CA-FOUNDATION FUNDAMENTALS OF ACCOUNTING CA/CMA SANTOSH KUMAR

INDEX- FUNDAMENTALS OF ACCOUNTING

Note 1- Follow the sequence given in my introduction video.

Note 2. All questions of your study material, RTP, MTP, Past year questions are covered in this book.
Note 3: No any other book is recommended.
Note 4. This book is fully amended. Any further amendment by ICAI will be shared in your what’s
app/telegram group of CA FOUNDATION.

Number Chapter name Page number

1. THEORITICAL FRAMEWORK ( INCLUDING FRAMEWORK
OF ACCOUNTING STANDARDS) 02 – 32
2. ACCOUNTING PROCESS 33-- 61

2A. JOURNAL ENTRIES 33- 36

2B. LEDGER AND TRIAL BALANCE 37 – 40
2C. SUBSIDIARY BOOK AND CASH BOOK 41- 48
2D. RECTIFICATION OF ERRORS 49- 61

3. BANK RECONCILIATION STATEMENT 62- 71

4. INVENTORIES (AS 2) 72- 81

5. CONCEPT AND ACCOUNTING OF DEPRECIATION 82-93

6. ACCOUNTING FOR SPECIAL TRANSACTIONS

6A. BILLS OF EXCHANGE AND PROMISSORY NOTES 94-105
6B. SALE OF GOODS ON APPROVAL OR RETURN BASIS 106- 113
6C. CONSIGNMENT ACCOUNT 114- 134
6D. AVERAGE DUE DATE 135-145
6E. ACCOUNT CURRENT 146-151

7. PREPARATION OF FINAL ACCOUNT OF SOLE

PROPRIETORS 152-181
7A. FINAL ACCOUNT OF NON-MANUFACTURING ENTITIES
7B. FINAL ACCOUNT OF MANUFACTURING ENTITIES

8. PARTNERSHIP ACCOUNTS 182-217

9. FINANCIAL STATEMENTS OF NON PROFIT 218-247

ORGANISATIONS
10. COMPANY ACCOUNTS
10A. INTRODUCTION TO COMPANY ACCOUNTS 248-254
10B. ISSUE, FORFEITURE & RE-ISSUE OF SHARES 255-267
10C. ISSUE OF DEBENTURES 268-271

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CHAPTER 1. THEORITICAL FRAMEWORK

Note: As per ICAI study material, we have covered unit 1 to unit 9 of chapter 1.

MEANING AND SCOPE OF ACCOUNTING

Every individual performs some economic activity. Such activities are performed through Transactions and Events.
Transactions: - it means a business activity which involves exchange of money or money’s worth between parties.
It is performance of an act or an agreement.
Events: - Event means happening due to any transactions. In other words result of any transaction. It can be
measured in terms of money and changes in financial position.
Example:- Raising money through various sources are transaction and profit or loss at the end of year is an events.

Definition of Accounting: - It’s an art of recording, classifying and summarizing transactions and events
in monetary term. It is also called Language of Business. It also analyses and interprets the financial
transaction and events.
As per American Institute of Certified Public Accountants ( year 1961), “ accounting is the art of recording,
classifying and summarising in a significant manner and in terms of money, transactions and events which are,
in art at least, of a financial character and interpreting the result thereof”.
As per American Accounting Association (year 1966), “the process of identifying, measuring and communicating
economic information to permit informed judgements and decisions by the users of accounting”.

Objectives of Accounting are as follows:-

(1) Systematic recording of transaction: - i.e. Book-Keeping.
(2) Ascertainment of results of above recorded transaction i.e profit or loss account is prepared.
(3) Ascertainment of financial position of business: - Balance Sheet is prepared.
(4) Assisting the management for decision making, exercising control, budgeting and forecasting.
(5) Providing information to the users for rational decision making:-
(6) To know solvency positions

FUNCTIONS OF ACCOUNTING ARE AS FOLLOWS:-

1. Measurement:- It measures past performance of business and shows its current financial position.
2. Forecasting:- It helps in forecasting future performance and financial position using past data.
3. Decision-making:- It helps users to take rational decision.
4. Comparison and Evaluation:- It helps in comparing and evaluating financial results of different intervals.
5. Control:- Accounting identifies weakness of system and provides feedback for control.
6. Meeting legal requirements( government regulation and taxation):-
Accounting provides necessary information to government to exercise control and collecting
tax. Accounting records are accepted as evidence by the court of law.

Book-keeping :- As defined by carter, ‘book keeping is a science and art of correctly recording in books of
accounts all those business transactions that result in transfer of money or money’s worth’.
It is a process of recording transaction and events of financial data related to business operation in order of its
occurrence. It is basic function of accounting. In it proper books of account are prepared.
Book keeping is a mechanical task which involves:
• Collection of basic financial information.
• Identification of transactions and events with financial character( economic transaction)
• Measurement of economic transactions in terms of money .
• Recording financial effects of economic transactions in order of its occurrence.
• Classifying effect of economic transactions i.e recordings in ledger .
• Preparing organized statement known as trial balance.

Objective of book-keeping :-
(1) Complete Recording of transaction:- It records all transaction in systematic manner
(2) Ascertainment of financial effect on business:- It shows combined effect of transaction made during
accounting year.

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Distinction between Accounting and Book-keeping

Book-keeping Accounting
1. It is process of recording transaction or events 1. It is process of summarizing recorded Transactions.
2. It is a base for accounting 2. It is considered as language of business
3. Financial statements do not form part of 3. Financial statement are prepared on the
this process. basis of book-keeping records
4. Managerial decisions are not taken on the 4. Management takes decision on the basis of
basis of these records these records.
5. There is no sub-filed of book-keeping 5. It has several sub-filed like financial
Accounting, cost accounting, management
accounting etc.
6. Financial position cannot be known 6. Financial position are ascertained on the
through book-keeping basis of accounting records.

ACCOUNTING CYCLE:- When complete sequence of accounting procedure is done which happens frequently
and repeated in same directions during an accounting period, the same is called an accounting cycle.

Steps/phases of accounting cycle:

(i) Recording of transaction.
(ii) journal
(iii) ledger
(iv) trial balance
(v) adjusted entries
(vi) adjusted trial balance
(vii) closing entries
(viii) financial statements
(ix) analysis and interpretation

Sub-field of Accounting are as follows:

1. Financial Accounting:- financial accounting is that branch of accounting which records financial
transactions and events, summarises and interprets them and communicates the results to the users.
It ascertains results (profit or loss) during an accounting period and financial position at the end. It is
also called stewardship accounting.
2. Cost Accounting:- It ascertain the cost of products manufactured or services rendered and helps
the management in fixing prices of product and exercising control over cost. It is also called control
accounting.
3. Management Accounting:- it is concerned with generating accounting information relating to funds,
cost, profits etc. as it enables the management in planning and decision making. It is also called decision
accounting.
4. Social responsibility accounting: The demand for social responsibility accounting stems from
increasing social awareness about the undesirable by-products of economic activities. Social
responsibility accounting is concerned with accounting for social costs incurred by the enterprise and
social benefits created.
5. Human resource accounting : human resource accounting is an attempt to identify, quantify and report
investments made in human resources of an organisation that are not presently accounted for under
conventional accounting practices.

Basis of accounting:-
1. Accrual basis of accounting: Accrual basis of accounting is a method of recording transactions by which
revenue, cost, assets and liabilities are reflected in the accounts for the period in which they accrue.
The basis includes consideration relating to deferrals, allocations, depreciation and amortisation. It is also
called mercantile basis of accounting.

2. Cash basis of accounting: cash basis of accounting is a method of recording transactions by which
revenue, cost, assets and liabilities are reflected in the accounts for the period in which actual receipts
or actual payments are made.

3. Hybrid or mixed basis: under the hybrid system of accounting, incomes are recognised as in cash basis
of accounting and expenses are recorded on accrual basis.

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Procedural Aspects of Accounting:-- On the basis of above definition, procedure of accounting is

divided into two parts:
1) Generating financial information.
2) Using the financial information.

Generating financial information:

(1) Recordings : - It is basic function of accounting. All transaction or events are evidenced by some
documents like Purchase Bill, Bank Pass Book, Sale Bill, Salary Slip etc. Recording is done in a book
called Journal.
(2) Classifying: - It is systematic analysis of recorded data. In this stage transaction or events of one nature
are put at one place so as to make more useful or informatics for uses. Book containing classified
information is called Ledger.
(3) Summarizing: - It is preparation and presentation of classified data to internal as well as external users
of financial statement. This process leads to preparation of Trial Balance, Profit and loss Account, Balance
sheet.
(4) Analysis and interpretation: financial data is analysed and interpreted so that the users of financial
data can make a meaningful judgement of the financial performance(profit) and financial position of the
business. Analysis helps in planning for future in better way. It is done through many tools like ratio
analysis etc.
(5) Communicating: - It is transmission of summarized, analyzed and interpreted information to users so
that they can take rational decision. It is done through accounting reports like P & L A/c, Balance Sheet etc.

II Using the financial information

Users not only include proprietor or owner but also include investor, employees, lender, suppliers,
government, customer and public at large. Accounting data is more useful if it stresses more on economic
substance rather than technical form. Information is useless and meaningless unless it is relevant and
material.

Users of Accounting Information:-

(1) Investors: They provide capital to business. They need information to assess whether to buy, hold or sell
their investment.
(2) Employees:- Growth of employee directly related to growth of organization. So they require much
information.
(3) Lenders:- They are interested to know capability of business to repay principal and interest.
(4) Supplier and creditors :- They want to know ability of firm to pay their dues. It is generally done by
credit policy of concern.
(5) Customer;- Customers are also interested to know stability and functioning of business.
(6) Government and their agencies :- They are also interested due to various reasons like for allocation
of scarce resources among competing enterprises, tax rate, and collection.
(7) Public:- They are interested in functioning of business since they contribute substantially too many ways.
(8) Management as a whole is also interested in the accounts for various managerial decisions
.
Note : they all above are collectively called stake-holders.

Relationship of Accounting with other discipline:

(i) Accounting and Economics:- Economics tells how scarce resources are utilized effectively. For that it is
required to analysis the data of resources. Accounting provides major data base for same purpose.

(2) Accounting and statistics :- In accounts all individual transactions or events are important but in
statistics behaviour (i.e. trend analysis, degree of variation over a period). So here statistics methods help
accounting to collect data in systematic manner. Statistic techniques like time series, cross-sectional
comparison etc. are used for better presentation of accounting data.

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(3) Accounting and Mathematics:- Mathematics helps accounting in numbers of ways like calculation of
interest, annuity to find out installments etc.

(4) Accounting and law:-- Business enterprises require complying so many laws and making its accounting to
comply their requirement. Partnership firms require to comply partnership act 1932, A company require to
comply requirement of company act 2013, and so many other laws like labour laws, MRTP Act, Contract Act,
Negotiable Instrument Act, The sale of good Act. Thus transaction and events of accounting are guided by law.

(5) Accounting and Management.:-- Accounting helps management in decision making process. Accounting data
are used by management as basic source documents. Large portion of accounting informations are prepared for
management decision making.

Limitation of Accounting:-- Generally it is assumed that account shows true and fair view of financial
statement of an enterprise. But it has following limitation
1) Accounts cannot reflect loyalty and skill of personnel which are most valuable these days.

2) Accounts never tell future of an enterprise. It only records past events that have occurred. E.g - Balance
sheet is prepared at the last moment of last day of accounting year. It never estimates what will happen in future.

3) Accounting mostly ignores changes in money factor like inflation.

4) In some occasions accounting principles conflict with each other.

5) Some accounting estimates require personal judgment like provisions for doubtful debts, method of
depreciation adopted, writing of intangible assets etc.

6) Financial statements consider only thing which are in monetary term. Those which are not in monetary term
are not considered by financial statement like human resources.

7) Different Accounting policies for treatment of same item increase the probability of manipulation.

Role of accountant in the society:-- There are few professions in the world having high esteem in public
eyes, Accounting profession is one of them.
- It helps business to see its financial position and plan for the future.
- It serves for welfare of society in numbers of ways by having education, training and experience
- Accountants help not only in the matter of taxation, costing, management accounting, financial layout
but also for financial planning and policies, budgetary policies even economics principle.
- Activities of accounting are not limited.

Area of service:-- Some of services are as follows:-

(1) Maintenance of books of accounts:
- Record transactions in systematic manner.
- Help ascertaining profit and loss and financial position.
- Help in planning, decision-making, controlling function.
(2) Statutory Audit:
- Every company requires to audit their accounts by an external auditor.
- Accountant helps auditor to audit the accounts.
(3) Internal Audit:
- Internal auditor examines the accounting system and ensures management that accounts have
been properly maintained.
- It improves operational efficiency of business.
(4) Taxation:
- An accountant can handle taxation matter of business as well as of individual and can
represent himself on their behalf to taxation authorities and settle tax liabilities.
- It can also reduce tax liability by proper planning.
(5) Management Accounting and consultancy services:
- Management accountant is mainly responsible for internal reporting to management. It provides
services for planning controlling current operation, decision-making and special matter and
making long term plans.

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- Accountant also provides consultancy service in area of management information system,
expenditure control, new investment, working capital management, corporate planning etc.
(6) Financial advise:-- Financial advise in following area:-
- Investment, Insurance, Business expansion, Investigation etc,
- To ascertain financial position
- To make or buy decision
- To ascertain reason of profit fallen
- To increase efficiency
- For valuation of business.
- Pension scheme.

(7) Other services

(i) Secretarial work
(ii) Share Registration work
(iii) Company formation
(iv) liquidation of company.
(v) Arbitrations
(vi) Cost Accounting.

Chartered accountant in industry: an accountant though he is a part of the highest planning team is not a planner
in an industry. He works within the functional departments and translates the organisation’s aim in terms of financial
expectations. Therefore he has to make a thorough study of the business and of individuals in the functional
departments, whether they are engineers or salesman. A qualified accountant will be able to play an important role in
performing important functions of a business relating to accounting, costing and budgetary control, estimating and
treasury.

Chartered accountant in public sector enterprises: Both in developed and developing countries, public
sector enterprises have become a special feature of the national economy. The system of financial and budgetary control
and of accounting, auditing and reporting has, therefore, become a matter of interest and concern to the nation, and
does not remain confined merely to a limited number of shareholders. The form of accounting followed by these
corporations or companies is different from that of ordinary government accounting. It is the duty of chartered
accountant to prepare the accounts and reports of these public corporations in such a way that they enable the general
public to know how far the items appearing in the various types of records and financial statements justify their
existence.

Chartered accountant in framing Fiscal policies : in the present times accountants should conceive their
duties as broadly as the conditions might require and do not restrict them to only literal compliance of the law.
Their aim should be not to allow any individual to gain at the cost of the nation. Chartered accounts have to
accept a positive role and do their best to encourage efficiency in individual business units and encourage those
social objectives which form the main foundation of the welfare state.

Question 1. Answer whether following statements are true or false. Also explain reason in brief. (ICAI Study material)

(i) There is no difference between book keeping and accounting, both are same.
(ii) Management Accounting covers the preparation and interpretation of financial statements and
communication to the users of accounts.
(iii) Financial accounting is concerned with internal reporting to the managers of a business unit.
(iv) Customers of business should not be considered as users of accounts prepared by business. They are not
interested to know performance of the business
(v) Summarising is the basic function of accounting. All business transactions of a financial characters evidenced
by some documents such as sales bill, pass book, salary slip etc. are recorded in the books of account.
(vi) Balance sheet shows the position of the business on the day of its preparation and not on the future date.

Answer: (i). False: Book-keeping and accounting are different from each other. Accounting is a broad subject.
It calls for a greater understanding of records obtained from book-keeping and an ability to analyse and interpret
the information provided by book-keeping records.
Book-keeping is the recording phase while accounting is concerned with the summarizing phase of an
accounting system.
(ii). False: Financial accounting covers the preparation and interpretation of financial statements and
communication to the users of accounts.
(iii). False: Management accounting is concerned with internal reporting to the managers of a business unit.

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(iv). False: Customers are also concerned with the stability and profitability of the enterprise because their
functioning is more or less dependent on the supply of goods
(v). False: Recording is the basic function of accounting. Summarising is concerned with the preparation and
presentation of the classified data in a manner useful to the internal as well as the external users of financial
statements
(iv). True: Balance Sheet is a statement of the financial position of an enterprise at a given date.

Question 2. Define accounting. What are the sub-fields of accounting? (ICAI Study material)

Question 3. Who are the users of accounting information? (ICAI Study material)

Question 4. Discuss briefly the relationship of accounting with

(i) Economics (ii) Statistics (iii) Law (ICAI Study material)

Question 5. Discuss the limitations which must be kept in mind while evaluating the Financial Statements.
What services can a Chartered Accountant provide to the society? (ICAI Study material)

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ACCOUNTING CONCEPTS, PRINCIPLES AND CONVENTIONS

INTRODUCTION:-- a widely accepted set of rules, conventions, standards and procedures for reporting financial
information, as established by the Financial Accounting Standards Board(FASB) are called Generally Accepted
Accounting Principles (GAAP).
They are common set of accounting principles, standards and procedures that companies/entities use to
compile their financial statements.

GAAP is to be followed by companies so that investors have optimum level of consistency in the financial
statements they use when analysing companies for investment purposes. GAAP cover such aspects like revenue
recognition, balance sheet items classification and their valuation, treatment and presentation.
Suppose we give to prepare our accounts from five different Accountants. After some time all accountants come
with their accounts by showing different profit, since all of them followed different accounting policies. In that
case it will not serve the purpose of accounting. So it is necessary that there should be some principle, so that all
accounts prepared by any number of accountant will show same amount of profit. So to avoid confusion and to
ensure uniformity, GAAP (Generally Accepted Accounting Principles ) are framed.

ACCOUNTING CONCEPTS, PRINCIPLES AND CONVENTIONS:

Accounting information is published in the form of financial statements. The three basic
financial statements are:
i. Profit and loss account
ii Balance sheet
iii Cash flow statement
As these statements are meant to be used by different stakeholders, it is necessary that the information contained
therein is based on definite principles, concrete concepts and well accepted convention.

ACCOUNTING CONCEPTS:-- These are basic assumptions and conditions on the basis of which financial
statements are prepared. Certain concepts are perceived, assumed and accepted in accounting to provide
unifying structure and internal logic to accounting process. The concept means idea or notion, which has universal
application. Financial statements are interpreted in the light of the concept, which govern accounting methods.
concepts are those basic assumptions and conditions, which form the basis upon which the accountancy has
been laid. Accounting concepts are only results of broad consensus. These accounting concepts lay down the
foundation on the basis of which the accounting principles are formulated.

ACCOUNTING PRINCIPLES:-- These are body of doctrines commonly associated with the theory and
procedures of accounting serving as an explanation of current practices . They act as guide for selection of
accounting procedures or conventions where alternative exists. Accounting principle must satisfy following
conditions:-

1) They should be based on Real Assumptions.

2) They must be Simple, Understandable and Explanatory.
3) They must be followed consistently.
4) They should Reflect Future Predictions.
5) They should be Informational for users.

ACCOUNTING CONVENTIONS:- These emerge out of Accounting Practices, commonly known as accounting
principles adopted by various organizations over a period of time. These conventions are derived by usages
and practices. It improves Quality of Accounting Information.

CONCEPTS/PRINCIPLES/CONVENTIONS-- an overview:
I. Separate Entity Concept or Entity Concept or business entity concept Business Entity Concept considered
business enterprises as a separate Entity & having separate identity distinct from its owner. Therefore business
transactions are recorded in the books of accounts from business point of view and not from the owner.
Therefore amount invested by owner into the business is also treated as liability (internal) for business.

II. Going Concern Concept :-- According to this concept, it is assumed that enterprise will continue its operation
for indefinite period of time. It is assumed that an enterprise neither has intention nor the need to liquidate or
wind up and curtail its scale of operation. It is because of this concept a distinction is made between assets
and expense, fixed and current assets / liabilities.

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III. Money Measurement Concept : -- According to this concept, only those transactions which can be expressed in
money should be recorded in the books of accounts . Transactions and events, that cannot be expressed in money
are not recorded in books of accounts, even if they are very useful or affect the result of business.

IV. Periodicity Concept/Accounting period concept:-- According to this concept, the life of an enterprise is broken into
smaller periods so that its performance can be measured at regular interval. Generally one year period is taken up for
performance measurement and appraisal of financial position. So life of the enterprise is divided into smaller
periods(usually one year) which is termed as ‘accounting period.’ At the end of accounting period, we prepare
financial statements.

V. Accrual Concept:-- Accrual means recognition of revenue and expenses as they are earned or incurred and not
when cash or money is received or paid.
Revenue means gross inflow of cash, receivables and other consideration arises in the ordinary course of business
activities from sale of goods, rendering services and using other enterprises resources yielding interest, royalties
and dividends. Expenses are cost relating to revenue earned for a particular period.

VI. Matching concept : For ascertaining profit and loss for a particular period, expenses should be matched
with revenue of that period. In financial statement, it is necessary to match revenue of the period with the
expenses of that period to determine correct profit or loss.

VII. Full disclosure concept : as per this concept, all significant information must be disclosed. Accounting
data should properly be clarified, summarised, aggregated and explained for the purpose of presenting the
financial statements which are useful for the users of accounting information.

VIII. Historical cost concept : According to this concept, value of asset is determined on the basis of historical cost
or acquisition cost or price paid for acquisition of asset. Although there are various measurement bases,
accountants prefer this concept in the interest of objectivity.

IX. Revenue realisation concept/realisation concept:- it closely follows the cost concept. Any change in the
value of an asset is to be recorded only when the business realises it. When an asset is recorded at its historical cost
of Rs 5,00,000 and even if its current cost is Rs 15,00,000. Such change is not counted unless there is certainty that
such change will materialise.

X. Duality concept/dual aspect concept: according to this concept every transaction has two aspects i.e. the
benefit receiving aspect and benefit giving aspect. These two aspects are to be recorded in the books of accounts.

XI. Conservatism/ prudence concept :-

• It states that accountant should not anticipatepossible income but should provide for all possible losses.
• Where there are many alternative method to value an asset, an accountant should choose method which shows
lesser value.
XII. Materiality concept : the materiality could be related to information, amount, procedure and nature.
According to American Accounting Association, “an item should be regarded as material if there is reason to
believe that knowledge of it would influence the decision of an informed investor. Thus whether an amount is
material or not, will depend on its amount, nature, size of business and level of person taking decision.
- It is an exception of full disclosure principal. As per this principle the items effecting significantly on
the business of enterprises should be only disclosed separately in the financial statements.

XIII. Consistency concept : this concept says that the accounting practices should not change or must remain
unchanged over a period of several years. The accounting policies are followed consistently from one period to
another to achieve comparability of financial statements from one period to another period. The concept of
consistency is applied where different methods of accounting are equally acceptable.
For e.g. A company may adopt any depreciation method, SLM, WDV method etc, similarly there are many methods
for valuation of stocks in hand. But the company should follow the principal of consistency over years.
An enterprise should change its accounting policy in any of the following circumstances only.
a. Bringing books of accounts in accordance with the issued accounting standards,
b. To compliance with provision of law.
c. When it is felt that new method will reflect more true and fair picture in the financial statement .

XIV. Conservatism/ prudence concept :-

• It states that accountant should not anticipatepossible income but should provide for all possible losses.
Where there are many alternative method to value an asset, an accountant should choose method which shows
lesser value.

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Fundamental Accounting assumptions(FAA) : There are three fundamental accounting assumptions:

1. Going Concern
2. Consistency
3. Accrual

When nothing is written about the fundamental accounting assumptions in the financial statements then it
is assumed that these accounting assumptions have been followed in preparation of financial statements. It
should be specifically disclosed if any of these assumption is not followed.

Financial statements:
-The aim of accounting is to keep records systematically to ascertain financial performance and financial position of
enterprises and communicate the relevant financial information to management and public at large.
- All enterprises prepare financial statements like balance sheet, profit and loss account, cash flow statement
by following various concepts, principles and conventions etc, to know financial position.

Qualitative Characteristics of financial statements :-

1. Understandability: The information in the financial statements must be easily understandable.
2. Relevance:
-Information must be relevant for decision making need of users. -
they must be able to evaluate past, present and future events.
3. Reliability: - Information must be reliable to be useful for the need of users. it should be free from errors and
bias . user can depend upon it and can take their decisions.
4. Comparability;- User must be able to compare financial statement of different period to know financial
position, performance and cash flows.
5. Materiality :-- Relevance of information is affected by its materiality.
6. Faithful Representation:-Information must be presented faithfully. The transaction and events to be reliable for
user.
7. Substance over form :- the transactions and other events in financial statement should be accounted and
presented in accordance with their substance and economic reality and not merely their legal form. For
example, assets taken on lease are shown as an asset in balance sheet, even firm is not a legal owner.

8. Neutrality :--Information contained in financial statement must be that , it is free from bias.

9. Prudence:-Prudence means degree of caution in exercise of judgments requires to estimate condition of uncertainty
so that assets and income are not overstated and liabilities and expenses are not understated.
10. Full, Fair and adequate Disclosure :-
-The disclosure should be full and final to assess financial position of enterprises. Principle of full disclosure
implies nothing should be omitted.
- Principle of fair disclosure implies all transaction recorded in financial statement present true and fair view
result of business.
- Adequate disclosure implies that information influencing the decision of users should be disclosed in details
and should make sense.
11. Completeness :- Information in financial statement must be complete. An omission may cause false or
misleading and unreliable information.

Question 1. State whether following statements are true or false with suitable reason. (ICAI Study material)
i. The concept helps in keeping business affairs free from the influence of the personal affairs of the owner is known as the
matching concept.
ii. Entity concept means that the enterprise is liable to the owner for capital investment made by the owner.
iii. Accrual means recognition as money is received or paid and not of revenue and costs as they are earned or incurred.
iv. The Conservatism Concept also states that no change should be counted unless it has materialized.
v. The concept of consistency implies non-flexibility as not to allow the introduction of improved method of accounting.
vi. The materiality depends only upon the amount of the item and not upon the size of the business, nature and level of
information, level of the person making the decision etc.
Answer:
i. False: Under matching concept all expenses matched with the revenue of that period should only be taken into
consideration. In the financial statements of the organization if any revenue is recognized then expenses related to earn that
revenue should also be recognized.

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ii. True: Since the owner invested capital, he has claim on the profits of the enterprise.
iii. False: Under accrual concept, the effects of transactions and other events are recognised on mercantile basis i.e., when
they occur (and not as cash or a cash equivalent is received or paid) and they are recorded in the accounting records and
reported in the financial statements of the periods to which they relate.
iv. False: The Realisation Concept also states that no change should be counted unless it has materialised.
v. False: The concept of consistency does not imply non-flexibility as not to allow the introduction of improved method of
accounting.
vi. True: As per materiality principle, all the items having significant economic effect on the business of the enterprise
should be disclosed in the financial statements.

Question 2. MULTIPLE CHOICE QUESTIONS: PRACTICE SESSION 1

1. According to the Money Measurement, currency transactions & events are recorded in books of accounts
(a) In the ruling currency of the country in which transaction takes place.
(b) In the ruling currency of the country in which books of accounts are prepared.
(c) In the currency set by ministry of finance.
(d) In the currency set by government.

2. The determination of expenses for an accounting period is based on the concept of…
(a) Objectivity (b) Materiality (c) Matching (d) Periodicity

3. Decrease in the amount of creditors results in

(a) Increase in cash
(b) Decrease in cash
(c) Increase in assets
(d) No change in assets

4. Ram purchased a car Rs.10,000 paid Rs. 3000 as cash and balance amount will be paid in three equal
installments/ Due to this………
(a) Total assets increase by Rs.10,000
(b) Total liabilities increase by Rs 3000
(c) Assets will increase by Rs.7000 with corresponding increase in liability by Rs.7000
(d) Both (b) and (c)

5. Accounting does not record non-financial transactions because of

(a) Entity concept
(b) Accrual Concept
(c) Cost Concept
(d) Money Measurement Concept

6. Provision for bad debt is made as per the

(a) Entity concept (b) Conservatism Concept
(c) Cost Concept (d) Going Concern Concept

7. Fixed Assets and Current Assets are categorized as per concept of

(a) Separate Entity (b) Going Concern (c) Consistency (d) Time Period

8. Omission of paise and showing the round figures in financial statements is based on
(a) Conservatism Concept (b) Consistency concept
(c) Materiality Concept (d) Realization Concept

9. Income tax of the sole trader paid is

(a) Debited to P&L Account
(b) Debited to Trading Account
(c) Debited to his Capital Account
(d) None

10. Payment of salary is recorded by

(a) Dr. Salary, Cr. Cash Account
(b) Dr. Cash Account, Cr. Salary Account
(c) Dr. Employee Account, Cr. Cash Account (d)Dr.
Employee Account, Cr. Salary Account

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11. Purchase of furniture for cash would

(a) Increase fixed assets & reduce current assets
(b) Reduce fixed assets & increase current assets
(c) Increase total assets
(d) Both (a) & (b)

12. Narration are given at the end of

(a) Final accounts
(b) Trial Balance Each Ledger Account
(c) Each ledger accounts
(d) Each journal entry

13. Which of the following is an example of Personal Account?

(a) Machinery
(b) Rent
(c) Cash
(d) Creditor

14. P & L Account is prepared for period of one year by following

(a) Consistency Concept
(b) Conservatism concept
(c) Accounting Period Concept
(d) Cost Concept

15. Current Liabilities means

(a) Liabilities which are payable within 12 months
(b) Liabilities which are payable immediately
(c) Liabilities which payable after one accounting year
(d) Liabilities which are readable within 3 months

16. Valuing inventory at market value though cost is lower for such inventory violates the concept of
(a) Money measurement
(b) Conservatism
(c) Cost
(d) Periodicity

17. A company deals in electronic goods (AC, Fridge, TV, etc) purchases two TV sets and install in its
showroom. The expenses will be recorded in
(a) Drawing A/c
(b) Purchase A/c
(c) Fixed Assets A/c
(d) P & L A/c
18. If an individual asset is increased, there will be a corresponding
(a) Increase of another asset or increase of capital
(b) Increase of drawings and liability
(c) Decrease of another asset or increase of liability
(d) Increase of specific liability or decrease of capital

19. Which of the following statements is not true?

(a) Depreciation is a nominal account
(b) The balances of Nominal accounts are transferred to trading account/ Profit & Loss a/c
(c) Rent a/c is a personal account but outstanding rent account is a nominal account
(d) In ledger, accounts are opened separately

20. Mr. Y purchased goods for Rs.9,00,000 and sold 4/5th of the goods for Rs.10,80,000 and met
expenses amounting to Rs.2,00,000 during the year, 2019. He counted net profit as Rs.
1,20,000. Which of the accounting concepts was followed by him?
(a) Entity
(b) Matching
(c) Periodicity
(d) Conservatism

21. …….. business activity which involves exchange of money or money’s worth between parties.

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a. transaction b. event c. expense d. liability.

22. Accounting is an art of…,…,….transactions and events in monetary term. a.

recording, classifying and summarizing.
b. recording, summarizing and classifying
c. classifying, summarizing and recording.
d. recording and classifying

23. …….. is also called Language of Business.

a. book keeping b. balance sheet
c. accounting d. cash flow statement

24. Accounting is the art of recording, classifying and summarising in a significant manner and in terms of
money, transactions and events which are, in art at least, of a financial character and interpreting the result
thereof”. This definition is given by…..
a. GAAP b. Accounting standard board
c. CBSE Board d. American Institute of Certified Public Accountants

25. Objectives of Accounting are

a. Systematic recording of transaction
b. Ascertainment of results of above recorded transaction.
c. Ascertainment of financial position of business .
d. All of the above
26. deleted
27. As defined by ………… “book keeping is a science and art of correctly recording in books of accounts all those
business transactions that result in transfer of money or money’s worth’.
a. ICAI b. ICMAI c. Carter d. COC Ltd

28. Following are features of book keeping except….

a. It is process of recording transaction or events
b. It is a base for accounting
c. Financial statements do not form part of this process.
d. Managerial decisions are taken on the basis of these records.

29. When complete sequence of accounting procedure is done which happens frequently and repeated in
same directions during an accounting period, It is called
a. accounting cycle . b. book keeping
c. accounting. d. financial statements.

30. Following are Sub-fields of Accounting except…

a. financial accounting b. cost accounting
c. management accounting d. book keeping

31. Following are basis of accounting except:-

a. Accrual basis of accounting b. cash basis of accounting
c. hybrid basis of accounting d. financial accounting

32. Recording ( primary recording) is done in a book called -------.

a. Journal b. ledger c. trial balance d. trading account

33. Book containing classified information is called…...

a. Journal b. ledger c. trial balance d. trading account

34. external user of financial statement are…….

a. Directors b. Partners c. Managers d. Investor

35. a widely accepted set of rules, conventions, standards and procedures for reporting financial
information are called
a. accounting b. book keeping c. Generally Accepted Accounting
Principles (GAAP) d. all of the above

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36. deleted from syllabus……

37. The ………. means idea or notion, which has universal application.
a. concepts b. principles.
c. conventions. d. imaginations.

38…………….. emerge out of Accounting Practices, commonly known as accounting principles adopted by
various organizations over a period of time.
a. accounting concepts b. accounting principles.
c. accounting conventions. d. imaginations.

39. A change in accounting policy is justified a.

To comply with accounting standard.
b. To ensure more appropriate presentation of the financial statement of the enterprise.
c. To comply with law.
d. All of the above.

40. Accounting policy for inventories of Xeta Enterprises states that inventories are valued at the
lower of cost determined on weighted average basis or net realizable value. Which accounting
principle in followed in adopting the above policy?
a. Materiality. b.Prudence/conservatism.
c. Substance over form. c. All of the above.
41. deleted

42. Which financial statement represents the accounting equation, assets = Liabilities + Owner's equity:
(a) Income Statement (b) Statement of Cash flows
(c) Balance Sheet (d) None of the above
43. Which account is the odd one out?
(a)Office furniture & Equipment. (b) Freehold land and Buildings.
(c) Stock of materials. (d) Plant and Machinery.

44. Indicate the alternative which you consider to be correct: In Double Entry System of Book-keeping
every business transaction affects:
(a) At least two accounts. (b) Two sides of the same account.
(c) The same account on two different dates, (d) All of the above
45. Business transactions are recorded in the books of accounts from business point of view and not from
the owner because of ……
a. accounting period concept b. separate entity concept
c. accrual concept d. money measurement concept

46. According to ……. concept, it is assumed that enterprise will continue its operation for indefinite period
of time.

a. accounting period concept b . separate entity concept

c. accrual concept d. going concern concept

47. According to ….. concept, only those transactions which can be expressed in money should be recorded
in the books of accounts.
a. accounting period concept b. separate entity concept
c. accrual concept d. money measurement concept

48. According to ….. concept, the life of an enterprise is broken into smaller periods so that its performance
can be measured at regular interval.
a. accounting period concept b. separate entity concept
c. accrual concept d. money measurement concept
49. …………. means recognition of revenue and expenses as they are earned or incurred and not when cash
or money is received or paid.
a. accounting period concept b. separate entity concept
c. accrual concept d. money measurement concept

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50. For ascertaining profit and loss for a particular period, expenses should be matched with revenue of
that period.
a. matching concept b. full disclosure concept
c. dual aspect/duality concept d. historical concept

51. As per …….. concept, all significant information must be disclosed.

a. matching concept b. full disclosure concept c. dual aspect/duality concept d. historical concept
52. According to ------- concept every transaction has two aspects.
a. matching concept b. full disclosure concept c. duality concept d. historical concept
53. Under ------- concept, accounting data must be verifiable.
a. matching concept b. full disclosure concept
c. Verifiable evidence concept: d. historical concept

54. According to ---- concept, value of asset is determined on the basis of price paid for acquisition of asset.
a. matching concept b. full disclosure concept
c. Verifiable evidence concept: d. historical concept

55. as per ------ concept, an item should be regarded as important if there is reason to believe that
knowledge of it would influence the decision of an informed investor.
a. consistency concept b. materiality concept
c. Verifiable evidence concept: d. full disclosure concept

56. ------ is an exception of full disclosure principal.

a. consistency concept b. materiality concept
c. Verifiable evidence concept: d. full disclosure concept

57.------- concept says that the accounting practices should not change or must remain unchanged over a
period of several years.
a. consistency concept b. prudence concept
c. timeliness concept: d. industry practices concept

58. -------- states that accountant should not anticipate income but should provide for all possible losses.

a. consistency concept b. prudence/conservatism concept

c. timeliness concept: d. industry practices concept

59. as per ------ where there are many alternative value of asset, an accountant should choose method which
shows lesser value.
a. consistency concept b. prudence concept
c. timeliness concept: d. industry practices concept

60. Under ----- principle, every transaction must be recorded in proper time.
a. consistency principle b. prudence principle
c. timeliness principle d. industry practices principle

61. as per ---- principle, the entity should follow such accounting practices which are prevailing in that industry
a. consistency principle b. prudence principle
c. timeliness principle d. industry practices principle

Answer:-
1.(b) 2.(c) 3.(b) 4.(c) 5.(d) 6.(b) 7.(b) 8.(c) 9.(c) 10.(a)
11.(a) 12.(d) 13.(d) 14.(c) 15.(a) 16.(b) 17.(c) 18.(c) 19.(c) 20.(b)
21.(a) 22.(a) 23.(c) 24.(d) 25.(d) 26.(d) 27.(c) 28(d) 29(a) 30.(d)
31.(d) 32.(a) 33(b) 34.(d) 35.(c) 36.(d) 37.(a) 38.(c) 39.(d) 40.(b)

41.(c) 42.(c) 43.(c) 44.(a) 45.(b) 46.(d) 47.(d) 48.(a) 49.(c) 50.(a) 51.(b)
52.(C) 53.(C) 54.(d) 55.(b) 56.(b) 57.(a) 58.(b) 59.(b) 60.(c) 61.(d)

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Accounting Standards, IFRS and IND-AS

Introduction:- Accounting as a language of business tells financial result or position of enterprises to shareholders or
owner by means of financial statement. If accounting process or system is not proper, than there are chances that
financial statement could be misleading and not showing fair view. So in order to make accounting or financial statement
transparent, consistent, comparable, adequate and reliable, there is requirement to make accounting standardize to
make accounting principle and policies. Accounting standard provide framework and standard accounting policies so that
financial statement of different enterprises become comparable.

Meaning of accounting standard: The accounting standards are set of guidelines i.e. Generally Accepted
Accounting Principles, that are followed for preparation and presentation of financial statements. They are
accounting rules and procedures relating to measurement, recognition, treatment, presentation and disclosures of
accounting transactions in the financial statements issued by the council of the institute of chartered Accountant
of india.

OBJECTIVE:-
1. Main objective of accounting standards are harmonizing accounting policies and practice followed by different
enterprises so that comparison of different enterprises can be done easily.
2. It reduce accounting alternative for preparing financial statement to maintain harmonization.
3. promote better understanding of financial statements.
4. enhances reliability of financial statements.
5. understand significant accounting policies adopted and applied.

Benefits:- There are following benefits

-It reduces variation between different enterprises for accounting treatment used to prepare financial statement.
-Standards discloses all information even which are not required by law.
-It helps in comparison of financial statement of companies situated in different parts of countries or world.

Limitation:-
-When there are alternative of many accounting treatment, choice of best alternative generally become difficult.
-Standards are rigid not flexible for applying accounting treatment.
-Standards cannot override statute. It has to follow requirement of statute.

Overview of Accounting Standard in India

-ICAI constitute Accounting Standard Board ( ASB ) on 21st April 1977.
-Main Function of ASB to formulate Accounting Standards.
-ASB issued so far 29 Accounting Standard but AS-8 (Accounting for Research and development ) and AS-
6(depreciation) have been withdrawn so there are 27 Accounting Standards.

NEED FOR CONVERGENCE TOWARDS GLOBAL STANDARDS:

The last decade has witnessed a sea change in the global economic scenario. The emergence of transnational corporations
in search of money, not only for fueling growth, but to sustain on going activities has necessitated raising of capital from
all parts of the world, cutting across frontiers.

Each country has its own set of rules and regulations for accounting and financial reporting. Therefore, when an enterprise
decides to raise capital from the markets other than the country in which it is located, the rules and regulations of that other
country will apply and this in turn will require that the enterprise is in a position to understand the differences between the
rules governing financial reporting in the foreign country as compared to its own country of origin. Therefore translation
and re-instatements are of utmost importance in a world that is rapidly globalising in all ways. In themselves also, the
accounting standards and principle need to be robust so that the larger society develops degree of confidence in the
financial statements, which are put forward by organizations.

International analysts and investors would like to compare financial statements based on similar accounting standards, and
this has led to the growing support for an internationally accepted set of accounting standards for
cross-border filings. The harmonization of financial reporting around the world will help to raise confidence of investors
generally in the information they are using to make their decisions and assess their risks.

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Also a strong need was felt by legislation to bring about uniformity, rationalization, comparability, transparency and
adaptability in financial statements. Having a multiplicity of accounting standards around the world is against the public
interest.
If accounting for the same events and information produces different reported numbers, depending on the system of
standards that are being used, then it is self-evident that accounting will be increasingly discredited in the eyes of those
using the numbers. It creates confusion, encourages error and facilitates fraud. The cure for these ills is to have a single set
of global standards, of the highest quality, set in the interest of public.

Global Standards facilitate cross border flow of money, global listing in different bourses and comparability of financial
statements.

The convergence of financial reporting and accounting standards is a valuable process that contributes to the free flow of
global investment and achieves substantial benefits for all capital market stakeholders.

It improves the ability of investors to compare investments on a global basis and thus lowers their risk of errors of
judgment. It facilitates accounting and reporting for companies with global operations and eliminates some costly
requirements say reinstatement of financial statements. It has the potential to create a new standard of accountability and
greater transparency, which are values of great significance to all market participants including regulators.

It reduces operational challenges for accounting firms and focuses their value and expertise around an increasingly unified
set of standards. It creates an unprecedented opportunity for standard setters and other stakeholders to improve the
reporting model. For the companies with joint listings in both domestic and foreign country, the convergence is very much
significant.

Benefits of convergence with IFRS:

There are many beneficiaries of convergence with IFRSs such as the economy, investors, industry etc.

i. The Economy: When the markets expand globally the need for convergence increases since the convergence benefits the
economy by increasing growth of its international business. It facilitates maintenance of orderly and efficient capital
markets and also helps to increase the capital formation and thereby economic growth.

It encourages international investing and thereby leads to more foreign capital flows to the country.

ii. Investors: A strong case for convergence can be made from the viewpoint of the investors who wish to invest outside
their own country. Investors want the information that is more relevant, reliable, timely and comparable across the
jurisdictions. Financial statements prepared using a common set of accounting standards help investors better understand
investment opportunities as opposed to financial statements prepared using a different set of national accounting standards.
Investors’ confidence is strong when accounting standards used are globally accepted. Convergence with IFRS contributes
to investors’ understanding and confidence in high quality financial statements.

iii. The Industry: A major force in the movement towards convergence has been the interest of the industry. The industry
is able to raise capital from foreign markets at lower cost if it can create confidence in the minds of foreign investors that
their financial statements comply with globally accepted accounting standards. With the diversity in accounting standards
from country to country, enterprises which operate in different countries face a multitude of accounting requirements
prevailing in the countries. The burden of financial reporting is lessened with convergence of accounting standards because
it simplifies the process of preparing the individual and group financial statements and thereby reduces the costs of
preparing the financial statements using different sets of accounting standards.

Development in Indian accounting standards:

First step towards IFRS:

The Institute of Chartered Accountants of India (ICAI) being the accounting standards-setting body in India, way back in
2006, initiated the process of moving towards the International Financial Reporting Standards (IFRSs) issued by the
International Accounting Standards Board (IASB) with a view to enhance acceptability and transparency of the financial
information communicated by the Indian corporates through their financial statements. This move towards IFRS was
subsequently accepted by the Government of India.

The Government of India in consultation with the ICAI decided to converge and not to adopt IFRSs issued by the IASB.
The decision of convergence rather than adoption was taken after the detailed analysis of IFRS requirements and extensive
discussion with various stakeholders. Accordingly, while formulating IFRS- converged Indian Accounting Standards (Ind
AS), efforts have been made to keep these Standards, as far as possible, in line with the corresponding IFRS and departures
have been made where considered absolutely essential. These changes have been made considering various factors, such
as, various terminology related changes have been made to make it consistent with the terminology used in law. Certain

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changes have been made considering the economic environment of the country, which is different as compared to the
economic environment presumed to be in existence by IFRS.

Why are Indian accounting standards:

Indian Accounting Standards (Ind-AS) are the International Financial Reporting Standards (IFRS) converged standards
issued by the Central Government of India under the supervision and control of Accounting Standards Board (ASB) of
ICAI and in consultation with National Advisory Committee on Accounting Standards (NACAS).

National Advisory Committee on Accounting Standards (NACAS) recommend these standards to the Ministry of
Corporate Affairs (MCA). MCA has to spell out the accounting standards applicable for companies in India.

The Ind AS are named and numbered in the same way as the corresponding International Financial Reporting Standards
(IFRS).

APPLICATION OF IFRS IN INDIA :- India had two options, i.e. either to accept IFRS as they are or converge the
Indian accounting standards in line with IFRS. It decided to converge its existing accounting standards with IFRS.
The converged accounting standards titled Ind -AS have been issued and notified. It should be noted that the
existing Indian accounting standards shall not cease to be applicable standards. They will continue to apply on
entities that are not required to migrate to IND-AS.

Question 1. Write true or false with reason.

i. The Government of India in consultation with the ICAI decided to adopt IFRSs issued by the IASB.
ii. There are many benefits of convergence with IFRSs to the economy, investors, industry etc.
iii. There was no need to converge to global accounting standards.
iv. International Financial Reporting Standards (IFRSs) are considered a “rules-based” set of standards.
v. Govt of India has taken IASB support to develop Ind AS standards.
vi. IASC stands for International Accounting Standards Council.

Answer:

i. False: The Government of India in consultation with the ICAI decided to converge and not to adopt IFRSs issued by the
IASB.
ii. True: Major benefits of convergence with IFRS’s to economy, investors and industry.
iii. False: Since India is going global, there was huge demand of global standards for better comparison.
iv. False: International Financial Reporting Standards (IFRSs) are considered a “principles-based” set of standards.
v. False: Govt. of India has taken ASB support to develop Ind AS standards.
vi. False: IASC stands for International Accounting Standards Committee.

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ACCOUNTING POLICIES

Meaning
➢ Accounting Policies means specific accounting principles and method of applying those
principles in the preparation and presentations of financial statement.
➢ The choice of specific accounting policy in different circumstances requires judgment by management.
➢ ICAI trying to reduce number of accounting policies through Guidance Notes and Accounting
standard in combined efforts with government and other regulatory agencies. ICAI already
achieved some progress in this respect.

Areas within different accounting polices are frequently encountered are as follows:
• Method of depreciation, depletion and Amortization
• Valuation of Inventories
• Treatment of goodwill
• Valuation of Investment
• Valuation of fixed assets etc.

Selection of Accounting Policies

➢ Choice of accounting policy is important decision which affects the performance of financial position of
business.
➢ Selection of inappropriate accounting polices may lead to understatement or overstatement of
performance and financial positions.
➢ There is no universal formula for selecting accounting policies.
➢ Three major characteristics which should be considered for selection and application of
accounting polices
• Prudence
• Substance over form
• Materiality
➢ Financial statement should be prepared on the basis of such accounting policies
➢ Accounting policies adopted in the preparation of financial statement should be disclosed at one place .

Change in Accounting policies:- Change in Accounting policies should be made in following conditions
a) When it is required by law.
b) Change result more appropriate presentation of financial statement.
c) Changes require to comply with accounting standard. So it is necessary to reflect change in financial
statement.

Question 1. State whether following statements are true or false with suitable reasons.
i. There is a single list of accounting policies, which are applicable to all enterprises in all circumstances.
ii. Selection of accounting policy doesn’t impact financial performance and financial position of the business
iii. A change in accounting policies should be made as and when business like to show result as per their choice.
iv. Choosing FIFO or weighted average method for inventory valuation is selection of accounting policy.
v. Selection of an inappropriate accounting policy decision will overstate the performance and financial position of a
business entity every time.

Answer:
i. False: There cannot be single list of accounting policies, which are applicable to all enterprises in all circumstances.
There would always be different policies chosen by different industries under different circumstances.
ii. False: Accounting policy has big impact on value of items goes under financial statements, hence it impacts financial
performance and financial position of the business.
iii. False: A change in accounting policies should be made in the following conditions:
(a) It is required by some statute or for compliance with an Accounting Standard.
(b) Change would result in more appropriate presentation of financial statement.
iv. True: An enterprise may adopt FIFO or weighted average method for inventory valuation and the method selected for
valuation is called an accounting policy.
v. False: It could understate/overstate the performance and financial position of a business entity.

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Accounting as a Measurement Discipline:- Valuation Principle, Accounting Estimates

Meaning of Measurement:-- Measurement is important aspect of accounting. Transaction and Events are measured in
term of money.

There are three basic elements of measurement :-

1. Identification of Objects and Events to be measured.
2. Selection of Standard or scale to be used.
3. Evaluation of dimension of measurement standard or scale. in accounting we take money as a unit of measurement

VALUATION PRINCIPLES There are four measurement base or valuation principles

1. Historical Cost
2. Current Cost
3. Realizable Value
4. Present Value

Historical Cost :- It means acquisition price or purchase price. For example, Rs.7,00,000/- paid to purchase the machine
and Rs 1,00,000 paid for its installation. Here historical cost of machine is Rs. 8,00,000.Under this principle, assets are
valued at an amount paid or cash equivalent at the time of purchase (i.e. fair market value at the time of acquisition).
Accordingly Liabilities are recorded at the amount of the proceeds received in exchange for the obligation.

Current Cost :- Assets are recorded at the amount of cash or cash equivalents that would have to be paid if the same or
an equivalent asset has been acquired currently.
Liabilities are carried at the undiscounted amount of cash or cash equivalents that would be required to be settle the
obligation currently.

Realisable (settlement) value :- Under this principle, Assets are recorded or valued at amount which can be
obtained if assets are sold in open market.
Liabilities are carried at their settlement values; i.e. the discounted amounts of cash or cash equivalents expressed to be
paid to satisfy the liabilities in the normal course of business.

Present Value :- Under this principle, Assets are recorded at present discounted value of future net cash inflows
that is expected to generate in the normal course of business.

Liabilities are recorded at present discounted value of future net cash outflows which are expected to be paid to
settle liabilities in normal course of business.

Measurement and valuation :- Value relates to benefit to be derived from objects, abilities or idea. According to
economist, value is the utility (i.e. satisfaction) of economic resources to the person using it. According to accountant,
value of objects, abilities or ideas is always measured in term of money.

Accounting Estimates:- Transaction is measured at the amount which is paid for or by applying valuation principle. But
there are some assets and liabilities which are not occurred or cannot be measured by applying valuation principle like
depreciation, provision for doubtful debts. But these assets or liabilities are necessary to record in books of accounts but
for recording these items we need some value and for withdrawing such value we make reasonable estimates based on
existing situation and past experience.
Thus management makes various estimates and assumption of assets, liabilities, income and expenses as on the date of
preparation of financial statement like depreciation, amortization of expenses, provisions of employee benefits etc.
Process of estimation involves judgments based on information available.
-Estimate requires revision if changes occur regarding circumstances on which the estimate was based.
Change in estimates means difference arises between certain parameters estimated earlier and re-estimated during the
current period or actual results achieved during current period.

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CAPITAL AND REVENUE TRANSACTIONS

There are 2 types of transaction:

i. Capital transaction:- transactions having long term effect are known as capital transaction.

ii. Revenue transaction:- transactions having short term effect are known as revenue transactions.

It is necessary to make a distinction between Revenue and Capital expenditure and income to determine the
correct income of the business. To calculate net profit of the business, only revenue income and expenditure will
be taken into consideration, however business may incur some expenditure of capital nature.

The following facts will not be taken into consideration to decide, whether an expenditure incurred
or income earned is capital or Revenue in nature: —

(i) Source of payment

(ii) Nature for recipient

(iii) Manner of payment

• Classification of Expenditure : • Classification of • Classification of Receipt

Income
1) Capital Expenditure 1) Capital Income 1) Capital Receipt
2) Revenue Expenditure 2) Revenue Income 2) Revenue Receipt
3) Deferred Revenue Expenditure

CONSIDERATION IN DETERMINING CAPITAL AND REVENUE EXPENDITURES:

(a) Nature of business: for a trader dealing in furniture, purchase of furniture is revenue expenditure but for
any other trade, the purchase of furniture should be treated as capital expenditure.

(b) Recurring nature of expenditure: if the frequency of an expenditure is quite often in an accounting year
then it is said to be revenue expenditure. For example, payment of salary, wages etc. but if the frequency is non-
recurring, then it is called capital expenditure. For example, purchase of assets.

(c) Purpose of expenses: expenses incurred for repair of machinery in normal course of maintenance is called
revenue expenditure. On the other hand, expenditure incurred for major repair of the asset so as to increase its
productive capacity is capital in nature.

(d) Effect on revenue generating capacity of the business: the expenses which help to generate
income/revenue in the current period are revenue in nature. On the other hand expenditure helps to generate
revenue over more than one accounting period are called capital expenditure.

(e) Materiality of amount involved : relative proportion of amount involved is another important consideration
in distinction between revenue and capital expenditure. For example, purchase of calculator is treated as revenue
expenditure, even though we derive benefit during more than one year.

Capital Expenditure: Capital expenditure is that expenditure which result in the purchase, alteration or
improvement of fixed assets. Such expenditures result in an increase in the earning capacity of a business. Such
expenditure is incurred with a view to bringing in improvements in productivity or earning capacity for
getting long-term advantages for the business. It is not incurred for day -to-day working of the business. The
following types of expenditure are treated as – 'Capital Expenditure’.
i) Acquisition of an asset.
ii) Delivery of fixed assets.
iii) Installation of fixed assets
iv) Legal cost of buying assets/property.
v) Demolition costs
vi) Architect fees
vii) Improvement of fixed assets
viii) Extension of an asset:
ix) Putting the new assets into working condition
x) Acquisition of a right to carry on business
xi. Cost of overhauling second hand machines.

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xii. Development expenditure

Other examples are --- money paid for goodwill since it will attract the old firm's customer and thus result in
higher sales and profit. Money spent to reduce the working expenses, for example conversion of hand driven
machinery to power driven machinery and expenditure which enable a firm to produce a large quantity of goods.

It is important to note that all amounts spent up to the point an assets is ready for use should be treated
as capital expenditure. The examples are - Fees paid to lawyer for drawing up the purchase deed of land,
overhaul expenses of second hand machinery etc. Interest paid on loans raised to acquire a fixed asset is
particularly noteworthy. Such interest can be capitalized; i.e. added to the cost of the assets but only for the period
before the assets is ready for use.

It is not necessary that capital expenditure always generate profit. Even if there is a loss or asset has not been
used, such expenditure will be treated as capital expenditure.

Revenue Expenditure: Revenue Expenditure is that expenditure which is incurred for maintaining
productivity or earning capacity of a business. An item of expenditure whose benefit express within the year or
expenditure which merely seeks to maintain the business or keep assets in good working condition is revenue
expenditure. Expenses of following nature are treated as revenue expenses:—
(i) Expenses for running the business.
(ii) Expenses incurred to maintain the fixed assets( maintenance expenditure).
(iii) Purchase of material and goods.
(iv) Depreciation.
(v) Administration of the business
(vi) Selling and distribution expenses.
(vii) taxes and legal expenses.
(viii) research expenditure

Such expenditure does not increase the efficiency of the firm, nor does it result in the organization of
something permanent.

Note 1: capitalised expenditure: expenditure connected with the purchase of fixed asset are called
capitalised expenditure e.g wages paid for the installation of machinery.

Note 2. Capital expenditure are shown in the balance sheet but revenue expenditure are shown in the
trading and profit & loss account.

Revenue Receipt:Amount received in the course of normal business transaction is treated as revenue
receipt.For example, sale proceeds of goods are revenue receipt, discount received. Commission received, interest
on bank deposits, annual subscriptions, general donation, entrance fees, sale of old newspaper, locker rent etc.

Capital Receipt :-- Receipts which are not of revenue nature are capital receipts. Following are covered
under capital receipts:
i. Capital contributed by members
ii. Share capital/ capital contribution
iii. Loan raised
iv. Proceeds from sale of fixed assets
v. life membership fees
vi. Legacies
vii. Government grants for specific purpose
viii. Donation for specific purpose

Amount received from the proprietors as capital or loan receipt is treated as capital receipt. Similarly sale
proceeds of permanent or fixed assets are also treated as capital receipt. In order to ascertain the profit made
by a business, only revenue receipt should be taken in to account. Capital receipts have no bearing on the
profit made or loss incurred during a particular year.

Revenue profit/Income: Any income or profit derived by carrying on the business or during the course
of business operations is treated as revenue income. Ex.-- Profit on sale of goods, dividend or interest received,
commission or discount received. Such income is shown in profit and loss A/c.

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Capital profit/Income: Capital profit is the profit which is earned on the sale of the fixed assets. For
example, profit on sale of fixed assets over its cost is treated as Capital Income. However any profit upto the cost
of the asset is treated as Revenue Profit.

Revenue loss: the loss suffered by the business in the ordinary course of business is called revenue loss.

Capital loss :- the loss suffered by a company on the sale of fixed assets is called capital loss.

Question:(1) State with reason whether the following are Capital or Revenue Expenditure:
(i) Expenses incurred in connection with obtaining a license for starting the factory were10,000.
(ii) Rs.2,000 spent as lawyer's fee to defend a suit claiming that the firm's factory site belong to the plaintiff
the suit was not successful.
(iii) Rs.12,000 interest had accrued during the year on term loan obtained and utilised for the construction of
factory building and purchase of machineries, however, the production had not commenced till the last
date of the accounting year,
(iv) Expenditure on acquisition of Export Rights, when payment is made in instalments.
(v) Interest on arrears of sales tax.
(vi) 1,000 paid for removal of Inventory to a new site.
(vii) Rings and Pistons of an engine were changed at a cost of Rs 5,000 to get fuel efficiency.
(viii) Money paid to Mahanagar Telephone Nigam Ltd. (MTNL) Rs 8,000 for installing telephone in the office.
(ix) 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.

Solution :
(i) Money paid Rs. 10,000 for obtaining a licence to start a factory is a capital expenditure. This is an item of
expenditure incurred to acquire the right to carry on business. The expenses necessary for either
establishing the business, like expenses for obtaining the necessary licence will be capital expenditure.
Only the initial expenditure is capital; renewal fees are revenue.
(ii) Rs.2,000 spent as lawyer's fee in defending the title to the firm's assets is a revenue expenditure. This is an
expenditure incurred for upkeep of a fixed assets. If there is a dispute about the ownership, legal expenses
incurred for defending the title will be a revenue expense.

(iii) Interest accrued Rs. 12,000 on term loan obtained and utilized for the construction of factory building and
purchase of machinery should be treated as capital expenditure since commercial production has not begun
till the last day of accounting year.

(iv) This is a kind of intangible assets which will help business to earn income for a long period. Whether payment is
made lump sum or in instalments , the nature of expenditure being capital will not change.

(v) When sales tax is payable in instalments, any interest paid with amount of sales tax is similar to tax for the
business. Further, this expenditure has direct relationship with the income earned during the current year.
Hence, treated as Revenue Expenditure.

(vi) Rs 1,000 paid for removal of Inventory to a new site is revenue expenditure. This is neither bringing
enduring benefit nor enhancing the value of the asset.

(vii) Rs 5,000 spent in changing Rings and Pistons of an engine to get fuel efficiency is capital expenditure.
This is an expenditure on improvement of a fixed asset. It results in increasing profit-earning capacity of the
business by cost reduction.

(viii) Money deposited with MTNL for installation of telephone in office is not expenditure. This is treated as
an asset and the same is adjusted over a period of time against actual telephone bills.
(ix) Cost of construction of building including cost of temporary huts is capital expenditure. Building is fixed
asset which will generate enduring benefit to the business over more than one accounting period. Construction
of temporary huts is incidental to the main construction. Such cost is also capitalised with the cost of building

Question 2. State with reasons whether the following statements are ‘True’ or ‘False’.
i. Overhaul expenses of second-hand machinery purchased are Revenue Expenditure.
ii. Money spent to reduce working expenses is Revenue Expenditure.
iii. Legal fees to acquire property is Capital Expenditure.

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iv. 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.
v. Amount spent for replacement of worn out part of machine is Capital Expenditure.
vi. Expense incurred on the repairs and white washing for the first time on purchase of an old building are
Revenue Expenses.
vii. Expenses in connection with obtaining a license for running the cinema is Capital Expenditure.
viii. 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.

Answer:
i. False: Overhaul expenses are incurred to put second-hand machinery in working condition to derive
endurable long-term advantage. So it should be capitalised.

ii. False: It may be reasonably presumed that money spent for reducing revenue expenditure would have
generated long-term benefits to the entity. It becomes part of intangible fixed assets if it is in the form of
technical know-how and tangible fixed assets if it is in the form of additional replacement of any of the existing
tangible fixed assets. So this is capital expenditure.
iii. True: Legal fee paid to acquire any property is part of the cost of that property. It is incurred to possess the
ownership right of the property and hence a capital expenditure.

iv.False: Legal expenses incurred to defend a suit claiming that the firm’s factory site belongs to the plaintiff is
maintenance expenditure of the asset. By this expense, neither any endurable benefit can be obtained in future
in addition to that what is presently available nor the capacity of the asset will be increased. Maintenance
expenditure in relation to an asset is revenue expenditure.

v.False: Amount spent for replacement of any worn out part of a machine is revenue expense since it is part of
its maintenance cost.

vi. False: Repairing and white washing expenses for the first time of an old building are incurred to put the
building in usable condition. These are the part of the cost of building. Accordingly, these are capital expenditure.

vii. True: The Cinema Hall could not be started without license. Expenditure incurred to obtain the license is
pre-operative expense which is capitalised. Such expenses are amortised over a period of time.

viii.True: Cost of temporary huts constructed which were necessary for the construction of the cinema house is
part of the construction cost of the cinema house. Therefore such costs are to be capitalised.

Question 2: State which of the following receipts are of capital nature and which of revenue nature:—

(a) Amount realised from old furniture.

(b) Amount received from a debtor whose account was previously written off as bad.
(c) Amount of loan taken from bank.
(d) Fees received from apprentices.
(e) Amount realised from debtors against their debts.
(f) Amount contributed by the proprietor to augment his capital.
(g) Rs. 10,000 received from sale of machinery which had cost Rs. 6,000.

Answer.
(a) Sale of old furniture only means conversion of one asset into another. Therefore, it is a capital receipt.
(b) This amount is to be treated as a revenue receipt because this amount is not refundable to the customer and
the amount was previously written off as a loss.
(c) The loan taken from a bank is repayable and, therefore they are capital receipt.
(d) Fee received from apprentices are not returnable and, therefore, they are an income of the firm. They are
revenue receipt.
(e) Amount realised from debtors against their debts is revenue receipts.
(f) This item is capital receipt since it increases the firm's liability to the proprietor.

(g) It will be treated as capital receipt as conversion of one asset into another (machinery into cash).

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Question 3. Good Pictures Ltd., constructs a cinema house and incurs the following expenditure during the first year
ending 31st March, 2022.
(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 October, 2021 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.

Answer:
(i) The total cost of the furniture should be treated as Rs 10,200 i.e., all the amounts mentioned should be capitalised since
without such expenditure the furniture would not be available for use. If Rs 1,000 and Rs 200 have been respectively
debited to the Repairs Account and the Wages Account, these accounts will be credited to the Furniture Account.

(ii) License for running the cinema house is necessary, hence its cost should be capitalised. But the fine of
Rs 1,000 is revenue expenditure. The renewal fee for the next year is also revenue expenditure but pertains to the next
year; hence, it is a prepaid expense.

(iii) Half of the insurance premium pertains to the year beginning on 1st April, 2021. Hence such amount should be treated
as prepaid expense. The remaining amount is revenue expense for the current year.

(iv) Since the temporary huts were necessary for the construction, their cost should be added to the cost of the cinema hall
and thus capitalised.

Question 4. State with reasons, how you would classify the following items of expenditure:
(i) Overhauling expenses of Rs 25,000 for the engine of a motor car to get better fuel efficiency.
(ii) Inauguration expenses of Rs 25 lacs incurred on the opening of a new manufacturing unit in an existing business.
(iii) Compensation of Rs 2.5 crores paid to workers, who opted for voluntary retirement.

Answer :
(i) Overhauling expenses are incurred for the engine of a motor car to derive better fuel efficiency. These expenses will
reduce the running cost in future and thus the benefit is in form of endurable long-term advantage. So this expenditure
should be capitalised.
(ii) Inauguration expenses incurred on the opening of a new unit may help to explore more customers This expenditure is
in the nature of revenue expenditure, as the expenditure may not generate any enduring benefit to the business over more
than one accounting period.

(iii) The amount paid to workers on voluntary retirement is in the nature of revenue expenditure. Since the magnitude of
the amount of expenditure is very significant, it may be better to defer it over future years.

Question 5. 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 Trade receivables during the year.

(iii) Amount spent on demolition of building to construct a bigger building on the same site.
Insurance claim received on account of a machinery damaged by fire.

Answer : (i) Capital expenditure.

(ii) Revenue receipt.
(iii) Capital expenditure.
(iv) Capital receipt.

Question 6. Are the following expenditures capital in nature?

(i) M/s ABC & Co. run a restaurant. They renovate some of the old cabins. Because of this renovation some space was
made free and number of cabins was increased from 10 to 13. The total expenditure was Rs 20,000.
(ii) M/s New Delhi Financing Co. sold certain goods on installment payment basis. Five customers did not pay
installments. To recover such outstanding installments, the firm spent Rs 10,000 on account of legal expenses.

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(iii) M/s Ballav & Co. of Delhi purchased a machinery from M/s Shah & Co. of Ahmedabad. M/s Ballav & Co. spent Rs
40,000 for transportation of such machinery. The year ending is 31st Dec, 2022.

Answer : (i) Renovation of cabins increased the number of cabins. This has an effect on the future revenue generating
capability of the business. Thus, the renovation expense is capital expenditure in nature.

(ii) Expense incurred to recover installments due from customer do not increase the revenue generating capability in
future. It is a normal recurring expense of the business. Thus, the legal expenses incurred in this case is revenue
expenditure in nature.

(iii) Expenses incurred on account of transportation of fixed asset is capital expenditure in nature

Question 7. MULTIPLE CHOICE QUESTION:

1. An expenditure is capital in Nature when –

(a) The receiver of the amount is going to treat it for the purchase of fixed assets.
(b) It increase the quantity of fixed assets
(c) It is paid as interests on loans for the business
(d) It is incurred to maintain fixed assets
2. Capital expenditures are recorded in the…..
(a) Balance sheet (b) Profit and loss A/c (c) Trading a/c (d) Manufacturing a/c

3. Which of the following transaction is of capital nature.

(a) Purchases of a truck (b) Repair of old trucks
(c) Cost of repairing of truck (d) All of the above

4. 5,000 incurred for upgradation of computer by installation of 128 MB Ram is

(a) Capital Expenditure (b) Deferred Revenue Expenditure
(c) Revenue Expenditure (d) None of the above

5. Entrance fee of Rs. 20,000 received by a club is a

(a) Capital Receipts (b) Revenue Receipt
(c) Capital Expenditure (d) Revenue Expenditure

6. Life Membership fees received by a club is

(a) Revenue expenditure (b) Capital Expenditure
(c) Deferred Revenue Expenditure (d) Capital Receipt

7. Cost of goods purchased for resale is an example of –

(a) Capital expenditure (c) Deferred Revenue Expenditure
(b) Revenue expenditure (d) None of these

8. Import duty of raw material purchased

(a) Revenue expenditure (b) Capital Expenditure
(c) Deferred Revenue Expenditure (d) None of these

9. Received from Solomon & co., an invoice for Rs. 1500 for repairs to factory walls
(a) Revenue Expenditure (b) Capital Expenditure (c) Deferred
Revenue Expenditure (d) None of these

10. Compensation received from government for compulsory acquisition of land

(a) Revenue Expenditure (b) Capital Expenditure
(c) Deferred Revenue Expenditure (d) None of these

11. All Revenue Receipts and Expenditures are shown in: -

(a) Balance Sheet (b) Trading and Profit and Loss A/c
(c) Cash Flow Statement (d) Statement of Affairs

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12. A Bad Debt recovered during the year will be

(a) Capital expenditure (b) Revenue expenditure
(c) Capital Receipt (d) Revenue Receipt

13 DELETED
(14) Amount of Rs.5,000 spent as lawyers’ fees to defend a suit claiming that the firm’s factory site belonged to the
plaintiff’s land is
(a) Capital Expenditures (b) Revenue Expenditure
(c) Deferred Revenue Expenditures (d) None

15. Money spent Rs.10,000 as travelling expenses of the directors on trips abroad for purchase of capital assets
(a) Capital expenditures (b) Revenue Expenditures (c) Deferred revenue expenditures (d) None
16. Insurance claim received on furniture destroyed by fire is a ____:
(a) Capital Receipt (b) Revenue Receipt
(c) Capital Expenditure (d) Revenue Expenditure

17. Purchase of Machinery is a

(a) Capital Receipt (b) Revenue Receipt
(c) Capital Expenditure (d) Revenue Expenditure

18. An expenditure is treated as revenue expenditure when

(a) Its benefit is exhausted within one accounting period
(b) Its benefit extends to more than one accounting period
(c) The amount spent is very large.
(d) When no cash outflow takes place for the same.

19. Cost of computer purchased for office use is a

(a) Capital Receipt (b) Revenue Receipt
(c) Capital Expenditure (d) Revenue Expenditure

20. Amount spent for development of factory site is a

(a) Capital Receipt (b) Revenue Receipt
(c) Capital Expenditure (d) Revenue Expenditure

Answer:- 1.(b) 2.(a) 3.(a) 4.(a) 5.(b) 6.(d) 7.(b) 8.(a) 9.(a) 10.(d)
11.(b) 12.(d) 13.(a) 14.(b) 15.(a) 16.(a) 17.(c) 18.(a) 19.(c) 20.(c)

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PROVISIONS, RESERVES AND CONTINGENT ASSET/LIABILITY

Meaning of provisions:-- Provision is an amount set aside, by charging it to the Profit and Loss Account or Statement
of Profit and Loss (in case of companies), to provide for a known liability the amount of which cannot be determined
with accuracy. It is charged in the Profit and Loss Account on the basis of best estimate. In other words, a provision is a
charge against profit for the purpose of providing for any liability or loss. Provision for Depreciation, Provision for
Doubtful. Debts, Provision for Repairs and Provision for Tax are few examples of provisions. Provision differs from
liability to the extent that provision is an estimated amount while liability is determined amount. For example, providing
for wages of 50,000 payable for the month of March is a liability. Thus, Provision is an estimated amount set aside to
meet an uncertain loss or expense in future.

Concept of Provisions:- Accrual Assumption is a fundamental accounting assumption. It means all liabilities,
losses and expenses, whether determined or not, should be accounted in the books of account to determine profit
or loss for the accounting period. Liabilities amounts of which are not determined are recorded in the books of
account on best estimate and should be near to actual liability or expense. The amount so set aside is known as
Provision.
Objectives of Provisions:-- The objectives of provision are to account all expenses and losses. Where the amount
of liability, expenses and losses is not ascertained or determined, they are estimated and accounted by making
provision. As a result of provision, correct (or near to correct) profit or loss is ascertained, liabilities and assets are
shown at correct values.
Features of Provision:
1. It is an amount set aside out of income or profits. It is retention of profit, made temporarily, for a specific purpose.
2. The purpose, for which a provision is created, is to meet:
(a) an anticipated loss which has occurred but the amount is not ascertained, or
(b) a known depletion or diminution in the value of an asset, or
(c) a liability which has been known to have arisen.
3. The exact amount of anticipated loss or the depletion in the value of the asset, or the liability is not ascertained
or ascertainable, at the time of accounting.
4. It is a charge to Profit and Loss Account.

Importance of Provisions:
1. Provision is an amount set aside out of current earnings considered necessary to provide for all losses that are
expected to arise out of transactions entered into, during the accounting period.
2. Provision is made to retain future operating performance undisturbed by losses arising out of transactions of prior
periods.
3. Provision is made following the Prudence Concept of accounting which holds "provide for all anticipated
expenses and losses but do not provide for anticipated incomes. By making a provision, a part of the profits and
corresponding assets are retained, which otherwise could have been distributed as profits.
4. Any loss or depletion in the value of an asset or any liability as may not have been provided against income or profit
would effectively erode the capital of a business. Creation of Provisions is an attempt to maintain the capital of
business intact.
Thus, Provisions represent (a) maintenance of capital, (b) adjustment of capital as is lost or eroded in the process of
generation of revenue with current revenue and (c) a shield where loss arising out of past transactions does not
affect result of future operations. The above discussion brings out the point that current income or profit cannot be
measured without creating provisions. Provisions are accordingly, considered as a charge against revenue or profits.

RESERVES-- Meaning and Concept

Reserves are the amounts set aside out of profits. It is an appropriation of profits or accumulated profits to strengthen
the financial position of the business. Reserves are not set aside to meet a liability or depreciation in the value of assets
but is set aside to meet known or unknown contingency that may arise in future. Examples are General Reserve,
Reserve for Expansion, Reserve for Equalisation of Dividends, Reserve for Increased Costs of Replacement, etc.

The amount of reserve when invested in outside securities, the reserve is termed as Reserve Fund. But when no
specific investment is made it is not called Reserve Fund but Reserve.
General Reserve, Workmen Compensation Reserve and Investment Fluctuation Reserve being appropriation of profit
are not shown in the Profit and Loss Account.

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Importance of Reserves: Reserves are important in a business to strengthen the financial position of the
enterprise. The creation of Reserves enables the enterprise to sail through difficult financial period in the future. The
purpose of Reserves can be:
(i) expansion of business,
(ii) improvement of financial position,
(iii) redemption of liabilities,
(iv) meeting unforeseen contingencies,
(v) making dividends uniform from year to year, and
(vi) meeting legal requirements such as Debentures Redemption Reserve under the Companies Act, 2013
required by the Income-Tax law.

Types of Reserves: To have a better understanding of the nature and purpose of Reserves, let us classify them into
different types. Reserves are generally classified into: 1. Revenue Reserves 2. Capital Reserves.

1. Revenue Reserves are set aside out of revenue profits which are available for distribution as dividend. Revenue
reserves can be classified into: (i) General Reserve (ii) Specific Reserve.

(i) General Reserve is the amount set aside out of profits not for any specific purpose. It is available for any future
contingency or expansion of business. Such reserve strengthens the financial position of the business. Example is
General Reserve.
(ii) Specific Reserve is that reserve which is set aside for a specific purpose and can be utilised only for that purpose. For
example, Workmen Compensation Reserve is a specific reserve because it is maintained to pay compensation to
workmen. Debentures Redemption Reserve, Capital Redemption Reserve, Investment Fluctuation Reserve, etc., are
other examples of Specific Reserve. It should be kept in mind that both General Reserve and Specific Reserve are set
aside as appropriation of profits.

2. Capital Reserves are set aside out of capital profits and are normally not available for distribution as dividend. In
other words, reserve created out of capital profits and which is not readily available for distribution as dividend among
the shareholders is called Capital Reserve. Examples of capital reserves are:

(i) Profit prior to incorporation,

(ii) Premium on issue of shares or debentures,
(iii) Profit on redemption of debentures,
(iv)Profit on forfeiture of shares,
(v) Profit on sale of fixed assets,
(vi) Capital Redemption Reserve, and
(vii) Profit on revaluation of fixed assets and liabilities.

All capital profits should, therefore, be regarded as Capital Reserves. Capital reserves may or may not involve any receipts of
cash. Having understood the meaning and purposes of Revenue Reserve and Capital Reserve, let us distinguish them.
Difference between Revenue Reserve and Capital Reserve

Basis Revenue Reserve Capital Reserve

1. Source it is created out of business profits. it is created out of capital profits.
2, Usage It can be used for distribution of It can be used for distribution of
dividends without any dividends only if the company
precondition. satisfies certain conditions
prescribed by the Companies Act.
3. Purpose it is created for strengthening the It is created for meeting capital
financial position and meeting the losses or to be used for purposes
unforeseen contingencies or some specified by the Companies Act.
specific-purpose.

Nature of Reserves: Reserve is an appropriation of profit and thus, belongs to the proprietors just as capital
does, it being appropriation of profit. Reserves reduce divisible profits and can be invested in outside securities.
Reserves are shown on the liabilities side of the Balance Sheet.

Reserve Fund: If Reserves are invested in outside securities and such securities are earmarked for a particular
purpose denoted by the reserve, the reserve is known as Reserve Fund. A business will invest the funds outside only if:
(a) ready cash is necessary on a certain date, or

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(b) The funds cannot be profitably invested in the business itself.

It should be remembered that a reserve fund and debit balance in profit and Loss Account or Statement of
Profit and Loss (in case of companies) cannot exist together.

In case it shows a debit balance, at any subsequent date, it is adjusted against the Reserve Fund. The reason being that
it would be a contradiction to state on one side of the Balance Sheet, an item showing a deficiency in Profit and Loss
Account or Statement of Profit and Loss (in case of companies) and on the other side, an item representing the surplus
set aside out of profits. Thus, the debit balance in the Profit and Loss Account or Statement of Profit and Loss (in case
of companies) (if any) should be shown as a deduction from the Reserve Fund or General Reserve under the head
'Reserves and Surplus' on the liabilities side of the Balance Sheet or vice versa.

SECRET RESERVE:-- Secret reserve is a reserve the existence and/or the amount of which is not disclosed in the
Balance Sheet. It is also called Hidden Reserve. It can be said that there is a surplus of assets over liabilities and that the
surplus is not disclosed or shown by the Balance Sheet. Such reserves are created by showing the assets at a lower
amount and liabilities at a higher amount.
Creation of a Secret Reserve:-- Some of the ways in which Secret Reserve can come into existence are:
1. by charging excessive depreciation,
2. by undervaluing stock-in-trade and goodwill,
3. by creating excessive provision for bad debts and other contingencies,
4. by charging capital expenditure to Profit and Loss Account,
5. by showing a contingent liability as a real liability, and
6. by grouping free reserves as creditors.

Advantages of a Secret Reserve:

1. It increases the working capital of the concern and also strengthens its financial position.
2. It enables the directors to tide over unfavourable time. As and when profit reduces, the directors can maintain
the rate of dividend by utilising it.
3. Heavy losses of an exceptional nature can be met without disclosing the fact in the published statements and
without disturbing the normal business profit.

Disadvantages of a Secret Reserve:

1. The Balance Sheet will not disclose true and fair position of the affairs of the business.
2. Value of shares goes down in the market.
3. The shareholders do not get their due share of profit from the business.

Difference between Reserve and Provision

Basis Reserve Provision

1. Nature It is an appropriation of profit. It is a charge against profit.
2, Purpose It is created to strengthen the It is made to meet known liability
financial position and to meet or contingency, if the amount is not
unforeseen liabilities or losses. determined.
3. Effect on Profit It is debited to the Profit and Loss It is debited to the Profit and Loss
Appropriation Account. Hence, Account, Hence, profit is reduced.
profit is not affected.
4. Investment it may be invested outside the It is not invested.
business.
5 Distribution Unutilised part can be distributed It cannot be used for distribution as
as dividend. It reduces divisible profit/ dividend. It reduces net
profits. profits.
6. Compulsion/ Prudence It is created out of profits as a It is made because of accounting
matter of prudence and due to legal principles (Prudence).
requirements.
7. Presentation A reserve is shown on the It is shown either as a liability
liabilities side of Balance Sheet under the head 'Current Liabilities'
under the head 'Reserves and or as deduction from the asset.
Surplus'.

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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. It usually arises from unplanned or unexpected events that give rise to the
possibility of an inflow of economic benefits to the business entity.
For example, a claim that an enterprise is pursuing through legal process, where the outcome is uncertain, is a
contingent asset.
As per the concept of prudence as well as the present accounting standards, an enterprise should not recognise a
contingent asset. These assets are uncertain and may arise from a claim which an enterprise pursues through a legal
proceeding. There is uncertainty in realisation of claim. It is possible that recognition of contingent assets may result
in recognition of income that may never be realised.

However, when the realisation of income is virtually certain, then the related asset no longer remains as contingent
asset.
A contingent asset need not be disclosed in the financial statements. A contingent asset is usually disclosed in the
report of the approving authority (Board of Directors in the case of a company, and the corresponding approving
authority in the case of any other enterprise), if an inflow of economic benefits is probable.

CONTINGENT LIABILITY : The term ‘Contingent liability’ can be defined as

“(a) a possible obligation that arises from past events and the existence of which will be confirmed only by the
occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise;
or
(b) a present obligation that arises from past events but is not recognised because:
(i) it is not probable that an outflow of resources embodying economic benefits will be required to settle the
obligation; or
(ii) a reliable estimate of the amount of the obligation cannot be made.”

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 [part (a) of the definition]. A contingent liability
may also be a present obligation that arises from past events [(part (b) of the definition)].

An enterprise should not recognise a contingent liability in balance sheet, however it is required to be disclosed in the
notes to accounts, unless possibility of outflow of a resource embodying economic benefits is remote.
These liabilities are assessed continually to determine whether an outflow of resources embodying economic benefits
has become probable. If it becomes probable that an outflow or future economic benefits will be required for an item
previously dealt with as a contingent liability, a provision is recognised in financial statements of the period in which
the change in probability occurs except in the extremely rare circumstances where no reliable estimate can be made.

DISTINCTION BETWEEN CONTINGENT LIABILITY AND LIABILITY :

The distinction between a liability and a contingent liability is generally based on the judgement of the management.
A liability is defined as the present financial obligation of an enterprise, which arises from past events. The settlement
of a liability results in an outflow from the enterprises of resources embodying economic benefits.

On the other hand, in the case of contingent liability, either outflow of resources to settle the obligation is not
probable or the amount expected to be paid to settle the liability cannot be measured with sufficient reliability.
Examples of contingent liabilities are claims against the enterprise not acknowledged as debts, guarantees given in
respect of third parties, liability in respect of bills discounted and statutory liabilities under dispute etc. In addition to
present obligations that are recognized as liabilities in the balance sheet, enterprises are required to disclose
contingent liability in their balance sheets by way of notes.
DISTINCTION BETWEEN PROVISIONS AND CONTINGENT LIABILITY.
Provision Contingent liability
(1) Provision is a present liability of uncertain A Contingent liability is a possible obligation that
amount, which can be measured reliably by using may or may not crystallise depending on the
a substantial degree of estimation. occurrence or non-occurrence of one or more
uncertain future events.

(2) A provision meets the recognition criteria. A contingent liability fails to meet the same.

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(3) Provision is recognised when (a) an enterprise has Contingent liability includes present obligations
a present obligation arising from past events; an that do not meet the recognition criteria because
outflow of resources embodying economic either it is not probable that settlement of those
benefits is probable, and (b) a reliable estimate obligations will require outflow of economic
can be made of the amount of the obligation. benefits, or the amount cannot be reliably
estimated.

(4) If the management estimates that it is probable If the management estimates, that it is less likely
that the settlement of an obligation will result in that any economic benefit will outflow the firm to
outflow of economic benefits, it recognises a settle the obligation, it discloses the obligation as
provision in the balance sheet. a contingent liability.

Question 1.
i. A contingent liability need not be disclosed in the financial statements.
ii. A Provision fails to meet the recognition criteria.
iii. A claim that an enterprise is pursuing through legal process, where the outcome is uncertain, is a contingent
liability.
iv. When it is probable that the firm will need to pay off the obligation, this gives rise to Contingent liability.
v.Present financial obligation of an enterprise, which arises from past event is termed as contingent liability.

Answer :
i. False: A Contingent liability is required to be disclosed unless possibility of outflow of a resource embodying
economic benefits is remote.
ii. False: A contingent liability fails to meet the recognition criteria.
iii. False: A claim that an enterprise is pursuing through legal process, where the outcome is uncertain, is a contingent
asset
iv. False: When it is probable that the firm will need to pay off the obligation, this gives rise to provision.
v. False: Present Financial obligation of an enterprise, which arises from past events is termed as liability,

Question 2.Multiple choice questions :

i. Contingent asset usually arises from unplanned or unexpected events that give rise to
(a) The possibility of an inflow of economic benefits to the business entity.
(b) The possibility of an outflow of economic benefits to the business entity.
(c) Either (a) or (b).

ii. If an inflow of economic benefits is probable then a contingent asset is disclosed

(a) In the financial statements.
(b) In the report of the approving authority (Board of Directors in the case of a company, and the corresponding
approving authority in the case of any other enterprise).
(c) In the cash flow statement.
(d) In notes to account

(iii) In the case of ……., either outflow of resources to settle the obligation is not probable or the amount expected to
be paid to settle the liability cannot be measured with sufficient reliability.
(a) Liability (b) Provision (c) Contingent liabilities. (d) reserves

(iv) Present liability of uncertain amount, which can be measured reliably by using a substantial degree of
estimation is termed as…..
(a) provision (b) liability (c) contingent liability (d) reserve

(v) In the financial statements, contingent liability is …….

(a) Recognised. (b) Not recognised. (c) Adjusted.

Answer: (i) (a) (ii) (b) (iii) (c) (iv) (a) (v) (b)

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CHAPTER 2. ACCOUNTING PROCESS

CHAPTER 2A. JOURNAL ENTRIES

Double entry system of accounting is more than 500 years old. “Luca Pacioli” is known as father of double entry
system. According to double entry system, every transaction has two-fold aspects–debit and credit and both the
aspects are to be recorded in the books of accounts. Therefore, in every transaction at least two accounts are effected.
For example, on purchase of furniture either the cash balance will be reduced or a liability to the supplier will arise.
and new asset furniture is acquired .

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.

Transaction:
In the system of book-keeping, students can notice that transactions are recorded in the books of accounts. A
transaction is a type of event, which is generally external in nature and can be determined in terms of money. In an
accounting period, every business has huge number of transactions which are analysed in financial terms and then
recorded individually, followed by classification and summarisation process, to know their impact on the financial
statements. A transaction is a two way process in which value is transferred from one party to another. In it either a
party receives a value in terms of goods etc. and passes the value in terms of money or vice versa. Therefore, one
can easily make out that in a transaction, a party receives as well as passes the value to other party.

For recording transaction it is very important that they are supported by a substantial document like purchasing
invoices, bills, pay-slips, cash-memos, passbook etc.
Transactions analysed in terms of money and supported by proper documents are recorded in the books of accounts
under double entry system. To analyse the dual aspect of each transaction, two approaches can be followed:
(i) Accounting Equation Approach.
(ii) Traditional Approach.

(i) Accounting Equation Approach.- The relationship of assets with that of liabilities and owners’ equity in
the equation form is known as ‘Accounting Equation’. Basic accounting equation comes into picture when sum total
of capital and liabilities equalises assets, where assets are what the business owns and capital and liabilities are
what the business owes.

Question 1. Mr. Dravid. has provided following details related to his financials. Find out the missing figures:

Particulars (` in’000)
Profits carved during the year 5,000
Assets at the beginning of year A
Liabilities at the beginning of year 12,000
Assets at the end of the year B
Liabilities at the end of the year C
Closing capital 35,000
Total liabilities including capital at the end of the year 50,000
Answer: A-42,000 ; B- 50,000; C- 15,000.

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Traditional approach :
Under traditional approach of recording transactions one should first understand the term debit and credit and
their rules. Transactions in the journal are recorded on the basis of the rules of debit and credit only. For the
purpose of recording, these transactions are classified in three groups:
(i) Personal transactions.
(ii) Transactions related to assets and properties.
(iii) Transactions related to expenses, losses, income and gains.

Classification of accounts :

(i) Personal Accounts: Personal accounts relate to persons, trade receivables or trade payables. Example would be
the account of Ram & Co., a credit customer or the account of Jhaveri & Co., a supplier of goods. The capital account
is the account of the proprietor and, therefore, it is also personal. This account is further classified into three
categories:

(a) Natural personal accounts: It relates to transactions of human beings like Ram, Rita, etc.

(b) Artificial (legal) personal accounts: For business purpose, business entities are treated to have separate
entity. They are recognised as persons in the eye of law for dealing with other persons. For example:
Government, Companies (private or limited), Clubs, Co-operative societies etc.

(c) Representative personal accounts: These are not in the name of any person or organisation but are
represented as personal accounts. For example: outstanding liability account or prepaid account, capital
account, drawings account.

(ii) Impersonal Accounts: Accounts which are not personal such as machinery account, cash account, rent account
etc. These can be further sub-divided as follows:

(a) Real Accounts: Accounts which relate to assets of the firm but not debt. For example, accounts regarding
land, building, investment, fixed deposits etc., are real accounts. Cash in hand and Cash at the bank accounts
are also real.

(b) Nominal Accounts: Accounts which relate to expenses, losses, gains, revenue, etc. like salary account,
interest paid account, commission received account. The net result of all the nominal accounts is reflected as
profit or loss which is transferred to the capital account. Nominal accounts are, therefore, temporary.

Golden rule of accounting :

Types of Account Account to be Debited Account to be Credited
Personal Account Receiver Giver
Real Account What comes in What goes out
Nominal Account Expense and losses Income and gains

Modern classification of accounts : Real, nominal and personal accounts is the traditional classification of
accounts. Now, let us see the modern and more acceptable classification of accounts:-

Type of account Normal balance of Account to be debited Account to be credited

account when there is when there is
Capital account Credit Decrease Increase
Revenue account Credit Decrease Increase
Expenditure account Debit Increase Decrease
Withdraw account Debit Increase Decrease
Assets debit Increase Decrease
Liabilities account Credit Decrease Increase

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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. It is
the book of original entry in which transactions are entered on a daily basis in a chronological order.

Journalising process : All transactions may be first recorded in the journal as and when they occur; the record
is chronological; otherwise it would be difficult to maintain the records in an orderly manner. Debits and credits are
listed along with the appropriate explanations. There are basically two types of journals:-
(a) General journal (also called journal proper)
(b) Specialized journal ( also called subsidiary book)
The latter is used when there are many repetitive transactions of the same nature.

Advantage of journal:
(i) As transactions are recorded on chronological order, one can get complete information about the business
transactions on time basis.

(ii) Entries recorded in the journal are supported by a note termed as narration, which is a precise explanation of the
transaction for the proper understanding of the entry. One can know the correctness of the entry through these
narrations.

(iii) Journal forms the basis for posting the entries in the ledger. This eases the accountant in their work and reduces
the chances of error.

Compound Entry:-- When more than two accounts are involved in a transaction and the transaction is
recorded by means single journal entry instead of passing several journal entries, such single journal entry is
termed as 'Compound Journal Entry'. A compound journal entry may also be passed if there are more
transactions of the same nature, taking place on the same date. It may be recorded in the following three
ways:
a) by debiting one account and crediting two or more accounts; or
b) by debiting two or more accounts and crediting one account; or
c) by debiting several accounts and crediting several accounts.

Example:-Paid Rs. 920 to Mr. Gopal in full settlement of his account of Rs. 1,000.

Gopal A/c Dr. 1,000

To Cash A/c 980
To Discount received A/c 20

➢ OPENING ENTRY:- A journal entry by means of which the balances of various assets, liabilities and
capital appearing in the balance sheet of previous accounting period are brought forward in the books
of current accounting period is known as ‘Opening Entry’.
While passing an opening entry. All those accounts which denote what the business possesses (assets)
are debited and all the accounts showing amounts due by the business (liabilities) are credited.
 If capital is not given, it can be easily found out by deducting liabilities from assets.
Opening entries are the following:
Cash Account - Dr.
Cash at Bank Account - Dr.
Sundry Debtors Account - Dr.
Stock Account - Dr.
To Sundry Creditors Account
To Capital Account
The opening entry is made in the journal. At the end of the trading period, closing entries are made, the object
being to close the books.

Question 1. State whether following statements are true or false with suitable reason: (ICAI Study material)
(i) In accounting equation approach, equity + Long-term liabilities = fixed asset + current assets-current liabilities.
(ii) In the traditional approach a debtor becomes receiver.
(iii) The rule of nominal account states that all expenses & losses are recorded on credit side.
(iv) Journal proper is also called a subsidiary book.
(v) Capital account has a debit balance.
(vi) Purchase account is a nominal account.
(vii) All the personal & real account are recorded in P&L A/c.
(viii) Asset side of balance sheet contains all the personal & nominal accounts.

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(ix) Capital account is a personal account.

(x) Journal is also known as the book of original entry

Question 2. Write short note on classification of accounts. (ICAI Study material)

Question 3. Distinguish between Real account and nominal account. (ICAI Study material)
Question 4. Show the classification of the following Accounts under traditional and accounting equation
approach: (ICAI Study material)

a Rent outstanding g Capital

b Closing Inventory h Sales Tax Payable

c Sales i Trade receivables

d Bank Fixed Deposit j Depreciation

e Cash k Drawings

f Bad Debts

Answer:
Sl. No. Title of Account Traditional Approach Accounting Equation Approach
a Rent Outstanding Personal Liability
b Closing Inventory Real Asset
c Sales Nominal Revenue
d Bank Fixed Deposit Personal Asset
e Cash Real Asset
f Bad Debts Nominal (Expense) Temporary Capital (Expense)
g Capital Personal Capital
h Sales Tax Payable Personal Liability
i Trade receivables Personal Asset
j Depreciation Nominal (Expense) Temporary Capital (Expense)
k Drawings Personal Temporary Capital (Drawings)

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2B. LEDGER AND TRIAL BALANCE

Meaning of ledger : After recording the transactions in the journal, recorded entries are classified and grouped into by
preparation of accounts. The book which contains all set of accounts (viz. personal, real and nominal accounts), is known as
Ledger. It is known as principal books of account in which account-wise balance of each account is determined.

Rules regarding posting of journal entries into ledger:

i. Separate account is opened in ledger book for each account and entries from ledger posted to respective account
accordingly.
ii. It is a practice to use words ‘To’ and ‘By’ while posting transactions in the ledger. The word ‘To’ is used in the
particular column with the accounts written on the debit side while ‘By’ is used with the accounts written in the particular
column of the credit side. These ‘To’ and ‘By’ do not have any meanings but are used to the account debited and credited.
iii. The concerned account debited in the journal should also be debited in the ledger but reference should be of the
respective credit account.

Utility/uses/benifits of the ledger:

 It provides complete information about all the accounts in one book.

 It enables to ascertain what the main item of revenues is.
 It enables to ascertain what the main items of expenses are.
 It enables to ascertain what the assets are and of what value.
 It enables to ascertain what the liabilities are and of what amounts.
 It facilitates (i.e. make easy) the preparation of Final Accounts.

➢ DISTINCTION BETWEEN JOURNAL AND LEDGER:

Journal Ledger

 It is a book of primary entry.  It is book of final or secondary entry.

 It is prepared on the basis of source  It is prepared on the basis of Journal.
documents of transactions.

 Recording of transactions in the journal

it first stage.  Recording in the ledger is second stage.
 It is prepared to record all transactions  It is prepared to know the net effect of various
in chronological order. transactions affecting a particulars account.
 It is not balanced.  All ledger accounts (except nominal account)
 Narration is written for each entry are balanced in the ledger.
 The process of recording in journal is  No narration is required.
called ‘Journalizing’  The process of recording in the ledger is called
 Journal directly does not serve as basis ‘posting’
for the preparation of final accounts.  Ledger serves the basis for the preparations of
final accounts.

Cross referencing: the process of using referencing, dat and/or some other identification to relate each posting to the
appropriate journal entry is known as cross-referencing. Transactions from the journal are often posted to several
different accounts, but cross-referencing allows users to find all components of the transactions in the ledger.

Balance of an Account:- After posting into the ledger the next stage is to ascertain the net effect of all
transactions posted to an account.

Balance of an account is the difference between the total of debit and total of credit appearing in an account. It
signifies the net effect of all transactions posted to that account during a given period. It may be debit balance or
credit balance or a nil balance depending upon whether the debit or the credit side total is higher.

IMP-- Normally, personal Accounts and Real Accounts are balanced. Nominal Accounts are not usually
balanced but are closed by transfer to Trading and Profit and Loss A/c.

Question 1.The following data is given by Mr. S, the owner, with a request to compile only the two personal
accounts of Mr. H and Mr. R, in his ledger, for the month of April, 2022.
i. Mr. S owes Mr. R Rs 15,000; Mr. H owes Mr. S Rs 20,000.
ii. Mr. R sold goods worth Rs 60,000 @ 10% trade discount to Mr. S.
iii. Mr. S sold to Mr. H goods prices at Rs 30,000.

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iv. Record a purchase of Rs 25,000 net from R, which were sold to H at a profit of Rs 15,000.
v. Mr. S rejected 10% of Mr. R’s goods of 4th April.
vi. Mr. S issued a cash memo for Rs 10,000 to Mr. H who came personally for this consignment of goods, urgently
needed by him.
vii. Mr. H cleared half his total dues to Mr. S, enjoying a ½% cash discount (of the payment received,
Rs 20,000 was by cheque).
viii. R’s total dues (less Rs 10,000 held back) were cleared by cheque, enjoying a cash discount of Rs 1,000 on the
payment made.
ix. Close H’s Account to record the fact that all but Rs 5,000 was cleared by him, by a cheque, because he was
declared bankrupt.
x. Balance R’s Account (ICAI Study material)

Question 2. State whether following statements are true or false with suitable reason. (ICAI Study material)
i. A ledger is also known as the principal book of accounts.
ii. Cash account has a debit balance.
iii. Posting is the process of transferring the accounts from ledger to journal.
iv. At the end of the accounting year, all the nominal accounts of the ledger book are balanced.
v. Ledger records the transactions in a chronological order.
vi. If the total debit side is greater than the total of credit side, we get a credit balance.
vii. Ledger accounts of assets will always be debited when they are increased.

Answer :
i. True: Since it classifies all the amounts related to a particular account and then it is used as the base for preparing
the Trial balance, a ledger is also known as principal books of accounts.
ii. True: Being an asset under the modern equation approach, cash account has a debit balance.
iii. False: Posting is the process of transferring the balances from journal to ledger.
iv. False: At the end of the accounting year, all the nominal accounts of the ledger book are totaled and transferred
to P&L A/c.
v. False: Ledger records the transactions in analytical order. But journal records the transactions in a chronological
order.
vi. False: If the total of debit side is greater than the total of credit side, we get a debit balance as the opening
balance.
vii. True: The increase to an asset shall be debited since the original balance is also debit.

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TRIAL BALANCE:
Meaning : Preparation of trial balance is the third phase in the accounting process. After posting the accounts in the ledger, a
statement is prepared to show separately the debit and credit balances. Such a statement is known as the trial balance. It may
also be prepared by listing each and every account and entering in separate columns the totals of the debit and credit sides.
Whichever way it is prepared, the totals of the two columns should agree. An agreement indicates reasonable accuracy of the
accounting work; if the two sides do not agree, then there is simply an arithmetic error(s).

Objectives of preparing trial balance : The preparation of trial balance has the following objectives:
i. Trial balance enables one to establish whether the posting and other accounting processes have been carried out without
committing arithmetical errors. In other words, the trial balance helps to establish arithmetical accuracy of the books.
ii. Financial statements are normally prepared on the basis of agreed trial balance; otherwise the work may be cumbersome.
Preparation of financial statements, therefore, is the second objective.
iii. The trial balance serves as a summary of what is contained in the ledger; the ledger may have to be seen only when details
are required in respect of an account.

Limitation of trial balance:

One should note that the agreement of Trial Balance is not a conclusive proof of accuracy. In other words, in spite of the
agreement of the trial balance some errors may remain. These may be of the following types:
i. Transaction has not been entered at all in the journal.
ii. A wrong amount has been written in both columns of the journal.
iii. A wrong account has been mentioned in the journal.
iv. An entry has not at all been posted in the ledger.
v.Entry is posted twice in the ledger.
vi. Still, the preparation of the trial balance is very useful; without it, the preparation of financial statement, the profit and loss
account and the balance sheet, would be difficult.

Methods of preparing trial balance :

i. Total method : Under this method, every ledger account is totalled and that total amount (both of debit side and credit side) is
transferred to trial balance. In this method, trial balance can be prepared as soon as ledger account is totalled. Time taken to
balance the ledger accounts is saved under this method as balance can be found out in the trial balance itself. The difference of
totals of each ledger account is the balance of that particular account. This method is not commonly used as it cannot help in the
preparation of the financial statements.

ii. Balance method : Under this method, every ledger account is balanced and those balances only are carried forward to the
trial balance. This method is used commonly by the accountants and helps in the preparation of the financial statements.
Financial statements are prepared on the basis of the balances of the ledger accounts.

iii. Total and balance method : Under this method, the above two explained methods are combined. Under this method
statement of trial balance contains seven columns instead of five columns. This has been explained with the help of the
following example:
Trial Balance of X as at 31.03.2022
Sl. Heads of Account L.F. Debit Credit Debit Total Credit Total
No. Balance Balance (`) (`)
(`) (`)

1. Cash Account 7,500 35,500 28,000

2. Furniture Account 3,000 3,000
3. Salaries Account 2,500 2,500
4. Shyam’s Account 3,500 21,500 25,000
5. Purchases Account 26,000 26,000
6. Purchase Returns Account 500 500
7. Ram’s Account 4,900 30,000 25,100
8. Sales Account 30,500 30,500
9. Sale Returns Account 100 100
10. Capital Account 9,500 500 10,000
Total 44,000 44,000 1,19,100 1,19,100

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Adjusted trial balance through suspense account :

If the trial balance does not agree after transferring the balance of all ledger accounts including cash and bank balance and
also errors are not located timely, then the trial balance is tallied by transferring the difference of debit and credit side to an
account known as suspense account. This is a temporary account opened to proceed further and to prepare the financial
statements timely.

Question1. One of your clients, Mr. Singhania has asked you to finalise his accounts for the year ended 31 st March, 2022. Till
date, he himself has recorded the transactions in books of accounts. As a basis for audit, Mr. Singhania furnished you with the
following statement.
Dr. Balance (`) Cr. Balance (`)

Singhania’s Capital 1,556

Singhania’s Drawings 564

Leasehold premises 750

Sales 2,750

Due from customers 530

Purchases 1,259

Purchases return 264

Loan from bank 256

Trade payables 528

Trade expenses 700

Cash at bank 226

Bills payable 100

Salaries and wages 600

Inventories (1.4.2021) 264

Rent and rates 463

Sales return 98
5,454 5,454
The closing inventory on 31st March, 2022 was valued at Rs 574. Mr. Singhania claims that he has recorded every transaction
correctly as the trial balance is tallied. Check the accuracy of the above trial balance. (ICAI Study material)

Question 2. Preparing trial balance is the third phase of accounting process. (ICAI Study material)
i. Trial balance froms a base for the preparation of Financial statement.
ii. Agreement of Trial balance is a conclusive proof of accuracy.
iii. A trial balance will tally in case of compensating errors.
iv. A Trial balance can find the missing entry from the journal.
v. Suspense account opened in a trial balance is a permanent account.
vi. The balance of purchase returns account has a credit balance.

Answer:
i. True: Preparing trial balance is the third phase of accounting process which forms the base for the preparation of the final accounts.
ii.True: Based on trial balance only, we can prepare financial statement.
iii.False: Agreement of Trial balance gives only arithmetical accuracy, there can still be errors in preparing the trail balance.
iv.True: Since compensating errors cancel out due to their compensating nature of the amounts, hence the Trial balance tallies.
v.False: A Trial balance cannot find the missing entry from the journal.
vi.False: Suspense account opened in a trial balance is a temporary account
vii. True: As purchases is debited, any returns shall be credited (treated in opposite way).

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CHAPTER- 2C. SUBSIDIARY BOOK AND CASH BOOK

In a business, most of the transactions generally relate to receipts and payments of cash, sale of goods and their purchase. It is
convenient to keep a separate register for each such class of transactions one for receipts and payments of cash, one for
purchase of goods and one for sale of goods. A register of this type is called a book of original entry or of prime entry.

For transactions recorded in such books there will be no journal entry. The system by which transactions of a class are first
recorded in the book, specially meant for it and on the basis of which ledger accounts are then prepared is known as the
Practical System of Book keeping or even the English System. It should be noted that in this system, there is no departure
from the rules of the double entry system.

These books of original or prime entry are also called subsidiary books since ledger accounts are prepared on their basis
and, without the further process of ledger posting, a trial balance cannot be taken out. Normally, the following subsidiary books
are used in a business:

i. Cash book to record receipts and payments of cash, including receipts into and payments out of the bank.
ii. Purchases book to record credit purchases of goods dealt in or of the materials and stores required in the factory.
iii. Purchase Returns Books to record the returns of goods and materials previously purchased.
iv. Sales Book to record the sales of the goods dealt in by the firm.
v. Sale Returns Book to record the returns made by the customers.
vi. Bills Receivable Books to record the receipts of promissory notes or hundies from various parties.
vii. Bills Payable Book to record the issue of the promissory notes or hundies to other parties.
viii. Journal (proper) to record the transactions which cannot be recorded in any of the seven books mentioned above.

Note: It may be noted that in all the above cases the word “Journal” may be used for the word “book”

Advantages of Subsidiary Books:- The use of subsidiary books has the following advantages:

(i) Division of Work: Since in the place of one Journal, subsidiary books are also maintained, accounting work can be
divided among a number of persons.

(ii) Specialisation and Efficiency: When the same work is handled by a particular person for a considerable time, he
acquires expertise in it and becomes efficient in handling it. Thus, accounting is done more efficiently.

(iii) Saving of Time: Various accounting processes can be undertaken simultaneously because of the use of number
of books. Thus, it leads to saving of time.

(iv) Availability of Information: Since a separate book is maintained for each class of transactions, information
relating to each class is available at one place.

(v) Facility in Checking: In case, the Trial Balance does not agree, locating the error or errors is facilitated by the
existence of separate books. Since the number of transactions is less in each subsidiary book as compared to only one
Journal, it is easy to locate the errors.

(vi) Responsibility: Division of work results in assigning a particular job to a particular person. If an error is
committed in recording, responsibility can be easily fixed.

Difference between Purchases Book and Purchases Account

Basis Purchases Book Purchases Account
1. part It is part of Journal. It is part of Ledger.
2. format Like ledger account, it does not have debit It has debit and credit columns.
and credit columns.
Only credit purchases of goods dealt in or Credit as well as cash purchases of goods dealt
3. content consumed for production are recorded. in or consumed for production are recorded.
4. amount Total of Purchases Book is posted to the Balance in the account is transferred to the
Purchases Account. Trading Account.

Question 1. State whether following statements are true or false with brief reason.
i. Transactions recorded in the purchase book include only purchases of goods on credit transactions.
ii. Transactions regarding the purchase of fixed asset are recorded in the purchase book.
iii. Cash sales are recorded in the sales book.
iv. Subsidiary books are also known as the books of original entry.

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v. Bills receivable book is a subsidiary book.

vi. Return inward book is also known as purchase return book.
vii. Purchase of a second hand machinery will be recorded in purchase book.
viii. Total of sales return book is posted to the debit side of sales account.
ix. If the sales are on a frequent basis, the transactions are recorded in the sales book.

Answer :
i. True: Since cash purchases are taken to the cash book , it is only credit transactions that are recorded in the purchases book.
ii. False: Transactions regarding the purchase of fixed asset are not recorded in the purchase book, only the credit purchases of
goods are recorded in it.
iii. False: Credit sales are recorded in the sales book.
iv. True: Subsidiary books are maintained as an alternate to the journal.
v. True: Bills receivable is one of the subsidiary book.
vi. False: Return inward book is also known as sales return book.
vii. False: Purchase of a second hand machinery will not be recorded in purchase book.
viii.True: Since sales return is reduction from the total sales value, it is debited in the sales account.
ix.True: When there are numerous transactions then there are subsidiary books like the sales book where there are recorded
instead of regular journal entries.

CASH BOOK

CASH BOOK – a subsidiary book and cash book:

Cash transactions are straightaway recorded in the Cash Book and on the basis of such a record, ledger accounts are prepared.
Therefore, the Cash Book is a subsidiary book. But the Cash Book itself serves as the cash account and the bank account. The
balances are entered in the trial balance directly. The Cash Book, therefore, is part of the ledger also. Hence, it has also to be
treated as the principal book. The Cash Book is thus both a subsidiary book and a principal book

2. Kinds of Cash Book:

i. Simple Cash Book : It is a cash book in which only cash transactions are recorded. It has only one column on each
side of the cash book.
ii. Double-column or Two-column Cash Book : If along with columns for amounts to record cash receipts and cash payments
another column is added on each side to record the cash discount allowed or the discount received, or a column on the debit side
showing bank receipts and another column on the credit side showing payments through bank. It is a double-column cash book.
iii.Triple-column or Three-column Cash Book : It is a cash book which has three columns on each side, one column to
record cash transactions, one for bank transactions and one for cash discount allowed and received.

Petty cash book: In a business house a number of small payments, such as for telegrams, taxi fare, cartage, etc., have to be
made. If all these payments are recorded in the cash book, it will become unnecessarily heavy. Also, the main cashier will be
overburdened with work. Therefore, it is usual for firms to appoint a person as ‘Petty Cashier’ and to entrust the task of making
small payments say below Rs 200, to him. Of course he will be reimbursed for the payments made. Later, on an analysis, the
respective account may be debited.

Imprest system of petty cash book: It is convenient to entrust a definite sum of money to the petty cashier in the beginning
of a period and to reimburse him for payments made at the end of the period. Thus, he will have again the fixed amount in the
beginning of the new period. Such a system is known as the imprest system of petty cash.

The system is very useful specially if an analytical Petty Cash Book is used. The book has one column to record receipt of cash
(which is only from the main cashier) and other columns to record payments of various types. The total of the various columns
show why payments have been made and then the relevant accounts can be debited.
The amount fixed for petty cash should be sufficient for the likely small payments for a relatively short period, say for a week
or a fortnight.

The reimbursement should be made only when petty cashier prepares a statement showing total payments supported by
vouchers, i.e., documentary evidence and should be limited to the amount of actual disbursements.
The vouchers should be filed in order.
No payment should be made without proper authorization. Also, payments above a certain specified limit should be made only
by the main cashier.
The petty cashier should not be allowed to receive any cash except for reimbursement.

Advantage of petty cash book: There are mainly three advantages:

(i) Saving of time of the chief cashier;
(ii) Saving in labour in writing up the cash book and posting into the ledger; and

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(iii) Control over small payments.

Types of Petty Cash Books:- Following are the two types of Petty Cash Books:
1. Simple Petty Cash Book 2. Analytical Petty Cash Book.

1. Simple Petty Cash Book: A Simple Petty Cash Book is identical with a Cash Book. Any cash which the Petty Cashier receives is
recorded on the left hand side cash column (debit or receipts column) and any cash which he pays out is recorded on the right
hand side (credit or payments column). The date and particulars of every transaction is written in the same date and particulars
column. A specimen form of a Simple Petty Cash Book is given below:
SIMPLE PETTY CASH BOOK
Amount Received Cash Book Folio Date Particulars Voucher No. Amount Paid
₹
Amount Received ………. ……… Heads of ……….. ………..
Expenses ……… ………..

2. Analytical Petty Cash Book: An Analytical Petty Cash Book has two sides; left hand side is used for recording
receipts of cash (which will be only from the main cashier) and right hand side, which is used for recording payments. In the
Analytical Petty Cash Book, a separate column is provided for recording a particular item of expenditure, i.e., postage,
stationery, travelling, advertisement, etc. A column is usually provided for 'sundries' to record infrequent payments. When
petty expense is recorded on the right hand side total payment column, same amount is also recorded in the appropriate
expense column. At the end of a particular period, analysis (expenses) column are added and posted to the debit side of the
respective accounts.
In an Analytical Petty Cash Book, petty expenses are classified into different heads of expenses. Each head of expense can
be conveniently transferred to appropriate account head in the ledger. Thus, posting from Petty Cash Book becomes easy.
While maintaining a Petty Cash Book, following points should be noted:

(i) The amount fixed for petty cash should be sufficient for the likely small payments for a relatively short period, say, for a
week, a fortnight or a month.
(ii) Reimbursement should be made only when the Petty Cashier prepares a statement showing total payments supported by
vouchers, i.e., documentary evidence and should be limited to the amount of actual disbursements.
(iii) The vouchers should be filed in order.
(iv) No payment should be made without proper authorisation.
(v) Petty Cashier should be allowed to make payment of expenses up to a specified limit. Beyond which, payment should be
made by the main cashier.
(vi) The Petty Cashier should be allowed to receive only the reimbursement.

Important terms:
i. Cash Discount : Cash discount is the amount of discount received or allowed on cash payments and cash receipts
respectively. Discount received is an income for the, business while discount allowed is an expense.
ii.Contra Entry : It means a transaction involving both cash and bank. Such transactions though recorded in the cash book are
not posted into the ledger. In the folio for ledger letter 'C' is written to indicate that it is a contra entry.

Most important note:- Cash Column cannot have a Credit Balance:- Cash Column in the Cash Book cannot show a
credit balance because cash payments cannot exceed cash receipts. At best, it can show nil balance when total cash receipts are
equal to total payments.

Question:1. Write a Three-column Cash Book with cash and bank columns from the following transactions:
2022 March 1. Cash in Hand 15,000.
March 3. Purchased goods for cash 6,000.
March 5. Deposited in bank 5,000.
March 8. Cash sales 10,000.
March 10. Cash withdrew from bank for office use Rs 2,000.
March 12. Received cash from Damini Rs 3,000, allowed her discount of Rs 100
March 15. Received cheque from Dolly Rs 2,000 and deposited in the bank on the same day, allowed her discount Rs 75.
March 18. Received cheque from Deepak for Rs 5,000 (not banked).
March 19. Cheque received from Deepak deposited in the bank.
March 24. Paid to Chander by cheque Rs 2,500, he allowed discount Rs 125.
March 27 Withdrew from bank for personal use Rs 1,500.
March 28. Sold goods on credit to Ashok Mitra Rs 4,000.
March 30. Purchased goods on credit from Chander Rs 5,000.
March 31. Received cheque from Ashok Mitra Rs 2,000 and deposited in the bank.
March 31. Bank charges for the month Rs 100.

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Question 2. Prepare Three-column Cash Book from the following transactions. Cheques are first treated as cash receipts -
2022 Rs
March 1 Cash in Hand 15,000
Overdraft in Bank 500
2 Cash Sales 3,000

3 Paid to Sushil Bros. by cheque 3,400

Discount received 100

5 Sales through credit card 2,800

6 Received cheque from Srijan 6,200
7 Endorsed Srijan’s cheque in favour of Adit
9 Deposit into Bank 6,800
10 Received cheque from Aviral and deposited the same into Bank by allowing discount of Rs
50

12 Adit informed that Srijan’s cheque is dishonoured. Now cash is received from Srijan and 3,600
amount is paid to Adit through own cheque
15 Sales through Debit Card 3,200
24 Withdrawn from Bank 1,800
28 Paid to Sanchit by cheque 3,000
30 Bank charged 1% commission on sales through
Debit/Credit Cards

Answer:
Date Particulars L. Di Cash Bank Date Particulars L. Disc Cash Bank
F. sc F.
2022 2022
March To Balance 15,000 March By Balance b/d 500
1 b/d 1
2 To Sales 3,000 3 By Sushil Bros. 100 3,400
5 To Sales 2,800 7 By Adit 6,200
6 To Srijan 6,200 9 By Bank C 6,800
9 To Cash A/c C 6,800 12 By Adit 6,200
10 To Aviral 50 3,600 24 By Cash A/c C 1,800
12 To Srijan 6,200 28 By Sanchit 3,000
15 To Sales A/c 3,200 30 By Commission 60
24 To Bank A/c C 1,800 31 By Balance c/d 19,200 1,440
50 32,200 16,400 100 32,200 16,400

Question:3. From the following particulars, prepare a Cash Book with suitable column:
2022 ₹
March 1 Cash in Hand 8,500
Bank balance with State Bank of India (SBI) 25,000
Overdraft with Punjab National Bank (PNB) 17,500
March 3 Cash sales 7,000
March 5 Paid salary to staff by cheque on SBI 10,000
March 8 Cheque received from Anil deposited with PNB, cash discount allowed ₹ 200 9,000
March 10 Cash deposited into SBI 5,000
March 12 Amount transferred from SBI to PNB by cheque 3,000
March 15 Cash withdrew from SBI 8,000

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Question 4. Prepare a Petty Cash Book on the imprest System from the following:
2022 Rs

Jan. 1 Received Rs 100 for petty cash

“ 2 Paid bus fare .50
“ 2 Paid cartage 2.50
“ 3 Paid for Postage & Telegrams 500
“ 3 Paid wages for casual labourers 6.00
“ 4 Paid for stationery 4.00
“ 4 Paid tonga charges 2.00
“ 5 Paid for the repairs to chairs 15.00
“ 5 Bus fare 1.00
“ 5 Cartage 4.00
“ 6 Postage and Telegrams 7.00
“ 6 Tonga charges 3.00
“ 6 Cartage 3.00
“ 6 Stationery 2.00
“ 6 Refreshments to customers 5.00

Question 5. Multiple choice questions:

1. Nominal Account represents

(a) Profit & gain (b) Loss/Expenses
(c) None (d) Both (a) and (b)

2. S.B.I Account is a …
(a) Nominal
(b) Artificial Personal Account
(c) Representative Personal Account
(d) None

3. The process of recording business transactions in a book of original entry is known as………..
(a) Journal
(b) balance
(c) Posting
(d) none

4. Prepaid rent is a
(a) Nominal A/c
(b) representative personal account
(c) Tangible Assets A/c
(d) none
5. In an asset account if debit > credit side, the balance is known as the
(a) Negative Balance
(b) Debit Balance
(c) positive balance
(d) credit balance
6. A sale of goods to Ram for cash should be debited to:
(a) Ram (b) Cash
(c) Sales (d) Capital

7. A withdrawal of cash from business by the proprietor should be credited to

(a) Drawing A/c (b) Capital A/c
(c) Cash A/c (d) Purchases A/c

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8. Rent Account is
(a) Personal (b) Real
(c) Nominal (d) None

9. Ledger contains various _____________ in it

(a) Transactions (b) Entries
(c) Accounts (d) None

10. The process of transfer of entries from day book to ledgers is called _____________
(a) Simple Posting (b) Journal Posting (c) Transaction (d) Ledger Posting

11. The rent paid to landlord is credited to

(a) Landlord’s A/c (b) Rent A/c (c) Cash A/c (d) None

12. Which financial statement represents the accounting equation Assets = Liabilities + Owner’s
equity:
(a) Income Statement (b) Statement of Cash flows
(c) Balance Sheet (d) None

13. The Debts Written off as bad, if recovered subsequently are

(a) Credited to Bad Debts recovered A/c (b) Credited to trade receivables Account
(c) Debited to profit and Loss Account (d) None

14. A trial balance will not balance if _______________

(a) Correct entry is posted twice
(b) The purchase on credit basis is debited to purchases and credited to cash
(c) Rs.500 cash payment to creditors is debited to creditors for Rs.50 and credited to cash as Rs.500
(d) None of the above

15. A Trial Balance shows

(a) Honesty of Accountants
(b) Accuracy of Account
(c) Only Arithmetical Accuracy of Accounts
(d) None of these

16. Mr. X purchased goods of Rs.10,000 for cash at 20% trade discount and 5% cash discount.
Purchases A/c is to be debited by ` _______________
(a) 7600 (b) 10,000
(c) 7500 (d) 8000

17. Outstanding salary A/c is a

(a) Personal account
(b) Real A/c
(c) Nominal A/c
(d) Representative Personal A/c

18. Discount received from Mr. X, a creditor, is credited to

(a) Discount allowed account
(b) Creditor account
(c) Debtor account
(d) Discount received account

19. Bank account is

(a) Personal A/c
(b) Real A/c
(c) Nominal A/c
(d) Both Personal and Real A/c
20. Which of the following accounts doesn’t carry a balance for the next year?
(a) Personal A/c (b) Real A/c
(c) Nominal A/c (d) Representative Personal A/c

Answer:- 1.(d) 2.(b) 3.(a) 4.(b) 5.(b) 6.(b) 7.(c) 8.(c) 9.(c) 10.(d)
11.(c) 12.(c) 13.(a) 14.(c) 15.(c) 16.(d) 17.(d) 18.(d) 19.(d) 20.(c)

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PRACTICE SESSION 2- MCQ BASED QUESTIONS:

1. Purchases book is used to record
(a) All purchases of goods (b) All credit purchase
(c) All credit purchases of goods (d) All credit purchases of assets other than goods

2. Goods bought from Mr. P the payment for which is due after a month, is entered into
(a) Cash book (b) Purchase book
(c) Sales book (d) Purchase return book

3. The source document or voucher used for recording entries in sales book is
(a) Invoice received (b) Invoice sent out
(c) Credit notes sent out (d) Debit notes received

4. A debit note issued to a creditor for goods returned by us is to be recorded in the

(a) Bills receivable book (b) Purchases book
(c) Journal proper (general journal) (d) Purchases returns book

5. Sales returns book is used to record

(a) Returns of fixed assets sold on credit (b) Returns of goods sold for cash
(c) Returns of goods sold on credit (d) Sale of goods

6. Closing entries are recorded in

(a) Cash book (b) Ledger
(c) Journal proper (d) Balance sheet

7. Cash book is a
(a) Subsidiary book (b) Subsidiary journal and ledger
(c) Ledger account (d) None of these

8. Cash book is a form of

(a) Trail balance (b) Journal entry (c) Ledger (d) All the above

9. The cash book records

(a) All cash receipts (b) All cash payments
(c) All cash receipts and payments (d) All Cash and Credit Transactions

10. Cash book does not record

(a) Credit purchases (b) Credit sales
(c) Outstanding expenses (d) All the above transactions

11. Single column cash book may show –

(a) Only a debit balance (b) Only a credit balance
(c) Either debit or a credit balance (d) Neither debit nor credit balance

12. A cash book with discount and bank column is called

(a) Single column cash book (b) Two column cash book
(c) Three column cash book (d) Petty cash book

13. The total of discounts column on the debit side of the cash book, recording cash discount
deducted from customers when they pay their accounts, is posted to the

(a) Credit of the discount allowed account (b) Debit of the discount received account (c)
Credit of the discount received account (d) Debit of the discount allowed account

14. Trade discount allowed at the time of sale of goods

(a) Is recorded in Sales Book (b) Is recorded in Cash Book
(c) Is recorded in Journal (d) Is not recorded in Books of Accounts

15. The periodical total of the Sales Return Book is posted to the
(a) Debit of Sales Account (b) Debit of Sales Return Account
(c) Credit of Sales Return Account (d) Debit of Debtors Account

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16. In the ledger an account shows credit balance at the end of the year. This balance is shown as_____.
(a) To balance c / d on the debit side. (b) By balance c / d on the credit side.
(c) To balance b / d on the debit side. (d) By balance b / d on the either side.

17. The total of Discount column on the debit side of cash book is transferred to _____
(a) Credit side of Discount allowed A/c
(b) Credit side of Discount received A/c
(c) Debit side of Discount allowed A/c
(d) Debit side of Discount received A/c
18. Agreement of Trial balance is not a _____________ proof of accuracy in maintaining accounts.

(a) Exclusive (b) Inclusive (c) Exhaustive (d) Conclusive

19. Capital- Rs.4,00,000 Interest paid- Rs.4,620 Debtors- Rs.30,400 Discount allowed- Rs.1,640
Creditors- Rs.25,920 Discount received- Rs.2,060 Purchases- Rs.1,85,340 Rent - Rs.29,340
Sales- Rs. 2,33.700 Loan - Rs.24,120 Opening stock – Rs.1,12,000 Sales returns Rs. 54,860
Debit Total of Trial Balance will be
(a) Rs.4,18,000 (b) Rs.4,18,200
(c) Rs.4,20,000 (d) None of these

20. A triple column cash book has

(a) Cash column (b) Bank column
(c) Discount column (d) All of the above

Answer:- 1.(c) 2.(b) 3.(b) 4.(d) 5.(c) 6.(c) 7.(b) 8.(c) 9.(c) 10.(d)
11.(a) 12.(c) 13.(d) 14.(d) 15.(b) 16.(a) 17.(c) 18.(d) 19.(b) 20.(d)

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CHAPTER 6 D – RECTIFICATION OF ERRORS

Unintentional omission or commission of amounts and accounts in the process of recording the transactions are
commonly known as errors. These various unintentional errors can be committed at the stage of collecting financial
information/data on the basis of which financial statements are drawn or at the stage of recording this information. Also errors
may occur as a result of mathematical mistakes, mistakes in applying accounting policies, misinterpretation of facts, or
oversight.

To check the arithmetic accuracy of the journal and ledger accounts, trial balance is prepared. If the trial balance does not
tally, then it can be said that there are errors in the accounts which require rectification thereof. Some of these errors may
affect the Trial Balance and some of these do not have any impact on the Trial Balance although such errors may affect the
determination of profit or loss, assets and liabilities of the business.

Note: An agreed trial balance, therefore, is only a reasonable proof of arithmetic accuracy of books.

Illustrative cases of errors and their nature:

To check the arithmetic accuracy of the journal and ledger accounts, trial balance is prepared. If the trial balance does not
tally, then it can be said that there are errors in the accounts which require rectification thereof. Some of these errors may
affect the Trial Balance and some of these do not have any impact on the Trial Balance although such errors may affect the
determination of profit or loss, assets and liabilities of the business.

(a) Wrong Entry in primary recordings: Let us start from the first phase in the accounting process. Wrong entry of the
value of transactions and events in the subsidiary books, Journal Proper and Cash Book may occur.

(b) Wrong casting( totalling) of subsidiary books: Subsidiary books are totalled periodically and posted to the appropriate
ledger accounts. There may arise totalling errors. Totalling errors may arise due to wrong entry or simply these may be
independent errors.

(c) Wrong posting from subsidiary books: In this case, the wrong amount may be posted to the ledger account or the
amount may posted to the wrong side or to the wrong account. For example, purchases from A may be posted to B’s account.

(d) Wrong casting(totalling) of ledger balances: Likewise subsidiary Book, any ledger account balance may be cast
wrongly. Whenever there arises independent casting error in the ledger, that is called wrong casting of ledger balances.

Types of errors: Basically errors are of two types:

(1) Errors of principle: When a transaction is recorded in contravention of accounting principles, like treating the purchase
of an asset as an expense, it is an error of principle. In this case there is no effect on the trial balance since the amounts are
placed on the correct side, though in a wrong account. Suppose on the purchase of a computer, the office expenses account is
debited; the trial balance will still agree.

(2) Clerical errors: These errors arise because of mistake committed in the ordinary course of the accounting work. These
are of three types:

(i) Errors of Omission: If a transaction is completely or partially omitted from the books of account, it will be a case of
omission. Examples would be: not recording a credit purchase of furniture or not posting an entry into the ledger.

(ii) Errors of Commission: If an amount is posted in the wrong account or it is written on the wrong side or the totals are
wrong or a wrong balance is struck, it will be a case of “errors of commission.”

(iii) Compensating Errors: If the effect of errors committed cancel out, the errors will be called compensating errors. The trial
balance will agree. Suppose an amount of Rs 10 received from A is not credited to his account and the total of the sales book is
Rs 10 in excess. The omission of credit to A’s account will be made up by the increased credit to the Sales Account.

Stages of errors: Errors may occur at any of the following stages of the accounting process:
(I) AT THE STAGE OF RECORDING THE TRANSACTIONS IN JOURNAL:- Following types of errors may happen
at this stage:

(i) Errors of principle,

(ii) Errors of omission,
(iii) Errors of commission.

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(II) AT THE STAGE OF POSTING THE ENTRIES IN LEDGER:

(i) Errors of omission:

(a) Partial omission,
(b) Complete omission.

(ii) Errors of commission:

(a) Posting to wrong account,
(b) Posting on the wrong side,
(c) Posting of wrong amount.

(III) AT THE STAGE OF BALANCING THE LEDGER ACCOUNTS

(i) Wrong Totalling of accounts,

(ii) Wrong Balancing of accounts.

(IV) AT THE STAGE OF PREPARING THE TRIAL BALANCE:

(i) Errors of omission,

(ii) Errors of commission:
(a) Taking wrong account,
(b) Taking wrong amount,
(c) Taking to the wrong side.

Distinction between Error of Principal and Error of Omission ( most imp.)

Errors of Principal Errors of Omission
• This error does not affect Trial Balance, • This error may affect Trial Balance
• This error is due to wrong classification of • This error is due to complete omission of a
Capital and Revenue expenditure or personal transaction or partial omission
and nominal account • This is a error may or may not affect profit of
• This is not a clerical error. the business.
• This error affects profit of the business. • This error may or may not affect value of assets
• This error will affect value of asset or liability or liability

Important note for exam: (it may be asked)

(i) List of types of errors which will affect the trial balance - because of these errors, trial balance does not agree; these are
the following:

(i) Wrong casting of the subsidiary books.

(ii) Wrong balancing of an account.
(iii) Posting an amount on the wrong side.
(iv) Posting the wrong amount.
(v) Omitting to post an amount from a subsidiary book.
(vi) Omitting to post the totals of subsidiary book.
(vii) Omitting to write the cash book balances in the trial balance.
(viii) Omitting to write the balance of an account in the trial balance.
(ix) Writing a balance in wrong column of the trial balance.
(x) Totalling the trial balance wrongly.

(ii) List of types of errors that do not affect the trial balance are the following:

(i) Omitting an entry altogether from the subsidiary book.

(ii) Making an entry with the wrong amount in the subsidiary book.
(iii) Posting an amount in a wrong account but on the correct side.

STEPS TO LOCATE A MISTAKES:-- Even if there is only a very small difference in the trial balance, the errors leading to it must be
located and rectified. A small difference may be the result of a number of errors. The following steps will be useful in locating errors :
1. Total the debit and credit columns of trial balance again.
2. it should be seen that the balances of all accounts, including the cash and bank balances, have been written in
the trial balance.

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3. Find out the difference in the trial balance. Look for such accounts as show this amount it is possible that the
balance of the particular account has been omitted from the trial balance. Account showing equal to half the
difference should also be checked; the amount may have been written on the wrong side of the trial balance.
4. See that there are no mistakes in the balancing of the various accounts.
5. Recheck the totals of the subsidiary books, especially if the mistake is of Re 1,Rs 10, Rs 100 and so on.
6. If the difference is very big, the balance in various accounts should be compared with the corresponding accounts in
the previous period. If the figures differ materially the cases should be seen. it is possible that an error has been committed.
Suppose the sales account for the current year shows a balance of Rs 32,53,000 whereas it was Rs 36,45,000 last year; it is
possible that there is an error in the Sales Account.

7. Postings of the amounts equal to the difference or half the difference should be checked. It is possible that an
amount has been omitted to be posted or has been posted on the wrong side.

8. If there is still a difference in the trial balance, a complete checking will be necessary. The posting of all the entries
including the opening entry should be checked. It may be better to begin with the nominal accounts.

RECTIFICATION OF ERROR ---

Errors should never be corrected by overwriting. If immediately after making an entry it is clear that an error has been committed,
it may be corrected by neatly crossing out the wrong entry and making the correct entry. If however the errors are located after
some time, the correction should be made by making another suitable entry, called rectification entry. In fact the rectification of
an error depends on at which stage it is detected. An error can be detected at any one of the following stages:

(i) Before preparation of Trial Balance.

(ii) After Trial Balance but before the final accounts are drawn.
(iii) After final accounts, i.e., in the next accounting period.

(i) Before preparation of Trial Balance:- There are some errors which affect one side of an account or which affect
more than one account in such a way that it is not possible to pass a complete rectification entry. In other words, there are
some errors which can be corrected, if detected at this stage, by making rectification statement in the appropriate side(s) of
concerned account(s). It is important to note here that such errors may involve only one account or more than one account.

Read the following illustrations:

The sales book for November is undercast by Rs 200. The effect of this error is that the Sales Account has been credited short
by Rs 200. Since the account is posted by the total of the sales book, there is no error in the accounts of the customers since
they are posted with amounts of individual sales. Hence only the Sales Accounts is to be corrected. This will be done by
making an entry for Rs 200 on the credit side: “By undercasting of Sales Book for November Rs 200”.
There are some errors which affect two accounts with same amount, then we should pass entry for the same in the books of
account. For example, sale to Ram wrongly recorded as sale to Rama.

Question 1. How would you rectify the following errors in the book of Rama & Co. if rectification is required before
preparing trial balance?

(i) The total to the Purchases Book has been undercast by Rs 100.
(ii) The Returns Inward Book has been undercast by Rs 50.
(iii) A sum of Rs 250 written off as depreciation on Machinery has not been debited to Depreciation Account.
(iv) A payment of Rs 75 for salaries (to Mohan) has been posted twice to Salaries Account.
(v) The total of Bills Receivable Book Rs 1,500 has been posted to the credit of Bills Receivable Account.
(vi) An amount of Rs 151 for a credit sale to Hari, although correctly entered in the Sales Book, has been posted as Rs 115.
(vii) Discount allowed to Satish Rs 25 has not been entered in the Discount Column of the Cash Book. the amount has been
posted correctly to the credit of his personal account.
(viii) The purchase of machinery for Rs 2,000 has been entered in the purchases book.
(ix) Rs 100 received from Kamal Kishore has been credited in the account of Krishan Kishore. (ICAI Study material)
Solution:
(i) The Purchases Account should receive another debit of Rs 100 since it was debited short previously: “To Undercasting of
Purchases Book for the month of --- Rs 100.”

(ii) Due to this error the Returns Inward Account has been posted short by Rs 50 : the correct entry will be: “To Undercasting
of Returns Inward Book for the month of --- Rs 50.”

(iii) The omission of the debit to the Depreciation Account will be rectified by the entry: “To Omission of posting of Rs 250”.
(iv) The excess debit will be removed by a credit in the Salaries Account by the entry: “By double posting on Rs 75”.

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(v) Rs 1,500 should have been debited to the Bills Receivable Account and not credited. To correct the mistake, the Bills
Receivable Account should be debited by Rs 3,000 by the entry: “To Wrong posting of B/R received of Rs 3,000”

(vi) Hari’s personal A/c is debited Rs 36 short. The rectification entry will be: “To Wrong posting Rs 36”.

(vii) Due to this error, the discount account has been debited short by Rs 25. The required entry is : “To Omission of discount
allowed to Satish of Rs 25.”
(viii) Machinery account Dr 2,000
To purchase account 2,000

(ix) Krishan kishore Dr 100

To Kamal Kishore 100

Rectification of error after preparing trial balance but before preparing final account :
The method of correction of error indicated so far is appropriate when the errors have been located before the end of the
accounting period. After the corrections the trial balance will agree. Sometimes the trial balance is artificially made to agree
inspite of errors by opening a suspense account and putting the difference in the trial balance to the account - the suspense
account will be debited if the total of the credit column in the trial balance exceeds the total of the debit column; it will be
credited in the other case.
One must note that such agreement of the trial balance will not be real. Effort must be made to locate the errors.

The rule of rectifying errors detected at this stage is simple. Those errors for which complete journal entries were not possible
in the earlier stage of rectification (i.e., before trial balance) can now be rectified by way of journal entry(s) with the help of
suspense account, for it these errors which gave rise to the suspense account in the trial balance.

The rectification entry for other type of error i.e. error affecting more than one account in such a way that a complete journal
entry is possible for its rectification, can be rectified in the same way as in the earlier stage (i.e. before trial balance).

SUSPENSE ACCOUNT:- If the difference in the trial balance is not quickly located, it is usual to put the difference to
suspense account in order to make the trial balance balanced.
• If the debit side is short, the suspense account will be debited saying “To differences in trial balance” and
• Similarly, the suspense account will be credited if the credit side is short.
• The difference in trial balance is due to type of mistakes which affect only one account, such as wrong posting of
an account, mistake in totalling a subsidiary book etc. Such types of mistakes are only reflected in suspense
account.
When the difference in trial balance is put to suspense account the account to be corrected will be debited or credited as
the case may be and the journal entry will be completed by crediting or debiting the suspense account. When all the
mistakes have been corrected, the suspense account will show no balance.

RECTIFICATION OF ERROR IN THE NEXT ACCOUNTING YEAR:-

Rectification of errors discussed so far assumes that it was carried out before the books were closed for the concerned year.
However, sometimes, the rectification is carried out in the next year, carrying forward the balance in the Suspense Account or
even transferring it to the Capital Account. Suppose, the Purchase Book was cast short by Rs 1,000 in December, 2021 and a
Suspense Account was opened with the difference in the trial balance. If the error is rectified next year and the entry passed is
to debit Purchase Account (and credit Suspense Account), it will mean that the Purchases Account for year 2022 will be Rs
1,000 more than the amount relating to year 2022 and thus the profit of the year 2022 will be less than the actual for that year.
Thus, correction of errors in this manner will ‘falsify’ the Profit and Loss Account.

To avoid this, correction of all amounts concerning nominal accounts, i.e., expenses and incomes should be through a special
account styled as “Prior Period Items” or “Profit and Loss Adjustment Account”. The balance in the account should be
transferred to the Profit and Loss Account. However, these Prior Period Items should be charged after deriving net profit of
the current year. ‘Prior Period items’ are material income or expenses which arise in the current period as a result of errors or
omissions in the preparation of the financial statements of one or more periods. Prior Period Items should be separately
disclosed in the current statement of profit and loss together with their nature and amount in a manner that their impact on
current profit or loss can be perceived.

Question 2. Mr. Roy was unable to agree the Trial Balance last year and wrote off the difference to the Profit and Loss
Account of that year. Next Year, he appointed a Chartered Accountant who examined the old books and found the following
mistakes:
i. Purchase of a scooter was debited to conveyance account Rs 3,000. Mr. Roy used 10% depreciation on vehicles.
ii. Purchase account was over-cast by Rs 10,000.

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iii. A credit purchase of goods from Mr. P for Rs 2,000 was entered as a sale.
iv. Receipt of cash from Mr. A was posted to the account of Mr. B Rs 1,000.
v. Receipt of cash from Mr. C was posted to the debit of his account, Rs 500.
vi. Rs 500 due by Mr. Q was omitted to be taken to the trial balance.
vii. Sale of goods to Mr. R for Rs 2,000 was omitted to be recorded.
viii. Amount of Rs 2,395 of purchase was wrongly posted as Rs 2,593.
Suggest the necessary rectification entries. (ICAI Study material)

Question 3. Correct the following errors found in the books of Mr. Dutt. The Trial Balance was out by Rs 493 excess credit.
The difference thus has been posted to a Suspense Account.
i. An amount of Rs 100 was received from D. Das on 31st December, 2022 but has been omitted to enter in the Cash Book.
ii. The total of Returns Inward Book for December has been cast Rs 100 short.
iii. The purchase of an office table costing Rs 300 has been passed through the Purchases Day Book.
iv. 375 paid for Wages to workmen for making show-cases had been charged to “Wages Account”.
v. A purchase of Rs 67 had been posted to the trade payables’ account as Rs 60.
vi. A cheque for Rs 200 received from P. C. Joshi had been dishonoured and was passed to the debit of “Allowances Account”.
vii. Rs 1,000 paid for the purchase of a motor cycle for Mr. Dutt had been charged to “Miscellaneous Expenses Account”.
viii. Goods amounting to Rs 100 had been returned by customer and were taken in to inventory, but no entry in respect there
of, was made into the books.
ix. A sale of Rs 200 to Singh & Co. was wrongly credited to their account. Entry was made correctly made in sales book.
(ICAI Study material)

Question 4. The trial balance of Mr. W & H failed to agree and the difference Rs 20,570 was put into suspense pending
investigation which disclosed that:
i. Purchase returns day book had been correctly entered and totalled at Rs 6,160, but had not been posted to the ledger.
ii. Discounts received Rs 1,320 had been debited to discounts allowed.
iii. The Sales account had been under added by Rs 10,000.
iv. A credit sale of Rs 1,470 had been debited to a customer account at Rs 1,740.
v. A vehicle bought originally for Rs 7,000 four years ago and depreciated to Rs 1,200 had been sold for Rs 1,500 in the
beginning of the year but no entries, other than in the bank account had been passed through the books.
vi. An accrual of Rs 560 for telephone charges had been completely omitted.
vii. A bad debt of Rs 1,560 had not been written off and provision for doubtful debts should have been maintained at 10% of
Trade receivables which are shown in the trial balance at Rs 23,390 with a credit provision for bad debts at Rs 2,320.
viii. Tools bought for Rs 1,200 had been inadvertently debited to purchases.
ix. The proprietor had withdrawn, for personal use, goods worth Rs 1,960. No entries had been made in the books.
You are required to give rectification entries without narration to correct the above errors before preparing annual accounts.
Answer:
Particulars Dr. Cr.

(i) Suspense Account Dr. 6,160

To Return Outward A/c 6,160

(ii) Suspense Account Dr. 2,640

To Discount Allowed Account 1,320

To Discount Received Account 1,320

(iii) Suspense Account Dr. 10,000

To Sales Account 10,000

(iv) Suspense Account Dr. 270

To Customer Account 270

(v) Suspense Account Dr. 1,500

To Vehicle Account 1,200

To Profit on Sale of Vehicle Account 300

(vi) Telephone Charges Account Dr. 560

To Outstanding Expenses Account 560

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(vii) Bad Debts Account Dr. 1,560

To Trade receivables Account 1,560

Provision for Doubtful Debts Account Dr. 164

To Profit and Loss Account 164

(viii) Loose Tools Account Dr. 1,200

To Purchases Account 1,200

(ix) Drawings Account Dr. 1,960

To Purchases Account 1,960

Question 5. Pass journal entries to rectify the following errors and prepare suspense account:
I. Rs. 1,080 received from Mohan was posted to the debit of his account.
II. Rs. 200 being purchases returns was posted to the debit of purchases account.
III. Rs. 400 received as discount was posted to the debit of discount account.
IV. Rs. 1,148 paid for repairs of motor car was debited to motor car account as Rs. 148.
V. Rs. 400 paid to Suresh was debited to Satish.

Question 6. On 28th February,2022, the trial balance of X did not agree. X put the difference in a newly opened suspense
account. Subsequently, the following errors were located:

i. The returns inward book for January,2022 had been cast Rs.1000 short.

ii. A purchase of Rs.1671 had been posted to the debit of the creditor’s account as Rs. 1617. The creditor is Panna and Co.

iii. A sale of Rs. 2,000 to Singh and Co. was credited to the account of the customer.

iv. A sale of Rs. 4,000 has been passed through the purchases book. The customer’s account has, however, been correctly debited.

v. While carrying forward the total of sales book from one page to the next, the amount was written as Rs.1,76,658 instead of
Rs. 1,67,568.

Pass journal entries to rectify the above mentioned errors. Also prepare the suspense account assuming that all errors have
been located. (ICAI Study material)

Question 7. A merchant while balancing his books of account finds that the trial balance shows excess debit of Rs. 1,700.
Being required to prepare the final accounts, he places the difference to a newly opened suspense account which he carries
forward. In the next accounting year, the following errors are discovered:

i. Goods bought from Narayan amounting to Rs. 5,000 had been posted to the credit of Narayan as Rs. 5,500.

ii. A discounted bill receivable for Rs. 20,000 was returned by the bank, as having been dishonored. The amount of the bill
was credited to bank and debited to bills receivable account.

iii. An item of Rs. 1,000 entered in the sales return book was posted to the debit of Pandey who had returned the goods.

iv. Sundry items of furniture sold for Rs. 26,000 had been entered in the sales book. Ignore depreciation and profit or loss on
the sale.

v. Discount amounting to Rs. 200 from a creditor had been duly entered in the creditor’s account, but not posted to discount
account.
Draft journal entries necessary for rectifying the abovementioned errors. Prepare the suspense account and show the ultimate
effect of the errors on the last year’s profit by preparing profit and loss adjustment account. (ICAI Study material)

Question 8. An accountant prepared a trial balance on 31st december,2022, which revealed a difference in the books of
account. He put the difference in a newly opened suspense account. He detected the following errors:

i. The total of the returns outward book, Rs. 4,200 had not been posted in the ledger.

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ii. A purchase of Rs. 3,500 for Y had not been entered in the purchases book. However, Y’s account had been correctly
credited with the amount.

iii. A sale of Rs. 3,900 to Z had been credited to his account as Rs. 2,900.

iv. Goods worth 500 taken by proprietor for personal use had not been recorded at all.

v. Wages paid for on installation of machinery, Rs. 1,000 had been debited to wages account.
Pass journal entries to rectify the above mentioned errors and prepare suspense account assuming that all the errors have
been located. (ICAI Study material)

Question 9. Pass journal entries to rectify the following errors assuming the existence of suspense account:

i. Goods bought from Vijay amounting to Rs. 27,500 were posted to the credit of his account as Rs. 25,700.

ii. Sales book was overcast by Rs. 10,000.

iii. While carrying forward the total of one page of the purchases book to the next page, the amount of Rs. 64,750 was
written as Rs. 61,750.

iv. Purchases returns to Goenka Brothers worth Rs. 15,500 were not recorded in purchases returns book, but the account of
Goenka Brothers was duly debited for the amount.

v. Drawings of goods by proprietor costing Rs. 1,500 were not recorded in the books of account.

The suspense account had a debit balance of Rs. 1,600 prior to the above adjustments. Prepare the suspense account and
comment on the same.

Answer : Journal entries

(i) Suspense A/c Dr. 1,800
To Vijay 1,800
(Being goods brought from Vijay amounting to Rs. 27,500 was
posted to credit of his account as Rs. 25,700)
(ii) Sales A/c Dr. 10,000
To Suspense A/c 10,000
(Being sales book was over cast by Rs. 10,000)
(iii) Purchases A/c Dr. 3,000
To Suspense A/c 3,000
(Being balance of purchases book carried forward as 61,750
instead of 64,750)
(iv) Suspense A/c Dr. 15,500
To Purchases Return A/c 15,500
(Being Purchases return to Goenka Brother worth Rs. 15,500 were
not recorded in Purchase Return Book, now rectified)
(v) Drawings A/c Dr. 1,500
To Purchases A/c 1,500
(Being drawing of goods not recorded earlier, now rectified)
Suspense A/c

Particulars Amount Particulars Amount

To Balance B/d 1,600 By Sales A/c 10,000
To Vijay 1,800 By Purchases A/c 3,000
To Purchase Return A/c 15,500 By Balance c/d 5,900

To Balance B/d 18,900 18,900

5,900

Question 10. Rectify the following errors and prepare the suspense account on the assumption that all the errors has been
located and rectified:
(i) A Sum of Rs. 10,800 received from Mohan was posted to the debit of his account.
(ii) Rs. 2,000 being purchases returns were posted to the debit of purchases account.
(iii) Discount received Rs. 400 was posted to the debit of discount account.

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(iv) Rs. 11,480 paid for repairs of motor car were debited to motor car account as Rs. 1,480.
(v) A sale for Rs. 23,500 to Sethi was entered in the sales book as Rs. 25,300.
(vi) While carrying forward the balance on one page in kalra’s account, the amount of Rs. 2,500 was
written on the credit side instead of the debit side.
Answer:
(i) Suspense A/c Dr. 21,600
To Mohan A/c 21,600
(Being a sum of Rs. 10,800 was received from Mohan, posted to his
debit, now rectified)
(ii) Suspense A/c Dr. 4,000
To Purchase A/c 2,000
To Purchase Return A/c 2,000
(Being purchases return wrongly debited to Purchase A/c, now
rectified)
(iii) Suspense A/c Dr. 800
To Discount A/c 800
(Being discount received was debited to discount A/c, now
rectified)
(iv) Repairs A/c Dr. 11,480
To Motor Car A/c 1,480
To Suspense A/c 10,000
(Being repairs to Motor car was debited to motor car A/c, now
rectified)
(v) Sales A/c Dr. 1,800
To Sethi A/c 1,800
(Being sales of Rs. 23,500 to sethi entered in sales Book as Rs.
25,300, now rectified)
(vi) Kalara Dr. 5,000
To Suspense A/c 5,000
(Being debit balance of Rs. 25,00 in Kalra’s A/c wrongly written on
the credit side of the A/c now rectified
Dr. Su spe n se A /c Cr.
Particulars Amount Particulars Amount
To Mohan 21,600 By Difference in Trial Balance 11,400
To Purchase A/c 2,000 (Bal. Fig)
To Purchase Return A/c 2,000 By Repairs A/c 10,000
To Discount A/c 800 By Kalara 5,000

26,400 26,400

Question 11. On 28th February, 2022, the trial balance of Zahir did not agree. The proprietor put the difference in a newly
opened suspense account. Subsequently, the following errors were located:
(i) The purchases book for January, 2022 has been cast Rs. 1,000 short.
(ii) A credit sale for Rs. 6,000 has been passed through the purchases book. The customer’s account has,
however, been correctly debited.
(iii) A credit purchase for Rs . 6,710 had been posted to the debit of the creditor’s account as Rs 6,170;
Rajan being the concerned creditor .
Pass journal entries to rectify the above mentioned errors. Also prepare the suspense account assuming that there are
no other errors . (ICAI Study material)
Answer
1) Purchase A/c 1000
To suspense A/c 1000
(being purchased book has cast short now rectified )
2) Suspense A/c 12000
To purchases 6000
To sales A/c 6000
( being a credit sales has been pass through the purchases book now rectified)

3) Suspense A/c Dr 12880

To Rajan 12880
(being credit purchase for Rs 6710 to Rajan’s debit now rectified )

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Suspense A/c
Particulars Amount Particulars Amount
To Purchases A/c 6000 By Differences in trial balances 238800
To Sales A/c 6000 By purchases 1000
To Rajan A/c 12800
24880 24880

Question 12. A book –keeping finds that trial balances is out by excess debit of Rs 500. He puts the differences to a newly
opened suspense account. Later on he detects the following errors :
1) Goods worth Rs 15,000 purchased from Ravi but entered in the sales book.

2) Received a promissory note for Rs 25,000 from Arun but entered in the bill payable book.

3) An item of Rs 3,500 relating to prepaid rent accounted was omitted to be brought forward.

4) An item of Rs 2,000 in respect of purchased returns to Roshan had been wrongly entered in the purchased book.

5) Rs 5,000 paid to Hari against acceptances was debited to Harish.

6) A bill was received for repairs of furniture for Rs 2,500 . The amount was debited to furniture account. Pass journal
entries to rectify the above errors.
Answer :-
1) Purchases A/c 15000
Sales A/c 15000
To Ravi 30000
(being goods purchased from Ravi entered in sales book now
rectified )
2 Bill receivables A/c 25000
Bill payable A/c 25000
To Arun 50000
(being promissory note received from Arun entered in bills
payable book now rectified )
3 Prepaid Rent A/c 3500
To Suspense A/c 3500
(being prepare rent accounted omitted to be brought forward
now rectified )
4 Suspense A/c 4000
To Purchase A/c 2000
To Purchase returns A/c 2000
( being Purchase returns to Roshan wrongly entered in purchase
book mow rectified )
5) Bills payable A/c 5000
To Harish 5000
(being cash paid to Hari against our acceptances debited to
Harish now rectified )
6) Repairs A/c 2500
To Furniture A/c 2500
(being repairs to furniture debited to furniture A/c now rectified )

Question 13. On 31st March 2022 the trial balances of Kunal did not agree. To prepare the final account, the
proprietor put the differences in a newly opened suspense account. In the next accounting year, the following
errors were located :
1) Rs 18,500 paid for the purchased of machinery was charged to office expenses account.

2) Cash sales of Rs 3,550 was posted as Rs 3,505

3) Purchase return book was under cast by Rs 100. Pass journal entries to rectify the above mentioned errors .

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Answer :
Machine A/c 18500
To profit and loss adjustment account 18500
(being of machines charges to expenses accounted error now rectified )
Suspense A/c 45
To profit and loss adjustment account 45
(being short cash sales , error now recorded and rectified )
Suspense A/c 100
To profit and loss adjustment account 100
(under cast of Purchases Return books error now rectified )

Question 14. On 31st March 2022 an accountant of a sole proprietorship concern could not agree his trial
balances. He put the difference in a newly opened suspense accounted and closed the books of accounted for the
year. In the subsequent accounting year the following error in the books for the year 2021-22 were located:

1) Rs 8000 paid for purchase of office furniture was posted to the purchase account.

2) The sales book was over casted by Rs 100.

3) Erections of machinery Rs 2,750 had been debited to wages accounted as Rs 5250.

4) A cheque for 7,330 was received from Rao after allowing him a discount of Rs 70 . It was endorsed in
favour of Sen in full settlement of Rs 7500, The cheque was dishonoured but no entry for dishonour was
passed in the books.

Pass journal entries for rectify the above mentioned errors. Also prepare the suspense account and Profit and
loss adjustment assuming that all the errors have been located.

Answer :- Rectifying journal Entries

Furniture A/c 8000
To P& L Adjustment A/c 8000
(being the cost of furniture wrongly debited to purchase A/c now rectified )
P&L adjustment A/c 100
To Suspense A/c 100
(being sales book was overcast now rectified )
Machinery A/c 2750
Suspense A/c 2750
To Profit & Loss Adjustment A/c 5500
(being 2750 paid for erection of machinery debited to wages a/c as 5250 now rectified
Rao 7400
Profit & loss Adjustment A/c 100
To Sen 7500

Suspense A/c
Particulars Amount Particulars Amount
To profit & loss A/c Adjustment 2500 BY differences in Trial balances 2400
A/c BY Profit & loss Adjustment A/c 100
2500 2500
Profit & loss Adjustment A/c
Particulars Amount Particulars Amount
To suspense A/c 100 By Furniture A/c 8000
To Sen 100 BY Machinery 2750
To Capital 13050 By Suspense 2500
13250 13250

Question 15. The book of account of Jawahar for the year ended 31st March 2022 were closed with different in the
trial balances carried forward . Subsequently the following errors were detected:

1) Rs 1500 being the total of discount column on the credit side cash book was not posted in general ledger.

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2) Closing stock was overstated by Rs 9000 being casting error in the schedule of inventory.
3) Return outward book was under cast by Rs 150.

4) A credit sales of Rs 870 was under wrongly as 780 to the customer‘s account.

5) Rs 6000 being the cost of purchase of office furniture was entered in the purchases book.

Pass rectified entries and prepare suspense account and find out the effect of rectification of errors on profit as
on 31st March 2022.

Question 16. Before preparing the final accounts, an accountant prepared a trial balances which did not agree. He
transferred the different to a suspense account. Before preparing the final account he was able to locate the followed
errors:
1) Rs 20,000 paid by way salaries were not posted from the cash book to the ledger.

2) Rs 100 paid for conveyances was debited to car maintenance accounted.

3) Purchase account includes purchase of machine costing Rs 25,000.

4) The cash column in the cash book on the receipt side was under cast by Rs 300.
Pass journal entries to rectify the above mentioned errors. (ICAI Study material)

Question 17. During the course of an accounting year accountant prepared a trial balances which did not tally. He put the
differences in a suspense accounted. Subsequently, he located the following errors in his book of account :
1) The total of the returns outward book Rs 21,500 has not been posted.
2) A sale of Rs 4,300 to Ramesh has been credited to him as Rs 3,400.
3) A sale of Rs 2,960 to Shyam has recorded in sales book as Rs 2,690.
4) Old furniture sold for cash worth Rs 5,400 has been entered in sales account as Rs 4,500. There was no profit or loss on
sales. Pass journal entries to rectify the above mentioned errors.

Answer :-
1 Suspense A/c 21500
To Returns Outward A/c 21500
(being rectification of the error in which total of returns outward book
was not posted )
2 Ramesh 7700
To Suspense A/c 7700
( Sales of Rs 4300 to Ramesh wrongly credited to him as Rs 3400 error
now rectified )
3 Shyam 270
To sales 270
(Being wrong amount of sales to Shyam entered in sales book now
rectified )
4 Sales A/c 4500
Suspense A/c 900
To furniture A/c 5400

Question 18. At the end of an accounting year trial balances of a concern agree but the followed errors were discovered
after preparing the final accounts.
1) No adjustment entry was preparing for an amount of Rs 2,000 of outstanding rent.
2) Purchases book was over cast by Rs 1,000.
3) Depreciation of Rs 4,000 on machinery had omitted to be recorded in the books
4) Rs 600 paid for purchases of stationery had been debited to purchases account.
5) Sales book was over cast by Rs1000.
6) Rs 5,000 received in respect of book debts had credited to sales accounts.
Show the effect of each one of the above-mentioned errors on the net profit of the year to which these errors pertain. If the
net profit as profit and loss account is 3,22,000 what is the correct profit arrived at after the rectification of above errors?

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Answer :- Statement showing effect on profit & loss A/c

Particulars Overstated Understated
No entry for outstanding rent 2000 ----
Purchase overcastted --- 1000
Depreciation omitted to be recorded 4000 ---
No entry
Sales overcastted 1000 ---
Sales overcastted 5000 ---
Profit overstated = 12000-1000 = 11000
Correct profit = 322000-11000 = 311000

Question 19. The book of Ramesh did not agree. The differences of Rs 27,000 in trial balances were places to the debit account.
Subsequently the following errors were located. Pass journal entries to rectified the errors and prepare suspense account.
1) The total of the purchases returns book Rs 2,100 has not been posted
2) A sales of Rs 4,300 to Ram has been credited to his account as Rs 3400
3) A purchase from Suresh for Rs 4,000 has been entered in the sales book. However Suresh has been correctly
credited with Rs 4,000.
4) Old furniture sold on credit for Rs 5,400 has been recorded in the sales book as Rs 4,500.
5) Goods taken away By Ramesh the proprietor for the personal use worth Rs 750 have not been recorded in the
book of account at all.
Question 20. MCQ BASED QUESTIONS
1. Whenever errors are noticed in the accounting records, they should be rectified _____
(a) At the time of preparation of trial balance
(b) Without waiting the accounting year to end
(c) After the preparation of final accounts
(d) In the next accounting year

2. A trial balance will not tally if ________

(a) Correct journal entry is posted twice
(b) Credit purchase debited to purchases and credited to cash
(c) 5000 cash paid to creditors is debited to creditors for 500 and credited to cash as 5000
(d) None of the above

3. Sales to shyam of 500 not recorded in the books would affect __

(a) Shyam’s account (b) Sales account (c) Sales account and shyam’s account (d) Cash account

4. Errors of carry forward from one year to another affects __

(a) Personal account (b) Real account
(c) Nominal account (d) Both a and b
5. Goods worth Rs. 272 returned by Lala passed through the books as Rs. 722. The rectification entry is
(a) Lala will be debited by Rs.450
(b) Lala will be debited by Rs.272
(c) Lala will be credited by Rs.722
(d) Lala will be credited by Rs.272

6. If a receipt of Rs. 200 from rajesh (debtor) has not been recorded in the books, the profits would show
(a) An increase of Rs. 2,000
(b) A decrease of Rs. 200
(c) Neither an increase nor a decrease
(d) None of the above
7. A credit purchase of Rs. 950 from sudhir was recorded in purchases book as Rs. 590. The rectification entry is __
(a) Purchases account will be debited by Rs. 360
(b) Sudhir will be credited by Rs. 590
(c) Purchases account will be debited by Rs. 950
(d) Sudhir will be credited by Rs. 950
8. Which of these errors affect only one account.
(a) Errors of casting (b) Errors of carry forward (c) Errors of posting (d) All the three
9. If goods worth 1750 returned to supplier is wrongly entered in sales returns book as 1570, then ___.
(a) Net profit will decrease by 3140
(b) Gross profit will increase by 3320
(c) Gross profit will decrease by 3500
(d) Gross profit will decrease by 3320

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10. Which of the following is one sided error

(a) Rs. 500 purchase of old equipment not recorded in the books of account at all
(b) Rs. 500 being expense on travelling expense credited to travelling expenses
(c) Both
(d) None
11. Which of the following errors affects the agreement of a trial balance?
(a) Mistake in balancing an account
(b) Omitting to record a transaction entirely in the subsidiary books
(c) Recording of a wrong entry in the subsidiary books
(d) Posting an entry on the correct side but in the wrong account
12. Which of the these errors affect only one account
(a) Errors of casting
(b) Errors of carry forward
(c) Errors of posting
(d) All the three

13. Which of these errors affect two or more accounts?

(a) Errors of complete omission
(b) Errors of principle
(c) Errors of posting to wrong account
(d) All the three
14. Which of the following error is an error of principle
(a) Rs. 5,000 received from sham credited to Ram A/c.
(b) Rs. 5,000 incurred on installation of new plant debited to travelling expenses A/c/ installation expenses.
(c) Rs. 500 paid for wages debited to salary A/c
(d) Rs. 500 being purchase of raw material debited to purchase A/c by50

15. Rs. 200 paid as wages for erecting a machine should be debited to
(a) Repair account (b) Machine account
(c) Capital account (d) Furniture account

16. Debiting overhauling expenses after purchase of a second hand car to Repairs A/c is an error of __.?
(a) Commission (b) Omission
(c) Principle (d) Not an error

17. In the course of locating the reason for the difference in the trial balance, it has been found that an amount
received from a customer has been debited to his account. The error may be classified as _________________ .
(a) Errors of commission
(b) Errors of omission
(c) Errors of principle
(d) Both errors of commission and omission

18. Errors can be detected ____:

(a) Before the preparation of Trial Balance
(b) After the preparation of Trial Balance, but before the preparation of final accounts
(c) After the preparation of Final accounts (next accounting year)
(d) All of the above
19. Rent received from a tenant Rs. 10,000 was correctly entered in the cash book but posted to the debit of Rent a/c.
The effect of this error on the trial balance will be
(a) Debit total will be Rs. 20,000 more than the credit total
(b) Debit total will be Rs. 10,000 more than the credit total
(c) Subject to other entries being correct, the total will agree.
(d) None of these

20. The suspense A/c facilities the preparation of _____even if the ____has not been balanced
(a) Trial Balance and Financial Statements
(b) Ledger and Trial Balance
(c) Trial Balance and Ledger
(d) Financial Statements and Trial Balance

Answer:- 1.(b) 2.(c) 3.(c) 4.(d) 5.(a) 6.(c) 7.(a) 8.(d) 9.(d) 10.(b)
11.(a) 12.(d) 13.(d) 14.(b) 15.(b) 16.(c) 17.(a) 18.(d) 19.(a) 20.(d)

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CHAPTER-3 BANK RECONCILIATION STATEMENT

Meaning of Pass book: Bank pass book is merely a copy of the customer’s account in the book of a bank. The
bank either sends periodical statements of account or gives a pass book to its customer in which all deposits and
withdrawals made by the customer during the particular period is recorded. Both represent almost a copy of the ledger
account of the customer in the books of the bank. Thus, it is the bank’s way of keeping the customers informed of the
entries made in his account. It is the customer’s duty to check the entries and immediately inform the bank of any
error that he may notice. These days with customers can easily access their bank statement online any time as
facilitated by Net Banking.

Meaning of cash book : Here cash book means bank column of the cash book maintained by the firm (customer)

Bank Reconciliation statement : To reconcile means to identify or find out the difference between two
different sources and eliminating that difference. Whenever we deposit or withdraws money from banks, it is
always recorded at two places:
(i) Bank column of the cash book (in customer books); and
(ii) Bank statement (pass book, i.e. in the banks books)

The cash book is maintained by the person having the bank account whereas the bank statement is prepared by the
bank. Therefore, the balance in both should be equal and opposite in nature. For eg:- if Mr. A deposited
Rs 1,00,000 in his bank account it will be recorded on the Dr. side of his cash book, but for the bank it’s a receipt
so it will be recorded as a Cr. Entry in the bank statement or the pass book.

But most of the times these two balances do not match. The reasons for difference in balances can be many and are
explained later in this chapter. It is possible to eliminate this difference by matching all the facts and figures of the two
statements. The process of eliminating this difference and bringing the two statements in line with each other is known
as “Reconciliation” , and the statement which reconciles the bank balance as per cash book with the balance as per the
pass book by showing all the causes of difference is known as “BANK RECONCILIATION STATEMENT”.

Following are few main reasons of differences between the balance shown by the cash book and pass book:

i. Cheques received are entered in the cash book as soon as they are received, however the same has not deposited
in to bank.

ii. The received cheque has been deposited into bank but the cheque has not been realised and the bank has not given a
credit to the customer. In this case, the cash book will show more balance than what the bank shows in the
customer’s account.

iii. When the Cheques are issued to the other, the entry for issuing a Cheque is recorded in cash book but the person
who received a cheque did not present the cheque into bank for payment, this means that the bank shows a
higher balance in favour of the client than what the cashbook of the client shows.

iv. The bank often makes some bank charges for services it renders. If there is an overdraft, the bank will also charge
interest. These bank charges and interest are recorded in the passbook and the entry is generally made in
cashbook only when the passbook is received.

v. Sometimes the bank is entrusted with the task of collecting interest on securities or dividends on shares or even the
collection of amounts due on bills of exchange or promissory notes. The bank will credit the customer as soon as
the amounts are received but the entry by the customers in the cashbook must await receipt of information by the
customer from the bank.

vi. The bank may also make payments according to the standing instruction of the client or in respect of any
special instruction such as presentation of documents for supply of goods for which a letter of credit has been
opened previously. Entries in the cashbook in such cases are made on receipt of advise from bank.

To know the reason or differences between balances shown by the bank pass book and that shown by the in cashbook on a
particular date and to be sure, that no mistakes have been committed there must be statement. The statement is known as the
bank reconciliation statement. It helps management to check the accuracy of the entries made in the cashbook and keep
track of checks, e.t.c. which may have been sent to bank for collection.

The bank reconciliation statement can be prepared starting from the bank passbook balances as well as cashbook balances

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Importance of preparing Bank reconciliation statement :

Bank reconciliation statement is a very important tool for internal control of cash flows. It helps in detecting errors, frauds
and irregularities occurred, if any, at the time of passing entries in the cash book or in the pass book, whether intentionally
or unintentionally. Since frauds can be detected on the preparation of bank reconciliation statement therefore accountants are
careful while preparing and maintaining the records of the business enterprise. Hence it works as an important mechanism of
internal control.

Following are the salient features of bank reconciliation statement:

i. The reconciliation will bring out any errors that may have been committed either in the cash book or in the pass book;
ii. Any undue delay in the clearance of cheques will be shown up by the reconciliation;

iii. A regular reconciliation discourages the accountant of the bank from embezzlement of funds. There have been many
cases when the cashiers merely made entries in the cash book but never deposited the cash in the bank; they were able to get
away with it only because of lack of reconciliation.

iv. It helps in finding out the actual or true position of the bank balance by incorporating the effect of any uncleared funds as
well.

Preparation of the Bank Reconciliation Statement:

Take the cash book or the pass book balance and then see what has been done or not been done in the other book.
Thus if we start from the pass book balance, we must see what has been or not been done in the cash book. Then
work out the balance as if the entries passed in the cash book had also been passed in the pass book and the entries
not passed in the cash book had also been removed from the pass book. If we start from the cash book, we should
follow the pass book entries.

Question: 1 COC Education Ltd has a current account with the state bank of India . On 31 st March 2022 the bank column
of its cash book showed a debit balances of Rs 1,54,300. However the bank statement showed a different balances as on
that date . The following were the reasons for the difference :
1) cheques deposited but not yet credited by the bank Rs 75,450
2) Cheques issued but not yet presented for payment Rs 80,760
3) Bank charges not yet recorded in the cash book Rs 1,135
4) Cheques received by the bank directly from trade debtors Rs 1,35,200
5) Insurances premium paid by the bank as per standing instruction but not yet recorded in the cash book Rs 15,400.
6) Dividend collected by the bank but not yet recorded in the cash book Rs 1,000
Find out balances as per the bank statement as on 31st March 2022.

Question: 2 On 31st March 2022 the cash book of Rahul showed a bank overdraft of Rs 7,640 . On the same data
Rahul received the bank statement . On perusal of the statement Rahul ascertained the following information :
a) Cheques deposited but not credited by the bank 10,000
b) Interest on securities collected by the bank but not recorded in the cash book. 1,280
c) Divided collected by the bank directly but not recorded in the cash book 1,000
d) Cheques issued but not presented for payment 37,400
e) Bank charges not recorded in the cash book 340
From the above information you are required to prepare the BRS ascertain the bank as per bank statement.
(ICAI Study material)

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Answer:
Particulars Plus Minus
Overdraft as per Cash Book 7640
Add:-
Interest on securities collected by the bank but not recorded in cash book 1280

Dividend directly collected by the bank not recorded in cash book. 1000

Cheques issued not presented for payment 37400

Less:-
cheques deposited but not credited by the bank 10000
Bank charges not recorded in cash book 340

Balances as per Pass book 17980

39680 39680

Question: 3 From the following information prepare a bank reconciliation statement as on 30st September 2022:
1) Overdraft as per cash book Rs 12,000.
2) Cheques for Rs 40,000 were sent to the bank for collection but cheques for Rs 25,000 only had
been collected and credited .
3) Cheques worth Rs 30,000 were issued but cheques for Rs 18,000 only were presented for payment.
4) A customer paid Rs 28,000 directly into bank account.
5) Bank charges interest Rs 250 on overdraft .
6) A cheque for Rs 5,000 Form a customer correctly recorded in the cash book but was omitted to be sent
to the bank for collection .
7) Fire insurances premium paid by bank under standing instruction Rs 2,000 not recorded in cash book .
8) Bill of Rs 5,000 discounted with bank for Rs 4,800 was dishonoured for which no entry is made in the cash
book.
9) Cheques recorded in the bank column of the cash book but not sent to the bank for collection Rs 2,500.

Question: 4. According to the Cash-Book of Gopi, there was a balance of Rs. 44,500 standing to his credit in Bank on 30 th
June, 2022. On investigation you find that
i. Cheques amounting to Rs. 60,000 issued to creditors have not been presented for payment.
ii. Cheques paid into Bank amounting to Rs. 1,05,000 out of which Cheques amounting to Rs. 55,000 only
collected by the Bank upto 30th Jun 2022.
iii. A dividend of Rs. 4000 and rent amounting to Rs. 6000 received by the bank and entered in the Passbook but
not recorded in the Cash-book.
iv. Insurance premium (up to 31.12.22) paid by the bank but Rs. 2700 not entered in the cash book.
v. The payment side of the Cash-book had been undercast by Rs. 50.
vi. Bank charges Rs. 50, shown in the Pass-book had not been entered in the Cash-book
vii. A bill payable for Rs. 2,000 has been paid by the Bank but is not entered in the cash book and bill receivable for
Rs.6,000 has been discounted with the Bank at a cost of Rs. 100 which has also not been recorded in Cash-book.
You are required :
(a.) to make the appropriate adjustments in the Cash-book, and
(b.) to prepare a statement reconciling it with the Bank Pass-book.

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Question: 5 Following are the entries recorded in the Bank Column of the Cash Book of Mr. X for the month ending
on31.3.97. Cash Book (Bank Column)
Date Particulars Rs. Date Particulars Rs.
15.3.97 To Cash 36,000 1.3.97 By Balance b/d 40,000
20.3.97 To Roy 24,000 4.3.97 By John 2,000
22.3.97 To Kapoor 10,000 6.3.97 By Krishnan 400
31.3.97 To Balance c/d 7,640 15.3.97 By Kailash 240
20.3.97 By Joshi 35,000

On 31.3.1997 Mr. X Received the Bank Statement. On perusal of the statement, Mr. X ascertained the following
information.
1. Cheques deposited but not credited by the bank Rs. 10,000.

2. Interest on securities collected by the bank but not recorded in cash book Rs. 1080.

3. Credit transfer not recorded in the cash book Rs. 200.

4. Dividend collected by the bank directly but not recorded in the cash book Rs. 1000.

5. Cheques issued but not presented for payment Rs. 37,400.

6. Interest debited by the bank but not recorded in the cash book Rs. 1000.

7. Bank Charges not recorded in the cash book Rs. 340.

From the above information you are asked to prepare a Bank reconciliation statement to ascertain the balance as per
bank statement.

Question: 6. On 31st march, 2022 the Cash-Book of Bittu showed an overdraft of Rs. 17,000 with Bank of India. This balance
did not agree with the balance as shown by the bank Pass Book; and you find that:

Bittu had paid into the bank on 26th March, four Cheques for Rs. 10,000, Rs. 12,000, Rs.6,000 and Rs 8,000. Of these, the
cheque for Rs.6,000 was credited by the Bank in April, 2022.

Bittu had issued on 24th March Cheques for Rs.35,000. Out of these, Cheques for Rs.27,000 had been presented and paid
while one cheque for Rs. 1,000 was returned for conversion into a bearer cheque. This was done and presented for
payment before 31st March 2022. The amount is included in the figure of Rs. 35,000. The others were not yet presented.

You also find that on 31st March, 2022, the Bank had debited Bittu with Rs. 1,400 for interest, and Rs.120 for Bank charges,
but had not recorded these amounts in the books.

Total of a page on the debit side of the Cash Book Rs.9,670 was carried to the next page as Rs.6,790.

It was also found that the total of one page on the payments side of the cash book was Rs. 5,670 but it was written on the
next page as Rs. 7,650.

You are required to prepare a Bank Reconciliation Statement as at 31 st March, 2022 and ascertain the balance as per the
Bank Pass Book.

Question: 7 Reconcile the following:- Cash Book (Bank Columns only)

2022 Rs. 2022 Rs.
Aug. 1 To Balance b/d 7,000 Aug. 4 By Drawing Account 2,500
10 To Sharad 1,000 7 By Rent Account 2,400
13 To Anand 5,000 13 By Kiran 4,000
16 To Sat Pal 1,800 27 By Mohan 1,200
28 To Gyan 3,200 28 By Raman 1,600
30 To Babu 6,000 29 By Radhey 1,800
31 To om 4,200 31 By Mahesh 1,100
31 By Balance c/d 13,600
28,200 28,200

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Bank Pass Book

Date Particulars Debit Credit Dr. or Cr. Balance

2022
Sept. 1 By Balance b/fd Cr. 2,900
1 By Dividend 400 Cr. 3,300
3 To Cheque — Raman 1,600 Cr. 1,700
3 By Cheque— Gyan 3,200 Cr. 4,900
7 To Cheque—Mahesh 1,100 Cr. 3,800
7 To Cheque — Rent 2,400 Cr. 1,400
8 By Cheque — Ramesh 100 Cr. 1,500
8 By Cheque — Babu 6,000 Cr. 7,500
10 By Cheque — Om 4,200 Cr. 1 1,700
10 To Cheque — Drawing 1,500 Cr. 10,200

Question: 8 Prepare a Bank Reconciliation Statement as at 30th September 2000. From the following entries in the Bank
Column of the Cash Book and the corresponding Pass Book: Cash Book (Bank Columns only)
2022 Rs. 2022 Rs.
Sept. 1 To Balance b/d 8000 Sept. 4 By Drawings 700
3 To Raj Kumar 2,200 8 By Sunder 3300
8 To Rameshwar 1,500 12 By Salary 2,800
15 To Ram Nath 3,400 16 By Shyam 1,700
22 To Rakesh 2,600 18 By Suresh 4,200
27 To Ravi 100 21 By Suraj 2,000
29 To Rup Narain 350 26 By Swatantra 1,100
29 By commission 100
30 By balance c/d 2,250

Total 18,150 Total 18,150

Bank Pass Book
Date Particulars Debit Credit Balance
Sept. 1 By Balance b/fd 8,000
4 To Cheque – Drawings 700 Cr. 7,300
5 By Cheques – Raj Kumar 2,200 Cr. 9,500
10 To Cheques – Sunder 3,300 Cr. 6,200
21 By Cheques – Rameshwar 1,500 Cr. 7,700
12 To Cheque – Salary 2,800 Cr. 4,900
17 To Cheque – Shyam 1,700 Cr. 3,200
20 By Cheques – Rakesh 2,600 Cr. 5,800
29 By Divided Received 900 Cr. 6,700
To Bank Charges 15 Cr. 6,685
To Electricity Bill 60 Cr. 6,625
To Cheques – Commission 100 Cr. 6,525

Question: 9. Perfect private Limited has two accounts with Ever Bank Limited. The accounts were known as 'Account I'
and 'Account II'. As on March 31, 2022, the date of closing of the accounts, the Accounts Books reflected the following
Account I—Rs. 1,25,000 (Dr.) Account II—Rs. 1,11,250 (Cr.)
The accountant failed to tally the balance with the Pass Book and the following information was available:

a) The Bank has charged interest on Account II. Rs 11,375 and credited interest in Account I. Rs.1,250. These were
not recorded by the Accountant.

b) Rs. 12,500 drawn on March10, 2022 from Account 1 was recorded in the Books in Account II.

c) Bank charges of Rs. 150 and Rs. 1,125 for Account I and Account II were not recorded in the cash Books.

d) A deposit of Rs. 17,500 in Account I was wrongly entered in Account II in the Books.

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e) Two Cheques of Rs.12,500 and Rs 13,750 deposited in Account I, but entered in Account II in the books, were
dishonoured. The entries for dishonoured Cheques were made in Account II.

f) Cheques issued for Rs.1,50,000 and Rs.15,000 respectively from account I and Account II were not presented until
5 April 2022.

(g) Cheques deposited Rs, 1,25,000 and Rs.117,500 in Account I and II respectively, were credited by Bank only on
April 3, 2022.
You are required to prepare the Bank Reconciliation Statement for Account I and in this respect state the amount to be
shown in the Balance Sheet.

Question 10. On 31-3-2022, Mahesh’s Cash Book Showed an overdraft of ₹ 98,700. On Comparison he finds the followings:
(1) Out of the total cheques of ₹ 8,900 issued on 27 th March, one cheque of ₹ 7,400 was presented for payment on 4th April and
the other cheque of ₹ 1,500 handed over to the customer, was returned by him and in lieu of that a new cheque of the same
amount was issued to him on 1st April. No Entry for the return was made till 31-3-2022.

(2) Out of total cash and cheques of ₹ 6,800 deposited in the Bank on 24 th March, one cheque of ₹ 2,600 was cleared on 3 rd
April and the other cheque of ₹ 500 was returned dishonoured by the bank on 4 th April.

(3) Bank Charges ₹35 and Bank Interest ₹2,860 charged by the bank appearing in the passbook are not yet recorded in the cash
book.
(4) A cheque deposited in another account of ₹ 1,550 wrongly credited to this account by the bank.

(5) A cheque of ₹ 800 drawn on this account, but ₹ 1,550 wrongly debited to this account by the bank.

(6) A debit of ₹ 3,500 appearing in the bank statement for an unpaid cheque returned for being ‘out of date’ had been re-dated
and deposited in the bank account again on 5 th April 2022.

(7) The bank allowed Interest on deposits ₹ 1,000.

(8) A Customer who received a cash discount of 4% on his account of ₹ 1,00,000 paid a cheque on 20 th March,2022. The
cashier erroneously entered the gross amount in the bank column of the Cash Book.
Prepare adjusted cash book and Bank Reconciliation Statement as on 31.3.2022. (ICAI Study material)

Answer : Adjusted Cash Book as on 31-3-2022

Particulars ₹ Particulars ₹
To Interest on Deposit 1,000 By balance b/d 98,700
To Customer A/c-Cheque Returned 1,500 By bank charges & interest (35+2,860) 2,895
To Balance c/d 1,07,095 By Customer A/c-Cheque Dishonoured 500
By Discount allowed 4,000
(1,00,000-96,000)
By customer-cheque out of date 3,500

1,09,595 1,09,595

(ii) Bank Reconciliation Statement as on 31 st March, 2022

Particulars ₹ ₹
Overdraft as per Adjusted Cash Book 1,07,095
Add:
Cheque Deposited but not credited in the bank 2,600

1,09,695
Less:
Cheques issued but not presented in the bank (7,400)
Cheque deposited in another account wrongly credited to this account by (1,550)
the bank
Cheque drawn in this A/c Wrongly debited to another A/c (750)
(1550-800) (9,700)

Overdraft balance as per Bank Statement 99,995

Question 11. Prepare a Bank Reconciliation Statement of Shri Hari as on 31 st March,2022;

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(i) Balance as per Pass Book is ₹ 10,000.

(ii) Bank collected a cheque of ₹ 500 on behalf of Shri Hari but wrongly credited it to Shri Nari’s Account (Another Customer
of bank)
(iii) Bank Recorded a Cash Deposited of ₹ 1,589 as ₹ 1,598.
(iv) Withdraw column of the Pass Book undercast by ₹ 100.
(v) The Credit balance of ₹ 1,500 on page 5 was recorded on page 6 as debit balance in pass book.
(vi) The Payment of a cheque of ₹ 350 was recorded twice in the Pass Book.
(vii) The Pass Book Showed a credit for a cheque of ₹ 1,000 deposited by Shri Pari (Another Customer of the bank)
(ICAI Study material)
Answer : Bank Reconciliation Statement as at 31.3.2022
Particulars ₹
Balance as per Pass Book 10,000
Add: Cheque wrongly credited to another customer’s A/c 500
Error in Carrying Forward 3,000
Cheque Recorded twice 350 3,850
13,850
Less: Excess Credit for Cash Deposit 9
Undercasting of Withdrawn Column 100
Wrong Credit 1,000 1,109

Balance as per Cash Book 12,741

Question 12. On 30th September, 2022, the bank account of Neel, according to the bank column of the Cash-Book, was
overdrawn to the extent of ₹ 8,124. On the same date the bank statement showed a debit balance of ₹ 41,516 in favour of Neel.
An examination of the Cash Book and Bank Statement reveals the followings:
1. A Cheque for ₹ 26,28,000 deposited on 29 th September, 2022 was credited by the bank only on 3 rd October,2022.

2. A Payment by Cheque for ₹ 32,000 has been entered twice in the Cash Book.

3. On 29th September, 2022, the bank credited an amount of ₹ 2,34,800 received from a customer of Neel, but the advice was
not received by Neel until 1st October,2022.

4. Bank Charges amounting to ₹ 1,160 had not been entered in the Cash Book.

5. On 6th September, 2022, the bank credited ₹ 40,000 to Neel in error.

6. A bill of exchange for ₹ 2,80,000 was discounted by with his bank. This bill was dishonoured on 28 th September, 2022 but
no entry had been made in the books of Neel.

7. Cheques issued upto 30th September, 2022 but not presented for payment upto that date totalled ₹ 26,52,000.
You are required:
(a) To Show the appropriate rectifications required in the Cash Book of Neel, to arrive at the correct balance on 30 th
September, 2022 and
(b) to Prepare a bank reconciliation statement as on that date. (ICAI Study material)

Answer: (i) Cash Book (Bank Column)

Date 2022 Particulars Amount Date Particulars Amount
₹ 2022 ₹
Sept 30 To Party A/c 32,000 By balance b/d 8,124
To Customer A/c 2,34,800 By Bank Charges 1,160
(Direct Deposited) By Customer A/c 2,80,000
To Balance c/d 22,484 (B/R Dishonoured)

2,89,284 2,89,284

(ii) Bank Reconciliation Statement as on 30th September, 2022

Particulars Amount (₹)
Overdraft as per Cash Book 22,484
Add: Cheque deposited but not collected upto 30th 2022 26,28,000
26,50,484
Less: Cheques issued but not presented for payment upto 30 th Sept 2022 (26,52,484)
Credited by Bank erroneously on 6th Sept. (40,000)
Overdraft as per bank Statement 41,516

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Question 13. From the following particulars ascertain the balance that would appear in the Bank Pass Book of A on
31st December, 2022. Also Present with Column for ‘’Plus’’ and ‘’Minus’’.

(1) The bank overdraft as per Cash Book on 31 st December, 2022 ₹ 6,340
(2) Interest on overdraft for 6 months ending 31 st December, 2022 ₹ 160 is entered in Pass Book.
(3) Bank Charges of ₹ 400 are debited in the Pass Book Only.
(4) Cheques issued but not cashed prior to 31st December,2022 amounted to ₹ 11,68,000.
(5) Cheques Paid into bank but not cleared before 31 st December, 2022 amounted to ₹ 22,17,000.
(6) Interest on Investment collected by the bank and credited in the Pass Book ₹ 12,00,000. (ICAI Study material)

Answer : Balance as per Pass Book (Credit/Favourable balance)

Particulars Plus, Amount ₹ Minus Amount ₹
Overdraft as per Cash Book 6,340
Interested debited in Pass Book but not yet in Cash Book 160
Cheque issued but not yet Presented 11,68,000
Cheque Paid in but yet Credited by the Bank 22,17,000
Bank Charges 400
Interest Collected and Credited by the Bank in the Pass
Book but not yet entered in Cash Book 12,00,000
Balance as per pass book 1,44,100
Total 23,68,000 23,68,000

Question 14. Prepare a bank reconciliation Statement from the following particulars as on 31 st March, 2022.
Particulars (₹)
Debit balance as per bank column of the cash book 18,60,000
Cheque issued to creditors but not yet presented to the Bank for payment 3,60,000

Dividend received by the bank but not entered in the Cash book 2,50,000
Interest credited by the Bank 6,250
Cheques deposited into bank for collection but not collected by bank up to 7,70,000
this date
Bank charges not entered in Cash book 1,000
A cheque deposited into bank was dishonoured, but no intimation received 1,60,000

Bank paid house tax on our behalf, but no intimation received from bank 1,75,000
in this connection

. Answer : Bank Reconciliation Statement as on 31.3.2022

Particulars Details Amount
₹ ₹
Debit balance as per Cash Book 18,60,000
Add: Cheque issued but not yet presented to bank for
payment 3,60,000
Dividend received by bank not entered in cash book 2,50,000
Interest credited by bank 6,250 6,16,250
24,76,250
Less: Cheques deposited into bank but not yet collected 7,70,000
Bank charges debited by Bank 1,000
Cheque deposited into bank was dishonoured 1,60,000
House tax paid by bank 1,75,000 (11,06,000)

Credit balance as per Pass Book 13,70,250

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Question 15. MCQ BASED QUESTIONS:

1. When preparing a bank reconciliation statement, if you start with debit balance as per cash
book, cheques sent to bank but not collected should be
(a) Added (b) Deducted
(c) Not required to be adjusted (d) None

2. Balance as per adjusted cash book Rs.274. Cheques not yet presented Rs.730. Cheques deposited
not yet recorded by bank Rs.477 balance as per pass book will be
(a) Rs.52 (b) Rs.527
(c) Rs.500 (d) None
3. A debit balance in the depositor’s cash book will be shown as
(a) A debit balance on the bank statement
(b) A credit balance on the bank statement
(c) An overdrawn balance on bank statement
(d) None of the above

4. Which of these types of errors are not detected during bank reconciliation?
(a) Cash embezzlement by the cashier
(b) Cheque deposited but not credited by bank
(c) Casting mistakes in bank column of cash book
(d) Interest or commission charged by the bank but not accounted for in cash book.

5. Which of these documents is not required for bank reconciliation

(a) Bank column of cash book (b) Bank pass book (c) Bank statement (d) Trial balance

6. From the following details ascertain the adjusted bank balance as per cash book – overdraft as
per cash book Rs.80,000; cheque received entered twice in the cash book Rs.5,000; credit side of
bank column cast short by Rs.500; bank charges amounting to Rs.200 entered twice;
cheque issued but dishonoured Rs.2,000 not entered in the cash book.
(a) Rs.80,500 (b) Rs.85,500
(c) Rs.85,000 (d) Rs.83,300

7. Which of these items are taken in to consideration for preparation of adjusted cash book
(a) Mistake in cash book
(b) Mistake in pass book
(c) Cheque issued but not presented for payment
(d) Cheques deposited but not cleared

8. When overdraft as per cash book is the starting point, a cheque of Rs.500 deposited in to bank
but not recorded in cash book will be:
(a) Added by Rs.500 (b) Deducted by Rs.500
(c) Added by Rs.1000 (d) Deducted by Rs.1000

9. Bank has directly paid Rs.1250 for rent as per standing instructions. In BRS starting with pass
book overdraft
(a) Rs.1250 will be added to pass book overdraft
(b) Rs.2500 will be added to pass book overdraft
(c) This amount will be ignored
(d) Rs.1250 will be deducted from pass book overdraft.

10. When credit balance as per pass book is the starting point bank charges are –
(a) Subtracted (b) Added (c) Neither of the two (d) None

11. The bank reconciliation statement is prepared

(a) To rectify the mistakes in the cash book
(b) To arrive at the bank balance
(c) To arrive at the cash balance
(d) To bring out the reasons for the difference between the balance as per cash book and the
balance as per bank statement

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12. Benefits of preparing bank reconciliation statement includes –

(a) It brings out any errors committed in preparation of cash book/ bank pass book
(b) Highlights under delay in clearance of cheques deposited but not credited
(c) Help known actual bank balance
(d) All the three

13. Debit balance as per bank pass book mean –

(a) Surplus cash (b) Bank overdraft
(c) Terms deposits with bank (d) None of these

14. Debit side of bank pass book corresponds to –

(a) Credit side of cash book (b) Debit side of cash book
(c) Debit side of trial balance (d) Credit side of balance sheet
15. Difference in bank balance as per pass book and cash book may arise on account of
(a) Cheque issued but not presented (b) Cheque issued but dishonored (c) Cheque
deposited and credited by bank (d) All of (a) and (b) above

16. Bank reconciliation is used to show the difference between the balance of ______
(a) Cash columns of cash book and bank statement/passbook
(b) Bank columns of cashbook and bank statement/passbook
(c) Cash columns of cashbook and bank columns of cashbook
(d) None of the above

17. Debit balance as per Cash book of B Ltd. As on 31.03.2016 is Rs.4,000. Cheques deposited but not cleared
amounts to the Rs. 200 and cheques issued but not presented of Rs.300. The bank allowed interest amounting Rs.200
and collected dividend Rs.100 on behalf of B Ltd. Balance as per Pass Book
(a) Rs.3400 (b) Rs.4000 (c) Rs.4200 (d) Rs. 4400

18. BRS is a part of _____:

(a) Final Accounts (b) Bank Book
(c) Cash Book (d) None of these

19. Credit balance of bank pass book will be ___ to the account holder
(a) An asset (b) A liability
(c) A provision (d) None of these

20. The cash book showed a credit balance of Rs.10,000 but the pass book made up the same date
revealed that a cheque of Rs.2,000 had not been presented for payment and a cheque of Rs.3,000
paid into account had not been cleared. The overdraft as per pass book will be:

(a) Rs. 8,000 (b) Rs.11,000

(c) Rs.14,000 (d) None

Answer:- 1.(b) 2.(b) 3.(b) 4.(a) 5.(d) 6.(d) 7.(a) 8.(b) 9.(d) 10.(b)
11.(d) 12.(d) 13.(b) 14.(a) 15.(d) 16.(b) 17.(d) 18.(d) 19.(a) 20.(b)

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CHAPTER 4. VALUATION OF INVENTORIES

Definition of inventory: Inventory can be defined as assets held

• for sale in the ordinary course of business, or
• in the process of production for such sale, or
• for consumption in the production of goods or services for sale, including maintenance supplies and consumables
other than machinery spares, servicing equipment and standby equipment.

Significance of inventory valuation: The significance of inventory valuation arises due to various reasons as
explained in the following points:

(a) Determination of Income- The valuation of inventory is necessary for determining the true income earned by a
business entity during a particular period.
(b) Ascertainment of Financial Position:- Inventories are classified as current assets. The value of inventory on the
date of balance sheet is required to determine the financial position of the business
(c) Liquidity Analysis:- Inventory is classified as a current asset, it is one of the components of net working capital
which reveals the liquidity position of the business. Current ratio which studies the relationship between current
assets and current liabilities is significantly affected by the value of inventory.
(d) Statutory Compliance:- Schedule III to the Companies Act, 2013 requires valuation of each class of goods i.e.
raw material, work-in-progress and finished goods under broad head to be disclosed in the financial statements

VALUATION/ MEASUREMENT OF INVENTORIES OF FINISHED GOODS:

According to AS-2 inventories should be valued at the lower of cost and net realisable value.

Cost of Inventories: The cost of inventories should comprise all costs of purchase, costs of conversion and
other costs incurred in bringing the inventories to their present location and condition.

• The costs of purchase consist of the purchase price including duties and taxes (other than those subsequently
recoverable by the enterprise from the taxing authorities), freight inwards and other expenditure directly
attributable to the acquisition. Trade discounts, rebates, duty drawbacks and other similar items are deducted in
determining the costs of purchase.
• Costs of Conversion: The costs of conversion of inventories include costs directly related to the units of
production, such as direct labour. They also include a systematic allocation of fixed and variable production
overheads that are incurred in converting materials into finished goods. Fixed production overheads are
those indirect costs of production that remain relatively constant regardless of thevolume of production, such
as depreciation and maintenance of factory buildings and the cost of factory management and administration.
Variable production overheads are those indirect costs of production that vary directly, or nearly directly, with the
volume of production, such as indirect materials.

• Other Costs: Other costs are included in the cost of inventories only to the extent that they are incurred in
bringing the inventories to their present location and condition. For example, it may be appropriate to
include overheads other than production overheads or the costs of designing products for specific
customers in the cost of inventories.

Exclusions from the Cost of Inventories:

In determining the cost of inventories in accordance with paragraph 6, it is appropriate to exclude certain costs and
recognise them as expenses inthe period in which they are incurred. Examples of such costs are:
(a) abnormal amounts of wasted materials, labour, or other productioncosts;
(b) storage costs, unless those costs are necessary in the production process prior to a further production
stage;

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(c) administrative overheads that do not contribute to bringing the inventories to their present location and
condition; and
(d) selling and distribution costs.

Inventory record system:

There are two principal systems of determining the physical quantities and monetary value of inventories sold and in hand.
One system is known as ‘Periodic Inventory System’ and the other as the ‘Perpetual Inventory System’. The periodic
system is less expensive to use than the perpetual method. But the useful information obtained from perpetual system is
more than cost incurred on it. These systems are distinguished on the basis of the actual records kept to ascertain the cost
of goods sold and the closing inventory valuations.

(i) Periodic inventory system:

Periodic inventory system is a method of ascertaining inventory by taking an actual physical count (or measure or weight) of
all the inventory items on hand at a particular date on which inventory is valued. It is because of actual physical count that the
system is also called physical inventory system. The cost of goods sold is determined as shown below:

Opening inventory (known) + Purchases (known) - closing inventory (physically counted) = Cost of goods sold.

Periodic inventory system is simple and less expensive than the perpetual system. In this system, inventory account is
adjusted at the end of the accounting period to determine cost of goods sold.

This system suffers from various limitations:

(i) Physical inventory taking is required more than once a year for preparation of quarterly or half yearly financial statements.

(ii) Physical count of goods requires closure of normal operations of business.

(iii) As cost of goods sold is taken as residual figure, it is not possible to identify loss of goods due to pilferage, damage or
even fraud.
(iv) Inventory control is not possible under this system.

(v) Books of accounts does not reflect inventory in hand and its value therefore, it is difficult to plan operations e.g. how
much or when to order/manufacture.

This system is used by small enterprises where is easy to control physical inventory. This system is not considered suitable
for medium or larger enterprises which generally use Perpetual Inventory system.

Perpetual inventory system:

Perpetual inventory system is a system of recording inventory balances after each receipt and issue. In order to ensure
accuracy of perpetual inventory records, physical inventory should be checked and compared with recorded balances.
Under this system, cost of goods issued is directly determined and inventory of goods is taken as residual figure with the
help of inventory ledger in which flow of goods is recorded on continuous basis. The basic feature of this system is the
maintenance of inventory ledger to have records of goods on continuous basis. Under perpetual inventory system, closing
inventory is determined as follows:

Opening inventory (known) + Purchases during the period (known) – Cost of Goods Sold (known) = Closing Inventory
(balancing figure)

Perpetual inventory system helps to overcome the limitations of periodic system. As inventory is taken as residual figure, it
includes loss of goods. However, the main limiting factor is the cost of using this system.

S. Periodic Inventory System Perpetual Inventory System

No.
1. This system is based on physical verification. It is based on book records.
2. This system provides information about It provides continuous information about inventory
inventory and cost of goods sold at a particular and cost of sales.
date.
3. This system determines inventory and takes It directly determines cost of goods sold and computes
cost of goods sold as residual figure. inventory as balancing figure.
4. Cost of goods sold includes loss of goods as Closing inventory includes loss of goods as all unsold
goods not in inventory are assumed to be sold. goods are assumed to be in Inventory.

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5. Under this method, inventory control is not Inventory control can be exercised under this system.
possible.
6. This system is simple and less expensive. It is costlier method.
7. Periodic system requires closure of business Inventory can be determined without affecting the
for counting of inventory. operations of the business.

FORMULAE/METHODS TO DETERMINE COST OF INVENTORY:

i. historical cost method
ii. non-historical cost method.

i. HISTORICAL COST METHODS: There is no unique formula for determination of historical cost of inventories.
The different techniques for valuation of inventory have been discussed below:

(a) Specific Identification Method: Pricing under this method is based on actual physical flow of goods. It attributes
specific costs to identified goods and requires keeping different lots purchased separately to identify the lot out of
which units in inventories are left. The historical costs of such specific purpose inventories may be determined on
the basis of their specific purchase price or production cost.
This method is generally used to ascertain the cost of inventories of items that are not ordinarily interchangeable and their
value is high like expensive medical equiptment, otherwise it requires the use of FIFO (First in first out) or weighted
average price/average price formula.

(b) FIFO (First in first out) Method: This method is based on the assumption that cost should be charged to
revenue in the order in which they are incurred, that is, it is assumed that the issue of goods is usually from the
earliest lot on hand. The inventory of goods on hand therefore, consists of the latest consignments. Thus, the closing
inventory is valued at the price paid for such consignments.

(c) LIFO (Last in first out) Method: As the name suggests, the LIFO formula states that the cost of goods that
have been purchased last though the actual issues may be made out of the earliest lot on hand to prevent unnecessary
deterioration in value. The closing inventory then is assumed to consist of earlier consignments and its value is then
calculated according to such consignments. Under this basis, goods issued are valued at the price paid for the latest lot
of goods on hand which means inventory of goods in hand is valued at price paid for the earlier lot of goods. LIFO
method is based on the principle of matching current cost with current revenue as cost of recently purchased or
produced goods are charged to cost against each sale. The cost of goods sold under this method represents the cost of
recent purchases resulting that there is better matching of current costs with current sales.

(d) Simple Average Price Method:Simple Average price for computing value of inventory is a very simple
approach. All the different prices are added together and then divided by the number of prices. The closing inventory
is then valued according to the price ascertained. This method is generally followed by the entities using periodic
inventory method as it does not require efforts of identifying that closing inventory belongs to which consignments or
lots.
(e) Weighted Average Price Method: Simple average price does not consider quantities purchased in various lots.
However, it is more logical to compute weighted average price using the quantities purchased in a lot as weights.
Under weighted average price method, cost of goods available for sale during the period is aggregated and then
divided by number of units available for sale during the period to calculate weighted average price per unit. Thus,

Weighted average price per unit =

total cost of goods available for sale during the period/ total number of units available for sale during the period.

Closing inventory = no of units of inventory X weighted average cost per unit.

Question: 1
Receipts
3rd January 500 units @ Rs. 10 per unit
6th January 300 units @ Rs. 11 per unit
10th January 400 units @ Rs 12 per unit
16th January 200 units @ Rs 10 per unit
Issues
20th January 850 units

You are required to calculate value of issue and value of closing stock under periodic method by :
(a) FIFO method

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(b) LIFO method

(c) Average price method
(d) Weighted average price method

ii. Non-historical cost methods: Non-historical cost methods do not consider the historical cost incurred to acquire
the goods. Non- historical cost methods include Adjusted Selling Price method and Standard Cost method. Adjusted
Selling Price method can be explained as follows:

(a) Adjusted selling price method: This method is also called retail inventory method. It is used widely in retail
business or in business where the inventory comprises of items, the individual costs of which are not readily
ascertainable. The use of this method is appropriate for measuring inventories of large numbers of rapidly changing
items that have similar margins and for which it is impracticable to use other costing methods. The cost of the inventory
is determined by reducing from the sales value of the inventory an appropriate percentage of gross margin.

Question: 2 Below given the accounting data of Raghu running retail business in paints for ending 31 st December,2022.
At cost At retail
Beginning inventory 20,000 30,000
Paints purchased 1,00,000 1,70,000
Paints available for sales 1,20,000 2,00,000
Net sales for the year 1,60,000
Ending inventory retail 40,000
You are required to estimate the cost of inventory as on 31 st December, 2022 using retail method

(b) Standard cost method: This method is used when there is frequent change in the price per unit of the goods and
goods are purchased frequently by the business e.g. crude oil. Based on the experience a standard cost is determined
on the basis of frequent changes in prices and inventory is valued on that price per unit.

Important note :
Inventories are usually written down to net realisable value on an item- by-item basis.

Question 3. The company deals in three products, A, Band C, which are neither similar nor interchangeable. At the time
of closing of its account for the -year 2002-03. The Historical Cost and net realisable value of the items of closing stock are
determined as follows:
Items Historical Cost Net Realisable Value
(Rs. in lakhs) (Rs. in lakhs)
A 40 28
B 32 32
C 16 24
What will be the value of Closing Stock? [May 2004, 4 marks]

Question 4. X ltd has stock of 100 kg of shampoo. Standard cost per kg Rs 40. Calculate cost of stock.

Question 5. Y ltd has stock of 500 pkd of shampoo. Retail price/pkd Rs 90. G.P. Rate 20%. Calculate cost of stock.

Question 6. Rashika ltd produces PEPSI. In the month of April, it produces 1,00,000 pkd of PEPSI . Following expenses
were incurred during the month of April:
Direct material = 8,00,000
Direct labour = 2,00,000
Indirect material( e.g. bottle) = 1,00,000( variable factory overhead)
Fixed production overhead = 2,50,000
Transport cost to stores = 50,000
Assume normal production capacity = 1,20,000 pkd.
Calculate cost per unit.

Question:7 The cost structure per kilogram of finished product is given below:
Material cost Rs. 100 per kg
Direct labour cost Rs. 20 per kg
Direct variable production overhead Rs. 10 per kg
Fixed production charges for the year on normal capacity of 1,00,000 kgs is Rs. 10 per kg. 2,000 kgs of finished goods are
in stock at the year end. How do you value the quantity in stock as per AS-2.

Question: 8 The Aroma Flour Mills Ltd. does not maintain a perpetual inventory of wheat which it buys and issues to the
mills. The physical inventory taken on 28th February, 2022 shows the following quantity of wheat on hand.
10 tonnes @ Rs. 420 per tonne.

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The purchases during March were as under:

10-3-2000 100 tonnes @ Rs. 425 per tonne.
20-3-2000 50 tonnes @ Rs. 450 per tonne.
30-3-2000 10 tonnes @ Rs. 460 per tonne.

A physical inventory taken on 31st March, 2022 shows a stock of 15 tonnes of wheat in hand. Compute the inventory value
on 31st March, 2022 by FIFO method. (ICAI Study material)

Question:9 .Sonar Bhandar deals in old colour TVs. It has 4 TVs the particulars of which are given below :
You are asked to compute the value of stock to be included, in Balance Sheet for the year ended 31 stMarch 2009:

TVs Onida Philips EC Sony Total

Rs. Rs. Rs. Rs. Rs.
Cost Price 10,000 20,000 35,000 50,000 1,15,000
(freight incurred to bring 3,000 2,000 5,000 10,000
into godown)
Net Realisable Value 18,000 30,000 36,000 55,000 1,39,000

Question: 10. Value of opening stock =Rs. 70,000

Purchases = Rs. 3,40,000
Manufacturing expense = Rs. 20,000
Gross Profit Margin = 25% on cost.
Selling expense = Rs. 10,000
Sales (Net) = Rs. 5,00,000
Calculate (i) Closing stock
(ii) Cost of goods available for sale
(iii) Cost of goods sold.
(iv) Net profit.

Question: 11. Purchases = Rs. 3,00,000

Manufacturing expenses = Rs. 40,000
Sales = 33 1/3 % above cost
Opening Stock = Rs. 40,000
Sales (Net) = 4,50,000
Sales return = Rs. 20,000
Calculate Closing stock and gross sales.

Question: 12.
1, April, 2022
Opening stock = 100 Kg @ Rs. 20
Date Purchases Issue Rate
4 April 200 Kg Rs. 21
7 April 300 Kg Rs. 18
10 April --- 150 Kg ---
12 April 100 Kg --- Rs.22
15 April --- 250 Kg ---
18 April 400kg --- Rs. 20
20 April 100Kg --- Rs. 15
22 April Goods returned to suppliers from the lot purchased on 20th April
25 April --- 400 Kg ---
28 April Shortage of 50 Kg
30 April 150 Kg --- 17

CALCULATE
Value of Closing stock
Cost of goods available for sale
Cost of goods sold
Profit earned if total sales is Rs. 2,00,000

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Under:
(a) FIFO
(b) Weighted Average method
Following perpetual system of recording .

Question 13. A Trader Prepared his accounts on 31st March, each year. Due to Some Unavoidable reasons, no stock taking
could be possible till 15th April, 2022 on which date the total cost of goods in his godown Came to ₹ 5,00,000. The Following
Facts were established between 31st March and 15th April, 2022.
(i) Sales ₹ 4,10,000 (Including Cash Sales ₹1,00,000)
(ii) Purchases ₹ 50,340 (Including Cash Purchases ₹ 19,900)
(iii) Sales Return ₹ 10,000.
Goods are sold by the trader at a profit of 20% on sales. You are required to ascertain the value of inventory as on 31st
March,2022. (ICAI Study material)

Answer: Statement of Valuation of Stock on 31st March,2022

Particulars ₹ ₹
Valuation of Stock as on 15th April, 2022 5,00,000
Add: Cost of Sales during the period from 31st March,2022 to
15th April,2022.
Sales (₹ 4,10,000-₹ 10,000) 4,00,000
Less: Gross Profit (20% of ₹ 4,00,000) 80,000 3,20,000
8,20,000
Less: Purchase during the period from 31-3-22 to 15-4-22. 50,340

Value of inventory as on 31-3-2022 7,69,660

Question 14. M/s X, Y and Z are in retail business, following information are obtained from their records for the year
ended 31st March, 2022:
Goods received from suppliers
(Subject to trade discount and taxes) ₹ 15,75,500
Trade discount 3% and sales tax 11%
Packaging and transportation charges ₹ 87,500
Sales during the year ₹ 22,45,500
Sales price of closing inventories ₹ 2,35,000

Find out the historical cost of inventories using adjusted selling price method. (ICAI Study material)

Solution
Determination of cost of purchases:
Goods received from suppliers ₹ 15,75,500
Less: Trade discount 3% ₹ (47,265)
₹ 15,28,235
Add: Sales Tax 11% ₹ 1,68,106
₹ 16,96,341
Add: Packaging and transportation charges ₹ 87,500
₹ 17,83,841
Determination of estimated gross profit margin:
Sales during the year ₹ 22,45,500
Closing inventory at the selling price ₹ 2,35,000
₹ 24,80,500
Less: Purchases ₹ (17,83,841)
Gross profit ₹ 6,96,659
Gross profit margin ₹ 28.09%
Inventory valuation:
Selling price of closing inventories ₹ 2,35,000
Less: Gross profit margin 28.09% ₹ (66,012)
₹ 1,68,988

Question 15. From the following particulars ascertain the value of Inventories as on 31st March, 2022:
₹

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Inventory as on 1.4.2021 1,42,500

Purchases 7,62,500
Manufacturing Expenses 1,50,000
Selling Expenses 60,500
Administrative Expenses 30,000
Financial Charges 21,500
Sales 12,45,000

At the time of valuing inventory as on 31st March, 2022, a sum of ₹ 17,500 was written off on a particular item, which was
originally purchased for ₹ 50,000 and was sold during the year for ₹ 45,000. Barring the transaction relating to this item,
the gross profit earned during the year was 20 percent on sales. (ICAI Study material)

Solution
Statement of Inventory in trade as on 31st March, 2022
₹ ₹
Inventory as on 1st April, 2021 1,42,500
Less: Book value of abnormal inventory (₹ 50,000 – ₹ 17,500) 32,500 1,10,000
Add: Purchases 7,62,500
Manufacturing Expenses 1,50,000

Less: Cost of goods sold:

Sales as per books 12,45,000 10,22,500
Less: Sales of abnormal item 45,000
12,00,000
Less: Gross Profit @ 20% 2,40,000
9,60,000
Inventory in trade as on 31st March, 2022 62,500

Question 16. Inventory taking for the year ended 31st March, 2022 was completed by 10th April 2022, the valuation of
which showed an inventory figure of ₹ 16,75,000 at cost as on the completion date. After the end of the accounting year
and till the date of completion of inventory taking, sales for the next year were made for ₹ 68,750, profit margin being
33.33 percent on cost. Purchases for the next year included in the inventory amounted to ₹ 90,000 at cost less trade
discount 10 percent.

During this period, goods were added to inventory at the mark up price of ₹ 3,000 in respect of sales returns. After
inventory taking it was found that there were certain very old slow-moving items costing ₹ 11,250, which should be taken
at ₹ 5,250 to ensure disposal to an interested customer. Due to heavy flood, certain goods costing ₹ 15,500 were received
from the supplier beyond the delivery date of customer. As a result, the customer refused to take delivery and net realizable
value of the goods was estimated to be ₹ 12,500 on 31 st March. Compute the value of inventory for inclusion in the final
accounts for the year ended 30th March, 2022. (ICAI Study material)

Solution
Statement showing the valuation of Inventory as on 31st March, 2022
₹
Value of Inventory as on 10th April 16,75,000
Add: Cost of goods sold after 31st March till Inventory taking 51,560
(₹ 68,750 – ₹ 17,190)
Less: Purchases for the next period (net) (81,000)
Less: Cost of Sales Returns (2,250)
Less: Loss on revaluation of slow-moving inventories (6,000)
Less: Reduction in value on account of default (3,000)

Value of Inventory on 31st March 16,34,310

Note: Profit margin of 33.33 percent on cost means 25 percent on sales price.

Question 17. The following are the details of a spare part of Sriram Mills:

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1-1-2022 Opening Inventory Nil

1-1-2022 Purchases 100 units @ ₹ 30 per unit
15-1-2022 Issued for consumption 50 units
1-2-2022 Purchases 200 units @ ₹ 40 per unit
15-2-2022 Issued for consumption 100 units
20-2-2022 Issued for consumption 100 units

Find out the value of Inventory as on 31-3-2022 if the company follows Weighted Average basis. (ICAI Study material)

Solution Weighted Average Basis

Calculation of the value of inventory as on 31-3-2022
Receipts Issues Balance
Date Units Rate Amount Units Rate Amount Units Rate Amount
₹ ₹ ₹ ₹ ₹ ₹
1-1-2022 Balance Nil
1-1-2022 100 30 3,000 100 30 3,000
15-1-2022 50 30 1,500 50 30 1,500
1-2-2022 200 40 8,000 250 38 9,500
15-2-2022 100 38 3,800 150 38 5,700
20-2-2022 100 38 3,800 50 38 1,900

Therefore, the value of Inventory as on 31-3-2022 = 50 units @ ₹ 38 = ₹ 1,900

Question 18. X who was closing his books on 31.3.2022 failed to take the actual stock which he did only on 9th April,
2022, when it was ascertained by him to be worth ₹ 2,50,000.
It was found that sales are entered in the sales book on the same day of dispatch and return inwards in the returns book as
and when the goods are received back. Purchases are entered in the purchases day book once the invoices are received.
It was found that sales between 31.3.2022 and 9.4.2022 as per the sales day book are ₹ 17,200. Purchases between
31.3.2022 and 9.4.2022 as per purchases day book are ₹ 1,200, out of these goods amounting to ₹ 500 were not received
until after the stock was taken.
Goods invoiced during the month of March, 2022 but goods received only on 4th April, 2022 amounted to ₹ 1,000. Rate of
gross profit is 33-1/3% on cost. Ascertain the value of physical stock as on 31.3.2022. (ICAI Study material)

Solution Statement of Valuation of Physical Stock as on 31 st March, 2022

₹ ₹
Value of stock as on 9th April, 2022 2,50,000
Add: Cost of sales during the intervening period
Sales made between 31.32022 and 9.4.2022 17,200
Less: Gross profit @25% on sales (4,300) 12,900

Less: Purchases actually received during the intervening period: 2,62,900

Purchases from 1.4.2022 to 9.4.2022 1,200

Less: Goods not received upto 9.4.2022 (500) 700

2,62,200
Less: Purchases during March, 2022 received on 4.4.2022
1,000
Value of physical stock as on 31.3.2022
2,61,200

Question 19. The Profit and loss account of Hanuman showed a net profit of ₹ 6,00,000, after considering the closing
stock of ₹ 3,75,000 on 31st March, 2022. Subsequently the following information was obtained from scrutiny of the
books:

(i) Purchases for the year included ₹ 15,000 paid for new electric fittings for the shop.
(ii) Hanuman gave away goods valued at ₹ 40,000 as free samples for which no entry was made in the books of

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accounts.
(iii) Invoices for goods amounting to ₹ 2,50,000 have been entered on 27th March, 2022, but the goods were not
included in stock.
(iv) In March, 2022 goods of ₹ 2,00,000 sold and delivered were taken in the sales for April, 2022.
(v) Goods costing ₹ 75,000 were sent on sale or return in March, 2022 at a margin of profit of 33-1/3% on cost.
Though approval was given in April, 2022 these were taken as sales for March, 2022.
Calculate the value of stock on 31st March, 2022 and the adjusted net profit for the year ended on that date.
(ICAI Study material)
Solution Profit and Loss Adjustment Account
Dr. Cr.
(₹) (₹)
To Advertisement (samples) 40,000 By Net profit 6,00,000
To Sales (goods approved in April to be By Electric fittings 15,000
taken as April sales: 7,500 + 2,500) 1,00,000 By Samples 40,000
To Adjusted net profit 10,40,000 By Stock (purchases of March not 2,50,000
included in Stock)
By Sales (goods sold in March wrongly 2,00,000
taken as April sales)
By Stock (goods sent on approval basis 75,000
not included in stock)
11,80,000 11,80,000

Calculation of value of inventory on 31st March, 2022

₹
Stock on 31st March, 2022 (given) 3,75,000
Add: Purchases of March, 2022 not included in the stock 2,50,000
Goods lying with customers on approval basis 75,000
7,00,000

Question 20. Physical verification of stock in a business was done on 23rd June, 2022. The value of the stock was ₹
48,00,000. The following transactions took place between 23rd June to 30th June, 2022:
(i) Out of the goods sent on consignment, goods at cost worth ₹ 2,40,000 were unsold.
(ii) Purchases of ₹ 4,00,000 were made out of which goods worth ₹ 1,60,000 were delivered on 5th July, 2022.
(iii) Sales were ₹ 13,60,000, which include goods worth ₹ 3,20,000 sent on approval. Half of these goods were
returned before 30th June, 2022, but no information is available regarding the remaining goods.
(iv) Goods are sold at cost plus 25%. However, goods costing ₹ 2,40,000 had been sold for ₹ 1,20,000.

Determine the value of stock on 30th June, 2022. (ICAI Study material)

Solution
Statement of Valuation of Stock on 30th June, 2022
Value of stock as on 23rd June, 2022 48,00,000
Add: Unsold stock out of the goods sent on consignment 2,40,000
Purchases during the period from 23rd June, 2022 to 30th June,2022 2,40,000
Goods in transit on 30th June, 2022 1,60,000
Cost of goods sent on approval basis (80% of ₹ 1,60,000) 1,28,000
7,68,000

55,68,000
Less: Cost of sales during the period from 23rd June, 2022 to 30th June, 2022
Sales (₹ 13,60,000 – ₹ 1,60,000) 12,00,000
Less: Gross profit 96,000
11,04,000
Value of stock as on 30th June, 2022 44,64,000

Working Notes:

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1. Calculation of normal sales:

Actual sales 13,60,000
Less: Abnormal sales
Return of goods sent on approval 1,20,000
1,60,000 2,80,000
10,80,000
2. Calculation of gross profit:
Gross profit or normal sales 20/100 x ₹ 10,80,000 2,16,000
Less: Loss on sale of particular (abnormal) goods (₹ 2,40,000 – ₹ 1,20,000) 1,20,000
96,000

Question 21. State whether following statements are true or false:

i. Inventories are stocks of goods and materials that are maintained for mainly the purpose of revenue generation.
ii. A building is considered inventory in a construction business.
iii. Inventory is valued as carrying cost less percentage decreases.
iv. Management has daily information about the quantity and valuation of closing stock under physical Inventory System.
v. Periodic Inventory System is more suitable for small enterprises.
vi. When closing inventory is overstated, net income for the accounting period will be understated.
vii. Closing inventory = Opening inventory + Purchases + Direct expenses + Cost of goods sold.
viii. Cost of inventories should comprise all cost of purchase.
ix. Costs of conversion of inventories include costs directly related to the units of production. They include allocation of
fixed overheads only.
x. Abnormal amounts of wasted materials, labour or other production overheads expenses are included in the costs of
inventories.
xi. Perpetual system requires closure of business for counting of inventory.
xii. Periodic inventory system is a method of ascertaining inventory by taking an actual physical count.
xiii. The value of ending inventory under simple average price method is realistic as compare to LIFO.
xiv. The value of stock is shown on the assets side of the balance-sheet as fixed assets.
xv. Under inflationary conditions, FIFO will not show lowest value of cost of goods sold.
xvi. Under LIFO, valuation of inventory is based on the assumption that costs are charged against revenue in the order in
which they occur.
xvii. Valuation of inventory, at cost or net realisable value, whichever less, is based on the principle of Conservatism.
xviii. Finished goods are normally valued at cost or market price whichever is higher.

Answer :
i. True: Inventories refers to stocks of goods and materials that are maintained in business for revenue generation.
ii. True: For a construction business a building under construction will be inventory. The building is being built in the
normal course of business and will eventually be sold as inventory.
iii. False: Inventory is valued at lower of cost or net realizable value.
iv. False: Under Perpetual Inventory System management have daily information of closing stock.
v. True: A periodic inventory system is suitable to small and micro enterprises, where physical counting of inventory is
not a tedious process.
vi. False: When closing inventory is overstated, net income for the accounting period will be overstated.
vii. False: Closing stock = Cost of goods sold - (Opening inventory + Purchases + Direct expenses).
viii. False: Cost of inventories should comprise all cost of purchase, costs of conversion and other costs incurred in
bringing the inventories to their present location and condition.
ix.False: Costs of conversion of inventories include costs directly related to the units of production. They also include a
systematic allocation of fixed and variable overheads as well.
x.False: Abnormal amounts of wasted materials, labour or other production overheads expenses are generally not included
in the costs of inventories.
xi. False: Periodic system requires closure of business for counting of inventory.
xii. True: Under Periodic inventory system actual physical count of inventory is taken of all the inventory on hand at a
particular date.
xiii. True: Value of Closing stock as per average method is more realistic then LIFO.
xiv. False: The value of stock is shown on the assets side of the balance-sheet as current assets. As it is realisable within 12
months.
xv. False: Under inflationary conditions, LIFO and weighted average will not show lowest value of cost of goods sold.
xvi. False: Under FIFO, valuation of inventory is based on the assumption that costs are charged against revenue in the
order in which they occur.
xvii.True: The conservatism concept states that one shall not account for anticipated profits but shall provide all
prospective losses. Valuing inventory at cost or net realisable value whichever is less, therefore is based on principle of
Conservatism.
xviii. False: Finished goods are normally valued at cost or market price whichever is lower.

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CHAPTER 5: CONCEPT AND ACCOUNTING OF DEPRECIATION

What do you mean by depreciation? Why depreciation is charged ?
Property, plant and equipment are tangible items that:
(a) are held for use in the production or supply of goods or services, for rental to others, or for administrative
purposes; and
(b) are expected to be used during more than a period of twelve months.

These are also called fixed assets in common parlance. When a fixed asset is purchased, it is recorded in books of account
at it original or acquisition/purchase cost. However fixed assets are used to earn revenues for a number of accounting
periods in future with the same acquisition cost until the concerned fixed asset is sold or discarded. It is therefore necessary
that a part of the acquisition cost of the fixed assets is treated or allocated as an expense in each of the accounting period in
which the asset is utilized. The amount or value of fixed assets allocated in such manner to respective accounting period is
called depreciation. Value of such assets decreases with passage of time mainly due to following reasons:

i. Wear and tear due to its use in business

ii.Efflux of time even when it is not being used
iii.Obsolescence due to technological or other changes
iv. Decrease in market value
v. Depletion mainly in case of mines and other natural reserves

It is important to account for value of portion of property, plant and equipment utilized for generating revenue during an
accounting year to ascertain true income. This portion of cost of Property, Plant & Equipment allocated to an accounting
year is called depreciation.

As per Schedule II under the Companies Act, 2013, Depreciation is the systematic allocation of the depreciable
amount of an asset over its useful life.

There are 3 important factors for computing depreciation:

(i) Estimated useful life of the asset
(ii) Cost of the asset
(iii) Residual value of the asset at the end of the of its estimated useful life.

Note 1. Depreciation of an asset begins when it is available for use, i.e., when it is in the location and condition
necessary for it to be capable of operating in the manner intended by management. Thus it is not necessary that an asset
must be used to be depreciated. There is decrease in value of assets due to normal wear and tear even when these are not
physically used. Accordingly, value of such wear and tear should be estimated and accounted for.

Note 2. The total cost of the asset is reflected in form of a) Expired cost (depreciation) and b) Unexpired Cost which
shall be the written down value of the asset being reflected in balance sheet. Also charging depreciation every year reduces
the distributable profits and hence ensuring the availability of funds whenever the replacement is required.

Note 3. The cost of an asset used for purpose of business has to be written off over its economic (not physical) life which
must be estimated.

Note 4. Depreciation on component of the asset: It may be noted that Accounting Standards as well as the Companies
Act, 2013 requires depreciation to be charged on a component basis. Each part of an item of Property, Plant and Equipment
with a cost that is significant in relation to the total cost of the item should be depreciated separately.

An enterprise should allocate the amount initially recognised in respect of an item of property, plant and equipment to its
significant parts/components and should depreciate each such part separately based on the useful life and residual value of
each particular component. For Example- Aircraft is a classic example of such an asset. The airframe (i.e. the body of the
aircraft), the engines and the interiors have different individual useful lives. If the life of the airframe (being the longest of
the individual lives of the three major types of components) is taken as the life of the aircraft, it is important that other two
major components i.e. engine and interiors are depreciated over their respective useful life and not over the life of airframe.
Other components (usually small and low value) which will require replacement very frequently may be depreciated over
the useful life of airframe and their frequent replacement cost may be charged to expense as and when it is incurred.

Here it is important to note that a part of Property, Plant & Equipment to be identified as a separate component should have
both:
(i) significant cost when compared to overall cost of item of property, plant and equipment and
(ii) estimated useful life or depreciation method different from rest of the parts of the property plant and equipment.

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A significant part of an item of property, plant and equipment may have a useful life and a depreciation method that are the
same as the useful life and the depreciation method of another significant part of that same item. Such parts may be
grouped in determining the depreciation charge.

Objective for providing Depreciation:- Prime objectives for providing Depreciation are:-
(1) Correct Income Measurement: - Depreciation should be charged for proper estimation of periodic Profit or Loss.
(2) True position statement: - Depreciation should be charged to know actual financial position.
(3) Funds For replacement: - Charging depreciation help to General adequate fund in the hand of business
for replacement of asset at the end of its useful life.
(4) Determine True Cost of production:- For determining true Cost of production, it is necessary to charge
depreciation since it’s a item of cost.

Factors affecting the amount of depreciation Measurement:- Following factors require to be considered
for calculating depreciation.
(1) Cost of assets
(2) Estimated useful life of asset.
(3) Estimated scrap value (if any) at the end of useful life of asset.

(1) Cost of property plant and equipment (Fixed assets):-

(a) Purchase price of assets including non-refundable import duties and purchase taxes, after deducting trade
discounts and rebates.
(b) Any cost directly attributable to bring the asset to the location and condition necessary for it to be capable
of operating in a manner intended by the enterprise.
(c) The initial estimate of the costs of dismantling, removing the item and restoring the site on which asset is located.

Examples of costs directly attributable to costs are:

(a) Cost of employees benefits arising directly from acquisition or construction of an item of property, plant and
equipment.
(b) Cost of site preparation
(c) Initial delivery and handling costs
(d) Installation and assembly costs
(e) Cost of testing whether the asset is functioning properly.
(f) Professional fees e.g. engineers hired etc.

Following expenses should not become part of the cost of asset:

(a) Cost of opening new facility or business, such as inauguration costs,
(b) Cost of introducing new product or service( for eg cost of advertisement or promotional activities)
(c) Cost of conducting business in a new location or with new class of customers( including cost of staff training)
(d) Administration and other general overheads costs.

2. Useful life:-The period over which depreciable assets is expected to be used by enterprises. The total number
of units expected to be produced or obtained from use of asset of enterprises.

3. Scrap value:- Determination of scrap value is matter of estimation based on many factors. If its value is not
significant then it is not considered, if its value is significant its value is considered for charging depreciation at the time
of acquisition/installation or at the time of subsequent revaluation of assets.

Method of Providing Depreciation :- there are mainly three methods of charging depreciation as per AS 10.

1. Straight Line Method:- According to this method, an equal amount is written off every year during the working
life of an asset so as to reduce the cost of the asset to nil or its residual value at the end of its useful life. The
advantage of this method is that it is simple to apply and gives accurate results.This method is also known as fixed
Installment method /Original cost method. Lease holds property generally depreciated by fixed installment
method.

Cost of Assets-Scrap value

Straight Line Depreciation = ------------------------------------------
Useful life.
Reducing Balance Method/ diminishing value method/ WDV method:-- Under this system, a fixed percentage of the
diminishing value of the asset is written off each year so as to reduce the asset to its residual value at the end of its life.

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Repairs and small renewals are charged to revenue. This method is commonly used for plant, fixtures, etc. Under this
method, the annual charge for depreciation decreases from year to year.

This method is based on the assumption that cost of repairs will increase as the asset get old, therefore, depreciation in
earlier years should be high when the repair cost is expected to be low and depreciation in later years should be low when
the repair cost is expected to be high. Therefore, this method will result in almost equal burden in all the years of use of the
asset.

The rate of depreciation under this method may be determined as follow:

𝑛 𝑟𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒
1− √ × 100
𝑐𝑜𝑠𝑡 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡𝑠
where, n = useful life

3. Unit of production method- In this method depreciation is charged on the basis of expected use or unit of
production.

CHANGE IN METHOD OF DEPRECIATION: According to AS 10 issued by ICAI, the depreciation method selected should
be applied consistently,to provide comparability of the results of operations of the enterprise from period to period.
➢
A change from one method of providing depreciation to another method should be treated as change in
accounting estimate.
➢
When such a change in the method of depreciation should apply on all assets existing in the group
with prospective effect only.

Revision of estimated useful life of the asset:

The residual value and the useful life of an asset should be reviewed at least at each financial year-end and, if expectations
differ from previous estimates, the change(s) should be accounted for as a change in an accounting estimate in accordance
with Accounting Standards.
Whenever there is a revision in the estimated useful life of the asset, the written down value or the balance depreciable
amount should be charged over the revised remaining estimated useful life of the asset.

Revaluation of property, plant and equipment:

i. After recognizing an asset initially, the asset whose fair value could be reliably measured should be carried at the
revalued amount, being the fair value at revaluation date and reduced by successively accumulated depreciation and
successive accumulated impairment losses (permanent decline in value) (if any).

ii. Revaluations must be made at adequate intervals (say yearly) for ensuring that carrying amount doesn’t differ
substantially from that which would be determined if fair value at end of the reporting period is used.

iii. In case an item of PPE is revalued, whole class of such PPE to which such asset belongs should be revalued

iv. In case the carrying amount of an asset increases due to revaluation, such increase should be credited to revaluation
surplus and should be accumulated in equity. However, such increase should be recognized in Profit and Loss statement to
the extent of reversal of a previous decrease of that asset that was recognized in the Profit and Loss account.

v. In case the carrying amount of an asset is decreased due to revaluation, such decrease should be recognized in the Profit
and Loss account. However, such decrease should be debited to the revaluation surplus to the extent of reversal of a
previous increase that was recognized in revaluation surplus for that asset.

CONCEPT BASED QUESTIONS:

Question 1: On 1st October,2022, COC Ltd purchased a building on Hire purchase basis, Payable Rs. 2,00,000 as down
and balance in three instalments of Rs. 2,00,000, 1,50,000 and 1,00,000 respectively. The above instalments include Rs.
40,000, Rs. 30,000 and Rs. 20,000 as interest. Calculate the price at which the building will be recorded in the books of
account. Make journal entry for purchase of asset and charging depreciation by 10% p.a. by SLM for the year ended on 31 st
March 2023.

Question 2: On 1st July 2022, X Ltd. purchased a machine for Rs. 2,00,000. On 1 st September 2022 it was put to use
(installed) and incurred Rs. 25,000 on its installation. But the actual use started on 1 November 2022. Calculate
deprecation for 2022-23 and 2023-24. Rate of depreciation 10% p.a. on written down value.

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Question 3: On 1st April 2021, COC EDUCATION Pvt ltd purchased a machine for Rs. 2,00,000. On 1 st October 2021, a
new machine was purchased for Rs. 1,00,000. On 1 st April 2022, Company purchased another machine for Rs. 50,000 and on
the same date first machine was sold for Rs. 1,10,000. On 31 st March.2023, a new machine was purchased for Rs. 1,50,000.
On 1st May 2023, Second machine became obsolete and sold for Rs. 30,000. Prepare machinery A/c for 2021-22,2022-23 and
2023-24. Rate of deprecation 10% p.a. on WDV. Accounts are closed on 31 st March every Year.

Question 4: COC Ltd purchased on 1 April 2020 a machine for Rs. 2,40,000 and spent Rs 10,000 on its installation. On 1
October 2020, a new machine costing Rs 3,00,000 was purchased. On 1 July 2021, a new machine was purchased for Rs.
1,00,000. On 1 October 2021, first machine became obsolete and sold for Rs 60,000. On the same day company
purchased a new machine for Rs 1,50,000.
Depreciation was provided annually on 31st March @ 10% p.a. on the original cost of asset. On 31st March
2023, however, the company changed the method of providing depreciation and adopted the method of writing
off 15% on the written down value. Prepare machinery a/c as it would stand at the end of each year from 2020-
21 to 2023-24.

Question 5: X ltd purchased on 1 April 2020 a machine for Rs. 3,60,000. It was installed (put to use) on 1 July 2020 and
incurred Rs 40,000 as installation charge. On 1 February 2021 company purchased another machine for Rs. 2,00,000 and
paid Rs. 40,000 on its registration and Rs 10,000 as commission. On 31 December 2021 a second hand machine costing Rs
5,00,000 was purchased and incurred Rs 50,000 on its repair.

During 2022, on 1 April first machine became obsolete and auctioned it for Rs 80,000 and paid 10% commission on its
sale. On the same date a new machine costing Rs 2,40,000 was purchased .
On 31st December 2024, company decided to change the method of charging depreciation from WDV @ 10% to SLM.
Prepare machinery A/C from 2020 to 2024 assuming that accounts are closed each year on 31 December.
( HUM MEIN HAI DUM)

Question 6: (Provision for depreciation) On 1st April, 2021, X Ltd purchased a machine for Rs. 1,00,000. On 1 st October
2022 a new machine was purchased for Rs 250,000. On 1st April, 2024, first machine became obsolete and sold for Rs.
20,000. Depreciation is charged @ 10% p.a. on WDV. Prepare machine A/c, provision for depreciation A/c for 4 years.
Accounts are closed on 31st March every year.

Question 7: On 1st April 2020 a firm purchased machinery for 2,00,000. On 1 st October in the same accounting year, additional
machinery costing Rs. 1,00,000 was purchased. On 1 st October 2021, the machinery purchased on 1st April, 2020 having become
obsolete, was sold for Rs. 90,000. On 1st October 2022, new machinery was purchased for Rs.2,50,000 while the machinery
purchased on 1st October 2020 was sold for Rs. 85,000 on the same day.

The firm provides depreciation on its machinery @ 10% per annum on original cost on 31 st March every year. Show machinery
Account, Provision for Depreciation Account for the Period of three years ending 31 st March, 2023.

Question 8: The Machinery Account of a Factory showed a balance of ₹ 19,00,000 on 1st January, 2019. Its accounts were
made up on 31st December each year and depreciation are written off at 10% p.a. under the Diminishing Balance Method.
On 1st June 2019, a new machinery was acquired at a cost of ₹ 2,80,000 and installation charges incurred in erecting the
machine works out to ₹ 8,920 on the same date. On 1st June, 2019 a machine which had cost ₹ 4,37,400 on 1st January
2017 was sold for ₹ 75,000. Another machine which had cost ₹ 4,37,000 on 1st January, 2018 was scrapped on the same
date and it realised nothing.
Write a plant and machinery account for the year 2019, allowing the same rate of depreciation as in the past calculating
depreciation to the nearest multiple of a Rupee. (ICAI Study material)
Solution
Plant And machinery Account
₹ ₹
2019 2019
Jan. 1 To Balance b/d 19,00,000 June 1 By Bank (Sales) 75,000
June. 1 To Bank (2,80,000 + 2,88,920 By Depreciation 14,762
8,920) (On sold machine)
By Loss on sale 2,64,532
By Loss on scrapping the 3,76,912
machine
By Depreciation (on 16,388
scrapped machinery)
By Depreciation (Note iii) 1,32,094
By Balance c/d 13,09,232
21,88,920 21,88,920

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Working Note:
(i) Calculation of loss on sale of machine on 1-6-2019
₹
Cost on 1-1-2017 4,37,400
Less: Depreciation @ 10% on ₹ 4,37,400 (43,740)
W.D.V. on 31-12-2017 3,93,660
Less: Depreciation @ 10% on ₹ 3,93,660 (39,366)
W.D.V. on 31-12-2018 3,54,294
Less: Depreciation @ 10% on ₹ 3,54,294 for 5 months (14,762)
3,39,532
Less: Sale proceeds on 1-6-2019 (75,000)
Loss 2,64,532
(ii) Calculation of loss on scrapped machine
₹
Cost on 1-1-2018 4,37,000
Less: Depreciation @ 10% on ₹ 4,37,000 (43,700)
W.D.V. on 1-1-2019 3,93,300
Less: Depreciation @ 10% on ₹ 3,93,300 for 5 months (16,388)
Loss 3,76,912
(iii) Depreciation
Balance of machinery account on 1-1-2019 19,00,000
Less: W.D.V of machinery sold 3,54,294
W.D.V. of machinery scrapped 3,93,300 (7,47,594)
W.D.V. of other machinery on 1-1-2019 11,52,406
Depreciation @ 10% on ₹ 11,52,406 for 12 months 1,15,240
Depreciation @ 10% on ₹ 2,88,920 for 7 months 16,854
1,32,094

Question 9:(Concept of change of method of Depreciation with provision for depreciation) On 1 April 2021, X ltd
purchased a machine for Rs 2,00,000. On 1 January 2022, company purchased another machine for Rs. 1,20,000. On 1
October 2022, a new machine costing Rs 80,000 was purchased. On 1 January 2023, company sold its first machine for Rs
45,000. On 31 March 2024, company decided to change the method of depreciation from SLM @10% to WDV. Prepare
machinery A/C and provision for Depreciation and machinery sold account.

Question 10: On 1 July 2020, A Ltd. Purchases second-hand machinery for Rs. 60,000 and spent Rs. 9,000 on
reconditioning and installing it. On January 1, 2021 the firm purchases new machinery worth Rs. 36,000. On June 30,
2022, the machinery purchased on January 1, 2021 was sold for Rs. 24,000 and on July 1, 2022 fresh plant was installed.
Payment for this plant was to be made as follows:

July 1,2022 15,000

June 30,2023 19,800
June30, 2024 17,400
Payment in 2023 and 2024 include interest of Rs. 4,800 and Rs. 2,400 respectively. The company writes off 10 % on
the original Cost. The accounts are closed every year on 31st March. Show the Machinery Account for 3 years
ending 31st March. 2023. (CA FOUNDATION.)

Question 11: X Co. Ltd. has plant and machinery which on 1st Jan. 2022 was entered in the ledger under two separate
account viz. Machinery Rs. 1,28,600 and Provision for Depreciation of Machinery Rs. 72,520. The company maintains a
machinery register showing full details. Depreciation is being charged @ 10% p.a. on cost.

On 30.6.22 it was decided to stop operation of a section of the plant immediately and sell its machinery ; this had been
purchased on 1.1.2013 at a cost (including erection) of Rs. 12,000. It was sold on 15.12.2022 to Alfa Ltd. for Rs. 1,600
(ex-factory). The Cost of wages for dismantling was Rs. 100.

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New and more efficient machinery was purchased from Bita Ltd. on 1.8.2022 at a cost (including erection) of Rs.
20,000. This new machinery commenced operation on 1.10.22. Open machinery account,provision for depreciation on
machinery account and scraped machinery account.. ( Bas pyar ho gaya mujhe)

Question 12: P. Ltd. which depreciates its machinery at 10 % p.a. on Diminishing Balance Method, had on 1st January
2022 Rs.9,72,000 on the debit side of Machinery Account. During the year 2022, Machinery purchased on 1st January
2020 for Rs.80,000 was sold for Rs.45,000 on 1st July 2022 and a new machinery at a cost of Rs. 1,50,000 was purchased
and installed on the same date, installation charges being Rs. 8,000. The Company wanted to change the method of
depreciation from 31st December 2022. The rate of depreciation remains the same as before. Show Machinery Account.
(CA-FOUNDATION November -2004, CMA INTER 12 MARKS)

Question 13:The LG Transport company purchased 10 trucks at ₹ 45,00,000 each on 1st April 2016. On October 1st,
2018, one of the trucks is involved in an accident and is completely destroyed and ₹ 27,00,000 is received from the
insurance company in full settlement. On the same date another truck is purchased by the company for the sum of ₹
50,00,000. The company write off 20% on the original cost per annum. The company observe the calendar year as its
financial year.
Give the motor truck account for two year ending 31 Dec, 2019. (ICAI Study material)

Solution
Date Particulars Amount Date Particulars Amount
2018 2018
Jan-01 To balance b/d 2,92,50,000 Oct-01 By bank A/c 27,00,000
Oct-01 To Profit & Loss A/c Oct-01 By Depreciation on lost
(Profit on settlement of 4,50,000 assets 6,75,000
Truck) Oct-01 By Depreciation A/c 83,50,000
Oct-01 To Bank A/c 50,00,000 Dec-31 By balance c/d 2,29,75,000

3,47,00,000 3,47,00,000
2019 2019
Jan-01 To balance b/d 2,29,75,000 Dec-31 By Depreciation A/c 91,00,000
Dec-31 By balance c/d 1,38,75,000

2,29,75,000 2,29,75,000

Working Note:
1. Profit On settlement of truck
₹
Original cost as on 1.4.2016 45,00,000
Less: Depreciation for 2016 (6,75,000)
38,25,000
Less: Depreciation for 2017 (9,00,000)
29,25,000
Less: Depreciation for 2018 (9 months) (6,75,000)
22,50,000
Less: Amount received from Insurance company (27,00,000)
4,50,000

Question 14. A Machinery costing ₹ 20,00,000 is depreciated on straight line assuming 10 years working life and nil
salvage value for four years. At the end of the fourth year, the machinery was revalued upwards by ₹ 80,000. The
remaining useful life of the machinery was also reassessed as 8 years at the end of the fourth year. Calculate the
depreciation for 5th Year. (ICAI Study material)

Solution
Depreciation per year for first 4 years = ₹ 20,00,000 / 10 = ₹ 2,00,000
Thus, WDV of the Machinery at end of the 4th year = ₹ 20,00,000 – (₹ 2,00,000 x 4) = ₹ 12,00,000
Revalued Amount i.e., New Depreciable Amount shall be = ₹ 12,00,000 + ₹ 80,000 = ₹ 12,80,000
Original remining useful life is (10-4) = 6 Years whereas it is reassessed as 8 Years.
Hence, depreciation for 5th Year = ₹ 12,80,000 / 8 = ₹ 1,60,000

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Question 15:( provision for repairs and renewals) The following particulars are available from the books of a public
company having a large fleet of vehicles:

Balance in provision for repairs and renewals account as on 31.3.2016 Rs 11,50,000

Actual repairs charged/incurred during the year ended 31.3.2016 Rs 7,50,000

31.3.2017 Rs 3,20,000

The company makes an annual provision of Rs 4,00,000 on repairs and renewals. Draw up provision for repairs and
renewals account for the years 2015-16 and 2016-17.

Question 16: A firm’s plant and machinery account at 1 January,2015 and the corresponding depreciation
provision account, broken down by year of purchase are as follows:

Year of purchase Plant and machinery at cost Depreciation provision

1998 2,00,000 2,00,000
2004 3,00,000 3,00,000
2005 10,00,000 9,50,000
2006 7,00,000 5,95,000
2013 5,00,000 75,000
2014 3,00,000 15,000

30,00,000 21,35,000

Depreciation is at the rate of 10% per annum on cost. It is the company’s policy to assume that all purchases, sales or
disposal of plant occurred on 30 June in the relevant year for the purpose of calculating depreciation, irrespective of the
precise date on which these events occurred. During 2015 the following transactions took place:

1. Purchase of plant and machinery amounted to Rs 15,00,000

2. Plant that had been bought in 2004 for Rs 1,70,000 was scrapped.
3. Plant that had bought in 2005 for Rs 90,000 was sold for Rs 5,000.
4. Plant that had been bought in 2006 for Rs 2,40,000 was sold for Rs 15,000.

You are required to calculate the provision for depreciation on plant and machinery for the year ended 31
December 2015. In calculating this provision you should bear in mind that it is the company’s policy to show
any profit or loss on the sale or disposal of plant as a completely separate item in the profit and loss account.
You are also required to prepare the following ledger accounts during 2015.

(i) Plant and machinery account at cost

(ii) Depreciation provision account
(iii) Disposal of plant and machinery account. (ICAI Study material)

Question 17. M/s Anshul commenced business on 1.1. 2011, when they purchased plant and equipment for 7,00,000.
They adopted a policy of charging depreciation at 15% P.A. on diminishing balance basis and over the years, their
purchases of plant have been:
Date Amount
1.1.2012 1,50,000
1.1.2015 2,00,000
On 1.1.2015 it was decided to change the method and rate of depreciation to straight line basis. On this date remaining
useful life was assessed as 6 years for all the assets purchased before 1.1.2015 and 10 years for the assets purchased on
1.1.2015 with no scrap value. Prepare plant and equipment account for the year ended on 31 December 2015.
(ICAI Study material)
Question 18: Voltas Ltd. bought a truck on 1 January, 2000 for Rs. 60,000 and a sum of Rs. 20,000 was spent for
various accessories. On 1 July, 2001 another vehicle was purchased for Rs. 52,000. On 1 July 2002, the first truck was
sold for Rs. 60,000. On the same date, another truck was purchased for Rs. 50,000. On 1 July 2003, the second vehicle
was sold for Rs. 46,000. Rate of depreciation was 10% on the original cost annually on 31 December. In 2002 the
method of charging depreciation has changed to diminishing value method, on the balance existing on 31-12-2002 the
rate being 15%. p.a Prepare Truck Account for 2000, 2001, 2002 and 2003.

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Answer: Value of truck on 31 december 2000 Rs 72,000; Value of truck on 31 december 2001 Rs 113400 ; Value of
truck on 31 december 2002 Rs 88,240; profit on sale of truck on I july 2003 Rs 7,160; Value of truck on 31 december
2003 Rs 39,312.

Question 19:(Exchange and Loss By Accident) The following information is available from the records of Well Planned
Limited in respect of Motor Vehicles used by it in its business: Vehicle No. 1 was purchased for Rs. 20,000 on 1 January,
2022. It was sold for Rs. 2,000 on 1 July, 2025. Vehicle No. 2 was purchased on 1 July, 2022 for Rs. 18,000. Vehicle No. 3
was purchased on 1 January, 2024 for Rs. 12,000 and it was exchanged for a new vehicle No. 5 on January, 1 2026. The
cash price of the Vehicle No. 5 was Rs. 10,000 on that date. Vehicle No.4 was purchased on 1 July 2024 for Rs. 10,500. On
1 July, 2027 this vehicle met with an accident and was sold for Rs. 2,500. The company also received Rs. 1,500 from the
insurance company in full satisfaction of its claim.

Note: When a vehicle has been used for a part of the year, depreciation is calculated in proportion to such part only.
Required : A consolidated Motor Vehicle Account for the years 2022-27. Year ends on 31st December every year.
Depreciation is written off at the rate of 20% p.a. on the original cost. (HUM MEIN HAI DUM. AUR KISI KE BAS KI BAAT NAHI)

Other methods of depreciation

1. Sum of years of Digit Method.-- It is a variation of Reducing Balance method.

Formula for calculating Depreciation.

The number of years (including present year) of
remaining life of asset.
Original cost ─ scrap value -------------------------------------------------------
Total of all digit of life of assets (in years)

Question 20. cost of machine= 2,00,000

Scrap value of machine = 50,000
Estimated life of asset = 5 years
Calculate depreciation by sum of year’s digit method for the first year and 4th year.

Question 21. Cost of machine = 4,00,000

Scrap value of machine = 1,00,000
Estimated life of asset = 40 years.
Calculate depreciation by sum of years digit method for the first year and 40 th year.

2. Machine hour Method:-

- Under this method, depreciation is calculated on the basis of machine hour that machine worked.
- Machine hour rate of depreciation is calculated after estimating the total number of hours that machine
would work during its whole life.
- However total number of machine hour during its life may varied from time to time on consideration of
changes in economic and technological conditions, so in those circumstances we will adjust depreciation
accordingly.
- It is slight variation of straight line method.

Question 22:- machine was purchased for Rs. 3, 00,000 having an estimated total working hour of 24000 hours.
The scrap value is expected to be Rs. 20000 and anticipated pattern of distribution of effective hours is as
follows Year
1—3 3000 hour per year
4—6 2600 hour per year
7—10 1800 hour per year

Solution:- Annual depreciation under Machine hour Rate Method.

Year Annual Depreciation
3000
1—3 (300000-20000) x ----------- = Rs. 35000
24000

2600
4—6 (300000-20000) x----------- = Rs. 30333
24000

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1800
7—10 (300000-20000) x ----------- = Rs. 21000
24000

(3) Production Units Method:- Under this Method, depreciation is calculated; on the basis of production units
that machine will produce during its useful life.

Question 23: A Machine is purchased for Rs. 200000. Its estimated useful life is 10 years with a Residual value of
Rs. 20000. The Machine is expected to produce 1.5 lakh units during its life time. Expected production is as follows:

Year Production
1—3 20000 Units per year
4—7 15000 Units per year
8—10 10000 Units per year

Solution. 1to 3 year

Rs 24,000 ; 4 to 7 years Rs 18,000 ; 8 to 10 years Rs 12,000

(4) depletion method: Depletion is the allocation of the cost of wasting natural resources such as oil, gas, timber, and
minerals to the production process. This method is used in case of mines, quarries etc. containing only a certain quantity of
product. The depreciation rate is calculated by dividing the cost of the asset by the estimated quantity of product likely to
be available to be extracted. Annual depreciation will be the quantity extracted multiplied by the rate per unit.

Question 24:- M/S Rinku & Co. took lease of a quarry on 1-1-2021 for Rs. 100,00,000. As per technical estimate the
total quantity of mineral deposit is 2,00,000 tonnes. Depreciation was charged on the basis of depletion method.
Extraction Pattern is given on following table:
Year Quantity of Mineral Extracted
2021 2000 Tonnes
2022 10000 Tonnes
2023 15000 Tonnes
Show the Quarry Account and Depreciation Account for each year from 2021 to 2023

.
Solution Quarry lease Account
2021 2021 By Depreciation 100000
1Jan To Bank A/c 10000000 31Dec. 9900000
10000000 By Bal. c/d 10000000
2022
1Jan To Balance b/d 9900000 31Dec. By Depreciation 500000
9900000 2022 A/c 9400000
9900000
2023 To Balance b/d 9400000 2023 By Depreciation 750000
1Jan 9400000 31Dec. A/C 8650000
By Balance c/d 9400000

Depreciation Account
2021 2021
31Dec To Quarry Lease A/c 100000 31Dec By P & L A/c 100000
100000
2022 100000
31Dec To Quarry Lease A/c 500000 2022
500000 31Dec By P & L A/c 500000
2023 500000
31Dec To Quarry Lease A/c 750000 2023 By P & L A/c 750000
750000 31Dec 750000

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Question 25. MULTIPLE CHOICE QUESTIONS – PRACTICE SESSION 1

1. Depreciation refers to the process of ________________-

(a) Asset valuation
(b) Allocation of cost of the assets over the period of its life
(c) Verification of assets
(d) Increasing or decreasing the value of asset

2. In case the depreciable assets are revalued, the provision for depreciation is based on
(a) Market value of the assets
(b) Historical cost of assets
(c) Depreciated value of the assets
(d) The revalued amount over the estimate of the remaining useful life of such asset

3. Which of the following is the internal cause for depreciation?

(a) Wear and Tear
(b) Depletion or Exhaustion
(c) Both a & b
(d) None of the above

4. Which are the methods of depreciation prescribed by the income tax act __
(a) Straight line and annuity method
(b) Sinking fund and double declining method
(c)Equal installment and written down value method
(d) Production hour and sum of year’s digit method

5. Depreciation is not provided for which of the following asset?

(a) Goodwill (b) Land
(c) Inventory of goods (d) Both b & c

6. Obsolescence means decline in the value due to

(a) Physical wear and tear
(b) Efflux of time
(c) Fall in market price
(d) Innovations and inventions

7. The depreciation account is closed at the end of the year by transfer to the
(a) General reserve a/c (b) Profit and loss a/c (c) Provision for depreciation a/c (d) Fixed asset a/c

8. Which of the following is an external cause for depreciation?

(a) Obsolescence (b) Time element (c) Abnormal occurrences (d) All of the above

9. Amit Ltd. purchased a machine on 01.01.2013 for Rs 1,20,000. Installation expenses were Rs 10,000.
Residual value after 5 years Rs 5,000. On 01.07.2013, expenses for repairs were incurred to the extent of Rs
2,000. Depreciation is provided under straight line method.
Depreciation rate = 10%. Annual Depreciation =
(a). 13,000 (b). 17,000 (c). 21,000 (d). 25,000

10. Purchase price of machine 8,90,000, freight and cartage 7000, installation charges 30,000, Insurance charges 20,000,
residual value is 40,000, estimated useful life 5 years. Calculate the amount of annual depreciation under straight
line method?
(a) 177400
(b) 181400
(c) 197400
(d) 177900

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11. Depreciation of a ten-year lease is best done on the method

(a) WDV (b) SLM
(c) Annuity method (d) Both a & b
12. Original cost is 1,50,000 residual value is 10.000, depreciation for 3rd year @ 10% p.a. under
WDV method___
(a) 14,000 (b) 12,150
(c) 11,340 (d) 12,240

13. For charging depreciation, on which of the following assets, the depletion method is adopted?
(a) Plant & Machinery (b) Land & Building (c) Goodwill (d) Wasting assets like mines and quarries

14. The value of an asset after deducting depreciation from the historical cost is known as
(a) Fair value (b) Market value (c) Net realizable value (d) Book value

15. If the original cost of the machine = 1,00,000, life = 5 years residual value = 2,000. If the depreciation for 4th
year as per SLM is 19,600, then the rate of depreciation p.a. is
(a) 10% (b) 15% (c) 20% (Approx.) (d) 5%

16. Cost of an asset = Rs 1,00,000 Rate of Depreciation = 10% under WDV method Value of the asses at
the end of 2nd year will be ` ________
(a) 90,000 (b) 81,000
(c) 74,000 (d) 75,000

17.A plant was purchased on 01-04-2015 for 7,00,000. The useful life was estimated to be 5 years and
scrap value as 1,00,000. Calculate the rate of depreciation under Straight line method.
(a) 17.14%
(b) 20%
(c) 15%
(d) 17.5%
18. Which of the following statements is/are false?
I. The terms ‘depreciation’, ‘depletion’ and ‘amortization’ convey the same meaning.
II. Provision for depreciation A/c is debited when provision is created.
III. The purpose of depreciation is to distribute the cost of an asset over its useful life systematically.
(a) Only I) above
(b) Only II) above
(c) Only III) above
(d) All I) II) above

19. A machine was purchased on 01-01-2012 for 3,00,000. Depreciation is charged at 15% p.a.
under SLM method. The machine was sold on 01-07-2015 for 1,60,000. Calculate the profit.
(a) 2,400
(b) 17,500
(c) 1,500
(d) 3,000

20. Calculate deprecation for the 4th year under sum of years digits method. Cost of the asset 1,00,000 Life
time 5 years Salvage value 10%.
(a) 6,000
(b) 18,000
(c) 24,000
(d) 12,000

Answer:- 1.(b) 2.(d) 3.(c) 4.(c) 5.(d) 6.(d) 7.(b) 8.(a) 9.(a) 10.(a)

11.(b) 12.(b) 13.(d) 14.(d) 15.(c) 16.(b) 17.(a) 18.(d) 19.(b) 20.(d)

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MULTIPLE CHOICE QUESTIONS – PRACTICE SESSION 2

1. Original Cost = Rs 1,00,000. Life = 5 years. Expected salvage value = Rs 2,000.

(i) Depreciation for 3rd year as per straight line method is
(a). Rs 12,800 (b). Rs 19,600 (c). Rs 20,000 (d). Rs 20,400

(ii). rate of depreciation p.a. =

(a). 20.0% (b). 19.8% (c). 19.6% (d). 19.4%

2. Consider the following data pertaining to M/s. E Ltd. who constructed a cinema house:
Particulars Rs.
Cost of second hand furniture 90,000
Cost of repainting the furniture 10,000
Wages paid to employees for fixing the furniture 2,000
Fire insurance premium 1,000
The amount debited to furniture account is
(a) Rs.90,000 (b) Rs.91,000 (c) Rs.1,00,000 (d) Rs.1,02,000

3. Akhil Ltd. imported a machine on 01.07.2002 for Rs 1,28,000, paid customs duty and freight Rs 64,000
and incurred erection charges Rs 48,000. Another local machinery costing Rs 80,000 was purchased on
01.01.2003. On 01.07.2004, a portion of the imported machinery { value one-third ) got out of order and
was sold for Rs 27,840. Another machinery was purchased to replace the same for Rs 40,000.
Depreciation is to be calculated at 20% p.a. by WDV Method
(i) Profit / Loss on sale =
(a). 20,160 (Profit) ( b). 19,600 (Profit) (c). 23840 (Loss) ( d). 20,160 (Loss)

(ii) Closing balance of Machinery on 31.3.05=

(a). 1,32,000 (b). 1,69,680 (c). 1,96,000 (d). 2,28,000

4. Glass, Cutlery etc. Balance on 01.01.2004 is Rs 28,000. Glass, Cutlery, etc. purchased during the year Rs
16,000. Depreciation is to be charged on the above assets as follows - l/5th of their values is to be written
off in the year of purchase and 2/5th in each of the next 2 years. Of the stock of Glass, Cutlery, etc. as on
01.01.2004, 1/2 was one year old and 1/2 was 2 years old. Purchases are made on 1January.
(i) Depreciation for the year =
(a). Rs 7,000 ( b). Rs 17,500 (c.) Rs 20,200 (d). Rs 24,200
(ii) Closing Balance in Glass, Cutlery A/c =
(a). Rs 18,000 (b). Rs 18,500 (c). Rs 19,800 (d). Rs 20,400

answer:
1.(i)-b, (ii)-c , 2-d, 3.(i)-c, (ii)-b, 4.(i)-d, (ii)-c

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CHAPTER 6 UNIT 1. BILLS OF EXCHANGE

Introduction :- It is general practice that when goods are sold or services are provided, the seller extends a credit
period to buyer. In sometimes, the seller may not be in a position to offer credit period and the purchaser is not in a
position to pay immediately. In such circumstances the seller would like that the purchaser should give a definite promise
in writing to pay the amount of the goods on a certain date which he can use to generate immediate funds. Commercial
practice has developed to treat these written promises into valuable instruments of credit that when a written promise is
made in proper form and is properly stamped, it is expected that the buyer discharges his debt and the seller receives
payment. This is because written promises are often accepted by banks and money is advanced against them. Also, they
can be endorsed, i.e., passed on from person to person. The written promise is either in the form of a Bill of Exchange or
in the form of a promissory note.

According to section 5 of Negotiable instrument Act 1881, A Bill of Exchange has been defined as an “instrument in
writing containing an unconditional order signed by the maker directing certain person to pay a certain sum of money
only to or to the order of a certain person or to the bearer of the instrument”. When such an order is accepted in writing
on the face of the order itself, it becomes a valid bill of exchange. Suppose A orders B to pay Rs 50,000 for three months
after date and B accepts this order by signing his name, then it will be a bill of exchange.

Essential features of bill of exchange are as follows:-

i. It must be in writing.
ii. It must be dated.
iii. It must contain an order to pay a certain sum of money.
iv. The promise to pay must be unconditional.
v.The money must be payable to a definite person or to his order to the bearer.
vi.The draft must be accepted for payment by the party to whom the order is made.
vii.It should be properly stamped.
viii. Payment must be in legal currency of the country.

The party which makes the order is known as the drawer. The party which accepts the order is known as the acceptor
(drawee) and the party to whom the amount has to be paid is known as the payee. The drawer and the payee can be
the same.

Sometimes, it may happen that a bill of exchange is drawn for foreign trade operations. Such a bill is known as “Foreign
Bill of Exchange”. A foreign bill of exchange is one which is drawn in one country and is payable in another. It is
generally drawn up in triplicate wherein each copy is sent by separate post so that at least one copy reaches the
intended party. Payment will be made only on one of the copies and when such payment is made the other copies
become useless. Section 12 of the Negotiable Instruments Act provides that all instruments, which are not inland
instrument, are foreign.

Following are examples of foreign Bill of exchange and Promissory Note:

1. A bill drawn in India on a person resident outside India and made payable outside India.
2. A bill drawn outside India and made payable outside India.
3. A bill drawn outside India on a person resident outside India
4. A bill drawn outside India and made payable in India.

Promissory Notes:- A promissory note is an instrument in writing, not being a bank note or currency note containing
an unconditional undertaking signed by the maker to pay a certain sum of money only to or to the order of a certain person.
Under Section 31(2) of the Reserve Bank of India Act a promissory note cannot be made payable to bearer.
It has following feature or characteristics :-
i. It must be in writing.
ii. It must contain a clear promise to pay. Mere acknowledgement of a debt is not a promissory note.
iii. The promise to pay must be unconditional “I promise to pay `50,000 as soon as I can” is not an unconditional
promise.
iv.The promiser or maker must sign the promissory note.
v. The maker must be a certain person.
vi. The payee (the person to whom the payment is promised) must also be certain.
vii.The sum payable must be certain. “I promise to pay `50,000 plus all fine” is not certain.
viii. Payment must be in legal currency of the country.
ix. It should not be made payable to the bearer.
x.It should be properly stamped.
xi. It does not require any acceptance.

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Bill of Exchange Promissory Note

i. A bill contains an unconditional order to pay A promissory note contains only a promise to pay
certain sum of money

ii.There are generally 3 parties (Drawer, Drawee There are 2 parties (Maker and Payee) in promissory
and Payee) in bill of exchange note

iii.A bill is paid by Acceptor A promissory note is paid by maker

iv.A bill is drawn by creditor A promissory note is made by debtor

v.The drawer and payee may be same person in In promissory note maker and payee cannot be same
case of bill of exchange person

vi.In a bill of exchange the liability of drawer is In a promissory note the liability of a maker is primary
secondary and conditional and absolute

vii.A bill of exchange can be accepted A promissory note cannot be made conditionally
conditionally
viii.In a bill of exchange, notice of dishonor must Notice of dishonor is not required in case of promissory
be given note

ix.In case of dishonor, a bill of exchange must be Noting and protest is not required in case of dishonor of
noted and protested a promissory note.

Term of bill: The term of bill of exchange may be of any duration. Usually the term does not exceed 90 days from
the date of the bill.

(a) When a bill is drawn after sight, the term of the bill begins to run from the date of ‘sighting’,i.e., when the bill is accepted.
(b) When a bill is drawn after date, the term of the bill begins to run from the date of drawing the bill.

Expiry/due date of bill: The date on which the term of the bill terminates is called as ‘Expiry/Due Date of the bill’

Date of maturity of the bill; The date which comes after adding three days to the expiry/due date of a bill, is
called the date of maturity.
The maturity of a promissory note or bill of exchange is the date at which it falls due. Every promissory note or bill of
exchange gets matured on the third day after the day on which it is expressed to be payable, except when it is expressed
to be payable:
i. on demand,
ii. at sight, or
iii. on presentment

bill at sight: Bill at Sight means the instruments in which no time for payment is mentioned. A cheque is always
payable on demand. A promissory note or bill of exchange is payable on demand-
(a) when no time for payment is specified, or
(b) when it is expressed to be payable on demand, or at sight or on presentment.

Bill after date : Bill after date means the instrument in which time for payment is mentioned. A promissory note or
bill of exchange is a time instrument when it is expressed to be payable-
(a) after a specified period.
(b) on a specific day
(c) after sight
(d) on the happening of event which is certain to happen

Notes:
(a) The expression ‘after sight’ means-
i. In a promissory note, after presentment for sight
ii. In a bill of exchange, after acceptance or noting for non-acceptance or protest for non- acceptance.

(b) A cheque cannot be a time instrument because the cheque is always payable on demand. Though a cheque
can be post dated and which can be presented on or after such date. A cheque has validity of 90 days from its
date after that it becomes void, normally termed as ‘Stale Cheque’ as bank will not honour such cheque.

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Grace period: 3 days of grace period is allowed while calculating due date of the bill.
The following instruments are not entitled to 'days of grace'.
(a) A cheque
(b) A bill or note payable 'at sight' or on presentment' or 'on demand',
(c) A bill or note in which no time is mentioned.

The following instruments are entitled to 'days of grace':

(a) A bill or note payable on a specified day,
(b) A bill or note payable 'after sight,
(c) A bill or note payable at a certain period after date,
(d) A bill or note payable at a certain period after the happening of a certain event.

How to calculate due date of the bill:

Case Due Date

(a) When the bill is made payable on a specific (a) That specific date will be the due date.
date.
(b) When the bill is made payable at a stated (b) That date on which the term of the bill shall expire
number of months(s) after date. will be the due date.

Note: The term shall expire on that day of the month

which corresponds with the day on which the bill is
dated. If the month in which the period terminates has
no corresponding day, the period shall be deemed to
expire on the last day of such a month. For example a
bill signed on January 31st payable after 3 months will
be due on April 30th.
(c) When the bill is made payable at a stated (c) That date which comes after adding stated number of
number of days after date. days to the date of bill, shall be the due date.

Note: The date of Bill is excluded.

(d) When the due date is a public holiday. (d) The preceding business day will be the due date.
(e) When the due date is an emergency/due (e) The next following day will be the date.
unforeseen holiday.

Noting charges:
It is necessary that the fact of dishonour and the causes of dishonour should be established. If the acceptor can prove that
the bill was not properly presented to him for payment, he may escape liability. Therefore, if there is dishonour, or fear
of dishonour, the bill will be given to a public official known as “Notary Public”.

These officials present the bill for payment and if the money is received, they will hand over the money to the original
party. But if the bill is dishonoured they will note the fact of dishonour, with the reasons and give the bill back to their
client. For this service they charge a small fee. This fee is known as noting charges. The amount of noting charges is
recoverable from the party which is responsible for dishonour.

Renewel of bill: Sometimes the acceptor is unable to pay the amount and he himself moves that he should be given
extension of time and in consideration agrees to bear interest for the extended time period (calculated from the date of
renewal till the date of expected settlement). In such a case a new bill will be drawn and the old bill will be cancelled. If
this happens entries should be passed for cancellation of the old bill. This is done exactly as already explained for
dishonour. When the new bill is received entries for the receipt of the bill will be repeated.

Retirement of bill of exchange and rebate:

We have seen that renewal of a bill of exchange is made when a person does not have sufficient fund to pay for the bill
of exchange on the due date and he requires a further period of credit. Many a time instances do arise when the acceptor
has spare funds much before the maturity date of the bill of exchange accepted by him.

In such circumstances he approaches the payee of the bill of exchange and asks him whether the payee is prepared to
accept cash before the maturity date. In such cases the acceptor gets a certain rebate or interest or discount for premature

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payment. The rebate becomes the income of the acceptor and expense of the payee. It is a consideration of premature
payment.

Insolvency of drawee : Insolvency of a person means that he is unable to pay his liabilities. This means that bills
accepted by him will be dishonoured. Therefore, when it is known that a person has become insolvent, entry for
dishonour of his acceptance must be passed. Later on, something may be received from his estate. When and if an
amount is received, cash account will be debited and the personal account of the debtor will be credited. The remaining
amount will be irrecoverable and, therefore, should be written off as bad debt.

In the books of drawee of the bill, the amount not ultimately paid by him due to insolvency, should be credited to
Deficiency Account.

Accomodation of bill: Bills of Exchange are usually drawn to facilitate trade transmission, that is, bills are meant
to finance actual purchase and sale of goods. But the mechanism of bill can be utilised to raise finance also. Suppose
Boss needs finance for three months. In that case he may persuade his friend Kapoor to accept his draft. The bill of
exchange may then be taken by Boss to his bank and get it discounted there. Thus, Boss will be able to make use of
funds. When the three months period expires, Boss will send the requisite amount to Kapoor and Kapoor will meet the
bill. Thus, Boss is able to raise money for his use.

If both Boss and Kapoor need money, the same devise can be used. Either Boss accepts a bill of exchange or Kapoor
does. In either case, the bill will be discounted with the bank and the proceeds divided between the two parties according
to mutual agreement. The discounting charges must also be borne by the two parties in the same ratio in which the
proceeds are divided. On the due date the acceptor will receive from the other party his share. The bill will then be met.
When bills are used for such a purpose, they are known as accommodation bills.

Bill sent for collection: When a person receives a bill of exchange, he may decide to retain the bill till the date of
maturity. But in order to ensure safety, he may send it to bank with instructions that the bill should be retained till
maturity and should be realised on that date. This does not mean discounting because the bank will not credit the client
until the amount is actually realised. If the bill is sent to the bank with such instructions it is known as “Bill sent for
collection”.

Negotiability: --Promissory Notes, bill of exchange and Cheque all are negotiable instrument. The holder can
claim payment on them subject to conditions that the holder takes them: -
(i) Without notice of defect in the title of the transferor, i.e. in good faith.
(ii) for consideration and
(iii) Before maturity.
Example:-- If A steals a bill of exchange and passes it on to B who is not aware of A's mode of acquiring the bill
and who takes it for the value and before the due date of the bill, B will be entitled to get payment on the bill.
Here B is a holder in due course. A holder in due course always gets a good title in case of forgery. Moreover
whoever gets the bill after the holder in due course will also get a good title to it; it has been purged of all
defects.

The instrument may be passed on from one person to another by endorsement and delivery. The liability of the
endorser to subsequent parties is same as in the case of endorsement of cheque. Thus, if a bill of exchange is
dishonoured, i.e. if payment is not made on the due date by the promisor (drawee in case of bill of exchange),
money can be claimed from any of the previous endorsers, the payee and the maker of the instrument.

(m.imp)Calculation of date of maturity :-- If a promissory note or bill of exchange is made payable
after stated number of months after date or after sight or after a certain event, it becomes payable three days
after the corresponding date of the month after the stated number of months. If the month in which the period
would terminate has no corresponding day. The period shall be held to terminate on the last day of such month.

1. In the above case, the day on which the instrument is drawn or presented for acceptance or sight or the day on
which the event happens is to be excluded.

2. When the day on which a promissory note or bill of exchange is at maturity is a public holiday, the instrument
shall be deemed to be due on the preceding day. E.g. A bill falling due for payment on August 15 will have to be
paid on August 14.

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CONCEPT BUILDING QUESTION

IF BILL HONOURED ON DUE DATE:

Question: 1 Firm sold goods to X for Rs. 2,00,000 and received his acceptance payable after 3 months. On the due date
bill was met.

Question:2 Firm sold goods to X for Rs. 2,00,000 and received his acceptance payable after 3 months. Bill was
discounted by firm @ 12% p.a. On the due date bill was met.

Question:3 Firm sold goods to X for Rs. 2,00,000 and received his acceptance payable after 3 months. Firm endorsed
his acceptance to Mr. C, a creditor for Rs. 2,00,000. On due date bill was met.

Question:4 Firm sold goods to X for Rs. 2,00,000 and received his acceptance payable after 3 months. Firm endorsed
his acceptance to Mr. C, a creditor for Rs. 2,20,000 in full settlement of his claim.

Question:5 Firm sold goods to X for Rs. 2,00,000 and received his acceptance payable after 3 months. Firm endorsed
his acceptance to Mr. C, a creditor, for Rs. 2,20,000 in part settlement of his claim.

Question:6 Firm sold goods costing Rs. 1,60,000 for Rs. 2,00,000 to X and received his acceptance payable after 3
months. Firm sent bill to his bank for collection. On due date bill was met. Bank charged Rs. 50 for his service.

IF BILL DISHONOURED ON DUE DATE:

Question:7 Firm sold goods to X for Rs. 2,00,000 and received his acceptance payable after 3 months. Bill was
dishonoured on due date. Noting charges paid Rs.200.

Question:8 Firm sold goods to X for Rs. 2,00,000 and received his acceptance payable after 3 months. Bill was
discounted by firm @ 12% p.a. Bill was dishonoured on due date. Noting charges Rs. 200.

Question:9 Firm sold goods to X for Rs. 2,00,000 and received his acceptance payable after 3 months. Firm endorsed
his acceptance to Mr. C, a creditor for Rs. 2,00,000. Bill was dishonoured on due date and noting charges paid Rs. 200.

Question:10 Firm sold goods to X for Rs. 2,00,000 and received his acceptance payable after 3 months. Firm endorsed
his acceptance to Mr. C, a creditor for Rs. 2,20,000 in full settlement of his claim. Bill was dishonoured on due date and
noting charges paid Rs. 200.

Question:11 Firm sold goods to X for Rs. 2,00,000 and received his acceptance payable after 3 months. Firm endorsed
his acceptance to Mr. C, a creditor, for Rs. 2,20,000 in part settlement of his claim. Bill was dishonoured on due date
and noting charges paid Rs. 200.

Question:12 Firm sold goods costing Rs. 1,60,000 for Rs. 2,00,000 to X and received his acceptance payable
after 3 months. Firm sent bill to his bank for collection. Bill was dishonoured and noting charges paid Rs. 200.

AFTER DISHONOURED:-
Question.13 Assume after question 7 to 12 , Mr. X requested to pay Rs. 1,20,200 immediately and to give a new
acceptance for the balance amount together with interest @ 12% p.a. payable after 2 months. On the due date bill
was met.
Question.14 Assume after question 7 to 12, Mr. X requested to pay Rs. 1,20,200 immediately together with interest
at the rate of 12% p.a. on the balance amount for 3 months and to accept a new bill for the balance amount. On the
due date of renewed bill, Mr. X became insolvent and official receiver declared a first and final dividend of 60% of the
amount due.
Concept of Renewal of Bill:-
Question:15 Mohan sold goods to Gupta on 1st September, 2022 for Rs. 1,600. Gupta immediately accepted a three
months bill. One due date Gupta requested that the bill be renewed for a fresh period of two months. Mohan agrees
provided interest at 9% was paid immediately in cash. To this Gupta was agreeable. The second bill was met on due
date. Give Journal entries in the books of Mohan.

Concept of Under Rebate:

Question:16 On 1stJanuary, 2022, A sells goods for Rs. 10,000 to B and draws a bill at three months for the amount. B
accepts it and returns it to A. On 1st March, 2022, B retires his acceptance under rebate of 12% per annum. Record
these transactions in the journals of A.

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Question:17 On 1st April 2022 Rohit sold goods to Mahesh for Rs 10,000 and drew upon him a bill for the
amount at 3 months. Mahesh accepted the bill. On 4th April 2022 , Rohit got the bill discounted with his bankers
@ 10% per annum. Just before the due date, Mahesh approached Rohit with a request for renewal of the bill for
3 months. Rohit agreed on the conditions that new bill will be drawn for Rs 10310 which included Rs 310 by
way of interest
Mahesh found the condition reasonable and accepted the new bill on 4 th July ,2022 . On 29th September, 2022
Mahesh was declared insolvent . On 2nd November, 2022 a first and final dividend of 40 paise in a rupee was
received from the insolvent‘s receiver.

Question:18 On 1st January 2022, Arun purchased from Barun goods invoiced at Rs 10,000. On the same date
Barun drew upon Arun a bill for the amount at 2 months and Arun accepted the same. On 4 th January 2022,
Barun got the bill discounted with his bank @ 12% per annum. On due date, Arun told Barun that he was not in
a position to pay the full amount and requested Barun to accept Rs 5000 in cash and Drew a fresh bill at 2
months for the remaining amount plus interest at 15% P.A. Barun agreed . The second bill was duly met on the
due date. Give journal entries to record the above transaction in the books of Barun.

MUTUAL ACCOMODATION ( YE CONCEPT SIRF HUM HI SAMAJH SAKTE HAI, AUR KOI NAHI, FEEL GOOD)

Question:19. For helping Mr. X, Y gave his acceptance for Rs. 20,000 payable after 3 months. X discounted the bill
with his bank @ 18% p.a. Just before due date X remitted the necessary amount to Y. On due date bill was met.
Make journal entries.

Question:20. For mutual accommodation of X and Y, X drew a bill for Rs. 60,000, Which was duly accepted by Y.
X discounted the bill with his bank @ 12% p.a. for 3 months and remitted 1/3 rd of the proceeds to Y. Just before
due date, X remitted the balance amount to Y and Y met the bill on due date. Make journal entries.

Question:21. Anil drew a bill for Rs. 20,000 on Sunil and Sunil drew a bill for Rs. 30,000 on Anil for mutual
accommodation for 3 months. Both of them discounted their bill with bank @ 12% p.a. Just before due date they
settled their account among themselves. On the due date, both met their bill.

Question.22( IMP Question)Bose and Mitra were in need of funds. On 1st May, 2022 Bose accepted Mitra’s draft
for Rs.6,000 at 3 months. Mitra got it discounted at 6%p.a. and remitted 1/3 of the proceeds to Bose. On the due
date Mitra was not able to send the amount instead he accepted to Bose’s bill for Rs. 4,500 at two months. Bose got
it discounted for 4,420. Out of this Rs. 280 were sent to Mitra . Before the maturity of the renewed bill, Mitra
became insolvent and only 60% was realized from his estate. Give Journal entries in the books of Bose and Mitra.

Question:23 Sohan drew an accommodation bill for Rs 12,000 on Mohan. The proceeds are to be shared by
Sohan and Mohan in the ratio of 2:1 respectively. Mohan accepts the bill. Sohan gets the bill discounted at a
discount of Rs 720 and remits 1/3rd of the proceeds to Mohan. Before the due date, Mohan draws an
accommodation bill for Rs 16,800 to arrange the funds to pay the first bill. The second bill is discounted for Rs
16320. The first bill is paid with the proceeds and a sum of Rs 2880 is remitted to Sohan.

Sohan become insolvent before the due of the second bill and Mohan received 50 paise in a rupee as the first and
final dividend from sohan’s estate . Pass necessary journal entries in the books of Mohan and prepare sohan’s
account in the ledger of Mohan .

Question: 24 On 1st December 2022 Shyam accepted for mutual accommodation a bill drawn on his by Ram for
Rs 80000 at three month . The bill was discounted at 5% per annum and the proceeds were shared equally .On
the same day and for the same purpose , Shyam received an acceptances from Ram for Rs 90,000 at three
months. The bill was discounted for Rs 1,800 as discount and the proceeds were shared as to two thirds to
Shyam and one third to Ram . On the due date Shyam met his acceptence , but Ram could not do so because he
had become insolvent . On 31st March , 2023 his estate paid a first and final dividend of 50 paise in a rupee. Pass
the journal entries for the transactions in the books of Shyam.
Answer:
Date Particular Dr Cr
2022 Ram 80000
Dec 1 To Bills payable A/c 80000
(being acceptance given to Ram)
Dec 1 Bill receivable A/c 90000
To Ram 90000
(being acceptances given by Ram for mutual )
Dec 1 Bank A/c 88200
Discount A/c 1800

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To bills receivable A/c 90000

(Being bill discount with the bank)
Dec 1 Ram 30000
To banks 29,400
To discount A/c 600
(being one –third proceeds sent to ram)
Dec1 Banks A/c 39500
Discount A/c 500
To Ram 40000
(being one –half of proceeds received from Ram)
2023 Bills payable A/c 80000
March 4 To bank A/c 80000
(being our acceptances met on due date )
Mar 4 Ram 90000
To banks A/c
(being dishonour of ram ‘s acceptance due to 90000
insolvency )
March 4 Bank A/c 35000
Bad-debts 35000
To Ram 70000
(being receipt of 50 paise in the rupee as dividend
from Ram’s estate)

Ram ‘s A/c
Particular Amount Particular Amount
To bills payable A/c 80000 By bills receivable A/c 90000
To banks A/c 29400 By bank A/c 39500
To discount A/c 600 By discounts A/c 500
To bank A/c 90000 By banks A/c 35000
By bad debts 35000
2,00,000 2,00,000

Question 25. Mr. David draws two bills of exchange on 1.1.2022 for ₹ 6,000 and ₹ 10,000. The bills of exchange for ₹
6,000 is for two months while the bill of exchange for ₹ 10,000 is for three months. These bills are accepted by Mr.
Thomas. On 4.3.2022, Mr. David to renew the first bill with interest at 18% p.a. for a period of the months. Mr. David
agree to this Proposal. On 20.3.2022, Mr. Thomas retires the acceptance for ₹ 10,000, the interest rebate i.e., discount
being ₹ 100. Before the due date of the renewed bill, Mr. Thomas becomes insolvent and only 50 paise in a rupee could
be recovered from his estate.
You are given journal entries in the books of Mr. David. (ICAI Study material)
Answer:
Journal Entries in the Books of Mr. David
2022 (₹) (₹)
Jan. 1 Bills receivable (No. 1) A/c Dr. 6,000
Bills Receivable (No.2) A/c Dr. 10,000
To Mr. Thomas’s A/c 16,000
(Being Drawing of bills receivable No.1 due for maturity on 4.3.2021 and bills
receivable No.2 due for maturity on 4.3.2021)
4 - mar Mr. Thomas’s A/c Dr. 6,000
To Bills receivable (No.1) A/c 6,000
(Being the reversal entry for Bill No.1 on agreed renewal)
4 - mar Bills receivable (No.3) A/c Dr. 6,180
To interest A/c 180
To Mr. Thomas’s A/c 6,000
(Being the drawing of bill of exchange no. 3 due to for maturity on 7.5.2021
together with interest at 18% p.a. in lieu Of the original acceptance of Mr.
Thomas)
20 - mar Bank A/c Dr. 9,900
Discount A/c Dr. 100
To Bills receivable (No.2) A/c 10,000
(Being the amount receivable on retirement of bills No. 2 Before the due date)
7 – may Mr. Thomas A/c Dr. 6,180
To bills receivable (No. 3) A/c 6,180

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(Being the amount due from Mr. Thomas on dishonoured of his acceptance on
Presentation on the due date)
7 – may Bank A/c Dr. 3,090
To Mr. Thomas’s A/c 3,090
(Being the amount received from official assignee of Mr. Thomas at 50 paise per
rupee against Dishonoured bill)
May 7 Bad debts A/c Dr. 3,090
To Mr. Thomas’s A/c 3,090
(Being the balance 50% debt in Mr. Thomas’s Account arising out of
dishonoured bill written as bad)

Question 26. Journalise the following transactions in the book of K. Katrak.

(i) Katrak’s Acceptance to Basu for ₹ 2,500 discharged by a cash payment of ₹ 1,000 and new bill for the balance plus ₹
50 for interest
(ii) G. Gupta’s Acceptance for ₹ 4,000 which was endorsed by Katrak to M. Mehta was dishonoured. Mehta paid ₹ 20
noting charges. Bill withdrawn against cheque.
(iii) D. Dalal retires a bill for ₹ 2,000 drawn on him by Katrak for ₹ 10 discount.
(iv) Katrak’s acceptance to Patel for ₹ 5,000 discharged by Patel. Mody’s Acceptance to Katrak for a similar amount.

Answer: Book of K. Katrak-- Journal Entries

₹ ₹
(i) Bills Payable Account(old) Dr. 2,500
Interest Account Dr. 50
To Cash A/c 1,000
To Bills Payable Account (new) 1,550
(Bills Payable to Basu discharged by cash payment of ₹ 1,000 and a new
bill for ₹ 1,550 including ₹ 50 as interest)
(ii) (a) G. Gupta Dr. 4,020
To M. Mehta 4020
(G. Gupta’s acceptance for ₹ 4,000 endorsed to M. Mehta Dishonoured, ₹
20 paid by M. Mehta as noting charges)

(b) M. Mehta Dr. 4,020

To Bank Account 4,020
(Payment to M. Mehta on withdrawal of bill earlier received from Mr. G.
Gupta)
(iii) Bank Payable Account Dr. 1990
Discount Account Dr. 10
To Bills Receivable account 2,000
(Payment received from D. Dalal against his acceptance for ₹ 2,000.
Allowed him a discount of ₹ 10)
(iv) Bills Payable Account Dr. 5,000
To Bills Receivable Account 5,000
(Bills Received from Mody endorsed to Patel in settlement of bills
Payable issued to him earlier)

Question 27. On 1st January, 2022 Vilas draws a bill of exchange for ₹ 10,000 due for payment after 3 months on
Eknath. Eknath accepts to this bill of exchange. On 4 th March 2022 Eknath retires the bill of exchange at a discount of
12% p.a. You are asked to show the journal entries in the book of Eknath. (ICAI study material)
Answer:
Journal entries in the books of Eknath
Date Particular Debit (₹) Credit (₹)
Jan 1 Vilas A/c Dr. 10,000
To Bills Payable A/c 10,000
(Being the bill draws by him Accepted)
Mar. 4 Bills Payable A/c 10,000
To Bank A/c 9,900
To Discount A/c 100
(Being retirement of acceptance 1 month before maturity @ 12% p.a.)

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Question 28. On 1st July, 2021 Gorge drew a bill for ₹ 1,80,000 for 3 months on Harry for mutual accommodation.
Harry accepted the bill of exchange. Gorge had purchased goods worth ₹ 1,81,000 from Jack on the same date. Gorge
endorsed Harry’s Acceptance to Jack in full settlement. On 1 st September, 2021, Jack purchased goods worth ₹ 1,90,000
from Harry. Jack endorsed the bill of exchange from Gorge to Harry and Paid ₹ 9,000 in full settlement of the amount
due to Harry. On 1st October, 2021, Harry purchased goods worth ₹ 2,00,000 from Gorge. Harry paid the amount due to
Gorge by cheque. Give the necessary Journal Entries in the books of harry and Gorge. (ICAI study material)

Answer: In the books of Harry Journal Entries

Date Particulars ₹ ₹
1.7.2021 Gorge’s account Dr. 1,80,000
To Bills Payable account 1,80,000
(Acceptance of bill drawn by Gorge)
1.9.2021 Jack’s account Dr. 1,90,000
To sales account 1,90,000
(Sales made to Jack)
1.9.2021 Bills receivable account Dr. 1,80,000
Bank Account Dr. 9,000
Discount account Dr. 1,000
To Jack’s account 1,90,000
(Acceptance received from Jack’s endorsement of bill
received from Gorge for ₹ 1,80,000 and ₹ 9,000 received in
full settlement of the amount due)
1.9.2021 Bills Payable account Dr. 1,80,000
To bills receivable account 1,80,000
(Own acceptance received from Jack’s endorsement
cancelled)
1.10.2021 Purchase account Dr. 2,00,000
To Gorge’s account 2,00,000
(Purchase made from gorge)
Gorge’s account Dr. 20,000
To Bank account 20,000
(Amount paid to Gorge after adjusting ₹ 180,000 for
accommodation extended to him)
Journal entries in the book of Gorge
1.7.2021 Purchase Account Dr. 1,81,000
To Jack Account 1,81,000
(Purchase of goods from Jack)
1.7.2021 Bills Receivable Account Dr. 1,80,000
To Harry Account 1,80,000
(Acceptance by Harry of bills drawn on him)
1.7.2021 Jack’s account Dr. 1,81,000
To Rebate Account 1,000
To Bills Receivable Account 1,80,000
(Harry’s Bill endorsed to jack)
1.10.2021 Harry Account Dr 2,00,000
To Sales account 2,00,000
(Sales to Harry)
1.10.2021 Bank account Dr. 20,000
To Harry Account
(Account received from gorge after adjusting ₹ 180,000 for
accommodation extended by him 20,000

Question 29. Anil draws a bill for ₹ 9,000 on Sanjay on 5 th April, 2021 for 3 months, which Sanjay returns it to Anil
after accepting the same. Anil gets it discounted with the bank for ₹ 8,820 on 8 th April, 2021 and remits one-third
amount to Sanjay. On the due date Anil fails to remit the amount due to Sanjay, but he accepts a bill for ₹ 12,600 for
three months, Which Sanjay discounts it for ₹ 12,330 and remits ₹ 2,220 to Anil. Before the maturity of the renewed bill
Anil becomes insolvent and only 50% was realised from his estate on 15 th October, 2021.
Pass necessary Journal entries for the above transactions in the books of Anil. (ICAI study material)

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Answer: In the books of Anil-- Journal entries

Date Particulars Debit Credit
2021 Amount (₹) Amount (₹)
5 - Apr Bills Receivable account Dr. 9,000
To Sanjay’s account 9,000
(Being acceptance received from Sanjay for mutual
accommodation)
8 - Apr Bank Account Dr. 8,820
Discount account Dr. 180
To Bills receivable account 9,000
(Being bill discounted with Bank)
8 - Apr Sanjay’s account Dr. 3,000
To Bank account 2,940
To Discount account 60
(Being one – third proceeds of the bill sent to Sanjay)
8 - Apr Sanjay’s Account Dr. 12,600
To Bills Payable account 12,600
(Being Acceptance given)
8 – Jul Bank Account Dr. 2220
6,000+2,200 180
Discount Account [ × 270] 𝐷𝑟.
12,330 2,400
(Being Proceeds of second bill received from Sanjay)
Oct. 11 Bills Payable account Dr. 12,600
To Sanjay’s account 12,600
(Being bill Dishonoured due to insolvency)
Oct.15 Sanjay’s Account (6,000 + 2,400) Dr. 8,400
To Bank account 4,200
To Deficiency account 4,200
(Being Insolvent, only 50% amount paid to Sanjay)

Question 30. MCQ BASED QUESTIONS- PRACTICE SESSION 1

1. The person other than the original creditor to whom the amount in the bill is made payable to is known as the
____ of the bill.
(a) Holder (b) Payee (c) Drawer (d) Endorser

2. Payment of Bills of exchange is received

(a) By drawer (b) By holder in due course of due date (c) endorsee (d) bank
3. Retirement of bill means:
(a) Making payment before the due date
(b) Cancellation of the bill
(c) Sending the bill for collection
(d) Endorsing the bill in favour of third party.

4. At the time of retirement of a bill, the acceptor debits:

(a) Bills receivable account (b) Bill payable account (c) Discount (d) None of the above

5. The party who is ordered to pay the amount is known as

(a) Payee (b) Drawer (c) Drawee (d) Endorsee

6. In which of these ways a bill of exchange cannot be disposed of

(a) Discounting with bank (b) Retain till maturity (c) Endorsement to creditors (d) Destroyed

7. Bills receivable book is a part of the

(a) Ledger (b) Balance sheet

(c) Journal/Subsidiary (d) Profit and loss account

8. X Sold goods to Y for Rs. 3,00,000. ½ of the amount will be received in cash and the balance through a B/R.
For what amount X should draw a bill Y
(a) 150000 (b) 300000 (c) 100000 (d) 120000

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9. A person who endorses a bill is called

(a) Drawer (b) Drawee (c) Bank (d) Endorser

10. At the time of dishonour of an endorsed bill which one of these accounts would be credited by the drawee

(a) Bill payable account (b) Drawer (c) Bank (d) Bill dishonoured account

11. Date on which the payment of the bill is to be made

(a) Public holiday (b)Date of grace (c) Due date (d) Date of bill+ 3 days

12. Kuntal draws a bill on shyam for 3,000. Kuntal endorsed it to Ram. Ram endorsed it to
Rahim. The payee of the bill will be:
(a) Kuntal (b) Ram (c) Shyam (d) Rahim

13. If the due date is a public holiday what will be the due date of the bill
(a) Following day (b) Preceding day
(c) The same day only (d) One month later

14. On 1-8-15, X draws a bill on Y for 30 days after sight. The date of acceptance is 8-8-15.
The due date of the bill will be…

(a) 8-9-15 (b) 10-9-15 (c) 11-9-15 (d) 9-9-15

15. If bill drawn on 3rd July 2015 for 40 days payment must be made on

(a) 16th August, 2006 (b) 15th August, 2006 (c) 12th August, 2006 (d) 14th August, 2006

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16. A draws a bill on 1/04/19 for 60,000 for 3 months. B accepted it 8/04/19. The bill was discounted on
8/05/19 @ 12% p.a. The amount of discount will be------ in case bill is after sight.
(a) 1800 (b) 1200 (c) 600 (d) 1300

17. A bill drawn and accepted for mutual help is known as ____ bill:

(a) Accommodation (b) Trade (c) Ordinary (d) Retired

18. ‘Bill at sight’ means the instance at which_______________

a) No time for payment is mentioned in the bill

b) The payment is to be made on demand at any time
c) The payment is made after a particular time
d) Both a & b

19. X draws a bill for Rs. 40,000 on ‘Y’. ‘Y’ accepts it for 2 months. After 1 month ‘Y’ paid
the bill amount @ 9%. Journal entry in the Books of ‘Y’ will be

(a) Bank A/c Dr. 40,000 To Bills payable A/c 40,000

(b) Bank A/c Dr. 40,000 To Bills payable A/c 39,700 To Discount A/c 300
(c) Bills payable A/c Dr. 40,000 To Bank A/c 40,000
(d) Bills payable A/c Dr. 40,000 To Discount A/c 300 To Bank A/c 39700

20. For bills receivable endorsed earlier and then dishonoured, the journal entry in the books of drawer will be
(a) Debtors A/c is debited and Creditors A/c is credited
(b) Debtors A/c is credited and Creditors A/c is debited
(c) Drawer A/c is debited and Creditors A/c is credited
(d) Debtors A/c is debited and Drawer A/c is credited

Answer:- 1.(b) 2.(b) 3.(a) 4.(b) 5.(c) 6.(d) 7.(c) 8.(a) 9.(d) 10.(b)
11.(c) 12.(d) 13.(b) 14.(b) 15.(d) 16.(b) 17.(a) 18.(d) 19.(d) 20.(a)

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CHAPTER 6 UNIT 2. Sale of Goods on Approval or Return Basis

1. INTRODUCTION:- With a view of pushing up the sales or for introducing a new product in the market, goods
are sometimes sent to the customers on sale or approval basis. Here, goods sent on 'approval' or 'on sale or return'
basis mean the delivery of the goods to the customers with the option to retain or return them within a specified
period. Generally, these transactions take place between a manufacturer (or a wholesaler) and a retailer, when a
businessman wants to increase his sales volume or introduce a new product in the market. The goods are
transferred from the seller to the customers under a sale or return basis. It implies a change in the possession of
goods only and not a transfer of the ownership of goods. The ownership is passed only when the Customer gives
his approval or if the goods are not returned within that specified period. The customer does not incur any
liability when the goods are merely sent to him.

As per the definition given under the Sale of Goods Act, 1930, in respect of such goods, the sale will take place
or the property in the goods pass to the buyer:

(i) When he signifies his approval or acceptance to the seller;

(ii) When he does some act adopting the transaction;

(iii) If he does not signify his approval or acceptance to the seller but retains the goods without giving notice of
rejection, on the expiry of the specified time (if a time has been fixed) or on the expiry of a reasonable time (if
no time has been fixed).

2. ACCOUNTING RECORDS:- Accounting entries depend on the fact whether the business sends goods on sale or
approval basis (i) casually; (ii) frequently; and (iii) numerously. An overview of the accounting treatment for the
goods sent on sale or approval basis can be depicted with the help of the chart given below :

Sale of Goods on Approval or Return Basis

Accounting treatment when the business sends goods

Casually Frequently Numerously

Transaction treated Sales or Return

as Ordinary Sale Journal is prepared with
four main columns Sales or Return Day Sales or Return
Book Ledger

Treated as Memorandum
Books

Goods sent on Goods Goods Balance

Approval Returned Approved

2.1 WHEN THE BUSINESS SENDS GOODS CASUALLY ON SALES OR RETURN:-- When the transactions are
few, the seller on sending the goods, treats them as an ordinary sale. If the goods are accepted or not returned or the
business receives no intimation within the specified time limit, no extra entry is required to be passed because the
transaction for sale or return becomes entry after the expiry of the specified period. If the goods are returned
within a specified time limit, a reverse entry is passed to cancel the previous transaction. If, at the year-end, goods
are still lying with the customers and the specified time limit is yet to expire, the entry for sales made earlier is
cancelled and the value of the goods lying with the customers must be reduced from the selling price to the cost
price, and treated as an ordinary stock for Balance Sheet purposes.

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Journal Entries:
1. When goods are sent on approval or on sale or return basis:
Sundry Debtors Account Dr. [Invoice price]
To Sales Account
2. When goods are rejected or returned within the specified time:
Sales/Return Inwards Account Dr. [Invoice price]
To Customers/Sundry Debtors Account
3 When goods are accepted at invoice price--- [No entry]
4 When goods are accepted at a higher price than invoice price:
Sundry Debtors Account Dr.
To Sales Account [Difference in price]
5 When goods are accepted at a lower price than the invoice price
Sales Account Dr.
To Sundry Debtors Account [Difference in price]
6 (i) At the year-end, when goods are lying with customers and the specified time limit is yet to expire
Sales Account Dr. [Invoice price]
To Sundry Debtors Account
(ii) These goods should be considered as stock with customers and in addition to the above, the following
adjustment entry is to be passed
Stock with Customers on Sale or Return Account Dr.
To Trading Account [Cost price or market price whichever is less]
No entry is to be passed for goods returned by the customers on a subsequent date.

Question 1. CE sends goods to his customers on Sale or Return. The following transactions took place during 2022:

Sept. 15 Sent goods to customers on sale or return basis at cost plus 33 1/3 % Rs. 1,00,000

Oct. 20 Goods returned by customers 40,000

Nov. 25 Received letters of approval from customers 40,000

Dec .31 Goods with customers awaiting approval 20,000

CE records sale or return transactions as ordinary sales. You are required to pass the necessary Journal Entries in the books
of CE assuming that accounting year closes on 31st December, 2022. (ICAI Study material)

Question 2. S. Ltd. sends out its goods to dealers on sale or Return basis. All such transactions are, however treated as
actual sales and are passed through the Day book. Just before the end of the accounting year on 31.03.2022, 200 such
goods have been sent to a dealer at ₹ 250 each (cost ₹ 200 each) on sale or return basis and debited to his account. Of
these goods, on 31.03.2022, 50 were returned and 70 were sold while for the other goods, date of return has not yet
expired. Pass necessary adjustment entries on 31.03.2022. (ICAI Study material)

Answer: In the books of S. Ltd- Journal Entries

Date Particulars L.F. ₹ ₹
2022
March 31 Return Inwards A/c (₹ 250 x 50) Dr. 12,500
To Trade Receivable A/c 12,500
(Being the adjustment for 50 units of goods returned by customers
to whom goods were sent on sale or return basis)
March 31 Sales A/c (₹ 250 x 80) (note 1) Dr. 20,000
To Trade Receivable A/c 20,000
(Being the cancellation of original entry for sale in respect of 80
units of goods not yet returned or Approval by customers)
March 31 Inventories with customer on sale or return A/c Dr. 16,000
To Trading A/c 16,000
(Being the cost of goods sent to customers on Approval or return
basis not yet approved, adjusted)
Note: (1) Quality of goods lying with dealer as on 31.3.2020 = 200 – 50 – 70 = 80

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Question 3. Caly Company sends out its gas containers to dealers on sale or Return Basis. All such transaction is however,
treated as actual sales and are passed through the day Book. Just before the end of the of the financial year, 100 gas
containers, which cost them ₹ 900 each been sent to the dealer on ‘sale or return basis’ and have been debited to his account
at ₹ 1,200 each. Out of this only 20 gas containers are sold at ₹ 1,500 each. You are required to pass necessary adjustment
entries for the purpose of Profit and loss Account and balance sheet. (ICAI Study material)

Solution In the books of Caly company-- Journal Entries

Date Particulars L.F. ₹ ₹
Trade receivable A/c Dr. 6,000
To Sales A/c 6,000
(Being the adjustment for excess Price of 20 gas containers @ 300
each)
Sales A/c Dr. 96,000
To Receivable A/c 96,000
(Being the cancellation of original entry for sale in respect of 80 gas
containers @ ₹ 1,200 each)
Inventories with Customers on sale or return A/c Dr. 72,000
To Trading A/c 72,000
(Being the adjustment for cost of 80 gas container lying with customer
awaiting approval)

Question 4. E Ltd. sends out its accounting machines costing ₹ 200 each to their customers on sale Return basis. All such
transaction is, However, treated like actual sales and are passed through the Day Book. Just before the end of the financial
year, i.e., on March 24,2022, 300 such accounting Machines were sent out at an invoice Price of ₹ 280 each, out of which
only 90 accounting machines are accepted by the customers @ ₹ 250 each and as to the rest no report is forthcoming. Show
the journal Entries in the books of the company for the purpose of preparing Final Account for the ended March 31,2022.
(ICAI Study material)

Answer: In the books of E Ltd.- Journal entries

Date Particulars L.F. ₹ ₹
2022
Mar, 31 Sales A/cs (₹ 30 x 90) Dr. 2,700
To Trade Receivable A/c 2,700
(Being the adjustment for reduction is the selling price of 90
accounting machines @ ₹ 30 each)
Mar, 31 Sales A/c (₹ 280 x 210) 58,800
To Trade Receivable A/c 58,800
(Being the cancellation of original entry for sale in respect of 210
accounting machines sent to customers not yet returned or
approved)
Inventories with customers on sale or return A/c 42,000
To Trading A/c 42,000
(Being the cost of 210 accounting Machine @ ₹ 200 each
adjustment against trading Account)

Question 5. A sends Out goods on approval to few customers and includes the same in the sales Account. On 31.3.2022,
the Trade receivable balance stood at ₹ 1,00,000 which included ₹ 7,000 goods sent on Approval against which no
intimation was received during the year. These goods were sent out at 25% over and above cost Price and were sent to Mr.
X – ₹ 4,000 and Mr. – ₹ 3,000.
Mr. X sent intimation of acceptance on 30th April and Mr. Y returned the goods on 10 th April, 2022.

Make the adjustment entries and show how these items will appear in the Balance sheet on 31st March 2022. Show also the
entries to be made during April, 2022. Value of closing Inventories as on 31st March, 2022 was ₹ 60,000. (ICAI Study material)
Answer:
In the books of A
Journal Entries
Date Particulars L.F. ₹ ₹
2022 Sales A/c Dr. 7,000
Mar, 31 To Trade receivable A/c 7,000
(Being the Cancellation of Original entry for sale in respect
og goods lying with customers awaiting Approval)
Mar, 31 Inventories with customers on sale or returns A/c 5,600
To Trading A/c (Note 1) 5,600

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(Being the adjustment for cost of goods lying with customers

awaiting Approval)
April, 30 Trade Receivable A/c Dr. 4,000
To sales A/c 4,000
(Being goods costing ₹ 3,200 sent to Mr. X on sale or return
basis has been accepted by him)

Balance sheet of A & Co. as on 31st March, 2022 (Extracts)

Liabilities ₹ Assets ₹ ₹
Trade Receivable (₹ 1,00,000 – ₹ 7,000) 93,000
Inventories-in-trade 60,000
Add: Inventories with customers on sale or return 5,600 65,600
1,58,600

Notes:
(1) Cost of goods lying with customers = 100/125 x ₹ 7,000 = ₹ 5,600
(2) No entry is required on 10th April, 2021 for goods returned by Mr. Y goods should be included physically in the
Inventories-in- trade
Question 6. On 31st December, 2022 goods sold at a sale price of Rs. 3,000 were lying with customer, Ritu to whom
these goods were sold on 'sale or return basis' and recorded as actual sales. Since no consent has been received from
Ritu, you are required to pass adjustment entries presuming goods were sent on approval at a profit of cost plus
20%. Present market price is 10% less than the cost price.

Question 7. Mr. Kumar sells goods on approval or return basis casually. He has sold goods worth ₹ 1,50,000, (sold at a
profit of 33 1/3 % on sale) which has been awaiting approval from the customers as on the date of closing the books. After
the expiry of the periods, the customers have accepted goods equivalent to 75% of the cost of the goods and the rest
considered to be rejected.

You are required to show the necessary journal entires as on the date of closing the books and the entries after the expiry of
the treatment of the goods. (ICAI Study material)

Answer: In the books of Kumar- Journal Entries

Date Particular L.F. Dr. (in ₹) Cr. (in ₹)
Closing date Sales A/c Dr. 1,50,000
To Trade receivable A/c 1,50,000
(Being the cancellation of original entry of sale in respect of
goods on sale or return basis)
Inventories with customers on sale or Return A/c Dr. 1,00,000
To trading A/c 1,00,000
(Being the adjustment for cost of goods lying with customers
awaiting Approval)
1
Note – 1,50,000 × = 50,000)
3
Cost Price = 1,50,000 – 50,000 = 1,00,000
On Expiry of Trade receivable A/c Dr. 1,12,500
Approval To Sales A/c 1,12,500
period (Being the goods equal to 75% of the cost of goods sent on
Approval basis, With the remaining being rejected)
Note: 1,50,000 x 75% = 1,12,500 (accepted)
1,50,000 – 1,12,500 = 37,500 (rejected)
There is no need to pass the entry for the return of the goods as they have already been reversed as on the
closing date.

2.2 WHEN THE BUSINESS SENDS GOODS FREQUENTLY ON SALE OR RETURN BASIS :- When goods are sent out on
sale, on approval or return basis, an immediate sale obviously does not take place. Only when the customer signifies his
intention to purchase the goods or takes some action whereby it is indicated that he has decided to purchase the goods,
the property m the goods passes to the buyer. So long as the property does not pass to the buyer the seller should not
record it as a sale and, therefore, should not debit the customer.
(i) At the time of approval

Customer’s A/c
To Sales A/c

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The amount, after eliminating the element of profit, is included in the Trading Account representing the value of stock
with customers at cost price. Like an ordinary closing stock, such goods are considered as stock lying with customers
on behalf of seller and are valued at cost or net realizable value whichever is less.

(ii) At the time of preparing of Final Accounts:-An adjustment entry is required for balance goods which is as follow:

Goods with Customers on Sale or Return Account Dr. [Cost or net realisable value To
Trading Account whichever is less]

2.3 WHEN THE BUSINESS SENDS GOODS NUMEROUSLY ON SALE OR RETURN:-- When transactions are
numerous, a business maintains the following books: (a) Sale or Return Day Book; and (b) Sale or Return Ledger.
Ledger contains the accounts of the customers and the 'Sale or Return' Total account. It is important to remember
is that both are Memorandum Books.

In this case, when the goods are sent to the customers on a sale or return basis, they are recorded in the Sale or
Return day Book. Thereafter, in the Sale or Return Ledger, all the customers are individually debited and the Sale
or Return Account is credited with the periodical total of the Sale or Return Day Book.

When the goods are returned by the customers within the specified time, they are recorded initially in the Sale or
Return Day Book. Thereafter, in the Sale or Return Ledger, the Sale or Return Account is debited with the periodical
total of the Sale or Return Day Book and the individual customers are credited. The above mentioned records
are all memorandum and hence cannot find a place in the regular books.

When the business receives information about the acceptance of the goods or no intimation is received within the
specified time, they are recognized as sales and are recorded in the Sales Day Book. Periodically, the total of the
Sales Day Book is credit to Sales Account and debited to the Individual Customers Account. To cancel the earlier
entries, individual customers are credited and the Sale or Return Account is debited. The entries for the approved
goods are shown below:

In the Memorandum Sale or Return Ledger In the regular General ledger

Sale or Return Account . Dr. Individual Customer's Account Dr.

To Individual customer’s Account To Sales Account

At the year end, in the Sale or return Ledger, the sum of the debit balances of the Individual Customers' Account
must be equal to the credit balance of the Sale or return Account. It represents stock with customers waiting for
approval at invoice price. To adjust the cost of such goods with customers in the Final Accounts, the following entry
is passed:

Stock with Customers on Sale or Return Account Dr. [Cost or net realisable value, whichever is
less]
To Trading Account

Question 8. X Supplied goods on sale or return basis to customers, The particulars of which are as under.
Date of dispatch Party’s Name Amount Remarks
₹
10.12.2019 M/s. ABC 10,000 No information till 31.12.2019
12.12.2019 M/s. DEF 15,000 Returned on 16. 12.2019
15.12.2019 M/s. GHI 12,000 Goods worth ₹ 2,000 returned on 20.12.2019
20.12.2019 M/s. DEF 16,000 Goods Retained on 24.12.2019
25.12.2019 M/s. ABC 11,000 Goods Retained on 28.12.2019
30.12.2019 M/s. GHI 13,000 No information till 31.12.2019

Goods are to be returned within 15 days from the dispatch, failing which it will be treated as sales. The Book of ‘X’ are
closed on the 31st December, 2020.
Prepare the following accounts in the books of ‘X’
(a) Goods on “sale or return, sold and returned day books”.
(b) Goods on sales or return total account. (ICAI Study material)

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Answer:
In the books of ‘X’
Goods on sales or return, Sold and returned day book.

Date Party to whom goods sent L.F. Amount Date Sold Returned
2019 ₹ 2019 ₹ ₹
Dec. 10 M/s. ABC 10,000 Dec. 25 10,000 -
Dec. 12 M/s. DEF 15,000 Dec. 16 - 15,000
Dec. 15 M/s. GHI 12,000 Dec. 20 10,000 2,000
Dec. 20 M/s. DEF 16,000 Dec. 24 16,000 -
Dec. 25 M/s. ABC 11,000 Dec.28 11,000 -
Dec. 30 M/s. GHI 13,000
77,000 47,000 17,000

Good on sales or Return Total Account

Date Particulars Amount Date Particulars Amount
₹ ₹
2019 2019
Dec.31 To Return 17,000 Dec.31 By Goods sent on sales or 77,000
To sales 47,000 return
To balance c/d 13,000
77,000 77,000

Question 9. A firm sends goods on sale or return basis. Customers having the choice of returning the goods within a
month. During May 2022, the following are the details of goods sent:

Date (May) 2 8 12 18 20 27

Customers P B Q D E R

Value (`) 15,000 20,000 28,000 3,000 1,000 26,000

Within the stipulated time, P and Q returned the goods and B, D, and E signified that they have accepted the goods. Show in
the books of the firm, the Sale or Return Account and Customer- P for Sale or Return Account on 15th June, 2022.
(ICAI Study material)

Answer: Sale or Return Account

Date Particulars Rs Date Particulars Rs

2022 2022
31-May To Sundries: Sales 24,000 31-May By Sundries 93,000
15-Jun To Sundries: Returned 43,000 (Goods sent on sale or
15-Jun To Balance c/d 26,000 return basis)
93,000 93,000
By Balance b/d 26,000
P’s Account

Date Particulars Rs Date Particulars Rs

2022 2022
To Sale or Return A/c 15,000 By Sale or Return A/c 15,000

Question 10. choose whether following statements are True or false. (ICAI Study material)
1. Goods Sold on Approval or return Basis are not recorded as credit sales initially when they are sent out in case the
business entity sells goods casually on sale on return basis.
Answer: False
ii. The customer retains the goods even after the expiry of the mentioned term, but this act does not confirm to sale of
goods as there is no express consent given.
Answer: False
iii. At the end of the year – those goods on approval basis awaiting approval from the customer are shown as part of sales in
the books of the seller.

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Answer: False
iv. No entry needs to be passed in the books of the seller, when the customer rejects the goods (awaiting approval) after the
closing of the books of the seller.
Answer: True
v. The period within which the customer has to reject or accept is fixed by the buyer.
Answer: False

Question 11. Choose the correct answer:

1. When a large number of articles are sent on a sale or return basis, it is necessary to maintain

(a) Sale journal (b) Goods returned journal

(c) Sale or return journal (d) None of the above.

2. On 31st December, 2019 goods sold at a sale price of Rs. 30,000 were lying with
customer, Mohan to whom these goods were sold on 'sale or return basis' and
recorded as actual sales. Since no consent was received from Mohan, the adjustment entry
was made presuming goods were
sent on approval at a profit of cost plus 20%. in the balance sheet, the stock with customers account will
be shown at Rs.

(a) 30,000. (b) 24,000. (c) 20,000. (d) 25,000.

3. A sent some goods costing Rs. 3,500 at a profit of 25% on sale to B on sale or return basis. B returned goods
costing Rs. 800. At the end of the accounting period i.e. on 31st December,2019, the remaining goods were
neither returned nor were approved by him. The stock on approval will be shown in the balance sheet at Rs.

(a) 2,000. (b) 2,700. (c) 2,700 less 25% of 2,700. (d) 3,500.

4. A merchant sends out his goods casually to his dealers on approval basis. All such transactions are, however,
recorded as actual sales and are passed through the sales book. On 31-12-2013, it was found that 100 articles
at a sale price of 200 each sent on approval basis were recorded as actual sales at that price. The sale price
was made at cost plus 25%. The amount of stock on approval will be amounting

(a) Rs.16, 000. (b) Rs. 20,000. (c) Rs. 15,000. (d) None of the above.
6. A company sends its cars to dealers on 'sale or return' basis. All such transactions are however treated like
actual sales and are passed through the sales day book. Just before the end of the financial year, two cars which
had cost Rs. 55,000 each have been sent on 'sale or return' and have been debited to customers at Rs. 75,000
each, cost of goods lying with the customers will be
(a) Rs. 1, 10,000. (b) Rs. 55,000. (c) Rs. 75,000. (d) None of the above.

7. A trader has credited certain items of sales on approval aggregating Rs. 60,000 to Sales Account. Of these, goods of the
value of Rs. 16,000 have been returned and taken into stock at cost of Rs. 8,000. Though the record of return was
omitted in the accounts. In respect of another parcel of Rs. 12,000 (cost being Rs. 6,000) the period of approval did
not expire on the closing date. Cost of goods lying with customers should be
(a) Rs. 12,000. (b) Rs. 54,000. (c) Rs. 6,000. (d) None of the above.

8. Under sales on return or approval basis, the ownership of goods is passed only
(a) when the retailer gives his approval
(b) if the goods are not returned within specified period.
(c) Both (a) and (b)
(d) None of the above
9. Under sales on return or approval basis, when transactions are few, the seller, while sending the goods,
treats them as
(a) An ordinary sale but no entry is passed in the books
(b) An ordinary sale and entry for normal sale is passed in the books
(c) Approval sale and no entry is passed
(d) None of the above

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10. Under sales on return or approval basis, when transactions are few and the seller at the end of the accounting
year reverse the sale entry, then what will be the accounting treatment for the goods returned by the
customers on a subsequent date?
(a) No entry will be passed for such return of goods
(b) Entry for return of goods is passed by the seller
(c) Only the stock account will be adjusted
(d) None of the above
11. Which of the following is not a main column of sales or return journal?

(a) Goods sent on approval column (b) goods returned column

(c) Goods approved column (d) purchase column

12. Sale or Return Day Book and Sale or Return Ledger are known as
(a) principal books (b) subsidiary books (c) Memorandum books (d) none of the above

13. In the Sale or Return Ledger

(a) All the customers are individually debited and the sale or return account is credited with the periodical
total of the Sale or Return Day Book.
(b) All the customers are debited in total and the sale or return account is credited with the periodical total
of the Sale or Return Day Book.
(c) All the customers are individually debited and the sale or return account is also credited with
the individual total of the Sale or Return Day Book.
(d) None of the above.
14. When the goods are returned by the customers within the specified time, they are recorded

(a) Initially in the Sale or Return Ledger. Thereafter, in the Sale or Return Day Book
(b) Initially in the Sale or Return Day Book. Thereafter, in the Sale or Return Ledger
(c) only in the Sale or Return Day Book
(d) only in the Sale or Return Ledger

ANSWERS 1.(c) 2.(d) 3.(b) 4.(a) 6.(a) 7.(c) 8.(c) 9.(b) 10.(a) 11.(d) 12.(c) 13.(a) 14.(b)

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CHAPTER 6 Unit 3. CONSIGNMENT ACCOUNT

Meaning of consignment : To consign means to send. In Accounting, the term “consignment account” relates to
accounts dealing with a situation where one person (or firm) sends goods to another person (or firm) on the basis that the
goods will be sold on behalf of and at the risk of the former.
The following should be noted carefully:

i. The party which sends the goods (consignor) is called principal.

ii. The party to whom goods are sent (consignee) is called agent.
iii. The ownership of the goods, i.e., the property in the goods, remains with the consignor or the principal.
The agent or the consignee does not become their owner even though goods are in his possession. On sale, of course, the
buyer will become the owner.
IV. The consignor does not send an invoice to the consignee. He sends only a proforma invoice. The object of the proforma
invoice is only to convey information to the consignee regarding particulars of the goods sent.
V. Usually, the consignee recovers from the consignor all expenses incurred by him on the consignment. This however can be
changed by agreement between the two parties.
VI. It is also usual for the consignee to give an advance to the consignor in the form of cash or a bill of exchange. It is
adjusted against the sale proceeds of the goods.

vii. For his work, the consignee receives a commission calculated on the basis of gross sale. For ordinary commission the
consignee is not responsible for any bad debt that may arise. If the agent is to be made responsible for bad debts, he is to be
paid a commission called del-credere commission. It is calculated on total sales, not merely on credit sales until and unless
agreed.

viii. Periodically, the consignees ends to the consignor a statement called Account Sales. It sets out the sales made by the
consignee, the expenses incurred on behalf of the consignor, the commission earned by the consignee and the balance due to
the consignor.

ix. Firms usually like to ascertain the profit or loss on each consignment or consignments to each consignee.

Meaning of Consignment Sale: Where one person in firm sends goods to another person or firm on the basis that the
goods will be sold on and at the risk of the former, it is called consignment sale.

Account Sales:- After sale of goods, consignee sends a statement to consignor. This statement is called account sales. In this
statement gross value, expenses and commission of consignee, advance paid by consignee and net amount due by
consignee are shown.

Types of commission:
Commission is the remuneration paid by the consignor to the consignee for the services rendered to the former for selling the
consigned goods. Three types of commission can be provided by the consignor to the consignee, as per the agreement, either
simultaneously or in isolation. They are:
i. Ordinary Commission: The term commission simply denotes ordinary commission. It is based on fixed percentage of
the gross sales proceeds made by the consignee. It is given by the consignor regardless of whether the consignee is
making credit sales or not. This type of commission does not give any protection to the consignor from bad debts and is
provided on total sales.
ii. Del-credere Commission: To increase the sale and to encourage the consignee to make credit sales, the consignor
provides an additional commission generally known as del-credere commission. This additional commission when
provided to the consignee gives a protection to the consignor against bad debts. In other words, after providing the del-
credere commission, bad debts is no more the loss of the consignor. It is calculated on total sales unless there is any
agreement between the consignor and the consignee to provide it on credit sales only.
iii. Over-riding Commission: It is an extra commission allowed by the consignor to the consignee to promote sales at
higher price then specified or to encourage the consignee to put hard work in introducing new product in the market.
Depending on the agreement it is calculated on total sales or on the difference between actual sales and sales at invoice
price or any specified price. In order to encourage the consignee to earn higher margins, it can also be in the form of
share of additional profits made by consignee on sale of goods.

Most important -- Discount paid on bills receivable discounted by Consignor

There are two alternative treatments for the aforesaid discount:
a. If discount is treated as "consignment expenses" it is debited to consignment account.
b. If discount is treated as "financial charges', it is debited to profit and loss account.

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Accounting treatment in the Books of consignor:

• To know the profit and the loss made on a consignment separately a consignment account is opened.
• A consignment account is not a personal account but is in the nature of a special type of a trading and profit and
loss account (Nominal account) which shows profit or loss made on the particular consignment.
• If goods are consigned to a number of parties, the profit and loss on consignment to each consignee may be
ascertained separately.

Valuation of Closing Stock:

The goods lying unsold with the Consignee at the end of the accounting year is usually valued at cost. In this case cost
means, cost at which goods sent on consignment plus all non-recurring (non-selling) expenses incurred till the goods reach
the premises of the consignee. Such expenses include packing freight, cartage, insurance in transit, octroi, import duty,
customs charges, packing, loading & unloading charges. But expenses incurred after the goods have reached the consignee
godown are not treated as part of the cost of purchase for valuing stock on hand, i.e. expenses like godown rent, godown
insurance, sales expenses e.t.c. are not included in the value of stock.

Return of goods from the consignee:

Consigned goods can be returned by the consignee because of many reasons like poor quality or not upto the specimen or
destroyed in transit etc. In such a situation, the question arises what is the valuation of returned goods. Consigned goods
returned by the consignee to the consignor are valued at the price at which it was consigned to the consignee. Expenses
incurred by the consignee to send those goods back to the consignor are not taken into consideration while valuing it because
the goods were already in a salable conditions and location and changing the location back from consignee to consignor is not
a cost which must have to be incurred to sell the goods. This is generally called secondary freight in accounting terms.

ADVANCE BY THE CONSIGNEE VS SECURITY AGAINST THE CONSIGNMENT:

Generally the consignor insist the consignee for some advance payment for the goods consigned at the time of delivery of
goods. This advance payment is adjusted in full against the amount due by the consignee on account of the goods sold.

But if the advance money deposited by the consignee is in the form of security against the goods consigned then the full
amount is not adjusted against the amount due by the consignee to the consignor on account of goods sold if, there is any
unsold inventory left with the consignee. In that case proportionate security in respect of unsold goods is carried forward till
the time the respective goods held with the consignee are sold.

(imp) Distinction between Consignment and sale

Consignment Sale
• Ownership of goods is not transferred to consignee. • Ownership of goods is transferred to the buyer.
• Consignee is not liable for losses. • Buyer is liable for losses.
• All expenses are born by consignor. • Buyer meets his own expenses.
• The document sent along with goods sent to • The document sent on sale of goods is called
consignee is called 'Performa invoice". 'Invoice'.
• Consignee does not become debtor on receipt of • Buyer becomes debtor immediately on receipt of
goods. He becomes debtor on sale of goods. goods.
• Consignee receives commission on sale of goods. • Buyer does not receive any commission. He earns
profit on sale of goods.

Distinction between Abnormal Loss And Normal Loss

Abnormal Loss Normal Loss
Normal loss occurs due to inherent characteristic of
• Abnormal loss occurs due to accident natural calamities or • goods,
negligence. e.g. normal leakage, evaporation etc.
• This loss does not affect Gross Profit. • This loss effect Gross Profit.
• Accounting entry is made for such loss. • No accounting entry is made for such loss. This is
• This loss can be insured against various contingencies. automatically absorbed in Gross profit.
• This loss is not certain. This depends on the happening of • This loss can not be insured.
certain event. • This loss is almost certain. This occurs during transit or
storage due to inherent characteristic of goods.

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Distinction between commission and discount

Commission Discount
Commission may be defined as remuneration of The term discount refers to any reduction or
an employee or agent relating to services rebate allowed and is used to express one of the
performed in connection with sales, purchases, following situations:
collections or other types of business transactions An allowance given for the settlement of a debt
and is usually based on a percentage of the before it is due i.e. cash discount.
amounts involved.
An allowance given to the whole sellers or bulk
Commission earned is accounted for as an income buyers on the list price or retail price, known as
in the books of accounts, and commission allowed trade discount. A trade discount is not shown in
or paid is accounted for as an expense in the the books of account separately and it is shown
books of the party availing such facility or by way of deduction from cost of purchases.
service.

Question.1 20,000 units of commodity ‘X’ were consigned by Ram of Delhi at an invoice cost of Rs 100 each to Mohan of
Mumbai.
Ram paid freight Rs 12,000, Insurance Rs 8000. Mohan received the consignment and incurred the following expenses:-
Clearing charges = Rs. 5,000
Freight to the godown = Rs. 7,000
Rent of godown = Rs. 3,000
Insurance = Rs. 2,000
Advertisement = Rs. 12,000
Loading and unloading charges = Rs. 3,000

Mohan sold all the goods @ Rs. 250 each.

He was entitled to a commission of 5% on sales.
Prepare consignment account and Mohan account in the book of Ram.

Question.2 Assume in Question No. 1, Mohan sold only 80% of the consignment @ Rs. 250 each.
Prepare necessary ledgers in the books of Ram.

Question.3 X sends goods costing Rs. 2,00,000 to Y to be sold at a minimum profit of 10% on cost. He will be
allowed a general commission of 5% on sales and 20% of any excess realized over minimum quoted price. Y sold all
the consignment for Rs. 3,00,000. Calculate the total commission payable to Mr. Y.

Question.4 COC of Delhi forwarded to TATA of Mumbai a consignment of 100 drums of coconut Oil of Rs. 500 per drums. Following
expenses were incurred by consignor.

Freight = Rs. 10,000

Insurance = Rs. 8,000
Loading charges = Rs. 2,000
Rent of consignee’godown =Rs. 3,000
TATA received the consignment and sent an account sale informing that he sold 80% of the consignment @ Rs. 1,000 per drum and
incurred following expenses
Clearing charges = Rs. 2,000
Freight = Rs. 3,000
Advertisement = Rs, 20,000
Consignee was entitled to 5% as general commission and 2% as del- Credere commission. Actual loss due to bad debts was Rs 8500.
Prepare consignment account and consignee account in the book of COC.

Question.5 10,000 Pens were sent by Rohit of Delhi to Mohit of Mumbai costing Rs. 20 each. Rohit incurred Rs. 5,000 on
sending the goods to Mohit place.
Mohit received the consignment and incurred Rs. 10,000 as recurring and 5,000 as non-recurring expense. He reported
that 70% of the consignments were sold @ Rs. 60 each and 10% of the consignments were lost due to fire. He was
entitled to commission @ 5%.Prepare consignment A/c and Mohit A/c in book of Rohit.

Question.6 5,000 units of commodity X were consigned by Mohanlal to Sohanlal @ Rs. 40 each. Mohanlal incurred Rs.
20,000 on sending the goods to consignee. During transit 10% of the consignments were lost due to fire. Insurance

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company admitted the claim for Rs. 12,000. Sohanlal received the remaining consignment and sent an account sale
showing that 70% of goods received were sold @ Rs. 100 each.
He incurred Rs. 20,000 as selling and Rs. 8,000 as non-selling expenses. He was entitled to commission @ 5%.
Prepare consignment Account and Sohanlal Account in the book of Mohanlal.

Question. 7 M/s Lal sent 4000 Kg of coconut oil costing Rs. 20 each to M/s Hara, Paid Freight Rs. 6000 and Loading charges Rs.
4000. M/s Hara received the consignment and incurred Rs. 4000 as recurring and Rs. 6000 as non-recurring expenses. He reported
a normal loss of 5% and he sold 80% of the consignment @ Rs. 50 each.
He was entitled to commission of 2% on sale. Prepare consignment A/c.

Question.8 ( advance against security) The Narang oil mills, Delhi consigned 5000 Kg of mustered oil to Mr. Gupta of Kanpur on 1st
June 2022. The cost of the oil was Rs. 40 per kg. The Narang mills paid Rs. 15,000 for packing fright and insurance. During transit
100 kg were destroyed for which insurance Co. paid directly to the consignor Rs. 4000 in full settlement of the claim. Narang oil
mills had received Rs 50,000 in advance as security against consignment.

Mr. Gupta took delivery of the consignment on the 15 June 2022. On 31st March 2023, Mr Gupta sent account sales that 4,000 Kg
were sold at Rs.52, the expenses being on godown rent Rs. 2,000; on advertisement Rs.3,000 and on salesman salaries Rs.5,500.
Mr. Gupta is entitled to a commission of 4 % plus 2% del-credere . A party, who had bought 400 Kg, was able to pay only 90% of
the amount due from it. Mr Gupta reported a loss of 50 Kg due to leakage.

Assuming that Mr. Gupta paid the amount due by bank draft. Show the journal entries and necessary ledger account in the books
of both the parties .The Narang oil mills Ltd closes books on 31st March 2023.

Question. 9 X Consigned 10,000 liters of Oil costing Rs 20 each to Y of Mumbai, incurring Rs. 5,000 as non-recurring
expense. During transit 10% of consignment were lost due to fire and insurance company Paid Rs. 20,000 to X in full
settlement of claim.
Y received the consignment and incurred Rs. 30,000 as recurring and Rs. 10,000 as non-recurring expense. He sold 70% of
the consignment received at 100% profit on cost. He also reported a further loss of 10% due to fire in his godown and 5%
due to normal leakage.
He was allowed a commission of 2% on sales. Y used 5 liters of Oil for his personal purpose at an agreed price of Rs. 35 per
litre. Prepare consignment A/c and Y A/c in the book of X.

Question.10 Assume in Question No.5 goods were sent at an invoice price of 25% on cost. Prepare necessary accounts in
the book of consignor.

Question. 11 Sarika mills Ltd. of Delhi sent 500 pieces of shirt to fancy store, Bombay on consignment basis. The consignee is entitled to
receive 5% commission plus expenses. The cost to Sarika mills Ltd. is Rs. 120 per piece.

Fancy store, Bombay, pay the following expenses:

Railway freight, etc - Rs. 1,000
Godown rent and insurance - Rs. 1,500
Sarika mills Ltd., draw on the consignees a draft for Rs.30,000 which is duly accepted. It is discounted for Rs.28,650. Later fancy store
Bombay, report that the entire consignment has been sold for Rs.78,000.
Show journal entries and important ledger accounts in the books of consignor & consignee.
Answer: Consignment (To Bombay) Account
Particular Amount Particular Amount

To goods sent to consignment 60000 By fancy store Bombay – Sale 78000

To fancy store (Bombay) expense 2500
To Fancy store (Bombay)-Commission 3900
To Profit & Loss A/c 11600
78000 78000

Fancy Store (Bombay) Account

Particular Amount Particular Amount

To Consignment A/C By Bill receivable A/C 30000

-Sale proceeds 78000 By Consignment A C(exp.) 2500
By Consignment A/c (Commission) 3900
By Balance c/d 41600
78000 78000

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Question.12 100 Television were consigned by M/s Lal & Com. Delhi to M/s Time center of Patna at an invoice cost of
Rs.3000 each M/s Lal & Com. paid freight Rs.18000, insurance Rs.2200. During the transit, 10 T.V were totally
damaged by fire and to be thrown in a way. M/s Time center took delivery of the remaining T. V.

M/s Time center had sent a bank draft to Lal & Company for Rs. 1,00,000 as an advance payment and later sent an
account sales showing that 80 T.V. were sold at Rs.4400 each. Expenses incurred by Time centre on godown rent and
advertisement etc, amounted to Rs. 12,000. Time center is entitled to commission of 5%. One of the credit customers
could not pay for 2 T.V. Record the journal entries and prepare the consignment A/C, M/s Time center Account and
Profit & Loss A/C in the books of M/s Lal & Co assuming that nothing has been recovered from the insurance Co. due to
a defect in the policy. M/s Time center settle his account immediately.
Answer: Consignment to Patna A/c
Particular Amount Particular Amount
To Goods sent on consignment 3,00,000 By Time center (Patna) A/C
To bank Account: —Sales 3,52,000
Freight- 18000 By Abnormal loss A/C 32,020
Insurance- 2200 20,200 (Loss by fire)
To Time center (Patna) A/C By Stock on consignment 32,020
--Godown rent & Adv. 12,000
--Commission 17,600
--Bad debts (2 x 4400) 8800
To Profit & Loss A/C (profit) 57,440
416040 416040

Time Centre (Patna) Account

Particulars Amount Particulars Amount
To Consignment to Patna A/c 3,52,000 By Bank
(Bank draft as advanced) 1,00,000
To Balance c/d (Amount of advance By Consignment to Patna A/c
relating to 10 T.V) 10,000 Godown rent and
advertisement -12000 20,800
Bad debts - 8800
By Consignment to Patna (Comm.) 17,600
By Bank 2,23,600
3,62,000 3,62,000
Abnormal Loss Account
Particulars Amount Particulars Amount
To Consignment to Patna 32020 By Profit & Loss A/C –Transfer 32020
A/C (Loss by Fire)
32020 32020
Working Notes
Abnormal Loss
Particulars Quantity Rs. Working
Cost of goods sent on consignment @3000 100 300000
Non recurring expense paid by Consignor 20200
100 320200
Cost of abnormal loss 10 units 10 32020 (320200/100*10)
90 288180
Non recurring expense paid by Consignee ------ NIL
90 288180

CLOSING STOCK(10 UNITS) 10 32020 (288180/90*10)

Question.13 Imperial Ltd., Delhi forwarded on 1st December 2022, 100 Bicycles to Mr. Manak of Ranchi to be sold on behalf
of Imperial Ltd. The cost of one Bicycle was Rs.1,600 but the invoice price was Rs. 1,800. Imperial Ltd. incurred Rs. 10,000 on
freight and insurance. Manak received the consignment on 15th Dec 2022 and accepted a 3 months draft drawn upon him by
Imperial Ltd. for 40,000. Manak paid Rs.2,500 as rent and Rs.2,500 as insurance and by 31st march had disposed of 80 bicycles
at Rs.2060 each.

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Manak is entitled to a commission of 5% on sales including a del-credere commission of 1%. Manak sold 20 bicycles on
credit and was not able to recover sale proceeds of 2 bicycles because of insolvency of the debtor. Give Ledger accounts in
the books of imperial Ltd. who closes their accounts on 31 March.
Answer:
Consignment to Ranchi Account
Date Particulars Amt. Date Particulars Amt.
2022 To Goods sent on 2022 By Manak (Sale Proceed)
Dec-1 Consignment (invoice value) 180000 Mar-31 By Goods sent on 1,64,800
Dec. 1 To Bank- Freight & Insurance 10000 Consignment A/c -(Loading) 20,000
2023
Mar -31 To Manak: By Consignment stock 38,000
-Rent 2500 5000
-Insurance- 2500 8240
To Manak- (commission)

Mar. 31 To Consignment Stock Reserve. A/c 4000

To P & Loss A/c-trf of profit
15560
222800 222800

Goods Sent on Consignment Account

Date Particulars Amount Date Particulars Amount
2022 To consignment to Ranchi 2022 By consignment to
Mar-31 Account (difference between invoice 20,000 Dec-1 Ranchi Account (invoice
value and cost ) value) 1,80,000
To trading A/C / Purchases A/c 1,60,000
1,80,000 1,80,000

Consignment Stock Account

Date Particulars Amount Date Particulars Amount
2022 2022
Mar-31 To Consignment to Ranchi A/c 38000 Mar-31 By Balance c/d
38000
Total 38000 Total 38000

Manak Account
Date Particulars Amount Date Particulars Amount
2023 2022
Mar-31 To Consignment to Ranchi 164800 Dec- 15 By Bill receivable A/C 40000
Account (Sale proceeds) 2023
Mar-31 By Consignment to Ranchi 5000
A/C (exp.)
Mar-31 By Consignment to Ranchi A/C
(commission) 8240
Mar-31 By Balance c/d 1,11,560
164800 164800

Working Notes Closing stock

Particulars Quantity Rs. Working

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Cost of goods sent on consignment @1600 100 160000
Non recurring expense paid by Consignor 10000
100 170000
Non recurring expense paid by Consignee ------ NIL
100 170000

CLOSING STOCK(20 UNITS) At COST PRICE 20 34000 (170000/100*20)

Load on 20 units @200 each 4000
38000 At I.P

Question.14 ( Over-ridding commission) Ajay sends goods on consignment to Arun. The terms are that Arun will receive 10%
commission on the invoice price (which is cost plus 25%) and 20% of any price realised above invoice price. Arun will meet his
expenses himself, goods to be sent freight paid.

Ajay sent goods whose cost was Rs. 16,000 and spent Rs.1500 on freight, forwarding etc. Arun accepted a bill for Rs.
16,000 immediately on receiving the consignment. His expenses were Rs.200 as rent and Rs 100 as insurance. Arun sold 3/4 th of the
goods for Rs. 19500. Part of the sales was on credit and one customer failed to pay Rs. 400. Prepare consignment Account and Arun's
account in the books of Ajay and Ajay's Account in the books of Arun.

Answer: Consignment A/C

PARTICULAR AMOUNT PARTICULAR AMOUNT
To Goods sent On Consignment 20000 By Arun’s A/c 19500
To bank(freight) 1500 By goods sent on consignment (load) 4000
To Arun’s A/c By closing Stock 4375
Bad debts - 400 400
To Arun’s A/c (comm) 2400
To profit on consignment 3575
27875 27875

Arun’s A/c
PARTICULAR AMOUNT PARTICULAR AMOUNT
To consignment (Sales) 19500 By Bill Receivable 16000
By Consignment A/c (Exp.) 400
By Consignment A/c (comm.) 2400
By bank (bal. fig.) 700
19500 19500

Working Notes: Closing stock

Particulars Rs. Working
Cost of goods sent on consignment 16000
Non recurring expense paid by Consignor 1500
17500
Non recurring expense paid by Consignee NIL
17500

CLOSING STOCK(1/4) At COST PRICE 4375 (17500*1/4)

Question.15 (concept building question) On 20 Jan 2002 M/s. Mohan Brothers of Mumbai forwarded to Ramesh of Lucknow a
consignment of 25 drums of coconut oil of Rs. 510 per dram. They paid Rs. 150 on freight on 18th March 2002. Consignor received
an account sales, on 31st March showing that goods had realised Rs 15000 gross including Rs. 5000 sold on credit and that following
expenses had been incurred. Octroi and insurance—Rs.100: Storage Rs. 30; Cartage Rs.25: Freight on sales Rs.95; Commission @ 3%
and del-credere commission 2%.

One customer owing Rs. 200 failed to pay because of insolvency and another customer deducted Rs.150 because of dispute
regarding quality. Ramesh sent a bill of exchange for the balance due. Prepare necessary accounts in the books of consignor and
consignee. Also show net profit/net loss of consignee.
Solution: consignment account
To Goods Sent On Consignment 12750 By Ramesh ’s A/c 15000
(25 x 510)

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To bank (Freight) 150
By Ramesh ’s A/c
Octroi - 100
Storage – 30
Contage - 25
Freight - 95
Discount -150 400
To Ramesh’s A/c (comm.) 750
To profit on consignment 950
15000 15000

Question. 16 (imp question) Vikram Milk Food s Co. Ltd. of Vikrampur sent to Sunder stores, sonepuri 5000 kg of baby food packed
in 2000 tins of net weight of 1 Kg and 6000 packets of net weight of 1/2 kg for sale on consignment basis. The consignee's
commission was fixed at 5% of sales proceeds. The cost price and selling price of the product were as under.
1kg tin ½ kg pack
Cost Price Rs. 10 Rs. 6
Selling Price Rs. 15 Rs. 7
The consignment was booked on freight 'to pay' basis and freight charges come to 2% of selling value. One case containing 50, 1kg
tin was lost in transit and the transport carrier admitted a claim of Rs. 450.
At the end of the first half year the following information is gathered from the 'Account Sales' sent by the consignee:
(i) Sale proceeds 1500 1 kg tin
4000 ½ kg packets
(ii) Store Rent and insurance charges Rs. 600.
Show the Consignment A/c and Consignee's Account in the books of Vikram Milk Food Co. Ltd,. Assuming that the consignee had
paid the amount due form Delhi. [Ans. Profit on consignment : 7,365] (ICAI Study material)

Question .17 Sanjay consigned 40 machines to Ram on 1st Jan 2002 on the following terms:-
All machines were to be sold 20% above cost of Rs. 10000. Any deficit in selling price is to be borne by Ram while Ram is to
retain 50 % of any surplus price realised,
Ram is to be paid 3% commission and 2% Del credere commission on all sales. Sanjay incurred freight charges of Rs.
40000 in consigning the machines. Ram sent account sale on 31st December 2002 disclosing:
10 machines sold for Rs. 12000 each
5 machines sold for Rs. 10000 each
15 machines sold for Rs. 14000 each.

Ram had incurred unloading charges of Rs. 4000 and selling expenses of Rs. 6000. He had collected the entire sale proceeds
except Rs. 2000 which had become a bad debt. Ram sent a bank draft for the net amount due to Sanjay. On 30 June 2003 Ram
sent a further account Sale disclosing:
10 machines sold at Rs. 12000 each, selling expenses were Rs. 1500. He also sent a draft for the net amount due. Sanjay
closes his books on 31st December each year. Write up the ledger accounts in the books of Sanjay recording the above
transactions.

Question. 18 (concept building question) The Cochin Consignment Account in the books of Ranaji of Mumbai showed a debit
balance of Rs. 1500 representing the cost of 10 fans on 1st Jan. 2022. The invoice value of each fan was Rs. 175. On 1st March
2022, Ranaji sent a further consignment to cochin of 40 fans costing Rs.160 each invoiced proforma at Rs. 180 each. The
freight and other charges amounted to Rs. 210. On 1st June 2022, Cochin agent sent an account sales showing that 8 fans from
the old stock realised Rs. 140 each and 25 fans from the second consignment realised Rs. 200 each and 15 fans remained in
stock unsold. Two fans from the old stock being unsalable at Cochin, were returned to Mumbai, for which the Cochin agent
spent Rs. 30.

The Cochin agent is entitled to a selling commission of 10%, which cover all out of pocket expenses in respect of
consignment. Show necessary accounts in the books of consignors, supposing he closes his books on 30 June.

Question. 19 Mr. Y consigned 800 pockets of tooth- paste, each pocket containing 100 tooth pastes. Cost price of each
pocket was Rs.900. Mr. Y spent Rs. 100 per packet as cartage, freight, insurance and forwarding charges. One packet was
lost in the way and Mr. Y lodged claim with the insurance company and could get Rs 570 as claim on average basis.
Consignee took delivery of the rest of the packets and spent Rs.39,950 as other non -recurring expenses and Rs. 22,500 as
recurring expenses. He sold 740 packets at the rate of Rs. 12 per toothpaste. He was entitled to 2% commission on sales
plus 1 % del-credere commission.
You are required to prepare consignment Account. Calculate the cost of Stock at the end. Abnormal loss and profit & loss
on consignment.

Answer: Consignment Account

To Good sent on consignment A/c 7,20,000 By Consignee's Account 8,88,000

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(800 x Rs. 900) (sales: 740 x 100 x Rs. 12)
To cash Account (Exp: 800 x Rs. 100) 80,000 By Abnormal Loss A/c 1000
To Consignee's A/c By Consignment Stock A/c 61,950
Recurring expenses 22,500
Non-recurring Expenses 39,950 62450
To Consignee's A/c
Commission @ 2% 17,760
Del Credere commission@ 1% 8,880 26640
To Profit on consignment 61,860

Consignee's A/c
PARTICULAR AMOUNT PARTICULAR AMOUNT
To consignment A/c (S ales) 888000 By Consignment A/c (Exp.) 62450
By Consignment A/c (comm.) 26640
By bank (bal. fig.) 798910
888000 888000

Abnormal Loss A/c

PARTICULAR AMOUNT PARTICULAR AMOUNT
To consignment A/c 1000 By bank 570
By profit & loss A/c (bal. fig.) 430
1000 1000

Working Notes:
Abnormal Loss
Particulars Quantity Rs. Working
Cost of goods sent on consignment @900 800 720000
Non-recurring expense paid by Consignor 80000
800 800000
Cost of abnormal loss one packet 1 1000 (800000/800*1)
799 799000
Non-recurring expense paid by Consignee ------ 39950
799 838950

CLOSING STOCK 59 units 59 61950 (838950/799*59)

Question. 20 X of Calcutta on 15th January 2022 sent to Y of Mumbai a Consignment of 250 television costing Rs. 10,000
each. Expenses of Rs. 7,000 were met by the consigner. Y of Mumbai spent Rs. 4,500 for clearance on 30th January,
2022 and the selling expenses were Rs. 500 per television as and when the sale made by Y.

Y sold on 4th March, 2022 150 television at Rs. 14,000 per T.V and again on 10th April, 2022, 75 T.V at Rs. 14,400. Mr. Y
was entitled to a commission of Rs. 500 per T.V sold plus one–fourth of the amount by which the gross sale proceeds less
total commission thereon exceeded a sum calculated at the rate of Rs. 12,500 per T.V Sold. Y Sent the account sale and
the amount due to X on 30th April, 2022 by Bank demand draft. You are required to show the consignment account and
Y's account in the books of X.

Question. 21. Ramesh consigned 2,000 MT of chemicals at a cost of Rs. 800 per MT to John. Ramesh paid freight and
insurance charges of Rs. 20,000. Of the above 500 MT of chemicals were destroyed by fire during transit. John cleared the
balance of 1,500 MT of chemicals and sold 1,000 MT at average price of Rs. 1,000 per MT. John incurred the following
expenses: Godown rent Rs. 5,000, Insurance Rs. 3,000. Clearing charges Rs. 4,500. Insurance claim received against fire
Rs. 4,00,000 after admitting the salvage value of stock destroyed by fire at Rs. 10,000. John was entitled to a commission
of 10%on sales proceeds. John sends the balance to Ramesh after adjusting his commission and expenses out of the sales
proceeds. Prepare a Consignment Account and John's Account in the books of Ramesh.

Question. 22 X of Delhi purchased 10,000 meters of cloth for Rs. 2,00,000 of which 5,000 meters were sent on consignment to
Y of Agra at the selling price of Rs.30 per meter. X paid Rs. 5,000 for freight ad Rs. 500 for packing etc.

Y sold 4,000 mtrs at Rs. 40/meter and incurred Rs.2,000 for selling expenses. Y is entitled to a commission of 5% on total sale
proceeds plus a further 20% on any surplus price realized over Rs. 30 per meter.

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3000 meters were sold at Delhi at Rs. 30 per meter less Rs 3,000 for expenses and commission. Owning to fall in market price,
the stock of cloth in hand is to be reduced by 10%. Prepare the Consignment Account and trading and Profit & Loss account in
books of X and his account in the books of Y.
Hint:
(1) Calculation of Commission payable to Y Rs.
Total Sales proceeds of Y 1,60,000
Surplus proceeds realized over Rs. 30 per meter
[4000 x (Rs. 40 – 30)] 40,000
Commission :-
5% of total sales proceeds 8,000
(5% of Rs. 1,60,000)
20% of surplus (20% of Rs. 40,000) 8,000
16,000

Question. 23 A of Agra sent on consignment goods valued Rs. 1,00,000 to B of Mumbai on 1st March, 2022. He incurred in
expenditure of Rs 12,000 on freight and insurance. A's accounting year closes on 31 st December. B was entitled to a commission
of 5% on gross sales plus a del-credere commission of 3%. B took delivery of the consignment by incurring expenses of Rs. 3,000
for goods consigned.

On 31.12.2022, B informed on Phone that he had sold all the goods for Rs. 1,50,000 by incurring selling expenses of Rs. 2,000.
He further informed that only Rs. 1,48,000 had been realized and rest was considered irrecoverable, and would be sending the
cheque in a day or so for the amount due along with the account sale.

On 5.1.2023, A received the cheque for the amount due from B and incurred bank charges of Rs.260 for collecting the cheque.
The amount was credited by the Bank on 9.1.2023.
Write up the Consignment Account finding out the Profit / loss on the consignment, B's A/c. Provision for expenses A/c and
Bank Accounts in the books of the consignor, recording the transactions upto the receipt and collection of the cheque.
Answer: Books of Mr. A
Consignment Account
2022 Rs. 2022 Rs.
Mar-1 To Goods sent on consignment A/c 1,00,000 Dec.31 By B's account 1,50,000
Dec-31 To Cash Account (Freight and Ins.) 12,000
To B's Account:
Clearance expenses 3,000
Commission @ 5%
On Rs. 1,50,000 7,500
Selling expenses 2,000
Commission @ 3%
on Rs. 1,50,000 4,500 17,000
To Prov. for exp. (Bank charges) 260
To Profit and Loss A/c
(Profit on consignment ) 20,740
1,50,000 1,50,000

B's Account
2022 Rs. 2022 Rs.
Dec-31 To Consignment A/c 1,50,000 Dec.31 By Consignment A/c
Clearance expenses 3,000
Selling expenses 2,000
Commission 7,500
Del credere commission 4,500
By Balance C/d 17,000
1,33,000
1,50,000 1,50,000

Bank Account
2023 Rs. 2023 Rs.
Jan. 5 To B's Account 1,33,000 Jan. 5 By Bank charges 260
Jan. 5 By Balance c/d 1,32,740

Question. 24 (concept building question) M/s Ram & Co. of Delhi purchased 20,000 pieces of sarees @ Rs. 200 per saree. Out
of these, 12,000 sarees were sent on consignment to M/s Laxman Traders of Mumbai at the selling price of Rs. 240 per saree. The
consignor paid Rs. 6,000 for packing and freight. M/s Laxman Traders sold 10,000 sarees @ Rs. 250 per saree and incurred Rs. 2,000
towards selling expenses and admitted Rs. 10,00,000 to Delhi on account. M/s Laxman Traders are entitled to a commission of 5% on

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total sales plus a further 20% commission on any surplus price realized over Rs. 240 per saree. 6,000 sarees were sold at Rs. 220 per
saree by the consignor. Owing to fall in the market price, the value of stock of sarees in hand is to be reduced by 10% . Prepare the
consignment Account and the account of M/s Laxman traders in the books of the consignor.
Answer: Consignment Account

Rs. Rs.
To Goods sent on consignment A/c By Laxman Traders (sales)
( 12,000 x 240 ) 28,80,000 (10,000 x 250) 25,00,000
To Bank (expenses) 6,000 By Goods sent on consignment
To Laxman Traders (expenses ) 2,000 (loading: 12,000x40) 4,80,000
To Laxman Traders ( commission ) 1,45,000 By Stock on consignment 4,32,900
To Stock Reserve 72,000
To Net Profit 3,07,900
Total 34,12,900 Total 34,12,900

Laxman Traders account

Rs. Rs.
To Consignment A/c (sales ) 25,00,000 By Consignment A/c (expenses ) 2,000
By Consignment A/c (com. ) 1,45,000
By Bank 10,00,00
By Balance c/d 13,53,000

Total 25,00,000 Total 25,00,000

Working Notes :
Commission payable
5% on 25,00,000 = 1,25,000
20% on 1,00,000= 20,000
1,45,000
Valuation of Closing stock on consignment
2,000 sarees x Rs.240 = 4,80,000
Add: proportionate expenses
6,000x2,000/12,000 1,000
Less: 10% 4,81,000
Value of Closing stock 48,100
Loading on Closing Stock
2,000 sarees x Rs.40 = 80,000
Less: 10% 8,000
72,000

Question. 25 (Loss of Goods Due To Consignee's Negligence) R of Ranchi consigned goods costing Rs. 1,60,000 to M of
Mumbai.
The terms of the consignment were :
(a) Consignee to get a commission of 5 per cent on cash sales and 4 per cent on credit sales.
(b) Any goods taken by the consignee himself or goods lost through consignee's negligence, shall be valued at cost
plus 12.5 per cent and no commission would be allowed on them.
The expenses incurred by the consignor were : carriage and freight Rs. 6,720 and insurance Rs. 3,440. The consignor
received Rs. 50,000 as advance against the consignment. Account sales together with a draft for the balance due was
received by the consignor showing the following position : Goods costing Rs. 1,28,000 were sold by M and goods
costing Rs. 4,000 were lost through M's negligence. The expenses incurred by M were : advertisement Rs. 1,720 and
other selling expenses Rs. 1,080. Show the ledger accounts in the books of R.

Answer: profit on consignment Rs 98,490, stock on consignment Rs 21,270, commission Rs 11,320

Question. 26 (Goods Stolen) On 1 January 2004, goods cost price of which was Rs. 66,000 were consigned by Ram Dhan
of Delhi to Agent Haldi Ram of Dadri at a Performa invoice price of 20% above cost. Haldi Ram paid freight and other
forwarding charges amounting to Rs. 2,000. He was allowed Rs. 1,000 per month towards establishment cost; 5%
commission on gross sales and 3% del credere commission. Haldi Ram paid Rs. 500 as rent of godown for 3 months ended
31 March 2004. Three fourth of the goods were sold for Rs. 66,000 half of which were credit sales. Half of the balance of
the goods was stolen, but the stock being insured, a claim lodged for Rs. 7,000 was settled for Rs. 6,900. Write up the
consignment account, consignee's account and stock lost on consignment account as on 31 March 2004 in the books of
Ram Dhan.

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Answer: Dr. Consignment to Dadri Account Cr.

To Goods Sent on Consignment By Haldi Ram' A/c (Sales)

Account (66,000+13,200) 79,200 Cash Sales 33,000
To Haldi Ram (Expenses) : Credit Sales 33,000 66,000
Freight and other By Goods Sent on Consign-
forwarding charges 2,000 ment (Load) 13,200
Establishment cost 3,000 By Abnormal Loss
(1,000*3) (Goods stolen) 8,500
Godown Rent 500 5,500 By Consignment Stock A/c
To Haldi Ram (Commission) (At Invoice Price) 10,150
(5% on Rs. 66,000) 3,300
(3% on Rs. 66,000) 1,980 5,280
To Stock Reserve Account
(1/6 of Rs. 9,900)
To Profit and Loss Account 6,220
97,850 97,850

(i) Calculation of Abnormal Loss

Add : Expenses (1/8 of Rs. 2,000) 250

8,500
(3/4 of the Goods were sold. Only 1/4 were left.
1/2 of 1/4 i.e. 1/8 were stolen)
(ii) Valuation of Consignment Stock
Invoice price of the goods unsold 9,900
Add : Expenses (1/8 of Rs. 2,000) 250
10,150
(iii) Stock Reserve
1/6 of Rs. 9,900 1,650 (Load on Cost is 20/100, therefore Load on Sale or invoice price is 20/120 or 1/6)

Question. 27 (Loss-In-Transit) Nagaraj of Kolkata consigned 100 radio sets costing Rs. 500 each to Ram Lal of Patna. The invoice was
made Performa at Rs. 600 per set. Ram Lal was entitled to a commission of 7.5% on sales plus 22.5% del credere commission and 10%
of any excess price realised over invoice price. Ram Lal was to bear all expenses incurred after the goods reached his godown.
While sending the goods, Nagaraj paid Rs. 1,500 as forwarding expenses and insurance. In transit 10 radio sets were damaged and
Nagaraj recovered Rs. 4,000 from Insurance Company. Ram Lal took delivery of the remaining radio sets paying Rs. 4,500 as freight,
cartage etc. Ram Lal sold 70 radio sets at Rs. 800 each, 30 of them on credit. Out of which the proceeds of 3 radio sets could not be
recovered because of disappearance of the customers. He paid Rs. 500 as storage and selling expenses. Ram Lal sent a bank draft for
the amount due to Nagaraj. Show Consignment Account, Ram Lal's Account, Stock Destroyed Account and Goods Sent on
Consignment Account in the books of Nagaraj.
Answer:
Consignment to Patna Account
Rs. Rs.
To Goods Sent on Consign- By Ram Lal (Sales) 56,000
ment Account (100 x 600) 60,000 (70 X 800)
To Cash Account (Expenses) 1,500 By Stock Destroyed Account 5,150
To Ram Lal (Expenses) 5,000 (Loss in-transit)
(4,500 + 500) By Goods Sent on Consign-
To Ram Lal (Commission) : ment Account (Load) 10,000
7.5% of Rs. 56,000 4,200 By Consignment Stock
2.5% of Rs. 56,000 1,400 Account 13,300
10% of Rs. 14,000 1,400 (At invoice Price)
To Stock Reserve Account 2,000
(20x100)
To Profit and Loss Account 8,950
(Profit)
84,450 84,450

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Important Calculations
(i) Value of the goods destroyed Rs.
Cost of 10 sets (500 x 10) 5,000
Add : Proportionate expenses paid
by the consignor (1,500X 10/100) 150
5,150
(ii) Value of consignment stock
Invoice Price of the unsold Stock (20 * 600) 12,000
Add : Proportionate expenses paid by the
Consignor (20/100 X1,500) 300
Add : Proportionate expenses paid by the
Consignee (20/90X 4,500) 1,000
13,300
(iii) Calculation of Commission Rs.
Ordinary Commission : 7.5% of Rs. 56,000 4,200
Del credere Commission : 2.5% of Rs. 56,000 1,400
Overriding Commission : 10% of Rs.1,4000 1,400
Sale Price 56,000
Less : Invoice Price 70 x 600 42,000
Excess Realised Price Over 14,000
Sale Price

Question. 28 (With Opening Stock And Returns) On 1 April, the Consignment to Rangoon Account in the books of Modern
Novel Stores, New Delhi, showed a debit balance of Rs. 5,500. This represented the invoice value 100 novels at 25% above
cost at Burma Book Depot. On 10 April, they sent another 5,000 books at a Performa price of Rs. 125 each which was 25%
above cost. They paid for packing Rs. 1,000, insurance Rs. 700 and freight Rs. 10,000.

Consignees received the books at the airport on 15 April and paid customs duty and clearing charges Rs. 5,000 and sent a two
months bill for 75% of the invoice price. After one month of the receipt of the consignment, the consignee returned 100 books
being defective. They paid freight and insurance Rs. 500. By the end of 31 December they had sold the opening stock of 100
books at Rs. 80 each and 4,500 new books at Rs. 150 each. Their expenses were : Advertising Rs. 15,000; salary Rs. 20,000 and
service charges Rs. 1,500.

After deducting their expenses and commission at 10% on sale price, consignees sent a bank draft for the remaining balance.
Show the consignment, consignee' and goods sent on consignment accounts.

Question 29. Mr. Y consigned 800 packets of toothpaste, each packet containing 100 toothpastes. Cost price of each packet was
Rs 900. Mr. Y Spent Rs 100 per packet as cartage, freight, insurance and forwarding charges. One packet was lost on the way and
Mr. Y lodged claim with the insurance company and could get
Rs 570 as claim on average basis. Consignee took delivery of the rest of the packets and spent Rs 39,950 as other non-recurring
expenses and Rs 22,500 as recurring expenses. He sold 740 packets at the rate of Rs 12 per toothpaste. He was entitled to 2%
commission on sales plus 1% del-credere commission.
You are required to prepare Consignment Account. Calculate the cost of inventories at the end, abnormal loss and profit or loss
on consignment. (ICAI Study material)
Answer: Consignment Account
` `
To Goods sent on consignment A/c 7,20,000 By Consignee’s A/c-Sales 8,88,000
(800 x Rs 900) (740 x100 x Rs 12)
To Cash A/c (expenses 800 x Rs 100) 80,000 By Abnormal Loss :
To Consignee’s A/c: Cash A/c 570
Recurring expenses 22,500 (insurance claim)
Non-recurring expenses 39,950 By Profit and loss account 430
Commission @ 2% on Rs 8,88,000 17,760 (abnormal loss) 61,950
Del-credere commission @ 1% on 8,880 By Consignment stock A/c
Rs 8,88,000
To Profit and loss A/c 61,860
(profit on consignment)
9,50,950 9,50,950

Question 30: Ajay of Mumbai consigned to Vijay of Delhi, goods to be sold at invoice price which represents 125% of
cost. Vijay is entitled to a commission of 10% on sales at invoice price and 25% of any excess realised over invoice price.
The expenses on freight and insurance incurred by Ajay were Rs 10,000. The account sales received by Ajay shows that
Vijay has effected sales amounting to Rs 1,00,000 in respect of 75% of the consignment. His selling expenses to be

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reimbursed were Rs 8,000. 10% of consignment goods of the value of Rs 12,500 were destroyed in fire at the Delhi
godown. Vijay remitted the balance in favour of Ajay. Prepare consignment account and the account of Vijay in the books
of Ajay along with the necessary calculations. (ICAI Study material)

Answer: in the book of Ajay -- Consignment account

Particulars Rs Particulars Rs
To Goods sent on Consignment A/c 1,25,000 By Goods sent on Consignment A/c (Loading) 25,000
To Cash A/c 10,000 By Abnormal Loss 11,000
To Vijay (Expenses) 8,000 By Vijay (Sales) 1,00,000
To Vijay (Commission) 10,938 By Inventories on Consignment A/c 20,250
To Inventories Reserve A/c 3,750 By General Profit & Loss A/c 1,438
1,57,688 1,57,688

Vijay account
Particulars ` Particulars `
To Consignment A/c 1,00,000 By Consignment A/c By 8,000
Consignment A/c By Bank A/c 10,938
81,062

1,00,000 1,00,000
Working Notes:
1. Calculation of value of goods sent on consignment:
Abnormal Loss at Invoice price Rs 12,500.
Abnormal Loss as a percentage of total consignment = 10%.
Hence the value of goods sent on consignment = Rs 12,500 X 100/ 10 = Rs 1,25,000.
Loading of goods sent on consignment = Rs 1,25,000 X 25/125 = Rs 25,000.

2. Calculation of abnormal loss (10%):

Abnormal Loss at Invoice price Rs 12,500
Abnormal Loss at cost = Rs 12,500 X 100/125 = Rs 10,000
Proportionate expenses of Ajay (10 % of `10,000) = Rs 1,000
= Rs 11,000
3. Calculation of closing Inventories (15%):
Ajay’s Basic Invoice price of consignment = Rs 1,25,000
Ajay’s expenses on consignment = Rs 10,000
Rs 1,35,000

Value of closing Inventories = 15% of Rs 1,35,000= Rs 20,250

Loading in closing Inventories = Rs 25,000 X 15/100 = Rs 3,750

Where Rs 18,750 (15% of Rs 1,25,000) is the basic invoice price of the goods sent on consignment remaining unsold.

4. Calculation of commission:
Invoice price of the goods sold = 75% of Rs 1,25,000 = Rs 93,750
Excess of selling price over invoice price = Rs 6,250 (` 1,00,000- Rs 93,750)
Total commission= 10% of Rs 93,750 + 25% of Rs 6,250
= Rs 9,375 + Rs 1,562.50
= Rs 10,937.50 OR 10,938
Note: It has been assumed that final payment received from Vijay.

Question 31. Shri Mehta of Mumbai consigns 1,000 cases of goods costing Rs 1,000 each to Shri Sundaram of Chennai.
Shri Mehta pays the following expenses in connection with consignment:

Carriage 10,000
Freight 30,000
Loading charges 10,000

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Shri Sundaram sells 700 cases at Rs 1,400 per case and incurs the following expenses:
Clearing charges 8,500
Warehousing and storage 17,000
Packing and selling expenses 6,000

It is found that 50 cases have been lost in transit and 100 cases are still in transit.
Shri Sundaram is entitled to a commission of 10% on gross sales. Draw up the Consignment Account and Sundaram’s
Account in the books of Shri Mehta. (ICAI Study material)

Answer: consignment account

Particulars Rs Particulars Rs
To Goods sent on Consignment 10,00,000 By Sundaram (Sales) 9,80,000
To Bank (Expenses) 50,000 By Loss in Transit 50 cases @ 52,500
To Sundaram (Expenses) 31,500 Rs1,050 each
To Sundaram (Commission) 98,000 By Consignment Inventories:
To Profit on Consignment to Profit 1,17,000 In hand 150 @ Rs 1,060 each 1,59,000
& Loss A/c In transit 100 @ Rs 1,050 each 1,05,000 2,64,000

12,96,500 12,96,500

Sundaram account
Particulars Rs Particulars Rs
To Consignment to Chennai A/c 9,80,000 By Consignment A/c (Expenses) By 31,500
Consignment A/c (Commission) By 98,000
Balance c/d 8,50,500
9,80,000 9,80,000

Question 32.. State whether following statements are true or false. (ICAI Study material)
(1) The relationship between the consignor and the consignee is that of Principal and Agent.
(2) In consignment the goods are dispatched on the basis that the goods will be sold on behalf of, at the
expense of and at the risk of the consignee.
(3) Account Sales is the statement sent by the consignor to the consignee.
(4) Del credere commission is normally calculated on total sales.
(5) If the consignee is not authorized to get the Del credere commission, then he is liable for all losses on
account of non-recovery of debts.
(6) Del credere commission is allowed to the consignee to bear the loss of account of bad debts.
(7) Consignee has no right in the profits on goods sent on consignment.
(8) In consignment Account, ownership of the goods remains with the consignor. .

[Ans : (1) True (2) False (3) False (4) True (5) False (6)" True (7) True (8) True}

Question 33. MULTIPLE CHOICE QUESTIONS (COC Students special)

2. Consignment account is of the nature of

(a) Personal account (b) Nominal account
(c) Real account (d) Profit and Loss A/c
3. P of Delhi sends out 100 boxes of toothpaste costing Rs 200 each. Each box consists of 12
packets. 60 boxes were sold by consignee at Rs 20 per packet. Amount of sale value will be:
(a) Rs.14400 (b) Rs.12000 (c) Rs. l3200 (d)Rs. l4200
4. X of Kolkata sends out 2000 boxes to Y of Delhi costing Rs 100 each. Consignor's expenses
Rs 5000. 1/10th of the boxes were lost in consignee's godown and treated as normal loss.1200 boxes
were sold by consignee. The value of consignment stock will be:

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(a) Rs. 68333 (b) Rs.61500 (c) Rs.60000 (d)Rs.60250
5. Goods costing Rs 2,00,000 sent out to consignee at Cost + 25%. Invoice value of the goods
will be:
(a) Rs.250,000 (b) Rs.2,40,000 (c) Rs.300,000 (d) None
6. Goods costing Rs 1,80,000 sent out to consignee to show a profit of 20% on Invoice Price.
Invoice price of the goods will be:
(a) Rs.2,16,000 (b) Rs.2,25,000 (c) Rs.2,10,000 (d) None

7. Goods of the Invoice value Rs 2,40,000 sent out to consignee at 20% profit on cost. The loading amount
will be:
(a) Rs.40,000 (b) Rs.48,000 (c) Rs.50,000 (d)None
8. X sent out certain goods to Y of Delhi. 1 /10 of the goods were lost in transit. Invoice value
of goods lost Rs 12,500. Invoice value of goods sent out on consignment will be:
(a) Rs.120,000 (b) Rs. 125,000 (c) Rs.140,000 (d)Rs.l00,000
9. Rabin consigned goods for the value of Rs 8,250 to Raj of Kanpur paid freight etc. of Rs 650 and
insurance Rs 400. Drew a bill on Raj at 3 months after date for Rs 3,000 as an advance against
consignment, and discounted the bill for Rs 2960. Received Account Sales from-Raj showing that part of
the goods had realized gross Rs 8,350 and that his expenses and commission amounted to Rs 870. The
stock unsold was valued at Rs 2750. Consignee wants to remit a draft for the amount due. The amount
of draft will be:
(a) Rs.2130 (b) Rs.4480 (c) Rs.5130 (d) Rs.5090
10. X of Kolkata sends out goods costing Rs 1,00,000 to Y of Delhi. 3/5th of the goods were sold by consignee
for Rs 70,000. Commission 2% on sales plus 20% of gross sales less all commission exceeds cost price.
The amount of Commission will be:
(a).2833 (b) Rs.2900 (c) Rs.3000 (d) Rs.2800
11. X of Kolkata send out 1,000 bag to Y of Delhi costing Rs 200 each. Consignor's expenses Rs
2,000. Y's expenses non-selling Rs 1000, selling Rs 2,000. 100 bags were lost in transit.
Value of lost in transit will be:
(a) Rs.20,200 (b) Rs.20,300 (c) Rs.20,000 (d) Rs.23,000
12. X of Kolkata sends out 1000 bags to Y on Delhi costing Rs 2000 each. 600 bags were sold
at 10% above cost price. Sale value will be:
(a) Rs.13,20,000 (b) Rs. 13,00,000 (c) Rs.12,00,000 (d) 13,50,000
13. Which of the following statement is not true:
a) If del-creder's commission is allowed, bad debt will not be recorded in the books of consignor.
b) if del-creder's commission is allowed, bad debt will be debited in consignment account
c) Del-creder's commission is allowed by consignor to consignee
d) Del-creder's commission is generally relevant for credit sales
14. X of Kolkata sends out 400 bags to Y on Delhi costing Rs 200 each. Consignor expenses Rs
2000. Y expenses non selling Rs 2000, selling 1000. 300 bags were sold by Y. Value of
consignment stock will be:
(a) Rs.20,400 (b) Rs.20,200 (c) Rs.20,000 (d) Rs.21000
15. X of Kolkata sent out 2000 boxes costing 100 each with the instruction that sales are to be made at cost
+ 45%. X draws a bill on Y for an amount equivalent to 60% of sales value.The amount of bill will be:
(a) Rs.1,74,000 (b) Rs.2,00,000 (c) Rs.2,90,000 (d) Rs.1,20,000
16. Which of the following statement is wrong:
a) Consignor is the owner of the consignment stock
b) Del-credere commission is allowed by consignor to protect himself for bad debt
c) Proportionate consignor's expenses is added up with consignment stock

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d) All proportionate Cconsignor and consignee's expenses will be added up for valuation of consignment
stock.
17. X of Kolkata sends out 500 bags to Y costing Rs 400 each at an invoice price of Rs 500
each. Consignor's A/c expenses Rs 4000 consignee's expenses, non-selling Rs 1000, selling
Rs. 2000. 400 bags were sold. The amount of consignment stock at Invoice Price will be:
(a) Rs.50,900 (b)Rs.50/800 (c) Rs.50,000 (d)Rs.51,000
18. X of Kolkata sends out 500 bags to Y costing Rs 400 each at an invoice price of Rs 500
each. Consignor's A/c expenses Rs 4,000 consignee's expenses, non-selling Rs 1000, selling
Rs. 2000. 400 bags were sold. The amount of Stock Reserve will be
(a) Rs.10,000 (b)Nil (c) Rs.20,000 (d) Rs50,400
19. Commission will be shared between:
(a) Consignor & Consignee (b) Only Consignee
(c) Only Consignor (d) Third Party
*20. X of Kolkata sends out certain goods to Y of Mumbai at cost + 25%. 1/2 of the goods
received by Y is sold at 1,76,000 at 10% above IP. Invoice value of goods send out is:
(a) Rs.300,000 (b) Rs.3,20,000 (c) Rs.180,000 (d) Rs.340,000
21. X of Kolkata sends out goods costing 300,000 to Y of Mumbai at cost + 25%. Consignor's
expenses Rs 5000. 1/10th of the goods were lost in transit. Insurance claim received Rs
3000. The net loss on account of abnormal loss is:
(a) Rs.27,500 (b) Rs.25,500 (c) Rs.30.500 (d) Rs.27,000
*22. Rahim of Kolkata sends out 1000 boxes to Ram of Delhi costing Rs 100 each at an IP of Rs
120 each. Goods send out on consignment to be credited in general trading will be:
(a) Rs.100,000 (b) Rs.120,000 (c) Rs.20,000 (d) None
23. In the books of consignor, the profit of consignment will be transferred to:
(a) General Trading A/c (b)General P/L A/c (c) Drawings A/c (d) None of these
*24. Ram of Kolkata sends out 1000 boxes to Y of Delhi, costing Rs 200 each. 1/10th of the
boxes were lost in transit. 2/3rd of the boxes received by consignee are sold at cost + 25%.
The amount of sale value will be:
(a) Rs.1,00,000 (b) Rs.1,50,000 (c) Rs.1,20,000 (d) Rs.1,40,000
25. X of Kolkata sends out goods costing Rs 80,000 to Y of Mumbai so as to show 20% profit on invoice
value. 3/5th of the goods received by consignee is sold at 5% above invoice price. The amount of sale
value will be:
(a) Rs.63,000 (b) Rs.60,000 (c) Rs.50,400 (d)Rs.40,000
*26. X of Kolkata sends out certain goods at cost + 25%. Invoice value of goods sends out Rs
400,000. 4/5th of the goods were sold by consignee at Rs.3,52,000. Commission 2% upto
invoice value and 10% of any surplus above invoice value.The amount of commission will be:
(a) Rs.9,600 (b) Rs.10,400 (c) Rs.6,400 (d)Rs. 3,200
*27. Ram of Kolkata sends out goods costing 100,000 to Y of Mumbai at 20% profit on invoice price. 1/10th
of the goods were lost in transit. ½ of the balance goods were sold. The amount of stock reserve on
consignment stock will be:
(a) Rs.4500 (b) Rs.9000 (c) Rs.11250 (d)None
28. C of Bangalore consigned goods costing Rs 3,000 to his agent at Delhi. Freight and insurance paid by
consignor Rs 100. Consignee's expenses Rs 200. 4/5th of the goods were sold for Rs 3,000. Commission 2%
on sales. Consignee wants to settle the balance with the help of a bank draft. The amount of draft will be:
(a) Rs.2740 (b) Rs.2800 (c) Rs.3000 (d) Rs.1800
29 Out of the following at which point the treatment of "Sales" and "Consignment" is same:

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(a) Ownership transfer, (b) Money receive, (c) Stock outflow. (d) Risk.
*30. Del-credere commission is allowed for bad debt, consignee will debit the bad debt amount to:
(a) Commission Earned A/c (b) Consignor A/c

(c) Debtors A/c (d) General Trading A/c

*31. A Performa invoice is sent by:
(a) Consignee to Consignor (b) Consignor to Consignee
(c) Debtors to Consignee (d) Debtors to Consignor
32. Which of the following statement is correct:
(a) Consignee will pass a journal entry in his books at the time of receiving goods from consignor.
(b) Consignee will not pass any journal entry in his books at the time of receiving goods from consignor.
(c) The ownership of goods will be transferred to consignee at the time of receiving the goods.
(d) Consignee will treat consignor as creditor at the time of receiving goods.

33. 1000 kg of apples are consigned to a wholesaler, the cost being Rs 3 per kg plus Rs 400 of freight, it is
known that a loss of 15% is unavoidable. The cost per kg will be:
(a) Rs 5 (b) Rs 4 (c) Rs 3.40 (d) Rs 3
*34. A of Mumbai sold goods to B of Delhi, the goods are to be sold at 125% of cost which is invoice price.
Commission 10% on sales at IP and 25% of any surplus realized above IP. 10% of the goods sent out on
consignment, invoice value of which is Rs 12,500 were destroyed. 75% of the total consignment is sold
by B at Rs 1,00,000. What will be the amount of commission payable to B?
(a) Rs.10,937.5 (b) Rs. 10,000 (c) Rs.9000 (d)Rs.9700
35. Consignment A/c is prepared in the books of : .
(a) Consignor (b) Consignee (c) Third Party" (d)None
36. Goods sent on consignment Invoice value 2,00,000 at cost + %. 33 1/3 1/5th
of the goods
were lost in transit. Insurance claim received Rs 10,000. The, amount of abnormal loss to
be transferred to General P/L is:
(a) Rs.30,000 (b) Rs.20,000 (c) Rs35,000 (d)Rs.40,000
37. X of Kolkata sends out 100 boxes to Y of Delhi costing Rs 200 each. Consignor's
expenses Rs 4000. Consignee's expenses non-selling 900, selling 500. 1/10th of the boxes
were lost in transit. 2/3rd of the boxes received by consignee were sold. The amount of
consignment stock, will be:
(a) Rs.-7200 (b) Rs.7500 (c) Rs.7000 (d) Rs.6,000
38. X of Kolkata sends out goods costing 100,000 to Y of Mumbai at cost + 25%. Consignor's expenses
Rs 2000. 3/5th of the goods were sold by consignee at 85000. Commission 2% on sales + 20% of gross sales
less all commission exceeds invoice value. Amount of commission will be
(a) Rs.3083 (b) Rs.3000 (c) Rs.2500 (d)Rs,2000
39. Consignment stock will be recorded-in the balance sheet of consignor on asset side at:
(a) Invoice Value (b) At Invoice value less stock reserve
(c) At lower than cost price (d) At 10% lower than invoice value
40. Which of the following expenses of consignee will be considered as non-selling expenses:
(a) Advertisement (b) Insurance of transit
(c) Selling Expenses (d) None of the above
*41. The consignment accounting is made on the following basis:
(a) Accrual (b) Realization (c) Cash Basis (d)None

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42. Goods sent on consignment Rs 7,60,000. Opening consignment stock Rs 48,000. Cash sales Rs 7,00,000.
Consignor's expenses Rs 20,000. Consignee's expenses Rs 12,000. Commission Rs 20,000. Closing
consignment stock Rs 3,00,000. The profit on consignment is:
(a) Rs.150,000 (b) Rs.140,000 (c) Rs.92,000 (d) None
*43. X of Kolkata sends out 100 boxes to Y of Delhi costing Rs 100 each. Consignor's expenses
Rs 1000. Consignees expenses selling Rs 500. 3/5th of the goods sold by consignee, ½ of the balance
goods were lost in consignee's godown due to fire. The value of abnormal loss will be:
(a) Rs.3000 (b) Rs.2200 (c) Rs.4000 (d) None
44. X of Kolkata sends out 1000 boxes costing Rs.200 each to Y of Delhi. l/10th of the boxes
were lost in transit. 2/3rd of the remaining boxes sold by consignee at cost + 25%. The sale
value will be:
(a) Rs.1,50,000 (b) Rs.1,40,000 (c) Rs.1,20,000 (d) Rs.1,00,000
45. Which of the following item is not credited to consignment account?
(a) Cash sales made by consignee
(b) Credit sales made by consignee
(c) Consignment Stock
(d) Stock Reserve
46. Goods sent out on consignment Rs 2,00,000. Consignor's expenses 5,000. Consignee's expenses 2000.
Cash sales Rs 1,00,000, credit sales Rs 1,10,000. Consignment stock Rs 40,000. Ordinary commission
payable to consignee Rs 3,000. Del-credere commission Rs 2000. The amount irrecoverable from
customer Rs 2,000. What will be the profit on consignment?
(a) Rs.38,000 (b) Rs.40,000 (c) Rs.36,000 (d) Rs.43000
47. The commission received from consignor will be transferred to which account?
(a) General Trading (b) General P/L (c) Balance Sheet (d) None of these
48 X of Kolkata sends out 1000 boxes to Y of Delhi costing Rs 20 each. Consignor's expenses 2000. 4/5th of
the boxes were sold at 25 each. The profit on consignment will be:
(a) Rs.2400 (b) Rs.2000 (c) Rs.3000 (d)Rs.3500
49. If del-credere commission is allowed by consignor to consignee, the bad debt treatment will be (In the
books of Consignor:
(a) Will not be recorded in consignor's books
(b) Bad Debt will be debited in Consignor's A/c
(c) Bad Debt will be charged to General P/L A/c
(d) Bad Debt will be recoverable along with credit sales
50. The owner of the consignment stock is:
(a) Consignor (b) Consignee (c) Debtors (d)None
51. The nature of the consignment account is:
(a) Capital in nature (b) Revenue in nature
(c) Realisation A/c in nature (d) Bank A/c in nature
52. Goods sent out on consignment Rs 2,00,000. Consignor's expenses 5,000. Consignee's expenses 2000.
Cash sales Rs 1,00,000, credit sales Rs 1,10,000. Consignment stock Rs 40,000. Commission payable to
consignee Rs 3,000. The amount irrecoverable from customer Rs 2,000. What will be the profit on
consignment?
(a) Rs.38,000 (b) Rs.40,000 - (c) Rs.43,000 (d) None
53. Rahim of Kolkata sends out goods of the invoice value Rs 2,00,000 to Ram of Delhi at cost
+ 25%. The amount of loading will be:
(a) Rs.50,000 (b) Rs.40,000 (c) Rs.30,000 (d) Rs.60,000
54. Goods sent to consignment at cost + 331'3 %. The percentage of loading on invoice price
will be:

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(a) 25% (b) 331/3 % (c) 20% (d) None
55. The balance of goods sent out on consignment will be transferred to:
(a) General P/L (b)General Trading (c) Balance Sheet (d) Capital A/c
56. X of Kolkata purchased 1000 boxes costing Rs 100 each. 200 boxes were sent out to Y of
Delhi at cost + 25%. 600 boxes were sold at 120 each. The amount of gross profit to be
recorded in general trading will be:
(a) Rs.12,000 (b) Rs.17,000 (c) Rs. (3,000) (d) None
57. In the books of consignor, the profit on consignment will be transferred to:
(a) General Trading A/c (b) General Profit and Loss A/c
(c) Drawings A/c (d) None of the above
58. P of Faridabad sent out goods costing Rs. 45,000 to Y of Delhi at cost + 33 1/3 %. 1/10th of goods were
lost in transit. 2/3rd of the goods are sold at 20% above IP. The amount of sale value will be:
(a) Rs.54,000 (b) Rs.43,200 (c) Rs.60,000 (d)Rs.36,000
59. M of Kolkata sent out goods costing Rs. 45,000 to N of Mumbai at cost + 331/3 %. 1/10th of goods were
lost in transit. 2/3rd of the goods received are sold at 20% above IP. ½ of the sales are on credit. The
amount of credit sales will be:
(a) Rs.21,600 (b) Rs.18,000 (c) Rs.21,000 (d)Rs.22,500
60. A of Ahmedabad sent out certain goods so as to show a profit of 20% on IP. 1/10th of the goods were lost
in transit. The cost price of goods lost is Rs.20,000. The invoice value of goods sent out is:
(a) Rs.250,000 (b) Rs.2,00,000 (c) Rs.225,000 (d) Rs.2,40,000
61. Ram of Delhi sends out goods costing Rs.2,00,000 to Krishna of Brindaban. Consignor's expenses
Rs.5000. Consignee's expenses in relation to sales Rs 2000. 4/5th of the goods were sold at 20% above cost.
The profit on consignment will be:
(a) Rs.26,000 (b) Rs.32,000 (c) Rs.26,200 (d) Rs.(6,000)
62. Over-ridding commission is a commission payable to consignee by consignor for:
(a) For protecting himself from bad debt
(b) For making sales above specific price
(c) As good friend
(d) As loyalty payment
63. A of Kolkata sends out 500 boxes to B of Delhi costing Rs 200 each. Consignor's expenses Rs 5000. 1/5th
of the boxes were still in transit. 3/4th of the goods received by consignee were sold. The amount of
goods still in transit will be:
(a) Rs.20,000 (b) Rs.21,000 (c) Rs.21,200 (d) Rs. None
64. Consignment account is
(a) Real account (b) Personal account
(c) Nominal account (d) None of the above
65. In the books of consignor, the loss on consignment business will be charged to:
(a) Consignee A/c (b) General Trading A/c
(c) General P/L A/c (d) Bank A/c
66. Dravid of Delhi sends out goods to Sourav of Kolkata, goods costing Rs 2,00,000 at cost +25%, with the
instruction to sell it at cost + 50%. If 4/5th of the goods are sold at stipulated selling price and
commission allowable 2% on sales. What will be the profit on consignment in the books of consignor?

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(a) Rs.86,200 (b) Rs.70,000 (c) Rs. 75,200 (d) Rs. 76,800

ANSWERS:

2.B, 3.A, 4.A, 5.A, 6.B, 7.A, 8.B, 9.B, 10.A, 11.A, 12.A, 13.B, 14.D, 15.A, 16.D, 17.D, 18.A,
19.B, 20.B, 21.A, 22.A, 23.B, 24.B, 25.A, 26.A, 27.C, 28.A, 29.C, 30.A, 31.B, 32.B, 33.B, 34.A,
35.A, 36.A, 37.B, 38.A, 39.B, 40.B, 41.A, 42.B, 43.B, 44.A, 45.D, 46.A, 47.B, 48.A, 49.A, 50.A,
51.B, 52.A, 53.B, 54.A, 55.C, 56.A, 57.B, 58.B, 59.A, 60.A, 61.A, 62.B, 63.B, 64.C, 65.C, 66.C,

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Chapter 6 unit 4. AVERAGE DUE DATE

If a person owes a number of sums to a person on different dates, he may like to pay the whole amount on such a day
as will involve neither party in loss of interest. Such a day is known as Average Due Date.
Average due date is generally used in following circumstances:

(a) For calculating interest on drawings of partners;

(b) For settling accounts between principle and agent;
(c) For settling contra accounts e.g. where parties sell goods to each other;
(d) For making lump sum payment against various bills drawn on different dates with different due dates;

It is calculated in the following way:

(i) Take one of the due date as the base date.
(ii) Calculate the number of days between the base date and the due date of every transaction. The basedate is
not to be taken into account.
(iii) Multiply each amount by its respective number of days as calculated in the second step.
(iv) Add the amounts and the products separately.
(v) Divide the sum of products by the total of the amounts. This give the number of days the average duedate is
away from the base date.
(vi) Add the number of days to the base date and thus arrive at the average due date.

Note :-We can take any of the due dates as the base date. The products of amount falling due before that date will
then be minus and the products for amounts due after that will be plus. The difference of the minus and plus totals
should be divided by the total amount and the average due date ascertained accordingly.
➢ If the minus products are higher, the days thus arrived at should be deducted from the base date.
➢ If the plus total is higher, the days should be added to the base date.

Important points for revision:

A. The average due date determines the day on which various amounts can be settled without loss or gain of
interest to either party.
B. If full payment is made on the average due date, no interest is payable.
C. If payment is made after the average due date, interest will be calculated for the number of days from the
average due date to the actual date of payment/ settlement.

Days of Grace and date of Maturity:

A bill of exchange or promissory notes matures on the due date on which it falls due and it falls due on the third day
after the day on which it is expressed to be payable. These extra three days are known as “Days of Grace". When it is
an 'after date bill', the period is counted from the date of drawing the bill but when there is 'after sight bill', the period
is counted from the date of acceptance of bill. However, when bill is payable on demand or on presentation, it
becomes due immediately on presentation for payment.

When the day on which bill or promissory note is at maturity after including three days of grace is a public holiday or
Sunday, the due date will be preceding business day. If holiday is emergency or unforeseen holiday then the due date
shall be the next following day.

Question 1. Calculate Average Due date from the following information: (ICAI study material)

Date of the bill Term Amount

August 10, 2022 3 months 6,000
October 22, 2022 60 days 5,000
December 4, 2022 2 months 4,000
January 14, 2023 60 days 2,000
March 14, 2023 2 months 3,000
(Assume February of 28 days) (ICAI Study material)

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Answer: Computation of average due date (taking 10 th August as the base date)
Date of bill Term Due date- No. of days from Amount Product
Maturity Date 10th August 2022 Rs Rs
August 10, 2022 3 months Nov. 13, 2022 95 6,000 5,70,000
October 22, 2022 60 days Dec. 24, 2022 137 5,000 6,85,000
December 04, 2022 2 months Feb. 07, 2023 181 4,000 7,24,000
January 14, 2023 60 days Mar. 18, 2023 220 2,000 4,40,000
March 14, 2023 2 months May 17, 2023 280 3,000 8,40,000
20,000 32,59,000

Total of product 32,59,000

Average Due Date = = = 162.95 = 163
Total of amount 20,000
= 163 days after August 10, 2022 i.e. January 20, 2023.
Question:2 E owes to F the following amounts:
Rs.5,000 due on 10th March, 2022.
Rs. 18,000 due on 2nd April 2022.
Rs.60,000 due on 30th April, 2022
Rs.2,000 due on 10th June, 2022
He desires to make full payment on 30th June, 2022 with interest @10 % per annum from the average due date. Find
out the average due date and the amount of interest.
[Ans. April.22, 2022 i.e.43 days from base date March 10, 2022, Interest Rs.1,607 approx.

Question:3. Mr. Green and Mr. Red had the following mutual dealings and desire to settle their account on the average
due date:
Purchases by Green from Red: `
6th January, 2020 6,000
2nd February, 2020 2,800
31st March, 2020 2,000
Sales by Green to Red:
6th January, 2020 6,600
9th March, 2020 2,400
20th March, 2020 500
You are asked to ascertain the average due date. (28 days in February) (ICAI Study material)

Answer : 20th February 2020.

Question:4 Mr. X owed Rs.12,000 on 1st January, 2022 to Y. The following transactions took place between the two
parties:-
2022 Rs.
January, 16 Y sold goods 8,000
January, 29 Y purchases goods 6,000
February, 10 Y pays cash 6,000
February, 10 X accepts a bill drawn by Y for one month 7,000
It is desired to settle the account between the two parties by one single payment on March, 15 together with interest
at 18% p.a. Ascertain the date and the amount paid.

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Answer: Let 1st January, 2022 be the base date.

Due date Amount due to X Due from X (Rs.) Number of days Product. Product
(Rs.) from1stJan. 2022 (Due to X) (Due from X)
2022
January, 1 ---- 12,000 0 --- ----
January, 16 ---- 8,000 15 ---- 1,20,000
January, 29 6,000 --- 28 1,68,000 ----
February, 10 --- 6,000 40 --- 2,40,000
March, 13 7,000 --- 71 4,97,000 ----
13,000 26,000 6,65,000 3,60,000
13,000 ---- --- 3,05,000
26,000 26,000 6,65,000 6,65,000
Dividing 3,05,000 by 13,000, one gets 23 days. Since the products are in favour of X and the amount against him, the
average due date is 23 days prior to 1st January, 2022. Interest will be calculated on Rs.13,000 @18 % p.a. for 96 days
i.e. for the period from 9th December, 2022 to 15 March, 2022; the amount of interest is Rs.615.45. On 15th March
2022 X will pay a total sum of Rs.13,615.45.

Question:5 A and B had the following transactions during the half year ending 30th September. 2022:-
Date Rs.
April 12 A sells goods to B 3,750
April 18 B sells goods to A 5,000
May 7 A accepts B's draft at 2 months 3,000
June 2 A pays cash 1,750
July 24 B sends his acceptance at one month 5,000
Aug. 1 A sells goods to B 4,000
Sept. 13 A pays cash 3,500
Sept. 30 Settlement made.
Interest is to be charged at 18% per annum. Find the average due date and calculate interest.
[Ans. Average due date, 25th July,2022; Interest, Rs.198.25]

Question:6 Ganga Ram has accepted the following Bills drawn by Parul:
On 8th March, Rs.4,000 for 4 months.
On 16th March, Rs.5,000 for 3 months.
On 7th April, Rs.6,000 for 5 months.
On 17th March, Rs.5,000 for 3 months.

He wants to pay all the bills on a single day. Find out this date. Interest is charged @ 18% p.a. and Ganga Ram wants to
save Rs. 150 by way of interest. Find out the date on which he has to effect the payment to save the interest of Rs. 150.
(CA-IPCC GROUP 1-NOV 2011)-8 MARKS

Question:7 A trader having accepted the following several bills falling due on different dates, now desires to have
these bills cancelled and to accept a new bill for the whole amount payable on the average due date:-
1. March 1 400.00 2 months
2. March. 10 300.00 3 months
3. April. 5 200.00 2 months
4. April. 20 375.00 1 month
5. May. 10 500.00 2 months
You are required to find out the said average due date. (ICAI study material)
(Ans. Average Due Date: 35 Days after the assumed date i.e 4th May.

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Question:8 For goods sold, Nair draws the following Bills on Roy who accept the same as per terms:-
Amount of the Bills (Rs.) Date of drawing Date of acceptance Tenor
8,000 06.01.2013 09.01.2013 3 months after date
9,000 15.02.2013 18.02.2013 60 days after sight
8,000 21.02.2013 . 21.02.2013 2 months.
15,000 14.03.2013 17.03.2013 30 days after sight
On 18th March, 2013, it is agreed that the above Bills will be withdrawn and the acceptor will pay the whole amount
in one lump sum by a cheque, 15 days earlier of average due date and for this a rebate of Rs. 1,000 will be allowed.
Calculate the average due date, the amount and the due date, of the Cheque.

Question:9 Parul had accepted the following bills payable to Nandita:

Amount Date (2022) Term
400 January. 15 3 months
500 February. 10 2 months
300 March. 9 2 months
600 March 15 3 months
Parul wishes to pay all the bills on one day. When should she pay? Suppose actually, Parul makes the payment on 30 th
June, assuming interest @ 6 % p.a., what will be the amount of the interest? Check your answer by calculating the
interest on each item and by calculating it using the average due date. [Ans. May. 11; Interest Rs.14.79]

Question 10. Manoj had the following bills receivables and bills payable against Sohan. Calculate the average due date,
when the payment can be received or made without any loss of interest.
Date Bills Receivable Tenure Date Bills Payable Tenure
01/06/2020 3,000 3 month 29/05/2020 2,000 2 month
05/06/2020 2,500 3 month 03/06/2020 3,000 3 month
09/06/2020 6,000 1 month 9/06/2020 6,000 1 month
12/06/2020 1,000 2 month
20/06/2020 1,500 3 month

15 August, 2020 was a Public holiday. However, 6 September, 2020 was also declared as sudden holiday.
(ICAI Study material)

Answer : Let us take 12.07.2020 as Base date.

Bills receivable
Due date No. of days from 12.07.2020 Amount Product
04/09/2020 54 3,000 1,62,000
08/09/2020 58 2,500 1,45,000
12/07/2020 0 6,000 0
14/08/2020 33 1,000 33,000
23/09/2020 73 1,500 1,09,500
14,000 4,49,500

Bills payable
Due date No. of days from 12.07.2020 Amount Product
01/08/2020 20 2,000 40,000
07/09/2020 57 3,000 1,71,000
12/07/2020 0 6,000 0
11,000 2,11,000

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Excess of products of bills receivable over bills payable = 4,49,500 – 2,11,000 = 2,38,500
Excess of bills receivable over bills payable = 14,000 – 11,000 = 3,000
Number of days from the base date to the date of settlement is 2,38,500/3,000 = 79.5 (appox.)
Hence date of settlement of the balance amount is 80 days after 12th July i.e. 30th September.
On 30th September, 2020 Sohan has to pay Manoj Rs 3,000 to settle the account.

Question 11. Mr. Kapoor had the following Bills receivable and Bills payable against Mr. Khan, the details of which
has been given as follows-
Bills receivable Bills payable
Date Amount Tenure Date Amount Tenure
1.5.2020 400 3 months 11.5.2020 800 60 days
19.6.2020 750 2 months 21.6.2020 950 30 days
25.6.2020 1,000 1 month 28.6.2020 1,150 45 days
7.7.2020 1,250 2 months 10.7.2020 1,800 50 days
14.7.2020 800 2 month 16.7.2020 1,250 55 days
Gazetted holidays in the intervening period. 15 August (Independence day), 24 July (Emergency holiday), 10th
th th

September (Sunday). Calculate average due date. (ICAI Study material)

Answer: Base date-The date of the first transaction - 13.07.2020

Payment to be made by Mr. Khan to Mr. Kapoor.
Due date No. of days from base date Amount Product

04.08.2020 22 400 8,800

22.08.2020 40 750 30,000
28.07.2020 15 1000 15,000
09.09.2020 58 1250 72,500
17.09.2020 66 800 52,800
Total 4,200 1,79,100
Payment to be made by Mr. Kapoor to Mr. Khan
Due date No. of days from base date Amount Product

13.07.2020 0 800 0
25.07.2020 12 950 11,400
14.08.2020 32 1,150 36,800
01.09.2020 50 1,800 90,000
12.09.2020 61 1,250 76,250
Total 5,950 2,14,450
Difference in products = Mr. Kapoor to pay to Mr. Khan = 2,14,450-1,79,100 = 35,350.
Difference in amounts = 5,950-4,200 = 1,750
Average due date = Base date ± Difference in products
Difference in amounts
35,350
13th July + 1,750 = 13th July + 20.2 days = 20 days

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Question:12 A partner has withdrawn the following sums of money during the half year ending 30 th June 2022.

January 12 700
January 18 1,000
February 8 600
March 14 350
April 26 1,000
May 1 800
June 15 700
Interest to be charged at 5% per annum. Find the Average Due Date and calculate interest.

Answer:- Taking 30th June, as the Starting Point

Due Amount No. of days from the Starting Point Product
January 12 700 -169 -1,18,300
January 18 1000 -163 -1,63,000
February 8 600 -142 -85,200
March 14 350 -108 -37,800
April 26 1,000 -65 -65,000
May 1 800 -60 -48,000
June 15 700 -15 -10,500
Total 5,150 Total -5,27,800
-5,27,800 / 5,150 = -102 days approximately
The average due date is 102 days prior to the starting point i.e. 30th June - 102 days = 20th March,
Interest on Drawing = 5,150 x 102 x 5 / 365 x 100.= Rs. 71.96 Approximately.

Question:13 A Partner in a firm has withdrawn from the business during 2022 on which he is to be charged interest at 5%
per annum.
January 31 100 July 31 60
February 29 50 August 31 100
March 31 200 September 30 200
April 30 100 October 3 1 150
May 31 150 November 30 250
June 30 80 December 31 300
Find out the interest chargeable on the above drawings through the methods of Average Due Date.

Answer: Taking 31st December as the Starting Point

Date Amount Withdrawn (Rs.) Months for which interest is to be charged Product

January 31 100 -11 -1,100

February 29 50 -10 - 500
March 31 200 -9 -1,800
April 30 100 -8 - 800
May 31 150 -7 -1,050
June 30 80 -6 - 480
July 31 60 -5 -300
August 31 100 -4 -400
September 30 200 -3 -600
October 31 150 -2 -300
November 30 250 -1 -250
December 31 300 -0 0
Total 1,740 -7,580
-7,580 / 1,740 = -4.36
Average due Date will be 4 1/3 months previous to 31st Dec.
Interest will be, 1,740 X 5/100 X 13 / 3 X 12 = Rs. 31.42 approximately.

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Question 14. A and B, two partners of a firm, have drawn the following amounts from the firm in the year ending 31st
March, 2020:
Date A Date B
Rs Rs
1st July 500 12th June 1,000
30th September 800 11th August 500
1st November 1,000 9th February 400
28th February 400 7th March 900
Interest at 6% p.a. is charged on all drawings. Calculate interest chargeable by using
(i) ordinary system
(ii) Average due date system. (assume 1 year = 365 days) any fraction of day should be ignored. (ICAI Study material)

(i) Ordinary System :

A.500 for 9 months = 4,500 for 1 month
800 for 6 months = 4,800 for 1 month
1,000 for 5 months = 5,000 for 1 month
400 for 1 month = 400 for 1 month
14,700 for 1 month
14,700 @ 6% for 1 month = 1/2% of 14,700
= Rs 73.50
B. 1,000 for 292 days = 2,92,000
500 for 232 days = 1,16,000
400 for 50 days = 20,000
900 for 24 days = 21,600
4,49,600
Interest on B’s drawing:
6 1
4,49,600 x  = Rs 73.91
100 365

(ii) Average due date system:

Taking 1st July as the base date (O-day)

Dates Rs Months from O-day Products
1st July 500 0 0
30th September 800 3 2,400
A 1st November 1,000 4 4,000
28th February 400 8 3,200

2,700 9,600

Average due date = 9,600/2700 months from 1st July i.e. 3.556 months i.e October 17.

Interest is chargable from 17 October to 31st March i.e. 5.444 months i.e. Rs 73.49.

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B. Taking 12th June as the base date (Zero-day)

Dates Rs Days from O-day Products
B 12th June 1,000 0 0
11th August 500 60 30,000
9th February 400 242 96,800
7th March 900 268 2,41,200

2,800 3,68,000

Average due date = 3,68,000/28,000 i.e 131 days from 12th June = 21st October.

Interest is chargable from 21st October to 31st March = 2,800 X 6/100 X 161/365 = Rs 74.10

Question:15. Ram Kumar has to pay the following bills to Raja Ram:
Date Amount Tenor
January 9 200 3months.
February 6 450 60 days.
March 9 500 2 months
March 12 300 30 days
It was agreed between Ram Kumar and Raja Ram that a fresh bill should be drawn for the aggregate amount on 25 th
January. What should be the equated tenor of the bill so that neither party should stand to lose?

Answer: Taking April 10 as the Starting Point

Date of Bill Tenor Due Date Amount No. of days from Product
the starting point
January 9 3m/s. April 12 200 2 400
February 6 60d/s. April 10 450 0 0
March 9 2 m/s. May 12 500 32 16,000
March 12 30d/s. April 14 300 4 1,200
Total 1,450 17,600
17,600/1,450 = 12
Therefore, Average Due Date will be 12 days after the starting point i.e., 10th April + 12 days = April 22.
The bill should be drawn at such tenor as would mature on April 22. Now the period from January 25 to April 22 in 87 days.
Deducting 3 Days of Grace the bill is to be drawn at 84 days.
Question:16. Rs10,000 lent by Dass Bros. to Kumar & Sons on 1st January, 2017 is repayable in 5 equal annual instalments
commencing on 1st January, 2018. Find the average due date and calculate interest at 5% per annum, which Dass Bros.
will recover from Kumar & Sons. (ICAI Study material)
Answer:
Due date No. of years from 1 Jan 2017
1 Jan 2017 0
1 Jan 2018 1
1 Jan 2019 2
1 Jan 2020 3
1 Jan 2021 4
1 Jan 2022 5

Answer : 1 January 2020.

Question:17 The following amounts are due to X by Y. Y wants to pay off (a) on 18.3 ... or (b) on 14.7 Interest rate of 8%
p.a. is taken into consideration.
Due Dates Rs
10.1 500
26.1(Republic Day) 1,000

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23.3 3,000
18.8 (Sunday) 4,000
Determine the amount to be paid in (a) and in (b). (ICAI Study material)

Answer:
Due Date Due Date No. Amount Product
(Normal) (Actual) from 10.1. . .
of days Rs.
taking as 0-Day
10.1 10.1 0 500 0
26.1 25.1 15 1,000 15,000
23.3 23.3 72 3,000 2,16,000
18.8 17.8 219 4,000 8,76,000
8,500 11,07,000

A.D.D. = 10th Jan.+ 11,07,000 = 10th Jan + 130 days = 20th May 8,500
January 21
February 8
March 31
April 30
110
(a) If the payment is made on 18.3 ... rebate will be allowed for unexpired time from 18.3 ...to 20.5 ... i.e., 13 + 30 + 20 i.e.
for 63 days. He has to pay the discounted value of the total amount.
Discount = 8,500 x 8/1000 x63/365 = 680x 63/365 = Rs. 117.37
Amount to be paid on 18.3 ... Rs. 8,500 - 117.37 = 8,382.63

(b) If the payment is deferred to 14.7, interest is to be paid from 20.5 ... to 14.7 ... i.e., for 11+ 30 + 14 = 55 days.
Interest = 8,500 x 8/100 x55/365 = 680 x 55/365 = Rs. 102.47
The amount to be paid on 14.7.
Rs. 8,500+ 102.47 = 8,602.47

Question 18: Swaminathan owed to Subhramanium the following sums;

Rs. 5,000 on 20th January, 2009
Rs. 8,000 on 3rd March, 2009
Rs. 6,000 on 5th April, 2009
Rs. 11,000 on 30th April, 2009
Ascertain the average due date.

Answer: Computation of average due date taking 20th January as the base date
Due date Amount No. of days from 20th January Product
20th January 5,000 0 0
3rd March 8,000 42 3,36,000
5th April 6,000 75 4,50,000
30th April 11,000 100 11,00,000
30,000 18,86,000
𝑇𝑜𝑡𝑎𝑙 𝑃𝑟𝑜𝑑𝑢𝑐𝑡
Average due date = 20th January +
𝑇𝑜𝑡𝑎𝑙 𝐴𝑚𝑜𝑢𝑛𝑡
18,86,000
= 20𝑡ℎ 𝐽𝑎𝑛𝑢𝑎𝑟𝑦 +
30,000
= 20th January, 2009+63 days (approx)
= 24th march, 2009
(CA-IPCC GROUP 1-MAY 2010)—2 MARKS

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Question 19: A and B are partners in a firm and share profits and losses equally. A has withdrawn the following sum during
the half year ending 30th June, 2010:
Date Amount
Rs.
January 15 5,000
February 10 4,000
April 5 8,000
May 20 10,000
June 18 9,000
Interest on drawing is charged @ 10% per annum. Find out the average due date and calculate the interest on drawings to
be charged on 30th June, 2010.(CA-IPCC GROUP 1- MAY 2011)- 4 MARKS

Answer: Calculation of Average due date (Base Date 15th Jan, 2010)
Date Amount Rs. No. of Days Product Rs.
January 15 5,000 0 0
February 10 4,000 26 1,04,000
April 5 8,000 80 6,40,000
May 20 10,000 125 12,50,000
June 18 9,000 154 13,86,000
36,000 33,80,000

Average Due date

𝑇𝑜𝑡𝑎𝑙 𝑃𝑟𝑜𝑑𝑢𝑐𝑡
= 𝐵𝑎𝑠𝑒 𝑑𝑎𝑡𝑒 + × 𝑑𝑎𝑦𝑠
𝑇𝑜𝑡𝑎𝑙 𝐴𝑚𝑜𝑢𝑛𝑡
33,80,000
= 15𝑡ℎ 𝐽𝑎𝑛 + × 𝑑𝑎𝑦𝑠
36,000
= 15 jan + 94 days (approx)
Number of days from 19th April, 2010 to 30th June, 2010 = 72 days
∴ Interest on drawings from 19th April to 30 th June @ 10%.
72 10
= 𝑅𝑠. 36,000 × × = 𝑅𝑠. 710
365 100
Thus Rs. 710 will be charged from A on 30th June, 2010 as interest on drawing.

Question 20. State whether following statements are true or false with suitable reason. (ICAI Study material)
i. The specific due date excludes the addition of grace days to arrive at the due date.
ii. Payment made before the average due date entitles rebate to the customer.
iii. Average due date results in loss to the party making the payment.
iv.Interest has to be paid by the party making payment exactly on the average due date.
v.Where the due date is a Public holiday and the preceding day is Sunday (holiday), then the due date falls on the day
preceding Sunday.

Answer:
i. True: Where the due date is specifically given, then there is no need of further addition of 3 days grace to it.
ii. True: The rebate is given to the customers who make payment early to the average due date calculate.
iii. False: It is single weighted average date calculated in such a way that it does not create any profit / loss to both the
parties involved.
iv.False: If payment made on the average due date, then there is no need to pay interest or provide rebate as it is a date
resulting in no profit/loss to either parties.
v. True: This can be understood from the following example- where August 15th is the due date, then the revised due date is
14th- which is Sunday (holiday), then the due date becomes 13th (preceding working day).

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Chapter 6 unit 5. ACCOUNT CURRENT

An Account Current is a running statement of transactions between parties for a given period of time and
includes interest allowed or charged on various items. It takes the form of an ledger account.
Some of the situations when account current is prepared are:

(i) It is prepared when frequent transactions regularly take place between two parties. For example it is
prepared by a manufacturer who sells goods frequently to a merchant on credit and receives payments from
him in instalments at different intervals and charges interest on the amount which remains outstanding.

(ii) A consignee of goods can also prepare an Account Current, if the latter is to settle the account at the end of
the consignment & interest is chargeable on outstanding balance.

(iii) An Account Current also is frequently prepared to set out the transactions taking place between a banker
and his customer.

(iv) It is prepared when two or more persons are in joint venture and each co-venture is entitled to interest on
their investment. Also, no separate set of book is maintained for it.

An Account Current has two parties - one who renders the account and the other to whom the account is rendered.
This is indicated in the heading of an Account Current, which is like the following: “A in Account Current with B”. It
implies that A is the customer, and the account is being rendered and prepared to him by B.

METHOD OF PREPARATION OF ACCOUNT CURRENT: There are three ways of preparing an Account Current:
(1) With help of interest table ( also called individual method)
(2) By means of products
(3) By means of products of balances

(1) With the help of interest table (also called Individual Method):- According to this method, all the transactions
are arranged in the form of an account. There are two additional columns on both the sides of such an account.

(a) One column is meant to indicate the number of days counted from the due date of each transaction to the date of
rendering the account. If no specific date is mentioned as the date on which payment is due, the date of the
transactions is presumed to be the due date.

(b) The other column is meant for writing interest.

With the help of ready made tables, interest due on different amounts at given rates for different periods of time is
found out and this is entered against each item separately. The interest columns of both the sides are totalled up and
the balance is drawn.

Question 1. Prepare Account Current for Nath Brothers in respect of the following transactions with Shyam:
2022 `
September 16 Goods sold to Shyam 200 due 1st Oct.
October 1 Cash received from Shyam 90
October 21 Good purchased from Shyam 500 due 1st Dec.
November 1 Paid to Shyam 330
December 1 Paid to Shyam 330
December 5 Goods purchased from Shyam 500 due 1st Jan.
December 10 Goods purchased from Shyam 200 due 1st Jan.
2023
January 1 Paid to Shyam 600
January 9 Goods sold to Shyam 20 due 1st Feb.

The account is to be prepared upto 1st Feb. Calculate interest @ 6% per annum.(1year = 365days)(ICAI Study material)

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Solution: Shyam in Account Current with Nath Brothers (Interest to 1st February, 2023 @ 6% p.a.)

Date. Particulars Due Amount Days Intere Date Particulars Due Amount Days Intere
st st
2022 date ` 2022 date `
Sept.1 To Sales a/c 1st 200 123 4.04 Oct. 1 1st Oct. 90 123 1.82
By Cash A/c
6 Oct.

Nov.1 To Cash a/c 1st 330 92 5 Oct. 1st Dec. 500 62 5.1
By Purchase A/c
Nov 21
.
By Purchase A/c
Dec. 1 To Cash a/c 1st 330 62 3.36 Dec. 1st Jan. 500 31 2.55
Dec. 5
By Purchase A/c
Dec.1 1st Jan. 200 31 1.02
0

2023 2023
Jan. 1 To Cash A/c 1st 600 31 3.06 Feb. 1 ByBalance of 4.97
Jan. Interest
Jan. 9 To sales A/c 1st 20 Feb.1 -
Feb. By Balance c/d 194.97
Feb. 1 To Interest 4.97
1,484.97 15.46 1,484.97 15.46
Important note: (i) While counting the number of days, the date of due date is ignored and the date upto which the
account is prepared, is included.
(ii) While counting the number of days, for opening balances, the opening date as well as date upto which the account
is prepared, is counted.

(2) By means of products:— When this method is followed, the way of preparing the Account Current
remains the same. In this method, only the method of calculating interest is different.
In this method, interest columns are replaced by “product” columns. Product in this case is the amount
multiplied by the number of days for which it has been outstanding. Interest on a certain sum of money for a
certain number of days is the same thing as interest on the product for one day.

In other words, with a view to reduce the period of each transaction to one day, the amount of each transaction
is multiplied by the number of days. This product is entered against each transaction the product column.
The remaining steps are as follows:
(a) Find out the balance of the products on the two sides.
(b) Calculate interest at the given rate on the balance of the products for a single day.
(c) Enter interest on the appropriate side in the amount column. This entry is made on the side other than that
on which the balance of products appears.

Method of Computing the numbers of Days:- Usually any of the following two methods is used for calculating
the number of days.
(i) Forward Method- Under this method the number of days are calculated from the due date of the transaction to
the date of closing the account.
(ii) Backward (or Epoque Method)- Under this method, the number of the days are calculated from the opening
date of statement to the due date of transaction.

Question 2. From the following particulars, make up an Account Current to be rendered by Mr. X to Mr. Y
on 31st December, 2022 taking interest into account at the rate of 18% p.a.

01.07. 2022 Balance owing by Mr. Y Rs 600

30.07. 2022 Goods sold to Mr. Y (Credit Period allowed 1 month) Rs 300

01.08. 2022 Good purchased from Mr. Y (Credit Period received 1 month) Rs 200

01.09. 2022 Cash received from Mr. Y Rs 100

01.09. 2022 Mr. Y accepted Mr. X’s Draft at 3 Months date Rs 400

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You are required to prepare the Account Current according to interest on individual transaction under the Forward and
Backward methods. (ICAI Study material)

Answer: (a) Product of individual Transaction Method (Forward Method)

Mr. Y in Account Current with Mr. X (interest to 31st Dec. 2020 @ 18% p.a
Date Particulars Due Amt Day Product Date Particulars Due Amt Day Product
date Rs s ` date Rs s Rs

1.7.22 To Balance b/d 600 184 1,10,400 01.08.22 By Purchase a/c Sep. 1 200 121 24,200

30.7. 22 To Sales A/c Aug 300 123 36,900 01.09.22 By Cash A/c Sep. 1 100 121 12,100
30
31.12.22 01.09.22 By B/R A/c Dec. 4 400 27 10,800
To Interest on
Balance for
1 day @ 18%
1,00,200x18x1
100x365 49

31.12.22 By Balance of 1,00,200

Products 249
949 1,47,300 949 1,47,300
By Balance c/d
(b) Product of individual Transaction Method (Epoque Method)
Mr. Y in Account Current with Mr. X (interest to 31st Dec. 2022 @ 18% p.a
Date Particulars Due Amt Day Product Date Particulars Due Amt Day Product
date Rs s Rs date Rs s Rs

1.7.22 To Balance b/d 600 1.8.22 By Purchase a/c Sep. 1 200 63 12,600

30.7.22 To Sales A/c 30- 300 61 18,300 1.9. 22 By Cash A/c Sep. 1 100 63 6,300
To Balance of Aug
31.12.22 Product 1,00,200 1.9.22 By B/R A/c Dec. 4 400 157 62,800
To Interest on
31.12.22 Balance for 1 49 31.12.22 By Balance of 36,800
day @ 18% Products
1,00,200x18x1 [200x 184]
100 X 365
31.12.22 By Balance c/d 249

949 - 1,18,500 949 1,18,500

Question: 3 Make out an Account Current to be rendered by Ram Kumar to Raja Ram as on 30 th April 2022,taking interest
into account at 5% per annuam. The following transactions took place between them:
Jan. 1 Balance due from Raja Ram 2,000
Jan. 1 Sold goods to Raja Ram, due on Feb. last 3,650
Jan. 19 Bought goods of Raja Ram, due on March last 1,000
Feb. 3 Cash received from Raja Ram 2,500
Feb. 12 Sold goods to Raja Ram due on 15th April 2,200
Mar. 21 Bought goods from Raja Ram 2,000
Mar. 23 Received Cash from Raja Ram 600
Mar.25 Sold goods to Raja Ram due on 10th April 1,500
Question:4 Make out an Account Current for XYZ from the following:

2022 Rs.
Jan. 1 Sold goods to XYZ due 1st May 250
Jan 30 Received cash from XYZ 175
Feb. 15 Bought goods from XYZ due 15th April 300
Mar. 10 Paid cash to XYZ 325
Apr. 15 Sold goods to XYZ 500
May 10 Bought goods from XYZ 200
June 15 Paid cash to XYZ 125
Interest is 5% p.a. The account is to be made up to 30th June, 2022

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Answer: XYZ in Account Current with ----- As on 30th June 2022.

Date Particulars Amt. Day Products Date Particulars Amt. Day Products
Int. nos. int. Nos.
2022 2022
Jan. 1 To Sales A/c Jan. 30 By cash A/c 175.00 151 264.25
(due May 1) 250 60 150 Feb. 15 By purchase 300.00 76 228.00
Mar. 10 To Cash A/c 325 112 364 (due April 15)
Apr. 15 To Sales A/c 500 76 380 May. 10 By Purchases 200.00 51 102.00
June 15 To Cash A/c 125 15 18.75 By Balance of
June30 Int. Numbers
June 30 To Int. A/c 4.36 June 30 By Balance C/d 529.36 318.50

1,204.36 912.75 1,204.3 912.75

2022
July 1 To Bal. B/d 529.36
Note:- Interest = 318.50 X 5 / 365 = Rs. 4.36

RED-INK INTEREST:- In case the due date of a bill falls after the date of closing the account, then no interest is
allowed for that period. However, interest from the date of closing to such due date is written in “Red-Ink" in the
appropriate side of the ' Account current'. This interest is called Red- Ink interest. This Red Ink interest is treated as
negative interest.

Question:5 Following running transactions took place between Me and You during the month of February, 2022.
Feb 2022 Particulars `
1 Amount payable by You to Me 5,000
5 Sales made by Me to You (invoice dated 07.04.2022) 8,250
8 Received acceptance of You by Me for 3 months 10,000
10 You sold goods to Me (invoice dated 10.3.2022) 11,000
12 Me received cheque from You dated (12.04.2022) 7,500
16 Cash paid by Me to You 2,500
24 Bills receivable accepted by Me from You on account of sale (due date- 24.03.22) 5,000
28 Cash paid by you to me 2500

Prepare account current to be rendered by me to you as on 31st March, 2022 charging interest @ 12% p.a.
(ICAI Study material)

Question 6. Following transaction took place between X and Y during the month of April, 2022.
April Rs
1 Amount payable by X to Y 10,000
7 Received acceptance of X to Y for 2 months 5,000
10 Bills receivable (accepted by Y) on 7.2.2022 is honoured on this due date
10 X sold goods to Y (invoice dated 10.5.2022) 15,000
12 X received cheque form Y dated 15.5.2022 7,500
15 Y sold goods to X (invoice dated 15.5.2022) 6,000
20 X returned goods sold by Y on 15.4.2022 1,000
20 Bill accepted by Y is dishonoured on this due date 5,000
You are required to make out an account current by products method to be rendered by X to Y as on 30.4.2022, taking
interest into account @ 10% p.a. (assume 1 year = 365 days)

Method 3: Preparation of Account Current by Means of Product of Balances in case of Banks.

This method, also known as periodic balance method, is usually adopted in the case of banks where the balance of
account is taken out after every transaction. In this case, the number of days written against each transaction are the
days counted from its date or due date to the date of the following transaction. In the case of the last transaction, the
number of days is counted to the close of the period.

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Each amount is multiplied with the number of days. If the amount represents a debit balance, the product is entered in
the Dr. Product column; and if it represents a credit balance, the product is written in the Cr. Product column. The Dr.
Product and Cr. Product columns are then totalled up. Interest is calculated on each total at the given rate of interest;
and the net interest is ascertained. If net interest is payable to the customer, it will appear as “By Interest A/c”, and if it
is due from the customer, it will appear as “To Interest A/c”.

Question:7 On 1st January 2022, Mr. Pramod opened a Current Account with Allahabad Bank. Ranchi and deposited
a sum of Rs.5,000.
He further deposited the following amounts: His withdrawals were as follows -

2022 Rs. 2022 Rs.

16th January 5,000 15th February 5,000
12th March 3,000 11th April 9,000
6th May 4,000 15th June 5,000
Show account of Pramod in Bank's Ledger on 30.6.2022 and charge 6% interest on debit balances and 3% on credit
balances.

Question 8. On 2nd January, 2022 Vinod opened a current account with the Allahabad Bank Limited; and deposited a
sum of Rs 30,000.
He further deposited the following amounts: Rs
15th January 12,000
12th March 8,000
10th May 16,000
His withdrawals were as follows :
15th February 26,000
10th April 30,000
15th June 14,000
Show Vinod’s a/c in the ledger of the Allahabad Bank. Interest is to be calculated at 5% on the debit balance and 2%
on credit balance. The account to be prepared as on 30 th June, 2022. Calculation may be made correct to the nearest
rupee. (assume 1 year = 365 days) (ICAI Study material)

Answer: Vinod Current Account with Allahabad Bank Ltd

Date Particular Dr. Cr. Dr. or Balance Day Dr. Cr.
Cr. s Product Product
2022
Jan. 2 By Cash Account - 30,000 Cr. 30,000 13 - 3,90,000
Jan. 15 By Cash Account - 12,000 Cr. 42,000 31 - 13,02,000
Feb. 15 To Self 26,000 - Cr. 16,000 25 - 4,00,000
Mar. 12 By Cash Account - 8,000 Cr. 24,000 29 - 6,96,000
April 10 To Self 30,000 - Dr. 6,000 30 1,80,000 -
May 10 By Cash Account - 16,000 Cr. 10,000 36 - 3,60,000
June 15 To Self 14,000 - Dr. 4,000 15 60,000 -
June 30 By Interest A/c - 140 Dr. 3,860 - -
June 30 By Balance c/d 3,860 -
70,000 70,000 2,40,000 31,48,000
July 1 To Balance b/d 3,860

* Interest is calculated as follows:

On Rs 31,48,000 @ 2% for 1 day = Rs 172.49
On Rs 2,40,000 @ 5% for 1 day = Rs 32.88
Net Interest = Rs 139.61 (Rs 172.49- Rs 32.88)

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Question 9. State whether following statements are true or false with reason.
i. Current account and account current are one and the same.
ii. The account current is an extension of the average due date concept.
iii. Date of transaction or the due date whichever is earlier is considered for computation of the number of
days.
iv. A is in account current with B- The person rendering the account current is Mr. A.
v. The honored bills of exchange will not be recorded in the account current.

Answer :i. False: Account current statement of running transaction between two parties to ascertain the amount along
with interest payable. Current account is an account type to be maintained with the bank. In both the interest is
calculated, but then different methods to calculate the interest.

ii. True: An extension of the counter transactions between two parties type under the average due date- where in the
date of the initial transaction is considered as the base date from which the no. of days to the date of rendering the
account is calculated.

iii. False: The due date is considered for the purpose of calculation of number of days and not the date of transaction.

iv. False: It is B who is preparing and rendering the account current to Mr. A.

v. True: The bills of exchange which is honored will not appear in the account current, only in case of dishonor, it will
be appearing in the account current.

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CHAPTER 7A & 7B. PREPARATION OF FINAL ACCOUNTS OF SOLE PROPRIETORSHIP

FINAL ACCOUNTS OF NON-MANUFACTURING ENTITIES:-
Introduction:- Non-Manufacturing entities are trading entities which are engaged in the purchase and sale of
goods at profit without changing form of goods.These entities do not process the goods.

The profit or loss of the enterprise is obtained through the preparation of Income Statement i.e Trading and Profit & Loss A/c

The financial position of the business enterprise is judged by measuring the assets, liabilities and capital of the
enterprise and the same is communicated to the users of financial statements. Financial position of the enterprise can
be known through the preparation of the Position Statement i.e Balance Sheet.

Comparison between Income Statement and Position Statement

Income Statement Position statement

Profit or loss is disclosed in the Income Statement It exhibits assets and liabilities of the business as at the
prepared at the close of the financial year close of the financial year.
Income Statement is sub-divided into following two Apart from balance sheet, to judge financial position of
parts for a non-manufacturing concern: the business, sometimes additional statements are also
(a) Trading account; and prepared like cash flow statement, value added statement
(b) Profit and Loss account etc. which is not mandatory for non-
corporate entities. These additional statements are
prepared for the better understanding of the financial
position of the business.

Income Statement discloses net profit or net loss of the Position statement discloses the assets and liabilities
business after adjusting from the income earned during position as on a particular date.
the year, all the expenditures of the business incurred in
that year.

PREPARATION OF FINAL ACCOUNTS: The principal function of final accounts (Trading Account, Profit
and Loss Account and the Balance Sheet) is to exhibit truly and fairly the profitability and the financial position of the
business to which they relate. In order that these may be properly drawn up, it is essential that a proper record of
transactions entered into by the business during a particular accounting period should be maintained.
The BASIC PRINCIPLES in regard to accumulation of accounting period data are:
(i) a distinction should be made between capital and revenue receipts and payments;
(ii) also income and expenses relating to a period of account should be separated from those of another period.
(iii) different items of income and expenditure should be accumulated under significant heads so as to disclose the
sources from which capital has been procured and the nature of liabilities, which are outstanding for payment.

Having regard to these basic principles, the various matters to which attention should be paid for determining the
different aspects of transactions, a record of which should be kept, and the different heads of account under which
various items of income and expenditure should be accumulated, are stated below:
(a) Distinction between personal and business income:- Since the final statements of account are intended to
show the profitability of the business and not that of its proprietors, it is essential that all personal income and
expenditure should be separated from business income and expenditure.

(b) Distinction between capital and revenue expenditure:- A distinction should be made between capital and
revenue, both receipts and expenditure. Different types of income and expenditure should be classified under separate
heads. Assets should be included in the Balance Sheet by following accounting principles and accounting standards.
Likewise, a provision for income and expenses which have accrued but not paid, should be made by estimation or
otherwise on the same basis as in the previous year.

(c) All material information to be disclosed:- Every information, considered material for judging the
profitability of the business or its financial position, should be disclosed. For example, when the labour charges have
increased on account of bonus having been paid to workmen, the amount of bonus paid should be disclosed. Similarly,
if some of the items of inventory are not readily saleable, these should be valued at their approximate net realisable
value and the basis of valuation and value of such inventory should be shown separately.

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(d) Record only current period transactions:- Though the record of transactions should be maintained continuously,
at the end of each accounting period, the transactions of the closing accounting period should be cut off from those of
the succeeding period.

(e) Only transactions completed before close of accounts should be given effect:- It should be seen that only the
effect of transactions, which were concluded before the close of period of account, has been adjusted in the accounts
of the year. For example, when a sale of goods is to take place only after the goods have been inspected by the
purchaser and the inspection had not been made before the close of the year, it would be incorrect to treat the goods as
a sale in the accounts of the year.

FORMAT OF FINANCIAL STATEMENTS:

Format of TRADING ACCOUNT For the year ended 31st March, 20…
Particulars Amount Particulars Amount
To Opening Stock ****** By Sales *****
To Purchase (Cash + Credit) ***** Less: Sales Return ***** ******
Less: Purchase Return *****
Goods withdrawn for personal By Abnormal Loss (if any)
use ***** Loss by fire *****
Goods distributed Loss by theft etc. ***** ******
by way of free sample *****
Goods given as charity ***** ****** By Closing Stock ******
To Customs Duty ******
To Octroi Duty ****** By Gross Loss trad. to P & L A/c ******
To Excise Duty ******
To Freight inward ******
To Carriage inward ******
To Wages and Salaries ******
To Rent & Taxes (Factory building.) ******
To Factory Lighting (electricity) ******
To Power & Fuel ******
To Gross Profit carried
to profit & Loss A/c ******
TOTAL ****** TOTAL ******

The Profit and Loss Account starts with the credit from the Trading Account in respect of Gross Profit or
Debit if there is Gross Loss. Thereafter, all those expenses, which have not been debited to trading account, arc
debited to profit and loss account. If there are any incomes or gains, for e.g. rent received on premises sublet,
interest on investments, discount received from suppliers, these will be credited to Profit and Loss Account

Format of Profit and Loss Account (For the year ending on----)

Particulars Amount Particulars Amount

To Gross Loss b/d ****** By Gross Profit b/d ******
To Salaries & Wages ****** By Profit on Sale of fixed assets ******
To Salaries to Proprietor/ Partners'/ Directors' ****** By Profit on Sale of investment ******
To Bonus ****** By Interest ******
To Rent, Rates & Taxes ****** By Dividend ******
To Freight & cartage outward ****** By Commission ******
To Electricity Exp. ****** By Discount ******
To Repair & Maintenance ****** By Rent ******
To Insurance Premium ****** By Sale of Scraps ******
To Staff Welfare exp. ****** .By Miscellaneous Income ******
To Pension & Gratuity ******
To Compensation to workmen ******
To Audit Fees ******
To Printing & Stationery ******
To Postage, Telegram & Telephone ******
To Commission, Brokerage & Discount ******
To Travelling Exp. ******
To Conveyance Exp. ******
To Entertainment Exp. ******
To Sales promotion Exp. ******

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To Advertising & Publicity ******

(including free sample distribution) ******
To discount allowed ******
To Bad Debts ******
To Interest ******
To Bank Charges ******
To Legal Charges ******
To General Exp. ******
To Packing Expenses ******
To Motor Car Expenses. ******
To Depreciation: ******
On Building *****
On Plant & machinery *****
On Furniture & Fixture etc. *****

To Loss on sale of fixed assets ******

To Loss on sale of investment ******
To Abnormal loss:
Loss by theft ******
Loss by fire ******
Loss by Embezzlement ******
To Provision for Doubtful Debts ******
To Provision for Taxation ******
To Net Profit trd. to Capital A/c ****** By Net Loss trd. To Capital A/c ******
Total ****** Total ******

(B) Position Statement:-Position statement mainly consist Balance sheet which shows assets, and liabilities and
capital of business. For better understanding of financial position additional statement like cash flow statement,
statement showing earning per share, value added statement etc. are prepared. The statement showing the financial
state of affairs is called Balance Sheet.

BALANCE SHEET:-- The balance sheet may be defined as “a statement which sets out the assets and liabilities of a
firm or an institution as at a certain date.” Since even a single transaction will make a difference to some of the assets
or liabilities, the balance sheet is true only at a particular point of time. That is the significance of the word “as at.”
The assets are shown on the right hand side and liabilities and capital on the left hand side.

CHARACTERISTICS OF BALANCE SHEET:

The balance sheet has certain characteristics, which should be noted. These are the following:
(i) It is prepared at a particular date, rather the close of a day and not for a period.

(ii) The balance sheet is prepared only after the preparation of the Profit and Loss Account. This is the reason why the
Profit and Loss Account (including the Trading Account) and the Balance Sheet are together called Final Accounts.
(iii) Since capital always equals the difference between assets and liabilities and since the capital account will
independently arrive at this figure, the two sides of the Balance Sheet must have the same totals.

The Profit and Loss Account and Balance Sheet are inter-linked. The Balance Sheet described the financial position
while the Profit and Loss Account supplies much of the explanation of the causes leading to the change in the
financial position.

ARRANGEMENT / MARSHALLING OF ASSETS AND LIABILITIES :

The term ‘Marshalling' refers to the order in which the various assets and liabilities are shown in the Balance Sheet.
The assets and liabilities can be shown either in the order of liquidity or in the order of permanency.

Assets: - Assets can be put down in a Balance Sheet, in two ways - either in the order of liquidity or in the order of
permanence.
i) Liquidity: - It means the ease with which the assets may be converted into cash; those assets which are
most difficult to convert them in cash are written last.
ii) Permanence: Assets that are to be used permanently in the business and are not meant to be sold are
written first. Assets that are most liquid such as cash in hand are written last.

The various assets is grouped in the two order will appear as follows:-

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In order of Liquidity In order of Permanence

Cash in hand Goodwill
Cash at Hand Patents
Investments Furniture
Sundry debtors Machinery
Stock of finished goods Land & building
Stock of raw material Prepaid exp,
Stock of WIP Stock of finished goods
Prepaid Exp. Stock of raw material
Land & Buildings Sundry debtors
Machinery Investment
Furniture Cash in hand
Patents Cash at bank
Some assets cannot be easily classified. For example, investment can be easily sold but desire may be to keep them. Investment
may, therefore, be both liquid and semi-permanent according to the intention of the firm.

Liabilities:- Liabilities can also be grouped in two ways — either in order to urgency of permanent or in reverse
order. One way is to first show the capital, then long term liabilities and last of all short term liabilities like amounts
due to supplier of goods or bills payable. The other way is to start with short term liabilities and then show long term
liabilities and last of all capital.

Limitation of financial statements: The principal limitations affecting financial statements are the following:
(i) Historical Cost: Accounting records and, on that account, the financial statements are prepared only on the basis of
the money value prevailing at the time the transaction were entered into. Thus, the effect of subsequent changes in the
value of money is not taken into account.

(ii) Intangible strengths and weaknesses: A company may have a number of strengths and weaknesses which cannot
be shown in the balance sheet e.g., the loyalty and calibre of its staff. These must be kept in mind while judging the
financial position of the company.

(iii) Perpetual continuity and periodical account: Financial statements ordinarily are drawn up at the end of each
year but the accounting record is maintained on the assumption that the business undertaking shall continue to exist
forever on the basis of going concern assumption. In consequence, much of the expenditure other than revenue
expenditure has to be distributed arbitrarily over a number of years during which benefit of the expenditure is expected
to arise. As a result, financial statements of account are not absolutely correct.

(iv) Different accounting policies: It is permissible for a company within certain limits to adopt different policies for
the preparation of accounts, valuation of various assets and distribution of expenditure over different periods of
account.

FINAL ACCOUNT OF MANUFACTURING ENTITIES:

MANUFACTURING ACCOUNT: In a case where the cost of manufacturing goods is to be ascertained, the Manufacturing
Account is prepared. The main feature of a Manufacturing Account are the following :—
 It is debited with all expenses that are incurred in manufacturing of goods. In this account, besides such
expenses as freight on purchases of raw materials, customs duty, wages, rent and lighting of factory building, we must
also debit the manufacturing account with repairs to plant and machinery. depreciation on machinery, loose tools, etc.
 In this account, we have to show the value of materials consumed instead of showing figures of opening stock,
purchases and closing stock separately.
➢ Raw Material consumed:
Opening Stock of Raw material *****
Add: Purchases of Raw Material *****
Less: Closing Stock of Raw Material *****
*****
Note:- Opening and Closing Stocks of finished goods are not entered in Manufacturing Account,
 The opening stock of work-in- progress is debited and closing stock of work-in-progress is credited. The usual
basis of valuation of work in progress is the actual materials used and labour spend on these unfinished goods
plus a proper proportion of manufacturing expenses, generally on the basis of labour.
 In the course of manufacturing some waste material always emerges. when they are sold, the amount realized
credited to “Scrap Account”. This Account is transferred to the credit side of the Manufacturing Account.
 The Balance in Manufacturing Account (i.e. the difference between the debit and credit sides) is the cost of the
goods produced during the period. This is transferred to the debit side of the Trading Account.

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Manufacturing Account of ----for the year ending----

Particulars Amount Particulars Amount
To Opening WIP ***** By Sale of Scrap ******
To Raw Material Consumed By Closing WIP ******
Opening Stock **** By Trading Account ******
Add: Purchases **** (Cost of Goods produced
Add: Cartage in ward **** transfrd.)
Add: Freight in ward ****
Less Closing Stock ****
To Wages ******
To Salary to Works Manager ******
To Power. Electricity and Water ******
To Fuel ******
To Depreciation on: ******
Plant and Machinery
Factory Land & Building ****
To Repair to: **** ****
Plant & Machinery
Factory Building ****
To Insurance: **** ****
Plant & Machinery
Factory Building ****
To Factory Rent & Taxes **** ****
To Royalty based on production ****
****
Total ***** Total ******

SEQUENCE OF ACCOUNTING PROCEDURE OR THE ACCOUNTING CYCLE:

What has been done so far shows that the accounting process in the following order :
(i) recording the transactions in the journal or journalising;
(ii) preparing ledger accounts on the basis of the journal or posting into the ledger;
(iii) taking out the trial balance to check arithmetical accuracy;
(iv) preparing the trading and profit and loss account or the income statement for the period concerned; and
(v) preparing the balance sheet to show the financial position at the end of the period.

Meaning of opening entry : The first entry in the journal is to record the closing balances of various assets and
liabilities at the end of the previous year as the opening balances in the beginning of the new year. The balance sheet
prepared at the end of the year records these balances and is the basis for this first entry. It is called the opening entry.

Question 1. Give opening entry for the year 2021-22 from the following informations:
Balance sheet as on 31st March 2021
Liabilities Rs Assets Rs
Mahendra & Sons 5,60,000 Cash in hand 43,000
Capital 20,00,000 Cash at Bank 2,67,500
Trade receivables 7,49,500
Closing Inventory 9,00,000
Machinery and Equipment 6,00,000
25,60,000 25,60,000

Answer : opening entry

Cash A/c Dr. Dr. Cr.
Bank A/c Dr. 43,000
Trade receivables Dr. 2,67,500
Inventory A/c Dr. 7,49,500
Machinery and Equipment A/c Dr. 9,00,000
6,00,000
To Mahendra & Sons A/c 5,60,000
To Capital A/c 20,00,000
(Being the balances brought forward)

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CONCEPT BASED QUESTIONS

Question: 2. Following are the extract from the Trial Balance of a Company as at 31st March 2022.
Particulars. Dr. (Rs.) Cr. (Rs.)
Sundry Debtors 2,05,000
Bad Debts 3,000

Additional Information:
(a) After preparing the Trial Balance, it is learnt that Mr. X, a debtors has become insolvent and nothing could be
recovered from him and, therefore, the entire amount of Rs. 5,000 due from him was irrecoverable,
(b) Create 10 % provision for doubtful debts.
Pass the necessary journal entries and show the relevant accounts.

Question: 3. Following are the extracts from the Trial Balance of a Company as at 31st March 2022.
Particulars Dr. (Rs.) Cr. (Rs.)
Sundry Debtors 2,05,000 ----
Provision for Doubtful Debts ----- 8,000
Bad Debts 3,000 ----
Additional Information:
(a) Additional Bad debts Rs.5,000
(b) Maintain the provision for doubtful debts @ 10 % on debtors.
Pass the necessary journal entries and show the relevant accounts.

Provision for Discount on Debtors:--The procedure is the same as for provision for bad debts. First, the profit
and loss account is debited and the provision for discount account credited. This account is carried forward to the
next year. Next year, the actual discounts allowed will be debited to the profit and loss account. The profit and loss
account will be debited to make up the required balance each year. If after providing the required balance a surplus
is left in the provision for discount account, it should be transferred to the credit of profit and loss account. But the
provision for discounts should be calculated on total debtors minus the provision for bad debts.

Question: 4. Following are the extracts from the Trial Balance of a Company as at 31st March 2022.
Particulars Dr. (Rs.) Cr. (Rs.)
Sundry Debtors 2,05,000
Bad Debts 3,000
Discount 1,800
Additional Information:
(i) Create a Provision for doubtful debts @ 10% on debtors.
(ii) Create a provision for discount on debtors @ 2% on debtors.
(iii) Additional Discount given to the debtors Rs. 5,000
Pass the necessary entries and show the relevant accounts (including final accounts)

Question: 5. Following are the extract from the Trial Balance of S. Ltd. on 31 st March 2022.
Particulars Dr. (Rs) Cr. (Rs)
Sundry Debtors 2,05,000 ----
Provision for Doubtful Debts ---- 8,000
Provision for Discount on Debtors ----- 2,000
Bad Debts 3,000 ----
Discount 1,000 ------
Additional Information:
(i) Additional bad Debts Rs. 4,000
(ii) Additional Discount allowed to Debtors Rs. 1,000
(iii) Maintain a provision for bad debts @ 10% on debtors.
(iv) Maintain a provision for discount @ 2% on debtors.
Pass the necessary journal entries and show the relevant accounts (including final accounts).

Question: 6.( mind blowing question) Trial balance as on 31, March 2022
Dr. Cr.
S. Debtors 2,00,000 --
Bad Debts 10,000 --
Creditor 1,00,000

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(i) Mr. A, a debtor of Rs. 20,000, suffering from financial difficulties, it is expected that he could pay only 60% of the
amount.
(ii) Mr. B, a debtor of Rs. 10,000 also a creditor of Rs. 10,000 .
(iii) Mr. C a debtor of Rs. 5,000 became insolvent and official receiver declared a first and final dividend of 65% of the
amount.
(iv) Create provision for doubtful debt @ 5% on debtors.
(v) Create provision for discount @ 2 % on debtors

Question: 7. Trial balance as on 31, March 2022

Dr. Cr.
Debtors 2,00,000
Sales 5,00,000
Purchases 1,00,000
Manufacturing exp. 40,000
(i) goods costing Rs. 60,000 were sent on approval basis for Rs. 80,000. Approval has not yet been received till the
end of 31 March 2022.
(ii) Closing stock was valued at Rs. 20,000.
(iii) Create provision for doubtful debt @ 10%.

Question: 8. Assume in previous question, out of goods sent on approval basis, company has not received approval
for 20% of goods.

Question: 9. Trial balance as on 31st March ,2022

Dr. Cr.
Machine 2,00,000
Addition to machine (1 Oct.,21) 50,000
Rent 40,000
Salary 30,000
Commission received -- 10,000
Fees received 20,000

Adj: (i) Charge depreciation @ 10% p.a. on machine.

(ii) Rent due but not paid Rs. 5,000.
(iii) Commission due but not received Rs. 2,000.
(iv) Fees received in advance Rs. 3,000.
(v) salary includes Rs 12,000 paid for next year.

Question: 10. Trial balance as on 31st march,2022

Dr. Cr.
Machine 1,80,000
Rent 45,000
O/S Rent 5000
Salary 26,000
Prepaid Salary 4,000
Commission Received 12,000
Accrued commission 2,000
Fees earned 17,000
Unearned fees 3,000
Depreciation 20,000

Question: 11. Trial balance as on 31st march ,2023

Dr. Cr.
Capital 3,00,000
Drawings 1,00,000
Adj: (i) Allow interest on capital @ 10% p.a.
(ii) Charge interest on drawings @ 5%.

Question: 12. Dr. Cr.

Gross Profit 3,00,000
Rent 10,000
Salary 20,000

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Adjustment: manager is entitled to a commission of 5% on net profit before commission. Calculate commission.

Question: 13. Assume in previous question, manager is entitled to a commission of 5% after charging such
commission.

Question: 14. Dr. Cr.

Op. Stock 10,000
Purchases 2,00,000
Sales 5,00,000
Manf. Exp. 20,000

Adj: (i) Closing stock was valued at Rs. 25,000.

(ii) During the year, goods costing Rs. 40,000 were lost due to fire and nothing could be recovered from insurance
company.

Question: 15. Assume in previous question, Insurance company admitted the claim for Rs. 27,000 in full settlement.

Question: 16. Trial Balance as on 31 march,2022

Dr. Cr.
Opening stock 10,000
Purchases 1,00,000

(i) Closing stock were valued at Rs. 20,000

Question: 17. Dr. Cr.

Purchases (Adjusted) 90,000
Stock 20,000

Question: 18. Dr. Cr.

Purchases 90,000

Adj: (i) Goods Costing Rs. 10,000 were lost due to leakage, considered as normal loss.
(ii) Goods costing Rs. 12,000 were lost due to theft.
(iii) Closing stock was valued at Rs. 20,000.

Question: 19. Trial Balance as on 31 march 2023

Dr. Cr.
Insurance 1,200
Salary 11,000
Building 3,00,000
Wages 20,000

Adj: (i) Insurance includes a premium of Rs. 170 on a policy, expiring on 30st September 2023.
(ii) Salary for the month of march 2023 is outstanding.
(iii) Wages includes Rs. 5,000 paid on erection of a cycle shed.
(iv) Charge depreciation @ 10% p.a. on building.

Question: 20. Trial Balance as on 31 March,2023

Dr. Cr.
Gross profit 2,50,000
Stock 10,000
Capital 6,00,000
Indirect expenses 40,000
Reserve --- 50,000

Adj: (i) owner to get a salary of Rs. 12,000 P.a.

(ii) 10% of net profit is to be credited to Reserve.
(iii) It was discovered in April 2022, that stock sheets as on 31 March, 2022 were overcast by Rs. 1,000.
However no entry was passed in April, 2022.

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Question: 21. Trial Balance as on 31 March,2023

Dr. Cr.
Loan from Vinod @ 10% 3,00,000
(as on 1 Oct. 2022)
Interest paid 8,000
Loan to Ram @ 15% 2,00,000
(as on 1 July 2022)
Interest received 14,000

Question: 22. Dr. Cr.

Purchases 60,000
Capital 3,00,000
Adj: (i) Goods costing Rs. 10,000 were used for distribution to customer as free sample.
(ii) Goods costing Rs. 5,000 (selling price Rs. 8,000) were used by proprietor for his personal purpose.

Question: 23. ( HAI HUM MEIN DUM) Trail Balance as on 31 March,2023

Dr. Cr
Opening stock 80,000
Purchases 7,00,000
Apprentice Premium 40,000
Machinery 4,00,000
Loose tools 60,000
Equipment 3,00,000
Wages 20,000
Debtors 80,000
Sales 4,50,000
Creditors 30,000
Land and building 2,00,000
Investments 50,000
Capital 10,00,000
Adjustments
(I) It was discovered in April, 2022,,that stock sheets as on 31st March 2022 were overcast by Rs. 1000.
However, no entry was passed in April 2016.
(II) Apprentice premium was unexpired to the extent of Rs 8,500.
(III) A new machine was installed on 31st Dec. 2022, costing Rs 14,000 but it was not recorded in the books
and no payment was made for it. Wages Rs 1,000 paid for its erection has been debited to wages
account.
(IV) Loose tools were valued at Rs. 56,000 on 31st March 2023.
(V) Equipments were valued at Rs 3,20,000.
(VI) Value of stock as on 31-03-2023 was Rs. 39,000. This includes goods return by customers on 31-03-2023
to the value of Rs. 1,500 for which no entry has been passed in the books,
(VII) Sundry debtors include Rs. 2,000 due from Robert and Sundry creditor includes Rs. 1,000 due to him.
(VIII) Building worth Rs. 35,000 purchased on 1-4-2021 was wrongly written off against Profit & Loss account.
This asset is to be brought into account on 1-4-2022 taking depreciation at 10% per annum on straight
line basis up to 31-3-2022.
(IX) Investments were sold at 10% profit, but the entire sales proceeds have been taken as sales.
(X) Commission is payable at 2% on sales.
(XI) Received Rs 6,000 Worth of goods on 27th March 2023 but the invoice of purchase was not recorded in
Purchase book.
Question: 24. Mr. X carries on retail business and his trial balance on March 31, 2023 was as follows :
Dr. Cr.
Purchases 565625
Sales 7,06,650
Return inward 4,250 ------
Return outward ---- 3,120
Provision for doubtful debts ----- 5,200
Sundry debtors 38,200 ----
Sundry Creditors ----- 25,526
Bills Payable (Promissory note to be paid) ----- 8,950
Stock (01-04-22) 56,725 -----
Wages 20,137 -----
Salaries 18,575 -----
Furniture 15,075 -----
Alternation to shop 4,500 -----

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Postage, Ins. Etc. 13,226 -----

Heating & Lighting 2,350 -----
Trade Exp. 10,314 -----
Rent, Rates & Taxes 13,517 -----
Bad Debts 525 -----
Loan at 15% to Mr. Vinod (1st Dec. 2022) 3,000 -----
Investment (at cost) 11,500 -----
Dividend from investment ---- 1,825
Prepaid insurance 524 -----
Cash in hand and at bank 15,752 -----
Bills Receivable (Amt. due on Promissory Notes) 19,070 -----
Capital Account ---- 77,000
Drawings 16,000 -----
Outstanding Wages ---- 2,019
Rent. Accrued but not paid --- 750
Dep. On Furniture 1,675 ----
Additions to Furniture 500 ---
Total 8,31,040 8,31,040

Prepare Trading & P/l Account as on 31-03-2023 and Balance-sheet as on that date having regard to the following
information:-
1. Sundry Debtors include an item of Rs. 250 for Goods Supplied to the proprietor and an item of Rs.600 due from a
Customer who has become insolvent.
2. Provision for Doubtful Debt is to be maintained at 5% of sundry debtors.
3. 1/5th of the alteration to the shop is to be written off.
4. Goods to the value of Rs. 1000 have been destroyed by fire and the insurance company has admitted the claim
for Rs 700.
5. Bills Receivable includes a dishonoured promissory note for Rs. 2,650
6. Stock at end of the year was Rs. 60,520.
7. Intimation from the bank that a customer’s cheque for Rs. 1,000 had been dishonoured is still to be entered in
the books.
Question: 25. From the following Trial Balance, Extracted from the books of Mr. Shyam, Prepare a Trading and Profit
and Loss Account for the year ended 31st March 2003 and a Balance Sheet as on that date.
Dr. Cr.
Shyam's Capital A/c ---- 1,80,000
Shyam’s Drawing A/C 32,960 ----
Land and Building 50,000 ---
Plant & Machinery 28,540 -----
Furniture & fixture 12,500 ----
Carriage Inward 8,740 ---
Wages (Manf.) 42,940 -----
Salaries 39,340 -----
Bad Debts Provision ----- 3,940
Sale ---- 2,82,460
Sales Return 3,520 -----
Bank Charges 280 ----
Coal, Gas & Water 4,440 ---
Rates & Taxes 1,680 -----
Discount account (Balance) ---- 240
Purchase (adjusted) 61,460 -----
Bills Receivable 12,540 ----
Trade Expenses 3,980 ---
Sundry Debtors 75,600 -----
Sundry Creditors ---- 24,340
Stock (31-3-03) 88,780 ----
Apprentice Premium ---- 6,000
Fire Insurance 980 -----
Cash at bank 26,000 ----
Cash in Hand 2,280 ---
Bad debts 420 -----
Total 4,96,980 4,96,980

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Charge depreciation on land & building @ 2.5% on plant & machinery @10% and on furniture & fixture @ 10% Make
a provision of 5% on the sundry debtors for Bad debts. The Bank has intimated that a cheque for Rs. 800 received
from customer has been dishonoured. The customer is in difficulties and it is expected that he would be able to pay
60 % of the claims on him. Carry forward the following unexpired amounts:—
i.) Fire Insurance Rs. 250
ii.) Rates & Taxes Rs. 480
iii.) Apprentice Premium Rs. 3,800
Trade expenses amounting to Rs. 430 have not yet been paid. Wages include Rs. 500 spent on the installation of new
machinery on 1st April 2002. Allow 10 % interest on capital but not charged on drawing. (CA FOUND- 16 Marks)
Answer:
Trading and Profit And Loss A/c
PARTICULAR AMOUNT PARTICULAR AMOUNT
To Purchase (Adjusted) 61460 By sales 282460
To Wages 42940 (-) return 3520 278940
(-) Installment 500 42440
To Carriage Inward 8740
To Coal and Gas 4440
To gross profit 161860
278940 278940

To Depreciation On building 1250 By gross profit 161860

To Depreciation On Plant 2904 By Discount Received 240
To Depreciation On Furniture 1250 By Apprentice Premium 6000
To salary 39340 (-) Advance 3800 2200
To Provision For Bad Debts4100
(-) Old Provision 3940 160
To Bank Charge 280
To Rent & Rates 1680
(-) Prepaid 480 1200
To Trade Expense 3980
(+) Outstanding 430 4410
To Fire Insurance 980
(-) Advance 250 730
To Bad Debts 420
To Interest on capital 18000
To Net Profit 94356
166500 166500
Balance Sheet as on 31-3-2003
LIABILITIES AMOUNT ASSETS AMOUNT
Capital 180000 Land and building 48750
(-) Drawing 32960 Plant 26136
(+) Interest.on capital 18000 Furniture 11250
(+) Net profit 94356 259396 Debtors 72300
Outstanding Trade Expense 430 Bank 25200
Sundry creditors 24340 Prepaid Rates 480
Advance Apprentice Premium 3800 Bill Receivable 12540
Stock 88780
Advance Insurance 250
Cash 2280
287966 287966

Question: 26. From the following figure extracted from the books of Mr. P. you are required to prepare a Trading and
Profit and Loss Account for the year ended 31- 03-2022 and a Balance Sheet as on that date after making necessary
adjustment.
Mr. P's Capital 2,58,000 Bills Payable 5,000
Mr. P’s Drawing 42,000 Stock (01-04-21) 49,175
Purchase 1,96,000 Wages 62,000
Freehold Properties 60,000 Sundry Creditors 40,000
Plant & Machinery 1,00,000 Postage & Telegram 1,400
Return Outward 7,000 Insurance Charges 3,200
Salaries 42,000 Gas & Fuel 2,700
Office Expenses 12,500 Bad Debts 600
Office Furniture & Fixture 25,000 Office Rent 12,600

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Discount A/c (Dr.) 1,200 Freight & duty 9,000

Sundry debtors 26,600 Loose tools 7,000
Loan to Mr. D @ 15% p.a. Factory Lighting 1,600
Balance on 01-04-21 40,000 Prov. For doubtful Debts. 800
Cash at Bank 26,600 Interest on loan to Mr. D 3,000
Cash in Hand 3,625
ADJUSTMENTS:
1. Stock on 31-3-22 was valued at Rs. 66,000
2. Wages Rs. 4,600 and Salaries Rs. 3,600 were outstanding.
3. Insurance Prepaid was Rs. 800.
4. A new machine was installed on 31st Dec. 2021, costing Rs 14,000 but it was not recorded in the books and no
payment was made for it. Wages Rs 1,000 paid for its erection has been debited to wages account.
5. Loose tools were valued at Rs. 5,600 on 31st March 2022.
6. Depreciate Plant and Machinery by 10 % p.a. Furniture & fixture by 7.5 % p.a and Freehold Property by 2%p.a.
7. Of the Sundry Debtors Rs 600 are bad and should be written off. Maintain Provision of 5 % on Sundry Debtors for
doubtful debts, and 2 % for discount on Debtors and a reserve of 2 % for discount on Sundry creditors.
8. The Manager is entitled to a commission of 5 % of net profit before charging such commission.

Hint :Note:-- Where a regular trial balance is not given, it is advisable to first make out trial balance to be sure that there is
no difference in books or to ascertain a figure that may be missing. (CA FOUNDATION- 16 marks)

Question: 27. From the following Trial Balance of Bannerji, Prepare the Final Accounts for the year ended 31st March
2023 and the Balance Sheet as at that date.
Dr. Cr.
Land & Building 50,000 Sales 3,85,000
Purchases(adjusted) 2,10,000 Capital account 1,15,000
Stock as on 31-3-23 45,000 Chatterji Loan A/c
Sales Return 1,500 (taken on 1.10.22 @ 18% p.a) 25,000
Wages 45,300 Commission 1,500
Salaries 39,000 Sundry Creditors 25,000
Office Expenses 15,400 Bills Payable 12,350
Carriage Inward 1,200 Expenses Payable 3,300
Carriage outward 2,000 Purchase Return 2,500
Discounts 750 Discount 1,200
Bad Debts 1,200
Insurance 1,500
Plant & Machinery 50,000
Furniture & Fixture 20,000
Bills Receivable 20,000
Sundry Debtors 40,000
Cash in Hand 1,500
Cash at Bank 14,500
Office Equipment 12,000
Total 5,70,850 Total 5,70,850

It was the practice of Bannerji to value stock at 10 % below cost. The opening stock on 01.04.22 was Rs. 49,500. Bannerji desires
that the final statement be drawn up according to the cost of the stock.
The following adjustments are also required:-
(I) Depreciate Land & Building @ 6%, Plant & Machinery @10%, Office Equipment @ 20% and Furniture & Fixture
@15%.
(II) Create bad & doubtful debt provision of 1.25% on sundry debtors.
(III) Insurance Premium includes Rs. 250 paid in advance.
(IV) Provide interest on capital @ 10 % p.a. and salary to Bannerji @ Rs. 15,000 p.a.
(V) 10 % of the final profit is to be kept in general reserve.

Question: 28. The following is the Trail Balance of K on 31st March, 2022.
Dr. (Rs) Cr. (Rs)
Capital ----- 8,00,000
Drawings 60,000 ---
Opening stock 75,000 ------
Purchase 15,95,000 -----
Freight on purchase 25,000 ------
Wages (11 months upto 29-2-2022) 66,000 -------
Sales ---- 23,10,000

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Salaries 1,40,000 ------

Postage, Telegrams, Telephones 12,000 ----
Printing & Stationary 18,000 -------
Miscellaneous Expenses 30,000 -------
Creditors ---- 3,00,000
Investments 1,00,000 ------
Discount received ---- 15,000
Debtors 2,50,000 -----
Bad debts 15,000 -----
Provision for debts ------ 8,000
Building 3,00,000 -----
Machinery 5,00,000 ------
Furniture 40,000 -----
Commission on Sales 45,000 ------
Interest on Investments ---- 12,000
Insurance(yearly upto 31-7-2022) 24,000 ----
Bank Balance 1,50,000 ------
34,45,000 34,45,000

Adjustments:
1. Closing stock Rs 2,25000
2. Machinery worth Rs. 45,000 purchased on 1-10-21 was shown as purchases. Freight paid on the Machinery was
Rs. 5,000, which is included in Freight on Purchase.
3. Commission is payable at 2.5% on sales.
4. Investments were sold at 10% profit, but the entire sales proceeds have been taken as sales.
5. Write off Bad Debts Rs 10,000 and create a provision for Doubtful debts at 5% of Debtors.
6. Depreciate Building by 2.5% p.a. and machinery and furniture at 10% p.a.
Prepare Trading and Profit & Loss A/c for year ending 31st March, 2022 and a Balance Sheet as on that date.

Answer:
Trading and Profit and Loss account of K For the year ended 31st March, 2022
Particular Rs. Particular Rs
Opening Stock 75,000 By Sales 23,10,000
To Purchase 15,95,000 Less: Sale of
Less: Transfer to Investments 1,10,000 22,00,000
Machinery A/c 45,000 15,50,000
To Freight on Purchase 25,000
Less: Transfer to
Machinery A/C 5,000 20,000
To Wages 66,000
Add: Outstanding 6,000 72,000 By Closing stock 2,25,000
To Gross Profit c/d 7,08,000
24,25,000 24,25,000
To Salaries 1,40,000 By Gross profit b/d 7,08,000
To Postage Telegrams, Telephone 12,000 By interest of investment 12,000
To Printing & Stationary 18,000 By Profit on sale of investment 10,000
To Miscellaneous expenses 30,000 By Discount received 15,000
To Commission on Sales 45,000
Add: Outstanding 10,000 55,000
To Insurance 24,000
Less: Prepaid 8,000 16,000
To Provision for bad &Doubtful debts::
Bad debts 15,000
Add: Written off 10,000
Add: Provision for doubtful
Debts (5% of Rs 240000) 12,000
37,000
less: Old provision 8,000 29,000
To Depreciation:
Building 7,500
Machinery (50000+2500) 52,500
Furniture 4,000 64,000
To Net Profit 3,81,000
Total 7,45,000 Total 7,45,000

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Balance Sheet of K as at 31st March 2022

Liabilities Rs Assets Rs
Capital 8,00,000 Building 3,00,000
Add: Profit 3,81,000 Less: Depreciation 7,500 2,92,500
Less: Drawing 60,000 11,21,000 Machinery 5,00,000
Creditors 3,00,000 Additions + 50,000
Outstanding Exp. 5,50,000
Wages 6,000 Less: Depreciation 52,500 4,97,500
Commission 10,000 16,000 Furniture 40,000
Less: depreciation 4,000 36,000
Debtors 2,50,000
Less: Bad debts 10,000
less: Provision for
doubtful debts 12,000 2,28,000
Prepaid insurance 8,000
Stock 2,25,000
Bank balance 1,50,000

14,37,000 14,37,000

Question: 29.Following is the Trial Balance of Ram as on 31st March, 2023.

Heads of Accounts Dr. (₹) Cr. (₹)
Purchases 1,50,000
Debtors 2,00,000
Interest earned 4,000
Salaries 30,000
Sales 3,21,000
Purchases Return 5,000
Wages 20,000
Rent 15,000
Sales Return 10,000
Bad Debts Written off 7,000
Creditors 1,20,000
Capital 1,00,000
Drawings 24,000
Provision for Doubtful Debts 6,000
Printing and Stationery 8,000
Insurance 12,000
Opening Stock 50,000
Office Expenses 12,000
Furniture and Fittings 20,000
Provision for Depreciation 2,000
Total
5,58,000 5,58,000

Prepare Trading and profit and Loss Account for the year ended 31 st March, 2023 and Balance Sheet as at that time date for
making the following adjustment:
(i) Depreciation Furniture and Fittings by 10% on original cost
(ii) Make a Provision for Doubtful Debts equal to 5% of Debtors.
(iii) Salaries for the month of March amounted to ₹ 3,000 were unpaid which must be provided for. The balance in
the amount includes ₹ 2,000 paid in advances.
(iv) Insurance is prepaid to the extent of ₹ 2,000,
(v) Provide ₹ 8,000 for office expenses.
(vi) Stock costing ₹ 6,000 was taken by Ram for his personal use, cost of which has not been adjusted in the book
of account.
(vii) Closing Stock valued at ₹ 68,000 (Net Realisable Value (Market Value) ₹ 60,000. (ICAI Study material)

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Solution TRADING AND PROFIT AND LOSS ACCOUNT For the year ended 31 st March, 2023
Particulars ₹ Particulars ₹
To Opening Stock 50,000 By Sales 3,21,000
To Purchases 1,50,000 Less: Sales Return 10,000 3,11,000
Less: Purchases Return 5,000 By Closing Stock 60,000
1,45,000
Less: For Personal Use 6,000 1,39,000
To Wages 20,000
To Gross Profit c/d 1,62,000
3,71,000 3,71,000

To Salaries 30,000
Add: Outstanding Salaries 3,000 By Gross Profit b/d 1,62,000
33,000 By Interest earned 4,000
Less: Paid in Advance 2,000 31,000
To Rent 15,000
To Bad Debts 7,000
Add: New Provision 10,000
17,000
Less: Old Provision 6,000
11,000
To Printing and Stationery 8,000
To Insurance 12,000
Less: Prepaid 2,000
To Office Expenses 12,000 10,000
Add: Outstanding 8,000
To Provision for Depreciation on Furniture and 20,000
Fittings 2,000
To Net Profit transferred to Capital A/C 69,000

1,66,000 1,66,000

BALANCE SHEET As at 31st March, 2023

Liabilities ₹ Assets ₹
Current liabilities Current Assets
Sundry Creditors 1,20,000 Stock (Note) 60,000
Outstanding Salaries 3,000 Debtors 2,00,000
Outstanding Office Expenses 8,000 Less: Provision for Doubt Debts 10,000 1,90,000
Capital Prepaid Salaries 2,000
Opening Balance 1,00,000 Prepaid Insurance 2,000
Add: Net Profit 69,000 Fixed Assets
1,69,000 Furniture and Fittings 20,000
Less: Drawing 24,000 Less: Provision for Depreciation 4,000 16,000
Stock for (₹2,000 + ₹2,000)
Personal use 6,000 30,000 1,39,000

2,70,000 2,70,000
Note: According to AS-2 issued by ICAI Closing Stock is valued at lower of cost or net realizable value (Market Value).

Question 30. The balance sheet of Thapar on 1st April, 2022 was as follows:

Liabilities Amount Assets Amount

Trade payables 15,00,000 Plant & Machinery 30,00,000
Expenses Payable 1,50,000 Furniture & Fixture 3,00,000
Capital 50,00,000 Trade receivables 14,00,000
Cash at Bank 6,50,000
Inventories 13,000,000
66,50,000 66,50,000

During 2022-23, his Profit and Loss Account revealed a net profit of Rs 18,30,000. This was after allowing for the
following :

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(a) Rent received from property let out Rs 3,00,000.

(b) Depreciation on Plant and Machinery @ 10% and on Furniture and Fixtures @ 5%.
(c) A provision for Doubtful Debts @ 5% of the trade receivables as at 31st March, 2020.

But while preparing the Profit and Loss Account he had forgotten to provide for (1) outstanding expenses totaling
Rs 1,80,000 and (2) prepaid insurance to the extent of Rs 20,000.

His current assets and liabilities on 31st March, 2023 were: Inventories Rs 14,50,000; Trade receivables
Rs 20,00,000; Cash at Bank Rs 10,35,000 and Trade payables Rs 11,40,000. During the year he withdrew Rs 6,00,000
for domestic use. Draw up his Balance Sheet at the end of the year. (ICAI Study material)

Answer: Profit and Loss Account (Revised)

Particulars Rs Particulars Rs
To Outstanding expenses 1,80,000 By Balance b/d 18,30,000
To Net profit 16,70,000 By Prepaid insurance 20,000

18,50,000 18,50,000

Balance Sheet of Thapar as on 31st March, 2023

Liabilities Rs Rs Assets Rs Rs
Capital 50,00,000 Cash at Bank 10,35,000
Add: Net Profit 16,70,000
20,00,000
66,70,000 Trade receivables
(1,00,000)
Less : Drawings (6,00,000) 60,70,000 Less: Provision for
19,00,000
Outstanding expenses 1,80,000 doubtful debts
Trade payables 11,40,000
Plant and Machinery 30,00,000
Less: Depreciation (3,00,000) 27,00,000
3,00,000
Furniture & Fixtures (15,000) 2,85,000
Less: Depreciation
14,50,000
Inventories 20,000
Prepaid insurance
73,90 000 73,90,000

Question 31. The following is the schedule of balances as on 31.3.22 extracted from the books of Shri Gavaskar, who
carries on business under the same name and style of Messrs Gavaskar Viswanath & Co., at Bombay:

Particulars Dr. Cr.

Cash in hand 14,000
Cash at bank 26,000
Sundry Debtors 8,60,000
Stock on 1.4.2021 6,20,000
Furniture & fixtures 2,14,000
Office equipment 1,60,000
Buildings 6,00,000
Motor Car 2,00,000
Sundry Creditors 4,30,000
Loan from Viswanath 3,00,000
Provision for bad debts 30,000

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Purchases 14,00,000
Purchase Returns 26,000
Sales 23,00,000
Sales Returns 42,000
Salaries 1,10,000
Rent for Godown 55,000
Interest on loan from Viswanath 27,000
Rates & Taxes 21,000
Discount allowed to Debtors 24,000
Discount received from Creditors 16,000
Freight on purchases 12,000
Carriage Outwards 20,000
Drawings 1,20,000
Printing and Stationery 18,000
Electricity Charges 22,000
Insurance Premium 55,000
General office expenses 30,000
Bad Debts 20,000
Bank charges 16,000
Motor car expenses 36,000
Capital A/c 16,20,000
TOTAL 47,22,000 47,22,000

Prepare Trading and Profit and Loss Account for the year ended 31 st March, 2022 and the Balance Sheet as at that date
after making provision for the following:
(i) Depreciate: (a) Building used for business by 5 percent; (b) Furniture and fixtures by 10 percent; One steel table
purchased during the year for Rs 14,000 was sold for same price but the sale proceeds were wrongly credited to Sales
Account; (c) Office equipment by 15 percent; Purchase of a typewriter during the year for Rs 40,000 has been
wrongly debited to purchase; and (d) Motor car by 20%.
(ii) Value of stock at the close of the year was Rs 4,40,000.
(iii) Two month’s rent for godown is outstanding.
(iv) Interest on loan from Viswanath is payable at 12 percent per annum, this loan was taken on 1.5.2021.
(v) Provision for bad debts is to be maintained at 5 percent of Sundry Debtors.
(vi) Insurance premium includes Rs 40,000 paid towards proprietor’s life insurance policy and the balance of the
insurance charges cover the period from 1.4.2021 to 30.6.2022. (ICAI Study material)

Answer: Trading for the year ended 31st March 2022

Particulars Details Amount Particulars Details Amount

To opening Stock 6,20,000 By Sales 23,00,000

To Purchases 14,00,000 Less: Sale of furniture 14,000
Less: Typewriter included 40,000 included in sale
in purchases Less: Sales Returns 42,000 22,44,000
Less: Purchase Returns 26,000 13,34,000
By Closing Stock 4,40,000
To Freight on purchase 12,000
To Gross Profit c/d 7,18,000
26,84,000 26,84,000

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Profit/Loss Account for the year ended 31st March, 2022

Particular Details Amount Particular Details Amount

To Salaries 1,10,000 By Gross profit b/d 7,18,000

By Discount received 16,000
To Rent for Godown 55,000
Add: Outstanding 11,000 66,000

To provision for doubtful debts 33,000

To Rent and Taxes 21,000
To Discount Allowed 24,000
To Carriage outwards 20,000
To printing and stationery 18,000
To Electricity charges 22,000
To Insurance premium 12,000
To Depreciation 1,20,000
To general office expenses 30,000
To Bank Charges 16,000
To interest on loan 27,000
Add: Outstanding 6,000 33,000
To Motor car expenses 36,000
To Net Profit transferred to Capital a/c 1,73,000

7,34,000 7,34,000

Balance Sheet of M/s Gavaskar Vishwanath & Co. as at 31st March, 2022

Liabilities Details Amount Assets Details Amount

Capital 16,20,000 Building 6,00,000

Add: Net Profit 1,73,000 Less: Dep. (30,000) 5,70,000
Less: Drawings (1,20,000)
Less: Insurance Premium (40,000) 16,33,000 Motor Car 2,00,000
Less: Dep. (40,000) 1,60,000
Loan from Vishwanath 3,00,000
Add: Outstanding 6,000 3,06,000 Office equipment 2,00,000
Less: Dep. (30,000) 1,70,000
Sundry Creditors 4,30,000
Outstanding rent 11,000 Furniture & Fixture 2,00,000
Less: Dep. (20,000) 1,80,000

Stock in Trade 4,40,000

Sundry Debtors 8,60,000
Less: Provision for (43,000) 8,17,000
doubtful debts
Cash at hand 26,000
Cash in bank 14,000
Prepaid insurance 3,000
23,80,000 23,80,000

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Question 32. From the following particulars extracted from the books of Ganguli, prepare trading and profit and loss
account and balance sheet as at 31st March, 2022 after making the necessary adjustments:

Rs Rs
Ganguli’s capital account (Cr.) 5,40,500 Interest received 7,250
Stock on 1.4.2021 2,34,000 Cash with Traders Bank Ltd. 40,000
Sales 14,48,000 Discounts received 14,950
Sales return 43,000 Investments (at 5%) as on 1.4.2021 25,000
Purchases 12,15,500 Furniture as on 1-4-2021 9,000
Purchases return 29,000 Discounts allowed 37,700
Carriage inwards 93,000 General expenses 19,600
Rent 28,500 Audit fees 3,500
Salaries 46,500 Fire insurance premium 3,000
Sundry debtors 1,20,000 Travelling expenses 11,650
Sundry creditors 74,000 Postage and telegrams 4,350
Loan from Dena Bank Ltd. (at12%) 1,00,000 Cash in hand 1,900
Interest paid 4,500 Deposits at 10% as on 1-4-2021 (Dr.) 1,50,000
Printing and stationery 17,000 Drawings 50,000
Advertisement 56,000
Adjustments:
(i) Value of stock as on 31st March, 2022 is Rs 3,93,000. This includes goods returned by customers on 31st March,
2022. to the value of Rs 15,000 for which no entry has been passed in the books.
(ii) Purchases include furniture purchased on 1st January, 2022 for Rs 10,000.
(iii) Depreciation should be provided on furniture at 10% per annum.
(iv) The loan account from Dena bank in the books of Ganguli appears as follows:

Rs Rs
31.3.2022 To Balance c/d 1,00,000 1.4.2021 By Balance b/d 50,000
31.3.2022 By Bank 50,000
1,00,000 1,00,000

(v) Sundry debtors include Rs 20,000 due from Robert and sundry creditors include Rs 10,000 due to him.
(vi) Interest paid include Rs 3,000 paid to Dena bank.
(vii) Interest received represents Rs 1,000 from the sundry debtors (due to delay on their part) and the balance on
investments and deposits.
(viii) Provide for interest payable to Dena bank and for interest receivable on investments and deposits.
(ix) Make provision for doubtful debts at 5% on the balance under sundry debtors. No such provision need to be made
for the deposits.

Answer : Trading and Profit & Loss Account for the year ended 31st March,2022
Rs Rs Rs Rs
To Opening stock 2,34,000 By Sales 14,48,000
To Purchases 12,15,500 Less: Returns (58,000) 13,90,000
Less: Transfer to furniture A/c (10,000) By Closing stock 3,93,000
12,05,500
Less: Returns (29,000) 11,76,500
To Carriage inwards 93,000
To Gross profit c/d 2,79,500
17,83,000 17,83,000

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To Salaries 46,500 By Gross profit b/d 2,79,500

To Rent 28,500 By Interest 17,250
To Advertisement 56,000 By Discount received 14,950
To Printing & stationery 17,000
To Interest 7,500
To Discount allowed 37,700
To General expenses 19,600
To Travelling expenses 11,650
To Fire insurance premium 3,000
To Postage & telegrams 4,350
To Provision for doubtful debts 4,750
(W.N.I)
To Depreciation on furniture 1,150
To Audit fees 3,500
To Capital A/c (Net profit 70,500
transferred)
3,11,700 3,11,700

Balance Sheet as on 31st March,2022

Liabilities Rs Rs Assets Rs Rs
Capital account: Furniture 9,000
Balance on 1st April,2021 5,40,500 Additions during the year 10,000
Add: Net profit 70,500 19,000
6,11,000 Less: Depreciation (1,150) 17,850
Less: Drawings (50,000) 5,61,000 Investments 25,000
Loan from Dena Bank Ltd. 1,00,000 Deposits 1,50,000
Insurance accrued on bank 3,000 Interest accrued on 10,000
loan investment & deposits
Sundry creditors 64,000 Stock in trade 3,93,000
Sundry debtors 95,000
Less: Provision (4,750) 90,250
Cash with Traders Bank Ltd. 40,000
Cash in hand 1,900
7,28,000 7,28,000

Question 33. Sengupta & Co. employs a team of eight workers who were paid Rs 30,000 per month each in the year
ending 31st March, 2021. At the start of financial year 2021-2022, the company raised salaries by 10% to Rs 33,000
per month each.
On October 1, 2021 the company hired two trainees at salary of Rs 21,000 per month each. The work force are paid
salary on the first working day of every month, one month in arrears, so that the employees receive their salary for
January on the first working day of February etc.
You are required to calculate:
(i) Amount of salaries which would be charged to the profit and loss for the year ended 31st March, 2022.
(ii) Amount actually paid as salaries during 2021-22
(iii) Outstanding Salaries as on 31st March, 2022. (ICAI Study material)

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Answer:

(i) Salaries to be charged to profit and loss account for the year
ended 31st March, 2022:
Salaries of 8 employees for full year @ Rs 33,000 per month each 31,68,000
Salaries of 2 trainees for 6 months @ Rs 21,000 p.m. 2,52,000
34,20,000
(ii) Salaries actually paid in 2021-22
March, 2021 salaries paid in April, 2021 (8 x 30,000) 2,40,000
Salaries of 8 employees for April 2021 to March, 2022 paid in
May 2021 to March 2022 @ Rs 33,000 for 11 months 29,04,000
Salaries of 2 trainees for October 2021 to February 2022 paid in
November 2021 to March 2022 @ Rs 21,000 for 5 months 2,10,000
33,54,000
(iii) Outstanding salaries as at 31st March, 2022
8 employees @ Rs 33,000 each for 1 month 2,64,000
2 trainees @ Rs 21,000 each for 1 month 42,000
3,06,000

Question 34. Mr. Kotriwal is engaged in business of selling magazines. Several of his customers pay money in
advance for subscribing his magazines. Information related to year ended 31 st March 2020 has been given below:
On 1.4.2019 he had a balance of Rs 2,00,000 advance from customers of which Rs 1,50,000 is related to year 2019-20
while remaining pertains to year 2020-21. During the year 2019-20 he made cash sales of Rs 5,00,000. You are
required to compute:
(i) Total income for the year 2019-20.
(ii) Total money received during the year if the closing balance in advance from customers account is Rs 1,70,000.
(ICAI Study material)
Answer: (i) Computation of Income for the year 2019-20:
Rs
Money received during the year related to 2019-20 5,00,000
Add: Money received in advance during previous years 1,50,000
Total income of the year 2019-20 6,50,000
(ii) Advance from Customers A/c
Date Particulars Rs Date Particulars Rs
To Sales A/c 1,50,000 1.4.2019 By Balance b/d 2,00,000
(Advance related to current By Bank A/c 1,20,000
year transferred to sales) (Balancing Figure)
31.3.20 To Balance c/d 1,70,000

3,20,000 3,20,000

So, total money received during the year is:

Rs
Cash Sales during the year 5,00,000
Add: Advance received during the year 1,20,000
Total money received during the year 6,20,000

Question: 35. Mahindra Traders operates in an industry that has a high rate of bad debts. On 31 st March 2023, the
Accounts Receivables showed a balance of Rs. 7,50,000 before any year end adjustment and the balance in the Reserve of
doubtful debts was Rs. 37,500. The year-end balance in the Reserve for Doubtful Debts A/c will be based on the following
ageing schedule.

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Days outstanding Amount (Rs.) Probability of collection

Less than 16 4,50,000 0.99
16 – 30 1,50,000 0.94
31 – 45 75,000 0.80
46 – 60 45,000 0.65
61 – 75 15,000 0.50
Over 75 15,000 0.00

Find out the appropriate balance in the Reserve for Doubtful Debts Account as on 31st March 2023. Show how Debtors
balance be shown in the Balance Sheet. Calculate the effect of year end adjustment on Account of Reserve for Doubtful
Debts.

Question: 36. A property dealer owned many properties which it had acquired by taking bank loans. There were separate
loan agreements for different properties. In some cases, interest was paid in advance and in other cases it was payable in
arrears. These properties were let out to different tenants on various agreements. Some agreements provided for rentals
in advance while the others provided for rent payable in arrears. The dealer has given the following balances:
31-03-2021 31-03-2022
Interest payable 12,000 14,500
Interest prepaid 8,000 6,400
Rentals due from tenants 15,000 19,000
Rentals received in advance 3,000 2,500
During the year 2021-22, the amount of interest transferred to P & L A/c was Rs. 56,000 and cash collected from tenants
for rentals was Rs. 1,16,000. You are required to prepare Interest A/c and Rental Income A/c for the year ended 2021-22

Question: 37. R retired from a company and started a business in Chennai. On retirement he got Rs. 1,00,000 from
his employer which he invested in his business on 1.1.22. He got from Life Insurance Corporation Rs. 20,000 on the
maturity of his policy which he also invested in his business. He draws Rs. 1,000 for his personal expenses every
month from 30thApril, 2022. The following figures are extracted from his books on 31 st December, 2022 :
Rs. Rs.
Purchases 3,10,000 Bad Debts 2,000
Cartage 5,000 Sundry Debtors 45,000
Salaries & Wages 24,000 Bills Receivable 30,000
Electricity Charges 4,500 Cash in hand 8,997
Travelling 8,900 Sales 3,00,000
Telephone 4,300 Income from Personal 20,000
Investments
Advertisement 10,000 Creditors 85,000
Repairs & Renewal 3,303 Bank Overdraft 80,000
Plant & Machinery 1,50,000 Buildings(Cr.) 10,000

You are requested to prepare a Trading and Profit & Loss Account of the business for the period ended
31stDecember, 2022 and also the Balance Sheet as on that date after taking into consideration the following further
information :
(1) Purchases include Rs. 10,000 representing the value of Furniture purchased.
(2) Rs. 4,000 representing erection wages on Plant & Machinery are debited to Salaries & Wages.
(3) Electricity charges include Rs. 2,500 paid as deposits to Electric Supply Company. There are bills
outstanding to the extent of Rs. 500.
(4) Advertisement includes Rs. 4,000 representing the cost of a Neon Sign.
(5) A dishonoured bill of Rs. 5,000 stands debited to the debtor. 50% thereof considered doubtful and has to be
provided accordingly.
(6) A debtor of Rs. 1,000 was declared insolvent on 30.12.22 and it is expected that nothing would be recovered
from his estate.
(7) Provide 5% discount on net realisable debtors.
(8) R received Rs. 25,000 in respect of a business with B. The sum received stood credited to Sundry Creditors.
It is noted that a sum of Rs. 5,000 was due to R as his share of profit from that business.
(9) During the period there was a fire damaging stock costing Rs. 50,000. The damaged goods were sold for Rs.
20,000. This sum of Rs. 20,000 is included in Sales. The Insurance Company paid Rs. 25,000 towards the

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loss of stock. The godown containing the stock was also damaged to the extent of Rs. 15,000, which has also
been paid by the Insurance Company. The total amount received from the Insurance Company was credited
to Building Account.
(10) Bank overdraft represents 80% of the drawing power.
(11) The bank overdraft was given on the hypothecation of stock-in-trade. You are informed that the bank had a
margin of 331/3 %.
(12) The manager of the business is entitled to a commission of 5% on the gross profit.
(13) Provide 10% depreciation on Plant & Machinery and on Furniture & Fittings and 5% on Building.
Depreciation to be provided on closing balance for full year.

Question 38. Mr. Pankaj runs a factory which produces motor spares of export quality. The following details were
obtained about his manufacturing expenses for the year ended on 31.3.2022.

₹
W.I.P. - Opening 3,90,000
- Closing 5,07,000
Raw Materials - Purchases 12,10,000
- Opening 3,02,000
- Closing 3,10,000
- Returned 18,000
- Indirect material 16,000
Wages - direct 2,10,000
- indirect 48,000
Direct expenses - Royalty on production 1,30,000
- Repairs and maintenance 2,30,000
- Depreciation on factory shed 40,000
- Depreciation on plant & machinery 60,000
By-product at 20,000
selling price

You are required to prepare Manufacturing Account for the year ended on 31.3.2022. (ICAI Study material)
Solution
Manufacturing Account for the year ended on March 31, 2022

Particulars Amount Particulars Amount

₹ ₹ ₹
To Opening W.I.P. 3,90,000 By Closing W-I-P 5,07,000
To Raw Material Consumed: By products 20,000
Opening inventory 3,02,000 By Trading A/c- Cost of 17,81,000
Purchases 12,10,000 finished goods transferred

Less: Return 15,12,000

(18,000)
Less: Closing inventory
14,94,000
(3,10,000) 11,84,000

To Direct Wages 2,10,000

To Direct expenses:
Royalty 1,30,000
To Manufacturing Overhead:
Indirect Material 16,000
Indirect Wages 48,000
Repairs & Maintenance 2,30,000
Depreciation on Factory Shed 40,000
Depreciation on Plant &Machinery 60,000
3,94,000

23,08,000 23,08,000

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Question 39. Following are the Manufacturing A/c, Creditors A/c and Trading A/c provided by Ms. Shivi related to
2021-22. There are certain figures missing from these accounts.

Raw Material A/c

Date Particulars Amount Date Particulars Amount
₹ ₹

To Opening Stock A/c 1,00,000 By Raw Material Consumed ..............

To Creditors A/c ............... By Closing Stock A/c ..............

Creditors A/c
Date Particulars Amount Date Particulars Amount
₹ ₹

To Bank A/c 22,00,000 By Balance b/d 15,00,000

To Balance c/d 6,00,000

Manufacturing A/c
Particulars Amount Particulars Amount
₹ ₹

To Raw Material Consumed .............. By Trading A/c 17,94,000

To Wages 3,50,000
To Depreciation 2,00,000
To Direct Expenses 2,44,000

Additional Information:
1. Purchase of machinery worth ₹ 10,00,000 has been omitted. Machinery is chargeable at a depreciation rate of 10%.
2. Wages include the following
Paid to Factory Workers – ₹ 3,00,000
Paid to labour at office – ₹ 50,000
3. Direct Expenses include following:
• Electricity charges of ₹ 80,000 of which 30% pertained to office.
• Fuel Charges of ₹ 20,000
• Freight Inwards of ₹ 35,000
• Delivery charges to customers – ₹ 20,000.
You are required to prepare revised Manufacturing A/c, and Raw Material A/c. (ICAI Study material)

Solution
Manufacturing A/c
Particulars Amount Particulars Amount

To Raw Material Consumed (Balancing Figure) 10,00,000

To Wages (W.N. 2) 3,00,000 By Trading A/c (W.N. 4) 18,00,000
To Depreciation (W.N. 1) 3,00,000
To Direct Expenses (W.N. 3) 2,00,000

18,00,000 18,00,000

Raw Material A/c

Date Particulars Amount Date Particulars Amount
₹ ₹

To Opening Stock A/c 1,00,000 By Raw Material Consumed (from 10,00,000

To Creditors A/c (W.N. 5) 13,00,000 Trading A/c above)
By Closing Stock A/c (Balancing 4,00,000
Figure)
14,00,000 14,00,000

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Working Notes:
1) Since purchase of Machinery worth ₹ 10,00,000 has been omitted. So, depreciation omitted from being charged = ₹
10,00,000 X 10%
= ₹ 1,00,000
Correct total depreciation expense = ₹ (2,00,000 + 1,00,000)
= ₹ 3,00,000
2) Wages worth ₹ 50,000 will be excluded from manufacturing account as they pertain to office and hence will be
charged P&L A/c.

3) Expenses to be excluded from direct expenses:

Office Electricity Charges (80,000 X 30%) 24,000
Delivery Charges to Customers 20,000
Total expenses not part of Direct Expenses 44,000
=> Revised Direct Expenses = ₹ (2,44,000 - 44,000)
= ₹ 2,00,000
Fuel charges are related to factory expenses and also freight inwards are incurred for bringing goods to factory/
godown so they are part of direct expenses.

4. Revised Balance to be transferred to Trading A/c:

Particulars Amount
₹

Current Balance transferred 17,94,000

Add: Depreciation charges not recorded earlier 1,00,000
Less: Wages related to Office (50,000)
Less: Office Expenses (44,000)
Revised balance to be transferred
18,00,000
5)
Creditors A/c
Date Particulars Amount Date Particulars Amount
₹ ₹

To Bank A/c 22,00,000 By Balance b/d 15,00,000

To Balance c/d 6,00,000 By Raw Materials A/c (Bal. 13,00,000
figure)
28,00,000 28,00,000

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Question 40.The following is the trial balance of Mr. Pandit for the year ended 31 st March, 2023:
Trial Balance as on 31st March 2023
Particulars Dr. ₹ Particulars Cr. ₹

Opening Stock: Sundry Creditors 50,000

Raw Materials 1,50,000 Purchase Returns 5,000
Finished goods 75,000 Capital 1,00,000
Purchase of Raw Materials 5,00,000 Bills Payable 24,000
Land & Building 1,00,000 Long-Term Loan 2,00,000
Loose tools 30,000 Provision for Bad and Doubtful Debts 2,000
Plant & Machinery 30,000 Sales 8,50,000
Investments 25,000 Bank Overdraft 23,000
Cash in Hand 20,000
Cash at Bank 5,000
Furniture & Fixtures 15,000
Bills Receivable 15,000
Sundry Debtors 40,000
Drawings 20,000
Salaries 20,000
Coal and Fuel 15,000
Factory rent & rates 20,000
General Expenses 4,000
Advertisement 5,000
Sales Return 10,000
Bad Debts 4,000
Direct Wages (Factory) 80,000
Power 30,000
Interest Paid 7,000
Discount Allowed 3,000
Carriage Inwards 15,000
Carriage Outwards 7,000
Commission Paid 5,000
Dividend Paid 4,000
12,54,000 12,54,000

Additional Information
i. Stock of finished goods at the end of the year ₹ 1,00,000
ii. A provision for doubtful debts. At 5% on Sundry Debtors. Depreciation on building ₹ 1,000 and ₹ 3,000 on
Machinery to be provided.
iii. Accrued commission ₹ 12,500. Interest has accrued on investment ₹ 15,000. Salary Outstanding ₹ 2,000 and
Prepaid Interest ₹ 1,500.
You are required to prepare Manufacturing, Trading and Profit and Loss Account for the year ended 31 st March, 2023.

Solution
In the books of Mr. Pandit
Manufacturing Account for the year ended 31 st March, 2023

Particulars ₹ Particulars ₹
To Opening Stock of Raw Materials 1,50,000 By Cost of Manufactured goods 8,08,000
To Purchase 5,00,000 transferred to Trading A/c
Less: Purchase Return 5,000 4,95,000
To Carriage Inwards 15,000
To Direct Wages 80,000
To Power 30,000
To Coal and fuel 15,000
To Factory Rent and Rates 20,000
To Depreciation on Machinery 3,000

8,08,000 8,08,000

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Trading Account for the year ended 31st March, 2023

Particulars ₹ Particulars ₹
To Opening Stock of finished goods 75,000 By Sales 8,50,000
To Cost of goods transferred from 8,08,000 Less: Sales Return 10,000 8,40,000
Manufacturing A/c 57,000 By Closing Stock 1,00,000
To Gross Profit c/d
9,40,000 9,40,000

Profit And Loss Account for the year ended 31st March 2023
Particulars ₹ Particulars ₹
To Carriage Outward 7,000 By Gross Profit b/d 57,000
To Discount Allowed 3,000 By Accrued Commission 12,500
To Commission Paid 5,000 By Accrued Interest 15,000
To Dividend Paid 4,000
To General Expenses 4,000
To Advertisement 5,000
To Salaries 20,000
Add: Outstanding 2,000 22,000
To Interest Paid 7,000
Less: Prepaid 1,500 5,500
To Provision for Bad & Doubtful Debts 2,000
Add: Bad Debts 4,000
Less: Old Provision for Doubtful Debts 2,000 4,000

To Depreciation on Building 1,000

To Net Profit c/d 24,000

84,500 84,500

Balance Sheet as on 31st March, 2023

Capital and Liabilities ₹ Assets ₹

Capital Plant & Machinery 30,000
Add: Net Profit 1,00,000 Less: Depreciation 3,000 27,000
24,000 Land & Building 1,00,000
1,24,000 Less: Depreciation 1,000 99,000
Less: Drawings 20,000 1,04,000
Bills Payable 24,000 Furniture & Fixtures 15,000
Sundry Creditors 50,000 Investments 25,000
Salary Outstanding 2,000 Closing Stock 1,00,000
Long-Term Loans 2,00,000 Loose Tools 30,000
Bank Overdraft 23,000 Sundry Debtors 40,000
Less: Provision for Bad & 2,000 38,000
Doubtful Debts
Bills Receivable 15,000
Accrued Commission 12,500
Accrued Interest 15,000
Prepaid Interest 1,500
Cash in Hand 20,000
Cash at Bank 5,000
4,03,000 4,03,000

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Question 41. Mr. Vimal runs a factory which produces soaps. Following details were available in respect of his
manufacturing activities for the year ended on 31.3.2023:
₹
Opening Work-in-Process (10,000 units) 16,000
Closing Work-in-Process (12,000 units) 20,000
Opening inventory of Raw Materials 1,70,000
Closing inventory of Raw Materials 1,90,000
Purchases 8,20,000
Hire charges of machine @ ₹ 0.60 per unit manufactured -----
Hire charges of factory 2,20,000
Direct wages-Contracted @ ₹ 0.80 per unit manufactured and @ ₹ 0.40 per unit of Closing ----
W.I.P.
Repairs and Maintenance 1,80,000
Units produced – 5,00,000 units

Required: Prepare a Manufacturing Account of Mr. Vimal for the year ended 31.3.2023. (ICAI Study material)

Question 42. 1,00,000 units were produced in a factory. Per unit material cost was ₹ 10 and per unit labour cost was ₹
5. That apart it was agreed to pay royalty @ ₹ 3 per unit to the Japanese collaborator who supplied technology.
Calculate Manufacturing Cost. (ICAI Study material)

Solution :In this case Manufacturing Cost comprises of –

Raw Material consumed (1,00,000 × ₹ 10) ₹ 10,00,000
Direct Wages (1,00,000 × ₹ 5) ₹ 5,00,000
Direct Expenses (1,00,000 × ₹ 3) ₹ 3,00,000
₹ 18,00,000

43. state whether following statements are true or false with suitable reason:

(i) The income statement shows either net profit or net loss for a particular period.
(ii) Gains from the sale or exchange of assets are not considered as the revenue of the business.
(iii) The salary paid in advance is not an expense because it neither reduces assets or nor increase liabilities.
(iv) A loss is an expenditure which does not bring any benefit to the concern.
(v) All liabilities which become due for payment within the year are classified as long-term liabilities.
(vi) The term current asset is used to designate cash and other assets or resources which are reasonably expected to be
realized or sold or consumed within one year.
(vii) An asset gives rise to expenditure when it is acquired and to an expense when it is consumed.
(viii) If the balance of an account on the debit side of the trial balance where the benefit has already expired then it is
treated as an expense.
(ix) Sales less cost of goods sold = gross profit.
(x) If the debit side of the trading account exceeds its credit side then the balance is termed as gross profit.
(xi) The provision for bad debts is debited to Sundry Debtors Account.
(xii) The provision for discount on creditors is often not provided in keeping with the principle of conservatism.
(xiii) The debts written off as bad, if recovered subsequently are credited to Debtors Account.
(xiv)The adjustment entry in respect of income received in advance is debit Income received in advance account and
credit income account.
(xv) Premium paid on the life policy of a proprietor is debited to profit and loss account.
(xvi) Depreciation account appear in the trial balance is taken only to profit and loss account.
(xvii) Personal purchases included in the purchases day book are added to the sales account in the Trading account.
(xviii) Medicines given to the office staff by a manufacturer of medicines will be debited to salaries account.
(xix) Goods worth Rs 600 taken by the proprietor for personal use should be credited to Capital Account.
(xx) If Closing Stock appears in the Trial Balance, the Closing inventory is then not entered in Trading Account. It is
only shown in the Balance Sheet.

Answer:
(i) True: Profit and loss account shows either net profit or net loss for a particular period.
(ii) False: Gains from the sale or exchange of assets are considered as the revenue of the business. But this revenue not
in the ordinary course of business so it is capital receipts.
(iii) True: The salary paid in advance is an asset it is not an expense because it neither reduces assets or nor increase
liabilities.
(iv)True: A loss is an expenditure of the business which does not bring any gain to the business.

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(v)False: All liabilities which become due for payment within one year are classified as current liabilities.
(vi)True: Current assets are all the assets which are expected to be realized or sold or consumed within one year.
(vii)True: When an asset is purchase capital expenditure is incurred and when the asset is put to use expenses are
incurred in consumption.
(viii)True: Debit balance of accounts are treated as expenses whose benefit is already received or expired.
(ix)True: Gross profit is obtained by deducting cost of goods sold from sales.
(x)False: If the debit side of the trading account exceeds its credit side then the balance is termed as gross loss.

(xi)False: The provision for bad debts is debited to debited to Profit and loss Account, in Balance Sheet it is shown
either on liability side or deducted from the head Debtors.
(xii)True: According to the provision of conservatism provision is maintained for the losses to be incurred in future.
Discount on creditors is an income so provision in not maintained.
(xiii)False: The debts written off as bad, if recovered subsequently are credited to Bad Debts Recovered Account and
becomes an income.
(xiv)False: Income received in advance is reduces it from the concerned income in profit and loss account. And, it is
shows it as a liability in the current balance sheet under the head Current Liabilities.
(xv)False: Premium paid on the life policy of a proprietor is to be debited to capital account, as it is personal expense.
(xvi)True: Depreciation is charge on each of the asset on a certain percentage. Depreciation is a charge to profit and
loss account and should be debited to profit & loss account by crediting the respective assets. If it appears in trial
balance then it is taken only to profit and loss account.
(xvii)False: Personal purchases included in the purchases day book are deducted from the purchases account in the
Trading account.
(xviii)True: Any benefit given to the staff is debited to the salary account.
(xix)False: Goods taken by the proprietor for personal use should be credited to Purchase Account as less goods are
left in the business for sale.
(xx) True: The closing Stock appears in the trial balance only when it is adjusted against purchases by passing the
entry. In this case, closing stock is not entered in Trading Account and is shown only in Balance Sheet.

Question 44. Multiple choice questions:

1. The purpose of preparing final accounts is to ascertain ____.

(a) Profit or loss (b) Capital (c) The value of assets (d) Profit or loss and financial position

2. If the manager is entitled to a commission of 5% on profits before deduction this commission, he will get
a commission of on a profit of 8400 before commission..
(a) 400 (b) 442.11 (c) 420 (d) None of these

3. The balance of the petty cash is

(a)An expense (b) An income (c) An asset (d) A liability

4. Fixed assets are

(a) Kept in the business for use over a long time for earning income
(b) Meant for resale
(c) Meant for conversion into cash as quickly as possible
(d) All of the above

5. The manufacturing account is prepared

(a) To ascertain the profit or loss on the goods produced
(b) To ascertain the cost of the manufactured goods
(c) To show the sale proceeds from the goods produced during the year
(d) Both (b) and (c)

6. A company wishes to earn a 20% profit margin on selling price. Which of the following is the
profit mark up on cost, which will achieve the required profit margin?
(a)33% (b) 25% (c) 20% (d) None of the above

7. At the time of preparation of financial accounts, bad debts recovered account will be transferred to
(a) Debtors A/c (b) Profit & Loss A/c
(c) Profit & loss Adjustment A/c (d) Profit & loss Appropriation A/c

8. Depreciation appearing in the Trial Balance should be

(a) Debited to P & L A/c (b) Shown as liability in balance sheet
(c) Reduced from related asset in balance sheet (d) Both (a) and (c) above

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9. Gross profit is equal to (b) Sales – Closing stock + purchase

(a) Sales – Cost of goods sold (d) None of the above
(c) Opening stock + Purchases – Closing stock

10. The profit and loss Account shows the

(a) Financial results of the concern for a period
(b) Financial position of the concern on particular date
(c) Financial results of the concern on a particular date
(d) Cost of goods sold during the period
11. Which of the following is not a financial statement?

(a) Profit and loss account (b) Balance sheet (c) cash flow statement (d) Trial balance

12. Based on which of the following concepts, share capital is shown on the liabilities side of a balance sheet?
(a) Business entity concept (b) Money measurement concept
(c) Going concern concept (d) Matching concept

13. Closing stock appearing in the trial balance is shown in –

(a) Trading A/c and Balance sheet (b) Profit and Loss a/c
(c) Balance Sheet only (d) Trading A/c only

14. Consider the following data and identify the amount which will be deducted from sundry debtors in
Balance sheet: Bad debts (from trial balance)= 1,600, Provision for doubtful debts (old) 1200
Current year’s provision (new) 800.
(a) 400 (b) 800 (c) 2,000 (d) 2,400

15. Inventory is ______________________ (b) An investment

(a) Included in the category of fixed assets (d) An intangible fixed asset.
(c) A part of current assets
16. For goods distributed as free samples in the market, the journal entry will be _________
(a) Drawing Dr. To Purchase A/c
(b) Sales A/c Dr. To Cash A/c
(c) Advertisement A/c Dr. To Purchase A/c
(d) No entry

17. At the time of finalization of Financial statements, Bad debts written off are to be transferred to
(a) Provisions (b) Reserves (c) Capital A/c (d) Profit and Loss A/c

18. General Manager gets 6% commission on net profit after charging such commission. Gross profit Rs.
1,20,000 and other indirect expenses other than manager's commission are Rs. 14,000. Commission amount will
be:
(a) Rs. 6,000 (b) Rs. 8000 (c) Rs. 7,500 (d) None of the above

19. Discount received Rs.2,000 Provision for discount on creditors(old) = Rs. 3200. It is desired to
make a provision of Rs.2200 on creditors. Find out the amount to be transferred to Profit & Loss A/c:
a) Rs. 1000 b) Rs. 7000 c) Rs. 2,000 d) Rs. 1600

20. Amount recovered from debtor, which was earlier written off as bad debt is debited to Cash A/c and
credited to _________ A/c:
(a) Bad Debts (b) Bad debts recovered (c) Debtors (d) Sales

Answer:-1.(d) 2.(c) 3.(c) 4.(a) 5.(b) 6.(b) 7.(b) 8.(a) 9.(a) 10.(a)

11.(d) 12.(a) 13.(c) 14.(b) 15.(c) 16.(c) 17.(d) 18.(a) 19.(a) 20.(b)

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Chapter 8. Partnership Account

Meaning of Partnership as per Section 4 of the Indian Partnership Act, 1932
"Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for
all."

MEANING OF PARTNERS, FIRM AND FIRM NAME:- the person who have entered into a partnership with one another
individually are called partners and collectively a firm. The name under which the business is carried is called FIRM NAME.

NATURE OF PARTNERSHIP: Partnership is a separate business entity from accounting point of view. However from the legal point
of view, a partnership firm is not a separate legal entity from its partners. Thus legally, partners and business are not separate from
one another. It means, in case the firm is insolvent/bankrupt, private estates of the partners become liable to meet the deficiency.

Essential Elements/Features/ Characteristics of Partnership

1. There must be two or more persons.
Note: the companies Act, 2013(section 464) empowers the central government to prescribe number of partners in a firm subject to
maximum of 100 partners.
The Central government has prescribed maximum number of partners in a firm to be 50.
2. There must be an agreement (written or oral).
3. There must be lawful business.
4. There must be sharing of profits of business.
5. There must be a mutual agency, i.e., the business must be either carried on by all or any of them acting for all.

It means partners are agent as well as principals.

As an agent, he represents other partners and thereby, bind them through his acts.
As a principal, he is bound by the act of other partners.

Rights of Partners
1. Every partner has the right to participate in the management of the business.
2. Every partner has the right to be consulted about the affairs of the business.
3. Every partner has the right to inspect the books of account and have a copy of it.
4. Every partner has the right to share profits or losses with others in the agreed ratio.
5. If a partner has advanced loan, he has the right to receive interest on it at an agreed rate of interest.
6. A partner has the right not to allow the admission of a new partner.
7. After giving proper notice, a partner has the right to retire from the firm.
8. If a partner incurs expenses on the business or he pays some money on behalf of the firm, that partner may get indemnified against
these payments from the firm.

POWERS OF PARTNERS:
The Partners are supposed to have the power to act in certain matters and not to have such powers in others. In case of a trading firm, the
implied powers of partners are the following:
(a) Buying and selling of goods;
(b) Receiving payments on behalf of the firm and giving valid receipt;
(c) Drawing cheques and drawing, accepting and endorsing bills of exchange and promissory notes in the name of the firm;
(d) Borrowing money on behalf of the firm with or without pledging the inventories-in-trade;
(e) Engaging servants for the business of the firm.
In certain cases an individual partner has no power to bind the firm. This is to say that third parties cannot bind the firm unless
all the partners have agreed. These cases are:
(a) Submitting a dispute relating to the firm arbitration;
(b) Opening a bank account on behalf of the firm in the name of a partner;
(c) Compromise or relinquishment of any claim or portion of claim by the firm;
(d) Withdrawal of a suit or proceeding filed on behalf of the firm;
(e) Admission of any liability in a suit or proceedings against the firm;
(f ) Acquisition of immovable property belonging to the firm;
(g) Entering into partnership on behalf of the firm.
The rights, duties and powers of partners can be changed by mutual consent.

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Liabilities of partners:- subject to agreement among the partners,

1. If a partner carries on a business that is similar to that of the firm in competition with the firm and earns profit from it, the
profit earned from such business shall be paid to the firm.
2. If a partner earns profit for self from any transaction of the firm or from the use of firm’s property, the profit so earned
shall be paid to the firm.

Some other Important Provisions of the Partnership Act, 1932:

(i) With the consent of all the partners, a minor may be admitted for the benefit of Partnership (section 30). But the
condition is that he can be admitted to share profit only. He cannot be made to share losses of the firm. If the
partnership firm suffers loss than it will be borne by other major partners is their profit-sharing ratio.

(ii) A person may be admitted as a partner either with the consent of all the existing partners or in accordance with an express
agreement among the partners (section 31).

(iii) A partner may retire from the firm either with the consent of all the other partners or in accordance with an express agreement
among the partners (section 32).

(iv) Registration of the firm is optional and not compulsory (section 69).

(v) Unless otherwise agreed by the partners, a firm is dissolved on the death of a partner (section 35).

Partnership Deed: :- Partnership comes into existence by an oral or written agreement. It is better to have written
agreement to avoid any dispute. This written document is known as Partnership Deed. In partnership deed, details of
the terms and conditions of partnership are mentioned. It is a legal document signed by all the partners and has clauses on the
following:
(i) Name and address of the firm.
(ii) Names and addresses of all partners.
(iii) Date of commencement of partnership.
(iv) Capital to be contributed by each partner.
(v) Whether interest is to be allowed on capitals.
(vi) Whether any partner is to be allowed salary.
(vii) The profit-sharing ratio.
(viii) The duties of each partner.
(ix) Method of valuation of goodwill in case of admission, retirement or death of a partner.
(x) Mode of settlement of accounts in case of retirement/death of a partner.
(xi) Duration of partnership (if any)
(xii) Mode of Settlement of disputes among partners

Benefits or Advantages or importance of having a Partnership Deed

(i) It facilitates functioning of the business.

(ii) It is helpful in the settlement of disputes arising among partners.
(iii) It helps in avoiding misunderstandings among the partners.

Is it essential to have a partnership deed?

No, it is not essential but desirable to have a partnership deed. In case partnership Deed does not exist, following
Provisions shall be applicable as per partnership Act 1932. (Provisions affecting accounting treatment in the Absence of
Partnership Agreement/Partnership Deed).

(i) Interest is not allowed on Partners' Capitals

(ii) No interest is charged on drawings.
(iii) Partner is not entitled to salary or remuneration for the work done for the firm.
(iv) Interest @ 6% p.a. is allowed on the loans by any partner.
(v) Profits or losses are divided equally among the partners.

ACCOUNTS OF PARTNERSHIP FIRMS:

Partnership Act doesn’t specify any format for preparation of accounts of Partnership Firm and thus accounts are prepared as per
Basic rules of accounts. There is not much difference between the accounts of a partnership firm and that of sole proprietorship. The
only difference to be noted is that instead of one Capital Account there will be as many Capital Accounts as there are partners. If,
for instance, there are three partners; A, B, and C, then there will be a Capital Account for each one of the partners; A’s Capital

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Account will be credited by the amount contributed by him as capital and similarly B’s and C’s Capital Accounts will be credited
with the amounts brought in by them respectively as capital.

When a partner takes money out of the firms for his domestic purpose, either his Capital Account can be debited or a separate
account, named as Drawings Account, can be opened in his name and the account may be debited. In a Trial Balance of a
partnership firm, therefore, one may find Capital Accounts of partners as well as Drawings Accounts. Finally the Drawings Account
of a partner may be transferred to his Capital Account so that a net figure is available. But, often the Drawings Account or Current
Account (as it is usually called) remains separate.

LIMITED LIABILITY PARTNERSHIP(LLP):

Introduction: The Indian Partnership Act of 1932 provides for a general form of partnership which has inherent shortcoming of
unlimited liability of all partners for business debts and legal consequences, regardless of their holding or profit-sharing ratio, as
the firm is not a legal entity. General partners are also jointly and severally liable for tortuous acts of co-partners. In case of
liquidation, personal assets of partners can be liquidated to meet liabilities of the firm.

With the growth of the Indian economy, the role played by its entrepreneurs as well as its technical and professional manpower has
been acknowledged internationally. Entrepreneurship, knowledge, risk and capital may be combined to provide a further impetus to
India’s economic growth. In this background, a need has been felt for a new corporate form that would provide an alternative to the
traditional partnership, with unlimited personal liability on the one hand, and, the statute-based governance structure of the limited
liability company on the other. This would enable professional expertise and entrepreneurial initiative to combine, organize and
operate in flexible, innovative and efficient manner.

The Government felt that with Indian professionals increasingly transacting with or representing multi- nationals in international
transactions, the extent of the liability they could potentially be exposed to, is extremely high. Hence, in order to encourage Indian
professionals to participate in the international business community without apprehension of being subject to excessive liability, the
need for having a legal structure like the LLP is encouraged. Thus, in convergence towards global scenario, Limited Liability
Partnership Act, 2008 was introduced.

The Limited Liability Partnership (LLP) is viewed as an alternative corporate business proposal that provides the benefits of limited
liability but allows its members, the flexibility of organizing their internal structure as a partnership, which is based on a mutually
arrived agreement.

The LLP will be a separate legal entity, liable to the full extent of its assets, with the liability of the partners being limited to their
agreed contribution in the LLP which may be of tangible or intangible nature or both tangible and intangible in nature. No partner
would be liable on account of the independent or un- authorized actions of other partners or their misconduct. The liabilities of the
LLP and partners who are found to have acted with intent to defraud Creditors or for any fraudulent purpose shall be unlimited for
all or any of the debts or other liabilities of the LLP.

The main benefit in an LLP is that it is taxed as a partnership, but has the benefits of being a corporate, or more significantly, a
juristic entity with limited liability. The LLP is a body corporate in nature.
Definition of LLP:
Section 2 of the Limited Liability Partnership (LLPs) Act, 2008 defines limited liability partnership” as a partnership formed and
registered under this Act; and “limited liability partnership agreement” means any written agreement between the partners of the
limited liability partnership or between the limited liability partnership and its partners which determines the mutual rights and
duties of the partners and their rights and duties in relation to that limited liability partnership.

Non-applicability of the Indian Partnership Act, 1932 :- The provisions of the Indian Partnership Act, 1932 shall not apply to a
limited liability partnership.

Minimum number of partners in case of LLP:-As per the LLP Act, any individual or body corporate may be a partner in a limited
liability partnership; provided that an individual shall not be capable of becoming a partner of a limited liability partnership, if-
(a) he has been found to be of unsound mind by a Court of competent jurisdiction and the finding is in force;
(b) he is an undischarged insolvent; or
(c) he has applied to be adjudicated as an insolvent and his application is pending. Every limited liability partnership shall
have at least two partners.
If at any time the number of partners of a limited liability partnership is reduced below two and the limited liability partnership
carries on business for more than six months while the number is so reduced, the person, who is the only partner of the limited
liability partnership during the time that it so carries on business after those six months and has the knowledge of the fact that it is
carrying on business with him alone, shall be liable personally for the obligations of the limited liability partnership incurred during
that period.

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There is no maximum limit of partners in LLP.

DISTINCTION BETWEEN AN ORDINARY PARTNERSHIP FIRM AND AN LLP

Key Elements Partnerships LLPs
1 Applicable Law Indian Partnership Act 1932 The Limited Liability Partnerships Act,
2008
2 Registration Optional Compulsory with ROC
3 Creation Created by an Agreement Created by Law
4 Body Corporate No Yes
5 Separate Legal Entity No Yes
6 Perpetual Succession Partnerships do not have perpetual It has perpetual succession and
succession individual partners may come and go
7 Number of Partners Minimum 2 and Maximum 50 Minimum 2 but no maximum limit
8 Ownership of Assets Firm cannot own any assets. The partners The LLP as an independent entity can
own the assets of the firm own assets
9 Liability of Partners / Unlimited: Partners are severally and Limited to the extent of their
Members jointly liable for actions of other partners contribution towards LLP except in case
and the firm and their liability extends to of intentional fraud or wrongful act of
personal assets omission or commission by a partner.

10 Principal Agent Partners are the agents of the firm and of Partners are agents of the firm only and
Relationship each other not of other partners

PRACTTICAL QUESTIONS:

Question 1 (Provisions of the Indian Partnership Act,1932). X, Y and Z are partners in a firm. They do not have a Partnership Deed.
(i) X, who has contributed more capital than other partners, demands interest on capital at 10% p.a. and share of profit in the
capital ratio. But Y and Z do not agree with him.
(ii) Y has devoted full time to run the business and demands a salary of ₹ 5,000 p.m. But X and Z do not agree with him.
(iii) Z demands interest on the loan of ₹50,000 advanced by him at the market rate of interest @12% p.a.

(iv) Net Profit before taking into account any of the above claims amounted to ₹ 50,000 at the end of the first year of the
business. How will the disputes be settled?

Solution: The partners do not have a Partnership Deed. Therefore, provisions of the Indian Partnership Act, 1932 will apply to
settle the disputes:
(i) Interest on capital is not payable to any partner. Therefore, X is not entitled to interest on the capital.
(ii) Remuneration is not payable to any partner. Therefore, Y is not entitled to any salary.
(iii) Interest on loan is payable @ 6% p.a. Therefore, Z is to get interest @ 6% p.a. on ₹ 50,000.
(iv) The profit after interest on loan @ 6% p.a., i.e., ₹ 47,000 is to be distributed equally.

PROFIT AND LOSS APPROPRIATION ACCOUNT:--

Features of Profit and Loss Appropriation Account

1. It is an extension of the Profit and Loss Account.
2. It is prepared only by the partnership firms.
3. It shows the appropriation of net profit for the accounting period.
4. The entries in this account are passed giving effect to the Partnership Deed and/or the Indian Partnership Act, 1932.

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Difference between Profit and Loss Account and Profit and Loss Appropriation Account
Profit and Loss Account Profit and Loss Appropriation Account
1. It is prepared after Trading Account. It is prepared after Profit and Loss Account.
2. It shows the net profit earned or net loss incurred. It shows appropriation of net profit.
3.This account has neither opening nor closing balance. This account may have both opening and closing balances.
4. Items debited to this account are all expenses (charge Items debited to this account are appropriations of profit.
against profit).
5.The preparation of this account is not based on partnership The preparation of this account is based on partnership
agreement, except for interest on loan from partners. agreement.
6. While preparing this account, matching principle (i.e., While preparing this account, matching principle is not
revenue is matched against expenses) is followed. followed.

IMPORTANT FOR EXAM: Partnership agreement may be written or oral. Therefore, the terms agreed orally between partners is a
valid agreement.

Question 2.(concept of profit and loss appropriation account and partner’s capital account) On 1st April 2021, A and B
started business with capital of ₹ 10,00,000 and ₹ 6,00,000 respectively. During the year, they have drawn ₹1,20,000 and ₹80,000
respectively. During the year ended on 31 st March 2022, they earned net profit of ₹ 7,20,000, which was to be distributed as follow:
(i) Transfer 10% of net profit to general reserve.
(ii) Interest on capital to be allowed @ 10%.
(iii) Interest on drawings to be charged @ 6%.
(iv) B was allowed salary of ₹10,000 p.m.
(v) A was allowed commission @10% on net sales of ₹5,00,000.
(vi) Balance profits were to be shared equally. Prepare profit and loss appropriation account and partner’s capital account
assuming capital account is fluctuating.

Question 3. Assume in previous question, amount to be transferred to general reserve is 10% of divisible profits. Calculate
amount transfer to General reserve account.

Question 3A. Assume in previous question, amount to be transferred to general reserve is 10% of distributed profits among
partners in their profit ratio. Calculate amount transfer to General reserve account.

Concept of computation of commission:

Question 4. Net profit earned during the year ₹ 11,00,000. Avinash and Srikant are partners. Avinash is entitled to a commission of
10% of net profit before such commission. Prepare profit and loss appropriation account.

Question 5. Net profit earned during the year ₹ 22,00,000. Vinash is entitled to a commission of 10% of net profit after charging
such commission. Calculate amount of commission.

Question 6. Salman and Aamir were partners with capital of ₹5,00,000 and ₹7,50,000 respectively. They were sharing profits in the
ratio of their capital. Net profit earned during the year ₹ 24,00,000. Salman is also entitled to a commission of 10% of net profit
before such commission and Aamir is entitled to commission of 10% after charging all commission. Prepare profit and loss
appropriation account.

Question 7. Aarti, Bharati and Criti were in partnership sharing profits and losses in the ratio 3:4:3. Their capitals as on 1 April 2021
were ₹3,00,000, ₹5,00,000 and ₹2,00,000 respectively. According to partnership deed, Criti is entitled to salary of ₹15,000 p.m.,
interest on opening capital is to be allowed @ 12% p.a. Aarti was entitled to rent @ ₹5,000/- p.m. for premises belonging to her, used
for the partnership business. No interest to be charged on drawings. Rent paid to Aarti and salary paid to Criti were debited to
drawings account of respective partners. Bharti had withdrawn ₹ 10,000 per month from the business .The profit of the firm for the
year ended 31st March 2022, before charging above items amounted to ₹ 4,60,000. 10% of net profit is to be transferred to general
reserve. You are required to prepare Profit and Loss appropriation Account and partners’ capital Accounts.(ICAI Study material)

Question 8. ( when appropriation of profit is more than available profits) Ram and Shyam are partners in a firm with their capital
balances of ₹6,00,000 and ₹2,00,000 respectively on 1st April 2021. As per their partnership deed, they were entitled to:
(i) Interest on capital to be allowed @ 10% p.a.
(ii) Salary to Ram ₹50,000 p.a.
(iii) Commission to Shyam ₹30,000 p.a.
(iv) Balance profits to be shared in profit ratio of 3:2.

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Prepare P/L appropriation account under following cases:

(a) Net profit earned by the firm ₹7,50,000.

(b) Net loss to the firm ₹3,20,000. If there is no specific agreement about distribution of losses( question is silent) .
(c) Net loss to the firm ₹3,20,000. If there is specific agreement that interest on capital, salary and commission will be
allowed even in case of loss.
(d) Net profit earned during the year ₹1,20,000.

PARTNERS' CAPITAL ACCOUNTS: The Partners' Capital Accounts may be maintained by following any of the two
methods:
(i) Fixed Capital Accounts Method;
(ii) Fluctuating Capital Accounts Method.

Fixed Capital Accounts Method: Fixed Capital means capitals of the partners are fixed. When Fixed Capital Accounts Method is
followed, two accounts, i.e., a Capital Account and a Current Account for each partner are maintained.

(i) Capital Account: Fixed Capital means that the capital remains unaltered, i.e., fixed unless additional capital is
introduced or withdrawal is made from the existing capital. Thus, if fresh capital is not introduced or capital is not
withdrawn, Capital Account of a partner will continue to show same balance year after year.

(ii) Current Account: Current Account is maintained to record transactions other than introduction and withdrawal of
capital such as interest on capital, interest on drawings, salary or commission to a partner, share of profits/losses. As a
result, the balance of Current Account fluctuates with every transaction with the partner. Current Account of each
partner is debited with:

(i) Drawings made by him;

(ii) Interest on drawings;
(iii) Share of loss;
(iv) Transfer of any amount to Capital Account permanently.

Similarly, Current Account of each partner is credited with:

(i) Interest on Capital;
(ii) Salary or commission;
(iii) Share of Profit; and
(iv) Transfer of any amount from Capital Account permanently.

Fluctuating Capital Accounts Method:- Under Fluctuating Capital Accounts Method only one account namely 'Capital
Account' is maintained for each partner. All transactions of a partner (e.g., salary or commission, interest allowed on capital,
drawings, interest charged on drawings, share of profit or share of loss, etc.) are recorded in his Capital Account.

As a result, balances in the Capital Account fluctuates with every transaction. Capital Accounts having credit balances are shown on
the liabilities side while Capital Accounts having debit balances are shown on the assets side of the Balance Sheet. Fluctuating
Capital Method is normally followed for maintaining Capital Accounts and therefore, in the absence of any instruction, this method
should be followed for maintaining the Partners' Capital Accounts.

Difference between Fixed Capital Account and Fluctuating Capital Account

Basis Fixed Capital Account Fluctuating Capital Account
1. No Of Accounts Two accounts are maintained for each partner: Only one account (viz., Capital Account) is
Maintained Fixed Capital Account and Current Account. maintained for each partner.
2. Frequency of Balance in Fixed Capital Account does not change The balance changes frequently from period
Change except under specific circumstances. to period.
3. Adjustment for All adjustments for drawings, interest on All adjustments for drawings, interest on
Drawings, etc. drawings, interest on capital, salary, share of drawings, interest on capital, salary, share of
profit/loss are made in Current Account. profits and losses are made in Capital Account.
4. Balance It always shows credit balance in Capital Account. Fluctuating Capital Account can also show
debit balance.

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Difference between Capital Account and Current Account:

Basis Capital Account Current Account
1. Need Capital Account is maintained in all the cases i.e., Current Account is maintained when fixed
under fixed capital account fluctuating capital account method is followed.
capital methods.
2. Balance of Account Capital Account will always have a credit balance Current Account may have a credit or debit
when fixed capital method is followed. In balance.
fluctuating capital account method, it may
have either credit or debit balance.
3. Nature In case of fixed Capital, Capital Account balance Current Account fluctuates with every
generally remain unchanged from year to year transaction.
It will change only when further capital is
introduced or capital is withdrawn from business.

4. Transactions Capital Account records the amount invested Current Account records the transactions such
by a partner in the firm. as drawings, interest on capital, interest on
drawings, salary, profit, etc.

Concept of drawings, interest on capital and interest on drawings:

Drawings mean the amount withdrawn, in cash or in kind, by partners for their personal use. Drawings may be out of capital or
against profits. Drawings out of capital means withdrawal of part of capital while drawings against profit mean withdrawal of
amount against profit earned during the year by the firm. Drawings out of capital is also known as permanent drawings and
drawings against profits is also called Regular drawings.

Difference between Drawings Against Profit and Drawings Against Capital

Basis Drawing Against Profit Drawing Against Capital
1. Where Debited It is debited to Drawings Account. It is debited to Capital Account.
2. Part It is a part of expected profit. It is a part of capital.
3. Effect It does not reduce capital. It reduces capital.
4. Interest It is considered to calculate interest on It is considered to calculate interest
drawings. on capital.

Question 9. On 1st April 2021, capital account of Chacha, Bhatija and Padosi stood at ₹7,00,000, ₹5,00,000 and ₹3,00,000
respectively. On the same date, their current account stood at ₹2,00,000(credit), ₹1,80,000(credit) and ₹1,00,000(debit) respectively.
On 1st June 2021, Chacha introduced additional capital of ₹2,00,000 and on 1st September 2021, he made permanent drawings of ₹
1,20,000. On 1st September 2021, Bhatija had made permanent drawings of ₹80,000 and regular drawings of ₹50,000 on the same
date. Padosi has also made drawings of ₹40,000 on 1st January 2022. As per partnership deed, profits were to be shared as follows:
(a) Interest on capital to be allowed @ 10% p.a.
(b) Interest on drawings to be charged @ 6% p.a.
(c) Profits to be shared equally. Profits earned during the year ₹12,00,000. Prepare partner’s capital account and current
account.

Question 10. (Interest on Drawings). A partner draws ₹1,000 per month. Under the Partnership Deed, interest on drawings is to be
charged @ 15% p.a. Calculate interest that should be charged to the partner if drawings are made:
(i) in the beginning of the month,
(ii) in the middle of the month, or
(iii) at the end of the month.

Question 11. (When there is regular Drawings at Quarterly Intervals). Calculate interest on drawings of Mr. Sid @ 10% p.a. for the year
ended 31st March, 2021 if he withdrew ₹60,000 in the beginning of each quarter.

Question 12. In a Partnership, partners are charged interest on drawings @ 15% p.a. During the year ended on 31 st March, 2021, a
partner drew as follows:
Date 1st May, 2020 1st August 2020 30th September, 2020 31st January, 2021 31.3.2021
Amount 12,000 15,000 12,000 16,000 12,000
What is the interest chargeable from the partner?

Question 13. A, B and C started a firm on 1st October, 2020 sharing profits equally. A drew regularly ₹4,000 in the beginning of every
month for the six months ended 31st March, 2021. B drew regularly ₹6,000 at the end of every month for the six months ended 31st
March, 2021. Calculate interest on drawings @ 10% p.a. for the period ending 31st March, 2021.

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Question 14. A, B and C are partners sharing profits equally. A drew regularly Rs.60,000 in the beginning of every month for the six
months ended 30th September 2021. Calculate interest on drawings @ 5% p.a. when the books are closed on 31 st March every year.

IMPORTANT POINTS FOR REVISION:

Note 1.If the date of withdrawal is not given, interest on total drawings for the year is calculated for 6 months on the average basis.
Note:2. If the date of drawings is not given then the Interest on Total Drawings is calculated for half of the accounting period.
Note 3.When the rate of interest is given without the word 'per annum' (p.a.), interest is charged for whole year without considering
the time factor.

Computation of capital ratio

Question:15. X and Y started business on 1st January, 2021 with ₹10,000 and ₹6,000 as capital respectively. They agreed
to share profits in the capital ratio. With the following details, calculate capital ratio.
Capital Introduced Capital withdrawn

X Y X Y
st
1 March 2,000 — — —
1st April — 7,000 3,000 —
1stJune 4,000 — — 6,000
30th September — 8,000 8,000 —
(Answer: Capital ratio between X and Y is 117: 117 or equally.)

CONCEPTS OF PAST ADJUSTMENTS:

Question 16: (Calculation of Opening Capital). A and B are partners in a business and their capitals at the end of the year were ₹7,00,000
and ₹6,00,000 respectively. Calculate their opening capital considering the following information:
(a) Drawings of A and B for the year were ₹75,000 and ₹50,000 respectively.
(b) B introduced capital of ₹1,00,000 during the year.
(c) Interest on capital credited to the Capital Accounts of A and B were ₹15,000 and ₹10,000 respectively.
(d) Interest on drawings debited to the Capital Accounts of A and B were ₹7,500 and ₹5,000 respectively.
(e) Share of profit credited to Capital Accounts was ₹1,00,000 each.

Question 17. From the following Balance Sheet of Ku and Tu, calculate interest on capital @5 % p.a. for the
year ended 31st March, 2022. Balance sheet as at 31st March, 2022:
Liabilities Rs. Assets Rs
Ku’s Capital A/c 90,000 Sundry Assets 2,10,000
Tu’s Capital A/c 80,000
Reserve 40,000

2,10,000 2,10,000
During the year ended 31st March, 2022, Ku's drawings were 10,000 and Tu's drawings were 30,000. Profit for the year ended 31st March,
2022 was 60,000. The amount of Reserve, i.e., 40,000 is the balance coming from last year. Assume that interest on capital has not been
provided to partners.

Question 18. A and B are partners in a firm sharing profits and losses in the ratio of 3:2. Following was the Balance Sheet of the firm as at
31st March, 2022:

Liabilities Rs. Assets Rs.

Capital A/cs: Sundry Assets 8,60,000
X 6,00,000
Y 2,00,000 Drawings:
General reserve 80,000 X 40,000
Liabilities 50,000 Y 30,000

9,30,000 9,30,000

(a) Profit ₹1,20,000 for the year ended 31st March, 2022, out of which ₹50,000 transfer to general reserve during the current year.
(b) Additional capital introduced by X ₹60,000 on 1st October 2021.
(c) Interest on capital @ 10% p.a. of both the partners was omitted to provide while distributing profits among partners.
Pass adjustment entry.

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Question 19.
X Y
Capital (31-3-2021) 6,00,000 2,00,000
Drawings 1,00,000 40,000
Net profit earned during the year ended on 31-3-2022 ₹4,20,000. Profits were to be distributed as follows:
(i) Interest on capital @ 10% p.a
(ii) Interest on drawings @ 5% p.a.
(iii) Profit ratio 1:1
Accountant distributed whole profit among partners in 3:2 ignoring above agreements. Pass adjustment entry.

Question 20: (Profits Apportioned without Providing for Interest on Capital and Interest on Drawings). Mannu and
Shristhi are partners in a firm sharing profits in the ratio of 3 : 2. Following is the Balance Sheet of the firm as on 31st March, 2021:
BALANCE SHEET as at 31st March, 2021
Liabilities ₹ Assets ₹
Mannu’s Capital 30,000 Drawings:
Shrishti’s Capital 10,000 40,000 Mannu 4,000
Shristhi 2,000 6,000
Other Assets 34,000
40,000 40,000

Profit for the year ended 31st March, 2021 was ₹5,000 which was divided in the agreed ratio, interest @ 5% p.a. on capital and 6% p.a.
on drawings was inadvertently omitted. Adjust interest drawings on an average basis for 6 months. Give the adjustment entry.

Question 21: (Interest on Capital Provided at a Higher Rate). X, Y and Z are partners in a firm sharing profits and losses in the
ratio of 5:3:2. Their fixed capitals were ₹3,00,000; ₹2,00,000 and ₹1,00,000 respectively. For the year ended 31st March, 2022,
interest on capital was credited to them @ 10% p.a. instead of 8% p.a. showing your working notes clearly, pass necessary
adjustment Journal entry.

Question 22: (Rectification of Interest on Capital less Allowed). A, B and C are partners in a firm sharing profits and losses in the ratio
of 2:2:1. Their capitals (fixed) are ₹1,00,000;₹ 80,000: and ₹70,000 respectively. For the year 2021-22, interest on capital was credited to
them @ 9% p.a. instead of 12% p.a. Give the adjustment Journal entry.

Question:23 After the accounts of the partnership have been prepared, it is discovered that for the year 2019,2020,2021, interest
has been credited on partner’s capital accounts at 5% p.a., although no provision is made for interest in the partnership
agreement. The amount involved are:
2019 2020 2021
X 3,250 3,500 3,600
Y 2,100 2,000 2,150
Z 900 1,100 1,100
You are required to put through an adjusting entry as on 1st January 2022 assuming that the profits are shared in the following proportions:
X Y Z
2019 ½ 3/10 1/5
2020 2/5 2/5 1/5
2021 3/10 2/5 3/10 (CA- Adapted)

Adjustment for wrong computation of past profit

Question 24. Weak, Able and Lazy are in partnership sharing profits and losses in the ratio of 2:1:1. It is agreed that interest
on capital will be allowed @ 10% P.a. and interest on drawing will be charged @ 8% p.a. (No interest will be charged/allowed
on current Accounts.) The following are the particulars of Capital and Drawings Accounts of the partner:

Weak Able Lazy

Capital (01.01.2021) 75,000 40,000 30,000

Current Account (01.01.2021) 10,000 5,000 (Dr.) 5,000
Drawings 15,000 10,000 10,000

The draft accounts for 2021 showed a net profit of ₹60,000 before taking into account interest on capitals and drawings and subject to following
rectification of errors:
a. Life insurance premium of Weak amounting to ₹750 paid by the firm on 30th June, 2021 has been charged to Miscellaneous
Expenditure Account.
b. Repair of machinery amounting of ₹10,000 has been debited to Plant Account and depreciation thereon charged @ 20%.

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c. Traveling Expenses of ₹3,000 of Able for a pleasure trip to U.K. paid by the firm on 30th June 2021 has been debited to traveling
Expenses Account.

You are required to prepare the Profit and loss Appropriation Account for the year ended 31st Dec. 2021 and partners current Account for the
year.( CA-inter-16 marks modidied)

[And: Adjusted Net Profit – 55,750, Distributable Profit as per P & L App. A/c – 42,800, Balance of Current Account:
Weak – 22,520, Able – 6,180, Lazy – (Dr.) 1,700

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Question 25. X and Y formed partnership sharing profits as 2:1. The term was to distribute mercantile profit. But cash profit has been
calculated all through. Now it is desired to convert cash account into mercantile accounts. The details are:
Cash profit Closing Closing
Outstanding outstanding
Income Expenses
₹ ₹ ₹
1st Year 10,000 1,000 500
2nd Year 12,000 3,000 1,000
3rd Year 18,000 2,000 800
Pass conversion entry. [CMA (Stage 1) June 1998]

Question 26. Anand and Bharat are in partnership sharing profits and losses in the ratio of 3 :2. With effect from 1 st January 1998 they
decided to share the profits earned in any year on the following basis:
Up to Rs. 25,000 Equally
Excess over Rs. 25,000 Anand 2/3rd
Bharat 1/3rd
They also decided to ascertain the income on mercantilist basis with effect from the accounting year 1997. Although profits were
shared on the basis of the new agreement, these were ascertained on cash basis only. It was agreed to make the necessary
adjustments at the end of 2000. The relevant information is given below
1997 1998 1999 2000
₹ ₹ ₹ ₹
Profits already shared — 21,000 23,000 31,000
As on 31st December
Accrued Income 2,000 3,500 5,000 2,500
Outstanding Expenses 500 1,000 1,300 300

You are required to give the necessary entry to correct the partners' accounts showing your workings assuming that books of
accounts were duly closed at the end of each year. [I.C.W.A. Final modified]

CONCEPT OF GUARANTEE OF PROFIT TO A PARTNER: A partner may be admitted in the firm on a

guarantee in respect of his minimum profit from the business. Such guarantee may be given even to an existing partner. Such a
guarantee to the incoming partner is given either by:
(a) all the remaining partners in their existing profit sharing ratio(also called firm guarantee), or
(b) all the remaining partners in ratio other than existing profit sharing ratio(also called firm guarantee), or
(c) one or more partners but not all remaining partners.
Under case (b) and (c), it is called guarantee given by partner/partners.

Question 27:(Guarantee of Profits by one Partner). X, Y and Z are partners in a firm. Their profit-sharing ratio is 5:3:2. Z is
guaranteed a minimum profit of ₹20,000 every year. The profits for the two years ended 31 st March, 2021 and 2022 were ₹80,000
and ₹1,20,000 respectively. Prepare Profit and Loss Appropriation Account for the two years.

Question 28. Anwar, Bishwas and Divya are partners in a firm. Their Capital Accounts stood at ₹ 8,00,000; ₹6,00,000 and ₹4,00,000
respectively on 1st April, 2020. They shared-profits and losses in the ratio of 3:2:1 respectively. Partners are entitled to interest on
capital @ 6% per annum and salary to Bishwas and Divya ₹4,000 per month and ₹6,000 per quarter respectively as per the
provisions of Partnership Deed.
Bishwas's share of profit including interest on capital but excluding salary is guaranteed at a minimum of ₹82,000 p.a. Any deficiency
arising on that account shall be met by Divya. Profit for the year ended 31st March, 2021 amounted to ₹ 3,12,000. Prepare Profit and
Loss Appropriation Account for the year ended 31st March, 2021.

Question 29: (Guarantee of Profit to a Partner in Case of Loss). A, B and C are partners having capitals, of ₹10,00,000; ₹8,00,000
and ₹6,00,000 respectively in a firm and sharing profits and losses equally. C is guaranteed a minimum profit of ₹1,00,000 as share
of profit every year. The firm incurred a loss of Rs. 3,00,000 for the year ended 31 st March, 2021. You are required to show the
necessary accounts for division of loss and giving effect to minimum guaranteed profit to C.

Question 30.( Guarantee of Profit when partnership starts during the year) X,Y,Z entered into partnership on 1st July, 2021 to
share profit and losses in the ratio of 3:2:1. Firm has guaranteed that Z’s share of profit after charging interest on capital @ 6% p.a.
would not be less than 36,000 p.a. The capital contributed by X- ₹2,00,000 Y- ₹1,00,000 and Z- ₹1,00,000. Profit for the year ended
31st March 2022 was 1,38,000. Prepare profit and loss appropriation account.

Question 31. Tom and Dom share profits and losses in the ratio of 3:2 and as from 1 st January, 2021 they admit Com who
is to have a tenth share of the profits with a guaranteed minimum of ₹15,000. Tom and Dom continue to share profits

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as before but agree to suffer any excess over 1/ 10th going to Com in the ratio of 4:1 respectively. The profits of the
firm in respect of the year are ₹1,00,000. Prepare profit and loss appropriation account.

Question 32. Harish and Rakesh were partners sharing profits in the ratio of 3 : 1. They took Satish as a junior partner on
a salary of ₹400 p.m. plus 10% of the profits after charging up salary and such 10% share of the profits or 1/5th share
of profit whichever is greater. Should the latter exceed the former, the excess is to be borne by Harish. The profit for
the year ended 31st December, 2021 after charging the salary was ₹52,800. Show profit and loss appropriation
account.

Question.33 Ram and Rahim are in partnership sharing profits and losses in the ratio of 3:2. As Ram, on account of his
advancing years, feels he cannot work as hard as before, the chief clerk of the firm, Ratan is admitted as a partner with
effect from 1st January, 2021, and becomes entitled to 1/10th of the net profits and nothing else, the mutual ratio between
Ram and Rahim remaining unaltered.
Before becoming a partner, Ratan was getting a salary of ₹500 p.m. together with a commission of 4% on the net profits
after deducting his salary and commission.

It is provided in the partnership deed that the share of Ratan’s profits as a partner in excess of the amount to which he
would have been entitled if he had continued as the chief clerk, should be taken out of Ram’s share of profits.
The net profit for the year ended 31-12-2021 is ₹1,10,000. Show the distribution of net profit amongst the partners.
(ICAI Study material)

Question 34. (Minimum earning Guaranteed by a Partner to the Firm and Minimum Profit
Guaranteed by the Firm to a Partner). Three Chartered Accountants X, Y and Z form a partnership, sharing profits
and losses in the ratio of 3 : 2 : 1 subject to the following conditions:
(i) Z's share of profits is guaranteed to be not less than Rs. 30,000 p.a.
(ii) Y gives a guarantee to the effect that the gross fee earned by him for the firm shall not be less than the
average gross fee earned by him during the preceding five years when he was carrying on the profession
alone (the average of which works out at Rs. 50,000).

Profit for the first year (year ended 31st March, 2021) of the partnership is Rs. 1,50,000. The gross fee earned by
Y for the firm is Rs. 32,000. Prepare Profit and Loss Appropriation Account after giving effect to the above.

Question:35 Mehra and Ratnam are in partnership with capitals of ₹28,000 and ₹14,000 respectively sharing profits and
losses as to 2: 1. Interest on capital at 5% per annum and salary of ₹2,800 per annum to Ratnam are available.
Due to ill health Mehra ceased to take active part in the business with effect from 1 January 2021 and the following terms
were agreed upon.
That the manager Johar shall be taken as a partner with a capital of ₹5,000. He being entitled to a salary of ₹5,250 per
annum, the excess over ₹2800 (the salary received by him as manager) to be borne by Mehra personally.

(a) That Ratnam shall get a salary of ₹3,500 per annum.

(b) That Johar shall be entitled to one-tenth share of profits and losses after charging interest on capital and partners'
salaries.
(c) The interest on capital shall be allowed @ 5% p.a.

The net profit for the year ended 31st December 2021 was ₹22,400 before charging interest on capital and partners'
salaries. You are required to show the division of profits for the year 2021 between partners. [C.A.Inter]

Question 36: state with reasons whether following statements are true or false:
1. In absence of any agreement partners share profits of the business in the ratio of their capital contribution.
2. Profit sharing ratio and capital contribution ratio need not be same.
3. Every partnership firm must register itself with Registrar of firms.
4. A partner can advance loan to the partnership firm in addition to capital contributed by him.
5. A partner can demand interest on capital even if it is not provided in the partnership deed.
6. If a partner does not take part in day to day business activities of the firm then he is not entitled to any share of
profit.
7. Interest should be paid @ 6% p.a. on partners’ loan even if it is not provided in the partnership deed.

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8. Husband and wife cannot be partners in the same firm.

9. One senior partner is Principal and other partners are his agents.
10. Partners are the agents of the firm and each other.

Answer :
1. False: In absence of any agreement partners share profits equally and not in capital contribution ratio.
2. True: Profit sharing can be different from that of the capital introduced by each of the partner. Not necessary that partner
contributing more capital should have a higher profit-sharing ratio and vice versa.
3. False: Registration of firms is not compulsory under Indian Partnership Act 1932.
4. True: Yes loan is given to the firm at a cost. Where the partnership deed is absent, then the interest shall be paid at a minimum
of 6% per annum. So the interest on the loan to be paid to the partner.
5. False: Interest on capital can be paid only if it is provided in the partnership deed.
6. False: Every partner need not take part in the business. Even if a partner does not take part in the business he is entitled for his
share of profit.
7. True: Yes, as per the provisions of the law- it is necessary that the interest on loan at 6% per annum shall be paid to the
concerned partner.
8. False: Husband and wife can be partners in the same firm.
9. True: There is no senior or junior partner. Every partner is agent/principal of other partners.
10.True: Concept of agency applies to every partner and the firm as well. So, each partner is a principal to and agent of every other partner
and to the firm

Question 37. Multiple Choice Questions

1. If a firm prefers Partners’ Capital Accounts to be shown at the amount introduced by the partners as capital in
firm, then entries for salary, interest, drawings, interest on capital and drawings and profits are made in
(a) Trading Account (b) Profit and Loss Account (c) Partners’ Current Account (d) partner’s capital account

2. In the absence of any agreement, partners are liable to receive interest on their Loans @
(a) 12% p.a. (b) 10% p.a. (c) 6% p.a. (d) 6%

3. The relationship between persons who have agreed to share the profit of a business carried on by all or any of
them acting for all is known as ………
(a) Partnership. (b) Joint Venture. (c) Association of Persons. (d) partnership firm
4. Firm has earned exceptionally high profits from a contract which will not be renewed. In such a case the profit
from this contract will not be included in ………
(a) Profit sharing of the partners. (b) Calculation of the goodwill. (c) Both. (d) none of the above

5. In the absence of an agreement, partners are entitled to

(a) Interest on Loan and Advances. (b) Commission. (c) Salary (d) interest on drawings

6. Partners are supposed to pay interest on drawings only when ……… by the ………
(a) Provided, Agreement. (b) Agreed, Partners (c) Both (a) & (b) above. (d) none of the above

7. When a partner is given a guarantee by the other partner, loss on such guarantee will be borne by
(a) Partner who gave the guarantee (b) All the other partners. (c) Partnership firm. (d) God
8. A, B and C had capitals of ₹ 50,000; ₹40,000 and ₹30,000 respectively for carrying on business in partnership. The
firm’s reported profit for the year was ₹80,000. As per provisions of the Indian Partnership Act, 1932, find out the share
of each partner in the above amount after taking into account that no interest has been provided on an advance by A of
₹20,000, in addition to his capital contribution.

(a) ₹ 26,267 for Partner B and C & ₹ 27,466 for partner A. (b) ₹ 26,667 each partner.
(c) ₹ 33,333 for A, ₹ 26,667 for B and ₹ 20,000 for C. (d) ₹ 30,000 each partner.
9. X, Y and Z are partners in a firm. At the time of division of profit for the year there was dispute between the partners.
Profits before interest on partner’s capital was ₹ 6,000 and X wanted interest on capital @ 20% on his capital
contributions was ₹ 1,00,000 as compared to that of Y and Z which was ₹ 75,000 and ₹ 50,000 respectively.

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(a) Profits of ₹ 6,000 will be distributed equally without providing interest on capital.
(b) X will get the interest of ₹ 20,000 and the loss of ₹ 14,000 will be shared equally.
(c) All the partners will get interest on capital and the loss of ₹ 39,000 will be shared equally.
(d) None of the above.
10. X, Y and Z are partners in a firm. At the time of division of profit for the year there was dispute between the partners. Profits
before interest on partner’s capital was ₹ 6,000 and Y determined interest @ 24% p.a. on his loan of ₹ 80,000. There was no
agreement on this point. Calculate the amount payable to X, Y and Z respectively.
(a) ₹ 2,000 to each partner. (b) Loss of ₹ 4,400 for X and Z & Y will take home ₹ 14,800.
(c) ₹ 400 for X, ₹ 5,200 for Y and ₹ 400 for Z. (d) ₹ 2,400 to each partner.
11. X, Y and Z are partners in a firm. At the time of division of profit for the year there was dispute between the partners. Profits
before interest on partner’s capital was ₹ 6,000 and Z demanded minimum profit of ₹ 5,000 as his financial position was not good.
However, there was no written agreement. Profits to be distributed to X, Y and Z will be
(a) Other partners will pay Z the minimum profit and will suffer loss equally.
(b) Other partners will pay Z the minimum profit and will suffer loss in capital ratio.
(c) X & Y will take ₹ 500 each and Z will take ₹ 5,000.
(d) ₹ 2,000 to each of the partners.

MCQ’s answer

1-C, 2-C, 3-A, 4-B, 5-A, 6-C, 7-A, 8-A, 9-A, 10-C, 11-D

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VALUATION OF GOODWILL
Meaning of Goodwill:--Goodwill is an intangible asset and an important aspect for an enterprise. It is something
which places an enterprise at an advantageous position due to which the enterprise is able to earn higher profits without
putting in extra efforts. It is so because the efforts have already been made in the past which have now put the
enterprise in an advantageous position.
Classification of Goodwill:-- Goodwill can be classified into two categories:
1. Purchased Goodwill; and 2. Self-generated Goodwill.

1. Purchased Goodwill: It is the Goodwill that is acquired by making a payment. For example, when a business is
purchased, the excess of purchase consideration of its Net Assets (i.e., Assets — Liabilities) is the Purchased
Goodwill. As per AS-26, only purchased goodwill can be shown in books of account.

Features of Purchased Goodwill

• It arises on the purchase of a business or purchase of a brand, etc.
• Since the consideration is paid for it, it is recorded in the books of accounts.
• It is shown in the Balance Sheet as an asset.
• Value of Goodwill is a subjective judgment but it is ascertained when both purchaser and seller agree to its
valuation.
• It is amortised at the earliest but not later than its useful life.

Question 1: (Purchased Goodwill). COC Pvt Ltd acquired the business of Tata ltd for a net consideration of
₹8,00,000 payable by cheque. The assets acquired and liabilities taken over are:
Assets: ₹ Liabilities: ₹
Furniture 40,000 Creditors 1,20,000
Inventory 2,60,000 Salaries Payable 25,000
Debtors 3,50,000 Outstanding Expenses 20,000
Pass the necessary Journal entries.

2. Self-generated Goodwill: It is an internally generated goodwill which arises from a number of factors (such as
good location, efficient management, good quality of products, etc.) that a running business possesses due to which it
is able to earn higher profit. Features of Self-generated Goodwill are as follows:
• It is generated internally, generally over the years.
• As per AS-26, internally generated goodwill is not to be recorded in the books of accounts.
• Valuation depends on the subjective judgment of the valuer.

Methods of Valuation of Goodwill :-The methods for valuing goodwill are:

1. Average Profit Method, 2. Super Profit Method, and 3. Capitalisation Method 4. Annuity method

1. Average Profit Method: Goodwill under Average Profit Method can be calculated using Simple Average Profit
Method or Weighted Average Profit Method.
(i) Simple Average Profit Method: Under the Simple Average Profit Method, normal profits earned by
the business for the specified number of years are considered. Profits earned are totalled and average is
determined. Average profit as calculated is multiplied by a number of years' purchase to arrive at the
value of goodwill.
Note:- Number of years' purchase means for how many years the firm will earn the same amount of profit
because of its past efforts after change of ownership.

(ii) Weighted Average Profit Method: Weighted Average Profit Method is a method whereby weight is assigned to
each year and thereafter, normal business profit of each year is multiplied by the assigned weight to determine the value.
Recent year's profit being more relevant in determining value of goodwill, is assigned higher weight.

Question 2 : (Average Profit Method when Past Adjustments are Made). Sikander purchased Anita's business on 1st
April, 2021. It was agreed to value goodwill at three years' purchase of weighted average normal profit of the last four years.
The profits of Anita's business for the last four years were:
Year Ended ₹
31st March, 2018 90,000
31st March, 2019 1,60,000
31st March, 2020 1,80,000
31st March, 2021 2,20,000
It was observed from the books of account that:

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1. During the year ended 31st March, 2018, an asset was sold at a gain (profit) of Rs. 10,000.
2. During the year ended 31st March, 2019, a machine got destroyed in accident and 30,000 was written off as loss in Profit
and Loss Account. During 2019-20, insurance claim received ₹12,000 from insurance company.
3. During the year ended 31st March, 2020, firm's assets were not insured due to oversight. Insurance premium being
₹10,000.
4. On 1st July, 2019, 5 cycles costing ₹20,000 were purchased and were wrongly debited to Travelling Expenses. Depreciation
on cycles was to be charged by WDV method @ 25%. Calculate value of goodwill.
5. A Bad Debt of ₹5,000 was omitted to be written off in the year 2018-19.
6. Overhauling cost of second hand machinery purchased on 1 st July, 2020 amounting to ₹1,00,000 was debited to Repairs
Account. Depreciation is charged @ 20% p.a. on written down Value Method. Calculate the value of goodwill

Question 3. Calculate the goodwill of a firm on the basis of three years' purchase of the weighted average profit of the last
four years. The appropriate weights to be used and profits are:
Year 2017-18 2018-19 2019-20 2020-21
Profit (Rs.) 3,00,000 1,40,000 1,50,000 1,60,000
Weight 1 2 3 4

On a scrutiny of the accounts, the following matters are revealed:

(i) On 1st December, 2019, a major repair was made in respect of the plant incurring Rs. 30,000 which was
charged to revenue. The said sum is agreed to be capitalised for goodwill calculation subject to adjustment
of depreciation of 10% p.a. on reducing balance method.
(ii) The closing stock for the year 2018-19 was overvalued by Rs.12,000.
(iii) To cover management cost, an annual charge of Rs. 24,000 should be made for the purpose of goodwill
valuation.
(iv) In 2018-19, on 1st September 2018, a machine having a book value of Rs. 10,000 was sold for Rs.11,000 but the
proceeds were wrongly credited to Profit and Loss Account. No effect has been given to rectify the same.
Depreciation is charged on machine @ 10% p.a. on reducing balance method.

Question 4 Reliance Ltd. desirous of selling its business to COC Ltd. has earned the following profits (after tax) in the past
three years: ₹ 7,00,000, ₹ 6,50,000 and ₹ 5,40,000. Following facts need to be taken into consideration:
(i) Directors' fees ₹ 20,000 per year will not be payable by COC Ltd. whose existing board can easily manage the additional
work.
(ii) Rent of ₹ 10,000 per month paid by Reliance Ltd. will not be a charge against the profits of COC Ltd. as the latter
company has its own premises.
(iii) Reliance Ltd. has not transferred its trade investments to COC Ltd. Hence, interest of ₹ 12,000 would not be earned
by the purchasing company.
(iv) Reliance Ltd. had outsourced some of its business work for an annual contract of ₹1,04,000. However COC Ltd. has enough
surplus staff to manage the same. Hence savings of this cost. Calculate the Future Maintainable Profits and goodwill by 3
years purchase price of average profit.

➢ SUNO MERI BAAT DHYAN SE

While calculating average profits (Average future maintainable profit) for the purpose of valuation of goodwill certain
adjustments are made, which are as follows:
(a)All non-recurring and abnormal expenses and losses not likely to occur in the future are added back to profits.
(b) Non-recurring or casual income not likely to recur in future are deducted from such profits.
(c) Expenses and losses expected to occur in future are deducted from such profits, (e.g. increase in rent, managerial
remuneration etc.)
(d) All profits likely to accrue in the future are added.
(e) all errors should be rectified.

After above adjustments, average of the past years profits is calculated. Then such average profit is multiplied by
certain number of years, say 4 years. The resultant amount will be value of goodwill.

Super Profit Method: Capital employed in a business yields profit. Some of the enterprises earn more profit, while
others earn less profit or incur loss on the same amount of capital employed. When a similar type of business earns
profit at a certain percentage of the capital employed, it is called normal return. But a buyer's advantage lies in the
excess of the normal return on capital employed. It is only such enterprises which enjoy goodwill. The excess of actual
profit over the normal profit is known as super profit.

Goodwill, under this method, is valued on the basis of following three values:
(I) Average Profits: it is also called average future maintainable profits.
(II) Normal Rate of Return: Normal Rate of Return is the rate of return normally earned by other firms of
similar size and nature.
(III) Capital Employed: Capital employed means capital invested in the firm to carry on business. Capital
employed may be calculated by any of the following two methods:
(a) Liabilities Side Approach:

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Capital Employed = Capital + Reserves - Fictitious Assets(i.e. losses/unamortised expenses) - Non-trade Investments.
(b) Assets Side Approach:
Capital Employed=All Assets (except goodwill, fictitious assets and Non-trade Investment)- outside Liabilities.

Question 5. (Super Profit Method when Past Adjustments are Made). Aaloo and Tamatar are partners in M/s
Maina Enterprises. They admit Pyaj as partner w.e.f. 1 st April, 2021. They decided to value goodwill at 3 years'
purchase by Super Profit Method for which they decided to take average of last 5 years profits. The profits for the last
five years were:
Year ended ₹
31st March, 2017 3,00,000 (Including gain of Rs. 35,000 from sale of fixed assets
31st March, 2018 1,70,000 (Including abnormal loss of Rs. 40,000)
st
31 March, 2019 Loss 3,10,000 ( including insurance claim received Rs 30,000)
31st March, 2020 6,30,000
31st March, 2021 3,50,000

Capital employed in the firm is ₹ 12,00,000 and normal rate of return in similar business is 10%. The remuneration of
the partners is estimated to be ₹20,000 p.a.
It was also found that closing stock for the year ended on 31 st march 2021 was under casted by ₹30,000. Calculate
value of goodwill.

Question 6. The average profit earned by a firm is Rs.80,000 which includes undervaluation of stock of Rs. 8,000 on
an average basis. The capital invested in the business is Rs. 8,00,000 and the normal rate of return is 8%. Calculate
goodwill of the firm on the basis of 7 times the super profit.
Hints: Adjusted Average Profit = Rs. 80,000 + Rs. 8,000 = Rs.88,000, Goodwill = Rs. 24,000 x 7 = Rs. 1,68,000.

Question 7 (Calculation of Average Profit). On 1st April, 2021, a firm had assets of ₹ 7,00,000 including cash of
₹5,000 and non-trade investment of ₹40,000. The Partners' Capital Accounts showed a balance of Rs. 2,00,000 and
the Reserve constituted the rest. If the normal rate of return is 10% and the goodwill of the firm is valued at Rs.
2,00,000 at four years' purchase of super profit, find the average profit of the firm.

Note: As outside liabilities are not given, they are assumed to be nil. Thus, capital employed = Total Assets.

Difference between Average Profit and Super Profit

Basis Average Profit Super Profit
1. Meaning It is average of the profits of past It is the excess of average profit
agreed years. over normal profit.

2. Normal Rate of Return Normal rate of return is not relevant Normal rate of return is considered
in the calculation of average profit. while calculating the super profit.
3. Average Capital Employed Average capital employed is not Average capital employed is taken
considered while calculating average into account while calculating the
profit. super profit.
4. Relevance of Valuing Goodwill Average profit is relevant for Super profit is relevant for Super
Average Profit Method, Super Profit Profit Method and Capitalisation of
Method and Capitalisation Method of Super Profit Method of valuation of
valuation of goodwill. goodwill.

Capitalisation Method: Under the Capitalisation Method, goodwill can be valued either by:
(i) Capitalisation of Average Profit Method; or
(ii) Capitalisation of Super Profit Method.

(i) Capitalisation of Average Profit: Under this method, goodwill is calculated by deducting actual
capital employed (i.e., Net Assets as on the date of valuation) in the business from the capitalised value
of average profit on the basis of Normal Rate of Return. Capitalised value of the business is ascertained
by capitalising average profit earned at the normal rate of profit. It is calculated as follows:

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑃𝑟𝑜𝑓𝑖𝑡 𝑋 100

Capitalised Value of the Business =
𝑁𝑜𝑟𝑚𝑎𝑙 𝑅𝑎𝑡𝑒 𝑜𝑓 𝑅𝑒𝑡𝑢𝑟𝑛 (𝑃𝑟𝑜𝑓𝑖𝑡)
Net Assets = All Assets (other than goodwill, fictitious assets and non-trade investments) at their current values minus'
outsiders' liabilities.

Question 8 (Capitalisation Method). A firm earned ₹ 600,000 as profit, the normal rate of return being 10%. Assets
of the firm are ₹72,00,000 (excluding goodwill) and Liabilities are ₹24,00,000. Find the value of goodwill by
Capitalisation of Average Profit Method.

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Question 9. Puneet and Tarun are in restaurant business having credit balance in their fixed Capital Accounts as
2,50,000 each. They have credit balances in their Current Accounts of ₹30,000 and ₹20,000 respectively. The firm
does not have any liability. They are regularly earning profits and their average profit of last 5 years is ₹1,00,000. If the
normal rate of return is 10%, find the value of goodwill by capitalisation of Average Profit Method.

(ii) Capitalisation of Super Profit: Under this method, goodwill is calculated by capitalising super profit at
the normal rate of return. Thus, as a first step Super Profit is determined on the same basis as is determined under
Super Profit Method, which is capitalised at the Normal Rate of Return to determine the value of goodwill.

Question 10. A business has earned average profit of Rs. 1,00,000 during the last few years and the normal rate of
return in similar business is 10%. Find out the value of Goodwill by:
(i) Capitalisation of Super Profit Method; and
(ii) Super Profit Method if the goodwill is valued at 3 years' purchase of super profit.
Assets of the business were Rs. 10,00,000 and its external liabilities Rs. 1,80,000.

Question 11. From the following information, calculate value of goodwill of M/s. Shaloo and Galu:
(i) On the basis of Capitalisation of Super Profit.
(ii) On the basis of Capitalisation of Average Profit.
Information:
(a) Average Capital Employed – Rs. 10,00,000.
(b) Net Profit/Loss of the firm for the past years: 2015 – Rs. 1,60,000 ( Profit ); 2016 – Rs. 1,40,000 (Profit);
2017 – Rs. 2,70,000 ( Profit).
(c) Normal Rate of Return on capital is 11%.
(d) Remuneration to each partner for his service to be treated as a charge on profit – Rs. 2,500 per month.
(e) Assets (excluding goodwill) – Rs. 11,00,000; Liabilities – Rs. 1,00,000.

Question 12. (Annuity method) Calculate the goodwill by annuity method of super profit from the following facts:
(a) Annual maintainable profit after tax is ₹ 65,000.
(b) Capital employed is ₹ 4,00,000.
(c) Normal rate of return is expected at 12% p.a.
(d) year’s purchase price is 5 years.
(d) Present value of an annuity of ₹ 1 for five years @ 12% interest is 3.604776.
Answer : goodwill ₹ 61,281

Question 13. Kuku and Akku were in partnership sharing profits and losses in the ratio 5:3. On 1 st April 2020, they
decided to admit Agu in the partnership on the following terms:
(1) Agu will bring ₹ 2,00,000/- as capital for ¼ share.
(2) New profit-sharing ratio shall be 2:1:1 among Kuku, Akku and Agu
(3) Kuku was entitled to salary of ₹ 2,000/- p.m., it was revised to ₹3,000 p.m. from 1st October 2018.
(4) Interest on capital was paid at 8% p.a.
(5) Capitals as on 31st March 2020 were Kuku ₹ 4,00,000 Akku ₹ 3,00,000, which had remained unchanged since
last four years.
(6) Goodwill was to be valued on the basis of 3 years purchase of average adjusted weighted average profits of past 4
years. The profits of previous four years, before charging interest on capital and salary to Kuku were as follows:

Year Profit
2016-17 2,10,000
2017-18 2,60,000
2018-19 2,10,000
2019-20 3,05,000
These profits were subject to following rectification:
i). A machine costing ₹ 40,000 purchased on 1st October 2018 was wrongly charged to revenue. The machinery was
depreciated at 20% p.a. on w.d.v. method
ii) Stock on 31st March 2018 was over-valued by ₹ 20,000/-
iii. There was a loss by fire amounting to ₹ 10,000/- in the year 2016-17 which was not considered in trading account
but correctly debited in the P/L account for that year.
iv. Debtors as on 31st March 2020 included bad debts of ₹ 5 ,800/-
v. Agu shall bring his share of goodwill in cash.
You are required to calculate amount of goodwill Agu is supposed to bring and journal entry for the same.

Answer :Goodwill = 3 years purchase = 3 X 1,80,00 = 5,40,000

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Ag’s share ¼ the = 5,40,000/4 = 1,35,000

Question 14. State with reason, whether following statements are true or false:

1. Goodwill is intangible asset therefore it cannot be valued.

2. Goodwill is valued whenever there is change in the constitution of the business.

3. Goodwill is excess earning capacity of the business attributable to many reasons.

4. At the time of admission or retirement of a partner, goodwill can be raised in the books of accounts and shown as an asset.

5. Only simple average method can be used for valuation of goodwill.

6. Super profit means excess of actual average profit over normal profit.

7. Normal profit means profit earned by similar companies in the same industry.

8. Normal profit depends upon Normal Rate of Return and past profits.

9. At the time of admission/retirement of a partner, since goodwill can not be raised in the books of accounts
is recorded through capital accounts of the partners.

10. At the time of admission of a partner, goodwill brought in by the new partner is shared equally by old partners.
Answer:

1. False: Even though Goodwill is intangible asset it can be valued in terms of money. It can be measured in
terms of physical units

2. True: Goodwill has to be valued each time when there is a reconstitution to make good the sacrifice made
by few partners due to such reconstitution.
3. True: Goodwill is the brand image the firm has in the market due to which it enjoys an
advantageous position over the other players in the market

4. False: At the time of admission or retirement of a partner, goodwill can be raised in the books of
accounts and it is immediately written off. It cannot remain in the books of accounts as asset in
balance sheet as per accounting standard.

5. False: Weighted average profit method, Capitalisation method, super profits methods also can be used
for valuation of Goodwill.

6. True: It is capacity of the firm to earn excessive profits over the industry normal evidencing the fact
that the firm experiences higher goodwill

7. True: The rate of return is considered as an average for the industry, which is applied to the capital
employed in the concerned firm.

8. False: Normal profit depends upon Normal Rate of Return only and not on past profits.

9. True: Generally, the goodwill at the time of admission id adjusted through the capital accounts and
not shown in the books of the firm.

10. False: Goodwill brought in by new partner is shared by old partners in Sacrifice Ratio and not equally.

Question 15. Multiple Choice Questions

1. Goodwill brought in by incoming partner in cash for joining in a partnership firm is taken away by the old partners
in their………ratio.
(a) Capital. (b) New Profit Sharing. (c) Sacrificing. (d) gaining
2. A & B are partners sharing profits and losses in the ratio 5:3. On admission, C brings ₹70,000 cash and ₹ 48,000
against goodwill. New profit-sharing ratio between A, B and C are 7:5:4. Find the sacrificing ratio of A: B.
(a) 3:1. (b) 4:7. (c) 5:4. (d) none of the above

3. Following are the factors affecting goodwill except:

(a) Nature of business. (b) Efficiency of management. (c) Location of the customers. (d) location of entity
4. Weighted average method of calculating goodwill is used if:
(a) Profits has increasing trend. (b) Profits has decreasing trend. (c) Either ‘a’ or ‘b’ (d) none of the above.

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5.In the absence of any provision in the partnership agreement, profits and losses are shared
(a) In the ratio of capitals. (b) Equally. (c) In the ratio of loans given by them to the firm (d) no idea
6. The profits and losses for the last 4 years are 2007-08 2016-17 Losses ₹ 10,000; 2008-09 2017-18 Losses ₹ 2,500; 2009-10
2018-19 Profits ₹ 98,000 & 2019-20 Profits ₹ 76,000. The average capital employed in the business is ₹ 2,00,000. The rate of
interest expected from capital invested is 12%. The remuneration of partners is estimated to be ₹ 1,000 per month not
charged in the above losses/ profits. Calculate the value of goodwill on the basis of two years purchase of super profits based
on the average of four years.
(a) ₹9,000. (b) ₹8,750. (c) ₹8,500. (d) ₹8,250.

MCQs
1. 2. 3. 4. 5. 6.
C A c c B b

ADMISSION, RETIREMENT AND DEATH OF A PARTNER

Computation of new, sacrificing and gaining ratio:-

In case of admission
Question 16. P,Q, and R are partners in a firm sharing profit and losses in the ratio of 3:2:1. They admit S as a partner with
1/4th share of profits. Calculate new profit sharing ratio. [Answer: 3:2:1:2]

Question 17. A,B, and C are partners in a firm sharing profit and losses in the ratio of 3:2:1. New partner D is admitted for
1/4th share. Only A and B contributed toward the share of D. calculate the new profit sharing ratio.

Question 18. P and Q are partners in a firm sharing profits and losses in the ratio of 3:2. R is admitted as partner with 1/8th
share in profits. It is decided that P and Q will share profits and losses in future in the ratio of 4:3. Calculate the new profit
sharing ratio and the sacrificing ratio. [Answer: 4:3:1 and 4:1]

Question 19. A and B are partners sharing profit and losses in the ratio of 3:2. C is admitted as a new partner. A gives 1/3 of
his share and B gives 1/10 from his share in favour of C. Calculate new and sacrificing ratio.

In case of retirement/death of a partner

Question 20. X,Y,Z are partners sharing profit in the ratio of 3:2:1. Y retires and his share was purchased by X and Z in
the ratio of 4:1. Calculate new and gaining ratio.

Treatment of goodwill
In case of admission of a partner:

Question 21. A,B and C are partners sharing profit in 3:2:1. On 1 st April 2021, D was admitted as new partner for 1/7 th
share. He has to brings ₹2,00,000 as his capital and ₹35,000 for his share of goodwill. Make journal entries if;
Case 1. He paid premium for goodwill privately to the partners.
Case 2. He brings his share of goodwill in cash along with his capital and 80% share in goodwill were withdrawn by
partners.
Case 3. He could not bring his share of goodwill in cash.
Case 4. He could bring only 70% of his share of goodwill in cash.
Case 5. He could not bring his share of goodwill in cash and partners decided to raise goodwill in the book of firm.
Case 6. He could not bring his share of goodwill in cash and partners decided to raise and then written off goodwill
from the books of firm.

Question 22. X and Y are partners sharing profits and losses in the ratio of 3: 2. They agree to admit Z as a partner for
1/5th share. Z acquires his share from X and Y in the ratio of 2 : 3. Goodwill of the firm is valued at ₹50,000. Z brings
his share of goodwill and ₹2,00,000 as his capital through cheque. Pass necessary Journal entries assuming that the
capitals are fixed under each of the following alternative cases:

Case 1. When goodwill appears in the books at 20,000. (and partners decided not to show goodwill in the book of
firm).
Case 2. When goodwill appears in the books at 20,000 and partners decided to show goodwill in the book of firm
at its book value.

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Question 23. A,B and C are partners sharing profit in 4:3:2. On 1 st April 2021, D was admitted as new partner for 1/4 th
share. He has to brings ₹2,00,000 as his capital and ₹25,000 for his share of goodwill. They decided to share future
profits equally. Make journal entries.

Question 24: X and Y are partners in a firm sharing profits in the ratio of 3 : 2. On 1st April, 2021, they admit Z as
new partner for 3/13th share in the profits. New ratio will be 5:5:3. Z contributed the following assets to his capital and
his share for goodwill: Stock ₹80,000; Debtors ₹1,20,000; Land ₹2,00,000; Plant and Machinery ₹1,20,000. On the
date of admission of Z, goodwill of the firm was valued at ₹10,40,000. Record necessary Journal entries in the books
of the firm on Z's admission.

Question 25. (Hidden or Inferred Goodwill) Abhay and Beena are partners in a firm. They admit Chetan as a partner
with 1/4th share in the profits of the firm. Chetan brings ₹2,00,000 as his share of capital. Value of the total assets of
the firm is ₹5,40,000 and outside liabilities are valued at ₹1,00,000 on that date. Give necessary entry to record
goodwill at the time of Chetan's admission. Also, show your working notes.

In case of retirement/death of a partner:

Question 26.(When all the Remaining Partners Gain). Surender, Ramesh , Naresh and Mohan are partners in a
firm sharing profit in 2 : 1 : 2 : 1 ratio. On the retirement of Naresh, goodwill was valued at ₹ 72,000. Surender,
Ramesh and Mohan decided to share future profits equally. You are required to make adjustment entries for goodwill
without opening Goodwill Account. Show your workings clearly.

Question 27. (When one of the remaining Partners also Sacrifices in Addition to the Retiring Partner). X,Y
and Z are partners sharing profits in the ratio of 3 : 2 : 1. Z retires and the new profit-sharing ratio between X and Y
was 1 : 2. On Z’s retirement, goodwill of the firm was valued at ₹ 30,000. Pass necessary Journal entries for the
treatment of goodwill of the firm Z’s retirement without opening the Goodwill Account.

Question 28.Virat ,Rohit and Shikhar are partners sharing profits in ratio of 3 : 2 : 1. Shikhar retired from the firm
on 1st April , 2021 on which date goodwill of the firm was valued at ₹ 2,40,000 . Virat and Rohit decided to share
future profits equally from that date. Pass the necessary Journal entries giving effect to goodwill on Shikhar’s
retirement (i) raising Goodwill at its current value,(ii) without raising goodwill in book of firm.

Question 29. A,B,C and D are partners sharing profit in the ratio of 4:3:2:1. C retires and his share was purchased by
remaining partners in the ratio of 1:1:1. Goodwill of the firm was valued at ₹ 2,40,000. Make table entry.

Admission cum retirement/death of a partner:

Question 30. A,B and C are partners sharing profits in ratio of 2:2:1. B retires and D is admitted as a new partner.
Goodwill of the firm valued at ₹1,80,000. New ratio among A,C and D will be 1:2:2. Make table entry.

Question 31. Sen and Chatterjee were partners sharing profit and losses as 3 : 2. They admitted Roy as third partner with
effect from 1 -1 -1998, the new profit-sharing ratio being 5:3:2. They again took Ghose as their fourth partner as on 1-1-
1999, the new profit-sharing ratio coming to 9 : 5 : 4 : 2 . On 1-1 -2000, Bose was taken in as their fifth partner, the profit-
sharing ratio now being agreed as 7 : 4 : 3 : 3 : 3. Chatterjee died on 1-1-2001 and you are requested to estimate the values
of his share of goodwill, which had never been raised in the books of account, nor was any premium received from any
entrant. On enquiry you find that the respective values of the goodwill of the firm were as follows:
Date: 1-1-1998 1-1-1999 1-1-2000 1-1-2001
Value Rs. 4,000 Rs. 6,000 Rs. 8,000 Rs. 12,000
Estimate the amount payable to the legal representatives of Chatterjee and state how such amount would be
contributed by the continuing partners, provided they do not raise any goodwill account in the books and-agree to
share profit from 1-1-2001 on the following basis : Sen 40%,Roy 25%, Ghose 20% and Bose 15% (M.Com.,Calcutta
University)

Concept of joint life policy

In case of admission / retirement of a partner
Question 32. X,Y,Z are partners sharing profit equally. They had taken a joint Life policy for Rs. 2,40,000 on which
premium paid 40,000 is treated as an expense. Y retires. On that date surrender value of policy was Rs 60,000. Show
treatment (without raising JLP Account.)

Question 33. A,B,C are partners sharing profits in 2:1:2: They had taken J.L.P. for Rs. 1,20,000. C retires. On that date
surrender value of policy was Rs. 40,000. Make jounal entry if partners decided to show J.L.P. in book of firm.

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Question 34. A and B are partners sharing profit in the ratio of 3:2. They had taken a J.L.P. for Rs. 5,00,000. C is
admitted as a new partner for ¼ share. On that date surrender value of policy was Rs. 2,40,000. Make adjustment
entry.

In Case of death of a partner

Question 35. Raja, Ram and Ranjan were partner sharing profit equally. On 1st July 2020,they had taken a J.L.P. for Rs.
6,00,000 on which annual premium payable was Rs 60,000. Ram died on 30th September 2022 and claim was admitted with
insurance company. On 12th November 2022, claim was received. The surrender value of policy on different dates were as
follows:
Year 1 - Rs Nil
Year 2- 40,000
Year 3- Rs 90,000
Year 4- Rs 2,00,000
Make journal entries and prepare ledger accounts assuming accounts are closed every year on 31st march if,
(a) J.L.P. was treated as an expense.
(b) J.L.P. was treated as an asset.
(c) J.L.P. was treated as an asset and reserve account is maintained.

COMPREHENSIVE QUESTIONS ON ADMISSION OF A PARTNER

Question 36. A and B are partners sharing profits in the ratio of 3:2. Following is the balance sheet of the firm as on
31-3-22:
BALANCE SHEET as on 31st March, 2022
Liabilities Amount Assets Amount
Creditors 38,000 Cash at bank 10,000
Salary outstanding 12,000 Debtors 40,000
Capital accounts: Less: provision for bad debts 4,000 36,000
A 40,000
B 38,000 78,000 Bills receivable 15,000
Stock 18,000
Investments 14,000
Furniture 5,000
Building 30,000

1,28,000 1,28,000

C is admitted as a new partner for ¼ share. He brings ₹20,000 as his capital and ₹6,000 for his share of goodwill.
Partners decided to withdrew 40% of their share of goodwill from the firm.
At this date it is found that estimated value of provision for doubtful debts is ₹6,500, and furniture ₹4,500, building
₹45,000; whilst an investment not recorded in the books is worth ₹4,300 and a contingent liability of ₹1,200 has
become a certain liability. Creditors were paid at a discount of 10%. You are required to prepare revaluation account
and balance sheet after giving effect to the above.

Question 37. Taking the previous question, if it has been agreed among the partners that assets and liabilities are to
be shown at old values, you are required to prepare revaluation account and a new balance sheet after the
admission of C.

Question 38. Swadesh and Swaraj were partners sharing profits equally. Sambhav is admitted as a partner from 1st April,
2021 for 1/5th share in profits. Their Balance Sheet as at 31.3. 2021 was:
Liabilities ₹ Assets ₹
Creditors 50,000 Cash 12,000
Bills Payable 15,000 Cash at Bank 28,500
Outstanding Expenses 3,000 Debtors 20,000
Workmen compensation reserve 30,000 Less: Provision for Doubtful Debts 500 19,500
Investment fluctuation fund 10,000 Stock 20,000
Provident fund 4,000 Furniture 10,000
General reserve 6,000 Machinery 18,000
Capital A/cs: Land and Building 70,000
Swadesh 60,000 1,00,000 Investments (market value 22,000) 40,000
Swaraj 40,000
2,18,000 2,18,000
(i) Sambhav will bring in ₹20,000 as his capital and ₹5,000 as his share of goodwill. Goodwill brought in by
Sambhav will be withdrawn by Swadesh and Swaraj.
(ii) Provision for Doubtful Debts should be brought up to 5% on Debtors.

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(iii) A debtor whose due of ₹14,000 were written off as bad debts last year, paid ₹10,000 in full settlement.
(iv) Machinery is undervalued by 10% and Furniture to be depreciated by 12.5%.
(v) Stock be valued at ₹23,000.
(vi) Cashier has misappropriated cash of ₹4,000
(vii) Land and Building be appreciated by 20%.
(viii) Investments of ₹2,000 which did not appear in books should be recorded.
(ix) An item of ₹ 600 included in S. Creditors is not likely to be claimed, hence should be written back.
(x) There was unrecorded equipment costing ₹40,000 now estimated at ₹28,000.
(xi) Out of the amount of insurance premium which was debited to profit and loss account, 5000 to be carried
forward to the next year.
(xii) Liability on account of workmen was estimated at ₹12,000.
(xiii) Firm had taken joint life policy of face value of ₹ 3,00,000. The surrender value of the policy on the date of
admission was ₹60,000. They decided to adjust JLP without raising JLP account.
(ivx) Capital accounts of other partners to be adjusted on the basis of Sambhav’s capital in the new firm.
Record necessary Journal entries and prepare Balance Sheet of the new firm.

Question 39. (Adjustment of Capital when partners’ capital are fixed ). A, B and C are partners in a firm sharing in
the ratio of 3:2:1. On 1st April, 2021, their Balance Sheet is as follows :
BALANCE SHEET OF A, B AND C as at 1st April, 2021
Liabilities ₹ Assets ₹
Capital A/cs : B’s Current Account 14,000
A 3,50,000 Land and Building 3,60,000
B 3,00,000 Investments 73,000
C 2,50,000 9,00,000 Bills Receivable 24,000
Current A/cs : Sundry Debtors 87,000
A 8,000 Stock 2,50,000
C 12,000 20,000 Bank 5,14,000
Capital Reserve 30,000 Goodwill 60,000
Creditors 1,60,000 Profit and loss account 18,000
Bills Payable 90,000
12% Bank loan 2,00,000
14,00,000 12,14,000

On the above date, D is admitted on the following terms :

(i) D will bring ₹ 1,00,000 as his capital and will get 1/6th share in profits. He could bring only 40% of his
share of goodwill premium. The goodwill of the firm was valued at ₹ 1,80,000. Capital of other partners
to be proportionately adjusted by transferring balancing figures to their current account.
(ii) The new profits-sharing ratio will be 2 : 2 : 1 : 1.
(iii) The firm had taken joint life policy of face value of ₹ 5,00,000. The surrender value of the policy on the
date of admission was ₹1,20,000. They decided to raise JLP in the books of account.
(iv) A bill Receivable of ₹ 14,000 discounted with Bank was dishonoured, which is to be recorded in the
books of account.
(v) Debtors of ₹20,000 were found bad. Debtors to the extent of 15,000 were unrecorded. Provision for
doubtful debts to be created @ 10%.
(vi) A bill for ₹12,000 for electricity expenses was not accounted.
(vii) Interest on bank loan is outstanding for 6 months.
(viii) There being a claim against the firm for damages, a liability to the extent of 8,000 will be created for the same.
(ix) The value of Stock is to be reduced by 20% whereas the value of Land and Building was found
overestimated/overvalued by 20%.
(x) Investments were taken over by C at 60,000.
(xi) B agreed to pay Bills payable at discount of 10%.

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(xii) Expenses on revaluation amount to ₹5000 paid by A.

(xiii) Half of the reserve is to be withdrawn by old partners.
Prepare Revaluation Account, Partners’ Current Accounts, Capital Account and Balance Sheet.
Question 40. Akash and Patal were carrying on business in partnership since 2014. Their balance sheet as on 31 st
March 2021 was as follows:
Liabilities ₹ Assets ₹
Capital account: Goodwill 4,000
Akash 39,700 Motor cars 16,500
Patal 21,300 61,000 Furniture and fixtures 6,200
Stocks 29,400
Profit and loss account 9,000 Debtors 39,600
Creditors 26,700 Cash at bank 2,300
Bills payable 1,500 Cash in hand 200

98,200 98,200
On 1 April, 2021 they decided to admit Bhuban as a partner on the following conditions:

(a) Bhuban will receive 1 /5th of the future profits (after charging interest @5% on capitals), subject to a minimum of
₹6,000 per annum. Any deficiency in his share of profits is to be met from Akash's share.

(b) The goodwill of the firm is valued at ₹20,000. Bhuban will bring necessary amount for his share of goodwill. They
also decided to continue to show goodwill at value appearing in the balance sheet.

(c) An independent valuation revealed that motor cars are worth ₹19,000, while the value of furniture is only ₹5,700,
₹1,500, of the debtors are likely to become bad.

(d) Bhuban was to bring in capital equal to 1/5th of the capitals of Akash and Patal arrived at after giving effect to the
foregoing considerations.

During the year ended 31st March 2022 the firm earned a profit of ₹30,000 (before charging interest on capitals). You
are required to—

Show journal entries in respect of transactions taking place at the time of Bhuban's admission.
(ii) Show the balance sheet immediately after Bhuban's admission.
(iii) Show the profit and loss appropriation account for the year ended 31st March, 2022, assuming that adjustments in
respect of guaranteed profits are to be made through the profit and loss appropriation account. [CA Inter modified)

Question 41. A and B are partners in a firm sharing profits in the ratio of 2: 1. The balance sheet of the firm on 31st
December, 2021 was as follows:
Rs. Rs.
Creditors 1,400 Bank 1,004
Investment provision 400 Bills receivable 2,500
Workmen compensation fund 1,200 Debtors 4,000
General reserve 2,100 Less: Provision 500 3,500
Capital: A 6,000 Stock 3,000
B 4,900 10,900 Investments 5,000
Goodwill 996
16,000 16,000
On the above date C is admitted for 2/5th share in the profits of the firm. Following revaluations were made at the
time of admission:
(1) Accrued incomes not appearing in the books ₹100.
(2) Market value of investments is ₹4,500.
(3) Claim on account of workmen compensation is at ₹150.
(4) A and B had purchased a machinery on hire purchase system for ₹3,000 of which only ₹100 are to be paid. Both
machinery and unpaid liability did not appear in the balance sheet.
(5) There was a joint life policy on the lives of A and B for ₹15,000. Surrender value of the policy on the date of
admission amounted ₹2,400. It was decided to record this as an asset of the new firm.

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(6) C is required to bring necessary amount for his capital and his share of goodwill ₹2,400. Capital of other partners
should also be in their profit sharing ratio. You are required to make entries and prepare new balance sheet after the
admission of C.

Question 42. Quick and Slow are partners in a firm sharing profits and losses in the ratio of 3:2. The Balance Sheet of
the firm as on 31 March, 1993 was as under.
Liabilities ₹ Assets ₹
Capital accounts: Furniture and fixtures 60,000
Quick 1,20,000 Office equipments 30,000
Slow 77,000 1,97,000 Motor car 75,000
Stock 50,000
General reserve 30,000 Sundry debtors 90,000
Cash at bank 18,000
Sundry creditors 96,000

3,23,000 3,23,000

Smooth was admitted as a new partner with effect from 1st April, 1993 and it was agreed that he would bring some
private furniture worth ₹10,000 and private stock costing ₹8,000 and in addition contribute ₹50,000 cash towards
capital.
He would also bring proportionate share of goodwill which is to be valued at two year's purchase of the average profits
of the last three years. The profits of the last three years were:
₹
1992-93 52,000
1991-92 32,000
1990-91 28,000

However, on a checking of the past records, it was noticed that on 1.4.91 a new furniture costing ₹8,000 was purchased
but wrongly debited to revenue and in 1992-93 a purchase invoice for ₹4,000 dated 25.3.93 has been omitted in the
books. The firm charges depreciation on furniture @ 10% p.a. Your calculation of goodwill is to be made on the basis
of correct profits.
On revaluation value of stock is to be reduced by 5% and Motor car is worth ₹85,000. Smooth duly paid the required
amount for goodwill and cash towards capital. It was decided that the future profits of the firm would be shared as
Quick-50%, Slow-30% and Smooth-20%. Assuming the above mentioned arrangements were duly carried out, show
the Capital Accounts of the partners and the Balance Sheet of the firm after Smooth's admission.(CMA Inter Dec.93)

Question 43. M/S NEPTUNE & CO’s Balance sheet as at 31st March 2021
₹ ₹ Assets ₹ ₹
Liabilities
Bank overdraft (SBI) 54,000 Cash at bank of India 800
Sundry creditors 1,56,000 Sundry debtors 2,80,000
Capital accounts: Stock 1,00,000
Mr A: Motor car as per last B/S 1,60,000
Balance as per last B/S 4,02,000 Less: dep till date 54,000 1,06,000
Add: profit for the year 95,400
Less: drawings 40,000 4,57,400 Machinery cost as per last
B/S 3,00,000
Mr B: Less: dep till date 1,40,000 1,60,000
Balance as per last B/S 2,00,000
Add: profit for the year 95,400 Land and building 2,40,000
Less: drawings 76,000 2,19,400

8,86,800 8,86,800
You have examined the foregoing Draft of the Balance Sheet and have ascertained that the allowing adjustments
are required to be carried out:
a) Land and Buildings are shown at cost less ₹60,000 being the proceeds of the sale during the year of
premises costing ₹70,000.
b) Machinery having a net book value of ₹4,300 had been scrapped during the year. The original cost was
₹12,300.
c) ₹2,000 paid for the license fees for the year ending 30th September, 2021 had been written off.
d) Debts amounting to ₹10,420 were considered to be bad and further debts amounting to ₹5,400 were
considered doubtful and required 100% provision. Provision for doubtful debts had previously been made for
₹10,000.
e) An item in the Inventory was valued at ₹37,400 , but had a realizable value of ₹26,000 only. Scrap materials
having a value of ₹6,600 had been omitted from the stock valuation.

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f) The cashier had misappropriated ₹700.

g) The cash-book for the year ending 31st March, 2021 included payments amounting to ₹6,924, the cheques having
been made out, but not dispatched to suppliers until April, 2021.
(h) Interest is to be allowed on the Partners’ Opening Capital Account balances less drawings during the year at
9%. You are required to prepare:
(a) Profit & Loss Adjustment Account for the year
(b) Capital Accounts of the partners. (CA-Inter Nov,2001modified)

Question 44. Laurel and Hardy are partners of the firm LH &Co., from 1.4.2003. Initially both of them contributed
Rs. 1,00,000 each as capital. They did not contribute any capital thereafter. They maintain accounts of the firm on
mercantile basis. They were sharing profits and losses in the ratio of 5:4. After the accounts for the year ended
31.3.2007 were finalized, the partners decided to share profits and losses equally with effect from 1.4.2003.
It was also discovered that in ascertaining the results in the earlier years certain adjustments, details of which are
given below, had not been noted.
Year ended 31st March 2004 2005 2006 .2007
Rs. Rs. Rs. Rs.
Profit as per accounts prepared and finalized 1,40,000 2,60,000 3,20,000 3,60,000

Expenses not provided for (as at 31st March) 30,000 20,000 36,000 24,000

Incomes not taken into account( 31st March) 18,000 15,000 12,000 21,000

The partners decided to admit Chaplin as a partner with effect from 1.4.2007. It was decided that Chaplin would
be allotted 20% share in the firm and he must bring 20% of the combined capital of Laurel and Hardy. Following is
the Balance sheet of the firm as on 31.3.2007 before admission of Chaplin and before adjustment of revised
profits between Laurel and Hardy.
Balance Sheet of LH & Co. as at 31.3.2007
Liabilities ₹ Assets ₹
Capital accounts: Plant and machinery 60,000
Laurel 2,11,500 Cash in hand 10,000
Hardy 1,51,500 Cash at bank 5,000
Stock in trade 3,10,000
Sundry creditors 2,27,000 Sundry debtors 2,05,000

5,90,000 5,90,000
You are required to prepare:
(i) Profit and Loss Adjustment account;
(ii) Capital accounts of the partners; and
(iii) Balance Sheet of the firm after the admission of Chaplin. (CA-PE2- MAY 2007)20 MARKS

Question 45. Amal and Bimal are partners sharing profits in the ratio of 2 : 3. Charu is admitted as a partner on 1 st
January, 2021 and he pays into the firm cash ₹ 9,000 out of which ₹ 3,000 is premium on his admission to a quarter
share, the ratio between Amal and Bimal to be 1 : 2. Charu also brings into the business his own Goodwill to be run as
a separate unit and the Goodwill is agreed at ₹ 4,800. Show the entries required to give effect to the above
arrangements (for both the units separately).

Question 46. A and B are partners in a firm sharing profits and losses in the ratio 3 : 2. Their Balance Sheet as on
31.12.2012 stood as follows :
Liabilities Amount Assets Amount
Sundry Creditors 20,000 Goodwill 12,000
Capital Account Cash in hand 15,000
A 12,000 Sundry Debtors 21,000
B 30,000 42,000 Less: Reserve for Bad Debts 1,000 20,000

Stock-in-trade 10,750
Fixture & Fittings 250
Profit and Loss Account 4,000
62,000 62,000

On 1.1.2013 they admit C as a partner on the following terms:

(a) The new profit sharing ratio of A, B and C becomes 5:3:2.
(b) Agreed value of Goodwill is ₹ 20,000 and C brings the necessary premium for Goodwill in cash, half of which is retained
in the business. Book value of Goodwill should remain undisturbed.

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(c) The Reserve for bad debts is to be raised to 10% of Sundry Debtors.
(d) Stock-in-trade is to be revalued at ₹ 12,000 but the effect is not to be shown in the books.
(e) Fixture & Fittings are to be reduced to ₹ 150.
(f) C should bring further sum in cash in order to make his capital equal to 1/5th of the combined adjusted capital of A and B.
Show the necessary journal entries and the Capital Accounts of the partners and also prepare the Balance Sheet of the new
firm as at 1.1.2013. (ICAI Study material)

Solution.
In the books of A, B and C Journal
Date Particulars L.F Dr. (₹) Cr. (₹)
Bank A/c Dr. 9,420
To C’s Capital A/c 7,280
To premium for Goodwill A/c 1,600
(Goodwill and capital to be brought in by C in cash)
Premium for Goodwill A/c Dr. 1,600
To A’s Capital A/c 800
To B’s Capital A/c 800
(Goodwill to be credited to A and B’s capital account in sacrificing
ratio
A’s Capital A/c Dr. 400
B’s Capital A/c Dr. 400
To Bank A/c 800
(Half of the goodwill to be distributed)
A’s Capital A/c Dr. 2,400
B’s Capital A/c Dr. 1,600
To Profit and Loss A/c 4,000
(Debit balance of P&L A/c transferred to A and B’s capital in 3 : 2)
Profit and Loss Adjustment A/c Dr. 1,200
To Reserve for Bad Debts A/c 1,100
To Fixture and Fitting A/c .100
(Value of assets is reduced on revaluation before C’s admission)
A’s Capital A/c Dr. 720
B’s Capital A/c Dr. 480
To Profit and Loss Adjustment A/c 1,200
(Loss on revaluation transferred to A and B’s capital in 3 : 2)
C’s Capital A/c Dr. 250
To A’s Capital A/c 125
To B’s Capital A/c 125
(Effect of stock on revaluation adjusted on C’s admission)

Capital Account
Particulars A B C Particulars A B C
To Profit and Loss — By Balance b/d 12,000 30,000 — —
Loss 2,400 1,600 — By Bank — 800 7,820
To Profit and Loss By premium for 800 125 125 —
Adj. A/c — Loss 720 480 — Goodwill —
To A’s Capital — — 125 By C’s Capita
To B’s Capital — — 125
To Bank (Withdraw 400 400 —
of goodwill)
To Balance c/d
9,405 28,445 7,570
12,925 30,925
12,925 30,925 7,820 7,820

Balance Sheet as at 1st January, 2013

Liabilities Amount Assets Amount
Capital: Goodwill 12,000
A 9,405 Cash (₹ 15,000 + ₹ 9,420 – ₹ 800) 23,620
B 28,445 Sundry Debtors 21000
C 7,570 45,420 Less: Prov. for Bad Debts 2,100 18,900
Sundry Creditors 20,000 Stock 10,750
Furniture and Fixtures (₹ 250 – ₹ 100) 150
65,420 65,420

Question 47. Following two problems are regarding issues in Partnership Accounts, kindly solve both :

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(i) Anil and Mukesh are partners sharing profit and losses in the ratio of 3 : 2. Govind is admitted for 1/4 share
of firm. Thereafter Madan enters for 20 paisa in a rupee. Compute new profit sharing ratios under both
the admission of partners.
(ii) The following Goodwill Account was opened by the partners of R and S, on the admission of H as a new
partner into firm Om and Sons. Calculate the share of profit agreed to be given to "H".

Goodwill A/c.
Dr. Cr.
Rs. Rs.
1-4-2010 To R's Capital A/c 24,800 1-4-2010 By R's Capital A/c 12,400
1-4-2010 To S's Capital A/c 18,600 1-4-2010 By S's Capital A/c 12,400
1 -4-2010 By H's Capital A/c 18,600
43,400 43,400
(CA- MAY 2010) 5 MARKS
Answer:
(i)1. At the time of admission of Govind :
Let the total share of profit at the time of admission of Govind is 1 Share of New Partner 'Govind' = ¼
Remaining share of profit = 1 – ¼ = ¾
∴new share of Anil
3 3 9
= × =
4 5 20
3 2 6
New share of Mukesh = × =
4 5 20
New profit sharing of Anil, Mukesh & Govind is
9 6 1
: : 𝑖. 𝑒 9: 6: 5
20 20 4

2. At the time of admission of Madan:

Let total share at the time of admission of Madan is 1 Share of new partner 'Madan = 1/5 Remaining
share =1-1/5 = 4/5
Now,
4 9 9
New share of Anil = × =
5 20 25
New share of Mukesh= 4/5 x 6/20 = 6/25
New share of Govind= 4/5 x 5/20 =5/25
New profit sharing ratio of Anil, Mukesh, Govind and Madan is
9 6 5 1
: : : 𝑖. 𝑒. 9: 6: 5: 5
25 25 25 5
(ii) Share of H in profit sharing ratio;
𝑆ℎ𝑎𝑟𝑒 𝑜𝑓 𝐻 𝑖𝑛 𝐺𝑜𝑜𝑑𝑤𝑖𝑙𝑙 3
H’s Share = =
𝑇𝑜𝑡𝑎𝑙 𝐺𝑜𝑜𝑑𝑤𝑖𝑙𝑙 7

Question 48. Amit and Sumit are partners sharing profits and losses in the ratio of 3: 2. Their Balance Sheet as on 31 st
March 2011 is given below:
Liabilities Amount Assets Amount
Rs. Rs.
Capital Accounts : Land & Building 3,20,000
Amit 1,76,000 Investment(Market value 55,000) 50,000
Sumit 2,54,000 4,30,000 Debtors 3,00,000
Loan from Puneet 3,00,000 Less: Provision for
doubtful debts 10,000 2,90,000
General Reserve 30,000 Stock 1,10,000
Employer's Provident Fund 10,000 Cash at Bank 50,000
Creditors 50,000 _______
Total 8,20,000 Total 8,20,000

They decided to admit Puneet as a new partner from 1st April, 2011 on the following terms:
1. Amit will give 1/3rd of his share and Sumit will give 1/4th of his share to Puneet.
2. Puneet's loan account will be converted into his capital.
3. The Goodwill of the firm is valued at ₹3,00,000. Puneet will bring his share of Goodwill in cash and the
same was immediately withdrawn by the partners.
4. Land and building was found undervalued by ₹1,00,000.

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5. Stock was found overvalued by ₹60,000.

6. Provision for doubtful debts will be made equal to 5% of debtors.
7. Investments are to be valued at their market price.
It was decided that the total capital of the firm after admission of new partner would be ₹10,00,000. Capital
accounts of partners will be readjusted on the basis of their profit sharing ratio and excess or deficiency will be
adjusted in cash. You are required to prepare: (a) Revaluation A/c., (b) Partner's Capital A/c. (c) Balance Sheet
of the firm after admission of new partner. (CA- MAY 2011) 16 MARKS

Answer : Revaluation A/c

Particulars Amount Particulars Amount
To Stock 60,000 By Land & building 1,00,000
To Provision for doubtful debts 5,000 By Investments 5,000
To Profit transferred to
Amit's capital A/c 24,000
Sumit's capital A/c 16,000
1,05,000 1,05,000

Partner’s Capital Account

Particulars Amit Sumit Puneet Particulars Amit Sumit Puneet
To Amit's capital A/c — — 60,000 By Balance b/d 1,76,000 2,54,000
To Puneet's capital A/c — — 30,000 By Puneets' Loan A/c — — 3,00,000
To Bank A/c 60,000 30,000 — By Puneet's capital
To Balance c/d 4,00,000 3,00,000 3,00,000 A/c 60,000 30,000 —
By Bank A/c (W.N.2) — — 90,000
By Revaluation A/c 24,000 16,000 —
By General reserve 18,000 12,000 —
By Bank 1,82,000 18,000 ---
4,60,000 3,30,000 3,90,000 4,60,000 3,30,000 3,90,000
Balance Sheet(NEW)
Liabilities Amount Assets Amount
Capital accounts Land and building (3,20,000+1,00,000) 4,20,000
Amit 400,000 Investments 55,000
Sumit 300,000 Debtors
Puneet300,000 10,00,000 3,00,000 2,85,000
Creditors 50,000 Less: Provision for doubtful debts 50,000
Employers' Provident Fund 10,000 (15,000) 2,50,000
Stock (1,10,000-60,000)
Cash at bank (W.N.3)
10,60,000 10,60,000
Working Notes:
(1) Calculation of incoming partner's share, new profit sharing ratio and sacrificing ratio.
Amit Sumit
Old profit sharing ratio 3/5 2/5
Surrendered by old partners 3/5x1/3=1/5 2/5x1/4=1/10
Remaining share 3/5 -1/5 =2/5 2/5-1/10=3/10

Employer's Provident Fund is current liability as it is assumed to be representing employer's contribution to provident
fund which is yet to be deposited. Puneet's total share in profits = 1/5 + 1/10 =3/10
New profit sharing ratio of Amit: Sumit: Puneet = 2/5 : 3/10 : 3/10 = 4:3:3 Sacrificing ratio of Amit: Sumit is 1/5 :1/10 : or
2:1
(2) Calculation of Share of goodwill be old partners
Goodwill of the firm was Rs. 3, 00,000
Share of Puneet in goodwill
3
= 𝑅𝑠. 3,00,000 ×
= 𝑅𝑠. 90,000
10
Goodwill will be distributed among the old partners in their sacrificing ratio of 2:1 i.e. Rs. 60,000 by Amit
and Rs. 30,000 by Sumit.

(3) Calculation of Closing Balance of Bank Account after admission.

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Bank A/c
Particulars Rs. Particulars Rs.
To Balance b/d 50,000 By Amit's capital A/c 60,000
To Puneet's capital A/c 90,000 By Sumit's capital A/c 30,000
To Sumit's capital A/c 18,000 By Balance c/d 2,50,000
To Amit's capital A/c 1,82,000
3,40,000 3,40,000

Question:- 49( updation of balance sheet). S and T were equal partners. Their Balance Sheet on 31 st March, 2021
stood as follows:
Liabilities Rs. Assets Rs.
Capital Accounts: Stock 2,70,000
S 6,40,000 Debtors 3,65,000
T 6,60,000 13,00,000 Furniture 75,000
Creditors 3,27,500 Joint Life policy 47,500
Bank Overdraft 1,50,000 Plant 1,72,500
Bills payable 62,500 Building 9,10,000
18,40,000 18,40,000
The operations of the business was carried on till 30 th September, 2021. S and T both withdrew in equal amounts half
the amount of profits made during the current period of 6 months after 10% per annum had been written off on
Building and Plant and 5% per annum written off on Furniture. During the current period of 6 months, creditors were
reduced by ₹50,000, Bills payable by ₹11,500 and Bank overdraft by ₹75,000.

The Joint Life policy was surrendered for ₹ 47,500 on 30 th September, 2021. Stock was valued at ₹3,17,000 and
debtors at ₹3,25,000 on 30th September, 2021. The other items remained the same as on 31 st March, 2021.
On 30th September 2021, U is admitted as a new partner for 1/4 th share in profits and losses of business. He brings
₹4,00,000 as his capital and ₹50,000 for his share of goodwill. Prepare balance sheet of the firm after U’s admission.

RETIREMENT OF A PARTNER
Question 50. P, Q, and R were partners sharing profit and losses in the ratio of P 5/10, Q 3/10, R 2/10. They had taken out
a joint life policy of the face value of ₹20,000. On 31st December, 1997 its surrender value was ₹4,000. On this date the
balance sheet of the firm stood as under:
Liabilities ₹ Assets ₹

Sundry creditors 5,300 Fixed assets 25,000

Expenses outstanding 700 Stock 11,000
Reserve 3,000 Book debts 9,000
Capitals: Cash at bank 2,000
P 20,000
Q 10,000
R 8,000 38,000
47,000 47,000

On this date Q decided to retire and for the purpose :

(i) Goodwill was valued at ₹15,000;
(ii) Fixed assets were valued at ₹30,000; and
(iii) Stock was considered as worth ₹10,000.
(iv) Q was to be paid through cash brought in by P and R in such a way as to make their capitals proportionate to
their new profit-sharing ratio which was to be P 3/5 and R 2/5. They also decided to maintain minimum cash of
₹1,000 in their bank Account. Goodwill was to be passed through books without raising a goodwill account; the joint
life policy was also not to appear in the balance sheet.

Record these matters in the journal of the firm and prepare the resultant balance sheet. (C.A. INTER)

Question 51. The following is the Balance Sheet of A, B and C who were equal partners on 31st December 1995:—

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BALANCE SHEET
Liabilities Rs. Assets Rs.
A’s Capital 33,600 Plant and Machinery (at cost) 49,000
B’s Capital 25,200 Furniture 4,800
C’s Capital 12,000 Stock-in-trade 22,800
10% Mortgage Loan 12,000 Sundry Debtors 21,600
Sundry Creditors 16,600 Cash in Hand 1,200
99,400 99,400

On 1 January 1996, C retired from business and claimed his share in the Secret Reserve/ Profit arising out of
the following-
i. During the year 1995, purchase of Machinery at a cost of ₹5,000 was charged to Purchases Account, the
Installation charges of ₹300 to erect the machinery, being charged to machinery repairs account.
ii. ₹1,200 received from a debtor towards rent of property sub-let, was credited to his personal account, instead of
rent account, so as to reduce his debit balance from ₹1,600 to ₹400 debit.
iii. Interest on Mortgage Loan was paid in advance up to 31st December 1996, and the whole amount was charged
to interest Account in 1995.

iv. That adjustment be made in the accounts to rectify a mistake previously made whereby B was credited in excess by
₹ 810 while A and C were debited in excess by ₹420 and ₹390 respectively.

After rectifying the above errors, it was mutually decided as under:—

a) The Goodwill of the firm is valued at three times the average profit of the last three years. Such profits should
be the correct profits and not the book profits. The book profits for the last three year were: 1993 ₹13,830;
1994 ₹32,000 ; 1995 ₹12,010.Machinery is depreciated by 10% and the provisions for bad and doubtful debts
are made at 5% on Debtors.

b) C should be paid half of his dues in cash which shall be brought in by A and B in their profit-sharing proportion and
the balance was transferred to a Loan Account for payment in 4 equal half-yearly instalments together with interest @
6% p.a. Show the necessary accounts, the Balance Sheet of the firm immediately after C’s retirement and his Loan
Account till finally paid off. [C.A. Inter May]

Question 52. Manish, Jatin and Paresh were partners sharing Profits/Losses in the ratio of Manish 40 per cent, Jatin
35 per cent, and Paresh 25 per cent. The draft Balance Sheet of the partnership as on 31st December, 2021 was as
follows:
Balance sheet as on 31 December 2021
Liabilities Amount Assets Amount
Sundry creditors 30,000 Cash and bank 67,000
Bills payable 8,000 Stock 42,000
Loan from Jatin 30,000 Sundry debtors 34,000
Current account: Less: provision for bad debts 6,000 28,000
Manish 12,000
Jatin 8,000 Plant and machinery (cost) 80,000
Paresh 6,000 26,000 Less: depreciation 28,000 52,000

Capital accounts: Premises 75,000

Manish 90,000
Jatin 50,000
Paresh 30,000 1,70,000

2,64,000 2,64,000

Jatin retired on 31 December, 2021. Manish and Paresh continued in partnership sharing profits/losses in the ratio of
Manish 60 per cent and Paresh 40 per cent. 50 per cent of Jatin's Loan was repaid on 1.1.2022 and it was agreed that
of the amount then remaining due to him a sum of ₹80,000 should remain as loan to partnership and the balance to
be carried forward as ordinary trading liability. The following adjustments were agreed to be made to the above
mentioned Balance Sheet:
(i) ₹10,000 should be written off from the premises.
(ii) Plant and Machinery was revalued at ₹58,000.
(iii) Provision for doubtful debts to be increased by ₹1,200.
(iv) ₹5,000 due to creditors for expenses had been omitted from the books of account,
(v) ₹4,000 to be written off on stocks.
(vi) Provide ₹1,200 for professional charges in connection with revaluation.

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As per the deed of partnership, in the event of the retirement of a partner, goodwill was to be valued at an amount
equal to one year's purchase of the average profits of the preceding three years on the date of retirement. Before
determining the said average profits a notional amount of ₹80,000 should be charged for remuneration of partners.
The necessary profits before charging such remuneration were:
Year ending 30.12.2019 ₹1,44,000
Year ending 31.12.2020 ₹1,68,000
Year ending 31.12.2021 ₹1,88,200 (as per draft accounts)
It was agreed that, for the purpose of valuing goodwill, the amount of profit for the year 2021 be recomputed
after charging the loss on revaluation in respect of premises and stock, the unprovided expenses (except
professional expenses) and increase in the provision for doubtful debts. The continuing partners decided to
eliminate goodwill account from their books. You are required to prepare:
(i) Revaluation Account;
(ii) Capital Accounts (merging current accounts therein);
(iii) Jatin's Account showing balance due to him; and
(iv) Balance Sheet of Manish and Paresh as at 1st January 2022. [CA Inter May, 2002 modified]

Question 53. A, B and C were in partnership sharing profits in the proportion of 5:4:3. The Balance Sheet of the firm as on
31st March, 2013 was as under:
Liabilities Amount Assets Amount
Capital Accounts: Goodwill 40,000
A 1,35,930 Fixtures 8,200
B 95,120 Stock 1,57,300
C 61,170 Sundry Debtors 93,500
Sundry Creditors 41,690 Cash 34,910

3,33,910 3,33,910

A had been suffering from ill-health and gave notice that he wished to retire. An agreement was, therefore entered into as on
31st March, 2013, the terms of which were as follows:

(i) The Profit & Loss Account for the year ended 31 st March, 2013, which showed a net profit of ₹ 48,000 was to be re-
opened. B was to be credited with ₹ 4,000 as bonus, in consideration of the extra work which had devolved upon him during
the year. The profit-sharing ratio was to be revised as from 1st April, 2012 to 3:4:4.

(ii) Goodwill was to be valued at two years’ purchase of the average profits of the preceding five years. The Fixtures were to
be revalued by an independent valuer. A provision of 2% was to be made for doubtful debts and the remaining assets were to
be taken at their book values.

(iii) The valuations arising out of the above agreement were Goodwill ₹ 56,800 and Fixture ₹ 10,980.

(iv) B and C agreed, as between themselves, to continue the business, sharing profits in the ratio of 3:2 and decided to
eliminate Goodwill from the Balance Sheet, to retain the Fixtures on the books at revised value, and to increase the provision
for doubtful debts to 6%.
You are required to submit the Journal Entries necessary to give effect to the above arrangement and to draw up the Capital
Accounts of the partners after carrying out all adjustment entries as stated above. ( ICAI Study material)

Question 54. On 1.1.2010, A and B started a firm of Cost Accountants sharing profits and losses equally. Each of the
partners contributed ₹ 2,000 towards his capital of the firm and was allowed to draw ₹ 400 p.m. in anticipation of profits. On
1.1.2011, they admitted C as a third partners with equal share and he contributed ₹3,000 towards his capital and a further sum
of ₹ 2,000 towards premium for goodwill. He too was entitled to draw ₹ 400 p.m. From 1.1.2012, A got a part-time job of
cost consultant elsewhere and considering that he would be unable to devote his full time towards the business of the firm
agreed to leave half of his share in the profits to be apportioned equally between B and C and his drawings was reduced to ₹
200 p.m. for 1st January, 2012. On 1.1.2013, B got a full-time job and in consequence A had to leave his part-time job and to
devote full time in the firm. It was arranged that B will remain only a quarter of his earlier share in the firm and would be
drawing nothing from 1.1.2013. A and C would be drawing @ ₹ 600 p.m. instead. The interest surrendered by B would be
apportioned equally by A and C. On 31 st Dec. 2013, B decided to retire altogether from the firm.

You are required to ascertain the amount due to B by the firm from the following particulars:
(a) Profits earned by the firm: 2010 — ₹ 17,000; 2011 — ₹ 18,000,
2012 — ₹ 24,000;2013 — ₹ 28,896
(b) B’s share of goodwill is to be taken at two years’ purchase of the average of his share of profit of the previous two years.
(c) The partners have drawn exactly what they could draw under the agreement.

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ADMISSION CUM RETIREMENT OF A PARTNER

Question 55. Ram, Rahim and Robert are partners, sharing Profits and Losses in the ratio of 5:3:2. It was
decided that Robert would retire on 31.3.2021 and in his place Richard would be admitted as a partner with new
profit sharing ratio between Ram, Rahim and Richard at 3:2:1.

Balance Sheet of Ram, Rahim and Robert as at 31.3.2021:

Liabilities ₹ Assets ₹
Capital Accounts: Cash in hand 20,000
Ram 1,00,000 Cash in Bank 1,00,000
Rahim 1,50,000 Sundry Debtors 5,00,000
Robert 2,00,000 Stock in Trade 2,00,000
General Reserve 2,00,000 Plant & Machinery 3,00,000
Sundry Creditors 8,00,000 Land & Building 5,30,000
Loan from Richard 2,00,000 ________
16,50,000 16,50,000
Retirement of Robert and admission of Richard is on the following terms:
(a) Plant & Machinery to be depreciated by ₹30,000.
(b) Land and Building to be valued at ₹6,00,000.
(c) Stock to be valued at 95% of book value.
(d) Provision for doubtful debts @ 10% to be provided on debtors.
(e) General Reserve to be apportioned amongst Ram, Rahim and Robert.
(f) The firm’s goodwill to be valued at 2 years purchase of the average profits of the last 3 years. The relevant
figures are:
Year ended 31.3.2018 − Profit ₹50,000
Year ended 31.3.2019 − Profit ₹60,000
Year ended 31.3.2020 − Profit ₹55,000
(g) Out of the amount due to Robert ₹2,00,000 would be retained as loan by the firm and the balance will be
settled immediately.
(h) Richard’s capital should be equal to 50% of the combined capital of Ram and Rahim.
Prepare:
(i) Capital accounts of the partners; and
(ii) Balance Sheet of the reconstituted firm. (16 Marks) (PE-II-Nov.2005) modified

Question 56. X, Y, & Z were equal partners. Their Balance Sheet as on 31.12.12 was as follows:
Partners’ Capital Land & Freehold Property 1,00,000
X 1,00,000 Plant & Machinery 2,00,000
Y 1,00,000 Furniture & Equipment 50,000
Z 2,00,000 4,00,000 Stock in-trade 1,00,000
Partner’s Current A/c: Sundry Debtors 1,00,000
X 50,000 Balance with Bankers 1,50,000
Y 75,000
Z 25,000 1,50,000
Sundry Creditors 1,50,000
7,00,000 7,00,000

On 1.1.13 X retired and it was agreed that he should be paid all his dues in full on that date. For this purpose, goodwill
was to be calculated on the basis of 3 years purchase of past 3 years profits which amounted to ₹1,00,000, ₹ 1,40,000
and ₹ 1,20,000 respectively.
In order to meet his obligation, a bank loan was arranged on 1.1.13 for ₹ 2,00,000 pledging the fixed assets as
security.
Further, to compensate a loyal manager Q, it was agreed between Y and Z that Q should be admitted as a partner, who
should bring in, over and above a capital of ₹ 1,00,000, his share of Goodwill in cash to serve as working capital. Y
and Z agreed to forego 1/3rd of their individual share of profits to Q.
Prepare the opening Balance Sheet of the firm as on 1.1.13 (ICAI Study material)

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Question 57. M/s X is a partnership firm with the partners A, B and C sharing profits and losses in the ratio of 3:2:5. The balance
sheet of the firm as on 30th June 2020, was as under:
i. Balance Sheet of M/s. X as on 30.06.2020
Liabilities ₹ Assets ₹

A’s Capital A/c 1,04,000 Land 1,00,000

B’s Capital A/c 76,000 Building 2,00,000
C’s Capital A/c 1,40,000 Plant and Machinery 3,80,000
Long Term Loan 4,00,000 Investments 22,000
Bank Overdraft 44,000 Inventories 1,16,000
Trade payables 1,93,000 Trade receivables 1,39,000
9,57,000 9,57,000

It was mutually agreed that B will retire from partnership and in his place D will be admitted as a partner with effect from
1st July, 2020. For this purpose, the following adjustments are to be made:
Goodwill of the firm is to be valued at ₹2 lakhs due to the firm’s locational advantage but the same will not appear as an
asset in the books of the reconstituted firm.

(a) Buildings and plant and machinery are to be valued at 90% and 85% of the respective balance sheet values.
Investments are to be taken over by the retiring partner at ₹25,000. Trade receivables are considered good only
up to 90% of balance sheet figure. Balance to be considered bad.
(b) In the reconstituted firm, the total capital will be ₹3 lakhs, which will be contributed by A, C and D in their new profit-
sharing ratio, which is 3:4:3.

(c) The amount due to retiring partner shall be transferred to his loan account.
Required: Prepare Revaluation Account and Partners’ Capital Accounts.
SOLUTION: Revaluation Account
2020 ₹ 2020 ₹
July 1 To Building 20,000 July 1 By Investments (25,000 - 22,000) 3,000
To Plant and Machinery 57,000 By Partners’ Capital A/cs (Loss on
To Bad Debts 13,900 revaluation)
A (3/10)
26,370
B (2/10)
17,580
C (5/10)
43,950
87,900

90,900 90,900

Partners’ Capital Accounts

A B C D A B C D
₹ ₹ ₹ ₹ ₹ ₹ ₹ ₹
To Revaluation A/c 26,370 17,580 43,950 – By Balance b/d 1,04,000 76,000 1,40,000 -
To B’s & C’s Capital A/cs – – – 60,000 By D’s Capital A/c – 40,000 20,000 –
(W.N.1)
To Investments A/c – 25,000 – – By Bank A/c 12,370 – 3,950 1,50,000
To B’s Loan A/c – 73,420 – –
To Balance c/d (W.N. 2) 90,000 - 1,20,000 90,000
1,16,370 1,16,000 1,63,950 1,50,000 1,16,370 1,16,000 1,63,950 1,50,000

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Death of a partner:
Question 58. A, B and C are carrying on partnership business as equal partners. On 31 st December, 2021 C dies and
the capitals of the partners after necessary adjustments stood at ₹20,000, ₹30,000 and ₹50,000 respectively. A and B
could settle the account of the executors of C only on 31st March, 2022, by which time the partnership made a profit
of ₹9,000. As there was no contract regarding the share to be given in the subsequent profits made by the firm, the
executors wanted to exercise option available under Section 37 of the Partnership Act. Determine the amount
payable to the executors.

Question 59. A, B and C were partners of a firm sharing profits and losses in the ratio of 3 : 4 : 3. The Balance Sheet of
the firm, as at 31st March, 2021 was as under :
Liabilities ₹ Assets ₹
Capital Accounts : Fixed Assets 1,00,000
A 48,000 Current Assets :
B 64,000 Stock 30,000
C 48,000 1,60,000 Debtors 60,000
Reserve 20,000 Cash and Bank 30,000 1,20,000
Creditors 40,000
2,20,000 2,20,000
Partner C died on 30 th September, 2021. It was agreed between the surviving partners and the legal
representatives of C that :
(i) Goodwill of the firm will be taken at ₹60,000.
(ii) Fixed Assets will be written down by ₹20,000.
(iii) In lieu of profits, C should be paid at the rate of 25% per annum on his capital as on 31 st March, 2021.

The profits for the year ended 31 st March, 2022, after charging depreciation of ₹10,000 (depreciation upto 30 th
September was agreed to be ₹6,000) were ₹48,000.
Partners’ Drawings Accounts showed balances as under:
A ₹18,000 (drawn evenly over the year)
B ₹24,000 (drawn evenly over the year)
C (up-to-date of death) ₹20,000
On the basis of the above figures, please indicate the entitlement of the legal heirs of C on 31st march 2020,
assuming that they had not been paid anything. (13 marks) (Intermediate–Nov. 2000)

Question 60. The following was the Balance Sheet of Om & Co. in which X, Y, Z were partners sharing profits and losses in
the ratio of 1:2:2 as on 31.3.2019. Mr Z died on 31st December, 2019. His account has to be settled under the following terms.
Balance Sheet of Om & Co. as on 31.3.2019

Liabilities ₹ Assets ₹
Trade payables 20,000 Goodwill 30,000
Bank loan 50,000 Building 1,20,000
General reserve 30,000 Computers 80,000
Capital accounts: Inventories 20,000
X 40,000 Trade receivables 20,000
Y 80,000 Cash at bank 20,000
Z 80,000 2,00,000 Investments 10,000
3,00,000 3,00,000

Goodwill appearing in the Balance Sheet on 31 st March, 2019 as it was purchased goodwill. Goodwill is to be calculated at
the rate of two years purchase on the basis of average of three years’ profits and losses. The profits and losses for the three years
were detailed as below:
Year ending on profit/loss
31.3.2019 30,000
31.3.2018 20,000
31.3.2017 (10,000) Loss
Profit for the period from 1.4.2019 to 31.12.2019 shall be ascertained proportionately on the basis of average profits and
losses of the preceding three years.

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During the year ending on 31.3.2019 a car costing ₹ 40,000 was purchased on 1.4.2018 and debited to traveling expenses
account on which depreciation is to be calculated at 20% p.a. This asset is to be brought into account at the depreciated value.
Other values of assets were agreed as follows: Inventory at ₹16,000, building at ₹1,40,000, computers at ₹50,000; investments
at ₹6,000. Trade receivables were considered good. Required:
(i) Calculate goodwill and Z’s share in the profits of the firm for the period 1.4.2019 to 31.12.2019.
(ii) Prepare revaluation account assuming that other items of assets and liabilities remained the same.
(iii) Prepare partners’ capital accounts and balance sheet of the firm Om & Co. as on 31.12.2019. (ICAI Study material)
Question 61. The partnership agreement of a firm consisting of three partners - A, B and C (who share profits in
proportion of ½, ¼ and ¼ and whose fixed capitals are ₹10,000; ₹6,000 and ₹4,000 respectively) provides as follows:
(a) That partners be allowed interest at 10 per cent per annum on their fixed capitals, but no interest be allowed on
undrawn profits or charged on drawings.
(b) That upon the death of a partner, the goodwill of the firm be valued at two years’ purchase of the average net
profits (after charging interest on capital) for the three years to 31st December preceding the death of a partner.
(c) That an insurance policy of ₹10,000 each to be taken in individual names of each partner, the premium is to be
charged against the profit of the firm.
(d) Upon the death of a partner, he is to be credited with his share of the profits, interest on capitals etc. calculated upon
31st December following his death.
(e) That the share of the partnership policy and goodwill be credited to the deceased partner as on 31st December
following his death.
(f) That the partnership books be closed annually on 31st December.
A died on 30th September 2019, the amount standing to the credit of his current account on 31st December, 2018 was ₹ 450 and
from that date to the date of death he had withdrawn ₹3,000 from the business.
An unrecorded liability of ₹2,000 was discovered on 30th September, 2019. It was decided to record it and be immediately
paid of.
The trading result of the firm (before charging interest on capital) had been as follows: 2016 Profit ₹9,640; 2017 Profit ₹6,720;
2018 Loss ₹ 640; 2019; Profit ₹3,670.
Assuming the surrender value of the policy to be 20 percent of the sum assured. Prepare an account showing the
amount due to A’s legal representative as on 31 st December, 2019.

Question 62. B and N were partners. The partnership deed provides inter alia:

(i) That the accounts be balanced on 31st December each year.

(ii) That the profits be divided as follows:
B: One-half; N: One-third; and carried to Reserve Account: One-sixth
(iii) That in the event of death of a partner, his executor will be entitled to the following:
(a) the capital to his credit at the date of death; (b) his proportion of profit to date of death based on the average profits of the
last three completed years; (c) his share of goodwill based on three years’ purchases of the average profits for the three
preceding completed years.
Trial Balance on 31st December, 2019

Particulars Dr. (₹) Cr. (₹)

B’s Capital 90,000
N’s Capital 60,000
Reserve 30,000
Bills receivable 50,000
Investments 40,000
Cash 1,10,000
Trade payables 20,000
Total 2,00,000 2,00,000
The profits for the three years were 2017: ₹42,000; 2018: ₹39,000 and 2019: ₹45,000. N died on 1 May, 2020. Show the
st

calculation of N (i) Share of Profits; (ii) Share of Goodwill; (iii) Draw up N’s Executors Account as would appear in the firms’
ledger transferring the amount to the Loan Account.

Answer : N’ loan account ₹128,000.

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CHAPTER 9. FINANCIAL STATEMENTS OF NON PROFIT ORGANISATIONS

Introduction: A non-profit organization is a legal accounting entity that is operated for the benefit of the society as a
whole, rather than for the benefit of a sole proprietor or a group of partners or shareholders. The main motive behind
the non-profitable organization is to render service to the society or the members of the organisation, such as public
hospitals, public educational institutions, clubs, Temples, churches etc

There is difference in the final accounts prepared between the profit making and the non-profitable organisations. Non-
profit making organisations, as a part of their final accounts, prepare Receipts and Payments Account and Income and
Expenditure Account to show periodic performance (either surplus or deficit) and Balance Sheet to show financial
position at the end of the period.

Nature of receipts and payment account :

A Receipts and Payments Account is a summary of the cash book without date column. It is an elementary form of
account commonly adopted by not for profit making concerns, for presenting the receipts and payments periodically
together with the cash balances at the beginning and close of the period. The receipts are entered on the left hand
side, and payments on the right hand side i.e., the same way as they appear in Cash Book. "The main point to be noted
here is that receipts and payments account is not based on the accrual system of book keeping as it records all the
receipts and payments whether capital or revenue, pertaining to the current, previous or future periods.

Nature of Income and expenditure account:

The income and expenditure account is equivalent to the Profit and Loss Account of a Profit making business enterprise.
It is an account which is widely adopted by most of the Non-profit making concerns and is prepared by following accrual
principle. Only items of revenue nature pertaining to the current period of account are included. The preparation of the
account, therefore, requires adjustments in relevant accounts in respect of both outstanding and advance items of
income and expenditure. The only difference is in the terms used to represent the profit and loss. Profit is termed as
Surplus- Excess of income over expenditure and loss is termed as Deficit- Excess of expenditure over income.

Important note : Non-profit organizations registered under section 8 of the Companies Act, 2013 are required to prepare
their Income and Expenditure account and Balance Sheet as per the Schedule III to the Companies Act, 2013.

Accounting treatment of some special items:

(i) Donations: it is gift in cash or kind from some person. It may be of two types:

(a) Specific Donation: It is received for certain specific purpose like Building Donation, Library Books donation etc.
It should be capitalized and shown on the liabilities side of the balance sheet.

(b) General Donation:It is not received for any specific purpose and shown on the credit side of Income & Exp a/c.

(ii) Entrance and Admission Fees: Such fees which are payable by a member on admission to club or society are
normally considered capital receipts and credited to Capital Fund. This is because these do not give rise to
any special obligation towards the member who is entitled to the same privileges as others who have paid only
their annual subscription. Nevertheless, where the amount is small, meant to cover expenses concerning
admission, or the rules of the society provided that such fees could be treated as income of the society, these
amounts may be included in the Income and Expenditure Account. The treatment depends upon the
requirement of question. If the question is silent then always take it to be capital receipt.

(iii) Subscription: Subscriptions being an income should be allocated over the period of their accrual and
should be shown in income and expenditure account.

(iv) Life Membership Fee: Fees received for life membership is a capital receipt as it is of non-recurring nature. It is
directly added to capital fund or general fund.
For adjusting lump sum subscription collected from the life members, one of the following methods can be adopted:
(a) The entire amount may be carried forward in a special account until the member dies, after which the same may be
transferred to the credit of the Accumulated Fund.
(b) An amount equal to the normal annual subscription may be transferred every year to the Income and
Expenditure Account and balance carried forward till it is exhausted. If, however, the life member dies
before the whole of the amount paid by him has been transferred in this way, the balance should be
transferred to the Accumulated Fund on the date of his death.
(c) An amount, calculated according to the age and average life of the member, may annually be transferred
to the credit of Income and Expenditure Account.

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(v) Legacy: It is an amount received by an organization as per the will of the person after the death of the person. It
should be capitalized and shown on the liabilities side of the balance sheet by adding to the Capital Fund.

(vi) Endowment Fund Donation: It is a donation received and only income from that donation is to be used for certain
specific purpose. In such cases income relating to special funds should be added to these funds on the liabilities side of
the Balance Sheet. All the expenses should be deducted from that fund on the liabilities side of the Balance Sheet.

(vii) Treatment of Sale of Old Newspaper and Periodicals: The amount received on such sale is shown as
Income on the credit side of income and expenditure account.

(viii) Sale of old Fixed Assets: The Sale proceeds of old Fixed Assets are treated as capital receipts. The profit or loss
on sale of fixed asset is shown in the Income and Expenditure A/c

(ix) Honorarium: It is paid to someone for receiving any services from person who are not the employees
of the Not for Profit Organisation.

Question: 1 During the year ended 31st March, 2023, the subscriptions received by the Jaipur Literary Society were
Rs 4,50,000. These subscriptions include Rs 20,000 received for the year ended 31 st March, 2022. On 31st March,
2023, subscriptions due but not received were Rs 15,000. Advance subscription received for the year ending 31 st
March 2023 but pertaining to year 2024 amounted to Rs 26,000. The Subscriptions received in advance for the year
ending 31st March, 2023 includes Rs 18,000 pertaining to year 2022-23. What amount should be credited to Income
and Expenditure Account for the year ended 31st March, 2023 as income from subscriptions. Show the subscription
account in book of the society?

Subscription A/c (for the year ended on 31st March 2023)

Particulars Amount Particulars Amount

To outstanding subscriptions (2022) 20,000 By Advance subscriptions (2022) 18,000

To Income from Subscriptions A/c 4,37,000 By Bank A/c 4,50,000
To Advance subscriptions (for 2024) 26,000 By Outstanding subscriptions (2023) 15,000
4,83,000 4,83,000

Question 2. You are required to calculate the income from subscriptions for the year ending December 31,2022 and
show them in the Income and Expenditure Account and the Balance Sheet of a Club:
Receipts & payment account for the year ended 31st December 2022
Payment
Receipts Amount s Amount
To Subscriptions:
For 2021 12,500
2022 75,000
2023 15,00 1,02,500

Additional Information:
(a) Subscription outstanding on December31,2021 15,000
(b) Subscription outstanding on December31,2022 12,500
(c) Subscription Received in Advance on December 31,2021 15,000
[Answer. Rs. 1,00,000]

Question 3. Calculatethe amount of subscriptions to be shown in 2022 in Income & expenditure A/c.
Subscription received in 2022 as: Rs.
2021 5,000
2022 45,000
2023 4,000 Rs. 54,000
Subscriptions outstanding in 2021 Rs. 7,500
Subscriptions outstanding in 2022 Rs. 7,500
Subscriptions Received in Advance in 2021:
For 2022 Rs. 6,500
For 2023 Rs 2,000
Life membership subscriptions received in 2022 Rs. 5,000
[Answer. Rs. 56,500]

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Question 4. Calculate the amount of Stationery Consumed during the year 2023 from the following data:
Stock of stationery on January 1,2023 2,400
Creditors for stationery on January 1,2023 1,600
Advance paid for stationery carried forward from 2022 160
Amount paid for stationary during the year Rs 8260
Stock of stationary on December 31, 2023 400
Creditors for stationery on December 31,2023 1,040
Advance paid for stationery on December 31,2023 240
[Answer. Rs. 10,000]
Question 5.Gavaskar Cricket Club given you the following receipts and Payments Account for the year ended 31st March 2023;
Receipts Rs Payments Rs.
To Balance of Cash on By Salaries and Wages 12,000
1st April 2022: By Sports Equipment 46,785
At Office 150 By Stationery and Printing 1,220
At Bank 14,200 14,350 By Maintenance of Ground 6,000
To Subscriptions 61,100 By Prizes 1,060
To Admission Fees 350 By Balance of Cash on
To Interest on Investments @ 9% 9,000 3 1st March, 2023:
per annum for full year At Office 380
At Bank 17,355 17,735
84,800 84,800
The Following additional information is provided to you:
On 1st April 2022 On 31st March 2023
Subscriptions Due 480 560
Subscriptions Received in Advance 80 40
Sports Equipment 21,800 29,700
Land & Buildings (cost less depreciation) 80,000 76,000

Prepare Income and expenditure A/c for the year ended 31st March, 2023 and Balance Sheet as at that date:
[Answer:surplus- 7405, opening B/S = 2,16,630, Closing B/s = 2,23,995]

Question 6. Shanti Library Society showed the following position on 31st December 2022.
Balance Sheet as at 31st Dec., 2022
Liabilities Rs. Assets Rs
Capital Fund 79,300 Electrical Fittings 15,000
Expenses Due 700 Furniture 5,000
Books 40,000
Investments in Securities 15,000
Cash in Bank 2,500
Cash on Hand 2,500
80,000 80,000

The Receipt and Payments A/c for the Year ending on 31st December 2023 is given below:
Receipts Rs. Payments Rs.
To Balance b/d By Electric charges 720
Cash at Bank 2,500 By Postage & Stationery 500
Cash on hand 2,500 5,000 By Telephone charges 500
To Entrance fees 3,000 By Books Purchased
To membership subscription 20,000 (on 1-1-23) 6,000
To sale proceeds of old papers 150 By Outstanding expenses paid 700
To hire of lecture Hall 2,000 By Rent A/c 8,800
To Interest on securities 800 By Investment in securities 4,000
By Salaries A/c 6,600
By Balance c/d
Cash at Bank 2,000
Cash on Hand 1,130
30,950 30,950
You are required to prepare an Income & Expenditure Account for the year ending 31-12-23 and Balance Sheet as on that date
after making the following adjustments:
1. Membership subscription included Rs. 1,000 received in advance.
2. Provide for outstanding Rent Rs. 400 and Salaries Rs. 300.
3. Books to be depreciated @10% including additions.Electrical fittings and furniture are also to be depreciated at same
rate.
4. 75% of the entrance fees are to be capitalised.
5. Interest on securities is to be calculated @ 5% p.a. including purchases of investments made on 1-7-2023 for Rs. 4000.
[ANS: Deficit = 1,670, closing B/S = 81,580 ]

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Question 7. From the Following particulars relating to Charitable Hospital, prepare (1) receipts and Payment for the year
ended 31st March, 2022 and (2) Balance Sheet as on 31st March 2022.

Expenditure Rs Income Rs
To Medicines Used 2,99,800 By subscriptions 5,60,000
To salaries 2,75,000 By interest on Investment @ 11% p.a 1,10,000
To Printing & Stationery 11,000 By Income from Film Show:
To Electricity & Water 4,750 Proceeds 1,14,500
To Rent 60,000 Less: Expenses 7,800 1,06,700
To Depreciation on furniture & Fixtures 21,000
To depreciation on Equipment 32,500
To Surplus i.e. excess of income over
Expenditure 47,650
8,71,700 8,71,700

Additional Information's
On 31.3.2021 (Rs.) On 03.03.2022 (Rs.)
Subscription due 1,200 1,600
Subscriptions received in advance 640 1,000
Electricity and Water Bills Unpaid 920 1,150
Stock of Medicines 78,200 97,500
Estimated value of equipment 1,16,000 1,39,000
Furniture and Fixture (cost less depreciation) 2,10,000 1,89,000
Land ---- 1,00,000

Interest Accrued on Investments in 11%Debentures costing

Rs. 10,25,000 (face value Rs. 10,00,000) 27,500 27,500
Cash in Hand 3,400 1,600
Cash at Bank 90,000 ?

Answer: capital fund(opening) Rs 15,49,740, Subscriptions received Rs 5,59,960, Medicines Purchased Rs 3,19,100, Equipment
Purchased: 55,500

Question: 8 The Lok Kalyan Dispensary had the following Income and Expenditure Accounts the Year ended for 31st March, 2023
Expenditure Rs. Income Rs.
To Salaries 2,35,000 By Subscriptions 2,50,000
To Surgery and Dispensary 30,000 By Interest 90,000
To Rent and Taxes 5,000 By Donation 40,000
To Insurance 2,000 By Miscellaneous Receipts 3,000
To Office Expenses 8,000
To Depreciation on:
Building 37,500
Furniture 1,200
Instruments 1,000 39,700
To surplus i.e. excess
of income over expenditure 63,300

3,83,000 3,83,000
Other information is as follows:
On 31-3-2022(Rs) On 3 1-3-2023 (Rs)
Cash in hand and at bank ? 1,87,000
Government securities (face value Rs. 10,00,000) 8,00,000 8,00,000
Subscription in arrear 70,000 1,00,000
Subscriptions received in advance 2,000 6,000
Salaries unpaid 10,000 15,000
Furniture 20,000 19,800
Land & Building 20,00,000 19,62,500
Instruments 35,000 39,000
Surgery expenses due 2,000 3,000
Stock of Medicines 3,000 1,000
You are required to prepare the Receipts and Payments Account for the year ended 31st March, 2023 and also the Balance Sheet
as on 31st March, 2023.

Working Notes: (a) Balance Sheet as on 31st March, 2022

Liabilities Rs. Assets Rs.
Subscriptions Received in Advance 2,000 Cash in Hand and at Bank 1,08,000
Salaries Unpaid 10,000 Government Securities 8,00,000
Surgery Expenses Due 2,000 Subscriptions Outstanding 70,000

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Furniture 20,000
Land and Building 20,00,000
Capital Fund Instruments 35,000
Balancing Figure) 30,22,000 Stock of Medicines 3,000

(b) Receipts on account of Subscriptions: Rs

income on account of subscriptions 2,50,000
add: subscriptions Outstanding on 31-3-22 70,000
subscriptions Received in Advance on 31-3-23 6,000
3,26,000
Less: Subscriptions Outstanding on 31-3-2023 1,00,000
Subscriptions received in Advance on 31-3-22 1,02,000
2,24,000
(d) Calculation of Payment on Account of surgery and Dispensary:
Expenses on surgery and Dispensary for the year 30,000
Add: surgery Expenses Due on 31-3-22 2,000
Stock of medicine on 31-3-2023 1,000
33,000
Less: surgery Expenses Due on 31-3-2023 3,000 6,000
Stock of medicine on 31-3-22 3,000 27,000

(e) Furniture purchased during the year:

Value of Furniture on 31-3-2023 19,800
Add: Depreciation for the year 1,200
21,000
Less: Value of Furniture on 31-3-22 20,000
1,000
(f) Calculation of Instruments Purchased:
value of Instruments on 31-3-2023 39,000
add: Depreciation for the year 1,000
40,000
Less: Value of Instruments on 31-3-2022 35,000
5,000

Question: 9. From the following Receipts and Payments Account of Excellent Recreation Club for the year ended 31.3.16
and additional information given, prepare an Income and Expenditure Account for the year ended 31.3.16 and Balance
Sheet.
Receipts Rs. Payments Rs.
Opening Balance : Secretary's Salary 12,000
Cash in hand & at Bank 3,180 Salaries to staff 25,000
Subscription 18,000 Charities 1,000
Sale of old Newspapers 2,500 Printing & Stationery 600
Legacies 4,000 Postage Expenses 120
Interest on Investments 2,000 Rates and Taxes 1,500
Endowment Fund Receipts 20,000 Upkeep of the Land 2,000
Proceeds of Sport & Concerts 4,020 Purchase of Sports Materials 10,000
Advertisement in the year book 5,000 Telephone expenses 3,480
Balance of cash and bank 3,000
Assets and Liabilities as on 31.3.15 and 31.3.16 were as follows:
31.3.15 31.3.16
(Rs.) (Rs.)
Subscription in arrears 2,000 1,000
Subscription received in advance 500 400
Furniture 2,000 1,800
Land 10,000 10,000
Depreciation shall be charged at 10% p.a. under the diminishing value method. Legacies received shall be capitalised.
Investments were made in Securities, the rate of interest being 12% p.a. the date of investments was 1.6.14 and the amount of
investments was Rs. 20,000. Due date of interest 31 March, every year. Stock of sports materials on 31.3.16 were useless and
value NIL. [CA-May-96] [Answer: Deficit i.e. Excess of Expenditure over Income: 24,880 and Balance Sheet : 36,200]

Question: 10. From the following receipts and Payments A/c of Mumbai Club, Prepare Income and Expenditure A/c for the year
ended 31.12.1996 and its balance Sheet as on that date:
Receipts Rs. Payments Rs.
Cash In Hand 4,000 Salary 2,000
Cash at Bank 10,000 Repair Expenses 500
Donations 5,000 Purchase of Furniture 6,000
Subscriptions 12,000 Misc. Expenses 500

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Entrance fees 1,000 Purchase of Investments 6,000

Interest on Investments 100 Insurance Premium 200
Interest Received from Bank 400 Billiard Table 8,000
Sale of Old Newspaper 150 Paper, Ink. Etc. 150
Sale of Drama tickets 1,050 Drama Expenses 500
Cash in Hand (Closing) 2,650
Cash at Bank (Closing) 7,200
33,700 33,700
Information:
1. Subscriptions in arrear for 1996, Rs. 900 and subscriptions in advance for 1997, Rs. 350.
2. Insurance premium Outstanding Rs. 40.
3. Misc. Expenses Prepaid Rs. 90.
4. 50% of donation is to be capitalised.
5. Entrance fees are to be treated as revenue income.
6. 8% interest has accrued on investment for five months.
7. Billiard Table costing Rs.30,000 was purchased during the last year and Rs. 22,000 were paid for it.
[CA Nov-97 foundation-20 marks] [ Answer: Surplus 14,150, Balance Sheet: 53,040]

Question: 11 The following information were obtained from the books of Delhi Club as on 31.3.1998, at the end of the first year of
the Club. You are required to prepare Receipts and Payments Account, Income and Expenditure Account for the year
ended 31.3.1998 and a Balance Sheet as at 31.3.1998 on mercantile basis:
Donations received for Building and Library Room Rs. 2,00,000
Other revenue income and actual receipts: Revenue Actual
Receipts
(Income Rs.) (Rs.)
Entrance Fees 17,000 17,000
Subscription 20,000 19,000
Locker rent 600 600
Sundry Income 1,600 1,060
Refreshment Account --- 16,000

Other Revenue Expenditure and actual Payments:

Revenue Actual
Expenditure Payments
Land (Cost Rs. 10,000) ----- 10,000
Furniture (cost Rs. 1,46,000) ----- 1,30,000
Salaries 5,000 4,800
Maintenance of Playgrounds 2,000 1,000
Rent 8,000 8,000
Refreshment Account ----- 8,000

Donations to the extent of Rs. 25,000 were utilized for the purchase of Library Books. Balance was still unutilized. In order to keep
it safe, 9% govt. Bonds of Rs. 1,60,000 were purchased on 31-3-1998. Remaining amount was put in the Bank on 31-3-98 under
the term deposit. Depreciation at 10% p.a. was to be provided for the whole year on Furniture and Library Books.
[CA INTER -Nov. 98]20 marks] [Answer:Overdraft; 1,08,140; Surplus 15,100, Balance Sheet 3,40,440]

Question: 12 Mahaveer Sport Club given the following Receipts and Payments account for the year ended March 31, 2022
Receipts Rs Payments Rs
To Opening Cash & Bank Balance 5,200 By Salaries 15,000
To Subscriptions 34,800 By Rent & Taxes 5,400
To donations 10,000 By Electricity Charges 600
To Interest on Investments 1,200 By Sports Goods 2,000
To sundry Receipts 300 By Library Books 10,000
By Newspaper & Periodicals 1,080
By Miscellaneous Expenses. 5,400
By Closing Cash and Bank Balance 12,020
51,500 51,500

Outstanding: As on 31.3.21 . As on 31.3.22.

Salaries 1,000 2,000
Newspaper and Periodicals 400 500
Rent and Taxes 600 1,000
Electricity Charges 800 ---
Library Books 10,000 ---
Sports Goods 8,000 -----
Furniture and Fixtures 10,000 -----
Subscriptions Receivable 5,000 12,000
Investment- Government Securities 50,000 ---

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Accrued Interest 600 600

Provide Depreciation on:
Furniture and Fixtures @ 10% p.a
Sports Goods @ 20% p.a.
Library Books @ 10%p.a.
You are required to prepare Club's Opening Balance Sheet as on 1.4.21, Income and Expenditure Account forthe year ended on
31.3.22 and Balance Sheet as on that date. [CA-INTER Nov-99] 20 marks

Question: 13 prepare the Income and Expenditure Account and the Balance Sheet from the following information.
Receipts and Payment Account of Zee club, Delhi For the year ending on 31st December 2012
Receipts Rs. Payments Rs.
To Balance b/d (cash) 1,025 By Upkeep of fields 220
To Subscriptions: By Salaries 600
2011 40 By Drama Expenses 450
2012 2,050 By Newspapers 150
2013 60 2,150 By Books 100
To Admission Fees 40 By Municipal Taxes 40
To Life Membership Subscription 100 By Charity 350
To Donations (on 1.8.2012) 500 By 12% General Investments 500
To Subscription for Tournament 1,500 (on 1.8.2012)
(on 1.8.2012) By 12% Tournament Fund
To sales of old newspapers 45 Investments (on 1.8.2012) 1,500
To sale of old bats etc. 50 By Tournament Expenses 1,200
By Bats, Balls etc. 700
To Proceeds of drama tickets 950 By Furniture 250
To sale of old furniture
(costing Rs. 100) 60
To Interest on 12% general Invest. 12.50 By Balance c/d (cash) 3,760
To Interest on 12% Tournament
Fund Investments 37.50
To Subs.for Governor's Party 3,450
9,920 9,920
Additional Information
a. There are 500 members each paying an annual subscription of Rs.5. Rs.50 are still in arrear for the year 2011.
b. Municipal taxes amounting to Rs.40 per year have been paid upto 31 March 2013 and Rs.50 are outstanding for salaries.
c. On 1.1.2012 the club owned building valued at Rs.5,000, Stock of Bats and Balls Rs. 1,500, Printing and Stationery Rs.200,
Cash at Bank Rs.3,000, Books Rs.500 and Furniture Rs,600.
d. Write 50% off Bats and Balls (without considering sale), 25% off printing and stationery.
e. Special subscription for governor's party outstanding Rs.550.
f. Admission fees to be treated as of revenue nature but Life Membership is to be treated as of Capital nature.
[Ans. Surplus Rs. 1,035; Closing Balance Sheet Total Rs. 17,545]

Question: 14. Prepare Income and Expenditure Account and Balance Sheet of Ramdas College Sports Club, Delhi from the
following information: (‘000)
Receipts Rs. Payments Rs.
To Balance b/d Cash 150 By Balance b/d (Bank Overdraft) 3,000
Stamps 50 By Insurance (paid up to 30.6.2022) 300
To subscriptions 7,000 By Miscellaneous Expenses 3,875
To Entrance fees 200 By Postage Expenses 200
To Life Membership Subscription 500 By refreshment Room Expenditure 2,100
To General Donations 2,000 By Furniture (Purchased on [1.10.21]) 600
To Cricket Fees 250 By Honorarium to Cricket coach 600
To Refreshment Room Receipts. 3,100 By Sports Equipment (on 1.10.21) 2,200
To Sale of Old periodicals 72 By 10% RBI Tax Free Bonds 10,000
To Interest on Govt. Securities 144 (on 1.1.22) (Pavilion)
(T.D.S. @ 20%) By Balance c/d:
To Donation for club Pavilion 10,000 Cash in Hand 52
(on 1.1.2022) Cash at Bank 514
Stamps 25 591
23,466 23,466

Particulars 1.4.2021 31.3.2022

Rs.'000 Rs. '000
Club Pavilion Fund 5,000 ?
Sports Equipment 4,500 ?
Furniture 3,200 ?
Stock of Foodstuff 120 80
6% Government Security (Face Value Rs.30,00,000) 2,580 ?

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Subscription Outstanding 600 250

Subscription in Advance - 300
Outstanding Miscellaneous Expenses 200 250
Accounting policies followed by Ramdas Sports Club, Delhi are as under:

The sports equipment and furniture are to be depreciated @25% and 10% p.a. respectively. One-half of the entrance fees and life
membership fee are to be treated as income. [Answer. Surplus Rs.2,872; Closing Balance Sheet Total Rs.22,022]

Question: 15 Prepare Income and Expenditure Account and Balance Sheet of Bhagat Singh College Sports Club. Delhi
Receipts and Payments Account of Bhagat Singh College Sports Club, Delhi for the year ended on 31st March 2003.
Receipts Rs. Payments Rs.
To Balance b/d Cash 500 By Rent 9,750
Bank 4,000 By miscellaneous Expenses 28,800
Stamps 300 By Postage Expenses 1,200
To Subscription By Furniture 8,000
4,650 By Creditors for Sports Material 12,200
67,200 By cost of prizes (to be awarded) 4,150
2,600 74,450 By Cash Purchase of Sports
To Entrance Fees 8,000 Materials 2,000
To general donations 4,050 By Match Expenses 7,030
To Donations for Prize Fund 2,800 By Balance c/d
To Sale of old Sports Materials 5,200 Cash 545
To Interest on Prize Fund Investments 300 Bank 26,000
To Miscellaneous Receipts 225 Stamps 150
99,825 99,825

Information
Particulars 1.4.2002 31.3.2003
Rs. Rs.
Sports Materials 4,000 5000
Furniture 40,000 ?
5% Prize Fund Investment (Face Value Rs. 12,000) 11,700 ?
Creditors for Sports Materials 1,400 2,950
Subscription in arrears 4,750 ?
Subscription in advance 1,400 ?
Prize Fund 12,000 ?
Rent paid in advance -- 750
Outstanding rent 750 ?
Outstanding Miscellaneous Expenses 2,280 4,020
Miscellaneous Expenses paid in advance 750 850

Book Value of Sports Materials sold was Rs.4,000. Depreciation on furniture is to be provided @10%. Half of entrance fees
to be capitalised. There are 720 members, each paying an annual subscription of Rs. 100
[Answer, Surplus Rs.19,005 Closing Balance Sheet Total. Rs.91,995] (CA INTER 16 MARKS)

Question: 16 The following is the Receipts and Payments Account of Apollo Club in respect of the year to 31 March 2023.
Receipts Rs. Payments Rs.
To Balance b/d By Salaries 3,000
Cash in hand 2,000 By Stationery 1,000
To Subscriptions: By Rates and Taxes 300
2021-2022 3,000 By Telephone Charges 1,500
2022-2023 4,000 By 8% Securities at par 5,000
2023-2024 1,000 8,000 By Sundry Expenses 200
To Profit on sports 3,000 By Balance c/d
To Interest on 8% Securities 1,000 Cash in hand 3,000

a. There are 500 members, each paying an annual subscription of Rs.10; Rs.3,500 being in arrears for 2021-2022 at the
beginning of 2022-2023. During 2021-2022, subscriptions were paid in advance by 30 members for 2022-2023.
b. Stock of stationery at 31 March 2022 was Rs. 400 and at 31 March 2023 Rs.500.
c. At 31 March 2023, the rates and taxes were prepaid to the following 31st January. The yearly charge being Rs.300.
d. A quarter's charge for telephone is outstanding, the amount accrued being Rs.300. The charge for each quarter is same
for both 2021 -2022 and 2022-2023.
e. Sundry Expenses accruing at 31 March 2022 were Rs.50 and at 31 March 2023 Rs.60.
f. At 31 March 2022 Building stood in the books at Rs.30,000 and it is required to write off depreciation at 10% p.a.
g. Face Value of 8% Securities at 31 March 2022 was Rs. 15,000 which was purchased at that date for Rs. 10,000. Additional
Securities worth Rs.5,000 are purchased at par on 31 March 2023. Prepare an Income and Expenditure Account for the
year ended 31 March 2023, and Balance Sheet at that date.
[Ans. Surplus Rs.590; Closing Balance Sheet TotalRs. 52,150] (CA Foundation, CA INTER 16 MARKS)

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Question: 17 The following is the Receipts and Payments Account of Modern Club for the year ending on 31st March 2023.
Receipts Rs. Payments Rs.
Cash in hand 150 Honorarium of Secretary &Treasurer 4,800
Bal. as per Bank Pass Book 8,230 8,380 Rates and Taxes 1,260
Subscriptions 10,710 Printing and Stationery 470
Receipts from fees 2,400 Other Miscellaneous Expenses 1,530
Net proceeds of variety Entertainment 4,270 Ground man’s wage 840
Bank interest 230 Expenditure on fetes 2,390
Bar takings 7,450 Payments for bar Purchases 5,770
Cash Overspent 20 Repairs 320
New Car (less sale proceeds of old car Rs.
3,000) 12,600
Balance as per pass Book 3,480
33,460 33,460
Cash overspent represents amount of honorarium to the treasurer not drawn due to shortage of fund. But the total salary payable
to him for the year was already included in 4,800. Depreciation is to be provided @ 5% p.a. on the w. d. v of the premises and @
15% p.a. on car for the whole year.
You are required to adjust bank balance according to cash book and prepare:
An Income and Expenditure Account of the Club for the year ended 31 March 2023.
A Balance Sheet as on 31 March 2023 (CA- PE2 NOV 2004 (20 MARKS) [Answer. Surplus Rs.6,090].
st
Following is the summary of bank transactions of club for the year ending 31 March 2023
Question: 18
Receipts Rs. Payments Rs.
To Petty cash in hand 150 By Rent 600
To Balance as per Pass Book 2,000 By Entertainment 800
To Subscriptions 2,500 By Advertisement (for 2021-22- Rs.50) 200
To Entertainment 1,900
To Legacy (to be capitalized) 800 By Capital Expenditure 2,000
To Donation for Books 500 By Upkeep of Grounds 300
To General Donation 500 By Bank Charges 30
By Salary 1,500
By Petty Expenses 80
By Balance as per Pass Book 2,770
By Petty Cash in Hand 70
8,350 8,350

Information:
1.4.2022 31.3.2023
Rs. Rs.
Unpresented cheque being payment for rent 100 50

Interest on fixed deposit of Rs. 10,000 not entered in the pass book. ----- 600

Entry in respect of bank charges was not passed through the cash book. --- 30
A member deposited subscription for 2023-2024
Direct into bank, not passed through the cash book ---- 20
Cheques deposited for subscription but not yet cleared
By the bank 800 600

Prepare Income and expenditure Account for the year ending 31st March 2013 and Balance Sheet as on that date.
[Ans: Surplus. Rs. 1870; Closing Balance Sheet Total Rs. 15,990]

Question: 19 The Lok Kalyan Dispensary had the following:

Income and Expenditure Account for the year ending on 31st March 2022
Expenditure Rs. Income Rs.
Salaries 23,500 Subscriptions 25,000
Surgery and Dispensary 3,000 Interest 9,000
Rent and Taxes 500 Donations 4,000
Insurance 200 Miscellaneous Receipts 300
Office Expenses 800
Depreciation:
Building 3,750
Furniture 120
Instruments 100 3,970
Surplus 6,330

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31.03.2021 31.3.2022
Information Rs. Rs.
Cash in hand and at bank ? 18,700
4.5% Tax free Government Securities
(Face Value Rs.2,00,000) 1,80,000 1,80,000
Subscription outstanding 7,000 10,000
Subscription received in advance 200 600
Salaries unpaid 1,000 1,500
Furniture 2,000 1,980
Land and Buildings 1,00,000 96,250
Instruments 3,500 3,900
Surgery Expenses due 200 300
Stock of medicines 300 100
Prepare Receipts and Payments Accounts of the year ending on 31st March 2022
( Ans; Opening cash and bank balance Rs 10,800)

Question: 20 From the following Trial Balance of the Gayatri Education Society as on 31st March 2022, prepare an Income and
Expenditure Account and a Balance Sheet.
Dr. (Rs.) Cr. (Rs.)
Furniture and Fittings 12,500
Additions to Furniture during the year 3,200
Library Books 17,500
Additions to Library during the year 4,300
Buildings 2,75,000
General Investments 1,50,000
Reserve Fund 15,000
Sundry Debtors and Creditors 5,000 14,500
Entrance Fees 15,200
Examination Fees 2,400
Subscriptions Received 20,000
Certificate Fees 500
Hire of Society’s Hall 6,500
Interest realized on Investment 5,500
Sundry Receipts 600
Staff salaries 10,200
Printing and Stationery and Advertising 1,000
Taxes and Insurance 800
Examination Expenses 600
Subscription of Periodicals 1,200
Prize Trust Fund 16,000
Prizes Trust Investment 15,800
Prize Trust Income 650
Prize Awarded 450
Prize Fund Bank Balance 275
Donations received (to be capitalized) 18,000
General Expenses 375
Capital Fund 3,89,150
Cash at Bank 5,500
Cash at office 300
5,04,000 5,04,000

Additional information:
Subscriptions to be received 4,500
Subscriptions received in advance 500
Interest on General Investment accrued 450
Staff Salaries outstanding 1,800
Taxes and Insurance paid in advance 500
Provide depreciation at the following rates (including the additions):
On Library Books @ 15%
On Furniture and Fittings @ 5%
On Building @ 1% p.a.

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The market value of General Investments on 31st March 2022 was Rs. 1,30,000, but you are not requiredto bring down the book
value to this level. Ignore Income Tax. [Ans. Surplus-Rs.32,870; Total of Closing Bal. Sheet Rs.4,88,020.] (CA INTER 16 MARKS)

Question: 21. A political party prepares its accounts on 31 December every year. Following information is available for the year 2022:
They started the year with Rs. 20,000 cash and bank balance and ended with a cash and bank balance of Rs. 9,650.
They received subscription amounting to Rs. 8,350 of which Rs. 250 represented arrears of 2021, Rs. 7,600 for current year and Rs.
500 received in advance for the year 2023.
They received Rs. 5,200 donation to Capital Fund and Rs. 8,500 to Election Fund. Balance of Election Fund on 1-1-2022 amounted to
Rs. 150 and election expenses paid during the year were Rs. 7,200.

They held Rs. 10,000 investments on 1-1-2022 and interest received on investment during 2022 amounted to Rs. 1,400.
Office space was purchased during the year at a cost of Rs. 30,000 out of which Rs. 20,000 was to be treated as loan and the balance
was paid in cash.

Office furniture was valued at Rs. 1,500 on 1-1-2022 and Rs. 1,700 was paid for additions during the year.
At the end of the year, furniture was valued at Rs. 2,500. Cost of literature published and distributed amounted to Rs. 750 and Rs.
1,200 was collected on distribution of literature. Other payments during the year 2022 were as follows :
Salaries: Rs. 10,500 (out of which Rs. 500 related to the year 2023)
Rent: Rs. 1,700 (Out of which Rs. 500 related to the year 2021)
Meeting and Propaganda Rs. 1,650 (Rs. 300 paid for arrangement of meetings to be held in the year 2023)
Stationery Rs. 1500

Prepare:1.Receipt and Payment Account for the year ended 31-12-2022;

2. Income and Expenditure Account for the year ended 31-12-2022;
3. Balance Sheet as at 1-1-2022; and
4. Balance Sheet as at 31 -12-2022.

Answer:
Dr. Receipt and Payment Account for the year ending December 31, 2022 Cr.
Receipt Amount Payment Amount
To Balance b/d 20,000 By Building (payment for
To Subscription Received 8,350 Purchase of office space) 10,000
To Interest Received 1,400 By Furniture Purchased 1,700
To Sale of Literature 1,200 By Salaries Paid 10,500
To Donation to Capital Fund 5,200 By Rent Paid 1,700
To Donation to Election By Meeting and
Fund 8,500 Propaganda Expenses Paid 1,650
By Stationery Purchased 1,500
By Cost of Literature Paid 750
By Election Expenses 7,200
By Balance c/d 9650
44,650 44,650

Income and Expenditure Account for the year ending December 31, 2022
Expenditure Amount Income Amount
To Salaries 10,000 By Subscription 7,600
To Rent 1,200 By Interest on Investments 1,400
To Stationery Consumed 1,500 By Sale of Literature 1,200
To Meeting & Propaganda 1,350 Less Cost of Literature 750 450
By Excess of Expenditure Over
To Depreciation on Office Income 5,300
Furniture:
Balance on 1-1-2022 1,500
Add Purchased 1,700
3,200
Less Closing Balance 2,500 700
14,750 14,750

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Balance Sheet as at January 1, 2022

Liabilities Amount Assets Amount
Rent Outstanding Election Fund 500 Cash 20,000
Capital Fund (Bal. figure) 150 Subscription Outstanding 250
31,100 Investments 10,000
Furniture 1,500

31,750 31,730

Balance Sheet as at December 31, 2022

Liabilities Amount Assets Amount
Subscription Received in Cash 9,650
Advance 500 Advance Salary 500
Loan for Building 20,000 Advance for Meetings 300
Election Fund on 1-1-2022 150 Investments 10,000
Add Donation 8,500 Furniture on 1-1-2022 1,500
8,650 Add: Purchased 1,700
Less Expenses 7,200 1,450 3,200 700
Less Depreciation Building.
Capital Fund on 1-1-2022 31,100 5,200 2,500
Add Donation 30,000
36,300
Less Deficit 5,300 31,000
52,950 52,950

Question: 22 Following is the receipts and payment Account of Roshnara club for the year ending December 31, 2021:
Balance b/d By salaries 15,000
Cash 20,000 By electricity Bills 20,000
Bank 50,000 By foodstuffs for restaurant 40,000
To subscription 2020 10,000 By telephone bills 25,000
2021 80,000 By 18% investments 78,000
2022 8,000 (31-3-2021)
To donation to sports fund 20,000 By sport expenses 40,000
To sale of furniture (book value Rs.5,000) 8,000 By subscription for periodicals 10,000
To sale of old periodicals, newspapers etc. 2,000 By balance c/d
To sale of foodstuffs 80,000 Cash 17,000
To rent of ground for Marriages 10,000 Bank 43,000
2,88,000 2,88,000
Additional Information:
(a) During 2021, the club had 90 members, each paying an annual subscription of Rs.1,000. Out of twelve members, who had not
paid annual subscription during 2020, ten members cleared their arrears in 2021 and the arrears of subscription of remaining two
members who left the club on 1-1-2021 were treated as irrecoverable.

(b) During 2021 Rs. 2500 was deposited with Mahanagar Telephone Nigam Limited for adjustment of telephone bills.On 31-12-2021
following statement was received from MTNL office:

Amount deposited 25,000

Interest on deposit 2,000
27,000
Less Telephone rent and bills for 2021 15,000
Balance of deposit on 31-12-2021 12,000
(c) Advance payment of subscription for periodicals magazines, newspapers etc., amounted to Rs. 2,000 and Rs. 4,000 at the end
of 2020 and 2021 respectively.

(d) Stock of foodstuffs for restaurant run by the club amounted to Rs.12,000 and Ras.15,000 at the end of 2020 and 2021 respectively.

(e) On 1-1-2021 other balances were as follow:

Furniture 80,000
Building 5,00,000
Sports fund 10,000

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(f) Depreciate furniture and building @20%

Prepare Income and Expenditure Account and Balance sheet as 31-12-2021

Answer: Balance sheet as at December 31, 2020

Liabilities Amount Assets Amount
Sports fund 10,000 Cash 20,000
Capital fund Bank 50,000
(balancing figure) 6,66,000 Advance subscription for periodicals 2,000
Subscription outstanding 12,000
Stock of foodstuffs 12,000
Furniture 80,000
Building 5,00,000
6,76,000 6,76,000

Income and Expenditure Account for the year ending December 31, 2021
To Salaries 15,000 By Subscription for 2021 80,000
To Electricity Expenses 20,000 Add Outstanding for 2021 10,000 90,000
To Foodstuff Purchased 40,000 By Sale of Old Periodicals 2,000
Add Opening Stock 12,000 By Interest on Deposit with MTNL 2,000
52,000 By Profit on Sale of furniture 3,000
Less Closing Stock 15,000 37,000 (Rs.8,000 - Rs.5,000)
To Telephone Expenses 15,000 By Sale of Foodstuff 80,000
To Sports Expenses 40,000 By Rent of Ground for Marriages 10,000
Less Sports Fund on 1-1-2021 10,000 By Excess of Expenditure Over Income 35,000
30,000

Less Donation 20,000 10,000

To Subscription for Periodicals 10,000

Add Advance on 1-1-2021 2,000

12,000
Less Advance on 31-12-2021 4,000 8,000
To Depreciation on Furniture 15,000
To Depreciation on Building 1,00,000
To Subscription for 2000 Written off 2,000
2,22,000 2,22,000

Balance Sheet as at December 31, 2021

Liabilities Amount Assets Amount
Subscription Received in Advance 8,000 Cash 17,000
Sports Fund on 1-1-2021 10,000 Bank 43,000
Add Donation 20,000 Advance Subscription for Periodicals 4,000
30,000 Subscription Outstanding 10,000
Less Sports Expenses 40,000 Stock of Foodstuffs 15,000
10,000 Investments 78,000
Transferred to Income Deposit with MTNL 12,000
& Expenditure A/c 10,000 — Furniture 80,000
Less Sold 5,000
Capital Fund 6,66,000

Less Deficit 35,000 75,000

6,31,000 Less Depreciation 15,000 60,000
Building 5,00,000

Less Depreciation 1,00,000 4,00,000

6,39,000 6,39,000

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Question:23 The following is the Income and Expenditure Account of Delhi Youth Club for the year ended 31st March, 2021 :

Dr. Income and Expenditure Account for the year ended 31st March, 2021 Cr.

To Salaries 19,500 By Subscription 68,000

To Rent 4,500 By Donation 5,000
To Printing 750
To Insurance 500
To Audit Fees 750
To Games & Sports 3,500
To Subscriptions written off 350
To Misc. Expenses 14,500
To Loss on Sale of furniture 2,500
To Depreciation :
Sports Equipment 6,000
Furniture 3,100
To Excess of Income over expenditure 17,050
73,000 73,000

Additional Information:
31-3-2020 31-3-2021
Rs. Rs.
Subscription in arrears 2,600 3,700
Advance Subscriptions 1,000 1,500
Outstanding expenses:

Rent 500 800

Salaries 1,200 350
Audit Fees 500 750
Sports Equipment less depreciation 25,000 24,000
Furniture less depreciation 30,000 27,900
Prepaid Insurance — 150

Book value of furniture sold is Rs. 7,000. Entrance fees capitalised Rs. 4,000. On 1st April, 2020, there was no cash in hand but
Bank Overdraft for Rs. 15,000. On 31st March, 2021, Cash in hand amounted to Rs. 850 and the rest was Bank balance. Prepare
the Receipts and Payments Account of the Club for the year ended 31st March, 2021. [CMA—Adapted]

Answer: Receipts and Payments Account for the year ended 31-3-2021
To Subscription A/c 67,050 By Balance b/d: Bank
15,000
To Donation A/c 5,000 By Salary 19,500
Add Outstanding last year 1,200
Less Outstanding this year 350 20,350
To Entrance Fees A/c 4,000 By Rent 4,500
Add Outstanding last year 500
Less Outstanding this year By 800 4,200
Printing 750
To Furniture A/c (Sale of furniture) 4,500 By Insurance 500
(7,000-4,500) Add Prepaid this year 150 650
By Audit Fees 750
Add Outstanding last year 500
Less Outstanding this year By 750 500
Games & Sports 3,500
By Miscellaneous Expenses 14,500
By Sports Equipment (Purchased) 5,000

By Furniture (Purchased) 8,000

By Balance c/d
Cash 850
Bank (balancing figure) 7,250
80,550 80,550

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Question 24: From the following information, prepare Balance Sheet as at December 31, 2021 :

Income and Expenditure Account for the year ending December 31, 2021
To Salaries 15,000 By Subscriptions 40,000
To Audit Fees 2,000 By Sale of Foodstuff 20,000
To Purchase of Foodstuffs 15,000 By Rent 5,000
Less Closing Stock of Foodstuffs 3,000 12,000
To Insurance Premium 1,000
To Depreciation on Fixed Assets 3,000
To Excess of Income over Expenditure 32,000
65,000 65,000

Dr. Receipts and Payment Account for the year ending December 31, 2021 Cr.
To Balance b/d 5,000 By Salaries 10,000
To Subscription 2021 35,000 By Audit Fees for 2020 1,000
2022 6000 By Purchase of Foodstuffs 15,000
To Rent Received 4,000 By Insurance Premium 2,000
To Sale of Foodstuffs 20,000 By Fixed Assets 20,000
By 12% Fixed Deposit (31-12-2021) 10,000
By Balance c/d 12,000

70,000 70,000
On 31-12-2020, following balances appeared in the books of Delhi Club : Building—Rs.50,000 ; Furniture—Rs. 10,000.

Question:25. Following is the Income and Expenditure Account of Victoria Club for the year ending 31st March ,2006:
Expenditure Amount Income Amount
To dep. On equipment 1200
To Salaries & Wages 19,000 By Subscription 30,000
To Misc. Expenses By Entrance fees received 1,000
( including Insurance) 2,000 By Annual Sports Income
To Audit fees 1,000 Receipts 6,000
To Chief Executive ‘ Less: Expenses 3,000 3,000
Honorarium 4,000
To Printing and Stationary 1,800
To Annual day
Celebration Exp. 6,000
Less – Donation 4,000 2,000
To Interest on Bank Loan 600
To Excess of Income over
Expenditure 2,400
34,000 34,000
Additional Information :
31.3.05 31.03.06
(Rs.) (Rs)
(i) Subscription outstanding 2,400 3,000
(ii) Subscription received in advance 1,800 1,080
(iii) Salaries outstanding 1,600 1,800
(iv) Sports equipment (after deducting depreciation) 10,400 10,800
(v) Prepaid Insurance - 240
(vi) Cash in Hand ? 6,400
The Club owned a Sports’ ground of Rs. 40,000
The Club took a loan of Rs. 8,000 from a bank during the year 2004 – 05,which was not paid in 2005 – 06.
Audit fee of 2005 – 06 was outstanding, but an Audit fee of Rs. 800 for 2004 – 05 was paid in 2005 – 06.
Prepare Receipts and payments Account for the year ending 31st March,2006 and a Balance Sheet on that date.
Answer: Opening balance of cash Rs. 5560. (CA-Inter 2006 – May)

Question 26 :Following is the Receipts and Payments Account of Nanoo Club for the year ended 31st March, 2022:
Receipts Rs. Payments Rs.
Opening Balance: Salaries 1,20,000
Cash 10,000 Creditors 15,20,000
Bank 3,850 Printing and stationery 70,000
Subscription received 2,02,750 Postage 40,000
Entrance donation 1,00,000 Telephone and fax 52,000
Interest received 58,000 Repairs and maintenance 48,000

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Sale of fixed assets 8,000 Glass and table lined 12,000

Miscellaneous income 9,000 Crockery and cutlery 14,000
Receipts at coffee room 10,70,000 Garden upkeep 8,000
Wines and spirits 5,10,000 Membership fees 4,000
Swimming pool 80,000 Insurance 5,000
Tennis court 1,02,000 Electricity 28,000
Closing balance:
Cash 8,000
Bank 2,24,600
Following additional information is provided to you:
1. Assets and liabilities as on 1.4.2021 were as follows:
Fixed assets (Net) 5,00,000
Stock 3,80,000
Investment in 12% government securities 5,00,000
Outstanding subscription 12,000
Gratuity fund 1,50,000
Prepaid insurance 1,000
Sundry creditors 1,12,000
Subscription received in advance 15,000
Entrance donation received pending membership 1,00,000

2.Subscription received in advance as on 31.3.22 was Rs. 18,000.

3.Outstanding subscription as on 31.3.22 was Rs. 7,000.
4.Outstanding expenses as on 31.3.22 are:
Salaries : Rs. 8,000
Electricity: Rs. 15,000
5. 50% of the entrance donation was to be capitalised. There was no pending membership as on 31.3.22.
6.The cost of assets sold as on 1.4.21 was 10,000. Depreciation was provided @10% p.a. on fixed assets on WDV basis,
7. A sum of Rs. 20,000 received in October, 2021 as entrance donation from an applicant was to be refunded, as he has not
fulfilled the requisite membership qualification. The refund was made on 3.6.22.
8.Purchases made during the year 2021-22 amounted to Rs. 1500,000.
9.The value of closing stock as on 31.3.22 was Rs. 2,10,000.
10.The Club as a matter of policy charges off to Income and Expenditure account, all purchases made on account of crockery,
cutlery, glass and linen in the year of purchase.
You are required to prepare:
(i) Income and Expenditure account for the year ended 31st March, 2022.
(ii) Balance Sheet as on 31st March, 2022. (CA-PCC- MAY 2009)20 MARKS

Answer:
Income and Expenditure Account of Nanoo club For the year ended 31st March, 2022
Expenditure Amount Income Amount
To Salaries (W.N.8) 1,28,000 By Subscriptions (W.N.2) 1,94,750
To Printing and stationery. 70,000 By Entrance donation (W.N.3) 90,000
To Postage 40,000 By Interest (W.N.4) 60,000
To Telephone & Fax 52,000 By Miscellaneous income 9,000
To Repairs and maintenance 48,000 By Profit from operations (W.N.6) 92.000
To Glass and table linen 12,000 By Excess of expenditure over income
To Crockery and cutlery 14,000 transferred to capital fund (deficit) 30,250
To Garden upkeep 8,000
To Membership fees 4,000
To Insurance (W.N.5) 6,000
To Electricity charges (W.N.8) 43,000
To Loss on sale of assets 2,000
(10,000-8,000)
To Depreciation (W.N.9) 49,000
4,76,000 4,76,000

Balance sheet of Nanoo Club As on 31st March, 2022

Liabilities Amount Assets Amount
Capital fund 10,89,600 Fixed assets 4,41,000
Gratuity fund 1,50,000 Stock 2,10,000
Sundry creditors (W.N.7) 92,000 Investments in 12% Government securities 5,00.000
Subscription received in advance 18,000 Subscription outstanding 7,000
Entrance donation refundable 20,000 Interest accrued (W.N.4) 2,000
Outstanding salary 8,000 Bank 2,24,600
Outstanding electricity charges 15,000 Cash 8.000
13,92,600 13,92,600

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Working Notes:
(1) Opening Balance Sheet as on 1" April, 2021
Liabilities Amount Assets Amount
Capital funds (Bal. Fig.) 10,29,850 Fixed assets 5,00,000
Sundry creditors 1,12,000 Stock 3,80,000
Subscription received in advance 15,000 Investment in 12% Government securities 5,00,000
Entrance donation received in advance (pending Subscription outstanding 12,000
membership) 1,00,000 Prepaid insurance 1,000
Gratuity fund 1,50,000 Cash 10,000
Bank 3,850
14,06,850 14,06,850
Subscription
Particulars Amount
Subscription received during the year 2,02,750
Add: Outstanding subscription on 31.3.2022 7.000
Add: Received in advance as on 1.4.2021 15,000
2,24,750
Less: Outstanding subscription as on 1.4.2021 (12,000)
Less: Received in advance as on 31.3.2022 (18,000)
1,94,750
Entrance donation
Particulars Amount
Entrance Donation received during the year 1,00,000
Add: Received in Advance as on 1.4.2021 1,00,000
2,00,000
Less: Refundable to Ineligible Member 20,000
1,80,000
Less: 50% Capitalized 90,000
90,000
Interest Received
Particulars Amount
Interest on Rs. 5,00,000 @ 12% p.a. 60,000
Less: Interest received during the year 58,000
Interest accrued as on 31.3.2022 2,000
Interest credited to Income and Expenditure A/c 60,000
Insurance
Particulars Amount
Insurance paid during the year 5,000
Add: Prepaid insurance as on 1.4.2021 1,000
6,000

Profit from Operations

Particulars Amount
Cost of Goods sold:
Opening Stock as on 1.4.2021 3,80,000
Add: Purchases 15,00,000
18,80,000
Less: Closing Stock 2,10,000
Cost of Goods Sold (A) 16,70,000
Receipts from operations
Receipts from Coffee Room 10,70,000
Receipts from Wines & Sprits 5,10,000
Receipts from Swimming Pool 80,000
Receipts from Tennis Court 1,02,000
Total of Receipts (B) 17,62,000
Profit from operations (B-A) 92,000
Sundry Creditors
Particulars Amount
Opening Balance as on 1.4.2021 1,12,000
Add: Purchases made during the year 15,00,000
16,12,000
Less: Payment made during the year 15,20,000
Closing Balance as on 31.3.2022 92,000

(8) (a) Salary

Salary paid as on 31.3.2022 1,20,000
Add: Outstanding Salary as on 31.3.2022 8,000 1,28,000

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(b) Electricity charges paid 28,000

Add: Outstanding Electricity charges as on 31.3.2022 15,000 43,000

(9) Fixed Assets

Fixed Assets as per Trial Balance 5,00,000
Less: W.D.V. of Assets sold 10,000
4,90,000
Less: Depreciation @ 10% on Rs. 4,90,000 49,000
Fixed Assets as on 31.3.2022 4,41,000

(10) Capital fund

Capital fund as on 31.3.2021 10, 29,850
Add: Entrance donation capitalized 90,000
11, 19,850
Less: Deficit 30,250
10,89,600

Question 27: On the basis of the following information’s, prepare Income and Expenditure Account for the year ended 31-3- 2010:

Receipts and Payments Account for the year ended 31st March, 2010
Receipts Rs. Payments Rs.
To Cash in hand (opening) 1,300 By Salaries 2,58,000
To Cash at Bank (opening) 3,850 By Rent 71,500
To Subscriptions 4,94,700 By Printing & Stationery 3,870
To Interest on 8% Govt. Bonds 4,000 By Conveyance 10,600
To Bank Interest 160 By Scooter purchased 50,000
By 8% Govt. Bonds 1, 00,000
By Cash in hand (closing) 840
By Cash at Bank (closing) 9,200
5,04,010 5,04.010

1. Salaries paid include Rs. 6,000 paid in advance for April, 2010. Monthly salaries paid were Rs. 21,000.
2. Outstanding rent on 31st March, 2009 and 31st March, 2010 amounted to Rs.5,500 and Rs. 6,000 respectively,
3. Stock of printing and stationery material on 31st March, 2009 was Rs. 340; it was Rs.365 on 31st March, 2010.
4. Scooter was purchased on 1st October, 2009. Depreciation @ 20% per annum is to be provided on it.
5. Investments were made on 1st April, 2009.
6. Subscriptions due but not received on 31st March, 2009 and 31" March, 2010 totalled Rs. 14,000 and Rs. 12,800 respectively. On
31 March, 2010 subscriptions amounting to Rs. 700 had been received in advance for April, 2010.(CA-IPCC- MAY 2010)8 MARKS

Answer :Income and expenditure Account for the year ended 31st march, 2010
Expenditure Amount Income Amount
To Salaries (W.N. 1) 2,52,000 Subscription (W.N.6) 4,92,800
To Rent(W.N.2) 72,000 Interest on 8% Government bonds
To Printing and stationery (W.N.3) 3,845 (W.N.5) 8,000
To Conveyance 10,600 Bank interest 160
To Depreciation on Scooter (W.N.4) 5,000
To Surplus i.e. excess of income
over expenditure 1,57,515
5,00,960 5,00,960
Working Notes:
1. Salaries paid 2,58,000
Less .Salary paid in advance for April, 2010 6,000
Salaries for the year 2,52,000

2. Rent paid 71,500

Add: Outstanding rent as on 31.3.2010 6,000
77,500
Less: Outstanding rent as on 31.3.2009 5,500
Rent for the year 2009-2010 72,000
3. Printing and stationery 3,870
Add: Stock as on 31.3.2009 340
4,210
Less : Stock as on 31.3.2010 365
Printing and stationery consumed during the year 2009-2010 3,845
20 6
4. Depreciation on scooter = 𝑅𝑠. 50,000 × × = 𝑅𝑠. 5,000 5,000
100 12

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5. Interest on Government bonds received 4,000

Add: Interest due but not received as on 31.3.2010 4,000
Interest income for the year 2009-2010 8,000
6. Subscription received 4,94,700
Add: Accrued subscription as on 31.3.2010 12,800
5,07,500
Less .Accrued subscription as on 31.3.2009 14,000
Unearned subscription for April, 2010 700 (14,700)
Income for the year 2009-2010 4,92,800

Question: 28 The Young Trust runs a Charitable Hospital and a Dispensary. The following information is available for the year
ended 31st March, 2022 from the books of accounts:
Dr. Cr.
Capital Fund 9,00,000
Donations received during the year 6,00,000
Recovery of the Rent 2,75,000
Fees received from patients 3,00,000
Recovery of Food Supplies 1,40,000
Surgical Equipments 4,55,000
Building & Operation Theatres 3,20,000
Consumption in the Hospital of:
Medicines 1,20,000
Food Stuff 90,000
Chemicals 30,000
Closing Stock of Hospital
Medicines 20,000
Food Stuff 4,000
Chemicals 1,000
Sales of Medicines (Dispensary) 3,10,000
Opening Stock of Medicines (Dispensary) 55,000
Purchase of Medicines (Dispensary) 3,00,000
Salaries:
Administrative Staff 30,000
Doctors/Nurses 1,50,000
Assistant at the Dispensary 15,000
Electricity & Power Charges:
Hospital 1,05,000
Dispensary 2,000
Furniture &Equipments 80,000
Ambulance 30,000
Postage & Telephone Expenses less recovery 26,000
Subscription to Medical Journals 21,000
Ambulance Maintenance Charges less recovery 800
Consumption of Bed Sheets 90,000
Fixed Deposits made on 01-04-2021 for three years at interest
@11%p.a. 5,00,000
Cash & Bank Balances 41,300
Sundry Debtors (Dispensary) 60,500
Sundry Creditors (Dispensary) 41,000
Remuneration to Trustees, Trust Office Expenses etc. 21,000

Additional Information:
a. The dispensary supplied medicines to the hospital worth Rs. 60,000, for which no adjustment was made in the books.
b. The closing stock of the medicines was Rs. 40,000 at the dispensary.
c. The stock of medicines on 31st March, 2022 at the hospital included Rs. 4,000 worth of medicines belonging to the patients,
which has not been considered while arriving at the figure of consumption of medicines.
d. The donations were received towards Corpus of the Trust.
e. On 15th August, 2021, surgical equipments were donated having market value of Rs. 40,000.
f. The hospital is to receive the grant of 25% of the amount spent on treatment of the poor patients from the Red Cross
Society. Such expenditure was Rs. 50,000.
g. Out of the fees recovered from the patients, 10% is to be given to the Specialist retained by the Hospital.
h. Depreciation on the assets on the closing balances :
Surgical Equipments @ 20%
Building @ 5%
Furniture &Equipments @ 10%
Ambulance @ 30%
You are required to prepare:

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Income and Expenditure Account of the Hospital, Dispensary and Trust,

Statement of Affairs of the Trust for the year ended 31st March, 2022.
(CA-IPCC- NOV 2010)16 MARKS
Answer: Income and expenditure Account of Dispensary for the year ended 31st march, 2022)
Particulars Amount Particulars Amount
To Opening stock of medicines 55,000 By Sales of medicine 3,10,000
To Purchase of medicines 3,00,000 By Supply of medicines to hospital 60,000
To Salaries to assistants 15,000 By Closing stock of medicines 40,000
To Electricity & power charges 2,000
To Surplus transferred to trust income &
expenditure account (Bal.Fig.) 38,000
4,10,000 4,10,000
Income & Expenditure Account of Hospital For the year ended 31st March, 2022)
Particulars Amount Particulars Amount
To Consumption of: By Fees received from patients 3,00,000
Medicines (W.N.1) 1,84,000 By Recovery for rent 1,40,000
Food stuff 90,000 By Recovery of food supplies 2,75,000
Chemicals 30,000 3,04,000 By Ambulance maintenance charges less
To Salaries: recovery 800
Admn. Staff 30,000 By Grant receivable from Red Cross Society
Doctors & nurses 1.50,000 1,80,000 (25% of 50.000) 12,500
To Electricity & power charges 1,05,000 By Deficit transferred to trust income &
To Consumption of bed sheets 90,000 expenditure account 1,33,700
To Subscription to medical journals 21,000
To Retainership of specialists outstanding (W.N.2)
To Depreciation on: 30,000
Surgical equipments 99,000
Building 16,000
Furniture & fixtures 8,000
Ambulance 9,000
1,32,000
8,62,000 8,62,000

Income & Expenditure Account of the Young Trust For the year ended 31st March 22
Particulars Amount Particulars Amount
To Deficit from hospital 1,33,700 By Surplus from dispensary 38,000
To Postage & telephone expenses less recovery 26,000 By Interest accrued on fixed deposits 55,000
To Remuneration to trustees, trust office expenses By Deficit (Excess of expenditure over income) 87,700
21,000
1,80,700 1,80,700
Statement of Affairs of Young Trust As on 31st March, 2022
Liabilities Rs. Assets Rs.
Capital fund: Building 3,20,000
Opening balance 9,00,000 Less: Depreciation 16,000 3,04,000
Add: Donations: Surgical equipment 4,55,000
Cash 6,00,000 Add: Donation 40,000
Surgical equipment 40,000 4,95,000
15,40,000 Less: Depreciation 99,000 3,96,000
Less: Deficit 87,700 14,52,300 Furniture 80,000
Sundry creditors(dispensary) 41,000 Less: Depreciation 8,000 72,000
Outstanding retainership to Ambulance 30,000
specialist (W.N.2) 30,000 Less: Depreciation 9,000 21,000
Stock:
Medicines:
Dispensary . 40,000
Hospital 16,000
Food stuff Hospital (20,000 - 4,000)
Chemicals 4,000
Sundry debtors (Dispensary) 1,000 61,000
Grant receivable from Red Cross 60,500
Society
fixed deposits 12,500
Interest accrued 5,00,000
Cash & bank balance 55,000
41,300
15,23,300 15,23,300

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Working Notes :

1. Consumption of medicines in hospital:

Medicines 1,20,000
Supplies received from dispensary 60,000
Medicines in stock belonging to patients 4,000
Total 1,84,000
2. Calculation of fee given to specialist:
10% of Rs. 3, 00,000 = Rs. 30,000
Note: It is assumed that surgical equipment donated on 15th August 2021 was not included in the closing balance
of surgical equipments as on 31st March, 2022

Question: 29:The following is the Receipt and Payment Account of Park View Club in respect of the year ended 31st March
2011.
Receipts Amount Payment Amount
To Balance b/d 1,02,500 By Salaries 2,08,000
To subscriptions: By Stationery 40,000
2008-09 4,500 By Rent 60,000
2009-10 2,11,000 By Telephone Exp. 10,000
2010-11 7,500 2,23,000 By Investment 1,25,000
To profit on sports meet 1,55,000 By Sundry Expenses 92,500
To Income from investments 1,00,000 By Balance c/d 45,000
5,80,500 5,80,500

Additional information:
1. There are 450 members each paying an annual subscription of ? 500. On 1SI April, 2010, outstanding subscription was Rs.
5,000.
2. There was an outstanding telephone bill for Rs. 3,500 on 31st March, 2011.
3. Outstanding sundry expenses as on 31s1 March, 2010 totalled Rs. 7,000.
4. Stock of stationery:
On 31st March, 2010 Rs. 5,000
On 31st March, 2011 Rs. 9,000
5. On 31st March, 2010 building stood in the books at Rs. 10, 00,000 and it was subject to depreciation @ 5% per annum.
6. Investment on 31st March, 2010 stood at Rs. 20, 00,000.
7. On 31st March, 2011, income accrued on the investments purchased during the year amounted to Rs. 3,750.
Prepare an Income and Expenditure Account for the year ended 31st March, 2011 and the Balance Sheet as at that date.
(CA-IPCC- MAY 2011)16 MARKS
Answer:
Income and Expenditure A/c
Expenditure Amount Income Amount
To Salaries 2,08,000 By Subscriptions (W.N.2) 2,25,000
To Stationery consumed (W.N.3) 36,000 By Profit on sports meet 1,55,000
To Rent 60,000 By Income on investments 1,00,000
To Telephone expenses 10,000 Add: Income accrued 3,750 1,03,750
Add: Outstanding on 31.311 3,500 13,500
To Sundry expenses 92,500
Less: Outstanding on 31.3.10 (7,000) 85,500
To Depreciation of building 50,000
To Surplus (excess of income overexpenditure)
30,750
4,83,750 4,83,750
Balance Sheet as at 31st March 2011
Liabilities Amount Assets Amount
Capital fund (W.N. 1) 31,05,500 Outstanding subscriptions 14,500
Add: Surplus 30,750 31,36,250 Investment
Subscriptions received in advance 7,500 (20,00,000 + 1,25,000) 21,25,000
Outstanding telephone bills 3,500 Add: Interest accrued on
investments 3,750 21,28,750
Building 10,00,000
Less: Depreciation (50,000) 9,50,000
Stock of stationery 9,000
Cash balance 45,000

31,47,250 31,47,250

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Working Notes: Balance Sheet as at 31st March 2010

Liabilities Amount Assets Amount
Outstanding sundry expenses 7,000 Building 10,00,000
Capital fund (Bal.fig) 31,05,500 Investments 20,00,000
Stock of stationery 5,000
Cash balance 1,02,500
Outstanding subscriptions 5,000
31,12,500 31,12,500

Calculation of subscriptions accrued during the year subscription A/c

Particulars Amount Particulars Amount
To Outstanding Subscriptions By Cash A/c 2,23,000
(as on 1.4.10) 5,000 By Outstanding subscriptions (as on 31.3.11) (Bal.
To Income & Expenditure A/c 2,25,000 fig) 14,500
To Subscriptions received in advance for 2011-12 7,500

Question 30. The Sportwriters Club gives the following Receipts and Payments Account for the year ended March 31, 2023:
Receipts and Payments Account
Receipts Rs Payments Rs
To Balance b/d 4,820 By Salaries 12,000
To Subscriptions 28,600 By Rent and electricity 7,220
To Miscellaneous income 700 By Library books 1,000
To Interest on Fixed deposit 2,000 By Magazines and newspapers 2,172
By Sundry expenses 10,278
By Sports equipments 1,000
By Balance c/d 2,450
36,120 36,120

Figures of other assets and liabilities are furnished as follows:

As at March 31
Rs Rs
2022 2023
Salaries outstanding 710 170
Outstanding rent & electricity 864 973
Outstanding for magazines and newspapers 226 340
Fixed Deposit (10%) with bank 20,000 20,000
Interest accrued thereon 500 500
Subscription receivable 1,263 1,575
Prepaid expenses 417 620
Furniture 9,600
Sports equipments 7,200
Library books 5,000

The closing values of furniture and sports equipments are to be determined after charging depreciation at 10% and
20% p.a. respectively inclusive of the additions, if any, during the year. The Club's library books are revalued at the
end of every year and the value at the end of March 31, 2023 was Rs 5,250.
Required: From the above information you are required to prepare:

(a) The Club's Balance Sheet as at March 31, 2022;

(b) The Club's Income and Expenditure Account for the year ended March 31, 2023.
(c) The Club's Closing Balance Sheet as at March 31, 2023. (ICAI Study material)

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Solution: Balance Sheet as on 31st March, 2022

Liabilities Rs Rs Assets Rs
Outstanding expenses: Furniture 9,600
Salaries 710 Library Books 5,000
Rent & Electricity 864 Sports Equipment 7,200
Magazines & Newspapers 226 1,800 Fixed Deposit 20,000
Capital Fund (Balancing figure) 47,000 Cash in hand & at Bank 4,820
Prepaid Expenses 417
Subscription receivable 1,263
Interest accrued 500
48,800 48,800
Income and Expenditure Account for the year ending 31st March, 2023

Expenditure Rs Income Rs
To Salaries 11,460 By Subscription 28,912
By Interest on Fixed Deposit
To Rent & Electricity 7,329 2,000
By Misc. Income
To Magazines & Newspapers 2,286 By Excess of expenditure over 700
income
To Sundry Expenses 10,075
To Depreciation : 2,888
Furniture 960
Sports Equipment 1,640
Library Books 750 3,350
34,500 34,500
st
Balance sheet as on 31 March 2023
Liabilities Rs Rs Assets Rs Rs
Outstanding Expenses: Furniture:
Cost 9,600
Salaries 170
Less : Depreciation (960) 8,640
Rent & Electricity 973
Newspapers 340 1,483 Magazines & Sport Equipment:
Opening balance 7,200
Capital Fund:
Addition 1,000
Opening balance 47,000 Less : Depreciation (1,640) 6,560
Less : Excess of
exp. over income (2,888) 44,112

Library Books :
Opening Balance 5,000
Addition 1,000
Less : Depreciation (750) 5,250

Fixed Deposit 20,000

Cash in hand & at bank 2,450
Prepaid Expenses 620
Subscription Receivable 1,575
Interest accrued 500
45,595 45,595

Question 31. From the following balances and particulars of Republic College, prepare Income & Expenditure
Account for the year ended March, 2023 and a Balance Sheet as on the date :

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Rs Rs
Seminars & Conference Receipts 4,80,000
Consultancy Receipts 1,28,000
Security Deposit - Students 1,50,000
Capital Fund 16,06,000
Research Fund 8,00,000
Building Fund 25,00,000
Provident Fund 5,10,000
Tuition Fee Received 8,00,000
Government Grants 5,00,000
Donations 50,000
Interest & Dividends on Investments 1,85,000
Hostel Room Rent 1,75,000
Mess Receipts (Net) 2,00,000
College Stores-Sales 7,50,000
Outstanding expenses 2,25,000
Stock of-stores and Supplies (opening) 3,00,000
Purchases - Stores & Supplies 8,00,000
Salaries - Teaching 8,50,000
Research 1,20,000
Scholarships 80,000
Students Welfare expenses 38,000
Repairs & Maintenance 1,12,000
Games & Sports Expenses 50,000
Misc. Expenses 65,000
Research Fund Investments 8,00,000
Other Investments 18,50,000
Provident Fund Investment 5,10,000
Seminar & Conference Expenses 4,50,000
Consultancy Expenses 28,000
Land 1,00,000
Building 16,00,000
Plant and Machinery 8,50,000
Furniture and Fittings 6,00,000
Motor Vehicle 1,80,000
Provision for Depreciation:
Building 4,80,000
Plant & Equipment 5,10,000
Furniture & Fittings 3,36,000

Cash at Bank 6,42,000

Library 3,60,000
1,03,85,000 1,03,85,000

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Adjustments:
Rs
(1) Materials & Supplies consumed: (From college stores)

Teaching 50,000

Research 1,50,000

Students Welfare 75,000

Games or Sports 25,000

(2) Tuition fee receivable from Government for backward class Scholars 80,000

(3) Stores selling prices are fixed to give a net profit of 10% on selling price

(4) Depreciation is provided on straight line basis at the following rates:

(1) Building 5%

(2) Plant & Equipment 10%

(3) Furniture & Fixtures 10%

(4) Motor Vehicle 20%

(ICAI Study material)

Answer: Income and expenditure account for the year ended on 31 st March 2023
Expenditure Rs Rs Income Rs Rs
To Salaries: By Tuitions & other fee 8,80,000
Teaching 8,50,000 By Govt. Grants 5,00,000
Research 1,20,000
By Income from Investments 1,85,000
To By Hostel room Rent 1,75,000
Material&SuppliesConsumed: By Mess Receipts 2,00,000
Teaching 50,000 By Profit-Stores Sales 75,000
Research 1,50,000 By Seminar and Conferences:
Income 4,80,000
To Repairs & Maintenance 1,12,000 Less : Expenses (4,50,000) 30,000

To Sports & Games Expenses: By Consultancy charges :

Cash 50,000 Income 1,28,000
Materials 25,000 75,000 Less : Expenses (28,000) 1,00,000

To Students Welfare Expenses: By Donations 50,000

Cash 38,000
Materials 75,000 1,13,000

To Misc. Expenses 65,000

To Scholarships 80,000

To Depreciation:
Building 80,000
Plant & Equipment 85,000
Furniture 60,000
Motor Vehicle 36,000

To Excess of Income over 3,19,000

Expenditure

21,95,000 21,95,000

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Balance Sheet as on 31st March, 2023

Liabilities Rs Rs Assets Rs Rs
Fixed Assets:
Capital Fund Land 1,00,000
Opening balance 16,06,000 Building Cost 16,00,000
Add: Excess of Income Less: Depreciation (5,60,000) 10,40,000
over Expenditure 3,19,000 19,25,000 Equipment Cost 8,50,000
Other Funds Less: Depreciation (5,95,000) 2,55,000
Research Fund 8,00,000 Furniture & Fittings:
Building Fund 25,00,000 Cost 6,00,000
Less: Depreciation (3,96,000) 2,04,000
Current Liabilities : Motor Vehicles
Outstanding Expenses 2,25,000 Cost : 1,80,000
Provident Fund 5,10,000 Less: Depreciation (36,000) 1,44,000
Security Deposit 1,50,000 Library 3,60,000
Investments:
Capital Fund Investments 18,50,000
Research Fund Investment 8,00,000
P.F. Investment 5,10,000
Stock (stores)
Material & Supplies 1,25,000
Tuition fees receivable 80,000
Cash in hand & at Bank 6,42,000
61,10,000 61,10,000

Working notes:
Rs Rs
(1) Material & Supplies - Closing Stock
Opening Stock 3,00,000
Purchases 8,00,000
11,00,000
Less : Cost of Material & Supplies (7,50,000*90% (100-10)) 6,75,000

Consumed 3,00,000 (9,75,000)

Balance 1,25,000
(2) Provisions for Depreciation
Building Plant & Furniture
Equipment & Fitting
Rs Rs Rs
Opening Balance 4,80,000 5,10,000 3,36,000
Addition 80,000 85,000 60,000
Closing Balance 5,60,000 5,95,000 3,96,000
Note: Expense related to income earned like consultancy charges,
conference expenses are shown as net of income.

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Question 32. The following is the Receipts and Payments Account of Lion Club for the year ended 31st March, 2023.

Receipts Rs Payments Rs
Opening balance: Salaries 1,20,000
Cash 10,000 Creditors 15,20,000
Bank 3,850 Printing and stationary 70,000
Subscription received 2,02,750 Postage 40,000
Entrance donation 1,00,000 Telephones and telex 52,000
Interest received 58,000 Repairs and maintenance 48,000
Sale of assets 8,000 Glass and table linen 12,000
Miscellaneous income 9,000 Crockery and cutlery 14,000
Receipts at Garden upkeep 8,000
Coffee room 10,70,000 Membership fees 4,000
Soft drinks 5,10,000 Insurance 5,000
Swimming pool 80,000 Electricity 28,000
Tennis court 1,02,000 Closing balance:
Cash 8,000
Bank 2,24,600
21,53,600 21,53,600
The assets and liabilities as on 1.4.2022 were as follows:
Rs
Fixed assets (net) 5,00,000
Stock 3,80,000
Investment in 12% Government securities 5,00,000
Outstanding subscription 12,000
Prepaid insurance 1,000
Sundry creditors 1,12,000
Subscription received in advance 15,000
Entrance donation received pending membership 1,00,000
Gratuity fund 1,50,000
The following adjustments are to be made while drawing up the accounts:
(i) Subscription received in advance as on 31st March, 2020 was Rs 18,000.
(ii)Outstanding subscription as on 31st March, 2020 was Rs 7,000.
(iii) Outstanding expenses are salaries Rs 8,000 and electricity Rs 15,000.
(iv)50% of the entrance donation was to be capitalized. There was no pending membership as on 31st March, 2023.
(v) The cost of assets sold net as on 1.4.2022 was Rs 10,000.
(vi) Depreciation is to be provided at the rate of 10% on assets.
(vii) A sum of Rs 20,000 received in October 2022 as entrance donation from an applicant was to be refunded
as he has not fulfilled the requisite membership qualifications. The refund was made on 3.6.2023.
(viii) Purchases made during the year amounted Rs 15,00,000.
(ix) The value of closing stock was Rs 2,10,000.
(x) The club as a matter of policy, charges off to income and expenditure account all purchases made on
account of crockery, cutlery, glass and linen in the year of purchase.

You are required to prepare an Income and Expenditure Account for the year ended 31 st March, 2023 and the
Balance Sheet as on 31st March, 2023 along with necessary workings.

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Answer: Income and Expenditure Account of Lion Club for the year ended 31 st March, 2023
Expenditure Rs Income Rs
To Salaries 1,28,000 By Subscription 1,94,750
To Printing and stationary 70,000 By Entrance donation 90,000
To Postage 40,000 By Interest 60,000
To Telephone and telex 52,000 By Miscellaneous income 9,000
To Repairs and maintenance 48,000 By Profit from operations 92,000
To Glass and table linen 12,000 By Excess of expenditure over income
To Crockery and cutlery 14,000 (deficit) transferred to capital fund 30,250
To Garden upkeep 8,000
To Membership fees 4,000
To Insurance 6,000
To Electricity charges 43,000
To Loss on sale of assets 2,000
To Depreciation 49,000
4,76,000 4,76,000

Balance Sheet of Lion Club as on 31st March, 2023

Liabilities Rs Assets Rs
Capital fund 10,89,600 Fixed assets 4,41,000
Gratuity fund 1,50,000 Stock 2,10,000
Sundry creditors 92,000 Investments 5,00,000
Subscription received in advance 18,000 Subscription outstanding 7,000
Entrance donation refundable 20,000 Interest accrued 2,000
Outstanding expenses 23,000 Bank 2,24,600
Cash 8,000

13,92,600 13,92,600

Working notes:
Balance Sheet of Lion Club as on 1st April, 2022
Liabilities Rs Assets Rs
Sundry creditors 1,12,000 Fixed assets 5,00,000
Subscription received in advance 15,000 Stock 3,80,000
Entrance donation received in advance 1,00,000 Investments 5,00,000
Gratuity fund 1,50,000 Subscription outstanding 12,000
Capital fund (balance figure) 10,29,850 Prepaid expenses 1,000
Cash 10,000
Bank 3,850
14,06,850 14,06,850

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Question 33. MCQ BASED QUESTIONS- PRACTICE SESSION 1

1. Endowment fund receipt is treated as –
(a) Capital Receipt (b) Revenue Receipt (c) Loss (d) Expenses

2. Which one of the following is not prepared by non-profit organizations

(a) Profit and loss account (b) Income & Expenditure account
(c) Receipts and payments account (d) Balance sheet

3. Legacy are generally –

(a) Capitalized (b) Treated Loss (c) Revenue Expenses (d) Deferred Revenue expenses

4. Any donation received for a specific purpose is a

(a) Assets (b) Revenue receipts (c) Capital receipts (d) None of the above

5. The receipts and payments account of a non-profit organization is a

(a) Nominal Account (b) Real Account
(c) Income Statement Account (d) Financial Account

6. The capital of a non-profit organization is generally known as

(a) Equity (b) Accumulated Fund/Capital Fund
(c) Finance Reserve (d) Cash Fund

7. If Rs 1,500 was outstanding at the beginning of the year towards subscription and 10,000 is received
during the year, with 2,500 still outstanding at the end of the year. The amount to be taken to receipts
and payments account is:
(a) 11,000 (b) 8,500 (c) 10,000 (d) None of the above

8. Any revenue expenses for which a separate fund is available will be

(a) Debited to the separate fund (b) Debited to income and expenditure account
(c) Capitalized and shown in the balance sheet (d) None of the above

9. Sale of old materials must be shown on the credit side of

(a) Cash Book (b) Income and expenditure account
(c) Balance Sheet (d) None of the above

10. The information for the preparation of receipts and payments account is taken from
(a) Cash Book (b) Income and expenditure account
(c) Cash Book and Balance Sheet (d) None

11. Any donation received for a specific purpose is a

(a) Capital Expenditure (b) Revenue receipt
(c) Liability (d) None of the above

12. The receipts and payments account shows the following details: Subscription Arrears Rs.500 Current
Rs.10,500 Advance Rs. 800 There are 1,200 members each paying an annual subscription of Rs10.
(a) Rs. 11,800 (b) Rs. 11,300 (c) Rs. 12,000 (d) None of the above

13. Any income arising from special fund will be credited to

(a) Special fund in the balance sheet (b) Income and expenditure account
(c) General fund in the Balance Sheet (d) None of the above

14. Income and expenditure account shows subscriptions at Rs.10,000. Subscriptions accrued in the
beginning of the year and at the end of the year were Rs 1,000 and Rs. 1,500 respectively. The figure
of subscriptions received appearing in receipts and payments account will be
(a) Rs. 9,500 (b) Rs. 11,000 (c) Rs.10,000 (d) None of the above

15. Which of the following item(s) is (are) shown in the income and expenditure account
(a) Only items of capital nature
(b) Only items of revenue nature which are received during the period of accounts
(c) Only items of revenue nature pertaining to the period of accounts
(d) Both the items of capital and revenue nature

16. Subscription received in advance is a/an

(a) Asset (b) Liability (c) Income (d) Expenditure

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17. Accrued subscription is a/an

(a) Asset (b) Liability (c) Income (d) Expenditure

18. Income and Expenditure account is prepared under

(a) Accrual basis (b) Cash basis
(c) Either of the two (d) Neither of the two

19. Receipt and Payment Account is prepared under

(a) Accrual basis (b) Cash basis
(c) Either of the two (d) Neither of the two

20. Donation not received for any specific purpose is transferred to

(a) Reserve fund (b) Capital fund
(c) Income and expenditure account (d) None of the above

21. If Rs 3,000 was outstanding at the beginning of the year towards subscription and 20,000 is received during the
year, with 5,000 still outstanding at the end of the year. The amount to be taken to Income and expenditure
account is:

a. 22,000 b. 20,000 c. 25,000 d. 23,000

Answer:- 1.(a) 2.(a) 3.(a) 4.(c) 5.(b) 6.(b) 7.(c) 8.(a) 9.(b)
10.(a) 11.(c) 12.(c) 13.(a) 14.(a) 15.(c) 16.(b) 17.(a) 18.(a) 19.(b)
20.(c), 21.(a)

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CHAPTER 10A. INTRODUCTION TO COMPANY ACCOUNTS

Definition of company:-- As per section 2(20) of the companies act 2013, “company” means a company incorporated under the
companies act,2013 or any previous company law.
SALIENT FEATURES OF A COMPANY :-
1. Incorporated association— A company comes into operation after its registration under Companies Act. Without such
registration no company can come into existence.
2. Separate legal entity – A company has a separate legal entity and is not affected by changes in its membership. Therefore,
being a separate business entity, a company can contract, sue and be sued in its incorporated name and capacity.
3. perpetual existence – Since company has existence independent of its members, it continues to be in existence despite the
death, insolvency or change of members.
4. common seal—Company is not a natural person, therefore, it can not sign the document in the manner as a natural person
would do. In order to enable the company to sign its documents it is provided with legal tool called ‘common seal’.
5. Limited liability--- The liability of every shareholder of a company is limited to the amount he has agreed to pay to the
company on the shares allotted to him.
6. Distinction between ownership and management:-- Since the number of shareholders is very large and may be distributed
at different geographical locations, it becomes difficult for them to carry on the operational management of the company on
day to day basis. This gives rise to the need of separation of the management and ownership.
7. Not a citizen—A company is not a citizen in the same sense as a natural person is.
8. Transferability of shares:- The capital is contributed by the shareholders through the subscription of shares. Such shares are
transferable by its members except in case of a private limited company, which may have certain restrictions on such
transferability.
9. Maintenance of books---A limited company is required by law to keep a prescribed set of account books and any failure in
this regard attract penalty.
10. Periodic audit --- a company has to get its accounts periodically audited through the chartered accountant appointed by the
shareholders in their Annual General Meeting on the recommendation of Board of Directors.
11. Right of access to information:-- The right of the shareholders of a company to inspect its books of accounts is governed by
article of association.

TYPES OF COMPANIES
1. STATUTORY COMPANY:- All those companies, which operate under the special act passed by the State Legislature or
Parliament, are called statutory companies. They are formed for special purpose by a special Act of Parliament. Included in this
category are the unit Trust of India, Life Insurance Corporation, Reserve Bank of India, State Bank of India and so on. Such
companies are not required to use the word ‘limited’ as part of their name. For example, Reserve Bank of India. Such companies
are required to get their accounts audited by Comptroller and Auditor General of India and are publicly accountable to the State
Legislature/Parliament.
2. GOVERNMENT COMPANY:- According to Section 2(45) of The Companies Act, 2013 "a Government company means any
company in which not less than 51% of the paid-up capital is held by the Central Government, or by any State Government or
Governments, or partly by the Central Government and partly by one or more State Governments and includes a company which is a
subsidiary of a government Company".
3. FOREIGN COMPANY:- According to Section 2(42) of The Companies Act, 2013 "A foreign company is one that is
incorporated outside India but has place of business or business operations in India.
4. HOLDING COMPANY:- Under Section 2(46) of The Companies Act, 2013, a company is deemed to be a holding company if
the other company is its subsidiary company. A company becomes a subsidiary company when other company controls 51% or more
of its paid-up share capital, has right to appoint directors on its board, or is a subsidiary of another subsidiary company.
5. SUBSIDIARY COMPANY:- According to Section 2(87), a company is deemed to be a subsidiary of another company if and
only if -
(a) That other company controls the composition of its board of directors, it implies that the controlling company (holding company)
has the right to exercise the power of appointing or removing any person or a majority of persons from the directorship at its
own discretion; or
(b) That other company holds more than half in its nominal value of its equity share capital; or
(c) That other company is a subsidiary of any company, which is that other's subsidiary. For example, Company B is a subsidiary
of Company A, and Company C is a subsidiary of Company B. Since, Company B is a subsidiary of Company A, Company C
becomes the subsidiary of Company A as well.
(d) In case of a body corporate which is incorporated in a country outside India, a subsidiary or holding company of the body
corporate under the law of such country shall be deemed to be a subsidiary or holding company within the meaning and for the
purpose of this ad whether the requirements of this section are fulfilled or not. It implies that if a company operating in India is
a subsidiary of a foreign company, it will be treated as such irrespective of the fact whether in India, if it fulfills conditions (a),
(b) and (c) listed above or no.
6. REGISTERED COMPANY:- All those companies that are registered under The Companies Act, 2013, are called Registered
Companies.
7. LIMITED LIABILITY COMPANY

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(a) LIMITED BY SHARES:--According to Section 2(22) of The Companies Act, 2013 " A company in which the liability of shareholders
is restricted to the amount of unpaid calls on shares is known as limited company.

(b) LIMITED BY GUARANTEE:--According to Section 2(21) of The Companies Act, 2013 " A company in which the
liability of shareholders is restricted to the amount of Guarantee given is called limited by guarantee.

8. UNLIMITED LIABILITY COMPANY:- According to Section 2(92) of The Companies Act, 2013 A company in which the liability of
shareholders is not restricted only to the value unpaid of shares is known as unlimited company
9. PUBLIC COMPANY:- According to Section 2(71) of the Act, 'public company' means a company which (a) is not a private
company; (b) has a minimum paid-up capital as may be prescribed; and (c) is a private company which is a subsidiary of a company
which is not a private« company. After Companies (Amendment) Act, 2000, a public company cannot be registered with a capital of
less than Rs. 5 lakhs. Public companies invite the public at large to participate and subscribe for the shares in, or debentures of, the
company and there are no restrictions on transfer of shares.
10. PRIVATE COMPANY:- According to Section 2(68), a private company means a company which has a minimum paid-up
capital as may be prescribed, and by its articles:
(a) Restricts the rights of members to transfer its shares.
(b) Except in one person company, limits the number of its member to 200 excluding: (i) persons who are in employment of the
company; and (ii) persons who, having been formerly in the employment of the company, were members of the company while
in that employment and have continued to be members after the employment ceased. For this purpose joint holders of shares
will be counted as single members.
(c) Prohibits any invitation to the public to subscribe to any shares in, or debentures of, the company.
(d) Prohibits any invitation or acceptance of deposits from persons other than its member, directors, and relatives. Private
companies do not involve participation of public in general.
11. LISTED COMPANY:- A listed company is a public company which has any of its securities listed in any recognized stock
exchange.
12. UNLISTED COMPANY:- An unlisted company is one whose securities are not listed on any recognized stock exchange for
trading.
13. One person company -- According to Section 2(62) of The Companies Act, 2013, a company which has only one person as
member is called one person company.
14. Small company – as per section 2(85), a small company means a company, other than a public company,-
(i) Paid up share capital of which does not exceed 50 lakhs or such higher amount as may be prescribed which should not be more than
5 crores; or
(ii) turnover of which as per last profit and loss account does not exceed 2 crores or such higher amount as may be prescribed which
should not be more than 20 crores. Provided that nothing in this clause should apply to
(a) A holding company or a subsidiary company
(b) A company registered under section 8
(c) A company or body corporate governed by any special act.

MAINTENANCE OF BOOKS OF ACCOUNT :-- As per section 128 of the companies Act 2013, every company should prepare
and keep at its registered office books of account and other relevant books and papers and financial statement for every financial year
which give a true and fair view of the state of affairs of the company, including that of its branch office or offices, if any, and explain
the transactions effected both at the registered office and its branches and such books should be kept on accrual basis and according to
the double entry system of accounting.
Provided further that the company may keep such books of account or other relevant papers in electronic mode in such manner as may
be prescribed.
Maintenance at place other than registered office:- it is the duty of the company to inform the registrar of companies within 7 days
of the decision in case the board of directors decide to maintain books at place other than the registered office.
In case of branch office :- where a company has a branch office in India or outside India, it should be deemed to have complied with
the provisions of the act, if proper books of account relating to the transactions effected at the branch office are kept at that office and
proper summarised returns periodically are sent by branch office to the company at its registered office or such other place as as the
board of directors have decided.
Statutory books: the following statutory books are required to be maintained by a company under different sections of the
companies Act 2013:
a. Register of investments of the company held in its own name.
b. Register of charges
c. Register of members
d. Register of debenture holders

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e. Minute books
f. Register of contracts, or arrangements in which directors are interested.
g. Register of directors and key managerial personnel and their shareholding
h. Register of loans and investments by the company.
i. Registers and documents relating to the issue of shares are:
1. Share application and allotment book
2. Share call book
3. Certificate book
4. Register of members
5. Share transfer books
6. Dividend register

ANNUAL RETURN:- in accordance with section 92 of the companies act 2013, every company should prepare an annual return in
the form prescribed by the companies Act 2013 signed by a director and the company secretary, or where there is no company
secretary, by a company secretary in practice.
Provided that in relation to one person company and small company, the annual return should be signed by the company secretary, or
where there is no company secretary, by the director of the company.
The annual return should be filed with the registrar within 60 days from the day on which each of the annual general meeting is held.
PREPARATION OF FINANCIAL STATEMENTS:- Under Section 129 of the Companies Act, at the annual general meeting
of a company, the Board of Directors of the company shall lay before the company. Financial statements as per section 2(40)
of the companies Act, 2013 include -
(a) A balance sheet as at the end of the financial period;
(b) A profit & loss account for that period (In case of a company not carrying on business for profit, an income and
expenditure account)
(c) cash flow statement
(d) A statement of change in equity, if applicable
(e) Any explanatory notes related to point (a) to (d) above.
Provided further that the financial statement, with respect to one person company, small company and dormant company, a
startup private company may not include cash flow statement.

Section 129 along with Schedule III of the Companies Act, 2013 deals with the preparation and presentation of profit and loss
account and the balance sheet. It requires that final accounts of a company shall give a true and fair view of the state of affairs of
the company. Schedule III prescribes the form in which profit and loss account and Balance Sheet should be prepared.
SCHEDULE III (Section 129) (PART I—FORMAT OF BALANCE SHEET)
Particulars Note Figures as at the Figures as at
No. end current the end of
reporting period previous
reporting
period
I. Equity and Liabilities
Shareholder’s fund ------- -------
Share capital 1 ------- -------
Reserves and surplus 2 ------- -------
Money received against share warrants 3

(2) Share application money pending allotment 4 ------ -------

(3) Non-current liabilities
Long-term borrowings 5 ------- -------
Deferred tax liabilities (Net) 6 ------- -------
Other long term liabilities 7 ------- -------
Long-term provisions 8 ------- -------
(4) Current liabilities
Short-term borrowings 9
Trade payables 10
Other current liabilities 11
Short-term provisions 12
Total ------- -------
II. Assets
(1) Non-current assets
Property, plant & equipment

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(a)Tangible assets 13 ------- -------

(b) Intangible assets 14 ------- -------
(c)Capital work-in progress 15 ------- -------
(d) Intangible assets under development 16 ------- -------
Non-current investments 17 ------- -------
Deferred tax assets (net) 18 ------- -------
Long-term loans and advances 19 ------- -------
Other non-current assets 20 ------- -------
(2) Current assets
Current investments 21 ------- -------
Inventories 22 ------- -------
Trade receivable 23 ------- -------
Cash and cash equivalent 24 ------- -------
Short-term loans and advances 25 ------- -------
Other current assets 26 ------- -------
Total ------- -------
Notes forming part of the financial statements 1-46
(Note number is not prescribed in schedule III is numbered as per individual requirement)

Format of Statement of Profit and Loss

Particulars Note Figures for the Figures for the

No. current previous reporting
reporting period period
I. Revenue from operations 28 ------ ------
II. Other income 29 ------ ------
III. Total revenue (I+II) ------ ------
IV Expenses:
Cost of materials consumed 30 ------ ------ ------
Purchases of Stock-in-Trade 31 ------ ------ ------
Changes in investments of finished goods work-in- 32 ------ ------ ------
progress and Stock-in-Trade
Employee benefits expense 33
Finance costs 34
Depreciations and amortization expenses 15&16
Other expenses 35
Total expenses ------ ------
V. Profit before exceptional and extraordinary items ------ ------
and tax (III-IV)
VI. Exceptional items 36 ------ ------
VII. Profit before extraordinary items and tax (V-VI) ------ ------

VIII. Extraordinary Items 37 ------ ------

IX. Profit before tax (VII-VIII) ------ ------
X. Tax expense: 38
Current tax ------ ------
Deferred tax ------ ------ ------ ------
XI. Profit (Loss) for the period from continuing ------ ------
operations (VII-VIII)
XII. Profit/(Loss) from discounting operations 39 ------ ------
XIII. Tax expense of discontinuing operations 40 ------ ------
XIV. Profit/(loss) from discounting operations ------ ------
(After tax) (XII – XIII)
XV. Profit (Loss for the period (XI+XIV) ------ ------
XVI. Earnings per equity share: 41
Basic ------ ------
Diluted ------ ------

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Question 1. State the major heads and sub-heads under which the following items will be shown:
a. Share application pending allotment
b. Share application pending allotment became refundable
c. Income tax reserve
d. Income tax provision
e. Income tax payable
f. Dividend payable
g. Unclaimed dividend
h. Proposed dividend
i. Share option outstanding account
j. Finance lease obligations
k. Current maturity of finance lease obligation
l. Debentures/ bonds
m. Current maturity of debentures/bonds
n. Loan repayable on demand

Question 2. State the major heads and sub-heads under which the following items will be shown:
A. Current maturity of finance lease
B. Application money received for securities and due for refund and interest accrued thereon
C. Provision for expense
D. Calls in advance
E. Calls in arrear
F. Provident fund/gratuity fund
G. PF payable
H. ESI/ Gratuity payable
I. Provision for employees
J. Stores and spare parts
K. Loose tools
L. Tools and equipment
M. Bank deposits for 3 years
N. Fixed deposits with restrictions for withdrawal after 2 years.
O. Drafts/cheques in hand

Question 3. State the major heads and sub-heads under which the following items will be shown:
A. Receivables arising from activities being carried out during lean period, which is not in normal course of business.
B. Capital commitments
C. Contingent liabilities
D. Forfeited share capital
E. Reserve capital
F. Capital reserve
G. Interest accrued on investments
H. Deposits with electricity supply company
I. Mining rights
J. Provision for doubtful debts
K. Long term loan/advances from debtors/customers
L. short term loan/advances from debtors/customers

Question 4. State the major heads and sub-heads under which the following items will be shown:
A. Interest accrued on calls in advance
B. Premium on redemption of debentures
C. Balance of loss( profit and loss account Dr balance)
D. Bank overdraft
E. Work in progress( machinery)
F. Development of software in progress
G. Computer software
H. Capital advances paid for purchase of machinery.
I. Machinery
J. Machinery( fixed assets) held for sale
K. Workmen compensation fund/reserve

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Question 5. Write short notes on presentation of share capital in the balance sheet of a company.
Question 6. Write short notes on presentation of tangible assets/intangible assets in the balance sheet of a company.
Question 7. Prepare the Balance Sheet of Payal Textiles Ltd. as required under Schedule III of the Companies Act, 2013, as on 31 March
2023. Following balances are given:

Accounts Dr. Cr.

Rs. Rs.
Secured Term Loans — 10,00,000
Creditors — 11,45,000
6% Debentures Account — 27,00,000
Provision for Tax — 1,70,000
Security Premium Account — 4,75,000
General Reserves — 20,50,000
Loans from Debtors — 2,00,000
Provision for (Doubtful) Debts — 20,200
Provision for Depreciation — 5,00,000
Equity Share Capital (30,000 x 10) — 3,00,000
8% Preference Share Capital (10,000 x 100) — 10,00,000
Advances given to employee 3,72,000 —
Advances to suppliers 55,000 —
Cash and Bank 2,75,000 —
Loose Tools 50,000 —
Long term Investments 2,25,000 —
Profit and Loss Account (Losses) 3,00,000 —
Debtors 12,25,000 —
Accrued income 58,000 —
Stores Items 4,00,000 —
Fixed Assets 56,50,000 —
Capital Work-in-Progress 2,00,000 —
Finished Goods Stock 7,50,200 —
95,60,200 95,60,200
QUESTION 8 From the following particulars furnished by Pioneer Ltd., prepare the Balance Sheet as at 31 st March, 2023. Give notes
at the foot of the Balance Sheet as may be found necessary:
Debit Credit
Equity Capital (Face value of Rs. 100) 10,00,000
Calls in Arrear 1,000 —
Land 2,00,000 .—
Building 3,50,000 —
Plant and Machinery 5,25,000 —
Furniture 50,000 —
General Reserve — 2,10,000
Loan from State Financial Corporation — 1,50,000
Stock:
Finished Goods 2,00,000
Raw Materials 50,000 2,50,000 —
Provision for Taxation --- 68,000
Sundry Debtors 2,00,000 —
Advances 42,700 —
Dividend Payable — 60,000
Profit and Loss Account — 1,00,000
Cash Balance 30,000 —
Cash at Bank 2,47,000 —
Preliminary Expenses 13,300 —
Loans (Unsecured) — 1,21,000
Sundry Creditors (For Goods) — 2,00,000
19,09,000 19,09,000

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The following additional information is also provided:

1. 2000 equity shares were issued for consideration other than cash.
2.Debtors of Rs. 52,000 are due for more than six months.
3.The cost of assets : Building : Rs. 4,00,000; Plant and Machinery : Rs. 7,00,000, Furniture : Rs. 62,500.
4.The balance of Rs. 1,50,000 on the loan account with State Finance Corporation is inclusive of Rs. 7,500 for interest accrued but
not due. The loan is secured by hypothecation of the Plant and Machinery.
5. Balance at Bank includes Rs. 2,000 with Perfect Bank Ltd. which is not a Scheduled Bank.
6. Bills receivable for Rs. 2,75,000 maturing on 30 June 2021, have been discounted.
7.The Company had contracts for the erection of Machinery at 1,50,000 which is still incomplete.(IPCC, 2014 Nov -16 marks)
QUESTION 9 The following are the balances of Johri Aabhushan Bhandar Co. Ltd. as on31 march, 2023:
Credit Rs Debit Rs.
Share Capital (Rs. 100 Shares) 40,00,000 Premises 30,72,000
12% Debentures 30,00,000 Plant 33,00,000
Profit and Loss Account 4,00,000 Stock 7,50,000
Bills payable 3,70,000 Debtors 8,70,000
Creditors 4,00,000 Goodwill 2,50,000
Sales 41,50,000 Cash and bank 5,44,000
General Reserve 2,50,000 Calls in Arrear 75,000
Bad-Debts Provision on 1.04.2020 35,000 Interim Dividend Paid 3,92,500
Purchases 18,50,000
Preliminary Expenses 50,000
Wages 9,79,800
General Expenses 68,350
Salaries 2,02,250
Bad-debts 21,100
Debentures Interest paid 1,80,000
1,26,05,000 1,26,05,000

(a) Depreciate plant by 15%

(b) Half year’s Debenture Interest due.
(c) Create 5% provision on debtors for doubtful debts
(d) Provide for income tax @ 30%
(e) Stock on 31 March, 2021 was Rs. 9,50,000.
(f) A claim of Rs. 25,000 for workmen compensation is being disputed by the company.
(g) The Board declared a dividend of 12% on paid up capital including interim dividend.
(h) Transfer Rs 10,000 to general reserve.

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CHAPTER 10 B. ISSUE,FORFEITURE AND RE-ISSUE OF SHARES

MEANING OF SHARES: In case of sole proprietorship and partnership there is limit of capital investment in business
since in sole proprietor there is only one owner and in case of partnership, there also number of owners are limited. So
where there is more capital required or nature of project is very big and that requires huge capital, those requirement
demands companies form of organization in which capital is big and number of owners are not limited.
According to section 2(84) of the companies act 2013, share means a share in the share capital of a company and
includes stock.

SHARE CAPITAL:-Total share capital of company is divided into number of small indivisible units of a fixed amount and
each unit is called share. The fixed value of share printed on the share certificates called Nominal/ Par/ Face value of
share. However company can issue share at a price different from face value of share i.e. at discount or premium. E.g.
Share having face value Rs 100 can be issued at Rs 50/- premium on one share, so here issue price is Rs 150.The liability
of holder of shares (called shareholders) is limited to issue price of share acquired by them.

According to SEBI guidelines, a company is free to price its issue if it has three years track record of consistent
profitability and in case of New Company, if it has been promoted by company with a five years tracks record of
consistent profitability. Since total capital of company is divided into shares, the capital of the company is called share
capital. Document used to invite offer from public to subscribe share and debenture of company is called prospectus.

Note: The issue price need not be equal to market price of the share. These days the shares are generally priced on
the basis of book building process. (Book building is a process through which company determines it's share prices.
Under this method company determines a price band of its shares and on the basis of bids received from potential
investors at various prices within the price band finally fixes its issue price.)

Share capital of company divided into following categories:-

1. Authorized share capital (section 2(8) :- This capital also called Registered Capital or Nominal Capital.
This is maximum capital requirement of company and mentioned in ‘capital clause’ of the ‘Memorandum of Association’
registered with Registrar of Company. This is maximum limit which a company can raise by issue of share capital during its
life time. It is shown on liabilities side of Balance Sheet at Face Value.

2. Issued Share Capital(section 2(50) :- It is that part of Authorized Capital which company uses to raise fund since it
is not necessary that all Authorized Capital should be issued. The remaining portion of the authorized capital which is
not issued is called un-issued capital. It is not shown in Balance Sheet.

3. Subscribed Share Capital (section 2(86) :- That part of issued share capital which has been subscribed by the public
is called subscribed share capital. Subscribed share capital may be more, less or equal to issued share capital. At least
90% of the issued share capital must be subscribed by the public before the allotment of shares.

4. Called-up Share Capital (section 2(15) :- Companies generally receive the issue price of share in installments. Called-up
Capital is that portion of issue price of share which a company has demanded and called from shareholder. The portion of issue
price which is not called or demanded by company is termed as uncalled capital.

5. Paid-up Share Capital (section 2(64) :- Paid-up capital is that portion of Called-up Capital which is paid by
shareholder. The portion of called up capital which is not paid by shareholders are called unpaid calls or Installment in
Arrears or Calls in Arrears. To calculate paid-up share capital, Calls in Arrear is deducted from Called- up Capital in the
balance sheet. Called-up Capital and Paid-up capital are shown together at liabilities side of balance sheet. Dividend are
paid on Paid -up Capital

6. Reserve Share capital :- According to section 65 of Company Act 2013, a company may decide by passing special
resolution that some portion of subscribed uncalled capital shall not be called up except in the event of winding- up of
Company. Portion of uncalled capital which a company has decided to call only in case of liquidation of company is called
Reserve Liability / Reserve Capital.

7. Capital Reserves:- Capital Reserves are created out of Capital Profits. These are not free for distribution as dividend.
This Reserve can be used to write off capital losses such as discount on issue of shares, underwriting commission etc.
This Reserve can also be used to issue Bonus Shares if they have been realized in cash. Capital reserves are part of
Reserves and surplus and shown under the head ‘Reserves and surplus’ in the balance sheet.

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TYPES OF SHARES: These are two type of shares:

1. Preference Shares:-Those shareholder which have preferential right in following matter

a. They get assured preferential dividend at fixed rate during the life of company.
b. They are having preferential right to be paid first in case of winding up of company, from other
shareholders.

According to section 43 of companies Act 2013, person holding preference shares are called preference shareholders.
However, Holder of preference share does not have voting rights.
The company Act 2013, prohibits the issue of preference share which is irredeemable. Preference shares are cumulative
and Non-participating unless otherwise stated. According to Company Act, preference shares which are redeemable
within 20 years can only be issued.

Types of Preference Shares.: These are following type:-

a. Cumulative Preference Shares

o A cumulative preference share is one that carries the right to a fixed amount of dividend every year. If
current year profit is insufficient, it is paid from future profit. So dividend is accumulated unless it is
paid in full and such shares are called Cumulative Preference Share.
o The arrears of dividend are shown in balance Sheet as ‘Contingent Liabilities’.
o In India ‘Preference shares’ are always cumulative unless otherwise stated.
o If dividends are in arrears for a period not less than two year, holders of such shares will be entitled to
take part and vote on every resolution in general body meeting of shareholders.
b. Non-Cumulative Preference Shares
o These are those shares which do not carry right to get divided accumulated or carry forward if profit of
current year are insufficient. In other words we can say if company cannot pay dividend in one year then
right of shareholder to receive dividend in future period expires.
o If dividend remains arrears for a period not less than two years or an aggregate periods of not less
than three years comprised in six years ending with the expiring of financial year, holder of such
shares will be entitled to take part and vote on every resolution at any meeting of shareholders.
c. Participating Preference shares :--These shareholders have following rights
o Right to get fixed percentage of dividend.
o Right to participate on stipulated profit after equity shareholders have been paid at stipulated rate.
o In case of winding up of company, these shareholder also get right to receive pre-determined portion of
surplus after equity shareholders have been paid off.
d. Non participating preference Share:- These shareholders only get fixed percentage of dividend every
year. They don’t have right to participate in profit and surplus in case of winding-up of company.

e. Redeemable Preference Shares.: These are shares that company may issue on the condition that company
will repay after the fixed period or even earlier at company discretion. It is governed by section 55 of the
companies Act 2013.

f. Non-Redeemable Preference shares:- Those shares which are not redeemable are called non redeemable
preference shares. According to section 55, no company limited by shares shall issue irredeemable preference
share or preference shares redeemable after expiry of 20 years from the date of issue.

g. Convertible Preference Shares:- These shareholder have right to convert their shares into equity shares at
their option according to terms and conditions of their issue.

h. Non-Convertible preference Shares :These shareholders do not have right to convert their shares into equity shares.

Note: Unless mentioned otherwise Preference Shares are Non-Cumulative, Non Participating, Non- Convertible and
Redeemable in nature.

2 Equity Shares(section 43(a) :-These are those shares which are not Preference Share. They don’t have
preferential right in matter of dividend or repayment of capital. On Equity shares dividend is recommended by Board
of Directors and dividend may vary from year to year.These shareholders carry voting right in general meeting of
shareholders. Company (Amendment) Act 2000, permit issue of equity share capital with differential right as to
dividend, voting or otherwise.

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ISSUE OF SHARES FOR CASH :- To Issue shares, private companies raise funds from private placement of shares. Public
companies for raising funds issue prospectus and invite general public to subscribe for its shares. On basis of prospectus,
applications are deposited in scheduled bank by interested parties along with amount payable at the time of application. First
installment along with application is called application money. As per section 39 of the co act 2013, application money
cannot be less than 5% of face value of shares.
▪ SEBI Guidelines require the shares issued are made fully paid-up within 12 months of the date of allotment if
the size of the issue is up to 500 crores.
▪ As per SEBI Guidelines, the minimum application money to be paid by an applicant along with the application
shall not be less than 25% of the issue price.

IMP. NOTE -- matters related to issue and transfer of securities will be administered by the SEBI and not by the
Company Law Board(CLB)
▪ According to company Act 2013, a company can not proceed to allot shares unless minimum subscription is
received by company.
▪ Share application money is converted into share capital after board of director approved for allotment of
shares.

Minimum Subscriptions :- A public limited company cannot make any allotment of shares unless the amount of
minimum subscription stated in prospectus has been subscribed. Amount of minimum subscription to be disclosed in
prosecutes by Board o f Director taking into account following
1. Preliminary expenses of company
2. Commission payable on issue of shares.
3. cost of fixed assets purchased or to be purchased
4. Working capital requirement of company.
5. Any other expenditure for day to day operation of business.
▪ According to guidelines of Securities Exchange Board of India(SEBI) a company must receive a minimum 90%
subscription against whole issue before making any allotment of shares or debenture to public
▪ If company is not able to receive minimum subscription of 90% of the issue, the entire subscription shall be
refunded to applicants within 15 days from closures of issue.
▪ In case of delayed refund interest for the delayed period as per section 73 of companies Act shall be payable @
4% to 15%(having regard to the length of the period in delay) on the amount of refund.
▪ The companies Act 2013 requires that the period of at least one month must be between two calls.
▪ The company has right to reject or accept an application fully or partially.

Subscriptions of Shares:- When ever company issues shares it is not necessary that all shares issued by company are
also subscribed by public. There are three situation of subscription by public
1. Full subscription
2. Under subscription
3. over subscription
Full subscription:- In this situation number of shares offered for subscription and the number of shares actually
subscribed by public are same.
Under Subscription:- In this situation number of shares offered for subscriptions is more than number of shares
subscribed by public.

Over subscriptions :- In this situation number of shares offered for subscription is less than number of shares
subscribed by public.

Shares issued at Discount(Section 53):- As per new section 53 of the co. act 2013, no shares can be issued at
discount( except ESOP and Sweat equity shares)

Shares Issued at Premium( section 52):- It is that situation where company issue share more than its have clue
nominal value / face value. This extra amount is called share premium. Example, where face value of company is Rs. 100
and company issue it at Rs. 200, here Rs 100 is share premium

Treatment of security Premium:- Amount of security premium is credited to separate account called security
premium account. It is not part of capital. It is shown on liabilities side of balance sheet under the sub-head reserve and
surplus( Heading shareholder’fund). According to section 52 of company Act 2013, security premium may be used
by company for the following purpose
a) For issuing Bonus shares
b) To write off preliminary expenses of company
c) To write off expenses, commission, and discount allowed on any securities and debenture of company.
d) To pay premium on redemption of preface share or debenture of company

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Over Subscription and pro- rata Allotment:- When shares are over subscribed, it is not possible for company to satisfy all
the applicants. Allotment of shares is done at the discretion of company. Allotment basis can be any one of the following:-
(a)Company may allot full shares to some and reject others.
(b) Allotment of shares on Pro-rata basis.

Pro-rata Allotment:- Means allotment of shares in proportion of shares applied for. Applicants are informed about
allotment procedure through an advertisement in leading newspapers.

Calls –in Arrears: Sometimes share holders fail to pay the amount due on allotment or calls. The total unpaid amount on
one or more installments is known as call-in-arrear or unpaid calls. Such amount represents uncollected amount of
capital from shareholders. Call-in-arrear is deducted from called-up capital to reach at paid-up value of share capital.
Generally Articles of Association empower the directors to charge interest at stipulated rate on call-in-arrear. However,
according to Table F of articles of association, Interest at the rate of 10% per annum is charged on unpaid calls for the
period started from the due date and end on when actual payment is made. However, directors have authority to waive
the application of this rule in individual cases at their discretion.

Call-in Advance:- Sometime, shareholders pay in advance for calls which have not been made. This amount may be with
application money, allotment money, first call etc. Calls in advance is shown as a separate item on the liability side of the
balance sheet under the head ‘other current liability’. As per table F of articles of association, INTEREST on calls in
advance is paid @ 12% p.a.

Difference between interest on calls in arrear and interest on calls in advance

Interest on Calls in Arrears Interest on Calls in Advance

It is payable by shareholders to company on the calls due It is payable by the Company to Shareholders on the
but remaining unpaid. call money received in advance but not yet due.

As per Table F maximum prescribed rate is 10%. As per Table F maximum prescribed rate is 12%.

Period considered : From the date call money was due to Period considered: From the date money was received
the date money is finally received. to the day call was finally made due.

Directors have a right to waive off such interest in Shareholders are not entitled for any dividend on calls
individual cases at their own discretion. in advance.

It is a nominal account in nature and is credited to It is a nominal account in nature with interest being an
statement of profit and loss as an income. expense for the company.

Forfeiture of shares:- The Article of a company usually authorize the directors to forfeit shares of a member on account
of non-payment of a call or interest thereon after serving him a prior notice as prescribed by the articles. Premium
money received is never forfeited.

Re-issue of forfeited shares:- Forfeited shares can be re-issued at any price so long as the total amount received (from
the original allottee and the second purchaser) for those shares is not less than the amount in arrears on those shares.
Loss on re-issue can not exceed the forfeited amount. If the loss on re-issue is less than the forfeited amount, the surplus
should be transferred to capital reserve. The forfeited amount on shares not yet re-issued should be shown in the
balance sheet as an addition to the share capital. When the shares are re-issued at loss then such loss is debited to
‘Forfeited shares account’. If the shares are re-issued at a price which is more than the face value of the shares, the excess
amount will be credited to ‘securities premium account’. When shares originally issued at a discount are re-issued at a
loss, the loss to the extent of original discount is debited to Discount on issue of shares Account and the balance loss is
debited to forfeited shares Account.

ISSUE OF SHARES FOR CONSIDERATION OTHER THAN CASH:- A company may issue shares in a direct exchange for
land, building or other assets. Shares may also be issued in payment for services rendered by promoters, lawyers in the
formation of the company. In the balance sheet, these shares should be shown separately. Within one month of
allotment, the company must provide before the registration.

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CONCEPT BASED QUESTIONS

Question1. X ltd issued 20,000 shares of Rs 10 each payable as follow:
On application Rs 2
On allotment Rs 3
On first call Rs 4
On final call Rs 1
Public applied for 20,000 shares ( Mr A for 12,000 shares and Mr B for 8,000 shares). Money dues on various calls were
received except Mr A who failed to pay both calls money. Thereafter his shares were forfeited. These shares were reissued at
Rs 7 as fully paid up. Make entries.

Question 2. COC ltd issued 25,000 shares of Rs 10 each payable as follow:

On application Rs 2
On allotment Rs 4
On first call Rs 3
On final call Rs 1
Public applied for 30,000 shares (Mr A for 18,000 and Mr B for 12,000 shares) and allotment was made pro-rata to both
applicants. Money dues on various calls were received except Mr A who failed to pay both calls money. His shares were
forfeited and reissued at Rs 9 as fully paid up. Make entries.

Question 3. Tata ltd. issued 40,000 shares of Rs 10 each payable as follow:

On application Rs 2
On allotment Rs 3
On first call Rs 2
On final call Rs 3
Public applied for 50,000 shares and allotment was made to all applicants on pro-rata basis. Money dues on various calls were
received except Mr Ramesh to whom 2000 shares were allotted failed to pay allotment and first call money. Subsequently his
shares were forfeited. Thereafter final call was made and Mr Rajan to whom 1000 shares were allotted failed to pay final call
money. His shares were also forfeited. All these forfeited shares were reissued at Rs 8 as fully paid up. Make journal entries.

Question 4. Hudco ltd. issued 25,000 shares of Rs 10 each at a premium of Rs 2 per share payable as follows:
On application Rs 2
On allotment Rs 5(including premium)
On first call Rs 4
On final call Rs 1
Public applied for 32,000 shares and allotment was made to applicants for 30,000shares on pro rata basis. Remaining
applications were rejected.
Money dues on various calls were received except Mr karan to whom 2400 shares were allotted failed to pay allotment and
first call money. Subsequently his shares were forfeited. Thereafter final call was made and Mr B to whom 1200 shares were
allotted failed to pay final calls money. His shares were also forfeited. These shares were re-issued at Rs 8 as fully paid up.
Make entries.

Question 5. Maruti ltd issued 40,000 shares of Rs 10 each at a premium of 20% payable as follow:
Application Rs 3(including premium Re 1)
Allotment Rs 4( including premium Re 1)
First call Rs 3
Final call Rs 2
Public applied for 50,000 shares and allotment was made on pro-rata basis to all applicants. Mr Raju to whom 4,000 shares
were allotted failed to pay allotment and first call money. Subsequently his shares were forfeited. Mr Kaju to
whom 6,000 shares were allotted failed to pay both calls money. His shares were also forfeited after the final call. Out of
forfeited shares 7,000 shares were re-issued at Rs 8 as fully paid. It includes all the shares of Mr Kaju. Make entries.

QUESTION 6. Umesh Ltd. issued 2,00,000 equity shares of Rs. 10 each at a premium of Re. 1 per share (to be adjusted on
allotment) payable as follows (i) Rs.2 on application; (ii) Rs. 3 on allotment and (iii) Rs. 4 on first call. Subscription list was
closed on 1 January 2004 by which date applications for 4,50,000 shares had been received. Allotment was made as under :
List A : Applicants for 50,000 shares were allotted in full.
List B : Applicants for 1,00,000 shares were allotted 50,000 shares on pro-rata basis
List C : Applicants for 3,00,000 shares were allotted 1,00,000 shares on pro-rata basis. Excess application money was adjusted
towards allotment and calls authorised by articles of association.
All the shareholders paid the amounts due on allotment and call except Aashima who was allotted 4,000 shares under List B
and Swati who was allotted 2,000 shares under List C. These shares were duly forfeited. Of these, 5,000 shares (including

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CA FOUNDATION FUNDAMENTALS OF ACCOUNTING CA/CMA Santosh kumar

4,000 shares of Aashima) were reissued @ Rs. 7 per share. Journalize the transactions including the cash and show the balance
sheet with relevant information only.

QUESTION 7. (Issue of shares to vendors and promoters) Doaba limited company has an authorised capital of Rs. 2,50,000
divided into 25,000 shares of Rs. 10 each. Of these 4,000 shares were issued to the vendors as fully paid for purchase of
building 8,000 shares were subscribed for by the public and during the first year, Rs. 2 per share were paid on application, Rs.
2 per share on allotment and Re. 1 per share on call. 2,000 shares were issued as fully paid to promoters. Of the 8,000 shares
subscribed for by the public, these had been paid at the end of the first year as under:
On 6,000 shares the full amount called up.
On 750 shares Rs. 4 per share (application and allotment money)
On 1,250 shares Rs. 2 share (application money only)
Company forfeited those shares on which less than 4 have been received.
You are required to submit journal and cash book entries recording the share capital transactions of the company.

Q UESTION 8. (Calls-in-arrears and calls-in-advance) Aashima Ltd. issued 2,00,000 equity shares of Rs. 10 each, payable in
equal amounts on application, allotment and the two calls. Applications were received for 2,50,000 shares. One applicant to
whom 1,000 shares were allotted paid in full while remitting the allotment money and another shareholder who was allotted
1,200 shares failed to pay the final call. The remaining shareholders paid the amount due as and when called upon to pay. The
following information is also relevant: (i) The company allotted the shares to applicants as per SEBI guidelines, (ii) The first call
was made 4 months after the allotment date and the final call made 6 months after the first call, (iii) The company received
the calls-in-arrears on 1,200 shares 4 months after the final call became due with interest on calls-in-arrears. Assuming that
the company allotted only the shares offered for subscription, pass journal entries. The company paid the interest due from it
on the date for final call in cash. Table F is applicable whenever needed.

QUESTION 9. (Share application and allotment account) Parul Construction Ltd. made an issue of 30,000 shares of Rs. 10 each
payable Rs. 3 on application, Rs. 5 on allotment and Rs. 2 on call. 93,200 shares were applied for and owing to this heavy over-
subscription, allotments were made as follows:
(i) Applicants for 21,500 shares (in respect of applications for 2,000 or more) received 10,200 shares,
(ii) Applicants for 50,600 shares (in respect of applications for 1,000 or more but less than 2,000) received 12,600 shares, (iii)
Applicants for 21,100 shares (in respect of applications for less than, 1,000) received 7,200 shares. Cash then received after
satisfying amount due on applications was applied towards allotment and call money and any balance then was returned. All
moneys due on allotment and call were realized.
Give journal entries including that of cash and write up the cash account and ledger accounts relating to this issue of shares in
the books of company. (CA FOUNDATION 16 MARKS)

Q UESTION 10 (Issue of securities at premium) Kavita Garments Ltd. with an authorised capital of Rs. 30,00,000 invited
applications for 20,000 shares of Rs. 100 each payable Rs. 30 on application, Rs. 40 on allotment (including premium) and Rs.
40 on final call. The issue was oversubscribed and applications were received for 36,000 shares. The basis of allotment was as
follows:
(i) To applicants for 15,000 shares 15,000 shares
(ii) To applicants for 2,500 shares Nil
(iii) To applicants for 18,500 share 5,000 shares

Excess application money was adjusted against the sums due on allotment and call in compliance with the provisions of the
Companies Act 2013. All the moneys were duly received except the final call on 1,050 shares from the applicants belonging to
full allotment category. Underwriting commission, amounted to Rs. 30,000. Give journal entries to record above transactions
and show the company's balance sheet with relevant information only.

Solution:
Date Particulars Debit Credit
Rs. Rs.
(i) Bank Account Dr. 10,80,000
To Share Application Account 10,80,000

(ii) Share Application Account Dr. 10,80,000

To Equity Share Capital Account 6,00,000
To Share Allotment Account 2,00,000
To Calls-in-Advance Account 2,00,000

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To Bank Account 80,000

(iii) Share Allotment Account Dr. 8,00,000

To Equity Share Capital Account 6,00,000
To Securities Premium Account 2,00,000

(iv) Bank Account Dr. 6,00,000

To Share Allotment Account 6,00,000

(v) Share First and Final Call Account Dr. 8,00,000

To Equity Share Capital Account 8,00,000

(vi) Bank Account Dr. 5,58,000

Calls-in-Advance Account Dr. 2,00,000
To Share First and Final Call Account 7,58,000

(vii) Underwriting Commission Dr. 30,000

To Bank Account 30,000
(Payment of underwriting commission)

QUESTION 11. (Profit on reissue transferred to capital reserve) Nivedita Limited issued 1,00,000 shares of Rs. 10, each
payable as under :
On Application : Rs. 1
On Allotment Rs. 2
On First Call : Rs. 3
On Final Call : Rs. 4

All moneys payable on application, allotment and calls has been received with the following exceptions: Patel who holds 1,000
shares has not paid the money due on allotment and calls. Asha who holds 500 shares has not paid the money due on the first
and final calls. Kumar who holds 300 shares has not paid the due on the final call. The shares of Patel, Asha and Kumar were,
therefore, forfeited. These shares were subsequently reissued for cash at a discount of 5 per cent Pass journal entries
recording the above transactions from the stage of receipt of application money till the reissue of forfeited shares.
Solution:
Rs. Rs.
(i) Bank Account Dr. 1,00,000
To Share Application Account 1,00,000
Receipt of application money on 1,00,000 shares
@ Re. 1 per share)
(ii)
Share Application Account Dr. 1,00,000
Share Allotment Account Dr. 2,00,000
To Equity Share Capital Account 3,00,000
(Application money @ Re. 1 received and allotment money @ Rs. 2 due on 1,00,000
shares transferred to share capital account as per resolution no....dated...)
(iii)

Bank Account Dr. 1,98,000

(iv) To Share Allotment Account 1,98,000
(Allotment money @ Rs. 2 received on 99,000 shares)
Share First Call Account Dr. 3,00,000
To Equity Share Capital Account 3,00,000
(First call money @ Rs. 3 due on 1,00,000 shares vide resolution no....dated,.)
(v)

(vi) Bank account Dr. 2,95,500

4,00,000
To share first call account 2,95,500
4,00,000
(First call money received on 98,500 shares @ Rs. 3 per share) 3,92,800

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Share second and Final call A/c Dr. 4,00,000

To equity share capital account 4,00,000
(vii) (Second cal due on 1,00,000 shares @ Rs. 4 per share vide resolution no…dated)

(viii) Bank Account Dr. 3,92,800

To share second and final Call account 3,92,800
(Final call money @ Rs. 4 per share received on 98,200 shares)
Share capital account (1,800 x Rs. 10) Dr. 18,000
To share forfeited Account 4,300
(1,000 + x Re. 1) + (500 x Rs. 3) + (300 Rs. 6)
To share allotment account ( 1,000 x Rs. 2) 2,000
(ix) To share first call account ( 1,500 x Rs. 3) 4,500
To share second and final call Account ( 1,800 x Rs. 4) 7,200
( forfeited of shares for non-payment of instalments)
Bank account ( 1,800 x Rs. 9.50 ) Dr. 17,100
(x) Share forfeited Account ( 1,800 x Re. 0.50) Dr. 900
To equity share capital account 18,000
(Reissue of forfeited shares at Rs. 9.50 per share)

Share forfeited Account Dr. 3,400

To capital Reserve Account 3,400
( transfer of the credit balance in the share forfeited account to the capital reserve
account, being the profit on reissue)

QUESTION 12. (Forfeiture and reissue) Malik Limited has a subscribed capital of 2,000 equity shares of Rs. 25 each, Rs. 20
per share called up. The directors forfeited 200 equity shares held by a shareholder who had failed to pay the first call made
@Rs. 10 per share. Later the directors reissued these forfeited shares at Rs. 20per share paid up at Rs. 15 per share. Pass the
journal entries for forfeiture and reissue of share. [CA(Foundation ) november 1999]

Solution:
Date Particulars Debit Credit
(i) Rs. Rs.
Equity Share Capital Account Dr. 4,000
To Share Forfeited Account 2,000
To Calls-in-Arrears Account 2,000
(Forfeiture of 200 equity shares, Rs. 20 per share called up for non-payment of
first call @ Rs*.10 per share)

(ii) Bank Account Dr. 3,000

Share Forfeited Account Dr. 1,000
To Equity Share Capital Account 4,000
(Reissue of 200 equity shares as
Rs. 20 per share paid up @ Rs. 15 per share)

(iii) Share Forfeited Account Dr. 1,000

To Capital Reserve Account 1,000
(Transfer of balance of share forfeited account to capital reserve account)

QUESTION 13 (Forfeiture and reissue of forfeited shares only) Give journal entries to record the forfeiture of shares
and their reissue:
1. The directors of A Ltd. forfeited 500 shares of Rs. 50 each, Rs. 40 being called up, on which Radha, a shareholder paid
application and allotment moneys of Rs. 25 per share but did not pay first call money of Rs. 15 per share. Of these forfeited
shares, the company subsequently reissued 350 shares as fully paid up for Rs. 40 per share.
2. B Ltd. forfeited 100 shares of Rs. 50 each, Rs. 35 per share called up on which Rs. 25 per share has been paid by Rakesh;
the amount of first call of Rs. 10 per share being unpaid. The directors reissued the forfeited shares to Baldeo crediting Rs.
35 per share paid for a payment of Rs. 25 per share.
3. The directors of D Ltd. forfeited 100 shares of Rs. 100 each called up for non payment of final call money of Rs. 50 per
share. Half of these shares were subsequently reissued at Rs. 120 per share as fully paid.
4. E Ltd. forfeited 200 shares of Rs. 100 each (issued at a premium of 10%) for non-payment of first call of Rs. 25 and final call
of Rs. 15. Of these 150 shares were reissued for Rs. 90 per share.

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QUESTION14 (Forfeiture after first call) Bhavna Ltd. offered 10,000 equity shares of Rs. 100 each for subscription at a
premium of Rs. 20 per share payable as follows:
On Application Rs. 10
On Allotment Rs. 40 (including premium)
On First Call Rs. 20
On Second Call Rs. 30
and balance on Final Call.
The company received applications for 12,000 shares and 10,000 shares were allotted pro-rata.
Holders of 400 shares failed to pay the first call and after due notice, their shares were forfeited. The amounts payable on
second call were paid in full except that a holder of 200 shares failed to pay.
250 of the 400 shares forfeited were reissued, credited Rs. 80 paid for Rs. 50 per share. The final call was met in full including
the arrears of the second call. Journalize the transactions including cash transactions in the books of the company.
CA Found-12 marks)

QUESTION 15 (Different bases of allotment and interest on calls-in-advance) Over-Confident Co. Ltd. issued a prospectus
offering 2,00,000 Equity Shares of Rs. 10 each on the following terms:
On Application: Re. 1
On Allotment: Re. 3 (including premium of Rs. 2)
On First Call (three months after allotment) : Rs. 4
On Second Call (three months after first call) :Rs. 4
Subscriptions were received for 3,17,000 shares on 23 April 2004 and the allotment made on 30 April was a under :
Shares Allotted
(i) Allotment in full (two applicants paid in full
on allotment in respect of 4,000 shares each) 38,000
(ii) Allotment of two-thirds of shares applied for 1,60,000
(iii) Allotment of one-fourth of shares applied for 2,000

Cash amounting to Rs. 31,000 (being application moneys received with applications for 31,000 shares upon which no
allotments were made) was returned to the applicants on 5 May. The amounts due were received on the due dates with the
exception of the final call on 100 shares. These shares were forfeited on 15 November and reissued to Vandana on the 16
November for payment of Rs. 9 per share. The company paid the interest due on calls-in-advance on 30 October in cash. Show
the journal and cash book entries and draw a balance sheet of the company giving effect to the above transactions.
[CMA INTER]
Question 16 (Reissue of forfeited shares originally issued at premium) The directors of Mamta Ltd. invited applications for
2,00,000 equity shares of Rs. 10 each to be issued at 20 per cent premium. The amount payable per share is as under :

On Application : Rs. 5
On Allotment : Rs. 4 (including premium of Rs. 2)
On First Call : Rs. 2
On Final Call : the balance.
Applications were received for 2,40,000 shares and allotment was made as follows :
(a) To applicants for 1,00,000 shares - in full.
(b) To applicants for 80,000 shares - 60,000 shares
(c) To applicants for 60,000 shares - 40,000 shares

Applicants for 1,000 shares falling in category (a) and applicants for 1,200 shares railing in category (b) failed to pay allotment
money. These shares were forfeited on failure to pay first call.
Holders of 1,200 shares falling in category (c) failed to pay first call and final call and these shares were forfeited after final
call. 1300 shares [1,000 of category (a) and 300 of category] (b)] were reissued at Rs. 8 per share as fully paid.
Journalize the above transactions. Show Cash Book and prepare Balance Sheet. [CA FOUNDATION-12 Marks]

Question 17. A & B Ltd. offered to public on 1st April, 2017; 1,00,000 Equity Shares and 50,000 Preference Shares of 10
each payable as under:

Equity Shares (Rs) Preference Shares(Rs)

On application 3 3
On allotment (1st May) 3 4
On first and final call (1st September) 4 3

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Subscription was received for 1,20,000 Equity Shares and 45,000 Preference Shares. Application for Preference Shares were
accepted in full. Out of applications for Equity Shares, application for 10,000 shares were rejected; applications for 85,000 shares
accepted in full and 15,000 share were allotted to the remaining applicants.
All amounts were received except the amount due on call on 1,000 Equity Share 500 Preference Shares. Pass entries in the Cash
Book and Journal.

Question 18 (Securities premium account credited only when the premium is actually received) Viney limited issued a
prospectus inviting applications for 40,000 shares of Rs. 10, each at a premium of Rs. 2 per share payable as under:
On Application : Rs. 2 per share
On Allotment : Rs. 5 per share (including premium)
On First Call : Rs. 3 per share
On Second Call : Rs. 2 per share

Applications were received for 60,000 shares including one from Nitin who applied for 1,400 shares. Shares were allotted to
the applicants including Nitin to whom only 1,000 shares were allotted, the remaining applications were refused and amount
refunded. Money overpaid by Nitin on application was employed on account of sums due on allotment. Nitin failed to pay the
allotment money due and on his subsequent failure to pay the first call, his shares were forfeited. These were sold to Rajiv at
Rs. 10 each fully paid including premium. Amount due on the second call was received in full from all the shareholders. Show
the journal entries in the books of the company.

Question 19. JYOTI' Ltd. invited applications for the issue of 1,00,000 equity shares of Rs. 10 each payable Rs. 4 on
application. Rs. 5 (including Rs. 3 as Securities Premium) on allotment and balance on first and final call. The prospectus provided
that in case of partial allotment, money received in excess on application would be adjusted towards the amounts due on
allotment and call.
The company received applications for 2,50,000 shares out of which applications for 50,000 shares were rejected out rightly
and other applicants were allotted shares on pro-rata basis. The company received all moneys due on allotment and call
except from one shareholder (who applied for 2,000 shares) who failed to pay the allotment and the call moneys. The
company forfeited his shares. Out of the forfeited shares, the company reissued 600 shares at the rate of Rs. 8 per shares, fully
paid up.
You are required to record the above transactions. Prepare Share Forfeited Account Capital Reserve Account and show the
relevant items in the balance sheet of the company.

Question 20. XL Ltd. invited applications for issuing 1.00,000 equity shares of 10 each at par. The amount was payable as
follows:
On Application Rs3 per share;
On Allotment Rs 4 per share; and
On First and Final Call Rs 3 per share.
The issue was oversubscribed by three times. Applications for 20% shares were rejected and the money refunded.
Allotment was made to the remaining applicants as follows:
Category No. of Shares Applied No. of Shares Allotted
I 1,60,000 80,000
II 80,000 20,000
Excess money received with applications was adjusted towards sums due on allotment and first and final call. All calls were
made and were duly received except the final call by a shareholder belonging to Category I who has applied for 320 shares. His
shares were forfeited. The forfeited shares were reissued at 15 per share fully paid-up.
Pass necessary Journal entries for the above transactions in the book of XL Ltd. Open Calls-in-Arrears and Calls-in Advance
Account whenever required.

Question 21. X Ltd. issued 40,000 Equity Shares of 10 each at a premium of 2.50 per share. The amount was payable as follows:
On application Rs 2 per share,
On allotment Rs 4.50 per share (including premium), and
On call Rs 6 per share.
Owing to heavy subscription the allotment was made on pro rata basis as follows:
(i) Applicants for 20,000 shares were allotted 10,000 shares.
(ii) Applicants for 56,000 shares were allotted 14,000 shares.
(iii) Applicants for 48,000 shares were allotted 16,000 shares.

It was decided that excess amount received on applications would be utilised on allotment and the surplus would be refunded.
Ram, to whom 1,000 shares were allotted, who belongs to category (i), failed to pay allotment money. His shares were
forfeited after the call. Pass necessary Journal entries in the books of X Ltd. for the above transactions.

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Question 22. A company had an authorised capital of Rs 10,00,000 divided into 1,00,000 equity shares of Rs 10 each. It
decided to issue 60,000 shares for subscription and received applications for 70,000 shares. It allotted 60,000 shares
and rejected remaining applications. Upto 31-3 -2022, it has demanded or called Rs 9 per share. All shareholders have
duly paid the amount called, except one shareholder, holding 5,000 shares who has paid only Rs 7 per share.
Prepare a balance sheet assuming there are no other details.

Answer: Balance Sheet as at 31st March, 2022

Particulars Notes No. Rs
EQUITY AND LIABILITIES
Shareholders’ funds
Share capital 1 5,30,000
Total 5,30,000
ASSETS
Current assets
Cash and cash equivalents 2 5,30,000
Total 5,30,000

Notes to account:
Rs Rs
1. Share Capital
Equity share capital
Authorised share capital
1,00,000 Equity shares of Rs 10 each 10,00,000

Issued share capital

60,000 Equity shares of Rs 10 each 6,00,000

Subscribed share capital:

60,000 Equity shares of Rs10 each 6,00,000

Called up and Paid up share capital:

60,000 Equity shares of Rs 10 each Rs 9 called up 5,40,000
Less: Calls unpaid on 5,000 shares @ Rs 2 per share (10,000) 5,30,000

2. Cash and cash equivalents: 5,30,000

Balances with banks

Question 23. JHP Limited is a company with an authorised share capital of Rs 10,00,000 in equity shares of Rs 10 each,
of which 6,00,000 shares had been issued and fully paid on 30th June, 2022. The company proposed to make a further
issue of 1,00,000 of these Rs 10 shares at a price of Rs 14 each, the arrangements for payment being:
(a) Rs 2 per share payable on application, to be received by 1st July, 2022;
(b) Allotment to be made on 10th July, 2022 and a further Rs 5 per share (including the premium) to be payable;
(c) The final call for the balance to be made, and the money received by 30 th April, 2023.

Applications were received for 3,55,000 shares and were dealt with as follows:
(i) Applicants for 5,000 shares received allotment in full;
(ii) Applicants for 30,000 shares received an allotment of one share for every two applied for; no money was returned
to these applicants, the surplus on application being used to reduce the amount due on allotment;

(iii) Applicants for 3,20,000 shares received an allotment of one share for every four applied for; the money due on
allotment was retained by the company, the excess being returned to the applicants; and
(iv) the money due on final call was received on the due date.

You are required to record these transactions (including cash items) in the Journal of JHP Ltd. (ICAI Study material)

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Date Rs Rs
2020 Particulars
July 1 Bank A/c Dr. 7,10,000
To Equity Share Application A/c 7,10,000
(Being application money received on 3,55,000 shares @ 2 per share)

July 10 Equity Share Application A/c Dr. 7,10,000

To Equity Share Capital A/c 2,00,000
To Equity Share Allotment A/c 4,30,000
To bank account 80,000
(Being application money adjusted)

Equity Share Allotment A/c Dr. 5,00,000

To Equity Share Capital A/c 1,00,000
To Securities Premium a/c 4,00,000
(Being allotment money due )

Bank A/c Dr 70,000

To Equity Share Allotment A/c 70,000
(Being balance allotment money received)

2021 Equity Share Final Call A/c Dr. 7,00,000

To Equity Share Capital A/c 7,00,000
(Being final call money due on 1,00,000 shares @ Rs 7/share)

April 30 Bank A/c Dr. 7,00,000

To Equity Share Final Call A/c 7,00,000
(Being final call money on 1,00,000 shares @ Rs7 each received)

Working notes: Calculation for Adjustment and Refund

Category No. of No. of Amount Amount Amount Refund Amount Amount
Shares Shares Received Required adjusted on [3 - 4 + 5] due on received
Applied Allotted on on Allotment Allotment on
for Application Application Allotment

(1) (2) (3) (4) (5) (6) (7) (8)

(i) 5,000 5,000 10,000 10,000 Nil Nil 25,000 25,000
(ii) 30,000 15,000 60,000 30,000 30,000 Nil 75,000 45,000
(iii) 3,20,000 80,000 6,40,000 1,60,000 4,00,000 80,000 4,00,000 Nil
TOTAL 3,55,000 1,00,000 7,10,000 2,00,000 4,30,000 80,000 5,00,000 70,000

Question 24. Rashmi Limited issued at par 1,00,000 Equity shares of Rs 10 each payable Rs 2.50 on application; Rs 3 on
allotment; Rs 2 on first call and balance on the final call. All the shares were fully subscribed. Mr. Nair who held 10,000 shares
paid full remaining amount on first call itself. The final call which was made after 3 months from first call was fully paid except
a shareholder having 1000 shares who paid his due amount after 2 months along with interest on calls in arrears. Company also
paid interest on calls in advance to Mr. Nair. Give journal entries to record these transactions. (ICAI Study material)

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Answer:
Date Particulars L.F Debit Credit
. Amount Amount

Bank A/c Dr. 2,50,000

To Equity Share Application A/c
(Money received on applications for 1,00,000 shares@ 2.50per share) 2,50,000

Equity Share Application A/c Dr. 2,50,000

To Equity Share Capital A/c 2,50,000
(Transfer of application money on 1,00,000 shares to share capital)
Equity Share Allotment A/c Dr. 3,00,000
To Equity Share Capital A/c 3,00,000
(Amount due on the allotment of 1,00,000 shares @ Rs 3 per share)
Bank A/c Dr. 3,00,000
To Equity Share Allotment A/c (Allotment money received) 3,00,000

Equity Share First Call A/c Dr. 2,00,000

To Equity Share Capital A/c 2,00,000
(Being first call made due on 1,00,000 shares at Rs 2 per share)

Bank A/c Dr. 2,25,000

To Equity Share First Call A/c 2,00,000
To Calls in Advance A/c 25,000
(Being first call money received along with calls in advance on 10,000
shares at Rs 2.50 per share)
Equity Share Final Call A/c Dr. 2,50,000
To Equity Share Capital A/c 2,50,000
(Being final call made due on 1,00,000 shares at Rs 2.50 each)

Bank A/c Dr. 2,22,500

Calls in Advance A/c Dr. 25,000
Calls in Arrears A/c Dr. 2,500
To Equity Share Final Call A/c 2,50,000
(Being final call received for 89,000 shares and calls in advance for
10,000 shares adjusted)
750
Interest on Calls in Advance A/c Dr.
To Shareholders A/c 750
(Being interest made due on calls in advance of Rs 25,000 at the rate
of 12% p.a.)
Shareholders A/c Dr. 750
To Bank A/c 750
(Being payment of interest made to shareholder)
Shareholders A/c Dr.
41.67
To Interest on Calls in Arrears A/c 41.67
(Being interest on calls in arrears made due at the rate of 10%)
Bank A/c Dr. 2,541.67
To Calls in Arrears A/c To Shareholders A/c 2,541.67
(Being money received from shareholder for calls in arrears and
interest thereupon)

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CHAPTER 10 C. ISSUE OF DEBENTURES

1. Introduction:--A debenture is a bond issued by a company under its seal, acknowledging a debt and containing
provisions as regards repayment of the principal and interest.

Section 2 (30) of the Companies Act, 2013 defines debentures as “Debenture” includes debenture stock, bonds or any
other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not.

FEATURES OF DEBENTURES:
(a) It is a document which evidences a loan made to a company.
(b) It is a fixed interest-bearing security where interest falls due on specific dates.
(c) Interest is payable at a predetermined fixed rate, regardless of the level of profit.
(d) The original sum is repaid at a specified future date or it is converted into shares or other debentures.
(e) It may or may not create a charge on the assets of a company as security.
(f) It can generally be bought or sold through the stock exchange at a price above or below its face value.

Distinction between shares and debentures

Debentures Shares
1. Debenture holders are the creditors of the company. 1. Shareholders are the owners of the company.

2. Debenture holders have no voting rights and 2. Shareholders have voting rights and consequently
consequently do not pose any threat to the existing control control the total affairs of the company.
of the company.
3. Debenture interest is paid at a pre- determined fixed 3. Dividend on equity shares is paid at a variable rate
rate. It is payable, whether there is any profit or not. which is vastly affected by the profits of the company
Debentures rank ahead of all types of shares for payment (however, dividend on preference shares is paid at a
of the interest due on them. fixed rate).

4. Interest on debentures are the charges against profits and 4. Dividends are appropriation of profits and these are
they are deductible as an expense in determining taxable not deductible in determining taxable profit of the
profit of the company. company.
5. There are different kinds of debentures, such as 5. There are only two kinds of shares–Equity Shares
Secured/ Unsecured; Redeemable/ Irredeemable; and Preference Shares.
Registered / Bearer; Convertible/ sNon-convertible, etc.

6. In the Company’s Balance Sheet, Debentures are shown 6. In the Company’s Balance Sheet, shares are shown
under “Long Term Borrowings”. under “Shareholder’s Fund” detailed in ‘Share Capital’
of Notes to Accounts.

7. Debentures can be converted into other debentures or 7. Shares cannot be converted into other shares in any
shares as per the terms of issue of debentures. circumstances.

8. Debentures cannot be forfeited for non- payment of call 8. Shares can be forfeited for non-payment of allotment
moneys and call moneys.
9. At maturity, debenture holders get back their money as 9. Equity shareholders cannot get back their money
per the terms and conditions of redemption. before the liquidation of the company (however,
preference shareholders can get back their money
before liquidation).
10. At the time of liquidation, debenture holders are paid- 10. At the time of liquidation shareholders are paid at
off before the shareholders. last, after paying debenture holders, Trade payable, etc.

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TYPES OF DEBENTURES:
The following are the types of debentures issued by a company. They can be classified on the basis of:

(1) Security; (2) Convertibility; (3) Permanence; (4) Negotiability; and (5) Priority.

(i) Security
(a) Secured Debentures: These debentures are secured by a charge upon some or all assets of the company. There are
two types of charges: (i) Fixed charge; and (ii) Floating charge. A fixed charge is a mortgage on specific assets. These
assets cannot be sold without the consent of the debenture holders. The sale proceeds of these assets are utilized first for
repaying debenture holders. A floating charge generally covers all the assets of the company including future one.

(b) Unsecured or “Naked” Debentures: These debentures are not secured by any charge upon any assets. A company
merely promises to pay interest on due dates and to repay the amount due on maturity date. These types of debentures
are very risky from the view point of investors.

(ii) Convertibility:
(a) Convertible Debentures: These are debentures which will be converted into equity shares (either at par or
premium or discount) after a certain period of time from the date of its issue. These debentures may be fully or partly
convertible. In future, these debenture holders get a chance to become the shareholders of the company.

(b) Non-Convertible Debentures: These are debentures which cannot be converted into shares in future. As per the
terms of issue, these debentures are repaid.

(iii) Permanence:
(a) Redeemable Debentures: These debentures are repayable as per the terms of issue, for example, after 8 years from
the date of issue.
(b) Irredeemable Debentures: These debentures are not repayable during the life time of the company. These are also
called perpetual debentures. These are repaid only at the time of liquidation.

(iv) Negotiability

(a) Registered Debentures: These debentures are payable to a registered holder whose name, address and particulars
of holding is recorded in the Register of Debenture holders. They are not easily transferable. The provisions of the
Companies Act, 2013 are to be complied with for effecting transfer of these debentures. Debenture interest is paid either
to the order of registered holder as expressed in the warrant issued by the company or the bearer of the interest
coupons.
(b) Bearer Debentures: These debentures are transferable by delivery. These are negotiable instruments payable to
the bearer. No kind of record is kept by the company in respect of the holders of such debentures. Therefore, the interest
on it is paid to the holder irrespective of any identity. No transfer deed is required for transfer of such debentures.

(v) Priority:
(a) First Mortgage Debentures: These debentures are payable first out of the property charged.
(b) Second Mortgage Debentures: These debentures are payable after satisfying the first mortgage debentures.

Issue of debentures for consideration other than cash

Question1 X Ltd purchased a machine costing Rs 99,000 payable by issue of 10% debentures of Rs 100 each at
Case 1. Par
Case 2. Premium of 10%
Case 3. Discount of 10%

Question2 Blue Prints Limited Purchases building worth Rs. 1,50,000, plant and machinery worth Rs. 1,40,000 and
furniture for Rs. 10,000 from Wadhwa and Company and took over liabilities of Rs. 20,000 for a purchase consideration Rs.
3,15,000. Blue Prints Limited paid the purchase consideration by issuing 12% debentures of Rs. 100 each at a premium of
5%. Pass the necessary journal entries.

Question3 Assume in the previous question purchase consideration was Rs 2,70,000 and payment was made by issue
of 12% debentures of Rs 100 each at a discount of 10%.

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Question4 (Issue of debentures to vendors with part payment in cash)

G.W.K Ltd. purchased assets worth Rs. 4,50,000 and took over liabilities of Rs. 35,000 of K.L.M. and Co. for a purchase
consideration of Rs. 4,00,000. The purchase price was paid by issue of Rs. 100, 12% debentures at a premium of 10% The
debentures of GWK Ltd. are quoted in the market at Rs. 140 at the relevant time. You are required to give journal entries to
record the above transactions in the books of the purchasing company.

Debentures issued as a collateral security:-a collateral security may be defined as additional security in addition to
some principal security. When a limited company obtains a loan from bank or any other financial institutions, it may pledge
some assets as a security against the said loan. But the lending institution may insist on some more assets as collateral security
so that the amount of loan can be realized in full with the help of collateral security. In such case company may issue its
debentures as collateral security. The collateral security will not be used or realized as long as company fulfills its obligation
regarding payment of interest when due and repayment of loan on the maturity date. If the amount realized from sale of
principal security falls short of the loan money, then loan of lending institution converted into debentures of the company and
lending institution claims all the right of being a debentureholders. Debentures issued as collateral security will be realized by
the lender only in case the loan is not repaid on the due date.
TREATMENT OF ISSUE OF DEBENTURES AS COLLATERAL SECURITY

Question5 A Ltd borrowed loan of Rs 10,00,000 from HDFC Bank. Company pledged machinery worth Rs 40 lacs. In
addition to machine company issued 40,000,12% debentures of Rs 100 each to the bank as collateral security. Show its
treatment in the book of A Ltd.
Issue of debentures for cash
Question6 (Terms of issue and redemption) Give journal entries for the following:
(a) Issue of Rs. 1,00,000 – 9% Debentures at par and redeemable at par.
(b) Issue of Rs, 1,00,000 – 9% debentures at premium of 5% but redeemable at par
(c) Issue of Rs. 1,00,000 – 9% Debentures at a discount of 10%, repayable at par.
(d) Issue of Rs. 1,00,000 – 9% Debentures at par but repayable at a premium of 5%.
(e) Issue of Rs. 1,00,000 – 9% Debentures at discount of 5% but redeemable at premium of 5%.
(f) Issue of Rs. 1,00,000 – 9% Debentures at premium of 5% but redeemable at premium of 5%.

Question7 Pass journal entries in year 1 in the case of the issue of debentures by ABC Co. Ltd.: Issued Rs. 1,00,000,11%
debentures at 95 per cent redeemable at the end of 10 years (i) at 102 per cent, and (ii) at 98 per cent.
[C.A. (Inter) May 2000]

DEBENTURE INTEREST
Question8 On 1st Jan 2010, X Ltd issued 12% debentures of Rs 2,00,000 at a premium of 15%. Interest is payable half
yearly on 30 June and 31st December each year. Make journal entries assuming that accounts are closed on 31 st
th

December each year. Assume that interest due on 31st December has not yet been paid.

Question9 On 1st Jan 2010, X Ltd issued 12% debentures ofRs 2,00,000 at a discount of 10%. Interest is payable half
yearly on 31 march and 30th September each year. Make journal entries assuming that accounts are closed on 31 st
st

December each year.

Question10 Babli Auto Limited had Rs. 10,00,000 -12% Debentures on which the interest is payable on 30 September and
31 March. Show the necessary journal entries relating to debenture interest for the year ending on 31 March 2004
assuming that all payments to debentureholders and Government were made in time. Tax deducted at source is 10%.

DISCOUNT/ LOSS ON ISSUE OF DEBENTURES

Question11 A company issued 9% Debentures of the face value of Rs. 2,00,000 at a discount of 6%. The debentures were
repayable by annual drawings of Rs. 40,000. How would you deal with the discount on issue of debentures? Show the
discount account in company's ledger for the duration of debentures.

Question12 A company issued 9% Debentures of the face value of Rs. 2,00,000 at a discount of 6%. The debentures were
repayable as follow
Year end amount repaid
2 40,000
4 1,20,000
5 40,000

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CA FOUNDATION FUNDAMENTALS OF ACCOUNTING CA/CMA Santosh kumar

How would you deal with the discount on issue of debentures? Show the discount account in company's ledger for the
duration of debentures.

Question13 Rashi Ltd. issued 12%Debentures at 94% for Rs. 1,00,000 on 1 July 2003 repayable by five equal annual
installments of Rs. 20,000 each. The company closes its accounts on 31 March every year. Indicate the amount of discount
to the written off every accounting year assuming that the company decides to write off the debenture discount during
the life of the debentures.

Question 14. Atul Ltd. issued 1,00,00,000, 8% debenture of Rs 100 each at a discount of 10% redeemable at par at the
end of 10th year. Money was payable as follows :
Rs 30 on application
Rs 60 on allotment
Record necessary journal entries regarding issue of debenture. (ICAI Study material)

Question 15. State whether following statements are true or false with suitable reason.
(i) Debenture holder are the owners of the company.
(ii) Perpetual debentures are payable at the time of liquidation of the company.
(iii) Registered debentures are transferable by delivery.
(iv) When companies issue their own debentures as collateral security for a loan, the holder of such debenture is
entitled to interest only on the amount of loan and not on the debentures
(v) Debentures suspense account appears on liability side of balance sheet.
(vi) If a company incurs loss, then it does not pay interest to the debenture holders.
(vii) At the time of liquidation, debenture holders are paid off after the shareholders.
(viii) Convertible debentures can be converted into equity shares.
(ix) Redeemable debentures are not payable during the life time of the company.
(x) Debentures can be issued for a consideration other than for cash, such as for purchasing land, machinery etc.
(ICAI Study material)
Answer:
(i) False: Debenture holder are the creditors of the company.
(ii) True: Perpetual debentures, also known as irredeemable debentures are not repayable during the life time of the
company.
(iii) False: Registered debentures are not easily transferable by delivery. Bearer debentures are transferrable by delivery.
(iv) True: In case the company cannot repay its loan & the interest thereon on the due date, the lender becomes
debenture holder & then only he is entitled to interest on debentures.
(v) False: Debentures suspense account appears on asset side of balance sheet under non-current asset.
(vi) False: Even if the company incurs loss or earns profit, it has to pay the interest on debentures.
(vii) False: At the time of liquidation, debenture holders are paid off before shareholders on priority basis.
(viii) True: Convertible debentures can be converted into equity share after a certain period of time from the date of its
issue.
(ix) False: These debentures are repayable as per the terms of issue, for example, after 8 years from the date of issue.
(x) True: Debentures can be issued for a consideration other than for cash, such as for purchasing land, machinery etc.

ALL THE BEST MY DEAR STUDENT

BELIEVE IN YOURSELF
YOU HAVE PREPARED BEST FOR YOUR EXAM

Your Santosh sir

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