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Final Accounts – Accounting CA Foundation Notes

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 acounting

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.


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.


13.1.1   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:

Stock (1.4.2005)62,000
Purchase Return2,600
Sales Return5,600
Freight on purchases1,200

Additional Information:

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

Prepare Trading A/c for the year ended 31.3.2006.


M/s Tendulkar and Company

Trading A/c

For the year ended 31st March, 2006

To Opening Stock62,000By Sales2,30,000
To Purchases1,36,000Less: Returns5,6002,24,400
Less: Returns2,6001,33,400
To Freight on purchase1,200By Closing Stock44,000
To Profit and Loss A/c (Gross Profit Transferred)71,800

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:

Reserve for Bad Debt3,000
Rent for Godown5,500
Interest on loan from Vishwanath2,700
Rates and Taxes2,100
Discount allowed to Debtors2,400
Discount received from creditors1,600
Carriage Outwards2,000
Printing and Stationary1,800


Electric Charges2,200
Insurance Premium5,500
General Office Expenses3,000
Bad Debts2,000
Bank Charges1,600
Motor Car expenses3,600

Additional Information:

  1. 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

  1. One month’s rent for godown is outstanding.
  2. One month’s salary is outstanding.
  3. Interest on loan from Vishwanath payable Rs.600
  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 1.4.2005 to 30.6.2006.
  6. 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.


M/s Tendulkar and Company

Profit and Loss A/c

For the year ended 31st March, 2006

To Salaries11,000By Trading A/c (Gross profit transferred)71,800
Adit Outstanding 11,000 × 1/111,00012,000By Discount Received1,600
To Rent for godown5,500
Add: Outstanding 5,500 × 1 /115006,000
To Rates and Taxes2,100
To Insurance Premium5,500
Less: Drawings4,000
Less: Prepaid for 3 months 1500 × 3/153001,200
To Electric Charges2,200
To Carriage Outwards2,000
To Printing and Stationary1,800
To Motor Car Expenses3,600
To Bank Charges1,600
To Interest on Loan2,700
Add Outstanding6003,300
To Office Expenses3,000
To Discount Allowed2,400
To Bad debt written off2,000
Add: Additional provision 4300-30001,3003,300


To Depredation:
Buildings (3000 – 1500 for personal)1,500
Furniture & Fixture2,000
To P&L appr. A/c (Net profit transferred)18,700

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:

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

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


M/s Tendulkar and Company

Profit and Loss Appropriation A/c

For the year ended 31st March, 2006

To Salary to Proprietor (500 × 12)6,000By Profit & loss A/c (Net profit transferred)18,700
To Interest on Capital8,100By Interest on Drawing2,100
To Capita] A/c (Balance profit transferred)6,700

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:

Cash in hand1,400
Cash at Bank2,600
Sundry Debtors86,000
Furniture and Fixture20,000
Office Equipment16,000
Typewriter purchased on 1.10.054,000
Motor Car20,000
Sundry Creditors43,000
Loan from Vishwanath30,000
Capital A/c1,62,000

Prepare Balance Sheet as on 31.3.2006.


M/s Tendulkar & Company

Balance Sheet as at 31.3.2006

Add: Net profit6,700Less: Depreciation30057,000
Salary due6,000
Interest on capital8,100Furniture & Fixture:20,000
1,82,800Less: Depreciation2,00018,000
Less: Drawings12,000Type writer:4,000
Interest on drawing2,100Less: Dep. (for 6 months)3003,700
50% Dep. for personal1,500Equipment:16,000
use of buildingLess: Depreciation2,40013,600
Insurance personal LIC4,00019,6001,63,200
Motor Car:20,000
Loan30,000Less: Depreciation4,00016,000
Add Outstanding Interest60030,600
Closing Stock44,000
Sundry Creditors43,000Sundry Debtors86,000
Outstanding Liabilities:Less: Reserve4,30081,700
Godown Rent500Cash in Hand1,400
Salaries1,0001,500Cash at Bank2,600
Prepaid Insurance300

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.   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   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

Debit BalanceRs.Credit BalanceRs.
Drawings1,500Capital Account50,000
Adjusted purchases6,99,200Loan from Desai
Salaries4,500@ 9% (taken on 1st July, 2004)20,000
Carriage on Purchases400Safes7,20,000
On sales500Discount500
Rates and Insurance400Sundry Creditors20,000
Sundry Debtors8,000
Cash on Hand250
Cash at Bank1,500
Stock (31st December, 2005)61,250

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

To Adjusted Purchases6,99,200By Sales7,20,000
To Carriage on Purchases400
To Gross Profit c/d20,400
To Salaries4,500By Gross Profit b/d20,400
To Carriage on Sales500By Discount500
To Rates & Insurance:
Less: Prepaid175225
To Bad Debts written off500
To Provision for Doubtful Debts
(5% of Rs. 7,500)375
To Depreciation:
Buildings (2%)540
Furniture (10%)6001,140
To Interest1,800
To Commission payable to manager
(5% of Rs. 11,860′)593
To Net Profit11,267

*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

LiabilitiesAmount Rs.AssetsAmount Rs.
Capital Account50,000Fixed Assets:
Add: Net Profit11,267Buildings27,000
Less: Drawings1,50059,767Less: Depreciation54026,460
Loan from Desai20,000Furniture6,000
Add: Interest Due1,80021,800Less: Depreciation6005,400
Sundry Creditors20,000Current Assets:
Commission Payable593Cash on hand250
Cash at Bank1,500
Sundry Debtors7,500
Less: Provision for Doubtful debt3757,125
Prepaid Rates175
1,02,1601,02,160   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


13.2.1   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:

Sentence GivenMeaning
(i) Provision to be maintained/createdTotal Provision (New R.D.D.)
(ii) Provision to be raised/increased toTotal Provision (New R.D.D.)
(iii) Provision to be increased byAdditional Provision
(iv) Additional Provision to be made/createdAdditional Provision   (New RDD-Old RDD)

♦       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:

To Debtors a/c(Bad debt written Off)xxx (1)By Provision for B&D a/c(excess provision written back)xxx (3)
To Provision for B&D a/c(Additional provision created)xxx (2)By Cash/Bank a/c(Bad debt recovered)xxx (4)
By P&L a/c(Balance Transferred )Xxx

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

To Bad debt a/cBy Opening Balance b/f
(excess provision written back)xxx (3)(old RDD)xxx
To Closing BalanceBy Bad debt a/c
(Final provision at the end) (New RDD)Xxx(Additional provision created)xxx (2)

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.


Dr.Bad Debts A/cCr.
2003To Sundry Debtors A/c9,0402003 Dec. 31By Profit & Loss A/c9,360
2003Dec.31To Prov. For bad debt a/c320 2004 Dec. 31By Profit & Loss A/c14,880
To Sundry Debtors A/c11,680 
20042004Dec,31To Prov. For bad debt a/cTo Sundry Debtors A/c3,200 
200514,1602005 Dec. 31By Prov. For bad debt a/c7,600
2005 Dec. 31By Profit & Loss A/c6,560


Dr.Provision for Bad Debts A/cCr.
31.12.03To Balance c/d11,2001.1.03By Balance b/d10,880
(5% of Rs. 2,24,000)31.12.03By Bad debt A/c (addl. Prov.)320
31.12.04To Balance c/d14,4001.1.04By Balance b/d11,200
(5% of Rs. 2,88,000)31.12.04By Bad debt A/c (addl. Prov.)3,200
31.12.05To Bad debt A/c (excess7,6001.1.05By Balance b/d14,400
provision cancelled) To Balance c/d (5% of Rs.1,36,000)6,800


Extract of P&L Account for the year ended on 31-12-2003
To Bad Debt A/c9,360
Extract of P&L Account for the year ended on 31-12-2004
To Bad Debt A/c14,880
Extract of P&L Account for the year ended on 31-12-2005
To Bad Debt A/c6,560
Extract of Balance Sheet as at 31st December, 2003
Sundry DebtorsRs. 2,24,000
Less: Prov. for Bad DebtsRs. 11,2002,12,800
Extract of Balance Sheet as at 31st December, 2004
Sundry DebtorsRs. 2,88,000
Less: Prov. for Bad DebtsRs. 14,4002,73,600
Extract of Balance Sheet as at 31st December, 2005
Sundry DebtorsRs. 1,36,000
Less: Prov. for Bad DebtsRs. 6,8001,29,200


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.


(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.


M/s. ………………………………….

Balance sheet as on……………………….

Capital and liabilitiesRs.AssetsRs.
Owners fundFixed assets
ReservesxxxxxxLand & buildingxxx
LoansPlant and machineryxxx
Current liabilities and provisionCurrent assets loans & advances
Expenses payablexxxDebtorsxxx
ProvisionsxxxxxxBills receivablexxx
Cash bank balancexxx
Prepaid expensesxxx
Loans and advancesxxxxxx


(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.



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

Interest Earned4,000
Purchase Returns5,000
Sales Return10,000
Bad Debt Written off7,000
Provision for Bad Debts6,000
Printing & Stationery8,000
Opening Stock50,000
Office Expenses12,000
Provision for Depreciation2,000

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.


M/s Hari

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

To Opening stock50,000By Sales3,21,000
To Purchases1,50,000(-) Return10,0003,11,000
(-) Return5,1001,45,000By Goods used6,000
To Wages20,000By Closing stock60,000
To Gross profit c/d1,62,000
To Salaries30,000By Gross Profit b/d1,62,000
(+) Outstanding salary3,000By Interest4,000
(-) Advance salary2,00031,000
To Rent15,000
To Bad debts7,000
(+) Provisions4,00011,000
To Printing and Stationery8,000
To Insurance12,000
(-) Prepaid2,00010,000
To Office expenses12,000
(+) Outstanding8,00020,000
To Depreciation2,000
To Net profit transferred to Capital a/c69,000

M/s Hari

Balance Sheet as on 31.3.2006

(+) Net profit69,000(-) Dep. Provision: Bal. B/f2,000
(-) Drawings24,000+ Current year dep.2,000 4,00016,000
(-) Goods taken6,0001,39,000Stock60,000
Salary payable3,000(-) Provision: old b/f6,000
Expense payable8,0004- Additional provision4,000 10,0001,90,000
Advance salary2,000
Prepaid insurance2,000

Adjustment Entries

No.ParticularsDr. Rs.Cr. Rs.
1.Depreciation a/cDr.2,000
To Depreciation provision a/c2,000
(Depreciation for the current year provided by SLM)
2.Bad debt a/cDr.4,000
To Provision for Bad debt a/c4,000
(Provision for additional bad debts created. Required prov. 5% on Debtors of Rs. 2,00,000 i.e. Rs. 10,000 less existing prov. Rs. 6,000 )
3.Salary a/cDr.3,000
To Salary payable a/c3,000
(Being salary for the month of March due)
Advance Salary a/cDr.2,000
To Salary a/c2,000
(Being advance salary paid transferred to advance a/c)
4.Prepaid Insurance a/cDr.2,000
To Insurance expenses a/c2,000
(Being premium paid for next year, transferred to prepaid a/c)
5.Office expenses a/cDr.8,000
To Expenses payable a/c8,000
(Being provision made for expense payable)
6.Drawings a/cDr.6,000
To Goods used a/c6,000
(Being goods withdrawn by owner for personal use)
7.Stock a/cDr.60,000
To Trading a/c60,000
(Being closing stock adjusted)

Transfer Entries/Book Closing Entries

No.ParticularsDr. Rs.Cr. Rs.
1.Purchase return a/c Dr.5,000
To Purchase a/c5,000
(Being purchase return balance transferred to purchases a/c)
2.Trading a/c Dr. To Opening stock a/c2,15,00050,000
To Purchase a/c1,45,000
To Wages a/c20,000
(Being direct expenses of goods transferred to trading a/c)
3.Sales a/c Dr.10,000
To Sales return a/c10,000
(Being sales return a/c transferred to sales a/c)
4.Sales a/c Dr.3,11,000
Goods used a/c Dr.6,000
To Trading a/c3,17,000
(Being sales a/c and goods used a/c transferred to trading a/c)
5.Trading a/c Dr.1,62,000
To Profit & Loss a/c1,62,000
(Being gross profit shown by trading a/c transferred to P&L a/c)
6.Interest a/c Dr.4,000
To Profit & Loss a/c4,000
(Being indirect incomes transferred to P&L a/c)
7.Profit & Loss a/c Dr.97,000
To Salary a/c31,000
To Rent a/c15,000
To Bad debt a/c11,000
To Printing and stationery a/c8,000
To Insurance a/c10,000
To Office expense a/c20,000
To Depreciation a/c2,000
(Being expenses a/c transferred to P&L a/c)
8.Profit & Loss a/c Dr.69,000
To Capital a/c69,000
(Being net profit as per P&L a/c transferred to capital a/c)
9.Capital a/c Dr.30,000
To Drawings a/c30,000
(Being drawing adjusted against capital a/c)

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

Dr. Rs.Cr. Rs.
K. Katrak’s Drawings12,000K. Katrak’s Capital60,000
Furniture & Fixtures4,000Returns Outward2,000
Plant & Machinery30,000Sales1,30,000
Opening Stock20,000Creditors12,000
Purchases80,000Loan at 6% p.a. taken from
Salaries and wages22,400M. Mehta on 1-10-200510,000
Return Inward5,000
Postage & telegrams1,500
Rent, Rates and taxes3,600
Bad debts written off400
Trade Expenses200
Interest on loan from M. Mehta150
Travelling Expenses500
Sundry Expenses300
Cash at Bank10,300


(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

To Opening stock20,000By Sales1,30,000
To Purchase80,000(-) Return Inward5,0001,25,000
(-) Return outward2,00078,000By Closing stock21,000
To Gross profit48,000
To Depreciation: Furniture200By Gross Profit48000
Plants & Mach.3,0003,200By Discount600
To Sundry expenses300
To Travelling expenses500
To Trade expenses200
To Salary & wages22,400
+ Salary payable80023,200
To Postage & Telegram1,500
To Rent, Rates & Taxes3,600
To Bad debts400
+ Addl. Bad debts written off400
+ Provision for bad debts1,0001,800
To Interest on loan from Mr. Mehta150
+ Interest payable150300
To Insurance800
(-) Prepared Insurance100700
To Discount on debtor Provided475
To Net profit transferred to P&L app. a/c12,825

Profit & loss Appropriation A/c

To Interest on capital3,600By Net profit as per P&L account12,825
To Balance profit transferred to capital a/c9,555By Interest on drawings330

♦  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

Capital60,000Furniture & fixture4,000
(+) Interest on Capital3,600(-) Depreciation2003,800
(-) Drawing12,000Plant & Machinery30,000
(-) Interest on drawing330(-) Depreciation3,00027,000
(+) Profit transfer from P&L a/c9,55560,825Debtors20,400
(-) Bad debt written off400
Interest payable150(-) Provision for bad debt 5%1,000
Outstanding salary800(-) Provision for discount 2.5%47518,525
Closing stock21,000
Prepaid Insurance100

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:

Dr. Rs.Cr. Rs.
Land and Buildings90,000
Plant and Machinery20,000
Returns Outward4,000
Loan from Gajanand on 1.7.05 @ 6% p,a.30,000
Returns Inward5,000
Sundry Expenses600
Printing and Stationery500
Insurance Expenses1,000
Provision for Bad and Doubtful Debts1,000
Provision for Discount on Debtors380
Bad Debts400
Profit of Textile Deptt.10,000
Stock of General Goods on 1.4.0521,300
Salaries and Wages18,500
Trade Expenses800
Stock of Textile Goods on 31,3.068,000
Cash at Bank4,600
Cash in Hand1,280

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

To Opening stock a/c21,300By Sales a/c1,40,000
To Purchases a/c80,000(-) Returns5,0001,35,000
(-) Returns4,000By Closing stock a/c27,300
(+) Unrecorded purchase6,00082,000By Goods lost a/c10,000
To Gross profit c/d71,000By Goods used a/c2,000
To Carriage a/c (assumed to be outward)10,000By Gross profit b/ d71,000
To Sundry expenses a/c600By Profit of textile department10,000
To Printing and stationery a/c500By Excess discount provision cancelled38
To Interest a/c (30,000 × 6% × 9/12 )1,350By Discount on creditors a/c360
To Insurance expenses a/c1,000
(-) Prepaid200800
To Bad debts a/c400
(+) Further bad debts400
(-) Excess provision cancelled100700
To Salaries and wages a/c18,500
To Trade expenses a/c800
To Loss by fire a/c10,000
(-) Claim6,0004,000
To Depreciation a/c (1800+4000+250)6,050
To Net profit38,098

M/s. Rishabh

Balance Sheet as on 31st March, 2006

Capital1,00,000Land and building90,000
(+) Net profit38,098(-) Depreciation1,80088,200
(-) Drawings12,000Plant and machinery20,000
(-) Goods taken2,0001,24,098(-) Depreciation4,00016,000
Creditors12,000(-) Depreciation2504,750
(+) Unrecorded purchases6,000Debtors18,400
18,000(-) Bad debt400
(-) Reserve for discount36017,64018,000
Interest outstanding1,350Provision old1,000
(-) Excess provision cancelled100900
Provision for discount380
(-) Excess provision cancelled3834216,758
Stock (textile)8,000
Stock (general goods)27,30035,300
Cash at bank4,600
Claim receivable6,000
Prepaid insurance200

Adjustment entries

S. No.ParticularsAmount Rs.Amount Rs.
1.Stock a/cDr.27,300
To Trading a/c27,300
2.Loss by fire a/cDr.10,000
To Goods lost a/c10,000
3.Claim receivable a/cDr.6,000
To Loss by fire a/ c6,000
4.Bad debts a/cDr.400
To Debtors a/c400
5.Provision for bad debt a/cDr.100
To Bad debt a/c .100
6.Provision for discount a/cDr.38
To Discount a/c38
7.Purchase a/cDr.6000
To Creditor a/c. 6000
8.Reserve for Discount a/cDr.360
To Discount on creditor a/c360
9.Drawings a/cDr.2000
To Goods used a/c2000
10.Interest a/cDr.1350
To Interest payable a/c1350
11.Prepaid insurance a/cDr.200
To Insurance a/c200

♦  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.


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

Plant and machinery70,000Sales2,50,000
Opening Stock35,000Returns2,000
Purchases75,000Bills payable10,500
Land and buildings60,000Capital A/c
Carriage Inwards1,500X          80,000
Carriage Outwards3,500Y          75,0001,55,000
Sundry7 Debtors48,000
Coal and Coke3,500
Bad Debts1,500
Gas and water350
Furniture and fixture15,400
Rent, Rates and taxes3,500
Bills receivable22,000
X 5,000
Y 4,0009,000
Trading expenses12,000
Balance at Bank22,700

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

To Opening stock35,000By Sales2,50,000
To Purchases75,000(-) Sales return2,8002,47,200
(-) Purchase return2,00073,000By Closing stock10,000
To Carriage inward1,500
To Wages25,000
(+) wages payable2,00027,000
To Coal & coke3,500
To Gas & Water350
To Gross profit1,16,850
To Trading expenses12,000By Gross profit1,16,850
To Carriage outward3,500
To Bad debts1,500
(+) Provision for bad debts1,2002,700
To Rent rate & taxes3,500
To Salaries16,000
(-) Salary of Partner3,000
+ Salary payable3,00016,000
To Depreciation7,000
To Advertisement expenses written off3,000
To Net profit trf. to P&L Appropriation a/c69,150

Profit & loss Appropriation A/c

To Interest on capitalBy Net profit69,150
X4,000By Interest on drawing
To Partners salary: withdrawn3,000Y120270
(+) outstanding salaryX1,500
To Reserve fund
(50% of profit 55,670)27,835
To Net profit transferred toX22,268
69,42069, 420

Balance sheet as on 31.12.05

X’s Capital80,000Land & Building60,000
(-) Drawing5,000Plant & Machinery70,000
+ Interest on capital4,000(-) Depreciation7,00063,000
(-) Interest on drawing150Furniture’s & Fixtures15,400
+ Salary payable1,500
+ Profit22,2681,02,618Closing Stock10,000
Sundry Debtors48,000
Y’s Capital75,000(-) Provision for Bad debts1,20046,800
(-) Drawing4,000Bill receivable22,000
+ Interest on capital3,750Cash750
(-) Interest on drawing120Bank22,70023,450
+ Salary payable1,500
+ Profit5,56781,697
Reserve fund27,835Miscellaneous expenditure (to the extent
Bill payable10,500not written off) Advertisement15,000
Wages payable2,000{-) l/5th Written off3,00012,000
Salary payable3,0005,000

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.


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

To Opening stock a/c45,000By Sales a/c4,91,000
To Purchases a/c                    2,65,000By Closing stock a/c60,000
(-) Return outward a/c            2,2502,62,750
To Wages50,000
To Carriage inward a/c3,000
To Gross profit1,90,250
By Gross profit1,90,250
To Salaries a/c30,000By Commission received a/c 90,000
To Carriage outward a/c2,500(-) Comm, transferred to reserve 45,00045,000
To Depreciation a/cBy Discount received a/c3,000
Plant a/c 15,000
Furniture a/c 5,00020,000
To Bad debts provided a/c1,500
To Net profit before charging
Manager’s commission c/d1,84,250
To Commission a/c (184250 × 5/105)8,774By Net profit b/d1,84,250
To Net profit trans. to P& L Apprn. a/c1,75,476

Profit & loss Appropriation A/c

To Interest on capitalA2,500By Net profit b/d1,75,476
To Salaries of PartnersA6,000
To Net profit transfer toA93,286

Balance sheet as on 31.12.06

A s capital50,000Free hold premises1,00,000
(+) Interest on capital2,500Plant1,50,000
(+) Salary allowed6,000(-) Depreciation15,0001,35,000
{+) Profit93,2861,51,786Furniture25,000
B’s capital40,000(-) Depreciation5,00020,000
(+) Interest on capital2,000Bill receivable30,000
(+) Salary allowed5,000Sundry debtors60,000
(+) Profit46,64293,642(-) Provision for bad debt1,50058,500
C’s capital10,000Cash750
(+) Interest on capita!500{+) Bank30,00030,750
{+) Salary allowed4,000Closing stock60,000
(+) Profit15,54830,048
General reserve50,000
(+) Commission transferred45,00095,000
Sundry Creditors40,000
Bill payable15,000
Manager commission payable8,774

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


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

Account HeadDr. Rs.Cr. Rs.
Bad debts1,210
Bad debts provision2,000
Bank charges240
Capital A/c of S. Singh70,000
Current A/c of S. Singh3,246
Drawing A/c of S. Singh16,000
Factory Power7,228
General expense-factory410
General expense-office692
Light & Heat964
Plant & Machinery 1-1-199830,000
Plant and Machinery bought 30-6-984,000
Packing and Transport2,170
Rent and rates2,972
Repairs to plant1,570
Salaries – office7,380
Stock, 1st. Jan. 1998:
(a) Raw materials10,460
(b) Finished goods14,760
(c) Work-in-progress3,340
Wages – Factory41,400

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

To Opening stock3,340By Cost of F.G. produce transfer to1,30,928
To Raw material purchases67,336trading a/c
(+) Addition10,460
77,796By Closing stock of WFP3,480
(-) Closing stock7,12070,676
To Power7,228
(+) Outstanding1,1248,352
To General expenses410
(+) Outstanding50460
To Repairs to plant1,570
To Wages41,400
To Depreciation on machinery3,200
To Insurance1,220
To Heat and light1,070
To Rent3,120

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

To Opening stock a/c14,760By Sales a/c1,58,348
To F.G. produced transfer from manu. a/c1,30,928By Closing finished goods19,300
To Gross profit a/c31,960
To Advertising a/c1,660By Gross profit a/c31,960
To Bad debts a/c1,210By Discount a/c824
(+) Provision1,0002,210
To Bank charges a/c240
To General expenses a/c692
(+) Outstanding80772
To Packing and transaction a/c2,170
(-) Closing stock2501,920
To Salaries a/c7,380
To Depreciation a/c90
To Insurance a/ c244
To Light and heat a/c214
To Rent a/c624
To Net profit17,430

Balance Sheet as on 31st December, 1998

Current3,246(-) Depreciation901,710
+ Net profit17,430Plant and machinery30,000
(-) Drawings16,0004,676(+) Addition4,000
Outstanding (1124+772+3204-504-80)2,346{-) Depreciation3,20030,800
Prepaid insurance340
(-) Provision 2000
(-) Provision 10003,00018,120
Stock (7120+3480+19300+250)30,150


(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:

Stock (1.4.2013)62,000
Purchase Return2,000
Sales Return5,000
Freight Inward1,200

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 :

Reserve for Bad Debt3,000
Rent, Rates & Taxes7,600
Interest on loan from Vishwanath2,700
Discount allowed to Debtors2,400
Discount received from creditors Carriage Outwards2,0001,600
Insurance Premium5,500
General Office Expenses12,200
Bad Debts2,000

Additional Information:

  1. Depreciate Fixed Assets @ 10%
  2. One month’s salary is outstanding.
  3. Reserve for bad debt is to be maintained at Rs. 4,300.
  4. 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:

  1. Salary due to Gavaskar Rs. 500 p.m.
  2. Interest on capital @5% be provided Rs. 8,100.
  3. 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 :

Cash in hand1,400
Cash at Bank2,600
Sundry Debtors86,000
Fixed Assets1,20,000
Sundry Creditors43,000
Loan from Vishwanath30,000
Capital A/c1,62,000

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:

Opening stock75,000
Purchases including freight16,20,000
Wages (11 months upto 29.2.2011)66,000
Miscellaneous expenses60,000
Discounts Received15,000
Bad debts15,000
Provision for bad debts8,000
Commission on sales45,000
Interest on investments12,000
Insurance (year upto 31.7.2011)24,000
Bank balance1,50,000


(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.

Opening Stock80,000
Freight on Purchases15,000
Travelling Expenses23,000
Miscellaneous Expenses35,000
Bad Debts written off (after adjusting recovery of bad debts of Rs. 6,000 written off in 2008)14,000.
Fixed Assets12,20,000
Provision for Doubtful Debts19,000
Investments 12%, Purchased on 1.10.20106,00,000
Bank Balance41,14,60021,10041,14,600


  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:

Account HeadDr. Rs.Cr. Rs.Additional Information:
PurchasesSales6,20,0008,30,000You are required to prepare Trading and Profit & Loss account for the year ended on 31-03-2011 and Balance Sheet as on that date.You are also given the following further information:

1.   Cost of goods in stock as on 31 st March, 2011, Rs.1,45,000/-.

2.   Debtors include Rs.5,000 bad debts.

3.   Creditors include a balance of Rs. 4,000 to the credit of Mr. B in respect of which it has been decided and settled with the party to pay only Rs.1,000/-.

4.   Provision for bad debts is to be created at 5% on sundry debtors.

5.   Depreciate Motor Car by 20%.

Stock of Goods on 1-4-101,00,000
Mr. As capital5,77,200
Postage and Telephone23,000
Salesman Commission70,000
Motor Car1,40,000
Bad debts4,000
Cash discount8,0006. The salesmen are entitled to a commission of 10% on total sales.
General Expenses60,000
Carriage Inwards20,000
Carriage Outwards44,000

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:

Dr. (Rs.)Cr. (Rs.)
Stock of goods as on 1-4-201050,000
Cash Bank balance14,100
Mr. Hari’s Capital2,88,600
Commission paid to Salesman35,000
Furniture and Fittings70,000
Selling expense27,000
Printing and Stationery12,000
Bad Debts2,000
Financial charges4,000
General Expenses14,000
Sundry Creditors40,000
Sundry Debtors96,000

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.

AccountDr. Rs.Cr. Rs.
Plant and Machinery10,000
Purchases less returns1,01,000
Factory Building50,000
Scrap sales4,000
Fuel and Power2,000
Factory expenses1,000
Insurance and taxes4,000
Bad Debts2,000
Administrative expenses4,000
Selling & Distribution expenses6,000
Cash and bank15,000
Stock on 31st Dec. 2009 :
Raw Material                                                   Rs. 5,000
WIP                                                                 Rs. 3,000
Finished Goods                                               Rs. 12,00020,000

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


Practice Problems

P. No.Answers & Hints
1.Gross Profit Rs. 71,800
2.Net Profit Rs. 18,000
3.Balance transfer to Capital A/c Rs. 6,000
4.Balance Sheet total Rs. 2,38,000 ; Closing Capital Rs. 1,64,000
5.Bad Debt: 2011- Rs. 11,000 ; 2012 – Rs. 13,500 ; 2013 – Rs. 8,000
Closing Provision : 2011- Rs. 12,000 ; 2012- Rs. 14,500 ; 2013- Rs. 8,500
6.Gross Profit – Rs. 8,08,000 ; Net Profit – 4,68,500 ; Balance sheet total – Rs. 15,37,000
7.Gross Profit – Rs. 9,05,000 ; Profit before commission – Rs. 5,80,900 ; Manager commission – Rs. 27,662 ; Net Profit- Rs. 5,53,238; Balance sheet total – Rs. 20,82,000
8.Gross Profit – Rs. 1,95,000; Net Loss – Rs. 1,88,750 ; Balance sheet total – Rs. 4,70,450
9.Gross Profit- Rs. 1,33,000; Net Loss- Rs. 25,500; Balance sheet total – Rs. 3,08,100
Closing stock is valued at lower of cost 1,40,000 & NRV 1,35,000 (1,50,000 – 10% sales commission)
10.Cost of goods manufactured transferred to trading a/c- Rs. 1,03,900 (scrap sale credited to manufacturing account); Gross Profit- Rs. 99,100; Net Profit- Rs. 81,500; Balance sheet total- Rs. 2,06,500

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