Banking transactions, Bank reconciliation statements

<< REVALUATION OF FIXED ASSETS

RECAP >>

Financial Accounting (Mgt-101)

Vehicle Account

Vehicle

Account Code 05

Date

No.

Narration

Dr. Rs.

Date

No.

Narration

Cr. Rs.

03-01---

04 Furniture purch.

50,000

Balance

50,000

Name Of The Organization (Ali Traders)

Trial Balance As On ( January 31, 20--)

Title of Account

Code

Dr. Rs.

Cr. Rs.

Cash Account

35,000

Bank Account

130,000

Capital Account

200,000

Furniture Account

15,000

Vehicle Account

50,000

Total

Financial Accounting (Mgt-101)

Purchases Account

Purchases

Account Code 06

No.

Narration

Cr. Rs.

Date No.

Narration

Dr. Rs.

Date

05-01--- 05 Goods purch.

50,000 10-01---

10,000

08 Purchase return

20,000

08-01---

07 Goods purch.

70,000

10,000

Balance

60,000

70,000

Name Of The Organization (Ali Traders)

Trial Balance As On ( January 31, 20--)

Title of Account

Code

Dr. Rs.

Cr. Rs.

Cash Account

35,000

Bank Account

130,000

Capital Account

200,000

Furniture Account

15,000

Vehicle Account

50,000

Purchases Account

60,000

Total

Financial Accounting (Mgt-101)

Mr. A (Supplier)

Mr. A (Creditor)

Account Code 07

No.

Narration

Cr. Rs.

Date

No.

Narration

Dr. Rs.

Date

10,000 05-01---

05 Goods purch.

50,000

10-01---

08 Purchase return

25,000

21-01---

11 Paid to Mr. A

35,000

50,000

Balance

15,000

50,000

Name Of The Organization (Ali Traders)

Trial Balance As On ( January 31, 20--)

Title of Account

Code

Dr. Rs.

Cr. Rs.

Cash Account

35,000

Bank Account

130,000

Capital Account

200,000

Furniture Account

15,000

Vehicle Account

50,000

Purchases Account

60,000

Mr. A (Creditor)

15,000

Total

Financial Accounting (Mgt-101)

Sales

Sales Account Code 08

No.

Narration

Cr. Rs.

Date

No.

Narration

Dr. Rs.

Date

18-01---

10 Sales return

5,000 06-01---

06 Goods sold

60,000

40,000

12-01---

09 Goods sold

5,000

100,000

Balance

95,000

100,000

Name Of The Organization (Ali Traders)

Trial Balance As On ( January 31, 20--)

Title of Account

Code

Dr. Rs.

Cr. Rs.

Cash Account

35,000

Bank Account

130,000

Capital Account

200,000

Furniture Account

15,000

Vehicle Account

50,000

Purchases Account

60,000

Mr. A (Creditor)

15,000

Sales

95,000

Total

Financial Accounting (Mgt-101)

Mr. B (Customer)

Mr. B (Debtor) Account Code 09

Date

No.

Narration

Dr. Rs.

Date

No.

Narration

Cr. Rs.

12-01---

09 Goods sold

40,000 18-01---

10 Sales return

5,000

20,000

25-01---

12 Received from B

40,000

25,000

Balance

15,000

40,000

Name Of The Organization (Ali Traders)

Trial Balance As On ( January 31, 20--)

Title of Account

Code

Dr. Rs.

Cr. Rs.

Cash Account

35,000

Bank Account

130,000

Capital Account

200,000

Furniture Account

15,000

Vehicle Account

50,000

Purchases Account

60,000

Mr. A (Creditor)

15,000

Sales

95,000

Mr. B (Debtor)

15,000

Total

Financial Accounting (Mgt-101)

Salaries

Salaries

Account Code 10

No.

Narration

Cr. Rs.

Date

No.

Narration

Dr. Rs.

Date

31-01---

13 Salaries paid

5,000

Balance

5,000

Name Of The Organization (Ali Traders)

Trial Balance As On ( January 31, 20--)

Title of Account

Code

Dr. Rs.

Cr. Rs.

Cash Account

35,000

Bank Account

130,000

Capital Account

200,000

Furniture Account

15,000

Vehicle Account

50,000

Purchases Account

60,000

Mr. A (Creditor)

15,000

Sales

95,000

Mr. B (Debtor)

15,000

Salaries

5,000

Total

Financial Accounting (Mgt-101)

Expenses

Expenses

Account Code 11

No.

Narration

Cr. Rs.

Date

No.

Narration

Dr. Rs.

Date

31-01---

14 Exp. accrued

20,000

Balance

20,000

Name Of The Organization (Ali Traders)

Trial Balance As On ( January 31, 20--)

Title of Account

Code

Dr. Rs.

Cr. Rs.

Cash Account

35,000

Bank Account

130,000

Capital Account

200,000

Furniture Account

15,000

Vehicle Account

50,000

Purchases Account

60,000

Mr. A (Creditor)

15,000

Sales

95,000

Mr. B (Debtor)

15,000

Salaries

5,000

Expenses

20,000

Total

Financial Accounting (Mgt-101)

Expenses Payable

Expenses Payable

Account Code 12

No.

Narration

Cr. Rs.

Date

No.

Narration

Dr. Rs.

Date

31-01---

14 Exp. accrued

20,000

Balance

20,000

Name Of The Organization (Ali Traders)

Trial Balance As On ( January 31, 20--)

Title of Account

Code

Dr. Rs.

Cr. Rs.

Cash Account

35,000

Bank Account

130,000

Capital Account

200,000

Furniture Account

15,000

Vehicle Account

50,000

Purchases Account

60,000

Mr. A (Creditor)

15,000

Sales

95,000

Mr. B (Debtor)

15,000

Salaries

5,000

Expenses

20,000

Expenses Payable

20,000

Total

330,000

Financial Accounting (Mgt-101)

PROFIT AND LOSS ACCOUNT (ACCOUNT FORM)

Name of the Entity (Ali Traders)

Profit and Loss Account for the Month Ending January 31, 20--

Debit

Credit

Particulars

Rs.

Particulars

Rs.

Cost of Sale (Purchases)

60,000

Income

95,000

Gross Profit

35,000

(income Cost of Sale)

Total

95,000

Total

95,000

Admin Expenses

25,000

Gross Profit

35,000

Salaries

5,000

Expenses

20,000

Net Profit

10,000

(gross Profit expenses)

Total

35,000

Total

35,000

PROFIT AND LOSS ACCOUNT (EPORT FORM)

Name of the Entity (Ali Traders)

Profit and Loss Account for the Month Ending January 31, 20--

Particulars

Amount

Rs.

Income / Sales / Revenue

95,000

Less: Cost of Goods Sold

(60,000)

Gross Profit

35,000

Less: Administrative Expenses

(25,000)

Net Profit

10,000

Rules of debit & credit

Any account that obtains a benefit is Debit and

Anything that will provide benefit to the business is Credit.

Both these statements may look different but in fact if we consider that whenever an account

benefits as a result of a transaction it will have to return that benefit to the business then both the

statements will look like different sides of the same picture.

Rules of debit & credits can also be explained like:

Financial Accounting (Mgt-101)

EXPENDITURE

o Increase in Expenditure is Debit

o Decrease in Expenditure is Credit

INCOME

o Increase in Income is Credit

o Decrease in Income is Debit

ASSETS

o Increase in Asset is Debit

o Decrease in Asset is Credit

LIABILITY

o Increase in Liability is Credit

o Decrease in Liability is Debit

Now we will explain these rules with the help of the following illustration:

No.

Date

Particulars

Jan 01

Mr. Rizwan invests Rs. 100,000 to commence his business.

Jan 03

He opened an account with bank & deposited Rs. 30,000.

Jan 05

He borrows Rs. 50,000 from Mr. Saleem at 12% per annum.

Jan 07

He purchased furniture worth Rs. 20,000 for cash.

Jan 09

He purchased goods (for resale) worth of Rs. 10,000 from Mr. Afzal

on credit.

Jan 10

He sold goods for cash Rs. 5,000

Jan 12

He sold goods for Rs. 5,000 to Mr. Naeem on credit basis.

Jan 15

Cash deposited in bank Rs. 5,000

Jan 16

He purchased stationery fore Rs. 3,000.

Jan 18

He purchased office equipment for Rs. 10,000 and paid by cheque.

Jan 19

He returned defective goods to Mr. Afzal worth Rs. 1,000.

Jan 25

Goods are returned by Mr. Naeem Rs. 500 to the business.

Jan 30

Cash paid to Mr. Afzal Rs. 9,000 in full settlement of his claim.

Jan 31

Cash received from Mr. Naeem Rs. 4,500 in full settlement of his

account.

Jan 31

Cash withdrawn from the bank Rs. 500.

Now first document that we prepare in accounting is the voucher. We will book first entry in voucher, i.e.

Name Of Company

Type Of Voucher

Date: 1-1-02--

No:

Financial Accounting (Mgt-101)

Description

Code

Debit

Credit Amount

Amount

Cash

100,000

Capital

100,000

Total:

100,000

Narration:

Capital Introduced in Cash by Mr. Rizwan.

Prepared By:

Checked by:

Same entry is presented in simpler form:

Date

Particulars

Code #

Amount(Dr.)

Amount(Cr.)

Rs.

01-01-2002

Cash A/c

100,000

Capital A/c

100,000

Capital Introduced in Cash by Mr.

Rizwan

In this case, cash account is debited because cash account has obtained benefit and Capital account is

credited because business has obtained benefit because of capital account.

This statement can also be interpreted like this:

As cash is an asset and it is increased in this case, so cash is debited. Capital is a liability and increase in

liability is credit. In this case capital is increased, hence it is credited.

Financial Accounting (Mgt-101)

ENTRY # 2

First, we will book this entry in voucher.

Name Of Company

Type Of Voucher

Date: 3-1-02--

No:

Description

Code

Debit

Credit Amount

Amount

Bank

30,000

Cash

30,000

Total:

30,000

Narration:

Deposited cash in bank.

Prepared By:

Checked by:

Again, the same entry in simple form

Date

Particulars

Code #

Amount(Dr.)

Amount(Cr.)

Rs.

03-01-2002

Bank A/c

30,000

Cash A/c

30,000

Deposited cash in bank.

Again, bank account is debited because bank account has obtained benefit and Cash account is credited

because business has obtained benefit because of cash account.

This statement can also be interpreted like this:

As bank is an asset and it is increased in this case, so bank is debited. Cash is an asset and decrease in asset is

credit. In this case cash is decreased, hence it is credited

From now onward, we will present entry in simple form.

Financial Accounting (Mgt-101)

ENTRY # 3

Date

Particulars

Code #

Amount(Dr.)

Amount(Cr.)

Rs.

05-01-2002

Cash A/c

50,000

Loan A/c

50,000

Obtained loan from Mr. Saleem.

Cash account is debited because cash account has obtained benefit and Loan account is credited because

business has obtained benefit because of Loan account.

This statement can also be interpreted like this:

As cash is an asset and it is increased in this case, so cash is debited. Loan is a liability and increase in liability

is credit. In this case Loan is increased, hence it is credited

ENTRY # 4

Date

Particulars

Code #

Amount(Dr.)

Amount(Cr.)

Rs.

07-01-2002

Furniture A/c

20,000

Cash A/c

Purchased furniture for cash

Again, furniture account is debited because furniture account has obtained benefit and Cash account is

credited because business has obtained benefit because of cash account.

This statement can also be interpreted like this:

As furniture is an asset and it is increased in this case, so furniture is debited. Cash is an asset and decrease in

asset is credit. In this case cash is decreased, hence it is credited.

ENTRY # 5

Date

Particulars

Code #

Amount(Dr.)

Amount(Cr.)

Rs.

09-01-2002

Purchases A/c

10,000

Mr. Afzal(Creditors) A/c

10,000

Purchased goods from Mr. Afzal on

credit

Purchase account is debited because purchase account has obtained benefit and Creditors account is credited

because business has obtained benefit because of Creditors account.

This statement can also be interpreted like this:

As purchase is an expense and it is increased in this case, so purchase is debited. Creditors are liabilities and

increase in liability is credit. In this case Creditors are increased, hence it is credited.

Financial Accounting (Mgt-101)

Creditor is any third person or organization, to whom business has to pay in future.

ENTRY # 6

Date

Particulars

Code #

Amount(Dr.)

Amount(Cr.)

Rs.

10-01-2002

Cash A/c

5,000

Sale A/c

5,000

Sold goods for cash

Cash account is debited because cash account has obtained benefit and Sale account is credited because

business has obtained benefit because of Sale account.

This statement can also be interpreted like this:

As cash is an asset and it is increased in this case, so cash is debited. Sale is an income and increase in income

is credit. In this case income is increased, hence it is credited

ENTRY # 7

Date

Particulars

Code #

Amount(Dr.)

Amount(Cr.)

Rs.

12-01-2002

Mr. Naeem(Debtors) A/c

5,000

Sale A/c

5,000

Sold goods to Mr. Naeem on credit

Debtors account is debited because Debtors account has obtained benefit and Sale account is credited

because business has obtained benefit because of Sale account.

This statement can also be interpreted like this:

As Debtors is an asset and it is increased in this case, so debtors account is debited. Sale is an income and

increase in income is credit. In this case income is increased, hence it is credited

Debtor is any third person or organization, from whom cash is receivable by the business.

Financial Accounting (Mgt-101)

ENTRY # 8

Date

Particulars

Code #

Amount(Dr.)

Amount(Cr.)

Rs.

15-01-2002

Bank A/c

5,000

Cash A/c

5,000

Cash deposited in bank

ENTRY # 9

Date

Particulars

Code #

Amount(Dr.)

Amount(Cr.)

Rs.

16-01-2002

Stationery A/c

3,000

Cash A/c

3,000

Stationery purchased for cash

Stationery account is debited because stationery account has obtained benefit and Cash account is credited

because business has obtained benefit because of Cash account.

This statement can also be interpreted like this:

As stationery is an expense and it is increased in this case, so stationery is debited. Cash is an asset and

decrease in asset is credit. In this case Cash is decreased, hence it is credited

ENTRY # 10

Date

Particulars

Code #

Amount(Dr.)

Amount(Cr.)

Rs.

18-01-2002

Office Equipment A/c

10,000

Bank A/c

10,000

Office equipment purchased by

cheque

Office Equipment account is debited because Office Equipment account has obtained benefit and Bank

account is credited because business has obtained benefit because of Bank account.

This statement can also be interpreted like this:

As Office Equipment is an asset and it is increased in this case, so Office Equipment is debited. Bank is an

asset and decrease in asset is credit. In this case bank account is decreased, hence it is credited

Financial Accounting (Mgt-101)

ENTRY # 11

Date

Particulars

Code #

Amount(Dr.)

Amount(Cr.)

Rs.

19-01-2002

Mr. Afzal(Creditors) A/C

1,000

Purchase return A/C

1,000

Creditors account is debited because Creditors account has obtained benefit and Purchase return account is

credited because business has obtained benefit because of Purchase return account.

This statement can also be interpreted like this:

As Creditors is a liability and it is decreased in this case, so Creditors is debited. Purchase return is an

expense and decrease in expense is credit, So it is credited.

ENTRY # 12

Date

Particulars

Code #

Amount(Dr.)

Amount(Cr.)

Rs.

25-01-2002

Sales return A/C

500

Mr. Naeem(Debtors) A/C

Goods returned by Mr.

Naeem(Debtors)

Sales return account is debited because Sales return account has obtained benefit and Debtors is credited

because business has obtained benefit because of Debtors account.

This statement can also be interpreted like this:

As sales return is decrease in income and decrease in income is debit, so it is debited. Debtors account is

decreased and decrease in asset is credit, so it is credited.

ENTRY # 13

Date

Particulars

Code #

Amount(Dr.)

Amount(Cr.)

Rs.

30-01-2002

Mr. Afzal(Creditors) A/C

9,000

Cash A/C

9,000

Cash paid to Mr. Afzal(Creditors)

Financial Accounting (Mgt-101)

ENTRY # 14

Date

Particulars

Code #

Amount(Dr.)

Amount(Cr.)

Rs.

31-01-2002

Cash A/C

4,500

Mr. Naeem(Debtors) A/C

4,500

Cash received from Mr.

Naeem(Debtors)

ENTRY # 15

Date

Particulars

Code #

Amount(Dr.)

Amount(Cr.)

Rs.

31-01-2002

Cash A/C

500

Bank A/C

500

Cash withdrawn from bank

CASH AND BANK BOOK

Ledger is a book that keeps separate record for each account;

The Account or Head of Account is a systematic record of transactions of one type; and

Like other things, a separate account is also required to record the movements in cash (usually called

cash in hand) and bank account (usually called cash at bank).

If the volume of transactions is high then we can separate books for cash and bank account.

These separate books for cash and bank account are called cash book and bank book respectively.

The Cash Book records all the movements in the cash account.

A cash book would look like one of the two samples shown here

Financial Accounting (Mgt-101)

Cash Book

Account Code 01

Receipt Side

Payment Side

Date No. Narration / Ledger

Receipt Date No. Narration / Ledger Payment

Particulars Code

Amount

Particulars Code Amount

Cash Book

Account Code 01

Date Voucher

Narration /

Ledger

Receipt Payment

Balance

Number

Particulars

Code

Amount Amount

Dr/(Cr)

THE CASH BOOK

In the first format / presentation, receipts (Debits) are written on left hand side of the page and

payments (Credits) on the right hand side.

In the second presentation, instead of using two pages, we use two columns on the same page.

Both these presentations are correct.

In the second format, we have an additional facility of knowing the balance of the account after

every transaction.

Whereas in the first one, we have to add up the receipts and payments every time we need to know

the balance.

Moreover, the second format utilizes less space, therefore, we will use this format in our future

discussions

THE BANK BOOK

The Bank book records all the movements in the bank account.

The format of the bank book is the same as that of cash book axcept for an additional column for

Cheque Number.

Again, we can use either two pages OR two columns to present the bank book.

Financial Accounting (Mgt-101)

Bank Book (Bank Account Number)

Account Code 02

Date

Voucher

Chq.

Narration /

Ledger

Receipt

Payment

Balance

Number

No.

Particulars

Code

Amount

Dr/(Cr)

As you can see that except for a few minor differences, the formats of Cash and Bank book are

almost similar to that of the General Ledger.

The differences are explained here:

The title of debit and credit columns has been changed to receipt and payment respectively. It is not

necessary to make this change. But, it is done to simplify things as we know that in case of cash and

bank, debit side would signify receipt and credit side would represent payment.

There is an additional column titled ledger code. In this column, we write the code of the other head

of account that is affected by the transaction. This helps in understanding the complete transaction

at a glance.

There may be a column for cheque number in the bank book.

It may be noted that in case the organization operates more than one bank account, separate ledger

accounts will be opened in bank book for each account.

Now we will summarize all cash transactions in both two page cash book & one page cash book for the

convenience of the reader.

Two page cash book will be presented asunder:

Cash Account

Account Code 01

Receipt Side

Payment Side

Date

No.

Narration /

Ledger Receipt

Date

No.

Narration /

Ledger

Payment

Particulars

Code Amount

Particulars

Code

Amount

Jan-1

Capital introduced

100,000 Jan-3

Deposited in bank

30,000

Jan-5

Loan received

50,000 Jan-7

Furniture purchased

20,000

Jan-10

Goods sold

5,000 Jan-15

Deposited in bank

5,000

Jan-31

Received

from

4,500 Jan-16

Stationery purchased

3,000

debtors

Jan-31

Cash drawn from

500 Jan-30

Paid to creditors

9,000

bank

Financial Accounting (Mgt-101)

Same record will be presented in two column cash book now

Date

Voucher

Narration /

Ledger

Receipt

Payment

Balance

Number

Particulars

Code

Amount

Dr/(Cr)

Jan-1

Capital introduced

100,000

Jan-3

Deposited in bank

(30,000)

70,000

Jan-5

Loan received

50,000

120,000

(20,000)

Jan-7

Furniture purchased

100,000

Goods soGoods sold

5,000

105,000 0

Jan-10

5,00

(5,000)

Jan-15

Deposited in bank

100,000

(3,000)

Jan-16

Stationery purchased

97,000

(9,000)

Jan-30

Paid to creditors

88,000

Jan-31

Received from debtors

4,500

92,500

Jan-31

Cash drawn from bank

500

93,000

Now, we will present Bank entries in bank book.

Bank Book (Bank Account # xxx) Account Code 02

Date

Voucher

Chq.

Narration /

Ledger

Receipt

Payment

Balance

Number

No.

Particulars

Code

Amount

Dr/(Cr)

Jan-3

Cash deposited

30,000

Jan-15

Cash deposited

5,000

35,000

Jan-18

Off. Equip.

(10,000)

25,000

purchased

Jan-31

Cash drawn

(500)

24,500

RECOMMENDED READING

After reading this lecture, you will be able to read

· Chapter # 2 of business accounting by Frank Woods

· Chapter # 2, 3 of accounting by M. Arif & Sohail Afzal

Financial Accounting (Mgt-101)

ILLUSTRATION

Nawab Sons started their business in the month of March, 2002. Following are their transactions for the

month. Pass journal entries, prepare ledger accounts, and make their profitability analyses.

No.

Date

Particulars

Mar. 01

Started business with Rs. 150,000

Mar. 05

Purchased office furniture for cash Rs. 2,000

Mar. 07

Purchased goods for cash Rs. 9,000

Mar. 10

Paid carriage on purchases Rs. 250

Mar. 12

Purchased goods from Saleem &co. Rs. 7,000

Mar. 13

Sold goods for cash Rs. 12,000

Mar. 15

Sold goods to Usman & Sons Rs. 25,000

Mar. 21

Received cash From Usman & Sons Rs. 25,000

Mar. 21

Paid cash to Saleem &co Rs. 7,000

Mar. 23

Paid salaries for the month Rs. 2,500

Mar. 25

Paid rent Rs. 3,000

Mar. 29

Purchased stationery Rs.2,000

Mar. 31

Utility bills are accrued Rs. 5,000

JOURNAL ENTRIES

ENTRY # 1

Date

Particulars

Code #

Amount(Dr.)

Amount(Cr.)

Rs.

03-01-2002

Cash A/c

150,000

Capital A/c

150,000

Started business with cash.

Financial Accounting (Mgt-101)

ENTRY # 2

Date

Particulars

Code #

Amount(Dr.)

Amount(Cr.)

Rs.

01-05-2002

Office Furniture A/c

2,000

Cash A/c

2,000

Purchased office furniture

ENTRY # 3

Date

Particulars

Code #

Amount(Dr.)

Amount(Cr.)

Rs.

03-07-2002

Purchases A/c

9,000

Cash A/c

9,000

Purchased goods for cash.

ENTRY # 4

Date

Particulars

Code #

Amount(Dr.)

Amount(Cr.)

Rs.

03-10-2002

Carriage on purchase A/c

250

Cash A/c

250

Paid carriage on purchase.

ENTRY # 5

Date

Particulars

Code #

Amount(Dr.)

Amount(Cr.)

Rs.

03-12-2002

Purchases A/c

7,000

Salim & co.(Creditors)

7,000

Purchased goods on credit

Financial Accounting (Mgt-101)

ENTRY # 6

Date

Particulars

Code #

Amount(Dr.)

Amount(Cr.)

Rs.

03-13-2002

Cash A/c

12,000

Sale A/c

12,000

Goods sold for cash.

ENTRY # 7

Date

Particulars

Code #

Amount(Dr.)

Amount(Cr.)

Rs.

03-15-2002

Usman & Sons(Debtors) A/c

25,000

Sale A/c

Goods sold on credit.

ENTRY # 8

Date

Particulars

Code #

Amount(Dr.)

Amount(Cr.)

Rs.

03-21-2002

Cash A/c

25,000

Usman & Sons(Debtors A/c

25,000

Cash received from Usman & Sons

ENTRY # 9

Date

Particulars

Code #

Amount(Dr.)

Amount(Cr.)

Rs.

03-21-2002

Salim & co.(Creditors) A/c

7,000

Cash A/c

7,000

Paid cash to Salim & co.

Financial Accounting (Mgt-101)

ENTRY # 10

Date

Particulars

Code #

Amount(Dr.)

Amount(Cr.)

Rs.

03-23-2002

Salaries A/c

2,500

Cash A/c

2,500

Started business with cash.

ENTRY # 11

Date

Particulars

Code #

Amount(Dr.)

Amount(Cr.)

Rs.

03-25-2002

Rent A/c

3,000

Cash A/c

3,000

Paid rent..

ENTRY # 12

Date

Particulars

Code #

Amount(Dr.)

Amount(Cr.)

Rs.

03-29-2002

Stationery A/c

2,000

Cash A/c

Stationery purchased.

ENTRY # 13

Date

Particulars

Code #

Amount(Dr.)

Amount(Cr.)

Rs.

03-31-2002

Utility Bills A/c

5,000

Accrued Expenses A/c

5,000

Accrual of utility bills for the month..

Financial Accounting (Mgt-101)

LEDGER ACCOUNTS

Cash Account

Account code # 1

Date

Particulars

Code Amount

Date

Particulars

Code

Amount

Rs. (Dr.)

Rs. (Cr.)

1-3-02

Commenced

150,000 5-3-02

Office furniture

2,000

business

purchased

13-3-02

Goods sold

12,000 7-3-02

Goods purchased

9,000

21-3-02

Received from

10-3-02

Carriage paid

250

debtors

25,000 21-3-02

Paid to creditors

7,000

23-3-02

Paid salaries

2,500

25-3-02

Paid rent

3,000

29-3-02

Paid for stationery

2,000

BALANCE

161,250

Total

187,000

Total

187,000

Capital Account

Account code # 2

Date

Particulars

Code Amount

Date

Particulars

Code

Amount

Rs. (Dr.)

Rs. (Cr.)

1-3-02

Cash introduced

150,000

BALANCE

150,000

Total

150,000

Total

150,000

Office furniture Account

Account code # 3

Date

Particulars

Code Amount

Date

Particulars

Code

Amount

Rs. (Dr.)

Rs. (Cr.)

5-3-02

Office furniture

2,000

purchased

BALANCE

2,000

Total

2,000

Total

2,000

Financial Accounting (Mgt-101)

Purchases Account

Account code # 4

Date

Particulars

Code Amount

Date

Particulars

Code

Amount

Rs. (Dr.)

Rs. (Cr.)

7-3-02

Purchased

9,000

goods

12-3-02

Purchased

7,000

goods on credit

BALANCE

16,000

Total

16,000

Total

16,000

Carriage on purchase Account Account code # 5

Date

Particulars

Code Amount

Date

Particulars

Code

Amount

Rs. (Dr.)

Rs. (Cr.)

10-3-02

Paid carriage on

250

purchase

BALANCE

250

Total

250

Total

250

Salim & co.(Creditors) Account

Account code # 6

Date

Particulars

Code Amount

Date

Particulars

Code

Amount

Rs. (Dr.)

Rs. (Cr.)

12-3-02

Purchased

7,000 21-3-02

Paid cash

7,000

goods

BALANCE

Total

7,000

Total

7,000

Sale Account Account code # 7

Date

Particulars

Code Amount

Date

Particulars

Code

Amount

Rs. (Dr.)

Rs. (Cr.)

13-3-02

Goods sold

12,000

15-3-02

Goods sold on

credit

25,000

BALANCE

37,000

Total

37,000

Total

37,000

Usman & sons(Debtors) Account

Account code # 8

Date

Particulars

Code Amount

Date

Particulars

Code

Amount

Financial Accounting (Mgt-101)

Rs. (Dr.)

Rs. (Cr.)

15-3-02

Goods sold

25,000 21-3-02

Received cash

25,000

BALANCE

Total

25,000

Total

25,000

Salaries Account

Account code # 9

Date

Particulars

Code Amount

Date

Particulars

Code

Amount

Rs. (Dr.)

Rs. (Cr.)

23-3-02

Salaries paid

2,500

BALANCE

2,500

Total

2,500

Total

2,500

Rent Account Account code # 10

Date

Particulars

Code Amount

Date

Particulars

Code

Amount

Rs. (Dr.)

Rs. (Cr.)

Rent paid

3,000

25-3-02

BALANCE

3,000

Total

3,000

Total

3,000

Stationery Account

Account code # 11

Date

Particulars

Code Amount

Date

Particulars

Code

Amount

Rs. (Dr.)

Rs. (Cr.)

29-3-02

Stationery

2,000

purchased

BALANCE

2,000

Total

2,000

Total

2,000

Utility Bills Account

Account code # 12

Date

Particulars

Code Amount

Date

Particulars

Code

Amount

Rs. (Dr.)

Rs. (Cr.)

Financial Accounting (Mgt-101)

31-3-02

Accrued utility

5,000

bills

BALANCE

5,000

Total

5,000

Total

5,000

Accrued Expenses Account Account code # 13

Date

Particulars

Code Amount

Date

Particulars

Code

Amount

Rs. (Dr.)

Rs. (Cr.)

31-3-02

Accrued utility

5,000

bills

BALANCE

5,000

Total

5,000

Total

5,000

TRIAL BALANCE

Saeed & co.

Trial Balance As On ( January 31, 2002)

Title of Account

Code

Dr. Rs.

Cr. Rs.

Cash Account

161,250

Capital Account

150,000

Furniture Account

2,000

Purchases Account

16,000

Carriage on purchase account

250

Salim& co. (Creditor)

Sales

37,000

Usman & co. (Debtor)

Salaries

2,500

Rent

3,000

Stationery

2,000

Utility billst

5,000

Accrued expenses

5,000

Total

192,000

Financial Accounting (Mgt-101)

Saeed & Co.

Profit & Loss Account for the period ended January 31, 2002

Particulars

Amount

Rs.

37,000.

Income / Sales / Revenue (See Note #1)

Less: Cost of Goods Sold

(16,250)

(See Note # 1)

Gross Profit

20,750.

Less: Admin. Expenses

(12,500)

(See Note # 2)

Net Profit/ (Loss)

8,250

Note # 1 Cost of goods sold

Purchases

16,000

Add: carriage on purchase

250

Cost of goods sold

16,250

Note # 2 Admin. Expenses

Salaries

2,500

Rent

3,000

Stationery

2,000

Utility bills

5,000

Total Admin. Expenses

12,500

RECOMMENDED READING

After reading this lecture, you will be able to read

· Chapter # 3 of business accounting by Frank Woods

· Chapter # 5 of accounting by M. Arif & Sohail Afzal.

Financial Accounting (Mgt-101)

Lesson-12

THE ACCOUNTING EQUATION

Resources in the business = Resources supplied by the owner

In accounting, terms are used to describe things. The amount of resources supplied by the owner is called

capital. The actual resources which are in the business are called assets. This means that the accounting

equation above, when the owner has supplied all the resources, can be shown as:

Assets=Capital

Usually, people, other than the owner has supplied some of the assets. Liabilities are the name given to the

amounts owing to these people for these assets. The equation has now changed to:

Assets=Capital + Liabilities

It can be seen that two sides of the equation will have the same totals. This is because we are dealing with

the same thing with two different points of view. It is:

Resources in the business = Resources: who supplied them

Assets = Capital + Liabilities

It is a fact that total of each side will always equal one another, and this will always be true no matter how

many transactions there may be. The actual assets, capital and liabilities may change, but the total of the

assets will always equal to the total of capital and liabilities.

Assets consist of property of all kinds, such as buildings, machinery, stocks of goods and motor vehicles.

Also benefits such as debts owned by customers and the amount of money in the bank accounts are

included.

Liabilities consist of money owing for goods supplied to the business and for expenses. Also loans made to

the firm are included.

Capital is often called the owner's net worth.

Working capital

Working capital of the business is the net value of current assets & current liabilities.

Current assets are the resources of the business that are expected to be received within 12 months in an

accounting period.

Current liabilities are the amount owing to the business that is expected to be paid within one year in a

financial year.

So, working capital is the net of what is receivable in an accounting year & what is payable in that year or:

Working Capital = Current Assets Current Liabilities

For instance, current assets of the business worth Rs.100,000 & current liabilities of the business has the

value of Rs. 75,000. Then working capital is Rs. 25,000.

i.e., (100,000-75,000).

Financial Accounting (Mgt-101)

STOCK

Stock is termed as "value of goods available to the business that are ready for sale". For accounting

purposes, stock is of two types:

· Opening stock

· Closing stock

Opening stock is the value of goods available for sale in the beginning of an accounting year. For purpose

of financial reporting, opening stock is added to the purchases for the year to become a part of cost of

goods sold. As this is available in the beginning of the year, it is assumed that it will be consumed in the

accounting year. That is why; it becomes a part of cost of goods sold. Stock of previous year is the opening

stock in present year.

Closing stock is the value of goods unsold at the end of accounting year. For purposes of making financial

statements, it is deducted from cost of goods sold & is shown as an asset in the balance sheet. As this is the

value of goods that are yet to be sold, so it cannot be included in cost of goods sold. That is why it is

deducted from cost of good sold. On the other hand, its benefit will be received in the next accounting year,

so it is shown as an asset in the balance sheet.

Now, the contents of cost of goods sold are:

Opening stock

Plus: purchases

Plus: Freight/ carriage paid on purchases

Less: closing stock

For instance, opening stock of a business worth Rs. 15,000, business purchased goods of Rs. 12,000 for the

year & also paid Rs. 1,500 as carriage on purchases. The value of closing stock at the end of the year is Rs.

10,000. Then, value of closing stock is calculated as under:

Opening stock

15,000

Add: purchases

12,000

Add: carriage on purchase

1,500

Less: closing stock

(10,000)

Cost of goods sold

18,500

Ali Traders

Trial Balance As On January 31, 20--

Title of Account

Code

Dr. Rs.

Cr. Rs.

Cash Account

35,000

Bank Account

130,000

Capital Account

200,000

Furniture Account

15,000

Vehicle Account

50,000

Purchases Account

60,000

Mr. A (Creditor)

15,000

Sales

95,000

Mr. B (Debtor)

15,000

Salaries

5,000

Financial Accounting (Mgt-101)

Expenses

20,000

Expenses Payable

20,000

Total

330,000

The Accounting Equation.

Assets = Capital + Liabilities

Assets = 35,000+130,000+15,000+50,000+15,000= 245,000

Capital = 200,000

Liabilities = 15,000 + 20,000 = 35,000

Capital + Liabilities = 235,000

We ignore the Net Profit Rs.10000 (Net profit is added in capital account)

When we added Net profit in capital then;

Assets = Capital + Liabilities

245000 = 210000+35000

245000 = 245000

Account form Balance Sheet

Name of the Entity (Ali traders)

Balance Sheet As At (January 31, 20--)

Liabilities

Assets

Particulars

Amount Rs.

Particulars

Amount

Rs.

Capital

200.000 Fixed Assets

65,000

Profit and Loss Account

10,000

Furniture

15,000

50000

210,000 Vehicle

Current Liabilities

Current Assets

Mr. A

15,000

Mr. B

15,000

Exp. payable

20,000

35,000

Bank 130,000

180,000

Cash

35,000

Total

245,000 Total

245,000

Financial Accounting (Mgt-101)

Report form Balance Sheet

Ali traders

Balance Sheet As At January 31, 20--

Particulars

Amount Rs.

Assets

Fixed Assets

65,000

Current Assets

180,000

Total

245,000

Liabilities

Capital

200,000

Profit and Loss Account

10,000

210,000

Current Liabilities

35,000

Total

245,000

Treatment of closing stock

If closing stock is Rs.10000 then;

Name of the Entity (Ali Traders)

Profit and Loss Account for the Month Ending January 31, 20--

Particulars

Amount

Rs.

Income / Sales / Revenue

95,000

Less: Cost of Goods Sold ( 60,000 - 1,000 )

(59,000)

Gross Profit

36,000

Less: Administrative Expenses

(25,000)

Net Profit

11,000

Financial Accounting (Mgt-101)

Ali traders

Balance Sheet As At January 31, 20--

Particulars

Amount Rs.

Assets

Fixed Assets

65,000

Current Assets (180,000 + 1,000)

181,000

Total

246,000

Liabilities

Capital

200,000

Profit and Loss Account

11,000

210,000

Current Liabilities

35,000

Total

246,000

Treatment of Depreciation

In Profit and Loss Account it is considered as expense and in Balance Sheet it is deducted from the

concerned asset.

If useful life of an asset is 50 month and considered that there is no residual value then,

Dividing total cost by life of the asset.

Rs.65,000 / 50 months = Rs.1,300 monthly charge

Name of the Entity (Ali Traders)

Profit and Loss Account for the Month Ending January 31, 20--

Particulars

Amount

Rs.

Income / Sales / Revenue

95,000

Less: Cost of Goods Sold ( 60,000-1,000 )

59,000

(59,000)

Gross Profit

36,000

Less: Administrative Expenses

25,000

Depreciation

1,300

(26,300)

Net Profit

9,700

Financial Accounting (Mgt-101)

Ali traders

Balance Sheet As At January 31, 20--

Particulars

Amount Rs.

Assets

Fixed Assets (65,000 1,300)

63,700

Current Assets (180,000 + 1,000)

181,000

Total

244,700

Liabilities

Capital

200,000

Profit and Loss Account

9,700

209,700

Current Liabilities

35,000

Total

244,700

Distribution of Profits / Drawing

Ali traders

Balance Sheet As At January 31, 20--

Particulars

Amount Rs.

Assets

Fixed Assets (65,000 1300)

63,700

Current Assets (181,000 - 5,000)

176,000

Total

239,700

Liabilities

Capital

200,000

Profit and Loss Account

9,700

Drawing

(5,000)

204,700

Current Liabilities

35,000

Total

239,700

Financial Accounting (Mgt-101)

Illustration

Consider the trial balance given hereunder:

Saeed & co.

Trial Balance As On ( January 31, 2002)

Title of Account

Code

Dr. Rs.

Cr. Rs.

Cash Account

161,250

Capital Account

150,000

Furniture Account

2,000

Purchases Account

16,000

Carriage on purchase account

250

Salim& co. (Creditor)

Sales

37,000

Usman & co. (Debtor)

Salaries

2,500

sRent

3,000

Stationery

2,000

Utility billst

5,000

Accrued expenses

5,000

Total

192,000

Financial Accounting (Mgt-101)

(This trial balance is extracted from the solved illustration, in lecture 11)

Let's say, the value of closing stock at the end of the period is Rs. 2,000. Then profit & loss account will bear

the following change.

Saeed & Co.

Profit & Loss Account for the period ended January 31, 2002

Particulars

Amount

Rs.

37,000.

Income / Sales / Revenue (See Note

16,250 2,000

(14,250)

#1)

Less: Cost of Goods Sold Closing

stock

Gross Profit

22,750.

Less: Admin. Expenses

(12,500)

(See Note # 2)

Net Profit/ (Loss)

10,250

Its effect in the balance sheet is as follows:

Saeed & Co.

Balance Sheet As At January 31, 2002

Liabilities

Assets

Particulars

Amount

Particulars

Amount

Rs.

Capital

150,000 Fixed Assets

Profit and Loss Account

10,250 Furniture Account

2,000

160,250

Current Liabilities

Current Assets

Accrued Expenses

5,000 Cash

161,250

Closing Stock

2,000

Total

165,250 Total

165,250

This is a practical demonstration of the treatment of closing stock. But, we are not mentioning the journal

entry of closing stock at this stage. It will be discussed in detail, when we will study the topic of fixed assets.

DEPRECIATION

Depreciation is the method of charging cost of fixed assets to the profit & loss account as an expense.

Fixed Assets are those assets which are:

Financial Accounting (Mgt-101)

· Of long life

· To be used in the business

· Not bought with the main purpose of resale.

When an expense is incurred, it is charged to profit & loss account of the same accounting period in which it

has incurred. Fixed assets are used for longer period of time. Now, the question is how to charge a fixed

asset to profit & loss account. For this purpose, estimated life of the asset is determined. Estimated life is the

number of years in which a fixed asset is expected to be used. Then, total cost of the asset is divided by total

number of estimated years. The value, so determined, is called `depreciation for that year' and is charged to

profit & loss account. The same amount is deducted from total cost of fixed asset. The net amount (after

deducting depreciation) is called ``Written Down Value''.

For instance, an asset has a cost of Rs. 150,000. It is expected to be used for ten years. Depreciation to be

charged to profit & loss account is Rs. 15,000, i-e. cost of asset/estimated life. In this case, it will be

150,000/10 = 15,000.

That is why depreciation is called an accounting estimate.

To understand its accounting treatment, consider the above mentioned illustration

Let's suppose the useful life of furniture is five years. Then, depreciation for the year will be (2,000/5 = 400).

Now, the profit & loss account will show the following picture:

Saeed & Co.

Profit & Loss Account for the year ended January 31, 2002

Particulars

Amount

Rs.

37,000.

Income / Sales / Revenue (See Note #1)

Less: Cost of Goods Sold

(16,250)

Gross Profit

20,750.

Less: Admin. Expenses + Depreciation

12,500 + 400

(12,900)

Net Profit/ (Loss)

9,850

Balance sheet will look like this:

Financial Accounting (Mgt-101)

Saeed & Sons

Balance Sheet As At January 31, 2002

Liabilities

Assets

Particulars

Amount

Particulars

Amount

Rs.

Capital

150,000 Fixed Assets

Profit and Loss Account

9,850 Furniture Account

2,000

Less: depreciation

(400)

159,850

1,600

Current Liabilities

Current Assets

Accrued Expenses

5,000 Cash

161,250

Closing Stock

2,000

Total

164,850 Total

164,850

Treatment of depreciation is practically demonstrated at this point. Its journal entry will be discussed in

detail, when we cover the topic `Fixed Assets'.

DRAWING

Capital is the cash or kind invested by the owner of the business. Sometimes, the owner wants to take cash

or kind out of the business for personal use. This is known as drawing. Any money taken out as

drawings will reduce capital.

The capital account is very important account. To stop it getting full of small details, cash items of drawings

are not entered in the capital account. Instead, a drawing account is opened, and all transactions are entered

there.

Sometimes goods are also taken by the owner of the business. These are also known as drawings.

To understand the accounting treatment of drawings, look into the following trial balance:

Saeed & co.

Trial Balance As On ( January 31, 2002)

Title of Account

Code

Dr. Rs.

Cr. Rs.

Cash Account

161,250

Capital Account

160,000

Furniture Account

2,000

Drawings

10,000

Profit & loss account

8,250

Salim& co. (Creditor)

Usman & co. (Debtor)

Accrued expenses

5,000

Total

173,250

BALANCE SHEET

Financial Accounting (Mgt-101)

Saeed & Sons

Balance Sheet As At January 31, 2002

Liabilities

Assets

Particulars

Amount

Particulars

Amount

Rs.

Capital

160,000 Fixed Assets

Profit and Loss

8,250 Furniture

2,000

Account

(10,000) Account

Less: Drawings

158,250

Current

Liabilities

5,000 Assets

161,250

Accrued Expenses

Cash

Total

163,250 Total

163,250

Financial Accounting (Mgt-101)

Lesson-13

LEARNING OBJECTIVE

After studying this lecture, you should be able to:

· Understand different types of vouchers.

· How to book entry in voucher.

· Carrying forward the balance of an account.

VOUCHER

In book keeping, voucher is the first document to record an entry. Normally three types of vouchers are

used. i-e.:

· Receipt voucher

· Payment voucher

· Journal voucher

RECEIPT VOUCHER

Receipt voucher is used to record cash or bank receipt. Receipt vouchers are of two types. i-e.

· Cash receipt voucher

· Bank receipt voucher

Cash receipt voucher denotes receipt of cash; bank receipt voucher indicates receipt of cheque or demand

draft. Standard format of cash receipt voucher is given below:

Name of the Organization

Bank Receipt / Cash Receipt OR Receipt Voucher

Date:

No:

Description / Title:

Cash / Bank code:

Description /

Code

Credit

Title of Account

Amount

Total:

Narration:

Prepared By:

Checked By:

Financial Accounting (Mgt-101)

PAYMENT VOUCHER

Payment voucher is used to record a payment of cash or cheque. Payment vouchers are of two types. i.e.

· Cash Payment voucher

· Bank Payment voucher

Cash Payment voucher denotes Payment of cash, bank Payment voucher indicates payment by cheque or

demand draft. Standard format of cash Payment voucher is given below:

Name of the Organization

Bank Payment / Cash Payment OR Payment Voucher

No:

Date:

Description / Title:

Cash / Bank code:

Description /

Code

Credit

Title of Account

Amount

Total:

Naration

Prepared By:

Checked By:

Financial Accounting (Mgt-101)

JOURNAL VOUCHER

Journal voucher is used to record transactions that do not affect cash or bank. Standard format of journal

voucher is given hereunder:

Name Of Organization

Journal Voucher

Date:

No:

Description

Code

Debit

Credit Amount

Amount

Total:

Narration:

Prepared By:

Checked by:

HOW TO CARRY FORWARD A BALANCE

It is already mentioned that in `T' account, at the end of accounting period, if one side is greater than the

other side, balancing figure will be written on the lesser side as balance. For instance, if amount on debit side

is greater than the amount on credit side, the balancing figure is written on the credit side as balance & it is

known as Debit Balance. On the other hand, if amount on the credit side is greater than that of amount on

the debit side, the balance is shown on the debit side. It is called the Credit Balance.

At the start of next accounting period, these balances are carried forward. Debit balance is written on the

credit side, but it is the excess of debit side over the credit side, when it is carried forward, it is written on the

debit side. For example, ledger account of cash is given below:

Financial Accounting (Mgt-101)

Cash Account

Account code # 1

Date

Particulars

Code Amount

Date

Particulars

Code

Amount

Rs. (Dr.)

Rs. (Cr.)

1-3-02

Commenced

150,000

5-3-02

Office furniture

2,000

business

purchased

13-3-02

Goods sold

12,000

7-3-02

Goods purchased

9,000

250

21-3-02

Received from

10-3-02

Carriage paid

7,000

debtors

25,000

21-3-02

Paid to creditors

2,500

23-3-02

Paid salaries

3,000

25-3-02

Paid rent

29-3-02

Paid for stationery

2,000

BALANCE

161,250

Total

187,000

Total

187,000

This cash account is showing the balance of Rs. 161,250 on the credit side. This balance is excess of debit

side over the credit side and, therefore, is called the debit balance. When it is carried forward it is written

on the debit side because debit side of the cash account is greater & Rs. 161,250 is the balancing amount of

the debit side of cash account. So, it is an asset & it will be used for further expenses in the forth coming

period.

This is another example of accrued expenses:

Accrued Expenses Account

Account code # 13

Date

Particulars

Code Amount

Date

Particulars

Code

Amount

Rs. (Dr.)

Rs. (Cr.)

31-3-02

Accrued utility

5,000

bills

BALANCE

5,000

Total

5,000

Total

5,000

In this account, balance is written on the debit side & it is called the credit balance. As this balance

represents excess of credit side over debit side, when it is carried forward it is again written on the credit

side.

It can also be explained like this:

· Debit balance when carried forward, is written on the debit side

· Credit balance when carried forward, is written on the credit side

This is further explained with the help of the following solved illustration:

ILLUSTRATION

Following is the trial balance of Saeed & sons for the month ended January 31, 2002

Financial Accounting (Mgt-101)

Saeed & Sons.

Trial Balance As On ( January 31, 2002)

Title of Account

Code

Dr. Rs.

Cr. Rs.

Cash Account

55,000

Accrued expense Account

10,000

Bank Account

25,000

Loan Account

100,000

Furniture Account

20,000

Office Equipment

10,000

Total

110,000

In the month of February, following transactions took place:

No.

Date

Particulars

Feb 07

They purchased stationery worth of Rs. 5,000

Feb 10

They paid their first installment of loan Rs. 10,000

Feb 12

They received a cheque from a customer of Rs. 5,000

Feb 17

Accrued expenses of Rs. 5,000 are paid.

Feb 20

They purchased furniture of Rs. 1,000

Feb 23

Office equipment of Rs. 2,000 is sold

Feb 25

Staff salaries are paid by cheque Rs. 10,000

Feb 28

Sold goods for cash Rs.2,000

Financial Accounting (Mgt-101)

SOLUTION

The ledger accounts of Saeed & Sons will bear the following changes:

Cash Account

Account code # 1

Date

Particulars

Code Amount

Date

Particulars

Code

Amount

Rs. (Dr.)

Rs. (Cr.)

1-2-02

Balance c/f

55,000 7-2-02

Stationery

5,000

23-2-02

Sold office

2,000

purchased

equipment

10-2-02

Loan paid

10,000

28-2-02

Sold goods

2,000 17-2-02

Accrued expenses

paid

5,000

Furniture

purchased

1,000

Balance c/d

38,000

Total

59,000

Total

59,000

Accrued Expenses

Account code # 2

Date

Particulars

Code Amount

Date

Particulars

Code

Amount

Rs. (Dr.)

Rs. (Cr.)

17-2-02

Accrued

5,000 1-1-02

Balance c/f

10,000

expenses paid

Balance c/d

5,000

Total

10,000

Total

10,000

Bank Account

Account code # 3

Date

Particulars

Code Amount

Date

Particulars

Code

Amount

Rs. (Dr.)

Rs. (Cr.)

17-2-02

Balance c/f

25,000 25-2-02

Salaries paid

10,000

12-2-02

Cheque received

5,000

Balance c/d

20,000

Total

30,000

Total

30,000

Financial Accounting (Mgt-101)

Loan Account

Account code # 4

Date

Particulars

Code Amount

Date

Particulars

Code

Amount

Rs. (Dr.)

Rs. (Cr.)

10-2-02

Installment paid

10,000

Balance c/f

100,000

Balance c/d

90,000

Total

100,000

Total

100,000

Furniture Account

Account code # 5

Date

Particulars

Code Amount

Date

Particulars

Code

Amount

Rs. (Dr.)

Rs. (Cr.)

10-2-02

Balance c/f

20,000

23-2-02

20-2-02

Furniture

1,000

purchased

Balance c/d

21,000

Total

21,000

Total

21,000

Office Equipment Account

Account code # 6

Date

Particulars

Code Amount

Date

Particulars

Code

Amount

Rs. (Dr.)

Rs. (Cr.)

10-2-02

Balance c/f

10,000

Office Equipment

2,000

sold

Balance c/d

8,000

Total

10,000

Total

10,000

Balance c/f is balance carried forward & balance c/d is balance Carried down.

100

Financial Accounting (Mgt-101)

Lesson-14

We have demonstrated the carrying forward of balances in lecture-13. Another solved example is given

below:

ILLUSTRATION

Following is the trial balance of Rahil & co. for the month ended January 31, 2002.

Rahil & co..

Trial Balance As On ( January 31, 2002)

Title of Account

Code

Dr. Rs.

Cr. Rs.

Cash Account

30,000

Accrued expense Account

10,000

Bank Account

50,000

Loan Account

100,000

Furniture Account

20,000

Office Equipment

10,000

Debtors account

12,000

Creditors account

10,000

Sales account

20,000

Purchase account

18,000

Total

140,000

During the month, following entries took place:

No.

Date

Particulars

Feb 07

They purchased stationery worth of Rs. 3,000

Feb 10

They paid their first installment of loan Rs. 12,000

Feb 12

They received a cheque from a customer of Rs. 5,000

Feb 13

They paid a cheque of Rs. 8,000 to a creditor

Feb 15

Purchased goods of Rs 6,000 & paid through cheque

Feb 17

Accrued expenses of Rs. 5,000 are paid.

Feb 20

They purchased furniture of Rs. 2,000

Feb 21

Sold goods for cash Rs.5,000

Feb 22

Purchased goods on credit Rs. 5,000

Feb 23

Office equipment of Rs. 5,000 is Purchased

101

Financial Accounting (Mgt-101)

Feb 25

Staff salaries are paid by cheque Rs. 15,000

Feb 28

Utility expenses of Rs. 3,000 are accrued.

Leger accounts of Rahil & co. during the month will show following picture:

Cash Account

Account code # 1

Date

Particulars

Code Amount

Date

Particulars

Code

Amount

Rs. (Dr.)

Rs. (Cr.)

1-2-02

Balance c/f

30,000 7-2-02

Stationery

3,000

21-2-02

Sold goods

5,000

purchased

10-2-02

Loan paid

12,000

17-2-02

Accrued expenses

paid

5,000

Furniture

2,000

purchased

23-2-02

Office equipment

5,000

purchased

Balance c/d

8,000

Total

35,000

Total

35,000

Accrued Expenses Account

Account code # 2

Date

Particulars

Code Amount

Date

Particulars

Code

Amount

Rs. (Dr.)

Rs. (Cr.)

17-2-02

Accrued

5,000 1-1-02

Balance c/f

10,000

expenses paid

Expenses accrued

3,000

Balance c/d

8,000

Total

13,000

Total

13,000

Bank Account Account code # 3

Date

Particulars

Code Amount

Date

Particulars

Code

Amount

Rs. (Dr.)

Rs. (Cr.)

Balance c/f

50,000 13-2-02

Paid to creditors

8,000

12-2-02

Cheque received

15-2-02

Goods purchased

6,000

5,000 25-2-02

Salaries paid

15,000

Balance c/d

26,000

Total

55,000

Total

55,000

Loan Account Account code # 4

Date

Particulars

Code Amount

Date

Particulars

Code

Amount

Rs. (Dr.)

Rs. (Cr.)

102

Financial Accounting (Mgt-101)

10-2-02

Installment paid

12,000

Balance c/f

100,000

Balance c/d

88,000

Total

100,000

Total

100,000

Furniture Account

Account code # 5

Date

Particulars

Code Amount

Date

Particulars

Code

Amount

Rs. (Dr.)

Rs. (Cr.)

10-2-02

Balance c/f

20,000

23-2-02

20-2-02

Furniture

2,000

purchased

Balance c/d

22,000

Total

22,000

Total

22,000

Office Equipment Account

Account code # 6

Date

Particulars

Code Amount

Date

Particulars

Code

Amount

Rs. (Dr.)

Rs. (Cr.)

Balance c/f

10,000

23-2-02

Office

5,000

Equipment

purchased

Balance c/d

15,000

Total

15,000

Total

15,000

Debtors Account

Account code # 7

Date

Particulars

Code Amount

Date

Particulars

Code

Amount

Rs. (Dr.)

Rs. (Cr.)

Balance c/f

12,000

12-2-02 Cheque received

5,000

Balance c/d

7,000

Total

12,000

Total

12,000

Creditors Account

Account code # 8

Date

Particulars

Code Amount

Date

Particulars

Code

Amount

Rs. (Dr.)

Rs. (Cr.)

103

Financial Accounting (Mgt-101)

13-2-02

Paid to creditors

8,000

Balance c/f

10,000

22-2-02

Goods purchased

5,000

Balance c/d

7,000

Total

15,000

Total

15,000

Sales Account Account code # 9

Date

Particulars

Code Amount

Date

Particulars

Code

Amount

Rs. (Dr.)

Rs. (Cr.)

Balance c/f

20,000

21-2-02

Goods sold

5,000

Balance c/d

25,000

Total

25,000

Total

25,000

Purchases Account

Account code # 10

Date

Particulars

Code

Amount

Date

Particulars

Code

Amount

Rs. (Dr.)

Rs. (Cr.)

Balance c/f

18,000

15-2-02

Goods

6,000

purchased

5,000

22-2-02

Goods

purchased

Balance c/d

29,000

Total

29,000

Total

29,000

Salaries Account

Account code # 11

Date

Particulars

Code

Amount

Date

Particulars

Code

Amount

Rs. (Dr.)

Rs. (Cr.)

25-2-02

Salaries paid

15,000

Balance c/d

15,000

Total

15,000

Total

15,000

Stationery Account

Account code # 12

Date

Particulars

Code

Amount

Date

Particulars

Code

Amount

Rs. (Dr.)

Rs. (Cr.)

104

Financial Accounting (Mgt-101)

25-2-02

Stationery

3,000

purchased

Balance c/d

3,000

Total

3,000

Total

3,000

Utility Expenses Account

Account code # 13

Date

Particulars

Code

Amount

Date

Particulars

Code

Amount

Rs. (Dr.)

Rs. (Cr.)

Accrued utility

3,000

28-2-02

expenses

Balance c/d

3,000

Total

3,000

Total

3,000

The trial balance at the end of the month is as follows:

Rahil & co..

Trial Balance As On ( January 31, 2002)

Title of Account

Code

Dr. Rs.

Cr. Rs.

Cash Account

8,000

Accrued expense Account

8,000

Bank Account

26,000

Loan Account

88,000

Furniture Account

22,000

Office Equipment

15,000

Debtors account

7,000

Creditors account

7,000

Sales account

25,000

Purchase account

29,000

Salaries Account

15,000

Stationery Account

3,000

Utility Expenses Account

3,000

Total

128,000

Difference between expenses & Purchases

· If business purchases items for its own use (items that are not meant to be resold) are charged to

expense account.

· If business purchases items for resale purposes are charged to purchases account.

STOCK

105

Financial Accounting (Mgt-101)

Stock is the quantity of unutilized or unsold goods lying with the organization.

Stock is termed as "the value of goods available to the business that are ready for sale". For

accounting purposes, stock is of two types

Type of Stock

In trading concern, Stock consists of goods that are purchased for the purpose of resale, but not

sold in that accounting period. Trading concern is that organization, which purchases items for

resale purposes.

In manufacturing concern(an organization that converts raw material into finished product by

putting it in a process), stock consists of:

o Raw material

o Work in process

o Finished goods

Raw material

Raw material is the basic part of an item, which is processed to make a complete item.

Work in process

In manufacturing concern, raw material is put in a process to convert it into finished goods. At the end of

the year, some part of raw material remains under process. i-e. it is neither in shape of raw material nor in

shape of finished goods. Such items are taken in stock as work in process.

Finished goods

Finished goods contain items that are ready for sale, but could not be sold in that accounting period.

Stock Account

Stock Account is Debited with the Value of the Goods Purchased

Stock account is Credited with the Purchase Price of the Goods Sold / Issued for Production.

Stock Account shows the cost / purchase value of unsold goods.

106

Financial Accounting (Mgt-101)

In manufacturing concern, entries for stock are:

Purchase of stock

Debit:

Stock Account

Credit:

Cash/Supplier /Creditors Account

When the stock is purchased, stock account gets the benefit, so it is debited & cash or supplier account

provides the benefit, so it is credited.

Payment to creditors

Debit: `

Supplier / Creditors account

Credit:

Cash account

Consumption of goods

Debit:

Cost of goods sold

Credit:

Stock Account

Cost of goods sold

Cost of goods sold is different in both form of organization

· In trading concern, cost of goods sold is the value of goods unsold(goods stands for the items

purchased for resale purpose)

· In manufacturing concern, cost of goods sold is the value of raw material consumed plus any other

manufacturing cost. e.g., salaries of labour cost of machinery etc.

Stock and cost of goods sold in manufacturing concern

Raw Material Stock

Other Costs Accounts

Work in Process Account

Finished Goods Account

Cost of Goods Sold Account

In manufacturing concern, Raw material stock is put into process. For accounting purposes, all value of

stock and other manufacturing costs are charged to work in process account. When the process is completed

and the goods are prepared, all the value of work in process is charged to finished goods account. The

business sells finished goods for the whole accounting year. At the end of the year, goods that are unsold are

deducted from cost of goods sold account.

107

Financial Accounting (Mgt-101)

Lesson-15

STOCK

Stock is termed as "the value of goods available to the business that are ready for sale". For accounting

purposes, stock is of two types:

· Opening stock

· Closing stock

Opening stock is the value of goods available for sale in the beginning of an accounting period.

Closing stock is the value of goods unsold at the end of the accounting period.

Journal Entries

(In Case of Trading Concern)

Journal entries for those goods which are bought for resale purposes are as follows:

Purchase of goods:

Debit:

Stock/Material Account

Credit:

Cash/Bank/Creditor

Consumption of goods

Debit:

Cost of goods sold

Credit:

Stock

Payment in case of credit purchase

Debit:

Creditors Account

Credit:

Cash/Bank

( In Case of Manufacturing Concern)

In case of manufacturer there are at least two types of Stock Accounts:

o Raw Material Stock Account

o Finished Goods Stock Account

Raw material

Raw material is the basic part of an item, which is processed to make a complete item

Finished goods

Finished goods contain the items that are ready for sale, but could not be sold in that accounting period.

Work in process

In manufacturing concern, raw material is put in a process to convert it into finished goods. At the end of

accounting period, some part of raw material remains under process. i-e. it is neither in shape of raw material

nor in shape of finished goods. Such items are taken in stock as work in process.

Flow of costs

108

Financial Accounting (Mgt-101)

Raw Material Stock

Other Costs Accounts

Work in Process Account

Finished Goods Account

Cost of Goods Sold Account

In manufacturing concern, Raw material stock is put into process. For accounting purposes, all value of

stock and other manufacturing costs are charged to work in process account. When the process is completed

and the goods are prepared, all the value of work in process is charged to finished goods account. The

business sells finished goods for the whole accounting year. At the end of the year, goods that are unsold are

deducted from cost of goods sold account.

Journal Entries (Manufacturing Concern)

Purchase of raw material

Debit:

Stock/Material Account

Credit:

Cash/Bank/Creditors

Other direct costs incurred

Debit:

Relevant cost/Expense Head

Credit:

Cash/Bank/Payables

Raw material issued and other costs allocated to production of units

Debit:

Work in process

Credit:

Stock Material Account

Debit:

Work in process

Credit:

Relevant Expense Head Account

When production is completed

Debit:

Finished Goods Stock Account

Credit:

Work in process account

Entry for Cost of sale

Debit:

Cost of Goods Sold Account

Credit:

Finished Goods Stock Account

Entry for sale of goods

Debit:

Cash/Account receivable Account

109

Financial Accounting (Mgt-101)

Credit:

Sales Account

Return of purchased material

There are two options for recording purchase material return

· Option 1

Debit:

Goods Return Account

Credit:

Stock Material Account

AND

Debit:

Cash/Bank Account

Credit:

Goods Return Account

If our supplier supplies us some other material in exchange of material returned. Then:

Debit

Raw Material Stock Account

Credit:

Goods Return Account

In the first case above, cash is received in return of goods. In the second case, defective goods are

exchanged with quality goods. That is why, we debited our stock account. Both entries are correct for

return of purchased items.

Option 2

Debit:

Cash/Creditor Account

Credit:

Stock Account

Example 1

· Record the following transactions:

1. Purchased goods for cash Rs. 10,000

2. Purchased goods on credit from ABC Co. Rs. 25,000

3. Sold goods whose cost was Rs. 20,000

4. Returned goods to ABC Co. that originally cost Rs. 5,000

5. Paid to ABC Co. Rs. 15,000 through cheque

6. Sold goods whose cost was Rs. 5,000

Answer following questions.

1. What is the cost of goods sold?

2. What is the value of closing stock?

3. What amount is payable to ABC Co.?

1 Purchased goods for cash Rs. 10,000

Cash Account

Code --

Date No.

Narration

Dr. Rs.

Cr. Rs.

Bal. Dr/(Cr)

Purchased goods for cash

10,000

(10,000)

110

Financial Accounting (Mgt-101)

Stock Account Code --

Date

No.

Narration

Dr. Rs.

Cr. Rs.

Bal. Dr/(Cr)

Purchased goods for cash

10,000

2 Purchased goods on credit from ABC Co. Rs. 25,000

ABC Co.

Code --

Date No.

Narration

Dr. Rs.

Cr. Rs.

Bal. Dr/(Cr)

Purchased goods from ABC

25,000

(25,000)

Stock Account Code --

Date

No.

Narration

Dr. Rs.

Cr. Rs.

Bal. Dr/(Cr)

Purchased goods for cash

10,000

Purchased goods from ABC

25,000

35,000

111

Financial Accounting (Mgt-101)

3 Sold goods whose cost was Rs. 20,000

Cost of Goods Sold

Code --

Date

No.

Narration

Dr. Rs.

Cr. Rs.

Bal. Dr/(Cr)

Goods sold

20,000

Stock Account Code --

Date

No.

Narration

Dr. Rs.

Cr. Rs.

Bal. Dr/(Cr)

Purchased goods for cash

10,000

Purchased goods from ABC

25,000

35,000

Goods sold

20,000

15,000

4 Returned goods to ABC Co. cost Rs. 5,000

ABC Co.

Code --

Date No.

Narration

Dr. Rs.

Cr. Rs.

Bal. Dr/(Cr)

Purchased goods from ABC

25,000

(25,000)

Returned goods to ABC

5,000

(20,000)

Stock Account Code --

Date

No.

Narration

Dr. Rs.

Cr. Rs.

Bal. Dr/(Cr)

Purchased goods for cash

10,000

Purchased goods from ABC

25,000

35,000

Goods sold

20,000

15,000

Returned goods to ABC

5,000

10,000

112

Financial Accounting (Mgt-101)

5 Paid to ABC Co. Rs. 15,000 through cheque

ABC Co.

Code --

Date

No.

Narration

Dr. Rs.

Cr. Rs.

Bal. Dr/(Cr)

Purchased goods from ABC

25,000

(25,000)

Returned goods to ABC

5,000

(20,000)

Paid to ABC

15,000

(5,000)

Bank Account Code --

Date

No.

Narration

Dr. Rs.

Cr. Rs.

Bal. Dr/(Cr)

Paid to ABC

15,000

6 Sold goods whose cost was Rs. 5,000

Cost of Goods Sold

Code --

Date No.

Narration

Dr. Rs.

Cr. Rs.

Bal. Dr/(Cr)

Goods sold

20,000

Goods sold

5,000

25,000

Stock Account Code --

Date

No.

Narration

Dr. Rs.

Cr. Rs.

Bal. Dr/(Cr)

Purchased goods for cash

10,000

Purchased goods from ABC

25,000

35,000

Goods sold

20,000

15,000

Returned goods to ABC

5,000

10,000

Goods sold

5,000

113

Financial Accounting (Mgt-101)

Q1 What is the cost of goods sold?

Cost of Goods Sold

Code --

Date

No.

Narration

Dr. Rs.

Cr. Rs.

Bal. Dr/(Cr)

Goods sold

20,000

Goods sold

5,000

25,000

Q2 What is the value of closing stock?

Stock Account Code --

Date

No.

Narration

Dr. Rs.

Cr. Rs.

Bal. Dr/(Cr)

Purchased goods for cash

10,000

Purchased goods from ABC

25,000

35,000

Goods sold

20,000

15,000

Returned goods to ABC

5,000

10,000

Goods sold

5,000

5,000

Q3 What amount is payable to ABC Co.?

ABC Co.

Code --

Date

No.

Narration

Dr. Rs.

Cr. Rs.

Bal. Dr/(Cr)

Purchased goods from ABC

25,000

(25,000)

Returned goods to ABC

5,000

(20,000)

Paid to ABC

15,000

(5,000)

Example 2

Using the following data calculate the Cost of Goods Sold of XYZ Co.

Stock levels

Opening Rs.

Closing Rs.

Raw material

100,000

85,000

Work in process

90,000

95,000

Finished goods

150,000

140,000

Purchase of raw material during the period Rs. 200,000

Paid to labour Rs. 180,000 out of which Rs. 150,000 used on production.

Other production costs Rs. 50,000

O/S

100,000

Raw Material Account

114

Financial Accounting (Mgt-101)

Purch.

200,000

WIP

215,000

Labour Account

C/S

85,000

Cost

180,000

Charge

150,000

Total

300,000

Total

300,000

Total

180,000

Total

180,000

Work in Process Account

Other Costs Account

O/B

90,000

Paid

50,000

Charge

50,000

Raw M

215,000

Labour

150,000

F/G

410,000

O/H

50,000

C/B

95,000

Total

505,000

Total

505,000

Total

50,000

Total

50,000

Cost of goods sold

Finished Goods Stock Account

F/G

420000

O/S

150,000

COS

420,000

WIP

410,000

C/S

140,000

Total

560,000

Total

460,000

ILLUSTRATION # 1

Record the following transactions

· Purchased goods for cash Rs, 10,000

· Purchased goods from Ali Brothers. worth of Rs. 20,000

· Sold goods having cost of Rs.15,000

· Returned goods to Ali Brothers. worth of Rs. 4,000

· Sold goods having cost of Rs. 5,000

· Paid to Ali Brothers. Rs. 10,000.

Also ascertain

· Cost of goods sold.

· Value of closing stock.

· Payable to Ali Brothers.

115

Financial Accounting (Mgt-101)

SOLUTION

First, we will pass journal entries

Particulars

Amount(Dr.)

Amount(Cr.)

Rs.

Stock Account

10,000

Cash Account

10,000

Goods purchased for cash

Particulars

Amount(Dr.)

Amount(Cr.)

Rs.

Stock Account

20,000

Ali Brothers.

20,000

Goods purchased from Ali Brothers.

Particulars

Amount(Dr.)

Amount(Cr.)

Rs.

Cost of goods sold

15,000

Stock Account

15,000

Goods sold whose cost was Rs. 15,000

Particulars

Amount(Dr.)

Amount(Cr.)

Rs.

Ali Brothers.

4,000

Stock Account

4,000

Goods returned to Ali Brothers.

Particulars

Amount(Dr.)

Amount(Cr.)

Rs.

Cost of goods sold

5,000

Stock Account

5,000

Goods sold whose cost was Rs. 5,000

Particulars

Amount(Dr.)

Amount(Cr.)

Rs.

116

Financial Accounting (Mgt-101)

Ali Brothers. Account

10,000

Cash Account

10,000

Paid to Ali Brothers.

PAYABLE TO ALI BROTHERS

Ali Brothers Account

Date

Particulars

Code

Amount Date

Particulars

Code

Amount

Rs. (Dr.)

Rs. (Cr.)

Goods returned

4,000

Purchased goods

20,000

Paid cash

10,000

BALANCE

6,000

Total

20,000

Total

20,000

COST OF GOODS SOLD

Cost of goods sold Account

Date

Particulars

Code Amount Date

Particulars

Code

Amount

Rs. (Dr.)

Rs. (Cr.)

Goods sold

15,000

Goods sold

5,000

BALANCE

20,000

Total

20,000

Total

20,000

VALUE OF CLOSING STOCK

Stock Account

Date

Particulars

Code

Amount Date

Particulars

Code

Amount

Rs. (Dr.)

Rs. (Cr.)

Purchased

10,000

Goods sold

15,000

goods for cash

Returned to

Ali

4,000

Purchased

20,000

Brothers

goods from Ali

Goods sold

5,000

Brothers.

BALANCE

6,000

Total

30,000

Total

30,000

ILLUSTRATION # 2

Using the following data calculate the Cost of Goods Sold of XYZ Co.

Stock levels

Opening Rs.

Closing Rs.

Raw material

100,000

85,000

117

Financial Accounting (Mgt-101)

Work in process

90,000

95,000

Finished goods

150,000

140,000

o Purchase of raw material during the period Rs. 200,000

o Paid to labour Rs. 180,000 out of which Rs. 150,000 used on production.

o Other production costs Rs. 50,000

SOLUTION

Labour Account

Raw Material Stock Account

Debit

Credit

Debit

Credit

O/S

100,000

Cost

180,000Charged

150,000

Purchases

200,000 WIP

215,000

C/S

85,000

300,000 Total

180,000Total

180,000

Total

300,000 Total

Other Costs Account

Debit

Credit

Paid

50,000 Charge

50,000

Total

50,000 Total

50,000

118

Financial Accounting (Mgt-101)

Work in Process Account

Debit

Credit

O/B

90,000

Raw M

215,000

Labor

150,000 F/G

410,000

O/H

50,000 C/B

95,000

Total

505,000 Total

505,000

Finished Goods Stock Account

Debit

Credit

O/S

150,000 COS

420,000

WIP

410,000 C/S

140,000

Total

560,000 Total

560,000

Cost of Goods Sold Account

Debit

Credit

F/G

420,000

In the Raw Material Account, the debit side contains:

o Opening balance

100,000

o Purchases

200,000

On the credit side, closing balance of Rs. 85,000 is shown along with the balancing figure of Rs. 215,000

which is charged to work in process OR WIP account through the following entry:

Debit:

Work in process OR WIP Account

Credit:

Raw Material Account

Labour cost of Rs. 180,000 is given, out of which Rs. 150,000 is charged to production. (Remaining cost

of Rs. 30,000 will be explained in some later stage). That means Rs. 150,000 are charged to work in

process OR WIP account through the following entry:

Debit:

Work in process OR WIP Account

Credit:

Labour Cost Account

119

Financial Accounting (Mgt-101)

Other costs of Rs. 50,000 is also charged to work in process OR WIP account through the following

entry:

Debit:

Work in process OR WIP Account

Credit:

Other Costs Account

Work in process account has the opening balance of Rs. 90,000 and closing balance of Rs. 95,000. After

charging all the above mentioned accounts to WIP. Balancing figure of work in process of Rs. 410,000 is

charged to finished goods account through the following entry:

Debit:

Finished Goods Account

Credit:

Work in process Account

Finished goods account has the opening balance of Rs. 150,000 and closing balance of Rs. 140,000.

After charging WIP account to Finished goods, the balancing figure of Rs. 420,000, is charged to cost of

goods sold account through the following entry:

Debit:

Cost of Goods Sold Account

Credit:

Finished Goods Account

120

Financial Accounting (Mgt-101)

Lesson-16

COST OF GOODS SOLD STATEMENT

In manufacturing concern, separate books are maintained to keep the record of every single work done in

manufacturing process to ascertain cost incurred on production of goods. This record gives information

about total cost incurred on manufacturing process and per unit cost of goods manufactured. When goods

are produced, these are sold to the customers of the business and goods unsold are taken into stock. At the

end of the financial year, manufacturing concern prepares a statement which gives the brief summary of the

whole process.

This statement shows the value of raw material consumed, amount spent on labour and other factory

expenses, finished goods produced and goods unsold (in stock). Such statement is called `cost of goods

sold statement'. Manufacturing concerns, while presenting financial statements, also present cost of goods

sold statement.

Standard format of cost of goods sold statement is given below:

Raw Material:

O/S Raw Material

+ Purchases

+ Cost Incurred to Purchase RM

- C/S Raw Material

Cost of Material Consumed

Conversion Cost:

+ Direct Labour Cost

+ Factory Overheads

Total Factory Cost

Work in Process

+ O/S of WIP

- C/S of WIP

Cost of Goods Manufactured

Finished Goods

+ O/S of Finished Goods

- C/S of Finished Goods

Cost of Good Sold

Cost of material consumed is the cost of material used for consumption that has been put in the

production process. This head shows the raw material left unused from the previous year(opening stock),

raw material purchased in the current year, expenses incurred in bringing the purchased material into the

business premises and raw material that is not used in the current year(closing stock).

Over Heads are the other costs incurred in relation of manufacturing of goods.

Examples are factory utilities, supervisor salaries, equipment repairs etc.

Total factory cost is the cost of material consumed plus labour and over heads. In other words it is the

total cost incurred in the factory.

Cost of goods manufactured is total factory cost plus opening stock of work in process less closing stock

of work in process.

Cost of goods sold is the cost of goods manufactured plus opening stock of finished goods less closing

stock of finished goods.

Prime/Basic Cost = Cost of Direct Material Consumed + Direct Labour cost

121

Financial Accounting (Mgt-101)

Conversion cost

it is the cost incurred to convert raw material to finished goods.

Conversion cost = Labour cost + factory overhead

Example

Using the following data calculate the Cost of Goods Sold of XYZ Co.

Stock levels

O/S Rs.

C/S Rs.

Raw material

100,000

85,000

Work in process

90,000

95,000

Finished goods

150,000

140,000

Purchase of raw material during the period Rs. 200,000

Paid to labour Rs. 180,000 out of which Rs. 150,000 used on production.

Other production costs Rs. 50,000

Solution

XYZ Co.

Cost of Goods Sols Statement

For the period ended-------

Raw Material:

Opening Stock Raw Material

100000

+ Purchases

200000

+ Cost Incurred to Purchase RM

- Closing Stock Raw Material

(85000)

Cost of Material Consumed

215000

Conversion Cost

+ Labour Cost

150000

+Factory overhead

50000

200000

Total Factory Costs

415000

Work in process

+ O/S of WIP

90000

+ C/S of WIP

(95000)

Cost of Goods Manufactured

410000

Finished Goods

+ O/S of Finished Goods

150000

+ C/S of Finished Goods

(140000)

Cost of Goods Sold

420000

ILLUSTRATION

Following information of Ahmad & Company is given. Prepare a cost of goods sold statement.

Stock levels

O/S Rs.

C/S Rs.

Raw material

150,000

115,000

Work in process

50,000

55,000

Finished goods

120,000

100,000

Purchase of raw material during the period Rs. 100,000

Transportation charges of items purchased Rs. 5,000

122

Financial Accounting (Mgt-101)

Paid to labour Rs. 100,000.

Other production costs(FOH) Rs. 80,000

SOLUTION

Raw Material:

Opening Stock Raw Material

150,000

+ Purchases

100,000

+ Cost Incurred to Purchase RM

5,000

- Closing Stock Raw Material

(115,000)

Cost of Material Consumed

140,000

Conversion Cost:

+ Labour

100,000

+ Factory Overheads

80,000

Total Factory Cost

320,000

Work in Process:

+ O/S of WIP

50,000

- C/S of WIP

(55,000)

Cost of Goods Manufactured

315,000

Finished Goods:

+ O/S of Finished Goods

120,000

- C/S of Finished Goods

(100,000)

Cost of Good Sold

335,000

STOCK CARD

Stock card is used to keep the record of what has come in stock and what has gone out of it. Standard

format of stock card is given below:

Stock Account Item 01

Date

Receipts

Qty

Rate

Amount

Date

Issues

Qty

Rate

Amount

Stock card has two parts.

· Receipt side

· Issue side

Both sides have similar columns that include:

· Nature of item to be kept in stock

· Quantity of items

· Rate at which it was purchased

· Total value of items

Receipt side is used to record data of items coming in the stock and issue side is used to record information

of goods issued for manufacturing process.

VALUATION OF STOCK

Any manufacturing organization purchases different material through out the year. The prices of purchases

may be different due to inflationary conditions of the economy. The question is, what item should be issued

first & what item should be issued later for manufacturing. For this purpose, the organization has to make a

123

Financial Accounting (Mgt-101)

policy for issue of stock. All the issues for manufacturing and valuation of stock are recorded according to

the policy of the organization. Mostly these three methods are used for the valuation of stock:

· First in first out (FIFO)

· Last in first out (LIFO)

· Weighted average

FIRST IN FIRST OUT (FIFO)

The FIFO method is based on the assumption that the first merchandise purchased is the first merchandised

issued. The FIFO uses actual purchase cost. Thus, if merchandise has been purchased at several different

costs, the inventory (stock) will have several different cost prices. The cost of goods sold for a given sales

transaction may involve several different cost prices.

CHARACTERISTICS

This is widely used method for determining values of cost of goods sold and closing stock.

In the FIFO method, oldest available purchase costs are transferred to cost of goods sold. That

means the cost if goods sold has a lower value and the profitability of the organization becomes

higher.

As the current stock is valued at recent most prices, the current assets of the company have the

latest assessed values.

LAST IN FIRST OUT (LIFO)

As the name suggests, the LIFO method is based on the assumption that the recently purchased

merchandise is issued first. The LIFO uses actual purchase cost. Thus, if merchandise has been purchased at

several different costs, the inventory (stock) will have several different cost prices. The cost of goods sold for

a given sales transaction may involve several different cost prices.

CHARACTERISTICS

This is alternatively used method for determining values of cost of goods sold and closing stock.

In the LIFO method recent available purchase costs are transferred to cost of goods sold. That

means the cost of goods sold has a higher value and the profitability of the organization becomes

lower.

As the current stock is valued at oldest prices, the current assets of the company have the oldest

assessed values.

WEIGHTED AVERAGE METHOD

When weighted average method is in use, the average cost of all units in inventory, is computed after every

purchase. This average cost is computed by dividing the total cost of goods available for sale by the number

of units in inventory. Under the average cost assumption, all items in inventory are assigned the same per

unit cost. Hence, it does not matter which units are sold; the cost of goods sold is always based on current

average unit cost.

CHARACTERISTICS

Under the average cost assumption, all items in inventory are assigned same per unit cost (the

average cost). Hence it does not matter which units are sold first. The cost of goods sold is always

on the current average unit cost.

124

Financial Accounting (Mgt-101)

Since all inventories are assigned same cost, this method does not make any effect on the

profitability and does not increase/decrease any asset in the financial statements.

· This is the alternatively used method for determining values of cost of goods sold and closing stock.

Example

· Receipts:

01 Jan 20--,

10 units @ Rs. 150 per unit

02 Jan 20--,

15 units @ Rs. 200 per unit

10 Jan 20--,

20 units @ Rs. 210 per unit

· Issues:

05 Jan 20--,

05 units

06 Jan 20--,

10 units

15 Jan 20--,

FIFO Method of Stock Valuation

Date

Receipts

Issues

Value of Stock

01-01-20--

10 @ Rs. 150

10 x 150 = 1500 1500

02-01-20--

15 @ Rs. 200

10 x 150 = 1500

15 x 200 = 3000 4500

05-01-20--

5 @ 150 = 750

750

5 x 150 = 750

15 x 200 = 3000 3750

06-01-20--

5 @ 150 = 750

0 x 150 =

5 @ 200 = 1000 1750

10 x 200 = 2000 2000

10-01-20--

20 @ Rs. 210

10 x 200 = 2000

20 x 210 = 4200 6200

15-01-20--

10 @ 200 = 2000

0 x 200 =

5 @ 210 = 1050 3050

15 x 210 = 3150 3150

Weighted Average Method of Stock Valuation

Date

Receipts

Issues

Value of Stock

Average Cost

01-01-20--

10x150 = 1500

1500

1500/10=150

02-01-20--

15x200 = 3000

1500 + 3000 = 4500

4500/25=180

05-01-20--

5x180 = 900

4500 900 = 3600

3600/20=180

06-01-20--

10x180 = 1800

3600 1800 = 1800

1800/10=180

10-01-20--

20x210 = 4200

1800 + 4200 = 6000

6000/30=200

15-01-20--

15x200 = 3000

6000 3000 = 3000

3000/15=200

Effects of Valuation Method on Profit

FIFO Method

125

Financial Accounting (Mgt-101)

Cost of Sales

= 750 + 1750 + 3050 = 5,550

Gross Profit

= 7500 5550

= 1,950

Weighted Average Method

· Cost of Sales

= 900 + 1800 + 3000 = 5,700

Gross Profit

= 7500 5700

= 1,300

ILLUSTRATION

Hamid & company is a manufacturing concern. Following is the receipts & issues record for the month of

May, 2002

Date

Receipts

Issues

May 7

200 units @ Rs. 50/unit

May 9

60 units

May 13

150 units @ Rs. 75/unit

May 18

100 units @ Rs. 60/unit

May 22

150 units

May 24

100 units

May 27

100 units @ Rs. 50/unit

May 30

200 units

Calculate the value of closing stock by

· FIFO Method

· Average Method

126

Financial Accounting (Mgt-101)

SOLUTION

Valuation of stock by FIFO method

Date

Receipts

Issues

Value of Stock

Total Remaining Net

Amount No. of

Balance

units

May 7

200 units @ Rs.

200 x 50 = 10,000

10,000 200

10,000

50/unit

May 9

60 units

Rs.

60 x 50 = 3,000

(3,000)

140

7,000

50/unit

May 13

150 units @ Rs.

75 x 150 = 11,250

11,250

290

18,250

75/unit

May 18

100 units @ Rs.

60 x 100 = 6,000

6,000

390

24,250

60/unit

May 22

140 units @ Rs.

50 x 140 = 7,000

(7,750)

240

16,500

50/unit

10 units @ Rs.

10 x 75 = 750

75/unit

May 24

100 units @ Rs.

75 x 100 =7,500

(7,500)

140

9,000

75/unit

May 27

100 units @ Rs.

50 x 100 = 5,000

5,000

240

14,000

50/unit

May 30

40 units @ Rs.

75 x 40 = 3,000

(12,000)

2,000

75/unit

100 units @ Rs.

60 x 100 = 6,000

60/unit

60 units @ Rs.

50 x 60 = 3,000

50/unit

127

Financial Accounting (Mgt-101)

Valuation of stock by weighted average method:

Date Receipts Issues

Value of

Total

Total Units

Average

Net

Stock

Amount(Rs.)

Cost(Rs.)/unit Balance(

Rs.)

May 200 units

200 x 50

10,000

200

10,000

7 @

Rs.

50/unit

10,000

May

60 units 60 x 50

(3,000)

140

7,000

3,000

May 150 units

150 x 75

7,000+11250

140+150

18250/290

18,250

13 @

Rs.

75/unit

11,250

18250

290

62.9

May 100 units

100 x 60

18250+6000

290+100

24250/390

24,250

18 @

Rs.

60/unit

6,000

24250

390

62.2

May

150

150 x 62.2

(9,330)

390-150

14,920

units

9330

240

May

100

100 x 62.2

(6,220)

240-100

8,700

units

6220

140

May 100 units

100 x 50

8,700+5,000

140+100

13700/240

13,700

27 @

Rs.

50/unit

5,000

13,700

240

57.1

May

200

200 x 57.1

(11,420)

240-200

2,280

units

11,420

LIFO METHOD WILL BE DISCUSSED AT SOME LATER STAGE

128

Financial Accounting (Mgt-101)

Lesson-17

DEPRECIATION

Depreciation is a systematic allocation of the cost of a depreciable asset to expense over its useful life. It is a

process of charging the cost of fixed asset to profit & loss account.

Fixed Assets are those assets which are:

· Of long life

· To be used in the business to generate revenue

· Not bought with the main purpose of resale.

Fixed assets are also called "Depreciable Assets"

When an expense is incurred, it is charged to profit & loss account of the same accounting period in which it

has incurred. Fixed assets are used for longer period of time. Now, the question is how to charge a fixed

asset to profit & loss account. For this purpose, estimated life of the asset is determined. Estimated useful

life is the number of years in which a fixed asset is expected to be used efficiently. It is the life for which a

machine is estimated to provide more benefit than the cost to run it. Then, total cost of the asset is divided

by total number of estimated years. The value, so determined, is called `depreciation for the year' and is

charged to profit & loss account. The same amount is deducted from total cost of fixed asset in the financial

year in which depreciation is charged. The net amount (after deducting depreciation) is called `Written down

Value'.

WDV = Original cost of fixed asset Accumulated Depreciation

Accumulated Depreciation is the depreciation that has been charged on a particular asset from the time of

purchase of the asset to the present time. This is the amount that has been charged to profit and loss

account from the year of purchase to the present year.

Depreciation accumulated over the years is called accumulated depreciation.

Useful life

· Useful Life / Economic Life is the time period for machine is expected to operate efficiently.

· It is the life for which a machine is estimated to provide more benefit than the cost to run it.

GROUPINGS OF FIXED ASSETS

Major groups of Fixed Assets:

· Land

· Building

· Plant and Machinery

· Furniture and Fixtures

· Office Equipment

· Vehicles

No depreciation is charged for `Land'. In case of `Leased Asset/Lease Hold Land' the amount paid for it is

charged over the life of the lease and is called Amortization.

RECORDING OF JOURNAL ENTRIES

Purchase of fixed asset:

Debit:

Relevant asset account

Credit:

Cash, Bank or Payable Account

129

Financial Accounting (Mgt-101)

For recording of depreciation, following two heads of accounts are used:

· Depreciation Expense Account

· Accumulated Depreciation Account

Depreciation expense account contains the depreciation of the current year. Accumulated depreciation

contains the depreciation of the asset from the financial year in which it was bought up to the present

financial year. . Depreciation of the following years in which asset was used is added up in this account. In

other words, this head of account shows the cost of usage of the asset up to the current year. Depreciation

account is charged to profit & loss account under the heading of Administrative Expenses. In the balance

sheet, fixed assets are presented at written down value. i-e.

WDV = Actual cost of fixed asset Accumulated Depreciation.

Journal entry for the depreciation is given below:

Debit: Depreciation Expenses Account

Credit:

Accumulated Depreciation Account

PRESENTATION OF DEPRECIATION

Charging depreciation to any head in profit & loss account depends upon the nature of work performed by

the asset. Consider an organization has purchased computers. If computers are being used by the

management, this means that administrative work is done by computers. So, depreciation of computers will

be charged to Administrative Expenses. On the other hand, if machines working in the factory are

computerized. The value of depreciation of the computers attached with the machines will be charged to

cost of goods sold. The reason being, the computers are the part of manufacturing process & depreciation of

computers will be charged to the cost of production. Again consider the selling department of the business is

very large. Depreciation of computers used in selling department will be charged to selling expenses.

You can see that computer is a single asset and its depreciation is charged in three different heads depending

upon the nature of work done by the computer.

Depreciation for the year is charged to:

Cost of Goods Sold

ii.

Administrative Expenses

iii.

Selling Expenses

In balance sheet Fixed Assets are shown at Cost less Accumulated Depreciation i.e. Written Down

Value (WDV)

METHODS OF CALCULATING DEPRECIATION

There are several methods for calculating depreciation. At this stage, we will discuss only two of them

namely:

· Straight line method or Original cost method or Fixed installment method

· Reducing balance method or Diminishing balance method or written down method.

STRAIGHT LINE METHOD

130

Financial Accounting (Mgt-101)

Under this method, a fixed amount is calculated by a formula. That fixed amount is charged every year

irrespective of the written down value of the asset. The formula for calculating the depreciation is given

below:

Depreciation = (cost Residual value) / Expected useful life of the asset

Residual value is the cost of the asset after the expiry of its useful life.

Under this method, at the expiry of asset's useful life, its written down value will become zero. Consider the

following example:

Cost of the Asset

= Rs.100,000

Life of the Asset

= 5 years

Annual Depreciation

= 20 % of cost or Rs.20,000

Written down value method

Cost of the Asset

= Rs. 100,000

Annual Depreciation

= 20%

Year 1 Depreciation

= 20 % of 100,000

= 20,000

Year 1 WDV

= 100,000 20,000

= 80,000

Year 2 Depreciation

= 20 % of 80,000

= 16,000

Year 2 WDV

= 80,000 16,000

= 64,000

Example

Cost of an asset: Rs. 120,000

Residual value: Rs. 20,000

Expected life:

Rs. 5 years

Calculate depreciation and the written down value of the asset for five years.

131

Financial Accounting (Mgt-101)

SOLUTION

Straight line method

Depreciation = (120,000 20,000) / 5 = Rs. 20,000

Particulars

Depreciation

Written

(Rs)

Down

Value (Rs.)

100,000

Depreciable cost

(20,000)

80,000

Dep. Of the 1st year

Dep. Of the 2nd year

(20,000)

60,000

Dep. Of the 3rd year

(20,000)

40,000

(20,000)

20,000

Dep. Of the 4th year

Dep. Of the 5th year

(20,000)

REDUCING BALANCE METHOD

Under this method, depreciation is calculated on written down value. In the first year, depreciation is

calculated on cost. Afterwards written down value is calculated by deducting accumulated depreciation from

the cost of that asset(cost accumulated depreciation) and depreciation is charged on that value. In this

method, the value of asset never becomes zero. Consider the following example:

Cost of an asset: Rs. 100,000

Expected life:

Rs. 5 years

Depreciation rate:

20%

SOLUTION

Particulars

Depreciation

Accumulated

Written

(Rs)

Depreciation

Down

(Rs.)

Value (Rs.)

Depreciable cost

100,000

Dep. Of the 1st year

20,000

80,000

100,000 x 20%

Dep. Of the 2nd year

80,000 x 20%

16,000

36,000

64,000

Dep. Of the 3rd year

12,800

48,800

51,200

64,000 x 20%

Dep. Of the 4th year

51,200 x 20%

10,240

59,040

40,960

Dep. Of the 5th year

40,960 x 20%

8,192

67,232

32,768

You see, at the end of five years, WDV of the asset is Rs. 32,768, not zero. But in case of straight line

method, the WDV, after five years was zero. So, in the opinion of some people, reducing balance method is

better than that of straight line method, but both methods are effective. It is the management that has to

decide, which method is best suited to their business.

Once an asset has been fully depreciated, no more depreciation should be recorded on it, even though the

property may be in good condition and may be in use. The objective of depreciation is to spread the cost of

an asset over the periods of its usefulness; in no case can depreciation be greater than the amount paid for

the asset. When a fully depreciated asset is in use beyond the original estimate of useful life, the asset account

132

Financial Accounting (Mgt-101)

and the accumulated depreciation account should remain in the accounting records without further entries

until the asset is retired.

133

Financial Accounting (Mgt-101)

Lesson-18

DEPRECIATION

It is a systematic allocation of the cost of a depreciable asset to expense over its useful life".

GROUPINGS OF FIXED ASSETS

Major groups of Fixed Assets:

· Land

· Building

· Plant and Machinery

· Furniture and Fixtures

· Office Equipment

· Vehicles

No depreciation is charged for `Land'. In case of `Leased Asset/Lease Hold Land' the amount paid for it is

charged over the life of the lease and is called Amortization.

RECORDING OF JOURNAL ENTRIES

Purchase of fixed asset:

Debit:

Relevant asset account

Credit:

Cash, Bank or Payable Account

For recording of depreciation, following two heads of accounts are used:

· Depreciation Expense Account

· Accumulated Depreciation Account

Depreciation expense account contains the depreciation of the current year. Accumulated depreciation

contains the depreciation of the asset from the financial year in which it was bought. Depreciation of the

following years in which asset was used, is added up in this account. In other words, this head of account

shows the cost of usage of the asset up to the current year. Depreciation account is charged to profit & loss

account under the heading of Administrative Expenses. In the balance sheet, fixed assets are presented at

written down value. i-e.

WDV = Actual cost of fixed asset Accumulated Depreciation.

Journal entry for the depreciation is given below:

Debit:

Depreciation Account

Credit:

Accumulated Depreciation Account

METHODS OF CALCULATING DEPRECIATION

There are several methods of calculating depreciation. At this stage, we will discuss only two of them

namely:

· Straight line method

· Reducing balance method

STRAIGHT LINE METHOD

134

Financial Accounting (Mgt-101)

In this method, a fixed amount is calculated by a formula. That fixed amount is charged every year

irrespective of the written down value of the asset. The formula for calculating the depreciation is given

below:

Depreciation = (cost Residual value) / Expected useful life of the asset

Residual value is the cost of the asset after the expiry of its useful life.

REDUCING BALANCE METHOD

In this method, depreciation is calculated on written down value. In the first year, depreciation is calculated

on cost. Afterwards written down value is calculated by deducting accumulated depreciation from the cost of

that asset(cost accumulated depreciation) and depreciation is charged on that value.

Cost of Asset Price at which the asset was initially recorded.

Written Down Value / Book Value Cost minus Accumulated Depreciation.

In reducing balance method, a formula is used for calculation of depreciation rate. i e.

Rate = 1

n RV / C

Where:

"RV" = Residual Value

"C" = Cost

"n" = Life of Asset

Calculate the rate if:

Cost

= 100,000

Residual Value (RV)

= 20,000

Life

= 3 years

Rate = 1 3 20000/100000

= 42%

Year 1

Cost

100,000

Depreciation

100,000 x 42%

(42,000)

WDV (Closing Balance)

58,000

Year 2

WDV (Opening Balance)

58,000

Depreciation

58,000 x 42%

(24,360)

WDV (Closing Balance)

33,640

Year 3

WDV (Opening Balance)

33,640

Depreciation

33,640 x 42%

(14,128)

WDV (Closing Balance)

19,511

Disposal of Asset

Cost of Asset

= 100,000

Life of the Asset

= 5 Years

Depreciation Method

= Straight Line

135

Financial Accounting (Mgt-101)

Residual Value

= Rs.10000

Sale Price after Five Years

= Rs.15000

Depreciation per year = (100000-10000) / 5

= Rs.5000 per year

Total Depreciation in Five Years

= 18,000 x 5

= 90,000

Book Value after Five Years

= 100,000- 90,000

= 10,000

Profit on Disposal

= 15,000 10,000

= Rs.5000

Recording of Disposal

Debit

Fixed Asset Disposal A/c

100,000

Credit

Fixed Asset Cost A/c

100,000

(With the cost of asset)

Debit

Accumulated Dep. A/c

90,000

Credit

Fixed Asset Disposal A/c

90,000

(With the depreciation accumulated to date)

Debit

Cash / Bank / Receivable A/c 15,000

Credit

Fixed Asset Disposal A/c

15,000

(With the price at which asset is sold)

[Note: one group to appear at a time]

Disposal of Asset Account

Fixed Asset Disposal Account

DEBIT

CREDIT

Cost Account

100,000

Acc. Dep. Account

90,000

Cash / Bank

15,000

P & L Account

5000

( Balancing Figure)

Total

105000

Total

105000

POLICY FOR DEPRECIATION

The management of the business selects the policy for charging depreciation. There is no law binding on the

management. The management is free to choose method of depreciation and policy of charging

depreciation. Normally two policies are commonly used:

· Depreciation on the basis of use

· In the year of purchase, full year's depreciation is charged; where as, in the year of sale no

depreciation is charged.

Now it is up to the management to decide, what method and what policy is better and effective for their

business.

136

Financial Accounting (Mgt-101)

DISPOSAL OF FIXED ASSET

When depreciable asset is disposed off at any time during the financial year, an entry should be made to give

effect of the disposal. Since, the residual value of asset is only estimated, it is common for asset to be sold at

price that differs from its book value at the date of disposal. When asset is sold, any profit or loss is

computed by comparing book value with the amount received from sale. As you know, book value is

obtained by deducting accumulated depreciation from original cost of the asset. A sale price in excess of the

book value produces profit; a sale price below the book value produces loss. This profit or loss should be

shown in the profit & loss account.

ENTRIES FOR RECORDING DISPOSAL

Debit

Fixed Asset Disposal A/c

Credit

Fixed Asset Cost A/c

(With the cost of asset)

Debit

Accumulated Dep. A/c

Credit

Fixed Asset Disposal A/c

(With the depreciation accumulated to date)

Debit

Cash / Bank / Receivable A/c

Credit

Fixed Asset Disposal A/c

(With the price at which asset is sold)

Example

An asset is purchased for Rs. 500,000 on Nov. 01, 2001.

Depreciation rate is 10% p.a.

The Asset is sold on Apr. 30, 2004.

Financial Year is July 1 to June 30

Question

· Calculate the WDV For both policies

137

Financial Accounting (Mgt-101)

Depreciation is Charged on the Basis of USe

Year

On the Basis of Use

Rs.

1-11-2001

Cost

500,000

2001-2002

Dep. 500,000 x 10% x 8 / 12

(33,333)

30-6-2002

WDV

466,667

2002-2003

Dep. 466,666 x 10%

(46,667)

30-6-2003

WDV

420,000

2003-2004

Dep. 420,000 x 10% x 10 / 12

(35,000)

30-4-2004

WDV

385,000

Full Dep. In the Year of Purchase

Year

Full Dep. in year of Purchase

Rs.

1-11-2001

Cost

500,000

2001-2002

Dep. 500,000 x 10%

(50,000)

30-6-2002

WDV

450,000

2002-2003

Dep. 450,000 x 10%

(45,000)

30-6-2003

WDV

405,000

2003-2004

Dep. 00 in the year of sale

30-6-2004

WDV

405,000

Contents of Fixed Assets Register

· Different record for each class of assets

· Date of purchase

· Detailed particulars of asset

· Location of asset

· Record of depreciation

ILLUSTRATION

Cost of asset

Rs. 200,000

Life of the asset

5 years

Depreciation method

Straight line

Residual value

Rs. 20,000

Sale price after 5 years

30,000

Calculate profit/Loss on the sale of the asset?

SOLUTION

138

Financial Accounting (Mgt-101)

Written down value = 200,000 20,000 = 180,000

Depreciation/year = 180,000/5 = 36,000 (Straight line method)

Particulars

Depreciation

Written

(Rs)

Down

Value (Rs.)

200,000

Depreciable cost

st year

(36,000)

164,000

Dep. Of the 1

Dep. Of the 2nd year

(36,000)

128,000

Dep. Of the 3

(36,000)

92,000

rd year

(36,000)

56,000

Dep. Of the 4th year

Dep. Of the 5th year

(36,000)

20,000

Book value after five years

Rs. 20,000

Sale price

Rs. 30,000

Profit on sale

Rs. 10,000 (30,000 20,000)

Same illustration is solved by reducing balance method

Cost of asset

Rs. 200,000

Residual value

Rs. 20,000

Estimated useful life

5 years

Calculation of depreciation rate

____

Depreciation Rate = 1 n√Rv/c

_____________

=1-

5√20,000/200,000

= 37%

Allocation of depreciation is given below:

Particulars

Depreciation

Accumulated

Written

(Rs)

Depreciation

Down

(Rs.)

Value (Rs.)

200,000

Depreciable cost

Dep. Of the 1st year

200,000 x 37%

74,000

126,000

Dep. Of the 2nd year

126,000 x 37%

46,620

120,620

79,380

Dep. Of the 3rd year

29,371

149,991

50,009

79,380 x 37%

Dep. Of the 4th year

50,009 x 37%

18,503

168,494

31,506

Dep. Of the 5th year

31,506 x 37%

11,657

180,151

19,849

Book value after five years

Rs. 19,849

Sale price

Rs. 30,000

Profit on sale

Rs. 10,151 (30,000 19,849)

139

Financial Accounting (Mgt-101)

Lesson-19

CAPITAL WORK IN PROGRESS

If an asset is not completed at that time when balance sheet is prepared, all costs incurred on that asset up to

the balance sheet date are transferred to an account called Capital Work in Progress Account. This

account is shown separately in the balance sheet below the fixed asset. Capital work in progress account

contains all expenses incurred on the asset until it is converted into working condition. All these expenses

will become part of the cost of that asset. When an asset is completed and it is ready to work, all costs in the

capital work in progress account will transfer to the relevant asset account through the following entry:

Debit:

Relevant asset account

Credit:

Capital work in progress account

ILLUSTRATION # 1

A machine is purchased for Rs. 400,000. Its useful life is estimated to be five years. Its residual value is Rs.

25,000. After four years, it was sold for Rs. 40,000. For the purpose of WDV, its depreciation rate is 40%.

You are required to show calculation of depreciation for four years. Also calculate profit or loss on disposal.

SOLUTION

Calculation of depreciation and profit & loss on the basis of straight line method:

Depreciation/year = (400,000 25,000)/5 = 75,000 (Straight line method)

As, machine was sold after four years but its useful life was estimated for five years, when we calculate

depreciation of the asset under straight line method, we will divide its WDV over five years, not on four

years.

Particulars

Depreciation

Written

(Rs)

Down

Value (Rs.)

375,000

Depreciable cost

Dep. Of the 1st year

(75,000)

300,000

Dep. Of the 2nd year

(75,000)

225,000

(75,000)

150,000

Dep. Of the 3rd year

Dep. Of the 4th year

(75,000)

75,000

Book value after four years

Rs. 75,000

Sale price

Rs. 40,000

Profit/(loss) on sale

Rs. (35,000) i-e.(40,000 75,000)

140

Financial Accounting (Mgt-101)

Calculation of depreciation and profit & loss on the basis of reducing balance method:

Depreciation rate = 40%

Particulars

Depreciation

Accumulated

Written

(Rs)

Depreciation

Down

(Rs.)

Value (Rs.)

Depreciable cost

400,000

Dep. Of the 1st year

400,000 x 40%

160,000

240,000

Dep. Of the 2nd year

96,000

256,000

144,000

240,000 x 40%

Dep. Of the 3rd year

144,000 x 40%

57,600

313,600

86,400

Dep. Of the 4th year

86,400 x 40%

34,560

348,160

51,840

Book value after four years

Rs. 51,840

Sale price

Rs. 40,000

Profit/(loss) on sale

Rs. (11,840) i-e.(40,000 51,840)

ILLUSTRATION # 2

Following information of machinery account is available in Year 2004:

· Machine # 1 is purchased on September 1, 2000 for Rs. 100,000

· Machine # 2 is purchased on January 31, 2002 for Rs. 200,000

· Machine # 3 is purchased on July 1, 2003 for Rs. 50,000

· Machine # 1 is disposed on March 31, 2004

Depreciation is charged @ 25% reducing balance method. Financial year is closed on June 30 every year.

Show the calculation of depreciation on machinery for four years using the following policies:

· Depreciation is charged on the basis of use

· Full depreciation is charged in the year of purchase and no depreciation is charged in the year of

disposal.

141

Financial Accounting (Mgt-101)

SOLUTION

Depreciation on the basis of use

Date

Purchase

Depreciation

Accumulated

Total

Written

Total

(Rs.)

depreciation

Accum.

Down Value

Written

machine

(Rs.)

Dep.

(Rs.)

Down

(Rs.)

Value

(Rs.)

01-09-2000

100,000 Machine # 1

Machine # 1

20,833

Machine # 1

79,167

100,000 x 25%

20,833

79,167

x10/12=20,833

2001-2002

Machine # 1

61,458

Machine # 1

238,542

79,167x25%

40,625

59,375

= 19,792

31-01-2002

200,000 Machine # 2

Machine # 2

200,000x25%x5/

20,833

179,167

12=20,833

2002-2003

Machine # 1

121,094

Machine # 1

178,906

59,375x25%

55,469

44,531

= 14,844

Machine # 2

179,167x25%

65,625

134,375

=44,792

2003-2004

Machine # 1

175,538

Machine # 1

138,281

44,531x25%x

63,819

(36,181)

9/12= 8,350

(sold)

Machine # 2

134,375x25%

99,219

100,781

= 33,594

01-07-2003

50,000 Machine # 3

Machine # 3

50,000x25%

12,500

37,500

= 12,500

Figure in blue color is the written down value of machine # 1, which is disposed of by the management.

142

Financial Accounting (Mgt-101)

Full year depreciation in the year of purchase and no depreciation in the year of sale:

Date

Purchase

Depreciation

Accumulated

Total

Written

Total

(Rs.)

depreciation

Accum.

Down Value

Written

machine

(Rs.)

Dep.

(Rs.)

Down

(Rs.)

Value

(Rs.)

01-09-2000

100,000 Machine # 1

Machine # 1

25,000

Machine # 1

75,000

100,000 x 25%

25,000

75,000

=25,000

2001-2002

Machine # 1

93,750

Machine # 1

206,250

75,000x25%

43,750

56,250

= 18,750

31-01-2002

200,000 Machine # 2

Machine # 2

200,000x25%

50,000

150,000

=50,000

2002-2003

Machine # 1

145,313

Machine # 1

154,687

56,250x25%

57,813

42,187

= 14,063

Machine # 2

112,500

150,000x25%

87,500

=37,500

Machine # 1 185,935

2003-2004

Machine # 1

121,875

57,813

42,187

Machine sold

(sold)

Machine # 2

112,500x25%

115,625

84,375

= 28,125

50,000 Machine # 3

Machine # 3

01-07-2003

Machine # 3

50,000x25%

12,500

37,500

= 12,500

143

Financial Accounting (Mgt-101)

Lesson-20

CAPITAL WORK IN PROGRESS

If an asset is not completed at that time when balance sheet is prepared, all costs incurred on that asset up to

the balance sheet date are transferred to an account called Capital Work in Progress Account. This

account is shown separately in the balance sheet below the fixed asset. Capital work in progress account

contains all expenses incurred on the asset until it is converted into working condition. All these expenses

will become part of the cost of that asset. When any expense is incurred or paid, it is included in the Capital

Work in Progress Account through the following entry:

Debit:

Work in Progress Account

Credit:

Cash/Bank/Payable Account

When an asset is completed and it is ready to work, all costs will transfer to the relevant asset account

through the following entry:

Debit:

Relevant asset account

Credit:

Capital work in progress account

PRESENTATION

It is already mentioned that Work in Progress Account is shown separately in the balance sheet below the

fixed asset. i-e.

Name of the Entity

Balance Sheet As At

Particulars

Amount

Amount Rs.

Rs.

Assets

Fixed Assets

xyz

Capital Work in Progress

xyz

Other Long Term Assets

xyz

Current Assets

Total

Xyz

Liabilities

Capital

xyz

Profit

xyz

Xyz

Long Term Liabilities

Xyz

Current Liabilities

Total

Xyz

Consider the solved illustration in the previous lecture:

Depreciation on the basis of use

Date

Purchase

Depreciation

Accumulated

Total

Written

Total

(Rs.)

depreciation

Accum.

Down Value

Written

144

Financial Accounting (Mgt-101)

machine

(Rs.)

Dep.

(Rs.)

Down

(Rs.)

Value

(Rs.)

01-09-2000

100,000 Machine # 1

Machine # 1

20,833 Machine # 1

79,167

100,000 x 25%

20,833

79,167

x10/12=20,833

2001-2002

Machine # 1

61,458 Machine # 1

238,542

79,167x25%

40,625

59,375

= 19,792

31-01-2002

200,000 Machine # 2

Machine # 2

200,000x25%x5/

20,833

179,167

12=20,833

2002-2003

Machine # 1

121,094 Machine # 1

178,906

59,375x25%

55,469

44,531

= 14,844

Machine # 2

179,167x25%

65,625

134,375

=44,792

2003-2004

Machine # 1

175,538 Machine # 1

138,281

44,531x25%x

63,819

(36,181)

9/12= 8,350

(sold)

Machine # 2

134,375x25%

99,219

100,781

= 33,594

01-07-2003

50,000 Machine # 3

Machine # 3

50,000x25%

12,500

37,500

= 12,500

PRESENTATION IN THE BALANCE SHEET

Year

Cost of Machinery

Accumulated

Written Down

Depreciation

Value

2000-2001

100,000

20,833

79,167

2001-2002

300,000

61,458

238,542

2002-2003

300,000

121,094

178,906

Written Down Value of the year 2003-2004

Opening Written Down Value:

Rs. 178,906

Add: Cost of machine purchased:

Rs. 50,000

Less: Depreciation of Machine # 1 in 2003-2004:

(8,350)

Less: Depreciation of other assets:

(46,094)

Less: Written Down Value of machine disposed:

(36,181)

Closing Written Down Value:

Rs. 138,281

145

Financial Accounting (Mgt-101)

Full year depreciation in the year of purchase and no depreciation in the year of sale:

Date

Purchase

Depreciation

Accumulated

Total

Written

Total

(Rs.)

depreciation

Accum.

Down Value

Written

machine

(Rs.)

Dep.

(Rs.)

Down

(Rs.)

Value

(Rs.)

01-09-2000

100,000 Machine # 1

Machine # 1

25,000 Machine # 1

75,000

100,000 x 25%

25,000

75,000

=25,000

2001-2002

Machine # 1

93,750 Machine # 1

206,250

75,000x25%

43,750

56,250

= 18,750

31-01-2002

200,000 Machine # 2

Machine # 2

200,000x25%

50,000

150,000

=50,000

2002-2003

Machine # 1

145,313 Machine # 1

154,687

56,250x25%

57,813

42,187

= 14,063

Machine # 2

150,000x25%

87,500

112,500

=37,500

2003-2004

Machine # 1

185,935 Machine # 1

121,875

57,813

42,187

Machine sold

(sold)

Machine # 2

112,500x25%

115,625

84,375

= 28,125

01-07-2003

50,000 Machine # 3

Machine # 3

50,000x25%

12,500

37,500

= 12,500

PRESENTATION IN THE BALANCE SHEET

Year

Cost of Machinery

Accumulated

Written Down

Depreciation

Value

2000-2001

100,000

25,000

75,000

2001-2002

300,000

93,750

206,250

2002-2003

300,000

145,313

154,687

Written Down Value of the year 2003-2004

Opening Written Down Value:

Rs. 154,687

Add: Cost of machine purchased:

Rs. 50,000

Less: Depreciation of Machine # 1 in 2003-2004:

Less: Depreciation of other assets:

(40,625)

Less: Written Down Value of machine disposed:

(42,187)

Closing Written Down Value:

Rs. 121,875

146

Financial Accounting (Mgt-101)

ILLUSTRATION # 2

Following information of machinery account is available in Year 2004:

· Machine # 1 is purchased on

August 1, 2000 for Rs. 50,000

· Machine # 2 is purchased on April 1, 2002 for Rs. 100,000

· Machine # 3 is purchased on March 1, 2004 for Rs. 150,000

· Machine # 1 is disposed on May 31, 2004

Depreciation is charged @ 20% reducing balance method. Financial year is closed on June 30 every year.

Show the calculation of depreciation on machinery for four years using the following policies:

· Depreciation is charged on the basis of use

· Full depreciation is charged in the year of purchase and no depreciation is charged in the year of

disposal,

SOLUTION

Depreciation on the basis of use

Date

Purchase

Total

Depreciation

Accumulated

Total

Written

Down Value

Written

(Rs.)

depreciation

Accum.

machine

(Rs.)

Down

Dep.

(Rs.)

Value

(Rs.)

01-08-2000

50,000 Machine # 1

Machine # 1

9,167 Machine # 1

40,833

50,000 x 20%

9,167

x11/12=9,167

2001-2002

Machine # 1

22,334 Machine # 1

127,666

40,833x20%

17,334

32,666

= 8,167

Machine # 2

01-04-2002

100,000 Machine # 2

5,000

Machine # 2

100,000x20%x3/

95,000

12=5,000

2002-2003

Machine # 1

47,867 Machine # 1

102,133

32,666x20%

23,867

26,133

= 6,533

Machine # 2

95,000x20%

24,000

76,000

=19,000

2003-2004

Machine # 1

77,858 Machine # 1

200,800

26,133x20%x

28,658

(21,342)

11/12= 4,791

(sold)

Machine # 2

76,000x20%

39,200

60,800

= 15,200

01-03-2004

150,000 Machine # 3

Machine # 3

150,000x20%x

10,000

140,000

4/12= 10,000

147

Financial Accounting (Mgt-101)

PRESENTATION IN THE BALANCE SHEET

Year

Cost of Machinery

Accumulated

Written Down

Depreciation

Value

2000-2001

50,000

9,167

40,833

2001-2002

150,000

22,334

127,666

2002-2003

150,000

47,867

102,133

Written Down Value of the year 2003-2004

Opening Written Down Value:

Rs. 102,133

Add: Cost of machine purchased:

Rs. 150,000

Less: Depreciation of Machine # 1 in 2003-2004:

(4,791)

Less: Depreciation of other assets:

(25,200)

Less: Written Down Value of machine disposed:

(21,342)

Closing Written Down Value:

Rs. 200,800

Full year depreciation in the year of purchase and no depreciation in the year of sale:

Date

Purchase

Depreciation

Accumulated

Total

Written

Total

(Rs.)

depreciation

Accum.

Down Value

Written

machine

(Rs.)

Dep.

(Rs.)

Down

(Rs.)

Value

(Rs.)

01-08-2000

50,000 Machine # 1

Machine # 1

10,000 Machine # 1

40,000

50,000 x 20%

10,000

40,000

=10,000

2001-2002

Machine # 1

38,000 Machine # 1

112,000

40,000x20%

18,000

32,000

= 8,000

01-04-2002

100,000 Machine # 2

Machine # 2

100,000x20%

20,000

80,000

=20,000

2002-2003

Machine # 1

60,400 Machine # 1

89,600

32,000x20%

24,400

25,600

= 6,400

Machine # 2

80,000x20%

36,000

64,000

=16,000

2003-2004

Machine # 1

103,200 Machine # 1

171,200

24,400

(25,600)

Machine sold

(sold)

Machine # 2

64,000x20%

48,800

51,200

= 12,800

01-03-2004

150,000 Machine # 3

Machine # 3

150,000x20%

30,000

120,000

= 30,000

148

Financial Accounting (Mgt-101)

PRESENTATION IN THE BALANCE SHEET

Year

Cost of Machinery

Accumulated

Written Down

Depreciation

Value

2000-2001

50,000

10,000

40,000

2001-2002

150,000

38,000

112,000

2002-2003

150,000

60,400

89,600

Written Down Value of the year 2003-2004

Opening Written Down Value:

Rs. 89,600

Add: Cost of machine purchased:

Rs. 150,000

Less: Depreciation of Machine # 1 in 2003-2004:

Less: Depreciation of other assets:

(42,800)

Less: Written Down Value of machine disposed:

(25,600)

Closing Written Down Value:

Rs. 171,200

REVALUATION OF FIXED ASSETS

Fixed assets are purchased to be used for longer period. In the subsequent years, the value of asset could be

higher or lower than its present book value due to inflationary condition of the economy. Assets are valued

at Historical Cost in the books of accounts. Historical Cost is the original cost of the asset at which it was

purchased plus additional costs incurred on the asset to bring it in working condition. Sometimes, the

management of the business, if it thinks fit, revalues the asset to present it on current market value. Once the

asset is revalued to its market value, then its value has to be constantly monitored to reflect the changes in

the market value.

If an asset is revalued at higher cost than its original cost, the excess amount will be treated as profit on

revaluation of fixed assets and it is credited to Revaluation Reserve Account.

On the other hand, if an asset is revalued at lower cost than its original cost, the balance amount will be

treated as loss on revaluation of fixed assets and it is shown in the profit & loss account of that year in which

asset was revalued.

149

Financial Accounting (Mgt-101)

Lesson-21

REVALUATION OF FIXED ASSETS

Fixed assets are purchased to be used for longer period. In the subsequent years, the value of asset could be

higher or lower than its present book value due to inflationary condition of the economy. Assets are valued

at Historical Cost in the books of accounts. Historical Cost is the original cost of the asset at which it was

purchased plus additional costs incurred on the asset to bring it in working condition. Sometimes, the

management of the business, if it thinks fit, revalues the asset to present it at current market value. Once the

asset is revalued to its market value, then its value has to be constantly monitored to reflect the changes in

the market value.

If an asset is revalued at higher cost than its original cost, the excess amount will be treated as profit on

revaluation of fixed assets and it is credited to Revaluation Reserve Account.

On the other hand, if an asset is revalued at lower cost than its original value, the balance amount will be

treated as loss on revaluation of fixed assets and it is shown in the profit & loss account of that year in which

asset was revalued.

FAIR VALUE

It is the value, which an asset would bring to the management, when sold to a knowledgeable party in a fair

deal.

RULES FOR REVALUATION

· Revaluation has to be carried out at regular intervals.

· The change in the value should be permanent.

· Whole class of asset has to be revalued.

ILLUSTRATION

An asset is purchased at the cost of Rs. 300,000. It was decided by the management that depreciation would

be charged @ 20 % on the basis of straight line method. At the end of third year, following information is

given:

Accumulated Depreciation

Rs. 180,000

Written Down Value

Rs. 120,000

The management has decided to revalue it to the current market value. The current market value of

the asset is 180,000. You are required to make the necessary adjustments.

SOLUTION

There are two options for making adjustments for the above mentioned changes:

· Charge the accumulated depreciation to the cost of asset and increase the value of asset with the

difference of current market value and WDV.

· Calculate the proportion of increase and increase the cost of asset and accumulated depreciation

with that proportion.

Option # 1

The accumulated depreciation is charged off against the cost of asset with the help of following entry:

Debit:

Accumulated Depreciation

180,000

Credit:

Cost of asset A/c

180,000

Cost of asset is increased to current market value, i-e., Rs.180000. The difference between current market

value and WDV is Rs. 60,000(180,000 120,000). The credit is given to Revaluation Reserve Account.

150

Financial Accounting (Mgt-101)

Debit:

Cost of asset A/c

60,000

Credit:

Revaluation Reserve A/c

60,000

Option # 2

Both Cost and Accumulated Depreciation are increased in a proportionate manner so that the resulting

Book Value is equal to the revalued amount.

Desired increase in WDV

180,000 120,000 = 60,000

Rs.60000 is 50% of 120,000. Therefore desired increase in Cost and Accumulated Depreciation is 50%.

Cost is increased by 50% by following entry:

Debit:

Cost of asset A/c

150,000

Credit:

Revaluation Reserve A/c

150,000

Accumulated depreciation is increased by 50% with the help of the following entry:

Debit:

Revaluation Reserve A/c

90,000

Credit:

Accumulated Depreciation A/c 90,000

CAPITAL AND REVENUE EXPENSES

Capital Expenses are those expenses for which benefit is enjoyed for more than one accounting period.

For example, the business has bought a car. Now, car will be used for many years. So, it is a capital expense.

Capital Expenditure generally adds Fixed Asset Units or increases Economic Life, Capacity or Efficiency of

existing fixed assets. The term used for Capital expenditures is `Capitalized'.

Revenue Expenses are those expenses for which, the benefit is enjoyed within one accounting period. For

example, the business has purchased stationery for office use. Now, the stationery is used within one year in

the office. So, this is a revenue expense. The term u1sed for Revenue Expenditures is `Charged Off'.

Revenue Expenses are those expenses that are:

· Incurred in day to day running of the business.

· Incurred to maintain fixed assets in their original / useable condition.

All Capital Expenses are grouped in balance sheet & all Revenue expenses are grouped in Profit & Loss

account.

TYPES OF CAPITAL EXPENDITURE

Capital Expenditure is of two types:

· When an asset is acquired, and

· When an improvement is made in an existing asset.

All the expenditure incurred up to the point of bringing the asset to its intended use is capitalized as the

initial cost of asset.

An expenditure that improves the performance of an asset from its originally assessed performance is capital

expenditure. However, the expenditure incurred on the maintenance of an asset is treated as Revenue

Expense.

DISTINCTION BETWEEN CAPITAL EXPENDITURE & REVENUE EXPENDITURE

Capital Expenditure

Revenue Expenditure

Its effect is long term, i-e. It is not exhausted Its effect is short term, i-e. The benefit is received

within the current accounting period. Its benefit is within one accounting period.

151

Financial Accounting (Mgt-101)

received for a number of years in future.

Expenditure is said to be capital expenditure when

Neither an asset is acquired nor is the performance

an asset is acquired or performance of an existing

of any asset increased.

asset is increased.

It does not occur again and again. It is

It is recurring and regular and it occurs repeatedly.

non- recurring and irregular.

This expenditure improves the financial position of

This expenditure helps to maintain the business.

the business.

A portion of this expenditure (Depreciation on

The whole amount of this expenditure is shown in

asset) is shown in the profit & loss account and the

the profit & loss account or income statement.

balance is shown in the balance sheet on asset side.

It appears in the balance sheet until its benefit is

It does not appear in the balance sheet.

fully exhausted.

It does not reduce the profit of the concern.

It reduces the profit of the concern.

DEFERRED EXPENDITURE

The revenue expenditure that provides benefit for more than one year is called deferred expenditure. It is

initially shown in balance sheet. Subsequently, it is charged to profit and loss account over the period in

which benefit is derived from it.

THE GENERAL RULE

The general rule for distinguishing between capital and revenue expenditure:

· The expense whose benefit lasts for a period longer than an accounting period is called capital

expenditure, and

· The expense whose benefit is obtained within an accounting period is termed as a revenue expense.

EXCEPTIONS

Depending upon the size of expenditure and policy of the organization expenditure can be

"Charged to Profit and Loss" instead of "Capitalizing".

Legal Charges are as per rule charged to P & L but when these are incurred to acquire an asset

these should be capitalized with the asset.

Repairs are also charged to P&L but when it is of such nature that it enhances the performance

of an asset from its original performance than it should be capitalized.

Wages are normally revenue expense but when these are paid to men employed to create an asset

these should be capitalized as the cost of asset.

Freight and Carriage normally a revenue expense, but when paid to bring an asset to its intended

use then it is treated as capital.

Interest on Loan is normally revenue expenditure but when the loan is taken to purchase an asset

its interest is treated as Capital and is added to cost of the asset.

CAPITAL AND REVENUE RECEIPTS

CAPITAL RECEIPTS

Receipts which are non-recurring and whose benefit is enjoyed over a long period are called `Capital

Receipts'. For instance, Capital invested, Loan from bank, Sale proceed of fixed assets etc. Capital receipts

are shown on the liability side of the balance sheet.

REVENUE RECEIPTS

152

Financial Accounting (Mgt-101)

Receipts which are recurring by nature and which are available for meeting all day to day expenses of a

business concern are known as `Revenue Receipts'. For example, sale proceeds of goods, interest received,

rent received etc.

153

Financial Accounting (Mgt-101)

Lesson-22

AREAS COVERED IN THIS LECTURE

In this lecture we will learn about:

· Banking transactions, and

· Bank reconciliation statements.

BANK BOOK AND BANK STATEMENT

Bank statement is the detail of transactions in one's account provided by the bank. We should understand

one thing that our money lying in the bank is an asset for us. But for bank, it is a liability as the bank has a

responsibility to return that money to us.

Therefore, when we see a bank statement, it looks like a mirror image of our bank book.

That is, when we pay money into bank account, our asset increases. So we Debit our account whereas for

bank, its liability to pay us increases. So our account is credited in its books.

Standard format of Bank book is given hereunder:

XYZ Traders

Bank Book (Bank Account Number)

Account Code --

Date

Vr.

Chq.

Narration /

Ledger Receipt Payment Balance

20--

No.

Particulars

Code Amount Amount Dr/(Cr)

Jul 01

Opening Balance

50,000

Jul 02

12345

Paid to Mr. Umer

10,000

40,000

Jul 03

Cash Deposit in Bank

5,000

45,000

Jul 03

12346

Paid to Mr. Ali

12,000

33,000

Standard format of Bank Statement is given hereunder:

ABC Bank

Bank Statement Account No. xxxxx

Date

Narration /

Withdrawals

Deposits

Balance

20--

Particulars

Amount

Dr/(Cr)

Jul 01

Opening Balance as on Jul 01

50,000

(50,000)

Jul 02

Chq # 12345

10,000

(40,000)

Jul 03

Cash paid in

5,000

(45,000)

Jul 03

Chq # 12346

12,000

(33,000)

At times, banks show the amount in balance column against our General Rule (a credit figure is shown in

brackets), just to facilitate the customers. The rule, then becomes, a balance favorable to the customer is

shown without brackets.

154

Financial Accounting (Mgt-101)

Our bank statement of previous example will look like as follows.

ABC Bank

Bank Statement Account No. xxxxx

Date

Narration /

Withdrawals Deposits

Balance

20--

Particulars

Amount

Jul 01

Opening Balance as on Jul 01

50,000

Jul 02

Chq # 12345

10,000

40,000

Jul 03

Cash paid in

5,000

45,000

Jul 03

Chq # 12346

12,000

33,000

At times, banks record transactions in our account without our knowledge. e.g. bank charges, profit, tax.

Sometimes, someone deposits money directly in our account that escapes recording in our books.

This problem is solved by tracing figures from bank book to bank statement on periodic basis in order to

update our record.

EXAMPLE # 1

The Bank book of Ali Traders shows the following picture for the month of July, 2002:

Ali Traders

Bank Book (Bank Account Number)

Account Code --

Date

Vr.

Chq.

Narration /

Ledger

Receipt Payment Balance

20--

No.

Particulars

Code

Amount Amount Dr/(Cr)

Jul 01

Opening Balance

150,000

Jul 05

0001

Paid to XYZ

20,000

130,000

Jul 10

Cash Deposit in Bank

5,000

135,000

Jul 15

0002

Paid to ABC

25,000

110,000

Jul 20

0003

Paid to creditors

50,000

60,000

Balance as per bank book on Jul 31, is Rs. 60,000

155

Financial Accounting (Mgt-101)

The Bank Statement of Ali Traders shows the following record for the month of July, 2002:

ABC Bank

Bank Statement Account No. xxxxx

Date

Narration /

Withdrawals

Deposits

Balance

20--

Particulars

Amount

Jul 01

Opening Balance

150,000

Jul 05

Chq # 0001

20,000

130,000

Jul 10

Cash Deposit in Bank

5,000

135,000

Jul 15

Chq # 0001

25,000

110,000

Jul 20

Chq # 0001

50,000

60,000

Jul 31

Bank charges

500

59,500

Jul 31

Profit

700

60,200

Balance as per bank statement on Jul 31, is Rs. 60,200

When we trace the figures, we come to know that there are two transactions that have not been recorded in

our books. i-e. Transactions of `Bank charges' and `Profit'.

After recording these two transactions, the bank book of Ali Traders looks like as follows:

Ali Traders

Bank Book (Bank Account Number)

Account Code --

Date

Vr. Chq.

Narration /

Ledger Receipt

Payment Balance

20--

No.

Particulars

Code Amount

Amount Dr/(Cr)

Jul 01

Opening Balance

150,000

Jul 05

0001

Paid to XYZ

20,000

130,000

Jul 10

Cash Deposit in Bank

5,000

135,000

Jul 15

0002

Paid to ABC

25,000

110,000

Jul 20

0003

Paid to creditors

50,000

60,000

Jul 31

Bank charges

500

59,500

Jul 31

Profit

700

60,200

After recording the missing transactions, Balance as per bank book on Jul 31, is Rs. 60,200, which is the

same as bank statement balance.

In the above example, dates of payments in bank book and bank statement are taken to be the same. In

actual life, this is not always the case. We write out cheque to our creditor today, he will deposit in his bank

tomorrow. The cheque will be presented in our bank, by the bank of the creditor, on the day after

tomorrow. We have recorded the transaction today but the payment in our statement will appear at least 2

days later. This period can even be greater.

Similarly, we receive a cheque from our debtor today and record it in our books. The cheque will be

deposited in bank tomorrow and it will take a few days to clear. Again, there will be a difference in date of

our receipt and that of our bank.

BANK RECONCILIATION STATEMENT

156

Financial Accounting (Mgt-101)

In the above example, it is assumed that a payment of Rs. 10,000 is made on 31 Jul, and it appears in the

bank on Aug, 02. When figures will be traced from bank book to bank statement, this amount will remain

un-ticked in the bank book in the month of July. No recording will be made in the books as they are already

correct.

In circumstances like these, a statement is made called Bank Reconciliation Statement. This reconciles

those differences in Bank Book and Bank Statement that cannot be adjusted by an accounting entry at that

date on which balances are being reconciled.

The event discussed above, where a cheque is issued but it has not been presented in the account is called

Un-presented Cheques. When this cheque is recorded, the bank book is credited with Rs. 10,000.

Therefore, the balance as per Bank Book is Rs. 50,200 (60,200 - 10,000), whereas, the bank is still showing a

balance of Rs. 60,200.

So, if we want to reconcile these balances, we will remove the effect of this entry (not in actual books but in

the statement only). So the Statement Would:

Balance As Per Bank Book

Dr.

50,200

Un-presented Cheques

Dr.

10,000

Balance as Per Bank Statement

Cr.

60,200

Note following things in this statement.

· We have started with the balance of Bank Book

· To reverse the effect of Cr. entry in bank book, we have written Dr. with the figure.

· Since both figures (50,200 and 10,000) are Dr. therefore, they are added.

· We also know that balances in bank book and bank statement are exactly opposite to each

other, therefore, Cr. has been written with the resulting figure (60,200)

UN-CREDITED CHEQUES

The other event discussed was of a receipt of a cheque that has not been cleared in the bank account as yet.

To record a receipt, bank book should have been debited. Therefore, to reverse the effect Credit will be

written with the figure in the statement.

Assume, the above Rs. 10,000 was a receipt rather than a payment. Then, the balance in the bank book

would be Rs. 70,200 (60,200 + 10,000).

The bank reconciliation will be as follows:

Balance As Per Bank Book

Dr.

70,200

Un-credited Cheques

Cr.

(10,000)

Balance As Per Bank Statement Cr.

60,200

157

Financial Accounting (Mgt-101)

EXAMPLE # 2

The Bank book of Usman Traders gives the following record for the month of December, 2002:

Usman Traders

Bank Book (Bank Account Number)

Account Code --

Date

Vr.

Chq.

Narration /

Ledger Receipt Payment Balance

20--

No.

Particulars

Code Amount Amount Dr/(Cr)

Dec 01

Opening Balance

150,000

Dec 07

Received form Anwer

10,000

160,000

Dec 08

57000

Paid to Tariq

19,500

140,500

Dec 15

57001

Paid to Shabbir

4,000

136,500

Dec 22

Received from Javed

9,700

146,200

Dec 28

57002

Paid to Salim

9,100

137,100

Dec 31

Received from Javed

20,000

157,100

Dec 31

Received form Rashid

17,800

174,900

Dec 31

The Bank Statement of Usman Traders shows the following picture:

ABC Bank

Bank Statement Account No. xxxxx

Date

Narration /

Withdrawals Deposits

Balance

20--

Particulars

Amount

Dec 1

Balance B/f

150,000

Dec 7

deposits

10,000

160,000

Dec 11

57000

19,500

140,500

Dec 20

57001

4,000

136,500

Dec 22

deposits

9,700

146,200

Dec 31

Charges

2,200

144,000

You are required to reconcile Bank book with Bank Statement and prepare Bank Reconciliation Statement.

SOLUTION

While tracing figures from bank book to bank reconciliation statement, it is noticed that bank charges

deducted by bank are not booked in bank book. So, bank charges will be booked through the following

entry:

Debit:

Bank charges

2,200

Credit:

Bank A/c

2,200

158

Financial Accounting (Mgt-101)

The corrected bank book is hereunder:

Usman Traders

Bank Book (Bank Account Number)

Account Code --

Date

Vr. Chq.

Narration /

Ledger Receipt

Payment Balance

20--

# No.

Particulars

Code Amount

Amount Dr/(Cr)

Dec 01

Opening Balance

150,000

Dec 07

Received form Anwer

10,000

160,000

Dec 08

57000

Paid to Tariq

19,500

140,500

Dec 15

57001

Paid to Shabbir

4,000

136,500

Dec 22

Received from Javed

9,700

146,200

Dec 28

57002

Paid to Salim

9,100

137,100

Dec 31

Received from Javed

20,000

157,100

Dec 31

Received form Rashid

17,800

174,900

Dec 31

Bank charges

2,200

172,700

It was also noticed that a cheques of Rs. 9,100 given to Salim on December 28 was not paid by bank as yet.

So, it is an un-presented cheque. Cheques received from Javed and Rashid worth of Rs. 20,000 and 17,800

respectively are not credited by bank till December 31,2002. These are un-credited cheques of Usman

Traders.

Bank Reconciliation Statement of Usman Traders shows the following picture:

Bank Reconciliation Statement

Usman Traders

Bank Reconciliation Statement as at Dec. 31, 2002.

(Rs.)

Balance as per bank book

Dr.

172,700

Un-presented cheques

Dr.

9,100

Un-credit cheques

(20,000)

(17,800) Cr.

(37,800)

Balance as per bank statement

Cr.

144,000

159

Table of Contents: