Financial ing Part 3 1o2957
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Financial and Management ing
Unit 3
Unit 3
Double Entry ing
Structure: 3.1
Introduction
3.2
Meaning of double entry ing
3.3
Cash and mercantile system of double entry system
3.4
ing trail
3.5
Transactions and events
3.6
Preparation of vouchers
3.7
Financial statements and their nature
3.8
ing equation
3.9
Effect of transactions on ing equation
3.10 Meaning and rules of debit and credit
3.1 Introduction The dual aspect concept of ing is a full-proof system of recording, having the advantage of internal checking. The very fact that every transaction is recorded of its debit and credit aspects indicates that the final s of an organization takes into consideration every small or big transaction and the impact is every is absorbed in the preparation of final financial statements. Double entry book keeping is definitely an improvement and more systematically designed than single entry system, where only a few personal and real s are considered. In this unit, the process of ing – recording, journalizing, posting, ledger balancing, preparation of trial balance, preparation of final statements of s – is described along with the effect of every transaction on ing equation. The rules of debit and credit as applicable to various types of s are also discussed.
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Learning Objectives: After studying this unit, you should be able to understand the following: 1. To know what double entry book keeping means. 2. To understand the process of ing, known as ing trail. 3. To know the nature of financial statements. 4. To formulate an ing equation basing on debits and credits. 5. To know practically the impact of each transaction on the ing Equation. 6. To summarize the rules of debit and credit as applicable to different types of s. The students should be able to appreciate the double entry system and know the ing process.
3.2 Meaning of Double Entry ing We have learnt that the dual aspect recording is the most important ing concept. According to the concept, every business transaction involves receiving aspect and giving aspect. If capital is brought in by the owner of the business unit, the owner is the giver of the benefit and the business unit is the receiver of the benefit. It is a liability to the business unit and it is equally balanced by an asset in the business unit, in the form of cash received towards capital. Therefore every liability is represented by an asset. This is also expressed as every debit has an equivalent credit. The logic adopted in double entry ing can well be understood by an illustration. We shall consider five transactions and show how they are ed for in the books of the business. a. Mr. Abhi brings Rs.100000 cash as capital into his business. b. He purchases furniture to his shop Rs.10000 c. He buys goods for cash Rs.50000 Page No.: 39
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d. He sells goods worth Rs.30000 for Rs.40000 on credit to Arjun e. He pays wages to servants Rs.1000 In the first transaction, the business receives capital in cash and so capital and cash are affected. Capital is a liability and cash is an asset to the business. Capital Rs.100000 (Liability) = Cash Rs.100000 (Asset) In the second transaction, Furniture is purchased for cash and so furniture and cash are affected. This transaction can be reflected as under Capital
Rs.100000
Cash Rs. (100000- 10000)
90000
Furniture
10000
100000
100000
The third transaction is buying goods for cash, which means that stock of goods are received and cash balance is reduced and this can be reflected in the statement as under. Capital
Rs.100000
Cash Rs (90000 – 50000)
40000
Furniture
10000
Stock of goods
50000
100000
100000
The fourth transaction is a credit transaction of selling goods for Rs40000, the cost of which is only Rs. 30000 to Arjun. So the s affected are goods , Arjun and profit . Since the profit belongs to the owner and it is fair to add it to the owner’s capital. The effect of this transaction can appear on the statement as shown below:
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Capital
Rs. 100000
Profit
10000
Unit 3
Cash
40000
Furniture
10000
Stock of goods(50000-30000)
20000
Arjun (Debtor)
40000
110000
110000
The fifth transaction is payment of wages, which means that cash is affected and profit is reduced as a result of the expenditure(wages ). This changes the statement as shown below: Capital
Rs. 100000
Profit (10000-1000) 9000
109000
Cash (40000 – 1000)
39000
Furniture
10000
Stock of goods
20000
Arjun
40000 109000
From the above illustration, it is clear that every transaction has dual effect and
recording these two aspects which are known as debit and credit
aspects is the fundamental idea behind double entry system of book keeping. So the meaning of double entry system is that every transaction is recorded by identifying the two or more s affected therein and suitably reflect them in the financial statements. This is a system where internal cross checking is ensured. Self Assessment Questions 1:
1. The system of recording transactions based on dual aspect concept is called i)
Double system
ii) Double entry system iii) Single entry system
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2. Show the dual aspect effect of the following transactions on the assets and liabilities of business. a. Purchased goods for cash Rs.80000 b. Purchased delivery van on credit for Rs.400000 c. Paid Rs.5000 to a supplier of goods on credit d. The proprietor withdrew Rs.20000 from the bank of business for Personal expenses.
3.3 Cash and mercantile system of double entry system There are two systems of double entry book keeping namely cash system and mercantile system. In case of cash system, transactions are recorded only if cash is received or paid. Government ing is done basing on this system. On the other hand, mercantile system is one where both cash and credit transactions are recorded. Besides, outstanding expenses or incomes also find place in the mercantile system. It is fair enough to adopt mercantile system because when an event takes place, it gets recorded irrespective of its immediate impact on the cash position. In case of credit transactions, cash does not flow immediately but it takes place at a future point of time. Transactions like sales
or purchases on credit, salary
payable, rent receivable, interest accrued but not received, depreciation provided etc., influence on the financial position of the business unit and therefore they should be recorded. Mercantile system facilitates this. Hence double entry recognizes the fact that every transaction, whether cash or credit, influences at least two s – one representing debit aspect and another credit aspect. Self Assessment Questions 2:
1. The two systems of double entry book keeping are ________ and __________ .
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2. Government ing is based on mercantile system. True or false? 3. All credit transactions come under mercantile system. True or False? 4. Interest receivable, rent receivable, dividend receivable are recorded in cash system of book keeping. True or False?
5. Profit as per cash system and mercantile system of double entry show different figures. True or False
3.4 ing Trail ing trail is the process of identifying the transactions or events, preparation of vouchers, recording them as journal entries, preparation of ledger
s,
balancing
the
ledger
s,
incorporating
all
adjustments, preparation of a trail balance and finally preparing the financial statements and balance sheet. It is a sequential order in which the ing process flows. All transactions are recorded first in a book called journal. The transactions are posted to the respective s, maintained in a separate book called ledger. Later, all adjustments such as opening entries, closing entries, adjusting entries are made in a book called journal proper and there from, the ledger balances are summarized to form a trial balance. From trial balance, trading , profit and loss and balance sheet are prepared. The identification of the s affected in the transactions is a major task. There are three types of s, namely personal s, real s and nominal s. An is a summary of transactions pertaining to a particular head. Personal s include s of natural persons, such as Abhi , Mohan’s , Sonali etc; artificial personal s such as Syndicate Bank , X Co. Ltd , a club etc;
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representative personal like outstanding rent , salaries payable etc. Real s are those which may be tangible real s and intangible real s. Tangible real s relate to things that can be touched, felt, physically measurable. Building , furniture , stock , cash etc are tangible real s. Intangible real s are such that they can not be seen or touched. They can be measured in of money such as goodwill, patent rights etc. Nominal s are also known as impersonal s. They are in the form of expenses or losses, incomes or gains. They do not really exist in physical form, but behind every nominal cash is involved. For example, salary is a nominal and when salary is paid, the reality is the cash goes out and there is nothing salary in physical form. Therefore salary is regarded as nominal . Similarly all expenses and losses and all incomes and gains s are regarded as nominal s. Self Assessment Questions 3: 1. ing trial is a process starting from identifying the transactions or events to preparation of final statement of s. True or False 2. There are three types of s namely ____________ and ________________. 3. A trial balance is the summarized form of ledger balances. True or False 4. Classify the following s into personal, real and nominal i) Bank of Baroda
ii) Printing and stationery expenses
Machinery Outstanding salary iii) Copy Rights iv) Sock of goods v) Loan given to Krishna vi) Loan from Bank
vii) Dividend received
viii) Discount
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3.5 Transactions and Events A transaction is a business activity involving transfer of money or money’s worth. It may be cash transaction or credit transaction. In cash transaction cash flows immediately where as in credit transaction cash will be paid or received at future date. Assets acquired or sold, liabilities incurred or paid, expenses paid or payable, incomes received or receivable – are all business transactions. But there are events which are neither cash nor credit transactions but it has an impact on the financial position of a business. These events may include provision for bad debts, provision for repairs, depreciation, taxation, transfer of profit towards reserve fund or sinking fund or investment fluctuation fund, etc., Events happen as a result of internal policies or external needs. In ing, transactions and events have equal relevance and they must be recorded to arrive at the financial results of the business concern. Self Assessment Questions 4: 1. A transaction is a business activity where there is transfer of money or money’s worth. True or False 2. An event happens as a result of internal policy of an organization. True or False 3. Business transactions and events have equal importance in finding the financial results of the business concern. True or False? 4. Identify the following as transactions or events as the case may be. i) Depreciation of assets ii) Tax rates iii) Acquisition of assets iv) Selling an asset v) Transfer of profits to Reserve Fund
3.6 Preparation of Vouchers A voucher is a document in of a business transaction. It may be a receipt, a counterfoil of a receipt, an invoice or even correspondence with
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the concerned parties. Usually in large organizations, voucher system is adopted to record payments. Some organizations will have printed voucher book and each voucher contains the number of voucher, date, the name of payee to whom the payment is made, the amount, the purpose for which payment is made, signature of the person authorized to pay and the person who receives the payment. For instance, Ram has supplied to us goods worth Rs5000, for which he has given an invoice. This invoice itself can be regarded as voucher, against which the payment is made. If carriage charges of Rs100 are paid, we prepare a voucher and take the signature of the person who receives it. When we pay cash, the receiver will give us a receipt, that itself becomes a voucher. Vouchers are often prepared basing on the invoices received or goods received returns. The actual payment may be made partially or completely and it may be made in course of time. In such cases, they are entered in Voucher . The payment of a voucher is recorded in cheque . The system has the following advantages: 1. It safeguards all cash disbursements 2. Total amount payable to creditors can be found out with the help of unpaid 3. vouchers. 4. Internal check is ensured 5. Information about future cash requirements can be found out. However, the system is not suitable for small organizations because it involves personnel and the cost of maintenance. Self Assessment Questions 5: 1. Voucher system is adopted to record payments. True or False? 2. Voucher system is suitable for small organizations. True or False?
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3. Voucher is a document showing the__________for which payment is made. 4. Voucher system ensures internal check . True or False?
3.7 Financial statements and their nature Financial statements are prepared to find out the profit or loss at the end of an ing period. In a trading concern, trading and profit and loss are prepared. The purpose of preparing trading is to find out the gross profit / loss. Similarly, profit and loss is prepared to find out net profit / loss. Both these s are revenue s. In other words, all revenue receipts and revenue payments are considered. Revenue expenses are those which are incurred in day to day business activities. Examples may include wages, carriage expenses, insurance paid on stocks, salaries, printing, stationary, istrative expenses, selling expenses and so on. Revenue receipts are called incomes and the examples include rent received, sales made, interest received,
dividend
received,
discount
received,
royalty
received,
compensation received etc. More details about trading and profit and loss are given in Unit 7. After preparing final s, a balance sheet is prepared containing capital and liabilities on one side and assets on the other side of a statement. Balance sheet is a statement of affairs and not an . Liabilities of a business include trade creditors, bills payable, bank over draft, loans payable, outstanding expenses, pre-received incomes etc. Capital of the owner, which is called equity, is added with liabilities on the left side of the balance sheet. Assets of a business include fixed assets like buildings, plant, machinery, furniture etc; current assets like sundry debtors, bills receivable, closing stock of materials, outstanding incomes, prepaid Page No.: 47
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expenses, cash in hand, cash at bank etc., Trading or profit and loss and balance sheet are prepared at the end of a particular ing period, say one year. In Unit 7, details about balance sheet preparation are given. Self Assessment Questions 6: 1. Trading and Profit and loss are revenue s. True or False? 2. What is the purpose of preparing Trading ? 3. What is the end result of preparing profit and loss ? 4. Is balance sheet an ? What is it otherwise? 5. What items are shown on the left hand side of balance sheet? 6. Assets are shown on which side of balance sheet? 7. What is the purpose of preparing a balance sheet?
3.8 ing equation The preparation of balance sheet is the final step in ing process. The ing equation indicates that the sources of funds should be equal to uses of funds. In other words, proprietor’s equity and liabilities to outsiders should be equal to assets. Sources of Funds = Application of funds
OR
Owner’s equity
= Asset
OR
= Assets
OR
Owner’s equity + outside liabilities L+P
=
A, where L is liabilities, P is
proprietor’ equity and A means assets. From this equation, the following expressions can be obtained L=A–P P=A–L A – L – P = Zero
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Self Assessment Questions 7: 1. Liabilities plus Equity is equal to ____________________________. 2. Assets minus liabilities to outsiders is equal to __________________. 3. If assets are Rs.5 lakhs, liabilities are Rs.3 lakhs, find out equity. 4. If Owner’s equity is Rs3 lakhs, Outsider liabilities are Rs.2 lakhs, Owner’s share of profit is Rs.1 lakhs, find out the total value of assets. 5. Every transaction influences balance sheet and it is shown by ing equation True or False?
3.9 Effect of Transactions on ing Equation As said earlier, every transaction has its effect on the balance sheet equation. This has been amply illustrated while discussing the meaning of double entry. The dual aspect of a transaction is reflected on the balance sheet, ultimately making liabilities side equal to asset side of a balance sheet. The following are the possible sets of transactions that can change the values of assets and liabilities but the changes are equal on both sides of balance sheet. 1. Increase in one asset with a decrease in another asset. For example, goods are purchased for cash. It affects cash balance to come down and stock balance increases and both of them are assets. 2. An increase in one asset with an equal amount of increase in liability. For example, a building is purchased for business for Rs500000 by raising a loan from bank. Here an asset is created and a loan is also raised and the balance sheet tallies. 3. An increase in asset with an equivalent rise in the proprietor’s equity. When an additional capital is obtained in cash, Cash on the asset side increases and capital on the liabilities side also increases with the same amount.
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4. An increase in a liability
Unit 3
causing an equal amount of decrease in
another liability. Ex: A bank’s overdraft is paid out of debenture amount collected. Here debenture liability increases with an equal amount of decrease in bank’s overdraft. 5. Increase in a liability, followed by decrease in proprietor’s equity. If debentures are issued for the purpose of paying redeemable preference shares, the owner’s equity gets reduced and an additional liability of debentures is added up. 6. Decrease in an asset and equivalent decrease in a liability. For instance, bills payable are paid out by cheque. The bank balance which is an asset is decreased and correspondingly the liability of bills payable is also decreased. 7. Decrease in an asset and corresponding decrease in owner’s equity. If capital is paid out for any reason, cash to that extent is decreased on the asset side and the capital is reduced to that extent on the liabilities side. Self Assessment Questions 8: 1. The principle of ing equation is that the total of assets should be equal to total of liabilities side. True or False. 2. Show how the ing equation is affected in the following transactions a. Lal started business with Rs20000 cash b. He purchased goods on credit Rs.80000 c. He sold goods costing Rs.25000 for Rs.30000 on cash. d. He purchased furniture for cash Rs14000 e. He sold goods to Hari costing Rs500 for Rs.800 f.
He received dividend on securities Rs.2000
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3.10 Meaning and rules of debit and credit Debit and credit are the two words basic for ing. Debit represents receiving aspect and credit represents giving aspect. However the meaning of debit and credit depends upon the classification of s. An , as we have understood is a summary of transactions pertaining to a particular head. The may be personal, real and nominal. Before grasping the rules of debit and credit as applicable to various classes of s, it is necessary to know how an appears in the books of s. An is recorded in a ‘ T ‘ form, the left side indicating the debit of the and the right side representing the credit of the . On the left side of an the columns are - date, particulars, ledger folio and amount and similarly on the right side (credit side), the columns are date, particulars, ledger folio and amount. The following illustration may be observed: CASH Debit Side Date particulars
Credit Side Ledger
Amount
Folio
(Rs)
2005
Date Particulars
Amount
Folio
(Rs)
2005
Jan. 1 To Balance brought down
20000
Jan 05 By salaries
Jan15 To Joseph
35
10900
Jan 25 By Furniture
Jan 28 To Sales
18
108900
10900 123
6000
Jan 30 By purchases
19
58800
Jan 31 By Rent
298
7500
By balance c/d 139800 Feb 1 To balance b / d
Ledger
56600 139800
56600
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Observe from the above form of an the following: 1. The balance brought down is the closing balance of the last month, December, 2004 2. The amount received from Joseph is Rs.10900 and his is prepared in the in the page number 35 of the ledger. Similarly from sales and its is found in the ledger folio (page) 18. 3. The credit side contains payment of cash towards salary, furniture, purchase of goods and rent respectively on different dates. 4. The balance carried down is the closing balance on the last day of January, 2005 and it is brought down as opening balance on Feb,1 5. On the debit side, ‘To’ and credit side ‘By’ are the prefix used for every entry as a matter of convention. There is a standard form of drawing a ledger . It is similar to that of a book issued by a bank. The above illustration is shown in the standard form. CASH Date
Particulars
2005
Post. Ref.
Debit
Credit
Balance
LF
Rs
Rs
Rs
Jan 1
Opening balance b /d
20000
20000
Jan 5
Salaries
Jan 15
Joseph
Jan 25
Furniture
Jan 28
Sales
18
Jan 30
Purchases
19
58800
64100
Jan 31
Rent
298
7500
56600
10900 35
10900
123
9100 20000
6000 108900
14000 122900
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The rules of debit and credit for different classes of s are the following 1. In respect of personal s : Debit the receiver and credit the giver 2. In respect of real s
: Debit what comes in and credit what goes out
3. In respect of nominal s
: Debit all expenses and losses and credit all incomes and gains.
The following steps should be ed to apply debit and credit principles a) Identify the s affected in a transaction from business point of view b) If a personal is involved, find whether the person is receiver or giver of benefit c) If the real is affected, find whether it is coming in or going out d) If the is nominal , find out if it is expenditure or income or loss or gain. e) Apply the suitable principle to debit or credit the respective affected . Illustration: Show what s are affected in the following transactions. Also show the ing equation for the transactions 1. Madan commenced business with cash 2. Purchased goods on credit 3. Withdrew for private use 4. Goods purchased for cash 5. Paid wages 6. Paid to creditors
Rs. 70000 14000 3000 12000 5000 10
7. Sold goods on credit (cost price Rs18000)
22000
8. Sold goods for cash (Cost price Rs.3000)
6000
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9. Purchased furniture for cash
5000
10. Received from debtors
11000
Solution: Transaction No
s affected in the books of the business
to be debited and to be credited
01
Capital and cash
Cash being real is debited and Capital being personal is credited
02
Goods and creditors
Goods being real is debited and creditor’s being personal is credited
03
Personal drawings and cash
Drawings being personal is debited and cash being real is credited
04
Goods and cash
Goods being real is debited and cash being real is credited
05
Wages and cash
Wages being nominal is debited and cash being real is credited
06
Cash and creditors
Creditor’s being personal is debited and cash being real is credited
07
Goods , Debtor’s and profit
Debtor’s being personal is debited, profit transferred to capital being personal is credited and goods being real is also credited
09
Furniture and Cash
Furniture being real is debited and cash being real is credited
10
Cash and debtor’s
Cash being real is debited and debtor’s being personal is credited.
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ing equations for the transactions Transaction
Assets = Cash
01
+
Goods +
Liabilities Equity Debtors +
Furniture + =
+
Creditors +
70000
02 - 3000
04
- 12000
05
- 5000
06
-10000
07 +6000
09
-5000
10
+11000
End equation
52000+
14000 -3000
+12000 -5000 -10000 -18000
08
Madan’s capital
70000 14000
03
Owners
22000
+4000
- 3000
+3000 5000 - 11000
5000
+
11000 +
5000 +
73000
4000 +
69000
73000
Self Assessment Questions 9: 1. Rules of debit and credit are different for different types of s. True or False? 2. Debit the receiver and _______________ the giver. 3. Debit all assets and credit all ________________. 4. Debit _____________________ and credit what goes out. 5. All expenses are ___________________ type of s. 6. Incomes and gains are always _________ as per principle of debit and credit for nominal s. 7. Capital is ____________________ when it is withdrawn. 8. When cash is received from debtors, debtor’s is ______ .
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Terminal Questions 1.
The ing equation is Assets = _______________
+
_______________. 2.
State the meaning of double entry book keeping.
3.
State the remarkable difference between cash system and mercantile system of
double entry.
4.
State the important ing trail.
5.
Classify the following s as personal, real and nominal a. Land
b. outstanding expenses
c. capital d. ABC co Ltd., f. salaries 6.
e. Discount received
A voucher is a document which _______________ cash disbursement.
7.
What is a trading ?
8.
The result of a trading is ____________ or _______________.
9.
Net profit or net loss is the result of ____________________.
10.
Give a list of any four items of assets.
11.
Name any four items that appear on the liabilities side of balance sheet.
12.
Balance sheet is a ________________________ of affairs of a business.
13.
Find the value of the following: a. If the total assets are Rs87000 and the liabilities are Rs47000, find out the amount of capital.
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b. If the capital of proprietor is Rs400000 and the total assets are Rs600000, what is the amount of liabilities to outsiders? c. If creditors are Rs56000, bank overdraft is Rs100000 and outstanding expenses are Rs.8000, what is the total amount of assets? d. Fixed assets are Rs.70000 and current assets are Rs.100000 and the creditors are Rs.30000. What is capital? 14.
Show the effect of the following transactions on assets, liabilities and owner’s Equity of the business: i. Ganesh started business with a capital of Rs.40000 9.
He purchased stock of goods Rs.30000
10.
Sold goods on cash Rs.40000, cost of which is Rs25000
11.
Bought goods on credit Rs.10000
12.
Sold goods on credit for Rs18000, the cost of which being
Rs10000 13.
Paid Sales commission Rs.5000
14.
Received cash discount Rs3000
15.
Purchased furniture Rs.10000.
16.
Received cash from debtors Rs.15000
17.
Paid cash to creditors Rs.6000.
Answer for Self Assessment Questions Self Assessment Questions 1:
1. Double entry system 2. a. Stock of goods increases and cash balance is reduced b. Delivery Van is an asset and the supplier of the delivery van becomes a creditor and it appears as liability
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c. Creditor’s balance is reduced on liabilities side and cash paid brings down the cash balance on the asset side d. The bank balance comes down on asset side and capital is reduced by the amount of drawings on the liabilities side. Self Assessment Questions 2: 1. Cash system, Mercantile system 2. False 3. True 4. False 5. True. Self Assessment Questions 3: 1. True 2. Personal, real and nominal 3. True
i. Personal ii. Nominal iii. Real iv. Personal v. Real vi. Real vii. Personal viii. Personal ix. Nominal x. Nominal Self Assessment Questions 4: 1. True 2. True Page No.: 58
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3. True 4. i) Event ii) Event iii) Transaction iv) Transaction v) Event Self Assessment Questions 5:
1. True 2. False 3. Purpose 4. True Self Assessment Questions 6: 1. True 2. To find out gross profit or gross loss 3. To find out net profit or loss 4. No. It is a statement of assets and liabilities 5. Capital, liabilities are shown on the left hand side of Balance Sheet 6. On right hand side 7. To know the financial position of the business. Self Assessment Questions 7: 1. Assets 2. Equity 3. Rs.2 lakh 4. Assets are Rs.6 lakh 5. True Self Assessment Questions 8: a) True b) i.
Lal’s capital increases on liabilities side and Cash balance increases on the asset side by Rs.20000
ii. Creditors on liabilities side and stock of goods on the asset side increase by Rs.80000 Page No.: 59
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iii. Profit of Rs.5000 is added to capital on the liabilities side, stock of goods
is reduced by Rs.25000 and Cash balance increases by
Rs.30000 iv. Furniture value increases by Rs.14000 on the asset side, Cash balance is reduced by Rs.14,000, thus making no effect on liabilities side. v. Hari appears as debtor on the asset side for Rs.800, Stock of goods gets reduced by Rs.500 on the asset side but on liability side the profit of Rs.300 is added to capital. vi. Cash balance on asset side increases by Rs2000, dividend being income results in profit
of Rs.2000 and so added to capital on
liability side. Self Assessment Questions 9: 1. True 2. Credit 3. Liabilities 4. What comes in 5. Nominal 6. Credited 7. Debited 8. Credited. Answers for Terminal Questions: 1. Liabilities + Owner’s capital 2. Every transaction has two aspects, debit and credit and for every debit, there is equivalent credit. 3. 3.All cash transactions are recorded in cash system, while both cash and credit transactions are recorded in mercantile system
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4. Identification of s affected in transactions, recording them in Journal, post them to ledger, balance the ledger s, prepare trial balance, finally prepare final s. 5. a) Real b) Personal c) personal d) Personal e) Nominal f) Nominal 6. Records 7. showing the result of trading activities (Purchase and sale of goods) 8. Gross profit or gross loss 9. Profit and Loss 10. Land and Buildings, Plant and Machinery, Furniture and Fixtures, Debtors, Cash in hand, and Bank, Closing stock etc. 11. Bills Payable, creditors, Bank overdraft, Capital etc., 12. Statement 13. a) Rs.40000 b) Rs.200000 c) Rs.164000 d) Rs.140000 14. Refer to Illustration under sub head 9.
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Unit 3
Unit 3
Double Entry ing
Structure: 3.1
Introduction
3.2
Meaning of double entry ing
3.3
Cash and mercantile system of double entry system
3.4
ing trail
3.5
Transactions and events
3.6
Preparation of vouchers
3.7
Financial statements and their nature
3.8
ing equation
3.9
Effect of transactions on ing equation
3.10 Meaning and rules of debit and credit
3.1 Introduction The dual aspect concept of ing is a full-proof system of recording, having the advantage of internal checking. The very fact that every transaction is recorded of its debit and credit aspects indicates that the final s of an organization takes into consideration every small or big transaction and the impact is every is absorbed in the preparation of final financial statements. Double entry book keeping is definitely an improvement and more systematically designed than single entry system, where only a few personal and real s are considered. In this unit, the process of ing – recording, journalizing, posting, ledger balancing, preparation of trial balance, preparation of final statements of s – is described along with the effect of every transaction on ing equation. The rules of debit and credit as applicable to various types of s are also discussed.
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Unit 3
Learning Objectives: After studying this unit, you should be able to understand the following: 1. To know what double entry book keeping means. 2. To understand the process of ing, known as ing trail. 3. To know the nature of financial statements. 4. To formulate an ing equation basing on debits and credits. 5. To know practically the impact of each transaction on the ing Equation. 6. To summarize the rules of debit and credit as applicable to different types of s. The students should be able to appreciate the double entry system and know the ing process.
3.2 Meaning of Double Entry ing We have learnt that the dual aspect recording is the most important ing concept. According to the concept, every business transaction involves receiving aspect and giving aspect. If capital is brought in by the owner of the business unit, the owner is the giver of the benefit and the business unit is the receiver of the benefit. It is a liability to the business unit and it is equally balanced by an asset in the business unit, in the form of cash received towards capital. Therefore every liability is represented by an asset. This is also expressed as every debit has an equivalent credit. The logic adopted in double entry ing can well be understood by an illustration. We shall consider five transactions and show how they are ed for in the books of the business. a. Mr. Abhi brings Rs.100000 cash as capital into his business. b. He purchases furniture to his shop Rs.10000 c. He buys goods for cash Rs.50000 Page No.: 39
Financial and Management ing
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d. He sells goods worth Rs.30000 for Rs.40000 on credit to Arjun e. He pays wages to servants Rs.1000 In the first transaction, the business receives capital in cash and so capital and cash are affected. Capital is a liability and cash is an asset to the business. Capital Rs.100000 (Liability) = Cash Rs.100000 (Asset) In the second transaction, Furniture is purchased for cash and so furniture and cash are affected. This transaction can be reflected as under Capital
Rs.100000
Cash Rs. (100000- 10000)
90000
Furniture
10000
100000
100000
The third transaction is buying goods for cash, which means that stock of goods are received and cash balance is reduced and this can be reflected in the statement as under. Capital
Rs.100000
Cash Rs (90000 – 50000)
40000
Furniture
10000
Stock of goods
50000
100000
100000
The fourth transaction is a credit transaction of selling goods for Rs40000, the cost of which is only Rs. 30000 to Arjun. So the s affected are goods , Arjun and profit . Since the profit belongs to the owner and it is fair to add it to the owner’s capital. The effect of this transaction can appear on the statement as shown below:
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Financial and Management ing
Capital
Rs. 100000
Profit
10000
Unit 3
Cash
40000
Furniture
10000
Stock of goods(50000-30000)
20000
Arjun (Debtor)
40000
110000
110000
The fifth transaction is payment of wages, which means that cash is affected and profit is reduced as a result of the expenditure(wages ). This changes the statement as shown below: Capital
Rs. 100000
Profit (10000-1000) 9000
109000
Cash (40000 – 1000)
39000
Furniture
10000
Stock of goods
20000
Arjun
40000 109000
From the above illustration, it is clear that every transaction has dual effect and
recording these two aspects which are known as debit and credit
aspects is the fundamental idea behind double entry system of book keeping. So the meaning of double entry system is that every transaction is recorded by identifying the two or more s affected therein and suitably reflect them in the financial statements. This is a system where internal cross checking is ensured. Self Assessment Questions 1:
1. The system of recording transactions based on dual aspect concept is called i)
Double system
ii) Double entry system iii) Single entry system
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2. Show the dual aspect effect of the following transactions on the assets and liabilities of business. a. Purchased goods for cash Rs.80000 b. Purchased delivery van on credit for Rs.400000 c. Paid Rs.5000 to a supplier of goods on credit d. The proprietor withdrew Rs.20000 from the bank of business for Personal expenses.
3.3 Cash and mercantile system of double entry system There are two systems of double entry book keeping namely cash system and mercantile system. In case of cash system, transactions are recorded only if cash is received or paid. Government ing is done basing on this system. On the other hand, mercantile system is one where both cash and credit transactions are recorded. Besides, outstanding expenses or incomes also find place in the mercantile system. It is fair enough to adopt mercantile system because when an event takes place, it gets recorded irrespective of its immediate impact on the cash position. In case of credit transactions, cash does not flow immediately but it takes place at a future point of time. Transactions like sales
or purchases on credit, salary
payable, rent receivable, interest accrued but not received, depreciation provided etc., influence on the financial position of the business unit and therefore they should be recorded. Mercantile system facilitates this. Hence double entry recognizes the fact that every transaction, whether cash or credit, influences at least two s – one representing debit aspect and another credit aspect. Self Assessment Questions 2:
1. The two systems of double entry book keeping are ________ and __________ .
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2. Government ing is based on mercantile system. True or false? 3. All credit transactions come under mercantile system. True or False? 4. Interest receivable, rent receivable, dividend receivable are recorded in cash system of book keeping. True or False?
5. Profit as per cash system and mercantile system of double entry show different figures. True or False
3.4 ing Trail ing trail is the process of identifying the transactions or events, preparation of vouchers, recording them as journal entries, preparation of ledger
s,
balancing
the
ledger
s,
incorporating
all
adjustments, preparation of a trail balance and finally preparing the financial statements and balance sheet. It is a sequential order in which the ing process flows. All transactions are recorded first in a book called journal. The transactions are posted to the respective s, maintained in a separate book called ledger. Later, all adjustments such as opening entries, closing entries, adjusting entries are made in a book called journal proper and there from, the ledger balances are summarized to form a trial balance. From trial balance, trading , profit and loss and balance sheet are prepared. The identification of the s affected in the transactions is a major task. There are three types of s, namely personal s, real s and nominal s. An is a summary of transactions pertaining to a particular head. Personal s include s of natural persons, such as Abhi , Mohan’s , Sonali etc; artificial personal s such as Syndicate Bank , X Co. Ltd , a club etc;
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representative personal like outstanding rent , salaries payable etc. Real s are those which may be tangible real s and intangible real s. Tangible real s relate to things that can be touched, felt, physically measurable. Building , furniture , stock , cash etc are tangible real s. Intangible real s are such that they can not be seen or touched. They can be measured in of money such as goodwill, patent rights etc. Nominal s are also known as impersonal s. They are in the form of expenses or losses, incomes or gains. They do not really exist in physical form, but behind every nominal cash is involved. For example, salary is a nominal and when salary is paid, the reality is the cash goes out and there is nothing salary in physical form. Therefore salary is regarded as nominal . Similarly all expenses and losses and all incomes and gains s are regarded as nominal s. Self Assessment Questions 3: 1. ing trial is a process starting from identifying the transactions or events to preparation of final statement of s. True or False 2. There are three types of s namely ____________ and ________________. 3. A trial balance is the summarized form of ledger balances. True or False 4. Classify the following s into personal, real and nominal i) Bank of Baroda
ii) Printing and stationery expenses
Machinery Outstanding salary iii) Copy Rights iv) Sock of goods v) Loan given to Krishna vi) Loan from Bank
vii) Dividend received
viii) Discount
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3.5 Transactions and Events A transaction is a business activity involving transfer of money or money’s worth. It may be cash transaction or credit transaction. In cash transaction cash flows immediately where as in credit transaction cash will be paid or received at future date. Assets acquired or sold, liabilities incurred or paid, expenses paid or payable, incomes received or receivable – are all business transactions. But there are events which are neither cash nor credit transactions but it has an impact on the financial position of a business. These events may include provision for bad debts, provision for repairs, depreciation, taxation, transfer of profit towards reserve fund or sinking fund or investment fluctuation fund, etc., Events happen as a result of internal policies or external needs. In ing, transactions and events have equal relevance and they must be recorded to arrive at the financial results of the business concern. Self Assessment Questions 4: 1. A transaction is a business activity where there is transfer of money or money’s worth. True or False 2. An event happens as a result of internal policy of an organization. True or False 3. Business transactions and events have equal importance in finding the financial results of the business concern. True or False? 4. Identify the following as transactions or events as the case may be. i) Depreciation of assets ii) Tax rates iii) Acquisition of assets iv) Selling an asset v) Transfer of profits to Reserve Fund
3.6 Preparation of Vouchers A voucher is a document in of a business transaction. It may be a receipt, a counterfoil of a receipt, an invoice or even correspondence with
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the concerned parties. Usually in large organizations, voucher system is adopted to record payments. Some organizations will have printed voucher book and each voucher contains the number of voucher, date, the name of payee to whom the payment is made, the amount, the purpose for which payment is made, signature of the person authorized to pay and the person who receives the payment. For instance, Ram has supplied to us goods worth Rs5000, for which he has given an invoice. This invoice itself can be regarded as voucher, against which the payment is made. If carriage charges of Rs100 are paid, we prepare a voucher and take the signature of the person who receives it. When we pay cash, the receiver will give us a receipt, that itself becomes a voucher. Vouchers are often prepared basing on the invoices received or goods received returns. The actual payment may be made partially or completely and it may be made in course of time. In such cases, they are entered in Voucher . The payment of a voucher is recorded in cheque . The system has the following advantages: 1. It safeguards all cash disbursements 2. Total amount payable to creditors can be found out with the help of unpaid 3. vouchers. 4. Internal check is ensured 5. Information about future cash requirements can be found out. However, the system is not suitable for small organizations because it involves personnel and the cost of maintenance. Self Assessment Questions 5: 1. Voucher system is adopted to record payments. True or False? 2. Voucher system is suitable for small organizations. True or False?
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3. Voucher is a document showing the__________for which payment is made. 4. Voucher system ensures internal check . True or False?
3.7 Financial statements and their nature Financial statements are prepared to find out the profit or loss at the end of an ing period. In a trading concern, trading and profit and loss are prepared. The purpose of preparing trading is to find out the gross profit / loss. Similarly, profit and loss is prepared to find out net profit / loss. Both these s are revenue s. In other words, all revenue receipts and revenue payments are considered. Revenue expenses are those which are incurred in day to day business activities. Examples may include wages, carriage expenses, insurance paid on stocks, salaries, printing, stationary, istrative expenses, selling expenses and so on. Revenue receipts are called incomes and the examples include rent received, sales made, interest received,
dividend
received,
discount
received,
royalty
received,
compensation received etc. More details about trading and profit and loss are given in Unit 7. After preparing final s, a balance sheet is prepared containing capital and liabilities on one side and assets on the other side of a statement. Balance sheet is a statement of affairs and not an . Liabilities of a business include trade creditors, bills payable, bank over draft, loans payable, outstanding expenses, pre-received incomes etc. Capital of the owner, which is called equity, is added with liabilities on the left side of the balance sheet. Assets of a business include fixed assets like buildings, plant, machinery, furniture etc; current assets like sundry debtors, bills receivable, closing stock of materials, outstanding incomes, prepaid Page No.: 47
Financial and Management ing
Unit 3
expenses, cash in hand, cash at bank etc., Trading or profit and loss and balance sheet are prepared at the end of a particular ing period, say one year. In Unit 7, details about balance sheet preparation are given. Self Assessment Questions 6: 1. Trading and Profit and loss are revenue s. True or False? 2. What is the purpose of preparing Trading ? 3. What is the end result of preparing profit and loss ? 4. Is balance sheet an ? What is it otherwise? 5. What items are shown on the left hand side of balance sheet? 6. Assets are shown on which side of balance sheet? 7. What is the purpose of preparing a balance sheet?
3.8 ing equation The preparation of balance sheet is the final step in ing process. The ing equation indicates that the sources of funds should be equal to uses of funds. In other words, proprietor’s equity and liabilities to outsiders should be equal to assets. Sources of Funds = Application of funds
OR
Owner’s equity
= Asset
OR
= Assets
OR
Owner’s equity + outside liabilities L+P
=
A, where L is liabilities, P is
proprietor’ equity and A means assets. From this equation, the following expressions can be obtained L=A–P P=A–L A – L – P = Zero
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Financial and Management ing
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Self Assessment Questions 7: 1. Liabilities plus Equity is equal to ____________________________. 2. Assets minus liabilities to outsiders is equal to __________________. 3. If assets are Rs.5 lakhs, liabilities are Rs.3 lakhs, find out equity. 4. If Owner’s equity is Rs3 lakhs, Outsider liabilities are Rs.2 lakhs, Owner’s share of profit is Rs.1 lakhs, find out the total value of assets. 5. Every transaction influences balance sheet and it is shown by ing equation True or False?
3.9 Effect of Transactions on ing Equation As said earlier, every transaction has its effect on the balance sheet equation. This has been amply illustrated while discussing the meaning of double entry. The dual aspect of a transaction is reflected on the balance sheet, ultimately making liabilities side equal to asset side of a balance sheet. The following are the possible sets of transactions that can change the values of assets and liabilities but the changes are equal on both sides of balance sheet. 1. Increase in one asset with a decrease in another asset. For example, goods are purchased for cash. It affects cash balance to come down and stock balance increases and both of them are assets. 2. An increase in one asset with an equal amount of increase in liability. For example, a building is purchased for business for Rs500000 by raising a loan from bank. Here an asset is created and a loan is also raised and the balance sheet tallies. 3. An increase in asset with an equivalent rise in the proprietor’s equity. When an additional capital is obtained in cash, Cash on the asset side increases and capital on the liabilities side also increases with the same amount.
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Financial and Management ing
4. An increase in a liability
Unit 3
causing an equal amount of decrease in
another liability. Ex: A bank’s overdraft is paid out of debenture amount collected. Here debenture liability increases with an equal amount of decrease in bank’s overdraft. 5. Increase in a liability, followed by decrease in proprietor’s equity. If debentures are issued for the purpose of paying redeemable preference shares, the owner’s equity gets reduced and an additional liability of debentures is added up. 6. Decrease in an asset and equivalent decrease in a liability. For instance, bills payable are paid out by cheque. The bank balance which is an asset is decreased and correspondingly the liability of bills payable is also decreased. 7. Decrease in an asset and corresponding decrease in owner’s equity. If capital is paid out for any reason, cash to that extent is decreased on the asset side and the capital is reduced to that extent on the liabilities side. Self Assessment Questions 8: 1. The principle of ing equation is that the total of assets should be equal to total of liabilities side. True or False. 2. Show how the ing equation is affected in the following transactions a. Lal started business with Rs20000 cash b. He purchased goods on credit Rs.80000 c. He sold goods costing Rs.25000 for Rs.30000 on cash. d. He purchased furniture for cash Rs14000 e. He sold goods to Hari costing Rs500 for Rs.800 f.
He received dividend on securities Rs.2000
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Financial and Management ing
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3.10 Meaning and rules of debit and credit Debit and credit are the two words basic for ing. Debit represents receiving aspect and credit represents giving aspect. However the meaning of debit and credit depends upon the classification of s. An , as we have understood is a summary of transactions pertaining to a particular head. The may be personal, real and nominal. Before grasping the rules of debit and credit as applicable to various classes of s, it is necessary to know how an appears in the books of s. An is recorded in a ‘ T ‘ form, the left side indicating the debit of the and the right side representing the credit of the . On the left side of an the columns are - date, particulars, ledger folio and amount and similarly on the right side (credit side), the columns are date, particulars, ledger folio and amount. The following illustration may be observed: CASH Debit Side Date particulars
Credit Side Ledger
Amount
Folio
(Rs)
2005
Date Particulars
Amount
Folio
(Rs)
2005
Jan. 1 To Balance brought down
20000
Jan 05 By salaries
Jan15 To Joseph
35
10900
Jan 25 By Furniture
Jan 28 To Sales
18
108900
10900 123
6000
Jan 30 By purchases
19
58800
Jan 31 By Rent
298
7500
By balance c/d 139800 Feb 1 To balance b / d
Ledger
56600 139800
56600
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Financial and Management ing
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Observe from the above form of an the following: 1. The balance brought down is the closing balance of the last month, December, 2004 2. The amount received from Joseph is Rs.10900 and his is prepared in the in the page number 35 of the ledger. Similarly from sales and its is found in the ledger folio (page) 18. 3. The credit side contains payment of cash towards salary, furniture, purchase of goods and rent respectively on different dates. 4. The balance carried down is the closing balance on the last day of January, 2005 and it is brought down as opening balance on Feb,1 5. On the debit side, ‘To’ and credit side ‘By’ are the prefix used for every entry as a matter of convention. There is a standard form of drawing a ledger . It is similar to that of a book issued by a bank. The above illustration is shown in the standard form. CASH Date
Particulars
2005
Post. Ref.
Debit
Credit
Balance
LF
Rs
Rs
Rs
Jan 1
Opening balance b /d
20000
20000
Jan 5
Salaries
Jan 15
Joseph
Jan 25
Furniture
Jan 28
Sales
18
Jan 30
Purchases
19
58800
64100
Jan 31
Rent
298
7500
56600
10900 35
10900
123
9100 20000
6000 108900
14000 122900
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The rules of debit and credit for different classes of s are the following 1. In respect of personal s : Debit the receiver and credit the giver 2. In respect of real s
: Debit what comes in and credit what goes out
3. In respect of nominal s
: Debit all expenses and losses and credit all incomes and gains.
The following steps should be ed to apply debit and credit principles a) Identify the s affected in a transaction from business point of view b) If a personal is involved, find whether the person is receiver or giver of benefit c) If the real is affected, find whether it is coming in or going out d) If the is nominal , find out if it is expenditure or income or loss or gain. e) Apply the suitable principle to debit or credit the respective affected . Illustration: Show what s are affected in the following transactions. Also show the ing equation for the transactions 1. Madan commenced business with cash 2. Purchased goods on credit 3. Withdrew for private use 4. Goods purchased for cash 5. Paid wages 6. Paid to creditors
Rs. 70000 14000 3000 12000 5000 10
7. Sold goods on credit (cost price Rs18000)
22000
8. Sold goods for cash (Cost price Rs.3000)
6000
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Financial and Management ing
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9. Purchased furniture for cash
5000
10. Received from debtors
11000
Solution: Transaction No
s affected in the books of the business
to be debited and to be credited
01
Capital and cash
Cash being real is debited and Capital being personal is credited
02
Goods and creditors
Goods being real is debited and creditor’s being personal is credited
03
Personal drawings and cash
Drawings being personal is debited and cash being real is credited
04
Goods and cash
Goods being real is debited and cash being real is credited
05
Wages and cash
Wages being nominal is debited and cash being real is credited
06
Cash and creditors
Creditor’s being personal is debited and cash being real is credited
07
Goods , Debtor’s and profit
Debtor’s being personal is debited, profit transferred to capital being personal is credited and goods being real is also credited
09
Furniture and Cash
Furniture being real is debited and cash being real is credited
10
Cash and debtor’s
Cash being real is debited and debtor’s being personal is credited.
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Financial and Management ing
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ing equations for the transactions Transaction
Assets = Cash
01
+
Goods +
Liabilities Equity Debtors +
Furniture + =
+
Creditors +
70000
02 - 3000
04
- 12000
05
- 5000
06
-10000
07 +6000
09
-5000
10
+11000
End equation
52000+
14000 -3000
+12000 -5000 -10000 -18000
08
Madan’s capital
70000 14000
03
Owners
22000
+4000
- 3000
+3000 5000 - 11000
5000
+
11000 +
5000 +
73000
4000 +
69000
73000
Self Assessment Questions 9: 1. Rules of debit and credit are different for different types of s. True or False? 2. Debit the receiver and _______________ the giver. 3. Debit all assets and credit all ________________. 4. Debit _____________________ and credit what goes out. 5. All expenses are ___________________ type of s. 6. Incomes and gains are always _________ as per principle of debit and credit for nominal s. 7. Capital is ____________________ when it is withdrawn. 8. When cash is received from debtors, debtor’s is ______ .
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Financial and Management ing
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Terminal Questions 1.
The ing equation is Assets = _______________
+
_______________. 2.
State the meaning of double entry book keeping.
3.
State the remarkable difference between cash system and mercantile system of
double entry.
4.
State the important ing trail.
5.
Classify the following s as personal, real and nominal a. Land
b. outstanding expenses
c. capital d. ABC co Ltd., f. salaries 6.
e. Discount received
A voucher is a document which _______________ cash disbursement.
7.
What is a trading ?
8.
The result of a trading is ____________ or _______________.
9.
Net profit or net loss is the result of ____________________.
10.
Give a list of any four items of assets.
11.
Name any four items that appear on the liabilities side of balance sheet.
12.
Balance sheet is a ________________________ of affairs of a business.
13.
Find the value of the following: a. If the total assets are Rs87000 and the liabilities are Rs47000, find out the amount of capital.
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b. If the capital of proprietor is Rs400000 and the total assets are Rs600000, what is the amount of liabilities to outsiders? c. If creditors are Rs56000, bank overdraft is Rs100000 and outstanding expenses are Rs.8000, what is the total amount of assets? d. Fixed assets are Rs.70000 and current assets are Rs.100000 and the creditors are Rs.30000. What is capital? 14.
Show the effect of the following transactions on assets, liabilities and owner’s Equity of the business: i. Ganesh started business with a capital of Rs.40000 9.
He purchased stock of goods Rs.30000
10.
Sold goods on cash Rs.40000, cost of which is Rs25000
11.
Bought goods on credit Rs.10000
12.
Sold goods on credit for Rs18000, the cost of which being
Rs10000 13.
Paid Sales commission Rs.5000
14.
Received cash discount Rs3000
15.
Purchased furniture Rs.10000.
16.
Received cash from debtors Rs.15000
17.
Paid cash to creditors Rs.6000.
Answer for Self Assessment Questions Self Assessment Questions 1:
1. Double entry system 2. a. Stock of goods increases and cash balance is reduced b. Delivery Van is an asset and the supplier of the delivery van becomes a creditor and it appears as liability
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c. Creditor’s balance is reduced on liabilities side and cash paid brings down the cash balance on the asset side d. The bank balance comes down on asset side and capital is reduced by the amount of drawings on the liabilities side. Self Assessment Questions 2: 1. Cash system, Mercantile system 2. False 3. True 4. False 5. True. Self Assessment Questions 3: 1. True 2. Personal, real and nominal 3. True
i. Personal ii. Nominal iii. Real iv. Personal v. Real vi. Real vii. Personal viii. Personal ix. Nominal x. Nominal Self Assessment Questions 4: 1. True 2. True Page No.: 58
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3. True 4. i) Event ii) Event iii) Transaction iv) Transaction v) Event Self Assessment Questions 5:
1. True 2. False 3. Purpose 4. True Self Assessment Questions 6: 1. True 2. To find out gross profit or gross loss 3. To find out net profit or loss 4. No. It is a statement of assets and liabilities 5. Capital, liabilities are shown on the left hand side of Balance Sheet 6. On right hand side 7. To know the financial position of the business. Self Assessment Questions 7: 1. Assets 2. Equity 3. Rs.2 lakh 4. Assets are Rs.6 lakh 5. True Self Assessment Questions 8: a) True b) i.
Lal’s capital increases on liabilities side and Cash balance increases on the asset side by Rs.20000
ii. Creditors on liabilities side and stock of goods on the asset side increase by Rs.80000 Page No.: 59
Financial and Management ing
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iii. Profit of Rs.5000 is added to capital on the liabilities side, stock of goods
is reduced by Rs.25000 and Cash balance increases by
Rs.30000 iv. Furniture value increases by Rs.14000 on the asset side, Cash balance is reduced by Rs.14,000, thus making no effect on liabilities side. v. Hari appears as debtor on the asset side for Rs.800, Stock of goods gets reduced by Rs.500 on the asset side but on liability side the profit of Rs.300 is added to capital. vi. Cash balance on asset side increases by Rs2000, dividend being income results in profit
of Rs.2000 and so added to capital on
liability side. Self Assessment Questions 9: 1. True 2. Credit 3. Liabilities 4. What comes in 5. Nominal 6. Credited 7. Debited 8. Credited. Answers for Terminal Questions: 1. Liabilities + Owner’s capital 2. Every transaction has two aspects, debit and credit and for every debit, there is equivalent credit. 3. 3.All cash transactions are recorded in cash system, while both cash and credit transactions are recorded in mercantile system
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4. Identification of s affected in transactions, recording them in Journal, post them to ledger, balance the ledger s, prepare trial balance, finally prepare final s. 5. a) Real b) Personal c) personal d) Personal e) Nominal f) Nominal 6. Records 7. showing the result of trading activities (Purchase and sale of goods) 8. Gross profit or gross loss 9. Profit and Loss 10. Land and Buildings, Plant and Machinery, Furniture and Fixtures, Debtors, Cash in hand, and Bank, Closing stock etc. 11. Bills Payable, creditors, Bank overdraft, Capital etc., 12. Statement 13. a) Rs.40000 b) Rs.200000 c) Rs.164000 d) Rs.140000 14. Refer to Illustration under sub head 9.
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