INDE

CHAPTER NO

PARTICULAR

Page no.

1.

Introduction & meaning of

2.

Transaction of Data

3.

Journal Entry

4.

Ledger Account

5.

Subsidiary Book

6.

Trial Balance

7.

Final Account

8.

Conclusion

Chapter 1
FINANCIAL STATEMENT ON SOLE TRADING
INTRODUCTION
A form of business in which one person owns all the assets of the business, in contrast to a
partnership or a corporation.
A person who does business for himself is engaged in the operation of a sole trader. Anyone who
does business without formally creating a business organization is a sole proprietor. Many small
businesses operate as sole traders. Professionals, consultants, and other service businesses that
require minimum amounts of capital often operate this way.
A sole trader is not a separate legal entity, like a partnership or a corporation. No legal
formalities are necessary to create a sole trader, other than appropriate licensing to conduct
business and registration of a business name if it differs from that of the sole proprietor. Because
a sole trader is not a separate legal entity, it is not itself a taxable entity. The sole proprietor must
report income and expenses from the business on Schedule C of her or his personal federal
income tax return.
A major concern for persons organizing a business enterprise is limiting the extent to which their
personal assets, unrelated to the business itself, are subject to claims of business creditors. A sole
trader gives the least protection because the personal liability of the sole proprietor is generally
unlimited. Both the business assets and the personal assets of the sole proprietor are subject to
claims of the sole trader's creditors. In addition, existing liabilities of the sole proprietor will not
be extinguished upon the dissolution or sale of the sole trader.
Unlike the managers of a corporation or a partnership, a sole proprietor has total flexibility in
managing and controlling the business. The organizational expenses and level of formality in a
sole trader are minimal as compared with those of other business organizations. However,
because a sole trader is not a separate legal entity, it terminates when the sole proprietor becomes
disabled, retires, or dies. As a result, a sole trader lacks business continuity and does not have a
perpetual existence as does a corporation.
For working capital, a sole trader is generally limited to the individual funds of the sole
proprietor, along with any loans from outsiders willing to provide extra capital. During her
lifetime, a sole proprietor can sell or give away any asset because the business is not legally
separate from the sole proprietor. At the death of the sole proprietor, the business is usually
dissolved. The proprietor's estate, however, can sell the assets or continue the business.

ADVANTAGES
It is easy to organize the needs only small amounts of capital needs to start and run a business.
It permits a high degree of flexibility for the owner since he/she is the boss of the business
establishment.
Due to the owner's unlimited liability, some creditors are more willing to extend credit.
The owner receives all the profit of the business.
There is secrecy in sole trader.
The owner of a sole trader is very likely to take a high level of personal interest in operations.
There are tax advantages in many juristictions.

Chapter 2
Journal
Definition and Explanation:
The word "journal" has been derived from the French word "jour". Jour means day. So
journal means daily. Transactions are recorded daily in journal and hence it has been named
so. It is a book of original entry to record chronologically (i.e. in order of date) and in detail
the various transactions of a trader. It is also known Day Book because it contains the
account of every day's transactions.

Characteristics of Journal:
The following arte the advantages of journal:

1. Each transaction is recorded as soon as it takes place. So there is no possibility of

any transaction being omitted from the books of account.

2. Since the transactions are kept recorded in journal, chronologically with narration, it
can be easily ascertained when and why a transaction has taken place.

3. For each and every transaction which of the two concerned accounts will be debited
and which account credited, are clearly written in journal. So, there is no possibility
of committing any mistake in writing the ledger.

4. Since all the debits of transaction are recorded in journal, it is not necessary to
repeat them in ledger. As a result ledger is kept tidy and brief.

5. Journal shows the complete story of a transaction in one entry.

6. Any mistake in ledger can be easily detected with the help of journal.
Objective of an Entry:
While recording transactions in journal the following two objects must be aimed at:

1. That each entry in the journal should be so clear that at any future time we may,
without the aid of memory, perceive the exact nature of the transactions.

2. That each transaction should be so classified that we may easily obtain the
aggregate effect of such transactions at the end of a certain period.

Form of Journal:
Date
(1)

Particulars
(2)

L.F.
(3)

Dr. Amount

Cr. Amount

TRANSACTION
Illustration.1:
On first April 1991 a Aryan started business with a capital of $15,000 and his transactions
of the month were as follows:
April 2

Purchased machinery for $7,000.

April 3

Bought furniture from S $300.

April 7

Purchased goods for cash $2,500

April 8

Sold goods to R & Sons $1,500

April 10

Bought goods from B, $1,000 and from C $2,000

April 12

Received cash from R & Sons $1,450, allowed him discount of $50.

April 15

Paid B cash $975, discount received $25.

April 16

Returned goods to C $500

April 17

Sold goods to Din Mohammad $800

April 20

Goods returned by Din Mohammad $200

April 21

Purchased from K goods of the list price of $600 subject to a 10 percent trade
discount.

April 22

Paid C cash $1,500

April 25

Gave away a charity cash $50 and goods worth $30.

April 27

Distributed goods worth $200 as free samples and goods taken away by the
proprietor for personal use $100

April 28

Amount withdrawn by the proprietor for private use $200

April 31

Salaries paid for the month $500

Record these transactions in the journal.

Solution:
Journal
of Aryan ltd.
Date

April 1

Particulars

Cash Account

...Dr.

L.F

Debit

Credit

15,000

To Capital Account

15,000

(Capital introduced)

April 2

Machinery Account

7,000

To Cash Account

7,000

(Machinery purchased)

April 3

Furniture Account

2,500

To Cash Account

2,500

(Goods purchased for cash C)

April 7

Purchases Account
To Cash Account
(Goods purchased for cash)

3,000
3,000

April 8

R & Sons

1,500

To Sales Account

1,500

(Goods sold on credit)

April 10

Purchases Account

3,000

To B

1,000

To C

2,00

(Goods purchased on credit)

April 12

Cash Account
Discount

1,450
50

To R & Sons

1,500

(Cash received and discount allowed)

April 15

1,000
To Cash Account

975

To Discount account

25

(Salaries paid)

April 16

500
To Purchases Return Account

500

(Goods returned to C)

April 17

Din Mohammad

800

To Sales Account

800

(Goods sold on credit)

April 20

Sales Returns Account

200

To Din Mohammad

200

(Goods returned by him)

April 21

Purchases Account

540

To K

540

(Goods purchased on credit)

April
22

1,500
To Cash Account

1,500

(Cash paid to C)

April
25

Charity Account

80

To Cash Account

50

To Purchases Account

30

(Cash and goods given in charity)

April
27

Free samples Account

200

Drawings Account

100

To Purchases Account

300

(Goods distributed free and taken by the proprietor for

private use)

April
28

Drawings Account
To Cash
(Cash drawn by the proprietor)

200
200

April
31

Salaries Account

500

To Cash Account

500

(Salaries paid in cash)

37320

TOTAL

37320

Illustration .2.
On first January, 1991 Aryan started business with capital of $20,000 and his transactions of
the month were as follows:

Jan.2

Purchased building for cash

8,000

Jan.8

Purchased goods from C

1,000

Jan.15

Sold goods for cash

500

Jan.20

Goods returned to C

100

Jan.22

Sold goods to R

400

Jan.25

R returned goods

Jan.31

Salaries paid for the month

200

Jan.31

Rent paid for the month

150

25

Solution:
Journal of Aryan ltd

Date
Jan. 1

Particulars
Cash Account

...Dr.

To Capital Account
(Capital introduced)

L.F

Debit

Credit

20,000
20,000

Jan 2.

Building Account

...Dr.

8,000

To Cash Account

8,000

(Building purchased for cash)

Jan. 8

Purchases Account

...Dr.

1,000

To Sales Account

1,000

(Goods purchased on credit form C)

Jan. 15 Cash Account

...Dr.

500

To Sales Account

500

(Goods sold for cash)

Jan. 20 C

...Dr.

100

To purchases Returns Account

100

(Goods returned to C)

Jan. 22 R

...Dr.

400

To Sales Account

400

(Goods sold on credit)

Jan. 25 Sales returns Account ..Dr.

25

To R

25

(Goods returned by him)

Jan. 31 Salaries Account

...Dr.

200

To Cash Account

200

(Salaries paid)

Jan. 31 Rent Account

...Dr.

150

To Cash Account

150

(Rent paid in cash)

Total

30,375

30,375

Chapter 3

Ledger
Meaning of Ledger
Although Journal is chronological record of all business transactions, yet it cannot provide all
information regarding a particular account at one place. The journal cannot show the net effect of
various transactions affecting a particular person, assets, revenue and expense. For example, if a
trader wants to know the amount due to a particular supplier or the amount due from a particular
customer, he will have to go through the whole journal. It would be a tedious and time
consuming process. To overcome this difficulty, another book of account, in addition to
Journal/special purpose books, is maintained. This book is called Ledger. Ledger is a book of
account which contains a condensed and classified record of all transactions of the business

posted from the journal. It is also called the book of final entry. In other words, the book, which
contains accounts, is known as the ledger, also called the Principal Book. Ledger provides
necessary information regarding various accounts. Personal accounts in ledger show how much
money firm owes to the creditors and the amount it can recover from its debtors. The real
accounts show the value of properties and also the value of stock. Nominal accounts reflect the
sources of income and also the amount spent on various items.

In accounting all transactions are ultimately recorded in the ledger. In this book, separate
accounts are opened for each account head and all transactions relating to a particular account
head will be posted in the concerned account. An account for each person, each type of revenue,
expense, assets and liability is opened in the ledger. For example, all transactions relating to a
particular supplier; say Vivek will be posted to the account of Vivek. This helps in ascertaining
the amount due to Vivek. Ledger is generally maintained in the form of a bound register. First
few pages of the ledger has ordinary horizontal ruling for indexing. Remaining pages area ruled
like an account and is consecutively numbered. The index pages are used for writing the names
of accounts and the Folio No. (Page No.) where a particular account has been opened for easy
location. The ledger may also be maintained in loose-leaf form instead of one bound book
Ledger is the King of all the books of accounts
Ledger is called the king of all the books of account, because it is the book which alone can
exhibit the position of each account head in a convenient form. It can supply all the useful
information such as the net result of various transactions involving an asset, a liability, capital,
revenue and an expense.
Ledger is the ultimate destination of all transactions because posting is made from the journal to
the ledger. The information available in the ledger in classified and summarised form also
facilitates the preparation of a Trading and Profit and Loss Account and a Balance Sheet. Thus,
Ledger is called the King of all books because no other book of account can supply all the
information like ledger.

Importance, Advantages of Ledger

(a) Consideration of Scattered Information: The ledger brings out the scattered information
from the Journal. It shows the condensed information under each account head.
(b) Full information at a glance: As the ledger records both the debit and credit aspects in two
different sides, the complete position of an account can be ascertained at a glance.
(c) Balance: At the end of a specified period, the net effect of transactions on a particular

account head can be ascertained by finding out the balance of that account. For example, how
much is due from a customer or how much is payable to a creditor or what is the total amount of
purchases or what has been the expenditure on different heads? All these information can be
ascertained by balancing the accounts appearing in the ledger.
(d) Trial Balance: As both the aspects are recorded, the net debit effect and the net credit on the
accounts must be equal on a particular date. This is verified by preparing a statement called Trial
Balance. This is possible only if the ledger accounts are maintained.
(e) Preparation of final accounts: Ledger is the store-house of all information relating to the
transactions. It facilitates the preparation of a Profit and Loss Account from the balances of
revenue and expenses accounts. It also, facilitates the preparation of a Balance Sheet from the
balances of assets, liabilities and capital accounts.
Purpose of Ledger:
A businessman requires various information to ascertain the net results, financial position and
progress of the business. Ledger can provide various information, which are given below.
(a) Information regarding Debtors: A trader can know the amount of money receivable from
various customers and others who are known as debtors.
(b) Information regarding Creditors: A trader can know the amount of money payable to
various suppliers and others who are known as creditors.
(c) Information regarding Purchases and Sales: The total purchase of goods and the total sale
of goods during a specific period can be known by preparing Purchase A/c and Sales A/c.
(d) Information regarding Revenue and Expenses: The amount of revenue earned from
different sources and the amount of expenses incurred on different accounts heads for a

General Ledger: This ledger contains all accounts other than the accounts of Debtors and
Creditors for goods. All accounts falling in the category of Assets, Liabilities (except debtors and
creditors for goods), Capital, Revenue and Expense are maintained in this proper ledger. For
example, if a machine is sold to Ram on credit, his account will appear in General Ledger; again,
if goods are sold to him on credit, his account will appear in the Debtors Ledger. General Ledger
is also known as Impersonal Ledger or Nominal Ledger.

Illustration 1 :
On 1st January 2008, Aryan ltd. started business with a capital Rs. 18,000
Journal of M/r Aryan ltd.

Date

2008
Jan1

L.
F.

Particulars

Cash A/c
Dr.
To Capital A/c
(Being cash brought in as capital)

Dr.
Amount
(Rs.)

Cr.
Amount (Rs.)

18,000
18,000

In the above entry, the accounts affected are Cash A/c and Capital A/c. Therefore, in the ledger,
Cash A/c and Capital A/c will be opened. Posting in both the accounts are shown as under.

Posting in cash account:

M/r Aryan ltd.
Ledger
Cash Account
Dr.

Date

2008
Jan1

Cr

Particulars

L
F

Amount
Rs.

Date

Particulars

L
F

Amount
Rs.

18,000
To Capital A/c

As the Cash A/c has been debited in the Journal, Cash account will also be debited in the Ledger.
This means that posting will be made in the debit side of the Cash A/c. On the debit side, in the
date column, date will be written. In the Journal i.e. 2008, Jan. 1, the date of the transaction,
will be written. In particulars column, the account which has caused an effect in the Cash A/c
will be written. As per the entry in the journal, Capital A/c will be written in the particulars
column with To as prefix. In the J.F. column, the Folio number (page number) where the
entry appears in journal will be written. In the amount column in the ledger, the figure stated
against Cash account in the journal, as shown above, will be entered.

Posting in the capital account:

M/r Aryan ltd.
Ledger
Capital Account
Dr.

Cr.

Date

Particulars

L
F

Amount
Rs.

Date

Particulars

2008
Jan 1

By Cash A/c

L
F

Amount
Rs.

18,000

Illustration 2 :
Purchase of furniture from Modern Furnishers Rs.12,000 on January 1,2008
Journal Entry:
Furniture A/C Dr.
12,000
To Modern Furnishers A/C Rs.
12,000
(Being furniture purchased)
The amount of Rs. 12,000 will be debited to the Furniture A/C and credited to Modern furnishers
A/C in the following way

Ledger
Furniture Account
Dr.

Date

Particulars

Cr

L
F

Amount
Rs.

Date

Particulars

L
F

Amount
Rs.

2008
Jan1

12,000

To Modern
Furnishers

Ledger
Modern Furnishers Account
Dr.

Date

Particulars

Cr

L
F

Amount
Rs.

Date

2008
Jan1

Particulars

By Furniture
Account

L
F

Amount
Rs.

12,000

Chapter 4
Subsidiary books

Introduction:
So far we have discussed that transactions are first recorded in journal, and then posted to ledger.
In case of large organizations where there are numerous transactions, it will be difficult to record
all these transactions through journal. Hence, for convenience of recording, the journal is divided
into a number of special journals. These are known as subsidiary books. The number of
subsidiary books maintained by a business organization depends on the size of the organization
and the nature of transactions. Now, we will discuss the subsidiary books maintained by a
business organization in general.
Though the principle of journalising all transactions, known as continental system of bookkeeping is quite
perfect in actual business but in a large business it is found inconvenient to Journalise every transaction
and sometime it becomes rather impossible for one man to Journalise numerous transactions on a business
in one journal. Therefore, the journal is sub-divided into different journals known as the subsidiary
books or books of prime entry or books of original entry. These are the books in which are recorded
the details of transactions as they take place from day to day, in a classified manner.
In every trading concern, the transactions, however numerous they may be, can be grouped into small
number of classes. They consist chiefly of receipts and payments of cash, purchases and sales of goods,
returns of goods purchased and sold, bills receivable and bills payable. The journal is divided in such a
way that a separate book is used for each class of transactions.
The important subsidiary books used in modern business world are the following:1. Cash Book: It is used to record all cash receipts and payments.
2. Purchases Book: It is used to record all credit purchases.
3. Sales Book: It is used to record all credit sales
4. Purchases returns book: It is used to record all goods returned by us to our suppliers.
5. Sales Returns Book: It is used to record all goods returned to us by our customers.
6. Bills Receivable Book: It is used to record all accepted bills received by us.
7. Bills payable Book: It is used to record all bill accepted by us to our creditors.
8. Journal Proper: It is used for recording those transactions for which there is no separate book.

1. Cash Book
Definition :
1. Define and explain cash book.
2. How a cash book is balanced.
3. Prepare a format of the simple cash book.
Cash book is a book of original entry in which transactions relating only to cash receipts and payments
are recorded in detail. When cash is received it is entered on the debit or left hand side. Similarly, when
cash is paid out the same is recorded on the credit or right hand side of the cash book.
The cash book, though it serves the purpose of a cash book of original entry viz., cash journal really it
represents the cash account of the ledger separately bound for the sake of convenience. It is more a ledger
than a journal. It is journal as cash transactions are chronologically recorded in it. It is a ledger as it
contains a classified record of all cash transactions. The balances of the cash book are recorded in the trial
balance and the balance sheet.

Vouchers:
For Every entry made in the cash book there must be a proper voucher. Vouchers are documents
containing evidence of payment and receipts. When money is received generally a printed receipt is
issued to the payer but counterfoil or the carbon copy of it is preserved by the cashier. The copy receipts
are called debit vouchers, and they support the entries appearing on the debit side of the cash book.
Similarly when payment is made a receipt is obtained from the payee. These receipts are known as credit
vouchers. All the debit and credit vouchers are consecutively numbered. For ready reference the number
of the vouchers are noted against the respective entries. A column is provided on either side of the cash
book for this purpose.
Balancing Cash Book:
The cash book is balanced at the end of a given period by inserting the excess of the debit on the credit
side as "by balance carried down" to make both sides agree. The balance is then shown on the debit side
by "To balance brought down" to start the next period. As one cannot pay more than what he actually
receives, the cash book recording cash only can never show a credit balance.

Format:
The following is the simple format of a cash book:
Date

Particulars

L.F.

Amount

Date

Particulars

L.F.

Amount

2.Single Column Cash Book:

Learning Objectives:
1. Define and explain single column cash book.
2. Prepare a single column cash book.

Definition and Explanation:

Single column cash book records only cash receipts and payments. It has only one money column on
each of the debit and credit sides of the cash book. All the cash receipts are entered on the debit side and
the cash payments on the credit side.
While writing a single column cash book the following points should be kept in mind:
1. The pages of the cash book are vertically divided into two equal parts. The left hand side is for
recording receipts and the right hand side is for recording payments.
2. Being the cash book with the balance brought forward from the preceding period or with what we
start. It appears at the top of the left side as "To Balance" or "To Capital" in case of a new
business.
3. Record the transactions in order of date.
4. If any amount of cash is received on an account, the name of that account is entered in the
particulars column by the word "To" on the left hand side of the cash book.
5. If any amount is paid on account, the name of the account is written in the particulars column by
the word "By" on the right hand side of the cash book.

6. It should be balanced at the end of a given period.

Posting:
The balance at the beginning of the period is not posted but other entries appearing on the debit side of
the cash book are posted to the credit of the respective accounts in the ledger, and the entries appearing on
the credit side of the cash book are posted to the debit of the proper accounts in the ledger.

Format of the Single Column Cash Book:

Following is the format of the single column cash book:
Date

Particulars

L.F.

Amount

Date

Particulars

L.F.

Amount

Example:
Single Column Cash Book
Write the following transactions in the simple cash book and post into the ledger:
1991
Jan. 1 Cash in hand

15,000

" 6

Purchased goods for cash

2,000

" 16

Received from Akbar

3,000

" 18

Paid to Babar

1,000

" 20

Cash sales

4,000

" 25

Paid for stationary

" 30

Paid for salaries

1,000

" 31

Purchased office furniture

2,000

60

Solution:
Cash Book
Date

Particulars

L.F

Amount

Date

Particulars

L.F

Amount

1991
Jan. 1 To Balance b/d

15,000

Jan. 6 By Purchases a/c

16 To Akbar

3,000

18 By Babar

20 To sales a/c

4,000

25 By stationary

2,000
1,000
60

30 By Salaries a/c

1,000

31 By Furniture a/c

2,000

By Balance c/d

15,940

22,000

To Balance b/d

22,000

15,940

Akbar
1991
Jan. 16 By Cash

$
3,000

Sales Account
1991
Jan. 2 By Cash

$
4,000

Purchases Account
1991
Jan. 6 To Cash

$
2,000

Babar Account
1991
Jan. 18 To Cash

$
1,000

Stationary Account

1991
Jan. 25 To Cash

$
60

Salaries Account
1991
Jan. 30 To Cash

$
1,000

Furniture Account
1991
Jan. 31 To Cash

$
2,000

Two Column Cash Book/Double Column Cash Book:

Definition and Explanation:
A double column cash book or two column cash book is one which consists of
two separate columns on the debit side as well as credit side for recording cash and
discount. In many concerns it is customary for the trader to allow or to receive small
allowance off or against the dues. These allowances are made for prompt
settlement of accounts. In certain business almost all receipts or payments are
accompanied by such discounts and in order to avoid unnecessary postings
separate columns in the cash book are introduced to record the discounts received
or allowed. These discount columns are memorandum columns only. They do not
form the discount account. The discount column on the debit side of the cash book
will record discounts allowed and that on the credit side discounts received.

Posting:
The cash columns will be posted in the same way as single column cash book. But
as regards discount column, each item of discount allowed (Dr. side of the cash
book) will be posted to the credit of the respective personal accounts. Similarly each
item of discount received will be posted to the debit of the respective personal
account. Total of the discount column on the debit side of the cash book will be
posted to the debit side of the discount account in the ledger and the total of
discount column on the credit side of the cash book on the credit side of the
discount account. The discount columns are not balanced like cash column of the
tow column cash book.

Format of the Double Column Cash Book:

Debit Side

Credit Side

Date

Particulars

V.N. L.F. Discount

Cash

Date

Particulars

V.N. L.F. Discount

Cash

Example
Two Column Cash Book:
From the following transactions write up a two column cash book and post into ledger:
Jan. 1 Cash in hand $2,000
" 7

Received from Riaz & Co. $200; discount allowed $10

" 12

Cash sales $1,000

" 15

Paid Zahoor Sons $500; discount received $15

" 20

Purchased goods for cash $300

" 25

Received from Salman $500; discount allowed $15

" 27

Paid Hussan & Sons $300.

" 28

Bought furniture for cash $100

" 31

Paid rent $100

Solution:
Cash Book
Debit Side
Date

Particulars

1991
Jan.1 To Balance b/d
" 7 To Riaz & Co.
" 12 To Sales a/c
" 25 To Salman

Credit Side
V.N. L.F. Discount

Cash

Date

15

2,000
200
1,000
500

1991
Jan.5
" 20
" 27
" 28
" 31

25

3,700

10

Particulars

By Zahoor & Sons

By purchase a/c
By Hussan&Sons
By Furniture a/c
By Rent a/c
By Balance c/d

V.N. L.F. Discount

Cash

15

500
300
300
100
100
2,400

15

3,700

2,400
1991
Feb1 To Balance b/d

Riaz & Co.

1991
Jan. 7 By Cash
By Discount

$
200
10

Sales Account
1991
Jan. 12 By Cash

$
1,000

Salman Account
1991
Jan. 25 By Cash
By Discount

$
500
15

Babar Account
1991
Jan. 18 To Cash

$
1,000

Three Column Cash Book:

Definition and Explanation:
A three column cash book or treble column cash book is one in which there are three columns on each
side - debit and credit side. One is used to record cash transactions, the second is used to record bank
transactions and third is used to record discount received and paid.
When a trader keeps a bank account it becomes necessary to record the amounts deposited into bank and
withdrawals from it. Fir this purpose one additional column is added on each side of the cash book. One
of the main advantages of a three column cash book is that it is very helpful to businessmen, since it
reveals the cash and bank deposits at a glance

Writing a Three column Cash Book:

Opening Balance: Put the opening balance (if any) on cash in hand and cash at
bank on the debit side in the cash book and bank columns. If the opening balance is

credit balance (overdraft) then it will be put in the credit side of the cash book in the
bank column.

Cheque/Check or Cash Received: If a cheque is received from any person and

is paid into the bank on the same date it will appear on the debit side of the cash
book as "To a Person". The amount will be shown in the bank column. If the cheque
received is not deposited into the bank on the same date then the amount will
appear in the cash column. Cash received will be recorded in the usual manner in
the cash column.

Contra Entries: If an amount is entered on the debit side of the cash book, and
the exact amount is again entered on the credit side of the same account, it is
called "contra entry". Similarly an amount entered on the credit side of an account
also may have a contra entry on the debit side of the same account.
Contra entries are passed when:
1. Cash is deposited into bank by office: It is payment from cash and receipt in bank. Therefore,
enter on credit side, cash column "By Bank" and on debit side bank column "To Cash". The
reason for making two entries is to comply with the principle of double entry which in such
transactions is completed and therefore, no posting of these items is necessary. Such entries are
marked in the cash book with the letter "C" in the folio column
2. Cheque/Check is drawn for office use: It is payment by bank and receipt in cash. Therefore,
enter on the debit side, cash column "To Bank" and on credit side, bank column "By Cash".

Posting: The method of posting three column cash book into the ledger is as
follows:
1. The opening balance of cash in hand and cash at bank are not posted.
2. Contra Entries marked with "C" are not posted.
3. All other items on the debit side will be posted to the credit of respective accounts in the ledger
and all other items on the credit side will be posted to the debit of the respective accounts.
4. As regards discounts the total of the discount allowed will be posted to the debit of the discount
account in the ledger and total of the discount received to the credit side of the discount account.

Format of the Three Column Cash Book:

Debit Side
Date

Particulars

Credit Side
V.N. L.F.

DisCash Bank Date

count

Particulars

V.N. L.F.

DisCash
count

Bank

Example
Illustretion :

Three Column Cash Book:

On January 1, 1991 Noorani Stores cash book showed debit balance of cash $1,550 and bank $13,575.
During the month of January following business was transacted.

Jan.1 Purchased office typewriter for cash $750; cash sales $315
"

Deposited cash $500

" 4 Received from A. Hussan a cheque for $2,550 in part payment of his account
" 6 Paid by cheque for merchandise purchased worth $1,005
" 8 Deposited into bank the cheque received from A. Hussan.
" 10 Received from Hayat Khan a cheque for $775 in full settlement of his account and allowed him
discount $15.
" 12 Sold merchandise to Divan Bros. for $1,500 who paid by cheque which was deposited in the bank.
" 16 Paid Salman $915 by cheque, discount received $5
" 27 Paid to Gulzar Ahmad by cheque $650
" 30 Paid salaries by cheque $1,750
" 31 Deposited into bank the cheque of Hayat Khan.
" 31 Drew from bank for office use $250.
You are required to enter the above transactions in three column cash book and balance it

Solution:

Three Column Cash Book::

Noorani Stores
Cash Book
Debit Side
Date
1991
Jan.1
" 1
" 3
" 4
" 8
" 10
" 12
" 31
" 31

Particulars

To Balance
b/d
To Sales a/c
To Cash a/c
To A Hussan
To Cash
To Hayat
Khan
To Sales a/c
To Cash
To Bank

Credit Side

V.N. L.F.

Discount

C
C
15
C
C

15

Cash

Date

Particulars

1991
1,550 13,575 Jan.1 By Office
1,315
" 3 Equip.
500
" 6 By Bank
2,550
" 8 By Purchases
2,550 " 16 a/c
775
" 27 By Bank
1,500 " 30 By Salman
775
" 31 By Gulzar
250
" 31 By Salaries
a/c
By Bank
By Cash
6,440 18,900
By Balanced
c/d

V.N. L.F.

Discount

Cash

750
500

2,550

1,005
5

C
C

915
650
1,750
775
250
1,865 14,330

6,440 18,900

1,865 14,330
1991
Feb.1
To Balance
b/d

Sales Account
1991
Jan. 1 By Cash
" 12 By Cash

$
1,315
1,500

A. Hussan

1991
Jan. 4 By Cash

$
2,550

Purchases Returns Book:

Definition and Explanation:
Purchases returns book is a book in which the goods returned to suppliers are
recorded. It is also called returns outward book or purchases returns day
book. Goods may be returned because they are of the wrong kind or not up to
sample or because they are damaged etc. The ruling of this book is absolutely the
same as of purchases day book. The book and entries are made therein just the
same as those made in the purchases day book.

Posting:
The total of the purchases returns or returns outwards book is credited to returns outward account or
purchases return account (being the goods sent out). Individual suppliers to whom goods are returned are
debited (because they receive the goods).

Example: Purchases Book

From the following transactions of a trader

prepare the purchases returns day book and post it into ledger:1991
$
January 8

Karim & Sons

135

"

20

Fazal Din & Co.

150

"

31

Saeed Bros.

250

Solution:
Purchases Book
Date

Particulars

D/N

L.F.

1991
Jan. 8 Karim & Sons
" 20 Fazal Din & Co.
" 31 Saeed Bros.

Amount
$
135
150
250
535

Purchases Returns Account

1991
Jan. 31 By Purchases as per
P.R.B.

$
535

Karim & Sons

1991
Jan. 8 To Purchases returns

135

Sales Book
Definition and Explanation:
A sales book is also known as sales day book is a book of original entry in which are recorded the
details of credit sales made by a businessman. Total of sales book shows the total credit sales of goods
during the period concerned. Usually the sales book is totaled every month. The sales day book is written
up daily from the copies of invoices sent out.
Posting:
The total of the sales book is credited to sales account. Customers whose names appear in the sales book
are debited with the amount appearing against their names. Double entry is thus completed.

Example: Sales Book

From the following transactions of a trader prepare the sales day book of M. Amin and post it into
ledger:1991
January 5

$
Sold goods to ideal college

200

"

10

Sold goods to Ahmad & Co.

100

"

20

Credit sales to Karim Bakhish

400

"

31

Sold goods to cheap stores

100

Solution:
Purchases Day Book
Date
1991
Jan. 5
" 10
" 20
" 31

Particulars

Idea college
Ahmad & Co.
Karim Bakhish
Cheap stores

D/N

L.F.

Amount
$
200
100
400
100
800

Sales Returns Book:

Definition and Explanation:
Sales returns book is also called returns inwards book. It is used for recording goods returned to us by
our customers. The ruling of this books is exactly as for sales day book.

Posting:
The of the returns inwards book or sales returns book is debited to returns inwards account or sales
returns account. The customers who have returned the goods are credited with the amount shown against
their names

Example: Sales Returns Book:

From the following transactions of a trader prepare the sales returns book and post it into ledger:1991
January 8

$
Goods returned by Parker & Co.

40

"

20

Goods returned by Ideal Traders $52

52

"

31

Allowance granted to Riaz & Co.., for short delivery

100

Solution:
Sales Returns Book
Date

Particulars

D/N

L.F.

1991
Jan. 8 Parker & Co.
" 20 Ideal Traders
" 31 Riaz & Co.

Amount
$
40
52
100

192

Sales returns Account

1991
Jan. 31 By Sundries as per S.R.B

$
192

Parker & Co.

1991
Jan. 8 By Sales returns

$
40

Bills Receivable Book:

Definition and Explanation: Bills receivable book is used to record the bills
received from debtors. When a bill is received, details of it are recorded in the bills
receivable book.

Posting:
In the ledger the account of the person from whom each bill is received is credited with the amount of that
bill and the periodical total of the book is posted to the debit of bills receivable account.
the bills receivable book is ruled according to the requirements of a particular account
Example:
From the following transactions of a trader prepare the bills receivable book and post it into ledger:1991
January 5

Drew a bill on Abdullah & Co. at 2 m/d for $700.

"

10

Acceptance received from Rahim Bakhish at 3 m/d for $ 1,000.

"

20

A. Riaz gives his acceptance at 3 m/d for $800.

"

30

Bill at 2 m/d for $100 is drawn on Bashir.

Solution:
Bills Receivable Book
Date
1991
Jan. 5
" 10
" 20
" 30

Particulars

Abdullah & Co.

Rahim Bakhish
A. Riaz
Bashir

Term

2 m/d
3 m/d
3 m/d
2m/d

Due Date

March 8
April 13
" 21
March 3

L.F.

Amount
$
700
1,000
800
100

2,600

Bills Payable Book:

Definition and Explanation : Bills payable book is used to record bill

accepted by us. When a bill drawn by our creditor is accepted particulars of the
same are recorded in this book.

Posting: In the ledger, the account of each person whose bill has been accepted is
debited with the amount of the bill. The monthly total of the bills accepted is
credited to the bills payable account ledger.

Example:
From the following transactions of a trader prepare the bills payable book and post
it into ledger:January 5

Accepted a bill at 3 m/d for $200 drawn by Rahmat & Co.

"

20

gave acceptance at 2 m/d for $500 to Kamal.

"

30

Acceptance at 1 m/d for $ 500 given to Feroz & Co.

Solution:
Bills Payable Book
Date

Particulars

1991
Jan. 5 Rahmat & Co.
" 20 Kamal
" 30 Feroz & Co.

Term

3 m/d
2 m/d
1 m/d

Due Date

L.F.

April 8
March 23
"
30

Amount
$
200
500
500

1,200
Bills Payable Account
1991
Jan. 31 By Sundries as per B/p Book

Chapter 5

Trial Balance

$
1,200

Introduction
When all the transactions have been recorded in their respective ledgers,
there will be numerous books of accounts. It would be difficult to tell at a
spar of a moment, which accounts has what balance. A trial balance would
help put this in perspective. A trial balance is a statement showing the list of
debit and credit balances of accounts. It is a check on the arithmetical
accuracy of the double entry regarding the business transactions at a given
period of time. The total of items recorded in all the accounts on the debit
side of the books should be equal in total with the items in all the accounts
on the credit side of the books. All the debit balances are listed in one
column and all the credit balances listed in another. The totals of these two
columns should be identical

Meaning of Trial Balance

After posting the accounts in the ledger and balancing the same, a statement is prepared to show
separately the debit and credit balances. Such a statement is known as Trial Balance.
The Trial Balance is a statement which shows the closing balances, debit balances as well as
credit balances of all ledger accounts. This statement is always prepared in T Shape. In the left
hand side, debit balances and in the right hand side, credit balances of ledger accounts are written
and both sides are totalled. The totals of the both the sides, should always be equal. This equality
in the totals of debit side and credit side ensures the completion of double entry system of bookkeeping. It also ensures the arithmetical accuracy of ledger accounts.

Objectives : After studying this chapter you should be able to:

Identify the purpose of a trial balance
Establish the elements in a trial balance
Extract a trial balance from ledgers.
Exercise more on ledger entries leading to a trial balance

Purpose of a trial Balance:

A trial balance is an attempt to check the accuracy of the double entry in the ledger accounts. Given that
every credit entry should have a corresponding debit entry, then a difference in the trial balance is an
indication of existence of errors that may have been made in the ledgers. However it must be noted that
though the total of all the credit entries should agree with the total of all the debit entries, this does not
necessarily guarantee the accuracy of the entries in the ledger accounts.

Structure of a trial balance :

A trial balance has two sides, the debit and the credit side. The debit side summarizes all debit balance
figures while the credit side summarizes all credit balance figures in the ledgers.

TRIAL BALANCE
DR
Assets

xxx

Expenses

xxx

Income (e.g. sales)

Purchases

CR

xxx
xxx

Capital

xxx

Liabilities

xxx
xxx

xxx

To make this process simple the accounts should be balanced off so as to get their balances at the end of
the financial period. The balancing of accounts involves the following steps.
The difference between the two sides is called the balance and in accounting procedure should be
inserted on the side having the lesser amount so as to balance the two sides. This process leads to a
common terminology in accounting, that is balance carried forward (or carried down) written in short as
balance c/f (or balance c/d). A second term is balance brought forward (or balance brought down) denoted
as balance b/f (or balance b/d) . Balance carried forward (or down) is the balancing figure at end of the
accounting period. It is the difference in amounts between the two sides of the accounts at the end of the
accounting period. Balance brought forward (or down) on the other hand is the balance in the account at
the beginning of the accounting period.
The balance brought forward is used to tell whether the account has a debit balance or a credit balance. If
the account is having its balance brought down on the debit side, it is said to have debit balance and if it is
on the credit side, it is said to have a credit balance.

Objects of Trial Balance:

The following are the objectives of preparing the Trial Balance.
1. Ascertainment of arithmetical accuracy of the ledger accounts: The Trial Balance is a test
of arithmetical accuracy of ledger accounts. If the totals of two sides of Trial Balance i.e. debit
side and credit side are equal, it ensures the arithmetical accuracy of the ledger accounts. It
means that there is no mistake in totalling the debit side and credit side of all the ledger accounts.

2. Help in the preparation of Final Accounts: Trial Balance facilitates the preparation of
Trading Account, Profit and loss Account and the Balance Sheet. Preparation of these financial
statements is very clumsy. If the ledger accounts balances are collected and grouped under the
two headings of Debit and Credit in the Trial Balance, it becomes easier to prepare the final
accounts.
3. Providing summary information of Financial result and position: A close and intelligent
observation of the Trial Balance gives us some information of the profit or loss and the financial
position of the firm.
4. Help in locating errors: Some of the errors in the books of accounts can be located with the
help of the Trial Balance. If the Trial Balance does not agree, an intelligent scrutiny to the items
and their amounts may reveal the cause of disagreement of the Trial Balance. Thus Trial Balance
discloses some of the errors in the books of accounts.
5. Completion of Double Entry: Trial Balance, if it agrees, i.e. the two sides are equal, proves
the completion of double entry.
two method of constructing a Trial Balance
1. Horizontal Format
2. T shape Format
Trial Balance
As on 31-03-1995

Heads of Accounts

Total:

L.F.

Debit Balance (Rs.)

Credit Balance (Rs.)

T shape Trial Balance:

Trial Balance as on 31-03-2007

Heads of Accounts

L.F.

Debit Balance

Heads of
Accounts

L.F.

Rs.

Rs

Illustration:
From the following balances prepare a Tri al Balance as on 31-03-2008
Items

Credit
Balance

Rs.

1. Capital

50,000

2. Cash

46,700

3. Furniture

11,000

4. Computer

42,000

5. Insurance

1,800

6. Purchases

36,000

7. Debtors

12,000

8. Creditors

16,000

9. Drawings

2,000

10. Sales

86,000

11. Salary

1,500

12. Interest received

1,000

2
3

Solution:
Trial Balance as on 31-12-94

Heads of Accounts

L.F. Debit Balance

Rs.

L.F.
Heads of Accounts

Credit
Balance
Rs.

Cash

46,700

Creditors

16,000

Furniture

11,000

Sales

86,000

Computer

42,000

Capital

50,000

Insurance

1,800

Interest
received

Purchases

36,000

Debtors

12,000

Drawings

2,000

Salary

1,500

1,000

Total:

153,000

153,000

Chapter 6

Final Accounts
Introduction
Having proved the arithmetical accuracy of ledger by means of trial balance we should
proceed to ascertain our profit or loss for a period, in order to determine the profit or loss of
a business and its financial position, final accounts at the end of a particular period are

prepared. The term "final accounts" means statements which are finally prepared to show
the profit earned or loss suffered by the firm and financial state of affairs of the firm at the
end of the period concerned. In order to know the profit or loss earned by a firm, income
statement or trading and profit and loss account is prepared. This statement is also called
"statement of operations." While the financial position is judged by means of preparing a
balance sheet of the business. This statement is also called "position statement" or
"statement of financial condition". In this section of the website we shall study the method
of preparing these two statements.
The basis of these statements is trial balance. The trial balance includes all the accounts
from the ledger. the nature of which may be either, personal, real, or nominal. It should be
noted that from the trial balance only nominal accounts are transferred to the profit and loss
account. The real or personal accounts go to the balance sheet.

Trading Account
Definition and Explanation:
A trading account is an account which contains, " in summarized form, all the
transactions, occurring, throughout the trading period, in commodities in which he deals"
and which gives the gross trading result. In short, trading account is the account which is
prepared to determine the gross profit or the gross loss of a trader.

Debit Side Items:

1. The value of opening stocks of goods (i.e., the stock of goods with which the
business was started).

2. Net purchase made during the year (i.e., purchases less returns).
3. Direct expenses, if any.
Credit Side Items:

1. Total sales made during the period less the value of returns, i.e., net sales.
2. The value of closing stock of goods.
The difference between the two sides of the trading account represents either gross profit or
gross loss. Thus if the credit side is heavier that would mean that the trader has earned
gross profit i.e., the excess of selling price of the goods sold over their purchase price. If the

Advantages of Trading Account:

The advantages of the trading account are as follows:

1. A trader can find out the gross profit and thereby can ascertain the percentage of
profit he has earned on the cost of goods sold. This percentage of gross profit may
serve as his ready guide for the adjustment of future sale price.

2. A trading account help a trader to compare his stock at open with that at the close.
He can further find out whether the purchases he has made during the period of
account have been judicious.

3. Once can compare the figure of sales with similar figure of the previous year and
can find out whether business is improving or declining.

4. If the gross profit disclosed by the trading account is less than expected, an
enquiry can be made into the cause responsible for the decline. And if the gross
profit is more than was expected, steps can be taken to maintain it.

Format of Trading Account (T or Account Form):

Trading Account
For the year ending .......20......

Dr.
PARTICULAR
To Opening stock
To purchases
.........
Less Returns
.........
To Carriage inwards
To Cartage
To dock charges
To Wages
To Duty
To Freight
To Clearing charges
To Etc. Etc.,
To Gross profit (Transferred to
profit and loss account)

PARTICULAR
Cr.
........ By Sales
.........
Less returns
.........
........ By Closing stock
.........By Gross loss transferred to
.........profit and loss account
.........
.........
.........
.........
.........
.........
.........

Profit and Loss Account:

Definition:

Profit and loss account is the account whereby a trader determines the net result of his
business transactions. It is the account which reveals the net profit (or net loss) of the
trader.The profit and loss account is opened with gross profit transferred from the trading
account (or with gross loss which will be debited to profit and loss account). After this all
expenses and losses (which have not been dealt in the trading account) are transferred to
the debit side of the profit and loss account. If there are any incomes or gains, these will be
credited to the profit and loss account. The excess of the gain over the losses is called the
net profit and that of the loss over the gain is called the net loss. The account is closed by
transferring the net profit or loss to capital account of the trader

Format of the Profit and Loss Account:

Profit and Loss Account
For the year ended ..............

To Gross Loss
To Salaries
To Rent
To Rent and Rates
To Discount Allowed
To Commission Allowed
To Insurance
To Bank Charges
To Legal Charges
To Repairs
To Advertising
To Trade Expenses
To Office Expenses
To Bad Debts
To Traveling Expenses
To Etc., Etc.
To Net Profit(trns to cap
a/c)

xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
ex.
xxxx
xxxx
xxxx
xxxx
xxxx

By
By
By
By
By
By

Gross Profit
Interest Received
Discount Received
Commission Received
Other Receipts
Etc., Etc.

xxxx
xxxx
xxxx
xxxx
xxxx
xxxx

By Net Loss (transferred to capital

account of the trader)
xxxx

Balance Sheet:
Definition and Explanation:
A balance sheet is a statement drawn up at the end of each trading period stating
therein all the assets and liabilities of a business arranged in the customary order to
exhibit the true and correct state of affairs of the concern as on a given date.
A balance sheet is prepared from a trial balance after the balances of nominal accounts are
transferred to the trading account or to the profit and loss account. The remaining balances
of personal or real accounts represent either assets or liabilities at the closing date. These
assets ant liabilities are shown in the balance sheet in a classified form - the assets being
shown on the right side and the liabilities on the left hand side.

Grouping and Marshalling:

In a balance sheet assets and liabilities should be properly grouped and classified under
appropriate headings. The individual balance of each debtor's and creditor's account need
not be shown. Debtors and creditors should be shown in total. The grouping together of
dissimilar assets will make the balance sheet misleading.
The term marshalling means the order in which assets and liabilities are stated on the
balance sheet as the balance sheet exhibits the financial position of a concern even to a non
technical observer. It is of great importance that the different assets and liabilities should be
arranged in the balance sheet on certain principles. The balance sheet is generally
marshaled in three ways

1. The Order of Liquidity or Realizability:

According to this method assets are entered up in the balance sheet following the order in
which they can be converted into cash and the liabilities in the order in which they can be
paid off. The following is a format of a balance sheet based on this order
Balance Sheet as at ..........
Liabilities
Bills Payable
Loans
Trade Creditors
Capital

Rs.

Assets
Cash in hand
Cash at Bank
Investments
Bills Receivables
Debtors
Stock (Closing)
Stores
Furniture & Fixtures
Plant & Machinery
Land & Buildings

Rs.

Objectives of the Balance Sheet:

The function of the correctly prepared balance sheet is to exhibit the true and correct view
of the state of affairs of any concern. In a balance sheet as the assets and liabilities are
shown in details after being properly valued, a trader can judge the position of his business
from it.
Balance Sheet as at ..........
Liabilities

Rs.

Capital
Trade Creditors
Loans
Bills Payable

Assets

Rs.

Land & Buildings

Plant & Machinery
Furniture & Fixtures
Stores
Stock (Closing)
Debtors
Bills Receivables
Investments
Cash at Bank
Cash in hand

Classification of Assets:
The properties and possessions of a business are called assets and they are classified into
the following classes:
Fixed assets: are assets which are acquired not for sale but for permanent use in the
business e.g., land and buildings, plant and machinery, furniture etc. These assets help the
business to be carried on.
Current assets: denote those assets which are held for sale or to be converted into cash
after some time e.g., sundry debtors. bills receivables, stock of goods etc.
Liquid assets: are those assets which are with us in cash or easily converted into cash e.g.,
cash in hand, cash at bank, investments etc.

Wasting Assets:
The assets that depreciate through "wear and tear", whose values expire with lapse of time
or that become exhausted through working are known as wasting assets. This is a subclass of fixed assets e.g., plant machinery, mines etc.

Intangible or Fictitious Assets:

There are assets which have no physical existence. Which can neither be seen with eyes not
touched with hands. These are called intangible assets or fictitious assets. They do not
represent any thing valuable. They include debit balance of profit and loss account, goodwill
etc.

Contingent Assets:
A contingent asset is one which comes into existence upon the happening of a certain
event. If that event happens the asset becomes available, otherwise not. For example
uncalled capital of a limited company.

Outstanding Assets: Expenses paid in advance i.e., prepaid expenses, and income
earned but not received are known as outstanding assets.

Classification of Liabilities:

The liabilities of a business are classified as

follows:

Fixed Liabilities: These are the liabilities which are payable immediately or in the near
future. These liabilities are payable after a long period. Long term loans, capital of the
proprietor are the examples of such kind of liabilities.
Current Liabilities: These are the liabilities which are payable immediately or in the near
future, such as creditors, bank loans etc.

Contingent Liabilities: Contingent liabilities are those liabilities which arise only on the
happening of some event. The event may or may not happen. Thus a contingent liability
may or may not involve the payment of money. Examples of contingent liabilities are:

1. Liabilities on bills discounted: In case the bill is dishonored by the acceptor, the
holder may be called upon to pay the amount to the discounter.

2. Liability under guarantee: In case the debtor fails to fulfill his obligation, the man
who has given a guarantee or surety have to make good the loss to the creditor.

3. Liability in respect of a pending suit: A suit pending against a person in a court is

a contingent liability because if the decision of the court goes against him, he may
thereby become liable to pay compensation.
Contingent liabilities are not recorded in the books not they are included in the balance
sheet. They are simply referred to by way of foot notes on the balance sheet. The surplus or
excess of assets over liabilities is called the capital or the proprietor. Capital may be
classified as follows on the basis of the capital fund invested:

Trading Capital: The portion of the funds of a concern which is represented by the fixed
and floating assets is called the trading capital

Fixed Capital: The portion of the funds of a concern which is represented by the fixed
assets is called fixed capital.

Prepare Final Account

Examples of Trading and Profit and Loss Account
and Balance Sheet:
1. Prepare trading and profit and loss account and balance sheet.

Illustration:1
From the following balances extracted from the books of X & Co., prepare a trading and
profit and loss account and balance sheet on 31st December, 1991.

particular

Stock on 1st January

Bills receivables
Purchases

$
11,000
4,500
39,000

particular

Returns outwards

500

Trade expenses

200

Office fixtures

1,000

Wages
Insurance
Sundry debtors

2,800

Cash in hand

500

700

Cash at bank

4,750

Tent and taxes

1,100
1,450

30,000

Carriage inwards

800

Carriage outwards

Commission (Dr.)

800

Sales

Interest on capital

700

Bills payable

Stationary

450

Creditors

19,650

Capital

17,900

Returns inwards

1,300

60,000
3,000

The stock on 21st December, 1991 was valued at $25,000.

Solution: 1
X & Co.
Trading and Profit and Loss Account
For the year ended 31st December, 1991

particular

Dr. Amt

Cr.Amt

particular

Dr. Amt

11,000

By Sales

60,000

39,000

Less returns
i/w

500

To Opening stock
To Purchases
Less returns o/w

To Carriage inwards
To Wages
To Gross profit c/d

38,500

800

2,800

30,600

Cr.Amt

1,300
58,700

By Closing stock

25,000

83,700

83,700

|
|

To Stationary

450

To Rent and rates

1,100

To Carriage outwards

1,450

To Insurance

700

To Trade expenses

200

To Commission

800

To Interest on capital

700

To Net profit
transferred to capital
a/c

By Gross profit
b/d

30,600

25,200
|
|

30,600

30,600

Balance Sheet
As at 31st December, 1991
Liabilities
Creditors
Bills payable

Assets

19,650 | Cash in hand

500

3,000 | Cash at bank

4,750

Capital

17,900

Sundry debtors

Add Net profit

25,200

Bill receivable

43,100 | Stock
|

Office equipment

30,000
4,500
25,000
1,000

65,750 |

65,750

illustration 2
The following trial balance was taken from the books of Habib-ur-Rehman on December 31, 19 ....
particular

Dr.Amt

Cash

13,000

Sundry debtors

10,000

Bill receivable

8,500

Opening stock

45,000

Building

50,000

Furniture and fittings

10,000

Investment (Temporary)

5,000

Plant and Machinery

15,500

Dr.Amt

Bills payable

9,000

Sundry creditors

20,000

Habib's capital

78,200

Habib's drawings
Sales

1,000
100,000

Sales discount

400

Purchases

30,000

Freight in

1,000

Purchase discount

500

Sales salary expenses

5,000

Advertising expenses

4,000

Miscellaneous sales expenses

500

Office salary expenses

8,000

Misc. general expenses

1,000

Interest income

1,000

Interest expenses

800
Total

2,08,700

2,08,700

Required: Prepare income statement/trading and profit and loss account and balance sheet from the above
trial balance in report form.

Solution:
Habib-ur-Rehman
Income Statement/Profit and Loss Account
For the year ended December 31, 19.....

Gross sales
Less: Sales discount

100,000
400

Net Sales

99,600

Cost of Goods Sold:

Opening stock
Purchases
Add: Freight in

30,000
1,000

Less purchase discount

31,000
500

Net purchases

45,000

30,500

Cost of goods available fort sale

Less closing stock

75,500
10,000

Cost of goods sold

65,500

Gross profit

34,100

-Operating Expenses:
Selling Expenses:
Sales salary expenses
Advertising expenses
Misc. selling expenses

5,000
4,000
500
9,500

General Expense:
Office salaries expenses
Misc. general expenses

8,000
1,000
9,000

Total operating expenses

18,500

Net profit from operations

15,600

Other Expenses and Incomes:

Interest income
Interest expenses
Net increase
Net income

1,000
800
200
15,800

Habib-ur-Rehman

Balance Sheet

As at December 31, 19.....

ASSETS
Current Assets:
Cash
Sundry debtors
Bills receivable
Stock on Dec. 31, 19 ..
Investment
Total Current Assets
Fixed Assets:
Buildings
Plant and Machinery
Furniture and fittings

13,000
10,000
8,500
10,000
5,000
46,500
50,000
15,500
10,000

Total Fixed Assets

Total Assets
LIABILITIES:
Current Liabilities:
Sundry creditors
Bills payable
Total Current Liabilities
Fixed Liabilities:
Habib's capital
Net income for the year

Less: Drawings

75,500
122,000

20,000
9,000
29,000
78,200
15,800
94,000
1,000
93,000

Total Liabilities and Capital

122,000