ACCOUNTANCY - Government Of Tamil Nadu

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ACCOUNTANCYHIGHER SECONDARY – SECOND YEARA Publication underGovernment of TamilnaduDistribution of Free Textbook Programme(NOT FOR SALE)Untouchability is a SinUntouchability is a CrimeUntouchability is InhumanTAMILNADU TEXTBOOK ANDEDUCATIONAL SERVICES CORPORATIONCollege Road, Chennai - 600 006.

Government of TamilnaduFirst Edition- 2005Reprint- 2017CHAIR PERSONDr. (Mrs) R. AMUTHAReader in CommerceJustice Basheer Ahmed Sayeed College for Women Chennai - 600 018.REVIEWERSDr. R. MATHIALAGANReader in CommerceGovernment Arts College (Men)Nandanam,Chennai - 600035.Dr. K. GOVINDARAJANReader in CommerceAnnamalai UniversityAnnamalai Nagar - 608002.AUTHORSThiru S. S. KUMARANCo-ordinator, Planning Unit(Budget & Accounts)Education for All ProjectCollege Road, Chennai-600006.Thiru N. MOORTHYP.G. Asst. (Special Grade)Govt. Higher SecondarySchool, Nayakanpettai - 631601Kancheepuram District.Mrs. N. RAMAP.G. AssistantLady Andal Venkatasubba RaoMatriculation Hr. Sec. School Chetpet,Chennai - 600031.Price : Rs.This book has been prepared by the Directorate of School Educationon behalf of the Govt. of Tamilnadu.This book has been printed on 60 G.S.M. paperPrinted by Offset at :ii

PREFACEThe book on Accountancy has been written strictly in accordance with the newsyllabus framed by the Directorate of School Education, Government of Tamil Nadu.As curriculum renewal is a continuous process, Accountancy Curriculum hasbeen improved from time to time in accordance with the changing needs of the society.The present effort of reframing and updating the curriculum in Accountancy at theHigher Secondary level is an exercise based on the feed back.The text book for Higher Secondary - First year deals with the basic frameworkof accounting in all its aspects. The next step is the logical application of the subjectmatter in maintaining records in different forms of business enterprises.The text books for Higher Secondary - Second year has been dealt with thepreparation of financial statements and their analysis. The two chapters FinancialStatement Analysis - Ratio Analysis and Cash Budget are included in the new syllabus,because of its significance in the sphere of decision making in business.The significance of Partneship and Companies in the sphere of business asalso in the field of accounting can in no way be over-stressed especially when the latterhas become the primary vehicle of economic and industrial growth. Therefore, all thefacts of Partnership and Company accounts, according to the syllabus of the secondyear, has been presented in four chapters.Each chapter starts with a simple and lucid discussion of the topic followed byproperly arranged worked out illustrations and ends with theoretical questions andpractical exercises.Students are strongly advised to go through the “Reference Books” as Questionsfor examinations need not be restricted to the exercises alone.R.AmuthaChairpersoniii

SYLLABUS1. Final Accounts - Adjustments [ 24 Periods ]Adjustments - Closing Stock - Outstanding Expenses - Prepaid Expenses - AccruedIncomes - Incomes received in Advance - Interest on Capital - Interest on Drawings Interest on Loan - Interest on Investments - Depreciation - Bad Debts - Provision forBad & Doubtful Debts - Provision for Discount on Debtors - Provision for Discount onCreditors - Preparation of Final Accounts.2. Accounts from Incomplete Records (Single Entry)[ 21 Periods ]Features of Single Entry - Limitations of Single Entry - Difference between Double EntrySystem and Single Entry - Distinction between Statement of Affairs and Balance Sheet- Methods of ascertaining Profit or Loss - Statement of Affairs Method - Procedure Conversion Method - Procedure for converting Single Entry into Double Entry System- Calculation of missing figures - Ascertainment of Total Purchases - Ascertainment ofTotal Sales - Ascertainment of Balances of Sundry debtors and Sundry Creditors.3. Depreciation Accounting [ 14 Periods ]Definition - Need for Providing Depreciation - Causes of Depreciation - Terms usedfor Depreciation - Methods of calculating Depreciation - Straight Line Method - WrittenDown Value Method - Annuity Method - Depreciation Fund Method - Insurance PolicyMethod - Revaluation Method - Recording Depreciation - Calculation of Profit or Losson Sale of Asset.4. Financial Statement Analysis - Ratio Analysis[ 28 Periods ]Significance of Financial Statement Analysis - Limitation of Financial StatementAnalysis - Ratio Analysis - Definition - Objectives - Classification of Ratios - LiquidityRatios - Current Ratio, Liquid Ratio and Absolute Liquid Ratio - Solvency Ratios- Debt-Equity Ratio and Proprietory Ratio - Profitability Ratios - Gross Profit Ratio,Net Profit Ratio, Operating Profit Ratio and Operating Ratio - Activity Ratios - CapitalTurnover Ratio, Fixed Asset Turnover Ratio, Stock Turnover Ratio, Debtors TurnoverRatio and Creditors Turnover Ratio.5. Cash Budget [ 7 Periods ]Budget - Definition - Characteristics - Cash Budget - Advantages - PreparationCash Budget - Receipts and Payments Method.ivof

6. Partnership - Basic Concepts[ 14 Periods ]Definition - Features - Accounting rules applicable in the absence of PartnershipDeed - Partners Capital Account - Fluctuating Capital Method - Fixed Capital Method Difference between Fixed & Fluctuating Capital Account - Distribution of Profit - Intereston Capital - Interest on Drawings - Salary, Commission to Partner - Preparation of Profitand Loss Appropriation Account - Goodwill - Method of valuing Goodwill - AveragePeriod Method - Super Profit Method.7. Partnership - Admission [ 28 Periods ]Introduction - Adjustments - New Profit Sharing Ratio - Sacrificing Ratio - Calculationof New Profit Sharing Ratio and Sacrificing Ratio - Revaluation of Assets and Liabilities- Undistributed Profit or Loss - Accumulated Reserve - Treatment of Goodwill Revaluation Method - Capital of New Partner - Preparation of Revaluation Account,Capital Accounts and Balance Sheet after admission of Partner.8. Partnership - Retirement of a Partner[ 19 Periods ]Introduction - Adjustments - New Profit Sharing Ratio - Gaining Ratio - Calculation ofNew Profit Sharing Ratio and Gaining Ratio - Revaluation of Assets and Liabilities Undistributed Profit or Loss - Accumulated Reserve - Treatment of Goodwill - Paymentto the Retiring Partner - Preparation of Revaluation Account, Capital Accounts, BankAccount and Balance Sheet of the Reconstituted Partnership Firm.9. Company Accounts [ 35 Periods ]Introduction - Characteristics - Types of Share Capital - Kinds of Shares - Issue ofShares - For consideration - For cash - Issue of Shares at Par - Issue of Shares atPremium - Issue of Shares at Discount - Calls in Advance - Calls in Arrears - Forfeitureof Shares - Reissue of Forfeited Shares - Capital Reservev

CONTENTSChapterPage No.1. Final Accounts - Adjustments 12. Accounts from Incomplete Records (Single Entry)613. Depreciation Accounting 994. Financial Statement Analysis - Ratio Analysis1345. Cash Budget 1796. Partnership Accounts - Basic Concepts 1947. Partnership Accounts - Admission 2268. Partnership Accounts - Retirement 2659. Company Accounts 294vi

CHAPTER -1FINAL ACCOUNTS – ADJUSTMENTSLearning ObjectivesAfter studying this Chapter, you will be able to understand the need for making adjustments in final accounts. know the items in respect of which adjustments are usually made in thebooks of account. pass necessary journal entries for different adjustments. prepare final accounts with adjustments.When a person starts a business he wishes to know the financial performanceof his business. A convinient and universally accepted method of knowing this is toascertain the profit or loss at yearly intervals (1st April to 31st March) and the financialposition of the business on a given date. He can ascertain these by preparing the FinalAccounts, which is prepared on the basis of the Trial Balance. The preparation of FinalAccounts is the last step in the accounting cycle and that is why they are called FinalAccounts.Final Accounts include the preparation ofi) Trading and Profit and Loss Account; andii) Balance sheet.Final accounts are the means of conveying the profitability and financial positionto management, owners and interested outsiders of the business. Final accountshave to be prepared every year, to make a continuous assessment of the businessfor a completed period. It must be kept in mind that expenses and incomes for the fullaccounting period are to be taken into account.Suppose, the firm closes its books on 31st March and rent for the month ofMarch has not been paid, this expense (rent) has been incurred and yet to be paid.Therefore, it would be proper to include the rent for the month (March) along with therent of the year to know the true profit. In a firm there will be a number of items, bothexpenses and incomes, which have to be adjusted. If such items are not adjusted, thefinal accounts will not reveal the true and fair picture of the business performance. Allsuch items which need to be brought into books of account at the time of preparingfinal accounts are called “adjustments”. Journal entries passed to effect the requiredadjustments are known as adjusting entries.1

1.1 AdjustmentsSome important and common items, which need to be adjusted at the time ofpreparing the final accounts are discussed below.1. Closing stock2. Outstanding expenses3. Prepaid Expenses4. Accrued incomes5. Incomes received in advance6. Interest on capital7. Interest on drawings8. Interest on loan9. Interest on investment10. Depreciation11. Bad Debts12. Provision for bad and doubtful debts13. Provision for discount on debtors14. Provision for discount on creditors.Note : All adjustments are given outside the trial balance.1.1.1 Closing StockThe unsold goods in stock at the end of the accounting period is called asclosing stock. This is to be valued at cost or market price whichever is lower.Example:The value of closing stock shown outside the trial balance on 31.3.2004 isRs.1,00,000.Adjusting EntryDate2004Mar 31ParticularsL.FClosing stock A/cTo Trading A/c(closing stock recorded)DrValue of closing stock will appeari)on the credit side of trading account andii)on the assets side of balance sheet.2DebitRs.1,00,000CreditRs.1,00,000

Trading account for the year ending 31st March, 2004Dr. Cr.ParticularsRs.ParticularsRs.By Closing Stock1,00,000Balance Sheet as on 31st March, 2004LiabilitiesRs.AssetsRs.Closing Stock1,00,0001.1.2 Outstanding ExpensesExpenses which have been incurred but not yet paid during the accountingperiod for which the final accounts are being prepared are called as outstandingexpenses.Example: Trial balance shows salaries paid Rs.22,000. Adjustment: Salary forMarch 2004, Rs.2,000 not yet paid.Adjusting EntryDate2004Mar 31ParticularsL.FSalaries A/cDrTo Salaries outstanding A/c(March salary outstanding)DebitRs.CreditRs.2,0002,000Outstanding expenses will be showni)on the debit side of Profit and Loss account by way of additions to the particularexpenses andii)on the liabilities side of the Balance Sheet.Profit and Loss account for the year ending 31st March, 2004Dr. Cr.ParticularsTo Salaries A/cAdd: s.

Balance Sheet as on 31st March, 2004LiabilitiesRs.Outstanding SalariesAssetsRs.2,0001.1.3 Prepaid ExpensesExpenses which have been paid in advance are called as prepaid (unexpired)expenses.Example: Trial Balance for the period ending 31st March, 2004 shows Rs.15,000 asinsurance premium. Adjustment: Prepaid Insurance premium Rs.7,500.Adjusting EntryDate2004Mar 31ParticularsL.FPrepaid Insurance Premium A/cDrTo Insurance Premium A/c(Insurance premium paid in advance)DebitRs.CreditRs.7,5007,500Prepaid expenses will be showni)on the debit side of the Profit and Loss account by way of deduction from theparticular expenses and2) on the assets side of the Balance Sheet.Profit and Loss account for the year ending 31st March, 2004Dr. Cr.ParticularsTo Insurancepremium A/cLess: nce Sheet as on 31st March, 2004LiabilitiesRs.AssetsPrepaid Insurance premiumRs.7,5001.1.4 Accrued Incomes or Outstanding IncomesIncome which has been earned but not received during the accounting period iscalled as accrued income.4

Example: Credit side of Trial Balance (31.3.2004) shows commission receivedRs.8,000. Adjustment: Commission accrued but not yet received Rs.2,000.Adjusting EntryDate2004Mar 31ParticularsL.FAccrued commission A/cDrTo Commission A/c(commission earned but not received)DebitRs.CreditRs.2,0002,000Accrued income will be showni)on the credit side of Profit and Loss account by way of addition to particular incomeandii)on the assets side of the Balance SheetProfit and Loss account for the year ending 31st March, 2004Dr. Cr.ParticularsRs.Rs.ParticularsRs.By Commission receivedAdd: Accrued CommissionRs.8,0002,00010,000Balance Sheet as on March 31, 2004LiabilitiesRs.AssetsRs.Accrued Commission2,0001.1.5 Incomes Received in AdvanceIncome received during a particular accounting period for the work to be donein future period is called as income received in advance.Example: Trial Balance for the period ending 31st March, 2004 shows Rent receivedRs.25,000. Adjustment: Rent received in advance Rs.5,000.Adjusting EntryDate2004Mar 31ParticularsL.FRent received A/cTo Rent received in advance A/c(rent received in advance)5DrDebitRs.5,000CreditRs.5,000

Incomes received in advance will be showni)on the credit side of the Profit and Loss account by way of deducting from theparticular income andii)on the liabilities side of the Balance sheet.Profit & Loss Account for the year ending 31st March, 2004Dr. Cr.ParticularsRs.Rs.ParticularsBy Rent receivedLess: Rent received inadvanceRs.Rs.25,0005,00020,000Balance Sheet as on 31st March, 2004LiabilitiesRs.Rent received in advanceAssetsRs.5,0001.1.6 Interest on CapitalIn order to see whether the business is really earning profit or not, it is desirableto charge interest on capital at a certain rate.Example: As per Trial Balance, capital as on 31.3.2004 is Rs.4,00,000.Adjustment: Provide 6% interest on capital.Adjusting EntryDate2004Mar 31ParticularsL.FInterest on capital A/cTo Capital A/c(6% interest on capital)DrDebitRs.24,000CreditRs.24,000To bring interest on capital to Profit and Loss account, the following transferentry is required.Transfer EntryDateParticularsL.F2004Mar 31Profit & Loss A/cDrTo Interest on Capital A/c(Interest on capital transferred to Profit &Loss A/c)6DebitRs.24,000CreditRs.24,000

Interest on capital will be showni.on the debit side of Profit and Loss account andii.on the liabilities side of the Balance Sheet by way of addition to the capital.Profit & Loss Account for the year ending 31st March, 2004Dr. Cr.ParticularsRs.To Interest on Capital A/cRs.ParticularsRs.Rs.24,000Balance Sheet as on March 31, 2004LiabilitiesRs.CapitalAdd: Interest on capitalRs.AssetsRs.Rs.4,00,00024,0004,24,0001.1.7 Interest on DrawingsAmount withdrawn by the owner for his personal use is called as drawings.When interest on capital is allowed, then interest on drawings is charged from theowner. Interest on drawings is an income for the business and will reduce the capitalof the owner.Example: The trial balance shows the following:Rs.Capital as on 31.3.20044,00,000Drawings as on 31.3.200430,000Adjustment : Charge interest on drawings @ 5%.Adjusting EntryDate2004Mar 31ParticularsL.FCapital A/cTo Interest on Drawings A/c(Interest on drawings)DrDebitRs.1,500CreditRs.1,500To bring interest on drawings to Profit and Loss account the following transferentry is required.7

Transfer EntryDate2004Mar 31ParticularsDebitRs.1,500L.FInterest on drawings A/cTo Profit & Loss A/c(Interest on drawings)DrCreditRs.1,500Interest on drawings will be showni)on the credit side of Profit and Loss account andii)on the liabilities side of the Balance Sheet by way of addition to the drawings whichare ultimately deducted from the capital.Profit & Loss Account for the year ending 31st March, 2004Dr. Cr.ParticularsRs.ParticularsRs.By Interest on drawings1,500Balance Sheet as on 31st March, 2004LiabilitiesCapitalLess: DrawingsInterest on .3,68,5001.1.8 Interest on Loan (Outstanding)Borrowings from banks, financial institutions and outsiders for business arecalled loans. Amount payable towards interest on loan is an expense for the business.Example: The trial balance (31.3.2004) shows the following:Bank loan @ 10% on 1.4.03Rs. 4,00,000Interest paidRs.14,000Adjustment: Provide for interest on bank loan outstanding.Adjusting EntryDate2004Mar 31ParticularsL.FInterest on Bank loan A/cTo Interest outstanding A/c(the interest on bank loan)DrDebitRs.26,000CreditRs.26,0008

Interest on loan outstanding will be showni)on the debit side of the Profit and Loss account by way of addition to the appropriateinterest account andii)on the liability side of the Balance sheet by way of addition to the particular loanaccount.Profit & Loss Account for the year ending 31st March, 2004Dr. Cr.ParticularsTo Interest on loanAdd: Interest s.Balance Sheet as on 31st March, 2004LiabilitiesBank loan @ 10%Add: Interest 0Note: Interest on Bank loan @ 10% on Rs.4,00,000 for the year Rs.4,00,000 x 10/100Rs.40,000Less: Interest paid as per Trial balanceRs.14,000Interest outstanding (Yet to be paid)Rs.26,0001.1.9 Interest on InvestmentInterest receivable on investments is an income for the business.Example: The Trial Balance (31.03.04) shows the following:Investments @10% Rs.5,00,000Interest received on investments Rs.40,000Adjustment:Provide for accrued interest on investments Rs.10,000.Adjusting EntryDate2004Mar 31ParticularsL.FAccrued interest on investments A/cDrTo Interest received A/c(Accrued interest on investments provided)9DebitRs.10,000CreditRs.10,000

Accrued interest on investments (outstanding interest receivable) will be showni)On the credit side of the Profit and Loss account by way of addition to the appropriateinterest account andii)On the assets side of the balance sheet by way of addition to the investmentsaccount.Profit and loss account for the period year 31st March, 2004Dr. Cr.ParticularsRs.Rs.ParticularsRs.By Interest received40,000Add: Accrued interest10,000Rs.50,000Balance Sheet as on 31st March, 00Add: Accrued interest10,0005,10,0001.1.10 DepreciationDepreciation is the reduction in the value of fixed assets due to its use orobsolescence. Generally depreciation is charged at some percentage on the value offixed asset.Example: The Trial balance shows the value of furniture on 31.3.2004 asRs.60,000. Adjustment: Furniture is to be depreciated at 10%.Adjusting EntryDate2004Mar 31ParticularsL.FDepreciation A/cTo Furniture A/c(10% depreciation on furniture)DrDebitRs.6,000CreditRs.6,000To bring depreciation into Profit and Loss account the following transfer entry isrequired.10

Transfer EntryDate2004Mar 31ParticularsL.FProfit & Loss A/cDrTo Depreciation A/c(10% depreciation on furniture transferred toProfit and Loss account)DebitRs.6,000CreditRs.6,000Depreciation will be showni)on the debit side of Profit and Loss account andii)on the assets side of the Balance Sheet by way of deduction from the value ofconcerned asset.Profit & Loss Account for the year ending 31st March, 2004Dr. Cr.ParticularsRs.To Depreciation on FurnitureParticularsRs.6,000Balance Sheet as on 31st March, 2004LiabilitiesRs.Rs.AssetsFurnitureLess: Depreciation @10%Rs.60,0006,000Rs.54,0001.1.11 Bad DebtsDebts which cannot be recovered are called bad debts. It is a loss for thebusines

ACCOUNTANCY HIGHER SECONDARY – SECOND YEAR A Publication under Government of Tamilnadu Distribution of Free

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