Final Accounts in Accounting  – CA Foundation, CPT notes, PDF

This article is about Final Accounts in Accounting for CA foundation CPT students. we also provide PDF file at the end.

final accounts in accounting

What we will study in this chapter: We will study in this chapter, how final accounts (annual accounts) are prepared for proprietary and partnership firms engaged in business and the adjustments required to be made.

INTRODUCTION :

Final accounts of non-corporate entities i.e. sole proprietary concerns and partnership firms/concerns will be studied in this chapter.

Final accounts are the end results of the whole accounting process. Final A/c’s or annual accounts includes the following statements:

(1) Trading & Profit & Loss Account and (2) Balance Sheet.

In case of manufacturing concerns the final a/c’s may include the following statements.

(1) Manufacturing A/c., (2) Trading, Profit & Loss A/c., (3) Balance Sheet.

The above final a/c’s are prepared with the help of trial balance and additional information/adjustments.

Trading and Profit & Loss A/c shows the result of the operation (performance) that is profits earned or loss incurred during that year. Therefore all Expenses and Incomes related to that period should come in the P&L A/c, whether it is paid/received or not is not important i.e. expense should be recognized when incurred means services/benefits are received and income should be recognized when earned i.e. when services/benefits are given. This is also referred as Mercantile system of accounting or recognition of accrual principle. Due to this we make adjustments for outstanding expenses, Outstanding Incomes, prepaid expenses. Advance Incomes, closing stock etc.

Balance sheet shows the Assets & Liabilities of the organization as on a particular date. It is not an account. It is not for any period or year. It shows the financial position of the entity as of a particular date (rather at a point of time).

Manufacturing account if prepared shows the cost of goods manufactured during that period. This cost is transferred to Trading A/c.

13.1  COMPONENTS OF FINAL ACCOUNT & THEIR MEANINGS:

13.1.1   Trading account:

♦       Trading account shows the profit/loss made on a gross basis that is including only the direct cost of the goods.

♦    In trading a/c, we credit the trading income like sale and debit the cost of goods sold (opening stock + purchases (-) closing stock).

♦       Alternatively Opening Stock & purchases is debited & Closing stock is credited to trading account.

♦    Other direct expenses related to purchase or manufacture of goods like carriage inward, wages, etc, are also debited here.

♦       Purchase return & Sales returns will be deducted/adjusted from the purchases & sales respectively.

♦       The balance is known as the gross profit or gross loss, which is transferred to profit and loss a/c.

♦       Non-corporate entities usually prepares trading a/c so as to know the gross margin available in its sale.

♦    But at corporate level usually it is not prepared. In those cases the items of trading account gets incorporated in profit & loss account.

Illustration 13.1 : The following is the extract of trial balance as on 31.3.2006 and certain additional information of Shri Tendulkar, who carries on business under the name and style of M/s. Tendulkar and Company at Bombay:

Additional Information:

1. Value of stock at close of year Rs. 44,000

Prepare Trading A/c for the year ended 31.3.2006.

Solution:

M/s Tendulkar and Company

Trading A/c

For the year ended 31st March, 2006

13.1.2   Profit and loss account:

♦    It shows the performance of the entity i.e. profit earned or loss suffered considering all indirect expenses and incomes.

♦        Gross profit or gross loss from trading account is transferred to P&L a/c.

♦        Other incomes like discount, interest, etc. are credited.

♦    Administrative expense, selling and distribution expense, financial expense, income tax, losses, etc. are debited to it.

♦        The net profit/net loss is transferred to P&L appropriation a/c (if made) otherwise to capital a/c.

♦    If trading a/c is not prepared then in place of gross profit/gross loss all items of trading a/c will come in P&L a/c itself

Although not necessary, but usually full profit/loss is transferred to proprietor/partners capital account, hence profit & loss account does not appear in balance sheet.

Illustration 13.2 : The following is the extract of trial balance as on 31.3.2006 and certain additional information of Shri. Tendulkar, in continuation of what is given in Illustration. 13.1:

Additional Information:

2. Depreciate-

(a) Building by Rs. 3,000

(b)              Furniture and fixture by Rs. 2,000

(c)              Office equipment by Rs. 2,400

(d)              Typewriter by Rs. 300

(e)              Motor Van by Rs. 4,000

3. One month’s rent for godown is outstanding.
4. One month’s salary is outstanding.
5. Interest on loan from Vishwanath payable Rs.600
6. Reserve for bad debt is to be maintained at Rs.4,300.
7. Insurance Premium includes Rs. 4,000 paid towards proprietor’s L.I.C. policy and the balance of the insurance charges cover the period 1.4.2005 to 30.6.2006.
8. Half of the building is used for residential purposes of Sri. Tendulkar.

Prepare Profit and Loss A/c for the year ended 31.3.2006.

Solution:

M/s Tendulkar and Company

Profit and Loss A/c

For the year ended 31st March, 2006

13.1.3   Profit & loss appropriation account:

♦        The net profit/net loss is transferred to P&L appropriation A/c.

♦        Interest charged on drawings is credited to it.

♦        Interest allowed on capital, salary/ commission to proprietor/partner and transfer to reserves are debited to it.

♦        The net balance then left is transferred to capital a/ c.

Expenses incurred to earn income is treated as charge against profit and are debited to P&L a/c whereas items which are division of this profit earned are known as appropriation of profit and charged to P&L appropriation a/c.

Trading account, P&L a/c and P&L app. a/c are period statements, showing the result (performance) of that period, usually an accounting year.

In case of corporate organization like companies balance after all appropriations including dividend, remains in P&L/P&L appropriation a/c and hence appears in balance sheet.

Illustration 13.3 : The following is the extract of trial balance as on 31.3.2006 and certain additional information of Shri Tendulkar, in continuation of what is given in Illustrations 13.1 and 13.2:

Additional Information:

9. Salary due to Tendulkar Rs.500 p.m.
10. Interest on capital @5% be provided Rs.8,100.
11. Interest on drawings Rs.2,100

Prepare Profit and Loss Appropriation A/c for the year ended 31.3.2006.

Solution:

M/s Tendulkar and Company

Profit and Loss Appropriation A/c

For the year ended 31st March, 2006

13.1.4   Manufacturing account:

♦        A manufacturing concern may prepare Manufacturing a/c to ascertain cost of goods manufactured.

♦    Raw material consumed (Op. stock + Purchases – Closing stock), carriage inward, wages, power, depreciation of factory building, machinery, etc. and other manufacturing (factory) expense are debited to it.

♦        Opening WIP stock is debited and closing WIP stock credited.

♦        Balance is the cost of goods manufactured and is then transferred to trading account.

♦    When manufacturing a/c is not prepared, these items will come in trading a/c. Sometimes depreciation a/c may be directly taken to P&L a/c instead of trading a/c.

♦        Manufacturing a/c is also a period statement.

A manufacturer is one who purchases raw material and process it into finished goods with the help of labour and machines at his factory and sells the finished goods. Whereas a trader purchases goods and sells it as it is.

Refer Illustration 13.13

13.1.5  Balance sheet:

♦    Balance sheet shows the financial position of the entity as at a particular point of time.

♦    It shows what and how much entity owns (i.e. its assets) and how much it owes to others (i.e. its liabilities), the balance (i.e. asset – liability) is the owners equity.

♦    It is not an account, hence does not have debit and credit side.

♦    On one side assets like fixed assets (building, machinery, furniture, etc.), current assets (like stock, debtors, cash bank balance, advances, prepared a/c) and investments if any are shown.

♦    On the other side in addition to owners capital and reserves, the outside liabilities like loans taken, creditors, expenses payable etc. are shown.

♦    The two sides total must be same.

♦    On the asset side of balance sheet we start with most permanent to least permanent i.e. fixed assets, investments and then current assets. It is known as permanency preference. In case of manufacturer/trader this sequence is followed hence student will see this in all the chapters.

♦    When asset side starts with most liquid asset to least liquid like cash bank balance and ends with fixed assets is known as liquidity preference generally followed by institutions like banks.

♦    Liability side is mostly same in all cases we have first owner capital and reserves, then loans and thereafter current liabilities and provisions.

Balance sheet is a point of time statement, when stated as at 31.3.2006 it means as at close of that date i.e. after considering all transactions of that day.

Even though balance sheet does not have debit and credit side, student should remember that asset side represent debit and capital and liability side represent credit. It will help in correctly preparing final accounts.

In General Mercantile/accrual system is followed, as it is the proper and complete system to measure the performance of entity. In your syllabus every where this is considered. Under this system, incomes are recognized when these are earned irrespective of whether amount is received or not. Similarly expenses are recognized when these are incurred or accrued irrespective of whether amount is paid or not. As a result we have to make adjustment for expenses outstanding (payable), prepaid, income outstanding (receivable) and advance-received etc.

Illustration 13.4 : The following is the extract of trial balance as on 31.3.2006 and certain additional information of Shri Tendulkar, in continuation of what is given in Illustrations 13.1, 13.2 and 13.3:

Prepare Balance Sheet as on 31.3.2006.

Solution:

M/s Tendulkar & Company

Balance Sheet as at 31.3.2006

13.1.6   Trial balance:

♦    Trial balance is a statement containing the balances of all accounts as at the end of certain period usually classified into debit and credit.

♦    The total of debit and credit side must tally because whole accounting is done by double entry principle, otherwise it indicates arithmetical inaccuracies.

♦       It has balance of expenses, incomes, assets and liabilities.

♦       With the help of trial balance and adjustments the final accounts are prepared.

♦    All expenses and incomes will go into Manufacturing, Trading, P&L and P&L app. a/ c depending upon its nature and all assets and liabilities will go into balance sheet.

13.1.7   Adjustment/Other information/Additional information :

♦    When the trial balance is prepared, there may still be some accounts which are not yet final and may need some adjustments, some corrections etc.

♦    Such information is given together with trial balance and commonly referred as adjustment/additional information/other information etc.

♦       It is basically a transaction which needs to be entered in the account books or some errors which needs to be rectified, hence we give double entry effect i.e. Debit & Credit both for such adjustments.

♦    Some times indirect information is contained, in the trial balance, which when interpreted results into an adjustment (known as adjustment derived).

Place where information is given is irrelevant. Hence adjustment though commonly given below the trial balance, can be given in the trial balance or above the trial balance.

13.1.7.1   Common adjustments and their entry:

(1)     Outstanding Expenses/Expenses payable/Expense accrued (i.e. services/benefits have been received during the year, but payment not yet made.)

Expenses a/c                    Dr

To Expenses Payable a/c (Liability)

(2)     Prepaid expenses/Advance payment, (i.e. payment has been made but services/benefits have not been received during the year.)

Prepaid Expenses a/c            Dr (Assets)

To Expenses a/c

(3)     Outstanding Income/Income receivable/Accrued income, (i.e. services/benefits have been rendered during the year, but payment not yet received.)

Income receivable a/c       Dr (Assets)

To Income a/c

(4)     Incomes received in advance (i.e. payment has been received but services/benefits have not been rendered during the year.)

Income a/c                        Dr

To Advance Income a/c (Liability)

(5)     Depreciation: Following are the two ways of accounting for Depreciation.

(a)             Depreciation a/c     Dr

To Assets a/c

(b)             Depreciation a/c     Dr

To Depreciation reserve/Depreciation fund/Depreciation provision a/c

(Depreciation a/c is an expense which will be transferred to P&L A/c)

(6)     Closing Stock adjusted/accounted.

Stock a/c                           Dr (Assets)

To Trading a/c

Refer Illustration 13.8

13.1.7.2   Adjustment of closing stock before preparing Trial Balance:

♦    Any or all of the adjustments mentioned above can be recorded in the books of account and then trial balance can be prepared.

♦        Similarly stocks can also be adjusted before preparing trial balance as follows:

♦        Transfer Opening stock account to Purchases account i.e. Debit purchase a/c and Credit Opening stock a/c.

♦        Record closing stock in the books i.e. Debit Closing stock account and Credit Purchases account.

♦    Now in the Trial balance opening stock will not appear instead closing stock will appear which will be shown as asset in the balance sheet.

♦    The balance in Purchases account is the cost of goods sold also known as adjusted purchases which will be debited to trading account.

Illustration 13.5: Below is the trial balance of Shah as December 31, 2005

Additional information:

1. Rates have been prepaid to the extent of Rs. 175.
2. Bad debts Rs. 500 have to written off. A provision for doubtful debts @ 5% on debtors is necessary.
3. Building has to be depreciated at 2% and Furniture @ 10%.
4. The manager is entitled to a commission of 5% of net profits before charging such commission. Solution:

Trading and Profit and Loss Account of Shah

for the Year ended on December 31, 2005

*Rs. 20,900 less Rs. 9,040 (the total of all expenses so far), Manager is entitled to 5% of this figure.

(1) The trial balance gives “Adjusted Purchases”. It means that the opening stock has already been transferred to the Purchases Account and thus been closed. Further, entry for closing stock has already been passed by debiting the Closing Stock Account and crediting Purchases Account. That is why closing stock appears inside the trial balance. It will now be shown in the Balance Sheet and not in the Trading Account since purchases already stand reduced.

(2) There is a Loan of Desai @ 9% taken in 2004 i.e. in last accounting year. As per mercantile system interest up to 31.12.04 must have been provided in the last years a/c itself. The trial balance makes no mention of any interest being paid to him. Hence, interest @ 9% must be provided for the whole of current year only.

Balance Sheet of Shah as at December 31, 2005

13.1.7.3   Add-less Vs. debit-credit while giving treatment to adjustments:

♦    Although there is nothing wrong in either.

♦    But as a student our objective should be to improve our knowledge of accounting.

♦    Debit credit is the language of accounting and not add-less, hence it is advisable to use your debit-credit (i.e. accounting) knowledge everywhere.

♦    Formulate a double entry for every transaction/adjustment and then give its effect to same accounts if appearing in trial balance and the final figure then will appear in final account.

♦    There is no point in memorising a long list of adjustment with there add less effects. Entry should be formed using basic accounting knowledge as studied in Chapter 1.

In any case in a real situation every adjustment is required to be accounted in the books of account then only profit and loss a/c and balance sheet will be as per the books of account (or in agreement with books of account) as is certified by an auditor.

13.1.8   Transfer entries/closing entries/closing of books of account:

♦    After all adjustment are duly accounted.

♦    The individual expenses accounts are closed by debiting into trading or P&L a/c etc. as the case may be.

♦    Similarly all incomes a/c are closed by crediting it to Trading & P&L a/c.

♦    Such entries are known as closing entries.

♦    Balance of trading account (gross profit) is transferred to P&L a/c.

♦    Balance of P&L a/c (net profit) is transferred to capital a/c.

♦    Thus we are left with only the balances of assets and liabilities (including capital) which are shown in the balance sheet and carried forward to next years books of account by writing the balance on the other side of the account and thus account is shown as closed i.e. total on both debit and credit side gets equalized.

♦    When the books of account have been audited and final accounts have been prepared, then the closing entries as above are passed.

♦    All assets and liabilities accounts are balanced, shown in the balance sheet and carried forward to next years account book.

♦    It is a accepted norm, not to make any changes once the account books are audited and closed.

(1)   All debit balances will be either expenses or assets & all credit balances will be either incomes or Liabilities.

(2)   All expenses and incomes accounts are transferred to trading and profit and loss a/c and are thus closed.

(3)   All assets & liabilities as shown in the Balance sheet are carried forward to next years books as opening balance.

Refer Illustration 13,8

13.2   ACCOUNTING FOR BAD DEBT:

13.2.1   Meaning of Bad debt loss and its accounting:

♦        When goods are sold on credit it creates a debt (debtor) to be collected in future.

♦        Debtors will include a number of parties from whom money has to be collected.

♦        If amount can’t be collected from any party it is said to be a bad debt (a loss).

♦    If we are sure that amount can’t be collected and wants to close that party’s account i.e., wants to write off the Bad debt then entry will be-

(1)           Bad debt a/c Dr …..

To Concerned party A/c (Debtors a/c) ….

♦    But if we don’t want to close the party account and still want to account the Bad debt loss i.e., want to provide for the Bad debts or create provision for Bad debts, then entry will be:

(2)           Bad debts a/c Dr

To Provision/Reserve for Bad & doubtful debt a/c …..

13.2.2   When are bad debts accounted?

♦        Entry for writing off the Bad debts (Entry No.1 in above question) may be passed any time during the year,

♦        But entry for creating provision for Bad debts (Entry No.2) is passed at the end of year only.

♦        The total debtors at the end of the year is ascertained and how much of it is doubtful of recovery is estimated.

♦        This will give the amount of total provision required or to be maintained.

♦        If already we don’t have any provision in the books then entry as per (2) above will be passed for full amount.

♦    But if we have opening balance of provision then entry will be passed only for the difference amount known as additional provision (i.e. New Provision (i.e. total provision required) (-) Opening balance of Provision).

♦    Alternatively opening provision is reversed and entry for closing provision (New provision) is passed by full amount.

13.2.3   If existing provision for bad and doubtful debt is more:

♦    If the opening balance of provision is more than the provision required at the end of the year, then the excess provision will have to be written back as follows:

(3)           Provision for Bad & Doubtful debt a/c Dr

To Bad debts a/c ….

♦        This may be mentioned in adjustment as ‘provision to be decreased/reduced by

13.2.4   Treatment in final account:

♦        The total of Bad debt is debited in profit & loss a/c. Total bad debt loss is:

(1)           bad debt written off + additional provision or

(2)           bad debt written off + new provision (-) old provision.

♦    The closing balance of provision (Final Provision/new provision) will be shown as deduction from Debtors in Balance Sheet.

13.2.5   Interpretation:

♦    Interpretation of adjustment given in the question as to whether it is Total Provision or Additional Provision can be made as follows:

♦       Entry as per (2) above should always be passed for additional provision.

♦    Whenever total provision is given, from this opening provision should be deducted to get the amount of additional provision.

♦       Alternatively old provision should be reversed (entry No.3) and then create full new provision (entry No.2).

13.2.6 Bad debt recovered:

♦       When Bad debt already written off is recovered later on, the entry will be:

(4) Cash/Bank a/c Dr…..

To Bad debt a/c OR Bad debt recovered a/c…..

13.2.7  Draft a bad debt account:

13.2.8 Draft a provision for bad and doubtful debt a/c:

Number (1) to (4) refers to entries given above.

♦    Some people suggest that provision when created should be directly debited to Profit & loss a/c.

♦    In the Author’s opinion all nominal accounts should be created in the books of account and then transferred to Profit and Loss a/c.

♦    When any accounting standard or guidance note etc. refers debit/credit to P&L a/c, it is giving recognition principle that is what should be the ultimate treatment, it should not be construed as requiring direct charge to P&L a/c.

Illustration 13.6 :

On 1-1-2003 M/s A & Co. had a provision for bad debts of Rs. 10,880.

The bad debts during the year 2003 amounted to Rs. 9,040.

The debtors as at 31-12-2003 were Rs. 2,24,000.

Provision for bad debts @ 5% is maintained by the business.

Bad debts during 2004 and 2005 were Rs. 11,680 and Rs. 14,160 respectively.

The sundry debtors as at 31-12-04 and 31-12-05 were Rs. 2,88,000 and Rs.1,36,000 respectively.

Prepare necessary Ledger Accounts in the books of M/s. A & Co. Also show how these would appear in the Profit and Loss Account and Balance Sheet for the years 2003 to 2005.

Solution:

13.3 SPECIAL ITEMS AND THEIR TREATMENT:

13.3.1 Interest on drawings:

♦ Drawings are the amount (cash or goods) withdrawn from business concern by owners for personal use.

♦    If it is required to charge interest on such drawings, following points be considered.

1. Interest on drawing should be calculated from the date of drawing to the end of year.
2. When the date of drawing is not given we take interest for half year (6 month) assuming that drawings are made evenly (i.e. in equal amount) throughout the year.
3. If it is mentioned that drawings are made evenly at the beginning of each month then interest will be charged for 6.5 month (on an average basis) on the full amount of drawing.
4. If drawings are made evenly at the end of each month then interest is calculated for 5.5 month on an average basis.

Interest on drawing is income for the concern and interest on capital is expense.

Illustration 13.7:

Calculate interest on drawings @ 12 %, under following situation for the year ended 31.12.2011:

(1)      Partner A withdrew Rs.12,000 during the year, Rs. 5,000 on 31.3.2011, Rs. 4,000 on 30.6.2011 & Rs. 3,000 on 30.9.2011.

(2)      Partner B withdrew Rs.12,000 during the year.

(3)      Partner C withdrew Rs.12,000 during the year, Rs. 1,000 at the beginning of each month.

(4)      Partner D withdrew Rs.12,000 during the year, Rs. 1,000 at the end of each month.

Solution:

(1)      Interest to be charged to Partner A:

Rs. 5,000 × 12% × 9/12 + Rs. 4,000 × 12% × 6/12 + Rs. 3,000 × 12% × 3/12 = 450 + 240 + 90 = 780

(2)      Interest to be charged to Partner B:

Rs.12,000 × 12% × 6/12 = 720

(3)      Interest to be charged to Partner C:

Rs.12,000 × 12% × 6.5/12 = 780

(4)      Interest to be charged to Partner D:

Rs.12,000 × 12% × 5.5/12 = 660

13.3.2   Trading or Operating Profit:

♦    Actually profit is a very vague term. Because profit can have or rather should have different components depending upon the purpose for which we need that information.

♦    Like trading account gives us the gross margin i.e. the difference between selling price and the cost of Goods purchased/manufactured, it does not have effect of further administrative and selling expenses.

♦    We get net profit when we have adjusted all administrative expenses, selling expenses, financial expenses, other incomes, abnormal profit/loss etc.

♦    But if we want to know trading/operating profit (i.e. the result of the operating activity) then from gross profit we will deduct administrative and selling expenses only.

♦    The financial expenses, income tax, other incomes like investment income, profit/loss on sale of fixed assets/ investments will not be considered while ascertaining trading/operating profit. Trading/operating profit can be before depreciation or after depreciation.

♦    After adjusting the above items what we get is the net profit.

♦    Similarly we have other terms like normal profit, profit before tax, profit after tax, etc.

13.3.3   Contingent Liability and Other Liabilities:

♦    Liability is defined as the financial obligation of an enterprise other than owners’ fund.

♦    They may be classified into current liabilities and long-term liabilities.

♦    Creditors, bills payable and outstanding expenses are examples of current liabilities whereas debentures and term loans from banks and financial institutions are examples of long-term liabilities.

♦    Guidance Note on Terms Used in Financial Statements defines contingent liability as “an obligation relating to an existing condition or situation which may arise in future depending on the occurrence or non-occurrence of one or more uncertain future events”.

♦    Contingent liability may be in respect of bills discounted, pending suits etc.

♦    Thus it is not an actual liability and as such it is not recorded in account books and hence does not appear in the balance sheet.

♦        It is simply mentioned (disclosed) by way of foot note to the balance sheet.

13.3.4   Funds:

♦    As per Schedule HI fund word should be used only when such reserve is specifically represented by earmarked investment.

Although in exam problems this restriction is not strictly followed & the words Reserve & Fund & the word Reserves & Provisions are interchangeably used.

13.3.5   Current Assets :

♦    Current Assets are the assets which in the normal course of business are used or realized within an accounting year.

♦        Example: Stock/Inventory, Debtors/Receivables, Prepaid/Advances, Cash Bank etc.

13.3.6   Current Liabilities :

♦    Current Liabilities are the liabilities which in the normal course of business are paid/settled within an accounting year.

♦        Example: Creditor, Payables/Outstandings, Provisions etc.

13.3.7   Working Capital :

♦        Current Assets (-) Current Liability is known as working capital.

13.3.8   Long term Liability :

♦        Long term liabilities are liabilities which are due/payable beyond one year.

♦        Example : Loans, Debentures etc.

13.3.9   Fixed Assets :

♦        Fixed Assets are assets held for use in the business or for giving on rent etc.

♦        Fixed Assets are not held for resale/consumption.

♦        Example : Land, Building, Plant & Machinery, Vehicles, Goodwill, Patent etc.

13.3.10   Intangible Assets :

♦    Intangible Assets are Fixed Assets which don’t have physical existence or physical existence is only secondary to its intangible part.

♦        Example : Goodwill, Patent, Trademark, Software etc.

13.3.11   Fictitious Assets :

♦    These are not asset in a correct sense, these are the expenditure/losses which have not been written off to profit & loss account, hence appears on the asset side of Balance sheet.

♦        Example: Preliminary expenses, Share/Debenture discount etc.

FORMAT OF BALANCE SHEET (PERMANENCY PREFERENCE)

M/s. ………………………………….

Balance sheet as on……………………….

Note:

(1) This is known as T form (or horizontal form) and commonly followed by proprietory and partnership type of small organizations. Annual accounts can also be prepared in vertical form. There is also a liquidity preference format, which is followed for organizations like Bank.

(2) In latter part we have not been rigid in following the above format.

ILLUSTRATIONS

FINAL ACCOUNTS OF PROPRIETORY CONCERN (SOLE TRADER)

Illustration 13.8 : From the following Trial Balance of Hari and additional information prepare Trading and Profit & Loss Account for the year ended 31st March, 2006 and a Balance Sheet as on that date:

Trial Balance as at 31st March, 2006

Additional Information:

(1)    Depreciate Furniture by 10% on original cost;

(2)    A provision for Doubtful Debts is to be created to the extent of 5% on Sundry Debtors;

(3)  Salaries for the month of March, 2006 amounting to Rs. 3,000 were unpaid which must be provided for. However salaries included Rs. 2,000 paid in advance;

(4)    Insurance amounting to Rs. 2,000 is prepaid;

(5)    Provide for outstanding office expenses Rs. 8,000;

(6)    Stock used for private purpose Rs. 6,000;

(7)    Closing Stock-in-Trade Rs. 60,000.

Solution:

M/s Hari

Trading and Profit and Loss A/c for the year ended on 31.3.2006

M/s Hari

Balance Sheet as on 31.3.2006

Adjustment Entries

Transfer Entries/Book Closing Entries

Illustration 13.9 : From the following Trial Balance of K. Katrak as on 31-3-2006. Prepare Trading Account, Profit and Loss Account for the year ended 31-3-2006, and a Balance Sheet as on that date after making necessary adjustments:

Trial Balance

Adjustments

(1) Closing stock was valued at Rs. 21,000.

(2) Of the debtors Rs. 400 are bad and should be written off. Create a reserve for bad debts at 5% on Sundry Debtors and a reserve for discount on Debtors at 2.5%.

(3) Salaries Rs. 800 for March, 06 were not paid.

(4) Interest on Capital is to be calculated at 6% p.a. and on drawings Rs. 330.

(5) Prepaid Insurance amounted to Rs.100.

(6) Depreciate Furniture & Fixture by 5% and plant and machinery by 10%.

Solution :

M/S K. K. Katrak

Trading and Profit & loss A/c for the year ended on 31.03.06

Profit & loss Appropriation A/c

♦  Interest on capital, interest on drawing, salary / commission etc. to owners and transfer to reserves etc. is taken in P&L appropriation a/c.

♦  Loan from Mr. Mehta has been taken 6 month ago for which the interest accrued is Rs. 300 out of which Rs. 150 has already been paid and accounted balance Rs.150 is payable and is accounted now.

Balance sheet as on 31.03.06

Illustration 13.10 : From the following trial balance and information, prepare Trading and Profit and Loss Account of Mr. Rishabh for the year ended 31st March, 2006 and a Balance Sheet as on that date:

Additional Information:

(i) Stock of General goods on 31.3.06 valued at Rs. 27,300.

(ii) Fire occurred on 23rd March, 2006 and Rs. 10,000 worth of general goods were destroyed. The Insurance Company accepted claim for Rs. 6,000 only and paid the claim money on 10th April, 2006.

(iii) Bad Debts amounting to Rs. 400 are to be written off. Provision for Bad and Doubtful debts is to be made at 5% and for discount at 2% on debtors. Make a provision of 2% on creditors for discount.

(iv) Received Rs. 6,000 worth of goods on 27th March, 2006 but the invoice of purchase was not recorded in Purchase Book.

(v) Rishabh took away goods worth Rs. 2,000 for personal use but no record was made thereof.

(vi) Charge depreciation at 2% on Land and Buildings, 20% on Plant and Machinery and 5% on Furniture.

(vii) Insurance prepaid amounts to Rs. 200.

Solution:                                                       M/s. Rishabh

Trading and P&L A/c for the year ended on 31st March, 2006

M/s. Rishabh

Balance Sheet as on 31st March, 2006

Adjustment entries

♦  Have you observed that Mr. Rishabh is dealing in two types of goods Textile goods and General goods.

♦  He has already prepared the trading a/c of textile goods and hence shown profit and closing stock in the trial balance.

♦  Whereas for General goods he has neither prepared trading a/ c nor made the adjustment for stock before preparing the trial balance.

FINAL ACCOUNTS OF PARTNERSHIP FIRM

Illustration 13.11: From the under mentioned Trial Balance of X and Y as on 31st December, 2005, prepare a Trading Account, Profit and Loss Account for the year ended 31-12-2005 and a Balance Sheet as on that date:

Trial Balance

The following additional information is supplied:

(a)       The partners share profits and losses as X = 4/5 and Y — 1/5;

(b)       Depreciate Plant and Machinery by 10%;

(c)       Bad Debts reserve to be raised to 2.5% on sundry debtors;

(d)       Interest on capital is to be provided at 5% p.a. and on drawings at 6% p.a. (assumed to be drawn on 30th June, 2005);

(e)       Salaries include Rs.3,000 drawn equally by the partners;

(f) Advertisement expenses to be written off against revenue over 5 years;

(g)       Outstanding liabilities to be provided: for wages Rs. 2,000; salaries Rs. 3,000;

(h)       Partners are allowed an annual salary of Rs. 3,000 each;

(i)         50% of the net profits are transferred to Reserved Fund;

(j) Closing Stock Rs. 10,000.

Solution :

Trading and Profit and loss A/c for the year ended on 31.12.05

Profit & loss Appropriation A/c

Balance sheet as on 31.12.05

Illustration 13.12: A, B and C are Partners in a firm sharing profits and losses as A-60%, B-3 0%, and C-10%. The ledger balances of firm as on 31-3-2006, are given below:

Opening stock Rs.45,000; Sales Rs.4,91,000; Purchases Rs.2,65,000; Plant Rs.1,50,000; Bills receivable Rs.30,000; Sundry Debtors Rs.60,000; Freehold premises Rs. 1,00,000; Wages Rs.50,000; Salaries Rs.30,000; Carriage inwards Rs.3,000; Carriage outwards Rs.2,500; Cash in hand Rs.750; Cash at Bank Rs.30,000; Sundry Creditors; Rs.40,000; Bills payable Rs. 15,000; Commission received Rs.90,000; Partners Capital: A-Rs.50,000; B-Rs.40,000; C-Rs.10,000; Furniture Rs.25,000; Returns outwards Rs.2,250; Discount received Rs.3,000; General reserve Rs.50,000.

You are required to prepare a Trading and Profit & Loss Account for the year ended 31 -3-06, and a Balance Sheet as at that date after considering the following adjustments:

(a)    Closing Stock valued at Rs.60,000;

(b)    Depreciate Plant at 10% and Furniture at 20%;

(c)    Create a reserve for Bad and Doubtful debts at 2.5% on Sundry Debtors;

(d)    50% of the commission received is to be transferred to firm’s General Reserve Account;

(e)    Interest on Capital is to be allowed at 5% p.a.;

(f)    Salaries to be allowed to partners: A-Rs.6,000; B-Rs.5,000; C-Rs.4,000;

(g)  The manager of the business is entitled to a commission of 5% on the Net profits before transfer to the Appropriation A/c but after charging his commission.

Solution:

Trading and Profit and loss A/c for the year ended on 31.12.06

Profit & loss Appropriation A/c

Balance sheet as on 31.12.06

In P&L a/c a temporary balancing is done to get profit before commission, alternatively that temporary balancing can be avoided.

MANUFACTURING ACCOUNT

Illustration 13.13: Prepare Manufacturing, Trading and Profit and Loss account for the year ended on 31 st December, 2005 and Balance Sheet as at that date of Shri S. Singh, manufacturers, from the following Trial Balance & information.

Trial Balance as at 31st December, 2005

Additional Information:

Stock at 31st December, 1998 were:

(a) Raw-materials Rs. 7,120 (b) Work-in-progress Rs. 3,480 (c) Finished goods Rs. 19,300 (d) Packing materials Rs. 250 The following liabilities are to be provided for:

(a) Factory power Rs. 1,124 (b) Rent & Rates Rs. 772 (c) Light & Heat Rs. 320 (d) General expenses – Factory Rs. 50 (e) General expenses – Office Rs. 80

Insurance prepaid Rs. 340

Provide depreciation at 1096 p.a. on Plant and machinery and 5% p.a. on furniture.

Increase Bad debts provision by Rs. 1,000.

Five sixth of Rent & Rates, Light & Heat, and Insurance are to be allocated to the Factory and one sixth to the office.

Solution:                                                      M/s. S. Singh

Manufacturing Account for the year ended 31st December, 1998

Trading and P&L A/c for the year ended on 31st December, 1998

Balance Sheet as on 31st December, 1998

PRACTICE PROBLEMS

(Answers & Hints given at the end of the Chapter)

P.l : The following is the extract of trial balance as on 31.3.2014 and certain additional information of Shri Gavaskar, who carries on business under the name and style of M/s. Gavaskar and Company at Bombay:

Additional Information:

1. Value of stock at close of year Rs. 44,000.

Prepare Trading A/c for the year ended 31.3.2014.

P.2 : The following is the extract of trial balance as on 31.3.2014 and certain additional information of Shri Gavaskar, in continuation of what is given in P.1 :

Additional Information:

2. Depreciate Fixed Assets @ 10%
3. One month’s salary is outstanding.
4. Reserve for bad debt is to be maintained at Rs. 4,300.
5. Insurance Premium includes Rs. 4,000 paid towards proprietor’s L.I.C. policy and the balance of the insurance charges cover the period 1.4.2013 to 30.6.2014.

Prepare Profit and Loss A/c for the year ended 31.3.2014.

P.3 : The following is the extract of trial balance as on 31.3.2014 and certain additional information of Shri Gavaskar, in continuation of what is given in P.1 : and P.2::

Additional Information:

6. Salary due to Gavaskar Rs. 500 p.m.
7. Interest on capital @5% be provided Rs. 8,100.
8. Interest on drawings Rs. 2,100

Prepare Profit and Loss Appropriation A/c for the year ended 31.3.2014.

P.4 : The following is the extract of trial balance as on 31.3.2014 and certain additional information of Shri Gavaskar, in continuation of what is given in P, 1:, P.2 : and P.3 :

Prepare Balance Sheet as on 31.3.2014.

P.5 : On 1-1 -2011 M/s A & Co. had a provision for bad debts of Rs. 10,000.

The bad debts during the year 2011 amounted to Rs. 9,000.

The debtors as at 31-12-2011 were Rs. 2,40,000.

Provision for bad debts @ 5% is maintained by the business.

Bad debts during 2012 and 2013 were Rs. 11,000 and Rs. 14,000 respectively.

The sundry debtors as at 31-12-12 and 31-12-13 were Rs. 2,90,000 and Rs. 1,70,000 respectively.

Prepare necessary Ledger Accounts in the books of M/s. A & Co. Also show how these would appear in the Profit and Loss Account and Balance Sheet for the year 2011 to 2013.

P.6 : The following is the trial balance of K on 31st March 2011:

Adjustments:

(i) Closing stock Rs. 2,25,000.

(if) Machinery worth Rs. 50,000 purchased on 1.10.2010 was shown as Purchases.

(in) Commission is payable at 2 1 /2% on sales.

(iv)   Write off bad debts Rs. 10,000 and create a provision for doubtful debts at 5% of debtors.

(v)      Depreciate building by 2 1/2% p.a. and machinery and furniture at 10% p.a.

Prepare Trading and Profit and Loss Account for the year ending 31st March, 2011 and a balance sheet as on that date. Also pass entries for adjustments & for book closing.

P.7 : The following is the Trial Balance of Shri Arihant as on 31st December, 2010.

Adjustments:

1. Closing stock Rs. 2,25,000
2. Goods worth Rs. 5,000 were taken for personal use, but no entry was made in the books.

III.     Depreciate Fixed assets at 10% p.a.

1. Provision for Doubtful Debts should be 6% on Debtors.
2. The Manager is entitled to a commission of 5% of Net profits after charging his commission.

Prepare Trading and Profit and Loss Account for the year ending 31st December, 2010 and a Balance Sheet as at that date.

P.8 : Mr. A a Shopkeeper had prepared the following Trial Balance from his ledger as on 31st March, 2011:

P.9 : The following is the Trial Balance of Hari as on 31st March, 2011. You are requested to prepare the Trading and Profit and Loss Account for the year ended 31st March, 2011 and a Balance Sheet as on that date after making the necessary adjustments:

The following adjustments are to be made:

(a)     Stock on 31st March, 2011 was Rs. 1,50,000 (at selling price) cost is Rs. 1,40,000.

(b)      Depreciate Furniture and Fittings by 10%.

(c)      The salesman are entitled to a commission of 10% on sales.

P.10 : From the following Trial Balance and accompanying adjustments of A & Co. prepare Manufacturing, Trading and Profit & Loss Account for the year ended 31st December 2010, and a Balance Sheet as on that date.

Additional Information:

(i) 60% of Insurance & taxes is related to Factory.

(ii) Depreciate plant at 10% and building at 5%

(iii) Closing Stock: Raw Materials Rs. 16,000 WIP Rs. 4,000

Finished Goods Rs. 15,000

ANSWERS AND HINTS FOR

Practice Problems