Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 6 Bank Reconciliation Statement

By going through these Maharashtra State Board Bookkeeping and Accountancy 11th Notes Chapter 6 Bank Reconciliation Statement students can recall all the concepts quickly.

Maharashtra State Board 11th Accounts Notes Chapter 6 Bank Reconciliation Statement

Meaning, Importance, And Utilities of Accounting Documents-
The documents which explain all the basic facts (information) of cash and banking transactions such as the date, amount, parties, and purposes of transactions are called Accounting documents. Accounting documents also provide evidence of financial transactions on account of the introduction and increasing use of the Internet and mobile banking, the functioning of the modern bank has undergone a drastic change. Payments and receipts of cash through the internet and mobiles generate instant and automatic evidence useful for concerned parties. Even today payments and receipts are made through cheques and drafts. Similarly a large number of banking transactions are completed by the account holders through visiting the banks.

Types of Bank Documents-
1. PAY-IN-SLIP: Pay-in-slip is an important source document used by the account holder for depositing cash as well as cheques into the bank account. A pay-in-slip book consists of 10 slips or 100 slips. Each slip is divided into two parts, each of which can be separated easily from the other. The longer part of the slip is called foil and the smaller part is called counterfoil.

Before depositing cash or cheque into the bank, account holder is required to fill up both the parts of pay-in-slip. Information regarding name of the account holder, his account number, amount in figures and words, signature, etc is required to be filled up on both the parts of the pay-in-slip. The cashier of the bank accepts cash or cheque along with the duly filled up pay-in-slip. The foil of pay-in-slip remains with the bank for making records in the books of the bank and the counter foil after stamping and signature of the cashier is given back to the account holder for his own reference. Separate pay-in-slips are used for depositing cash and cheque.

The pay-in-slip is a bank printed form provided by the bank free of charge to the account holders to facilitate them to deposit cash or cheque into the bank. On the basis of slip entries are made in the cash book as well as in the bank passbook.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 6 Bank Reconciliation Statement

Contents: The pay-in-slip contains the following details:

  • Name of the bank and its branch. Usually, they are printed.
  • Date of banking transaction.
  • Name of the account holder.
  • Account No.
  • Types of Account.
  • Amount deposited in words as well as in figures.
  • Form of amount deposited i.e. cheque/cash.
  • Signature of the depositor.
  • Signature of officer in charge and stamp of bank.
  • On the backside of the pay-in-slip, the details of cash or cheque deposited are given.

(a) Specimen form of pay-in-slip is given below: From side.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 6 Bank Reconciliation Statement 1

(b) Reverse (Back-side) of Pay-in-Jip :

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 6 Bank Reconciliation Statement 2

Withdrawal Slip:
A source document which is used by the account holder for withdrawing cash from the bank is called withdrawal slip. It is used to withdraw the amount from Savings Account. Before withdrawing cash from the bank, an account holder is required to fill up a withdrawal slip. Information regarding the name of the account holder, his account number, amount in figures and in words, date, signature, etc. are required to be filled up. The account holder is also required to sign on the back of the withdrawal slip. Both the signatures made on withdrawal slip must be matched with the specimen signature recorded in the computer. This is to avoid malpractices.

A person other than an account holder can also withdraw money with the help of a withdrawal slip. In such case, a person appointed to withdraw the money is required to sign on the reverse of the withdrawal slip below the signature of the account holder. While withdrawing the money from the bank, the withdrawal slip must be accompanied by the bank passbook. An account holder is not allowed to carry withdrawal slips outside the bank premises. It is a bearer document. This is because the person holding duly filled in and signed by the account holder can easily withdraw the amount from the bank by signing on the backside. In the case of use of withdrawal slip, account holder gets no document from the bank on such withdrawal.

Contents: Withdrawal slip contains the following details:

  • Name of the Bank and its branch. They are generally printed.
  • Date of withdrawal of cash.
  • Name of the account holder.
  • Account Number.
  • Amount in words as well as in figures.
  • Signature of account holder.

Specimen form of a withdrawal slip is given below.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 6 Bank Reconciliation Statement 3

Bank Pass Book:
A bank passbook is a small booklet given by the bank to the account holder free of charge. In the passbook, an account holder’s transactions with the bank are recorded by the banker chronologically. A passbook is a copy of ledger account appearing in the books of bank. The entries in the passbook are made by the banker.

Nowadays printed entries in the passbook are made through computer. This book has a number of pages and on each page, there are several columns like Sr. No., date, particulars, cheque or withdrawal slip nos., amount deposited, amount withdrawn, balance amount and initials of bank clerk, etc. An account holder is required to carry a bank pass book whenever he goes to bank for a transaction. The bank passbook serves as an identity of the account holder. Account holder cannot pass any entry or make any changes on the Bank passbook.

Importance:

  • Bank passbook shows the balance of amount i.e. standing position of account holder with the bank on a particular date.
  • It is a documentary proof accepted as an evidence of banking transactions in the court of law.
  • It gives confirmation by the bank that all the transactions are made through the bank.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 6 Bank Reconciliation Statement

Contents:

  • Date of transaction.
  • Particulars regarding banking transactions.
  • Cheque No.
  • Amount withdrawn from the bank.
  • Amount deposited into the bank.
  • Balance amount.
  • Signature of Bank clerk or officer.

Specimen form of the Bank Pass Book is given below:

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 6 Bank Reconciliation Statement 4
Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 6 Bank Reconciliation Statement 5

Bank Statement:
A statement which shows the details of the banking transactions of the account holder during a specific period of time is called a bank statement. It is issued by the banker to its current account holders every month or after a fixed interval of time. It is usually issued by the bank at the end of every month. It may be issued by the bank whenever demanded by the current account holders. It substitutes to the bank passbook.

The current account holder gets a bank statement in place of the bank passbook. Nowadays, many schedule bank instead of issuing the bank passbook, issues a bank statement to its current account holders as well as savings account holders. Periodical information about the deposits of money and cheques in the bank account, withdrawals, issue of cheques opening balance and closing balance, etc., are recorded in the bank statement. Information provided in the bank statement is useful to the account holder to prepare his business plans.

Under computerised accounting system, the printouts of the bank statement are issued to Current Account holders.

Importance:

  • The Bank statement provides the information to current account holder about his banking transactions and balance position with the bank.
  • By referring bank statement businessman makes arrangement for payments.
  • By referring bank statement, the businessmen can try to arrange for overdraft facility from the bank.
  • Businessman knows about the clearing of the cheque deposited and issued.

Contents:

  • Date of banking transactions.
  • Particulars of banking transactions entered.
  • Cheque numbers.
  • Withdrawal slip nos.
  • Amount deposited into the bank.
  • Amount withdrawn from the bank.
  • Balance amount.

Specimen of Bank Statement is given below:

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 6 Bank Reconciliation Statement 6

Bank Advice: Bank advice is a statement or source document prepared and issued by the bank to inform the account holder that his account has been debited or credited for the amount specified therein. If an account holder gives instructions in writing to the bank to pay certain business expenses like insurance premium, share call money, electricity bill, telephone charges, etc., the bank accordingly makes payments and debits the account of the account holder. Similarly, the bank also collects the earnings as well as incomes like salaries, rent, commission, dividend, discount, etc., of the account holders as per their instructions on their behalf and credit their accounts for the amount so collected.

When a bank makes payments to account holders, it issues debit advice to the concerned account holder to inform that his account has been debited for the payments so made by the bank. A Debit advice is also issued by the bank whenever the bank deducts certain charges or commission from the balance amount of the account holder with the bank for the services rendered. Similarly, when a bank collects the fund as per instructions of the account holder from various parties, it issues a credit advice to the concerned account holder to inform that his account has been credited for the account so collected.

Importance:

  1. After receiving debit advice and credit advice, the businessman can update his records from time to time.
  2. Bank advice serves as an evidence of the transaction made through bank.

Specimen of a bank advice is given below:

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 6 Bank Reconciliation Statement 7

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 6 Bank Reconciliation Statement

Bank Reconciliation Statement-
1. Introduction: When a businessman opens and operates a current account in a bank, he gets a bank passbook, cheque book and a pay-in-slip book free of charge from the bank to operate his bank account. The bank opens the account holder’s account in its ledger and enters therein all the banking transactions carried on with the account holder. The bank passbook is a small booklet in which banking transactions of account holder are recorded by the bank in chronological order.

Thus, the account holder’s banking transactions are recorded in two different books viz. first they are recorded by businessman (i.e. by account holder) in his three column cash book under bank column and secondly they are recorded in the bank passbook by the bank from the bank ledger. For instance, if an account holder has issued a cheque of ₹ 500 in favour of Mr. Sachin S. Shetty, it is first recorded in the three column cash book on credit side under bank column by account holder and then it is recorded on the debit side of bank passbook by the bank soon after it is paid by the bank. When all the banking transactions of account holder are systematically recorded in the cash book and in the passbook, then balance shown by cash book and balance shown by bank passbook as on particular date must agree with each other.

Many a times bank balance shown by passbook and bank balance shown by cash book do not tally with each other. The account holder prepares a statement showing causes of disagreement between two balances usually at the end of every month.

2. Meaning: Bank Reconciliation Statement is a statement which attempts to explain causes of disagreement of balance shown in cash book and balance shown in Bank passbook. In short a Bank Reconciliation Statement is a statement prepared to disclose causes of difference between the balances shown by cash book and passbook. Importance of Bank Reconciliation Statement lies in the fact that it ensures that the bank balance shown. by cash book is reconciled with that of the bank passbook.

Definition: “A statement which is prepared to reconcile the difference between the balance shown by bank column of cash book and balance shown by bank passbook and also showing causes of disagreement of these two balances is called Bank Reconciliation Statement.”

3. Need And Importance of Bank Reconciliation Statement-

  • Proper Records: Bank Reconciliation Statement serves a check or follow up on the banker whether the bank is making proper entries in the passbook for cheque or money deposited into the bank and amount withdrawn or cheques issued from the bank.
  • Explanation of Causes of Disagreement: Bank Reconciliation Statement, explains and clarifies the causes of disagreement between the balance shown in the cash book under bank column and the balance shown in the passbook.
  • Rectification of Errors or Omissions: Bank Reconciliation Statement helps to rectify the mistakes or omissions that take place in the books maintained by the banker as well as the customer.
  • Confidence in Bank: In the absence of a Bank Reconciliation Statement, a customer will lose confidence in the bank, because the customer cannot be sure of the correctness of the bank balance depicted in the bank passbook.
  • Reduction in the chances of frauds: The Bank Reconciliation Statement helps to reduce the chances of frauds committed by the staff handling the cash.
  • Delay in collection of cheques: The Bank Reconciliation Statement explains any delay in the collection of cheques.

Reasons For Differences in Balances-

Reasons or causes responsible for difference in balance shown by passbook and balance shown by cash book are explained below:
1. Some of the banking transactions are entered in the cash book and pass book on different dates, e.g. as soon as cheques are sent to the bank, entries are made in the cash book. But the bank records the same in the passbook only when the cheques are realised, (cheques are deposited but not cleared), then on the date of deposit of the cheques, bank balance in cash book will go up. But passbook balance will not go up, and balance in passbook appears as it is.

2. If some mistakes or omissions are committed by the bank clerk in the pass book or if mistakes or omissions are committed by the businessman in recording business transactions in the three column cash book, then there will be a difference in the balance shown by the passbook and the balance shown by cash book.

3. If banking transactions are entered twice by the bank clerk in the passbook or if they are entered twice by businessman in his cash book, then difference in bank balance in cash book and balance in bank passbook are bound to occur.

4. If banking transactions are recorded by a businessman on the wrong side or in the wrong column of the three-column cash book, difference between balance shown by pass book and cash book are bound to occur.

5. The difference between the balance shown by the Cashbook under Bank column and the balance shown by the passbook also occurs on account of the following reasons:

  • When cheques are issued but not presented for payment.
  • When direct deposit is made into the bank by the client. .
  • Dividend/Interest/Commission collected by the bank but not shown in the cash book.
  • Bank charges/direct payment to clients made by the Bank, but not shown in the cash book.
  • Dishonour of cheque intimation not received from the bank to record in the cash book.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 6 Bank Reconciliation Statement

Specimen Form of Bank Reconciliation Statement-

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 6 Bank Reconciliation Statement 8 Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 6 Bank Reconciliation Statement 9

Bank Reconciliation Statement as on 31st March, 2004-

Formulae of Bank Reconciliation Statement:

(A) When bank balance as per Cash Book is given:

  • Cheque issued but not presented for payment.
  • Interest and dividend collected by the bank and credited in the passbook, but are not recorded in the cash book
  • Direct deposit made by the customer into the bank and credited in the passbook.
  • Interest on deposit allowed by the bank and credited in the passbook, but not recorded in the cash book.

Less:

  • Cheque deposited into the bank but not realised.
  • Commission and bank charges debited by the bank in the passbook but same are not recorded in the cash book.
  • Insurance premium or any other expenses paid by the bank recorded in the passbook but is not recorded in the cash book.
  • Dishonour of a bill or cheque, recorded in the bank passbook, but not entered in the cash book.

(B) When Overdraft as per Cash Book is given :

Add:

  • Cheque deposited into the bank but not realised.
  • Commission and bank charges debited by the bank in the passbook but same are not recorded in the cash book.
  • Insurance premium or any other expenses paid by the bank and debited in the passbook but is not recorded in the cash book.
  • Dishonour of a bill or cheque, recorded in the bank passbook, but not entered in the cash book.
  • Interest on Bank overdraft debited in passbook only.

Less:

  • Cheque issued but not presented for payment.
  • Interest and dividend collected by the bank and credited in the passbook but not recorded in the cash book.
  • Direct deposit made by the customer into the bank and credited in the passbook but not entered in the cash book.
  • Interest on deposit allowed by the bank and credited in the passbook, but not recorded in the cash book.

(C) When Bank balance as per pass book is given:

Add:

  • Cheque deposited into the bank but not realised.
  • Commission and bank charges debited in the passbook by the bank, but same are not recorded in the cash book.
  • Insurance premium or any other expenses paid by the bank and debited in the passbook but same is not recorded in the cash book.
  • Dishonour of cheque or bill of exchange recorded by the bank in passbook but not entered in the cash book.

Less:

  • Cheque issued but not presented for payment.
  • Interest and dividend collected by the bank and credited in the passbook but not recorded in the cash book.
  • Direct deposit made by customer into the bank and credited in the passbook but not entered in the cash book.
  • Interest on deposit allowed by the bank and credited in the passbook, but not recorded in the cash book.

(D) When Overdraft as per pass book is given:

Add:

  • Cheque issued but not presented for payment.
  • Interest and dividend collected by the bank and credited in the passbook but not recorded in the cash book.
  • Direct deposit made by customer into the bank and credited in passbook but not entered in the cash  book.
  • Interest on deposit allowed by the bank and credited in the passbook but not recorded in the cash book.

Less:

  • Cheque deposited into the bank but not realised.
  • Commission and bank charges debited in the passbook by the bank but same are not recorded in the cash book.
  • Insurance premium or any other expenses paid by the bank and debited only in the passbook.
  • Dishonour of cheque or bill of exchange recorded by the bank in the passbook but not entered in the cash book.
  • Interest on Bank overdraft debited in passbook only.

Position in Cash Book

  • Bank balance as per cash book means debit balance as per cash book.
  • Overdraft as per cash book means credit balance as per the cash book.

Position in Pass Book

  • Bank balance as per pass book means credit balance as per passbook
  • Overdraft, as per pass book means debit balance as per pass book,

(B) Method to ascertain items to be added to and deducted from balance.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 6 Bank Reconciliation Statement 10
Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 6 Bank Reconciliation Statement 11

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 5 Subsidiary Books

By going through these Maharashtra State Board Bookkeeping and Accountancy 11th Notes Chapter 5 Subsidiary Books students can recall all the concepts quickly.

Maharashtra State Board 11th Accounts Notes Chapter 5 Subsidiary Books

Introduction-
Journal is the main accounts book in which all types of day to day business transactions are recorded systematically and in chronological order. As in the past, business was small in size and transactions carried on by businessman were less in numbers, the journal as a book of accounts was adequate and convenient to record all transactions. Today, the journal is useful for traders whose business is small and limited in size. Journal as a single book of account is not convenient to those traders whose business is large in size and who carries on unlimited business transactions every day.

If a single journal is kept for an entire large scale business, it will be bulky and difficult to operate and handle and carry from one place to another in the same organisation. Similarly, many clerks simultaneously cannot do office work based on information written in the journal. Similarly, if all transactions are recorded in one journal, it will be time consuming to obtain necessary information. Due to this, need was felt to have subsidiary books.

Meaning: When journal is divided into a number of parts, each of those parts is individually called subsidiary book. Thus, subsidiary book is sub-division of journal. In other words sub-division of journal on the basis of ‘
nature of transactions such as purchases, sales, cash expenses, cash receipts, return of goods, etc. is called subsidiary books. When subsidiary books are prepared and maintained, transactions are first recorded in
the subsidiary books and then conveniently posted to the respective ledger accounts. That is why subsidiary  books are also called books of original entry or prime entry. They are also called as special journals or day books.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 5 Subsidiary Books

Need For Subsidiary Books-
The need for subsidiary books is explained below:

  • Division of work: When journal is divided into a number of books, it facilitates division of work among the  staff of the businessman. Many clerks work simultaneously in the office.
  • Specialisation: When employees are assigned with same type of work everyday, it will lead to specialisation. Specialisation increases efficiency.
  • Time Savings: Due to division of work various accounting processes can be undertaken simultaneously by the employees which in turn helps in saving of time.
  • Information available readily: Maintaining separate books for each type of transaction, the information relating to each transactions is easily and readily available to the traders from the books of accounts.
  • Facilitates easy internal audit: Division of journal into different sub parts helps in conducting effective internal audit of accounts prepared by the organisation.
  • Verification of correctness: Division of journal into different sub parts facilitates the verification of correctness of the books of accounts.
  • Helps in preventing frauds: Since entries are passed in the subsidiary books in chronological order, they  help in preventing fraudulent entries in an account.

Types of Subsidiary Books-
The different types of subsidiary books are:

  1. Purchase Book or Bought Day Book,
  2. Sales Book or Sales Day Book,
  3. Purchase Return Book or Return Outward Book,
  4. Sales Return Book or Return Inward Book,
  5. Cash Book,
  6. Bills Receivable Book,
  7. Bills Payable Book and
  8. Journal Proper.

Types of subsidiary books on the basis of transactions.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 5 Subsidiary Books 1

The different types of subsidiary books are explained as follows:

(1) Cash Book :
Cashbook is an important subsidiary book of accounts, which is used by a businessman for recording cash and banking transactions of the business. Credit and barter transactions do not find any place in this book. Purchase of goods and assets on cash, sale of goods and assets on cash, payment of expenses in cash, receipt of income in cash, deposits and issues of cheques etc. are recorded in the cash book. In this book all receipts in cash and deposit of cheques are debited and all payments in cash and issue of cheques are credited. Cashbook is similar to a Cash A/c and hence no separate Cash A/c is opened and maintained in the ledger when the Cash Book is operated by the businessman.

Cash in hand is an asset of the business. Unless a business has cash, it cannot be spent and hence cash book always shows a debit balance. Cashbook is written on the basis of cash receipts and cash vouchers. Like a Ledger A/c, a cash book has two main sides namely receipt side and payment side. On the left-hand side i.e. on the debit side all cash receipts are recorded and on the right-hand side i.e. on the credit side, all cash payments are recorded. The cash book is totalled and balanced periodically. By balancing a cash book, a trader can ascertain the balance of cash and can plan the business activities. When the cash book is operated, no journal entries and ledger posting of cash transactions are required to be passed, in the journal and ledger. It results in saving of labour, time, stationery, and business cost.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 5 Subsidiary Books

Types of Cash Book :

Cash Book is classified under the following heads :

  • Simple or Single Column Cash Book.
  • Cashbook with cash and bank columns – Two-column cash book.
  • Petty Cash Book.
    The types of cash books are explained in detail:

(1) Single Column Cash Book :
(A) Meaning: This cash book is also called simple cash book. It has two sides viz. receipt side and payment side. The debit side of cash book is meant for recording all receipts and the credit side of the cash book is meant for recording all payments. This book is written on the basis of cash receipts received, cash receipts issued, cash memos received, cash memos issued and cash vouchers. The cash book is balanced from time to time and the balance is carried forward. The cash book always shows a debit balance. In this book discount earned or allowed and banking transactions are not recorded.

Specimen of single column cash book :

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 5 Subsidiary Books 2

(B) Explanation of columns of Simple Cash Book: The columns drawn on receipt side (Debit side) are explained below:

  • Date: In this column the date on which cash received is recorded. The date of transactions is written in order of year, month and date. In the beginning of each page year, month and date are written and then for each subsequent transactions on the same page only date is written.
  • Particulars: In this column name of the other accounts credited is written. The name of the account begins with the word ‘To’.
  • Receipt Number: In this column of cash book, the serial number of the receipt and cash memos is recorded.
  • Ledger Folio Number: In this column of cash book the page number of the ledger on which concerned account opened is recorded.
  • Amount: This column of cash book shows amount received. The amount is written in figures.

The columns drawn on payment (credit) side are explained below:

  • Date: In this column, the date on which cash paid is recorded.
  • Particulars: In this column name of the other account debited is written. The name of the account begins with the word ‘By’.
  • Voucher Number: In this column, the serial number of voucher and cash memo is recorded.
  • Ledger Folio: In this column page number of ledger on which concerned account opened is recorded.
  • Amount: In this column actual amount paid is recorded in figures.

(C) Recording in Simple Cash Book: The procedure of recording entries for cash transactions in simple cash book is explained as follows:

  • Opening balance: Previous month’s balance if any, appears on the debit side (Receipts side) as “To Balance b/d”. Here b/d stands for “brought down”.
  • Opening Capital: In the case of new business, capital contributed by the proprietor appears on the Receipts side as “To Capital A/c”.
  • Receipts of Cash: When cash is received on any account, it is recorded on the receipts side under the “Particulars” column.
  • Cash Payments: When ’cash is paid on any account, it is recorded on the payments side under
    “Particulars” column. ,
  • Chronological order: Transactions are always recorded in the cash book in chronological (datewise) order only.

(D) Balancing of Simple Cashbook: Generally, at the end of the month, cash book is balanced to find out balance of cash in hand. First ‘Amount’ column on the debit side of cash book is totalled. Thereafter ‘Amount’ column on the credit side of cash book is totalled in rough. The difference is ascertained by deducting the total of the amount appearing on credit side from the total of the amount appearing on debit side. This difference is recorded on the credit side under “Particular” column as “By Balance c/d”. Here c/d stands for carried down.

Cashbook always shows debit balance. This is because one cannot spend more than what one has. This balance is then recorded on the receipt side as “To Balance b/d” to start next period, as cashbook records only cash transactions and will always have excess of receipts overpayments.

(2) Cash Book with Cash and Bank Columns :

(A) Meaning: This cash book is also called as cash book with cash and bank columns. A businessman who does business transactions through a bank, records his banking transactions along with cash transactions in double column cash book. Banking transactions like receipts and deposit of cheques, issue of cheques, deposit and withdrawal of cash from bank, etc. are recorded in the double column cash book.

By maintaining double column cash book, a businessman gets information of inflow and outflow of cash and details of banking transactions. Exact position of cash in hand and balance of cash at bank can be ascertained quickly by referring to the double column cash book. Double column cash book is useful for a businessman to take quick decisions on the business matters.

This cash book has two columns on receipts side and the payment side viz. Cash column and Bank column. Bank column appearing in two-column cash book represents bank current account.

(B) Specimen of Two Column cash book:

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 5 Subsidiary Books 3

(C) Types of Bank Accounts :
On the basis of nature, characteristics and advantages, bank accounts are classified into the following four types, viz. (i) Current account, (ii) Savings account, (iii) Fixed deposit account and (iv) Recurring deposit account.

The above types of bank accounts are explained in detail as follows:
(i) Current Account: This type of bank account is more useful to businessmen. It is a type of bank account in which there is no restriction on deposits of money into the bank and on withdrawals of money from the bank. The account holder is permitted to deposit money into his account any number of times in a day. Similarly, the account holder is at liberty to withdraw money or issue cheques from the bank any number of times provided he has sufficient balance in his account to honour withdrawals and cheques issued.

The bank pays interest at the lowest rate ranging from 0.5% to 1% p.a. on balance amount remaining in this account, and also gives overdraft facility to account holders. Current account is a running account, as it is operated daily and continuously by the account holder. It should be noted that the bank columns in the cash book implies Current Bank Account.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 5 Subsidiary Books

(ii) Savings Account: This is a type of bank account in which the bank keeps no restrictions on deposits, but imposes restrictions on withdrawals of money from the bank. In this type of account maximum of 2 withdrawals per week and maximum 25 withdrawals per every 3 months, are permitted by the bank. The main intention of savings account is to increase the savings of account holders and to channelise them into investment and thus capital formation of the nation. This account is more useful to non-business community. Bank allows interest at the prescribed rate on balance remaining in the savings account.

(iii) Fixed Deposit Account: Fixed deposit account is a blocked account as money once deposited into the bank by account holders, cannot be withdrawn by them until the period for which it is deposited, is over. It is a type of bank account in which money is deposited for specific period of time.

This account is more useful to retired people or non-business community who are interested in earning regular fixed income. On fixed deposits, a bank pays a higher rate of interest to deposit holders. Payment of interest is made half-yearly or yearly. If interest is not paid periodically, then accumulated interest is paid to deposit holders at the time of maturity along with the principal amount deposited. The minimum period for which deposit is accepted by the bank is upto 30 days and maximum period is 6 years or even more than 6 years. The rate at which interest is paid on deposits is not fixed, but fluctuates with the length of period for which deposits are kept.

The longer the period, higher is the rate of interest payable on deposit by the bank. The rate of interest also depends on the monetary policy of the government. In case of need, an account holder can borrow from the same bank the amount equivalent to 70% of the fixed deposit against the security of the deposit. In such a case, the bank charges 2% interest more than the rate of interest paid on the fixed deposit by the bank.

(iv) Recurring Deposit Account: A bank account in which an account holder is required to deposit a fixed sum of money after every fixed interval for a specific period of time is called a recurring deposit account. In this type of account, the bank accepts the fixed amount daily or once in a month on fixed date upto the maturity date. The deposit holder is not permitted to withdraw money from this account, but in case of need, the bank gives loan to the account holder on the credit balance standing in his account.

On maturity, the bank pays the total amount deposited and interest accrued on that amount in lump sum to the account holder. The main purpose of this account is to increase savings and thereby helps lower-income groups to purchase costly articles with accumulated savings. This account is more useful to the non-business community, specially lower-income groups.

(D) Documents used by the Account Holder:
The following documents are provided by bank, free of charge to account holders. These documents are used by account holders while doing transactions with the bank. These documents are: (i) Bank Pass Book,
(ii) Pay-in-slip Book, (iii) Cheque Book, (iv) Withdrawal Slip.

The documents are explained in detailed:
(i) Bank Pass Book: The bank passbook is a small booklet, given to account holders free of charge to record their transactions with bank. Banking transactions are recorded in the passbook by bankers only. In other words, passbook is a small booklet having a number of pages, used for recording banking transactions. It provides identity giving document of account holder. By referring to the passbook, an account holder comes to know his financial position with the bank. Current account holder is not given the passbook, instead, they are provided with the monthly statement of the transactions with the bank.

(ii) Pay-in-Slip Book: Pay-in-slip book is another document used by account holder for depositing cash and cheque into the bank. Pay-in-slip book consists of either ten slips or hundred slips. Each slip is divided into two parts which can be separated easily from the other.

The longer part of the slip is called foil and smaller part is called the counterfoil. Before depositing cash or cheque into the bank, an account holder is required to fill up both parts of the pay-in-slip. Information regarding name of account holder, his account number, amount in figures and words, signature etc are required to be filled up on both the parts of the pay-in-slip. The Cashier of the bank accepts cash or cheque along with duly filled in pay-in-slip. The foil of the pay-in-slip remains with the bank for making records in the books of the bank and the counterfoil after stamping and signature of cashier is given back to the account holder.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 5 Subsidiary Books

(iii) Cheque Book: A cheque is a document used by the account holder for withdrawing cash from the bank or for making payments to other persons through the bank. A book which consists of 10 or 20 blank cheques is called a cheque book. A Cheque book is provided by the bank to account holders free of charge, if an account holder agrees to keep minimum balance of? 500/- or more 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 the bearer or to the person named therein.” There are three parties to a cheque i.e. Drawer, Drawee and Payee. The person to whom the amount of cheque is payable is called payee and the bank on whom the cheque is drawn is called drawee bank, and the account holder who issues the cheque is called drawer.

Specimen of cheque is given below:

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 5 Subsidiary Books 4

Types of Cheques-
Cheques used by the account holder are classified into the following three categories viz.

  1. Bearer cheque,
  2. Order cheque and
  3. Cross cheque.

The above types of cheques are explained as below:
1.  Bearer Cheque: Bearer means possessor. In case of bearer cheques, the 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 the name of the payee, the word ‘self ’ is written, is called a bearer cheque.

Bearer of the cheque has to sign on the reverse of the bearer cheque before withdrawing money from the bank. While making cash payment against bearer cheque, the bank never makes inquiry whether payee is a wrong doer or right person. Bearer cheque is dangerous because in case if it is lost the wrong doer who possesses the cheque, can easily obtain cash from the bank. 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 :

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 5 Subsidiary Books 5

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

Specimen of order cheque :

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 5 Subsidiary Books 6

3. Crossed Cheque: A 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 words written between them. When the crossed cheque is presented for payment it is not paid in cash to payee or possessor, but it will be credited to payee’s account in the bank and after three days, the payee i.e. the account holder is permitted to withdraw the amount from the bank, if it is cleared and not dishonoured.

This type of cheque is more safer than any other type of cheque. If a crossed cheque is lost, a wrongdoer cannot obtain payment from the bank. The bank never makes immediate cash payment on counter on presentation of crossed cheque. Crossed cheques are sent to distant place by ordinary post safely.

Specimen of crosscd cheque:

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 5 Subsidiary Books 7

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 5 Subsidiary Books

Dealings of Cheque-

The different types of dealings of the cheque are explained below :
1. Honour of cheque,
2. Dishonour of cheque, and
3. Endorsement of cheque.

The dealings of cheque is explained :
1. Honour of Cheque: A cheque is said to be honoured if the drawee bank pays the entire amount of cheque to its holder on presentation of cheque before the bank. The bank always honours a cheque if there is sufficient fund in the account of the drawer.

2. Dishonour of Cheque: A cheque is said to be dishonoured if the drawee bank refuses to make payment to the holder of a cheque on its presentation. The drawee bank never dishonours a cheque but under the following circumstances, the drawee bank is compelled to dishonour the cheque.

  • If signature on cheque does not tally with the specimen signature of drawer (i.e. account holder.)
  • If amount mentioned on cheque in figures and in words does not agree with each other.
  • If funds in the account of the drawer in drawee bank is not sufficient to honour the cheque.
  • If a cheque is a stale cheque or post dated cheque. A cheque is valid for a period of three months from the date of its issue.
  • A cheque is said to be stale if a period of three months is over from the date of its issue. A stale cheque is always dishonoured by the bank. Post dated cheque is a cheque which bears a future date. Post-dated cheque is always dishonoured by the bank if it is presented before its date of presentation.
  • If a cheque is overwritten and if overwriting is not supported by the signature of its drawer.
  • If a cheque is torn from anywhere.

(3) Endorsement of Cheque: Endorsement of cheque refers to an act of signing on the reverse of a cheque by its holder to transfer it to another person. Cheque may be endorsed in favour of a creditor to settle his debts or it may be endorsed in favour of debtor to give further loan. A person who endorses a cheque is called endorser and a person in whose favour a cheque is endorsed is called the endorsee. Endorsement is necessary in case of transfer of order and crossed cheque. Endorsement is not necessary for transfer of bearer cheque.

Contra Entry-
The accounting entries which appear on both the sides of the cash book with cash and bank column is called contra entries. Contra entry appears only in cash book with cash and bank column and not in single column cash book. An accounting entry for an amount withdrawn from bank which is posted on the debit side of a two column cash book in the cash column and on the credit side in the bank column or an accounting entry for an amount deposited with the bank which is posted on the debit side of two column cash book in the bank column and on credit side in cash column is called contra entry. Letter ‘C’ which stands for contra is written in“L.F. No.” column to identify, contra entry.

Contra entry is passed in three column cash book under the following circumstances :
1. Cheque received on earlier day and deposited today: Journal entry for this transaction is:

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 5 Subsidiary Books 8

2. Cash deposited into the bank: Journal entry for this transaction is:

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 5 Subsidiary Books 9

(The above entries appear in the bank column on the debit side of the three-column cash book and in the cash column on the credit side).

3. Cash withdrawn from the bank for office use: Journal entry for this transaction is:

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 5 Subsidiary Books 10

(This entry appears in cash column on debit side of the three-column cash book and in bank column on the credit side.)

(A) Journal Entries For Cash And Banking Transactions :

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 5 Subsidiary Books 11 Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 5 Subsidiary Books 12 Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 5 Subsidiary Books 13 Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 5 Subsidiary Books 14

(B) Journal Entries For Dishonour of Cheque-
Dishonour of Cheque: When a bank refuses to make payment on cheque on any justifiable ground, cheque is said to be dishonoured. When a cheque is dishonoured, the value of cheque reduces to zero. On dishonour of cheque, earlier accounting effects given to cheque are required to be cancelled. Accounting effects of cheque are cancelled by passing reverse entry of earlier entry. For example:

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 5 Subsidiary Books 15
Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 5 Subsidiary Books 16 Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 5 Subsidiary Books 17

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 5 Subsidiary Books

Petty Cash Book-
When business develops, a businessman prefers to meet his business payments and receipts through the bank. Due to fast development in banking sectors, most of the businessmen carry on their day to day business activities through the bank. Generally, bank cheques are used for payments and receipts of higher amount. But generally a cheque is not used for payments and receipts of small or minor amount whose payments and receipts are inevitable in the business. For example cheque is not used for payment of taxi fare, coolie charges, sweeping charges, payment of postage etc. and receipt of sale proceeds of old newspapers etc.

In big business house or in industry to manage and pay minor expenses in cash, a separate clerk or cashier is appointed. The cashier or clerk who manages, looks after and makes payment of petty i.e. minor expenses in the organisations is called petty cashier. An account book in which the petty cashier records payments of petty expenses and receipts is called petty cash book.

In other words, a petty cash book is a separate account book in which a businessman keeps records of daily transactions which are minor in nature and whose payments and receipts are made in cash only. The Petty cashier is given lump sum amount of cash at the beginning of every month by the head cashier and he is also permitted to spend that amount on various minor expenses and also permitted to receive minor receipts during a specific period. At the end of the month the petty cashier is required to return the balance amount to the head cashier. This procedure is followed every month.

Types of Petty Cash Book-
Petty cash book is classified into the following three categories viz.
1. Simple petty cash book,
2. Columnar petty cash book,
3. Petty cash book kept on imprest system.

They are explained below.
1. Simple Petty Cash Book: A Simple petty cash book is similar to simple or single column cash book. To record receipts and payments made in cash, this cash book has two main sides viz. receipts side and payments side. In this cash book, columns like date and particulars are common for both receipt and payment side. This cash book is not extensively used in business field.

Specimen of Simple Petty Cash Book :
Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 5 Subsidiary Books 19

Importance of Columns:

  • Amount received column: In this column the petty cashier records the amount received from head cashier and proceeds received on sale, etc.
  • Cash book folio column: In this column the page number of cash book on which entry for payment of lump-sum amount of cash made by head cashier to petty cashier is mentioned for future reference.
  • Date column: In this column, the date of transaction is recorded.
  • Particulars column: In particulars column, the name of expenses on which the amount is spent and name of receipts from which amount is received are recorded. After entry narration is not written in this column. Entry for receipt is written with word ‘To’ and entry for payment is written with word ‘By’.
  • V. No. Column: Voucher number of various minor payments are recorded in V. No. column for future reference.
  • L.F. No.: Page number of ledger where entry of expenses and receipts are posted, is recorded in L.F. No. column.
  • Amount paid column: In this column, amount paid on various minor expenses is recorded.

2. Columnar Petty Cash Book: As the name indicates, this petty cash book has many sub-columns on payment side to record minor expenses individually. This cash book has two main sides viz. receipts.side and payment side. In comparison to receipt side, the payments side is much longer. The payment side of this cash book has many sub-columns which are not fixed in number.

On. the payment side of this cash book, one sub-column is provided for one similar nature of expenditures. In short, the payment side has as many columns as expenditures on which the business has spent money. In addition to these columns, at the end, two more columns are provided for L.F. No. and ledger account. In ledger account column, entries of personal account and real account are posted. This cash book is more popular and extensively used in the business field.

Specimen of columnar petty cash book :

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 5 Subsidiary Books 20

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 5 Subsidiary Books

3. Petty Cash Book kept on Imprest System: In many business houses, Petty Cashbook kept on imprest system is more popular. In this system, at the beginning of every month, the head cashier gives to the petty cashier that much amount of cash or cheque which is equivalent to amount spent in the last month. This makes the opening cash in hand with petty cashier equal in the beginning of every month. In other words, in imprest system, a definite amount of cash is given to the petty cashier at the beginning of a certain period.

This amount is known as imprest money. The petty cashier is then allowed to spend money on various petty expenses and when he has spent substantial amount of his imprest amount, he gets reimbursement of the amount he has spent from the head cashier. Thus, he again has the same amount of imprest cash. The reimbursement may be made on a weekly, fortnightly, or monthly basis, depending on the frequency of small payments.

This system renders the following advantages:

  • No excess cash is issued to petty cashier than actually required.
  • Petty cashier will not have excess or idle cash.
  • Misuse of cash is avoided as far as possible.
  • Records of petty expenses can be easily checked and compared.

Purchase Book-
A subsidiary book in which only credit purchases of goods are recorded is known as the purchase book. This book is used to record credit purchase of goods in which a trader regularly deals. In this book, cash purchases of goods and assets are not recorded. Similarly, the purchase of asset on credit is also not recorded in this book. The purchase book is written on the basis of inward invoice i.e. a statement received from the supplier.

Trade discount is never recorded in this book. Trade discount is calculated and deducted from invoice price and net price is recorded in the purchase book. If a bookseller purchases books on credit, same will be recorded in his purchase book. Purchase of furniture by the bookseller on credit, will not be recorded in his purchase book. At the end of each month the purchase book is totalled and this total shows the total amount of goods purchased on credit. Purchase Book is also known as Purchase Journal, Purchase Register and Bought Book.

Specimen of Purchase book is given below :

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 5 Subsidiary Books 21

Explanation of Columns :

  • Date: This column meant for recording the date of credit purchase of goods.
  • Particulars: In this column, the name of the supplier from whom the goods are purchased on credit is recorded. Along with the name of the supplier, his address and description of goods is also written in this column.
  • L.F. No. : In this column, the page number of the ledger on which the supplier’s account is prepared is recorded for ready reference.
  • Inward Invoice No.: Statement received from supplier along with goods purchased is called inward invoice. In this column, the number of inward invoice is mentioned.
  • Amount: This column shows the net amount of credit purchases of goods.

Sales Book-

A subsidiary book in which only credit sales of goods are recorded, is known as sales book. This book is meant for recording credit sales of goods in which the trader regularly deals. In this book sale of goods as well as assets on cash basis are not recorded. Similarly, sale of assets on credit is also not recorded in this book. This book is written on the basis of the outward invoice. Trade discount never appears in this book. Trade discount is simply calculated and deducted from the invoice price and net price is recorded in this book.

If a grocer sells different types of grains to his customers on credit, it will be recorded in his sales book. Cash sales made by the grocer will not be recorded in his sales book. Sales book is also known as sales day book. At the end of each month the sales book is totalled and this total shows the total amount of goods sold on credit, and the net amount receivable from customers. Sales book is also known as Sales Day Book, Sales Journal, Sales Register and Sold Book.

Specimen .of Sales Book is given below :

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 5 Subsidiary Books 22

Explanation of Columns :

  • Date: In this column date of credit sale is recorded.
  • Particulars: In this column, name of customers to whom the goods has been sold on credit is recorded. Along with name, address of customers and description of goods are also written.
  • L.F. No.: In this column, page number of ledger on which the customer’s account is prepared, is mentioned for ready reference.
  • Outward Invoice No.: The statement sent along with goods sold is called outward invoice. In this column the outward invoice number is recorded.
  • Amount: This column shows net amount receivable from the customers, i.e. net amount of credit.

Purchase Return Book :

A subsidiary book in which return of goods purchased on credit is recorded, is known as the purchase return book. The purchase return book is also known as return outward book or debit note book or purchase return journal. This book is used by the trader for recording the returns of goods purchased on credit to the suppliers. Goods may be returned by trader to supplier on one of the following reasons, viz.
(a) defective goods,
(b) damaged goods,
(c) delayed goods,
(d) inferior goods,
(e) goods which are not as per design, colour or sample sent
(f) excess goods received, etc. This book is written on the basis of debit. Purchase return book is totalled at the end of each month. This total shows value of goods returned to suppliers.

Specimen of Purchase Return Book is given below :

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 5 Subsidiary Books 23

Sales Return Book-
A subsidiary book in which transactions relating to return of goods sold on credit are recorded, is called
the sales return book. This book is used by the trader for recording the goods returned by customers which  were purchased by them on credit. Goods sold to customers on credit, may be returned by them for one of the following reasons, viz. (a) defective goods, (b) damaged goods, (c) delayed goods, (d) inferior quality goods, (e) goods not in accordance with sample, specification, colour, design, (f) over supply of goods, etc. Sales return book is written on the basis of a credit note. This book is also called credit note book or return ’ inward book or sales return journal. At the end of each month sales return book is totalled.

Specimen of Sales Return Book is given below :

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 5 Subsidiary Books 24

Bank Book-
When businessman operates more than one bank account, it is convenient for him to maintain separate account book to record only hanking transactions entered with various banks. The account book in which only banking transactions are recorded is called Bank Book. The bank book is combined with discount columns for recording discount allowed and earned in banking transactions.

This book has two main sides viz left hand side (i.e. Debit / Receipt side) and Right hand side (i.e. Credit
/ Payment side). Cheque received and deposited into the bank, direct deposit received by bank, dividend,
interest and commission collected by the bank, etc. are recorded on the receipt side and cheques issued, bank charges paid, interest on overdraft, payments made by cheques, etc. are recorded on the payments side of Bank Pass Book.

Advantages: Maintaining Bank book is benefited the businessman in different ways such as:

  • He get easy reference of banking transactions.
  • It saves labour and time of businessman as he is not required to pass entries in subsidiary books and
    ledger.
  • It facilitates preparation of Bank Reconciliation Statement.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 5 Subsidiary Books 25

Journal Proper-
A subsidiary book which is used to record all those business transactions which do not find any place in the purchase book, sales book, return books, cash book, bills receivable book, bills payable book, etc. is called journal proper.

This book is used for recording the following types of the transactions viz.
(1) Purchase and sale of assets on credit.
(2) Opening entries
(3) Transfer entries
(4) Rectification entries
(5) Adjustment entries
(6) Closing entries
(7) Other transactions like bad debts written off, dishonour of the bill, depreciation, interest on capital, loss of goods by fire or theft or goods damaged in transit, distribution of goods as free samples, withdrawal of goods by proprietor, discount received and allowed on cash transactions, etc.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 5 Subsidiary Books 26

General Information-

The following points should be considered while recording entries in the subsidiary books:

  • Cash sale of goods should not be recorded in sales book and cash purchases of goods should not be recorded in purchase book.
  • Sale of assets on cash and credit should not be recorded in sales book, and purchase of assets on cash and credit should not be recorded in purchase book.
  • Only credit sale of goods should be recorded in sales book and credit purchase of goods should be recorded in purchase hook.
  • Cash transactions should be recorded in cash book and non-cash transactions should be recorded in subsidiary books.
  • Assets purchased on credit and assets sold on credit should be recorded in journal proper.
  • Trade discount is to he calculated and simply deducted from invoice price and net sales or net purchases should be entered in related subsidiary books.

Debit Note And Credit Note-
Sometimes some corrections become necessary in the original documents prepared for business transactions. Such correction cannot be made by cancelling the entry on the original documents or adding new entry in the original documents. Such correction can be done by preparing another new document for the amount of difference in the original document. Such a new document is called as debit note or credit note. Debit note is prepared for debiting the account of the counterpart with the amount by specifying reasons thereon. It is issued:

  • When less debit is formerly given.
  • When additional debit is to be given and
  • When extra credit or wrong credit is to be cancelled.

Credit note is prepared for crediting the account of the counterpart with amount by specifying reasons thereon. It is issued:

  • When less credit is formerly given.
  • When additional credit is to be given and
  • When extra debit or wrong debit is to be cancelled.

In order to avoid the handling of original documents again and again such are prepared.
When a businessman issues debit note to a party, the party receiving debit note should issue a corresponding credit note to give acknowledgement of acceptance and vice versa. The entry of such debit and credit should be passed in the journal proper. If they are recurrent and large in numbers, the separate register called Debit Note Register and Credit Note Register should he maintained.

Usually these are printed and are serially numbered by machine. These are prepared in duplicate. The original copy is issued to the opposite party and second copy is retained by the businessman for office record. These are kept serially and in chronological order in the bound book.

Circumstances under which are issued:

  • Difference in the quantity mentioned in the bill and the quantity actually delivered.
  • Either higher or lower rates are charged in the bill.
  • Wrong calculations made on the bill.
  • Goods are rejected and returned.
  • Wrong rate of tax, packing, forwarding, transportation, etc. are charged.
  • Adjustments in discount and commission are done.
  • Difference in the quality descriptions of goods ordered or delivered.
  • Dishonour of cheque or bill of exchange.
  • Interest is charged on outstanding amount due.

Importance of Notes-

  • On the basis of debit note and credit accounting entries are passed in the journal proper.
  • On the basis of debit, buyer makes entries in the Purchase Return Book and on the basis of credit seller records entries in the Sale Return Book.
  • If due to mistakes invoice is undercharged by the seller, the seller prepares a credit note and the buyer prepares debit note and the parties sent these to each other.
  • On the basis of these entries are passed to rectify the mistakes made earlier.
  • As these are signed by the responsible authority, they became authentic proofs of goods returned by the buyer or seller.

Contents of: The debit note and credit note contains the following details:

  • Name and address of the party or organisation issuing the note.
  • Number of the note (Debit/ Credit Note).
  • Date of transaction.
  • Reasons for debiting or crediting the account.
  • Amount in words as well as in figures. .
  • Signature of the person preparing note and the person verifying the note.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 4 Ledger

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.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 4 Ledger

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 :

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 4 Ledger 1

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:

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 4 Ledger 2

(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.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 4 Ledger

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.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 4 Ledger

(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.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 4 Ledger 3

(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

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 4 Ledger 4

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:

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 4 Ledger 5

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.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 4 Ledger

(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.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 7 Depreciation

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. .

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 7 Depreciation

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.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 7 Depreciation

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.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 7 Depreciation 1

(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.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 7 Depreciation 2

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 7 Depreciation

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.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 7 Depreciation

Accounting Treatment of Depreciation-

(A) Journal entries in the books of firm.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 7 Depreciation 4

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 7 Depreciation 5

(B) Ledger Accounts in the books of firm

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 7 Depreciation 6
Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 7 Depreciation 7

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 3 Journal

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:

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 3 Journal 1

(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:

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 3 Journal 2

(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 :

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 3 Journal 3

(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:

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 3 Journal 4

(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:

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 3 Journal 5

(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:

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 3 Journal 6

(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 :

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 3 Journal 7

(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 :

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 3 Journal 8

(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:

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 3 Journal 9

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.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 3 Journal 10

(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:

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 3 Journal 11

(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:
    Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 3 Journal 12
  • 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 :

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 3 Journal 13

(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:

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 3 Journal 14

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.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 3 Journal 15

(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 :

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 3 Journal 16

(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 :

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 3 Journal 17

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.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 3 Journal 18

(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.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 3 Journal 19

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.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 10 Single Entry System

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.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 10 Single Entry System

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 :

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 10 Single Entry System 1

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.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 10 Single Entry System

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 :

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 10 Single Entry System 2
[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.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 10 Single Entry System

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.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 9 Final Accounts of a Proprietary Concern

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.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 9 Final Accounts of a Proprietary Concern

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.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 9 Final Accounts of a Proprietary Concern

Specimen Form of Trading Account –

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 9 Final Accounts of a Proprietary Concern 1

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 –

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 9 Final Accounts of a Proprietary Concern 2

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.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 9 Final Accounts of a Proprietary Concern

Specimen Form Of Profit And Loss Account-

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 9 Final Accounts of a Proprietary Concern 3 Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 9 Final Accounts of a Proprietary Concern 4

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-

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 9 Final Accounts of a Proprietary Concern 5
Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 9 Final Accounts of a Proprietary Concern 6

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.”

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 9 Final Accounts of a Proprietary Concern

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-

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 9 Final Accounts of a Proprietary Concern 7

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.]

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 9 Final Accounts of a Proprietary Concern 8

(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.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 9 Final Accounts of a Proprietary Concern 9

(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.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 9 Final Accounts of a Proprietary Concern 10

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 9 Final Accounts of a Proprietary Concern

(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.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 9 Final Accounts of a Proprietary Concern 11

(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.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 9 Final Accounts of a Proprietary Concern 12

(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.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 9 Final Accounts of a Proprietary Concern 13

(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.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 9 Final Accounts of a Proprietary Concern 14

(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.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 9 Final Accounts of a Proprietary Concern 15

(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.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 9 Final Accounts of a Proprietary Concern 16

(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.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 9 Final Accounts of a Proprietary Concern 17

(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:

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 9 Final Accounts of a Proprietary Concern 18

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.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 9 Final Accounts of a Proprietary Concern

(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

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 9 Final Accounts of a Proprietary Concern 19

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 :

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 9 Final Accounts of a Proprietary Concern 20

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.”

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 9 Final Accounts of a Proprietary Concern

(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:

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 9 Final Accounts of a Proprietary Concern 21

(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.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 9 Final Accounts of a Proprietary Concern 22
Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 9 Final Accounts of a Proprietary Concern 23
Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 9 Final Accounts of a Proprietary Concern 24
Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 9 Final Accounts of a Proprietary Concern 25
Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 9 Final Accounts of a Proprietary Concern 26
Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 9 Final Accounts of a Proprietary Concern 27

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 8 Rectification of Errors

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.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 8 Rectification of Errors

Types of Accounting Errors-

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

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 8 Rectification of Errors 1

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:Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 8 Rectification of Errors 2
  • 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:

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 8 Rectification of Errors 3

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 8 Rectification of Errors 4

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 8 Rectification of Errors

(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.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 8 Rectification of Errors

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 :
Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 8 Rectification of Errors 5

(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.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 8 Rectification of Errors 6

(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:
Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 8 Rectification of Errors 7

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.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 8 Rectification of Errors 8

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 8 Rectification of Errors

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 8 Rectification of Errors 9

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

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.

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

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.

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

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:

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 2 Meaning and Fundamentals of Double Entry Book-Keeping 1

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.

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

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.

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

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

(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 :

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 2 Meaning and Fundamentals of Double Entry Book-Keeping 3
Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 2 Meaning and Fundamentals of Double Entry Book-Keeping 4

(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:

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

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.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 2 Meaning and Fundamentals of Double Entry Book-Keeping 5

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

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 2 Meaning and Fundamentals of Double Entry Book-Keeping 6

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

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

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 2 Meaning and Fundamentals of Double Entry Book-Keeping 7

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)

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 2 Meaning and Fundamentals of Double Entry Book-Keeping 8

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.

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

(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.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 2 Meaning and Fundamentals of Double Entry Book-Keeping 9

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:
Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 2 Meaning and Fundamentals of Double Entry Book-Keeping 10

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.

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

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.

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

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 1 Introduction to Book Keeping and Accountancy

By going through these Maharashtra State Board Bookkeeping and Accountancy 11th Notes Chapter 1 Introduction to Book Keeping and Accountancy students can recall all the concepts quickly.

Maharashtra State Board 11th Accounts Notes Chapter 1 Introduction to Book Keeping and Accountancy

Introduction-

In the ancient days, in order to satisfy wants, commodities and services were directly exchanged against A other commodities and services. After the introduction of money as a medium of exchange commodities and services were purchased and sold directly for money or money’s worth. Along with civilisation, growth and development of economy, business activities also increased. Later on it became difficult for businessman to remember all the business transactions of the day. Thus, a need was felt to record (i.e. to write) business dealings in a systematic way. This very job of recording or writing the business transactions in a separate book is known as “Book-Keeping”. Book-Keeping records are useful for taking important decisions as to whether the business activities are feasible, profitable and to be continued further or not. The detail information of business and other organisations is also required by the proprietors, managers and other stakeholders like government, customers, employees, researchers, investors to fulfill their different objectives.

Evolution of Accounting:
The system of book keeping was in operation in India, since the time of Chandragupta Maurya. During his regime his minister Kautilya wrote a book called ‘Arthashastra’ in which some references were given regarding the way of recording and maintaining accounting records. This system of recording business transactions in the separate book was known as Deshi Nama.

The person who records the business transactions in the books of accounts is called an ‘Accountant’. In the earlier times of civilisation, accountants were appointed by the wealthy people to keep detailed information of their properties. Accountants used to prepare accounts periodically for the owners of the property. The double entry system of book-keeping was first originated in Italy and developed by Luca De Bargo Pacioli in 1494.

Industrial revolution took place in 18th and 19th century which gave birth to the large scale business organisations such as Partnership firm, Joint stock companies, Cooperative societies, etc. In the large scale business organisations, due to separation of ownership from the management, the need was felt to develop comprehensive accounting information system to provide detail information about the business to the shareholders (owners) and investors.

In the 20th century, a separate branch of accounting called Management Accounting system is discovered and developed to analyses financial information and to provide financial information to the management for decision making.

In the 21st century due to the vast and rapid growth and development in the business activities and business organisations, the individual centric accounting system gradually developed into Social Responsibility Accounting. Thus, in the modern world of business, accounting become the most important aspect of every business organisation.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 1 Introduction to Book Keeping and Accountancy

Meaning And Definition OF Book-Keeping-

(A) Meaning : Book-keeping is an art or system of keeping or maintaining a record of business transactions in a regular and systematic manner. According to R. N. Carter, “Book-keeping is a science and an art of correctly recording in the books of accounts, all those business transactions that result in transfer of money or money’s worth.” In other words, Book-keeping is a science as well as an art of recording pecuniary i.e. financial transactions systematically and in chronological order in a separate set of books.

Book-keeping is a science, because in book-keeping there are a number of well defined rules and principles which we use and follow while recording business transactions. It is a social science because, in book-keeping, we study human behaviour with respect to his earning of money and wealth and spending to satisfy the numerous human wants.

Book-keeping is also considered as an art of recording business transactions, because the writing of accounts in a specific style and format requires education, knowledge, training, skill and experience.
From another point of view, Book-keeping is a continuous process of collecting, analysing, classifying, summarising and recording the different types of business transactions. In brief, book keeping may be defined as “A science as well as an art of collecting, analysing, classifying, summarising and recording all types of business transactions in a significant manner and in terms of money in a separate set of books.

Definition:

  • “Book-keeping is a Scientific Method of recording day to day business transactions in words and figures in the books of Accounts so as to show correctly and clearly the financial position of a business.”
  • According to J.R. Batliboi, “Book-keeping is an art of recording business dealing in a set of books.”
  • Finney and Miller : “Book-keeping is the process of analyzing, classifying and recording transactions in accordance with preconceived plans.”
  • L. C. Cropper : “Book-keeping is the art of recording in a suitable form a person’s business dealings, so that, at any time, their nature and effect may be clearly seen.”

Thus, book-keeping involves the following :

  • Recording financial business transactions in the main book of accounts called Journal.
  • Preparing different accounts in another book of accounts called Ledger. – –
  • At the end of the accounting year, balancing all accounts opened and operated in the ledger.
  • On the basis of the balance extracted from different accounts, preparing a trial balance for various purposes.

Features of Book-Keeping:

The main features of book-keeping are explained below :

  • Book-keeping is process or method of recording business transactions.
  • Book-Keeping is a science. This is because the book of accounts is prepared on the basis of some well defined principles and conventions.
  • Book-keeping is an art. This is because the preparation of accounts in a specific style and format calls for skill, experience, knowledge and judgement.
  • In book keeping only records of monetary (financial) transactions are prepared and maintained.
  • Various books of accounts such as journal, subsidiary books, ledger, registers, etc. are prepared to record business transactions.
  • The records of business transactions are prepared for specific period of time say one year.
  • The records are maintained and preserved for a long period of time. .
  • The result of business activities is ascertained on the basis of book-keeping records.

Objectives of Book-Keeping:

The different objectives of book-keeping are given below :

  • To keep a complete and accurate records of all financial transactions in a systematic, orderly and logical s, manner.
  • To maintain date wise and account wise permanent, correct and complete records of the business transactions . for various purposes.
  • Book-Keeping enables the businessman to make permanent record of financial transactions of business
    organisation. This records can be produced in the court of law as an evidence in settlement of any claim or disputes.
  • To ascertain the profit earned or loss sustained in the business.
  • To know the financial position of the business i.e. capital invested in the business, assets accumulated and acquired and liabilities owed, etc. .
  • To know the exact amount due from debtors and the exact amount payable to creditors.
  • To know the exact amount of taxes payable to the Government and to do tax planning for the business ventures.
  • To detect and prevent errors and frauds committed by others in the business.
  • To provide valuable business information to various groups of users.
  • To take decisions on significant business matters.
  • To know the progress made by the business and to measure the efficiency of business.
  • Various laws such as Income Tax, Companies Act, Co-operative Societies Act, Charitable Trust Act, etc. make it mandatory to prepare and maintain books of accounts.

Importance of Book-Keeping :

The importance of book-keeping is explained as follows :

  • Record: In this present dynamic world, every day a businessman enters into a number of business transactions with different customers and the nature of each of those transaction is different. It is not possible for a businessman to remember all such transactions, and therefore it is necessary to record these transactions.
  • Financial Information: Book-keeping provides valuable and much needed information on profit earned or loss sufferred, balance of assets and liabilities, stock, investments, capital balance, etc.
  • Decision making: Owner or top management get valuable information from book keeping records for decision making in the business.
  • Controlling: Information obtained from book keeping help the businessman to apply control and check on the expenses and to increase the profitability of the business. Information provided by the accounting system are also of great importance in avoiding wastage and unnecessary expenses. It is also helpful to achieve success in business ventures.
  • Evidence: Information recorded in the books of accounts are considered by the court of law as an evidence in settlement of any disputes.
  • Comparison: By comparing the financial statements of the past years with the current year and with the financial statements of similar other firms, managements or owners of the business can judge whether the business is making progress or not and accordingly introduce changes in the business planning to increase his profitability.
  • Tax Liability: Government authorities can collect taxes like sales tax, income tax and revenue collecting departments can accurately impose and collect taxes from the business firm on the basis of information provided by the books of accounts.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 1 Introduction to Book Keeping and Accountancy

Utility of Book-Keeping :

Utility means usefulness. The utility of book-keeping to different persons and entities is explained as follows : ‘

(1) Businessman or Owner: The businessman or owner who invests his money and assets into his business must know the profitability, financial stability, and solvency of his business concern. This can be ascertained only from the books of accounts. It would not be possible for a businessman to carry-out the business without a systematic record of the business transactions. A businessman can take business decisions more realistically on the basis of the information provided by the books of accounts.

(2) Management: From the Book Keeping records, a manager can provide timely information to the different parties to gain their confidence. Besides this, book keeping records help the management in planning, decision making, controlling and managing the business activities.

(3) Government: On the basis of information provided by the accountant, various departments of the Government will be able to calculate and collect sales tax, income tax and revenues due from business organisations.

(4) Prospective Investors: After studying the book-keeping information, the prospective investors such as
shareholders, debentureholders, creditors, partners can decide whether to invest money into the business or not.

(5) Customers: Book keeping records provide information on the financial capacity and profitability of the business organisations.. This in turn help the customers to find out whether they are being exploited by the businessmen or not.

(6) Creditors & Lenders: Book-keeping has a great utility to creditors and lenders. The creditors get valuable and correct financial informations from the different financial statements published by the business concern. On the basis of such information, they can decide whether to invest further or to extend the credit period or
to recover the amount due from business.

(7) Development: With the help of accounting, businessman can avoid wastages, losses and control the .
expenditure. As a result profitability and revenue earning capacity of the business organisation increase which in turn help the organisation to expand and develop its business.

Difference Between Book-Keeping And Accountancy-

The difference between Book-Keeping and Accountancy is explained as under :

  • Meaning: Book keeping refers to the process of recording business transactions in the book of accounts.
    Accountancy refers to the process of summarising and analysing the business transactions and interpreting the effects of those transactions on the business activities.
  • Stage: Book-keeping is a first stage of accounting as it involves preliminary work of accountancy. Its work starts immediately after completion of transactions. The work of accountancy starts after the completion of  Book Keeping work. Thus accountancy is the next stage of book-keeping.
  • Objectives: The main aim of book-keeping is to provide primary information while the main aim of
    accountancy is to process and interpret profits & losses from the data available in the book-keeping.
  • Responsibility: Junior staff or newly recruited staff is responsible for keeping records of business
    transactions. Senior staff is responsible for maintaining accounting records.
  • Outcomes: Book-Keeping ultimately results in Journal and Ledger. Accountancy ultimately result in
    preparation of Trading A/c, Profit and Loss A/c and Balance Sheet. .
  • Period: Book keeping discloses the day to day details of business transactions whereas accounting gives yearly details of business transactions.
  • Scope: Book-keeping is a part and parcel of accountancy and it has a limited and narrow scope whereas accountancy has a vast and unlimited scope.
  • Procedure: In book keeping entries for day to day transactions are recorded by following basic principles and rules of double entry book keeping. In accountancy, book keeping information are classified, analysed and summarised to prepare financial statements, reports, ratios etc.
  • Principles: To record preliminary information in journal, ledger and subsidiary books elementary knowledge of journalising and posting are required. To prepare accounting statements, reports, final accounts, ratios etc., knowledge of all accounting concepts, principles and conventions are required.

Meaning And Definition Of Accountancy:

Accounting is a broader concept than the concept of Book-Keeping. It refers to the process of summarising and  analysing the business transactions and interpreting the effects of those transactions on the business. The definition of accounting as given by American Accounting Association is stated as follows, “Accounting _ refers to the process of identifying, measuring and communicating economic information to permit informed judgements and decision by the user of accounts.

Kohler’s definition of Accountancy is stated as follows: “Accountancy refers to the entire body of the ‘ theory and process of accounting.”

In brief accounting is a process of recording, classifying, summarising, analysing and interpreting the financial transactions and communicating the results thereof to the users of such information.

Basis (Methods) of Accounting System :

Accounts are recorded and maintained on various basis.

(1) Cash basis: Under this system income is recorded as and when cash is actually received and expenses are
recorded when they are actually paid in cash or by cheque.

Every transaction in which cash comes into the business or cash goes out of the business is recorded with v its specific purpose. Under this system only cash transactions are recorded. Credit transactions as well as barter transactions are not recorded. This method of accounting system is usually followed (Adopted) by the professionals like Doctors, Lawyers, Chartered Accountant, Actors, etc.

(2) Accrual Basis/Mercantile Basis: Under accrual basis or mercantile basis of accounting system, incomes are recorded as and when they accrues or earned and expenses are recorded as and when they are due or become payable. Under this system both the types of transactions viz. cash transactions and credit transactions are recorded. This system records incomes and expenses in the books of accounts as and when they are earned and incurred and not when they are actually received and paid. This system is also called Mercantile basis of accounting.

Example: Professional fees amounted to ₹ 3,000 is due to Chartered Accounting firm as on 31st March 2019, but received by the firm on 1st May, 2019. The accounting year of the firm ends on 31st March every year. As per cash basis, the Chartered Accountant Firm would record professional fees received in the accounting year 2019-20.
As per accrual basis, the Chartered Accountant Firm would record professional fees received in the accounting year 2018-19.

(3) Mixed or Hybrid basis: Under Mixed or Hybrid basis of accounting the principles of both cash basis and accrual basis are followed in recording business transactions. Under this method of accounting system revenues and assets are usually recorded on cash basis and expenses are generally recorded on accrual basis. In brief it is a mixture (combination) of cash basis and accrual basis of accounting. The laws in India do not permit the organisations to use this method of accounting system.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 1 Introduction to Book Keeping and Accountancy

Qualitative Characteristics of Accounting Information –

Qualitative characteristics of Accounting information are explained as follows :

(1) Reliability of Accounting information : The information provided in the financial statements must be reliable. These information must be free from material errors and bias. The information must be presented in good faith. The reliability of the financial statement is dependent on the following points:

  • Completeness or verifiability: The information provided in the financial statements is said to be reliable when it is complete within the limits of materiality and cost. Any omission may cause information to be false or misleading on unreliable in terms of its relevance.
  • Neutrality: The information given in the financial statements must be neutral in all respect. Such statements or information are not neutral if by selective presentation of information, may affect the decision making power of the users.
  • Faithfulness: The transactions and the other events must be represented faithfully in the information. Many times the financial information provided is subject to some risks and they are not faithfully represented.

(2) Relevance of Accounting information: The information given in the financial statements must be relevant to the decision making requirements of the users. The information provided in the financial statements shoqld have quality of relevance when it creates favourable impact on the decision making power of users by helping them to evaluate past, present or future events. The productive and confirm roles of information are related to each other.

The relevance of information is affected by its nature and materiality. Accounting information is said to be material, if its omission from the financial statement affect the decision making for its users.

(3) Understandability of Accounting information : One of the important qualitative characteristics of Accounting information is that the information given in the financial statements should be readily understandable by the users. The information provided should be as simple as possible. It is assumed that the users are having reasonable knowledge of the business and its accounting activities. It is also assumed that the users are having willingness to study the information given in the financial statements. However, information of complex matters should not be excluded simply on the grounds that they are very difficult for certain users to understand.

(4) Comparability of Accounting information: Every user should have enough knowledge and capability to compare the financial statements to identify trends (ups and down) in the financial position and performance of the business unit over the number of years and also of different business units. This is to evaluate their relative financial position, performance and changes in financial position. This qualitative characteristic requires that there should be consistency in choosing accounting policies. Lack of consistency may not allow the early comparability of the financial statements of different periods and different enterprises.

Basic Accounting Terminologies :

(1) Transaction : In common parlance, transaction is a dealing between two or more persons, in which one person gives something to the other and in exchange of that receives something from the other. It is an exchange of goods and services either for cash or for any other goods or services. In other words, it is a business activity which interprets in money terms what business gives and what business receives in that exchange. To complete the transaction at least two persons are required. Purchase of goods, sale of goods, receipt and payment of cash, borrowing and lending, depositing cash into the bank, withdrawal of cash from the bank, etc. are the examples of business transactions.

Business transactions are broadly classified into two categories viz. (a) Monetary transactions and (b) Non¬monetary transactions.

(a) Monetary transactions : The business transactions in which goods and services are directly
or indirectly exchanged for money or money’s worth are called monetary transactions. Business organisations record only monetary transactions in their books of accounts. Monetary transactions “”v are further classified as (i) Cash transactions and (ii) Credit transactions. ,,

(i) Cash transactions: In cash transaction, goods or services are directly exchanged for cash. When
goods or services are purchased for immediate cash payment, it is known as cash transaction, e.g.
goods purchased against immediate cash payment.

(ii) Credit transactions: In credit transaction, goods or services are exchanged for a certain value to be ,
received or paid in the future. In a credit transaction, goods or services are purchased, but payment is
postponed to a future date e.g. Mr. ‘A’ has purchased goods for ₹ 500/- and agrees to pay the amount after a month. It is a credit transaction.

(b) Non-monetary transactions : The business transactions in which goods and services are directly
exchanged for other goods and services are called non-monetary transactions. In this type of transaction,
money does not play any role e.g. purchase of 5 kgs rice in exchange of 1 metre cloth is a non-monetary transaction. It is also called as barter transaction or money less transaction.

(2) Entry : Recording the summary of business transactions in the form of debit and credit in the journal and
in proper form in subsidiary books and ledger is called an entry.

(3) Narration : A brief or short explanation of an entry written just below the entry in a bracket in the
particulars column of journal is called narration. It is started with a word ‘Being’. Narration should be as
short as possible. It should be easy to understand.

(4) Goods : Any commodity or article which is produced or purchased for sale by a trader is called goods. In
other words, any commodity or article in which a trader regularly deals or carries on trade is called goods
for that business or trader.

Goods have the following features, viz.

  • Goods may be any commodity or article which has exchange value.
  • Goods must be manufactured or purchased by a trader for sale.
  • Goods must be stored and exhibited for sale and not for use. For instance, books and literature are goods for publishers or book sellers. Similarly, clothes are goods for a cloth merchant and different kinds of grains stored or kept for sale are goods for a grocer.
  • Goods which are stored and not yet sold are the property of the trader.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 1 Introduction to Book Keeping and Accountancy

(5) Capital and Drawings :

(a) Capital: Total amount of cash, goods, assets, etc. invested by the proprietor into his business from
time to time is called capital. In accounting sense, excess of business assets over business liabilities
is described as capital. It is an asset for a proprietor and long term liabilities for the business. It is
received back by the proprietor only on the dissolution of his business. In the form of equation.

Capital = Business Assets – Business Liabilities

Investments into the business, profit earning capacity, withdrawals from the business by the proprietor for
self use, etc. are the main determinants of capital. The amount of capital may be calculated as follows:

(1) Mr. Kamalakar started business with Cash ₹ 1,50,000, Goods worth ₹ 1,40,000. Building valued at
₹ 4,00,000 and Furniture costing ₹ 45,000. Here Mr. Kamalakar’s capital arrived ₹ 7,35,000/-.

(2) Business information of Mr. Ravikant Sharma shows that his business assets are valued at ₹ 15,00,000
and business liabilities are estimated at ₹ 5,00,000. Here Ravikant Sharma’s capital is computed at
₹ 10,00,000/-. [i.e. ₹ 15,00,000-₹ 5,00,000]

(b) Drawings: Word ‘drawings’ is just the opposite to the word ‘capital’ in meaning. Drawings refer to total amount of cash and/or goods withdrawn by the proprietor from the business from time to time for self (personal) use or family use. Drawings are always adjusted with capital. Heavy withdrawals made by a businessman for self use reduces capital in the business. If the businessman controls his drawings, business can be developed further due to less loss of capital. Withdrawals made by a businessman for business purpose is not treated as drawings.

For example, Mr. Ramesh, a cloth merchant, took away 15 metres of cloth for family use on the occasion of the Diwali Festival without paying any thing to the business. The price of cloth per metre is ₹ 250/-. Here, drawings of Ramesh are computed at ₹ 3,750/-.
[i.e. 250 x 15 mts.].

(6) Debtors and Creditors :

(a) Debtors: Debtor refers to a person br an entity from whom money or money’s worth is receivable to a business enterprise. Debt is a total sum of money due from a person with whom the business has dealings. Accordingly, a person from whom such debt is due to a business, is called the debtor. In other words, the debtor is a person who has already taken a loan or services or goods from the business for which he has not yet paid for. A debtor is always under obligation to make payment to a business or a creditor. The following example will make the above ideas clear. Mr. Ashok sold goods worth ₹ 10,000 to Mr. Kishor on the condition that Mr. Kishor will pay that amount of ₹ 10,000 to Mr. Ashok after 2 months. Here, Mr. Kishor is a debtor to Mr. Ashok till he pays the entire amount to Mr. Ashok.

(b) Creditors: A creditor is a person or an entity to whom the business is under obligation to pay a certain
amount of cash. In other words, a person to whom the business owes or is required to pay some amount of cash is called creditor. A creditor is a person who has given a loan or goods or services to the business and for which he has not yet received any amount of cash, or reward. The business is under obligation to pay money to its creditor. For example, Mr. Anil, a businessman borrows money from the Bank of India for one year period for business purpose. Here the Bank of India is a creditor to Mr. Anil, till Mr. Anil clears his loan. .

(c) Bad debts: A sum of money due from other person is called debts. The debts which cannot he recovered from debtors inspite of repeated efforts are called ‘Bad debts’. It is a revenue loss to the business.

(7) Expenditure : An amount spent or incurred by the business organisation on the purchase of goods and
services or for any other consideration received by the business is called expenditure.; e.g. amount spent on purchase of raw material, electricity bill paid, etc.
Business expenditures are classified as (i) Capital expenditure, (ii) Revenue expenditure and (iii) Deferred
Revenue expenditure.

(a) Capital Expenditure: The expenditures which are incurred (1) on acquisition of an asset (2) in putting a new asset in working condition and (3) for acquiring benefits which will last for a long time are called capital expenditures, e.g. purchase of plant and machinery, wages paid for installation or erection charges of machinery, advertisement paid at a stretch for four years, octroi, freight paid on assets, over-hauling charges, etc. are categorised into the capital expenditure.

(b) Revenue Expenditure: The expenditures which are incurred to acquire the benefits which will last for a short period, are called revenue expenditures. It is normal day to day expenditure which do not
. increase profit earning capacity of an organisation, e.g. salaries, rent, interest paid, repairs and renewals, etc. are the examples of revenue expenditures.

(c) Deferred Revenue Expenditure: Heavy expenditure which is incurred in the current year, but benefit of which may be received or accrued to the business in the following two or more years, is called deferred revenue expenditure, e.g. Heavy amount spent on advertisement and publicity is a deferred revenue expenditure.

(8) Cash Discount and Trade Discount:

(a) Discount: An allowance, benefit or reduction in payment in monetary terms given by the trader to buyer or by a creditor to a debtor at the time of sale or repayment is known as discount, e.g. goods costing ₹ 15,000/- sold by a trader to the buyer and accepts ₹ 14,700 in full settlement. Here the difference of t 300 is considered as discount. Discount may be classified into two categories, viz. (a) Trade discount and (b) Cash discount.

(b) Trade Discount: Discount given by the seller to the buyer to increase sales turnover and to enable the buyer to earn a reasonable profit on resale is called Trade discount. It may be given by a manufacturer to a wholesaler or by a wholesaler to a retailer on bulk purchases. Trade discount is calculated on the catalogue price or list price of the goods. Amount of trade discount is deducted from invoice price. It is not shown in the books of accounts.
For instance if goods of ₹ 5,000 are purchased @5% Trade Discount, the value of goods that will be
recorded will be ₹ 4,750. Here Trade Discount = 5000 x \(\frac{5}{100}\) = ₹ 250
Net value of Goods = Catalogue price – Trade discount
= 5,000 – 250 = ₹ 4,750.

(c) Cash Discount: Discount given by the creditor to the debtor on payment of cash is called cash discount. It is the concession given to encourage prompt payment. It is always recorded in the books of accounts, as it is gain to the buyer and loss to the seller.

(9) Solvent and Insolvent:

(a) Solvent: A person who is capable of paying his past and present debts fully from his business and personal property is known as solvent. His financial condition is sound to pay his business debts. Solvency of the businessman increases the goodwill of the business. A solvent person’s property always A exceeds his business debts.
Example: On revaluation of assets and liabilities, it is found that total assets of Sudhakar, a proprietor is ₹ 9,50,000 and his total obligations (debts) are ₹ 2,50,000. Here financial position of Sudhakar is sound as he can easily pay off his total obligations (debts). He is therefore called solvent person.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 1 Introduction to Book Keeping and Accountancy

(b) Insolvent: A person who is unable to pay his debts, is called insolvent. An insolvent person does not
have sufficient assets to pay his debts. His business debts are much larger than his business and personal
assets. He cannot settle the dues of his creditors fully. Insolvency leads to compulsory dissolution of
the business. . .
Example: Total Assets of the proprietor ‘X’ in the business are worth ₹ 2,00,000 whereas his total , liabilities (obligations) are ₹ 3,50,000 and he does not have any personal property to set off business debts. Here in this case ‘X’ is called insolvent, because he cannot pay off all the liabilities of his business.

If the court is satisfied that he cannot pay debts of the business even from his personal property, he will be declared as insolvent by the court of law.

(10) Accounting year : A period of 12 months is called a year. A year which begins with 1st January and ends with 31st December is called the calendar year. Accounts of the business enterprises are usually prepared
for a period of 12 months i.e. one complete year. The year for which the accounts of the business enterprises are prepared is called the accounting year. In India business enterprises may select one of the following periods as its financial year:

  • From 1st January to 31st December.
  • From 1st April of one year to 31st March of the next year.
  • From 1st July of one year to 30th June of the next year.
  • From 1st October of one year to 30th September of next year.

Now for Income Tax purpose an accounting year starts on 1st April and end on 31st March of next year.

(11) Trading concern and Not for Profit concern :

(a) Trading Concern: The enterprises which undertake business activities for earning profit are called
trading concerns. They are also called business organisations. They either manufacture or purchase the
goods for resale for a profit. They may be classified as sole trading concern, partnership organisation, company organisation, state enterprises, co-operative societies, etc.

(b) Not for Profit Concerns / Non-trading Concern: The enterprise which undertakes activities
not for earning profit but to provide services to its members or public at large is called ‘Not for profit
concerns’ or ‘Non-profit organisation’, Cricket Club of India, Mahalaxmi Charitable Trust, Educational Institution, etc. Thebe enterprises prepare income and expenditure account to find out whether income
is just sufficient to meet their expenses.

(12) Goodwill: Money value of a business reputation earned by the business over a number of past few years
is called goodwill. It is nothing but the reputation or name established in the market by the business organisation. It is an extra value attached to the business over and above its value. It is an intangible asset of the business.

(13) Profit or Loss ; Income and Revenue :

(a) Profit: Profit means a gain earned by the businessman by undertaking ventures or risks. In accounting terminology, excess of sales revenue over the expenses is called profit.

Symbolically, Profit = Revenue – Expenses.

If a firm sold goods for ₹ 50,000 and all related expenses incurred by the firm during the said period is ₹ 41,000.

Here, in this case profit earned by the firm is arrived at₹ 9,000.
It is calculated as follow:
Sales revenue = ₹ 50,000 and total expenses = ₹ 41,000
Profit = Sales Revenue – Expenses
= 50,000 – 41,000 = ₹ 9,000

(b) Loss: Excess of expenses or expenditures over revenue or income is called loss. Businessmen incur losses on account of several factors like misuse of resources, abnormal wastage, negligence of proprietor, improper planning, competition, lack of innovation, unfavourable policy of the government, etc. Recurring losses lead to compulsory dissolution of the business.

Symbolically, Loss = Expenses – Revenues

If a firm sold goods for ₹ 30,000 and all related expenses incurred by the firm during the said period is ₹ 36,000.
Here, in this case firm incurs the loss of ₹ 6,000.
It is calculated as follow:
Expenses = ₹ 36,000 and Revenue = ₹ 30,000 ,
Loss = Expenses — Revenue
= 36,000 – 30,000 = ₹ 6,000

(c) Income: Revenue received by the business organisation after rendering services or subletting assets is called income. Symbolically:
Income = Amount received after rendering services or renting owned property. If auditorium of the college is subletted to the Bank for ₹ 45,000 per month, the total rent ₹ 5,40,000 in a year becomes an income of the college authorities

(d) Revenue: Income received by the business organisation from its normal business activities especially from the sale of goods and services to the customers is called Revenue.

(14) Assets, Liabilities and Net Worth :

(a) Assets: Property-of any type or description owned and possessed by a person is known as an asset. Assets are not stored for sale but they are kept for the use of the owner. In other words, economic resources which provide benefits to the enterprise are called assets, e.g. furniture, goods, etc.

Assets possess the following features, viz.

  • Assets is a property of any type or economic resource which has an exchange value,
  • It is belonged to a person or a user,
  • It is always stored for use and not for sale.

For example, land and building, furniture and fixtures, bank balance, unsold goods, cash in hand, etc. are called assets. The classification of assets is shown below:

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 1 Introduction to Book Keeping and Accountancy 1

  • Fixed Assets are those assets which are held in the business for a long period of time and are generally used for manufacturing goods and services. For example land & building, plant & machinery, motor vehicles, etc. are the fixed assets of an enterprise.
  • Current Assets are those assets which are held in the business for a very short period and they are used for maintaining the liquidity of the business. For example, cash in hand, bank balance, stock of goods in hand, amount receivable from debtors, etc. are current assets of the business enterprise.
  • Assets like cash, machinery, stock of goods, furniture, etc. are called tangible assets as they can»be seen, touched and felt.
  • Assets which cannot be seen, touched and felt, but can be sold and converted into cash are called intangible assets. Use of intangible assets enables its owner to earn income in the form of royalty. For example goodwill, copy rights, patents, trade marks, services of doctors, teachers, bankers, etc. are called intangible assets.
  • Assets which neither represent any tangible thing in existence nor have realisable value in the market are called fictitious asset, e.g. preliminary expenses, discount on issue of shares, etc.

(b) Liabilities: Liabilities refer to the total amount of debts or obligations that a business has to pay or fulfill, in future. In other words ‘liabilities’ mean total amount owed by the business to other persons. In short, liabilities represent the total amount payable to outside parties at different dates. For example, bank overdraft, bank loan, sundry creditors, bills payable, capital, loan taken from financial institution, etc. are called business liabilities. Liabilities may be classified as Fixed Liabilities and Current Liabilities.

(i) Fixed Liabilities: Liabilities which are settled or paid only on winding up or dissolution of the organisation are called fixed liabilities. It may be in the form of owner’s capital, share capital, secured loans like debentures, bonds, loans from banks, loans from financial institutions, etc. Fixed liabilities are refunded only after a long period of time. Fixed liabilities constitute long term sources of finance.

(ii) Current Liabilities: Liabilities which are payable within a year are called current liabilities. Short term obligations or debts which are matured within a year or within a operating cycles are called current liabilities. Current liabilities constitute short term sources of finance. They arise in the regular course of business operations. They are usually unsecured. Bank overdraft, Sundry Creditors, Bills Payable, Outstanding expenses payable are considered as current liabilities.

(c) Net Worth: Worth means value or price. Accordingly, net worth refers to the net value of the business enterprise in terms of its assets and liabilities. It implies the excess of assets over liabilities as disclosed by a firm’s balance sheet, i.e. capital owned by a business. In other words, net worth refers to the value of a business enterprise when its liabilities have been deducted from the value of its assets. In terms, of equation,

Net Worth = Market value of total assets shown in the balance sheet – Current liabilities

Example: Suppose, the total assets of the business is ₹ 7,50,000 whereas the total liabilities of the business is ₹ 3,65,000.
Here, net worth of th business is calculated as follows:
Net Worth = Value of Total Assets — Value of Total Liabilities
= 7,50,000 – 3,65,000 = ₹ 3,85,000

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 1 Introduction to Book Keeping and Accountancy

(15) Contingent Liabilities : The contingent liabilities are the liabilities whose occurrence depends upon the happening of a certain events which may or may not take place. Such liabilities may or may not occur in the future. These liabilities are shown in the balance sheet on the liabilities side only in the inner column and their description is written in the foot note. These liabilities are not taken in the balance sheet total. They are considered as probable losses of the business enterprise. E.g. demand of worker for compensation of ₹ 20,000 pending before the court of law.

Accounting Principles-

The basic aims of book-keeping and accountancy are to record the business transactions in a summarised form, systematically and in chronological order in the books of accounts and to prepare various accounting statements and report periodically to communicate the result and financial position of the business to the stakeholders or concerned parties. To achieve these aims, accounting is based on universally accepted and scientifically laid down principles. The basic fundamental truth of accounting or rules of conducts or procedures which are universally accepted and followed by the accountants every where without unreasonable likes or dislikes to record business transactions and to prepare accounts are called accounting principles. Through usage, necessity and experience, these accounting principles are gradually developed over a long period of time.

According to the Institute of Chartered Accountants of India (ICAI), accounting conventions, accounting concepts, accounting principles, accounting postulates, etc. are the basic points of agreement on which financial accounting theory and practice are founded.

Accounting principles are also considered as general laws or precedents for taking decisions and actions in the field of business.

Accounting Concepts-

Concept means the general idea which conveys certain meanings. Accordingly accounting concepts imply general notion or abstract ideas on which accounting is based.

Accounting is the language of the business with the help of which financial information are transmitted to the concerned parties of the business. In order to communicate the business information exactly with the same meaning to all interested parties related to the business, accountants have discovered a number of accounting concepts. Accounting concepts are general guidelines for sound accounting practices.

The different accounting concepts are discussed as follows :

(1) Business entity concept : The business entity concept suggests that a business has a separate entity and has an independent legal existence distinct from the person who owns it. Although a business has no body, soul, life and existence, still the law recognises it as a legal person. This accounting concept enables the accountants to record the transactions of the owner or proprietor separately from the transactions of the business. In the absence of such distinction the private affairs of the proprietor would have mixed up with the affairs of the business. As a result, the true and clear picture of the state of affairs of the business would not have been made available. The concept of business entity is applicable to all forms of business organisations such as sole trader, partnership, joint stock companies, co-operative societies, etc.

Illustration: A proprietor Mr. Ashok has spent ₹ 13,000 from business funds on Travelling and Conveyance. This includes a bill for the amount of ₹ 4,500 spent on personal and family travelling. In this case only ₹ 8,500 should be charged to Profit and Loss Account under the heading of Travelling and Conveyapce and ₹ 4,500 should be considered as drawings and each amount of drawings should be deducted from capital of the proprietor.

(2) Money measurement concept: This accounting concept states that in the books of accounts, accountant records only those business transactions which are financial in nature and capable to be expressed in monetary terms. It means the qualitative and quantitative aspects which can not be measured in terms of money, are not recorded in the books of accounts.

In India all the accountants records business transactions in Indian Currency i.e. Rupee (₹).
Illustration: A businessman invested the following properties (Assets) into the business: Building with 5 rooms at the cost of ₹ 40,00,000, Cash ₹ 5,00,000 Furniture costing ₹ 40,000 and raw materials 2 tonnes at the cost of ₹ 80,000. Here the total assets of the business is 40,00,000 + 5,00,000 + 40,000 + 80,000 = ₹ 46,20,000. In the books of accounts, the accountant records assets of ₹ 46,20,000 and Capital at ₹ 46,20,000.

(3) Cost concept: According to this accounting concept, an asset of the business is recorded in the books of account at the price paid to acquire or produce it, i.e. at its cost and not at its current market value. The cost at which assets are acquired and recorded, provides the base for the subsequent accounting for that asset. E.g. if a plot of land is bought for ₹ 2,50,000 by a business, it will be recorded in the books of accounts at ₹ 2,50,000 for further accounting. A year later if its market value increases to ₹ 4,00,000 or even more, then no change will be made in the books of account so to reflect this increase in its value. This concept enables the accountant to depreciate assets correctly and show their correct value in the books of accounts. This concept prevents arbitrary value being put on the assets purchased.

(4) Consistency concept : This accounting convention states that once a particular accounting practice, method or policy is adopted to prepare accounts, statements and reports, it should be continued for years together and should not be changed unless unavoidable circumstances force the enterprise to change it. If the change is unavoidable, the change and its effects should be stated clearly. If consistency is maintained in the accounting practice or procedures over many years, a comparison of two different accounting periods may be made easily to draw meaningful conclusions.

Illustration: It would be improper to depreciate the machinery according to one method of depreciation in one year and to switch over to another method in the next year.

(5) Conservatism : This accounting concept suggests that while preparing accounting statements, planning, policies, strategies and budgets, all possible or anticipated losses must be taken into consideration while unrealised, prospective or anticipated profit should be ignored. This is also known as “the policy of playing a safe game.” It is also called “Principle of prudence.” According to this accounting concept, closing stock is valued at the market price or cost price whichever is lower. Similarly, provision for bad and doubtful debts is also permitted and made every year. If this accounting convention is not applied or followed continuously, it may result into an understatement of incomes, assets and overstatement of liabilities and provisions. Illustration: The closing stock of a factory is valued at cost price ₹ 80,000. However, its market value determined at ₹ 86,000. According to conservatism concept, here closing stock is to be valued at ₹ 80,000 which is lower than it market value ₹ 86,000.

(6) Going concern concept: According to this concept, it is assumed that business will be carried out indefinitely for a long period of time in the future and accordingly business transactions are undertaken and recorded. Hence in this concept it is assumed that the business will continue for a long time. It has continuity of life. It is not to be closed at the end of each year. It is assumed that business is permanent. This Concept is also called continuity concept or permanency concept. Fixed assets like plant and machinery, furniture and fixture, land and building, motor vehicles, etc. are purchased on the assumption that a business is a going concern. This accounting concept enables the accountants to make distinction between the capital expenditure and revenue expenditure. Managerial functions like planning, financing, organising, controlling, etc. are performed in every organisation on the basic assumption that the business is a going concern.

(7) Realisation concept: This accounting concept explains that sale is supposed to be completed when the title and possession of goods are passed from the seller to the buyer and in exchange the payment is received by the seller from the buyer. Revenue or income is considered to be earned on the date on which its actual payment is received. In other words, income realised by selling goods or by rendering services during the accounting year should be considered in the income statement of that accounting year. Since accounting is the historical records of transactions, it records what is actually received and paid. In the case of installment sale or hire purchases, the sales are treated to have been completed only to the extent to which the installment are received. Similarly, in the case of contract account, profit is calculated on the basis of work certified.

Illustration: In business there may be a building whose purchase price i.e. cost is shown at ₹ 2,00,000. Now the market price of that building may be ₹ 10,00,000/-. It does not mean that the profit of ₹ 8,00,000 is realised. Such profit should not be recorded in the books of accounts.

(8) Accrual concept: This accounting concept states that revenue is recognised when they are earned and not when they are received. Similarly-, costs are recognised as soon as they are incurred and not when they are paid. This accounting concept enables the accountants to measure the income for a particular period by calculating the difference between the revenue recognised in that period and expenses incurred to earn that revenue. Accrual accounting is a basic accounting concept used in preparation of Trading Account, Profit and Loss Account and the Balance Sheet.

Illustration: A firm has deposited ₹ 5,00,000 with the Bank in Fixed deposit carrying interest @ 12% p.a. on 1st July, 2010 for 5 years. Bank is required to pay interest on maturity along with principal amount, i.e. on 30th June, 2015.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 1 Introduction to Book Keeping and Accountancy

As per the principle of accrual, interest for 9 months i.e. from 1st July 2010 to 31st March, 2011 of ₹ 45,000 is to be shown as “interest accrued” on the credit side of Profit and Loss A/c as on 31st March, 2011. i.e. in the accounting year 2010-11, although interest is not received in cash.

Dual aspect concept: This accounting concept explains that every business transaction has two aspects viz. (i) acquisition or increase in asset of the business and (ii) creation or increase in claims against business. Assets refer to the valuable things owned by the business. Capital refers to the proprietor’s contribution to the business to provide fund to undertake activities. Capital is the owner’s claim against the business, e.g. a capital of ₹ 5,00,000 received in cash by the business from the proprietor has dual aspects viz. business has cash i.e. asset of ₹ 5,00,000 and the proprietor has a claim of ₹ 5,00,000 against the business entity called capital. If you put the same idea in the form of equation, we can state,
Capital (₹ 5,00,000) = Assets (₹ 5,00,000)

A month later, the business has borrowed ₹ 2,00,000 from the bank to meet its increasing requirement. Now, the asset of the business has increased by ₹ 2,00,000 on the one hand and a claim against the business has also increased by ₹ 2,00,000. We can state the above situation in an equation form as follows:
Capital (₹ 5,00,000) + Liabilities (Bank Loan ₹ 2,00,000)
= Assets 7,00,000 (₹ 5,00,000 + ₹ 2,00,000)
The above equation can be restated by interchanging the terms as follows:
Capital (₹ 5,00,000) = Assets (₹ 7,00,000) – Liabilities (₹ 2,00,000)
OR
Liabilities (₹ 2,00,000) = Assets (₹ 7,00,000) – Capital (₹ 5,00,000)
Thus, the accounting system called double entry book-keeping system is set up to record dual aspects of every business transaction in the books of accounts.

(10) Disclosure : According to concept of full disclosure, accounting must disclose all the material facts and information so that interested parties after reading such accounting report can get a clear view of the state of affairs of the business. Accounting statements must be prepared honestly and they should be free from any bias or prejudice. The statements of accounts so prepared by the accountants must neither hide any material information nor exaggerate any facts. Disclosure does not mean leaking out the business secrecy, but to disclose all the significant information and fact keeping in view various accounting assumptions. This accounting concept is more relevant to the joint stock company where there is a divorce between ownership and management. The management of the company must prepare financial statements and reports of the functioning of the company periodically and these statements must disclose the true and fair view of the state of affairs of the company.

(11) Materiality : The term ‘material’ means ‘relatively important’. Accounting information is said to be material, if its omission from the financial statement affects the decision making for its users. According to convention of materiality, accountants must disclose all material facts and information which highlights the financial position and profitability of the business organisation. However, materiality will differ or change with nature, size and tradition of the business. What is material for one organisation may be immaterial
for another organisation.

(12) Matching Cost Concept : This concept suggests that while determining the exact or accurate profit or income, we have to compare or match the revenue of the business with the cost that is incurred to earn that revenue. In other words, only relevant cost or expenses of the period are required to be deducted from the relevant revenue of that year. For instance if in the accounting year 2011-12, the revenue of ₹ 18,00,000 is earned, by way of sales, this entire revenue is not the profit. In order to calculate the profit, we have to deduct cost of goods sold from the sales revenue. In the above example, if the cost of goods sold is ₹ 15,00,000, then the gross profit would be ₹ 3,00,000. The gross profit here is ascertained by comparing and matching the sales revenue with the cost of goods sold.

Importance of Accounting Concepts :

  • With the help of accounting concepts accountant can easily prepare reliable financial statements such as cash flow statement, fund flow statement, trading A/c, profit and loss A/c etc. They add the reliability to the financial statements.
  • Accounting statements are helpful to keep and maintain uniformity in presentation of financial statement. Uniformity is helpful for comparison of financial statements of two or more business entries and also different periods.
  • Accounting concepts provide acceptable basis of measurement.
  • They are helpful to provide proper information ahout the business to various interested parties.
  • They provide valid and appropriate assumptions for preparation of financial statements and reports.

Accounting Standards (AS) and International Financial Reporting Standard (IFRS)-

(A) Accounting Standards:

(1) Meaning: Accounting standards may be defined as, “Codified Generally Accepted Accounting Principles (GAAP), uniform accounting rules and guidelines to prepare financial statements of different business units in a uniform manner for easy comparison and disclosures of business information to the users.” Standard of Accounting are recommended by the Institute of Chartered Accountants of India (ICAI) and prescribed by the Central Government in consultation with the National Advisory Committee on Accounting Standards (NACAS). Accounting Standards are written policy document covering the different aspects such as recognition, measurement, treatment and presentation.

Kohler States, “Accounting Standards are codes of conduct imposed by customs, law or professional bodies for the benefit of public accountants and accountants generally.”

(2) Need for accounting standards:

  • To promote better understanding of financial statements. Accounting standards reduce confusion about the accounting treatments used to prepare financial statements.
  • To facilitate accountants to follow uniform procedures and practices.
  • To enable or help the organisation to make meaningful comparison of financial statements of different companies situated at different places.
  • To standardise the diverse accounting policies and practices with a view to eliminate the non-comparability of financial statements and add the reliability to the financial statements.
  • To fulfil and complete the legal requirements more effectively.

(B) International Financial Reporting Standards (IFRS):
International Financial Reporting Standards (IFRS) are prepared and issued by the International Accounting Standard Board (IASB). IFRS is a set of International Accounting Standards which explain and show how different types of financial transactions and other events should be shown or reported in the financial statements. IFRS are prepared and issued to develop Accounting Standards that would be acceptable world wide and to improve financial reporting internationally.

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 1 Introduction to Book Keeping and Accountancy

(C) Accounting Standards in India :
In India, the Council of Institute of Chartered Accountants of India (ICAI) has issued accounting standards. Accounting Standards Board (ASB) was constituted by ICAI on 218t April 1977. ASB recognised the need for Accounting Standards in India and by considering the applicable laws, custom, usage, business environment and International Accounting Standards,framed Accounting Standards to be followed in India. The council of Institute of Chartered Accountants of India has so far issued 31 Accounting Standards. Some of those

Maharashtra Board Book Keeping and Accountancy 11th Notes Chapter 1 Introduction to Book Keeping and Accountancy 2