Category: Maharashtra State Board Notes

By going through these Maharashtra State Board Organisation of Commerce and Management 11th Notes Chapter 6 Institutes Supporting Business students can recall all the concepts quickly.

Maharashtra State Board Organisation of Commerce and Management 11th Notes Chapter 6 Institutes Supporting Business

Small Industrial Development Bank of India (SIDBI)-

1. Established on 2nd 1990.
2. Initially subsidiary of Industrial Development Bank of India (IDBI)
3. Ownership is held by 34 public sector institutes
4. Focuses on Micro, Small and Medium Enterprises (MSM,s)
5. Head office Lucknow
   • 15 regional offices
   • 84 branches all over India

Features of SIDBI-

(1) Sustainable Development:

• Creation of economic wealth.
• Enhance awareness of benefits of climate control.
• To promote investment in clean production and energy efficient technologies.
• To reduce the emission of greenhouse gases.

(2) Nodal / Implementing Agency:
helps in implementing various subsidy schemes for upgradation, modernisation and expansion of business.

(3) Financial Institute for promotion of MSMEs (Micro, Small and Medium Enterprises:):

• To provide short and long term finance to MSMEs.
• It provides refinance to banking and Non-Banking Financial Companies (NBFC).
• To cater the specific needs of Indian MSMEs.

(4) Advisory Function:

• To expand marketing channels at domestic and international markets.
• Steps for modernization and technological upgradation.

(5) Forms of finance:

• Direct Finance
• Indirect Finance
• Micro Finance

(6) Digital initiatives:

• SIDBI Startup Mitra
• Udyami Mitra

(7) Achievements of National Goals:

• Helps in poverty alleviation and employment generation
• Promotes entrepreneurship and fosters competitiveness as well as for women and economically weaker section.
• Provides finance to industries in semi-urban areas

(8) Services to MSMEs:

• SIDBI Venture Capital Ltd. (SVCL)
• Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)
• SME Rating Agency of India Ltd. (SMERA)
• India SME Technology Services Limited (ISTSL)
• India SME Asset Reconstruction Company Ltd. (ISARC)
• Micro Units Development and Refinance Agency (MUDRA)

National Bank for Agriculture and Rural Development (NABARD)-

• Established on July 12,1982
• An apex institution for agricultural finance

Objectives:

• Providing and regulating credit and other facilities
• Promotion and development of agriculture, small scale industries, cottage and village industries, handicrafts and other rural crafts and allied economic activities

Features of NABARD-

Financing Rural Industries:

• To refinance small scale industries and other village and cottage industries
• To promote rural employment by providing loan to commercial and co-operative banks
• To organize skill and entrepreneurship development programmes

(2) Assistance to Financial Institutes:

• To assist in preparing, developing, implementing, action plans for Co-operative Banks and Regional Rural Banks.
• To provide financial assistance to improve Management Information System (MIS), Computerization of operations and development of human resources.

(3) Refinancing Facilities:

To provide refinance facilities to –

• State Co-operative Banks (SCBs)
• Land Development Banks (LDBs)
• Regional Rural Banks (RRBs)

To provide – short term credit

• Medium term credit
• Long term credit

To help during natural calamities

(4) Credit for Rural development.

• To provide funds to State government in development and promotion of different activities
• To uplift weaker section by refinancing them.
• To provide finance for promoting non-farm activities and generating employment

(5) Apex Bank:

• To meet credit needs of all types of financial institution in field of agricultural and rural development
• To frame policies and guidelines for rural financial institution
• To monitor the flow of rural credit in India.

(6) Recommendations to Reserve Bank of India:
on issue of licenses to Co-operative Banks, opening new branches by State Co-operative Banks and Regional Rural Banks (RRBs)

(7) Development of Nation:

• To promote warehousing facilities to improve storage facilities for agricultural commodities.
• To promote export of agricultural commodities
• To help in sustainable development of the country through Green, Blue and White Revolution.

(8) Supervision of Financial Institutes engaged in Agricultural Finance.
To inspect Regional Rural Banks and Co-operative Banks, State Co-operative Agriculture and Rural Development Banks (SCARDBs) on voluntary basis

Khadi and Village Industries Commission (KVIC):

• Under the Khadi and Village Industries Commission Act, 1956
• Established on April, 1957
• An Apex organization under the Ministry of Micro, Small and Medium Enterprises
• Head office: Mumbai

Objectives of KVIC-

• Social Objective
  providing employment
• Economic Objective
  providing saleable articles
• Wider Objective
  • creating self reliance among poor
  • build strong rural community spirit

Features of KVIC-

Research and Development.

• To give training to sales staff for effective marketing of khadi products.
• To provide design support services.
• To bring technological improvements in products so as to reduce the cost of production and increase incomes.
• To promote use of non-conventional energy and electric power for sustainable development.

Other Functions:

• To plan, promote, organize and implement the programmes with relation to Khadi and other village industries.
• To organise training programme for artisans.

Marketing and Promotion:

• To hold exhibitions, seminars and lectures in Universities and Colleges.
• To generate interest, awareness and attraction among people.
• To improve the quality of products, packaging and marketing skills.

Financial Assistance:

• To finance rural industrialization projects and provide for margin money through subsidy.
• To provide higher subsidies in case of weaker sections, tribal areas and backward regions.
• To provide financial assistance for development and operation of Khadi and Village Industries.

Rural Development:

• To utilise natural resources properly in generating income for rural people
• To promote development of tiny, cottage and small scale enterprises

Employment Generation:

• To create employment opportunities with low per capital investment, promote non-farm employment opportunities.
• To focus on betterment of rural artisans and socio-economic weaker section.

Entrepreneurship Development:

• To generate self employment and help to provide additional livelihood revenue.
• To prevent migration by increasing earning capacity of rural people.
• To participate in international trade exhibitions.

Women’s Self Help Groups (Mahila Bachat Gat)-

Objectives:

1. To eradicate poverty and empower the women
2. Fundamental principle

• “helping each other”
• “Unity is strength”

Features Women’s Self Help Groups-

(1) Formation:

• It is an informal small group of homogeneous individuals generally formed by NGOs.
• Registration under any act is not mandatory.

Membership:

• It is through a process of self selection based upon the affinity (harmony) of its members.
• At least 5 members are required. One member from one family is allowed.

Empowerment of Women:

• It is a tool for socio-economic development of women.
• To promote women entrepreneurship.
• To provide financial and non financial assistance.

Collateral Free Loan:

• To provide small loans to the poor individual to start self employment projects.
• To encourage poor individuals to participate in banking activities.
• To ensure timely repayment of loans and responsible for collecting repayment amount who borrowed the loan.

Democratic Setup.

• It is responsible for organizing themselves independently.
• To hold regular meetings, maintaining records and accounts of the group.
• To work on principle of collective leadership and mutual discussions.

Entrepreneurship Development.

• To provide capital at low interest rate to promote micro enterprise.
• To provide timely financial support and managerial skills.
• To provide skill development trainings and marketing and technical support.

Saving Habit.

• To encourage small saving habits at regular intervals.
• To generate common fund to be used to lend the members in time of need.

Mutual Trust.

• To overcome individual shortcomings and weakness with collective efforts.
• To help poor and marginalized individuals builds their lives, families and their society.

World Bank-

(1) International
‘ Bank for Reconstruction and Development (IBRD).
provides debt financing to government

(2) International Development Association (IDA)
Gives interest free loans to the governments of poor countries

(3) International Finance Corporation (IFC)
Focuses on private sector and provides developing countries with investment financing and financial advisory services

(4) Multilateral Investment Guarantee Agency (MIGA).
Promotes Foreign Direct Investments in developing countries

(5) International Centre for Settlement of Investment Disputes.
Provides arbitration on international investment disputes

Features of World Bank-

Goals-

2 goals by 2030
To end extreme poverty
To promote shared prospering by fostering the

• income growth of bottom 40% for every country.
• World Bank group consists of 5 institutions which are managed by their member countries.

(3) Financial Products and Services.
Provides low-interest loans, zero to low interest credits and grants to developing countries in area of education, health, public administration, infrastructure, financial and private sector development, etc.

(4) Innovative Knowledge Sharing.

• To support in policy advice, research and analysis and technical assistance
• To sponsor host or participate in conferences and forums on issues of development
• To provide best global expertise to developing countries

(5) Innovation and Entrepreneurship:

• higher productivity leading to increased economic growth
• enhancing competitiveness and productivity by introducing new products, novel business models, new markets, etc.
• facilitates global experience, knowledge, research and-investments to develop effective innovations

(6) Social Development:L

• promotes economic growth and leads to higher quality life
• solves the problems of poor and vulnerable into development process
• undertakes social risk analysis, including poverty and social impact analyses

Word Meaning:

hurdles – difficulties; vibrant – energetic; emerge – comes out; dedicated – committed; infusing – to fill; ecosystem – interconnection of organism and environment; channels – means/medium; co-ordinate – bring together; refinance – giving loans with low rate of interest; traditional – regular; sustainable – able to maintained; creation – formation; ecological – relation of organism and surrounding; emission – to release; upgradation – to improve; associates – connected; subsidiaries – subordinate/secondary; comprehensive – complete; micro – small; semi-urban – in between rural and urban; assistance – to help; extensive – large scale; incubators – company that helps to start up new companies; mentors – guide; portal – website; accessibility – able to reach; track – path; handbolding – to support; nodal agency – a direct office which is assigned for implementing; allied along with – executing new project; review – to check; eye opener – unexpected event; plunge – to jump; apex – at top; regulating – to control; cottage – business carried on by home; guidelines – instruction; monitors – to look after; tideover – to help at difficult; computerization – use of computer in doing work; upliftment – to raise; voluntary – not compulsory; recommendations – to advice; revolution – to bring change in society; boycott – to refuse; key – important; potential – possibility; emphasis – importance; strengthen – to power; functions – activities; self reliance – self sufficient; community spirit – feeling of togetherness of one community/group; premier – main/leading; generating – to produce; masses – people; massive – huge; per capita – by each head; avenues – direction; migration – movement of people from one place to another; formulated – to prepare; schemes – plan; subsidy – a sum pf money granted by government to support; beneficiaries – recipient/receiver; cater – to provide; publicity – to make famous; disseminating – to distribute; derive – to get; organizes – to arrange; agencies – a business firm; eradicate – to remove; refused – to say no; empower – to allow; inspired – to encourage; homogeneous – same group; collateral – security; alternative – different; voluntary association – group of individuals forming a body having same goals; reasonable – fair price; enhances – increase; collective – together; out reach – influence; affinity – harmony; inculcates – to fix; thrift – budgeting; overcome – to solve; philosophy – study of particular system; marginalized – system insignificant; grassroot – basic level; scarcity – shortage; untapped – resource not used; tool – device; clutches – holds; artisans – individual with/good proficient in particular art; vested – given/ to give; fostering – to promote; unique – special; vital – important; analysis – to evaluate.

By going through these Maharashtra State Board Organisation of Commerce and Management 11th Notes Chapter 5 Forms of Business Organisation – II students can recall all the concepts quickly.

Maharashtra State Board Organisation of Commerce and Management 11th Notes Chapter 5 Forms of Business Organisation – II

Public Sector Organizations-

Definition of Public Sector Organizations

1. Britannica Encyclopedia
“An undertaking that is owned by a central, state or local government, supplies services or goods at a price and is operated on more or less self-supporting basis is called as Public Sector Organisation.”

2. Prof. Hansen
“Public Enterprise means state ownership and operation of industrial, agricultural, financial and commercial undertaking.”

Classification of Public Sector Organizations-

1. Departmental Oranization
2. Statutory Corporation
3. Government Company

Department Organisation-

• Meaning : Organization which is owned, managed, controlled and financed by government is known as “Departmental Organisation”.
• Example : Post Office, Railways, Defence Industries, Radio, Public Utility Services, etc.

Features of Departmental Oraganisation-

• Delegation of Authority
• Organizational Structure
• Government Employees
• Financed by the Government
• Useful for Secret
• No Legal Status
• Government Sanction for Expansion
• Examples of Departmental Organization
• Run by Government
• Managed by Government
• Accounting Control
• Accountability

Merits of Departmental Organization-

1. Qualified Staff
2. Proper use of Funds
3. Social Welfare
4. Public Accountability
5. Maintain secrecy
6. Easy Formation
7. Direct control
8. Direct revenue to Government
9. Less Overheads
10. Easy Finance
11. Development of Public Utilities

Demerits Of Departmental Organisation-

1. Delay in Action
2. Inefficiency and Corruption
3. Less Scope for Initiative
4. Instability
5. Delayed
6. Lack of Flexibility
7. Incurring Losses/Huge Losses
8. Absence of professionalism
9. Political Interference
10. Red Tapism and Bureaucracy
11. Insensitive to Consumer Needs
12. Lack of Autonomy

Statutory Corporation-

Meaning : A Statutory Corporation is an autonomous corporate body created by the Special Act of the parliament or state legislature with defined powers, functions and duties. State helps statutory corporation by subscribing to its capital.
Example : Reserve Bank of India, LIC, etc.

Features of Statutory Corporation

1. No political Interference
2. Own Staffing System
3. No Political Interference
4. Financial Autonomy
5. Independent Identity
6. Special Act
7. Corporate Body
8. Answerable to the Legislature
9. Legal Status
10. Independent Accounting System
11. Public Accountability
12. Objective

Merits of Statutory Corporations-

1. Professional Management,
2. Rapid Decisions
3. Efficient Staff
4. Motivated Staff
5. Service Motive
6. Easy to Raise Capital
7. Administrative Autonomy
8. Public Accountability
9. Initiative and Flexibility
10. Enjoys Economies of Scale
11. Creates Employment Opportunities
12. Enjoy Monopoly

Demerits of Statutory Corporations-

1. Clashes Amongst Interests
2. Autonomy on Paper Only
3. Rigid Structure
4. Lack of Initiative
5. Unfair Practices

Government Company-

Meaning : “The company which is registered under Companies Act, 2013 having minimum 51% of paid- up share capital held by the central government or any state government or partly by central government and partly by one or more state governments is known as Government Company.”

Example :

• National Thermal Power Corporation (NTPC)
• Bharat Heavy Electricals Limited (BHEL)
• Hindustan Machines Tools (HMT)

Features of Government Company-

1. Free from Procedural Controls
2. Majority of Government Directors
3. Public Accountability
4. Registration under the Companies Act
5. Own Staff
6. Promotes Social Welfare
7. Objective
8. Separate Legal Entity
9. Exemptions
10. Suitability

Merits of Government Company-

1. Profitability and Accountability
2. Internal Autonomy
3. Government Ownership
4. Foreign Capital and Technical Know how
5. Acquisition of Sick Units
6. Concessions and Privileges
7. Efficiency
8. Professional Management
9. Easy Formation
10. Flexibility
11. Easy to Alter
12. Enjoys Private and Public Objective

Demerits of Government Company-

• (1) Inefficiency and Corruption
• (2) Lack of Professional view
• (3) Domination of Ministers and Politicians
• (4) Red Tapism and Delay
• (5) Autonomy only in Name
• Weak Public Accountability
• Fear of Expoaure
• Lack of Expertise
• Ineffective Control of Parliament
• Poor Labour Management Relation

Multinational Corporations (MNC)-

Meaning : “A multinational corporation is a business organisation that operates in many different countries at the same time.
In other words, “It’s a Company that has business activities in more than one country.”

Example : Indian Multinationals

• Bata India
• Infosys
• Tata Motors

Features Multinational Corporation-

Features of Multinational Corporation-

1. Advanced and Sophisticated Technology
2. Legal Existence
3. Government
4. Origin
5. Research & Development
6. International Operations
7. Target Profitoriented
8. Huge Assets and Turnover
9. Mighty economic power
10. Centralized Control
11. Area of Operation
12. Professional management

Merits Multinational Corporation-

1. Proper Use of Idle Resources
2. Inflow of foreign Capital
3. Promotion of International 1 Brotherhood and Culture
4. End of Local Monopolies
5. technical Development
6. Improvement in Standard) of Living
7. Managerial Development
8. Employment Generation

Demerits Multinational Corporation

1. Danger for Domestic Industries
2. Create Problem for Environment
3. Outsourcing of Job
4. Misuse of Mighty Status
5. Multinational Corporations Import Skilled Labour
6. Interference
7. Take away Profits to Home Country
8. Encourage Political Corruption
9. Repatriation of Profiles

Word Meaning:

co-existence – to exist in same time; criticism – disapproval; reliable – genuine / good; supervision – to look after; annual budget – yearly estimated income and expenditure; sanctioning – to approve; autonomous – to manage its work independently; legislature – Government body; subscribing – to enroll / to be a member; revenues – income; statutory – as per the law; government treasury – funds available with the government; interfere – to check / disturb; budgeting – to allocate; recruited – to appoint; integral – essential; remunerated
– to pay salary; centralisation – concentration of control; operations – working; red tapism – process of excessive paper work and rigid formalities; nominated – to be selected; floating – to fluctuate / change; bureaucracy – a government system where important decisions are taken by the officials; trustworthiness – truthful; initiative – to do independently; guided – to show; smooth – without any problems; hampered – to suffer; characters – nature; indulge – to involve; demoralized – to lose hope; inefficiency – not achieving maximum productivity; innovative – new ideas; comptroller – controller; expertise – skill to do best; auditor general – government officer charged with accounts auditing; bounded – to restrict; professional – person qualified in particular profession; affiliates – connected with; productivity – output; modifications – to change; framework – a structure; acquire – to get; entities – independent organizations; deputation – to give charge; host – a place or person who holds the event; budgetary – to allocate the fund; sophisticated – highly developed; undertakings – agreements; intensive – concentrated / focused; executive – administrative; boost – to encourage; relatively – in comparison; inflow – movement of large thing; active – energetic; monopolies – control of trade; personnel – human resource; exploitative – treating others unfairly; debated – discuss; brotherhood – friendship; peace – freedom from disturbance; repatriation – to send money; prosperity – being success; implicit – indirect; chronic – for a long time; challenges – problems; wipe off – clean off; wind up – to end; depletion – reduction; non renewable – resources which cannot be produced again; threat – warning; alien – foreign; synthetic – chemical substance; setback – in reverse of; injurious – harmful; concentration – at centre; enrich – improve the quality, legal entity – legal rights and obligation, overheads – expenses, of business, interference – the illegal obstruction.

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.

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.

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.

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 :

(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:

(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.

(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.

(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:

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 :

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 :

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:

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:

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

(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:

(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 :

(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:

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 :

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 :

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 :

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 :

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 :

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 :

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.

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.

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.

By going through these Maharashtra State Board Book Keeping & Accountancy Notes 12th Chapter 4 Reconstitution of Partnership (Retirement of Partner) students can recall all the concepts quickly.

Maharashtra State Board 12th Accounts Notes Chapter 4 Reconstitution of Partnership (Retirement of Partner)

Introduction, Meaning and Reasons-

To retire means to give up or to cause a person to give up his work, especially reaching superannuation age. Accordingly, retirement of partner refers to a process in which a partner leaves the firm or severs his connection or relationship with other partners on account of old age or continued ill health or loss of interest in the firm, misunderstanding amongst the partners, loss in the business or any other similar reasons. On retirement, retired partner ceases to be a partner of the firm. A partner who leaves the firm or goes away from the business is called “retiring partner” and partners who continue (or remain) in the partnership firm are called “continuing partners”. On retirement of partner, it is just necessary to ascertain or compute the amount payable to him. It is ascertained by considering net balance in Capital Account and Current Account, his share in accumulated profit, Reserve fund, part losses, goodwill, revaluation profit or loss, etc.

A partner may retire from the firm due to : (1) old age, or continued sickness (2) loss incurred in the business (3) loss of interest in the firm on account of any reason (4) partner intends to start another or new business (5) differences of opinion or misunderstanding with the other partners, etc.
The partner may retire from the firm by undertaking one of the following steps or procedures : (i) As per the terms mentioned in the partnership agreement or Deed (ii) By taking consent of other partners, (iii) By giving notice of retirement in writing to other partners.

New Ratio-

New ratio is a ratio or proportion in which continuing partners decide to share profits or losses of the business after retirement of a partner.
Calculation of new profit sharing ratio :

Gain Ratio-

Profit sharing ratio which is acquired by continuing partners on account of retirement or death of a partner is called Gain Ratio. It is generally calculated at the time of retirement or death of a partner. Gain ratio is calcualted by using the following formula :
Gain Ratio = New Ratio – Old Ratio.

Gain ratio is calculated and used to write off the goodwill raised or created to the extent of retiring partner’s share only.

Treatment of Goodwill-

At the time of retirement of a partner for adjustment of goodwill, one of the following courses may be adopted :

(1) When goodwill does not appear in the books of account:
If goodwill account is not shown at all in the books of account on the date of retirement, it may be adjusted in any one of the following five ways :

(a) When goodwill is raised to its full value and retained in the business :

(Note : In this case, the full value of goodwill is shown in the Balance Sheet on Assets side.)

(b) When goodwill is raised to its full value and then written off from the books of account:
(i) When Goodwill is raised :

(ii) When Goodwill is written off:

(Note : In this case, goodwill does not appear in the Balance Sheet.)

(c) When goodwill is raised partially, that is by an amount equal to retiring partners’ share and then retained in the business :

(Being goodwill to the extent of retiring partner’s share raised and credited to his Capital A/c)

(d) When goodwill is raised only to the extent of retiring partner’s share and then written off from the books of account:
(i) When Goodwill is raised :

(Being goodwill to the extent of retiring partner’s share raised and credited to his Capital A/c)

(ii) When goodwill is written off :

(Being goodwill adjusted to continuing partners’ Capital or Current A/cs In their gain ratio)

(e) When goodwill is adjusted through Current A/cs or Capital A/cs of the partners without opening a Goodwill A/c :

(Being continuing Partners’ Current A/cs or Capital A/cs are debited in their gain ratio)

(2) When goodwill is already appearing in the books of account:
(i) If the amount of goodwill appears in the Balance Sheet is less than its actual value of goodwill (undervalued):

(Being increased value of goodwill transferred to all Partners’ Capital A/cs/Current A/cs in their old profit sharing ratio)

(Being increased value of goodwill transferred to Profit and Loss Adjustment A/c or Revaluation A/c)

(ii) If the amount of goodwill appears in the Balance Sheet is greater than the value of goodwill (overvalued) :

(Being decreased value of goodwill adjusted to all Partners’ Capital / Current A/cs in their old profit sharing ratio)
Alternatively, following entry may be passed :

(Being decreased value of goodwill adjusted to Profit and Loss Adjustment A/c or Revaluation A/c)

Transfer of Reserve Fund or General Reserve / Accumulated Profit or Loss-

On retirement of a partner, balance in general reserve, as well as past accumulated undistributed profit are transferred to all partners’ capital accounts or current accounts in their old profit sharing ratio. Similarly accumulated past losses of the firm are also adjusted to all partners’ capital accounts or current accounts in their old profit sharing ratio.

However, sometimes, if continuing partners so desire, only retiring partners’ share in general reserve and accumulated past profits or losses is transferred to his capital account or current account. Following journal entries are passed for transfer of general reserve and accumulated undistributed profits or losses, i.e. balance of Profit and Loss Account:

(1) Transfer of general reserve, accumulated profits, etc. :

(Being general reserve. accumulated profit transferred)

(2) Transfer of accumulated losses :

(Being accumulated losses transferred and debited to all partners’ capital/current A/cs in old ratio)

Revaluation of Assets and Re-assessment of Liabilities-

At the time of retirement of a partner, all the assets and liabilities of the partnership firm are usually revalued and changes in their values are, therefore, effected through a Profit and Loss Adjustment A/c or Revaluation A/c. A reduction in the values of assets and an increase in the values of liabilities are debited to this account while an increase in the values of assets and a reduction in the values of liabilities are credited to this account. The balance of Profit and Loss Adjustment A/c or Revaluation A/c is then transferred to all partners’ capital accounts or current accounts in their old profit sharing ratio.

Adjustment of Capitals-

The continuing partners if they so desire, may make their capitals proportionate to their new profit sharing ratio either through their Current Accounts or Loan Accounts or by actually bringing in or withdrawing cash. In this case, total capital of the new firm is decided and following steps are taken :

• From the total capital of the firm, the amount of capital to be maintained in the new firm by each continuing partner is determined as per new profit sharing ratio.
• New capital balance i.e. balance as per new profit sharing ratio of each partner is compared with the latest balance in its Capital Account to ascertain surplus or deficit.
• Surplus or deficit in each partner’s Capital Account is worked out.
• Such surplus or deficit of each partner is adjusted through withdrawal in cash or bringing in cash. Such surplus or deficit may be transferred to Current Account or Loan Account as per the decision taken by the continuing partners or as per the provisions made in the Partnership deed.

Pro forma journal entries of adjustment, of deficit or surplus :

Ascertainment of retiring partner’s share of profit till retirement:

1. If a partner retires from the firm during the accounting year i.e. on a date other than the Balance Sheet date, the profit or loss for the period for which he was a partner may be calculated on the basis of last year’s profit or the average of the profits for the last two to five years.
2. From the average annual profit of the firm, calculate profit for the proportionate period from the date of last Balance Sheet to the date of retirement of a partner.
3. Calculate retiring partner’s share in that proportionate profit or loss.
4. To record retiring partner’s share in proportionate profit or loss, following accounting entry is to be passed :

(i) For transfer of retiring partner’s share in proportionate profit:

(ii) For adjustment of retiring partner’s share in proportionate loss :

Total payable amount to Retiring Partner-

The total amount payable to retiring partner may be paid as per the terms of partnership deed or otherwise as per the mutual agreement among the partners. The partnership firm may pay either full or part of the amount due to retiring partner at the time of retirement and balance if any, is transferred to his Loan A/c. The various types of repayment of retiring partners’ dues are explained as follows :

(1) Lumpsum : Under this method, entire amount due to the retiring partner is paid in one instalment or at a time. The journal entry is given as follows :
Payment of retiring partner’s dues in one instalment or in lumpsum :

(2) Instalment: Under this method, retiring partner’s dues are paid in several convenient instalments. Journal entries relating to this are shown below :

(3) If the total amount due transferred to Loan A/c :

(4) If part of the total amount due to retiring partner is paid in cash and balance is transferred to his Loan A/c :

Accounting steps to record retirement of a partner : The usual accounting steps for recording
the retirement of a partner are stated below :

• Prepare ledger accounts like Partner’s Capital / Current A/cs, Profit and Loss Adjustment A/c, Cash/Bank A/c, Goodwill A/c, etc.
• Transfer opening balances as given in the last Balance Sheet to the respective ledger accounts mentioned above.
• Transfer the balances of General Reserve, the Profit and Loss A/c and other undistributed profits or unadjusted losses to All Partners’ Capital / Current A/cs in their old profit sharing ratio.
• Give accounting treatment to Goodwill.
• Revalue the assets and liabilities and transfer resulting profit or loss to All Partners’ Capital/ Current A/cs (including retiring partner) in their old profit sharing ratio.
• Pass an entry for payment made to retiring partner.
• Transfer unpaid balance on Retiring Partner’s Capital A/c to his Loan A/c.
• Balance the Capital A/cs of continuing partners and prepare the Balance Sheet of the firm after retirement of a partner.

By going through these Maharashtra State Board Organisation of Commerce and Management 11th Notes Chapter 7 Business Environment students can recall all the concepts quickly.

Maharashtra State Board Organisation of Commerce and Management 11th Notes Chapter 7 Business Environment

Business Environment-

Definition:
Boyard O Wheeler
The total of all things external to firm and industries which affect their organization and operations is called as Business Environment”.

Barry M. Richman and Melvyan Copan
“Environment factors of constraints are largely if not totally external and beyond the control of individual enterprises and their arrangement”.

William F. Glueck
“Business Environment is the process by which strategists monitor the economic, governmental, market, supplier, technological, geographic and social settings to determine opportunities and threat to the firms.

Importance of Business Environment

1. Flexible and Dynamic
2. Opportunities and Threats
3. Competition
4. Utilization of Resources
5. Strength and Weakness
6. Knowledge
7. Image Building
8. Adaptability to Socio – Economic – Changes.

Dimention of Business Environment-

Business Environment:

1. Internal (Controllable)
2. External (Uncontrollable)

1. Internal (Controllable):

• Shareholders
• Managers
• Employees
• Unions

2. External (Uncontrollable)

Natural:

• Weather
• Topographical factors
• Location
• Land form
• Climate
• Soil
• Minerals

Social:

• Social aspect
• Trends
• Values
• Traditions

Political:

• Legislature
• Government
• Judiciary

Economic:

• Economic condition
• Economic policies
• Economic system

Technological:
Method & Techniques

Legal:

• Legal framework
• Laws

Dimension of Business Environment-

1. Internal (Controllable)
2. Other factors

Internal (Controllable):

• Value system
• Vision, Mission and Objectives
• Management Structure and Nature
• Internal Power Relationship
• Human Resources

Other factors:

• Physical Assets and Facilities
• Marketing Resources
• Financial Factors

Financial Factors-

Dimension in Business Environment

External (Uncontrollable) Factors:

Natural Environment:

• Weather
• Topographical factors
• Location
• Land form
• Climate
• Soil
• Minerals

Social Environment:

• Social aspect
• Social trends
• Social values
• Traditions

Political Environment:

• Legislature
• Government
• Judiciary

Economic Environment:
Condition:

1. Economic Condition
2. Economic Policies
3. Economic System:

• Capitalist Economy
• Socialist Economy
• Mixed Economy

Technology Environment:
Methods and Techniques

Legal Environment

• Legal frame work
• Laws

New Economic Policy and Business

• New Economic Policy And Business (24TH JULY, 1991)
• Known as (LPG Policy)
• Introduced on 24th July, 1991
  1. Liberalization
  2. Privatization
  3. Globalization

Liberalization-

Meaning: The process of eliminating unnecessary controls and restrictions for smooth functioning of business.

Indian Economic Liberalization Includes:

• Abolishing Industrial Licensing System
• Reduction in physical restrictions on import and import duties
• Reformation of financial system
• Reduction in taxation
• Reduction in control of foreign exchange
• Changing approach towards industrial sickness
• Freedom to decide the scale of business activities
• Attracting foreign investment
• Freedom in fixing prices of goods and services
• Opening of telecommunication sectors

Privatization-
Meaning : To reduce the involvement of state or public sectors by involving of private sector in economic activities.

Need for Privatization :

• More efficiency
• Less Political interference
• Reduction in labour problem
• Ensuring accountability
• Capital Market discipline

Privatization Includes-

• Reduction in number of industries reserved for public sector.
• In order to raise resource disinvestment of shares of selected public sector.
• Improvement in Performance through MOU system.

Globalisation-
Meaning : Integration of national economy and societies through cross country flows of information, ideas, technologies, goods securities, capital, finance and people.
Includes-

• Removing anti export biasness
• Minimization of high import tariffs
• Lesser reliance on quantitative restrictions on imports

Features of globalization-

• Buying and selling from/to any country
• Freedom to set business anywhere in the world
• Lesser distance between local and international market
• Exchange of new ideas and technology around the world
• Direct foreign participation

Impact of Globalisation-

1. Global agreement in trade
2. Spreading the economic policies
3. Physical and geographical% boundaries are reduced and world is as “global village”.
4. Customers are only concerned about the product – quality, price, design, value and appeal.
5. Created an economically interdependent international environment
6. Increased in privatization of manufacturing and service sector

Impact of New Economic policy on Business-

1. Budgetary Support
2. Increase in Competition
3. New Trade Policy
4. Demanding Customers
5. New For Development
6. Change in Technological Environment
7. Change in the Concept of Marketing

Word Meaning:

isolated – unreachable; relevant – appropriate / related; negotiates – work out; thrives – prosper / grow; survive – to stay on; disturbances – distraction / trouble; spell – amount to; threats – dangers; appraise – to judge; orientations – direction of something; demographic – related to structure of population; trends
– movement; strategies – planning; constraints – restrictions; beyond – extreme; overcoming – deal with; sensitivity – reactivity; analyze – to examine; formulate – to prepare; frontiers – limits; intimacy – relationship; controllable – influence; domain – area / sector; structure – formation; logistic – activity of transporting; preservation – to protect; non-replenishable – cannot be renewed; to cope with – to deal with; reciprocal – give and take; ethics – principles; expectancy – hope; heritage – tradition; mobility – ability to move; ideology
– ideas; survival – to exist/to live; monetary – in terms of money; dramatic – considerable; alert – aware; persist – to continue; amendments – changes; eliminating – to remove; accountability – responsibility; disinvestment – reduction in investment; interdependent – depend on each other; implication – indications; reliance – to be dependent; diminishing – reducing; tremendous – huge; discontinuation – not to continue; varying – differ; nurtured – to raise; restructuring – to rearrange; fundamentally – basics; reliable – to good; integration – combination.

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

Maharashtra State Board 11th Accounts Notes Chapter 7 Depreciation

Meaning And Definition of the Term Depreciation-

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

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

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

Causes of Depreciation-

Causes of depreciation are explained below:

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

Need And Importance of Depreciation-

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

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

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

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

Factors Affecting Depreciation-

The factors affecting depreciation are stated as follows:

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

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

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

Formula For Computation of Depreciation-

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

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

Methods of Depreciation-

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

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

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

Fixed Instalment Method-

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

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

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

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

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

Disadvantages:

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

Reducing Balance Method-

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

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

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

Advantages:

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

Disadvantages:

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

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

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

Difference Between Fixed Instalment Method And Reducing Balance Method-

Fixed Instalment Method:

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

Reducing Balance Method:

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

Accounting Treatment of Depreciation-

(A) Journal entries in the books of firm.

(B) Ledger Accounts in the books of firm

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

Maharashtra State Board 11th Accounts Notes Chapter 3 Journal

Introduction-

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

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

Importance and Utility Of Accounting Documents-

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

Important Accounting Documents are Explained As Follows-

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

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

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

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

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

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

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

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

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

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

Specimen of cheque is given below:

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

Specimen of bearer cheque is given below:

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

Specimen of order cheque is given below :

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

Specimen of crossed cheque is given below :

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

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

Journal-

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

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

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

(ii) JOURNAL (Definition) :

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

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

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

(iv) Utility of Journal :

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

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

(v) Specimen Form of the Journal :

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

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

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

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

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

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

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

(vi) Journalisation:

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

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

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

Steps in journalisation :

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

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

The different types of journal entries are explained below:

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

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

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

Illustration of combined entry is shown below :

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

Capital = Total Assets – Total Liabilities

GST-

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

Note :

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

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

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

Discount-

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

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

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

Distinguish Between Trade Discount And Cash Discount-

Trade Discount Cash Discount:

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

Cash Discount:

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

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

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

Introduction-

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

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

Meaning And Definition of Single Entry Book Keeping System-

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

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

Difference Between Single Entry System And Double Entry System-

Single Entry System:

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

Double Entry System:

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

Statement of Affairs-

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

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

Proforma of Statement of Affairs :

Difference Between Balance Sheet And Statement of Affairs-

Balance Sheet:

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

Statement of Affairs:

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

Statement of Profit or Loss-

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

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

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

Proforma of Profit or Loss :

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

Additional Information (Adjustments):

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

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

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

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

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

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

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

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

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

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

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

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

Interest on capital is calculated as follows:

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

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

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

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

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

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

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

Meaning and Definition of Double Entry Book-Keeping System-

Meaning:

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

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

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

Definition of Double Entry Book Keeping System:

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

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

Methods of Recording Accounting Information-

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

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

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

Single Entry Book-Keeping System :

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

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

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

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

Advantages of Double Entry Book – Keeping System-

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

Conventional System of Accounting-

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

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

Classifications of Accounts-

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

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

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

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

(ii) Classification of Accounts :

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

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

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

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

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

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

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

(iii)List of Legal Persons Are Given Below:

Legal Persons:

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

(iv) Illustrations on Different types of Accounts :

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

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

(vi) Meaning of Debit and Credit:

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

Examples :

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

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

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

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

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

E.g.

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

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

Debit What Comes in Credit What Goes Out:

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

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

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

E.g.

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

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

Activity II (Given in the Text book to solve)

(I) From the following transactions find out

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

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

(2) Two Aspects and Two Accounts :

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

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

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

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

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

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

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

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

(1) For changes in Assets / Expenses.

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

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

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

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

Analysis of the Following Transactions and Finding Out Their Effects-

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Introduction-

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

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

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

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

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

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

Salient features of a Bill of Exchange :

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

Draft, Format of Bills of Exchange-

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

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

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

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

Contents of format of B of Exchange :

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

Pro Forma of a Bill of Exchange :

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

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

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

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

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

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

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

Parties to a Promisory Note :

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

Specimen of Promisory Note:

Terms of Bills of Exchange:

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

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

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

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

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

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

Types of Due Date :

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

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

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

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

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

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

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

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

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

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

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

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

How using of Bill :

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

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

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

Legal protection afforded by Bills of Exchange :

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

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

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

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

Accounting treatment of Bills of Exchange-

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

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

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

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

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

Formulae for calculation of discount :

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

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

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

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

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

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

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

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

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

(f) Ways to renew a bill of exchange :

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

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

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

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

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

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

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

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

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

Pro Forma ledger accounts :

మృత్యుంజయ స్తోత్రమ్