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Accountancy

Financial Statements - II

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LEARNING OBJECTIVES
After studying this chapter, you will be able to : • describe the need for adjustments while preparing the financial statements; • explain the accounting treatment of adjustments for outstanding and prepaid expenses, accrued and advance receipts of incomes; • discuss the adjustments to be made regarding depreciation, bad debts, provision for doubtful debts, provision for discount on debtors; • explain the concepts and adjustment of manager’s commission and interest on capital; • prepare profit and loss account and balance sheet with adjustments; and • make vertical presentation of financial statements.

n chapter 9, you learnt about the preparation of simple final accounts in the format of trading and profit and loss account and balance sheet. The preparation of simple final accounts pre-supposes the absence of any accounting complexities which are nor mal to business operations. These complexities arise due to the fact that the process of determining income and financial position is based on the accrual basis of accounting. This emphasises that while ascertaining the profitability, the revenues be considered on earned basis and not on receipt basis, and the expenses be considered on incurred basis and not on paid basis. Hence, many items need some adjustment while preparing the financial statements. In this chapter we shall discuss all items which require adjustments and the way these are brought into the books of account and incorporated in the final accounts. 10.1 Need for Adjustments According to accrual concept of accounting, the profit or loss for an accounting year is not based on the revenues realised in cash and the expenses paid in cash during that year because there may be some receipts of incomes and payments of expenses during the current year which may partially relate to the previous year or to the next year. Also, there may be some incomes and expenses relating to the current year that are still to be brought into books of account. So, unless such items duly adjusted, the final accounts will not reflect the true and fair view of the state of affairs of the business.

Financial Statements - II

373

Let us take an example of an amount of Rs. 1,000 paid on July 01, 2005 towards insurance premium. You understand that any general insurance premium paid usually covers a period of 12 months. Suppose the accounting year ends on March 31, 2006, it would mean that one fourth of the insurance premium is paid on July 01, 2005 relate to the next accounting year 2006-07. Therefore, while preparing the financial statements for 2005-06, the expense on insurance premium that should be debited to the profit and loss account is Rs. 900 (Rs. 1,200 – Rs. 300). Let us take another example. The salaries for the month of March, 2005 were paid on April 07, 2005. This means that the salaries account of 2004-05 does not include the salaries for the month of March 2005. Such unpaid salaries is termed as salaries outstanding which have to be brought into books of account and is debited to profit and loss account along with the salaries already paid for the month of April, 2004 up to Feburary, 2005. Similarly, adjustments may also become necessary in respect of certain incomes received in advance or those which have accrued but are still to be received. Apart from these, there are certain items which are not recorded on day-to-day basis such as depreciation on fixed assets, interest on capital, etc. These are adjusted at the time of preparing financial statements. The purpose of making various adjustments is to ensure that the final accounts reveal the true profit or loss and the true financial position of the business. The items which usually need adjustments are : 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. Closing stock Outstanding/expenses Prepaid/Unexpired expenses Accrued income Income received in advance Depreciation Bad debts Provision for doubtful debts Provision for discount on debtors Manager’s commission Interest on capital

It may be noted that when we prepare the financial statements, we are provided with the trial balance and some other additional information in respect of the adjustments to be made. All adjustments are reflected in the final accounts at two places to complete the double entry. Our earlier example in chapter 9 which represents the trial balance of Ankit is reproduced in figure 10.1:

374 Trial Balance of Ankit as on March 31, 2005 Account Title Elements L.F. Debit Amount Rs. 1,000 5,000 8,000 25,000 15,000 13,000 15,500 4,500 75,000

Accountancy

Credit Amount Rs.

Cash Bank Wages Salaries Furniture Rent of building Debtors Bad debts Purchases Capital Equity Sales Creditors Long-term loan (raised on 1.4.2004) Commission received Total

Assets Assets Expense Expense Assets Expense Assets Expense Expense

12,000 Revenue Liabilities Liabilities Revenue 1,62,000 1,25,000 15,000 5,000 5,000 1,62,000

Additional Information : The stock on March 31, 2005 was Rs. 15,000. Figure 10.1 : Showing the trial balance of Ankit

We will now study about the items of adjustments and you will observe how these adjustments are helpful in the preparation of financial statements in order to reflect the true profit and loss and financial position of the firm. 10.2 Closing Stock As already discussed in chapter 9, the closing stock represents the cost of unsold goods lying in the stores at the end of the accounting period. The adjustment with regard to the closing stock is done by (i) by crediting it to the trading and profit and loss account, and (ii) by showing it on the asset side of the balance sheet. The adjustment entry to be recorded in this regard is : Closing stock A/c To Trading A/c Dr.

The closing stock of the year becomes the opening stock of the next year and is reflected in the trial balance of the next year. The trading and profit

the trial balance does not show any opening stock. Instead.000 1. you should remember that the adjusted purchases shall be debited to the trading and profit and loss account. To Opening stock A/c Another important point to be noted in this context is that when the opening and closing stocks are adjusted through purchases. 2005 and his balance sheet as on that date shall appear as follows : Trading and Profit and Loss Account of Ankit for the year ended March 31. . even the opening stock will not be separately reflected in the trading and profit and loss account. Not only.000 Sometimes the opening and closing stock are adjusted through purchases account.000 57.II 375 and loss account of Ankit for the year ended March 31. in such a situation. In this context.000 5. In that case.000 8.000 57.40. the closing stock shall appear in the trial balance (not as additional information or as an adjustment item) and so also the adjusted purchases. it may be noted.000 1.500 62. 2005 Dr. To Purchases A/c This entry reduces the amount in the purchases account and is also known as adjusted purchases which is shown on the debit side of the trading and profit and loss account.25.000 15. In such a situation. the entry recorded is as follows : Closing stock A/c Dr. as it is also adjusted in purchases by recording the following entry: Purchases A/c Dr.000 62.000 13. Expenses/Losses Purchases Wages Gross profit c/d Salaries Rent of building Bad debts Net profit (transferred to Ankit’s capital account) Amount Rs.000 4. 1. 75.Financial Statements .500 19. that the closing stock will not be shown on the credit side of the trading and profit and loss as it has been already been adjusted through the purchases account.40. Amount Rs.000 25.000 Gross profit b/d Commission received Revenues/Gains Sales Closing stock Cr.

500 as expense on account of wages in the trading and profit and loss account and recognise a current liability of Rs. salaries.000 15. they are termed as outstanding expenses. Such items usually are wages. the correct expense on wages amounts to Rs. The amount of outstanding expenses is added to the total of expenses under a particular head for the purpose of preparing trading and profit and loss account. Let us assume that Ankit owes Rs. When expenses of an accounting period remain unpaid at the end of an accounting period.000. 8.500 Assets Non-Current Assets Furniture Current Assets Debtors Bank Cash Closing stock Amount Rs. 8.500 5.500 as wages relating to the year 2004-05 to one of his employees. The above entry opens a new account called Outstanding Expenses which is shown on the liabilities side of the balance sheet. In that case.000 19. 8. It will be referred to as wages outstanding and it will be adjusted to wages account by recording the following journal entry: Wages A/c Dr.1). etc. interest on loan. 8.000 51.500 instead of Rs. The entry to bring such expenses into account is : Concerned expense A/c To Outstanding expense A/c Dr. 2005 Liabilities Owners funds Capital Add Net profit Non-Current Liabilities Long-term loan Current Liabilities Creditors Amount Rs.3 Outstanding Expenses It is quite common for a business enterprise to have some unpaid expenses in the normal course of business operations at the end of an accounting year. 500 To Wages outstanding A/c 500 .500 5. As they relate to the earning of revenue during the current accounting year.000. it is logical that they should be duly charged against revenue for computation of the correct amount of profit or loss. For example.500 31.000 15. 500 towards the sum owed to his staff. 15. refer to Ankit’s trial balance (refer figure 10.000 15.376 Accountancy The closing stock shall be shown on the assets side of the balance sheet as shown below: Balance Sheet of Ankit as at March 31.000 51. Ankit must show Rs.500 10.000 1. 12. You will notice that wages are shown at Rs.

Amount Rs.000 25.000 500 51. 12.000 4.000 5.II 377 The amount of outstanding wages will be added to wages account for the preparation of the trading and profit and loss account as follows : Trading and Profit and Loss Account of Ankit for the year ended March 31. The item relating to outstanding wages will be shown in balance sheet as follows : Balance Sheet of Ankit as at March 31.000 Assets Non-Current Assets Furniture Current Assets Debtors Bank Cash Closing stock Amount Rs. 19.40.Financial Statements . Did you notice the amount of net profit is reduced to Rs. 15.000 19.500 Gross profit b/d Commission received Revenues/Gains Sales Closing stock Cr. 2005 Dr. a portion .000 51.500 19.500 56.000 500 8.000 61.000 15.000 1.000 15.000 56.000 61.25.500 5.40.500 5.4 Prepaid Expenses There are several items of expense which are paid in advance in the normal course of business operations.000 15.000 on account of outstanding wages. At the end of the accounting year.500 10. it is found that the benefits of such expenses have not yet been fully received.000 8.000 15. Expenses/Losses Purchases Wages Add Outstanding wages Gross profit c/d Salaries Rent of building Bad debts Net profit (transferred to Ankit’s capital account) Amount Rs. 2005 Liabilities Owners Funds Capital Add Profit Non-Current Liabilities Long-term loan Current Liabilities Creditors Outstanding wages Amount Rs.000 13.500 31.500 1. 75.000 1.500 Observe carefully the trading and profit and loss account of Ankit. 1.

000 instead of Rs. let us assume that the amount of salary paid by him to the employees includes an amount of Rs.000 as an advance salary to the employee.000 61. Expenses/Losses Purchases Wages Add Outstanding wages Gross profit c/d Amount Rs 75.25. 1.000 The account of prepaid salary will be shown in the trading and profit and loss account as follows: Trading and Profit and Loss Account of Ankit for the year ended March 31. Ankit must show Rs.000 8. For example. 5. 20. Amount Rs. 5. 25.000 56. It will be termed as prepaid salary account and will be recorded by the following journal entry : Prepaid salary A/c Dr. This portion of expense.000. correct expense on account of salary during the current period will be Rs. 5.40. This implies that Ankit has overpaid his staff by Rs.500 56. The necessary adjustment in respect of prepaid expenses is made by recording the following entry: Prepaid expense A/c Dr.500 24. in Ankit’s trial balance. Hence.378 Accountancy of its benefit would be received in the next accounting year.500 5.40.000 500 8. To concerned expense A/c The effect of the above adjustment entry is that the amount of prepaid part is deducted from the total of the particular expense. 2005 Dr.000 expense on account of salary in the profit and loss account and recognise a current asset of Rs.000 on account of his salary. 20. and the new account of prepaid expense is shown on the liabilities side of the balance sheet.000 13. 5.000) Rent of building Bad debts Net profit (transferred to Ankit capital account) Gross profit b/d 20.000 15.000 Less Prepaid salary (5. is carried forward to the next year and is termed as prepaid expenses.000 To salary A/c 5.500 Commission received 1.500 .000 which was paid in advance to one of his employees upon his joining the office.000 Revenues/Gains Sales Closing stock Cr.500 1.000 61.000 4.000 Salaries 25.

Financial Statements . 500 (Rs.II 379 Observe how the prepaid salary has resulted in an increase of net profit by Rs.500 5.000. commission. 1. This implies that income from commission earned during 2004-05 is Rs.000 Further. 5.000 15.000 5. Such incomes are known as accrued income. for example. etc. To Concerned income A/c The amount of accrued income will be added to the related income in the profit and loss account and the new account of accrued income will appear on the asset side of the balance sheet.000 500 56. the item relating to prepaid salary will be shown in the balance sheet on the assets side as follows : Balance Sheet of Ankit as at March 31. 12. 000 + Rs. rent.500 10.5.500 . Assets Non-Current Assets Furniture Current Assets Debtors Prepaid salary Bank Cash Closing stock Amount Rs.000 making it as Rs.500 36.000 1. In the trial balance of Ankit you will notice an item of commission received amounting to Rs. are earned during the current accounting year but have not been actually received by the end of the same year.1. The adjusting entry for accrued income is : Accrued income A/c Dr. 500 was still receivable from the fellow businessman. Let us.000 56. 6. 5.000 24. 24.500) Ankit needs to record an adjustment entry to give effect to the accrued commission as follows : Accrued Commission A/c To Commission A/c Dr.500 1.000 15. 1.000 15.000 5.000 15.5 Accrued Income It may also happen that certain items of income such as interest on loan.2005 Liabilities Owners Funds Capital Add Profit Non-Current Liabilities Long-term loan Current Liabilities Creditors Outstanding wages Amount Rs. Assume that the commission amounting to Rs. assume that Ankit was giving a little help to a fellow businessman by introducing few parties to him on commission for this service.

500 63.000 4.000 1. 1.500.40.000 Purchases Wages Add Outstanding Gross profit c/d Sales Closing stock 6.500 Assets Non-Current Assets Furniture Current Assets Debtors Prepaid salary Accrued commission Bank Cash Closing stock Amount Rs.000 1.000 15.000) Gross profit b/d 20.000 56.380 Accountancy The account of accrued income will be recorded in trading and profit and loss account as follows : Trading and Profit and Loss Account of Ankit for the year ended March 31.000 . Balance Sheet of Ankit as at March 31.25.000 Commission received 5. 25.500 56.000 25.500 25.000 (5.500 5.000 Observe that the accrued income has resulted in an increase in the net profit by Rs. 2005 Dr.000 8.000 Salaries Less Prepaid salary Rent of building Bad debts Net profit (transferred to Ankit’s capital account) 25.000 15.500 making it as Rs.500 Revenues/Gains Cr.000 13.500 Add Accrued commission 1.000 37. 1.500 5. 12.500 1.000 15. Further.000 1.000 15. Expenses/Losses Amount Rs.40. 2005 Liabilities Owners Funds Capital Add Profit Non-Current Liabilities Long-term loan Current Liabilities Creditors Outstanding wages Amount Rs.000 500 8. 75. Amount Rs.000 500 58.500 5.000 58. 15. it will be shown in the balance sheet of Ankit on the assets side under the head current asset.500 63.

To Income received in advance A/c The effect of this entry will be that the balance in the income account will be equal to the amount of income earned for the current accounting period.000 15.500 Non Current Liabilities Long-term loan Current Liabilities Creditors Outstanding wages Rent received in advance Amount Rs.000 . a certain income is received but the whole amount of it does not belong to the current period.000. let us assume Ankit has agreed in March 31. 15.000 Add Net profit 25. The person gives him rent in advance for the next three months of April. this income does not pertain to current year and hence will not be credited to profit and loss account. and the new account of income received in advance will be shown as a liability in the balance sheet.000 3.000 61. The portion of the income which belongs to the next accounting period is termed as income received in advance or an Unearned Income. 3. Income received in advance is adjusted by recording the following entry: Concerned income A/c Dr. It is income received in advance and will be recognised as a liability amounting to Rs.000 per month. 3.6 Income Received in Advance Sometimes.000 which will appear as follows : Balance Sheet of Ankit as at March 31.000 61.000 37. However.II 381 10.500 5. 1. To Rent received in advance A/c 3. Assets Non Current Assets Furniture Current Assets Debtors Prepaid salary Accrued commission Bank Cash Closing stock Amount Rs.000 15.000 This will lead a new account of rent received in advance of Rs.500 5.Financial Statements . Ankit needs to record an adjustment entry to give effect to income received in advance by way of following journal entry: Rent received A/c Dr.500 5.000 500 3. May and June.000 15. 2005 to sublet a part of the building to a fellow shopkeeper @ Rs.000 1. The amount received had been credited to the profit and loss account. For example. 2005 Liabilities Owners Funds Capital 12.000 4.

000 1. the asset will be shown at cost minus the amount of depreciation.000 56. 15.500 1. To Concerned asset A/c In the balance sheet. This implies that Ankit must recognise that at the end of the year the value attached to furniture is to be reduced by Rs. The entry for providing depreciation is : Depreciation A/c Dr. that depreciation is the decline in the value of assets on account of wear and tear and passage of time. 75.7 Depreciation Recall from chapter 7.000 (500) 8.500 To Furniture A/c 1.000 Commission received 5.500 24. Amount Rs. 2005 Dr.500 Add Accrued Commission 1.000 63.000 × 10%).000 Notice that the amount of net profit declines with the adjustment of depreciation. Let us now see how depreciation as an expense will be shown in balance sheet.000 8.000. It is treated as a business expense and is debited to profit and loss account.000 1.500 Depreciation will be shown in the profit and loss account and balance sheet as follows : Trading and Profit and Loss Account of Ankit for the year ended March 31.000) Gross profit b/d 20.500 (Rs.000 (5.40.500 Revenues/Gains Sales Closing stock Cr. Ankit needs to record an adjustment entry to give effect to depreciation on furniture as follows : Depreciation A/c Dr. 1.382 Accountancy 10. in effect. the trial balance in our example shows that Ankit has a furniture account with a balance of Rs.40.25. Expenses/Losses Purchases Wages Add Outstanding wages Gross Profit c/d Amount Rs. amounts to writing-off a portion of the cost of an asset which has been used in the business for the purpose of earning profits. 1. .000 63. 1. For example.500 6. 15. This.000 13.000 Salaries Less Prepaid salary Rent of building Depreciation-Furniture Bad debts Net profit (transferred to Ankit’s capital account) 25.000 15. Let us assume that furniture is subject to a depreciation of 10% per annum.500 4.500 56.

Whereas. 15. 2.000 1.000 Add Profit 24.000 Non-Current Liabilities Long-term loan Current Liabilities Creditors Outstanding wages Rent received in advance Amount Rs.500 15. The adjustment entry to be recorded for the amount will be as follows.000 Less Depreciation (1.Financial Statements . The entry for recording bad debt is: Bad debts A/c To Debtors A/c Dr.500 2.000 (Rs. 13. This fact appears as additional information and is termed as further bad debts.500 13. But the amount of bad debts related to the current year is still to be account for. You will notice in Ankit’s trial balance. 7.000 15. The existence of bad debts in the trial balance signifies that Ankit has incurred a loss arising out of bad debts during the year and which has been already recorded in the books of account. 2.8 Bad Debts Bad debts refer to the amount that the firm has not been able to realise from its debtors. 2.000 59.500 had become insolvent.500. It is regarded as a loss and is termed as bad debt. 15. 36.500).000 5.500 10.000( Rs.500) and increases the amount of bad debts to Rs. the sundry debtors of Ankit are reported as Rs. 2005 Liabilities Owners Funds Capital 12. and nothing is receivable from him. For this purpose.500 5. However.000 4. 4. assuming one of his debtors who owed him Rs. 2.500 This entry will reduce the value of debtors to Rs.500 + Rs.500. that it contains bad debts amounting to Rs.500 5.000 15.II Balance Sheet of Ankit as at March 31. Assets Non-Current Assets Furniture 15.500 – Rs. 4. Ankit needs to record an adjustment entry as under : Bad debts A/c To Debtors A/c Dr. .000 500 3.500) Current Assets Debtors Prepaid salary Accrued commission Bank Cash Closing stock 383 Amount Rs.000 59.

000 Balance Sheet of Ankit as at March 31. It is quite possible that the whole . Rs.000 500 Cash 4.000 12.000 Debtors 15.500 Current Liabilities and Provisions Creditors Outstanding Wages Rent received in advance 10.500 Less Depreciation (1.25.000 21.9 Provision for Bad and Doubtful Debts In the above balance sheet.000 57.500 Less Further bad debts (2.500) 13.500 Revenues/Gains Sales Closing stock Cr.000 Accrued commission 1.000 6. 75.000 56.000 33.000) Gross profit b/d 20.40.000 Commission received 5.384 Accountancy The treatment of further bad debts in profit and loss account and balance sheet is shown below : Trading and Profit and Loss Account of Ankit for the year ended March 31.500 7.000 Add Accrued 1.000.500 56.000 25. Non-Current Assets Furniture 15. Amount Rs.000 3.500 commission 1.500 Current Assets 5. 1.500 1.500 Depreciation – Furniture Bad Debts 4.500 Net profit (transferred to Ankit’s capital account) 1.000 (5.000 Prepaid salary 5.000 15. 2005 Dr.500 Bank 5.000 8.500 63.000 21. Expenses/Losses Purchases Wages Add Outstanding wages Gross profit c/d Salaries Less Prepaid salary Rent of building Amount Rs. which is their estimated realisable value during next year.000 13.500 Add Further bad debts 2.000 Closing stock 15. 2005 Liabilities Owners Funds Capital Add Profit Non-Current Liabilities Long-term loan Amount Assets Amount Rs.000 500 8.500) 13.000 57.40.000 15.000 63. 13. debtors now appears at Rs.

000 13.40. it will be shown as a deduction from sundry debtors. 2005 are likely to default on their payments next year. 75. This implies he expects bad debts of Rs. Expenses/Losses Purchases Wages Add Outstanding Gross profit c/d Amount Rs.500 .000 Commission received 5. To Provision for doubtful debts A/c 650 650 This implies that Rs. 650 will reduce the current year’s profit on account of doubtful debts. Such provision is called provision for bad debts and is created by debiting profit and loss account. Trading and Profit and Loss Account of Ankit for the year ended March 31.000 Less Prepaid salary (5.000 56.000 1.500 commission 1.000 63.850 63. However. 650 (Rs. In the balance sheet.500 56. we make a reasonable estimate of such loss and provide the same.000 Add Accrued 1. 1. Amount Rs.000 6. Ankit needs to record the adjustment entry as : Profit and loss A/c Dr.Financial Statements . Ankit feels that 5% of his debtors on March 31. 2005 Dr.000 Salaries 25.000) Rent of building Depreciation – Furniture Bad debts 4. Hence. Let us assume.000 15. To Provision for doubtful debts A/c Provision for doubtful debts is also shown as a deduction from the debtors on the asset side of the balance sheet.000 500 8. The following journal entry is recorded in this context : Profit and Loss A/c Dr.25. 13.500 1. it is not possible to accurately know the amount of such bad debts.40.000 650 20.500 Add Further bad debts 2.500 Revenues/Gains Sales Closing stock Cr.500 Provision for doubtful debts Net profit (transferred to Ankit’s capital account) Gross profit b/d 20.500 7.000 × 5%).000 8.II 385 of this amount may not be realised in future.

2005 is given below : Sundry debtors Bad debts Provision for doubtful debts Additional Information : Write-off further bad debts Rs. The provision for doubtful debts brought forward from the previous year is called the opening provision or old provision.500 5.500 12.000 13.000 500 3.850 Non-Current Liabilities Long-term loan Amount Assets Rs. Rs.000 Less Provision for 650 doubtful debts Prepaid salary Accrued commission Bank Cash Closing stock Accountancy Amount Rs.500 Less Furtherbad debts 2.000 3. When such a provision already exists.350 5. 32.000 Less Depreciation (1.386 Balance Sheet of Ankit as at March 31.000 56.000 1.350 It may be noted that the provision created for doubtful debts at the end of a particular year will be carried forward to the next year and it will be used for meeting the loss due to bad debts incurred during the next year. 2005 Liabilities Owners Funds Capital 12.850 5.000 15. Non-Current Assets Furniture 15. 1.000 4.000 2. 32.500) Current Assets Debtors 15. The balance of old provision as given in trial balance should also be taken into account.000 56.000 Add Net profit 20. Let us take an example to understand how bad debts and provision for doubtful debts are recorded. the loss due to bad debts during the current year are adjusted against the same and while making provision for doubtful debts required at the end of the current year is called new provision.500 13. An extract from a trial balance on March 31.000 and create a provision for doubtful debts @ 5% on debtors.500 .350 Current Liabilities & Provisions Creditors Outstanding wages Rent received in advance 15.

II 387 In this case. 1. To Bad debts A/c (Bad debts adjusted against the provision) Profit and Loss A/c Dr.000) bad debts 31.000 Less Provision (1.000 1. 1.000 Further bad debts 1.550 4.450 10.550.Financial Statements . Provision for doubtful debts: Bad debts 2.10 Provision for Discount on Debtors A business enterprise allows discount to its debtors to encourage prompt payments.500 *Only relevant items.000 New provision 1.F. 1.000 3. the following journal entries will be recorded : Date Particulars (a) Bad debts A/c To Sundry debtors (Futher bad debts) Dr. Discount likely to be allowed to customers in an accounting year . 2005 Rs. (b) Provision for doubtful debts A/c Dr. Balance Sheet as at March 31.550 Less Old provision 3. 31. Sundry debtors 32. To Provision for doubtful debts A/c (Amount charges from profit and loss account) Profit and Loss Account for the year ended March 31.000 3. 29.000 1.050 Rs. 2005 Rs.000 1 × 5/100 = Rs.550) for doubtful debts *Only relevant items. Debit L.050 1.050 Credit Amount Rs.000 Less Further (1. Amount Rs. Note : The amount of new provision for doubtful debts has been calculated as follows: Rs.

it will be shown as a deduction from the debtors account to portray correctly the expected realiable value of debtors as Rs.000 56.623 63.000 – Rs.40.000 6.000 13. Amount Rs.000 (500) 8.500 56. To Provision for discount on debtors A/c As stated above. 75. the provision for discount on debtors will be created only on good debtors. Ankit needs to record the adjustment entry as : Profit and loss A/c Dr.500 Revenues/Gains Sales Closing stock Cr. Expenses/Losses Purchases Wages Add Outstanding wages Gross profit c/d Amount Rs. 1.25.000 Salaries Less Prepaid salary Rent of building 25.500 commission 1. 13.000) Gross profit b/d 20. i.000 8.000 (5.000 15. It will be calculated on the amount of debtors arrived at after deducting the doubtful debts.123. 2005 Dr.000 63.500 Depreciation–Furniture Bad debts 4. Trading and Profit and Loss Account of Ankit for the year ended March 31. Provision for discount is made on good debtors which are arrived at by deducting further bad debts and the provision for doubtful debts.000 650 227 20.000 Commission received 5.350 (Rs.500 7. In the balance sheet.e. 12. 650). Rs. To Provision for discount on debtors A/c 227 227 This will reduce the current year profit by Rs. 12.40. 227 on account of probable discount on prompt payment. The following journal entry is recorded to create provision for discount on debtors: Profit and loss A/c Dr.500 Add Further bad debts 2.500 Provision for doubtful debts Provision for discount on debtors Net profit (transferred to Ankit’s capital account) .000 Add Accrued 1.500 1.388 Accountancy can be estimated and provided for by creating a provision for discount on debtors.000 1.

II Balance Sheet of Ankit as on March 31.350 Less Provision for discount (227) on debtors Prepaid salary Accrued commission Bank Cash Closing stock 389 Amount Rs. it is assumed that commission is allowed as a percentage of the net profit before charging such commission. Suppose the net profit of a business is Rs. 2005 Liabilities Owners Funds Capital Add Net profit Non-Current Liabilities Long-term loan Amount Rs.123 In the subsequent year.623 5.500 2.000 15.500 Current Liabilities & Provisions Creditors Outstanding wages Rent received in advance 15.000 13. the commission will be calculated as : = Rs. 11 . 110 × 10/100 = Rs.500 5.000 4.500 Less Further bad debts 13. 10.000 56. In the absence of any such information. 32. The account will be treated in the same manner as the provision for doubtful debts. 110 before charging commission.000 Less Provision for bad and 650 doubtful debts 12.000 20.000 1.000 500 3.Financial Statements .11 Manager’s Commission The manager of the business is sometimes given the commission on the net profit of the company.123 5. The percentage of the commission is applied on the profit either before charging such commission or after charging such commission. If the manager is entitled to 10% of the profit before charging such commission.623 Assets Non-Current Assets Furniture 15.000 56. 12.500) Current Assets Debtors 15.000 Less Depreciation (1. the discount will be transferred to the provision for discount on debtors account.123 12.

Observe the following profit and loss account if it is based on : (i) amount of net profit before charging such commission (ii) amount of profit after charging such commission. it will be calculated as : = Profit before commission × Rate of commission/ (100 + commission) = Rs.561 63.390 Accountancy In case the commission is 10% of the profit after charging such commission.000 13. 2005 Dr.000 1.000 8.500 Revenues/Gains Sales Closing stock Cr.000 63. The managers commission will be adjusted in the books of account by recording the following entry : Profit and loss A/c To Manager’s commission A/c Dr.25.000 6.000) Gross profit 20.000 650 227 2.500 56.000 500 8. 10. Expenses/Losses Purchases Wages Add Outstanding wages Gross profit c/d Amount Rs. 110 × 10 110 = Rs. Let us recall our example and assume that Ankit’s manager is entitled to a commission @ 10%.000 56.500 Add Further bad debts 2.062 18.500 Provision for doubtful debts Provision for discount on debtors Manager’s commission Net profit (transferred to Ankit’s capital account) .40. 75.000 Salaries Less Prepaid salary Rent of building 25.000 Commission received 5.500 7.40.000 15.000 1.500 1. Amount Rs. 1.500 Depreciation – Furniture Bad debts 4.000 (5.500 Add Accrued commission 1. (i) Trading and Profit and Loss Account of Ankit for the year ended March 31.

2005 Dr.000 Commission received 5.000 56.000) Gross profit b/d 20.500 56.500 5.500 Less Further bad debts(2.561 Less Depreciation (1.500 12.500 1.000 1.000 4.000 8. 2005 Amount Assets Rs. Amount Rs. Owners Funds Non-Current Assets Capital 12. 1.40.561 30.500) Non-Current Liabilities Current Assets Long-term loan 5.500 Add Accrued commission Revenues/Gains Sales Closing stock 391 Amount Rs.875 18.000 Less Provision for bad Current Liabilities and Provisions and doubtful (650) Creditors 15.500 Depreciation–Furniture Bad debts 4.000 1.123 Cr.748 63.000 1.500 7.500 Provision for bad and doubtful debts Provision for discount on debtors Manager’s commission Net profit (transferred to Ankit’s capital account) 63.350 Less Provision for discount on debtors (227) Outstanding wages 500 Prepaid salary Rent received in advance 3.000 15.000 Debtors 15.000 (5.II Balance Sheet of Ankit as at March 31.500) 13.000 1.000 13.000 650 227 1.40.500 Add Further bad debts 2. 75.000 Accrued commission Bank Cash Manager’s commission 2. 13.123 5.000 500 8.000 debts 12.000 Furniture 15.123 Liabilities (ii) Trading and Profit and Loss Account of Ankit for the year ended March 31.000 .500 6.000 56.000 15.Financial Statements .000 25.062 Closing stock outstanding 56. Expenses/Losses Purchases Wages Add Outstanding wages Gross profit c/d Salaries Less Prepaid salary Rent of building Amount Rs.000 Add Net profit 18.25.

748 Assets Non-Current Assets Furniture Less Depreciation Accountancy Amount Rs.000 18.500 30.350 Less Provision for discount on debtors(227) 12. interest is calculated at a given rate of interest on capital as at the beginning of the accounting year.000 Cash 4. 12.123 10. 15. the reduced amount of profit shall be added to the capital in the balance sheet.500 Bank 5. 600 for which the following journal entry will be recorded: Interest on capital A/c Dr. Let us assume. This shall amount to Rs.500) 13.748 5.500) 13.000 1.000 Closing stock 15. If however.875 56.000 56.123 Current Assets Debtors 15.000 Current Liabilities and Provisions Creditors Outstanding wages Rent received in advance Manager commission outstanding 15.123 Prepaid salary 5. 600. In such a situation.12 Interest on Capital Sometimes.000 Accrued commission 1. it is shown as an expense on the debit side of the profit and loss account and added to capital in the balance sheet. Ankit decides to provide 5% interest on his capital.000 500 3. the proprietor may like to know the profit made by the business after providing for interest on capital.500 Less Further bad debts (2. Such interest is treated as expense for the business and the following journal entry is recorded in the books of account: Interest on capital A/c Dr.000 (1. the interest may also be computed on such amount from the date on which it was brought into the business. 2005 Liabilities Owners Funds Capital Add Net profit Non-Current Liabilities Long-term loan Amount Rs. To Capital A/c In the final accounts. any additional capital is brought during the year. 600 To Capital A/c 600 This implies that net profit shall be reduced by Rs.392 Balance Sheet of Ankit as at March 31. .000 Less Provision for bad & doubtful (650) debts 12. As a result.

3.250 (b) Rs. As shown below : Rs.000 (c) Rs. 4. 2.000 It is desired to maintain a provision for bad debts of Rs. this effect shall be neutralised.000 and pre-paid insurance Rs. If the opening capital is Rs. 4. 1. If the rent of one month is still to be paid the adjustment entry will be : (a) Debit outstanding rent account and Credit rent account (b) Debit profit and loss account and Credit rent account (c) Debit rent account and Credit profit and loss account (d) Debit rent account and Credit outstanding rent account.000 as on April 01. 5. The amount of interest on capital shown in profit and loss account as on March 31. 300. 4.000 (d) Rs. 3.300 (b) Rs.II 393 But. 700. 2005 will be : (a) Rs.000. 3. The adjustment entry will be : (a) Debit profit and loss account and Credit rent account (b) Debit rent account Credit rent received in advance account (c) Debit rent received in advance account and Credit rent account (d) None of these.961 600 Add Interest on capital 30.961 29.000 on January 01. Capital 12. 5.000 Bad debts Rs. 10.000 Provision for bad debts Rs. Rahul’s trial balance provide you the following information : Debtors Rs. If the rent received in advance Rs. 300 (d) Rs. 80.561 Test Your Understanding Tick the correct answer : 1.000 State the amount to be debited/credited in profit and loss account : (a) Rs.Financial Statements . 1.000 (Debit) (b) Rs. If the insurance premium paid Rs. 2.000 (Debit) (c) Rs. 1. . 1. 2006. 2. The amount of insurance premium shown in profit and loss account will be : (a) Rs. 1. 50. 5.a.000 Add Profit 17. Interest charge on capital 10% p.000 (Credit) (d) none of these.000 (c) Rs. 6. when interest on capital shall be added to the capital.000. 2005 and additional capital introduced Rs.

Deducted from the Shown on the respective expense on assets side the debit side Added to the respective income on the credit side Deducted from the respective income on the credit side Shown on the debit side Shown on the debit side Shown on the debit side Shown on the debit side Shown on the assets side Shown on the liabilities sides Deducted from the value of asset Shown as deduction from debtors Shown as deductoin form debtors Shown on the liabilities side 4. Dr. Further bad debts Dr. Closing stock Closing stock A/c To Trading A/c Expense A/c To outstanding expense A/c Prepaid expense A/c To Expenses A/c Shown on the credit Shown on the assets side and profit assets side and loss account Added to the respective expense on the debit side Shown on the liabilities side 2. Interest on capital 11. Provision for discount on debtors 9. Depreciation Depreciaton A/c To Assets A/c Dr. Dr. 7. Prepaid/ Unexpired expenses Dr. Outstanding expenses 3. Manager’s commission Profit and Loss A/c To Provision for discount debtors Manager’s commission A/c To outstanding commission A/c Interest on capital A/c To capital A/c Dr. Income received Income A/c in advance To Income received in advence A/c 6. 10. Income earned Accured income A/c but not received To Income A/c 5. Dr. Provision for Profit and Loss A/c bad and To Provision for doubtful debts doubtful debts 8. Dr.394 Adjustment Adjustment Entry Treatment in Trading and Profit and Loss Account Dr. Shown on the debit side Shown on the debit side Shown as addition to capital Deducted from debtors Bad debts A/c Dr.2 : Showing treatment of various types of adjustments . Dr. To Sundry Debtors A/c Fig. Accountancy Treatment in Balance Sheet 1. 10.

870 1.170 86.99.250 750 4.81.49.74.74. 6. 2005 Dr. 5. 50 Rent outstanding Rs.640 82.220 1. Debit Balances Drawings Cash at bank Bills receivable Loan and Building Furniture Discount allowed Bank charges Salaries Purchases Stock (opening) Sales return Carriage Rent and Taxes General expenses Plant and Machinery Book debts Bad debts Insurance Amount Rs. Closing stock Rs.860 42.610 3. prepare the trading and profit and loss account and balance sheet as on March 31.130 3. Sales 2.670 4.300 13.220 1.49.99. 3. 60.000 2.000 Create a reserve for bad and doubtful debts @ 10% on book debts Insurance prepaid Rs. 150 Interest on loan is due @ 6% p.II Illustration 1 395 From the following balances.630 Closing stock 70. Credit Balances Capital Discount received Loans Purchases return Sales Reserve for bad debts Creditors Amount Rs.250 Adjustments 1.Financial Statements .500 4. 4. 70.870) 2. Amount Rs.500 Less : Sales return (1.740 1.170 7. Expenses/Losses Opening stock Purchase Less Purchases return Carriage Gross profit c/d Amount Rs. 2.a.980 15.000 1.650 18.080 (1.630 5.580 5.870 5.97.630 . 1.630 31.000 3.450 2.50.79.81.250 Solution Trading and Profit and Loss Account for the year ended March 31.080 60.450) 1.420 1.960 100 6. 2005.630 Revenues/Gains Cr.680 3.

274 for bad debts 9.000 61.960 100 6.39.870 2.640 50 70.876 Less Reserve (8.596 .176 (6.590 89.420 7.874 900 61.000 900 15.466 1.274) for bad debts Bills receivable Land and Building Furniture Plant and Machinery Insurance (prepaid) Closing stock 74.000 2.650) for bad debts Interest on loan outstanding Net profit (transferred to capital account) 3.670 15.630 700 Gross profit b/d Discount received Accountancy 86. 13.524 Less Old provision (4.610 2.250 Add New provision 8.900 150 1. 18. 2005 Liabilities Creditors Loan Add Interest on loan outstanding Rent outstanding Capital Add Net profit Less Drawings Amount Rs.300) Assets Cash at bank Book debts 82.176 89.860 42.830 3.130 31.39.590 Balance Sheet as at March 31.04.596 2.11.740 Amount Rs.396 Discount allowed Bank charges Salaries Rent and Taxes 7.580 5.980 4.50.176 2.680 Add Rent outstanding 150 General expenses Insurance 750 Less Insurance prepaid (50) Bad debts 1.

Create a provision @ 5% on debtors.675 680 8.500 were outstanding. 2005. 2005 : Debit Balances Cash in hand Cash at bank Purchases Return inwards Wages Fuel and Power Carriage on sales Carriage on purchases Opening stock Building Freehold land Machinery Salaries Patents General expenses Insurance Drawings Sundry debtors Amount Rs. 725.000 20.000 7.000 6. 2005 amounting to Rs. 98. 540 2.730 3200 2040 5. Insurance includes a premium of Rs.780 500 62.480 4.II Illustration 2 397 The following were the balances extracted from the books of Yogita as on March 31. 170 on a policy expiring on September 30. 2005 : (a) (b) (c) (d) Stock in hand on March 31. Salaries for the month of March.500 3. (e) Further bad debts are Rs.000 15. .630 40.000 600 5.was Rs. 6.000 Taking into account the following adjustments prepare trading and profit and loss account and balance sheet as on March 31.500 Credit Balances Sales Return outwards Capital Sundry creditors Rent Amount Rs. 1.800.Financial Statements . Machinery is to be depreciated at the rate of 10% and patents @ 20%.760 32.000 10.245 14.300 9. 2006.

414 3.04.341 20.000 1.000 10. 5.586 (5. 1.141 .398 (f) Rent receivable Rs.000) 7.040 43.715 Balance Sheet as at March 31.000 53. 2005 Dr.675 (500) 40.586 53.500 Assets Cash in hand Cash in bank Sundry debtors Less Further bad debts Less Provision for bad debts Insurance prepaid Stock Rent accrued Freehold land Building Machinery Less Depreciation Patents Less Depreciation Revenues/Gains Accountancy Cr.000.500 Carriage General expenses Insurance 600 Less Prepaid insurance (85) Further bad debts 725 Add Provision for bad debts 689 Depreciation : machinery 2.000 10.141 90.586 87.500 3. Amount Rs.500) 18.775 (689) 13. Amount Rs. Liabilities Sundry creditors Salaries outstanding Capital 62.500 (1.780 Less Return inwards (680) Closing stock 98.000 515 1.000 Patent 1.480 4.200 3.245) 82. 6. Sales 98.715 9.000 (2.900 16.000 32.800 Salaries 15. 540 2.100 6.715 Cr.000 90.000 Add Outstanding salaries 1.800 1.175 8.086 85 6.760 40. 2005 Dr.04.500 Net profit (transferred to capital account) Gross profit b/d Rent Add Accrued rent 1.000 Amount Rs.000 Add Net profit Less Drawings 25. Expenses/Losses Opening stock Purchases Less Return outwards Wages Fuel and Power Carriage on purchases Gross profit c/d Amount Rs.000 6.630 14.300 1.500 25. Solution: Books of Yogita Trading and Profit and Loss Account for the year ended March 31.715 1.500 (725) 13.730 2.900 43.

500 9. 1.100 16. 2005 Account Title Capital Drawings Purchases Sales Purchases return Stock on April 01. (vii) Unexpired insurance Rs.370 2.) Railway freight on sales Carriage inwards Office expenses Printing and Stationery Postage and Telegram Sundry debtors Sundry creditors Cash in bank Cash in hand Office furniture Salaries and Commission Addition to buildings Amount Rs.300 190 1. .000 Prepare the trading and profit and loss account and a balance sheet as on March 31.940 2.400 3. 625 and addition to building at 2% and office furniture at 5%.600 80.240 6. (vi) Interest on capital at 5% to be charged. 570 are outstanding for salary.070 18.240 4.400 2. (iv) On March 31. (viii) Stock was valued at Rs. (v) Rent receivable Rs.290 on March 31.870 7.II Illustration 3 399 The following balances were extracted from the books of Shri R. Lal on March 31. (iii) Increase the bad debts reserve to 6% of debtors. 240.40.820 11. 2005. 2005. 200 on March 31. 2004 Rates and Insurance Discount (Cr.460 1. 14.000 17. 2004 Bad debts Bad debts reserve April 01. 2005 after keeping in view the following adjustments : (i) Depreciate old building by Rs. 2. 570.340 660 820 62.210 3.) Bills receivable Sales returns Wages Buildings Amount Rs.310 1.Financial Statements .000 1.000 1. 2005 Rs.280 25.240 Account Title Rent (Cr.920 12.00. (ii) Write-off further bad debts Rs.

Sales 1.310 6.130 Closing stock 14.370 Less Sales Return (4.680 .240) for bad debts Interest on capital Depreciation on building Depreciation on addition to building Depreciation on furniture Net profit (transferred to capital account) 16.000 (2.190 2.690 provision 5660 Less Old provision (3.940 1. Expenses/Losses Opening stock Purchases Less Purchase return Carriage inwards Wages Gross profit c/d Amount Rs.240) 1.400 Solution Books of Shri R.36.190 1.420 Railway freight on sales Office expenses Postage and Telegram Printing and Stationery Salary and Commission 9. 11.300 Less unexpired insurance (240) Bad debts 1.820) 77.870 Add Outstanding salary 570 Rates and Insurance 1.440 1.060 Gross profit c/d Rent Add Accrued rent Discount 2.280 53.50.060 55.300 190 2. Lal Trading and Profit and Loss Account for the year ended March 31. 2005 Dr.340 820 660 10.460 80.000 625 140 175 16.50.290 1.680 55.180 2.100 200 Revenues/Gains Accountancy Cr.420 5.420 53.40.400 Add Further bad debts 570 Add New bad debts 3. Amount Rs.

000 16.500 Less New provision (3.50.000 Less Depreciation (625) Addition to building 7.240 Less Drawings Debtors 62.000 16.000 28.000 6.000 8.210 1.460 Assets Cash at bank Cash in hand Bills receivable 401 Amount Rs.Financial Statements .000 6.810 200 240 24.00.000 18.000 1.40.000 18.000 30. 18.000 4.000 (140) Less Depreciation Office furniture 3. 4.400 2.21.II Balance Sheet as at March 31.950 Illustration 4 Prepare the trading profit and loss account of M/s Mohit Traders as on 31 March 2006 and draw necessary Journal entries and balance sheet as on that date : Debit Balances Opening stock Purchases Cash in hand Cash at bank Return inwards Wages Fuel and Power Carriage inwards Insurance Buildings Plant Patents Salaries Furniture Drawings Rent Debtors Amount Rs.60.325 14.950 1.000 2.40.000 32.060 5.000 1.22.000 2.000 6.000 20. 12.860 3.000 4.500 Less Depreciation (175) Closing stock 57.000 12.22.000 .000 Credit Balances Sales Return outwards Capital Creditors Bills payable Commission received Amount Rs.03.000 1.000 80.690) for bad debts Accrued rent Unexpired insurance Building 25.920 570 1.600) 1.000 1.375 6.000 80.000 22. 24.290 1.00.00.070 Less Further bad debts (570) 61. 2005 Liabilities Sundry creditors Outstanding salaries Capital Add Net profit Add Interest on capital Amount Rs.000 64.060 (17.

1. 12.400 700 12.400 2.000 2.F.000 6. 12.000 12.000 2.000 6. Salaries outstanding Wages outstanding Commission is accrued Depreciation on building 5% and plant 3% Insurance paid in advance Closing stock Rs. Dr. To Building A/c To Plant A/c (Depreciation charged on plant and building) March 31 Profit and Loss A/c To Capital A/c (Profit transferred to capital account) Dr.700 1.000 Dr.402 Adjustments (a) (b) (c) (d) (e) (f) Solution Books of Mohit Traders Journal Date Particulars L.23.400 1.400 Dr.400 5.000 6. .400 7. 2006) March 31 Prepaid Insurance A/c To Insurance A/c (Insurance paid in advance] March 31 Commission accrued A/c To Commission A/c (Commission accrued but not received) Dr. 2005 March 31 Salary A/c Wages A/c To Salary outstanding A/c To Wages outstanding A/c (Amount of salary and wages outstanding as on March 31.400 1. Debit Amount Rs. 2.23.000 Accountancy Credit Amount Rs.700 March 31 Depreciation A/c Dr.

16.000) 3. Amount Rs.400 Balance Sheet as at March 31.000 12.000 6.000 3.000 (700) Revenue/Gains Sales Less Returns Closing stock 403 Cr.000 1.000 18.700 .000 12.II Books of Mohit Traders Trading and Profit and Loss Account for the year ended March 31.000 95.000 Add Outstanding wages 6.700 1.000 6.80.000 28.50.000 1.000 1.000 2.000) Add Accrued 2.000 5.57.700 (18.00. Expenses /Losses Opening stock Purchases 1.700 2.400 Plants Net Profit (transferred to capital account) 1.000 4.000 32.Financial Statements .000 7. 64.000 1.000) Assets Cash in hand Cash at bank Building Plant Patents Debtors Insurance prepaid Commission accrued Furniture Closing stock Amount Rs.60.58. 24.96.08. 4.000 12.400 12.08.400 6.000 Salary Add Outstanding salary Insurances Less Prepaid Rent Depreciation on building 28.74.23.000 8.55.000 700 2.000 Less returns (2.57.700 2.600 30.000 Fuel and Power Carriage inwards Gross profit c/d Amount Rs.73.74. 2006 Liabilities Creditors Bills payable Capital Add Net profit Less Drawings Outstanding salaries Outstanding wages Amount Rs.000 (4.000 3.000 77.300 2.000 Gross Profit b/d 1.400 commission 40.700 12.80. 2006 Dr.000 80.000 Commission received(4.000) Wages 22.400 1.23.000 20.000 4.

404 Illustration 5 Accountancy The following information has been extracted from the trial balance of M/s Randhir Transport Corporation. Discount on debtors @ 2%.000 1. Depreciation charged on plant and machinery 5% and land and building 6%.000 50. 35.000 6.020 6. 3.500.000 2. 2.200 75.000 1.82. 7.000 3.500 3.20.000 2. 2. 5.55. 100.500 1. Closing stock for the year was Rs. 6. 9.000 700 1.000 4.500 400 4. Debit balances Opening stock Rent Plant and Machinery Land and Buildings Power Purchases Sales return Telegram and Postage Wages Salary Insurance Discount Repair and Renewals Legal charges Trade taxes Debtors Investment Bad debts Trade expenses Commission Travelling expenses Drawings Amount Rs. 4.500 1.000 50.70.500 and make provision for bad debts on debtors 5%. Insurance prepaid Rs.000 2.500 Credit balances Capital Creditors Bills payable Loan Discount Sales Provision for bad debts General reserves Amount Rs.50. Further bad debts 2.000 2. Wages outstanding Rs. .230 20.000 1.82.000 50.000 2. Interest on investments @ 4%.10.250 1.200 1.500 Adjustments 1. 2005. Salary outstanding Rs. You are required to make trading and profit and loss account and a balance sheet on March 31. Interest on drawing @ 6% and Interest on loan @ 5%.500 2. 8.000 1. 200.500 75. 500.000 65. 40.

50. 40.053 Less Old provision (1.053 10.500 1.200 4.200 65.000 2.II Solution Books of Randhir Transport Corporation Trading and Profit and Loss Account for the year ended March 31.500 1.500 35.83.600 3.500 59.000 400 Gross profit b/d Outstanding interest on investment Discount Interest on drawings Revenue/Gains Sales Less Sales return Closing stock 1.230 1. 1.000 Add Further bad debts 2.700 1.000 (2.250 1.217 65.900 2.300 7.000) Net Profit (transferred to capital account) 2.450 6.500 Add Outstanding salary 200 Insurance 3.000 75.500 Add New provision 3.000 700 1.500) 405 Amount Rs.000 15.900 1.Financial Statements .000 Rent Telegram and Postage Salary 2.500 100 4.000 4.200 Less Prepaid (500) Discount Repair and Renewals Legal charges Trade taxes Trade expenses Outstanding interest on loan Commission Travelling expenses Discount on debtors Depreciation on Plant and Machinery Depreciation on Land and Building Bad debts 2. 2005 Expenses/Losses Opening stock Purchases Wages Add Outstanding wages Power Gross profit c/d Amount Rs.83.700 2.200 .500 5.47.553 8.000 59.600 1.200 2.500 1.

50.000 (2.000 3.430 . 2005 Liabilities Creditors Bills payable Loan 1.430 Credit balances Sales Return outwards Creditors Bills payable Provision for bad debts Capital Rent received Commission received Amount Rs.00.500) 72.000 50.406 Balance Sheet as at March 31.217 2.000 2.600 500 2.553) Investment Outstanding interest on investment Insurance pre-paid Debtors Less Further bad debts Less Discount Accountancy Amount Rs.80.020) Amount Rs.497 65.000 2.24.000 Assets 75.000 Add Outstanding interest 5. Debit balances Plant and Machinery Debtors Interest Wages Salary Carriage inwards Carriage outwards Return inwards Factory rent Office rent Insurance Furniture Buildings Bills receivable Cash in hand Cash at bank Commission Opening stock Purchases Bad debts Amount Rs.500 5. 1.450) 71.15.500 2.58.10.000 1.200 2.000 2.217 Less Drawings (20.500 (1.200 Outstanding salary Outstanding wages 2.000 8.500 8.450 2.500 500 700 2.000 2.000 1.000 500 60.000 2. 3.500 2.000 3.500 General reserve Capital 2.050 Less New Provision (3.000 Add Net Profit 10.550 2.000 1.24.39. 2005.000 50. 67.70.300 780 22.380 16.000 1.500 50.500 35.60.70.797 Plant and Machinery Land and Building Closing stock 1.000 70.700 35. 50.30.797 Illustration 6 From the following balances of M/s Keshav Bros. You are required to prepare trading and profit and loss account and a balance sheet of March 31.20.50.70.000 22.000 10.997 200 100 5.14.80.197 Less Interest on drawings 1.

550) Net Profit (transferred to capital account) 2.000. Amount Rs.II Adjustment (i) (ii) (iii) (iv) Provision for bad debts @ 5% and further bad debts Rs.400 7.68.000 2.200 500 1.350 4.350 3. plant and machinery @ 6%.000 6.380 Less Advance rent (6. Depreciation on furniture @ 5%.500 Add Further bad debts 2.68. building @ 7%.500) 2.47.00.900 Less Old provision (1. 200. 60. 407 Solution Books of Keshav Bros.730 77.125 7.000 2.50.380 16.275 77.500 700 2. 2005 Dr.300 580 1.000) Cr.Financial Statements .730 .000 (2.000.000 Interest Salary Carriage outwards Office Rent Insurance 780 Less Prepaid insurance (200) Depreciation on furniture Depreciation on Plant and Machinery Depreciation on building Commission Bad debts 3. Prepaid insurance Rs.350 34.000) Commission received Revenue/Gains Sales Less Return Closing stock 3.000 57. 6.000 3.600 500 Gross profit b/d Rent received 10.000 (2.500 1. 2. Trading and Profit and Loss Account for the year ended March 31. Rent received in advance Rs.98.450 57.000 Add New provision 2. 2.800 19. Expenses/Losses Opening stock Purchases Less Returns Wages Carriage inwards Factory rent Gross profit c/d Amount Rs.000 70.

000 70.000 40. 2006.060 Credit balances Sales Loan 12% (1.600 2.275 Liabilities Cash In hand Cash at bank Bills receivable Accountancy Amount Rs.200 1. 3.80. 2005 Liabilities Creditors Bills payable Advance rent Capital Add Net profit Amount Rs.610 75.60.000 .000 4.050 4.200 Furniture 21.22.400 Closing stock 70.620 16.000 1.590 3.600 2.275 Illustration 7 The following information have been taken from the trial balance of M/s Fair Brothers Ltd.060 5.375 Buildings 2.000 2.80.7.000 3.000 5.20.000 60.000 81.000 5.000 250 32.000 34.38.600 Plant and Machinery 1.275 2.60. 22.000 6.2005) Discount received Return (Purchase) Creditors Capital Amount Rs.275 5.000 1.000 Prepaid insurance 200 Debtors 50. 20. 2.000 Less New provision (2400) 45.38.000 45.600) Stock Purchases Repairs Interest on loan Sales tax Insurance Rent Amount Rs. You are required to prepare the trading and profit and loss account and a balance sheet as at March 31.060 390 60.408 Balance Sheet as at March 31.350 1.50.500 35.61.1.000) bad debts 48.54. Debit Balances Cash Wages Return outwards Bad debts Salaries Octroi Charity Machinery Debtors (Including a dishonoured bill of Rs.000 Less Further (2.800 4.

600. 4.600 3.600 1. Create a provision at 5% on debtors.Financial Statements .II Adjustments 1. Half the amount of bill is recoverable.200 4. Expenses/Losses Opening stock Purchases Less Purchases return Wages Less Prepaid wages including erection of machines Octroi Gross profit c/d Amount Rs. 6.000 1.600 4. 2006 Dr.400 2.200 2.060 Salaries Add Outstanding salary 16. 3. 2005.000 (600) 4. 81.800) 409 Cr.620 800 2.38.960 1. 7. Amount Rs. 2.850 1.050 (4.200 41. Closing stock Rs.000 for erection of new machinery on April 01.050 Gross profit b/d Discount received 54.800 14. 81.61.280 55. Salaried unpaid Rs.38.1. Books of Fair Brothers Ltd.000 1.60. 3.850.050 Revenue/Gains Sales Less Sales return Closing stock 3.000 54.000 17.260 .200 81.600 1. 600.56.350 Repairs Bad debts Add Further bad debts Add New provision Interest on loan Add Outstanding interest Sales tax Insurance Less Prepaid insurance Charity Rent Less Prepaid rent Depreciation on machinery Net profit (transferred to capital account) 8. 8. Provide 5% depreciation on furniture. Trading and Profit and Loss Account for the year ended March 31. Insurance unexpired Rs.380 3.600 2. 4.000 1. Rent is paid up to July 30.260 55.590 (390) 45.000 (4. 5.200 1. 2006.050 4.60.000) 2. Wages include Rs.400 250 3.

000 Add Erection Wages 36.890 Illustration 8 From the following balance extracted from the books of of M/s Hariharan Brother.000 5.800 4.200 81. 60.000 500 700 300 400 1.000 2.000 14.400 5.400 Credit balance Capital Sales Return outwards Apprenticeship premium Bills payable Creditors Amount Rs.000 7.800 1. Debit balance Opening stock Purchases Return inwards Carriage inwards Carriage outwards Wages Salaries Rent Freight and Dock Fire Insurance premium Bad debts Discount Printing and Stationery Rates and Taxes Travelling expenses Trade expenses Business premises Furniture Bills receivable Debtors Machine Loan Investment Cash in hand Cash at bank Proprietor’s withdrawals Amount Rs. 20.000 800 3.000 6.240 1.000 40.400 .000 4.00. 16. you are require to prepare the trading and profit and loss account and a balance sheet as on December 31.280 89.600 3.00.000 Less Bad debts (800) Less Provision 2.200 4.200 1.60.000 500 7.000 3.610 1.000 3.000 2.000 Less Depreciation (1.850 1.000 56.000 40. 2005.00.600 40.93.000 2.800) Closing stock Accountancy Amount Rs.000 31.000 6.410 Balance Sheet as at March 31.10.93.000 5.000 6. 2006 Liabilities Creditors Outstanding salaries Loan Outstanding interest Capital Add Net profit Amount Rs.960 Prepaid rent Unexpired insurance Machinery 32.600 11.000 600 1.890 34.000 10. 1.000 9.000 1.400 75.280 Assets Cash Debtors 60.

Interest on capital to be allowed at 5% for one year. Expenses/Losses Opening stock Purchases Less purchases return Wages Add Outstanding Wages Carriage inwards Freight and Dock Gross profit c/d Amount Rs.03.01.200 4. Trading and Profit and Loss Account for the year ended December 31. 16. Apprenticeship Premium is for three years paid in advance on January 01.03.200 paid in July 01. Amount Rs. 4.000 Carriage outwords Rates and Taxes Printing and Stationery 500 Add Outstanding bill 60 Trade expenses Travelling expenses Fire insurance 1.000 1.800 (600) Less Prepaid insurance Bad debts Rent 2.000 Add Outstanding salary 1.200 2. 160.000 700 160 150 . 2005 Dr. Machinery @ 10%.200 Add Outstanding rent 200 Interest on capital Depreciation on Premises Depreciation on furniture Depreciation on machinery Discount Net profit (transferred to capital account) 1. Interest on loan given accrued for one year @ 7%.000 63.57.000 5. Fire Insurance premium includes Rs.000 premium Less Advance premium (2. Wages outstanding Rs. 1. 9.60.000. Salaries Outstanding Rs. 60 remain unpaid.410 1. Rent outstanding Rs.200 2. 2005 to June 30. Stationery bill for Rs.400 1.000 5. Interest on drawings to be charged to him ascertained for the year Rs. 10. furniture @ 10%.000 Closing stock 14.200 7.000 700 560 400 300 1.000 40. 14.410 Gross profit b/d Apprenticeship 3. 7. 6. 1.000. Interest on investment @ 5% for half year to December 31.600 600 39.400 4.000) 1.000 Salaries 11.400 5. Sales 1. 5. 2005.000) Accrued interest on loan Interest on drawings Accrued interest on investment Revenue/Gains Cr. 2006. 200.400 1.000 Less Sales return (3.000 (800) 6. Solution Books of Hariharan Bros. 600.01. Depreciation on Premises @ 5%. 2.71. Closing stock Rs.500 500 900 1.750 1.71. 8.000 12.800 1.II 411 Adjustments 1.Financial Statements . 3. 2005 has accrued. 2005 to run for one year from July 01.

750 Furniture 4.000 2.000 100 5.000 1.000) 1.500 500 2.000 8.000 4.03. 6.590 Creditors 31.000 1. 2006.000 2.000 24.412 Liabilities Accountancy Balance Sheet as at December 31.10.000 Add accrued interest 150 6.000 Outstanding stationery 60 Add accrued interest 700 10.050 Illustration 9 The following balances have been extracted from the trial balance of M/s Kolkata Ltd.600 Debtors 40.000 41.300 .000 400 5.000 1.62.000 Cash at bank 7. Water Amount Rs.750 1.100 Less Interest on drawings (160) 1.000 Less Depreciation (5.750 Machinery 8.000 4.000 1. Gas. 2005 Amount Assets Amount Rs.000 Outstanding rent 200 Loan 10. Rates and Taxes Coal.400 1.000 Bills receivable 7.700 Apprenticeship premium (advance) 2.000 Outstanding wages 600 Cash in hand 500 Outstanding salaries 1.500 Add Net profit 63.500 Less drawings (6.300 Credit balances Capital Sales Purchases return Bank overdraft Bad debts provision Creditors Commission Bills payable Apprenticeship premium Amount Rs.500) 1.000 6.000 500 80.150 Pre-paid insurance 600 Closing stock 14.03.300 4.000 Bills payable 5.050 2.62.800 3. You are required to prepare the trading and profit and loss account on dated March 31. 20.04.000 Premises 1.68. Rs.000 Investments 6. Capital 1.000 Add Interest on capital 5. Debit balances Opening stock Furniture Drawings Cash in hand Purchases Sales return Establishment expenses Bad debts Debtors Carriage Bills receivable Bank deposits Wages Trade expenses Bank charges General expenses Salaries Insurance Postage and Telegram Rent.000 500 400 1.000 2.00.200 2. Also prepare balance sheet on that date.000 10.000 2.000 80.

200 48.500 (500) Less Prepaid insurance Postage and Telegram Rent. Water Gross profit c/d Establishment expenses Carriage Trade expenses Bank charges General expenses Salaries 2. 200.000. 200 New provision @ 5% on debtors.100 2. rates and Taxes Interest on bank overdraft Bad debts 1.000 500 2. 413 Solution Books of Kolkata Ltd.II Adjustments 1. 100. 6. 100. 9.000 100 20.000 24. Gas. 5.000 400 168 1.300 4. 8.000) Cr. Further bad debts Rs. 750. Wages Rs. 2006 Dr. Rent and taxes Rs. 7.690 Less Old provision (400) Depreciation on furniture Net profit (transferred to capital account) Amount Rs.058 20. 6. Expenses /Losses Opening stock Purchases Less purchases return Wages Add Outstanding wages Coal.318 . Depreciation on furniture @ 10%. Trading and Profit and Loss Account for the year ended as at March 31.318 20.000) 1.000 1.000 Add Further bad debts 200 Add New provision 490 1.300 19. 10.Financial Statements . Amount Rs. Closing stock Rs. 4. Outstanding salaries Rs.000 2. 3.000 (4. Unexpired insurance Rs.200 50 500 Revenue/Gains Sales Less sales return Closing stock 41300 (2. 100. 9.000 19.100 1.200 750 Gross profit b/d Commission 100 Less Advance commission (50) Accrued interest on deposits Apprenticeship premium 500 Less Advance received 100 Interest on drawings 48. 50.400 1. Interest Rs.000 500 400 1. Apprenticeship premium received in advance Rs.300 9. 500. 39. 2. 500 is to be received on bank deposits.290 120 5. Commission is received in advances Rs.000 Add Outstanding salary 100 Insurance 1. Interest on drawings @ 6%. Interest on bank overdraft Rs.

000 10. from the following trial balance and a balance sheet as at March 31.802 60.250 1.800) 22.090 5.058 25.414 Balance Sheet as at March 31.27.000 1.420 2. Debit balances Drawings Sundry debtors Carriage outwards Establishment expenses Interest on loan Cash in hand Stock Motor car Cash at bank Land and Buildings Bad debts Purchases Sales return Advertisement Carriage inward Rates.110 24.000 17. 16.000 4. 6.27.208 .692 880 5.000 9. Assets Insurance prepaid Bank deposits Accountancy Amount Rs.858 7.000 (200) 9.058 Less Drawings (2.000 1.642 4.208 Credit balances Creditors Capital Loan on mortgage Bad debts provision Sales Purchases return Discount Bills payable Rent received Amount Rs.310 6.978 13.916 15.782 8. taxes.00 5.390 Illustration 10 Prepare the trading and profit and loss account of M/s Roni Plastic Ltd.100 11.428 500 3. 2006. insurance General expenses Bills receivable Amount Rs.000 750 4.194 400 6.00.800 (490) Add outstanding interest 500 22. 500 8.258 Less Interest on drawings (168) Creditors Commission received in advance Apprenticeship premium Outstanding wages Outstanding salaries Outstanding rent.000 37.678 18. rates. 2006 Liabilities 2.000 8.000 50 100 100 100 200 Furniture Cash in hand Debtors Less Further bad debts Less Provision for bad debts Bills receivable Closing stock 9.528 7.486 2.22.000 9.34.808 16.764 3.500 1.390 37.080 3.200 2. taxes Bank overdraft Add Outstanding interest Bills payable Capital Net profit Amount Rs.000 38.750 5.

486 Purchases 1. Salaries amounting to Rs.224 Closing stock Carriage inwards 7.090 Less Old provision (1. Opening stock 11. Solution Books of Roni’s Plastic Ltd.II 415 Adjustments 1.19.400 on March 30.144 2. The bad debts provision is to be brought up to @ 5% on sundry debtors. 13.808 Discount 880 Establishment expenses 16.400 Gross profit b/d 68. 8. 6. 2.000 were taken away by the proprietor for his personal use but not entry has been made in the books of account.700 Less Goods withdrawn (1.224 13.764 . Provide the manager’s commission at @ 5% on Net profit after charging such commission.Financial Statements .400 and Rates amounting to Rs. Interest on loan is @ 5% taken on April 01. 1.432 Add Outstanding 800 8.642 return 2. Goods costing Rs1. Trading and Profit and Loss Account for the year ended March 31.250 Add New provision 1.528 Interest on loan 400 Add Outstanding Interest 450 850 General expenses 8. 1. Rs. 2006 Dr.420) 1.978 Depreciation on : Land and Building 1. 3. 2005. Expenses/Losses Amount Revenue/Gains Amount Rs.916 Less Sales 15.144 Outstanding salaries 1. Depreciation on land and building at @ 5% and Motor vehicle at @ 15%.692 Less Return basis (1.858 Gross profit c/d 68.200 Motor car 2. Cr.19.200 were sent to a customer on sale on return basis for Rs. 350.844 Less Purchases return 2.32.764 69.670 Rates and Taxes 7.194 capital account) 69.840 3. 2006 and has been recorded in the books as actual sales.22.782 (350) Less Prepaid 7.010 Net profit (transferred to 20.700. Insurance pre-paid Rs.06.31.700 3. 800 are due.232 Advertisement 4.678 Sales 2.34. Closing stock was Rs.444 1.384 Carriage outwards 2. 4.400) 2. Goods costing Rs. 7. 5.194 Rent 500 Bad debts 1.900 Manager commission 1.384 2.05. 1. 9.000) 1.

194 (6.010 1.194 80.000 17. the final accounts are prepared in a form of statement with different items being shown on below the other in a purposeful sequence.000 (2.800 15.194 17.13 Methods of Presenting the Financial Statements The financial statements.16. .700 1.450 5.764 38.428 16. Under vertical presentation. 6.700) 73. items are shown side by side in the trading and profit and loss account and also in the balance sheet as we are doing so far.194) 1.100 9.e. now-a-days.084 34.16.000 450 Amount Rs.110 13.000) (74. 2006 Liabilities Capital Add Net profit Less Drawings Less Goods withdrawn loan Add interest Bills payable Creditors Outstanding Salaries Outstanding Rates Taxes Manager commission 60.802 1.960 22.200 (1. trading and profit and loss account and balance sheet can be presented in two ways: (1) Horizontal form (2) Vertical form Under horizontal form of presentation. i.840) 24.3. Hence.400 800 1. This format is rather technical in nature and is not easily comprehensible for many users.416 Balance Sheet as at March 31. the trading and profit and loss account will appear as shown in figure 10. most firms present them in a simpler and more intelligible form called a narrative style or vertical presentation. Under vertical presentation.800 (1.200) 18.300 350 13.400) 36.000 20.000 (1. Assets Cash in hand Cash at bank Bills receivable Debtors Less sales return basis Less New provisions Land and Building Less Depreciation Motor car Less Depreciation Prepaid insurance Closing stock Accountancy Amount Rs.084 10.

... .. ... . .. .. . ... . ..... .............II Income Statement for the period ended . ... . ...... . . .. . ..... ... ... . Particulars Sales (Gross) Less Returns Net sales Cost of goods sold Opening stock Purchases . ... .... .... . .. .. ... Carriage Inwards Wages Cost of goods available for sale Less Closing stock Gross Profit Operaing Expenses (a) Selling expenses Advertising Discount Allowances Bad debts and Provisions Carriage outwards Total selling expenses (b) General and Administration expenses Salaries Rent and Rates Insurance Depreciation Postage Repairs General expenses Total operating expenses Net Income from operations (Operating profit) Other Income (Non-operating gains) Interest earned Commission earned Profit on sale of fixed assets Less Deductions (Non-operating expenses) Interest paid Loss by fire Net non-operating gains Net income (Net profit) Amount 417 Amount Rs. .......... . ... ... ... ...... .. ....... .. . ..... Less Returns . ..Financial Statements . ...

. . .. .....418 Under the vertical presentation. ... ...... . . . .. .. 10. Fig. .. . . ... the Balance Sheet will appear as follows : Balance Sheet as on .... ..... ..3 : Showing vertical presentation of financial statements .. ....... ... .. ....... ..... ... . . .. .... .... . .. .... . . Particulars Current Assets Cash in hand Cash at bank Bills receivable Accrued income Debtors Stock Prepaid expenses Total current assets Less Current Liabilities Bank overdraft Outstanding expenses Bills payable Trade creditors Income received in advance Total current liabilities Net working capital (Current assets and Current liabilities) Fixed Assets Furniture and Fixtures Patents Plants and Machhinery Building Land Goodwill Total fixed assets Total assets (After paying current liabilities) Capital Employed Long-term liabilities Loan Mortgage Total long-term liabilities Net assets (being the difference between total assets and long-term liabilities) Capital (Proprietor) Capital in the begining Add Capital introduced during the current year Interest on capital... Profit for the current year Less Drawings during the current year Interest on drawing Loss for the current year Total capital of the proprietor at the end of the year Accountancy Amount Amount Rs.... salary.......... etc.... .

000 Adjustments Closing stock Rs.500 1.000 80. 2006.000 Depreciation on Plant and Buildings @ 10%.Financial Statements .98.320 3.000 6.960 1.000 2.000 15.II Illustration 11 419 From the following balances extracted from the books of M/s Rohit Traders.000 12. prepare the profit and loss account and balance sheet in the vertical form as on March 31.000 3.68.460 10.000 28.600 5.000 10.40. 4.000 1.200 30.520 81.200 9. 1.000 1. Debit Balances Opening stock Purchases Debtors Discounts Carriage outwards Drawings Insurance Salaries Investments Motor car Plants Land and Building Carriage inwards Legal charges Audit fee Fuel and Power Wages Return inwards Cash at bank Cash in hand Interest Bad debts Amount Rs.000 2.200 3.000 400 12. 11.68.000 4.000 20.360 5.000 .080 3.000 40. Credit Balances Capital Return outwards Creditors Commission Sales Long-terms loan Amount Rs.200 2.

16. 4.000 (400) 80.000 28.200 12.96.98. 8.360] 11.200 30.520 81.600 (b) Selling and Distribution Expenses Carriage outwards Discount Bad debts Total operating expenses [a+b] [C-D] 6.12. 2006 Particulars A Net Sales Less Sales return B Cost of goods sold Opening stock Purchase Less Purchases return Carriage Inwards Fuel and Power Wages Cost of goods available for sale Less Closing stock C D Gross Profit Amount Rs.000 (2.960 1.000 49.000 3.620 84.000 2.460 10.200 3.640 1.000 + Rs.920 25.100 G Net profit transferred to capital account .320 58.000) Accountancy Amount Rs.000) 1.600 4.620 (4.000 [1.000 1. 1.080 9.020 {A-B} Operating expenses (a) Administrative Expenses Insurance Salaries Legal charges Audit fee Depreciation (Rs.100 5.000) E F Net operating profit Non-operating incomes Commission earned Less Interest paid 3.420 Solution Books of Rohit Traders Profit and Loss Account for the year ended March 31. 1.

Financial Statements - II Balance sheet of Rohit Traders as at March 31,2006 Particulars Sources of firm’s funds a Proprietors fund Opening capital Add Net profit Less Drawings Long -term loan Amount Rs.

421

Amount Rs.

1,40,000 28,100 1,68100 (10,500)

b

1,57,600 12,000 1,69,600

Application of Funds (i) Cash In hand Cash at bank Closing stock Debtors (ii) Less Creditors (a) Investments (b) Fixed assets : Motor car Plants Land and Buildings 2,000 5,200 4,000 28,000

39,200 12,600

26,600 20,000

15,000 36,000 72,000

1,23,000 1,69,600

Key Terms Introduced in the Chapter • • • • • • Outstanding /Accrued expenses Accrued Incomes Depreciation Provision for doubtful debts Managers commission Horizontal form • • • • • • Prepaid/Unexpired expenses Income received in advance Bad Debts Provision for discount on debtors Interest on capital Vertical form

Summary with Reference to Learning Objectives 1 Need for adjustments : For the preparation of financial statements, it is necessary that all the adjustments arising out of the accrual basis of accounting are made at the end of the accounting period. Another important consideration in the preparation of final accounts with adjustments, is the distinction between capital and revenue items. Entries which are recorded to give effect to these adjustments are known as adjusting entries. Outstanding expenses : At the end of the accounting period sometimes a business enterprises is left with some unpaid expenses due to one reason or another. Such expenses are termed as outstanding expenses.

2

422 3.

Accountancy Prepaid expenses : At the end of the accounting year, it is found that the benefits of some expenses have not been fully received; a portion of total benefits would be received in the next accounting year. That portion of the expense, the benefit of which will be received during the next accounting period is known as ‘prepaid expenses’. Accrued Income : These are certain items is received by a business enterprise but the whole amount of it does not belong to the next period. Such portion of income which belongs to the next accounting period is income received in advance and is known as “unearned income”. Depreciation : Depreciation is the decline in the value of an asset an account of wear and tear or passage of time or with. It actually amounts to writing off a portion of the cost of an asset which has been used in the business for the purpose of earning profits. In the balance sheet, the asset is shown at loss minus the amount of depreciation. Provisions for bad and doubtful debts : It is a normal feature of business operations that some debts prove irrecoverable which means that the amount to the realised from them becomes had to view of this. An attempt is made to bring in a certain element of certainty in the amount in respect of bad debts charged every year against incomes. Questions for Practice Short Answers 1. 2. 3. Why is it necessary to record the adjusting entries in the preparation of final accounts? What is meant by closing stock? Show its treatment in final accounts? State the meaning of: (a) Outstanding expenses (b) Prepaid expenses (c) Income received in advance (d) Accrued income Give the Performa of income statement and balance in vertical form. Why is it necessary to create a provision for doubtful debts at the time of preparation of final accounts? What adjusting entries would you record for the following : (a) Depreciation (b) Discount on debtors (c) Interest on capital (d) Manager’s commission What is meant by provision for discount on debtors? Give the journal entries for the following adjustments : (a) Outstanding salary Rs. 3,500. (b) Rent unpaid for one month at Rs. 6,000 per annum. (c) Insurance prepaid for a quarter at Rs. 16,000 per annum. (d) Purchase of furniture costing Rs. 7,000 entered in the purchases book.

4.

5.

6

4. 5. 6.

7. 8.

Financial Statements - II Long Answers 1. 2. What are adjusting entries? Why are they necessary for preparing final accounts? What is meant by provision for doubtful debts? How are the relevant accounts prepared and what journal entries are recorded in final accounts? How is the amount for provision for doubtful debts calculated? Show the treatment of prepaid expenses depreciation, closing stock at the time of preparation of final accounts when: (a) When given inside the trial balance? (b) When given outside the trial balance?

423

3.

Numerical Questions 1. Prepare a trading and profit and loss account for the year ending December 31, 2005. from the balances extracted of M/s Rahul Sons. Also prepare a balance sheet at the end of the year. Amount Rs. 50,000 3,000 8,000 1,75,000 3,000 82,000 1,000 3,200 4,300 20,000 1,500 2,000 32,000 1,600 4,200 300 200 500 50,000 1,10,000 5,51,800 Adjustments 1. Commission received in advance Rs.1,000. 2. Rent receivable Rs. 2,000. 3. Salary outstanding Rs. 1,000 and insurance prepaid Rs. 800. Account Title Sales Purchases return Discount received Provision for bad debts Capital Bills payable Commission received Rent Loan Amount Rs. 1,80,000 2,000 500 2,500 3,00,000 22,000 4,000 6,000 34,800

Account Title Stock Wages Salary Purchases Sales return Sundry Debtors Discount allowed Insurance Rent Rates and Taxes Fixtures and fittings Trade expenses Bad debts Drawings Repair and renewals Travelling expenses Postage Telegram expenses Legal fees Bills receivable Building

5,51,800

000.000 40. Closing stock 10.000 . Interest on investment @ 5% p. for the year ending December 31.500 23. 35.000 2.a.71.000 1.400 75. 1.000 500 400 4.000 50.1. 2. Total balance sheet Rs. Depreciation charged on machinery @ 5% p.424 Accountancy 4.43.000 1. Further bad debts Rs.52.500.565).000 6.100 3.000 20. (Ans : Gross loss Rs.000 . Wages prepaid Rs.a.000 3. : Gross Profit Rs.900 Adjustments 1.57. Further bad debts Rs.000 10. Closing stock Rs. from the following figures taken from his trial balance : Amount Rs. 5. Depreciation on building @ 6% p.000 5. Total Balance Sheet Rs.500 5. 4. Account Title Sales Purchase return Creditors Bills payable Discount Provision for bad debts Interest received Capital Amount Rs. 5.a.000 20.000 600 12.500 3. Net Profit Rs. Net loss Rs.83.17. Account Title Opening stock Purchases Return inwards Postage and Telegram Salary Wages Rent and Rates Packing and Transport General expense Insurance Debtors Cash in hand Cash at bank Machinery Lighting and Heating Discount Bad debts Investment 3. discount on debtors @ 5% and make a provision on debtors @ 6%.1. 2005.000.000 4.000.300 3. 32.189 .50.611) Prepare a trading and profit and loss account of M/s Green Club Ltd.000 25.71. (Ans.2.79. 3.000 20. 2.1.000 1. 6.565 .000 and provision for bad debts @ 5% on debtors and discount on debtors @ 2%.900 .25.

Further bad debts Rs. 4.060. : Gross profit Rs. 1. 2005. 2. 66.00.500 400 1. 200 respectely. Interest received on investment @ 5%. Depreciation charged on motor car @ 5% p.000 425 4.000 53.500 3.89. 500 and make a provision on debtors @ 5%.440 Adjustments 1.040 1.500 2.97.440 .50. 32. Closing Stock Rs. Wages and interest outstanding Rs. 2. (Ans.II 3 The following balances has been extracted from the trial of M/s Runway Shine Ltd.000 440 500 100 400 25. Total balance sheet Rs. Prepare a trading and profit and loss account and a balance sheet as on December 31.400) Account Title Sales Return outwards Interest received Discount received Creditors Bill payable Capital Amount Rs. 3. 2.000 6.800 2.50.500 400 1.500. 78.a. 100 and Rs.000 4.25. 1.800 60.000 2.000 400 200 1.500 32. 5.000.89.400 4.000 4. Net profit Rs.000 20.500 77. Discount on debtors Rs. Account Title Purchases Opening stock Return inwards Carriage inwards Cash in hand Cash at bank Wages Printing and Stationery Discount Bad debts Insurance Investment Debtors Bills receivable Postage and Telegraph Commission Interest Repair Lighting Charges Telephone charges Carriage outward Motor car Amount Rs.000 50.000 .Financial Statements .000 4.

060) Account Title Sales Purchases return Creditors Rent Interest Bills payable Capital Amount Rs. 4.400 10.000 2. Amount Rs.73.500 12.200 . 40. 500 and trade expense Rs.000 1.000 3.000 1.000 10.000.50. 300 are due.400 3.1.500 2.900 5.000 2.85.000 1. Make a provision of @ 5% on sundry debtors.426 4. Depreciation charged on building and machinery are @ 4% and @ 5% respectively.200 12.20. 3. 2005 from the given information. Salary amounting Rs.200 Adjustments 1. : Gross profit Rs. Accountancy The following balances have been extracted from the trial of M/s Haryana Chemical Ltd.20.11.000 1. 50.000 5.00.500 25.56. (Ans.56.09. 2.000 2.000 100 3. Net profit Rs.000 32.000 34. Total balance sheet Rs.000 Account Title Opening stock Purchases Sales return Cash in hand Cash at bank Carriage Free hold land Patents General Expenses Sundry Debtors Building Machinery Insurance Drawings Motor vehicle Bad debts Light and Water Trade expenses Power Salary and Wages Loan a 15% (01.000 21.2005) 8. You are required to prepare a trading and profit and loss account and balance sheet as on December 31.500 2. Closing stock was valued at the end of the year Rs.560 . 2.700 3.71.200 2.000 .25.000 8.6.500 86. 3.

3. Closing stock was Rs.909 .Financial Statements .000 was purchased on July 01.000 2. 2005.891) .000 6.00. Total balance sheet Rs. 5.000 60.000 4.000 1. The manager is entitle to a commission of @ 10% of the net profit after charging such commission.000 2.000 10.45.000 15. 4.000 40. 2.000 1.000 12. Net profit Rs. 3.30.000 7. 20.01. Manager’s commission Rs.000 80.400 Account Title Capital Return outwards Bank overdraft Provision for bad debts Sundry creditors Bills payable Sales Amount Rs. : Gross profit Rs.II 5.000 .000 14.000 51.000 25.1.69. Amount Rs.400 2.76.80.400 2.200 . From the following information prepare trading and profit and loss account of M/s Indian sports house for the year ending December 31. Provision for bad debts is to be maintained @ 2% on debtors.000 5. Depreciation charged on : furniture and fixture @ 5%. 2005.000 4.6.400 Adjustments 1.000 5.00. A Machine of Rs.000 427 Account Title Drawings Sundry debtors Bad debts Trade Expenses Printing and Stationery Rent Rates and Taxes Feright Return inwards Opening stock Purchases Furniture and Fixture Plant and Machinery Bills receivable Wages Cash in hand Discount allowed Investments Motor car 5.68.69.000 2.000 1. plant and Machinery @ 6% and motor car @ 10%.000 20. 2.43.000. (Ans.

000 2.000. Rent.00. 1.344 . Depreciation charged on motor car @ 10%. Interest on drawing @ 6%. Further bad debts Rs.17.200. 7. Make a provision for bad debts @ 5% on sundry debtors.000 13.500 4. Account Title Bills payable Sundry creditors Provision for bad debts Return outwards Capital Discount received Interest received Sales Amount Rs.050 . 85.000. Discount on debtors 2%.000 75.000 53.260 1.81.000 3.250 6. 1.000 1. 4. 3.19. 6. 2.81.500 75.310 .500 5.000 4.00. Total balance sheet Rs. 35.450 2. Amount Rs. 3.000 Account Title Sundry debtors Bad debts Trade expenses Printing and Stationary Rent.560 65.500 2.550 25. Closing stock was valued Rs.000 3.500 36.27.500 11.428 6. rates and taxes was outstanding Rs.000 25.032).310 Adjustments 1.550 15. : Gross loss Rs. Net loss Rs. Depreciation charged on furniture and fixture @ 5%. (Ans. Accountancy Prepare the trading and profit and loss account and a balance sheet of M/s Shine Ltd. 5.000 3. Rates and Taxes Freight Sales return Motor car Opening stock Furniture and Fixture Purchases Drawings Investments Cash in hand Cash in bank 4.50. from the following particulars.

600. 2. 2005.78.78. 2005 was Rs. Amount Rs.000 3.50.000 98.500 79.400 10. You are required to prepare the trading and profit and loss account and a balance sheet as on December 31. Account Title Sales Return outwards Creditors Bills payable Interest receivced Capital Amount Rs.700 The following additional information is available : 1.500 22. 3.000. Unexpired insurance was Rs.80.700 .II 7. The Manager is entitled to a commissiion @ 5% on net profit before charging such commission.000 11.000 1.000 3.26. Provision for doubtful debts is to be maintained at 5% on Sundry Debtors. Depreciation is to be charged on building at 5% and motor van at 10%. 6.Financial Statements .000 30.000 3.700 20.000 5.000 3.000 75. Stock on December 31.000 6. 30.000 25.000 50.00.40.000 429 Account Title Opening stock Purchases Drawings Buildings Motor van Freight inwards Sales return Trade expense Heat and Power Salary and Wages Legal expense Postage and Telegram Bad debts Cash in hand Cash at bank Sundry debtors Investments Insurance Machinery 11. 5.000 1.000 4.000 63.300 8.000 3.000 40.000 15. 2. 4. Following balances have been extracted from the trial balance of M/s Keshav Electronics Ltd.

prepare a trading and profit and loss account for the year ended December 31. 2005 and a balance sheet as on that date. 2. Depreciation on plant and machinery charged at 5% and land and building at 10%. Amount Rs.66. Account Title Drawings Land and Buildings Plant and Machinery Carriage inwards Wages Salary Sales return Bank charges Coal. 20.600 . Total balance sheet Rs. The manager is entitled a commission of 5% on net profit after charging such commission. . 6.870 10.50. 2.470 Account Title Sales Capital Discount Apprentice premium Bills payable Purchases return Amount Rs. Salary outstanding was Rs. 4.800 76.000 100 500 2.20. Closing stock was valued at the end of the year Rs.01. : Gross profit Rs.1.300 30.000 870 24.800 50.28. Discount on debtors at 3%.000 200 200 1. Net profit Rs.470 The additional information is as under : 1.381 .000 40.37. Gas and Water purchases Trade Expenses Stock (Opening) Cash at bank Rates and Taxes Bills receivable Sundry debtors Cash in hand 4. Make a provision at 5% on debtors for bad debts.15.269) From the following balances extracted from the books of Raga Ltd.000.200 1. 20.66.000 1.260 5.500 54.000 4.000 3.4.25.100 and Wages prepaid was Rs.110 1.430 Accountancy (Ans. 3.000 8.350 .000 12.230 1. Manager’s commission Rs. 5. 40.

21. 350 are outstanding.770 820 1. To provision for bad debts is to be maintained at 5 per cent on sundry debtors. 3.800 34.12.000 1.35.II (Ans.10. Depreciation charged on Plant and Machinery @ 5% and Building @ 10%.200 .440 390 940 1.000 431 9. Wages amounting to Rs. 1.600 2.200 Closing stock Rs.35. 2. : Gross profit Rs.430 15. 100.500 72.540 10. Sundry debtors Opening stock Purchases Carriage inwards Wages Office rent Insurance Factory rent Cleaning charges Salary Building Plant and Machinery Cash in hand Gas and Water Octroi Furniture Patents Sundry creditors Sales Purchases returns Bills payable Capital 1.2. Net profit Rs. prepare trading and profit and loss account for the year ended March 31.377 .664 .670 2.800 450 1. 2006 and balance sheet as on this date. 4. 9.23. Manager’s commission Rs.000.240 .600 22. Total balance sheet Rs.000 3.500 and salary amounting to Rs. Account Title Credit Amount Rs.Financial Statements .160 240 60 20.600 42. 2.590 24.633) From the following balances of M/s Jyoti Exports. Factory rent prepaid Rs. Account Title Debit Amount Rs.

500 2. Total balance Sheet 63.000 2.530) 10.250 . Accountancy (Ans : Gross profit Rs.000 60.000 34.00.000 70. Outstanding wages Rs.10. Outstanding insurance Rs. 2005.000.23.500 adjustments : (a) (b) (c) (d) Machinery is depreciated at 10% and buildings depreciated at 6%.70.370 .000 5. 2.700 3. 80.000 50. Net profit Rs.000 45.50.000 3.000 4.000 18. Closing stock Rs. Interest on capital @ 4%.432 5.800 4.000 7. prepare trading and profit and loss account and balance sheet as on this date.200 4.000 120.16.500 5.300 1.000 4. 50.100. Account T itle Purchases Bank balance Wages Debtors Cash in hand Legal expenses Building Machinery Bills receivable Office expenses Opening stock Gas and fuel Freight and Carriage Factory lighting Office furniture Patent right Amount Rs. The following balances have been extracted from the books of M/s Green House for the year ended December 31.70. Account Title Capital Bills payable Sales Creditors Return outwards Amount Rs.000 11.500 .000 6.

000 40.3. .36.750 .II (Ans : Gross profit Rs. Charge 5% depreciation on furniture. Net Profit Rs.000.000 1.000 2.000 6.000 Closing stock was Rs.19. You are requested to prepare the trading and profit and loss account and a balance sheet as on this date. Land and Machinery is depreciated at 5%.Financial Statements .52.750 .000 43. 10. Income Rent Capital Drawings Debtors and Creditors Cash Investment Patent Land and Machinery Donations and Charity Sales tax collected Furniture Amount Rs. (a) (b) (c) (d) (e) Interest on drawings @ 7% and interest on capital @ 5%.000 4.000 40. Account Title Opening stock Purchases and Sales Returns Wages Dock and cleaning charges Lighting Misc.300 1.600 7.600 1.000 3.2.000 6. 2005. Total balance sheet Rs.100.36. 11.000 2. From the following balances extracted from the book of M/s Manju Chawla on March 31.000 500 Amount Rs.000 600 11.000 600 433 6. Unexpired rent Rs.000 200 6. Interest on investment @ 6%.000 4. 80.250).83.

(a) (b) (c) (d) (e) (f) Unexpired insurance Rs 1.600 1. Net profit Rs. Total balance sheet Rs. Salary due but not paid Rs. Debit Amount Rs.000 200 8.185). : Gross profit Rs.800 16.000 6.000 12.94. 200. The following balances were extracted from the books of M/s Panchsheel Garments on December 31. Scooter is depreciated @ 5%.000 1.400 10.200 65.200 1.000 67.185 .000 1.71. 31 and a balance sheet as on that date.434 Accountancy (Ans. Account Title Opening stock Purchases Return Inwards Carriage inwards General expenses Insurance Scooter expenses Salary Cash in hand Scooter Furniture Buildings Debtors Wages Sales Return outwards Discount Bank overdraft Commission Creditors Capital 1.@ 10%. 2005.000. Furniture is depreciated Rs. 1800.000 3. 16.000 50.12.800 4.900 .000 5. 1.400 4.400 2.26.400 Prepare the trading and profit and loss account for the year ended December. .400 Account Title Credit Amount Rs. Interest on capital 5%.600 4. Wages outstanding Rs.94.30.200 1.000 8.

440 58. 67.780}. Interest on drawings @ 5%. 19. .200 .500 1.975 530 41.530 45.425 24. 13.385 1.000 6.73.750 42.50.300 2.600 1. Prepare the trading and profit and loss account and balance sheet of M/s Control Device India on December 31.20.22.73.400 2. Account Title Debit Amount Rs.700 27.700 Credit Amount Rs. Total balance sheet Rs. : Gross profit Rs. Net profit Rs.470 2.98.500 2.600 Closing stock was valued Rs.500 1. 20.215 2.II (Ans.39.660 2. Outstanding salary Rs. Wages outstanding Rs.Financial Statements .485 36.160 11.780 .000 25. (a) (b) (c) (d) (e) Interest on capital @ 10%.575 435 Drawings and Capital Purchase and Sales Salary and Commission Carriage Plant and Machinery Furniture Opening stock Insurnace premium Interest Bank overdraft Rent and Taxes Wages Returns Carriage outwards Debtors and Creditors General expenses Octroi Investment 7.000 6. Provide a depreciation @ 5% on plant and machinery. 2006 from the following balance as on that date.000.12.

4. Dr.8.000) 14. (d) .500 500 2.760 .28. 30. 2. provision for account.000 Checklist to Test Your Understanding 1. debtors account. 80. Prepare the bad debts account. : Gross profit Rs. (Ans .1.115) Rs. 2006 Sundry debtors Bad debts Provision for bad debts Rs.29. (b).1.820) 15. 2005 Debtors Bad debts Provision for bad debts Adjustments : Bad debts Rs. profit and loss account and balance sheet from the following information as on December 31. Total balance sheet Rs. Show the following adjustments in the bad debts account. 3.973 .000 The partners of the firm agreed to records the following adjustments in the books of the Firm: Further bad debts Rs.300. (c). The following balances apperead in the trial balance of M/s Kapil Traders as on March 31.000 5. profit and loss account and balance sheet. (Ans. Profit and Loss account Rs. (a). Net loss Rs.000 2. (Ans : Credit Profit and Loss account Rs.500 Provision on debtors @ 3%.436 Accountancy (f) Make a 5% provision on debtors. provision account. 5. Maintain provision for bad debts 10%. (d).

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