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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

In such a situation. In that case.25. .000 1. the entry recorded is as follows : Closing stock A/c Dr.40. even the opening stock will not be separately reflected in the trading and profit and loss account.000 62.II 375 and loss account of Ankit for the year ended March 31.000 25. Not only. 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 Dr.500 19.000 13. you should remember that the adjusted purchases shall be debited to the trading and profit and loss account.500 62.000 Sometimes the opening and closing stock are adjusted through purchases account. the closing stock shall appear in the trial balance (not as additional information or as an adjustment item) and so also the adjusted purchases.000 15. In this context. Instead.000 Gross profit b/d Commission received Revenues/Gains Sales Closing stock Cr. 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.Financial Statements .000 8. 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. 75. Amount Rs.000 4. in such a situation. 1.000 1. 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. Expenses/Losses Purchases Wages Gross profit c/d Salaries Rent of building Bad debts Net profit (transferred to Ankit’s capital account) Amount Rs. it may be noted.000 57.40. as it is also adjusted in purchases by recording the following entry: Purchases A/c Dr. the trial balance does not show any opening stock.000 5.000 57.

2005 Liabilities Owners funds Capital Add Net profit Non-Current Liabilities Long-term loan Current Liabilities Creditors Amount Rs. 15. they are termed as outstanding expenses. refer to Ankit’s trial balance (refer figure 10. As they relate to the earning of revenue during the current accounting year.000 51. 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. 8. In that case. interest on loan.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. When expenses of an accounting period remain unpaid at the end of an accounting period.500 10.500 as wages relating to the year 2004-05 to one of his employees. 8.000 15.000. The entry to bring such expenses into account is : Concerned expense A/c To Outstanding expense A/c Dr.000 15.000.376 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 31.500 31. For example. 8.000 1. the correct expense on wages amounts to Rs. 500 To Wages outstanding A/c 500 . it is logical that they should be duly charged against revenue for computation of the correct amount of profit or loss. Such items usually are wages. 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.000 51. 12. 8. 500 towards the sum owed to his staff.500 instead of Rs.500 as expense on account of wages in the trading and profit and loss account and recognise a current liability of Rs.1). Let us assume that Ankit owes Rs.000 19. Ankit must show Rs. salaries.500 5.500 Assets Non-Current Assets Furniture Current Assets Debtors Bank Cash Closing stock Amount Rs. The above entry opens a new account called Outstanding Expenses which is shown on the liabilities side of the balance sheet.500 5.000 15. etc. You will notice that wages are shown at Rs.

500 31.40.000 15.500 5.000 56. 19.000 15. 2005 Liabilities Owners Funds Capital Add Profit Non-Current Liabilities Long-term loan Current Liabilities Creditors Outstanding wages Amount Rs.500 Observe carefully the trading and profit and loss account of Ankit. Amount Rs.40.000 15.000 15. 2005 Dr.25.000 51.Financial Statements .000 on account of outstanding wages.000 8. a portion .500 5.000 5.500 1.000 1.500 10.4 Prepaid Expenses There are several items of expense which are paid in advance in the normal course of business operations.000 61. it is found that the benefits of such expenses have not yet been fully received.000 Assets Non-Current Assets Furniture Current Assets Debtors Bank Cash Closing stock Amount Rs.500 Gross profit b/d Commission received Revenues/Gains Sales Closing stock Cr.500 56. Did you notice the amount of net profit is reduced to Rs.500 19.000 500 51. The item relating to outstanding wages will be shown in balance sheet as follows : Balance Sheet of Ankit as at March 31. 12. 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.000 4.000 500 8. 15.000 25. 75.000 61.000 13. 1.000 1.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. At the end of the accounting year.000 19.

in Ankit’s trial balance.000 Less Prepaid salary (5. 1. Ankit must show Rs.000 which was paid in advance to one of his employees upon his joining the office. correct expense on account of salary during the current period will be Rs.000 expense on account of salary in the profit and loss account and recognise a current asset of Rs.000 4.000 15. It will be termed as prepaid salary account and will be recorded by the following journal entry : Prepaid salary A/c Dr.000 8.500 24.40. 20.000 500 8. let us assume that the amount of salary paid by him to the employees includes an amount of Rs. Hence.500 Commission received 1.000 on account of his salary.378 Accountancy of its benefit would be received in the next accounting year.500 56.000 Revenues/Gains Sales Closing stock Cr.000 61.000 13. 2005 Dr. 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.000 Salaries 25. 5.40. 5. is carried forward to the next year and is termed as prepaid expenses.000) Rent of building Bad debts Net profit (transferred to Ankit capital account) Gross profit b/d 20.500 5. 5. This portion of expense.500 . 20.000 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. 5. For example.000 instead of Rs. Expenses/Losses Purchases Wages Add Outstanding wages Gross profit c/d Amount Rs 75. Amount Rs.000 To salary A/c 5. and the new account of prepaid expense is shown on the liabilities side of the balance sheet.000 61.25. This implies that Ankit has overpaid his staff by Rs. The necessary adjustment in respect of prepaid expenses is made by recording the following entry: Prepaid expense A/c Dr. 25.500 1.000 56.000.000 as an advance salary to the employee.

5.000. 24.000 24. In the trial balance of Ankit you will notice an item of commission received amounting to Rs. The adjusting entry for accrued income is : Accrued income A/c Dr.500 .000 15.2005 Liabilities Owners Funds Capital Add Profit Non-Current Liabilities Long-term loan Current Liabilities Creditors Outstanding wages Amount Rs.000 1.1.000 15. etc. 6.500 5. for example.000 15.000 making it as Rs.000 5.500 36. 12.5 Accrued Income It may also happen that certain items of income such as interest on loan. Such incomes are known as accrued income.000 500 56. rent.000 56. 500 (Rs. This implies that income from commission earned during 2004-05 is Rs. Assets Non-Current Assets Furniture Current Assets Debtors Prepaid salary Bank Cash Closing stock Amount Rs. 5. commission.000 5.000 15. are earned during the current accounting year but have not been actually received by the end of the same year.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. Let us. 1.II 379 Observe how the prepaid salary has resulted in an increase of net profit by Rs. 5. Assume that the commission amounting to Rs. 1.500 10. 000 + Rs. assume that Ankit was giving a little help to a fellow businessman by introducing few parties to him on commission for this service. 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 Further. 500 was still receivable from the fellow businessman. 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.Financial Statements .

500.500 1.25.500 making it as Rs. 15.500 5.000 37.000 Purchases Wages Add Outstanding Gross profit c/d Sales Closing stock 6.500 Add Accrued commission 1. 1.000 Observe that the accrued income has resulted in an increase in the net profit by Rs.000 15.000 8.000 .500 5. 1.000 1.000 15.500 Revenues/Gains Cr. Further. Expenses/Losses Amount Rs.000 500 8.000 25.000 1.380 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 1.000 13.40.40. 2005 Dr.000 500 58.000 15. 25.000 Commission received 5.000 Salaries Less Prepaid salary Rent of building Bad debts Net profit (transferred to Ankit’s capital account) 25. 75.000) Gross profit b/d 20.500 Assets Non-Current Assets Furniture Current Assets Debtors Prepaid salary Accrued commission Bank Cash Closing stock Amount Rs.000 15.500 5. Balance Sheet of Ankit as at March 31.500 63. 12.500 63. Amount Rs.500 56. it will be shown in the balance sheet of Ankit on the assets side under the head current asset.000 56.000 4. 2005 Liabilities Owners Funds Capital Add Profit Non-Current Liabilities Long-term loan Current Liabilities Creditors Outstanding wages Amount Rs.500 25.000 58.000 (5.

1. 3. It is income received in advance and will be recognised as a liability amounting to Rs. Assets Non Current Assets Furniture Current Assets Debtors Prepaid salary Accrued commission Bank Cash Closing stock Amount Rs. a certain income is received but the whole amount of it does not belong to the current period. 2005 to sublet a part of the building to a fellow shopkeeper @ Rs. this income does not pertain to current year and hence will not be credited to profit and loss account.000 61. 2005 Liabilities Owners Funds Capital 12.000 which will appear as follows : Balance Sheet of Ankit as at March 31. let us assume Ankit has agreed in March 31.000 . Income received in advance is adjusted by recording the following entry: Concerned income A/c Dr.000 Add Net profit 25.000 37. The portion of the income which belongs to the next accounting period is termed as income received in advance or an Unearned Income. For example.000 61. To Rent received in advance A/c 3. 3. 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.000.000 This will lead a new account of rent received in advance of Rs.6 Income Received in Advance Sometimes. and the new account of income received in advance will be shown as a liability in the balance sheet. The amount received had been credited to the profit and loss account.500 5.000 500 3. However.000 1.000 3.500 5.000 15.000 per month.000 4.500 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. 15.000 15.II 381 10.000 15. The person gives him rent in advance for the next three months of April. May and June.500 Non Current Liabilities Long-term loan Current Liabilities Creditors Outstanding wages Rent received in advance Amount Rs.

000 13. 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.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. Expenses/Losses Purchases Wages Add Outstanding wages Gross Profit c/d Amount Rs. . 1.500 24.000. Let us assume that furniture is subject to a depreciation of 10% per annum.000 63.000 8.000 × 10%).7 Depreciation Recall from chapter 7.000 1.500 6. 15.000) Gross profit b/d 20. 15.000 63. It is treated as a business expense and is debited to profit and loss account. Let us now see how depreciation as an expense will be shown in balance sheet.000 (500) 8.500 1.000 (5. For example.500 (Rs. This.25. 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.000 Salaries Less Prepaid salary Rent of building Depreciation-Furniture Bad debts Net profit (transferred to Ankit’s capital account) 25.500 Add Accrued Commission 1.000 15. 75.500 Revenues/Gains Sales Closing stock Cr. 1.000 1. Amount Rs. the trial balance in our example shows that Ankit has a furniture account with a balance of Rs.000 56.000 Notice that the amount of net profit declines with the adjustment of depreciation. 2005 Dr.500 4.500 56. the asset will be shown at cost minus the amount of depreciation. in effect. 1.40.382 Accountancy 10. 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. Ankit needs to record an adjustment entry to give effect to depreciation on furniture as follows : Depreciation A/c Dr.40.500 To Furniture A/c 1.000 Commission received 5.

000 5.000 Less Depreciation (1.500) Current Assets Debtors Prepaid salary Accrued commission Bank Cash Closing stock 383 Amount Rs. that it contains bad debts amounting to Rs.000( Rs.000 59. 15. It is regarded as a loss and is termed as bad debt. For this purpose. You will notice in Ankit’s trial balance.500 2. Ankit needs to record an adjustment entry as under : Bad debts A/c To Debtors A/c Dr. 13.500 10.500). assuming one of his debtors who owed him Rs. 7.500. The adjustment entry to be recorded for the amount will be as follows. 2. Whereas.000 (Rs. 4.500 This entry will reduce the value of debtors to Rs. 4. However.500 had become insolvent. . 2.Financial Statements . Assets Non-Current Assets Furniture 15.000 15. The entry for recording bad debt is: Bad debts A/c To Debtors A/c Dr. But the amount of bad debts related to the current year is still to be account for.8 Bad Debts Bad debts refer to the amount that the firm has not been able to realise from its debtors. 36.000 Add Profit 24. 15. and nothing is receivable from him.500 – Rs.000 59. This fact appears as additional information and is termed as further bad debts.000 Non-Current Liabilities Long-term loan Current Liabilities Creditors Outstanding wages Rent received in advance Amount Rs. 2.000 500 3. the sundry debtors of Ankit are reported as Rs.500 5.000 1. 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.000 4.500) and increases the amount of bad debts to Rs.500 13.000 15.500.500 + Rs.500 5. 2005 Liabilities Owners Funds Capital 12.500 15.II Balance Sheet of Ankit as at March 31. 2.

500 7.500) 13. Expenses/Losses Purchases Wages Add Outstanding wages Gross profit c/d Salaries Less Prepaid salary Rent of building Amount Rs.500 Net profit (transferred to Ankit’s capital account) 1.25.000 21.000 13. 2005 Dr.000 33. Non-Current Assets Furniture 15.500 Depreciation – Furniture Bad Debts 4. 13. Amount Rs.000 63.000 Accrued commission 1.500 Current Liabilities and Provisions Creditors Outstanding Wages Rent received in advance 10.000 57.000 21.500 Add Further bad debts 2.000 Prepaid salary 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 63.000 3.000 Closing stock 15.500 Revenues/Gains Sales Closing stock Cr.500 Current Assets 5.000 Add Accrued 1.000 500 Cash 4.000 Commission received 5.40.000 25.000 Debtors 15.40.000 12. 1.500 56. 2005 Liabilities Owners Funds Capital Add Profit Non-Current Liabilities Long-term loan Amount Assets Amount Rs.000 500 8.000. which is their estimated realisable value during next year.000 8. Rs. It is quite possible that the whole .9 Provision for Bad and Doubtful Debts In the above balance sheet.500 commission 1.000 15. 75.000 (5.500) 13.000 6.000 Balance Sheet of Ankit as at March 31.500 Bank 5.000 56. debtors now appears at Rs.000 15.500 1.500 Less Further bad debts (2.500 Less Depreciation (1.000 57.000) Gross profit b/d 20.

it is not possible to accurately know the amount of such bad debts. The following journal entry is recorded in this context : Profit and Loss A/c Dr.000 Commission received 5. 2005 Dr. 650 will reduce the current year’s profit on account of doubtful debts. Let us assume.000 Less Prepaid salary (5.000 15.000 56.500 1. Hence. 1.40.500 56. However. it will be shown as a deduction from sundry debtors. 75.000 500 8.500 7.000 × 5%).25.500 .500 Provision for doubtful debts Net profit (transferred to Ankit’s capital account) Gross profit b/d 20. Trading and Profit and Loss Account of Ankit for the year ended March 31. 13.000 13. we make a reasonable estimate of such loss and provide the same.500 Add Further bad debts 2.000 8.000 650 20. 650 (Rs.500 Revenues/Gains Sales Closing stock Cr. Amount Rs.000 Add Accrued 1.500 commission 1. Such provision is called provision for bad debts and is created by debiting profit and loss account. 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. Ankit needs to record the adjustment entry as : Profit and loss A/c Dr.000 6.Financial Statements .II 385 of this amount may not be realised in future.850 63. Ankit feels that 5% of his debtors on March 31.000 63. In the balance sheet. To Provision for doubtful debts A/c 650 650 This implies that Rs.000) Rent of building Depreciation – Furniture Bad debts 4. This implies he expects bad debts of Rs.000 Salaries 25.000 1. Expenses/Losses Purchases Wages Add Outstanding Gross profit c/d Amount Rs.40. 2005 are likely to default on their payments next year.

Non-Current Assets Furniture 15.500 12.000 15.000 56.350 5. 32.000 13. 1. The provision for doubtful debts brought forward from the previous year is called the opening provision or old provision. An extract from a trial balance on March 31. 2005 is given below : Sundry debtors Bad debts Provision for doubtful debts Additional Information : Write-off further bad debts Rs.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.000 and create a provision for doubtful debts @ 5% on debtors. When such a provision already exists.000 3.350 Current Liabilities & Provisions Creditors Outstanding wages Rent received in advance 15.000 1.000 56.850 Non-Current Liabilities Long-term loan Amount Assets Rs.850 5.000 2. 32. Rs. The balance of old provision as given in trial balance should also be taken into account.500 5. Let us take an example to understand how bad debts and provision for doubtful debts are recorded.000 Add Net profit 20.000 500 3. 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. 2005 Liabilities Owners Funds Capital 12.386 Balance Sheet of Ankit as at March 31.000 4.500 13.500 .000 Less Provision for 650 doubtful debts Prepaid salary Accrued commission Bank Cash Closing stock Accountancy Amount Rs.500 Less Furtherbad debts 2.000 Less Depreciation (1.500) Current Assets Debtors 15.

2005 Rs.050 1.050 Credit Amount Rs. Debit L.500 *Only relevant items.10 Provision for Discount on Debtors A business enterprise allows discount to its debtors to encourage prompt payments.000 Further bad debts 1. Discount likely to be allowed to customers in an accounting year .550) for doubtful debts *Only relevant items. 1. Amount Rs.F.II 387 In this case.000) bad debts 31.Financial Statements .000 New provision 1. Provision for doubtful debts: Bad debts 2. 29. 2005 Rs.000 1. To Provision for doubtful debts A/c (Amount charges from profit and loss account) Profit and Loss Account for the year ended March 31.050 Rs.000 Less Provision (1. To Bad debts A/c (Bad debts adjusted against the provision) Profit and Loss A/c Dr. 1.550 4. 1. Note : The amount of new provision for doubtful debts has been calculated as follows: Rs. (b) Provision for doubtful debts A/c Dr.000 Less Further (1.000 3.000 1.450 10.000 1 × 5/100 = Rs.550 Less Old provision 3. the following journal entries will be recorded : Date Particulars (a) Bad debts A/c To Sundry debtors (Futher bad debts) Dr.000 3. 31. Balance Sheet as at March 31.550. Sundry debtors 32.

388 Accountancy can be estimated and provided for by creating a provision for discount on debtors.000) Gross profit b/d 20. 12.000 63. 12.350 (Rs. To Provision for discount on debtors A/c As stated above.500 Provision for doubtful debts Provision for discount on debtors Net profit (transferred to Ankit’s capital account) .e.000 56.40. 650). To Provision for discount on debtors A/c 227 227 This will reduce the current year profit by Rs.500 7. 1. 227 on account of probable discount on prompt payment.000 (5. i.500 Depreciation–Furniture Bad debts 4.25.500 56. Ankit needs to record the adjustment entry as : Profit and loss A/c Dr.000 650 227 20. 75.000 Salaries Less Prepaid salary Rent of building 25. It will be calculated on the amount of debtors arrived at after deducting the doubtful debts. Amount Rs. Rs.000 (500) 8.000 Add Accrued 1.000 15.000 1.000 – Rs.40. 13.623 63.500 Revenues/Gains Sales Closing stock Cr. the provision for discount on debtors will be created only on good debtors. Provision for discount is made on good debtors which are arrived at by deducting further bad debts and the provision for doubtful debts.123.500 Add Further bad debts 2.000 6. 2005 Dr. Trading and Profit and Loss Account of Ankit for the year ended March 31. In the balance sheet.000 8.500 1. it will be shown as a deduction from the debtors account to portray correctly the expected realiable value of debtors as Rs.000 13.000 Commission received 5. Expenses/Losses Purchases Wages Add Outstanding wages Gross profit c/d Amount Rs. The following journal entry is recorded to create provision for discount on debtors: Profit and loss A/c Dr.500 commission 1.

The percentage of the commission is applied on the profit either before charging such commission or after charging such commission.000 20. 10. 110 before charging commission.000 56.000 Less Provision for bad and 650 doubtful debts 12. Suppose the net profit of a business is Rs.000 56. 2005 Liabilities Owners Funds Capital Add Net profit Non-Current Liabilities Long-term loan Amount Rs.123 5. 110 × 10/100 = Rs.500 5.500 2. the discount will be transferred to the provision for discount on debtors account.000 13.11 Manager’s Commission The manager of the business is sometimes given the commission on the net profit of the company. If the manager is entitled to 10% of the profit before charging such commission. the commission will be calculated as : = Rs. In the absence of any such information.500 Current Liabilities & Provisions Creditors Outstanding wages Rent received in advance 15. 32.350 Less Provision for discount (227) on debtors Prepaid salary Accrued commission Bank Cash Closing stock 389 Amount Rs. 11 . 12.123 12.623 Assets Non-Current Assets Furniture 15.000 15.000 1.500) Current Assets Debtors 15. The account will be treated in the same manner as the provision for doubtful debts.Financial Statements .000 4.623 5.000 500 3.000 Less Depreciation (1.123 In the subsequent year.500 Less Further bad debts 13. it is assumed that commission is allowed as a percentage of the net profit before charging such commission.II Balance Sheet of Ankit as on March 31.

Expenses/Losses Purchases Wages Add Outstanding wages Gross profit c/d Amount Rs.000 Commission received 5.000 63. 110 × 10 110 = Rs.500 Depreciation – Furniture Bad debts 4.500 Add Accrued commission 1.500 Revenues/Gains Sales Closing stock Cr. it will be calculated as : = Profit before commission × Rate of commission/ (100 + commission) = Rs.000 6.500 1.000 (5. 75. 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.390 Accountancy In case the commission is 10% of the profit after charging such commission.000 1.500 Provision for doubtful debts Provision for discount on debtors Manager’s commission Net profit (transferred to Ankit’s capital account) .000 Salaries Less Prepaid salary Rent of building 25.000 56. 2005 Dr.500 Add Further bad debts 2.000 8. 10.000 1. Amount Rs.500 56.062 18.25. (i) Trading and Profit and Loss Account of Ankit for the year ended March 31.561 63.40.000 500 8.40.000 15. 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.000 13.000 650 227 2. 1. Let us recall our example and assume that Ankit’s manager is entitled to a commission @ 10%.000) Gross profit 20.500 7.

000) Gross profit b/d 20.000 8.500 1.000 Add Net profit 18.000 650 227 1.500 6. Amount Rs.25.123 Liabilities (ii) Trading and Profit and Loss Account of Ankit for the year ended March 31.500 7.561 30.000 debts 12.062 Closing stock outstanding 56.000 Accrued commission Bank Cash Manager’s commission 2.500) Non-Current Liabilities Current Assets Long-term loan 5. Expenses/Losses Purchases Wages Add Outstanding wages Gross profit c/d Salaries Less Prepaid salary Rent of building Amount Rs.500 56.000 1.000 1.350 Less Provision for discount on debtors (227) Outstanding wages 500 Prepaid salary Rent received in advance 3. 75.500 12.500 Add Further bad debts 2.000 25.748 63.40.123 5.561 Less Depreciation (1.875 18.40.000 (5. 1.123 Cr.000 1.500) 13.000 15.Financial Statements .000 13.000 Debtors 15.000 500 8.000 .000 Less Provision for bad Current Liabilities and Provisions and doubtful (650) Creditors 15. 2005 Amount Assets Rs.500 Add Accrued commission Revenues/Gains Sales Closing stock 391 Amount Rs.II Balance Sheet of Ankit as at March 31. 2005 Dr.000 15.000 Commission received 5.500 Depreciation–Furniture Bad debts 4.500 Provision for bad and doubtful debts Provision for discount on debtors Manager’s commission Net profit (transferred to Ankit’s capital account) 63.000 1.000 56. 13.000 4.000 56.500 Less Further bad debts(2.500 5. Owners Funds Non-Current Assets Capital 12.000 Furniture 15.

the reduced amount of profit shall be added to the capital in the balance sheet.000 (1.000 Current Liabilities and Provisions Creditors Outstanding wages Rent received in advance Manager commission outstanding 15. Let us assume. 600.123 10.000 Less Provision for bad & doubtful (650) debts 12. 600 for which the following journal entry will be recorded: Interest on capital A/c Dr. the interest may also be computed on such amount from the date on which it was brought into the business.123 Prepaid salary 5. This shall amount to Rs.000 56.748 5. If however. any additional capital is brought during the year.000 Closing stock 15.000 18.748 Assets Non-Current Assets Furniture Less Depreciation Accountancy Amount Rs. Ankit decides to provide 5% interest on his capital.875 56.500) 13.12 Interest on Capital Sometimes.500 Bank 5. the proprietor may like to know the profit made by the business after providing for interest on capital.123 Current Assets Debtors 15.000 Cash 4.000 1.500 Less Further bad debts (2. interest is calculated at a given rate of interest on capital as at the beginning of the accounting year.000 Accrued commission 1.350 Less Provision for discount on debtors(227) 12. 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.000 500 3.500 30. To Capital A/c In the final accounts.500) 13. it is shown as an expense on the debit side of the profit and loss account and added to capital in the balance sheet. 15. In such a situation. 12.392 Balance Sheet of Ankit as at March 31. As a result. . 2005 Liabilities Owners Funds Capital Add Net profit Non-Current Liabilities Long-term loan Amount Rs. 600 To Capital A/c 600 This implies that net profit shall be reduced by Rs.

000 State the amount to be debited/credited in profit and loss account : (a) Rs. 3.000 (Debit) (b) Rs. 6. If the rent received in advance Rs. The amount of insurance premium shown in profit and loss account will be : (a) Rs. 2. 5. . this effect shall be neutralised. As shown below : Rs. If the opening capital is Rs.000 Bad debts Rs.000. 80.000 (c) Rs. 5. 300 (d) Rs.250 (b) Rs. 4. when interest on capital shall be added to the capital. 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 Provision for bad debts Rs. 1.000 (Debit) (c) Rs.Financial Statements . 2005 will be : (a) Rs. Interest charge on capital 10% p. 300.000 It is desired to maintain a provision for bad debts of Rs. 2.000 Add Profit 17.300 (b) Rs. 3.000. 5. The amount of interest on capital shown in profit and loss account as on March 31.000 (Credit) (d) none of these.000 as on April 01. If the insurance premium paid Rs. 2005 and additional capital introduced Rs.II 393 But. 50.000 (c) Rs. 1. 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.000 on January 01.961 29.561 Test Your Understanding Tick the correct answer : 1. 1. 1. 2.a. Rahul’s trial balance provide you the following information : Debtors Rs. Capital 12. 10.000 and pre-paid insurance Rs. 2006. 4.961 600 Add Interest on capital 30. 4.000 (d) Rs. 3. 700.

10. 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. Prepaid/ Unexpired expenses Dr. Interest on capital 11. 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. Provision for Profit and Loss A/c bad and To Provision for doubtful debts doubtful debts 8. Accountancy Treatment in Balance Sheet 1. Income earned Accured income A/c but not received To Income A/c 5. Dr. To Sundry Debtors A/c Fig. Dr.2 : Showing treatment of various types of adjustments . 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. Dr. Depreciation Depreciaton A/c To Assets A/c Dr. Further bad debts Dr. Income received Income A/c in advance To Income received in advence A/c 6. Outstanding expenses 3. 7. Dr. 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. 10. Provision for discount on debtors 9.

Amount Rs.450 2.000 Create a reserve for bad and doubtful debts @ 10% on book debts Insurance prepaid Rs.630 5. 50 Rent outstanding Rs.300 13.640 82.a.97.630 Revenues/Gains Cr.870 5.49. 6. Expenses/Losses Opening stock Purchase Less Purchases return Carriage Gross profit c/d Amount Rs. 3.420 1. 2005.81.630 Closing stock 70. 4.870 1.130 3.74. Closing stock Rs.000 2.080 60. 70.450) 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.630 31.670 4. Credit Balances Capital Discount received Loans Purchases return Sales Reserve for bad debts Creditors Amount Rs.680 3.610 3.740 1.170 86.74. 5.99.170 7.580 5.000 1.250 Adjustments 1.250 750 4.500 4.250 Solution Trading and Profit and Loss Account for the year ended March 31. 2005 Dr.870) 2.49.79.99. Sales 2.000 3.50.630 .500 Less : Sales return (1. 60. 150 Interest on loan is due @ 6% p.81. 2.650 18. 1.220 1.220 1.080 (1.960 100 6. prepare the trading and profit and loss account and balance sheet as on March 31.860 42.II Illustration 1 395 From the following balances.980 15.Financial Statements .

590 Balance Sheet as at March 31.420 7.630 700 Gross profit b/d Discount received Accountancy 86.000 900 15. 13.000 61.670 15.176 89.300) Assets Cash at bank Book debts 82. 2005 Liabilities Creditors Loan Add Interest on loan outstanding Rent outstanding Capital Add Net profit Less Drawings Amount Rs.524 Less Old provision (4.860 42.650) for bad debts Interest on loan outstanding Net profit (transferred to capital account) 3.590 89.680 Add Rent outstanding 150 General expenses Insurance 750 Less Insurance prepaid (50) Bad debts 1.250 Add New provision 8.900 150 1.000 2.610 2.176 2.870 2.130 31.740 Amount Rs.176 (6.39.596 2.396 Discount allowed Bank charges Salaries Rent and Taxes 7.274 for bad debts 9.274) for bad debts Bills receivable Land and Building Furniture Plant and Machinery Insurance (prepaid) Closing stock 74.596 .04.980 4.830 3.11.876 Less Reserve (8. 18.50.960 100 6.39.466 1.580 5.874 900 61.640 50 70.

Financial Statements .000 10.630 40.780 500 62. 2006.730 3200 2040 5.000 600 5. Insurance includes a premium of Rs.II Illustration 2 397 The following were the balances extracted from the books of Yogita as on March 31. 2005.000 20.000 6. 98.500 Credit Balances Sales Return outwards Capital Sundry creditors Rent Amount Rs. .675 680 8.500 were outstanding. 2005 : (a) (b) (c) (d) Stock in hand on March 31.000 Taking into account the following adjustments prepare trading and profit and loss account and balance sheet as on March 31. 725.800.480 4.245 14. 170 on a policy expiring on September 30. (e) Further bad debts are Rs. 1.was Rs. Machinery is to be depreciated at the rate of 10% and patents @ 20%.000 7.000 15. Create a provision @ 5% on debtors. 2005 amounting to Rs. 540 2.500 3. 6.300 9.760 32. 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. Salaries for the month of March.

500) 18.500 3. Liabilities Sundry creditors Salaries outstanding Capital 62. 1.900 16. Amount Rs.586 53.086 85 6.000 6.000 Add Net profit Less Drawings 25.000) 7.775 (689) 13.900 43.04.715 9.000 (2.675 (500) 40.000 1. 6. Expenses/Losses Opening stock Purchases Less Return outwards Wages Fuel and Power Carriage on purchases Gross profit c/d Amount Rs.500 (1. 2005 Dr.480 4.730 2. Sales 98.000 10.000 90.715 Balance Sheet as at March 31. 5.780 Less Return inwards (680) Closing stock 98.800 1.800 Salaries 15. Amount Rs.715 Cr.000 Patent 1.630 14. 2005 Dr.040 43.000 Amount Rs.500 Carriage General expenses Insurance 600 Less Prepaid insurance (85) Further bad debts 725 Add Provision for bad debts 689 Depreciation : machinery 2. 540 2.398 (f) Rent receivable Rs.500 Net profit (transferred to capital account) Gross profit b/d Rent Add Accrued rent 1.000 53.715 1.000.175 8.341 20.500 25.000 Add Outstanding salaries 1.500 (725) 13.760 40.100 6.300 1.200 3.000 515 1.414 3.245) 82.586 (5.586 87.500 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 32. Solution: Books of Yogita Trading and Profit and Loss Account for the year ended March 31.04.141 .000 10.141 90.

100 16. 570.000 17.II Illustration 3 399 The following balances were extracted from the books of Shri R.240 4. 2005 Account Title Capital Drawings Purchases Sales Purchases return Stock on April 01. .300 190 1.) Bills receivable Sales returns Wages Buildings Amount Rs.290 on March 31. 2005 Rs.600 80.400 2. 240.240 Account Title Rent (Cr. 2005. Lal on March 31.280 25.Financial Statements . 2004 Rates and Insurance Discount (Cr. 2. (iv) On March 31. 200 on March 31. 625 and addition to building at 2% and office furniture at 5%.310 1. 2005.920 12.240 6.940 2.820 11.870 7. (ii) Write-off further bad debts Rs. 14.000 1.500 9. 1. 2005 after keeping in view the following adjustments : (i) Depreciate old building by Rs.000 Prepare the trading and profit and loss account and a balance sheet as on March 31. (vii) Unexpired insurance Rs.070 18.400 3. (vi) Interest on capital at 5% to be charged. (v) Rent receivable Rs.40. 2004 Bad debts Bad debts reserve April 01.210 3. 570 are outstanding for salary.000 1.370 2. (viii) Stock was valued at Rs.460 1.00.) 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. (iii) Increase the bad debts reserve to 6% of debtors.340 660 820 62.

Amount Rs.000 (2.100 200 Revenues/Gains Accountancy Cr.190 1.400 Solution Books of Shri R.440 1. Expenses/Losses Opening stock Purchases Less Purchase return Carriage inwards Wages Gross profit c/d Amount Rs.180 2. Sales 1.310 6. 11.680 .400 Add Further bad debts 570 Add New bad debts 3.300 190 2.340 820 660 10.50.420 Railway freight on sales Office expenses Postage and Telegram Printing and Stationery Salary and Commission 9.940 1.060 Gross profit c/d Rent Add Accrued rent Discount 2.420 53.300 Less unexpired insurance (240) Bad debts 1.370 Less Sales Return (4.290 1.820) 77.680 55.870 Add Outstanding salary 570 Rates and Insurance 1.240) for bad debts Interest on capital Depreciation on building Depreciation on addition to building Depreciation on furniture Net profit (transferred to capital account) 16.060 55.50.190 2.280 53.420 5.690 provision 5660 Less Old provision (3. Lal Trading and Profit and Loss Account for the year ended March 31.460 80.240) 1.000 625 140 175 16.36.130 Closing stock 14. 2005 Dr.40.

375 6.000 28.000 6.290 1.000 4.II Balance Sheet as at March 31.50.22.000 (140) Less Depreciation Office furniture 3.000 80. 18.400 2.21.000 20.000 64.000 4.000 22.500 Less Depreciation (175) Closing stock 57.000 1.950 1.000 Less Depreciation (625) Addition to building 7.000 6.060 (17.000 32.690) for bad debts Accrued rent Unexpired insurance Building 25.000 2.00.860 3.500 Less New provision (3.000 8.000 16. 4.325 14.000 30.000 18.920 570 1.000 .000 18.000 6.00. 12.240 Less Drawings Debtors 62.22.810 200 240 24.210 1. 2005 Liabilities Sundry creditors Outstanding salaries Capital Add Net profit Add Interest on capital Amount Rs.60.070 Less Further bad debts (570) 61. 24.000 80.000 1.000 1.060 5.00.40.03.000 12.000 1.950 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.000 16.000 2.Financial Statements .460 Assets Cash at bank Cash in hand Bills receivable 401 Amount Rs.40.600) 1.000 Credit Balances Sales Return outwards Capital Creditors Bills payable Commission received Amount Rs.

400 2.F.000 2. 12.402 Adjustments (a) (b) (c) (d) (e) (f) Solution Books of Mohit Traders Journal Date Particulars L. 2.400 1. Salaries outstanding Wages outstanding Commission is accrued Depreciation on building 5% and plant 3% Insurance paid in advance Closing stock Rs.400 5.23. 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.400 7.700 March 31 Depreciation A/c Dr.000 6.400 Dr.000 6. 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. 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. 12.000 2. Dr. 1. .000 6.000 Dr.400 1.23.400 700 12.700 1.000 Accountancy Credit Amount Rs.000 12. Debit Amount Rs.

Amount Rs.57.000 7.58.60.000 700 2. Expenses /Losses Opening stock Purchases 1.23.II Books of Mohit Traders Trading and Profit and Loss Account for the year ended March 31.000 Add Outstanding wages 6.000 12.000 (700) Revenue/Gains Sales Less Returns Closing stock 403 Cr.000 6.000 18.000 28.23.000) 3.57.55.000 Gross Profit b/d 1.000 3.700 2.000 5. 2006 Liabilities Creditors Bills payable Capital Add Net profit Less Drawings Outstanding salaries Outstanding wages Amount Rs.000 32.000 12.000 4.300 2.000 1.80.400 12.400 Plants Net Profit (transferred to capital account) 1.000 6.700 12.700 .600 30.400 6.50. 4.Financial Statements .80.400 Balance Sheet as at March 31.400 1.08.000 20.000 1.000 8.000 2.000 (4.000 95.000 Fuel and Power Carriage inwards Gross profit c/d Amount Rs.000 Salary Add Outstanding salary Insurances Less Prepaid Rent Depreciation on building 28. 16.73.000) Wages 22.00. 2006 Dr.000 12.700 1.000 3.000 80.08.000 77.000 Commission received(4.000) Add Accrued 2.700 2. 64. 24.000) Assets Cash in hand Cash at bank Building Plant Patents Debtors Insurance prepaid Commission accrued Furniture Closing stock Amount Rs.700 (18.000 Less returns (2.74.000 1.96.000 1.000 4.400 commission 40.74.

000 2.82.20.000 3. Insurance prepaid Rs.000 50.200 1. . Depreciation charged on plant and machinery 5% and land and building 6%.82. 9.000 4.10.230 20. Discount on debtors @ 2%.500 75. Interest on drawing @ 6% and Interest on loan @ 5%.000 6. 3.500 Adjustments 1.500.000 700 1. 2005.500 1.200 75.500 Credit balances Capital Creditors Bills payable Loan Discount Sales Provision for bad debts General reserves Amount Rs.500 3. 500.50.000 1.70.250 1.404 Illustration 5 Accountancy The following information has been extracted from the trial balance of M/s Randhir Transport Corporation.55.500 1.020 6. Wages outstanding Rs.000 2.000 2. 8.500 400 4.000 1. Further bad debts 2. 5. Salary outstanding Rs.000 50.000 1. 4. 40. 7. 2. 35.000 50.000 2. 2.500 and make provision for bad debts on debtors 5%. 100.000 1. 6. You are required to make trading and profit and loss account and a balance sheet on March 31. Interest on investments @ 4%.000 2. Closing stock for the year was Rs. 200.000 65.500 2. 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.

230 1.000 Rent Telegram and Postage Salary 2.500 1.500 59. 40.000 700 1.200 65.900 1.450 6.500 35.200 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 2.000 4.000) Net Profit (transferred to capital account) 2.700 2.300 7.500 5.500) 405 Amount Rs.47.053 10. 2005 Expenses/Losses Opening stock Purchases Wages Add Outstanding wages Power Gross profit c/d Amount Rs.Financial Statements .217 65.000 2.500 Add New provision 3.83.200 2. 1.500 1.II Solution Books of Randhir Transport Corporation Trading and Profit and Loss Account for the year ended March 31.000 (2.000 59.500 1.200 4.600 3.250 1.50.200 .500 Add Outstanding salary 200 Insurance 3.000 400 Gross profit b/d Outstanding interest on investment Discount Interest on drawings Revenue/Gains Sales Less Sales return Closing stock 1.700 1.000 15.500 100 4.000 75.000 Add Further bad debts 2.053 Less Old provision (1.83.600 1.553 8.900 2.

24.500) 72.997 200 100 5.70.430 .497 65.000 2. You are required to prepare trading and profit and loss account and a balance sheet of March 31.50.24.500 500 700 2.000 500 60. 2005 Liabilities Creditors Bills payable Loan 1.450 2.500 5.10.00.000 1.550 2.15.000 2.60.20.80. 3.217 2.050 Less New Provision (3.406 Balance Sheet as at March 31.500 General reserve Capital 2.000 1. 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.000 50.600 500 2.500 8.500 2.500 50. 2005.14.500 (1.797 Plant and Machinery Land and Building Closing stock 1.30.000 (2. 50.70.450) 71.553) Investment Outstanding interest on investment Insurance pre-paid Debtors Less Further bad debts Less Discount Accountancy Amount Rs.000 1.000 3.000 3.500 35.000 22.200 Outstanding salary Outstanding wages 2.50.500 2.000 2.000 8.000 Assets 75.200 2.300 780 22.197 Less Interest on drawings 1.000 Add Outstanding interest 5.80.000 2.39.020) Amount Rs.797 Illustration 6 From the following balances of M/s Keshav Bros.000 10.217 Less Drawings (20.000 50.430 Credit balances Sales Return outwards Creditors Bills payable Provision for bad debts Capital Rent received Commission received Amount Rs.380 16.000 1.700 35.70.000 70.58. 67. 1.000 Add Net Profit 10.000 2.

00.350 4.000 6. 6. 60. 2005 Dr. Depreciation on furniture @ 5%.125 7.500 1. Trading and Profit and Loss Account for the year ended March 31.600 500 Gross profit b/d Rent received 10. 2.98.550) Net Profit (transferred to capital account) 2. building @ 7%.47.000 57.000 (2.730 .000 (2. 407 Solution Books of Keshav Bros.000 Add New provision 2.500 700 2.II Adjustment (i) (ii) (iii) (iv) Provision for bad debts @ 5% and further bad debts Rs.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 3.000 2.275 77. Amount Rs.380 16.68. 2.500) 2.450 57.68.730 77.000 2.350 3.500 Add Further bad debts 2. Prepaid insurance Rs.000.400 7.380 Less Advance rent (6.000 70.300 580 1.Financial Statements . plant and machinery @ 6%.900 Less Old provision (1.000) Cr.000) Commission received Revenue/Gains Sales Less Return Closing stock 3.000 3.200 500 1. 200.800 19. Rent received in advance Rs.50.000. Expenses/Losses Opening stock Purchases Less Returns Wages Carriage inwards Factory rent Gross profit c/d Amount Rs.350 34.

060 Credit balances Sales Loan 12% (1.275 2.20.38.60.408 Balance Sheet as at March 31.590 3. You are required to prepare the trading and profit and loss account and a balance sheet as at March 31.60.000) bad debts 48.000 1.000 60.54.600 Plant and Machinery 1.000 Less Further (2.600 2.000 4.7.620 16.000 3.050 4.38.22.000 .000 34.275 Liabilities Cash In hand Cash at bank Bills receivable Accountancy Amount Rs. 2005 Liabilities Creditors Bills payable Advance rent Capital Add Net profit Amount Rs.80. 3.80.000 45.600 2.275 5. 20.000 6. Debit Balances Cash Wages Return outwards Bad debts Salaries Octroi Charity Machinery Debtors (Including a dishonoured bill of Rs.600) Stock Purchases Repairs Interest on loan Sales tax Insurance Rent Amount Rs.500 35.000 5.000 Less New provision (2400) 45.000 Prepaid insurance 200 Debtors 50.1.000 250 32.000 70.61.50.275 Illustration 7 The following information have been taken from the trial balance of M/s Fair Brothers Ltd.000 2.350 1.400 Closing stock 70. 2.000 5.200 1.200 Furniture 21.2005) Discount received Return (Purchase) Creditors Capital Amount Rs. 2006.800 4.375 Buildings 2.610 75.060 5.000 1.000 40. 22.060 390 60.000 81.

850.600 2.000 1.Financial Statements . Expenses/Losses Opening stock Purchases Less Purchases return Wages Less Prepaid wages including erection of machines Octroi Gross profit c/d Amount Rs.280 55.200 41. 4. Amount Rs.800) 409 Cr.000 1.050 Gross profit b/d Discount received 54.000 1.600 1.60.000 54. 600.050 Revenue/Gains Sales Less Sales return Closing stock 3.060 Salaries Add Outstanding salary 16. 2005. Salaried unpaid Rs.000) 2.260 55. Rent is paid up to July 30. 3.600.380 3.850 1.600 4.400 2.56.050 4.000 for erection of new machinery on April 01. Closing stock Rs.200 81. 81.350 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. 2.38. 2006 Dr. Insurance unexpired Rs. 81. 8.260 .590 (390) 45.600 1. 2006. Trading and Profit and Loss Account for the year ended March 31.200 1.38.200 4. Provide 5% depreciation on furniture.050 (4.620 800 2. Half the amount of bill is recoverable.61. Wages include Rs. 6.000 (4. 3.60.400 250 3.800 14.1. Create a provision at 5% on debtors.600 3.000 17. 7.000 (600) 4. 4.200 2. Books of Fair Brothers Ltd.II Adjustments 1.960 1. 5.

you are require to prepare the trading and profit and loss account and a balance sheet as on December 31.000 1.93.890 Illustration 8 From the following balance extracted from the books of of M/s Hariharan Brother. 16.890 34.000 Add Erection Wages 36. 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.000 40.000 5. 2005.000 2.960 Prepaid rent Unexpired insurance Machinery 32.400 75. 20.610 1.000 Less Depreciation (1.00.240 1.000 500 700 300 400 1.400 5.000 Less Bad debts (800) Less Provision 2.600 3.000 5.000 31.800) Closing stock Accountancy Amount Rs.800 4.000 6.000 9.400 .850 1.200 1.000 2.000 6.000 14.280 89.000 10.93.000 3.280 Assets Cash Debtors 60.600 40.10.000 600 1.200 4.000 7. 1. 60.000 6.410 Balance Sheet as at March 31.800 1.000 2.600 11.200 81.000 56.400 Credit balance Capital Sales Return outwards Apprenticeship premium Bills payable Creditors Amount Rs.000 40.000 3.60.00.000 500 7.000 800 3.00. 2006 Liabilities Creditors Outstanding salaries Loan Outstanding interest Capital Add Net profit Amount Rs.000 4.

410 1. Interest on investment @ 5% for half year to December 31. 2005. Wages outstanding Rs. Rent outstanding Rs. 2005 to June 30.800 1.000 5.000 63.000 Closing stock 14. 9.600 600 39.000. 8.71. Trading and Profit and Loss Account for the year ended December 31.000) 1.000. 16. 7.000 5. Apprenticeship Premium is for three years paid in advance on January 01.200 Add Outstanding rent 200 Interest on capital Depreciation on Premises Depreciation on furniture Depreciation on machinery Discount Net profit (transferred to capital account) 1. Depreciation on Premises @ 5%. 3. 2005 Dr.200 4.57.400 4.400 1. Closing stock Rs.000 Add Outstanding salary 1. 14.000 Carriage outwords Rates and Taxes Printing and Stationery 500 Add Outstanding bill 60 Trade expenses Travelling expenses Fire insurance 1.03.01.500 500 900 1.200 2. Interest on loan given accrued for one year @ 7%. 6. 2005 to run for one year from July 01. 4. Fire Insurance premium includes Rs.000 Salaries 11.200 paid in July 01. Stationery bill for Rs. Expenses/Losses Opening stock Purchases Less purchases return Wages Add Outstanding Wages Carriage inwards Freight and Dock Gross profit c/d Amount Rs.000 40.60. 600.000 (800) 6. Salaries Outstanding Rs. 5. 10.400 5. 60 remain unpaid. 2005 has accrued.000 700 560 400 300 1.410 Gross profit b/d Apprenticeship 3. Sales 1. 2006. 1.750 1.03.71.000 700 160 150 .000 1.Financial Statements . Solution Books of Hariharan Bros.000 premium Less Advance premium (2. furniture @ 10%.200 2. Machinery @ 10%. 1.400 1.200 7. Interest on capital to be allowed at 5% for one year. Interest on drawings to be charged to him ascertained for the year Rs.000 Less Sales return (3.800 (600) Less Prepaid insurance Bad debts Rent 2. Amount Rs. 2.000) Accrued interest on loan Interest on drawings Accrued interest on investment Revenue/Gains Cr. 200. 160.01.000 12.II 411 Adjustments 1.

000 Outstanding rent 200 Loan 10. 2006.000 Bills payable 5.000 1.000 500 80.62.500 Add Net profit 63.000 8.000 1.500 Less drawings (6. Water Amount Rs.000 2.000 10.700 Apprenticeship premium (advance) 2.750 1.000 41.000 4.000 2. Rs.200 2.500 500 2. 2005 Amount Assets Amount Rs.000 100 5.400 1.600 Debtors 40.00.000 400 5. Rates and Taxes Coal.000 Cash at bank 7.62.300 Credit balances Capital Sales Purchases return Bank overdraft Bad debts provision Creditors Commission Bills payable Apprenticeship premium Amount Rs.000 Investments 6. 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 24.050 2.04.300 4.03.100 Less Interest on drawings (160) 1.03.000 2.000 Outstanding wages 600 Cash in hand 500 Outstanding salaries 1. You are required to prepare the trading and profit and loss account on dated March 31. Also prepare balance sheet on that date. Capital 1.050 Illustration 9 The following balances have been extracted from the trial balance of M/s Kolkata Ltd.000 500 400 1.800 3.000 Add accrued interest 150 6. 20.750 Furniture 4.68.590 Creditors 31.300 .000 2.000 Premises 1.000 Bills receivable 7.000 Outstanding stationery 60 Add accrued interest 700 10.000 80.412 Liabilities Accountancy Balance Sheet as at December 31.000 Less Depreciation (5.000 Add Interest on capital 5. 6.000) 1.750 Machinery 8.500) 1.000 6.150 Pre-paid insurance 600 Closing stock 14.000 1. Gas.10.000 1.000 4.

318 20. Unexpired insurance Rs. 500 is to be received on bank deposits. 413 Solution Books of Kolkata Ltd. 500.200 48. 8. Commission is received in advances Rs.300 19.II Adjustments 1. 6. Closing stock Rs. 200 New provision @ 5% on debtors. Further bad debts Rs.000 400 168 1. Trading and Profit and Loss Account for the year ended as at March 31. 100. 7. Interest on bank overdraft Rs.690 Less Old provision (400) Depreciation on furniture Net profit (transferred to capital account) Amount Rs.200 50 500 Revenue/Gains Sales Less sales return Closing stock 41300 (2. Water Gross profit c/d Establishment expenses Carriage Trade expenses Bank charges General expenses Salaries 2. Rent and taxes Rs.000 19.000) 1.500 (500) Less Prepaid insurance Postage and Telegram Rent.300 9. 6.000 500 400 1. 10. 2.000.200 750 Gross profit b/d Commission 100 Less Advance commission (50) Accrued interest on deposits Apprenticeship premium 500 Less Advance received 100 Interest on drawings 48.000 Add Outstanding salary 100 Insurance 1. Wages Rs. 5. 100. Apprenticeship premium received in advance Rs.000 24.400 1. 3.000) Cr. Gas.000 (4. 50. 100.000 100 20. 4. Expenses /Losses Opening stock Purchases Less purchases return Wages Add Outstanding wages Coal.290 120 5. 200. Amount Rs.300 4.000 Add Further bad debts 200 Add New provision 490 1.100 2. 750.Financial Statements . 9. Interest Rs. 2006 Dr. rates and Taxes Interest on bank overdraft Bad debts 1. Depreciation on furniture @ 10%. 9. Interest on drawings @ 6%.058 20.000 1.000 2.100 1.000 500 2.318 . 39. Outstanding salaries Rs.

800 (490) Add outstanding interest 500 22.000 50 100 100 100 200 Furniture Cash in hand Debtors Less Further bad debts Less Provision for bad debts Bills receivable Closing stock 9.208 Credit balances Creditors Capital Loan on mortgage Bad debts provision Sales Purchases return Discount Bills payable Rent received Amount Rs.916 15.058 Less Drawings (2.486 2.000 8.000 750 4.800) 22.00 5. taxes.390 37.390 Illustration 10 Prepare the trading and profit and loss account of M/s Roni Plastic Ltd.000 1. from the following trial balance and a balance sheet as at March 31.27.000 10.414 Balance Sheet as at March 31.200 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.858 7.000 1.34. 6.000 9.808 16. 2006 Liabilities 2. 2006.764 3.194 400 6.000 38.27.000 9.750 5. Assets Insurance prepaid Bank deposits Accountancy Amount Rs. rates.000 37.678 18.000 4.420 2.428 500 3.090 5.802 60.642 4.080 3.100 11.250 1. insurance General expenses Bills receivable Amount Rs.110 24.500 1.058 25.978 13.22. 16.528 7.000 (200) 9. taxes Bank overdraft Add Outstanding interest Bills payable Capital Net profit Amount Rs.782 8. 500 8.000 17.258 Less Interest on drawings (168) Creditors Commission received in advance Apprenticeship premium Outstanding wages Outstanding salaries Outstanding rent.208 .00.310 6.692 880 5.

486 Purchases 1.700 Less Goods withdrawn (1.22.978 Depreciation on : Land and Building 1.400) 2.432 Add Outstanding 800 8. 6.528 Interest on loan 400 Add Outstanding Interest 450 850 General expenses 8. Goods costing Rs.678 Sales 2.000) 1.692 Less Return basis (1.144 Outstanding salaries 1.400 and Rates amounting to Rs.32. 1.250 Add New provision 1.34.700 3. Goods costing Rs1. Rs.384 Carriage outwards 2.000 were taken away by the proprietor for his personal use but not entry has been made in the books of account. 2006 and has been recorded in the books as actual sales. Opening stock 11.858 Gross profit c/d 68.844 Less Purchases return 2.900 Manager commission 1.764 . 2006 Dr.194 capital account) 69. 350.05.808 Discount 880 Establishment expenses 16.444 1. Insurance pre-paid Rs.782 (350) Less Prepaid 7. Solution Books of Roni’s Plastic Ltd.916 Less Sales 15.19. 1. 800 are due. Interest on loan is @ 5% taken on April 01.700. Provide the manager’s commission at @ 5% on Net profit after charging such commission.400 Gross profit b/d 68.224 Closing stock Carriage inwards 7. Salaries amounting to Rs.670 Rates and Taxes 7.010 Net profit (transferred to 20.144 2.Financial Statements . The bad debts provision is to be brought up to @ 5% on sundry debtors. 8.II 415 Adjustments 1.200 were sent to a customer on sale on return basis for Rs. 3. 7.420) 1. Cr. 13. Closing stock was Rs.232 Advertisement 4.384 2. 2005. 9.840 3.06.194 Rent 500 Bad debts 1.224 13. Trading and Profit and Loss Account for the year ended March 31. 2.764 69. Expenses/Losses Amount Revenue/Gains Amount Rs.31. Depreciation on land and building at @ 5% and Motor vehicle at @ 15%.400 on March 30.200 Motor car 2.642 return 2.19. 1.090 Less Old provision (1. 5. 4.

Hence.194 80.16. Under vertical presentation. 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.e.960 22. 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.800 (1.300 350 13.200 (1.194 (6.802 1.100 9.084 34.000 (1.16.084 10.400) 36.000 17.194) 1. This format is rather technical in nature and is not easily comprehensible for many users. the final accounts are prepared in a form of statement with different items being shown on below the other in a purposeful sequence. now-a-days.428 16.800 15.700) 73.000 20.840) 24. i.3. the trading and profit and loss account will appear as shown in figure 10.194 17.010 1.700 1.000) (74. most firms present them in a simpler and more intelligible form called a narrative style or vertical presentation.400 800 1.416 Balance Sheet as at March 31. Under vertical presentation.110 13.000 450 Amount Rs.13 Methods of Presenting the Financial Statements The financial statements.450 5. 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. .000 (2. 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. 6.200) 18.764 38.

. 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. . ........... .. . . .. ... .. . ... ....... ... .... ... .. ....... .. ... . ..... ..... ...... .... ... Particulars Sales (Gross) Less Returns Net sales Cost of goods sold Opening stock Purchases .. .. ......... . ...II Income Statement for the period ended . .. .. ... ...... Less Returns .. .. . .... .Financial Statements . ... . . ... .

..3 : Showing vertical presentation of financial statements .... .. . . ... ...... . .. . . . .. .... . .. 10. Fig. .. . ..... .. . 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.... 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.... . ........... the Balance Sheet will appear as follows : Balance Sheet as on .... ..... ..... . . ...... etc.. .. .. . .........418 Under the vertical presentation.

520 81.000 Adjustments Closing stock Rs.000 12. 1. 11. Credit Balances Capital Return outwards Creditors Commission Sales Long-terms loan Amount Rs.68.000 40. 4.000 2.000 15.600 5. 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.200 9.080 3.460 10.II Illustration 11 419 From the following balances extracted from the books of M/s Rohit Traders.000 10.360 5.000 6.000 20.000 3.960 1.68. 2006.000 400 12.000 Depreciation on Plant and Buildings @ 10%.98.200 30.000 1.000 1.320 3.Financial Statements .200 2.000 28.500 1.000 . prepare the profit and loss account and balance sheet in the vertical form as on March 31.000 4.200 3.000 80.000 2.40.

200 3.080 9.620 84.000 3.320 58.100 5.000 + Rs.000 49.000) E F Net operating profit Non-operating incomes Commission earned Less Interest paid 3.98.020 {A-B} Operating expenses (a) Administrative Expenses Insurance Salaries Legal charges Audit fee Depreciation (Rs.640 1.200 12.960 1.000) Accountancy Amount Rs. 1.100 G Net profit transferred to capital account .000 (2.520 81. 1.420 Solution Books of Rohit Traders Profit and Loss Account for the year ended March 31.600 4. 4.460 10.620 (4. 8.200 30.000 28.96.000 2.360] 11.920 25.12.000) 1.000 [1.000 (400) 80.600 (b) Selling and Distribution Expenses Carriage outwards Discount Bad debts Total operating expenses [a+b] [C-D] 6.16.000 1. 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.

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

1.000 and provision for bad debts @ 5% on debtors and discount on debtors @ 2%.000.000 50.000 2.83. Net loss Rs.a. 3. (Ans. 5.000 4.500 5.50.000 500 400 4.000 5. 5.611) Prepare a trading and profit and loss account of M/s Green Club Ltd.1. Closing stock Rs.500 3. 2.900 . Net Profit Rs. Further bad debts Rs.000 20. Depreciation on building @ 6% p.a.79. for the year ending December 31.565).000 600 12. 35.000 6.424 Accountancy 4. 4.000 .000 3.900 Adjustments 1.57.25.300 3. (Ans : Gross loss Rs.000. Closing stock 10.189 .43.000 20.000.52.000 25.000 40.500 23.000 10. Total balance sheet Rs.a.500.2. : Gross Profit Rs. discount on debtors @ 5% and make a provision on debtors @ 6%. Wages prepaid Rs. Depreciation charged on machinery @ 5% p. 2.000 20. Account Title Sales Purchase return Creditors Bills payable Discount Provision for bad debts Interest received Capital Amount Rs.000 1. Interest on investment @ 5% p.17. Total Balance Sheet Rs. 32.400 75.100 3.1.71.565 .1. 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. 2005.000 . from the following figures taken from his trial balance : Amount Rs. 6.000 1.000 1. Further bad debts Rs.71.

000 20. 5.500 3.440 Adjustments 1.000 4.000 . 2.500 400 1. 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. 32.000 6.000. Wages and interest outstanding Rs.000 425 4. Prepare a trading and profit and loss account and a balance sheet as on December 31.060.000 400 200 1.400) Account Title Sales Return outwards Interest received Discount received Creditors Bill payable Capital Amount Rs.000 4. 500 and make a provision on debtors @ 5%.800 2.000 2. Interest received on investment @ 5%.a.89.97. 2. 78. : Gross profit Rs.00.000 440 500 100 400 25. 100 and Rs.II 3 The following balances has been extracted from the trial of M/s Runway Shine Ltd.50.800 60.Financial Statements .040 1.89. 4. 200 respectely. Net profit Rs. Further bad debts Rs. (Ans.50.000 50. Discount on debtors Rs. 1. 2005.000 4.500 77.400 4. 66. 1. 2.500 2.440 . Depreciation charged on motor car @ 5% p.25.000 53. Total balance sheet Rs.500 32.500.500 400 1. Closing Stock Rs. 3.

700 3.56. Amount Rs.200 Adjustments 1.426 4. (Ans. 2. Depreciation charged on building and machinery are @ 4% and @ 5% respectively.500 25.000 1.000 32.000 2. 3.000 .500 86.060) Account Title Sales Purchases return Creditors Rent Interest Bills payable Capital Amount Rs.56.000. 3.000 2.25. 2005 from the given information.500 12.09.000 34. 4.000 21. 50.200 2.00. Total balance sheet Rs.900 5.000 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% (01.200 . Salary amounting Rs.85.000 2.000 1. 40. 500 and trade expense Rs.000 100 3. Accountancy The following balances have been extracted from the trial of M/s Haryana Chemical Ltd. 300 are due.000 1.000 3.2005) 8. Closing stock was valued at the end of the year Rs.500 2.500 2.200 12. : Gross profit Rs.20.400 3. Net profit Rs. 2. You are required to prepare a trading and profit and loss account and balance sheet as on December 31.6.000 5.000 10.560 . Make a provision of @ 5% on sundry debtors.400 10.11.71.000 1.000 8.73.50.1.20.

6. : Gross profit Rs.II 5. plant and Machinery @ 6% and motor car @ 10%. 3. Closing stock was Rs. 4.000 4.000 60. A Machine of Rs.891) .000 25.000 5.000 5.69.000 80. Total balance sheet Rs. (Ans.1. 3.000 7.Financial Statements . Net profit Rs.000 1.000 2.68.000 40.000 . Amount Rs.400 2.000 2.909 .30.000 10.69.45. 2.000 427 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 5.000 was purchased on July 01.000 15.00.400 Adjustments 1.76.000 1. 2. Depreciation charged on : furniture and fixture @ 5%. 5.000 14.000 2. 2005.01. The manager is entitle to a commission of @ 10% of the net profit after charging such commission.000 51. Provision for bad debts is to be maintained @ 2% on debtors.000 1.43. From the following information prepare trading and profit and loss account of M/s Indian sports house for the year ending December 31.400 Account Title Capital Return outwards Bank overdraft Provision for bad debts Sundry creditors Bills payable Sales Amount Rs.000.000 4.00. 2005.400 2.000 12. Manager’s commission Rs.200 .000 20. 20.000 6.80.

81.450 2.000 13. Net loss Rs.250 6.500 4.000 25.560 65. 4.000 Account Title Sundry debtors Bad debts Trade expenses Printing and Stationary Rent. 35. from the following particulars.000 4.000 75.000. Further bad debts Rs.17. Depreciation charged on motor car @ 10%.260 1. : Gross loss Rs.200. Rent. 6.344 .00. (Ans. Rates and Taxes Freight Sales return Motor car Opening stock Furniture and Fixture Purchases Drawings Investments Cash in hand Cash in bank 4. rates and taxes was outstanding Rs. Depreciation charged on furniture and fixture @ 5%. Make a provision for bad debts @ 5% on sundry debtors. 7.310 .27.550 25. 1. Discount on debtors 2%.500 2. Accountancy Prepare the trading and profit and loss account and a balance sheet of M/s Shine Ltd.000 53.000 3.81.032).000 2.50.000 1.428 6.000 3.500 5. Account Title Bills payable Sundry creditors Provision for bad debts Return outwards Capital Discount received Interest received Sales Amount Rs.500 11.000. 85. Total balance sheet Rs.310 Adjustments 1. 3. 2.500 36. Closing stock was valued Rs.550 15.500 75.050 . Amount Rs.00. 5.000 3.19. Interest on drawing @ 6%. 3. 1.

Financial Statements . Unexpired insurance was Rs. Following balances have been extracted from the trial balance of M/s Keshav Electronics Ltd.000 11.300 8.500 79.000 98. 2005.000 1.000 3. Amount Rs.50.000.000 3.000 3.000 4. Provision for doubtful debts is to be maintained at 5% on Sundry Debtors.700 .000 25.78.80. Depreciation is to be charged on building at 5% and motor van at 10%. 4. 2005 was Rs.000 6.000 40.700 The following additional information is available : 1.II 7.00. You are required to prepare the trading and profit and loss account and a balance sheet as on December 31. 2.78. 6.400 10. The Manager is entitled to a commissiion @ 5% on net profit before charging such commission.000 15. 3.000 3.000 30. 5. 600. Account Title Sales Return outwards Creditors Bills payable Interest receivced Capital Amount Rs.000 63.000 5.700 20.40.000 50.26.000 3.000 75. Stock on December 31.000 429 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. 2.000 1.500 22. 30.

000 200 200 1. 4. 3.66.470 The additional information is as under : 1.000 100 500 2.15. Amount Rs.110 1.000 8.50. Net profit Rs.470 Account Title Sales Capital Discount Apprentice premium Bills payable Purchases return Amount Rs.28.430 Accountancy (Ans.01.20. Account Title Drawings Land and Buildings Plant and Machinery Carriage inwards Wages Salary Sales return Bank charges Coal. 5. Salary outstanding was Rs.200 1.000 870 24.000 3. . Manager’s commission Rs.000 12. 20. 40. Make a provision at 5% on debtors for bad debts.870 10.1.381 .300 30.260 5. 6. prepare a trading and profit and loss account for the year ended December 31.66.800 76.100 and Wages prepaid was Rs. Depreciation on plant and machinery charged at 5% and land and building at 10%. Closing stock was valued at the end of the year Rs.000 40. Total balance sheet Rs.350 .269) From the following balances extracted from the books of Raga Ltd. Discount on debtors at 3%.25. The manager is entitled a commission of 5% on net profit after charging such commission.500 54.4.000.600 .800 50. : Gross profit Rs. 2005 and a balance sheet as on that date.000 4. 2.37. 2.000 1.230 1. 20. Gas and Water purchases Trade Expenses Stock (Opening) Cash at bank Rates and Taxes Bills receivable Sundry debtors Cash in hand 4.

600 42. 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 1.633) From the following balances of M/s Jyoti Exports.240 .377 .21.664 .160 240 60 20.II (Ans.440 390 940 1.800 450 1. 2006 and balance sheet as on this date.35.590 24. 4.000 1. 1. 3.600 2. prepare trading and profit and loss account for the year ended March 31.35.000 431 9.500 and salary amounting to Rs. Net profit Rs. 9.000 3. : Gross profit Rs. Account Title Credit Amount Rs. Total balance sheet Rs.670 2.430 15.Financial Statements .000.540 10.10.200 Closing stock Rs.770 820 1. Factory rent prepaid Rs. Manager’s commission Rs. 350 are outstanding. Account Title Debit Amount Rs. 2. To provision for bad debts is to be maintained at 5 per cent on sundry debtors. 100.2.800 34.200 . Wages amounting to Rs. 2. Depreciation charged on Plant and Machinery @ 5% and Building @ 10%.23.12.600 22.500 72.

70.000 120. Total balance Sheet 63.000 6. 2.370 .000 7.000 11. 80. Account Title Capital Bills payable Sales Creditors Return outwards Amount Rs.432 5.000 4. Outstanding insurance Rs.500 . Closing stock Rs.000 70.000 5.000 18. 50. Outstanding wages Rs.000 45.000 34.16.000 2.530) 10. Accountancy (Ans : Gross profit Rs. Net profit Rs.50.000 50. prepare trading and profit and loss account and balance sheet as on this date. 2005.500 2.000 4.700 3. Interest on capital @ 4%.000 60.23.10.200 4.100.000. The following balances have been extracted from the books of M/s Green House for the year ended December 31.500 5.000 3.250 .300 1. 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.500 adjustments : (a) (b) (c) (d) Machinery is depreciated at 10% and buildings depreciated at 6%.70.800 4.00.

000 43.000 600 11. 10. 80.000 3. Net Profit Rs.000 4.750 .000 2. Charge 5% depreciation on furniture.250). . You are requested to prepare the trading and profit and loss account and a balance sheet as on this date.000 40. Account Title Opening stock Purchases and Sales Returns Wages Dock and cleaning charges Lighting Misc. Total balance sheet Rs.000 500 Amount Rs.750 . Income Rent Capital Drawings Debtors and Creditors Cash Investment Patent Land and Machinery Donations and Charity Sales tax collected Furniture Amount Rs.000 200 6. 11. (a) (b) (c) (d) (e) Interest on drawings @ 7% and interest on capital @ 5%.2.II (Ans : Gross profit Rs.600 1.000 600 433 6. Land and Machinery is depreciated at 5%.000 Closing stock was Rs.000 4.000 1. Unexpired rent Rs. Interest on investment @ 6%. From the following balances extracted from the book of M/s Manju Chawla on March 31. 2005.52.000.100.300 1.600 7.83.000 40.19.Financial Statements .3.36.36.000 6.000 2.000 6.

: Gross profit Rs.400 10.@ 10%. 16.000 8.800 4. Salary due but not paid Rs.000 12.000 3.26.434 Accountancy (Ans.000 50. Furniture is depreciated Rs. .12. 1800. Scooter is depreciated @ 5%.30. Net profit Rs.000 6.185 .000. Total balance sheet Rs. 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 1.94.94. Debit Amount Rs.71.600 4.600 1.000 1.400 Prepare the trading and profit and loss account for the year ended December.200 1.400 4.000 200 8.200 1. 1.900 .400 2. 200. The following balances were extracted from the books of M/s Panchsheel Garments on December 31.000 5.800 16. 31 and a balance sheet as on that date. 2005. Interest on capital 5%.185).200 65.000 67. Wages outstanding Rs.400 Account Title Credit Amount Rs. (a) (b) (c) (d) (e) (f) Unexpired insurance Rs 1.000 1.

98.Financial Statements .600 1. Interest on drawings @ 5%.485 36.425 24.39. : Gross profit Rs.470 2. Provide a depreciation @ 5% on plant and machinery.22. Wages outstanding Rs.12.200 . Prepare the trading and profit and loss account and balance sheet of M/s Control Device India on December 31.700 27.385 1.400 2. Net profit Rs.440 58.500 1.215 2.530 45.780}.500 1.975 530 41. Account Title Debit Amount Rs.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 7.73. (a) (b) (c) (d) (e) Interest on capital @ 10%.73.50.660 2. Total balance sheet Rs.000 6. .750 42.300 2. 19. 67. 13.160 11.II (Ans.000 25.780 .500 2.000. 2006 from the following balance as on that date. 20.600 Closing stock was valued Rs.20. Outstanding salary Rs.000 6.700 Credit Amount Rs.

000) 14. 2005 Debtors Bad debts Provision for bad debts Adjustments : Bad debts Rs. profit and loss account and balance sheet.000 The partners of the firm agreed to records the following adjustments in the books of the Firm: Further bad debts Rs.115) Rs.973 . The following balances apperead in the trial balance of M/s Kapil Traders as on March 31. Profit and Loss account Rs.300.500 Provision on debtors @ 3%. provision for account.28. debtors account.8. Net loss Rs. Maintain provision for bad debts 10%. (a). (d).000 Checklist to Test Your Understanding 1. Show the following adjustments in the bad debts account. provision account.000 2. profit and loss account and balance sheet from the following information as on December 31. : Gross profit Rs.29. (c). (d) . (Ans. 2.436 Accountancy (f) Make a 5% provision on debtors.1. (b). 80.1. 30. (Ans : Credit Profit and Loss account Rs. Dr. 5. Total balance sheet Rs.500 500 2. Prepare the bad debts account.760 .000 5. 3. 4.820) 15. 2006 Sundry debtors Bad debts Provision for bad debts Rs. (Ans .

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