Business : In general term any activity undertaken for purpose of earning profit

Capital : Capital represents cash and resources introduced by the owner(s) of the business to set up or to run the business

Drawing : Drawing represents cash and resources withdrawn by the owner of business for personal use

Owner : The person who starts a business by introducing capital

Assets : Assets are the tangible or intangible resources controlled or owned by the business to get future economic benefits

Liabilities : These are the obligations of business arisen by past transaction or event

Transaction : Any dealing between two persons that can be measured in money. For example sale of good by business is a transaction

Account : A record or log used to record the transactions of business

Voucher : Any written evidence of occurrence of a transaction like invoice for purchase of goods on credit

Trade discount : A discount given by seller to buyer on listed price of good

Cash discount : A discount for quick or prompt payment of credit. For example a company has purchased goods on credit and if it makes payment of credit within specific period time, the seller would give the company cash discount on quick payment

Stock : Goods or commodities remaining unsold at the end of accounting period (Generally 1 year)

Creditor or Account payable : A person, business or an organization from which the business has purchased goods or services on credit

Debtor or Account receivable : A person, business or an organization to which the business has sold goods or services on credit

Accounting heads or type of accounts

• Accounting errors are the errors committed by persons responsible for

recording and maintaining accounts of a business firm in the course of

accounting process.

• Errors can be in the form of omission of recording of transaction in

various books or posting in ledger or mistake in totalling or recording

wrong amount or in wrong account.

• There can be accounting errors which affect the agreement of trial

balance and errors which do not affect the agreement of Trial Balance.

On the basis of nature accounting errors can be

• Errors of omission
• Errors of commission
• Errors of principle

On the basis of impact on ledger accounts errors can be :

• one sided errors
• two sided errors

• Errors should never be rectified by erasing or overwriting.
• Methods of rectification of errors are

• Before preparing trial balance, instant correction and correction

in the affected account.

• After preparing trial balance through suspense Account

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We know that now-a-days in business transactions on credit are on the rise. When goods are sold on credit a huge amount of capital is blocked. Then there is no certainity when the amount will be paid. A solution of the problem is giving this fact in writing in proper form so that the buyer or debtor has to pay a definite sum to the seller/creditor on demand or after the expiry of a certain period. Such a formal document duly signed by both the parties is called a Bill of Exchange.

When such a document is given by the debtor/buyer from his own side it is called a promisory note. These two documents when prepared as per provisions of the Negotiable Instruments Act, 1881 attains the position of money and are used for settlement of the amount due. In this lesson you will learn about these two instruments and their accounting treatment in the books of parties concernced.

BILLS OF EXCHANGE – MEANING

A bill of exchange is an instrument is writing containing an unconditional order signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of the instrument.

Features of Bill of Exchange

1. It is an instrument drawn by the creditor upon his debtor.
2. It contains an unconditional order to pay a specified amount.
3. The specified amount is payable to the person named in the bill or to his order or to the bearer.
4. The bill must be signed/accepted by the maker.
5. The bill specifies the date by which the amount should be paid.
6. It can be payable to the bearer.

Parties to a Bill of Exchange

1. Drawer : Drawer is a person who writes/makes the Bill of Exchange. He is generally the creditor who had sold goods on credit.
2. Drawee : Drawee is a person upon whom the bill is drawn. He is generally the debtor to whom goods have been sold on credit. Bill is generally signed and accepted by the Drawee.
3. Acceptor : He is the person who accepts the bill of exchange. Generally debtor/ drawee is the acceptor but sometimes a bill of exchange may be accepted by some one also on behalf of the debtor/drawee. Normally the drawee and acceptor are the same parties.
4. Payee : Payee is the person named in the Bill of exchange. The amount in the bill is paid to the payee. In most cases Drawer and the payee will be the same.

Promissory Note  : According to secton 4 of the Negotiable Instruments Act, 1881, A Promissory Note is an instrument in writing (not being a bank note or a currency note) containing an unconditional undertaking signed by the maker to pay a certain sum of money only to or to the order of a certain person.

Features of a Promissory Note

1. It is an unconditional written undertaking to pay the specified amount.
2. It is drawn and signed by the maker/promisor.
3. It specifies the name of the payee.
4. The specific amount is payable to the specified person or to his order or to the bearer.
5. Proper stamp duty is paid on Promissory Note.
6. It is not payable to the bearer.

TERMS OF BILL Computers

1. Due Date : It is the date on which the payment of the bill becomes due.

2. Days of Grace : To ascertain the period of the bill, three extra days are added, which can be called as ‘Days of Grace’ to calculate the date of maturity.
3. Bill at Sight :Bills which are payable on presentation to the Drawee are known as ‘Bill at Sight or Demand’.
4. Bill After Date : The period is counted from the date of acceptance of the bill in ‘Bill After Date’.
5. Discounting of Bill : The process of receving the bill amount at a date earlier than the due date from the bank, is known as ‘Discounting the Bill’. When the bill is discounted the bank credits the trader’s account after decucting some discount. The discount is calculated at the lending rate of the bank for the period that extends between the date of discounting of the bill to the date of maturity.

6. Endorsement of the Bill : The drawer may transfer the bill in favour of his creditor to settle the creditor’s account. The process of transferring the ownership of the bill in favour of somebody by putting the signature of the holder at the back of the instrument and delivering the same to transferee is known as endorsing the bill. The person who delivers it is endorser and the person to whom it is delivered is called the endorsee.

7. Terms of the Bill : Bills is generally drawn for a certain period, say for two months or three months. Bills may be drawn payable at sight on demand, on presentation, after date and so on.

8. Date of Maturity : It is the date of which the payment of the bill is due. It is calculated by adding three days of grace. For example a bill drawn on 1.1.2013 for a period of two months will mature on (2 months + 3 days) 3rd March, 2013.

9. Dishonour of a Bill : Dishonour means that the bill is not paid by a Drawee on the due date. It arises when the acceptor refuses or is unable to pay the amount of bill, i.e., Bill of Exchange, Promissory Note or cheque.

10. Notary Public : Notary Public is an officer appointed by the Central or State Government to exercise the power and functions relating to noting and protesting of negotiable instruments for dishonour. ‘Noting’ authenticates the fact of dishonour.
11. Noting Charges : Noting Charges is the fee paid to the Notary Public for noting and protesting the Bill of Exchange of it’s dishonour.

12. Renewal of Bill : When the acceptor of a bill is not in a position to meet the bill on due date, he may, with the consent of the holder accept a fresh bill in place of the old bill, it is called Renewal of a Bill. The fresh bill may include interest for the extended period (or it may be paid separately), stamp duty and other incidental expenses incurred by the holder.

13. Retirement of Bill : When the Drawee pays the bill before its due date, it is called Retirement of a Bill. The holder allows him a rebate of certain amount calculated at a certain rate per cent per annum, from the date of retirement to the date of maturity.

Part 2 is work in Progress

Financial statements are the statements that are prepared at the end of the accounting period, which is generally one year. These include Income Statement i.e. Trading and Profit & Loss Account and Position statement i.e. Balance Sheet

Following are the objectives of preparing financial statements: –

1. Ascertaining the results of business operations : Every businessman wants to know the results of the business operations of his enterprise during a particular period in terms of profits earned or losses incurred. Income statement serves this purpose.
2. Ascertaining the financial position : Financial statements show the financial position of the business concern on a particular date which is generally the last date of the accounting period. Position statement i.e. Balance Sheet is prepared for this purpose.
3. Source of information : Financial statements constitute an important source of information regarding finance of a business unit which helps the finance manager to plan the financial activities of the business and making proper utilisation of the funds.
4. Helps in managerial decision making : The Manager can make comparative study of the profitability of the concern by comparing the results of the current year with the results of the previous years and make his/her managerial decisions accordingly.
5. An index of solvency of the concern : Financial statements also show the short term as well as long term solvency of the concern. This helps the business enterprise in borrowing money from bank and other financial institutions and/or buying goods on credit.

TRADING ACCOUNT

Trading Account is prepared to ascertain the results of the trading activities of the business enterprise. It shows whether the selling of goods purchased or manufactured has earned profit or incurred loss for the business unit. Cost of goods sold is subtracted from the net sales of the business of that accounting year. In case the total sales value exceeds the cost of goods sold, the difference is called Gross Profit. On the other hand, if the cost of goods sold exceeds the total net sales, the difference is Gross Loss.

All accounts related to cost of goods sold such as opening stock, net purchases i.e. purchase less returns outward, direct expenses such as wages, carriage inward etc. and closing stock with net sales (i.e. Sales minus Sales returns) are posted to the Trading Account. Then this account is balanced. Credit balance shows the gross profit and debit balance shows the gross loss.

Cost of goods sold and gross profit

A business enterprise either purchases goods or manufactures goods to sell in the market. Cost of goods sold is computed to know the profit earned (Gross Profit) or loss incurred (Gross Loss) from the trading activities of a business unit for a particular period.

Cost of goods sold = Opening stock + Net purchases + All direct expenses – Closing stock Gross Profit = Net sales – Cost of goods sold

1. Calculate the cost of goods sold from the following information : `
   1. Opening stock 10000
   2. Closing stock 8000
   3. Purchases 80000
   4. Carriage on purchases
   5. 2000 Wages 6600

Answer:- COGS is 90600

2. Calculate cost of goods sold and gross profit from the following information.
   1. Sales 62500
   2. Sales Returns 500
   3. Opening Stock 6400
   4. Purchases 32000
   5. Direct Expenses 4200
   6. Closing Stock 7200

Answer:- 26600

3. The ledger balances extracted at the close of a trading year on 31st March, 2014 are given as follows

Opening stock 12,000

Purchases 52,000

Sales 74,000

Purchase Returns 2,000

Carriage Inward 800

Wages 4,200

Closing stock 13,500

Pass necessary journal entries in the journal And Prepare Trading Accounts.

4.Following balances have been extracted from the ledger of Rohit & Sons at the close of the year 2014.

Stock (1.1.2014) 21,000

Purchases 1,40,000

Sales 2,24,000

Purchases Returns 8,000

Sales Returns 12,000

Wages 15,000

Factory Power 12,000

Stock (31.12.2014) 26,500

Prepare  Trading Account