Chapter 7

Financial Statements from Incomplete Records (Single Entry System)

INTRODUCTION

Accounting is an ancient art. Any business enterprise should keep a systematic record of transactions. A systematic record of such transactions is called “accounting” – precisely. But here one has to understand what a “transaction” really means. A well-known definition explains it as types of actions and reactions having monetary implications of one person or firm in relation to another person or firm. It clearly reveals that if there is a transaction then there must be transfer of money from one person (firm) to another person (firm). Hence the necessity arises to record any type of transaction in a systematic way.

Notwithstanding the fact that the art of accounting has attained perfection with the advent of Double Entry System in India and accounting equation approach in the United States, still some people follow rudimentary method of keeping accounts. Some maintain personal accounts only. No other accounts relating to assets, liabilities, expenses, gains and so on are maintained. Recording all types of transactions in a concise and complete set of records is not being followed. Such system of accounting popularly known as Single Entry System is still in vague. Technically speaking, there is no such system of accounting called “Single Entry System.” It is technically termed as “Accounts from Incomplete Records.” It is called as incomplete records because real and nominal counts are not maintained. Some transactions are not at all recorded. In some transactions only one aspect (debit or credit) is recorded and only personal accounts are kept.

In this chapter, salient features of this system and proper accounting treatment to attain perfection from such incomplete records of accounts are explained in detail.

OBJECTIVE 1: MEANING AND DEFINITION OF SINGLE ENTRY SYSTEM

Accountants, in general, feel reluctant to use the phrase “Single Entry System,” because strictly speaking there exists no such system. The so-called system is developed by certain business entities for their convenience without adhering to the rules of double entry system. Under this system only cash book and personal accounts are maintained, but the most essentially needed subsidiary books – backbone of the double entry system – are not maintained. To put it in a nutshell, this system may be termed as an incomplete double entry system. Kohler defines it as “A system of book-keeping in which as a rule only records of cash and personal accounts are maintained; it is always incomplete double-entry, varying with circumstances.”

OBJECTIVE 2: SALIENT FEATURES OF INCOMPLETE RECORDS SYSTEM

1. Suitable for Sole Trading Concerns: This system is generally vogue in sole trading concerns and to some extent in partnership firms. But limited companies cannot keep their accounts under this system because of legal requirements.

2. Only Personal Accounts: Only personal accounts are kept.

3. Mix-up of all Transactions: It is very common in this system to maintain one single cash book mixing business as well as private transactions.

4. No Uniformity in Maintenance of Records: There is no uniformity in maintaining the records. It varies from firm to firm according to the convenience of the firm.

5. Only an estimate: Profit/loss ascertained under this system is only an estimate and it may not reflect the accurate status of the business entities.

6. Only Vouchers and No Subsidiary Books: For information one has to rely on vouchers only, because it is not recorded then and there in subsidiary books.

7. Lacks Accuracy: It lacks accuracy, scientific and systematic method of recording/accounting transactions.

2.1 Advantages of Incomplete Double Entry System

1. Easy to Maintain: It is very simple and easy to maintain by any person even without basic knowledge of accounting principles.
2. Economy: It is very economical and it costs less as records to be maintained are very few.
3. Time Saving: As the number of records to be kept is very minimal, it is less time-consuming for recording transactions.

2.2 Disadvantages of Single Entry System

1. Both aspects (Debit and Credit) of the transactions are not recorded. Trial balance cannot be prepared. It lacks from arithmetical accuracy.
2. As real accounts are not maintained, it is not easy to prepare Balance Sheet. So the true financial position of such enterprises cannot be ascertained.
3. It does not reveal any information relating to sources of profit/loss or causes for them.
4. It is difficult to detect fraud, as this systems lack automatic checks.
5. Errors are rampant, as it is difficult to detect and rectify them under this system.
6. It is not easy to conduct audit of such accounting system.
7. It is difficult to operate internal control and check system.
8. It is difficult to exercise control over assets of the concern.
9. Inter-firm or intra-firm comparisons are not possible in this system.
10. Records maintained under this system are not recognised by tax authorities, insurance companies and so on.
11. Real and nominal accounts are ignored and as such net worth of the business, goodwill, claim from insurance companies and so on cannot be ascertained with accuracy.

OBJECTIVE 3: DIFFERENCES BETWEEN SINGLE ENTRY SYSTEM (INCOMPLETE RECORDS SYSTEM) AND DOUBLE ENTRY SYSTEM

Basis of Difference	Incomplete Records System (Single Entry)	Double Entry System
1. Aspect of transaction	In some cases both the aspects (i.e., Dr. and Cr.) and in most of the cases only one aspect of the transaction is recorded	Both aspects of transactions are recorded in all cases
2. Assumptions and principles	It is not based on certain assumptions and principles	It is based on certain assumptions and principles
3. Nature of accounts	Generally, personal accounts and cash accounts are maintained	All types of accounts, Personal, Real and Nominal accounts are maintained
4. Trial balance Trial	Trial Balance cannot be prepared	Trial Balance can be prepared
5. Profit/loss	Trading and Profit and Loss accounts are not prepared. So, profit/loss cannot be ascertained accurately	Trading and Profit and Loss accounts can be prepared and profit/loss can be ascertained accurately
6. Financial position	In the absence of Balance Sheet, financial position cannot be ascertained	As Balance Sheet is prepared, financial position can be easily ascertained
7. Adjustments	Usually, adjustments are not carried out in preparing accounts	All types of adjustments are carried out in the preparation of accounts
8. Utility	This system is suitable only for small size business concerns	This system is suitable for all types of business entities
9. Recognition	Records maintained under this system are not recognized by statutory bodies	All statutory bodies give due recognition to the records maintained under this system
10. Accuracy and reliability	Arithmetical accuracy and reliability of accounting results cannot be expected	All results are reliable and accurate

OBJECTIVE 4: PREPARATION OF ACCOUNTS (OR) ASCERTAINMENT OF PROFIT OR LOSS FROM INCOMPLETE RECORDS

Any business entity wants to know its financial position and operating results for a specific period. Under this system, as no records are maintained in accordance with standardised accounting principles, it is not possible to prepare final accounts – Trading and Profit and Loss Account to furnish operating results and Balance Sheet to ascertain its financial position.

For this system, generally, the following two methods are employed to ascertain profit /loss.

1. Statement of Affairs Method (or) Net Worth Method
2. Conversion Method

4.1 Statement of Affairs Method (or) Net Worth Method

4.1.1 Meaning

A statement that shows items of different assets and liabilities is referred to as the Statement of Affairs.

1. This is prepared to compute the Capital (difference between Total Assets and Total Liabilities) in the beginning and at the end of the accounting period.
2. This is similar to the Balance Sheet.
3. Sources of accounting under this method:
   1. Cash book
   2. Bank pass book
   3. Debtors and creditors personal ledger
   4. List of fixed assets (not proper records)
   5. Outstanding and prepaid income and expense (not proper records)

4.1.2 Accounting Procedure

1. Statement of Affairs Method is used to ascertain profit/loss for the accounting period.
2. Under this method the following two statements have to be prepared:
   1. Statement of Affairs
   2. Statement of Profit and Loss

(i) Statement of Affairs is prepared to ascertain the capital, (i.e. excess of assets over liabilities) on a particular date

Two statements of affairs have to be prepared – one to ascertain the capital in the beginning of the accounting period and the other to ascertain the capital at the end of the accounting period.

Such statements will reveal the amount relating to capital in the beginning and capital at the end, respectively.

This statement will simply depict whether there is an increase or decrease in capital during the accounting period. Mere increase or decrease may not be enough to compute the net profit/loss, as many other factors can affect such increase or decrease in the capital.

So, the necessity arises to make certain adjustments to compute the capital at the end. This can be done by preparing another statement, which is known as Statement of Profit and Loss.

(ii) Statement of Profit and Loss is prepared mainly to make adjustments to ascertain the actual capital during the accounting period

Adjustments relating to the following have to be made:

1. Drawings
2. Additional capital introduced
3. Interest on capital
4. Interest on drawings
5. Salary to a partner
6. Depreciation
7. Provisions
8. Outstanding incomes and expenses
9. Prepaid incomes and expenses

This Statement of Profit and Loss is prepared by making the adjustments in the capital to arrive at profit/loss.

Under this method, these two statements (1) Statement of Affairs and (2) Statement of Profit and Loss have to be prepared to compute profit/loss during an accounting period.

To put in a nutshell:

Statement of Affairs Method requires preparation of two statements: (1) preparation of Statement of Affairs to compute the capital and (2) preparation of Statement of Profit or Loss (adjustments of certain items with the capital) to compute profit or loss.

4.1.3 Format of Statement of Affairs

4.1.4 Format of Statement Showing Profit or Loss

Statement Showing Profit or Loss for the Period Ending …….

Particulars	Rs
1. Capital (generally, at the end of accounting period)	—
2. Add: Drawings (both cash in hand and kind)	—
3. Less: Additional capital introduced during the accounting period (both cash in hand and kind)	—
4. Adjusted capital at the end of the accounting period (1 + 2 – 3)	___
5. Capital at the beginning of the accounting period	___
6. Profit if 4 > 5 (i.e., 4 – 5) or Loss if 4 < 5 (i.e., 5 – 4)	___

OBJECTIVE 5: DISTINCTION BETWEEN STATEMENT OF AFFAIRS AND BALANCE SHEET

Even though the Statement of Affairs is similar or looks like a Balance Sheet, it really differs in the following aspects:

Basis of Distinction	Statement of Affairs	Balance Sheet
1. Main objective	Computation of capital in the beginning and at the end is the main objective in preparing this statement	To ascertain the financial position on a specific date is the reason for preparing the Balance Sheet
2. Basis of preparation	It is prepared on the basis of estimates mostly and to some extent on the basis of ledgers	It is prepared mainly on the basis of ledgers only
3. Reliability	It lacks reliability as it relies on estimates, assumptions and information obtained from memory	Balance Sheet is reliable as it relies on records only and can be verified at any time
4. Omissions	Omission of an item (asset or liability) cannot be detected easily	Such omissions can at once be detected due to non-agreement of both the sides of Balance Sheet
5. Financial position	It reflects only the estimated financial position	It shows the true financial position
6. Arithmetical accuracy	As Trial Balance cannot be prepared, it suffers from arithmetical accuracy	Preparation of Trial Balance ensures arithmetical accuracy
7. Basis of valuation	No standard method of valuation is adapted. It is mostly prepared in an arbitrary way and method of valuation is not disclosed as such	Standardised accounting principles are adopted in assessing the value of assets. Method of valuation is properly disclosed
8. Assets– Liabilities equation	Assets may not be equal to liabilities	Total of assets side and total of liabilities side will be equal always

OBJECTIVE 6: ACCOUNTING TREATMENT

Computation of Profit/Loss as per Statement of Affairs Method

 

Step 1:	Draw the format of Statement of Affairs (for the beginning of the accounting period).
Step 2:	Transfer the items relating to assets to the assets side of Statement of Affairs Account.
Step 3:	Transfer the items relating to liabilities to liabilities side.
Step 4:	Ascertain the capital (balancing figure – the difference between the sum of the assets and liabilities). This may be termed as opening capital as it is prepared in the beginning of the accounting.
Step 5:	Repeat the procedure (from Step 1 to Step 4) to ascertain the capital at the end of the accounting period. This is termed as closing capital.
Step 6:	After ascertainment of capital in the beginning and at the end (i.e., opening capital and closing capital), statement showing profit or loss (second statement and second part of the solution) is to be prepared.
Step 7:	Take the closing capital as the base and add the drawing (main adjustment to the capital).
Step 8:	Another adjustment – additional capital introduced or took place during the accounting has to be deducted from the closing capital.
Step 9:	The figure arrived at after these main adjustments is termed as adjusted closing capital.
	Adjusted Closing Capital = Closing Capital + Drawings – Additional Capital.
Step 10:	Find the difference between the adjusted closing capital and the opening capital to ascertain profit or loss.
	Profit – If the Adjusted Closing Capital > Opening Capital
	Loss – If the Adjusted Closing Capital < Opening Capital
Step 11:	From profit/loss ascertained, further adjustments should be made for items not yet adjusted, to arrive at net income

6.1 Model 1: Computation of Capital

Illustration: 1

From the particulars provided, you are required to calculate the capital of Mrs. Bhagya Shree as on Mar 31, 2009.

Cash in hand Rs 15,000; Stock in trade Rs 75,000; Sundry Creditors Rs 20,000; Sundry Debtors Rs 70,000; Bills Payable Rs 50,000; Bills Receivable Rs 40,000; Bank Overdraft Rs 30,000; Loans and Advances Rs 90,000 (Dr.); Outstanding Expenses Rs 25,000; Prepaid Expenses Rs 10,000; Loan from X (Cr.) Rs 1,50,000; Land and Building Rs 1,70,000.

Solution

• As computation of capital alone is the requirement, preparation of Statement of Affairs will be enough.
• Remember the procedure explained and follow the sequence of the steps.

Step 1:	Draw the format
Step 2:	Classify the items whether they relate to asset or liability
Step 3:	Record them in the format
Step 4:	Add the assets side and liabilities side
Step 5:	Find the difference
Step 6:	Result will be the capital at Mar 31, 2009

 

6.2 Model 2: Ascertainment of Profit/Loss

Illustration: 2

Opening Capital Rs 50,000; drawings Rs 15,000; capital introduced during the year Rs 25,000; Closing Capital Rs 1,05,000. Ascertain the profit/loss for the year 2008.

Solution

1. In this question both opening capital and closing capital values are shown. So, the first part, Statement of Affairs need not be prepared.
2. So, the second part, Statement of Profit or the Loss has to be prepared.

Step 1:	Closing Capital is taken as base
Step 2:	Add the Drawings
Step 3:	Deduct the Additional Capital (less)
Step 4:	This figure represents adjusted capital at the end (1 + 2 – 3)
Step 5:	Deduct the Opening Capital (less)
Step 6:	Profit (4 – 5)

 

Statement of Profit or Loss for the year ending 2008

Particulars	Rs
1. Capital at the end	1,05,000
2. Add: Drawings	15,000
	1,20,000
3. Less: Additional Capital	25,000
4. Adjusted Capital at the end	95,000
5. Less: Opening Capital	50,000
6. Profit (4 > 5; 4 – 5)	45,000

6.3 Model 3: Ascertainment of Opening Capital, Closing Capital and Profit/Loss

Illustration: 3

Mr. Sameer keeps his accounts on Single Entry System from the following figures available, compute profits made by him for the year ended Dec 31, 2008.

	As on 31.12.2007 Rs	As on 31.12.2008 Rs
Cash in hand	10,000	15,000
Cash at bank	50,000	80,000
Furniture	10,000	10,000
Stock in trade	75,000	1,00,000
Sundry Creditors	30,000	35,000
Sundry Debtors	20,000	30,000

During the year 2008, he withdrew Rs 500 every month for his personal use and invested on June 15, 2008 Rs 10,000 as additional capital.

Solution

Particulars are available for two years. So, Statement of Affairs – one for the year ending on Dec 31, 2007 and the other one for the year ending on Dec 31, 2008 – have to be prepared.

Remember the steps and proceed accordingly.

Stage I: Computation of Opening Capital

 

Stage II: Computation of Closing Capital

 

Stage III: Ascertainment of profit or loss

Remember the steps involved in computing the profit or loss (preparation of the Statement of Profit or Loss).

		Rs
Step 1:	Capital at the end, i.e. on 31.12.88	2,00,000
Step 2:	Add: Drawings (Rs 500 per month × 12)	6,000
		2,06,000
Step 3:	Less: Additional capital, introduced on June 15	10,000
Step 4:	Adjusted capital at the end of 2008	1,96,000
Step 5:	Less: Capital in the beginning, i.e. on 31.12.2007	1,35,000
Step 6:	Profit (4 – 5) (4 > 5)	61,000

6.4 Model 4: Computation of Net Profit (After Adjustments)

Illustration: 4

Mrs. Renu could not keep complete records. She provides you with the following details:

	As on 1.4.2008 Rs	As on 31.3.2009 Rs
Bank balance	9,000	1,200 (Cr.)
Stock in trade	41,000	70,000
Sundry Debtors	30,000	40,000
Sundry Creditors	15,000	6,000
Bills payable	5,000	3,000
Bill receivable	13,000	17,000
Furniture and fixtures	6,000	6,000
Buildings	1,20,000	1,20,000

Further Information

She sold her private investments of Rs 6,000 @ 33 1/3% premium and brought this money in her business on June 1, 2008. Her drawings were Rs 1,500 per month. Stock costing Rs 9,000 was taken by her for personal use. Rs 5,000 is outstanding for wages and Rs 2,000 for salaries. Prepaid insurance Rs 500, outstanding medical expenses amounted to Rs 2,000. A provision @ 10% is required for doubtful debts. Depreciation is to be written off @ 5% on furniture and fixtures and 10% on buildings.

You are required to compute profit and loss by statement of affairs method for the year 2008–2009 and Balance Sheet as on Mar 21, 2009.

Solution

1. Calculation of opening and closing capital has to be made by preparing Statement of Affairs.
2. Computation of profit or loss has to be made by preparing Statement of Profit or Loss. But here, after arriving profit or loss, all the other adjustments have to be carried out to arrive at net profit (this is the Step 6, the last step discussed)
3. Finally a Balance Sheet has to be drawn as on Mar 31, 2009.

Stage I: Computation of Opening Capital and Closing Capital

 

Stage II: Calculation of profit or loss

 

		Rs
Step 1:	Capital at the end (i.e., on 31.3.2009)	2,42,800
Step 2:	Add: Drawings (Cash Rs 1,500 × 12 + Stock Rs 9,000)	27,000
		2,69,800
Step 3:	Loss: Additional capital (Rs 6,000 = 33 1/3 of Rs 6,000)	8,000
Step 4:	Adjusted capital at the end (1 + 2 – 3)	2,61,800
Step 5:	Less capital in the beginning (i.e., as on 1.4.2008)	1,99,000
Step 6:	Profit (4 > 5; 4 – 5) (but subject to adjustments)	62,800
Step 7:	Less: Other adjustments

 

	Provision for doubtful debts	4,000
	Depreciation on furniture and fixtures	300
	Depreciation on building	12,000
	Outstanding Wages	5,000
	Outstanding Salaries	2,000

 

Outstanding Medical Expenses	2,000	Rs
	25,300
* Pre-paid insurance	(500)
	24,800	24,800

Step 8: Net Profi t for the year (Step 6 – Step 7)            =      38,000

Stage III: Preparation of Balance Sheet as on 31.3.2009

 

6.5 Model 5: Cheques Issued but not Presented

Illustration: 5

On 1.4.2008, Mr. B.P. Singh started a business with a capital of Rs 1,00,000 with which he opened a bank account. In the same date, he bought furniture for Rs 15,000 and stock of goods for Rs 45,000.

On Mar 31, 2009, the stock in hand was valued at Rs 70,000 and fittings stood at Rs 13,500. Book debts amounted to Rs 50,000 of which Rs 2,000 was considered as bad. His bank balance as per cash book was Rs 10,000. A cheque of Rs 1,750 sent for deposit on Mar 29, 2009 was realised on Apr 7, 2009 and a cheque of Rs 900 issued on Mar 17, 2009 was not presented till Apr 3, 2009. Bank charges amounted to Rs 100, but the same was not intimated to him upto Mar 31, 2009. His drawings stood at Rs 750 per month. He also took goods worth Rs 7,500 for personal use from the business. Creditors stood at Rs 12,000 at the end. You are required to prepare a statement showing profit or loss for the period ending on Mar 31, 2009.

Solution

1. In this problem bad debts are shown. It has to be deducted from book debts.
2. Some transactions relating to cheques are shown. Accounting treatment for them:
   1. A cheque of Rs 1,750 – even though sent for deposit on Mar 29 itself (i.e., during the accounting period), it was realised only on Apr 7 (i.e., next accounting period). So that transaction need not be taken into account.
   2. Another cheque of Rs 900, even though it was issued on Mar 17 itself, it was not presented till Apr 3, 2009. So this also need not be recorded now.
   3. Bank charges Rs 100, even though not intimated to the client it has to be deducted from cash at bank as per cash book, as it really affects the amount during the accounting.
3. As opening capital is given, a statement of affairs for the closing capital has to be computed, with the adjustments, discussed as above.
4. Finally a Statement of Profit or Loss for the year ending Mar 31, 2009 is to be prepared.

Stage I: Statement of Affairs as on Mar 3, 2009

Stage II: Statement of Profit or loss for the year ending on Mar 31, 2009

	Rs
1. Capital on Mar 3, 2009 (Computed as in Stage I)	1,29,400
2. Add: Drawings (Rs 750 per month × 12 + Stock worth Rs 7,500)	16,500
3. Adjusted Capital	1,45,900
4. Less: Capital on 1.4.2008 (Given in question)	1,00,000
5. Profit (3 > 4; 3 – 4) for the year	45,900

6.6 Model 6: Bank Transactions – Adjustments

Illustration: 6

Mr. Jain had Rs 2,00,000 in bank on Jan 1, 2008 on which date he started business. His incomplete records reveal:

	31.3.2008 Rs	31.3.2009 Rs
Cash in hand	10,000	16,000
Stock in trade	25,500	32,500
Sundry Debtors	40,000	50,000
Sundry Creditors	22,500	16,500

On Feb 1, 2008, he started withdrawing Rs 2,500 per month from the business for his personal use. His account in the bank reveals:

	Deposits Rs	Withdrawals Rs
Jan 1, 2008	2,00,000	—
Jan 1, 2008 to Mar 31, 2008	—	1,25,000
Apr 1, 2008 to Mar 31, 2009	2,12,500	1,75,000

The above withdrawals included payments by cheques of Rs 1,06,000 and Rs 37,500, respectively, during the period from Jan 1, 2008 to Mar 31, 2008 and from Apr 1, 2008 to Mar 31, 2009 for purchase of machinery for the business. The deposits after Jan 1, 2008 consisted wholly of sale price received from customers by cheques. Determine the profit/loss of Mr. Jain for the year ended Mar 31, 2009.

 

(B.Com Bombay University – Modified Slightly)

Solution

As some transactions relate to bank and through cheques, while entering the amount relating to bank the following adjustments have to be made:

Step 1

• While preparing statement of affairs (on Mar 31, 2008), i.e. for the period from Jan 1, 2008 to 31 Mar, 2008, amount relating to, bank will be: deposits during the period – withdrawals during the period. Rs 2,00,000 – 1,25,000 = Rs 75,000, shown on the assets side.

Step 2

• Computation of cash at bank, for the preparation of Statement of Affairs (as on Mar 31, 2009) will be as follows.

		Rs
	Opening balance of cash at bank	75,000
	(as worked out earlier)
	(i.e., on 1.4.2008)
	Add: Deposits for this period	2,12,500
	i.e., From 1.4.2008 to 31.3.2009	_____
	(given in question)	2,87,500
	Less: Withdrawals for this period
	i.e., from 1.4.2008 to 31.3.2009
	(given in question)	1,75,000
	*2 Cash at bank on Mar 31, 2009	1,12,500

Step 3

• Statement of Affairs for both the dates have to be prepared, as usual.

Step 4

• Finally, Statement of Profit and Loss for the year ending Mar 31, 2009 is to be prepared.

Stage I: Statement of Affairs as on Mar 31, 2008

Stage II: Statement of Affairs as on Mar 31, 2009

Stage III: Statement of Profit/Loss for the year ending on Mar 31, 2009

	Rs
Capital as on Mar 31, 2009	3,13,000
Add: Drawings (Rs 2,500 × 12)	30,000
Adjusted Capital	3,43,000
Less: Capital as on Mar 31, 2008	2,34,000
Net Profit (3 > 4; 3 – 4) for the year	1,09,000

6.7 Model 7: Net Increase in Assets or Net Decrease in Liabilities

Net worth direct from the Balance Sheet.

Illustration: 7

The Balance Sheets of Mrs. Rukmani as on Mar 31, 2008 and Mar 31, 2009 are given below. She is unable to understand what has happened to the profit of Rs 75,000 as disclosed by the Balance Sheet on Mar 31, 2009 as she does not find the same in her bank balance. Draw up a statement which may help her solve the problem:

 

[B.Com. (Kolkata University) – Slightly Modified]

Solution

• If data are given in two Balance Sheets as in this problem, the approach to solve the problem is quite different.
• We have to ascertain whether there is any increase in assets or decrease in liabilities for each item – (profit items) and the decrease in assets or increase in liabilities – (loss items) and the net profit/loss is arrived at by finding the difference. This is carried out in the following tabular form.
• After computing Net increase /Net decrease,
  (Profit)     (Loss)
• We have to make adjustments to arrive at the profit for the year ending Mar 31, 2009.

Stage I

Stage II: Computation of Profit for the Year Ending Mar 31, 2009

 

* Net increase in assets (decrease in liabilities)	=	63,000
Add: Drawings	=	12,000
Profit for the year ending Mar 31, 2009	=	75,000

Now Mrs. Rukmani will be able to understand how the profit Rs 75,000 shown in the Balance Sheet is arrived at.

6.8 Incomplete Records and Partnership Firms

The accounting treatment for a partnership firm under this system is mostly similar to those adopted in sole proprietorship business that we have discussed so far in this chapter.

But the accounting treatment differs in the following aspects:

1. Items of appropriations (interest on capital, interest on drawings, partners’ commission, salary and so on) are to be shown separately after calculating the profits before such appropriations. This is adopted in order to distribute the final profits among the partners in their profit sharing ratio only.
2. Adjustments relating to items of appropriations: they have to be added to or deducted from the profits calculated.
3. While preparing the Statement of Affairs in the beginning and at the end of the accounting period, only combined capital figures have to be recorded.
4. Only after ascertaining the profits after the incorporation of items, individual (partners) accounts (Capital and Current A/c) are to be recorded in the Statement of Affairs at the end of the accounting period.

The accounting treatment can be best explained with the help of an illustration.

6.9 Model 8: Single Entry and Partnership Firm

Illustration: 8

X, Y and Z were partners and towards the end of 2008, most of their books and records were destroyed by tsunami. Their Balance Sheet as on Dec 31, 2007 not affected much by the natural calamity and other information is given below:

The drawing during 2008 were X – Rs 56,000; Y – Rs 40,000 and Z – Rs 26,000.

On Dec 31, 2008: cash at bank Rs 1,28,000; debtors Rs 1,61,000; stock Rs 2,36,000; advance payment Rs 1000; creditors Rs 2,41,600; machinery is to be depreciated @ 10% p.a and fixtures and fitting @ 7 1/2%. Interest on capital is to be calculated @ 5% p.a.

 

Partners share profit/loss as	X − 1/2
	Y − 1/3
	Z − 1/6

You are required to prepare a statement showing new trading profit for the year 2008 and division of same amongst the partners together with a Balance Sheet as on Dec 31, 2008.

 

[B. com (Hons) – Delhi Modified]

Solution

First, closing capital, i.e. on Dec 31, 2008 (of course, combined capital) has to be calculated. This can be done in the following form also instead of showing in the Balance Sheet Format (Statement of Affairs)

Stage I: Calculation of Capital as on Dec 31, 2008

 

X, Y and Z Capital as on Dec 31, 2008
•	All assets:	Rs
	Cash at bank	1,28,000
	Debtors	1,61,000
	Stock	2,36,000
	Advance payments	1,000
	Machinery and plant	57,600
	Fixtures and fittings	24,000
		6,07,600
•	Less: Liabilities: Creditors	2,41,600
•	Combined capital	3,66,000

Stage II: Statement of Profit/Loss for the year 2008

Stage III:

 

OBJECTIVE 7: METHOD 2: CONVERSION METHOD (OR) FINAL ACCOUNTS METHOD

7.1 Meaning

To ascertain gross profit and net profit of a business entity, it becomes essential to convert single entry records to double entry records.

Accounting procedure involved in the conversion of single entry into double entry is termed as Conversion Method or Final Accounts Method.

7.2 Conversion Method Features

This involves lengthy and time-consuming process of journalising, posting balancing and preparing the trial balance. In practice, such a logical sequence of preparation of accounts is not feasible.

In practice, final accounts may be prepared from the available records and need not be relied entirely on Trial Balance. So figures relating to certain items may be prepared directly. If it cannot be done, such missing figures can be ascertained by preparing the respective ledger accounts.

7.3 Procedure Under Conversion Method

Step 1: Lengthy process to ascertain the missing figures.

The following tabular column will help the students to ascertain the missing figures.

Missing Figure	Name of the Account to be Prepared	Method of Computing in the Missing Figure
1. Cash and bank balance (opening and closing)	Cash/bank account summary	Format of cash book is drawn, i.e. cash and bank account summary. All the figures (given in the question) are transferred to this account. Balancing figure – desired result
2. Cash sales	Cash/bank account summary	Balancing figure – and cash sales = Total sales – Net credit sales
3. Cash purchases	Cash/bank account summary	Balancing figure – and cash purchases = Total purchases – Net credit purchases
4. Drawings	Cash/bank account summary	Balancing figure – i.e., preparation of cash and bank account summary alone will be sufficient
5. Operating expenses	Cash/bank account summary	Balancing figure – i.e., preparation of cash and bank account summary alone will be sufficient
6. Income received	Cash/bank account summary	Balancing figure – i.e., preparation of cash and bank account summary alone will be sufficient
7. Additional capital	Cash/bank account summary	Balancing figure – i.e., preparation of cash and bank account summary alone will be sufficient
8. Loan raised	Cash/bank account summary	Balancing figure – i.e., preparation of cash and bank account summary alone will be sufficient.
9. Repayment of loan	Cash/bank account summary	Balancing figure – i.e., preparation of cash and bank account summary alone will be sufficient
10. Collection from debtors	Cash/bank account summary and total creditors account	Balancing figure – + Total Debtors Account (balancing figure)
11. Payments to creditors	Cash/bank account summary and Bills Receivable account	Balancing figure – + Total Creditors Account (balancing figure)
12. Bills Receivable collected	Cash/bank account summary and bills payable account	Balancing figure – + Bill Receivable Account (balancing figure)
13. Bills payable discharged	Cash/bank account summary and bills payable account	Balancing figure – + Bill Payable Account (balancing figure)
14. Net credit sales	Total debtors account	Besides remember: (1). Net Credit Sales = Total Sales – Cash Sales – Sales Return
15. Net sales	—	(2). Closing Debtors × 12/credit period (in months). Net sales = Cash Sales + Credit Sales – Sale Returns) (or) = Cost of Goods Sold + Gross Profit (or) = Gross Profit X 100/Rate of G.P. on sales
16. Cost of goods sold	Prepare stock account	C.G.S = Opening Stock + Purchases + Direct Expenses – Closing Stock (or) = Net Sales – Gross Profit (or) = Prepare Stock account and from bal. fig.
17. Gross – Profit	—	G.P. = Net Sales – C.G.S. (or) Net sales X Rate of G.P. / 100
18. Net credit purchases	Prepare total creditors account	Net Credit Purchases = Total Purchases – Cash Purchases – Purchases Returns (or) = Closing Creditors X 12 / Credit period
19. Net purchases	Stock account	Net purchases = Cash Purchases + Credit Purchases – Purchases Returns (or) C.G.S + Closing Stock – Opening Stock
20. Bills Receivables drawn	Bills Receivable account Total debtors account	Balancing figure
21. B/P accepted	Bills payable account Total creditors account	Balancing figure
22. B/R dishonoured	B/R account Total debtors account	Balancing figure
23. Current years sales	—	Previous year’s sales ± Changes in sales price, sales quantity
24. Current years revenue income	Revenue income account	Income received + Accrued at the end + un accrued in the beginning – Accrued in the beginning – un accrued at the end
25. Current years revenue expenses	Revenue expenses account	Expenses Paid + Outstanding at the end + Pre-paid in the beginning – outstanding in the beginning – Pre-paid at the end
26. Opening capital	Opening Balance Sheet	Balancing figure
27. Opening and closing balance of any other item	Respective account has to be prepared	Balancing figure

Step 1:	To ascertain capital in the beginning, Statement of Affairs in the beginning is to be prepared. Some needed items may be missing. So, at this stage, students are advised to prepare the Statement of Affairs as much as they can. By doing so, they may be able to come to know – what are all the figures missing.
Step 2:	This is the most important step. Prepare the cash book.
Step 3:	Prepare
	Total debtors account Total creditors account B/R account B/P account Gather the relevant figures from each such account.
Step 4:	Calculate total sales and total purchases
Step 5:	Besides the above-mentioned accounts, all the other accounts have to be prepared. As it is a lengthy and time-consuming process, only the most frequently needed items are dealt. (Any how students may refer the table presented to comprehend the accounting procedure involved in ascertaining the missing information)
Step 6:	Trial Balance is to be prepared.
Step 7:	From the Trial Balance, final accounts can be prepared in the usual manner. Under the conversion method, for preparing Trading Account, the following information must be made available.
	Opening stock Purchases Direct expenses Closing stock Sales

Preparation of these accounts is explained by way of illustration in the following pages:

 

If both the sides of a cash book are not tallied then the difference in the sides (both) may be treated as one of the following items:

If credit side exceeds debit side	If debit side exceeds credit side
1. Opening cash balance (or) Opening bank balance (or) Closing bank overdraft	1. Closing cash balance (or) Closing bank balance (or) Opening bank overdraft
2. Cash sales	2. Cash Purchases
3. Collection from debtors	3. Payment to creditors
4. B/R collected	4. B/P discharged
5. Additional capital	5. Drawings
6. Sale of fixed asset	6. Purchase of fixed asset
7. Sundry Income	7. Sundry Expenses

Illustration: 9

From the following transactions, you are required to ascertain the missing figure by preparing cash book for the year 2008–2009; Collection from debtors Rs 60,000; Payment to creditors Rs 40,000; Bills Receivables collected Rs 20,000; Bills Payable discharged Rs 19,000; Cash sales deposited Rs 13,000; Cash purchases (by cheque) Rs 5,000; Capital introduced Rs 10,000; Drawings Rs 15,000; Commission received Rs 6,000; Wages paid Rs 20,000; Salaries paid Rs 12,000; Rent paid Rs 9,000; Insurance premium paid Rs 1,000; Carriage inwards Rs 1,000; Bank balance as on Apr 1, 2008 Rs 9,000. All the above transactions are made through cheque only.

Solution

• As, all the transactions took place through cheque only, cash book (with bank column alone) may be drawn and the items are transferred to it.

 

Cash Book (Bank Column)

7.4 Model: Calculation of Missing Figure – Opening Stock

Illustration:10

Ascertain the opening stock from the given information:

Solution

• Generally opening stock figure is provided in the question. Here as it is not shown, it has to be ascertained as follows:

  Rate of G.P. on cost = 1/2. Given

  ∴1/2 on cost = 1/3 on sale]

   

  Profi t made on sales	=	1/3 × Rs 90,000
  	=	Rs 30,000

• A memorandum trading account is to be prepared to ascertain opening stock
• All the items except indirect expenses have to be shown (because indirect expenses are to be taken to profit and loss account)
• Balancing figure will be opening stock

7.5 Model: Calculation of Missing Figure – Purchases

Purchases

• Cash purchases shall be added to credit purchases and the total purchases figure is used in the preparation of trading account.
• Cash purchases – amount can be had from the cash book
• Credit purchases are to be determined by preparing
  1. Total Creditors Account
  2. Bills Payable Account
  3. Memorandum Trading Account

7.5.1 Total Creditors Account

To ascertain

1. Opening balance of creditors

           (or)

2. Closing balance of creditors

           (or)

3. Cash paid to creditors

           (or)

4. Credit purchases

Total creditors account has to be prepared.

 

Illustration: 11

You are required to calculate total purchases from the following information:

Creditors as on Mar 31, 2009 Rs 4,000; creditors as on Mar 31, 2008 Rs 20,000; cash paid to creditors Rs 90,000; discount allowed by creditors Rs 3,000; purchase returns Rs 2,000; bills payable accepted Rs 15,000; cheques issued to creditors Rs 15,000; Bills Receivables endorsed in favour of creditors Rs 30,000 out of which 30% bills were dishonoured.

Solution

• First credit purchases will be computed by preparing Trade Creditors’ Account.
• Then it is added with cash purchases to get the figure for total purchases.

Total Purchases	=	Cash Purchases + Credit Purchases
	=	Rs 90,000 + Rs 1,30,000
	=	Rs 2,20,000

7.5.2 Bills Payable Account

A part of payment may be made by way of bills to the creditors.

Bills payable is prepared to ascertain the figure relating to bills accepted in favour of creditors.

 

Illustration: 12

You are required to prepare Bills Payable A/c and ascertain the missing figure from the following information:

Bills payable as on 31.3.2008 Rs 5,000

Bills discharged Rs 27,000

Bills payable as on 31.3.2009 Rs 2,000

 

Illustration: 13

You are required to calculate total purchases from the following information:

(B.Com, Delhi)

Solution

Step 1: Preparation of Bills Payable Account

 

Step 2: Preparation of Total Creditors’ Account

Step 3: Total Purchases

 

	Cash Purchases:	Rs 51,600
	Add: Credit Purchases:	Rs 80,600
	Total Purchases:	Rs 1,32,200

7.5.3 Direct Expenses

Cash book reveals most of the direct expenses.

At times they need adjustments relating to outstanding and pre-paid expenses.

7.5.4 Sales

Like purchases, cash sales and credit sales have to be ascertained. Cash sales are shown in the cash book

Credit sales are computed by preparing

1. Total debtors account
2. Total debtors account and Bills Receivable account

7.6 Model: Calculation of Missing Figure – Credit Sales

Illustration: 14

From the following you are required to calculate total sales made during the year 2008.

Debtors as on Jan 1, 2008 Rs 30,600; cash received from debtors during the year (as per cash book) Rs 91,200; bad debts 3,600; cash sales (as per cash book) Rs 85,200; returns inwards Rs 8,100; by debtors as on Dec 31, 2008 Rs 41,400.

Solution

Step 1: Preparation of Total Debtors Account to Determine Credit Sales

 

Step 2: Total Sales

 

	Cash sales	Rs 85,200
	Add: Credit sales	Rs 1,13,700
	Total sales Rs	1,98,900

Bills Receivable Account

 

7.7 Model: Calculation of Missing Figure – Bills Receivable

Illustration: 15

From the following details you are required to calculate total sales

Solution

Step 1: Preparation of Bills Receivable A/c

 

Step 2: Preparation of Total Debtor’s Account

 

Step 3: Total Sales

 

Cash sales	=	Rs 30,000
Add: Credit sales	=	Rs 46,850 (*2)
Total sales	=	Rs 76,850

7.8 Cost of Goods Sold and Memorandum Trading Account

Illustration: 16

You are required to determine the amount of sales from the data:

Stock in the beginning Rs 15,000; Purchases Rs 60,000; Stock at the end Rs 15,000; Rate of G.P. on Sale = 1/6

Solution

Notes

• As items relating to debtors are not appearing, no need to prepare Debtors Account.
• Further items relating to Bills Receivable are also not shown.

As such, first, from the available figures, gross profit has to be calculated. Then by transferring these data to Memorandum Trading Account, sales (balancing figure) can be ascertained.

 

Step 1:	Calculation of Cost of Goods Sold:
	Cost of goods sold = Opening Stock + Purchases − Closing Stock
	= Rs 10,000 + 60,000 − 15,000
	= Rs 55,000
Step 2:	Calculation of Gross Profit
	1/6 on sales will be 1/5 on cost
	Gross profit on C.G.S = 1/5 × Rs 55,000
	= Rs 11,000 *1
Step 3:	Calculation of Sales
	(Preparation of Memorandum Trading Account)

 

7.9 Revenue Expenses

To ascertain figure relating to expenses. Revenue expenses account has to be prepared, and the balancing figure represents the missing figure.

 

Model: Calculation of Missing Figure – Revenue Expenses

Illustration: 17

You are required to ascertain the missing figure from the following information:

	31.3.2008 Rs	31.3.2009 Rs
Outstanding Rent	500	1,200
Prepaid Rent	1,500	3,000

Rent paid during the year 2008–2009 Rs 18,000.

Solution

• Here, rent (expenses incurred for the current accounting period) is the missing figure.
• This is computed by preparing “Revenue Expense Account – Rent.” [In case if there are some other items appearing, then the revenue expense account for that particular item (e.g., salary, wages, and so on) has to be prepared.]

Actual expense incurrent during 2008–2009 for Rent Rs 17,200.

7.10 Revenue Income

To ascertain the figures relating to income, Revenue Income Account has to be prepared and the balancing figure in that account reveals the missing figure for such items.

 

Model: Calculation of Missing Figure – Revenue Income

Illustration: 18

You are required to ascertain the appropriate missing figure from the following information:

	33.3.2009 Rs	31.3.2009 Rs
Accrued interest	5,500	9,250
Interest received in advance	12,700	24,500

Interest received during the year Rs 75,000

Solution

Computation of interest

 

	Interest received
	During 2008–2009: Rs 67,000.

7.11 Model: Computation of Missing Figures (Combination of More Than One Item)

Illustration: 19

You are required to compute credit purchases and credit sales from the following information:

Solution

Credit Purchases can be ascertained by preparing Total Creditors Account.

 

	Credit purchases: Rs 62,000.
	Credit sales to be ascertained by preparing Total Debtors Account

Note: As bad debts recovered, and bills receivables discounted will not affect Total Debtors Account, those items need not be included in Total Debtors Account.

 

  Credit sales: Rs 76,000.

Illustration: 20

Mr. Raichand keeps his accounts on single entry. You are required to ascertain total purchases during the year 2008.

B/P 1.1.2008 Rs 40,000; Creditors Rs 48,000; (1.1.2008), Creditors on 31.12.2008 Rs 32,000; Cash paid to the creditors Rs 2,41,600; Cash received from debtors Rs 2,00,000; Cash purchases Rs 2,06,400; Bills payable during the year Rs 71,200; Returns outwards Rs 9,600; Returns inwards Rs 56,000; Bills payable 31.12.2008 Rs 56,000.

 

(Delhi – B. Com – Modified)

Solution

• Items relating to sales, i.e. sales returns and cash received from debtors are not taken into account here.
• To ascertain sundry creditors, Bills Payable Account has to be prepared first.

Now total creditors account is to be prepared

 

Total Purchases

 

Cash Purchases (Given):	Rs 2,06,400
Add: *Credit Purchases:	Rs 3,22,400
Total Purchases:	Rs 5,28,800

7.12 Model: Preparation of Trading and Profit and Loss Account Together with Balance Sheet

Illustration: 21

Mr. Praveen keeps his accounts on a single entry system. You are required to prepare Trading and Profit and Loss Account for the year ended 31.3.2009, together with Balance Sheet as on that date.

Cash Book Analysis Shows the Following

Further details

Provide 5% interest on Praveen’s capital balance as on 1.4.2008. Provide Rs 3,000 for doubtful debts, 5% depreciation on all fixed assets, 5% group incentive commission to staff has to be provided for net profit after meeting all expenses and commission.

 

[B. Com (Hons) – Delhi – Modified]

Solution

The missing figures have to be ascertained in the following sequence by preparing:

1. Cash Book to ascertain Cash Balance
2. Opening Balance Sheet – Capital
3. Total Debtors A/c – Sales
4. Total Creditors A/c – Purchases

Step 1: Preparation of Cash Book

 

Step 2: Preparation of Opening Balance

 

Step 3: Preparation of Total Debtor’s Account

 

Step 4: Preparation of Total Creditors Account

 

Step 5

1. Calculation of interest on capital:

   Opening Capital = Rs 70,000

   5% on Rs 17,000 = 5/100 × Rs 70,000 = Rs 3,500

2. Depreciation:
   1. Furniture: Rs 2,000 × 5/100 = Rs 100
   2. Premises: Rs 30,000 × 5/100 = Rs 1,500
3. Calculation of Commission:

(Note: First leave gap for this. After computing G.P. transfer that amount here and calculate)

	Rs
Gross Profit
(From Trading and Profit and Loss A/c)	73,440
Less: All expenses except Commission:	41,100
(From Trading and P and L A/c)
Net Profit before Commission	32,340
Commission @ 5%	1,540
Net Profit after Commission	30,800

Step 6: Preparation of Trading and Profit and Loss Account

 

Step 7: Preparation of Balance Sheet

 

(Comprehensive)

Illustration 22

Mr. X. carries on some business. He has no knowledge of double entry accounting. He banks all receipts and makes all payments only by means of cheques. He maintains proper cash book, a debtor’s ledger and creditor’s ledger. He also makes proper records of assets and liabilities at the closing of every accounting year. From such records, the following facts are collected for the year 2008:

Receipt for the year ended 31.12.2008:

 

	Rs
From Sundry Debtors	35,250
Cash Sales	8,250
Paid in by Mr. X	5,000

Payments made during the year:

 

New Equipment Purchases	1,250
Wages	13,450
Interest Paid	150
Rent	2,400
Sundry Expenses	4,250
Paid to Sundry Creditors	15,250
Drawings	3,000
Salaries	2,250
Telephone	250
Electricity Charges	950

Assets and liabilities:

	31.12.2007 Rs	31.12.2008 Rs
Sundry Creditors	5,050	4,800
Sundry Debtors	7,000	12,250
Bank	1,250	?
Stock	12,500	6,250
Equipment	15,000	14,630

You are required to prepare Trading and Profit and Loss Account for the year ending Dec 31, 2008 and a Balance Sheet on that date.

 

[B.Com. (Hons) – Delhi Modified]

Solution

Order of Sequence

1. As all transactions are by Cheques, Cash Book (with Bank Columns) is to be prepared to ascertain closing bank balance – a missing figure.
2. Opening balance is to be prepared to compute the (Opening) Capital.
3. To ascertain the exact amount on depreciation, Equipment (Machinery) Account has to be prepared.
4. To ascertain purchases (Credit), Total Creditors Account has to be prepared.
5. To ascertain sales (Credit), Total Debtors Account has to be prepared.
6. Trading and Profit and Loss A/c is to be prepared to compute gross profit and net profit.
7. After ascertaining all the figures, final Balance Sheet has to be prepared.

Step 1: Preparation of Cash Book (with bank columns only)

 

Bank balance as on Dec 31, 2008: Rs 6,550

Step 2: Preparation of Balance Sheet (Opening)

 

Opening capital = Rs 31,200

Step 3: Calculation of Depreciation on Equipment

 

Depreciation = Rs 1,620

Step 4: Calculation of Credit Purchases

 

Credit Purchases = Rs 15,000

Step 5: Calculation of Credit Sales

 

Credit Sales = Rs 40,000

Step 6: Preparation of Trading and Profit and loss Account to Compute Gross Profit and Net Profit

 

Step 7: Preparation of Balance Sheet

 

Illustration: 23

Mr. Raj carries on business as a retail merchant. He does not maintain regular books. From cash sales effected by him he effects business and other payments, always retains cash of Rs 500 on hand and deposits the balance in the bank account. The stock inventories for the year ended Dec 31, 2008 are lost. However he informs you that he has sold goods invariably at a price which yields him a profit of 33 1/3% on cost. From the following additional information supplied to you, prepare necessary final accounts for the year ended Dec 31, 2008.

Assets and Liabilities	Jan 1, 2008 Rs	Dec 31, 2008 Rs
Cash in hand	500	500
Sundry Creditors	2,000	4,500
Cash at	Not available	4,000
Sundry Debtors	5,000	17,500
Stock of Goods	14,000	Not available

Analysis of the bank pass book reveals the following information:

 

	Rs
Payment of Creditors	35,000
Payment for bussiness expenses	6,000
Receipt from Debtors	37,000
Loan from Gopi taken on Jan 1, 2008 @ 10%	5,000
Cash Deposited in the bank	5,000

In addition, he paid to the creditors for goods Rs 1,000 in cash and salaries Rs 2,000 in cash. He also withdrew Rs 4,000 cash for his personal expenses.

 

(B. Com. Madras Modified)

Solution

1. Prepare Cash Book (Cash Columns) and ascertain cash sales
2. Prepare Cash Book (Book Columns) and ascertain bank balance on 1.1.2008
3. Prepare Total Creditor’s Account and ascertain Credit Purchases
4. Prepare Total Debtors Account and ascertain Credit Sales
5. Prepare Balance Sheet as on 1.1.2008 to ascertain Opening Capital
6. Prepare Trading and Profit and Loss A/c to ascertain Profit
7. Finally, Balance Sheet as on 31.12.2008 has to be drawn.

Step 1: Calculation of Cash Sales:

 

Cash sales = Rs 12,000.

Step 2: Calculation of Opening Bank Balance

 

Bank balance as at 1.1.2008: Rs 2,500

(As Cr. – it is overdraft)

Step 3: Note: Step 1 and Step 2 can be presented in a combined ledger A/c

 

Credit Purchases: Rs 38,500

Step 4

 

Credit Sales: Rs 50,000

Step 5: Calculation of Opening Capital

 

Step 6: Preparation of Final Account

 

Illustration: 24

You are given below:

1. Information about assets and liabilities of Mr. Krishna Yadav
2. Cash transaction for 12 months to Mar 31, 2009
3. A summary of additional information

(i) Assets of Mr. Krishna:

Bills Receivable Rs 12,500; Sundry Debtors Rs 19,500; Stock in trade Rs 37,650; Plant and Machinery Rs 23,500; Land and Buildings Rs 35,000; Cash in hand Rs 350

Liabilities:

Bank O/D Rs 2,500; Sundry Creditors Rs 18,000; Bills Payable Rs 8,000.

(ii) Cash Transaction:

Receipt from debtors Rs 1,45,000; Bills Receivable encashed Rs 50,000

Payments: Salaries Rs 6,000; Wages Rs 7,900; Bills Payable Rs 71,500; Payment to Creditors Rs 73,500;General Expenses Rs 4,000; Drawings Rs 22,500; Cash in hand at the end Rs 1,200.

(iii) Other Information:

Create provision for doubtful debts on debtors at the end @ 5%. Depreciate plant @ 5% and building @ 2 1/2%.

You are required to prepare a trading and profit and loss account for the year ended Mar 31, 2009 and a Balance Sheet on that date.

 

(B. Com. – Bombay – Modified)

Step 1: Calculation of Capital in the Beginning

Step 2

 

Step 3

 

Step 4

 

Step 5

 

Step 6

 

Step 7

 

Step 8

 

Illustration: 25

Mr. Khan commenced business in retail on July 1, 2008 in premises for which he paid a rent of Rs 1600 per month. The only records he kept, apart from his bank statements, were files of paid invoices and unpaid invoices for goods purchased, together with a notebook in which he record a few sales on credit to special customers who paid him by cheques. Cash received from cash sales was paid into the till out of which he had paid certain amounts, of which he kept a rough record, and he made weekly banking out of the balance in the till. He paid all suppliers for goods purchased by cheque.

An analysis of the bank statements for the six months ended Dec 31, 2008 was as follows:

Mr. Khan estimates that the total amounts paid out of the till before making the weekly banking for the six months were:

Drawings Rs 16,000; wages Rs 11,200 and Sundry Shop Expenses Rs 6,400.

You ascertain that as on Dec 31, 2008:

1. Stocks, correctly taken at cost, were Rs 13,760.
2. The balance in the till was Rs 2,080, including a post-dated cheque for Rs 1,200, cashed for a customer
3. Cheques for Rs 1,360 from special credit customers paid into the bank had not been cleared. One for Rs 560 was cleared on Jan 23, 2009, and the other for Rs 800 was returned dishonoured and the other customer could not be traced. This sum is considered as bad. Other special customers owed Rs 1920.
4. The following cheques had been issued but had not been presented. Rent for Dec Rs 1,600 and lighting charges Rs 1,200.
5. The cash paid into the bank included Rs 2,400 from a sale of surplus shop fittings. There was no profit or loss on this transaction.
6. The insurance premium covered the year to June 30, 2009 and the rates covered the period of 9 months to Mar 31, 2009.
7. Suppliers’ unpaid invoices amounted to Rs 17,920 and there was Rs 320 owing for electricity.

You are required to prepare the Balance Sheet as on Dec 31, 2008 and Trading and Profit and Loss Account for the half year ended on that date.

 

(B. Com. Madras)

Solution

Note: This is a different and typical problem

1. Missing figure has to be computed in a different way, not by preparing respective accounts, as was discussed in the preceding illustration.
2. Bank reconciliation – adjustment for Cheques (paid but not credited, issued but not yet presented for payment, etc.) – has to be prepared.
3. Cash sales, Total sales, Purchases, Bank balances are to be ascertained as follows:

Step 1: Computation of Cash Sales:

 

		Rs
Total of Weekly Cash bankings		95,440
Add: All payments paid out of till
	Rs
Drawings	16,000
Wages	11,200
Shop expenses	6,400	33,600
Balance on hand		2,080
		1,31,120
Less: Sales of surplus shop fittings
Included in weekly bankings		2,400
Total Cash sales		1,28,720

Step 2: Computation of Sales to Special Customers:

 

	Rs
Cheques received from special customers and banked	2,400
Add: Cheques received from special customers paid in but not collected	1,360
Amount due from special customers	1,920
Total sale to special customers	5,680

(Note: Sale to special customers is similar to credit sale in ordinary transactions)

 

So Total sales	=	Cash sales + Sale to special customers
	=	Rs 1,28,720 + 5,690
	=	Rs 1,34,400

Step 3: Calculation of Purchases

	Rs
Payment to suppliers (i.e., Purchases)	78,720
Add: Unpaid invoices	17,920
Purchases	96,640

Step 4: Calculation of Bank Balance as per Cash Book

 

	Rs
Balance as per pass book	25,520
Add: Cheques paid in but not credited	1,360
	26,880

Less: Cheques issued but not yet presented for Payment

 

Rent	1,600
Lighting	1,200	2,800
Bank blance as per Cash Book		24,080

Note: The cheque in the till is a post dated cheque and treated as cash. As such it is not taken into account, in the adjustment here.

Step 5: The cheque for Rs 800 received from a special customer is not treated as bad debts bluntly. Here, while preparing final accounts a provision is made for that amount. The same may be treated as written off for the next accounting period.

[Special Note: Students are asked to be thorough with bank transactions as given in this question.]

Step 6: Preparation of Trading and Profit and Loss A/c

 

Step 7

 

• Incomplete Double Entry System (single entry) is a system of book-keeping in which as a rule only records of cash and personal accounts are maintained; it is always incomplete double-entry, varying with circumstances.
• Salient features: (i) limited companies cannot follow; (ii) personal accounts alone are kept; (iii) business as well as private transactions are mixed up; (iv) no uniformity in maintenance; (v) profit or loss assessment is an estimate only; (vi) no subsidiary books but only vouchers and (vii) lacks accuracy.
• Advantages: (i) easy to maintain; (ii) economy and (iii) time-saving.
• Disadvantages: (i) both debit and credit are not recorded; (ii) Trading and P and L Account cannot be prepared; (iii) no Balance Sheet can be prepared; (iv) do not reveal sources of profit; (v) lacks checking; (vi) errors are rampant; (vii) audit cannot be conducted; (viii) inter and intra-firm comparisons cannot be made; (ix) not recognised by statutory authorities and (x) real and nominal accounts are ignored.
• Difference between Incomplete Record System and Double Entry System (refer the table in the text).
• Methods to ascertain profit/loss under this system: (i) Statement of Affairs Method (net worth method) and (ii) Conversion Method.
• Statement of Affairs is a statement that shows items of different assets and liabilities.
• Method of ascertaining profit/loss by applying Statement of Affairs Method – procedure step-by-step wise – refer to text.
• Computation of capital, net profit, accounting treatment and adjustments: Cheques issued and not presented, bank transactions, net increase in assets – net decrease in liabilities, partnership firm accounts that use this system of accounting, ascertainment of missing figures: (i) creditors; (ii) purchases; (iii) bills; (iv) debtors; (v) credit sales; (vi) total sales; (vii) revenue expenses; (viii) revenue incomes and (ix) other items – preparation of Trading and Profit and Loss Account and Balance Sheet from incomplete records (refer the illustrations from no. 1 to 25 in the text).

Incomplete Records: Accounting records that are not being maintained strictly on the basis of Double Entry System. This is also known as Single Entry System.

Conversion Method: A method to convert books of accounts maintained on single entry into Double Entry System.

Statement of Affairs: A statement enlisting items of assets and liabilities in order to determine the capital in the beginning and at the end of an accounting period.

Statement of Affairs Method: The method to determine profit/loss from incomplete records. This is also known as net worth method or capital comparison.

 

S.P. Iyengar, “Advanced Accountancy,” Sultan Chand and Sons, New Delhi.

R.L. Gupta and M. Radhasamy, “Advanced Financial Accounting,” Sultan Chand and Sons, New Delhi, 2008.

P.C. Tulsian, “Financial Accounting,” Pearson Education, New Delhi, 2004.

 

I State whether the following statements are True or False

1. In single entry system only one entry is made for all types of transactions.
2. Single entry system is similar to double entry system.
3. Single entry system is not a system at all.
4. Companies may follow single entry system,
5. Small traders follow single entry system only.
6. Even all accounts are maintained under double entry system, still there may be incomplete accounts.
7. Statement of affairs differs from balance sheet.
8. Trial balance can be prepared from the books kept under single entry system.
9. Conversion method may be possible in every case of incomplete records.
10. Under the net worth method, profit is ascertained by deducting the value of assets at the beginning of the accounting period from the value of assets at the end.
11. Under conversion method, credit purchases are ascertained by preparing total creditors account.
12. Missing credit sales are ascertained by preparing cash account.
13. Provision for doubtful bills does not affect Bills Receivable account.
14. Provision for bad debts recovered affect total debtors account.
15. Reserve for discount on creditors does not affect the total creditors account.
16. Missing cash sales may be ascertained by preparing cash and bank account summary.
17. Opening capital can be ascertained by preparing opening Balance Sheet.
18. When closing capital is less than opening capital it shows profit.
19. Net credit sales can be ascertained by preparing cash book.
20. Missing figure – net purchases may be traced by preparing stock account.

Answers

 

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

 

II Choose the Correct Answer

1. An estimate of assets and liabilities as specified dates is called:
   1. Trial balances
   2. Statement of affairs
   3. Balance Sheet
   4. Summary of cash book
2. Incomplete records are generally maintained by:
   1. Limited companies
   2. Government bodies
   3. Not-for-profit organisations
   4. Traders
3. Under the net worth method, profit/loss is ascertained by the difference between:
   1. Assets and liabilities on two dates.
   2. Gross assets on two dates.
   3. Capital on two dates.
   4. Liabilities on two dates.
4. Under the net worth method, when closing capital is lesser than opening capital, it shows;
   1. Loss
   2. No Profit – no loss
   3. Profit
   4. Loss, if there is no drawing
5. While preparing cash account, the information relating to cash received from debtors may be had from:
   1. Pass book
   2. Balance Sheet
   3. Total debtors account
   4. Bills payable account
6. The closing balance of trade creditors can be had from:
   1. Total creditors account
   2. Bills payable account
   3. Bills Receivable account
   4. Cash book
7. Pre-paid insurance – a missing figure – may be ascertained by preparing:
   1. Cash book
   2. Revenue expense account
   3. Revenue income account
   4. Total balance
8. Accrued interest on investment – a missing figure – can be had by preparing:
   1. Cash book
   2. Total debtors account
   3. Total creditors account
   4. Revenue income account
9. Net sales – Gross profit = ?
   1. Cost of goods sold
   2. Net profit
   3. Net loss
   4. Stock
10. Opening stock + Purchases + Direct expenses – Closing stock = ?
    1. Net purchases
    2. Stock consumed
    3. Cost of goods sold
    4. Gross profit

Answers

1. (b)
2. (d)
3. (c)
4. (d)
5. (c)
6. (a)
7. (b)
8. (d)
9. (a)
10. (c)

III Fill in the blanks with suitable words

1. Accounting records that are not maintained strictly on the basis of double entry book keeping system is termed as ___________.
2. Single entry system is usually maintained by ________.
3. Generally, there will be no records relating to _______ and _______accounts under this system.
4. _________ cannot be prepared under this system.
5. This system is never maintained by _________ on account of legal requirement.
6. Under this system _________ accounts are not maintained properly.
7. Ascertainment of profit/loss under this system can be made by preparing _________ and statement of profit or loss.
8. Statement of affairs method is also known as ________.
9. When net worth at the end of the given period is more than that of the beginning (after adjustments), the result is ___________.
10. The difference between total assets and total outside liabilities is known as ___________.
11. Statement showing items of different assets and liabilities is known as ___________.
12. If the adjusted closing capital is less than the capital in the beginning, the result will be ________.
13. Capital = Assets __________.
14. The method of transferring single entry records to double entry records is called as __________.
15. A missing item in respect of credit sales or opening/ closing balance of debtors is ascertained by preparing ___________.
16. To ascertain credit purchase or opening/closing creditors ___________ account is to be prepared.
17. Bills payable account also provides information relating to ___________.
18. Sundry creditors may also be ascertained by the preparation of ___________.
19. Cash book can expose information on __________ and ___________ of cash/bank.
20. If percentage of gross profit on sale is 25%; then on cost it must be ___________.
21. Cost of goods sold = Net sales __________ (…..).
22. Cost of goods sold + Gross profit = __________.
23. Bad debts recovered and Bills Receivable dishonoured will not affect ___________.
24. The amount received from debtors can be had from ___________.
25. To ascertain profit/loss, closing capital is to be adjusted by ___________ drawings and deducting additional capital introduced.
26. Closing capital: Rs 10,000; opening capital Rs 7,000; drawings Rs 2,000 – profit will be ___________.
27. Generally, decrease on capital at the end of the accounting period represents ___________.
28. To ascertain accrued income ___________ account is to be prepared.
29. Revenue expense account is prepared to trace the missing figure relating to ___________.
30. Opening capital can be ascertained by preparing ___________ at the beginning of the period.

Answers

1. Single entry system
2. Sole traders (or businessmen)
3. Real and personal
4. Trial balance
5. Limited companies
6. Nominal
7. Statement of affairs
8. Net worth method/method of capital comparison
9. Profit
10. Capital
11. Statement of affairs
12. Loss
13. Liabilities
14. Conversion method
15. Total debtors account
16. Total creditors account
17. Sundry debtors
18. Bills Receivable account
19. Opening balance and closing balance
20. 33 1/3 %
21. Gross profit
22. Net sales
23. Total debtors account
24. Cash book
25. Adding
26. Rs 5,000
27. Loss
28. Revenue income
29. Current year’s income
30. Statement of affairs

1. What is meant by single entry system?
2. What do you mean by incomplete records?
3. Why incomplete records are maintained?
4. Explain the term “pure single entry.”
5. What is meant by “simple single entry”?
6. What do you mean by “quasi single entry”?
7. Explain the significance of maintaining incomplete records.
8. State any two advantages of single entry system.
9. State any two defects of single entry system.
10. Explain the term “statement of affairs.”
11. What are the sources to compute profit/loss under the single entry system?
12. Mention the methods of ascertaining profit/loss from incomplete records.
13. Explain in the form of proforma to ascertain opening capital.
14. How the items of appropriations are dealt with in ascertaining profit/loss of partnership firms under single entry system?
15. Is it possible to convert every single entry to double entry?
16. How can the missing figures (scattered information) be ascertained in general?
17. How can the opening stock be ascertained?
18. How can certain revenue income/revenue expenses be ascertained?
19. Explain the significance of maintaining cash book.
20. Is it necessary to prepare trial balance to construct Balance Sheet under this system? Why?

1. Explain the terms “single entry system.” Explain the significance with illustrations.
2. Enlist the limitations of maintaining incomplete records.
3. Distinguish between single entry system and double entry system.
4. What is “statement of affairs”? Explain the steps involved to ascertain the profit/loss of a business concern by preparing “statement of affairs.”
5. Distinguish between statement of affairs and Balance Sheet.
6. Explain the term “conversion method.” Enlist the important stages involved in the preparation of final accounts under single entry system.
7. Explain the proper procedure for preparing:
   1. Total debtors account
   2. Bills Receivable account
   3. Total creditors account
   4. Bills payable account
8. Explain the accounting procedure required to be taken to convert single entry books into double entry when all the subsidiary books are maintained.
9. Illustrate – ascertainment of profit/loss by preparing a statement of profit/loss for an accounting period – under the single entry system.

 

Model: Calculation of Capital:

 

1. Calculate the Capital of Mr. Vasudev as on Mar 31, 2009 for the following information:

Answer: Rs 10,00,000

Model: Calculation of Profit/Loss:

 

2. Opening capital Rs 70,000; Capital introduced during the year Rs 15,000; Drawings Rs 5,000; Closing Capital Rs 1,00,000. Calculate Profit/Loss for the year.

Answer: Profit Rs 20,000

3. Opening capital Rs 1,50,000; Additional Capital introduced Rs 30,000; Drawings Rs 10,000; Closing Capital Rs 1,60,000. Compute Profit/Loss for the year.

Answer: Loss Rs 10,000

4. Calculate the missing figure:

 

	Assets	Rs 93,000
	Liabilities	Rs 53,000
	Capital	Rs ?

 

5. Calculate the missing figure:

 

	Opening capital	Rs 1,80,000
	Drawings	Rs 2,500 per month
	Addition capital	Rs 35,000
	Closing capital	Rs 2,40,000
	Profit/Loss ?
	Answer: Profit Rs 55,000

 

6. Calculate the missing figure:

 

	Capital in the beginning	Rs 15,000
	Profits made during the year	Rs 6,000
	Capital at the end	Rs 39,000
	Additional capital or drawing:	Rs ?
	Answer: Capital addition Rs 18,000; drawings NIL

 

7. Calculate the missing figure:

 

	Capital at the end	Rs 48,000
	Capital introduced during the year	Rs 12,000
	Profit made during the year	Rs 14,400
	Drawings	Rs 7,200
	Capital in the beginning	Rs: ?
	Answer: Rs 28,800

 

8. Calculate the missing figure:

 

	Capital at the end	Rs 9,100
	Capital introduced	Rs 2,350
	Loss	Rs 700
	Drawings	Rs 1,400
	Capital in the beginning	Rs: ?
	Answer: Rs 8,850

 

9. Calculate the missing figure:

 

	Capital in the beginning	Rs 12,000
	Profit made during the year	Rs 2,000
	Drawings	Rs 4,000
	Capital introduced	Rs 6,000
	Capital at the end	Rs: ?
	Answer: Rs 16,000

 

10. Calculate the missing figure:

 

	Capital in the beginning	Rs 35,000
	Capital at the end	Rs: 36,400
	Loss made during the year	Rs 2,800
	Drawings	Rs 5,600
	Additional capital introduced during	Rs 6,000
	the year:	Rs ?
	Answer: Rs 9,400

Model: Preparation of Statement of Profit/Loss

 

11. Mrs. Shiva commenced business on Apr 1, 2008 with a capital of Rs 60,000. On the same day she purchased fixtures and furniture for Rs 12,000. On Sep 30, she borrowed Rs 30,000 from her husband @ 9% p.a. (interest not yet paid) and introduced a further capital of Rs 9,000. She withdrew @ Rs 1,800 p.m. for household expenses.

On Mar 31, 2009, her position stood at: cash in hand Rs 16,800; Sundry Debtors Rs 28,800; Stock Rs 40,800; Bills Receivable Rs 9,600; Sundry Creditors Rs 3,000; owing for rent Rs 900; Furniture and fixtures are to be depreciated by 10%.

You are requested to compute Profit/Loss made by Mrs. Shiva during 2008–2009.

Answer: Rs 25,350

12. Mr. Dev commenced a business with Rs 60,000 on Apr 1, 2008. During the year he invested a further sum of Rs 25,000 and withdrew Rs 1,000 per month for personal expenses.

His assets and liabilities as on Mar 31, 2009:

	Rs
Cash in hand	12,000
Bank Overdraft	20,000
Loan (Dr.)	17,500
Stock	16,500
Bills Receivable	20,000
Bills Payable	18,000
Sundry Debtors	25,000
Sundry Creditors	8,500
Machinery	20,000
Outstanding Expenses	800

Further it was decided to depreciate machinery @ 10% and provide doubtful debts @ 5% on debtors.

You are required to ascertain profit/loss for the year ended Mar 31, 2009.

Answer: Net loss: Rs 12,550

13. Mr. Balaji commenced business on Jan 1, 2008 with a capital of Rs 96,000. He purchased furniture and fixtures for Rs 24,000. During the year he withdrew Rs 1,600 per month to meet the hostel expenses of his son. He invested Rs 12,800 on Jan 15, 2008. On Dec 31, 2008 his financial position stood at:

	Rs
Cash in hand	2,400
Cash at bank	25,000
Sundry Debtors	42,400
Stock	44,800
Bills Receivable	19,200
Sundry Creditors	6,400
Outstanding Expenses	800

Depreciate furniture and fixtures by 10%. Compute Profit/ Loss made by Mr. Balaji during 2008.

Answer: Profit Rs 59,200

14. Mr. S. commenced business on Jan 1, 2008 with a capital of Rs 2,00,000 and bought furniture and fixtures for Rs 40,000. On June 30, 2008 he borrowed Rs 1,00,000 from his friend at 12% p.a. (interest not yet paid) and introduced additional capital of Rs 30,000. He withdrew Rs 6,000 p.m. for household expenses.

On Dec 31, his position was as:

Cash in hand Rs 4,000; Cash at bank Rs 52,000; Sundry Debtors Rs 96,000; Stock Rs 1,00,000; Bills Receivable Rs 32,000; Sundry Creditors Rs 10,000; Owing for rent Rs 3,000; Furniture and fixtures are to depreciated at 10%. Compute the capital and Profit/Loss during 2008

 

Delhi – B.Com (Pass)

Answer: Capital Rs 2,01,000; Profit Rs 43,000

15. Mr. Patel does not maintain double entry books of accounts. From the following details determine the profits for the year and statement of affairs at the end of the year.

	1.1.2008 Rs	31.12.2008 Rs
Stock	80,000	1,20,000
Debtors	60,000	80,000
Cash	4,000	2,000
Bank	20,000	10,000(O.D.)
Creditors	30,000	50,000
Outstanding Expenses	10,000	16,000
Furniture (cost)	6,000	4000

Furniture Rs 2,000 (cost) was sold for Rs 10,000 on 1.11.2008. Ten percent depreciation is to be charged on furniture. Mr. Patel has drawn Rs 2,000 per month. Rs 4,000 was invested by Mr. X in 2008.

Bank balance on 1.1.2008 is as per cash book. But the bank overdraft on 31.12.2008 is as per bank statement. Rs 4,000 cheques drawn in Dec 2008 have not been encashed within the year.

 

[B.com (Madras) Modified]

Answer: Opening Capital Rs 1,30,000; Closing Balance Rs 1,26,000; Net Profit Rs 15,600

16. Mr. Mukerjee had Rs 1,50,000 in bank on Jan 1, 2008 when he started his business. He closed his accounts on Mar 31, 2009. His single entry books (in which he did not maintain any account for the bank) showed his position as follows:

	31.3.2008 Rs	31.3.2009 Rs
Cash in hand	1,000	1,500
Stock in trade	9,500	14,500
Debtors	500	1,000
Creditors	2,500	1,500

On Feb 1, 2008 he began drawing Rs 350 p.m. for his personal expenses from the cash box of the business. His account in the bank had the following entries.

	Deposits Rs	Withdrawals Rs
1.1.2008	1,50,000	—
1.1.2008 to 31.3.2008	—	1,11,500
1.4.2008 to 31.3.2008	1,11,500	1,35,000

The above withdrawals include payment by cheque of Rs 1,00,000 and Rs 30,000, respectively, during the periods from Jan 1, 2008 to Mar 31, 2008 and from Apr 1, 2008 to Mar 31, 2009 for the purchase of machinery for the business and the deposits after Jan 1, 2008 consisted wholly of sale price received from customers by cheque.

You are required to draw up his statement of affairs as at Mar 31, 2008 and Mar 31, 2009, respectively, and compute his profit or loss for the year ended Mar 31, 2009.

(C. S. Modified)

 

Answer:	Capital as on 31.3.2008	Rs 1,47,000
	Capital as on 31.3.2009:	Rs 1,64,000
	Profit earned:	Rs 21,200
	(depreciation is yet to be adjusted)

Model: Partnership (Single Entry)

 

17. Vasu and Doss started business on Jan 1, 2008 with Rs 1,00,000 as capital contributed equally but the profit sharing ratio was 3:2. Their drawings were Rs 600 and Rs 400 per month, respectively. They had kept no account except the following information:

	31.12.2007 Rs	31.12.2008 Rs
Machinery at cost	40,000	50,000
Stock in trade	60,000	60,000
Debtors	1,00,000	1,20,000
Cash	4,000	1,000
Creditors	60,000	40,000
Outstanding Expenses	8,000	6,000
Bank balance (as per pass book)	12,000	16,000

Provision is to be made for depreciation @ 10% on cost of machinery as on the end of the each year. Debtors on 31.12.2008 include Rs 10,000 for goods sent out on consignment at 25% above cost and were not sold until 2008.

A cheque for Rs 2,000 has been deposited on 31.12.2008 but was credited on 2.1.2008. A cheque of Rs 4,000 issued on 26.12.2008 was presented on 3.1.2009. A cheque for Rs 2000 was directly deposited by a customer on 27.12.2008 and a cheque for Rs 1,000 deposited in Dec 2008 was dishonoured. No adjustment for these was made.

Determine the Profits for 2007 and 2008 and draw up a Balance Sheet as on Dec 31, 2008

(C.A. Inter Modified)

Answer:	Capital as on 31.12.2007	Rs 1,44,000
	Capital as on 31.12.2008	Rs 1,87,000
	Profit for the year 2008	Rs 33,600
	Profit for the year 2008	Rs 33,000

 

18. X and Y carrying on business in partnership and sharing profits and losses in the ratio of 2:1 had the following balances to the credit of their accounts in the books of the firm as on Dec 31, 2007:

 

	X: Rs 1,72,500
	Y: Rs 90,000

A statement of affairs prepared on Dec 31, 2008, disclose the following position of business:

During the year X had drawn Rs 49,500 from the firm. He had also taken for his personal use goods worth Rs 6,000. He had sold some goods of the business for Rs 13,500 and retains the money himself. He had personally paid to some of the employees of the firm Rs 29,750 towards their salaries which he was entitled to be reimbursed.

Y had withdrawn Rs 18,750 in cash and also taken for his personal use goods worth Rs 3,750. He had paid towards some expenses of the firm for Rs 12,000 his private estate.

Prepare a statement showing profit of the firm for the year ending Dec 31, 2008 as well as Balance Sheet of the firm as on that date.

 

Answer:	Net profit: Rs 30,000
	Balance Sheet: Total: Rs 3,69,750

 

19. A retail trader keeps his books on single entry system. His assets and liabilities on Jan 1 and on Dec 31, 2008 are as follows:

During the year he had drawn out of the business Rs 18,000. Of this sum, Rs 8,100 had been spent by him for purchasing a delivery van for the business.

Prepare a statement showing his profit for the year and a statement of affairs as on Dec 31, 2008 after writing off 10% depreciation on furniture and fittings and providing 10% reserve on sundry debtors for bad debts and salary outstanding Rs 600.

 

(B.Com – Andhra Modified)

Answer: Net Loss: Rs 10,479; Capital at the end: Rs 16,941.

 

20. A trader has not kept proper books of account. From the following balances prepare a statement of gross profit and net profit for the year ended 31.3.2009.

Drawings during the year amounted to Rs 3,000. Depreciate land and buildings @ 2% and furniture and fittings @ 5%. Provide for doubtful debts @ 2 1/2 %.

 

(B. Com. Osmania Modified)

Answer: Gross profit: Rs 8,650; Net profit: Rs 7,518

Model: Conversion Method

 

21. Calculate the cost of goods sold in each of the following alternative cases:

1. Closing stock Rs 2,00,000; Direct wages Rs 50,000; Carriage inwards Rs 30,000; Freight Rs 20,000; Opening stock Rs 1,00,000; Purchases Rs 2,00,000;
2. Sales Rs 42,000; Gross Profit on Sales 1/3
3. Sales Rs 42,000; Gross Profit on Cost 1/3
4. Sales Rs 1,26,000; Gross Loss on Sales 1/3
5. Sales Rs 1,26,000; Gross Loss on Cost 1/3

Answers:

1. Rs 3,60,000
2. Rs 28,000
3. Rs 31,500
4. Rs 1,68,000
5. Rs 1,89,000

Model:

 

22. Calculate the sales in each of the following alternative cases:

1. Cost of Goods Sold Rs 36,000; Purchases Rs 20,000; and Gross Profit Rs 6,000
2. Cost of Goods Sold Rs 42,000; Gross Profit on Sales 1/4
3. Cost of Goods Sold Rs 42,000; Gross Profit on Cost 1/4
4. Cost of Goods Sold Rs 42,000; Gross Loss on Sales 1/4
5. Cost of Goods Sold Rs 42,000; Gross Loss on Cost 1/4

	Answer:	Rs 42,000
		Rs 56,000
		Rs 52,500
		Rs 33,600
		Rs 31,500

 

23. Calculate the sales:

1. Stock in the beginning Rs 1,00,000; Closing stock Rs 20,000; Direct wages Rs 50,000; Carriage outwards Rs 20,000; Freight inwards Rs 30,000; Gross Profit Rs 60,000 and Purchases Rs 2,00,000
2. Stock in the beginning Rs 24,000; Purchases Rs 1,20,000; Stock at the end Rs 21,000; Rate of Gross Profit on sale 1/6.

Answer:

1. Rs 4,20,000
2. Rs 1,47,600

24. Calculate the amount of sales in each of the following alternative cases:

1. Cost of Goods sold Rs 1,44,000; Purchases Rs 80,000; Gross Profit Rs 24,000
2. Stock in the beginning Rs 80,000; Purchases Rs 4,00,000; Stock at the end Rs 70,000 and Rate of Gross Profit on sale 1/6

Answer:

1. Rs 1,68,000
2. Rs 4,92,000

25. Calculate the amount of purchases in each of the following alternative cases:

1. Cost of Goods Sold Rs 72,000; Opening Stock Rs 7,000; Closing Stock Rs 35,000
2. Opening Stock Rs 2,00,000; Closing Stock Rs 40,000; Direct Wages Rs 1,00,000; Carriage outwards Rs 40,000; Freight inwards Rs 60,000; Gross Profit Rs 1,20,000; Sales Rs 8,40,000

Answer:

1. Rs 1,00,000
2. Rs 4,00,000

26. Calculate the amount of purchases in each of the following alternative cases:

1. Sales Rs 42,000; G.P. on sales 1/4; opening stock Rs 3,500; closing stock Rs 8,500
2. Sales Rs 42,000; G.P. on cost 1/4; opening stock Rs 3,500; closing stock Rs 8,500
3. Sales Rs 42,000; Gross loss on sales 1/4; opening stock Rs 3,500; closing stock Rs 8,500
4. Sales Rs 42,000; Gross loss on cost 1/4; opening stock Rs 3,500; closing stock Rs 8,500

Answer:

1. Rs 36,500
2. Rs 38,600
3. Rs 57,500
4. Rs 61,000

Model: Stock as the end

 

27. Calculate the stock at the end in each of the following alternative cases:

1. Sales Rs 84,000; Purchases Rs 56,000; Opening Stock Rs 20,000; Gross Profit on sales 1/7
2. Sales Rs 84,000; Purchases Rs 56,000; Opening Stock Rs 44,000; Gross Loss on sales 1/7

Answer:

1. Rs 4,000
2. Rs 4,000

28. Calculate the stock at the end

1. Cost of goods sold Rs 1,80,000; Purchases Rs 1,00,000; Opening stock Rs 50,000; Direct wages Rs 25,000; Carriage inwards Rs 15,000; Freight outwards Rs 10,000;

Answer: Rs 10,000

Model: Stock in the beginning

 

29. Calculate the stock in the beginning

1. Cost of goods sold Rs 72,000; Purchases Rs 40,000; Closing Stock Rs 4,000; Direct wages Rs 10,000; Carriage inwards Rs 6,000; Freight outwards Rs 4,000

Answer: Rs 20,000

 

30. Calculate the stock in the beginning in each of the alternative cases:

1. Sales Rs 42,000; Purchases Rs 28,000; Closing Stock Rs 2,000; Gross Profit on sales 1/7
2. Sales Rs 42,000; Purchases Rs 28,000; Closing Stock Rs 2,000; Gross Loss on sales 1/7
3. Sales Rs 1,00,8000; Purchases Rs 67,200; Closing Stock Rs 4,800; Gross Profit on Cost 1/6
4. Sales Rs 1,00,8000; Purchases Rs 67,200; Closing Stock Rs 4,800; Gross Loss on cost 1/8

	Answers:	Rs 10,000
		Rs 22,000
		Rs 24,000
		Rs 52,800

 

31. Calculate Sales

		Rs
	Opening Debtors	12,500
	Closing Debtors	20,000
	Opening B/R	5,000
	Closing B/R	2,500
	Cash received from
	Debtors (including cash from B/R 5,000)	25,000

Answer: Sales: Rs 30,000

 

32. Calculate Total Sales made during the year 2008.

Answer: Rs.1,44,150

Model: Bills Receivable – computation of

 

33. Compute the Bills Receivable drawn:

 

		Rs
	Bills Receivable
	as on 31.12.2007	45,000
	as on 31.12.2008	69,000
	Bills endorsed to Creditors	12,000
	Bills dishonoured (including Rs bills endorsed to creditors)	15,000
	Bills collected	45,000

Answer: Bills Receivable drawn: Rs.90,000

 

34. Calculate the Bills Received from Customers:

 

	Bills Receivable collected, i.e. honoured	80,000
	Opening Balance of Bills Receivable	1,50,000
	Bills Receivable endorsed in favour of creditors	20,000
	Bills Receivable dishonoured	10,000
	Closing Balance of Bills Receivable	2,00,000

Answer: Rs 1,60,000

Model: (B/R and Total Debtors)

 

35. You are required to prepare Bills Receivable account and total debtors’ account for the year ended 31.12.2008:

 

		Rs
	Total Debtors on 1.1.2008	1,08,000
	Bills Receivable on 1.1.2008	30,000
	Sales (including cash sales of Rs 60,000)	9,00,000
	Cash received from Debtors	6,00,000
	B/R on 31.12.2008	45,000
	Returns Inwards	45,000
	Discount allowed to Debtors	30,000
	Bad debts written off	9,000
	B/R endorsed to creditors	30,000
	Cash received on B/R matured	45,000

Answer: B/R received during the year Rs.90,000; Closing debtors: Rs.1,74,000

 

36. You are required to prepare the total debtors account and Bills Receivable account from the following information for the year ending on Dec 31, 2008

 

		Rs
	Debtors as on 1.1.2008	12,000
	Debtors as on 31.12.2008	14,400
	B/R as on 1.1.2008	1,500
	B/R as on 31.12.2008	1,600
	Discount allowed:	500
	Bad debts	600
	Total Sales	96,000
	Cash sales 10% of total sales	–
	B/R dishonoured	100
	Bills Collected	900
	B/R dishonoured with Banker before maturity
	(Discount Rs 50)	–
	B/R endorsed to creditors	400

Answer:

1. Collection from Debtors: Rs.81,000,
2. B/R drawn : Rs 2,000

37. Prepare Total Creditors Account and Bills Payable Account from the following information for the year ended Mar 31, 2009:

		Rs
	Creditors as on 1.4.2008	70,000
	Creditors as on 31.3.2009	1,33,600
	B/P as on 1.4.2008	12,000
	B/P as on 31.3.2009	15,750
	Discount received	8,800
	Bills Discharged	12,750
	Total Purchases	5,28,000
	Cash purchases 25% of Total purchases;

Answer:

1. Payment to creditors Rs 4,13,100,
2. Bills payable accepted Rs 16,500

Model: Credit Purchases and Net Purchases

 

38. Compute credit purchases and net purchases from the following:

Answer:

1. Credit purchases Rs 61,000,
2. Net purchases: Rs 1,16,600

Model: Net Purchase and Net Sales

 

39. Calculate net purchases and net sales from:

Answer:

1. Net purchases: 1,27,500,
2. Net sales: 5,79,000

Model: Credit Sales and Credit Purchases

 

40. Compute Credit Sales and Credit Purchases from the following particulars for the year ending on Dec 31, 2008:

Answer: Credit sales: Rs. 45,900; Credit purchases: Rs.41,604

Model: Net Sales, Net Purchase and Closing Stock

 

41. Calculate Net Sales, Net Purchases and Closing Stock from the following information:

Particulars	1.4.2008 Rs	31.3.2009 Rs
Debtors	31,800	326,500
Creditors	24,000	16,000
Bills payable	21,000	29,000
Stock in trade	10,000	?
Bills Receivable	8,800	7,000

Transactions during the year:

Discount allowed to customers Rs 1,000; Discount allowed by the suppliers Rs 800; B/P discharged Rs 35,600; B/R collected Rs 20,900; Returns inwards Rs 8,700; Returns outwards Rs 4,800; Bad debts Rs 2,800; B/R dishonoured Rs 1,800; Cash paid to the creditors (including Rs 1,000 paid for purchase of fixed assets) Rs 1,21,000; Cash received from debtors (including Rs 500 recovered; written as bad debt in 2007–2008) Rs 69,500; Cash sales Rs 40,900; Cash purchased Rs 1,03,200; Gross Profit 20% on sales:

Answer: Net Sales: Rs 1,27,500; Net Purchases: Rs 2,59,600; Closing Stock: Rs 1,67,600

Model: Comprehensive Questions:

 

42. Shri. Vas Dev keeps his books on single entry system. From the following particulars prepare Trading and Profit and Loss Account and the Balance Sheet for the year ended Dec 31, 2008.

On 1.1.2008 his assets and liabilities were as follows: Stock Rs 75,000; Sundry Debtors Rs 90,000; Machinery Rs 90,000; Furniture Rs 7,500; Sundry Creditors Rs 45,000; Bank overdraft Rs 15,000;

The cash book gives the following information:

Discount allowed to debtors Rs 6,000; Discount earned from creditors was Rs 3,750; Goods worth Rs 4,500 were returned by customers and goods worth Rs 2,250 were returned to suppliers.

On Dec 31, 2008, his position was as follows:

Stock Rs 67,500; Sundry Debtors Rs 1,05,000; Bills Receivable Rs 9,000; Bills payable Rs 6,000; Machinery Rs 90,000; Furniture Rs 7,500; Sundry Creditors Rs 37,500; Salary outstanding Rs 750;

Depreciate Machinery @ 10% and furniture @ 6%.

 

(B.Com – Madurai-Kamaraj – Modified)

Answer:

1. Gross Profit Rs 87,750;
2. Net Profit Rs 50,250;
3. Balance Sheet total Rs 2,91,000

 

43. Mr. Vasanth Reddy whose accounts are recorded by single entry only with Rs 10,000 lent by his wife and Rs 20,000 of his own; acquired a retail business of which he took possession on Apr 1, 2008.

Of the acquisition price Rs 7,500 was attributed to goodwill; Rs 2,500 to furniture, fixtures; Rs 17,500 to stock and Rs 2,500 was retained as working capital of which Rs 2,000 was paid into the bank. During the year his takings amounted to Rs 1,15,000 of which Rs 1,09,000 was paid into the bank, the remainder being in part utilised for cash payments. The payments out of the bank and cash during the year were:

	Purchases	78,000
	Salary	2,500
	Wages	8,200
	Trade Expenses	3,600
	Rent, Rates and Taxes-Business	2,960
	Personal	1,480
	Payments to Domestic use	1,200
	Drawings	12,000

At the close of the year his stock was of the value of Rs 18,750; He owned Sundry creditors for goods Rs 6,750; there was an owing to him for goods sold Rs 7,500; The balance at the bank was Rs 2,750.

Provide 5% for depreciation on furniture, fittings; interest @ 5% p.a. on his wife’s loan. Rs 500 for doubtful debts. Prepare the necessary final accounts for the year ending on Mar 31, 2009 and the Balance Sheet as on that date.

 

(B.Com – Madras – Modified)

Answer:

1. Gross Profit Rs 30,800;
2. Net Profit Rs 20,615;
3. Balance Sheet total Rs 43,185

 

44. Mrs. Renu is a retail trader dealing with software components. She follows the practice of paying creditors for goods purchased through her Bank Account and making payments in cash on all nominal accounts.

	Apr 1, 2008 Rs	Mar 31, 2009 Rs
Cash in hand	300	500
Cash at Bank	10,000	15,000
Sundry Debtors	17,500	25,000
Sundry Creditors	34,100	37,500
Investments	62,500	62,500
Stock	25,000	18,700

Transactions during the year:

Salaries paid Rs 15,000; General expenses paid Rs 35,000; Payment for e-mail services Rs 8,700; Payment for Rent and Rates Rs 7,000; Electricity charges Rs 2,500; Cash receipts from Debtors Rs 3,12,500; Payments to Creditors through Bank and of Trade expenses in cash Rs 2,00,000; Payments into the bank business Rs 1,87,500; Payment into Bank – Additional capital Rs 2,500; Payment from Bank Account – Personal Rs 32,500; Cash Payments – Personal Rs 9,100; Stock taken for personal use Rs 1,400.

You are required to prepare trading and profit and loss account for the year ended Mar 31, 2009 and Balance Sheet of Mrs. Renu as on Mar 31, 2009.

 

(B.Com – Delhi – Modified)

Answer:

1. Gross Profi t Rs 1,59,200;
2. Net Profi t Rs 43,500;
3. Balance Sheet total Rs 1,21,700

	Hint:	Bank A/c (Balancing figure Crs): 1,52,500
		Cash A/c Trade expenses: Rs.47,500
		Credit purchases: Rs.1,55,900
		Credit sales: Rs.3,20,000

 

45. You are required to prepare the final accounts of a trader from the following information:

Assets and Liabilities:

	1.1.2008 Rs	31.12.2008 Rs
Furniture	18,000	19,050
Stock	24,000	21,000
Debtors	48,000	?
Creditors	33,000	45,000
Prepaid Expenses	1,800	2,100
Outstanding Expenses	6,000	5,400
Cash in hand and at bank	3,600	1,875

Cash transactions during the year 2008:

 

	Receipts from Debtors (after allowing 2 1/2% discount)	1,75,000
	Bills Receivable discounted (at an average rate of 2%)	18,375
	Paid to Creditor (@ 2% discount)	1,17,600
	Freight inward	9,000
	Drawings	21,000
	Furniture purchased	3,000
	4% Investments purchased at 96% (on 1.7.2008)	28,800
	Expenses including salary	43,500
	Miscellaneous receipts	1,500

During the year Bills Receivable received were Rs 30,000; Rs 6,000 of which are endorsed in favour of creditors, of the later a bill for Rs 1,200 was dishonoured.

Goods costing Rs 2,700 were used for advertising materials

Goods are invariably sold to show a profit of 50% on cost

Difference in cash, if any, is to be treated as drawings or introduction of capital.

Provision for doubtful debts is to be provided @ 2 1/2% on debtors.

Answer: Gross Profit Rs 73,050; Net Profit Rs 23,966; Balance Sheet total Rs 1,35,566

(Hint: Prepare cash book – Rs 25,800 – Balancing figure)

Debtors account: Rs 58,350 (B.F)

Creditors account: Rs 1,36,800 (B.F)

Opening capital: Rs 56,400)

 

46. The following balances are available from the books of a trader as on Dec 31, 2007 and 2008.

	31.12.2007 Rs	31.12.2008 Rs
Building	1,20,000	1,20,000
Equipments	2,40,000	2,68,000
Furniture	20,000	20,000
Debtors	?	96,000
Creditors	64,000	?
Stock	?	68,000
Bank loan	40,000	32,000
Cash	64,000	44,000

Transactions during the year ended Dec 31, 2008 were:

 

		Rs
	Collection from Debtors	3,72,000
	Payment to Creditors	2,44,000
	Cash Purchases	64,000
	Expenses	40,000
	Sale of one equipment on 1.7.2008 (Book value Rs 20,0000)	12,000
	Drawings	40,000

Cash sales amounted to 10% to total sales. Credit sales amounted to Rs 3,60,000. Credit purchases 80% of total purchases. The trader sells goods at cost plus 33 1/3% discount allowed by suppliers Rs 4,000.

Equipments and furniture are to be depreciated by 10% p.a. and buildings @ 2%. New equipment was purchased on 1.7.2008.

Prepare the final accounts for the year 2008.

Answer: Gross Profit Rs 1,00,000; Net Profit Rs 27,200; Balance Sheet total: Rs 5,87,200

(Hint: Opening capital Rs 4,96,000)

Total Debtors A/c (balancing figure): Rs 3,60,00

Total Creditors A/c (balancing figure): Rs 72,000

47. The following is the Balance Sheet of Mr. Raghu as on Mar 31, 2007.

A riot occurred on Mar 31, 2008 in which all books and records were lost. The cashier had absconded with the available cash. Mr. Raghu gives the following information:

1. His sales for the year ended Mar 31, 2008 were 20% higher than the previous years. He always sells goods at cost plus 25%; 20% of total sales for the year ended Mar 31, 2008 were for cash; there were no cash purchases.
2. On Apr 1, 2007, the stock level was raised to Rs 1,20,000 and the stock was maintained at this level throughout the year.
3. Collections from debtors amounted to Rs 5,60,000 of which Rs 1,40,000 was received in cash. Business expenses amounted to Rs 80,000 of which Rs 20,000 was outstanding on 31.3.2008 and Rs 24,000 was paid by cheque.
4. Analysis of pass book revealed the following:

    

   		Rs
   	Payment to Creditors	5,50,000
   	Personal drawings	30,000
   	Cash deposited in bank	2,86,000
   	Cash withdrawn from bank	48,000

5. Gross Profit as per last year’s audited accounts Rs 1,20,000
6. Provide depreciation on buildings and furniture at 5% and motor car @ 20%
7. The amount defalcated by the cashier may be treated as received from him.

Prepare the trading and profit and loss account for the year ended Mar 31, 2008 and a Balance Sheet on that date.

Answer: Gross Profit: Rs 1,44,000; Net Profit: Rs 49,300, Balance Sheet (Total): Rs 4,81,310

(Hint: Prepare, total debtors A/c)

Total Creditors A/C

(Cash book with Bank Column)

48. On 1.4.2008, Mrs. Parul commenced business. She did not maintain proper books of accounts. At the end of the year following information was obtained after going through the records:

1. All cash received on cash sales was banked after keeping Rs 2000 p.m. for petty expenses and after withholding monthly drawing of Rs 1,000.
2. Counterfoils of pay-in-slips the following deposits.

    

   	Rs
   Capital contributed Mrs. Parul	2,00,000
   Balance of Cash sales	1,56,000
   Collection from Debtors	2,00,000

3. Counter foils cheques revealed the following payments:

    

   	Rs
   Payment to Creditors	3,00,000
   Payment of Salary	70,000
   Purchase of Furniture	20,000

4. Sales were effected at a uniform rate of gross profit at 25% on sales.
5. Discount allowed Rs.4,000; Discount received Rs.6,000; Bad debts Rs.2,000.
6. Petty cash expenses were postage Rs 400; Stationery Rs 2,000; Conveyance Rs 4,000 and rent Rs 4,400.
7. On 31.3.2009, amount due by debtors Rs 20,000 and the amount owing to creditors were Rs 40,000.

Prepare Trading and Profit and Loss Account for the year ended 31.3.2009 and a Balance Sheet as on that date.

Answer: Gross Profit Rs 1,04,500; Net Profit: Rs 23,700; Balance Sheet total: Rs 2,51,700

Hints:

1. Prepare Total Debtors Account and ascertain credit sales and the total sales and G.P.
2. Total Creditors Account → Purchases.
3. Bank A/c.
4. Stock at the end.