Book-Keeping and Accountancy पुस्तपालन व लेखाकर्म

Quick summary

Every business must keep records of its money transactions. This chapter introduces book-keeping and accountancy: their meaning, objectives and importance, the difference between them, bases of accounting, qualities of good accounting information, basic accounting terms, accounting concepts, conventions and principles, and Accounting Standards and IFRS.

Key points

• Records of debit and credit existed even in the 12th century. In 1494, Luca Pacioli (Italy) introduced the double-entry system of book-keeping.
• Book-keeping (R. N. Carter): the science and art of correctly recording in books of accounts all business transactions that result in transfer of money or money's worth.
• Book-keeping is the recording stage; accountancy is wider — recording, classifying, summarising, analysing, interpreting and communicating financial information.
• Objectives: permanent record, find profit or loss, know financial position, control over assets, help in tax matters, evidence in court, help decision-making.
• Bases of accounting: cash basis (record only when cash is received/paid) and accrual (mercantile) basis (record when income is earned or expense incurred). A hybrid basis also exists.
• Qualitative characteristics: reliability, relevance, understandability, comparability (and faithful representation).
• Basic terms: business, transaction (cash/credit), capital, drawings, assets (fixed/current), liabilities, revenue, expenses, purchases, sales, debtors, creditors, goods, stock, discount, voucher.
• Accounting concepts: business entity, money measurement, going concern, accounting period, dual aspect, cost, matching, realisation, accrual. Conventions: consistency, full disclosure, conservatism (prudence), materiality.
• Accounting Standards Board (ASB) was set up by ICAI on 21 April 1977. IFRS = International Financial Reporting Standards; India's converged standards are Ind AS.

Important terms

• Capital – money or assets brought in by the owner.
• Drawings – cash or goods taken by the owner for personal use.
• Debtor – person who owes money to the business.
• Creditor – person to whom the business owes money.
• Voucher – written document supporting a transaction.

Formats and formulas

• Dual aspect: Assets = Capital + Liabilities

5 important questions

Q1. Define book-keeping. State its objectives.

R. N. Carter: the science and art of correctly recording business transactions resulting in transfer of money or money's worth. Objectives: permanent record, ascertain profit/loss, know financial position, control over assets.

Q2. Distinguish between book-keeping and accountancy (four points).

Scope, stage, person and skill — see the table above.

Q3. Explain business entity and going concern concepts.

Business entity: business and owner are separate. Going concern: the business will continue for a long time, so assets are shown at cost less depreciation.

Q4. Who introduced double-entry book-keeping and when?

Luca Pacioli, an Italian, in 1494.

Q5. Distinguish between cash basis and accrual basis of accounting.

Cash basis records only actual receipts and payments; accrual basis records income when earned and expenses when incurred, whether cash is received/paid or not.

Exam tip

Learn one-line meanings of all basic terms — 'give the term' and 'find the odd one' questions come from them.

Quick summary

Every business transaction has two aspects — one account receives a benefit and another gives it. Recording both aspects as debit and credit is the double-entry system. This chapter explains its meaning and advantages, methods of recording, classification of accounts, the golden rules (traditional approach), the modern approach and the accounting equation.

Key points

• Double entry: each transaction affects at least two accounts, equally, on the debit (Dr.) and credit (Cr.) sides. Hence total debits = total credits.
• Methods of recording: Indian system (Mahajani/Deshi Nama, in Indian languages), single entry (incomplete), double entry (English/scientific system).
• Advantages: complete and scientific record, arithmetical accuracy (trial balance), profit/loss and financial position known, fraud prevention, comparison, legal acceptance.
• Classification (traditional):
• Personal accounts – natural (Ram), artificial (bank, company), representative (outstanding salary, prepaid rent).
• Real accounts – tangible (cash, building) and intangible (goodwill, patents).
• Nominal accounts – expenses, losses, incomes, gains.
• Golden rules: Personal — Debit the receiver, Credit the giver. Real — Debit what comes in, Credit what goes out. Nominal — Debit all expenses and losses, Credit all incomes and gains.
• Modern approach: accounts are Assets, Liabilities, Capital, Expenses (and Losses), Revenue (and Gains). Increase in assets/expenses → Debit; decrease → Credit. Increase in liabilities/capital/revenue → Credit; decrease → Debit.
• Accounting equation: Assets = Liabilities + Capital. Every transaction keeps both sides equal.

Important terms

• Debit (Dr.) – left side of an account.
• Credit (Cr.) – right side of an account.
• Representative personal account – account representing a person indirectly (outstanding wages A/c).
• Accounting equation – A = L + C.

Formats and formulas

• Assets = Liabilities + Capital
• Capital = Assets − Liabilities
• Liabilities = Assets − Capital

5 important questions

Q1. State the golden rules of debit and credit.

Personal: Debit the receiver, credit the giver. Real: Debit what comes in, credit what goes out. Nominal: Debit expenses and losses, credit incomes and gains.

Q2. Classify: Capital A/c, Goodwill A/c, Rent received A/c, Bank A/c.

Capital – personal; Goodwill – real (intangible); Rent received – nominal; Bank – personal (artificial).

Q3. Mr. A started business with cash ₹50,000. Show the accounting equation.

Assets (Cash) 50,000 = Liabilities 0 + Capital 50,000.

Q4. Bought goods on credit from B ₹10,000 (after Q3). Show the new equation.

Assets: Cash 50,000 + Stock 10,000 = 60,000; Liabilities: Creditor B 10,000; Capital 50,000. 60,000 = 10,000 + 50,000.

Q5. State any four advantages of the double-entry system.

Complete record; arithmetic accuracy through trial balance; knowledge of profit and financial position; helps detect and prevent fraud.

Exam tip

Before writing an entry, write the two accounts, their type and the rule — this habit prevents most mistakes.

Quick summary

The Journal is the book of original (first) entry, where every transaction is recorded date-wise as a debit and credit entry. This chapter explains accounting documents (source documents), the meaning, importance and format of the Journal, and how to pass journal entries, including entries with GST.

Key points

• Accounting (source) documents: cash memo, invoice/bill, receipt, debit note, credit note, pay-in slip, cheque, voucher. They are evidence of transactions and the basis for entries.
• Journal (from French 'jour' = day): a daybook in which transactions are recorded in chronological order as they happen.
• Recording in the Journal is called journalising. Each entry has: date, debit account (with 'Dr.'), credit account (with 'To'), L.F. (ledger folio), amounts and narration (short explanation).
• Importance: complete chronological record, reduces errors, shows both aspects, helps posting to ledger, gives explanation through narration.
• A compound entry has more than one debit or credit account.
• GST (Goods and Services Tax, from 1 July 2017): for purchases within the state, debit Input CGST and Input SGST (half rate each); for sales within the state, credit Output CGST and Output SGST. For inter-state transactions, IGST at the full rate is used.
• Common entries: capital introduced, purchases/sales (cash/credit), returns, payments to creditors, receipts from debtors, discount allowed/received, expenses, drawings, assets bought, bank deposits/withdrawals.

Important terms

• Narration – brief explanation below a journal entry.
• L.F. – Ledger Folio, page number of the account in the ledger.
• Input GST – GST paid on purchases (can be set off).
• Output GST – GST collected on sales.

Formats and formulas

• GST within state: CGST = SGST = rate/2 on the taxable value

5 important questions

Q1. What is a Journal? Why is it called a book of original entry?

A book in which transactions are first recorded in date order with debit and credit; since every transaction is first recorded here, it is the book of original entry.

Q2. Pass the entry: Started business with cash ₹1,00,000.

Cash A/c Dr. 1,00,000 To Capital A/c 1,00,000 (Being business started with cash).

Q3. Pass the entry: Sold goods to Vikas on credit ₹55,000.

Vikas's A/c Dr. 55,000 To Sales A/c 55,000 (Being goods sold on credit).

Q4. Bought a laptop for ₹50,000 + 18% GST, paid by cheque. Pass the entry.

Laptop A/c Dr. 50,000; Input CGST A/c Dr. 4,500; Input SGST A/c Dr. 4,500; To Bank A/c 59,000.

Q5. Paid salary ₹8,000 and withdrew cash ₹2,000 for personal use. Pass entries.

Salary A/c Dr. 8,000 To Cash A/c 8,000. Drawings A/c Dr. 2,000 To Cash A/c 2,000.

Exam tip

Write a narration for every entry and keep the debit line before the 'To' credit line — format carries marks.

Quick summary

The Ledger is the principal book of accounts in which all entries of the Journal and subsidiary books are posted to their respective accounts. This chapter explains the meaning, format and importance of the Ledger, posting of entries, balancing of ledger accounts, and preparation of the Trial Balance.

Key points

• Ledger: book containing all accounts — personal, real and nominal. It is called the book of final entry or principal book.
• Each account has two sides: debit (left) and credit (right), with columns for date, particulars, J.F. (journal folio) and amount.
• Posting: transferring entries from the Journal to Ledger accounts. For the account debited in the journal, write "To (credit account)" on its debit side; for the account credited, write "By (debit account)" on its credit side.
• Balancing: add both sides; write the difference on the shorter side as "To/By Balance c/d", and bring it down on the opposite side as "Balance b/d".
• A debit balance means the debit side is bigger (assets, expenses, debtors); a credit balance means the credit side is bigger (liabilities, capital, incomes, creditors).
• Nominal accounts are closed by transfer to Trading/P&L Account at year-end; real and personal accounts are balanced and carried forward.
• Trial Balance: a statement of all ledger balances (debit and credit) on a date, prepared to check arithmetical accuracy. If totals agree, posting is arithmetically correct (but some errors may still exist).
• Methods: balance method (commonly used) and total method.

Important terms

• J.F. – Journal Folio, the page of the journal from which posting is made.
• Balance c/d – carried down; balance b/d – brought down.
• Trial Balance – list of ledger balances to test arithmetical accuracy.

Formats and formulas

• Total of debit balances = Total of credit balances (Trial Balance)

5 important questions

Q1. What is a Ledger? Why is it called the principal book?

The book containing all accounts to which entries are posted; it gives the final position of each account, so it is the principal book.

Q2. Explain the procedure of posting.

For each journal entry, go to the debit account and write "To credit account" on its debit side; go to the credit account and write "By debit account" on its credit side, with date, J.F. and amount.

Q3. Explain balancing of an account.

Total the larger side, write the same total on both sides, write the difference as balance c/d on the smaller side, and bring it down as balance b/d on the next day.

Q4. What is a Trial Balance? State its objectives.

A statement of debit and credit balances of all ledger accounts. Objectives: check arithmetical accuracy, help prepare final accounts, give a summary of accounts, help locate errors.

Q5. Which accounts usually have debit balances and which have credit balances?

Debit: assets, expenses, losses, debtors, drawings. Credit: capital, liabilities, incomes, gains, creditors.

Exam tip

In Trial Balance problems, remember: Drawings, Purchases, Sales returns and Opening stock are debit balances; Capital, Sales, Purchase returns and Creditors are credit balances.

Quick summary

When a business grows, recording everything in one Journal becomes difficult. So the Journal is divided into subsidiary (special) books, each for a similar type of transaction. This chapter covers the Cash Book (single and double column), Petty Cash Book (simple and analytical, imprest system), Purchase Book, Purchase Return Book, Sales Book, Sales Return Book and Journal Proper.

Key points

• Need: division of work, saves time, easy reference, fewer errors, better control, specialisation.
• Cash Book: records all cash receipts (debit side) and cash payments (credit side). It is both a book of original entry and a ledger account. Cash balance can never be a credit balance.
• Cash Book with cash and bank columns (double column): records cash and bank transactions together. Contra entries affect both cash and bank (e.g., cash deposited in bank, cash withdrawn from bank) and are marked 'C'.
• Petty Cash Book: records small expenses (postage, stationery, travelling). Imprest system: the petty cashier gets a fixed amount (imprest) at the start of a period and is reimbursed the amount spent at the end, so the balance is restored to the imprest. Analytical petty cash book has separate columns for each type of expense.
• Purchase Book: only credit purchases of goods (meant for resale). Cash purchases go to the Cash Book; purchase of assets on credit goes to Journal Proper.
• Purchase Return Book (Returns Outward Book): goods returned to suppliers; supported by a debit note.
• Sales Book: only credit sales of goods.
• Sales Return Book (Returns Inward Book): goods returned by customers; supported by a credit note.
• Journal Proper: transactions not fitting any other book — opening entries, closing entries, adjustment and rectification entries, credit purchase/sale of assets, bad debts, transfer entries.
• With GST, columns for CGST, SGST (or IGST) are added in purchase and sales books.

Important terms

• Contra entry – entry affecting both cash and bank columns.
• Imprest – fixed amount given to the petty cashier.
• Debit note – sent to supplier on returning goods.
• Credit note – sent to customer when goods are returned by him.

Formats and formulas

• Imprest system: Amount reimbursed = Amount spent during the period
• Closing petty cash balance = Imprest − Expenses (before reimbursement)

5 important questions

Q1. What are subsidiary books? State their need.

Special books into which the journal is divided for similar transactions. Need: division of work, saving time, easy reference, fewer errors.

Q2. What is a contra entry? Give two examples.

An entry affecting both cash and bank columns. Examples: cash deposited into bank; cash withdrawn from bank for office use.

Q3. Explain the imprest system of petty cash.

A fixed sum is given to the petty cashier for a period; at the end, the amount spent is reimbursed so that he again starts with the same sum.

Q4. Why can the Cash Book never show a credit balance?

Because cash paid cannot exceed cash available; payments are always less than or equal to receipts plus opening balance.

Q5. Name the book for: (a) credit sale of goods; (b) goods returned to supplier; (c) bad debts written off.

(a) Sales Book; (b) Purchase Return Book; (c) Journal Proper.

Exam tip

Remember: only credit transactions of goods go to purchase/sales books; any asset bought on credit goes to Journal Proper.

Quick summary

The balance shown by the Cash Book (bank column) and the Pass Book (bank statement) on the same date often differ. A Bank Reconciliation Statement (BRS) explains the reasons for this difference and reconciles the two balances. This chapter covers bank documents, causes of differences and preparation of BRS.

Key points

• Bank documents: pay-in slip, cheque, withdrawal slip, pass book/bank statement, debit and credit advice.
• In the Cash Book (business), bank deposits are debited and withdrawals credited. In the Pass Book (bank's record of the customer), deposits are credited and withdrawals debited — opposite sides.
• Favourable balance: debit balance in Cash Book = credit balance in Pass Book. Overdraft: credit balance in Cash Book = debit balance in Pass Book.
• BRS is a statement prepared to find and explain the causes of difference and to check the correctness of both records.
• Causes of difference:
• Cheques issued but not yet presented for payment.
• Cheques deposited but not yet collected/credited by the bank.
• Bank charges, interest on overdraft debited by the bank only in the Pass Book.
• Interest on deposit, dividends collected, direct deposits by customers credited only in the Pass Book.
• Direct payments by bank on standing instructions (insurance premium, EMI) shown only in the Pass Book.
• Dishonour of cheques, and errors in either book.
• Method: start with one balance; add items that made the other balance higher; subtract items that made it lower.

Important terms

• Pass Book – copy of the customer's account in the bank's books.
• Overdraft – excess withdrawal over deposit allowed by the bank.
• Standing instruction – customer's order to the bank to make regular payments.
• Reconciliation – bringing two balances into agreement.

Formats and formulas

Starting with Cash Book (debit) balance:

• Add: cheques issued but not presented; interest/dividend credited by bank only; direct deposits by customers
• Less: cheques deposited but not credited; bank charges; direct payments by bank; dishonoured cheques
• = Balance as per Pass Book

5 important questions

Q1. What is a Bank Reconciliation Statement? Why is it prepared?

A statement that reconciles the Cash Book and Pass Book balances; it is prepared to find the reasons for differences and to detect errors and frauds.

Q2. State any four causes of difference between Cash Book and Pass Book balances.

Cheques issued but not presented; cheques deposited but not collected; bank charges debited by bank; interest credited by bank.

Q3. Cash Book balance ₹20,000 (Dr.). Cheques issued not presented ₹3,000; cheques deposited not collected ₹2,000; bank charges ₹200. Find Pass Book balance.

20,000 + 3,000 − 2,000 − 200 = ₹20,800.

Q4. What is an overdraft?

A facility by which a customer withdraws more than his deposit balance; it shows as a credit balance in the Cash Book and debit balance in the Pass Book.

Q5. Distinguish between Cash Book and Pass Book (two points).

Cash Book is prepared by the business, Pass Book by the bank. Deposits are debited in the Cash Book but credited in the Pass Book.

Exam tip

Decide the starting balance, then ask for each item: "did it make the other book's balance more or less?" — add or subtract accordingly.

Quick summary

Fixed assets like machinery, furniture and vehicles lose value over time because of use, wear and tear and passage of time. This loss is called depreciation and is charged to the Profit and Loss Account every year. This chapter explains the meaning, causes and factors of depreciation, the Straight Line and Written Down Value methods, and its accounting treatment.

Key points

• Depreciation (घसारा) = permanent, gradual and continuous fall in the value of a fixed asset due to use, wear and tear, passage of time or obsolescence.
• Causes: wear and tear, passage of time, exhaustion (mines, oil wells), obsolescence (new technology), accidents.
• Need/importance: to find true profit, show true value of assets in the Balance Sheet, keep funds for replacement, correct cost of production, follow legal requirements.
• Factors: original cost of the asset (including installation and transport), estimated useful life, estimated scrap (residual) value.
• Straight Line Method (SLM) / Fixed Instalment Method: equal amount of depreciation every year, calculated on original cost.
• Written Down Value Method (WDV) / Diminishing Balance Method: fixed percentage on the reducing book value each year; depreciation amount falls every year; asset never becomes zero.
• Accounting entry: Depreciation A/c Dr. To Asset A/c; then Profit and Loss A/c Dr. To Depreciation A/c.
• Depreciation for part of a year is calculated for the months the asset was used.
• On sale of an asset: profit or loss = sale price − book value on the date of sale.

Important terms

• Book value – cost less total depreciation charged.
• Scrap value – expected value at the end of useful life.
• Obsolescence – asset becoming out of date.
• Fixed assets – assets held for long-term use, not for resale.

Formats and formulas

• SLM depreciation = (Original cost − Scrap value) ÷ Estimated life
• SLM rate = Annual depreciation ÷ Original cost × 100
• WDV depreciation = Book value at beginning × Rate/100
• Book value at end = Book value at beginning − Depreciation

5 important questions

Q1. Define depreciation and state its causes.

The gradual and permanent decrease in the value of a fixed asset. Causes: wear and tear, passage of time, exhaustion, obsolescence, accidents.

Q2. A machine costs ₹1,00,000, scrap value ₹10,000, life 10 years. Find annual depreciation by SLM.

(1,00,000 − 10,000) ÷ 10 = ₹9,000 per year.

Q3. A machine costs ₹50,000; depreciation 10% p.a. on WDV. Find depreciation for the first two years.

Year 1: 50,000 × 10% = ₹5,000; book value 45,000. Year 2: 45,000 × 10% = ₹4,500.

Q4. Furniture bought on 1st October for ₹24,000; depreciation 10% p.a. (SLM). Find depreciation up to 31st March.

24,000 × 10/100 × 6/12 = ₹1,200.

Q5. Distinguish between SLM and WDV (four points).

Base of calculation, amount every year, final book value and suitable assets — see the table above.

Exam tip

In ledger problems, always calculate depreciation for the exact months the asset was used in that year.

Quick summary

Even if the Trial Balance agrees, some errors may remain in the books. This chapter explains the meaning and effects of errors, the types of errors (omission, commission, principle and compensating), how to detect and rectify them, and how a Suspense Account is used when the Trial Balance does not agree.

Key points

• Reasons for errors: lack of accounting knowledge, wrong data, wrong recording, incorrect calculations.
• Need for rectification: correct records, correct profit or loss, true financial position.
• Errors of omission: transaction completely or partly not recorded. Complete omission does not affect the Trial Balance; partial omission (e.g., not posted to one account) does.
• Errors of commission: wrong amount, wrong account (of the same class), wrong side, wrong totalling or balancing.
• Errors of principle: violation of accounting principles, e.g., treating capital expenditure as revenue (purchase of furniture debited to Purchases A/c). Do not affect the Trial Balance.
• Compensating errors: one error cancels the effect of another of the same amount; Trial Balance agrees.
• One-sided errors affect only one account and disturb the Trial Balance; two-sided errors affect two accounts and usually do not.
• Suspense Account: a temporary account in which the difference in the Trial Balance is placed so that final accounts can be prepared; it is closed when errors are rectified.
• Rectification: before preparing the Trial Balance, one-sided errors are corrected directly in the account; after, they are corrected through the Suspense Account. Two-sided errors are rectified by a journal entry.

Important terms

• Rectification – correcting an error by a suitable entry.
• Suspense Account – temporary account for Trial Balance difference.
• Error of principle – wrong classification against accounting principles.

Formats and formulas

Method of rectification entry: (Correct entry) − (Wrong entry already passed) = Rectifying entry.

Example: Furniture purchased ₹5,000 wrongly debited to Purchases A/c.

• Rectifying entry: Furniture A/c Dr. 5,000 To Purchases A/c 5,000

5 important questions

Q1. Explain the types of errors with examples.

Omission (credit purchase not recorded), commission (sale to Ram posted to Shyam's A/c), principle (furniture bought debited to Purchases A/c), compensating (excess debit in one account balanced by excess credit elsewhere).

Q2. Which errors are not disclosed by the Trial Balance?

Complete omission, errors of principle, compensating errors and errors of posting to a wrong account on the correct side.

Q3. Rectify: Goods sold to Amit ₹2,000 were posted to Anil's account.

Amit's A/c Dr. 2,000 To Anil's A/c 2,000.

Q4. Rectify (after Trial Balance): Sales Book was undercast by ₹500.

Sales A/c is short-credited. Suspense A/c Dr. 500 To Sales A/c 500.

Q5. What is a Suspense Account? When is it opened?

A temporary account opened to place the difference of the Trial Balance when it does not agree; it is closed after rectifying all one-sided errors.

Exam tip

For each error, write the 'wrong entry' and the 'correct entry' side by side first; the rectifying entry becomes obvious.

Quick summary

At the end of the accounting year a sole trader prepares final accounts to know the profit or loss and the financial position. This chapter explains the Trading Account, the Profit and Loss Account and the Balance Sheet, and the treatment of common adjustments such as closing stock, outstanding and prepaid expenses, depreciation, bad debts, R.D.D., discount, accrued income and goods withdrawn.

Key points

• Final accounts = Trading Account (gross profit/loss) + Profit and Loss Account (net profit/loss) + Balance Sheet (financial position on a date).
• Trading Account (debit): opening stock, purchases less returns, direct expenses (wages, carriage inward, freight, power, factory rent). Credit: sales less returns, closing stock.
• P&L Account (debit): indirect expenses — office and selling expenses, salaries, rent, depreciation, bad debts, interest on capital. Credit: gross profit, other incomes (commission, rent received, interest received, discount received).
• Balance Sheet: liabilities (capital ± profit/loss − drawings, loans, creditors, bills payable, outstanding expenses) and assets (fixed and current assets).
• Every adjustment given outside the Trial Balance has two effects.
• Closing stock: credit side of Trading A/c and asset side of Balance Sheet.
• Outstanding expense: add to expense (debit side) and show as liability. Prepaid expense: deduct from expense and show as asset.
• Accrued income: add to income and show as asset. Income received in advance: deduct from income and show as liability.
• Depreciation: debit P&L and deduct from asset.
• Bad debts and R.D.D.: debit P&L (further bad debts + new R.D.D. − old R.D.D.) and deduct from debtors.
• Goods withdrawn by proprietor: deduct from purchases and add to drawings. Free samples: deduct from purchases and debit P&L as advertisement.
• Interest on capital: debit P&L, add to capital. Interest on drawings: credit P&L, deduct from capital.

Important terms

• Direct expenses – expenses up to the point goods are ready for sale.
• Indirect expenses – office, selling and distribution, finance expenses.
• R.D.D. – Reserve for Doubtful Debts.
• Outstanding expense – expense due but not yet paid.

Formats and formulas

• Gross Profit = Net Sales + Closing Stock − (Opening Stock + Net Purchases + Direct Expenses)
• Net Profit = Gross Profit + Other Incomes − Indirect Expenses
• Closing Capital = Opening Capital + Net Profit + Interest on capital − Drawings − Interest on drawings

5 important questions

Q1. What are final accounts? State their objectives.

Trading A/c, P&L A/c and Balance Sheet prepared at the year-end. Objectives: find gross and net profit, know financial position, help planning and tax.

Q2. How is outstanding salary ₹2,000 shown in final accounts?

Added to salary on the debit side of P&L A/c and shown as a liability in the Balance Sheet.

Q3. Debtors ₹42,000; further bad debts ₹2,000; new R.D.D. 5%; old R.D.D. ₹1,500. Show the treatment.

New R.D.D. = 5% of 40,000 = 2,000. P&L debit = 2,000 + 2,000 − 1,500 = ₹2,500. Balance Sheet: Debtors 42,000 − 2,000 − 2,000 = ₹38,000.

Q4. Goods worth ₹3,000 taken by the proprietor for personal use. Show the treatment.

Deduct ₹3,000 from purchases in the Trading A/c and add to drawings (deduct from capital) in the Balance Sheet.

Q5. Distinguish between Trading Account and Profit and Loss Account (two points).

Trading A/c shows gross profit using direct items; P&L A/c shows net profit using indirect items.

Exam tip

Tick each Trial Balance item once you have used it, and tick each adjustment twice (both effects) — this avoids missing items.

Quick summary

Many small traders do not keep complete double-entry records; they keep only cash book and personal accounts. This is the single entry (incomplete records) system. This chapter explains its meaning, how it differs from double entry, and how profit or loss is found by preparing a Statement of Affairs and a Statement of Profit or Loss, with adjustments.

Key points

• Single entry: an incomplete and unscientific system; usually only cash book and personal accounts of debtors and creditors are kept; real and nominal accounts are not maintained.
• Used by small traders, hawkers and shopkeepers because it is simple and cheap.
• Limitations: no trial balance, no accurate profit, no Balance Sheet, frauds hard to detect, not accepted by tax authorities.
• Statement of Affairs: a statement of assets and liabilities on a date, like a Balance Sheet, prepared from available records and estimates. Capital = Assets − Liabilities.
• Statement of Profit or Loss (Net Worth Method / Capital Comparison Method): compare closing capital with opening capital, adjusting for drawings and additional capital.
• Adjustments: additional capital, drawings, depreciation, bad debts, R.D.D., interest on capital, interest on drawings, interest on loan, outstanding and prepaid expenses, accrued income, under/over valuation of assets and liabilities.

Important terms

• Incomplete records – books not kept on full double entry.
• Statement of Affairs – statement of assets and liabilities to find capital.
• Additional capital – fresh capital brought in during the year.

Formats and formulas

• Capital = Total assets − Total liabilities
• Profit = Closing capital + Drawings − Additional capital − Opening capital
• Adjusted net profit = Profit as above − Depreciation − Bad debts − R.D.D. − Interest on capital + Interest on drawings (as given)

5 important questions

Q1. What is the single entry system? State its features.

An incomplete system of book-keeping. Features: only cash book and personal accounts kept, no real and nominal accounts, suitable for small traders, mix of records.

Q2. Distinguish between Statement of Affairs and Balance Sheet (two points).

Statement of Affairs is prepared from incomplete records and estimates; Balance Sheet from ledger balances of double entry. The first finds capital; the second shows financial position.

Q3. Opening capital ₹80,000; closing capital ₹1,00,000; drawings ₹15,000; additional capital ₹10,000. Find profit.

Profit = 1,00,000 + 15,000 − 10,000 − 80,000 = ₹25,000.

Q4. Assets ₹1,50,000 and liabilities ₹40,000 on 31st March. Find capital.

Capital = 1,50,000 − 40,000 = ₹1,10,000.

Q5. State any four limitations of the single entry system.

No trial balance; true profit cannot be found; no proper Balance Sheet; not accepted for tax purposes.

Exam tip

Prepare the opening and closing Statements of Affairs first, then the Statement of Profit or Loss — it is a three-step answer.