## Ledger Reconstruction — The Core Exam Technique

When a question gives you opening and closing balances of assets/liabilities plus P&L figures (depreciation, profits/losses), you must reconstruct the ledger to find actual cash flows.

This technique is tested in virtually every AS 3 exam question involving PPE, investments, tax, dividends, or retained earnings.

### General Template

```

[Asset / Liability] Account

─────────────────────────────────────────────────────────

Dr side | Cr side

Opening balance (given) | Items that REDUCE balance

Items that INCREASE balance | Closing balance (given)

Cash flow (balancing figure) | OR Cash flow (balancing figure)

```

If the Dr side is short → the balancing figure is cash received (Cr)
If the Cr side is short → the balancing figure is cash paid (Dr)

---

### Worked Template: Plant Account

Dr		Cr
Opening bal	given	Depreciation	given
Purchases (CIB)	find	Sale proceeds (CIB)	find
		Closing bal	given

You may need TWO unknowns if both purchase and sale occur — use sale value = book value ± profit/loss.

### Worked Template: Provision for Tax

Dr		Cr
Cash paid (CIB)	find	Opening balance	given
Closing balance	given	P&L charge	given

Formula shortcut: Cash paid = Opening + P&L Charge − Closing

### Worked Template: P&L / Retained Earnings

Used to find PBT when only net profit and appropriations are given:

Dr		Cr
Tax provision	given	Opening balance	given
Transfer to reserves	given	Net profit (PAT)	given
Dividend	given
Closing balance	given

PBT = PAT + Tax provision (reconstruct tax provision separately if needed)

### Worked Template: Investments

Dr		Cr
Opening bal	given	Sale proceeds (CIB)	find
Purchase (CIB)	find	Profit on sale (to P&L)	given
		Closing bal	given

Sale proceeds = Cost of investments sold + Profit on sale (or − Loss)

Cost of investments sold = Opening + Purchases − Closing (if no loss)

Worked example

### Example 1

PIL (P&L) Ledger Reconstruction — Illustration 1 (Pages 17–19)

Known: Transfer to PIL Reserve = ₹56,000; Transfer to Gen Reserve = ₹2,10,000; Opening P&L = ₹84,000; Closing P&L = ₹1,40,000

```

P&L Account

Dr Transfer to PIL Reserve 56,000 | Cr Opening bal 84,000

Dr Transfer to Gen Reserve 2,10,000 | Cr Net Profit (PAT) [bal] ?

Dr Closing bal 1,40,000 |

───────── ─────────

Total Dr 4,06,000 | Total Cr must = 4,06,000

Net Profit (PAT) = 4,06,000 − 84,000 = 3,22,000

```

Then: PBT = PAT + Tax Provision = 3,22,000 + (98,000 + 1,12,000 − 1,40,000 provision reconstructed) ... resolve via Tax Payable ledger.

### Example 2

Tax Payable Ledger — Illustration 1

Known: Opening Tax Payable = ₹98,000; Closing Tax Payable = ₹1,40,000; Cash Paid = ₹70,000 (given)

```

Tax Payable Account

Dr Cash paid 70,000 | Cr Opening bal 98,000

Dr Closing bal 1,40,000| Cr P&L provision [bal] 1,12,000

─────── ────────

2,10,000 2,10,000

```

Tax provision for the year = ₹1,12,000; PBT = PAT + provision = 3,22,000 − wait, re-derive:

PAT = 3,22,000 (from P&L ledger); Tax provision = ₹1,12,000 → PBT = 3,22,000 + 1,12,000 = ₹4,34,000 (confirm with question data).

### Example 3

Investments Ledger — Illustration 2 (Pages 20–22)

Known: Opening = ₹1,27,000; Purchase = ₹78,000; Sale proceeds = ₹1,02,000; Profit on sale = ₹12,000

```

Investments Account

Dr Opening bal 1,27,000 | Cr Cash sale 1,02,000

Dr Cash purchase 78,000 | Cr P&L profit 12,000

| Cr Closing bal [bal] 91,000

───────── ─────────

2,05,000 2,05,000 ✓

```

Cost of investments sold = ₹1,02,000 − ₹12,000 = ₹90,000 (cross-check: 1,27,000 + 78,000 − 90,000 = 1,15,000 closing — textbook shows ₹1,15,000 ✓)

⚠️ Common exam mistakes

Putting profit on sale of asset on the wrong side of the asset ledger — profit goes on the Cr side (it increases the sale proceeds above book value), not the Dr side.
Confusing 'book value of asset sold' with 'cash received' — the cash figure is what goes in the cash flow statement; book value is just an intermediate step.
Forgetting that depreciation always appears on the Cr side of the asset ledger (it reduces the carrying amount) — students sometimes put it on the Dr side.
Not cross-checking that both sides of the reconstructed ledger balance — always verify before recording the cash flow figure.
Using the P&L provision for tax (non-cash) as the income tax paid figure in the cash flow statement — reconstruct the Tax Payable account every time.

Reference:

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AS 3 – Ledger Reconstruction Technique for Cash Flow Preparation

Worked example

⚠️ Common exam mistakes