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By going through these Maharashtra State Board Bookkeeping and Accountancy 11th Notes Chapter 4 Ledger students can recall all the concepts quickly.

Maharashtra State Board 11th Accounts Notes Chapter 4 Ledger

Meaning And Definition of Ledger-

(i) Meaning : Ledger is another important and principal book of accounts in which a businessman keeps individual records of persons, properties, expenses, incomes, gains and losses. It is the end point of entries made in the journal, or subsidiary books. Ledger may be in the form of a bound register or cards or separate sheets may be attached and maintained in a loose leaf binder. For every person with whom the business keep dealings, a separate account is prepared in the ledger. Similarly, a separate account is maintained in the ledger for each kind of assets, expenses, losses and gains.

As and when business transactions occur, they are first recorded in the journal and subsequently those recorded entries from journal are transferred and posted to the respective account in the ledger. Each ledger account is totalled at the end of the accounting period. This book contains many pages and each page is called ledger folio. The relationship between the business and a particular account on given date can be ascertained only from the ledger. For example, if a businessman wants to know on a particular date the amount due from a certain customer or debtor, it can be known easily only from the ledger. Various transactions pertaining to different dates of a particular account may be spreaded over in the journal on various pages but in the ledger they are found on one page.

Ledger is also called as book of final entry. The word ‘Ledger’ is originated from the Latin word ‘Ledger’ which means ‘to contain.’ Ledger is the collection of all the account. Ledger contains all the account opened and operated.

(ii) Definition: According to S.P. Jain’s and K.L. Narang’s Advanced Accountancy,
“A Ledger Account may be defined as a summary statement of all the transactions relating to persons, assets, expenses and revenues, which have to be taken place during a given period of time and show their net effect.” According to the Oxford Dictionary, ledger is the main record of the accounts of a business, traditionally, a ledger was a large book with separate pages for each account. In modern systems ledger may consist of separate cards or computer records.

Importance of Ledger-

Importance of Ledger is explained as follows :

• Ledger is useful for maintaining individual records of person with whom the business keep dealings.
• It keeps records of every item of properties, expenses, incomes, gains and losses.
• Amount due from various debtors can be known easily and quickly from the ledger. This will help the businessman to send reminders to recover the outstanding amount due from the debtors.
• Amount due to suppliers or creditors can be known easily and quickly to make timely payments to gain their confidence.
• Trial balance can be prepared easily on the basis of balances ascertained from the ledger accounts. Therefore ledger is necessary for preparation of trial balance.
• It is easier to prepare business planning and strategies on the basis of balances shown by the ledger accounts.
• The financial position of the business can be easily known by referring to balances of various assets and liabilities.
• Various income statements can be prepared on the basis of the balances shown by the ledger accounts.
• Ledger is useful tool to control various expenses because ledger shows accounts of various expenses with total amount spent on them.
• Ledger facilitates the management to get classified information of various accounts such assets, liabilities, capital etc. They can easily prepare plans for various business activities.
  Ledger also facilitates decision making process.

Contents of A Ledger-

The contents of a ledger are explained as below:
A ledger contains many pages and each page is called ledger folio. Each page of a ledger is serially numbered. Each ledger account has two main sides viz. left hand side which is called the debit side and right hand side which is called the credit side. A list of ledger account in alphabetically order is given on the first page of a ledger which is called as an ‘Index’. Each side has four sub-columns. These sub-columns are:

• Date Column: In this column, the date of transaction is written. Date of transaction is written in order of year, month and date. In the beginning of each page the year, month and date are written. For subsequent transactions on the same page only dates are written for the same month and year.
• Particulars Column: In the particulars column the name of the account is written. In the particulars column on the debit side of the account, the name of the account to be credited is written and on the credit side in the particulars column, the name of the account to be debited is written.
• Journal Folio No. Column: In Journal Folio No. (J.F. No.) column of the ledger, the page number of the journal from which the entry is posted is recorded in red ink for cross reference. By referring to the journal page as shown in the ledger, a businessman can understand the nature of transaction by
• reading the journal entry and narration.
• Amount Column: In this column the amount of the transaction is entered in figures.

Specimen of The Ledger :

Steps to be Taken For Preparation of Ledger Account:
(1) At the top of ledger, in the middle, the name of the account should be written.

(2) The date of transaction should be written in date column in the same order as we record in the journal.

(3) In the particulars column on the debit side of the ledger account the name of account credited is written and in the particulars column on the credit side of ledger account, the name of account debited is written. For example the following journal entries are posted in the cash account as follows:

(4) Opening balance of ledger account should be shown as Balance (b/d). Real account like Cash A/c, Furniture A/c, Goods A/c, Machinery A/c. etc. always show debit balances, and liabilities like Capital A/c, Sundry Creditor’s A/c. Bank Loan A/c, etc. always show credit balances.

Posting of Entries From Journal And Subsidiary Books to Ledger-

(i) Posting of entries from journal to ledger :
Transferring or recording journal entries from journal to the respective ledger account is called ledger posting. Ledger posting implies entering the information in the ledger from journal for individual records. Ledger posting is done from time to time by the accountant. The account credited is posted on the credit side of that account and account debited is posted on the debit side of the same account. Process of ledger posting is continued throughout the year. At the end of the financial year all ledger accounts are closed and thereafter they are totalled and balanced.

(ii) Posting” of entries from subsidiary books to ledger:

(1) Single column and double column cash book: While posting the entries from single column and double columns Cash book, Cash Account and Bank Account are not opened. Cash column and Bank column are served as Journal as well as Ledger. Each Person’s Asset’s Account is opened and entries passed on the debit side of cash book are posted to credit side of Person’s A/c or Asset’s A/c. Similarly entries appeared on the credit side of cash book are posted to debit side of related Person’s A/c or Asset’s Account.

(2) Purchase Book: The total of posted to Purchases at the end of the month or year is posted to Purchases Account on the debit side as ‘To Sundries as per Purchases book”. Each Supplier’s Account is opened and related entries are recorded on the credit side as “By Purchases A/c.”

(3) Purchase Return Book / Return Outward Book: The total of Purchase Return Book is posted to Purchase Return A/c as “Sundries as per Purchase Return Book”. Each Supplier’s account is debited with the account of goods returned as ‘To Purchase Return A/c.”

(4) Sales Book: The total of Sales book at the end of month or year is posted to Sales A/c on the credit side as “By Sundries as per Sales Book”. Each Customer’s Account is opened and related entries are recorded on the debit side as ‘To Sales A/c”.

(5) Sales Return Book: The total of Sales Return Book is posted, to debit side of Sales Return Account as ‘To Sundries as per Sales Return Book”. Each Customer’s A/c is credited with the amount of goods returned as “By Sales Return A/c”.

(6) Journal Proper: Each entry from journal is posted to respective Account in the ledger.

Balancing of Ledger account-
Balancing of ledger account means finding the difference between the heavier total, and lighter total of ledger account and recording that difference on lighter total side.
At the end of the accounting year all accounts operated in the ledger are totalled and balanced.
Steps required for balancing of ledger account are given below:

• First do totalling of debit side and credit side of ledger account separately on rough sheet.
• Find out difference by subtracting lighter total from heavier total. Such difference is called balance.
• Draw a single line before making the totals.
• Draw double lines across the amount column after the totals are made.
• If total of debit side of ledger account is heavier than total of credit side of that account, the balance is called debit balance and is written on credit side (i.e. on the side where total is lighter) as “By Balance (c/fd.) or (c/d)”.
• If total of credit side of ledger account is heavier than total of debit side of that account, the balance is called credit balance, and is written on debit side (i.e. on the side where total is lighter) as “To Balance (c/fd) or (c/d),”
• Last year’s closing balance, becomes opening balance of current year. If there is debit balance it should be shown on debit side of concerned account as “To Balance (b/d) or (b/fd)” and vice versa.

Preparation of Trial Balance-
(i) Introduction: As and when business transactions take place, the same are first recorded in the journal in the summarised form and subsequently they are posted to respective ledger accounts. This in short is known as journalisation and ledger posting respectively. This process of normalisation and ledger posting are continuously done throughout the accounting year and then at the end of the accounting year all ledger accounts are closed, totalled and balanced.

On totalling and balancing, some ledger accounts show debit balances and some ledger accounts show credit balances. In rare cases some ledger account do not show any balance. After this process, a statement is prepared by businessman or accountant wherein total of debit side and credit side of every ledger account or net balance shown by every ledger account is systematically recorded to ascertain arithmetical accuracy and to detect errors or frauds committed in the business. This statement is called the trial balance.

(ii) Meaning: Trial balance is an abstract or list of all the ledger accounts as on a specified date showing debit total and credit total of all the accounts or their balances. A trial balance may be prepared on any date, but it must be prepared by a businessman at the close of the accounting year.

(iii) Definitions: (1) “It is the final list of balances, totalled and combined.” – Rolland
(2) “It is a list of abstract of the balances or of total debits and total credits of accounts in a ledger, with the purpose being to determine the equality of posted debits and credits and to establish a basic summary for financial statements.” – Eric Kohler.

(iv) Types of Trial Balance: A trial balance can be prepared in one of the following two forms, viz.
(i) Gross trial balance, and
(ii) Net trial balance. Each of them is discussed below:

(i) Gross Trial Balance: Gross Trial Balance is a type of trial balance in which total of debit column and total of credit column of all ledgers are recorded and posted in respective columns of trial balance. Gross trial balance is prepared by transferring the total of debit column and total of credit column from each ledger account and posted and entered in the respective columns of the trial balance. Gross Trial Balance is not so popular or common in the business world.

(ii) Net Trial Balance: Net trial balance is a type of trial balance in which net balance shown by each ledger account is systematically transferred and recorded. Net trial balance is prepared by transferring net balance shown by ledger accounts in respective columns, i.e. debit balance in debit column and credit balance in credit column of the trial balance. Ledger account which does not show balance is not transferred to trial balance. Net trial balance is more common and popular in the business world. It is extensively used by the business people.

The following illustration will explain the difference between Gross trial balance and Net trial balance.

(v) Methods of preparing trial balance :
Trial balance can be prepared in any one of the following 2 forms : (i) Vertical or Journal form of Trial Balance and (2) Horizontal or Ledger form of Trial Balance.

(1) Vertical or Journal Form of Trial Balance

Explanation of columns:

• Particulars Column: In this column name of account is written.
• Ledger Folio (L.F.): In this column page number of ledger from where balance is extracted and transferred to trial balance is written.
• Debit balance: In this column accounts having debit balances are written in figures.
• Credit balance: In this column accounts having credit balances are written in figures.
• After writing all the balances in debit column and credit column, amounts written in debit column and amounts written in credit column are totalled separately. If the total of debit column agrees with the total of credit column, it is said that trial balance is tallied.

(2) Horizontal or Ledger Form of Trial Balance:

This trial balance has two main sides viz left-hand side and right-hand side. On the left-hand side debit balances are written down and on the right-hand side, credit balances are noted down.
Each side has three columns viz. name of the accounts, L.F. No. and Amount.

Explanation of columns:
(1) Left-hand side: In the first column names of the accounts having debit balances are written.
In the second column i.e. L.F. column Page No. of Ledger from where balance is extracted and transferred to Trial balance is written. In the third column balance amount of the account is written in figures.

(2) Right-hand side: In the first column names of the accounts having credit balances are written.
In the second column i.e. L.F. column Page No. of Ledger from where balance is transferred is written.
In the third column balance amount of Account is written in figures.

(vi) Utility of Trial Balance :
(1) Trial balance is prepared to know the final balance of every account.

(2) Trial balance is prepared to ascertain arithmetical accuracy of ledger accounts. If total of debit column and total of credit column of the trial balance tallies with each other, then it is proved that, no mistakes of whatsoever nature, has been committed in writing accounts. It is also confirmed that the posting to ledger account in terms of debit and credit amount, carry forward, etc. are accurate.

(3) Trial balance is also useful for preparation of final accounts like Trading Account, Profit and Loss Account and Balance Sheet. It is also useful to prepare other important financial statements.

(4) To locate accounting errors committed in writing accounts, a trial balance is used. Trial balance will not tally if mistakes or omissions in writing accounts carry forward, etc. are committed.

(5) Trial balance provides a condensed picture of each account opened and operated in the ledger. With the help of trial balance, the position of any account prepared in the ledger can be easily known or found without referring to the ledger.

By going through these Maharashtra State Board Bookkeeping and Accountancy 11th Notes Chapter 7 Depreciation students can recall all the concepts quickly.

Maharashtra State Board 11th Accounts Notes Chapter 7 Depreciation

Meaning And Definition of the Term Depreciation-

When fixed assets are used for producing goods and services of a business, their values are bound to decrease. Such reduction in the value of fixed assets due to their productive use is called depreciation. The word ‘depreciation’ is derived from the Latin word ‘depretium’ which means ‘decline’ or ‘reduction’ in value of a fixed asset due to its natural wear and tear or any other similar causes.

In the words of well-known author Carter, “Depreciation is a gradual, continuous and permanent decrease in the value of the asset from any cause whatsoever according to William Pickles, “Depreciation is the gradual and permanent decrease in the value of an asset from the cause.” The following illustration will make the above idea clear. If the computer costs you ₹ 35,000 when you purchase it.

After using it for two years, if you want to sell it away, you will not get ₹ 35,000 but much less than its original price. Such reduction or loss in price whatsoever takes place and in accounting, the terminology is known as depreciation. Depreciation is always charged on fixed assets. It is a part of operating expenses. It is a reduction in the value of assets due to their productive uses, and such reduction is gradual, continuous, and permanent. Depreciation A/c is a nominal account. Depreciation is always charged to Profit and Loss A/c at the end of the accounting year to arrive at a correct net profit or net loss of business. .

Causes of Depreciation-

Causes of depreciation are explained below:

• Natural wear and tear and antiquity: As a result of use of assets during the course of business, their value gets reduced every year. Value of fixed assets does not remain same due to natural wear and tear and antiquity.
• Passage of effluxion of time: Assets get depreciated due to effluxion of time hence it is necessary to
  depreciate them even if they are not in use.
• Obsolescence: On account of new inventions and technological development in asset or techniques of production, the old or existing assets become outdated, although they can be used. Such loss or reduction in the value of assets due to invention is called obsolescence.
• Natural calamities: Fall in the price of fixed asset may take place due to accidents like fire, earthquake, storm, cyclone, etc.
• Invention: When new machine or asset is invented, the earlier asset or machine in use may lose its utility and hence looses its value.
• Market value: The market price of an asset is also determined by its market demand and market supply. Market price of an asset goes on falling if its demand falls without corresponding fall in its supply.
• Depletion: To deplete means to empty. Depletion is also one of internal causes of decrease in value of wasting assets such as forests, oil wells, quarries, etc.

Need And Importance of Depreciation-

1. To ascertain true and correct profit and loss: Depreciation reduces value of assets. It is an expense of the business. This operating expense is charged to Profit and Loss Ac. Unless depreciation is written off to Profit & Loss Ac, profit or loss whichever is shown by P/L Ac will not give, correct result.

2. To present a true financial position of business: A1 types of assets belonging to business are listed
and shown on the asset side of the balance sheet. Balance Sheet shows correct and true financial position of a business if assets are shown by deducting depreciation from its original value.

3. Replacement of assets: Every asset used in business has specific life. At the end of its life that asset is required to be replaced by new asset. If depreciation fund is created and accumulated by charging it to Profit & Loss A/c every year, it enables the business to replace asset at due time.

4. To compute correct tax liability: When depreciation is charged to Profit & Loss A/c correctly along
with other business expenses and losses, it will give correct result of profit or loss. This enables business to compute and pay correct tax on taxable profit. It is necessary to charge depreciation to comply with the provisions made in Companies Act and Income Tax Act.

Factors Affecting Depreciation-

The factors affecting depreciation are stated as follows:

(i) Cost of an Assets: Cost of asset is one of the important factors required to be considered for computation of depreciation. Cost of asset refers to the purchase price of asset and its incidental or installation charges. In short Cost of Asset = Purchase price of asset + its incidental or installation charges. Incidental or installation charges refer to all those expenses incurred by business in connection with purchase of asset i.e. transportation cost, custom duty, octroi, brokerage, coolie charges, cost of fixing asset in factory, electrification charges, etc., e.g. a company purchased a machinery for ₹ 18,500/- and spent ₹1,500/- for erection of machinery. In this case cost of machinery is (18,500 + 1,500) ₹ 20,000/-. There is a direct relation between cost of asset and depreciation chargeable on that asset per year.

(ii) Residual Value (or Estimated Scrap Value): This is another important factor considered for computation of depreciation on asset. Total amount whatsoever received by selling used or obsolete asset or its spare parts is called residual value or scrap value, e.g. a company purchased a machinery for ₹ 20,000 and used it for 9 years. Then company sold it away for ₹ 3,000/-. Here residual value is ₹ 3,000/-.

(iii) Estimated Life of an Asset: The specific period for which fixed assets give useful services to the business organisation is called estimated life of an assets e.g. a machinery may be useful to the business say for 10 years. After 10 years its replacement is necessary to carry on business further. Usually life of the fixed assets is determined by the experts in the respective field. Depreciation is calculated by dividing net cost of asset by the estimated life of the asset.

Formula For Computation of Depreciation-

For computation of depreciation on fixed asset, following factors are considered viz. (a) cost of asset (b) estimated life of an asset and (c) residual value of asset i.e. scrap value.

(Where Cost of asset = Purchase price + Incidental charges.)
e.g. A Ltd. Co. purchased a machinery for ? 44,000/- and spent ? 1,000/- on its installation. Its estimated life is 10 years and its estimated residual value is ? 5,000/- work out depreciation chargeable per year.

Methods of Depreciation-

Depreciation on fixed asset may be charged by any one of the following given methods:

• Fixed Instalment Method
• Reducing Balance Method
• Annuity Method
• Depreciation Fund Method
• Insurance Policy Method
• Revaluation Method
• Machine Hour Rate Method etc.

(Only first two methods of depreciation are covered in this syllabus)

Fixed Instalment Method-

Meaning: This method of depreciation is also known as straight line method or original cost method or fixed percentage method of depreciation. This is one of the simplest method of depreciation. As name indicates, under this method depreciation at fixed percentage is computed on original cost of asset every year. According to this method, over a every full year period amount of depreciation and rate of depreciation remain same. This method of depreciation enables the business to spread depreciation evenly over a life period of asset.

Main features: Main features of fixed instalment method of depreciation are explained below :

• Depreciation is charged every year on original cost of asset.
• Amount of depreciation remains same over an every full year if there is no purchase or sale of assets.
• Rate of depreciation remains same every year.
• Amount of depreciation charged to Profit and Loss A/c remains identical during the economic life of the asset.

Advantages: Advantages of fixed instalment method of depreciation are as follows:

• It is simplest method of depreciation. Depreciation can be computed easily.
• Burden of depreciation amount spreads evenly over economic life of the assets.
• Book value of asset can be reduced to zero after its estimated useful life.
• If addition is made to existing assets with same life period, no separate calculations need to be made for ascertaining depreciation.

Disadvantages:

• If addition is made to existing assets which does not have same working life span, separate calculations for depreciation are required to be made for every new asset every time.
• In later life of asset, depreciation and repairs and renewal charges together give heavier burden on the business.
• This method of depreciation does not consider or take into account, interest chargeable on amount
  invested in asset while charging depreciation on asset.

Reducing Balance Method-

Meaning: This method of depreciation is also known as written down value method or diminishing balance method of depreciation. It is a method of depreciation in which depreciation is computed at a fixed rate not on original cost of asset but on reducing balance of asset appearing at the beginning of each year. Under this method of depreciation, amount of depreciation goes on reducing year after year, but rate of depreciation remains fixed and same.

Main features : Main features of reducing balance method of depreciation are as follows:

• Depreciation is charged every year on opening cost of asset that appears in the beginning of the every year.
• Rate of depreciation charged, every year remains fixed and same.
• Amount of depreciation goes on reducing year after year.

Advantages:

• Under this method of depreciation, Profit and Loss A/c is debited uniformly for depreciation and repair charges every year in the sense that in the beginning depreciation amount chargeable is higher and repairs and renewal charges are lower. But in the later life of asset depreciation amount comes down with increase in the cost of repairs and renewals of asset.
• Under this method depreciation is charged on balancing cost of asset every year. Therefore there is no need to calculate depreciation separately on additions, if any, made.
• This method of depreciation is acceptable by business community as well as income-tax authority as
  correct method of depreciation.

Disadvantages:

• As per this method of depreciation, interest on investment of asset made is altogether ignored while charging the depreciation.
• Value of asset cannot be brought down to zero even after its working life.
• If depreciation is considered for costing purpose, it costs higher in the beginning due to higher depreciation and in later life it costs lesser due to less amount of depreciation.

Illustrations: The following illustration will explain difference between fixed instalment method of depreciation and reducing balance method of depreciation. Let us presume that cost of machinery is ? 1,00,000/-. Rate of depreciation chargeable is 10% p.a.

Year	Fixed Instalment Method	Reducing Balance Method
I	₹ 10,000/- (10% of 1,00,000)	₹ 10,000 (10% of 1,00,000)
II	₹ 10,000/- (10% of 1,00,000)	₹ 9,000 (10% of 90,000)
III	₹ 10,000/- (10% of 1,00,000)	₹ 8,100 (10% of 81,000)
IV	₹ 10,000/- (10% of 1,00,000)	₹ 7,290 (10% of 72,900)                  ‘
V	₹ 10,000/- (10% of 1,00,000) i.e. 10% on the original cost	₹ 6,561 (10% of 65,610) i.e. 10% on the balance.

Difference Between Fixed Instalment Method And Reducing Balance Method-

Fixed Instalment Method:

1. Meaning: Method of depreciation in which depreciation at fixed percentage (rate) is charged every year on original cost of fixed asset is called ‘Fixed Instalment Method’.
2. Amount of depreciation: Unless there is addition on or sale of fixed assets, the amount of depreciation remains same (constant) every year.
3. Suitability: This method of depreciation is easy to calculate and more suitable for the assets of small value and does not require to spent any amount on repairs and maintenance.
4. Acceptance of method: This method of depreciation is not accepted for income tax purposes.
5. Charge: Depreciation is charged on the original cost of asset every year.
6. Book value: After certain year book value of the asset becomes zero.

Reducing Balance Method:

1. Method of depreciation in which depreciation at fixed percentage (rate) is charged every year on opening cost of fixed asset is called ‘Reducing Balance Method’.
2. Unless there is any addition to or sale of fixed asset, the amount of depreciation goes on reducing every year.
3. This method of depreciation is difficult to calculate and more suitable for the assets of higher value having longer life requiring heavy expenditure in later life of assets.
4. This method of depreciation is accepted for calculation and payment of income tax.
5. Depreciation is charged on written down value of asset every year.
6. The book value of asset never becomes zero.

Accounting Treatment of Depreciation-

(A) Journal entries in the books of firm.

(B) Ledger Accounts in the books of firm

By going through these Maharashtra State Board Bookkeeping and Accountancy 11th Notes Chapter 3 Journal students can recall all the concepts quickly.

Maharashtra State Board 11th Accounts Notes Chapter 3 Journal

Introduction-

The businessman or accountant records all day-to-day business transactions in the books of account on the basis of supporting documents. The word ‘document’ means a piece of paper or booklet providing information, especially of an official or legal nature. Accordingly, a source document refers to the first document to record the transactions in the journal or subsidiary books of account. It is a first or original document on the basis of which information is recorded in, the different books of accounts. When we purchase machinery in cash for ₹ 50,000, we get the cash memo. Such a cash memo is a sources document.

Thus, cash memos, vouchers, debit and credit notes, pay-in-slip, receipts, withdrawal slips, inward and outward invoices, cheques, etc. are the different source documents, businessmen use in their day-to-day business transactions. Each and every accounting entry is supported by the relevant documentary evidence called ‘accounting documents’. Accounting documents provide a base for entering business transactions in the books of accounts.

Importance and Utility Of Accounting Documents-

• Accounting documents are useful for recording all business transactions into the books of accounts.
• Accounting documents help to record business transactions in the proper mode.
• Accounting documents can be kept physically in files or they can be stored in the software.
• Accounting documents can be used as legal evidence in a court of law.
• They are also required by the charity commissioner’s office.
• They are needed for payments of state government and local body authority.

Important Accounting Documents are Explained As Follows-

Voucher : A document that supports a payment made by the business is called voucher. It is a legal proof of certain amount money is paid to a person or party. The different types of vouchers prepared by the accountants, e.g. Cash voucher, Bank voucher, Purchase vouchers, Sales vouchers, Travel bills, Wage bill, Salary bill, etc. Vouchers are classified as internal voucher and external voucher.

• Internal voucher : The voucher which is prepared in the organisation by the accountant is called internal voucher. It is created by the accountant and singed by the payee. It is prepared when organisation cannot get receipt or any other legal proof for payment made, e.g. payment of taxi fare, auto fare, coolie charges, payment made to scavengers, etc.
• External voucher : The vouchers which are generated or prepared outside the business organisation are called external voucher. It is a document receipt from outside agency after making payments, e.g. receipt of electricity bill paid, tax invoice received from seller for purchase of goods, etc. Debit note, credit note, cash memo, etc. are called external voucher.
• Journal voucher : The vouchers on the basis of which business transactions are recorded in the journal book. The specimen of journal voucher is given below:

(iv) Cash voucher : The legal proof or evidence of cash receipts and cash payments is called cash voucher. Accounting document obtained from payee is also called cash voucher. Entries in the cash book are made on the basis of cash vouchers. The specimen of cash voucher is given below:

(v) Tax invoice : A document which is prepared by the seller to inform the buyer about the quantity of goods supplied rates and terms of payment, trade discount if any allowed, CGST and SGST charged on the goods supplied and total amount payable by the buyer is called Tax invoice. Tax invoice is considered by buyer as ‘Purchase invoice’ or ‘Inward invoice’. Same tax invoice is considered by seller as ‘Sales invoice’ or ‘Outward invoice’. Tax invoice is prepared and sent by seller to buyer after the goods are supplied to buyer. The buyer makes the entries in the purchase book on the basis of purchase invoice and the seller makes the entries in the sales book on the basis of sales invoice.
The specimen of Tax invoice is given below :

(vi) Credit Memo : When the goods are sold on credit the supplier of the goods issues a document called credit memo to the purchaser of goods. It is also known as ‘Bill’ or ‘Invoice’. The period of credit, date of payment, name of customer, address of the customer, etc. are mentioned on this document. Credit memos are usually printed and serially numbered by machine. Credit memo is prepared in duplicate. The second copy i.e. carbon copy is retained by the seller. On the basis of carbon copy of the credit memo entries in the books of seller are made. Credit memo is sent by the seller to the buyer. The buyer’s signature is obtained on the carbon copy. The entries made in the sales book are verified on the basis of credit memo.

(vii) Receipt : A document issued by the receiver of money or creditor to acknowledge the receipt of cash or payment of debt is called a receipt. It serves as proof of payment. It is a written acknowledgement that one has received goods or money. It is issued by the receiver to the person who makes payment or gives money. Receipt is a main document on the basis of which the debit side or the receipts side of the cash book is written. The specimen of Receipt is given below:

(viii) Cheque : A cheque is a document used by an account holder for withdrawing cash from the bank or for making payments to other people through the bank. A cheque book contains 10, 25, 50 or 100 blank cheques. Cheques are serially numbered. A cheque book is provided by the bank to account holders free of charge, if the account holder agrees to keep a minimum balance of ₹ 1,000/- in his account.

In legal language, a cheque is a written unconditional order of the account holder to his banker to pay a certain sum of money only to himself or to bearer or to the person named therein. The person to whom the amount of cheque is payable is called payee and the bank on whom the cheque is drawn is called the drawee bank, and account holder who issues the cheque is called the drawer.

A separate slip with the printed columns are attached at the end of the cheque book to write details regarding cheques issued.
The cheque may be classified as Bearer Cheque, Order Cheque and Crossed Cheque.
Contents : The cheque contains the following details:

• Name of the bank and its branch. The address of the branch. They are printed on the cheque.
• Date of banking transaction.
• Name of payee.
• Amount in words and in figures.
• Account No. / L.F.
• Signature of the Account holder.
• Cheque No.
• MICR No. / Code No. They are usually printed.

Specimen of cheque is given below:

(a) Bearer Cheque: Bearer means possessor. In case of bearer cheques, a bank makes immediate cash payment to the possessor of the bearer cheque on its presentation. For immediate withdrawal of cash, a bearer cheque is used by the account holder. A cheque on which instead of writing name of the payee, the word self is written, is called a bearer cheque. The bearer of a cheque has to make a signature on the back
of the bearer cheque before withdrawing money from the bank. While making cash payment, against bearer cheques a bank never makes inquiry whether the payee is a wrong doer or not. A bearer cheque is very dangerous, because, in case it is lost, the possessor, can easily obtain cash from the bank. A bearer cheque is as good as cash, because it can be encashed by any one at any time during banking hours.

Specimen of bearer cheque is given below:

(b) Order Cheque : A cheque in which the account holder orders the bank to make payment to a person whose name appears on the cheque, is called an order cheque. In this type of cheque, word ‘bearer;’ after the name of payee is struck off and word ‘order’ is retained. An order cheque is safer than a bearer cheque. While making cash payments against order cheques, a bank makes inquiry whether the possessor of the order cheque is the right person or not.

Specimen of order cheque is given below :

(c) Crossed Cheque :
Crossed cheque is a cheque on which two parallel transverse lines are drawn on the face of the cheque at the left hand top corner with some words or without any word. When the crossed cheque is presented for payment it is not paid in cash to payee or possessor, but it is credited to the payee’s account in the bank and after two or three days, payee i.e. account holder is permitted to withdraw the amount from the bank if it is cleared and not dishonoured. This type of cheque is more safe than any other. If a crossed cheque is lost, a wrong doer cannot obtain payment from the bank. The bank never makes immediate cash payment on counter on presentation of a crossed cheque. Crossed cheques are sent to distant places by ordinary post safely.

Specimen of crossed cheque is given below :

(d) Account Payee Cheque :
A cheque is said to be A/c payee crossed cheque, when the drawer inserts the words ‘A/c payee’ in between the two parallel transverse lines of a crossed cheque. When the drawer of a cheque desires to pay the amount of a cheque to the banker who has an account of the payee for the benefit of the payee; he issues an A/c payee crossed cheque. In this type of crossing, there is direction to the collecting banker to collect the amount of the cheque for the benefit of the payee. This type of crossing prevents further negotiability of a cheque.

Specimen of an A/c payee crossed cheque is given below:

Journal-

Meaning:
Journal is the most important book of accounts, in which business transactions are systematically recorded.
It is a book of daily records. As and when a businessman completes a business transaction, he records it in
the rough or waste book in a short and summarised form. Then this business information from the rough
book is recorded in a journal. Thus, business transactions are recorded in a journal on the basis of the rough
book or waste, book.

The word bJournal is derived from the French word ‘jour’, which means ‘a day’. Accordingly, journal is a book of daily records. Journal is one of main books of original entry in which transactions are recorded for
the first time, from source documents. This is also known as the book of original entry or first entry or
primary entry. Business transactions are first entered in a journal and subsequently they are posted to another account book called ledger. Journal is a book of account in which all types of day to day business transactions are recorded in chronological order (i.e. datewise). In a journal, business transactions are recorded systematically and in summarised form by following the rule of debit and credit.
According to L. C. Cropper, “A journal is a book, employed to classify or sort out transactions in a form convenient for their subsequent entry in the ledger. ”

Generally, the following Books of Accounts are maintained by a businessman for recording the business transactions.

(ii) JOURNAL (Definition) :

• According to a Dictionary for Accountant written by Eric Kohler – “A Journal is the book of original entry in which are recorded transaction not provided for in specialised journals. ”
• “Journal is a book of original entry or prime entry in which all day to day transactions of business are recorded first in chronological order firstly in debit and credit form in a systematic manner. ”

(iii) IMPORTANCE OF JOURNAL :
The importance of a journal is explained as below:

• A journal is very important from the business point of view as it creates complete, preliminary and basic records of accounting transactions.
• In a journal business transactions are recorded in chronological order which is useful for easy reference in the future.
• Information recorded in the journal serves as a proof or evidence which can be used to defend the suit filed against the business concern or to prove claims in the court of law.
• Information recorded in the journal provides the base for ledger posting.
• It provides a base for cross checking of accounting entries posted in the various ledger accounts.
• It maintains the detail records of each transaction in the form of narration which is written immediately after passing the accounting entry.
• It provides the base for advanced accounting work and helps in preparation of final accounts.
• Arithmetical accuracy of the entries is ensured when the totals of debit and credit amount columns agree.

(iv) Utility of Journal :

Utility means usefulness. Journal is useful to different parties in different ways. The utility of a journal is explained as below:

• The journal as an account book is useful to the businessmen because it provides complete, detailed, datewise and accurate records of business transactions to businessmen as and when they need.
• The journal creates permanent records of business transactions which will be useful to businessmen in future.
• In a journal, business information is recorded in chronological order i.e. datewise systematically for easy reference.
• The business information in a journal is written on the basis of the waste book and different source documents systematically. Explanation of business transaction is also written just below the entry for a better understanding of the nature of business transactions.
• By referring to the Ledger Folio column in a journal, a businessman can easily refer to the position of that account in the ledger.
• On the basis of recorded business information in journal, ledger posting or filling of ledger can be done easily and at a convenient time.
• Business information which is recorded chronologically in a journal serves as valuable evidence in the court of law. The court of law recognizes a journal as an important evidence while proving or disproving the business claims. If insured goods are lost by fire, the insurance company or court of law determines the claim amount on the basis of information noted in the journal.
• With the help of journal and ledger, cross checking of business transaction is possible and bogus entries if at all passed can be easily found out.

(v) Specimen Form of the Journal :

(a) Specimen form of the journal is given below:

(b) Significance and explanation of columns provided in the journal :

(1) Date column: In this column of the journal, the date of transaction is written. Date of transaction is written in order of year, month and date. For example, 1st July, 1997 is written as 1997 July 1st.

(2) Particulars column: In the particulars column of the journal, the accounting entry is written in summarised  form of debit and credit. On the first line account debited is written. The word ‘Dr’ is written at the right  end of particular column or the same line of account debited. On the second line account credited is written with a prefix the word ‘To’ after leaving short space from the date column. Just below this accounting entry narration i.e. explanation of business transaction, is written in brackets. Narration begins with the word “Being”.

(3) Ledger Folio No. Column : In the Ledger Folio No. (L.F. No.) column of the journal, the page number of s
the ledger on which the journal entry is posted, is recorded. The page number of the ledger is recorded in ,
red ink for easy reference. By referring to the ledger page as indicated in the journal under L.F. No. column, businessman can easily ascertain the exact financial position of that account.

(4) Debit amount and Credit amount columns : In the journal, the fourth and fifth columns are provided
for debit amount and credit amount respectively. In those columns, amounts of business transactions are entered, in figures.

Totalling (Casting) of Journal: At the end of each page of the journal, the total of the amounts recorded ‘
in Debit column and Credit column is done to check arithmetical accuracy of the amount recorded in debit ‘
and credit columns of the journal. The total of both the columns must agree with each other. This totals are again recorded on the next page in the beginning as total brought forward from the previous page. On the
last page of journal ‘Grand Total’ is cast.

(vi) Journalisation:

(a) Meaning of Journalisation : Journalisation refers to recording business transactions systematically and in summarised form in the journal. In other words, journalisation means a process of entering two fold effects of business transactions –
in the summarised form of debit and credit in the journal.

(b) Steps to be taken for journalisation of business transactions are discussed below:

• Read the given business transaction, understand it and find out the different accounts involved in it.
• As per nature and types of those accounts, apply rules of journalisation for giving debit and credit effects to those accounts.
• Record date of business transaction in the date column and account to be debited on first line and account to be credited on the second line in the particulars column of the journal.
• The word Debit in abbreviation is written as ‘Dr’, and the same letters are written against the name of the account debited. The word ‘To’ is written preceding to the name of account credited. For example, the entry for credit sale of goods to Kishor is recorded in the journal under particulars coloumn as:
  
• Enter the amount of business, transaction in debit column and credit column of the journal. Draft the narration in simple and short words.
• A blank line should be drawn or left before writing the next entry in the particulars column of the journal.
• L.F. (Ledger Folio) i.e. the page on which the particular account is opened in ledger is stated under the LF. column for easy reference.

Steps in journalisation :

(vii) Goods Account : In the books of account, Goods Account does not appear. It is usually classified as Purchase A/c, Return Outward A/c (Purchase Return A/c), Sales A/c, Return Inwards A/c (Sales Return A/c), Goods destroyed by Fire A/c, Goods distributed as free samples, Goods withdrawn by the Proprietor’s A/c, Goods damaged or Lost in Transit A/c, etc.
Purchases are of two types viz. Cash Purchases and Credit Purchases. Similarly Sales are of two types viz. Cash Sales and Credit Sales.

(viii) Types of Journal Entry :
The different types of journal entries are shown in the following chart:

The different types of journal entries are explained below:

(a) Simple Journal Entry : A journal entry in which only two accounts are affected of which one account is debited and the other account is credited is called simple journal entry. In a simple entry, one account is always debited and othei account is always credited.

Example of simple jourr al entry is given below:
Purchase furniture for ₹ 25,000.

(b) Combined Journal Entry: Journal entry may be classified as simple journal entry and compound / combined journal entry. A journal entry which contains more than one debit and more than one credit or both is called combined or compound journal entry. In a combined journal entry: (i) one account is debited and more than one account are credited or (ii) more than one account are debited and one account is credited or (iii) more than one account are debited and more than one account are credited.

Illustration of combined entry is shown below :

(c) Opening Entry: The combined journal entry which is passed in the books of accounts in the beginning of the accounting year to record the balances of all assets and liabilities of the business carried forward from the last Balance Sheet is called opening entry. In the Balance Sheet, balancing value of assets, liabilities and capital of the business enterprise on the last day of the financial year are recorded. In the beginning of the next financial year, new books of accounts are opened and balances of assets, liabilities and capital account recorded in the previous balance sheet are brought forward. The positive difference between account debited and account credited in the opening entry is treated as capital fund of the proprietor. Thus, in the beginning of the year capital fund is ascertained by deducting all liabilities from all the assets. In the form of equation.

Capital = Total Assets – Total Liabilities

GST-

(i) Meaning : GST is the abbreviation of Goods and Service Tax. Before the application of GST every state used to impose variety of taxes at different stages of trading. The different taxes which existed before were: Excise duty, Custom duty, VAT i.e. Value Added Tax, Entertainment Tax, Central Sales Tax, Octroi, etc. Now all these taxes are brought under one head called GST. GST is also called One nation, one tax, one market. GST is implemented with effect from 1st July, 2017.
In the tax invoice for Goods there is Harmonised System of Nomenclature Code (HSN) whereas in the tax invoice for services there is Service Accounting Code (SAC).
The chart showing goods and services and Rate of GST applicable is given below :

Note :

(1) The rates and types of GST are as prescribed by the government. GST rates are subject to change. Electricity, petrol, diesel etc are not under purview of GST.

(2) IGST means Integrated Goods and Service Tax. This is one of the three categories under Goods and service Tax (CGST, IGST and SGST) with concept of‘One Tax One Nation’.

IGST falls under integrated Goods of Service Tax Act 2017.
IGST is charged when movement of goods and services take place from one state to another.

Discount-

Discount is a concession given in monetary term by one trader to another trader for purchase of large quantity or for quick repayment. There are two types of discount viz.
(i) Trade discount and (ii) Cash discount.

(i) Trade Discount: It is a discount given by one trader to another trader like manufacturer to wholesaler or wholesaler to retailer to induce the later to purchase a large quantity of goods. It is given for credit transaction also. It is deducted from invoice price of goods and not recorded in the books of account, e.g. Sold goods to Ravi for ₹ 1,000 on 10% Trade discount.

(ii) Cash Discount: It is a discount given by the seller to the purchaser for quick cash payment. It is given or received for cash transaction and cash payment only. It is calculated after deducting trade discount i.e. on the net price and recorded in the journal by means of entry, e.g. Sold goods to Ravi for ₹ 1,000 on 10% T.D. and 5% C.D. terms and cash paid.

Distinguish Between Trade Discount And Cash Discount-

Trade Discount Cash Discount:

• It is given for cash as well as credit transactions.
• It is calculated on the gross price i.e. invoice price.
• It is calculated before cash discount.
• It is deducted from the price and not recorded in the books of account.
• It is given for large purchases to encourage a buyer to buy more and more quantities.

Cash Discount:

1. It is given for cash transactions only.
2. It is calculated on net price.
3. It is calculated after trade discount.
4. It is recorded in the books of account.
5. It is given for quick payment to induce the buyer to make quick payment.

By going through these Maharashtra State Board Bookkeeping and Accountancy 11th Notes Chapter 10 Single Entry System students can recall all the concepts quickly.

Maharashtra State Board 11th Accounts Notes Chapter 10 Single Entry System

Introduction-

On account of many factors such as incomplete knowledge of accounting principles, lack of experience of writing accounts, less staff,.shortage of finance, time factor, etc., small businessmen cannot adopt the scientific method of accounting to record their business transactions systematically in the separate set of books.

However, they record only a single aspect of every business transaction in their books to ascertain the result of business and to know the amount receivable from customers and amount payable to suppliers or lenders. They keep record of cash received, cash paid, cash sales, cash purchases, debtor’s account, creditor’s accounts, etc. Thus, any set of procedure adopted to ascertain business result is usually referred as Single entry system of accounting. Although single entry system of accounting.is suitable for small business, it suffers from many drawbacks.

Meaning And Definition of Single Entry Book Keeping System-

A system of book-keeping in which the accountant or the businessman records only one aspect of business transaction and ignores the other aspect is called ‘Single entry book keeping system’. Under single entry system of book keeping, only record of cash and personal accounts are maintained.
According to Kohler, single entry book-keeping refers to “a system of book-keeping in which as a rule only records of cash and of personal accounts are maintained, it is always incomplete double entry, varying with circumstances.”

According to this definitioft, under single entry system accountants or businessmen keep records of those transactions and accounts which they find absolutely necessary. Under this system cash accounts, debtor’s accounts and creditor’s accounts are maintained. The record of impersonal accounts such as real accounts and nominal accounts is not maintained under this system.
When businessmen or accountants adopt single entry book-keeping system, they calculate profit or loss made during the accounting year by any one of the following two methods viz. (i) Statement of Affairs methods and (ii) Conversion method.

Difference Between Single Entry System And Double Entry System-

Single Entry System:

1. Meaning: A book keeping system in which only one aspect of every business transaction either debit or credit is recorded in the books of accounts is called ‘Single Entry System’.
2. Nature : It is unscientific and incomplete system of accounting.
3. Transactions Recorded: Under this system, records of only personal accounts of debtors and creditors and cash book are prepared and maintained.
4. Suitability: It is suitable for small business organisations such as sole trading concerns and partnership firms.
5. Arithmetical Accuracy: Under this system trial balance cannot be prepared to check arithmetical accuracy.
6. Final Accounts: Under this system final accounts cannot be prepared. Instead statements of affairs and statement of profit or loss to find out business result and financial position.
7. Authenticity: This system cannot be considered authentic and hence it is not accepted by the court of law.
8. Cost: This system is relatively less expensive.

Double Entry System:

1. Meaning: A book keeping system in which dual aspects of every business are systematically recorded in the books of accounts is called ‘Double Entry System’.
2. Nature : It is more complete and scientific system of accounting.
3. Transactions Recorded: Under this system, personal, nominal and real accounts including cash accounts are prepared and maintained.
4. Suitability: It is suitable for all types of business organisations whether small or large scale.
5. Arithmetical Accuracy: Under this system trial balance is prepared to find out arithmetical accuracy.
6. Final Accounts: Under this system final accounts are prepared to find out true business result and financial position of the business.
7. Authenticity:This System is considered authentic and hence it is accepted by the court of law.
8. Cost: This system is relatively more expensive.

Statement of Affairs-

A list of all assets and liabilities prepared under single entry system to find out capital balance is called statement of affairs. It is just similar to Balance Sheet prepared under double entry system. On left hand side of this statement all liabilities are recorded and on the right hand side all assets are recorded. It is usually prepared to find out capital employed in the business.

Statement of affairs prepared on the basis of opening balances of assets and liabilities in the beginning of the accounting year is called opening statement ,
of affairs and a statement of affairs prepared on the basis of closing balances at the end of the year is called closing statement of affairs. From the opening statement of affairs, opening capital is ascertained and from closing statement of affairs capital at the end of year is ascertained. If capital at the end of the year exceeds the opening capital, there is a profit. If opening capital exceeds the capital at the end of the year, there will
be loss.

Proforma of Statement of Affairs :

Difference Between Balance Sheet And Statement of Affairs-

Balance Sheet:

1. Meaning: A statement showing the position of assets and liabilities at their correct values at the end of the accounting year is called Balance Sheet.
2. Objective : The objective of preparing balance sheet is to ascertain the financial position of the business.
3. Accounting System: Balance Sheet is prepared under double entry book-keeping system.
4. Value of Assets and Liabilities : In the balance sheet assets and liabilities are shown at their actual cost shown by the ledger.
5. Capital: In the balance sheet, capital account balance is taken from ledger account.
6. Reliability: As Balance Sheet is prepared by following the principle of double entry system, it is more reliable.
7. Arithmetical accuracy: If balance sheet is tallied it proves that there is no arithmetical mistakes.
8. Omission: Omission of any asset or liability can be easily trace out in case balance sheet does not tally.

Statement of Affairs:

1. Meaning: A statement showing the position of assets and liabilities at their approximate or estimated value at the beginning or end of the accounting year is called ‘Statement of Affairs’.
2. Objective : The objective of preparing statement of affairs is to find out capital invested in the business and thereby find out profit or loss of the business.
3. Accounting System: Statement of affairs is prepared under single entry system.
4. Value of Assets and Liabilities : In the statement of affairs assets and liabilities are shown at their estimated values.
5. Capital: In the statement of affairs, capital fund is worked out by ascertained balancing figure.
6. Reliability: As statement of affair is prepared on the basis of estimated amount, it is less reliable.
7. Arithmetical accuracy: In the case of statement of affairs, there is no scope for finding out arithmetical accuracy.
8. Omission: In case of statement of affairs omission of any asset or liability cannot be traced out.

Statement of Profit or Loss-

Under single entry system financial position is ascertained by preparing statement of affairs. Similarly business result is ascertained by preparing statement of Profit or Loss.
Under single entry book keeping system, Profit or Loss of the business in a particular year is calculated by following one of the following two method viz.
(i) Net Worth Method and (ii) Conversion Method
(Please note that conversion method is not prescribed in XI syllabus)

Net Worth Method :
Under this method profit is calculated by deducting capital at the beginning of the year from the capital at the end of that accounting year. From the balancing figure amount of drawings made during the accounting year is added and addition made to capital if any is deducted. The balancing figure represents trading profit or profit before adjustments. From trading profit business expenses are deducted and business incomes are added to get net profit of the business. For this statement of Profit or Loss is prepared.

The statement prepared by the business organisation under single entry to find out profit earned or loss suffered is called statement of Profit or Loss. The following accounting items are considered in the Statement of Profit or Loss viz. Opening Capital, Capital at the end of the year, drawings made during the year, additional capital introduced during the year, interest on capital, interest on drawings, all business expenses and all business incomes.

Proforma of Profit or Loss :

[Note: If result comes positive there is profit and if result comes negative there is loss]

Additional Information (Adjustments):

Information in respect of unrecorded transactions or unrecorded accounting effects are called additional information or adjustments :

(1) Additional Capital : Amount of cash or any other asset brought into the business by the proprietor any time during the accounting year is called additional capital.
Additional capital is introduced into the business by the proprietor, it increases the amount of closing capital. Hence, in order to calculate the profit, additional capital is deducted from the Closing Capital.

(2) Drawings: Total amount of cash or any other business asset withdrawn by the proprietor from the business for self use or family use is called drawings. Due to withdrawal of funds or assets closing capital decreases. Hence the amount of drawings is added to Closing Capital.

(3) Depreciation: The reduction in the value of fixed assets due to it use, wear and tear, etc. is called depreciation. Depreciation is charged against profit. Hence the amount of depreciation is deducted from trading profit.

(4) Bad Debts : Irrecoverable amount from the debtor is called Bad debts. Bad debts is treated as business loss. Hence the amount of bad debts is deducted from trading profit.

(5) Reserve for Doubtful Debts (Provision for Bad and Doubtful Debts): The provision made for probable loss is called ‘Provision for Bad and Doubtful Debts’. The amount of Provision for Bad and Doubtful Debts is deducted from Trading Profit.

(6) Undervaluation of Assets : Assets which are undervalued previously and if they are brought to correct value, there will be increase in the value of concerned assets.
Since Capital = Assets – Liabilities.
Increase in the value of asset results into the capital gain and therefore such increase is to be added to trading profit.

(7) Overvaluation of Assets : Assets which are overvalued previously and if they are brought to correct value, there will be decrease in the value of the concerned assets. Decrease in the value is a loss and hence overvaluation i.e. decrease in the value of asset is to be deducted from the trading profit.

(8) Undervaluation of Liabilities: Liabilities which are undervalued previously and if they are to be brought to the correct value, there will be increase in the value of liabilities. Increase in the value of liabilities deduces the volume of profit and hence undervaluation of liabilities i.e. increase in the value of liabilities is deducted from the trading profit.

(9) Overvaluation of Liabilities : Liabilities which are overvalued previously and if they are brought to correct value, there will be decrease in the value of liabilities. Decrease in the value of liabilities is a gain to the business and hence overvaluation of liabilities i.e. decrease in the value of liabilities is to be added to trading profit.

(10) Interest on Loan : Amount borrowed by the business enterprises from the financial institutions including banks for productive purpose is called loan. Interest on loan required to be paid by the business enterprise to the lending institutions. While calculating interest on loan the period for which it is used is to be considered. Interest on loan is an expenditure and hence the amount interest is to be deducted from trading profit.

(11) Interest on Capital: Interest on capital changed by the proprietor is an expense of the business. Hence amount of interest is deducted from the trading profit. On opening balance of capital interest at specified rate is to be calculated for complete one year and interest on additional capital introduced into the business during the accounting year is to be calculated at specified rate for the proportionate period i.e. from the date of investment of additional capital to the 31st March of the accounting year. E.g..Capital as on 1st April 2019 is ₹ 2,50,000 and additional capital of ₹ 50,000 is introduced into the business on 1st August 2019. The rate of interest on capital is 12% p.a.

Interest on capital is calculated as follows:

• On opening balance of ₹ 2,50,000 @ 12% for 1 year = 2,50,000 x 1 x \(\frac{2}{100}\) = ₹ 30,000
• On additional capital of ₹ 50,000 @ 12% for 8 months = 50,000 x \(\frac{8}{12} \times \frac{12}{100}\) = ₹ 4,000
  (i.e. from 1st August 2019 to 31st March 2020)
  Total interest on capital = 30,000 + 4,000 = ₹ 34,000

(12) Interest on Drawings : Interest charged on the drawing is an income for the business enterprises. Hence, amount of interest is always added to trading profit. If the dates of drawings are given, then interest is to be charged at specified rate for proportionate period i.e. from the date of drawing to the end of that accounting year.

If the dates of drawings are not given, then interest at the specified rate is to be calculated for average period of 6 months.

(13) Outstanding / Unpaid Expenses: Expenses that are due for payment but not yet paid are called outstanding or unpaid expenses. The amount of outstanding or unpaid expenses is charged against Profit and Loss A/c and hence the amount of outstanding/unpaid expenses is deducted from the trading profit.

(14) Prepaid Expenses / Expenses paid in Advance: Expenses that are paid before they are due for payment are called prepaid expenses. The amount of prepaid expense is added to the trading profit.

By going through these Maharashtra State Board Bookkeeping and Accountancy 11th Notes Chapter 9 Final Accounts of a Proprietary Concern students can recall all the concepts quickly.

Maharashtra State Board 11th Accounts Notes Chapter 9 Final Accounts of a Proprietary Concern

Meaning of Final Accounts-

Every business organisation prepares two important financial statements viz. income statements and statement of financial position to find out the result of business done in the accounting year and to find out financial position in the form of assets owned and liabilities payable to outsiders. In income statements Trading Account and Profit and Loss Accounts are prepared and in the statement of financial position Balance Sheet is prepared.

Thus, final account refers to the group of Trading Account, Profit and Loss Account and Balance Sheet. Final Accounts are prepared on the basis of trial balance and additional information called adjustments at the end of every accounting year.

Final Accounts may be defined as “the statements prepared at the end of an accounting year to disclose the financial position and performance of a business concern”.
Final Accounts include Trading Account, Profit and Loss Account and Balance Sheet.

Objectives of Final Accounts-

• To know the amount of Profit earned or loss if any suffered during the accounting period.
• To know the amount of assets and liabilities in the business on a particular date.
• To know the amount of capital in the business. ,
• To know the amount receivable from various debtors and the amount payable to various creditors.
• To know the Trading (Gross) profit, Operating (Net) profit and abnormal gains and losses.
• To enable the trader to compare the result and financial position of the business with other similar business.
• To find out or ascertain the amount of taxes, i.e. Income tax, Sales tax, Wealth tax, etc. payable to the government.
• To calculate the various ratios for the purpose of financial analysis.
• To enable the trader to take necessary policy decisions regarding future business activities.

Importance of Final Accounts-

• With the help of final accounts businessman can find out gross result, i.e. gross profit earned or gross loss suffered during the accounting period.
• Final Accounts helps to find out cost of goods sold.
• Current year’s stock can be compared with the previous year’s stock.
• Net Profit or Net Loss can be easily ascertain.
• Ratio of Net Profit to Net Sales can be easily calculated.
• Ratio of expenses to Net Sales can be ascertained.
• Comparison of actual performance with desired performance can be easily done.
• Financial position of the business can be ascertained.
• Proprietor’s equity can be ascertained.
• Facilitates the accountant to check arithmetical accuracy of the accounting records.

Trading Account-

Trading Account is a part of final accounts which is prepared on the basis of direct expenses and direct incomes of business to ascertain the gross result of the business, done in the accounting year. Preparation of Trading Account is the first step in preparation of final accounts. Trading Account is prepared by considering only direct expenses and direct incomes of the business. Expenses and incomes which have a direct connection with production are called direct expenses and direct incomes, e.g. power and fuel, cost of raw materials, wages etc. are called direct expenses, and sales proceeds are called direct incomes.

Thus, the Trading Account shows gross result of trading or business activities carried out in the particular accounting year. It is prepared with the basic objective of ascertaining how much gross profit is earned or loss suffered as a result of manufacturing goods or services or buying and selling of goods. Service industries like banks, insurance companies, medical and education institutions never prepare Trading Account. They prepare revenue account, instead of trading account. On the debit side of Trading Account, direct expenses, opening stock and purchases are recorded and on the credit side of account direct income, closing stock and sales are recorded. This account is also credited if goods are lost on account of fire or theft and goods distributed as free samples.

Debit balance of this account indicates gross loss and credit balance of this account indicates gross profit. Results shown by this account i.e. either gross profit or gross loss is carried forward to the Profit and Loss Account.

Specimen Form of Trading Account –

Equation of Gross Profit And Gross Loss –

1. Gross Profit = Net Sales – Cost of goods sold
2. Gross Loss = Cost of goods sold – Net Sales
3. Net Sales = Total Sales – Sales Returns (Return Inwards)
4. Total Sales = Cash Sales + Credit Sales
5. Cost of Goods Sold = Opening Stock + Net Purchases + Direct expenses – Unsold goods
6. Net Purchases = Total Purchases – Purchase Returns (Return Outward)
7. Total Purchases = Cash Purchases + Credit Purchases
   Unsold goods at the end of the accounting year refers to Closing Stock.

Journal Entries For Preparation of Trading A/C –

Profit And Loss Account-

Profit and Loss Account is a part of final accounts which is prepared on the basis of indirect expenses and indirect incomes of the business to ascertain the net result of the business, done in the accounting year. On completion of Trading Account, Profit and Loss Account are prepared by considering only indirect expenses and indirect incomes of the business. Expenses and incomes which have no direct relation with production and whose absence do not affect production, are called indirect expenses and indirect incomes, e.g. salaries, interest, rent, cost of stationery etc. Indirect expenses are recorded on the debit side of the Profit and Loss Account and indirect incomes are shown on the credit side of the Profit and Loss Account. Indirect expenses of business are classified as:

(i) Office expenses (they are also called administrative expenses.) (ii) Selling expenses and (iii) Distribution expenses.

Indirect incomes and gains include discount received, commission earned, interest received, rent received etc.

Debit balance of Profit and Loss Account indicates net loss incurred in the business and credit balance of Profit and Loss Account shows net profit earned in the business in the accounting year.
Net profit is then carried forward and added to the capital where net loss is adjusted in the capital account of the proprietor.

Specimen Form Of Profit And Loss Account-

Note : R.B.D.D. A/c. stands for Reserve for Bad and Doubtful Debts Account.
N/R stands for New Reserve O/R stands for Old Reserve
F/B/D stands for Further Bad Debts.

Journal Entries Relating to Profit And Loss Account-

Balance Sheet: –

An accounting statement which shows the financial position of all assets and liabilities of the business as on particular date is called the Balance Sheet. Balance Sheet is not an account but a positional statement showing financial position of a business concern as on a particular date. On the left hand side of this statement liabilities of various types are systematically recorded and on the right hand of this statement all types of business assets are shown systematically. Business liabilities include short term liabilities like sundry creditors, bank overdraft, bills payable, outstanding expenses etc. and long term liabilities like bank loan, capital, loan etc. Business assets are classified as fixed assets, tangible assets, intangible assets, current or circulating assets and fictitious assets.

According to Palmer, “The Balance Sheet is a statement at a given date showing on one side the trader’s property and possession and on the other side his liabilities.”

Features of Balance Sheet-

1. Balance Sheet is not an account but it is a statement.
2. It depicts financial position of the business as on a particular date.
3. It is prepared usually at the end of every accounting period, i.e. on 31st March every year.
4. The balances of ledger accounts which are not transferred to Trading A/c and Profit and Loss A/c are ultimately transferred to Balance Sheet.
5. Balance of Real A/cs and Personal A/cs are transferred to Balance Sheet.

Specimen Form of Balance Sheet-

Adjustments-

Additional business information provided after completion of trial balance for preparation of final accounts are known as adjustments. To get a clear view and real results of business done in the trading year, some other business information, which do not find place in the trial balance, are required to be considered, while preparing final accounts. These adjustment items are required to be given proper effects in the final accounts. For every adjustment item, double effects (i.e. debit and credit) are given in the final accounts, e.g. outstanding wages are first added to wages on the debit side of the trading account and Secondly outstanding wages are shown separately on the liability side of the balance sheet.

Some Important Adjustments And Their Double Effects Are Discussed And Shown Below-

(i) Closing Stock : Value of stock in hand at the end of the accounting period is called closing stock. If closing stock is given in the list of adjustments, the same is to be recorded twice as – 1st effect: It is to be recorded separately on the credit side of the Trading Account.
2nd effect: Same is to be shown separately on the asset side of the Balance Sheet as it is shown below.
[Note: Closing Stock is always valued at cost price or market price whichever is less.]

(ii) Outstanding Expenses : Expenses which are not paid or remains unpaid at the end of year, are called outstanding expenses, e.g. outstanding wages, outstanding rent, outstanding salaries etc. If outstanding expense is included in the trial balance, it is to be recorded only on the liability side of the Balance Sheet. If outstanding expense is given in the list of adjustments, the same is to be treated as: E.g. Outstanding Salaries.

1st effect: Add to Salary on the debit side of the Profit and Loss A/e.
2nd effect: Show separately on liability side of the Balance Sheet.

(iii) Income Receivable OR (Income earned but not received) : Income which is not received when it is due, is called as income receivable e.g. outstanding interest (receivable). If income receivable is included in trial balance, than it is to be shown only on the assets side of the Balance Sheet separately. If it is given in the adjustment list, same is to be shown as below : E.g. Interest Receivable.
1st effect: Add to interest received on the credit side of the Profit and Loss Account.
2nd effect: Show separately on the asset side of the Balance Sheet.

(iv) Expenses Paid in Advance (Prepaid Expenses) : When any expense is paid before it is due, the same is called as prepaid expense, e.g. prepaid insurance, prepaid rent etc. If it is given in the trial balance, the same is to be shown on the the assets side of the Balance Sheet. If prepaid expenses are given in the list of adjustments same is to be shown as below. E.g. Prepaid Insurance.

1st effect: Deduct prepaid insurance from the insurance premium paid in the Profit & Loss A/c on debit side.
2nd effect: Show prepaid insurance on the asset side of the Balance Sheet.

(v) Income Received in Advance : Income which is received before it is due, is called as income received in advance e.g. rent received in advance. If it is given in the trial balance, it is to be recorded on the liability side of the Balance Sheet only. If an item of income received in advance is given in the list of adjustments, the same is to be shown as below : E.g. Rent received in advance.

1st effect: Deduct rent received in advance from rent received in Profit & Loss account on credit side.
2nd effect : Show rent received in advance separately on the liability side of the Balance Sheet.

(vi) Depreciation : Depreciation means reduction in the value of fixed asset due to its continuous use, wear and tear or any other similar cause. Depreciation is charged on fixed assets like land & buildings, plant & machinery, furniture and fixtures etc. If depreciation item is provided in the trial balance it is to be debited to Profit and Loss Account only. If depreciation on fixed assets is given in the list of adjustments, the same is to be shown in final accounts as follows:
E.g. Depreciation on Plant & Machinery.

1st effect: Record depreciation separately on the debit side of Profit & Loss A/c.
2nd effect: Deduct the amount of depreciation from the related asset on asset side of the Balance Sheet.

(vii) Interest on Capital: If interest on capital is provided, it is an expense for the business and an income for the proprietor. Adjustment effects of interest on capital are given below.
1st effect: Interest on capital is to be shown on the debit side of Profit and Loss Account separately. 2nd effect: Same amount of interest is to be added to the capital of proprietor, on the liability side of the Balance Sheet.

(viii) Interest on Drawings : Interest charged on the drawings is an income to the business and an expense for the proprietor. Adjustment effects of interest on drawings are given below:
1st effect: Interest on drawings is to be shown on the credit sideof Profit and Loss Accountseparately.
2nd effect: Deduct the same amount of interest from the capital of proprietor on liability side of the Balance Sheet.

(ix) Interest on loan taken : Loan taken is a liability of the business. Interest on loan taken is an expense of the business. Adjustment effects of interest on loan taken is shown as below:

1st effect: Show interest on loan separately on the debit side of the P & L A/c.
2nd effect: Add this amount of interest to loan taken on the liability side of the Balance Sheet.

(x) Interest on loan given : Loan given is an asset of the business. Interest due on such loan is an income for the business. Two effects of interest on loan given are shown below:

1st effect: Show interest on loan separately on the credit side of the P&L A/c.
2nd effect: Add this amount of interest to loan taken on the asset side of the Balance Sheet.

(xi) Reserve for Bad and Doubtful Debts Account (R.B.D.D. A/c) : This provision is created on Sundry Debtors. In connection with this account, bad debts incurred during the year and opening balance of R.B.D.D. . A/c (or R.D.D. A/c) are given in the trial balance. Further, bad debts and closing balance of R.B.D.D. A/c (or R.D.D. A/c) are provided in the list of adjustments. Their location and adjustments effects in final accounts . are shown below:

Where: F/B/D → stands for further bad debts.
New Res. D.D. → stand for New Reserve for Doubtful Debts.
Old Res. D.D. → stand for Old Reserve for Doubtful Debts.
R.B.D.D. A/c → stand for Reserve for Bad and Doubtful Debt Account.
Adj. → stands for Adjustment & T.B. stands for Trial Balance.

If (Bad debts + F/BID + NIR) > Old Reserve, the result is to be shown on the debit side of the Profit and Loss
Account.
If Old Reserve> (BID + FIBID + NIR), the result is to be shown on credit side of Profit and Loss Account.

(xii) Reserve for Discount on Debtors A/c : It is calculated on Sundry Debtors. Accounting treatment and adjustment effects of Reserve for Discount on Debtors are same as like adjustment effects of R.B.D.D. A/c

Where: R.D.D. A/c → stands for Reserve for Discount on Debtors Account.
If (Discount + F/Discount + New Reserve) > Old Reserve, result is to be shown on debit side of Profit & Loss account.
If Old Reserve > (Discount + F/Discount + New Reserve), the result is to be shown on credit side of Profit & Loss Account.
Discount on debtors is to be carried out after completion of adjustment effects of reserve for bad and doubtful debts.

(xiii) Provision for Discount on Creditors Account: It is calculated on Sundry Creditors. Accounting treatment and adjustment effects for provision for discount on creditors are given below :

Where: R.D.C. A/c stands for Reserve for Discount on Creditors Account.
If (Discount + Further Discount + New Reserve) > Old Reserve, the result is to be shown on credit side of Profit and Loss Account.
If Old Reserve > (Discount + Further Discount + New Reserve), the result is to be shown on debit side of Profit and Loss Account.

(xiv) Goods Distributed as Free Samples : Newly established firms and even well established firms distribute samples of new product free of charge in the nearby areas to increase their sale. Adjustment effects of free samples are shown below:
1st effect: Show separately as “Goods distributed as free samples”on the credit side of Trading Account or deduct the amount of free sample from purchases on debit side of Trading Account.
2nd effect: Show separately on the debit side of Profit and Loss Account under the heading “Advertisement Account.”

(xv) Loss of Goods by Fire or Theft: Adjustment effects of goods lost by fire or theft are shown below:
(A) If goods are insured :

1st effect: Show separately, on the credit side of Trading Account, the full value of goods lost.
2nd effect: Show separately on debit side of Profit and Loss Account, the difference between value of goods lost and insurance claim receivable i.e. net loss by fire or theft.
3rd effect: Show the insurance claim admitted by the insurance company on the asset side of the Balance Sheet. This is shown as below:

(B) If goods are not insured :

1st effect: Show separately on the credit side of Trading Account the full value of goods lost by fire or theft.
2nd effect: Show separately on debit side of Profit & Loss Account the full value of goods lost by fire or theft.

This is shown as below.

By going through these Maharashtra State Board Bookkeeping and Accountancy 11th Notes Chapter 8 Rectification of Errors students can recall all the concepts quickly.

Maharashtra State Board 11th Accounts Notes Chapter 8 Rectification of Errors

Meaning of Accounting Errors-

In simple words error means mistake or omission. Accounting error refers to mistakes committed in recording business transactions in the books of accounts, carrying forward amount to next page, posting the amount on the wrong side of ledger account, failing to record transactions in the books of accounts. Omission of writing accounts in the books of accounts is also considered as accounting error. Accounting errors are committed without any intention. If mistakes are committed with some intention, it is not considered as an accounting error but is cheating or fraud.

Accounting errors if at all committed, are required to be corrected as soon as they are detected. Some accounting errors are traced out by checking or verifying the ledger accounts systematically whereas others can be found out through preparation of trial balance. When total of debit column of the trial balance does not tally with the total of credit column of trial balance, it is confirmed that some type of accounting errors have been committed in writing the accounts in the books of accounts. For instance, instead of debiting Vishwanath’s A/c. for amount paid, wrongly debited Vishwasrao’s A/c. is considered as accounting error.

Effects of Accounting Errors-

Some accounting errors if committed do not allow the total of trial balance to agree with each other. Accounting errors affect the net result and financial position of the business. They also affect the arithmetical accuracy of the business. Accounting errors may occur at any one of the following stages viz. (1) Preparation of documents (2) Preparation of Primary books (3) Preparation of ledger accounts (4) Preparation of trial balance and (5) Preparation of final accounts.

Types of Accounting Errors-

The different types of accounting errors are shown in the following chart:

Each of the above accounting errors is explained in detail:

(i) Errors of Principle : Error of principle is said to be committed if accounting entries are not made as per fundamental rules, of accountancy. Errors of principle refers to mistake committed by accountant by not following accounting principles properly. Error of principle is said to be committed when an accounting principles relating to proper distinction between capital and revenue items is violated. These errors are not disclosed by the trial balance.

Examples :

• Wages paid for installation of machinery, debited to Wages Account is an error of principle. Wages paid for installation of machinery is a capital expenditure and it supposed to be added to the cost of machinery. Correct entry for wages paid for installation of machinery is:
• Repair charges of building paid are debited to Building A/c
• Payment of rent debited to Landlord’s A/c.

(ii) Error of Commission : Errors of commission occur when incorrect entries are passed in the journal, wrong posting is done in the ledger, wrong casting is done, wrong calculations are done, mistake made in carrying forward the amount to next page etc. This type of error is disclosed by trial balance. If error of commission takes place, trial balance will not tally. Error of commission is detected by preparing a trial balance.

For instance, in credit purchase of goods worth ₹ 1,850 from M/s. Shanti General Stores is entered in the purchase book as ₹ 1,850 and in the ledger account of M/s. Shanti General Stores as ₹ 1,580. This is error ‘
of commission. In this case M/s. Shanti General Stores Account is given less debit by ₹ 270. This error is rectified by giving additional debit of ₹ 270 to M/s. Shanti General Stores Account. ‘

(iii) Errors of Omission : Errors of omission are said to occur if the accountant or clerk has failed completely  to record a particular business transaction in the books of account. In other words, if business transactions  are not at all recorded in the books of account, errors of omission are said to be committed.
For example, failure on part of the clerk to record credit sales in the sales book, is an error of omission. Error committed due to entire omission will not affect the agreement of totals of trial balance, but error committed due to partial omission will definitely affect the agreement of totals of trial balance.

(iv) Compensating Errors : Compensating error is said to be committed if error committed on one side of
ledger account compensate an error committed on the other side of some other ledger account. Errors which are committed on one side of account remove or nullify the effect of errors committed on the other side of account, is called a compensating error. This type of error may be different in nature but they are similar in amount. Compensating errors are committed exactly on opposite side of same account or different account.

Even compensating errors are committed on same side of different account, by giving over debit to one account and under debit of same amount to.other account. This type of error cannot be detected by preparing trial v balance.

For instance, if purchase book is overcast by ₹ 1,500 and sales book is also overcast by ₹ 1,500 than such ‘
errors are called compensating errors because one error removes the effect of other error. ;

Errors Affecting And Not Affecting The Trial Balance-

The classification of error on the basis of trial balance is shown in the following chart:

Trial Balance Basis:

(A) Errors not affecting the trial balance (Two sided Errors)

• Complete omission of transaction.
• Posting wrong amount on both the sides of an account.
• Posting wrong heads of account.
• Compensating Errors. BoIbhartSoIution5com
• Recording wrong amount in original books.

(B) Errors affecting the trial balance (One sided errors)

• Partial omission of a transaction.
• Posting of Wrong amount on one side of an account.
• Posting entry on wrong side of an account.
• Wrong totalling or balancing of an account.
• Omission of transferring the balance of an account to Trial Balance.

(A) Errors not affecting the trial balance (Two sided errors):

An accounting error which affects or does not affect debit side of one account as well as credit side of another account is called two sided error. This type of error cannot be detected by preparing a trial balance. These types of errors are explained below.

(i) Complete omission of a transaction: For the explanation please refer to point 3 (iii) of this chapter.

(ii) Posting or recording wrong amount on both the sides of an account: This type of error is said to be committed when accountant enters wrong amount in both affected accounts. Such error will not be disclosed by the trial balance.

This is explained as follows:

(iii) Posting to wrong head of account: This type of error is said to be committed when a transaction is recorded correctly in the original books of account, but ledger posting is done to wrong heads of account, e.g. Furniture purchased from M/s Salgaonkar is posted to Machinery A/c. In this case M/s Salgaonkar’s A/c is correctly credited but Machinery A/c is wrongly debited instead of Furniture A/c.

(iv) Compensating errors : For the detail information, refer point No. 3 (iv) from the Subject Matter.

(v) Wrong amount in the original books: This type of error is said to be committed when a transaction is wrongly recorded in the original books and is subsequently carried through to the ledger account, e.g. Sales of goods ₹ 854 on credit recorded in the sales books as ₹ 584 and subsequently posted to ledger the same wrong amount of ₹ 584. This error does not affect the trial balance.

(vi) Errors of principle :
Errors of Omission : Errors of omission are said to occur if the accountant or clerk has failed completely  to record a particular business transaction in the books of account. In other words, if business transactions  are not at all recorded in the books of account, errors of omission are said to be committed.

For example, failure on part of the clerk to record credit sales in the sales book, is an error of omission. Error committed due to entire omission will not affect the agreement of totals of trial balance, but error committed due to partial omission will definitely affect the agreement of totals of trial balance.

(vii) Recording twice : This type of error is said to be committed when transaction is recorded twice in the original book. e.g. Paid salaries ₹ 5,000 recorded twice in the cash book. Since excess debit and credit given to both the account, such error does not affect the trial balance.

(B) Errors affecting the trial balance (One sided errors)’:
Some accounting errors bring out the difference in debit total and credit total of trial balance. Such errors are called errors affecting the trial balance or one sides errors. The different types of errors affecting trial balance are explained below.

(i) Partial omission of a transaction : When a transaction is recorded correctly in the original books of accounts, but due to mistake one of the ledger accounts remains to be posted, then such a error is called error of partial omission of transaction. e.g. Cash ₹ 6,000 received from Mr. Kishor not posted to Mr. Kishor’s A/c. In this case trial balance will not agree.

(ii) Posting of wrong amount to one account: Error of posting of wrong amount to one account is said . to be omitted when wrong amount is posted to one of the ledger accounts from the original books. In
‘this case trial balance will not get tallied.

(iii) Posting on the wrong side of an account: This type of error is said to be committed when entry
is posted to wrong side of the ledger account from the original book. In this case trial balance will not agree.

(iv) Wrong totalling and balancing: When any ledger account is totalled wrongly or balanced wrongly, this type of error is said to be committed. Because of wrong totalling or wrong balancing, the trial balance will not agree.

(v) Omission of balance of an account in trial balance : If balance of any one or more account are omitted to transfer to the trial balance, this type of error get committed. As a result trial balance will not agree.

(vi) Errors of double posting to one account : When entry for accounting transaction is correctly recorded in the original book but it is posted or recorded two times in one of the ledger accounts, then such error is called error of double posting to one account.

Steps to locate Accounting errors :

The following steps are taken to locate the errors :

• Verification of trial balance: The total of debit column and credit column should be checked once again. Accounts that are grouped together and shown under one head of account should be checked minutely and carefully, e.g. Total of sundry debtors and sundry creditors.
• Verification of cash book: The total of debit column and credit column of cash book should be rechecked. Closing balance of cash and bank balance must be verified.
• Verification of ledger accounts: All the posting made to various ledger accounts must be checked once again. The total of amount column on debit side and credit side of each ledger account should be checked. Similarly balancing figures and carry forward of each ledger account should be checked once again. Any discrepancy, if noticed, it should be corrected at once.
• Verification of trial balance: After verification of ledger accounts, if difference still arises in the totals of the  trial balance, the accountant has to find out exact difference in the totals of the trial balance. This will help to locate the errors.
• The accountant should confirm whether closing balance of each ledger account is transferred to trial balance or not. There is possibility that balance of one or two accounts may be omitted or recorded twice.
• The accountant should also go through the journal to find out if any entry is passed with unequal amount specially of compound entries.
• The totals of subsidiary books such as Purchase Book, Sales book, Purchase Return book, Sales Return book etc. should be verified once again and posting to various ledger accounts there from should be verified.
• The accountant should check whether closing balances of various accounts of last year are brought forward to the respective ledger accounts correctly or not.

Suspense’Account:

Final account is prepared on the basis of the trial balance. Trial balance is supposed to be tallied then only final account can be prepared. Sometimes the trial balance does not tally eveti after repeated efforts. In such circumstances preparation of the final accounts cannot be postponed indefinitely till the errors are disclosed and rectified. In such a case difference of trial balance is usually placed or transferred to a separate account known as suspense account, and the trial balance is made to tally for the purpose of preparation of final accounts. If debit column of trial balance cast short, difference of trial balance is transferred and posted to debit side of suspense account.

Similarly if credit column of trial balance cast short, the difference of trial balance is transferred and posted to credit column of suspense account. If errors are not detected and rectified, balance of suspense account is transferred to balance sheet. Debit balance of Suspense A/c should be shown on asset side of Balance Sheet and Credit balance of Suspense account should be shown on the liabilities in suspense account. When all errors are detected, rectified and adjusted, suspense account will automatically stand balanced. Rectification of errors which affect trial balance are only adjusted in suspense account.

Rectification Entry-

An accounting entry which is drafted to cancel the effects of wrong entry and to give the correct effect of the entry is called rectification entry.

(a) Rectification of Errors of Principle : To rectify errors of principle, the following procedure is to be followed.
First draft a wrong entry of given transaction and then pass reverse entry of wrong entry. After this, draft ‘ correct entry which we are suppose to pass. Then reconcile reverse entry and correct entry so drafted, to get rectification entry. In short, ;

Reverse entry of wrong entry + Correct entry = Rectification entry

Example : Rent of ₹ 1,200 paid to land lady Mrs. Anuradha has been debited to her personal account. Rectification entry is composed by following procedure :

(b) Error of Commission : Procedure of rectification of error of commission is stated as below : Example : Paid general expenses of ₹ 18, were posted in the ledger as ₹ 81.

(c) Error of Omission: Procedure of rectification of omission is given be1ov:
Example: Credit purchase of goods worth Z 2,000 from Kishor remained to be recorded in the books of
accounts.
(i) Wrong entry: Not passed
(ii) Reverse entry: NIL

(iii) Correct entry:

Since no wrong entry is passed, correct entry is itself a rectification entry.

(d) Two-sided Errors: The procedure of rectification of two-sided errors is stated as below:
Examples: Wages ₹ 500 paid for the installation of machinery, debited to wages account.

By going through these Maharashtra State Board Bookkeeping and Accountancy 11th Notes Chapter 2 Meaning and Fundamentals of Double Entry Book-Keeping students can recall all the concepts quickly.

Maharashtra State Board 11th Accounts Notes Chapter 2 Meaning and Fundamentals of Double Entry Book-Keeping

Meaning and Definition of Double Entry Book-Keeping System-

Meaning:

The Double Entry Book keeping system is scientific, perfect and a complete method of recording business information in the books of accounts. Usually, in every business transaction, we find two accounts, out of which one account is given debit effect and other account is given credit effect. In this system for every debit, there is a corresponding credit and in money term all debits are equal to all credits. If any thing comes into business, an account of that item is to be debited and if any thing goes out from business, an account of that item is to be credited in the books of account, e.g. Ashok purchases goods worth ₹ 5,000 from Kishor by paying cash. Here, Ashok gets goods of ₹ 5,000 and parts with cash of ₹ 5,000. In the books of Ashok, Goods A/c. will be given debit effect to extent of ₹ 5,000 and Cash A/c will be given credit effect to extent of ₹ 5,000. Thus, every business transaction is split up into two parts or two aspects, i.e. debit aspect and credit aspect. Debit effect is posted to the debit side of one Ledger A/c. and credit effect is recorded on the credit side of the other Ledger A/c.

It means every business transaction is recorded in two different accounts at two different places. In this manner, in double entry book keeping system, completed business transactions are first recorded in journal and then in ledgers. At the end of the accounting year, all ledger accounts are closed and balanced. The balance shown by each ledger account is then recorded on a separate sheet in order of debit and credit. This is known as trial balance. When this process is over, the debit column and credit column of trial balance are totalled. The total of debit side always agrees or equals with the total of credit side. It means every debit is given equivalent credit under the double entry book-keeping system.

Thus, double entry book-keeping system seeks to record every business transaction in money or money’s worth in its double aspects viz. debit and credit.

Definition of Double Entry Book Keeping System:

(1) J. R. Batliboi : “Every business transaction has a two fold effect and that it affects two accounts in opposite directions and if a complete record is to be made of each such transaction it would been necessary to debit one account and credit another account. It is this recording of two fold effect of every transaction that has given rise to term Double Entry. ”

(2) William Pickles : “The Double Entry System seeks to record every transaction in Money or Money’s worth in its double aspect – the receipt of a benefit by one account and the surrender of a like benefit by another account, the former entry being to the debit of the account receiving and the later to the credit of the account surrendering.’’

Methods of Recording Accounting Information-

Book keeping system is classified as (i) Indian system of recording accounting information and (ii) English system of recording accounting information.

(i) Indian System : Traditional method of recording and keeping the records of accounts in any one of Indian languages like Marathi, Hindi, Gujarati, Urdu, etc. is called the Indian accounting system. It is also called Mahajani / Deshi Nama system. Under this system, transactions are recorded in long books known as Kird or Bahi Khata and it is not based on Double Entry book-keeping system. This system does not have scientific base. This system is still used in India by small business organisations.

(ii) English System: When business informations are recorded in the books of accounts in English language as per modern (advanced) method, it is called. English accounting system. Now-a-days, English accounting system is more advanced and popular and universally followed all over the world. In India, in many large scale business organisations, English system of recording accounting is followed. English accounting system is sub classified as (i) Single entry book-keeping system and (ii) Double entry book-keeping system.

Single Entry Book-Keeping System :

A book-keeping system in which only one aspect of business transaction is considered and systematically recorded in the books of accounts and other aspect is completely ignored is called single entry book-keeping system. Under this system of book keeping only Cash Book and personal accounts are prepared and maintained. It is incomplete and unscientific method of book-keeping. It cannot provide accurate information about the profitability and financial position of the business. It has several drawbacks and defects. It is not as popular as double entry book-keeping system. It is rarely used in the modern business world. This system is suitable for small business organisations.

Double Entry Book-Keeping System :
A book-keeping system in which double or two fold effects of each transaction is recorded systematically is called double entry book-keeping system. In this system one account is debited and another account is credited with equal amount. It is scientific method of recording all business transactions in the books of accounts.

The main principles of double entry system are stated as follows :

In every business transaction minimum two interested parties are involved.
Every business transaction has minimum two aspects or effects viz. one receiving benefit and another giving benefit.
Two aspects or effects of every business transaction are recorded in the books of accounts.
In monetary term every debit has equal credit. It means every debit has corresponding credit of equal amount. Two fold effects of every business transaction are recorded by debiting one account and crediting another account.

Advantages of Double Entry Book – Keeping System-

• Recording double aspects of each transaction in the books of accounts, ensures an arithmetical accuracy of accounts.
• This system is helpful to detect, prevent and reduce the frauds.
• If at all any mistake occurs, it can be easily detected and rectified.
• Exact amount due to us from customers/debtors and other parties, and exact amount payable to creditors/ suppliers by us can be known easily from the records maintained as per this system.
• This accounting system keeps complete, accurate and perfect records of business transactions.
• This accounting system is suitable for all types of business organisations i.e. small scale, medium scale and large scale, public and private business organisations, etc.
• This accounting system is helpful to prepare trial balance and final accounts of the business at the end of the accounting year.
• With the help of this system income statements of the current year can be compared with the income statements of previous years and on the basis of that comparison a businessman gets information about the variations in incomes and expenses. To control expenses, a businessman can adopt different measures.
• As all accounts are prepared independently under this accounting system, item wise detail information can be known easily, e.g. value of assets, amount of expenses, amount payable to other parties, etc.

Conventional System of Accounting-

Conventional system of accounting is an old and traditional method of recording business transactions in the books of accounts. Indian accounting system is one of the finest example of conventional system of accounting. Under this system accounting information are recorded in any one of the Indian languages such as Marathi, Gujarati, Hindi, Marwadi, Urdu, etc.

It is a system of accounting in which businessman or accountant (in local language called ‘munimjV) prepares conventional cash book, Journal i.e. Rojmel and Ledger i.e. Khatavahi to record business transactions. Conventional system of accounting is more suitable and useful for those businessmen whose turnover is small and number of business activities is limited. Even today this accounting system is adopted by many professionals and businessmen.
Left hand side of every ledger account is called Debit i.e. ‘Jama’ and right hand side is called Credit i.e. ‘Udhar’ or ‘Nave’. This system suffers from many drawbacks. It is incomplete system of maintaining accounting records. It is not recognised by law as an accounting system.

Classifications of Accounts-

(i) Account:
(A) Meaning: An account is a list of business transactions falling under the same description for a given period of time. A systematic and summarised record of business transactions with respect to person, property, loss, gain, income or expense is known as account. An account is generally prepared for one complete year. The word ‘Account’ in abbreviation can be written as ‘A/c.’ Accounts are prepared and maintained in the Ledger. Separate Ledger sheet or page is used for one specific account.

According to J. R. Batliboi, “An account is summarised record of transactions affecting one person, one kind of property or one class of gain or loss. ”
An account is divided into two equal parts, viz. left hand side called debit side and right hand side called credit side.

(B) Specimen of an account: The specimen form of an account is given below:

An account is divided into two equal parts by drawing a double line in middle of the account (i.e. T form). The left hand side is called debit side (Debit record) and right hand side is called credit side (Credit record).

(ii) Classification of Accounts :

Classification of accounts means dividing or grouping different accounts into certain well defined classes with certain objectives.
Accounts are classified into two main groups as (i) Personal Account, and (ii) Impersonal Account.

(1) Personal A/c : Account of person or account relating to person with whom a business keeps dealing is called Personal A/c. Therefore, an account of an individual, partnership firm, company, club, institution, local authority, association, State Government and Central Government with which business keeps dealings is called a personal account. From the view point of law, persons are classified as (a) natural or living persons,(b) legal or artificial persons and (c) Representative Persons. The term natural person implies individuals human beings, e.g. Ashok’s A/c, Kishor’s A/c etc. A legal person does not have life, body and soul, but the law recognises it as a person because all business transactions are done in its name.

For instance Bank of India’s A/c is a personal account as Bank of India is a financial institution which deals in money. It is a legal person. Under the title of legal person the following institutions and legal bodies are included, viz. partnership firm, joint stock company, association, clubs, legal, medical, financial, educational and charitable institutions, gram panchayat, district body, State Government, Central Government, etc. Account of Debtor, Account of Creditor, Bank A/c, College’s A/c, Hospital’s A/c, Club’s A/c and Partnership Firm A/c. are called Personal A/cs.

Representative Personal Account represents an account of a group of certain persons with whom business keeps dealings e.g. Sundry Debtors A/c, Prepaid Insurance A/c, Outstanding Salaries A/c , etc.

(2) Impersonal Account : All accounts other than personal accounts are known as impersonal accounts. In other words, all accounts which are not personal accounts are grouped under impersonal account. For instance Cash A/c, Rent A/c, Wages A/c and Furniture A/c. are impersonal accounts. Impersonal accounts are classified as (a) Real A/c. and (b) Nominal A/c.

(a) Real A/c : An account of tangible as well as intangible property or any thing owned and possessed by a business is called Real A/c. In other words Real A/c is that account which relates to tangible as well.as intangible assets, objects, etc. of the business. For example Cash A/c, Furniture A/c, Land and Building A/c, Goods A/C, Goodwill A/c, Patent A/c, Plant and Machinery A/c. are called Real A/c. as they relate to the property of the business. Real A/c is further divided into Tangible Real A/c and Intangible Real , A/c.
Tangible Real assets are those which can be seen, touched, felt and measured. It has physical existence. Accounts of Tangible assets are called Tangible Real A/c. E.g. Cash A/c, Goods A/c etc. Intangible Real assets are those which cannot be seen or touched, but it can be measured in terms of money. Accounts of intangible assets are called Intangible Real A/c., e.g. Goodwill A/c, Patent A/c, Trademark A/c, Copy right A/c etc.

(b) Nominal Account: An account relating to business expense, income, gain and loss is called Nominal account. In other words, an account of business expense, business income, business loss or business gain is called Nominal A/c. For instance Rent A/c. is a Nominal A/c, as rent is an expense if it is paid by business and it is an income if it is received by business. Similarly, Salaries A/c, Interest A/c, CQmmission A/c, Discount A/c., etc are Nominal A/c. Nominal A/c is also called as Fictitious A/c. In the ledger, separate account is prepared and maintained for each head of business expenses, losses, incomes and gains. Nominal A/c represents business incomes, gains, expenses and losses. Thus, a classification of accounts is shown in summarised form as below.

(iii)List of Legal Persons Are Given Below:

Legal Persons:

• Partnership Firm
• Hindu Undivided Family
• joint Stock Company (a) Private Limited Company, (b) Public Limited Company,
• Co-operative Societies,
• Institutions (a) Financial Institutions, (b) Educational Institutions, (c) Medical Institutions, (d) Legal Institutions, (e) Charitable or Welfare Institutions,
• Associations
• Clubs,
• Government Authorities (a) Local-grampanchayat, different kinds of district authorities or bodies, Municipalities (b) State Government, (c) Central Government (d) Government Department.

(iv) Illustrations on Different types of Accounts :

• Anand Agrawal’s A/c.: Mr. Anand Agrawal with whom business deals is a living person. Hence, Mr. Anand Agrawal’s A/c is a Personal A/c..
• Audit Fees A/c.: Audit means to check or to verify an account. The qualified person who does this work of checking is called the auditor. Fees charged by the auditor is called as audit fees. It is an income for auditor and expense for the business. It is a Nominal A/c.
• Bad Debts A/c.: ‘Bad debts’ is a loss that business suffers on account of irrecoverable debts from insolvent debtor. It is an account relating to business loss, hence it is a Nominal A/c. If it is recovered in subsequent accounting year it is termed as Bad Debt Recovery A/c. The same is also included in Nominal A/c. as there is a gain on recovery of bad debts.
• Bank Charges A/c.: Bank charges are the expense for the business and income for the bank, therefore, Bank Charges A/c. is a Nominal A/c.
• Bank of India’s A/c.: Bank of India is a financial institution dealing in money. It is a legal person and so Bank of India’s A/c. is a Personal A/c.
• Mumbai English School A/c.: Mumbai English School is an educational institution. It is a legal person and hence Mumbai English School A/c. is a Personal A/c.
• Building A/c.: Building is an asset of the business. Account of business asset is known as Real A/c. Therefore, Building A/c. is a Real A/c.
• Cash A/c.: Cash in Hand is a business asset and hence Cash A/c. is a Real A/c.
• Carriage A/c.: Expenses incurred to carry goods or raw materials are known as carriage. Carriage is a business expense and hence it is a Nominal A/c.
• Commission A/c.: Commission if received by business, is a business income and if it is paid by business it is a business expense. Commission A/c. thus relates to income or expense of the business, hence it is a Nominal A/c.
• Copy Right A/c.: Copy right is the right given to author by law, in respect of sales of book written by him. Copy right is an asset of author. It is, therefore, a Real A/c.
• Capital A/c.: Capital is provided by proprietor. Proprietor is a living person. Hence, Capital A/c. is a Personal A/c.
• Debtor’s A/c.: Debtor is a person from whom money or money’s worth is receivable by business. Debtor may be natural or legal person. Therefore, Debtor’s A/c. is a Personal A/c.
• Depreciation A/c.: Depreciation is a reduction in value of the fixed asset of the business due to its use, wear and tear or any other similar causes. It is a business expense or notional loss. So Depreciation A/c. is a Nominal A/c.
• Discount A/c.: Discount is an allowance or concession, in money terms received or given by the business. If it is allowed by business it is an expense and if it is received by business it is an income. Hence, Discount A/c is a Nominal A/c.
• Dividend A/c.: Returns on share investment paid by company to shareholders are known as Dividend. Many times, a business invest the surplus money in the shares of company. Thus, dividend is a business income, and hence included in the classification of Nominal A/c.
• Drawings A/c.: Withdrawal in cash or in kind made by a businessman from time to time from business for self use or family’s use is known as drawings. It is an account of proprietor, a living person. Therefore, Drawing A/c is a Personal A/c.
• Freehold Premises A/c.: Premises means building and surrounding area or land attached to it. Premises which is not leased or hired is called ‘Freehold premises’. Freehold premises are an asset of the business and they are covered in Real A/c.
• Furniture A/c.: Furniture of business is a business asset and therefore, Furniture A/c. is a Real A/c.
• Goods A/c.: Goods exhibited or remained in the stock are business assets. So Goods A/c. is a Real A/c.
• Goodwill A/c.: Goodwill is a money value of business reputation earned by business over number of years. It is an intangible asset of the business. It is a Real A/c.
• Investment A/c.: Investment made by the business is a business asset and therefore, Investment A/c. is a Real A/c.
• Interest A/c.: Interest A/c. is an account of expense when it is due or paid by business on debt. Interest is an income if it is received or earned on investment, by business. Thus interest A/c. is a Nominal A/c.
• Insurance Premium A/c.: If business property is insured with insurance against risk of fire or theft, the business has to pay a stipulated amount decided by the insurance company at a regular interval to the insurance company. Such payment is called the insurance premium. It is a business expense. Thus, Insurance Premium A/c. is a Nominal A/c. ‘
• Live Stock A/c.: Stock or collection of animal kept for sale by the business is called Live Stock. It is an asset of the business. It is a Real A/c.
• Loan A/c.: Loan is given by business to debtor or it is taken by business from creditor. Debtor and creditor are persons. Therefore, Loan A/c. is a Personal A/c.
• Loss by Fire A/c.: Loss by fire is a business loss and so it is a Nominal A/c.
• Machinery A/c.: Machinery of business is a business asset and hence Machinery A/c. is a Real A/c.
• Motor Vehicles A/c.: Motor vehicles of business are business assets, so Motor Vehicles A/c. is a Real A/c.
• Patent A/c.: Patent refers to right of manufacturer or business to produce and sell goods or services. It is a business asset and therefore, Patent A/c. is a Real A/c.
• Printing and Stationery A/c.: Amount spent by business on printing and stationery is business expense and so Printing and Stationery A/c. is a Nominal A/c. x
• Prepaid Rent A/c.: Rent which is paid in advance by the business for period yet to exist is called prepaid rent. It is an asset of proprietor. Thus, Prepaid Rent A/c. is a Personal A/c.
  (Note: Outstanding and Prepaid expenses are Personal A/c. e.g. outstanding wages, prepaid insurance premium, outstanding salaries, etc. are Personal A/c.)
• Royalty A/c.: The amount paid to the owner of a copy right or patent right for making use of trade mark of their product is called Royalty. Royalty is a business expense. It is a direct expense of the business. So Royalty Account is a Nominal Account.
• Stock of Goods A/c. or Stock of Stationery A/c.: Total unsold goods or total goods remaining in the godown of the business is called stock of goods. Stationery remaining or unused in the office for daily correspondence is called stock of stationery. Both Stock of Goods A/c and Stock of Stationery A/c. are Real A/cs. as they are the assets of the business.
• Shiv Vaibhav Co-operative Stores A/c: Shiv Vaibhav Co-operative Stores is a legal person (it is recognised by law as person) and hence Shiv Vaibhav Co-operative Stores A/c is a Personal A/c.
• Shares A/c.: Amount invested by business in the company in the form of shares is called as investment in shares. It is an asset of business. Therefore, Shares A/c. is a Real A/c.
• Loose Tools A/c.: Different types of equipments and instruments used by business in manufacturing goods and services are together known as loose tools. It is a Real A/c.

(v) Table Showing Classification of Accounts Into Personal Accounts, Real Accounts & Nominal Accounts :

(vi) Meaning of Debit and Credit:

• Debit: To debit an account means to enter the entry or to write on the left hand side of an account.
• Credit: To credit an account means to enter the entry or to write on the right hand side of an account.

Examples :

(1) Paid ₹ 10,000 to Seema.
In this transaction since Seema is receiver of cash, her account is to be debited i.e. we have to enter this transaction on the debit side of Seema’s A/c. On the other hand as cash goes out from the business, Cash A/c is to be credited i.e. we have to enter the transaction on the credit side of Cash A/c.

(2) Received ₹ 6,000 from Sameer.
In this transaction since cash comes into the business, Cash A/c is to be debited i.e. we have to enter the transaction on the debit side of Cash A/c. On the other hand Sameer is the giver of cash and hence his account is to be credited i.e. we have to enter this transaction on the credit side of Sameer’s A/c.

Rules For Journalisation : (Golden Rules of Accountancy) (Traditional Approach)-

(a) Personal A/c.: Personal A/c. relates to persons with whom a business keeps dealings. A person may be a natural person or a legal person. If a person receives anything from the business, he is called receiver and his account is to be debited in the books of the business. If person gives anything to the business, he is called a giver and his account is to be credited in the books of the business.
Principle of Personal A/c. states that:

Debtt the Receiver of The BenefiT Credit the Giver of the Benefit:

E.g.

• Goods worth ₹ 1,000 sold to Ramesh. In this transaction, Ramesh is the receiver of goods, he is called receiver and his A/c is to be debited in the books of the business.
• Purchased goods worth ₹ 500/- from Kiran. In this transaction, Kiran is the giver of the goods to the business. He is giver and his A/c. is to be credited in the books of the business.
• Paid cash ₹ 500 to Sanjay. In this transaction Sanjay is the receiver. Hence, Sanjay’s A/c is to be debited.

(b) Real A/c.: Real A/c relates to property which may either come into the business or go from the business. If any property or ‘goods’ comes into the business, account of that property or goods is to be debited in the books of the business. If any property or ‘goods’ goes out from the business, account of that property or goods is to be credited in the books of the business. Principle of Real A/c states that:

Debit What Comes in Credit What Goes Out:

E.g. Goods sold on cash for ₹ 1,500/-. In this transaction cash, an asset comes into the business on sale of goods, and therefore Cash A/c is to be debited in the books of business. On the other hand, goods, an asset of the business goes out of the business on sale and therefore Goods A/c. is to be credited in the books of the business.

(c) Nominal A/c.: Nominal account is an account that relates to business expenses, loss, income and gain. If business incurs expense to manage and run business, account of that expense is to be debited in the books of business. When a business earns income by rendering services or hiring business assets, an account of that income is to be credited in the books of business. In the transaction of sale or purchase of goods or assets, if any loss is incurred by the business, account of that loss is to be debited in the books of the business. If in the transaction of sale of goods or asset any profit is earned by the business, then account of that profit is to be credited in the books of the business.
Principle of Nominal A/c. states that:

Debit All The Expenses or Losses
Credit All Incomes, Gains or Profits

E.g.

• Paid ₹ 50/- as commission to our agent.
• Received ₹ 100/- as interest on our fixed deposit.
• Sold old furniture costing ₹ 5,000/- for ₹ 4,000/- and incurred a loss of ₹ 1,000/-.

In the first transaction, commission which is paid to an agent is business expense and it is to be debited in the books of the business. In the second transaction interest which is received is business income and therefore it is to be credited in the books of the business. In the third transaction, the business has incurred a loss of ₹ 1,000/- on account of sale of furniture. The account of loss is to be debited in the books of the business.

Activity II (Given in the Text book to solve)

(I) From the following transactions find out

(1) Two Aspects (2) Two Accounts (3) Classify the Accounts
(i) Started business with Cash ₹ 50,000.
(ii) Purchased Machinery on credit from Avinash ₹ 20,000.
(iii) Purchased goods ₹ 5,000 from Rahul on cash.
Solution :
(1) Two Aspects

Aspect I	Aspect II
Cash comes in	Proprietor is giver
Machinery comes in	Avinash is giver
Purchases is an expense	Cash goes out
Aniket is the receiver	Sales is an income
Salaries is an expense	Cash goes out
Cash comes in	Furniture goes out

(2) Two Aspects and Two Accounts :

Two Aspects	Two Accounts
Cash comes in Proprietor is giver	Cash A/c …………………….	……………………. Capital A/c
Machinery comes in Avinash is giver	Machinery A/c, …………………….	……………………. Avinash’s A/c
Purchases is an expense Cash goes out	Purchases A/c …………………….	……………………. Cash A/c
Aniket is the receiver Sales is an income	Aniket’s A/c …………………….	……………………. Sales
Salaries is an expense Cash goes out	Salaries A/c …………………….	……………………. Cash A/c
Cash comes in Furniture goes out	Cash A/c …………………….	……………………. Furniture A/c

(3) Two Aspects, Two Accounts and Classify the Accounts :

Two Aspects	Two Accounts	Classification
Cash comes in Proprietor (Capital) is giver	Cash A/c Capital A/c	Real A/c Personal A/c
Machinery comes in Avinash is giver	Machinery A/c Avinash A/c	Real A/c Personal A/c
Purchases is an expense Cash goes out	Purchases A/c Cash A/c	Nominal A/c Real A/c
Aniket is the receiver Sales is an income	Aniket’s A/c Sales A/c	Personal A/c Nominal A/c
Salaries is an expense Cash goes out	Salaries A/c Cash A/c	Nominal A/c Real A/c
Cash comes in Furniture goes out	Cash A/c Furniture A/c	Real A/c Real A/c

Analysis of transaction by applying rules of Debit and Credit
(Traditional Approach)

Table showing various business transactions, two aspects affected, two accounts involved, classification of accounts, rules applicable, account to be debited and account to be credited is given below.

Activity: 02 (Given in Textbook to Solve)
Fill the following table.
Analysis of transaction by applying rules of Debit and Credit
(Traditional Approach)

Rules For Debit And Credit: (Modern approach) :
The chart showing the rules of debit and credit as per modern approach is given below.

Two fundamental rules are followed to record the changes in the accounts are stated below:

(1) For changes in Assets / Expenses.

• Increase (↑) in assets is debited and
  Decrease (↓) in asset side is credited
• Increase (↑) in expenses / losses is debited and
  Decrease (↓) in expenses / losses is credited.

(2) For changes in Liabilities / Revenues (Gains)

• Increase (↑) in Liabilities is credited and
  Decrease (↓) in Liabilities is debited.
• Increase (↑) in Revenues (Gains) is credited
  Decrease (↓) in Revenues (Gains) is debited.
• Increase (↑) in Capital is credited and
  Decrease (↓) in Capital is debited.

Activity: 03 : Fill the following table.
Analysis of transaction by applying rules of Debit and Credit (Modern Approach)

Analysis of the Following Transactions and Finding Out Their Effects-

(1) Started business with cash ₹ 50,000.
In this transaction cash comes in and increases (↑) Capital by ₹ 50,000. Hence, Cash A/c is debited by ₹ 50,000. On the other hand Liability of the business viz. Capital is created and increased (t). Hence, Capital A/c is credited by ₹ 50,000.

(2) Deposited ₹ 40,000 into the bank.
In this transaction after depositing Cash ₹ 40,000 into the bank, Bank balance increases (↑) and hence Bank A/c is debited by ₹ 40,000. On the other hand cash balance decreases (4) and hence, Cash A/c is credited by ₹ 10,000.

(3) Purchased goods worth ₹ 6,500 from Sameer on credit.
In this transaction Goods worth ₹.6,500 comes into the business after purchases. Purchases is our expense and it increases (↑). Hence, Purchases A/c is debited by ₹ 6,500. On the other hand Sameer is our Creditor and Liability towards creditor increases (↑). Hence, Sameer’s A/c is credited by ₹ 6,500.

(4) Sold goods worth ₹ 4,000 to Mr. Sawant on Credit.
In this transaction after sale of goods of ₹ 4,000, our revenue increases (↑) by ₹ 4,000. Hence, Sales A/c is credited. Mr. Sawant is our debtor and our assets in the form of cash receivable from debtors increases (↑). Hence, Mr. Sawant’s A/c is debited.

(5) Purchased Furniture for ₹ 25,000 for office use and amount paid by cheque.
In this transaction value of furniture i.e. assets increases (↑) and hence, Furniture A/c is debited by ₹ 25,000. After payment, bank balance i.e. our assets decreased (↓) and hence, Bank A/c is credited by ₹ 25,000.

(6) Received cash ₹ 2,000 from Mr. Sawant.
In this transaction cash comes in and cash balance i.e. assets increases (↑). Hence, Cash A/c is debited by ? 2,000. Amount receivable from Mr. Sawant i.e. debtor (asset) decreases (↓). Hence, Mr. Sawant’s A/c is credited by ₹ 2,000.

(7) Paid cash ₹ 1,500 to Sameer.
In this transaction, Sameer is our creditor and amount payable to Sameer i.e. Liability decreases. Hence, Sameer’s A/c is debited by ₹ 1,500. Cash goes out and cash balance i.e. asset decreases. Hence, Cash A/c is credited by ₹ 1,500.

From the following information prepare a chart showing assets, liabilities, incomes, expenses and capital.

(1) Furnitures and Fixtures
(2) Commission Received
(3) Machinery
(4) Sundry Creditors
(5) Bills Payable
(6) Discount Allowed
(7) Sundry Debtors
(8)  Patents
(9) Royalty
(10) Discount Earned
(11) Bills Receivable
(12) Drawings
(13) Capital
(14) Bank Loan
(15) Bank Balance
(16) Cash in Hand
(17) Salaries Paid
(18) Travelling Expenses
(19) Repairs and Renewals
(20) Goodwill
(21) Depreciation
(22) Bank Overdraft
(23) Prepaid Insurance
(24) Outstanding Salary
(25) Wages
(26) Carriage
(27) Premises
(28) Dividend Received.
Answer:

Accounting Equations :
Accounting equation implies that the total assets of a business are always equal to the total liabilities of a business plus capital i.e. Owner’s equity.

This equation is symbolically expressed as follows:
Assets = Liabilities + Capital OR
A = L + C

Other equations are stated below:
Capital = Total Assets – External Liabilities Total Assets = Total Liabilities Assets = External Liabilities + Capital Assets = Equities
Above fundamental equations provide foundation to Double Entry Book-keeping System.

Equities: The properties owned and possessed by the business are called as Assets. The rights to the properties are called equities. Equities may be sub-divided into two categories viz. the right to creditors and the right to the owners. The equity of creditors represents debts of the business. It is called liabilities. The equity of owner is called as Capital. Proprietor is the debtor of all his expenses and creditor for all his incomes. This relationship is shown in the following diagram.

By going through these Maharashtra State Board Book Keeping & Accountancy Notes 12th Chapter 7 Bills of Exchange students can recall all the concepts quickly.

Maharashtra State Board 12th Accounts Notes Chapter 7 Bills of Exchange

Introduction-

When goods are sold on credit, there is an implied promise by the buyer to pay money to the seller on a future date. Similarly, in the case of borrowing or lending of money, borrower/debtor borrows money on oral or implied promise. Such credit sales or lending of money involves risk of recovery of debts in time. In spite of repeated reminders, some borrowers/debtors do not fulfil their promises. So in the interest of seller or creditor, the party to the credit transaction prepares a written document or undertaking giving the details of debts such as person liable to pay debts, person entitled to receive the payment, amount of debts, date of payments, signatures of the parties to the transaction, etc.

This written document or undertaking is called Credit Document or Negotiable Instrument. Bill of Exchange is one of the important credit instruments used to support credit transactions. In India, in ancient days, instrument of credit popularly known as Hundies were used on large extent. Bills of exchange if drafted in any one of the Indian languages such as Marathi, Gujarati, Urdu, Hindi, etc., is called Hundi. Hundies are classified into different types like Shahjog Hundi, Darshani Hundi, Muddati or Miadi Hundi, Namjog Hundi, Dhani-Jog Hundi, Jawabee Hundi, Hukhami Hundi, Firman-Jog Hundi, etc.

Necessity : The necessity of Bills of Exchange is summarised as follows :

• In the Bills of Exchange the debtor gives acknowledgement of the debts which automatically
  creates evidence of debts. ,
• The seller or creditor is relieved from the tension or risk of recovery of the amount or debts.
• The seller or creditor comes to know the exact date of receiving the payment of the bill.
• It is a valuable document which can be discounted with the bank to raise needed finance.
• It can be used or endorsed by its owner in settlement of the debts owed by him / her.

Meaning and definition : Bill of Exchange is a written acknowledgement of debt given by the debtor to the creditor along with a written promise to pay that debt on demand or after a specified period to the creditor or any other person as per his order. Usually bill of exchange is drawn by the creditor on his debtor. It is accepted by debtor.

According to the Negotiable Instruments Act, 1881, Bill of Exchange is defined as, “ an instrument in writing containing an unconditional order signed by the maker, directing a certain person to pay on demand, or on a certain future date, or after a certain period of time, a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument. ”

Salient features of a Bill of Exchange :

• A bill of exchange must be in writing.
• A stamp of proper value must be affixed on it as per the provisions of Stamp Duty Act, 1889.
• It must be dated.
• It should contain an unconditional order to pay certain sum of money only.
• Such order is given to make payment of certain or definite sum of money only.
• The order is to make payment to a certain person whose name is specified in it or to his order or the bearer.
• The maker of the bill signs the bill of exchange.
• It must be accepted by the drawee i.e. the person on whom it is drawn.
• It must clearly specify when payment is to be made.

Draft, Format of Bills of Exchange-

There are three parties to a bill of exchange viz., the drawer, the drawee and the payee.

(1) Drawer : The person who draws or prepares the bill, gives the order to pay money and signs on it is called Drawer. He is a creditor. He has to receive the amount specified on the bill. Accordingly drawer records all transactions relating to bills under the title or name called “Bill Receivable”.

(2) Drawee : The person on whom the bill is drawn is called Drawee. Every bill drawn by the drawer Is required to be accepted by the drawee. When drawee accepts the bill or agrees to make the payment, he becomes the Acceptor. Since, the amount of bill is payable on due date by drawee and hence for him it is “Bill Payable”.

(3) Payee : The person named in the instrument, to whom the amount of the bill is to be paid is called the Payee. Generally, drawer is the payee, but payee could also be a third person like a creditor to whom the amount is made payable by drawer.

Contents of format of B of Exchange :

•  Date : At the top righ and corner below the address of the drawer, date on which bill is drawn is to be written, which is required to calculate maturity date.
• Term : Term of bill must be mentioned in months or in days.
• Amount: Below the stamp, amount of bill in figure should be mentioned and amount of bill in words are written in the body of bill.
• Stamp : Appropriate value of stamp should be affixed as per Indian Stamp Act 1889.
• Parties : in the bill of exchange names of drawer, drawee and payee and their address must be mentioned.
• For value received : The bill of exchange should be issued in exchange of some benefit received which is legally necessary.
• Acceptance : At per mutual understanding, drawer makes a draft for bills of exchange and sent it to drawee for acceptance. Drawee then signs that draft with his name along with date across the face of the bill with the words ‘Accepted’. On acceptance by drawee, that ‘draft’ becomes bill of exchange.

Pro Forma of a Bill of Exchange :

Acceptance of Bill of Exchange : Acceptance of a bill of exchange means signing the bill of exchange by drawee to give his assent to pay the amount of the bill. Unless the bill is accepted by drawee, he is not liable to pay an amount of the bill. A bill of exchange before its acceptance is called a Draft.

Types of Acceptance : Acceptance of bill of exchange can be of two types viz., (1) Unconditional or General Acceptance and (2) Conditional or Qualified Acceptance.

(1) General Acceptance :if the drawee accepts the bill without putting any condition or making any change in the original terms of the bill, such an acceptance is known as Unconditional or General Acceptance.

(2) Qualified Acceptance : If the drawee accepts the bill by making certain changes in the original terms regarding the time, amount of payment or place of payment, the acceptance is said to be Conditional or Qualified Acceptance.

A qualified or conditional acceptance may be of five types. They are explained below :

• Qualified as to Time : When drawee accepts the bill by making changes in the period of the bill, it is called Qualified as to Time.
• Qualified as to Place : When drawee is not ready to make payment at the place mentioned in the bill and suggests a different place where he is willing to pay the amount of the bill, it is called Qualified acceptance as to Place.
• Qualified as to Amount : When drawee accepts the bill not for entire amount specified on the bill but for part of the amount of the bill, it is called Qualified acceptance as to Amount.
• Qualified as to Parties : When drawee is not ready to pay the amount of bill to the payee as mentioned in the bill, it is called Qualified acceptance as to Parties.
• Qualified as to Condition : When drawee accepts the bill by putting his own conditions, it is called Qualified as to Condition.

Promisory Note: Promisory note is one of the negotiable instrument payable either to order to bearer.

Parties to a Promisory Note :

• Drawer: A person who draws a promisory note, promises to pay a certain amount as specified
  in the promisory note is known as Drawer or Maker of the promisory note. Drawer is also known as the Promiser.
• Drawee : A person in whose favour the promisory note is drawn is known as Drawee or Payee of the promisory note. Drawee is aLIso known as Promisee.

Specimen of Promisory Note:

Terms of Bills of Exchange:

Tenor or Term : Tenor or Term of the bill of exchange refers to a period or duration for which bill of exchange is drawn. It is the period of the bill after which it becomes payable. It may be in number of months or in number of days. If the bill of exchange is drawn for 90 days, the term of the bill of exchange in that case is 90 days.
Draft: A bill which is prepared by drawer and not yet accepted by drawee, then it is called Draft.

Days of Grace : Days of grace refer to three extra days allowed by law to the drawee over and above the period of the bill to enable him to make payment. Legal due date is calculated by adding days of grace to the period of the bill. However, grace days are not allowed for the bill payable on ‘Demand’ or ‘At sight’.

Date of Maturity/Due Date of a Bill: The date of maturity or the due date of a bill is the date on which the amount of the bill is to be paid. In the case of a bills made payable, a specified period after date or after sight, the law allows three days of grace in addition to the period specified in the bill. Formulae to calculate the due dates are given below :

(i) If the bill is payable ‘on Demand’ or ‘At sight’, its due date is that date on which it is presented to the drawee for payment. It does not have definite period of time and grace days are not allowed for this type of bill.

(ii) If the bill is drawn ‘After date’
Due Date = Date of bill drawn + Period of the bill + 3 days of grace.
Period of the bill may be in number of months or in number of days.

(iii) If the bill is drawn ‘After sight’
Due Date = Date of bill accepted or date of bill presented for acceptance + Period of the bill + 3 days of grace.

Types of Due Date :

(a) Nominal Due Date : The date on which the term i.e. the period of a bill of exchange gets expired is called Nominal due date. It is calculated without adding days of grace to the period of the bill. .•. Nominal due date = Date of bill drawn / accepted + Period of the bill.

(b) Legal Due Date : Legal due date is that date which is arrived at after adding 3 days of grace in nominal due date.
∴ Legal due date = Nominal due date + 3 days of grace.

If the due date falls on public holiday or Sunday, the payment of the bill is required to be made on immediate preceding working day, e.g. if the due date falls on 15th August, payment must be made on 14th August. Similarly if the due date falls on 26th January, payment must be made on 25th January. According to the provisions made in the Negotiable Instruments Act, 1881, if in emergency, the Government of India declares a particular date as holiday, then all bills fall due for payment on that date will be paid on very next working date.

However, if due date of a bill falls due on 7th July, 2020 and this day, the Government of India declared emergency public holiday due to heavy rain and flood, then that bill would be paid on 8th July, 2020 provided it is not Sunday.

Holder : Any person who is entitled in his own name to the possession of the bill and to receive or recover the amount due thereon from the concerned parties thereon is called “holder of the bill”. He may be drawer himself or his creditor in favour of whom drawer has endorsed the bill. Somebody in possession of a stolen or a lost instrument i.e., bills of exchange cannot be a holder. The payee of the bill can be a holder. Any person who has received the instrument from the payee or any previous holder can be a holder.

Holder in due course : A person is said to be “holder in due course” if he satisfies the following conditions :

• He is a holder if it is payable to bearer or he is the payee or endorsee, if it is payble to or to the order of the payee.
• He became the holder before the amount mentioned in the instrument became payable i.e. before maturity.
• He became the holder for valid consideration.
• He became the holder without having sufficient cause to believe that any defect existed in the title of the person from whom he received it, though not of any prior party.

Types of Bills of Exchange : The bills of exchange may be classified as :

(1) Trade bill : A bill of exchange which is drawn by a creditor on his debtor for certain valuable consideration is called Trade bill. Only in case of credit and lending and borrowing, transactions Trade bills are used. The different types of trade bills are explained below :

• Inland bill of exchange : A bill of exchange drawn and accepted between the two parties from the same country is called Inland bill of exchange, e.g. a bill of exchange drawn and accepted at Mumbai and made payable at Kolkata, is known as Inland bill of exchange.
• Foreign bill of exchange : A bill of exchange drawn and accepted in one country and made payable in some other country is called a Foreign bill of exchange, e.g. a bill of exchange drawn in India and made payable in Japan is called a Foreign bill of exchange.
• Bills Payable on Demand or at Sight: A bill of exchange which does not have definite period of time and made payable whenever its payment is demanded, is called bill payable on Demand or at Sight. Grace period of 3 days is not allowed on these bills.
• Bills Payable After Date : A bill of exchange in which period of bill is counted from the date of bill drawn, is called Bills Payable after Date. Grace period of 3 days is allowed on these bills.
• Bills Payable After Sight: A bill of exchange in which period of a bill is counted from the date of presentation or date of acceptance whichever is earlier is called Bill Payable after Sight. Grace period of 3 days is allowed on these bills.

(2) Accommodation bill : A bill drawn not against value received, but to raise money on credit and thus meet the temporary financial needs of the parties thereto, is called Accommodation bill. In order to help a friend and for mutual benefits of the parties thereto, this type of bill is drafted and accepted without any consideration.

Classification of bills for Accounting : The two fundamental accounting rules for recording bill transactions are : first, to remember that for the acceptor or drawee, a bill is always a Bills payable as he is required to make payment, while for all other parties, it is a Bill receivable; and secondly, to treat both the Bills Receivable A/c and the Bills Payable A/c as Real accounts, debiting what comes in and crediting what goes out.
Thus, on accepting a bill of exchange, the acceptor will debit the Drawer’s A/c and credit the Bills Payable A/c, and on receipt of this acceptance, the drawer will debit the Bills Receivable A/c and credit the Acceptor’s or Drawee’s A/c.

How using of Bill :

If on the due date of a bill, its drawee or acceptor makes a full payment on it to its holder, the bill is said to be duly met or honoured.

Meeting or honouring a bill, thus, means making a full payemnt on it to the holder on the due date by its drawee. For honouring the bill, the drawer or holder of the bill must present the bill to the drawee on or before due date for payment.
Dishonour of a Bill : If the drawee or acceptor of a bill fails to make payment on it on the due date, the bill is said to be dishonoured. The bill may be dishonoured in two ways :

• When drawee does not accept bill, the bill is said to be dishonoured for non-acceptance.
• When drawee refuses or does not make payment on the due date of the bill, the bill is said to be dishonoured for non-payment.

Legal protection afforded by Bills of Exchange :

(i) Noting of Dishonour : On dishonour of a bill, the holder has to create official proof of dishonour by getting the bill noted. For this he has to approach a Notary Public. Noting of a bill of exchange means recording the facts of dishonour of bill of exchange, date of dishonour, reasons of dishonour, parties to bill, etc. by a Notary Public. The Notary Public also records the facts of dishonour in his official register. Thereafter, the holder generally gives a notice of dishonour to all parties to the bill and seeks to recover from any or all of them the value of the bill plus the noting charges.

(ii) Protesting : Protesting refers to issue of formal certificate bearing a Notary’s seal by notary public, certifying the facts of dishonour of bill of exchange based on noting. Protesting is absolutely necessary in respect of dishonour of foreign bill of exchange. The protest is accepted by the court as evidence of dishonour of a bill of exchange.

Notary Public : An officer appointed by the Government to certify dishonour of bills of exchange is called Notary Public. According to provisions made in the Notaries Act, 1952, he is a public officer whose function is to administer oaths, to attest and certify, by his hand and official seal, certain classes of documents, in order to give them credit and authenticity, to take acknowledgments of deeds and other to conveyances, and certify the same, and to perform certain official acts, chiefly in commercial matters such as the protesting of notes and bills, the noting of foreign drafts, and marine protests in cases of loss or damage. The Notaries Act is administered by the Central as well as State Governments.

Noting Charges : Noting charges refer to fees charged by Notary Public for establishing facts and causes of dishonour of the bill. Drawee or acceptor who is ultimately responsible for dishonour of the bill, has to bear noting charges.

Accounting treatment of Bills of Exchange-

(a) Retaining the bill till due date : Retaining the bill till due date means act of drawer or holder to keep the bill with himself till its due date. On the due date, the drawer or holder of it has to present the bill to the drawee for payment which may be honoured or dishonoured by drawee.

(b) Endorsement of a bill of exchange : When the holder or owner of a bill of exchange signs on its back with the object of transferring its title to somebody else, the signature or the act of signing is called an Endorsement and the bill is said to be Endorsed. The person so signing a note or bill is called the Endorser, while the person to whom it is endorsed is called the Endorsee. The act of endorsement of bill of exchange may continue till its due date.

(c) Discounting of a bill of exchange : A bill is said to be discounted, if before its due date, the holder of the bill, exchanges it for cash, giving away a small part of its face value by way of interest for the unexpired period. Bill is usually discounted with the bank.

While computing the amount of such discount, the students should remember that unless followed biy the words ‘per annum’, the given rate of discount is to be treated as straight or flat, irrespective of the period. Thus, if a three-month bill for ₹ 10,000 is discounted at 5%, the discount will be ₹ 500, but if it is discounted at 5% per annum, the discount will be ₹ 125.

On the due date of the discounted bill, the bank presents the bill before the drawee and recover the entire amount of the bill. In case the bill is dishonoured by the drawee, the bank returns the bill to the drawer and recovers the entire amount from drawer.

Formulae for calculation of discount :

(i) If flat rate of discount is given (i.e. when per annum rate is not given) :

(ii) If discount rate per annum and period in months are given :

(iii) If discount rate per annum and period in number of days are given :

in case of leap year number days will be 366 instead of 365.

(d) Sending the Bills of Exchange to the bank for collection : The drawer of a bill of exchange may deposit the bill with the bank with the instruction that the bill be kept till its maturity and present the same before the drawee on its due date to collect its amount. Accordingly on the due date the bank present the bill before the drawee and collects the amount of the bill. Then the bank credits the proceeds of the bill to the bank account of the depositor (drawer or holder). If bill is dishonoured, the bank will return bill to the depositor. For this service the bank debits the account of the depositor with certain amount of charges.

On depositing the bill with the bank for collection purpose, the drawer opens a separate Account called “Bill sent to Bank for collection Account,” in his books of accounts.

(e) Renewal of a bill of exchange : If the drawee or acceptor of a bill is not in a position to make full payment on it on its due date, he can approach the drawer on or before the due date and request him for an extension of time for payment.

Thus, renewal of a bill of exchange refers to drafting a new bill of exchange in cancellation of earlier bill of exchange by drawer at the request of drawee.

Note that in most cases, the drawer will not agree to a renewal unless a part payment of the amount due is made in cash and the interest on the unpaid balance for extension of time is also taken into consideration. (Such interest is either paid in cash immediately or is included in the amount of the new bill.)

(f) Ways to renew a bill of exchange :

(1) New bill is drawn without interest for extended credit period :

• A new bill is drafted and accepted equal to the amount of old bill for the extended period of credit.
• The drawer or holder of bill accepts the part payment and drafts a new bill for the balance amount for the extended credit period.

(2) New bill is drawn with interest for extended credit period :

• The drawer or holder receives the interest in cash and drafts a new bill for the amount equal to the amount of that old bill for the extended credit period.
• The drawer or holder receives the part payment along with interest on the balance amount in cash and drafts a new bill for the balance amount for the extended credit period.
• The drawer or holder receives only part of the bill amount of bill and drafts a new bill for the balance amount plus interest due thereon for the extended credit period.

The drawer may renew the bill even after its dishonour on maturity. In such a case, noting
charges may be recovered immediately or added to the amount of new bill.

(g) Insolvency of Acceptor / Drawee on or before due date of a bill :A person whose liabilities are greater than his assets and such liabilities he cannot pay in full, is called insolvent or bankrupt person. If the drawee or acceptor of a bill is declared insolvent, his acceptance is deemed to be dishonoured. Thus, as soon as the drawee or acceptor is declared insolvent, all parties to the bill will treat the bill as dishonoured and pass appropriate entries. If insolvent person owns and possesses any property, it is sold by a liquidator appointed by the court and proceeds so obtained is distributed among the creditors as per the ratio of their dues. Thus, drawer or holder recovers part of the amount due from insolvent drawee’s property. The unsatisfied balance which is not recovered is treated as Bad debts and debited to ‘Bad debts Account’ in the books of drawer and credited to ‘Deficiency Account’ in the books of drawee or acceptor.

(h) Retirement of a bill of exchange : If the drawee or acceptor desires to pay the amount of the bill before its due date, he may approach its holder and offer to make an early payment, generally in reborn for a discount or rebate. If the holder of the bill agrees to the proposal, and accordingly drawee makes payment before maturity, the bill is said to be retired.

Retirement of a bill, thus, means its payment by the drawee or acceptor before its due date, generally at a discount or rebate. Such rebate or discount is an expense to the party (i.e. drawer) receiving the payment and gain to the party (i.e. drawee) making the payment.

Pro Forma journal entries with respect to bills transactions in the books of Drawer and Drawee :

Pro Forma ledger accounts :