which accepts the deposit for the purpose of lending or investment from the public,
repayable on demand through cheques, drafts or otherwise and also performs a
number of agency services to its clients on instruction. The central bank of a country
issues the paper notes as its basic function.
Key Point A bank is a financial institution, which accepts money as deposit
from individuals and organisations and lends it to those who need it
against their security deposit.
2. Importance of Bank
A bank is important for all the parties i.e. general public, business organization
and the government. It is rather important for the business organizations. A bank
provides finance, which is the foundation of every business activity. It is thus,
regarded as an indispensable tool of the wheel of commerce. It acts as a middleman
or agent between the savers and borrowers of money. The importance of a bank is
highlighted in terms of the following points:
i. The central bank of a country issues coins and paper notes, which facilitate in
the transfer of properties.
ii. Commercial banks collect capital in terms of the deposit of the general public
and organizations and mobilize to the productive fields to activate the entire
economic sectors.
iii. Banks provide security to the deposits of the general public and organizations,
on one hand and pay interest on such deposits on the other and encourage
saving.
iv. Commercial banks issue various credit instruments like cheque, bank draft,
traveller’s cheque, credit cards, letter of credit etc. that assure fast and safe
remittance of money and personal expenses in a reliable manner.
v. Banks provide a number of agency services to their clients/customers, like
receipt of income and payment of expenses, etc.
vi. Banks provide financial, technical and administrative assistance to the persons
and institutions for the development of agricultural, industrial and commercial
sectors.
vii. Banks take responsibilities for underwriting i.e. buying and selling the shares,
debentures and other securities issued by the government or public limited
companies.
viii. Banks provide necessary data, statistics and other economic information to the
government on monetary and fiscal matters for the formulation of a sound
monetary and fiscal policy.
ix. Directly and indirectly bank provides employment opportunities in a country.
x. The bank issues coins, paper notes and credit card which help for exchanging
goods and services which makes easier for measuring the value of goods and
services.
Bank and Insurance 101
3. Types of Banks in Nepal
The banks may be categorised into various types according to their functional
area, rights and authorities. In Nepal, the banks are generally divided into the
following category:
a. Central Bank b. Commercial Bank c. Development Bank
a. Central Bank
Central bank is the bank of a country which
occupies central position in the monetary and banking
sectors of a country. It is fully owned and managed
by government. So, the central bank is known as the
government’s bank. The central bank formulates the
monetary and fiscal policy and solely regulates the
entire banking sector by issuing notes and determining
their values with the foreign currencies, managing cash Nepal Rastra Bank
and credit policy to strengthen national economy. Thus,
the central bank may be defined as that bank, which holds the topmost position in
the banking sectors and solely exercises the rights of issuing notes, managing cash
and credit system, controlling foreign exchange and formulating banking policy for
the development of banking sectors in the interest and welfare of the public. It is
always aimed towards strengthening the national economy by making economic
infrastructure in the country. There is just a single central bank in a country. Nepal
Rastra Bank is the central bank of Nepal. It was established in 2013 B.S. under Nepal
Rastra Bank Act, 2012 with one crore of authorised capital.
According to Dr. D. Kock, “Bank which constitutes the apex of the monetary and banking
structure of its country is called a central bank.”
Same as dictionary of Banking and Finance, “Main government controlled bank in a
country which controls the financial affairs of the country by fixing main interest rates, issuing
currencies, supervising the commercial bank and controlling the foreign exchange rate.”
The distinguished characteristics of the central bank are that, it is fully owned and
managed by government and there is only one central bank in a country. ‘Reek bank
of Sweden’ is the first central bank in the world which was established in 1656 AD.
‘Bank of England’ (1694 A.D) is the central bank of England, ‘Reserve Bank of India’
is the central bank of India.
Key Point Central bank refers to the government bank which holds top most
position in the monetary and banking sectors of a country.
102 Aakar’s Office Practice and Accountancy - 8
b. Commercial Bank
Generally, the word bank refers to the
commercial bank. The concept of bank was evolved
from the development of commercial activities. A
commercial bank refers to that bank which accepts
deposits of the public and organizations, grants loan
to them against securities providing financial and Rastriya Banijya Bank
technical assistance to the traders and commercial
parties and rendering agency services to the clients/customers as requested. Nepal
Bank Ltd. was established as the first commercial bank and the first bank of Nepal
in 1994. B.S. Then Rastriya Banijya Bank was established in 2022B.S. under Rastriya
Banijya Bank Act, 2021. Again Agriculture Development Bank, which was established
in 2024, has also been allowed to serve commercial functions from 2041 B.S. Other
commercial banks established in Nepal are Himalayan Bank Ltd., Nabil Bank Ltd.,
Megha Bank Ltd., Standard Chartered Bank Ltd., etc.
According to the dictionary of Banking and Finance, “Bank which offers banking service
to public is commercial bank”.
According to M.L. Seth, “A bank is an institution which deals in money and credit.”
According to the Commercial Bank Act 2031, “Commercial banks are those banks
which are established under this Act to perform commercial functions except those which are
established for specific purposes like development bank, cooperatives or other.”
In conclusion, commercial bank accepts the deposits from the customers, grants loan
and provides other banking services to the ordinary people for earning profit or
profit motive. It is established for the development of trade industry and commerce.
Commercial bank grants loans to the individuals and corporations and charges interest.
Key Point Commercial bank refers to the bank which accepts deposits of the
public and organisations and grants loan to them against securities
and provides financial services such as agency service, transfer of
money, exchanging foreign currency, issuing capital, etc.
c. Development Bank
A development bank is the one, which is
established under a special Act for the upliftment
of a certain economic sector by providing special
financial, technical and administrative assistance
under simple and easy terms and condition. Such
a bank is established as the important aspect
of national economy, mostly in industrial and Nepal Gramin Bikas Bank
agricultural sectors. In Nepal, development banks
are established under the provision of Development Bank Act, 2052 A.D.
Bank and Insurance 103
Nepal Industrial Development Corporation (NIDC), Agricultural Development
Bank and other private development banks have already been established in Nepal
under this act.
Development bank provides short term, mid term and long term loan to the
industries and it provides capital, technical assistance, managerial and administrative
suggestions to the development of industrial, agricultural, rural and other specific
sectors of the country. It also creates proper environment in the country for the
development of concerned sectors. The first development bank of world was ‘Societe
Generale de Beljique’, Belgium 1822 A.D.
Key Point A development bank is the bank which provides capital and technical
assistance for the development of certain sectors such as industrial,
agricultural, rural sectors of the country.
Insurance
4. Introduction
Human beings are exposed to different types of risks such as loss of property by
fire, theft, accident, untimely death of the earning persons, professional or business
failure, etc. Such risks may cause a large-scale financial losses. It is not possible to
eliminate such risks but can be reduced and/or recovered. It is insurance which
bears the risks and assures the recovery of the financial losses so caused. Insurance
is a means for compensating the probable losses caused by any uncertain events in
consideration to the payment of a certain fees called premium.
According to Hall, “A contract in writing whereby one party, called the insurer, agrees
in consideration of either a single or a periodical payment called the premium, to indemnify
another party called the insured, against loss of damage resulting to him on the happening of
certain events or to pay him a sum on the happening of a specified event or events.”
According to Professor R.S. Sharma, “Insurance is a co-operating device to spread loss
caused by a particular risk over a number of persons who are exposed to it, who agree to insure
themselves against the risk.”
Insurance Act 2049 B.S., “Insurance business means life insurance business and non life
insurance business which also refers to the reinsurance too.”
From the study of the above meaning and definition, insurance may be considered
to be a better means of shifting and dividing the business risks. Hence, insurance
may be defined as a contract between the insured and insurer by which the later
undertakes to compensate the former with a fixed sum of money as the recovery of
the pre decided financial loss in consideration to a certain premium.
104 Aakar’s Office Practice and Accountancy - 8
Nowadays, insurance has become a business and it is initiated by insurance
companies. In Nepal, the insurance business is carried out by public as well as private
sectors. Rastriya Beema Sansthan, Everest Insurance Co., National Life and General
Insurance Co., etc. are some examples of insurance companies. In Nepal, insurance
companies are established according to the Insurance Act 2049.
Key Point The way of transferring own risk to a large number of persons for
compensating the probable loses caused by any uncertain events in
consideration to the payment of a certain premium.
In order to understand the concept of insurance, one should be familiar with the
following terms:
i. Insured
The person or party who seeks protection against a particular risk and pays
a certain amount in consideration to the recovery of the financial loss is known
as insured.
ii. Insurer
The party i.e. insurance company which undertakes to protect the insured
from the specified risks and the loss so caused in consideration to a certain premium
received from the insured is known as insurer.
iii. Premium
It is the fees paid by the insured to the insurer as the consideration of the
insurance contract for the assurance of the recovery of financial loss so caused. It is
payable monthly, quarterly, half yearly or yearly depending upon the agreement.
iv. Insured Amount
It is the agreed financial value of the future loss caused by certain events.
Insurance is made for the recovery of this value.
v. Insurance Policy
It is the contract between the insured and the insurer containing the details of
the terms and conditions of a certain insurance.
5. Functions of Insurance
The functions of insurance may vary on the basis of its nature and types. It means
the functions of fire or marine insurance may differ from that of life insurance, etc. The
common functions of insurance may be studied in terms of the following points.
i. Providing Assurance for Compensation
Insurance provides assurance for the compensation of pre-decided and
accidental financial losses against the premium paid by the insured.
Bank and Insurance 105
ii. Reducing Financial Losses
Human beings are exposed to different kinds of risks in their personal as well as
business life. Such risks may cause great financial loss. Insurance acts as a mechanism
to reduce or eliminate the financial loss due to various risks by forecasting the chances
of such happenings and suggesting for their controlling measures.
iii. Mobilisation of Capital
Insurance accumulates fund in terms of insurance premium from the parties
willing to get secured from the financial losses. Compensation is made to the insured
who have actually suffered from the pre-decided accidental losses. The other fund
may be invested in different secured and productive sectors. Hence, insurance
accumulates fund and mobilizes into different areas.
iv. Maintaining Financial/Economical Stability
Risks and uncertainties create instability in the financial sector. Insurance
companies help to maintain financial stability by assuring for the compensation of
the losses caused by various risks and thus promotes the performance efficiency,
which leads to financial stability.
v. Financial Security
Insurance provides financial security to an insured. It guarantees protection
against uncertain and large losses in return of small premium. There are different
types of insurance to give economic protection in different sectors. Insurance
provides certainty of compensation in case of accidental loss. Thus, it gives a feeling
of financial security against the possible losses caused by the uncertain events.
vi. Promotes other Business
Business sectors are more risky. The chances of fire in the godown or production
unit, loss by accident or theft, sea perils and the explosion in the aviation etc. are
more frequent in the business sectors. Insurance takes away these risks and promotes
and develops business sectors. Thus, it helps to expand business activities in and
outside a country.
vii. Reduction of Risk
Insurance company does researches and investigations to forecast the future
loss. It organizes different seminars and workshops to make their customers aware
of different risks or events, which help to reduce loss.
Points to Remember
i. Providing assurance for compensation ii. Reducing financial losses
iii. Mobilisation of capital iv. Maintaining financial/economical stability
v. Financial security vi. Promotes other businesses
vii. Reduction of risk
106 Aakar’s Office Practice and Accountancy - 8
6. Types of Insurance
There are various types of insurance as the difference in the financial risks. The
following are the common types of insurance:
Types of Insurance
Life Insurance Non-life Insurance/General Insurance
Marine Insurance Fire Insurance Miscellaneous Insurance
Motor Aviation Employers’ Liability Fidelity Guarantee
a. Life Insurance
Life insurance came into existence
after the development of the marine
insurance. The first life insurers were
the marine insurers who started issuing
life insurance policies on the life of the
merchants, ship captains and the crew of
the ship sailing along with the goods.
Every human being wants the financial
security of his/her life on one hand
and the financial security of his
dependent after his death on the other. Happy family
So it is a contract to recover the financial
uncertainty of human life to some extent from business valuation method. It is not
a contract of indemnity like other insurance. Hence, life insurance may be defined
as the insurance by which the insurer undertakes to pay the fixed sum of money on
the happening of some events which may be death of the insured or the expiry of the
term against the receipt of the premium. Thus, life insurance contains the elements
of security as well as investment.
Key Point Life insurance is a contract whereby the insurer agrees to pay a
certain sum of money to the insurer on the maturity of the policy in
consideration of premium paid by insured to him or to his nominee
if the insured dies.
Bank and Insurance 107
b. Non life/ General Insurance
Insurance other than life insurance is known as non-life insurance. Some types
of general insurance are described below:
i. Marine insurance
Marine insurance is an agreement between
the insurer and the insured by which the former
undertakes to indemnify the latter, in the manner they
have agreed, the financial loss caused by a certain
sea perils in consideration to a certain premium paid
periodically or in lumpsum. It is believed that it was
the first developed form of insurance. In the ancient Ship accident
times, international trade used to be done mainly
through sea routes and they were subject to various risks like collision of a ship with
rocks or other ships, attack by sea pirates, etc. Such risks were attached both to the
ship and the cargo. Hence, the marine insurance was felt necessary to be secured
from the loss of ship, the cargo, etc. In course of time, other types of insurance were
also developed gradually.
Key Point Marine insurance provides security to the shipping company,
passengers, and businessman due to marine risks against amount
of premium.
ii. Fire Insurance
Fire insurance is a measure, which provides
security against the risk of fire. It was initiated from
England when London City was caught by fire
devastation in 1666 AD. Fire insurance is a contract
between the insurer and insured by which, the former
undertakes to indemnify the latter the financial loss
caused by fire in consideration to a certain premium Building on Fire
paid periodically or in lumpsum. In this policy, the
insured must prove that the loss is caused by fire and that must be unintentional
accidental case. It is generally made by the owners of cinema house, godown,
business premises, residential house, etc.
Key Point Fire insurance is the contract in which the insurance company
promises to compensate the loss of property due to fire risk against
the amount of premium.
108 Aakar’s Office Practice and Accountancy - 8
iii. Miscellaneous insurance
There are many other types of insurance policies for different financial risks.
Some of them are introduced below:
a. Motor Insurance Bus crash
The insurance which is made to compensate
the loss of the vehicles by means of the pre-decided
events which may be caused by accident or other
causes is known as motor insurance.
b. Aviation Insurance
The insurance, which is made to compensate
the financial loss caused by aviation risks and
accidents is known as aviation insurance.
c. Employers’ Liability Insurance
There is risk of happening accident in the Aeroplane crash
organization due to which the employee may
be unable to generate income or even die. So to
protect the dependent of the workers, employers’ liability insurance is done. To get
the compensation in this policy, employer is liable to pay the premium regularly.
This insurance helps to motivate the workers and increase their efficiency.
d. Fidelity Guarantee Insurance
Fidelity guarantee insurance is a process of compensating the loss which is
incurred due to fraud, embezzlement, misuse and theft made by the staff.
e. Others
Besides, the above insurance types, other types of insurance are also in use
in Nepal. They are Personal Accident Insurance, Theft Insurance, Cattle Insurance,
Crops Insurance, Medical Aid Insurance, etc.
7. Importance/Advantages of Insurance
The advantages of insurance can be studied in terms of the following points:
i. Assures for Financial Compensation
Insurance provides financial security to the insured. It gives guarantee of
compensation against large financial losses in return of small premium.
ii. Reduction of Risks
Human beings are exposed to different kinds of financial risks, which may cause
large financial losses. It is not possible to eliminate the risks but it can be forecasted
Bank and Insurance 109
and reduced by applying some precautionary measures. Insurance helps in reducing
risks by suggesting for precautionary measures on one side and by sharing the losses
to a group of persons in terms of the company itself who has agreed to join the
common pool.
iii. Encouragement to Saving and Investment
In the insurance agreement, the insured has to pay a certain regular or lumpsum
premium to the insurer in return to the compensation of the probable future loss or
compensation at the old age or compensation after his/her death. Insurance is thus,
a method of collecting savings from the parties willing to get secured from financial
risks. Hence, it encourages persons to make regular savings.
iv. Basis of Credit
An insured can easily get loan by pledging insurance policy as a security from
the insurance company itself. Besides, financial institutions grant credit facilities on
the pledge of the properties which are being insured.
v. Maintains Economic Stability
Financial risks and uncertainties push the entire economy into instability. It is a
very bad sign to total business and social sectors. Insurance assures the compensation
of the financial losses caused by the specified future events and considerably helps in
maintaining economic stability.
vi. Promotes Business Activities
Business sector is more risky sector. The chances of fire in the godown, loss
of stocks by theft, explosion in the ship, train or plane, etc. are more frequent in
this sector. Insurance takes away these risks and promotes and develops business
activities in consideration to a nominal charge, i.e. premium.
vii. Provides Employment Opportunities
As insurance has become business in the modern day business world. Hundreds
of entrepreneurs and thousands of employees have been engaged in this line. Hence,
by establishing and developing insurance companies, it has provided employment
opportunities to thousands of people as per their qualification and skill.
Points to Remember
i. Assures for financial compensation ii. Reduction of risks
Basis of credit
iii. Encouragement to saving and investment iv. Promotes business activities
v. Maintains economic stability vi.
vii. Provides employment opportunities
110 Aakar’s Office Practice and Accountancy - 8
8. Disadvantages of Insurance
Besides, a number of benefits, insurance has also some limitations. Some
limitations of insurance are mentioned below.
i. Insurance leads to negligence as the insured feels that he/she can be
compensated for any loss or damage.
ii. Insurance companies do not make the compensation promptly on maturity of
the policy or for the financial losses as the expectation of the insured.
iii. It may lead to the crimes in the society as the beneficiaries of the policy may
encourage to commit crimes to receive the insured amount.
iv. Although insurance encourages savings, it does not provide the whole return
that are provided by a bank.
Glossary
Eliminate : reduce/remove
Compensating : pay damages/pay compensation
Indemnify : assure
Risk : danger/threat
Assurance : guarantee/promise
Periodically : from time to time/occasionally
Perils : dangers/risk
Pirates : robbers/thief
Accumulates : build up/collect
Stability : constancy/firmness
Precautionary : preventive
Contract : agreement
Liability : amount to be paid
Policy period : duration of insurance contract
Exercise 111
A. Fill in the blanks:
1. ……………….. is the fees to be paid to insurance company.
2. …………....... are the types of insurance.
3. London city was devastated by fire in ………….......
Bank and Insurance
4 …………....... is the insurance of the goods loaded on the ship.
5. The contract between the insured and the insurer of a certain insurance is
called ………….......
B. Give very short answers to the following questions:
6. What is bank?
7. What is central bank?
8. Name the central bank of Nepal.
9. When was Nepal Rastra Bank established?
10. Which is the first commercial bank of Nepal?
11. What is insurance?
12. Define insurance premium.
13. What is employment liability insurance?
14. Define insured amount.
15. Define the term ‘insurance policy’.
16. State the parties involved in insurance.
C. Give short answers to the following questions:
17. Write the importance of bank.
18. “Commercial Bank is the bank of trade.” Justify.
19. Describe the functions of insurance in brief.
20. Explain any five points of importance of insurance.
21. What is non-life insurance? Explain its types.
D. Give long answers to the following questions:
22. Explain the types of bank.
23. What is insurance? Explain the types of insurance.
24. Explain the advantages and disadvantages of insurance in brief.
Pr oject Work
a. Prepare a list of benefits of insurance by asking the person in your
society who has done insurance.
b. Visit an insurance company and prepare a list of services which are
provided by the insurance company to the customers.
112 Aakar’s Office Practice and Accountancy - 8
Unit 9 Tax
Learning Objectives After studying this unit, students will
be able to :
write about the meaning of tax,
write about the objectives and
importances of tax,
know the types of tax.
Tax 113
1. Introduction
State is represented by the government. Government has responsibilities toward
the people. Hence, the government of any country performs a number of activities in
order to maintain law and order, peace and security, satisfying with the requirements of
basic needs and public utilities, etc. It also initiates various development programmes
and maintains diplomatic and friendly relation with other nations. In order to carry
out all these activities and discharge its overall responsibilities toward the people, it
needs sufficient revenue. Such a revenue is known as government revenue. It is also
known as public revenue. Government revenue is collected through various sources
according to the provisions of the financial acts, rules and regulations. Such sources
of revenue are taxes, fees and charges, fines and penalties, foreign grants, etc. Among
them, tax is the main source of collecting the government revenue.
The concept of tax was initiated from Great Britain in 1799 AD to collect revenue for
the government to manage for the war against France. It didn’t come into practice
after that for a long time. Income tax system was practised regularly from 1840
AD onwards in different countries in the world. It was practised from 1840 AD in
Switzerland, 1849 AD in Austria, 1860 AD in England and India, 1862 AD in the
USA, 1864 AD in Italy and 1959 AD in Nepal as a regular source of government
revenue. The concept of income tax in Nepal was initiated with the declaration of
budget system in 1952 AD (2008 B.S.) and it was imposed only from 1959 AD i.e. 2016
B.S. on business profit and remuneration with the enactment of ‘Finance Act, 2016’.
Taylor, “A tax is a compulsory payment to the government without expectation of direct
benefit in return to the taxpayer.”
Prof. Seligman, “A tax is a compulsory contribution from a person to the government
to defray the expenses incurred in the common interest of all without reference to special
benefit.”
From the study of the above concept and definition, the term ‘tax’ may be defined as
a compulsory contribution of a person, to the state to incur in the common interest of
the general people without any expectation and benefit in return. It is payable only
on income or profit exceeding a certain specified limit.
Key Point Tax is compulsory contribution of a citizen, to the state without
any expectation and direct benefits.
Hence, a tax may involve the following characteristics:
A tax is a compulsory contribution of a person or entity to the state as per the
rules.
114 Aakar’s Office Practice and Accountancy - 8
The tax payer does not receive direct and special benefit in return.
It is spent by the government for the common interest and benefit of the people.
It is paid only by those persons and entities who earn income exceeding a
certain specified limit.
It is paid in the subject to punishment by law.
It is lavied on persons as per the prevailing laws.
2. Objectives of Tax
The concept of tax was initiated with a view to generate government revenue
in its very beginning stage. In course of time it has been utilized for various purposes.
The following are the important objectives of tax:
i. To raise government revenue for development and welfare programmes in the
country.
ii. To maintain economic equalities by imposing tax on the income earners and
improving the economic condition of the general people.
iii. To encourage the production and distribution of the products of basic needs
and discourage the production of harmful ones.
iv. To discourage import trade and protect the national industries through import
and custom duty.
v. To increase the employment saving and investment in the country.
vi. To boost up the economy
vii. To minimize regional disparity, etc.
Tax Loan
Fee Service charge
Foreign Aid Fine and penalties
Income Government Expenditure
Construction of road, school, Expenses on government office
hospital, etc. Maintain peace and security
Provides services of water, telephone, Salary to staff
electricity, etc.
Tax 115
3. Importance of Tax
Tax is a major source of government revenue and it contributes for the overall
development and prosperity of a country. Hence, the importance of tax may be
studied in terms of the following points:
i. Raising government revenue in terms of income tax, custom duty, excise duty,
entertainment tax, VAT, land revenue tax, etc. from various sectors in order to
initiate development and welfare programmes.
ii. Maintaining economic stability by reducing economic inequalities by means of
equitable distribution of wealth by way of imposing tax on the income earners
and improving the economic condition of the general people.
iii. Regulating the economic sectors into right direction by encouraging the
production and distribution of useful goods and discouraging the liquor,
tobacco and luxurious goods by imposing high tax rate on them.
iv. Building and strengthening the national economy by encouraging and
protecting national industries and promoting export trade.
v. Reducing regional economic disparity by encouraging the entrepreneurs
to establish industries in the remote and backward regions by giving tax
exemptions, rebates and concessions, etc.
vi. Increasing the employment opportunity, saving and investment in the country.
4. Types of Tax
Taxes may be categorized into different types as their nature as direct taxes,
indirect taxes, progressive taxes, regressive taxes, etc. Within the course of study at
this grade, the following types of taxes are studied.
i. Direct Tax
A direct tax is the one, which is directly collected from the concerned person
or organizations. It is collected from the persons or entities on the income they have
earned exceeding a certain specified limit. Tax is generally calculated at a certain
percentage on the income. Income tax, corporate tax, land revenue tax, salary tax,
house rent tax, etc. are some examples of direct tax.
ii. Indirect Tax
An indirect tax is the one, which is imposed upon one person or entity but
paid partly or fully by others. It is transferable to others. The tax is collected from
customers by including it in the price of the goods or services they have purchased.
The producers collect such a tax from wholesalers, the wholesalers from retailers and
the retailers from the final consumers. Excise duty, custom duty, VAT, etc. are some
of the examples of indirect tax.
116 Aakar’s Office Practice and Accountancy - 8
iii. Personal Income Tax
Personal income tax refers to the tax imposed on individuals or families who
earn income exceeding a certain specified limit subject to change as per the provisions
made in financial rules and regulations. The individuals and families are taxable who
earn income more than certain specified limit within tax bracket, i.e. tax paying class.
It is levied on a progressive basis, i.e. high rate for high income and low rate for low
income. Likewise, one percent (1%) of tax is paid from those who earn income as
salary Rs. 3,50,000 as an individual and Rs. 4,00,000 for families and these amounts
are ceiling of income tax as per the current provision. After tax exemption limit, they
have to pay 15% after deducting the amount of exemption limit upto Rs. 1,00,000 and
more than Rs. 1,00,000, it must pay 25% of tax on income.
iv. Corporate Tax
Corporate tax is the tax imposed on the net profit of a business entity. It occupies
the most part of the government revenue collected from taxes. Corporate tax rates
are generally applied in flat system with high rate for large undertakings and low
rates for smaller ones. The small and large undertakings are categorised as per the
size of the activities. Such business must pay 25% tax on taxable profit.
v. Excise Duty
Tax which is imposed on production of goods by the government is known as
excise duty. Excise duty is the tax levied on liquor, tobacco and luxurious products.
It is intended to discourage the consumption of such harmful products on one side
and to collect government revenue to considerable extent on the other.
vi. Custom Duty
Custom duty is the tax charged on the goods dealt in the foreign trade
especially on the imported goods to encourage and promote export and to protect
national industries. Government simply gives exemption of this tax on export trade
and imposes on import trade. Custom duty may be export duty or import duty as its
nature and imposed on the trading goods.
vii. Land Revenue Tax
Land revenue tax is the one which is imposed upon the landlords on the
revenue generated from land especially while selling or purchasing land. In Nepal,
land revenue tax is also collected from the small farmers who have land under their
ownership in the name of ‘Tiro’ as the grading of land.
viii. Value Added Tax (VAT)
Value added tax is the tax levied on value added on the price of the product at
each stage of production, and/or distribution activities. Value added is the difference
between sales value and purchase value or the conversion cost plus profit. Conversion
cost means the expenses on rent, depreciation, maintenance, insurance, salary, etc. It
Tax 117
is imposed on the goods at import (buying), production
and selling stages. For example, when certain goods
where VAT is applicable purchased by a wholesaler
for Rs. 1,00,000 are sold to a retailer for Rs.1,25,000;
the value added tax at wholeselling stage is imposed
on the value added i.e. on Rs. 1,25,000 at a given rate.
The current rate of VAT is 13%. It is implemented to
simplify and systematize the sales tax and minimize the
chance of cheating.
Example: VAT Bill
A factory produced a bicycle in Rs. 4000/- and sold by
getting 20% profit. It is sold by the producer through
wholesaler and retailer to the consumer. Calculation
process of VAT is as follows:
Stages of sales Cost price (Value) Selling Price VAT (13%) Selling price
Profit added without VAT
Producer 4000 5424
Wholesaler 4800 800 4800 624 6503.8
Retailer 5760 7810.56
Consumer 960 5760 748.8
1152 6912 898.56
Rs. 7810.56 (Finally consumer should pay for a bicycle)
ix. Sales tax
Sales tax is collected by the government from the selling price of goods.
Generally, a business organization requires to pay 5-10% of the total value of sales as
sales tax. Nowadays, sales tax is replaced by the value added tax (VAT).
x. Octori
The Octori tax is collected by the local government/local authorities like District
Development Committee, Village Development Committee and Municipality to use
for local development. Amount of Octori remains nominal.
Points to Remember
i. Direct tax ii. Indirect tax
iii. Personal income tax iv. Corporate tax
v. Excise duty vi. Custom duty
vii. Land revenue tax viii. Value added tax (VAT)
ix. Sales tax x. Octori
118 Aakar’s Office Practice and Accountancy - 8
Glossary
Revenue : income of government
Budget : financial plan/estimated income and expenses
Remuneration : salary/compensation
Consumption : use
Depreciation : decrease in the value of assets
Wholesaler : trader/seller who sells big volume of goods
Retailer : seller who sells small volume of goods
Equitable : impartial/fair
Landlord : land owner
Ceiling : maximum limit
Excise duty : tax imposed on production
Exercise
A. Fill in the blanks:
1. ……………… is the tax imposed on the net profit of a business.
2. The tax which is paid by the person to the government is called ………
3. Tax paid for tobacco is known as ………………
4. Full form of VAT is ………………
5. ......................... is called if you earn more than limit amount.
B. Give very short answers to the following questions:
6. Define tax.
7. Write the full form of VAT.
8. What is land revenue tax?
9. Who pays the corporate tax?
10. Write a difference between custom duty and excise duty.
Tax 119
C. Give short answers to the following questions:
11. Distinguish between direct tax and indirect tax with examples.
12. Briefly describe the evolution of tax in the world.
13. Mention any four objectives of tax.
D. Give long answers to the following questions:
14. What is tax? Describe any five types of tax in brief.
15. Why is tax important for a nation? Explain briefly.
Pr oject Work
a. List out the taxes which are paid by your school to the government.
b. Consult the local government body of your city or town. List out the
taxes and tax rates which are taken by the local government body.
120 Aakar’s Office Practice and Accountancy - 8
Unit 10 Book-keeping
Learning Objectives After studying this unit, students will
be able to :
write about the meaning,
importance and objectives of
book-keeping,
describe the meaning of financial
transactions and their components,
differences between double entry
and single entry book-keeping
system,
describe about the book keeping
systems,
write the meaning of different
terminologies of book-keeping.
Summary of Financial Information
1. Cash received Rs. 11,000 Rs. 3,650/-
Cash payment Rs. 7,350 Rs. 5,850/-
Balance
Rs. 3,000/- Rs. 1,000/-
2. Total expenses for the month Rs. 2,000/- Rs. 1,500/-
Rs. 1,300/
3. Credit purchase
Cash payment
Due
4. Income from house rent
5. Total expenditure for children
Book-keeping 121
1. Introduction
Organization performs the monetary transactions to achieve the goals.
Investment of capital, taking loans, purchase of assets, materials or suppliers, payment
of wage, salary, rent, interest, commission, sales of goods, etc. are some examples of
business transactions. All these transactions cannot be recalled by a human memory
whenever required and thus they are to be regularly and systematically recorded
in a set of books for ascertaining profit or loss during a certain period and financial
position till the date.
The term ‘Book-Keeping’ is comprised of the two words ‘Book’ and ‘Keeping’.
where ‘Book’ means the documents where to keep the records, i.e. journal, ledger,
etc. and `Keeping’ means the systematic management of book for future reference.
J.R. Batliboi, “Book-keeping is the art of recording business dealings in a set of books.”
Dr. A.N. Agrawal, “Book-keeping is the science and art of recording transactions in money
or money’s worth so accurately and systematically that the true state of a businessman’s
affairs can be ascertained.”
With the study of the above meaning and definitions, it may be defined as a science
of collecting and recording the financial transactions of an entity regularly and
systematically in a set of books so as to ascertain its operational result i.e. profit/loss
during a certain period and the financial position up to the date.
Key Point Book-keeping is the act of collecting and recording the financial
transaction in a systematic and scientific way in a set of books.
2. Objectives of Book-keeping
There are various objectives of book-keeping and accounting to different
parties i.e the owners, managers, creditors, government, customers, etc. The common
important objectives of book-keeping are shortly described below.
i. Ascertainment of result of operation
Book-keeping is intended to the ascertainment of the result of operation i.e. the
profit/loss of a firm or company by recording all the revenue income and gains and
expenses and losses of a certain period and by comparing them. It is ascertained by
preparing the income statement or profit and loss account at the end of each fiscal
year.
ii. Ascertainment of the financial position
It helps to ascertain the financial position of a firm or company by recording
the appropriate values of different types of assets, specially in its net cost, and the
122 Aakar’s Office Practice and Accountancy - 8
capital and liabilities up to the date. It is found by preparing the balance sheet at the
close of the fiscal year.
iii. Maintaining control over the assets and budget
Book-keeping maintains control on the assets, income and expenses of all types
by making their complete records. It helps one to see how efficiently the assets are
utilized and the budget is disposed off. Thus, it establishes financial discipline by
controlling frauds on budget and its expenditure.
iv. Prediction of the volume of cash for future
Book-keeping helps the future forecast of cash by verifying the receipt and
payments of an organization and the proposed expansion programmes. Specially, it
is important for those whose financial system is based upon cash budget.
v. Assessment of tax liabilities
Book-keeping keeps the complete records of all business transactions and get
them audited. Book-keeping involves the income statement and balance sheet at the
end of the fiscal year. It gives the details about the financial affairs of an organization,
including the sales and net income on the basis of which tax liabilities i.e. sales tax,
income tax, etc. can be easily assessed.
Points to Remember
i. Ascertainment of result of operation ii. Ascertainment of the financial position
iii. Maintaining control over the assets and budget iv. Prediction of the volume of cash for future
v. Assessment of tax liabilities
3. Importance and Advantages of Book-Keeping
Book-keeping is important for all, who are engaged in any sort of occupation
and is rather more important for the organizations for ascertaining the true state
of the organization’s affairs. The importance of book-keeping can be studied with
respect to the different sectors.
i. Importance to the professional and the other individuals
Book-keeping is important for the professionals like doctor, engineer,
mechanics, lawyer, auditor, etc. for recording their incomes and expenses and profits
and losses, etc. regularly and systematically for controlling expenses and gaining
income. Similarly, it is important for the general people for making a proper balance
of their income and expenses for their personal and household affairs.
Book-keeping 123
ii. Important for business organizations
Book-keeping is essentially important for a business organization for keeping
the complete records of the transactions. It is important, specially to determine
the result of operation, financial position, controlling assets and other resources,
establishing financial discipline, assessing tax liabilities, etc.
iii. Important for the government
Book-keeping is important for the government to evaluate the progress of
the government projects, to collect necessary statements, data and information for
the preparation of government budget, to control over the leakage, misuse and
misappropriation of budget, etc. of the government property and resources.
iv. Important for other parties
Book-keeping is equally important for the financial analysts and other
interested parties like investors, creditors, banks, customers, etc. to study and analyse
the different financial statements of a certain firm or company. It is also important for
the job seekers for better opportunity for getting employment.
Points to Remember
i. Importance to the professional and the other individuals ii. Importance to business organizations
iii. Importance to the government iv. Importance to other parties
4. Financial Transactions
The transactions which show at least a financial character i.e. the involvement
of money of money’s worth, are known as the financial or business transactions.
Purchase of goods, sales of goods, purchase of assets, raising of capital, borrowing
loan, payment of expenses, receiving income are the examples of the financial
transactions. The transaction may occur in terms of cash and credit. Cash paid
and cash received are the examples of cash transactions, likewise credit sales and
credit purchase of goods are some examples of credit transactions. Only financial
transactions are recorded under book-keeping. Mainly, there are three components
of financial transactions. They are:
4.1 Collection of Financial Information `
In an organization, number of financial transactions take place to achieve their
organizational goals. Without financial activities, we can’t hope the organization.
So all financial activities should, be recorded for future references. The first step of
book keeping is collecting the financial information as per their date of occurrence.
Thus, the process of noting down all the financial transactions daily on the basis
124 Aakar’s Office Practice and Accountancy - 8
of proofs like voucher, cheque, receipt, bill, etc. is known as collection of financial
information. It is necessary for the individual as well as organizations for preparing
financial reports. An example of collection of financial information can be presented
as follows:
Mr. Nabin Marahatta collects financial information of his household activities for the
month of Jestha, 2075 as follows:
S. No. Date Particulars Rs.
1. 1st Jestha, 2075 Bought a pen for son Rs. 100/-
2. 6th Jestha, 2075 Bought rice from ABC shop on credit Rs. 3000/-
3. 8th Jestha, 2075 Received house rent Rs. 1,500/-
4. 9th Jestha, 2075 Paid to ABC Rs. 2,000/-
5. l0th Jestha, 2075 Purchase vegetables Rs. 250/-
6. 16th Jestha, 2075 Paid children’s school fees Rs. 200/-
7. 19th Jestha, 2075 Loan given to Babu Ram Rs. 2,500/-
8. 22th Jestha, 2075 Purchase snacks Rs. 800/-
9. 24th Jestha, 2075 Paid doctor’s fees Rs. 500/-
10. 28th Jestha, 2075 Bought school dress Rs. 1,000/-
11. 29th Jestha, 2075 Received salary Rs. 8,000/-
12. 30th Jestha, 2075 Received from Babu Ram Rs. 1,500/-
Mr. Nabin Marahatta has made the collection of financial transactions because he
has noted down all the expenses and other information in a record book. This record
helps to know the expenditure and income of his house which is useful in the days
to come.
4.2 Classification of Financial Information
The word ‘classification’ means division, allocation, and separation of activities
into various groups as per their nature. In an organization, the financial transactions
should be separated according to the requirement of the financial information. So
classification of information refers to the act of separating the transactions into various
groups as per their same nature. The financial transactions should be classified into
various groups to get the actual and individual financial information.
It helps to know the financial position of income, creditors, debtors, expenses, assets
and liabilities of the organization. The classification of financial transactions as per
their nature can be made by preparing ledger account or individual separate account.
Mr. Marahatta wants to know his income, expenditure, and other individual financial
information. For this, he classifies his previous collections of financial information as
follows:
Book-keeping 125
Cash received in the Month of Jestha, 2075
8th Jestha, 2075 Received house rent Rs. 1,500/-
29th Jestha, 2075 Received salary Rs. 8,000/-
30th Jestha, 2075 Received from Babu Ram Rs. 1,500/-
Total cash received Rs. 11,000/-
Cash paid in the month of Jestha, 2075
1st Jestha, 2075 Bought a pen for his son Rs. 100/-
9th Jestha, 2075 Paid to ABC Rs. 2,000/-
10th Jestha, 2075 Purchase vegetables Rs. 250/-
16th Jestha, 2075 Paid children’s school fees Rs. 200/-
19th Jestha, 2075 Give loan to Babu Ram Rs. 2,500/-
22th Jestha, 2075 Purchase snacks Rs. 800/-
24th Jestha, 2075 Paid doctor’s fees Rs. 500/-
28th Jestha, 2075 Bought school dress Rs. 1,000/-
Total cash paid Rs. 7,350/-
Record of household expenses for the month of Jestha, 2075
1st Jestha, 2075 Bought a pen for his son Rs. 100/
6th Jestha, 2075
10th Jestha, 2075 Bought rice from ABC shop on credit Rs. 3000/-
16th Jestha, 2075
22th Jestha, 2075 Purchase vegetables Rs. 250/-
24th Jestha, 2075
28th Jestha, 2075 Paid children’s school fees Rs. 200/-
Purchase snacks Rs. 800/-
Paid doctor’s fees Rs. 500/-
Bought school dress Rs. 1,000/-
Total household expenditure Rs. 5,850/-
Record of credit purchase from ABC shop
6th Jestha, 2075 Bought rice from ABC shop on credit Rs. 3,000/-
Total credit transactions Rs. 3,000/-
Record of cash payment of ABC
9th Jestha, 2075 Paid to ABC Rs. 2,000/-
Total Cash payment to ABC Rs. 2,000/-
Income from house rent
8th Jestha, 2075 Received house rent Rs. 1,500/-
Total income of house rent Rs. 1,500/-
126 Aakar’s Office Practice and Accountancy - 8
Record of children expenses
1st Jestha, 2075 Bought a pen for his son Rs. 100/-
16th Jestha, 2075
28th Jestha, 2075 Paid children’s school fees Rs. 200/-
Bought school dress Rs. 1,000/-
Total expenses of children during the month Rs. 1,300/-
In the above transactions, Nabin Marahatta has performed the second act of classifying
the financial information, grouping into the various natures of transactions, i.e. cash
received, payment of cash, credit payments, etc. Mr. Marahatta can easily get the
financial information of income, expenditure, etc. which helps to match and forecast
the expenditure with income for the coming months.
4.3 Summary of Information
Summarising is the act of preparing financial information in short and correct
way which helps to know its result. After classification of financial information, we
should summarize all the collected and classified financial information to find out
the result in short. The summary of the above transactions is given below:
1. Cash received Rs. 11,000 Rs. 3,650/-
Cash payment Rs. 7,350 Rs. 5,850/-
Balance
Rs. 3,000/- Rs. 1,000/-
2. Total expenses for the month Rs. 2,000/- Rs. 1,500/-
Rs. 1,300/
3. Credit purchase
Cash payment
Due
4. Income from house rent
5. Total expenditure for children
The example given above represents the conclusion of his accounts for the month of
Jestha and presents the results of his financial activities which are the functions of
book-keeping.
5. Book-keeping Systems
Book-keeping is being used by many individuals and organizations from the
ancient times. The modern concept of book-keeping is the recent origin and before
this, the traditional system of book-keeping was in use. Thus, book-keeping system
is studied under two types, viz.
(i) single entry book-keeping system and
(ii) double entry book-keeping system.
Book-keeping 127
5.1 Single Entry Book-keeping System
It is the traditional system of keeping books of account. Every business
transaction has its double aspects, i.e. debit and credit, for both the parties involved,
but it does not recognize the two side effects of the transactions. It considers only
the personal i.e. the debtors and creditors and some sort of cash summaries in the
books of account. Other real and nominal accounts are completely ignored by this
system. Since the transactions are posted in personal and cash accounts but not
in other impersonal accounts, it is called single entry system of book-keeping. As
such, single entry system of book-keeping may be defined as the system of keeping
books of account, which does not recognize the two fold aspects of every transaction.
Since it does not record the transactions other than the personal account and a cash
summary, it is an incomplete system.
According to R.N. Carter, “ Single entry is a method employed for recording transactions,
which ignores the two-fold aspects and consequently, fails to provide the businessman with
the information necessary for him to be able to ascertain the position.”
Merits of single entry system
i. It is simple to use because only the personal accounts and a cash summary are
prepared under this system.
ii. It is less costly in the sense that only a limited number of books are maintained
by a few number of persons.
iii. It is useful for every small and sole proprietorship type of firms.
iv. It saves time to maintain the record.
Demerits of single entry system
i. It is incomplete, unsystematic and unscientific system and thus necessary
information cannot be supplied.
ii. It cannot check the errors and the books of account may lead to the wrong
result.
iii. It cannot ascertain the true state of affairs of a firm or company.
iv. It cannot control different types of frauds, leakage, misuse and misappropriation
of assets as well as other resources.
v. It cannot make a factual evaluation of projects, neither can assess the tax
liabilities in true sense.
5.2 Double Entry Book-keeping System
It is already mentioned that every financial transaction shows its double effect,
one in the debit side of one account and the another in the credit side of another
account. This double effect, in every business transaction, cannot be recognized by the
single entry book-keeping system. Thus, it was felt necessary to develop the double
entry book-keeping system to satisfy the needs of organizations in course of time.
128 Aakar’s Office Practice and Accountancy - 8
It is completely systematic and scientific and thus keeps
the records of the transactions by considering both the
aspects. So the double entry book-keeping system may be
defined as the system of keeping books of account which
recognizes the two fold aspects of every transaction. It is
based on the double entry principles that for every debit
there is corresponding credit, i.e. one aspect is debited Luca De Bourga Pacioli
with a certain value and the other is credited with the
same value. Double Entry Book-keeping system was propounded by an Italian
businessman Luca De Bourga Pacioli in 1494 AD. He published his book named
‘Summa De Arithmetica’ mentioning the recording system of transactions. The
double entry system is illustrated here in respect to the following transactions.
1. Furniture purchased for Rs. 10, 000. in cash. This transaction shows the two
side effects, i.e. on the furniture and cash.
Furniture A/c is debited with Rs. 10, 000 and the cash A/c is credited with the
same amount.
The entry is:
Furniture A/c Dr 10,000.
To Cash A/c 10, 000.
(Being furniture purchased)
While posting the above entries in the concerned accounts. It is made as:
i) Furniture A/c
To Cash A/c 10,000.
ii) Cash A/c
By Furniture A/c 10,000
2. Sold goods for cash Rs. 20,000.
Journal Entry:
Cash A/c Dr. 20,000
To Sales A/c 20,000
(Being goods sold on cash)
Ledger Posting:
(i) Cash A/c ii) Sales A/c
To Sales A/c 20,000 By Cash A/c 20,000
Note: The term book-keeping generally refers to the double entry book-keeping system.
Book-keeping 129
5.3 Objectives and importance of double entry book-keeping system
Double entry book-keeping system is the systematic and scientific system and
is completely based on the double entry principles. It is introduced to overcome the
limitations of the traditional system of book-keeping, i.e. the single entry system.
There are some important objectives of the double entry book-keeping system, which
are mentioned below:
i. To ascertain the profit or loss resulted from the business operation.
ii. To measure the financial position of a concern by making the appropriate
valuation of the assets, capital and liabilities.
iii. To know the exact amount of the debtors and creditors of a firm for a certain
duration.
iv. To see the capital structures and the management of assets for analyzing the
economic soundness of a firm or company, i.e. short term liquidity and long
term solvency, etc.
v. To determine the tax liability i.e. sales tax, VAT, income tax, etc. by ascertaining
the total sales and net income of the year.
vi. To establish an efficient financial administration for the control of all types of
resources from leakage, misuse, misappropriation, etc. by keeping complete
records of all the transactions.
vii. To facilitate the auditing of the books of account.
viii. To submit, as evidence, in the courts, if necessary, because the audited financial
statements are the authentic and legal financial documents.
5.4 Differences between double entry and single entry book: keeping
system.
Basis of difference Single entry system Double entry system
i. Duality
It does not recognize the two-fold It recognizes the two: fold
principle aspect of every transaction. aspect of every transaction.
ii. Scope
It has a very limited scope for It has a large and wider scope for
iii. Trial balance small scale business organizations all the organizational sectors for
and enters only the personal and all types of business transactions.
iv. Net profits/loss cash transactions.
A trial balance is prepared
A trial balance cannot be prepared under this system to check the
and thus the arithmetical accuracy arithmetical accuracy of the
cannot be checked. books of account.
Because of an incomplete The true net profit or loss can
information, the true net profit/loss be ascertained by preparing the
cannot be ascertained. income statement or profit and
loss account.
130 Aakar’s Office Practice and Accountancy - 8
It cannot provide accurate and True financial position of
v. Financial complete information for the a business can be easily
position
preparation of balance sheet. Thus, ascertained by preparing the
vi. Authenticity
the financial position cannot be balance sheet.
vii. Reliability
ascertained under this system.
The books of account are neither Since the books of account are
complete nor can be audited audited by the recognized auditor,
systematically under this system. these are duly authentic.
So it is not authentic.
It is incomplete and unscientific It is completely scientific and
and thus not trusted by creditors, systematic system of keeping
bankers, tax authority and other books of account, Thus, it is
financial analysts for the reliability trusted by tax authority, creditors,
of the financial statements. banker and other financial
analysts for the reliability of the
results.
6. Terminologies of Book-keeping
There are many terms frequently used in book-keeping and accounting. Some
of them are briefly discussed below:
i Financial/business transactions
The transactions, which show, at least, a financial character, i.e. the involvement
of money of money’s worth, are known as the financial or business transactions.
Purchase of goods, sales of goods, purchase of assets, raising of capital, borrowing
loan, payment of expenses, receiving income are the examples of the financial
transaction. The transaction may occur in terms of cash and credit. Cash paid and
cash received are the examples of cash transactions likewise credit sales and credit
purchase of goods are some examples of credit transactions.
ii. Assets
Any physical objects (tangible) or rights (intangible) owned by an organization
or firm having an economic value are termed as assets. The followings are the
examples of assets.
Assets = Liabilities + Capital - Good will
- Cash - Bills receivable - Land and building
- Accrued income - Bank - Stock
- Debtors - Plant and machinery
- Furniture and fixtures - Vehicles and equipment
Book-keeping 131
iii. Capital
The investment of cash, goods, assets in the business by the proprietor/owner is
known as capital. The following are the examples of capital. It is a kind of permanent
liability to the business enterprise.
Capital = Assets - Liabilities
iv. Liability
The claim or series of claims against the firm or company are liabilities.
Liabilities are the obligations of a firm and are of short term as well as long term
nature. The following are the examples of liability:
- Creditors Liabilities = Assets - Capital
- Bills payable - Advance receipts - Bank overdraft
- Outstanding expenses - Loan
v. Accountant
The person who performs accounting job is known as an accountant.
vi. Accounting
Accounting is the act of recording, classification and summarizing the business
transactions.
vii. Account
An account is the financial detail or statement of certain subject, such as cash
account, goods account, furniture account, etc. It is denoted as A/c in short form.
viii. Accountancy
The profession of accounting is called accountancy. It is also a branch of
knowledge which deals with accounting activities.
ix. Drawing
The withdrawal of cash or goods from the business by the proprietor or owner
for his household purpose is known as drawing. It reduces the capital in extent of the
withdrawn amount and thus is deductible from capital in the balance sheet or treated
as asset.
x. Revenue/Income
Revenue is the inflow of assets by selling goods or services to others. Revenues
132 Aakar’s Office Practice and Accountancy - 8
are the incomes of the business. The following are the examples of income or revenue
of an organization.
- Sales proceeds - Commission received - Interest received
- Dividend received - Discount received - Bad debt recovered, etc.
xi. Expenses
An expense is the cost of providing goods or services to others. It is the money
spent on earning revenues. There are various types of expenses. The following are
some of the examples of expenses.
- Purchase - Carriage on purchases
- Purchasing expenses - Shipping, or railway freight
xii. Purchase
Purchase refers to the acquiring of raw materials, semi-raw materials and
finished products for regular production and sales activities. For example, if a
furniture centre buys some pieces of furniture items, this is termed as purchase;
otherwise if the same is bought by a school or college, it is known as furniture asset.
A purchase may be made in cash or credit.
xiii. Sales
Sales refer to the transfer of the goods or services along with their ownership
to them who demand the goods or services and pay or agree to pay, a certain value
or price. The sales of any asset do not mean sales. It is also made in cash or credit.
xiv. Stock
Stock is the unused or unsold quantity of raw materials, semi-raw materials or
finished goods. There are generally two types of such stocks, viz. opening stock and
closing stock. The stock which is determined at the close of the fiscal year is known as
closing stock and the same for the beginning of the coming year is known as opening
stock.
xv. Cash
It refers to a certain amount of money remained in hand, at any time. It is the
most liquid asset.
xvi. Bank
It refers to the amount of money with a bank. It may be kept in current A/c,
saving bank A/c and fixed deposit A/c. It is also a liquid asset because it can be
Book-keeping 133
immediately changed into cash within a short period. As the institution, bank is a
financial institution, which deals with the monetary transactions.
xvii Bank overdraft
It is the act of withdrawing amount from the bank by its client in excess of his/
her deposit. It is thus, a short-term liability of the firm or company in the sense that
it should be re-paid to the bankers within a short period of time, i.e. with in 90 days.
xviii. Cheque
Cheque is an instrument, Cheque slip
which is used in withdrawing
cash from the bank. It is an order
made by the account holder called
drawer or depositor to his/her
banker (drawee) to pay a certain
sum of money on demand.
xix. Depreciation
A fixed asset is purchased by a firm or company comparatively in higher
prices and for longer period. The firm or company makes the scientific estimation of
the economic life of such an asset and its value is written-off during its life period.
The value of such fixed assets declines gradually by wear and tear, continuous use
and by other reasons. As such, depreciation is a gradual reduction in the original
value/ price of a fixed asset due to wear and tear, effluxtion of time, continuous use,
obsolescence, etc. It is a non-cash expense for an organization. It is charged in Dr.
side of profit and loss A/c, as expense.
xx. Debtors and creditors
The person or firm who owes something to the firm or company in monetary
value is called a debtor. In a debtor or book, debt is a short-term asset. Similarly,
the firm or company to whom the firm owes something to pay in monetary value is
called a creditor. A creditor is a short-term liability. For example, if Ram purchased
goods of Rs.15000 from Shyam on credit, Ram becomes Shyam’s debtor and Shyam
becomes Ram’s creditor until the debt is paid/received.
xxi. Loan and interest
The sum borrowed from a bank or other persons under some terms and
conditions is a loan. Loan is also termed as borrowed capital to a firm or company.
Similarly, interest is a certain charge payable to the loan giver, mostly on annual
basis until the loan is repaid. The loan is liability and the interest is an expense.
134 Aakar’s Office Practice and Accountancy - 8
xxii. Profit and loss
The income and expenses are completely recorded in the books of account
during a certain period. The excess of income over expenses is net profit and the
excess of expenses over income is loss.
Profit = Income - Expenses, if +ve
Loss = Income - Expenses, if -ve
xxiii. Commission and Discount
A commission is a kind of reward offered by the business to his agent or by a
consignor to his consignee for performing his works. A discount is a kind of rebate
offered by a seller to the buyer on the sales of goods or a creditor to his debtor on
the payment of cash before the due date. Both the commission and discount may be
incomes or expenses as the nature of the transactions or they may be gains or losses.
xxiv. Insolvent
A firm/company, which is not financially capable of meeting its debt from its
own business resources are considered as insolvent. Only, the court can declare a
firm or company as insolvent. An insolvent businessman cannot conduct a business
in his name.
Glossary
Retention : preservation
Transaction : financial activities
Ascertainment : find out
Prediction : forecast
Occur : take place
Auditor : examiner/ who checks the book of accounts
Outstanding expenses : payable expenses
Dividend : amount of profit given to shareholders
Exercise
A. Fill in the blanks:
1. Book-keeping is the act of ………………………… .
2. The double effect of every transaction cannot be recognized by the ……
3. The double entry book-keeping system was propounded by an …………
in 1494 AD.
Book-keeping 135
4. Financial information is ………………………….. .
5. The amount which we have to pay other is called ………………… .
6. A debtor is a ………………….. asset.
7. The excess of income over expenses is …………………… and the excess
of expenses over income is ………………………. .
B. Give very short answers to the following questions.
8. Define financial transactions.
9. What is single entry book-keeping system?
10. Define drawing.
11. What is bank overdraft?
12 Write the formula of capital.
13. How are profit and loss calculated?
14. Write any two differences between debtors and creditors.
C. Give short answers to the following questions.
15. What is book-keeping? Explain its objectives.
16. Describe the importance of book-keeping.
17. Define double entry system of book-keeping. Illustrate with examples.
18. Write any two differences between purchase and sales.
D. Give long answers to the following questions.
19. Explain the objectives of double entry book-keeping system.
20. Write any five differences between single entry and double entry book-
keeping system.
21. Write the objectives of book-keeping.
22. Make a list of collections of financial information, maintaining at least
five transactions of your own house.
23. Write any two differences between classification of financial information
and collection of financial information.
24. Write any two differences between classification of financial information
and summarizing of financial information.
Pr oject Work
a. Make a list of fixed assets of your school.
b. Observe the accounting system which are applied by your school.
136 Aakar’s Office Practice and Accountancy - 8
Unit 11 Debit and Credit
Learning Objectives After studying this unit, students will
be able to :
Personal Account Debit: The Receiver write the meaning and principles of
Real Account Credit: The Giver rules of debit and credit,
Debit: What comes in
Nominal Account Credit: What goes out solve same numerical transactions
Debit: Expenses or Loss of debit and credit.
Credit: Incomes or Gain
Debit and Credit 137
1. Introduction
An organization, regardless of its nature and type, deals with thousands of
transactions. These transactions may relate to generation of income, incurring
expenses, raising capital, purchasing assets, etc. For this, all the financial transactions
are to be regularly and systematically collected, recorded and retained in a set of
books. When transactions occur, they are, first of all, verified with the original bills,
vouchers and/or the related source documents and then originally recorded in the
journal. While maintaining account, one aspect of a transaction is recorded in debit
and another aspect of the same is in credit. Generally, debit refers to the left hand side
of an account and credit refers to the right hand side of an account. In accountancy,
Dr. refers to ‘debit’ and Cr. refers to ‘credit’.
2. Rules of Debit and Credit
Every business transaction is debited with its total value in one place and
credited with the same value in other place. There are certain rules/ principles for
debit and credit entry of the transactions. These rules/principles may be studied
under the two approaches, viz. (i) accounts classification approach and (ii) accounting
equation approach. Both these approaches are discussed below.
i. Accounts classification approach
Under this approach, the accounts affected by the transactions are classified into
three different accounts, viz. (a) personal account, (b) real account and (c) nominal
account. The meaning, examples and the rules of all the three accounts are discussed
below.
a. Personal Account:
Personal account is related with an individual, firm and institution. When the
credit transaction takes place, the rule of personal account should be used. The rules
for debit and credit are;
Debit - the receiver and Credit - the giver
e.g. Goods purchased from Lalpratap, Chitwan Rs. 15,000.
Purchase A/c Dr. 15000
To Lalpratap’s A/c 15000
(Being goods purchased from Lalpratap)
The two effects of this transaction are; purchase/goods and Lalpratap. Goods consist
the real account and Lalpratap consists the personal account. According to the rules
of personal account, Dr. is receiver and Cr. is giver. Here, Lalpratap is credited as he
is the giver of the goods. Likewise, the purchase account is debited as the goods have
come into the business.
138 Aakar’s Office Practice and Accountancy - 8
b. Real Account:
Real account is related to assets and properties or things, the rule of real account
should be used. The rules for debit and credit are;
Debit - what comes in and Credit - what goes out
Machinery purchased in cash Rs. 20,000.
Machinery A/c Dr. 20,000 (debit what comes in)
To Cash A/c 20,000 (credit what goes out)
(Being machinery purchased)
In this example, the two effects are machinery A/c and cash A/c. Machinery is
debited as the machinery has come into the business and cash is credited as the cash
has gone out from the business.
c. Nominal Account:
Nominal account is related to income, expenses, profit and loss, and thus, the
rule of nominal account should be used. The rules for debit and credit are;
Debit - expenses or losses and Credit - incomes and gains
Paid salary Rs. 20,000
Salary A/c Dr. 20,000 (debit the expenses)
To Cash A/c 20,000 (credit what goes out)
(Being salary paid)
In this example, the two effects are salary and cash A/c. Salary is debited as the
expenses of the firm and cash is credited as the cash has gone out from the business.
Types of Account Examples Rules/Principle of
debit and Credit
a) Personal A/c Ram, Sita, Harihar, ABC Co., XYZ Dr. the receiver
(related to person, firm, Institute, PQR Academy, Megha Cr. the giver
organization when credit Bank Ltd., Ganesh Gyan Joyti
School, etc.
transaction occurred)
b) Real A/c Cash, furniture, land and building, Dr. What comes in
(related to assets and computer, machinery, etc. Cr. What goes out
properties or things)
c) Nominal A/c Salary, rent, allowance, budget Dr. Expenses & Losses
(Income, exp., profit, loss) release, revolving fund release, Cr. Incomes & gains
commission, discount, wages, etc.
Debit and Credit 139
The following transactions show the application of the above mentioned principles.
Illustration : 1
Journalise the following transactions with the detailed analysis of the classified
accounts:
2075-5-1 Hari Bahadur started business with Rs. 1,00,000.
2075-5-3 He deposited into bank Rs. 70,000.
2075-5-3 Purchased goods of Rs. 10,000.
2075-5-6 Purchased from Narayan Rs. 50,000.
2075-5-10 Paid for stationery Rs. 5,000.
2075-5-12 Sold goods for Rs. 75,000.
2075-5-15 Sold to Basanta Stores for Rs. 60,000.
2075-5-22 Paid to Narayan on account.
2075-5-27 Furniture purchased for Rs 8,000.
2075-5-28 Salary and rent paid by cheques Rs. 20,000 and Rs.7,000 respectively.
2075-5-30 Withdrew for personal use from bank Rs. 3,000 and for office use
Rs. 10,000.
Solution:
Journal Entries of Hari Bahadur
Date Headings Types of Rules or principles Journal entry
2075-5-1 affected account
2075-5-3 Dr. what comes in Cash A/c Dr.
2075-5-3 Cash Real Cr. the giver To Capital A/c
2075-5-6 Dr. the receiver
2075-5-10 Capital Personal Cr. what goes out Bank A/c Dr.
2075-5-12 Dr. what comes in To Cash A/c
Bank Personal / Cr. what goes out
Dr. what comes in Purchase A/c Dr.
Cash Real Cr. the giver To Cash A/c
Dr. what comes in
Purchase (goods) Real Cr. what goes out Purchase A/c Dr.
Dr. what comes in To Narayan’s A/c
Cash Real Cr. income & gain
Stationery A/c Dr.
Purchase (goods) Real To Cash A/c
Narayan Personal Cash A/c Dr.
To Sales A/c
Stationery Real
Cash Real
Cash Real
Sales (goods) Nominal/Real
140 Aakar’s Office Practice and Accountancy - 8
2075-5-15 Basanta Stores Personal Dr. the receiver Basanta Stores’s A/c Dr.
2075-5-22 Sales (goods) Nominal/Real
2075-5-27 Narayan Personal Cr. income & gain To Sales A/c
2075-5-28 Cash Real
Furniture Real Dr. the receiver Narayan’s A/c Dr.
2075-5-30 Cash Real
Salary Nominal Cr. what goes out To Cash A/c
Rent Nominal
Bank Personal Dr. what comes in Furniture A/c Dr.
Drawing Personal
Cash Real Cr. what goes out To Cash A/c
Bank Personal
Dr. expenses & losses Salary A/c Dr.
Dr. expenses & losses Rent A/c Dr
Cr. the giver To Bank A/c
Dr. the receiver Drawing A/c Dr.
Dr. what comes in Cash A/c Dr.
Cr. the giver To Bank A/c
Note: Purchase of goods and sales of goods are commonly termed as purchase and sales
respectively or they can also be treated as goods. When they are regarded as goods,
under the real account principle: ‘Dr. what comes in and Cr. what goes out’ should be
applied. And when they are taken as purchase and sales, nominal account principle:
‘Dr. expenses and losses and Cr. incomes and gains’ should be applied, purchase as expense
and sales as income. If in a question, the name of person or organization is given, the
transaction is considered as a credit transaction. But in a question, if the name of
person or organization and cash is given, it is considered as cash transaction.
ii. Accounting Equation Approach
This is the modern approach of debiting and crediting the accounts of the
financial transactions. In the equation of assets and liabilities, the rule of debit and
credit is made. It is also known as second rule of debit and credit. The following is
the accounting equation and its principle for debit and credit.
Accounting equation:
Assets + Expenses = Capital + Revenue + Liabilities
Particulars Debit Credit
1. Assets, expenses and losses increase decrease
2. Capital, liabilities, revenue & gain decrease increase
or
Dr. = Increase in assets, expenses, losses and decrease in capital, income and liabilities.
Cr. = Decrease in assets, expenses, losses and increase in capital and income and liabilities.
Debit and Credit 141
Illustration : 2
Solution of illustration 1. on the basis of accounting equation.
Journal Entries of Hari Bahadur
Date Headings affected Types of heading Rule/principle Journal entry
2075-5-1 Cash Asset Increase in asset Dr. Cash A/c Dr.
2075-5-3 Capital Capital Increase in capital Cr.
2075-5-3 Cash Assets Decrease in asset Cr. To Capital A/c
2075-5-6 Bank Assets Increase in asset Dr.
2075-5-10 Purchase (goods) Expenses Increase in expense Dr. Bank A/c Dr.
2075-5-12 Cash Asset Decrease in asset Cr.
Purchase (goods) Expenses Increase of expense Dr. To Cash A/c
Narayan Liability Increase in liability Cr.
Stationery Expenses Increase in asset/exp. Dr. Purchase A/c Dr.
Cash Asset Decrease in Asset Cr. To Cash A/c
Sales (goods) Income Increase in income Cr.
Cash Asset Increase in asset Dr. Purchase A/c Dr.
To Narayan’s A/c
Stationery A/c Dr.
To Cash A/c
Cash A/c Dr
To Sales A/c
2075-5-15 Sales (goods) Income Increase in income Cr. Basanta Stores’s A/c Dr.
Basanta Stores Asset Increase in asset Dr.
To Sales A/c
2075-5-22 Cash Asset Decrease in asset Cr. Narayan’s A/c Dr.
2075-5-27 Narayan Liability Decrease in liabilities Dr.
2075-5-28 To Cash
2075-5-30 Furniture Assets Increase in assets Dr.
Cash Assets Decrease in assets Cr. Furniture A/c Dr.
2075/5/30
Salary Expense Increase in expense Dr. To Cash
Rent Expense Increase in expense Dr.
Bank Assets Decrease in assets Cr. Salary A/c Dr
Rent A/c Dr
Drawing Receivable Increase in assets Dr.
Cash Assets Increase in assets Dr. To Bank A/c
Bank Assets Decrease in assets Cr.
Drawing A/c Dr.
Drawing Personal Decrease in capital Dr.
Cash Real Income in assets Dr. Cash A/c Dr.
Bank Personal/Real Decrease in assets Cr.
To Bank A/c
Drawing A/c Dr.
Cash A/c Dr.
To Bank
Glossary
Purchase : buying of goods for selling purpose
Sales : selling of goods which is purchased for selling purpose
Liabilities : any payable amount to others
Debit : left part of an account
Credit : right part of an account
Drawing : money taken out from business or bank for personal use.
142 Aakar’s Office Practice and Accountancy - 8
Exercise 143
1. Which of the following payments are assets, expenses and losses?
a. Payment of wages b. Purchase of machinery
c. Payment of interest d. Sales of goods
e. Paid salary to workers f. Payment of advertisement
g. Compensation paid to staff.
2. Show which accounts are debited and credited.
a. Commenced business with cash Rs. 20,000.
In the account of cash ..........................
In the account of capital ..........................
b. Furniture purchased from ABC Furniture Rs. 1,500.
In the account of furniture ...........................
In the account of ABC Furniture ..........................
c. Goods sold for cash Rs. 1700.
.......................... account debit
.......................... account credit
d. Paid Krishna & Co. Rs. 950.
.......................... account debit
.......................... account credit
e. Sold to Rajendra & Co. Rs. 2,500.
In the account of Rajendra & Co. ..........................
In the account of sales ..........................
3. Fill in the blanks.
a. Increase in the assets is ..........................
b. Decrease in capital and income is ..........................
c. Increase in loss is ..........................
d. Increase in liabilities is ..........................
e. Decrease in expenses is ..........................
f. Decrease in profit is ..............................
g. Increase in profit is ..............................
4. What are debit and credit?
5. What is personal account? Write the rules of personal account.
6. What is nominal account? Write its rules.
Debit and Credit
7. Write the rules of debit and credit on the basis of equation.
8. What is account? Explain the types of account.
PRACTICAL PROBLEMS
9. Journalise the following transactions according to the accounts
classification approach and equation approach. 075, Baisakh:
l, Commenced business with cash Rs. 20,000.
2, Deposited into bank Rs. 15,000.
3, Bought goods for cash Rs. 1,000.
4, Furniture purchased from ABC Furniture Rs. 1,500.
6, Purchased goods from Kailash & Co. Rs. 2,000.
8, Goods sold for cash Rs. 1700.
10, Sold to Rajendra & Co. Rs. 2,500.
17, Purchased machinery of Rs. 1,300.
28, Salary paid by cheque Rs. 2,500.
29, Rent paid by cheque for the month of Baisakh Rs. 1,500.
10. Journalise the following transactions.
1-1-2075, Commenced business with Rs. 100,000.
3-1-2075, Deposited into bank Rs. 80,000.
5-1-2075, Machinery purchased and paid by cheque Rs. 30,000.
7-1-2075, Paid for stationery Rs. 2,000.
Pr oject Work
a. Make a report after observe the records of journal entries of your
school and present it in your classroom.
144 Aakar’s Office Practice and Accountancy - 8
Unit 12 The Journal
Learning Objectives After studying this unit, students will
be able to :
Specimen of a Journal write the meaning of journal,
Journal Entries of ... explain the important and
objectives of journal,
Date Particulars L.F. Dr. Amt. (Rs) Cr. Amt. (Rs)
(1) (2) (3) (4) (5) journalize the different types of
business transactions.
Date Journal entries of .... L.F. Dr. Amt. (Rs.) Cr. Amt. (Rs.)
2075/6/1 2,50,000
Particulars 1,00,000
2075/6/2 Cash A/c Dr. 1,50,000
2075/6/3 To Ram’s Capital A/c 200,000
To Shyam’s Capital A/c
2075/6/4 (Being business commenced in partnership by Ram and Shyam) 1,50,000
Purchase A/c Dr. 50,000
To Cash A/c
To Sundar Stores’s A/c 49,500
(Being purchased from Sundar Stores and partial payment has 500
been made)
Cash A/c Dr. 50,000
Discount A/c Dr.
To Krishna’s A/c 7,000 145
(Being cash received from a previous debtor for full settlement)
Cash A/c Dr. 2,000
To Interest A/c
To Dividend A/c 5,000
(Being amount received as interest and dividend)
The Journal
1. Introduction
When transactions occur, they should be, first of all, recorded in the primary
books. The primary books are termed as original books. The entry made on the original
books is known as journal entry. It shows the double effect of each transaction with
the same values in both the sides, i.e. in debit and credit sides. The word ‘Journal’
is derived from French word ‘Jour’ which means a daily, long book or day book.
Journal entries are made in a certain format by showing the debit and credit headings
with their respective amounts in order of dates. As such, a journal may be defined
as a chronological record of the business transactions showing the accounts to be
debited and credited along with the amounts in the respective columns. The journal
book is also called the memory book or memorandum book because it recalls the
transactions in the future when required. The book in which the entries are made is
called a journal book and the act of entering the transactions in the journal book is
called journalising.
Accounting to L.C. Cropper, “A journal is a book employed to classify or sort out
transactions in a form convenient for their subsequent entry in the ledger.”
In conclusion, journal is the original/initial/primary entry of all financial transactions
in chronological order which are recorded systematically under double entry book
keeping concept. It is the way of identifying the debit and credit account heads.
Key Point Journal is the primary record of the business transaction in
chronological order showing the accounts to be debited and
credited along with their amounts.
2. Importance and Advantages of Journal
Even though a journal is just a memory book of the business transactions, it has
a number of advantages and importance. The common importance and advantages
of journal are mentioned below.
i. All the transactions are entered in the journal book; thus, it acts as the proof of
the occurrence of the transactions.
ii. The date of the transactions can be easily identified.
iii. Easy identification of the accounts debited and credited along with their
amounts which facilitates the checking of arithmetical accuracy.
iv. Base for preparing the ledger accounts.
v. Journal avoids the chance of omitting the record of transactions.
vi. It is prepared with the help of supporting documents to provide legal evidence
of all transactions.
146 Aakar’s Office Practice and Accountancy - 8
3. Objectives of a Journal
The objectives of journal are mentioned below.
i. To identify the transactions date.
ii. To support for making ledger.
iii. To support the transaction by the narration.
iv. To give information about posting of transactions.
v. To solve the disputes and misunderstanding.
4. Specimen of a Journal
Journal Entries of ...
Date Particulars L.F. Dr. Amt. (Rs) Cr. Amt. (Rs)
(1) (2) (3) (4) (5)
All the transactions are recorded in this format chronologically. The Five
columns of journal are explained below:
i. The first column is provided to record the date of the transactions.
ii. The second for mentioning the accounts to be debited and credited along with
a brief explanation of the entries so made is called narration.
iii. The ledger folio (page) number is mentioned in the third column, if any.
iv. The fourth and fifth columns are provided for the respective debit and credit
amounts of the accounts, so debited and credited.
5. Steps / Methods of Journalizing
The act of recording transactions in Journal is called ‘Journalizing’ and the
record of a transaction in journal is called ‘Journal entry’. Before journalizing a
transaction, following steps must be followed.
a. Read the transaction
b. Identify the accounts involved
c. Identify the nature or type of accounts affected like Personal Account, Real
Account, Nominal Account.
d. Determine the rules of debit and credit
e. Apply the rules and pass the journal entry in chronological order.
f. Don’t forget to write narration for the journal and account in concerned
columns. Underline the narration at last.
g. Write the L.F. (Ledger Folio) and amount in debit and credit side.
The Journal 147
6. Types of a Journal Entry
The systematically recorded of financial transactions in journal book is called
journal entry. Every organization performs a number of financial transactions to
achieve the organizational goals in a day. According to the nature of transactions
there are two types of journal entry. They are:
i. Simple Journal Entries
Some transactions give effect to just two accounts where there’s a single account
in each side, i.e. one account is debited with a certain monetary value and another
is credited with the same value, such an entry is known as simple journal entry. The
following illustration may help to understand the simple entries.
Illustration : 1
Journalise the following transactions:
On 2075/6/1, business commenced with Rs 1,00,000.
On 2075/6/2, machinery purchased of Rs. 60,000.
On 2075/6/3, cash purchase of goods worth Rs. 25,000.
On 2075/6/4, sold goods to Hari of Rs 75,000.
On 2075/6/5, stationery purchased for Rs. 10,000.
On 2075/6/8, cash sales made for Rs. 20,000.
On 2075/6/9, commission received Rs. 5,200.
On 2075/6/10, loan taken from Megha Bank Ltd. Rs. 200,000.
On 2075/6/11, commission paid Rs. 1,500
Journal entries of ....
Date Particulars L.F. Dr. Amt. (Rs. Cr. Amt. (Rs.)
2075/6/1 1,00,000
Cash A/c Dr. 1,00,000
2075/6/2
To Capital A/c
(Being business started)
Machinery A/c Dr. 60,000
To Cash A/c 60,000
(Being machinery purchased for business)
2075/6/3 Purchase A/c Dr. 25,000
To Cash A/c 25,000
(Being goods purchased)
148 Aakar’s Office Practice and Accountancy - 8
2075/6/4 Hari’s A/c Dr 75,000
2075/6/5 10,000
2075/6/8 To Sales A/c 20,000 75,000
2075/6/9 2,500 10,000
2075/6/10 (Being goods sold on credit) 2,00,000 20,000
2075/6/11 1500 2,500
Stationery A/c Dr 494000 2,00,000
1500
To Cash A/c 494000
(Being stationery purchased)
Cash A/c Dr
To Sales A/c
(Being goods sold for cash)
Cash A/c Dr
To Commission received A/c
(Being commission received)
Cash A/c Dr.
To Megha Bank Ltd. A/c
(Being loan taken from Megha Bank Ltd.)
Commission A/c Dr.
To Cash A/c
(Being commission paid)
Total
ii. Compound Journal Entries
Some transactions give effect to more than two accounts i.e. headings. In such
a case, there may be more than one heading in debit side or in credit side or in both
the sides for the equal effect in total of debit and credit each. Such entries are known
as compound entries.
For example:
Ram commenced business with cash Rs. 50,000 and furniture of Rs. 20,000. The
effect is on cash, furniture and capital account.
Date Particulars L.F. Dr. Amt, Cr. Amt. (Rs)
Cash A/c Dr 50,000
Furniture A/c Dr. 20,000
To Capital A/c (Being 70,000
business commenced with cash
and furniture)
The following are the other examples of compound entries:
The Journal 149
Illustration : 2
On 2075/6/1, Ram and Shyam commenced business in partnership with cash
Rs. 1,00,000 and 1,50,000 respectively.
On 2075/6/2, purchased goods of Rs 2,00,000 from Sundar Stores and partial
payment of Rs, 1,50,000 is made.
On 2075/6/3, received Rs. 49,500 from Krishna, a previous debtor, in the full
settlement of his owing of Rs. 50,000.
On 2075/6/4, interest and dividend received Rs. 2,000 and Rs. 5,000 respectively.
On 2075/6/5, paid to Sunder Stores Rs 48,000 for their full settlement.
Solution
Journal entries of ....
Date Particulars L.F. Dr. Amt. (Rs.) Cr. Amt. (Rs.)
2075/6/1 2,50,000
2075/6/2 Cash A/c Dr. 1,00,000
1,50,000
2075/6/3 To Ram’s Capital A/c
2075/6/4
2075/6/5 To Shyam’s Capital A/c
(Being business commenced in
partnership by Ram and Shyam)
Purchase A/c Dr. 200,000
To Cash A/c
1,50,000
To Sundar Stores’s A/c 50,000
(Being purchased from Sundar
Stores and partial payment has been
made)
Cash A/c Dr. 49,500
500
Discount A/c Dr.
7,000
To Krishna’s A/c 50,000
50,000
(Being cash received from a previous 2,000
debtor for full settlement) 5,000
Cash A/c Dr. 2,000
48,000
To Interest A/c
To Dividend A/c
(Being amount received as interest and
dividend)
Sundar Stores’s A/c Dr.
To Discount A/c
To Cash A/c
(Being payment made to Sunder Stores
for their full settlement)
150 Aakar’s Office Practice and Accountancy - 8
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