Class 11th Commerce

Class 11 Accountancy Revision Notes for Computerised Accounting System of Chapter 13

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Features of Computerised Accounting System
Computerised accounting system is based on the concept of database.
This system offers the following features:

1. Online input and storage of accounting data.
2. Printout of purchase and sales invoices.
3. Every account and transaction is assigned a unique code.
4. Grouping of accounts is done from the beginning.
5. Instant reports for management, for example: Stock Statement, Trial Balance, Income Statement, Balance Sheet, Payroll Reports, Tax Reports etc.

Automation of Accounting Process
When accounting functions are done by computerised accounting software that is known as automation of accounting process under the automation of accounting process human activity is less but accounting software is more used.
So, accounting functions like posting into ledger, Balancing, Trial Balance and Final Accounts are prepared by computer.
Stages of Automation
There are different stages of automation as:

1. Planning: Under this stage the assessment of size, and business transactions is done for which automation has to be made.
2. Selection of Accounting Software: As there are many accounting softwares available in the market. So, in this stage appropriate accounting software is to be selected according to company’s need.
3. Selection of Accounting Hardware: Under this stage of automation the computer hardware is selected. The hardware should be such that can fullfill the accounting requirement and support the accounting software.
4. Chart of Accounts: Under this stage list of required heads of accounts is prepared.
5. Grouping of Accounts: There are various transactions for Expenses, Income, Assets, Liabilities. All these transactions cannot be shown directly. So, these transactions are grouped as salary, wages, discount and commission etc.
6. Generation of Reports: This is final stage of automation under this final reports are prepared in from of Cash Book, Journal, Ledger, Trial Balance, P&L A/c and Balance Sheet etc.

Comparison of Manual and Compute red Accounting System

	Base	Manual Accounting	Computerised Accounting
1.	Identifying Financial Transactions	In this system, it is done manually according to principles.	In this system, it is also done manually according to principles.
2	Recording	In this system, entries are recorded manually and other calculations also done manually.	In this, entries are recorded manually but other calculations are done by computers.
3	Adjustment Entries	In this system, all adjustments entries are done manually.	In this system entries related to posting are done by computers.
4	Financial statement	In this system, final statements is prepared manually	In this system final statement is prepared by computer with help of software.

Sourcing of Accounting Software
India is one of software making country. So, accounting softwares are easily available in Indian Market. But it is more important to know what is your need of accounting software.
Generally, Tally accounting software is used in India which is easily available in market.
Accounting Softwares

1. Readymade Software: Readymade Softwares are the softwares that are developed not for any specific user but for the users in general. Some of the ready-made softwares available are Tally, Ex, Busy. Such softwares are economical and ready to use. Such softwares do not fulfill the requirement of very user.
2. Customised Software: Customised software means modifying the ready-made softwares to suit the specific requirements of the user Readymade softwares are modified according to the need of the business Cost of installation, maintenance and training is relatively higher than that of ready-made user. There packages are used by those medium or large business enterprises in which financial transactions are some what peculiar in nature.
3. Tailor-made Software: The softwares that are developed to meet the requirement of the user on the basis of discussion between the user and developers. Such softwares help in maintaining effective management information system. The cost of these softwares in very high and specific training for using these packages is also required.

Generic Considerations Before Sourcing Accounting Software

1. Flexibility: a computer software system must be flexible in respect of data handling and report preparing.
2. Maintenance Cost: The accounting software must be such which has less maintenance cost.
3. Size of organisation: The accounting software must be according to need and size of organisation.
4. Easy to adaptation: The accounting software must be such which is easy to apply in organisation.
5. Secrecy of data: The accounting software provide the secrecy of business data.

Preparation of Accounts Groups
Groups of accounts means classifying the accounting transactions into different heads like Assets Group, Liabilities Group, Income Group and Expenses Group. By these grouping of accounts the final Accounts are meaningful for its users.
Generation of Accounting Reports
After collecting business data, it is converted into meaningful informations. Such summarised and converted information is known as a report.
The report is more effective if it is based on accurate and timely data.

Applications of Computers in Accounting Notes Class 11 Accountancy Chapter 12

Computers are becoming indispensable in our day-to-day life. It has brought a complete revolution in every sphere of human activity. It becomes an essential tool of today’s society.

Examples of their increasing uses are; reservation in railway and air tickets, to forecast weather, preparing customer’s bill, diagnosing diseases, recording the monetary transaction of customers in the bank, etc. In fact, computers have become indispensable in almost every field of communication, commerce, industry, science and research, technology, transport.

Computers are not used only by engineers, scientists, and mathematicians but even in the typesetting for printing, TV programming, film editing, music composing, etc.

Both in the commercial and personal areas, there are so many works which we are not able to do. due to lack of time. The computer makes it possible by doing our work speedily and efficiently. Computers are nowadays being used on a large scale in business houses for a number of functions. They are used for recording and posting transactions, maintaining journals, ledgers, stock records, pay-rolls, wages records, purchases and sales records, etc. The computer performs all the accounting operations at a phenomenal speed and with a high degree of accuracy.

Limitations of a Computer System:

1. Lack of common sense.
2. Lack of feelings.
3. Lack of IQ (Intelligence Quotient).
4. Lack of decision-making.
5. Complex and rigid procedure.
6. Installation cost.
7. Frequent changes.
8. Costly maintenance.
9. Unemployment.
10. Loss of data: Backup required.

Difference between Human and Computer:
Following are the differences between Human and Computer:

1. Memory: Human memory is limited however computer’s memory has no limits.
2. Speed: is faster than human.
3. Repetitive task: can be performed by computers errorlessly.
4. Computers do not possess mind and work as directed by a human. It has no impact of emotions however human is emotional and decides on its own, which computers cannot.

Difference between Hardware and Software:

Difference between Computer and Calculator

Components of Computer:
The computer is an electronic device that stores and processes information to give meaningful results. It takes information from an input device and after processing the information, gives the processed information to an output device.

Three basic components of a computer are:

1. Input Device
2. Central Processing Unit (CPU)
3. Output Device.

Need of Computer in Accounting or Evolution of Computerised Accounting:
In past, the business transactions were limited so that they were handled manually. Trader himself or by taking the service of Accountant to maintain the books of accounts such as cashbook, journal, and ledger. As the economy starts growing, the trades also developed and the number of transactions starts increasing.

With the help of scientific development, new machines were invented which perform the large work in a short time, for e.g. billing the machine. With the substantial increase in the number of transactions, the technology advanced further. The success of a growing organization with the complexity of transactions tended to depend on resource optimization, quick decision-making, and control. Such a system of maintaining accounting records becomes convenient with the computerized accounting system.

Computers are required in accounting for the following tasks:

1. To note down business transactions.
2. Processing and maintaining payrolls.
3. Maintaining personal records.
4. Keeping effective stock control.
5. Invoicing of sales.
6. To maintain ledgers of creditors.
7. To make bills.
8. To prepare accounts of credit and debit.
9. Classification of accounting transactions through sorting; merging and updating.
10. Prepare reports in the form of ledger accounts and balance sheets.
11. Stores accounting.

Automation of Accounting Process:
An organization is a col section of interdependent decision-making units that works for the achievement of common goals. Every organization, as a system, performs the same function that accepts inputs and transforms them into outputs. Information system facilitates the decision-making regarding allocation of resources.

The information thus becomes the most important resource in business. With the increasing use of information systems in organizations. Transaction Processing Systems (TPS) have started playing important role in supporting business operations. A large number of devices are now available to automate the input process for TPS.

Transaction Processing System:
They can perform and records the daily routine transactions which are necessary to conduct the business.

Process of TPS

1. Collection of data.
2. Validation of data
3. Manipulation of data
4. Storage of data
5. Generation of output
6. Query support.

Features of Computerised Accounting System:

1. Online input and storage of accounting data.
2. Automatically update the ledger etc.
3. Printout of purchases and sales invoices.
4. Grouping of accounts.
5. Instant Reports like Stock Statement, Trial Balance, Trading and Profit, and Loss A/c, Balance Sheet, Value Added Tax (VAT), Payroll, etc.
6. Codification of accounts and transactions.

Management Information System (MIS) and Accounting Information System (AIS):
Accounting information is one of the most important information used by the management in taking decisions. However, the scope of accounting information is limited. Accounting information when contained in a computerized environment is called an accounting information system.

However, management information system is a much broader term and incorporates many functional information systems like production, marketing, research, and development, etc., besides accounting information systems.

A management information system is an information system that generates, accurate, timely, and organized information to help managers make decisions, control processes, solve problems, supervise activities and track progress.

An accounting information system identifies, collects processes, and communicates the economic information of an organization to a wide variety of users. Every accounting system is a part of an accounting information system where AIS is part of a management information system.

Meaning of Computer:
The dictionary meaning of computer is “an electronic calculating machine”. This meaning of computer does not reflect upon the true capabilities of a computer. A computer is a very versatile machine capable of performing diversified functions at an incredibly fast speed with accuracy.

It converts raw data into meaningful information. The data is fed into the computer and in case of need, it can be retrieved and converted into output.

A computer is an electronic machine that operates on given instruction and PROCESSES the INPUT DATA, to convert it into some OUTPUT.

“A computer is a data processor that can perform substantial computation, including numerous arithmetical and logical operations, without intervention by a human operator during the run.” – International Standards Organisation

‘‘A computer is a device capable of solving problems by accepting data, performing described operations on the data, and supplying the results of these operations. —U.S. Institute

Thus, a computer is an electronic device, in which a lot of information or data can be stored so Jhat the data can be used in the future. It can also perform various calculations at a very high speed.

Elements of Computer System
A Computer System is a combination of six elements:

1. Hardware
2. Software
3. People.
4. Procedure
5. Data
6. Connectivity.

1. Hardware: The hardware of a computer may be classified under the following categories:

They are further classified as follows:
Input Devices

1. Keyboard
2. Mouse
3. Joystick
4. Touch Screen
5. Scanner
6. Voice Input System
7. Magnetic Ink Character Reader (MICR)
8. Bar Code Reader (BCR)

Output Devices:

1. Monitor or Visual Display Unit (VDU)
2. Printers
3. Voice Response System (VRS)

Central Processing Unit (CPU)

1. Storage Unit
2. Control Unit
3. Arithmetic Logic Unit (ALU)

Secondary Storage Devices

1. Hard Disk
2. Floppy Disk
3. Compact Disk
4. DVD (Digital Visual Disc)

2. Software: A set of programs, which is used to work with hardware is called its software. There are six types of software which are following:

1. Operating System
2. Utility Software
3. Application Software
4. Language Processors
5. System Software
6. Connectivity Software.

3. People: People are basically those individuals who use computers to develop, maintain and use the information system. They are also called live-ware of the computer. The main categories of people involved with the computer system are:

1. System Analysts
2. Computer Operators
3. Programmers.

4. Procedures: The procedures are the various operations performed in a certain way in order to achieve some desired results.

There are basically three types of procedures:

1. Software-oriented
2. Hardware-oriented
3. Internal procedure.

5. Data: The data is therefore processed and organized to create information that is relevant and can be used for decision-making.

6. Connectivity: The element of connectivity refers to the way in which a computer system is connected to other electronic devices and link-ups such as satellite links, internet, telephone lines, etc.

Capabilities or Features of a Computer System
1. High Speed: A computer can perform millions of operations in one second. The calculations will be error-free.

2. Automatic IHachine: Once the data are fed into the computer, it executes the instructed functions without human intervention.

3. Accuracy: This machine is extremely accurate. Its operations are error-free and the information derived from that is more reliable.

4. Reliability: Computer can perform jobs of repetitive nature any number of times. They are immune to tiredness, boredom, or fatigue. Therefore, they are more reliable than human beings.

5. Versatility: A computer can perform a wide variety of jobs simple as well as complex.

6. Storage: The storage capacity, of a computer, is so large that it can store any volume of information or data for being processed.

7. Scientific Approach: The computer operates scientifically and never gets emotional while solving problems.

8. Work on Special Language: A computer can perform many functions by giving or programming in any one language of computers, which are developed in order to feed the information and data into a computer.

9. Logical decision: Computer has the capability to make decisions that are based on certain conditions.

10. Use of Binary System: The computer uses a two-way system known as Binary System, not the decimal system.

Relationship of Management Information System with other functional Information Systems
Designing of Accounting Reports: When the related information is summarised to meet a particular need it is called a report. It must be effective, efficient, and useful for decision-making.

Every accounting report must be able to fulfill the following features:

1. Relevance
2. Accuracy
3. Completeness
4. Timeliness
5. Summarisation.

Types of Reports

1. Summary Reports
2. Customer Reports
3. Supplier Reports
4. Demand Reports
5. Exception Reports
6. Responsibility Reports.

Steps in Designing Reports

1. Definition of objectives
2. Structure or format of the report
3. Querying with database
4. Finalizing the report.

Data Interface between the Information System:
I. Relationship between Accounting Information System (AIS), Manufacturing Information System and Unman Resource Information System.

II. Relationship between AIS and Marketing Information System: Marketing and Sales Department perform following activities:

1. Inquiry Process
2. Creating Contacts
3. Order Taking
4. Dispatching Goods
5. Billing

The accounting sub-system transaction cycle includes:

1. Processing of sales order
2. Credit Authorisation
3. Keeping custody of goods
4. Stock Position
5. Dispatch Details
6. Accounts Receivable etc.

III. Relationship between AIS and Manufacturing Information
System: Production Department performs the following activities:

1. Preparing plans, schedules ‘
2. Issue of material requisition forms
3. Issue of job cards
4. Issue of stock
5. Handling of vendor invoices
6. Payment to vendors/suppliers

The accounting sub-system transaction cycle includes:

• Processing purchases order
• Advance payment
• Stock Updation
• Accounts payable etc.

Application of Computer in Accounting
Although computers influence every field of accounting, however, its usage in normal modes is mentioned below:
(a) Recording of Business Transactions
(b) Accounting of Debtors
(c) Stores Accounting
(d) Pay-toll Accounting.

(a) Problems that arise due to manual accounting such as complexity, percentage of error, delayed work can be easily rectified using a computer in accounting. Computers can automatically generate ledger postings of business transactions. Using computers, can therefore completely maintain ledger accounts.

(b) Debtors account can easily be maintained via computers. Computers can generate accurate figures for the debtor’s account. They can also be used to prepare reminders to debtors in order to timely collect debt.

(c) Stores Accounting: In stores accounting, the contribution of computers is appreciable. They can be used for

1. Daily Stock Position
2. Price of Stock
3. Need of goods to be credited.

(d) Payroll Accounting: To generate pay of employees in an organization, wages, salary, bonus, allowances, etc. are calculated. Furthermore, employee provident fund, income tax, etc. is deducted from salary. Traditional manual accounting is difficult and bound to make errors that can be made easy, fast, and accurate through the use of payroll accounting.

Components Of Computerised Accounting Software System

Accounts from Incomplete Records Notes Class 11 Accountancy Chapter 11

Generally, business transactions are recorded on the basis of the double-entry system of bookkeeping. Sometimes rules of the double-entry system are not followed for recording business transactions. When a double entry system is not followed for maintaining records, these records are turned into incomplete records. Many authors describe it as a Single Entry System.

However, Singe Entry System is a misnomer because there is no such system for maintaining accounting records. It is rather a mechanism of maintaining records in which rules of the double-entry system are not followed completely. There is the partial observance of rules of the double-entry system in this system.

This recording is done according to the convenience and needs of business entities and there is no uniformity in the maintenance of records by different entities. This system differs from concern to concern. In this, only records of cash and of personal accounts are maintained. It is always an incomplete double entry system, varying with circumstances. business, nature of business, prevailing circumstances, etc.; the procedure of recording followed by different business entities may vary’. Therefore, there is no uniformity in the maintenance of records under incomplete records.

→ Suitability: This system is suitable for a sole trader or partnership firms. Companies, because of legal provisions, cannot keep incomplete records.

→ Flexibility: This method is flexible as the recording procedure can be adjusted according to the information needs of a particular business enterprise. As rules of the double-entry system are not followed, knowledge of principles of the double-entry system of bookkeeping is not necessary.

→ Maintenance of Personal Accounts and Cash Book: Under this system mainly the personal and cash-book maintained which mixes up business as well as private transactions.

→ Variation of Recording Process: It is an incomplete double entry system, varying according to the information needs of business entities. There is no hard and fast rule for the maintenance of records under this system.

→ Dependence on Original Vouchers: Original vouchers play every important role as they provide all the information to be recorded.

→ Less Expensive: As complete records are not kept, the time and labor involved in maintaining accounting records are less in comparison to double entry.

Incomplete Records contain:

1. Both aspects of some of the transactions.
2. Only one aspect of some of the transactions.
3. No aspect of some of the transactions.

Reasons for Incompleteness:
Accounting records may be incomplete due to any one or more of the following reasons:

1. The businessman may be ignorant of the separate legal entity assumption.
2. The businessman may be ignorant of the double-entry accounting principle.
3. The businessman may not intentionally maintain proper accounts to evade taxation.
4. Destruction of the books of accounts due to fire, flood, etc.

Limitations of Che Incomplete Records:
→ Unscientific: The absence of systematic recording of both aspects of a transaction under this, makes it unscientific.

→ No trial balance or arithmetical accuracy of accounts cannot be checked: The dual aspect of a transaction is not recorded under this system. As a result, the trial balance cannot be prepared from the accounting records maintained. Hence, the arithmetical accuracy of accounting records cannot be checked.

→ True profits cannot be known: Nominal accounts are not maintained and therefore it is not possible to prepare a trading account and Profit & Loss Account to calculate gross profit and net profit respectively. Although the amount of net profit is determinable the absence of details of revenue, other income, expenses, and losses affect sound decision making.

→ The finance position cannot be determined: As all the assets and liabilities and depreciation are not recorded, the Balance Sheet cannot be prepared and thus the true financial position cannot be ascertained.

→ Difficult to detect fraud: Trial balance cannot be prepared to check prima facia arithmetical accuracy of accounts. It encourages carelessness, misappropriation, and fraud because, in the absence of complete records, detection of fraud is very difficult.

→ Difficult to make planning and decision making: In the absence of reliable information about nominal and real accounts, effective planning and control over expenses, assets, etc. are not possible.

→ Not recognized by tax authorities: Accounts maintained based on this system are not accepted by sales-tax and income-tax authorities.

→ Interfirm comparison not possible: Because of variation in accounting procedure and rules, comparison of two or more businesses is not possible.

Advantages of Incomplete Records
→ Simple method: It is a very simple method of accounting. It can be maintained by anyone who does not have adequate knowledge of accounting.

→ Less time-consuming: It is less time-consuming since it requires a limited number of books.

→ Less costly: It is less costly because expenses related to the keeping of books are nominal.

→ Suitable-It is suitable for small shopkeepers who do not require an elaborate system of accounting.

Ascertainment of Profit and Loss:
A profit or loss in the case of a Single Entry System can be ascertained by the following two methods:

1. Statement of Affairs Method (or Net Worth Method)
2. Conversion Method (or Final Account Method).

Statement of Affairs Method: A statement of affairs is a statement of assets and liabilities of a business as on a particular date. Under this method, profit is ascertained by comparing the capital at the beginning and capital at the end of the accounting period and necessary adjustments are made for drawings, fresh additional capital, drawings, and interest on capital.

The following steps are followed to ascertain the profit or loss:
1. Prepare a Statement of Affairs at the beginning (if not given) of the accounting period to ascertain the Opening Capital.

2. Ascertain drawings and capital introduced during the year.

3.Prepare a Statement of Affairs at the end of the accounting period to ascertain the Closing Capital (capital at the end) or Prepare a Statement for ascertaining the closing capital before making certain adjustments.

Format of Statement of Affairs Statement of Affairs of…………. as on …………..

4. Prepare a Statement of Profit with the help of the following formula:
Net Profit = Capital at the end Add: Drawings
Less: Additional Capital introduced Less: Opening Capital
Statement of profit is usually prepared as follows:

Statement of Profit for the year ended ………….

If it is desired to calculate profit before certain adjustments separately the Statement of Profit should be prepared as follows:

Statement of Profit for the year ended……………….

5. Prepare Balance Sheet/Received or Final Statements of Affairs at the end after adjusting depreciation, provision for bad and doubtful debts, etc.

Difference between Balance Sheet and Statement of Affairs:


Calculation of Missing Figures and Prepare Final Accounts:
The following steps are followed while calculating the missing figures and preparation of final accounts:
1. Prepare cash and Bank Summary (if not available in proper form with both sides tallied) to ascertain the missing information (Such as opening and closing balances, cash sales/cash purchases, drawing, etc.).

If both the sides of the Cash Book are not tallied, then the difference in both sides may be treated as one of the following items:

If credit sides exceed debit side:

1. Opening Cash or Bank Balance or Closing Bank Overdraft
2. Cash sales
3. Collection from debtors
4. Bills Receivable collected
5. Additional Capital
6. Sale of fixed assets
7. Sundry Income.

If debit sides exceed credit side:

1. Closing Cash or Bank Balance or Opening Bank Overdraft
2. Cash purchases
3. Payment to creditors
4. Bills Payable discharged
5. Drawings
6. Purchase of fixed assets
7. Sundry expenses
8. Cash embezzlement by Cashier.

2. Prepare Total Debtors Account to ascertain the missing information (such as opening debtors, closing debtors, credit sales, collections, bills receivable drawn). If both sides of this account are not tallied, then the difference of both the sides may be treated as one of the following items:

If the credit side exceeds the debit side:

1. Opening Debtors
2. Credit Sales
3. Bills receivable dishonored

If the debit side exceeds the credit side:

1. Closing Debtors
2. Collection from debtors
3. Bills receivable drawn
4. Sales Returns
5. Discount allowed
6. Bad debts.

Format of Total Debtors Account

Important: Provision for Doubtful Debts, Provision for Discount on Debtors, Bad Debts Recovered, Trade Discount Allowed, Bills Receivable Discounted do not affect the Total Debtors Account.

3. Prepare Bills Receivable Account to ascertain the missing information (such as Opening B/R, Closing B/R, B/R drawn, B/R collection, B/R endorsed).

If both the sides of this account are not tallied then the difference in both the sides may be treated as one of the following items:

If the credit side exceeds the debit side:

1. Opening B/R
2. B/R drawn

If the debit side exceeds the credit side:

1. Closing B/R
2. B/R collected
3. B/R dishonored
4. B/R discounted
5. Banker’s discount charges
6. B/R endorsed

Format of Bills Receivable Account

Important: Provision for Doubtful Bills does not affect the Bill Receivable Account

4. Prepare Total Creditors Account to ascertain the missing information (such as Opening Creditors, Closing Creditors, Credit Purchases, Payment made, B/P accepted).

If both the sides of this account are not tallied, then the difference in both the sides may be treated as one of the following items:

If the credit side exceeds the debit side:

1. Closing Creditors
2. Payment to Creditors
3. B/P accepted
4. B/R endorsed to creditors
5. Purchase Return
6. Discount Received.

If the debit side exceeds the credit side:

1. Opening Creditors
2. Credit Purchases
3. B/P canceled
4. Endorsed B/R Dishonoured.

Format of Total Creditors Account

Important: Reserve for Discount on Creditors does not affect the Total Creditors Account.

5. Prepare Bills Payable Account to ascertain the missing information (such as Opening B/P, Closing B/P, B/P accepted, B/P discharged). If both the sides of this account are not tallied, then the difference in both sides may be treated as one of the following items:

If the credit side exceeds the debit side:

1. Closing B/P
2. B/P discharged/canceled.

If the debit side exceeds the credit side:

1. Opening B/P
2. B/P accepted.

Format of Bills Payable Account:

6. Ascertain opening capital by preparing the statement of affairs at the beginning of the accounting period.

7. Prepare the Trial Balance to check the authentical accuracy.

8. Prepare Trading and Profit & Loss Account and the Balance Sheet.

Class 11 Accountancy Revision Notes for Financial Statements -II Adjustments of Chapter 10

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Adjustment in preparation of financial statements of Sole-proprietor
Meaning of Adjustment entries: Those entries which need to be passed at the end of the accounting year to show the accurate profit or loss and fair financial position of the business.
Need of Adjustment: There are number of transactions that may not find the place in the Trial Balance due to any reason such as Closing Stock (because it is valued at the end of the year), Manager’s Commission based on Net profits (because its calculation requires preparation of Income Statement first). These transactions can only be taken into account by passing Adjustment entries so that their impact on the profitability and financial position can be shown.
Closing Stock: the closing stock represents the cost of unsold goods lying in the stores at the end of the accounting period.
Outstanding Expenses: When expenses of an accounting period remain unpaid at the end of an accounting period, they are termed as outstanding expenses.
As they relate to the earning of revenue during the current accounting year, it is logical that they should be duly charged against the revenue for computation of the correct amount of profit or loss.
Prepaid Expenses: At the end of the accounting year, it is found that the benefits of some expenses have not yet been fully received; a portion of its benefit would be received in the next accounting year. This portion of expenses, is carried forward to the next year and is termed as prepaid expenses.
Accrued Income: It may sometime happen that certain items of income such as a interest on loan, commission, rent, etc. are earned during the current accounting year but have not been actually received by the end of the same year. Such incomes are known as accrued income. .
Income Received in Advance: Sometimes, a certain income is received but the whole amount of it does not belong to the current period. The portion of the income which belongs to the next accounting period is termed as income received in advance or an Unearned Income.
Depreciation: It is the decline in the value of assets on account of wear and tear and passage of time. It is treated as a business expense and is debited to profit and loss account.
This, in effect, amounts to writing-off a portion of the cost of an asset which has been used in the business for the purpose of earning profits.

Closing Stock	Closing Stock A/c	Dr.	(i) Credit side of Trading A/c.
To Trading A/c		(ii) Show on the assets side of BALANCE SHEET.
Outstanding/Unpaid Expenses	Expenses A/c	Dr.	(i) Add to the concerned item on the Debit side of Trading/Profit & Loss A/c.
Outstanding Expenses A/c		(ii) Shown on the liabilities side of BALANCE SHEET.
Prepaid expenses/Unexpired expenses	Prepaid Expenses A/c	Dr.	(i) Deduct from the concerned expenses on the debit side of Profit & Loss A/c
To Expenses A/c		(ii) Show on the assets side of BALANCE SHEET.
Accrued income/ Income due but not received	Accrued Income A/c	Dr.	(i) Add to the concerned income on Credit side of Profit and Loss A/c
To Income A/c		(ii) Show on the assets side of BALANCE SHEET.
Unearned income/Income received in Advance	Income A/c	Dr.	(i) Deduct from the concerned income on the credit side of Profit & Loss A/c
To Unearned Income A/c		(ii) Show on the liabilities side of Balance Sheet.
Depreciation	Depreciation A/c	Dr.	(i) Show on the debit side of Profit Loss A/c
To Asset A/c		(ii) Deduct from the concerned asset in the Balance Sheet.

Bad Debts : The debtors from whom amounts cannot be recovered are treated in the books of accounts as bad and are termed as bad debts.
Further Bad Debts : These Bad debts is a loss that occurred after reparation of Trial Balance. Further bad debts be added in the bad debts already appearing in the Profit and Loss Ae and Debtors would be reduced with the same amount.

To write off bad debts	Bad Debts A/c	Dr.	(i) Debit side of P&L A/c.
To Debtors		(ii) Deduct from debtors on the as- sets side of Balance Sheet.
Provision for bad and doubtful debts	Provision for Doubtful Debts A/c	Dr.	(i) Debit side of P & L A/c.
To Debtors A/c		(ii) Deduct from debtors on the assets side of Balance Sheet.
Provision for discount on debtors	P & L A/c	Dr.	(i) Debit side of P & L A/c.
To Provision for Discount on Debtors Debtors A/c		(ii) Deduct from debtors on the assets side of Balance Sheet.

Manager’s Commission
The manager of the business is sometimes given the commission on the net profit of the company. The percentage of the commission is applied on the profit either before charging such commission or after charging such commission. In the absence of any such information, it is assumed that commission is allowed as a percentage of the net profit before charging such commission.
1. Commission on net profits before charging such commission

Interest on Capital	Interest on Capital A/c	Dr.	(i) Debit side of P & L A/c.
To Capital A/c		(ii) Add to capital on the liabilities side of Balance Sheet.
Interest on drawings	Capital/Drawings A/c	Dr.	(i) Credit side of P & L A/c.
To Interest on Drawings A/c		(ii) Deduct from capital on the liabilities side of Balance Sheet.
Interest payable on loan (borrowed)	Interest on Loan A/c	Dr.	(i) Debit side of P & L A/c.
To Loan A/c		(ii) Add to loan on the liabilities side of Balance Sheet.
Commission payable to manager	P& L A/c	Dr.	(i) Debit side of P & L A/c.
To Comm. Payable to manager A/c		(ii) Show on the liabilities side of Balance Sheet.

Adjustment in Respect of Goods
Abnormal Loss : Sometimes losses occur due to some abnormal circumstances such as accident, fire, flood, earhquakes etc. Such losses are called Abnormal losses. These may be divided into two categories :-
(A) Loss of Goods (B) Loss of fixed assets
Good taken for personal use {Drawings in goods) : When the goods are withdrawn by proprietor for personal use the cost of such goods deduct from purchases and the amount should be deduct from capital in Balance Sheet.
Goods distributed as free samples : Sometime goods are distributed as free sample by the businessman for the purpose of advertisement. The cost of free sample deduct from purchase and shown in Debit side of profit and loss account.
Abnormal loss of goods by fire, theft, accident, etc.

Adjustment	Treatment in Trading & P & L A/c	Treatment in Balance Sheet
1) Loss of Goods (By accident, Fire, Theft)	1) Loss of … A/c	Dr.	(i) Gross Loss: Deduct from Purchases or show on the credit side of Trading A/c.
To Trading A/c (or)
To Purchases A/c
If goods were note insured	2) P & L A/c	Dr.	(ii) Net Loss: Debit side of P & L A/c.
To Loss by …… A/c
If goods were insured and full claim accepted by insurance company	2) Insurance company A/c	Dr.	(iii) Insurance claim: Assets side of Balance Sheet.
To Loss by … A/c
If full claim not accepted by Insurance Company	2) Insurance Company A/c	Dr.
Profit & Loss A/c	Dr.
To Loss By …. A/c
2) Goods taken by the proprietor for his personal use	Drawings A/c	Dr.	(i) Deduct the amount of goods from the purchases in Trading A/c.
To Purchases A/c		(ii) Deduct the amount from the capital on the liabilities side of Balance Sheet.
3) Goods distributed as free samples	Advertising A/c	Dr.	(i) Deduct the amount of goods from the purchases in Trading A/c.
To Purchases A/c		(ii) Show on the debit side of P & L A/c.
4) Goods given as charity	Charity A/c		(i) Deduct the amount from the purchases on the debit side of Trading A/c.
To Purchases a/c		(ii) Show on the debit side of P & L A/c.

Key Points:

1. If closing stock is shown in Trial Balance then it will be shown in balance sheet only. It is assumed that purchases amount already gets adjusted in trial balance.
2. Salary and wages will be shown in profit and loss A/c debit side (assuming that salary is prominent) while wages and salary will be shown in trading A/c debit side, (wages are prominent).
3. Freight, carriage, cartage will be shown in Dr. side of trading A/c. if inward word attached with these then it also debited to trading A/c, if outward word attached with these item then it will be debited to profit and loss account.
4. Any expenses related to factory are debited to trading account like factory lighting, factory rent if factory word is not given then lighting and rent will be debited to profit and loss account.
5. Trade expenses always debited to profit and loss A/c not as name indicate trading A/c.
6. Packaging material: cost of packaging material used in product are direct expenses as it refers to small containers which form part sold, it will debited to trading A/c.
7. Packing: the packing refers to the big containers that are used for transporting the goods and regarded as indirect expenses and debited to profit and loss account.
8. Adjusted purchases mean the amount of purchases is adjusted by way of adding opening stock and reduced by the amount of closing stock, e.g., purchases Rs. 1,00,000; opening stock Rs. 12,000, closing stock Rs. 8,000. Calculate adjusted purchases.
   Adjusted purchases = purchases + opening stock – closing stock
   = Rs. 1,00,000 + Rs. 12,000 – Rs. 8,000 = Rs. 1,04,000
   When adjusted purchases is given in trail balance, then there is no need of debiting opening stock and crediting closing stock in trading A/c.
   In this case closing stock will be shown in balance sheet only.

Financial Statements 1 Notes Class 11 Accountancy Chapter 9

Meaning of Financial Statements:
When the business enterprise satisfies itself with the agreement of trial balance, then they proceed to prepare the financial statements for their business. Now they are interested to know whether they have earned profit or incurred losses during the accounting period. They also want to ascertain the business position at the end of the accounting period for this purpose.

They prepare financial statements which are also called Final Accounts. It is the last phase of the accounting process. In our system of accounting, financial statements include a Balance Sheet, Trading Account and Profit and Loss Account, and explanatory schedules and notes. Financial statements are those statements that report the profitability and the financial position of the business at the end of the accounting period. The Statements are presented to users of accounting information for decision making.

According to John N. Myer “The financial statements provide a summary of accounts of the business enterprise, the balance sheet reflecting the assets, liabilities, and capital as on a certain date and the income statement showing the result of operations during a certain period.”

Need of Financial Statements:
The main objective of financial statements is to communicate the financial position and performance of the business entities to the users of accounts. The financial position of the business entity is indicated through the Balance Sheet and performance is indicated through the Trading and Profit and Loss Account.

Users of Financial Statements:

1. Management use financial statements for their decision-making.
2. Investors use it to assess the financial soundness of the firm.
3. Potential investors use to know how safe their investment will be.
4. Lenders like debenture holders, suppliers of loans, etc. uses it to know the short-term and long-term financial soundness of the firm.
5. Creditors use it for knowing the ability of the enterprise to meet the debts when they fall due.
6. Employees use it to demand an increase in bonuses and wages.
7. The government uses it to regulate different policies.
8. Income Tax and Sales Tax Authorities use them to ascertain the tax liability of the firm.

The distinction between Capital and Revenue:
It is a very important distinction in accounting between capital and revenue items. The revenue items form part of the trading and profit and loss account the capital items help in the preparation of a balance sheet.

The distinction between Capital Expenditure and Revenue Expenditure:
Capital expenditure is the amount spent by an enterprise on the purchase of fixed assets that are used in the business to earn income and are not intended for resale. For example, expenditure incurred in acquiring assets, or erection of fixed assets, an extension of fixed assets, to acquire the right to carry on business, legal charges, etc.

Capital expenditure is debited to a fixed account which appears in the Balance Sheet.

Revenue expenditure is the amount spent on running a business. The benefit of revenue expenditure is exhausted in the accounting period in which it is incurred. For example rent, salaries, wages, power and fuel, carriage, freight, depreciation, cartage, etc.

Revenue expenditure appears in a Trading and-Profit and Foss Account. Capital expenditure increases the earning capacity of the business whereas revenue expenditure incurred for earning profits.

Capital Receipts and Revenue Receipts:
Capital receipts are those receipts that imply an obligation to return the money. The amount received in the form of additional capital introduced, loan received and sale of fixed assets are capital receipts. These are shown in the Balance Sheet only. Revenue Receipts are those receipts that do not imply an obligation to return the money. The amount received in the normal and regular course of business mainly by the sale of goods and services. These are shown in the Profit and Loss Account.

Trading Account:
Trading Account is prepared for calculating the gross profit or gross loss arising or incurred as a result of the trading activities of a business. Its main components are sales, services rendered, and the cost of goods sold.

Form of Trading Account
Trading Account

Profit and Loss Account
It is prepared to calculate the net profit or net loss of the business of a given accounting period.

“Profit and Loss Account is an account into which all gains and losses are collected in order to ascertain the excess of gains over the losses or vice-versa.” – Prof Carter

Form of Profit and Loss Account
Profit and Loss Account


Operating Profit and Net Profit
Operating Profit = Net Sales – Operating Cost = Net Sales – (Cost of Goods Sold + Administration and Office and Expenses + Selling and Distribution Expenses)
Or
Operating Profit = Net Profit + Non-Operating Expenses – Non-Operating Incomes

Gross Profit = Net Sales – Cost of Goods Sold.
= Net Sales (Opening stock + Net purchases + Direct expenses – Closing stock)

Net Sales = Total Sales – Sales Return
Net Purchases = Total Purchases – Purchase Returns
Net Profit = Gross Profit + Revenue Receipts-Indirect Expenses

Balance Sheet:
A statement that sets out the assets and liabilities of finner an institution at a certain date.

“Balance Sheet is an a.screen picture of the financial position of a going business at a certain moment.” – Francis R. Stead

It shows the financial position of the business at a certain date.

Form of Balance Sheet Balance Sheet as at……………….


Grouping and Marshalling of Balance Sheets
Grouping means putting items of similar nature under a common heading. The arrangement of assets and liabilities in a particular order in the Balance Sheet is called ‘Marshalling’.

Marshaling of Balance Sheet can be made in two ways:
1. In order of Liquidity: According to this method, an asset which is most easily convertible into cash such as cash in hand is written first and then will follow those assets which are comparatively less easily convertible, so that the least liquid assets such as goodwill, is shown last.

In the same way, those liabilities which are to be paid at the earliest will be written first. In other words, current liabilities are written, first of all, then fixed or long-term liabilities, and lastly, the proprietor’s capital. Proforma of a Balance Sheet in the order of liquidity will be the same as shown in the topic Balance Sheet.

2. In order of Permanence: This method is just opposite to the first method. Assets that are most difficult to be converted into cash such as Goodwill are written first and the assets which are most liquid such as cash in hand are written last.

Those liabilities which are to be paid last will be written first. The proprietor’s capital is written, first of all, then fixed or long-term liabilities, and lastly the current liabilities. The Proforma of the Balance Sheet in the order of Permanence will be just opposite to the above.

Bills of Exchange Notes Class 11 Accountancy Chapter 8

When goods are sold or bought for cash, payment is received immediately whereas when goods are sold or bought on credit the payment is deferred to a future date. In such a case, the seller would like to get a written undertaking from the buyer to get the payment after a fixed period. Nowadays these written undertaking is called bills of exchange or promissory notes. The bill of exchange contains an unconditional order to pay a certain amount on an agreed date while the promissory note contains an unconditional promise to pay a certain sum of money on a certain date.

Meaning of Bill of Exchange:
“A bill of exchange is defined as an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument.” – Negotiable Instrument Act, 1881

Features of Bill of Exchange:

1. It must be in writing.
2. It is an order to make payment.
3. The order to make payment is unconditional’.
4. The maker of the bill of exchange must sign it.
5. The payment to be made must be certain.
6. The date on which payment is made must also be certain.
7. It must be payable to a certain person.
8. The amount mentioned in the bill of exchange is payable either on-demand or on the expiry of a fixed period of time.
9. It must be stamped as per the requirement of law.

Parties to a Bill of Exchange:
1. Drawer: The drawer is the maker of the bill of exchange. A seller/ creditor who is entitled to receive money from the debtor can draw a bill of exchange upon the buyer/debtor. The drawer of the writing the bill of exchange has to sign it as a maker of the bill of exchange.

2. Drawee: Drawee is the person upon whom the bill of exchange is drawn. Drawee is the purchaser or debtor of the goods upon whom the bill of exchange is drawn.

3. Payee: Payee is the person to whom the payment is to be made.

The drawer of the bill himself will be the payee if he keeps the bill with him till the date of its payment. The payee may change in the following situations:
(a) In case the drawer has got the bill discounted, the person who has discounted the bill will become the payee;
(b) In case the bill is endorsed in favour of a creditor of the drawer, the creditor will become the payee.

Promissory Note:
“A promissory note is defined as an instrument in writing (not being a banknote or currency note), containing an unconditional undertaking signed by the maker, to pay a certain sum of money only to or to the order of a certain person.” -Negotiable Instrument Act, 1881

Features of Promissory Note:

1. It must be in writing;
2. It must contain an unconditional promise to pay;
3. The sum payable must be certain;
4. It must be signed by the maker;
5. The maker must sign it;
6. It must be payable to a certain person;
7. It should be properly stamped.

Parties to a Promissory Note:
1. Maker or Drawer: The maker or drawer is the person who makes or draws the promissory note to pay a certain amount as specified in the promissory note. He is also called the promisor.

2. Drawee or Payee: Drawee or payee is the person in whose favour the promissory note is drawn. He is called the promisee.

The distinction between a Bill of Exchange and Promissory Note


Advantages of Bill of Exchange:

1. Goods can be sold and purchased easily on credit with the use of Bill of Exchange.
2. The drawer can discount the bill of exchange with the bank if the money is needed immediately.
3. When the bill is accepted by the drawee, it is proof of debt.
4. A bill of exchange can be endorsed to any third party for the settlement of the debt.
5. It is a legal document and a suit can be fed against the drawee if he refuses to pay it.
6. Bill of exchange payable on the due date and needs no remainder for payment.
7. In foreign, Trade Bills are generally used and facilitate payments.

Maturity of Bill:
The term Maturity refers to the date on which a bill of exchange or a promissory note becomes due for payment. In arriving at the maturity date three days know as days of grace must be added to the date on which the period of credit expires instrument is payable.

Discounting of Bill:
Sometimes the holder of the bill may need cash before the maturity of the bill. For this, he needs to hand over the bill to his bank. The bank charges a normal discount for its services. This process of encashing a bill any time before maturity is known as discounting a bill. In this case, the bank gets the amount from the drawee on the due date.

Endorsement of Bill:
The transfer of a bill by the holder by putting his signature on its back is called Endorsing a Bill. In this way, the transferee becomes the holder of the bill of exchange. Now the bill of exchange would be payable to the endorsee instead of the transferer.

Accounting Treatment:
1. When the drawer retains the bill with him till the date of its maturity and gets, the same collected directly.

2. When the bill is retained by the drawer with him and sent to the bank for collection a few days before maturity.

3. When the drawer gets the bill discounted from the bank.

4. When the bill is endorsed by the drawer in favour of his creditor.

Dishonour of a Bill:
When the drawee refuses to pay the amount of the bill on the date of maturity or becomes insolvent, a bill is said to have been dishonoured. In case of dishonour, the holder of the bill can recover the amount of the bill from any of the endorsers or the drawer. For this purpose, the holder of the bill must serve a notice of dishonour to the drawer and each prior endorser whom he seeks to make liable for payment immediately of the dishonour or with a reasonable time.

Noting Charges:
A bill of exchange should be duly presented for payment on the date of its maturity. The drawee is absolved of his liability if the bill is not duly presented. Proper presentation of the bill means that it should be presented on the date of maturity to the acceptor during business working hours. To establish, beyond doubt that the bill was dishonoured, despite its due presentation, it may prefer to be got noted by Notary Public. Noting authenticates the fact of dishonour. For providing this service, a fee is charged by the Notary Public which is called ‘Noting Charge’.

Renewal of the Bill:
Sometimes, the acceptor of the bill foresees that it may be difficult to meet the obligation of the bill on maturity and may, therefore, approach the drawer, with the request for an extension of time for payment.

If it is so, the old bill is cancelled and the fresh bill with the new term of payment is drawn and duly accepted and delivered. This is called renewal of the bill. Here noting charges are not required. The drawee may have to pay interest to the drawer for the extended period of credit.

Retiring of the Bill:
Sometimes the drawee of the bill has funds at his disposal and makes a request to the drawer or holder to accept the payment of the bill before its maturity. If the holders agree to do so, the bill is said to have been retired. To encourage the retirement of the bill, the holder allows some discount called Rebate on bills for the period between the date of retirement and maturity.

Bills Receivable and Bills Payable Books:
When a large number of bills are drawn and accepted, their recording by means of journal entry for every transaction relating to the bills become a very cumbersome and time-consuming exercise. It is then advisable to record them separately in special subsidiary books, the bills receivables in the Bills Receivable Book and the Bills Payable in the Bills Payable Book. The reason for the use of subsidiary books for recording bill transactions is the same as that in the case of other subsidiary books for cash, purchases etc.

An important point in connection with these books is that they only record the transactions relating to drawings and acceptance of bills, all other transactions do not record the entire range of transactions relating to the bills, e.g. relating to bills discounted, endorsement, retirement, renewal etc. simply have a passing reference in these books and the entries relating thereto are recorded as usual in the journal. It may be noted that the entry relating to honouring bills appear in the cash book.

Format of Bills Receivable Book
Bills Receivable Book

Format of Bills Payable Book
Bills Payable Book

Accommodation Bills
Apart from financing transaction in goods, bills of exchange, promissory notes may also be used for raising funds temporarily. Such a bill is called an ‘accommodation bill’ as it is accepted by the drawee to accommodate the drawer. Hence, the drawee is called the ‘accommodating party’ and the drawer is called the ‘accommodation party’.

Sometimes, the accommodation parties agree to raise the funds through an accommodation bill for mutual benefits. It can be done in any of the following two ways:
(a) The drawer and the drawee share the proceeds in an agreed ratio.
(b) Each draws a bill and each accepts a bill.

Depreciation, Provisions and Reserves Notes Class 11 Accountancy Chapter 7

SECTION-1 (Depreciation)
The term ‘Depreciation’ means a decline in the value of fixed assets due to use, the passage of time, or obsolescence. an accounting item, depreciation is that part of the cost of a fixed asset that has expired on account of its usage and/or lapse of time. The amount of depreciation, being a charge against profit, is debited to the profit and loss account.

Meaning of Depreciation
Depreciation may be described as a permanent, continuing, and gradual shrinkage in the book value of fixed assets. It is based on the cost of assets consumed in a business and not on its market value,

“The depreciation is the diminution in the intrinsic value of the assets due to use and/or lapse of time.”

– Institute of Cost and Management Accounting, London (ICMA)
Accounting Standard-6 issued by The Institute of Chartered Accountants of India (ICAI) defines depreciation as “a measure of the wearing out, consumption or other loss of value of depreciable assets arising from use, effluxion of time or obsolescence through technology and market change.

Depreciation is allocated so as to change the fair proportion of depreciable amount in each accounting period during the expected useful life of the assets. Depreciation includes amortization of assets whose useful life is predetermined.”

Features of Depreciation:

1. It is a decline in the book value of fixed assets.
2. It includes loss of value due to effluxion of time, usage, or obsolescence.
3. It is a continuing process.
4. It is an expired cost and hence must be deducted before calculating taxable profits.
5. It is a non-cash expense.

Depreciation and, Other Similar Terms:

1. Depletion: It is used in the context of extraction of natural resources like mines, quarries, etc. that reduces the availability of the quantity of the material or assets.
2. Amortization: It refers to writing off the cost of intangible assets like patents, copyright, trademarks, franchises, leasehold mines which have entitlements to use for a specified period of time.

Causes of Depreciation:

• Wear and tear due to use or passage of time.
• Expiration of legal rights.
• Obsolescence due to technological changes etc.
• Abnormal factors such as accidents due to fire, earthquake, floods, etc.

Need for Depreciation:

• Matching of Costs and Revenue.
• Consideration of Tax.
• True and Fair Financial Position.
• Compliance with Law.

Factors affecting the Amount of Depreciation

1. Cost of Assets.
2. Estimated Net Residual Value.
3. Depreciable Cost.
4. Estimated Useful Life.

Methods of Calculating Depreciation Amount
The selection of an appropriate method depends upon the following:

1. Type of the asset.
2. Nature of the use of such assets.
3. Circumstances prevailing in the business.

1. Straight Line Method:
This method is based on the assumption of equal usage of the assets over its entire useful life. It is also called the fixed installment method because the amount of depreciation remains constant from year to year over the useful life of the assets. Accordingly to this method, a fixed and equal amount is charged on depreciation in every accounting period during the lifetime of an asset. This method is also known as a fixed percentage on the original cost method.

Formula:
Depreciation = \frac{\text { Cost of assets-Estimated residual value }}{\text { Estimated usefullife of the asset }}
Rate of Depreciation = \frac{\text { Annualdepreciation amount }}{\text { Acquisition cost }} × 100

2. Written Down Value Method:
Under this method, depreciation is charged on the book value of the asset. It is also known as the reducing balance method. The amount of depreciation reduces year after year.

Under this method, the rate of depreciation is computed by using following formula:
R = \left[1-\sqrt[n]{\frac{s}{c}}\right] × 100

Where . R = rate of deprecition
n = expected useful life
s = scrap value
c = cost of an asset

Straight Line Method and Written Down Method: A Comparative Analysis


Methods of Recording Depreciation:
In the books of account, there are two types of arrangements for recording depreciation of fixed assets.

1. Charging depreciation to assets account.
2. Creating provision for depreciation/accumulated depreciation account.

1. Charging depreciation to assets account: Under this, depreciation is deducted from the depreciable cost of the asset (credited to the asset account) and charged (or debited) to the profit and loss account.

Journal Entries:
1. For recording purchase of asset: (Only in the year of purchase)
Asset A/c Dr. [With the cost of assets including installation etc.]
To Bank/Vendor A/c

2. Following two entries are recorded at the end of every year
(a) For deducting depreciation amount from the cost of the asset.
Depreciation A/c Dr. [[With the amount of depreciation]
To Asset A/c

(b) For charging depreciation to profit and loss account.
Profit & Loss A/c Dr. [With the amount of depreication]
To Depreciation A/c

The fixed asset appears at its net book value i.e. cost less depreciation charged till date on the asset side of the balance sheet,

2. Creating Provision for Depreciation Account/ Accumulated Depreciation Account: Under this method of recording depreciation, the asset account continues to appear at its original cost year after year over its entire life, and depreciation is accumulated on a separate account instead of being adjusted into the assets account at the end of each accounting period.

Journal Entries:
l. For recording purchase of asset: (Only in the year of purchase)
Asset A/c Dr. [With the cost of assets including installation etc.]
To Bank/Vendor A/c [Cash/Credit purchase]

2. Following two journal entries are recorded at the end of each year
(a) For crediting depreciation amount to provide for depreciation account
Depreciation A/c Dr. [[With the amount 0f depreication]
To Provision for depreciation A/c.

(b) For charging depreciation to profit and loss account.
Profit & Loss A/c Dr. [With the amount of depreication]
To Depreciation A/c

Balance Sheet Method: In the balance sheet, the fixed assets continue to appear at their original cost on the assets side. The depreciation charged till that date appears, in the provision for depreciation account which is shown either on the liabilities side of the balance sheet or by way of deduction from the original cost of the assets concerned on the asset side of the balance sheet.

Disposal of Asset:
Disposal of an asset can take place either at the end of its useful life or during its useful life due to obsolescence or any other abnormal factor.

Journal Entries:
1. For the sale of asset as scrap
Bank A/c Dr.
To Assets A/c

2, For transfer of balance in assets account
(a) In case of profit
Asset A/c Dr.
To Profit & Loss A/c

(b) In case of loss
Profit & Loss A/c Dr.
To Assets A/c

In case, however, the provision for depreciation account has been in use for recording the depreciation, then before passing the above entries transfer the balance of the provision for depreciation account to the asset account by recording the following journal entry:
Provision for Depreciation A/c Dr.
To Asset A/c

Asset Disposal Account:
This method is generally used when a part of the asset is sold and a provision for a depreciation account exists.

Journal Entries:
1. Assets Disposal A/c Dr. [With the original cost of the asset, being sold]
To Assets A/c

2. Provision for Depreciation A/c Dr. [With the accumulated balance in provision for depreciation account]
To Assets Disposal A/c

3. BankA/c Dr. [With the net sale proceeds]
To Assets Disposal A/c

4. In case of loss
Profit & Loss A/c Dr. [With the amount of loss on sale]
To Assets Disposal A/c

5. In case of profit
Assets Disposal A/c Dr. [With the amount of profit on sale]
‘ To Profit & Loss A/c

SECTION-II (Provisions and Reserves)
Provisions:
Provisions mean, “any amount written off or retained by way of providing for depreciation, renewals or diminution in the value of assets, or retained by way of providing for any known liability .of which the amount cannot be determined with substantial accuracy’’. Provision is a charge Against profit.

Reasons/Purposes of creating Provisions

1. To provide for doubtful debts.
2. To provide for taxation.
3. To provide for depreciation, etc.

Reserves:
Reserve means the profit retained in the th&business not having any attributes of a provision. A provision in excess of the amount considered necessary for the purpose for which it was created is to be treated as a reserve. Thus it is an appropriation of profit.

Difference between Reserve and Provision:
1. Basic nature: A provision is a charge against profit whereas a reserve is an appropriation of profit.

2. Purpose: A provision is made to meet a specific liability or contingency whereas reserves are created to strengthen the financial position of the business.

3. Presentation in Balance Sheet: Provision is shown either

1. by way of deduction from the item on the asset side for which it is created or
2. on the liabilities side along with the current liabilities. On the other hand, the reserve is shown on the liabilities sides of the capital.

4. Effect on taxable profits: Provision reduces taxable profits whereas reserve has no effect on the taxable profits.

5. Element of compulsion: Creation of provision is necessary to ascertain true and fair profit or loss whereas the creation of a Reserve is at the discretion of the management however in certain cases law has stipulated for creation of specific reserves such as Debenture Redemption Reserve. ,

6. Use for the payment of dividend: Provision cannot be used for dividend distribution whereas Reserves can be used for dividend distribution.

Types of Reserves:

1. General Reserves: When the purpose for which reserve is created is not specified, it is called General Reserve.
2. Specific Reserves: Specific reserve is a reserve, which is created for some specific purpose and can be utilized only for that purpose.

Examples are:

• Dividend Equalisation Reserve
• Workmen Compensation Fund
• Investment Fluctuation Fund
• Debenture Redemption Reserve

Reserve is also classified as revenue and capital reserve according to the nature of profit out of which they are created.

Revenue Reserves:
They are created from revenue profits which arise out of the normal operating activities of the business and are otherwise freely available for distribution as dividend Examples are:

1. General Reserve
2. Workmen Compensation Fund
3. Investment Fluctuation Fund
4. Dividend Equalisation Reserve
5. Debenture Redemption Reserve etc.

Capital Reserves:
They are created out of capital profits that do not arise from the normal operating activities. Such reserves are not available for distribution as dividends. These reserves can be used for writing off capital losses or issue of bonus shares in the case of a company.

Examples are:

1. Premium on issue of shares or debentures
2. Profit on sale of fixed assets
3. Profit on redemption of debentures
4. Profit on revaluation of fixed assets and liabilities.
5. Profit prior to incorporation
6. Profit on the reissue of forfeited shares.

Importance of Reserves:
A business firm may consider it proper to set up some mechanism to protect itself from the consequences of unknown expenses and losses.

The amount so set aside may be meant for the purpose of:

1. To meet the unforeseen liability or loss
2. To strengthen the financial position of the business
3. To provide funds for meeting a specific liability
4. To provide funds for the payment of dividends at the time of inadequacy of profits.

Secret Reserves:
It is a reserve that does not appear in the balance sheet. It may also help to reduce the disclosed profits and also tax liability. When total depreciation charged is higher than the total depreciable cost, a secret reserve is created.

Trial Balance and Rectification of Errors Notes Class 11 Accountancy Chapter 6

Meaning of Trial Balance
A trial balance is a statement showing the balances, or total of debits and credits, of all the accounts in the ledger with a view to verify the arithmetical accuracy of posting into the ledger accounts.

“The statement prepared with the help of ledger balances, at the end of the financial year (or at any other date) to find out whether debt total agrees with credit total is called Trial Balance.” – William Pickles

Objectives of Preparing the Trial Balance
The trial balance is prepared to fulfil the following objectives:

1. To ascertain the arithmetical accuracy of the ledger accounts.
2. To help in locating errors.
3. To help in the preparation of the financial statements.

Preparation of Trial Balance:
1. Totals Method: Under this method, the total amount of debit side of each ledger account is put on the debit side of the trial balance and the total amount of credit side of each ledger account is put on the credit side of a trial balance.

2. Balances Method: Under this method, the trial balance is prepared by showing the balances of all ledger accounts and then totalling up the debit and credit columns of the trial balances to assure their correctness.

3. Totals-cum-balance Method: This method is a combination of the totals method and the balances method. Under this method, four columns for amount are prepared. Two columns for writing the debit and credit totals of various ‘ accounts and two columns for writing the debit and credit balances of these accounts.

Significance of Agreement of Trial Balance
Normally, a tallied ‘Trial Balance’ stands that debit and credit entries have been made correctly for each transaction. However, the agreement of ‘Trial Balance’ only proves, to a certain extent, that the posting is arithmetically correct, but it does not guarantee that there is no error compelled in the accounting records.

Classification of Errors:
1. Errors of Commission: Errors caused due to wrong recording of a transaction, wrong totalling, wrong casting, wrong balancing etc.

2. Errors of Omission: The errors of omission may be committed at the time of recording the transactions in the books of original entry or while posting to the ledger. It is caused due to omission of recording a transaction entirely or partly in the books of accounts.

3. Errors of Principle: Errors arising due to the wrong classification of receipts and payments between revenue and capital receipts and revenue and capital expenditure.

4. Compensating Errors: Two or more errors committed in such a way that nullifies the effect of each other on the debits and credits.

Searching of Errors:
If the trial balance does not tally, it is a clear indication that at least one error has occurred. The error or errors needs to be located and corrected before preparing the financial statements.

Rectification of Errors:
From the point of view of rectification, the errors may be classified into the following two categories:
(a) Errors that do not affect the trial balance.
(b) Errors that affect the trial balance.

This distinction is relevant because the errors which do not affect the trial balance usually take place in two accounts in such a manner that it can be easily rectified through a journal entry whereas the errors which affect the trial balance usually affect one account and a journal entry is not possible for rectification unless a suspense account has been opened.

Suspense Account:
Sometimes, in spite of best efforts, all the errors are not located and the trial balance does not tally. In such a situation, to avoid the delay in the preparation of final accounts, the difference in the Trial Balance is placed to a newly opened account known as ‘Suspense Account’ and the trial balance tallies.

When all the errors are located and rectified the suspense account stands disposed of.

Bank Reconciliation Statement Notes Class 11 Accountancy Chapter 5

We know that Banks provide very important financial services in modern society. These days a large number of cash transactions are in fact passed through banks. Usually, all the business firms open a current account with a bank, and in order to record the transactions entered into with the bank, maintain a Bank Column in the Cash Book. Bank also maintains an account for each customer in its books.

All deposits by the customer are recorded on the credit side of his/her account and all withdrawals are recorded on the debit side of his/her account. A copy of this account is regularly sent to the customer by the bank. This is called ‘Pass Book’ or ‘Bank Statement’. The amount of balance shown in the passbook or the bank statement must tally with the balance as shown in the cash book. The businessman has to ascertain the cause for such a difference.

Meaning of Bank Reconciliation Statement:
According to Patil, “Bank reconciliation statement is a statement prepared mainly to reconcile the difference between the ‘Bank Balance’ shown by the Cash Book and Bank Pass Book.”

In other words, Bank Reconciliation Statement is a statement of account that explains the reasons for any difference between the bank balance as per cash book and bank balance as per bank statement/passbook and reconciles the two.

In simple words, it is generally experienced that where a comparison is made between the bank balance as shown in the firm’s cash book and the bank balance as shown in the bank passbook, the two balances do not tally/Hence, we have to first ascertain the causes of difference thereof and then reflect them in a statement called Bank Reconciliation Statement to reconcile (tally) the two balances.

Need for Reconciliation:
It is neither compulsory to prepare Bank Reconciliation Statement nor the date is fixed on which it is to be prepared. It is prepared from time to time to check that all transactions relating to the bank are properly recorded by the businessman in the bank column of the cash book and by the bank in its ledger account. Thus, it is prepared to reconcile the bank balances shown by the cash book and by the bank statement. It helps in detecting if there is an error in recording the transactions and ascertaining the correct bank balances as a particular date.

Reasons or Causes of Difference in the balance of the Cash Book and Pass Book
Reconciliation of the cash book and the bank passbook balances amounts to an explanation of differences between them. The differences between the cash book and the bank passbook is caused by:

1. Timing differences on a recording of the transactions
2. Errors made by the business or by the bank.

1. Timing Difference:
(a) Cheques issued by the firm but not yet presented for payment in the bank.
(b) Cheques paid or deposited into the bank but not yet collected.
(c) Bank charges or other charged, charges by the bank on behalf of the customer.

(d) Amount collected or credited by bank on standing instructions given by the customers.
(e) Amount paid or debited by the bank on standing instructions given by the customer.
(f) Interest credited by the bank.
(g) Interest debited by bank or overdraft.
(h) Direct payment by the customer into the bank account.
(i) Dishonour of cheques or bills.

2. Differences caused by errors
(a) Errors committed in recording transactions by the firm.
(b) Errors committed in recording transactions by the bank.

Preparation of Bank Reconciliation Statement
After identifying the causes of difference, the reconciliation may be done in the following two ways:
(a) Preparation of bank reconciliation statement without adjusting cash book balances.
(b) Preparation of bank reconciliation statement after adjusting cash book balance.

Preparation of Bank Reconciliation Statement without adjusting cash book balances
We may have two types of balances while preparing the Bank Reconciliation Statement which is following:
(a) Favourable balances

1. Credit balance as per passbook or bank statement is given and the balance as per cash book is to be ascertained.
2. Debit balance as per cash book is given and the balance as per pass book is to be ascertained.

(b) Unfavourable balances

1. Debit balance as per pass book (i.e. overdraft) is given and the balance as per cash book is to be ascertained.
2. Credit balance as per cash book (i.e. overdraft) is given and the balance as per pass book is to be ascertained.

Steps are to be taken for preparation of the Bank Reconciliation Statement
1. When debit balance as per Cash Book (Favourable balance) is given:

1. Take balance as a starting point say Balance as per Cash Book.
2. Add all transactions that have resulted in increasing the balance of the passbook.
3. Deduct all transactions that have resulted in decreasing the balance of the passbook.
4. Extract the net balance shown by the statement which should be the same as shown in the passbook.

Proforma:
Bank Reconciliation Statement as on…………..


2. When the credit balance as per Pass Book (Favourable balance) is given:

1. Take balance as a starting point say Balance as per Pass Book.
2. Add all transactions that have resulted in increasing the balance of the cash book.
3. Deduct all transactions that have resulted in decreasing the balance of the cash book.
4. Extract the net balance shown by the statement which should be the same as shown in the cash book.

Proforma:
Bank Reconciliation Statement as on…………..


3. When the credit balance as per Cash Book (Uufavoarable balance) is given:

1. Take balance as a starting point say Overdraft as per Cash Book.
2. Add all the transactions that have resulted in decreasing the balance of the passbook.
3. Deduct all the transactions that have resulted in increasing the balance of the passbook.
4. Extract the net balance shown by the statement which should be the same as shown in the passbook.

Proforma:
Bank Reconciliation Statement as on……………..


4. When the debit balance as per Pass Book (Unfavourable balance) is given:

1. Take balance as a starting point say overdraft as per Pass Book.
2. Add all the transactions that have resulted in decreasing the balance of the cash book.
3. Deduct all the transactions that have resulted in increasing the balance of the cash book.
4. Extract the net balance shown by the statement which should be the same as shown in the cash book.

Proforma:
Bank Reconciliation Statement as on…………….

Preparation of Bank Reconciliation Statement with Adjusted Cash Book
Bank Reconciliation Statement is prepared usually without adjusting the Cash Book during the different months of the financial year. However, at the. end of the financial year, the Cash Book must be adjusted before preparing the Bank Reconciliation Statement as the adjusted balance of the Cash Book is to be shown in the Balance Sheet.

The procedure for finding out adjusted cash balance is as follows:
1. Firstly a Cash Book with Bank Columns only will be prepared with the balance of the existing Cash Book.

2. All errors that have been committed in the Cash Book will have to be rectified by passing adjusting entries in the Cash Book.

For example:
(a) Any amount recorded twice in the Cash Book.
(b) Recording of issued cheques omitted in Cash Book.
(c-) Cheques deposited into the bank but omitted to be recorded in • Cash Book.
(d) Overcosting or undercoating of debit or credit column of Cash Book.
(e) Entries on the wrong side of columns etc.

3. Amounts for which bank has given credit in Pass Book but not recorded in the debit side of Cash Book. They will be recorded.
(a) Interest allowed by the bank.
(b) Interest Or dividend collected by the bank.
(c) Amount directly deposited by customers into bank etc.

4. Amounts for which bank has given debit in Pass Book but not recorded in the credit side of Cash Book. They will be recorded, such as
(a) Interest charged by the bank on overdraft.
(b) Bank charges, commission charges, etc.
(c) Insurance premium paid by the bank.
(d) cheque sent for collection and dishonored.

5. Following items must not be recorded in the Amended/Adjusted Cash Book:
(a) Cheques deposited into the bank but not collected.
(b) Cheques issued but not presented for payment.
(c) Any wrong entry in Pass Book.

6. Adjusted Cash Book is then balanced and this new balance is taken as a starting point for preparing the Bank Reconciliation Statement.

Recording of Transactions 2 Notes Class 11 Accountancy Chapter 4

A small business may be able to record all its transactions in one book only, i.e., the journal. But as the business expands and the number of transactions becomes large, it may become cumbersome to journalize each transaction. For the quick, efficient, and accurate recording of business transactions, Journal is sub-divided into special journals. These special journals are also called day books or subsidiary books. A transaction that cannot be recorded in any special journal is recorded in a journal called the Journal Proper.

Following are the subsidiary books for special purposes:

1. Cash Book
2. Purchase Book
3. Purchases Return Book,
4. Sales Book
5. Sales Return Book
6. Journal Proper, etc.

1. Cash Book: Cash Book is a special Journal that is used for recording all cash receipts and cash payments. It starts with the cash or bank balances at the beginning of the period. The Cash Book is both a journal and a ledger. It is also called the book of original entry.

Types of Cash Book

1. Single Column Cash Book: Single Column Cash Book records all cash transactions of the business in chronological order. It has one amount column on each side. All cash receipts are recorded on the debit side and all cash payments are recorded on the credit side.

Format of Single Column Cash Book:

2. Double Column Cash Book: Double Column Cash Book has two amount columns (One for Cash and one for Bank) on each side when the number of bank transactions is large, it is convenient to have a separate amount column for bank transactions in the cash book itself instead of recording them in the journal. This helps in getting information about the position of the bank account from time to time. All cash receipts, deposits into the bank are recorded on the debit side and all cash payments and withdrawals from the bank are recorded on the credit side.

Contra Entry: When cash is deposited into the bank, and when cash is withdrawn from the bank for use1 in the office, each such transaction affects both ‘Cash column’ as well as ‘Bank column’, and the transaction is, therefore, recorded on both sides of the cash book. Such entries, the double-entry of which is complete in the cash book itself, are called contra entries’.

Format of Double Column Cash Book:

3. Petty Cash Book: In every organization, a large number of small payments such as conveyance, cartage, postage, telegrams, and other expenses are made. These are generally repetitive in nature. If all these payments are handled by the cashier and are recorded in the main cash book, the procedure is found to be very cumbersome. To avoid this large organizations normally appoint one more cashier (petty cashier) and maintain a separate cash book to record these transactions such a cash book maintained by the petty cashier is called a petty cash book. The petty cashier works on the imprest system.

Format of Petty Cash Book:

2. Purchases (Journal) Book: All credit purchases of goods are recorded in the Purchases (Journal) Book. It records neither the cash purchase of the goods nor the purchase of any assets other than the good. The source documents for recording entries in the books are invoices or bills received by the firm from the supplies of the goods. Entries are made with the net amount of the invoice. The monthly total of the purchases book is posted to the debit of purchases account in the ledger.

Format of Purchases (Journal) Book:
Purchase (Journal) Book

3. Purchases Return (Journal) Book: Purchases Returns Book (Return Outward Book) is used for the purposes of recording the returns of goods purchased on credit. It records neither the returns of goods purchased on a cash basis nor the returns of any assets other than the goods. The entries in the purchases return book are usually made on the basis of debit notes issued to the suppliers or credit notes received from the suppliers.

A debit note is a document prepared by the purchaser to inform the supplier that his account has been debited with the amount mentioned and for the reasons stated therein. The debit note contains the date of return, name of the supplier to whom the goods have been returned, details of the goods returned, reasons for returning the goods. Each debit note is serially numbered.

Format of Purchases Return (Journal) Book:
Purchases Return (Journal) Book

Format of Debit Note:

4. Sales (Journal) Book: All credit sales of goods are recorded in the sales journal. It records neither the cash sale of the goods nor the sale of any assets other than goods. The source document for recording entries in the sales journal is a sales invoice or bill issued by the firm to the customer.

Format of Sales (Journal) Book:
Sales (Journal) Book

The sales journal is totaled periodically (generally monthly), and this total is credited to the sales account in the ledger.

5. Sales Return (Journal) Book: This journal is used to record the return of goods by customers to them on credit. On receipt of goods from the customer, a credit note is prepared. The source document for recording entries in the sales return book is generally the credit note.

A credit note is a document prepared by the seller to inform the buyer that his account has been credited with the amount mentioned and for the reasons stated therein. Credit does not contain the date of return of goods, the name of the customer who has returned the goods, detail Is of goods received back, and the number of such goods. Each credit r/ote is serially numbered.

Format of Sales Return (Journal) Book:
Sales Return (Journal) Book

6. Journal Proper: Journal proper is a residuary book in which those transactions are recorded which cannot be recorded in any other subsidiary book. The various examples of transactions entered in a journal proper are opening entry, Adjustment Entries, Rectification Entries, Transfer Entries, Closing Entries, etc.