CBSE Notes

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

Accounts from Incomplete Records Notes Class 11 Accountancy Chapter 11

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

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

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

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

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

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

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

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

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

Incomplete Records contain:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

2. Ascertain drawings and capital introduced during the year.

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

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

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

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

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

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

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

Difference between Balance Sheet and Statement of Affairs:


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

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

If credit sides exceed debit side:

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

If debit sides exceed credit side:

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

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

If the credit side exceeds the debit side:

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

If the debit side exceeds the credit side:

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

Format of Total Debtors Account

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

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

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

If the credit side exceeds the debit side:

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

If the debit side exceeds the credit side:

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

Format of Bills Receivable Account

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

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

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

If the credit side exceeds the debit side:

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

If the debit side exceeds the credit side:

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

Format of Total Creditors Account

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

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

If the credit side exceeds the debit side:

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

If the debit side exceeds the credit side:

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

Format of Bills Payable Account:

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

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

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

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

Financial Statements 2 Notes Class 11 Accountancy Chapter 10

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Deduct from Sundry Debtors but show it.

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

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

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

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

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

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

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

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

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

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

1. Horizontal Form
2. Vertical Form

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

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

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


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

Balance Sheet as on


Summary of Treatment of Adjustments

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

Financial Statements 1 Notes Class 11 Accountancy Chapter 9

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

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

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

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

Users of Financial Statements:

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

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

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

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

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

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

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

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

Form of Trading Account
Trading Account

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

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

Form of Profit and Loss Account
Profit and Loss Account


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

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

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

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

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

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

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


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

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

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

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

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

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

Bills of Exchange Notes Class 11 Accountancy Chapter 8

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

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

Features of Bill of Exchange:

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

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

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

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

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

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

Features of Promissory Note:

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

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

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

The distinction between a Bill of Exchange and Promissory Note


Advantages of Bill of Exchange:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Format of Bills Receivable Book
Bills Receivable Book

Format of Bills Payable Book
Bills Payable Book

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

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

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

Depreciation, Provisions and Reserves Notes Class 11 Accountancy Chapter 7

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

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

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

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

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

Features of Depreciation:

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

Depreciation and, Other Similar Terms:

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

Causes of Depreciation:

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

Need for Depreciation:

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

Factors affecting the Amount of Depreciation

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

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

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

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

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

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

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

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

Straight Line Method and Written Down Method: A Comparative Analysis


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Reasons/Purposes of creating Provisions

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

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

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

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

3. Presentation in Balance Sheet: Provision is shown either

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

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

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

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

Types of Reserves:

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

Examples are:

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

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

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

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

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

Examples are:

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

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

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

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

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