Category: CBSE Notes

By going through these CBSE Class 11 Accountancy Notes Chapter 11 Accounts from Incomplete Records, students can recall all the concepts quickly.

Accounts from Incomplete Records Notes Class 11 Accountancy Chapter 11

Generally, business transactions are recorded on the basis of the double-entry system of bookkeeping. Sometimes rules of the double-entry system are not followed for recording business transactions. When a double entry system is not followed for maintaining records, these records are turned into incomplete records. Many authors describe it as a Single Entry System.

However, Singe Entry System is a misnomer because there is no such system for maintaining accounting records. It is rather a mechanism of maintaining records in which rules of the double-entry system are not followed completely. There is the partial observance of rules of the double-entry system in this system.

This recording is done according to the convenience and needs of business entities and there is no uniformity in the maintenance of records by different entities. This system differs from concern to concern. In this, only records of cash and of personal accounts are maintained. It is always an incomplete double entry system, varying with circumstances. business, nature of business, prevailing circumstances, etc.; the procedure of recording followed by different business entities may vary’. Therefore, there is no uniformity in the maintenance of records under incomplete records.

→ Suitability: This system is suitable for a sole trader or partnership firms. Companies, because of legal provisions, cannot keep incomplete records.

→ Flexibility: This method is flexible as the recording procedure can be adjusted according to the information needs of a particular business enterprise. As rules of the double-entry system are not followed, knowledge of principles of the double-entry system of bookkeeping is not necessary.

→ Maintenance of Personal Accounts and Cash Book: Under this system mainly the personal and cash-book maintained which mixes up business as well as private transactions.

→ Variation of Recording Process: It is an incomplete double entry system, varying according to the information needs of business entities. There is no hard and fast rule for the maintenance of records under this system.

→ Dependence on Original Vouchers: Original vouchers play every important role as they provide all the information to be recorded.

→ Less Expensive: As complete records are not kept, the time and labor involved in maintaining accounting records are less in comparison to double entry.

Incomplete Records contain:

1. Both aspects of some of the transactions.
2. Only one aspect of some of the transactions.
3. No aspect of some of the transactions.

Reasons for Incompleteness:
Accounting records may be incomplete due to any one or more of the following reasons:

1. The businessman may be ignorant of the separate legal entity assumption.
2. The businessman may be ignorant of the double-entry accounting principle.
3. The businessman may not intentionally maintain proper accounts to evade taxation.
4. Destruction of the books of accounts due to fire, flood, etc.

Limitations of Che Incomplete Records:
→ Unscientific: The absence of systematic recording of both aspects of a transaction under this, makes it unscientific.

→ No trial balance or arithmetical accuracy of accounts cannot be checked: The dual aspect of a transaction is not recorded under this system. As a result, the trial balance cannot be prepared from the accounting records maintained. Hence, the arithmetical accuracy of accounting records cannot be checked.

→ True profits cannot be known: Nominal accounts are not maintained and therefore it is not possible to prepare a trading account and Profit & Loss Account to calculate gross profit and net profit respectively. Although the amount of net profit is determinable the absence of details of revenue, other income, expenses, and losses affect sound decision making.

→ The finance position cannot be determined: As all the assets and liabilities and depreciation are not recorded, the Balance Sheet cannot be prepared and thus the true financial position cannot be ascertained.

→ Difficult to detect fraud: Trial balance cannot be prepared to check prima facia arithmetical accuracy of accounts. It encourages carelessness, misappropriation, and fraud because, in the absence of complete records, detection of fraud is very difficult.

→ Difficult to make planning and decision making: In the absence of reliable information about nominal and real accounts, effective planning and control over expenses, assets, etc. are not possible.

→ Not recognized by tax authorities: Accounts maintained based on this system are not accepted by sales-tax and income-tax authorities.

→ Interfirm comparison not possible: Because of variation in accounting procedure and rules, comparison of two or more businesses is not possible.

Advantages of Incomplete Records
→ Simple method: It is a very simple method of accounting. It can be maintained by anyone who does not have adequate knowledge of accounting.

→ Less time-consuming: It is less time-consuming since it requires a limited number of books.

→ Less costly: It is less costly because expenses related to the keeping of books are nominal.

→ Suitable-It is suitable for small shopkeepers who do not require an elaborate system of accounting.

Ascertainment of Profit and Loss:
A profit or loss in the case of a Single Entry System can be ascertained by the following two methods:

1. Statement of Affairs Method (or Net Worth Method)
2. Conversion Method (or Final Account Method).

Statement of Affairs Method: A statement of affairs is a statement of assets and liabilities of a business as on a particular date. Under this method, profit is ascertained by comparing the capital at the beginning and capital at the end of the accounting period and necessary adjustments are made for drawings, fresh additional capital, drawings, and interest on capital.

The following steps are followed to ascertain the profit or loss:
1. Prepare a Statement of Affairs at the beginning (if not given) of the accounting period to ascertain the Opening Capital.

2. Ascertain drawings and capital introduced during the year.

3.Prepare a Statement of Affairs at the end of the accounting period to ascertain the Closing Capital (capital at the end) or Prepare a Statement for ascertaining the closing capital before making certain adjustments.

Format of Statement of Affairs Statement of Affairs of…………. as on …………..

4. Prepare a Statement of Profit with the help of the following formula:
Net Profit = Capital at the end Add: Drawings
Less: Additional Capital introduced Less: Opening Capital
Statement of profit is usually prepared as follows:

Statement of Profit for the year ended ………….

If it is desired to calculate profit before certain adjustments separately the Statement of Profit should be prepared as follows:

Statement of Profit for the year ended……………….

5. Prepare Balance Sheet/Received or Final Statements of Affairs at the end after adjusting depreciation, provision for bad and doubtful debts, etc.

Difference between Balance Sheet and Statement of Affairs:


Calculation of Missing Figures and Prepare Final Accounts:
The following steps are followed while calculating the missing figures and preparation of final accounts:
1. Prepare cash and Bank Summary (if not available in proper form with both sides tallied) to ascertain the missing information (Such as opening and closing balances, cash sales/cash purchases, drawing, etc.).

If both the sides of the Cash Book are not tallied, then the difference in both sides may be treated as one of the following items:

If credit sides exceed debit side:

1. Opening Cash or Bank Balance or Closing Bank Overdraft
2. Cash sales
3. Collection from debtors
4. Bills Receivable collected
5. Additional Capital
6. Sale of fixed assets
7. Sundry Income.

If debit sides exceed credit side:

1. Closing Cash or Bank Balance or Opening Bank Overdraft
2. Cash purchases
3. Payment to creditors
4. Bills Payable discharged
5. Drawings
6. Purchase of fixed assets
7. Sundry expenses
8. Cash embezzlement by Cashier.

2. Prepare Total Debtors Account to ascertain the missing information (such as opening debtors, closing debtors, credit sales, collections, bills receivable drawn). If both sides of this account are not tallied, then the difference of both the sides may be treated as one of the following items:

If the credit side exceeds the debit side:

1. Opening Debtors
2. Credit Sales
3. Bills receivable dishonored

If the debit side exceeds the credit side:

1. Closing Debtors
2. Collection from debtors
3. Bills receivable drawn
4. Sales Returns
5. Discount allowed
6. Bad debts.

Format of Total Debtors Account

Important: Provision for Doubtful Debts, Provision for Discount on Debtors, Bad Debts Recovered, Trade Discount Allowed, Bills Receivable Discounted do not affect the Total Debtors Account.

3. Prepare Bills Receivable Account to ascertain the missing information (such as Opening B/R, Closing B/R, B/R drawn, B/R collection, B/R endorsed).

If both the sides of this account are not tallied then the difference in both the sides may be treated as one of the following items:

If the credit side exceeds the debit side:

1. Opening B/R
2. B/R drawn

If the debit side exceeds the credit side:

1. Closing B/R
2. B/R collected
3. B/R dishonored
4. B/R discounted
5. Banker’s discount charges
6. B/R endorsed

Format of Bills Receivable Account

Important: Provision for Doubtful Bills does not affect the Bill Receivable Account

4. Prepare Total Creditors Account to ascertain the missing information (such as Opening Creditors, Closing Creditors, Credit Purchases, Payment made, B/P accepted).

If both the sides of this account are not tallied, then the difference in both the sides may be treated as one of the following items:

If the credit side exceeds the debit side:

1. Closing Creditors
2. Payment to Creditors
3. B/P accepted
4. B/R endorsed to creditors
5. Purchase Return
6. Discount Received.

If the debit side exceeds the credit side:

1. Opening Creditors
2. Credit Purchases
3. B/P canceled
4. Endorsed B/R Dishonoured.

Format of Total Creditors Account

Important: Reserve for Discount on Creditors does not affect the Total Creditors Account.

5. Prepare Bills Payable Account to ascertain the missing information (such as Opening B/P, Closing B/P, B/P accepted, B/P discharged). If both the sides of this account are not tallied, then the difference in both sides may be treated as one of the following items:

If the credit side exceeds the debit side:

1. Closing B/P
2. B/P discharged/canceled.

If the debit side exceeds the credit side:

1. Opening B/P
2. B/P accepted.

Format of Bills Payable Account:

6. Ascertain opening capital by preparing the statement of affairs at the beginning of the accounting period.

7. Prepare the Trial Balance to check the authentical accuracy.

8. Prepare Trading and Profit & Loss Account and the Balance Sheet.

By going through these CBSE Class 11 Accountancy Notes Chapter 10 Financial Statements 2, students can recall all the concepts quickly.

Financial Statements 2 Notes Class 11 Accountancy Chapter 10

The businessman, first of all, enters his transactions in the books of original entry, then prepares ledger to know its combined effect and, then prepares Trial Balance to test for accuracy of foe ledger posting.

With the help of Trial Balance, he prepares Final Accounts. Jb find out foe net profiteer Iqps of .the business, it is necessary to take all foe adjustments into consideration. For example, if an expense belongs to the current year but part of it has been paid in for next year it should be recorded in the accounts current year otherwise the net profit or net loss at foe current year will not be the effect

Need for Adjustments
The following are foe objects of making adjustments
1. To account for all foe expenses pertaining to the current year. The purpose is to adjust all such expenses that have been incurred but not paid, viz., expenses outstanding and also such expenses which have been paid in advance for the coming year or months, viz., prepaid expenses.

The outstanding expenses are added to the expenses paid in Profit & Loss A/c and shown as liabilities in the Balance Sheet. The prepaid expenses are deducted from the expenses in the Profit & Loss A/c and shown as assets in the Balance Sheet.

2. To account for all the incomes pertaining to the current year. The purpose is to adjust all such incomes which have accrued during this year but have actually not been received or it has been received but are actually for the future period of activity.

3. Providing for depreciation and reserve to arrive at net profit. The purpose is to make provision for the wear and tear of fixed assets and reserves for unforeseen losses which might accrue. Examples are depreciation on assets, interests on capital, reserves for bad debts, and other contingencies.

Types of Adjustments:
1. Closing Stock: Stock of those goods which are either not sold, processed, or completed at the end of the year is known as Closing Stock. It is valued on cost or market value whichever is less.

Accounting Treatment:
(a) In case closing stock appearing inside the Trial Balance. No adjustment is required. It will appear only in the Balance Sheet on the Assets side.
(b) In case closing stock appearing outside the Trial Balance:

Journal Entry:
Closing Stock A/c Dr.
To Trading A/c
(Being closing stock transferred to Trading A/c)

Treatment in:
Trading A/c
This appears on the credit side of Trading A/c.
Balance Sheet
This appears on the assets side.

2. Outstanding Expenses: Those expenses which relate to the current year but for which payment is not made. For example, Salary Outstanding, Rent Outstanding, Wages Outstanding, etc.

Journal Entry:
Expenses A/c Dr.
To Outstanding Expenses A/c

Treatment in:
Trading A/c
Add to the respective items on the debit side.
Profit & Loss A/c
Add to the respective items on the debit side
Balance Sheet
Show on the liabilities side.

3. Prepaid Expenses: Expenses that are paid in advance i.e. those expenses which are paid in the current year but relate to the next accounting year. For example, Rent Paid in Advance, Prepaid Taxes, Prepaid Insurance Premium, etc.
Journal Entry:
Prepaid or Unexpired Expenses A/c Dr.
To Expenses A/c

Treatment in:
Trading A/c
Deduct from the concerned item on the debit side.
Profit & Loss A/c
Deduct from the concerned item on the debit side.
Balance Sheet Show on the assets side.

4. Accrued Income: Income earned but not yet received i. e. those incomes which although earned in the current year but are not received in the current year. For example, Interest on Investments, Dividends on Shares, etc.
Journal Entry:
Accrued Income A/c Dr.
To Income A/c

Treatment in:
Profit & Loss A/c
Add to the concerned item on the credit side.
Balance Sheet Show on the assets side.

5. Income Received in Advance or Unearned Income: That income that is received in the current year but which relates to the next year.
Journal Entry:
Income A/c Dr.
To Unearned Income A/c

Treatment in:
Profit & Loss A/c
Deduct from the concerned item on the credit side.
Balance Sheet
Show on the liabilities side.

6. Depreciation: Cost of wear and tear of fixed assets i.e. that expenses by which the value of fixed assets, used for earning revenue, decreases.
Journal Entry:
Depreciation A/c Dr.
To Assets A/c

Treatment in:
Profit & Loss A/c Show on the debit side.
Balance Sheet
Deduct from the concerned asset on the assets side.

7. Bad Debts: Amount which is due from debtors but not receivable. It is a loss of the firm.
Journal Entry:
Bad Debts A/c Dr.
To Debtors A/c

Treatment in:
Profit & Loss A/c
If Bad Debts is already given in trial balance, then Bad Debts given in adjustments is termed as Further Bad Debts and it is added to Bad Debts given in Trial Balance on the debit side of Profit and Loss A/c.
Balance Sheet
Deduct from the debtors but show it.

8. Provision for Bad and Doubtful Debts: It is not possible to accurately know the amount of Bad Debts. Hence, we have to make a reasonable estimate of such loss and provide for the same. Such provision is called provision for bad and doubtful debts.
Journal Entry:
Profit & Loss A/c Dr.
To Provision for Bad and Doubtful Debts A/c

Treatment in:
Profit & Loss A/c
To calculate the amount of Provision for Bad and Doubtful Debts, first, we have to deduct the B^d Debts given as adjustment from the debtors after that calculate the amount of provision on balance.

The amount is shown on the debit side of Profit & Loss A/c as follows:

Deduct from Sundry Debtors but show it.

9. Provision for Discount on Debtors: To encourage prompt, payments, a business enterprise allows discounts to its debtors. Discount likely to be allowed to customers in an accounting year can be estimated and provided for by creating a provision for discount on debtors. Provision for discount is made on good debtors which are arrived at by deducting further bad debts and the provision for doubtful debts.
Journal Entry:
Profit & Loss A/c Dr.
To Provision for Discount on Debtors A/c

Treatment in:
Profit & Loss A/c Shown on the debit side.
Balance Sheet

Provision for Discount on Debtors will be shown on the assets side of the Balance Sheet as:

10. Manager’s Commission: The manager of the business is sometimes given the commission on the net profit of the company. The percentage of the commission is applied to the profit either before charging such commission or after charging such commission.
1. Before charging such commission:
= Profit × \(\frac{\text { Rate of Commission }}{100}\)

2. After charging such commission:
= Profit × \(\frac{\text { Rate of Commission }}{100+\text { Rate }}\)

Journal Entry:
Profit & Loss A/c
To Manager’s Commission A/c

Treatment in:
Profit & Loss A/c Shown on the debit side.
Balance Sheet
Shown in liabilities side as Outstanding Manager’s Commission.

11. Interest on Capital: Interest on capital is calculated at a given rate of interest on opening capital. If however, any additional capital is brought during the year, the interest may be computed on such amount from the date on which it was brought into the business.
Journal Entry:
Interest on Capital A/c Dr.
To Capital A/c

Treatment in:
Profit & Loss A/c
Shown on the debit side.
Balance Sheet
Add to the capital on the liabilities side.

Method of Presenting the Financial Statements
The Financial Statements can be presented in two ways:

1. Horizontal Form
2. Vertical Form

Horizontal Form: Here items are shown side by side in the financial statements. This format is rather technical in nature and is not easily comprehensible for many uses.

Vertical Form: Here the final accounts are prepared in the form, of statements with different items being shown below the other in a purposeful sequence. Under the vertical form, the format of Trading and Profit & Loss Account and format of Balance Sheet is given below:

Income Statement for the period ended……………..


Under the vertical presentation, the Balance Sheet will appear as follows:

Balance Sheet as on


Summary of Treatment of Adjustments

By going through these CBSE Class 11 Accountancy Notes Chapter 9 Financial Statements 1, students can recall all the concepts quickly.

Financial Statements 1 Notes Class 11 Accountancy Chapter 9

Meaning of Financial Statements:
When the business enterprise satisfies itself with the agreement of trial balance, then they proceed to prepare the financial statements for their business. Now they are interested to know whether they have earned profit or incurred losses during the accounting period. They also want to ascertain the business position at the end of the accounting period for this purpose.

They prepare financial statements which are also called Final Accounts. It is the last phase of the accounting process. In our system of accounting, financial statements include a Balance Sheet, Trading Account and Profit and Loss Account, and explanatory schedules and notes. Financial statements are those statements that report the profitability and the financial position of the business at the end of the accounting period. The Statements are presented to users of accounting information for decision making.

According to John N. Myer “The financial statements provide a summary of accounts of the business enterprise, the balance sheet reflecting the assets, liabilities, and capital as on a certain date and the income statement showing the result of operations during a certain period.”

Need of Financial Statements:
The main objective of financial statements is to communicate the financial position and performance of the business entities to the users of accounts. The financial position of the business entity is indicated through the Balance Sheet and performance is indicated through the Trading and Profit and Loss Account.

Users of Financial Statements:

1. Management use financial statements for their decision-making.
2. Investors use it to assess the financial soundness of the firm.
3. Potential investors use to know how safe their investment will be.
4. Lenders like debenture holders, suppliers of loans, etc. uses it to know the short-term and long-term financial soundness of the firm.
5. Creditors use it for knowing the ability of the enterprise to meet the debts when they fall due.
6. Employees use it to demand an increase in bonuses and wages.
7. The government uses it to regulate different policies.
8. Income Tax and Sales Tax Authorities use them to ascertain the tax liability of the firm.

The distinction between Capital and Revenue:
It is a very important distinction in accounting between capital and revenue items. The revenue items form part of the trading and profit and loss account the capital items help in the preparation of a balance sheet.

The distinction between Capital Expenditure and Revenue Expenditure:
Capital expenditure is the amount spent by an enterprise on the purchase of fixed assets that are used in the business to earn income and are not intended for resale. For example, expenditure incurred in acquiring assets, or erection of fixed assets, an extension of fixed assets, to acquire the right to carry on business, legal charges, etc.

Capital expenditure is debited to a fixed account which appears in the Balance Sheet.

Revenue expenditure is the amount spent on running a business. The benefit of revenue expenditure is exhausted in the accounting period in which it is incurred. For example rent, salaries, wages, power and fuel, carriage, freight, depreciation, cartage, etc.

Revenue expenditure appears in a Trading and-Profit and Foss Account. Capital expenditure increases the earning capacity of the business whereas revenue expenditure incurred for earning profits.

Capital Receipts and Revenue Receipts:
Capital receipts are those receipts that imply an obligation to return the money. The amount received in the form of additional capital introduced, loan received and sale of fixed assets are capital receipts. These are shown in the Balance Sheet only. Revenue Receipts are those receipts that do not imply an obligation to return the money. The amount received in the normal and regular course of business mainly by the sale of goods and services. These are shown in the Profit and Loss Account.

Trading Account:
Trading Account is prepared for calculating the gross profit or gross loss arising or incurred as a result of the trading activities of a business. Its main components are sales, services rendered, and the cost of goods sold.

Form of Trading Account
Trading Account

Profit and Loss Account
It is prepared to calculate the net profit or net loss of the business of a given accounting period.

“Profit and Loss Account is an account into which all gains and losses are collected in order to ascertain the excess of gains over the losses or vice-versa.” – Prof Carter

Form of Profit and Loss Account
Profit and Loss Account


Operating Profit and Net Profit
Operating Profit = Net Sales – Operating Cost = Net Sales – (Cost of Goods Sold + Administration and Office and Expenses + Selling and Distribution Expenses)
Or
Operating Profit = Net Profit + Non-Operating Expenses – Non-Operating Incomes

Gross Profit = Net Sales – Cost of Goods Sold.
= Net Sales (Opening stock + Net purchases + Direct expenses – Closing stock)

Net Sales = Total Sales – Sales Return
Net Purchases = Total Purchases – Purchase Returns
Net Profit = Gross Profit + Revenue Receipts-Indirect Expenses

Balance Sheet:
A statement that sets out the assets and liabilities of finner an institution at a certain date.

“Balance Sheet is an a.screen picture of the financial position of a going business at a certain moment.” – Francis R. Stead

It shows the financial position of the business at a certain date.

Form of Balance Sheet Balance Sheet as at……………….


Grouping and Marshalling of Balance Sheets
Grouping means putting items of similar nature under a common heading. The arrangement of assets and liabilities in a particular order in the Balance Sheet is called ‘Marshalling’.

Marshaling of Balance Sheet can be made in two ways:
1. In order of Liquidity: According to this method, an asset which is most easily convertible into cash such as cash in hand is written first and then will follow those assets which are comparatively less easily convertible, so that the least liquid assets such as goodwill, is shown last.

In the same way, those liabilities which are to be paid at the earliest will be written first. In other words, current liabilities are written, first of all, then fixed or long-term liabilities, and lastly, the proprietor’s capital. Proforma of a Balance Sheet in the order of liquidity will be the same as shown in the topic Balance Sheet.

2. In order of Permanence: This method is just opposite to the first method. Assets that are most difficult to be converted into cash such as Goodwill are written first and the assets which are most liquid such as cash in hand are written last.

Those liabilities which are to be paid last will be written first. The proprietor’s capital is written, first of all, then fixed or long-term liabilities, and lastly the current liabilities. The Proforma of the Balance Sheet in the order of Permanence will be just opposite to the above.

By going through these CBSE Class 11 Accountancy Notes Chapter 8 Bills of Exchange, students can recall all the concepts quickly.

Bills of Exchange Notes Class 11 Accountancy Chapter 8

When goods are sold or bought for cash, payment is received immediately whereas when goods are sold or bought on credit the payment is deferred to a future date. In such a case, the seller would like to get a written undertaking from the buyer to get the payment after a fixed period. Nowadays these written undertaking is called bills of exchange or promissory notes. The bill of exchange contains an unconditional order to pay a certain amount on an agreed date while the promissory note contains an unconditional promise to pay a certain sum of money on a certain date.

Meaning of Bill of Exchange:
“A bill of exchange is defined as an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument.” – Negotiable Instrument Act, 1881

Features of Bill of Exchange:

1. It must be in writing.
2. It is an order to make payment.
3. The order to make payment is unconditional’.
4. The maker of the bill of exchange must sign it.
5. The payment to be made must be certain.
6. The date on which payment is made must also be certain.
7. It must be payable to a certain person.
8. The amount mentioned in the bill of exchange is payable either on-demand or on the expiry of a fixed period of time.
9. It must be stamped as per the requirement of law.

Parties to a Bill of Exchange:
1. Drawer: The drawer is the maker of the bill of exchange. A seller/ creditor who is entitled to receive money from the debtor can draw a bill of exchange upon the buyer/debtor. The drawer of the writing the bill of exchange has to sign it as a maker of the bill of exchange.

2. Drawee: Drawee is the person upon whom the bill of exchange is drawn. Drawee is the purchaser or debtor of the goods upon whom the bill of exchange is drawn.

3. Payee: Payee is the person to whom the payment is to be made.

The drawer of the bill himself will be the payee if he keeps the bill with him till the date of its payment. The payee may change in the following situations:
(a) In case the drawer has got the bill discounted, the person who has discounted the bill will become the payee;
(b) In case the bill is endorsed in favour of a creditor of the drawer, the creditor will become the payee.

Promissory Note:
“A promissory note is defined as an instrument in writing (not being a banknote or currency note), containing an unconditional undertaking signed by the maker, to pay a certain sum of money only to or to the order of a certain person.” -Negotiable Instrument Act, 1881

Features of Promissory Note:

1. It must be in writing;
2. It must contain an unconditional promise to pay;
3. The sum payable must be certain;
4. It must be signed by the maker;
5. The maker must sign it;
6. It must be payable to a certain person;
7. It should be properly stamped.

Parties to a Promissory Note:
1. Maker or Drawer: The maker or drawer is the person who makes or draws the promissory note to pay a certain amount as specified in the promissory note. He is also called the promisor.

2. Drawee or Payee: Drawee or payee is the person in whose favour the promissory note is drawn. He is called the promisee.

The distinction between a Bill of Exchange and Promissory Note


Advantages of Bill of Exchange:

1. Goods can be sold and purchased easily on credit with the use of Bill of Exchange.
2. The drawer can discount the bill of exchange with the bank if the money is needed immediately.
3. When the bill is accepted by the drawee, it is proof of debt.
4. A bill of exchange can be endorsed to any third party for the settlement of the debt.
5. It is a legal document and a suit can be fed against the drawee if he refuses to pay it.
6. Bill of exchange payable on the due date and needs no remainder for payment.
7. In foreign, Trade Bills are generally used and facilitate payments.

Maturity of Bill:
The term Maturity refers to the date on which a bill of exchange or a promissory note becomes due for payment. In arriving at the maturity date three days know as days of grace must be added to the date on which the period of credit expires instrument is payable.

Discounting of Bill:
Sometimes the holder of the bill may need cash before the maturity of the bill. For this, he needs to hand over the bill to his bank. The bank charges a normal discount for its services. This process of encashing a bill any time before maturity is known as discounting a bill. In this case, the bank gets the amount from the drawee on the due date.

Endorsement of Bill:
The transfer of a bill by the holder by putting his signature on its back is called Endorsing a Bill. In this way, the transferee becomes the holder of the bill of exchange. Now the bill of exchange would be payable to the endorsee instead of the transferer.

Accounting Treatment:
1. When the drawer retains the bill with him till the date of its maturity and gets, the same collected directly.

2. When the bill is retained by the drawer with him and sent to the bank for collection a few days before maturity.

3. When the drawer gets the bill discounted from the bank.

4. When the bill is endorsed by the drawer in favour of his creditor.

Dishonour of a Bill:
When the drawee refuses to pay the amount of the bill on the date of maturity or becomes insolvent, a bill is said to have been dishonoured. In case of dishonour, the holder of the bill can recover the amount of the bill from any of the endorsers or the drawer. For this purpose, the holder of the bill must serve a notice of dishonour to the drawer and each prior endorser whom he seeks to make liable for payment immediately of the dishonour or with a reasonable time.

Noting Charges:
A bill of exchange should be duly presented for payment on the date of its maturity. The drawee is absolved of his liability if the bill is not duly presented. Proper presentation of the bill means that it should be presented on the date of maturity to the acceptor during business working hours. To establish, beyond doubt that the bill was dishonoured, despite its due presentation, it may prefer to be got noted by Notary Public. Noting authenticates the fact of dishonour. For providing this service, a fee is charged by the Notary Public which is called ‘Noting Charge’.

Renewal of the Bill:
Sometimes, the acceptor of the bill foresees that it may be difficult to meet the obligation of the bill on maturity and may, therefore, approach the drawer, with the request for an extension of time for payment.

If it is so, the old bill is cancelled and the fresh bill with the new term of payment is drawn and duly accepted and delivered. This is called renewal of the bill. Here noting charges are not required. The drawee may have to pay interest to the drawer for the extended period of credit.

Retiring of the Bill:
Sometimes the drawee of the bill has funds at his disposal and makes a request to the drawer or holder to accept the payment of the bill before its maturity. If the holders agree to do so, the bill is said to have been retired. To encourage the retirement of the bill, the holder allows some discount called Rebate on bills for the period between the date of retirement and maturity.

Bills Receivable and Bills Payable Books:
When a large number of bills are drawn and accepted, their recording by means of journal entry for every transaction relating to the bills become a very cumbersome and time-consuming exercise. It is then advisable to record them separately in special subsidiary books, the bills receivables in the Bills Receivable Book and the Bills Payable in the Bills Payable Book. The reason for the use of subsidiary books for recording bill transactions is the same as that in the case of other subsidiary books for cash, purchases etc.

An important point in connection with these books is that they only record the transactions relating to drawings and acceptance of bills, all other transactions do not record the entire range of transactions relating to the bills, e.g. relating to bills discounted, endorsement, retirement, renewal etc. simply have a passing reference in these books and the entries relating thereto are recorded as usual in the journal. It may be noted that the entry relating to honouring bills appear in the cash book.

Format of Bills Receivable Book
Bills Receivable Book

Format of Bills Payable Book
Bills Payable Book

Accommodation Bills
Apart from financing transaction in goods, bills of exchange, promissory notes may also be used for raising funds temporarily. Such a bill is called an ‘accommodation bill’ as it is accepted by the drawee to accommodate the drawer. Hence, the drawee is called the ‘accommodating party’ and the drawer is called the ‘accommodation party’.

Sometimes, the accommodation parties agree to raise the funds through an accommodation bill for mutual benefits. It can be done in any of the following two ways:
(a) The drawer and the drawee share the proceeds in an agreed ratio.
(b) Each draws a bill and each accepts a bill.

By going through these CBSE Class 11 Accountancy Notes Chapter 7 Depreciation, Provisions and Reserves, students can recall all the concepts quickly.

Depreciation, Provisions and Reserves Notes Class 11 Accountancy Chapter 7

SECTION-1 (Depreciation)
The term ‘Depreciation’ means a decline in the value of fixed assets due to use, the passage of time, or obsolescence. an accounting item, depreciation is that part of the cost of a fixed asset that has expired on account of its usage and/or lapse of time. The amount of depreciation, being a charge against profit, is debited to the profit and loss account.

Meaning of Depreciation
Depreciation may be described as a permanent, continuing, and gradual shrinkage in the book value of fixed assets. It is based on the cost of assets consumed in a business and not on its market value,

“The depreciation is the diminution in the intrinsic value of the assets due to use and/or lapse of time.”

– Institute of Cost and Management Accounting, London (ICMA)
Accounting Standard-6 issued by The Institute of Chartered Accountants of India (ICAI) defines depreciation as “a measure of the wearing out, consumption or other loss of value of depreciable assets arising from use, effluxion of time or obsolescence through technology and market change.

Depreciation is allocated so as to change the fair proportion of depreciable amount in each accounting period during the expected useful life of the assets. Depreciation includes amortization of assets whose useful life is predetermined.”

Features of Depreciation:

1. It is a decline in the book value of fixed assets.
2. It includes loss of value due to effluxion of time, usage, or obsolescence.
3. It is a continuing process.
4. It is an expired cost and hence must be deducted before calculating taxable profits.
5. It is a non-cash expense.

Depreciation and, Other Similar Terms:

1. Depletion: It is used in the context of extraction of natural resources like mines, quarries, etc. that reduces the availability of the quantity of the material or assets.
2. Amortization: It refers to writing off the cost of intangible assets like patents, copyright, trademarks, franchises, leasehold mines which have entitlements to use for a specified period of time.

Causes of Depreciation:

• Wear and tear due to use or passage of time.
• Expiration of legal rights.
• Obsolescence due to technological changes etc.
• Abnormal factors such as accidents due to fire, earthquake, floods, etc.

Need for Depreciation:

• Matching of Costs and Revenue.
• Consideration of Tax.
• True and Fair Financial Position.
• Compliance with Law.

Factors affecting the Amount of Depreciation

1. Cost of Assets.
2. Estimated Net Residual Value.
3. Depreciable Cost.
4. Estimated Useful Life.

Methods of Calculating Depreciation Amount
The selection of an appropriate method depends upon the following:

1. Type of the asset.
2. Nature of the use of such assets.
3. Circumstances prevailing in the business.

1. Straight Line Method:
This method is based on the assumption of equal usage of the assets over its entire useful life. It is also called the fixed installment method because the amount of depreciation remains constant from year to year over the useful life of the assets. Accordingly to this method, a fixed and equal amount is charged on depreciation in every accounting period during the lifetime of an asset. This method is also known as a fixed percentage on the original cost method.

Formula:
Depreciation = \(\frac{\text { Cost of assets-Estimated residual value }}{\text { Estimated usefullife of the asset }}\)
Rate of Depreciation = \(\frac{\text { Annualdepreciation amount }}{\text { Acquisition cost }}\) × 100

2. Written Down Value Method:
Under this method, depreciation is charged on the book value of the asset. It is also known as the reducing balance method. The amount of depreciation reduces year after year.

Under this method, the rate of depreciation is computed by using following formula:
R = \(\left[1-\sqrt[n]{\frac{s}{c}}\right]\) × 100

Where . R = rate of deprecition
n = expected useful life
s = scrap value
c = cost of an asset

Straight Line Method and Written Down Method: A Comparative Analysis


Methods of Recording Depreciation:
In the books of account, there are two types of arrangements for recording depreciation of fixed assets.

1. Charging depreciation to assets account.
2. Creating provision for depreciation/accumulated depreciation account.

1. Charging depreciation to assets account: Under this, depreciation is deducted from the depreciable cost of the asset (credited to the asset account) and charged (or debited) to the profit and loss account.

Journal Entries:
1. For recording purchase of asset: (Only in the year of purchase)
Asset A/c Dr. [With the cost of assets including installation etc.]
To Bank/Vendor A/c

2. Following two entries are recorded at the end of every year
(a) For deducting depreciation amount from the cost of the asset.
Depreciation A/c Dr. [[With the amount of depreciation]
To Asset A/c

(b) For charging depreciation to profit and loss account.
Profit & Loss A/c Dr. [With the amount of depreication]
To Depreciation A/c

The fixed asset appears at its net book value i.e. cost less depreciation charged till date on the asset side of the balance sheet,

2. Creating Provision for Depreciation Account/ Accumulated Depreciation Account: Under this method of recording depreciation, the asset account continues to appear at its original cost year after year over its entire life, and depreciation is accumulated on a separate account instead of being adjusted into the assets account at the end of each accounting period.

Journal Entries:
l. For recording purchase of asset: (Only in the year of purchase)
Asset A/c Dr. [With the cost of assets including installation etc.]
To Bank/Vendor A/c [Cash/Credit purchase]

2. Following two journal entries are recorded at the end of each year
(a) For crediting depreciation amount to provide for depreciation account
Depreciation A/c Dr. [[With the amount 0f depreication]
To Provision for depreciation A/c.

(b) For charging depreciation to profit and loss account.
Profit & Loss A/c Dr. [With the amount of depreication]
To Depreciation A/c

Balance Sheet Method: In the balance sheet, the fixed assets continue to appear at their original cost on the assets side. The depreciation charged till that date appears, in the provision for depreciation account which is shown either on the liabilities side of the balance sheet or by way of deduction from the original cost of the assets concerned on the asset side of the balance sheet.

Disposal of Asset:
Disposal of an asset can take place either at the end of its useful life or during its useful life due to obsolescence or any other abnormal factor.

Journal Entries:
1. For the sale of asset as scrap
Bank A/c Dr.
To Assets A/c

2, For transfer of balance in assets account
(a) In case of profit
Asset A/c Dr.
To Profit & Loss A/c

(b) In case of loss
Profit & Loss A/c Dr.
To Assets A/c

In case, however, the provision for depreciation account has been in use for recording the depreciation, then before passing the above entries transfer the balance of the provision for depreciation account to the asset account by recording the following journal entry:
Provision for Depreciation A/c Dr.
To Asset A/c

Asset Disposal Account:
This method is generally used when a part of the asset is sold and a provision for a depreciation account exists.

Journal Entries:
1. Assets Disposal A/c Dr. [With the original cost of the asset, being sold]
To Assets A/c

2. Provision for Depreciation A/c Dr. [With the accumulated balance in provision for depreciation account]
To Assets Disposal A/c

3. BankA/c Dr. [With the net sale proceeds]
To Assets Disposal A/c

4. In case of loss
Profit & Loss A/c Dr. [With the amount of loss on sale]
To Assets Disposal A/c

5. In case of profit
Assets Disposal A/c Dr. [With the amount of profit on sale]
‘ To Profit & Loss A/c

SECTION-II (Provisions and Reserves)
Provisions:
Provisions mean, “any amount written off or retained by way of providing for depreciation, renewals or diminution in the value of assets, or retained by way of providing for any known liability .of which the amount cannot be determined with substantial accuracy’’. Provision is a charge Against profit.

Reasons/Purposes of creating Provisions

1. To provide for doubtful debts.
2. To provide for taxation.
3. To provide for depreciation, etc.

Reserves:
Reserve means the profit retained in the th&business not having any attributes of a provision. A provision in excess of the amount considered necessary for the purpose for which it was created is to be treated as a reserve. Thus it is an appropriation of profit.

Difference between Reserve and Provision:
1. Basic nature: A provision is a charge against profit whereas a reserve is an appropriation of profit.

2. Purpose: A provision is made to meet a specific liability or contingency whereas reserves are created to strengthen the financial position of the business.

3. Presentation in Balance Sheet: Provision is shown either

1. by way of deduction from the item on the asset side for which it is created or
2. on the liabilities side along with the current liabilities. On the other hand, the reserve is shown on the liabilities sides of the capital.

4. Effect on taxable profits: Provision reduces taxable profits whereas reserve has no effect on the taxable profits.

5. Element of compulsion: Creation of provision is necessary to ascertain true and fair profit or loss whereas the creation of a Reserve is at the discretion of the management however in certain cases law has stipulated for creation of specific reserves such as Debenture Redemption Reserve. ,

6. Use for the payment of dividend: Provision cannot be used for dividend distribution whereas Reserves can be used for dividend distribution.

Types of Reserves:

1. General Reserves: When the purpose for which reserve is created is not specified, it is called General Reserve.
2. Specific Reserves: Specific reserve is a reserve, which is created for some specific purpose and can be utilized only for that purpose.

Examples are:

• Dividend Equalisation Reserve
• Workmen Compensation Fund
• Investment Fluctuation Fund
• Debenture Redemption Reserve

Reserve is also classified as revenue and capital reserve according to the nature of profit out of which they are created.

Revenue Reserves:
They are created from revenue profits which arise out of the normal operating activities of the business and are otherwise freely available for distribution as dividend Examples are:

1. General Reserve
2. Workmen Compensation Fund
3. Investment Fluctuation Fund
4. Dividend Equalisation Reserve
5. Debenture Redemption Reserve etc.

Capital Reserves:
They are created out of capital profits that do not arise from the normal operating activities. Such reserves are not available for distribution as dividends. These reserves can be used for writing off capital losses or issue of bonus shares in the case of a company.

Examples are:

1. Premium on issue of shares or debentures
2. Profit on sale of fixed assets
3. Profit on redemption of debentures
4. Profit on revaluation of fixed assets and liabilities.
5. Profit prior to incorporation
6. Profit on the reissue of forfeited shares.

Importance of Reserves:
A business firm may consider it proper to set up some mechanism to protect itself from the consequences of unknown expenses and losses.

The amount so set aside may be meant for the purpose of:

1. To meet the unforeseen liability or loss
2. To strengthen the financial position of the business
3. To provide funds for meeting a specific liability
4. To provide funds for the payment of dividends at the time of inadequacy of profits.

Secret Reserves:
It is a reserve that does not appear in the balance sheet. It may also help to reduce the disclosed profits and also tax liability. When total depreciation charged is higher than the total depreciable cost, a secret reserve is created.

By going through these CBSE Class 11 Accountancy Notes Chapter 5 Bank Reconciliation Statement, students can recall all the concepts quickly.

Bank Reconciliation Statement Notes Class 11 Accountancy Chapter 5

We know that Banks provide very important financial services in modern society. These days a large number of cash transactions are in fact passed through banks. Usually, all the business firms open a current account with a bank, and in order to record the transactions entered into with the bank, maintain a Bank Column in the Cash Book. Bank also maintains an account for each customer in its books.

All deposits by the customer are recorded on the credit side of his/her account and all withdrawals are recorded on the debit side of his/her account. A copy of this account is regularly sent to the customer by the bank. This is called ‘Pass Book’ or ‘Bank Statement’. The amount of balance shown in the passbook or the bank statement must tally with the balance as shown in the cash book. The businessman has to ascertain the cause for such a difference.

Meaning of Bank Reconciliation Statement:
According to Patil, “Bank reconciliation statement is a statement prepared mainly to reconcile the difference between the ‘Bank Balance’ shown by the Cash Book and Bank Pass Book.”

In other words, Bank Reconciliation Statement is a statement of account that explains the reasons for any difference between the bank balance as per cash book and bank balance as per bank statement/passbook and reconciles the two.

In simple words, it is generally experienced that where a comparison is made between the bank balance as shown in the firm’s cash book and the bank balance as shown in the bank passbook, the two balances do not tally/Hence, we have to first ascertain the causes of difference thereof and then reflect them in a statement called Bank Reconciliation Statement to reconcile (tally) the two balances.

Need for Reconciliation:
It is neither compulsory to prepare Bank Reconciliation Statement nor the date is fixed on which it is to be prepared. It is prepared from time to time to check that all transactions relating to the bank are properly recorded by the businessman in the bank column of the cash book and by the bank in its ledger account. Thus, it is prepared to reconcile the bank balances shown by the cash book and by the bank statement. It helps in detecting if there is an error in recording the transactions and ascertaining the correct bank balances as a particular date.

Reasons or Causes of Difference in the balance of the Cash Book and Pass Book
Reconciliation of the cash book and the bank passbook balances amounts to an explanation of differences between them. The differences between the cash book and the bank passbook is caused by:

1. Timing differences on a recording of the transactions
2. Errors made by the business or by the bank.

1. Timing Difference:
(a) Cheques issued by the firm but not yet presented for payment in the bank.
(b) Cheques paid or deposited into the bank but not yet collected.
(c) Bank charges or other charged, charges by the bank on behalf of the customer.
(d) Amount collected or credited by bank on standing instructions given by the customers.
(e) Amount paid or debited by the bank on standing instructions given by the customer.
(f) Interest credited by the bank.
(g) Interest debited by bank or overdraft.
(h) Direct payment by the customer into the bank account.
(i) Dishonour of cheques or bills.

2. Differences caused by errors
(a) Errors committed in recording transactions by the firm.
(b) Errors committed in recording transactions by the bank.

Preparation of Bank Reconciliation Statement
After identifying the causes of difference, the reconciliation may be done in the following two ways:
(a) Preparation of bank reconciliation statement without adjusting cash book balances.
(b) Preparation of bank reconciliation statement after adjusting cash book balance.

Preparation of Bank Reconciliation Statement without adjusting cash book balances
We may have two types of balances while preparing the Bank Reconciliation Statement which is following:
(a) Favourable balances

1. Credit balance as per passbook or bank statement is given and the balance as per cash book is to be ascertained.
2. Debit balance as per cash book is given and the balance as per pass book is to be ascertained.

(b) Unfavourable balances

1. Debit balance as per pass book (i.e. overdraft) is given and the balance as per cash book is to be ascertained.
2. Credit balance as per cash book (i.e. overdraft) is given and the balance as per pass book is to be ascertained.

Steps are to be taken for preparation of the Bank Reconciliation Statement
1. When debit balance as per Cash Book (Favourable balance) is given:

1. Take balance as a starting point say Balance as per Cash Book.
2. Add all transactions that have resulted in increasing the balance of the passbook.
3. Deduct all transactions that have resulted in decreasing the balance of the passbook.
4. Extract the net balance shown by the statement which should be the same as shown in the passbook.

Proforma:
Bank Reconciliation Statement as on…………..


2. When the credit balance as per Pass Book (Favourable balance) is given:

1. Take balance as a starting point say Balance as per Pass Book.
2. Add all transactions that have resulted in increasing the balance of the cash book.
3. Deduct all transactions that have resulted in decreasing the balance of the cash book.
4. Extract the net balance shown by the statement which should be the same as shown in the cash book.

Proforma:
Bank Reconciliation Statement as on…………..


3. When the credit balance as per Cash Book (Uufavoarable balance) is given:

1. Take balance as a starting point say Overdraft as per Cash Book.
2. Add all the transactions that have resulted in decreasing the balance of the passbook.
3. Deduct all the transactions that have resulted in increasing the balance of the passbook.
4. Extract the net balance shown by the statement which should be the same as shown in the passbook.

Proforma:
Bank Reconciliation Statement as on……………..


4. When the debit balance as per Pass Book (Unfavourable balance) is given:

1. Take balance as a starting point say overdraft as per Pass Book.
2. Add all the transactions that have resulted in decreasing the balance of the cash book.
3. Deduct all the transactions that have resulted in increasing the balance of the cash book.
4. Extract the net balance shown by the statement which should be the same as shown in the cash book.

Proforma:
Bank Reconciliation Statement as on…………….

Preparation of Bank Reconciliation Statement with Adjusted Cash Book
Bank Reconciliation Statement is prepared usually without adjusting the Cash Book during the different months of the financial year. However, at the. end of the financial year, the Cash Book must be adjusted before preparing the Bank Reconciliation Statement as the adjusted balance of the Cash Book is to be shown in the Balance Sheet.

The procedure for finding out adjusted cash balance is as follows:
1. Firstly a Cash Book with Bank Columns only will be prepared with the balance of the existing Cash Book.

2. All errors that have been committed in the Cash Book will have to be rectified by passing adjusting entries in the Cash Book.

For example:
(a) Any amount recorded twice in the Cash Book.
(b) Recording of issued cheques omitted in Cash Book.
(c-) Cheques deposited into the bank but omitted to be recorded in • Cash Book.
(d) Overcosting or undercoating of debit or credit column of Cash Book.
(e) Entries on the wrong side of columns etc.

3. Amounts for which bank has given credit in Pass Book but not recorded in the debit side of Cash Book. They will be recorded.
(a) Interest allowed by the bank.
(b) Interest Or dividend collected by the bank.
(c) Amount directly deposited by customers into bank etc.

4. Amounts for which bank has given debit in Pass Book but not recorded in the credit side of Cash Book. They will be recorded, such as
(a) Interest charged by the bank on overdraft.
(b) Bank charges, commission charges, etc.
(c) Insurance premium paid by the bank.
(d) cheque sent for collection and dishonored.

5. Following items must not be recorded in the Amended/Adjusted Cash Book:
(a) Cheques deposited into the bank but not collected.
(b) Cheques issued but not presented for payment.
(c) Any wrong entry in Pass Book.

6. Adjusted Cash Book is then balanced and this new balance is taken as a starting point for preparing the Bank Reconciliation Statement.

By going through these CBSE Class 11 Accountancy Notes Chapter 4 Recording of Transactions 2, students can recall all the concepts quickly.

Recording of Transactions 2 Notes Class 11 Accountancy Chapter 4

A small business may be able to record all its transactions in one book only, i.e., the journal. But as the business expands and the number of transactions becomes large, it may become cumbersome to journalize each transaction. For the quick, efficient, and accurate recording of business transactions, Journal is sub-divided into special journals. These special journals are also called day books or subsidiary books. A transaction that cannot be recorded in any special journal is recorded in a journal called the Journal Proper.

Following are the subsidiary books for special purposes:

1. Cash Book
2. Purchase Book
3. Purchases Return Book,
4. Sales Book
5. Sales Return Book
6. Journal Proper, etc.

1. Cash Book: Cash Book is a special Journal that is used for recording all cash receipts and cash payments. It starts with the cash or bank balances at the beginning of the period. The Cash Book is both a journal and a ledger. It is also called the book of original entry.

Types of Cash Book

1. Single Column Cash Book: Single Column Cash Book records all cash transactions of the business in chronological order. It has one amount column on each side. All cash receipts are recorded on the debit side and all cash payments are recorded on the credit side.

Format of Single Column Cash Book:

2. Double Column Cash Book: Double Column Cash Book has two amount columns (One for Cash and one for Bank) on each side when the number of bank transactions is large, it is convenient to have a separate amount column for bank transactions in the cash book itself instead of recording them in the journal. This helps in getting information about the position of the bank account from time to time. All cash receipts, deposits into the bank are recorded on the debit side and all cash payments and withdrawals from the bank are recorded on the credit side.

Contra Entry: When cash is deposited into the bank, and when cash is withdrawn from the bank for use1 in the office, each such transaction affects both ‘Cash column’ as well as ‘Bank column’, and the transaction is, therefore, recorded on both sides of the cash book. Such entries, the double-entry of which is complete in the cash book itself, are called contra entries’.

Format of Double Column Cash Book:

3. Petty Cash Book: In every organization, a large number of small payments such as conveyance, cartage, postage, telegrams, and other expenses are made. These are generally repetitive in nature. If all these payments are handled by the cashier and are recorded in the main cash book, the procedure is found to be very cumbersome. To avoid this large organizations normally appoint one more cashier (petty cashier) and maintain a separate cash book to record these transactions such a cash book maintained by the petty cashier is called a petty cash book. The petty cashier works on the imprest system.

Format of Petty Cash Book:

2. Purchases (Journal) Book: All credit purchases of goods are recorded in the Purchases (Journal) Book. It records neither the cash purchase of the goods nor the purchase of any assets other than the good. The source documents for recording entries in the books are invoices or bills received by the firm from the supplies of the goods. Entries are made with the net amount of the invoice. The monthly total of the purchases book is posted to the debit of purchases account in the ledger.

Format of Purchases (Journal) Book:
Purchase (Journal) Book

3. Purchases Return (Journal) Book: Purchases Returns Book (Return Outward Book) is used for the purposes of recording the returns of goods purchased on credit. It records neither the returns of goods purchased on a cash basis nor the returns of any assets other than the goods. The entries in the purchases return book are usually made on the basis of debit notes issued to the suppliers or credit notes received from the suppliers.

A debit note is a document prepared by the purchaser to inform the supplier that his account has been debited with the amount mentioned and for the reasons stated therein. The debit note contains the date of return, name of the supplier to whom the goods have been returned, details of the goods returned, reasons for returning the goods. Each debit note is serially numbered.

Format of Purchases Return (Journal) Book:
Purchases Return (Journal) Book

Format of Debit Note:

4. Sales (Journal) Book: All credit sales of goods are recorded in the sales journal. It records neither the cash sale of the goods nor the sale of any assets other than goods. The source document for recording entries in the sales journal is a sales invoice or bill issued by the firm to the customer.

Format of Sales (Journal) Book:
Sales (Journal) Book

The sales journal is totaled periodically (generally monthly), and this total is credited to the sales account in the ledger.

5. Sales Return (Journal) Book: This journal is used to record the return of goods by customers to them on credit. On receipt of goods from the customer, a credit note is prepared. The source document for recording entries in the sales return book is generally the credit note.

A credit note is a document prepared by the seller to inform the buyer that his account has been credited with the amount mentioned and for the reasons stated therein. Credit does not contain the date of return of goods, the name of the customer who has returned the goods, detail Is of goods received back, and the number of such goods. Each credit r/ote is serially numbered.

Format of Sales Return (Journal) Book:
Sales Return (Journal) Book

6. Journal Proper: Journal proper is a residuary book in which those transactions are recorded which cannot be recorded in any other subsidiary book. The various examples of transactions entered in a journal proper are opening entry, Adjustment Entries, Rectification Entries, Transfer Entries, Closing Entries, etc.

By going through these CBSE Class 11 Accountancy Notes Chapter 3 Recording of Transactions 1, students can recall all the concepts quickly.

Recording of Transactions 1 Notes Class 11 Accountancy Chapter 3

As we know that, accounting involves a process of identifying and. analyzing the business transactions, recording them, classifying and summarising their effects, and finally communicating it to the interested users of accounting information. Now, we will discuss the details of each step involved in the accounting process. The first step involves identifying the transactions to be recorded and preparing the source documents which are in turn recorded in the basic book of original entry called journal and are then posted to individual accounts in the principal book called ledger.

Business Transactions and Source Document
Business Transactions: Business transactions are exchanges of economic consideration between parties and have the two-fold effect that one recorded in at least two accounts. For example, purchase of furniture for cash.

It involves the reciprocal exchange of two things:

1. payment of cash,
2. delivery of furniture.

Source Document: Each business transaction should be supported by documentary evidence such as cash memos, cash receipts, invoices or bills, debit and credit notes, pay-in-slip, cheque,s, etc. These business documents are called source documents.

Vouchers: On the basis of source document entries are, first of all, recorded on vouchers, and then on the basis of vouchers recording is made in the Journal or books of original entry. A separate voucher is prepared for each transaction and it specifies the accounts to be debited and credited. Vouchers are prepared by an accountant and each voucher is countersigned by an authorized person of the firm.

Types of Accounting Vouchers

Note: Transfer Voucher is also called Transaction Voucher. Specimen of Transaction Voucher

Specimen of Debit Voucher

Specimen of Credit Voucher

The transaction with multiple debits and multiple credits are called complex transactions and the accounting voucher prepared for such transactions is called a Complex Voucher/Journal Voucher.

Specimen of Complex Transaction Voucher:

Features of Accounting Voucher:
An accounting Voucher must contain the following essential features:

1. It is written on a good quality paper;
2. The name of the firm must be printed on the top;
3. The date of the transaction is filled up against the date;
4. The number of the voucher is to be in serial order;
5. The name of the account to be debited or credited is mentioned;
6. Debit and the credit amount is to be written in figure against the amount;
7. Description of the transaction is to be given account-wise;
8. The person who prepares the voucher must mention his name along with his signature;
9. The name and signature of the authorized person are mentioned on the voucher.

Accounting Equation:
An accounting equation is a statement of equality between the resources (Assets) and the sources (Capital and Liabilities) which finance the resources. In simple words, an accounting equation signifies that the assets of a business are always equal to the total of its liabilities and capital (owner’s equity) in mathematical form:
Assets = Liabilities + capital

The accounting equation is also called the Balance Sheet Equation, as it depicts fundamental relationship among the components of the balance sheet.

Using Debit and Credit
Every transaction involves a give and takes aspect, in double-entry accounting both the aspect of the transaction is recorded. If the business acquires something, it must have been acquired by giving something. While recording each transaction, the total amount debited must be equal to the total amount credited.

The term ‘Debit’ and ‘Credit’ indicate whether the transaction is to be recorded on the left-hand side or right-hand side of the account. In its simplest form, an account looks like the English language letter “T”. This helps in ascertaining the ultimate position of each item at the end of an accounting period. In a “T” account, the left side is called debit (Dr.) and the right side is called credit (Cr.).

Specimen of T Account:

Rules of Debit and Credit:

Two fundamental rules are followed to record the changes in these accounts:
1. For recording changes in Assets/Expenses/Losses

1. “Increase in assets is debited and decrease in assets is Credited.”
2. “Increase in expenses/losses is debited and decrease in expenses/losses is credited.”

2. For recording changes in Liabilities and Capital/Revenue/Gains.

1. “Increase in liabilities is credited and decrease in liabilities is debited.”
2. “Increase in the capital is credited and decrease in the capital is debited.”
3. “Increase in revenue/gain is credited and decrease in revenue/gain is debited.

The rules applicable to the different kinds of accounts have been summarised in the following chart:


Books of Original Entry:
The book in which the transaction is recorded for the first time is called a journal or book of original entry. The source document is required to record the transactions in the journal. This practice provides a complete record of each transaction in one place and links the debit and credits for each transaction. The process of recording transactions in the journal is called journalizing. The process of transferring journal entry to individual accounts is called posting. This sequence causes the journal to be called the Book of Original Entry and the ledger account on the Principal Book of entry.

Journal is sub-divided into a number of books of original entry as follows:

1. Journal proper
2. Cash Book
3. Other day Books
   (a) Purchase Book
   (b) Sales Book
   (c) Purchase Returns Book
   (d) Sales Returns Book
   (e) Bills Receivable Book
   (f) Bills Payable Book

Journal:
A Journal is a book in which transactions are recorded in the order in which they occur i.e., in chronological order. A Journal is called a book of prime entry (also called of original entry) because all business transactions are entered first in this book.

Format of Journal:

1. Date Column: In this column, the date on which the transaction is entered is recorded. The year and month are written once till they change.

2. Particulars Column: In this column, first the name of accounts to be debited then the names of the account to be credited, and lastly the narration is entered.

3. L.F. (Ledger Folio) Column: In this column, the ledger page number containing the relevant account is entered at the time of posting.

4. Debit amount column: In this column, the amount to be debited is entered.

5. Credit amount column: In this column, the amount to be credited is entered.

The Ledger:
A ledger is a principal book that contains all the accounts (Assets Accounts, Liabilities Accounts, Capital Accounts, Revenue Accounts, Expenses Accounts) to which the transactions recorded in the books of original entry are transferred. As the ledger is the ultimate destination of all transactions, the ledger is called the “Book of Final Entry”.

Format of Ledger

1. Name of the Account: The name of the item is written at the top of the format as the title of the account. The title of the account ends with the suffix ‘Account’.
2. Dr./Cr.: Dr. means Debit side of the account that is left side and Cr. means Credit side of the account i.e. right side.
3. Date: Year, Month, and Date of transactions are posted in chronological order in this column.
4. Particulars: The name of the item with reference to the original book of entry is written on the debit/credit side of the account.
5. Journal Folio: It records the page number of the original book of entry on which relevant transaction is recorded.
6. Amount: This column records the amount in numerical figure, corresponding to what has been entered in the amount column of the original book of entry.

The distinction between Journal and Ledger:

Journal	Ledger
1. The Journal is the book of the first entry (original entry).	1. The ledger is the book of secondary entry.
2. It is the book for chronological records.	2. It is the book for analytical records.
3. It is prepared on the basis of source documents of transactions.	3. It is prepared on the basis of the journal.
4. Process of recording in the Journal is called Journalising	4. The process of recording in the ledger is known as posting.
5. Narration is written for each entry.	5. No narration is given

Classification of Ledger Accounts:

All permanent accounts are balanced and carried forward to the next accounting period. The temporary accounts are closed at the end of the accounting period by transferring them to the trading and profit and loss accounts. This classification is also relevant for preparing financial statements.

By going through these CBSE Class 11 Accountancy Notes Chapter 2 Theory Base of Accounting, students can recall all the concepts quickly.

Theory Base of Accounting Notes Class 11 Accountancy Chapter 2

Accounting aims at providing information about the financial performance of a firm to its various users. Accounting information must be reliable and comparable based on some consistent accounting policies, principles, and practices. This calls for developing a proper theory base of accounting.

The importance of accounting theory need not.be over-emphasized as no discipline can develop without a sound theoretical base. The theory base of accounting consists of principles, concepts, rules, and guidelines developed over a period of time to bring uniformity and consistency to the process of accounting and enhance its utility to different users of accounting information.

Apart from these, the Institute of Chartered Accountants of India which is the regulatory body for the standardization of accounting policies in the country has issued Accounting Standards which are expected to be uniformly adhered to, in order to bring consistency in the accounting practices.

Generally Accepted Accounting Principles (GAAP)
Generally Accepted Accounting Principles refers to the rules or guidelines adopted for recording and reporting business transactions in order to bring uniformity in the preparation and presentation of financial statements. These principles are also referred to as concepts and conventions.

From the practical viewpoint, various terms such as principles, postulates, conventions, modifying principles, assumptions, basic accounting concepts, etc. have been used interchangeably. However, the principles of accounting are not static in nature. These are constantly influenced by changes in the legal, social and economic environment as well as the needs of the users.

Basic Accounting Concepts
The basic accounting concepts are referred to as the fundamental, ideas or basic assumptions underlying the theory and practice of financial accounting and are broad working rules for all accounting activities and developed by the accounting professions.

The important basic accounting concepts are following:
1. Business Entity Concept: This concept assumes that a business, has a distinct and separate entity from its owners. Thus, for the purpose of accounting, a business and its owners are to be treated as two separate entities.

2. Money Measurement Concept: The concept of money measurement states that only those transactions and happenings in an organization, which can be expressed in terms of money are to be recorded in the books of accounts. Also, the records of the transactions are to be kept not in the physical units but in the monetary units.

3. Going Concern Concept: This concept assumes that a business firm would continue to carry out its operations indefinitely (for a fairly long period of time) and- would not be liquidated in the near future.

4. Accounting Period Concept: The accounting period refers to the span of time at the end of which the financial statements of an enterprise are prepared to know whether it has earned profit or incurred losses during that period and what exactly is the position of its assets and liabilities, at the end of that period.

5. Cost Concept: The cost concept requires that all assets are recorded in the book of accounts at their cost price, which includes the cost of acquisition, transportation, installation, and making the assets ready for use.

6. Dual Aspect Concept: This concept states that every transaction has a dual or two-fold effect on various accounts and should therefore be recorded in two places. The duality principle is commonly expressed in terms of fundamental accounting equations, which is
Assets = Liabilities + Capital

7. Revenue Recognition (Realisation) Concept: Revenue is the gross inflow of cash arising from the sale of goods and services by an enterprise and use by others of the enterprise’s resources yielding interest royalties and dividends. The concept of revenue recognition requires that the revenue for business transactions should be considered realized when a legal right to receive it arises.

8. Matching Concept: The concept of matching emphasizes that expenses incurred in an accounting period should be matched with revenues during that period. It follows from this that the revenue and expenses incurred to earn this revenue must belong to the same accounting period.

9. Full Disclosure Concept: This concept requires that all material and relevant facts concerning the financial performance of an enterprise must be fully and completely disclosed in the financial statements and their accompanying footnotes.

10. Consistency Concept: This concept states that accounting policies and practices followed by enterprises should be uniform and consistent over a period of time so that results are composable. Comparabilities results when the same accounting principles are consistently being applied by different enterprises for the period under comparison, or the same firm for a number of periods.

11. Conservatism Concept: This concept requires that business transactions should be recorded in such a manner that profits are not overstated. All anticipated losses should be accounted for but all unrealized gains should be ignored.

12. Materiality Concept: This concept states that accounting should focus on material facts. If the item is likely to influence the decision of a reasonably prudent investor or creditors, it should be regarded as material, and shown in the financial statements. 13. Objectivity Concept: According to this concept, accounting transactions should be recorded in the manner so that it is free from the bias of accountants and others.

Systems of Accounting:
There are two systems of recording business transactions which are following:
1. Double Entry System: This system is based on the principle of “Dual Aspect” which states that every transaction has two effects, viz. receiving of a benefit and giving of a benefit. Each transaction, therefore, involves two or more accounts and is recorded at different places in the ledger. The basic principle followed is that every debit must have a corresponding credit. A double-entry system is a complete system as both the aspects of a transaction are recorded in the books of accounts.

2. Single Entry System: This system is not a complete system of maintaining records of financial transactions. It does not record the two-fold effect of each and every transaction. Instead of maintaining all the accounts, only personal accounts and cash books are maintained under this system. The accounts maintained under this system are incomplete and unsystematic and, therefore, not reliable.

Basis of Accounting
From the point of view of the timing of recognition of revenue and costs, there can be two broad approaches to accounting. These are:

1. Cash basis
2. Accrual basis

1. Cash Basis of Accounting: Under the cash basis, entries in the book of accounts are made when cash is received or paid and not when the receipt or payment becomes due. This system is incompatible with the matching principle, which states that the revenue of a period is matched with the cost of the same period.

2. Accrual Basis of Accounting: Under the accrual basis, revenue and costs are recognized in the period in which they occur rather than when they are paid. A distinction is made between the receipt of cash and the right to receive cash and payment of cash and the legal obligation to pay cash. Thus, under this system, the monitory effect of a transaction is taken into account in the period in which they are earned rather than in the period in which cash is actually received or paid by the enterprise.

Accounting Standards:
Accounting standards are written statements of uniform accounting rules and guidelines or practices for preparing the uniform and consistent financial statements and for other disclosures affecting the user of accounting information. However, the accounting standards cannot override the provision of applicable laws, customs, usages, and business environments in the country.

Kohler defines accounting standards as “a mode of conduct imposed on accountants by custom, law or professional body”.

In order to bring uniformity and consistency in the reporting of accounting information, the Institute of Chartered Accountants of India (ICAI) constituted an Accounting Standard Board in April 1977 for developing Accounting Standards. Accounting Standard Board submits the draft of the standards to the council of ICAI, which finalizes the accounting standards.

Accounting-Standards (AS):
The ICAI has issued the following standards:

• AS 1 Disclosure of Accounting Policies
• AS 2 Valuation of Inventories
• AS 3 Cash Flow Statements
• AS 4 Contingencies and Events Occurring after the Balance Sheet Date
• AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies
• AS 6 Depreciation Accounting AS 7 Construction Contracts
• AS 8 Accounting for Research and Development
• AS 9 Revenue Recognition
• AS 10 Accounting for Fixed Assets
• AS 11 The Effects of Changes in Foreign Exchange Rates
• AS 12 Accounting for Government Grants
• AS 13 Accounting for Investments
• AS 14 Accounting for Amalgamations
• AS 15 Accounting for Retirement Benefits in the Financial Statements of Employers (recently revised and titled as Employee Benefits’)
• AS 16 Borrowing Costs
• AS 17 Segment Reporting
• AS 18 Related Party Disclosures
• AS 19 Leases
• AS 20 Earnings Per Share
• AS 21 Consolidated Financial Statements
• AS 22 Accounting for Taxes on Income
• AS 23 Accounting for Investments in Associates in Consolidated Financial Statements
• AS 24 Discontinuing Operations
• AS 25 Interim Financial Reporting AS 26 Intangible Assets
• AS 27 Financial Reporting of Interests in Joint Ventures AS 28 Impairment of Assets
• AS 29 Provisions. Contingent Liabilities and Contingent Assets

International Financial Reporting Standards (IFRS):
“International Financial Reporting Standards (IFRS) are a set of accounting standards developed by the International Accounting Standards Board (IASB), the international accounting standard-setting body, which came into existence in the year 2001.

The use of a single set of high-quality accounting standards would facilitate investment and other economic decisions across borders, increase market efficiency and reduce the cost of capital. IASB places emphasis on developing standards based on sound and clearly stated principles, from which interpretation is necessary. Therefore, IFRS are referred to as principles-based accounting standards.

IFRS issued by the IASB:

S.No.	Title
1. IFRS 1	First-time Adoption of International Financial Reporting Standards.
2. IFRS 2	Share-Based Payment
3. IFRS 3	Business Combinations
4. IFRS 4	Insurance Contracts
5. IFRS 5	Non-Current Assets Held for Sale and Discontinued Operations
6. IFRS 6	Exploration for and Evaluation of Mineral Resources
7. IFRS 7	Financial Instruments: Disclosures
8. IFRS 8	Operating Segments
9. IFRS 9	Financial Instruments
10. –	IFRS for Small and Medium Enterprises. It provides standards applicable to private entities (those that are not publicly accountant as defined in this standard)

IASB has adopted all outstanding IAS and SIC issued by the IASC as its own standards. Those IAS and SIC continue to be in force to the extent they are not amended or withdrawn by the IASB. Out of 41 IAS, 12 IAS standards withdrawn and in effect 29 IAS are still applicable.

IFRS compliant financial statements are:

1. Statement of Financial Position,
2. Comprehensive Income Statement,
3. Statement of Changes in Equity,
4. Statement of Cash Flow, and
5. Notes and Summary of Accounting Policies.

Difference between IFRS and Indian Accounting Standards:
The principal difference between the two is that while IFRS is based on principle and fair value. Indian Accounting Standards are based on rules and historical value.

By going through these CBSE Class 11 Accountancy Notes Chapter 1 Introduction to Accounting, students can recall all the concepts quickly.

Introduction to Accounting Notes Class 11 Accountancy Chapter 1

In the period when ownership and management were treated, the prime objective of accounting was to ascertain profit and loss and the financial position of the enterprise. In the modern world, the growth of business required large investments and this brought in the period when ownership and management got separated, taking the place of professional management.

Accounting became an important tool In helping decision-making by the management as it makes available the required information. Accounting, therefore, means an information system that provides the accounting information to users thereof to arrive at the correct decision.

Meaning of Accounting
“Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are in part at least, of financial character and interpreting the result thereof.”.

– The American Institute of Certified Public Accountants
“Accounting is the art of recording and classifying business transactions and events, basically of a financial nature and the art of making significant summaries, analysis and interpretation of those transactions and events and communicating the results to persons who must make decisions or firm judgment.” – Smith and Ashburne.

Accounting can therefore be defined as the process of identifying, measuring, recording, and communicating the required information relating to the economic events of an organization to the interesting uses of such information.

Relevant aspects of the definition of accounting

1. Economic events
2. Identification, measurement, recording, and communication
3. Organization
4. The interested user of information

1. Economic Events: An economic event is known as a happening of consequence to a business organization which consists of transactions and which are measurable in monetary terms.

2. Identification, measurement, recording, and communication:
1. Identification: It means determining what transactions to record i.e. to identify events that are to be recorded.

2. Measurement: It means quantification (including estimates) of business transactions into financial terms by using monetary units.

3. Recording: Once the economic event is identified and measured in financial terms, these are recorded in books of accounts in monetary terms and in chronological order.

4. Communication: The economic events are identified, measured, and recorded in order that the pertinent information is generated and communicated in a certain form to
management and other internal and external users.

3. Organisation: It refers to a business enterprise, whether for profit or not-for-profit motive.

4. Interested user of information: Accounting is a means by which necessary financial information about business enterprise is communicated and is also called the language of business. Many users need financial information in order to make important decisions.

Accounting as a source of information: Accounting is a service activity. Its function is to provide qualitative information primarily financial in nature, about economic entities that are intended to be useful in making economic decisions.

It is universally accepted that making available qualitative accounting information is an important objective because it is the basis to make decisions by its users. The accounting information expected by its users is provided through financial statements. Financial statements are Profit and Loss Account and the Position statement or Balance sheet made available the Information relating to profit and loss, and information relating to financial position.

Similarly, investors, lenders, creditors, employees, and the Government agencies by analyzing the financial statements can make decisions about investments pattern, lending and making credit available, information relating to providing funds & other dues, and natural accounts of government agencies respectively.

Branches of Accounting
1. Financial Accounting: It assists in keeping a systematic record of financial transactions, the preparation, and presentation of financial reports in order to arrive at a measure of organizational success and financial soundness.

2. Cost Accounting: It assists in analyzing the expenditure for ascertaining the cost of various products manufactured or services provided by the firm and fixation of prices thereof.

3. Management Accounting: It deals with the provisions of necessary accounting information to people within the organization to enable them in decision-making, planning, and controlling business operations.

Qualitative Characteristics of Accounting Information:
1. Reliability: An accounting information should be objective and reliable. To be reliable, it should be free from errors and bias and should represent what it should represent.

2. Relevance: An accounting information should be relevant for decision making. To be relevant, information must be made available in time and help in prediction and feedback.

3. Understandability: An accounting information should be readily understandable by its user. It should be presented in simple terms and form.

4. Comparability: An accounting information will be useful and • beneficial to the different users only when it is comparable over time and with other enterprises. For this, there should be consistency, i.e. use of the common unit of measurement, common format of reporting, and common accounting policies.


Objectives of Accounting

1. To keep systematic records of the business.
2. To ascertain the financial results, i.e. profit or loss of the firm during a particular period.
3. To show the financial position of the firm by preparing a position statement on a particular date.
4. To communicate the accounting information to its users.

Role of Accounting: An accountant with his education training, analytical mind, and experience are best qualified to provide multiple need-based services to the end growing society. The accountants of today can do full justice not only to matters relating to taxation, costing, management accounting, financial layout, company legislation, and procedures but they can act in the fields relating to financial policies, budgetary policies, and even economic principles.

The service recorded by accountants to the society include the following:
(a) To maintain the Books of Account in a systematic manner.
(b) To act as a Statutory Auditor.
(c) To act as an Internal Auditor.
(d) To act as a Taxation Advisor.
(e) To act as a Financial Advisor. ,
(f) To act as a Management information system consultant.

Basic Terms in Accounting
1. Entity: It means a thing that has a definite individual existence.

2. Transaction: A event involving some value between two or more entities.

3. Assets: Anything which is in the possession or is the property of business enterprises including the amount due to it from others is called assets. Assets may be classified as Fixed Assets and Current Assets.

4. Liabilities: It refers to the amount which the business enterprise owes to outsiders excepting the amount owned to proprietors.

Liabilities may be classified as follows:

1. Long-term Liabilities
2. Current Liabilities

5. Capital: Amount invested in an enterprise in form of money or assets by its owner is known as capital.

6. Sales: Sales are total revenues from goods or services sold or provided to customers. It may be cash sales or credit sales.

7. Revenues: Amounts which business earned or received. Revenue in accounting means the income of a recurring nature from any source.

8. Expenses: Costs incurred by a business in the process of earning revenue are known as expenses.

9. Expenditure: Spending money or incurring liability for some benefits, service, or property received is called expenditure. It is of two types: Revenue expenditure and Capital expenditure.

10. Profit: The excess of revenue of a period over its related expenses during the accounting year is profit.

11. Gain: It is a monetary benefit, profits, or advantages resulting from events or transactions which are incidental to the business.

12. Loss: In accounting, this term conveys two different meanings:

1. The result of the business for a period when total expenses exceed the total revenue.
2. Some facts or activities against which the firm receives no benefit.

13. Discount: Discount is the deduction in the price of the goods sold. It is of two types:

1. Trade discount and
2. Cash discount.

14. Voucher: The documentary evidence in support of a transaction is known as a voucher.

15. Goods: It refers to the products in which the business unit is dealing, i.e. in terms of which it is buying and selling or producing and selling.

16. Drawings: Withdrawal of money and/or goods by the owner from J the business for personal use is known as drawings.

17. Purchases: Purchases are the total amount of goods procured by a business on credit and on cash, for use or sale.

18. Stock: Stock is a measure of something on hand – goods, spares, and other items in a business.

19. Debtors: They are persons and/or other entities who owe to an enterprise an amount for buying goods and services on credit.

20. Creditors: They are persons and/or other entities who have to be paid by an enterprise an amount for providing the enterprise goods and services on credit.

By going through these CBSE Class 12 Accountancy Notes Chapter 11 Cash Flow Statement, students can recall all the concepts quickly.

Cash Flow Statement Notes Class 12 Accountancy Chapter 11

The Income Statement and the Balance Sheet (Position Statement) are the two important and basic financial statements prepared by every business enterprise. Income Statement shows the profit or loss incurred by the enterprise for the accounting period and the Balance Sheet discloses the financial condition or position at a particular date. But many of those who study these statements are, for different reasons, also interested in knowing the inflow and outflow of cash.

Hence, many companies presented along with the final accounts, a statement called ‘Cash Flow Statement’ which shows inflows and outflows of the cash and cash equivalent. In June 1995, the Securities and Exchange Board of India, (SEBI) amended clause 32 of the Listing Agreement requiring every listed company to give along with its balance sheet and profit and loss account, a Cash Flow Statement prepared in the prescribed format showing separately cash flows from operating activities, investing activities and financing activities.

Meaning of Cash Flow Statement
A Cash Flow Statement is a statement that shows inflow (receipts) and outflow (payments) of cash and its equivalents in an enterprise during a specified period of time. Accounting Standard (AS-3) Revised issued by the Institute of Chartered Accountant of India on Cash Flow Statement in March 1997 has defined Cash Flow Statement as “a statement which shows inflows (receipts) and outflows (payment) of cash and its equivalents in an enterprise during a specified period of time.” According to the revised accounting standard 3, an enterprise should prepare a cash flow statement and should present it for each period for which financial statements are presented.

The terms, Cash, Cash Equivalents, and Cash Flows explained below:
Cash: It comprises cash in hand and demand deposits with banks.

Cash Equivalents: They are short term highly liquid investments that are readily convertible into cash and which are subject to an insignificant risk of change in value. An investment normally qualifies as a cash equivalent only when it has a short maturity, of say three months or less from the date of acquisition. Cash equivalent is held for the purpose of meeting short-term cash commitments rather than for investment or another purpose.

Cash Flows are inflows and outflows of cash and cash equivalents. An inflow increases the total cash and cash equivalents at the disposal of the enterprise whereas an outflow decreases them.

As per AS 3, Cash Flows exclude movements between items that constitute cash or cash equivalents because these components are part of the cash management of an enterprise rather than part of its operating, investing, or financing activities.

Objectives of Cash Flow Statement
The basic objective of the Cash Flow Statement is to highlight the change in the cash position including the sources from which cash was obtained by the enterprise and specific uses to which cash was applied.

The Cash Flow Statement serves a number of objectives which are following:
1. Depict Inflows and Outflows of Cash: The cash Flow Statement gives information about cash inflows and cash outflows of an enterprise during a particular period from operating activities, investing activities, and financing activities. It is an effective tool for managing cash.

2. Cash Flow information helps in Planning: Cash Flow Statements provide information for planning for short-range cash needs of the enterprise. It helps in the formulation of financial policies.

3. Helping in understanding the Liquidity of the Enterprise: Cash Flow Statement helps the enterprise to assess whether it would meet its current obligations or not. It also helps the lending institutions like banks etc to ascertain the liquidity of the enterprise.

4. Help in preparing Cash Budget: A cash Flow Statement helps the management of the firm in preparing a Cash Budget.

5. Analysis Management of Cash: CashFlow Statement reveals good and bad points relating to the management of Cash.

According to AS-3 (Revised) the objectives of the Cash How Statement are as follows: ” Information about the cash flow of an enterprise is useful in providing users of financial statements with a basis of assessing the ability of the enterprise to generate cash and cash equivalents and the needs of the enterprise to utilize these cash flows.

The economic decisions that are taken by users require an evaluation of the ability of an enterprise to generate cash and cash equivalents and the timing and certainty of their generation. The statement deals with the provision of information about the historical changes in cash and cash equivalent of an enterprise by means of a cash flow statement which classifies cash flows during the period from operating, investing and financing activities.”

Advantages of Cash Flow Statement
A Cash Flow Statement is a useful financial statement and provides the following benefits:
(a) It enables the management to identify the magnitude and directions of changes in cash.
(b) It enables the users to evaluate the changes in the economic resources of an enterprise.
(c) It enables the users to evaluate the changes in financial structure. ‘
(d) It enables the users to evaluate the changes in net assets of enterprises.
(e) It enables the users to evaluate the enterprise’s ability to alter the amounts and timings of cash flows in order to adapt to changing circumstances and opportunities.
(f) It is useful in assessing the ability of the enterprise to generate Cash and Cash Equivalents and enables users to develop models to assess and compare the present value of the future cash flows of different enterprises.
(g) As a tool of planning, the Projected Cash Flow Statement enables the management to plan its future investments, operating, and financial activities such as repayment of long-term loans and interest thereon, modernization or expansion of the plant, payment of cash dividend, etc.
(h) It helps in efficient cash management. The management can know the adequacy or otherwise of cash and can plan for the effective use of surplus cash or can make the necessary arrangement in case of inadequacy of Cash.
(i) It also enhances the comparability of the reporting of operating performance by different enterprises because it eliminates the effects of using different accounting treatments for the same transactions and events.

Classification of Cash Flows
A Cash Flow Statement shows the inflow and outflow of cash and cash equivalents from various activities of a company during a specific period. As per AS-3, these activities can be classified into three categories which are following:

1. Operating activities
2. Investing activities
3. Financing activities

1. Operating Activities: Operating activities are the principal revenue-producing activities of the enterprise and other activities that are not investing or financing activities. Cash flows from operating activities generally result from the transactions and other events that enter into the determination of net profit or loss.

The amount of cash flows arising from operating activities is a key indicator of the extent to which the operations of the enterprise have generated sufficient cash flows to maintain the operating capability of the enterprise to pay dividends, repay loans and make investments without resources to extent source of financing. Examples of Cash Flows from operating activities are:

Cash Inflows from Operating Activities:

1. Cash receipts from the sale of goods and rendering of services.
2. Cash receipts from royalties, fees, commissions, and other revenues.
3. Cash receipts relating to future contracts, forward contracts, option contracts, and swap contracts when the contracts are held for dealing or trading purpose.
4. Cash receipts as income tax refunds unless they can be specifically identified with financing and investing activities.

Cash Outflows from Operating Activities:

1. Cash payments to suppliers of goods and services.
2. Cash payments to and on behalf of employees for wages, salaries, etc.
3. Cash payments of income tax unless they can be specified as financing or investing activities.
4. Cash payments for future contracts, forward contracts, etc.
5. Cash Payments for interest etc.

2. Investing Activities: As per AS-3 investing activities are the acquisition and disposal of long-term assets (such as land, building, plant, machinery, etc.) and other investment not included in cash equivalents. It is important to make a separate disclosure of cash flows arising from investing activities because the cash flows represent the extent to which expenditures have been made for resources intended to generate future income and cash flows.

Cash Inflows from Investing Activities:

1. Cash receipts from disposal of fixed assets.
2. Cash receipts from disposal of shares, warrants, or debt instruments of other enterprises and interest in joint ventures other than cash equivalents.
3. Cash receipts from the repayment of advances and loans made to third, parties (other than advances and loans of the financial enterprise.)
4. Interest received in cash from loans and advances.
5. Dividend received from investment in other enterprises.

Cash Outflows from Investing Activities:

1. Cash payments to acquire fixed assets.
2. Cash payment, relating to capitalized research and development costs.
3. Cash payment, to acquire shares, warrants, etc. other than cash equivalent.
4. Cash advances and loans made to a third party (other than advances and loans made by a financial enterprise wherein it is operating activities.)

3. Financing Activities: As per AS-3, financing activities are activities that result in changes in the size and composition of the owner’s capital (including preference share capital in the case of a company) and borrowings of the enterprise. The separate disclosure of cash flows from financing activities is important because it is useful in predicting claims on future cash flows by providers of funds (both capital and borrowings) to the enterprise.

Cash Inflows from Financing Activities:

1. Cash proceeds from issuing shares or other similar instruments.
2. Cash proceeds from issuing debentures, loans, bonds, and other short or long-term borrowings.

Cash Outflows from Financing Activities:

1. Cash repayments of the amounts borrowed.
2. Payment of dividend, Interest, etc.
3. Redemption of Preference Shares.

Classification of Business Activities as per AS-3, showing Inflow and Outflow of Cash.



Treatment of Important Items:
1. Extraordinary Items: Extraordinary items are not the regular phenomenon for example loss due to theft or fire or flood, winning of a lawsuit, or a lottery. They are non-recurring in nature and hence cash flow associated with extraordinary items is disclosed separately as arising from operating, investing, or financing activities in the cash flow statement, to enable users to understand their nature and effect on the present and future cash flows of the enterprise.

2. Interest and Dividend: Treatment of cash flows from interest and dividends can be described under two heads which are the followings:
1. In the case of a financial enterprise (whose main business is lending and borrowing), cash flows arising from interest paid and interest and dividend received are classified as cash flows from operating activities, while dividend paid is classified as a financing activity.

2. In the case of a non-financial enterprise, cash flows arising from interest and dividends paid should be classified as cash flows from financing activities while interest and dividend received should be classified as cash flows from investing activities.

3. Taxes on Income and Gains: Taxes may be income tax, capital gains tax, dividend tax, etc. As per AS-3, cash flows arising from taxes on income should be separately disclosed and should be classified as cash flows from operating activities unless they can be specifically identified with financing and investing activities.

This clearly implies that:

1. Tax on Operating Profit i.e. Income Tax should be classified as operating cash flows.
2. Dividend tax i.e. tax on the amount distributed as a dividend to shareholders should be classified as financing activity along with dividend paid.
3. Capital Gains Tax i.e. tax on capital profits like tax paid on the sale of fixed assets should be classified under investing activities.
4. Non-Cash Transactions: As per AS-3, investing and financing transactions which do not involve inflow or outflow of cash or cash; equivalent, are excluded from the cash flow statement. But significant such transactions should be disclosed elsewhere in the financial statements in a way that provides all the relevant information about these investing and financing activities.

Examples of the non-cash transaction are:

1. Acquisition of fixed assets by the issue of share or on Credit.
2. Redemption of debenture by conversion into equity share.
3. Acquisition of an enterprise by means of an issue of share. s

Preparation of Cash Flow Statement: (Main Heads Only):

Cash Flows from Operating Activities:
Operating activities are the main source of revenue and expenditure in an enterprise. Therefore, the ascertainment of cash flows from operating activities is of prime importance.

As per AS-3, an enterprise should report cash flows from -N * operating activities using either by.
Direct Method
or
Indirect Method
In Direct Method, major classes of gross cash receipts and gross cash payments, are disclosed.
or
In the Indirect Method, net profit or loss is adjusted for the effects of

1. Transactions of a non-cash nature.
2. any deferrals or accruals of past/future operating cash receipts.
3. Items of income or expenses associated with investing or financing cash flows.

Direct Method:
As we know that items are recorded on an accrual basis in profit and loss accounts therefore certain adjustments are made to convert them into cash bases.

These adjustments are discussed below:
1. Cash Inflow from Sales: Total Sales include Cash Sale and Credit Sale both. Cash sales is a cash inflow, but in the case of credit sales, cash receipts from Debtors are calculated as follows:

Cash receipts from Customers = Credit Sales + Opening Debtors and Bills Receivable: Closing Debtors and Bills Receivable – Bad Debts – Discount Allowed – Sales Returns.

2. Cash Outflow from Purchases: Total Purchases include both cash purchases and credit purchases. Cash purchases are cash outflow, but in the case of credit purchases, cash paid to the suppliers is calculated as follows:

Cash paid to Suppliers = Credit Purchases + Opening Creditors and Bills Payable – Closing Creditors and Bills Payable – Discount received – Purchases Returns.

Purchases = Cost of Goods Sold – Opening Stock + Closing Stock

3. Cash Outflow on Expenses Incurred: The figures of expenses given in the Profit and Loss Account have to be adjusted to find out cash outflow. The amount outstanding and the amount paid in advance have to be adjusted for this purpose.
Cash Paid for Expenses = Expenses as given in Profit & Loss A/c – Prepaid Expenses in the beginning and Outstanding Exp. at the end + Prepaid Expenses at the end and Outstanding Expenses in the beginning.

However, the following items are not to be considered:
1. All non-cash items are ignored as no cash is involved in them. Examples are:
(a) Depreciation
(b) Discount on issue of Shares written off
(c) Goodwill written off.
(d) Preliminary Expenses are written off
(e) Discount on issue of Debenture written off
(f) Patents and Copyright wrote off
(g) Underwriting commission written off.

2. Appropriations of transfer to different reserves and provisions like to General Reserve, Provision for Taxation, and Proposed Dividend should be ignored.

3. Items that are classified as investing or financing activities like profit or loss on sale of fixed assets, interest received, the dividend paid, etc. are also ignored.

Cash Flows From Operating Activities (Direct Method)

Indirect Method:
In this method, net profit or loss is adjusted for the effects of transactions of a non-cash nature flow. In other words, Net profit or loss is adjusted for items that affected net profit but did not affect cash.

As per AS-3, (Revised), under the indirect method, net cash flow from operating activities is determined by adjusting net profit or loss for the effects of:
1. Non-cash items are to be added back. Non-cash items like
(a) Depreciation
(b) Goodwill has written off
(c) Patents and Copyrights are written off
(d) Appropriation to General Reserve
(e) Interim dividend
(f) Deferred taxes etc.

2. All other items for which the cash effects are investing or financing cash flows. The treatment of such items depends upon their nature. All investing and financing incomes are to be deducted from the number of net profits while all such expenses are to be added back.

3. Changes in current assets and liabilities during the period. An increase in current assets and a decrease in current liabilities are to be deducted while the increase in current liabilities and a decrease in current assets are to be added up.

Cash Flows from Operating Activities (Indirect Method)

Cash Flow from Investing Activities:
Investing activities are the acquisition and disposal of long terms assets and other investments not included in cash equivalent. Accordingly, cash inflow and outflow relating to fixed assets, shares, and debentures of other enterprises, advances, and loans to third parties and their repayments are shown separately under Investing activities in the Cash Flow Statement.

It is important because the cash flows represent the extent to which expenditures have been made for resources intended to generate future income and cash flows.

Cash Flow from Investing Activities

Cash Flows from Financing Activities:
The Financing Activities of an enterprise are those activities that result in a change in size and composition of owners capital and borrowing of the enterprise. It includes separate disclosure of proceeds from the issue of shares or other similar instruments, issue of debentures, loans, bonds, other short-term or long-term borrowings, and repayment of amounts borrowed. It is useful in predicting claims on future cash flows by providers of funds (both capital and borrowings to the enterprise.)

Cash Flow from Financing Activities

Format for Cash Flow Statement (As Per AS-3 (Revised))
1. Direct Method
Cash Flow Statement for the year ended………….



2. Indirect Method
Cash Flow Statement for the year ended…………