My son Kushal is preparing for his 12th standard exam. As there are no regular classes in the college, he has to study at home. I always relied on self study so I thought why he should not do it. He has already proved his self study abilities by passing Oracle DBA OCA at the age of 15 and CISA at 17.
He was having trouble in understanding accounting. I learned accounting practically even before I started studying so I did not have any problem with accounting when I appeared for 12th or CS or CA. Accounting is a subject which need ones involvement from the very basic steps. One must understand the transactions/ events and then the method of recording them.
Therefore, I devised the following plan for him.
I asked him to form an imaginary proprietary business of computer trading by the name “Kushal Computers”. Starting a new business involves opening a bank account, introducing capital, borrowing, acquiring fixed assets, buying and selling etc. I give below a narrative of the transactions, recording of cash and journal entries and preparation of final accounts that is Trading and Profit and Loss account and balance sheet.
Kushal introduced Rs. 10,000/- in cash for the business.
He opened a current account with Karnataka Bank Ltd by depositing Rs. 5000/-.
He borrowed Rs. 1,00,000/- interest free loan from me.
He Rented a shop/showroom at a monthly Rent of Rs. 2000/- . He paid Rs. 6000/- to the landlord by cheque of Karnatake Bank. (Rs. 2000/- as advance Rent and Rs. 4000/ as deposit).
He acquired Furniture worth Rs. 15,000/- for the showroom from Vijay Furniture (amount paid by cheque).
He bought 5 computers from Vishal computers @15000/- amounting Rs. 75000/- and paid Rs. 25000/- by cheque.
He paid Rs. 500/- for transportation of computers.
He sold one computer in cash for Rs. 20,000/-.
He sold one Computer to Ramesh for Rs. 21000/- and received Rs. 15000/- by cheque.
He sold one computer to Gopal for Rs. 22000/- on credit for 2 months.
He incurred Rs. 500/- for traveling and conveyance expenses.
Let us see how these transactions are recorded in the books of account.
Cash Book
|
Date |
Receipts |
Ledger Folio |
Amount |
Date |
Payment |
Ledger Folio |
Amount |
|
1/1/2009 |
Kushal Asawa A/c |
|
10,000 |
1/1/2009 |
Karnataka Bank Ltd. A/c |
|
5,000 |
|
|
Capital introduced in cash |
|
|
|
Cash deposited for opening current account |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1/1/2009 |
Inward Transport A/c |
|
500 |
|
|
|
|
|
|
Local carting for computers |
|
|
|
|
|
|
|
|
|
|
|
|
2/1/2009 |
Computer Sales A/c |
|
20,000 |
|
|
|
|
|
|
One PC sold in cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5/1/2009 |
Travelling and Conveyance Exps A/c |
|
500 |
|
|
|
|
|
|
Local conveyance expenses paid |
|
|
|
|
Total Receipts |
|
30,000 |
|
Total Payments |
|
6,000 |
|
|
|
|
|
|
Cash in Hand |
|
24,000 |
|
|
|
|
|
|
Total |
|
30,000 |
Journal
|
Date |
Particulars |
Ledger folio |
Debit |
Credit |
|
1/1/2009 |
Karnataka Bank Ltd. |
|
1,00,000 |
|
|
|
To Ramanuj Asawa |
|
|
1,00,000 |
|
|
Interest free loan received by cheque and deposited in the bank. |
|
|
|
|
|
|
|
|
|
|
1/1/2009 |
Rent A/c |
|
2,000 |
|
|
|
Rent Deposit A/c |
|
4,000 |
|
|
|
To, Karnataka Bank Ltd. |
|
|
6,000 |
|
|
Rent for Jan 09 and Deposit for 2 months paid to the Landlord by cheque. |
|
|
|
|
|
|
|
|
|
|
1/1/2009 |
Furniture A/c |
|
15,000 |
|
|
|
To, Karnataka Bank Ltd. |
|
|
15,000 |
|
|
Furniture purchased from Vijay Furniture and payment made by cheque. |
|
|
|
|
|
|
|
|
|
|
1/1/2009 |
Computer Purchase A/c |
|
75,000 |
|
|
|
To, Vishal Computers |
|
|
75,000 |
|
|
5 desktop computers bought. |
|
|
|
|
|
|
|
|
|
|
1/1/2009 |
Vishal Computers A/c |
|
25,000 |
|
|
|
To, Karnataka Bank Ltd. A/c |
|
|
25,000 |
|
|
Paid by cheque on account. |
|
|
|
|
|
|
|
|
|
|
3/2/2009 |
Ramesh A/c |
|
21,000 |
|
|
|
To Computer Sales A/c |
|
|
21,000 |
|
|
One PC sold in credit |
|
|
|
|
|
|
|
|
|
|
3/2/2009 |
Karnataka Bank Limited A/c |
|
15,000 |
|
|
|
Ramesh A/c |
|
|
15,000 |
|
|
Cheque received on account. |
|
|
|
|
|
|
|
|
|
|
4/2/2009 |
Gopal A/c |
|
22,000 |
|
|
|
Computer Sales A/c |
|
|
22,000 |
|
|
One PC sold at 2 months credit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
Ledger
Account of : Kushal Asawa (Proprietor A/c)
|
Date |
Particulars |
Folio |
Debit |
Credit |
Dr or Cr |
Balance |
|
1/1/2009 |
Cash received |
|
|
10,000 |
Cr |
10,000 |
|
|
|
|
|
|
|
|
Account of :Karnataka Bank Limited
|
Date |
Particulars |
Folio |
Debit |
Credit |
Dr or Cr |
Balance |
|
1/1/2009 |
To cash deposited for a/c opening |
|
5,000 |
|
Dr |
5,000 |
|
1/1/2009 |
To cheque from Ramanuj Asawa deposited |
|
1,00,000 |
|
Dr |
1,05,000 |
|
1/1/2009 |
By cheque issued to landlord |
|
|
6,000 |
Dr |
99,000 |
|
1/1/2009 |
By Ch to Vijay Furniture |
|
|
15,000 |
Dr |
84,000 |
|
1/1/2009 |
By ch. To Vishal Computers |
|
|
25,000 |
Dr |
59,000 |
|
3/1/2009 |
To ch recd from Ramesh |
|
15,000 |
|
Dr |
74,000 |
|
|
|
|
|
|
|
|
Account of: Ramanuj Asawa
|
Date |
Particulars |
Folio |
Debit |
Credit |
Dr or Cr |
Balance |
|
1/1/2009 |
By ch loan received |
|
|
1,00,000 |
Cr |
1,00,000 |
|
|
|
|
|
|
|
|
Account of : Landlord (Deposit)
|
Date |
Particulars |
Folio |
Debit |
Credit |
Dr or Cr |
Balance |
|
1/1/2009 |
To ch. Karnataka Bank |
|
4,000 |
|
Dr |
4,000 |
|
|
|
|
|
|
|
|
Account of : Rent
|
Date |
Particulars |
Folio |
Debit |
Credit |
Dr or Cr |
Balance |
|
1/1/2009 |
Rent for January paid by che |
|
2,000 |
|
Dr |
2,000 |
|
|
|
|
|
|
|
|
Account of : Furniture
|
Date |
Particulars |
Folio |
Debit |
Credit |
Dr or Cr |
Balance |
|
1/1/2009 |
To ch. Furniture purchase |
|
15,000 |
|
Dr |
15,000 |
|
|
|
|
|
|
|
|
Account of : Vishal Computers
|
Date |
Particulars |
Folio |
Debit |
Credit |
Dr or Cr |
Balance |
|
1/1/2009 |
By purchase of 5 PCs |
|
|
75,000 |
Cr |
75,000 |
|
1/1/2009 |
To che on account |
|
25,000 |
|
Cr |
50,000 |
|
|
|
|
|
|
|
|
Account of: Ramesh
|
Date |
Particulars |
Folio |
Debit |
Credit |
Dr or Cr |
Balance |
|
3/2/2009 |
To PC sold on Credit |
|
21,000 |
|
Dr |
21,000 |
|
3/2/2009 |
By che received |
|
|
15,000 |
Dr |
6,000 |
|
|
|
|
|
|
|
|
Account of : Gopal
|
Date |
Particulars |
Folio |
Debit |
Credit |
Dr or Cr |
Balance |
|
4/2/2009 |
To one PC sold on credit |
|
22,000 |
|
Dr |
22,000 |
|
|
|
|
|
|
|
|
Account of : Computer Purchase
|
Date |
Particulars |
Folio |
Debit |
Credit |
Dr or Cr |
Balance |
|
1/1/2009 |
To 5 PCs purchased from Vishal Comp |
|
75,000 |
|
Dr. |
75,000 |
|
|
|
|
|
|
|
|
Account of : Computer Sales
|
Date |
Particulars |
Folio |
Debit |
Credit |
Dr or Cr |
Balance |
|
2/1/2009 |
By One Pc Sold in cash |
|
|
20,000 |
Cr |
20,000 |
|
3/1/2009 |
By One PC sold to Ramesh |
|
|
21,000 |
Cr |
41,000 |
|
4/1/2009 |
By One Pc sold to Gopal |
|
|
22,000 |
Cr |
63,000 |
|
|
|
|
|
|
|
|
Account of : Inward Transport
|
Date |
Particulars |
Folio |
Debit |
Credit |
Dr or Cr |
Balance |
|
1/1/2009 |
To inward carting paid in cash |
|
500 |
|
Dr |
500 |
|
|
|
|
|
|
|
|
Account of : Travelling and Conveyance Exps
|
Date |
Particulars |
Folio |
Debit |
Credit |
Dr or Cr |
Balance |
|
5/1/2009 |
To Local Conveyance |
|
500 |
|
Dr |
500 |
|
|
|
|
|
|
|
|
Trial Balance
|
Sl No. |
Account Head |
Folio |
Debit |
Credit |
|
1. |
Kushal Asawa (Proprietor) |
|
|
10,000 |
|
2. |
Karnataka Bank Ltd. Current Account |
|
74,000 |
|
|
3. |
Ramanuj Asawa Loan |
|
|
1,00,000 |
|
4. |
Furniture |
|
15,000 |
|
|
5. |
Landlord (Deposit) |
|
4,000 |
|
|
6. |
Rent |
|
2,000 |
50,000 |
|
7. |
Vishal Computers |
|
|
|
|
8. |
Ramesh |
|
6.000 |
|
|
9. |
Gopal |
|
22,000 |
|
|
10. |
Computer Purchase |
|
75,000 |
|
|
11. |
Inward Transport |
|
500 |
63,000 |
|
12. |
Computer Sales |
|
|
|
|
13. |
Travelling and Conveyance |
|
500 |
|
|
14. |
Cash in Hand |
|
24,000 |
|
|
|
|
|
|
|
|
|
Total |
|
2,23,000 |
2,23,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After the trial balance is prepared the closing stock should be valued for preparation of Trading and Profit and Loss Account:
|
|
Total PCs purchased |
5 |
|
|
|
|
Sold |
3 |
|
|
|
|
Balance in stock |
2 |
|
|
|
|
|
|
|
|
|
|
Cost each of computers purchased |
|
15,000 |
|
|
|
Inward carting |
|
100 |
|
|
|
|
|
15,100 |
|
|
|
|
|
|
|
|
|
Closing value of 2 computers @15100 |
|
30,200 |
|
|
|
|
|
|
|
Trading and Profit and Loss Account for the period ended 31/1/2009
|
|
Particulars |
Amount |
Particulars |
Amount |
|
|
To Purchases |
75,000 |
By Sales |
63,000 |
|
|
To Inward Carting |
500 |
By Closing Stock |
30,200 |
|
|
To Gross Profit Carried down |
17,700 |
|
|
|
|
Total |
93,200 |
Total |
93,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
To Rent |
2,000 |
Gross Profit Brought down |
17,700 |
|
|
To Travelling and Conveyance |
500 |
|
|
|
|
To Depreciation |
125 |
|
|
|
|
To Net Profit |
15,075 |
|
|
|
|
Total |
17,700 |
Total |
17,700 |
|
|
|
|
|
|
Balance Sheet as at 31/1/2009
|
|
Liabilities |
|
Amount |
Assets |
|
Amount |
|
|
Proprietor’s Capital |
10,000 |
|
Fixed Assets |
|
|
|
|
Add: Net Profit |
15,075 |
25,075 |
Furniture |
15,000 |
|
|
|
|
|
|
Less: Depreciation |
125 |
14,875 |
|
|
Loan from Ramanuj Asawa |
|
1,00,000 |
|
|
|
|
|
|
|
|
Current Assets, Loans and Advances |
|
|
|
|
Sundry Creditors |
|
|
Stock in Trade |
|
|
|
|
Vishal Computers |
|
50,000 |
Computers |
30,200 |
|
|
|
|
|
|
Sundry Debtors |
|
|
|
|
|
|
|
Ramesh 6000 |
|
|
|
|
|
|
|
Gopal 22000 |
28,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Bank Balances |
|
|
|
|
|
|
|
Cash in Hand 24,000 |
|
|
|
|
|
|
|
Karnataka Bank 74,000 |
98,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposit |
4,000 |
1,60,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
1,75,075 |
Total |
|
1,75,075 |
|
|
|
|
|
|
|
|
The basic purpose of this whole exercise was to explain how the records are recorded in the books of account at a very fundamental level.
I will cover the accounting concepts and conventions in a separate article.
CAclubindia
