Journalise the following transactions in the books of Madhu and prepare necessary

ledger accounts
2003 January 1. Madhu commenced business with Rs.15,000/-
2. Paid in to bank Rs.10,000/-
3. Purchased goods from B for Rs.2,000/-
4. Returned goods to B for Rs.200/-
5. Paid to B in full settlement of A/C Rs.1,700/-
7. Received interest from the bank Rs.750/-
9. Sold goods for cash Rs.7000/-
12. Sold goods to Don for Rs.4000/-
15. Received goods worth Rs.100/- from Don with a complaint about
damage
16. Paid salaries Rs.400/-
17. Entertainment Rs.50/-
20. Received a cheque from Don Rs.500/-
25. Issued a cheque for Rs.1000/- towards rent to landlord

Sol: In the books of Madhu

JOURNALISATION
Date PARTICULARS LF AMOUNT AMO NT
Dr. Cr.
2003 Jan 1 Cash A/c Dr 15,000
To Madhus capital A/c 1,5000
(Being the business commenced)
2 Bank A/c Dr 10,000
To cash A/c 10,000
(Being the cash deposited into
bank)
3 Purchases A/c Dr 2,000
To B A/c 2,000
(Being goods purchased from B on
credit)

4 Bs A/c Dr 200
To purchase returns A/c 200
(Being the goods returned to B on
account of damage)
5 Bs account Dr 1800
To Cash account 1700
To discount A/c 100
(Being the payment made in full
settlement)
Date PARTICULARS LF AMOUNT AMO NT
Dr. Cr.
2003 Jan 7 Cash A/c Dr 750
To interest from bank A/c 750
(Being the business commenced)
9 Cash A/c Dr 7000
To Sales A/c 7000
(Being goods sold for cash)

12 Dons A/c Dr 4,000

To Sales A/c 4,000
(Being goods sold to Don on credit)

15 Sales returns A/c Dr 100

To Dons A/c 100
(Being the goods returned from Don
on account of damage)
16 Salaries A/c Dr 400
To Cash A/c 400

(Being salaries paid)

Date PARTICULARS LF AMOUNT AMO NT
Dr. Cr.
2003 Jan 17 Entertainment A/c Dr 50
To cash A/c 50
(Being the entertainment expenses
incurred)
20 Bank A/c Dr 500
To Dons A/c 500
(Being cheque received from Don)

25 Rent A/c Dr 1,000

To Bank A/c 1,000
(Being the rent paid by cheque)

Total 42,850 42,850

 Dr. Madhu Account Cr.

Date Particulars F Amount Date Particulars F Amount

Rs Rs
2003 Jan31 To bal c/d 15,000 2003 Jan 1 By cash A/c 15,000
15,000 15,000

Feb 1 By blc b/d 15,000

Preparation of Ledger Accounts:
Dr. Cash Account Cr.

Date Particulars F Amount Date Particulars F Amount

Rs Rs
2003 Jan 1 To Madhu A/c 15,000 2003 Jan 2 By bank A/c 10,000
7 To Interest A/c 750 5 By Bs A/c 1,700
9 To Sales A/c 7,000 6 By Salary A/c 400
7 By 50
entertainment
A/c
31 By bal c/d 10,600
22,750 22,750
Feb 1 To bal b/d 10,600
 Trial Balance ending January 31, 2003

Debit Balances Credit Balances

Rs. Rs.
Cash Account 10,600
Madhu Capital Account 15,000
Interest From Bank Account 750
Discount Account 100
Sales Account 11,000
Ravi Account 3,400
Purchase Returns Account 200
Bank Account 9,500
Rent Account 1,000
Salaries Account 400
Entertainment Account 50
Purchases Account 2,000
Sales Returns Account 100

27,050 27,050
 Trial Balance

Trial balance is a statement containing debit and credit balances of various accounts
taken out from ledger books as on a particular date.

The trial balance must agree , as on a given date.

If it does not agree, that means there are certain arithmetical errors in the books of
accounts.

In case the firm is unable to locate and rectify the errors by the date of preparation of
final accounts, the difference in the trial balance will be placed in final accounts as
suspense account and it will be carried to the balance sheet
 Preparation of Trial Balance
For preparing Trial Balance, first of all it should be understood which are the
accounts that go under debit and credit balances.

Accounts showing debit balances:

Debtors Accounts
Asset Accounts like Plant, furniture etc.
Expense accounts like rent etc.
Losses accounts like goods destroyed in fire.
Purchases Accounts
Sales returns accounts
Drawings account
Accounts showing credit balances:
Creditors accounts
Liabilities Account
Incomes account
Gains Account
Profits Account
Loan Account
Bank Overdraft Account
Sales Account
Purchase returns Account
Reserves and funds (capital)
Example:
Make a trial balance as on 31.12.2002 from the following information.

Particulars Rs
Sundry Debtors 32,000
Stock 22,000
Cash in hand 35
Cash at bank 1,545
Plant and machinery 17,500
Sundry Creditors 10,650
Trade expenses 1,075
Sales 2,34,500
Salaries 2,225
Carriage Outwards 400
Rent 900
Bills payable 7,500
Purchases 2,18,870
Discount(Dr) 1,100
Capital 79,500
Business Premises 34,500
 Trial Balance As On 31.12.2002

Particulars Dr. (Rs.) Cr. (Rs.)

Sundry Debtors 32,000
Stock 22,000
Cash in hand 35
Cash at bank 1,545
Plant and machinery 17,500
Sundry Creditors 10,650
Trade expenses 1,075
Sales 2,34,500
Salaries 2,225
Carriage Outwards 400
Rent 900
Bills payable 7,500
Purchases 2,18,870
Discount(Dr) 1,100
Capital 79,500
Business Premises 34,500

Total 3,32,150 3,32,150

Capital and revenue items:

Capital expenditure: capital expenditure refers to that expenditure incurred to acquire a fixed
asset used continuously in the business for the purpose of earning revenue.any amount spent to
increase the earning capacity of the asset is also called capital expenditure. Ex:
Cost of plant and machinery,buildings and other fixed assets
Cost of installation of such assets
Modifying,extending or improving an existing fixed asset such as upgrading a production line
or a computer .

Capital expenditure is recorded on the assets side of balance sheet.

Revenue expenditure: It refers to that expenditure which is incurred to maintain the earning
capacity of the business in the normal course during the current period.It means the benefit of
revenue expenditure is utilised in that period itself.Ex:
Expenditure on rent ,wages ,salaries, carriage etc
Interest on loan borrowed to carryout business
Cost of goods bought for resale
Depreciation of fixed assets
All expenses incurred in manufacturing,office,selling and distrbution
Loss of stock due to fire or any other reason
Discounts and allowances (recorded on trading and profit & loss account)
Final Accounts:

Two Parts a) Trading Account

b) Profit & loss Account
Trading Account shows gross profit or gross loss for the end of a given accounting
period.
Gross profit or gross loss is the excess of sales revenue over the cost of goods sold.

Gross profit=net sales-cost of goods sold.

If the cost of goods sold is more than the sales revenue, it results in gross loss.

Items to be considered in trading account are:

1) Opening stock
2) Purchases less purchase returns
3) Wages
4) Carriage inwards
5) Fuel and power
6) Sales less sales returns
7) Any other direct expenses such as freight, spent on raw materials
8) Closing stock given as additional information( adjustments)
While preparing trading account for a manufacturing concern consider only such factory
expenses that increase the cost of goods manufactured, such as fuel and power,heating and
lighting etc. Gross profit is arrived at after considering all factory expenses.
Proforma:

Trading account for the year ending.............................

Dr. Cr.

To opening stock xxx By sales xxx

less; sales returns xxx Xxx
To purchases xxx
less purchase returns xxx xxx By closing stock Xxx
To wages Xxx
To carriage inwards Xxx
To fuel and power Xxx
To direct expenses Xxx
To gross profit transferred to profit Xxx
& loss account
xxx xxx
From the following extract of trial balance, from the books of kamal, for the year ending dec
31, 2002, prepare a trading account.

Particulars Dr.(Rs) Cr(Rs)

Sales 325000
Purchases 240000
Freight 5000
Sales returns 5000
Purchase returns 5600
Wages 40000
Salaries 20000
Carriage inwards 10000
Opening stock 25000

Adjustments : stock as on 31.12.2002 was rs.40,000

Solution:

Dr. Cr.

Particulars Rs. Particulars Rs.

To opening stock 25000 By sales 3,25000
less sales returns 5000
To purchases 240000 320000
less: purchase returns 5600 234400
By closing stock 40000
To wages 40000
To carriage inwards 10000
To freight 5000
To gross profit transferred to profit 45600
And loss account

360000 360000

Note: salaries given in trial balance is not considered here.salaries is office expense
and hence it is transferred to profit and loss account.trading acc considers only
expenses and receipts at the factory.
Profit and loss account:

p&l acc shows net profit or net loss for the end of a given period.
From the gross profit (or gross loss) transferred from trading acc, deduct all expenses
relating to office,selling and distribution depts.
Add all non operating income such as commission or rent received, interest received
etc.

Profit & loss acc considers only revenue expenditure such as those incurred in:
1. Maintaining the capital assets
2. Running business from time to time
3. Selling and distributing the goods of the business they deal in
Proforma:
Profit and loss account for the year ending............................

Dr cr
To salaries Xxx By gross profit Xxx
To rent Xxx By discount received Xxx
To insurance Xxx By comission received Xxx
To carriage outwards Xxx By reduction in provision for bad debts Xxx
To telephones Xxx By profit on sale of fixed asset Xxx
To provision for depreciation Xxx
To bad debts written off xxx
add: increase in bad debts xxx Xxx
To cost of samples Xxx
To advertising Xxx
To interest on loan Xxx
To discount allowed Xxx
To net profit transferred to capital
account Xxx

xxx xxx

In brief Net profit=gross profit+other incomes-expenses.

Here all expenses relating to office,selling and distribution are considered
Ex: prepare (a) trading account and (b) profit and loss account from the following Bharaths trial
balance for the year ending 31/3/2014.
(In the books of bharath)
Trial balance for the year ending 31.3.2014

Rs Rs
Drawings 4,000
Discounts allowed 1,500
Discounts received 500
Office expenses 2,000
Manufacturing expenses 1,200
Bills payable 17,000
Bills receivable 10,000
Cash in hand 4,800
Cash at bank 30,800
Office rent 3,600
Bharaths capital 2,00,000
Machinery 60,000
Stock (01.04.2014) 32,000
Wages 1,00,000
Carriage inwards 1,000
Cont....
 Rs rs
Salaries 10,000
Factory rent 4,800
Repairs 800
Fuel and power 5,000
Furniture 11,000
Buildings 80,000
Sundry debtors 40,000
Sales 4,07,200
Purchases 2,44,000
Creditors 25,000
Returns inwards 7,200
Returns outwards 4,000

6,53,700 6,53,700

Adjustments: closing stock rs. 40,000

 (In the books of Bharath)
Trading account for the year ending 31.03.2014
Dr. Cr.

To opening stock 32,000 By sales 4,07,200

less: sales returns 7,200 4,00,000
To purchases 2,44,000
less: purchase returns 4,000 2,40,000 By closing stock 40,000
To wages 1,00,000
To carriage inwards 1,000
To manufacturing expenses 1,200
To fuel and power 5,000
To factory rent 4,800
To gross profit transferrd to
Profit & loss account 56,000

4,40,000 4,40,000
 Profit and loss account for the year ending 31.03.2014
Dr. cr.
Rs. Rs.
To salaries 10,000 By gross profit 56,000
To repairs 800 By discount received 500
To discounts allowed 1,500
To office expenses 2,000
To office rent 3,600
To net profit transferred to capital
account 38,600

56,500 56,500
Balance sheet
Balance sheet is a statement of assets and liabilities of a business as on a given date. It
shows a true and fair view of financial position of a business as on a given date.

Balance sheet is a statement.(not an account) so it doesnt have debit or credit side. It has 2
sides: liabilities side and assets side

Under double entry system assets must always be equal to capital and liabilities
Proforma of balance sheet:
Balance sheet as on .......................

Liabilities Rs Assets Rs
Long term liabilities: Fixed assets:
Owners capital xxx Plant & machinery xxx
add: net profit from less : provision for depreciation xxx Xxx
P&l account xxx Xxx
less: drawings bank Furniture and fixtures xxx
overdraft xxx Xxx less: provision for depreciation xxx Xxx

Current liabilities: Current assets:

Sundry creditors Xxx Stock Xxx
Bills payable Xxx Sundry debtors xxx
Outstanding expenses Xxx less: provision for bad and
Doubtful debts xxx Xxx
Bills receivables Xxx
Cash at bank Xxx
Cash in hand Xxx
Prepaid expenses Xxx

Total xxx Total xxx

Prepare balance sheet for the information given in previous example.
Sol: (in the books of bharath)
Balance sheet as on 31.03.2014

Liabilities Rs Assets Rs
Long term liabilities: Fixed assets:
Bharaths capital 2,00,000 Buildings 80,000
add: net profit from Plant & machinery 60,000
P&l account 38,600 2,38,600 Furniture and fixtures 11,000
less: drawings 4,000
2,34,600
Current liabilities: Current assets:
Sundry creditors 25,000 Stock 40,000
Bills payable 17,000 Sundry debtors 40,000
Bills receivables 10,000
Cash at bank 30,800
Cash in hand 4,800

Total 2,76,600 Total 2,76,600