वित्तीय लेखांकन Financial Accounting

थोडक्यात सारांश

Errors creep into books while journalising, posting, totalling or balancing. Rectification of errors means correcting them by passing proper entries, not by cutting or erasing. Some errors disturb the trial balance and some do not. When the trial balance does not agree, the difference is put temporarily in a Suspense Account, which is closed once all errors are corrected.

महत्त्वाचे मुद्दे

• Errors (चुका) are classified as errors of omission, commission, principle and compensating errors.
• Errors of omission: a transaction is fully or partly left out (complete omission does not affect the trial balance; partial omission does).
• Errors of commission: wrong amount, wrong account, wrong side, wrong totalling or balancing.
• Errors of principle: violating accounting principles, e.g. treating capital expenditure as revenue (furniture bought debited to Purchases).
• Compensating errors: one error cancels the effect of another.
• One-sided errors affect only one account (undercasting of a book, posting to the wrong side, omission from posting); they affect the trial balance and are corrected through the Suspense Account.
• Two-sided errors affect two accounts (wrong account, error of principle, complete omission); they do not affect the trial balance and are corrected by a journal entry between the two accounts.
• Errors found before preparing the trial balance can be corrected directly in the accounts; after the trial balance, by journal entries.
• Errors in nominal accounts found after final accounts are corrected through Profit and Loss Adjustment Account.

महत्त्वाच्या संज्ञा

• Suspense Account (अनामत खाते) – temporary account opened for the difference in trial balance.
• Undercasting – totalling a book or account less than the correct figure; overcasting – more than correct.
• Rectifying entry – journal entry passed to correct an error.
• Clerical errors – errors of omission, commission and compensating errors (made by clerks).

नमुने व सूत्रे

Method: (1) Write the wrong entry made. (2) Write the correct entry. (3) The rectifying entry is the difference: cancel the wrong effect and give the correct effect. If only one account is wrong, the other side of the rectifying entry is Suspense A/c.

Worked problem. Trial balance did not agree; the difference was put in Suspense A/c. Errors found:

1. Sales Book undercast by ₹1,000.
2. Furniture bought for ₹5,000 was debited to Purchases A/c.
3. Credit sale of ₹2,000 to Ram was posted to Shyam's account.
4. Payment of ₹700 to Gopal was posted to the credit side of his account.

Rectifying entries:

Error 4: Gopal should have been debited ₹700 but was credited ₹700, so he must be debited twice the amount (₹1,400).

Suspense Account:

So the original difference was ₹400 on the debit side of Suspense (the trial balance's debit total was short by ₹400): error 1 made credits ₹1,000 short and error 4 made debits ₹1,400 short; net debit shortage = ₹400.

५ महत्त्वाचे प्रश्न

Q1. What is a suspense account?

A temporary account in which the difference of a disagreeing trial balance is placed so that final accounts can be prepared. It is closed when the one-sided errors causing the difference are rectified.

Q2. Give two examples of errors of principle.

(1) Repairs to a building debited to Building A/c instead of Repairs A/c. (2) Purchase of a machine debited to Purchases A/c. Both confuse capital and revenue items and do not affect the trial balance.

Q3. Explain the classification of errors with examples.

Outline: omission (complete, partial) → commission (wrong amount, account, side, casting) → principle → compensating → which of them affect the trial balance (table) → why an agreed trial balance is not proof of accuracy.

Q4. Pass rectifying entries and prepare the Suspense Account (numerical).

Steps: for each error, write wrong entry and correct entry → derive the rectifying entry → use Suspense A/c only for one-sided errors → post the suspense items → the balancing figure is the original difference (see the worked problem).

Q5. How are errors rectified after preparation of final accounts?

Outline: errors in nominal accounts would change last year's profit → so use Profit and Loss Adjustment A/c instead of the nominal account (e.g. Sales undercast: Suspense Dr To P&L Adjustment A/c) → close P&L Adjustment A/c to Capital A/c → real and personal accounts are corrected as usual.

परीक्षेसाठी टीप

For wrong-side posting, always double the amount. For wrong amount, rectify only the difference. These two rules settle most suspense problems.

थोडक्यात सारांश

Fixed assets like machines, vehicles and furniture lose value over time because of use, wear and tear and age. This permanent and gradual fall in the book value of a fixed asset is called depreciation (घसारा). Charging it every year gives the true profit and shows the asset at a fair value in the balance sheet. The two main methods are the Straight Line Method and the Written Down Value Method.

महत्त्वाचे मुद्दे

• Causes: wear and tear by use, passage of time, depletion (mines, oil wells), obsolescence (new technology), accidents, expiry of legal rights (patents, leases).
• Need: to find true profit (matching concept), to show true financial position, to keep funds for replacement, for tax purposes, legal requirement for companies.
• Factors: cost of the asset (purchase price + installation + transport), estimated useful life, estimated scrap (residual) value.
• Straight Line Method (SLM) / fixed instalment / original cost method: equal depreciation every year.
• Written Down Value Method (WDV) / reducing balance / diminishing balance: fixed rate on the opening book value each year, so the amount falls every year.
• SLM is simple and suits assets like leases and patents; WDV suits machinery, where repairs rise as depreciation falls, keeping the total charge even.
• Under WDV the asset's value never becomes exactly zero.
• Other methods: annuity, sinking fund, insurance policy, depletion, machine hour and revaluation methods.
• In India, AS 10 (Property, Plant and Equipment) now covers depreciation (the old AS 6 was withdrawn). Companies follow the useful lives in Schedule II of the Companies Act, 2013; income tax uses the WDV block-of-assets system with rates set by the rules (check the current year's rates).
• If an asset is sold, depreciation is charged up to the date of sale and the profit or loss on sale is transferred to the Profit and Loss Account.

महत्त्वाच्या संज्ञा

• Book value – cost minus total depreciation charged so far.
• Scrap/residual value – estimated value at the end of the useful life.
• Obsolescence – loss of usefulness due to new inventions or changes in demand.
• Provision for depreciation (accumulated depreciation) A/c – a separate account where depreciation is collected while the asset stays at cost.

नमुने व सूत्रे

• SLM annual depreciation = (Cost − Scrap value) ÷ Useful life
• SLM rate = (Annual depreciation ÷ Cost) × 100
• WDV depreciation = Opening book value × Rate
• Journal entries: Depreciation A/c Dr To Asset A/c; then Profit and Loss A/c Dr To Depreciation A/c.

Worked example 1 (SLM). Machine bought for ₹1,00,000; installation ₹10,000; scrap value ₹10,000; life 10 years.
Total cost = ₹1,10,000. Depreciation = (1,10,000 − 10,000) ÷ 10 = ₹10,000 per year. Rate on cost = 10,000 ÷ 1,10,000 × 100 ≈ 9.09%.

Worked example 2 (WDV). Machine costs ₹1,00,000; rate 10% on WDV.

Compare SLM at 10% on cost for the same machine (no scrap): ₹10,000 every year; book value after 3 years = ₹70,000.

५ महत्त्वाचे प्रश्न

Q1. Define depreciation.

Depreciation is the permanent, continuous and gradual decrease in the book value of a fixed asset due to use, passage of time, obsolescence or other causes. It is a non-cash expense charged to the Profit and Loss Account.

Q2. Distinguish between SLM and WDV.

SLM charges depreciation on original cost, so the amount is equal every year. WDV charges a fixed rate on the reducing book value, so the amount falls every year. Under SLM the asset can be written down to zero (or scrap value); under WDV it never reaches zero.

Q3. Explain the causes and need for charging depreciation.

Outline: causes (wear and tear, time, depletion, obsolescence, accident, expiry of legal rights) → need (true profit, true position, replacement funds, legal and tax requirement, matching concept, avoid paying dividend out of capital).

Q4. Prepare Machinery Account for three years under the WDV method (numerical).

Steps: Year 1 – To Bank (cost + installation) → By Depreciation (rate × value, proportionate if bought mid-year) → By Balance c/d → repeat with opening balance each year → if part of the machine is sold, calculate its book value on the date of sale and transfer profit/loss to P&L.

Q5. What is the Provision for Depreciation Account method? Give its advantages.

Outline: asset kept at original cost, depreciation credited to Provision for Depreciation A/c each year → on sale, the accumulated depreciation of the asset sold is transferred to Asset Disposal A/c → advantages: original cost and total depreciation both visible, easy to compute profit on sale, required format in company balance sheets.

परीक्षेसाठी टीप

Note the purchase date in every question. If an asset is bought or sold during the year, charge depreciation only for the months it was used (unless told "charge full year").

थोडक्यात सारांश

Final accounts are prepared at the end of the accounting year from the trial balance and adjustments. For a sole trader they include the Trading Account (gross profit), the Profit and Loss Account (net profit) and the Balance Sheet (financial position). Adjustments such as closing stock, outstanding and prepaid expenses and depreciation make the accounts show the true profit.

महत्त्वाचे मुद्दे

• Trading Account shows gross profit: net sales minus cost of goods sold (opening stock, net purchases and direct expenses like wages, carriage inward, freight, factory power).
• Profit and Loss Account shows net profit: gross profit plus other incomes minus indirect expenses (office and administration, selling and distribution, financial expenses, depreciation).
• Balance Sheet (ताळेबंद) is a statement of assets and liabilities on a date; it is not an account.
• Every adjustment is recorded at two places (dual aspect).
• Closing stock: credited in Trading A/c and shown as an asset (if given outside the trial balance).
• Outstanding expense: added to the expense and shown as a liability. Prepaid expense: deducted from the expense and shown as an asset.
• Accrued income: added to the income and shown as an asset. Income received in advance: deducted from income and shown as a liability.
• Depreciation: charged to P&L and deducted from the asset.
• Bad debts and provision for doubtful debts: charged to P&L and deducted from debtors.
• Interest on capital: expense in P&L, added to capital. Drawings: deducted from capital.

महत्त्वाच्या संज्ञा

• Gross profit – excess of sales over cost of goods sold.
• Net profit – final profit after all expenses and losses.
• Direct expenses – expenses up to bringing goods to saleable condition.
• Marshalling – order of assets and liabilities in the balance sheet (liquidity or permanence).
• Outstanding expense – expense due but not yet paid.

नमुने व सूत्रे

• Cost of goods sold = Opening stock + Net purchases + Direct expenses − Closing stock
• Gross profit = Net sales − Cost of goods sold
• Net profit = Gross profit + Other incomes − Indirect expenses
• Closing capital = Opening capital + Net profit − Drawings

Worked problem. Trial balance of Anil as on 31 March:

Adjustments: closing stock ₹30,000; wages outstanding ₹1,000; rent prepaid ₹1,000; depreciation on machinery 10%.

Trading A/c: Dr = 20,000 + 80,000 + 11,000 (wages 10,000 + 1,000) + 2,000 = ₹1,13,000. Cr = 1,50,000 + 30,000 = ₹1,80,000. Gross profit = ₹67,000.

P&L A/c: expenses = salaries 15,000 + rent 5,000 (6,000 − 1,000) + depreciation 6,400 = ₹26,400. Net profit = 67,000 − 26,400 = ₹40,600.

Balance Sheet as on 31 March:

५ महत्त्वाचे प्रश्न

Q1. What is the difference between Trading Account and Profit and Loss Account?

Trading Account finds gross profit from buying and selling goods using direct expenses. Profit and Loss Account starts with gross profit, adds other incomes and deducts indirect expenses to find net profit.

Q2. How is outstanding salary treated in final accounts?

It is added to salaries in the Profit and Loss Account (debit side) and shown as a current liability in the Balance Sheet.

Q3. Explain the treatment of any five adjustments.

Outline: closing stock, outstanding expense, prepaid expense, accrued income, income received in advance, depreciation, bad debts and provision, interest on capital and drawings → for each, write the two places it appears.

Q4. Prepare Trading and P&L Account and Balance Sheet (numerical).

Steps: list direct items in Trading A/c → apply adjustments → find GP → transfer to P&L → indirect items with adjustments → NP → Balance Sheet with capital + NP − drawings → tick each trial balance item and adjustment as you use it; totals must agree (see the worked problem).

Q5. What is a Balance Sheet? State its features and the order of marshalling.

Outline: definition → features (statement, on a date, assets = liabilities, shows position) → order of liquidity (cash first) and order of permanence (fixed assets first, used by companies) → grouping into fixed and current assets, long-term and current liabilities.

परीक्षेसाठी टीप

Tick every item of the trial balance and each adjustment as you use it. If the Balance Sheet does not tally, look first for an adjustment you used only once.

थोडक्यात सारांश

Non-profit organisations (NPOs) such as clubs, schools, hospitals, libraries and charitable trusts work for service, not for profit. They prepare a Receipts and Payments Account (a summary of cash), an Income and Expenditure Account (like a P&L Account, showing surplus or deficit) and a Balance Sheet. This topic explains these statements, their differences and the treatment of special items like subscriptions, donations and legacies.

महत्त्वाचे मुद्दे

• NPOs (ना-नफा संस्था) earn income from subscriptions, donations, grants, entrance fees, legacies, interest and events.
• Their capital is called Capital Fund or General Fund; profit is called surplus (excess of income over expenditure) and loss is deficit.
• Receipts and Payments Account: summary of the cash book; real account; starts with opening cash/bank balance, ends with closing balance; records all receipts and payments, capital or revenue, of any year.
• Income and Expenditure Account: nominal account; prepared on accrual basis; only revenue items of the current year; result is surplus or deficit.
• Balance Sheet: shows assets, liabilities and Capital Fund.
• Specific donations (for a building, prize fund) and legacies (amount received under a will, usually treated as capital) go to the Balance Sheet; general donations of small amounts are revenue income.
• Entrance (admission) fees: usually revenue income; capitalised if large or if the rules say so.
• Sale of old assets (newspapers are revenue; old furniture is capital, with profit/loss to I&E).
• Life membership fees are normally capitalised.
• Expenses out of a special fund are deducted from that fund in the Balance Sheet.

महत्त्वाच्या संज्ञा

• Subscription – regular membership fee paid by members.
• Legacy – amount left to the organisation by a person's will.
• Endowment fund – fund whose income is used for a specific purpose.
• Honorarium – payment to a non-employee for services (e.g. a visiting speaker).
• Opening Capital Fund – opening assets minus opening liabilities.

नमुने व सूत्रे

Subscriptions credited to Income and Expenditure A/c:

• Opening Capital Fund = Opening assets − Opening liabilities
• Surplus = Total income − Total expenditure (of the current year)

Worked example 1. Subscriptions received ₹50,000, including ₹3,000 for last year and ₹2,000 for next year; ₹4,000 is still due for the current year.
Income = 50,000 − 3,000 − 2,000 + 4,000 = ₹49,000.

Worked example 2 (Income and Expenditure A/c, Bhandara Sports Club). Salaries paid ₹18,000 (₹2,000 outstanding), rent ₹6,000, electricity ₹3,000, depreciation on equipment ₹2,500; subscriptions ₹49,000 (as above), general donations ₹5,000.

५ महत्त्वाचे प्रश्न

Q1. What is a Receipts and Payments Account?

It is a summary of all cash and bank receipts and payments of an NPO during the year, classified under heads. It begins with the opening cash/bank balance and ends with the closing balance. It is a real account and includes both capital and revenue items.

Q2. How are legacies and specific donations treated?

Both are capital receipts. A legacy is usually credited to Capital Fund (or shown as a liability) in the Balance Sheet. A specific donation is added to the related fund (e.g. Building Fund) on the liabilities side, not shown in the Income and Expenditure Account.

Q3. Distinguish between Receipts and Payments Account and Income and Expenditure Account.

Outline: nature (real vs nominal) → basis (cash vs accrual) → items (capital and revenue vs revenue only) → period (any year vs current year only) → opening balance (cash balance vs none) → closing (cash balance vs surplus/deficit) → non-cash items like depreciation (not included vs included).

Q4. Prepare Income and Expenditure Account and Balance Sheet from a Receipts and Payments Account (numerical).

Steps: find opening Capital Fund → separate capital and revenue items → adjust subscriptions and expenses for outstanding and prepaid amounts → charge depreciation → find surplus/deficit → prepare the Balance Sheet with Capital Fund + surplus, special funds, assets and liabilities.

Q5. Explain the treatment of any five special items in NPO accounts.

Outline: subscriptions (with adjustments), entrance fees, life membership fees, legacies, specific and general donations, sale of old assets, special funds and their expenses, honorarium → state where each appears.

परीक्षेसाठी टीप

Before preparing the I&E Account, work out the Capital Fund and the subscription figure separately as working notes. Working notes earn marks even if the final figure goes wrong.