Outstanding expenses or Acerued expenses Prepaid expenses ‘Averved income Tacome received in advance Goods solé on approval basis Goods distributed as free samples Goods withdrawn by proprietor! partner for personal use Depreciation andl Amortisation Bad debts ‘Provision for doubtful debts Trovision for discount on debtors Abnormal loss of stock ° ° ° ° ° ° ° ° ° ° ° ° ° ° Firstly, the Trading Account is prepared and its balance (reflecting Gross Profit or Gross Loss) gets transferred to Profit & Loss Account. ‘Thereafter, the Profit & Loss Account is prepared and its balance (reflecting Net Profit or Net Loss) is transferred to Capital Account (after drafting Profit & Loss Appropriation Account in case of partnership firms). Finally, the Balance Sheet is drafted considering a ledger balances reflecting asses, liabilities and capital. Mlustration 1 Following are the ledger balances presented by M/s. P, Sen as on 31st March 2022: a Stock (1.4.2021) Parchase on Retuen Inward Bea (Carriage Inwards 10,000 Retum Outward 10,000 Wages 30,000 Royalty on Production 6,000 Freight 8,000 Gas and Fuel 2,000 Additional Information: (1) Stock on 31 3.2022: (i) Market Price 224,000: (i) Cost Price 20.000; 2) Stock valued 210,000 were destroyed by fre and insurance company admitted the claim tothe extent of 76,000. (8) Goods purchased for 6,000 on 29th March, 2022, but still lying in-transit, not stall recorded in the books. (4) Goods taken for the proprietor for his own use for €3,000. “The Insiute of Cost Accountants oF India(3) Outstanding wages amounted to 24,000. (6) Freight was paid in advance for €1,000. Solution Mis. Sen ‘Trading Account for the year ended 31st March, 2022. ee “To, Opening Steck 10,000 By, Sates ‘To, Purchase 1,60,000 Less: Return Inward 16,000 2,84,000 Petree 10,000 1,50,000 By, Closing Stock 20000 Less: Goods taken by [Ada Stock Destroyed 10000 Proprietor 3,00 147,000 30,000 Add: Goods-in-transit 6,000 153,000 Add: Goods-in-Transit 6000 36,000, To, Wages 30,000 ‘Ad: Outstanding 4000 34,000 “To, Caiage inwards 10,000 “To, Freight 5,000 Less: Prepald 1.400 7,000 “To, Royalty on production 6,000 “To, Gas & fuel 2,000 “To, Profit & Loss Ak 8,000 (Goss profit wansterred) 320,000 320,000 Note: (a) Stock should be valued as per cost price or market price whichever is lower. (b) The claim which was admiuted by insurance company and the loss of stock, will not appear in ‘Trading Account. Mustration 2 From the following particulars presented by Mr. Shankar for the year ended 31st March 2022, prepare Profit and Loss Account after taking into consideration the given details: “The Institute of Cost Accountants of IndiaGross Profit ?1,00,000, Rent 22,000; Salaries, 10,000; Commission (Cr.) 12,000; Insurance @ 8,000; Interest (Ce) 26,000; Bad Debts 22,000; Provision for Bad Debts (1.4.2021) 2 4,000; Sundry Debtors 2 40,000; Discount Received %2,000; Plant & Machinery £80,000. Adjustments: (@) Outstanding salaries amounted to 4,000; (@) Rent pai for 11 months: (©) Interest due but not received amounted to 22,000 (© Prepaid Insurance amounted 1 €2,00; (©) Deprosiats Plast and Machinery by 10% pa. (Further Bad Debts amounted 0 22,000 and make a provision for Rad Debts 5% on Surry Debtors. (z) Commissions received in advance amounted to % 2,000. Solution ‘Mr. Shankar Profit and Loss Account for the year ended 31st March 2022 ce ‘To, Rent 22,000 By, Trading A/c. 1,00,000 Add: Outstanding 2,000 24,000 Gross Profit > Salaries 10,000 > Commission 12000 ‘Add: Outstanding 4,000 14,000 Less:Received in advance 2,000—10,000 Insurance 8,000 > Interest 6.000 Less: Prepaid 2.000 6,000 Add: Accrued Interest 2000 8,000 Bad Debts 2.000 ‘Add: further Bad Debts 2.000 4,000” Discount received 2.000 Depreciation on Plant 8,000” Provisions for Bad Debts 4.000 & Machinery @10% on £50,000 ~ Captalave 66,100 Less: New Provision @ 5% 1,900 (Net Profit Transferred) ‘on (240,000 ~ 22,000) on 1,22,100 122,100 Ilustration 3 AVY and Z are dee Partners sharing profit and Losses equally. Their capital as on 01.04.2021 were: X 280,000 : ¥ €60,000 and Z % 50,000. “The Insiute of Cost Accountants oF India‘They mutually agreed on the following points (as per partnership deed): (@) Interest on capital to be allowed @ 5% Pa. (©) Xto be received a salary @ 2500 p.m. (©) Yto be received a commission @ 4% on net profit after charging sich commission (@ After charging all other items 10% of the net profit to be transferred General Reserve. Profit from Profit and Loss Account amounted to % 66,720. Prepare a Profit and Loss Appropriation Account for the year ended 31st March, 2022. Solution: Profit & Loss Appropriation A/c for the year ended Sst March, 2022 a ‘To, Inerest on Capital: By, Profitand Loss A/e x 4,000 owe profit transfered) y 3,000 Zz 2500 9,500 Salaries X-:(@ 500 x 12) 6.000 * Commission 1970 Y[WN: 1] General Reserve [WN: 2] 4925 ~ Parmers* Capital ave: (Net Divisible Profit) x 14.775 Y 14,775 Zz 14,75 44325 66,70 66,720 Working Note: | Net Profit before charging Y's Commission = [66,720 ~(9,500~6,000)] = 51220 Less: Y's Commission @ 4% a(R e120) = 21970 49250 2. Transfer toGeneral Reserve = 249,250 «10% = 4925 Iustrations 4 From the following Trial Balance of Mis BJ & Sons, prepare the final accounts for the year ended on ‘lst March 2022, and also the Balance shestas om that date: “The Institute of Cost Accountants of IndiaStock as on 01.04.2021: Finished goods 2,00,000 Purchases and Sales 200,000 35,00,000 Bills receivables 50,000 Returns 100,000 50,000 Carriage Inwards 50,000 Debtors and Creditors 2,00,000 400,000 Carriage Outwards 40,000 Discounts 5,000 5,000 Salaries and wages 2,20,000 Insurance 60,000 Rent 60,000 ‘Wages and salaries 80,000 Bad debts 10,000 Furniture -4,00,000 BI’s capital 5,00,000 BY's drawing 70,000 Loose tools 100,000 Printing & stationery 30,000 Advertising 50,000 Cash in hand 45,000 (Cash at bank 2,00,000 Petty Cash 5,000 Machinery 3,00,000 Commis sion 10,000 30,000 ‘Total 44,85,000 44.85,000 Adjustments: (Finished goods stock: Stock on 31st March was valued at Cost price &4,20,000 and Market price & 400,000. (i) Depreciate furniture @ 10% p.a. and machinery @ 20% p.a. on reducing balance method. (ii) Remi of €5,000 was paid in advanee. Gv) Salaries & wages due but not paid % 30,000. “The Insiute of Cost Accountants oF India(W) Make a provision for doubtful debts @ 5% on debtors. (vi) Commission receivable ¥3,000. Solution : ‘M/s BJ & Sons ‘Trading Account for the year ended 31st March 2022 ee “To, Opening Stock : 35,00,000, Finished Goods Pen) [eco 1,00,000 3.400.000 ‘To, Purchases 22,00,000 Less: Purchases Retums $0,000 21,50,000 By, Closing Stock “To, Cariage Inwards 50,000 Finished Goods 4,00,000 “To, Wages & Salaries 30,000 ToPILA 1320.00 ee aaneenen 38,00,000 38,00,000 Profit & Loss Account for the year ended 31st March 2022 a “To, Administrative expenses Gross Proft bl 13,20,000 ‘To, Salaries & wages 2.20.00 Discount received 5.000 ‘Ad: Outstanding 30.000 2.50.000 Commission received 30.000 ‘To, Depreciation: on Furniture 40,000 Add : Receivable 5.000 35.000 ‘on Machinery 60.000 ‘To, Insurance 60.000 To, Rent 00 Less Pid in Advance 5.000 55,000 To, Printing & Stationery 30,000 ‘To, Advertising 0,000 ‘To, Cariage Outwards 40,000 ‘To, Discounts 5,000 ‘To, Bad debts 10,000 “The Institute of Cost Accountants of IndiaA Th coma ebsanent Dati Des reoneniaue ren 10,000 740,000 13,60,000 Balance Sheet as on 31st March 2022 13,60,000 a Y's Capital Fixed Assets: Less : Drawings a Furniture ‘Add : Net Profit for the year 740,000 11,70,000 Less: Depreciation Long Term Liabilities: = Machinery Less: Depreciation ‘Current Liabilities: Loose Tools Sundry Creditors 4,00,000 (Outstanding Salaries & 30,000 Current Assets: a Stocks ‘Sundry Debtors Less Provision Doubtful Debss Bills Receivables (Cash in Hand (Cash at Bank Petty Cash Prepaid Rent ‘Commission Receivable 16,00,000 Notes: (0) Closing stock is valued at market price here as it is less than cost price (conservatism concept) “The Insite of Ce Accountants of India 200,000 10,000 3,60,000 240,000 400,000 190.000 50.000 45.000 5.000 5.000 5,000 16,00,000Mlustrations § ‘Mr. Arvind Kumar has a small business enterprise. He has given the trial balance as at 31st March 2022 Me. Arvind Kumar's Capital 1,00,000 Machinery 36,000 Depreciation on Machinery 4,000 Repairs to Machinery 5,200 Wages 54,000 Salaries 21,000 Income Tax of Mr. Arvind Kumar 1,000 Cash in Hand 4,000 Land & Bulding 149,000 ‘Depreciation on Building 3,000 Purchases 2,50,000 Purchase Returns 3,000 Sales 498,000 CC Bank 7,00 ‘Accrued Income 3,000 Salaries Outstanding 4,000 Bills Receivables 30,000 Provision for Doubtful Debis 10,000 Bills Payable 16,000 Bad Debts 2,000 Discount on Purchases 7,080 Debtors 70,000 Creditors 62,220 Opening Stock (01.08.2021) 74,000 Total 7,08,200 708,200 Additional information: (1) Stock as on 31st March 2022 was valued at € 60,000 @) Write off Further 2 6,000 as bad debt and maintain a provision of 5% on doubtful debs. “The Institute of Cost Accountants of India@) Goods costing 10,000 were sent on approval basis to a customer for € 12,000 on 30th March, 2022. This ‘was recorded as actual sales. ) 22.400 paid as rent for office was debited to Landlord’s AJe and was included in debvors. (3) General Manager isto be given commission at 10% of net profits after charging his commission. (6) Works manager is to be given a commission at 12% of net profit before charging General Manager's commission and his own, ‘You are required to prepare final accounts in the books of Mr. Arvind Kuma, and also the Balance Sheet as on that date. Solution : ‘Mr. Arvind Kumar ‘Trading Account for the year ended 31st March 2022 “To, Opening stock: By, Sales A/c 4,98,000 Finished goods 74,000 Less: Senton Approval (12,000) 436,000 To, Purchases: 250,000 Less: Purchases returns (3,000) 2,47,000 By, Closing stock Ale Finished goods 60,000 To, Wages: 54,000 Add Sent on Approval 10,000 70,000 To, PLA 181,000 (Gross Profit transfered) 5,56,000 5,536,000 Profit and Loss Account for the year ended 31st March 2022 To, Salaries By, Trading Ale (Gross Profit To, Repairs to Machinery 5,200 transferred) 181,000 To, Depreciation:on Machinery 4,000 By, Discount Received 7.080 on Building 5,000 To, Rent 2.400 “To, Bad Debts 2,000 ‘Add: Further Bad Debts 6,000 Provision for Doubtiul Debts 2.480 “The Insiute of Cost Accountants oF IndiaLess: Provision Opening (10,00) 480 To, Commission to Works ‘Manager 18,000 “To, Commission to General Manager 12,000 To, Capital Ale (Net Profit transferred) 1,20,000 188,080 188,080 Balance Sheet as on Sst March 2022 (ee ‘Arvind Kumar's Capital 1,00, Fixed Assets: Less: Drawings (income tax) (1,000) Land & Building 149,000 ‘Add: Net Profitfor the year 1,20,000 2,19,000 Machinery 36,000 Long term Liabilities: = Current Assets: (Current Liabilities: Stocks 60,000 Sundry Creditors 520 Adds Sent on Approval 10,000 70,000 ‘Outstanding Salaries 4.000 Sundry Debtors 70,000 Less:Goods on Approval (12,000) CC Bank’s Overdrat 7,600 Less: Bad Debts (6.000) Bills Fayable 16,000 Less:Related to Landlord (2,400) Less: Provision forDoubtfial ‘Commission Payable 30,000 Debts (2.480) 47,120 Bills Receivable 30,000 (Cash in Hand. 4.000 Accrued Income 3,000 3,39,120 339,120 Working Notes: (1) Commission payable to works manager & general manager is computed as below: Prt chai ay commision sno ‘Commission to works manager @ 12% on 1,50,000 18,000 “The Institute of Cost Accountants of IndiaProfit after works manager's commission 1,32,000 ‘Commission to General Manager 12,000 (1,32,000/110 » 100) ‘Mr. Abhay runs a small shop and deals in various goods. He has not been ble totally hs tral balance and has closed it by taking the difference to Suspense A/c. It is given below: Sone ‘Abhay’s Capital 150,000 Drawings 75,000 Fixed Assets 135,000, ‘Opening Stock (01.04.2021) 36,500 Purchases & Returns 6.75000 13,500 Sales & returns 34,000 850,000 Due from Customer & to Creditors 95,000 3.25,000 Expenses 45,750 Cash 3,000 Bank Deposits & Interest Eamed 55,000 5,750 Suspense Me 4,000 Advertising 2,00,000 ‘Total 13,81,250 131,250 Mr. Abhay has requested you to help him in tallying his trcl balance and also prepare his final accounts. On investigation of his books you get the following information: (Closing Stock on 31st March 2022 was 45,000 at cost and could sell over this value. (i) Depreciation of @ 13,500 needs to be provided for the year. (il) A withdrawal slip indicateda cash withdrawal of 15,000 which was charged as drawing. However, it was noticed that €11,000 was used for business purpose only and was entered as expenses in cash book. (v) Goods worth 2 19,000 were purchased on 24th March 2022 and sold on 29th March 2022 for 23,750. Sales were recorded correctly, but purchase invoice was missed out. (0) Purchase retums of % 1,500 were routed through sales return. Party’s A/c was correctly posted. (vi) Expenses include £3,750 related to the period after 31st March 2022. (vil) Purchase book was over-cast by & 1,000. Posting to suppliers’ Alc is correct. (vil) Advertising will be useful for generating revenue for 5 years “The Insiute of Cost Accountants oF IndiaSolution: Rectification of Errors: (@) Cash withdrawn was recorded as Cash Ale Dr 15,000 ‘To Bank Ale 115,000 [But it was charged to drawing and 711,000 was recorded as expenses as well ie. Drawings Ale Dr 15,000 Expenses Ale Dr 211,000 To Cash Ale 25,000 ‘This resulted in negative cash of % 11,000. The rectification entry to be passed is Cash Ale Dr 211,000 To Drawings Ale 211,000 (©) Omitted transaction to be recorded Purchases Ae Dr 219,000 ‘To Suppliers’ Ale 219,000 (©) Incorrect recording of purchase retums correcied by Suspense Ale Dr 3.000 ‘To Purchase rem A/C 1,500 ‘To sales return Ae 1,500 (8) Incorrect expenses rectified by Propaid expenses Ale Dr 3,750 To Expenses Ale 750 (©) Overcasing of purchase book rectified by Suspense Ale Dr 21,000 To Purchases A/e 31,000 Based on these rectfications we can now proceed to complete the inal accounts. a ‘To, Opening Stock = 36500 By, Sales §,50,000 To, Purchases 675,000 Less: Retuns (64,000) ‘Less: Retums 13,500) Add: Rectification 1500, 8,17,500 ‘Less: Additional returns 1.500) By, Closing stock 45,000 “The Institute of Cost Accountants of Indiaa ‘Add: Purchases missed out, 19,000 Less: Overccasting rectified (1,000) 6,78,000, To, Gross Profit e/d 1,48,000 8,250 Profit and Loss Account for the year ended 31st March, 2022 a ‘To, Expenses 45,750 ‘Less : Prepaid 3,150 42,000 ‘To, Depreciation 13,500 ‘To, Advertising 2,00,000 2,85,500 By, Gross Profit b/d By, Interest on Bank deposits By, Net Loss Balance Sheet as on 31st March, 2022 (Current Liabilities: Sundry Creditors 3.25,000 ‘Add: Missed out purchase 199000 3,44,000 430,000 1,35,000 13500 Sundry Debtors Cash in hand 3.000) Add: Rectification 11,000 Fixed deposit with Bank Prepaid expenses Miscellaneous Expenditure: Profit & Loss Dr.) 8.62500 5,750, 101,750 121,500 45,000 95,000 8,000 35,000 3,750, 101,750 430,000 ‘Note : The expenditure incurred on intangible items after the date AS 26 became/becomes mandatory (01.04.2003 (0F01.04.2004, asthe case may be) would have to be expensed when incurred since these do not meet the definition ofan ‘asset’ as per AS 26. Hence, full amount of Advertisement expense is charged to Profit & Loss Account. “The Insiute of Cost Accountants oF IndiaFinancial Accounting Ilustration 7 Mr. O maintains his accounts on Mercantile basis. The following Trial Balance has been prepared fromm his books as at 31st March, 2022 after making necessary adjustments for outstanding and accrued items as well as ene va ee ee aoe ‘Sundry Creditors 2,64,000, Sales 650,000 ‘Purchases 4,20,000 = oa ——— m = an ‘Outstanding Salary 6,000 = son a s Sona oe ea om ee. so — vo x wn wens ee SS on a oe a ee ‘Dividend from Investmeats 8,000 ee so Ss ae Se vo — =. som “The Institute of Cost Accountants of IndiaSes ‘Sundry Debtors Stationery and Printing (Cash at Bank Interest on Loan Interest Due but Not Paid on Loan 1,500, ‘Loan Account 30,000 1231920 1231,920 Additional Information: () Salaries include 210,000 towards renovation of Proprietor’s residence. (i) Closing Stock amounted to £75,000. ‘Mr. O, however, request you to prepare a Trading and Profit & Loss Account for the year ended 31stMarch, 2022 ‘and a Balance Sheet as on that date following cash basis of accounting. Solution Mr Loss Account for the year ended 31st March, 2022 Particulars ‘To, Opening Stock “To, Purchases 420,000 By, Closing Stock 75,000 “To, Profit & Loss A/c. ~ Gross Profit transfered 2,55,000 7.25.00 725,000 To, Salaries 40,000 By, Trading Ale Less: Outstanding 6,000 Gross Profit transfered 2,55,000 Salaries 34,000 By, Dividend 8,000 Add: Advance Salary 2,500 Less: Accrued Dividend 1500 6,500 36,500 Less Rerovation Drawings) 10,000 26,500 To, Insurance 1,200 Ada: Prepaid 370 1.870 To, Rent 10,000 “The Insiute of Cost Accountants oF India—— Ada Advance Rent To, Electricity Charges: Less: Oustanding To, Miscellaneous Expenses ‘To, Stationery & Printing ‘To, Depreciation: Plant & Machinery ~Fumiture & Fixtures To, Inerest on Loan Less: Oustanding To, Telephone Charges ‘To, Cqpital Account Net Profit transfered |Add: Net Profit ‘Less: Drawings (24,000 +210.000) ‘Loan Account Sundry Creditors Mlustration 8 2.650 450 2.200 14.000 1200 37.500 8,000 45,500 8,000 1,500 6,500 6,000 1,46,030 261,500 261,500 Balance Sheet as at 31st March, 2022 a 211,970 140,030 3,58,000 34,000 3.24.00 90,000 2,64,000 6,78,000 Plantand Machinery 212,500 {at cost less depreciation) Furniture & Fixtures 72,000 (at cost less depreciation) Investments 80,000 Stock-in-Trade 75,000 Debtors, 170.500 Cash at Bank 65,000 Cashin hand 3,000, 6,78,000 ‘The following Trial Balance has been prepared from the books of Mrs. Sexema as on 31st March, 2022 after “The Institute of Cost Accountants of India