Chapter -1 Introduction to the concept of business Concept of business Any activity to make profit.

t. Whenever a person or two or more persons are coming together and involves themselves into any activity with an object to make some profit. To get profit means earnings are more than what they have invested into the business. In practice we can see number of people are buying some goods on wholesale basis and are selling it at retail with an object of making profit. For example Mr.Sanjay who is buying bed sheets from Solapur on whole sale basis and selling in Pune on retail basis. There are different types and combinations of businesses but for understanding purpose we can divide the business activities in Trading , Manufacturing and service providers. Trading business In trading, the businessman buys goods in bulk and sells the same goods to his customers in retail. Here the businessman is not making any changes/process on the goods. For example Vinayak Medicals, Mahalaxmi Jwellers, Nirmiti Furnitures are the examples of traders where the owner of the business is buying the ready made goods and selling it again to his customers. Manufacturing activities includes buying of raw material , processing it to convert into finished goods with the use of machines and workers and then to sell into the market. For Example Reliance Industries Ltd, Tata Motors Ltd etc. Here in comparing with trading business, number of transactions are on higher side, more workers are required, more assets are required for the business such as factory building, machines, tools, equipments etc . Service provider In such type of business, customers are getting different types of services such as Bank of India, Kingfisher Airlines, Infosys Technologies Ltd, Ludhiyana Roadways , TNT Courier Services etc. In such type of businesses goods are not produced however the owner is providing different services to the customers. In service industry huge factory building, machines are not required but manpower is the basic asset of the business. Forms of Business Organizations All the above different business can be managed under various forms of business organizations. Mainly there are three types of business organizations 1. Sole Proprietorship Sole proprietor is the only owner of the business. He invests his personal funds as the initial capital of the business. He takes all the decisions of his business and he is responsible for all the profits and losses of the business. For example Mr.Ganesh is having a Pan shop, Mr.Salim is having a garage, Mr.Agarwal is having a business of exporting readymade garments. Advantages of Sole Proprietorship- Owner of the business is in full control of the business. He takes all the decisions of the business. Decisions can be very fast. He enjoys all the profits

Disadvantages There is limitation to introduce capital for the business. One person can not be expert in various business areas such as finance, marketing, production etc. If there are losses to the business the owner has to suffer the losses. He has to make the losses good by bringing money from his personal property. Sole Proprietor has no separate legal entity. Partnership Firms- When two or more persons are coming together to do a business it is a partnership firm. All the partners are bringing capital into the business and accordingly profit and losses can be shared among the partners. Since there are two or more partners, everybody is having expertise to deal with various business areas such as finance, marketing, production etc. Comparing to Sole proprietor, decisions relating to the business are taken by all the partners with consultation so more time is involved in decision making process. If there are losses all the partners have to suffer the losses and like sole proprietor, Partnership firms are also do not have a separate legal status. If there are losses to the business all the partners have to suffer the losses and have to make the losses good by bringing money from their personal property. However recently a new concept of Limited Liability Partnership is introduced where liability of the partners is limied. Company Company form of organization is totally different form of organization. Here minimum two and maximum 50 members in case of private company and minimum seven members and maximum with no limit can come together to do any legal business. They have to register and complete the legal formalities with the Government ( Registrar of Companies ) to take permission and then they can start the business. Every member has to share in capital of the business that is why the capital is called share capital. The owners of the company are called Equity shareholders. Every shareholder is having voting right according to his share holding ( generally one share one vote ). Profits of the business can be distributed among the shareholders which is called dividend. Shareholders will appoint different persons from different fields to manage the business who are called Directors of the Company. To run the business, specific powers are with the directors and specific powers are with the owners of the company i.e. equity shareholders. Companies are mainly divided in Private Companies and Public Companies. Private Companies are those companies which are privately managed and have number of restrictions to raise the funds from public. Public money is not involved in private companies and that is why number of provisions under the Companies Act are not applicable to Private Companies. Public Companies on the other hand can mobilize funds from public at large. Public Companies are further divided into Listed Public Companies and Unlisted Public Companies. Listed Public Companies means those companies who have executed agreement with the stock exchange and shares of such companies are available for trading through that stock exchange say BSE, NSE say Tata Motors Limited, Infosys Technologies Limited, Bajaj Auto Limited. Unlisted Public Companies means those Public companies who have not yet issued shares to the public and their shares are not listed on the stock exchange say Tata Sons Limited, Krishidhan Seeds Limited.

Comparing to Sole proprietor and Partnership firm, under company form of organization more capital can be brought in to the business. Any outsider can be appointed who is expert in a specific area as employee of the company. All the properties of the business are in the name of the company and not the owners of the company. Shareholders are contributing towards share capital as per the agreed amount per share. Once this amount is paid they are not liable to pay further amount. Even if the company is having huge losses, shareholders are not liable to make good the loss of the company.( Limited Liability ).Another important advantage under company form of organization is equity shareholders can at any time sell their shares to any interested party and can get their money back . Exercise Explain the concept of business

What are the different types of business?

What are the features of different types of businesses ?

Which are the different forms of business organization ?

Explain the advantages and disadvantages of different types of business organization

What is the limit of minimum and maximum number of members for Private Company and a Public company? What is the meaning of Dividend ? Who are directors of a company ?

Chapter - 2 Basic objects of any business All the business houses as mentioned above are doing their business with the object of making profit and that is why it is up most necessary for them to know whether we are running the business at profit or loss and what is the position about the assets i.e properties of the business and liabilities of the business i.e various amounts which business has to pay to outsiders. To understand and to achieve the above objects of the business, it is necessary to record each every transaction relating to the business which is called accounting. It is necessary to record all the transactions whether they are big or small, such as purchases and sales made for the business and also a transaction where even ten rupees are involved. Financial AccountingTo record each and every transaction of the business where funds are involved is called Financial Accounting i.e recording of transactions relating to finance. Financial Accounting considers all the transactions which can be expressed in terms of money. In case of a manufacturing company, transactions includes buying of raw material, buying of land, constructing building, factory sheds, purchase and installation of machines, processing the raw material with the use of machines and workers, advertisement, selling the finished goods , recovery from the customers, payment to suppliers of raw material etc. Recording of all such transactions where funds are involved is called Financial Accounting. To achieve the object of the business, owner must know the profit or loss from the business and whether this profit is sufficient or not. For this purpose Profit & Loss Account is to be prepared where all the revenues from the business are to be considered and all the expenses for the same are to deducted so as to calculate profit or loss. Similarly to know the position of assets and liabilities, Balance sheet is to be prepared. In short for any business the transactions recorded will come under either of the following headings 1. Revenues/ Income of the business 2. Expenses of the business business 4. Liabilities of the business. 3. Assets of the

Assets of the Business Assets or properties of the business means with the use of those assets business can generate benefits in future. Assets means what business owns. Such as land ,building, plant, machinery, furniture, vehicles, amount receivable from customers, stock lying in stores etc. Assets or properties can be converted in to cash at any point of time. Liabilities - Liabilities are what business owes to others. What business has to pay. For example capital received from the owners, bank loans or any other loans, amounts payable to suppliers of raw material, workers are examples of liabilities of the business. Liabilities are mainly divided in two first owners equity and second other liabilities.

Revenue Expenditure We observe here that we have to put revenue receipts/incomes ( income from business) on one hand and all expenses on the other hand so as to calculate profit or loss. Another important point is expenses what we have to record are recurring in nature and are of day to day expenses. These are the expenses where no any asset is created. In fact benefit from this expenses is already received by the business i.e. different parties involved have already provided the services to the business against which business has to pay. For example material is received from supplier, workers have worked or the business, space is occupied by the business so rent is paid Electricity and telephone services are received by the business etc. These expenses are called Revenue Expenses. These expenses are routine expenses and will be repeated again and again during the year. Revenue expenses will appear only in Profit & Loss Account. Following are some examples of revenue expenses /recurring expenses for a hotel business 1. Food and beverages 2.salary to staff 3. licensing and fees 4. Electricity and water 5. Fuel, coal and gas 6.Washing and cleaning 7. Linen and uniform expenses 8.Painting and Decoration 9. Repairs and maintenance 10. Laundry expenses 11. Various taxes 12. Crockery expenses 13. Advertisement 14. Audit fees 15. Computer maintenance 16.Books and newspaper 17. Depreciation on Fixed assets etc. So depending upon the business and product, revenue expenses will be different . Following are some examples of revenue expenses for a manufacturing business 1. Material consumed 2. Store & spares 3.Salaries, wages, bonus 4.Contribution to Provident other fund and staff welfare 5. site expenses and labour charges 6. Freight and transport 7. Travel and conveyance 8. Insurance 9.Rent 10. Power & Fuel 11.Repairs and Maintenance 12. testing charges 13. Communication expenses 14.Advertisement 15. Bad debts and Provision for doubtful debts 16.Sales commission 17. Loss on sale of fixed assets 18. Foreign exchange fluctuation loss/gain 19.Misc. Expenses 20.Depreciation on Fixed Assets 21. Audit fees 22.Legal expenses etc Following are some examples of revenue expenses for a Software business 1. Software Development Expenses which includes salary and allowances, contribution to Provident and other funds, Travel expenses, sub-contractor charges, software purchase, computer consumables, post contract support services etc 2.Salary and allowances, contribution to Provident and other funds to other staff 3. Power & fuel 4. Rent, 5. Telephone 6.Printing and stationery 7.Office maintenance 8.Insurance 9.Advertisement 10. Legal and Professional fees.11 Depreciation on Fixed Assets etc Following are some examples of revenue expenses for a banking business 1. Interest paid on deposits 2. Interest paid on funds borrowed from RBI 3. Other interest 4. Salary to staff 5. Insurance 6.Rent 7. Communication expenses 8.Advertisement 9.Depreciation on Fixed Assets 10. Audit fees 11.Legal expenses 12. Repairs and Maintenance etc

Revenue Receipts Similarly all receipts for a year we have to show in Profit & Loss Account are from day to day operations of the business For example for a manufacturing company income generated from sale of goods manufactured. In case of software companies, software development fees is the major income, For a Bank, major income is Interest earned on loans, interest earned on balance with RBI etc. All revenues which are earned for that particular period are treated as revenue receipts/income. Apart from main business activity there can be income from other sources such as dividend received, interest received on investments, profit on sale of fixed assets/investments, rent received etc. All income for the year either from business activities or from other sources is shown in Profit & Loss Account for that year Capital Expenditure For any business, certain assets are required with the use of which income can be generated such as land, building, machinery, vehicles, furniture etc. For example for a manufacturing business only workers and raw material is not required but land, factory building, machines are required to convert the raw material in to finished goods. Money spend by the business on such types of assets is called Capital Expenditure. The most important point is Capital expenditure will not appear in Profit & Loss account and will be presented directly under Balance sheet. The logic is very simple as the above mentioned assets are being used and giving benefits to the business ( by using it for manufacture ) for next so many years and not only for the year in which they are purchased. Capital Receipts - For capital expenditure i.e. to buy fixed assets, long term funds are required. Business can collect those funds by way of capital or loans taken from banks, or accepting deposits which are called Capital Receipts. Capital receipts are directly shown in Balance sheet and they will not appear in Profit & Loss Account. In short any transaction relating to the business will come under the following four categories 1. Revenue Expenses 2. Capital Expenses( assets ) Receipts (Long term Liabilities ) 3. Revenue Receipts 4. Capital

Revenue receipt and Revenue expenses are covered under Profit & Loss Account and Capital receipts and Capital expenditure are covered under Balance Sheet. Example- Mr.A who is trading in furniture, has given the following information Sales for the year Rs.1,00,000 , Material purchased Rs.60,000, Rent paid Rs. 5,000, Salary paid to employees Rs.10,000, Electricity Bills paid Rs.2,000, Advertisement Rs.10,000, Telephone Bill paid Rs.1,000.

In the above example profit made by the business is Rs.12,000 where the revenues are Rs.1,00,000 and expenses are Rs.88,000. Here sales for the year are shown and expenses for the year are considered. When we are recording all the sales on daily basis then we get the total sales figure. Similarly expenses are recorded as and when they are incurred so as to calculate total expenses for the full year . Profit & Loss Account always show revenues and expenses for a particular period that is why heading for the Profit & Loss Account is for the year ended on Here it is important to note that Profit & Loss Account shows all revenues from the business whether actually received or not . For example out of total sales of Rs.1,00,000, customers have paid Rs.65,000 and for remaining amount of Rs.35,000, they have promised to pay the amount in future. Similarly all the revenue expenses will be shown in Profit & Loss Account whether they have actually paid or not. This system of accounting is called Accrual system of accounting . If we put figures in the above example, Profit & Loss Account will look like as Profit & Loss Account Particulars Amount Particulars Amount Material 60,000 Sales 1,00,000 Salary 10,000 Rent 5,000 Electricity 2,000 Advertisement 10,000 Telephone Expenses 1,000 Profit 12,000 Total 1,00,000 Total 1,00,000 Profit & Loss Account shows the transactions for the year say from 1st April to 31st March. All the sales made during this period will be clubbed and can be shown as total sales under Profit & Loss Account, similarly total of all expenses for the year will appear under profit & Loss Account. Balance Sheet shows the position of assets and liabilities on the last day of the year. i.e what business owes to the others and what business owns on the last day of the year. Income Tax authorities requires the records for tax purposes from the period 1 st April to 31st March every year. That is why maximum businesses keeps their records for the period 1st April to 31st March every year so that there is no need to keep separate records for tax and accounts. Example From the following balances of various accounts on the last day of the year i.e. 31st March, 2009 . Prepare a Balance sheet Land & building Rs.1,20,000, Machinery Rs.80,000, Furniture Rs.20,000, Sales for the year Rs.4,50,000 , Vehicles Rs.40,000 , Amount receivable from customers ( Debtors) Rs.15,000, Cash & Bank balance Rs. 35,000, Share Capital 2,00,000, Reserve & surplus ( profit ) 40,000, Loan from Bank Rs.60,000, amount payable to suppliers of raw material ( Creditors ) Rs.10,000

Balance sheet as on 31st March, 2009 Liabilities Amount Share Capital 2,00,000 Reserves & Surplus 40,000 Bank Loan 60,000 Creditors 10,000

Total 3,10,000 . While preparing Balance sheet, we have considered sales for the year because it is revenue from the business and will be part of Profit & Loss Account. Exercise -1 A company engaged in hotel business and has given the following transactions which have taken place during the year Sales for the year Rs.5,00,000, Food & beverages expenses Rs.2,50,000, Electricity & water expenses Rs10,000, Washing & cleaning expenses Rs.25,000, Linen & uniform expenses Rs.20,000, Laundry expenses Rs.12,000, Audit fees Rs.3,000, Purchase of Machine Rs.2,25,000, crockery expenses Rs.5,000. Calculate profit /loss for the year Exercise 2 Information for a manufacturing company is given, state whether the following items are coming under Asset, liability, revenue or expenditure 1. Salary paid 2. Cash in hand 3. sales 4. loan from bank 5. share capital 6. amount receivable form customers 7. amount payable to suppliers 8. amount paid in advance to suppliers 9. Land & Building 10. printing & stationery 1. 5. 9. 2. 6 10 3. 7 4. 8

Assets Land & Building Machinery Furniture Vehicles Debtors Cash & Bank balance Total

Amount 1,20,000 80,000 20,000 40,000 15,000 35,000 3,10,000

Exercise -3 The total Assets of a business are Rs.87,000 , share capital is Rs.53,000 what is the amount of liability? Exercise 4 Share capital of a company is twice of its liabilities. The total assets of the company are Rs.81,000. what is the amount of liability ?

Exercise - 5 On 1st April, 2008, Mr.Ramesh stared a real estate agency under the name Ramesh Real Estate Agency Private Limited by depositing Rs.1,00,000 in the companies bank account. The activities resulted in the following revenue and expenses Commission Income Rs.1,35,000, Salary expenses Rs.25,000, Electricity charges Rs.3,000, Rent Expenses Rs.36,000, Advertisement Rs.20,000. The assets and liabilities of the business on 31st March, 2009 are Cash Rs.95,000, Debtors Rs.40,500, office Equipments Rs.30,000. Creditors- Rs.2,500, Loans payable Rs.12,000. What is the meaning of Financial Accounting ?

Why it is necessary to record all business transactions ? What is the meaning of Profit & Loss Account ? What is the meaning of Balance sheet ? Explain the meaning of Assets and Liabilities

Explain the meaning of Capital Expenditure with example

Explain the meaning of Revenue expenditure with example

Explain the meaning of Revenue receipt and Capital receipt

Chapter - 3 We have seen that Financial Accounting is necessary to find out profit or loss for the business. Under Financial Accounting Profit & Loss Account and Balance sheet is prepared. They are collectively called Financial Statements. Features of Financial Accounting Financial Accounting is historical accounting . It records the transactions which have already taken place. Financial Accounting considers only monetary transactions. Financial Accounting records only those transactions which can be expressed in terms of money. Financial Accounting is a legal requirement. Keeping of records for business transactions, getting them audited are the requirements, particularly for company form of business organization. Financial Accounting is for outsiders. Outsiders such as Govt, Banks, Suppliers, Investors, shareholders are interested in Financial accounting and financial results and that is why uniformity is ensured so that comparison is possible between financial performance of two different entities. Financial statements are available at a particular point of time after the expiry of the accounting period for example Balance sheet as on 31st March, 2009 can be available after this date. Financial Accounting gives the result of the business as a whole. It does not give the details about the individual departments, job wise information etc. Even though now a days segment reporting etc are introduced, it is applicable only to limited companies.

Generally Accepted Accounting principles ( GAAP ) While recording various business transactions under Financial Accounting there are certain assumptions which are followed by all accountant and are referred as accounting principles, concepts, conventions and rules. The principles which are basic of theory and practice of accounting are as below. Business Entity Concept It means there is clear cut separation between business and the owners of the business. While recording transactions accountant has to keep this in mind. For example, in case of proprietary firm accounting process is carried out for the business and not for the individual person who owns it. There should be clear cut separation between business and owner.

Dual Aspect Concept It means every business transaction has two aspects that means when a person brings capital say of Rs.10,000/- in the business then we have to show Rs.10,000/- as liability of the business ( as this amount I payable to the owner in future ) and Rs.10,000/- cash as an asset of the business. Going Concern Concept It assumes that business is going to be in existence for a long time in future. Because of this assumption we have to valuate all assets and liabilities at a cost price less depreciation and not at market price. Accounting Period Concept as we have discussed in the first para that accounts are prepared to know the profit or loss of the business. However we have to take a cut off period to prepare those accounts to ascertain profit or loss and hence a period of 12 months i.e one is a period decided for this purpose. Hence Profit & Loss Account and Balance Sheet is prepared after every 12 months to find out the business position. Cost Concept It proposes that assets should be shown at cost in the books less depreciation. Money measurement concept The transactions which are expressed in term of money only will find place in accounting for example a company is having a very good team of very skilled workers will not find any place in accounting. Matching Concept This concept proposes that to find out profit or loss of a particular period we have to consider all the revenues and expenses and cots for that period whether they have actually paid or not. For example if accounting period is 1st April to 31st March then salary for the month of March is to be considered in the same year even though it is paid in the April of next year. Now if we see the above mentioned assumptions while preparing accounts, first we have to assume that business is separate from its owner, we have to fix a period for which we have to record the transaction etc. With the above assumptions we have to consider certain traditions or customs which are called conventions while preparing accounts Materiality Consider only those transactions which are having material/ significant impact on the profitability of the business. Consistency The accounting policies which are now following, follow it for the next periods also then only you can compare the financial statements for different periods. Case 1- Mr.Anand after completing his MBA, started his own furniture business under the name Anand Plywoods. He introduced Rs.2,00,000 towards capital by way of cash. He purchased a plot of Rs.75,000 and constructed a shed of Rs.25,000. During the year he approached a bank and takes a loan of Rs.50,000 @ 10% interest, Sale for the year were made for Rs.2,50,000 and following expenses were incurred and paid

Purchase of stock Rs. 1,50,000, Wages & Salaries Rs.20,000, Electricity Rs.2,500, Advertisement Rs.15,000 and delivery expenses Rs.4,500. 1. Explain the capital expenditure and revenue expenditure involved in the first year of business 2. Explain the capital receipts and revenue receipts which are involved in the first year 3. Prepare Profit & Loss Account and Balance sheet of the sole proprietor. Ignore depreciation and tax. 4. Discuss various generally accepted accounting principles followed while preparing the Profit & Loss Account and Balance sheet. Solution Particulars Purchases Wages & Salaries Electricity Advertisement Delivery Expenses Interest on Loan Profit for the year Total Liabilities Capital Add: Profit Bank Loan Total Profit & Loss Account for the year Amount Particulars 1,50,000 Sales 20,000 2,500 10,000 4,500 5,000 58,000 2,50,000 Total Balance Sheet as on Amount Fixed Assets 2,00,000 Plot 58,000 Shed 2,58,000 Current Assets 50,000 Cash & Bank 3,08,000 Total Cash Account Amount Fixed Assets 2,00,000 Plot 2,50,000 Shed 50,000 Purchases of material Expenses Closing balance 5,00,000 Total Amount 2,50,000

2,50,000 Amount 75,000 25,000 2,08,000 3,08,000 Amount 75,000 25,000 1,50,000 42,000 2,08,000 5,00,000

Capital Sales Bank Loan Total

GAAP followed 1. Business Entity concept 2. Money measurement concept 3. Double Effect concept 4. Cost Concept 5. Accounting year concept.

Case -2 - Mr. Sanjay is M.D. of a private company having business of ready made garments. He was going through the records of the business and found the following transactions for the first year which ended on 31st March, 2009 1. 2. 3. 4. 5. 6. 7. 8. 9. Introduced Rs.5,00,000 as share capital of the business Purchase of premises for the shop of Rs.2,60,000 Material purchased on cash basis Rs.1,00,000 Salary paid to staff Rs.24,000 Cash Sales Rs.1,80,000 Material purchased on credit Rs.20,000 Credit sales Rs.24,000 Interest free Loan taken from directors Rs.50,000 Telephone, Electricity bill paid for the shop Rs.12,000

On 31st March, his accountant informed him that salary for the month of march of Rs.12,000 to staff is not yet paid and material costing Rs.8,000 is still lying in the shop on 31st March, 2009 and depreciation is to be charged @5% on shop building. Ignore tax Prepare the Income statement and Balance sheet of the business and also discuss the Generally Accepted Accounting Principles followed by the business. Profit & Loss Account for the year ended on 31st March, 2009 Particulars Amount Particulars Purchases on cash basis 1,00,000 Cash Sales Purchases on credit basis 20,000 Credit sales Salaries 24,000 Closing stock Add: outstanding 12,000 36,000 Telephone & Electricity 12,000 Depreciation on shop 13,000 Profit for the year 31,000 Total 2,12,000 Total Balance Sheet as on Liabilities Amount Fixed Assets Capital 5,00,000 Premises less Depreciation Add: Profit 31,000 Current Assets 5,31,000 Stock Loan from friend 50,000 Debtors Creditors 20,000 Cash & Bank Outstanding salary 12,000 Total 6,13,000 Total Cash Account Amount Fixed Assets Capital 5,00,000 Premises Sales 1,80,000 Purchases of material Loan from Director 50,000 Salary Telephone & Electricity Closing balance Total 7,30,000 Total Amount 1,80,000 24,000 8,000

2,12,000 Amount 2.47,000 8,000 24,000 3,34,000 6,13,000 Amount 2,60,000 1,00,000 24,000 12,000 3,34,000 7,30,000

Chapter - 4 Contents of Company Balance sheet Equity Share Capital. As per the provisions of the Companies Act, 1956 equity shareholders are owners of the company and they are having specific rights such as voting rights whenever any decision is taken with the approval of the shareholders.( on the basis of one share one vote ). They are also having other rights such as right to attend general meetings of the company, right to receive dividend, right to inspect the statutory registers of the company etc. However equity shareholders are unsecured i.e they dont have any right on assets of the company to receive their amount given to the company. Similarly at the time of liquidation ( closing down the business ) of the company equity shareholders are having last priority to get their funds from the liquidator of the company. even though they are owners of the company they can not decide the rate of dividend it is the Board of Directors who decides whether to declare and pay any dividend or not. At the outset we can conclude that equity shareholders are owners of the company with limited rights with lot of risk towards their investment made in the company. As far as business is concern the amount which is received from equity shareholders for the business is liability because business has to pay this amount to the equity shareholders hence Equity Capital is the first item shown as liability of the business. In the Balance sheet equity capital is shown under following headings Authorized Capital This is the maximum amount of capital company can raise from the investors. For example 1,00,000 equity shares of Rs.10 each. Issued capital This is the amount out of Authorized capital which company has offered to the investors by way of offering no. of shares. For example 80,000 equity shares of Rs.10 each Subscribed Capital This is the amount of capital, investors have agreed to pay to the company For example - 70,000 equity shares of Rs.10 each Called Up Capital This the amount of capital out of subscribed capital which company has called up ( demanded ) from the investors i.e shareholders. For example 70,000 equity shares of Rs.10 each amount called up Rs.5 per share Paid Up Capital This is the amount shareholders have paid to the company. For example out of 70,000 equity shares company has received Rs.5 on 69,500 shares and on 500 shares only Rs.3 per share. i.e calls are in arrears of Rs. 2 per share on 500 shares. So paid up capital is Rs.3,47,500 + Rs.1,500. ( i.e Paid up capital Calls in arrears Rs.3,50,000 Rs.1,000) If there is any amount because if forfeiture of shares it has to be added to the Paid up capital. In the Balance sheet paid up capital has to be shown in the outer column.

A Company can issue its shares at a premium i.e a share having face value of Rs.10/- will be issued at price say Rs.12/-. In this situation, amount towards face value will be shown under Share Capital account and Rs.2 per share under share premium account. A Company can issue its shares at discount i.e a share having a face value of Rs10/- will be issued at Rs 9/- per share. In this situation, amount towards face value of Rs.10 will be shown under Share Capital Account and rs.1 per share under Misc. Expenses not written off under Asset side. Preference Shareholders Preference shareholders are less risky than equity shareholders. They get dividend from the company at a predetermined rate. Company has to pay dividend to the preference shareholders and then to equity shareholders. At the time of liquidation of the company, to get the funds from the company, preference shareholders get priority over equity shareholders . Preference shareholders are not owners of the company. They dont have any voting rights means they are not the part of decision making process. They are having voting rights only under specific circumstances where their interest is affected. Like equity shareholders they are also unsecured. They get the dividend only when there is profit to the company. Company can issue preference shares to mobilize the funds and can repay them after a specific predetermined period. As far as business is concern the amount which is received from preference shareholders for the business is liability because business has to pay this amount to the preference shareholders hence Preference Capital is the item shown as liability of the business after Equity Capital. Sometimes a company issues convertible preference shares where after a specific period, preference shares gets converted into equity shares. A Company can issue its shares at a premium i.e a share having face value of Rs.10/- will be issued at price say Rs.12/-. In this situation, amount towards face value will be shown under Share Capital account and Rs.2 per share under share premium account. A Company can issue its Preference shares at discount i.e a Preference share having a face value of Rs10/- will be issued at Rs 9/- per share. In this situation, amount towards face value of Rs.10 will be shown under Share Capital Account and Rs.1 per share under Misc. Expenses not written off under Asset side. Sometimes a company will redeem the preference shares at a premium i.e a Preference share of a face value of Rs.10 will be repaid at the rate of Rs.11/-. In this situation, amount towards additional amount paid i.e Rs.1 will be shown under Misc. Expenses not written off under Asset side.

Reserves & Surplus A company out of its profits keeps aside certain amount for future which are called Reserves. Reserves are divided in two Revenue reserves and Capital Reserves. Revenue Reserve are those reserves which are created out of the profits generated from the main business activity ( operating activities ) of the company whereas Capital Reserves are those reserves which are created out of profits generated from other ( nonoperational ) activities. For example in case of a manufacturing company, any reserve created from the profit generated from the manufacturing activity is revenue reserve and if company has sold any asset during the year at profit then it is a capital reserve. When a company keeps aside any amount from profits without any specific reason it is called General Reserve. When a company issues its shares at a price more than its face value, the excess amount collected is called share premium. For example recently Reliance Power issued its equity shares of a face value of Rs.10 per share issued the shares at Rs.430 per share to retail investors, the excess amount i.e Rs.420 per share is share premium. All the amount coming under Reserves are considered as part of owners funds that is why they are included in shareholders equity. When a company transfers any amount from profits to reserves it is only through book entry, no funds are involved. Profit is to be reduced by the amount and reserve has to be increased by that amount. Secured Loans Under secured loans , major item is debentures. Debentures means loan taken by the company from the investors for its business. Company has to pay interest on the debentures at a pre determined rate whether there is profit or not. In case of secured debentures, at the time of accepting money, company gives its fixed assets such as land, buildings as security to the debenture holders. In case company is not able to pay interest and principle loan amount, debenture holders have every right to sell off the assets to recover their dues. Comparing to Equity shareholders and Preference shareholders , debenture are less risky because they are secured that is why rate of interest on debentures is lower comparing to equity and preference dividend. They do not have any voting rights. After a specific period company can pay back the amount taken from the debenture holders. Like Preference shares, a company can issue convertible debentures means after specific period debentures gets converted into equity shares. Interest accrued and due on debentures is shown with the principle amount under the liability side whereas interest accrued but not due will appear under Current liabilities.

Like debentures, under Secured Loan Category , Term loans taken from the banks and financial institutions are covered. Like debentures, company has to pay interest on the loan taken irrespective of the profitability. Company has to accept certain terms and conditions put by the bankers. Sometimes bankers appoints their representative on the Board of the company. Interest accrued and due on term loans is shown with the principle amount under the liability side whereas interest accrued but not due will appear under Current liabilities. Interest paid to debenture holders and to the bankers is treated as expenditure for the business under the head finance expenses which reduces profit and ultimately tax. Unsecured Loans Under this heading company accepts money from investors as fixed deposit or loans from other companies which are unsecured means company is not giving any asset as security for the repayment. All the above alternative sources available to the company to mobilize the funds for the business are long term sources. Company uses this money for the business for a long term period say 5 to 10 years even more than that. When these parties gives money to the business, they expects return i.e either dividend or interest from the company which is called cost of capital. i.e amount paid by the company to these parties for the usage of funds. The basic difference is that interest payment made to debenture holders or banker is treated as expenditure of the business which reduces profits and whereas dividend payment to equity shareholders and preference shareholders is appropriation of profit which is paid after payment of tax which will not save tax of the company. Current Liabilities & Provisions Like long term liabilities as discussed above there are certain current liabilities which are created due to the day to day activities of the company. Company has to pay off such type of liabilities in one year. It includes Creditors, Bills payables, outstanding expenses, short term borrowings from the banks such as bank overdraft, cash credit. Company has to make certain provisions considering the likely payments such as Provision for taxation, provision for PF, gratuity, advances received from customers, etc. In the net shell balance sheet liability side is divided in two parts 1) Long term liabilities which consist of share capital, reserves and surplus, secured loans and un secured loans and 2) short term liabilities which includes Current Liabilities and provisions. Balance Sheet Asset side The fist item under Balance sheet asset side is Fixed Assets. Fixed assets are those assets with the use of which company carry on its business. Fixed assets are mainly divided in two tangible fixed assets and in tangible fixed assets. Tangible assets are land, building, plant, machinery, vehicles, furniture having physical existence where as intangible assets consist of patents, trade marks, copy rights, goodwill etc which are by way of rights.

Since tangible fixed assets are giving benefits to the company for a longer period and not just one year in which they are purchased. The purchase value of the asset is spread over the life time of that asset. Every years portion is called depreciation which is treated as expenditure for that year. For example when a machine is purchased for Rs.1,00,000 life of which is 10 years, the amount of Rs.1,00,000 is spread over a period of ten years since company is going to use the asset for ten years. Thus every years portion will be Rs Rs.10,000 which is called depreciation and will be treated as expenditure for that year. Thus at the end of first year balance sheet will show machine value as Rs.1,00,000 Rs.10,000 = Rs.90,000 and income statement for the year will show expenditure of Rs.10,000/Like tangible fixed assets, money spent to acquire/ generate intangible assets is also required to spread over a number of years. This is called amortization. Investments - Second heading under asset side is Investments. Company can invest the surplus funds in various securities like equity shares, debentures, mutual funds. Investments are shown in the Balance Sheet at purchase price and market price in the brackets. Current Assets & Loans and Advances Like fixed assets, business requires certain assets for its day to day operations. These assets are called current assets. For example in case of a manufacturing company the process is purchase of raw material, conversion of raw material in to finished goods with the use of machines and workers and then selling the finished goods in the market either on cash or credit basis. So the assets which can be generated are raw material, work in progress, finished goods, debtors, cash in hand, cash at bank etc. Current assets are those assets which can be convertible in to cash or cash equivalent assets in a period of one year without reduction in its value. Current assets includes cash in hand, cash at bank, stock, debtors, bills receivables, prepaid expenses, advance paid to suppliers, advance tax paid, various deposits kept with various authorities etc. Current assets are to be supported by Current liabilities which are short term liabilities of the business. Investment in current assets is called gross working capital of the company and Current assets Current liabilities is called Net working Capital Misc.Expenses ( to the extent not written off ) - Under this heading we have to show expenses incurred at the time of formation of the company, discount allowed on issue of shares, debentures, premium paid while redemption of preference shares, debentures etc which has to be spread over in next few years and has to be recovered from every years profit.

Format of Balance Sheet Liabilities Share Capital Equity Share Capital Preference Capital Reserves & Surplus General Reserve Capital Reserve Share Premium Account Profit & Loss Account Secured Loans Debentures plus interest accrued and due Term Loans plus interest accrued and due Unsecured Loans Deposits Inter Corporate Dep. Current Liabilities & Provisions Sundry Creditors Bills Payables Outstanding Expenses Provision for Taxation Proposed Dividend Bank Overdraft/ cash credit Provision for PF Interest accrued but not due Total Amount Assets Fixed Assets Goodwill Patents Land & Building Plant & Machinery Furniture Vehicles Investments Long Term Investments Current Assets and Loans And Advances Stock Debtors/ Bills Receivables Cash in Hand & at Bank Prepaid expenses Short term investments Inter Corporate Deposits Advance Tax paid Loans to group companies Deposits kept with various authorities Misc. Expenses to the extent not written off Preliminary expenses Issue expenses Total Amount

Chapter - 5 Steps involved in preparation of Profit & Loss Account and of Balance Sheet We have already seen that Profit & Loss Account shows the profit or loss for the business. This Profit & loss Account is divided in two parts left hand side and right hand side. Left hand side of the account is called Debit side which shows all the revenue expenses and losses for the business where as right hand side is called Credit side which shows all incomes and gains for the business. The items which are coming under Profit & Loss Account depends on the business. For a manufacturing company , trading company and a service provider company, items are different. For a manufacturing company along with opening balances of stock, all revenue expenses such as raw material consumed, consumption of stores and spare parts, power & fuel, repairs to machinery, building, rent, depreciation on fixed assets, wages paid, insurance, other factory expenses, office expenses, selling expenses, are shown on the left hand side of the account whereas sales and closing stock are shown on the right hand side of the account. For a Trading Company opening stock, Purchases along with all office and selling expenses are shown on left hand side whereas Sales and closing stock on right hand side of the Profit & Loss Account. Depending upon the business of the company Profit & Loss Account will give information about trading activities or manufacturing activities so as to calculate profit or loss. Profit & Loss Account for a Trading Company Debit Particulars Opening Stock Purchases Gross Profit ( Balancing figure ) Total Office Expenses Selling Expenses Finance Expenses ( Interest ) Depreciation on assets Provision for Tax Net Profit after Tax Total Amount 35,000 5,50,000 5,95,000 11,80,000 2,00,000 1,60,000 20,000 40,000 70,000 1,30,000 6,20,000 Particulars Sales Closing stock Credit Amount 11,55,000 25,000

Total 11,80,000 Gross Profit brought 5,95,000 forward Other Income 30,000

Total

6,20,000

Since it is a trading business , there will be no factory related expenses

Profit & Loss Account for a Manufacturing Company Debit Particulars Amount Particulars Opening Stock of raw material, 35,000 Closing stock of raw WIP and FG material, WIP and FG Purchases of Raw material 5,50,000 Wages paid 1,00,000 Cost of Production Power & Fuel 40,000 ( Balancing figure ) Consumable stores 15,000 Manufacturing expenses 25,000 Depreciation on manufacturing 25,000 assets Total 7,90,000 Total Cost of Production ( Brought 7,65,000 Sales forward) Office Expenses 1,00,000 Other Income Selling Expenses 95,000 Finance Expenses 20,000 Provision for Tax 70,000 Profit after Tax ( Net profit ) 1,30,000 Total 11,80,000 Total

Credit Amount 25,000 7,65,000

7,90,000 11,55,000 25,000

11,80,000

Net profit made by the company along with earlier accumulated balance will be distributed to various reserves, as dividend etc and will be shown under Profit & Loss Appropriation Account Profit & Loss Appropriation Account Debit Proposed Dividend Transfer to reserve Balance transferred Balance sheet Total Credit 25,000 40,000 to 65,000 1,30,000 Total 1,30,000 Opening Balance ( last year ) 0 Net profit for the year brought 1,30,000 forward

Here the ultimate figure of Profit is transferred to Balance sheet under Reserves & Surplus. However some times there can be loss also in such case either the loss can be deducted from the earlier balance of Profit & Loss Account or it can be shown on Balance sheet asset side under separate heading of Profit & Loss Account.

There is no specific format under Companies Act for preparation of Profit & Loss Account and hence there is liberty to prepare and present Profit & Loss Account. It can also be prepared under vertical format. All listed companies are preparing Profit & Loss Account in Vertical format . Vertical Format with imaginary figures Particulars Gross Sales Less: Excise Duty Net Sales Add: Other Income Total Income Less: Expenditure Raw Material consumed Opening stock of Raw material( WIP,FG) Add: Purchase of Raw material Less: Closing stock of Raw material ( WIP,FG) Less: Employee cost Less: Factory , Office and Selling Exp. Profit before Depreciation, Interest and Tax Less: Depreciation Profit before Interest and Tax Less: Interest Profit before Tax Less: Provision for Tax Profit after Tax ( Net Profit ) Less: Transfer to Reserves Less: Proposed Dividend Balance transferred to Balance sheet Amount rupees 12,00,000 45,000 in Amount rupees 11,55,000 25,000 11,80,000 35,000 5,50,000 25,000 in

5,60,000 1,25,000 2,35,000 2,60,000 40,000 2,20,000 20,000 2,00,000 70,000 1,30,000 40,000 25,000 65,000

Similarly Balance sheet is divided in two parts , left hand side is Liability side where all the amounts which business owes to outsiders are shown including owners capital and on right hand side all the amounts the business owns i.e assets or properties of the business. Important Concepts under Financial Accounting Double Entry System of Accounting Basic assumption under double entry system of accounting is that every business transaction has two elements means when business receives something it has to pay something. For example when the business pays the rent it gets the benefit of using the place for the business but at the same time cash goes out of the business. Similarly when goods are sold goods are going out from the business however cash is coming in to the business.

Cash System of Accounting Under this system of accounting expenses are considered to be expenses only when they are paid for and income is are considered as income only when they are actually received. This system is generally used for non-profit making organizations. Mercantile System of Accounting Under this system of accounting, expenses are considered as expenses during the period to which they are pertain similarly incomes are considered as income during the period to which they are pertain. Whether expenses are actually or incomes actually received is not important. For example Telephone expenses incurred during April to March are say Rs.6,000 and amount paid is Rs.5,000, under this system of accounting we have to consider the amount of Rs.6,000. Steps involved in preparation of Balance Sheet and Profit & Loss Account Making of journal entries Preparation of Ledger Accounts Preparation of Trial Balance Consideration of adjustments, closing entries Preparation of Balance Sheet & profit & Loss Account

How to make journal entries -This step is for recording of basic transaction in the books. For example capital introduced, purchases made, wages paid etc. while recording the transactions they can be divided in three heads of accounts. We also have to keep in mind that under double entry system of accounting every transaction affects on minimum two accounts 1.Real Account which is for assets. 2.Personal Account which is for parties which are associated with the business such as banks, creditors, debtors, Owners (Capital accounts) etc 3. Nominal Account i.e. the accounts which are not coming under either Real Account or Personal Account. These accounts are of expenses and incomes and profits and losses. The rules for recording the transactions are -For Real Account such as land, building, plant, machinery, furniture, vehicles, cash Rule Debit What comes in to the business Credit What goes out of the business

For Personal Account such as suppliers, customers, bankers Rule Debit the receiver ( who has received something from the business ) Credit the giver ( who has given something to the business ) For Nominal Accounts such as salaries, wages, telephone expenses, printing, stationery etc Rule Debit all expenses and losses of the business Credit all profits and gains of the business Giving debit to any account means nothing but putting the figure on the left hand side of that account and giving credit to any account means putting the figure on the right hand side of that account. As mentioned earlier under double entry system of accounting , from every transaction there can be minimum two accounts which are generated/affected and they are from the above three heads i.e Real Account, Personal Account and Nominal Account. While recording any transaction, we have to put one figure on either left hand side or right hand side of the account, means we have to give either debit or credit for the particular item. this procedure is called making Journal entries. For every transaction debit and credit amount should be the same. For this purpose first we have to find out the accounts which can be generated/affected from every transaction Example No.1The transaction is - machinery purchased for Rs.10,000 by paying cash Here the accounts which are created from this transaction are machinery account and cash account. After finding out the account then we have to check each of them whether it is a Real Account, Personal Account or Nominal Account. In our example both machinery and cash are Real Account. Finally we have to apply the rules of debit and credit. In the above example both machinery and cash are Real Accounts so the rule isgive Debit to What comes in to the business and give Credit to what goes out of the business. Here machinery is coming into the business since it is purchased and cash is going out of the business ( for payment ) so Machinery Account is to be debited and Cash account is to be credited.

Example No.2If transaction is payment of Rs.5,000 made to suppliers by paying cash Here the accounts which are created from this transaction are Suppliers account and cash account. In this example Suppliers account is a Personal account and cash is Real Accounts so the rule for Personal Account is Debit the Receiver Credit the Giver Here Supplier has received cash from the business so we have to give him debit in the books and cash is a real account where the rule is give Debit to What comes in to the business and give Credit to what goes out of the business. Since cash is going out of the business we have to give credit to Cash Account by the same amount. Example No.3 Rent of Rs.2,000 paid through cheque Here the accounts which are created from this transaction are Rent Account and Cash Account. In this example Rent Account is a Nominal Account and Bank is a Personal Accounts so the rule for Nominal Account is Debit all expenses and losses of the business and Credit all profits and gains of the business. Since rent paid is expenditure of the business we have to give debit to Rent Account Since Bank Account is a Personal Account the rule is Debit the Receiver and Credit the Giver. Here our Banker has made payment on our behalf i.e banker has given Rs.2,000 on our behalf so we have to give credit the Bank Account. Ledger Posting - After making journal entry we have to post the above facts to the ledger accounts. Ledger Account shows all transactions for a particular item. The objective of ledger accounts is convenience. Suppose the accountant has to check the amount paid for electricity for the month of October. Now instead of checking all the transactions ( journal entries ) it is better for the accountant to check the information at Electricity Expense account. Every accountant has to open various ledger accounts according to the nature of expenditure. If we continue the example number 1 where we have given debit to Machine Account and credit to Cash Account, we have to put the figure on left hand side of Machinery account and right hand side of cash account. Which will look like as

Machinery Account (Debit side) Date Particulars To Cash Amount Rs.10,000 Cash Account (Debit side) Date Particulars Amount Date Particulars By Machinery (Credit side) Amount Rs.10,000 Date Particulars (Credit side) Amount

Let us consider another example where the transaction is Telephone bill of Rs.500 paid. Here the two accounts which are generated are Telephone Expenses Account and Cash Account. Now Telephone Expense is a Nominal Account and cash is Real Account. For Nominal Account, rule is Debit all expenses and losses and Credit all incomes and gains. Since telephone expenses is our expenditure we have to give Debit to Telephone Expenses Account and since Cash is a Real Account and which is going out we have to Credit to Cash Account. Telephone Expenses Account (Debit side) Date Particulars To Cash Amount Rs.500 Cash Account (Debit side) Date Particulars Amount Date Particulars By Telephone Exp. (Credit side) Amount Rs.500 Date Particulars (Credit side) Amount

Trial Balance Trial Balance as the name indicates tries to balance between debit and credit totals. i.e. total of all debits must be equal to all credits. After posting all the transaction in the above manner to related accounts for the whole year or a specific period, we have to close the ledger accounts. While closing the accounts we will get the balancing figures. For example when we are paying rent of Rs.2,000 every month, Debit side of Rent Account will show Rs.24,000/- at the end of the year. This amount of Rs.24,000 first will go to Trial Balance debit column and then to Profit & Loss Account as total rent paid during the year. Similarly if we have purchased machinery of Rs.10,000 and at the end of the year we have charged depreciation of Rs.2,000 for its use then we will get Rs.10,000 on debit side of Machinery Account and Rs.2,000 on credit side and a balancing figure of Rs.8,000 which is the balance of Machinery account at the end of the year. Here we can say that Machinery Account is having a debit balance of Rs.8,000 i.e. debit side is more by Rs.8,000 than credit side. Ultimately we have to take balances of all the ledger accounts either debit or credit and have to prepare the Trial Balance where total debit must be equal to total credit.. On the Trial Balance we have to make adjusting entries such as valuation of closing stock, charging of depreciation on fixed assets, making of provisions at the end of the year etc and then finally we have to prepare Trading, Profit & Loss Account and Balance Sheet. Other important concepts Closing stock This indicates the amount of stock in hand at the end of the year i.e on the Balance sheet date. Closing stock is valued at cost or market price whichever is less. As a first effect, closing stock is shown on the credit side of the Profit & Loss Account and as a second effect, on the asset side of the Balance sheet. Journal Entry Closing stock A/s Profit & loss A/c Debit Credit

Depreciation Depreciation is an expenditure for normal wear and tear ( usage ) of a fixed asset. The simple logic is when a company purchases any fixed asset say a machine for Rs.10 lacs and the life of the machine is 10 years, company is going to use this machine for next 10 years so the total expenditure on machine i.e Rs.10 lacs we have to divide for 10 years so every we have to show depreciation as expenditure of every year of Rs.1 lac. So as a first effect depreciation is to be shown as expenditure to the debit side of Profit & Loss Account and as a second effect we have to deduct the amount of depreciation from the value of the asset shown o asset side.

Journal Entry Depreciation A/c Fixed Asset A/c Outstanding Expenses This indicates the amount of expenditure pertaining to the relevant period which are not paid during the said period. According to mercantile system of accounting, we have to add the amount in corresponding expenses even though they are not paid and as a second effect we have to show it as a current liability on the liability side of the Balance sheet Journal Entry Expenses A/c Outstanding Expenses Prepaid Expenses This indicates the amount pertaining to next period is paid in advance in this year. So a s a first effect we have to reduce the amount from expenses and as a second effect we have to show it as current asset under the Balance sheet asset side. Journal Entry Prepaid Expenses Expenses Account Accrued Income This indicated the amount of income for the current year but not received. Accordingly as a first effect we have to add this amount in current years income and as a second effect as current asset under the asset side of the Balance sheet. Journal Entry Accrued Income Income Account Debit Credit Debit Credit Debit Credit Debit Credit

Income received in Advance This indicates the amount of income for the next period received during the current period. Accordingly first we have to reduce current years income and as second effect we have to it as liability under current liabilities on liability side of the Balance sheet. Journal Entry Income A/c Income received in advance Debit Credit

Bad debts This is the amount which is not recoverable from the customer to whom goods are sold on credit. Accordingly assuming it as a loss to the business, we have to reduce the income for the current year and as a second effect we have to reduce the balance of debtors from the asset side of Balance sheet. Journal Entry Bad debts A/c Debtors A/c Provision for Bad debts There is always possibility that some customers are not paying the bills. So management has to make provision for bad debts by reducing the current years profit and as a second effect we have to reduce the balance of debtors from the asset side of Balance sheet. Journal Entry Profit & Loss A/c Debtors A/c Debit Credit Debit Credit

Let us consider one example to understand how to give and credit to any account Example Mr.Ganesh left his job as carpenter and started a company under name Woodcraft Private Limited. The transactions for the business for September are as follows Date Sept.1 Sept.5 Sept.10 Sept.14 Sept.17 Sept.23 Sept.25 Sept28 Sept.29 Sept.30 Particulars Started business by depositing Rs.1,00,000 in the bank account of the company for 10,000 equity shares of Rs.10 each Purchased equipments for cash of Rs.12,000 Received Rs.18,600 for remodeling a kitchen Paid cash of Rs.2,000 in cash for advertisement Received Rs.11,200 for furnishing an office room Billed customers for work done other than on cash terms Rs.15,000 Paid wages to assistant Rs.10,000 in cash Paid electricity bill Rs.500 in cash Received partial payment from customers billed on Sept.23, Rs.4,800 Declared and paid dividend of Rs.2500 Debit Credit

Let us consider one example where we are covering all the steps to prepare a Balance Sheet and Profit & Loss Account

Problem No.1 From the following particulars of Rivolta Auto Trading Private Limited, make journal entries, ledger accounts, Trial Balance and Final accounts Started business by introduction of a share capital of Rs.1,00,000 Opened a Bank Account with Vijaya Bank and deposited Rs.35,000 Purchased goods from M/s Ajay Trading Company on credit for Rs.20,000 Sold goods to Vijay & Sons on credit of Rs.14,000 Paid to Ajay & Sons by cheque of Rs.19,500 in full settlement Received Rs.13,000 from Vijay & Sons in full settlement by a cheque Purchased furniture of Rs.10,000 and paid the amount by cheque Paid Rs.3,000 for traveling of the director in cash Sold goods of Rs. 10,000 to Ganesh Auto Pvt Ltd for cash Goods purchased from Akanksha Steels Ltd of Rs.8,0000 against cash Cash deposited in Vijaya bank Rs.5,000. Salary paid in cash Rs.2,000 Additional information Value of stock on 31st March, 2008 is Rs.17,000 Depreciation is to be charged @2% on furniture Telephone bill of Rs.1,500 for the month of march is not yet paid Journal entries 1. Cash Account Share Capital Account 2. Vijaya Bank Account Cash Account 3. Purchases Account Ajay Trading Company Account 4. Vijay & Sons Account Sales Account 5. Ajay Trading Company Account Vijay Bank Discount Account 6. Vijaya Bank Account Discount Account Vijay & Sons Account 7. Furniture Account Vijaya Bank Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit Credit Debit Debit Credit Debit Credit Rs.50,000 Rs.50,000 Rs.35,000 Rs.35,000 Rs.20,000 Rs.20,000 Rs.14,000 Rs.14,000 Rs.20,000 Rs.19,500 Rs. 500 Rs.13,000 Rs. 1,000 Rs.14,000 Rs.10,000 Rs.10,000

8. Traveling Expenses Account Cash Account 9. Cash Account Sales Account 10. Purchases Account Cash 11.Vijaya Bank Cash Account 12. Salary Account Cash Account

Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit

Rs. 3,000 Rs. 3,000 Rs.10,000 Rs. 10,000 Rs.8,000 Rs.8,000 Rs.5,000 Rs.5,000 Rs.2,000 Rs.2,000

Ledger Accounts in the books of the company Cash Account (Debit side) Date Particulars Amount Date Particulars (Credit side) Amount

Vijaya Bank Account Date Particulars Amount Date Particulars Amount

Share Capital Account Date Particulars Amount Date Particulars Amount

Purchases Account Date Particulars Amount Date Particulars Amount

Sales Account Date Particulars Amount Date Particulars Amount

Traveling Expenses Account Date Particulars Amount Date Particulars Amount

Salary Account Date Particulars Amount Date Particulars Amount

Telephone Expenses Account Date Particulars Amount Date Particulars Amount

Discount Account Date Particulars Amount Date Particulars Amount

Depreciation Account (Debit side) Date Particulars Amount Date Particulars (Credit side) Amount

Ajay Trading Co Account Date Particulars Amount Date Particulars Amount

Vijay & Sons Account Date Particulars Amount Date Particulars Amount

Furniture Account (Date Particulars Amount Date Particulars Amount

Outstanding Expenses Account Date Particulars Amount Date Particulars Amount

After closing all ledger accounts we have to complete the third step i.e.Trial Balance. On every account there is either debit balance or credit balance. If debit side ( left hand side ) is more than credit side( right hand side ) it means the account is having debit balance for the differential amount and vice versa. Here we have to balance between debit and credit side on trial basis that is why it is called Trial Balance Name of the account Cash Vijaya Bank account Purchases Sales Traveling Expenses Salary Telephone expenses Depreciation Discount Share Capital Furniture Outstanding expenses Total Trial Balance Debit Credit

Particulars

Profit & Loss Account Amount Particulars

Amount

Liabilities

Rivolta Auto Trading Private Limited Balance Sheet Amount Assets

Amount