Accounting for Not-for-Profit Organisation Notes Class 11 Accountancy Chapter 16

There are certain institution or organization which are set-up not to earn a profit, but for providing service to its members and the public in general. The main aim of these institutions or organizations is rendering service to their members and public, but not the profit as in the case of business. Such organization includes schools, hospitals, clubs, charitable institutions, religious organizations, trade unions, welfare societies, consumer-cooperatives, literary societies, etc.

These organizations or institutions are managed by a group of people known as trustees who are fully accountable to their members and the society for the utilization of funds and the objectives of the organization. So, you have to maintain proper accounts and financial statements in the form of the Receipt and Payment Account, Income and Expenditure Account, and the Balance Sheet. These financial statements help them to keep track of their income and expenditure as well as fulfill the legal requirements for maintaining records.

Meaning of Not-For-Profit Organisation:
All trading and business organizations are profit organizations since their main objective is to earn profit. Not-For-Profit Organisations are those organizations whose main aim/objective is to rendering service to their members or the society at large and not the earning of profits.

These organizations refer to the organizations that are set up for the welfare of the society, as a charitable institution, which runs without profit motive. Its main aim is to provide services to its members. The main source of their income usually is subscriptions from their members, donations, grants, income from investment, etc. These organizations keep the accounting records to meet the statutory requirements and controlling the utilization of their funds. They usually prepare them at the end of the financial year to ascertain their income and expenditure and the financial position of the organization and submit them to the statutory authority i.e. Registrar of Societies.

Characteristics of Not-For-Profit Organisation:
1. Service Motive: The main motive of these organizations is service motive. They provide service either free of cost or at a nominal cost and not to earn profit. These are formed for rendering service to a specific group or society at large such as education, health care, recreation, sports, and so on without any consideration of caste, creed, and color.

2. Organisation: Not-For-Profit Organisations are organized as charitable trusts or societies. The subscribers to such trust or societies are called its members.

3. Management: The affairs of Not-For-Profit Organisations are normally managed by a managing committee or executive committee. These committees are elected by their members or subscribers.

4. Source of Income: The main source of income of these organizations are:

1. Subscriptions from members
2. Life-membership fees
3. Endowment fund
4. Donations
5. Legacies
6. Grant-in-aid
7. Income from investments etc.

5. Capital Fund or General Fund: The funds raised by Not-For-Profit Organisations through various sources are credited to capital funds or general funds.

6. Surplus Added to Capital Fund: The surplus generated in the form of excess income over expenditure is simply added to the capital fund or general fund. It is not distributed amongst the members as in trading or business organization.

7. Goodwill: The Not-For-Profit Organisation earn their reputation or goodwill on the basis of their contribution to the welfare of the society rather than on the customers’ satisfaction or owner’s satisfaction.

8. Accounting Records: The accounting records of these organizations are totally different from the trading or business organization. They are not prepared financial statements like Trading Account and Profit & Loss Account, instead, they prepare Receipts and Payment Account and Income and Expenditure Account. The preparation of the Balance Sheet is the same in both organizations.

9. Statutory Requirement: The accounting information provided by such organizations is meant for the present and potential contributors to meet the statutory requirements.

Accounting Records of Not-For-Profit Organisations:
As we know that Not-For-Profit Organisations are not engaged in any trading or business activity normally. Their main source of income are subscriptions, donations, financial assistance or grant from the government, etc. Most of their transactions are in form of cash or through the bank. These organizations are required by law to keep proper accounting records and keep proper control over the utilization of their funds.

For maintaining accounting records these organizations usually keep a cash book to record all receipts and payments and maintain ledger accounts of all income, expenses, assets, and liabilities. In addition, they maintain a stock register to keep records of all fixed assets and consumables.

In place of the capital account, they maintain a capital fund or general fund that goes on the increase due to surpluses, life membership fees, donations, legacies, etc. received from year to year.

Final Accounts or Financial Statements of Not-For-Profit Organisation:
As they are non-profit making entities, so they are not required to make Trading and Profit & Loss Account but instead of these accounts to know whether the income during the year was enough to meet the expenses or not they prepare

1. Receipts and Payment Account,
2. Income and Expenditure Account, and
3. Balance Sheet.

For the preparation of these financial statements, the general principles of accounting are fully applicable. The statements provide the necessary financial information to members, donors, and to the Registrar of Societies.

Along with all these, Not-For-Profit organizations also prepare a trial balance for checking the accuracy of ledger accounts. The trial balance also facilitates the preparation of accurate Receipts and Payment Account as well as the Income and Expenditure Account and the Balance Sheet.

Receipts and Payment Account:
A Receipts and Payment Account is a summary of cash transactions. It is prepared at the end of the accounting period from the cash receipts journal and cash payment journals.

“Receipts and Payment Account is nothing more than a summary of the cash book (Cash and Bank transactions) over a certain period, analyzed and classified under the suitable heading. It is the form of account most commonly adopted by the treasurers of societies, clubs, associations, etc. when preparing the results of the year’s working.” – William Pickles

In other words, Receipts and Payment Account simply is a summary’ of cash and bank transactions under various heads. On the debit side, it begins with an opening balance of cash and bank and records all the items of receipts irrespective of whether they are of capital or revenue nature or whether they pertain to the current or past or future accounting periods.

The payments are recorded on the credit side without making any distinction between items of revenue and capital nature and whether they belong to the current or past or future accounting period(s). It may be noted that this account does not show any non-cash item like depreciation. At the end of the period, this account is balanced to ascertain the balance of cash in hand or cash at the bank. The annual totals of various items of receipts and payments are found from their respective accounts in the ledger or from the cash book and are then entered in the Receipts and Payment Account.

Salient Features of Receipts and Payment Account:
1. Real Account-It is a real account, so the rule of real account. e. ‘Debit what comes in and credit what goes out is followed. Thus receipts are recorded on the Debit side and the payments are recorded on the Credit side.

2. Summary of the Cash Book: It is a summary of the cash book. Its form is similar to cash book (without discount and bank column) with debit and credit sides.

3. Shows amount irrespective of period: It shows the total amount of all receipts and payments irrespective of the period to which they pertain.

4. No distinction between nature (Capital or Revenue nature): It includes all receipts and payments whether they are of capital nature or of revenue nature.

5. No distinction between the mode of the transaction (Cash or Bank): No distinction is made in receipts/payments make cash or through the bank. With the exception of the opening and closing balances, the total amount of each receipt and payment is shown in this account.

6. Do not show non-cash items: Non-cash items like depreciation, outstanding expenses, accrued income, etc. are not shown in this account.

7. Opening and closing balances: The opening and closing balances in it respectively mean cash in hand or cash at the bank in the beginning and at the end. The balance of receipts and payment account must be debit being cash in hand or cash at the bank unless there is a bank overdraft.

8. Does not reflect net income or net loss: This account does not tell us whether the current income exceeds the current expenditure or vice versa or in other words, it does not give any information of net income or a net loss.

Steps in the Preparation of Receipt and Payment Account
1. Put the opening balance of cash in hand and cash at the bank at the beginning on the Receipt side. If there is a bank overdraft at the beginning, but the same in the Payment side of the account.

2. Enter the total amounts of all receipts (either cash or cheque) in the Receipt side (Dr. side) irrespective of their nature (whether capital or revenue) and whether they pertain to past, present, and future periods.

3. Enter the total amounts of all payments (either cash or cheque) in the Payment side (Cr. side) irrespective of their nature (whether capital or revenue) and whether they pertain to past, present, and future periods.

4. Do not enter the non-cash item like depreciation, outstanding expenses, accrued income, etc.

5. Find out the difference between the total debit side and the total credit side of the account and enter the same on the credit side as the closing balance of cash or bank balances.

But, if the total of credit side is more than of debit side, show the difference on the debit as bank overdraft and close the account.

Examples of Important Receipts and Payments Items

Format of Receipts and Payments Account
Receipts and Payments Account


There will be either of the two amounts i.e. cash at a bank or bank overdraft, not both.

Limitations of Receipts and Payments Account:

1. It does not show expenses and incomes on an accrual basis.
2. It does not show whether the organization is able to meet its day-to-day expenses out of its income.

Income and Expenditure Account:
it is a nominal account of Not-For-Profit Organisation equivalent to the Profit & Loss Account of the grading concerns. The terms profit is substituted by the words excess of income over expenditure (surplus) and the loss is expressed as an excess of expenditure over income (deficit). It reveals the surplus or deficit arising out of the organization’s activities during an accounting period.

This account is prepared on an accrual basis and includes only items of a revert ie nature. All the revenue items placing to the current penned shop in the account, the expenses and losses on the expenditure side (debit side), and incomes and gains on the income side (credit side) of the account. It shows the net operating result in the form of surplus or deficit, which is transferred to the capital fund is shown in the balance sheet.

Salient Features of Income and Expenditure Account:
1. Nominal Account: It is a nominal account, therefore the ride of nominal account i.e. “Debit all expenses and losses and credit all incomes and gains” is followed.

2. Ignore Items of Capital Nature: In this account, only items of revenue nature are to be considered and all the items of capital nature should be ignored.

3. Prepare from Receipt and Payment Account: It is generally prepared from a given Receipts and Payments Account and other information after making necessary adjustments.

4. No Opening and Closing Balances: In this account, no opening and closing balances of cash and bank are recorded.

5. Same as Profit & Loss Account: This account is prepared in the same manner in which a Profit & Loss Account is prepared, considering, all adjustments relating to the current year.

6. Exclude Past and Future Items: It excludes all the items of income and expenditure which do not pertain to the current period.

7. End-balance of this Account: The end-balance of the Income and Expenditure Account, which may be either “excess of income over expenditures’ or ‘excess of expenditure over income’ would be added to or deducted from, as the case may be, the capital fund, on the liabilities side of the Balance Sheet.

Steps in the Preparation of Income and Expenditure Account:
1. From the Receipts and Payments Account exclude the opening and closing balance of cash and bank as they are not an income.

2. Exclude the items of capital nature as these are to be shown in the balance sheet.

3. Take out the revenue receipts only for the current year to be shown on the income side of the Income and Expenditure Account. These are adjusted by excluding the amounts relating to the preceding and the succeeding periods and including the amounts relating to the current year not yet received.

4. Take out the revenue payments only for the current year to be shown on the expenditure side of the Income and Expenditure Account. These are adjusted by excluding the amounts relating to the preceding and the succeeding periods and including the amounts relating to the current year not yet paid.

5. Make the adjustments to non-cash items like
(a) Depreciation on fixed assets.
(b) Provision for doubtful debts, if required.
(c) Profit or Loss on sale of fixed assets etc.

For determining the surplus/deficit for the current year.
So, we can also prepare the Income and Expenditure Account with the help of the following methods after considering the Receipt and Payment Account and information given

Income and Expenditure Account for the year ended………..


Format of Income and Expenditure Account
Income and Expenditure Account for the year ended…………..


The distinction between Income and Expenditure Account and Receipt and Payment Account


Balance Sheet:
Not-For-Profit organizations prepare a Balance Sheet at the end of an accounting period to ascertain the financial position of the organization. The preparation of their Balance Sheet is the same as that of the business or trading entities. It is prepared in the usual way showing assets on the ‘right-hand side and the liabilities on the ‘left-hand side. However, the term capital is not to be found.

Instead, there will be a capital fund or a general fund, or an accumulated fund, and the surplus or deficit as per the Income and Expenditure Account shall be added to or deducted from this fund. Some capitalized items like legacies, entrance fees, and life membership fees directly (added) in the capital fund.

Sometimes it becomes necessary to prepare a Balance Sheet at the beginning of the year in order to find out the opening balance of the capital/general fund.

Steps in the Preparation of Balance Sheet:
1. Find out the Capital fund as per the Opening Balance Sheet and add surplus from the Income and Expenditure Account. Then, add capitalized items like legacies, entrance fees, and life membership fees, etc. received during the year.

2. Put all the fixed assets (from the opening balance sheet) with additions (from Receipts and Payments Account) after charging depreciation (as per Income and Expenditure Account), on the assets side of the balance sheet.

3. Compare items on the receipts side of the Receipts and Payments Account with the income side of the Income and Expenditure Account to find out the amounts of
(a) Subscription due but not yet received,
(b) income received in advance,
(c) Sale of fixed assets made during the year,
(d) Items to be capitalized etc.

4. Compare items on the payment side of the Receipts and Payments Account with the expenditure side of the Income and Expenditure Account to find out the amount of
(a) Outstanding Expenses,
(b) Prepaid Expenses,
(c) Purchases of a fixed asset during the year,
(d) Depreciation on fixed assets,
(e) Stock of consumable items like stationery in hand,
(f) Closing balance of cash in hand and cash at bank etc.

Format of Balance Sheet
Balance Sheet of…………………
as on ………………….


Some important items relating to Not-For-Profit Organisations
1. Subscription: It is the amount paid by the members of the organization periodically so that their membership is not canceled. This is the main source of income of Not-For-Profit Organisations.

Treatment:
1. The total amount of subscriptions received during the accounting period is shown on the receipt side (Dr. side) of the Receipt and Payment Account.

2. Subscription related to the current period shown in the income side (Cr. side) of Income and Expenditure Account. The amount of subscription to be shown in the Income and Expenditure Account is calculated as follows :

Table Showing Calculation of Subscriptions

Or
Subscription Account

3. Subscription Outstanding at the end of the year is shown on the assets side of the Balance Sheet and subscription received in advance in the current year for the next year is shown on the liabilities side of the Balance Sheet.

2. Donations: It is a type of gift in cash or in property received from some person, firm, or company. The donation can be for specific purposes or for general purposes.

Both the donation received appears on the receipts side of the Receipts and Payments Account.
1. Specific Donations: If the amount received as the donation is for a specific purpose such as a donation for extension of the existing building, donation for the library, for construction of new computer laboratory, etc., it is capitalized and is shown on the liabilities side of Balance Sheet.

2.. General Donations: Such donations are to be utilized to promote the general purpose of the organization. It is of two types:
(a) General Donation of Big Amount: It is shown on the liability side of the Balance Sheet because it is non-recurring in nature as the donations of huge amounts cannot be expected every year.

(b) General Donation of Small Amount: These are treated as revenue receipts as it is a regular source of income hence, it is taken to the income side of the Income and Expenditure Account of the current year.

3. Legacies: It is in the nature of a gift, received in cash or in the property as per the will of a deceased person. It is not treated as an income because it is not of recurring nature. Such receipts come very rarely and therefore it is of a capital nature and is shown on the liabilities side of the Balance Sheet. It appears on the receipt side of the Receipts and Payments Account and is directly added to Capital Fund in the Balance Sheet. However, legacies of the small amount may be treated as income and show on the income side of the Income and Expenditure Account.

4. Life Membership Fees: In order to become a member of an organization for the whole of the life, some members pay the fee in lump sum i.e. once in their lifetime. It is a receipt of non¬recurring nature since the members will not be required to pay the fees regularly. It is shown on the receipt side of the Receipt and Payment Account and added to the Capital Fund in the Balance Sheet. It should not be credited to the Income and Expenditure Account.

5. Entrance Fees: The entrance fee also known as the Admission Fee is paid only once by the member at the time of becoming a member.
1. In the case of organizations like clubs and some charitable institutions, where the membership is limited and the amount of Entrance Fees is quite large, it is treated as the non-recurring item and added directly to Capital Fund in the Balance Sheet and also shows in the receipt side of the Receipt and Payment Account.

2. For some organizations like educational institutions the entrance fee is a regular income and the amount is quite small. So it is treated as the recurring item and shown in the income side of the Income and Expenditure Account. It is also shown on the receipt side by the Receipt and Payment Account.

From the examination point of view, if there is no specific instruction about Entrance Fees, it should be treated as Capital Receipt and directly added to Capital Fund in the Balance Sheet.

6. Sale of Old Assets: Receipt from the sale of the old asset appears in the receipt side of Receipt and Payment Account. Only the profit or loss on the sale of a fixed asset is credited or debited, as the case may be, to the Income and Expenditure Account. In the Balance Sheet, the book value of the asset sold should be deducted from the relevant asset.

7. Sale of Periodicals: Receipts from the sale of periodicals shown in the receipt side of Receipt and Payment Account. It is an item of recurring nature and shown in the income side of the Income and Expenditure Account.

8. Sale of Sports Materials: The sale of sports materials like old bats, old nets, etc. is a regular feature with any sports club. It is treated as revenue income on the assumption that their book value is zero. It is therefore shown in the income side of the Income and Expenditure Account. It is also shown on the receipt side of the Receipt and Payment Account.

9. Payment of Honorarium: It is the payment made to a person for his specific services rendered by him, not as a regular employee. This is an item of expense and is shown in the ‘debit or expenditure side’ of the Income and Expenditure Account.

→ Endowment Fund: “It is a fund arising from a bequest or gift, the income of which is devoted for a specific purpose.” – Eric L. Kohler

Thus, Endowment Fund is a capital receipt and is shown on the liabilities side of the Balance Sheet.

→ Government Grant: Some organizations like schools, colleges, public hospitals, etc. depend upon Government grants for their activities.

It is shown on the receipt side of the Receipt and Payment Account:

1. The maintenance grant is a recurring grant. It is treated as a revenue receipt and shown on the income side of the Income and Expenditure Account.
2. Grants such as building grants are treated as capital receipts and transferred to the building fund account.

→ Cash subsidy: Some Not-For-Profit Organisations receive cash subsidies from the Government or Government agencies. This subsidy is also treated as revenue income for the year in which it is received.

→ Special Funds: Not-For-Profit Organisation creates some special funds for a specific purpose such as ‘prize funds’, ‘match fund’ and ‘sports fund’ etc. The amount of such fund is invested in securities and the income earned on such investment is added to the respective fund, not credited to the Income and Expenditure Account. Similarly, the expenses incurred on such a specific purpose are also deducted from the fund.

→ Stationery (or some consumable items): Expenses incurred on Stationery (or some consumable items) are charged to the Income and Expenditure Account.

If the opening or closing stock of stationery is given, then the amount of stationery consumed during the year will be shown in the Income and Expenditure Account and the closing stock in the Balance Sheet.

The calculation for Expenses for the Current Year

Total Amount paid shown in Payment side of Receipt and Payment Account. Outstanding experiences at the end of the current year shown in the Liabilities side of the Balance Sheet and prepaid at the end shown in the Assets side of the Balance Sheet.

The calculation for Income for the Current Year

Total Amount Received shown in Receipt side of Receipt and Payment Account. Accrued income at the end of the current year shown in the assets side of the Balance Sheet and Income received in advance at the end of the current year shown on the liabilities side of the Balance Sheet.

Accounting System Using Database Management System Notes Class 11 Accountancy Chapter 15

A Database Management System (DBMS) is essentially a collection of inter-related data and |set of programmes to access this data. This selection of data is usually called the database. It can be regarded as an electronic filing cabinet. Relational Database Management System (RDBMS) enables us to manipulate data in a more sophisticated way. RDBMS avoids redundancy in data and defines the relationships between sets of data. The data stored in each table can be retrieved and updated based on data in another table.

MS ACCESS is a Database Management System (DBMS) that help in managing data that is stored in a computer database. Like the majority of database management systems in use today. Access is a relational database management system. Access database help in storing and managing information.

Access is Database Management System that allows the user to create and manipulate the database. Access is software that enables its user to perform various functions such as create, modify, delete and create data in tables of the database.

With Access, we can perform the following tasks:

• Organize data into manageable related units.
• Enter, locate and modify data.
• Extract subsets of data based on specific criteria.
• Create custom forms and reports.
• Automatic common database tasks.
• Graph data relationships.

In Access, the term database refers to a single file that contains a collection of information. A database consists of the following objects:

→ Tables: Tables store data in a row-and-column format similar to spreadsheets. Every table in a database focuses on one subject, for example, products, customers, students etc. Each row or record in the table is a unique instance of the subject of the table.

→ Queries: Queries extract data from a table on user-defined criteria. They enable us to view’ fields from more than one table.

→ Forms: Forms display and print data from a table(s) or a query based on a user-defined custom format. Forms enable us to view, edit and print data.

→ Reports: Reports display and print data from a table(s) or query based on a user-defined custom format.

→ Pages: Pages can be posted on a website of an organisation using the internet or sent via email to someone on the organisation network.

→ Macros: Macros automate common database action based on user-specified commands and events.

→ Modules: Modules automate complex operations and give a programme more control than macros. Modules are procedures written in Visual Basic or Application Programming Language.

→ Capabilities of MS Access: Access has certain capabilities, which bring it closer to an ideal Database Management System.

These capabilities are

• Storing the data in an organised manner.
• Enforcing data integrity constraints.
• Representing complex relationship among data.
• Providing for persistent storage of database object.
• Restricting unauthorised access to the database.
• Allowing fast retrieval of data with or without processing by using SQL.
• Flexibility to create multiple user interfaces.
• Providing for data showing and multi-user transaction processing.
• Supporting multiple views of advanced information. A new database can be created with the help of a computer wizard or without the help of a wizard.

Creating of Table in Access shows three columns i.e. Field Name, Data Type and description, which define the schema of a table is created. Field name refers to the column name of the table being created. Access supports different data types like Text, remove, Number, Date/ Time, Auto Number, Yes/No, OLE object and Hyperlink.

Access allows the designer to define the two types of properties of each column which are General properties and Lookup properties. General properties are Field size, format, Decimal places, Input Mask, Caption, Default value, validation Rule and Text, required and induced and Allow-zero length. Look up properties used by a field to find its values in another table, query or from a fixed list of values.

Forms are a way to view table data. We create the link between the form and its record source by using graphical objects called controls. We can use forms for a variety of purpose, for example, create a data entry form to enter data into a table or create a custom dialogue box to accept user input, and then carry out an action based on that input. The first step in designing a form is to create the table(s) or review the design of the tables. A forms problem often can be attributed to improperly designed table(s).

• Forms offer several advantages:
• Forms can display a complete record at a time, usually in vertical format.
• Forms allow us to customize the appearance in much more detail than a table with fonts, colours and graphics.
• Forms can display fields that the user cannot edit and can edit.
• Forms enable us to rearrange the field.
• Forms provide special field display functions, for example, drop-down list, word wrapping in fields and calculated fields.
• Forms enable us to automate tasks and display custom menus.

Every form control is complete objects with its independent set of properties, which determine the shape, size, behaviour and functionality of the object. Properties of these objects are of three types: Format, Data and other.

Format Properties:

1. Format
2. Decimal Places
3. Caption
4. Visible
5. Layout Properties (Left, Top, Width, Height)
6. Back Colours and Style
7. Special Effects
8. Border Properties (Style, Colours, Effect)
9. Fore Colour
10. Font Properties (Name, Size etc.)
11. Text Align
12. Margins (Left, Right, Top, etc.)
13. Line Spacing
14. Display When
15. Scroll Bars

Data Properties:

1. Control Source
2. Input Mask
3. Default Value
4. Validation (Rule and Text)
5. Enabled and Locked

Other Properties:

1. Name
2. Status Bar Text
3. Enter Key Behaviour
4. Allow AutoCorrect
5. Vertical
6. Default
7. Tab Stop
8. Tab Index
9. Shortcut Menu
10. Control Tip Text
11. Help Context ID

Access provides for a number of controls and more can be added using the added-in-manager in Tools of the menu bar. Bound, Unbound and Calculated are three types of control.

Some of the common controls important for designing a form are:

1. Label
2. Text Box
3. List Box
4. Combo Box
5. Sub-Form
   (a) Source Object
   (b) Link Child Fields
   (c) Link Master Fields
6. Option Group
7. Command Button
   (a) Record Navigation
   (b) Record Operation
   (c) Form Operation
   (d) Report Operation
   (e) Application
   (f) Miscellaneous
8. Control Wizard

Creation of Form can be done by
(a) Design,
(b) Wizard.

One of the most useful features of modern database applications is the query, which provides us with a way to question our database. The result of the query can then .be printed or viewed on-screen.

A query is a statement that communicates to Access the kind of information we need to extract from one or more table. Queries can be used as a source of information for forms and reports. Access executes the query each time we open the form of the object or the report.

For each type of query, we can specify the query parameters that prompt the user to specify the query criteria before the query executes.

There are several types of queries in Access that are used to generate information:
(a) Simple Query
(b) Parameter Queries
(c) Summary Queries

There are three methods by which any of the above queries can be created in Access:
(a) Wizard Method
(b) Design Method
(c) SQL view Method

An accounting reporting capability is incomplete as reporting is one of the main purposes for which an accounting system is designed and operated upon. The output of the accounting system takes the form of accounting reports.

Accounting report display information that is acquired from data processing and transformation in an organised manner. Reports sent to reduce the level of uncertainly associated with decision-makers and also influence their positive actions. The output of the computerised is accounting reports. Financial accounting Reports such a Cash Books, Bank Book, Ledger and Trial Balance may be generated in Access by adhering to the report generation process.

Generating accounting reports in Access involves three steps:

1. Designing the report
2. Identifying accounting information queries
3. Using the record set o final SQL

There are two types of formats for presenting information through a report:

1. Columns Report Format
2. Tabular Report Format

A report in Access is designed using seven sections which taken together constitutes the structure of report design.

1. Report Header
2. Page Header
3. Group Header
4. Details
5. Group Footer
6. Page Footer
7. Report Footer

The Report can be created by using any of the following methods:
(a) Auto Report Method
(b) Wizard Method
(c) Design View Method

The design of the report created by any of the methods may be improved upon by making the following addition and modification to the report.

1. Adding Dates and Page Number.
2. Adding and Deleting Report Contbls
3. Conditionally Formatting Report Control
4. Grouping Levels and Sorting Order

The design and a generated report ai saved for future use and reference. The generated report may also b exported for use by others.
(a) Saving and Exporting Report ejects in Access
(b) Saving as Snapshot
(c) Exporting to Excel
(d) Exporting to MS WORD
(e) Printing a Report
(f) E-Mailing a Report

Financial Accounting Reports such as Cash Book, Bank Book, Ledger Accounts and Trial Balance may be generated on Access by adhering to the report generation process.

Structuring Database for Accounting Notes Class 11 Accountancy Chapter 14

As we know that the working and success of any business is based on lots of information. Every business enterprise needs ready answers to lots of its queries. For this, it requires a proper system that readily provides an accurate and prompt answer to its queries. Numerous techniques and devices have been developed to manage and organize the information.

Before the development of computers, people used to store and process data with the help of papers, file folders, etc. Now-a- days, computers are playing a significant role in performing these tasks. They have replaced all old techniques. The advantages of the computer over the other tools are that it is faster, more accurate, and more reliable than other methods.

In today’s information society, it is often said that information is power. Due to the rapid growth of information technology, all organizations have realized the value of information as a resource.

As we know that computerized accounting involves identifying, storing, and retrieving the data content of transactions. This requires a technique to record and store data in such a way that it allows Its user, easy and convenient retrieval as and when required. This can be achieved by designing a suitable database for accounting. Such a database consists of inter-related data tables that are structured in a manner that ensures data consistency and integrity,

Data can be anything such as a number, a person’s name, images, sounds, etc. So, it is a set of isolated and unrelated raw facts, N represented by values, which have little or no meaning. They have little or no meaning because they lack a context for evaluation. When data is processed and converted into a meaningful and useful form, it is known as information. It is a set of organized and validated collections of data.

Database: Database is a collection of related data. A database is an integrated and logical collection of data. Data is collected and stored in such a way that a common and controlled approach is sufficient in adding new data and modifying and retrieving existing data within the database. A database system is an integrated collection of related files along with details of the interpretation of the data contained therein.

Basic Concept; of Database System of Accounting: Data Processing Cycle Data processing involves the technique of collecting, sorting, relating, interpreting, and computing data items in such a manner as to provide meaningful and useful information for decision making. Data capturing, inputting, processing, and generating information available to the user are the basic steps of the data processing cycle.

In the context of accounting, the data process cycle involves the following steps:

1. Source documents
2. Input of data
3. Data storage
4. Manipulation of data
5. Output of data

Designing Database for Accounting:
A definite data structure for storing the accounting data is required by both computerized and computer-based A.I.S.

Process of Database Designing:

Entity-Relationship (ER) Model:
It is a popular conceptual data model, which is mostly used in database-oriented applications. Even though ER model describes the physical database model, it is more useful in the design and communication of the logical data model.

The model is best depicted with the help of ER symbols. While preparing ER diagram, the following symbols are used to represent the different types of entities, attributes, identifies and relationships:

Anything in a real-world with independent existence is called an entity. Accounting data is captured through entities. Some properties of interest that describe the entity are called attributes.

Types of Attributes:

1. Composite and simple attributes
2. Single-valued and multivalued attributes
3. Stored and derived attributes
4. Null value
5. Complex attributes
6. Entity types and entity sets
7. Value sets of attributes

Almost every entity type has one of its attributes, which contains unique values for identifying the entity instance. Relationship among two or more entity types represents an interaction among their respective entities. Entity types, which do not has key attributes of their own are known as weak entity types.

ER Presentation of Accounting Reality
1. Accounting database

2. An entity type accounting database

3. An entity type ‘voucher’ with Vno. as a key attribute

4. An entity type accounts type

5. An entity type support

Database Technology:
Database Technology is the technique used for designing a database. Concepts that are crucial to the creation of structure and development of the database designs are:

1. Reality
2. Data
3. Database
4. Information
5. DBMS
6. Database System

Reality is some aspect of the real world. It consists of an organization, people facilities, etc., and the environment in which the organization exists arid operates. The continuous interaction with the environment in which it works results in real-world transactions.

Data are known facts that ora be recorded and which have implicit meaning. It represents concerning people, places, objects, entities, events, concepts, etc., it may be quantitative and qualitative or they may be of financial character or Nora-financial character.

A database is a collection of related data. It Is a shared collection of interrelated -data tables, files, or structures, which are designed to meet the varied information needs of an organization.

It has two properties:

1. it is Integrated,
2. It Is Shared.

An accounting database is a collection of related accounting data to -represent some -aspect of accounting information in a system.

The raw data processed In accordance with decision usefulness becomes information, Information is a date that has -been processed arad refilled, and then presented in a format for decision making purpose.

DBMS i.e., Database Management System is essentially a collection of Interrelated data, and a set of programs to access this data. This collection of data is usually called the database. It can be regarded as an electronic filing cabinet Database systems are designed to maintain large volumes of data.

Management of data involves:

• Defining the structures for the storage of data.
• Providing fie mechanisms for the manipulation of data.
• Providing for fie security of the data against unauthorized access.

The DBMS is a general-purpose software system that facilitates the process of defining, constructing, and maintaining databases for various applications. A database management system is a collection of programs that enables the user to create and maintain a database.

Defining a database involves specifying the data types, structures, and constraints or the data to be stored in a database. Constructing the database is the process of storing the data itself on some storage medium that is controlled by the DBMS. Manipulating a database includes some functions as query tug Ac database to receive specific data, updating the database to retrieve specific data, updating the database to reflect changes in reality, and generating the reports from the data.

Database Processing for an application

Relational Data Model (RDM):
Relational database stores and organizes information in table rows and columns where rows of a table represent records and columns represent fields. A relational database is one that is built and operated in accordance with the Relational Model of Data proposed by E.F. Codd (1970).

Relational Model provides a simple and intuitive method for defining a database,.storing and updating data in it, and submitting queries of arbitrary complexity to it. It also provides a firm, sound, and consistent foundation for all the other topics that database management systems must commonly embrace, such as security and authorization database integrity, transaction management, reeord&bility and distribution of data.

The relation model is based on the concept of an entity and attribute. An entity is like a name, person, place, or event and an attribute is a property. of an entity. In a relation a table is also called ‘relation’: Each (able is made up of records. Horizontal rows known as records and vertical columns known as attributes.

A domain is a collection of all possible values from which values for a given column or attribute are drawn. The domains are defined for every attribute in the table. The number of attributes determines the degree of the relation. The number of types in a relation is known as the cardinality of the relation. Each table can be identified by a unique name.

Relational Databases and Schemes:
It is a set of related schemes and a set of integrity constraints. A relational database state is a state of relation states such that even/ relational database state satisfies the integrity constraints specified on relational database scheme.

Constraints and Database Schemes

1. Domain constraint
2. Key constraint
3. Entity integrity constraint
4. Referential integrity constraint

Operations and Constraint Violations

These operations must enforce integrity constraints specified OR relational database schemes. Retrieval operations do not cause violation of any integrity constraints.

Designing Relational Database Scheme
To transform ER design into Relational Data Model design the following steps should be taken:

1. Create a relation for every strong entity.
2. Create a separate relation for each weak entity type.
3. Identify entity types participating in binary 1: N relationship type.

Example: It is based on modified example reality that uses Credit and Debit Vouchers.

Interacting with Database
Query language enables the users to ask specific questions to the database. Database query languages are not universal such as procedure-oriented languages. Each database may have its own query language with a unique rules instruction format. The most popular query language is a structured query language (SQL), which has an industry-wide standard.

The name SQL stands for Structured Query Languages which was originally called Sequel (Structured English Query Language) developed by IBM in 1970. It has statements for data definition, query, and update. It has the capability to define user-oriented views of the database, specify security and authorization, define integrity constraints, and various other operations. DQL, Data Query Language, is a sub-set of SQL that is widely used. A basic set of queries.

Select-From-Where Structure

• Select: Specify the data or information that is described to answer the query.
• From: Specify the source of data for answering the query.
• Where: Specify the conditions that are used to narrow down the choice of data.

Computerised Accounting System Notes Class 11 Accountancy Chapter 13

Accounting is called the language of business. It communicates financial information to a variety of users by preparing financial reports. It is considered as a system that collects and processes financial information of an enterprise and reports that information to users to enable them to make appropriate decisions.

Accounting helps to summarise a lot of financial transactions and events and enables accountants to convey economic information to their users. According to AiCPA, American Institute of Certified Public Accounts, accounting is ‘‘the art of recording, classifying and summarizing in a significant manner and its terms of money, transactions, and events, which are. in part at least. of a financial character and interpreting the results thereof”

Accounting, as an information system is a process of identifying, measuring, and communicating the economic information of an organization to its user who needs the information for decision-making. It is based on the following:

It is very important that accounts of different enterprises are prepared on a uniform basis and an enterprise maintains consistency in the preparation of financial accounts over a period of time. To have uniformity and consistency in the preparation and presentation of financial accounts, accounting operates within a framework of ‘Generally Accepted Accounting Principles (GAAP).

The term GAAP is used to describe rules developed for preparations of financial statements and are variously called concepts, conventions, axioms, postulates, principles modifying principles, etc. Accounting standards are the policy documents issued by the regulatory accountancy body, relating to various aspects of measurements, treatment, and disclosure of accounting transactions and events with a view to harmonize and standardize accounting policies.

So, accounting is a systematic but flexible exercise. It includes entering the transactions, preparation of vouchers, preparing books of accounts, drawing trial balances, and thereafter, preparing the trading account, profit and loss account, and balance sheet. It includes calculations relating to multiplication, addition, and subtraction. It is quite a monotonous job as transactions in the business are quite repetitive in nature.

On the basis of the record, the profit has to be ascertained based on some principles. The first part is monotonous and at times boring, whereas, the second part is more challenging and at times very interesting, when the records are kept manually, it is referred to as manual accounting.

When accounts are maintained with the help of computers, it is called computerized accounting. Most of the computer programs help in the proper basic recording of business transactions. Nowadays computer is being widely used in the field of accounting. It itself can do the calculation, collects and process accounting data and presents the results in the form of proper reports to the management for decision-making purpose. It also performs the function of recording, posting, classification, summarization, and interpretation of the results.

A computerized accounting system is an accounting information system that records and processes the accounting transactions and events and produced the reports as per the requirement of the user, according to Generally Accepted Accounting Principles (GAAP). Every accounting system whether manual or computerized works under a framework of well-defined principles i.e. accounting principles and in a user-defined network for maintenance of records and generation of reports.

Operating Environment: The framework of storage and processing of data in a computerized accounting system is called the operating environment.

The operating environment of a computerized accounting system consists of hardware and software of the computer system. Hardware and software are both dependent on each other. The type of software determines the structure of hardware whereas the selection of hardware depends upon the type and number of users, size of the organization, network and working of the organization, extent of working, etc.

In a small business where the number and variety of transactions are small, the number of customers and suppliers are less, a personal computer with the standard software may be perfect. But in an organization, whose business is spread over large area i.e., in different parts of city or country or world, a number of transactions are very large with variety, some powerful computer system with sophisticated software needed to maintain the voluminous data. For this purpose multi-user systems such as Unix, Linux, etc. are used.

Modern accounting systems use the concept of database. It is implemented using a DBMS i.e. Database Management System. Every’ computerized accounting system need two things:

1. Accounting Framework
2. Operating Procedure.

Requirements of database-oriented application of computer system:

1. Front-end Interface
2. Back-end Database
3. Data Processing
4. Reporting System.

Thus, a computerized accounting system based on database applications is a system where data is collected, stored, processed, and interpreted to generate reports for the decision-making purpose of management.

Comparison between Manual and Computerised Accounting

As we know that the accounting is the art of identifying, recording, classifying, and summarising financial transactions to produce the financial statements, so we can also compare the working of manual accounting and computerized accounting on the basis of the following heads:

1. Identifying financial transactions
2. Recording of these transactions
3. Classification of the recorded transactions
4. Summarising
5. Adjusting Entries
6. Preparation of Financial Statement
7. Closing of books of accounts.

All the above functions, under the manual accounting system done according to the principle of accounting and by preparing vouchers, journal, ledger, trial balance, etc., manually and in a computerized system, all this work is done by some standard database software automatically. In both systems the accounting process is identical but the technology used is different.

Advantages of Computerised Accounting System

1. Record and process a large volume of transactions
2. Timely reporting
3. Lower cost
4. Less paperwork.
5. Provide flexible reports
6. Scalable to handle the growing transactions
7. Secured
8. Accurate
9. Fast
10. Reliable
11. Up-to-date information
12. Automatic
13. VIIS reporting
14. Storage and retrieval at ease
15. Motivate the employees.

Limitations of Computerised Accounting System

1. Huge training cost
2. Opposition from staff
3. Loss of work time
4. The danger of system failure
5. Ill effect on health
6. Inability to check unanticipated errors
7. Breaches of security.

Sourcing of Accounting Software:
Today there is a number of readymade software packages that are available in the market. Since the applications in the area of accounting are standard, the difference is in the number of features provided by an individual package. The most popular software used in India is Tally and Ex. Accounting software is an integral part of the computerized accounting system. It is the people, who are responsible for accounting, not the computer, so before acquiring the accounting software it is very important to analyze the expertise level of the people who would use it.

The need of acquiring software arises in two following situations:

1. When the organization replaces the manual system of accounting with the computerized system of accounting.
2. When the organization replaces the current accounting software with the new accounting software according to the recent changes.

Accounting Packages and Their Types
Since the application in the area of accounting is standard, every computerized accounting system is implemented to perform recording, classifying, storing, and summarizing of accounting data and generates reports according to the requirements of the user. So there is a difference in the number of features provided by an individual package.

The accounting packages are classified into the following categories:

1. Ready to use
2. Customized
3. Tailored.

Considerations before Sourcing an Accounting Software

1. Cost of installation and maintenance
2. Size of organization
3. Flexibility
4. Adaptation and training needs
5. Level of utilities/MIS reports
6. Level of secrecy
7. Vendor reputation and capability
8. Exporting/Importing data facility.

Applications of Computers in Accounting Notes Class 11 Accountancy Chapter 12

Computers are becoming indispensable in our day-to-day life. It has brought a complete revolution in every sphere of human activity. It becomes an essential tool of today’s society.

Examples of their increasing uses are; reservation in railway and air tickets, to forecast weather, preparing customer’s bill, diagnosing diseases, recording the monetary transaction of customers in the bank, etc. In fact, computers have become indispensable in almost every field of communication, commerce, industry, science and research, technology, transport.

Computers are not used only by engineers, scientists, and mathematicians but even in the typesetting for printing, TV programming, film editing, music composing, etc.

Both in the commercial and personal areas, there are so many works which we are not able to do. due to lack of time. The computer makes it possible by doing our work speedily and efficiently. Computers are nowadays being used on a large scale in business houses for a number of functions. They are used for recording and posting transactions, maintaining journals, ledgers, stock records, pay-rolls, wages records, purchases and sales records, etc. The computer performs all the accounting operations at a phenomenal speed and with a high degree of accuracy.

Limitations of a Computer System:

1. Lack of common sense.
2. Lack of feelings.
3. Lack of IQ (Intelligence Quotient).
4. Lack of decision-making.
5. Complex and rigid procedure.
6. Installation cost.
7. Frequent changes.
8. Costly maintenance.
9. Unemployment.
10. Loss of data: Backup required.

Difference between Human and Computer:
Following are the differences between Human and Computer:

1. Memory: Human memory is limited however computer’s memory has no limits.
2. Speed: is faster than human.
3. Repetitive task: can be performed by computers errorlessly.
4. Computers do not possess mind and work as directed by a human. It has no impact of emotions however human is emotional and decides on its own, which computers cannot.

Difference between Hardware and Software:

Difference between Computer and Calculator

Components of Computer:
The computer is an electronic device that stores and processes information to give meaningful results. It takes information from an input device and after processing the information, gives the processed information to an output device.

Three basic components of a computer are:

1. Input Device
2. Central Processing Unit (CPU)
3. Output Device.

Need of Computer in Accounting or Evolution of Computerised Accounting:
In past, the business transactions were limited so that they were handled manually. Trader himself or by taking the service of Accountant to maintain the books of accounts such as cashbook, journal, and ledger. As the economy starts growing, the trades also developed and the number of transactions starts increasing.

With the help of scientific development, new machines were invented which perform the large work in a short time, for e.g. billing the machine. With the substantial increase in the number of transactions, the technology advanced further. The success of a growing organization with the complexity of transactions tended to depend on resource optimization, quick decision-making, and control. Such a system of maintaining accounting records becomes convenient with the computerized accounting system.

Computers are required in accounting for the following tasks:

1. To note down business transactions.
2. Processing and maintaining payrolls.
3. Maintaining personal records.
4. Keeping effective stock control.
5. Invoicing of sales.
6. To maintain ledgers of creditors.
7. To make bills.
8. To prepare accounts of credit and debit.
9. Classification of accounting transactions through sorting; merging and updating.
10. Prepare reports in the form of ledger accounts and balance sheets.
11. Stores accounting.

Automation of Accounting Process:
An organization is a col section of interdependent decision-making units that works for the achievement of common goals. Every organization, as a system, performs the same function that accepts inputs and transforms them into outputs. Information system facilitates the decision-making regarding allocation of resources.

The information thus becomes the most important resource in business. With the increasing use of information systems in organizations. Transaction Processing Systems (TPS) have started playing important role in supporting business operations. A large number of devices are now available to automate the input process for TPS.

Transaction Processing System:
They can perform and records the daily routine transactions which are necessary to conduct the business.

Process of TPS

1. Collection of data.
2. Validation of data
3. Manipulation of data
4. Storage of data
5. Generation of output
6. Query support.

Features of Computerised Accounting System:

1. Online input and storage of accounting data.
2. Automatically update the ledger etc.
3. Printout of purchases and sales invoices.
4. Grouping of accounts.
5. Instant Reports like Stock Statement, Trial Balance, Trading and Profit, and Loss A/c, Balance Sheet, Value Added Tax (VAT), Payroll, etc.
6. Codification of accounts and transactions.

Management Information System (MIS) and Accounting Information System (AIS):
Accounting information is one of the most important information used by the management in taking decisions. However, the scope of accounting information is limited. Accounting information when contained in a computerized environment is called an accounting information system.

However, management information system is a much broader term and incorporates many functional information systems like production, marketing, research, and development, etc., besides accounting information systems.

A management information system is an information system that generates, accurate, timely, and organized information to help managers make decisions, control processes, solve problems, supervise activities and track progress.

An accounting information system identifies, collects processes, and communicates the economic information of an organization to a wide variety of users. Every accounting system is a part of an accounting information system where AIS is part of a management information system.

Meaning of Computer:
The dictionary meaning of computer is “an electronic calculating machine”. This meaning of computer does not reflect upon the true capabilities of a computer. A computer is a very versatile machine capable of performing diversified functions at an incredibly fast speed with accuracy.

It converts raw data into meaningful information. The data is fed into the computer and in case of need, it can be retrieved and converted into output.

A computer is an electronic machine that operates on given instruction and PROCESSES the INPUT DATA, to convert it into some OUTPUT.

“A computer is a data processor that can perform substantial computation, including numerous arithmetical and logical operations, without intervention by a human operator during the run.” – International Standards Organisation

‘‘A computer is a device capable of solving problems by accepting data, performing described operations on the data, and supplying the results of these operations. —U.S. Institute

Thus, a computer is an electronic device, in which a lot of information or data can be stored so Jhat the data can be used in the future. It can also perform various calculations at a very high speed.

Elements of Computer System
A Computer System is a combination of six elements:

1. Hardware
2. Software
3. People.
4. Procedure
5. Data
6. Connectivity.

1. Hardware: The hardware of a computer may be classified under the following categories:

They are further classified as follows:
Input Devices

1. Keyboard
2. Mouse
3. Joystick
4. Touch Screen
5. Scanner
6. Voice Input System
7. Magnetic Ink Character Reader (MICR)
8. Bar Code Reader (BCR)

Output Devices:

1. Monitor or Visual Display Unit (VDU)
2. Printers
3. Voice Response System (VRS)

Central Processing Unit (CPU)

1. Storage Unit
2. Control Unit
3. Arithmetic Logic Unit (ALU)

Secondary Storage Devices

1. Hard Disk
2. Floppy Disk
3. Compact Disk
4. DVD (Digital Visual Disc)

2. Software: A set of programs, which is used to work with hardware is called its software. There are six types of software which are following:

1. Operating System
2. Utility Software
3. Application Software
4. Language Processors
5. System Software
6. Connectivity Software.

3. People: People are basically those individuals who use computers to develop, maintain and use the information system. They are also called live-ware of the computer. The main categories of people involved with the computer system are:

1. System Analysts
2. Computer Operators
3. Programmers.

4. Procedures: The procedures are the various operations performed in a certain way in order to achieve some desired results.

There are basically three types of procedures:

1. Software-oriented
2. Hardware-oriented
3. Internal procedure.

5. Data: The data is therefore processed and organized to create information that is relevant and can be used for decision-making.

6. Connectivity: The element of connectivity refers to the way in which a computer system is connected to other electronic devices and link-ups such as satellite links, internet, telephone lines, etc.

Capabilities or Features of a Computer System
1. High Speed: A computer can perform millions of operations in one second. The calculations will be error-free.

2. Automatic IHachine: Once the data are fed into the computer, it executes the instructed functions without human intervention.

3. Accuracy: This machine is extremely accurate. Its operations are error-free and the information derived from that is more reliable.

4. Reliability: Computer can perform jobs of repetitive nature any number of times. They are immune to tiredness, boredom, or fatigue. Therefore, they are more reliable than human beings.

5. Versatility: A computer can perform a wide variety of jobs simple as well as complex.

6. Storage: The storage capacity, of a computer, is so large that it can store any volume of information or data for being processed.

7. Scientific Approach: The computer operates scientifically and never gets emotional while solving problems.

8. Work on Special Language: A computer can perform many functions by giving or programming in any one language of computers, which are developed in order to feed the information and data into a computer.

9. Logical decision: Computer has the capability to make decisions that are based on certain conditions.

10. Use of Binary System: The computer uses a two-way system known as Binary System, not the decimal system.

Relationship of Management Information System with other functional Information Systems
Designing of Accounting Reports: When the related information is summarised to meet a particular need it is called a report. It must be effective, efficient, and useful for decision-making.

Every accounting report must be able to fulfill the following features:

1. Relevance
2. Accuracy
3. Completeness
4. Timeliness
5. Summarisation.

Types of Reports

1. Summary Reports
2. Customer Reports
3. Supplier Reports
4. Demand Reports
5. Exception Reports
6. Responsibility Reports.

Steps in Designing Reports

1. Definition of objectives
2. Structure or format of the report
3. Querying with database
4. Finalizing the report.

Data Interface between the Information System:
I. Relationship between Accounting Information System (AIS), Manufacturing Information System and Unman Resource Information System.

II. Relationship between AIS and Marketing Information System: Marketing and Sales Department perform following activities:

1. Inquiry Process
2. Creating Contacts
3. Order Taking
4. Dispatching Goods
5. Billing

The accounting sub-system transaction cycle includes:

1. Processing of sales order
2. Credit Authorisation
3. Keeping custody of goods
4. Stock Position
5. Dispatch Details
6. Accounts Receivable etc.

III. Relationship between AIS and Manufacturing Information
System: Production Department performs the following activities:

1. Preparing plans, schedules ‘
2. Issue of material requisition forms
3. Issue of job cards
4. Issue of stock
5. Handling of vendor invoices
6. Payment to vendors/suppliers

The accounting sub-system transaction cycle includes:

• Processing purchases order
• Advance payment
• Stock Updation
• Accounts payable etc.

Application of Computer in Accounting
Although computers influence every field of accounting, however, its usage in normal modes is mentioned below:
(a) Recording of Business Transactions
(b) Accounting of Debtors
(c) Stores Accounting
(d) Pay-toll Accounting.

(a) Problems that arise due to manual accounting such as complexity, percentage of error, delayed work can be easily rectified using a computer in accounting. Computers can automatically generate ledger postings of business transactions. Using computers, can therefore completely maintain ledger accounts.

(b) Debtors account can easily be maintained via computers. Computers can generate accurate figures for the debtor’s account. They can also be used to prepare reminders to debtors in order to timely collect debt.

(c) Stores Accounting: In stores accounting, the contribution of computers is appreciable. They can be used for

1. Daily Stock Position
2. Price of Stock
3. Need of goods to be credited.

(d) Payroll Accounting: To generate pay of employees in an organization, wages, salary, bonus, allowances, etc. are calculated. Furthermore, employee provident fund, income tax, etc. is deducted from salary. Traditional manual accounting is difficult and bound to make errors that can be made easy, fast, and accurate through the use of payroll accounting.

Components Of Computerised Accounting Software System

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.

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

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.

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.

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.