF Dis Cash Bank Date Particulars LF Dis Cash Bank
count count

Rules for entering transactions in Cash Book:

a) When cheque is received & no further information is given at a later date about that
cheque it is to be assumed that cheque is deposited in Bank on same date entry is-
Bank A/c Dr
To Debtors A/c
b) If cheque is received on 2nd April & deposited in bank on 4th April entries are as follows-
2nd April Cash A/c Dr
To Debtors A/c
4th April Bank A/c Dr
To Cash A/c
c) It above cheque is dishonored by bank entry is-
Debtor’s A/c Dr
To Bank A/c
d) Cheque is received from Debtor is endorsed to Creditor:
When cheque is received- Cash A/c Dr
To Debtors A/c
When cheque is endorsed- Creditors A/c Dr
To Cash A/c
e) If endorsed cheque is dishonored there will be no entry in cash book
f) Discount is allowed when payment is received from debtors & is entered on debit side.
Discount is received when payment is made to creditors. If cheque net of discount amount is
 dishonored entry for dishonor is done in cash book by reversing original entry but
cancellation of discount is not made through cash book but through journal proper.

Format of various subsidiary books-

Sales Day Book of Anil Industries for April 2009
Date Name of Customer LF Invoice No Amount Remarks

Return Inward Book of Anil Industries for April 2009

Date Name of Customer LF Cr.Note No Amount Remarks

Purchase Day Book of Anil Industries for April 2009

Date Name of Supplier LF I/W Ref. No Amount Remarks

Return Outward Book of Anil Industries for April 2009

Date Name of Supplier LF Dr.Note No Amount Remarks

Bill Receivable Book of Anil Industries for April 2009

Date Received Bill date Term Maturity Amount Payable at Disposal
from Date

Bill Payable Book of Anil Industries for April 2009

Date Received Bill date Term Maturity Amount Payable at Disposal
from Date

Journal Proper – Role of Journal is thus restricted to following type of entries

• Opening & closing entries- When new business is started or when books are started for
new year opening balance of assets & liabilities are journalized, similarly at year end
balances of all nominal accounts are transferred to Profit & loss a/c
• Rectification entries- If error has been committed it is rectified
• Transfer entries- If some amount is to be transferred from one account to another
• Adjusting entries- At year end amount of expenses or incomes have to be adjusted for
amounts received in advance or for amounts not yet settled in cash. Few examples are:
• Outstanding expenses- expenses incurred but not yet paid
• Prepaid expenses- expenses paid in advance for some period in the future
• Interest on Capital- interest which proprietor thinks proper to allow on his investment
• Depreciation- fall in the value of the asset used on a/c of wear& tear
• Credit sale & purchase of assets
• Any other entry which cannot be entered in any other book
Illustration 1- Enter the following transactions in the proper subsidiary books of Mr.Anand
1/6/09 Purchased goods worth Rs.25000 from Akhil with trade discount @10%
3/6/09 Placed an order with M/s Patel & sons for goods worth Rs.16000
8/6/09 Cash sales Rs.10000
10/6/09 Sold goods of Rs.15000 to Nikhil. We paid carriage Rs.300 on Nikhil’s behalf
13/6/09 Goods returned by Nikhil Rs.500
14/6/09 Returned goods to Akhil of catalogue price of Rs.200
16/6/09 Purchased furniture on credit from Ravi for Rs.5000
20/6/09 Took for private use goods of Rs.100
25/6/09 Nikhil paid office rent of Anand Rs.500 & balance due from him in cash

In the Books of Anand

Sales Day Book for June 2009
Date Name of Customer LF Invoice No Amount
10/6/09 Nikhil 15000

Purchase Day Book for June 2009

Date Name of Supplier LF I/W Ref No Amount
1/6/09 Akhil 22500

Purchase Returns Book for June 2009

Date Name of Supplier LF Debit Note No Amount
14/6/09 Akhil 180

Sales Returns Book for June 2009

Date Name of Customer LF Credit Note No Amount
13/6/09 Nikhil 500

Dr Single – column Cash Book Cr

Date Particulars LF Amount Date Particulars LF Amount
8/6/09 To Sales 10000 10/6/09 By Nikhil 300
25/6/09 To Nikhil 14300 30/6/09 By Balance c/d 24000
24300 24300
1/7/09 To Balance b/d 24000

Anand’s Journal
Date Particulars LF Debit Amount Credit Amount
6/6/09 Furniture Account Dr 5000
To Ravi’s Account 5000
(Being furniture purchased on credit)
20/6/09 Drawings Account Dr 100
To Purchases Account 100
( goods withdrawn for personal uses)
 25/6/09 Office Rentnt Dr 500
To Nikhil’s Account 500
(Being office rent paid by Nikhil)
Illustration 2- Enter the following transactions in the proper subsidiary books of Madhav
1/6/09 Purchased goods worth Rs.10000 from Anand @10% trade discount
4/6/09 Placed an order with M/s Patel & sons for goods worth Rs.16000
8/6/09 Cash purchases Rs.5000 & cash sales Rs.10000
10/6/09 Purchased goods of Rs.15000 from Nikhil. He paid carriage Rs.300 on our behalf
13/6/09 Goods returned to Nikhil Rs.5000
15/6/09 Received ordered goods from M/s Patel & sons & paid Rs.300 as carriage
17/6/09 Sold goods of Rs.18000 to Akhil & paid Rs.200 as carriage on his behalf
20/6/09 Akhil paid life Insurance premium Rs.5000 of Madhav & Rs.5000 in cash
21/6/09 Goods distributed as free sample Rs.1000
22/6/09 Received goods returned by Akhil Rs.2000

In the Books of Madhav

Sales Day Book for June 2009
Date Name of Customer LF Invoice No Amount
17/6/09 Akhil 18000

Purchase Day Book for June 2009

Date Name of Supplier LF I/W Ref No Amount
1/6/09 Anand 9000
10/6/09 Nikhil 15000
15/6/09 M/s Patel & sons 16000
40000

Purchase Return Book for June 2009

Date Name of Supplier LF Debit Note No Amount
13/6/09 Nikhil 5000

Sales Returns Book for June 2009

Date Name of Customer LF Credit Note No Amount
22/6/09 Akhil 2000

Dr Single – column Cash Book Cr

Date Particulars LF Amount Date Particulars LF Amount
8/6/09 To Sales 10000 8/6/09 By Purchases 5000
20/6/09 To Akhil 5000 15/6/09 By carriage 300
17/6/09 By Akhil 200
30/6/09 By Balance c/d 9500
15000 15000
1/7/09 To Balance b/d 9500

Madhav’s Journal
Date Particulars LF Debit Amount Credit Amount
10/6/09 Carriage Account Dr 300
To Nikhil’s Account 300
(Carriage paid by Nikhil on our behalf)
20/6/09 Drawings Account Dr 5000
To Akhil’s Account 5000
( LIC of proprietor paid by Akhil)
21/6/09 Advertisement A/c Dr 1000
To Purchases(goods) Account 1000
(Being goods distributed as free samples)

Illustration 3- Prepare Purchase & sales books of Olympic sports house

1/6/09 Purchased from Delhi sports Mart -10 A grade bats @ Rs.100 each , 20 B grade bats @
Rs.50 each & 100 balls @ Rs.25 each
5/6/09 Purchased from Nadkarni stores 100 full size rackets @Rs.95 each & 100 small size
rackets @ Rs.50 each
7/6/09 Sold to Samanta club 5 A grade bats @ Rs.125 each , 5 B grade bats @ Rs.80 each & 25
balls @ Rs.40 each
10/6/09 Sold to sky sports club 10 B grade bats @ Rs.75 each , 20 balls @ Rs.35 each & 50 full
size rackets @Rs.120 each
12/6/09 Sold goods to Nashik gymkhana Rs.8000
15/6/09 Sold goods to Shivaji gymkhana Rs.5000
In the Books of Olympic Sports House
Purchases Day Book for June 2009
Date Name of Customer LF I/W Ref No Amount
1/6/09 Delhi Sports Mart
Bats: 10 A grade @ Rs.100 1000
20 B grade @ Rs.50 1000
Balls: 100 @ Rs.25 2500
4500
5/6/09 Nadkarni Stores
100 Full size rackets @ Rs.95 9500
100 small size rackets @ Rs.50 5000
14500
19000
Sales Day Book for June 2009
Date Name of Supplier LF Invoice No Amount
7/6/09 Samanta Club
Bats: 5 A grade @ Rs.125 625
5 B grade @ Rs.80 400
Balls: 25 @ Rs.40 1000
10/6/09 Sky Sports club 2025
Bats: 10 A grade @ Rs.75 750
20 B grade @ Rs.35 700
50 Full size rackets @ Rs.120 6000
7450
12/6/09 Nashik Gymkhana 8000
Shivaji Gymkhana 5000
22475
Illustration 4- Prepare Purchase Return’s and Sales Return’s books
1/6/09 Om traders returned 10 bags of sugar @ Rs. 950 each, 50 bags of wheat @ Rs.450 each.
Credit Note No 1001
7/6/09 Returned to Daruwala & sons Debit note 57- 10 bags of rice @ Rs.350 each
10/6/09 Returned to Samant Bros 20 bags of wheat @ Rs.500 each –Debit note 1002
15/6/09 Received from Ram & sons credit note 1003 for 10 sugar bags @ Rs.750 each, 5 bags of
rice @ Rs.450 each

Purchases Returns Book for June 2009

Date Name of Customer LF Debit Note Amount
7/6/09 Daruwala & sons 57
10 bags of rice @ Rs.350 3500
10/6/09 Samant Bros 1002
20 bags of wheat @ Rs.500 10000
13500

Sales Returns Book for June 2009

Date Name of Supplier LF Credit Note Amount
1/6/09 Om Traders 1001
10 bags of sugar @ Rs.950 9500
50 bags of wheat @ Rs.450 22500
----------- 32000
15/6/09 Ram & sons 1003
10 bags of sugar @ Rs.750 7500
5 bags of rice @ Rs.450 2250
--------- 9750
41750

Illustration 5- Prepare a single column cash book of Handsome from following details-
1/6/09 Opening Cash on hand Rs.2500
2/6/09 The proprietor introduced Rs.37500 as further capital
5/6/09 Sold goods for Rs.3000
6/6/09 Received commission Rs.1200 from SBI
7/6/09 Paid Rs.2000 to Madhuri on a/c
9/6/09 Purchased goods for Rs.15000
11/6/09 Deposited Rs.3000 into bank
17/6/09 Paid interest on loan taken from Sachin Rs.1200
22/6/09 Received Rs.4000 from Swati
23/6/09 Withdrew Rs.1700 for paying college fees
24/6/09 Withdrew Rs.4000 for office use
26/6/09 Cash sales Rs.15000 & carriage paid Rs.400
 27/6/09 Purchased goods for Rs.41000
30/6/09 Deposited into bank all excess cash

Dr Single – column Cash Book of Handsome

Cr
Date Particulars R.no LF Amount Date Particulars V.no LF Amount
1/6/09 To Balance b/d 2500 7/6/09 By Madhuri’s a/c 2000
2/6/09 To Capital a/c 37500 9/6/09 By Purchases a/c 15000
5/6/09 To Sales a/c 3000 11/6/09 By Bank a/c 3000
6/6/09 To Commission a/c 1200 17/6/09 By Interest a/c 1200
22/6/09 To Swati’s a/c 4000 23/6/09 By Drawings a/c 1700
24/6/09 To Bank a/c 4000 26/6/09 By Carriage a/c 400
26/6/09 To Sales a/c 15000 27/6/09 By Purchases a/c 41000
30/6/09 By Bank a/c 2900
67200 67200

Illustration 6- Prepare a double column cash book from following details-

1/6/09 Started business with cash Rs.140000 & had a bank a/c with Rs.60000 balance
2/6/09 Deposited Rs.18000 into bank
8/6/09 Sold goods for Rs.40000 less 10% trade discount & 5% cash discount
14/6/09 Purchased goods for Rs.35000 less 10% cash discount
18/6/09 Received Rs.11930 from Patel in full & final settlement of Rs.12000
22/6/09 Paid Rs.18000 to Suresh & earned from him a discount of Rs.200
24/6/09 Received commission of Rs.2000 from Mehta
26/6/09 Paid salaries Rs.2600 to staff
28/6/09 Withdrawn from bank Rs.10000 for office use
29/4/09 Withdrawn from office Rs.4000 for personal use
30/6/09 Withdrawn sufficient cash from bank to keep Rs.150000 in hand

Dr Cash Book with Discount Column Cr

Date Particulars R.no LF Disc Cash Date Particulars V.no LF Disc Cash
1/6/09 To Capital a/c 140000 2/6/09 By Bank a/c 18000
8/6/09 To Sales a/c 1800 34200 14/6/09 By Purchases a/c 3500 31500
18/6/09 To Patel’s a/c 70 11930 22/6/09 By Suresh’s a/c 200 18000
24/6/09 To Comm a/c 2000 26/6/09 By Salaries a/c 2600
28/6/09 To Bank a/c 10000 29/6/09 By Drawings a/c 4000
30/6/09 To Bank a/c 25970 30/6/09 By Balance c/d 150000
1870 224100 3700 224100
1/7/09 To Balance b/d 150000
Illustration 7- Prepare a three column cash book from following details-
1/5/09 Opening cash Balance Rs.50000, Bank Balance Rs.40000
4/5/09 Deposited Rs.18000 in bank
6/5/09 Received cash Rs.2400 & a cheque for Rs.1570 from Anil in full settlement of Rs.4000
& deposited the cheque into bank
9/5/09 Received a cheque for Rs.1480 from Bhaskar in full settlement of Rs.1550
11/5/09 Received interest Rs.500 from Chandrakant by cheque
13/5/09 Endorsed Bhaskar’s cheque to Venkatesh in full settlement of his dues Rs.1500
16/5/09 Deposited Chandrakant’s cheque into bank
18/5/09 Paid cash Rs.1200 & a cheque for Rs.1250 to Yeshwant in full settlement of Rs.2500
19/5/09 Bank informed that Chandrakant’s cheque is dishonored & debited our A/c by Rs.540
including Rs.40 as bank charges
22/5/09 Paid commission of Rs.300 to Zeba by cheque
24/5/09 Withdrew Rs.2000 from office & Rs.1000 from bank for personal use
25/5/09 Withdrew Rs.3000 from bank for office use
30/5/09 Learnt from passbook that bank has-
Credited our a/c with interest Rs.1000
Debited our a/c with bank charges Rs.120
Collected on our behalf dividends Rs.1500 &
Paid on our behalf electricity bill Rs.170
31/5/09 Transfer Rs.15000 from fixed deposit a/c to current a/c

Dr Cash Book with Cash Bank & Discount Columns Cr

Dis Dis
Date Particulars c Bank Cash Date Particulars c Bank Cash
2009 2009
1-May To Bal b/d 40000 50000 4-May By Bank 'C' 18000
4-May To Cash a/c 'C' 18000 13-May By Venkatesh a/c 20 1480
6-May To Anil's a/c 30 1570 2400 16-May By Bank 'C' 500
9-May To Bhaskar's a/c 70 1480 18-May By Yeshwant a/c 50 1250 1200
By Interest a/c 500
11-May To Interest a/c 500 19-May By Bank charges 40
16-May To Cash a/c 'C' 500 22-May By Commission a/c 300
25-May To Bank a/c 3000 24-May By Drawings a/c 1000 2000
30-May To Interest a/c 1000 25-May By Cash a/c 3000
By Bank charges
30-May To Dividend a/c 1500 30-May a/c 120
31-May To FD a/c 15000 30-May By electricity a/c 170
31-May By Balance c/d 71190 34200
100 77570 57380 70 77570 57380
1-Jun To Bal b/d 71190 34200
Ledger Accounts & Trial Balance-
Ledger-
• Is a collection of all the accounts debited or credited in the general journal & various
special journal
• It contains all the accounts (asset accounts, liability accounts, Capital accounts, Revenue
accounts, expense accounts) to which transactions recorded in books of original entry are
transferred.
• It is the ultimate destination of all transactions & is called ‘Book of Final Entry’
• It is considered as a permanent record & is more frequently referred to.
• An account is a formal record of all transactions relating to a change in a particular item
• It facilitates the preparation of Final Accounts
• Ledger account is conventionally in T shape. The left side of account is called debit &
right side is called credit. Format is-
Dr Account Name Cr
Date Particulars Folio Amount Date Particulars Folio Amount

Distinction between Journal & ledger-

• Posting is the process of transferring entries from books of original entry to ledger. It
means grouping of all the transactions in respect of one particular a/c at one place for
meaningful conclusions & to further accounting process. It may be done daily or periodically
as per requirements of business

Specimen example of Ledger posting-

Transaction – Paid rent Rs.670 on 30th Jun’09
Journal entry - Rent a/c Dr 670
To Cash a/c 670
Ledger Posting-
Dr Rent Account Cr
Date Particulars JF Amount Date Particulars JF Amount
30/6/09 To Cash a/c 670

Dr Cash Account Cr
Date Particulars JF Amount Date Particulars JF Amount
30/6/09 By Rent a/c 670

While posting to debit side of Rent a/c (in particulars) we write name of other a/c i.e Cash a/c
& the amount for which Rent a/c & Cash A/c are debited & credited is mentioned in amount
 column. While posting to the credit side of cash a/c we have to write By Rent a/c in
particulars column
Thus when there is posting in Dr side of one a/c simultaneously there must be entry in credit
side of other a/c

Rules of posting of various subsidiary books-

Cash Book-
• Transactions recorded on Dr/Cr side of cash book are to be posted on Cr/Dr side of
accounts in Ledger
• Contra entries are not posted
• Total of discount columns in cash book are to be posted in Dr & Cr side of Discount
received & Discount Allowed a/c’s
• Balance in cash & bank columns are not posted any where they are shown on asset side
of Balance sheet
Purchase Day Book-
• Open ledger a/c’s for all suppliers (creditors)
• Cr these suppliers a/c’s by amount of purchases made from them
• Total of Purchase Day Book is posted on Dr side of Purchases a/c
Purchase Returns or Return Outward Book-
• Total of Purchase Return Book is posted on Cr side of Purchase Return a/c
• Individual purchase returns are Dr to respective suppliers a/c
Sales Day Book-
• Open ledger a/c’s for all customers (debtors)
• Dr these customers a/c’s by amount of sales made to them
• Total of Sales Day Book is posted on Cr side of Sales a/c
Sales Returns or Return Inward Book-
• Total of Sales Return Book is posted on Dr side of Sales Return a/c
• Individual sales returns are Cr to respective customers a/c
Bills Receivable Book-
• Individual Bill amount Cr to Party’s a/c
• Total of Bills Receivable Book is posted on Dr side of Bills Receivable a/c
Bills Payable Book-
• Individual Bill amount Dr to Party’s a/c
• Total of Bills Payable Book is posted on Cr side of Bills Payable a/c
Fixed Assets-
• Purchase or acquisition cost includes – basic price+ taxes+ transport charges+ interest on
borrowed capital paid upto installation & commissioning of asset & the charges for the same
• Sale of asset may result in profit or loss-
Profit/ Loss = Sale Value – Book Value
Book Value = Cost of Acquisition – Accumulated Depreciation
Accounting Entry for Loss - Bank a/c Dr (amount realized)
P & L a/c Dr (Loss on sale)
To Asset a/c (Book value of asset)
Accounting Entry for Profit - Bank a/c Dr (amount realized)
 To P & L a/c (Profit on sale)
To Asset a/c (Book value of asset)

Balancing an a/c-
• Each a/c in a ledger may have some entries on debit side & some entries on credit side of
an a/c. The difference in totals of both the sides is termed as Balance of an a/c.
• The difference arrived at is inserted on the side the total of which is less, writing against
it ‘By Balance c/d’ ( for inserting the difference the credit side of an a/c) or ‘To Balance c/d’
(for inserting the difference on the debit side)
• c/d means carried down & b/d means brought down. c/f means carried forward & b/f
means brought forward
• After inserting the difference the totals of both sides are made (which equal). Thus the
accounting is closed. The process of extracting the balance & inserting it on lesser side of an
a/c is called Balancing or Closing of an a/c
• If the debit side of an a/c is heavier than its credit side the balance is called a Debit
Balance & if the credit side of an a/c is heavier than its debit side it is called a Credit Balance
• Both debit & credit side totals of a ledger account are equal then it is called nil balance
• The usual period adopted for balancing of a/c’s is as under-
Type of Account’s Balanced Balanced at Remarks
monthly at year end
Debtors & Creditors a/c’s Yes Yes Balance c/f to next accounting year
Capital a/c, Drawings a/c --- Yes Drawings a/c balance transferred to Capital &
and Other Personal a/c’s the balance in Capital or Personal a/c’s are c/f
to next accounting year
Cash & Bank a/c’s Yes Yes Balance c/f to next accounting year
Real (Asset) a/c’s --- Yes Balance c/f to next accounting year
Purchase /Sales Returns Yes Transferred to Purchases & Sales es
accounts respectively at year end
Sales & Purchases a/c’s Yes Transferred to Trading a/c at yr end
Nominal a/c’s Yes At Yr end Transferred to Trading, or P& L

Illustration 1- Journalize the following transactions in the books of a trader

Debit Balance as on 1st April 2009 – Cash in Hand Rs.8000; Cash at Bank Rs. 25000; Stock of
Goods Rs.20000; Building Rs.10000; Sundry Debtors-Vijay Rs.2000 & Madhu Rs.2000
Credit Balances on 1st April 2009 – Sundry Creditors-Anand Rs.5000
Following were the transactions in the month of April 2009-
Apr 1 Purchased goods worth Rs.5000 for cash less 20% trade discount & 5% cash discount
Apr 4 Received Rs.1980 from Vijay & allowed him Rs.20 as discount
Apr 8 Purchased Plant from Mukesh for Rs.5000 & paid Rs.100 as cartage for bringing the plant
to the factory & another Rs.200 as installation charges
Apr 12 Sold goods to Rahim on credit Rs.600
Apr 15 Rahim became insolvent & could pay only 50 paise in a Rupee
Apr 18 Sold goods to Ram for Cash Rs.1000
Dr Anand’s Account Cr
Date Particulars JF Amount Date Particulars JF Amount
30/4/09 To Balance c/d 5000 1/4/09 By Balance b/d 5000
5000 5000
1/5/09 By Balance b/d 5000
Dr Cash Account Cr
Date Particulars JF Amount Date Particulars JF Amount
1/4/09 To Balance b/d 8000 1/4/09 By Purchases a/c 3800
4/4/09 To Vijay 1980 8/4/09 By Plant a/c 300
15/4/09 T Rahim 300 30/4/09 By Balance c/d 7180
18/4/09 To Sales a/c 1000
11280 11280
1/5/09 To Balance b/d 7180

Dr Bank Account Cr
Date Particulars JF Amount Date Particulars JF Amount
1/4/09 To Balance b/d 25000 30/4/09 By Balance c/d 25000
25000 25000
1/5/09 To Balance b/d 25000
Dr Stock Account Cr
Date Particulars JF Amount Date Particulars JF Amount
1/4/09 To Balance b/d 20000 30/4/09 By Balance c/d 20000
20000 20000
1/5/09 To Balance b/d 20000
Dr Building Account Cr
Date Particulars JF Amount Date Particulars JF Amount
1/4/09 To Balance b/d 10000 30/4/09 By Balance c/d 10000
10000 10000
1/5/09 To Balance b/d 10000
Dr Vijay Cr
Date Particulars JF Amount Date Particulars JF Amount
1/4/09 To Balance b/d 2000 4/4/09 By Cash a/c 1980
By Discount 20
2000 2000

Dr Madhu Cr
Date Particulars JF Amount Date Particulars JF Amount
1/4/09 To Balance b/d 2000 30/4/09 By Balance c/d 2000
2000 2000
1/5/09 To Balance b/d 2000

Dr Capital Account Cr
Date Particulars JF Amount Date Particulars JF Amount
30/4/09 To Balance c/d 62000 1/4/09 By Balance b/d 62000
62000 62000
1/5/09 By Balance b/d 62000
Dr Purchases Account Cr
Date Particulars JF Amount Date Particulars JF Amount
1/4/09 To Cash 3800 30/4/09 By Balance c/d 4000
1/4/09 To Discount a/c 200
4000 4000
1/5/09 To Balance b/d 4000
Dr Discount Account Cr
Date Particulars JF Amount Date Particulars JF Amount
4/4/09 To Vijay 20 1/4/09 By Purchases a/c 200
30/4/09 To Balance c/d 180
200 200
1/5/09 By Balance b/d 180
Dr Plant Account Cr
Date Particulars JF Amount Date Particulars JF Amount
8/4/09 To Mukesh 5000 30/4/09 By Balance c/d 5300
8/4/09 To Cash a/c 300
5300 5300
1/5/09 To Balance b/d 5300
Dr Mukesh Cr
Date Particulars JF Amount Date Particulars JF Amount
30/4/09 To Balance c/d 5000 8/4/09 By Plant a/c 5000
5000 5000
1/5/09 By Balance b/d 5000
Dr Sales Account Cr
Date Particulars JF Amount Date Particulars JF Amount
30/4/09 To Balance c/d 1600 12/4/09 By Rahim 600
18/4/09 By Cash a/c 1000
1600 1600
1/5/09 By Balance b/d 1600
Dr Rahim Cr
Date Particulars JF Amount Date Particulars JF Amount
12/4/09 To Sales a/c 600 15/4/09 By Cash a/c 300
15/4/09 By Bad debts a/c 300
600 600

Dr Bad Debts Account Cr

Date Particulars JF Amount Date Particulars JF Amount
15/4/09 To Rahim 300 30/4/09 By Balance c/d 300
300 300
1/5/09 To Balance b/d 300

Illustration 2- The following data is given by S the owner with a request to compile only the 2
personal accounts of H & R in his ledger for the month of April 2009
1st Apr S owes R Rs.15000; H owes S Rs.20000
4th Apr R sold goods worth Rs.60000 @ 10% trade discount to S
5th Apr S sold to H goods priced at Rs.3000
17th Apr Record a purchase of Rs.25000 net from R which are sold to H at a profit of Rs.15000
18th Apr S rejected 10% of R’s goods of 4th Apr
19th Apr S issued a cash memo for Rs.10000 to H who came personally for this consignment
22nd Apr H cleared half his totalk dues to S enjoying a ½ % cash discount (of the payment
Rs.20000 was by cheque)
26th Apr R’s total dues (less Rs.10000 held back) were cleared by cheque enjoying a cash
discount of Rs.1000 on the payment made
29th Apr Close H’s account to record the fact that all but Rs.5000 was cleared by him, by a
cheque, because he was declared bankrupt
30th Apr Balance R’s account

In the Books of S

Dr H’s Account Cr
Date Particulars JF Amount Date Particulars JF Amount
1/4/09 To Balance b/d 20000 22/4/09 By Bank a/c 20000
5/4/09 To Sales a/c 30000 22/4/09 By Cash a/c 24775
17/4/09 To Sales a/c 40000 29/4/09 By Disc Allow a/c 225
29/4/09 By Bank a/c 40000
29/4/09 By Bad debts a/c 5000
90000 90000

Sale of Rs10000 on 19th Apr is cash sales hence not included in personal a/c of H
On 22nd Apr H owes S Rs.90000 & paid amount paid by H is ½ of 90000 less ½ % discount
hence ½ of 90000 = 45000 & ½ % of 45000 is 225. Hence 45000-225 = 44775 out of which
20000is in cheque & balance 24775 in cash
Dr R’s Account Cr
Date Particulars JF Amount Date Particulars JF Amount
18/4/09 To Pur Ret A/c 5400 1/4/09 By Balance b/d 15000
26/4/09 To Bank a/c 77600 4/4/09 By Purchases a/c 54000
26/4/09 To Disc recd a/c 1000 17/4/09 By Purchases a/c 25000
30/4/09 To Balance c/d 10000
94000 94000
1/5/09 By Balance b/d 10000
Trial Balance-
• Is a statement showing the balances or total of debits & credits of all the accounts in the
ledger with a view to verifying the equality of debits & credits posted to the ledger a/c’s
• It helps to ascertain the accuracy of ledger a/c’s & in locating errors
• It helps in preparation of Final a/c’s. All the revenue & expenses a/c’s appearing are
transferred to Trading or Profit & Loss a/c. All assets, liabilities & capital a/c’s are
transferred to Balance sheet
• The balance of all Asset a/c’s, Expenses, Losses, Drawings, Cash & Bank balances, B/R,
Debtors, Stocks, Purchases, Sales Returns are placed in the debit column & balances of all
Liabilities a/c’s, Income, Profit, Capital a/c’s, B/P, Bank overdraft, Creditors, Loan, Sales,
Purchase Returns are placed in credit column
• Following are the methods of preparing a Trial Balance-
• Total Amounts Method (Gross TB) - Every ledger a/c is totaled & that total amount (both
of debit side & credit side) is transferred to TB. Under this method balance can be found out in
TB itself. This method is not commonly used
• Balance method ( Net TB) – Every ledger a/c is balanced & those balances only are c/f to
the TB. This method is commonly used in preparation of Financial Statements
• Adjusted TB through Suspense a/c – If TB does not agree after transferring all balances
& errors are not located timely, then TB is tallied by transferring difference of debits & credits to
a suspense a/c. This is a temporary a/c opened to proceed further to prepare final a/c’s

Illustration 1- Journalise the following transactions, post into ledger & prepare a Trial Balance-
May 1 Started business with Rs.10000 & paid into bank Rs.5000
May 3 Bought Furniture for Rs.900
May 4 Purchased goods worth Rs.4000 from Mohan for cash
May 5 Sold goods for Rs.1700
May 7 Paid telephone rent Rs.400
May 8 Purchased goods for Rs.1000 from Bijur
May10 Paid Rs.100for advertisement by cheque
May11 Bought one typewriter for Rs.750 from Universal Typewriter on credit
May12 Sold goods to Bedi for Rs.2900
May14 Withdrew Rs.350 from the bank for private use
May16 Sold goods worth Rs.650 to Omega for cash
May25 Received cash from Bedi Rs.2850, discount allowed Rs.50
May26 Paid into bank Rs.2500
May31 Issued cheque for Rs.300 in favour of landlord for rent
Paid salaries to staff Rs.600
Paid Bijur Rs.950 cash in full settlement of his account

Journal
Date Particulars LF Debit Amount Credit Amount
2009 C 10
May 1 ash Account Dr 000
To Capital Account 10000
(Cash brought in as capital)
May 1 Bank Account Dr 5000
To Cash Account 5000
( cash paid into Bank)
May 3 Furniture Account Dr 900
To Cash Account 900
(Furniture purchased)
May 4 Purchases Account Dr 4000
To Cash Account 4000
(goods purchased for cash)
May 5 Cash Account Dr 1700
To Sales Account 1700
(goods sold for cash)
May 7 Telephone rent Account Dr 400
To Cash Account 400
(Paid telephone rent)
May 8 Purchases Account Dr 1000
To Bijur’s Account 1000
(goods purchased on credit)
May 10 Advertisement Account Dr 100
To Bank Account 100
(Being advertisement made by cheque)
May 11 Office Equipment Account Dr 750
To Universal Typewriter Account 750
(Purchased one typewriter on credit)
May 12 Bedi Account Dr 2900
To Sales Account 2900
(Goods sold on credit)
May 14 Drawings Account Dr 350
To Bank Account 350
(amount withdrawn for personal use)
May 16 Cash Account Dr 650
To Sales Account 650
(goods sold for cash)
May 25 Cash Account Dr 2850
Discount Allowec Account Dr 50
To Bedi’s Account 2900
(Cash received & discount allowed)
May 26 Bank Account Dr 2500
To Cash Account 2500
(Cash deposited)
May 31 Rent Account Dr 300
 To Bank Account 300
(cheque paid for rent)
May 31 Salaries Account Dr 600
To Cash Account 600
(Being cash sale of goods to Boon)
May 31 Bijur’s Account Dr 1000
To Cash Account 950
To Discount received Account 50
( Cash paid in full settlement)

Dr Cash Account Cr
Date Particulars JF Amount Date Particulars JF Amount
May 1 To Balance b/d 10000 May 1 By Bank a/c 5000
May 5 To Sales 1700 May 3 By Furniture a/c 900
May 16 To Sales 650 May 4 By Purchases 4000
May 25 To Bedi’s a/c 2850 May 7 By Tel Rent 400
May 26 By Bank a/c 2500
May 31 By Salaries a/c 600
May 31 By Bijur’s a/c 950
May 31 By Balance c/d 850
15200 15200
Jun 1 To Balance b/d 850

Dr Capital Account Cr
Date Particulars JF Amount Date Particulars JF Amount
May 31 To Balance c/d 10000 May 1 By Cash a/c 10000
10000 10000
Jun 1 By Balance b/d 10000

Dr Furniture Account Cr
Date Particulars JF Amount Date Particulars JF Amount
May 3 To Cash a/c 900 May 31 By Balance c/d 900
900 900
Jun1 To Balance b/d 900

Dr Bank Account Cr
Date Particulars JF Amount Date Particulars JF Amount
May 1 To Cash a/c 5000 May 10 By Advertisemnt 100
May 26 To Cash a/c 2500 May 14 By Drawings 350
May 31 By Rent 300
May 31 By Balance c/d 6750
7500 7500
Jun1 To Balance b/d 6750

Dr Discount Allowed Account Cr

Date Particulars JF Amount Date Particulars JF Amount
May 25 To Bedi’s a/c 50 May 31 By Balance c/d 50
50 50
Jun1 To Balance b/d 50

Dr Telephone Rent Account Cr

Date Particulars JF Amount Date Particulars JF Amount
May 7 To Cash a/c 400 May 31 By Balance c/d 400
400 400
Jun 1 To Balance b/d 400
Dr Advertisement Account Cr
Date Particulars JF Amount Date Particulars JF Amount
May 10 To Bank a/c 100 May 31 By Balance c/d 100
100 100
Jun 1 To Balance b/d 100
Dr Discount Received Account Cr
Date Particulars JF Amount Date Particulars JF Amount
May 31 To Balance c/d 50 May 31 By Bijur’s a/c 50
50 50
By Balance b/d 50
Dr Purchases Account Cr
Date Particulars JF Amount Date Particulars JF Amount
May 4 To Cash a/c 4000 May 31 By Balance c/d 5000
May 8 To Bijur’s a/c 1000
5000 5000
Jun 1 To Balance b/d 5000
Dr Sales Account Cr
Date Particulars JF Amount Date Particulars JF Amount
May 31 To Balance c/d 5250 May 5 By Cash a/c 1700
May 12 By Bedi’s a/c 2900
5250 May 16 By cash a/c 650
5250
Jun 1 By Balance b/d 5250
Dr Bijur’s Account Cr
Date Particulars JF Amount Date Particulars JF Amount
May 31 To Cash a/c 950 May 8 By Purchases a/c 1000
May 31 To Disc recd a/c 50
1000 1000

Dr Bedi’s Account Cr
Date Particulars JF Amount Date Particulars JF Amount
May 12 To Sales a/c 2900 May 25 By Cash a/c 2850
May 25 By Disc All a/c 50
2900 2900

Dr Office Equipment Account Cr

Date Particulars JF Amount Date Particulars JF Amount
May 11 To Universal a/c 750 May 31 By Balance c/d 750
750 750
Jun 1 To Balance b/d 750
Dr Universal Typewriter Account Cr
Date Particulars JF Amount Date Particulars JF Amount
May 31 To Balance c/d 750 May 11 By Off Eqp a/c 750
750 750
Jun 1 By Balance b/d 750
Dr Drawings Account Cr
Date Particulars JF Amount Date Particulars JF Amount
1/4/09 To Bank a/c 350 May 31 By Balance c/d 350
350 350
Jun1 To Balance b/d 350
Dr Rent Account Cr
Date Particulars JF Amount Date Particulars JF Amount
May31 To Bank a/c 300 May31 By Balance c/d 300
300 300
Jun1 To Balance b/d 300
Dr Salaries Account Cr
Date Particulars JF Amount Date Particulars JF Amount
May 31 To Cash a/c 600 May 31 By Balance c/d 600
600 600
Jun1 To Balance b/d 600
Trial Balance as at May 31
Debit Balances Amount Credit Balances Amount
Cash Account 850 Capital account 10000
Bank Account 6750 Sales account 5250
Furniture Account 900 Universal Typewriters 750
Telephone rent account 400 Discount Received 50
Advertisement account 100
Purchases account 5000
Office Equipment account 750
Drawings 350
Rent account 300
Salaries account 600
Discount allowed account 50
16050 16050

Illustration 2- From the following balances, prepare a trial balance of Anuradha Traders as on
31/3/2009: Capital Rs.100000; Sales Rs.166000; Purchases Rs.150000; Sales Returns Rs.1000;
Discount allowed Rs.2000; Expenses Rs.10000; Debtors Rs.75000; Creditors Rs.25000;
Investments Rs.15000;Cash in bank & hand Rs.37000; Interest received on investments Rs.1500;
Insurance paid Rs.2500
Trial Balance of Anuradha Traders as at 31/3/2009
Debit Balances Amount Credit Balances Amount
Purchases 150000 Capital 100000
Sales Returns 1000 Sales 166000
Discount allowed 2000 Creditors 25000
Expenses 10000 Interest received on Investment 1500
Debtors 75000
Investments 15000
Cash in Bank & Hand 37000
Insurance paid 2500
292500 292500

Illustration 3- One of your clients Singhania has asked you to finalize his accounts for year
ended 31/3/09. Till date he himself has recorded the transactions in books. As a basis of audit
Singhania furnished following statement.
Particulars Debit Balance Credit Balance
Singhania’s Capital 1556
Singhania’s Drawings 564
Leasehold Premises 750
Sales 2750
Due from Customers 530
Purchases 1259
Purchases Returns 264
Loan from Bank 256
Creditors 528
Trade Expenses 700
Cash at Bank 226
Bills Payable 100
Salaries & wages 600
Stock 264
Rent & Rates 463
Sales Returns 98
5454 5454
Check accuracy of above Trial Balance

Corrected Trial Balance of Singhania as on 31/3/09

Particulars Debit Balance Credit Balance
Singhania’s Capital 1556
Singhania’s Drawings 564
Leasehold Premises 750
Sales 2750
Due from Customers 530
Purchases 1259
Purchases Returns 264
Loan from Bank 256
Creditors 528
Trade Expenses 700
Cash at Bank 226
Bills Payable 100
Salaries & wages 600
Stock 264
Rent & Rates 463
Sales Returns 98
5454 5454

Due from Customers is an asset so its balance will be a debit balance

Purchase return a/c always shows a credit balance because asset goes out
Creditors is a liability so its balance will be a credit balance
Bills Payable is a liability so its balance will be a credit balance
Stock represents assets so it will have a debit balance
Sales return a/c always shows a debit balance because asset comes in

Types of Errors-
• Errors affecting a Trial Balance (other than those committed while preparing a TB)
• Errors of Partial Omission – e.g omission of posting in any one a/c of a transaction
• Errors of commission -
• Related to Subsidiary books-
• Error of casting ( under casting or over casting in totaling)
• Error in carrying forward
• Related to Ledger Book-
• Error of posting on wrong side of a correct a/c( eg instead of debiting a
customer who has bought on credit his a/c might be credited)
• Error of Posting of wrong amount( eg a customer who has purchased
Rs.100 will be debited but wrongly with Rs.1000)
 • Wrong balancing/ totaling of an a/c
• Error in c/f of a total of an a/c
• Errors not affecting a Trial Balance-
• Error of Complete Omission-
• Related to Subsidiary Books- Omission of recording a transaction
• Related to Ledger Book- Omission of posting in all related a/c’s of a transaction
• Errors of commission -
• Related to Subsidiary books-
• Error of recording in the correct book
• Recording in a wrong book
• Related to Ledger Book-
• Posting of a correct amount on correct side of a wrong account
• Error of Principle
• Compensatory Errors

Illustration 1- Rectify the following errors

a) Sale of old machinery Rs.1000 has been entered in sales book
b) The total of discount column debit sude of cash book is Rs.10 short
c) A sale of Rs.250 to Murthy has been debited to him as Rs.520
d) Haridas pays of Rs.200. This amount has been credited to Hariram
e) A purchase of typewriter for Rs.5000 on credit has not been entered in books at all
f) Rs.210 received from estate of Gopi has been credited to his a/c. His a/c was written off
last year as bad

Correct Entry Wrong Entry Rectified Entry

a) Debtors a/c Dr Debtors a/c Dr Sales a/c Dr 1000
To Machinery a/c To Sales To Machinery a/c 1000
c) Murthy’s a/c Dr 250 Murthy’s a/c Dr 520 Murthy’s a/c is to be credited
For Rs.270 (520-250)
d) Cash a/c Dr 200 Cash a/c Dr 200 Hariram’s a/c Dr 200
To Haridas 200 To Hariram 200 To Haridas a/c 200
e) _______ _______ Typewritr a/c Dr 5000
To Suppliers a/c 5000
f) Cash a/c Dr Cash a/c Dr Gopi’s a/c Dr 210
To Bad debts recovered To Gopi’s a/c To Bad debts rec 210
b) The error is rectified by debiting Discount Account for Rs.10