AKS University, Satna

B.Com(H) CSP/CAP- 1st Semester

Subject- Financial Accounting
UNIT 1
Meaning of Accounting:
Accounting is the art of recording, classifying, summarizing, analyzing, interpreting and
communicating the financial information of an entity. Accounting is language of business.

Procedural Aspects of Accounting:

a. Generating Financial Information

b. Using Financial Information
The objective of financial statements is to provide information about the financial position,
performance and cash flows of an enterprise that is useful to a wide range of users in making
economic decisions.
There are certain users of accounts i.e. the owners and management of business enterprises,
investor, employees, lenders, suppliers, customers, government and other agencies and public.
The users should understand not only the financial results, but also should be able to assess its
reliability and compare it with information about alternative opportunities and the past
experience.
Functions of Accounting
The main functions of accounting are as follows:-
1. Measurement: Accounting measures the performance of the business entity and depicts its
current financial position.
2. Forecasting: Accounting helps in forecasting future performance and financial position of
enterprise using past data.
3. Decision-making: Accounting provides relevant information to the Users of accounts to aid
rational decision-making.
4. Comparison & Evaluation: Accounting assesses performance achieved in relation to targets
and discloses information regarding accounting policies and Contingent Liabilities, which play
an important role in predicting, comparing and evaluating the financial results.
5. Control: Accounting identifies weaknesses in the operational system and provides feedback
regarding effectiveness of measures to rectify such weaknesses.
6. Government Regulation: Accounting provides necessary information to the Government, to
exercise control on the entity as well as in collection of direct and indirect tax revenues.

Book-Keeping
Meaning : It is an activity of recording and classifying the financial data relating to business
operations in a significant and orderly manner.
Objective :
 Complete recording of transactions.
 Ascertainment of financial effect on the business.
Book-Keeping Vs Accounting
Basis Book-keeping Accounting
1 Scope Book-keeping involves- In addition to book-keeping, Accounting
(a) Identifying the transactions involves-
(b) Measuring the identified (a) Summarizing the classified
transactions, transactions,
(c) Recording the measured (b) Analyzing the summarized results,
transactions, (c) Interpreting the analysed results, and
(d) Classifying the recorded (d) Communicating the information to
transactions. interested parties.
2 Stage Book-keeping is the primary stage, Accounting is the secondary
(i.e. record-keeping phase) (summarizing) stage. It starts where
book-keeping ends.
3 Basic To maintain systematic records of To ascertain net results of operations
Objective financial transactions. and financial position and to
communicate information to the
interested parties.
4 Person Book-keeping is done by Junior Accounting work is performed by Senior
Staff. Staff.
5 Analytical Book-Keeper may or may not Accountant is required to possess
Skills possess analytical skills. analytical skills.
 6 Nature of The job of a Book-Keeper is often The job of an Accountant is analytical in
job routine and clerical in nature. Nature.
7 Financial Financial Statements do not Financial Statements are part of the
Statement form a part of the book-keeping accounting process. These Statements
process. are prepared based on book-keeping
records.
8 Financial Financial position of the business Financial position of the business is
position cannot be ascertained through ascertained based on the accounting
book keeping reports.
9 Sub-fields There are no sub-fields for Book- It has several sub-fields such as Financial
Keeping. Accounting, Management Accounting,
etc.
10 Managerial decision cannot be Management can take decision on the
Managerial taken with the help of book- basis of accounting records and
decision keeping records alone. statements.

ACCOUNTING CONCEPTS
Entity Concept:
Business is separate from its owner. Owner related transaction not recorded as business
transaction. i.e. owner capital is shown as liabilities in the business, owner expenses recorded
as drawing not business exp and bank account can not use for personal transaction.
Money Measurement Concept:
Only those transactions, which can be measured in terms of money, are recorded.
i.e. Employees are not recorded as an Asset in the Balance Sheet. Qualitative information is not
recorded in the books of account.
Periodicity Concept:
According to this concept accounts should be prepared after every period & not at the end of
the life of the entity. Usually this period is one calendar year. In India we follow the financial
year which started from 1st April of a year to 31st March of the immediately following year.
Cost Concept:
By this concept, the value of an asset is to be determined on the basis of historical cost, in other
words, acquisition cost. Hence, All the fixed assets are recorded at Historical Cost only and
market value of fixed assets is ignored.
Matching concept:
In this concept, all expenses matched with the revenue of that period should be taken into
consideration. In the financial statement of the organization if any revenue is recognized then
related expenses to be incurred for that revenue, should also be recognized.
Conservatism Concept
Conservatism states that the accountant should not anticipate income and should provide for
all possible losses.
Effects:
Provision for doubtful debts is created at the end of the year.
Stock is valued at Cost or NRV, whichever is less.
Materiality Concept:
According to Materiality principle, all the items having significant economic effect on the
business of the enterprise should be disclosed in the financial statements and any insignificant
item which will not be relevant to the users need should not be disclosed in the financial
statement.
Dual Aspect Concept:
Every Transaction has two effects: Debit and Credit. Both are opposite and equal also known as
Double Entry System. Accounting equation has been derived on the basis of dual aspect
concept as under:
Assets = Liabilities + Equity (Balance Sheet Equation)
Net Profit = Income – Expenses (Profit & Loss Equation)

Going Concern Concept

The financial statements are normally prepared on the assumption that an enterprise is a going
concern and will continue in operation for the foreseeable future. Hence, it is assumed that the
enterprise has neither the intention nor the need to liquidate or curtail (Less) materially the
scale of its operations.
Effect that the assets are classified as current assets and fixed assets and The liabilities are
classified as short-term liabilities and long-term liabilities.
Accrual Concept:
Accrual means recognition of revenue and costs as they are earned or incurred and not as
money is received or paid.
Advance money received is not treated as a sale.
Consistency Concept
It is assumed that accounting policies are consistent from one period to another.
An enterprise should change its accounting policy in any of the following circumstances only:
a. To bring the books of accounts in accordance with the issued Accounting Standards.
b. To compliance with the provision of law.
c. When under changed circumstances it is felt that new method will reflect more true and fair
picture in the financial statement.

Accounting Convention:
(Tradition)
Accounting conventions are certain guidelines for complicated and unclear business
transactions. While standardizing the financial reporting process, these conventions consider
comparison, relevance, full disclosure of transactions, and application in financial statements.
Though it is not compulsory or legally binding, these generally accepted principles maintain
consistency in financial statements.
Accounting Standards:
Accounting Standards are formulated by ASB and issued by the Council of ICAI. Accounting
standards cannot override the statue.
Accounting standards is a selected set of accounting policies or broad guidelines regarding the
principles and method to be chosen out of several alternatives. Standards conform to
applicable laws, customs usage and business environment.
Accounting Standards are mandatory for companies as per companies act, 1956.
So far 32 Accounting standards have been issued by ICAI.
OBJECTIVES
(i) eliminate the non-comparability of financial statements and thereby improving the
reliability of financial statements; and
(ii) provide a set of standard accounting policies, valuation norms and disclosure requirements.
ICAI’s AS-1: Disclosure of Accounting Policies (as on 01/02/2022)
AS-1 deals with the disclosure of significant accounting policies followed in preparing and
presenting financial statements, by way of a separate statement/ notes forming part of such
financial statements, to facilitate meaningful comparison of financial statements of different
enterprises/ periods.
ICAI’s AS-2: Valuation of Inventories (as on 01/02/2022)
This Standard deals with the determination of value at which inventories are carried in the
financial statements, including the ascertainment of cost of inventories and any write-down
thereof to net realisable value.
ICAI’s AS-3: Cash Flow Statements (as on 01/02/2022)
This Standard deals with the provision of information about the historical changes in cash and
cash equivalents of an enterprise by means of a Cash Flow Statement which classifies cash flows
during the period from operating, investing and financing activities.
ICAI’s AS-4: Contingencies and Events Occurring After Balance Sheet Date (as on 01/02/2022)
This Standard deals with the treatment of contingencies and events occurring after the balance
sheet date.
ICAI’s AS-5: Net profit or Loss for the period, Prior Period Items and Changes in Accounting
Policies (as on 01/02/2022)
This Standard should be applied by an enterprise in presenting profit or loss from ordinary
activities, extraordinary items and prior period items in the Statement of Profit and Loss, in
accounting for changes in accounting estimates, and in disclosure of changes in accounting
policies.
ICAI’s AS-7: Construction Contracts (as on 01/02/2022)
This Standard prescribes the accounting for construction contracts in the financial statements of
contractors.
ICAI’s AS-9: Revenue Recognition (as on 01/02/2022)
This Standard deals with the bases for recognition of revenue in the Statement of Profit and Loss
of an enterprise. The Standard is concerned with the recognition of revenue arising in the course
of the ordinary activities of the enterprise from: a) Sale of goods; b) Rendering of services; and c)
Interest, royalties and dividends.
ICAI’s AS-10: Property, Plant and Equipment (as on 01/02/2022)
The objective of this Standard is to prescribe the accounting treatment for property, plant and
equipment (PPE).
ICAI’s AS-11: The Effects of Changes in Foreign Exchange Rates (as on 01/02/2022)
AS 11 lays down principles of accounting for foreign currency transactions and foreign
operations, i.e., which exchange rate to use and how to recognise in the financial statements the
financial effect of changes in exchange rates.
ICAI’s AS-12: Government Grants (as on 01/02/2022)
This Standard deals with accounting for government grants. Government grants are sometimes
called by other names such as subsidies, cash incentives, duty drawbacks, etc.
ICAI’s AS-13: Accounting for Investments (as on 01/02/2022)
This Standard deals with accounting for investments in the financial statements of enterprises
and related disclosure requirements.
ICAI’s AS-14: Accounting for Amalgamations (as on 01/02/2022)
This Standard deals with accounting for amalgamations and the treatment of any resultant
goodwill or reserves.
ICAI’s AS-15: Employee Benefits (as on 01/02/2022)
The objective of this Standard is to prescribe the accounting treatment and disclosure for
employee benefits in the books of employer except employee share-based payments. It does not
deal with accounting and reporting by employee benefit plans.
ICAI’s AS-16: Borrowing Costs (as on 01/02/2022)
This Standard should be applied in accounting for borrowing costs. This Standard does not deal
with the actual or imputed cost of owners’ equity, including preference share capital not
classified as a liability.
ICAI’s AS-17: Segment Reporting (as on 01/02/2022)
The objective of this Standard is to establish principles for reporting financial information, about
the different types of segments/ products and services an enterprise produces and the different
geographical areas in which it operates.
ICAI’s AS-18: Related Party Disclosures (as on 01/02/2022)
This Standard should be applied in reporting related party relationships and transactions
between a reporting enterprise and its related parties. The requirements of this Standard apply
to the financial statements of each reporting enterprise and also to consolidated financial
statements presented by a holding company.
ICAI’s AS-19: Leases (as on 01/02/2022)
The objective of this Standard is to prescribe, for lessees and lessors, the appropriate accounting
policies and disclosures in relation to finance leases and operating leases.
ICAI’s AS-20: Earnings Per Share (as on 01/02/2022)
AS 20 prescribes principles for the determination and presentation of earnings per share which
will improve comparison of performance among different enterprises for the same period and
among different accounting periods for the same enterprise.
ICAI’s AS-21: Consolidated Financial Statements (as on 01/02/2022)
The objective of this Standard is to lay down principles and procedures for preparation and
presentation of consolidated financial statements. These statements are intended to present
financial information about a parent and its subsidiary(ies) as a single economic entity to show
the economic resources controlled by the group, obligations of the group and results the group
achieves with its resources.
ICAI’s AS-22: Accounting for Taxes on Income (as on 01/02/2022)
The objective of this Standard is to prescribe accounting treatment of taxes on income since the
taxable income may be significantly different from the accounting income due to many reasons,
posing problems in matching of taxes against revenue for a period.
ICAI’s AS-23: Accounting for Investments in Associates (as on 01/02/2022)
This Standard should be applied in accounting for investments in associates in the preparation
and presentation of consolidated Financial Statements (CFS) by an investor.
ICAI’s AS-24: Discontinuing Operations (as on 01/02/2022)
The objective of AS 24 is to establish principles for reporting information about discontinuing
operations, thereby enhancing the ability of users of financial statements to make projections of
an enterprise’s cash flows, earnings generating capacity, and financial position by segregating
information about discontinuing operations from information about continuing operations. AS
24 applies to all discontinuing operations of an enterprise.
ICAI’s AS-25: Interim Financial Reporting (as on 01/02/2022)
This Standard applies if an entity is required or elects to publish an interim financial report. The
objective of AS 25 is to prescribe the minimum content of an interim financial report and to
prescribe the principles for recognition and measurement in complete or condensed financial
statements for an interim period.
ICAI’s AS-26: Intangible Assets (as on 01/02/2022)
AS 26 prescribes the accounting treatment for intangible assets (i.e. identifiable non-monetary
asset, without physical substance, held for use in the production or supply of goods or services,
for rental to others, or for administrative purposes).
ICAI’s AS-27: Financial Reporting of Interests in Joint Ventures (as on 01/02/2022)
The objective of AS 27 is to set out principles and procedures for accounting for interests in joint
ventures and reporting of joint venture assets, liabilities, income and expenses in the financial
statements of venturers and investors.
ICAI’s AS-28: Impairment of Assets (as on 01/02/2022)
The objective of AS 28 is to prescribe the procedures that an enterprise applies to ensure that its
assets are carried at no more than their recoverable amount. The asset is described as impaired
if its carrying amount exceeds the amount to be recovered through use or sale of the asset and
AS 28 requires the enterprise to recognise an impairment loss in such cases. It should be noted
that AS 28 deals with impairment of all assets unless specifically excluded from the scope of the
Standard.
ICAI’s AS-29: Provisions, Contingent Liabilities and Contingent Assets (as on 01/02/2022)
The objective of AS 29 is to ensure that appropriate recognition criteria and measurement bases
are applied to provisions and contingent liabilities and that sufficient information is disclosed in
the notes to the financial statements to enable users to understand their nature, timing and
amount.
The objective of this Standard is also to lay down appropriate accounting for contingent assets.
MEASUREMENT OF ELEMENTS OF FINANCIALSTATEMENTS
Measurement is the process of determining money value at which an element can be
recognised in the balance sheet or statement of profit and loss. The framework recognises four
alternative measurement bases.
In preparation of financial statements, all or any of the measurement basis can be used in varying
combinations to assign money values to items, subject to the requirements under the Accounting
Standards. However, it may be noted, that Accounting Standards largely uses the ‘historical cost’
for the purpose of preparation of financial statements though for some items, use of other
value is permitted, e.g., inventory is recorded at historical costs on its acquisition, however, at
year end, it is valued at lower of costs and net realisable value.
VALUATION PRINCIPLES:
There are four generally accepted measurement bases or valuation principles.
a. Historical Cost: It means acquisition price. According to this base, assets are recorded at an
amount of cash or cash equivalent paid.
b. Current Cost: Assets are carried out at the amount of cash or cash equivalent that would
have to be paid if the same or an equivalent asset was acquired currently.
c. Realisable value: As per realisable value, assets are carried at the amount of cash or cash
equivalent that currently could be obtained by selling the assets in an orderly disposal.
d. Present Value: As per present value, an asset is carried at the present discounted value of
the future net cash inflow that the asset is expected to generate in the normal course of
business.
CAPITAL AND REVENUE EXPENDITURE
Revenue Expenses
The revenue expenses either occur in direct relation with the revenue or in relation with
accounting periods, for example cost of goods sold, salaries, rent, etc.
Cost of goods sold is directly related to sales revenue whereas rent is related to the particular
accounting period.
**Recurring, Regular, benefit will receive in same year.
Example of Revenue Expenditure
1. Expenditure for replacement of worn-out part of an existing asset.
2. Regular Advertisement Expenses in respect of products and services.
3. Expenditure on removal of stock to new site.
4. Legal Fees incurred to file suit against a Customer from whom money is due.
Capital expenditure
Capital expenditure may represent acquiring / improving of any tangible or intangible fixed
assets for enduring future benefits. Therefore, the benefits arising out of capital expenditure
for more than one accounting period.
**Non recurring, Not regular, Benefit will receive in next few year.
Capital Expenditure
1. Purchase of Fixed Asset (Land, Building, etc.)
2. Purchase of Second-hand Asset (e.g. Vehicle, Furniture, etc.)
3. Overhaul Expenses to put second-hand machinery in working condition. -
4. Repairing & Painting of Old Building purchased recently by the Firm.
5. Expenditure incurred to reduce working expenses / operating expenses.
6. Legal Fee paid to acquire new property.
7. Licence Fee paid by Cinema Theatre to commence its business.
8 Cost of constructing Temporary Huts which were necessary for Factory
Building Construction, which were demolished when the Factory was ready.
Deferred Revenue Expenditure
1. Meaning : It is an expenditure primarily of revenue nature, but the benefit whereof extends
to periods more than the year of incurrence.
Expenditure which gives benefits for 2 / 3 years, but does not result in creation or improvement
of fixed assets.
3. Examples :
(a) Expenditure on an advertisement campaign to introduce a product in the market,
(b) Discount allowed on issue of Debentures,
(c) Development Expenses in the case of Mines and Plantations.
(d) Cost of construction / extension to a leased building (Since the building has to be returned
after the lease period is over, its benefits are for only a limited period.)
CAPITAL RECEIPTS AND REVENUE RECEIPTS

Revenue Receipts
Receipts which are obtained in course of normal business activities are revenue receipts (e.g.
receipts from sale of goods or services, interest income etc.). Revenue receipts are credited to
the Profit and Loss Account.

Capital Receipts
Capital Receipts refer to receipts other than Revenue Receipts. Capital receipts are not directly
credited to Profit and Loss Account.
For example, when a fixed asset is sold for Rs. 92,000 (cost Rs. 90,000), the capital receipts
Rs. 92,000 is not credited to Profit and Loss Account. Profit/Loss on sale of fixed assets is
calculated and credited to Profit and Loss Account as follows:
Sale Proceeds Rs. 92,000
Cost (Rs. 90,000)
Profit Rs. 2,000
Revenue and capital receipts are recognised on accrual basis as soon as the right of receipt is
established.

CONTINGENT ASSETS AND LIABILITIES

Contingent liability:
A contingent liability is a possible obligation arising from past events and may arise in future
depending on the occurrence or non-occurrence of one or more uncertain future events
Examples
(i) Outcome of a law suit
(ii) Claims against the business, not acknowledged as debts
(iii) Guarantees given, if the principal debtor is solvent
(iv) Workmen Compensations under Dispute
(v) Unspecified Business Risk
(vi) Liability on Bills Discounted

Contingent asset:
A contingent asset may be defined as a possible asset that arises from past events and whose
existence will be confirmed only after occurrence or non-occurrence of one or more uncertain
future events not wholly within the control of the enterprise A contingent asset need not be
disclosed in the financial statements
For example, a claim that an enterprise is pursuing through legal process, where the outcome is
uncertain, is a contingent asset.
DOUBLE ENTRY SYSTEM
It is the only scientific system of accounting. According to this system, every transaction has
two-fold aspects–debit and credit and both the aspects are to be recorded in the books of
accounts.
ADVANTAGES OF DOUBLE ENTRY SYSTEM
This system affords the under mentioned advantages:
(i) By the use of this system the accuracy of the accounting work can be established, through
the device of the trial balance.
(ii) The profit earned or loss suffered during a period can be ascertained together with details.
(iii) The financial position of the firm or the institution concerned can be ascertained at the
end of each period, through preparation of the balance sheet.
(iv) The system permits accounts to be kept in as much details as necessary and, therefore
affords significant information for the purposes of control etc.
(v) Result of one year may be compared with those of previous years and reasons for the
change may be ascertained.

APPROACHES TO ACCOUNTING
To analyse the Dual Aspect of each transaction, the following approaches can be applied -
1. Accounting Equation Approach.
2. Traditional Approach
Accounting Equation
The relationship of assets with that of liabilities and owners' equity in the equation form is
known as 'Accounting Equation
Balance Sheet Equation:
Equity + Liabilities = Assets
Equity + Long-Term Liabilities + Current Liabilities = Fixed Assets + Current Assets
Equity + Long-Term Liabilities = Fixed Assets + Current Assets - Current Liabilities
Profit & Loss Equation
Net Profit = Income – Expenses

Traditional Approach
This is the commonly used method for accounting the transactions. Under this method each
transaction is recorded in the books by reference to the rules of Debit and Credit only. These
Rules are called Golden Rules of Accounting which is given below:

Nature of Account When Debited When Credited

1. Personal Account Debit the Receiver of Benefit Credit the Giver of Benefit
2. Real Account Debit What comes in Credit What goes out
3. Nominal Account Debit All Expenses and Losses Credit All Incomes and Gains
Type of Account
A.Personal Accounts
(a) Natural Personal Accounts
* All Accounts which record transactions of Natural human beings, i.e. Ram, Lakshman,
Krishna, Joseph, Kabir, Debtors, Creditors etc.
(b) Artificial (Legal) Personal Accounts
* All Accounts which record the transactions with other business entities having separate legal
status for accounting purposes, i.e. Ram Industries Limited (Company), Aditya & Co,
(Partnership Firm), Krishna & Co. (say Proprietary Firm), Cooperative Societies, Clubs,
Government, Banks, Debtors, Creditors etc.
(c) Representative Personal Accounts
* All Accounts which indirectly represent the persons. For Example -
Name of the Account Indirectly represents
Capital Account Owner
Outstanding Expenses Account Service Provider / Supplier(For Eg - O/s Rent
represents landlord)
Prepaid Expenses/Expenses paid
in advance A/c Service Provider / Supplier
Accrued Incomes Customers
Incomes received in advance Customer.
Note: All Liabilities will fall under “Personal Accounts”
B.Impersonal Accounts
(a) Real Accounts
All Accounts which record transactions relating to Assets of the Firm (but not except those
covered under Personal A/c above - i.e. Debtors, Prepaid expenses etc. )For Example:
Building, Machinery, Other Fixed Assets, Investments, Cash, Bank, etc.
(b) Nominal Accounts
All Accounts which record transactions relating to -
• Incomes / Gains, e.g. Sales, Rent / Interest / Dividend / Commission Receive/ Profit on Sale of
Fixed Assets / Investments, etc.
• Expenses / Losses, e.g. Salary, Wages, Rent Paid, Insurance, Bad Debts / Depreciation,
Discounts allowed, etc.

JOURNAL
Transactions are first entered in this book to show which accounts should be debited and
which credited. Journal is also called subsidiary book. Recording of transactions in journal is
termed as journalizing the entries.

JOURNAL format
Dr. Cr.
Date Particulars L.F. Amount in Rs. Amount in Rs.
(1) (2) (3) (4) (5)
Advantage of Journal
Chronological Order- Date wise
Explanation of transaction – Narration
Recording of Both Aspects(Debit & Credit)

Limitation of Journal
Time Taking
Cost Consuming
No internal Check
Voluminous.
Illustration 1
State with reasons whether the following statements are 'True' or 'False'.
(1) Overhaul expenses of second-hand machinery purchased are Revenue Expenditure.
(2) Money spent to reduce working expenses is Revenue Expenditure.
(3) Legal fees to acquire property is Capital Expenditure.
(4) Amount spent as lawyer's fee to defend a suit claiming that the firm's factory site belonged
to the plaintiff's land is Capital Expenditure.
(5) Amount spent for replacement of worn out part of machine is Capital Expenditure.
(6) Expense incurred on the repairs and white washing for the first time on purchase of an
old building are Revenue Expenses.
(7) Expenses in connection with obtaining a license for running the cinema is Capital
Expenditure.
(8) Amount spent for the construction of temporary huts, which were necessary for
construction of the Cinema House and were demolished when the cinema house was
ready, is Capital Expenditure.
(9) Heavy advertising to introduce a new product or to explore a new market is Capital
Expenditure.
Illustration 2
State with reasons whether the following are Capital or Revenue Expenditure:
(1) Expenses incurred in connection with obtaining a license for starting the factory for
Rs. 10,000.
(2) Rs. 1,000 paid for removal of stock to a new site.
(3) Rings and Pistons of an engine were changed at a cost of Rs. 5,000 to get fuel efficiency.
(4) Money paid to Mahanagar Telephone Nigam Ltd. (MTNL) Rs. 8,000 for installing telephone
in the office.
(5) A factory shed was constructed at a cost of Rs. 1,00,000. A sum of Rs. 5,000 had been
incurred in the construction of temporary huts for storing building material.
Illustration 3
Good Pictures Ltd., construct a cinema house and incur the following expenditure during the
first year ending 30th June, 2006.
(i) Second-hand furniture worth Rs. 9,000 was purchased; repainting of the furniture costs
Rs. 1,000. The furniture was installed by own workmen, wages for this being Rs. 200.
(ii) Expenses in connection with obtaining a license for running the cinema worth Rs. 20,000.
During the course of the year the cinema company was fined Rs. 1,000, for contravening
rules. Renewal fee Rs. 2,000 for next year also paid.
(iii) Fire insurance, Rs. 1,000 was paid on 1st January, 2006 for one year.
(iv) Temporary huts were constructed costing Rs. 1,200. They were necessary for the
construction of the cinema. They were demolished when the cinema was ready.
Point out how you would classify the above items.
Illustration 4
Classify the following expenditures and receipts as capital or revenue:
(i) Rs. 10,000 spent as travelling expenses of the directors on trips abroad for purchase of
capital assets.
(ii) Amount received from debtors during the year.
(iii) Amount spent on demolition of building to construct a bigger building on the same site.
(iv) Insurance claim received on account of a machinery damaged by fire.
Illustration 5:
Develop the accounting equation from following information available at the
beginning of accounting period:
Rs.
Capital 1,00,000
Loan 50,000
Trade Creditors 70,000
Fixed Assets 80,000
Stock 60,000
Debtors 50,000
Cash and Bank 30,000
At the end of the accounting period the balances appear as follows :
Capital ?
Loan 50,000
Trade Creditors 80,000
Fixed Assets 72,000
Stock 90,000
Debtors 50,000
Cash at Bank 60,000
(a) Reset the equation and find out profit.
(b) Prepare Balance Sheet at the end of the accounting period.
Illustration 6 (Journal)
Journalise the following transactions. Also state the nature of each account involved in the
Journal entry.
1. December 1, 2005, Ajit started business with Cash Rs. 40,000.
2. December 3, he paid into the Bank Rs. 2,000.
3. December 5, he purchased goods for cash Rs. 15,000.
4. December 8, he sold goods for cash Rs. 6,000.
5. December 10, he purchased furniture and paid by cheque Rs. 5,000.
6. December 12, he sold goods to Arvind Rs. 4,000.
7. December 14, he purchased goods from Amrit Rs. 10,000.
8. December 15, he returned goods to Amrit Rs. 5,000.
9. December 16, he received from Arvind Rs. 3,960 in full settlement.
10. December 18, he withdrew goods for personal use Rs. 1,000.
11. December 20, he withdrew cash from business for personal use Rs. 2,000.
12. December 24, he paid telephone charges Rs. 1,000.
13. December 26, cash paid to Amrit in full settlement Rs. 4,900.
14. December 31, paid for stationery Rs. 200, rent Rs. 500 and salaries to staff Rs. 2,000.
15. December 31, goods distributed by way of free samples Rs. 1,000.
Illustration 7
Transactions of Ramesh for April are given below Journalise them.
2006 Rs.
April 1 Ramesh started business with 10,000
" 2 Paid into bank 7,000
" 3 Bought goods for cash 500
" 5 Drew cash from bank for credit 100
" 13 Sold to Krishna goods on credit 150
" 20 Bought from Shyam goods on credit 225
" 24 Received from Krishna 145
" Allowed him discount 5
" 28 Paid Shyam cash 215
" Discount allowed 10
" 30 Cash sales for the month 800
Paid Rent 50
Paid Salary 100
Illustration 8
Pass Journal Entries for the following transactions in the books of Gamma Bros.
(i) Employees had taken stock worth Rs. 10,000 (Cost price Rs. 7,500) on the eve of Deepawali
and the same was deducted from their salaries in the subsequent month.
(ii) Wages paid for erection of Machinery Rs. 8,000.
(iii) Provision for discount on creditors is to be made amounting Rs. 1,500.
(iv) Income tax liability of proprietor Rs. 1,700 was paid out of petty cash.
(v) Purchase of goods from Naveen of the list price of Rs. 2,000. He allowed 10% trade
discount, Rs. 50 cash discount was also allowed for quick payment.