Tag: Accounting Equation

Management Notes

Preparation of Statement of Profit and Loss and Balance Sheet of a Proprietary concern with Special adjustments like Depreciation, Outstanding expenses and Prepaid expenses, Outstanding incomes and Incomes received in advance and Provision for doubtful debts, interest on drawings and interest on capital. (Vertical Form)

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Statement of Profit and Loss and Balance Sheet (Vertical Form) for a proprietary concern with common adjustments, including:

  • Depreciation

  • Outstanding Expenses

  • Prepaid Expenses

  • Outstanding Incomes

  • Incomes Received in Advance

  • Provision for Doubtful Debts

  • Interest on Drawings

  • Interest on Capital

🧾 Trial Balance as on 31st March 2025

Particulars Debit (₹) Credit (₹)
Capital 3,00,000
Drawings 30,000
Interest on Capital
Interest on Drawings
Land and Building 2,00,000
Furniture 50,000
Debtors 1,00,000
Provision for Doubtful Debts (Old) 5,000
Creditors 60,000
Cash in hand 10,000
Bank Balance 40,000
Sales 3,50,000
Purchases 2,00,000
Returns Inward (Sales Returns) 5,000
Returns Outward (Purchase Returns) 3,000
Salaries 60,000
Rent 20,000
Insurance Premium 6,000
Commission Received 10,000
Bad Debts 2,000
Total 7,23,000 7,23,000

  1. Depreciation on Furniture @ 10%, Building @ 5%

  2. Salaries Outstanding ₹5,000

  3. Rent Paid in Advance ₹2,000

  4. Commission Received but not yet earned ₹1,000

  5. Create a new provision for doubtful debts @ 5% on debtors

  6. Interest on Capital @ 10%

  7. Interest on Drawings @ ₹1,500

  8. Insurance includes ₹1,000 prepaid

  9. Outstanding Commission ₹2,000 (not yet received)

📊 Statement of Profit and Loss for the Year Ended 31st March 2025

(Vertical Form)

Particulars Amount (₹)
Revenue from Operations:
  Sales 3,50,000
  Less: Sales Returns (5,000)
Net Revenue 3,45,000
Add: Outstanding Commission 2,000
Less: Unearned Commission Received (1,000)
Total Revenue 3,46,000
Expenses:
Purchases 2,00,000
Less: Purchase Returns (3,000)
Net Purchases 1,97,000
Salaries 60,000
Add: Outstanding Salaries 5,000
Total Salaries 65,000
Rent 20,000
Less: Prepaid Rent (2,000)
Net Rent 18,000
Insurance 6,000
Less: Prepaid Insurance (1,000)
Net Insurance 5,000
Bad Debts (given) 2,000
Add: New Provision (5% of ₹1,00,000) = 5,000
Less: Old Provision (5,000)
Net Bad Debts + Provision 2,000
Depreciation on Furniture (10% of 50,000) 5,000
Depreciation on Building (5% of 2,00,000) 10,000
Interest on Capital (10% of ₹3,00,000) 30,000
Add: Interest on Drawings (Income) (1,500)
Total Expenses 3,28,500
Net Profit 17,500

(Vertical Format)

A. Equity and Liabilities

Particulars Amount (₹)
1. Capital
Original Capital 3,00,000
Add: Net Profit 17,500
Add: Interest on Capital 30,000
Less: Drawings (30,000)
Less: Interest on Drawings (1,500)
Adjusted Capital 3,16,000
2. Current Liabilities
Creditors 60,000
Outstanding Salaries 5,000
Commission Received in Advance 1,000
Total Liabilities 66,000
Total Equity and Liabilities 3,82,000
Particulars Amount (₹)
1. Non-Current Assets
Land and Building 2,00,000
Less: Depreciation (10,000)
Net Value 1,90,000
Furniture 50,000
Less: Depreciation (5,000)
Net Furniture 45,000
2. Current Assets
Debtors 1,00,000
Less: New Provision (5%) (5,000)
Net Debtors 95,000
Prepaid Rent 2,000
Prepaid Insurance 1,000
Outstanding Commission (Receivable) 2,000
Cash in Hand 10,000
Bank Balance 40,000
Total Assets 3,82,000
Management Notes

Simple Problems on the Purchases, Purchase Returns, Sales, Sales Returns, Bills Receivable and Payable Books

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Here are simple problems on the following subsidiary books with sample entries in tabular form:

  • Purchases Book

  • Purchase Returns Book

  • Sales Book

  • Sales Returns Book

  • Bills Receivable Book

  • Bills Payable Book

📘 1. Purchases Book (Credit Purchases of Goods only)

Date Particulars Invoice No. L.F. Amount (₹)
Jan 5 Purchased from M/s Verma Traders:
10 boxes of pens @ ₹100		 101 – 1,000
Jan 10 Purchased from M/s Arya & Co.:
5 reams of paper @ ₹200		 102 – 1,000
Total 2,000
Date Particulars Debit Note No. L.F. Amount (₹)
Jan 12 Returned 2 boxes of pens to M/s Verma Traders @ ₹100 each (defective) DN01 – 200
Total 200
Date Particulars Invoice No. L.F. Amount (₹)
Jan 8 Sold to M/s Mohan & Sons:
20 boxes of pencils @ ₹50		 201 – 1,000
Jan 15 Sold to M/s Gupta Traders:
10 calculators @ ₹300		 202 – 3,000
Total 4,000
Date Particulars Credit Note No. L.F. Amount (₹)
Jan 20 M/s Mohan & Sons returned 5 boxes of pencils @ ₹50 (damaged) CN01 – 250
Total 250
Date From Whom Received Bill No. Due Date Amount (₹) L.F. Remarks
Jan 25 Received bill from M/s Gupta Traders BR01 Mar 25 3,000 – 60 days credit
Total 3,000
Date To Whom Given Bill No. Due Date Amount (₹) L.F. Remarks
Jan 27

Accepted bill of M/s Arya & Co.

 BP01 Mar 27 1,000 – 60 days credit
Total 1,000
Management Notes

Proforma Invoice, Features, Format

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Proforma Invoice is a preliminary or estimated bill of sale sent by a seller to a buyer before the actual delivery of goods or services. It provides details such as description of goods, quantity, value, terms of sale, payment method, and estimated shipping costs. Unlike a final invoice, it is not a demand for payment but serves as a quote or declaration of intent to deliver goods. It helps the buyer understand the cost and terms in advance and is often used in international trade for customs clearance and approvals. A proforma invoice does not affect accounting records.

Features of Proforma Invoice:

  • Preliminary Document

A Proforma Invoice is a preliminary document that acts as a quotation or offer issued by the seller to the buyer before goods or services are delivered. It outlines the expected cost, description of goods, quantity, price, and terms of trade. It is not a legally binding invoice but rather a confirmation of intent to provide goods or services. Buyers can review the information, clarify terms, and prepare for future transactions, making it an essential document in international trade and business planning.

  • Non-Binding in Nature

One of the primary features of a Proforma Invoice is that it is non-binding. It does not serve as a final demand for payment and does not get recorded in the books of accounts as a receivable or payable. Since it is not an actual invoice, the buyer is not legally obligated to pay the amount mentioned. Instead, it functions more like a sales quotation or a commercial estimate, allowing both parties to agree on the terms before entering into a binding agreement or transaction.

  • Includes Detailed Product Information

A Proforma Invoice provides comprehensive details of the proposed transaction. It typically includes the description of goods, quantity, unit price, total value, applicable taxes or duties, terms of delivery (like Incoterms), and payment terms. This ensures that the buyer has all relevant information before the final invoice is issued or the transaction is executed. In the case of services, it may outline the scope of work, hourly rates, and total expected charges. This helps prevent disputes or misunderstandings between the seller and the buyer.

  • Useful for Customs and Import Approval

In international trade, Proforma Invoices are often used by importers to obtain import licenses, arrange for foreign exchange, or seek approvals from customs authorities. Since it contains estimated shipping costs and duties, customs officials use it to assess the value of goods entering the country. Although it is not the final commercial invoice, it serves as a required document to initiate the process of international shipment and compliance with regulatory requirements. It acts as a basis for customs clearance before the goods are dispatched.

  • Helps in Budgeting and Planning

For buyers, a Proforma Invoice is a valuable tool for financial planning and budgeting. Since it outlines the projected cost of the goods or services, buyers can estimate their future expenses and arrange necessary funds in advance. Businesses use proforma invoices to generate purchase orders, secure internal approvals, or initiate payment processes before the actual sale takes place. In project-based or service-driven industries, it helps clients understand project costs and allocate resources effectively before committing to the purchase.

Proforma Invoice Format (in Table):

Proforma Invoice
Seller’s Name and Address
Company Name: XYZ Traders Pvt. Ltd.
Address: 123, Business Park, Delhi – 110001
GSTIN: 07AAACX1234F1Z1
Phone: +91-9876543210     Email: info@xyztraders.com

| Buyer: ABC Enterprises |
| Address: 56, Market Street, Mumbai – 400001 |
| GSTIN: 27AABCA1234G1Z2 |

Proforma Invoice No. PI/2025/001 Date 10-June-2025
Purchase Order No. PO/ABC/2025/076 PO Date 08-June-2025
S. No. Description of Goods/Services Quantity Unit Price (₹) Total Amount (₹)
1 Wireless Mouse (Model X) 50 pcs 500 25,000
2 Wireless Keyboard (Model Y) 30 pcs 750 22,500
Subtotal 47,500
Add: GST @18% 8,550
Grand Total ₹56,050
Terms and Conditions
– Delivery Time: Within 7 working days from order confirmation
– Payment Terms: 100% advance
– Validity: This Proforma Invoice is valid for 15 days from the date of issue
– Freight: Extra as applicable

| Name: Mr. Rohit Mehra    Designation: Sales Manager |

Management Notes

Simple Problems on Journal

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Journal is the primary book of accounting where all business transactions are recorded in chronological order for the first time. It shows the date, accounts affected, amounts debited and credited, and a brief description. Known as the book of original entry, the journal ensures accurate, systematic, and complete records for further posting to the ledger.

Simple Journal Problems in Table Format:

S. No. Transaction Journal Entry Debit (₹) Credit (₹)

1

 Started business with cash ₹50,000

Cash A/c Dr.

  To Capital A/c

(Being business started with cash)

 50,000 50,000

2

 Purchased goods for cash ₹10,000

Purchases A/c Dr.

  To Cash A/c

(Being goods purchased for cash)

 10,000 10,000
3

Sold goods for cash ₹15,000

Cash A/c Dr.

  To Sales A/c

(Being goods sold for cash)

 15,000 15,000
4

Paid salary ₹5,000

Salary A/c Dr.

  To Cash A/c

(Being salary paid)

 5,000 5,000
5

Purchased furniture for ₹8,000

Furniture A/c Dr.

  To Cash A/c

(Being furniture purchased for cash)

 8,000 8,000
6

Received commission ₹2,000

Cash A/c Dr.

  To Commission Received A/c

(Being commission received)

 2,000 2,000
7 Paid rent ₹3,000 Rent A/c Dr.

  To Cash A/c

(Being rent paid)

 3,000 3,000
8 Withdrawn cash for personal use ₹1,500 Drawings A/c Dr.

  To Cash A/c

(Being cash withdrawn for personal use)

 1,500

1,500

9

 Paid to creditor ₹4,000 Creditor’s Name A/c Dr.

  To Cash A/c

(Being amount paid to creditor)

 4,000

4,000

10

 Received from debtor ₹6,000

Cash A/c Dr.

  To Debtor’s Name A/c

(Being amount received from debtor)
Management Notes

Golden Rules of Debit and Credit

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Golden Rules of Accounting are foundational principles used in the Traditional Accounting System to determine how to record business transactions using debit and credit entries. These rules are based on the types of accounts: Personal, Real, and Nominal. Each type has a specific rule that guides whether an account should be debited or credited in a journal entry.

✅ 1. Personal Account

Rule:
👉 Debit the receiver, Credit the giver

🔹 Explanation:

Personal accounts are related to individuals, firms, companies, or institutions. This rule means that when someone receives something from the business, they are debited, and when someone gives something to the business, they are credited.

🔹 Examples:

  1. Paid ₹5,000 to Mohan:
      → Mohan (Receiver) is debited
      → Cash (Giver) is credited
      Journal Entry:
      Mohan A/c Dr. ₹5,000
        To Cash A/c ₹5,000

  2. Received ₹8,000 from Rahul:
      → Rahul (Giver) is credited
      → Cash (Receiver) is debited
      Journal Entry:
      Cash A/c Dr. ₹8,000
        To Rahul A/c ₹8,000

✅ 2. Real Account

Rule:
👉 Debit what comes in, Credit what goes out

🔹 Explanation:

Real accounts are related to assets or properties—both tangible (like cash, furniture) and intangible (like goodwill, patents). This rule means when an asset comes into the business, it is debited, and when an asset goes out, it is credited.

🔹 Examples:

  1. Purchased furniture for ₹10,000 in cash:
      → Furniture comes in → Debit
      → Cash goes out → Credit
      Journal Entry:
      Furniture A/c Dr. ₹10,000
        To Cash A/c ₹10,000

  2. Sold a machine for ₹25,000:
      → Machine goes out → Credit
      → Cash comes in → Debit
      Journal Entry:
      Cash A/c Dr. ₹25,000
        To Machinery A/c ₹25,000

✅ 3. Nominal Account

Rule:
👉 Debit all expenses and losses, Credit all incomes and gains

🔹 Explanation:

Nominal accounts deal with expenses, losses, incomes, and gains. This rule implies that all business expenses and losses are debited, while all incomes and gains are credited.

🔹 Examples:

  1. Paid ₹2,000 as salary:
      → Salary is an expense → Debit
      → Cash is going out → Credit
      Journal Entry:
      Salary A/c Dr. ₹2,000
        To Cash A/c ₹2,000

  2. Received ₹3,000 as commission:
      → Commission is an income → Credit
      → Cash is coming in → Debit
      Journal Entry:
      Cash A/c Dr. ₹3,000
        To Commission Received A/c ₹3,000

🧠 Quick Summary Table: Golden Rules

Type of Account Golden Rule Examples
Personal Account Debit the receiver, Credit the giver Payment to supplier, receipt from customer
Real Account Debit what comes in, Credit what goes out Purchase of assets, sale of machinery
Nominal Account Debit all expenses/losses, Credit all incomes/gains Payment of rent, receiving interest

  • Foundation of Journal Entries:

Helps in accurate and systematic recording of transactions in the books of accounts.

  • Easy to Learn and Apply:

Simple rules based on the nature of the accounts make them practical for beginners.

  • Ensures Accuracy:

Maintains the balance of the accounting equation (Assets = Liabilities + Equity).

  • Facilitates Auditing and Reporting:

Provides clarity and consistency, which helps auditors and accountants in verification and reporting.

Management Notes

Types of Accounts: Traditional and Modern Accounting

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In accounting, classification of accounts is essential to systematically record, analyze, and interpret business transactions. There are two main approaches to classifying accounts:

Traditional Classification of Accounts:

The Traditional Approach classifies all accounts into three main types, and each has specific rules for debit and credit. These are known as the Golden Rules of Accounting.

A. Personal Accounts

These accounts relate to individuals, firms, companies, and institutions.

  • Examples: Ram’s Account, State Bank of India Account, Creditors, Debtors

  • Golden Rule:
      Debit the Receiver, Credit the Giver

Example: If cash is paid to Ram, Ram is receiving the value.
  → Debit Ram’s Account
  → Credit Cash Account

B. Real Accounts

These accounts relate to assets and properties — both tangible (like buildings) and intangible (like goodwill).

  • Examples: Cash, Machinery, Building, Goodwill

  • Golden Rule:
      Debit what comes in, Credit what goes out

Example: When furniture is purchased for cash:
  → Debit Furniture Account (asset coming in)
  → Credit Cash Account (asset going out)

C. Nominal Accounts

These accounts relate to expenses, losses, incomes, and gains.

  • Examples: Salary, Rent, Commission Received, Interest Paid

  • Golden Rule:
      Debit all expenses and losses, Credit all incomes and gains

Example: If salary is paid:
  → Debit Salary Account (expense)
  → Credit Cash Account (asset going out)

Modern Classification of Accounts:

Modern or Accounting Equation Approach is based on the equation:

  Assets = Liabilities + Owner’s Equity

Under this system, accounts are classified into five major types:

A. Asset Accounts

These represent resources owned by a business that provide future benefits.

  • Examples: Cash, Inventory, Buildings, Vehicles, Prepaid Expenses

  • Rule: Increase in assets = Debit, Decrease = Credit

Example: Buying machinery:
  → Debit Machinery Account
  → Credit Cash/Bank Account

B. Liability Accounts

These represent obligations or debts owed by the business to outsiders.

  • Examples: Creditors, Loans Payable, Bills Payable, Outstanding Expenses

  • Rule: Increase in liabilities = Credit, Decrease = Debit

Example: Taking a loan:
  → Debit Bank Account
  → Credit Loan Account

C. Equity (Capital) Accounts

These represent the owner’s interest in the business. It includes capital introduced and retained earnings.

  • Examples: Owner’s Capital, Retained Earnings, Drawings

  • Rule: Increase in equity = Credit, Decrease = Debit

Example: Owner invests cash in business:
  → Debit Cash Account
  → Credit Capital Account

D. Revenue (Income) Accounts

These represent income earned by the business through sales or services.

  • Examples: Sales, Interest Income, Commission Received

  • Rule: Increase in income = Credit, Decrease = Debit

Example: Goods sold for cash:
  → Debit Cash Account
  → Credit Sales Account

E. Expense Accounts

These represent costs incurred in the process of earning revenue.

  • Examples: Rent, Salary, Utilities, Advertising

  • Rule: Increase in expense = Debit, Decrease = Credit

Example: Paying rent:
  → Debit Rent Expense Account
  → Credit Cash Account

Key Differences between Traditional and Modern Approach

Aspect Traditional Approach Modern Approach

Basis

 Nature of accounts Accounting Equation

Number of Types

3 (Personal, Real, Nominal)

5 (Asset, Liability, Equity, Income, Expense)

Common Usage

 Older/manual systems

Modern/accounting software

Ease of Understanding

 Simpler for beginners Logical for system-based accounting

Rules of Debit/Credit

 Based on account nature

Based on increase/decrease in elements
Management Notes

Meaning of Double entry System, Applications, Example

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Double Entry System is a fundamental accounting principle where every financial transaction affects at least two accounts — one is debited, and the other is credited — ensuring that the accounting equation (Assets = Liabilities + Equity) remains balanced. This system was developed to maintain accuracy and prevent fraud or errors in financial records. Each entry has equal debit and credit amounts, which helps in cross-verifying records. For example, if a company buys machinery for cash, the Machinery Account is debited, and the Cash Account is credited. The double entry system provides a complete view of transactions, supports financial statement preparation, and improves the reliability of accounting records.

Applications of Double Entry System:

  • Business Organizations

Double Entry System is widely applied in all forms of business organizations — sole proprietorships, partnerships, companies, and corporations. It helps maintain accurate and systematic financial records by ensuring that every transaction affects two or more accounts. For instance, a sale on credit increases the Sales Account (credit) and the Accounts Receivable (debit). This system assists businesses in monitoring their income, expenses, assets, and liabilities, which is essential for preparing financial statements like the income statement, balance sheet, and cash flow statement to make informed business decisions.

  • Banking and Financial Institutions

Banks and financial institutions heavily rely on the Double Entry System to manage customer deposits, loans, investments, interest calculations, and more. When a customer deposits money, the bank credits the customer’s account and debits its cash or deposit account. This dual recording ensures accuracy, detects errors quickly, and strengthens internal control mechanisms. It also helps in preparing regulatory reports and complying with statutory requirements such as those set by the Reserve Bank of India (RBI) or other financial authorities. This system is critical for maintaining trust in financial operations and accountability.

  • Government and Public Sector Accounting

Double Entry System is used in public sector accounting to maintain transparency and accountability in the use of public funds. Government departments, municipalities, and public enterprises use it to record grants, taxes, expenditures, and liabilities. For example, when the government receives tax revenue, it debits the cash/bank account and credits tax revenue. This system ensures that each transaction is traceable and verifiable, which is vital for auditing and public financial management. It also aids in budget preparation, deficit management, and evaluating the financial performance of public programs.

  • Non-Profit Organizations (NPOs)

Non-profit organizations like NGOs, trusts, and charitable institutions use the Double Entry System to maintain clear and accurate financial records. Although their primary aim is not profit, they must account for donations, grants, and expenses properly. For example, receiving a donation is recorded by debiting the bank account and crediting the donation income. This helps in preparing financial reports, ensuring donor accountability, and maintaining transparency. It also supports internal and external audits, legal compliance, and the efficient management of resources and funds used for social or charitable activities.

  • Educational and Healthcare Institutions

Schools, colleges, universities, hospitals, and clinics also apply the Double Entry System to handle fees, salaries, donations, purchases, and other financial transactions. For instance, when fees are collected from students, the institution debits the cash or bank account and credits the fee income account. This systematic recording helps educational and healthcare institutions maintain financial discipline, prepare accurate reports, and manage budgets. It is also useful for complying with government regulations, securing funding, and facilitating audits to ensure that funds are used responsibly and efficiently.

  • Personal Financial Management

Individuals can also apply the Double Entry System for personal financial planning and management. For instance, if a person buys a car using a loan, the car (asset) is debited and the loan payable (liability) is credited. Using this system in personal finance helps track income, expenses, savings, investments, and loans in a more structured way. It provides a clear picture of one’s financial position and aids in making better decisions regarding spending, saving, and borrowing. This is especially beneficial for freelancers, investors, or those managing multiple income sources.

Example of Double Entry System:

Here is the example of the Double Entry System presented in a table format:

Date Particulars L.F. Debit (₹) Credit (₹)
June 10, 2025 Furniture A/c Dr. – 10,000 –
–   To Cash A/c – – 10,000
– (Being office furniture purchased for cash) – – –

  • Furniture A/c is debited because furniture (an asset) is increasing.

  • Cash A/c is credited because cash (an asset) is decreasing.

  • Both debit and credit sides are equal, fulfilling the rules of the Double Entry System.

Bangalore City University BBA Notes

Financial Accounting Bangalore City University BBA SEP 2024-25 1st Semester Notes

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Unit 1 [Book]
Introduction, Meaning, Definition, Scope, Objectives, Functions of Accounting VIEW
Terminologies used in accounting VIEW
Users of Accounting Information VIEW
Limitations of Accounting VIEW
Accounting Principles VIEW
Accounting Concepts and Conventions VIEW
Meaning of Double entry System VIEW
Process of Accounting VIEW
Types of Accounts: Traditional and Modern Accounting VIEW
Golden Rules of Debit and Credit VIEW
Accounting Standards (Ind AS), Meaning, Definition, Need and Objectives VIEW
List of Accounting Standards issued by ICAI VIEW
Accounting Equations VIEW
Problems on Accounting Equations VIEW
Unit 2 [Book]
Transaction Analysis VIEW
Journal VIEW
Ledger VIEW
Balancing of Accounts VIEW
Trial Balance VIEW
Simple Problems on Journal VIEW
Ledger Posting VIEW
Preparation of Trial Balance VIEW
Unit 3 Subsidiary Books [Book]
Meaning, Types of Subsidiary Books VIEW
Preparation of Purchases Book, Purchase Returns Book, Sales Book, Sales Return Book VIEW
Proforma Invoice VIEW
Account Sales VIEW
Bills Receivable Book and Bills Payable Book VIEW
Simple Problems on the Purchases, Purchase Returns, Sales, Sales Returns, Bills Receivable and Payable Books VIEW
Unit 4 [Book]
Introduction, Types of Cash Book VIEW
Simple Cash Book, Double Column Cash Book VIEW
Three Column Cash Book and Petty Cash Book VIEW
Unit 5 [Book]
Preparation of Statement of Profit and Loss and Balance Sheet of a Proprietary concern with Special adjustments like Depreciation, Outstanding expenses and Prepaid expenses, Outstanding incomes and Incomes received in advance and Provision for doubtful debts, interest on drawings and Interest on Capital. (Vertical Form) VIEW
Bangalore University BBA Notes

Fundamentals of Accounting 1st Semester BU BBA SEP Notes

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Unit 1 [Book]
Introduction Meaning and Definition Objectives of Accounting VIEW
Functions of Accounting VIEW
Uses of Accounting Information VIEW
Limitations of Accounting VIEW
Terminologies used in Accounting VIEW
Accounting Process VIEW
Accounting Cycle VIEW
Basis of Accounting, Cash basis and Accrual Basis VIEW
Accounting Equations VIEW
Branches of accounting VIEW
Accounting Principles VIEW
Accounting Concepts and Accounting Conventions VIEW

 

Unit 2 [Book]
Process of Accounting VIEW
Double entry system VIEW
Kinds of Accounts, Rules VIEW
Transaction Analysis VIEW
Journal VIEW
Ledger VIEW
Balancing of Accounts VIEW
Trial Balance VIEW
illustrations on Journal, Ledger Posting and Preparation of Trial Balance VIEW

 

Unit 3 [Book]
Subsidiary Books Meaning and Significance VIEW
Types of Subsidiary Books: Purchases Book, Sales Book (With Tax Rate), Purchase Returns Book, Sales Return Book VIEW
Bills Receivable Book, Bills Payable Book VIEW
Types of Cash Book: Simple Cash Book, Double Column Cash Book VIEW
Petty Cash Book VIEW

 

Unit 4 [Book]
Introduction to Financial Statement VIEW
Income Statement VIEW
Profit and Loss Account VIEW
Balance Sheet VIEW
Preparation of Statement of Profit and Loss of a Proprietary Concern with special adjustments like Depreciation VIEW
Preparation of Statement of Balance Sheet of a Proprietary Concern with special adjustments like Depreciation VIEW
Outstanding Expenses VIEW
Prepaid Expenses VIEW
Outstanding and Received in Advance of Incomes VIEW
Provision for Doubtful Debts VIEW
Drawings and Interest on Capital VIEW

 

Unit 5 [Book]
Bank Reconciliation Statement (BRS), Definition, Purpose, Importance VIEW
Reconciling Bank Statements and Bank Accounts Prepared in Businesses VIEW
Causes for Differences between Cash Book and Pass Book, Timing differences, Outstanding Cheques and Deposits in transit, Errors in the Cash Book and Bank Statements, Bank charges and Interest, Direct debits, Standing instructions and Auto payments, Dishonoured Cheques VIEW
Preparation of Bank Reconciliation Statement VIEW
Management Notes

Preparation of Bank Reconciliation Statement

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Bank Reconciliation Statement (BRS) is a document that helps reconcile the differences between the bank balance as per the bank statement and the balance as per the company’s cash book. This statement is essential for ensuring that a business’s financial records align with the actual transactions processed by the bank. It helps identify discrepancies due to timing differences, errors, and omissions.

Purpose of Bank Reconciliation Statement:

  1. Error Detection:

It helps in identifying errors made in either the bank’s records or the company’s cash book.

  1. Fraud Prevention:

Regular reconciliations can help uncover unauthorized transactions.

  1. Cash Flow Management:

By maintaining accurate cash records, businesses can better manage their cash flow.

  1. Financial Reporting:

It ensures that financial statements reflect the true financial position of the business.

  1. Bank Charges and Interest:

It helps track any bank fees or interest that may not have been recorded in the cash book.

Steps to Prepare a Bank Reconciliation Statement:

  1. Gather Bank Statements and Cash Book:

Obtain the latest bank statement and the cash book balance for the same period.

  1. Compare Balances:

Start by comparing the ending balance in the cash book with the balance in the bank statement.

  1. Identify Differences:

Note down any discrepancies. Common differences include outstanding checks, deposits in transit, bank charges, direct deposits, and errors.

  1. Adjust the Balances:

Adjust the cash book balance and bank statement balance to reflect the correct figures.

  1. Prepare the BRS:

Present the findings in a structured format.

Example of Bank Reconciliation Statement Preparation

Let’s say a company has the following balances:

  • Cash Book Balance: ₹50,000
  • Bank Statement Balance: ₹48,000

Identified Differences:

  1. Outstanding Checks: ₹10,000 (checks issued but not yet cleared by the bank)
  2. Deposits in Transit: ₹12,000 (deposits made but not yet reflected in the bank statement)
  3. Bank Charges: ₹2,000 (bank fees not recorded in the cash book)
  4. Direct Deposits: ₹2,000 (money received directly by the bank not recorded in the cash book)

Bank Reconciliation Statement Format:

Particulars Amount (₹)
Balance as per Cash Book 50,000
Add: Deposits in Transit 12,000
Less: Outstanding Checks (10,000)
Less: Bank Charges (2,000)
Add: Direct Deposits 2,000
Adjusted Cash Book Balance 52,000
Balance as per Bank Statement 48,000
Add: Deposits in Transit 12,000
Less: Outstanding Checks (10,000)
Less: Bank Charges (2,000)
Adjusted Bank Balance 52,000

Explanation of Each Entry

  1. Balance as per Cash Book: This is the balance available in the company’s cash book as of the date of reconciliation.
  2. Deposits in Transit: These are amounts that have been deposited by the company but are not yet reflected in the bank statement. Adding this amount adjusts the cash book balance upward.
  3. Outstanding Checks: These are checks issued by the company that have not yet been cleared by the bank. Subtracting this amount adjusts the cash book balance downward.
  4. Bank Charges: These are fees charged by the bank for account maintenance or other services. If these charges are not recorded in the cash book, they need to be subtracted from the cash book balance.
  5. Direct Deposits: These are amounts received directly into the bank account that have not yet been recorded in the cash book. Adding this amount adjusts the cash book balance upward.
  6. Adjusted Cash Book Balance: After making all adjustments, this is the reconciled cash book balance.
  7. Balance as per Bank Statement: This is the ending balance shown in the bank statement as of the date of reconciliation.

  8. Adjusted Bank Balance: After accounting for deposits in transit and outstanding checks, this is the reconciled bank statement balance.

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