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Preparatory Material for the Module Financial Accounting

Introductory Note:

Please find enclosed the reading note followed by relevant exercises covering the introductory concepts of Financial Accounting. The objective of this material is to familiarize you with the basic accounting concepts, mechanics and the financial statements (balance sheet and profit & loss account). We request you to read the assigned material in sequence and solve the relevant exercises given in the end.

Reading: Sessio n No. 1 2 3 4 5 6 7 8 9 10 11 12 Particulars The Nature and Purpose of Accounting The Accounting concepts related to Balance Sheet Exercise 1: Cost Concepts Exercise 2: Accounting Equation (Use the blank worksheet given after the exercise 2) The Accounting concepts related to Profit & Loss Account (income Statement) Exercise 3: Expenditure versus Expenses Accounting Mechanics I Exercise 4: Debits & Credits Accounting Mechanics II Exercise 5: Adjustment & Closing Entries Comprehensive Exercise 1: Model Demonstration Farm (A) with blank worksheets Comprehensive Exercise 2: Model Demonstration Farm (B) with blank worksheets Page No. 36 7 10 26 27 28 10 16 29 17 21 30 22- 25 31 34 35 38 39 42

Note: Readings are prepared from various sources. The primary source was: Accounting: Text & Cases by Anthony, Hawkins and Merchant, Tata McGraw-Hill Edition


Introduction An organization is a group of people who work together to accomplish one or more objectives. In doing its work, an organization uses resources-material, labour, and various types of services. The people in an organization need information about these resources, and about the results achieved through using them. Parties outside the organization need similar information in order to judge the performance of the organization. The system that provides this information is called accounting. Need for Information An organization has three types of accounting information: (1) operating information; (2) management accounting information; and (3) financial accounting information. (1) Operating Information: Considerable amount of information is required simply to conduct day-to-day operations. Employees must be paid exactly the amount due to them. The sales people need to know what products are available for sale their quantities and the selling price of each of them. The person in the stores needs to know the items in the stock and their locations and when the stock of a given item is depleted so that an additional quantity can be ordered. Amounts to be collected from the organisations customers and the amount that it owes to others need to be known and when these amounts should be received or paid. It needs to know how much money it has in bank. In a very small organisation, the owner or manager could carry much of this information in his head, but in a large organisation where the detailed information is complicated, written records are necessary. (2) Management Accounting: The executives and managers rely on summaries of the operating information as they do not have time to examine it, and they use these summaries, together with other information to carry out their management responsibilities. The functions for which they use this information can be categorised as control, coordination, and planning. The accounting information specifically intended for these purposes is called management accounting (or managerial accounting).

Control: In an organisation, sales people make sales, products are produced by production people, designs are prepared by engineers, and so on. The managers do not do this work themselves; rather it is their responsibility to see to it that it is done, and done properly, by the employees. The process they use for this purpose is called control. Accounting information is used in the control process as a means of communication, of motivation, of attention-getting, and of appraisal. As a means of COMMUNICATION, accounting reports help in informing employees about managements plans and policies. As a means of MOTIVATION, accounting reports can induce members of the organisation to act in a way that is consistent with the overall goals and objectives of the company. As a means of ATTENTION-GETTING, the reports may signal the problems that require attention and possibly action. As a means of APPRAISAL, accounting helps to show how well employees of the organisation have performed, and thus provides a basis for a salary increase, promotion, corrective action of various kinds, or, in extreme cases, dismissal. Coordination: The several parts of the organization must work together to achieve the organizations objectives, and this requires that the activities of each unit must be coordinated with those of other units. Accounting aids in this coordination process. Planning: Planning is the process of deciding what action should be taken in future. One important form of planning is called budgeting. Budgeting is the process of planning the overall activity of the company for a specified period of time, usually a year. An important objective of this process is to fit together the separate plans made for various segments of the company so as to assure that these plans harmonise with one another. Planning involves making decisions. Decisions are arrived at essentially by recognizing that a problem exists, identifying alternative ways of solving it, analyzing the consequences of each alternative, and comparing these consequences so as to decide which is best. Accounting information is useful especially in the analysis step of the decision-making process. (3) Financial Accounting: Another type of accounting information is intended both for managers and external agencies such as shareholders, bankers, other creditors and government agencies. The shareholders want information on how well the organisation 3

is doing. If they decide to sell their share, they need information to judge how much their investment is worth. If the organisation wants to borrow money, the bank or other lender wants information that will show that the loan is sound and that it will be repaid when it is due. Definition of Accounting It is the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character, and interpreting the results thereof. Nature of Accounting Principles To understand information supplied by the organisation to outsiders, certain ground rules that governed its preparation are to be known. There is a need for having basic ground rules that apply to all businesses so that the information from one business can be compared with that of another and to obviate the necessity of learning a separate set of rules for each business. These ground rules are the subject matter of financial accounting. The rules and conventions of accounting are commonly referred to as principles, that is, general laws or rules adopted or professed as a guide to action; a settled ground of basis of conduct or practice. The set of accounting principles are also called Generally Accepted Accounting Principles (GAAP). Thus, there are Indian GAAP, US GAAP and so on. Each country has a Body which sets the accounting principles or standards. For example, in the USA, Financial Accounting Standards Board (FASB) is such a Body. In India, the Institute of Chartered Accountants of India is the standard-setting body. The general acceptance of an accounting principle usually depends on how well it meets three criteria: relevance, objectivity, and feasibility. A principle is relevant to the extent that is results in information that is meaningful and useful to those who need to know something about a certain business. A principle is objective to the extent that the information is not influenced by the personal bias or judgment of those who furnish it. Objectivity connotes reliability trustworthiness. A principle is feasible to the extent that it can be implemented without undue complexity or cost. Accounting Statements

The financial condition of an organisation at any given point of time is determined by drawing up a balance sheet of the properties and rights owned by it as of a particular day (assets), and simultaneously, the claims owed by it either to its shareholders (capital), or (owners equity) or to outsiders (liabilities). The profitability of an organisation is, however, determined for a period e.g. one year, by taking into account the revenue earned by it during that time and the costs and expenses incurred by it in earning the revenue. These revenues (or earnings) and expenses are recorded separately in an accounting statement called the income statement (or a profit and loss account) and depending on whether there is a surplus or deficit during a particular period, the business is said to have earned a profit or incurred a loss respectively. *******************


Introduction Preparation of financial statements described in the previous Chapter is based on the Generally Accepted Accounting Principles (GAAP). There are basic concepts that guide formulation of GAAP in relation to the balance sheet and the profit and loss statement. Balance Sheet and related concepts The balance sheet shows the financial position of an accounting entity as of a specified moment of time. A balance sheet dated 'March 31' means, at the close of business on March 31. It is therefore a status report, rather than a flow report. In India, the format and the contents of the Balance Sheet for companies are specified in Schedule VI of the Companies Act, 1956. Accordingly, assets are shown on the right hand side of the balance sheet while liabilities and owners' equity are shown on the left. Alternatively, a columnar format can also be adopted in which liabilities are shown on the top and assets are shown at the bottom of the balance sheet. The Liabilities side includes major groupings like Shareholders funds (Equity Capital, Preference Capital and Reserves & Surplus), Secured Loans, Unsecured Loans, and Current Liabilities & Provisions. The Assets side includes major groupings like Fixed Assets (Gross value, Accumulated Depreciation, Net Value), Capital-work-in-progress, Investments, and Current Assets. The break-up of various groupings is normally provided in the form of Schedules attached to the Balance Sheet. The basic concepts that guide the formulation of generally accepted accounting principles in relation to the balance sheet are: Entity concept, Going Concern concept, Monetary Unit concept, Cost concept, Conservatism concept, and Accounting Equivalence Concept. 1. Entity Concept

The entity (i.e. organization) consists of many persons and bodies. They include the owners shareholders in case of a company or a company, partners in case of a partnership firm, or a proprietor in case of a proprietorship firm. Similarly, the entity like a public charitable trust or a Society includes trustees or the members of the governing body as the case may be and the donor or funding agencies. An Entity exists primarily to produce goods and services. Hence, in the ultimate analysis, the results of the operations must be related to the entity itself and they are distinct from the owners, trustees, members of the board and the donor agencies. Accordingly, the accounting process must be related to the operation of the entity distinct from the persons within that entity. 2. Going Concern Concept In corporation laws of all countries, an organisation, is presumed to have uninterrupted existence with continuing activity till such time as it is legally liquidated. It is for this reason that for purposes of accounting, organisations are presumed to carry on their operations indefinitely till such time as they are in fact liquidated. A corollary to this concept is the assumption that an organisation will not be liquidated within the foreseeable future since this would make it impossible for it to carry out its present contractual commitments or to use its resources according to a predetermined plan of operation. 3. Monetary Unit Concept In financial accounting, a record is made only of these facts that can be expressed in monetary terms. This is so because money provides a common denominator by means of which heterogeneous facts about the operations of an organisation can be expressed as numbers that can be added and subtracted. This concept imposes a severe limitation on the scope of an accounting report. Accounting does not record the state of the director's health; it does not report that a strike is beginning; and it does not reveal that a competitor has placed a better product on the market. Accounting therefore neither gives a complete account of the happenings in, nor an accurate picture of the condition of the organsation. 4. Cost Concept For purposes of accounting/all transactions are recorded at their monetary cost of acquisition i.e. the price paid for acquiring the asset or for receiving the services provided. In case of partially/fully-donated assets, normally nominal value is considered as the acquisition cost. Since assets are recorded at acquisition costs, as a rule any 7

subsequent increase or decrease in their values would not be recorded in the balance sheet. The balance sheet of the organisation will continue to show only the acquisition cost and not the present worth or value. Since all end-users are interested in knowing the value of the assets owned by the organisation, it would be logical to argue that a balance sheet would fail to achieve the primary objective of communicating the worth of the organisation, if the present value of its assets is not shown in the balance sheet. Why, then, is this concept which is inconsistent with the relevance convention (since present values are relevant to most end-users) still adopted? There are several reasons for this. The primary one is that most people cannot agree on what is the present value of an asset. Accordingly, the recording of assets on acquisition cost basis meets the convention of objectivity. Moreover, the present value of assets constantly undergoes changes that would require altering them practically every day. This would introduce a degree of instability in the accounts which would considerably reduce their effectiveness and acceptance. 5. Conservatism Concept It means that when the accountant has a reasonable choice as to how a given event should be recorded, he ordinarily chooses the alternative that results in a lower, rather than higher, asset amount or owners' equity amount. This concept is often stated as Anticipate no profit, and provide for all possible losses. The provision for the bad debts is an example of this concept. 6. Accounting Equivalence Concept (Accounting Equation) The resources owned by an organisation are called "assets". The claims of various parties against these assets are called "equities". There are two types of equities; (1) Liabilities; which are the claims of creditors, i.e. everyone other than the owners of the business; and (2) owners' equity (or capital) which is the claim of the owners of the business. Since all of the assets of an organisation are claimed by someone and since the total of these claims cannot exceed the amount of assets, it follows that Assets = Equities Because of the two different types of equities, Assets = Liabilities + Owners Equity In case of a charitable trust or a Society, the term Owners Equity is replaced by Corpus which is created out of donations/grants.

Examples: A public charitable trust is created in the name of XYZ. Mr. A donates Rs. 50000 by a cheque. In accounting terms, this will be shown as: Assets Bank Balance Rs. 50,000 Equities = Corpus Rs.50,000

Thereafter, Rs.40000 is invested in a fixed deposit of a bank. Assets Bank Bal Rs. 10,000 + Investment Rs. 40000 = Equities Corpus Rs. 50000

Thus every event that is recorded in the accounts affects at least two items of the accounting equation and therefore accounting is properly called a double-entry system. Profit and Loss Statement and related concepts The end-users of accounting statements are interested not only in knowing the financial conditions of an organisation at a particular point of time but also in finding out whether it has earned profits or incurred losses during a particular period. Thus, the important distinction between balance sheet and profit & loss account is that a balance sheet is on a particular date while an income statement is for a period. Types of revenues or income Revenues from sale of goods Revenues from services rendered Other Income not derived from the business operations such as dividend received, interest received, profit on sale of fixed assets etc.

Types of Expenses Raw material consumed Manufacturing expenses such as power & fuel, repairs & maintenance, stores & spares consumed, factory wages, etc. General and Administrative expenses such as salaries, conveyance, travel, communication, printing & stationery, staff welfare, rent, legal, auditing etc.

Marketing & Selling expenses such as advertisement, commission, discount, salesmen salaries & incentives, freight outward, godown rent etc. Interest and Finance charges such as interest on loans, interest on working capital, other interest, lease rentals, interest on hire purchase, bank charges etc.

Definition of Profit Gross profit or operating profit = Net sales cost of goods sold Where, Net sales = Gross sales excise duty, and cost of goods sold = raw material consumed plus all manufacturing expenses adjusted for changes in inventory of work-in-process and finished goods Net profit or profit after tax = Gross profit general & admin expenses marketing & selling expenses interest & finance charges income tax The loss occurs when either gross profit is negative or net profit is negative. The basic concepts that guide the formulation of generally accepted accounting principles in relation to the profit and loss statement are: Accounting period concept, realization concept, matching costs with revenues concept, and accrual concept. 1. Accounting Period concept Normally the profit & loss statement or income statement is prepared for a period of one year. The accounting period varies from company to company but by and large in India, the companies define their accounting period from April to March. Some companies which encounter seasonality in their operations adopt accounting periods that synchronise with their operating cycles. Accounting time cycle problems: - Unfortunately, the time cycle of revenues does not necessarily synchronize with that of the accounting period. For example, a companys accounting year is April to March. Suppose in February 2005 it receives advance money of Rs. 100,000 from the customers for products to be sold during February 2005 to April 2005. In such cases, one has to determine the portion of money received relating to the period 1st February 2005 to 31st March 2005 so that it could be accounted as revenue for the accounting period for 10

which the income statement has to be prepared. The remaining money in respect of April 2005 for the next year will be shown in the balance sheet as deferred or prepaid revenues (as liability). In the same example, if a company has sold goods worth Rs. 80,000 during February and March 2005, then sales revenue for F.Y. 2004-05 would be Rs. 80,000 and the balance amount of Rs. 20,000 would be shown as the liability in the balance sheet as on 31st March 2005. In other situations goods or services might have been supplied by a company during the accounting period but money related to such goods/services may not have been received from the customers during the same period. In such a case, the income statement would show the value of such goods/services supplied as revenues for the accounting period, but offset as accounts receivables / debtors in the balance sheet. Since the time cycle of revenues received are substantially different in many cases, one has to be particularly careful in ensuring that only revenues related to the current accounting period, representing goods/ services sold or transferred during the year, are taken into account in the income statement. Expenditure and Expenses: - expenditure takes place when the cash or other assets of the company are exchanged for acquisition of new assets, goods or services or by incurring liabilities. The important point to note is that the expenditure is never related to the accounting period, but to the process of exchange of assets or acquisition of new assets or services. Suppose an insurance policy for fixed assets for 1 year is purchased for Rs.12, 000 on 1st July 2001 by a company, which has its accounting period from April to March. It is a fact that during the current accounting period an expenditure of Rs. 12,000 took place in July. However expenses are entirely different and represent the sacrifice made or the goods or benefits received or assets consumed during an accounting period. In the above case, the expense for the accounting period July 2001 to march 2002 would, however, be Rs. 9000. Thus expenditures represent outflow of resources or assets while expenses represent cost of services rendered or goods or assets consumed during an accounting period. There are four situations where expenditure will have to be distinguished from expense: i) Expenditures during the accounting period which are also expenses of that period. This is the easiest category to handle, as there is no 'spillover' problem. Expenditure during the accounting period which will become expenses only in future periods. In such cases 11


cash or assets will be reduced and the new assets or services acquired will be shown in the balance sheet either as addition to assets or as prepaid expenses. iii) Expenditure during the previous accounting period which will become expenses during the current accounting period. In this case the assets or prepaid expenses representing the expenditure in the balance sheet will be reduced, as they are consumed during the current accounting period and the amount so consumed will be shown as the expense for the current accounting period. Expenses of current accounting period that have not yet been paid i.e. for which no expenditure has been incurred. For example, salaries /wages payable to the employees In respect of the last month of accounting period, where the date of payment falls beyond the accounting period. The amount corresponding to the current period will be shown as expenses in the income statement for the period and the amount relating to future period will be shown as liability in the balance sheet as deferred expense-or outstanding expenses.


2. Realization Concept The realization concept revolves around the determination of the point of time when revenues are earned. The concept followed is that revenue is realised when goods and services produced by a business enterprise are transferred to a customer either for cash or some other asset or, for a promise to pay cash or other assets in future. The important thing is that revenue is earned only when the goods are transferred or when services are rendered, following the legal principle relating to transfer of property. There must also be a reasonable expectation that the revenue will be realised either presently or in future. The thing to note is that revenue is not earned merely I when an order is received. Nor does recognition of the revenue have to wait till actual cash is paid. Consider a case where an order was received in April, the goods were transferred in May and the payment was received in June. The revenue would be deemed to have been earned in May when the transfer took place notwithstanding the fact that the order was received in April and cash was received in June. 3. Matching Expenses with Revenue Since all transfer of goods is considered to be sales for the period during which such transfers take place, we have to carefully trace the 12

expenses for producing the goods actually sold, if we are to determine the profit earned out of such sales. In other words, the earnings or revenues and the expenses shown in an income statement must both refer to the same goods transferred or services rendered to customers during the accounting period. Sometimes expenditures are incurred either in advance or subsequent to the accounting period even though they relate to expenses for goods or services sold during the current accounting period. In such cases careful determination of such expenses have to be made and appropriate adjustments will require to be made in order to determine the proper profits (or loss) for the current accounting period. The matching principle, then, requires that expenses should be matched to the revenues of the appropriate accounting period and not the other way around. Consequently, the first step must be to determine what are the revenues earned during a particular accounting period and then to determine the expenses incurred in order to generate or earn the revenues during that accounting period. The usual accounting practice is that those expenses, which cannot be traced to particular goods or services generating revenues, are charged as expenses in the income statement of the accounting period in which they are incurred. Obviously, the General Manager's salary and that of other administrative staff cannot be related to a specific product and accordingly, have to be charged as expenses in the income statement of the accounting period in which such salaries are paid. Such expenses are called period expenses, as distinct from those expenses known as product expenses which can be related to products. 4. Accrual Concept Since all accounting transactions are monetary transactions, the organisations have two options regarding timing of recording transactions viz. to record the transaction when it takes place (accrual basis), or to record at the time of receiving or paying money for that transaction (cash basis). For example, a purchase transaction can be recorded when the goods are received and accepted or when the payment is made to the supplier after the credit period allowed by him, say 30 days credit. Under the accrual concept, the transactions are recorded as soon as they take place irrespective of the timings of receipt or payment of money thereto. This concept is necessary to ensure that the financial statements of any period reflect effect of all relevant transactions that took place in that period. Even NPOs engaged in providing services need to use accrual concept for arriving at the proper costs of various services.



A NOTE ON DEPRECIATION Introduction The organization produces goods and services by using various types of resources. In doing so, it incurs operating expenses for use of such resources like materials consumed (material resource), salaries and wages (manpower resource), interest paid on loan (money resource) etc. These expenses are recurring and are forming a part of the profit and loss statement. On the other hand, the entire expenditure for a fixed asset is incurred on a one-time basis at the time of acquisition and this fixed asset is used in producing goods or services during its useful economic life which normally exceeds one year. Except land, all other fixed assets have a limited period of useful life. Hence, the fact that the asset is used during its useful economic life though its cost was paid only once at the time of acquisition must also be reflected in the profit and loss statement. In addition, when one determines the cost of a product produced or a service rendered, this cost of use of the fixed asset must be included otherwise the pricing of the product or service would be incorrect. Definition The process of gradually converting fixed assets into current operating expense over its useful economic life is called DEPRECIATION. The depreciable value of an asset is the cost of the asset less its salvage value. Thus, the depreciation amount per year would be equal to depreciable value divided by useful economic life. However, one does not require to calculate the depreciation of various assets as in India,


the depreciation rates for various assets are prescribed in the Schedule XIV of the Companies Act, 1956. Methods of computation Two widely used methods for computation of depreciation are: Straight Line Method, and Written Down Value Method. Under Straight Line method, the depreciable value of the asset is charged off in equal proportion during its useful economic life. In other words, the amount of depreciation remains the same throughout its useful life. Under Written Down Value Method, a depreciation percentage rate ( which is always higher than the depreciation rate under Straight Line method) is applied to the value of the asset at the beginning of each accounting period rather than the original cost. That is, the depreciation charged off during the year is deducted from the cost of the asset and the balance is known as the book value or Written Down Value. In the next year, the same depreciation percentage is applied on WDV. Example: An asset is purchased for Rs. 1000 and it has the useful economic life on 5 years. Therefore, the straight line depreciation rate would be 20% and the annual depreciation would be Rs. 200. Let us assume that depreciation rate under WDV is 25%. The WDV depreciation would be as follows: Year Opening WDV 1 1000 2 750 3 562.50 Depreciation 250 187.50 140.625 Closing WDV 750 562.50 421.875

and so on. Thus, under WDV method, the asset never depreciates to zero. Depreciation is tax-deductible expense. In India, for Income Tax purposes, only WDV method is allowed. Further, the WDV depreciation rates for income tax purposes are different from those specified in Schedule XIV of the Companies Act which are used for reporting purposes in the annual financial statements. Myth1: Depreciation is a Source of Fund


As defined, depreciation is a gradual process of converting the cost of the asset into an expense. Hence, it is a non-cash expense and there is no outflow of any money from the organization to anybody outside. We are simply deducting depreciation as one of the expenses from the profit and loss statement as a result of which the accounting profit decreases. Thus, depreciation does not bring in any additional funds and hence, it is not a source. Myth 2: Depreciation is a source of replacement funds for acquisition of new assets Some people argue that depreciation is charged as a mechanism for providing funds for replacement of the assets at the end of their useful life. This point of view is also without any foundation since even if the company saved cash equal to depreciation (extremely unlikely when companies have in fact to borrow for their liquidity requirement!!!!) , it could use such funds to buy new assets when the old assets are retired or sold. This would be feasible only if prices are constant. However, all of us know that there has been continuing inflation and prices of all items increase over a period of time. ***** ACCOUNTING MECHANICS & BASIC RECORDS PART I * In order to prepare the financial statements, accounting transactions are required to be recorded, classified and summarized. The mechanics of accounting in a sequential order is described in the following paragraphs. This Note covers the first 5 steps, and Part II covers the balance steps. 1) An accounting transaction takes place. 2) The transaction is recorded in a document called voucher providing all the necessary details of the transaction (types of vouchers are described later). 3) Depending upon the nature of the transaction, the names of accounts are selected and written in the voucher. 4) The transaction is then recorded in either one of the special day books or journal proper. 5) From the day books or journal proper, the relative amounts and details are posted to the debit/credit side in the ledger (general ledger). (Note: While describing the Ledger later in this note, the words debit and credit are introduced along with the rules for debit and credit). 6) Whenever the financial statements are required to be prepared (monthly or quarterly for MIS purposes, or least at the end of the


financial year for statutory purposes) then closing/adjustment transactions are identified and posted in the ledger. 7) The balances of each account in the ledger are computed and are transferred on a Trial Balance to verify the accuracy. 8) From the trial balance, profit & loss account is prepared first. The balance sheet is prepared at the end after incorporating any appropriations made from the profit of the year. 9) The books of accounts are then closed for that accounting year and new books for the next accounting year are opened with opening balances in the asset and liability accounts carried forward from the previous years closing balances. Types of Vouchers Depending upon the size of the organization and nature of transactions taking place in that organization, the following types of vouchers may be required: 1) Cash receipt/payment voucher to record receipt or payment of cash 2) Bank receipt/payment voucher to record receipt or payment through cheques 3) Purchase voucher - to record purchases on credit terms; any cash purchases are recorded through cash/bank payment voucher depending upon the mode of payment i.e. cash or cheque 4) Expense voucher - to record expenses as soon as they are incurred and if not paid immediately e.g. electricity or telephone bills 5) Sales invoice to record sales transactions 6) Journal voucher to record any transaction which can not be recorded through any of the above vouchers e.g. closing/adjustment entries, depreciation entries, entries to rectify mistakes made while recording original entries Types of Day books The purpose of a day book is to record the details of similar transactions in one book. Generally, the following day books are maintained: 1. 2. 3. 4. 5. Cash book Bank book Sales day book Purchase day book Journal proper (only for journal vouchers) 17

In a large organization, there can be transactions of purchase returns and sales returns. In such cases, separate day books for Purchase returns and Sales returns are maintained. The contents of various day books would be different. Day books permit to record similar transactions at one place. Thus, a day book is a chronological record of similar transactions. Ledger An organisation enters into a variety of transactions and hence, it needs to sort (technically speaking to post) these transactions and accumulate the effects of similar transactions. This is done on the basis of the nature of accounts involved (e.g. land, bank loan, sales, traveling expense etc.) and opening separate pages for each account in a register called Ledger or General Ledger. Thus, a ledger is a group of accounts covering assets, liabilities, income and expenses. A list of Accounts for which separate pages are opened in the Ledger is called a Chart of Accounts . Depending upon the volume of transactions expected, few pages are left blank between two accounts. As mentioned earlier, the related amounts are posted in the ledger account from the day book or journal. The difference in the entries in the day book and the same entries in the Ledger is that day book contains the details of entire transactions whereas the Ledger contains summary posting of all similar transactions occurred on that day. For example, 5 sales invoices were raised on 5 different customers on the same day. The Sales Day book would contain entire details of 5 transactions separately whereas the Ledger would have one summary entry in the Debtors/Accounts Receivable account (asset account) and Sales account (Income account). Each page of Ledger is numbered and this number is called Ledger Folio No. When the details are transferred from the day book, LF No. of Ledger is written against the entry in the day book and the page no. of day book is written against the entry in the Ledger. This helps in cross-checking of entries. However, its relevance is lost because of the computerised accounting systems. All accounts in the ledger appear in the shape of English Alphabet T and hence, they are also called T Accounts as shown below: Title of the Account 18

-----------------------------------------------------------------------Debit Side | Credit Side | | The title or name of the account is written above the line e.g. Cash-onhand, BOB Current A/c, Travelling Exp, Sale A/c, etc. the left hand side of the T account is called Debit Side and the right hand side is called Credit Side. Thus, to Debit means to post the amount in the left hand side of the T account and to Credit means to post the amount in right hand side. Thus, from the accounting point of view, the meanings of Debit/Credit is as mentioned above and does not carry any value judgments as per the dictionary meanings. Rules for Debit & Credit How does one decide as to when to debit and when to credit a particular account involved in a transaction? For this purpose, the following rules are used: 1. Increases in Assets signify Debits i.e. increase in asset is debit 2. Decreases in assets signify Credits i.e. decrease in asset is credit 3. Increases in Liabilities signify Credits i.e. increase in liability is credit 4. Decreases in Liabilities signify Debits i.e. decrease in liability is debit In addition to transactions related to asset and liability, there are also transactions related to income and expense accounts. We know that profit, which is a difference between income and expenses, increases Owners Equity and increase in Owners equity is credit as per above rule. This implies that income accounts are credits (because profit is earned only if income exceeds expenses) and expense accounts are debits. Hence, 2 more rules: 5. All Income accounts are credited 6. All Expense accounts are debited. As per above rules, for every debit there would be equal amount of credit. Hence, for every transaction, the sum of debit amount would always be equal to sum of the credit amount. Naturally, this follows from the Accounting Equivalence Concept (Assets = Liabilities + Owners equity) related to the Balance Sheet.


Subsidiary Ledgers An organisation may require to maintain additional details for certain transactions. For example, it may be buying raw materials or other inputs from several parties and the purchase department needs to know the details of partywise purchases or outstandings. Similarly, a NPO may be receiving funds from different donor agencies and for different projects in which case it may require to submit the details of donorwise receipts and expenses and /or projectwise receipts and expenses. If the details of all parties, donors or projects are included in the general ledger, it would become bulky. In such cases, subsidiary ledgers are used for maintaining the required details and only the summary entry is entered/posed in the general ledger. Accordingly, there would be subsidiary ledgers for the suppliers, customers, donor/funding agencies, projects etc.

Relationship between the Rules of Debit and Credit, and the Accounting Equation Assets Liabilities + Owners Equity -------------------- = ----------------------------------------------------------+ + Retained Contributed Debit Credit Debit Credit Earnings Capital + + Debit Credit Debit Credit
Net loss Net Income Dividend


Revenues Debit + Credit

Expenses + Debit Credit



The Part I of the Note covered the first 5 steps of the accounting mechanics and basic records. In this Note, the balance steps are covered leading up to the closing of books of accounts for a given financial year. 6) Whenever the financial statements are required to be prepared (monthly or quarterly for MIS purposes, or at the end of the financial year for statutory purposes) then all adjustment transactions are identified and posted in the day book and/or the ledger. 7) Each account in the Ledger is closed and the balance in each account is computed. 8) The closing balances of all accounts are transferred on a Trial Balance to verify the accuracy. If the sum of debits is not equal to sum of credits on a trial balance then the errors/mistakes are detected and resolved. When the trial balance is prepared from


the closing balances of ledger accounts before posting of adjustment and closing entries then it is called Unadjusted Trial Balance. The trial balance after taking the effects of adjustment entries is called Adjusted Trial balance. 9) From the trial balance, profit & loss account is prepared first. For this purpose, balances of revenue accounts and expense accounts are transferred to an account called P &L Account thereby making balances in revenue and expense accounts zero. Lastly, appropriation entries will be identified and posted. The balance sheet is prepared at the end after incorporating appropriations made from the profit of the year. After posting appropriations entry, the balance in P & L account will become zero. 10) The books of accounts are then closed for that accounting year and new books for the next accounting year are opened with opening balances in the asset and liability accounts carried forward from the previous years closing balances. The new books will not have any opening balances in the income and expense accounts. Adjustment/Closing Entries Several adjustment/closing entries related to a given accounting period (usually April to March) are required before completing the books of accounts. Some of these adjustments are as under: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. Recording of accrued expenses Recording of accrued revenues Allocating revenues received in advance Allocating Expenditure incurred in advance Computation of the Cost of Goods sold Providing for bad debts Writing off bad debts Amortising of specific assets Providing for depreciation Providing for income tax P & L Appropriation Entries.

Balancing a T Account Whenever a need arises to know the balance in any of the T account (especially when the financial statements are to be prepared) then one needs to balance that account. For this purpose, both debit and credit side amounts are totaled and the difference is written on the lower side as balance carried down such that both sides match. The difference is then written on that side which was having higher balance 22

and this difference is called the balance in T account at that point of time. For Example: Cash-on-hand -----------------------------------------------------------------------Debit 10000 | 4000 Credit 3000 | 1500 1000 | 500 | 3000 | 5000 Balance carried down ===== |============ 14000 | 14000 =====|========== Balance carried forward 5000 | -----------------------------------------------------------------------------------------------


Trial Balance The trial balance is extracted from the ledger on a particular day by collecting all debit and credit balances from the ledger as on that day (e.g. Rs. 5000 for Cash-on-hand as shown above). The format may be as under: Trial balance as on dd/mm/yyyy Name of the Account Dr Amount Account 1 Account 2 Account n Total The total of Debit and Credit side in a trial balance should be equal. If not, then there is likely to be a mistake in posting a transaction or a mistake of balancing a T account. Thus, the Trial Balance proves arithmetical accuracy of the books of accounts. Financial Statements The Profit & loss statement is prepared first from the adjusted trial balance after recording the effects of the adjustment entries. First an account called P & L Account is opened. All revenue accounts are debited and the new P & L Account is credited, all expense accounts are credited and the P&L Account is debited. In short, at this stage, all revenue and expense accounts in GL will have zero balance and the new P&L Account will have the balance Credit balance if profit ,or debit balance if loss. Assuming that there is a credit balance (profit), the last set of entries would be: a) Provision for income tax (if payable, net of advance tax paid) P & L Account Dr Provision for income tax Cr b) Proposed dividend P & L Account Dr Proposed Dividend Cr c) Balance transferred to various Reserves & Surplus accounts. P & L Account Dr Reserves & Surplus Account(s) Cr Cr Amount


The above entries will reduce the balance in P & L Account to zero and all credit entries of above 3 would go to the balance sheet. At this stage, the final balance sheet will be prepared. Closing of Books of Accounts After preparation of the financial statements for a given accounting period, the books of accounts are closed for that accounting period. This means that new day books and Journal proper are opened for the new accounting period. The opening balances, if applicable like cash and bank book, are carried forward from the previous years closing balances. The new Ledger is also opened with all types of accounts viz. assets, liabilities, income and expenses. Since, the organization carries forward the balances of only assets and liabilities accounts, while opening such accounts in the ledger for the new year, such balances are carried forward and recorded as the Opening Balances in the respective account. ***********************

Exercise 1 Cost Concept 25

1. A company buys material x from another company. The consignment is of 500 kg. @ Rs. 10 per kg. (ex-works price). The excise is 10% and the Central Sales Tax (CST) is 4%. The buyer has to bear freight of Rs. 250. The unloading charges would be Rs. 100. Calculate the landed cost. 2. A company receives an invoice for 1000 units of a material @ Rs. 10 per unit ex-works price, excise 15%, CST 4%. However, the accountant found that only 900 units were accepted and 100 units were sent back to the supplier, as they were defective. He also found that Rs. 5000 was paid as advance to this party. Help him to compute the landed cost. 3. A company imported a raw material @ $10/kg. FOB basis. The total quantity was 1000 kg. The ocean freight and insurance worked out to 4% of FOB value. The customs duty was 18%. Inland freight and insurance worked out to Rs. 10000. Calculate the landed cost. 4. A company had purchased the land for Rs. 10 lakhs in 1996, which remained unutilized till recently. In 2003, it was decided to set up a new plant on this land whose current market price was Rs. 25 lakhs. Land improvement would cost another Rs. 5 lakhs. What is the cost of land and land improvements that is relevant for this project? 5. A company has ordered a reactor from XYZ Engg. Co. The value of the order is Rs. 25 lakhs (ex-works) inclusive of all taxes, if any. Since it is a high-pressure item, the buyer sent its Engineer for pre-delivery inspection and this trip cost Rs. 10000 to the company. During hydraulic testing, one component failed damaging the reactor. The total cost of repairs was Rs. 3 lakhs. After successful testing, the reactor was dispatched. The freight and handling costs worked out to Rs. 50000. The erection and commissioning required the company to spend another Rs. 50000. Calculate the cost of reactor for recording in the books of accounts. ****


Exercise 2 - Accounting Equation Study the following transactions. Identify appropriate asset/liability account and enter their names in the blank worksheet provided. Write the effects of each transaction in appropriate columns. 1. Gandhi & Co. was established with a share capital of Rs. 80000. The capital was deposited in ICICI Banks Vadodara Branch. 2. Purchased goods worth Rs. 30000 by issuing the cheque. 3. Withdrew Rs. 10000 from the bank for purchase of few items and other expenses. 4. Purchased office furniture worth Rs. 4000 on payment of cash. 5. Sold goods worth Rs. 30000 for Rs. 35000 and deposited a cheque received from the buyer. 6. Purchased goods worth Rs. 25000 from XYZ and promised to pay after one week. 7. Goods worth Rs. 5000 were damaged. No insurance policy was taken. The remaining goods were sold for Rs. 25000. The customer promised to pay within 3-4 days. 8. The customer paid Rs. 20000 and expressed his inability to pay the balance. However, the supplier was paid in full. 9. Paid salary to the office boy- Rs. 1000. Paid office rent - Rs. 2000. 10. Purchased goods worth Rs. 20000 from XYZ and forwarded them to ABC with 10% mark-up. The money was neither received from ABC nor paid to XYZ. 11. ABC returned goods worth Rs. 11000, which in turn, was returned to XYZ. 12. Additional capital of Rs. 20000 was infused in the firm.


Exercise 2 - Worksheet ASSETS Transaction No. 1 2 3 4 5 6 7 8 9 10 11 12 Assets = LIABILITIES + OWNERS EQUITY Liabilities Capital, (Owners Equity)


Exercise 3 Expenditure versus Expenses Fill in the blanks. Sr. Transaction No .

On the date of transaction, state whether Expenditure or expense Expenditure

Ex. Paid Rs. 12,000/= insurance on 1.1.2002 for one year 1 Purchased office stationery worth Rs. 2000/- in Feb. 2002. All items were consumed by 31st march 2 Took stock-in-transit insurance on 1.1.2002 for 3 months and paid Rs. 5000/as premium. 3 Paid office rent of Rs. 12000/- in advance for 3 months on 1-2-2002. 4 Hired a godown for 6 months on 1-3-2002 and paid 6-month rent of Rs. 18000/- on 1.3.2002. 5 Electricity bill of Feb. 2002 of Rs. 5000/- paid on 5.3.2002. 6 Paid an advance of Rs. 10000/- to a supplier on 1.2.2002 for supply of an item. No delivery made by 31.3.2002 7 Paid Rs. 10000/- to an employee on 25.3.2002 for his trip. He did not return by 31.3.2002. 8 Salaries for March 2002 Rs. 25000 not paid as on 31-32002

If expenditure, write amounts of expense and carried forward expenditure on 31.3.2002 Expense Expenditure 3000 9000


Exercise 4 - Debits & Credits For each of the following transactions, identify the accounts to be debited and credited and the amounts. Compare your answers with the posting of the same transactions using the accounting equation. 1. Gandhi & Co. was established with a share capital of Rs. 80000. The capital was deposited in ICICI Banks Vadodara Branch. 2. Purchased goods worth Rs. 30000 by issuing the cheque. 3. Withdrew Rs. 10000 from the bank for purchase of few items and other expenses. 4. Purchased office furniture worth Rs. 4000 on payment of cash. 5. Sold goods worth Rs. 30000 for Rs. 35000 and deposited a cheque received from the buyer. 6. Purchased goods worth Rs. 25000 from XYZ and promised to pay after one week. 7. Goods worth Rs. 5000 were damaged. No insurance policy was taken. The remaining goods were sold for Rs. 25000. The customer promised to pay within 3-4 days. 8. The customer paid Rs. 20000 and expressed his inability to pay the balance. However, the supplier was paid in full. 9. Paid salary to the office boy- Rs. 1000. Paid office rent - Rs. 2000. 10. Purchased goods worth Rs. 20000 from XYZ and forwarded them to ABC with 10% mark-up. The money was neither received from ABC nor paid to XYZ. 11. ABC returned goods worth Rs. 11000, which in turn, was returned to XYZ. 12. Additional capital of Rs. 20000 was infused in the firm. *****


Exercise 5 - Adjustment & Closing Entries Record entries as on 31/3/2003 for each of the followings: (A) Accrued Expenses 1. A company has an outstanding loan of Rs. 50.00 lakhs as on 1.4.02 @15% p.a. Write the interest entry for the following two cases: (a) The interest is payable quarterly at the end of the quarter. The interest due on 31.3.03 was not paid as on 31.3.03. Principal amount is paid @ Rs. 5.00 lakhs per quarter along with the interest. (b) The interest is payable on 30th June and 31st December. The principal amount is paid @ Rs. 5.00 lakhs every 6 months along with the interest. 2. A company received goods from XYZ on 25.3.03. However, the bill from XYZ was not received. The purchase order for this consignment was for Rs. 35000/-. What changes, if any, in the entry would be there if the goods were received along with the bill from XYZ? 3. The last telephone bill was received for the period upto 15.2.03. The next bill would be received only on 15.4.03. On an average, the telephone expenses are Rs. 4000 per month. Accrued Revenues


1. A company has invested Rs. 25 lakhs as inter-corporate-deposit @20% p.a. for the period 1.1.03 to 31.5.03. The principal amount together with accrued interest would be received on 31.5.03. 2. A commission agent receives 2% commission on sales of products of XYZ. The commission is paid once in a quarter. The total sales during Jan-Mar 2003 were Rs. 25 lakhs. He has not yet received his dues as on 31.3.03. (C) 1. Allocating Revenue received in advance : A magazine house received a subscription of Rs. 24000 for the period 1-12-02 to 30.11.03.



A company had received an advance of Rs. 5 lakhs on 1-1202 for delivery of goods of Rs. 1.00 lakh for next 5 months starting from December 2002. The entry for delivery made in March 2003 is pending.

(D) Allocating Pre-paid Expenses (expenses incurred in advance) 1. A company has paid 6 months rent of Rs. 60000 on 1-1-03. The entry of rent expense for March 2003 is pending. 2. The company took insurance policy by paying premium of Rs. 48000 for the period 1-8-02 to 31-7-03. The entry for 1-8-02 to 31-3-03 is pending. (E) Computation of Cost of Goods Sold 1. A trading company had opening stock of Rs. 50,000 on 1-1-03. During Jan-Mar 2003, it purchased goods worth Rs. 200000. The closing stock on 31-3-03 was Rs. 20000. Compute CGS and show all entries as on 31-3-03. 2. The following balances were found in various accounts as on 31-303 for a manufacturing company: Op. stock of raw materials (1-1-03) Op. stock of stores items (1-1-03) Purchase of r/m (Jan-Mar 03) Purchase of stores ( ) Factory wages (Jan-Mar 03) Factory rent ( ) Factory electricity ( ) Pollution Control Expenses ( ) Laboratory Expenses ( ) Closing stock of r/m (31-3-03) Closing stock of stores (31-3-03) Op. stock of finished goods (1-1-03) Closing stock of finished goods (31-3-03) 50000 15000 200000 25000 60000 6000 15000 12000 6000 20000 15000 20000 25000

Compute cost of goods manufactured and cost of goods sold for JanMar 2003. (F) Providing for Bad Debts

1. A company has an opening balance of Rs. 15000 as on 1-4-02 at the credit of provision for bad debts. It was a policy of providing for bad debts @ 2% of Debtors amount at the year-end. The year-end


balance in debtors account was Rs. 30 lakhs. Record the entry for provision for bad debts. 2. As on 31-3-03 the company found that it needed Rs. 25000 as provision for bad debts as per the policy. However, due to conservative attitude, the balance in this account had gone up to Rs. 35000. How would you rectify?

(G) Writing off Bad Debts 1. As on 31-3-03, a company had a provision of Rs. 5000 for bad debts. One of the customers whose outstanding was Rs. 2000 became insolvent and there was no hope to receive this amount. 2. As on 31-3-03, a company had a balance of Rs. 10000 in provision for bad debts, based on a specific policy. However, during the year, 3 customers having total outstanding of Rs. 12000 became defaulters and vanished. 3. A company had supplied goods worth Rs. 5000 to XYZ during financial year 2001-02. During the same year, XYZ expressed its inability to pay this amount and hence, the company had written off this amount on 31-3-02. But, XYZ revived its business in FY 200203 and decided to pay all its suppliers. Accordingly, XYZ paid Rs. 5000/- to this company on 31-3-03. What would be the entry in the books of this company? 4. Against the outstanding of Rs. 30000, a company received only Rs. 15000 and the balance was to be written off. No provision for bad debt was made earlier. (H) Amortising specific Assets 1. A business acquired a patent worth Rs. 20000 on 1-4-02 with the right to exploit it commercially for 5 years. Write the entry for 2002-03. (I) Providing for Depreciation 1. The Plant and machinery at cost was Rs. 40 lakhs and was depreciated @10% (SLM). The balance at the credit of Accumulated depreciation was Rs. 12 lakhs as on 1-4-02. Write the depreciation entry for 2002-03. What is the net block of P&M as on 31-3-03? 2. In the above example, if depreciation rate were 10% based on WDV, what would be your answers?


(J) Providing for Income Tax 1. After the profit for the current accounting period has been determined, an estimate is made of the income tax payable in the context of prevailing tax laws and regulations. Suppose a business has made a profit of Rs. 3 lakhs and tax rate is 40%. Write the provision entry. 2. As per the requirements in India, a company deposited advance tax on 15-6-02, 15-9-02, 15-12-02 and 15-3-03 based on estimated profit. The total amount of advance tax was Rs. 45000. At the year end, the companys taxable profit was Rs. 150000 and the tax rate was 40%. Show all entries as on 31-3-03. (K) Providing for Dividends

1. Subject to the relevant provisions under the companies Act, a company declares the dividend from the profit after deduction of income tax. The provision for dividend is made while closing the books, and is paid after approval from the shareholders in AGM that takes place in the next financial year. Suppose a company has 10 lakhs shares of par value of Rs. 10 each. For F.Y. 2002-03, it decided to declare a dividend of 10%. Write the provision entry. (L) Reserves/carried forward balance in P&L Account 1. Once the provision for dividend is made from the profit after tax, the residual balance/amount is retained in the business for use during the subsequent accounting periods. Suppose a company had PBT of Rs. 100000, Tax of Rs. 40,000, dividend of Rs. 30000. Show all the entries including transfer to Reserves such that the balance in P&L account becomes zero. *****


MODEL DEMONSTRATION FARM (A) (Preparation of Financial Statements) After six months of operations, Mr. Joseph, the Head of the Model Demonstration Farm (MDF) was reviewing the financial performance of MDF which was set up for providing supervised demonstration of effective ways of using the agricultural inputs and farming technology. It was set up in April 2001 with Rs. 2,100,000 of capital provided by a large fertilizer company. MDF borrowed a sum of Rs. 4,450,000 from an Agricultural bank. Though interest on the loan was payable on quarterly basis, no principal repayment was required during the first year. With these funds, it purchased land for Rs. 800,000 and spent Rs. 3,200,000 for building and other infrastructure. It spent Rs. 1,320,000 for equipments and furniture. The entire amount was paid from the initial funds. During the first 6 months which ended on 30th September, 2001, the following amounts were paid in cash: Salaries Insurance Utilities Material Purchase Interest Total Rs. 1,312,000 Rs. 134,000 Rs. 101,900 Rs. 437,000 Rs. 364,200 Rs. 2,349,100

MDF received Rs. 1,688,000 of fees from various inputs/implements manufacturers who organized demonstrations at MDF. As on 30th September, 2001, MDF had to receive Rs. 60,000 of fees, had some inventories worth Rs. 32,000 and had to pay Rs. 52,000 to suppliers. Mr. Joseph estimated that for the next 6 months ending 31st March 2002, he would receive Rs. 2,560,000 as fees (in addition to outstanding amount of Rs. 60,000). The estimated expenses were as under:


Salaries Utilities Material Purchase Interest

Rs. 1,312,000 Rs. 128,000 Rs. 560,000 Rs. 272,000

He expected inventories to be Rs. 32,000, no outstanding to suppliers, and no additional payment for insurance as Rs. 134,000 paid earlier was for the whole year. He was of the opinion that MDF being a nonprofit organization, there is no need to provide for any depreciation. Required: 1. Prepare the Balance Sheet of MDF as on 30th September, 2001 and as of 31st March, 2002. 2. Prepare the operating statements for the periods AprilSeptember 2001, and Oct 2001 March 2002. How are they related to the balance sheets prepared earlier ? 3. Do you think MDF is a viable entity in terms of financial solvency ?



LIABILITIES Capital Profit/Loss for the period Loan from Agri Bank Creditors/Payables TOTAL ASSETS Fixed Assets Land Building etc. Equipt/Furni. Current Assets Cash/Bank Prepaid Insurance Debtors Stock TOTAL


MODEL DEMONSTRATION FARM WORKSHEET FOR PREPARING PROFIT & LOSS STATEMENT PARTICULARS Income from fees Expenses: Salaries Interest Insurance Expense Utilities Material consumed TOTAL PROFIT/LOSS APRIL SEPT 2001 OCT 2001 MAR 2002


MODEL DEMONSTRATION FARM (B) (Accounting Mechanics & Financial Statements) Model Demonstration Farm (MDF) was set up in April 2001 as a separate entity by a large fertilizer company for providing supervised demonstration of effective ways of using the agricultural inputs and farming technology. The fertilizer company provided initial capital of Rs. 2,100,000. MDF borrowed a sum of Rs. 4,450,000 from an Agricultural bank @ 12 % per annum. Though interest on the loan was payable on monthly basis, no principal repayment was required during the first year. With these funds, it purchased land for Rs. 800,000 and spent Rs. 3,200,000 for building and other infrastructure. It spent Rs. 1,320,000 for various equipments. The entire amount was paid from the initial funds. During the first month i.e. April 2001, the following transactions took place. 1. Purchase of materials on cash Rs. 300,000 2. Purchase of materials on credit Rs. 300,000 3. Various manufacturers of inputs/implements organized demonstrations for which total fees were Rs. 1,000,000. As on 30th April 2001, Rs. 800,000 was received and the balance was receivable. 4. A sum of Rs. 100,000 was paid towards wages to the laborers. However, the salaries of the staff for April 2001 amounting to Rs. 150,000 were to be paid on 2nd May 2001 as per the practice. 5. It received electricity bill of Rs. 50,000 and telephone bill of Rs. 25,000, which was not paid till 30th April 2001. 6. The interest on the term loan for April 2001 was paid on 30th April 2001. 7. Closing stock of materials on 30th April 2001 Rs. 200,000 Required: 4. Prepare the opening balance sheet (You have already done it) and post the opening balances in the general ledger. 5. Journalise the transactions and post them in the general ledger and prepare trial balance as on 30th April 2001.


6. Prepare the profit & loss statement for the month of April 2001 and the balance sheet as on 30th April 2001. (Ignore the depreciation). ****

MODEL DEMONSTRATION FARM (B) Worksheet - Journalising the transactions Transacti on No. 1 2 3 4(a) Wages 4(b) Salaries 5 (a) Electricity 5 (b) Telephone 6 Name of the Account (a) (b) (a) (b) (a) (b) (c) (a) (b) (a) (b) (a) (b) (a) (b) (a) (b) Dr Amount Cr Amount


MODEL DEMONSTRATION FARM (B) Worksheet General Ledger Capital Loan Land Buildings Equipments



Income from Fees





Salaries Payable

Electricity Expenses

Electricity Exp. Payable

Telephone Expenses

Telephone Exp. Payable

Interest Expenses

Material Consumed


MODEL DEMONSTRATION FARM (B) Worksheet Trial Balance Name of the Account Capital Loan Land Buildings Equipments Cash/Bank Stock Creditors Income from fees Debtors Wages Salaries Salaries Payable Electricity Expenses Electricity Exp. Payable Telephone Expenses Telephone Exp. Payable Interest Expenses Material consumed Dr Amount Cr Amount