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Chapter 3Financial Statements

Objectives: To make the student understand the procedure of preparation of financial

statements. To give them clarity about the link between each and every step of accounting

while preparing financial statements. To make them get the clarity on Profit and Loss Statement and Balance Sheet To make them well versed the corporate financial statements. To give them an insight into understanding Annual report.

3.1 Introduction

We have discussed the procedure of accounting in the earlier chapter and also we have discussed the steps up to preparation of Trial Balance. Once you are able to understand the basis of preparation of Trial Balance and also the purpose for which the Trial Balance is prepared, we have discussed that the Trial Balance serves as a base for preparing the Financial statements. All the balance of the ledger accounts indicate the balance left at the end of the year in terms of respective accounts. These balances serve as a cushion to fine pout the performance in terms of profit or loss of an enterprise and also the company’s financial position in terms of what it owes and how much it owns. All this and ,much more can be understood once you start reading the following chapters. Objective of Financial Statement:Financial Statements are prepared to provide an information about the financial position , performance , cash flow position etc to help the end users to carry out an evaluation of the ability of the business enterprise to generate cash and cash equivalents and also for forecasting the future requirements in order to increase the ability of the business enterprise. Financial statements may not provide all the information that is needed, but definitely they serve the purpose to meet the common needs. Financial Statements may not provide the entire information because of the following reasons

They are largely based on the historical data and hence they reflect the past events

They may provide a base for future decision making , it can not be taken as hundred percent foolproof for future decision making.

Of course they do not provide any non financial information which may be of some help while taking strategic decisions.

3.2 Classification of Financial StatementsConventionally financial statements were classified under three categories;

1. Manufacturing or Trading Account2. Profit and loss Account3. Balance SheetLet us look into these first and then we will have detailed understating of the corporate financial statementsNote: All the business enterprises have to prepare either Manufacturing or Trading Account depending on their nature of business. But invariably they have to prepare the remaining two account which reflects the financial performance and also the financial position of the enterprise.

Manufacturing or Trading Account:This account is mainly prepared by the enterprises which are into either Manufacturing or Trading as the case may be. Basic objective of preparing the account is to find out the residual after spending on the direct expenses that are required to either manufacture or purchase the finished goods and the revenue generated out of selling the same . All the expenses and income generated out of the selling activity occupy a place in the manufacturing or trading account. The following pro forma clearly explains the components of these accounts.Points at a Glance: Trading account is the first part of the Income statement of the trading

concerns. It is prepared to ascertain the trading results of the business. Opening stock, net purchases, wages, direct expenses are debited to the

account. Net sales & closing stock is credited to the account. Gross profit / Gross Loss earned is ascertained in trading account. The amount

is then transferred to the profit & loss account to find net profit / net loss.

ProformaManufacturing or Trading Account

For the year ended xxxxxxxxxxDr. Cr.

Particulars Amount Rs Particulars Amount Rs.To Opening Stock xxx By Sales xxx

(Less) Returns xxx xxxTo Purchases xxx(Less) Returns xxx xxxTo Wage xxx (Add) Outstanding xxx xxxTo Carriage Inward xxxTo Gas, Water, & Fuel xxxTo Factory rent xxxTo Factory Lighting xxxTo Trade Expenses xxx By Closing stock xxxTo Gross Profit* Transferred to P&L A/c xxx

By Gross Los*Transferred to P&L A/c

xxx

Total xxx Total xxx* Note: the business will have either the gross profit or gross loss.

e.g. From the following prepare the Trading Account for the year ending on 31st March, 2008. a. Opening Stock Rs. 90,000b. Cash sales Rs. 36,000c. Credit Sales Rs. 7,20,000

d. returns Outwards Rs. 6,000e. Wages & Salaries Rs. 2,400f. Carriage Inward Rs. 1,200g. Freight inward Rs.1,800h. Cartage Inward Rs. 600i. Cash Purchases Rs. 30,000j. Credit Purchases Rs. 6,00,000k. Returns Inward Rs. 12,000l. Closing Stock as 31-03-2008 Rs. 50,400

Solution:Trading Account

For the year ended 31st March, 2008Dr. Cr.

Particulars Amount Rs Particulars Amount Rs.To opening Stock 90,000 By Sales To Purchases Cash Sales 36,000Cash Purchases 30,000 Credit Sales 7,20,000 Credit Purchases 6,00,000 Total Sales 7,56,000Total Purc. 6,30,000 Less Return 12,000 744,000Less Returns 6,000 6,24,000 By Closing Stock 50,400 To Freight Inward 1,800To Cartage Inward 1,200To Carriage Inward 600To Wages & Salaries 2,400To Gross Profit Transferred to P& L A/c

74,400

Total 794,400 Total 7,94,400

3.4 Profit and Loss Account: Second part of the income statement of the trading concern. Prepared to find out net profit or net loss of the year. Starts with Gross Profit on credit side or gross loss on the debit side. All indirect incomes and gains of the year received or accrued on credit side. All indirect expenses of the year whether paid out standing debited. After entering all incomes and gains on credit side. and expenses on debit

side, the account is balanced. If total of credit balances is more than total of debit balances, the difference

is Net Profit. If total of debit balances is more than total of credit balances, the difference is

Net Loss. Examples of Indirect Income Discounts received Commissions received Interest received Rent received etc. Dividends received Profit on sale of assets Examples Of Indirect Expenses Administrative expenses Selling and distributive expenses Financial expenses Maintenance and depreciation expenses

Provisions

Uses of Profit and Loss Account Shows the net profit / loss. Compares previous years profits with present year profit. It will help the

management to take right decisions Guides management in controlling expenses and to improve future profits Calculates taxes payable to Government

Profit and loss AccountFor the year ended xxxxxxx

Dr. Cr.Particulars Amount Rs. Particulars Amount Rs.

To Gross Loss (xxx) By Gross Profit XxxTo Salaries xxx(Add) Outstanding xxx xxx

By Interest Received Xxx

To Depreciation xxx By Dividend Received XxxTo Rent Paid xxx(less) Prepaid xxx

xxx By Rent Received Xxx

To Printing and Stationery

Xxx By Discount Received xxx

To Bad Debts Xxx By Provision for Bad Debts

Xxx

To Carriage outward xxx By Commission Received

xxx

To Rates and taxes xxx By Profit on Sales of Fixed Assets

xxx

To Insurance Premium Xxx By Net Loss transferred to Capital*

To Telephone Expenses XxxTo Audit Fees XxxTo Discount Allowed XxxTo Freight Outward xxxTo Commission Paid xxxTo Traveling Expenses XxxTo Bank Charges XxxTo Legal Charges XxxTo Repairs and Maintenance

xxx

To Miscellaneous Expenses

xxx

To Interest on Loan XxxTo Advertising and Publicity

Xxx

To Packing Expenses XxxTo Loss on sale of Fixed Assets

Xxx

To loss by theft XxxTo loss by fire XxxTo loss by embezzlement

Xxx

To Net Profit xxx

Transferred to Capital*Total Xxx Total XXX

e.g. From the following information prepare a Profit and Loss Account of a trader for the year ending on 31st March, 2008Particulars Amount Rs.Gross Profit 3,00,000Salary & Wages 60,000Wages & Salaries 600Carriage Inwards 1,200Carriage Outwards 3,000Freight Inward 1,800Freight outwards 3,000Discount Allowed 600Discount Received 1,200Dividend Received 1,800Commission allowed 1,200Commission received 1,800Interest allowed 1,800Interest Received 2,400Rent Paid 2,400Rent Received 3,000Apprenticeship Premium received 3,000Apprenticeship premium paid 3,600General expenses 600Miscellaneous income 1,800Brokerage Allowed 1,800

Solution:Profit and Loss Account

For the year ended 31-03—2008Dr. Cr.Particulars Amount Rs. Particulars Amount Rs.To Salaries & Wages 6,000 By Gross Profit 3,00,000To Carriage Outwards 3,000 By Discount Received 1,200To Freight outwards 3,000 By Dividend Received 1,800To Discount Allowed 600 By Commission 1,800

ReceivedTo Commission Allowed 1,200 By Interest Received 2,400To Interest Allowed 1,800 By Rent Received 3,000To Rent Paid 2,400 By Apprenticeship

Premium Received3,000

To Apprenticeship Premium Paid

3,600 By Miscellaneous Income

1,800

To General Expenses 600To Brokerage Allowed 1,800To Net Profit t/f capital account

2,91,000

Total 3,15,000 Total 3,15,000

*The company will have either the Net Profit or Net loss at any given point of time.

3.5 Balance sheet: 1 It is a statement with two columns.2 All assets are entered on one side (right side)3 All liabilities including the capital are entered in other side (left side)4 It is prepared at the end of the accounting period on a specific date.5 It shows the financial position of a firm. It shows the nature and value of

Assets, Liabilities and Capital. Right Hand side: All the assets are written.

Left Hand side: All the liabilities including capital are written. Total of the assets must be equal to the total of the liabilities, i.e. Right Hand

side = Left Hand Side Balance Sheet is prepared only after the preparation of trading account and

profit and loss account. All the accounts which have not been closed by transfer to either trading

account or profit and loss account, must appear in the Balance sheet

Is prepared in two ways 1. In the order of liquidity2. in the order of permanence

Proforma -1Balance Sheet As on xxxxxxxx

Liabilities Amount Rs. Assets Amount Rs.Current Liabilities: Current AssetsBank Overdraft Xxx Cash In Hand XxxBills Payable Xxx Cash In Bank XxxOutstanding Expenses Xxx Bills receivable XxxSundry Creditors xxx Sundry Debtors XxxIncome received in advance

xxx Prepaid Expenses Xxx

Accrued Income XxxClosing Stock Xxx

Long Term Liabilities InvestmentsLoan Xxx Share XxxCapital Fixed Assets (Tangible)Opening Capital xxx Furniture & Fixtures xxxAdd: Interest on capital xxx

Depreciation xxx Xxx

Add: Net Profit xxx Plant & machinery xxxLess: Drawings xxx xxx Depreciation xxx Xxx

Building xxxDeprecation xxx XxxFixed Assets (Intangible)Goodwill XxxPatents XxxCopyrights xxxTrademarks Xxx

Total Xxx Total xxx

Proforma IIBalance Sheet As on xxxxxxx

Liabilities Amount Rs. Assets Amount Rs.Capital Fixed AssetsOpening Capital xxx Fixed Assets

(Tangible)Add: Interest on capital xxx

Furniture & Fixtures xxx

Add: Net Profit xxx Depreciation xxx XxxLess: Drawings xxx xxx Plant & machinery xxxLong Term Liabilities Depreciation xxx XxxLoan Xxx Building xxxCurrent Liabilities: Deprecation xxx XxxBank Overdraft Xxx InvestmentsBills Payable Xxx Share XxxOutstanding Expenses Xxx Current AssetsSundry Creditors xxx Cash In Hand XxxIncome received in advance

xxx Cash In Bank Xxx

Bills receivable XxxSundry Debtors XxxPrepaid Expenses XxxAccrued Income XxxClosing Stock Xxx

Total Xxx Total xxx

e.g. From the following information , prepare a Balance Sheet of M/s ABC as on 31st March, 2008 under both format of Balance Sheet.

Particulars Amount Rs.Plant & Machinery 60,000Prepaid Expenses 600Income received in advance 1,200Bills Payable 1,800Sundry Debtors 60,000Bank Overdraft 6,000Long-term form bank 60,000Capital 1,20,000Land 6,000Drawings 6,000Cash – in -Hand 3,000Furniture and Fixtures 12,000Accrued Income 1,200Outstanding Expenses 600Bill Receivable 1,200Sundry creditors 59,400Investments in shares of X Ltd. 6,000Closing Stock 51,000Building 60,000Goodwill 6,000Net Profit 30,000Cash at Bank 6,000

Balance SheetOf M/s ABC Ltd.

As on 31-03-2008Liquidity Form

Liabilities Amount Rs. Assets Amount Rs.Current Liabilities Current AssetsBank Overdraft 6,000 Cash In Hand 3,000Bills Payable 1,800 Cash at Bank 6,000Outstanding Expenses 600 Bills Receivable 1,200Sundry Creditors 59,400 Sundry Debtors 60,000Income Received in Advance

1,200 Prepaid Expenses 600

Long Term Liabilities Accrued Income 1,200Loan 60,000 Closing Stock 51,000Capital Investments Opening Balance 1,20,000 Shares of X LTd. 6,000Add: Net Profit 30,000 Fixed AssetsLess: Drawings 6,000 1,44,000 Furniture &

Fixtures 12,000

Plant & Machinery 60,000Building 60,000Land 6,000Goodwill 6,000

Total 2,73,000 Total 2,73,000

Balance SheetOf M/s ABC Ltd.

As on 31-03-2008In the order of Permanence

Liabilities Amount Rs.

Assets Amount Rs.

Capital Fixed AssetsOpening Balance 1,20,000 Furniture &

Fixtures 12,000

Add: Net Profit 30,000 Plant & Machinery 60,000Less: Drawings 6,000 1,44,000 Building 60,000Long Term Liabilities Land 6,000Loan 60,000 Goodwill 6,000Current Liabilities Investments Bank Overdraft 6,000 Shares of X LTd. 6,000Bills Payable 1,800 Current AssetsOutstanding Expenses 600 Cash In Hand 3,000Sundry Creditors 59,400 Cash at Bank 6,000Income Received in Advance

1,200 Bills Receivable 1,200

Sundry Debtors 60,000Prepaid Expenses 600Accrued Income 1,200Closing Stock 51,000

Total 2,73,000 Total 2,73,000

3.6 Comprehensive Illustration:

From the following Trial Balance of Tirumala Traders, Kurnool prepare Trading and Profit and Loss account and Balance Sheet as on 31-03-2009.

Particulars Debit ( Rs.) Credit (Rs.)

CashPurchases Opening StockSundry debtorsPlant and machineryFurniture Bills receivableRent & taxesWagesSalariesCapitalBill payable Sundry creditorsSalesProvision for bad debts`

2,200 1,25,000 34,000 40,000 70,000 10,000 15,000 3,800 21,000 33,000

2,000 3,56,000

1,10,000 24,000 22,000 2,00,000 -------------

3,56,000

Additional Information: Stock as on 31/03/2009 is valued at Rs. 50,000/-. Solution:

Trading AccountOf

Tirumala Traders Ltd.For the year ended 31-03-2009

Particulars Amount Particulars Amount

To opening stockTo purchasesTo wagesTo gross profit (transf. to P&L a/c)

34,000 125,000 21,000 70,000----------- 250,000-----------

By sales By closing stock

200,000 50,000

----------- 250,000-----------

Profit And Loss AccountFor the Year ended 31-03-2009

Particulars Amount Particulars Amount

To Rent and taxesTo Salaries

To Provision for bad debtsTo Net profit ( tranfd. to

capital a/c)

3,800 33,000 2,000

31,200------------ 70,000------------

By Gross profit

70,000

------------ 70,000

------------

Balance SheetAs on 31-03-2009

Liabilities Amount Assets Amount

Bills payableSundry creditors

Capital 110,000 Add. Net profit 31200 --------

24,000 22,000

1,41,200

-----------1,87,200-----------

Cash Sundry debtors Closing stock Plant & Mach.

Furniture Bills receivable

2,200 40,000 50,000 70,000 10,000 15,000-----------

1,87,200------------

3.7 Additional Information or Adjustments: The main object of final accounts is to find out exact Net profit / Loss and true

financial position of the firm

To get correct net profit / loss, all expenses incurred and incomes earned in the year whether actually paid or to be paid or received (or to be received) are brought into account

Certain expenses relating to the trading period may be due but not paid. Similarly, certain expenses are paid in advance but not due.

There are some incomes earned during the trading period but not received. Sometimes, incomes are received in advance but not earned in the trading period.

Certain debts may become irrecoverable, which are to be written off. And provision is to be made for bad and doubtful debts.

Depreciation is to be made on fixed assets.

The above are some of the cases, among many, which require adjustments. Before preparing final accounts, adjustments are to be made to find out

exact net profit/loss.

Common Adjustments:

Note: All adjustments will have dual effect according to the dual aspect Principle. As these adjustment are the ones which are not taken into

account at any of the steps of accounting. Hence we have to show two effects.Each adjustment will have first effect either on the Trading Account or Profit and Loss Account or compulsorily on the Balance Sheet.

1. Closing StockClosing Stock is the stock which is left at the end of the year , which consist of the stock of material, work in progress and finished goods.

If the closing stock is given in the Trial Balance it will be directly taken on the Balance sheet.

If it is given as adjustment, two effects will be

Closing Stock

Cr. Side of The Trading Account Current Asset side of the balance Sheet

2. Depreciation:Depreciation is the loss in the value of an asset; we have discussed various types and reasons of depreciation in the earlier chapters. As the depreciation is worked out at the year end it is given as an adjustment. The value has to be reduced from the respective asset in order to show the book values of an asset as per the cost concept.

Depreciation

Deduct from the Asset on the Dr. Side of Profit & Loss Account Asset side of Balance Sheet

3. Prepaid Expenses:Prepaid expenses are the expenses which are paid in advance. These expenses are supposed to be paid in the following accounting year but it has been paid in this year. There are two possibilities of these kinds of expenses. One it may be adjusted in the next year and two it may be paid back, but chances of the first occurrence are more. This has to be adjusted in order to fulfill the requirements of matching concept. e.g Rent, Insurance, Telephone charges etc.

Prepaid Expenses

Deduct from the respective item on the Under Current Assets of Balance SheetDr. Side of profit and Loss Account

4. Outstanding ExpensesOutstanding expenses are the expenses which are supposed to be paid in the current accounting year, but have not been paid. Such expenses are called as outstanding. According to the matching concept these expenses have to be shown as the one which would have taken place in the same accounting year and as a liability as it is yet to be paid.

Outstanding Expenses

Add to the respective account on the Show on the liability side of the Dr. side of either the Trading Account Balance SheetOr the Profit and Loss Account.

5. Accrued Income:Accrued income is the income which is earned but it is yet fall in the hands of the organization. E.g. when the amount is received in the form of cheque , we make an entry in the same date on which cheque is received, but in true parlance it will not considered as earned in total until it gets realized. Again in order to stick to the Matching Concept we have to show the two effects of the adjustment.

Accrued Income:

Add to the respective account on the Show on the Current Asset side of the Cr. side of the Profit and Loss Account. Balance Sheet

6. Bad Debts:Bad debts are the loses which occurs due to the non payment of the debts on time. These are considered as the irrecoverable losses.

Bad Debts

Deduct form the Debtors on the Current Show it on the Dr. Side ofAsset of Balance Sheet Profit and Loss Account

Note: If the bad debts are given in the Trial Balance , then it is considered as the old bad debts and the one which is given in the form of adjustment is considered as new bad debt. Old bad debt has to be taken on the Dr. Side of Profit and loss Account and new bad debt has to added to the old bad debt. Only the bad debt which is given as adjustment will have two effects.

7. Provision for Bad Debts:Provision for bad Debt means, creating a provision against the bad debts in order to overcome the loss if at all there is any additional bad debts.

Provision for Bad Debts

Deduct from the Debtors on the Show it on the Dr. Side of Current Asset side of Balance Sheet Profit and Loss Account.

Note: If Provision for Bad Debt is given in the Trial Balance it is considered as the old provision. And while showing the effect new provision has to be deducted from the old provision on the debit side of profit and loss Account. Or old provision has to be shown on the credit side of the Profit and loss account and new provision on the debit side of the profit and loss accounts.

8. Discount on Debtors:

When discount is given for debtors it is considered as a loss. And accordingly it has to be reflected in the accounting.

Discount on Debtors

Deduct it from Debtors on the Current Show it on the Dr. Side of ProfitAsset side of Balance Sheet and Loss Account

Note: When all the three adjustments are given i.e. additional Bad Debts, additional Provision for Bad Debts and Discount on Debtors. Then it has to be shown in the following sequence.

Debtors

Less: Bad Debts

Less: Provision For bad Debts

Less: Discount on Debtors

9. Income Received in Advance:It is the income which the company was not supposed to receive in the current accounting year, but it has received. Hence there will be two chances of this type of income, one it may be given back to the parties or it can be adjusted in the next accounting year. As we had already discussed in terms of the accrued income the effect in this case will be reverse.

Income Received in Advance

Deduct from the Cr. Side of the Profit show it on the Liability And Loss Account side of Balance Sheet

10.Goods Lost by Fire:Whenever goods are lost by fire ,(it may not be a regular occurrence ) but sometimes if the goods catch fire and if they are damaged, if the claim is admitted with the insurance company for which , insurance company may pay the

entire amount or it may pay partially. If the partial payment is made in that case the adjustment will have three affects. Otherwise it will have only two effects.

e.g. goods lost by fire Rs. 10,000 and insurance company has admitted a claim of Rs. 8,000.

Goods Lost by Fire

Show It on the Cr. Side of the Trading Show it on the CurrentAccount Asset side of Balance Sheet(Total Loss- Rs. 10,000) (Only the amount admitted

By the Insurance CompanyRs. 8,000)

Dr Side of Profit and loss Account(Actual Loss – Rs. 2,000)

11.Managers Commission:From the net profit of the company , suppose the manager of the firm is entitled to a commission @ 5% on the net profit, it can be calculated in two ways

a. If the manager is allowed commission on the net profit before charging such commission.

It can be calculated in the following manner

Commission

= Net Profit before charging such commission x rate of commission / 100

b. If the manager is allowed commission on the net profit after charging such commission.

It can be calculated in the following manner Commission

= Net Profit before charging such commission x rate of commission / 100 + Rate of Commission

Illustration: Preparation of Financial Statement based on the adjustment.

1. The following is the Trial Balance of Shri. Vinay as on 31st March, 2009

Particulars Amount Rs.

Particulars Amount Rs.

Fixed Assets 1,80,000 Creditors 60,000Opening Stock 45,000 Bills Payables 3,360Debtors 1,23,000 Loan From Bank 2,400

Bills Receivable 6,000 Capital Account 3,00,00012% Investments (purchased on 1st July, 08)

30,000 Sales 3,78,000

Cash In Hand 3,000 Purchase Returns 3,000Cash at bank 6,000 Discount Earned 600Drawings 6,000 Bad Debts

Recovered2,100

Purchases 3,15,000 Interest 1,800Sales Returns 6,000Carriage Inwards 3,000Carriage Outwards 1,200Rent 1,800Insurance 2,160Office & Administration Exp 7,920Discount Allowed 1,200Bad Debts 3,000Interest 1,500Selling & Distribution Exp. 9,480Total 7,51,260 7,51,260

Additional Information:1. Closing stock as on 31st March, 2009 was Rs. 25,2002. Rent is payable at the rate of Rs. 180 per month 3. Insurance Premium was paid for the year ending on 30th June, 20094. Write off further Rs. 3,000 as bad Debts.5. Create Provision for discount on debtors @ 2%6. Provide for deprecation on fixed assets @ 10% p.a.7. Create a provision for discount on creditor @ 2%8. Create a provision for doubtful debts @ 10%

You are required to prepare Trading and Profit & Loss Account for the year ended, 31st ,March, 2009 and Balance Sheet as on that date.

Explanation of the additional information:

1. Closing stock as on 31st March, 2009 was Rs. 25,200

Cr. Side of Trading Account Assets(Current Asset) Side of Balance Sheet

2. Rent is payable at the rate of Rs. 180 per month Rent was supposed to be paid @ Rs. 180 Per month , for a period of 12 months total rent would have been Rs. 2,160. But actual paid is only Rs. 1,800, hence the balance amount is unpaid (Rs. 360).

Unpaid rent

Add to the Rent on Dr. side of Profit Show it as the current liabilityAnd Loss Account as outstanding on the Balance Sheet

3. Insurance Premium was paid for the year ending on 30th June, 2009Insurance was supposed to be paid only for 12 months Rs. 1,620 for the year ended 31st march, 2009,but in the Trial Balance it is shown as Rs. 2,160 which means the amount has been paid for the next three months also which falls under the next accounting year. Hence which ever is not supposed to be paid in this year is an advance payment. Insurance premium has been paid to the extent of Rs. 540 as an advance. i.e Rs. 180 per month x 12= Rs. 2,160, three months advance payment Rs.180 x 3= Rs. 540

Prepaid Insurance

Deduct From the Insurance on the Show it on the Current Assets of the Dr. Side of Profit and loss Account Balance Sheet

6 Write off further Rs. 3,000 as bad Debts

Deduct from the Debtors Show it on the Dr. Side of Profit and lossOn the Balance Sheet Account as new bad debts.

5. Create Provision for discount on debtors @ 2%

Deduct from the Debtors Show it on the Dr. Side of Profit and lossOn the Balance Sheet Account as new bad debts.

6. Provide for deprecation on fixed assets @ 10% p.a.

Deduct from the fixed Assets Show it on the Dr. Side of the Profit and LossOn the Balance Sheet Account.

7. Create a provision for discount on creditor @ 2%

Deduct form Creditors on the Show on the Cr. Side of the Profit and A/cLiability side of Balance Sheet

8. Create a provision for doubtful debts @ 10%

Deduct form debtors from Show it on the Dr. Side of Profit and LossCurrent Asset on the Balance Sheet Account.

Solution:Trading Account

Dr. For the year ended 31-03-2009 Cr.Particulars Amount Rs. Particulars Amount Rs.

To, Opening Stock 45,000 By Sales 3,78,000To Purchases 3,15,000 Less: Returns 6,000 3,72,000Less: Returns 3,000 3,12,000 By Closing Stock 25,200To Carriage Inwards 3,000To Gross Profit T/f to P& L 37,200Total 3,97,000 Total 3,97,000

Profit and Loss Account

Dr. For the year ended 31-03-2009 Cr.Particulars Amount

Rs.Particulars Amount

Rs.To Carriage outward 1,200 By Gross Profit 37,200To Rent Paid 1,800 By Discount 600Add: Outstanding 360 2,160 By Bad Debts Recovered 2,100To insurance paid 2,160 By Interest Received 1,800Less: Prepaid 540 1,620 Add: Accrued but not due 900* 2,700To office & Admn. Exp 7,920 By Reserve for Discount on

Creditors1,200

To Discount 1,200 By Net Loss Transferred to Capital Account

19,440

To Bad Debts 3,000 (Old)+ New Bad debts 3,000 6,000To interest 1,500To Selling & Distribution Exp 9,480To Provision doubtful Debts 12,000To provision for discount Debtors

2,160

To Depreciation on fixed assets 18,000Total 63, 240 Total 63,240

Balance Sheet

As on 31-03-2009Liabilities Amount

Rs.Assets Amount

Rs.Capital Account Fixed Assets

Opening balance 3,00,000 Fixed Assets 1,80,000Less: Net Loss 19,400 Less Depreciation 18,000 1,62,000Less: Drawings 6,000 2,74,560 12% investments 30,000Loans: Current AssetsLoan From Bank 2,400 Closing Stock 25,200Current LiabilitiesCreditors 60,000Less : Reserve for Discount 1,200 58,800

Debtors 1,20,000Less: Provision for doubtful debts 12,000

1,08,000Bills payable 3,360 Less: Provision for Discount

2,160 1,05,840Outstanding Rent 3,60 Interest accrued but not due 900

Cash in hand 3,000Cash In Bank 6,000Bills Receivable 6,000Prepaid Insurance 540

Total 3,39,480 Total 3.39,480

2. The following Trial Balance is extracted from the books of a merchant Mr. A. Nageswara Rao on 31-03-2009.

Trial BalanceAs on 31-03-2009

Particulars Dr. Amount Rs. Cr. Amount Rs.Furniture & Fittings 640Motor Vehicles 6,250Buildings 7,500Capital 12,500Bad Debts 125Provision for Doubtful Debts 200Sundry Debtors & Creditors 3,800 2,500Stock on 1-04-2008 3,460Purchases and Sales 5,475 15,450Bank Overdraft 2,850Returns Inward and Outward 200 175Advertising 450Interest on Bank overdraft 118Commission 375Cash 650Taxes and Insurance Premium 782General Expenses 1,250Salaries 3,300Total 34,000 34,000

Adjustments:1. Closing stock was valued at Rs. 3,250

2. Depreciate Building @5%, Furniture @ 10% and motor Vehicle @ 20% p.a. 3. Rs. 85 is due for interest on Bank Overdraft.4. Salaries Rs. 300 and taxes Rs. 200 are outstanding5. Insurance Premium amounting Rs. 100 prepaid6. One -third of the commission received in respect of work to be done next year7. Write off a further sum of Rs 100 as bad debts from Debtors and create

provision for Doubtful Debts @ 5% on Debtors.You are required to prepare Trading and Profit & Loss Account and the Balance Sheet.

Solution:Explanation of the adjustments

1. Closing stock was valued at Rs. 3,250

Show on the credit side Show on the current assets on the Balance Sheet

Of Trading Account

2. Depreciate Building @5%, Furniture @ 10% and motor Vehicle @ 20% p.a.

Deduct from the respective fixed Show on the Dr. Side ofAsset on the Balance Sheet Profit and Loss Account

3. Rs. 85 is due for interest on Bank Overdraft.

Add to the Interest on Bank Show as a current Liability Overdraft on the Dr. Side of on the Balance Sheet as outstandingProfit and Loss A/c

4. Salaries Rs. 300 and taxes Rs. 200 are outstanding

Add to the respective item Show as a current Liability on the Dr. Side of on the Balance Sheet as outstandingProfit and Loss A/c

5. Insurance Premium amounting Rs. 100 prepaid

Deduct from Insurance Premium show as Current AssetOn the Dr. Side of Profit & on the Balance SheetLoss Account

6. One -third of the commission received in respect of work to be done next year.

Deduct from commission on the Show as Current Liability on the BalanceCr. Side of Profit & Loss A/c Sheet

7. Write off a further sum of Rs 100 as bad debts from Debtors and create.

Deduct from Debtors on the Asset Show it in the Dr. side of Profit & Loss Side of Balance Sheet account.

Trading AccountDr. For The year ending 31-03-2009 Cr.

Particulars Amount Rs. Particulars Amount Rs.To Opening Stock 3,460 By Sales 15,450

- Returns - 200 15,250To Purchases 5,475- Returns - 125 5,350

By Closing Stock 3,250

To Gross Profit T/f to Profit & Loss A/c

9,690

Total 18,500 Total 18,500

Profit and Loss AccountDr. For the year ended 31-03-2009 Cr.

Particulars Amount Rs.

Particulars Amount Rs.

To Bad Debts 125- New Bad Debts - 100- Provision New - 185

By Gross Profit 9,690

410- Old Provision - 200 210

By Commission 375- Received in Advance - 125 250

To Advertising 450To Interest on Bank OD 118+ Outstanding + 85 203To General Expenses 1,250To Salaries 3,300+ Outstanding + 300 3600To Ins. Premium 782+ Outstanding +200 982- Prepaid Premium - 100 882To DepreciationBuildings @ 5% 375Furniture @ 10% 64Motor Vehicle @ 20% 1,250 1,689To Net Profit 1,656Total 9,940 9,490

Balance SheetAs on 31-03-2009

Liabilities Amount Rs. Assets Amount Rs.

Capital 12,500+ Net Profit + 1,656 14,156

Furniture & Fittings 640- Dep @10% - 64 576

Sundry Creditors 2,500 Motor Vehicle 6,250- Dep @ 20% -1,250 5,000

Bank Overdraft 2,850 Buildings 7,500- Dep @ 5% - 375 7,125

Outstanding Expenses Sundry Debtors 3,800- W/ off Bad Debts - 100

Salaries 300Taxes 200Interest on Bank OD 85 585

3,700-5% Provision for DD-185 3,515

Commission received in advance 125

Cash 650

Closing Stock 3,250Pre- paid Insurance Premium

100

Total 20,126 Total 20,126

3. From the following Trial Balance and additional information of Mr. Sri Ram Rao, a proprietor. Prepare Trading and Profit & Loss Account for the year ending on 31st March, 2009 and the Balance Sheet as on date:

Trial BalanceAs on 31-03-2009

Particulars Dr. Amount Rs. Cr. Amount Rs.Bad Debts 4,620Rent 22,000 13,000

Wages 41,920Building 1,20,000Machinery 32,000Salaries 83,200Debtors (Including Raj’s Dishonored bill of Rs. 800) 67,400Purchases/ Sales 1,34,916 2,01,400Capital 2,76, 856Printing & Advertising 29,200Commission Received 6,000Creditors 38,000Total 5,35,256 5,35,256

Additional Information:a. Wages include – a sum of Rs. 8,000 spent on the erection of a cycle shed for employees customers, and Rs. 4,000 for erection of new machinery on 1.1.2009b. Provide 5% depreciation on machinery and buildingc. Remuneration of Rs. 4,000 paid to Dr. Pavan, a temporary employee, stands debited to his personal account.d. Sundry Creditors include an amount Rs. 11,000 received from Harish and credited to his account. The amount was written off as a bad debt in the previous year.e. Goods costing Rs. 1,000 were taken by the proprietor for his personal use but no entry has been made in the books of accounts.f. Goods costing Rs. 1,200 were sent to a customer on sale or return for Rs. 1,400 on 30th March, 2009 and has been recorded in the books as actual sale.g. A fire occurred on 25th March, 2009 in the godown and stock of Rs. 2,000 was destroyed, it was fully insured but the insurance company admitted the claim to the extent of 60% only.h. Half the amount of Raj’s Bill is irrecoverable i. Create a provision of 5% on the other debtorsj. 50% of Printing and Advertising is to be carried forward as a charge in the following year.k. One third of the commission received is in respect of work to be done next year.m. Included amongst the Debtors is Rs. 6,000 due from Krishna and included among the Creditors Rs. 2,000 due to him.n. Provide for personal Income tax @ 10% of Net Profit in excess of Rs. 1,00,000o. Stock in hand on 31st March was valued at Rs. 2,23,776p. Manager is entitled to a commission of 5% on Net Profit after charging his commission.

Explanation:a. Wages include – a sum of Rs. 8,000 spent on the erection of a cycle shed for employees customers.

Deduct from wages on the Dr. Add to Building as the Fixed Asset Side of Trading Accounting on the Balance Sheet

Rs. 4,000 for erection of new machinery on 1.1.2009

Deduct from wages on the Add to machinery as the Fixed AssetDr.Side of Trading Accounting on the Balance Sheet

b. Provide 5% depreciation on machinery and building

Deduct from the respective Show it on the Dr. Side of Asset on the Balance sheet Profit & Loss AccountAs Depreciation

c. Remuneration of Rs. 4,000 paid to Dr. Pavan, a temporary employee, stands debited to his personal account.

Add to Salary on the Dr. Side of Profit Deduct from Debtors on the Balance& Loss Account Sheet as current asset.

d. Sundry Creditors include an amount Rs. 11,000 received from Harish and credited to his account. The amount was written off as a bad debt in the previous year.

Deduct from Creditors Show it on the Cr. Side of the As current liability Profit & Loss Account as bad

Debts recovered. e. Goods costing Rs. 1,000 were taken by the proprietor for his personal use but no entry has been made in the books of accounts.

Deduct from Purchases on the Dr. Deduct from capital as

Side of Trading Account Liability

f. Goods costing Rs. 1,200 were sent to a customer on sale or return for Rs. 1,400 on 30th March, 2009 and has been recorded in the books as actual sale.

Add to closing stock on the Dr. Deduct from Debtors Side Trading Account and Balance from Balance Sheet Sheet as Current Asset (Rs. 1,400)(Rs. 1,200)

g. A fire occurred on 25th March, 2009 in the godown and stock of Rs. 2,000 was destroyed, it was fully insured but the insurance company admitted the claim to the extent of 60% only.

Show it on the Cr. Side Trading Show as Current Asset on the Balance Account . Sheet Rs. 1,200(Full Amount Rs. 2,000)

Dr. Side of P&LAccount Rs. 800

h. Half the amount of Raj’s Bill is irrecoverable.

Deduct from Debtors on the Show on the Dr. Side of Profit Balance Sheet as Bad Debts & Loss Account as Bad debts

i. Create a provision of 5% on the other debtors.

Deduct from Debtors on the show as new provision on the Dr. SideBalance Sheet of Profit & Loss Account

j. 50% of printing and Advertising is to be carried forward as a charge in the following year.

Deduct from printing & Stationery Show as a current LiabilityOn the Dr. side of P & L account

k. One third of the commission received is in respect of work to be done next year.

Deduct form commission received Show as a current liability onOn Cr. Side of P & L Account Balance Sheet

m. Included amongst the Debtors is Rs. 6,000 due from Krishna and included among the Creditors Rs. 2,000 due to him.

Deduct from Debtors show as a current liability and current assetDeduct form Creditors the RespectivelyAmount respectively

n. Provide for personal Income tax @ 10% of Net Profit in excess of Rs. 1,00,000

Show on the Dr Side of P&L Deduct form capitalAccount

o. Stock in hand on 31st March was valued at Rs. 2,23,776.

Show on the Cr. Side of Show as a current AssetTrading Account on the Balance Sheet

p. Manager is entitled to a commission of 5% on Net Profit after charging his commission.

Work out form the profit As explained in the adjustment Show as current liability on the Balance Sheet

Trading Account For the Year EndedDr 31-03-2009 Cr.

Particulars Amount Rs. Particulars Amount Rs.To Purchases 1,34,916- Goods Withdrawn -1,000 1,33,916

By Sales 2,01,400- Goods Sent on Approval - 1,400 2,00,000

To Wages 41, 920-Wages for Erection - 8,000 - Wages Machines- 4,000 29,920

By loss of stock by fire 2,000

To Gross Profit C/D 2,63,140 By Closing Stock 2,23,776- Goods Sent on Approval - 1,200

2,24,976

4,26,976 4,26,976

Profit and Loss AccountDr. For the year ended 31-03-2009 Cr.

Particulars Amount Rs.

Particulars Amount Rs.

To Salaries 83,200+ Salary to Pavan 4,000 87,200

By Gross Profit C/D 2,63,140

To Dep on Building 6,400 By Bad Debts Recovered 11,000To Dep on Machinery 1,800 By Commission received

6,000- Unaccrued -2,000 4,000

To loss of stock by fire 800 By Rent received 13,000- Un accrued (1/3 ) 1,000 12,000

To bad Debts 4,620+ 50% Due 800+ New Provision 2,920 8,340To Printing & Advt. 29,200- Prepaid - 14,600 14,600To Rent Paid 22,000 + O/S 2,000 24,000To Managers Commission(1,47,000 x 5/105) 7,000To Net Profit t/f/ to Capital A/c 1,40,000Total 2,90,140 Total 2,90,140

Balance SheetAs on 31-03-2009

Liabilities Amount Rs.

Assets Amount Rs.

Capital 2,76,856+ Net Profit 1,40,000- Income Tax 4,000- Drawings 1,000 4,11,856

Building 1,20,000+ Wages for Cycle shed 8,000

Current Liabilities 1,28,000- Depreciation 6,400 1,21,600

Creditors 38,000- Bad Debts 11,000- Due to Pavan 2,000 25,000

Machinery 32,000 + Wages for erection 4,000- Deprecation 1,800 34,200

Outstanding Rent 2,000 Current Assets:Unaccrued commission 2,000 Closing Stock 2,23,776

+ Stock with Customers 1,200 2,24,976

Unaccrued rent 1,000 Debtors 67,400- Salary to Pavan 4,000- Goods sent on approval 1,400 - Bad Debts 800- Due from Pavan 2,000(set off against creditors)

Provision for Income Tax 4,000 59,200- Provision @ 5% 2,920 56,280

Manager’s Commission 7,000 Prepaid Printing & Stationery 14,600Insurance Prepaid 1,200

Total 4,52,856 Total 4,52,856