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INTERMEDIATE
STUDY NOTES
INTERMEDIATE : PAPER -
5
FINANCIAL
ACCOUNTING
The Institute of Cost Accountants of India
CMA Bhawan, 12, Sudder Street, Kolkata - 700 016
SYLLABUS - 2016
First Edition : August 2016
Reprint : January 2018
Revised Edition: June 2018
Published by :
Directorate of Studies
The Institute of Cost Accountants of India (ICAI)
CMA Bhawan, 12, Sudder Street, Kolkata - 700 016.
Printed at :
Mumbai - 400 0
Copyright of these Study Notes is reserved by the Institute of Cost Accountants of India and prior permission from the Institute is necessar y for reproduction of the whole or any part thereof. February 2019
Syllabus - 2016
Paper 5: Financial Accounting (FAC)
Syllabus Structure
The syllabus comprises the following topics and study weightage
AAccounting Basics25%
BPreparation of Financial Statements40%
CSelf Balancing Ledger, Royalties, Hire Purchase & Installment System, Br anch & Departmental Accounts20% DAccounting in Computerised Environment and Accounting Standards15% B 40%A
25%
C 20%D 15%
ASSESSMENT STRATEGY
There will be written examination paper of three hours
OBJECTIVES
To gain understanding and to provide working knowledge of accounting concepts, detailed procedures and documentation
Learning Aims
The syllabus aims to test the student"s ability to: Understand the framework of accounting systems and the Generally Accepte d Accounting Principles
Skill set required
Level B: Requiring the skill levels of knowledge, comprehension, applica tion and analysis.
Sec-A : Accounting - Basics25%
1. Fundamentals of Accounting
2. Accounting for Special Transactions
Sec-B : Preparation of Financial Statements40%
Incomplete Records.
4. Partnership Accounts
Sec-C : Self Balancing Ledgers, Royalties, Hire Purchase & Installment S ystem, Branch & Departmental Accounts20%
5. Self-Balancing Ledgers
6. Royalties, Hire-Purchase and Installment System
7. Branch and Departmental Accounts
Sec-D : Accounting in Computerised Environment and Accounting Standards15%
Section A : Accounting - Basics [ 25 Marks]
1. Fundamentals of Accounting:
2. Accounting for Special Transactions
Section B : Preparation of Financial Statements [40 Marks] 3. (i) (ii)
Income& Expenditure account and Balance Sheet.
(iii) Preparation of Financial Statements from incomplete records (Single ent ry)
4. Partnership Accounts
Section C: Self Balancing Ledgers, Royalties, Hire Purchase & Installmen t System, Branch & Departmental Accounts [20 Marks]
5. Self-Balancing Ledgers
6. Royalty Accounts, Hire Purchase and Installment System.
7. Branch and Departmental Accounts.
Section D: Accounting in Computerized Environment and Accounting Standar ds [15 marks]
8. Packages and their selection criteria
9. Accounting Standards (AS-1, AS-2, AS-7, AS-9, AS-6 and AS-10 has been replaced by revised AS-10)
Study Note 1 : Fundamentals of Accounting
1.1 Basics 1
1.2 Generally Accepted Accounting Principles 11
1.3 Accounting Concepts and Conventions 11
1.4 Capital & Revenue Transactions 26
1.5 Accounting for Depreciation 56
Study Note 2 : Accounting for Special Transactions
2.1 Bills of Exchange 93
2.2 Consignment Accounting 112
2.3 Joint Venture Accounts 133
3.1 Introduction 169
3.2 Bad Debts 169
3.3 Preparation of Financial Statements 180
Study Note 5 : Preparation of Financial Statements from Incomplete Reco rds
5.1 Preparation of Financial Statements from Incomplete Records 249
Study Note 6 : Partnership
6.1 Admission of Partner 275
6.2 Retirement of Partner 303
6.3 Death of Partner 327
6.4 Dissolution of a Partnership Firm 330
6.5 Insolvency of a Partner 338
Contents
6.6 Amalgamation of Firms and Conversion to a Company 363
6.7 Conversion or Sale of a Partnership Firm to a Company 377
Study Note 7 : Self Balancing Ledger
7.1 Self Balancing Ledger 389
Study Note 8 : Royalties
8.1 Royalties 407
Study Note 9 : Hire-Purchase and Installment System
9.1 Hire-Purchase and Installment System 423
Study Note 10 : Branch and Departmental Accounts
10.1 Branch Accounts 451
10.2 Departmental Accounts 491
Study Note 11 : Computarised Accounting System
11.1 Computerised Accounting System 523
Study Note 12 : Accounting Standards
12.1 AS - 1: Disclosure of Accounting Policies 528
12.2 AS - 2: Valuation of Inventories 531
12.3 AS - 7: Construction Contracts 539
12.4 AS - 9: Revenue Recognition 545
12.5 AS - 10: Property, Plant and Equipment 550
12.6 IND AS 558
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 1
1.1 BASICS
This Study Note includes
1.1 Basics
1.2 Generally Accepted Accounting Principles
1.3 Accounting Concepts and Conventions
1.4 Capital & Revenue Transactions
1.5 Accounting for Depreciation
Study Note - 1
FUNDAMENTALS OF ACCOUNTING
FINANCIAL ACCOUNTING
2 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
(a) (b) (c) Cost Accounting and (d) (a) Book-keeping (b) Financial Accounting interpretation.
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 3
Fundamentals of Accounting
(c) Cost Accounting (d) Management Accounting
Difference between Book-keeping and Accountancy:
Sl
No.Points of
differenceBook KeepingAccountancy
1.Meaning
Accountancy is considered as
2.FunctionsThe primary stage of accounting function is
3Depends Accounting.
4.Data prepare reports and statements from the
5.Recording of Transactions and conventions. keeping.
FINANCIAL ACCOUNTING
4 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
Difference between Management Accounting and Financial Accounting:
Management AccountingFinancial Accounting
the monetary transactions of the enterprise. management to assist them in the process of and decision making. of every accounting period. meant for management and as per management creditors of the concern.
Accounting Cycle
Accounting Cycle
Steps/Phases of Accounting Cycle
Recording of Transaction:
Journal:
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 5
Fundamentals of Accounting
Ledger:
Trial Balance:
Adjustment Entries:
Adjusted Trial Balance:
Closing Entries:
Financial Statements:
Objectives of Accounting
(a) (b) (c) (d) (e) StakeholderInterest in businessAccounting Information of assets given as security products and services unions packages
Competitorssynergies
FINANCIAL ACCOUNTING
6 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
Users of Accounting Information
Types of Accounting Information
(a) Financial Position (b) Financial Performance- (c) Cash Flows II. Accounting information relating to cost of a product, operation or function.
III. Accounting information relating to planning and controlling the activities of an enterprise for internal reporting.
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 7
Fundamentals of Accounting
IV. Accounting information relating to Social Effects of business decisions. V. Accounting information relating to Environment and Ecology. VI. Accounting information relating to Human Resources.
Basic Accounting Terms
(i) Transaction: parties. (ii) Goods/Services : (iii) (iv) Loss: (v) Asset:
FINANCIAL ACCOUNTING
8 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
term etc. (vi) Liability: (vii) Internal Liability : (viii) Working Capital : (ix) Contingent Liability : (x) Capital : (xi) Drawings : (xii) Net worth :
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 9
Fundamentals of Accounting
(xiii) Non-current Investments : (xiv) Current Investments : (xv) Debtor : (xvi) Creditor : (xvii) Capital Expenditure: (xviii) Revenue expenditure: (xix) Balance Sheet: (xxi) Trade Discount: dis (xxii) Cash Discount:
15000 on which
15000 -
FINANCIAL ACCOUNTING
10 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
Illustration 1.
to the . over . to others. . period. . . . or . over .
Solution:
Illustration 2.
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 11
Fundamentals of Accounting
Solution:
1.2 GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
1.3 ACCOUNTING CONCEPTS AND CONVENTIONS
statements are
FINANCIAL ACCOUNTING
12 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
Theory Base of Accounting
Basic Assumptions
A. BASIC ASSUMPTIONS
(a) Business Entity Concept (b) Going Concern Concept (c) Money Measurement Concept
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 13
Fundamentals of Accounting
owned. (d) The Accounting Period Concept (e) The Accrual Concept during the period. of Accounting.
B. BASIC PRINCIPLES
(a) The Revenue Realisation Concept 50 thousand
FINANCIAL ACCOUNTING
14 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
(b) The Matching Concept (c) Full Disclosure Concept (d) Dual Aspect Concept
Assets Liabilities + Capital
Assets Liabilities + Owner"s equity
Cash 25,00,000 Liabilities nil + Mr. Suresh"s equity 25,00,000
Assets = Liabilities + Owner"s equity
Cash 40,00,000 Liabilities 15,00,000 + Mr. Suresh"s equity 25,00,000
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 15
Fundamentals of Accounting
(f) Historical Cost Concept (g) Balance Sheet Equation Concept
C. MODIFYING PRINCIPLES
(a) The Concept of Materiality recording. e.g. even
FINANCIAL ACCOUNTING
16 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
(b) The Concept of Consistency (c) The Prudence Concept 9 (d) Timeliness Concept
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 17
Fundamentals of Accounting
(e) Industry Practice
Conclusion
Exercise:
Events and Transactions:
accounting event has occurred.
Transactions vs. Events
FINANCIAL ACCOUNTING
18 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
Voucher:
Types of Voucher
(i) Receipt Voucher (a) Cash receipt voucher - it denotes receipt of cash (b) (ii) Payment Voucher (a) (b) (iii) Non Cash Or Transfer Voucher (iv) Supporting Vouchers These vouchers are the documentary evidence of transactions that have happened.
Source Documents
transactions.
Name of the BookSource document
The Concept of Account", Debit" and Credit": accounting treatment.
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 19
Fundamentals of Accounting
Dr.Cash AccountCr.
Credit side
Cash Account
ParticularsAmount
`ParticularsAmount `
1,25,000
1,25,000
Types of Accounts:
characteristics.
Accounts
Accounts
(1) Personal Account :
FINANCIAL ACCOUNTING
20 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
more here. (2) Real Accounts : (3) Nominal Account :
The Accounting Process:
A. American approach
For Assets
Cr.
For Liabilities
Cr.
For Capital
Cr.
For Incomes
Cr.
For Expense
Cr.
Illustration 4.
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 21
Fundamentals of Accounting
Solution:
Effect of TransactionAccountTo be debited/Credited (a)
Cash A/c
Credit
(b)Cash A/c
Credit
(c)Cash A/c
Credit
(d)Cash A/c
Credit
(e)Cash A/c
Credit
(f)
Credit
(g)
Credit
B. British Approach or Double Entry System :
Illustration 5.
Solution:
Step-IStep-IIStep-IIIStep-IV
(a)Cash A/c
Comes in Credit
(b)Cash A/cCredit
FINANCIAL ACCOUNTING
22 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
(c)Cash A/c
Comes in Credit
(d) Cash A/cCredit (e)Cash A/cComes in Credit (f)Credit (g)Credit
Accounting Equations:
Assets = Liabilities + Owner"s equity
}
Illustration 6.
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 23
Fundamentals of Accounting
Solution:
Effect of transaction on Assets, Liabilities and Capital
DateTransactionAssets =Liabilities +Capital
1 2
Revised Equation22,000 =2,000 +20,000
4
Revised Equation22,000 =2,000 +20,000
8
Revised Equation22,000 =2,000 +20,000
12
Revised Equation24,0002,000 +22,000
18
Revised Equation23,000 =1,000 +22,000
22
300+300
Revised Equation23,000 =1,000 +22,000
25
Revised Equation17,000 =1,000 +16,000
30
Revised Equation22,000 =1,000 +21,000
31
Revised Equation19,000 =1,000 +18,000
Accrual Basis and Cash Basis of Accounting
(i) Accrual Basis of Accounting (ii) Cash Basis of Accounting
FINANCIAL ACCOUNTING
24 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
Distinction between Accrual Basis of Accounting and Cash Basis of Accoun ting Accrual basis of accounting differs from Cash basis of accounting in the following respects: Basis of DistinctionAccrual Basis of AccountingCash Basis of Accounting
1. Prepaid/Outstanding Expenses/
accrued/unaccrued Income in Balance Sheet. Sheet. prepaid/outstanding unaccrued incomes.
2. Higher/lower Income in case of
prepaid expenses and accrued income
3. Higher/lower income incase
of outstanding expenses and unaccrued income higher income.
4. Recognition under the Companies
Act. 1956. 1956.
5. Availability of options to an
accountant to manipulate the accounts by way of choosing the most suitable method out of several alternative methods of accounting e.g. FIFO/LIFO/SLM/ WDVoptions. has no option to make a choice as such.
Hybrid or Mixed Basis
arise irrespective of when they are paid.
Illustration 7.
Additional Information:-
year and rent of
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 25
Fundamentals of Accounting
Solution:
Statement of Income (Cash Basis)
For the year ended 31st December, 2013
ParticularsAmount ()Amount ()
Fees received
(ii) Mr. Anil Roy
Statement of Income (Accrual Basis)
For the year ended 31st December, 2013
ParticularsAmount (
)Amount ()
Fees received
Less :
800800
FINANCIAL ACCOUNTING
26 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
Mr. Anil Roy
Statement of Income (Mixed or Hybrid Basis)
For the year ended 31st December, 2013
ParticularsAmount (
)Amount ()Amount ()
Fees received
Less :
800800
1.4 CAPITAL & REVENUE TRANSACTIONS
2. When the owner does not consume the entire periodic income.
500 +
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 27
Fundamentals of Accounting
provided to the customers.
Capital and Revenue Expenditures
The accounting treatment of capital and revenue expenditure are as under : Sl.
No.Capital ExpenditureSl.
No.Revenue Expenditure
1.
1. accounting period.
2. nature.2. nature.
3. 3.
4. 4.
Rules for Determining Capital Expenditure
FINANCIAL ACCOUNTING
28 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
Some examples of Revenue Expenditure
Replacement of Fixed Assets
Deferred Revenue Expenditures
which is shown in the revenue expenditure
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 29
Fundamentals of Accounting
Capital and Revenue Receipts
Sl.
No.Revenue ReceiptSl.
No.Capital Receipt
1. within one accounting period.1.for many years in future. 2.2. 3.3. 4.4. 5.5.
6. dividend received on shares is a revenue receipt.6.
FINANCIAL ACCOUNTING
30 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
Capital and Revenue Losses
Illustration 9.
Solution:
Illustration 10.
Solution :
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 31
Fundamentals of Accounting
period.
Illustration 11.
Solution :
of the engine.
Illustration 12.
Solution :
asset.
FINANCIAL ACCOUNTING
32 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
a permanent nature. Double Entry System, Books of Prime Entry, Subsidiary Books:
Double Entry System -
Books of Prime Entry
Functions of Journal
Advantages of Journal
DateParticularsVoucher
numberLedger folioDebit amount ( )Credit amount ( )
Explanation of Journal
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 33
Fundamentals of Accounting
Example:
In the books of Roy Brothers
Journal Entries
Dr.Cr.
DateParticularsVoucher
No.Ledger FolioAmount
( )Amount ( )
10.05.2013
315
17
Illustration 13.
cash of
20 Bought a motor car worth
into Bank.
Solution:
In the Books of Vikash & Vaibhavi
Journal Entries Journal Folio-1
Dr. Cr.
DateParticularsVoucher
numberL.F
Amount () Amount ()
1 2 3
To Cash A/c
2013/F/34 1
To Cash A/c
5 1
FINANCIAL ACCOUNTING
34 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
36 5
7 5 8
B13/4/159
10
11 12
Subsidiary Books
TransactionSubsidiary Book
discount due to defects date.
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 35
Fundamentals of Accounting
Recording of Cash and Bank Transactions
Cash Book
Cash Book as the only Book of Original Entry
Dr.Cr.
(1) (2)
To Cash A/c
Although the original entry is
Types of Cash Book
Single Column Cash Book-
Double Column Cash Book-
Triple Coulmn Cash Book-
Dr. Specimen of Single Column Cash Book Cr.
ReceiptsPayments
DateParticularsL.F.CashDateParticularsL.F.Cash
FINANCIAL ACCOUNTING
36 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
Dr. Specimen of Double Column Cash Book Cr.
ReceiptsPayments
DateParticularsL.F.CashDisc.
AllowedDateParticularsL.F.CashDisc.
Received
Double Column Cash Book containing contra transaction and cheque transac tion (I) Contra Transactions known as Contra Transactions.
Example:
1. Cash deposited in to Bank To Cash A/c 2. Cash withdrawn from Bank To Bank A/c (II) Cheque Transactions To Cash A/c To Bank A/c
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 37
Fundamentals of Accounting
200
deposited the same into the Bank.
In the Books of Mr. Abhishek
Dr. Cash Book Cr.
Receipts Payments
DateParticularsL.F.Cash
( )Bank ()Discount
Allowed
( )DateParticularsL.F.Cash ( )Bank ()Discount received ( ) Wages paid 200
Cash withdrawn Cash withdrawn
500500
700 500
Purchase Day Book
In the Books of .........
Purchase Day Book
reference
1200 on 7th
FINANCIAL ACCOUNTING
38 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
In the Books of Furniture Shop
Purchase Day Book
DateName of the Suppliers and Details of goods purchased Invoice referenceL. F.Amount () 22334
1112
375
Sales Day Book
In the books of ...........
Sales Day Book
Amount
750 each
In the books of Cloth Merchant
Sales Day Book
DateParticularsInvoice referenceL. F.Amount
2 25055
750
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 39
Fundamentals of Accounting
Other Subsidiary Books - Returns Inward, Return Outward, Biils Receiv able,Bills Payable. (i) Return Inward Book- Book.
Returns Inward Day Book
DateParticularsOutward
InvoiceL.F.DetailsTotalsRemarks
(ii) Return Outward Book-
Return Outward Day Book
DateParticularsDebit NoteL.F.DetailsTotalsRemarks
(iii) Bills Receivable Book-
Bills Receivable Day Book
No. of
BillsDate of
Receipt
of BillFrom whomName of the
ReceiverName
of
DrawerName of
AcceptorDate of
BillDue
DateL.F.Amount
of BillHow disposed off (iv) Bills Payable Book-
Bills Payable Day Book
No. of
BillsDate of
AcceptanceTo
whom givenName of
DrawerName
of the
PayeeWhere
PayableDate
of BillTermDue
DateL.F.Amount
of BillHow disposed off
Journal Proper
Ledger Accounts
FINANCIAL ACCOUNTING
40 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
Dr. Ledger-Account Cr.
Date ParticularsJ. F.Amount ()Date ParticularsJ. F.Amount ()
Ledger Posting
The rules for writing up accounts of various types are as follows: right hand side.
To summarise
Dr. Assets Cr. Dr. Liabilities & Capital Cr. Dr. Expenses or Loses Cr. Dr. Income or Gains Cr. The student should clearly understand the nature of debit and credit.
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 41
Fundamentals of Accounting
At a glance:
What comes inWhat goes out
`
Rent Account
Dr. Cr.
Date ParticularsJ. F.Amount (`)Date ParticularsJ. F.Amount (`)
Cash Account
Dr. Cr.
Date ParticularsJ. F.Amount (`)Date ParticularsJ. F.Amount (`)
Dr. Cash Account Cr.
DateParticularsJ. F.Amount
( ` )DateParticularsJ. F.Amount ( ` )
1.4.2013
110.4.2013By Furniture A/c 1
1.4.2013
111.4.2013 1
30.4.2013
1.5.2013
FINANCIAL ACCOUNTING
42 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
Dr. Mr. Vikas"s Capital Account Cr.
Date ParticularsJ. F.Amount ()Date ParticularsJ. F.Amount ()
30.4.2013
1.4.2013By Cash A/c 1 1.5.2013
Dr. Mrs. Vaibhavi"s Capital Account Cr.
Date ParticularsJ. F.Amount ()Date ParticularsJ. F.Amount () 1.4.2013 By Cash A/c 1
Dr. Furniture Account Cr.
Date ParticularsJ. F.Amount ()Date ParticularsJ. F.Amount () 10.04.2013 To Cash
Dr. Punjab National Bank Account Cr.
Date ParticularsJ. F.Amount ()Date ParticularsJ. F.Amount ()
11.4.2013 To Cash A/c 115.4.2013 1
25.4.2013
120.4.2013 1
Dr. Rent Account Cr.
Date ParticularsJ. F.Amount ()Date ParticularsJ. F.Amount ()
15.4.20131
Dr. Motor Car Account Cr.
Date ParticularsJ. F.Amount ()Date ParticularsJ. F.Amount ()
20.4.2013 1
1
Dr. Loan from HDFC Bank Account Cr.
Date ParticularsJ. F.Amount ()Date ParticularsJ. F.Amount () 20.4.2013 1
Dr. Avon Pharmaceuticals Account Cr.
Date ParticularsJ. F.Amount ()Date ParticularsJ. F.Amount ()
25.4.20131
Dr. Consultancy Fees Account Cr.
Date ParticularsJ. F.Amount ()Date ParticularsJ. F.Amount ()
25.4.20131
25.4.20131
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 43
Fundamentals of Accounting
Dr. Salary Account Cr.
Date ParticularsJ. F.Amount ()Date ParticularsJ. F.Amount ()
30.4.2013 1
Dr. Salary Payable Account Cr.
Date ParticularsJ. F.Amount ()Date ParticularsJ. F.Amount () 30.4.2013 1
Important note :
Posting to Ledger Accounts from Subsidiary books
` `
Dr. Cash Account Cr.
Date ParticularsJ. F.Amount
( )Date ParticularsJ. F.Amount ( ) By Wages A/c To Bank A/c
Dr. Purchases Account Cr.
Date ParticularsJ. F.Amount ()Date ParticularsJ. F.Amount () To Sundries as per purchase By Transfer to
FINANCIAL ACCOUNTING
44 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
Dr. Sales Account Cr.
Date ParticularsJ. F.Amount ()Date ParticularsJ. F.Amount () By Sundries as
Typical Ledger Account Balances
Type of AccountType of balance
The Structure of Ledger
Transaction
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 45
Fundamentals of Accounting
Subdivisions of Ledger
Personal Ledger
Impersonal Ledger
(a) Debtors" Ledger: (b) Creditors" Ledger: (a) Cash Book: (b) General Ledger: (a) Nominal Ledger: (b) Private Ledger:
FINANCIAL ACCOUNTING
46 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
Advantages of sub-division of Ledger.
Easy to Divide work : Easy to handle : Easy to collect information: Minimizations of mistakes: Easy to compute: Fixation of responsibility:
Trial Balance
Trial Balance as on...
Account nameDebitCredit
Cash A/c
Furniture A/c
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 47
Fundamentals of Accounting
Feature"s of a Trial Balance
Preparation of Trial Balance:
Purpose of a Trial Balance
Is Trial Balance indispensable?
Trial Balance - Utility and Interpretation
FINANCIAL ACCOUNTING
48 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
Trial Balance and Errors
A/c is done for
taking it to the T.B. it is taken as
Errors which are not disclosed by a Trial Balance
Errors of Omission: Errors of Commission: 800 either 80 or Errors of Principal: Errors of Misposting: agree.
Compensating Errors: 100 not
Procedure to locate Errors:
not.
Illustration 14.
Carriage Outward
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 49
Fundamentals of Accounting
; Stock at 31.03.2013 ;
Solution:
Trial Balance of Mr. Sen
Dr. as on 31st March, 2013 Cr.
Heads of AccountsAmount ()Heads of AccountsAmount ()
Current A/c
Cash at Bank
Carriage outward
12,84,00012,84,000
Note Closing Stock will appear in Trial Balance since there is adjusted purch ase.
Measurement, Valuation and Accounting Estimates
statement is added or deducted from
FINANCIAL ACCOUNTING
50 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
Closing Stock
10000 is charged off to the
Note :
Depreciation
accounting.
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 51
Fundamentals of Accounting
Accrued Expenses or Outstanding Expenses
Mar 2013
Apr 2013
Prepaid Expenses
` `
3 months
31
st Mar 2013 1 st Jan 2013
12 months
31
st Dec 2013
9 monthsfor Current Year
Prepaid amount
FINANCIAL ACCOUNTING
52 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
Accrued Incomes
1 st Feb 2013
10 months31
st Mar
2 months
12 months
31
st Jan 2014 One - Show as income in the P & L A/c and two - show as an asset i n the Balance Sheet.
Income Received in Advance
One - Reduce from respective income and two - show it as liability in Balance Sheet.
Illustration 15.
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 53
Fundamentals of Accounting
200.
Solution:
In the books of Gourav
Journal Entries
Dr.Cr.
DateParticulars
L.F.Amount () Amount () 2013
Cash A/c
To Cash A/c To Cash A/c
Cash A/c
Bank A/c
To Cash A/c
Cash A/c
To Commission A/c To Cash A/c 100
To Cash A/c
Cash A/c
200
FINANCIAL ACCOUNTING
54 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
Bank A/c
Dr. Cash Account Cr.
DateParticularsJ.F.Amount ()DateParticularsJ.F.Amont ()
1/6/134/6/13
1/6/137/6/13
10/6/1312/6/13By Bank A/c
19/6/13To Commission A/c22/6/13
27/6/1325/6/13
30/6/13
1/7/13
Dr. Capital Account Cr.
DateParticularsJ.F.Amt. ()DateParticularsJ.F.Amt. ()
30/6/131/6/13By Cash A/c
1/7/13
Dr. Loan from Wife Account Cr.
DateParticularsJ.F.Amount ()DateParticularsJ.F.Amt. ()
30/6/131/6/13By Cash A/c
1/7/13
Dr. Purchases Account Cr.
DateParticularsJ.F.Amt. ()DateParticularsJ.F.Amt. ()
4/6/13To Cash A/c15/6/13
4/6/1330/6/13
7/6/13To Cash A/c
1/7/13
Dr. Aniket"s Account Cr.
DateParticularsJ.F.Amt. ()DateParticularsJ.F.Amt. ()
22/6/13To Cash A/c4/6/13
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 55
Fundamentals of Accounting
22/6/13100
Dr. Vishakha"s Account Cr.
DateParticularsJ.F.Amt. ()DateParticularsJ.F.Amt. ()
10/6/1327/6/13By Cash A/c
27/6/13200
Dr. Sales Account Cr.
DateParticularsJ.F.Amt. ()DateParticularsJ.F.Amt. ()
30/6/1310/6/13By Cash A/c
10/6/13
1/7/13
Dr. Bank Account Cr. DateParticularsJ.F.Amt. ()DateParticularsJ.F.Amt. ()
12/6/13To Cash A/c30/6/13
30/6/13
1/7/13
Dr. Loss by Fire Account Cr.
DateParticularsJ.F.Amt. ()DateParticularsJ.F.Amt. ()
15/6/1330/6/13
1/7/13
Dr. Commission Account Cr.
DateParticularsJ.F.Amt. ()DateParticularsJ.F.Amt. ()
30/6/1319/6/13By Cash A/c
1/7/13
Dr. Discount Account Cr.
DateParticularsJ.F.Amt. ()DateParticularsJ.F.Amt. ()
27/6/1320022/6/13100
30/6/13100
200200
FINANCIAL ACCOUNTING
56 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
1/7/13100
Dr. Loss by Theft Account Cr.
DateParticularsJ.F.Amt. ()DateParticularsJ.F.Amt. ()
25/6/13To Cash A/c30/6/13
1/7/13
Dr. Interest Account Cr.
DateParticularsJ.F.Amt. ()DateParticularsJ.F.Amt. ()
30/6/1330/6/13By Bank A/c
1/7/13
Trial Balance as on 30.6.13
Cr.
Cash A/c
21000
Bank A/c
Commission A/c3500
100
1.5 ACCOUNTING FOR DEPRECIATION
period.
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 57
Fundamentals of Accounting
Certain Useful Terms
Amortization -
and that is
Depletion -
reduction in the service capacity of an asset.
Obsolescence -
Dilapidation -
Nature of Depreciation
International Accounting Standard
AICPA
Causes of Depreciation
A. Internal Causes
Wear and tear :
Depletion (or exhaustion)
B. External or Economic Causes
Obsolescence
Inadequacy :
asset.
C. Time element :
FINANCIAL ACCOUNTING
58 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
D. Abnormal occurrences
Characteristics of Depreciation
. diminution in service potential. estimated loss actual loss. assumptions internal cause external transaction. restricted periodic revenues. This is known as amortization. Objective and Necessity for Providing Depreciation
Eric Kohler
Correct calculation of cost of production: cost of production.
Provision of replacement cost:
Maintenance of capital:
Compliance with technical and legal requirements:
Methods of Charging Depreciation
Capital/Source of Fund
Time Base
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 59
Fundamentals of Accounting
Use Base
Price Base
Depreciation as per Property, Plant and Equipment (AS-10) Revised [AS 6 has been replaced by this part of AS 10 Property Plant and Equipme nt] ʇ ʇ cost. ʇ ʇ ʇ
FINANCIAL ACCOUNTING
60 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
ʇ carrying amount of another asset. ʇ
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 61
Fundamentals of Accounting
I. Fixed/Equal Instalment OR Straight Line Method
Illustration: 16
Machine
No.Cost of
Machine (
)Expenses incurred at the time of purchase to be capitalized ( )Estimated Residual
Value (
)Expected Useful Life in years 18 26
33
45
Solution:
Machine
NoCost of
Machine
( )Expenses incurred at the time of purchase to be capitalize ()Total Cost of Asset = (b+c) ( )Estimated
Residual
Value (
)Expected
Useful Life
in yearsDepreciation = (d-e)/f ()Rate of
Depreciation
under SLM = (g/d)×100 acdefgh 18 26
35
410
Illustration 17.
A machine is purchased for
st
Solution:
Amount of Depreciation:
12 12 12
FINANCIAL ACCOUNTING
62 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
9 12 6 12 3 12 II. Reducing / Diminishing Balance Method or Written Down Value Method
Illustration 18.
On 1.1.2011 a machine was purchased for
Solution:
YearOpening Book Value ()RateDepreciation () Closing Book Value () 2011
2012
2013
Note: 1
III. Sum of the Units Method:
Illustration 19.
A machine is purchased for
Solution:
Computation
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 63
Fundamentals of Accounting
Illustration 20.
On 1.1.11 machinery was purchased for
purchased on 1.1.2014 costing st
Solution:
Statement of Depreciation
DateParticularsMachines - I
Cost = 80,000Machines - II
Cost = 40,000Machines - III
Cost = 20,000Total
Depreciation
01.01.2011
31.12.2011
01.01.2012
01.07.2012
31.12.2012600
01.01.2013
31.03.2013
285285
115
30.06.2013
01.10.2013
31.12.2013500
01.01.2014
Dr. Machinery Account Cr.
DateParticularsAmount ()DateParticularsAmount
( )
01.01.1131.12.11
01.01.12
01.07.1231.12.12
FINANCIAL ACCOUNTING
64 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
01.01.13
30.06.13
31.3.13
30.6.13
31.12.13
285
115
Provision for Depreciation Account
There are following features of provision for depreciation account: To Cash/Bank A/c
Disposal of an Asset
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 65
Fundamentals of Accounting
Illustration 21.
st
Solution:
S & Co.
Dr. Machinery Account Cr.
DateParticularsAmount ()DateParticularsAmount ()
1.1.201131.12.2011
1.1.2012
1.7.201231.12.2012
1.1.201331.12.2013
31.12.2013
1.1.2014
Dr. Provision for Depreciation Account Cr.
DateParticularsAmount ()DateParticularsAmount ()
31.12.201131.12.2011
31.12.20121.1.2012
31.12.2012
31.12.20131.1.2013
31.12.201331.12.2013
1.1.2014
FINANCIAL ACCOUNTING
66 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
Dr. Machinery Disposal Account Cr.
DateParticularsAmount ()DateParticularsAmount ()
31.12.201331.12.2013
Working Notes
Accounting Treatment
a. Where no provision for depreciation account is maintained: (i) WDV of asset has been transferred to Asset Disposal A/c To Asset A/c (ii) In case of Sale of an Asset (iii) For depreciation (if any) (v) In case of Loss on Sale of Asset b. Alternative Approach (i) In case of Assets sold To Assets A/c
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 67
Fundamentals of Accounting
(ii) In case of Depreciation To Assets A/c (iv) In case of Loss on Sale To Assets A/c
Illustration 22.
On 1 st st st
Solution:
In the books of Som Ltd.
Dr. Machinery Account Cr.
DateParticularsAmount ()DateParticularsAmount ()
01.04.2011
01.04.2012
01.04.2013
31.03.2012
31.03.2013
01.10.2013
Working Note :
500 +
15 T st part of the cost of asset.
Change of Method
FINANCIAL ACCOUNTING
68 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
Illustration 23.
st 2013
and a new machinery at a cost of
Solution:
In the books of Ram Ltd.
Dr. Machinery Account Cr.
DateParticularsAmount ()DateParticularsAmount ()
01.01.1301.07.13
01.07.13
31.12.13
1 2 3
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 69
Fundamentals of Accounting
Working Notes :
10 1 2 st st st st
Illustration 24.
costing the method of providing depreciation and adopted the method of writing off
FINANCIAL ACCOUNTING
70 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
Solution:
In the books of M/s Hot and Cold
Dr. Machinery Account Cr.
DateParticularsAmount (DateParticularsAmount (
01.07.1230.6.13
01.10.12
Workings:
1. Statement of Depreciation:
DateParticularsMachine - I (Machine - II (Total Depreciation ()
01.07.2008
30.06.2009
01.07.2009W.D.V.
01.01.2010
30.06.2010
01.07.2010W.D.V.
30.06.2011
01.07.2011W.D.V.
30.06.2012
01.07.2012W.D.V.
6,73,280
2. Depreciation Overcharged:
On On
Depreciation overcharged
3. Depreciation for the year:
On On
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 71
Fundamentals of Accounting
1.6 RECTIFICATION OF ERRORS
Opening Entries
Illustration 25.
Solution:
Closing Entries
FINANCIAL ACCOUNTING
72 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
To Opening stock A/c To Trading A/c To Trading A/c
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 73
Fundamentals of Accounting
Illustration 26.
ParticularsAmount ()
Opening stock
Wages
Solution:
In the Books of X Ltd.
Journal
Dr.Cr.
DateParticularsLFAmount ()Amount ()
2013
31
st
FINANCIAL ACCOUNTING
74 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
made to the wrong entries. head.
Type of error
account.head. side and other to give effect on correct side
Before preparing
trial balance
Double
sided errors Single sided errors
AŌer preparing
trial balance
Double
sided errors Single sided errors
AŌer preparing
Įnal accounts
Double
sided errors Single sided errors
A. Before Preparation of Trail Balance
Double Sided Error:
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 75
Fundamentals of Accounting
Example
Solutions:
To Cash A/c To Cash A/c (b) Single Sided Error appropriate posting.
Example
Solution:
Dr. Purchase Account Cr.
ParticularsParticulars
B. After Preparation of Trial Balance
Double Sided Errors: - Single Sided Errors: -
Suspense Account
Example:
FINANCIAL ACCOUNTING
76 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
C. After Preparation of Final Accounts
(a) For Double Sided Errors
Example
Solution:
If after Trial Balance
If after Final Account (b) for Single Sided Errors:
Example
500.
Solution:
If after Trial Balance
To Suspense A/c
If after Final Account
To Suspense A/c
Illustration 27.
100.
500.
Solution:
In the Books of .........................
Journal (without narration)
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 77
Fundamentals of Accounting
DateBefore preparation of Trial
BalanceAfter preparation of Trial BalanceAfter preparation of Final Accounts with 900
To Suspense A/c 900 To Suspense A/c 900 llustration 28.
Solution:
To Suspense A/c 500 and another
FINANCIAL ACCOUNTING
78 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
DrSuspense AccountCr
Date ParticularsJ. F.Amount ()Date ParticularsJ. F.Amount ( ) 500
300
Illustration 29.
100.
80 received as interest was credited to commission.
Solution:
Sl No. Particulars Debit ()Credit ()
Wrong Entry200
To Cash 200 Correct entry200 To cash 200 200
200
Wrong Entry300
300
Correct entry300 300
300
300
600
Wrong Entry100
To Santhanam 100
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 79
Fundamentals of Accounting
Sl No. Particulars Debit ()Credit ()
Correct entrySanthanam100 100
Santhanam200 100
100
Wrong EntryCash150
150
Correct entryCash150 150
150
150
Wrong Entry375
To cash 375 Correct entry375 To cash 375 375
375
Wrong Entry
To Cash
Correct entry To Cash
Wrong Entry
Correct entry To Akashdeep500
500
To Asashdeep500 500
Wrong Entry Sethi
200
200
Correct entry Sethi To Furniture 200
200
To Furniture200 200
Wrong Entry
Correct entrySuspense 100
100
Suspense 100
100
Wrong EntryCash To Commission80
80
Correct entryCash80
80
Commission80
80
FINANCIAL ACCOUNTING
80 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
Illustration 30.
500.
d. A purchase made for 100.
Solution:
In the Books of ............
Journal
Dr.Cr.
DateParticularsL.FAmount () Amount ()
500
500
To Shyam A/c 600
300
300
900
900
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 81
Fundamentals of Accounting
ItemsParticularsIncrease ()Decrease ()
500
900
Total 3,600
5,0005,000
llustration 31.
Solution:
returns A/c. To Suspense A/c 900
FINANCIAL ACCOUNTING
82 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
Illustration 32.
415 which was
46 was endorsed to Sharma in
320.
650.
f. 97.
Solution:
In the books of S Ltd.
Journal
Dr.Cr.
DateParticularsL.F. Amount
( )Amount ( ) discount 44
3500
46
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 83
Fundamentals of Accounting
To Suspense A/c
230320
230
230
90
To Suspense A/c505 505
750
650
100
To Trading A/c To Freight A/c 79
18 97
Illustration 33.
100.
Solution:
In the Books of A Co. Ltd.
Journal
Dr.Cr.
DateParticularsL/FAmount ()Amount ()
1 100
100
FINANCIAL ACCOUNTING
84 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
To Suspense A/c 90
90
Dr. Suspense Account Cr.
DateParticularsAmount
( )DateParticularsAmount ( ) 2013
1100
2013
1 90
Increase
(+) Decrease (-) 100
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 85
Fundamentals of Accounting
Illustration 34.
Solution:
Balance Sheet
Adjusting Entry
FINANCIAL ACCOUNTING
86 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
SELF EXAMINATION QUESTIONS:
is referred to as paid
Charges
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 87
Fundamentals of Accounting
Answer:
State whether the following statement is True (or) False: assets. 7
QUESTIONS:
1. State whether the following items are in the nature of Capital, Revenue and/or Deferred Revenue Expenditure.
(i) Expenditure on special advertising campaign 66,000; suppose the advantage will be received for six
years. (ii) An amount of 8,000 spent as legal charges for abuse of Trade Mark. (iii) Legal charges of 15,000 incurred for raising loan. (iv) Share issue expenses 5,000. (v) Freight charges on a new machine 1,500 and erection charges 1,800 for that machine.
Answer:
FINANCIAL ACCOUNTING
88 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
2. Classify the following Accounts into Personal, Real and Nominal Accounts. Also state whether it is recorded
as asset, liability, expenses/loss or revenue: (i) Returns Inward Account (ii) Bad Debt Recovered Account (iii) Interest On Investment Account (iv) Outstanding Rent Account and (v) Capital Work-in-Progress Account
Answer:
3. Classify the following under personal, real and nominal accounts.
Advertisement
Securities and Shares
Suspense
Bank Overdraft
Answer:
Bank Overdraft
Securities and Shares
Advertisement
Suspense
4. Mr. X is owner of a Cinema Hall. He spent a heavy amount for complete renovation of the hall, for installation
of air-condition machines and for sitting arrangement with cushion seats. As a result the revenue has been
doubled. He also spent for few more doors for emergency exit. State your opinion amount the treatment of
the entire expenditure.
Answer:
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 89
Fundamentals of Accounting
5. Mr. Agarwal could not agree the Trial Balance. He transferred to the Suspense Account of 296, being
excess of the debit side total. The following errors were subsequently d iscovered. (i) Sales Day Book was overcast by 300 (ii) An amount of 55, received from Mr. Y was posted to his account as 550 (iii) Purchases Return Book total on a folio was carried forward as 221, instead of 112 (v) A car sale of 1,235 duly entered in the Cash Book but posted to Sales A/c as 235
(vi) Rest of the difference was due to wrong total in Salaries A/c. Show the Journal entries to rectify the
above errors.
Answer:
300
300
To Suspense a/c 495
495
instead of 109
109
Suspense A/c
235
Suspense A/c200
200
6. Shyama Limited purchased a second-hand plant for 7,50,000 on 1st July, 2011 and immediately spent
2,50,000 in overhauling. On 1st January, 2012 an additional machinery at a cost of 6,50,000 was purchased.
On 1st October, 2013 the plant purchased on 1st July, 2011 became obsolete and it was sold for 2,50,000.
On that date a new machinery was purchased at a cost of 15,00,000. Depreciation was provided @ 15% per annum on diminishing balance method. Books are closed on 31st March in every year. You are required to prepared Plant and Machinery Account upto 31st March , 2014.
Answer:
1.7.11To Bank A/c
31.3.12
1.1.12To Bank A/c31.3.12
1.4.1231.3.13
1.4.13
1.10.13To Bank A/c
FINANCIAL ACCOUNTING
90 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
Working Notes:
On 01.07.2011
9 / 12 6 / 12
On 01.01.2012
6 / 12
7. On 31
st December, 2011 two machines which were purchased on 1.10.2008 costing 50,000 and 20,000 respectively had to be discarded and replaced by two new machines costin g 50,000 and 25,000 respectively.
One of the discarded machine was sold for 20,000 and other for 10,000. The balance of Machinery Account
on April 1, 2011 was 3,00,000 against which the depreciation provision stood at 1,50,000. Depreciation
was provided @ 10% on Reducing Balance Method. Prepare the Machinery Account, Provision for Depreciation Account and Ma chinery Disposal Account.
Answer:
1.4.1131.12.11
To Bank A/c
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 91
Fundamentals of Accounting
1.4.11
1.4.11
31.3.1231.3.12
1.4.1131.12.11
By Bank A/c
Working Note: 1.
Working Note: 2.
9 / 12
Working Note: 3.
FINANCIAL ACCOUNTING
92 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
EXERCISE:
1.
Bank Overdraft A/c
Answer:
Real A/c (i)
Personal A/c (ii), (iv), (v), (vii)
Nominal A/c (iii), (vi), (vii)
2.
An amount of
Carriage paid on a new machine purchased for
Answer:
Capital Expenditure (i), (iii), (iv)
Revenue Expenditure (ii)
3. side is
Items of account
( )Figures as it appears in the Trial Balance ( )
Opening Stock15,00010,000
Rent and Rates36,00063,000
Sundry Creditors 81,00018,000
Sundry Debtors1,04,0001,58,000
Answer:
The correct total is 2,89,000
4.
Answer:
Machinery A/c Balance as on 01.04.2014 (Dr.) 6,25,256.
Depreciation as on 31.03.2014
1,10,339.
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 93
This Study Note includes
2.1 Bills of Exchange
2.2 Consignment Accounting
2.3 Joint Venture Accounts
2.1 BILL OF EXCHANGE
Introduction
Business activity involves exchange of goods or services for money. A business transaction gets closed" if the
exchange is settled immediately. When goods are purchased from supermarket and paid for in cash the settlement
is instant. Same is the case when we go to a restaurant, have food and pay either by cash or credit card. Most
of the settlements are not on cash basis, where payment for goods or services is deferred at the behest of both
parties to the transaction. Such deferred payments are done through instruments like cheques, pay order, letter of
credit, promissory note, bills of exchange, hundies etc. These instruments facilitate credit transactions and hence
sometimes they are referred to as credit instruments or negotiable instruments. Even in ancient time s some credit instrument like hundies were extremely popular.
In case of credit transaction, the supplier normally gets a promise from the customer that he will settle the payment
at a future date as agreed. It could either be a promissory note or bill of exchange. The promissory note is written by
the customer as an undertaking to pay the money, whereas the bill of exchange is a note drawn by the seller and
accepted by the buyer. In India, the Negotiable Instruments Act 1981 governs the provisions for bills of exchange.
by the maker, directing a certain person to pay a certain some of money only to the order of the certain person
or to the bearer of the instrument" (a) It"s an instrument in writing. (b) It contains an unconditional order. (c) It"s signed by the drawer. (f) It must be dated. bearer. (h) The amount of money to be paid must be certain. (i) It must be properly stamped
Whereas, a bill of exchange is drawn by seller and accepted by buyer; a promissory note, on the other hand, is
created by the buyer as an undertaking to pay to the seller.
Study Note - 2
ACCOUNTING FOR SPECIAL TRANSACTIONS
FINANCIAL ACCOUNTING
94 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
Specimen of a bill of exchange:
Stamp Address of Drawer
Date Three months after date pay to a sum of 50,000 (Fifty Thousands only) far the value received.
To B accepted
(B"s signature & stamp) A (Drawer)
Parties to Bill of Exchange
He is a person who draws the bill. Typically, he is the seller or a creditor. He is the person on whom the bill is drawn. Normally, he is the buyer or debtor. He has to pay the amount of the bill to the drawer on the due date.
He is the person to whom the amount of bill is payable. He may be the drawer himself or the creditor
of the drawer.
He is the person in whose favour the bill is endorsed by the drawer. He is usually the creditor of the
drawer. Sometimes the name of another person is mentioned as the person who will accept
Calculation of Due Date
Date of Maturity is also known as Due Date. The date on which the amount of the bill becomes payable is called
Due Date" or Date of Maturity". The period between the date of drawing of the bill and the due date is called
Tenure of the Bill. To compute due date, three days (called Grace Period) are included to the date of maturity of
the period of the bill.
The date of maturity of the period of bills depends on whether the bill is payable on date or bill is payable on sight.
If the bill is payable on date, the date of maturity is computed by incl uding tenure of bill to the making of the bill.
Date of Drawing 12.12.2012
Tenure + 3 Months
12.03.2013
However, If the bill becomes due at sight, the date of maturity is counted by including tenure of the bill to the date
Date of Acceptance 16.12.2012
Tenure + 3 months
16.3.2013
The due date of the bill after including grace period of 3 days is 15.3.2013 if the bill is payable at date and 19.3.2013
if the bill is payable at sight. amount is required to be paid on presentation and no grace period is all owed.
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 95
Accounting for Special Transactions
2. If period of the bill matures on a date which is not there in the month in question, then the due date is taken
as the last date of the month. For example, if a bill is drawn on 31.1.2013 and the period of the bill is 3 months,
the period bill becomes payable on 30.4.2013 and after including grace d ays, due date is 3.5.2013.
3. In case the expiry date of a bill falls on a holiday, the bill becomes payable on the preceding day. But when
the maturity date is a bank holiday or a Sunday and the second day of grace is also a holiday, the bill is
payable on the next working day.
4. The tenure of the bill can be explained in months or in days. The due date of bill should be computed
considering this fact in mind. Hence, if S draws bill on A on 31.1.2013 of one month, the maturity date of the
Date of Drawing 31.1.2013
Tenure +1 month
28.2.2013
Days of Grace + 3 days
03.03.2013
Date of Drawing 31.1.2013
Tenure + 30 days
02.03.2013
Days of Grace + 3 days
5.3.2013 Hence, tenure of one month and 30 days are different.
Acceptance of a Bill of Exchange
it is called acceptance.
A bill, except in certain special cases, requires acceptance; otherwise the liability of the drawee cannot be
established thereon.
the bill in full, without any condition or limitation, it is a case of general acceptance. When the drawee accepts
Discounting a Bill
If the holder of a bill wants to get the money of the bill before its due date, he can do so by selling the bill to a
bank or a Discounting House who in consideration of a charge called discount, provides him with ready cash. This
is known as discounting the bill. Discount charged by the bank is the interest at a certain rate per cent per annum
on the amount of the bill for its unexpired period, i.e., the period from the date of discounting upto the date of
maturity. This discount has no connection with the cash discount and mus t not be confused therewith.
Dishonour of Bill
Dishonour of a Bill means that the acceptor refuses to honour his commitment on due date and for this, payment
of the bill on presentation does not take place. At the time of dishonour of a bill, original relationship between the
parties is restored, that is, the drawee again becomes the debtor of the drawer in his boo ks and drawer is treated
then as a creditor in the books of drawee. Moreover, the drawer becomes liable here to compensate the bank
(or for that matter endorsee) if the bill is not retained by the drawe r till date of the maturity.
To provide a legal evidence of dishonour, the fact of dishonour is to be noted on the bill by Notary Public". The
fact of dishonour which he is recording is called noting" and the amount charged by him for his services are
called noting charges". These charges are to be paid by the holder of the bill on the date of default. Actually the
acceptor of the bill is liable for the dishonour, the noting charges paid by the holder are to be reimbursed by the
acceptor.
FINANCIAL ACCOUNTING
96 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
Sometimes the drawee of a bill is not able to meet the bill on due date. He may request the drawer to draw a
which he has to pay a certain amount of interest which is either paid in cash or is included with the fresh bill. This
bill is known as Renewal of Bills. That, the amount of the new bill will be face value of the original bill minus cash
payment, if any, plus interest for the renewed period.
Retirement of Bill
Sometimes the drawee pays the bill before the date of maturity. Under the circumstances, the drawer allows certain
amount of rebate or discount which is calculated on certain percentage p.a. basis. The rebate is calculated from
the date of payment to the date of maturity.
Accounting entries
(i) Bills Receivable to those who receive the bills, and (ii) Bills Payable to those who accept the bills. Thus, the same bill is both a Bill Receivable and a Bill Payable. (a) He may retain the bill till the date of maturity (b) He may get the bill discounted (c) He may endorse it to a third party in settlement of a debt (d) He may send it to his banker for collection.
Transactions
When the bill is drawn
and acceptedBills Receivable A/c ... Dr. To Drawee"s A/cDrawer"s A/c ... Dr. To Bills Payable A/c
When the bill is duly
honoured on maturityBank A/c ... Dr. To Bills Receivable A/c (This entry will be made if the drawer retains the bill till due date and receives payment)Bills Payable A/c ... Dr. To Bank A/c
When the bill is endorsed
to a creditorEndorsee"s A/c ... Dr. To Bills Receivable A/c
When the bill is
discounted with the bank(i) Bank A/c ... Dr. To Bills Receivable A/c (with full amount of the bill) (ii) Discount on Bills A/c ... Dr. To Bank A/c (with the amount of discount)
Bank A/c ... Dr.
Discount on B ills A/c ... Dr.
To Bills Receivable A/c
When the bill is sent to
bank for collection and the bill is duly collected
Bills for Collection A/c ... Dr.
To Bills Receivable A/c
Bank A/c ... Dr.
To Bills for Collection A/c
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 97
Accounting for Special Transactions
Transactions
When the bill is retired
before maturityBank A/c ... Dr.
Discount on Bills
(or Rebate) A/c ... Dr.
To Bills Receivable A/cBills Payable A/c ... Dr. To Bank A/c `` Discount on Bills (or Rebate) A/c
When the bill is
dishonoured
Drawee"s A/c ... Dr.
To Bills Receivable A/cBills Payable A/c ... Dr. To Drawer"s A/c (ii) If discounted with Bank
Drawee"s A/c ... Dr.
To Bank A/cBills Payable A/c ... Dr. To Drawer"s A/c
Drawee"s A/c ... Dr.
To Endorsee"s A/cBills Payable A/c ... Dr. To Drawer"s A/c
Drawee"s A/c ... Dr.
To Bills for Collection A/cBills Payable A/c ... Dr. To Drawer"s A/c
When Noting Charges
are paid on dishonoured bill
Drawee"s A/c ... Dr.
To Bank A/cNoting Charges A/c ... Dr. To Drawer"s A/c
Drawee"s A/c ... Dr.
To Endorsee"s A/cNoting Charges A/c ... Dr. To Drawer"s A/c
Drawee"s A/c ... Dr.
To Bank A/cNoting Charges A/c ... Dr. To Drawer"s A/c
When the bill is renewed
for a further period ... Dr. To Bills Receivable A/cBills Payable A/c ... Dr. To Drawer"s A/c
Drawee"s A/c ... Dr.
To Interest A/cInterest A/c ... Dr. To Drawer"s A/c
Bills Receivable A/c ... Dr.
To Drawee"s A/cDrawer"s A/c ... Dr. To Bills Payable A/c
Illustration 1.
On 1.4.2017 A draws a bill on B for 1,00,000 3 months after date. B accepts the bills signs on it and returns to A. Pass
1. The bill is hold by A till maturity.
2. The bill is discounted with bank on 4.4.2017 at a discount of 6 % p.a.
1,05,000 on 1.4.2017.
Solution:
Working notes:
1. The bill is discounted with bank for 6% p.a . so the amount of discount will be
=100000 x 6/100 x 3/12 = 6000 x 3/12 = 1,500.
FINANCIAL ACCOUNTING
98 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
Calculation is made for 3 months because the bill is for three months and is discounted with the bank exactly
before three months before maturity.
2. Amount due to C was for 1,05,000. However the bill is given for
Therefore Mr. A has received 5,000 as discount.
Important: Students must not confuse with discount received and discount on bills.
Journal
BOOKS OF ABOOKS OF B
DateParticularsDebit
Credit
DateParticularsDebit
Credit
1.4.2017Billls Receivable A/c1,00,0001.4.2017A1,00,000
To B A/c1,00,000To Bills Payable1,00,000
(for the bill drawn)(for the bill drawn)
Situation 1Situation 1
4