Unit 02 — How to Solve Anything
Five topics covering every question shape in the accounting process. Every transaction in all seven faculty journal problems and all three trial-balance problems is worked here, in a two-column why / what to write layout — plus the textbook's ledger illustrations, its full MCQ bank, and extra exam-shaped questions.
◆ Read this before the first question
Every journal question is the same question asked sixty times. Run the routine and it becomes mechanical:
1 WHAT MOVED? two things, always — name them in plain words
2 WHICH ACCOUNT? goods in = Purchases · goods out = Sales · cheque = Bank
owner takes anything = Drawings · never "Goods A/c"
3 WHAT TYPE? Personal / Real / Nominal (or Asset/Liab/Cap/Inc/Exp)
4 RUN THE GATES settled now or outstanding? · service done or advance?
asset or expense? · goods or fixed asset?
5 WRITE IT Dr first, flush left · "To" second, indented · narration
then check: total debit = total credit
The full routine with a 90-wording phrase-book is on Which Account? Dr or Cr?
Topic 1 of 5 · Textbook §3.3 · pp. 46–48 · 18 questions
Classify the Account, Apply the Rule
Before you can journalise anything you must be able to look at a name and say instantly: Personal, Real or Nominal? These questions are also asked directly, in their own right, as a two- or three-mark opener.
How to know a question belongs to this topic
It asks you to
Classify, not compute. State the head, and often the rule that follows from it.
Give-away words
state under what heading
classify the following accounts
personal, real or nominal
which rule applies
name the type of account
The three tests, in order
1. Is it a person or an institution you can owe or be owed by? → Personal. Includes banks, firms, companies, clubs — and the Capital and Drawings accounts.
2. Is it a thing you own, touchable or not? → Real. Cash, furniture, stock, goodwill, patents.
3. Is it a measure of performance — an expense, loss, income or gain? → Nominal.
2. Is it a thing you own, touchable or not? → Real. Cash, furniture, stock, goodwill, patents.
3. Is it a measure of performance — an expense, loss, income or gain? → Nominal.
The two traps
Bank is PERSONAL, not real. · A prefix flips nominal to personal: Rent → Outstanding Rent.
What a full answer contains
The head, the reason in half a line, and the rule. "Bank A/c — Personal, because a bank is an artificial person. Rule: debit the receiver, credit the giver."
Textbook bank — Illustration 1 and the MCQ set§3.3 and §3.7, pp. 46–56 · answered
18 questionsRama Gopal Ch. 3 Double Entry Principles and Journal pp. 46–56
Q. State under what heading (Personal, Real or Nominal) you would classify: (i) Rent A/c (ii) Bank A/c (iii) Furniture A/c (iv) Goodwill A/c (v) Proprietor's A/c — with a suitable explanation.
Solution
Rent is money spent to use someone's premises — nothing is owned afterwards, and it measures performance.
(i) Rent A/c — NOMINAL
Rule: debit all expenses and losses.
If the question said "Rent Received", still nominal — but credit all gains and incomes.
Rule: debit all expenses and losses.
If the question said "Rent Received", still nominal — but credit all gains and incomes.
A bank is an institution — an artificial person created by law. The balance is a claim against that institution.
(ii) Bank A/c — PERSONAL (artificial)
Rule: debit the receiver, credit the giver.
The textbook flags this one explicitly as the account students most often misclassify as real p. 47.
Rule: debit the receiver, credit the giver.
The textbook flags this one explicitly as the account students most often misclassify as real p. 47.
Furniture is property, and you can touch it.
(iii) Furniture A/c — REAL (tangible)
Rule: debit what comes in, credit what goes out.
Rule: debit what comes in, credit what goes out.
Goodwill cannot be touched, but it can be measured in money and it can be sold. That makes it property, not a performance measure.
(iv) Goodwill A/c — REAL (intangible)
Not nominal, and not fictitious — the textbook says so in as many words.
Not nominal, and not fictitious — the textbook says so in as many words.
The proprietor is a natural person, and the business owes him his capital.
(v) Proprietor's A/c — PERSONAL (natural)
Same for Capital A/c and Drawings A/c — both represent the owner.
Same for Capital A/c and Drawings A/c — both represent the owner.
1.2Classify · 12 items
Q. Classify: (a) Outstanding Salaries (b) Purchases (c) Bad Debts (d) Patents (e) Capital (f) Discount Allowed (g) Prepaid Insurance (h) Stock (i) Bills Payable (j) Drawings (k) Loss by Fire (l) Provision for Depreciation.
Solution
| Account | Head | Why |
|---|---|---|
| (a) Outstanding Salaries | Personal (representative) | Stands in for the group of employees owed money. One account instead of many. |
| (b) Purchases | Nominal | An expense — the cost of goods bought for resale. |
| (c) Bad Debts | Nominal | A loss. |
| (d) Patents | Real (intangible) | Property; measurable and saleable. |
| (e) Capital | Personal | Represents the proprietor. |
| (f) Discount Allowed | Nominal | An expense — the price of early payment. |
| (g) Prepaid Insurance | Personal (representative) | The insurer owes you cover. Prefix flips Insurance from nominal to personal. |
| (h) Stock | Real | Goods you own. |
| (i) Bills Payable | Personal | Represents the people you have promised to pay. |
| (j) Drawings | Personal | Represents the owner. |
| (k) Loss by Fire | Nominal | A loss. |
| (l) Provision for Depreciation | Personal (representative) | A valuation account standing against the asset. Some texts treat it as real; either is accepted if you justify it. |
Q. Complete the table: which personal accounts do Interest, Rent, Salary and Insurance become when a prefix is added?
Solution
| Nominal account | Becomes personal as… |
|---|---|
| Interest A/c (expense) | Outstanding Interest A/c · Pre-paid Interest A/c |
| Rent A/c | Outstanding Rent A/c · Rent Pre-paid A/c |
| Salary A/c | Outstanding Salaries A/c · Pre-paid Salaries A/c |
| Interest A/c (income) | Accrued Income A/c · Interest Received in Advance A/c |
| Insurance A/c | Outstanding Insurance A/c · Pre-paid Insurance A/c |
The ruleA nominal account measures a flow for the period. The moment you attach outstanding or prepaid, you are no longer talking about the flow — you are talking about a debt owed in one direction or the other, and a debt always belongs to a person. That is why the head changes.
Q. Is a motor car a fixed asset or a current asset? Explain with reference to two different businesses.
Solution
AnswerIt depends entirely on what the business does.
To a wholesale cloth merchant, a car is used to conduct the business and is not meant for sale → fixed asset. Buying it is capital expenditure, debited to Motor Van A/c, and it is depreciated.
To a second-hand car dealer, cars are the stock in trade → current asset. Buying one is debited to Purchases A/c, it is not depreciated, and unsold cars appear as Closing Stock.
The test to state: "It is necessary to know whether the asset is meant for sale or used for conducting the business. If meant for sale, it is a current asset; if used in business to earn profits, it is a fixed asset."
To a wholesale cloth merchant, a car is used to conduct the business and is not meant for sale → fixed asset. Buying it is capital expenditure, debited to Motor Van A/c, and it is depreciated.
To a second-hand car dealer, cars are the stock in trade → current asset. Buying one is debited to Purchases A/c, it is not depreciated, and unsold cars appear as Closing Stock.
The test to state: "It is necessary to know whether the asset is meant for sale or used for conducting the business. If meant for sale, it is a current asset; if used in business to earn profits, it is a fixed asset."
1.5Fictitious vs intangible
Q. Distinguish between an intangible asset and a fictitious asset, with two examples of each.
Solution
Both sit on the assets side and neither can be touched, which is why they are confused.
The difference is whether it could be sold.
An intangible asset has genuine, separable value — a buyer would pay for it.
Intangible (real) assets: Goodwill, Patents, Trademarks, Copyrights.
A fictitious asset is simply expenditure already incurred that has not yet been written off. Nobody would buy it; it is parked on the balance sheet only until the P&L absorbs it in instalments.
Fictitious assets: Preliminary Expenses, Discount on Issue of Shares, Underwriting Commission, Share Issue Expenses, heavy advertisement treated as deferred revenue expenditure.
Textbook, verbatim: "Goodwill, patents cannot be called as fictitious assets as these are Intangible assets." p. 48
Textbook, verbatim: "Goodwill, patents cannot be called as fictitious assets as these are Intangible assets." p. 48
Q. Cherry & Co starts with ₹1,00,000 capital, buys furniture ₹10,000 cash, buys stock ₹20,000 cash, buys goods ₹30,000 on credit from Dimpy & Co, sells goods costing ₹4,000 on credit for ₹5,000, and pays ₹200 rent and ₹600 salaries. Show the accounting equation after each step.
Solution
| Step | Assets | = | Capital + Liabilities | Total |
|---|---|---|---|---|
| 1. Capital ₹1,00,000 | Cash 1,00,000 | = | Capital 1,00,000 | 1,00,000 |
| 2. Furniture ₹10,000 cash | Cash 90,000 + Furniture 10,000 | = | Capital 1,00,000 | 1,00,000 |
| 3. Stock ₹20,000 cash | Cash 70,000 + Furniture 10,000 + Goods 20,000 | = | Capital 1,00,000 | 1,00,000 |
| 4. Credit purchase ₹30,000 | Cash 70,000 + Furniture 10,000 + Goods 50,000 | = | Capital 1,00,000 + Creditors 30,000 | 1,30,000 |
| 5. Sold goods costing 4,000 for 5,000 on credit | Cash 70,000 + Furniture 10,000 + Goods 46,000 + Debtors 5,000 | = | Capital 1,01,000 + Creditors 30,000 | 1,31,000 |
| 6. Paid rent 200 + salaries 600 | Cash 69,200 + Furniture 10,000 + Goods 46,000 + Debtors 5,000 | = | Capital 1,00,200 + Creditors 30,000 | 1,30,200 |
The two things to noticeStep 5: stock falls by the cost ₹4,000 but debtors rise by the selling price ₹5,000. The ₹1,000 gap is profit, and profit belongs to the owner, so capital rises to ₹1,01,000.
Step 6: expenses are the mirror image — they reduce profit, so capital falls to ₹1,00,200.
The general statement: profit increases capital; loss and drawings decrease it. Every intermediate line still balances.
Step 6: expenses are the mirror image — they reduce profit, so capital falls to ₹1,00,200.
The general statement: profit increases capital; loss and drawings decrease it. Every intermediate line still balances.
Q. (a) Point out the correct equation: (i) Assets = Liabilities − Capital (ii) Assets = Liabilities + Capital (iii) Liabilities = Assets + Capital (iv) Capital = Assets + Liabilities.
(b) Point out the incorrect equation from: (i) Assets = Liabilities + Capital (ii) Assets = Capital + Liabilities (iii) Liabilities = Assets + Capital (iv) Capital = Assets − Liabilities.
Solution
Answers(a) (ii) Assets = Liabilities + Capital. · (b) (iii) Liabilities = Assets + Capital is the incorrect one.
How to answer these in three seconds without thinking: the equation has Assets alone on one side. Anything that puts Liabilities or Capital alone on a side, with a plus sign on the other, is wrong. The only legitimate rearrangements are
How to answer these in three seconds without thinking: the equation has Assets alone on one side. Anything that puts Liabilities or Capital alone on a side, with a plus sign on the other, is wrong. The only legitimate rearrangements are
Capital = Assets − Liabilities and Liabilities = Assets − Capital — both with a minus.1.8Theory
Q. What is the double entry system? State four of its features and its primary advantage — and its limitation.
Solution
AnswerDefinition (Batliboy, quoted by the textbook p. 41): "Every business transaction has two fold effect and it affects two accounts. In order to keep a complete record of transactions, one account is bound to be debited and the other account is bound to be credited. Recording this two fold account of each transaction is called Double Entry System."
Features: (1) it records two aspects of every transaction — a receiving aspect and a giving aspect; (2) one aspect is debited and the other credited; (3) total debits always equal total credits; (4) it is universally followed.
Primary advantage: arithmetical accuracy — once the trial balance tallies you know the two sides were recorded with equal amounts.
The limitation, which is the examinable half: "Double Entry Book-keeping ensures arithmetical accuracy alone, does not guarantee financial correctness." Cash paid for repairs ₹100 debited to Radha's A/c instead of Repairs A/c leaves the trial balance tallied and the accounts wrong p. 49.
Features: (1) it records two aspects of every transaction — a receiving aspect and a giving aspect; (2) one aspect is debited and the other credited; (3) total debits always equal total credits; (4) it is universally followed.
Primary advantage: arithmetical accuracy — once the trial balance tallies you know the two sides were recorded with equal amounts.
The limitation, which is the examinable half: "Double Entry Book-keeping ensures arithmetical accuracy alone, does not guarantee financial correctness." Cash paid for repairs ₹100 debited to Radha's A/c instead of Repairs A/c leaves the trial balance tallied and the accounts wrong p. 49.
Q. Pick the most appropriate answer.
Solution
| # | Question | Answer | Why |
|---|---|---|---|
| 1 | The prime function of book-keeping is to: | Classifying and recording business transactions | "Provide information for action" is accounting, not book-keeping. |
| 2 | The original form of accounting is: | Financial Accounting | Cost and management accounting developed later. |
| 3 | The system universally followed in accounting: | Double Entry System | — |
| 4 | System in which entries are made only when cash is received: | Cash accounting | As opposed to mercantile/accrual. |
| 5 | Management Accounting aids management in respect of: | Presentation of accounting data | Recording is financial/cost accounting's job. |
| 6 | The basic function of financial accounting is to: | Record all business transactions | Assisting managerial functions is management accounting. |
| 7 | The process of recording in the ledger is called: | Posting | Recording in the journal is journalising. |
| 8 | A bank account is a: | Personal account | An artificial person. |
| 9 | Cash account is a: | Real account | Tangible property. |
| 10 | Outstanding salaries account is a: | Representative personal account | It stands for the group of employees owed. |
X1Both systems on one transaction
Q. For "Paid insurance premium ₹4,000 by cheque", derive the entry twice — once by the golden rules, once by the modern rules — and show they agree.
Solution
Golden rules routeModern rules route
Insurance A/c is nominal — an expense. Debit all expenses and losses.
Insurance is an expense. Expenses increase on the debit side.
Bank A/c is personal. The bank is giving the money. Credit the giver.
Bank is an asset and it is going down. Assets decrease on the credit side.
Same answer, both ways.
Insurance A/c Dr. 4,000
To Bank A/c 4,000
To Bank A/c 4,000
The pointPick one system and use it for the whole paper. Switching mid-question is how errors creep in. The golden rules are faster once memorised; the modern rules are harder to get wrong.
X2Cash vs Bank
Q. For each, name the account: (a) paid by cheque (b) received in cash (c) paid via UPI (d) deposited into bank (e) bank overdraft used (f) withdrew from bank for office (g) withdrew from bank for personal use (h) no mode stated.
Solution
| (a) paid by cheque | Bank A/c | Cheque = bank. |
| (b) received in cash | Cash A/c | — |
| (c) paid via UPI | Bank A/c | Electronic transfer. |
| (d) deposited into bank | Bank Dr. / To Cash | Contra entry. |
| (e) bank overdraft used | Bank A/c with a credit balance | Now a liability, not an asset. |
| (f) withdrew for office | Cash Dr. / To Bank | Contra, reversed. |
| (g) withdrew for personal use | Drawings Dr. / To Bank | Not contra — the money left the business. |
| (h) no mode stated | Cash A/c | The default assumption. |
Topic 2 of 5 · Faculty Journal sheet Q1, Q2, Q4, Q6 · 4 problems, 40 transactions
Journal Entries — the Core Set
The bread and butter. Four faculty problems, every transaction worked with the reasoning beside it. If you can do these forty cold, you can do any journal question your test sets.
How to know a question belongs to this topic
It asks you to
"Journalise" or "Pass journal entries" for a dated list of transactions.
What you must produce
Date · Particulars (Dr. line, then indented "To" line) · L.F. · Dr. amount · Cr. amount · and a narration. A missing narration loses marks even when the accounts are right.
Recurring traps in this bank
loan given vs loan taken
cheque given vs cheque received
interest received from a person
for cash from [name]
invoiced … for cash
took goods for domestic use
computer / machinery, not goods
destroyed in fire
free samples
Time-saver
Do the obvious lines first and come back to the two or three that need thought. A half-finished journal with the easy ten right scores far better than a perfect first three.
Faculty Journal sheet — Q1: books of Sachin10 transactions · January 2011 · sheet p. 1
Q. Journalise in the books of Sachin: 1.1 Started business with cash ₹25,000 · 3.1 Goods purchased from Ram ₹20,000 · 5.1 Goods sold to Laxman ₹15,000 · 7.1 Loan given to Sita ₹12,000 · 9.1 Loan taken from Bharat ₹10,000 · 11.1 Cheque given to Radha ₹8,000 · 15.1 Cheque received from Anand ₹3,000 · 18.1 Rent paid by cheque ₹500 · 20.1 Interest received from Vijay ₹1,000 · 25.1 Cash withdrawn for personal use ₹2,500.
Solution — all ten entries with reasoning
1.1.2011 · Started business with cash ₹25,000
| Cash A/c | Dr. | 25,000 | |
| To Capital A/c | 25,000 |
(Being business commenced with cash introduced as capital)
Cash is real and it comes in → debit. Capital is personal, representing the owner, who is the giver → credit. This is also the equation's first line: Assets 25,000 = Capital 25,000.
3.1.2011 · Goods purchased from Ram ₹20,000
| Purchases A/c | Dr. | 20,000 | |
| To Ram's A/c | 20,000 |
(Being goods purchased from Ram on credit)
Not Goods A/c — goods coming in are always Purchases. The supplier is named and no cash is mentioned, so this is a credit purchase: Ram becomes a creditor. Ram is personal and the giver → credit.
5.1.2011 · Goods sold to Laxman ₹15,000
| Laxman's A/c | Dr. | 15,000 | |
| To Sales A/c | 15,000 |
(Being goods sold to Laxman on credit)
Mirror of the previous line. Laxman is the receiver of the goods and now owes you → debit; he is a debtor, an asset. Goods going out are Sales.
7.1.2011 · Loan given to Sita ₹12,000
| Loan to Sita A/c | Dr. | 12,000 | |
| To Cash A/c | 12,000 |
(Being loan granted to Sita in cash)
Sita receives the money and must return it → debit her loan account. It is an asset to you. Cash goes out → credit. Compare the very next line — the sheet sets the two directions back to back on purpose.
9.1.2011 · Loan taken from Bharat ₹10,000
| Cash A/c | Dr. | 10,000 | |
| To Loan from Bharat A/c | 10,000 |
(Being loan obtained from Bharat in cash)
Exactly reversed. Cash comes in → debit. Bharat is the giver → credit; his loan account is a liability. Ask yourself only one thing: whose pocket is lighter? Theirs → you owe them. Yours → they owe you.
11.1.2011 · Cheque given to Radha ₹8,000
| Radha's A/c | Dr. | 8,000 | |
| To Bank A/c | 8,000 |
(Being cheque issued to Radha in settlement of her account)
Cheque → Bank A/c, never Cash A/c. No reason is given for the payment, so the standard reading is that Radha was a creditor and is being paid off — she is the receiver → debit, which cancels the liability.
15.1.2011 · Cheque received from Anand ₹3,000
| Bank A/c | Dr. | 3,000 | |
| To Anand's A/c | 3,000 |
(Being cheque received from Anand on account)
Mirror again. Bank receives → debit. Anand is the giver → credit, which reduces what he owed you.
18.1.2011 · Rent paid by cheque ₹500
| Rent A/c | Dr. | 500 | |
| To Bank A/c | 500 |
(Being rent paid by cheque)
Rent is nominal, an expense, and the service — occupying the premises — has been received → debit all expenses. No landlord is named and none is needed. Bank gives → credit.
20.1.2011 · Interest received from Vijay ₹1,000
| Cash A/c | Dr. | 1,000 | |
| To Interest Received A/c | 1,000 |
(Being interest received from Vijay in cash)
This is the trap line of the question. Vijay's name is there, so the instinct is to credit Vijay — but interest is income you have earned, not money you now owe him. Credit the nominal income account. Contrast: if the question said "advance interest received from Vijay", you would credit Vijay, because it would be refundable p. 52.
25.1.2011 · Cash withdrawn for personal use ₹2,500
| Drawings A/c | Dr. | 2,500 | |
| To Cash A/c | 2,500 |
(Being cash withdrawn by the proprietor for personal use)
Drawings, not Capital and not an expense. The business is a separate person; money leaving for the owner's household reduces what the business owes him. At year end Drawings is deducted from Capital. Mr Roopchand's second mistake, exactly L1 slide 7.
CheckTotal debits = 25,000 + 20,000 + 15,000 + 12,000 + 10,000 + 8,000 + 3,000 + 500 + 1,000 + 2,500 = ₹97,000, and the credits come to the same. In an exam, strike this total at the foot of the page — the textbook says to do it on every page p. 50.
Faculty Journal sheet — Q2: books of Mr Rahul13 transactions · July 2010 · sheet p. 1
Q. Journalise in the books of Mr Rahul: 1/7 commenced business with cash ₹1,00,000 · 3/7 purchased goods for cash from Sachin ₹20,000 · 6/7 paid cartage in cash ₹20,000 · 8/7 sold goods to Yuvraj on credit ₹2,000 · 11/7 invoiced goods to Saurav for cash ₹30,000 · 14/7 paid salary to office clerk ₹25,000 · 15/7 paid rent to landlord for office ₹50,000 · 18/7 purchased goods from Amit for cash ₹70,000 · 21/7 borrowed from Gaurav ₹30,000 · 22/7 Rahul drew cash for domestic use ₹30,000 · 25/7 Rahul took goods for domestic use ₹30,000 · 28/7 purchased a computer from Kapil ₹50,000 · 30/7 purchased machinery from Samit for cash ₹1,00,000.
Solution — all thirteen entries
| Date | Entry | ₹ | Why this and not the obvious alternative |
|---|---|---|---|
| 1/7 | Cash A/c Dr. To Capital A/c | 1,00,000 | Standard opening entry. |
| 3/7 | Purchases A/c Dr. To Cash A/c | 20,000 | Not Sachin's A/c. "For cash" settles it on the spot, so the supplier's name is irrelevant — Gate 1 p. 51. |
| 6/7 | Carriage Inward A/c Dr. To Cash A/c | 20,000 | Cartage on goods coming in. Goes to the Trading A/c. If it were cartage on a machine it would be capitalised into Machinery A/c instead. |
| 8/7 | Yuvraj's A/c Dr. To Sales A/c | 2,000 | Explicitly "on credit" → the customer's account. |
| 11/7 | Cash A/c Dr. To Sales A/c | 30,000 | Not Saurav's A/c. "Invoiced" sounds like credit, but "for cash" at the end of the sentence overrides it. Read to the full stop. |
| 14/7 | Salaries A/c Dr. To Cash A/c | 25,000 | Service already rendered → nominal expense, not the clerk's personal account. |
| 15/7 | Rent A/c Dr. To Cash A/c | 50,000 | Same logic — the landlord is not debited. |
| 18/7 | Purchases A/c Dr. To Cash A/c | 70,000 | Same trap as 3/7, reworded ("from Amit for cash" instead of "for cash from Sachin"). |
| 21/7 | Cash A/c Dr. To Gaurav's Loan A/c | 30,000 | "Borrowed" = loan taken. A liability. |
| 22/7 | Drawings A/c Dr. To Cash A/c | 30,000 | Cash drawings. |
| 25/7 | Drawings A/c Dr. To Purchases A/c | 30,000 | Goods drawings — note the different credit. Goods left the business without a sale, so you reverse part of Purchases. Recorded at cost p. 53. |
| 28/7 | Computer A/c Dr. To Kapil's A/c | 50,000 | Not Purchases. Rahul deals in goods, not computers — this is a fixed asset. Gate 4. No cash mentioned + supplier named → credit purchase. |
| 30/7 | Machinery A/c Dr. To Cash A/c | 1,00,000 | Fixed asset again, but this time "for cash", so Samit's name drops out. |
Three pairs to notice3/7 vs 8/7 — cash purchase vs credit sale: the party's name is used in one and ignored in the other. 22/7 vs 25/7 — cash drawings credit Cash, goods drawings credit Purchases. 28/7 vs 30/7 — both fixed assets, but one on credit and one for cash.
Worth writing in your answer: this question is not internally consistent on cash — the cash receipts total ₹1,60,000 and the cash payments ₹2,95,000, so the cash account would be overdrawn by ₹1,35,000. That does not change a single entry (journalising records what happened, not what was affordable), but a one-line note showing you noticed reads well.
Faculty Journal sheet — Q4: goods leaving for non-sale reasons10 transactions · January 2025 · sheet p. 2
Q. Journalise: 1/1/25 X started business with cash ₹5,000, machinery ₹20,000 and goods ₹10,000 · 2nd purchased goods ₹15,000 · 3rd purchased from Mr A ₹3,000 · 4th sold goods to Mr Y ₹4,000 · 5th sold goods ₹5,000 · 6th Mr Y returned goods ₹1,000 · 7th returned goods to Mr A ₹2,000 · 8th X took away goods ₹1,000 · 9th goods ₹2,000 destroyed in fire · 10th distributed goods ₹500 as free samples.
Solution — all ten entries
1 Jan · Started business with cash ₹5,000, machinery ₹20,000 and goods ₹10,000
| Cash A/c | Dr. | 5,000 | |
| Machinery A/c | Dr. | 20,000 | |
| Purchases A/c | Dr. | 10,000 | |
| To Capital A/c | 35,000 |
(Being business commenced with cash, machinery and goods introduced as capital)
A compound entry — three debits, one credit. Capital need not be cash p. 14. Note the three different accounts: cash is Cash, the machine is Machinery (a fixed asset), and the trading stock is Purchases. Capital is credited with the total, ₹35,000.
| Date | Entry | ₹ | Reasoning |
|---|---|---|---|
| 2nd | Purchases A/c Dr. / To Cash A/c | 15,000 | No party, no mode → cash purchase by default. |
| 3rd | Purchases A/c Dr. / To Mr A's A/c | 3,000 | Party named, no cash → credit purchase. Contrast with the line above: same words minus a name. |
| 4th | Mr Y's A/c Dr. / To Sales A/c | 4,000 | Party named → credit sale. Y becomes a debtor. |
| 5th | Cash A/c Dr. / To Sales A/c | 5,000 | No party → cash sale. |
| 6th | Sales Returns A/c Dr. / To Mr Y's A/c | 1,000 | Y is a customer; goods come back in. Crediting Y reduces what he owes to ₹3,000. |
| 7th | Mr A's A/c Dr. / To Purchase Returns A/c | 2,000 | A is a supplier; goods go back out. Debiting A reduces what you owe to ₹1,000. |
| 8th | Drawings A/c Dr. / To Purchases A/c | 1,000 | Goods out for the owner, at cost. |
| 9th | Loss by Fire A/c Dr. / To Purchases A/c | 2,000 | Goods out with no sale and no recovery. A nominal loss → P&L debit side. If insured, split: Insurance Claim A/c for the recoverable part, Loss by Fire A/c for the rest. |
| 10th | Advertisement A/c Dr. / To Purchases A/c | 500 | Goods out as a marketing cost. A nominal expense. |
The pattern this question exists to teachLines 8, 9 and 10 all have the same credit — To Purchases A/c — and three different debits. Whenever goods leave the business for a reason that is not a sale, you reverse part of Purchases and debit whatever describes where they went: the owner (Drawings), a disaster (Loss by Fire), or marketing (Advertisement). Charity would be the fourth.
Why never "To Sales"? Because no customer paid anything. Crediting Sales would inflate your revenue and your profit with money that does not exist. Your textbook's drawings illustration credits Sales at cost price p. 53 — an alternative convention. If your faculty follows it, follow your faculty; either way, at cost, and say in one line which you used.
Why never "To Sales"? Because no customer paid anything. Crediting Sales would inflate your revenue and your profit with money that does not exist. Your textbook's drawings illustration credits Sales at cost price p. 53 — an alternative convention. If your faculty follows it, follow your faculty; either way, at cost, and say in one line which you used.
Faculty Journal sheet — Q6: the opening entryBalances of Mala, 1 January 2025 · sheet p. 4
Q. The following balances appeared in the books of Mala as on 1st January 2025: Cash ₹7,000; Bank ₹70,000; Stock ₹80,000; Furniture ₹10,000; Computer ₹50,000; Debtors ₹33,000; Creditors ₹90,000. Pass the opening journal entry.
Solution
Why this question looks incomplete: it gives you no capital figure. It does not need to — capital is the balancing figure, and finding it is the question.
Why this stepWhat to write
Sort every balance into assets and liabilities. Cash, Bank, Stock, Furniture, Computer and Debtors are all things owned or owed to you.
Assets \(= 7{,}000 + 70{,}000 + 80{,}000 + 10{,}000 + 50{,}000 + 33{,}000\)
\(= \)₹2,50,000
\(= \)₹2,50,000
Creditors are the only outside liability given.
Outside liabilities \(=\) ₹90,000
Apply the equation rearranged. Whatever is left after paying outsiders belongs to the owner.
\(\text{Capital} = \text{Assets} - \text{Liabilities}\)
\(= 2{,}50{,}000 - 90{,}000 = \)₹1,60,000
\(= 2{,}50{,}000 - 90{,}000 = \)₹1,60,000
1 Jan 2025 · Opening journal entry
| Cash A/c | Dr. | 7,000 | |
| Bank A/c | Dr. | 70,000 | |
| Stock A/c | Dr. | 80,000 | |
| Furniture A/c | Dr. | 10,000 | |
| Computer A/c | Dr. | 50,000 | |
| Debtors A/c | Dr. | 33,000 | |
| To Creditors A/c | 90,000 | ||
| To Capital A/c (balancing figure) | 1,60,000 |
(Being the opening balances of assets and liabilities brought forward, capital being the balancing figure)
₹2,50,000 = ₹2,50,000. Every asset is debited because assets are debit-natured; every liability and capital is credited because they are credit-natured. Write the words "balancing figure" against capital — it shows the examiner you derived it rather than being handed it.
Why the opening entry exists at all: last year's ledger closed with these balances carried down. The new year's ledger starts empty, so one compound entry re-opens every account at its brought-down balance. It is the bridge between two accounting periods — the Accounting Period Concept made mechanical.
Topic 3 of 5 · Faculty Journal sheet Q3, Q5, Q7 · 3 problems, 23 transactions + 8 extras
Discounts, Banking Modes, Bad Debts
The three sub-topics that turn a routine journal question into a hard one. Each has a single rule; the difficulty is entirely in spotting which rule the wording is pointing at.
How to know a question belongs to this topic
Trade discount cues
@ 10% trade discountlist priceless trade discount
→ record the NET figure. No entry for the discount itself.
→ record the NET figure. No entry for the discount itself.
Cash discount cues
in full settlement@ 5% cash discountfull and final settlementfor prompt payment
→ always a separate line: Discount Allowed (you gave) or Discount Received (you got).
→ always a separate line: Discount Allowed (you gave) or Discount Received (you got).
Banking-mode cues
NEFTRTGSnet bankingdebit cardCash Deposit Machinebank charges
→ Bank A/c every time. Cash Deposit Machine both ways = contra.
→ Bank A/c every time. Cash Deposit Machine both ways = contra.
Bad-debt cues
declared insolventX paise in a rupeecould pay onlywritten off last yearrecovered
→ close the debtor's account for the FULL amount; split the debit between Cash and Bad Debts.
→ close the debtor's account for the FULL amount; split the debit between Cash and Bad Debts.
The one-line distinction to memorise
Trade discount is invisible; cash discount is always recorded. And cash discount arises only on CREDIT transactions — there is no cash discount on a cash sale p. 16.
Faculty Journal sheet — Q3: books of Mr Arun7 transactions, all discount-related · sheet p. 2
Q. Journalise in the books of Mr Arun: 1 Jan 2025 purchased goods ₹50,000 from Suman · 2nd returned goods ₹1,000 to Suman · 5th purchased goods ₹50,000 from Vimal @10% trade discount · 7th returned goods having list price ₹1,000 to Vimal · 16th purchased goods ₹1,00,000 from Naren on credit @10% trade discount · 26th returned goods having list price ₹10,000 to Naren · 31st purchased goods for ₹12,000 @5% cash discount from Rakesh.
Solution — all seven entries with the arithmetic
| Date | Arithmetic | Entry | Reasoning |
|---|---|---|---|
| 1 Jan | No discount. ₹50,000. | Purchases A/c Dr. 50,000 To Suman's A/c 50,000 |
Baseline credit purchase, given first so you can see what a discount changes. |
| 2nd | No discount. ₹1,000. | Suman's A/c Dr. 1,000 To Purchase Returns A/c 1,000 |
Debiting Suman reduces what you owe her to ₹49,000. |
| 5th | \(50{,}000 - 10\% = \)₹45,000 | Purchases A/c Dr. 45,000 To Vimal's A/c 45,000 |
Net price only. There is no Trade Discount A/c anywhere in the books — mention the 10% in the narration instead p. 53. |
| 7th | List ₹1,000 − 10% = ₹900 | Vimal's A/c Dr. 900 To Purchase Returns A/c 900 |
The key line. The question deliberately says "list price ₹1,000". You bought at net, so you return at net — the same 10% comes off. Recording ₹1,000 would leave Vimal's account permanently wrong by ₹100. |
| 16th | \(1{,}00{,}000 - 10\% = \)₹90,000 | Purchases A/c Dr. 90,000 To Naren's A/c 90,000 |
Same as the 5th, bigger number. |
| 26th | List ₹10,000 − 10% = ₹9,000 | Naren's A/c Dr. 9,000 To Purchase Returns A/c 9,000 |
Same as the 7th. Naren's balance is now ₹90,000 − ₹9,000 = ₹81,000. |
| 31st | \(12{,}000 \times 5\% = 600\) Cash paid \(= 12{,}000 - 600 = \)₹11,400 |
Purchases A/c Dr. 12,000 To Cash A/c 11,400 To Discount Received A/c 600 |
Completely different treatment. Purchases stay at the full ₹12,000; the ₹600 is an income you earned by paying promptly. One debit, two credits. |
The comparison this question is built aroundLook at the 5th and the 31st side by side.
5th — trade discount: Purchases recorded at ₹45,000. The ₹5,000 never appears anywhere. It was never a cost and never an income; it simply was not the price.
31st — cash discount: Purchases recorded at ₹12,000, the full price, because that was the price. The ₹600 you did not have to pay is a genuine gain, earned separately by paying early, and it gets its own account.
One sentence for the exam: a trade discount changes the price; a cash discount changes the settlement.
5th — trade discount: Purchases recorded at ₹45,000. The ₹5,000 never appears anywhere. It was never a cost and never an income; it simply was not the price.
31st — cash discount: Purchases recorded at ₹12,000, the full price, because that was the price. The ₹600 you did not have to pay is a genuine gain, earned separately by paying early, and it gets its own account.
One sentence for the exam: a trade discount changes the price; a cash discount changes the settlement.
Faculty Journal sheet — Q5: Valluvar, sole trader in textiles10 transactions · every banking mode · March 2025 · sheet p. 3
Q. Valluvar is a sole trader dealing in textiles. March 2025: 1 commenced business with cash ₹90,000 and goods ₹60,000 · 2 purchased 20 readymade shirts from X and Co. on credit ₹10,000 · 3 cash deposited into bank through Cash Deposit Machine ₹30,000 · 4 purchased 10 readymade sarees from Y and Co. by cash ₹6,000 · 5 paid X and Co. through NEFT · 6 sold 5 sarees to A and Co. on credit ₹4,000 · 7 A and Co. deposited the amount due in the Cash Deposit Machine · 8 purchased 20 sarees from Z & Co. and paid through debit card ₹12,000 · 9 stationery purchased and paid through net banking ₹6,000 · 10 bank charges levied ₹200.
Solution — all ten entries
March 1 · Commenced business with cash ₹90,000 and goods ₹60,000
| Cash A/c | Dr. | 90,000 | |
| Purchases A/c (or Stock A/c) | Dr. | 60,000 | |
| To Capital A/c | 1,50,000 |
(Being business commenced with cash and goods introduced as capital)
Compound opening entry. Capital is credited with the total.
| Date | Entry | ₹ | Reasoning |
|---|---|---|---|
| 2 | Purchases A/c Dr. / To X and Co. A/c | 10,000 | "On credit" → supplier's account. The 20 shirts are not recorded — only the value. |
| 3 | Bank A/c Dr. / To Cash A/c | 30,000 | Contra entry. Cash Deposit Machine = depositing into your own bank. No income, no expense, no outsider. Bank receives, cash goes out. |
| 4 | Purchases A/c Dr. / To Cash A/c | 6,000 | "By cash" → Y and Co.'s name is irrelevant. |
| 5 | X and Co. A/c Dr. / To Bank A/c | 10,000 | The amount is not restated in the question — you must carry it from March 2. NEFT → Bank. Debiting X and Co. clears the liability to nil. |
| 6 | A and Co. A/c Dr. / To Sales A/c | 4,000 | Credit sale. A and Co. become a debtor. |
| 7 | Bank A/c Dr. / To A and Co. A/c | 4,000 | Amount carried from March 6. Not contra this time — the money came from an outsider, through the machine, into your bank. A and Co.'s account clears to nil. |
| 8 | Purchases A/c Dr. / To Bank A/c | 12,000 | Debit card → Bank, not Cash. A very common slip. |
| 9 | Printing & Stationery A/c Dr. / To Bank A/c | 6,000 | Stationery is a nominal expense, never Purchases — Valluvar sells textiles, not stationery. Net banking → Bank. |
| 10 | Bank Charges A/c Dr. / To Bank A/c | 200 | A nominal expense the bank deducted itself. No cash is involved at any point. |
What this question is really testingSeven of the ten lines touch the Bank account, and only two touch Cash. Modern faculty problems are written this way on purpose — the examiner wants to see that you convert "NEFT", "debit card", "net banking" and "Cash Deposit Machine" into Bank A/c automatically.
The one genuine subtlety is the difference between March 3 and March 7. Both say money went into the bank through the Cash Deposit Machine. March 3 is your own cash moving pocket to pocket — a contra entry, credit Cash. March 7 is a customer's money arriving — credit A and Co. Ask whose money was it a second ago?
Two lines give no amount (March 5 and 7). Both are deliberate: you have to carry ₹10,000 and ₹4,000 forward from the earlier transactions. Read the whole question before starting.
The one genuine subtlety is the difference between March 3 and March 7. Both say money went into the bank through the Cash Deposit Machine. March 3 is your own cash moving pocket to pocket — a contra entry, credit Cash. March 7 is a customer's money arriving — credit A and Co. Ask whose money was it a second ago?
Two lines give no amount (March 5 and 7). Both are deliberate: you have to carry ₹10,000 and ₹4,000 forward from the earlier transactions. Read the whole question before starting.
Closing cash and bank, if asked: Cash = 90,000 − 30,000 − 6,000 = ₹54,000. Bank = 30,000 − 10,000 + 4,000 − 12,000 − 6,000 − 200 = ₹5,800.
Faculty Journal sheet — Q7: settlements, insolvency and recovery7 transactions · 2025 · sheet p. 4
Q. Pass the journal entry for each: Jan 1 goods sold to Shanthi ₹25,000 · Jan 10 received cash ₹24,700 from Shanthi in full settlement of her account of ₹25,000 · Jun 5 goods purchased from Shiva ₹15,000 · Jun 14 paid cash to Shiva ₹14,500 in full settlement of ₹15,000 · Jul 1 goods sold to Jamuna ₹10,000 · Jul 15 Jamuna is declared insolvent and 25 paise in a rupee is received · Dec 1 received cash for a bad debt written off last year ₹7,500.
Solution — all seven entries
Jan 1 · Goods sold to Shanthi ₹25,000
| Shanthi's A/c | Dr. | 25,000 | |
| To Sales A/c | 25,000 |
(Being goods sold to Shanthi on credit)
Credit sale. Shanthi now owes ₹25,000.
Jan 10 · Received ₹24,700 from Shanthi in full settlement of ₹25,000
| Cash A/c | Dr. | 24,700 | |
| Discount Allowed A/c | Dr. | 300 | |
| To Shanthi's A/c | 25,000 |
(Being cash received from Shanthi and discount allowed on full settlement of her account)
Shanthi is credited with the full ₹25,000, not ₹24,700 — because her debt is being extinguished entirely. You received ₹24,700 in cash; the ₹300 you gave up to get paid early is an expense. Two debits, one credit.
Jun 5 · Goods purchased from Shiva ₹15,000
| Purchases A/c | Dr. | 15,000 | |
| To Shiva's A/c | 15,000 |
(Being goods purchased from Shiva on credit)
Credit purchase. You now owe ₹15,000.
Jun 14 · Paid ₹14,500 to Shiva in full settlement of ₹15,000
| Shiva's A/c | Dr. | 15,000 | |
| To Cash A/c | 14,500 | ||
| To Discount Received A/c | 500 |
(Being cash paid to Shiva and discount received on full settlement of his account)
The exact mirror of Jan 10. Shiva is debited with the full ₹15,000 to clear the liability. You parted with only ₹14,500; the ₹500 you kept is an income. One debit, two credits. Same transaction, opposite side of the table: what was Discount Allowed to the seller is Discount Received to the buyer p. 53.
Jul 1 · Goods sold to Jamuna ₹10,000
| Jamuna's A/c | Dr. | 10,000 | |
| To Sales A/c | 10,000 |
(Being goods sold to Jamuna on credit)
Routine credit sale — but watch what happens to it two weeks later.
Jul 15 · Jamuna declared insolvent; 25 paise in a rupee received
| Cash A/c | Dr. | 2,500 | |
| Bad Debts A/c | Dr. | 7,500 | |
| To Jamuna's A/c | 10,000 |
(Being 25 paise in a rupee received from Jamuna on her insolvency and the balance written off as bad debts)
"25 paise in a rupee" means 25%. \(10{,}000 \times 25\% = ₹2{,}500\) recovered; \(10{,}000 - 2{,}500 = ₹7{,}500\) lost.
Jamuna is credited with the full ₹10,000 because her account is being closed completely — she cannot pay the rest and never will. The ₹7,500 is a loss, debited to Bad Debts and charged to the P&L.
Structurally identical to Jan 10 — cash plus a second debit, closing the debtor in full. Only the name of the second debit changes: Discount Allowed when you chose to forgo it, Bad Debts when you had no choice.
Jamuna is credited with the full ₹10,000 because her account is being closed completely — she cannot pay the rest and never will. The ₹7,500 is a loss, debited to Bad Debts and charged to the P&L.
Structurally identical to Jan 10 — cash plus a second debit, closing the debtor in full. Only the name of the second debit changes: Discount Allowed when you chose to forgo it, Bad Debts when you had no choice.
Dec 1 · Received cash for a bad debt written off last year ₹7,500
| Cash A/c | Dr. | 7,500 | |
| To Bad Debts Recovered A/c | 7,500 |
(Being a bad debt written off in an earlier year now recovered)
Do not credit Jamuna, or any other debtor. That account was closed and written off in a previous accounting period — it no longer exists in this year's ledger, and reopening it would be wrong.
Money has arrived with no corresponding obligation, so it is a gain of this year, credited to Bad Debts Recovered A/c and taken to the P&L credit side. The textbook's own ledger illustration does exactly this p. 83.
Money has arrived with no corresponding obligation, so it is a gain of this year, credited to Bad Debts Recovered A/c and taken to the P&L credit side. The textbook's own ledger illustration does exactly this p. 83.
The three-entry family to recogniseLook at Jan 10, Jun 14 and Jul 15 together. All three close a person's account at its full value and split the other side into two parts:
Cash + Discount Allowed → Debtor (you chose to give something up)
Creditor → Cash + Discount Received (they chose to give something up)
Cash + Bad Debts → Debtor (nobody chose; the money is simply gone)
Once you see them as one shape with three names, the question stops being three questions.
Cash + Discount Allowed → Debtor (you chose to give something up)
Creditor → Cash + Discount Received (they chose to give something up)
Cash + Bad Debts → Debtor (nobody chose; the money is simply gone)
Once you see them as one shape with three names, the question stops being three questions.
Extra questions — same shapes, new wordings8 exam-shaped problems
X1Both discounts at once
Q. Sold goods of list price ₹20,000 to Meera at 15% trade discount. She paid within the discount period and was allowed a further 2% cash discount on the amount due, paying by cheque. Pass both entries.
Solution
Why this stepWhat to write
Trade discount first, and it never enters the books. The recorded sale is the net figure.
\(20{,}000 - 15\% = \)₹17,000
Meera's A/c Dr. 17,000
To Sales A/c 17,000
Meera's A/c Dr. 17,000
To Sales A/c 17,000
Cash discount is computed on the amount due — ₹17,000 — not on the ₹20,000 list price. This is the single most common error in these questions.
\(17{,}000 \times 2\% = ₹340\)
Cheque received \(= 17{,}000 - 340 = \)₹16,660
Cheque received \(= 17{,}000 - 340 = \)₹16,660
Meera's account is closed at its full book value of ₹17,000.
Bank A/c Dr. 16,660
Discount Allowed A/c Dr. 340
To Meera's A/c 17,000
Discount Allowed A/c Dr. 340
To Meera's A/c 17,000
The ruleTrade discount comes off the list price; cash discount comes off what is left. They stack, in that order, and the textbook confirms both can apply to one transaction because their purposes differ p. 16.
X2No cash discount here
Q. "Sold goods for cash ₹8,000, allowing a cash discount of 3%." A student passes: Cash Dr. 7,760 / Discount Allowed Dr. 240 / To Sales 8,000. Is this right?
Solution
AnswerThe wording is defective, and the textbook says so explicitly.
"Cash discount comes into picture as and when credit sales are made. There is no cash discount on cash purchases. Many students, it is observed during teaching, wrongly think that cash discount is allowed on cash sales. This is not the case." p. 16
Why not? A cash discount is a reward for paying before the credit period expires. On a cash sale there is no credit period to beat — payment is immediate by definition. A reduction given on a cash sale is simply a lower price, i.e. a trade discount, and would be recorded net: Cash A/c Dr. 7,760 / To Sales A/c 7,760.
What to write if this appears: record it net, and add a one-line note that a cash discount properly arises only on credit transactions. That shows the examiner you know the principle rather than that you missed the arithmetic.
"Cash discount comes into picture as and when credit sales are made. There is no cash discount on cash purchases. Many students, it is observed during teaching, wrongly think that cash discount is allowed on cash sales. This is not the case." p. 16
Why not? A cash discount is a reward for paying before the credit period expires. On a cash sale there is no credit period to beat — payment is immediate by definition. A reduction given on a cash sale is simply a lower price, i.e. a trade discount, and would be recorded net: Cash A/c Dr. 7,760 / To Sales A/c 7,760.
What to write if this appears: record it net, and add a one-line note that a cash discount properly arises only on credit transactions. That shows the examiner you know the principle rather than that you missed the arithmetic.
X3Paise in a rupee
Q. Ravi owed ₹24,000. He is declared insolvent and only 60 paise in a rupee is realised from his estate. Pass the entry.
Solution
"60 paise in a rupee" = 60%.
Recovered \(= 24{,}000 \times 0.60 = \)₹14,400
The rest is irrecoverable.
Bad debt \(= 24{,}000 - 14{,}400 = \)₹9,600
Entry
| Cash A/c | Dr. | 14,400 | |
| Bad Debts A/c | Dr. | 9,600 | |
| To Ravi's A/c | 24,000 |
(Being 60 paise in a rupee realised from Ravi on insolvency, balance written off as bad)
Same shape as Jamuna. The only variable is the recovery percentage — always compute the rupee amount first, then subtract.
X4Advance vs payment
Q. Pass entries for: (a) paid ₹9,000 to Mohan, a contractor, as an advance against office renovation; (b) Mohan completes the work and submits a bill for ₹11,000; (c) the balance is paid by cheque.
Solution
| Entry | Why | |
|---|---|---|
| (a) | Mohan's A/c Dr. 9,000 To Cash A/c 9,000 | Not Repairs A/c. No service has been rendered; if Mohan fails to do the work you can demand the money back, so he is a debtor — an asset p. 52. |
| (b) | Repairs A/c Dr. 11,000 To Mohan's A/c 11,000 | Now the expense is recognised, because the service has been delivered. Mohan's account swings from ₹9,000 debit to ₹2,000 credit — he is now a creditor for the balance. |
| (c) | Mohan's A/c Dr. 2,000 To Bank A/c 2,000 | Settles the ₹2,000 still owing. His account closes at nil. |
The principleThis is the textbook's Kalyan example with different numbers p. 52. Money paid before the service is a balance-sheet item; after the service it becomes a P&L item. Watch one person's account move from asset to liability across three entries — that is the Accrual Concept in motion.
X5Contra or not?
Q. Which of these are contra entries? (a) cash deposited into bank ₹15,000 (b) cheque received from a customer and deposited ₹9,000 (c) cash withdrawn from bank for office use ₹5,000 (d) cash withdrawn from bank for the proprietor's son's fees ₹20,000 (e) bank charges ₹150.
Solution
| (a) | Contra ✓ | Bank Dr. / To Cash. Your money, pocket to pocket. |
| (b) | Not contra | Bank Dr. / To Customer's A/c. The money came from outside the business. |
| (c) | Contra ✓ | Cash Dr. / To Bank. The reverse of (a). |
| (d) | Not contra | Drawings Dr. / To Bank. The money left the business entirely — it did not move to another of the business's pockets. |
| (e) | Not contra | Bank Charges Dr. / To Bank. An expense, and only one of the two accounts is yours. |
The testA contra entry needs both accounts to be the business's own cash-type accounts. The moment an outsider, an expense, an income, or the owner appears on either side, it is an ordinary entry.
X6In whose books?
Q. Gupta sells goods worth ₹40,000 to Mehta on credit at 5% trade discount. Pass the entry in the books of Gupta and in the books of Mehta.
Solution
Books of Gupta (seller)Books of Mehta (buyer)
Net amount = ₹40,000 − 5% = ₹38,000 in both sets of books. Trade discount is invisible on both sides.
Same net figure, opposite entries.
To Gupta, goods went out and Mehta owes him.
Gupta: Mehta's A/c Dr. 38,000 / To Sales A/c 38,000
Mehta: Purchases A/c Dr. 38,000 / To Gupta's A/c 38,000
Mehta: Purchases A/c Dr. 38,000 / To Gupta's A/c 38,000
The textbook's note to students"For every transaction, there are two persons… it is important to understand in whose books the transactions are recorded. In the books of the buyer, the same transaction is a purchase, while it is a sale in the books of the seller." p. 53
Read the first line of the question before anything else — "in the books of X" changes every entry on the page.
Read the first line of the question before anything else — "in the books of X" changes every entry on the page.
X7Goods out, four ways
Q. A cloth merchant records: (a) goods costing ₹5,000 taken by the proprietor's family (b) goods costing ₹3,000 given to a flood-relief fund (c) goods costing ₹1,200 distributed as samples at a trade fair (d) goods costing ₹8,000 destroyed by theft, of which the insurer admits ₹6,000. Pass all four entries.
Solution
| (a) | Drawings A/c Dr. 5,000 / To Purchases A/c 5,000 | Owner's family = the owner. |
| (b) | Charity A/c Dr. 3,000 / To Purchases A/c 3,000 | A nominal expense. |
| (c) | Advertisement A/c Dr. 1,200 / To Purchases A/c 1,200 | A marketing cost settled in goods. |
| (d) | Insurance Claim A/c Dr. 6,000 Loss by Theft A/c Dr. 2,000 To Purchases A/c 8,000 | Split the debit: ₹6,000 is now receivable from the insurer — an asset — and only the unrecovered ₹2,000 is a loss. |
One credit, four debitsEvery line credits Purchases, at cost. Only the debit changes, and it simply names where the goods went. Part (d) adds the one refinement worth knowing: an admitted insurance claim is an asset, not a loss — only the shortfall hits the P&L.
X8Spot the six errors
Q. A student writes these entries. Find and correct the errors.
(i) Purchased goods from Naresh ₹6,000 → Goods A/c Dr. / To Naresh
(ii) Paid rent by cheque ₹2,000 → Rent A/c Dr. / To Cash A/c
(iii) Sold goods to Priya for cash ₹4,000 → Priya's A/c Dr. / To Sales A/c
(iv) Owner took ₹3,000 cash for home → Capital A/c Dr. / To Cash A/c
(v) Bought a delivery van ₹5,00,000 → Purchases A/c Dr. / To Bank A/c
(vi) Received an order for ₹12,000 → Debtor's A/c Dr. / To Sales A/c
Solution
| The error | Correct entry | |
|---|---|---|
| (i) | There is no Goods A/c. | Purchases A/c Dr. 6,000 / To Naresh's A/c 6,000 |
| (ii) | "By cheque" means Bank, not Cash. | Rent A/c Dr. 2,000 / To Bank A/c 2,000 |
| (iii) | "For cash" means the transaction is settled — Priya's name is irrelevant. As written, Priya would appear as a debtor who owes ₹4,000 she has already paid. | Cash A/c Dr. 4,000 / To Sales A/c 4,000 |
| (iv) | Debiting Capital directly is not wrong in effect but it is wrong in practice — the year's withdrawals must be visible in one place. | Drawings A/c Dr. 3,000 / To Cash A/c 3,000 |
| (v) | A van is a fixed asset, not goods for resale. As written, profit would be understated by ₹5,00,000. This is the textbook's own example of an error of principle p. 14. | Motor Van A/c Dr. 5,00,000 / To Bank A/c 5,00,000 |
| (vi) | An order is not a transaction. Nothing has been exchanged. | No entry. Realisation Concept L3 slide 10. |
Note which ones a trial balance would catchNone of them. Every error here keeps debits equal to credits, so the trial balance still tallies perfectly. (i), (ii), (iii), (iv) and (v) are errors of principle or commission; (vi) is an error of over-recording that inflates both sides equally. This is precisely why "Double Entry Book-keeping ensures arithmetical accuracy alone, does not guarantee financial correctness" p. 49.
Topic 4 of 5 · L3 slides 12–15 · Textbook §4.2–4.9 · pp. 71–80 · 12 questions
Ledger Posting and Balancing
Posting is mechanical once you accept one rule: on any side of any account, you write the name of the OTHER account. Everything else is bookkeeping.
How to know a question belongs to this topic
It asks you to
"Post the following into the ledger", "open the necessary accounts", "balance the accounts", or "show how the entries are transferred".
The four posting rules
1. One account per item, never opened twice.
2. Debited in the journal → debited in the ledger. Never flip.
3. "To" on the debit side, "By" on the credit side — and always the other account's name.
4. Total the heavier side first; put that same total on the lighter side; the gap is the balance.
2. Debited in the journal → debited in the ledger. Never flip.
3. "To" on the debit side, "By" on the credit side — and always the other account's name.
4. Total the heavier side first; put that same total on the lighter side; the gap is the balance.
c/d and b/d
The balancing figure goes in on the lighter side as "Balance c/d" (carried down), and reappears on the opposite side on the first day of the next period as "Balance b/d" (brought down). b/d always sits on the side that was heavier.
Instant sanity check
Assets and expenses should finish with a debit balance; liabilities, capital and incomes with a credit balance. A cash account with a credit balance means you made an arithmetic error — or the business has no cash left.
Lecture and textbook bankL3 Shyam Enterprises · Textbook Illustrations 1–4 · answered
Q. Post the journal entries of Shyam Enterprises Ltd into the ledger and balance each account. (Jan 1 capital ₹1,000 cash · Jan 8 goods bought for cash ₹800 · Jan 15 goods sold to A on credit ₹500 · Jan 31 A pays ₹500.)
Solution — five accounts, balanced
Cash Account
| Dr. | Cr. | ||
|---|---|---|---|
| Jan 1 To Capital A/c | 1,000 | Jan 8 By Purchases A/c | 800 |
| Jan 31 To Mr A's A/c | 500 | Jan 31 By Balance c/d | 700 |
| 1,500 | 1,500 | ||
| Feb 1 To Balance b/d | 700 | ||
Capital Account
| Dr. | Cr. | ||
|---|---|---|---|
| Jan 31 To Balance c/d | 1,000 | Jan 1 By Cash A/c | 1,000 |
| 1,000 | 1,000 | ||
| Feb 1 By Balance b/d | 1,000 | ||
Purchases Account
| Dr. | Cr. | ||
|---|---|---|---|
| Jan 8 To Cash A/c | 800 | Jan 31 By Balance c/d | 800 |
| 800 | 800 | ||
| Feb 1 To Balance b/d | 800 | ||
Mr A's Account (Account Receivable)
| Dr. | Cr. | ||
|---|---|---|---|
| Jan 15 To Sales A/c | 500 | Jan 31 By Cash A/c | 500 |
| 500 | 500 | ||
Sales Account
| Dr. | Cr. | ||
|---|---|---|---|
| Jan 31 To Balance c/d | 500 | Jan 15 By Mr A's A/c | 500 |
| 500 | 500 | ||
| Feb 1 By Balance b/d | 500 | ||
Four things to notice
1. Mr A's account needs no balancing — debits equal credits, so it closes at nil. He bought on credit and paid up. Never force a c/d line into an account that already balances.
2. Every entry appears twice, in two different accounts, on opposite sides. Jan 1 is "To Capital" in Cash and "By Cash" in Capital.
3. The names confirm the rule: inside Cash you write Capital; inside Capital you write Cash. Never your own name.
4. Sanity check: Cash ₹700 Dr (asset ✓), Capital ₹1,000 Cr (liability ✓), Purchases ₹800 Dr (expense ✓), Sales ₹500 Cr (income ✓). All four land where their type says they should.
2. Every entry appears twice, in two different accounts, on opposite sides. Jan 1 is "To Capital" in Cash and "By Cash" in Capital.
3. The names confirm the rule: inside Cash you write Capital; inside Capital you write Cash. Never your own name.
4. Sanity check: Cash ₹700 Dr (asset ✓), Capital ₹1,000 Cr (liability ✓), Purchases ₹800 Dr (expense ✓), Sales ₹500 Cr (income ✓). All four land where their type says they should.
And the trial balance that follows: Dr — Cash 700, Purchases 800 = ₹1,500. Cr — Capital 1,000, Sales 500 = ₹1,500. Tallied.
Q. Post the following in the books of Theer & Co, 2008: (a) Mr Kalyan has to pay ₹15,000 but could pay 45 paisa in a rupee (b) outstanding wages of last year ₹200 are paid now (c) the typewriter at ₹3,000 has been taken by the owner for personal use (d) old furniture ₹800 sold for ₹600 cash (e) a debt previously written off as bad recovered this year ₹350 (f) goods of ₹200 sold to Kishore returned by him.
Solution — the six entries, then the key ledger accounts
| Entry | Why this and not the obvious alternative | |
|---|---|---|
| (a) | Cash A/c Dr. 6,750 Bad Debts A/c Dr. 8,250 To Mr Kalyan's A/c 15,000 | 45% of ₹15,000 = ₹6,750 recovered; ₹8,250 written off. Kalyan is closed at the full ₹15,000. |
| (b) | Outstanding Wages A/c Dr. 200 To Cash A/c 200 | Not Wages A/c. Last year's P&L already carried this expense; the liability was created then. Paying it now simply cancels the liability. Debiting Wages would charge the same expense twice. |
| (c) | Drawings A/c Dr. 3,000 To Typewriter A/c 3,000 | An asset can be drawn, not just cash or goods. Credit the asset, not Purchases. |
| (d) | Cash A/c Dr. 600 Loss on Sale of Furniture A/c Dr. 200 To Furniture A/c 800 | The asset leaves at its book value ₹800. Proceeds were ₹600, so ₹200 is a loss to the P&L. Never credit Sales — an asset sale is not revenue. |
| (e) | Cash A/c Dr. 350 To Bad Debts Recovered A/c 350 | The old debtor's account was closed in a prior year. This is a fresh income. |
| (f) | Sales Returns A/c Dr. 200 To Kishore's A/c 200 | Kishore is a customer; goods come back in. His debt falls by ₹200. |
Cash Account — three of the six transactions land here
| Dr. | Cr. | ||
|---|---|---|---|
| (a) To Mr Kalyan's A/c | 6,750 | (b) By Outstanding Wages A/c | 200 |
| (d) To Furniture A/c | 600 | By Balance c/d | 7,500 |
| (e) To Bad Debts Recovered A/c | 350 | ||
| 7,700 | 7,700 | ||
| To Balance b/d | 7,500 | ||
Mr Kalyan's Account — closed in full
| Dr. | Cr. | ||
|---|---|---|---|
| To Balance b/d | 15,000 | (a) By Cash A/c | 6,750 |
| (a) By Bad Debts A/c | 8,250 | ||
| 15,000 | 15,000 | ||
Furniture Account — the asset leaves at book value
| Dr. | Cr. | ||
|---|---|---|---|
| To Opening Balance | 800 | (d) By Cash A/c | 600 |
| (d) By Loss on Sale of Furniture A/c | 200 | ||
| 800 | 800 | ||
The teaching point of (b)Every year end, unpaid expenses are converted from an expense into a liability: Wages A/c Dr. / To Outstanding Wages A/c. That liability sits on the balance sheet. When the money is finally paid the following year, you debit the liability, not the expense — otherwise the same ₹200 hits two years' profits. This is the Accrual and Matching Concepts working together across a year boundary.
Q. How do you post a compound journal entry in which one account is debited and two are credited?
Solution
AnswerOpen each account separately, and in the account you are posting into, write the names of all the accounts on the other side with their own amounts.
Take Shiva's A/c Dr. 15,000 / To Cash 14,500 / To Discount Received 500:
· In Shiva's A/c, debit side, write two lines: "To Cash A/c 14,500" and "To Discount Received A/c 500".
· In Cash A/c, credit side, write one line: "By Shiva's A/c 14,500".
· In Discount Received A/c, credit side, write one line: "By Shiva's A/c 500".
The rule is unchanged: the name of the account on the other side is what you write. A compound entry simply means one of the accounts has two partners instead of one.
Take Shiva's A/c Dr. 15,000 / To Cash 14,500 / To Discount Received 500:
· In Shiva's A/c, debit side, write two lines: "To Cash A/c 14,500" and "To Discount Received A/c 500".
· In Cash A/c, credit side, write one line: "By Shiva's A/c 14,500".
· In Discount Received A/c, credit side, write one line: "By Shiva's A/c 500".
The rule is unchanged: the name of the account on the other side is what you write. A compound entry simply means one of the accounts has two partners instead of one.
X1Which side does b/d go on?
Q. A Creditors account has: credit side ₹48,000 opening + ₹22,000 purchases; debit side ₹35,000 paid + ₹3,000 returns. Balance it and say which side "Balance b/d" appears on, and what it means.
Solution
Total both sides.
Credit \(= 48{,}000 + 22{,}000 = 70{,}000\)
Debit \(= 35{,}000 + 3{,}000 = 38{,}000\)
Debit \(= 35{,}000 + 3{,}000 = 38{,}000\)
Credit side is heavier, so the balancing figure goes on the lighter (debit) side as "To Balance c/d".
\(70{,}000 - 38{,}000 = \)₹32,000 → debit side as Balance c/d; both sides now total ₹70,000.
It comes back down on the opposite side — the side that was heavier.
Balance b/d ₹32,000 on the CREDIT side.
Meaning: the business still owes ₹32,000 to its suppliers. A credit balance on a Creditors account is exactly right — it is a liability.
Meaning: the business still owes ₹32,000 to its suppliers. A credit balance on a Creditors account is exactly right — it is a liability.
The mnemonicc/d goes on the light side; b/d comes back on the heavy side. And the b/d side tells you the account's nature: debit b/d = asset or expense, credit b/d = liability, capital or income.
X2Read the ledger backwards
Q. A ledger shows: Machinery A/c — Dr side: "To Balance b/d 80,000", "To Bank A/c 20,000". Cr side: "By Depreciation A/c 10,000", "By Balance c/d 90,000". Reconstruct the journal entries and state the closing position.
Solution
| Ledger line | The journal entry it came from | What happened |
|---|---|---|
| To Balance b/d 80,000 | — | Opening book value carried from last year. |
| To Bank A/c 20,000 | Machinery A/c Dr. 20,000 / To Bank A/c 20,000 | A new machine bought, paid by cheque. Machinery is debited because the asset increased. |
| By Depreciation A/c 10,000 | Depreciation A/c Dr. 10,000 / To Machinery A/c 10,000 | This year's depreciation, written directly off the asset — Method A from Unit 3. |
| By Balance c/d 90,000 | — | Closing written-down value: \(80{,}000 + 20{,}000 - 10{,}000 = ₹90{,}000\). |
The skill being testedReading a ledger line in reverse. "To X" on the debit side means X was credited in the journal; "By Y" on the credit side means Y was debited. Being able to run the rule backwards is what lets you spot a wrong posting — and it is exactly the skill a "rectify the following" question needs.
Topic 5 of 5 · Faculty Trial Balance sheet Q1–Q3 · L3 slides 16–20 · 11 questions
The Trial Balance
Three faculty problems, all three worked to their totals — including one that does not tally, and what to do about it.
How to know a question belongs to this topic
It asks you to
"Prepare a trial balance from the following balances", or "the total is correct but the trial balance is not — prepare the correct one".
The only rule you need
Assets and expenses → debit column. Liabilities, capital and incomes → credit column. Apply it item by item without thinking about the business at all.
The six items that need a second's thought
Returns Inward → Dr · Returns Outward → Cr · Drawings → Dr · Bank Overdraft → Cr · Carriage Inward AND Outward → both Dr · Opening Stock → Dr
If it doesn't tally
Check, in order: (1) an item put in the wrong column — the error will be exactly twice the item's value; (2) an item omitted — the error equals the item; (3) arithmetic. If it still won't tally, open a Suspense A/c for the difference and say so.
Marks are in the format
Head it "Trial Balance as at [date]", use three columns (Ledger Accounts · Dr. Amount · Cr. Amount), and rule off the Grand Total on both sides.
Faculty Trial Balance sheet — all three problemsQ1, Q2, Q3 · sheet p. 1 · fully worked
Q. From the following list of balances prepare a trial balance: Capital ₹1,00,000; Debtors ₹20,000; Fixed Assets ₹92,000; Sales ₹1,10,000; Returns Outward ₹1,000; Bills Payable ₹8,000; Bank overdraft ₹11,000; Opening Stock ₹15,000; Creditors ₹20,000; Purchases ₹70,000; Returns Inward ₹2,000; Wages and Salaries ₹30,000; Bills Receivable ₹15,000; Rent ₹6,000.
Solution
| Ledger Account | L.F. | Dr. Amount ₹ | Cr. Amount ₹ | Why that column |
|---|---|---|---|---|
| Capital | 1,00,000 | Owed to the owner — credit-natured. | ||
| Debtors | 20,000 | Asset. | ||
| Fixed Assets | 92,000 | Asset. | ||
| Sales | 1,10,000 | Income. | ||
| Returns Outward | 1,000 | Credit — it reduces Purchases, which is a debit. | ||
| Bills Payable | 8,000 | Liability. | ||
| Bank Overdraft | 11,000 | Credit — you owe the bank, so it is a liability, not an asset. | ||
| Opening Stock | 15,000 | Asset brought forward. | ||
| Creditors | 20,000 | Liability. | ||
| Purchases | 70,000 | Expense. | ||
| Returns Inward | 2,000 | Debit — it reduces Sales, which is a credit. | ||
| Wages and Salaries | 30,000 | Expense. | ||
| Bills Receivable | 15,000 | Asset. | ||
| Rent | 6,000 | Expense. | ||
| Grand Total | 2,50,000 | 2,50,000 | Tallied ✓ |
The two rows that decide this questionReturns Outward on the credit side and Returns Inward on the debit side. Swap them and you will be out by ₹6,000 (twice the difference between them) and spend ten minutes hunting.
The memory device: a return always sits on the OPPOSITE side to the thing it reduces. Purchases is a debit, so purchase returns are a credit. Sales is a credit, so sales returns are a debit.
Bank overdraft is the other trap: "bank" normally means an asset, but an overdraft means the bank has lent you money.
The memory device: a return always sits on the OPPOSITE side to the thing it reduces. Purchases is a debit, so purchase returns are a credit. Sales is a credit, so sales returns are a debit.
Bank overdraft is the other trap: "bank" normally means an asset, but an overdraft means the bank has lent you money.
Q. Prepare a trial balance as at 31-12-2022: Capital ₹40,000; Purchases ₹36,000; Discount allowed ₹1,200; Carriage inward ₹8,700; Carriage outward ₹2,300; Sales ₹60,000; Return Inwards ₹300; Return Outwards ₹700; Rent and Taxes ₹1,200; Plant and Machinery ₹10,700; Stock ₹15,500; Sundry Debtors ₹20,200; Sundry Creditors ₹12,000; Commission (Dr) ₹1,200; Cash in hand ₹100; Cash at bank ₹10,100; Motor cycle ₹4,600.
Solution — and what to do when it won't balance
| Ledger Account | Dr. ₹ | Cr. ₹ |
|---|---|---|
| Capital | 40,000 | |
| Purchases | 36,000 | |
| Discount Allowed | 1,200 | |
| Carriage Inward | 8,700 | |
| Carriage Outward | 2,300 | |
| Sales | 60,000 | |
| Returns Inward | 300 | |
| Returns Outward | 700 | |
| Rent and Taxes | 1,200 | |
| Plant and Machinery | 10,700 | |
| Stock | 15,500 | |
| Sundry Debtors | 20,200 | |
| Sundry Creditors | 12,000 | |
| Commission (Dr.) | 1,200 | |
| Cash in hand | 100 | |
| Cash at bank | 10,100 | |
| Motor cycle | 4,600 | |
| Sub-total | 1,12,100 | 1,12,700 |
| Suspense A/c (balancing figure) | 600 | |
| Grand Total | 1,12,700 | 1,12,700 |
Read this carefullyThe balances as given do not tally. The credit column exceeds the debit column by ₹600. This is not your arithmetic — check it and you will get the same answer.
What to do in an exam: do not invent a figure and do not force an item into the wrong column. Open a Suspense Account for the difference — on the debit side here, because the debits are short — and write one line beneath the statement: "The balances given do not agree by ₹600; a Suspense Account has been opened for the difference pending detection of the error." That is the textbook treatment and it earns full marks.
Where the ₹600 probably is: an error of exactly ₹600 on one side suggests either a ₹600 debit balance omitted from the list, or a ₹300 item entered on the wrong side (since a wrong-column error is always twice the item — and ₹300 is the Returns Inward figure). Say so; it shows you understand the diagnostic, not just the fix.
What to do in an exam: do not invent a figure and do not force an item into the wrong column. Open a Suspense Account for the difference — on the debit side here, because the debits are short — and write one line beneath the statement: "The balances given do not agree by ₹600; a Suspense Account has been opened for the difference pending detection of the error." That is the textbook treatment and it earns full marks.
Where the ₹600 probably is: an error of exactly ₹600 on one side suggests either a ₹600 debit balance omitted from the list, or a ₹300 item entered on the wrong side (since a wrong-column error is always twice the item — and ₹300 is the Returns Inward figure). Say so; it shows you understand the diagnostic, not just the fix.
One printing note: the sheet prints Plant and Machinery as "Rs 10.700". Read as ₹10,700. Nothing in this range of values makes the statement tally, so the ₹600 gap stands either way.
Q. Prepare a trial balance as at 31-3-2022 from: Sundry Debtors ₹48,000; Sundry Creditors ₹98,000; Plant and Machinery ₹40,000; Carriage Outward ₹1,000; Carriage Inward ₹200; Bad debts ₹1,200; Purchases ₹51,900; Capital ₹35,000; Freehold Premises ₹25,000; Commission Received ₹625; Cash at Bank ₹25,000; Cash in hand ₹400; Salaries ₹55,000; Wages ₹20,000; Printing & Stationery ₹577; Office Expenses ₹1,212; Sales ₹1,50,680; Opening Stock ₹21,275; Bank Loan ₹6,459; Rent received ₹10,000; Deposit with SBI ₹10,000.
Solution
| Ledger Account | Dr. ₹ | Cr. ₹ | Note |
|---|---|---|---|
| Sundry Debtors | 48,000 | Asset | |
| Sundry Creditors | 98,000 | Liability | |
| Plant and Machinery | 40,000 | Asset | |
| Carriage Outward | 1,000 | Debit — an expense. Goes to the P&L. | |
| Carriage Inward | 200 | Debit too. Goes to the Trading A/c. Different destination, same column. | |
| Bad debts | 1,200 | A loss | |
| Purchases | 51,900 | Expense | |
| Capital | 35,000 | Owner's claim | |
| Freehold Premises | 25,000 | Asset | |
| Commission Received | 625 | Income — note the word "Received" | |
| Cash at Bank | 25,000 | Asset | |
| Cash in hand | 400 | Asset | |
| Salaries | 55,000 | Expense → P&L | |
| Wages | 20,000 | Expense → Trading A/c (factory labour) | |
| Printing & Stationery | 577 | Expense | |
| Office Expenses | 1,212 | Expense | |
| Sales | 1,50,680 | Income | |
| Opening Stock | 21,275 | Asset b/f | |
| Bank Loan | 6,459 | Liability | |
| Rent received | 10,000 | Income — again, "received" | |
| Deposit with SBI | 10,000 | Asset — money you have placed with the bank, so it is owed to you | |
| Grand Total | 3,00,764 | 3,00,764 | Tallied ✓ |
Three things this question tests deliberately
1. Carriage Inward and Carriage Outward are BOTH debits. Students who have half-learnt "inward vs outward" from the returns rule put one on each side. The returns rule does not transfer — returns have opposite signs because they reverse opposite things; carriages are both expenses.
2. The word "Received". Commission Received and Rent received are incomes and go to the credit column. Bare "Commission" or "Rent" would be expenses on the debit side. Exactly the point of L3 slide 18 — the column tells you what the item is.
3. "Deposit with SBI" vs "Bank Loan". One is money you gave the bank (asset, debit); the other is money the bank gave you (liability, credit). Both mention a bank; they sit in opposite columns.
The odd numbers (₹577, ₹1,212, ₹6,459) are deliberate — they make it impossible to fudge a total. Add carefully.
2. The word "Received". Commission Received and Rent received are incomes and go to the credit column. Bare "Commission" or "Rent" would be expenses on the debit side. Exactly the point of L3 slide 18 — the column tells you what the item is.
3. "Deposit with SBI" vs "Bank Loan". One is money you gave the bank (asset, debit); the other is money the bank gave you (liability, credit). Both mention a bank; they sit in opposite columns.
The odd numbers (₹577, ₹1,212, ₹6,459) are deliberate — they make it impossible to fudge a total. Add carefully.
Q. The total of this trial balance is correct, but the trial balance is not. Prepare the correct one. Capital ₹25,000 (Dr); Sales ₹40,000 (Dr); Cash in hand ₹3,600 (Cr); Purchases ₹30,330 (Cr); Machinery ₹20,600 (Cr); Drawings ₹1,200 (Cr); Debtors ₹9,600 (Cr); Purchases Returns ₹500 (Cr); Sales Returns ₹600 (Dr); Opening Stock ₹8,000 (Dr); Discount Allowed ₹800 (Dr); Creditors ₹11,330 (Cr); Trade Expenses ₹2,100 (Dr). Totals ₹76,830 each side.
Solution
Why the totals can be right while the statement is wrong: several items have been put in the wrong column, and the misplacements happen to cancel out in total. That is a compensating error — the classic case of a trial balance that tallies and lies.
| Account | As printed | Correct column | Why |
|---|---|---|---|
| Capital | Dr ✗ | Cr ₹25,000 | Owed to the owner. |
| Sales | Dr ✗ | Cr ₹40,000 | Income. |
| Cash in hand | Cr ✗ | Dr ₹3,600 | Asset. |
| Purchases | Cr ✗ | Dr ₹30,330 | Expense. |
| Machinery | Cr ✗ | Dr ₹20,600 | Asset. |
| Drawings | Cr ✗ | Dr ₹1,200 | Reduces capital, so it sits opposite capital. |
| Debtors | Cr ✗ | Dr ₹9,600 | Asset. |
| Purchases Returns | Cr ✓ | Cr ₹500 | Already correct. |
| Sales Returns | Dr ✓ | Dr ₹600 | Already correct. |
| Opening Stock | Dr ✓ | Dr ₹8,000 | Already correct. |
| Discount Allowed | Dr ✓ | Dr ₹800 | Already correct. |
| Creditors | Cr ✓ | Cr ₹11,330 | Already correct. |
| Trade Expenses | Dr ✓ | Dr ₹2,100 | Already correct. |
| Corrected totals | Dr ₹76,830 = Cr ₹76,830 | Same totals, correct statement. |
Method for any question of this typeIgnore the printed columns entirely. Go down the list, classify each item as asset / expense / liability / capital / income, and place it yourself. Then add. If your totals match the printed grand total, you have found every misplacement; if they do not, an item is also missing or misvalued.
X1Theory · 5 marks
Q. "A tallied trial balance is conclusive proof of the accuracy of the books." Discuss, naming the errors it cannot detect.
Solution
AnswerThe statement is false. A tallied trial balance proves only arithmetical accuracy — that for every debit there was an equal credit. It says nothing about whether the right accounts were used.
The quotable line: "Double Entry Book-keeping ensures arithmetical accuracy alone, does not guarantee financial correctness." p. 49
The textbook's example: cash paid for repairs ₹100, but Radha's A/c is debited instead of Repairs A/c. Debits still equal credits; the trial balance still tallies; and yet the Repairs account does not show the repairs incurred, so the accounts are financially wrong.
Errors NOT disclosed by a trial balance:
The quotable line: "Double Entry Book-keeping ensures arithmetical accuracy alone, does not guarantee financial correctness." p. 49
The textbook's example: cash paid for repairs ₹100, but Radha's A/c is debited instead of Repairs A/c. Debits still equal credits; the trial balance still tallies; and yet the Repairs account does not show the repairs incurred, so the accounts are financially wrong.
Errors NOT disclosed by a trial balance:
| 1. Errors of principle | The right amount in the wrong class of account — machinery debited to Purchases, or a repair capitalised. |
| 2. Compensating errors | Two errors that cancel each other in amount and direction. Illustration 6 above is exactly this. |
| 3. Errors of complete omission | A transaction never recorded at all — nothing on either side. |
| 4. Errors of commission | The right class, the wrong account — Ram debited instead of Ramesh. |
| 5. Errors of original entry | A wrong amount recorded in the journal — ₹540 written as ₹450 — but posted consistently to both sides. |
What it DOES catchOnly one-sided errors: an amount posted to one side and not the other, or two different amounts on the two sides. Your deck names the first two of the five explicitly — "There still may be errors of Principle and compensating errors" slide 18 — so give those two first and the rest as additional marks.
X2Find the misplaced item
Q. A trial balance shows debits ₹4,86,000 and credits ₹4,74,000. You are told exactly one item has been placed in the wrong column. What is that item worth, and which column should it be in?
Solution
A misplaced item is wrong twice over: it is missing from the column it belongs in and present in the column it does not. So the gap is double its value.
Difference \(= 4{,}86{,}000 - 4{,}74{,}000 = ₹12{,}000\)
Halve the difference to get the item.
Item value \(= 12{,}000 \div 2 = \)₹6,000
The debit column is too heavy, so a ₹6,000 item sitting in the debit column belongs in the credit column.
The debit column is too heavy, so a ₹6,000 item sitting in the debit column belongs in the credit column.
The diagnostic to rememberDifference ÷ 2 = the misplaced item. If the difference is an odd number it cannot be a single misplacement — look for an omission (difference = the item) or an arithmetic slip instead. This one check finds most trial-balance errors in seconds. A difference divisible by 9 often means transposed digits — ₹540 written as ₹450.
X3Where does each item go next?
Q. For each item in TB-Q3, say which final statement it goes to: Trading A/c, Profit & Loss A/c, or Balance Sheet.
Solution
| Trading A/c | Profit & Loss A/c | Balance Sheet |
|---|---|---|
| Dr: Opening Stock, Purchases, Carriage Inward, Wages Cr: Sales |
Dr: Salaries, Carriage Outward, Bad Debts, Printing & Stationery, Office Expenses Cr: Commission Received, Rent Received |
Assets: Plant & Machinery, Freehold Premises, Sundry Debtors, Cash at Bank, Cash in hand, Deposit with SBI Liabilities: Capital, Sundry Creditors, Bank Loan |
The sorting ruleTrading A/c takes everything to do with buying and selling the goods themselves — stock, purchases, sales, and any cost of getting the goods ready to sell (carriage inward, factory wages). Its balance is Gross Profit.
P&L A/c takes everything else that is an income or an expense — running the business rather than making the goods. Its balance is Net Profit, which is then added to Capital.
Balance Sheet takes what is left: every asset, every liability, and capital. Preparing these statements is Unit 4 — beyond the M1 portion — but knowing the destination of each trial-balance item is exactly what a Unit 2 examiner can ask, and it makes Unit 4 trivial when you get there.
P&L A/c takes everything else that is an income or an expense — running the business rather than making the goods. Its balance is Net Profit, which is then added to Capital.
Balance Sheet takes what is left: every asset, every liability, and capital. Preparing these statements is Unit 4 — beyond the M1 portion — but knowing the destination of each trial-balance item is exactly what a Unit 2 examiner can ask, and it makes Unit 4 trivial when you get there.