1

Chapter- 1.

DEPRECIATION ACCOUNTING

Synopsis-
1. Meaning & Definition
2. Features
3. Causes
4. Methods-
5. Factors of depreciation
6. Fixed Installment Method: Meaning & Features, Merits, Demerits
7. Reducing Balance Method: Meaning & Features, Merits, Demerits
8. Illustrations
9. Exercise

A) Meaning and definition:

Meaning: Depreciation is a gradual and permanent fall/decline/decrease in the value of
fixed assets over a period of time due to its continuous use, wear and tear & effluxion of
time.
Depreciation is a continuous and permanent decrease in the quantity, quality & value of
the fixed assets.

Definitions:
The word Depreciation has been derived from the Latin word ‘Depretium’ which means
decline in value.
Depreciation is a loss on account of gradual and permanent reduction in the value of fixed
assets.
1) “Depreciation is the gradual and permanent decrease in the value of an asset from any
cause. :- R. N. Carter.

2) “Depreciation is the permanent decrease in the value of an asset due to use and / or lapse
of time.” :- I.C.M.A., England.

Thus, depreciation means the decline in the book value of assets. It is a loss for the business.
This loss must be recorded in the books of accounts. Otherwise, the profit and loss account
and balance sheet of the business will not show true and fair view of the state of affairs of
the business.

B) Main Features of Depreciation-

i) Depreciation is a continuous process. Since fixed assets are continuously used in the
business they go on depreciating.
ii) It is a permanent fall in the value.
iii) Fixed assets such as Building, Plant, furniture etc. only depreciate.
iv) It is a gradual/slow process. Assets do not fall in value abruptly. A part of its value
declines due to use.
v) Assets depreciate for various reasons such as, wear and tear, effluxion (passage) of
time, amortization, depletion, accident, obsolescence (out of fashion) etc.
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C) Causes of Depreciation:

1) Physical wear and tear resulting from use:

Fixed assets are used in the business during the useful life of the assets. The value of
fixed assets gets reduced due to its wear and tear. Continuous use of assets lead to its
decrease in the value due to factors, such as friction, vibration, strain, chemical reaction,
weathering, intensity of use, care in handling, standard of maintenance, minor accidents,
etc.

2) Exhaustion:
Assets like plantation, animals etc. lose their value gradually with passage of time.
They became valueless after completion of particular age or life span. That means
certain assets get decreased in their value due to passage of time even if the assets are
not used. e.g. leasehold premises, copyright, patents, etc.

3) Depletion:
It is a factor more attributed to wasting assets, such as stone-mines, oil-quarries/wells
and forest lands. These assets lose their value on extraction of their natural resources.
Natural resources in these forms are limited and once extracted or obtained these assets
lose their value.

4) Effluxion of time:
Intangible assets such as leasehold premises, patents, Copyright etc. decrease in value
as time passes.

5) Obsolescence:
Recent developments in technology evolve assets with reduction in processing time,
saving of labour and minimum of wastage. Old assets, though usable, become more
expensive to continue their use. Hence businessmen opt for replacement of old with
new having high speed and efficiency.

6) Natural Calamities:
The value of the assets reduces due to accidents, such as fire, earthquakes, storm, etc.

D) Method of Calculating depreciation:

1) Fixed Installment Method.
2) Reducing Balance Method.
3) Annuity Method.
4) Depreciation fund Method.
5) Insurance Policy Method.
6) Revaluation Method.
7) Compound Interest Method.
8) Depletion Unit Method.
9) Machine Hour Method.

E) Factors to be considered while charging depreciation:

i) Cost of Asset: It is means total of the following:
1) Invoice price less cash discount.
2) Erection / Installation charges.
3) Primary renovation or alteration charges.
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4) Repairing, painting, over-hauling, etc. done, before the asset is brought into use.
5) Incidental charges such as Carriage, Octroi duty, Import duty, Freight, Loading,
unloading expenses, etc.
6) Stamp duty, architect/advocate‟s fees etc.
ii) Scrap Value:
It is also called as Residual value. It is the price expected to be reeived on disposal of an
asset at the end of its useful life.
Scrap Value = Estimated disposal value of useless asset – Dismantling charges.
For e. g. Machinery installed is expected to recover Rs. 2,500 at the end of its life of 10
years. The machine can be sold only after dismantling it from its present position which
may cost Rs. 500. Then,
Scrap value = 2500 – 500 = Rs. 2000. (i.e. Price realized – dismantling expenses)

iii) Estimated useful life of an asset: Normally, useful life of an asset is determined in the
form of no. of years of its productive life. Basically the usefulness should be
determined both in terms of productivity and cost of utility.

F) Journal Entries relating to assets & depreciation thereon:

S.n Transaction Entry
01 Purchase of asset for cash or on credit Asset A/c……….. Dr.
To Cash/Bank/Creditors A/c.
02 Expenses such as installation, Repairs, Asset A/c……….. Dr.
Repainting etc. incurred on assets. To Cash/Bank A/c.
03 Depreciation charged on asset at the end of Depreciation A/c ………. Dr.
the financial year : To Asset A/c
04 For closing the Depreciation Account by Profit & Loss A/c ……….. Dr.
transferring balance to profit & loss A/c To Depreciation A/c
05 Sale of Asset – 1) For Depreciation on asset sold (in
a] At book value i.e. at w. d. v. on the date each case)-
of sale- Depreciation A/c …..Dr.
To Asset A/c ( By Depre. on asset sold
from op. date of the year of sale to the date of sale)
2) For sale of asset-
Cash/Bank/Buyer's A/c……… Dr.
To Asset A/c.( at book value)
b] At profit- Cash/Bank/Buyer's A/c……… Dr.
To Asset A/c.( at book value)
To Profit on sale of Asset A/c
c] At Loss Cash/Bank/Buyer's A/c……… Dr.
Loss on sale of Asset A/c…...Dr.
To Asset A/c.( at book value)
06 Profit made on change in method Asset A/c ……………… Dr.
To Profit & loss A/c
08 Loss suffered on change in method Profit & Loss A/c ………… Dr.
To Asset A/c.
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Proforma ledger accounts : In the ledgers of M/s. __________________

Dr. Fixed Asset Account Cr.

Date Particulars J Amount Date Particulars J Amount
F F
To Balance b/d xxx By Depreciation A/c xxx
To Cash/Bank A/c xxx (Depreciation charged )
(Purchases on Cash)
To Seller's A/c xxx By Cash/Bank A/c xxx
(Purchases on Credit) (Sale of fixed asset on cash)
To Cash/Bank A/c xxx By Purchaser's A/c xxx
(Installation Charges) (Sales on Credit)
To Cash/ Bank A/c xxx By profit & Loss A/c xxx
(Repairing /reconditioning (Loss on Sale)
charges)
To profit & loss A/c xxx By Balance c/d xxx
(Profit on Sale )
xxx xxx
To Balance b/d xxx xxx

Dr. Depreciation Account Cr.

Date Particulars JF Amount Date Particulars JF Amount
To Fixed Asset A/c xxx By Profit & Loss A/c xxx
(Depreciation ) (Transfer)
xxx xxx

METHODS OF DEPRECIATION :

1) Fixed Instalment Method :

Fixed Instalment method is also known as straight line method or original cost method or
fixed percentage method of depreciation.
Under this method depreciation is charged at fixed percentage on original cost of asset for
each year during the life time of an asset. Depreciation is charged evenly every year so as
to reduce the asset value up to zero or to its scrap value.
Under this method depreciation is charged evenly throughout the life of the asset by
applying a fixed percentage on the original cost of the asset.

cs
Formula, D
n

Where, D : Depreciation Amount per year

c : Original cost of asset ( i.e. Purchase price + all incidental/installation charges)

s : Estimated Scrap value

n : Life in No. of years for which asset will be in use or estimated life of
asset.
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Once the rate of depreciation is derived it can be applied every year to calculate quantum
of depreciation as follows :
i) When asset is used for full year :
Depreciation Amount = Original Cost x Rate of depreciation

ii) When asset is used for part of a year :

Depreciation Amount = Original cost x Rate of depreciation x Period of use
12/365
Depreciation may be expressed in the form of percentage as follows :
D
Rate of Depreciation= r = x 100
C
Where, r = Rate of depreciation in form of percentage
D = Depreciation Amount derived as per above formula
C= Original cost of asset.
E.g. A machinery worth Rs. 20,000 is purchased. Its useful life is 10 years and residual
value is Rs. 2000. The depreciation to be charged every year will be calculated as under :
20,000  2000 18000
Depreciation p.a. = R = = = Rs. 1800
10 10

1800
Rate of Depreciation = r = x 100 = 9% P.A.
20000

Merits :
1) It is simple method to understand and easy to calculate the Amount of depreciation
2) The provision for depreciation is spread evenly over the useful life of the asset.
3) The book value of an asset is reduced to zero or its scrap value.
4) Amount of depreciation charged to profit and loss A/c is same during the life time of
the assets.
5) No separate calculation of depreciation is required for purchase of additional asset
having the same working life.

Demerits :
1) Under this method Amount of depreciation is equal during the life of the asset. With the
passage of time, work efficiency of asset goes on decreasing and repair charges go on
increasing. Therefore in later life of asset profit and loss A/c has to bear higher burden
of depreciation and repair charges.
2) If the additional asset purchased does not have same working life, separate calculation
of depreciation is to be made.
3) The interest on capital invested in the asset is not taken into consideration.
4) This method does not take into account the effective utilization of the asset. Amount of
depreciation charged every year is same irrespective of the use of asset.
Illustrations on Fixed Instalment Method of Depreciation:
Illustration No. 1
On 1st April 2007, Ranjana Traders, Ratnagiri, purchased furniture for Rs. 2,60,000/-.
Estimated life of the furniture is 10 years and scrap value of the Furniture is Rs. 40,000/- The
furniture was sold on 31st March 2011 for Rs. 9000/- The accounts are closed on 31st march
every year.
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From the above information prepare Furniture Account and Depreciation Account for
the year 2007-08, 2008-09, 2009-10 and 2010-11 by charging depreciation under fixed
Installment Method.
Solution : In the books of M/s. Ranjana Traders, Ratnagiri
Dr. Furniture Account Cr.
Date Particulars JF Amount Date Particular JF Amount
2007 2008
April 1 To Cash/Bank A/c 2,60,000 Mar.31 By Depreciation a/c 22,000
Mar.31 By Balance c/d 2,38,000
2,60,000 2,60,000
2008 2009
April 1 To Balance b/d 2,38,000 Mar.31 By Depreciation A/c 22,000
Mar.31 By Balance c/d 2,16,000
2,38,000 2,38,000
2009 2010
April 1 To Balance b/d 2,16,000 Mar.31 By Depreciation A/c 22,000
Mar.31 By Balance c/d 1,94,000
2,16,000 2,16,000
2010 2011
April 1 To Balance b/d 1,94,000 Mar.31 By Depreciation A/c 22,000
Mar.31 By Cash/Bank A/c 90,000
Mar.31 By profit & loss A/c 82,000
(Loss on Sale of Furniture )

1,94,000 1,94,000

Dr. Depreciation Account Cr.

Date Particular JF Amount Date Particular JF Amount
2008 2008
Mar.31 To Furniture A/c 22,000 Mar.31 By Profit & Loss A/c 22,000
22,000 22,000
2009 2009
Mar.31 To Furniture A/c 22,000 Mar.31 By Profit & Loss A/c 22,000
22,000 22,000
2010 2010
Mar.31 To Furniture A/c 22,000 Mar.31 By Profit & Loss A/c 22,000
22,000 22,000
2011 2011
Mar.31 To Furniture A/c 22,000 Mar.31 By Profit & Loss A/c 22,000
22,000 22,000

Working Notes :

1) Depreciation per annum =

Original Cost of Asset - Scrap value

=
Estimated Life in years

2,60,000 - 40,000 2,20,000

= = = Rs. 22,000
10 10
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2) Book Value/Written Down value of an asset on the date of sale = Original Cost -
Depreciation for 4 years @ Rs. 22,000 P.a = 2,60,000 - (22,000 x 4) = 2,60,000 - 88,000
= Rs. 1,72,000

Loss on Sale = Book value/ W.D.V. - Selling price

= 1,72,000 - 90,000 = Rs. 82,000
Loss on sale of Rs. 82,000 is debited to profit & loss account and credited to Furniture
Account.

Illustration No. 2
The machinery account shows a debit balance of Rs. 15,000 on 1st April 2005. This
machinery was originally purchased on 1st Oct. 2002 for Rs. 20,000. On 1st April, 2005 a
new machinery was purchased for Rs. 45,000. On 1st July, 2005 he again purchased the
machinery costing Rs. 15,000 and spent Rs. 1,000 on its erection.

On 1st January, 2006 the machine purchased on 1st Oct. 2002 was sold for Rs. 15,500 on
31st March ever year, depreciation is charged at 10% P.A. on cost price.
Prepare Machinery A/c and Depreciation A/c in the books of Mr. Prasad Kumar for
one year ended on 31st March, 2006

Solution : In the books of MR. PRASAD KUMAR

Dr. Machinery Account Cr.
Date Particular JF Amount Date Particular JF Amount

2005 2006
April 1 To Balance b/d 15,000 Jan. 1 By Cash/Bank A/c 15,500
April To Cash/ Bank A/c 45,000 (Sale of Machinery)
(New machinery purchased ) Mar.31 By Depreciation A/c 7,200
(Depreciation charged)
July 1 To Cash/Bank A/c 16,000
(New machinery purchased ) Mar.31 By Balance c/d 55,300
2006
Jan.1 To Profit & loss 2,000
A/c (Profit on Sale)
78,000 78,000
2006
April 1 To Balance b/d 55,300

Depreciation Account
Dr. Cr.
Date Particular JF Amount Date Particular JF Amount
2006 2006
Mar.31 To Machinery A/c 7,200 Mar.31 By Profit & Loss A/c 7,200
7,200 7,200

Working Notes :
Table showing year wise depreciation and profit or Loss on Sale of machinery is
given below : FIM 10% P.A.
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Table showing year wise depreciation

Machinery I Machinery II Machinery III Total
Original Cost------------> Rs. 15,000 Rs. 45,000 (15,000 +1000) C/[2+3+5]
Date of purchase--------> (1.04.2005) (1.04.2005) (1.07.2005)
15,000 45,000 16,000
Less-Depre.[2005-06]> -1,500 -4,500 -1,200 7,200
W.D.V. on 01-01-2006 13,500 - - -
Less-Selling price -15,500 - - -
Profit 2,000
Balance as on 01/04/2006 NIL 40,500 14,800 55,300
Since Amount of sale-proceeds of machinery Rs. 15,500 is greater than its cost of Sales i.e.
Rs. 13,500 there is a profit of Rs. 2,000.
Accounting entry for profit earned on Sale of machinery :-
Machinery A/c Dr. 2,000
To profit & loss A/c 2,000

Illustration No. 03
M/s. Anjali Trading Company, Satara, purchased a Machinery for Rs. 3,70,000 on 1st April
2008 and spent Rs. 30,000 on its erection. On 1st Oct. 2008 company purchased an additional
machinery of Rs. 2,00,000. The Company decided to depreciate the Machinery @ 10% P.A.
on Fixed Instalment method. On 31st March, 2011 the company sold one machine purchased
on 1st April 2008 having the original cost Rs. 1,00,000 for Rs. 75000 Financial year of the
company closes on 31st March every year.
Prepare Machinery Account and Depreciation Account for the years 2008-09, 2009-
10 and 2010-11
Solution :
In the books of M/s. ANJALI TRADING COMPANY, Satara
Dr. Depreciation Account Cr.
Date Particular Amount Date Particular Amount

2008 2009
April 1 To Cash/Bank A/c 4,00,000 Mar.31 By Depreciation A/c 50,000
(3,70,000+30,000) (Dep. Charged )
Oct. 1 To Cash/Bank A/c 2,00,000 By Balance c/d 5,50,000
(Purchases)
6,00,000 6,00,000
2009 2010
April 1 To Balance b/d 5,50,000 Mar.31 By Depreciation A/c 60,000
(Dep. charged)
Mar.31 By Balance c/d 4,90,000
5,50,000 5,50,000
2010 2011
April 1 To Balance c/d 4,90,000 Mar.31 By Cash/ Bank A/c 75,000
(Sales)
2010 Mar.31 By Depreciation A/c 60,000
Mar.31 To Profit & Loss 5,000 (Dep. charged)
A/c (Profit on sale)
Mar.31 By Balance c/d 3,60,000
4,95,000 4,95,000
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Dr. Depreciation Account Cr.

Date Particular Amount Date Particular Amount
2009 2009
Mar.31 To Machinery A/c 50,000 Mar.31 By profit & loss A/c 50,000

50,000 50,000
2010 2010
Mar.31 To Machinery A/c 60,000 Mar.31 By profit & loss A/c 60,000

60,000 60,000
2011 2011
Mar.31 To Machinery A/c 60,000 Mar.31 By profit & loss A/c 60,000

60,000 60,000

Working Note :
Year Machinery I Machinery II Total
Original Cost----------> Rs. 4,00,000 (1.04.2008) Rs. 2,00,000 (1.10.2008) C/4=[2+3]
Date of purchase----->
2008-09 Sold Unsold
Original Cost 1,00,000 3,00,000 2,00,0000 -
Less : Dep.@ 10% -10,000 -30,000 for 6 months -10,000 50,000
2009-10 90,000 2,70,000 1,90,000 -
Less : Dep. -10,000 -30,000 -20,000 60,000
2010-11 80,000 2,40,000 1,70,000 -
Less : Dep. -10,000 -30,000 -20,000 60,000
Cost of Sale 70,000
Less- Sale price -75,000 - - -
Profit on Sale 5,000 - - -
Balance - 2,10,000 1,50,000 3,60,000

Notes :
1) Since Machinery has been sold on the last day of the Financial year i.e. 31.03.2010, the
depreciation has been charged on the same for full year.
2) As the sales price of the Machinery sold i.e., Rs. 75,000 is greater than its cost Rs. 70,000. There is
a profit of Rs. 5,000 (75,000 - 70,000)

Problem No. 4
M/s Vinod & company, Latur purchased a computer on 1st January, 2008 for Rs. 40,000.
In the same year on 1st July another computer costing Rs. 45,000 was purchased.
On 30th June 2010 the computer purchased on 1st January 2008 was sold for Rs.
15,000 and on the same date a new computer was purchased at a cost of Rs. 48000/-
Depreciation was provided annually on 31st December at 30% on the original cost.
Prepare computer A/c and Depreciation A/c for the year 2008, 2009 and 2010.
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Working Note : Calculation of Depreciation on Computer

Year Computer I Computer II Computer III Total =[C/2+3+4]
2008 40,000 45,000
[on 01-01-2008] [on 01-07-2008]
Less : 30% Depreciation -12,000 -6750 - 18,750
(for 6 Months)
2009 28,000 38,250 -
Less : 30% Depreciation -12,000 -13,500 - 25,500
2010 16,000 24,750 48,000
[on 30-06-10]
Less : 30% Depreciation -6000 -13,500 -7,200 26,700
[up to 30-06-10 [from 30-06-10
i.e. for 6 months] i.e. for 6 months]

Cost Price 10,000

Less : Sales Price -15,000
Loss on Sale - 5,000
2011 - 11,250 40,800 52,050

In the books of M/s. Vinod & Company

Date Particular Amount Date Particular Amount
2008 2008
1st Jan To Bank A/c 40,000 31st Dec. By Depreciation A/c 18,750
1st July To Bank A/c 45,000 31st Dec. By Balance c/d 66,250
85,000 85,000
2009 2009
1st Jan To Op. Bal. b/d 66,250 31st Dec. By Depreciation A/c 25,500
31st Dec. By Balance c/d 40,750
66,250 66,250
2010 2010
1st Jan To Op. Bal. b/d 40,750 31st Dec. By Bank A/c 15,000
30/06/10 To Bank A/c 48,000 30/06/10 By Depreciation A/c 6,000
30/06/10 To profit & loss 5,000 31st Dec. By Depreciation A/c 20,700
A/c (loss on sale) 31st Dec. By Balance c/d 52,050
93,750 93,750
2011 To Balance b/d 52,050
1st Jan.
Dr. Depreciation A/c Cr.
Date Particular Amount Date Particular Amount
2008 2008
31st Dec. To Computer A/c 18,750 31st Dec. By Profit & Loss A/c 18,750
18,750 18,750
2009 2009
31st Dec. To Computer A/c 25,500 31st Dec. By Profit & Loss A/c 25,500
25,500 25,500
2010 2010
31st Dec. To Computer A/c 26,700 31st Dec. By Profit & Loss A/c 26,700
26,700 26,700
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Problem No. 5
M/s. Dinesh Furniture company purchased a furniture for Rs. 60,000 on 1st July,
2012. On 1st January, 2013 company purchased an additional furniture costing Rs. 20,000 On
31st December, 2014 the furniture purchased on 1st July, 2012 became obsolete and was sold
for Rs. 40,000 Depreciation was provided annually on 31st December every year at the rate
of 10% p.a. on fixed Instalment method.
Prepare Furniture A/c and Depreciation A/c for the period from 2012 to 2014.
Solution :
Working Note : Calculation of Depreciation on Furniture
Year Furniture I Furniture II Total
Date of purchase-----> (1st July, 2012) (1st Jan. 2013)
2012 Original Cost------> 60,000 -
Less : 10% Depreciation -3,000 3000
(for 6 months)
2013 57,000 20,000
Less : 10% Depreciation -6,000 -2,000 8,000
2014 51,000 18,000
Less : 10% Depreciation -6,000 -2,000 8,000
W.D.V.[0n the date of sale] 45,000
Less : Sales Price -40,000
Loss on Sale 5,000
2015 00000 16,000 16,000

In the books of M/s. Dinesh Furniture Co.

Dr. Furniture Account Cr.
Date Particular Amount Date Particular Amount
2012 2012
1st July To Bank A/c 60,000 31st Dec. By Depreciation 3,000
31st Dec. By Balance c/d 57,000
60,000 60,000
2013 2013
1 Jan To Balance b/d 57,000 31 Dec. By Depreciation 8,000
1Jan To Bank A/c 20,000 31 Dec. By Balance c/d 69,000
77,000 77,000
2014 2014
1st Jan To Balance b/d 69,000 31st Dec. By Bank A/c 40,000
31st Dec. By Profit & loss A/c 5,000
(Loss on Sale)
31st Dec. By Depreciation 8,000
31st Dec. By Balance c/d 16,000
69,000 69,000
2015
1stJan To Balance b/d 16,000
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Depreciation Account
Dr. Cr.
Date Particular JF Amoun Date Particular JF Amount
t
2012 2012
31st Dec. To Furniture A/c 3,000 31st Dec. By profit & loss A/c 3,000
3,000 3,000
2013 2013
31st Dec. To Furniture A/c 8,000 31st Dec. By profit & loss A/c 8,000
8,000 8,000
2014 2014
31st Dec. To Furniture A/c 8,000 31st Dec. By profit & loss A/c 8,000
8,000 8,000

2) Reducing Balance Method (W.D.V. Method):

This method of depreciation is also known as written down value method or
Diminishing Balance Method. In this method, depreciation is charged at a fixed percentage,
on the reduced balance i.e. W.D.V. of asset appearing at the beginning of every year.
Under this method even though the rate of depreciation is fixed for each year, the Amount of
depreciation goes on decreasing year after year.
Thus, the percentage of depreciation is not applied on the original cost but on w.d.v.
i.e. the balance which remains after charging depreciation for the preceding years. Under this
method, the Amount of depreciation charged to Profit & Loss A/c goes on reducing.
In the beginning few years, a new asset does not need any repairs or maintenance. In
these years depreciation is charged more under WDV method. Later on, after use of asset for
few years, repairs and maintenance cost becomes a recurring expense. In these later years
depreciation Amount goes on reducing. The total of depreciation & repairs expenses shows
loss due to use of such assets. Hence the charge on profit remains same every year. The rate
of depreciation under this method can be computed as under.
S
Formula, R = 1- n x 100
C
Where, R = Rate of depreciation
n = Estimated economical life of asset.
S = Scrap value of the asset
C = Cost of acquisition of the asset.
Every year depreciation can be calculated as follows :
i) On the balance brought down in the beginning of the year-
Depreciation Amount = Opening Balance of Asset x Rate of Depreciation

ii) On the new purchases made during the current year-

Depreciation Amount = Original cost of new purchases x Rate of depreciation x…
.. x Period of use in current year, in months
12 months

Total Depreciation to be charged on the respective asset =

Yearly Depreciation on opening balance excluding WDV of asset sold during the year
Add- Depreciation on newly purchased asset for the part of current year.
Add- Depreciation on opening WDV of asset sold during the year up to the date of sale.
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 Merits of Reducing Balance Method:

1] The Expenses for the use of the asset are scientifically provided. These expenses
include depreciation charge and charges for repairs and renewals. In Earlier years of
asset, the depreciation charges will be higher but repairs and renewal charges will be
lower. As the asset grows older, depreciation charge will be lower but repairs and
renewal charges will be higher. Thus profit and loss account is debited more or less by
equal Amount each year.
2] The asset being not completely written off will enable one to keep track of asset.
3] This method of depreciation is recognized under Companies Act and Income Tax Act.

 Demerits of Reducing Balance Method:

1] The asset value can never be reduced to zero in the books.
2] Interest on capitals invested in the asset is not considered.
3] If this depreciation is considered for costing, the cost of production in the earlier period
will be more.

Practical Problems on: Reducing Balance Method of depreciation

Illustration No. 1
On 1st April, 2008, Gurudas Traders, Sangli purchased a building for Rs. 20,00,000.
On 1st Oct. 2008 an extension was made to the above building by spending Rs. 10,00,000/
On 1st Oct. 2010,. half of the building was sold through a broker for Rs. 12,50,000
and brokerage Rs. 5,000 was paid.
Depreciation is charged on 31st March every year at 10% P.A. under the Diminishing
Balance method.
Prepare Building A/c and the Depreciation A/c for 2008-09, 2009-10 and 2010-11.
Solution : In the books of M/s, Gurudas Traders, Sangli
Building Account
Dr. Cr.
Date Particular Amount Date Particular Amount
2008 2009
April 1 To Cash/Bank A/c 20,00,000 Mar.31 By Depreciation A/c 2,50,000
(New purchases) Mar.31 By Balance c/d 27,50,000
Oct. 1 To Cash/Bank A/c 10,00,000
(Extension)
30,00,000 30,00,000
2009 2010
April 1 To Balance b/d 27,50,000 Mar.31 By Depreciation A/c 2,75,000
Mar.31 By Balance c/d 24,75,000

27,50,000 27,50,000
2010 2010
April 1 To Balance b/d 24,75,000 Oct. 1 By Cash/Bank A/c 12,45,000
Oct. 1 To Profit & loss A/c 69,375 (Sales price)
Mar.31 By Depreciation A/c 1,85,625
Mar.31 By Balance c/d 11,13,750
25,44,375 2011 25,44,375
2011
April 1 To Balance b/d 11,13,750
 14

Depreciation Account
Dr. Cr.
Date Particular Amount Date Particular Amount
2009 2009
Mar.31 To Building A/c 2,50,000 Mar.31 By profit & loss A/c 2,50,000

2,50,000 2,50,000
2010 2010
Mar.31 To Building A/c 2,75,000 Mar.31 By profit & loss A/c 2,75,000

2,75,000 2,75,000
2011 2011
Mar.31 To Building A/c 1,85,625 Mar.31 By profit & loss A/c 1,85,625

1,85,625 1,85,625
Working Note :
Calculation of depreciation and profit or loss made on the sale of Building is shown in the
following table :

Year Building (on1.04.2008) Total

Rs. 20,00,000
2008-09 20,00,000
Add : Extension made 10,00,000
[on 01.10.2008]
Total Cost of construction 30,00,000
Less : Dep. @ 10% -2,50,000 2008-09 - = 2,50,000
(on 20,00,000 for 1 year [i.e. 2,00,000 + 50,000]
and 10,00,000 for ½ year)
2009-10 27,50,000 2009-10- = 2,75,000
Less : Dep. @ 10% -2,75,000
2010-11 24,75,000
Sold Unsold
Op. Balance of two parts 12,37,500 12,37,500
Less : Dep. @ 10% -61,875 -1,23,750 2010-11- = 1,85,625
(for 6 months) (for 12 month)
W.D.V on the date of sale 11,75,625
Less- Sales price -12,45,000
Profit on sale 69,375
Closing Bal. on 31/03/11 11,13,750
Note: Calculation of Net selling price:
Sale price ½ of the building sold Rs. 12,50,000
Less: Brokerage paid to broker - 5,000
Net Selling price 12,45,000

Illustration No. 2
Renuka Trading Company Ambajogai purchased furniture 1st April 2002, For Rs. 50,000. In
the same year on 1st October additional furniture was purchased for Rs. 20,000 On 1st
October 2003 the furniture purchased on 1st April, 2002 was sold for Rs. 30,000 and on the
same date, new furniture was purchased for Rs. 25,000.
 15

The company charges depreciation at 10% P.A. on Reducing Balance Method.

Prepare furniture A/c and Depreciation A/c for three years ending on 31.03.2003, 31.03.2004
and 31.03.2005.

Solution : In the books of RENUKA TRADING COMPANY

Furniture Account
Dr. Cr.
Date Particular Amount Date Particular Amount
2002 2003
April 1 To Cash/Bank A/c 50,000 Mar.31 By Depreciation A/c 6,000
(Furn. purchased) (Dep. Charged)
Oct. 1 To Cash/Bank A/c 20,000 Mar.31 By Balance c/d 64,000
70,000 70,000
2003 2003
April 1 To Balance b/d 64,000 Oct. 1 By Cash/Bank A/c 30,000
(Sale of Furniture)
Oct. 1 To Cash/Bank A/c 25,000 Oct. 1 By Profit & Loss A/c 12,750
(New furniture purchased ) 2004
Mar.31 By Depreciation A/c 54,000
(Dep. Charged)
Mar.31 By Balance c/d 40,850
89,000 89,000
2004 2005
April 1 To Balance b/d 40,850 Mar.31 By Depreciation A/c 4,085
(Dep. Charged)
Mar.31 By Balance c/d 36,765
40,850 40,850
2005
April 1 To Balance b/d 36,765

Depreciation Account
Dr. Cr.
Date Particular Amount Date Particular Amount
2003 2003
Mar.31 To Furniture A/c 6,000 Mar.31 By profit & loss A/c 6,000
6,000 6,000
2004 2004
Mar.31 To Furniture A/c 5,400 Mar.31 By profit & loss A/c 5,400
5,400 5,400
2005 2005
Mar.31 To Furniture A/c 4,085 Mar.31 By profit & loss A/c 4,085
4,085 4,085
 16

Working Note :
Table showing year wise total depreciation and profit or loss made on sale of furniture
under R.B.M. - Rate of Dep : 10% P.A.
Year Furniture I Furniture II Furniture III Total
Rs. 50,000 Rs. 20,000 Rs. 25,000
(1.04.2002) (1.10.2002) (1.10.2003)
2002-03 50,000 20,000 -
Less : Dep. -5,000 -1,000 - 6,000
2003-04 45,000 19,000 25,000
Less : Dep. (6m) -2,250 -1,900 -1,250 5,400
Cost 42,750 - - -
Less : Sale -30,000
Loss on sale 12,750
2004-05 - 17,100 23,750 -
Less : Dep. - -1,710 -2,375 4,085
Balance on
01.04.2005 - 15,390 21,375 36,765

As the sale price of Furniture sold Rs. 30,000 is less than its cost of sale, the company
has incurred loss on its sale Rs. 12,750. Loss on sale is debited to Profit & Loss A/c. and
credited to Furniture A/c.
Illustration No. 3:
On 1st July, 2008, M/s. Navneet and company, Beed., purchased Machinery for Rs.
1,98,000 and spend Rs. 2000 for its erection. On 1st October, 2008, additional machinery was
purchased for Rs. 1,20,000.
The part of machinery costing Rs. 80,000 purchased on 1st July, 2008 was sold out on 31st
July, 2010 for Rs. 40,000.
On the same date new machinery was purchased at a cost of Rs. 1,50,000.
Depreciation was provided for annually on 31st March @ 10 P.A. on reducing Balance
Method. Prepare machinery Account and Depreciation Account for the year 2008-2009,
2009-10 and 2010-11.
Solution:
Machinery A/c
Dr. Cr.
Date Particular Amount Date Particular Amount

2008 To Cash/Bank A/c 2,00,000 2009 By Depreciation A/c 21,000

April 1 (New Purchases) Mar.31 (Yearly Depre. Charged)
To Cash/Bank A/c 1,20,000 By Balance c/d 2,99,000
Oct. 1 (New purchase) Mar.31
3,20,000 3,20,000
2009 2010
April 1 To Balance b/d 2,99,000 Mar.31 By Depreciation A/c 29,900
Mar.31 By Balance c/d 2,69,100
2,99,000 2,99,000
2010 2010
April 1 To Balance b/d 2,69,100 July 31 By Cash/Bank A/c 40,000
July 31 To Cash/Bank A/c 1,50,000 (Sales price)
(purchase ) July 31 By Profit & Loss A/c 24,380
 17

(Loss on sale)
2011
Mar.31 By Depreciation A/c 32,470
(Dep. Charged)
Mar.31 By Balance c/d 3,22,250
4,19,100 4,19,100
2011
April 1 To Balance b/d 3,22,250

Depreciation Account
Dr. Cr.
Date Particular Amount Date Particular Amount
2009 2009
Mar.31 To Machinery A/c 21,000 Mar.31 By profit & loss A/c 21,000

21,000 21,000
2010 2010
Mar.31 To Machinery A/c 29,900 Mar.31 By profit & loss A/c 29,900
29,900 29,900
2011 2011
Mar.31 To Machinery A/c 32,470 Mar.31 By profit & loss A/c 32,470
32,470 32,470

Working Note :
Calculation of depreciation on Machinery and Profit or Loss made on Sale of
machinery is shown in the following table :
Machinery I Machinery II Machinery III
Total
Year Rs. 50,000 Rs. 1,20,000 Rs. 25,000
(1.07.2008) (1.10.2008) (31.07.2010)
Sold Unsold
2008-09 80,000 1,20,000 1,20,000 -
Less : Dep. -6,000 -9,000 -6,000 - 21,000
(9 months) (9 months)
2009-10 74,000 1,11,000 1,14,000
Less : Dep. -7,400 -11,100 -11,400 29,900
2010-11 66,600 99,900 1,02,600 1,50,000
Less : Dep. -2,220 -9,990 -10,260 10,000 32,470
(for 8 months)
Cost 64,380
Sales -40,000
Loss 24,380
Balance - 89,910 92,340 1,40,000 Balance
on 1.04.11 3,22,250

Problem No. 4
M/s. Ajay & company, Kalyan purchased a printer on 1st Jan. 2008 for Rs. 25,000/-
In the same year on 1st July, another printer costing Rs. 26,000 was purchased.
 18

On 30th June, 2010 the printer purchased on 1st Jan. 2008 was sold for Rs. 10,000
and on the same date, a new printer was purchased at a cost of Rs. 28,000. Depreciation was
provided annually on 31st Dec. at 20% on the Reducing Balance Method.
Prepare Printer A/c and Depreciation Account for 3 years.
Working Note :
Calculation of Depreciation on Printer :
Printer I Printer II Printer III Total
Year
(1st Jan. 2008) (1st July 2008) (30th July 2010) Depreciation
2008 25,000 26,000
Less : 20% Depreciation 5,000 2,600
(6 Months) - 7,600

2009 20,000 23,400

Less : 20% Depreciation 4,000 4,680 - 8,680

2010 16,000 18,720 28,000

Less : 20% Depreciation 1,600 3,744 2,800 8,144
(6 Months) (6 Months)

Cost Price 14,400

Less-Sale Price 10,000

Loss on Sale 4,400

2011 - 14,976 25,200

In the books of M/s. Ajay & Co., Kalyan

Printer A/c
Dr. Cr.
Date Particular Amount Date Particular Amount
2008 2008
1st Jan To Bank A/c 25,000 31st Dec. By Depreciation 7,600
1st July To Bank A/c 26,000 31st Dec. By Balance c/d 43,400
51,000 51,000
2009 2009
1st Jan To Balance b/d 43,400 31st Dec. By Depreciation 8,680
31st Dec. By Balance c/d 34,720
43,400 43,400
2010 2010
1st Jan To Balance b/d 34,720 31st Dec. By Bank A/c 10,000
30th June To Bank A/c 28,000 31st Dec. By Profit & loss A/c 4,400
(Loss on Sale)
31st Dec. By Depreciation 8,144
31st Dec. By Balance c/d 40,176
62,720 62,720
2011
1st Jan To Balance b/d 40,176
 19

Depreciation A/c
Dr. Cr.
Date Particular Amount Date Particular Amount
2008 2008
31st Dec. To computer A/c 7,600 31st Dec. By profit & loss A/c 7,600
7,600 7,600
2009 2009
31st Dec. To computer A/c 8,680 31st Dec. By profit & loss A/c 8,680
8,680 8,680
2010 2010
31st Dec. To computer A/c 8,144 31st Dec. By profit & loss A/c 8,144
8,144 8,144

Problem No. 5
M/s. Radha & Company, Thane purchased machinery costing Rs. 45,000 and they
spent Rs. 5000 for installation of machinery on 1st April, 2012.
On 1st Oct., 2013 they purchased new machine costing Rs. 20,000
On 1st April, 2014 the company purchased new machine costing Rs. 10,000/-
Company decided to charge the depreciation on machinery at 10% p.a.on reducing
balance method. Financial year ends on 31st March every year.
Prepare Machinery A/c, Depreciation A/c for 3 years in the books of M/s. Radha &
company.
Working Note : Calculation of Depreciation on Machinery :
Machinery I Machinery II Machinery III Total
Year
(01.04.12) (01.10.13) (01.04.14) Depreciation
2012-13 50,000
Less : 10% Dep. 5,000 - - 5,000
2013-14 45,000 20,000
Less : 10% Dep. 4,500 1,000 - 5,500
(6 months)
2014-15 40,500 19,000 10,000
Less : 10% Dep. 4,050 1,900 1,000 6,950
2015-16 36,450 17,100 9,000

In the books of M/s. Radha & Co., Thane

Machinery Account
Dr. Cr.
Date Particular Amount Date Particular Amount
2012-13 2012-13
1st.April, To Bank A/c 45,500 31st March By Depreciation 5,000
2012 2013
1st.April, To Bank A/c 5,000 31st March By Balance c/d 45,000
2012 (Instalment charg.) 2013
50,000 50,000
2013-14 2013-14
1st.April, To Balance b/d 45,000 31st March By Depreciation 5,500
2013 2014
 20

1st.April, To Bank A/c 20,000 31st March By Balance c/d 59,500

2013 2014
65,000 65,000
2014-2015 2014-2015
1st.April, To Balance b/d 59,500 31st March By Depreciation 6,950
2014 2014
1st.April, To Bank A/c 10,000 31st March By Balance c/d 62,550
2014 2014
69,500 69,500
2015-16
1st.April, To Balance b/d 62,550
2015

Depreciation A/c
Dr. Cr.
Date Particular Amount Date Particular Amount
2012-13 2012-13
31st March To computer A/c 5,000 31st March By profit & loss A/c 5,000
5,000 5,000
2013-14 2013-14
31st March To computer A/c 5,500 31st March By profit & loss A/c 5,500
5,500 5,500
2014-15 2014-15
31st March To computer A/c 6,950 31st March By profit & loss A/c 6,950
6,950 6,950

Problem No. 6
1) M/s. Suchitra Co. Pune purchased a Machinery on 1st Jan. 2012 for Rs. 50,000/- &
purchased new machinery on 1st July, 2013 costing Rs. 40,000/-.
On 1st Jan., 2014, they sold the first machinery purchased on 1st Jan. 2012 for
Rs. 35,000/- and on the same day they purchased new machinery for Rs. 30,000.
Depreciation was provided on the machinery at the rate of 10% p.a. Financial year closes on
31st Dec. every year.
Prepare Machinery & Depreciation A/c for 3 years under:
a)fixed installment method and
b)Reducing Balance Method..
Solution :
A) Under Fixed Instalment Method :
Working Note : Calculation of Depreciation on Machinery and profit or loss made on
Sale of Machinery is shown as follows :
Machinery I Machinery II Machinery III Total
Year
(01.01.12) (01.07.13) (01.01.14) Depreciation
2012 50,000 - -
Less : 10% Depreciation 5,000 5,000

2013 45,000 40,000

Less : 10% Depreciation 5,000 2,000 - 7,000
2014 40,000 38,000 30,000
 21

Less : 10% Depreciation - 4,000 3,000 7,000

Sales 35,000
Loss on Sales 5,000
2015 - 34,000 27,000 -

In the Books of M/s. Suchitra Co. Pune

Machinery A/c.
Dr. Cr.
Date Particular Amount Date Particular Amount
2012 2012
1st Jan To Bank A/c 50,000 31st Dec. By Depreciation 5,000
31st Dec. By Balance c/d 45,000
50,000 50,000
2013 2013
1st Jan To Bank A/c 45,000 31st Dec. By Depreciation 7,000
1st July To Bank A/c 40,000 31st Dec. By Balance c/d 78,000
85,000 85,000
2014 2014
1st Jan To Balance b/d 78,000 31st Dec. By Bank A/c 35,000
1st Jan To Bank A/c 30,000 31st Dec. By Profit & loss A/c 5,000
(Loss on Sale)
31st Dec. By Depreciation 7,000
31st Dec. By Balance c/d 61,000
1,08,000 1,08,000
2015
1st Jan To Balance b/d 61,000

Depreciation A/c
Dr. Cr.
Date Particular Amount Date Particular Amount
2012 2012
31st Dec. To Machinery A/c 5,000 31st Dec. By profit & loss A/c 5,000
5,000 5,000
2013 2013
31st Dec. To Machinery A/c 7,000 31st Dec. By profit & loss A/c 7,000
7,000 7,000
2014 2014
31st Dec. To Machinery A/c 7,000 31st Dec. By profit & loss A/c 7,000
7,000 7,000

B) Under Reducing Balance method :

 22

Working Note :
Calculation of Depreciation on Machinery and profit or loss made on Sale of
Machinery is shown as follows :
Machinery I Machinery II Machinery III Total
Year
(01.01.12) (01.07.13) (01.01.14) Depreciation
2012 50,000 - -
Less : 10% Depreciation 5,000 5,000
2013 45,000 40,000
Less : 10% Depreciation 4,500 2,000 - 6,500
2014 40,500 38,000 30,000
Less : 10% Depreciation - 3,800 3,000 6,800
Sales 35,000
Loss on Sales 5,500
2015 - 34,200 27,000 -
In the Books of M/s. Suchitra Co. Pune
Machinery A/c.
Dr. Cr.
Date Particular Amount Date Particular Amount
2012 2012
1st Jan To Bank A/c 50,000 31st Dec. By Depreciation 5,000
31st Dec. By Balance c/d 45,000
50,000 50,000
2013 2013
1st Jan To Bank A/c 45,000 31st Dec. By Depreciation 6,500
1st July To Bank A/c 40,000 31st Dec. By Balance c/d 78,500
85,000 85,000
2014 2014
1st Jan To Balance b/d 78,500 31st Dec. By Bank A/c 35,000
1st Jan To Bank A/c 30,000 31st Dec. By Profit & loss A/c 5,500
(Loss on Sale)
31st Dec. By Depreciation 6,800
31st Dec. By Balance c/d 61,200
1,08,500 1,08,500
2015
1st Jan To Balance b/d 61,200
Depreciation A/c
Dr. Cr.
Date Particular Amount Date Particular Amount
2012 2012
31st Dec. To Machinery A/c 5,000 31st Dec. By profit & loss A/c 5,000
5,000 5,000
2013 2013
31st Dec. To Machinery A/c 6,500 31st Dec. By profit & loss A/c 6,500
6,500 6,500
2014 2014
31st Dec. To Machinery A/c 6,800 31st Dec. By profit & loss A/c 6,800
6,800 6,800
 23

Exercise :
Q.1. A)Fill in the blanks :
1) Depreciation is charged on ________ assets.
2) Balance in depreciation A/c is transferred to ___________
3) Straight line method is known as ________
4) Depreciation A/c is a _____________ A/c
5) Loss on Sale of machinery is ___________ to machinery A/c
6) Reduction in a value of an asset is termed as _________
7) Under _______ system, Amount of Depreciation changes every year.
8) Depreciation Amount remains _____________ under Fixed Instalment Method.
9) The Amount of Depreciation goes on decreasing every year under the ______
method of Depreciation
10) At the end of every year the balance of depreciation account is transferred to ____
account.
11) Under the _______ system of depreciation, the Amount of depreciation does not
change from year to year.
12) Under ________ method, the cost of asset cannot be reduced to Zero.
13) Depreciation = Cost of the asset - Estimate scrape value + ___________
14) Under ________ method depreciation is calculated on written down value.
15) Gradual and permanent decrease in the value of asset is known as ________

Q.1. B) Match the Columns :

A B
1) Depreciation a) Reduction in value of Fixed Assets

2) Depretium b) Fixed Assets

3) Working life of assets c) Sale proceed of used asset

4) Plant & Machinery d) Latin word

5) Residual value e) Period of which asset gives use.

f) Current assets

Q. 2 Answer in brief :
1) What is Depreciation ?
2) What are the causes of Depreciation ?
3) On what three factors does the Amount of depreciation depend ?
4) What is depreciation charged ?
5) What is scrap value ?
6) Define Depreciation and explain main features of Depreciation ?
7) How is the Amount of annual depreciation calculated under fixed installment method ?
8) What is the fixed installment method ?
9) What are the merits and demerits of fixed installment method ?
10) How is the depreciation account closed at the end of the year ?
11) What do you understand by Reducing balance method ?
12) Why is fixed installment method also called as straight line Method ?
 24

Practical Exercise :
Problem 1 :
Vishal traders, Mumbai purchased machinery on 01/04/2008 for Rs. 68,000 and paid
installation charges Rs. 2,000 & decided to depreciated the machinery at 10% P.A. under the
fixed instalment method. On 1/10/2010 a machinery having original cost of Rs. 10,000 was
sold for Rs. 5,000 & on same date a new machinery was purchased for Rs. 10,000.
Give the Journal entries & write up the machinery A/c from 1.04.08 to 31.3.11
assuming the A/c's of the firm are closed on every 31st March.

Problem 2 :
On 1st April, 2002 Ganesh Trading Company Ltd., Pune purchased machinery costing
Rs. 80,000. On 1st October, 2002 additional machinery was purchased for Rs. 40,000.
On 1st October, 2004 the machinery purchased on 1st April, 2002 was sold for Rs. 50,000. on
the same date, new machinery was purchased for Rs. 20,000.
Assuming that machinery is depreciated on 31st March every year @ 10% P.A. by the fixed
installment method.
Prepare Machinery Account and Depreciation Account for the year 2002-03, 2003-04 and
2004-05.

Problem 3 :
Ravindra Trading Co., Ambajoga purchased machinery for Rs. 55,000/- on 1st April,
2006 and spent Rs. 5,000/- on its fixation and erection. In the same year on 1st Oct.
additional machinery costing Rs. 40,000/- was purchased. On 1st Oct., 2008 the machinery
purchased on 1st April, 2006 became obsolete and was sold for Rs. 43,000/- on 1st Jan.,
2009, a new machinery was also purchased for Rs. 20,000/-
Depreciation was provided annually on 31st March at the rate of 10% P.A. on Fixed
Installment Method. Prepare : Machinery A/c and Depreciation A/c for the year 2006-07,
2007 -08 and 2008-09.

Problem 4 :
Sameer Printers, Rajapur, purchased a furniture on 1st April, 2008 for Rs. 1,00,000/-
In the same accounting year, on 1st Oct. another Furniture costing Rs. 80,000 was purchased.
On 30th Sept., 2010 part of the furniture costing Rs. 40,000 purchased on 1st April, 2008 was
sold for Rs. 30,000 and on the same date a new furniture was purchased at a cost of Rs.
60,000. Depreciation was provided annually on 31st March at 10% P.A. on the original cost.
Prepare: Furniture A/c and Depreciation A/c for the years 2008-09, 2009-2010 and 2010-11.

Problem 5 :
Shri. Yashraj and company, Kolhapur, purchased Furniture for Rs. 60,000 on 1.04.2007. On
1.10.2009 the company sold out a part of the Furniture for Rs. 6,000, the original cost of
which on 1.04.2007 was Rs. 12,000. The company charges depreciation at the rate of 10%
P.A. on Reducing Balance method.
The financial year of the company ends on 31st March, every year.
Prepare Furniture Account and Depreciation Account for the years 2007-08, 08-09, 09-10.
Problem 6 :
On 1st April, 2004 Saikripa enterprises purchased two computers of Rs. 40,000 each. On 1st
October, 2004 they purchased one more computer for Rs. 40,000. On 1st October 2006 they
sold one of the computers, which was purchased on 1st April, 2004 for Rs. 18,780.
Depreciation on Computers was provided @ 10% P.A. on Diminishing Balance Method and
the Financial year closes on 31st March every year.
 25

Prepare : Computer A/c and Depreciation A/c for years 2004-05, 2005-06 and 2006-07.

Problem 7 :
On 01.04.2006 Bharat Trading Company, Shegaon purchased Furniture for Rs. 60,000. On
01.10.2006 additional Furniture was purchased for Rs. 30,000. On 01.10.2007 the furniture
purchased on 01.04.2006 was sold for Rs. 62,992. The company charges depreciation @ 8%
P.A. on Reducing Balance Method. Assuming that the accounting year of the company closes
on 31st March every year, prepare furniture A/c and Depreciation A/c for 3 years from 2006-
07 to 2008-09. Also give Journal entries for 2007-08.

Problem 8 :
M/s. Deepali International bought furniture worth Rs. 24,000. On 01.04.2016 and additional
furniture on 01.10.2016 worth Rs. 16,000. They charged depreciation at 15% p.a. on fixed
installment basis.
On 01.10.2018 they sold out one cupboard for Rs. 2200, original cost on 01.04.2016 was Rs.
4000. On the same date a new cupboard was purchased for Rs. 8000.
Show the furniture A/c and depreciation A/c for the year 2016-17, 2017-18 and 2018-19
assuming that the financial year closes on 31st March every year.

Problem 9 :
Crestchem Ltd. books showed a balance of Rs. 60,000 under machinery A/c on 01.04.93.
They charge depreciation @ 20% p.a. under straight line method. They follow 31st March as
their year ending. The above machine was acquired on 01.04.1991. On 01.07.1993 additional
machinery was purchased for Rs. 30,000. On 31st Dec., 1993 another machine was bought
for Rs. 50,000 and on the same date half of the first purchase (i.e. purchased on 01.04.1991)
was sold for Rs. 30,000.
Prepare Machinery A/c for the year 1993-94 and also pass journal entries.
Problem 10 :
Janab Hasansab of Hyderabd made furniture for his own office on 1st Oct. 1975. For this, he
had spent Rs. 36,000 on materials and Rs. 16,000 on wages.
He estimated the life of the furniture to be 10 years. He estimated that the scrap value at the
end of its life would be Rs. 12,000.
He closed his books of accounts on 31st March every year. He sold the entire furniture for
Rs. 40,000 on 1st Oct., 1978.
Show the furniture A/c and Depreciation A/c for the years ended 31.3.1976, 31.3.2016,
31.3.1978 and 31.3.1979.

Problem 11 :
M/s. Tarachand Traders purchased machinery worth Rs. 45000 on 1st Jan., 2000. On 30th
June, 2000 additional machinery worth Rs. 25,000 was purchased.
On 31st December, 2001 machinery which had cost Rs. 4000 on 1st Jan, 2000 was sold off
for Rs. 3200. On 31st December, 2002 a machinery costing Rs. 10,000 on 1st January, 2000
was sold for Rs. 6250.
Prepare Machinery A/c and Depreciation A/c for three years after providing depreciation @
10% p.a. under straight line method.

Problem 12 :
M/s. Joshi Bros., Jalgaon purchased on 1st Jan., 2005 a set of machinery for Rs. 17,400 and
spent Rs. 600 on its erection. On 1st January, 2006 another set of machinery was purchased at
10,000.
 26

On 1st July, 2007, the machinery purchased on 1st January, 2005 was sold at Rs. 8000 and on
the same day a fresh machinery was purchased at Rs. 15,000.
Depreciation was charged at 10% p.a. under Straight Line Method on the original cost of
asset on 31st December every year.
Prepare Machinery A/c for 3 years, i.e. 2005, 2006, 2007 and Depreciation A/c for the same
period in the books of Joshi Bros., Jalgaon.

Problem 13 :
Mona Trading company of Akola purchased machinery for Rs. 65,000 on 1st January, 1992
and immediately spent Rs. 5000 on its fixation and erection. In the same year on 1st July,
additional machinery costing Rs. 30,000 was purchased.
On 1st July, 1994 the machinery purchased on 1st January, 1992 became obsolete and was
sold for Rs. 51,000.
On 1.10.1994 a new machine was also purchased for Rs. 41,000.
Depreciation was provided on 31st December @ 12% p.a. on fixed installment method.
Prepare Machinery A/c and Depreciation A/c from 1992 to 1994.

Problem 14:Taj International bought 4 computers @ Rs. 35000 each, on 01.04.1990.

Installation charges Amounted to Rs. 2000 per computer. Company sent four of its personnel
for a one month computer course, costing Rs. 3000 per person. Company took comprehensive
Insurance Policy for each computer with New India Assurance Co. Ltd.
The first premium payable Amounted to Rs. 2500. Each year henceforth company was liable
to pay Rs. 500 towards insurance premium. On 01.10.1992 one computer was destroyed by
fire. Insurance co. paid Rs. 22,000. The residue of the destroyed computer was sold as scrap
for Rs. 3000.
Company depreciates computers @ 10% under diminishing balance method on 31st Dec.
every year.
Prepare computers A/c and Depreciation A/c for the years 1990, 1991, 1992 and 1993.

Problem 15 :
Mr. Aurangabadkar purchased a furniture worth Rs. 20,000 on 01.04.2003. He charges
depreciation @ 10% p.a. on reducing balance method. On 01.07.2005 he sold out a part of the
furniture for Rs. 2000, the original cost of which on 01.04.2003 was Rs. 4000. His financial
year ends on 31st March every year.
You are required to prepare his furniture A/c for the first four years and pass journal entries
for the transactions of third year.

Problem 16 :
Amit Traders, Sinnar purchased furniture on 01.01.1984 for Rs. 15000. In the same year on
1st July additional furniture was bought for Rs. 8000.
On 01.07.1985 the furniture purchased on 01.01.1984 was sold for Rs. 10000 and on the
same date new furniture was bought for Rs. 12,000.
The firm charges depreciation @ 10% p.a. on reducing balance method.
Prepare Depreciation A/c and Furniture A/c for the years ended 31st Dec., 1984, 1985 and
1986.

Problem 17 :
Sangam Trading Co. purchased some machinery on 1st Jan, 1986 for Rs. 88,000 and spent
Rs. 2000 on its erection. On 30.06.1986 additional machinery was bought for Rs. 10,000.
 27

On 31st Dec., 1987 a part of the machinery was sold for Rs. 2100 which had a cost of Rs.
4000 on 1st Jan. 1986.
Prepare machinery A/c for the years 1986, 1987 and 1988 and pass Journal entries for the
year 1987 assuming that machinery is depreciated at 10% p.a. on diminishing balance method
on 31st Dec. each year.

Problem 18 :
On 1st Jan. 2012, Sunil Traders purchased machinery costing Rs. 20,000. On 1st July, 2012
they purchased further machinery for Rs. 10,000.
On 01.07.2014 they sold for Rs. 6000 the machine purchased on 1st Jan. 2012 and bought
another machine for Rs. 12000 on the same day.
Depreciation was provided on machinery at 10% p.a. on the diminishing balance method and
the financial year closes on every 31st Dec.
Prepare the machinery A/c and the Depreciation A/c for four years.

Problem 19 :
Rahul Gupta Trading Co., Kalyan purchased furniture on 01.01.1992 for Rs. 25,000. In the
same year, on 1st July additional furniture was purchased for Rs. 10,000,
On 1st July, 1993 the furniture purchased on 01.01.1992 was sold for Rs. 15,000 and on the
same date, new furniture was purchased for Rs. 12,000.
The company charges depreciation at 15% on reducing balance method.
Prepare furniture A/c and Depreciation A/c for 3 years, assuming that the accounting year of
the company closes on 31st December every year.

Problem 20 :
Ajanta Traders, Pune acquired a building on 1st July, 2002 for Rs. 8,00,000. On 1st April,
2003 on extension was made to the above building by spending Rs. 4,00,000.
On 1st October, 2004, they sold half part of the building through broker for Rs. 5,60,000.
Brokerage paid 2% on selling price.
On 31st March every year, they charged depreciation at 10% p.a. under diminishing balance
method. Prepare Building A/c and Depreciation A/c for 3 years.
 28

Chapter- 2.

ACCOUNTING OF CONSIGNMENT TRANSACTIONS

A)Meaning & Necessity of Consignment :

a)Meaning- In olden days, the business was on small scale hence manufacturer/seller was
able to sale his products in his own village/town/city i.e. local market. But as the size of
business increased, it becomes impossible for businessman, to reach to all of his customers
because of his limited resources as well as infrastructure. So he developed an idea of selling
the goods through his representatives called as agents. Therefore the need for sending the
goods to his agents arises and this is known as consignment.
Consignment means goods dispatched to an agent for sale. Here manufacturer/wholesaler
sends his goods to his authorized representatives called as selling agents, to be sold by them
for & on behalf of manufacturer/wholesaler, at a fixed rate of commission.
The manufacturer/wholesaler sending the goods to an agent for sale is called as consignor/
principal. The person to whom the goods are sent for selling them for & on behalf of sender
is called as consignee. The agent/consignee merely gets the possession of goods from the
principal (sender). Agent is only the possessor/custodian of goods sent to him.
An agent/consignee never becomes the owner of goods sent to him for sale.
In consignment the owner-ship of goods is never transferred to an agent but it remains with
sender of goods till the movement of sale.
On sale of goods the owner-ship passes directly from seller/consignor to the buyer.
Consignee sales the goods cosigned to him for & on behalf of the consigner, merely as a
commission agent.
The relationship between consignor and consignee is that of principal and agent.
All consignment dealings are governed by the contract of agency.

b)Necessity of consignment dealings-

Following points explain the necessities or need of consignment transactions:

1) Wider Market : Now a days the size the market has widened/increased to a great extent
because of large scale production. The manufacturers and wholesalers are not located at
the same place. So to have an access directly with a customer, they appoint agents for sale,
at different places. The agents sell goods in wider market on commission basis which in
turn maximize the profits of manufacturers/wholesalers. Thus the manufacturers and
wholesalers are free from the burden of reaching the wider market.
2) Large Scale Production : Due to large scale production, it is not possible to sell all the
goods at local market. So to reach different markets to sell the products to large number of
customers, consignment sale is inevitable. A big chain of agents helps to reduce the burden
of manufacturers to sale the goods at different markets situated at different places.
3) Growth in business organization : In today's world, manufacturers are producing goods
at different places and selling it in different markets on their own brand name. That is
possible due to Consignment Sale.
4) Increase in Standard of living : Increased standard of living creates the demand for high
class brands of products which are not locally available. This in turn increases need of
consignment dealings. Through the authorized dealers these demands can be satisfied.
 29

B)Parties in Consignment Business : In Consignment there are two parties :

1) Consignor :
Consignor is the person who sends goods to an agent for sale, to be sold by him at an
agreed rate of commission. He is also called as the ''Principal.''

2) Consignee :
The person to whom the goods are dispatched for sale on commission basis is called as an
agent/consignee.
A person receiving the goods on consignment from the consignor is called as ''Consignee''.
He is also called as an ''Agent''.

C)Types of consignments:-

1) Inward Consignments/ Consignments' Inward - Goods dispatched to an agent for sale

are called as 'Inward Consignments' for the consignee. I.E. Goods received by consignee
from consignor for selling purpose are called as 'Inward Consignments' for the consignee.

2) Outward Consignments/ Consignments' Outward - Goods dispatched to an agent for

sale are called as 'Outward Consignments' for the consignor. I.E. Goods sent by consignor
to consignee for selling purpose are called as 'Outward Consignments' for the consignor.

D) Law governing consignment dealings- All transactions of consignment are governed by

'Contract of Agency' as described in Indian Contract Act, 1872.

E) Difference between Consignment and Sale :- Followings are the points of differences
between consignment & sale:
Points Consignment Sales
1. Ownership of The ownership of the goods The ownership of the goods
goods remains with the persons who passes to the buyers after the
consign the goods. sale is made.
2. Responsibility In consignment the losses & In sale the losses & damages
for loss of damages are borne by the are borne by the buyer.
goods
Consignor (The principal)
3. Return of Goods consigned may be returned Goods sold are not returned
unsold goods by the agent to the principal if the except for some special cases.
fails to sell goods.
4. Relationship The relationship between consignor The relationship between the
and consignee is that of principal parties to a sale is that of
and agent buyer and seller.

F) Special documents used in consignment dealings:

1) Proforma Invoice :
It is statement of goods dispatched to an agent for sale. It is sent by consignor to
consignee. It shows all the details of goods sent on consignment. It gives the information
of goods dispatched to consignee/agent i.e. 'description & specification, quality, quantity,
rate & total value' of goods sent together with all the expenses incurred by consignor on
goods dispatched to consignee. It is informative invoice & hence called as proforma
 30

invoice. In proforma Invoice the rate of goods specified may be a cost or cost plus some
loading/margin. It is not necessarily the maximum retail price i.e. sales price. Selling price
may differ from ordinary invoice price/sales price.

2) Account Sales :
It is a periodical statement of sales prepared by consignee and sent to a consignor.
It is the account/summary of goods sold by the consignee, expenses incurred by him for
selling the goods, commission due to him on sales made by him; advance paid by him &
the ultimate balance due from him to the consignor. It is sent by the consignee for every
consignment or periodically i.e. monthly, quarterly etc. as agreed with the consignor.
Account Sales is an evidence of goods sold & the Amount receivable from the consignee
& the stock with the consignee.

3) Other Documents used in consignment:-

Except these two special consignment documents viz. proforma invoice & account sales,
there are also other documents such as cash memos, sales invoices/credit memos, expenses'
vouchers, commission vouchers, receipts for advance & final remittance etc., which are
required to be prepared by consignor/ consignee which are already studied in Std. XI & hence
not explained here. Following is the list of other documents-
1) Receipt- For advance received from consignee.

2) Payment Vouchers- For expenses incurred by consignor &consignee.

3) Bill of exchange – If drawn on consignee for advance Amount.

4) Cash/Credit Memo –For cash/credit sales.

5) Journal Voucher – For commission due to consignee.

6) Receipt – For final remittance by consignee either in cash or by cheque/bank draft.

Special documents are illustrated as follows:

Illustration- 01- Proforma Invoice-

Prepare pro- forma invoice from the following information given to you :
1) Consigner – M/S. Hanmant Musale & Sons, Ahmednagar.
2) Consignee – Bhimaji Enterprises , Main Road, Kolhapur
3) Regular Commission – 10% on total sales
4) Del- credere commission – 4% on credit sales
5) Advance paid – Rs. 8,00,000
6) 100 computers sets @Rs. 25000 each sent on dated 19.12.2016 by transport receipt No.
72 dated 21.12.2016. Transport charges paid Rs. 16000 and octroi duty paid Rs. 9000/-
by Consignor. Insurance paid Rs. 25000 by consignor.
 31

PROFORMA INVOICE No.- 32

M/s. HEMANT MUSALE & SONS Date : 19.12.2016

M.G. Road, Ahmednagar.

Goods Consigned to,

M/s. Bhimaji Enterprises
Main Road, Kolhapur.

SN Particulars / Description Quantity Rate Amount

Rs. Rs.
1 Computer Sets 100 25000 25,00,000
Add – Expenses of Cosignor
1) Transport charges Rs. 16,000
2) Octroi Rs. 9,000
3) Insurance Rs. 25,000 + 50,000

Total Rs. 25,50,0000

(Twenty Five Lacs Fifty Thousand Only )

Note :
1) Regular commission – 10%

2) Del- credre commission – 4%

3) Transport receipt No. 72, dated 21.12.2016

E & O.E. Sd/-

For M/s. Hanmant Musale
M.G. Road. A. Nagar

Illustration- 02.
Prepare an Account Sales from the following :
Consignor : Vishwanath & Co. Ltd. - Solapur – 2
Consignee : Anil & Company - Amaravati – 4
Sales ; 20 V.C.R. Sets @ Rs. 9000/- each
Expenses of Consignee : Advertisement Rs. 6000/- General Expenses Rs. 2000/-
Commission : 2.5% on Total Sales.
Advance Payment : Rs. 80,000/-
Balance due : Balance due paid by Bank draft.
 32

ACCOUNT- SALES No.-_______

M/S. ANIL & COMPANY, AMRAVATI - 4

To, Date-_________
M/s. Vishwanath & Co. Ltd.
Solapur - 2

Ref. : Consignment of 20 V.C.R. sets @ Rs. 9000 each for sale on their account &
at their risk.

Particulars Amount Amount

Sales :
20 V.C.R. Sets @ Rs. 9000/- each 1,80,000
Less : Expenses -
Advertisement 6,000
General Expenses 2,000
Commission (2.5% on total sales ) 4,500 -12,500
Balance 1,67,500
Less : Advance paid -80,000
Balance due remitted by Bank Draft enclosed. 87,500

Sd/-
E & O.E. For M/s. Anil & Company
(Consignee)

G) Losses in Consignment dealings-

Many times goods sent on consignment, are lost due to different reasons. Such a loss
may be a normal loss or an abnormal loss, depending upon circumstances of each case.

1) Normal Loss :
It is the loss in quantity of goods consigned due to the natural properties or inherent or
inborn qualities of the goods. It can occur in transit, loading, unloading, storage or
handling. It is inevitable/unavoidable & uninsurable even after proper care is taken. This
loss may be due to evaporation, loss of weight due to minor leakages/heat etc., loss in
loading, unloading etc.
e.g. Loss due to evaporation of petrol, kerosene, diesel etc., Loss due to Handling of Sand,
Cement, sugar etc.
This loss should not be entered in the books but it should be considered while valuation of
closing stock on consignment.
There is no Journal entry for recording such loss because it is automatically reflected/
adjusted in consignment account.
However while valuing closing stock (if any), the total cost of goods consigned, should be
spread over the quantity remained after loss & reached to the consignee.
Hence the cost of stock increases proportionately. For this purpose the total cost of
consignment should be divided by quantity reached to the consignee. (i.e. Total Quantity
 33

cosigned minus Quantity of normal loss), instead of quantity consigned/dispatched, for the
calculation of unit cost price.

The value of stock = Total cost of consignment x Stock Quantity

Quantity reached to consignee
( i.e. Total qty. consigned minus Qty. of normal loss)
Illustration-
200 kg of chemicals are consigned @ Rs. 150/- per kg. The total non-recurring expenses
incurred by consignor are Rs. 8000/-. The normal loss in transit is 5%. If closing stock
quantity is of 30 kg., then find out value of closing stock on consignment?
Ans :
Valuation of Closing stock will be as under :

Total chemicals consigned 200 kg

Less : Normal Loss at 5% -10 Kg.
Quantity reached to the consignee = 190 Kg.

Valuation of Stock

Cost of total chemical consigned Rs. 30,000/-

(200 kg x Rs. 150)
Add : Non – recurring/direct expenses +Rs. 8,000/-
Total cost of consignment = Rs. 38,000/-

Closing stock on consignment = Total Cost of consinment x Stock Quantity

Quantity reached to the consignee

= Rs. 38000 x 30 kg.

190 kg.

So the Value of Closing stock on consignment = Rs. 6000/-

2) Abnormal Loss :
The loss of an accidental nature is called as 'Abnormal Loss'. So it is treated avoidable
loss. Such loss may occur due to natural calamity like flood, earthquake, lightings, storms
etc. or due to human carelessness or negligence e.g. accident, theft etc.
It is called as abnormal loss as it occurs exceptionally. i.e. it does not occur in ordinary
course of business. It is an insurable & exceptional loss. It may be avoidable, if proper care
and precaution is taken by related parties. It is of non recurring nature.
Abnormal loss should not affect the consignment profit. Hence this loss should be
accounted for, while ascertaining correct profit/loss on consignment sales.
So its proper valuation should be done.

Valuation of the Abnormal Loss :- Following procedure is to be followed:

1) Take original cost of all goods sent on consignment.
2) Add all direct expenses of consignor & consignee up to the stage of abnormal loss.
3) Take the total of above two items which will be the total cost of consignment up to
movement of loss.
4) Find out total cost per unit by dividing total cost of consignment by total quantity sent.
 34

5) Multiply total cost per unit by the quantity of abnormal loss for getting the value/cost of
abnormal loss.

The valuation of the Abnormal Loss is to be done as follows –

Original cost of all goods sent on consignment xxx

Add- Total direct expenses incurred by
the consigner /consignee up to the time of loss + xxx
Total cost of consignment (up to the time of Abnormal Loss) = xxx

The Cost of Abnormal Loss is calculated as follows:-

Cost of Abnormal Loss = Total cost of consignment up to Ab.Loss x Qty. of Ab. Loss
Total Quantity consigned

The Total cost of abnormal loss should be debited to the Abnormal Loss A/c & credited to
the consignment A/c.
Insurance claim admitted if any, should be debited to Insurance Co.'s A/c & credited to
Abnormal Loss A/c.
Net loss should be debited to Profit & Loss A/c & credited to Abnormal Loss A/c.
The net abnormal loss is to be debited to profit & loss account & credited to abnormal loss
account as shown below.
Total Cost of Abnormal Loss as calculated above XXXX
Less- Insurance claim - XXX
Net Loss to be charged to profit & loss A/c XXXX

Illustration-
100 T.V. sets costing Rs.7,000 per set, are sent on consignment and the expenses of the
consignor are Rs.10,000.
During transit 5 T.V. sets are destroyed by accident.
Then cost of abnormal loss i.e. the value of 5 sets will be calculated as follows-
Valuation of abnormal loss :

= Total cost up to the movement of Abnormal Loss X Units of abnormal loss

Total units consigned

= Rs. 7,00,000(Original cost + Rs.10,000( Direct Exp.) X 5 Sets

100 Sets
= 7,10,000 x 5
100
Cost/value of Abnormal Loss = Rs. 35,500/-

*In the case of abnormal loss, while valuing closing stock with consignee, the proportionate
Amount of non recurring/direct expenses of the consignee is calculated on the basis of
quantity received by the consignee and not on the basis of quantity dispatched by the
Consignor.
 35

Accounting Treatment of Abnormal loss :

If the goods are insured & the claim is admitted by the insurance company then following
entries are to be passed in the books of consignor-

1)For recording Total Loss-

Loss by accident / Fire/Abnormal Loss A/c Dr. XXX
To consignment A/c XXX
2)For recording claim admitted by insurance co.-
Insurance Co.'s A/c. Dr. XXX
To loss by accident / fire/Abnormal Loss A/c XXX
(Amount of claim admitted )
3)For recording net abnormal loss –
Profit & Loss A/c Dr. XXX
To Loss by accident/Fire/Abnormal Loss A/c XXX

H) Commission & its types : The consignee is the commission agent of the consignor.
In consignment the consideration of consignee for selling the goods for & on behalf of
consignor, is the commission allowed to him by the consignor.
The consignee is entitled to receive commission calculated at an agreed percentage on the
gross sale proceeds.
Commission may be Normal, Delcredere or Over riding/ special commission.

1) Normal / Ordinary commission : This is ordinary commission allowed by consignor

to the consignee for selling the goods of the consignor. It is calculated as per terms laid
down by the consignor in consignment deed. Usually this is calculated at fixed percentage
on total sales/gross sale proceeds.
Commission = Total Sales x Rate of Commission in %.

2) Del-Credere commission : It is that commission which is given by consignor to the

consignee for getting a guarantee of recovery of credit sales from the consignee. This is
an extra commission given by consignor to consignee over & above ordinary
commission.
If del-credere is given, the consignee has to bear a loss on account of bad debts.
This commission is also calculated on total sales. This is because of the fact that if it is
allowed only on credit sales then consignee will be tempted to show all sales as credit
sales.
If it is specified on credit sales, in the problem, then only it is be calculated on credit sales
only.

3) Over-riding commission: This is the commission allowed by consignor to the

consignee for taking extra efforts for selling the products newly launched in the market or
to sale the goods at a price over & above the invoice price. It is allowed on total sales or
on sales exceeding minimum limit or on any extra price recovered over & above the
invoice price/MRP.
E.g. – If the sales price actually realized is Rs. 20,000 and the proforma invoice price of
these goods is Rs. 15000. Then the consignee will get extra commission at an agreed
percentage on Rs. 5000 which is extra selling price, in addition to his normal commission.

I) Valuation of Closing Stock on Consignment : In order to arrive at the true profit or loss
on consignment, it is necessary to value unsold goods i.e. closing stock lying with the
 36

consignee, at total cost price. Here the total cost means original cost plus proportionate
direct expenses incurred by both consignor & consignee.
The correct profit or loss on Consignment can only be calculated if proper value of unsold
stock is taken in to account.
As a general rule, “stock is to be valued at cost or Market price, whichever is less.‟‟
But in consignment, value of stock includes original cost/Purchase price & proportionate
direct expenses of both consignor & consignee.
Direct/Non-recurring expenses include clearing charges, freight, Loading & unloading
charges, custom duty, dock dues, carriage etc., which are incurred on goods consigned.

Cost / Invoice price Stock (Qty. x Rate) xxx

ADD - Consignor‟s proportionate Exp. xxx
Total Direct Exp.
x Closing Stock (Qty.)
Total Qty.

ADD - Consignee‟s proportionate Non Recurring Exp. xxx

Direct / Non – recurring Exp.
x Closing stock (Qty)
Goods received by consignee (Qty. )

Value of Stock xxx

Abnormal Loss & Unsold stock can be more easily calculated as under :
Valuation of Abnormal Loss & unsold stock
Particulars Qty. Amount
Original cost of all goods sent on consignment xxxx xxxx
Add- Total direct expenses incurred by the consigner + xxx
Total cost of consignment (up to the time of Abnormal Loss) = xxxx xxxx
Less- Cost of Abnormal Loss in transit (as shown earlier) -xxx - xx
Cost of remaining goods reached to the consignee xxxx xxxx
Less- Normal Loss (Only quantity) -xx
Add- Direct Expenses incurred by consignee +xx
Total cost of goods reached to the consignee xxxx xxxx
Less- Abnormal Loss if any occurred after reaching the goods -xxx xx
Total Cost of goods remaining after abnormal loss xxxx xxxx
Less- Normal Loss in the godown ( i.e. after receiving goods) -xx
Total Cost of remaining goods (after deducting all losses) xxxx xxxx
Less- Cost of goods sold by consignee -xxx -xxxx
Cost of stock on consignment xxx xxxx

List of Recurring Non- Recurring Expenses :

Non- Recurring / Direct Expenses Recurring / Indirect Expenses
1) Packing charges, Freight & Insurance (On goods Packing charges, Freight & Insurance (On goods Sold )
consigned )
2) Carriage Inward Carriage Outward
3) Import duties, dock dues, clearing & unloading Export duties, dock dues, Forwarding (on goods sold )
charges, Octroi
on goods consigned.
4) Loading & unloading charges, custom duties on Godown rent, insurance, show-room rent, salaries,
goods consigned. advertisement , brokerage
5) All other Direct expenses on goods consigned All other Indirect Expenses- Sales man's salary, bad debts,
sundry Expenses, Discount & allowance to customers ,
Commission, Storage exp., Fire Insurance, Selling Expenses
etc.
 37

J) ACCOUNTING TREATMENT OF CONSIGNMENT DEALINGS:-

a) Journal Entries in the books of Consignor & Consignee:-

S.N. Transactions Books of Consignor Books of Consignee
1. Goods sent on Consignment A/c ……. Dr. No Entry
consignment To Goods sent on-
Consignment A/c
2. Expenses paid by Consignment A/c ……. Dr. No Entry
consignor To Cash/ Bank A/c
3. Advance received Cash/Bank/Bills Receivable A/c Dr. Consignor's A/c …… Dr.
from consignee To Consignee A/c To Cash/ Bank/ Bills-
(Cash, bank draft & Payable A/c
bill of exchange )
4. Bills receivable Cash/ Bank A/c …..… Dr. No Entry
discounted with Bank Discount A/c ………. Dr.
To Bills receivable A/c.
4. a For transferring Consignment A/c……. Dr. No Entry
discount to To Discount A/c
consignment a/c (If discount is treated as consignment
loss/exp.)
5. For expenses incurred Consignment A/c…… Dr. Consignor‟s A/C… Dr.
by the consignee To consignee‟s A/c To Cash/ Bank A/c.
6. For goods sold by Consignee‟s A/c………Dr. Cash/Bank A/c……. Dr.
consignee on Cash To consignment A/c To Consignor‟s A/c.
7. For goods sold by Consignee's A/c Dr. Consignment Debtors
consignee on credit To Consignment A/c A/c Dr.
To Consignor's A/c
8. Amount collected No Entry Cash/Bank A/c ……. Dr.
from debtors To Consignment -
Debtors' A/c
9. For Bad Debts 1) If delcredere is not allowed – 1) If delcredere is not allowed –
Consignment A/c Dr. Consignor's A/c Dr.
To Consignee's A/c To Consignment-
2) If delcredere is allowed – Debtors' A/c
2) If delcredere is allowed –
No Entry Bad Debts A/c Dr.
To Consignment-
Debtors' A/c
10. For Commission Consignment A/c…… Dr. Consignor‟s A/c . Dr.
allowed by the To consignee‟s A/c To Commission A/c
consignor to Consignee
11. Closing stock on Stock on Consignment A/c. Dr. No Entry
consignment To Consignment A/c
SN Transactions Books of Consignor Books of Consignee
12. Normal loss of Goods No Entry No Entry
13. Abnormal loss of Abnormal loss A/c … Dr. No Entry
goods To consignment A/c
14. Profit on Consignment A/c …… Dr. No Entry
Consignment To Profit & Loss A/c
15. Loss on Consignment Profit & Loss A/c …. ..Dr. No Entry
To Consignment A/c
 38

16. For balance paid by Cash/ Bank/ A/c…….. Dr. Consignor‟s A/c Dr.
consignee to To Consignee‟s A/c. To Cash/Bank/ A/c
consignor
17. For transferring balance Goods sent on consignment A/c Dr. No Entry
of Goods sent on To Trading A/c
Consignment A/c to
Trading A/c
18. For insurance claim Insurance company/ Bank A/c Dr. No Entry
admitted for abnormal To Abnormal Loss A/c
loss
19. For transferring 'net
abnormal loss' to profit &loss
Profit & Loss A/c ……. Dr. No Entry
account (i.e. Total Abnormal To Abnormal Loss A/c.
loss at cost minus claim
admitted)
20. For return of goods by Consignment A/c ……. Dr. No Entry
consignee to consignor To Goods sent on Consignment A/c

b) Ledger accounts in the books of both the parties:-

i) In the books of Consignor:-

Dr. Consignment A/C
Cr.
Particulars Amount Particulars Amount
To Goods sent on- xxx By Consignee‟s A/c xxx
-Consignment A/c (Sales )
To Bank A/c (Expenses) xxx By Insurance claim A/c (if any) xxx
To Discount A/c (if any) xxx By Profit & loss A/c (ab. loss ) xxx
To Consignee‟s A/c xxx By Stock on Consignment A/c xxx
(Expenses) (Value of unsold goods )
To Consignee‟s A/c xxx By Profit & Loss A/c xxx
(Commission) (Net Loss – bal. Fig.)
To Profit & Loss A/c xxx
(Net Profit-bal figure)
xxx xxx

Dr. Consignee's Account Cr.

Particulars Amount Particulars Amount
To Consignment A/c (Sales) xxx By Consignment A/c (Expenses) xxx
By Consignment A/c xxx
(Commission )
By Bank/ Bills Receivable xxx
A/c (advance)
* By Bank A/c xxx
(Net Balance paid - bal. Fig.)
xxx xxx

Dr. Goods sent on Consignment Account Cr.

Particulars Amount Particulars Amount
To Trading A/c (bal. Fig.) xxx By Consignment A/c xxx
xxx xxx
 39

Stock on Consignment Account

Dr. Cr.
Particulars Amount Particulars Amount
To Consignment A/c (bal.fig.) xxx * By Balance c/d (bal. Fig.) xxx
xxx xxx

Abnormal loss Account

Dr. Cr.
Particulars Amount Particulars Amount
To Consignment A/c xxx By Insurance Co. A/c Claim xxx
(received )
* By profit & Loss A/c xxx
(Bal. Fig. – Loss )
xxx xxx

ii)In the books of Consignee:-

Consignor’s Account
Dr. Cr.
Particulars Amount Particulars Amount
To Cash/ Bank A/c (Expenses ) xxx By Cash/Bank A/c (Sales) xxx
To Commission A/c xxx
To Bank/Bills Receivable A/c xxx
(advance)
* To Bank A/c (Net balance xxx
paid bal. Fig. )
xxx xxx

Practical Illustrations on Consignment Accounting:-

Problem No. 1 :
Pranay of Pune sents 100 machines on Consignment to Manav of Madras, the cost of each
machine is Rs. 160/-.
Pranay spents Rs. 400/- on packing & forwarding.
Manav Received the consignment & accepted Pranay‟s Draft for Rs. 8000/-.
All the machines have been sold by Manav at Rs. 200/- each in cash.
Expenses paid by Manav are freight Rs. 600/- & insurance Rs. 150.
Manav is entitled to a commission of 5% on sales.
Manav sent the balance due by a Bank draft.
Give Journal of both books & Ledger Account.
Solution: 1
In the books of Pranay of Pune
Journal Entries
Dr. Cr.
Date Particulars LF Debit Credit
Madras Consignment A/c …………… ………..Dr. 16,000 -
To Goods sent on consignment A/c 16,000
(Being consigned 100 sewing machine @ Rs. 160/-each to Manav of Madras)

Madras consignment A/c ………….. …………Dr. 400 -

To cash A/c - 400
(Being spent on packing & forwarding of Goods on consignment )
 40

Bank A/c ……………………. ………………..Dr. 800 -

To Manav‟s A/c - 800
(Being Manav accepted our draft as advance against consignment )
Madras consignment A/c ………….. …………Dr. 750 -
To Manav‟s A/c - 750
(Being spent Rs. 600/- for freight & Rs. 150/- for Insurance by Manav )

Manav‟s A/c …………………… Dr. 20,000 -

To Madras Consignment A/c - 20,000
(Being Manav sold 100 machine @ Rs. 200 each on our behalf )
Madras Consignment A/c …………… ………..Dr. 1000 -
To Manav‟s A/c 1000
(Being commission allowed @ 5% on Rs. 20,000/-)
Bank A/c ……………………………………… Dr. 10,250, -
To Manav‟s A/c 10,250
(Being received a bank draft in final settlement)
* Goods sent on consignment A/c …… ……….Dr. 16,000 -
To Trading A/c - 16,000
(Being closed goods sent on consignment A/c )
* Madras Consignment A/c …………. ………..Dr. 1850 -
To Profit & Loss A/c - 1850
(Being Profit on consignment transferred to profit & Loss A/c )
Total = Rs. 74,250 74,250

Journal Entries in the books of

Manav of Madras
Dr. Cr.
L. Debit Credit
Date Particulars
F.
Pranay‟s A/c …………… Dr. 8,000 -
To Bank A/c - 8,000
(Being accepted Pranay‟s draft as advance against
consignment )

Pranay‟s A/c …………… Dr. 750 -

To cash A/c - 750
(Being spent Rs. 600 for fright & Rs. 150 for
insurance on behalf of Pranay of Pune )
Cash A/c …………………….. Dr. 20,000 -
To Pranay‟s A/c - 20,000
(Being sold 100 machines @ Rs. 200 each on behalf
of Pranay)
Pranay‟s A/c ………… Dr. 1000 -
To commission A/c - 1000
(Being charged commission at 5% on Rs. 20,000)
Pranay‟s A/c ……………… Dr. 10,250 -
To Bank A/c - 10,250
(Being paid the balance due by a bank draft.)
Total = Rs. 40,000 40,000
 41

In the books of Pranay of Pune

Madras Consignment Account
Dr. Cr.
Particulars Amount Particulars Amount
To Goods sent on Consignment A/c 16,000 By Manav‟s A/c (Sales ) 20,000
To Cash/ Bank A/c 400
(Exp. Of Consignor)
To Manav‟s A/c 750
(Exp. Of Consignee)
To Manav‟s A/c (Commission ) 1000
To Profit & loss A/c 1850
(Net Profit- bal. Fig. )

20,000 20,000

Goods sent on Consignment Account

Dr. Cr.
Particulars Amount Particulars Amount
* To Trading A/c 16,000 By Madras Consignment A/c 16,000

16,000 16,000

Manav’s Account
Dr. Cr.
Particulars Amount Particulars Amount
To Madras Consignment A/c 20,000 By Bank A/c 8,000
(Sales) (Advance )
By Madras consignment A/c 750
(Expenses )
By Bank A/c 10,250
(Balances as per W.N.1)
By Madras Consignment A/c
(Commission ) 1000
20,000 20,000

In the books of Manav of Madras

Pranay’s Account
Dr. Cr.
Particulars Amount Particulars Amount
To Bank/ Cash A/c (Advance) 8,000 By Cash A/c (Sales) 20,000
To Cash A/c (Expenses of Manav) 750
To commission A/c 1000
To Bank A/c 10,250
(Balance as per W.N.1)
20,000 20,000
 42

Working Note :

1) Balance due sent by bank draft.

Sales 20,000
Less - Expenses 750
Commission 1000
Advance 8000 -9,750
Balance due - 10,250

Problem No. 2
Mr. „A‟ of Bombay sent goods on Consignment to Mr. „‟B‟ of Ahmedabad.
The cost of 1,000 leather bags was Rs. 100/- each.
Mr. „A‟ incurred expenses for fright Rs. 600, Carriage Rs. 100/- Loading charges of Rs. 150
and Insurance – in transit Rs. 150/-
Mr. „B‟ received the goods & incurred expenses on custom duty Rs. 4000/- unloading
charges Rs. 500, Octroi duty Rs. 500/- Godown rent Rs. 300.
On 31st Dec. 95 Mr. „B‟ sent an account sales showing that 750 leather bags were sold for
Rs. 90,000.
You are requested to value the unsold stock lying with Mr. „B‟ as on 31/12/95.

Solution 2
Journal Entries in the books of Mr. ‘A’
Dr. Cr.
Debit Credit
Date Particulars L.F.
Ahemadabad Consignment A/c ……… Dr. 1,00,000 -
To Goods sent on Consignment - 10,000
(Being goods consigned 1000 bags x 100 each )

Consignment A/c ………… Dr. 1000 -

To cash A/c - 1000
(Being paid for freight, carriage, Loading & insurance in transit)

Consignment A/c …………. Dr. 5,300 -

To B‟s A/c - 5,300
(Being Expenses on custom duty unloading charges, -
Octroi, Godown rent )
Mr. B‟s A/c ………………… Dr. 90,000 -
To consignment A/c - 90,000
(Being goods sold on cash )
Stock on Consignment A/c ………… Dr. 26,500 -
To Consignment A/c - 26,500
(Being 250 bags was unsold )
Total = Rs. 3,17,700 3,17,700
 43

In the books of Mr. ‘A’

Ahmedabad Consignment Account
Dr. Cr.
Particulars Amount Particulars Amount
To Goods sent on - 1,00,000 By B‟s A/c (Sales of 750 bags) 90,000
consignment A/c
(1000 bag x Rs. 100) By consignment stock A/c 26,500
To cash A/c (Expenses) 1000 (as per W.N.1)
To B‟s A/c (B's Expenses ) 5300
* To Profit & Loss A/c (bal. Fig.) 10,200
1,16,500 1,16,500

Goods sent on Consignment Account

Dr. Cr.
Particulars Amount Particulars Amount
To Trading A/c(bal. Fig) 1,00,000 By Ahmedabad Consignment 1,00,000
A/c (Goods sent)
1,00,000 1,00,000

Mr. B’s Account

Dr. Cr.
Particulars Amount Particulars Amount
To Ahmedabad 90,000 By Ahmedabad Consignment 5,300
Consignment A/c A/c (Expenses )
(Sales - 750 bags)
By Cash/ Bank A/c 84,700
(Balance remitted as per W.N.2)
90,000 90,000

Consignment Stock Account

Dr. Cr.
Amount
Particulars Amount Particulars
To Ahmedabad 26,500
Consignment A/c
(as per W.N.1) * By Balance c/d 26,500
(Bal. Fig. )

26,500 26,500

Journal Entries in the books of Mr. ‘B’

Dr. Cr.
Date Particulars L.F. Debit Credit
Mr. A‟s A/c …………….. Dr. 5,300 -
To cash A/c - 5,300
(Being expenses incurred by Mr. A)

Cash A/c ……………… Dr. 90,000 -

 44

To Mr. A‟s A/c - 90,000

(Being sold goods on cash )

Mr. A‟s A/c …………… Dr. 84,700 -

To Cash / Bank A/c - 84,700
(Being paid a Bank draft in final settlement )

Total = Rs. 1,80,000 1,80,000

In the books of Mr. B

Mr. A’s Account
Dr. Cr.
Particulars Amount Particulars Amount
To Cash/Bank (Expense of B) 5,300 By Cash/ Bank A/c. 90,000
To Cash/ Bank A/c 84,700
(Balance remitted as per W.N. 2)
90,000 90,000

Working Notes :
1) Valuation of unsold stock of 250 bags.
Cost of unsold stock (250 bags x Rs. 100) 25,000
Add – Proportionate Non- recurring
Expenses of Consignor
Rs. : Expenses
1,00,000 : 1000
25,000 : ? 250

Add – Proportionate Non- recurring

Expenses of Consignee
Rs. : Expenses
1,00,000 : 5,000
25,000 : ? 1,250
Total cost of unsold stock 26,500

2) Amount to be remitted by Mr. B

Sales 90,000
Less : Expenses of B 5,300
Commission & Advance Nil
Balance Due 84,700

Problem No. 3

Mr. „J‟ of Ahmedabad consigned 2 refrigrators of each Rs. 2000/- to Mr. „B‟ of Surat &
incurred Rs. 120 for freight, Rs. 100 for insurance & Rs. 500 for handling charges.
Mr. „B‟ is given a commission of 10% & also 5% del creder commission.
„B‟ spent Rs. 150 towards godown rent & Rs. 100 for other expenses.
„B‟ sold one refrigerator on cash for Rs. 6,250 & remits Rs. 5,000 to Mr. „J‟.
 45

The other refrigerator was sold on credit for Rs. 7,550, but Rs. 1,500 remained unrealized &
subsequently become bad.
The consignee remitted the balance with the account sales. Show ledger Accounts in both
books.
Solution 3
In the books of Mr. J
Surat Consignment Account
Dr. Cr.
Particulars Amount Particulars Amount
To Goods sent on Consignment A/c 4,000 By Mr. B‟s A/c 13,800
(Sales= Cash +credit)
To Cash/Bank A/c 720 = 6250 + 7550
(Expenses of Mr. J)
To Mr. B‟s A/c 2070
(Commission )
To Mr. B‟s A/c 250
(Expenses of Mr. B)
* To profit & loss A/c 6760
(Bal. Fig.) (Profit)

13,800 13,800

Mr. B’s Account

Dr. Cr.
Particulars Amount Particulars Amount
To Surat Consignment A/c 13,800 By Surat Consignment A/c 2070
(Total Sales) (Commission)
By Surat Consignment A/c 250
(Expenses of Mr. B)
By Cash /Bank A/c 5000
(Advance)
By Bank A/c 6480
(Balance to be remitted )
13,800 13,800

Goods Sent on Consignment Account

Dr. Cr.
Particulars Amount Particulars Amount
* To Trading A/c (Bal. Fig.) 4000 By Surat Consignment 4000
4000 4000

In the books of Mr. B.

Consignment Debtors Account
Dr. Cr.
Particulars Amount Particulars Amount
To Sales 7,550 By Cash 6,050
By Bad Debts A/c 1500
1500 1500
 46

Mr. J’s Account

Dr. Cr.
Particulars Amount Particulars Amount
To Cash/bank A/c 2,070 By Cash/ Bank A/c 13,800
(Commission as per W.N.-01) (Cash Sales )
To Cash/ Bank A/c 250
(Expenses of Mr. B)
To Cash/Bank A/c 5000
(Advance)
To Bank A/c 6480
(Balance remitted as per W.N.02)

13,800 13,800

Working Notes :

1) Calculation of commission :

Total Sales (6,250 + 7,550) Rs. 13,800

Ordinary Commission Rs. 1,380

(10% on Rs. 13,800)
Add – Del. Creder commission Rs. +690
(5% on Rs. 13,800)
Total Commission Rs. 2,070

2) Balance to be remitted :
Rs.
Sales 13,800
Less – Expenses of B 250
Commission 2,070
Advance 5,000 -7,320
Balance Due 6,480

Problem No. 4.-

Sachin consigned to Madhav 40 boxes of goods at a cost of Rs. 5000 per box and
incur the following expenses in connection with the same.

Cartage Rs. 940, Freight Rs. 3,480 and Insurance Rs. 12,500.

On arrival of the goods Madhav paid Octroi Rs. 3120, Cartage Rs. 960 and godown
Rent Rs. 200 six boxes are destroyed by fire and a sum of Rs. 30,000 is realized from
insurance company by way of compensation. The remaining 24 boxes are sold at a total price
Rs. 2,20,000/-
Madhav is entitled to an ordinary commission of 5% and 2% del-credre commission
on total sales. He sends to Sachin an account Sales together with a bank draft for the balance
due to Sachin.
 47

Show the Consignment A/c & Madhav's A/c in the Books of Sachin's and Sachin's
A/c in the books of Madhav.
Solution 4 :
In the Books of Sachin
Consignment A/c
Dr. Cr.
Particulars Amount Particulars Amount
To Goods sent on Consignment 2,00,000 By Madhav A/ c 2,20,000
A/c (40 x 5000)
To Bank A/c By Loss by fire 33,150
Cartage – 940 By Consignment
Freight – 3,480 Stock A/c 55,250
Insurance – 12,500 16,920
To Madhav A/c
Octroi – 3,120
Cartage – 960
Godown Rent – 200 4280
To Madhav A/c – commission
Simple – 5% - 11,000
Del- Credre – 2% - 4400 15,400
To profit transferred to
Profit & Loss A/c 71,800
3,08,400 3,08,400

Dr. Goods Sent on Consignment A/c Cr.

Amount Amount
Particulars Particulars
* To Trading A/c 2,00,000 By Consignment A/c 2,00,000
(Bal. Fig.)
2,00,000 2,00,000

'Madhav' A/c
Dr. Cr.
Particulars Amount Particulars Amount
To Consignment A/c 2,20,000 By Consignment A/c Exp 4,280
By Consignment A/c
(Commission ) 15,400
By Bank (Bal. Fig.) 2,00,320
2,20,000 2,20,000

Dr. Loss by Fire A/c Cr.

Particulars Amount Particulars Amount
To consignment A/c 33,150 By Insurance Claim A/c 30,000
By Profit & Loss A/c 3,150
33,150 33,150
 48

1) Calculation of Abnormal Loss :

Cost Price of 6 boxes @ Rs. 5000 each 30,000
Add – Proportionate Exp. on Consigner
16920 x 6 2,538
=
40
Add – Proportionate Exp. on Consignee
= 4080 x 6 612
40
(Excluding Go down Rent Rs. 200)
TOTAL 33,150
Less – Amount realized from insurance Co. 30,000
Loss transferred to P & L A/c. 3,150

2) Stock on Consignment-
Cost Price of 10 boxes @ Rs. 5000 each 50,000
Add – Proportionate Exp. on Consigner
16920 x 10 4,230
= 40
Add – Proportionate Exp. on Consignee
4080 x 10 1020
= 40
(Excluding Go down Rent Rs. 200)
Value of Consignment Stock 55250

Problem No. 5
Mr. M despatched on Consignment 1,000 liters of Chemical to Mr. N. @ Rs. 10 per
liter on a commission of 5% & incurred Rs. 250 for freight & insurance.
The normal loss in transit is expected to be 5%.
Mr. N received only 850 liters of chemical because of an accident in a transit. The insurance
company paid a claim of Rs. 750.
Mr. N. sold 700 liters at Rs. 15/- per liter. He spent Rs. 200 on unloading.
Prepare- 1] consignment Account,
2] Mr.N‟s Account &
3] Abnormal Loss A/c in the books of Mr. M.
Solution 5
In the books of Mr. M
Consignment Account
Dr. Cr.
Particulars Amount Particulars Amount
To Goods sent on Consignment A/c 10,000 By Mr. N‟s A/c 10,500
(1000 litres x Rs. 10) (700 litres x Rs. 15 cash sales)
To Cash/Bank A/c (Expenses of Mr. N) 250 By Abnormal Loss A/c 1100
(as per W.N. 1)
To Mr. N‟s A/c (Expenses of Mr. N) 200 By Consignment Stock A/c 1650
(As per W.N.1)
To Mr. N‟s A/c (commission ) 525
* To Profit & Loss A/c 2275
(Profit on Consignment )
13,250 13,250
 49

Mr. N’s Account

Dr. Cr.
Particulars Amount Particulars Amount
To consignment A/c (Sales) 10,500 By consignment A/c 200
(Expenses of Mr. N.)
By consignment A/c 525
(commission @ 5% on Rs. 10,500)

By Cash/Bank A/c 9,775

(Balance remitted as per W.N.2)
10,500 10,500

Goods sent on Consignment Account

Dr. Cr.
Particulars Amount Particulars Amount
To Trading A/c (Bal. Fig.) 10,000 By Consignment A/c 10,000
10,000 10,000

Dr. Stock on Consignment Account Cr.

Particulars Amount Particulars Amount
To consignment A/c 1,650 By balance c/d (Bal. Fig.) 1,650
1,650 1,650

Abnormal Loss Account

Dr. Cr.
Particulars Amount Particulars Amount
To consignment A/c 1,100 By Insurance Co. A/c 750
(claim received)
* By profit & Loss A/c 350
(– Loss Bal. Fig.)
1,100 1,100

In the books of Mr. N.

Mr. M’s Account
Dr. Cr.
Particulars Amount Particulars Amount
To Cash/Bank A/c 200 By Cash/ Bank A/c 10,500
(expenses ) (Sales)
To Commission A/c 525
To Cash/Bank A/c 9,775
(Balance remitted as per W.N.2)
10,500 10,500

Working Notes :

a) Valuation of Abnormal Loss :

Total Liters Consigned 1000 Ltrs.

 50

Less : 5% Normal Loss -50 Ltrs.

950 Ltrs.
Less : Received only 850 Ltr. -850 Ltrs.
Litres of Abnormal Loss due to accident in transit = 100 Ltrs.

b) Litres of closing stock :

Total Liters Consigned 1000 Ltrs.

Less : Normal Loss 5% - 50
Abnormal Loss - 100
Sold - 700 -850 Ltrs.
Unsold stock of chemical 150 Ltrs.
Reduced Quantity = Total Litres - Normal Loss 5%
= 1000 Ltrs. - 50 Ltrs.
= 950 Ltrs.
Cost of Abnormal Loss & closing stock :
Rs.
Total Cost Goods Consigned (1000 x 10) 10,000
Add - Non - recurring expenses of Mr. M 250
Add - Non - recurring expenses of Mr. N 200
Total Cost 10,450
This total cost of Rs. 10,450/- is for 950 Ltrs.
Value of Abnormal Loss Value of Closing Stock
Ltr : Cost Ltr : Cost
950 : 10,450 950 : 10,450
1 : ? 1 : ?
= Rs. 11 = Rs. 11

Liter = Rs. Liter = Rs.

1 = 1 1 = 1
100 = ? 100 = ?
= Rs. 1100 = Rs. 1650

2) Balance to be remitted :
Rs.
Sales 10,500
Less : Advance -
Expenses of Mr. N. 200
Commission 525
725
9775

3) Actual Abnormal Loss

Cost of Abnormal Loss 1100

Loss : received from insurance Co. 750
Net Abnormal Loss 350
 51

EXCERCISE

Q.1 A Fill in the Blanks.

1. The owner of the goods who sends goods to the agent on consignment is called
______________.
2. Consignor sends a ______________ invoice to consignee
3. One who sells goods on behalf of his principal is called _____________.
4. An account sales is sent by _____________ to _____________.
5. ______________ Commission is given to consignee for recover of credit sales only.
6. In consignment ownership in goods remains with the ______________.
7. The relation between the consignor and the consignee is of ___________ and
_____________.
8. Consignee is the __________________ of consignor
9. If further incentive is given to consignee on extra sales is called _________________
commission.

B) Match the following.

1. Consignor a) Risk of bad –debts taken by consignee
2. Pro-forma Invoice b) An agent.
3. Account sales c) Owner of the goods
4. Del-credere commission d) Sent by consignor
5. Consignee e) Sent by Consignee

Q.2 Answer in brief : -

1) What do you mean by consignment?
2) What is the necessity of consignment?
3) Explain the parties to consignment.
4) Explain the documents of consignment.
5) What is normal commission, del-credere commission and over-riding commission?
6) Explain the difference between consignment and sale.
7) What is normal loss and abnormal loss in Consignment of goods?

Q.3 Prepare and Account Sale from following :

1) Consignor – Avinash & Sons Sangli.
2) Consignee – Ganesh Traders, rajaram Road Balegaon – 7
3) Date of account Sale – 19-12-2007.
4) Details of goods sold :
Cash sales - 1000 F.M. radio @ Rs. 200 each.
Credit sales – 500 F.M. radio @ Rs.250 each.
5) Expenses of consignee – Freight Rs. 2000, Salary Rs. 18,000 /-, Rent – Rs.1000.
Insurance – Rs.1000.
6) Commission – 8% on sales 2% del – creder commission on total sales.
7) Bill Accepted Rs. 50,000.
Out of the credit sales made by M/S Ganesh traders, Rs. 500 could not be received from
customers.

Q.4 Prepare an account sales from the following details.

Consigner – Joshi Enterprises, Jalgaon.
 52

Consignee – M/S. Rai Traders, Solapur.

Sales – 300 Machine Rs. 225 each.
Advance – Rs. 40,000.
Consigners expenses – Railway Freight Rs. 500
Consignee Expenses – Insurance – Rs. 950
Ware house Rent Rs. 2340
Discount – Rs. 280
Advertisement Rs. 930
Commission Rs. 300.

Q.5 M/S Raman & co. Consigned to Arora of Akola. 500 radio sets costing Rs. 450/-
each. The company paid freight Rs. 2,500/- insurance Rs. 500/- & Sundry expenses
Rs. 300/- Arora took delivery of the goods paying clearing charges Rs. 700/- &
carriage Rs. 500/- m/s Raman & Co. drew on Arora a 3 months bill of Rs. 1,00,000/-
which was discounted @ 5% P.A. Arora sold 300 sets st Rs. 600/- each & the balance
at Rs. 500/- each Arora is entitled to a Commssion of 5% on the sale proceeds. Arora
remitted the balance due by a Bank overdraft.
Show the Consignment Account & Arora‟s Account in the books of Raman & Co.

Q.6 „A‟ of Agra sent a Consignment Costing Rs. 40,000 to „B‟ of Bombay for Sale @ 5%
Commission on the gross sales. „A‟ paid Freight Rs. 1200 & other charges Rs. 800/-.
„B‟ sells 3/4of the Consignment for Rs. 38,000/- & remits the balance to „A‟ after
deducting his Expanses Rs. 1500 & commission at agreed value.
Pass Journal entries & show ledger Accounts in the books of „A‟ & „B‟. Show
how the Consignment Account will be closed assuming that no further sales took
place.

Q.7 Mr. „E‟ Consigned goods of Rs. 35,000 to mr. „F‟ Mr. „E‟ spent Rs. 1,500 for
Consignment expenses. Mr. „F‟ sent the Account sales showing details:-

1) Sales : Cash RS. 30,000/- & credit Rs. 20,000.

2) Expenses incurred by „F‟ are Rs. 80.
3) Commission deductable at 10% on cash sales + Amount from Debtors.
4) Amount collected from debtors Rs. 15,000.
Cash sales & collection from debtors were remitted after deducting the expenses &
Commission.
Mr. „E‟ allowed discount of Rs. 200 to debtors & debtor of Rs. 500 proved Bad.
Show ledger accounts in the books of Mr. „E‟ & „F‟.

Q.8. Mr. „G‟ sent on Consignment 500 T.V. sets of Rs. 10,000/- each to mr. „H‟. Mr. „G‟
Spent Rs. 3,000 for Carriage & insurance on the Consignment mr. „H‟ is entitled to a
Commission of 5% & also del creder Commssion of 5% on all sales. Mr. „H‟ incurred
the expenses of Rs. 500 on unloading etc.
His sales were:
1) Cash – 200 Sets at Rs. 12,000 each.
2) Credit – 300 Sets at Rs. 13,000 each.
50% of the Amount due From debtors was recovered by mr. „H‟. He remitted
the Amount due from him to mr. „G‟. Show necessary accounts in the boks of mr. „G‟
& „H‟ Assuming that total discount of Rs. 200 was allowed to debtors and bad debts
Amounted to Rs. 500/-.
 53

Q. 9. „x‟ Consigned to „Y‟ 2,000 litres of petrol at Rs. 5 per litres & spent Rs. 1 per litres on
Freight & insurance. 100 litres of petrol evaporated 760 litres are left unsold & the
balance is Sold at Rs. 10/- per litre. „Y‟ s expenses are Rs. 1,300 direct & Rs. 200
indirect. His Commission is 10% of the selling price. Show Consignment Account
assuming the loss by Evaporation to be normal Loss in the books of mr. „X‟.

Q.10. Mr. „K‟ sent on consignment 100 pieces of goods of Rs. 500/- each to Mr. 'L' at a
Commission of 2% on sales. He paid insurance charges of Rs. 800 & Freight Rs.
1000/- mr. L Sold 80 pieces at Rs. 650/- each. The normal loss is 10% mr. L spent Rs.
400 on unloading. Show the Consignment Account & mr. L‟s A/C in the books of mr.
K assuming that the balance due was remitted by mr. L.

Q.11. „A‟ Consigned to „B‟ 200 kgs of a chemical. The cost of chemical & Freight there on
were Rs. 180 & Rs. 10 per kg. respectively. An Account sales was received from the
Consignee showing 100 kgs sold @ Rs. 320 per kg., Insurance Rs. 1000, Brokerage
10% & Consignee‟s commission 2 ½ %. They also reported a shortage of weight of
10 kgs on the whole Consignment. This loss is considered to be normal in this
business.
Sales expenses Amounted to Rs. 10 per kg.
Show the Consignment Accounts in the books of „A‟

Q.12. M/S. Talwalkar Bandhu sent on Consignment goods to sapre & co. of the value of Rs.
20,000 & paid for freight Rs. 500 cartage Rs. 100 & insurance Rs. 300.
Half of the goods were sold by sapre & Co. for Rs. 12,000 subject to their
Commission of 5%. Clearing charges Rs. 150 & other selling expenses Rs.
100/-.
One fourth of the Consignment was lost by fire in transit & a claim of Rs. 4,500 was
recovered.
Pass the necessary entries in the ledger of M/s. Talwalkar Bandhu.
 54

Chapter- 3.

Single Entry System of Accounting

Synopsis –
3.1 Introduction to single entry system, Meaning, Definition &
Features of single entry
3.2 Distinction between Single entry & Double entry system
3.3 Methods of calculation of profit – Statement of affairs method &
Conversion method
3.4 Problems on calculation of profit under, statement of affairs method
3.5 Problems on calculation of profit under conversion method

3.1. Introduction :-
Under double entry system of book-keeping both the aspects of each & every
transaction are recorded. This system is suitable for large business organizations/corporate
world. It is much expensive & requires too-much manpower. Hence it is not adopted by sole
traders or small scale production & business units.
On account of many factors such as incomplete knowledge of accounting principles,
lack of time & experience of writing accounts, shortage of finance etc.; small businessmen
cannot adopt scientific double entry system of accounting to record their business
transactions. Therefore, they keep convenient record which is essential for their business
operations. Generally they maintain cash-book & personal ledgers. They keep record of Cash
Received, Cash Paid, Cash Sales, Cash Purchases, Debtors & Creditors accounts only.
Cash-book is maintained for having cash control. Personal ledgers are maintained for having
control over debts i.e. for knowing the Amount receivable from customers and Amount
payable to creditors/ lenders. They give single effect to some transactions i.e. cash sales,
cash purchases, other incomes & expenses, credit purchases & credit sales. They give double
effects to some transactions i.e. cash received from debtors & cash paid to creditors. They
don‟t record some transactions e.g. goods taken over for self use, private assets brought into
the business etc. Thus their record becomes incomplete.

Meaning, Definition and features of Single Entry System:-

Meaning:
Single entry system is a system of Book - keeping in which the book-keeper records only one
aspect of majority business transactions.

Definition:-
According to Kohler, Single Entry Book-keeping system refers to a “System of book –
keeping in which as a rule only records of Cash and Personal accounts are maintained, it is
always incomplete double entry system, varying with circumstances”.
From the above definition it can be understood that under this system the businessmen keep
records of those transactions and accounts which they find themselves of an absolute
necessity. When businessman or accountant adopts single entry system, he calculates profit
or loss made during the accounting year by any one of the following methods:
1) Statement of affairs
2) Conversion method.
 55

Features of Single Entry

1) Only sole trader and partnership organisations may keep their books of accounts under
this system.
2) Under this system only cash and personal accounts are kept, impersonal and other real
accounts are not maintained.
3) Cash book may be containing proprietors personal as well as business transactions.
4) For getting factual information, it will be necessary to refer to the original documents and
other information.
5) The system of accounting may vary from business to business or person to person. There
is no uniformity in the maintenance of accounts.
6) It is an incorrect, unscientific and unsystematic method of recording business transactions.
7) Under this system, only one aspect of the transaction is recorded in majority cases.
8) Profit under this system is only an estimate and therefore true and correct profit cannot be
determined.

3.2. Distinction between Single entry system and Double entry system.
Single Entry System Double Entry System
1) Meaning:- A book- keeping system in which only 1) A book-keeping system in which dual
one aspect of every business transaction either debit or aspects of every business transaction are
credit is recorded. systematically recorded.
2) Nature: - It is unscientific and incomplete system 2) It is complete and scientific system of
of accounting. accounting.
3) Record :- Records of only cash & personal 3) Under this system all personal, real and
accounts of debtors and creditors are maintained. nominal accounts are maintained.
4) Suitability: - It is suitable for small business 4) It is suitable for all types of business
organizations such as sole trading and partnership. organizations whether small or large scale.
5) Authenticity: - The court, Govt. and tax 5) This system is considered as an
authorities do not consider this system as complete, authentic system by the court, Govt. and
full proof & authentic. tax authorities.
6) Arithmetical accuracy:- Under this system because 6) Trial balance is prepared to find out
of single effect to majority transactions & selected ledger arithmetical accuracy.
accounts, trial balance cannot be prepared & hence
arithmetical accuracy cannot be checked.
7) Final accounts:- Under this system final accounts 7) Under this system final accounts are
cannot be prepared. Instead, statement of affairs and prepared to find out true business result and
statement of profit or loss are prepared to find out the financial position of the business.
business result and financial position.
8) Cost:-This system is relatively less expensive. 8) This system is relatively more
expensive as all books of prime entries &
every ledger account is required to be
maintained.

3.3 Methods of ascertainment of Profit:-

When the accounts are kept under single entry system, profit or loss can be ascertained by
adopting any one of the following two methods:
1) Statement of affairs method
2) Conversion method

1) Statement of affairs method:-

In this method profit or loss is ascertained by comparing opening & closing capitals as
shown by opening & closing statement of affairs.
 56

Statement of Affairs is a statement of assets & liabilities on any given date prepared from
the information available or made available by the proprietor of the business.
The statement of affairs is a statement of assets & liabilities of a business, based on
information given, available or acquired from documents.
It is an estimated / forecasted balance-sheet.
It is similar to balance-sheet in respect of form & columns. But it cannot be called as
balance-sheet, as complete & full proof record is not maintained.
It is a statement, where in the assets are listed on the right hand side and the liabilities are
listed on the left hand side & the difference between the assets and liabilities i.e. balancing
figure is called as capital as on the date of the statement of affairs.

Under single entry system, profit or loss cannot be ascertained by preparing Trading and
profit and loss Account, as the trial balance cannot be prepared under single entry system.
So the result of the business can be ascertained by comparing capitals at the beginning and at
the close of the year.
It is presumed that „in the absence of any other transaction affecting capital‟, the profit only
increases capital & the loss only decreases the capital as, the profit is a return on capital & the
loss is a charge against capital. Thus by comparing opening & closing capitals, profit/loss is
found out under this method.

Statement prepared on the basis of the opening estimated balances of various assets and
liabilities is called, „Opening statement of affairs‟. It is necessary to find out the capital at the
beginning of the year.
The opening capital is equal to opening assets minus opening liabilities.

i.e. Opening capital = Opening Assets - Opening Liabilities

A statement prepared on the basis of the closing estimated balances of various assets and
liabilities is called „Closing statement of affairs.‟
The closing balance is also necessary to find out profit or loss of the business. The closing
capital is equal to closing assets minus closing liabilities.
i.e. Closing capital = Closing Assets - Closing Liabilities
A Statement of affairs is a summarized statement of financial position. (i.e a statement of
assets and liabilities of a business as on any particular date, which is similar to the Balance
Sheet.)
Following is the specimen of the statement affairs to get an idea of the items shown:
Statement of affairs of M/s……………. as on……..
Liabilities Amount Assets Amount
Creditors xx Plants Machinery xx
Bills payable xx Furniture & fitting xx
Bank overdraft xx Stock in trade xx
Capital (balancing figure) xx Bills receivable xx
Debtors xx
Cash at bank xx
Cash in hand xx
Total Rs. xxx Total Rs. xxx

Calculation of Profit under Statement of affairs method /Net worth method:

Under this method profit is calculated by comparing two capitals viz. closing & opening.
 57

‘Net Profit’ under „statement of affairs method‟ is the excess of closing capital over the
opening capital, provided no any other transactions in between proprietor & business are
there, which will affect the capital e.g. Additional capital introduced, Drawings during the
year etc..
The excess of opening capital over the closing capital is considered as „net loss’ under
„statement of affairs method‟, provided no any other transactions in between proprietor &
business are there, which affects the capital.
For this comparison a separate statement is prepared, which is called as „statement of profit or
loss‟.
Statement of profit or loss - A statement which shows the calculation of net profit/loss
under single entry system is called as ‘statement of profit or loss’.
In this statement the drawings of the proprietor will have to be added back in the closing
capital and additional capital if any introduced during the year, will have to be deducted from
the closing capital. Thereafter, the opening capital is to be deducted from adjusted closing
capital. The remaining balance represents profit or loss made during the year.
Statement of Profit or Loss at the end of the year
Particulars Amount
Closing capital (capital at the end of the year) xxx
Add: Drawings made during the year (In cash and goods) xxx
Balance xxx
Less: Additional capital introduced during the year xxx
Adjusted closing capital xxx
Less: Opening capital ( Capital at the beginning of the year.) xxx
Profit / Loss for the year xxx

The following example can give you the clear cut idea of calculating Profit or Loss.
Illustration -01- Mr. Rao commenced business on 1-1-2010 with cash Rs. 20,000.
On 1-7-2010 he introduced further capital of Rs. 5000. During the year he withdrew Rs.400
per month from the business for his personal use. On 31-12-2010 his assets and liabilities
were as follows : Rs.
Stock in trade 20,000
Debtors 15,000
Furniture 4,000
Cash at Bank 3,000
Unpaid Expenses 1,000
Sundry Creditors 8,000
Calculate profit earned by Mr. Rao on 31-12-2010.
Solution : -
Statement of affairs of Mr. Rao as on 31-12-2010
Liabilities Amount Assets Amount
Sundry Creditors 8,000 Furniture 4,000
Unpaid Expenses 1,000 Debtors 15,000
Capital (Balancing figure) 33,000 Stock in trade 20,000
Cash at Bank 3000
Total 42,000 42,000
 58

Statement of profit/loss of Mr. Rao for the year ended 31-12-2010

Capital at the end of the year(as shown in the statement of affairs) 33,000
Add – Drawing (Rs. 400 p.m. @ 12 months) + 4,800
37,800
Less - Further Capital introduced - 5,000
32,800
Less – Capital in the beginning of the year -20,000
Profit for the year 12,800

Adjustments – Adjustments are unrecorded transactions or unrecorded effects of a

transactions.
Followings are the adjustments which are to be taken into consideration while calculating
net profit –
1) Additional Capital - If any additional capital is brought in by the proprietor in the
business, during the year then the closing capital will increase to that extent. But this increase
in capital cannot be called as net profit of the year. Hence, this additional capital is to be
deducted from closing capital. Additional capital can be in cash or in kind.
2) Drawings - The decrease in closing capital may be due to withdrawals by the proprietor
during the year, such drawings are to be added in the closing capital in statement of profit or
loss.
3) Depreciation – The Amount of depreciation is a charge against profit and hence is
deducted in the statement of profit or loss.
4) Bad debts - Bad debts is a loss on account of irrecoverable debts from debtors, hence
while calculating profit , it is to be deducted in statement of profit or loss.
5) Reserve for Doubtful debts - Doubtful debts is a probable loss for the business, a
provision is to be made for these losses out of current year‟s profit. Hence it should be
deducted from net profit in statement of profit or loss.
6) Under-valuation of Assets - While calculating profit during the year under valuation of
asset is to be added in the statement of profit or loss.
7) Over-valuation of Assets - While calculating profit during the year over valuation of
asset in to be deducted in the statement of profit or loss.
8) Under-valuation of Liabilities - Under valuation of liability results in higher capital
which needs to be properly adjusted. Therefore, such liabilities are to be deducted.
9) Over-valuation of liabilities – Over-valuation of liability results in lower capital which
needs to be adjusted. Therefore overvalued liabilities should be added.
10) Interest on capital - It is an expenditure & hence to be deducted in the statement of
profit. Interest on capital is to be calculated on the amount of capital at the beginning of the
year and the interest on additional capital should be in proportion with the period of use of
that capital.
11) Interest on loan - It is an expenditure to the business hence should be deducted.
12) Outstanding Expenses - Outstanding expenses are the expenses due but not paid during
the year. They are charge on the current year‟s profit and hence to be deducted in the
statement of profit or loss.
13) Prepaid Expenses – These expenses are the expenses of subsequent accounting year
which are paid in current year & hence these expenses are shown as addition to the profit of
current year. These expenses are added back in the statement of profit.
The consolidated effects of the above adjustments in the statement of profit /loss are as
follows:-
 59

Statement of profit or loss for the year ended…………..

Particulars Amount Amount
Closing capital/capital at the end of the year xxx
Add- Drawings during the year: a) Cash xxx
b)Goods xxx +xxx
Less- Additional capital brought during the year -xxx
xxx
Less- Opening capital/capital at the beginning of the year -xxx
xxx
Add- Unrecorded Incomes & Gains during the year
1) Interest on drawing xxx
2) Undervaluation of Assets xxx
3) Overvaluation of Liabilities xxx
4) Prepaid Expenses xxx +xxx
xxx
Less- Unrecorded Expenses & Losses during the year
1) Interest on Capital xxx
2) Depreciation of Assets xxx
3) Interest on Loans xxx
4) Overvaluation of Assets xxx
5) Undervaluation of Liabilities xxx
6) Bad debts xxx
7) Reserve for Doubtful Debts xxx
8) Salary to Partners xxx
9) Outstanding expenses xxx xxx
Net Profit/Net loss during the year xxx

Problems on ascertainment of profit under Statement of Affairs/Net worth method –

Problem 1)
– Rakhi started a business on 1-4-2010 with a capital of Rs.2,00,000. On 1-7-2010, she
borrowed Rs.80,000 from Bank for business and introduced further capital of Rs. 30,000.
On 31-3-2011 her position was: –
Cash balance Rs.12,000 stock 1,88,,000 , Debtors Rs. 1,40,000 creditors Rs. 1,20,000. She
had withdrawn Rs. 40,000 for personal use. Ascertain Profit or Loss during the year.
Solution – Statement of Affairs as on 31-3-2011
Liabilities Amount.Rs. Assets Amount.Rs.
Creditors 1,20,000 Cash 12,000
Bank Loan 80,000 Stock 1,88,000
Capital(balancing figure) 1,40,000 Debtors 1,40,000
3,40,000 3,40,000

Statement of profit or loss for the year ended 31-3-2011.

Capital at the end /closing capital 1,40,000
Add - Drawing during the year 40,000
1,80,000
Less - Capital introduced during the year 30,000
1,50,000
Less - Opening Capital 2,00,000
Net loss during the year - 50,000
 60

* Problem 2) –
Mr. Harish keep his book under single entry system. His assets and liabilities are as follows
Particulars 1-4-2011 31-3-2012
Amount Amount
Cash in hand 5,000 4,500
Bill payable - 25,000
Sundry creditors 75,000 74,500
Plant and Machinery 3,00,000 4,00,000
Sundry Debtors 1,95,000 2,25,000
Stock 1,70,000 1,60,000
During the year 2011-12, he brought additional capital Rs. 5000 and withdrew Rs. 5000 per
month for personal use. Calculate profit or loss for 31-3-2012.
Solution 2
Statement of Affairs as on 1-4-2-2011
Liabilities Amount Assets Amount
Rs. Rs.
Creditors 75,000 Cash in hand 5,000
Capital (balancing figure) 5,95,000 Plant & Machinery 3,00,000
Debtors 1,95,000
Stock 1,70,000
6,70,000 6,70,000
Statement of Affairs as on 31-3-2012
Liabilities Amount Assets Amount
Rs. Rs.
Creditors 74,500 Cash in hand 4,500
Bills Payable 25,000 Plant & Machinery 4,00,000
Capital 6,90,000 Debtors 2,25,000
(balancing figure) Stock 1,60,000

7,89,500 7,89,500
Statement of Profit or Loss for the year ended 31-3-2012
Particulars Amount Rs.
Closing Capital 6,90,000
Add: Drawings (5000 X 12) 60,000
7,50,000
Less: Additional Capital introduced during the year 5,000
7,45,000
Less: Opening Capital 5,95,000
Net profit during the year 1,50,000

Problem: 3- The following information is available of Mr. Rajan.

 61

Particulars Bal. on 1-7-2012 Bal. on 30-6-2013

Rs. Rs.
Creditors 500 8,000
Bank overdraft - 15,000
Bank balance 10,000 -
Plant and machinery 10,000 20,000
Furniture 4,000 4,000
Debtors 30,000 52,000
Stock of goods 34,000 28,000
Mr. Rajan had withdrawn Rs.5000 for personal expenses and Rs.4000 for son‟s marriage
from his business. He also purchased a building of Rs.20,000 for personal use, from business
funds, which is not shown in the above balances. Additions to machinery were made on 1-7-
2012.depriciation @10% should be provided on plant and machinery.
Solution - 3)
Statement of affairs as on 1-7-2012.
Liabilities Amount Rs. Assets Amount.
Creditors 5,000 Bank balances 10,000
Capital 83,000 Debtors 30,000
(balancing figure) Stock 34,000
Furniture 4,000
Plant & Machinery 10,000
Total 88,000 Total 88,000

Statement of affairs as on 30-6-2013.

Liabilities Amount Assets Amount
Rs. Rs.
Creditors 8000 Debtors 52000
Bank Overdraft 15,000 Stock 28000
Capital 79,000 Furniture 4000
(balancing figure) Plant & Machinery 20,000
Less Depreciation 2000 18000
1,02,000 1,02,000
Statement of Profit or Loss for the year 30-6-2013.
Capital as on 30-6-2013 79,000
Add Drawings during the year (see working note-1) 29,000
1,08,000
Less Capital as on 1-7-2012 83,000
Net Profit 25,000

Working note-1 - Drawings during the year = 5000 + 4000 + 20,000 = 29,000.

Problem - 4 ) Mr. Mani is dealing with accounts of single entry. The followings are the
details of the business.

Particulars Bal. Rs. on 1-4-2012 Bal. Rs. on 31-3-2013

Land & Building 20,000 25,000
Machinery 15,000 20,000
Furniture 5,000 5,000
 62

Debtors 10,000 20,000

Stock 5,000 12,500
Cash balance 25,000 7,500
Bills receivable 2500 2500
Creditors 12,500 12,500
Bank Overdraft 2500 -
Bank balance - 5000

Mr. Mani introduced additional capital of Rs. 5000. He spent Rs. 22,500 for personal use.
Depreciate Land & Building Rs. 5000. Provide 5% R.D.D. on Debtors.
Prepare opening & closing statement of affairs and statement of profit or loss.

Solution – 4 Statement of affairs on 1-4-2012

Liabilities Rs. Assets Rs.
Creditors 12,500 Land & Building 20,000
Bank Overdraft 2,500 Machinery 15,000
Capital (balancing figure) 45,000 Furniture 5,000
Debtors 10,000
Stock 5,000
Bills receivable 2500
Cash balance 2500
60,000 60,000

Statement of affairs as on 31-3-2013

Liabilities Rs. Assets Rs.
Creditors 12,500 Land & Building 25,000
Capital Machinery 20,000
(balancing figure) 85,000 Furniture 5,000
Debtors 20,000
Stock 12500
Bills Receivable 2500
Cash balance 7,500
Bank Balance 5,000
97,500 97,500

Statement of Profit or Loss for the year ended 31-3-2013.

Particulars Rs. Amount
Closing capital on 31-3-2013 85,000
Add - Drawing made during the year (2012-13) 22,500
1,07,500
Less - Additional capital introduced during the year 5,000
1,02,500
Less - Opening Capital on 1-4-2-12 45,000
57,500
Less - Depreciation on Land & Building(Rs. 5000) 5,000
Less - Reserve for Doubtful debts (5% on 20,000) 1,000
Net profit earned during the year 51,500
 63

Problem -5)
Mr. Surya maintains his books on single entry basis and gives you the following information:

Particulars Bal. on 31-3-2010 Bal. on 31-3-2011

Cash in hand 500 2,000
Cash in Bank 2,500 5,000
Stock 20,000 30,000
Sundry Debtors 25,000 40,000
Investment 20,000 20,000
Furniture 10,000 25,000
Machinery 25,000 40,000
Sundry Creditors 10,000 10,000
Outstanding Expenses 3,000 2,000
Additional information:-.
1. Mr. Surya introduced further capital Rs. 20,000 on 1-7-2010 and had withdrawn
Rs. 10,000 during the year.
2. Interest on capital is allowed at 10% p.a.
3. Additions to furniture and machinery were made on 1-10-2010.
4. Write off depreciation on Furniture and Machinery at 10% p.a.
5. Create reserve for doubtful debts at 5% on S. Debtors .
Prepare:- 1) Statement of affairs
2) Statement of profit & loss for the year ended 31-3-2011

Solution – 5
Statement of affairs as on 31-3-2010
Liabilities Amount Assets Amount
Rs. Rs.
Sundry Creditors 10,000 Cash in hand 500
Outstanding expense 3,000 Cash at bank 2,500
Capital 90,000 Stock 20,000
(balancing figure) Sundry debtors 25,000
Investment 20,000
Furniture 10,000
Machinery 25,000
1,03,000 1,03,000

Statement of affairs as on 31-3-2011

Liabilities Amount Assets Amount
Rs. Rs.
Sundry Creditors 10,000 Cash in hand 2000
Outstanding expense 2,000 Cash at bank 5000
Capital 1,50,000 Stock 30,000
(balancing figure) Sundry debtors 40,000
Investment 20,000
Furniture 25,000
Machinery 40,000
1,62,000 1,62,000
 64

Statement of profit and loss for the year ended 31-3-2011

Particulars Amount Rs. Amount Rs.
Capital at the end of the year 1,50,000
Add - Drawing during the year 10,000
1,60,000
Less -1)Capital of the beginning 90,000
2)Additional capital introduced 20,000
3)Interest on Capital 10,500 1,20,500
Profit before adjustments 39,500
Less -1) Depreciation on furniture 1750
2) Depreciation on Machinery 3250
3) Reserve for Doubtful debts 2000 7,000
Net Profit for the year 32,500

Problem -6)
Miss. Simmi keeps her books on Single Entry System with the following information:-
Particulars As on 31-3-2010 Rs. As on 31-3-2011 Rs.
Cash at Bank 18,000 27,000
Stock in trade 15,000 18,750
Debtors 30,000 45,000
Furniture 7,500 7,500
Sundry Creditors 26,250 34,500
Bills payable - 9000
Investment - 15000
Additional information:-
1) Simmi transferred Rs. 150 each month during first half of the year and Rs. 100 each for
the remaining period from her business to her private bank account by way of drawings and
took away Rs. 350 worth of goods for private use.
2) Simmi sold private vehicle for Rs. 3500 and proceeds were utilized for business.
3) Furniture is to be depreciated by 10% and reserve for doubtful debts to be maintain
@5% on debtors. Prepare statement affairs and statement of profit or loss for 31-3-2011.
Solution-6)
Statement of affairs as on 1-4-2010
Liabilities Amount Assets Amount
Sundry Creditors 26,250 Cash at bank 18,000
Capital 44,250 Stock in trade 15,000
(balancing figure) Debtors 30,000
Furniture 7,500
70,500 70,500

Statement of affairs as on 1-4-2011

Liabilities Amount Assets Amount
Sundry Creditors 34,500 Cash at bank 27,000
Bills Payable 9,000 Stock in trade 18,750
Capital 69,750 Debtors 45,000
(balancing figure) Furniture 7,500
Investments 15,000
1,13,250 1,13,250
 65

Statement of profit and loss for the year ended 31-3-2011

Amount Amount
Capital at the end of the year 69,750
Add - Drawings (Rs. 150 X 6) + (Rs. 100 X 6) 1500
Add - Drawings of goods 350 1850
71,600
Less - Capital at the beginning of the year 44,250
Additional Capital introduced 3,500 47,750
Profit before adjustments 23,850
Less - Depreciation on Furniture 750
Less - Reserve for Doubtful Debts 2,250 3000
Net Profit for the year 20,850

Problem-7 Mr. Bipin maintains his book in single entry system following information is
available.
Particulars 1-4-2010 31-3-2011
Creditors 40,000 32,000
Bills payable 3,000 4000
Cash at bank 40,000 45,000
Furniture 20,000 25,000
Stock of goods 14,000 16,000
Stock of stationary 500 700
Shares in ABC co.ltd 10,000 -
Debtors 5,000 10,000

The following additional information is given:-

1) Capital introduced during the year Rs. 15,000.
2) Depreciate furniture @ 10% p.a. The additions to furniture were made in middle of the
year.
3) During the year he invested Rs. 5000 in National saving certificate in the name of his
wife.
4) Share in ABC ltd were sold in June 2010 Rs. 14,000. The Sales Proceeds were deposited
in Bank Account.
5) Create reserve for bad and doubted debts @ 5% and reserve for discount on Debtors.
You are required to prepare statement of affairs as on 31-3-2011and statement of profit or
loss for the year ended 31-3-2011.

Solution- 7)
Statement of affairs as on 31-3-2010
Liabilities Amount Assets Amount
Rs. Rs.
Creditors 40,000 Cash at Bank 40,000
Bills payable 3,000 Furniture 20,000
Capital 46,500 Stock of goods 14,000
(balancing figure) Stock of stationary 500
Shares in ABC co.ltd 10,000
Debtors 5,000
89,500 89,500
Statement of affairs as on 31-3-2011
 66

Liabilities Amount Assets Amount

Rs. Rs.
Creditors 32,000 Cash at Bank 45,000
Bills payable 4,000 Furniture 25,000
Capital 60,700 Stock of goods 16,000
(balancing figure) Stock of stationary 700
Debtors 10,000
96,700 96,700

Statement of profit and loss for the year ended the year ended 31-3-2011
Particulars Amount Amount
Capital at the end of the year 60,700
Add - Drawings-invest in NSC in the name of his wife 5000
Less - 1)Capital at the beginning of the year 46,500 65,700
2)Additional capital introduced. 15,000 61,500
Profit before adjustments 4,200
Less - 1) Depreciation furniture(2000+250) 2250
2)Reserve for bad debts(5% on 10000) 500
3)Reserve for discount on debts(2% on 9500) 190
4)Profit on sales of share 4000 6,940
Net Loss for the year -2740

Problem - 8) Sun and Moon are partners sharing profits and losses in the ratio 2:1.
Statement of affairs as on 31-3-2011.
Liabilities Rs. Assets Rs.
Creditors 32,000 Cash at bank 6,000
Bills payable 6,000 Bills Receivable 12,000
Capitals - Sun 60,000 Debtors 24,000
Moon 30,000 Stock 16,000
Furniture 10,000
Machinery 20,000
______ Building 40,000
1,28,000 1,28,000

On 31-3-2012 the following balances were given : -

Creditors 36000, Bills payable Rs.14000, Stock Rs.32000,

Bills receivable 17000, Cash at Bank 16000, Debtors 35000.

Additional information :-
1) Sun and Moon had withdrawn for personal use Rs.9,000 and Rs.7,000 respectively.
2) They had brought additional capital of Rs.5,000 and Rs. 3000 by Sun and Moon
respectively.
3) Allow interest @10% p.a. on capital.
4) Charge interest on drawings as Sun Rs.600 Moon Rs.400 respectively.

Prepare statement of affairs on 31-3-2012 and statement of profit for the year
ended 31-3-2012.
 67

Solution- 8)
Statement of affairs as on 31-3-2012.
Liabilities Rs. Assets Rs.
Creditors 36,000 Cash at bank 16,000
Bills payable 14,000 Bills receivable 17,000
Capital (Balancing figure) 1,20,000 Debtors 35,000
Sun 81,400 Stock 32,000
Moon 38,600 Furniture 10,000
Machinery 20,000
________ Building 40,000
1,70,000 1,70,000

Statement of profit or loss for 31-3-2012.

Particulars Rs. Rs.
Combined capital at the end of the year. 1,20,000
Add - Drawing during the year : Sun 9,000
Moon 7,000 16,000
1,36,000
Less - Additional capital introduced: Sun 5,000
during the year. Moon 3,000 8,000
1,28,000
Less - Capital of the beginning Sun 60,000
Moon 30,000 90,000
Profit before adjustment 38,000
Add - Interest on drawing: Sun 600
Moon 400 1,000
39,000
Less - Interest on capital : Sun 6,000
Moon 3,000 9,000
Net profit for the year 30,000
Sun- 20,000
Moon- 10,000

Working Note:
Partners' Capital Account
Particulars Sun Moon Particulars Sun Moon
To Drawing 9,000 7,000 By Op. Bal. 60,000 30,000
To Int. on Drawing 600 400 By Bank 5,000 3,000
To Closing Balance 81,400 38,600 By Int. on Capital 6,000 3,000
To P & L A/c 20,000 10,000
91,000 46,000 91,000 46,000

Problem - 9)
Mrs. Kanika commenced her business with capital of Rs. 1,30,000 on 1-4-2010.
Her financial position on 31-3-2011 is as follows:
Cash Rs. 9120, Stock Rs. 10,250, Bills payable Rs. 12,880, Creditors Rs. 17,180.
Debtors Rs. 31,550. Bills receivable Rs. 29,120 Premises Rs. 85,750 ,Vehicles Rs. 40,250 .
Additional information:-
1) She brought additional capital Rs. 20,000 on 30-9-2010. Interest on capital is to be
provided at 5% p.a.
 68

2) She withdrew Rs. 10,000 for personal use on which interest is charged at 6% p.a.
3) R.D.D is to be provided at 2½% after providing for Bad debts of Rs. 1000.
4) Depreciate vehicle at 2% p.a. and premises at 4%p.a.

Solution-9) In the books of Mrs. Kavita.

Statement of affairs on 31-3-2011
Liabilities Amount Assets Amount
Rs. Rs.
Creditors 17,180 Premises 86,750
Bills payable 12,830 Vehicles 40,250
Capital(balance figure) 1,75,980 Debtors 31,550
Bills receivable 29,120
Stock 10,250
Cash 9,120
2,06,040 2,06,040

Statement of Profit or Loss of Mrs. Kavita for the year ended on 31-3-2011.
Particulars Amount Amount
Rs. Rs.
Capital at the end of the accounting year 2010-11 1,75,980
Add: Drawings made during the year 2010-11 +10,000
1,85,980
Less: Additional capital introduced during the year -20,000
Adjusted Capital 1,65,980
Less: Capital at the beginning of the year 2010-11. -1,30,000
Profit before adjustments 35,980

Add: Interest on drawing (on 10,000 @ 6% for 6 months) +300

= 10,000 x 6/100 x 6/12 = 300 _______
Net Profit before adjustment 36,280
Less: 1) Interest on Capital
a) On opening capital Rs.1,30,00 @ 5% p.a. for 6,500
one year 1,30,000 X 5/100
b) On additional capital Amount Rs. 20,000 @ 5%
for 500
6 months i.e. (30-9-2010 to 31-3-2011)
2) Bad debts written off 1,000
3) Reserve for Doubtful debts 2½ % on Debtors 764
31,550 – 1000 =30,550
4) Depreciation on – 1) Vehicle Rs. 40,250 – 2% 805
2) Premises Rs. 85,750 – 4% 3,430 -12,999
Net profit earned during the year 2010-11 23,281

Problem- 10) Mr. Sanil provides you the following details about his business.
Particulars On 1-4-2011 Rs. On 31-3-2012 Rs.
Debtors 45,000 50,000
Creditors 60,000 70,000
Computer 60,000 1,20,000
 69

10% Governed bonds - 10,000

Bank Overdrafts 80,000 40,000
Motor van 80,000 80,000
Furniture 10,000 10,000
Stock 65,000 80,000
Cash in hand 2000 8000
Bills receivable 60,000 80,000
Additional Information:-
1) On 1st October 2012, he withdrew Rs. 40,000 for his personal use.
2) Charge interest on drawings Rs.2000.
3) He also withdrew Rs.30000 for rent of his residential flat.
4) Depreciate furniture by 10% and write off Rs. 2000 from motor-van.
5) 10% Government bonds were purchased on 1-10-2011.
6) Allow interest on capital at 10% P.G.
7) Rs.2000 is to be written off as bad debts and provide 5% R.D.D on Debtors.
Prepare opening & closing statement of affairs, statement of profit or loss of
the year ended 31-3-2012.
Solution -10) In the books of m/s Sunil.
Opening and closing statement of affairs
Liabilities 1-4-2011 31-3-2012 Assets 1-4-11 31-3-12
Creditors 60,000 70,000 furniture 10,000 9,000
Bank overdraft 80,000 40,000 Motor van 80,000 79,000
Capital 1,82,000 3,21,100 Computer 60,000 120,000
(balancing figure) 10% govt. Bonds - 10,500
Stock 65,000 80,000
Bills receivable 60,000 80,000
Debtors 45,000 45,600
________ ________ Cash in hand 2,000 8,000
3,22,000 4,31,100 3,22,000 4,31,100

Working Note -1)Furniture less 10% Depre.=10000-1000=9000.

2) Motor van less to be written off Rs.2000 =80,000-2000=78000
3) 10% Government bonds purchased on 1-10-12 =10% int. on 10000 for six months =500.
Cl. Bal. of 10% Govt. Bonds =10000 + 500 int. accrued = 10500.
4) Debtors Rs.2000 to be written off as bad debts & 5% R.D.D.:-
50000-2000 = 48000, 5% R.D.D = 48000×5/100=2400,
Debtors = 50,000- 2000 bad-debts – 2400 R.D.D. =45600.
Statement of profit or loss for the year 31-3-2012.
Particulars Amount
Capital at the end of accounting year 2011-12 3,21,100
ADD- Drawings made during the year 2011-12(cash 40000 and rent 30000) +70000
3,91,100
LESS-Capital at the beginning of the accounting year 2011-12. -1,82,000
Profit before adjustment. 2,09,100
ADD Interest on drawings +2,000
2,11,100
LESS interest on capital (182000×10/100) -18,200
Profit after adjustment 1,92,900
 70

Practical Exercise- Problems:

1) Mr. Amar maintains his accounts under single entry system.
Following information is available from the books of accounts.
Particulars Amount Rs.
Capital at the beginning of the year 1,00,000
Capital at the end the year 2,80,000
Drawings 24,000
Capital introduced during the year 60,000
You are required to find the Amount of profit earned by Mr. Amar during the year.
Ans : (Net profit earned Rs.1,44,000)

2) Mr. khanna keeps his books under single entry system.

The following information is available:
Particulars Amount Rs.
Capital at the beginning of the year 2,00,000
Capital at the end of the year 3,80,000
Drawings of Mr. Khanna 30,000
Capital introduced during the year 60,000
Interest on opening capital is @12% p.a
Ans- (Net profit Rs. 1,26,000 )

3) Mr. Arjun commenced business on 1-1-2010 with capital of Rs. 25000.

He brought furniture Rs.6000 during the year. He borrowed Rs.15000 from his wife and
introduced further capital Amounting to Rs.9500. He had withdrawn Rs.900 at the end the
every month for family expenses.
On 31-12-2010 his position was as follows:-
Cash in hand Rs.600, Cash at bank Rs.7800, Sundry Debtors Rs.14,400, Stock Rs.20,400,
Bills receivable Rs.4800, Sundry Creditors Rs.1,500, Rent due Rs. 450.
Furniture is to be depreciated by 10%.
Ascertain profit or loss made by Mr. Arjun.
Ans: (Capital at the end of the year Rs.37,050, Net profit Rs.12,750)

4) Mr. Mahesh keeps his books under single entry system.

His position on 1-4-2012 is as follows.
Cash in hand Rs.7,900, Cash at bank Rs.20,000, Debtors Rs.18,000, Stock Rs.29,000,
Motor car Rs.5,000, Bank Loan Rs.18,000 and Outstanding expenses Rs.2,700.
On 1-10-2012 he introduced further capital Rs.10000 in the business and withdrawn on the
same date Rs. 7000 out of which he spend Rs. 5000 for the purchase of machinery for the
business & used the rest Amount Rs. 2,000 for his household purposes.
On 31-3-2013 his position is as follow cash in hands Rs.7,600,cash at bank Rs.22,000 stock
Rs.30,000 debtors Rs.25,700 furniture Rs.6,000 creditors Rs. 25,200 and prepaid expense
Rs.200 .Prepare a statement showing profit or loss made by him during the year 31-3-2013
and Opening and closing statement of affairs after considering the following adjustments.
1) Depreciate motor car and furniture @ 10% p.a.
Addition to furniture was made on 1-10-2012.
2) Provide Rs.1200 for bad debts & 5% . R.D.D.
3) Goods taken for personal use Rs. 1,500 by Mr. Mahesh.
4) Provide interest on capital @ 10% p.a.
Ans. [Net loss 4045]
 71

5) Mr. Anil keeps his books on Single Entry method. His financial position on 1-4-
2012. Was Land and Building Rs.1,00,000 ,Sundry Creditors Rs.12,000, Plant and Machinery
Rs.45,000 Stock Rs.25,000, Furniture and Fixtures Rs.35,000 ,Cash at bank Rs.12,500,
Sundry Debtors Rs.18,000, Cash in hand Rs.17,500.
On 31-3-2013 his Financial position was as follows.
Land and Building Rs.1,50,000, Plant and Machinery Rs.85,000
Furniture and Fixture Rs.35,000, Sundry Debtors Rs.15,000
Sundry Creditors Rs.10,000, Stock Rs.30,000
Cash at bank Rs.12,000, Cash in hand Rs.12,500
Outstanding expense Rs.2,500, Prepaid insurance Rs.1,000 .
During the year Mr. Anil had withdrawn Rs.1000 p.m. from his business for Personal
Expenses.
You are required to prepare:
1) Opening & Closing statement of affairs.
2) Statement of Profit or Loss.
[Ans . Capital at the beginning Rs. 2,41,000 capital at the end Rs. 3,28,000
Net Profit Rs. 99,000]

6) Mr. Birju started business with capital Rs. 1,00,000. He had withdrawn Rs. 5000 for
Personal Expenses. He had introduced Rs. 20,000 in the business by selling his own property.
At the end of the accounting year 2011-12, his financial position was as under :-
Particulars Amount Particulars Amount
Machinery 20,000 Creditors 14,000
Stock 16,000 Outstanding
Furniture 28,000 Expenses 5000
Debtors 11,000 Bills receivable 14,000
Bank 15,000 Bills Payable 8,000
Cash 13,000
Prepare- 1) Opening statement of affairs
2) Closing statement of affair
3) Statement of Profit or Loss for 31-3-2012.
[Ans.- Closing Capital Rs. 90,000, Drawing Rs. 60,000, Net Profit Rs. 30,000]
 72

2) Conversion Method :-

In the absence of complete records, the correct profit and financial position cannot be
ascertained. Therefore single entry system is converted into Double entry system.
Under conversion method an attempt is made to prepare complete final accounts from
available records by first completing basic double entry effects to the extent possible. This is
done when details of all cash and trading transactions are available. This process requires
preparation of control accounts such as Total Debtors A/c, Total Creditors A/c etc. These
control accounts‟ balances lead to preparation of Trial Balance and then preparation of Final
accounts in usual manner.
The following procedure is followed under conversion method:
1) A statement of affairs at the beginning of the year should be prepared to find out
opening capital, if not given in opening balances.
2) Open all assets and liabilities‟ accounts & record all related transactions in these
accounts. Debtors & creditors accounts are to be prepared in Total form as individual
personal accounts are usually maintained. These total debtors & total creditors accounts
are prepared to find out the missing information, if any, relating to debtors & creditors.
Find out missing information if any by applying logical sense. Some of the items such
as credit sales to Debtors or credit purchases from creditors or Cash received from
debtors or cash paid to creditors may be the missing information.
3) Prepare Cash book by recording all cash & bank transactions. If opening & closing
balances are given & if still it is not in agreement then find out missing transaction
which may be any one of the following;
Cash sales/ cash purchases/cash received from debtors/cash paid to
creditor/drawings/capital introduced etc.
4) Make posting of cash transactions to respective ledger accounts.
5) Sales Account, Purchase Account must be verified to know the correct figure of total
sales & purchases. Credit sales & credit purchases may be found out by preparing Total
Debtors or Total Creditors Account. Cash sales & cash purchases may be the missing
figures in cash book.
6) Even if no records are kept in respect of certain transactions, such transactions must be
journalized and posted.
7) Scrutinize Total Debtors account to ascertain missing information such as
opening/closing balances, Credit sales, Cash received from Debtors, Bills receivable
drawn/ Bills payable paid etc.
8) Scrutinize Bills Receivable A/C to ascertain missing information such as
opening/closing balance, total amount of Bills receivable drawn/total amount received
during the year on a/c of B.R. retained by business.
9) Scrutinize Total Creditors Account to ascertain missing information such as
Opening/Closing creditors/cash paid to creditors/ total credit purchases/discount
received etc.
10) Scrutinize Bills Payable Account to ascertain the missing information such as
Opening/Closing balances/total bills accepted/paid during the year etc.
11) Scrutinize stock record to ascertain missing information such as opening/closing
stocks, total purchases/cost of goods sold/returns etc.
12) Prepare Revenue Expense account to ascertain the missing information, such as -
- opening/closing balances of outstanding /prepaid expenses/ current year‟s expenses.
13) Scrutinize fixed asset account to ascertain the missing figures opening/closing-
- balance, purchases/ sales, profit or loss on sale, depreciation etc.
14) Balance all the ledger accounts.
 73

15) Prepare a Trial Balance by enlisting all ledger balances.

16) Prepare Trading & Profit & Loss A/c and Balance Sheet from the Trial Balance &
opening statement of affairs.
For preparation of Final accounts from Single Entry, a number of figures are required to be
ascertained. For this purpose some control accounts are required to be opened.
These control accounts generally include Total Debtors, Total Creditors, Cash & Bank
A/c, Bills Receivable, Bills Payable, Sales and Purchases A/c. The available information is
posted to these accounts. Then these accounts are balanced for getting some missing
information if any. This requires careful & in depth scrutiny of these accounts.
We must know the usual transactions/ postings relating to these accounts & hence these
accounts are demonstrated below:
Cash-Book
Particulars Bank Cash Particulars Bank Cash
To Op. Bal. b/d xx xx By Op. Bal. b/d ( Bank O.D.) xx xx
To Cash-Sales xx xx By Purchases (Cash) xx xx
To Bills Receivable xx xx By Creditors (Payments made) xx xx
(collected)
To Capital (introduced) xx xx By Bills Payable (Paid) xx xx
To Fixed Asset (sold) xx xx By Drawings xx xx
To Misc. Incomes(received) xx xx By Fixed Assets (purchased) xx

To Cl. Bal.c/f.( Bank O.D.) xx xx By Misc. Expenses (paid) xx xx

By Bal. c/f (cl. bal) xx xx
xxx xxx xxx xxx
Sundry Debtors A/C
Particulars Amount Particulars Amount
To Balance b/f / Opening bal xx By Cash/Bank (Amount. received from xx
debtors)
To Sales (Credit) xx By Bills receivable (Drawn) xx
To Bills Receivable (Dishonoured) xx By Return inward A/C xx
To Bank (Cheques dishonoured) xx By Discount allowed xx
By Bad debts (written off) xx
By Balance c/f /Closing bal. xx
xxx xxx
Bills receivable Account
Particulars Amount Particulars Amount
To Bal. b/d xx By Cash/bank (Amount. of Bills received) xx
To Sundry Debtors By Sundry Debtors (B. R. dishonored) xx
A/C (B.R. drawn & accepted) xx By Bal c/d xx
xxx xxx
Sundry Creditors Account
Particulars Amount. Particulars Amount.
To Cash/Bank xx By Balance b/d (opening bal) xx
To Bills payable xx By Purchases (credit) xx
To Returns outward xx By Bank (cheque dishonoured) xx
To Discount (received) xx By Bills payable(dishonoured) xx
To Bal. c/d (Closing balance) xx xx
xxx xxx
 74

Bills Payable Account

Particulars Amount Particulars Amount
To Cash or Bank (Amount xx By Bal b/d xx
paid)
To Creditors A/C (B.P. xx By Creditors A/C (B.P accepted) xx
dishonoured)
To Bal. c/f. xx xx
xxx xxx

Fixed Asset A/c

Particulars Amount Particulars Amount
To Opening bal. b/d xx By Cash/Bank (sale of asset) xx
To Cash/Bank (purchase of asset) xx By P & L A/c ( loss on sale) xx
To Bank (Exp. incurred) xx By Depreciation xx
To P & L A/c ( Profit on sale) xx By Bal. c/d (closing bal.) xx
xxx xxx
Revenue Expenses A/c
Particulars Amount Particulars Amount
To Op. bal. of prepaid exp. xx By Op. Bal. of Out-standing exp. xx
To Cash/Bank (Exp. paid) xx By Trading & P & L A/c( yearly xx
transfer)
To Cl. Bal. of out-standing exp. xx By Cl. Bal. of prepaid exp. c/f. xx
xxx xxx

Practical Illustrations
Problem 1.
Mr. Gaurav does not maintain proper books. From the following data available, find
purchases and sales for the year. All his purchases and sales were on credit.

Particulars Balance as on 1-1-2010 Rs. Balance as on 31-12-2010 Rs.

Bills Receivable 10,000 5,000
Sundry Debtors 50,000 60,000
Sundry Creditors 20,000 30,000
Bills payable 8,000 7,000
The returns from debtors Amounted Rs. 5000 and returns to creditors Rs. 2000.
The discount allowed was Rs. 500 & discount received was Rs. 100.
Debts amounting Rs. 500 were proved as bad-debts.
Collection from Debtors amounted to Rs. 50,000 & payments to creditors were Rs. 70,000.
Bills Payable of Rs. 15000 were paid during the year.
Debtors honoured bills of Rs. 20,000.
Solution-
Bills Receivable Account
Date Particulars Amount Date Particulars Amount
1-1-2010 To Bal b/d 10,000 By Bank 20,000
To Debtors (bal. figure) 15,000 By Bal c/d 5,000
25,000 25,000

Bills Payable Account

Date Particulars Amount Date Particulars Amount
1-1-2010 To Bank a/c 15,000 By Bal b/d 8,000
 75

To Bal c/d 7,000 By Creditors 14,000

22,000 (balancing figure) 22,000
Sundry Debtors a/c
Date Particulars Amount Date Particulars Amount
1-1-2010 To Bal b/d 50,000 By Bills Receivable 15,000
To Sales (credit) 1,81,100 By Bank 15,000
By Return Inward 5,000
By discount 500
By Bad debts 600
By Bal c/d 60,000
2,31,100 2,31,100

Sundry Creditors A/C

Date Particulars Amount Date Particulars Amount
To Return Outward 2000 By Bal b/d 20,000
To Discount 100 By Credit 9610
To Bank 70,000 Purchases
To Bills payable 14,000
To Bal c/d 30,000
1,16,100 1,16,100

Problem- 2) Mr. Hari presented the following figures from incomplete records.
31-12-2010 1-1-2010
Cash in hand 17,000 12,000
Cash at bank 13,000 2,000
Stock 60,000 40,000
Debtors 15,000 20,000
Bills receivable 25,000 5,000
Furniture (additions made on 30-6-2010) 40,000 20,000
Plant 30,000 30,000
Land 10,000 10,000
Building 50,000 50,000
Creditors 25,000 15,000
Bills payable 5,000 10,000
Loans 10,000 10,000
Summary of cash book showed the following details .
Receipts:
1) Cash collected from Debtors Rs. 14,000
2) Collection on Account of Bills Receivable Rs. 3,000
3) Fresh capital Rs. 1000
Payments
1) Cash paid to creditors Rs. 80,000
2) Bills payable honoured Rs. 25,000
3) Salary Rs. 6,000 Rent Rs. 3000 , Office expense Rs. 2000
4) Cash purchases Rs. 10,000
5) Drawings Rs. 1500 pm
The following details are also available.
Discount received Rs. 500, discount allowed Rs. 1000.
Return inward Rs. 2000. Return outward Rs. 500
 76

Bad debts Rs. 250 . Provide depreciation at 10% .on furniture & plant.

Solution: Bills receivable A/C

Particulars Amount Particulars Amount
To bal b/d 5000 By cash / bank 30,000
To Debtors (New bills accepted- By bal c/d 25,000
i.e. bal. figure) 50,000
55,000 55,000

Sundry Debtors A/C

Particulars Amount Particulars Amount
To bal c/d 20,000 By cash / bank 1,40,000
To credit sales 1,88,250 By discount 1000
By return onward 2000
By bad debts 250
By bills receivable 5000
By bal c/d 15,000
2,08,250 2,08,250

Bills Payable A/c

Particular Amount particular Amount
To cash/bank 25000 By bal b/d 10,000
To bal c/d 5000 By creditors (bal fig) 20000
30,000 30,000
Creditors A/c.
Particulars Amount Particulars Amount
To cash/bank 80,000 By bal b/d 5,000
To discount 500 By purchases 1,11,000
To return outward 500
To bills payable 20,000
To bal c/d 25,000
126,000 126,000

Cash/Bank A/c
Particulars Amount Particulars Amount
To bal b/d cash/bank 12000 By creditors 80,000
To bank 2000 By bills payable 25000
To debtors 1,40,000 By salary 6000
To bills receivable 30,000 By rent 3000
To capital 1000 By office exp 2000
To cash sales 9000 By drawings 18000
By purchases 10000
By furniture 20000
By Bal c/d cash 17000
Bank 13000
1,94,000 1,94,000
 77

Statement of affairs as on 1-1-2010

Particulars Amount Particulars Amount
creditors 15,000 Cash in hands 12,000
Bills payable 10,000 Cash at banks 2,000
loans 10,000 Stock 40,000
Capital A/c 1,54,000 Bills receivable 5,000
(Balancing figure) Debtors 20,000
Furniture 20,000
Plant 30,000
Land 10,000
Building 50000
1,89,000 1,89,000

Trading & Profit &Loss Account for 31-12-2010

Particulars Amount Particulars Amount
To Opening Stock 40,000 By Sales A/C
To Purchase A/C Credit 1,88,250
Cash 10,000 Cash + 9,000
Credit +1,11,000 1,97,250
1,21,000
Less:- Purchase Returns - 500 1,20,500 Less:- Returns Inward -2,000 1,95,250
To Gross profit c/d 94,750 By closing stock 60,000
2,55,250 2,55,250
To salaries A/C 6,000 By Gross Profit b/d 94,750
To Rent A/c 3,000 By Discount a/c 500
To office expenses A/C 2,000
To Discount A/C 1,000
To Bad debts A/C 250
To Depreciation on
- Furniture 3,000
Plant + 3,000 6,000
To Net Profit c/d 77,000
95,250 95,250

Balance sheet as on 31-12-2010

Liabilities Amount Assets Amount
Capital of Mr. Hari 1,54,000 Bills receivable 25,000
Add- Additional Cap. + 1000 Debtors 15,000
Add- Net Profit for of Stock 60,000
the year +77,000 Furniture 40,000
2,32,000 Less- Depreciation -3000 37,000
Less- Drawings - 18,000 2,14,000 Plant 30,000
Bills payable 5000 Less-Depreciation -3,000 27,000
Creditors 25,000 Land 10,000
Loans 10,000 Building 50,000
Cash in hand 17,000
Cash at Bank 13,000
2,54,000 2,54,000
 78

Problem- 3. From the following incomplete record maintained by Mr.Arjun-

As on April 2010 As on 31st March 2011
Cash &Bank balances 10,000 15,000
Stock 70,000 90,000
Debtors 25,000 45,000
Fixed Assets 1,20,,000 1,50,000
Motor Car 70,000 -
Creditors 20,000 15,000
Bank overdraft 30,000 25,000

The Cash book provides the following details:-

Rent Rs. 6,000, Salary Rs. 12000,Office Expenses 8000, Carriage Rs. 2000,
Cash purchases Rs. 5,000 Cash sales 12,000, Credit Purchases Rs.1,80,000 ,
Credit sales Rs. 2,20,000
Car was sold during the year at a profit of Rs. 5,000 .
Arjun received cheque of Rs. 5,000 as consulting fees in individual capacity which he
deposited in business bank account.
He paid Rs. 2000 as electricity bill of his residence, from business Bank Account.
The bad debts Amounted Rs. 3,000 & the discount to debtors was Rs. 400.
Creditors offered discount of Rs. 600.
Provide depreciation on Fixed Assets at 15% on the closing balance.
Prepare Profit & Loss Account and Balance sheet of Mr. Arjun.
Solution –
Sundry Debtors A/C
Particulars Amount Particulars Amount
To Op. Bal. b/f 25,000 By bad debts 3000
To Sales (credit A/C) 2,20,000 By discount 400
By Cash & Bank A/C 1,96,000
(Balancing figure)
By Cl. Balance c/f 45,000
2,45,000 2,45,000

Sundry Creditors A/C

Particulars Amount Particulars Amount
To discount 600 By bal b/d 2000
To Cash & Bank A/C 1,84,400 By purchases 1,80,000
(Amount paid – balancing figure)
To bal c/d 15,000
2,00,000 2,00,000

Cash & Bank A/C

Particulars Amount Particulars Amount
Rs.
To bal c/d 10,000 By Salary A/c 12,000
To Cash sales A/C 12,000 By rent A/C 6,000
To Sale of Car 75,000 By Expense A/C 8,000
To Capital A/c 5,000 By Carriage A/c 2,000
(chq of consulting fees)
To Debtors A/C 1,96,600 By Purchases A/c 5,000
 79

By Drawings A/c 2,000

(Electricity bill)
By Bank Overdraft 30,000
By Creditors 1,84,000
By Drawings(bal figure) 34,200
By bal c/d 15,000
2,98,600 2,98,600

Trading & Profit & Loss Account for the year 31-3-2011
Particulars Amount Particulars Amount
Rs.
To Opening Stock 70,000 By Sales- Cash 12,000
Credit 2,20,000 2,32,000
To Purchases Cash 5,000 1,85,000 By closing stock 90,000
Credit 1,80,000
To Carriage 2,000
To Gross Profit c/d 65,000
3,22,000 3,22,000
To Salary 12,000
To Rent 6,000 By Gross profit 65,000
To Office exp 8000 By profit on
To Bad debts 3000 Sale of car 5,000
To discount 400 By discount 600
To Depreciation on
Fixed Assets 22,500
To Net Profit 18,700
7,06,000 7,06,000

Statement of affairs as on 1-4-2010

Liabilities Amount Assets Amount
Creditors 20,000 Cash at Bank 10,000
Bank Overdraft 30,000 Stock 70,000
Capital A/C 2,45,000 Debtors 25,000
(excess of assets over Liabilities)
(2,95,000-50,000)
Fixed assets 1,20,000
Motor Cars 70,000
2,95,000 2,95,000

Balance sheet as on 31-3-2011

Liabilities Amount Assets Amount
Rs. Rs.
Arun‟s Capital A/c Cash & Bank
Op. Balance 2,45,000 Balance 15,000
Add - additions + 5,000 Cl. Stock 90,000
Add - Net Profit +18,700 Debtors 45,000
2,68,700 Fixed Assets- 1,20,000
Less – Drawing 2000 Additions during the year-
(Electricity bill ) +30,000
 80

Less - Drawing -29,200 2,37,500 1,50,000

Less – Depreciation -22,500 1,27,500

Creditors 15,000
Bank Overdraft 25,000
2,77,500 2,77,500

Problem- 4) Mr. Naresh a small businessman does not keep his books on double entry. The
following information is available.
Particulars Amount 1-4-2010 Amount 31-3-2010
Plant & Machinery 25,000 25,000
Stock 22,000 19,500
Sundry Debtors 8,000 25,500
Sundry Creditors 12,500 10,000
Cash in hand 400 800
Bank balance 6,250 7000

The following transactions took place during the year. 30-6-2011

Particulars Amount Particulars Amount
Received on Account of cash 31,250 Payment for Purchase 28,850
sales Payment to sundry creditors 1,32,000
Received From Sundry Debtors 1,60,000 General Expenses of business 21,450
Wages 15,000
Drawings 6,800
1,91,250 2,04,100
During the year Naresh had taken Goods from business for his own use Rs. 1950 and not paid
any money in the business. You are required to prepare – Profit & Loss A/C for 30-6-
2011.charging depreciation on plant and machinery at 10% p.a. Prepare Balance Sheet as on
30-6-2011.
Total Debtors a/c.
particulars Rs. particulars Rs.
To balance b/d 8000 By cash(Received from sundry debtors) 1,60,000
To sales(credit) By bal c/d 25,500
Balancing figure 1,77,500
185500 185500

Total Creditors A/C

particulars Rs. particulars Rs.
To cash 132000 by balance b/d 12500
To bal c/d 10,000 by purchases (balancing figure) 129500
1,42,000 1,42,000.

Statement of affairs as in 1-7-2015.

Liabilities AMOUNT Assets AMOUNT
Sundry creditors 12500 Cash in hand 400
capital Bank balance 6250
 81

(balancing figure) 49150 Stock 22000

Sundry debtors 8000
Plant and machinery 25000

61650 61650

Trading and profit and loss A/C for 30-6-2011.

Particulars AMOUNT Particulars AMOUNT
To Op. stock 22,000 By sales
To Purchases- Cash 31,250
Cash 28,050 Credit 1,77,500 2,08,750
Credit 1,29,500 1,58350 By Closing stock 19,500
To wages 15,000 By Goods taken over 1950
(Drawing)
To Gross profit c/d 34,850
2,28,250 2,28,250
To General expense 21,450 By gross profit b/d 34,850
To Depreciation on Plant and 2,500
machinery
To Net profit transferred to Capital A/C 10,900
36,800 36,800

Balance sheet as on 30-6-2011.

Liabilities AMOUNT Assets AMOUNT
Sundry creditors 10,000 Cash in hands 800
Bank overdraft 7,000 Debtors 25,500
Capital 49,150 Stock 19,500
Add- Net Profit +10,900 Plants & Machinery 25,000
60,050 Less-Depreciation -2500 22,500
Less – Drawing - 8,750 51,300
68,300 68,300

Problem- 5. Mr. Prasad maintains his accounts in single Entry. His balances on 31-3-2010 &
2011 were as follows.
Particulars Bal. On 31-3-2010 Bal. On 31-3-2011
Bills Receivable 4,000 2,400
Stock 7,900 8,800
Creditors 9,400 8,350
Cash 3,908 1,963
Bills Payable 3,471 5,051
Debtors 9,361 8,355
Furniture 2000 2000
From the cash book the information is available.
Wages Rs. 900, Bills payable Rs. 3000 , Bills Receivable Rs. 4300, Miscellaneous Exp.
1200, Purchases Rs. 600, Received from Debtors 2450,Paid to creditors Rs. 1425,
Miscellaneous Income 30, Drawings Rs. 1500. In 2010 & 2011 Discount allowed and
received were Rs.400 & 355. During the period were Rs. 4580 and received bill for Rs.
3000. His Bad debts were Rs. 560 and Bills receivable dishonored Rs. 300.
Prepare Trading , P & L A/c and Balance sheet for 31-3-2011.
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Solution-
Total Creditors A/C
Particulars Amount Particulars Amount
To cash 1,425 By bal b/d 9,400
To discount 355 By purchases(balancing figure) 5,310
To Bills payable 4,580
To Balance c/d 8,350
14,710 14,710

Total Debtors A/C

Particulars Amount Particulars Amount
By bal b/d 9,361 By cash 2,450
To Bills Receivable(dishonoured) 300 By Discount 400
To sales(bal. figure) 5,104 By Bills Receivable 3,000
By Bad Debts 560
By Bal. c/d 8,355
14,765 14,765

Statement of Affairs as on 31-3-2010

Liabilities Amount Asset Amount
Creditors 9,400 Cash 3,908
Bills Payable 3,471 Bills Receivable 4,000
Capital(bal.figure) 5,104 Debtors 9,361
Stock 7,900
Furniture 2,000
27,169 27,169

Trading P & L A/C for the year 31-3-2011

Particulars Amount Particulars Amount
To Op. Stock 7,900 By sales
To Purchases Cash 1,200
Cash 600 Credit 5,104 6,340
Credit 5,310 By Closing stock 8.800
To wages 900
To Gross Profit c/d 394
15,104 15,104
To Salary 800 By gross profit b/d 394
To Discount 400 By Misc income 30
To Bad Debts 560 By Discount Received 395
To Misc Expenses 700 By Net Loss 1,681

2,460 2,460

Balance sheet as on 31-3-2011

Liabilities Amount Assets Amount
Sundry creditors 8,350 Cash in hand 1,963
Bills Payable 5,051 Debtors 8,355
Capital 14,298 Investment 1,000
Less- Net Loss 1,681 Bills Receivable 2,400
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12,617 Stock 8,800

Less -Drawing 1,50011,117 Furniture 2,000
24,518 24,518
Problem- 6. The Balance sheet ofMr. Kumar on 31-3-2010 & Cash A/c for 31-3-2011 is
given. Prepare Trading & P& L Account for 31-3-2011 & Balance Sheet as on that date.
Balance sheet of Mr. Kumar on 31-3-2010
Liabilities Amount Assets Amount
Creditors 20,000 Cash 5000
Bills payable 40,000 Cash in bank 10,000
Capital 1,00,000 Bills receivable 20,000
Debtors 25,000
Stock 20,000
Furniture 10,000
Plant 70,000
1,60,000 1,60,000

Cash Book for the year ended 31-3-2011

Receipts Amount Payments Amount
Op. Balances – Cash 5,000 Drawings 12,000
Bank 10,000 15,000
Cash sales 35,000 Wages 20,000
Collection from Debtors 80,000 Payment to creditors 35,000
Bills receivable 75,000 Bills paid 60,000
Sundry exp. 30,000
Rent & Rates 20,000
Balance cash 3000
Bank 25000 28,000
2,05,000 2,05,000

Additional information:
Debtors as on 31-3-2011 Rs. 40,000
Creditors as on 31-3-2011 25,000
Bills receivable as on 31-3-2011 30,000
Bills payable as on 31-3-2011 50,000
Stock in Trade as on 31-3-2011 30,000
Bills Receivable dishonored 5,000
Bills Payable dishonored 2,000
Bills Receivable endorsed 15,000
Bills Receivable endorsed dishonored 2,000
Discount allowed 1,000
Discount Received 2,000
Bills Receivable A/C
Particulars Amount Particulars Amount
To Balance b/d 20,000 By cash 75,000
To Debtors 1,05,000 By debtors 5,000
By creditors 15,000
By bal c/d 30,000
1,25,000 1,25,000
 84

Bills payable A/c

Particulars Amount Rs. Particulars Amount Rs.
To cash 60,000 By balance b/d 40,000
To creditors 2,000 By Sundry Creditors 72,000
To bal c/d 50,000
1,12,000 1,12,000

Total Debtors A/C

Particulars Amount Particulars Amount
To balance b/d 25,000 By cash 80,000
To bills receivable 5,000 By discount 1,000
To creditors 2,000 By bills receivable 1,05,000
To sales 1,94,000 By bal c/d 40,000
2,26,000 2,26,000

Total Creditors A/C

Particulars Amount Rs. Particulars Amount
To cash 35,000 By bal c/d 20,000
To bills receivable 15,000 By bills payable 2,000
To discount 2,000 By Debtors 2,000
To bills payable 72,000 By Purchases 1,25,000
To Balance c/d 25,000
1,49,000 1,49,000

Trading and Profit & Loss A/C for 31-3-2011

To Opening Stock 20,000 By sales cash 35,000
Credit 1,94,000 2,29,000
To Purchases 1,25,000 By cl. Stock 30,000
To Wages 20,000
To Gross Profit c/d 94,000 ________
2,59,000 2,59,000
To Sundry Exp. 30,000
To Rent & Rates 20,000
To Discount 1,000 By Gross Profit b/d 94,000
To Net Profit transferred to 45,000 By Discount 2,000
Capital A/c
96,000 96,000

Balance sheet as on 31-3-2011

Liabilities Amount Assets Amount
Creditors 25,000 Cash 3000
Bills payable 50,000 Bank 25,000
Capital 1,00,000 Bills receivable 30,000
Add- Profit +45,000 Debtors 40,000
1,45,0000 Stock 30,000
Less – Drawings -12000 1,33,000 Furniture 10,000
Plant 70,000
2,08,000 2,08,000
 85

Exercise:-
Q. 1. a. Select the most appropriate answer from the following alternatives given below
and rewrite the sentences.
1. Generally incomplete records are maintained by ________(traders, companies, Government)
2. Under single entry system, capital = Assets minus _________( loss, liabilities, drawings)
3. When closing capital is greater than opening capital it denotes____. (Profit, Loss, Assets)
4. The capital is the beginning of the accounting year is ascertained by preparing ________.-
(Receipts & payment Account, Cash Account , Opening statement of Affairs, Statement of profit or loss)

b. Answer the following questions in one sentence.

1. What is single entry system?
2. Which accounts are normally kept under the single entry system?
3. In which method statement of affair is prepared?
4. How is the closing capital calculated under single entry system?

C. State whether the following statement are true or false.

1. For big manufacturing concern the single entry system is insufficient.
2. A Trial balance can be prepared from single entry records.
3. The accounts of assets are maintained in the ledger under single entry system.
4. In single entry system only one effect of all transactions is given.

Q.2. Distinguish between- 1) Single entry & Double Entry System

2) Balance sheet & statement of affairs

Q.3 State the method of ascertaining Profit under single entry system.

Q. 4 How single entry system is converted into double entry system.

Practical Problems:-

1. From the following balances of Mr Santosh ascertain the opening balance of sundry
Debtors & closing balance of Sundry creditors.
Bal. on Rs.
Sundry creditors 31-12-2009 2,06,000
Sundry debtors 31-12-2010 3,74,000
Stock 31-12-2009 2,60,000
Stock 31-12-2010 2,40,000

Other information:- Rs.

Purchases during the year 2010 11,00,000
Discount allowed to creditors 8,000
Discount allowed to customers 11,000
Cash paid to sundry creditors 9,50,000
Bills payable issued to creditors 1,40,000
Bills receivable received from customers 1,65,000
Cash received from Debtors 13,00,000
Bills receivable dishonoured 19,000
Rate of Gross profit is 30% on selling price.
Total sales Rs. 2,00,000 were on cash basis.
(Ans- Sundry Debtors on 1-1-2010- 4,20,000, Closing Sundry Creditors- 2,08,000)
 86

2) Mr. Lal gives you the following information:

Particulars Bal.as on 1-1-2010 Bal. as on 31-12-2012

Cash at bank 56,000
Cash in hand 3,100 1,900
Stock 2,54,000 1,82,000
Creditors for goods 1,64,000
Outstanding exp. 42,000 24,000
Sundry debtor 2,67,000
Furniture and fixture 50,000 70,000

Cash received from debtors 3,50,000

Discount allowed to debtors 8,000
Bad debts written off 16,000
Credit sales 4,50,000
Cash sale 1,50,000
Purchases(credit) 3,60,000
Cash paid for purchases 3,05,000
Discount received from creditors 3,000
Expenses 1,25,000
Drawing 90,000

Depreciation on furniture is to be charged 10% p.a.

Prepare final accounts of Mr. Lal for 31-12-90 .
(Ans- Sundry Debtors Opening bal. - 1,91,000, Creditors Closing bal.- 2,16,000
Net Profit- 34,000, Balance sheet- 5,32,100)

3) Mr. Arjun’s record under Single Entry from 1-1-2010 to 31-12-2010 shows the
following:-
He has Rs. 4000 of his own & borrowed Rs. 500 for furniture Rs. 3500 for stock.
Total cash received by him during the year from Debtors was Rs. 23,000.
His payments were
Particulars Rs.
Purchases 15,600
Salary & Wages 2,140
Trade Expense 720
Rent & Rates for business 592
For Pvt. House 296
Payment made for Drawings 2,640

At the close of the year, the stock was Rs. 3750.

He owed Rs. 1350 to Creditors for goods and his customers owed to him Rs. 1500 .
Provide 5% for depreciation on furniture, Interest at 5% on wife‟s loan & Rs. 100-
for doubtful debts.
Prepare cash A/C, Profit & Loss A/C and Balance sheet at the close of the year.
(Ans.- Gross Profit Rs 7,800, Net Profit Rs. 4,123, Balance Sheet total Rs. 8,637)
 87

4) Mr. Jayesh keeps his books under Single Entry System.

Following information is available:
particulars 1-7-2010 30-6-2011
Stock 28,000 30,000
Bills receivable 8,000 6,000
Debtors 14,000 18,000
Bills payable 4,000 5,000
Sundry creditors 12,000 9,000
Cash at bank 3,000 3,000

Summary of cash transactions-

Receipts Amount Payments Amount
Opening balancing 3,000 Payment to creditors 30,000
Received from debtors 45,000 Payment against bills payable 25,000
Received against Bills receivable 25,000 Office expense 4,000
Domestic expense 5000
Sundry income 2,000 Investment 6,000
_______ Closing balance 5,000
75,000 75,000

Investments of 4% govt. bonds of value Rs.10000 was purchased on 1-7-2010.

Prepare trading and P &L A/C & balance sheet.

(Ans.- Gross profit Rs. 21,000, Net profit Rs. 19,200, Bills receivable closing balance Rs. 6,000, Debtors
closing balance-Rs. 18,000, Bills payable closing balance Rs. 26,000,Creditors closing balance Rs.53,000)
 88

Chapter- 4.

Final Accounts of Non-Trading Concerns

LEARNING OBJECTIVES:-
After studying this chapter, you will be able:
a. To know the concept of Non Trading Organization.
b. To know Receipts and Payments A/C
c. To know Income and Expenditure A/C
d. To understand the process of preparing Income and expenditure and Balance Sheet on the
basis on the Receipts and Payments A/C.

SYNOPSIS:-
1. Meaning
2. Need of Maintenance of Accounts
3. Books of Accounts
4. Performa of Subscription Register
5. Final Accounts
5.1 At the end of the 1st Year
5.2 At the end of the 2nd & Subsequent Years
5.3 Receipts and Payments A/C:
5.3.1 Features
5.3.2 Format of Receipts & Payments A/C
5.4 Income and Expenditure A/C
5.4.1 Features
5.4.2 Format of Income and Expenditure A/C
5.5 Balance Sheet:
5.5.1 Features
5.5.2 Format
5.6 Distinction between Receipts & Payments A/C and Income & Expenditure A/C
5.7 Distinction between Income & Expenditure A/C and P &L A/C
5.8 Treatment of some special items:-5.8.1 Subscriptions
5.8.2 Life Membership Fees
5.8.3 Legacies
5.8.4 Entrance Fees
5.8.5 Donations
5.8.6 Govt. Grants
5.8.7 Special Fund
5.8.8 Sale of Old News Papers
5.8.9 Specific Collections & Expenses
5.8.10 Sale of Old Sports Materials
5.8.11 Purchase of Sports Materials
5.8.12 Sale of Fixed Assets and Investments
5.8.13 Payment of Honorarium
5.8.14 Calculation of Income
5.8.15 Calculation of Expenses
5.8.16 Calculation of Stationery Used
5.8.17 Proceeds of concerts and lectures
6. Practical Illustrations on:-
6.1. Preparation of receipts & payments account from the given information.
6.2. Preparation of Income & Expenditure A/C and Balance Sheet from given
Receipts & Payments A/C.
6.3. Preparation of Income and Expenditure A/C and Balance Sheet from the
given Trial Balance.
6.4. Preparation of Receipts & Payments from Income & Expenditure A/C,
Opening & Closing Balance Sheet
7. Key Points 8. Key Terms 9. Exercises: a. Objective Tests
b. Theory Questions
c. Practical Problems
 89

MEANING OF NON-TRADING ORGANISATIONS

Non Trading organisations are those organisations which are not engaged in trading
activities. These organisations deal in monetary transactions which are of a charitable or non
trading nature. Hence purchasing and selling of goods are not undertaken by these
organisations. Aim of such organization is not to earn profit but to give services.
Thus the non trading organisations neither deal in buying and selling of goods nor do
they have an intention of earning profit.
These organisations render social services such as promotion of literature, culture,
Art, Science, Education, Sports, Charity, religion etc.
Non-Trading Organisations include concerns engaged in any fields of activity where
the object to earn profits is not there. Such concerns may engage in fund raising activities for
carrying out its objectives. The normal types of institutions encompassed under this category
are as follows:
i. Educational - Like schools, colleges, universities, institutions,
ii. Medical - Like Hospitals.
iii. Cultural - For promotion of Literature, library, art etc.
iv. Charitable - For rendering help, assistance or donation to
persons in need in different field.
v. Promotional - For promotion of profession, sports, etc.
vi. Clubs or Associations.
The nature of transaction, receipts and payments of each type of organisation differs
from each other.
NEED OF MAINTENANCE OF ACCOUNTS
Considerable Amount is collected by the non trading organisations by way of
subscription and donations from public at large. For public faith and confidence a proper
control over this huge Amount is required. This control is possible only with the help of
proper maintenance of Books of Accounts.
Due to this, the following objects are achieved:
I. Possibilities of misappropriation of funds are avoided.
II. Income and Expenses for a particular period can be ascertained.
III. Financial position at the end of the year can be understood
BOOKS OF ACCOUNTS OF NON TRADING CONCERN
Non Trading concern maintains Books of Accounts as under:
(a) Cash Book, (b) General Ledger,
(c) Journal Book, (d) Membership Register
(e) Donation Register, (f) Property Register,
(g) Subsidiary Registers depending upon special features e.g. Patients Register, Students
General Register.
Cash Book and General Ledger are maintained in a usual way and therefore do no
need any further explanation.
In the Journal Book, Rectification, closing, transfer entries and opening entries are
recorded. Format of subscription Register depends on so many factors such as period, number
of subscribers and Amount of subscription. Generally subscription is a collected per month.

PROFORMA OF SUBSCRIPTION REGISTER

Sr. NO._____ Name of subscriber_______________________________________ Membership NO._______

JAN FEB MAR APR MAY JUNE JULY AUG SEP OCT NOV DEC TOTAL
 90

Donation Register indicates names of the donors and Amounts collected from them, while
property Register indicates various properties such as Dead stock, Furniture and other assets.
Importance of this register is that figures shown by these registers are always in agreement
with the figures appearing in the Balance Sheet.

FINAL ACCOUNTS OF THE NON TRADING ORGANISATION

5.1 At the end of the1st Year
Final accounts of the Non Trading Organisations mean & consist of the following:
a) Receipts and Payments account
b) Income and Expenditure Account
c) Balance sheet at the end of the year
Students should note that at the beginning of first year slates of all the concerns are clean.
In other words concerns will have neither liabilities nor assets at the opening of first year.
Hence final accounts at the end of the first year consists these three statements only. It
can, therefore be concluded that Income and Expenditure Account and Balance Sheet of
the N.T.O at the end of the first year are prepared only with the help of Receipts and
Payments Account.
Receipts and Payments Account

Revenue Items Capital Items

Income and Expenditure A/c Balance Sheet

5.2 At the end of second and subsequent years

Receipts and Payments Account at the end of the second and subsequent years is
prepared. Items of such Receipts and Payments A/c are classified under Income and
Expenditure A/c and the Balance sheet of the year concerned in the similar fashion.
At this stage, Balance sheet prepared at the end of the earlier year is referred to as closing
balances of the previous year and opening balances of the current year. Students are,
therefore advised to consider & refer opening balance sheet to prepare final accounts of
the subsequent year which will consist of:
1. Receipts and Payments Accounts
2. Income and Expenditure Account
4. Closing Balance Sheet

Opening Balance Sheet + Receipts and Payments A/c

Income and Expenditure A/c Closing Balance Sheet

This procedure is repeated year after year

5.3 Receipts and Payments Account-

Receipts & payments account is a summary of cash book with cash & bank columns.
It is a summary of all cash & bank transactions of the current accounting year.
In Receipts and Payments account all cash transactions of a stipulated period usually a
year, are summarized. Actual cash receipts, bank receipts, cash payments & bank
 91

payments during the year are considered in this account. These cash receipts and
payments are recorded under appropriate headings. Such an account necessarily
commences with the initial cash and Bank Balances/overdrafts and closes with the final
cash and Bank Balances/overdrafts.
It is thus clear that Receipts and Payments Account includes cash receipts and cash
payments relating to previous year, current year and even of subsequent year. It also
includes capital as well as revenue receipts and payments.
5.3.1 Features
i. It is a real account.
ii. It is prepared from the cash Book, at the end of each year.
iii. It begins with opening cash and Bank Balances or Bank overdrafts and closes
with closing cash and Bank Balance or Bank overdrafts
iv. Includes capital as well as Revenue receipts and Payments
v. It includes all receipts and payments made during the year, which may relate to
previous year, current year or even subsequent year.
vi. It records actual receipts payments related to current year & hence outstanding
incomes & expenses are not recorded in this account .
vii. Bad Debts, Depreciation etc. are non cash losses. These items do not result in cash
payment and hence are not recorded in this account.
viii. It does not show surplus or deficit. It merely shows closing cash and bank
balances or overdrafts.
Note: When Bank column is showing an overdraft, it is shown on credit side of cash-book
as ‘By Balance b/d ‘.

5.3.2 Format
Receipts & Payments A/c of _________ for the year ended__________
Receipts Amount. Payments Amount.
To balance B/d By Bal. b/d (Bank overdraft) xx
Cash in hand xx By Salaries xx
Cash in Bank xx By Rent xx
To Subscriptions By Printing and Stationery xx
Previous year xx By Govt. Bonds xx
Current year xx By Prizes xx
Subsequent year xx By Electricity charges xx
By Purchase of sports
To Entrance fees xx Material xx
To Life Membership fees xx By Telephone Expenses xx
By Newspapers and
To Interest on Newspaper xx Periodicals xx
To Sale of old Newspaper xx By Repairs and Maintenance xx
To Legacies xx By Office Expenses xx
To Tournament Funds xx By Gardening xx
To Donations for Prize
Fund xx By Insurance Premium xx
To Grants from Govt. xx By Tennis Expenses xx
To Hire Rent of Hall xx By Billiard Expenses xx
To Tennis court Receipts xx By Bar Expenses xx
To Billiard fees xx By Purchase Of Medicines xx
To Tennis fees xx By Purchase of Investments xx
To Misc. Receipts xx By Misc. Expenses xx
 92

To Sale of asset xx By Balance c/d xx

To Balance c/d Cash in hand xx
(Bank overdraft ) xx Cash in Bank xx
Total xx Total xx

Note: The actual items of receipts of income/payment of expenditure depend on the nature
of transaction. The above list indicates general format & it is not exhaustive.

5.4 Income and Expenditure A/c

Income and Expenditure Account is a revenue statement of non trading concerns
which is similar to profit & loss account of trading concerns. Income and Expenditure
Account summarises all revenue receipts and revenue expenses of only current accounting
year. It does not include revenue items of the previous year or of the next year. Current year‟s
revenue items are included in this account in spite of the fact that whether such items are
transacted in cash or these are outstanding. For Non Trading Organisations this account
serves the purpose of P and L A/c.
Income and Expenditure A/c closes either with a deficit or with a surplus. Deficit is excess of
expenses over incomes. Surplus is excess of incomes over expenses.
However, if the total of Expenditure recorded on the debit side of the account is exactly equal
to the total of Incomes recorded on the credit side of the a/c, the Income and Expenditure A/c
will show neither deficit nor surplus. It will close automatically.
Deficit or surplus are transferred to capital fund or shown separately in balance-sheet as a
balance of income & expenditure account. Deficit is deducted from capital fund & surplus is
added to capital fund.

5.4.1 Features
i. It is a nominal account
ii. It is prepared from Receipts and Payments A/c and other relevant information
iii. It is just like a P&L A/incomes are recorded on the credit side and expenses are
recorded on the debit side of the Income & Expenditure A/c.
iv. It includes not only Incomes actually received but also the out-standing incomes.
Similarly, it includes outstanding expenditure along with expenses actually paid.
v. It includes only revenue receipts (Incomes) and revenue payments (Expenses) of only
current year. Revenue receipts and payments relating to the previous year & the next
year are not included in this a/c.
vi. It includes non cash items such as Depreciation, Bad Debts etc.
vii. It is necessary to pass the adjustment entries for above items to arrive at balances to
be included.
viii. It does not begin with any opening balance. It has a closing balance. The closing
balance represents either deficit or surplus. Deficit is defined as excess of expenditure
over income while surplus is defined as excess of Income over expenditure.

5.4.2.- Format
Income & Expenditure A/c of _______________ for the year ended __________
Expenditure Amount. Income Amount.
To Salaries xx By Subscriptions xx
To Rent xx By Interest on Investments xx
To Printing and Stationery xx By Grants from Govt. xx
To Electricity charges xx By Hire of Hall xx
 93

To Telephone Expenses xx By Tennis court Receipts xx

To News Papers & Periodicals xx By Billiard fees xx
To Repairs and Maintenance xx By Tennis fees xx
To Office Expenses xx By Miscellaneous Receipts xx
To Gardening xx By Drama Receipts xx
To Insurance Premium xx By Proceeds from xx
To Tennis Expenses xx Charity show xx
To Billiard Expenses xx By Subscription for xx
To Bar Expenses xx annual dinner xx
To Purchase of Medicines xx By Proceeds from xx
To Misc. Expenses xx from entertainments xx
To Wages xx By Excess of Expenditure xx
To Lecturer's fees xx over Income
To Refreshment Expenses xx
To Depreciation on Assets xx
To Bad Debts xx
To Magazine Expenses xx
To Annual Dinner xx
To Loss on sale of old assets xx
To Drama Expenses xx
To Annual Dinner xx
To Excess of Income over
expenses xx
Total xx Total xx

Note: The actual items of expenses/incomes depend on nature of organization. The items
shown above are illustrative and not exhaustive.
5.5 Balance Sheet:-
It is statement of assets and liabilities of a non trading organisation. It is prepared at
the end of every accounting year. All assets & liabilities of non-trading organisation are
shown in this statement. The Balance Sheet of non-trading organisation is similar to
balance sheet of trading concerns. The only difference is that instead of capital, here
capital fund is shown. The excess of assets over liabilities is termed as Capital Fund. The
Capital Fund is made up of excess of income over expenditure and other incomes or
surpluses which might have been capitalised by the organisation from time to time. If
Capital fund is not given, it can be ascertained by preparing balance sheet at the
beginning of the year, on the same principle as preparation of Statement of Affairs in case
of accounting from incomplete records.

5.5.1 Features
I. It indicates financial position of the organisation.
II. Asset side indicates assets and properties of the concern
III. Liabilities side shows liabilities or obligations of the concern
IV. It shows relationship between two consistent Income and Expenditure
accounts with the help of outstanding and prepaid items.
V. It includes all capital items from Receipts and Payments Account.
VI. It controls items which appear in Receipt and Payment A/c but do not appear
in Income and Expenditure A/c and vice versa.
VII. It shows accumulated result of Income and Expenditure Account
 94

5.5.2 Format
Balance Sheet of ------------------------as on ---------
Liabilities Amount Assets Amount
Capital Fund xx Cash in hand xx
+ Entrance fees xx xx Cash at Bank xx
Building Funds xx Stock of Stationery xx
Tournament Funds xx Investments xx
Charity Fund xx Books xx
Loans From Others xx Sports Materials xx
Sundry creditors xx Furniture xx
Outstanding Expenses xx Motor Vehicles xx
Incomes recd.in Advance xx Buildings xx
Grounds xx
Outstanding Incomes xx
Prepaid Expenses xx
Total xxxx Total xxxx

1) Difference Between Capital and Revenue Receipts

Points Capital Receipts Revenue
These receipts are not of recurring These receipts occur in the ordinary
1 Meaning nature and do not arise in the course of business.
ordinary course of business Such receipts are of recurring nature
loans taken or deposits received, interest on bank deposits, etc
2 Examples sales proceeds of assets and
investment, issue of Debentures etc
This type of income is non This type of income is of recurring
3 Nature
recurring nature nature
Some of the capital receipts are in Revenue receipts are not liabilities
4 Liabilities the form of liabilities have to be hence they need not be repaid
repaid
These are shown in balance sheet These are transferred to the Profit &
5 Disclosure Loss Account (or Income and
Expenditure A/c)
Effect on It does not affect the profit or loss These affect the profit or loss of the
6 Profit of the business business

2. Differences Between Receipt & Payments A/c & Income & Expenditure A/c
Points Receipts & Payments A/c Income & Expenditure A/c
1 Classification It is a real account It is nominal A/c
It is summary of actual cash It is summary of incomes and
2 Summary receipt and payment of a particular Expenses of a particular period.
period.
Items It includes both Capital and It includes only revenue items
3 Included revenue items.
It deals with transactions relating It deals with transactions pertaining
Transactions
4 dealt with
to personnel real and nominal to nominal accounts only
A/Cs.
5 Outstanding It does not include outstanding it includes outstanding items
 95

items.
It does not include non- cash items It includes non- cash items
Non-Cash
6 items
such as Bad Debts, Depreciations
etc.
Receipts are shown on debit and Expenditure are shown on debit
7 Sides payment are shown on credit side. side and incomes are shown on
credit side.
Opening It begins with opening balance of It does not begin with any opening
8 Balance cash & bank. balance.
It includes items related to It contains only items of the
previous year and next year if current year
9 Period
received along with current year's
items.
The closing balance is cash in The closing balance may be deficit,
Closing
10 Balance hand and cash at bank or bank if there is debit balance, or surplus
overdraft. if there is a credit balance.
Accounting Closing balance is carried Closing balance is either transferred
Treatment of forwarded. to capital fund or accumulated in
11 The closing
Balance
the balance sheet.
Balance It need not be necessarily It is always accompanied by the
12 sheet accompanied by the balance sheet. balance sheet.

3) Difference between Capital Expenditure & Revenue Expenditure

Points Capital Expenditure Revenue Expenditure
These expenses are of non recurring Such expenses are of recurring
1 Nature nature. i.e. such expenses are nature. i.e. such expenses are
incurred once in 5 to 10 years incurred frequently in every year.
Such expenses create utility or Business firm gets a benefit for a
benefit for longer period small period such period of benefit
Period of
2 Utility
is less than one year normally, if
such expenses are not incurred,
business firm cannot get benefit.
Such expenses are incurred Such expenses are incurred for day
a) To increase production to day activities of business without
Object of
3 Spending
b) To minimize or reduce the cost making such expenses business
3) To increase the profit of the cannot run
business
Creation of These expenses create assets for the Such expenses never create any
4 Assets business asset for the business
Such expenses are not changed to They are shown to the debit side of
profit and loss account because they the profit and the loss account and
Accounting
5 Treatment
do not reduced profit, On the thus reduce the profit
contrary they show financial
position of the firm
Such expense can be encashed at Such expenses cannot realized in
Whether we
the later stage means you can sell cash
6 encash these
expenses the assets and get money after the
lapse of some time
7 Examples Land and Building, Plant and General Expenses, Postage and
 96

Machinery, Cost of Goodwill, Telegraph Electricity Charges,

Trademark, Patents, Leasehold wages, Audit fees
Premises Library Books, Sports
Equipment‟s

4) Distinction between Income & Expenditure A/c and Profit & Loss A/c
Points Profit and Loss A/c Income & Expenditure A/c
1 Nature of It is revenue account of a trading
Organization organization or Profit making It is Revenue account of non profit
concern making organization
2 Result of It is prepared to find out profit or It is prepared to find out excess of
Operations loss income over expenditure or vice
versa
3 Closing Closing Balance is called Net profit Closing balance is called Deficit or
Balance or Net Loss Surplus
4 Accounting Closing balance is transferred to Closing balance is either transferred
Treatment capital account to capital fund or it is accumulated
under the separate accounting head

5.8 Treatment of some special items

It is to be remembered that capital items and items for specific purposes are non-
recurring. These items will appear in the Balance sheet. Items of recurring nature will be
recorded in Income and Expenditure A/c. In absence of specific information an item can
appear either in Balance sheet or in Income and Expenditure A/c. Students, under these
circumstances, are advised to write an explanatory note for the accounting treatment given in
the solution. Followings are some important items of non trading concerns:
5.8.1 Subscriptions
This item is normally recurring and therefore, appears on income side of Income &
Expenditure A/c. This is a regular income of the organization which is utilized for meeting
day to day revenue expenses of the organization. Members‟ yearly subscriptions are revenue
receipts of non trading concerns. Subscriptions are not specific unless and until classified in
the problem.
5.8.2 Life Membership Fees
These fees are received in lump sum from the members only at once in their
membership life span/time. Hence the amount received under this head is non-recurring and
appears as an addition to the Capital fund.

5.8.3 Legacies
Legal representatives give gifts to the organisations as per the will of the deceased.
Such gifts are called as legacies. If there is no specific information in the problem, such
receipts are treated as capital Receipts. These are of a non-recurring nature and are recorded
in the balance sheet of the Non Trading Organisation.

5.8.4 Entrance fees

Entrance fees are received from the members of the organisation on their admission.
Entrance fees are thus non-recurring. Hence these receipts are recorded in the balance sheet.
Amount of the capital Fund is increased due to these receipts. It is a fact that capital fund is
increased due to these receipts. Every year entrance fees are collected from new members due
 97

to continuous change in membership. Hence such receipts are definitely non-recurring in

nature and will be added to the capital fund. This item will be recorded in Income and
Expenditure A/c as revenue receipt only when it is specified in the problem.

5.8.5 Donations
Non Trading Organisations collect donations from people for financing its activities
and can be classified as:
1. Special Donations
2. General Donations
Special Donations are non-recurring and hence they are recorded on the liabilities side
of the Balance Sheet. These are shown separately and are used only for the special purpose
for which they are given.
General Donations, not related to specific objective may be recurring or otherwise and
are recorded on the Income side of Income and Expenditure account. Such donations are
regular incomes of the organisations.

5.8.6 Government Grants

When specific instructions are given, Govt. Grants should be added to the special
Fund. Such Government grants should not be included in the capital Fund.
Government Grants, without specific instruction, should be considered as Revenue
Receipts and should be credited to Income and Expenditure A/c.

5.8.7 Special Fund

If there is a special fund created, like (a) Building fund for construction of a Building,
(b) Charity fund for giving charity,(c) Prize fund for giving prizes or Tournament fund for
conducting tournaments, all incomes and expenses pertaining to the special fund should not
be recorded in Income and Expenditure A/c. Incomes connected with the special fund should
be added to the special fund and expenses connected with the special fund should be
deducted from the special fund and the balance is shown on the liability side of the Balance
Sheet. If the Amount of the fund is less than the expenses, the balance of expenses not
covered in the special fund should be shown on the debit side of Income and Expenditure
A/c. However, the above principles are not applicable to General Fund. Income from General
Fund Investment is taken to Income and Expenditure A/c.

5.8.8 Sale of old news papers and periodicals

Amount received by selling old news papers and periodicals should be entered on the
credit side of Income and Expenditure A/c as it is a regular income.
Newspapers and periodicals purchased or subscriptions to news papers and
periodicals should be treated as revenue expenditure and entered on the debit side of income
and Expenditure Account.
5.8.9 Specific Collections and Expenses
Specific collections such as proceeds from concerts, drama and lectures are revenue
income items. These will appear on the credit side of Income and Expenditure A/c. Expenses
connected with such concerts, drama and lectures are revenue expenses. These will appear on
the debit side of the Income and Expenditure A/c.
5.8.10 Sale of old sports materials
Under this heading sale of old Bats, old Balls, old nets are included. It is a regular
transaction of any club. These are of recurring nature, and as such these transactions are
entered on the credit side of the I/E A/c.
5.8.11 Purchase of Sports Materials
 98

Purchase of sports materials should be treated as a capital expenditure and entered on

the assets side of the Balance Sheet. Depreciation on sports material should be treated as a
revenue expenditure and entered on the debit side of the Income & Expenditure A/c.

5.8.12 Sale of Fixed Assets and Investments:

Receipts due to sale of fixed assets or investments is a capital receipts hence it should
not be recorded in the I/E A/c. Book value of fixed assets or investments sold should be
deducted from the total value of the fixed assets or investments on the assets side of the
Balance Sheet.
Profit or loss on sale of fixed assets or investments, if any, is entered in the I/E A/c.
Profit is entered on the credit side and loss is recorded on the debit side of the I/E A/c.
Comparison of selling price and Book value of the Fixed Assets or Investments results in to
profit or loss. If book value is less than selling price, the excess of sales price over the book
value is the profit and the excess of book value over the sales price of the fixed assets or
investments is a loss. If book value of the asset is not given, students should assume that the
book value is equal to selling price & in such a case, there will be neither profit nor loss on
sale of assets.

5.8.13 Payment of honorarium:

Honorarium is the remuneration given to special persons e.g. visiting faculties of
hospitals, President, Secretary, Treasurer etc. working for the institution on honorary basis
i.e. without expecting any salary, fee or remuneration from the institute. But the institute
honors them by giving some remuneration/gift as a guard of honor. So this is yearly revenue
expenditure & hence it will be entered on the debit side of Income & Expenditure A/c.

5.8.14 Calculation of actual Amount of Income under any accounting head –

(say Subscription)
Formula: Rs.
Subscription Received during the year xxx
(Figure from R and P A/c)
a) Less : last year's outstanding subscriptions xx
included in subscription received during the year xx
b) Less : Subscription of the next year received in advance xx
and included in the subscription received during the year xx
c) Add: Current year's subscription received in advance xx
in previous year and not included in the subscription received during the
year xx
d) Add: Current year's outstanding subscription xx
Amount of subscriptions to be recorded on credit side of I/E A/c xx

Alternative Method
Open concerned Income Account as under:
Dr. Subscription A/c Cr.
Particulars Amount. Particulars Amount
To Last year O/s (a) xx By Last year recd. In adv. (c) xx
[will appear in Opening Balance Sheet as asset] (will appear in Opening Balance Sheet)

To Next year's received in xx By Current year O/s (d) xx

Advance (b) (will appear as an asset in Closing Balance
Sheet)
(will appear as Liability in Closing Balance
Sheet)
 99

By Cash/ Bank (Amount received

To Income and Expenditure A/c xx during the year) xx
xx xx

Dr. R & P A/c Cr. Dr. I & E A/c Cr.

Rs. Rs.
To Subscription xx By Subscription xx

The above disclosure shows relationship between Receipts and Payments & Incomes and
Expenditure, and difference in the item of income & receipt.
Students will recollect that these add or less adjustments in the formula are the effects
of adjusting Journal entries given below:
At the end of the year At the beginning of the next year
b) Subscription A/c Dr. c) Subscriptions received Dr.
To Subscriptions received in advance To Subscription A/C
d) O/s Subscription (closing)A/c Dr. a) Subscription A/c Dr.
To Subscription A/c To O/s Subscription(opening )A/c

Adjustment Entries passed at the end of the year will be reversed at the beginning of the next
year.

5.8.15 Calculation of actual Amount of Expenses under any accounting head :

1. Without adjustment (Say Tel. Expenses Rs.2, 500)

Item without adjustment does not require any calculation but with the help of such
item, relationship between the particular item and R & P and I &E A/c can be easily
explained as follows:
Dr. Telephone Expenses A/c Cr.
Amount. Amount.
Rs. Rs.
To Cash & Bank (R & P A/c) 2,500 By Income & Expenditure A/c 2,500
2,500 2,500

Dr. Receipts & payments A/c Cr.

By Telephone Expenses 2,500

Dr. Income & Expenditure A/c Cr.

To Telephone Expenses 2,500

2. With adjustments (say salary)

Formula : Rs.
Salary paid during the year xx
(This figure is from R and P A/c)
a) Less : Last year's outstanding salary
included in the salary paid during the current year xx
b) Less: Salaries of the next year paid in advance in the current year
and included in the salary paid in the current year xx
 100

c) Add : Current year's salaries, paid in advance in the previous year xx

d) Add : Current year's outstanding salaries xx
Amount of salaries to be shown on the debit side of I/E A/c xx

Alternative Method
Dr. Salaries A/c Cr.
Amount Amount
To last year paid in advance
(c) (will appear in Opening Balance Sheet
as asset) xx By Last year O/s (a) xx
(will appear in Opening
Balance Sheet as liability)
To current year O/s.
(d) xx By Next year paid in
(will appear in Cl.B/S Advance (b) xx
as liability) (will appear in Cl. B/S. as asset)
To Cash/Bank (R and P A/c) xx By Income & Expenditure A/c xx
xx xx

Dr. R and P A/c Cr. Dr. I and E A/c Cr.

Particulars Amount Particulars Amount
By Salaries A/c xx To Salaries xx
A/c

Recollect the adjustment Journal entries to be passed

At the end of the year At the beginning of the ext year

b) Salaries paid in adv. c) Salaries A/c Dr.
(for next year) A/c Dr. To salaries paid in Adv. A/c
To Salaries A/c
d) Salaries A/c Dr. a) O/s Salaries A/c Dr.
To O/s Salaries A/c (last year)
(Current year) To Salaries A/c

5.8.16 Calculation of Stationery used

All items of stationery purchased during the accounting year are recorded on credit
side of R/P A/c and items of stationary used during the year are debited side of I/E A/c.
These figures differ due to unused stationery items at the end of the year. Opening stock of
stationery is purchased in the earlierand remain unused. Hence it is added in the Amount of
stationery purchased during the year. Closing stock of stationery is purchased during the
current year but remains unused at the end of the year. This item is deducted from the
resulting figure.

Actual stationery used can be calculated as under.

Rs.
Amount paid for stationery during the year xx
Add: Opening stock of the stationery at the beginning for the xx
current year
 101

Add: Advance payment made for stationery at the beginning of the current
year
previous year carried forward xx
Add: Creditors for stationery at the end of the xx
current year
Less Creditors for stationery at the end previous xx
year
Less: Advance payment for stationery at the end of the current xx
year
Less: Stock of stationery at the end of the current xx
year
Amount of stationery actually used to be shown on debit side of I/E A/c xx

Alternative Method:
Stationery A/c
Amount. Amount.
By Creditors for stationery A/c
To Opening Stock xx (of last year closing) xx
To Last Year Advance payment
for stationery i.e.-Op. Bal xx
To Creditors for stationery A/c xx By Advance paid at the end of
current year the current year xx
To R and P A/c xx By Closing stock xx
By I/E A/c (Actually used) xx
xx xx

Dr. Receipts & Payments A/c

Amount Amount
By Stationery A/c (cash paid) xx

Income & Expenditure A/c

Amount Amount.
To Stationery (Actually used) xx

5.8.17 Proceeds of concerts and lectures

A concert is a programme of musical entertainment. Concerts and lectures are
arranged to enrich the members & public at large. As these are routine yearly activities the
Amount collected from sale of tickets is a revenue receipt which should be shown on income
side of income & expenditure account. Expenses on these activities are revenue expenses
which should be shown on expenditure side of income & expenditure account.

6. ILLUSTRATIONS

Illustration 1:
From the following details, ascertain the Amount of subscription to be credited to
Income and Expenditure for the year 2007:
Subscription received in 2007 Rs.24, 000 which includes Rs.2, 000 for 2006 and Rs.
4, 000 for 2008 subscription due but not received at the end of the year 2007 were Rs. 10,000
subscriptions received in 2006 in advance for 2007 were Rs.6,000
 102

Solution:
Calculation of Subscriptions for the year 2007
Rs.
Subscription received during 2007 24,000
Less: Last year's subscription outstanding included in the subscriptions 2,000
received during the year 2007 22,000
Add: Subscription of the year 2008 received in advance during the year 2007 4,000
18,000
Add: Subscriptions of the year 2007 received in advance in the year 2006 6,000
24,000
Add: Outstanding subscriptions of the year 2007 10,000
Subscriptions to be shown on Credit Side of Income & Expenditure A/c 34,000

Illustration 2:
Find out the Amount of salaries to be debited to the income and Expenditure A/c of
2007 from the details
Rs.
Payment made for salaries during 2007 24,000
Outstanding salaries as on 31-12-2006 1,000
Outstanding salaries as on 31-12-2007 1,600
Prepaid salary as on 31-12-2006 600
Prepaid salary as on 31-12-2007 800
Solutions:
Rs.
Salaries paid during 2007 24,000
Less : Last year's outstanding salaries included in salary -1,000
23,000
Less : Prepaid salary as on 31-12-2007 - 800
22,200
Add: Prepaid salaries on 31-12-2006 + 600
22,800
Add: Outstanding salary as on 31-12-2007 +1,600
Amount of salary to be debited to Income & Expenditure A/c 24,400

Illustration 3:
From the following information, calculate the Amount of stationery to be charged to
income and Expenditure A/c for the year 2007
Rs.
Stock of stationery as on 1-1-2007 800
Stock of stationery as on 31-12-2007 400
Paid for stationery during 2007 4,000
Creditors for Stationery as on 1-1-2007 240
Creators for stationery as on 31-12-2007 600
 103

Advance payment for stationery as on 31-12-2006 carried forward 200

Advance payment for stationery as on 31-12-2007 300
Solution:
Rs.
Stock of stationery at 1-1-2007 800
Add : Paid for stationery during 2007 4,000
Add: Advance payment for stationery in 2006 200
Add: Creditors for stationery on 31-12-2007 600
5,600
Less : Creditors for stationery on 1-1-2007 240
Less : Advance payment for stationery as on 31-12-2007 300
Less : Stock of stationery as on 31-12-2007 400 940
Amount to be changed to Income & Expenditure A/c 4,660

Illustration 4:
Following information is a respect of certain items of a sports club. You are required
to show them in the Income and Expenditure A/c and Balance Sheet.
Rs.
Sports Fund on 1-1-2007 20,000
Sports Fund Investments 20,000
Interest on Sports Fund Investment 2,000
Donation's for sports funds 8,000
Sports prizes awarded 6,000
Expenses on Sports events 2,000
General Fund 30,000
General Fund Investments 30,000
Interest on General Fund Investments 3,000

Solution: Income & Expenditure A/c for the year ended 31-12-2007
Expenditure Amount. Income Amount.
By Interest on General Fund
Investments 3,000
Balance Sheet as on 31-12-2007
Liabilities Amount Assets Amount
Sports Fund
Sports Fund 20,000 Investments 20,000 22,000
Add- Interest 2,000
General Fund
Add: Interest on Sports Investments 30,000
Fund Investments 2,000
Add: Donations 8,000
Sports 30,000
Less: Prizes awarded 6,000
24,000
Less: Expenses on
Sports events 2,000 22,000
 104

General
Fund 30,000
52,000 52,000

7. PROCEDURE OF PREPARATION OF INCOME AND EXPENDITURE A/C AND

BALANCE SHEET FROM THE GIVEN RECEIPTS AND PAYMENTS A/C

Step A: Consider the Receipt side of Receipts and Payment A/c and do as given below:
i) Take opening Cash/Bank balance on asset side of the Opening Balance Sheet.
ii) Show revenue receipts of the current year on income side of Income and Expenditure
A/c
iii) Show capital receipts of the current year on liability side of the closing Balance Sheet.
iv) In case there is sale of asset, deduct the book value from the respective asset in the
closing Balance Sheet. Any profit or loss on sale of asset should be shown in
Income and Expenditure A/c.
v) Record the receipts of previous year as “outstanding……….” On asset side of the
opening Balance Sheet.
vi) Record the receipts relating to next year on liabilityside of the closing Balance Sheet
as “Income Received in Advance.

Step B: Consider the payment side and do as given below

i) Take any opening Bank overdraft on liability side of the opening Balance Sheet.
ii) Write revenue payments for the current year on expenditure side of the Income and
Expenditure A/c.
iii) Record the capital payments viz. Purchase of assets, on the asset side of the closing
Balance Sheet as an addition to the respective assets.
iv) Show payments of the previous year as “outstanding liabilities” in the opening
Balance Sheet.
v) Any payments relating to the next year should be shown as an asset in the closing
Balance Sheet.
vi) Consider the closing Cash/Bank balance and write it on asset side of the closing
Balance Sheet.

Step C: Find out a difference in the opening Balance Sheet which is considered as “Capital
Fund”. It should be written on liability side of the closing Balance Sheet.

Step D: Balance the Income and Expenditure A/c and find out the deficit or surplus should be
added to capital fund in the closing Balance Sheet and deficit should be deducted from
Capital fund in the closing Balance Sheet.

Step E: Take the Totals of the closing Balance Sheet.

7.1Illustrations

Illustrations 5: (Treatment of donation and entrance fees)

From the following receipts and payments Account of Western Gymkhana for the
year ended 31st December, 2007 and other information, prepare Income and Expenditure
Account for the year ended on and a Balance Sheet as at that date.
Receipts Amount Payments Amount
To Balance B/F 1,040 By Salaries 1,300
 105

To Subscriptions for: By Entertainment Expenses 645

2006 85 By Electric charges 234
2007 4,000 By General Expenses 350
2008 103 By rates and Taxes 120
To Donations 1,200 By Investments 3,000
To Entrainment Receipts 876 By Stationery and Printing 241
To Interest 81 By Expenses of 2006 600
To Entrance Fees 1,000 By 5 % Fixed Deposit 1,000
By Balance C/F 895
8,385 8385
1] The Gymkhana has 450 members paying an annual subscription of Rs. 10/-each, Rs.20/- is
still in arrears towards subscription for the year 2006.
2] Carry forward Rs.20/- for Rates paid in advance.
3] Provide Rs.200/- for salaries outstanding.
4]The Gymkhana owns Land and Building standing in the books at Rs.15,000/- and Furniture
standing at Rs. 1,150 on which depreciation @ 5 % and 15% respectively is to be written
off.
5] Interest for 3 month at 12% p.a. is accrued on investments.
6] The capital fund as on 1st January 2006 was Rs.16, 695/-.
7] 50 % of the entrance Fees are to be capitalized.

Solution: Western Gymkhana

Income & Expenditure A/c for the year ended 31st Dec. 2007
Expenditure Amount. Income Amount.
To Salaries 1,300 By Subscription 4,000
+O/S 200 1,500 Add- O/S for 2007 500 4,500
To Rent and Taxes 120 By Interest on
.-Prepaid 20 100 Investment 81
To Entertainment +O/S for 3 Months 90 171
Expenditure 645 By Entrance fees (50%) 500
To Electric charges 234 By Entertainment Receipts 876
To General Expenses 350
To printing & Stationery 241
To Depreciation:
Land and Building 750
Furniture 173 923
To Excess of Income
over Expenditure 2,054 ____
6,047 6,047

Balance Sheet as on 31st Dec 2007

Liabilities Amount. Assets Amount.
Capital Fund 16,695 Land and Building 15,000
.+ Entrance Fees 500 . - Depreciation 750 14,250
.+ Donations 1,200 Furniture 1,150
.+ Excess Of Income . - Deprecation 173 977
over Expenditure 2,054 20,449 Investments 3,000
 106

Subscriptions received 5% Fixed Deposit 1,000

in advance 103 Outstanding Interest
On Investment 90
Prepaid Rates 20
Outstanding salaries 200 Outstanding Subscription :
for 2006 20
for 2007 500 520
Cash 895
20,752 20,752

Illustration 6: (Donations and legacies)

From the following Receipts and Payments Account of a Charitable Institution, and
other additional information supplied to you, prepare an Income and Expenditure Account for
the year ended 31.12.2007
Receipts & Payments of a Charitable Institution
for the year ended 31.12.2007
Receipts Amount. Payments Amount.
2007 To Balance b/d: 2007 By Charities 8,500
Jan.1 Cash in Hand 150 Dec.31 By Salaries 2,500
Cash in Deposit A/c 2,500 By Rent and Taxes 1,300
Cash in Current A/c 1,200 By Printing Stationery 400
Dec.31 To Donations 4,000 By Postage 150
To Subscription 2,000 By Advertisements 350
By Purchase of
To Endowment furniture 850
Fund receipts 16,000 By Investments 16,000
To Legacies 8,000 By Advance against
To Interest on contract for
extension of
Investments 8,000 premises 2,500
To Int. on Deposits 200 By Balance c/d
To sale of old Cash in hand 1,050
Furniture 50 Cash in Deposit A/c 6,000
_____ Cash in Current A/c 2,500
42,100 42,100
1. Treat 50% of donations and legacies received as income
2. Outstanding rent for the year Rs.300
3. Salaries unpaid for the year Amounted to Rs.400
4. Interest on investment due but not received Rs.400
Solution:
Income & Expenditure A/c for the year ended 31.12.2007
Expenditure Amount. Income Amount.
To Charities 8,500 By Donations 2,000
To Salaries 2,500 By Subscriptions 2,000
.+Outstanding 500 3,000 By Legacies 4,000
To Rent and Taxes 1,300 By Interest on
.+Outstanding 300 1,600 Investments 8,000
 107

To Printing & Stationery 400 .+Due but not recd 500 8,500
To Postage 150 By Interest on Deposit 200
To Advertisements 350
To Excess of Income
over Expenses 2,700 ______
16,700 16,700

Illustration 7: (Special subscription)

The following is the Receipts and Payment Account of Pensioners‟ Association for
the year ending 31st March 2008:
Receipts & Payments for the year ended 31.3.2008
Receipts Amount. Payments Amount.
By Travelling
To Balance : 1.4.2007 1,500 Expenses 2,000
To Entrance Fees 375 By Stationery 1,500
By Salaries 3,700
By Wages 8,000
By Repairs 1,250
To Subscriptions:
2005-06 200 By Interest 470
2006-07 15,000 By balance 31.03.08 4,105
2007-08 700
To Special subscription for
Chairman's party 3,250
21,025 21,025

Additional Information:-
1] Stationery expenses included Rs.300 for the year 2006-2007.
2] Similarly salary for the month of March 2008 Rs.700 is not yet paid
3] Subscription unpaid for the current year is Rs.300
4] Special subscription or the Chairman‟s party Rs. 100 is yet outstanding.
From the above information you are requested to make out an Income and Expenditure
Account of the Association for the year ending 31.03.2008

Solution:
Income & Expenditure A/c of Pensioners’ Association
for the year ended 31.3.2008
Expenditure Amount. Income Amount.
To Travelling Expenses 2000 By Entrance fees 375
To Stationery 1,500 By Subscription 700
-for 06-07 300 1200 .+Outstanding 300 1,000
To salaries 3,700 By Special
.+Outstanding 700 4,400 Subscription 3,250
To Wages 8,000 .+Outstanding 100 3,350
To Repairs 1,250 By Excess of Expenditure
To Interest 470 over Income 12,595
17,320 17,320
 108

Illustration 8: (Donations, life membership fees)

Receipts & Payments A/c for the year ended 31.12.2007
Receipts Amount. Payments Amount.
To Subscription 1,100 By Salaries 1,000
To Bar Receipts 600 By Printing and Stationery 100
To Interest on Securities 150 By Telephone 150
To cricket Fees 250 By Gardening 120
To Tennis Fees 300 By Cricket 200
To Billiard Fees 250 By Insurance 100
To Life Members' Fees 2,000 By Tennis 300
To Donations 24,800 By Billiards 400
To Entrance Fees 3,000 By Bar expenses 1,200
By Investments 5,000
To Tournament Fund 1,000 By Land and Buildings 20,000
By Tournament Expenses 1,000
By Furniture 1,200
By Sports
Material 1,000
By Current A/c Balance 1,000
By Cash in
hand 680
33,450 33,450
Additional information:
i) Subscriptions outstanding for the year Rs. 550
ii) Subscriptions of Rs. 100 were received in advance
iii) Salaries unpaid for 2007 Amounted to Rs.200
iv) Insurance prepaid Rs.50
v) Half of the entrance fees received was to be capitalised
vi) Donations and life Member‟s Fees were to be capitalised
vii) Interest due but not received Rs.100
viii) Sports materials were valued as Rs. 800
ix) Depreciate furniture by 5 % and land and building by 2.1/2%
From the above information, prepare an Income and Expenditure Account for the year ended
31.12.2007
Solution:
Income & Expenditure A/c for the year ended 31.12.2007
Expenditure Amount. Income Amount.
To Salaries 1,000 By Subscription 1,100
Add- Outstanding 200 1,200 .+Outstanding 550 1,650
To Printing & Stationery 100
To Telephone 150 .-Recd in Advance 100 1,550
To Gardening 120 By Int.on Securities 150
To Cricket 200 .+Due but not recd 100 250
To insurance 100 By Cricket fees 250
 109

- Prepaid 50 50 By Tennis fees 300

To Tennis 300 By Billiard fees 250
To Billiards 400 By Entrance fees 3,000
To Bar Expenses 1,200 -Capitalized 1,500 1,500
To Dep. on Sports Materials 200 By Excess of Expenditure
To Dep. on Furniture 60 over Income 380
To Dep. On Building 500 _____
4,480 4,480

Illustration 9: (Adjustment of subscriptions, sale of furniture)

From the following information prepare Income and Expenditure Account for the year
ended 31st March, 2008 and a Balance Sheet as on that date:

Receipts & Payments A/c for the year ended 31.03.2008

Receipts Amount. Payments Amount.
To cash in hand (1.4.2007) 1,750 By Bank overdraft 2,500
To Subscription By Salaries 5,300
2006-07 150 By Furniture 2,000
2007-08 14,100 By Investments in Securities 4,000
2008-09 75 14,325 By Printing and Stationery 800
To Proceeds from Drama 2,500 By Cost of staging drama 1,500
To Entrance Fees 800 By Sundry Expenses 1,300
To Interest on Securities 500 By Cash at Bank 2,500
To Sale of old furniture 200 By Cash in Hand 175
20,075 20,075

1. The society has 1,500 members, each paying an annual subscription of Rs.12
2. Subscriptions of Rs.100 pertaining to the year 2006-07are still in arrears
3. Value of stationery at hand on 31.3.2007 was Rs.200 and on 31.3.2008 was Rs.150
4. Entrance fees are to be treated as Capital receipts
5. Salary of Rs.700 for the current year is unpaid
6. Balance as on 31.3.07:-
Investments 4,500
Building 25,000
Furniture 200
7. Depreciste building by 2 ½ % and furniture by 5 %

Solution:
Balance Sheet as on 31st March 2007
Capital & Liabilities Amount. Assets & Properties Amount.
Bank overdraft 2,500 Cash in hand 1,750
Capital Fund 29,400 Outstanding Subscriptions 250
(Balancing Figure) Stock of stationery 200
Investments 4,500
Buildings 25,000
_____ Furniture __200
31,900 31,900
 110

Income & Expenditure A/c for the year ended 31.3.2008

Expenditure Amount. Income Amount.
To Salaries 5,300 By Subscription 14,100
.+Outstanding 700 6,000 +Outstanding 3,900 18,000
To Opening stock To Proceeds from drama 2,500
of stationery 200 By Interest on Securities 500
+ Purchases 800
1000
.-Closing stock 150 850
To cost of Staging drama 1,500
To Sundry Expenses 1,300
To Depreciation :
On Bldg 625
On Furniture 100 725
To Excess of Income
over Expenditure 10,625 ______
21,000 21,000

Balance Sheet as on 31st March 2008

Capital & Liabilities Amount. Assets & Properties Amount.
Subscription received Cash in hand 175
in advance 75 Cash at bank 2,500
Outstanding Salaries 700 Outstanding Subscription
Capital Fund 29,400 2006-07 100
.+Entrance fees 800 2007-08 3,900 4,000
.+Excess 10,625 40,825 Stock of Stationery 150
Investments 4,500
.+Addition 4,000 8,500
Furniture 200
.+Addition 2,000
2,200
.-Sales (same as 200
book value) 2,000
.-Dep 100 1,900
Buildings 25,000
_____ .-Dep 625 24,375
41,600 41,600

Illustration 10: (Sale of investment, purchases of furniture)

The following is the Receipts and Payments Account of the Dostana Club for the year
ended 31st December 2007.
 111

Receipts Amount Payments Amount.

To Bal.at Bank on 1.1.2007 1,020 By Salaries 4,160
To Entrance Fees 1,000 By Rents 1,860
To Subscriptions By Electricity 1,280
2006 250 By Postage and Stationery 330
2007 3,050
2008 350 3,650 By Insurance Premium 180
By General Expenses 460
To Sale of Investments 7,500 By Payments on account

To Loan taken from of new Furniture 4,500

Mr.Varma on 1st July By Balance at Bank 2,400
2007 at 15 % p.a.
interest 2,000

15,170 15,170
.
The following information is also available:
31st Dec 2006 31st Dec 2007
1. Rent Due 180 360
2. Electricity due 640 200
3. Insurance paid in advance 50 70
4. Subscriptions due 250 400
2. The Cost of Investments which are sold out was Rs.5, 000/- only. The surplus is to be
treated as income.
3. Furniture was valued as Rs. 3,000/- on 31 December 2006. On 30th June 2007 the Club
purchased additional new furniture at a cost of Rs. 5,200/- Depreciation at the rate of 15
% is to be provided on all furniture.
4. The Entrance Fees are not to be capitalized.
You are required to prepare an I & E A/c for the year ended 31.12.2007
Solution:
Income & Expenditure A/c of Dostana Club
for the year ended 31.12.2007
Expenditure Amount. Income Amount.
To Salaries 4,160 By Entrance fees 1,000
To Rent 1,860 By Subscription 3,050
.-O/S for 2006 180 +O/S Subscription 400 3,450
1,680 By Profit on sale of
.+O/S for 2007 360 2,040 investment 2,500
To Electricity 1,280 By Excess of Expenditure
.-O/S for 2006 640 over Income 2,030
640
.+O/S for 2007 200 840
To Postage & Stationery 330
 112

To Insurance 180
.+Last Year's 50
230
.-Prepaid this year 70 160
To General Expenses 460
To Interest on Loan 150
To Dep. on Furniture __840 ____
8,980 8,980
Working Notes:
1. Interest on Loan (15% of 2,000 for six months) 150
2. Depreciation on furniture: 15% on 3,000 for one year 450
15% on 5,200 for six months 390
840
Illustration 11: (Conveyance for private Purpose)
Dr. Narendra commenced practice in the month of January 2007.He prepared the
following Receipts and Payments Account for the year ended 31.12.07
Receipts & Payments A/c of Dr. Narendra for the year ended 31.12.07
Receipts Amount. Payments Amount.
To Cash 10,000 By Furniture 1,500
To Visits 7,000 By Equipment 2,500
To Sundry Receipts 400 By Drugs 2,000
By Salaries 1,000
By Rent 500
By Conveyance 700
By Stationery 100
By Lighting 125
By Periodicals 100
By Drawings 4,375
_____ By Balance c/d 4,500
17,400 17,400
i) Rs.200 were to be received on account of visits
ii) Unpaid salaries Rs.200
iii) 60% of conveyance is for private purposes
iv) Value of drugs on hand was estimated at Rs.1,000
v) Depreciate furniture and equipment by 10%
Prepare Income and Expenditure Account and Balance Sheet
Solution
Dr. Narendra's
Income & Expenditure A/c for the year ended 31.12.07
Expenditure Amount. Income Amount.
To Drugs 2,000 By Visits 7,000
.-Stock 1,000 1,000 +Outstanding 200 7,200
To Salaries 1,000 By Sundry Receipts 400
.+Unpaid 200 1,200
To Rent 500
To Conveyance 60% 700
.-Drugs 420 280
 113

To Stationery 100
To Lighting 125
To Periodicals 100
To Depreciation:
On Furniture 150
On Equipment 250 400
To Excess of Income
over Expenditure 3,895 ____
7,600 7,600

Dr. Narendra's Balance sheet as on 31.12.07

Capital & Liabilities Amount. Assets & Properties Amount.
Capital Fund 10,000 Furniture 1,500
.+Surplus 3,895 .-Dep 150 1,350
13,895 Equipment 2,500
.-Drawings 4,795 9,100 .-Dep 250 2,250
Unpaid
Salaries 200 Stock of rugs 1,000
Receipts due from visits 200
Cash balance 4,500
9,300 9,300

Illustration 12: (Donations, entrance fees)

From the following information, prepare Income and Expenditure Account for the
year ended 31.12.2007 and a Balance Sheet as on that date.
Receipts Amount Payments Amount
To Balance b/d 3,500 By Salaries
To Donations 1,500 2006 250
To Subscriptions: 2007 2,250 2,500
2006 250 By Rent 4,300
2007 3,500 By Postage 300
2008 750 4,500 By Printing and Stationery 3,000
To Entrance fees 1,000 By Balance c/d 2,400
To Interest on investments 2,000
12,500 12,500
i) Salaries unpaid Rs.250, Printing unpaid includes Rs.600
ii) Printing paid includes Rs.500 pertaining to the previous year
iii) Subscriptions outstanding Rs.650
iv) Balance on 1.1.08:
(i) Furnitue-Rs.6,000; (ii) Investments-Rs.50,000;(iii) Buildings-Rs.20,000
Solution: Income & Expenditure A/c for the year ended 31.12.2007
Expenditure Amount. Income Amount.
To Salaries 2,250 By Subscription 3,500
+Outstanding 250 2,500 +Outstanding 650 4,150
To Rent 4,300 By Interest on investments 2,000
To Postage 300 By Donations 1,500
To Printing & Stationery 3,000 By Entrance fees 1,000
 114

.-Previous year's 500 By Excess of Expenditure

2,500 over Income 1,550
.+Outstanding 600 3,100 _____
10,200 10,200

Balance Sheet as on 31.12.07

Capital & Liabilities Amount. Assets & Properties Amount.
Outstanding Exp : Cash Balance 2,400
Salaries 250 Outstanding subscription 650
Printing 600 Furniture 6,000
Subscriptions recd Investments 50,000
in advance 750 Building 20,000
Capital Fund 79,000
.-Deficit 1,550 77,450 _____
79,050 79,050
Working Note
Capital Fund as on 31.12.06
Assets: Furniture 6,000
Investments 50,000
Building 20,000
Outstanding subscriptions 250
Cash Balance 3,500
79,750
Less: Liabilities
Unpaid printing 500
Unpaid salaries 250 750
Capital Fund = 79,000

Illustration 13: (Stock of stationery, subscription)

The following is the Receipts and Payments Account of the Smart Club in respect of
the year ending 31st December 2007
Receipts Amount. Payments Amount.
To Opening Balance 2,050 By Salaries 4,160
To Subscriptions: By Printing & Stationery 800
2006
80 By Rates and Taxes 1,200
2007
4,220 By Telephone 200
2008
160 4,460 By Purchase of 4 % Govt.
To Sports Meeting surplus 3,100 securities at per on 6.12.07 2,500
To Interest on Investments 2,000 By Sundry Expenses. 1,850
_____ By Balance At Close 900
11,610 11,610
In addition to the information contained in the above account, the following additional facts
are ascertained:
1. There are 450 members each paying an annual subscription of Rs.10, Rs.90 being in
arrears for 2006 at the beginning of 2007.
 115

2. Stock of stationary at 31st Dec 2006 was Rs 100 and at 31st Dec 2007 Rs 180.
3. At 31st December 2007, the rates were prepaid up to the following 31st March the yearly
charge being Rs 1200. A quarter charges for telephone Rs 70 is outstanding. Sundry expenses
outstanding on 31st December 2006 were Rs.140.
4. On 31st December 2006, the Building stood in the books at Rs.20,000 and it is required to
write off depreciation at 5 % per annum. Investments at 31st December were Rs.40, 000/-
You are required to prepare an Income and Expenditure Account for the year ended 31st
December 2007 and Balance Sheet as at that date.
Solution:
Income & Expenditure A/c of Smart Club
for the year ended 31.12.2007
Expenditure Amount Income Amount
To Salaries 4,160 By Subscription 4,220
To Stationery & Printing 800 .+Outstanding +280 4,500
.+Stock on 31.12.06 100 By Interest on
900 Investments 2,000
.-Stock on 31.12.07 180 720
To Rates and Taxes 1200
.+Prepaid on 31.12.06 300 By Sports meeting surplus 3,100
1500
.-Prepaid on 31.12.07 300 1,200
To Telephone 200
.+Outstanding 70 270
To Sundry Exp. 1850
-Outstanding on 31.12.06
140 1,710
To Depreciation on Buildings 1,000
To Excess of Income
over Expenditure 540
9,600 9,600

Balance sheet of Smart Club as on 31.12.07

Liabilities Amount. Assets Amount.
Capital Fund 62,400 Buildings 20,000
.+Excess of Income .-Depreciation 1,000 19,000
over Expenditure 540 62,940 Investments 40,000
Subscriptions received .+Addition 2,500 42,500
in advance 160 Cash in hand 900
Outstanding Expenses 70 Outstanding Subscription:
2006 10
2007 280 290
Prepaid rates and taxes 300
Stock of printing
_____ and Stationery __180
63,170 63,170
Working Notes :
Capital Fund as on 31.12.2006: Rs.
 116

Assets: Building 20,000

Outstanding subscriptions 90
Cash Balance 2,050
Investments 40,000
Stock of Stationery 100
Prepaid rates 300 62540
Less: Sundry Exp. due 140 = 62,400

Illustration 14: (Donations for prize)

From the following information relating to Thane Cricket Association, prepare the
Income and Expenditure Account for the year ended 31st March 2008 and the Balance Sheet
as at that date. The following is the abstract from the cash book of the year
Cash-Book
Particulars Amount. Particulars Amount.
To Members' Subscriptions 10,000 By Tournament Expenses 1,800
To Members' Admission Fees 300 By Maintenance charges
To Miscellaneous Receipts 400 of ground 1,500
To Hire Of Ground 1,000 By Rates and Insurance 600
To Subscription fee By Telephone 150
for Tournaments 3,000 By Printing and Stationery 300
To Cash drawn from Bank 6,000 By General charges 500
To Donations for By Honorarium to Secretary 1,300
instituting a prize 10,000 By Fixed Deposit in Bank 6,000
By Investments 9,550
By Sports equipment 2,000
_____ By Payment into Bank 7,000
30,700 30,700

Assets on 1st April 2007 were: Rs.

Sports and Equipment 3,000
Cash at Bank 6,000
Prepaid Insurance 3,000
Subscription due to the Association 6,000
Liabilities on 1st April 2007 were:
Printing and Stationery 100
Honorarium to Secretary 100
Donation of Rs. 10,000 should be kept in a separate account. Subscription received
for the year 2008-2009 are Rs.1, 000/- while Subscriptions outstanding on 31stMarch 2008
are Rs 400
Investments are of the face value of Rs.10, 000/-and were purchased on 1st October
2007. Interest thereon at 12 % per annum has accrued due. Write off 50 % of Sports
Equipment, prepaid Insurance Amounts to Rs.250/- and the Secretary is to be given a bonus
of Rs.500/-.
 117

Solution: Thane Cricket Association

Income & Expenditure A/c for the year ended 31.3.2008
Expenditure Amount Income Amount
To Telephone 150 By Subscription 10,000
To Maintenance charges of ground- 1,500 Add- O/S sub.(Clo.) 400
10,400
Less- Hire charges received -1,000 500 Less- O/S sub.on1.4.07 - 600
To Rates and Insurance- 600 9,800
Less-Prepaid - 250 Less- Sub. Recd. in adv. 1,000 8,800
350 By Admission fees 300
Add- Op.Prepaid on1.4.07 + 200 550 By Misc. Receipts 400
To Printing & Stationery 300 By Subscriptions for
Less- O/S on1.4.07 -100 200 Tournaments 3,000
To General charges 500 Less- Tournament Exp. 1,800 1200
Less- O/S on 1.4.07 -100
1200 By Interest on Investments 600
Add- O/S bonus + 500 1,700
To Depreciation on Sports Equipment 2,500
To Excess of Income Over Expenditure 5,200
11,300 11,300

Balance sheet as on 31.3.08

Liabilities Amount Assets Amount.
Capital Fund 9,600 Sports & Equipments 3,000
.+Excess of Income .+Addition 2,000
over expenditure 5,200 14,800 5,000 2,500
Subscription in .-Depreciation 2,500 9,550
Advance 1,000 Investments 600
Donations for Prizes 10,000 Int. accrued on Investments 250
O/S bonus to Secretary 500 Prepaid Insurance 400
Subscriptions Due 6,000
Fixed Deposit 7,000
Cash at Bank
26,300 26,300

Working Note :
1.Capital Fund as on 1.4.2007
Rs.
Assets : Cash at Bank 6,000
Sports Equipment 3,000
Prepaid Insurance 200
Sub. due 600 9,800
Less : Liabilities Rs.
Printing and Stationery 100
Honorarium 100 200
Capital Fund 9,600
 118

2. Interest on Investments 12% on 10,000 for six months Rs.600

3. Interest is charged on the face value of investments

Illustration 15: (Membership subscription, Donations and Sale of Asset)

From the following Receipts & Payments Account of a Credit Club and the subjoined
information, prepare Income and Expenditure Account for the year ended 31.12.07
Receipts Amount. Payments Amount
To Balance - Cash 352 By Crockery Purchases 265
Current A/c with Bank 2,738 By Maintenance 682
To Fixed Deposit at 6 % 3,000 By Match Expenses 1,324
To Membership By Salaries 1,100
Subscription 4,000 By Conveyance 82
(Including Rs.600 for 2006) By Upkeep of Lawn 424
To Entrance Fees 275 By Postage Stamps 105
To Donation 501 By Purchase of
To Interest on Cricket goods 972
Fixed Deposit 90 By Sundries 200
To Tournament Fund 2,000 By Investments 570
To Sale of Crockery 200 By Tournaments Exp 1,880
(Book Value Rs.120) By Balance:
Cash in Hand 220
Current A/c 2332
By Fixed Deposit 3000 5,552
13,156 13,156

Additional Information:
1. Monthly Salary is Rs. 100
2. The value of unused postage stamps is as follows:
Rs.
st
31 December 2006 75
31st December 2007 90
3. Stock of Cricket Equipments are as follows:
Rs.
st
31 December 2006 321
21st December 2007 280
4. Arrear of Membership Subscriptions:
Rs.
2006 660
2007 800

Solution:
Income & Expenditure A/c for the year ended 31.12.2007
Expenditure Amount. Income Amount.
To Maintenance 682 By Subscriptions 4,000
To Match Expenses 1,324 Less: Received for
To Salaries last year 600
1,000
Add: Outstanding 200 1,200 3,400
 119

To Conveyance 82 Add :Outstanding

To Upkeep of Lawn 424 at the end 800 4,200
By Int. on
To Postage purchased 105 Deposit 90
Add: Stock at Add :Outstanding 90 180
the beginning 75 By Profit on
180 Sale of Crockery 80
Less: Stock at the
end 90 90 By Excess of Expenditure
To Cricket
Expenditure 972 over Income 555
Add: Stock at
the beginning 321
1,293
Less : Stock at the
end 280 1,013
To Sundries 200
5015 5015

Balance sheet as on 31.12.06

Liabilities Amount Liabilities Amount
Capital Fund 7,266 Cash 352
(Balancing Figure) Bank 2,738
Fixed Deposit 3,000
Subscription 660
Postage Stamps 75
Cricket Equipment 321
Crockery 120
7,266 7,266

Balance sheet as on 31.12.07

Liabilities Amount. Assets Amount.
Entrance Fees 275 Cash in Hand 220
Salary Outstanding 100 Bank Account 2,332
Tournament Funds 2,000 Fixed Deposit 3,000
Less : Expenses 1,880 120 Crockery 265
Capital Fund 7,266 Investments 570
Add Donation 501 Postage Stamps 90
7,767 Stock of Cricket goods 280
Less : Excess of Subscription :
Expenditure over 2006 60
Income 555 7,212 2007 800 860
Interest on Fixed
Deposit Outstanding 90
7,707 7,707
 120

Illustration 16: (Sale of Investment, loan taken etc)

The following is the Receipts and Payments Account of Madras Junior Club for the
year ended 31st December 2007
Receipts & Payments A/c of Madras Junior Club,
for the year ending 31st December 2007
Receipts Amount Payments Amount
To Balance at Bank of 1.1.07 1,020By Salaries 4,160
To entrance Fees 1,000By Rent 1,860
To Subscriptions : By Electricity 1,280
2006 250 By Postage & Stationery 330
2007 3,050 By Insurance Premium 180
2008 350 3,650By General Expended 460
To Sale of By Part Payment on Account of
Investments 7,500new furniture 4,500
To Loan taken From
Krishnaswamy on 1.7.2007
at 10 % interest p.a. 2,000By Balance at Bank 2,400
_____
15,170 15,170

The following information is also available:

31.12.2006 31.12.2007
1. Rent due 180 360
Electricity 640 200
Subscriptions due 250 400
Insurance paid in advance 50 70
2. The cost of the investment sold was Rs.5, 000. The surplus is to be treated as income.
3. Furniture was valued at Rs. 3,000 on 31.12.2006. On 30th June 2007 the club
purchased additional new furniture at a cost of Rs. 5,200. Depreciation at the rate of
10% is to be provided on all furniture
4. The entrance fees are not be capitalised.
Prepare an Income and Expenditure A/c for the year ended 31st Dec. 2007.

Solution:
Income & Expenditure A/c of Madras Junior Club,
for the year ending 31.12.2007
Expenditure Amount. Income Amount.
To Salaries 4,160 By Entrance Fees 1,000
To Rent Paid By Subscriptions Recd 3,050
1,860
Less : Due at end Add : Due 400 3,450
of 2006 180 By Profit
1,680 Sale of Investment 2,500
Add : Due at the By Excess of
of 2007 360 2,040 over Income 1,700
 121

To Electricity 1,280
Less : Due at the
of 2007 640
640
Add : Due at the
end
of 2007 200 840
To Postage & Stationery 330
To Insurance
premium 180
Add : Amount
Prepaid
in 2006 50
230
Less : Amount
Prepaid
in 2007 70 160
To Interest on Loan 100
To Depreciation on
Furniture 560
To General
Expenses 460 ____
8,650 8,650

8. PROCEDURE OF PREPARATION OF INCOME AND EXPENDITURE A/C AND

CLOSING BALOANCE SHEET FROM OPENING BALANCE SHEET AND
RECEIPTS AND PAYMENT A/C

i. Fixed Assets as per opening Balance Sheet should be taken to closing Balance Sheet
ii. See the payment side of Receipts and Payment A/c and find out any purchase of
assets during the year. It should be added to the respective assets in the closing
Balance Sheet.
iii. See the Receipts side of Receipts and payment A/c and find out any sale of assets.
Book value of asset and sold should be deducted from the respective asset in the
closing Balance Sheet.
iv. Calculate profit or loss on sale of assets and transfer it to Income and Expenditure
A/c.
v. Compare the outstanding income from opening Balance sheet with the respective
items on receipt side of the Receipts and Payment A/c. If the Amount of outstanding
income appearing in the opening Balance Sheet is more than what is recorded on
receipts side; the difference suggests the income of the previous year still outstanding
which should be shown on asset side of the closing Balance Sheet.
vi. Revenue receipts for the current year should be shown as an income in Income and
Expenditure A/c
vii. Capital receipts should be shown on the liability side of the closing balance Sheet.
 122

viii. Outstanding expenses appearing in the opening Balance Sheet but not appearing on
payment side of Receipts and Payment A/c should be shown on liability side of the
closing Balance Sheet.
ix. Payment of outstanding expenses of the last year should be compared with the
respective item in the Balance Sheet. If the Payment is less than what is appearing in
the Balance Sheet, the difference should be shown in the closing Balance Sheet on
liability side
x. If there is any Bank overdraft appearing in the opening Balance Sheet it should be
compared with payment of Bank overdraft .If the payment of Bank overdraft is less
than what is appearing in the opening Balance Sheet , difference should be shown on
liability side of the closing Balance Sheet
xi. Revenue expenses of the current year should be shown on expenditure side of the
Income and Expenditure A/c.
xii. Any capital expenditure of the current year should be shown in the closing Balance
Sheet on asset side.
xiii. Take closing Cash/Bank balance on asset side of the closing Balance Sheet.
xiv. Consider the adjustments and
a) Add outstanding expenses of the current year to respective expenses in the
Income and Expenditure A/c and show it on liability side of the closing Balance
Sheet.
b) Add outstanding income of the current year to the respective item of income in
the Income and Expenditure A/c and show it on asset side of the closing Balance
Sheet.
c) Deduct prepaid expenses during the current year from the respective expenses
in Income and Expenditure A/c and show it on asset side of the closing Balance
sheet
d) Deduct income received in advance during the current year from the
respective incomes in Income and Expenditure A/c and Show it on liability side of
the closing Balance Sheet.
xv) Provide for depreciation on fixed assets as per the rate suggested
xvi) Balance Income and Expenditure A/c and find out deficit or surplus and transfer it to
capital fund in the closing Balance Sheet.
xvii) Total up the closing Balance Sheet

8.1 Illustrations:
Illustration 17: (Sale of old papers, O/S Expenses)
Utkarsha Library showed the following position on 1st January 2007:

Balance Sheet
Liabilities Amount. Assets Amount.
Outstanding
Liabilities : Furniture 2,500
For Expenses 350 Books A/c 20,000
Capital Fund 39,650 Investments 15,000
Cash at
Bank 2,500
_____ _____
 123

40,000 40,000

Below is given the Receipts and Payments A/c for the year ended 31st Dec 2007:
Amount. Amount.
To Balance b/d 2,500 By Electric Charges 360
To Entrance Fees 1,500 By Postage and Stationery 250
To Subscriptions 10,000 BY Telephone charges 250
To Sale Proceeds of old papers 75 By Books A/c 3,000
To Hire of Lecture Hall 1,000 By Outstanding Exp 350
To Interest on Investments 400 By Rent A/c 4,400
By Investment A/c 2,000
By Salaries A/c 3,300
_____ By Balance c/d 1,565
15,475 15,475

You are asked to prepare an income and Expenditure Account of the Library for the year
ended 31st December,2007 and a Balance Sheet as at that date after making the following
adjustments:-
a) Subscriptions include Rs.500/- received in advance
b) Provide for outstanding liabilities
Rent Rs. 400
Salaries. Rs. 300
c) Books A/c to be depreciated at 20 % p.a excluding any additions during the year.
d) 50% of the Entrance fees are to be capitalised.
Solution:
Income & Expenditure A/c of Uttkarsha Library
for the year ending 31.12.2007
Expenditure Amount. Income Amount.
To Electric charges 360 By Entrance fees 1,500

To Postage and Stationery 250 - Capitalized 750 750

To Telephone
charges 250 By Subscriptions 10,000
To Rent 4,400 - Subs. In Advance 500 9,500
.+Outstanding 400 By Sale proceeds of
To Salaries 3,300 4,800 old papers 75
.+Outstanding 300 By Hire of Lecture Hall 1,000
To Depreciation 3,600 By Interest on
4,000 Investments 400
By Excess of Expenditure
______ over Income 1,535
13,260 13,260
 124

Balance sheet as on 31.12.07

Liabilities Amount Assets Amount
Capital Fund
39,650 Furniture 2,500
+ Entrance fees 750 Books 20,000
Excess of .+ Additions 3,000
Expenditure over 23,000
Income 1,535 38,865 .- Depreciation 4,000 19,000
Outstanding Rent 400 Investments 15,000
Outstanding salaries 300 .+ Additions 2,000 17,000
Subscriptions
received Cash at Bank 1,565
in advance 500 _____
40,065 40,065

Illustration 18: (Purchase of investments)

The Balance Sheet of Janata Library was as follows:
Balance sheet as on 30.06.07
Capital & Liabilities Amount Assets & Properties Amount
Creditors for expenses 600 Cash at bank 5,000
Creditors for Purchases 4,000 Outstanding subscriptions 800
Capital Fund 78,550 Outstanding rent of hall 300
10 % Investments 8,000
Library Books 30,000
Furniture 4,000
Buildings 35,000
______ Prepaid Insurance ____50
83,150 83,150

Receipts & Payments A/c for the year ended 30.06.2008

Receipts Amount Payments Amount
To Bank Balance ???? By Creditors : for Purchases 4,000
To Entrance Fees 1,500 By Library Books 1,500
To Subscriptions 13,000 By Lighting 250
To Proceeds from lectures 4,250 By Taxes 800
To Rent of Lecture Halls 1,800 By Repairs to Building 700
To Interest on Investments 600 By Insurance 450
To Sale old Newspapers 25 By Creditors for expense 600
BY Printing and Stationery 650
By Sundry Expenses 200
By Postage 325
By Subscriptions to
Periodicals 1,200
By 10 % Investments 2,000
By Salaries 2,500
____ By Balance at Bank ????
???? ????
 125

1.
Insurance was prepaid to the extent of Rs. 70
2.
Subscription outstanding for the current year Amounted Rs.2,000
3.
Rs.200 were to be received on account of rent of lecture hall
4.
Entrance fees were to be capitalised
5.
Salaries unpaid for the year Amounted to Rs. 650
6.
A bill of Rs.50 was outstanding toward printing and stationery
7.
Provide depreciation:
On Furniture 15%
On Building 5%
On Library Books 10%
8. Investments were purchased on 1st Jan.2008. After taking into account the above
information prepare Income and Expenditure Account for the year ended 30.06.2008
And a Balance Sheet as on that date.
Hints: Interest on investments Rs.
10% on Rs. 8, 000 = 800
10% on Rs. 2, 000 for half year = 100
900
Of which Rs.600 are received. The remaining Amount is outstanding.

Solution:
Janata Library
Income & Expenditure A/c
for the year ending 30.06.2008
Expenditure Amount Income Amount
13,0
To Lighting 250 By Subscription 00
To Taxes 800 .-Previous year 800
12,2
To Repairs to Bldg. 700 00
To Insurance 450
.+Prepaid ' 07 50 .+ Outstanding
2,00
500 for the year 0 14,200
.-Prepaid ' 08 70 430 By Proceeds from Lectures 4,250
To Stationery 650 By Rent of Lecture
1,80
+ Outstanding 50 700 Hall 0
To Sundry Expenses 200 -Previous year 300
1,50
To Postage 325 0
To Subscriptions to
Periodicals 1,200 +Outstanding 200 1,700
To Salaries 2,500 By Interest on
+ Outstanding 650 3,150 Investment 600
To Depreciation : .+Outstanding 300 900
On furniture 600 To Sale of old
on Bldg 1,750 Newspapers 25
On Library Books 3,150 5,500
To Excess of Income
 126

over Expenditure 7,820

21,075 21,075

\ Janata Library Balance Sheet as on 30.06.2008

Capital & Liabilities Amount Assets & Properties Amount.
Outstanding Salaries 650 Balance at bank 11,000
Outstanding Printing Investments 8,000
and Stationery 50 .+Addition 2,000 10,000
Capital Fund 78,550 Outstanding Int. on
.+ Entrance Fees 1,500 Investments 300
.+ Excess 7,820 87,870 Prepaid Insurance 70
Subscription O/S 2,000
Outstanding Rent of
Lecture Hall 200
Library books 30,000
.+Addition 1,500
31,500
.-Depreciation 3,150 28,350
Furniture 4,000
.-Depreciation 600 3,400
Buildings 35,000
_____ .-Depreciation 1,750 33,250
88,570 88,570

Illustration 19: (O/S Expenses paid)

Dadar Library showed the following position on 1st Jan 2007:
Balance sheet as on 01.01.07

Capital & Liabilities Amount Assets & Properties Amount

Outstanding
Expenses 460 Furniture 3,700

Library
Capital Fund 51,740 book 25,000
Investments 20,000
Cash at
Bank 3,500
______ _____
52,200 52,200

Receipts & Payments A/c for the year ended 31.12.07

Receipts Amount Payments Amount
To Balance
b/d 3,500 By Lighting charges 400
To Entrance 2,500 By Postage 150
 127

Fees
To By
Subscriptions 12,000 Stationery 300
To Sale of old Newspapers 50 By Books 6,500
To Rent of Lecture Hall 1,500 By Outstanding Exp 460
By Rent
To Interest on Investments 500 and Rates 5,600
By
Investments 3,000
By Salaries and Wages 2,500
By Balance
______ c/d 1,140
20,050 20,050

From the above statements & the following information, prepare an income &
Expenditure A/c of the Library for the year ended 31.12.07 and a Balance Sheet as on that
date:
1. Subscriptions received included Rs.3,000 pertaining to the year 2008
2. Outstanding rent salaries Amount to Rs.500 and Rs.400 respectively
3. 60% of the entrance fees are to be capitalised
4. Depreciate books by 7 ½ % (exclude any additions made during the year)

Solution:
Income & Expenditure A/c of Dadar Library for the year ending 31.12.07
Expenditure Amount Income Amount
To Lighting
charges 400 By Entrance fees 1,000
To Postage 150 By Subscriptions 12,000
To Stationery 300 .-Prepaid 3,000 9,000
To Rent and
Rates 5,600 By Sale of old news papers 50
.+Outstanding 500 6,100 By Rent of Lecture Hall 1,500
To Salaries &
Wages 2,500 By Interest on Investment 500
.+Outstanding 400 2,900
To Depreciation on Books 1,875
To Excess of
Income
over
Expenditure __325 _____
12,050 12,050
Dadar Library's
Balance sheet as on 31.12.07
Capital & Liabilities Amount Assets & Properties Amount
Outstanding Rent & Rates 500 Balance at Bank 1,140
Outstanding Salaries & Wages 400 Library Books 25,000
Subscriptions
received .+Addition 6,500
in advance 3,000 31,500
Depreciation 1,875 29,625
 128

Capital Fund 51,740 Investment 20,000

.+Entrance
Fees 1,500 .+Addition 3,000 23,000
.+Excess 325 53,565 Furniture 3,700
57,465 57,465

9. PROCEDURE OF PREPARATION OF INCOME AND EXPENDITURE A/C

AND BALANCE SHEET FROM THE GIVEN TRIAL BALANCE AND
ADJUSTMENTS
In this case usual principles should be followed for preparation of Income and
Expenditure A/c and Balance Sheet.
9.1 Illustrations:
Illustration 20 :( Prize Trust Fund and other relevant items given)
From the following Trail Balance of the Samir Education Society as at 31st December
2007, prepare an Income and Expenditure Account and a Balance Sheet.
Trial Balance of the Samir Education Society as at 31st December 2007
Amount Amount
Furniture and Fittings 10,000 Investments Fluctuation Fund 20,000
Furniture &
Additions Sundry Creditors 12,500
during the year 2,500 Entrance Fees 4,600
Library Books 15,700 Examination Fees 2,200
Library Book
Additions Subscription and Recd. 18,000
during the year 3,500 Certificate fees 600
Society's Building 75,000 Hire of Hall 5,600
General Investments 2,00,000 Interest realized on investment 7,300
Sundry Debtors 3,000 Sundry Receipts 400
Staff Salaries 12,800 Rent. From subletting building 3,600
Printing , Stationery , Advertising 1,100 Prize Trust Fund 18,000
Taxes and Insurance 900 Prize Trust Income 850
Examination
Expenses 750 Donations received
Subscriptions to
period 1,200 (to be Capitalized 16,000
Prize Trust
Investments 17,875
Prizes awarded from Capital Fund 2,43,825
Prize Trust Fund 600
Bank Balance 375
General Expenses 475
Cash at Bank 7,500
Cash in Office 200
3,53,475 3,53,475

The following further information is supplied to enable you to make the necessary
 129

adjustments:
Particulars Rs.
Subscriptions to be received 2,400
Subscriptions received in advance 350
Interest on General Investments accrued 450
Taxes and Insurance paid in advance Staff Salaries outstanding 250
Library books to be depreciated by 15%
Furniture and Fittings to be depreciated by 15%
Building to be depreciated by 2.1/2 %
Salaries outstanding 1,200
Calculate depreciation on the assets on the opening balance only

Solution:
Samir Education Society's
Income & Expenditure A/c
for the year ending 31.12.07
Expenditure Amount Income Amount
To Staff Salaries 12,800 By Entrance fees 4,600
+ o/s 1,200 14,000 By Examination fees 2,200
To Printing, Stationery .-Exam. Exp 750 1,450
and Advances 1,100 By Subscriptions 20,050
To Taxes and Insurance
900 By Certificate fees 600
- Prepaid 250 650 By Hire of Hall 5,600
To Subscriptions By Interest 7,300
Periodicals 1,200 .+ Int. Accrued 450 7,750
To General Expenses 475 BY Rent 3,600
To Depreciation: By Sundry receipts 400
Buildings 1,875
Furniture 1,500
Books 2,355 5,730
To Excess of Income
over expenditure 20,895 ______
44,050 44,050

Balance sheet as on 31st December 2007

Liabilities Amount Assets Amount
Capital Fund 2,43,825 Buildings 75,000
.+Excess of - Depreciation 1,875 73,125
Income over Furniture 10,000
expenditure 20,895 +Additions 2,500
.+Donations 16,000 2,80,720 12,500
Prize Trust Fund 18,000
+ Income 850 -Depreciation 1,500 11,000
18,850 Library Books 15,700
 130

- Prizes awarded 600 18,250 + Additions 3,500

Investments fluctuation fund 20,000 19,200
Sundry Creditors 12,500 -Depreciation 2,355 16,845
O/S Salaries 1,200 Interest accrued 450
Prepaid Insurance 250
Prize Trust Investment 17,875
Subscriptions received General Investment 2,00,000
in advance 350 Outstanding subscriptions 2,400
Sundry Debtors 3,000
Cash in Hand 200
Cash at Bank 7,500
______ Prize Trust Bank balance ____375
3,33,020 3,33,020

Working Notes:
1. Subscriptions Rs. 18,000
+ Outstanding Rs. 2,400
Rs. 20,400
– Subscriptions received in advance Rs. 350
Rs. 20,050
2. Since the date of addition of furniture and Library Books is not given, depreciation is not
charged on additions

Illustration 21: (Donations partly capitalised and partly for election fund)
From the following Trial Balance and accompanying notes for adjustments, prepare
Income and Expenditure Account for the year ended 31st December, 2007 and the balance
sheet as on that date of Indian Gymkhana Club:
Dr. Rs. Cr. Rs.
Club Buildings 37,400
Library Books 2,280
Furniture and Fixtures 3,520
Glass, Cutlery , etc - 1st Jan 2007 2,000
Glass Cutlery etc Purchases during the year 1,000
Printing and Stationery 225
Rent 10,370
Annual Subscription 12,150
Entertainment cost 345
Billiard Room Receipts 3,845
Billiard Board 10,400
Billiard Room Expenses 2,135
Canteen Profit 1,200
Subscription arrears- 1 st Jan. 2007 1,125
Honorarium 1,500
Sale of Tickets for Annual Dinner 1,600
Annual Dinner Expenses 1,875
Salaries to Staff 2,700
 131

Donations 8,500
Audit Fees 600
Repairing , Cleaning and Washing 350
Newspapers and Magazines 180 95
Interest on Bank Deposit 25
Bank charges 20
Entrance Fees 225
Election Expenses 2,995
Stock of Canteen Provisions on 31st Dec.2007 300
Sundry Creditors 3,135
Cash in Hand 1,400
Cash in Bank 1,735

Capital Fund ______ 32,940

74,085 74,085

Adjustments:
1. Stock of Stationery and Printing on 31st December 2007 Rs.35
2. Out of the total subscription, Rs 1,125 represented arrears collected and Rs. 760 paid
in advance.
3. An Amount of Rs.500 was outstanding on account of rent
4. Unpaid salary Amounted to Rs. 200
5. Entrance Fee to be capitalised
6. Out of the donation , Rs. 3,600 represented donation to election fund and of the
balance half the Amount shall be capitalised
7. Depreciation to be provided as under:
i. Library Books 10% ii. Furniture and Fixtures 15 %
ii. Club Building 5 % iv. Glass, Cutlery etc.Rs.1,700

Solution:

Income & Expenditure A/c of The Indian Gymkhana Club

for the year ended 31.12.07
Expenditure Amount Income Amount
To Salaries 2,900 By Rent 10,870
To Honorarium 1,500 By annual subscription 10,265
To Repairing cleaning By Billiard Room
and washing 350 Receipts 3,845
To Entertainment cost 345 .- Exp 2,135 1,710
To Printing and Stationery 190 By Canteen Profit 1,200
To Bank Charges 20 By Donations 2,450
To Newspapers & Magazines 85 By Interest on
To Audit fees 600 Bank Deposit 25
To Annual Dinner
Exps. 1,875
- Receipts 1,600 275
To Depreciation:
 132

Library books 228

Furniture 528
Buildings 1,870
Glass, Cutlery etc. 1,700 4,326
To Excess of Income
over Expenditure 15,929
26,520 26,520

Balance Sheet of The Indian Gymkhana Club as on 31st December 2007

Liabilities Amount Assets Amount
Capital Fund 32,940 Buildings 37,400
+ Donations 2,450 .- Depreciation 1,870 35,530
+ Entrance fees 225 Billiard Board 10,400
+ Excess of income Furniture & Fixtures 3,520
over Expenditure 15,929 51,544 .- Depreciation 528 2,992
Election Fund: Library Books 2,280
Donations 3,600 .- Depreciation 228 2,052
- Ellection Expenses 2,995 605 Glass, Cutlery etc. 3,000
Sundry Creditors 3,135 .- Depreciation 1,700 1,300
Subscriptions recd. Stock of Canteen Prov. 300
in advance 760 Stock of Stationery 35
Outstanding Salaries 200 Rent Due 500
Cash in hand 1,400
_____ Cash at Bank _1,735
56,244 56,244

Working Notes
1. Subscriptions 12,150
-Arrears 1,125
11,025
-Sub. in advance 760
10,265
2. Printing and Stationery 225
-Stock 35
Actual Exp. 190

10. KEY POINTS

 Treat the income and Expenditure A/c as if it is the P&L A/c and adjust the
adjustment given.
 Income and Expenditure A/c is prepared with Revenue Income and Revenue
Expenditure.
 Do not take any Income and Expenditure in respect of any Fund to the Income and
Expenditure A/c Take them straight to the Balance Sheet.
 Any Income or Expenditure in respect of the previous year should be deducted from
the respective head in Income and Expenditure A/c
 Capitalise any Revenue Incomes as per the policy of the management and take the
capitalised part to the Balance Sheet and add with Capital Fund
 133

 The net result of Income and Expenditure A/c is known as Surplus or Deficit, which
will be adjusted in the capital Fund.
 Method of preparation of Balance Sheet is the same as in case of any other Balance
Sheet
11. KEY TERMS

Receipts & Payments A/c

Income & Expenditure A/c
Subscription
Donation
Life Membership Fees
Entrance Fees
Government Grants
Honorarium

EXERCISES

Objectives Tests
1. Select the appropriate answers and complete the following sentences:
a) Receipts and Payments A/c shows
i) Profit and loss A/c
ii) List of ledger balance
iii) Summary of receipts and Payments

b) Non-trading organisations are

i) Non trading organisations are
ii) Manufacturing organisations
c) Non-trading organisations prepare:
i.) Trading A/c
ii) Profit and Loss A/c
iii) Income and Expenditure
d) Subscription received in advance is
i) A liability
ii) An expenditure
iii) An Income
e) Donations received for a specific purpose are
i) Credited to Profit and Loss Account
ii) Credited to Income and Expenditure Account
iii) Shown in the Balance Sheet on liability side
f) Income and Expenditure Account records
i) Revenue Expenses and Incomes only
ii) Capital Expenses and Incomes only
iii) Both Capital and Revenue Expenses and Incomes

2 Select the appropriate answers and complete the following statements:

1. Non-trading organisations prepare----------.
a) Income and Expenditure A/c
b) Trading and profit and Loss A/c
c) Only Trading A/c
 134

2. Receipts and Payments A/c is a summary of--------.

a) Incomes and expenses
b) Cash receipts and payments
c) Ledger balances
3. Subscription received in advance by a club is shown--------.
a) On liability side of Balance Sheet
b) On asset side of Balance Sheet
c) On debit side of Income and Expenditure A/c
4. Donations received by a club for construction of a library should be shown in
----------.
(a) Balance Sheet
(b) Income and Expenditure
5. Life membership fees received should be shown on ---------.
a) Asset Side of Balance Sheet
b) Liability Side of Balance Sheet
c) Credit Side of Income and Expenditure Account
6. Accrued interest on investment is shown on----------.
a) Liability side of Balance Sheet
b) Asset side of Balance Sheet
c) Receipt and Payment Account on receipt

3. Match the following

A B
1. Income and expenditure A/c a) M.I.G. Cricket Club
2. Legacies b) Liability Side of Balance Sheet
3. Non-Trading Organisation c) Credit Side of Income and Expenditure Account
4. Special Fund d) Capitalised
5. Sale of old newspapers e) Nominal Account

4. State whether the following statements are true or false

a) Receipts and Payments A/c is an extract of cash Book.
b) Income and Expenditure A/c records capital items only.
c) Income and Expenditure A/c commences with opening Cash/Bank Balance
d) Credit sales are recorded on receipt side of receipt and Payments Account.
e) Depreciation is excluded from Income and Expenditure account.
f) Excess of assets over liabilities is known as capital fund.
g) Provision for bad debts is included in Receipts and Payments Account.
h) Charitable institutions are non-trading concerns.
i) A surplus is an asset of a Non-Trading concern.
j) Capital receipts and capital expenditure are reflected in the Balance Sheet

5. Fill in the blanks with an appropriate word/s:

a) The receipts and payment account prepared annually by a non trading concern is a
summary of HS ______.
b) The receipts and payments account is ______ of the year‟s______.
c) Non Trading concerns prepare _____ instead of Profit & Loss Account
d) Excess of _____ over _____ is called surplus.
e) Excess of _____over _____ is called capital fund.
f) Surplus and deficit are terms which pertain to the compilation of _____by_____.
g) Non- trading concerns prepare______ to ascertain financial position.
 135

h) Entrance and life members fees capitalised will be shown on ______.

i) Subscription of the previous year still not received is shown on the ______ side of
the Balance Sheet.

08. Long Answer Questions

1. A) What do you mean by Non-Trading organisation?
B) What are the features of Receipts and Payments Account?
2. A) What do mean by Income and Expenditure Account?
B) What are the features of Income and Expenditure Account?
3. Distinguish between Receipts and Payments Account and Income and
Expenditure Account.
4. Explain the treatment of the following in the accounts of Non Trading
Organisations:
a) Subscriptions
b) Legacies
c) Life Membership fees
d) Government Grants

09. Practical Problems

Calculation of capital fund
1. A Trust gives you the following information as on 1stApril 2001:
Rs. Rs.
Land &Bldg. 75,000 O/s Salaries 300
Playground 60,000 Prepaid insurance 100
Tennis court 70,000 O/s subscription 1,500
Subscription received in
Furniture 19,000 advance 1,000
Sports Material 10,000
st
Find out capital fund on 1 April 2001

2. Prepare the Receipts and Payments account for the ended on 31st March 2002 of
Tarun Club:

Rs. Rs.
Opening Cash Balance 200 Furniture purchased 4,000
Bank Balance 4,000 Salaries 1,500
Loan given to members 1,50,000 Loan from bank 1,30,000
Loan recovery from members 25,000 Closing Balance 450
Closing Bank Balance 3,075
Stationery 175

Sale of furniture
3. From the following Receipts and Payments Account of Rose Club for the year ending
31st December 2001 and other information prepare Income and Expenditure Account for the
year ended 31st December 2001 and Balance Sheet as on that date.
 136

Receipts & Payments A/c

Receipts Amount Payments Amount
To Opening Cash Balance 3,350 By Salaries 4,500
To Subscription By Rent 2,200
(including Rs 250/- for 2000 By Printing & Stationary 190
and Rs. 150/- for 2002) 8,900 By Postage 160
To Donations 15,000 By Furniture (1.1.01) 5,000
To Entrance fees 100 By Investments in Defense Bonds 500
To Sales of old Newspapers 50 By Paid into Fixed Deposit of
To Sale of old Furniture Bank of India (31.12.2001) 10,000
(Book value Rs.300 on 1.1.2001) 300 By Sports Material 2,000
By General Expenses 700
By Closing Cash Balance 2,450
27,700 27,700

Other Information:
a) The Assets on 1.1.2001 were : Land Rs.5,000 ; Furniture Rs,300; Sports Material Rs.
1,000; outstanding Subscription Rs. 250/-
b) Donations represents Donations for Building Fund and Entrance Fees are to be treated
as income
c) Subscription of Rs.500 is outstanding for 2001
d) Outstanding salary for 2001 is Rs.500
e) Depreciation Furniture at 10 % and Sports Material is valued at Rs. 800 on 31.12.2001.
(Ans. - Deficit: Rs 1,800; B/s Total Rs. 23,750)

4. Capitalisation of entrance fees

From the following Receipts & Payments A/c of Bajrang Vyayam Shala, Amaravati; and
the adjustments given, you are required to prepare Income and Expenditure Account and
a Balance Sheet.

Receipts Amount Payments Amount

To Balance b/d 4,160 By Salaries 5,500
To Subscription: By Entertainment Expenses 2,580
2007 16,000 By Lighting 1,000
2008 412 16,412 By General Expenses 1,536
To Donations 5,000 By Taxes 500
To Receipts from By Investments 12,000
entertainments 3,644 By Printing & Stationery 944
To Interest 324 By Expenses of 2006 paid 2,400
To Entrance Fee 4,500 By Fixed Deposit 4,000
By Balance c/d 3,580
34,040 34,040

Adjustments
a) There are 450 members paying an annual subscription of Rs 40/- each
 137

b) Salary outstanding was Rs.1, 000.

c) Land and Building stood in the books at Rs. 60,000/- and furniture at Rs
4,600 and it required to write off depreciation at 2 % and 10 %
respectively
d) Interest on Investments at 5 % p.a. has accrued for 3 months
e) The capital fund was Rs.66,360 on 1st January 2007
f) 50 % of the entrance fee is to be capitalised
(Ans. Surplus Rs.14, 648 B/s Total Rs. 84,670)

Opening and Closing balances of various items

5. The following is the Receipts and Payments Account of the Medical Society, Nagpur
for the year ended 31st March ,2002

Receipts Amount Payments Amount

To Cash in hand on 1st April 2002 7,000 By Payments for Medicines 30,000
To Subscriptions 50,000 By Honorarium to Doctors 10,000
To Donations 14,500 By Salaries 27,500
To Interest on Investments By Sundry xpenses 500
.@7 % for the
yr. 7,000 By Equipment‟s Purchased 15,000
By Charity show
To Charity Show proceeds 10,000 Exp 1,000
_____ By Cash on hand 4,500
88,500 88,500

Additional Information
On 1stApril 2001 On 31stMarch 2002
a) Subscription due Rs. 500 Rs. 1,000
b) Subscription received in adv Rs. 1,000 Rs. 500
c) Stock of Medicines Rs. 10,000 Rs. 15,000
d) Amounts due to medicines suppliers Rs. 8,000 Rs 12,000
e) Value of equipment‟s Rs. 21,000 Rs 30,000
f) Value of Buildings Rs. 40,000 Rs. 38,000
g. Investments Rs. 1, 00,000 Rs.1, 00,000

You are required to prepare: (a) Income and Expenditure Account for the year ended 31st
March 2002 and b) Balance Sheet as on that date
(Ans: Surplus Rs. 6,500; Opening capital Fund Rs. 1,69,500; B/S Total Rs.1,88,500)

Govt. Securities
6. The following is the Statements of Receipts and Payments of K Hospital for the year
ending 31.12 .2007:
Receipts Amount Payments Amount
Opening Balance : Furniture Purchased 100
Cash 1,250 Salaries 23,000
Bank 7,250 Instruments Purchased 500
Govt.Securities 1,80,000 Diet Expenses 2,350
Receipts: Surgery And Dispensary 3,500
Subscriptions 25,000 Rent and Rates 1,000
Interest 9,000 Insurance 700
 138

Donations 11,500 Office Expenses 1,200

Sundry Receipts 650 Travelling Paid to Doctors 1,500
Medicines 1,500
Sundry expenses 600
Closing Balance: Cash 1,450
Bank 17,250
______ Govt.Securities 1,80,000
2,34,650 2,34,650

Prepare Income & Expenditure A/c for the year end Balance Sheet as on 31.12.2007
The assets on 1.1.07 were
Furniture Rs.2, 000 ; Land Rs.50,000, Building Rs 1,50,000 Surgical instruments Rs.
3,500. Write off depreciation 10 % on land 15 % on Buildings, 10 % on furniture and
20 % on Surgical Instrument.
Government Securities were of the face value of Rs.2, 00,000 and represent investments
of the Endowment Fund. The subscriptions received include Rs. 10,000
For the year 2006 but Rs.7, 000 outstanding for 2007.Salaries paid included Rs.1, 000
For 2006 but Rs. 1,500 are payable for 2007.Interest received includes Rs.2, 000 for 2006
but Rs. 2,300 are outstanding for 2007
(Ans : Deficit Rs.20,910;B/S Total Rs. 3,85 ,590 ; Op. Capital; Rs.1,80,000)
7. The following is the Receipts and Payments A/c of Laxmi Cultural Society, Pune for the
year ended 31.3.2007
Receipts and Payments A/c of Laxmi Cultural Society, Pune for the year ended 31.3.2007
Receipts Amount Payments Amount
Cash in Hand on
1.4.06 1,500 Bank old 1.4.06 3,100
Subscription : Investment in Securities 3,000
2005-06 300 Furniture 1,450
2006-07 16,200 Salaries 6,200
2007-08 150 16,650 Stationery and Printing 890
Proceeds from
Drama 2,000 Cost of staging drama 1,710
Entrance fees 670 Misc.Expenses 1,420
Interests on securities 480 Balance on 31.3.07:
Sale Proceeds of
Furniture 120 Cash in hand 550
Cash at Bank 3,100 3,650
21,420 21,420
You are required to prepare Income and expenditure A/c of the Society in respect of the year
ended 31.3.2007 and a Balance Sheet.
a) The Society has 1,800 members each paying an annual subscription of Rs. 10
An Amount of Rs. 390 was in arrears in respect of the year ended 31.3.2006
b) Stock of Stationery on 31.3.2006 was Rs.125 and at 31.3.2007 Rs.87
c) Entrance fees are to be capitalised
d) Salary of Rs. 550 for March 2007 is outstanding. Expenses accruing up to 31.3.2006
Amounted to Rs. 132. The Society had paid Rs. 500 in the year 2005-06 toward
telephone charges of which Rs.125 relate to the year 2006-07
e) At 31.3.2006 premise stand at Ts. 24,500 and Investment 6,500. Depreciate premises
and furniture10 %
(Ans: Surplus Rs, 7,084, B/S Total Rs. 38,362 Opening Capital Rs. 29,900)
 139

Treatment of donation
08. From the following particulars, prepare the Income and Expenditure Account for the year
ended 31st December, 2007 and Balance sheet as at date of the Progressive Club Bombay
A. Receipts and Payments A/c for the year ending 31st Dec 2007
Receipts Amount Payments Amount
To Balance b/d 7,000 By Salaries :
To Donations 3,000 2006 500
To Subscriptions : 2007 4,500 5,000
2006 500 By Rent 8,400
2007 7,000 By Postage 600
2008 1,500 9,000 By Printing & Stationery :
To Entrance Fee 2006 200
(To be capitalized) 2,000 2007 1,800 2,000
To Interest on Investment 4,000 By Balance c/d 9,000
25,000 25,000

B. Expenses outstanding as on 31st December 2007:

Salaries Rs. 200
Printing Rs. 500
C. Other Balances on 1st January 2007:
i) Capital funds (Donations) Rs. 1, 00,800
ii) Income and Expenditure A/c Cr. Bal. Rs. 11,000
iii) Furniture Rs. 5,000
iv) Investments Rs. 1, 00,000
D. Subscription outstanding for the year 2007 Rs.500
(Ans : Excess of expenditure over income Rs.1,500)

Treatment of life membership fees

09. From the following particulars, prepare the Income and Expenditure A/c and the Balance
Sheet of the Pathare Gymkhana, for the year ending on 31st Dec, 2005.

Receipts Amount Payments Amount

Cash on hand on
1.1.05 Nil Land and Building 24,500
Donations 25,000 Tournament Expenses 1,100
Entrance fees 5,000 Furniture 1,500
Tournament Fund 1,500 Sports Material Purchases 1,200
Subscriptions 2,200 Salaries 1,200
Canteen Receipts 1,300 Insurance 120
Interest on Securities 120 Canteen Expenses
Cricket Dept. Fees 1,705 (including purchases) 1,500
Life Members Fees 4,000 General Expenses 1,685
4 % Govt.Securities 6,000
Amount deposited in Bank 1,800
Cash Balance as on
_____ 31.12.2005 __220
40,825 40,825
 140

You are required to take into account the following adjustments:

a) Subscriptions Rs. 450 are outstanding on 31.12.2005 and subscriptions Rs.125 are
received in advance
b) Outstanding expenses are as follows:
Salary Rs. 175. Tournament Expenses Rs. 100
c) Prepaid Insurance as on 31.12.05 Rs.30
d) Capitalise Donations and life Members Fees on 50 % of the Entrance Fees
e) Sports Materials and canteen stock as on 31.12.2005 are valued at Rs. 750 and Rs.400
respectively.
f) Depreciate Furniture by 10 % and Land and Building by 15 %
(Ans: Deficit Rs. 255)

Treatment of Special subscription

10.Following is the Receipts & Payments A/c of Jolly Club for the year ending 31.12.07

Receipts & Payments A/c of Jolly Club for the year ended 31.12.07
Receipts Amount Payments Amount
To Balance 1st January 2007 150 By Rent 2,600
To Entrance Fees 275 By Stationery Exp 1,534
To Subscriptions2006 100 By Wages 2,665
ToSubscriptions
2007 8,450 By Billiard Table 1,950
To Subscriptions 2008 150 By Interest 750
By Repairs and
To locker Rents 250 Renewals 403
By Balance on 31st
To Special subscription Dec .2007 1,198
for President's Party 1,725 _____
11,100 11,100

Locker Rents Rs.30 referred to 2006 and Rs. 45 still owing. Rent. Rs.650 pertains to
2006 and Rs. 650 is still due. Stationery expenses etc. Rs 156 related to 2006 and Rs.
182 still owing.
Subscriptions unpaid for 2007 are Rs. 234, special subscriptions for President‟s Party
outstanding Rs.275
From the above information, you are required to take out an Income and Expenditure
Account of the Club for the year ending 31st December, 2007
(Ans : Excess of Income over Expenditure Rs 3,266)

Payment of O/S Expenses

11. Following is the Cash Account of Youngmen’s Library for the year ending 31.12.2007
Receipts Amount Payments Amount
To Balance b/d 4,500 By Salaries and Wages 6,800
To Admission fee 3,500 By Rent 8,250
To Subscriptions 19,500 By Investments 3,500
To Lecture Hall Hire Charges 2,500 By Stationery 1,250
To Miscellaneous 350 By Electric charges 730
To Interest on investment 600 By Books 6,000
 141

By Outstanding Exp 700

_____ By Balance c/d 3,720
30,950 30,950
You are required to prepare an Income and Expenditure Account for the year ended
31.12.2007 and a Balance Sheet as at 31.12.2007. The following further information is also
made available to you.
a) On 31.12.2006, the library had the following assets also:
Furniture Rs. 5,500, Books valued at Rs. 45,000 and Investment at a cost of Rs 20,000
b) Subscription realised in advance this year Amounted to Rs. 600 and Outstanding
liabilities on 31.12.2007 , for salaries and wages Rs. 1,200 and for rent Rs 750
c) 60% of the Admission fees should be capitalised
d) Furniture and library books are to be depreciated at 6 % & 10 % p.a. respectively
(Ans: Excess of Expenditure over Income Rs. 360; Balance Sheet Rs.78, 590; Capital
Fund Rs.74, 300)
Treatment of Special fund receipt
12. The following is the Receipts and Payments Account of the Bombay Sports Club for the
year ended 31.12.2007
Receipts Amount Payments Amount
To Entrance fees 10,000 By Special Fund expenses 2,200
To Special fund By Purchase of sports
receipts materials 2,400
(for Governor's
Party) 3,000 By Bar purchase & expenses 3,000
To Subscription 4,400 By Salaries 2,400
To Interest on Securities 600 By Printing and Stationery 910
To Bar receipts 2,600
To Miscellaneous receipts 550 By Billiard exp 2,260
To Donation 58,000 (Including Insurance premium) 440
To Billiard fees 2,500 By Furniture 3,000
By Land and
Building 49,000
By Investments 12,000
By Bank Balances 3,600
_____ By Cash balances __440
81,650 81,650
Subscription include Rs. 250 for the year 2008 and subscription in arrear Amounted to Rs.
900 Interest accrued Amounted to Rs. 240 Salaries unpaid for the year Amounted to Rs. 350
and Insurance Prepaid Rs.60 Stock of Sports materials and Bar stock at the end year are
valued at Rs. 1,500 and Rs.800 respectively Depreciate furniture by 6 % and Land and
Building by 2 % 50 % of the Entrance fees are to be treated as revenue and the whole
Amount of Donation is to be capitalised. Prepare an Income and Expenditure Account for the
year ended 31.12.2007 and a Balance Sheet as on that date.
(Ans: Excess of Income over Expenditure Rs. 6,780
Balance Sheet Rs. 70,380)

Treatment of life membership fees and donations

13. The is given below Receipts and Payments Account for 2007 of the C.Y‟s Indoor
Recreation club.
 142

Receipts and Payments Account for 2007 of the C.Y’s Indoor Recreation club
Receipts Amount Payments Amount
To Donation 4,000 By Rent 9,000
To Life Membership Fees 5,000 By Salaries 11,500
To Entrance Fees 2,500 By Furniture 2,000
To Subscription 6,750 By electricity 600
To Bar receipts 25,000 By Bar Purchases 20,000
To Tourney Receipts 1,800 By Tourney expenses 1,505
To Billiard fees 500 By Telephone 370
To Table Tennis fees 250 By Postage 120
To Card room
Receipts 125 By Bank Balance 1,430
To Grant from Calcutta Corp. 1,000 By Cash balance 400
46,925 46,925

a) Donation in entirely ¾ of the life Membership fees and ½ of the Entrance fees are
to be capitalised
b) Subscriptions received in advance are Rs.250 and outstanding Rs. 1,000
c) Rs.200 was unrealised on Tourney account
d) Rent was paid for three years in advance
e) Salaries include an advance of Rs.500 and a sum of Rs 1,000 remained unpaid as
on 31st December , 2007
f) Furniture is to be depreciated by 6 %
g) Bar stock as at 31st Dec.Amounted to Rs.5,000
h) Telephone rent had been paid up to March 2008
You are required to draw up an Income and Expenditure Account for 2007 and also a
Balance Sheet as on that date
(Ans : Excess of Income over Expenditure Rs. 6,984, Balance Sheet Rs. 17,234)

Sale of Furniture, donation for building fund

14. Following is the Receipts and Payments Account of X Club for the year ended
31.12.2007.
Receipts Amount Payments Amount
Balance b/d Rs Salaries :
Cash 2,000 Secretary 6,000
Bank 12,000 14,000 Staff 5,000 11,000
Canteen
Subscription- Expenses 12,000
2007 5,500 Miscellaneous Expenses 2,500
2006 500 Construction of Building 15,000
2008 400 6,400 Balance c/d
Interest from 1,000 Cash 1,300
Sale proceeds of old newspapers 400 Bank 4,000 5,300
Sale of old furniture 2,000
Canteen collections 12,000
 143

Donation for Building Fund 10,000 _____

45,800 45,800

With the additional information given below, prepare the Income and Expenditure Account
for the year ended 31.12.2007 and the Balance Sheet as on that date:
31.12.2006 31.12.2007
a) Subscription Receivable 1,000 600
b) Subscription received in advance 200 400
c) Salary of staff outstanding 1,000 2,000
d) Canteen expenses prepaid 1,000 1,500
e) Furniture at book value 14,000 ?
f) Building 15,000 ?
g) Fixed Deposit with Bank 10,000 10,000
h) Book value of Furniture sold during
The year 2007 was Rs. 3,500
i) Charge depreciation on Furniture at 10 % p.a. on the closing balance
(Ans : Excess of Expenditure over Income Rs 8,850 Balance Sheet Rs 57,350 , Capital Fund Rs. 53,800)

Hints: Balance Sheet as on 01-01-2007

Liabilities Amount Assets Amount
Subscription recd.in advance 200 Furniture 14,000
Outstanding
salary 1,000 Buildings 15,000
Capital Fund 53,800 Fixed Deposit 10,000
Canteen Exp.
prepaid 1,000
Subscription Receivable 1,000
Bank 12,000
_____ Cash 2,000
55,000 55,000

Purchase of Investments
15. From the Following Receipts and Payments Account of Sanmitra Club , prepare Income
& Expenditure A/c for the year ended 30.6.2007 and Balance Sheet as on that date :
Receipts Amount Payments Amount
To Subscriptions 35,000 Furniture 2,000
To Life Membership Fees 8,400 By Investments (12 % Interest) 10,000
To Entrance
Fees 2,600 By Electricity 2,320
To Sale of Old
Papers 300 By Rent 6,000
To Interest on Investments 600 By Telephone 1,680
By Salaries 13,835
By Stationery 2,595
By Sports Materials 5,670
_____ By Cash & Bank Balance 2,800
46,900 46,900
Additional information is as follows:
 144

1. Investments Purchased on 1.10.2006

2. Depreciate Furniture @ 15 % and Sports Material @ 20 %
3. Subscription received in advance Rs.800 for 2007-08
4. There are 900 Members paying annual subscription of Rs. 40 each
5. Rent paid for 10 months only
6. Stationery remained unused Rs. 595
(Ans : Surplus – Rs.17,131 ; B/S Total – Rs. 21,731)

Capitalisation of donations and legacies

16. From the following Receipts and Payments Account for the year ended 30.6.2007,
prepare Income and Expenditure Account after taking into consideration the following
information:
a) Treat 75 % of Donation and 60 % Legacies as Capital Receipts
b) Book Value of Furniture sold was Rs. 1,200
c) Salaries paid in advance as on 30.6.2007 were Rs. 900
c) Rent and Taxes were unpaid Rs. 200 at the end of the year
e) Furniture was sold on 30.6.99. Depreciate furniture @ 15 % p.a.

Receipts Amount Payments Amount

To Balance b/d By Advertisements 2,400
Cash in hand 150 By Rent & Taxes 4,600
Cash in Dep. A/c 2,500 By Purchase of Furniture 15,000
Cash at Bank ???? By Charity 8,400
To Donations 10,000 By Investments 2,000
To subscriptions 20,000 By Salaries 4,900
To Legacies 5,000 By Postage 600
To Int. on Deposits 1,200 By Printing 500
To Sale of Furniture 2,400 By Balance c/d
800 Cash in Hand 200
Cash in Dep. A/c ????
_____ Cash at Bank 1,300 _____
42,400 42,400
(Ans : Surplus –Rs 4,930 ; B/S Total-Rs. 18.630 )

Treatment of revenue donation

17. From the following Balance Sheet and Receipts and Payments Account of Nanavati
Hospital , Bombay , prepare Income and Expenditure Account for the year ending on
31.12.2007 and the Balance Sheet as on date:
Balance Sheet as on 31.12.2006
Liabilities Amount Assets Amount
Salaries unpaid 2,000 Cash 11,000
Medicines Bill unpaid 1,500 Securities 1,50,000
Capital Fund 3,83,000 Furniture 4,000
Land and Buildings 2,00,000
Equipments 15,000
Subscription due 5,000
______ Interest Accrued __1,500
3,86,500 3,86,500
 145

Receipts and Payments Account of Nanavati Hospital , Bombay

for the year ended 31.12.2007
Receipts Amount Payments Amount
To Cash 11,000 By Furniture (Purchased on 1.1.2007) 1,900
To Subscription 30,000 By Salaries ( including Rs. 2,000/- of
To Interest (Rs. 1,500/- last
year) 5,000 last year) 23,000
To Donations (Revenue) 4,300 By Equipment purchased on 1.1.2007 7,500
To Life Membership fee 10,000 By Dispensary expenses 4,700
By Medicines 5,500
By Taxes 500
By Closing Cash bal. 17,200
60,300 60,300

Adjustments :
1. Capitalise the Amount of life membership fees
2. Interest earned but not received Rs. 1,000/-
3. Subscription include Rs 1,000/- for 2008 and outstanding subscription for 31.12.2007 is
Rs. 4,200/-
4. Unpaid salary for the year 2007 is Rs. 2,500/-
5. Provide for depreciation on furniture 10 % Land & Building 5 % Equipments 20 %
6. Prepaid taxes Rs.100/-
(Ans: Deficit Rs.10, 690)

Tournament receipts and expenses

18. The Balance Sheet as at 1st January 2007 and the Receipts and Payments Account for the
year ended 31.12.2007 pf the Young Sports Club, Dadar are as under:

Liabilities Amount Assets Amount

Capital Fund 30,000 Building 9,500
Outstanding
Expenses: Furniture 5,000
Salaries 400 Entrance fee receivable 200
Printing 300 700 Subscriptions fee receivable 800
Income and Sports Material & Equipment 28,000
Expenditure A/c 23,300 Cash in hand 4,200
_____ Cash at Bank _6,300
54,000 54,000
Receipts Amount Payments Amount
To Opening
Balance 4,200 By cricket Tournament Exp. 16,460
Cash in Bank 6,300 10,500 By Printing & Stationery 860
To Subscriptions 18,000 By Salaries & Honorarium 1,600
To Entrance fees 4,000 By Repairs to Building 500
To Receipts from By Newspapers & Periodicals 470
Cricket 14,520 By Advertising Exp 300
 146

Tournament
To Interest on Bank A/c 300 By Insurance 400
By Investments 15,000
By Closing Balance:
Cash in hand 5,280
_____ Cash in Bank 6,450 11,730
47,320 47,320

You are also given the following additional information:

j) Subscription of the Amount of Rs. 800 were receivable as on 31.12.2007
ii) Subscription Rs. 200 and Entrance Fees Rs. 300 were received in advance
iii) Outstanding Expenses were : Salaries and Honorarium – Rs. 100 ; Insurance – Rs. 50;
Cricket Tournament expenses – Rs.250

You are required to prepare Income and Expenditure Account for the year ending
st
31 December, 2007 and a Balance Sheet as on that date.
(Ans: Excess of Income over Expenditure Rs.15, 830)

Donations for Building and fixed deposits

19. The Balance Sheet as on 30.6.2006 and the Receipts and payments A/c for the year
ended 30.6.2007 of Prayag Litrary Society is as below:
Balance Sheet as on 30.6.2006
Liabilities Amount Assets Amount
Capital Fund: Buildings 25,000
As per last B/S 58,520 Furniture 2,000
Add : Excess of Books 1,150
Income over Exp 3,000 Sports Equipment 2,000
61,500 Fixed Deposit with SBI 30,000
Subscriptions recd.in Interest accrued on
advance 400 Investments 200
Subscriptions Receivable 1,000
Cash on Hand 150
Cash with Bank ___400
61,900 61,900
 147

Receipts and payments A/c for the year ended 30.6.2007

Receipts Payments Amount
Opening Balance (1.7.06) By Salaries 2,560
Cash on hand By Printing & Stationery 220
cash with Bank By Taxes & Insurance 180
Subscriptions received By Subscriptions to Newspapers 550
Hall Rent Received By Repairs and Renewals 650
Interest received By Sports Equipment‟s
Sales of Old Newspapers etc. (Purchased (1.4.07) 1,000
Donations received By Fixed Deposit with Central
Bank of India Ltd (1.4.07) 5,000
By Closing Balance (30.6.07)
Cash on hand 150
By Balance with
Central Bank of India Ltd 2,630
12,940
The following information is supplied to you :
a) Subscription for the year 2007-08 received during the year Rs.500.
b) The Society consist of 500, Members , the Annual Subscription payable by each
Member being Rs. 12
c) The rent for the Society‟s Hall is Rs. 250 per day and the Hall was let out on hire 8
days in the year
d) Interest accrued on fixed Deposits with the Bank has to be provided at 6 % per
annum.
e) Depreciation on Buildings and other assets at 10 % per annum has to be provided.
f) Donations have been collected for constructing a Building and, therefore, have to be
shown under the Building Fund Account.
g) Prepare the Income and Expenditure Account for the year ended 30.6.07 and Balance
sheet as on 30.6.2007.
(Ans : Surplus Rs. 2,835, Total of Balance Sheet Rs. 68,035)

Typical Problem
20. From the following Trail Balance and other information prepare Receipts and Payments
Account, Income and Expenditure Account and the Balance Sheet of Dolly Club

Dr. Cr.
Subscription 27,000
Donation 1500
Entrance fees 750
Capital fund 30,000
General Fund 15,000
Prize fund 7,500
Investments Income 1,500
Salaries 6,000
Rent. Rates & Taxes 3,600
Printing and Stationery 1,500
 148

Postage and Telephone 750

Miscellaneous Expenses 450
Sundry Debtors 1,500
Prizes 150
Sundry Creditors 4,500
Sale of Food Stuff 45,000
Purchase of Food Stuff 37,500
Opening Stock of Food stuff 37,500
Sport Expenses 4,500
Sport Equipments 7,500
Picnic Expenses 2,250
Furniture 1,500
Investments 45,000
Bank 18,000
Cash 1,800
Bank Interest _______ ____750
1,33,500 1,33,500

Prize fund is exactly represented by 5% Investments (F.V..Rs.9000). Other

Investments are 5 % investments of face value of Rs.36,000. Accrued investments income at
the beginning of the year was Rs. 600. Rs. 7500 investments (F.V.Rs.8250) were purchased
in the current year.Opening Balance of furniture was Rs.300/- Depreciation at 10 % p.a. is
charged on closing balance.
Entrance fees are capitalised. At the beginning of the year subscriptions outstanding
was Rs. 1500 whereas Rs. 750 subscription was received in Advance. At the end of the year
outstanding subscriptions Amounted to Rs 3750 and advance subscriptions was Rs. 300.
Salaries outstanding at the beginning was Rs 300 and at the end Rs 150. An advance salary of
Rs 300 Paid to a clerk in the last month of the current year.
Closing stock of food stuff was valued at Rs. 750/-
20 % Depreciation is to be written off on the opening balance of sports Equipment‟s. Rs 750
worth of Equipments, has been added in the current year. Opening debtors and creditors were
Rs. 750 and Rs. 450 respectively.
Cash in hand at the beginning of the year was Rs. 600/-
(Ans : Opening bank balance Rs. 4,500/- Sundry Debtors –sale of foods stuff Rs. 44,250/- Sundry creditors-purchase of food stuff
Rs. 33,450/- Excess of Income over Expenditure Rs. 13,750/- Balance Sheet total Rs. 78,975/-)

21. From the following Trial Balance of the Vivek Education Society College, Pune as on
st
31 December, 2007, prepare Income and Expenditure Account for the year ended on that
date and a Balance Sheet:
Dr Cr.
Furniture & Fittings 15,000
Additions to the furniture during the year 3,000
Library books 18,000
Addition to Books during the year 5,000
Buildings 1,75,000
General investments 40,000
Investment Reserve funds 20,000
Sundry Debtors and Creditors 4,000 13,000
 149

Admission fees 3,000

Examination fees 5,000
Fees received 30,000
Certificate fees 1,000
Hire of Society Hall 7,000
Interest realized on Investments 5,500
Sundry Receipts 1,000
Staff Salaries 20,000
Printing, Stationery and Advertising 2,000
Taxes and Insurance 1,000
Examination Expenses 1,500
Subscription of Periodicals 1,500
Prize funds 13,000
Prize fund Investment 14,800
Prize fund Income 600
Prizes Awarded 500
Donation Received from Gymkhana Hall 20,000
General Expenses 700
Capital Fund 1,75,000
Cash at Bank 6,500
Cash at Office 1,500
Grants 15,000
3,10,000 3,10,000

The following further information is supplied:

Fees to be received Rs 1000/-
Fees received in Advance Rs 500/-
Staff Salaries outstanding Rs 5000/-
Taxes and Insurance paid in Advance Rs 200/-
Interest on General Investments outstanding Rs 300/-
Provide depreciation:
Library Books @ 20 %
Furniture & Fitting @ 10 %
Building @ 2 1 /2 %
(Ans. Excess of Income over Expenditure Rs. 26,125/- , Balance Sheet Total Rs.2, 73,525)
 150

Chapter- 5.
Partnership Accounts
Synopsis:
A- Fixed & Fluctuating Capital Methods
1) Meaning of Partnership
2) Definition of Partnership
3) Characteristics of Partnership
4) Types of Partners
5) Partnership deed
6) Capital of Partners
a) Fixed capital method
b) Fluctuating capital method
B- Admission of a partner-
1. Introduction.
2. Reasons for Admission of partner.
3. Need for accounting entries.
4. Calculation of New Profit sharing ratio.
5. Calculation of Ratio of sacrifice.
6. Revaluation of Assets & Liabilities.
7. Accounting Treatment of capital & premium for goodwill
brought in by new partner
8. Accounting Treatment of Goodwill.
9. Preparation of revaluation A/c, Partners’ Capital A/c &
Balance Sheet of a new firm
C- Partnership Final a/c
a) Trading a/c
b) Profit & Loss a/c
c) Profit & Loss appropriation a/c
d) Balance Shee

1) Meaning of Partnership
We have studied final accounts of sole trader in std. XI. In sole proprietary concern
business is managed by single person. But when business is expanded single owner cannot
handle all the activities of business due to lack of capital & limited managerial skill. To
overcome these drawbacks of sole proprietary concern a new form of organisation called as
„partnership firm‟ came into existence.
When two or more persons come together, agree to combine their capitals, skills or services
in any business & agree to share the profit or loss of the business, it is called as partnership
business. The persons carrying on partnership business are individually called as partners &
they are collectively called as a firm. The business is managed by all the partners jointly or it
may be managed by any one of them on behalf of others.
2 Definition of Partnership
The Indian Partnership Act 1932, section 4 defines partnership as follows -
“Partnership is the relation between the persons who have agreed to share profits of
business carried on by all or any of them acting for all”
A partnership is an association of two or more persons. The maximum limit is 10
persons in the case of banking business & 29 persons in the case of other business.
3) Characteristics of Partnership:
From the above definition, essential characteristics or features of partnership is as
under-
1) Agreement: - Partnership is the result of an agreement. Without an agreement it cannot
come into existence. The agreement between the partners may be written or oral. In order
 151

to avoid future disputes an agreement should be in written form. Such written agreement is
called as „Partnership Deed‟.
2) Membership: - Minimum two persons are required to form a partnership firm.
Maximum ten persons are allowed in banking business & twenty persons are allowed in
any other (non banking) business.
3) Voluntary Association: - It is a voluntary association of persons who would like to carry
on the business.
4) Contractual Relation: - The persons who are known as partners are bound by an
agreement. The relations among the partners are contractual.
5) Lawful business:- A firm must undertake the business which is permitted by law. Illegal
business is not allowed by law.
6) Collective Management: - All the partners have a right to manage the business jointly.
Therefore, the management of the partnership is collective.
7) Profit Motive: - The purpose of partnership is to earn & share the profit. The profit earned
by the partnership is shared by the partners in an agreed proportion stated in the deed. If
the deed is silent about ratio, then all partners must share profits & losses in an equal
proportion.
8) Unlimited liability: - The liability of partners in a firm is unlimited except minor partner.
It is a joint as well as several. All partners are jointly & severally (individually)
responsible for the debts of the firm.

4 ) Types of Partners
1) Active or Working partner: - He takes active part in the partnership business. He
provides capital for the business.
2) Sleeping partner ( Dormant or silent partner): - He contributes the capital but does not
take active part in the working of the business.
3) Nominal partner: - A nominal partner neither contributes any capital not takes active
interest in the conduct of the business. He only lends his name or reputation for the benefit
of the firm.
4) Partner in profit only: - Such a partner shares profits only. He does not share any losses.
5) Minor partners: - A minor is not legally competent to enter into contracts. A minor
partners can be admitted only into the benefits can be admitted only into the benefits of the
firm but he is not personally liable for any debt of the firm.
6) Secret partner: - He does not disclose his name as a partner of the firm to the outsider,
though in fact, he is a partner.
7) Quasi partner: - He is a partner who has retired from the active management of the firm,
but leaves his capital behind in the firm. He is liable for the debts of the firm.

5) Partnership Deed
“A mutual agreement entered into by the partners of the firm.”
A partnership is created by an agreement between the partners. It is not made
compulsory by the Partnership Act to have such agreement in writing. It may be oral or in
writing. However, to avoid the future disputes it is desirable to have it in writing.
The partnership deed usually contains the following important provisions:-
1) Name & Address of the firm & partners.
2) Date of agreement.
3) Duration of the firm.
4) Nature & objective of the business.
5) Capital contribution by each partner.
6) The profit/ loss sharing proportion of the partners.
 152

7) Operation of bank account.

8) Rate of Interest on loan capital & Drawing
9) Accounts & Audit of the firm.
10) In case of death & retirement, method of settlement of account.
11) Valuation of Goodwill of the firm & revaluation of asset & liabilities on admission,
retirement & death of partners.
12) The procedure for Dissolution of the firm.
Provisions of the Indian Partnership Act, 1932: -
If there is no partnership deed made or the deed is silent then the following rules as laid
down by the Indian Partnership Act, 1932 will be applicable: -
1) The partners are entitled to share profits & losses equally.
2) The partners are not entitled to interest on their capitals.
3) No Salary is to be given to any partner.
4) No interest is to be allowed on capitals or to be charged on drawings of the partners.
5) Interest @ 6% p.a. is to be given on a partner‟s loan.
6) Every partner has a right to manage the business.
7) Every partner should do his work honestly & diligently.
6) Capital of partners:-
Amount contributed by the partners towards the business of the firm is called partner‟s
capitals. It is not compulsory for each partner to contribute capital. However, all the partners
may not contribute capital equally or in profit sharing ratio. It is not necessary that the
partners should bring capital in cash only. The capital may be brought in the form of cash or
in the form of assets such as stock, furniture, machinery, etc.
A separate capital account is opened for each partner & the Amount brought by the
partner is credited to his capital account.
Methods of maintaining Capital Accounts: -
There are two methods of maintaining capital accounts of partners: -
1) Fixed capital method.
2) Fluctuating capital method.

1) Fixed Capital Method: -

Under this method for each partner two accounts are maintained:-
1) Partner‟s Capital Account
2) Partner‟s Current Account

1) Partner’s capital account - Capital account is maintained for recording only for initial/
additional capital contributed & capital withdrawn by the partner. So the balance of capital
a/c generally remains fixed & hence it is called as fixed capital method. Except capital
nothing is recorded in this a/c. So this a/c always shows a credit balance.

2) Partner’s Current Account- Partner‟s current account is maintained for recording all
other day to day transactions & adjustments such as drawings, profit share, interest on capital
etc. The current a/c may show a debit or credit balance.
Both the accounts are shown separately in the balance sheet.
Capital accounts always appear on the liability side of balance-sheet.
Debit Balance of the current account is shown on the asset side & credit balance of current
account is shown on the liability side of the Balance Sheet.
Capital & Current accounts of a partner will appear as follows:-
 153

Dr. Partners Capital Account Cr.

Date Particulars J.F Amount Date Particulars J.F Amount
To Balance b/d xx By Balance b/d xx
(old debit (old credit
Balance) Balance)
To Balance c/d xx By Cash/Bank xx
(If there is a/c (Additional
credit Balance) Capital brought)
By Balance c/d xx
(If there is Debit
Balance)
xx xx
Dr. Partners Current Account Cr.
Date Particulars JF Amount Date Particular JF Amount
To Balance b/d (op. xx By Balance b/d (If there xx
debit balance) is op. credit balance)
To Drawings a/c xx By Internet on Capital
To Interest on xx a/c xx
Drawing a/c By Salary/remuneration xx
To Profit & Loss a/c xx By Commission a/c xx
(Share of Net Loss) By Profit & Loss a/c xx
To Balance c/d (If xx (Share of Net Profit) xx
credit side is greater) By Balance c/d (If debit
side is greater) xx
xx xx
2) Fluctuating Capital Method:-
Under this method only one capital account is maintained for each partner. All adjustments
are recorded directly in the capital accounts of the partners. The balance of capital account
fluctuates by every transaction between the firm & partner such as, capital contributed,
drawings, interest on capital, share in profit etc.
Therefore this method is known as fluctuating capital method.
Dr. Partners Capital a/c Cr.
Date Particular J.F Amount Date Particular J.F Amount
To Balance b/d (If xx By Balance b/d (If xx
there is old Debit there is old credit
Balance) Balance)
To Drawing a/c xx By Cash/Bank a/c xx
To P & L a/c (Share xx (Capital contributed)
of Net Loss) By Interest on Capital xx
To Balance c/d (If xx a/c
credit side is By Salary a/c xx
greater) By Commission a/c xx
By profit & loss a/c xx
(Share of Net Profit)
By balance c/d (If xx
debit side is greater)
xx xx
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B- ADMISSION OF A PARTNER
1. Introduction-
When existing partners in a firm take a new person as a partner in the firm, it is called
„Admission of a Partner‟.
A new partner may be admitted into an existing partnership for the purpose of
additional capital, additional skill or for any other purpose. On admission of a partner, old
partners have to make a sacrifice. Hence, an incoming partner has to give some premium to
the old partners for their sacrifice. This premium is called as „goodwill‟.

2. Reasons for admission of a partner-

1. To raise further capital
2. To get Business skill & Knowledge.
3. To increase the Business activities.
4. To eliminate competition in future.

3. Accounting Treatment on admission-

1. Capital of the incoming partner.
2. Distribution of accumulated profits or losses & reserves.
3. Calculation of New profit sharing ratio.
4. Revaluation of assets & Liabilities.
5. Treatment of goodwill.
6. Adjustment of capital accounts of the partners.

1) Capital of the incoming partner

When a new partner is admitted into the firm, the old partners decide by agreement the
Amount of the capital to be brought in by a new partner. The Amount of capital to be
contributed by the new partner depends upon the terms and conditions laid down in the
partnership deed. The new partner generally brings his capital in cash, the following entry is
passed-
1. Cash a/c…………………….Dr.
To New partner‟s capital a/c.
2. If the new partner brings his capital in certain assets & liabilities the entry will be –
Assets a/c……………………Dr.
To Liabilities a/c
To New partner‟s capital a/c

2) For transfer of undistributed profits, losses & reserves

If there is any General Reserve, Accumulated Reserve & Profit & Loss account
appearing in the Balance Sheet of the firm, it should be distributed amongst the old partners
in their old profit sharing ratio.

The following journal entries passed –

1. For reserves & accumulated profits –
Reserve a/c…………………..Dr.
P&L a/c (Cr.) ……………………...Dr.
To Old partner‟s Capital a/c.

2. For accumulated losses –

Old partner‟s capital a/c……Dr.
 155

To P& L (Dr.)a/c.

4. Calculation of new profit sharing ratio

On admission of new Partner, the profit sharing ratio of old partners will be changed.
New partner has been given a share in the profits of the firm. The old partners have to
sacrifice for the new partners. The profit sharing ratio of old partners will reduce.
Calculation of new profit sharing ratio involves the following two steps:-
1. Find out balance of one.
Balance of one = 1 – Share of new partner.

2. Calculation of new profit sharing ratio –

New Ratio = Balance of one × Old Ratio.
New profit sharing ratio is to be calculated, (i) when the capital accounts of the
partners is to be adjusted in their new profits sharing ratio & (ii) when the ratio of sacrifice is
to be calculated.

5. Calculation of ratio of sacrifice-

On the admission of a partner, the old partners have to make a sacrifice. The
proportion in which the old partners make a sacrifice is called „Ratio of Sacrifice‟.
Sacrifice Ratio = Old Ratio – New Ratio.

 Illustration 1:-
A & B are partners sharing profit & losses in the ratio of 5:3. C is admitted in the firm
with 1/5th share in future profits.
Calculate New profit Sharing ratio.
Solution:
Step i) Balance of one = 1 – Share of new partner
= 1 – 1/5
= 4/5
Step ii) New Ratio = Balance of one × Old Ratio
A = 4/5 × 5/8
= 20/40
B = 4/5 × 3/8
= 12/40
Hence,
New Ratio will be-
A = 20/40, B = 12/40, C= 1/5 i.e. 8/40
i.e. 5:3:2

 Illustration 2:-
P & Q are partners sharing profits & losses in the ratio of 3:2. They admit R into
partnership for 1/4 share in profits.
Solution:
i) Balance of one = 1- 1/4
= 3/4
ii) New ratio P = 3/4 × 3/5
= 9/20
 156

Q = 3/4 × 2/5
= 6/20
The new ratio will be,
P = 9/20, Q = 6/20, R = 1/4 i.e. 5/20
i.e 9:6:5

 Illustration 3:-
A & B are partners in a firm sharing profits & losses in the ratios of 5:3. They admit C
into partnership. The new ratio of the partners in 4:2:1.
Calculate the ratio of Sacrifice.

Solution:
Ratio of sacrifice = Old Ratio – New Ratio
A= 5/8 - 4/7
= 35 – 32/ 56
= 3/ 56
B= 3/8 -2/7
= 21 – 16 / 56
= 5/56
The ratio of sacrifice will be 3:5

 Illustration 4:-
Sujata & Sunita are partners in a firm sharing profit & losses in the ratio of 3:2. They
admitted Vanita into partnership. The new ratio of the partnership is agreed to be 2:1:1.
Find out Ratio of Sacrifice of Sujata & Sunita.
Solution:
Ratio of Sacrifice = Old Ratio – New Ratio
Sujata =3/5 – 2/4
= 12–10 / 20
= 2/20
Sunita = 2/5 – 1/4
= 8–5 / 20
= 3/20
The ratio of sacrifice will be 2:3.

6. Revaluation of assets & liabilities

When a new partner is admitted in a firm he will acquire a share in the profits as well
as assets of the firm. Hence old partners will not allow a new partner to share in profit due to
increase in the value of assets. Similarly new partner will not allow the old partners to charge
him for the loss on account of decrease in the value of assets. Hence the assets & liabilities
are revalued. A Revaluation Account or Profit & Loss adjustment account is opened in the
books of the firm for adjusting the changes in the values of assets & liabilities. Increase in
asset & decrease in liability results in revaluation profit & hence revaluation a/c is credited.
Decrease in asset & increase in liability results in revaluation loss & hence revaluation a/c is
debited. After revaluation, the balance on revaluation account which represents either profit
or loss on revaluation is transferred to old partners' capital accounts in their old profit sharing
ratio.
The following journal entries have to be passed in the books of the firm on Revaluation
of the assets & Liabilities.
1. For increase in the value an asset.
 157

Asset a/c ……………………………Dr

To Revaluation a/c

2. For decrease in the value of an asset.

Revaluation a/c ……………………..Dr
To Asset a/c.

3. For increase in Liability

Revaluation a/c……………………… Dr.
To Liability a/c

4. For decrease liability

Liability a/c …………………………..Dr.
To Revaluation a/c

5. For an binging an unrecorded asset

Asset a/c………………………………Dr.
To Revaluation a/c

6. For an unrecorded Liability

Revaluation a/c ………………………Dr.
To Liability a/c
7. For profit on revaluation
Revaluation a/c………………………. Dr.
To Old partners capital a/c (in old
8. For loss on Revaluation
Old partner‟s capital a/c - Dr.
To Revaluation a/c (Old Ratio)

7. Accounting treatment of goodwill

The Amount of goodwill is adjusted in any one of the following ways –
1. When the new partner brings in cash for his share of goodwill & it is retained in
Business –
i. Cash/ Bank a/c ……………….Dr.
To Goodwill a/c

ii. Goodwill a/c…………………..Dr.

To Old Partner‟s capital a/c. (In the Ratio of Sacrifice)

2. When the new partner brings cash for goodwill & it is withdrawn by the old partners
–
i. Cash/ Bank a/c ………………Dr.
To Goodwill a/c.
ii. Goodwill a/c………………….Dr.
To old partner‟s capital a/c.
(In the ratio of sacrifice)
iii. Old partners‟ Capital a/c ……….Dr.
To Cash/ Bank a/c.
 158

3. When the new partner does not bring the Amount of goodwill in the cash & goodwill
is raised at its full value –
Goodwill a/c …………………..Dr.
To old partners‟ capital a/c( In old profit sharing ratio)
Note:- In this case goodwill will appear in the new Balance sheet.
4. When Goodwill is raised & written off immediately after admission–
i. Goodwill a/c …………………… Dr.
To Old partner‟s Capital a/c (in old ratio)
ii. All partners‟ (including new partner)Capital a/c ………….Dr. (in New Ratio)
To Goodwill a/c.
5. When the new partner pays Goodwill to Old Partners privately –
In this case no entry is to be passed in the books of the firm.

6. When Goodwill already appears in the books of the firm –

i. Where the book value of goodwill is less than the agreed value of goodwill-
Good will a/c ………………Dr.
To Old Partner‟s Capital a/c (in old ratio)
ii. Where the agreed value is less than the book value–
Old partner‟s capital a/c ………Dr. (in old ratio)
To Goodwill a/c.

 Illustration 1:-
(When new partner bring goodwill in cash & retained in business)
The Balance Sheet of Ram & Laxman as on 31st December 2014 is set out below. They
share profit & Losses in the ratio 2:1

Balance-Sheet as on 31-12-2014
Liabilities Amount(Rs) Assets Amount(Rs)
Ram‟s Capital 40000 Building 20000
Laxman‟s Capital 30000 Furniture 6000
General Reserve 24000 Stock 12000
Creditors 16000 Debtors 60000
Cash 6000
Profit and Loss a/c 6000
110000 110000

They agreed to admit Bharat as a partner into the firm on 1st January 2015 on the
following terms:
1) Bharat to bring Rs. 12000 as capital & Rs. 9000 as goodwill which is retained in the
business. He will be entitled to ¼ the share of the profit of the firm.
2. Furniture is to be depreciated by 5%
3. Stock is to be revalued at Rs. 13000.
4. Creditors of Rs1000 are not likely to claim & hence should be written off.
5. Rent of Rs. 400 due but not received has not been recorded in the books.
Prepare-i) Revaluation a/c
ii) Partner‟s capital a/c
iii)Balance sheet after the admission of Bharat.
 159

Solution:-
Revaluation a/c
Particulars Rs. Particulars Rs.
To Furniture 300 By Stock 1000
To Capital a/c By Creditors 1000
(profit transferred) By Outstanding Rent 400
Ram‟s capital 1400
Laxman‟s capital 700 2100

2400 2400

Capital a/c
Particulars Ram Laxman Bharat Particulars Ram Laxman Bharat
To profit & 4000 2000 - By Bal b/d 40000 30000 -
loss a/c By G.R 16000 8000 -
To Balance 59400 39700 12000 By Goodwill 6000 3000 -
c/d By -
Revaluation 1400 700
a/c
By Cash - - 12000
63400 41700 12000 63400 41700 12000

Balance Sheet as on 1st January 2015

Liabilities Rs. Assets Rs.
Creditors 15000 Building 20000
Capital-Ram 59400 Furniture 5700
Laxman 39700 Stock 13000
Bharat 12000 Debtors 60000
Cash 27000
Outstanding Rent 400
126100 126100

 Working Notes
Cash a/c
Particulars Rs. Particulars Rs.
To Balance b/d 6000 By Balance c/d 27000
To Bharat‟s Capital 12000
To Bharat‟s Goodwill 9000
27000 27000

 Illustration 2:-
(Goodwill withdrawn)
Anil & Sunil are partners in a firm sharing profits & losses in the ratio of 3:2
respectively. Their Balance Sheet on 31st December, 2011 was as under-
Balance Sheet
Liabilities Rs. Assets Rs.
Sundry Creditors 5000 Cash at Bank 6000
Anil‟s Capital 30000 Sundry Debtors 12000
Sunil‟s Capital 20000 Land& Buildings 25000
 160

General Reserve 10000 Stock 8000

Plant& Machinery 10000
Furniture & Fixture 4000
65000 65000

On 1st January 2012 they are to admit Sanjiv into partnership on following terms:-
1) He shall pay Rs. 8000 as his share of goodwill. Goodwill shall be withdrawn by the old
partners.
2) He shall have to bring in Rs 10000 as his capital for 1/4th share in future profit
3) Land & Buildings is to be valued at Rs. 30000.
4) Plant & Machinery to be valued at Rs. 8000.
5) Stock values at Rs. 10000 & Furniture and Fixtures at Rs. 2000.
6) A provision of 5% on debtors would be made against doubtful debts.
Prepare ledger a/c‟s in the books of a new firm.

Revaluation a/c
Particulars Rs. Particulars Rs.
To Plant & Machinery 2000 By Land & Building 5000
To Furniture & Fixture 2000 By Stock 2000
To R.D.D 600
To capital a/c (profit transferred)
Anil/- 1440
Sunil/- 960 2400
7000 7000

Capital a/c
Particulars Anil Sunil Sanjiv Particulars Anil Suil Sanjiv
To cash 4800 3200 - By Balance b/d 30000 20000 -
To Bal. c/d 37440 24960 10000 By Gen. Reserve 6000 4000 -
.
By Revaluation 1440 960 -
By Bank a/c - - 10000
By GIW 4800 3200 -
42240 28160 10000 42240 28160 10000

Balance Sheet of New Firm as on 1st January 2012

Particulars Rs. Particulars Rs.
Sundry Creditors 5000 Cash at Bank 16000
Anil‟s Capital 37440 Sundry Debtors12000
Sunil‟s Capital 24960 Less – R.D.D 600 11400
Sanjiv‟s Capital 10000 Land & Building 30000
Stock 10000
Plant & Machinery 8000
Furniture & Fixture 2000
77400 77400
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 Working Notes
Bank a/c
Particulars Rs. Particulars Rs.
To Balance b/d 6000 By Anil‟s a/c 4800
To Sanjiv‟s cap 10000 By Sunil‟s a/c 3200
To Goodwill 8000 By Balance c/d 16000
24000 24000

 Illustration 3:-
(Goodwill raised)
Rekha & Surekha are in partnership sharing profits & losses in proportion of ¾ & ¼
respectively. Their Balance Sheet as on 31st December 2012 was as under-
Balance Sheet as on 31st December 2012
Liabilities Rs. Assets Rs.
Capital-Rekha 60000 Land & Building 50000
-Surekha 32000 Stock 44000
General Reserve 8000 Sundry Debtors 40000
Sundry Creditors 80000 Bank 46000
180000 180000
st
On 1 January 2013 they decided to admit Smita on the following terms:-
1) Smita should be given 1/5th share in future profits & for that she should bring in Rs.
40000/- as capital.
2) Goodwill should be raised at Rs. 40000.
3) Depreciate stock by 10% & create R.B.D.D @ 5% on the debtors.
4) Appreciate land & building by 20%.
5) Capital balances of the ld partners were to be adjusted in their new profit sharing ratio.
Differences to be settled in cash.
Pass the necessary journal entries in the books of the firm & prepare Balance Sheet of the
new firm.
Solution:-
In the book of M/S Rekha & Surekha
Journal
S.No. Particulars Dr Cr.
1) Profit & loss adjustment a/c- Dr. 6400
To Stock 4400
To Debtors 2000
(The stock & Debtors reduced)
2) Land & Building a/c – Dr. 10000
To Profit & Loss adjustment a/c 10000
(The value of L & B increased)
3) P & L adjustment a/c – Dr. 3600
To Rekha‟s Capital a/c 2700
To Surekha‟s Capital a/c 900
(Profit made on P & L adjustment a/c is transferred)
4) General Reserve a/c – Dr. 8000
To Rekha‟s Capital a/c 2700
To Surekha‟s Capial a/c 900
(The Amount of G.R transferred)
 162

5) Bank a/c – Dr. 40000

To Smita‟s Capital a/c 40000
(The Amount contributed as capital)
6) Goodwill a/c – Dr. 40000
To Rekha‟s Capital a/c 30000
To Surekha‟s Capital a/c 10000
(The g/w raised & transferred to capital a/c)
7) Bank a/c - Dr. 21300
To Rekha‟s Capital a/c 21300
(The required Amount contributed)
8) Surekha‟s Capital a/c – Dr. 4900
To Bank a/c 4900
(The excess Amount of capital refunded)
134200 134200

Balance Sheet of the New Firm

Liabilities Rs. Assets Rs.
Creditors 80000 Goodwill 40000
Capitals: Land & Building 60000
Rekha 120000 Stock 39600
Surekha 40000 Debtors 40000
Smita 40000 200000 Less- R.B.D.D. 2000 38000
Bank 102400
280000 280000
 Illustration 4:-
(Raised & written off)
P, Q, R were in partnership sharing profit & losses on the proportion of 2/8, 3/8 & 3/8
respectively. Their position on 31th March 2011 was as follows:-
Balance Sheet as on 31th March 2011
Liabilities Rs. Assets Rs.
Creditors 40000 Cash 22500
Bank overdraft 20000 Bills Receivable 4500
General Reserve 16000 Debtors 60000
Capital –P 20000 Stock 35000
-Q 27000 Furniture 2000
-R 30000 Building 29000
153000 153000

On 1st April 2011, they admitted ‟ S‟ into partnership on the following terms:-
1) S‟ to bring in Rs. 30000 as his capital for 1/4th share in the futre profit.
2) A Goodwill a/c to be raised in the book as Rs. 40000.
3) The value of the stock to be reduced by 10%.
4) Building to be appreciated by 15%.
5) A provision of Rs. 4000 to be made for bad debts.
6) An item of Rs. 500 due to Mr. A‟ included in the creditors to be written off.
After S‟ admission into the firm the G/w a/c to be written off.
Prepared Revaluation a/c, capital a/c & B/S of the new firm.
 163

Revaluation a/c
Liabilities Rs. Assets Rs.
To stock 3500 By Building 4350
To provision for bad debts 4000 By Crediors 500
By Capital‟s a/c
(loss transferred)
P 662
Q 994
R 994 2650
7500 7500

Partners' Capital a/c

Particulars P Q R S Particulars P Q R S
To Goodwill 7500 11250 11250 10000 By Balance c/d 20000 27000 30000 -
To Revaluation 662 994 994 - By G.R 4000 6000 6000 -
To Balance b/d 25838 35756 3756 20000 By cash - - - 30000
By G/W 10000 15000 15000 -
34000 48000 51000 30000 34000 48000 51000 30000

Balance Sheet as on 1st April 2011

Liabilities Rs. Assets Rs.
Creditors: 39500 Building 33350
Capital- P 25838 Furniture 20000
-Q 35756 Stock 31500
-R 38756 Debtors 60000
-S 20000 Less-R.D.D 4000 56000
Bank overdraft 20000 Bills Receivable 4500
Cash 52500
179850 179850

 Working
Goodwill
1) Goodwill a/c – Dr 40000
To P‟s capital a/c 10000
To Q‟s capital a/c 15000
To R‟s capital a/c 15000

2) P‟s capital a/c – Dr. 7500

Q‟s capital a/c Dr. 11250
R‟s capital a/c Dr. 11250
S‟s capital a/c Dr. 10000
To Goodwill a/c 40000
CALCULATION OF NEW RATIO
1–¼=¾
P = ¾ × 2/8 = 6/32
Q = ¾ × 3/8 = 9/32
R = ¾ × 3/8 = 9/32
S = ¼ i.e. 8/32
New Ratio = 6:9:9:8
 164

Goodwill a/c
Liabilities Rs. Liabilities Rs.
To P‟s capital a/c 10000 By P‟s capital a/c 7500
To Q‟s capital a/c 15000 By Q‟s capital a/c 11250
To R‟s capital a/c 15000 By R‟s Capital a/c. 11250
By S‟s Capital a/c 10000
40000 40000

Cash a/c
Liabilities Rs. Liabilities Rs.
To Balance b/d 22500 By Balance c/d 52500
To S‟s capital a/c 30000
52500 52500

Illustration 5:--
(Adjustment of Capitals)
Swati & Jyoti are partners in a firm sharing profit & losses in the proportion of 3/5 &
2/5 respectively. Their Balance Sheet on 31st December,2012 was as under.
Liabilities Rs. Assets Rs.
Capitals: Swati 24500 Land & Building 17500
Jyoti 24500 Plant & Machinery 24500
General Reserve 5000 Furniture 1050
Creditors 38000 Stock 14350
Bill payable 400 Debtors 31500
Cash 3500
92400 92400

They agreed to admit Pragati in their partnership on 1st January, 2013 on the following
terms:
1) The new profit sharing ratio will be 3:1:1.
2) Pragati should bring Rs. 7000 as his share of goodwill in the business & Rs. 10000 as
his capital.
3) Land & Building be valued at 90% of its book value.
4) Plant & Machinery & Stock to be reduced by 5% & 10% respectively.
5) Reserve for doubtful debts be provided at 5% on debtors.
6) The capitals of all the old partners are to be adjusted in their new profit sharing ratio
by making adjustments in cash, on the basis of new partners capital.
Prepare profit & Loss Adjustment Account, Capital Accounts & Balance Sheet after
admission of Pragati.
Solution:
Profit & Loss Adjustment a/c
Liabilities Rs. Liabilities Rs.
To Land & Buildings 1750 By Capital a/c (loss on
revaluation)
To Plant & Machinery 1225 Swati 3591
To Stock 1435 Jyoti 2394 5985
To Debtors (R.D.D) 1575
5985 5985
 165

Capital a/c
Liabilities Swati Jyoti Pragati Liabilities Swati Jyoti Pragati
To P & L adj 3591 2394 - By Balance b/d 24500 24500 -
(loss)
To Cash a/c - 16906 - By G.R 3000 2000 -
To Balance c/d 30000 10000 10000 By Cash a/c - - 10000
By Goodwill 4200 2800 -
By Cash a/c 1891 - -
33591 29300 10000 33591 29300 10000

Balance Sheet as at 1st January 1990

Liabilities Rs. Assets Rs.
Creditors 38000 Furniture 1050
Bills payable 400 Land & Building 17500
Capitals a/c- Less Dep. 10% 1750 15750
Swati 30000 Plant & Machinery 24500
Jyoti 10000 Less Dep. 5% 1225 23275
Pragati 10000 50000 Stock 14350
Less Dep. 10% 1435 12915
Debtors 31500
Less R.D.D 5% 1575 29925
Cash in hand 5485
88400 88400

 Working:
Cash a/c
Liabilities Rs. Liabilities Rs.
To Balance b/d 3500 By Jyoti‟s capital 16906
To Goodwill 7000 By Balance c/d 5485
To Pragati‟s Capital 10000
To Swati‟s Cpital 1891
22391 22391

Goodwill a/c
Liabilities Rs. Liabilities Rs.
To Swati‟s Capital 4200 By Cash a/c 7000
To Jyoti‟s Capital 2800
7000 7000
EXERCISES
Objective Questions:-
Q. 1) Select the appropriate alternatives & complete the statement.
1) A credit balance on Revaluation Account represents _______ .
a) Profit b) Loss c) Deficit d) Surplus

2) On admission of new partner the increase in value of liability is debited to _______ .

a) Partners Capital a/c b) Revaluation a/c
c) Profit & Loss a/c d) Realization a/c

3) If goodwill is written off, _______ is debited in the book of the firm.

 166

a) Capital a/c b) Goodwill a/c

c) Revaluation a/c d) Cash a/c

4) On admission of a partner, the profit or loss on Revaluation a/c shared by the old
partners in their _______ .
a) Old Ratio b) New Ratio
c) Sacrifice ratio d) Gain Ratio

5) The Reserve fund should be transferred to the capital a/c‟s of the old partners in their
______ .
a) New Ratio b) Sacrifice Ratio
c) Gain Ratio d) Old Ratio

6) Profit & Loss on Revaluation is transferred to _______ Partner‟s capital accounts.

a) New b) Old
c) Incoming partner d) Outgoing partner

7) A & B, who are equal partners, they admit C, his share is 1/5, the new profit sharing
ratio is ______ .
a) 4/10, 3/10, 3/10 b) 3/5, 1/5, 1/5
c) 2/5, 1/5, 2/5 d) 2/5, 2/5, 1/5

8) If x & y sharing profit & loss in the ratio of 2:1, they admit z & the new profit ratio is
2:1:1, the sacrifice ratio will be x & y is ______ .
a) 3:2 b) 1:3
c) 2:1 d) 1:2

Q.2) Match the following pairs.

Group A Group B
1) Goodwill a) Debit balance of Revaluation a/c
2) Sacrifice Ratio b) Old Ratio – New Ratio
3) New Ratio c) Revaluation a/c credit side
4) General Reserve d) Balance of one × Old Ratio
5) Loss on Revaluation a/c e) Credit balance of Revaluation a/c
6) Profit on Revaluation a/c f) Intangible Asset
7) Increase in the value of Assets g) Revaluation a/c Debit side
8) Increase in the value of Liabilities h) Distribution among the old partners
. i) Tangible Assets

Q. 3) Fill in the blanks with appropriate words.

1) If Goodwill is withdrawn by the partners, _______ account is credited.
2) Ratio of sacrifice is equal to Old Ratio _______ .
3) If any asset is taken by partner from firm, his capital Account will be _______ .
4) A & B who are equal partner‟s admit C into partnership for 1/5th share, their new
profit sharing ratio will be _______ .
5) A credit balance on Revaluation account represents ________ .

Q.4) State whether the following statements are True or False.

1. General Reserve should be transferred to old partner‟s capital a/c in their old Ratio.
2. If Goodwill is withdrawn by the old partners, their capital a/c is debited.
 167

3. Incoming partner must bring his capital in cash only.

4. Sacrifice Ratio = New Ratio – Old Ratio.
5. Goodwill is intangible asset of the business.
6. When Goodwill paid privately no entry in the books of account is required.
7. If any asset is taken by any partner from firm Revaluation a/c is credited.
8. Ratio of Sacrifice is the proportion in which old partners make a sacrifice.

Q. 5) Answer the following in Brief.

1) Why a new partner is admitted?
2) What is goodwill?
3) What is General Reserve?
4) Why Revaluation a/c is prepared?
5) When Goodwill is raised in the books of firm?
6) What is ratio of Sacrifice?
7) What is Revaluation Account?
8) What Journal entry will be passed when a partner brings cash as capital in the
Business?

Practical Problems:
1) The Balance Sheet of A & B who share profit in the ratio of 3:1 is as follows:-
Balance Sheet
Liabilities Rs. Assets Rs
Creditors 41500 Cash 22500
Capitals – A 30000 Bills Receivable 3000
B 16000 Debtors 16000
Stock 20000
Fixtures 1000
Buildings 25000
87500 87500

C was taken as a partner on the following terms:-

1) C pays Rs. 10000 as his capital for 1/5 share & Rs. 5000 as goodwill in cash & it is retain
in business.
2) Stock & Fixtures be reduced by 10%.
3) 5% provision be created on debtors & bills receivable.
4) Building is appreciated by 20%.
5) A provision of Rs. 1000 be made for outstanding repair bills.
6) An item of Rs. 650 included in creditors is not likely to be claimed & hence should be
written back.
Give necessary ledger a/c & also the Balance sheet of the new firm.
Answer-
(Profit on revaluation a/c Rs. 1600 /- , Balance Sheet total Rs. 104450 /-)

(Goodwill withdrawn by Old Partner in Cash)

2) The following is Balance Sheet of x & y sharing profit & losses in the ratio of 3:2
respectively as on 31- 12- 2012
Balance Sheet
Liabilities Rs. Assets Rs.
Sundry Creditors 10000 Cash 12000
Capital:- Sundry Debtors 24000
 168

X 60000 Land & Building 50000

Y 40000 Stock 16000
General Reserve 10000 Plant & Machinery 20000
Bill Payable 10000 Furniture & Fixtures 8000
130000 130000

On 1st January 2013 they have admit Z into partnership on the following terms –
1) He shall pay Rs. 16000 /- as his share of Goodwill. 50% Amount of Goodwill shall be
withdrawn by the old partners.
2) He shall have to bring in Rs. 20000 as his capital for 1/4th share in future profits.
3) Land & Building is to be valued at Rs. 60000.
4) Plant & Machinery to be valued at Rs. 16000.
5) Stock valued at Rs. 20000 & Furniture & Fixtures at Rs.4000.
6) A provision of 5% on debtors would be made against doubtful debts.
Prepare – 1) Revaluation a/c
2) Partners capita/c
3) Balance Sheet of the new firm.
Answers:
(Revaluation profit X = 2880, Y = 1920, Balance Sheet total Rs. 162800 /-)

(When Goodwill is raised)

3) Paresh & Mahesh are in partnership sharing profits & losses n proportion of ¾ & ¼
respectively. Their Balance Sheet on 31-12-2012 was as under.
Liabilities Rs. Assets Rs.
Capital:- Land & Building 25000
Paresh 30000 Stock 22000
Mahesh 16000 Sundry Debtors 20000
General Reserve 4000 Cash 23000
Sundry Creditors 40000
90000 90000

On 1st January 2013 they decided to admit Suresh on the following terms:
1. Suresh should be given 1/5th share in future profits & for that he should bring in Rs.
20000/- as capital.
2. Goodwill should be raised at Rs. 20000.
3. Depreciate stock by 10% & create R.B.D.D @ 5% on debtors.
4. Appreciate land & building by 20%.
5. Capital balances of the old partners were to be adjusted in their new profit sharing ratio.
6. Deference to be settled in cash.
Pass the necessary journal entries in the books of the firm & prepare balance sheet of
the new firm.
(Answer: Revaluation profit – Paresh Rs. 1350, Mahesh Rs. 450, Balance total Rs.140000/-)

(When new Partner brings goodwill in cash & retained in business)

4) Ajay & Vijay are partners in a firm, sharing profits & losses in the ratio of 2:1
respectively. Their Balance Sheet as on 31st March 2013 was as under.
Balance Sheet as on 31st March 2013
Liabilities Rs. Assets Rs.
Sundry Creditors 48000 Cash at bank 4000
 169

Bills Payable 1500 Sundry Debtors 30000

Capital: Land & Building 25000
Ajay 25000 Furniture 2000
Vijay 20000 Stock 18500
Machinery 15000
94500 94500

On 1st April 2013 they have admitted Sanjay in the following terms.
1. He shall pay Rs. 9000/- as her share of goodwill which sum to be retained in the business.
2. For 1/5th share in future profit he would contribute Rs. 15000/- as his capital in cash.
3. A provision of 5% is to be created on Sundry Debtors for doubtful debit.
4. The value of stock & Furniture are to be reduced by 10% & 5% respectively.
5. Land & Building be appreciated by 18%
Pass the Journal entries & prepare profit & loss adjustment a/c, capital a/c & Balance
Sheet of the new firm.
(Answer: Profit & loss adjustment a/c – profit Ajay Rs. 700, Vijay Rs. 350, Balance Sheet
total 119550)

(Contingent Liability & loan repaid)

5) Amitabh & Jaya were partners sharing their profits in the ratio of 3:2. Their position on
31st March 2013 was as under.
Balance Sheet as on 31st March 2013
Liabilities Rs. Assets Rs.
Capital a/c- Furniture & Fixture 8000
Amitabh 50000 Building 45000
Jaya 30000 Investment 12000
Current a/c- Debtors 28000
Amitabh 1000 Stock 17000
Jaya 600 Bank 3000
Creditors 23400
Loan from Sham 8000
113000 113000

On 1st April 2013, they decided to admit Rekha on following terms:-

1) Rekha should bring in 20000 as capital & Rs. 15000/- as his share of goodwill & he
should given 1/4th share in future profit.
2) Furniture & Fixture were to be valued Rs. 7000/- & Investment at Rs. 15000 & stock at
Rs. 15000/-.
3) Building is to be appreciated by 20% & create R.D.D at 5% on Debtors.
4) A contingent liability of Rs. 3250 not included in the above Balance sheet had to be
cleared.
5) The loan from Sham was to be repaid.
Prepare-
1. Revaluation a/c
2. Partners Current a/c
3. Balance Sheet of new firm.
(Answer:- Revaluation profit – Amitabh Rs. 2610/- , Jaya Rs. 1740/- Balance Sheet Total Rs.
144350/-)
 170

C- Partnership Final Accounts

Partnership Final Accounts are the ultimate accounts & statements of partnership firm
which are prepared at the end of the trading year, to find out the profit earned or loss suffered
& to know the financial position of the firm. These accounts show the final results of all
business operations carried out during the financial year. Final accounts are prepared to find
out the profit earned or loss sustained by a firm & the financial position of the business.
These accounts consist of –
a) Trading account
b) Profit & Loss account
c) Profit & Loss Appropriation account &
d) Balance Sheet
The basic principles of preparing Final accounts of a partnership firm are similar to that of a
sole trading concern. The only difference is that in the case of partnership, capital accounts,
drawing a/c, current a/c‟s are opened separately in the name of each partner & they are shown
in the Balance Sheet.
a) Trading Account-
Trading account is prepared to find out gross profit or gross loss of the business carried out
during the year. It is a nominal account. It is a part of profit & loss account. Trading account
is prepared to ascertain the trading profit or loss arising out of buying & selling transactions.
Trading a/c is divided into two sides i.e. debit side & credit side. Debit side contains all
trading/direct expenses & credit side contains trading/direct incomes i.e. sales. It compares
sales & cost of sales. If the sales are more than cost of sales, then the result will be gross
profit. If the cost of sales is more than sales, then the result will be gross loss.
Closing/transfer entries for preparing trading account are as follows:-
1) For transfer of direct expenses-
Trading A/c ……………………..Dr.
To Opening Stock
To Purchases
To Direct Expenses e.g. Carriage inward, wages etc.
To Sales Return
2)For transfer of direct incomes, Goods Lost by Fire, Purchase Returns & closing stock-
Sales A/c …………………………Dr.
Closing Stock A/c ……………… .Dr.
Purchases Return A/c …………….Dr.
Goods Lost by Fire A/c ………….Dr.
To Trading A/c
3) For transfer of gross profit to profit & loss a/c-
Trading A/c ……………………….Dr.
To Profit & Loss A/c
4) For transfer of gross loss to profit & loss a/c -
Profit & Loss A/c ……………………….Dr.
To Trading A/c
 171

Proforma of Trading Account-

Trading a/c of M/s._____________

for the year ended ________

Particulars Amount Particulars Amount

To opening stock xx By Sales xx
To Purchases xx Less-Return Inward xx
Less-Returns Outwards xx By Sale of scrap xx
To carriage inwards xx By Goods distributed as free samples xx
To Freight inwards xx By Goods lost by theft xx
To Direct wages xx By closing stock xx
To Direct expenses xx By Gross loss c/d xx
To Royalty on production xx
To Motivate power xx
To Factory expenses xx
To Repairs & Renewals xx
To Fuel, Power, & Lighting xx
To Coal, Gas & Water xx
To Factory Rent xx
To Factory Insurance xx
To Octroi xx
TO Dock charges xx
To Customs Duty xx
To Import Duty xx
To Trade Expenses xx
To works Manager‟s Salary xx
To Gross profit c/d xx

xx xx

b) Profit & Loss Account-

Profit & Loss a/c is a nominal account. It is prepared to ascertain net profit earned or
net loss suffered by the partnership business during the accounting period. All indirect
expenses & losses are shown on debit side of profit & loss account & all indirect incomes &
gains earned during the year are shown on the credit side of profit & loss account.
 172

Proforma of Profit & Loss Account

Particulars Amount Particulars Amount
To Gross Loss b/d xx By Gross profit b/d xx
To Office expenses xx By Discount received xx
To Staff Salaries xx By Commission received xx
To Office Rent & Taxes xx By Interest on Investments xx
To Insurance xx By Interest on Deposits xx
To Printing & Stationery xx By Dividend received xx
To Postage & Telegrams xx By Rent received xx
To General Expenses xx By Sundry receipts xx
To Sundry Expenses xx By Miscellaneous for discount on xx
To Conveyance xx creditors
To Travelling Expenses xx By Net Loss c/d xx
To Sales Commission xx
To Audit Fees xx
To Legal Expenses xx
To Carriage on Sales xx
To Export Duty xx
To forwarding charges xx
To Discount allowed xx
To Telephone charges xx
To Depreciation on Office xx
Equipment & Assets
To Selling & Distribution xx
Expenses
To Carriage on sales/outward xx
To Free samples xx
To Advertising xx
To Commission on sales xx
To Delivery expenses xx
To Salesmen‟ Salaries xx
To Travelling expenses of xx
salesman xx
To Showroom expenses xx
To Discount allowed xx
To Interest on loan xx
To Bank charges & commission xx
To bad debts xx
To provision for Bad debts xx
To provision for Discount on
debtors xx
To Net profit c/d
xx xx

c) Profit & Loss Appropriation Account:-

The account which shows distribution of net profit among the partners under various
heads is known as Profit & Loss Appropriation Account. The net profit as shown by the
profit & loss account cannot be divided among the partners directly. It is distributed to
partners under various heads such as interest on capital, salary to a partner, commission to a
 173

partner etc. It is credited with interest on drawings, interest on loan to partner. Therefore
profit & loss Appropriation Account is prepared to ascertain the net profit after all the
adjustments regarding interest on capital, interest on drawing, salary to a partner etc. The net
profit as shown by the profit & loss Appropriation Account is divided among the partners in
their profit sharing ratio.
Profit & Loss Appropriation a/c
Particulars Amount Particulars Amount
To interest on Capital xx By Net Profit b/d xx
To Salary to partner xx By Interest on Drawings xx
To partner‟s Commission xx By Net Loss xx
To Reserve (Transfer) xx
To interest on a Partner‟s loan xx
To Net Profit xx
xx xx
d) Balance Sheet:-
Balance Sheet is not an account but a statement showing financial position of the
business on a particular date. It is a statement showing assets & liabilities of the business. The
Balance Sheet is prepared after the preparation of the trading & the profit & loss a/c. Balance
Sheet contains balances of Real & Personal accounts. It is important to note that the Balance
Sheet always gets tallied. It means the total value of the assets is always equal to the capital
& liabilities.
Assets = Liabilities + Capital
Proforma of Balance Sheet
Liabilities Amount Liabilities Amount
Partners Capital a/c xx Premises xx
A- Op. Balance xx Land & Building xx
Add- Interest on Capital xx Furniture & Fixtures xx
Add- Net Profit xx Plant & Machinery xx
Less- Net Loss (If any) xx Motor Car xx
Less- Drawings xx Loose tools xx
B- Op. Balance xx Patents & copyrights xx
Add- Interest on Capital xx Trademarks xx
Add- Net Profit xx Goodwill xx
Less- Net Loss (If any) xx Investments xx
Less- Drawing xx Closing Stock xx
Partners Loan xx Sundry Debtors xx
Loans from Bank xx Bills receivable xx
Bank overdraft xx Outstanding income xx
Sundry Creditors xx Prepaid Expenses xx
Bill payable xx Cash in hand xx
Outstanding expenses xx Cash at Bank xx
Income received in advance xx Fictitious Assets xx

xx xx
 174

ADJUSTMENTS IN FINAL ACCOUNTS:-

Effects of Adjustments in Final Accounts-

Adjustment Adjustment Entry Accounting Treatment in
Trading Profit & Balance Sheet
Account Loss
Account
Closing stock Closing Stock a/c ....Dr. Credit Side - Asset Side
To Trading a/c
Goods distributed as Advertising a/c …….Dr. Credit Side Debit Side -
free Samples To Goods distributed as
free Samples a/c
Uninsured Goods 1) Loss by fire A/c .. ……Dr. Credit Side Debit Side -
destroyed by To Goods Lost by fire Cost of goods Total loss by
Fire/Accident 2)Profit & loss a/c ...........Dr. lost by fire fire
To Loss by fire A/c
3) Goods Lost by Fire .....Dr.
To Trading a/c
If the Goods insured 1) Loss by fire A/c .. …....Dr. Credit Side Debit Side Asset Side
are destroyed by To Goods Lost by fire Cost of goods Net loss by Insurance Claim
Fire/Accident & 2) Insurance Co. a/c……..Dr. lost by fire fire admitted
claim is partly To Loss by fire A/c
accepted by 3) Profit & loss a/c ……...Dr.
insurance Company To Loss by fire A/c
4) Goods Lost by Fire … Dr.
To Trading a/c.
Goods stolen 1) Loss by theft A/c …….Dr. Credit Side Debit Side Asset Side
To Goods lost by theft Insurance Claim
2) Insurance Co. a/c……..Dr. admitted
To Loss by theft
3) Profit & Loss a/c…… Dr.
To Loss by theft (Net loss)
4) Goods Lost by theft .....Dr.
To Trading a/c
Goods withdrawn by 1)Partner‟s Drawing a/c Credit Side - Added in
the Partners ………………. Dr. Drawing &
deduct To Goods withdrawn deducted from
2)Goods withdrawn A/c from Capital on
……………..Dr. the liability Side
To Trading a/c OR shown on
debit side of
current a/c
Unrecorded Purchases a/c ……..Dr. Debit Side --to - Liability Side -to
Purchases To Creditors a/c be added in be added in
purchases Creditors

Unrecorded Sales Debtors a/c ………..Dr. Credit Side -to - Asset Side
To Sales a/c be added in -to be added in
Sales Debtors
 175

Outstanding
Expenses Added in Added in
a) Any Expenses due Expenses a/c ………Dr. Expenses Expenses (if To be shown as
but not paid To Outstanding Exp. a/c (if direct) indirect) Liability

b) Wages due but Wages a/c ....Dr. Debit side Debit side Liability side
not paid To Outstanding Wages To be added in Added in
wages Salaries
c) Salaries due but Salaries a/c ..Dr. - Debit side Liability side
not paid To Outstanding salaries Added in
Rent
Debit Side
d) Rent due but not Rent a/c …...Dr. - Added in Liability side
paid To Outstanding Rent a/c Advt.

e)Advertisement due Advertisement a/c …Dr. - Liability side

but not paid To Outstanding Advt. a/c

Income Received in
Advance
a) Any income Income a/c ...Dr. - To be To be shown as
received in Advance To income received in deducted Liability
advance a/c from income
on
Credit side
E.g. Rent received in Rent a/c ………....Dr. To be Liability side
advance To Rent received in advance - deducted
a/c from Rent
on
Cr. side
Prepaid Expenses
a) Any Prepaid Prepaid Expenses a/c - To be To be shown as
Expenses …………………….Dr. deducted Asset
To Expenses a/c from
Expenses
Debit side

E.g. Insurance Paid Prepaid insurance - To be To be shown as

in Advance/Prepaid a/c ……………….Dr. deducted Asset
insurance To insurance a/c from
insurance
Debit side
Income receivable or
Outstanding Income
a) Any Outstanding Outstanding Income a/c ...Dr. - To be added Asset side
Income (Income To Income a/c in Income on
Receivable) the Credit
side
E.g. Outstanding Outstanding rent a/c Dr. To be added
Rent To Rent a/c - in Rent on Asset side
Credit side
Bad Debts & R.D.D.
a) Bad debts
1) Bad debts a/c …..Dr. - Debit side Bad debts to be
To Sundry Debtors deducted from
2) Profit & Loss a/c Dr. debtors
To Bad Debts a/c on asset side
 176

b) New provision for

bad/doubtful debts Profit & Loss a/c Dr. - Debit side R.D.D. to be
(R.D.D.) To R.D.D. a/c deducted from
debtors on
Asset side
c) Reserve for Profit & Loss a/c Dr. - Debit side Reserve for
discount on debtors To Reserve for discount to be
discount on debtors a/c deducted from
debtors on
Asset side
d) Reverse for
discount on Reserve for discount on - Credit side Reserve for
Creditors creditors a/c ………Dr. Discount to be
To Profit & Loss a/c deducted from
Creditors on
Liability side
Depreciation Depreciation a/c …..Dr. - Debit side Depreciation to
To Fixed assets a/c be deducted from
Fixed asset on
Asset side

Illustration 1:
From the following Trial Balance of M/s. Neha & Sneha, you are required to prepare Trading
& Profit & Loss a/c for the year ended 31st March, 2014 & the Balance Sheet as on that date
after taking into account the necessary adjustments.
Trial Balance
Particulars Debit Rs. Credit Rs.
Neha‟s Capital 180000
Sneha‟s Capital 150000
Neha‟s Drawings 14450 -
Sneha‟s Drawings 10000 -
Stock on 1-4-2014 200000 -
Purchases 275000 -
Bills Receivable 26000 -
Sales 400000
Bills Payables 60000
Return Inwards 5000 -
Return Outwards - 4500
Plant & Machinery 100000
Loose Tools 25000
Patents 25000
Sundry Debtors 125000
Sundry Creditors 140000
Discount 1000
Cash at Bank 77550
Wages 19000
Salaries 17500
Rates & Taxes 7500
Insurance 3000
Printing & Stationary 2000
Power & Fuel 3500

935500 935500
 177

Adjustments:-
1. Depreciate Plant& Machinery by 5% & patents by 15%;
Loose Tools are revalued at Rs.24,000.
2. Provide for Bad & Doubtful Debts at 5% on Sundry Debtors.
3. Prepaid Insurance Rs. 750.
4. Outstanding Expenses: a) Salaries Rs. 2,500 b) Wages Rs. 1,000.
5. Stock as at 31st March 2014 Rs 1,30,000.
6. Neha & Sneha have taken goods worth Rs. 2,000 & Rs. 3,000 respectively for their
personal use. No entry has been passed in the books.
Solution:
M/s Neha & Sneha
Trading, Profit & Loss Account
for the year ended 31st March 2014
Particulars Rs. Rs. Particulars Rs.
To stock 200000 By Sales 400000
To Purchases 275000 Less: Ret.
Less: R.O. 4500 Inwards 5000 395000
Drawings 5000 9500 265500 By Closing Stock 130000
To Wages 19000
Add: Outstanding 1000 20000
To Power & Fuel 3500
To Gross Profit c/d 36000
525000 525000
To Salaries 17500
Add: Outstanding 2500 20000 By G.P. b/d 36000
To Printing & Stationery 2000 By Discount 1000
Add: Outstanding 500 2500 By Net Loss
To Rates & Taxes 7500 transferred to
To Insurance 3000 Capitals
Less: Prepaid 750 2250 Neha 5625
To Reserve for Sneha 5625 11250
Doubtful Debts 6250
To Depreciation –
Plant & Machinery 5000
Patents 3750
Loose Tools 1000 9750

48250 48250
 178

M/s Neha & Sneha

Balance Sheet as on 31st March 2014
Liabilities Rs. Rs. Assets Rs. Rs.
Sundry Creditors 140000 Cash at Bank 77550
Bills Payable 60000 Sundry Debtors 15000
Outstanding Expenses Less: R.D.D. 6250 118750
Salaries Stock-in-Trade 130000
Wages 2500 Bills Receivable 26000
Printing & 1000 Prepaid Insurance 750
Stationery 500 4000 Loose Tools 25,000 24000
Capital a/c‟s: Less- Written off 1,000
Neha: Balance 180000 Patents 25000 21250
Less: Drawings Less: Depreciation 3750
16450 Plant & Machinery 100000 95000
Less: Less: Depreciation 5000
Net Loss: 5625 22075 157925
Gross: Balance 150000
Less: Drawings
13000
Less:
Net Loss: 5625 18625 131375

493300 493300

Illustration 2:
Aarya & Bharya are partners sharing profits & losses in the ratio of 3:2. Their Trial Balance
on 31st March 2011 is given bellow. Prepare Trading & Profit & Loss a/c for the year ended
31st March, 2011 & a Balance Sheet as on that date after taking into account the adjustments
given below:
Trial Balance
Particulars Rs. Particulars Rs.
Purchases 98000 Capitals – Aarya 30000
Patents Rights 4000
- Bharya 40000
Building 100000 Provident Fund 7000
Stock 1-4-2010 15000 Creditors 50000
Printing & Stationery 1750 Bank Loan 20000
Sundry Debtors 33000 Sales 150000
Wages & Salaries 11000 Res. for doubtful debts 250
Audit Fees 700 Purchases Returns 3500
Sundry Expenses 3500
Furniture & Fixtures 8000
10% Investments (Purchases
30-9-2010) 10000
Cash 4000
Provident Fund Contribution 800
Carriage Inwards 1300
Trade Expenses 2700
Bills Receivable 7000

Total 300750 Total 300750

 179

Adjustments:-
1. Closing Stock is valued at cost Rs. 23,000, while its market price is Rs. 28,000.
2. On 31st March, 2011 the stock of stationery was Rs. 500.
3. Reserve of bad & doubtful debts at 5% on debtors.
4. Depreciate Building at 5% & patents at 10%.
5. Goods worth Rs. 10,000 were destroyed by fire. The Insurance Company admitted a
claim for Rs. 9,500.
6. Bills Receivable include a Bill dishonored for Rs. 2,000.
7. Bharya is to receive 1% commission on Sales.
Solution:
M/s Aarya & Bharya
Trading, Profit & Loss a/c
for the year ended 31-3-2011
Particulars Rs. Particulars Rs.
To Stock 15000 By Sales 150000
To Purchases 98000 By Loss & Fire 10000
Less: R.O. 3500 94500 By Closing Stock 23000
To Wages & Salaries 11000
To Carriage Inwards 1300
To Trade Expenses 2700
To Gross Profit c/d 58500
183000 183000
To Audit Fees 700 By G.P. b/d 58500
To Printing & Stationery 1250 By Interest on Investments 500
To Sundry Expenses 3500 {for 6 months
To P.F. Contribution 800 i.e. 30-9-2010
To R.D.D. 1500 to 31-3-2011}
To Depreciation –
Building 5000
Patents 400 5400
To Loss by Fire 500
To Commission to Bharya 1500
To N.P. transferred to
Capital:
Aarya 17540
Bharya 26310
43850
59000 59000
 180

Balance Sheet of M/s Aarya & Bharya as on 31-3-2011

Liabilities Rs. Assets Rs.
Creditors 50000 Cash 4000
Bank Loan 20000 Sundry Debtors 33000
Provident Fund 7000 Add: Bills Receivable
Capitals –Aarya 30000 dishonored 2000
Add: N.P 17540 47540 35000
Less: R.D.D. 1750 33250
Bharya 40000 Stock in Trade 23000
Add: Commission 1500 Stationery Stock 500
N.P. 26310 67810 Bills Receivable 7000
Less: Dishonored 2000 5000
Investments 10000
Outstanding Interest
on investments 500
Outstanding Claim
from Insurance Co. 9500
Furniture & Fixtures 8000
Patents Rights 4000
Less: Depr. 400 3600
Building 100000
Less: Depr. 5000 95000

192350 192350

Illustration 3:
From the following Trial Balance of Shahrukh & Kajol being equal partners. You are
required to prepare Trading & Profit & Loss Account for the year ended 31st March 2014 &
Balance Sheet as on that date after taking into consideration the adjustment.
Trial Balance as on 31st March 2014
Particulars Debit Credit
Loose Tools 25000 -
Motive Power 1300 -
Opening Stock 22000 -
Audit Fees 4500 -
Goodwill 11000 -
Printing & Stationary 3700 -
Advertisement 1800 -
Interest 1000 -
Motor Van 20000 -
Sundry Debtors 30000 -
Sales Returns 3000 -
Wages 1600 -
Discount 600 -
Bad Debts 2200 -
Purchases 66000 -
Octroi 1200 -
Cash in Hand 1100 -
Plant & Machinery 40000 -
Drawings: -
 181

Shahrukh 6000 -
Kajol 5000 -
Sales - 88000
Sundry Coeditors‟ - 18000
Purchases Return - 1000
Capitals: -
Shahrukh - 80000
Kajol - 60000
247000 247000
Adjustments:
1) On 31st March 2014 stock is valuable of Rs. 35,000.
2) Goods distributed as free samples were 2,000.
3) Stock of Printing & Stationery on 31st March 2014 is valued at Rs. 700.
4) Motive power & Audit Fee outstanding Rs. 700 & Rs. 1,500 respectively.
5) Depreciate Motor Van & Plant & Machinery at 10% & 5% respectively.
6) Create reserve for Bad & Doubtful Debts at s5% on Debtors.
7) Provide Interest on Partners Capital & Drawing at 6% & 8% respectively.
Solution:
M/s. Shahrukh & Kajol
Trading of Profit & Loss a/c for the year ended 31st March 2014
Particulars Amount Particulars Amount
To Opening Stock 22000 By Sale 88000
To Purchases 66000 Less: S.R. 3000 85000
Less : P.R. 1000 65000 By Goods Distributed as free 2000
To Wages 1600 samples
To Motive Power 1300 By Closing Stock 35000
Add: Outstanding 700 2000
To Octori 1200
To Gross Profit 30200
122000 122000
To Advertisement 1800 By Gross Profit 30200
Add: Free Samples 2000 3800 By Interest on Drawing
To Audit Fees 4500 Shahrukh 480
Add: Outstanding 1500 6000 Kajol 480 880
To Printing & Stationary 3700
Less: Stock 700 3000
To Interest 1000
To Discount 600
To Dep. On plant 2000
On Motor 2000 4000
To Bad Debts 2200
Add: R.D.D 1500 3700
To Interest on Capital
Shahrukh 4800
Kajol 3600 8400
To Net Profit
Shahrukh 290
Kajol 290 580
31080 31080
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M/S Shahrukh & Kajol

Balance Sheet as on 31st March 2014
Liabilities Amount Assets Amount
Sundry Creditors 18000 Plant & Machinery 40000
Outstanding Expenses Less: Dep. 2000 38000
Motive Power 700 Motor Van 20000
Audit Fees 1500 2200 Less: Dep .2000 18000
Capital Account Loose Tools 25000
Shahrukh 80000 Goodwill 11000
Add: Interest on Capital 4800 Sundry Debtors 30000
Add: N.P. 290 Less: R.D.D 1500 28500
85090 Cash in Hand 1100
Less: Drawing 6000 Stock of Printing & Stationary 700
Less: Int. on Drawing 480 78610 Closing Stock
Kajol‟s Capital 60000 35000
Add: Int. on Capital 3600
Add: N.P. 290
63890
Less: Drawing 5000
Less: Int. on Drawing 400 58490
157300 157300

Illustration 4 :
Ganga & Yamuna are partners, sharing profits & losses in the ratio of 3:1. The following
balances were extracted from the books of a partnership from as on 31st March 2014.

Trial Balance as on 31st March 2014

Particulars Debit Credit
Purchases 165000
Sundry Debtors 33000
Stock 1st April, 2013 25000
Wages 18000
Loan at 6% to Dev (1stApril 2013 10000
Salaries
Power & Fuel 19000
Plant & Machinery 1300
Insurance 40000
Printing & Stationery 3200
Bills Receivable 4700
Office Expenses 7000
Bad Debts 1300
Cash in Hand 200
Investment 7800
Sundry Creditors 15000
Bills Payable 40000
Sales 5000
Commission 235000
Reserve Fund 5500
Capital Account :- 12000
Ganga
 183

Yamuna 80000
Advertisement 70000
Drawing:- 12000
Ganga
Yamuna 10000
Land & Building 15000
60000
447500 447500

Adjustments :
1) Stock on 31st March 2014 was valued at cost price Rs. 62,000/- market price Rs. 74,000.
2) Depreciate Land & Building at 15% & Plant & Machinery at 10%.
3) Provide 10% interest on investment outstanding.
4) Goods worth Rs 15000/- were purchased on 31st March 2014 & included in closing stock
but not recovered in the books of accounts.
5) Uninsured goods worth Rs. 6000/- were destroyed by fire.
6) Debtors of Rs. 3000/- were bad & should be written off & R.D.D. should be maintained at
5%.

Solution:-
M/S Ganga & Yamuna
Trading &Profit & Loss a/c for the year ended 31st Mar.2014
Particulars Amount Particulars Amount
To Opening stock 25000 By Sales 235000
To Purchases 165000 By Goods destroyed by fire 62000
Add- unrecorded pur15000 180000 By Closing stock 6000
To Wages 18000
To Power & Fuel 1300
To Gross Profit 78700
303000 303000

To Salaries 19000 By Gross Profit 78700

To Insurance 3200 By Commission 5500
To Printing & Stationary 4700 By Interest on investment 1500
To Office Exp. 1300 By Interest On Dev‟s Loan 200
To Bad Debts 200
Add:Further Bad deb. 3000
Add:R.D.D. 3000 6200
To Advertisement 12000
To Dep- P&M 9000
-L&B 4000 13000
To Cash by Fire 6000
To Net Profit
Ganga 15375
Yamuna 5125 20500

85900 85900
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M/S Ganga & Yamuna

Balance Sheet as on 31st Mar. 2014
Liabilities Amount Assets Amount
Sundry Creditors 40000 Land & Building 60000
Add Unrecorded Pur.15000 55000 Less:Dep 9000 51000
Bills Payable 5000 Plant & Machinery 40000
Reserve Fund 12000 Less: Dep 4000 36000
Capital a/c-Ganga 80000 Sundry Debtors 33000
Less: Drawing 10000 Less:Bad Deb. 3000
70000 Less:R.D.D. 3000 27000
Add: N.P. 15375 85375 6% Loan to Dev 10000
Add:Int 200 10200
Cap a/c-Yamuna 70000 Bills Rec. 7000
Less: Drawing 15000 Cash in Hand 7800
55000 Investment 15000
Add:Inntrest 1500 16500
Add:N.P 5175 60175 Closing stock 62000

217500 217500

Illustration 5 :-
Sita & Gita are partners sharing profits & losses in the ratio 3:1. Following is the Trial
Balance as on 31st March 2013.
Trial Balance as on 31st March 2013
Particulars Debit Credit
Motor Vans 22000
Office Expenses 1200
Carriage inwards 750
Bad debts 1600
Opening Stock 27000
Land & Building 60000
Salaries 11000
Cash in hand 1250
Cash at Bank 21000
Purchases 140000
Insurance 3600
Sundry debtors 30400
Rent & Taxes 1600
Freight 900
Wages 4800
Sales 185000
Sundry Expenses 1740
Printing & Stationary 2900
Sundry Creditors 24000
Carriage outwards 1250
Capital a/c-Sita 60000
-Gita 50000
Current a/c-Sita 8000
Gita 6000
333000 333000
 185

Adjustments:
1) Closing stock on 31st Mar. 2013 was valued at Rs. 42000/-
2) Interest on partners capitals at 6% was to be provided.
3) Goods distributed an free samples were Rs. 1500/-
4) Rs.400/- due from customer is not recoverable.
5) Create R.D.D. at 5% on sundry debtors.
6) Depreciate motor vans at 5% & land & building at 10%.
7) Audit fee for the year was outstanding Rs. 3600/-

Solution:-
M/S Sita & Gita
Trading & Profit &Loss a/c
For the year ended 31st Mar. 2013

Particulars Amount Particulars Amount

To Opening stock 27000 By Sales 185000
To Purchase 140000 By Goods distributed as free
To wages 4800 samples 1500
To Carriage inwards 750 By Closing stock 42000
To Freight 900
To Gross profit 55050
228500 228500

To Salaries 11000 By Gross Profit 55050

To Office Exp. 1200
To Bad debts 1600
Add: Further bad debts 400
2000
Add: R.D.D. 1500 3500

To Insurance 3600
To Rent & Taxes 1600
To Sundry Exp. 1740
To Printing & Stationary 2900
To Carriage outwards 1250
To Adjustment 1500
To Outstanding Audit Fee 3600
To Interest on Capital
Sita 3600
Gita 3000 6600
To Depreciation
Motor Van 1100
Land & Building 6000 7100
7100
To Net Profit
Current A/C
Sita 7095
Gita 2365 9460
55050 55050
 186

M/S Sita & Gita

Balance Sheet as on 31st Mar. 2014

Particulars Amount Particulars Amoun

. t.
Capital A/C Motor Van 22000
Sita 60000 Less-. Dep. 1100 20900
Gita 50000 Land & Building 60000
Current A./C Less Dep. 6000 54000
Sita 8000 Cash in Hand 1260
Add: Int. on Capital 3600 Cash at Bank 21000
11600 Sundry debtors 30400
Add : N.P. 7095 18695 Less Further bad debts 400
30000
Gita 6000 Less R.D.D. 1500 28500
Add : Int. on Capital 3000
9000 Closing Stock 42000

Add : N.P. 2365 11365

Sundry Creditors 24000
Outstanding Audit fee 3600
167600 167600

EXERCISES:-

Q.1) Fill in the blanks.

1) In case of dissolution assets& liabilities are transferred to -----------------------a/c.

2) Assets 4 Liabilities are transferred to Realization a/c at their ------------------values.

3)Dissolution expenses are credited to ----------------------- a/c.

4)Profit on realization is transferred to capital Accounts in ----------------------- ratio.

5)Loss on Realization a/c is transferred to the ----------------------- side of partner‟s capital a/c.

6)If an unrecorded liability is paid on dissolution of the firm ---------------------a/c is debited.

7)Accumulated loss is transferred to the ----------------------- Account.

8)When the assets of the firm are sold Realization Account is --------------------

9)If any liability is taken over by a partner, the ----------------------- A/c is to be debited.

10)All activities of the partnership firm cease on ----------------------- of a firm.

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Q.2) Match the following pairs :-

Sr. Group “A” Group “B”

No.
1) Good will a)Winding up of business
2) Debit balance on Realization a/c b)Realization of Assets
3) Credit balance of Realization a/c c)Intangible Asset
4) Dissolution d)Loss on Realization a/c
5) Sale of Assets e)Profit on Realization a/c

Q.3) Answer the following in one sentence only.

1) What do you mean by dissolution of a partnership firm?

2) What is the object of a Realization a/c?

3) What is the Reason of dissolution of firm?

4) How is General reserve dealt with on dissolution of a firm?

5) Which entry is passed when an asset is taken over by a partner on dissolution of the
firm?

Practical problems:-

1) Keshav & Madhav are partners and the trial balance and the necessary adjustment of their
firm are given below.

Trial Balance as at 31st March 2014

Particulars Amount Particulars Amount
Purchases 125225 Capital-Keshav 47000
Sales Return 4250 -Madhav 35000
Debtors 50200 Sales 205000
Opening Stock 28788 Purchase Returns 3230
Wages 20167 Commission 245
Salaries 13677 Creditors 31073
Furniture(bal. as at 1/4/03 6750 Dividend on Investments 825
Add: Purchases on 31/3/04 700 7450 Reserve for Doubtful debts 500
Machinery 25125
Bad Debts 315
Advertisement for 3 years 3000
w. e. f. 1st Oct. 2014
Investments 9500
Insurance 320
Drawings-Keshav 3000
-Madhav 1500
Cash & Bank Balance 27981
Dep. On Machinery 2375
322873 322873
 188

Adjustments:
i) Closing stock Rs. 15000.
ii) Depreciation to be charged on furniture at 10% p. a.
iii) Deduct Rs. 200 from debtors for bad debts and provide 2% for R.D.D.
iv) Allow interest on capital (opening balance) at 5% p.a. but no interest is to be charged on
drawings.
v) Keshav brought additional capital Rs. 20000 on 31-3-2014.
vi) Keshav is to get 1% commission on Gross profit & Madhav is to be paid at Rs.2000 p. a.
as a salary.
After considering the above adjustments, prepare the Trading & profit & loss a/c for the year
ended 31st March 2014 and a balance Sheet as on that date.
(Ans:- G.P.-Rs.44800/- , N.P. Rs.21760 , B/S Total-Rs. 135881/-)

2) From the following Trial Balance of Amit & Ajit ,you are required to prepare a Trading &
Profit & loss a/c for the year ended 31st March, 2015 & Balance Sheet as on that date after
taking into consideration the additional information. They share profit & losses in their
capital ratio.
Trial Balance as on 31st March, 2015
particulars Amount. particulars Amount.
Drawing:- Amit 2000 Capital a/c- Amit 40000
-Ajit 1000 -Ajit 60000
Opening stock 12000 Creditors 30000
Purchases 80000 Sales 142000
Office Salaries 6000 R.D.D. 1000
Royalties 2000 Return Outwards 2400
Trade Expenses 1400 Bills payable 8000
Wages & Salaries 5200
Cash in hand 10400
Debtors 8000
Bad Debts 50000
Investment 400
Motor van 16000
Furniture 30000
Office rent 10000
Plant & Machinery 3400
Freehold Property 24000
Bills Receivable 16000
Discount 4000
1600
283400 283400
Adjustments :-
1) Closing stock was valued at Rs. 17600.
2) Audit Fee for the year outstanding Rs. 2400.
3) Create R.D.D. at 5% on Debtors.
4) The goods for Rs. 5600 purchased and received on 25th March ,2015 were not recorded in
the purchase book.
5) Share of Rs. 2000 included in investment are sold for Rs. 2000 & the Amount is credited
to sales.
6) Depreciate Freehold Property at 10% and Motor Van 25%.
7) Allow 5% intrest on capital but no intrest on Drawing.
 189

3) Bharat & Shatrugna are equal partners. From following Trial Balance as at 31st March,
2012,you are required to prepare Trading, Profit & Loss a/c for the year ending 31st March,
2012 & the Balance Sheet as on that date.

Trial Balance
Particulars Debit Credit
Capitals:- Bharat 20000
-Shatrugna 15000
Drawing:-Bharat 4500
-Shatrugna 4000
Purchases 28000
Carriage 1000
Salaries 3500
Rent 1200
Rates & Taxes 200
General Expenses 3000
Sales returns 1500
Bad Debts 800
Sales 56000
Intrest 200
Reserve for Bad Debts 1500
Discount 100
Creditors 7200
Furniture 3000
Loose Tools 5000
Goodwill 10000
Cash at Bank 5000
Cash in hand 200
Debtors 21400
Wages 7200
100000 100000

Adjustments:-
1) Machinery is to be depreciated by 10% p. a. & Furniture by 5% p. a.
2) Provide interest on partners capitals at 5% p. a.
3) Rent has been paid for three quarters, a quarter‟s rent due on 31st March 2012 is still to be
paid.
4) Reserve for bad debts is to be maintained at 2% on the net sales.
5) The balance of machinery a/c includes Rs. 2000 for the purchase of additional Machinery
on 1st Oct. 2012.
6) Stock of goods on 31-3-2012 is valued at Rs. 8000.

4) Radha & Krushna are the partners, sharing profit and losses in the proportion of their capitals.
From the following Trial Balance of the firm, prepare a Trading, Profit & Loss a/c for the
year ended 31st March 2013 and a Balance Sheet as on that date.
Trial Balance as on 31st March 2013
Particulars Debit( Rs.) Credit(Rs.)
Opening stock 120000
 190

Salaries 4000
Unproductive Wages 8000
Railway Freight charges on Purchases 5000
Bills Receivable 1200
Purchases 120000
Rent 7500
Sales 253000
Reserve for Bad Debts 1000
Sundry Creditors 32600
Returns Outwards 1500
Bad Debts 300
Plant & Machinery 20000
Travelling Expenses 5000
Repairs to plant 1600
Cash at Bank 2000
Buildings 50000
Returns Inwards 1000
Sundry Debtors 35000
Office Expenses 5000
Drawinigs-Radha 4000
-Krushna 2500
Capital- Radha 30000
-Krushna 20000
Maharashtra Bank Loan 54000

392100 392100

Adjustment:- 1) Closing stock Rs. 35000.

2)Provide intrest on capital @ 5% p.a.
3) provide Reserve 5% for bad & Doubtful Debts on Debtors.
4)Depreciate Plant & Machinery at 5% & Building at 2.5%.
5)Unexpired Insurance Amounting to Rs. 500 is included in office expenses.
6)Make provision for unpaid unproductive wages Rs. 1000 & unpaid salaries of
Rs. 500.

5) From the following Trial Balance of M/s. Avinash & Arvind. You are required to
prepare Trading & Profit & Loss a/c for the year ended 31st March 2012 & the Balance Sheet
as on that date after taking in to account the necessary adjustment.
Trial Balance as on 31st March 2013
Particulars Debit Credit
Stock on 1st April 2011 28000
Salaries 20500
Insurance 3000
Bill receivable 7500
Patents 25000
Power & fuel 1200
Bad debts 800
Wages 700
Land & Building 60000
 191

Discounts 1250
Trade Expenses 1750
Cash in hand 2200
Cash at Bank 4800
Travelling Expenses 4300
Reserve for Doubtful Debts 800
Sundry Debtors 21500
Bills payable 8700
Purchases 56000
Sundry Creditors 19000
Sales 87000
Capital a/c-Avinash 70000
-Arvind 80000
Drawings-Avinash 10000
-Arvind 12000
Returns 2000 1000
266500 266500

Adjustment:-
1) Profit sharing ratio is 3:2 respectively.
2) Closing stock is valued at Rs. 36000/- on 31st Mar.2012
3) Write off Rs. 1500/- for bad debts & provide reserve for Doutful debts at 5% on sundry
debtors.
4) Avinash has taken goods worth Rs. 1500/- for his personal use.
5) Outstanding Expenses:- Salaries Rs. 3500/-,Wages Rs. 1300/-
6) Prepaid Insurance Rs. 750/-
7) Depreciation Land & building by 10% & patents by 5%.
 192

CHAPTER – 6.

STUDY OF FINANCIAL STATEMENTS-

RATIO ANALYSIS

A ratio is one figure expressed in terms of another figure. It is an expression relating one
number to another. It is a mathematical yardstick that measures the relationship between two
figures, which are related to each other and mutually interdependent.

Classification of ratios:
1. Traditional Ratios
2. Functional Ratios
3. User‟s Ratios

1. Traditional classification: Under this classification, the ratios readily suggest through
their names, their respective sources. From this point of view, ratios are classified as
follows :
a) Balance sheet ratios or Financial Ratios : They deal with the relationships between
two items, or groups of items, Which are together found in balance sheet. Ratios of
Current assets and current liabilities, ratio of stock to working capital etc.
b) Revenue Statement Ratios or income statement ratios : These ratios deal with the
relationship between two items, or two group of items, which are both found in
income statements. e.g. ratio of net profit to sales ratio of expenses to sales etc.
c) Inter-statement ratios or Combined ratios : These ratios indicate the relationships
between two items or group of items, of which one is found in balance sheet and the
other in the income statement (Profit & Loss Account)
e.g. Stock turnover ratio, Return on proprietors‟ Fund.

Traditional classification of ratios

a) Balance Sheet Ratios b) Income Statement Ratios c) Combined Ratios

1. Current Ratio 1. Gross profit ratio 1. Return on
capital employed
2. Liquid ratio 2. Operating ratio 2. Return on Equity
Capital ratio
3. Proprietary ratio 3. Expenses ratio 3. Return on Proprietors‟
Fund Ratio
4. Stock – working capital 4. Net profit ratio 4. Earnings per
Ratio share Ratio
5. Capital gearing ratio 5. Stock Turnover Ratio 5. Debtors turnover
6. Debt Equity Ratio 6. Net Operating Profit 6. Creditors turnover
Ratio 7. Price earning ratio
8. Dividend Payout
9. Debt Service Ratio

2. Functional Classification of Ratios :

The ratios may be grouped in accordance with the purposes they serve of different users
of accounting information. On this basis the ratios are classified as follows:
 193

a) Liquidity Ratios: These ratio analyse short term and immediate financial position of
a business organisation and indicate the ability of the firm to meet its short term
commitments (current liabilities) out of its short term resources (current assets). They
are also known as solvency ratios.
b) Leverage Ratios : These ratios measure the relationship between proprietors‟ fund
and borrowed funds. They indicate the degree of debt financing in a firm.
c) Activity Ratios: These ratios are designed to indicate the effectiveness of the firm in
utilising its funds, its degree of efficiency, and it‟s standard of performance. Hence
they are also known as Efficiency or Performance Ratios
d) Profitability Ratio: These ratios are intended to reflect the overall efficiency of the
organisation, its ability to earn a reasonable return on capital employed or on the
shares issued and the effectiveness of its investment policies.

Functional Classification of Ratios

A. Solvency Ratio B. Activity Ratios C. Leverage Ratio
Long Term : 1. Stock turnover ratio 1. Proprietary ratio
1 Proprietary ratio. 2. Turnover of Total Assets Ratio 2. Capital Gearing
2 Debt Equity 3. Stock working capital Ratio. Ratio.
Short Term : 4. Debtors Turnover Ratio
1 Current Ratio 5. Working Capital Turnover Ratio
2 Quick Ratio 6. Fixed Asset Turnover Ratio.

D. Profitability Ratios E. Valuation

Product 1. Earnings per Share
1.Gross Profit Ratio 2. Earning yield Ratio
2. Net Profit Ratio 3. Dividend yield Ratio
3. Operating Expenses Ratio

F. Investment :
1. Return on capital employed
2. Return on proprietors‟ fund
3. Return on Equity share capital
4. Earnings per share
5. Dividend per share

Classification from the view point of Users :

a. From shareholders’ point of view: There are certain ratios, which serves the purposes of
shareholders. Generally shareholders expect a reasonable return on their capital. They are
also interested in safety of their investments. The major point of interest to the shareholders is
the profitability of the organisation.
e.g. Earnings per share Return on proprietors‟ fund etc.
b. From short term creditors point of view : Short term creditors of company are basically
interested in knowing the company‟s ability to pay its short term liabilities as and when they
become due. Hence creditors place much importance on the liquidity aspect of the company‟s
assets.
e.g. Current and liquid ratios.
c. From long term creditors and management point of view : Leverage ratios
Provide useful information to long term creditors. Long term creditors include debenture
holders, vendors of fixed assets and financial institutions. These creditors are primarily
 194

interested in company‟s ability to repay the principle sum and make periodical interest
payments as and when they become due.

Classification of ratios in the view point of users:

a) Shareholders b) Long Term Creditors c) Short Term creditors
1. Earnings per share 1. Debt Equity Ratio 1. Liquidity Ratios
ratio etc. 2. Shareholders equity a) Current Ratios
to Total Equity Ratio b) Quick Ratios
3. Long Term Funds to 2.StockTurnover
Fixed Assets Ratio 3. Debtors Turnover

BALANCE SHEET RATIOS

1. Current Ratio :
This ratio expresses the relationship between current assets and current liabilities. Generally
it is expressed as pure ratio.
Alternative names : Working Capital Ratio, Solvency Ratio or 2 to 1 Ratio

Current Assets
Current Ratio =
Current Liabilities

Components: 1. Current Assets 2.Current Liabilities

Special Points : Advance against purchase of goods and services is current asset. However
advance against purchase of fixed asset is not current asset.
Deposits for adjustments of ongoing transactions are current assets. Deposits with excise,
customs port trust are current assets.
Significance of current ratio :
a) The current ratio is a test of the credit strength and solvency of an organisation.
b) Current ratio indicates the strength of the working capital of the business enterprise.
c) It indicates the company‟s ability to meet its day to day financial obligations.
d) The ratio discloses the possible tendencies of the business to over trade or under capitalise
or over investment in the stock.
Standard Current Ratio : 2:1 (Current Assets : Current Liabilities )

2. Liquid Ratio :
This ratio is designed to indicate the liquid financial position of an enterprise. Thus the ratio
indicates the firms ability to pay its immediate obligations promptly. It measures the
relationship between quick assets and quick liabilities.
Alternative names : Quick Ratio or Quick Asset Ratio or Acid Test Ratio.

Quick Assets
Liquid Ratio =
Quick Liabilities

Components of Quick Ratio :

Quick Assets: Assets which can be realised immediately at short notice without much
difficulty or undue losses.
Quick Assets = Current Assets – (Stock + prepaid expenses )
 195

Quick Liabilities = Current Liabilities – (Bank overdraft + Income received in advance)

Significance of ratio :
a. It indicates the immediate solvency of the business enterprise.
b. It is a more qualitative concept than current ratio.
c. It indicates the inventory hold-ups when studies with current ratio.

Standard Liquid Ratio : 1:1 (Liquid Assets : Liquid Liabilities )

3. Proprietary Ratio :
Proprietary ratio is a test of the financial and credit strength of the business. It relates
shareholders funds to total assets i.e total funds. This ratio determines the long term solvency
of the business.
Alternative names: worth Debt Ratio/Net worth to Total Assets Ratio/Equity Ratio/Net
worth Ratio/Asset Backing Ratio.

Proprietor‟s Funds/Equities
Proprietary Ratio =
Total Assets / Total Funds
Components :
1 a. Equity share capital
b. Preference share capital
c. Capital reserves
d. Revenue Reserves
e. Surplus and undistributed profits. Less : Accumulated Losses and unamortised misc exp.
Items.
The sum total of above items is called „proprietor‟s Funds‟/Owners or shareholders funds or
proprietors equity or shareholders equity or owners equity.
2.Total Funds will include:
a. Proprietors Funds
b. All Long Term external Funds i.e. secured and unsecured loans
C. Current Liabilities and provisions.

Significance:
A high ratio would mean that :
1. Financial soundness of business. 2. Good long term solvency position 3. Greater cover
and security to outsiders and creditors. 4. Company may not be in a position to practice
trading on equity. 5. External equities are inadequately utilised. 6. The earnings per share is
low. 6. The dependency on external funds is less.

Standard Ratio :
The Proprietary Ratio should neither be too high or too low. As a rough guide it may be
suggested that 65% to 75% proprietary ratio is advisable.

4. Stock Working Capital Ratio :

The Stock Working capital ratio brings out the relationship between Stock and working
capital.
Alternative names: Inventory working capital ratio./inventory net current assets ratio.
Stock
Stock to Working capital Ratio =
Working Capital
 196

Components :
1. Stock (Closing Inventory)
2. Working Capital (Current Assets – Current Liabilities)
Significance:
This ratio is an indicator of the adequacy of working capital. A higher ratio indicates weak
working capital and doubtful immediate solvency position.

Standard Ratio: 1:1 may be considered as a reasonable standard.

5.Capital Gearing Ratio :

This ratio brings out the relationship between two types of capital i.e. capital carrying
fixed rate of interest or fixed dividends and capital that dose not carry fixed rate of
interest or dividend.
Alternative names: Leverage Ratio / Financial Leverage Ratio/Capital Structure Ratio

Capital bearing fixed rate of interest/dividends

Capital gearing ratio =
Capital that does not bear fixed rate of interest/dividend

Significance:
a. Tool to ascertain whether the organisation is practicing trading on equity and if so to
what extent.
b. The ratio aids in bringing about a balanced capital structure in a company.

Consequences of high gearing:

1. Proprietors‟ fund will be at low level 2. Earnings per share will be high
3. Shares may be traded frequently with more speculative motive resulting in wide
fluctuations in their market prices.
4. Dividend rates may fall disproportionately against a fall in net profits.

Standard Ratio: A ratio of 1:4 between equity and preference capital is considered
reasonable.

6. Debt Equity Ratio:

It expresses the relationship between the external equities and internal equities or the
relationship between borrowed capital and owner' capital

Long Term Debts

Debt Equity Ratio = OR
Shareholders Funds

Long Term Debts

Debt Equity Ratio =
Shareholders Funds + Long Term Debts
Components:
Shareholder‟s Funds consist of preference share capital equity share Capital reserves,
revenue reserves, reserves for contingencies etc. The Amount of fictitious assets is
deducted from the above.
 197

Debt represents long term debts. It includes mortgage loans, debentures etc.

Significance:
The ratio shows favourable or unfavorable financial position of business. It shows
long term capital structure. The low ratio is viewed favourable from long term creditors
point of view. It reveals high margin of safety to the creditors. High Ratio is
unfavourable. Higher the ratio, greater will be the risk involved in respect of the creditors.
It indicates too much dependence on long term debts.

Revenue Statement Ratios

1. Gross Profit Ratio 2. Operating Profit Ratio 3. Expenses Ratio
4. Net Profit Ratio 5. Stock Turnover Ratio 6. Net Operating Profit Ratio

 1.Gross Profit Ratio : (expressed as percentage)
 Gross Profit Ratio brings out the relationships between gross profit and net sales.

 Alternative Names: Turnover Ratio or Margin or Gross Margin Ratio or Rate of Gross
Profit Ratio.

 Components :
 1. Gross Profit 2. Net Sales 3. Cost of Goods sold

 Formula :
 Gross Profit
 Gross Profit Ratio = ---------------- x 100
 Net Sales

 Gross profit = Net sales – Cost of goods sold
Cost of goods sods = (Opening stock of finished goods + Purchases +labour + other direct
charges – closing stock)
Significance :
The ratio is important in analysis of the basic profitability. It indicates the efficiency of
the production department, Purchase department and sales department and the degree of
cost control and labour efficiency.
A low G.P. ratio may indicate unfavourable purchase and markup policies, inability to
increase sales volume and excessive competition.

1. Operating Ratio : (expressed as percentage)

Operating Ratio is the relationship between cost of activity(operating expenses) and net
sales.
Formula :
Operating Costs
Operating Ratio = -------------------- x100
Net Sales

Components :
1. Operating cost 2. Net Sales
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Operating cost = ( cost of goods sold + operating expenses like office expenses, selling
and distribution expenses etc.)

Significance :
The purpose of ratio is to find out the efficiency of the management as regards operations.
This ratio is the test of operational efficiency of the business.
If the operating ratio is higher, it would lead to lower profit and therefore will be less
favourable.
Alternative Methods :1. 100 – Operating Net Profit Ratio
2. 100 – the total of G.P. Ratio and administrative and Selling Exp.
Ratio

 Expense Ratios :
 The ratio of each item of expense or each group of expense to Net Sales is known as
Expense Ratio. This ratio brings out the relationship between various elements of
operating costs and net sales.

Formula :
 Administrative Expenses
 1. Ratio of Administrative Expenses = ---------------------------- x 100
Net Sales
Selling Expenses
2. Ratio of Selling Expenses = -------------------- x 100
Net Sales

Material Consumed
3. Material consumed Ratio = ---------------------- x 100
Net Sales

Manufacturing expenses– material consumed

4. Conversion cost Ratio = --------------------------------------------------------- x 100
Net Sales

Non Operating Expenses

5. Ratio of non operating expenses = ------------------------------------ x 100
Net Sales

Significance :
The trend of expenses can be over a period of time can be can be well judged by an
analytical study of expense ratios. Enables management in controlling costs and improving
the managerial efficiency.

4. Net Profit Ratio : (expressed in percentage)

The Net Profit Ratio indicate the relationship between Net Profit and Net sales
Alternative name : Margin on sales Ratio
Components:
1. Net Profit ( Net Profit can be either net profit after tax or net profit before tax)
2. Net Sales
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Formula :
NAT NBT
a. Net Profit Ratio = ---------- x 100 a. Net Profit Ratio = ----------- x 100
Net Sales Net Sales
Significance : This ratio is a measure of overall profitability and is very useful to the
proprietor and investors. It reveals the efficiency of the business.

5. Net Operating Profit Ratio : (expressed in percentage)

It is a relationship between Net operating Profit and Net sales

Components : 1. Net sales 2. Net operating Profit

Formula : Net Operating Profit

Net Operating Profit Ratio = ----------------------- x 100
Net Sales
Significance : It indicates the operating efficiency of the management and strict control over
operating cost. Higher ratio is favourable.
6. Stock Turnover Ratio : (expressed as numbers)
This Ratio indicates the frequency of inventory replacement during a given period of
time. These Ratio measures the number of times stock turns or flows or rotates in an
accounting period compared to the sales effected during the period

Components :
1. Cost of goods sold 2. Average Stock [(opening stock +closing stock)/2]
When opening stock figure is not available closing stock may be consider as average
stock.

Alternative Names : Inventory turnover ratio, Stock Turns Ratio, Merchandise Turnover
Ratio, Stock Velocity Ratio or Velocity of Stock Ratio.

Formula : Cost of goods sold

Stock Turnover Ratio = --------------------- OR
Average Stock

Net Sales
Stock Turnover Ratio = -------------------------------------
Average inventory at selling price

Significance :
The ratio helps in determining the liquidity of a firm. It provides vital information as
to whether capital is being blocked up in slow moving stocks or otherwise. The ratio shows
whether the firm is over-trading or under-trading.
A High Inventory Ratio may indicate :
1. Possibility of over-trading
2. Effective inventory management
3. Inadequate inventory
4. Sales at lower prices resulting in lower profit
A Low Inventory Ratio may indicate :
1. Slackness in business activities
2. Over investment in inventories
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3. Anticipation of rise in prices

4. Accumulation of old and obsolete stock in business.

Standard Ratio :
It is difficult to establish a standard inventory ratio as inventory levels differs from
industry to industry. However the following guidelines may be consider:
1. Inventory of Raw Material not to exceed 2 to 4 months consumption in a year.
2. Inventory of finished goods not to exceed 2 to 3 months‟ sales.
3. WIP not to exceed 15 to 30 days‟ sales, depending upon the process time.

COMBINED RATIOS
1. Return on capital employed 2. Return on Equity Capital ratio
3. Return on Props‟ Fund Ratio 4. Earnings per share Ratio
5. Price earnings Ratio 6. Dividend Payout Ratio
7. Debt Service Ratio 8. Debt Service Coverage Ratio
9. Debtors turnover Ratio 10. Creditors Turnover Ratio

1. Return on Capital Employed Ratio :

This ratio brings out the relationship between total profit earned by the business and total
investment made or total assets employed.

Alternative name: Return on Total Resources

Components : 1. Net profit before tax and interest and preference dividend (interest
on short term borrowings will be deducted, non trading income such as interest on
government securities and non trading losses or expenses will be excluded while
calculating net profit for this purpose.)
2. Capital employed ( Total resources are also known as „Total Capital Employed‟ and
sometimes as „Gross Capital Employed‟ or „Total Assets before Depreciation‟
Asset side approach for calculating Capital Employed :
Fixed Assets + Current Assets – fictitious Assets OR
Total of Asset Side – Fictitious Assets
Liability Side approach for calculating Capital Employed :
Equity Share Capital + Preference Share Capital + undistributed profits + Reserves and
Surplus – Fictitious Assets + Long Term Borrowings

Formula :
N.P before tax, interest and preference dividend
Return on Capital Employed = ---------------------------------------------------------- x 100
Capital Employed
Alternative Method :
Net operating Profit
Return on Capital Employed = ------------------------ x 100
Capital Employed
( Net Operating Profit will be the profit before tax depreciation finance and interest
charges and other non operating losses and non operating incomes)

Significance :
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This ratio is a clear indication of earning capacity of the business and shows the
optimum utilisation of assets or resources. This ratio indicates the degree of managerial
efficiency and overall efficiency of the business.

2. Return on Equity Shareholder’s Fund :

This ratio finds out the relationship between profit available to Equity Shareholders
and Equity shareholders‟ Equity. Net Profit available after deducting tax and preference
dividend is compared with Equity Shareholders‟ Equity.

Components : 1. Net Profit after tax and preference dividend

2. Equity Shareholders Equity ( Equity Share Capital + All
Reserves and Surplus – Fictitious Assets)

Formula :
Rate of Return on Equity Net Profit after tax, Preference dividend
Shareholder‟s Fund = ------------------------------------------------ x 100
Equity Shareholder‟s Equity

Significance :
This ratio indicates how well the business is being managed as compared to other
companies in similar line of business. It shows the efficiency of the management. When
the ratio is high profit available to equity shareholders is high and vice-versa.

3. Return on Equity Share Capital : (Expresses in percentage or in absolute money terms)

This ratio indicates the rate of earnings on Equity or ordinary share Capital. The ratio is
designed to show what percentage does the earnings bear to the Amount of capital
invested by equity shareholders.
Components: 1. Net Profit after tax, financial charges & Preference dividend
2. Equity Share Capital ( without adding Reserves and deducting
fictitious assets)

Formula :
Rate of Return on Equity Net Profit after tax, Preference dividend
Share Capital = --------------------------------------------------- x 100
Equity Share Capital
Alternatively the following formula can be employed for calculating the return per equity
share.
Net Profit after tax, Preference dividend
Rate of Return per Equity = ------------------------------------------------
No. Of Equity Shares

Significance :
This ratio indicates the practice of Trading on Equity of the business. This ratio is also
useful to compare the performance of a company‟s equity capital with those of other
companies. This ratio provide valuable guidance to the investors.

4. Earnings Per Share :

Earnings per share represents earnings of the company whether or not dividends are
declared
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Components : 1. Net profit after tax and preference dividends

2. No. of Equity Shares

Formula :
Net profit after tax and preference dividends
Earnings per Equity share = ---------------------------------------------------
No. of Equity Shares

Significance :
This ratio is calculated to find out overall profitability of the organisation. Higher
ratio indicate that the company may pay dividend at higher rate in future This ratio shows
the effective utilisation of equity share capital.

5. Dividend Payout Ratio :

This ratio finds out the proportion of earnings used for payment of dividend and the
proportion of earnings retained. The ratio is a relationship between earnings per equity
share and dividend per equity share.

Components : 1. Dividend per equity share 2. Earnings per Equity share

Formula :
Dividend per equity share
Dividend Payout Ratio = ----------------------------------
Earnings per Equity share

Significance : Higher ratio signifies that the company has utilised larger portion of its
earnings for payment of dividends to equity shareholders and lesser Amount of earnings
has been retained. It indicates brighter chances of future growth and expansion and
greater possibility of appreciation in the value of shares. It shows stronger financial
position of a company and vive-versa.

6. Price Earnings Ratio :

This ratio brings out the relationship between market price per share and earnings per
share.

Components: 1. Market price per equity share 2. Earnings per equity share

Formula :
Market price per equity share
Price Earnings Ratio = -------------------------------------
Earnings per equity share

Significance : This ratio helps the investors in deciding about the purchase of shares of a
company at a particular market price. It shows whether the shares of company are under
or overvalued.

7. Debt Service Ratio :

The purpose of this ratio is to find out the no. of times the fixed financial charges are
covered by income before interest and tax.
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Alternative Name : Interest Coverage Ratio

Components: 1. Net Profit before interest and tax 2. Fixed interest charges

Formula :
Net Profit before interest and tax
Debt Service Ratio = --------------------------------------------
Fixed interest Charges

Significance: This Ratio indicates whether the company will earn sufficient profits to pay
periodically the interest charges. Higher Ratio is favourable.

8. Debt Service Coverage Ratio :

Debt Service Ratio tells about the ability of a company to pay interest regularly. It
does not tell about the ability of a company to make payment of Principle Amount on
time. For this purpose Debt Service Coverage Ratio is calculated.
Components: 1. Net Profit before interest and tax 2. Principal payment Installments 3.
Fixed financial charges 4. Interest rate

Formula :
Net Profit Before Interest and Tax
Debt Service Coverage Ratio = -------------------------------------------------
Interest + Principle payment installment
1 - Tax Rate

Significance : Higher ratio indicates that company will be able to repay the principal
Amount on time along with interest.

9. a)Debtors Turnover Ratio :

This ratio attempts to measure the collectability of debtors and other accounts
receivables. It shows the rate at which the trade debts are being collected.

Alternative Names : 1. Turnover of Debtors Ratio 2.Accounts Receivables Turnover

Ratio 3. Debtors Turnover Period
4. Average Collection Period.

Components : 1. Sundry Debtors 2. Other A/cs Receivables e.g. B/R

3. Average Daily Sales
Special Points : 1. Accounts Receivables should not include debtors or bill arising from
non Operating (trading) transactions.
2. Debtors Taken for this purpose should be gross debtors i.e. before deducting any
provision for doubtful debts. But if there are unadjusted bad debts, the same has to be
deducted.

Formula:
Credit Sales
Debtors Turnover Ratio = --------------------------------
Average Accounts Receivables
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Accounts Receivables = Trade debtors + Bills Receivables

Average Accounts Receivables = [Opening Bal. + Closing Balance]/2
If opening balances are not given closing balances should be considered as Average
Accounts receivables.

Significance : This ratio indicates the efficiency of the administrative staff of collecting
debts. Higher ratio is favourable.

9b)Debt Collection Period :

This Ratio indicates the extent to which the debts have been collected in time

Components: 1. Accounts Receivables ( Debtors + B/R)

2. Average Daily or Monthly Credit Sale
Average Daily Sales is calculated as follows:
Net Credit Sales Months or Days in a year
------------------------ OR ----------------------------
No. of Days in a year Debtors Turnover
Average Accounts Receivables
OR --------------------------------------- x Months or Days in a Year
Credit Sales for the year

Formula:
Debtors + Bills Receivables
Debt Collection Period = -------------------------------------
Average daily or monthly sales

Significance : It shows the quality of debtors. A shorter collection period implies prompt
payment by debtors. Larger collection period implies liberal policies and inefficiency of
credit collection staff.

10 Creditors turnover Ratio :

This Ratio indicates the speed at which the payments are made to the suppliers
or trade creditors.

Components: 1. Net Credit purchases 2. Average Creditors

Creditors = Creditors + Bills Payable
Average Creditors = (opening creditors + Closing creditors)/2
If opening balance is not available, closing balance should be
considered.
Formula:
Net Credit Purchases
Creditors turnover Ratio = -------------------------------
Average Creditors

Significance : This ratio indicates promptness in payment of credit purchases. Higher

creditors turnover indicates lower credit availability. It shows credit-worthiness of
organisation.
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Vertical form of Profit & Loss A/c-

Income Statement for the year ended ________
Gross Sales
Cash xx
Credit xx
xxx
Less- Sales Returns xx
Net Sales xxxx xxxx
Less- Cost of Sales
Opening Stock of Raw Materials xx
Add- Purchases of Raw Materials (Net) xx
Add- Direct Expenses on Materials purchased(Carriage, Octroi etc.) xx
xxx
Less- Closing Stock of Raw Materials xx
Raw Materials consumed xxx
Add- Direct/ Manufacturing Exp.- xx
Factory Power & Fuel xx
Factory Rent, rates & taxes xx
Wages xx
Water/ Gas/Heating xx
Depreciation on plant & machinery, factory building xx
Patents/loose tools to be written off xx
Add- Opening stock of works in progress xx
Total xxx
Less- Closing stock of works in progress xx
Total xxx
Less- Sale of Scrap xx
Total xxx
Add- Opening stock of finished goods xx
Total xxx
Less- Closing stock of finished goods xx
Cost of Sales/ Cost of goods sold xxxx -xxxx
Gross Profit xxxx
Less- Operating Exp.-
a) Office & Administrative Exp. xx
b) Selling & distribution Exp. xx
c) Financial Exp. xx
xxx -xxx
Operating Net Profit xxx
Add – Non Operating Incomes +xx
Rent received xx
Commission received xx
Discounts received xx
Dividend received xx
Interest received xx
Miscellaneous Incomes xx
Bad debts recovered xx
Share transfer fees received xx
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Profit on sale of assets/shares/investments xx

xx +xxx
Total xxxx
Less – Non operating Expenses
Loss on sale of assets/investments/shares xx
Loss by fire/theft/accident(net) xx
Compensation for damages xx
Preliminary exp. written off xx
Underwriting commission written off xx
Discount on issue of shares written off xx
Goodwill written off xx
xxx -xxx
Net Profit before tax xxxx
Less- Provision for tax xx
Net Profit after tax xxxx
Add- P & L Appropriation (Cr. Bal.) xx
Less- P & L Appropriation (Dr. Bal.) xx
xxxx
Less- Appropriations
Proposed Dividend(Equity/Preference) xx
Interim Dividend paid xx
Transfer to Reserves xx
Transfer to Sinking Fund xx
Transfer to Debenture Redemption Fund xx -xxx
Retained Earnings (P & L Appropriation a/c closing bal.) xxxx
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Vertical Form of Balance Sheet

Balance Sheet of ____________ Ltd. as on __________
I. Sources Of Funds -
1. Shareholders‟ Funds- xxxx
a)Share Capital-
Equity xx
Preference xx
Total xxx
Less- Calls in arrears -xx
Add- Share Forfeiture +xx xxx
b) Add- Reserves & Surplus-
Profit & Loss A/c (Cr. Bal.) xx
General Reserve xx
Capital Reserve xx
Premium on issue of shares & debentures xx
Sinking Funds xx
Other Reserves xx
Capital Redemption Reserve xx xx
xxx
c)Less- Miscellaneous Expenditure-
Profit & Loss A/c (Dr. Bal.) xx
Share Issue Expenses xx
Preliminary Expenses xx
Discount on issue of shares & debentures xx
Heavy Advertisement Exp. xx
Deferred Revenue Exp. xx -xx

2. Loan Funds- xxxx

a) Secured Loans- xxx
Debentures/ Bonds xx
Bank Loans xx
Loans From Financial Institutions xx
Add- Interest accrued xx
b) Unsecured Loans- xxx
Public Deposits xx
Fixed Deposits xx
Loan from directors xx
Add- Interest Accrued xx
Total Funds/ Sources xxxx
II. Applications of Funds-
1. Fixed Assets-(Gross block Less- Depre. = Net block) xx xxxx
Goodwill xx
Patents xx
Trade Marks xx
Copy Rights xx
Patterns xx
Premises/Land & Building xx
Plant & Machinery xx
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Furniture & Fixture xx

Motor Vehicles xx
Railway Sidings xx
Live Stock xx
Oil wells/Gas reserves/Forests/Quarries/Mines xx
2. Investments- xxx
Long term Investments xx
Investment in Govt. Securities xx
Trade Investments xx
Investment in Immovable Properties xx
Investment in Capital of Partnership firm xx
3. Working Capital- xxx
a) Current Assets, Loans & Advances-
Closing Stocks- (Raw Mat., W.I.P. & Finished Goods) xx
Debtors Less- Provisions for bad & doubtful debts xx
Bills Receivable xx
Prepaid Expenses xx
Out-standing Incomes xx
Temporary Staff Loan/ Advances xx
Short term marketable Investments xx
Advance Income tax xx
Bank balances xx
Cash in hand xx
Total- a)- xxx
Less -b) Current Liabilities-
Sundry Creditors xx
Bank overdraft xx
Bills Payable xx
Out-standing Exp. xx
Incomes Received In Advance xx
Interest accrued xx
Other Short Term Liabilities xx
Total- b)- -xxx
Total Applications/ Capital Employed xxxx
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Chapter- 7

Classification of Expenditures and Receipts

Business transactions may include two types of receipts & payments viz. Capital &
Revenue. It is very essential to know exactly the nature of a receipt & payment, so that it may
be recorded accordingly in the final accounts. If correct distinction is not made between
capital and revenue, the profit and loss account will not reveal a true profit or loss and the
Balance Sheet will not disclose a true and fair financial position. A variety of errors may arise
in the books of accounts if receipts & expenses are not distinguished in capital and revenue.

Thus it is necessary to classify the items appearing in trial balance between capital &
revenue. This classification is based on matching principle & going concern concept.

Periodic matching of costs & revenues is necessary for the correctness of profit or loss
as well as the financial position.

There are no clear cut rules for distinction of capital & revenue, but following are
certain well established tests to guide this classification:

Tests for classification:

1. Effect of expenditure giving rise to a tangible asset or a right.

2. Period of benefit- Short period exhausting in one year or for a long period.

3. Materiality of Amount- Huge Amount or small Amount. But this should not be treated as
a conclusive evidence.
4. Source or cause of receipt or profit. i.e. whether trading transactions or other transaction.
5. Treatment by other party is not relevant.
6. Recurringness of an expenditure or receipt.
7. Effect on revenue earning capacity.

Classification:
All capital and revenue items may be put into differed categories as stated below:
1. Capital expenditure, Revenue expenditure & Deferred Revenue expenditure
2. Capital receipt & Revenue receipt
3. Capital profit & Revenue profit
4. Capital loss & Revenue loss

1. Capital Expenditure & Revenue Expenditure

a) Capital Expenditure –
Capital expenditures are those expenditures which incurred for the purpose of
purchasing fixed assets or improving assets on a permanent basis which increases the
earning capacity of the business. It is the expenditure giving long term benefit to the
business. It is non recurring in nature.
Expenditure for development, improvement & alteration are capital expenditure because
the expenditure made in one year will give benefit for a number of years.
 210

These expenditures are not immediately written off in the year of actual expenditure but
split over certain number of years, as per the decision & policy of the management.
These expenditures are treated as assets & shown on the assets side of balance sheet.

Special Features of capital expenditure-

1. Capital expenditure is made for acquiring fixed assets.
2. This expenditure increases the value of assets.
3. This expenditure increases the profit earning capacity of business.
4. This expenditure is incurred once in a long period of time.
5. The assets acquired through this expenditure are not meant for sale.
6. This expenditure is shown on the asset side of the balance sheet.
7. The assets acquired from such expenses can be converted into cash at any point of
time.
8. This expenditure acquires some right useful for the business.

Certain examples of capital expenditure

1. Purchase of fixed asset
2. Purchase of material for construction of building
3. Payment of good will
4. Payment of wages for construction or extension of building
5. Installation charges of plant & machinery etc.

b )Revenue Expenditure-
Revenue expenditures are those expenses which are of recurring nature & incurred for
carrying on day–to–day business activities of the concern or for maintenance of the fixed
assets.

Special Features
1. These are routine expenses.
2. These expenses are frequently incurred.
3. Current assets acquired through these expenditures are meant for sale.
4. Revenue expenses does not increase the profit earning capacity, but it simply
maintains it.
5. Revenue expenses are shown on the debit side of the trading & profit & loss A/c.
6. Most of these expenses cannot be converted into cash.

c) Deferred revenue expenditure-

These are basically revenue expenses but their period of benefit exceeds a period of one
year. Hence an Amount equal to current years benefit is shown as revenue expenditure &
Amount related to subsequent years benefit is deferred from revenue & shown on asset
side of balance sheet. Sometimes business expenses are very huge, so instead of
charging the whole Amount of expenditure in the year of the actual expenses, the
expenditure is split & written off over certain period. Preliminary expenses, Prepaid
expenses, Discount on issue of shares & debentures, Heavy advertising expenses are the
examples of deferred revenue expenses.

2. Capital receipts & revenue receipts-

a) Capital Receipts-
The receipts which are utilised for acquiring fixed assets are called as capital receipts.
Amount received from sale of fixed asset is a capital receipt. Amount received as capital,
 211

Long term loan or by issue of shares & debentures is a capital receipt. Capital receipts
are of non-recurring nature. These receipts show a credit balance & they are capitalised
by showing them on the liabilities side of balance-sheet. E.g. Any Amount received as
Capital, Share capital, Long term loans taken, Sale of fixed asset, Premium on issue of
shares & debentures,
b) Revenue Receipts –
These are routine receipts of the business such as receipt from sale of goods. Routine
receipts of rent, discount received, interest received, commission received etc. are also
the items of revenue receipts. These receipts are shown either on the credit side of
Trading account or Profit &loss account.

3. Capital Profit & Revenue Profit –

a) Capital Profit – Those profits which are not earned during the regular course of
business are called capital profits. E.g. Profit on sale of fixed assets is called as capital
profit; Premium received on issue of shares & debentures is a capital profit.

b) Revenue profits–
Those profits which are earned during the regular course of business are called Revenue
profits. Profits which are earned on account of trading are called revenue profits. Profits
earned from sale of products is revenue profits.

4) Capital loss &revenue loss

a) Capital loss:-
Loss on capital may arise because of depreciation of capital assets or loss on sale of
fixed assets . For example plant & machinery costing Rs-30,000 sold for Rs-20,000
incurring a loss for Rs10,000. Issue of a share of Rs100 for Rs 90 result in a loss of
Rs10 per share. Capital losses are shown in the balance sheet.
b) Revenue Loss-
Losses arising during normal or ordinary course of business are revenue losses.
Revenue losses are charged or debited to the profit &loss account.

The Difference between capital expenditure & Revenue expenditure is as follows:

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Capital Expenditure Revenue Expenditure

1)Nature –
These expenses are of non recurring nature These expenses are of recurring nature i.e.
i.e. these expenses occur once in a very long they occur very often during every year in
time 5 years, 10 years etc the business.
2) Period of benefit –
Such expenses create utility or benefit for Expenditure of this type, create a benefit
long period of time that is more than 5 year. for a short period of time that is less than
E.g. Telephone deposit is a Capital one year. E.g. Rent, telephone bill etc. are
Expenditure revenue expenses.
3)Purpose:
Such expenses are incurred to increase Such expenses are incurred for day to day
production or to minimize or reduce the cost activities of business without making such
to increase the profit of business. expenses business cannot run.
4) Creation of assets:
These expenses create assets for the These expenses do not create any assets for
Business the business.
5) Possibilities of encashment:
The Amount once spent for such expenses The Amount once spent for such expenses
can be recovered in cash at any time. cannot be recovered in cash.
6) Treatment in accounts:
These expenses are shown on the assets side They are shown on the debit side of the
of the balance sheet as they show financial profit & Loss Account and thus reduce the
position of the business. Therefore they are profit.
not deducted from profit.
7) Examples Examples
1. Purchase of machinery 1. Salaries & wages
2. Land & Building 2. General Expenses
3. Plant 3. Postage &Telegram
4. Copyrights 4. Electricity Charges
5. Audit Fees

Lists of various types of expenses, receipts, profits & losses -

1]Capital Expenditure-
Purchase of -Land, Building, Plant, Machinery, Loose Tools, Equipments, Furniture,
Fixture, Vehicles, Sports Equipments, Club Ground & Pavilion, Laboratory Equipments,
Billiards Table, Surgical Instruments, Purchase of second hand Motor Car, Payment on
account of New Furniture, Purchase of Sports Material, Purchase of Surgical Instruments,
Swimming Pool, Library Books, Hospital Equipments & Machinery, Purchase of Grass
Cutting Machine, Purchase of Computer, Printer, Scanner, Speakers, Pen drive etc.

2]Revenue Expenditure-
Tournament Expenses, Ground Upkeep, General Charges, Secretary‟s Salary, Rates &
Taxes, Postage Telegram & Telephone, Journals & News Paper, Bank Interest & Charges,
Tea & Lunch Charges, Garden Expenses, Meeting Expenses, Cost of arranging Lectures,
Election Expenses, Cleaning charges, Drugs & Medicines, Cost of arranging Programme,
Establishment Charges, Labour Charges, Hire of Lecture Hall, Examination Expenses,
Cost of Drama, Remuneration to Coach, Grounds „men Fees, Expenses of Annual
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Gathering, Celebrations Expenses, Municipal Taxes, Bar Expenses, Competition Prizes,

Expenses on Matches, Social Event Expenses, Lawn Expenses, Surgery Expenses,
Traveling paid to Doctor‟s, Cost of Staging Drama, Canteen Expenses, Tennis Expenses,
Locker Rent, Refreshment Charges, Maintenance of Cricket Ground, Maintenance of
Tennis Court, Maintenance of Swimming Pool, Diet Expenses.

3]Deferred Revenue Expenditure-

Heavy Advertisement expenditure for launching a new product, advt. campaign exp.,
Expenses on issue or raising loan or capital, Exp. on formation or registration of business.
i.e. Preliminary exp., all prepaid expenses etc.

4]Incomes/Revenue receipts-
Sales i.e. sale of goods, all types of service-charges, Tennis Court Fees/Receipts,
Contribution for Annual Dinner, Proceeds from Drama, Sale of old Sports Material, Sale
of Grass, Dividend Received, Tournament Receipts, Admission Fees, Tuition Fees,
Receipts from Program-Tickets Sold, Visit Fees, Receipts from Dispensary, Certificate
Fees, Examination fees, Surplus from Matches.

5]Capital profits/gains-
Profit on sale of any fixed asset, Premium of issue of shares & debentures etc.

6]Revenue profits/ gains-

Discount received, profit on sale of goods & services etc.

7]Capital losses-
Loss on sale of any fixed asset, Discount on issue of shares & debentures etc.

8]Revenue losses-
Loss on sale of goods & services, Discount allowed.

Theory Exercise-
Q 1 Fill in the blanks of the following:
1. Capital expenditure is made for acquiring _______assets.
2. _______expenditure increases the profitability of business.
3. _______expenditure increase the profit earning capacity of business .
_______expenditure is incurred once in a while.
4. The assets acquired through _______expenditure are not meant for sale.
5. _______expenditure are shown on the debit side of profit and loss a\c
6. _______expenses are of recurring nature that is they occur very often on day to day
in the business.
7. The expenditure having long lasting benefit is a ___________.
8. The expenditure having short term benefit is a ___________.
9. The revenue expenditure having long term benefit is called as _________.
10. The receipt from sale of fixed asset is ________.
11. The receipt from regular trade operations is ________.
12. Loss on day to day business activities is ________.
13. Loss on sale of fixed assets is ________.
14. Profit on sale of goods is ________.
15. Profit on sale of fixed asset is __________.
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Q.2. Answer the following in brief:

a. What is deferred revenue expenditure?
b. What is meant by capital expenditure?
c. What is revenue receipt?
d. What is meant by revenue expenditure?
e. What is capital receipt?
f. What is revenue loss?

Long answer questions:

Q.3. Explain the meaning of Capital expenditure, Capital receipts, Revenue expenditure,
Revenue receipts, Capital profit, revenue profit.

Q. 4. Distinguish between Capital and Revenue Expenditure.

Q. 5. Classify the expenses, receipts, profits & losses.

Q. 7. Give 10 examples of Capital expenditure and Revenue expenditure each.

Practical Exercise:
Q.1) From the following list prepare a statements showing Capital and Revenue
expenses, receipts, losses & profits separately:
Purchase of VCR, Preliminary Expenses, Purchase of watch, Subscription received, Sale of
News Paper, Heating Charges, Maintenance of Vehicle, Repairs of Building, Stationary,
Telegram, Labour Charges, Expenses on tour of Principal, Purchase of Punching Machine,
Purchase of Counter, Washing Charges, Plant, Tea bill, Trade Expenses, Equipment, Sundry
Gain, Miscellaneous Expenses, Purchase of Car, Flue, Octroi, Import duty paid,
Manufacturing Expenses, Godown Rent, Packing Charges, Legal Expenses, Bad debts
recovered, Entertainment Expenses, Office Car upkeep, Agents Commission, Crockery,
General Expenses, Audit fees, Free Sample, Purchase of Store well, Bank Commission,
Administration Expenses, Interest (Cr.), Distribution of prize, Sale of old furniture,
Compounders Salary, Interest paid, Advertising Expenses (unwritten off) Freight, Power &
fuel Expenses, Drama Expenses, Selling Expenses,

Q.2) Skill-Capital & Revenue Expenditure & Capital & Revenue Receipt
From the Following information you are required to prepare a statement classifying the
items into: 1. Capital Expenditure 2. Revenue Expenditure 3. Deferred Revenue expenditure
4. Capital Receipt 5.Revenue Receipt.
ITEMS:
1.Purchase of computer 2. Purchase of V.C.R 3.Sale of fixed asset, 4. Preliminary Expenses
5.Trade expenses 6. Fuel 7. Purchase of Car.8. Heating Charges 9.Telegram expenses
10. Freight 11. Power expenses 12. Selling expenses 13. Plant 14. Equipment
15. Free samples 16.Tea Bill 17. Octroi18. Godown Rent 19. Cost of Good will
20. Stationary 21. Electricity Fitting 22.Advertising Expenses unwritten off 23.Advertising
Expenses on tour of Principal 24.Interest Paid 25.Crockery26. Office Car up keep
27. Leasehold Premises 28. Trade mark 29. Patents 30.Sale of old machinery 31.Rent
received 32. Experimental expenditures33.Development expenditures 34. Interest on loans
35. Research expenditure 36. Plant rearrangement and removing costs 37. Discount
allowed on the issue of debentures38.Labour Charges 39. Audit fees 40. Administration
expenses 41.Loose Tools 42. Interest received 43. Rent Received 44. Bills Receivables
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45. Sale of Investments 46. Scrap Sales 47. Sale of issue of Shares 48.Sale of old Furniture
49. Sale of News Paper 50. Bad-Debts recovered 51. Subscription received 52. Debentures
issued & Loans taken 53. Premium on Shares 54. Commencement of business with Cash,
Solution:

Capital Expenditure Deferred Revenue Expenditure

Revenue Expenditure
1. Purchase of 1. Trade Expenses 1.Experimental
Computer 2. Fuel Expenditure
2. Purchase of V.C.R 3. Heating Charges 2.Research Expenditures
3. Preliminary 4. Telegram 3.Development
Expenses 5. Freight Expenditure
4. Purchases of Car 6. Power Expenses 4.Plant Rearrangement
5. Plant 7. Selling Expenses and removing cost.
6. Equipment 8. Tea Bill 5.Discount allowed on the
7. Free Simples 9. Octroi issue of debenture.
8. Cost of Good will 10. Godown Rent
9. Electricity fitting 11. Stationary
10.Advertisement 12. Expenses of Tour
expenses unwritten off of Principal
11.Leasehold Premises 13. Interest paid
12.Trade mark 14. Crockery
13Patents 15. Office car up keep
14.Loose tools 16. Interest on loan
17.Labour charges
18.Audit fees
19.Administration
Expenses

The list of capital Receipts & Revenue Receipts -

Capital Receipt Revenue Receipt
1. Sale of fixed assets 1. Rent Received
2. Sale of old machinery 2. Interest Received
3. Sale of Investments 3. Bills Receivable
4. Sale of Equity Shares 4. Scrap Sales
5. Sale of old furniture 5. Sale of News Paper
6. Debenture & Loan 6. Bad debts recovered
7. Premium on issue of shares 7. Subscription Received
8. Capital brought into the business 8. Sundry gain