‘Understanding of Financial Statements Doubtful Debt Reserve (Ist April, 2018) ‘Cash at Bank 1,58,350 Cash in Hand 12,750 ‘Motor Car Expenses 75,150 ‘Motor Car 2,04,000 le Total € 1,15,24,600 ‘Additional Information: (a) Depreciate Furniture and Fixtures at 10% and Motor Car at 20% (b) Rent outstanding was & 7,500. (© Commission due to Salesmen was € 32,500. (@ Closing Stock on 31st March, 2019 was valued at € 30,74,000. (©) Write off € 9,000 as further Bad Debts and to bring RDD to € 50,000. (Carried forward & 1,150 from the expenses of Telephone Charges for the next year. (Answer: Gross Profit € 11,24,750, Net Loss & 1,91,050 and Balance Sheet Total %44,56,550) Reference: Websites: 1. hitp:/www.accountingtools.com 2. hitp://accounting-simplified.comManagerial Commission Debtors Salaries Cash in Hand Cash at Bank On nee am | cashaBank [eae dl nal formati 3 ae oh oe the Sundry Debtors is not recoverable and should be weitten off. Bad Debts should be maintained @ 10% on Sundry Debtors. 4 : Rent due but not paid & 2,500 and Salaries include © 100 paid as advance to Written off & 4,000 on furniture and © 8,000 on Buildings a8 depreciation, — “ at due but not received © 2,800. : household purpose. © © (@) Provide for Commission (© Goods worth & 1,500 were used by Mrs. Varsha for her (© Allow interest on Capital @ 5%. (@) Closing Stock was valued at € 1,26,000. ‘ (Answer: Gross Profit € 33,500, Net Loss & 1,22,300 and Balance Sheet Q.6 Following is the Trial Balance of Mr. Nitinkumar, prepare Trading, P&L ‘ended 31st March, 2019 and Balance sheet as on that date after taking additional information. Head of Accounts Salaries Freight and Clearing Charges Commission Printing and Stationery Furniture and Fixtures Rent, Rates and Taxes Telephone Charges Postage and Telegrams Office Expenses ‘Capital Account Drawings Insurance Charges Purchases and Sales Returns Stock on Ist April, 2018 ‘Sundry Debtors and Creditors Bad Debts .‘Understanding of Financial Statements Bad Debts 200 Investment in Debentures 8,000 Bills Receivable 2,000 Discount 800 Motor Van 15,000 Fomiture 3,000 Office Rent 1,700 lant and Machinery 12,000 Freehold Property 8,000 Total® 1,41,700 Total® Additional Information: (@ Closing Stock on 31st March, 2019 was valued at ® 8,800 (©) Audit Fees for the year was outstanding & 1,200 (©) Create a Reserve for Bad and Doubtful Debts @ 5%. @ Goods worth & 2,800 purchased and received on 25th March, 2019 were not recorded in the books. (©) Depreciate Freehold Property by 10% and Motor Van by 25% (Answer: Gross Profit ® 25,000, Net Profit ¥ 9,500 and Balance Sheet Total % 82,000) Q5 Following is the Trial Balance of Mrs. Varsha as on 31st March, 2019. Prepare Trading, P&L ‘Ale for the year ended 31st March, 2019 and Balance sheet as on that date Trial Balance Head of Accounts Debit Amount & 4,40,000 80,000 10,000 1,60,000 Purchase Returns Land and Building 2,40,000 Office Expenses 16,000 Stock on Ist April, 2018 1,20,000 Sundry Expenses 6,000 Rent, Rates and Taxes 8,000 Wages 1,00,000 Sales Carriage Inward 4,000 Travelling Expenses 7,000 Bad Debis 4,000——— Managerial Accoun 1,90,000 | Discount nae tam 6,000 | Sundry Creditors Retums ne 10,000 0 Carriage Outward, ae Coe, 24,000 Insurance ie oe 800 Sundry Debtors sot at 24,000 Scala 9,800 Machinery 80,000 Rent and Taxes 1,200 Printing and Stationery ps Total® Taal —e Additional Information: (@) Closing Stock amounted to % 56,000 (©) Outstanding Wages ¥ 2,000 and Salaries % 930 (©) Goods distributed worth & 2,000 as free samples. (4) Interest on Capital @ 7% p.a. was to be provided. (©) Prepaid Insurance was % 100. (© Depreciate Machinery by 5% and Fumniture by 10%. (g) Create Reserve for Bad and Doubtful Debts @ 5% on Sundry Debtors. (Answer: Gross Profit % 96,000, Net Profit % 61,050 and Balance Sheet Q44 From the following Trial Balance of Mr. Ramnath as at Sta Mach as P&L Alc for the year ended 31st March, 2019 and Balance Sheet Opening Stock Purchases Office Salaries Royalties Trade Expenses Advertisement Wages and Salaries ‘Cash in Hand Sundry DebtorsUnderstanding of Financial Statements Bank Overdraft interest on Investments Capital Account ‘Opening Stock ‘Salaries and Wages Cash at Bank. Purchases Office Expenses Productive Wages, Bills Receivable Legal Expenses Bad Debts Works Manager's Salary Commission Investments Land and Building ‘Total & Additional Information: (@) Closing Stock costing 2,000 and its Market Value & 2,250 (b) Goods worth 60 withdrawn for personal use. (©) Uninsured Goods worth % 500 were destroyed by fire. @)_%22.50 written off as Bad Debts from Debtors. (©) Outstanding Salaries and Wages % 40, (f) Depreciate Land and Buildings at 7.5 % p.a. (Answer: Gross Profit % 5,050, Net Profit € 3,660 and Balance Sheet Total € 10,140) Q3 From the following Trial Balance of Mrs. Sumitra as at 31st March, 2019 prepare Trading, P&L Alc for the year ended 31st March, 2019 and Balance sheet as on that date. Trial Balance Debit Balance Debit Credit Balance Amount & 3,000 44,000 1,800Managerial Ag Creditors Discount Received R.B.D.D. ' 7,500 Unpaid Salaries 2,00,000 Drawings Buildings Plant and Machinery Cash at Bank Purchases Return Inward Carriage Outward Opening Stock ‘Wages Debtors Salaries Postage and Telegram Insurance Bad Debts. Rent Total & Additional Information: (a) Closing Stock on 31st March, 2019 was valued at % 80,000 (b) Prepaid Insurance & 1,000 (c) Depreciate Buildings by 5% and Plant and Machinery by 10% (4) Maintain Reserve for Doubtful Debts 5% on Debtors, (©) Allow interest on capital @ 5% pa. © (Answer: Gross Profit 1,91,000, Q.2. From the following Trial Bal, Profit and Loss Account for date after taking into conside Net Profit ® 1,23,250 and B lance of Kanhaiya Ltd, the year ended 31st Mache ation the additional jof Moanolal Statomonts pacers 61 fo Tnierest on Capital 10,000 1 Depreciation on Machinery 7,800 ] 1 Gowxls Distributed as Free Samples 1,000 TwNewRDD @ S% 2,250 Less? OM RDD Provision — $25 Lins Dy Not Profit transferred (6 BAS 26.070 67,770 Total® 67,770 Balance Sheet as at 31st March, 2019 Linbitities Amount | Amount ‘Assets ‘Amount | Amount as & g z z Capital 1,00,000 Machinery 78,000 ‘Ada nverest on Capital +10,000, Less: Depreciation 7,800} 70,200 Less: Goods Withdrawn 5,000 Furniture | ‘Ada: Not Profit +26,070 | 1,31,070 45,000 Sundry Creditors 25,000 2250] 42,750 34,220 6900 Z [ Total & 1,56,070 1,56,070 Review Questions: Q.1 What do you mean by ‘Financial Statements"? Explain its objectives and importance in detail. Q3 Q4 Qs Q6 Qu Q2 “ ‘nancial statement analysis focuses on the evaluation of past performance of the business in terms of liquidity, profitability, operational efficiency and growth potentiality”. Discuss. What do you mean by Financial Statement Analysis? Elucidate its Advantages and Limitations, Write Short Note on Effects of Adjustment. “While Balance Sheet is like a Snapshot, Profit and Loss Account is like a moving picture”. Explain, Briefly explain how to make financial deci on the basis of financial statements. Exercise From the following Trial Balance of Gokul Ltd. you are required prepare Trading and Profit and Loss Account and Balance Sheet as on 31st March, 2019. ‘Trial Balance Head of Accounts ‘Debit Amount © | Credit Amount € Capital Account Sales Return Outwards 22,50,000 7,58,000 10,000Returns Opening Stock Discount Debtors Creditors Salaries Wages Carriage Outward Provision for Bad Debts Rent Advertisement Cash Additional Information: (@) Closing Stock was valued at & 34,220. (b) Allow interest on capital @ 10% p.a. (©) Depreciate machinery at 10% p.a. @_ Provision for bad debts is to be kept at of 5%. (©) Mr. Anant has taken goods worth % 5,000 for personal use and 1,000 as free samples. In the Books of Mr. Anant ‘Trading A/c as on 31st March, 2019 To Gross Profit transferred to P&L Alc To Discount Allowed To Salaries To Rent To Carriage Outward To AdvertisementNy ‘Understanding of Financial Statements 59 Dr. Profit and Loss A/c as on 31st March, 2019 Cr. pacoules am wount © Particulars ‘Amount @ To Salaries 304 By Gross Profit b/d 1,08,000 ‘Add: Unpaid Salary 3,000 By Interest Earned 4,000 MO, ff | cess: Prepaid Salary — _2,000_ 31,000 | By Provision for Depr 2,000 To Rent 15,000 ‘To Printing and Stationery 8,000 % ‘To Insurance 12,000 Less: Prepaid 2,000 10,000 To Office Expenses 12,000 Add: Outstanding 8,000 20,000 ‘To Depreciation on Furniture 2,000 To Bad Debts w/o 7,000 ‘Add: New RDD @ 5% 10,000 000 Less: Old RDD Provision_6,000 11,000 By Net Profit transferred to B/S 17,000 Total T 1,14,000 Total Z 1,14,000 Balance Sheet as at 31st March, 2019 Ts, Liabilities Amount | Amount Assets Amount | Amount must x z z z Capital 1,00,000 Furniture 20,000 Less: Drawings 24,000 Less: Depreciation —2,000 18,000 Less: Stock/Goods Withdrawn 6,000 Sundry Debtors 2,00,000 Add: Net Profit +17,000 87,000 | Less: RDD @ 1000 x 5% 10,000 | 1,90,000 ‘Sundry Creditors 1,20,000 | Closing Stock 6,000 ‘Unpaid Salary 3,000 | Prepaid Insurance 2,000 Outstanding Office Expenses 8,000 | Prepaid Salary 2,000 Total % 2,18,000 Total & 2,18,000 Problem No. 7 (SPPU MBA) The following Trial Balance was extracted from the books of Mr. Anant as on 31st March, 2019. Prepare Trading and Profit and Loss Account for the year ended 31st March, 2019 and Balance Sheet t a8 on that date, 3th Trial Balance ot Head of Accounts Debit Amount | Credit ae ot z Capital Account 1,00,000 Machinery 78,000 Fumiture 2,000 Sales 1,27,000$000 Sales Purchase Return 20,000 Wages 15,000 Rent 10,000 ‘Sales Return 7,000 Bad Debis Written Off Creditors 24,000 Drawings Provision for Bad Debts 8,000 Printing and Stationery 12.000 pean 50,000 ning Stock ‘ Office Expenses : Provision for Depreciation Total® Seas Additional information: (a) Depreciate furniture by 10% at original cost. (©) A provision for doubsful debts needs to be created to the extent of 5% on sundry deb (©) Salaries for the month of March 2019 amounting to & 3,000 were unpaid which provided. However, salaries included & 2,000 paid in advance. (@)_ Insurance premium amounting to 8 2,000 is prepaid. (©) Provide for outstanding office expenses % 8,000. (Stock used for private purpose ® 6,000, (8) Closing Stock in trade & 6,000. Solution: In the Books of Shri. Haribhau Dr. ‘Trading A/c as on 31st March, 2019 ‘Amount € To Opening Stock 50,000 | B; To Purchases 1,50,000 ae 321,000 Less: Purchase Return 5,000 1,45,000 | By Stock ae 10,000 To Wages 20,000 | for Private Pyne” OY Proprietor To Gross Profit transferred to P&L AleLE) Q Amounit sail a siden es tinderstanding of Financial Statements 57 Jo Advertising 15,000 To Salaries 15,000 ‘To Good Distributed as Free 3,000 ‘Samples ‘To Bad Debts 500 ToNew RDD 2.975 Less: Ol RDD Cr. Bal. _ 200 2715 ‘ToDepreciation on Plant and Machinery 7,500 To Net Profit transferred to B/S 92,875, Total © 1,43,750 Total® 143,750 Balance Sheet as at 31st March, 2010 Liabilities Amount @ | Amount % ‘Assets ‘Amount % | Amount Z Capital 75,000 Plant and Machinery 75,000 Less: Drawings — 6,000 Less: Depreciation 7,500 67,500 Add: Net Profit +92,875 1,61,875 | Furniture 7,500 Sundry Creditors 15,000 Sundry Debtors 60,000, ‘Less: Reserve for 300 14,700 | Less: Bad Debts 500 Discount on Creditors $9,500 Bills Payable 2,000 | Less: New RDD. =2.915 56,525 ‘Outstanding Factory Rent 300 | Bills Receivable 6,000 Cash in Hand 2,000 Cash at Bank 12,500 Closing Stock 25,000 Prepaid Office Rent 1,500 Prepaid Insurance 350 Total % 1,78,875, Total % 1,78,875, Problem No. 6 (SPPU MBA) From the following Trial Balance of Shri. Haribhau and additional information, prepare Trading and Profit and Loss Account for the year ended 31st March, 2019 and Balance Sheet as on that date. Trial Balance Head of Accounts Debit Amount & | Credit Amount & Capital 1,00,000 Fumiture 20,000 | Purchases 1,50,000 | Pebiors 200,000 Interest Earned 4,000 ‘Salaries 30,00056 500 ‘ Furniture a 0 ' Coal and Gas yes © | Cashin Hand 2 © | cash at Bank nee ade Total® 5,12,95 Additional Information net (@) Closing Stock amounted to € 25,000. (b) Depreciate Machinery by 10%. oa (©) Write off Bad Debts € 500 and Provision for Bad Debts @ 5%. ()_ Outstanding Factory Rent % 300. 54) (©) Insurance paid up to 30th September, 2019. bs (© Good worth % 3,000 distributed as free samples. 3 (g) Provide Reserve for Discount @ 2% on Creditors. Solution: In the Books of Mr. Siddhant Dr. Trading A/c as on 31st March, 2019 Particulars Amount @ Particulars To Opening Stock 45,000 | By Sales ‘To Purchases 2,25,000 | By Good Distributed as Free Samples ‘To Wages: 20,000 | By Closing Stock To Factory Rent 1,500 ‘Add: Outstanding 300 1,800 To Carriage Inward 2.500 To Trade Expenses 10,000 To Coal and Gas 1,000 To Gross Profit Transferred to aa 143,450 Total & 4, 148,750 Tea Dr. Profit and Loss A/c as oy n 31st March, Particulars Amount @ = = To Carriage Outward 1500 | By Gow articulars To Discount Allowed Boilers rofit bid To Insurance 700 © for Discount on Creditors Less: Prepaid 350 at ‘To Office Rent 3,000 Less: Prepaid poms 1,500 ‘To Printing and Stationery an To General Expenses 2,800 ONre ae Understanding of Financial Statements “To General Expenses ‘To Provision for Bad Debts ‘To Depreciation on Machinery 8,000 000 1,25,500 ‘Totul & Balance Sheet as at 31st Mai 1 2019 1,25,500 From the following Trial Balance of Mr. Siddt ‘Aland Balance Sheet for the year ended 31st March, 2019. Liabilities Amount | Amount ‘Assets ‘Amount | Amount z g z z Capital 181,500 ~_| Machinery 12000| | Less: Goods Withdrawn | 30,000 Less: Depreciation 12,000 | 1,08,000 Less: Net Loss ~69,500 | 82,000 | Sundry Debtors 70,000 Sundry Creditors 40,000 | Less: Provision for Bad Debis | _~5,000 | 65,000 Bank Loan 1,50,000 | Closing Stock 1,00,000 Bills Payable 26,000 | Cash in Hand 5,00 Outstanding Interest on Cash at Bank 20,000 Bank Loan 5,000 | Prepaid Salaries 5,000 Total® 3,03,000 Total 3,03,000 Problem No. 5 lhant as on 31st March, 2019, prepare Trading, P&L Debit Balance Amount & Credit Balance Amount 7 Stock 45,000 4 Capital 75,000 Plant and Machinery sf 4,20,750 ‘Purchases 225,000 ¢, Sundry Creditors 15,000 ‘Trade Expenses 10,000 | Bad Debts Provision 200 Carriage Inward 2,500 |(Bills Payable 2,000 Carriage Outward 1,500 Factory Rent 1,500 Discount 350 Insurance 700 Sundry Debtors 60,000 Office Rent (for Two Years) 3,000 Printing and Stationery 600 General Expenses 2,800 Advertising, 15,000 Bills Receivables 6,000 Drawings 6,000 Salaries 15,000 Wages 20,000Managerial Accounting 54 5,000 5 | Inmerest paper | Salaies Bo | Cashin Hane Ff Purchase Ret L | Bank Loan | aia % _ | Accounts Payable £ | mits Payabie 500 3 | Legal Charges 8,000 3 | Geral Bye 20,000 | ash at Ban ( aes. — 7,07,500 A ts: oa oh 000 but its market value was 1. 86 (@) Closing Stock on 31-03-2019 was valued at & 1,00,0 @) Interest on bank loan was outstanding of & 5,000. 3s ¢ © Depreciate Machinery at 10%. 34° 6 The owner of M/s Surya & Company has withdrawn the goods worth % 30,000 for p . ne 2 purpose. The accountant has forgotten the said entry while preparing Trial Balance. yt © Prepaid Salaries of & 5,000. (© Provide Bad and Doubiful Debts & 5,000. wf Solution: In the Books of M/s Surya and Company Dr. Trading A/c as on 31st March, 2019 Particulars Amount 7 Particulars Amount To Opening Stock 1,20,000 | By Sales 3,00,000 = Purchases 2,30,000 Less: Sales Return 30,000 Zz Ba Purchase Return 10,000 2,20,000 | By Goods Withdrawn by Proprietor Freight 4,000 | By Closing Stock To Gross Profit transferred to P&L Alc 56,000 Total Z 4,00,000 Total® Profit and Loss A/c as o1 n 31st March, Particulars Amount & au To Rent, Rates and Taxes 20000 | By Gao = . y Gross To Discount 5,000 | By Ne Profit bd To Interest 5,000 Y Net Loss transferred to B/S ‘Add: Outstanding Interest $,000 on Bank Loan To Salaries 70,000 Less: Prepaid Salaries _5,000 To Legal ChargesUnderstanding of Financial Statements =o Rent, Rates and Taxes a) o Insurance 2,400 Less: Prepaid 400 2,000 ‘To General Expenses 2,680 To Carriage Outward 1,630 ‘To Provision for Bad Debts 2,600 ‘ToDepreciation on: ¢ Plant and Machinery 4,400 ‘¢ Motor Car 2.400 ‘To Net Profit transferred to B/S 95,700 Total Z 1,29,530 Total 1,29,530 Balance Sheet as at 31st March, 2019 Liabilities ‘Amount | Amount Assets z z Capital 20,000 Motor Car Less: Drawings 8,000 Less: Depreciation 17,600 Add: Net Profit +95,700 Plant and Machinery Sundry Creditors Less: Depreciation 21,600 Outstanding Wages Furniture 3,500. Sundry Debtors Less: Bad Debts @ 5% 49,400 Cash in Hand 2,400 Cash at Bank 6,200 Closing Stock 35,000 Prepaid Insurance 400 Total® 1,36,100 Total 1,36,100 Problem No. 4 Prepare Trading and Profit and Loss Account and Balance Sheet from the following information Of M/s Surya & Company. ‘Trial Balance as on 31-03-2019 Particulars Sales Return Freight Accounts Receivable Opening Inventoryere | Managerial Account, 52 8,420, 11,400 3 | Salaries i + | Opening Stock Gul | 3 | Motor: Car Expenses 3,600, Rent, Rates and Taxes 2,400 To > | snaurance Premium Paid 6,200 ie £ | Cashat Bank 24,000 ive & | Machinery 23,600 i 1 | Wages 2,680 | | General Exp 2,040 | ae 1 | Carriage Inward 1,630 ie, 3 — oe ade + | Poet and Power ed © | Capiral 8,000 70,009 ¢ [Drawings : {| cs Towle 334,000 som] |S Additional Information: Ad +s (a) Closing Stock amounted to ® 35,000. Su 3as_(b)_Depreciate Fumiture and Machinery by 10% and Motor Car by 20%. ou yes ©) Outstanding Wages % 6,400. sts (@) Prepaid Insurance % 400, at (©) Make Provision for Bad and Doubtful Debts @ 5%. Solution: In the Books of Shilpa Ee Pe Trading A/c as on 31st March, 2019 an Particular = To Opcaing Stock = Anew = Particulars ‘Amount _ ToPurchases eso By Seg 2,92,000 ofN ‘To Wages 23,600 i ie Sales Returns 2,600 2,89,400, ‘Add: Outstanding 6,400 a y Closing Stock aie 35,000) To Carriage Inward ear ad 0,000 To Fuel and Power pine sal To Gross Profit transferred to 6.430 Ms P&L Ale Rei Tae : 29,530 eT a Dr. AA Total® + Fre Profit and Loss Aj 3244) | Ac Particulars, 8 on 31st March, 2019 cr} | OP To Salaries Amount % = Ly | Pu To Motor Car Ex, 8, rioulat Gs Di ‘penses 420 | By G Amount 4 is G00 | * st Prone bia [ 1,29,530 =Understanding of Financial Statements Dr. Profit and Loss A/c as on 31st March, 2019 rticulars Amount & Particulars “To Carriage Outward ‘To General Expenses To Rent ‘To Bad Debts ‘To Income Tax ‘To Legal Charges ‘To Depreciation on = # Machinery «Buildings ‘To Net Profit transferred to B/S 9,000 2,000 39,150 3,000 | By Gross Profit bd 9,100 | By Interest and Commission 1,700 650 300 400 B Total & 65,300 Total Balance Sheet as at 31st March, 2019 Liabilities z z ‘Amount | Amount Assets Capital Less: Drawings ‘Add: Net Profit Sundry Creditors Bills Payable ‘Outstanding Expenses 1.16350 4,300 +39,150 Machinery Less: Depreciation 81,000 Buildings Less: Depreciation 38,000 ‘Sundry Debtors Loan to Mahajan Closing Stock Cash in Hand Cash at Bank 35,000 17,000 20,900 1,550 9,150 Total @ 2,03,200 Total @ 2,03,200 Problem No. 3 From the following particulars tak the year ended 31st March, 2019 and Bal Trial Balance Particulars | Debit Amount & en out from the books of Shilpa, prepare Trading, P&L A/c for lance Sheet as on that date. Credit Amount € | 52,000 2,400 2,000Managerial Accounting » 1,10,800 y | Pawchases. pe sp Wages: | Come Oger 35,000 : ‘Sundry Debtors 9,100 3 | General Bepenses ra * Reet 650 s | BaiDebs 300 3 | tacome Tax 400 : | Legal Charges 17,000 © | Loan to Mahajan 4,300 s | Drawings 1,550 . | Cash in Hand 9,750 © | caharBank s Capital s ‘Sundry Creditors $ Bills Payable . ‘Returns Outward . Interest and Commission .. Sales 2 | Retums Inward 2,500 Total® 3,60,750 | Additional Information: “& —(@)_ Stock on 31st March, 2019 was valued at 20,900. © (@)_Depreciate Machinery at 10% and Building at 5%. €4) © Outstanding Wages 2 3,000. Solution: In the Books of Mr. Dhananjay Dr. ‘Trading A/c as on 31st March, 2019 Particulars Amount & To Opening Stock 20200 | By Sates a — pas < less Reus tawarg 195500 To Wages 17,000 200 | By Closing Stock cs ‘Add: Outstanding ——__3,000 20,000 To Gross Profit transferred to P&L Ale 64.400 i Total & 213,900 Total zUnderstanding of Financial Statements Closing Stock valued at 29,000 Solution: In the Books of Kimaya a ‘Trading A/c as on 31st March, 2019 Cr. Particulars Amount & Particulars ‘Amount & By Sales, 3,50,000 By Closing Stock 29,000 To Opening Stock 50,000 ‘To Purchases 2,25,000 ‘To Wages 45,000 ‘To Carriage Inward 5,000 To Gross Profit 54,000 Total & 379,000 Total & 3,79,000 pr. Profit and Loss A/e as on 31st March, 2019 cr Particulars Amount ® Particulars ‘Amount @ To Interest Paid 1,250 | By Gross Profit ‘54,000 To Salaries 8,250 To Rent Paid 1,250 To Audit Fees 500 To Net Profit Transferred to Balance Sheet 42,750 Total & 54,000 Total & 54,000 Balance Sheet as at 31st March, 2019 Liabilities Amount & Assets Amount 7 Capital 25,000 Machinery 25,000 Add: Net Profit 42,750 67,750 | Investment 25,000 Creditors 12,750 | Debtors 10,000 Bank Loan 10,000 | Cash in hand 1,000 Bills Payable 9,000 | Bills Receivable 10,000 Outstanding Expenses 500 | Closing Stock 29,000 Total & 1,00,000 Total @ 1,00,000 Problem No, 2 From the following Trial Balance of Mr. Dhananjay, prepare Trading, P&L. ‘Ne for the year ended 31st March, 2019 and Balance Sheet as on that date after considering the following adjustments. Trial Balance [_Debit Amount © Credit Amount © Machinery 90,000 Building ee 20,200 Particulars Opening Stock48 12] Goods Disibuedas Free | PAL Ale Debi Side ee Side or Less rading A/e Credit Sid : Proprietor ie Managerial Accounting Trading A/c Credit Side Less from Capital in Balance Sheet Liability Side ‘Add in Capital in Balance Sheep 14 | Interest on Capital PAL A/c Debit Side Liability Side Less from Capital in Balance 15 | Interest on Drawings P&L Ale Credit Side Sheet Liability Side ‘Add in Creditors in Balance 16 | Goods Purchased But Not Recorded in Purchases ‘Trading A/c Debit Side Add in Purchases as Unrecorded Purchases Liability Side as Unrecorded Purchases ‘Add in Debtors in Balance Shes 17 | Goods Sold But Not ‘Trading A/c Credit Side Add in Recorded in Sales Sales as Unrecorded Sales Asset Side as Unrecorded Sales Solved Problems of Sole Problem No. 1 From the following information, prepare Trading, 3ist March, 2019, Proprietary Firm: P&L A/c and Balance Sheet for Kimaya as on Item Debit Amount Credit Amount® |] Opening Stock 50,000 Purchases 2,25,000 Sales Carriage Inward 5,000 Interest Paid 1,250 Salaries 8,250 oe 45,000 Debtors Cash in hand ee Rent Paid uo Audit Fees pes Capital 500 Creditors Bank Loan Bills Receivable Bills Payable 10,000 Investments Machinery 25,000 Outstanding Expenses 28,000 Total & feUnderstanding of Financial Statements a ale Unana Othexs T 1 | Prepaid trauesnce Preliminary Exgeraes | 4 a4 Total & Tas? j Note: ‘e For every item given in Trial Balance, only single effect should be given ‘e For every item given in Adjustment, double effect should be given as shown below Effects of Adjustment: ‘Adjustments are nothing but the entries which are not included im the original Trial Balenc= extracted from the Ledger. Therefore, it must be included in Final Accounts by Dosble Estey Sys Tr means every adjustment has two effects, i., one debit and one credit. Following se Cffesmxt adjustments and their effects in Final Account. Sr. Adjustment First Effect | Second Effect Be | 1 | Closing Stock Trading Alc Credit Side | Balance Sheet Asset Side 2 | Outstanding Expenses “Add in Respective Expense Balance Stes Liskiey Site | Trading Alc Debit Side or P&L Ale Debit Side ; 3 _| Prepaid Expenses Leas from Respective Expense | Balance Stent Ast Sie | “Trading Ale Debit Side or P&L Alc Debit Side aa ‘Depreciation P&L Alc Debit Side | Less from Respective Asset | Balance Shost Asset Side | [5 Tincone Accrued ButNot | P&L Alc Credit Side Balance Shox Asse Side [Less from Respective Income P&L Alc Credit Side — Pa ne De Se46 To Trade Expenses To Advertising To Audit Fees To Income Tax To Legal Charges To Interest Paid on Capital To Commission Paid To Motor Car Expenses To Carriage Outward To Travelling Expenses ‘To Sundry Expenses To Discount Allowed To Loss by Fire To Depreciation on To Bad Debts (New RDD (Old RDD Cx. Bal To Net Profit transferred to ee eee Managerial Ac ‘counting Capital A/e (B/S) Total® Total Note: ; In problem, if Trade Expenses are given along with General Expenses, Office Expenses or Sundry Expenses then { it should be debited to Trading A/c, If General Expenses, Office Expenses or Sundry Expenses are not given in the problem and only Trade Expenses are given in that case it should be debited to Profit and Loss A/c. Liabilities Amount Amount Capital (© Drawings (4) Net Profiv/(-) Loss (©) Goods withdrawn +) Interest On Capital Plant and Machinery Less: Depreciation Land and Buildings Less: Depreciation Furniture and Fixtures Less: Depreciation Sundry Creditors Motor Car/Vehicte Bills Payable Less: Depreciat Bank Overdraft caciwin Loans from Others ee Outstanding Salaries eaten, Outstanding Wages Sundry Debtors Outstanding Rent Lest: Bad Debs Outstanding Expenses ees New bias Bills Receivable Investments Closing Stock See ‘SSG oo, ie eeending of Financial Statements ormat of Final Accounts for Sole Proprietary Firm: In the Books of -. jiness and is personally responsible for its debts. In sole proprietorship business, all incomes and ‘are taxed on the individual’s personal income tax return. Trading A/c as on -- Cr. Particulars Amount @ Particulars ‘Amount @ To Opening Stock By Sales (Cash + Credit) ‘To Purchases (Cash + Credit) Less: Sales Returns, i.c., Returns ‘Less: Purchase Returns, i.e., Inward Returns Outward By Goods Distributed as Free To Wages Samples (4) Outstanding By Goods Destroyed by Fire To Carriage Inward By Goods Withdrawn for Personal ire Octroi Use by Proprietor To Custom Duty/Import Duty By Closing Stock To Freight By Gross Loss c/d To Clearing Charges (transferred to P and L A/c) To Coal and Gas To Royalty To Fuel, Power and Lighting To Factory Rent and Rates (+) Outstanding/(-) Prepaid ‘To Works Manager's Salary To Gross Profit c/d | (transferred to P and L A/c) Total cr. Particulars Amount 7 Particulars Amount % Gross Loss e/d ls By Gross Profit o/d 0 Salaries By Discount Received }) Outstanding By Commission Received ‘Tolnsurance By Interest Received -) Prepaid By Rent Received Office Rent and Rates By Dividend Received Prepaid/(+) Outstanding By Interest on Drawings Charges By Other Income By Net Loss transferred to Capital Alec (B/S)eee tee 44 Advantages of Financial S! ae 1, Ithelps in knowing the exact position o 2. Itprovides true financial picture, ang formotating plans and polices forthe Fug, s e faking decisions a 3. Ithelps the Management in tal tatements Analysis: any. 4, Italso helps in forecasting, ie destcigemak ie pees b he shareholders +s for their decision-making process. 5. It provides base to the shareho! and investor: Limitations of Financial Statements Analysis: 1, Itignores current costs completely. Financial Statements are essentially interim reports. Financial analysis is only a means and not an end. ‘Sometimes analysis is affected by the personal bias of the analyst. It completely ignores the facts, that cannot be expressed in terms of money. Ypup Making Financial Decisions on the Basis of Financial Statements: In order to improve the usage of financial information in the context of the decision-making Process, we need to critically evaluate financial statements. In that context, we can elucidate financi Statement analysis as the process where we convert data from financial statements into Usable information for the measurement of business quality by using different analytical techniques, whichis Very important in the process of rational management. Therefore, to know the present level of busines uality, itis very important in the context of upcoming business management. The mission of financial statement analysis is to identify good characteristics of the ‘company s9 that one could use the most of those advantages, but also to Tecognize company’s weaknesses in order to take remedial actions. Proper planning is Very important for good management. Good financial plan must judge all strength and weaknesses of the company, Therefore, we can say that Management of the Organiaii é ‘ganization, Shareholders, Investors, Debtors, Creditors, Bankers and Employees can take the propriate financial decision at right time based on the information mentioned in financial statements, Preparation of Final Accounts of Sole Proprietary Firm: To find out the profit or loss atthe end of given 3 © Trading Account @ Profit and Loss Account Balance Sheet The sole proprietorship isthe simplest business The ole proprietorship is nota separate legal ena aad ee Ffers to a person who owns theunderstanding of Financial Statements “a 10. Limitations of Finan The important limitations of financial statements are as follows: L 2 2aYe wp Meaning of Financial statement analysis highlights the important relations! financial Statements. It focuses on the evaluation of past performance of liquidity, profitability, operational efficiency and growth potentiality. The primary uses of financial statements analysis are evaluating past perfor 2 future performance and both of these are facilitated by comparisons. Therefore, _ Amalysis is always on the crucial information contained determine the probability of a bad loan, Any deci an. y decision to lend must orted by a sufficient asset base and sound liquidity, oe aE Suppliers require Financial Statements to find out the eredit worthiness of a business and ascertain whether to supply goods on ered, Suppliers need to know if they wil be repaid on time, Terms of credit are set by the suppliers according to the assessment of their customers’ financial health, Customers use Financial Statements to assess whether a supplier has the resources to ensure the steady supply of goods in the future, This is especially vital where a customer is dependent on a supplier for a specialized component, Employees use Fi consequence on thei Statements for assessing the company’s profitability and its future remuneration and job security. Competitors compare their performance with rival companies to learn and develop strategies to improve their competitivenes: Governments require Financial Statements to determine the accuracy of tax declared in the tax returns. Government also keeps track of economic progress through analysis of Financial Statements of businesses from different sectors of the economy. General Public may be interested in the effects of a company on the economy, environment and the local community. 1 Statements: The financial statements are based on the accounting concepts and conventions. Financial statements provide only historical data. Information provided in the financial statements many times do not give the exact position. The qualitative information is ignored in the financial statements. Personal judgments may affect the financial statements. In financial statements, many intangible assets are not recorded as assets. Financial statements can gain an incorrect view of the financial results or business because it is based on specific time period. The financial statements do not address non-financial issues, such as the environmental attentiveness of a company’s operations, or how well it works with the local community. cash flows of a ancial Statement Analysi: hip between different items in the ff the business in terms of mance and predicting the focus of financial the financial statements.DEMON hawera 42 Meaning of Financial Statements: ‘A financial statement (or financial report) position of a business, person, or other os structured manner and in a form easy to understand. a formal official record of the financial scsiv Relevant financial information is prevented in a Definition of Financial Statements: no “Financial statements are a collection of reports about an organiza :, financial condition, and cash flows”. are interim reports, presented nthony, “Financial Statements, essentially, into more or less arbitrary accounting period, According to Robert A annually and reflect a division of the life of an enterprise more frequently a year.” In simple words, we can say that the Financial Statement relating to the profitability, liquidity and solvency of the business. statement is to provide accurate and reliable information relating to the eco! business obligations, changes in net resources etc. provides the vital information ‘The main aim of the financial momic resources, Objectives of Financial Statements: 1. To provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions To determine the ability of a business to generate cash, and the sources and uses of that cash. To determine whether a business has the capability to pay back its debts. To track financial results on a trend line to spot any threatening profitability issues. To derive financial ratios from the statements that can indicate the condition of the business. .. To investigate the details of certain business transactions, as outlined in the disclosures that accompany the statements. Awrwn Purpose/Importance of Financial Statements: Financial Statements provide practical and useful informatio to wide range of users as 1. Managers need Financial Statements to manage the dealings of the com financial performance and position and taking important business decisions. Shareholders use Financial Statements to evaluate the risk and re - the company and take investment decisions based on their analysis, 3. Prospective Investors need Financial Statements to judge the possipiy company. Investors may predict future dividends based on joo sPility of investing ; Financial Statements. Moreover, risks associated with the ia Profits discloseq a from the Financial Statements. For example, variable profits ing enett AY be deters = Financial Statements provide a basis for the investment decisions ("© higher risk, pj iT*4 4, Financial Institutions (¢., banks) refer Financial Statemeny, ) PoX°BtiA investor, “POF Joan or credit to a business. Financial institutions assess th. IS to decide whe financial s ther trength of . | (© grant tape ness 'y by assessing its 2. tum ae Of their investment in StMig Understanding of Financial Statements Contents of the Chapte Introduct Meaning of Financial Statements, Objectives, Importance and Limitations of Financial Statements Meaning of Financial Statements Analysis, Advantages and Limitations Making Financial Decisions on the Basis of Financial Statements Preparation of Final Accounts of Sole Proprietary Firm and Solved Problems in: ‘The financial statements are prepared to find out the profit or loss of the organization and also to Know the financial positions of the business organization. The company’s financial information is contained in three basic financial statements namely Trading and Profit and Loss Account, Balance Sheet and Funds Flow and Cash Flow Statement. These statements are very useful to different concemed parties such as management, investors, creditors and others to form judgment about the operational efficiency and financial position of the company. These statements may be more fruitfully used if they are analyzed and interpreted to have an insight into the strengths and weaknesses of the firm. The success of the company’s financial plans is based on the financial analysis which is the starting point for making new plans, before using sophisticated forecasting and budgeting procedures. ‘The standard contents of a set of financial statements are: Balance Sheet: Balance Sheet shows the firm’s assets, liabilities, and stockholders’ equity as. of the report date. It does not show the information that covers a span of time. Trading and Profit and Loss Account: It shows the results of the firm’s operations and financial activities for the reporting period. It includes revenues, expenses, gains, and losses. Statement of Funds Flows: This statement shows changes in the firm's funds flow during the reporting period. Statement of Cash Flows: This statement shows changes in the firm’s cash flows during the reporting period. Supplementary Note: Includes explanation of various activities, additional details on some accounts, and other items as mandated by the regulatory authorities, bodies from time to time, such as GAAP or IFRS.