Chapter 5a

Accounting Process — From Trial Balance to Final Accounts and Final Accounts of Non-corporate Business Entities

INTRODUCTION

 

As explained earlier, the process of accounting starts with the recording of entries of business transactions in the books of journal, passing through various stages and reaches the final stage of preparing final accounts. The term “final accounts” usually represents three types of various accounts, viz. Trading Account, Profit and Loss Account and Balance Sheet. In the accounting principle, Balance Sheet is only a statement and not an account. But for all practical uses, Balance Sheet forms part of Final Accounts.

OBJECTIVE 1: ACCOUNTING PROCESS — PREPARATION OF FINAL ACCOUNTS FROM TRIAL BALANCE

The final phase — preparation of final accounts from Trial Balance — is discussed in detail in this chapter. The final accounts are to be prepared to ascertain the net profit or loss for a period (Trading and Profit and Loss Account) and the financial position of the business entities on the last date of a period (Balance Sheet).

OBJECTIVE 2: TRADING ACCOUNT

2.1 Trading Account: A Constituent of Final Accounts

Trading account is a constituent of financial statements. In practice, it is treated along with Trading and Profit and Loss Account, as one account and one unit. The Trading and Profit and Loss Account consists of two parts — the first part or stage or section is called Trading Account and the second part or stage or section is called Profit and Loss Account. The next stage after preparing the Trial Balance is the preparation of Trading Account. Trading Account is to be prepared for a particular accounting period, as this is not a static statement. It is important to mention here that trading account is not prepared at a particular time or date. Hence it is headed as “Trading and Profit and Loss Account for the period ended on….”

Trading Account is prepared to know whether a business enterprise has earned profit or suffered loss. Here profit or loss represents only gross profit or gross loss. Gross profit means the excess of operating revenues over direct operating expenses. To put in other words, gross profit is the excess of net sales revenue over cost of goods sold. In the preparation of Trading Account, selling prices of goods and services are matched with cost of goods sold and services rendered. Some concepts and terms associated with Trading Account are explained now.

1. Net Sales Revenue = Cash Sales + Credit Sales − Sales Returns
2. Cost of Goods Sold = Opening Stock + Net Purchases − Closing Stock (stock at the end) + Direct Expenses
3. Net Purchases = Cash Purchases + Credit Purchases − Purchases Returns
4. Gross Profit = Net Sales Revenues − Cost of Goods Sold

Opening Stock refers to the goods existing at the beginning of the (accounting) period.

Direct expenses refer to the expenses that incurred from the purchase of goods till the conversion of goods into saleable goods.

This includes:

1. Freight inwards
2. Carriage inwards
3. Cartage inwards
4. Wages
5. Import duty
6. Octroi
7. Packing expenses
8. Forwarding charges
9. Transit — insurance
10. Dock dues

Closing Stock refers to goods remain unsold at the end of the (accounting) year.

2.2 Preparation of Trading Account

The balances of accounts of all related items have to be transferred to the Trading Account by way of passing entries. The entries needed for such transfer are termed as “Closing Entries.” By passing such closing entries, the respective accounts will be closed. The closing entries are as follows:

1. For closing of debit accounts:

   Trading Account

   Dr.

   To Opening Stock

   To Purchases Account

   To Sales Returns Accounts

   To Purchases Account

   To Wages Account

   To Direct Expenses Account

   (Direct expenses to be shown separately)

2. For closing of credit accounts:

   Sales A/c	Dr.
   Purchase Returns A/c	Dr.

   To Trading Account

3. For closing of Trading Account:
   1. For Gross Profit:

      Trading Account

      Dr.

      To Profit and Loss Account

   2. For Gross Loss:

      Profit and Loss Account

      Dr.

      To Trading Account

Note: The Trading Account is closed by transferring Gross Profit/Loss (balance in the account) to the Profit and Loss Account, i.e. to the second section (stage) of the account.

While preparing the Trading Account, care should be taken to treat the closing stock.

1. In case, if the Closing Stock does not appear in the Trial Balance (appear outside the Trial Balance), the following entry is passed to incorporate the closing stock:

   Stock A/c	Dr.
   To Trading A/c

   Net effect: It appears both on the credit side of the Trading Account and on the Assets side of the Balance Sheet.

2. In case, if Closing Stock appears in the Trial Balance, Closing Stock will not be shown separately in the Trading Account because as it was already adjusted in Purchases or Cost of Goods Sold. But Closing Stock will be shown in the Balance Sheet.

Illustration: 1

From the following information prepare Trading Account for the year ending on Mar 31, 2009:

Opening Stock Rs 30,000; Cash Purchases Rs 70,000; Carriage Inwards Rs 5,000; Cartage Inwards Rs 3,000; Freight Inward Rs 2,500; Wages Rs 7,500; Credit Purchases Rs 50,000; Cash Sales Rs 60,000; Credit Sales Rs 1,50,000; Purchases Return Rs 10,000; Sales Returns Rs 15,000; Stock at the end Rs 40,000; Carriage Outwards Rs 10,000; Office Rent Rs 12,000.

 

Solutions:	*Carriage Outwards and Office Rent (expenses relating to office) are not to be entered in Trading A/c.
	*All the other items are recorded in the format as follows:

 

Illustration: 2 (Treatment of Closing Stock)

Prepare the Trading Account for the year ended on Mar 31, 2009 from the following information:

Purchases (after adjustments) Rs 4,70,000; Sales Rs 5,65,000; Freight Rs 3,000; Carriage Rs 5,000; Freight and Carriage Outward Rs 7,000; Wages Rs 24,000; Closing Stock Rs 27,000; Sales Returns Rs 15,000.

Solution:

 

Step 1:	Purchases are shown as after adjustments. This means that closing stock is adjusted with purchases. (As explained earlier, closing stock may be adjusted either with purchases or cost of goods sold). Remember Purchases (adjusted) = Net Purchases (i.e., Cash Purchases + Credit Purchases − Purchase Returns) + Opening Stock − Closing Stock
Step 2:	Hence it will not entered in the Trading Account.
Step 3:	Freight and carriage are not to be recorded in Trading Account because they are not direct expenses.
Step 4:	Draw the format and enter the figures.
Step 5:	Finally, balance the account as the net effect (Gross Profit or Gross Loss) has to be transferred to the next stage of the accounts, i.e. Profit and Loss Account.

 

Illustration: 3

Prepare the Trading Account for the year ending on Mar 31, 2009 from the following information:

Cost of Goods Sold Rs 7,63,500;

Sales Rs 8,13,500; Sales Return Rs 40,000

Closing Stock Rs 15,500

Solution:

In this illustration, cost of goods sold and closing stock are given.

As explained earlier, closing stock may be adjusted either with purchases or cost of goods sold. Here, cost of goods sold is given. It means closing stock is adjusted with cost of goods sold and hence it will not appear in Trading Accounts.

 

 

Illustration: 4

From the following particulars of Raj Chand, prepare the Trading Account for the year ending on Dec 31, 20…..

Solution

 

Notes

1. Expenses relating to office are not recorded in the Trading Account. In this illustration such expenses are:

   Carriage on sales

   Office insurance

   Rent (office)

   Manager’s salary (office)

   General expenses

2. Closing stock is included because it is not adjusted with purchases or cost of goods sold.

OBJECTIVE 3: MANUFACTURING ACCOUNT

3.1 Meaning of Manufacturing Account

Manufacturing Account is prepared by the business enterprises that are engaged in manufacturing activities. In order to ascertain the cost of goods manufactured, the Manufacturing Account is prepared. In this account, both direct and indirect expenses relating to the process of manufacturing are recorded (i.e., debited to this account). The Manufacturing Account is closed by transferring its balance (cost of goods produced) to the Trading Account.

3.2 Pro-forma of a Manufacturing Account

Illustration: 5

The following were some of the ledger balances in the books of Dev and co. on Mar 31, 2009.

Additional Information

1. Factory buildings are held on a 60-year lease
2. Stocks on Mar 31, 2009: Raw materials Rs 25,000; Work-in-Progress Rs 35,000; Finished Goods Rs 60,000
3. Depreciate the Plant and Machinery @10% p.a.
4. The factory production was charged to finished goods at cost
5. Prepare a Manufacturing Account for the year ended on Mar 31, 2009.

Solution:

Notes

1. Figures relating to finished goods are not taken into account.
2. Bank Overdraft and “provisions” are also not recorded.
3. Items relating to Fixed Assets are also not entered.
4. Depreciation on Plant and Machinery is worked out as Rs 80,000 × 10/100 = Rs 8,000 for a year. In practice for 6 months, Rs 4,000 only is recorded as the exact date of purchase of machinery is not given. (Provision for Depreciation given in the question is to be ignored.)
5. It is customary to show one figure for raw materials as:

    

   Raw materials (opening stock):	—
   Add: Purchases:	—
   Less: Closing stock:	____   —	….

But, Closing Stock is shown separately on the credit side.

 

3.3 Differences Between Trading Account and Manufacturing Account

A Trading Account differs from Manufacturing Account on the following aspects:

Basis of Distinction	Trading Account	Manufacturing Account
1. Main objective of preparation	This is prepared to ascertain the gross profit or gross loss	The main object is to ascertain the cost of goods manufactured
2. Transfer of A/c	This is transferred to the Profit and Loss Account	This is transferred to Trading Account
3. Stock of finished goods	This account shows the stock of finished goods (opening and closing)	This account does not show the stock of Finished Goods (both opening and closing)
4. Raw Materials and work-in-progress	Trading Account does not deal with raw materials and work-in-progress. This deals with only finished goods	This account deals with raw materials and work-in-progress. This does not deal with finished goods

OBJECTIVE 4: PROFIT AND LOSS ACCOUNT

As already explained, Trading and Profit and Loss Account, a constituent of Final Accounts is divided into two sections (stages or parts). The first section is Trading Account. After the preparation of Trading Account, the next step in the accounting process is to prepare the Profit and Loss Account.

4.1 Profit and Loss Account: Meaning and Features

Profit and Loss Account is prepared to ascertain the net profit earned or net loss suffered by a business enterprise during an accounting period. This account starts with gross profit on the credit side much which is brought forward from the Trading Account. It is followed by any other item of revenue income. It is important to mention here that only items of revenue incomes and revenue losses will be recorded in this account. But profit or loss on sale of capital items is recorded here. On the debit side it starts with gross loss, in case of gross loss brought forward from Trading Account. It is followed by items relating to revenue expenses. (Items that are not recorded in Trading Account will have to be recorded in this account.)

After recording all items, both sides of the Profit and Loss Account are totalled. If the credit side total exceeds the debit side total, the difference is Net Profit. On the other hand, if the debit side exceeds the credit side such difference is termed as Net Loss. Profit and Loss Account is closed by transferring the Net Profit/ Loss to Capital Account in the Balance Sheet. Net profit is added to the Capital Account in the Balance Sheet while net loss is deducted from the Capital Account in the Balance Sheet.

4.2 Closing Entries Relating to Profit and Loss Account

The preparation of Profit and Loss Account requires the transfer of all items (nominal accounts relating to Profit and Loss Account) in the Trial Balance to the Profit and Loss Account with the help of the following closing entries:

1. For Debit: (items of revenue expenses and losses) (or for items other than those record in debit side of Trading Account)

   Profit and Loss A/c

   Dr.

   To Respective items A/c

   (individually)

2. For Credit: (items of revenue income and gains) (or for items other than those recorded in credit side of Trading Account)

   Respective items A/c (individually)

   Dr.

   To Profit and Loss Account

3. 1. For Net Profit:

      Profit and Loss Account

      Dr.

      To Capital account

   2. For Net Loss:

      Capital Account

      Dr.

      To Profit and Loss Account

4.3 Pro-forma of Profit and Loss Account

Refer Chapter 15.

4.3.1 Uses of Profit and Loss Account

1. Determination of net income: It is very essential for any kind of business entities to know the profit earned periodically for which this account facilitates the task of computing the net income with accuracy.
2. Capital maintenance: Capital should be maintained at an optimum level in business organisations. The preparation of this account extends a helping hand in determining how much amount can be kept in capital and how much can be earmarked for the other areas in the business firms. The income statement plays a vital role in this aspect.
3. Tool of financial planning: Only after ascertaining net profit, financial planning can be carried on without much hindrance. The business entities can plan how much to earmark to replace the assets and how much to keep in reserve to meet any unforeseen eventualities which may arise in future and the like.
4. Source of internal financing: It helps in maintaining the level of retained income which will act as a source for all other activities relating to finance within any enterprise.
5. Basis for tax computation: This account provides accurate basic data to calculate tax. But for this, it will not be easy to compute tax.
6. Future investment decisions: Level of earnings in future can be estimated based on the past level of earnings. This P and L Account throws much light on this aspect by which a proper investment decision can be made by a careful analysis of incomes and expenses occurred in the previous years.
7. Managerial use: Information regarding profitability can be had from income statement which is useful for management to streamline the different and varied activities of the larger enterprises.

4.4 Explanation of Some of the Terms Appearing in Profit and Loss Account

Some of the items that frequently appearing in the preparation of Profit and Loss Account have to be understood in the proper context. They are as follows:

1. Outstanding income: The amount which is due and receivable but not yet received is referred to as “outstanding income.” A person is entitled to receive the “outstanding income” once it becomes due legally.
2. Accrued income: The amount which is earned but not yet due and receivable is referred to as “Accrued Income.” This is calculated periodically. A person is not entitled to receive the “accrued income” legally.
3. Net profit: Excess of operating revenues over operating expenses and losses is termed as “Operating Profit” (Operating Profit = Gross Profit — Operating Expenses). Operating expenses are such expenses that form part of normal business activities.
4. Operating loss: Excess of operating expenses over the gross profit is known as operating loss:

    

   Operating Loss = Operating Expenses − Gross Profit

    

5. Non-operating profit = Non-operating profit arises from sources other than normal activities of the business entities. (In order to understand the concept of operating activities in detail, students are asked to refer the chapter “Cash Flow Statement”.)

Illustration: 6

From the following information, prepare the Profit and Loss Account for the year ending on Mar 31, 20….

Solution:

Notes

1. As gross profit is given, Trading Account need not be prepared. Profit and Loss Account can be prepared straight away.
2. Gross profit is entered on the credit side and all the incomes of revenue nature are recorded one by one.
3. All expenses are entered (revenue nature) on the debit side.
4. Sale of machinery — only the loss on sale (Rs 15,000 − Rs 12,000) (book value — sale). Rs 3000 is entered on the debit side. Sale amount Rs 12,000 is not recorded in Profit and Loss Account.
5. Reinvestment on fixed assets is capital expenditure and hence not recorded in Profit and Loss Account.

Illustration: 7

From the following balances of Raj and Sons, prepare a Trading and Profit and Loss Account for the year ending Mar 31, 2009.

Solution

 

Note:

1. Items relating to capital nature are not recorded in Profit and Loss Account.
2. Trading Account and Profit Loss Account is a single account and always has to be prepared, as explained in this illustration.

OBJECTIVE 5: BALANCE SHEET

5.1 Meaning and Features of a Balance Sheet

The next step in the process of accounting after preparing Trading and Profit and Loss Account is the preparation of Balance Sheet. The process that started with the recording of Journal entries ends (as the last step) in the preparation of Final Accounts. But this term “Final Accounts” is applied collectively to comprise the three accounts, i.e. Trading Account, Profit and Loss Account and the Balance Sheet. Balance Sheet is not an account but a statement summarising the financial position of a business enterprise at a particular date. All the accounts that have not been closed by transfer to either the Trading Account or the Profit and Loss Account are to be recorded in the Balance Sheet. It summarises on the one side — the right-hand side — the assets of the business enterprise and on the left hand side the liabilities of the business. The capital — the business owes to the owner is recorded on the liabilities side. Net profit is added to it, while net loss is deducted from the capital. At the same time, Drawings (owner’s debt to the business) is not recorded as a separate item on the assets side but it is deducted from Capital Account. Consequently, the total of two sides must show equal amounts. This equality is a proof of arithmetical accuracy. Hence, a Balance Sheet may be called a Statement of Assets and Liabilities of a business entity at a particular date.

5.2 Contents of the Balance Sheet

The right-hand side of a Balance Sheet is called the “Assets” side and the left-hand side is called the “Liabilities” side.

Items shown on the Assets side of a Balance Sheet: The debit balances of the ledger accounts that were not transferred to the Trading and Profit and Loss Account are to be shown on the Assets side of the Balance Sheet, because a debit balance in the real account and the personal account represents an “Asset.” Assets are generally classified as Current Assets, Investments and Fixed Assets.

Further, fixed assets are classified into two categories: Tangible Assets and Intangible Assets.

Current Assets: Current Assets are those assets which are held for a short period and can easily be converted into cash (or sold or consumed).

Example: Cash in hand, cash at bank, raw material, stock of goods, bills receivable, debtors, prepaid expenses and so on. The current assets are also called floating assets or circulating assets. Turnover of these assets occur quickly and frequently. Generally, current assets are valued at cost price or market price whichever is less.

Investments: Acquisition of assets which in turn earn interest, dividend, rent or any other incomes are referred to as investments. For example, Shares, Debentures, Bonds and Fixed Deposits. These are usually held in business for a long period, generally more than a year.

Fixed Assets: The term “Fixed Assets” refer to those assets which are acquired for use in business activities rather than for resale in the course of the business. They are usually held in the business for a relatively longer period. Fixed assets are classified into Tangible Fixed Assets and Intangible Fixed Assets.

Tangible Fixed Assets can be seen and they posses concrete physical existence. For example, Land, Building, Plant, Machinery, Furniture and Fixtures, Vehicles and so on.

Intangible Fixed Assets cannot be seen and they do not possess any physical existence. Example: Goodwill, Patents, Copyrights, Trademarks and so on.

Someother assets also appear in the assets side because of the nature of account, i.e. a debit balance relating to special items such as “Suspense Account” of Advertisement, Interest, etc. Because of its status as a debit balance, it is shown as an asset.

Wasting Fixed Assets such as mines, oil wells, quarries also have the status of assets appearing on the Assets side of the Balance Sheet.

It is to be noted here that Contingent Assets are not shown on the assets side of the Balance Sheet, but they are shown as notes to the Balance Sheet now.

Items shown on the “Liabilities side” of a Balance Sheet: The credit balances of the ledger accounts that were not transferred to the Trading and Profit and Loss Account are to be shown on the “Liabilities side” of the Balance Sheet, because a credit balance in personal account is a liability. Liabilities may broadly be classified as follows: (i) Current Liabilities and (ii) Long-term Liabilities.

Current liabilities: Current liabilities represent the debts that have to be paid within a short period. For example, Creditors, Bills Payable, Outstanding Liabilities and Income received in advance.

1. Creditors: These include both trade and nontrade creditor’s purchases of goods on credit basis, for use of services amount not yet paid are some of the examples for trade creditors. Money borrowed for a short period is nontrade creditor. All creditors are clubbed together and entered under the head “Creditors.”
2. Outstanding liabilities: Amount not yet paid (for the expenses already incurred) till the date of preparation of Balance Sheet is called outstanding liabilities. For example, outstanding rent, tax, salary, wages, interest, etc.
3. Income received in advance: As on the date of Balance Sheet, amount would have been received but expense for which will incur on a later date.
4. Bills payable: It is an instrument to pay money to the creditor for purchase of goods or services.

Long-term liabilities: Long-term liabilities represent the debts that need not be paid in a short period. Due date for payment of such liabilities will be usually for a period of more than a year. Long-term liabilities may be classified as (i) Secured Loans and (ii) Unsecured Loans.

1. Secured Loans: In case, if loan is obtained by mortgaging a fixed asset as security, such loan is said to be a secured loan, i.e. loans are availed against security.
2. Unsecured Loans: No security is to be provided to secure a loan in this type of liability.

Examples: Debentures and loan from financial institutions.

Contingent liabilities: A contingent liability is not a liability on the date of Balance Sheet, but it may be a liability or may not be a liability on a future date. Uncertainty clouds over the amount pertaining to those liabilities. The obligation to discharge these liabilities on the date of Balance Sheet is uncertain.

Examples: Bills of exchange discounted; law suit against business enterprises, still pending, surety or guarantee given to others and arrears of dividends on cumulative preference shares.

As contingent liability is not an actual liability on the date of Balance Sheet, it will not be recorded on the liabilities side of the Balance Sheet but it is shown as footnote or explanation to the Balance Sheet.

5.3 Grouping and Marshalling of Assets and Liabilities: Meaning of Grouping and Marshalling

Grouping: Arranging items of a similar nature together under a common heading is known as “grouping.”

Examples: Creditors, Debtors.

Creditors: This includes accounts of all the supplies from whom goods were purchased on credit.

Debtors: This includes accounts of all debtors arising from the credit sales of goods, i.e. the balances of all the ledger accounts of debtors are totalled and written under the head “Debtors.”

Marshalling: The order in which the assets and liabilities are recorded in the Balance Sheet is referred to as marshaling. The items in the Balance Sheet are generally marshald in the following two ways: (i) in the order of liquidity and (ii) in the order of permanency.

5.4 In the Order of Liquidity

1. Assets are arranged in the order of liquidity (liquidity means the ability to convert the asset into cash or time taken to convert the asset into cash) — the most liquid asset is shown first and the least is shown last.
2. The liabilities are arranged in the order in which they have to be paid off— the most emergent amount has to be made is recorded first and other liabilities are arranged in the order of emergency to be paid off.

The sole proprietorship, partnership firms, banking and financial entities usually adopt this kind of preparing balance sheets in order of liquidity.

 

5.5 In the Order of Performance

Items are arranged in the order of performance according to the purpose. This order is just the reverse of the liquidity order.

The assets are arranged in the order of their performance — the least liquid asset is to be recorded first and the most liquid asset is recorded last, i.e. just the reverse order of the liquidity order.

The liabilities (also the reverse of the liquidity order), the least urgent payment is to be recorded first and vice versa.

It is mandatory for companies incorporated under the Companies Act 1956 to prepare the Balance Sheet in the order of performance.

 

OBJECTIVE 6: USES OF BALANCE SHEET

• To ascertain the nature and value of assets of business entities at a particular date.
• To ascertain the nature and value of the liabilities and their values of the business on a particular date.
• To assess the solvency of the business.
• To examine how much capital is distributed among the various assets to strengthen the efficiency of the firms.
• To assess exactly the financial position of a business.
• To facilitate comparison within the enterprise and with the enterprises of similar nature in the market.

OBJECTIVE 7: DIFFERENCES BETWEEN TRIAL BALANCE AND BALANCE SHEET

A Trial Balance may differ from Balance Sheet in the ways as shown in the tabular column.

Basis of Distinction	Trial Balance	Balance Sheet
1. Object of preparation	The main object is to test the arithmetical accuracy of the ledger postings	This is prepared to ascertain the financial position of a firm
2. Periodically of preparation	Trial balance may be prepared more than once in a year	Balance Sheet is prepared only once at the end of an accounting period
3. Types of accounts	All types of accounts, i.e. personal, real and nominal accounts are recorded	Only personal and real accounts are recorded
4. Contents	All the ledger accounts are shown	The balances of ledger accounts, which were not closed till Trading and Profit and Loss Account is prepared, are shown
5. Stock	It always contains opening stock and only rarely closing stock	It contains only closing stock
6. Headings	The headings of the Trial Balance columns are “Debit balance” and “Credit balance”	The headings in the Balance Sheet are “Liabilities” and “Assets”
7. Adjustments	Adjustments (in respect of outstanding expenses, prepaid, accrued income, etc.) are not necessary in the preparation of a Trial Balance	Adjustments relating to certain items are absolutely necessary to prepare a Balance Sheet
8. Net Result	Net profit or net loss cannot be known from the Trial Balance	Net result can be best obtained from the Balance Sheet
9. Mandatory	Preparation of Trial Balance is only obligatory. It is not mandatory	Preparation is mandatory for companies registered under Companies Act
10. Ends or means	A Trial Balance is a means to know the financial position of a business enterprise	A Balance Sheet is the end to know the financial position of an enterprise

Adjustments

To be made at the time of preparing Balance Sheet — (Final Accounts)

Adjustments of various items in the preparation of Final Accounts

At times, balances in the Trial Balance do not show the correct amounts for the full accounting period.

Revenue recognition is one kind of principle to be followed for making adjustments. According to this principle, the revenue should be recognised in the period in which the sale is said to have taken place.

Matching principle is another kind of principle which emphasises that the expenses will have to be recognised in the same accounting period with revenues. Any expense is recognised in relation to its revenue. “No revenue, No expense” policy is the motive behind such principle.

As final accounts are prepared on accrual basis, adjustments are necessary to record all assets and liabilities at their correct values. For this, the amount relating to a transaction may be received/spent in the previous year, such amount must be added this year. Similarly, if any amount has been received/spent for the next year, it must be deducted as it relates only to the next accounting period. Irrespective of the year in which it was received/spent, MUST be brought to this year, if it pertains to this year and get adjusted with that time. Such adjustments are made to ensure a proper match of revenue and expense.

Some of the items of adjustments required to be made at the end of the accounting period are explained below.

7.1 Stock at the End or Closing Stock

The stock at the end or closing stock or closing inventory is valued properly (i.e., at cost or net realizable value that is less) and then it is incorporated in the final accounts.

Accounting treatment

A: Journal entry

 

	Closing Stock Account	Dr.
	To Trading Account

B: In Trading Account	Recorded on the Credit Side
C: In Balance Sheet	Recorded on the “Assets Side” As a “Current Asset.”

If the closing stock appears in the Trial Balance,

 

(a) Journal entry	Stock at the End A/c	Dr.
	To Purchase A/c
(b) In Trading Account	No entry
(c) In Balance Sheet	On the Assets side as “Current Asset.”

Illustration: 8

Closing stock as on Mar 31, 2009 Rs 1,750 appears outside the Trial Balance. Accounts are closed on Mar 31. Pass an adjusting entry and how will you record in the trial accounts.

Solution

 

1. Adjusting entry
   
2. Trading Account
   
3. Balance Sheet

    

   Balance Sheet as on Mar 31, 2009

   

7.2 Accrued Expenses or Outstanding Expenses

Usually expenses are recorded only when they are paid. It means that expenses were actually incurred but not paid during the accounting period.

Adjustment:

 

(A) Journal entry	Expenses A/c	Dr.
	To Outstanding Expenses A/c
	Enter:
(B) Trading Account	On the debit side to be added to the respective expenses account.
(direct expenses only)
(C) Profi t and Loss A/c	On the debit side to be added to the respective expense account
(for indirect expenses)
(D) Balance Sheet	On the liabilities side under the head: current liability

Note: If Outstanding Expenses appear in the Trial Balance, no adjusting entry is needed. Such outstanding expenses are shown only on the liabilities side of the Balance Sheet. Further it is not shown in Profit and Loss Account too.

Illustration: 9

A private business enterprise disburses salary to its staff on the fifth day of the next month. The monthly salary bill is Rs 30,000. Pass an adjusting entry and how will you record in final accounts.

Solution

 

1. Adjusting entry

    

   Journal

   
2. Profit and Loss Account

    

   Profit and Loss Account for the year ended Dec 31, 20.….

   
3. Balance Sheet

    

   Balance Sheet as on Dec 31, 20….

   

7.3 Prepaid Expenses

Payments for certain expenses will be paid in advance, i.e. expenses are paid in the current accounting period, but the benefit to a certain extent will occur in the next accounting period. For example, insurance premium, rent, etc.

Accounting treatment

 

(A) Adjusting entry	Prepaid Expenses A/c	Dr.
	To Respective expenses A/c
(B) Trading Account	It is deducted from the concerned expenses on the debit side
(for direct expenses only)
(C) Profi t and Loss Account	It is deducted from the concerned expenses on the debit side.
(for indirect expenses only)
(D) Balance Sheet	It is to be recorded on the “Assets Side” under “Current Assets”

Note: If it appears in Trial Balance it will be shown only on the assets side of the Balance Sheet. No adjustment entry is required in that case.

Illustration: 10

A firm pays Insurance Premium Rs 3,600 on June 1 every year. The accounting period ends on Dec 31. Make the adjustment entry in order to prepare final accounts.

Solution

1. Adjusting entry

    

   Journal

   
2. Profit and Loss Account

    

   Profit and Loss Account for the year ended Dec 31, 20….

   
3. Balance Sheet

    

   Balance Sheet as on Dec 31, 20….

   

7.4 Accrued Income

Income that has been earned but not received during the accounting period is referred to as “accrued income.”

 

(A) Adjustment entry
	Accrued Income A/c	Dr.
	To Respective Income A/c
(B) Profi t and Loss Account	To be entered on the credit side and added with respective income
(C) Balance Sheet	To be entered on the assets side as Current Asset in Balance Sheet.

If accrued income appears in Trial Balance, no adjusting entry is needed. It will not be shown in Profit and Loss Account, but accrued income is to be shown in the Balance Sheet.

Illustration 11

A business firm owns Rs 20,000, 12% debentures on which interest is receivable on Sep 30 and Mar 31. Accounting year is the financial year. The interest was received on June 30 only. Pass an adjusting entry and how will this appear in final accounts.

Solution

1. Adjusting entry

    

   Journal

   
2. Profit and Loss Account

    

   Profit and Loss Account for the year ended Mar 31, 20….

   
3. Balance Sheet

    

   Balance Sheet as on Mar 31, 20….

   

7.5 Income Received in Advance (or) (Unearned Income or Unaccrued Income)

The income or revenue that has been received in advance for the goods or services to be provided in the near future is generally known as unearned income. For example, subscription, insurance premium, etc. Income received in advance is a liability in the sense that the amount has to be repaid or an equal value of goods or services will have to be provided in the near future.

 

(A) Adjusting entry	Respective income A/c	Dr.
	To Income received in advance A/c
(B) Profit and Loss Account	Entered in the credit side, has to be deducted from the respective account
(C) Balance Sheet	Entered on the liabilities side as “Current Liability”

Note: As usual, if it appears in Trial Balance, no adjusting entry is needed. It will be shown only in the Balance Sheet.

Illustration: 12

A social service organisation receives subscriptions from its members Rs 30,000, of which Rs 3,500 relates to next accounting year. Pass the necessary adjustments in final accounts.

1. Adjusting entry
   
2. Profit and Loss Account

    

   Profit and loss account for the year ended…..

   
3. Balance Sheet

    

   Balance Sheet as on….

   

7.6 Description of Fixed Assets

Depreciation of Fixed Assets: A certain portion of the cost of a fixed asset (its use in business) is charged as an expense which is referred to as depreciation.

Accounting treatment:

 

(A) Adjusting entry	Depreciation Account	Dr.
	To (the concerned) Asset A/c
(B) Profit and Loss Account	Recorded as a separate item on the debit side
(C) Balance Sheet	Recorded on the Assets side of the Balance Sheet. It should be deducted from the respective “Fixed Asset”

Note: In general, deprecation is provided after the preparation of Trial Balance. But at times, it is shown in Trial Balance. In that case, no adjustment entry is needed. It will be shown only in Profit and Loss Account. It will not be shown in Balance Sheet.

Illustration: 13

The following balances were extracted at the end of an accounting period from the books of Renu:

 

Plant and Machinery	Rs 1,00,000
Furniture and Fixtures	Rs 15,000
Building	Rs 5,00,000

Depreciation is to be charged as 10% on Plant and machinery, 20% on Furniture and Fixtures and 2% on Buildings. You are required to pass adjusting entry and show this will appear in the final accounts.

Solution:

First, calculate the charge, i.e. depreciation amount for each item individually as:

 

Plant and Machinery:	Rs 1,00,000 × 10/100	=	Rs 10,000
Furniture and Fixtures:	Rs 15,000 × 20/100	=	Rs 3,000
Building:	Rs 5,0,000 × 2/100	=	Rs 10,000
Total amount of depreciation		=	Rs 23,000

Then, pass the adjusting entry in the books of Journal as follows:

1. Adjusting entry

    

   Journal

   
2. Profit and Loss Account

    

   Profit and Loss Account for the year ended….

   
3. Balance Sheet

    

   Balance Sheet as on….

   

7.7 Bad Debts

Accounting Treatment of Bad Debts: Losses that arise due to liability to recover debt are called “Bad Debts.”

 

(A) Accounting treatment:	Bad Debts A/c	Dr.
	To Debtors A/c
(B) Profi t and Loss Account	To be recorded on the debit side as a separate account
(C) Balance Sheet	To be entered on the Assets side by deducting from Debtors

If “Bad Debts” appear in the Balance Sheet, no adjusting entry is required. It will be entered in the Profit and Loss Account.

Illustration: 14

Mr Dilip, a debtor for Rs 25,000 is declared insolvent. Debtors appear in the Trial Balance at Rs 3,00,000 (including Dilip’s Debt). Write up the adjustment entry and prepare the final accounts. Accounting year ends on Dec 31.

Solution

1. Adjusting entry
   
2. Profit and Loss Account

    

   Profit and Loss Account for the year ended on Dec 31…..

   
3. Balance Sheet

    

   Balance Sheet as on Dec 31…

   

7.8 Provision for Bad and Doubtful Debts

In addition to the bad debts written off, as explained in the previous illustration, a provision is created by way of a pre-determined percentage of debtors.

 

(A) Accounting entry	Profit and Loss Account	Dr.
	To Provision for Doubtful Debts
(B) Profit and Loss Account	To be entered on the debit side as separate item
(C) Balance Sheet	To be recorded on the Assets side of the Balance Sheet by deducting from Sundry Debtors

Illustration: 15

Following is the extract of a Balance Sheet (relating to this particular item Debtors and Bad Debt) as on Mar 31, 2009:

	Dr. Balance Rs	Cr. Balance Rs
Sundry Debtors	1,10,000
Bad Debts	7,500

Additional information

1. After preparing Trial Balance, it is surfaced that one Mr. Yadav has become insolvent and the entire amount of Rs 10,000 was not recoverable from him.
2. It is desired to make a provision of 5% on debtors. Write up the relevant adjustment entry and prepare the final accounts.

Solution

 

	Rs
Sundry Debtors (as given)	1,10,000
Less: Bad Debts (given in additional information)	10,000
	1,00,000
Provision @ 5% (5% of Rs 1,00,000)	5,000
	95,000

Note: Provision for doubtful debts, i.e. Rs 5,000 is calculated after deducting the additional bad debt (i.e., Rs 7,500 was shown as bad debt already in final balance). As such Rs 1,10,000 − Rs 10,000 = Rs 1,00,000. 5% on Rs 1,00,000 − Rs 5,000 is the provision for doubtful debts.

1. Adjusting entry

    

   Journal

   
2. Profit and Loss Account

    

   Profit and Loss Account for the year ended on Mar 31, 2009

   
3. Balance Sheet as on Mar 31, 2009
   

Illustration: 16

Following is the extract from the Trial Balance of a business entry as on Mar 31, 2009:

Account	Dr. Balance Rs	Cr. Balance Rs
Sundry Debtors	1,10,000
Provision for Doubtful debts		5,000
Bad Debts	7,500

Additional Information

1. Additional Bad debts Rs 20,000
2. Maintain the provision for doubtful debts @ 5% on debtors make the necessary journal entries, ledger accounts and final accounts.

Solution:

Note

 

Sundry Debtors	Rs 1,10,000
(given)
Less: Bad Debts (given in additional information)	Rs 20,000
	Rs 90,000
Provision @ 5% on Rs 90,000	4,500
	Rs 85,500

 

Profit and Loss Account for the year ended on Mar 31, 2009

Balance Sheet as on Mar 31, 2009

7.9 Provision for Discount on Debtors

Accounting Treatment and Provision for Discount on Debtors: After the treatment of provision for bad and doubtful debts (i.e., provision for bad and doubtful debts are deducted from total debtors), the balance represents sound debtors. Such debtors may claim discount for prompt payments. Such discount allowed on sound debtors is also treated as business expense.

Accounting treatment

 

(A) Adjusting entry	Profit and Loss Account	Dr.
	To Provision for discount on Debtors A/c
(B) Profit and Loss A/c	To be entered on the debit side as a separate item
(C) Balance Sheet	To be recorded on the assets side of the Balance Sheet by deducting from Sundry Debtors

Illustration: 17

An extract of Trial Balance as on Mar 31, 2009:

Account	Dr. Balance Rs	Cr. Balance Rs
Sundry Debtors	1,05,800
Bad Debts	3,200
Discount	1,500

Additional Information

1. Create a provision for doubtful debts @ 10% on debtors.
2. Create a provision of discount on debtors @ 3% on debtors.
3. Additional discount given to debtors Rs 5,800.

Pass necessary Journal entries and make necessary ledger accounts.

Solution

 

Sundry Debtors	Rs 1,05,800
Less: Additional discount	5,800
	1,00,000
Less: Provision for Doubtful Debts @ 10%	10,000
	90,000
Less: Provision for Discount 3%	2,700
	87,300

 

7.10 Provision (or) Reserve for Discount on Creditors

Provision for discount which would be allowed by the creditors is similar (as in the above) to the treatment discussed in the case of debtors.

Accounting treatment

 

(A) Adjusting entry	Provision for discount on creditors account	Dr.
	To Profit and Loss A/c
(B) In Profit and Loss A/c	Entered on the credit side as a separate item
(C) In Balance Sheet	Recorded on the Liabilities side by deducting from the Sundry Creditors

Note: Discount likely to be earned from creditors occurs occasionally.

7.11 Adjustment of Interest on Capital

In individual proprietorship or partnership firms, interest is charged on the capital employed by the owners (proprietor or partner).

Accounting treatment:

 

(A) Adjusting entry	Interest on Capital A/c	Dr.
	To Capital A/c
(B) Profit and Loss A/c	To be entered on the debit side as a separate item
(C) Balance Sheet	To be entered on the Liabilities side by adding to the Capital

Note: When interest on capital appears in Trial Balance, it will be transferred to the debit side of Profit and Loss Appropriation Account only.

7.12 Interest on Drawings

Interest is charged on drawings. Interest is charged due to the reason if the same amount is obtained from other sources, one has to pay interest.

Accounting treatment

 

(A) Adjusting entry	Capital A/c	Dr.
	To Interest on Drawings A/c
	or
	To Profit and Loss Appropriation A/c
(B) Profit and Loss A/c	Entered on the credit side as a separate item
(C) Balance Sheet	Entered on the liabilities side by deducting from capital

Note: If this item appears in the Trial Balance, it will be credited to Profit and Loss Appropriation Account only.

7.13 Abnormal Loss of Stock

The abnormal loss of stock arises due to natural calamities, fire, flood, breakage, pilferage, etc.

 

	(A) Adjusting entry	Loss of stock (or) Profit and Loss A/c	Dr.
		To Trading Account
	(B) Trading Account	Shown on the credit side
	(C) Profit and Loss Account	(Total loss - Amount received from insurance company). The arrived value is entered on the debit side
	(D) Balance Sheet	The amount due from the insurance company is recorded as an asset

Illustration: 18

Stock at the end of a business of a business firm is Rs 30,000. It came to notice that goods amounting to Rs 4,000 were destroyed by fire during the current accounting period. Make necessary adjusting entries in each of the following alternative situations:

1. The stock is not insured
2. The stock is fully insured
3. The stock is partly insured, the insurance company has agreed to pay Rs 1,000.

Solution: For “stock at the end”

In all the three situations “stock at the end” is treated as above:

Case (a): Three situations “stock at the end” is treated as above:

Case (a): Not insured

 

Adjusting entry	Profit and Loss A/c	Dr.	4,000
	To Trading A/c			4,000
Trading A/c	Shown in credit side of Trading A/c
Profit and Loss	Losses and expenses are shown on the debit side of Profit and Loss A/c

Case (b): Fully insured

 

Adjusting entry	Insurance company	Dr.	4,000
	To Trading A/c			4,000
Balance Sheet	Entered in the Assets side under the insurance company’s head Rs 4,000

Case (c): Partly insured

 

Adjusting entry
	Insurance company	Dr.	1,000
	Profit and Loss A/c	Dr.	3,000
	To Trading A/c			4,000

In the Balance Sheet, Rs 1,000 is shown on the Assets side under the insurance company’s name in this case.

7.14 Insurance Premium

1. Life Insurance Premium: Life insurance premium is a personal expense. The accounting treatment is similar to that of drawings as explained already.
2. Insurance Premium: If no specific information is given, it is entered on the debit side of Profit and Loss Account. If it is mentioned specifically such as factory machinery, goods stored (stock), then it is treated as direct expense. Hence it is shown in Trading Account.

7.15 Salaries and Wages

Salaries and wages are treated as follows:

1. If it is shown as “Salaries and Wages,” i.e. Salary first and then followed by Wages, wages portion is to be treated as non-productive. Hence it is shown in the Profit and Loss Account.
2. If it is shown as “Wages and Salaries,” i.e. Wages first followed by Salaries, just reverse of the above salaries portion is to be treated as non-productive and the combined amount is taken to trading account.
3. In case, if there is no manufacturing activity, Wages and Salaries will have to be recorded in the Trading Account.

7.16 Commission on Profit

Profit before and after Charging Commission: In practice, managers are paid commission on Net Profit before charging such a commission or after charging such a commission.

In case, if the commission is payable as a percentage of Net Profit before charging commission, manager’s commission is calculated as:

 

 

In case, if the commission is payable at a fixed percentage on Net Profit then

In case if there is no specific information, manager’s commission is calculated as a percentage on Net Profit before charging such commission:

 

(A) Adjusting entry	Manager’s Commission A/c	Dr.
	To Outstanding Commission
(B) Profit and Loss A/c	Entered on the debit side
(C) Balance Sheet	Recorded on the Liabilities side as a current liability

Illustration: 19

From the following information, calculate the manager’s commission at 12% of profit (i) before charging such commission and (ii) after charging such commission.

 

	Rs	Rs
Gross Profit	—	70,000
Salaries	24,000
Rent and Rates	4,800
Office Expenses	8,000
Selling Expenses	10,000
Advertisement	12,000
		58,800
Profit before Commission:		11,200

You are also required to show how this will appear in final accounts.

Solution

1. Calculation of Manager’s Commission

    

   Case (i):	Commission	=	Net Profit before Commission × Rate/100
   		=	Rs 11,200 × 12/100 (Given)    = Rs 1,344
   			(Given)

   Case (ii):	Commission	=	Net Profit before Commission × Rate/Rate + 100
   		=	Rs 11,200 × 12/12 + 100
   		=	Rs 11,200 × 12/112     = Rs 1,200

    

2. Profit and Loss Account for the year ended on Mar 31, 200….
   
3. Balance sheet as on Mar 31, 20…..
   

7.17 Goods Sent on Approval: Meaning and Accounting Treatment

Goods sent to customers with a tag “Sale or return” (or) “retain or return” (within a specified period) is referred to as “Goods sent on Approval.” Such transactions are treated as

1. Adjusting entry
   1. Sales A/c       Dr. (with selling price)

      To Debtor A/c

   2. Stock with customer’s A/c (with cost price)

      To Trading A/c

2. Trading Account
   1. Sales value of goods is entered by deducting from sales
   2. Cost of goods is recorded on the credit side by adding to the closing stock
3. Balance Sheet
   1. Sale value of goods is recorded on the assets side by deducting from Debtors
   2. Cost of goods is recorded on the assets side by adding to closing stock

Illustration: 20

An extract of Trial Balance as on Mar 31, 20009 is given below:

Particulars	Dr. Balance Rs	Cr. Balance Rs
Sales		99,750
Debtors	12,625

Additional Information

Goods costing Rs 1,250 were sent to a customer on sale or return for Rs 1,500 on Mar 30, 2009 and was recorded as actual sales. Stock-in-hand on Mar 31, 2009 was valued at Rs 5,750.

How will these items appear in Final Accounts?

Solution:

In Trading Account, goods sent on sale or return for Rs 1,500 is to be recorded by deducting it from sale Rs 99,750. Goods costing Rs 1,250 (sent on approval) is to be added to losing stock, i.e. Rs 5,750.

This is shown as follows:

 

7.18 Goods-in-transit

Goods that have been purchased but not received till the end of the accounting period are referred to as Goods-in-transit. Generally, these goods are treated as a form and part of closing stock.

Accounting treatment

 

(A) Adjusting entry	Goods-in-transit A/c	Dr.
	To Trading A/c
(B) Trading Account	Recorded on the credit side
(C) Balance Sheet	Entered on the Assets side as a current Asset

Illustration: 21

Goods costing Rs 70,000 were sent on Mar 25, 2009 but they were not yet received till Mar 31, 2009. Accounting year is financial year. Pass the necessary adjusting entry and show how this is treated in the final accounts.

Solution

 

(A) Adjusting entry	Goods-in-transit A/c	Dr.	70,000
	To Trading A/c			70,000

Goods purchased not yet received, i.e. Goods-in-transit

 

7.19 Bad Debts Written off Recovered

When the amount written off as bad debt but recovered in future, it is generally treated as an item of gain:

Accounting treatment

 

(A) Adjusting entry	Cash/Bank A/c	Dr.
	To Bad Debts Recovered (amount) A/c
(B) Profit and Loss A/c	It will be recorded on the credit side
(Because, Bad Debts Recovered is a gain. It is transferred to the Profit and Loss Account and the usual entry is:
Bad Debts Recovered A/c		Dr.
To Profit and Loss A/c)

7.20 Withdrawals, Samples and Free Gifts

Accounting Treatment of Samples, Free Gifts, etc.: Goods are being distributed by way of samples and free gifts as a part of sales promotion scheme. Goods distributed free to the staff and taken for personal use by the proprietor are all to be treated in a different way. They are not to be treated as part of sale.

 

Accounting treatment
Adjusting entry	Purchases are to be adjusted (by crediting) as:
Respective items Account	Dr.
To Purchase A/c

Illustration: 22

A proprietor is dealing with “Knit Wear” — a hosiery product

1. He took for personal use Rs 2,500
2. Rs 12,000 worth were distributed to his staff, free
3. Distributed by way of samples Rs 9,000
4. Given free to his valuable customers (dealers Rs 3,000 pass the necessary adjusting entries)

Solution:

In the above illustration, all the transactions are to be treated as follows:

1. Goods taken for personal use is “Drawings” A/c
2. Distributed free to his staff is Salaries A/c
3. and (iv) Sales promotion items are Sales Promotion A/c

Hence entry will be:

 

		Rs
(i) Drawings A/c	Dr.	2,500
(ii) Salaries A/c	Dr.	12,000
(iii + iv) Sales promotion A/c	Dr.	12,000
To Purchases A/c			24,500

7.21 Income Tax

The Income tax, for sole proprietors, has to be treated as a personal expense for them. Hence it is to be deducted from the Capital Account in the Balance Sheet.

But interest on advance income tax received, if any, the same is also to be treated as a personal income. Hence it is to be added to the Capital Account in the Balance Sheet.

7.22 Provident Fund: Employee’s and Employer’s Contribution

Both employer and employee contribute a certain amount every month in the employee’s name for a future benefit. It may be said this scheme is called as Provident Fund Scheme. Contribution to this scheme is to be treated as:

 

(A) For Employee’s contribution to P.F.
Salary and Wages A/c	Dr.
To Employee’s contribution to P.F. A/c
To Cash A/c
(B) For Employer’s contribution to P.F.
Salary and Wages A/c	Dr.
To Employer’s contribution to P.F. A/c
(C) For both the contributions to P.F.
Employee’s contribution to P.F. A/c	Dr.
Employer’s contribution to P.F. A/c	Dr.
To Cash A/c

Example 1: Following are the extracts from a Trial Balance of a firm as on Mar 31, 2009.

 

Salaries	Dr. Balance	Cr. Balance
	20,000
P.F. deducted from Salaries		2,000

Additional information: Provide for employer’s share of P.F. equivalent to employee’s share to P.F. Pass Journal entries. Show how will this appear in final accounts?

Answer

1. Journal entry

   	Dr.
   Salaries A/c	2,000
   To Employer’s contribution to P.F. A/c		2,000
   (Employer’s contribution to P.F. entered)

2. Profit and Loss Account for the year ended on Mar 31, 2009

    

   
3. Balance Sheet as on Mar 31, 2009

    

   

Example 2: Following are the extracts from a Trial Balance of a firm as on Mar 31, 2009

	Dr. Balance	Cr. Balance
Salaries Less P.F.	12,000
P.F. Remittance (including 50% employer’s contribution)	1,000

Pass the necessary Journal entry. How will you treat in Final Accounts?

Answer

Entry (1)

Salaries A/c	Dr.    1,000
To Employee’s contribution to P.F.		500
To Employer’s contribution to P.F.		500
(P.F. remittance transferred to Salary)
(2) P and L Account for the year ended Mar 31, 2009

Example 3: Following is the extract from a Trial Balance

	Dr. Balance Rs	Cr. Balance Rs
Salaries Less P.F.	12,000
Employee’s Contribution to P.F.	1,200

Information: Provide for employee’s share of P.F. equivalent to employee’s share to P.F.

Answer

Entry:

1. Salary A/c	Dr.     1,200
   To Employee’s contribution to P.F.		1,200
   (employee’s contribution transferred to Salary A/c)

2. Salary A/c	Dr.     1,200
   To Employer’s contribution to P.F.		1,200
   (employer’s contribution provided for)

3. Profit and Loss Account for the year ended ….
   
4. Balance Sheet as on …..
   

Illustration: 23

You are required to pass the necessary adjusting entries for the following items appearing in the Trial Balance as on Mar 31, 2009.

1. Closing stock in hand as on Mar 31, 2009 Rs 12,500
2. Rent unpaid Rs 1,200
3. Rent received in advance Rs 900
4. Interest due but not received Rs 750
5. Drawings in goods Rs 1,400
6. Insurance for the next period paid Rs 450
7. Wages paid Rs 1,000 for installation of plant
8. Goods worth 1,100 distributed as free samples
9. Capital as on Apr 1, 2008: Rs 75,000. Allow interest on capital @ 12% p.a.

Solution

 

Illustration: 24

You are required to pass the necessary adjusting entries for the following that appear outside the Trial Balance as on Mar 31, 2009:

1. Goods purchased Rs 5,000 were taken to stock but brought to enter in purchases book.
2. Bad debts to be written off Rs 2,000
3. Depreciation is to be provided on fixed assets @ 10%
4. Create provision for doubtful debts @ 5%
5. Provide a provision for discount on debtors @ 3%
6. Create reserve for discount on creditors @ 2%
7. Goods worth Rs 500 were given as charity
8. Allow interest on drawings @ 12%
9. Salaries unpaid Rs 4,800 further information: Fixed Assets: 7,000

   Debtors: 1,05,000

   Creditors: 80,000

   Drawings: 10,000

Solution

 

Illustration: 25

Following are the extracts from a Trial Balance of a business firm as on Mar 31, 2009

Name of Account	Dr. Balance Rs	Cr. Balance Rs
Sundry Debtors	1,05,000
Provision for Doubtful Debts		10,000
Provision for Discount on Debtors		1,200
Bad Debts	2,500
Discount	1,000

Additional Information

1. Additional bad debts: Rs 3,500
2. Additional discount allowed to debtors Rs 1,500
3. Provision for bad debts to be maintained @ 10% on debtors
4. Maintain a provision for discount @ 3% on debtors

You are required to

1. Pass the necessary journal entries
2. Prepare the necessary (ledger) accounts
3. Prepare the final accounts (relating to these items only).

Solution:

Step 1: Adjusting Entries have to be Recorded in the Books of Journal

 

Step 2: Preparation of Ledger Accounts

 

Final Accounts

 

Illustration: 26

A book-keeper has submitted to you the following Trial balance of Mr. Patel wherein the total of debit and credit balances is not equal:

Particulars	Debit Balance Rs	Credit Balance Rs
Capital	—	15,340
Cash in hand	—	60
Purchases	17,980	—
Sales	—	22,120
Cash at bank	1,770	—
Fixtures and Fittings	450	—
Freehold Premises	3,000	—
Lighting and Heating	130	—
Bills Receivable	—	1,650
Returns Inwards	—	60
Salaries	2,150	—
Creditors	—	3,780
Debtors	11,400	—
Stock (Apr 1, 2008)	6,000	—
Printing	450	—
Bills Payable	3,750	—
Rates, Taxes and Insurance	380	—
Discounts Received	890	—
Discounts Allowed	—	400
	48,350	43,410

1. You are required to redraft the Trial Balance correctly.
2. Prepare a Trading and Profit and Loss Account and a Balance Sheet after taking into account the following adjustments:
   1. Stock in hand on Mar 31, 2009 was valued at Rs 3,600
   2. Depreciate fixtures and fittings by Rs 50
   3. Rs 700 was due and unpaid in respect of salaries
   4. Rates and insurance has been paid in advance to the extent of Rs 80

Solution:

First note down the following mistakes.

1. Cash in hand is entered wrongly in the credit balances column. It has to be corrected by entering in the debit balances column.
2. Similarly, returns inwards will have to be corrected by entering it in debit balances column.
3. Bills Receivable and Bills Payable — both wrongly entered. This mistake has to be set right by interchange of amount.
4. Discount allowed and Discount received are to be interchanged.

Redrafted Trial Balance as on Mar 31, 2009

Particulars	Debit Rs	Credit Rs
Capital	—	15,340
Cash in hand	60	—
Cash at bank	1,770	—
Purchases	17,980	—
Sales	—	22,120
Fixtures and Fittings	450	—
Freehold Premises	3,000	—
Lighting and Heating	130	—
Bills Receivable	1,650	—
Returns Inwards	60	—
Salaries	2,150	—
Creditors	—	3,780
Debtors	11,400	—
Stock (Apr 1, 2008)	6,000	—
Printing	450	—
Bills Payable	—	3,750
Rates, Taxes and Insurance	380	—
Discounts Received	—	890
Discounts Allowed	400	—
	45,880	45,880

Illustration: 27

From the following Trial Balance of Mr. Reddy, you are required to prepare Trading and Profit and Loss Account for the year ended on Mar 31, 2009 and a Balance Sheet on that date:

Particulars	Debit Balance Rs	Credit Balance Rs
Capital	—	1,00,000
Drawings	12,000	—
Sundry Creditors	—	40,000
Cash-in-hand	5,000	—
Cash-at-bank	11,600	—
Sundry Debtors	51,000	—
10% Loan (taken on Sep 1, 2008)	—	20,000
Provision for Doubtful Debts	—	4,000
Furniture	12,000	—
Machinery	28,400	—
Stock (Apr 1, 2008)	80,000	—
Purchases	1,80,000	—
Rent and Taxes	6,800	—
Salaries	18,000	—
Manufacturing Wages	25,000	—
Sales	—	2,80,800
Sundry Expenses	2,000	—
Insurance (including a premium of Rs 600 per annum paid Sep 30, 2009)	800	—
Commission	—	1,400
Carriage	4,000	—
Travelling Expenses	1,600	—
Bills Receivable	8,000	—
	4,46,200	4,46,200

Adjustments

1. Stock on Mar 31, 2009 was Rs 76,000
2. Write off bad debts Rs 1,000 and maintain the provision for doubtful debts at 5% on debtors
3. Manufacturing wages include Rs 1,600 for erection of new machinery on Mar 1, 2009
4. Depreciate machinery by 5% and furniture by 10%

[B. Com (Hons)—Modified]

Solution

Note:

1. Bad Debts are shown outside the Trial Balance. That amount has to be deducted from debtors (i.e., Rs 1,000)
2. Calculation to maintain provision for doubtful debts @ 5%

   1. Debtors	=	Rs 51,000
      Less: Bad Debts	=	Rs   1,000	(Given in adjustments)
      		Rs 50,000
      Less: Provision @ 5%:		2,500
      		Rs 47,500	To be shown in balance sheet

   2. Provision for Bad Debts:	Rs 4,000	(Given)
      Less: 5% as
      computed above:	Rs 2,500
      	Rs 1,500	To be shown in P and L A/c

Illustration: 28

The following is the Trial Balance extracted from the books of Shri Arvind as on Dec 31, 2008:

Particulars	Debit Balance Rs	Credit Balance Rs
Capital	—	2,00,000
Plant and Machinery	1,56,000	—
Furniture	4,000	—
Purchases and Sales	1,20,000	2,54,000
Returns	2,000	1,500
Opening Stock	60,000	—
Discount	850	1,600
Sundry Debtors/Creditors	90,000	50,000
Salaries	15,100	—
Manufacturing Wages	20,000	—
Carriage Outwards	2,400	—
Provision for Doubtful Debts	—	1,050
Rent, Rates and Taxes	20,000	—
Advertisements	4,000	—
Cash	13,800	—
	5,08,150	5,08,150

Adjustments

1. Closing stock was valued at Rs 68,440
2. Provision for doubtful debts is to be kept at Rs 1,000
3. Depreciate plant and machinery @ 10%
4. The proprietor has taken goods worth Rs 10,000 for his personal use and additionally distributed goods worth Rs 2,000 as samples
5. Purchase of furniture Rs 1,840 has been passed through purchases book

[B. com. Hons—(Modified)]

Solution

Note:

1. The proprietor took goods worth Rs 10,000 for his own personal use. It has to be treated as drawings. Adjustment: In trading account it has to be deducted from purchases. Further in the balance sheet it has to be deducted from the capital.
2. Samples Rs 2,000 is also to be deducted from purchases in the trading account and it has to be shown in profit and loss account as “advertisement expenses.”
3. Furniture purchases are entered through purchases book. Hence it has to be deducted from purchases in the Trading Account. It is shown as an asset by way of addition to the existing furniture.
4. Provision for bad debts is to be kept at Rs 1,000. It is shown as Rs 1,050. So (Rs 1,050 − Rs 1,000) Rs 50, is to be shown in Profit and Loss Account and Rs 1,000 is shown by way of deduction from the debtors on the Assets side of the Balance Sheet.

Illustration: 29

The following Trial Balance is extracted from the books of Shri Gulsar on Mar 31, 2009

Particulars	Dr. (Rs)	Cr. (Rs)
Capital	—	25,000
Furniture and Fittings	1,280	—
Motor cycle	12,500	—
Building	15,000	—
Bad Debts	250	—
Provision for Doubtful Debts	—	400
Sundry Debtors/Creditors	7,600	5,000
Stock (as on Apr 1, 2008)	6,920	—
Purchases and Sales	10,950	30,900
Bank Overdraft	—	5,700
Returns	400	250
Interest on Bank Overdraft	236	—
Advertising	900	—
Commission	—	750
Cash	1,300	—
Taxes and Insurance Premium	1,564	—
General Expenses	2,500	—
Salaries	6,600	—
	68,000	68,000

Adjustments

1. Stock on hand (as on Mar 31, 2009) Rs 6,500
2. Depreciate building @ 5% p.a.; furniture @ 10% p.a.; motor cycle @ 20% p.a.
3. Rs 170 is due for interest on bank overdraft
4. Salaries Rs 600 and taxes Rs 400 are outstanding
5. Insurance premium Rs 200 is prepaid
6. One-third of the commission received is in respect of work to be done next year
7. Write off a further sum of Rs 200 as bad debts from the debtors
8. Create provision for doubtful debts @ 5% on debtors, you are required to prepare a Trading and Profit and Loss Account for the year ended on Mar 31, 2009 and a Balance Sheet on that date

Solution:

 

Provision for doubtful debts is calculated as
Debtors	7,600	(given in Trial Balance)
Less: Written off	200	(given in adjustments)
	7,400
Less: Provision @ 5%	370
	7,030	(to be shown in Balance Sheet)
For Profit and Loss Account
Bad Debts	Rs 250	(shown in Trial Balance)
Add: Written off	Rs 200	(shown in adjustments)
	450
Add: Provision	370
	820
Less: Existing Provision	400	(given in Trial Balance)
	420	(to be shown in P and L A/c)

 

Illustration: 30

Prepare Trading and Profit and Loss Account and Balance Sheet from the following particulars as on Mar 31, 2009.

 

Trial Balance

Particulars	Dr. (Rs)	Cr. (Rs)
Capital/Drawings	2,800	20,000
Cash-in-hand	3,000	—
Purchases/Sales	24,000	30,000
Returns	2,000	4,000;
Bank Overdraft @ 5%	—	4,000
Salaries	5,000	—
P.F. remittance (deducted from salary)	—	1,000
Taxes and Insurance	1,000	—
Provision for Doubtful debts	—	2,000
Bad Debts	1,000	—
Sundry Debtors and Creditors	10,000	3,700
Commission	—	1,000
Investments	8,000	—
Stock (as on Apr 1, 2008)	6,000	—
Furniture	2,200	—
Bills Receivable and Bills Payable	6,000	5,000
Sales Tax Collected	—	300
	71,000	71,000

Further, you are required to take into account the following information:

1. Salary Rs 200 and taxes Rs 800 are outstanding but insurance Rs 100 pre-paid
2. Commission Rs 200 is received in advance for work to be done next year
3. Provision for doubtful debts is to be maintained at 20%
4. Depreciation on furniture is to be charged @ 10% p.a.
5. Interest accrued on investments Rs 420
6. Stock as on Mar 31, 2009 is valued at Rs 9,000
7. A fire accrued on Mar 1, 2009 in the godown which destroyed the goods worth Rs 8,000, and insurance claim was received for Rs 6,000
8. Provide for employer’s share of P.F. equivalent to employee’s share to P.F.

Solution:

 

Note:

1. P.F. Contribution = Rs 1,000 (shown in Trial Balance)

   Contribution by employer 100% = Rs 1,000

   In P and L A/c this P.F. employer contribution amount has to be added to salary

   In Balance Sheet, this has to be shown in Liabilities side (i.e., Rs 2,000)

2. Loss by fire = Goods worth =	Rs 8,000
   Insurance received:	Rs 6,000
   Loss (Abnormal):	RS 2,000

This is shown in Trading A/c on the credit side and again in P and L on the debit side.

 

Illustration: 30 (another approach)

Note:

1. Loss by fire: This may be treated in another way. Goods worth destroyed by fire Rs 8,000 is shown in Trading Account.
2. Actual loss incurred, i.e. goods worth lost by fire — insurance claim allowed Rs 8,000 — Rs 6,000 = Rs 2,000 is debited to Profit and Loss Account
3. Claim allowed by the insurance company, i.e. Rs 6,000 is shown on the assets side of the Balance Sheet.

Illustration: 31

From the following Trial Balance of Mr. Kannan as on Mar 31, 2009 and additional information given, prepare the Trading and Profit and Loss Account for the year ended on Mar 31, 2009 and a Balance Sheet on that date:

Particulars	Debit Balance Rs	Credit Balance Rs
Opening Stock	12,500	—
Capital	—	1,12,500
Debtors and Creditors	15,000	8,750
Purchases and Sales	1,00,000	1,75,000
Returns	3,750	2,500
Carriage	2,000	—
Wages and Salaries	6,250	—
Commission	—	3,250
Machinery	20,000	—
Furniture	5,000	—
Bad Debts	2,000	—
Provision for Doubtful Debts	—	2,500
Bills Receivable/Bills Payable	7,500	1,750
Land and Buildings	1,00,000	—
Taxes and Insurance	4,250	—
Discount Allowed	3,000	—
Bank	12,500	—
Drawings	12,500	—
	3,06,250	3,06,250

Additional Information

1. Value of the closing stock as on Mar 31, 2009 is Rs 10,000
2. Wages and salaries outstanding is Rs 250
3. Insurance prepaid is Rs 1,000
4. Provide for doubtful debts on the debtors at the rate of 10%
5. Depreciate the machinery @ 10% and the furniture @ 15%
6. Goods costing Rs 6,000 have sold on the approval basis for Rs 7,500, but these were not approved by the customers as yet.

(B. Com. Adapted)

Solution

Note:

1. “Goods sent on approval” — item appear in this question
2. Hence, Rs 7,500 (goods sold on approval) has to be deducted from (i) sale and (ii) debtors, as goods sold on approval are not at all treated as sales.
3. Goods lying with the customers, which were not yet approved, is to be ADDED to the closing stock: As such Rs 6,000 has to be added to the closing stock.

Illustration: 32

On Mar 31, 2009, the following Trial Balance has been extracted from the books of Shri Gokale.

Particulars	Dr. Balance Rs	Cr. Balance Rs
Capital/Drawings	6,000	60,000
Sundry Debtors/Creditors	38,200	16,802
Purchases/Sales	1,34,916	2,22,486
Returns	15,642	2,692
Bills Receivable/Bills Payable	13,764	5,428
5% Loan on Mortgage (1,4,2008)	—	17,000
Interest on Loan	400	—
Cash in Hand	6,100	—
Stock (Apr 1, 2008)	11,678	—
Motor vehicle	18,000	—
Cash at bank	9,110	—
Land and Buildings	24,000	—
Bad Debts	1,250	—
Carriage Outward	2,808	—
Bad Debts Provision	—	1,420
Discount	—	880
Carriage Inward	7,858	—
Establishment Expenses	16,194	—
Rates, Taxes and Insurance	7,782	—
Advertisement	4,528	—
General Expenses	8,978	—
Rent Received	—	500
Total	3,27,208	3,27,208

Prepare Trading and Profit and Loss Account for the year ended on Mar 31, 2009 and a Balance Sheet on that date after considering the following:

1. Depreciate land and building @ 5% p.a. and motor vehicle @ 15% p.a.
2. Salaries Rs 1,400 and rates Rs 800 are due
3. The provision for doubtful debts is to be maintained @ 5% on Sundry Debtors
4. Stock in hand on Mar 31, 2009 is valued at Rs 12,500
5. Goods costing Rs 1,000 were taken by the proprietor for his personal use, no entry has been made in the books of accounts
6. Prepaid insurance Rs 350
7. Provide for manager’s commission at 5% net profit after charging such commission
8. A fire broke out on Apr 1, 2009 destroying goods worth Rs 4,700
9. Goods costing Rs 1,200 were sent to a customer on sale or return for Rs 1,400 on Mar 27, 2009, and have been recorded in the books as actual sales

(C.A. Modified)

Solution

Note: Goods sent on approval:

1. Adjustment in Trading A/c: Sale price of goods on approval is to be deducted from sale (Rs 1,400). Cost of goods sold sent on approval (Rs 1,200) has to be added to closing stock.
2. In Balance Sheet, Rs 1,400 is to be deducted from debtors: Rs 1,200 is to be added to stock.

Note: Manager’s commission at 5% on Net Profit after changing such commission:

Commission	=	Net Profit before charging commission × 5/105
	=	Rs 21,204 × 5/105
	=	Rs 1,009.71
	=	Rs 1,010 (rounded off)

Illustration: 33

From the following Trial Balance of Devnath, prepare Trading and Profit and Loss Account for the year ended on Mar 31, 2009 and a Balance Sheet as on that date after considering the adjustments given at the end:

Particulars	Dr. Rs	Cr. Rs
Purchases and Sales	3,49,600	3,70,000
Wages	450	—
Capital	—	24,250
National Insurance	150	—
Carriage Inwards	200	—
Carriage Outwards	250	—
Lighting	300	—
Rates and Insurance	200	—
Stock on Mar 31, 2009	30,625	—
Cash in Hand	875	—
Discounts	50	300
Buildings	15,000	—
Debtors and Creditors	3,000	10,000
Furniture	4,000	—
Dividend	—	150
Total	4,04,700	4,04,700

Adjustments

1. Rates and insurance include a premium of Rs 150 p.a. paid up to Sep 30, 2009.
2. National insurance balance includes employee’s contribution of Rs 75 also. Wages are shown “net” after deducting the above employee’s contribution.
3. Some employees are housed in the building of the business, the rented value of which is Rs 250 p.a.
4. Sale as shown in the Trial Balance includes the sale of old furniture (on Sep 2008) realising Rs 100. The book value of this furniture was Rs 150 at the commencement at the rate of depreciation on this asset has all along been 20% p.a.
5. The manager is entitled to get a commission of 1/10 of net profits after charging his commission.
6. Depreciate building by 5%.

(B. Com—Modified)

Solution

Note:

1. Employees contribution to National Insurance and rental value of building — both form part of gross wages. Hence, they have to be added to wages. In Profit and Loss A/c, rental value is shown on the credit side.
2. Depreciation:

   (a) Furniture Sold	Rs
   Book value at the beginning	150
   Less: Depreciation for 6 months at 20%
   (150 × 20/100 × 6/12)	15
   Book value on date of sale	135
   Sales price	100
   *1 Loss on sale of furniture	35
   (b) Furniture in hand (20% on Rs 4,000 − Rs 150)	770
   *2 Depreciation: Rs 15 + Rs 770	785

3. Manager’s Commission = Net Profit × 10/110

Illustration: 34

The following is the Trial Balance of a merchant on Mar 31, 2009

Particulars	Dr. Rs	Cr. Rs
Capital/Drawings	30,000	4,00,000
Opening Stock	37,500	—
Purchases/Sales	7,97,500	11,55,000
Freight on Purchases	12,500	—
Wages (11 months upto Feb 28, 2009)	33,000	—
Salaries	70,000	—
Postage, Telegrams, Telephone	6,000	—
Printing and Stationery	9,000	—
Miscellaneous Expenses	15,000	—
Debtors/Creditors	1,25,000	1,50,000
Investments	50,000	—
Discount Received	—	7,500
Bad Debts	7,500	—
Provision for Bad Debts	—	4,000
Building	15,0000	—
Machinery	2,50,000	—
Furniture	20,000	—
Commission on Sales	22,500	—
Interest on Investments	—	6,000
Insurance (up to Aug 31, 2009)	12,000	—
Bank Balance	75,000	—
	17,22,500	17,22,500

Adjustments

1. Closing Stock Rs 1,12,500
2. Machinery worth Rs 22,500 purchased on Oct 1, 2008 was shown as purchases. Freight paid on the machinery was Rs 2,500, which was included in freight on purchases
3. Commission is payable at 2½ on sales
4. Investments were sold @ 10% profit but the entire sale proceeds have been taken as sales
5. Write off bad debts Rs 5,000
6. Create a provision for doubtful debts at 5% on debtors
7. Depreciate Building by 2½12; %; Plant and Machinery at 10% p.a. you are required to prepare Trading and Profit and Loss Account for the year ended on Mar 31, 2009 and a Balance Sheet as on that date.

(C.A. Foundation—Adapted)

Note:

1. Machinery purchased was entered in purchases. So, that amount has to be deducted from purchases.
2. Freight included in purchases has to be deducted from purchases and has to be transferred to Machinery Account.
3. Sales of investments have to be deducted from sales: Sales = Rs 50,000 + 10% Profit = Rs 55,000.
4. Provision for Doubtful Debts:

    

   	Rs
   (a) Debtors	1,25,000
   Less: Bad Debts	5,000	(given in Adjustment)
   	1,20,000
   *1 Less: Provision @ 5%	6,000
   	1,14,000	(to be shown in Balance Sheet)
   *2 (b) In Profit and Loss Account:
   Provision for Doubtful Debts	6,000
   (5% of Rs 1,20,000)
   Less: Provision (in Trial Balance)	4,000
   	2,000

Hence, Rs 2,000 has to be entered on the Debit side of Profit and Loss Account under “Provision for Doubtful Debts.”

 

Illustration: 35

Mr. Shewag carries on a retail business and his Trial Balance on Mar 31, 2009 is as follows:

Particulars	Dr. Rs	Cr. Rs
Purchases	11,31,250	—
Sales	—	14,13,300
Returns Inwards	8,500	—
Returns Outwards	—	6,240
Provision for Doubtful Debts	—	10,400
Sundry Debtors	76,400	—
Sundry Creditors	—	51,052
Bills Payable (promissory notes to be paid)	—	17,900
Stock in the beginning	1,13,450	—
Wages	40,274	—
Salaries	37,150	—
Furniture	30,150	—
Alternations to shop	9,000	—
Postage, Stationery, Insurance, etc.	26,452	—
Heading and Lighting	4,700	—
Trade Expenses	20,628	—
Rent, Rates and Taxes	27,034	—
Bad Debts	1,050	—
Loan at 15% (to Ajay, Dec 1, 2008)	6,000	—
Investments (at cost)	23,000	—
Dividends from Investments	—	3,650
Unexpired Insurance	1,048	—
Cash at Hand and at Bank	31,504	—
Bills Receivable (amount receivable on Promissory Notes	38,140	—
Promissory Notes	38,140	—
Capital Account	—	1,54,000
Drawings Account	32,000	—
Outstanding Wages	—	4,038
Rent Accrued but not Paid	—	1,500
Depreciation on Furniture	3,350	—
Additions to Furniture	1,000	—
	16,62,080	16,62,080

Prepare the Trading and Profit and Loss Account for the year ended on Mar 31, 2009 and a Balance Sheet on that date after taking into consideration the following:

1. Sundry Debtors include an item of Rs 500 for goods supplied to the proprietor and on item of Rs 1,200 due from a customer who has become insolvent.
2. Provision for doubtful debts is to be maintained at 5% of the Sundry Debtors.
3. One-fifth of alternations to the shop is to be written off.
4. Goods of the value of Rs 2,000 have been destroyed by fire and the insurance company had admitted the claim for Rs 1,400 only.
5. Bills receivable include a dishonored promissory note for Rs 5,300.
6. Stock at the end was Rs 1,21,040.
7. An intimation from the bank that a customer’s cheque for Rs 2,000 had been dishonored is still to be entered in the books.

— (C.A. Adapted and Modified)

Solution:

Notes:

1. Four months interest on loan extended to Mr. Ajay Rs 300 is due. It is shown on the credit side of Profit and Loss Account as “By Interest accrued.” And in the Balance Sheet it is added with loan and shown on the assets side.
2. Goods destroyed by fire are treated as follows:
   1. Total value of goods destroyed in fire Rs 2,000 — Enter into credit side of Trading Account.

      Loss = Goods value − Claim admitted by insurance company

      = Rs 2,000 − Rs 1,400 = Rs 600

   2. This (Rs 600) is entered in the Debit side of P and L A/c
   3. Amount from insurance company is shown (Rs 1,400) on the Assets side of the Balance Sheet.
3. Sundry Debtors:

   	Rs
   Debtors (as in Trial Balance)	76,400
   Less: To be transferred to Drawings	500
   	75,900
   Less: Written off as Bad Debt	1,200
   	74,700
   Add: Dishonored promissory note
   (deducted from bills receivable)	5,300
   	80,000
   Add: Dishonored cheque:
   (deducted from bank)	2,000
   	82,000

This amount Rs 82,000 has to be recorded in the Balance Sheet and provision for doubtful debts (Rs 4,100) has to be deducted from this.

 

Note: Double entry with respect to depreciation, prepaid insurance, rent accrued and outstanding wages has been completed and shown in Trial Balance. As such, in respect of wages and rent, they are to be recorded without only adjustment in the Balance Sheet as shown below:

 

Illustration: 36

The following Trial Balance has been extracted from the books of a merchant.

Particulars	Debit Dr. Rs	Credit Rs
Drawings	17,500	—
Buildings	30,000	—
Debtors and Creditors	25,000	40,000
Purchases and Sales	1,50,000	2,32,500
Returns	1,750	1,450
Discount	3,550	2,550
Life Insurance	1,500	—
Cash	15,000	—
Stock (opening)	6,000	—
Bad Debts	2,500	—
Reserve for Bad Debts	—	8,500
Carriage Inwards	3,100	—
Wages	13,850	—
Machinery	4,00,000	—
Furniture	30,000	—
Salaries	17,500	—
Bank Commission	1,000	—
Bills Receivable/Bills Payable	30,000	20,000
Trade Expenses/Capital	6,750	4,50,000
	7,55,000	7,55,000

Adjustments

1. Allow interest on capital @ 5% p.a.
2. Machinery includes Rs 1,00,000 of a machine purchased on Dec 31, 2008. Wages include Rs 2,850 spent on the installation of a machine.
3. Trade expenses Rs 1,250 and wages Rs 1,750 have not been paid as yet.
4. Depreciate building by 5%; furniture and machinery by 10% p.a.
5. Make provision of doubtful debts at 5%.
6. Stock on Mar 31, 2009 was valued at Rs 25,000.

You are required to prepare the Trading and Profit and Loss Account for the year ended on Mar 31, 2009 and a Balance Sheet as on that date.

 

B.Com (Hons)—Adapted

Solution

Note:

1. Interest on capital is to be adjusted with net profit (after computing and at the end of P and L A/c to be shown separately). This is again added to Capital in Balance Sheet.
2. Life insurance is shown by deducting from Capital in the Liabilities side of Balance Sheet.

Illustration 37

From the following Trial Balance and additional information of Mr Raj, prepare Trading and Profit and Loss Account for the year ended on Mar 31, 2009 and the Balance Sheet as on that date.

Particulars	Debit Dr. Rs	Credit Rs
Capital	—	69,214
Purchases/Sales	33,729	50,350
Bad Debts	1,155	—
Rent	5,500	3,250
Wages	10,480	—
Building	30,000	—
Machinery	8,000	—
Salaries	20,800	—
Debtors (including Goel’s dishonoured bills of Rs 400)	16,850	—
Printing and Advertising	7,300	—
Commission Received	—	8,500
Creditors	—	9,500
	1,33,814	1,33,814

Additional Information

1. Wages include a sum of Rs 2,000 spent on the erection of a cycle shed for employees and customers and Rs 1,000 for preparation of new machinery on Jan 1, 2009.
2. Depreciate machinery and building by 5%.
3. Remuneration of Rs 1,000 paid to an employee was debited to his personal account.
4. Sundry Creditors include an amount of Rs 2,750 received from Rajeev and credited to his account. The amount was written off as a bad debt in the previous year.
5. Goods costing Rs 250 were taken by the proprietor for his personal use but no entry was made in the books of accounts.
6. Goods costing Rs 300 were sent to a customer on sale or return for Rs 350 on Mar 27, 2009 and were recorded in the books as actual sale.
7. A fire occurred on Mar 15, 2009 in the godown and goods worth Rs 500 were destroyed. It was fully insured but the insurance company admitted the claim for Rs 300.
8. 50% of the amount of Goel’s bill is irrecoverable.
9. Create a provision of 5% on debtors.
10. One-third of the commission received is in respect of work to be done next year.
11. Rent has been paid for 11 months but received for 13 months.
12. Included among the debtors is Rs 1,500 due from Rohit and included among the creditors Rs 500 due to him.
13. Provide for personal income tax @ 10% on net profit in excess of Rs 25,000.
14. Stock in hand on Mar 31, 2009 was valued as Rs 55,944.
15. Manager is entitled to a commission of 5% on net profit after charging his commission.

Solution

Note:

1. Loss of stock by fire Rs 500 is to be entered in the credit side of Trading Account.
2. Actual loss, i.e. Rs 500 − 300: Rs 200 to be debited to P and L A/c.
3. Insurance company admitted claim for Rs 300 only. This amount has to be shown as an asset in the name of insurance company.
4. Goods sent on approval Rs 350 is to be deducted from sales and cost of goods sent on approval Rs 300 has to be added to closing stock in Trading Account.

In Balance Sheet, Rs 300 has to be added to stock and Rs 350 has to be deducted from debtors.

 

*Manager’s Commission:	Net Profit before commission × 5/105
(after charging commission):	Rs 36,750 × 5/105 (Rs 72,535 − Rs 35,785)
	= Rs 1,750

 

• Final Accounts represent (i) Trading, (ii) Profit and Loss Account and (iii) Balance Sheet.
• Final accounts are prepared to ascertain (i) the net profit or loss for a period (Trading and Profit and Loss Account) and (ii) the financial position of the business entities on a particular date.
• Trading Account is treated along with Profit and Loss Account as one account (unit). Next stage, after preparing the Trial Balance is the preparation of Trading Account to ascertain gross profit or loss for a period.
• Net sales revenue, Cost of goods sold, net purchases and direct expenses explained.
• For preparation of Trading Account, refer the main part of text.
• Manufacturing account is prepared by entities engaged in manufacturing activities to ascertain cost of goods manufactured. This account is closed by transferring its balance to trading account. For preparation of Manufacturing Account, refer the main part of text.
• Profit and Loss Account is prepared after preparing Trading Account to ascertain Net Profit. Profit and Loss Account is closed by transferring Net Profit/ Loss to the Capital Account in the Balance Sheet.
• Uses of Profit and Loss Account: (i) Net income determination, (ii) Tool of financial planning, (iii) Capital maintainance, (iv) Source of internal financing, (v) Basis for tax computation and (vi) Future investment decisions.
• For accounting treatment of various items (refer illustrations numbers from 6 to 37).
• The next step in the accounting process after preparing the Trading and Profit and Loss Account is the preparation of Balance Sheet. Balance Sheet is a statement comprising the summary of financial position of enterprises on a particular date. Contents of the Balance Sheet. “Grouping” is arranging items of similar nature together under a common heading. “Marshalling” is the order in which the assts and liabilities are recorded either in the order of liquidity or in the order of permanency.
• Differences between Trial Balance and Balance Sheet (refer text).
• Treatment of (1) Closing Stock, (2) Accrued Expenses, (3) Prepaid Expenses, (4) Accrued Income, (5) Income Received in Advance, (6) Depreciation, (7) Bad Debts, (8) Provision for Bad Debts, (9) Provision for Discount on Debtors, (10) Provision for Discount on Creditors, (11) Interest on Capital, (12) Interest on Drawings, (13) Insurance Premium, (14) Salaries and Wages, (15) Commission on Profit, (16) Goods Sent on Approval, (17) Goods-in-transit, (18) Bad Debts Written Off, (19) Samples, Free Gifts, etc., (20) Income Tax, (21) P.F., (22) Loss by Fire, Theft, Embezzlement, (23) Dishonour of Cheques. Accounting treatment is illustrated item wise in the main part of the text, not repeated again (refer main part of the text).

Balance Sheet: The statement that summarises the assets, liabilities and owner’s equity of an entity on a particular date. It may also be said as follows: A statement of financial position of a business enterprise on a given date enlisting all assets, liabilities, capital and reserve and surplus at their book value.

Contingent Assets: They are not proper assets but come into existence upon the happening of certain events or the expiry of certain time. It does not appear in the Balance Sheet.

Contingent Liability: An obligation relating to an existing situation that may arise in the future depending on the occurrence or nonoccurrence of one or more uncertain events. It is not an effective liability until some future event occurs. It is not shown in the balance sheet and mentioned in footnote only.

Current Assets: Assets that are expected to be converted into cash or consumed in the production of goods or rendering of services during the operating cycle of business firms.

Current Liabilities: Liabilities that are normally payable in a relatively short period (not exceeding 12 months).

Goods Sent on Approval: Goods sent to customers with a tag “sale or return.”

Gross Profit: The difference between net sale and cost of goods sold or the excess of proceeds of goods sold over their cost during an accounting period.

Grouping and Marshalling: Arranging and putting together under the common heading the items of same nature in Balance Sheet is termed grouping. Arrangement of items in order of liquidity or in the order of performance in the Balance sheet is termed as marshalling.

Manufacturing Account: An account dealing with raw materials, work in progress and the cost of goods produced is termed as Manufacturing Account.

Net Profit: Excess of revenue over expenses during an accounting period.

Operating Profit: The net profit arising from the normal operations of a business enterprise. (Expenses of financial nature are not included in operating profit.)

Owner’s Equity: A claim of proprietor or owner in the assets of an entity. It is the excess of assets over liabilities.

Prepaid Expenses: Payments made in advance for certain expenses, leaving same unexpected portion of expenses at the end of an accounting period.

Profit and Loss Account: A constituent of final accounts (financial statements). It depicts revenues and expenses of a business enterprise for an accounting period. It shows the excess of revenues over expenses.

Profit and Loss Appropriation Account: The net profit arrived at Profit and Loss Account is carried down to a new account to record items of appropriation changes against the profit. The new account is known as Profit and Loss Appropriation Account.

Trading Account: An account prepared to ascertain gross profit/loss of a firm prior to the preparation of Profit and Loss Account.

 

“Accountancy – Financial Accounting,” National Council of Educational Research and Training,” New Delhi.

R.L. Gupta and V.K. Gupta, “Principles and Practice of Accountancy.” Sultan Chand and Sons, New Delhi.

P.C. Tulsian, “Financial Accounting,” Pearson Education, New Delhi.

 

I. State whether the following statements are True or False

1. Balance Sheet is not an account but only a statement.
2. According to business entity concept, business is a separate identity for accounting purposes.
3. The final accounts of sole trader are governed by specific statue – Schedule VI of Companies Act, 1956.
4. Trading Account is prepared to know whether the business entity has earned gross profit or suffered gross loss.
5. Trading Account is prepared after the preparation of Profit and Loss Account.
6. If closing stock is given in the Trial Balance, it will be shown on the credit side of the Trading Account.
7. Gross Profit/Loss is shown in the Balance Sheet.
8. The nominal accounts are transferred to either Trading Account or Profit and Loss Account.
9. Profit and Loss Account is prepared to ascertain net profit or net loss of a firm for a specified accounting period.
10. Net profit increases the capital.
11. Accrued income means that amount which has been earned but yet due.
12. Profit and Loss Account deals with both direct expenses and indirect expenses.
13. Carriage inward and carriage outward – both are debited to Profit and Loss Account.
14. Charity is a direct expense and should be debited to Trading Account.
15. Manufacturing Account is prepared to ascertain the cost of the goods produced.
16. Manufacturing Account deals with finished goods only.
17. The Balance Sheet contains only personal and real accounts.
18. The Balance Sheet contains both opening and closing stock.
19. Putting together items of the same nature under the common heading is called “Marshalling.”
20. Contingent liability is not shown in the Balance Sheet.

Answers

 

1. True	2. True	3. False	4. True	5. False
6. False	7. False	8. True	9. True	10. True
11. False	12. False	13. False	14. False	15. True
16. False	17. True	18. False	19. False	20. True

 

II. Fill in the blanks with appropriate word(s)

1. Gross profit is the excess of net sales revenue over __________.
2. Net Sales Revenues = Cash Sales + Credit Sales minus __________.
3. Cost of Goods Sold = Opening Stock + Net Purchases – Stock at the end + __________.
4. Net Purchases = Cash Purchases + Credit purchases minus __________.
5. If closing stock is given in the Trial Balance, it is not shown in Trading Account because purchases have already been __________.
6. Gross Profit/Loss is transferred to __________.
7. Transfer items of revenues and expenses to Trading and Profit and Loss Account are made by means of Journal entries which are technically called __________.
8. Net loss __________ the capital.
9. Outstanding income means that amount of income which is due and receivable but not yet ________.
10. Gross Profit/Loss is transferred to __________.
11. Net Profit/Loss is transferred to __________.
12. Excess of gross profit over operating expenses is known as __________.
13. Carriage inward is debited to __________.
14. Combined item – salaries and wages should be debited to __________.
15. Any duty paid on purchases should be debited to __________.
16. Bonus is charged to __________.
17. Manufacturing Account is prepared to ascertain the __________ produced.
18. The order or classes in which the assets and liabilities are stated in the Balance Sheet is termed as __________.
19. Debit balance in the Profit and Loss Account appearing on the Assets side of a Balance Sheet is called __________.
20. Contingent liability is shown by way of __________ to the Balance Sheet.
21. The amount provided by the owners is known as __________.
22. If accrued income appears in the Trial Balance, it will be shown on the __________ side of the Balance Sheet.
23. Goods sold on approval are never treated as __________.
24. Goods lying with the customers who have not given their approval are treated as part of the __________.
25. The Net Profit calculated in the Profit and Loss Account is transferred to a new account known as __________ to record items of appropriation as against charges against the profit.

Answers

1. Cost of goods sold
2. Sales Returns
3. Direct Expenses
4. Purchases Returns
5. Adjusted
6. Profit and Loss Account
7. Closing entries
8. Decreases
9. Received
10. Profit and Loss Account
11. Capital Account in Balance Sheet
12. Operating profit
13. Trading Account
14. Profit and Loss Account
15. Trading Account
16. Profit and Loss Account
17. Cost of the goods
18. Marshallling
19. Fictitious
20. Foot-note
21. Capital or owners’s equity
22. Assets
23. Sales
24. Closing stock
25. Profit and Loss Appropriation Account

1. Name the different accounts which constitute “Final Accounts.”
2. Explain why the Trading Account is prepared before the preparation of Profit and Loss Account.
3. What are direct expenses? Mention any four such direct expenses.
4. Write short note on closing entries.
5. What are the advantages of a Trading Account?
6. What are “Indirect Expenses”? Give few examples.
7. How will you treat gain or loss on sale of fixed assets in the preparation of final accounts?
8. Distinguish between outstanding income and accrued income.
9. Explain “Operating Profit.”
10. What is meant by nonoperating profit?
11. How would you treat the following items while preparing final accounts?
    1. Carriage inward and outward
    2. Dock dues, cleaning charges, octroi, import and export duty
    3. Loose tools
    4. Trade discount
    5. Wages and salaries
12. What is “Manufacturing Account”?
13. List any two differences between Trading Account and Manufacturing Account.
14. Write short notes on
    1. Grouping
    2. Marshalling
15. What are the main classification of assets?
16. What are contingent assets?
17. What are the major classification of liabilities?
18. How would you treat contingent liabilities while preparing final accounts?
19. What is meant by “Owner’s Equity”?
20. Mention any four uses of balance sheet.
21. How would you computer manager’s commission?
22. What is Profit and Loss Appropriation Account?

1. What is Trading Account? Draw a pro forma of a Trading Account. Pass the necessary closing entries relating to Trading Account. What are the advantages of Trading Account?
2. What is Profit and Loss Account? Draw a pro forma of Profit and Loss Account. Pass the necessary closing entries relating to Profit and Loss account.
3. What are the uses of Profit and Loss Account?
4. What is Balance Sheet? Draw a pro forma of it. Explain its significance. How does it differ from a Trial Balance?
5. Discuss the uses and limitations of financial statements.

 

1. From the following particulars of Mr. Raj for the year ending on Mar 31, 2010, prepare the trading account.

(Answer: Gross Profit: Rs 7,89,850)

 

2. From the following balances of M/S Kapil and Sons, prepare a Trading and Profit and Loss Account for the year ending on Mar 31, 2010.

(Answer:	Gross Profit: Rs 24,552
	Net Profit: Rs 11,128)

 

3. The following balances appeared in the Trial Balance of Star and Co.

		Rs
Opening Stock:	Raw Material	1,20,000
	Work-in-progress	70,000
	Finished goods	1,40,000
	Purchases	5,40,000
	Sales	10,50,000
Returns:	Purchases	15,000
	Sales	9,000
	Wages	1,95,000
	Factory expenses	1,35,000
Freight:	Inwards	25,000
	Outwards	45,000
Carriage:	Inwards	5,000
	Outwards	10,000
At the end of the accounting period, the stock on hand were:
	Raw Materials	1,05,000
	Work-in-progress	30,000
	Finished Goods	1,65,000

Prepare the Manufacturing and Trading Account.

 

(Answer:	Cost of Goods Manufactured Rs 9,40,000
	Gross Profit Rs 1,26,000)

 

4. Prepare Manufacturing and Trading account and Profit and Loss Account from the following information for year ending on Mar 31, 2010.

 

Stock of raw materials (opening)	7,31,520
Stock of raw materials (closing)	8,89,200
Purchases of raw materials	6,25,824
Work-in-progress on Apr 1, 2009	2,25,072
Work-in-progress on Mar 31, 2009	2,47,824
Finished goods on Apr 1, 2009	5,15,232
Finished goods on Mar 31, 2010	3,04,560
Productive Wages	5,02,568
Unproductive Wages	14,160
Carriage Inward	9,648
Rent and Taxes	15,840
Lighting and Heating	8,064
Depreciation and Maintenance of Plant	76,896
Works Salaries	56,304
Stores Expenses	10,512
General Works Expenses	2,01,600
Sales	21,60,000
Sales Returns	60,000
Sale of Scrap	60,000
Office Rent	2,400
Office Salaries	6,000
Distribution Expenses	7,200
Bad Debts	8,400

 

(Answer:	Cost of Goods Manufactured Rs 12,81,984
	Gross Profit Rs 6,07,344
	Net Profit Rs 5,82,344)

 

5. From the following trial balance of Mrs. Renu prepare Trading, Profit and Loss Account for the year ended on Dec 31, 2009.

Closing stock is valued at Rs 4,05,000
(Answer:	Gross Profit: Rs 16,44,000
	Net Profit: Rs 5,91,000)

 

6. Give the necessary adjusting entries for the following items appearing outside the Trial Balance as on Dec 31, 2009

1. Closing stock as on Dec 31, 2009 Rs 10,000
2. Rent received in advance Rs 3,750
3. Salary due but not paid Rs 5,400
4. Interest due but not received Rs 1,200
5. Unexpired insurance on Dec 31, 2009 Rs 970
6. Bad debts to be written off Rs 600
7. Depreciation on fixed assets @ 20%
8. Create provision for doubtful debts @ 5%
9. Create provision for discount on debtors @ 2%
10. Create provision for discount on creditors @ 2%
11. All interest on capital @ 12% p.a.
12. Charge interest on drawings @ 10% p.a.

Other Information: Fixed Assets Rs 69,000; Debtors: Rs 90,000; Creditors: Rs 40,000; Capital: Rs 2,50,000; Drawings: Rs 10,000.

 

7. Trial Balance of Mr. Balaji as on Mar 31, 2010 was as follows:

Particulars	Dr. Rs	Dr. Rs
Capital/Drawings	1,600	90,000
Stock as on Apr 1, 2009	4,500	—
Purchases/Sales	59,500	32,250
Sales Returns	1,000	—
Insurance Premium	750	—
Duty Paid on Purchases	5,000	—
Primary Packing Expenses	1,000	—
Carriage Outwards	4,000	—
Postage	50	—
Advertisement	500	—
Bad Debts	150	—
Discount	—	250
Bills Payable	—	4,500
Bank Overdraft	—	1,500
Land and Buildings	45,000	—
Plant and Machinery	35,000	—
Furniture	500	—
Debtors/Creditors	12,700	21,000
Goodwill	4,500	—
Wages and Salaries	8,000	—
Cash in Hand	250	—
Cash at Bank	20,000	—
	1,76,750	1,76,750

Adjustments

1. Closing stock as on Mar 31, 2010 is Rs 10,800
2. Interest on bank O/D unpaid is Rs 138
3. Half-yearly insurance premium pre-paid
4. Depreciate land and buildings @ 10%
5. Depreciate plant and machinery @ 20%
6. Write off further bad debts of Rs 200
7. Make provisions for required doubtful debts @ 5% on debtors.

You are required to prepare trading and profit and loss A/c for the year ending on Mar 31, 2010 and a balance sheet as on that date.

 

(Answer:	Gross Profit: Rs 18,550;
	Net Profit: Rs 1,262;
	Total of Balance Sheet: Rs 1,66,800)

 

8. From the following data prepare Trading and Profit and Loss Account for the year ending on Mar 31, 2010 and a Balance sheet as on that date:

Merchandise inventory on Mar 31, 2010 is Rs 1,14,600. Depreciation for current year on stores equipment is Rs 6,200; and on office equipment: Rs 5,400; Rs 3,200 for rent is due but not paid. Insurance prepaid is Rs 5,500. At computer of the value of Rs 10,000 purchased during the year is included in the purchase.

(Answer:	Gross Profit: Rs 2,88,800
	Net Profit: Rs 1,18,800
	Total of Balance Sheet: Rs 3,21,200)

 

9. A trader maintained provision for doubtful debts @ 5%; provision for discount @ 2% on debtors and reserve for discount @ 2% on creditors which on Jan 1, 2008 stood at Rs 4,500, Rs 1,500 and Rs 1,200, respectively. His balances on Dec 31, 2008 and on Dec 31, 2009 were:

	Dec 31, 2008 Rs	Dec 31, 2009 Rs
Bad Debts written off	5,400	900
Discount Allowed	1,800	600
Sundry Debtors	60,000	18,000
Discount Received	900	150
Sundry Creditors	45,000	90,000

You are required to show necessary accounts in the ledger:

 

(I.C.W.A—Modified)

  [Answer:

1. Debit P and L A/c with Rs 3,900 in 2008 for Reserve for Doubtful Debts and Credit P and L A/c with Rs 1,200 in 2009 for Reserve for Doubtful Debts
2. Debit P and L A/c with Rs 1,440 in 2008 Credit P and L A/c with Rs 198 in 2009 for Provision for Discount on Debtors]

10. From the following particulars prepare (1) Reserve the Doubtful Debts A/c; (2) Reserve for Discount on Debtors and (3) Reserve for Discount on Creditors for both the years:

1. Balance as on Jan 1, 2008; Reserve for doubtful debts Rs 3,000; Reserve for Discount on debtors Rs 1,500; Reserve for discount on creditors Rs 1,200.
2. Total debtors as on Dec 31, 2008 were Rs 75,000 after writing off bad debts Rs 1,800 and allowing discount Rs 600.
3. Total debtors as on Dec 31, 2009 were Rs 60,000 after writing off bad debts Rs 1,800 and allowing discount Rs 150.
4. Total creditors as on Dec 31, 2008 and 2000 were Rs 45,000 and Rs 30,000, respectively.
5. Discounts received during the years were Rs 900 and Rs 150, respectively.
6. Provide 5% as Reserve for Doubtful Debts; 2½12; % as Reserve for Discount on Debtors and 2% as Reserve for Discount on Creditors.

Answers:

1. Reserve for Doubtful Debts:
   1. For the year 2008: P and L A/c is debited with Rs. 2,550
   2. For the year 2008: P and L A/c is debited with Rs 1,050
2. Reserve for Discount on Debtors:
   1. For 2008: P and L A/c is to be debited with Rs 881.25
   2. For 2008: P and L A/c is to be credited with Rs 206.25
3. Reserve for Discount on Creditors:
   1. For 2008: P and L A/c is to be credited with Rs 600
   2. For 2008: P and L A/c is to be debited with Rs 150

11. An inexperienced book keeper prepared the following Trial Balance as on Mar 31, 2010

Correct the Trial Balance.

Prepare Trading and P and L account for the year ending on Mar 31, 2010 and the Balance Sheet on that date after considering the following adjustments:

1. Closing stock was valued at Rs 20,500
2. Write off bad debts of Rs 500
3. Outstanding salary Rs 500
4. Depreciate building and furniture by 10% p.a.
5. Depreciate plant by 15% p.a.

Answer

1. Total of corrected trial balance Rs 1,65,000
2. Gross profit Rs 32,000
3. Net profit Rs 9,500
4. Total of balance sheet: Rs 95,000

12. Mrs. Bhagya submitted to you the following trial balance which she has not been able to agree. Rewrite the Trial Balance and prepare Trading and Profit and Loss Account for the year ended on Dec 31, 2009 and a balance as on that date after giving effect to the under mentioned adjustments:

Particulars	Dr. Rs	Dr. Rs
Capital	—	64,000
Opening stock	70,000	—
Closing stock	—	75,160
Drawings	13,220	—
Return Inward	—	2,200
Carriage Inward	4,960	—
Deposit with Mr. x	—	5,600
Return Outward	3,360	—
Carriage Outward	—	2,900
Rent Paid	3,200	—
Rent Outstanding	600	—
Purchases	52,000	—
Sundry Debtors	20,000	—
Sundry Creditors	—	16,000
Furniture	6,000	—
Sales	—	1,16,000
Wages	3,400	—
Cash	5,480	—
Goodwill	7,200	—
Advertisement	3,800	—
	1,93,220	2,81,860

Adjustments

1. Write off Rs 2,400 as bad debts and make Reserve for Bad Debts on Sundry Debtors @ 5%
2. Stock values at Rs 8,000 were destroyed by fire on Dec 20, 2009 but insurance company admitted a claim for Rs 6,000; and paid the sum in Jan 2010.
3. Depreciate furniture by 10%:

(C.A.—Modified)

Answer:	Corrected Trial Balance Total: Rs 1,99,600.
	Gross Profit: Rs 69,960
	Net Profit: Rs 54,180
	Total of Balance Sheet: Rs 1,21,560)

 

13. From the following Trial Balance and information prepare Trading and Profit and Loss Account of Mr. Kumar for the year ending on Mar 31, 2010 and a Balance Sheet on that date.

Particulars	Dr. Rs	Dr. Rs
Capital/Drawings	6,000	50,000
Land and Buildings	45,000	—
Plant and Machinery	10,000	—
Furniture	2,500	—
Sales/Purchases	40,000	70,000
Returns	2,500	2,000
Debtors/Creditors	9,200	6,000
Loam from “x” on July 1, 2009 @ 6% p.a.	—	15,000
Carriage	5,000	—
Sundry Expenses	300	—
Printing and Stationery	250	—
Insurance	500
Provision for Doubtful Debts	—	500
Provision for Discount on Debtors	—	190
Bad Debts	200	—
Profit of Textile Department	—	5,000
Stock of general goods on Apr 1, 2009	10,650
Salaries and Wages	9,250
Trade Expenses	400
Stock of goods (textiles) on Mar 31, 2010	4,000
Cash at bank	2,300
Cash in hand	640
	1,48,690	1,48,690

Information

1. Stock of general goods on Mar 31, 2010 valued at Rs 13,650.
2. Fire occurred on Mar 25, 2010 and Rs 5,000 worth of general goods were destroyed. The insurance company accepted claim for Rs 3,000 only and paid the claim money on Apr 15, 2010.
3. Bad debts amounting to Rs 200 are to be written off.
4. Provision for doubtful debts is to be made at 5% and for discount at 2% on debtors.
5. Make a provision of 2% on creditors for discount.
6. Received Rs 3,000 worth of goods on Mar 28, 2010 but the invoice of purchase was not recorded in purchases book.
7. Kumar took away goods worth Rs 1,000 for personal use but no record was made thereof.
8. Depreciate land and buildings as 2%, plant and machinery at 20% and furniture at 5%.
9. Insurance prepaid amounts to Rs 100.

(C.A.—Modified)

    Answer:

1. Gross Profit: Rs 30,500
2. Net Profit: Rs 19,049
3. Total of Balance Sheet: Rs 86,544

14. The accountant of M/s Leo Enterprises extracted the following Trial Balance as on Dec 31, 2009.

Particulars	Dr. Rs	Dr. Rs
Capital	—	50,000
Drawings	—	9,000
Buildings	7,500	—
Furniture and Fittings	3,750	—
Motor Van	12,500	—
Loan from x @ 12% interest	7,500	—
Interest paid on above	225	—
Sales	—	50,000
Purchases	37,500	—
Stock as on Jan 1, 2009	—	16,000
Stock as on Dec 31, 2009	12,500	—
Establishment Expenses	7,500	—
Freight Inward	1,000	—
Freight Outward	—	500
Commission Received	—	3,750
Sundry Debtors	14,050	—
Bank Balance	10,250	—
Sundry Creditors	—	5,000
	1,34,250	1,34,250

The accountant located the following errors but is unable to proceed any further:

1. A totaling error in bank column of payment side of cash book whereby the column was under totaled by Rs 250.
2. Interest on loan paid for the quarter ending Sep 30, 2009. Rs 225 was omitted to be posted in the ledger. There was no further payment of interest.

You are required to set right the Trial Balance and prepare Trading and Profit and Loss Account for the year ended on Dec 31, 2009 and the Balance Sheet as on that date after carrying out the following:

1. Depreciate:
   1. Building at 2.5% p.a.
   2. Furniture at 10% p.a.
   3. Motor van at 25% p.a.
2. Balance of interest on the loan is also to be provided for

[C.A.—Modified]

    (Answer:

1. Total of corrected trial balance: Rs 1,16,225
2. Gross profit: Rs 15,000
3. Net profit: Rs 6,387.50
4. Balance sheet total: Rs 60,112.50)

15. From the following particulars extracted from the books of Gambir, prepare Trading and Profit and Loss Account for the year ending on Mar 31, 2010 after making the necessary adjustments:

Adjustments

1. Value of stock as on Mar 31, 2010 is Rs 78,600. This includes goods returned by customers on Mar 31, 2010 to the value of Rs 3,000 for which no entry has been passed in the books.
2. Purchases include furniture purchased on Jan 1, 2010 for Rs 2,000.
3. Depreciate furniture as 10% p.a.
   
4. The loan account from State Bank of India in the books of Gambir appears as follows:
5. Sundry Debtors included Rs 4,000 due from Rahul and Sundry Creditors include Rs 2,000 due to him.
6. Interest paid include Rs 600 paid to State Bank of India.
7. Interest received represents Rs 200 from the Sundry Debtors and the balance on investments and deposits.
8. Provide for interest payable to State Bank of India and for interest receivable on investments and deposits.
9. Make a provision for doubtful debts at 5% on the balance under “Sundry Debtors.” No such provision needs to be made for the deposits.

C.A. (Foundation)—Modified

(Answer:	Gross Profit: Rs 55,900;
	Net Profit: Rs 14,100;
	Balance Sheet Total: Rs 1,45,600)

 

16. Following figures are extracted from the books of Bintu:

Adjustment

1. Stock on Mar 31, 2010 was valued as Rs 72,600
2. A new machine was installed during the year costing Rs 15,400, but it was not recorded in the books and no payment was made for it. Wages Rs 1,100 paid for its erection have been debited to wages account.
3. Depreciate plant and machinery by 33 1/3%, Furniture by 10% and Freehold property by 5%.
4. Loose tools were valued at Rs 1,760 on Mar 31, 2010.
5. If the Sundry Debtors Rs 660 are bad and should be written off.
6. Maintain a provision of 5% on Sundry Debtors for doubtful debts.
7. The manager is entitled to a commission of 10% of the net profits after charging such commission.

Answer:	Gross Profit: Rs 1,08,570
	Net Profit: Rs 40,800
	Total of Balance Sheet: Rs 3,25,380)

 

17. Following is the Trial Balance as on Dec 31, 2009

Particulars	Dr. Rs	Dr. Rs
Opening Stock	15,000	—
Drawings and Capital	5,000	50,000
Purchases and Sales (adjusted)	75,000	1,37,500
Wages	3,000	—
Salaries	10,000	—
Import Duty	2,500	—
Carriage Inwards	2,000	—
Insurance	2,500	—
Advertisement	5,000	—
Furniture	20,000	—
Bad Debts	2,500	—
Book Debts	25,000	—
Creditors	—	15,000
Loose Tools	12,500	—
Reserve for Bad Debts	—	1,000
Rent	2,500	—
Discount Received	—	4,000
Depreciation of Furniture	2,500	—
Depreciation of Loose Tools	2,500	—
Closing Stock	15,000	—
Outstanding Import Duty	5,000	—
Premises	35,000	—
Commission Received	—	5,000
Cash Balance	10,000	—
Bank Balance	2,500	32,500
	2,50,000	2,50,000

Adjustments

1. A customer of Rs 2,500 is also a creditor of Rs 5,000. Create Reserve for Bad Debts @ 5% p.a. after writing off further bad debt of Rs 2,500.
2. Depreciate furniture and loose tools @ 25% and by Rs 5,000, respectively, and appreciate premises by Rs 5,000.
3. Annual payment is salaries Rs 12,500 and rent Rs 5,000.
4. Unexpired import duty and insurance are Rs 500 each.
5. Sale of furniture (book value nil) for Rs 1,500 to be accounted for as omitted in the books.
6. Withdrawn from the bank by the owner for domestic use of Rs 7,500.

You are required to prepare the final accounts by applying marshalling of balance sheet as on Dec 31, 2009.

 

—B.Com. Modified

(Answer:	Gross Profit: Rs 40,500;
	Net Profit: Rs 16,500;
	Balance Sheet Total: Rs 1,66,500)

 

18. From the following balances extracted from this books of Mrs. Rukhmani, prepare Trading and Profit and Loss Account for the year Mar 31, 2010 and a Balance Sheet as on that date:

Particulars	Dr. Rs	Dr. Rs
Purchases	35,640	—
Mrs. Rukhmani’s Capital	—	30,000
Computer at Cost	9,190	—
Cash at Bank	2,000	—
Cash in Hand	1,418	—
Sundry Creditors	—	6,500
Bills Payable	—	5,110
Furniture and Fittings	770	—
Rent	6,270	—
Discount Received	—	11,000
Bills Receivable	3,360	—
Trade Charges	460	—
Sundry Debtors	17,078	—
Sales	—	30,360
Return Outwards	—	5,716
Drawings	2,600	—
Rent Due	—	160
Discount Allowed	270	—
Wages	900	—
Salaries	8,390	—
Returns Inwards	500	—
	88,846	88,846

Adjustments

1. Closing stock on Mar 31, 2010 was valued at cost Rs 12,800 (Market value, Rs 13,100)
2. Rs 3,000 paid to Mrs. Y against bill payable were debited by mistake to Mrs. Z. and included in the list of Sundry Debtors.
3. Travelling expenses paid to sales representative Rs 2,500 for the month of Mar 2010 were debited to his personal account and included in the list of Sundry Debtors.
4. Depreciate furniture and fittings by 10% p.a.
5. Provide for doubtful debts at 5% on Sundry Debtors.
6. Goods casting Rs 750 were used by the proprietor. Entry for it has not yet been passed.
7. Salaries include Rs 6,000 paid to the sales representative who is further entitled to a commission of 5% on net sales.
8. Stationery charges Rs 600 on Mar 31, 2010.
9. Purchases include opening stock values at Rs 3,500 (cost price).
10. Sales representative is further entitled to an extra commission of 5% on net profit after charging his extra commission.
11. No depreciation need be provided for computer, as it was purchased on Mar 31, 2010 and not to put to use on that date.

(C.A. (Inter)—Adapted and Modified)

(Answer:	Gross Profit: Rs 12,586
	Net Profit: Rs 2,806.50
	Total of Balance Sheet: Rs 40,460)

 

19. The accountant of Khurana ascertained the business profits; but due to his defective knowledge or otherwise a number of discrepancies have crept in the Trading and Profit and Loss Account prepared by him. You are requested to draft these accounts properly ascertaining the cost of goods produced. The accounts prepared by the accountant are as under:

 

(C.A. Inter—Adapted and Modified)

Answer:	Cost of Goods Produced: Rs 88,175
	Gross Profit: Rs 6,775
	Net Loss: Rs 6,800)

 

20. From the following particulars for the year ending on Mar 31, 2010 of M/s Gemini Company, prepare Trading and Profit and Loss Account and Balance Sheet on that date:

Adjustments to be made for the current year are:

1. Interest on capital to be allowed at 5% for the year.
2. Interest on drawings to be charged to him as ascertained for the year Rs 464.
3. Apprenticeship premium is for three years received in advance on Apr 1, 2009.
4. Stock valued at Rs 17,400 destroyed by fire on Mar 26, 2010 but the insurance company admitted a claim of Rs 11,600 only to be paid in the year 2011.
5. Rs 29,000 out of advertisement expenses are to be carried forward.
6. The manager is entitled to a commission of 10% of the net profit calculated after charging such commission.
7. The stock includes material worth Rs 5,800 for which bill had not been received and therefore, not yet accounted for

C.A. (Foundation)—Modified

Answer:	Gross Profit: Rs 3,07,400
	Net Profit: Rs 2,21,086
	Total of Balance Sheet: Rs 6,46,410