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Cash Book - Subsidiary Books 1

Cash Book—Subsidiary Books

MEANING

A cash book is a special journal which is used for recording all cash transactions only - i.e., all cash receipts and cash payments are recorded in it.

The cash book is both a journal and a ledger as well. All the transactions are first recorded in prime books and then they are transferred in cash A/c. The debit side of cash A/c records receipts and credit side records all payments.

Fig. 7.1.

(1) Single Column Cash Book :It is one amount column on each side. All cash receipts are recorded on debit side and all cash

payments are recorded on credit side.

Format on Single Column Cash Book :

Dr. Cash A/c Cr.Date Particular V.F.

No.Amount

Rs.Date Particular V.F.

No.Amount

Rs.

Illustration 1. From the following prepare a cash book

Rs.Jan 1

5

810

1621

253131

Cash in hand Paid to Bansal Discount allowed Purchased goods Received from Ram Discount allowed Sold goods to garg for cash Paid to Chand Discount Received Paid wagesPaid to XPurchased furniture

340060020

8001960

4080059010

100780400

Solution :


Dr. Cash Book Cr.Date Particular R.F.

No.Amount

Rs.Date Particular R.F.

No.Amount

Rs.Jan. 1Jan.10Jan.15

To, Balance b/dTo, RamTo, Sales

34001960800

Jan. 58

21253131

"

By, BansalBy, PurchasesBy, ChandBy, WagesBy, XBy, FurnitureBy, Balance c/d

600800590100780400

28906160 6160

Discount: The term 'discount' is used to express one of the following situations (i) The amount charged by a bank on discounting of a bill of exchange.(ii) The excess of par or face value of shares or debentures over the amount paid by the subscriber, i.e.,

discount on issue of shares or debentures.(iii) An allowance given to the wholeseller or bulk buyer on the list price or retail price, known as trade

discount.Discount earned is accounted for as an income in the books of the beneficiary and discount allowed is

accounted for as an expense or deferred revenue expenditure in the books of the party.

(2) Cash Book with Discount Column

Meaning : Cash book with Discount Column has two amount columns (one for cash and another for discount) on each side. All cash receipts and cash discount allowed are recorded on the debit side and all cash payments and cash discount received are recorded on the credit side.Format of Cash Book with Discount Column

The format of Cash Book with Discount Column is given below :Dr. Cash Book Cr.Date Particulars L.F. Discoun

t Rs.Cash Rs.

Date Particulars L.F. Discount Rs.

Cash Rs.

Illustration 2. Prepare a Two-column Cash Book from the following transactions of Shri M.L. Gupta :

Date Particulars Rs.Jan. 1

6101112

19

2728

Cash in handCash purchasesWages paidCash SalesCash received from Suresh andallowed him discountCasn paid to Munnaand discount receivedCash paid to RadheyPurchased goods for cash

40,00020,000

40060,00019,800

20024700

3004,000

20,700Solution :


Dr. Cash Book Cr.

Date ParticularsR.F.

No.

AmountDate Particulars

V.F.

No.

AmountDiscount

Rs.Cash Rs.

Discount Rs.

Cash Rs.

2006 2006Jan1

11To Balanace b/d To Sales A/c To Suresh 200

40,000 60,000 19,800

Jan6 10 192728 31

By Purchases A/c By Wages A/c By Munna By Radhey By Purchases A/c By Balance c/d

300 20,000 400

24,470 4000

20,700 50,000

200 119,800 300 119,8002006Feb1 To Balance b/d 50,000

(3) Three Column Cash BookMeaning of Three Column Cash BookThree Column Cash Book has three amount columns (one for cash, one for Bank and third for

Discount) on each side. All cash receipts, deposits into bank and discount allowed and other are recorded on debit side and all cash payments, withdrawal from bank and discount received are recorded on the credit side.

Format of Three Column Cash Book :The format of three column cash book is given below :

Cash Book with Discount ColumnDebit Side Credit SideDate Particulars V.F.

No.Discount

Rs.Cash Rs.

Bank Rs.

Date Particulars

V.F.No.

DiscountRs.

Cash Rs.

Bank Rs.

Posting from Main Cash Book : The various items appearing on the debit side and credit side are posted as follows :

S.No. Posting of items appearing on debit side Posting of items appearing on credit side

1.

2.

All the receipts appearing on the debit side are posted to the credit of the respective ledger accounts in the ledger by writing 'By Cash/Bank A/c' in the particulars column since cash/cheque has been received in respect of them.

An individual entry in the discount allowed column is posted to the credit of the respective personal accounts in the ledger by writing 'By Discount Allowed A/c' in the particular column.

All the payments appearing on the credit side are posted to the debit of the respective ledger accounts in the ledger by writing 'To Cash/Bank A/c' in the particular column since cash/cheque has been paid in respect of them.

An individual entry in the discount received column is posted to the debit of the respective personal accounts in the ledger by writing 'To Discount Received A/c' in the particular column.


3. The total of discount allowed column on the debit side is posted to the debit of the 'Discount Allowed A/c' in the ledger by writing 'To Sundries as per Cash Book' in the particulars column.

The total of discount received column on the credit side is posted to the credit of the 'Discount Received A/c' in the ledger by writing 'By Sundries as per Cash book' in the particulars column.

Illustration 3. How would you record the following items in a Three-column Cash Book ?

2008 Jan. 1 Paid into-bank Rs. 60,000

2 Withdrew for private expenses Rs. 10,0003 Withdrew from bank Rs. 30,0004 Withdrew from bank for private use Rs. 15,0005 Placed on Fixed Deposit A/c at Bank Rs. 5,000

Solution:

Cash Book with Discount ColumnDebit Side Credit SideDate Particulars L.

F.Disc.Rs.

Cash Rs.

Bank Rs.

Date Particulars L.F.

Disc.Rs.

Cash Rs.

Bank Rs.

2006 2006Jan. 1

3To Cash A/cTo Bank A/c

CC 30,000

60,000

Jan. 12345

By Bank A/cBy Drawing A/cBy Cash A/cBy Drawing A/cBy Fixed Deposit A/c

C

C

60,00010,000

30,00015,000

5,000

Illustration 4. How would you record the following items in a Three Column Cash Book ?

2008Jan. 1 Received a cheque from Ramesh & Co. to whom goods were sold for Rs 20,000 Allowed him

Discount @ 1%. 2 Ramesh & Co.'s cheque deposited into bank. 5 Ramesh & Co.'s cheque dishonoured (bank charged Rs 20. 8 Ramesh & Co. settled his account by means of a cheque for Rs 2,0250 Rs 430 being for

interest charged.

Solution :

Cash Book with Discount ColumnDr. Cr.Date Particulars L.

F.Disc.Rs.

Cash Rs.

Bank Rs.


Disc.Rs.

Cash Rs.

Bank Rs.

2006 2006Jan. 1

28

8

To , Ramesh & Co.To, Cash A/cTo, Ramesh& Co. A/cTo, Interest A/c

C200 19,800

19,80019,820

430

Jan. 2

5

By Bank A/c

By Ramesh A/c

C

200

19,800

19,800

Illustration 5. How would you record the following items in a Three-column Cash Book ?


2008

Jan. 1 Purchased machinery from Rajiv for Rs 5,000. and paid him by means of a bank draft purchased from bank for Rs 5,000.

2 Discounted a bill for Rs 1,000 at 1% through bank. 3 Purchased 100 War Bonds of Rs 100 each at Rs 95 each and paid for them by cheque. 4 Honoured our acceptance in favour of Shyam by cheque Rs 5,000. 5 Received Rs 2,000 for a B/R from Hari Ram and deposited the same into the bank 6 Received payment of a loan of Rs 5.000 and deposited Rs 3,000 out of it into the bank.

Solution :Cash Book with Discount Column

Dr. Cr.Date Particulars L.

F.Disc.Rs.

Cash Rs.

Bank Rs.


Disc.Rs.

Cash Rs.

Bank Rs.

2006 2006Jan. 2

5

66

To B/R A/cTo B/R A/c

To Loan A/cTo Cash A/c C

10

5,000

9902,000

3,000

Jan. 1

346

By MachineryBy DraftCom. A/cBy War BondsBy Bills Pay A/cBy Bank A/c 3,000

5,0005

9,5005,000

Illustration 6. On 1st January 2008. Ram opened a Bank Account by depositing Rs. 6,000 in cash. All remittances are to be paid into bank on the same day on which they are received and all payments are made by cheques. Enter the following transactions in the Three Column Cash Book and Post the same into the ledger.Jan. 2 Goods sold to Mohan for Cash Rs 250. 5 Settled Hart's account of Rs 200 at a discount of 5%. 7 Received from Shyam a cheque for Rs 725. Discount allowed Rs 25. 10 Purchased a old typewriter for Rs 200 and spent Rs 50 on its repairs. 12 Shyam's cheque was returned dishonoured. 15 Received a money order for Rs 25 from Hari 20 Shyam settled his account by means of a cheque for Rs 755, Rs 5 being for interest charged. 27 Purchased machinery from Rajiv for Rs 5,000 and paid him by means of a bank draft purchased from,

bank for Rs 5,005.Solution :

Cash Book with Discount ColumnDr. Cr.Date Particulars L.

F.Disc.Rs.

Cash Rs.

Bank Rs.


Disc.Rs.

Cash Rs.

Bank Rs.

2008 2008Jan. 1

1227

151520

To Capital A/c To Cash A/cTo Sales A/cTo Cash A/cTo ShyamTo HariTo Cash A/cTo Shyam A/c To Interest A/c

C

C

C

––

25––––

6,000

250––

25–––

6,000–

250725

–25

7505

Jan. 125

10

121527

31

By Bank A/c By Bank A/CBy HariBy Typewriter A/c

By ShyamBy Bank A/cBy Machinery A/c By Draft Commission A/c By Balance c/d

CC

C

10–

25–––

–

6,000250

––

–25––

–

190250

725–

5,0005

1,58525 6,245 7,755 35 6,275 7,755

Feb. 1 To Balance b/d – – 1,585Ledger Accounts


Capital AccountDr. Cr.

Date2008

Particulars JF. Rs. Date2008

Particulars JF. Rs.

Jan 1 By Cash A/c 6,000

Sales AccountDr. Cr.

Date2008


Particulars JF. Rs.

Jan 2 By Cash A/c 250

Shyam's AccountDr. Cr.

Date2008


Particulars JF. Rs.

Jan 1Jan 12

To Bank b/dTo Bank A/cTo Discount allowed A/c

750725

25

Jan 7

20

By Bank A/cBy Discount allowed A/cBy Bank A/c

725

25750

Hari's AccountDr. Cr.

Date2008


Particulars JF. Rs.

Jan 5 To Bank A/cTo Discount Received A/c

190

10

Jan 15

By Cash A/c 25

Interests AccountDr. Cr.

Date2008


Particulars JF. Rs.

Jan 20

By Bank A/c 5

Typewriter AccountDr. Cr.

Date2008


Particulars JF. Rs.

Jan 10 To Bank A/cTo Bank A/c

20050

Machinery AccountDr. Cr.

Date2008


Particulars JF. Rs.

Jan 27 To Bank A/c 5,000


Draft Commission AccountDr. Cr.

Date2008


Particulars JF. Rs.

Jan 27 To Bank A/c 5

Discount Received AccountDr. Cr.

Date2008


Particulars JF. Rs.

Jan 5 By Hari 10

Discount Allowed AccountDr. Cr.

Date2008


Particulars JF. Rs.

Jan 7 To Shyam 25 Jan 12 By Shyam 25

Illustration 7. Prepare a Cash Book with Bank Column from the following transactions :

Date Particulars Rs.October1 Cash in hand 1,800

Cash at bank 11,0005 Discount a B/E at 1% through bank 4,0007 Bought goods by cheque 7,0008 Bought goods for cash 500 10 Honoured our own acceptance by cheque 5,000 14 Paid trade expenses 105 16 Paid into bank 1,000 18 Ramesh who owed us Rs 500 became

bankrupt and paid us 50 Paisa in the rupee 20 Received cash from Manohar 400

Allowed discount 1023 Withdrew from bank 400

Paid to & Ghanshyamdas & Co. 300 Allowed us discount 10

24 Received Rs 2.000 for a B/E from Hari Ram and deposited the same into bank

25 Withdrew from bank for private expenses 30027 Sold goods for cash 20028 Received A/c Payee's cheque for goods sold 9,00029 Received a loan of Rs 5,000 and deposited

Rs 3,000 out of it into bank30 Bank charges as per Pass Book 5


Solution :Three Column Cash Book

Dr. Cr.Dat

eParticulars L.

F.Disc.Rs.

Cash Rs.

Bank Rs.


Disc.Rs.

Cash Rs.

Bank Rs.

Oct. Oct.15

161820232427282929

To Balance b/dTo Bills Receivable A/cTo Cash A/cTo Loss by theftTo ManoharTo Bank A/cTo Bills Receivable A/cTo Sales A/cTo Sales A/cTo Loan A/cTo Cash A/c

C

C

C

–40––

10––––––

1,800––

250400400

–200

–5,000

–

11,0003,9601,000

–––

2,000–

9,000–

3,000

78

101416232325293031

By Purchases A/cBy Purchases A/cBy Bills Payable A/cBy Trade Expenses A/cBy Bank A/cBy Cash A/cBy Ghanshyam & Co.By Drawings A/cBy Bank A/cBy Bank Changes A/cBy Balance c/d

CC

C

––––––

10––––

500–

1051,000

–300

–3,000

–3,145

7,000–

5,000––

400–

300–5

17,25550 8,050 29,96

010 8,050 29,960

Nov1 To Balance b/d – 3,145 17,255

Illustration 8. Enter into Ram's Cash Book the following transactions, which took place on end of 28 February 2008 and balance the Cash Book :(i) Balance brought forward from the previous day : Cash in hand Rs 100 and at bank Rs. 8,000.(ii) Instructed the bank to issue a bank draft for Rs 5,000 in favour of Suresh. The bank charged Rs 10 for

issuing the draft.(iii) Received a bank draft for Rs 5,760 from Mahesh in full settlement of Rs 6,000 due from him. Sent the

draft to the bank.(iv) Received a cheque from Rakesh for 2,000. Allowed him discount Rs 120. (v) Endorsed Rakesh's cheque in favour of Harish. (vi) Sent a cheque for Rs 50 in payment of school fees of Naresh's son. (vii) Withdrew Rs 500 from the bank.(viii) Placed an order with Vikas for goods of the value of Rs 1,000 and sent cheque for Rs 1,000 with the order.

Solution :Cash Book with Discount Column


F.Disc.Rs.

Cash Rs.

Bank Rs.


Disc.Rs.

Cash Rs.

Bank Rs.

Mar.1 To Balance b/dTo MaheshTo RakeshTo Bank A/c C

240120

100

2,000500

8,0005,760

Mar.31

Mar.31

By SureshBy Bank ChargesBy Harish By Drawings A/c By cash A/c By purchases A/c (Placed on order with Vikas for goods)By Balance c/d

C

2,000

600

5,00010

50500

1,000

7,200

360 2,600 13,760 – 2,600 13,760Apr 1 To Balance b/d – 600 7,200

Illustration 9. Prepare a three column Cash Book of M/s Gupta & Co. from the following particulars :Jan. 1 Cash in hand Rs 50,000.2 Paid into bank Rs 10,000.3 Bought goods from Hari for Rs 200 for cash.


4 Bought goods for Rs 2.000 paid cheque for them, discount allowed 1%.5 Sold goods to Mohan for cash Rs 1,175.6 Received a cheque from Shyam to whom goods were sold for Rs 800.

Discount allowed 12.5%.7 Shyam's cheque deposited into bank.8 Purchased an old typewriter for Rs 200. Spent Rs 50 on its repairs.9 Bank notified that Shyam's cheque has been returned dishonoured and debited the account in respect of

charges Rs 10. 10 Received a money order for Rs 25 from Hari.11 Shyam settled his account by means of a cheque for Rs 820, Rs 20 being for interest charged.12 Withdrew for bank Rs 10.000.18 Discounted a B/E for Rs 1,000 at 1% through bank. 20 Honoured our own acceptance by cheque Rs 5,000. 22 Withdrew for personal use Rs 1,000.24 Paid trade expenses Rs 2,000.25 Withdrew from bank for private expenses Rs 1,500.26 Purchased machinery from Rajiv for Rs 5,000 and paid him by means of a bank draft purchased for Rs

5,005.27 Issued cheque to Ram Saran for cash purchase of furniture Rs 1,575.28 Received a cheque for commission Rs 500 from R. & Co. and deposited into bank.29 Ramesh who owes us Rs 500 became bankrupt and paid us 50 paise in the rupee.30 Received a loan of Rs 5,000 from Shashank and deposited Rs 3,000 out of its into bank.31 Paid rent to landlord 'Mohan' by a cheque of Rs 220. 31 Interest allowed by bank Rs 30.31 Half-yearly bank charges Rs 50.

Solution :Three Column Cash Book of M/s Arya & Co.


F.Disc.Rs.

Cash Rs.

Bank Rs.


Disc.Rs.

Cash Rs.

Bank Rs.

Jan. 12567

1011

12182829

30

31

31

To Balance b/dTo Cash A/cTo Sales A/cTo ShyamTo Cash A/cTo HariTo ShyamTo Interest A/cTo BankTo B/RTo Commission A/cTo Ramesh

To Shashank LoansTo CashTo Interest

To Balance c/d(Bank overdraft)

C

C

C

C

100

10

50,000

1,175700

25

10,000

250

5,000

10,000

700

80020

990500

3,00030

10,000

Jan. 23478

99

1220

2224

2526

273031

By Bank A/cBy Purchases A/cBy Purchases A/cBy Bank A/cBy Typewriter A/c

By ShyamBy Bank ChargesBy Cash A/cBy B/P A/c

By Drawings A/cBy Trade expenses A/c

By Drawings A/cBy Machinery A/cBy Draft CommissionBy Furniture A/cBy Bank A/cBy Rent A/cBy Bank chargesBy Balance c/d

C

C

C

C

20

100

10,000200

700250

1,0002,000

3,000

50,000

1,980

70010

10,0005,000

1,5005,000

51,575

22050

110 67,150 26,040

120 67,150 26,040

Feb 1 To Balance b/d – 50,000 Feb. 1 10,000

(4) PETTY CASH BOOK

Meaning of Petty Cash Book :


Petty Cash Book is the book which is used for the purposes of recording the payment of petty cash expenses.Meaning of Petty Cashier : Petty Cashier is the person who is authorised to make payments of petty cash expenses and to record them in petty cash book.

Features of Petty Cash Book :The main features of petty cash book are as follows :

1. Recording is done on the basis of internal as well as external vouchers. Whenever external vouchers are not received, (e.g., in case of auto-rickshaw charges, coolie charges, postage stamps etc.), internal vouchers are prepared and got verified by an authorised person.

2. Its balance represents unspent petty cash in hand.3. It can never show a credit balance because the cash payments can never exceed the cash receipts.4. The payments of petty cash expenses are recorded on the right hand side in the respective columns.5. The amount of cash received from the main cashier is recorded on the left hand side column.6. Petty Cash Book is both a book of original entry as well as a book of final entry.7. All the columns of expenses are totalled periodically and such periodic totals are individually posted to

the debit side of the respective expenses accounts in the ledgers by writing 'To Sundries as per Petty Cash Book' in the particular column.

Similarities between Main Cash Book and Petty Cash Book

1. Both are books of final entry. In other words, both serve the purpose of ledger. Both are ledger in the sense that main cash book serves the purpose of 'Main Cash Account' and 'Bank Account' and petty cash book serves the purpose of 'Petty Cash Account'.

2. Both are books of original entry. In other words, both serve the purpose of journal. Both are journal in the sense that the transaction are recorded in it for the first time from the source documents.

Differences between Main Cash Book and Petty Cash Book

1. In the main cash book all cash payments except payments of petty cash expenses, are recorded whereas in the petty cash book only payments of petty cash expenses are recorded.

2. In the main cash book all cash receipts are recorded whereas in the petty cash book only Cash Receipts from Main Cashier are recorded.

Difference between Imprest and Non-Imperest System of Petty Cash Book

The amount which the main cashier hands over to the petty cashier in order to meet the petty cash expenses of a given period is known as 'Imprest' or 'Float'.

Features of Imperest system of petty cash : The main features of imprest system of petty cash are as follows : 1. Availability of same amount of petty cash : The Petty Cashier again has the same amount of petty

cash in the beginning of new period.2. Reimbursement of amount spent : The chief cashier makes the reimbursement of the amount spent

by the Petty Cashier.3. Examination of Petty cash bank by chief cashier : The chief cashier examines the petty cash book.4. Submission of petty cash book by petty cashier : The Petty Cashier submits the petty cash book

along with supporting vouchers to the chief cashier at the end of the period.5. Advances by chief cashier: The Chief Cashier advances the estimated amount to the petty cashier in

the beginning of the period.6. Estimation by chief cashier: The Chief Cashier estimates the total petty cash expenses for a particular

fixed period.


Advantages of Imprest System of Petty CashThe advantages of imprest system of pretty cash are as follows :1. Control over fraud: Misappropriation if any, is always kept within the limits of imprest.2. Control over petty expenses : Petty expenses are kept within the limits of imprest since the petty

cashier can never spend more than the available petty cash.3. Control over mistakes : The choices of mistakes are reduced since the chief cashier regularly

examines the Petty Cash Book.Non-imprest system : Under non-imprest system, the Chief Cashier may handover the cash of the

Petty Cashier equal to/more than/less than the amount spent by the petty cashier.

Format of Petty Cash Book

The format of Petty Cash Book may be designed according to the requirements of the business. However, the simplest form is given below :

Petty Cash Book

Date CashReceived

R.F.

No.Particulars

V.F.

No.

AmountPaid

Allocation of Expanses

Postage&

Telegram

Printing&

Stationery

Freight&

Cartage

Conveyance&

Travelling

StaffExp.

SundryExp.

Advantages of Petty Cash Book

The advantages of petty cash book are as follows :1. Benefits of specialisation: The benefits of specialisation are available since recording of cash

transactions is divided between main cash book and petty cash book.2. Control over fraud: Misappropriation if any, is always kept within the limits of imprest.3. Control over Petty expenses : Petty expenses are kept within the limits of imprest since the petty

cashier can never spend more than the available petty cash.4. Control over mistakes : The chances of mistakes arc reduced since the chief cashier regularly

examines the petty cash book.5. Saving of labour in posting : There is saving in labour in posting because of the following two

reasons :(a) limited number of accounts are opened for various heads to petty expenses only,(b) periodical totals (say monthly) of each column of expenses are posted to the debit of the

respective ledger accounts.


6. Savings of chief cashier's time: The time of chief cashier is saved when petty expenses are recorded in petty cash book.

Posting from Petty Cash Book

All the heads of expenses (including miscellaneous) are totalled periodically (usually monthly) and such periodic totals are individually posted to the debit side of the concerned ledger accounts in the ledger by writing "To Sundries as per Petty Cash Book" in the particular column. The ledger folio number is written under every total amount of expense to indicate that the entry has been posted in the ledger. In the folio column of the ledger account, the page number of the petty cash book is written.

Illustration 10. From the following particulars, prepare Petty Cash Book on imprest system of Shri Saxena & Co. for the month of January 2008.

Date2008

Particulars Rs.

Jan. 123456789

10111213141516

Opening Balance (on imprest system)Paid for stampsPaid cleaners wagesPaid for farePaid for office tea etc.Paid for repairs of cycle .Paid for advertisementDrew imprest from head cashierPaid for cartagePaid for travelling expensesPaid for telegram sentPaid for entertainment to travelling salesmenPaid for repairs of cyclePaid for printing billPaid for stationeryDrew imprest from head cashier

100121516151030

102515201053

Solution :Petty Cash Book

Date AmountReceived

R.F.

No.Particulars

V.F.

No.

AmountPaid

Allocation of Expanses

Postage&

Telegram

Conveyance&

TravellingExp.

StaffWelfare

Etc.

Cartage&

Carriage

Printing&

Stationery

SundryExp.

Jan 12345677

100 To balance b/dBy stampsBy clearners wag.By fare chargesBy office teaBy repairBy advertisementBy balance c/d

12 --15 --16 --15 --10 --30 --2 --

12----------

-- ----

16------

--

------

15----

--

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

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

--15----

1030

--

----

100 -- 100 12 -- 16 -- 15 -- -- -- 55 --889

1011121314

298

----

To balance b/dTo cash A/cBy cartageBy travelling exp.By telegram char.By entertain, exp.By rapair A/cBy printing char.

10 --25 --15 --20 --10 --5 --

----

15------

--

--25--------

--------

20----

--

10----------

-- ----------5 --

--------

10--

--


1515

By stationaryBy balance c/d

3 --12 --

-- -- -- -- 3 -- --

100 -- 100 -- 15 -- 25 -- 20 -- 10 -- 8 -- 10 --1616

1288

To balance b/dTo cash a/c

QUESTIONS:

Multiple Choice Questions :

1. Which is not contra entry in three column Cash Book ?(a) Cash deposited into bank (b) Cash withdrew from bank(c) Cash withdrew from Bank for personal use (d) None of these.

2. Which is entered on the debit side of Cash Book ?(a) Trade discount allowed (b) Trade discount received(c) Cash discount allowed (d) Cash discount received.

3. Bank Column of the cash book may show :(a) only a debit balance (b) only a credit balance(c) either debit balance or a credit balance

4. In a Three Column Cash Book :(a) only cash column and discount column are balanced(b) only bank column and discount column are balanced(c) only cash column and bank column are balanced (d) cash column, bank column and discount column are balanced.(e) only a credit balance.

5. Which of the following transactions is not posted in the ledger.(a) Withdrew from bank(b) Withdrew from bank for personal use(c) Withdrew for personal use.

6. Which of the following transactions is posted in the ledger(a) Cash deposited into bank(b) Cash withdrew from bank(c) Cash withdrew from bank, for personal use.

7. Transactions entered on the credit side of the cash book are to be posted to :(a) the debit side of the concerned ledger accounts in the ledger(b) the credit side of the concerned ledger accounts in the ledger.

8. Transactions entered on the debit side of the cash book are to be posted to:(a) the debit side of the concerned ledger accounts in the ledger(b) the credit side of the concerned ledger accounts in the ledger.

9. If the debit as well as the credit aspects of a transaction are recorded in the cash book itself, it is called(a) an opening entry (b) a compound entry(c) a transfer entry (d) a contra entry.

10. In a Three Column cash book:(a) trade discount allowed is recorded on the debit side of cash book(b) cash discount received is recorded on the credit side of cash book(c) discount columns are balanced.

11. When a cheque received is endorsed, it must be entered on:(a) credit side of the cash book only (b) debit side of the cash book only (c) both sides of the-cash book.(d) all receipts and payments of cash.


12. When a cheque is returned dishonoured, it is recorded in:(a) cash column on the credit side(b) cash column on the debit side(c) bank columm on credit side.


13. When a cheque received on a particular date is not deposited the same day into bank, it is entered in:(a) cash column on debit side(b) bank column on the debit side(c) cash column on the credit side(d) cash column on the debit side and credit side.

14. When a firm maintains a Three Column Cash Book, it need not to maintain :(a) cash account in the ledger(b) bank account in the ledger(c) discount account in the ledger(d) both cash account and bank account in the ledger.

15. Single Columm Cash Book may show :(a) only a debit balance(b) only a credit balance(c) either debit balance or a credit balance.

16. When s firm maintains a simple Cash Book, it need not to maintain(a) sales journal (b) purchases journal(c) general journal (d) cash account in the ledger(e) bank account in the ledger.

17. Which of the following is correct:(a) cash book is a journal and not a ledger (b) cash book is ledger and not a journal (c) cash book is both a journal and a ledger.

18. Cash payments are recorded : (a) on debit side(b) on credit side (c) on both sides

19. Cash receipts are recorded:(a) on debit side(b) on credit side(c) on both sides

20. Cash book is used to record:(a) all reciepts only(b) all payments only(c) an cash and credit sales(d) all receipts and payments of cash

[Answer : 1. (c), 2. (c), 3. (c), 4. (c), 5. (a), 6. (c), 7. (a), 8. (b), 9. (d), 10. (6). 11. (c), 12. (c). 13. (a), 14. (d). 15. (a). 16. (d), 17. (c). 18. (d), 19. (a). 20. (d)]

Very Short Answer Type Questions :

1. Name the accounts which are not opened in the case of a Three Column Cash Book.2. If the total of Bank Column on credit side exceeds the total of Bank Column on debit side, what does it

Indicate ?3. Can the total of discount allowed column exceed the total of discount received column ?4. Give two examples of contra entry.5. Can there be a credit balance in a simple cash Book ? State with reason.6. Are the discount Columns of Cash Books balanced ?7. Which discount is recorded in the discount column of Cash Book ?


8. How is contra entry distinguished from other entries ?9. What is a contra entry ?10. What is a Petty Cash Book ?11. What is a Cash Book ?12. What is a Special Journal ?

Short Answer Type Questions :

1. State the name of the account and the side of the account to which each of the following transaction would be posted:(a) total of discount column on the credit sides of the Cash Book.(b) a receipt in the Cash Book for goods sold on credit.(c) a payment in the Cash Book for goods bought on credit(d) an amount in the Cash Book for purchase of furniture.(e) an amount in the Cash Book for sale of old furniture. (/) a sale to Ham for cash.(g) a purchase from Shyam for cash

2. How are the discount columns of a Cash Book posted in the ledgers?3. Explain the method of posting the Petty Cash Book.4. What are the rules of posting from Cash Book ?5. Explain how the cash book is a journal as well as a ledger account.6. Explain the meaning of imprest system of Petty Cash.7. List the Special Journals.8. What are the advantages of special journals ?9. Why is a journal subdivided ?

[Answer : 1. (a) Discount Received A/c-Cr.side, (b) Customer's Account Cr. side, (c) Suppliers A/c-Dr. side, (d) Furniture Account-Dr. side (e) Furniture Account, side. (f) Sales Account-Dr. side, (g) Purchases Account-Dr. side]

Essay Type Questions:1. Explain the meanings and types of Cash Books.

Practical Questions:

1. Prepare Cash Book with Bank Column of Ram and post them to ledger from the following transactions:

2008Jan. l He commenced business with Rs 80,000 of which Rs 16,000 were borrowed from Mr Bharat 2 Deposited into bank Rs 40,000. 3 Purchased from X & Co. furniture for office use for cash Rs 4,000. 4 Paid Petty Cash Expenses Rs 1,600. 5 Bought goods Rs 16,000. 6 Issued a cheque cf Rs 23,200 in full and final settlement to Charat from whom goods costing Rs

24,000 were purchased. 7 Sold goods to Shyam for Cash Rs 8,000. 9 Received a cheque of Rs 30,400 in full and final settlement from Hari to whom goods amounting to Rs

32,000 were sold. (This cheque was deposited into the bank on the next day). 10 Withdrew from bank Rs 4,000. 11 Withdrew from bank for private purposes Rs 4,800 12 Withdrew cash for personal use Rs 800. 13 Paid Business Expenses of Rs 800 by cheque.


14 Paid salary to Mr. X Rs. 160. 15 Sold goods Rs 8,000 to Sunder who paid by a cheque after deducting 5% in full and final settlement. 15 Bank charges debit by bank Rs 16. 16 Repaid the loan taken from Mr Bharat by cheque including interest @ 18% p.a.

[Answer: Cash Rs 29.440, Bank Rs 29.064]

2. Write the following transactions in Cash Book with Discount and Bank Columns:

Date Rs.Jan. 1 Chander commences business with Rs 12,000 in cash. 3 He pays Rs 11,400 into bank current A/c. 4 He receives cheque for Rs 360 from Kirti & Co. on account 7 He pays into bank Kirti & Co.'s cheque

for Rs 360. 10 He pays Ratan & Co. by cheque Rs 198 and is allowed discount Rs 12. 12 Tripathi & Co. pay into his bank A/c Rs 285. 15 He receives cheque for Rs 270 from Warsi and allows him discount Rs 21 and deposits

the cheque into the bank. 20 He receives cash Rs 105 and cheque Rs 60 for Cash Sales and deposits the cheque into

the bank. 25 He pays into bank Rs 600.

27 He pays by cheque for cash purchases Rs 165. 30 He pays John & Co. Rs 225 in cash and is allowed discount Rs 21. He pays sundry expenses in cash Rs

30. 31 He pays office rent by cheque Rs 120.

He pays staff salaries by cheque Rs 180.He draws a cheque for personal use Rs 150. He draws a cheque for office use Rs 240. He pays cash for stationery Rs 15. He purchases goods for cash Rs 75. He pays Jagpal by cheque for commission Rs 180.He gives cheque to Ram Saran for cash purchases of furniture for officeRs 945.He receives cheque for commission Rs 300 from Raghubir & Co. and pays the same into bank.He receives cheque from Kesri & Co. for Rs 270 and deposits the cheque into bank.

[Answer: Cash Nil, Bank (Dr.) Rs 11,367]3. Enter into Naresh's Cash Book the following transactions, which took place on 28 February,

2008 and balance the Cash Book :

(i) Balance brought forward from the previous day : Cash in hand Rs 60 and at bank Rs. 4,800.(ii) Instructed the bank to issue a bank draft for Rs 3,000 in favour of Suresh. The bank charged Rs 6 for

issuing the draft.(iii) Received a bank draft for Rs 3,456 from Mahesh in full settlement of Rs 3,600 due

from him. Sent the draft to the bank. (iv) Received a cheque from Rakesh for 1,200. Allowed him discount Rs 72.(v) Endorsed Rakesh cheque in favour of Harish.(vi) Sent a cheque for Rs 30 in payment of school fees of Naresh's son.(vii) Withdrew Rs 300 from the bank.(viii) Placed an order with Vikas for goods of the value of Rs 600 and sent cheque for Rs 600 with the order.

[Answer : Cash Rs 360, Bank (Dr.) Rs 4,320]


4. Prepare a Bank Column Cash Book from the following transactions:

Date2008Oct.

Particulars Rs.

1

578

1014161820

23

242527282930

Cash in handCash at bank .Discount a B/E at 1% through bankBought goods by chequeBought goods by cash Honoured our own acceptance by cheque Paid trade expenses Paid into bank Ramesh who owed us Rs 300 became bankrupt and paid us 50 p in the rupeeReceived cash from Manohar Allowed discount Withdrew from bankPaid to Ghan Shyamdas & CoAllowed us discountReceived Rs 1,200 for a B/E from Hari Ram and deposited,the same into bankWithdrew from bank for private expensesSold goods for cashReceived cheque for goods soldReceived payment of a loan of Rs 3,000 and deposited Rs 1,800 out of it into bankBank Charges as per Pass Book

1,0806,6002,4004,200

3003,000

63600

2406

240180

6

180120

5,400

3

[Answer : Cash Rs 1.887. Bank Rs 10.353]

5. Prepare a three-column Cash Book from the following particulars:

DateJan. 1 Cash in hand Rs 960 and in bank Rs 6.000.2 Discounted a bill for Rs 3,000 at 1% through bank. 5 Bought goods by cheque Rs 4.800. 8 Bought goods for cash Rs 120. 10 Paid 3,600 by cheque for a bill drawn upon us. 12 Paid trade expenses Rs 60.17 Paid into bank Rs 600. 18 Jones, who owed us Rs 120 became bankrupt, and paid 50 p per rupees.20 Received Rs 60 from Govind and allowed him discount Re 1.21 Paid Rs 150 to Madan and he allowed us discount Rs 3.22 Withdrew from bank Rs 120.24 Received Rs 1,200 for a B/E from Ram Chandra and deposited the same into bank.25 Withdrew from bank for private expenses Rs 60.26 Sold goods for cash Rs 60.27 Received a cheque for goods sold Rs 5,400.28 Received repayment of a loan Rs 1.800 and deposited out of it Rs 1,500 in the bank.

[Answer : Cash Rs 630, Bank (Dr.) Rs 9,090]


6. Make the following entries in a three-column Cash Book:

Date Particulars Rs2008Jan. l Cash in hand 1,891

Cash at bank 54,841 2 Discounted a bill for Rs 600 at 1% through bank 3 Bought goods for Rs 1,200 paid cheque for them, allowed 1% 15 Paid trade expenses 72 16 Paid taxes 240 17 Paid insurance charge 60

Sold goods for Rs 7,500, received cheque for them, discount allowed 1% 28 Received cheque from John & Co.3,600 30 Purchased 60 War Bonds of Rs 100 each at Rs 95 each and paid for them cheque 30 Sold goods to Bimal on credit 31

[Answer : Cash Rs 1,519, Bank (Dr.) Rs 59,572]Cash Book with Discount Column7. Prepare Cash Book with Discount Column from the following transactions:

Date 2008

Rs. Date 2008

Rs.

Mar. 1

3 446

9121315

Mr Y commencedbusiness with cashBought Goods for Cash Paid Mr Mohan Lal Cash Discount allowed Deposited in Bank Paid for office furniture in cashSold goods for cash Paid wages in cash Paid for stationery Sold goods for cash

3,900

411 57 3

2,400 279

1,800 72 24

1,500

Mar. 17

19

212225282931

Paid for miscellaneous expensesReceived cash from Mr Tritok Chand allowed his discount Purchased a radio set Paid salary Paid rentPaid electricity bill Paid advertising Paid into bank

27

291

9150 240 54 21 24

1,500

[Answer : Cash Balance Rs 2,232]

8. Prepare a Simple Cash Book from the following transactions of Mr X of Delhi.Date 2008

Rs. Date 2008

Rs.

Apr. 1

3

56

91316

Mr X commencedbusiness with cashHe Bought Goods for Cash

Sold goods for cashReceived, cash from Mr. Manohar LalPaid into bankPaid cash to hari Kishan Sold goods for cash

4,800

3,000

60 216

1,800 129 900

Apr. 17

2122

25

Paid for stationery Paid for office furniture Received from Mr. Kailash ChandPaid for AdvertisingPurchased Postage stamps Paid rentPaid electricity charges

9 111

408 54 5

60 9


[Answer: Cash Balance Rs 1,207]

Book Reconciliation Statement 21

Bank Reconciliation Statement

MEANING OF BANK RECONCILIATION STATEMENT

Bank Reconciliation statement is prepared with a view to find out the causes responsible for the differences between the balances of the cash Book and passbook and to reconcile the balance. The cashbook is maintained and possessed by the firm itself but the passbook or statement of customer’s account are prepared by the bank and sent to the customer for information. In this way, both the books are with the customers and he can compare them and verify records at it’s own convenience. Bank reconciliation statements are prepared by the firm regularly after certain interval. It may be prepared every month, every week or even daily depending upon the number transactions and the size of firms. While preparing Bank Reconciliation statement the first step is to identify the transaction, which cause difference between the balance of cash book and Pass Book

NEED AND IMPORTANCE OF BANK RECONCILIATION STATEMENT

Bank reconciliation statement is the basic document of the accounting, needed by every business enterprise for having check and control on its dealing with the bank; It has got the following importance.

1. Pin pointing mistakes in Cash Book and Pass Book. Bank Reconciliation statement is prepared by comparing the information of the cashbook with the information of the passbook. The comparison discloses and identifies the entries, which have been made in the cashbook but omitted or wrongly entered in the passbook and vice versa.

2. Identifying delay in the clearance of cheques. The comparison of cashbook with the Pass book or Bank statement issued by the bank reveals the date of depositing the cheque into the bank and the date of the clearance. In case there is substantial delay. Causes for delay may be investigated and remedial measures can be applied.

3. Checking on embezzlement. The continuous comparison of the cashbook with the passbook keeps check on employees trying to indulge in embezzlement and misappropriation of funds. As the balances of cashbook and passbook are checked, compared and tallied while preparing Bank Reconciliation statement on monthly, weekly or even daily basis, misappropriation and embezzlement of funds becomes very difficult.

4. Checking the accuracy of Cash Book. The comparison of the Cash Book with the Pass Book satisfies the management, that the Cash Book is being maintained properly. If there is any inaccuracy in the posting the mistake is identified and rectified.

5. Technique of Control. The preparation of Bank Reconciliation statement is an important technique of control. It prevents misappropriation in cheques, bank drafts and other transaction with the


bank. The malpractices of dishonest employees dealing with cash and bank are controlled and effective measures are employed to plug the loopholes, if any.

PREPARATION OF BANK RECONCILIATION STATEMENT

While preparing Bank Reconciliation Statement let us first consider causes responsible for its preparation :

Causes Responsible for the Difference Between the Balances of Cash book and Pass Book :-

1. Cheque issued or drawn but not yet presented for payment or cashed by customers or debited in the pass book. It is a common practice of the business to issue cheques in favour of outside parties against the payment. These cheques are delivered to the parties, who are expected to collect the payment of the cheque from our bank. The firm will record the issue of cheques in the cash book on the date of the issue of cheques with the help of the counterfoils of the cheque book. As the payment of cheque may be collected within six or three months from the date of its issue, so the party receiving the cheque may not collect its payment the same day from the bank. It will mean that the issue of cheque has been recorded in the cashbook bur it does not find a place in ledger accounts of the bank or the passbook, maintained by the bank. The transaction will definitely reduce our bank balance as shown by the cash book, but the bank balance as shown by the pass book will remain the same i.e. not reduced. There will be difference between the balance of cashbook and passbook and the transaction will be identified for bank reconciliation statement.

Cheques issued but not cashed by the customers means that the cheque has not been presented by the customer and the payment has not been made by the bank. While issuing cheque, we credit bank account because cash at bank as an asset will reduce or the bank is giver. The bank on the other hand will debit our account after making payment of the cheque issued by us because the payment by the bank will reduce bank’s liability towards us, Cheques, not debited by the bank will mean the same things i.e. not presented or not cashed by customers.

2. Cheques debited or deposited or paid onto the bank but not yet collected or cleared or credited by the bank. We may received cheques from outside parties and deposit into the bank for collection. The firm, will debit bank account at the time of depositing cheques, because cash at bank as an asset will increase. By debiting bank account while sending the cheque to the bank means that our bank balance as per our cash book has been increased. The bank will credit our account or increase our balance, only when the bank actually collects the payment of the cheques, deposited with it. Collection of cheques is also known as clearance of cheque. After collection of chques the bank increases our balance with it or credits customer’s account.

The transaction increases our bank balance as per cash book at the time of depositing the cheque into bank, but the bank balance as per the pass book will increase, when the bank actually collects the payment of the cheque from the Drawer’s bank. As the bank has not yet co9llected the payment and credited the payment and credited customer’s acco8nt. Bank balance as per pass book will be lesser than the balance as per cash book and the result will be the difference between the balances of cash book and pass book.


3. Cheques directly deposited by the debtors to our account in the bank. It is just possible that certain parties, instead of sending the cheque to us may deposit the same into our bank account directly. The transaction will increase our bank balance, as per the records maintained by the bank, because the payment has already been received by the bank. The firm does not have any knowledge of this direct deposit, so bank balance as per cash book will be responsible for resulting in the difference between the balances of cash book and pass book. The balance of passbook will be more the balance of cash book.

4. Interest paid or allowed or credited or collected by the bank. The bank may allow or pay interest on our deposits. It is just possible that possible that we may instruct the bank to collect interest on our investment or loan advanced by us. The bank after collection the interest, will credit the same into our account. As we do not have any knowledge of the interest credited by the bank into our account, there will be no entry of interest in the cash book. The result will be the difference between the balance as per cash book and pass b9ook. The balance of pass book will be comparatively more than the balance of cash book.

5. Interest on overdraft on interest charged or debited by the bank. If we take an overdraft or borrow funds form the bank, interest will be charged by the bank on overdraft or loan advanced by the bank. The bank will debit the amount of interest to our account, thus our bank balance as per pass book will decrease or the amount of loan or overdraft will increase. The balance of the cash at bank will reaming, unchanged as per cash book, because of the ignorance of the interest debited by the bank. There will be difference between the bank balance as per cash book and pass book, so far the interest charged by the bank is not entered into cash book.

6. Payment made by the bank on our behalf. The bank is also an agent of the customer, so the bank may be instructed to make the following payments on behalf of the customer :

(a) Payment of insurance premium(b) Payment of installment of loan(c) Payment of office or godown rent(d) Issue bank draft in favour of certain outside party(e) Make any transfer of money.

In all these cases, the bank debits the amount paid on behalf of his customer into his account and his bank balance as per pass book will decrease. As the customer has not been informed of these payments, it will not have been recorded in the cash book, so the balance of cash book will reaming the same i.e. lesser than the pass book.

7. Dishonour of cheque or bills. The cheques received from outside parties are deposited with the bank. Deposits of cheques is recorded in the cash book at the time of depositing, it with bank and thus balance of cash book will increase. The bank could not collect the payment of the cheque, because it was dishonored, so the amount will not have been credited by the bank onto our account. As a result of the treatment of dishonored cheque in the cash book and pass book the balances of the two books will differ.

While discounting the bills receivable, the bank will credit the customer’s account and the same amount will be debited to the bank account by the customer. It means the transaction affects positively the balance of both the cash book and pass book with the same amount and cannot be identified as transact5ion for bank reconciliation statement. In cash the bill is presented by the bank


to the drawee of the bill and the payment is not received, the bank will immediately debit the amount of the bill into customer’s account, causing decrease in bank balance as per pass book. Due to ignorance and lack of information, dishonor of the bill will not be recorded in the cash book and the result will be the difference between the balances of cash book and pass book.

8. Bank charges or collection charges. The bank may charge certain account for the services rendered. The notable charge is collection charge, which is charged by the bank for collection of outstation cheques. These charges are debited by the bank in the customer’s account, so they reduce bank balance as per pass book. The bank charges have not been entered in the cash book by the customer, because he was not informed or it as yet. The bank balance as per cash book will remain unchanged and thus there will be difference between the balance of cash book and pass book.

9. Cheques entered into cash book but omitted to be banked. The cheque received from outsider parties if entered in the cash book will increase our bank balance as per our record but the question of increase in the bank balance as per the records for the bank does not at all arise, because the cheque has not yet been sent to the bank for collection. The transaction will increase bank balance as per cash book but the balance of pass book will reaming unchanged i.e. lesser as compared to cash book. The transaction will thus cause difference between the balances of cash book and pass book.

10. Cheque paid into bank but omitted to be entered in the cash book. The cheque received from outside party has been sent to the bank for collection, so the bank balance, as per ledger accounts of the bank will increase after the collection of the cheque. The cheque has not been recorded in the cash book by mistake, so the bank balance as per our record will remain unchanged. The transaction will result in the difference between the balances or cash book and pass book and will be identified as an item of bank reconciliation statement.

11. Cheque deposited into the bank but under-credited by the bank. It may sometimes happen the we may deposit a cheque for Rs. 50 in the bank may wrongly credit our account with Rs. 15 only. The transaction will cause a difference of Rs. 35 (i.e. 50 – 15 ) between the balances of cash book and pass book, because the customer debited bank account with Rs. 50 whereas the bank credited customers account with Rs. 15 only.

12. Retiring a bill under rebate by the bank. In certain cases, we may send our bills payable to bank and instruct to make its payment . We shall be deduction the entire amount of the bills payable form our bank balance while sending the bill. The bank may retire the bill or make its payment before its due date and earn certain amount of cash discount form us. The bank will reduce lesser amount from our account i.e., the amount of the bills less amount of discount, so there is going to be the difference between the balances of cash book and pass book.

13. Dividends and interest collected and credited by the bank. The bank may collect dividends on our investment in shares and also interest on our investment and loans as per our instruction. The bank will credit these dividends and interest collected in our account. This will increase our bank balance as per the records of the bank. The transaction will not be recorded in the cash book because we have not been informed of it as yet. The balance of cash book will therefore be lesser than the balance of pass book.


BANK RECONCILIATION STATEMENT

Particulars Plus Minus Balance as per Cash Book Cheque issued but not yet presented Cheque deposited but not yet cleared Direct Payment made by a customer into Bank Cheque / Bill dishonoured Interest credited by Bank Bank Charges Amount wrongly credited in Pass Book Amount wrongly debited in Pass Book Amount wrongly debited in Cash Book Amount wrongly credited in Cash Book Balance as per Pass Book

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1. When Balance as per Pass Book is taken as a starting point

BANK RECONCILIATION STATEMENT

Particulars Plus Minus Balance as per Pass Book Cheque issued but not yet presented Cheque deposited but not yet cleared Direct Payment made by a customer into Bank Cheque / Bill dishonoured Interest credited by Bank Bank Charges Amount wrongly credited in Pass Book Amount wrongly debited in Pass Book Amount wrongly debited in Cash Book Amount wrongly credited in Cash Book Balance as per Cash Book

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PRACTICAL QUESTION

Q.1. On 31st December, 2007, the Cash Book of Mahesh showed a debit bank balance Rs. 75,000. When compared with the Pass Book, the following facts were discovered. On 30th December, two cheques of Rs. 5,000 and Rs. 7,000 were deposited in the bank but were not realized till date. On 28th December, three cheques of rs. 6,000 Rs. 8, 000 and Rs. 12, 000 were issued but none of these was presented before the bank for payment. On 31st December, the bank credited Rs. 1, 250 as interest but this was


not recorded in the Cash Book. Similarly, the bank had charged Rs. 150 but this was not recorded in the Cash Book. Prepare a Bank Reconciliation Statement on 31st December, 2007.

[Balance as per Pass Book – Rs. 90,000]Q.2. On 30th June, 2008, the bank column of the Cash Book showed a balance of Rs. 12,000 but the Pass

Book shows a different balance due to the following reasons: (i) Cheques paid into Bank Rs. 8,000 but out of these only cheques of Rs. 6,500 credited by

bankers. (ii) The receipt column of the Cash Book underacts by Rs. 200. (iii) On 29th June, a customer deposited Rs. 3,000 direct in the Bank account but it was entered in

Pass Book only. (iv) Cheques Rs. 9,200 were issued of which Rs. 2,200 were presented for payment on 15th July. (v) Pass Book shows a credit of Rs. 330 as interest and a debit of Rs. 60 as bank charges. Prepare a Reconciliation Statement as on 30th June, 2008.

[Balance as per Pass Book – Rs. 16, 170]

Q.3. The Cash Book shows a balance of Rs. 12, 500. On comparing the Cash book with the Pass Book, the following discrepancies were noted :

Rs. (1) Cheques issued but not yet presented for payment 6,000 (2) Cheques deposited in bank but not collected 9,000 (3) Bank paid insurance premium 5,000(4) Bank charges 300(5) Directly deposited by a customer 8,000(6) Interest on investment collected by bank 2,000

[Balance as per Pass Book – Rs. 14,200]

Q.4. Ram requested his friend Shyam to compile his Bank Reconciliation Statement based on the data collected, as on June 30, 2008, by his accountant, prior to his sudden illness: The Bank Statement showed a favorable balance of Rs. 9,214

(i) on 29th June, the Bank credited the sum of Rs. 1,650 erroneously. (ii) Certain cheques, valued at Rs. 4,500 issued before, June 30, were not cleared. (iii) A hire purchase payment of Rs. 950 made by a standing order was not entered in the Cash Book. (iv) A cheque of Rs. 600 received, deposited and credited by the bank was accounted as a receipt in the cash column of the Cash Book. (v) Other cheques for Rs. 8,500 were deposited in June, but cheques for Rs. 6,000 only were cleared by

the bankers. [Balance as per Cash Book-Rs. 5.914]

Q.5. From the following particulars, prepare a Bank Reconciliation Statement of Govil, on 31st December 2007: Balance as per Pass Book on 31st December, 2007 is Rs. 8,500. Cheque for Rs. 5,100 were issued during the month of December but of these, cheque for Rs. 1,200 were presented in the month of January, 2008 and one cheque for Rs. 200 was not presented for payment. Cheque and cash amounting to Rs. 4,800 were deposited in the Bank during December but credit was given for Rs. 3,800 only. A customer had deposited Rs. 800 into the bank directly. The bank has credited the merchant for Rs. 200 as interest and has debited him for Rs. 30 as bank charges, for which there are no corresponding entries in the Cash Book.

[Balance as per Cash Book – Rs. 7, 130]


Q.6. From the following particulars, ascertain the balance by means of a statement that would appear in the pass book of Mr. Swaminathan as at 31st December 1992.

Rs. (a) Overdraft as per Cash Book (on 31.12.1992) 7,190(b) Interest on overdraft for six months ending 31st December 1992 160(c) Bank charges for the above period 70(d) Cheques drawn but not cashed by the customers prior to

31st December 1992 1,270(e) Cheques paid into the Bank but not cleared before 31st December

1992 2,210(f) A bill receivable (discounted with the bank in November) dishonored

On 31st December 1992 600(g) Interest on investment collected by the Bankers and credited in the

Pass Book 1,800[Overdraft as per pass book Rs. 7,160.]

Q.7. On 31st July, 1992 Ramesh has an overdraft of Rs. 15, 830, as shown by the Bank column of his Cash Book. Cheques amounting to Rs. 2,000 has been paid in by him on 28th July but of these only Rs. 1,500 had been credited in the pass book.

He had also issued cheques amounting to Rs. 5,000 of which only those for Rs. 5,000 of which only those for Rs. 4,000 had been presented. There was a debit in his pass book for Rs. 150 on account of interest. A cheque for Rs.120 which he had debited to bank account in his book had not been sent to the bank.

The pass book contains an entry of Rs. 600 which seems to have been paid directly into the bank by a customer. Prepare a reconciliation Statements as at 31st July 1992.

[Overdraft as per pass book Rs. 15,000.]Q.8. On 31st December, 2007, the Cash Book of B. Babu showed an overdraft of Rs. 18,000 with the Bank

of India. This balance did not agree with the balance as shown by the bank Pass Book. You find that Babu had paid into the bank on 26th December four cheques for Rs. 10,000, Rs. 12,000, Rs. 6,000 and Rs. 8,000. Of these the cheque for Rs. 6,000 was credited by the bank in January 2008. Babu had issued on 24th December three cheques for Rs. 15,000, Rs. 12,000 and Rs. 7,000. The first two cheques were presented to the bank for payment in December 2007 and the third cheque in January 2008.

You also find that on 31st December, 2007 the bank had debited Babu’s account with Rs. 500 for interest and Rs. 20 as charges, but Babu had not recorded these amounts in his books. You are required to prepare a Bank Reconciliation Statement as on 31st December, 2007, and ascertain the balance as per the bank pass book.

[Overdraft as per Pass Book – Rs. 17, 520]Q.9. Prepare Bank Reconciliation Statement from the following particulars as on 31st December, 2007,

when pass book shows a debit balance of Rs. 2,500.(i) Cheque issued for Rs. 5,000 but up to 31st December, 2007 only Rs. 3,000 could be cleared. (ii) Cheques issued for Rs. 1,000 but omitted to be recorded in Cash Book. (iii) Cheques deposited for Rs. 5,500 but cheques for Rs. 500 were collected on 4th January, 2008. (iv) A discounted bill of exchange dishonored Rs. 1,000. (v) A cheque of Rs. 500 debited in Cash Book, but omitted to be banked. (vi) Interest allowed by bank Rs. 200, but no entry was passed in the Cash Book.

[Overdraft as per Cash Book – Rs. 1,700]


Q.10. On 31st December, 2007, the Bank Pass Book of Naresh & Co. showed an overdraft of Rs. 10,700. From the following particulars prepare a Bank Reconciliation Statement :

(i) Cheuqes issued before December 31, 2007 but prepared for payment after that date amounted to Rs. 900.

(ii) Cheques paid into the Bank but not collected and credited until December 31, 2007 amounted to Rs. 2,200.

(iii) Interest on overdraft amounting to Rs. 1,200 did not appear in the Cash Book. (iv) Rs. 5,000 being interest on investments collected by the bank and credited in the Pass Book were not

shown in the Cash Book. (v) Bank Charges of Rs. 50 were not entered in the Cash Book. (vi) Rs. 800 in respect of dishonored cheque were entered in the Pass Book but not in the Cash Book.

[Overdraft as per Cash Book – Rs. 12,350]

Q.11. On checking the Bank Pass Book it was found that it showed as overdraft of Rs. 5,220 as on 31st December, 2007 while as per Ledger it was different to bank debit. The following differences were noted :

(i) Cheque deposited but not yet credited by bank Rs. 6,000. (ii) Cheque dishonored and debited by bank but not given effect to it in the Ledger Rs. 800. (iii) Bank Charges debited by bank debit memo not received from bank Rs. 50.(iv) Interest on overdraft excess credited in the Ledger Rs. 200. (v) Wrongly credited by bank to account, deposit of some other party Rs. 900. (vi) Cheques issued but not presented for payment Rs. 400

[Overdraft as per Cash Book – Rs. 130]

Q.12. Accounting to the Cash – Book of Gopi, there was a balance of Rs. 44,500 standing to his credit in bank on 30th June, 1996. On Investigation you find that :

(i) Cheques amounting to Rs. 60,000 issued to creditors have not been presented for payment till that date.

(ii) Cheques paid into Bank amounting to Rs. 1,05,000 out of which cheques amounting to Rs. 55,000 only collected by the Bank upto 30th June, 1996.

(iii) A dividend of Rs. 4,000 and rent amounting to Rs. 6,000 received by the bank and entered in the Pass – Book but not recorded in the Cash Book.

(iv) Insurance premium (upto 31st December, 1996) paid by the Bank Rs. 2,700 not entered in the Cash Book.

(v) The payment side of he Cash Book had been undercast by Rs. 50.(vi) Bank Charges Rs. 50. Shown in the Pass – Book had not been entered in the Cash Book. (vii) A bill payable for Rs. 2,000 has been paid by the Bank put is not entered in the cash book and bill

receivable for Rs. 6,000 has been discounted with the Bank at a cost of Rs. 100 which has also not been recorded in Cash Book. You are required: (i) to make the appropriate adjustment in the cash book and (ii) to prepare a statement reconciling it with the Bank Pass – Book.

Answer:


(i) Mr. GopalBank Column Cash Book

Receipts Rs. Payments Rs.To Balance b/d 44,500 By Insurance Premium 2,700To Dividend received a/c 4,000 By Rectification of error 50To Rent a/c 6,000 By Bank Charges a/c 50To B/R a/c 5,900 By B/P a/c 2,000

By Balance c/d 55,60060,400 60,400

(ii) Mr. GopalBank Reconciliation Statement

as on 30th June, 1996Detail Amount Rs. Amount Rs.Balance as per Cash Book Dr. and adjusted (Dr.) 55,600Add : Cheque issued to creditors have not been presented for payment till 30.06.96 60,000 60,000

1,15,600Less : Cheque send to Bank put not collected till 30.06.96 (1,05,000-55,000) 50,000 50,000 Balance as per Pass Book 65,600

Q.13. Debit balance as per cash book Rs. 1,00,000 prepare B.P.S. on 31st March 2011.(i) Cheques amounted to Rs. 16,500 drawn out of which a cheque of Rs. 6,600 was presented in next

month & another cheque of Rs. 3,000 was never presented for payment.(ii) Cheques paid into bank worth Rs. 11,200 out of which a cheque of Rs. 7,700 got dishonored.(iii) A cheque of Rs. 1,900 deposited into bank though not recorded in cash book.(iv) A cheque of Rs. 1,450 recorded in cash book but not sent to bank.(v) Debit side of cash book was overcasted by Rs. 1,000.(vi) Credit side of cash book was overcasted by Rs. 900.(vii) A wrong credit made by bank Rs. 1,000 in pass book.(viii) Bank charges of Rs. 150 recorded twice in pass book.(ix) Interest on securities collected by the bank Rs. 2,000.(x) A cheque sent to bank for collection worth Rs. 1,300 got dishonoured though it was not recorded in

cash book.Bank Reconciliation Statement

(As on 31st March, 2011)Particulars Plus Minus

Dr. Balance as per cash book 1,00,0001. Cheques issued but not presented for payment 9,6002. Cheque sent to bank for collection but dishonored 7,7003. Cheque deposited into bank but not recorded in cash book 1,9004. Cheque recorded in cash book but not sent to bank 1,4505. Dr. side of cash book was overcasted 1,0006. Cr. side of cash book was overcasted 9007. A wrong credit made by bank 1,0008. Bank charges 1509. Interest on securities collected by bank 2,00010. Cheque sent to bank for collection but dishonored 1,300

1,15,400 11,650Cr. Balance as per pass book 1,03,800


Bank Reconciliation Statement(As on 31st March, 2011)

Particulars Plus MinusCr. Balance as per pass book 1,00,000

1. Cheques issued but not presented for payment 9,6002. Cheque sent to bank for collection but dishonored 7,7003. Cheque deposited into bank but not recorded in cash book 1,9004. Cheque recorded in cash book but not sent to bank 1,4505. Dr. side of cash book was overcasted 1,0006. Cr. side of cash book was overcasted 9007. A wrong credit made by bank 1,0008. Bank charges 1509. Interest on securities collected by bank 2,00010. Cheque sent to bank for collection but dishonored 1,300

1,11,600 15,400Dr. Balance as per cash book 96,200


Particulars Plus MinusCr. Balance as per cash book 1,00,000


15,400 1,11,600Dr. Balance as per pass book 96,200


Particulars Plus MinusDr. Balance as per pass book 1,00,000


11,600 1,15,400


Cr. Balance as per cash book 1,03,800Q.14. Cr balance as per cash book Rs. 70,000 on 31st December, 2012.

1. Cheques drawn / issued of Rs. 4,000, 5,000 & 6,000 respectively out of which second cheque was presented on 3rd Jan, 2012 & third cheque was not presented at all.

2. Cheques of Rs. 1,000, 2,000 & 3,000 paid into bank out of which third cheque was collected in Jan, 2012.

3. A wrong credit of Rs. 1,000 made by bank in pass books.4. A customer directly deposited into bank Rs, 6,000.5. Credit side of cash book was overcastted by Rs. 7,000.


Particulars Plus MinusCr. Balance as per cash book 70,000

1. Cheques issued but not presented for payment 11,0002. Cheques sent to bank for collection but not yet collected 3,0003. Wrongly credited by bank. 1,0004. A customer directly deposited in to bank 6,0005. Credit side of cash book was over casted. 7,000

25,000 73,000Dr. Balance as per pass book 48,000

Q.15. Dr. Balance as per pass book Rs. 48,000 ( Rest information is as above)


Particulars Plus MinusDr. Balance as per pass book 48,000

1. Cheques sent to bank for collection but not yet collected 3,0002. Cheques issued but not presented for payment 11,0003. Wrongly credited by bank. 1,0004. A customer directly deposited in to bank 6,0005. Credit side of cash book was over casted. 7,000

3,000 73,000Dr. Balance as per cash book 70,000

Q.15. Pass book of Prof. Shubham reflected a balance of Rs. 80,000 as on 31st Dec. 2010 :

1. Cheques worth Rs. 19,000 deposited into bank out of which a cheque of Rs. 4,000 got dishonored.2. Bank retired one of our acceptances (Bill Payable) of Rs. 1,000 under a discount of 5% through the full

amount was credited in cash book.3. Interest credited by bank Rs. 4,000.4. Life Insurance premium paid by the bank as per the standing orders Rs. 500.5. Receipt side of cash book was over-casted by Rs. 1,000.6. Payment side of cash book was over-casted by Rs. 600.7. A wrong debit made by the bank Rs. 3,000.8. Cheques issued of Rs. 25,000 out of which cheques of Rs. 17,000 only, presented for payment during

the month.9. Cheques deposited in to bank worth Rs. 300 recorded as Rs. 3,000.10. Bank charges of Rs. 100 recorded twice in cash book.


11. An account of Rs. 1,200 recorded in debit side of cash book though the cheque of the same amount yet not deposited in to the bank.


Particulars Plus MinusDr. Balance as per pass book 80,000

1. Cheques got dishonored 4,0002. Bank retired acceptance 503. Interest credited 4,0004. Life Insurance premium paid 5005. Receipt side overcastted 1,0006. Payment side overcastted 6007. Wrong debit 3,0008. Cheques issued but not presented 8,0009. Cheque deposited 2,70010. Bank Charges 10011. Cheque recorded but not deposited 1,200

92,400 12,750Dr . Balance as per cash book 79,650

Q.16. Dr Balance as per cash book Rs. 75,000.(Rest information as above)


Particulars Plus MinusDr . Balance as per cash book 75,000

1. Cheques got dishonored 4,0002. Bank retired acceptance 503. Interest credited 4,0004. Life Insurance premium paid 5005. Receipt side overcastted 1,0006. Payment side overcastted 6007. Wrong debit 3,0008. Cheques issued but not presented for payment 8,0009. Cheque deposited 2,70010. Bank Charges 10011. Cheque recorded but not deposited 1,200

12,750 87,400Dr . Balance as per pass book 74,650


CHAPTER 10

Preparation of Final Accounts(Financial Statement of Non–Corporate Business Entity)

MEANING OF FINANCIAL STATEMENTS

Basically, Finacial Statements are organised summaries of detailed information about the financial position of an enterprises Traditionally, the term Financial Statements is used to denote only two basic statements which as under

(а) Balance sheet which shows the financial position of an enterprises(b) Trading and profit and loss Account which shows the financial performance of business operations

during an accounting period.Now a days, in addition to the aforesaid two basic financial statements a statments of Retained Earnings

and a Cash Flow statement and Value Added Stamements are also prepared in practice

USEFULNESS OF FINANCIAL STATEMENTS

The information contained in these statments is used by the management, present and potential investors, lenders, short–term creditors employees, customers, government and their agencies to satisfy some of their different needs for information. Users can get better insight about the financial strengths and weaknesses of the firm, if they properly analyse the information from their own points of view. The usefulness of the financial statments for some of the users is explained below :

User Need For Information

1. Public Enterprises affect members of the public in a variety of ways. For example, enterprises may make a substantial contribution to the local economy in many ways including the number of people, they employ and their patronage of local suppliers. While all the information needs of these users cannot be made by financial statements, there are some needs which are common to all users. The information contents of the financial statements which meet information needs of the investors or providers of risk capital will also meet most of the needs of other users.

2. Government and their agencies Government and their agencies are interested in the allocation of resources and, therefore, the activities of enterprise. They also require information in order to regulate the activities of enterprise.

3. Customers Customers have an interest in information about the continuation of an enterprise, especially when they have established a long–term involvement.

4. Tax Authorities Tax authorities need information to assess the tax


liabilities of an enterprise.

5. Employees Employees and their representative groups are interested in information about the stability and profitability of the employers.

6. Management Management need information to review the firm's (a) short–term solvency, (b) long–term solvency,(c) activity (viz., effective utilisation of its resources),(d) profitability in relation to turnover, (e) profitability in relation to investments and to decide upon the course of action to be taken in future.

7. Potential investors [For example, those who want to invest]

Potential investors need information to judge prospects for their investment and to determine whether they should buy, the shares.

8. Present investors [For example, equity share holders]

Present investors need information to judge prospects for their investment and to determine whether they should buy, hold or sell the shares.

9. Long–term creditors [For example, suppliers of long–term loans]

Long–term creditors need information to determine whether their principals and the interest thereof will be paid, when due and whether they should extend, maintain or restrict the flow of credit to an enterprise.

10. Short–term creditors [For example, suppliers of raw materials/goods, suppliers of short–term loans.

Short–cum creditors need information to determine whether the amount owing to them will be paid when due and whether they should extend, maintain and restrict the flow of credit to an individual enterprise.

CAPITAL AND REVENUE

There are two types of expenditures and two types of income, which are classified as under:

(1) Revenue Expenditure and Revenue Receipts(2) Capital expenditure and Capital receipts.

(1) Revenue Expenditure: Those expenditure are recorded in the profit and loss account such as rent, interest, commission etc. It includes such other expenses which are incurred. In the purchase of raw materials for manufacturing purposes. Similarly, if something is spent for acquiring services, then it is also known as revenue expenditure such as payment of salaries, wages etc. Thus any expenditure which are not of capital nature are treated as revenue expenditure.

(2) Revenue Receipt: These receipt are of such nature, which are received regularly in the business from the sale of goods and services.Similarly when anything is paid for the maintenance of the business asset, it is also treated as revenue

expenditure. The following are the revenue expenditure : (i) For operating the business such as salary, wages, rent, insurance, postage etc. (ii) Expenses for the maintenance of the asset such as repair etc.(iii) Tax and other legal expenses.(iv) Interest on loan.(v) Depreciation of fixed assets.(vi) Cost of raw materials for resale. (vii) Any other miscellaneous expenditures.

Some expenditure appear to be of revenue type, but they are really capital expenditure. They are as under :(1) Legal expenses paid is connectors with the purchase of land such as registration charges.(2) Interest on loan paid to acquire an asset.


(3) Wages paid to workers for fixing a machine.(4) Expenses paid on the repair of old buildings for the first time.

Capital Expenditure :

Capital expenditure is that expenditure, which is incurred either to acquire a fixed asset or to increase the utility and profit / earning capacity of any concern. This expenditure is available for a longer time to come. The example of Capital expenditure are as under :(i) The expenditure for acquiring a long term asset, which is not for resale such as purchase of land and

building.(ii) The expenditure incurred for extension and improvement of working condition of any machine.(iii) Expenditure which does not provide any benefit immediately such as expenditure on advertising.(iv) Expenditure for improvement of the existing capacity of the asset.(v) Expenditure made to acquire any rights such as patents and copyrights.(vi) Expenditure which increases the earning capacity of any business.

Capital Receipts

Any amount received from the sale of fixed assets or money received as loans or construction in the form of capital from the partners shareholders etc., is treated as Capital receipts.

It always increases the liability. Hence it cannot he treated as revenue. Capital receipts do not effect the profit or loss of the business. It is always seen in the Balance Sheet.

Capitalised Expenditure or Deferred Revenue Expenditure

Sometimes a large amount is spent as revenue, expenditure but the benefit of which are enjoyed for more than one year. Similarly sometimes, some expenditure may be of non–recurring nature, and the benefits of which are limited to one year only but in fact it is aval1 able for a number of years. In such cases this amount is spread over a number of years. Thus the amount which remained uncharged is termed as deferred revenue expenditure, such as discount onissue of shares, brokerage for the issue of shares, advertising expenses etc. Similarly sometimes, a big loss arising from unforseen circumstances may he spread over for 3 to 5 years. This spread over amount is shown in the Balance Sheet as an asset.

ELEMENTS OF FINANCIAL STATEMENTS

Asset: An asset is a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise. An enterprise usually employs its assets to produce goods or services capable of satisfying the wants or needs of custom§j£% Since these goods or services can satisfy wants or needs, the customers are prepared to pay for them, hence contribute to the cash flow of the enterprise. Cash itself renders several services to the enterprise because of its command over other resources. The future economic benefits embodied in an asset may flow to the enterprise in a number of ways :

(a) an asset to. be used singly, or in combination with other assets in the production of goods or services to be sold by the enterprise;

(b) exchanged for other assets; (c) used to settle a liability; or (d) distribute to the owners of the enterprise.


Fig. 9.1

Many assets have a physical form. For example, land and building, plant, equipment etc. are of physical form.

Many assets for example, receivables and property are associated with legal rights, including ownership. In determining the existence of an asset, the right of ownership is not essential. For example, if a property is held on lease, it is an asset to the enterprise, if it controls the benefits which are expected to flow from the property.

The assets of an enterprise result from past transactions or other past events. For example, the plant and machinery acquired is a past transaction from which an asset occurred. But the transactions or event expected to occur in future do not give rise to assets.

Liability : A liability is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. An essential characteristic of a liability is that the enterprise has a present obligation. An obligation is a duty or responsibility to act or perform in a certain way. An obligation may be legally enforceable as a consequence of a binding contract or statutory requirement.

The settlement of a present obligation usually involves the enterprise giving up resource embodying economic benefit in order to satisfy the claim of the other party. The settlement of a present obligation may be done by:

(a) payment of cash, (b) transfer of other assets, (c) provision of services, (d) replacement of that obligation with another obligation, (e) conversion of the obligation to equity.

Liabilities result from past transactions or other past events. Some liabilities can be measured only by using a substantial degree of estimation. For example, income tax liability of a year may not be exactly known at the time of preparation of financial statements.

Equity : Equity is a residual interest in the assets of the enterprise after deducting ius liabilities. In a corporate enterprise equity is suitably sub–classified in the balance sheet. For example, in India equity is classified as Share Capital and Reserve and surplus

Income : Income is the increase in economic benefits during the accounting period in the form of inflows or enhancement of assets or decreases of liabilities that result in increase in equity, other than those relating to contribution from equity participants. The definition of income encompasses both revenue and gains. Gains represent other items that meet the definition of income and may or may not arise in the course of ordinary activities of an enterprise. The definition of income also includes unrealised gains. When gains are recognised in the income statement they are usually displayed separately because knowledge of them is useful for making economic decisions. Gains are often reported net of related expenses. Income may also result from settlement of liabilities.

Expenses : Expenses decreases the economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences in liabilities that result in decreases in equities other than those relating to distribution to equity participants. The definition of expenses encompasses losses as well as those expenses that rise


in the course of the ordinary activities of the enterprise. Expenses in the course of the ordinary activities of the enterprise include, cost of sales, wages, manufacturing expenses, depreciation.

Losses represent other items that meet the definition of expenses and may or may not arise in the course of the ordinary activities of the enterprise. Loose tools include, for example, those items resulting from disasters such as fire and flood as well as those arising on disposal of non–current assets. When losses are recognised in the income statement, they are usually displayed separately because such Knowledge is useful for the purposes of making economic decisions.

RECOGNITION OF ASSETS, LIABILITIES, INCOME AND EXPENSES

Recognition of an Asset : An asset is recognised in the balance sheet when it is probable that the future economic benefits will flow to the enterprise and the asset has a cost or value that can be measured reliably. An asset is not recognised in the balance sheet when expenditure has been incurred and for which it is considered improbable that economic benefits will flow to the enterprise beyond the current accounting period.Recognition of a Liability : A liability is recognised in the balance sheet with its proposal that an outflow of a resource embodying economic benefits will result in the settlement of a present obligation and the amount on which the settlement will take place can be measured reliably.Recognition of an Income : Income is recognised in the income statement when there is an increase in the future economic benefits related to an increase in an asset or a decrease of a liability which can be measured reliably.Recognition of Expenses : Expenses are recognised in the income statement when a decrease in future benefits related to a decrease in an asset or an increase of a liability has arisen which can be measured reliably.

MEASUREMENT OF THE ELEMENTS OF FINANCIAL STATEMENTSMeasurement is the process of determining the monetary amounts at which the elements of the financial statements are to be recognised and carried in the balance sheet and income statement.They include the following : (a) Historical cost: Assets are recorded at the amount of cash or cash equivalent paid or the fair value of the

consideration given to acquire them at the time of their acquisition and liabilities are recorded at the amount of proceeds received in exchange, for the obligation.

(b) Current cost : Assets are carried at the amount of cash or cash equivalents that would have to be paid if the same or an equivalent asset was acquired currently. Liabilities are carried at the undiscounted amount of cash or cash equivalents that would be required to settle the obligation currently.

(c) Realisable (settlement) value : Assets are carried at the amount of 'cash or cash equivalent that could currently be obtained by selling the assets in an orderly disposal. Liabilities arc carried at their settlements values : that is, the undiscounted amounts of cash or cash equivalent expected to be paid to satisfy the liabilities in the normal course of business.

(d) Present value : Assets are carried at the present discounted value of the future net cash inflows that the firm is expected to generate in the normal course of business. Liabilities are carried at the present discounted value of the future net cash outflows that are expected to be required to settle the liabilities in the normal course of business.

TRADING ACCOUNT

Meaning of Trading Account : Trading account is one of the financial statements which shows the amount of buying and selling of goods and/or services during an accounting period.Heading of Trading Account: Trading Account is a flow statement and not a static statement. It is prepared for a particular accounting period and not at a particular point of time. Hence, it is headed as follows :"Trading Account for the period ended..."Purpose of Trading Account:


Trading account is prepared to know the gross profit or gross loss during the accounting period. The basis for the preparation of this account is the matching of selling prices of goods and services with the Cost of goods sold and services rendered.

Gross Profit means excess of operating revenues over direct operating expenses. Contents of Trading Account: Items to be shown on the debit side of Trading AccountTrading account is debited with the following items :(а) Opening Stock refers to the closing stock of unsold goods at the end of previous accounting period which

has been brought forward in the current accounting period.(b) Purchases refer to those goods which have been bought for resale. Purchases include cash as well as credit

purchases.(i) Purchases Returns or Return Outwards (i.e., goods returned to suppliers).(ii) Goods withdrawn by the proprietor for his personal use. (iii) Goods distributed by way of free samples.(iv) Goods given as charity.

(c) Direct expenses refer to all those expenses which are incurred from the stage of purchase till the stage of making the goods in saleable condition. Such expenses include the following expenses.(i) Freight Inwards(ii) Import Duty(iii) Octroi(iv) Carriage Inwards and Cartage Inwards,(v) Wages.Items to be Shown on the Credit Side of Trading AccountTrading Account is credited with the following items :

(a) Sales refer to the sales of those goods which have been bought for resale. Sales include cash as well as credit sales. Sales Returns or Returns Inwards are shown by way of deduction from the amount of total sales.

(b) Closing Stock refers to that part of unsold goods at the end of the current accounting period. According to convention of conservatism, stock is valued at cost or Net Realistic Value (NRV) whichever is lower. The rationale behind this practice is to provide for anticipated losses. Closing Stock is accounted for as under :

1. If the Closing Stock appears outside the Trial Balance

The following entry is passed to incorporate Closing Stocks in the books : Stock A/c Dr. To Trading A/c

2. If the Closing Stock appears Inside the Trial Balance

(a) Closing stock will not be shown in the Trading Account since the Closing Stock has already been taken into Account while computing the adjusted purchases/cost of goods sold.(b) Closing Stock will be shown in the Balance Sheet.

Preparation of Trading Account: The preparation of a Trading Account requires the passing of entries to transfer the balances of accounts of all the concerned items to the Trading Account. The entries required for such transfer are called 'Closing Entries', The following closing entries are passed to give affect to such transfer of balance :

Account(s) to be closed Accounting Entry to be passed(a) Purchases Returns Account

(b) Opening Stock Account, PurchasesAccount and Accounts of DirectExpenses (e.g., wages, carriageinwards freight inwards)

(c) Sales Returns or Return inwardsAccount

(d) Sales

Purchases Returns A/c To Purchases A/cTrading A/c To Opening Stock A/c To Purchases A/c To Direct Expenses A/cSales A/c To Sales Returns A/cSales A/c

Dr.

Dr.

Dr.

Dr.


To Trading A/c

After recording of the transactions in the Journal, posting them into the ledger and testing its arithmetical accuracy by means of the Trial Balance, we prepare the summary of the accounts, which consists of Trading and Profit & Loss Account and a Balance sheet.

The proprietor of the enterprise is interested, at the end of the year, in finding out the profit earned and the financial position of the business. For knowing the profits, he prepares the Trading, Profit & Loss Account, and in order to know the position of his business he prepares the Balance Sheet. These are called 'Final Accounts'. As these accounts are prepared finally in the process of accounting and, moreover, they are prepared to know the final trading results and as they are prepared at the end of the year, hence they are called 'Final Accounts :

TRADING AND PROFIT & LOSS ACCOUNT

Preparation of Trading Account: The trading account is that account which shows the result of the buying and selling of goods. It is prepared to find out the gross Profit or Gross Loss of a business during a given period of time. Gross Profit is the excess of net sales over the cost of goods sold and Gross Loss is the excess of the Cost of goods sold over the net sales. A Trading Account is prepared in the same form in which any other account is prepared. The specimen proforma of a Trading Account is given as under.


TRADING ACCOUNT(For the Year ended 31st December….)

Dr. Cr. Particulars Amount

Rs.Particulars Amount

Rs.To opening stockTo Purchases ……

Less : Purchases Returns ……To Direct Expenses : Wages Manufacturing or Producting Expenses Coal, gas and fuel etc. Motive Power Octroi Import Duty Custom Duty Consumable Stores Foreman/Works Manager's Salary RoyaltyTo Gross Profit if any transferred to P & La/c

……

……

………………………………………………

…………

By Sales ……Less : Sales

Returns ……

By Closing Stock

By Gross Loss Transferred to P& La/c

…………

……

……

The Items posted to the Debit side of Trading Account

1. Opening Stock: It is that amount of goods which is in hand at the beginning of the period for which the Trading Account is prepared. This figure is available from the Trial Balance. There will be no opening stock in the case of a new business. Opening stock consists of Raw material; Work–in–progress; and Finished goods.

2. Purchases : It consists of Cash and Credit purchases of goods which are for resale purposes. The value of such purchases which have been returned and discount on purchases, if any, should be deducted from purchases in the inner column and only net purchases are shown in the outer column.

3. Direct Expenses : Direct expenses on the purchase of goods, i.e., all expenses which have been incurred before the goods become ready for sale are shown on the debit side of the Trading Account. Such expenses are–Wages, Carriage inward, Manufacturing expenses, Coal, Water and Gas, Factory Lighting, Freight, Octroi, Factory Rent; Excise Duty, Import Duty; Custom Duty, Factory Insurance, Consumable Stores {e.g., engine oil, soft soap, cotton waste, oil grease and waste consumed in a factory to keep the machines in right condition) etc.

The Items posted to the Credit side of the Trading Account:

1. Sales : Sales should include both Cash and Credit sales of those goods which were purchased for resale purposes, less the value of goods returned by the customers. Sales returns are deducted from Sales in the inner column, and the amount of net sales is shown in the outer column.

2. Closing Stock : It is the amount of goods in hand at the end of the trading period. Generally, the Closing stock is given outside the Trial Balance, but when purchases are adjusted through Opening and Closing stock, in that case Closing stock will have a debit balance in the Trial Balance. If given outside the Trial Balance, it will be Credited to the Trading Account but if it is given in the trial balance, then it appears as asset in the Balance Sheet. Closing stock may be in the form of Raw materials, Work–in–Progress and Finished goods.In order to ascertain the value of closing stock, a list of all goods in stock after physical checking is

prepared (this is known as stock taking). This stock in hand is valued at cost or realisable value whichever is less. It


is valued on conservative basis, i.e., expected profits are ignored but possible losses are duly provided for. The value of closing stock is brought into account by means of an adjusting entry. Closing stock a/c is debited because the unsold goods represent an Asset. The Trading a/c is credited to arrive at the profit made on buying and selling of goods. The credit balance of the Trading Account represents the Gross Profit on trading for the period and is transferred to the Credit of Profit and Loss Account. If there is a Debit balance of the Trading Account, it represents the Gross Loss and is transferred to the debit of Profit and Loss Account.

Preparation of Profit & Loss Account

This account is prepared to find out the net result of the trader's business activities of the net profit or net loss resulting from transaction during a trading period. There are certain items of incomes and expenses of the business which must be taken into account for calculating net profit of the business. These are of indirect nature, i.e., concerning the whole business for the purpose of making the goods available to the consumers. Indirect expenses may be selling and distribution expenses, management expenses, financial expenses, extraordinary losses and expenses to maintain the assets into working order.

The items which usually appear in Profit and Loss Account may be stated as under :

1. The Items posted to the Debit side of Profit & Loss Account

(i) First of all, if there is any Gross Loss (Carried from Trading Account) that is to be shown.(ii) Indirect Expenses–

(a) Selling and Distribution expenses e.g., Advertisement Travellers' salaries, Expenses–and commission, Godown rent, Carriage outwards, Bad debts etc.,

(b) Management Expenses, e.g., Rent, Rates and Taxes, Office salaries. Printing and stationery, Postage and Telegrams, Bank charges, Legal charges. Audit fees, Insurance, General expenses etc.

(c) Financial Expenses – Discount allowed, Interest on Capital, Interest on Loans, Discount on Bills etc.

(d) Maintenance & Depreciation expenses – e.g., Depreciation, Repairs, Maintenance etc.(e) Extraordinary Expenses – e.g., Loss by Fire (not covered by insurance); Cash deficiency etc.All the above and all such other expenses appear on the debit side of the Profit and Loss Account. It

represents the cost of earning the net profits.

2. The Items posted to the Credit side of the Profit and Loss Account(a) First of all Gross Profit transferred from Trading Account is shown.(b) This account is credited with the items of various incomes or gains, e.g., Discount received.

Interest received. Profit on Sale of Investments, Bad Debts recovered etc.The difference between the two sides of the Profit and Loss Account is either Net Profit or Net Loss of the

business for the trading period. If the Credit total is more, the difference would be Net Profit; if the debit total is more, it would be Net Loss.

The Net Profit or Net Loss is transferred to the Credit or debit of the Proprietor's/Partner's Capital Accounts, as it is the owner who is entitled to get profits or responsible to bear losses. Net Profit will increase his Capital and Net Loss will reduce it. The specimen proforma of Profit and Loss Account is given as under.


PROFIT & LOSS ACCOUNT(For the year ended 31st December…..)



Rs.To Gross Loss (if any) transferred from Trading a/c To SalariesTo Travelling Expenses To Godown Rent To Postage & Telegrams To Rent, Rates & Taxes To Carriage outwardsTo InsuranceTo Stationery and Printing To Interest paid To Discount allowed To Commission paid To Advertisement To General Expenses To Legal Expenses To Audit Fees To Bad Debts To DepreciationTo Interest on Capital To Interest on Loan To Loss on Fire (uncovered by insurance) To Net Profit transferred to Capital a/c

……………………………………………………………………………………………………

……

By Gross Profit (if any) By Interest on investments By Interest on Deposits By Rent received By Commission received By Discount received By Interest received By Other Incomes By Net Loss (if any) transferred to Capital a/c

……………………………………………………

…… ……

MANUFACTURING ACCOUNT

Those concerns which convert the raw material into finished goods like to ascertain the cost of production besides gross and net profit of the concern. These are manufac–turing–cum– 'i trading concerns. Hence, these concerns in order to ascertain the cost of production firstly prepare Manufacturing Account, and then prepare Trading and Profit & Loss Account. Thus Manufacturing Account reveals the Cost of goods manufactured in a particular period.

The main object of Manufacturing Account is to show–(i) Cost of finished goods produced, and(ii) Constituent items thereof, such as cost of material consumed, productive wages, direct

and indirect expenses.Following points should be noted while preparing manufacturing account–

1. Cost of Materials used : The opening stock of materials, purchases and carriage inward be added and the value of Closing stock of materials be deducted, opening and closing stocks of finished goods be ignored while preparing the Manufacturing Account as they will , appear in the Trading Account.

2. Factory Expenses : All expenses incurred in the factory to produce the goods be debited to this account, e.g., wages paid to labourers, salaries to factory staff, factory rent and lighting, depreciation on machinery, repairs of machinery, power and fuel etc.

3. Work–in–progress : It is valued at materials used, labour spent plus a reasonable share of other expenses. Work–in–progress in the beginning should be added to and the Work– in–progress at the end be deducted from the debit side of the Manufacturing Account.


4. Sale of Scrap material: The proceeds from the sale of wastage and scrap material should be credited to the Manufacturing Account.

5. Cost of Goods Manufactured: The balance in the Manufacturing Account represents the cost of goods manufactured and is transferred to the debit side of the Trading Account.A specimen of Manufacturing Account is given below–

FORM OF MANUFACTURING ACCOUNT(for the year ended on 31st December…..)



Rs.To Opening Stock Raw Material ……Work–in–progress ……To Purchases of Raw Material...Less: Returns ……To Wages of Workers To Salaries of Foreman Master, Technical staff To Factory ExpensesRent ……Lighting ……Insurance ……To Other Manufacturing Expenses:Power ……Repairs to Plant & Machinery ...Depreciation on Plant ……To Consumable Stores

…………

……

………………

By Sale of Scrap By Closing Stock:Raw Materials ……Work in Progress ……By Cost of Finished goods transferred to Trading a/c (Balance)

……

…………

Illustration 1. Prepare Manufacturing Account and Trading Account for the year ended 31st December, 2008 from the following particulars taken from the books of a manufacturer—

Stock (January 1) Rs. Rs.Raw MaterialWork–in–progressStoresFinished goods purpose

Raw MaterialStoresReturned RawMaterial purchasedFreight and Carriage onRaw materials purchasesFactory Rent & TaxFactory InsuranceCoal, Power and Fuel

3,5002,000

5008,000

37,0001,000

2,000

1,1001,9002,0004,300

Factory Building RepairsRepairs to Plant and MachineryDepreciation on Plant & MachineryPurchases of Finished goodsCarriage of Finished goodspurchasedSalesStock on 31.12.2008 :

Finished goodsRaw MaterialStores

2,4002,2001,500

16,000

1,7301,23,400

28,0004,000

800


Solution :MANUFACTURING ACCOUNT

(For the year ended on 31st December, 2008) Dr. Cr.

Particulars Amount Rs.


To Stock (Jan. 1,2008) Raw Material 3,500 Work–in–Progress 2,000 Stores 500To Purchases : Raw materials 37,000 Less : Returns 2,000To StoresTo Freight and carriage on Raw materialsTo Factory Rent & TaxesTo Factory InsuranceTo Coal, Power and FuelTo Factory Building RepairsTo Repairs to Plant and MachineryTo Depreciation on Plant and Machinery

6,000

35,0001,000

1,1001,9002,0004,3002,400

2,200

1,500

By Stock (Closing) Raw materials Stores

By Trading a/c

(Cost of finished goods) transferred)

4,000800

52,600

57,400 57,400

TRADING ACCOUNT(For the year ended on 31st December, 2006)



Rs.To Stck of finished goodsTo Manufacturing a/c (Cost of finished gods)To Purchases of finished goods CarriageTo Gross Profit transferred to P & L a/c

8,000

52,60016,0001,730

73,070

By SalesBy Stock of finished goods (Closing)

1,23,400

28,000

1,51,400 1,51,400

METHODS OF PRESENTING THE FINAL ACCOUNTS

The Trading and Profit and Loss Account and the Balance Sheet can be presented either in Horizontal Form or in Vertical Form.

(a) Horizontal Form : Under this form of presentation, the items are presented in 'T' shape. The horizontal forms of presenting the Trading Account, Profit and Loss Account and Balance Sheet are shown on coming pages.

(b) Vertical Form : Under this form of presentation, the items are presented in a single column statement in a purposeful sequence. The vertical forms of presenting the Income Statement and the Balance Sheet are shown below :

Vertical Form of Profit and Loss Account

Particulars Rs. Rs. Rs.


A.

B.

C.D.

E.F.

Net SalesSales (Gross) Less : ReturnsCost of Goods soldOpening StockAdd : PurchasesLess: ReturnsAdd: Direct Expenses Carriage/Cartage/Freight inwards Wages and Salaries Cost of Goods available for saleLess : Closing StockGross profit (A – B)Operating Expenses(a) Selling Expenses Carriage outward Discount allowed Commission allowed Travelling Expenses Entertainment Expenses Sales Promotion Expenses Bad debts.(b) Office and Administration Expenses Salaries & Wages Rent/Rates & Taxes Repairs Insurance Printing & Stationery Water & Electricity Postage & Telegram Staff Welfare Expenses Conveyance Charges Misc. Expenses DepreciationNet Operating Profit/Loss (C – D)Net Non–operating result(a) Interest earned Commission earned Discount earned Miscellaneous incomes(b) Non–operating Expenses & Losses Interest allowed Loss on sale of a fixed Asset

xxxxx

xxxxx

xxxx

xxxxx

xxxxx

xxxxx

xxxxx

xxxxx

xxxxx

xxxxx

xxxxx

xxxxx

xxxxx

xxxxx

xxxxx

xxxxx

xxxxx

xxxxx

xxxxx

xxxxx

xxxxx

xxxxx

xxxxx

xxxxx

xxxx

xxxxxxxxxx

xxxxx

xxxxx

xxxxx

xxxxx

xxxxxxxxxx

xxxxxxxxxx

xxxxx


xxxxx

x

xxxxx

xxxxx

xxxxx

xxxxx

xxxxx

xxxxx

G. Net Profit xxxxx


Vertical Form of Balance Sheet

Particulars Rs. Rs. Rs.A.

B.

Sources of Funds(a) Proprietor's Funds(b) Long–term Debts

Application of Funds(a) Net Working Capital(i) Current Assets Cash in hand Cash at bank Bills receivable Accrued income Debtors Stock Prepaid Expenses(ii) Less : Current Liabilities Bank Overdraft Accrued expenses Bills payable Trade creditors Income received in advance(b) Investments(c) Fixed Assets Furniture & Fixtures Patents & Trade Marks Plant & Machinery Building Goodwill

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx

xxxxxxxxxxxxxxxxxxxx

xxxxxxxxxxxx

xxxxxxxx

xxxx

xxxx

A Schedule of Proprietor's Funds

Particulars Rs. Rs.A.B.

C.

Capital in the beginningAdd : Additional Capital introduced

Interest on CapitalSalary to PartnerProfit for the current accounting period

Less : DrawingsInterest on DrawingsLoss for the current accounting period

xxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxx

xxxx

xxxx


D. Capital at the end of the year (A + B – C) xxxx

TREATMENT OF SOME ITEMS WHICH MAY BE DIRECT ITEMS/INDIRECT ITEMS/INCOMES/EXPENSES

The treatment of some items which may be direct items/indirect items/incomes/expenses is shown as under :


Treatment of some items in the absence of any Specific InformationItems If item appears on

debit sideIf items appears on credit side

It is is not given whether debit or credit

(a) Returns Shown on the credit side of Trading A/c by way of deduction from the amount of Sales.

Show on the debit side of Trading A/c by way of deduction from the amount of Purchases.

It may be assumed as Returns Inward or Returns outward by giving an assumption to that effect.

(b) Carriage Shown on the debit side of Trading A/c (if assumed as carriage on purchases or P&L A/c (if assumed as carriage on sales).

–– It may be assumed as carriage on purchases or carriage on sales by giving an assumption to that effect.

(c) Freight Shown on the debit side of Trading A/c (if assumed as Freight Inwards) or P &L A/c (if assumed as Freight outwards).

–– It may be assumed as Freight Inwards or Freight outwards by giving an assumption to that effect.

(d) Wages & Salaries Shown on the debit side of Trading A/c

–– ––

(e) Salaries & Wages Shown on the debit side of P & L A/c

–– ––

(f) Discount Shown on the debit side of P&L A/c as Discount Allowed.

Shown on the credit side of P&L A/c as Discount Received.

It may be assumed as Discount Allowed or Received by giving an assumption to that effect.

(g) Commission Shows on the debit side of P & L A/c as Commission Allowed.

Shown on the credit side of P&L a/c as Commission Earned.

It may be assumed as Commission Allowed or Commission earned by giving an assumption to that effect.

(h) Interest Shown on the debit side of P&L A/c as Interest Allowed.

Shown on the credit side of P&L A/c as Interest Earned.

It may be assumed as Interest Allowed or Earned by giving an assumption to that effect.

(i) Rent Shown on the debit side of P&L A/c as Rent Paid.

Shown on the credit side of P&L A/c as Rent Earned.

It may be assumed as Rent paid or Rent earned by giving an assumption to that effect.

(j) Apprenticeship Premium

Shown on the debit side of P&L A/c as Apprenticeship Premium paid.

Shown on the credit side of P&L A/c as Apprenticeship Premium received.

It may be assumed as Apprenticeship Premium paid or received by giving an assumption to that effect.

Balance SheetA Balance Sheet is a statement which is prepared on a certain fixed date showing what a business owns and

what is owes. It is a statement of all the ledger balances of Personal and Real accounts as on a particular day. A


Balance Sheet is also described as a 'statement showing the sources and application of Capital.' After all the revenue accounts are transferred to the Trading and Profit and Loss Account the accounts left over in the Trial Balance will be those relating to Assets and Liabilities. These Assets and Liabilities accounts are presented in a convenient form which is known as Balance Sheet.

DEFINITIONS

Balance Sheet has been defined by different eminent writers in a different way. Some of the important definitions are stated as under:

According to Carter, "A Balance Sheet is a statement prepared from the books of a concern showing the debit and credit balances, thereof after the Trading and Profit & Loss Account has been prepared, whether actual Assets and Liabilities or not, and the balance whether o f Capital Reserve or Profit at a given date."

According to Bigg, "Balance Sheet is a statement which shows in summarised form the capital employed in the business and the various sources from which the capital has been obtained and how that capital is employed, the various assets by which it is represented."

According to Batliboi, "A balance sheet may be defined as a statement prepared with a view to measure the exact financial position of business on a certain fixed date."

Objects of preparing a Balance SheetThe main purpose of preparing a balance sheet is to ascertain the financial position of a trader as at the

close of business on a given date.The other subsidiary objects of preparing a balance sheet may be stated as under–

1. To determine the worth of a sole trader for the purpose of granting credit.2. To have an idea of the nature of assets in which the capital of the trader is invested, for instance, whether

the value of fixed assets is more than that of floating assets which affect liquidity of a trader.3. To ascertain the nature of liabilities of a trader, i.e., whether he has long–term liabilities or short–term

liabilities.4. To submit the final accounts to the taxation authorities.5. To use balance sheet as the basis while admitting a partner.6. To negotiate a sale of the entire business with goodwill, furniture etc., commonly known as a balance sheet

sale.7. To know the position of Debtors and Creditors of the business, as how much amount is to be received and

how much amount is to be paid.8. To know the Cash and Bank position at a particular date.Classification of Assets

Every business is run on the soundness of assets. If the fictitious assets are more in comparison to real assets, the soundness of the concern will be in doubt.

Every concern has got some liabilities also. Generally, big concerns do not have assets of their own. They got some liabilities also, which have to be paid by the concern.

Assets and liabilities are divided into various categories and they may be put into various forms.Assets are the property of a business. Assets are divided according to their nature into the following

classes–

1. Liquid Assets : Liquid assets are held for the purpose of consumption, resale or subsequent conversion into cash. They exist in the form of cash or that can be readily converted into cash, such as investments in gilt–edged securities, bills receivable etc.

2. Contingent Assets : It depends for its existence upon the happening of a certain event. If that event happens, the assets become available, otherwise not. Such assets are not– credited in the accounts, but they are usually disclosed on the balance sheet.

3. Outstanding Assets. Income earned but not received and expenses paid in advance are known as outstanding assets.

4. Fixed Assets. These assets are held for the purpose of earning income and not for resale as land and buildings, motor vehicles, furniture, etc.

5. Nominal Assets. These assets do not represent anything valuable, such as deferred revenue expenditure, a capital loss etc.


6. Fictitious Assets. The assets which are not represented by anything concrete are known as fictitious assets, e.g., preliminary expenses, goodwill etc.

Classification of liabilities

The liabilities may be divided into the following classes :1. Current Liabilities: These liabilities are payable immediately such as trade creditors, bank loans etc.2. Outstanding liabilities : Income received but not earned and expenses incurred but not paid are known as

outstanding liabilities.3. Fixed Liabilities. These liabilities are not payable in the near future but they are paid after a long period as

the capital of the proprietor.4. Contingent liabilities. These liabilities arise only on the happening of a certain event, which may or may

not become payable, such as liability on bill discounted, liability in respect of pending suit and liability as surety for another person.

Classification of capitalCapital is the excess of assets over liabilities and is known as the amount originally contributed by the

proprietor. The various classes of capital are as under :1. Fixed Capital: All the fixed assets taken together are known as fixed capital,2. Loan Capital : Long–term loans taken for the business are known as loan capital.3. Working Capital: The excess of current assets over current liabilities is known as the working capital.

Similarly, in case of a newly started business the amount which remains in hand for the working of the business is known as the working capital.

4. Circulating Capital. All the liquid assets pf a business are known as the circulating capital. It includes Stock, Bills Receivables, Bank and Cash balance. Debtors etc.

5. Trading Capital: It consists of all the fixed and liquid assets of the business.6. Overtrading: If the current assets are less than the current liabilities, it is said to be overtrading. It means

that the business is carried on with insufficient liquid resources and the financial position of the concern is not sound. The financial position of the concern is judged by the amount of working capital. If a business is started by insufficient capital or its capital has been reduced by trading losses or personal drawings, such situation is known as the overtrading.

(i) Contingent Liabilities : It is shown on the liability side of Balance Sheet but outside the total of liability side. Thus it is shown outside the balance sheet but on liability side.

(ii) Stock Burnt by Fire : It is a loss and its entry is to be written on the debit side of P&L a/c and the closing stock is increased by this amount.

(iii) Accrued Income : It is shown on the credit side of P&L a/c and on the asset side of Balance Sheet.

(iv) Outstanding Income : It is shown on the debit side of the P&L a/c and on the liability side of Balance Sheet. It is an expense which is to be made during the business period. They have not been paid, but they arc to be paid later on.

Grouping and Marshalling of Assets and Liabilities

The arrangement of assets and liabilities in certain groups and in a particular order is called Grouping and Marshalling of the Balance Sheet of a business. Assets and liabilities can be arranged in the Balance Sheet into two ways–

(i) In order of Liquidity, and (ii) In order of Permanence.

(i) In order of Liquidity : When assets and liabilities are arranged according to their reliability and payment preferences (i.e., the asset which is easily realisable or convertible into cash at a very short notice will come at the top and the asset which is last in order of realisation will appear at the end; similarly, the liability which is payable immediately after the balance sheet date is placed at the top, whereas the liability which is required to be paid last is placed at the bottom).

(ii) In order of Permanence : When the order is reversed from that what is followed in case of liquidity, it is called order of permanence (i.e., the most permanent asset appearing first on the asset side and the most


liquid asset as the last item; similarly, the liability shown at the top will be the last payment to be made by the trader in case of closure of business.)Specimen of Marshalling of Assets and Liabilities is as under–

(i) Order of LiquidityBALANCE SHEET AS ON…..

Liabilities Amount Rs.

Assets Amount Rs.

Bank Overdraft Bank Loan (short–term) Bills Payable Creditors for goods Creditors for Loan Creditors for Expenses Unearned Income Long–term Loan Reserves and Fund Capital ……+ Net Profit – Net Loss ……Less : Drawings

……

……

……………………………………………………

……

Cash in hand Cash at Bank Other Bank DepositsShort–term money callInvestments (Short–term) Bills Receivable Unearned Income Prepaid expensesSundry Debtors ……Less : Reserve ……Stock in handFurniturePatentsLivestocksVehiclesMachineryLand & BuildingsGoodwillPatent Right etc.

…………………………………………

………………………………………………

…… ……


(ii) Order of Permanence –BALANCE SHEET AS ON…..


Assets Amount Rs.

Capital ……+ Net Profit ……– Net Loss ……– Drawings ……Long–term LoansReserve & Funds Unearned Income Creditors for expenses Creditors for Loans Bills PayableBank Loan Bank overdraft

……………………………………………………

GoodwillLand & Buildings Plant & Machinery Furniture Patents Trademark Livestock Vehicles Closing stock Sundry Debtors Bills Receivable Investments Cash at Bank Cash in hand

………………………………………… ………………………………

…… ……

DIFFERENCE BETWEEN TRADING ACCOUNTAND PROFIT AND LOSS ACCOUNT

S.No.

Points of Difference

Trading Account

Profit and Loss Account

1 When prepared It is prepared after preparing Trial balance at the end of the accounting period.

It is prepared after preparing Trading Account but before preparing Balance Sheet at the end of accounting period.

2 Object The object of preparing it is to know the result of buying goods and selling goods, i.e., to ascertain Gross Profit or Gross Loss of the business.

The object of preparing it is to know the net result of trading, i.e., Net Profit or Net. Loss of the business during a given period.

3 Items to appear Items relating to goods and direct nominal accounts showing debit balances appear on the debit side. On the credit side sales, minus sales Returns, and closing stock appear.

Indirect expenses appear on the debit side and all indirect income appears on the credit side.

4 Transfer of balancesof the accounts

The balance of Trading Account shows Gross Profit or Gross Loss which is transferred to Profit &Loss Account.

The balance of Profit and Loss Account shows Net Profit or Net Loss which is transferred to Capital account of the


proprietor.5 Compulsion It is not compulsory to

prepare. Many of the concerns do not prepare it.

It is prepared compulsorily by nearly all trading concerns.

DIFFERENCE BETWEEN TRAILS BALANCEAND BALANCE SHEET

S.No.

Points of Difference

Trading Account

Profit and Loss Account

1 Object of preparing It is prepared to check the arithmetical accuracy of the posting.

It shows readily the financial position of business on a given date.

2 Sides It has two sides, which are called Debit and Credit.

It has also two sides.

3 Accounts The items in it relate to all types of accounts, whether they are Nominal, or Real or Personal Accounts.

It contains the balances of only Real and Personal accounts.

4 Time of preparation It is completed before preparing a Trading and Profit & Loss Account.

It is prepared after all the income and expenditure accounts (Nominal accounts) have been closed off by transfer to Trading and Profit and Loss Account.

5 Stock Normally, the closing stock does not figure in the Trial Balance.

The value of Closing Stock appears as an Asset in it.

6 Adjustment entries It can be prepared at any stage, without even making adjustments.

A Balance Sheet cannot be prepared without making adjustments for outstanding and prepaid items and without taking into account all events and transactions for the prepaid.

ADJUSTMENTS

While preparing the Profit and Loss Account for a particular period it is essential that all the expenses, losses, incomes and gains relating to that period should be taken into account to ascertain the true net profit of the period. But, it frequently happens that certain expenses relating to an accounting period are not recorded in that period's books, simply because they have not been paid during that period. On the other hand, there are certain other expenses which are paid in advance, for a period which extends beyond the accounting period. Similarly, an income may become due during that accounting period but may not be recorded in the books as the same has not been received. Further, an income received in advance may relate to a period not covered by the accounting period. There may be some other transactions which have not been completely recorded or have been recorded incorrectly. As


such, proper adjustments for all these and other similar items relating to the Profit and Loss Account or the Balance Sheet are dealt with in the books and it is known as making adjustments at the end of a trading period. Adjustments are made by means of suitable Journal entries, which are known as Adjusting or Adjustment Entries.'

The main adjustments are divided into 4 parts as under :(1) Adjustments relating to expenses.(2) Adjustments relating to income.(3) Adjustments relating to provisions.(4) Other adjustments.

Adjustments

Relating to Relating to Relating to Relating to other Expenses Income Provision Adjustments

Some important adjustments which are to be made at the end of the accounting period are discussed in the following pages.

1. Closing Stock : At the end of accounting period the goods remained unsold is the closing stock which is valued at cost or market price whichever is less, and the following adjusting entry is passed—

Closing Stock a/c Dr.To Trading a/c

(Being closing stock brought into books) Closing stock is shown on the credit side of Trading Account and at the same value it will appear in Balance Sheet on assets side. Closing stock is ascertained in the following ways–(i) Actual Stock Taking : Stock of goods and stores are grouped and taken separately. Goods are

those that are meant for resale while stores are those that are not meant for resale but used for consumption in the business itself. Stock taking is a complicated procedure and may take several days, because prices, weights, measurements etc. are noted and the value ascertained. Stock taking is necessary for calculating the value of goods on hand. The valuation of stock is made at original cost or market price, which ever is less and proper allowance is given for unsaleable goods.

(ii) Approximation Procedure : When physical stock taking is not possible, the value of stock is ascertained by approximation method. For doing so, the average percentage of gross profit is ascertained and then out of the total of opening stock plus the net purchases and. the direct charges together with gross profits, net sales are deducted and the result is treated as the approximate value. The stolen goods should also be deducted from this amount.

2. Outstanding Expenses : At the end of the accounting period there may be certain expenses which have not been actually paid but have become due for payment they are known as outstanding expenses. If proper adjustment is not made for such expenses, the profit and loss account will not reveal the true position of the concern. Therefore, the necessary adjustment in respect of unpaid expenses (outstanding expenses) shall be made as under–

Expense (name of the expense) a/c Dr.To Outstanding ………..expenses a/c

(Name of Expense)The account of expense will be added to particular expense of the debit side of Trading a/ c or

Profit and Loss Account. Outstanding Expense a/c, being a personal account, will appear as a liability on the Balance Sheet. On the first day of the next year a reverse entry will be made as under.–

Outstanding Expense a/c Dr.To Expense a/c


3. Prepaid Expenses : There are certain expenses such as fire insurance premium, which are paid in full during a trading period, but the full benefit of which is not received in that year and a portion of that is utilised in subsequent year. Such expenses are known as prepaid expenses. The adjustment entries are made by opening a 'Prepaid Expenses A/c'. The adjustment entry is made as under—

Prepaid Expenses a/cTo Expenses a/c

(Being expense paid in advance)The prepaid expenses account is a personal account and shall appear as asset in the Balance Sheet.

The expenses account, being a nominal account shall be transferred to the debit of Profit and Loss Account. On the first day of the next year, reverse entry shall be made, thereby expenses account will be debited and prepaid expense a/c will be credited.

4. Accrued or Earned Income : That income which has been earned but actually not received during the accounting period is called Accrued or Earned Income. In order to bring accrued income into books of account, the following adjusting entry will be passed–

Accrued Income a/c Dr.To Income a/c

(Being Income due but not received)Earned or accrued income is shown on the credit side of Profit and Loss a/c as an addition to the

concerned Income a/c. Accrued Income a/c is a personal account and as such it is shown on Assets side of the Balance Sheet. On the first day of the next year, a reverse entry shall be made as under–

Income a/c Dr.To Accrued Income a/c

5. Unearned Income : During a trading period, the income which has been received, the whole of which may not belong to that period but to the subsequent period and such income is known as unearned income. This income is adjusted in the books by opening an account known as 'Unearned Income Account*. The adjusting entry shall be as under–

Expenses a/c Dr.To Unearned Expenses a/c

The unearned expenses account is a personal account and it will appear as a liability in the Balance Sheet. The expenses account being a nominal account will be transferred to the credit of Profit and Loss Account, On the first day of the next year, reverse entry shall be passed and unearned expenses account will be debited and expenses account credited.

6. Interest on Capital: Business and the owner are considered to be separate entities, so whatever amount a businessman has invested into his business will be considered as loan to the business, on which interest becomes payable by business to its owner. It is known as 'Interest on Capital.' This amount of Interest is not paid to the owner in cash, but credited to his Capital a/c. The entry will be–

Interest on Capital a/c Dr.To Capital a/c

(Being interest on Capital provided)Interest on capital being expenditure of the business appears on the debit side of Profit and loss

account and the amount is also added to the Capital on the liabilities side of the Balance Sheet.7. Interest on Drawings : Drawings by the business owner are treated as loan taken by him from the business

and he is required to pay interest on the same. This interest is not paid by him in cash but the adjusting entry is made as follows–

Capital a/c Dr.To Interest on Drawings a/c

(Being interest on Drawings charged)Interest on Drawings being income to the business is shown on the credit side of Profit and Loss

Account. It is also shown as deduction from Capital on the liabilities side of the Balance Sheet.8. Depreciation: Depreciation is the reduction in the value of fixed asset (e.g., Building, Machinery,

Furniture etc.) due to its constant use, wear and tear or obsolescence. When an asset is used for earning purposes, it is necessary that reduction due to its use, must be charged to the profit of that year in order to show correct profit or loss and to show the asset at its correct value in the Balance Sheet. An adjusting entry is made–

Depreciation a/c Dr.To Concerned Asset a/c


(Being depreciation for the year provided)Depreciation being a nominal account shall appear in Profit & Loss Account and asset shall appear

in the Balance Sheet on its reduced value on assets side.9. Bad Debts : Debts which cannot be recovered or become irrecoverable are called 'Bad Debts.' It is a

busines loss and should be written off before the preparation of Final Accounts. The adjusting entry may be passed as–

Bad Debts a/c Dr.To Personal a/c of the Debtor

(Being bad debts written off)Bad Debts being loss of business are shown on the debit side of Profit and Loss Account and on

the assets side of the Balance Sheet by way of deduction from Sundry Debtors.10. Provision for Bad and Doubtful Debts : In case of some debtors it cannot be ascertained whether amount

shall be recovered or not. Therefore, a reserve is created with an estimated amount based on preceding year's practice so that if a loss occurs, it is set off against the income of that year only in which this transaction was effected. Adjusting entry for provision is made as under–

Profit and Loss a/c Dr.To Reserve for Bad & Doubtful Debts a/c

(Being provision made for Bad Debts)It is shown in profit & Loss Account on the debit side and the amount of provision is subtracted

from Total Debtors on the assets side of the Balance Sheet.

Treatment of Provision for Bad and Doubtful Debts when there is an opening balance in the Trial BalanceIf there is an opening balance of Provision for Bad and Doubtful Debts as shown by the Trial Balance the

following procedure is adopted to ascertain the exact amount to be charged to Profit and Loss Account–1. Bad Debts a/c is transferred to Provision for Doubtful Debts a/c. If there is no Provision a/c, the

Bad Debts a/c is transferred directly to Profit & Loss a/c.2. Provision are to be created is found out for the current year. We call it as new Provision/ Reserve.3. If the total of Bad Debts and New Provisions is greater than the old Provision (ie., shown in the

Trial Balance), the difference is debited to Profit & Loss Account and Provision for Doubtful Debts a/c is credited.

4. If the old Provision (i.e., opening balance given in the Trial Balance) is greater than the Total of Bad Debts and the new Provision, the Provision for Doubtful Debts a/c is debited, and Profi & Loss Account is credited with the difference amount.

5. The New Provision is always shown as a deduction from the Sundry Debtors in the Balance Sheet.11. Provision for Discount on Debtors : The actual cash discounts allowed to the customers are recorded in

Cash book and posted into the ledger. But there remains a number.of book debts outstanding, and it may be possible that they may also claim discount in future at the time of making payment. Under such condition, it will be necessary to make provision for discount on debtors. Such provision is made on debtors after deducting the Reserve for Bad Debts. The amount of provision for discount on debtors is to be allowed which must be calculated on the good debts only because the allowance can arise only on good debts. For making provision for discount on debtors the ently will be made as under–

Profit & Loss a/c Dr.To Provision for Discount on Debtors

(Being provision for discount on debtors)This provision will be shown on the debit side of Profit & Loss Account, and it will also be shown

by way of deduction from Sundry Debtors (after deduction of further bad debts, and provision for doubtful debts) on the assets side of the Balance Sheet.

12. Reserve for Discount on Creditors : As the business has to provide for discount on debtors, similarly, the business may have chance to receive discount on the last date of the accounting period, if the payment is made within the scheduled period. Such discount on creditors is anticipated profit and therefore Reserve for Discount on creditors is made instead of Provision for Discount on Creditors. Such reserve will be calculated on the amount of Creditors at a fixed percentage. The entry is made as follows–

Reserve for Discount on Creditors a/c Dr.To Profit & Loss a/c

(Being reserve for discount on creditors)


It is shown on the credit side of Profit & Loss Account and also shown on the liabilities side of the Balance Sheet by way of deduction from Creditors.

13. Salaries and Wages : If both the accounts are grouped into one, wages are treated as non productive and are taken to profit and loss account. If wages and salaries account appears, salaries are treated as productive and are taken to trading account.

14. Loss or Gain on Assets sold: Any loss or gain on the assets sold is shown separately in the final accounts so that it is not mistaken for trading loss or gain.

15. Accidental Losses : In business there may be losses due to fire, earthquake or other natural causes. Such loss is known as accidental loss. This loss may occur due to stock or to any fixed asset.(i) Loss in fixed Assets : When any loss occurs to a fixed asset due to fire the following entry is

made–Loss on Fire a/c Dr.

To Asset a/c (Being asset destroyed by fire) Loss is transferred to P & L a/c. The entry will be– P & L a/c Dr.

To Loss by Fire a/c (Being loss transferred to P & L a/c)While preparing Profit & Loss Account such a loss will be shown on the debit side, and in the Balance Sheet it is shown by of way deduction from the value of the Asset.

(ii) Loss of Stock by fire or Theft: When any loss occurs due to fire or theft of the goods purchased for resale, the following adjustment entry is made–

(a) If the Stock is fully insured : If the stock is fully insured, the whole loss will be claimed from the insurance company–Insurance Co. a/c Dr.

To Trading a/c(Being loss of goods by fire and claimed with Insurance Co.)The double effect of this entry will be– (i) It will be shown on the credit side of Trading A/c, and (ii) will be shown on the Assets side of the Balance Sheet.

(b) If the Stock is not fully insured : The loss of stock covered by insurance policy will be claimed from the Insurance Company and the rest of the amount will be loss for the business. The entry will be made–Insurance Co. A/c Dr. (Amount covered by Insurance policy)Profit & Loss A/c Dr. (Rest of the amount of loss)

To Trading A/c(i) If will be shown on the credit side of Trading a/c with the value of stock and shown on the debit side of Profit and Loss a/c for that part of the stock which is not insured, and (ii) is shown on the assets side of the Balance Sheet with the amount which is to be recovered from the Insurance Company, i.e., that part of the loss which is insured,

(c) If the Stock is not insured at all: Whole of the loss will be borne by the firm. The entry will be–Profit & Loss a/c Dr.To Trading a/cThis is shown on the credit side of the Trading a/c, and is shown on the debit side of the Profit &

Loss Account.16. Goods Distributed as Free Samples : Sometimes in order to promote the sale of goods, some of the goods

out of the stock are distributed as free samples. On account of such distribution it will be an advertisement and publicity for the business and on the other hand stock will be reduced by such goods. In order to bring this into the books of account, the entry will be made as under–

Advertisement &Publicity a/c Dr.To Purchases a/c

(Being goods distributed as free samples)It is shown as a deduction from the amount of purchases on the debit side of the Trading Account, and is

also shown on the debit side of Profit & Loss Account as Advertisement and Publicity expenses.S.No.

Adjustment for Treatment inTrading and Profit Balance Sheet


& Loss Account1 Closing Stock Shown on the credit

side as a separate item in Trading Account.

Shown on the Assets side as a separate item.

2 An outstanding Added to the concerned expense on the debit side.

Shown on the liabilities side as a separate item.

3 A Prepaid Expenses Deducted from the concerned expense on the debit side.


4 An Earned or Accrued Income

Added to the concerned income on the credit side.


5 An Unearned Income or Income received in advance

Deducted from the concerned income on the credit side.

Shown on the Liabilities side of the Balance Sheet.

6 Depreciation Shown as a separate item on the debit side of the P & L a/c

Deducted from the concerned Asset on the Assets side.

7(a) Drawing, or a personal expense included in a business Expense.

Deducted from the concerned expense on the debit side.

Added to Drawings and total Drawings are deducted from the Capital on Liabilities side.

7(b) If goods are taken for personal use and not recorded in the books.

Deducted from Purchases on the debit side of the Trading Account.

Added to Drawings and total Drawings are deducted from the Capital on Liabilities side.

8 Goods distributed as "Free Samples."

Deducted from Purchases a/c, on the debit side of the Trading Account; and shown on the debit side of the Profit & Loss Account as "Advertisement and Publicity."

9 Goods destroyed by fire and insurance claim admitted.

Shown the uninsured Loss as "Loss by fire" on the debit side of the Profit & Loss & Loss a/c and the total value of the goods destroyed as "Goods Destroyed by Fire" on the Credit side of the Trading Account.

Shown the amount recoverable from the insurance Co., as "Insurance claim Recoverable" on the Assets side.

10 Machinery erection charges included in wages.

Deducted from 'Wages' on the debit side of the Trading Account.

Added to the Machinery Account on the Assets side.

11 Purchases of Stationery included in

Deducted from Purchases a/c on the


Purchases a/c debit side of the Trading a/c, and added to "Stationery" on the debit side of Profit & Loss a/c.

12 Loose Tools made from own material and labour

Deducted from "Purchases" and "Wages" on the debit side of the Trading a/c.

Added to "Loose Tools" on the assets side.

13 Writing off Further Bad Debts

Added to "Bad Debts" on the debit side of the Profit and Loss Account

Deducted from "Sundry Debtors" on the assets side.

14 Provision for Bad Debts

Shown "Bad Debts+New Provision'1 —Old Provision on the debit side; or if that gives a negative figure, "Old Provision—Bad Debts—New Provision". On the credit side.

Deducted new Provision for Bad Debts from "Sundry Debtors" on the Assets side.

15 Provisions for Discount on Debtors

Shown "Discount Allowed + New Provision"—Old Provision on the debit side; or if that gives a negative figure, "Old Provision—Discount Received—New Provision" on the debit side

Deducted the New Provision for Discount from "Sundry Debtors Less Provision for Bad Debts" on the Assets side.

16 Reserve for Discount on Creditors

Shown "Discount Received + New Reserves"—Old Reserve on the credit side; or if that gives a negative figure, "Old Provision discount—New Provision". On the debit side.

Deducted the New Provision for Discount from "Sundry Creditors" On the Liabilities side.

17 Unrecorded purchase of goods

Added to "Purchases" on the debit side.

Added to "Sundry Creditors" on the liabilities side.

18 Goods sold included in Closing Stock

Deducted the cost of the goods from the 'Closing Stock' on the Credit side.

Deducted the Cost of the goods from the "Closing Stock" on the Assets side.

19 Deferred Revenue expenditure

The amount to be written off is shown on the debit side.

Unwritten off balance is shown on the Assets side.

20 Goods sent on approval or return basis included in Sales

The selling price of the goods is deducted from the "Sales" on

The selling price of the good s is deducted from the "Sundry


the credit side, and added the cost price of such goods to the 'Closing Stock' on the credit side.

Debtors" on the Assets side, and added to the amount of "Closing Stock" on the Assets side.

21 Set off, where the same person is both a debtor for Rs. X and a creditor for Rs. Y.

Deducted the Smaller of the two amounts X and Y from both, the Sundry debtors on the assets side and Sundry Creditors on the liabilities side.


Illustration 2. From the following prepare final account as on 31st December 2008:

Particulars Dr.Rs.

Cr.Rs.

Legal ExpensesGeneral ExpensesCash at bankBuildingsSales ReturnsCash in HandDiscountProductive WagesB/RB/PPurchasesSalesCapital AA's DrawingsCapital BB's DrawingsTrade DebtorsTrade CreditorsCreditors LoanStock 1.1.2008Purchase ReturnsCarriageSalaryBad debtsB.D. ReserveRent, Tax & InsurancePlant & Machinery

84015,16037,96080,00057,200

80017,20079,88010,720

––2,34,400

––––

12,000––

16,0001,26,440

––––

1,27,800––

7,16031,4005,200

––22,400

1,18,000

11,600

37,400––

4,27,2001,50,400

––1,85,600

––––

71,56080,000

––32,400

––––––

4,400

10,00560 10,00560

Following adjustments are to be taken into consideration : Bad debt reserve increased up to Rs. 7,000, charge interest on capital at 5%, P.A., Interest on loan for a year Rs. 3,200 is to be paid, depreciation of Plant & Machinery at 10% stock on 31st December, amounted to Rs. 1,87,680.


Solution.TRADING AND PROFIT & LOSS ACCOUNT(For the year ending on 31st December, 2008)

Particulars Rs. Particulars Rs.To Stock. l.1.2008To Purchases 2,34,400Less : Returns 32,400

To WagesTo CarriageTo Gross Profit transferred toP & L a/c

1,27,800

2,02,000

79,8807,160

1,40,840

By Sales 4,27,200 Returns 57,200

By Closing Stock

3,70,000

1,87,680

5,57,680 5,57,680

To Legal ExpensesTo General ExpensesTo SalariesTo Bad Debts 800+ B.D. Reserve 7,000To Interest on LoanTo Depreciation on Plant& MachineryTo Rent, Rates & InsuranceTo DiscountTo Interest on Capital: A BTo Net Profit transferred toCapital a/cs. A B

84015,16031,400

7,8003,200

11,80022,40017,200

7,5209,280

12,92012,920

By Gross Profit transferred from Trading a/cBy Discount

1,40,84011,600

1,52,440 1,52,440

BALANCE SHEET AS ON 31ST DECEMBER, 2008

Dr. Cr.Liabilities Rs. Assets Rs.Bills Payable Trade Creditors Loan Creditors 80,000+ Interest 3,200Capital Accounts :A: 1,50,400+ Interest 7,520+ Profit 12,920 1,70,840– Drawings 12,000Capital: B: 1,85,600+ Interest 9,280+ Profit 12,920 2,07,800– Drawings 16,000

37,400 71,560

83,200

1,58,840

1,91,800

Cash in Hand Cash in Bank B/RDebtors : 1,26,440— Reserves 7,000StockPlant&Machinery : 1,18,000— Depreciation 11,800Buildings

800 37,960 10,720

1,19,4401,87,680

1,06,20080,000

5,42,800 5,42,800

Notes:1. Interest on capital at 5% of A and B is shown on the debit side of Profit & Loss Account and on liability

side of Balance Sheet.2. Total net profit has been divided equally between A and B.


3. Drawing has been deducted from the capital account of each partner.4. Reserve on debtors Rs. 7,000 has been deducted from debtors.5. Depreciation 10% on Plant and Machinery Rs. 11,800 has been deducted from Plant and machinery.

Illustration 3. Prepare final accounts from the following trial balance for the period ending on 31st December, 2008–

Particulars Rs. Rs.Capital DrawingLand and BuildingPlant and MachineryFurnitureCarriage inwardWagesSalaryB.D. ReserveSalesSales returns Bank expenses Coal, gas and water Rent and tax Discount Purchases Purchase returns B/RTrading expenses Debtors Creditors StockFire insurance premium Cash at Bank Cash in hand

––12,960 50,000 28,540 2,500 8,740

42,940 9,340

––––

3,520 280

1,440 1,680

––84,320

––2,540 3,980

75,600––

52,840 980

26,000 1,700

1,80,000

4,940 1,82,460

240

16,920

25,340

Rs. 4,09,900 Rs. 4,09,900

While preparing final accounts, the following adjustments are to be taken into consideration–

1. Charge depreciation at 2.5% on Land and Building; 10% on plant and machinery and 10% on furniture.2. Create B.D. Reserve by 5% on debtors.3. Rs. 250 for fire insurance Premium Rs. 480 for Rent and Tax is to be carried forward for next year.4. Charge 5% Interest on capital.5. Closing stock Rs. 58,780.


Solution. TRADING AND PROFIT & LOSS ACCOUNT(For the year ending on 31st December, 2008)

Particulars Rs. Particulars Rs.To StockTo Purchases 84,320Returns 16,920

To CarriageTo WagesTo Coal & GasTo Gross Profit transferred to P & L a/c

52,840

67,400

8,74042,9401,440

64,360

By Sales 1,82,460– Returns 3,520

By Closing stock

1,78,940

58,780

2,37,720 2,37,720To Rates & TaxesTo InsuranceTo SalariesTo Bank chargesTo Trade expensesTo Depreciation : Buildings Plant & Machinery FurnitureTo Interest on CapitalTo Net Profit transferred to Capital a/c

1,200730

9,340280

3,980

1,2502,854

2509,000

36,876

By Gross profit transferred from Trading A/cBy DiscountBy Provision for Bad Debts

64,360240

1,160

65,760 65,760

BALANCE SHEET(as on 30th December 2008)

Liabilities Rs. Assets Rs.Sundry creditorsCapital 1,80,000+ Net Profit 36,867+ Interest 9,000 2,25,876– Drawings 12,960

25,340

2,12,916

Cash in handCah at BankB/RSundry debtors 75,600– B.D. Res. 3,780StockPrepaid expensesFurniture 2,500– Dep. 250Plant & Machinery 28,540– Dep. 2,854Building 50,000– Dep. 1,250

1,70026,0002,540

71,82058,780

730

2,250

25,686

48,7502,38,256 2,38,256

Notes :

1. Reserve 5% on debts =

75600×5100 = 3,780

2. Fire insurance Rs. 250 and rent and tax Rs. 470 are to be deducted from P/L and A/c and shown in the asset side of Balance sheet.

3. Interest on capital 5% =

1,80 ,000×5100 = 9,000


4. Depreciation is to be shown on the debit side of P & L A/c and assets are to be shown in the Balance sheet after deducting depreciation.

Illustration 4. The following is the trial balance of Shri Manohar Lai for the period ending on 31st December, 2008. Prepare Trading and Profit/Loss Account and Balance Sheet:

Particulars Rs. Particulars Rs.StockSales returnPurchasesCarriage inwardRent & TaxWages & SalariesSundry debtorsInterestPrinting & Advert.Cash in BankInvestmentFurniture & fittingsDiscount PayableGeneral expensesInsuranceTravelling expensesStationeryCash in handLand and BuildingDrawings

46,8008,600

2,43,10018,6005,7009,300

24,000900

14,6008,2005,0001,8007,3403,610

8002,630

870380

30,00010,000

CapitalSalesPurchase returnsSundry creditorsBank loan 6%Income from investmentDiscount received

1,08,0902,89,600

5,80014,80020,000

2503,690

4,42,230 4,42,230

Stock on 31st December was Rs. 78,600,50% expenses of Printing and Advertising to be carried forward for next year. Charge depreciation 10% on furniture and 2.5% on Land and Buildings. Create bad debts reserve at 5% and discount on debtors and creditors at 2%. Unexpired insurance Rs. 200. Outstanding salary Rs. 500 and carriage Rs. 100. Interest on bank loan is to be paid.


Solution. TRADING AND PROFIT & LOSS ACCOUNT(For the year ending on 31st December, 2008)

Particulars Rs. Particulars Rs.To StockTo Purchases 2,43,100Less : Returns 5,800To carriage inwardTo Gross Profit transferred toP&La/c

46,800

2,37,30018,700

56,800

By Sales 2,29,600– Returns 8,600

By Closing Stock

2,81,000

78,600

3,59,600 3,59,600To Rent & TaxesTo Wages & SalariesTo Interest on Bank LoanTo Printing & Advert.To Discount allowedTo General expensesTo InsuranceTo Travelling exp.To Post. & StationeryTo Depreciation : Furniture & fittings Land & BuildingsTo B.D. ReserveTo Dis. Res. of debtorsTo Net Profits

5,7009,8001,2007,3007,3403,610

6002,630

870

180750

1,200456

19,400

By Gross Profit transferredfrom Trading a/cBy Income from investmentBy Discount receivedBy Discount reserve oncreditors

56,800250

3,690

296

61,036 61,036

BALANCE SHEET(as on 31.12.2008)

Liabilities Rs. Assets Rs.Bank Loan 20,000+ Interest 300Sundry Creditors 14,800Dis. Res. 296

Outstanding expensesCapital: 1,08,090+ Net Profit 19,400 1,27,490Less : Drawing 10,000

20,300

14,504

600

1,17,490

Cash in handCash at BankSundry Debtors 24,000– B.D. Res. 1,200

22,800– Discount Res. 456StockPrepaid expensesInvestmentsFurniture 1,800– Dep. 180Land & Building 30,000– Dep. 750

3808,200

22,34478,6007,500 5,000

1,620

29,2501,52,894 1,52,894

Notes :1. Printing and advertising 50%, Rs. 7,300 are to be deducted and shown on the assets side of balance sheet.2. Unexpired insurance Rs. 200/– are to be deducted from insurance, Rs. 800 and Rs. 600 are to be shown on

the debit side of P/L A/c and Rs.200 to the assets side of balance sheet.

3. 2% discount reserve on debtors = 24,000 – 1,200 = 22,800

22 ,800×2100 = 456


4. Interest on bank loan =

20 ,000×61, 000 = 1,200

Illustration 5. Prepare Manufacturing, Trading and Profit Loss a/c and Balance Sheet from the following trial balances :

Particulars Rs. Rs.CapitalDrawingsLoan A/cSundry creditorsCash in handCash of BankSundry debtorsProvision for bad debtsPatentsPlant & MachineryLand & BuildingPurchases of Raw materialsOpening Stock of:Raw materialsWork in ProgressFinished goodsCarriage inwardWagesFactory Manager's SalaryFactory expensesFactory Rent & TaxesRoyalties (Paid on Sales)SalesAdvertisingOffice Rent & InsurancePrinting & StationeryOffice expenses Carriage outwardDiscountBad debts

––6,100

––––

2504,000

40,500––

2,00020,00026,00035,000

––3,5002,000

18,0001,100

27,0005,6003,4002,5001,200

––3,0004,8001,0005,8006,00

1,400750

41,000––

4,00045,000

1,000

1,23,400

Rs. 2,15,500 Rs. 2,15,500

Other required information is as follows :(i) The above trial balance is drawn on December 31, 2008; and you are required to prepare annual accounts

for the year ended on this date.(ii) Stock on December 31,2008 was as under—Raw materials 4,000, work in progress 4,500, finished goods

28,000.(iii) Following expenses were outstanding–Factory expenses 250, wages 600, office salaries 3,000.(iv) Provision is to be made @ 5% for Bad debt and 5% for Discount to Debtor separately.(v) Depreciate land and building @ 2%, Plant and machinery @ 7.5% and patents @10%.(vi) Provide for 5% Interest on capital and owner's salary for Rs. 6,000.(vii) Owner's salary is to be allocated between factory and office as 2/3 and 1/3.Solution :

MANUFACTURING, TRADING AND PROFIT & LOSS ACCOUNT(for the year ending on 31st December, 2008)

Particulars Rs. Particulars Rs.To Opening Stock of


Raw materialsTo Opening Stock work in progressTo Opening Stock Finished GoodsTo PurchasesTo Carriage inwardTo WagesTo Factory ExpensesTo Factory Manager's SalaryTo Factory Rent & TaxesTo Outstanding factory expensesTo Outstanding wagesTo Owner Salary to factoryTo Gross Profit transferred to P & L a/c

3,500

2,000

18,00035,0001,100

27,0003,4005,6002,500

250600

4,000

56,950

By SalesBy Stock of Raw materialsBy Stck of Work–in–ProgressBy Stock of finished goods

1,23,4004,0004,500

28,000

1,59,900 1,59,900To RoyaltiesTo AdvertisingTo Office RentTo Printing & StationeryTo Office expensesTo Carriage outwardTo DiscountTo Bad debts 750Add : New Reserve 2025

2,775Less : Old Reserve 1,000To Outstanding Office expenses Discount on debtorsTo Depreciation on land & buildingTo Depreciation on Plant & MachineryTo Depreciation on PatentsTo Interest on CapitalTo Owner's salary 1/3To Net Profit transferred to P & L a/c

1,2003,0004,8001,0005,800

6001,400

1,775

3,0001,924

520

1,500200

2,0502,000

27,281

By Gross Profit transferred From Trading a/cBy Discount

56,9501,100

58,050 58,050


BALANCE SHEET(as on 31.12.2008)

Liabilities Rs. Assets Rs.Capital 41,000+ N/P 27,281+ Interest on Capital 2,050+ Owner's Salary 6,000

76,331Less : Drawings 6,100Loan A/c Sundry creditors Outstanding expenses

70,2314,000

45,0003,850

Cash in handCash at BankDebtors 40,500Less : Reserve 2,025

38,475Less : Discount 1,924Patents 2,000Less : Depreciation 200Plant & Mach. 20,000Less : Depreciation 1,500Land & Building 26,000Less : Depreciation 520Stock of Raw materialsStock of work–in–progressStock of finished goods

2504,000

36,551

1,800

18,500

25,4804,0004,500

28,0001,23,081 1,23,081

Notes:

1. Opening stock is shown on the debit side and closing stock on the Credit side of Trading and Profit and loss A/c.

2. Outstanding expenses have been added appropriate balances.3. 5% reserve is made on sundry debtors and discount on debtors is made after deducting reserve for bad

debts :

40,500 @5% = 5% on 40,500 – 2,025 = 38,475 ¿ 2

100 = 1,924

4. Depreciation:

2,60 , 000×2100

=520

Plant and machinery :

2, 000×7 .5100 = 1,500

Patents

2,000×10100 = 200.

Illustration 7 : Below is given the Trial Balance of M/s Ram Krishna and Sons as on March 31, 2008. You are required to prepare a Trading and Profit and Loss Accounts for the year ended 31st March 2008 and a Balance Sheet on that date, after making the given adjustments:

Dr. Amount

Cr. Amount

Cash in Hand Sundry Debtors PurchasesStock on April 1, 2007CapitalSalesSundry Creditors BuildingInvestments

5,000

20,00050,00075,000

50,0005,000

64,0001,25,000

35,000


Carriage InwardInterest on InvestmentFreight and TaxesAdvertisingCarriage OutwardFixtures and FittingsDoubtful DebtsProvision for Doubtful DebtsBank OverdraftGoodwillInterest

500

500125100

2,000900

20,000125

500

1,2503,500

2,29,250 2,29,250

Adjustments:

(1) The stock on 31st March, 2008 was valued at Rs 50,000.(2) Rs. 100 are unpaid for Freight and Taxes.(3) Rs. 100 are prepaid for Advertising.(4) Depreciation is to be charged @ 5% on Building and Furniture and Fixtures.(5) The provision for Doubtful Debts is to be maintained @ 5% on Sundry Debtors.

[U.P.T.U. 2000–01]Sol.

In the books of M/s Ram Krishna and SonsTrading and Profit & Loss AccountFor the year ended March 31st, 2008

Particulars Rs. Particulars Rs.To Opening Stock To Purchases To Carriage Inwards To Gross Profit c/d

75,00050,000

50049,500

By SalesBy Closing Stock

1,25,00050,000

1,75,000 1,75,000To Freight and Taxes 500Add: Outstanding 100To Advertisement 125Less : Prepaid 100Depreciation Building 2,500Fixtures 100To carriage outward To InterestTo Doubtful Debts 900 Add: provision for 1,000Doubtful Debts 1900Less: Old provision for B.D 1,250 To Net Profit

600

25

2,600100125

65045,900

By Gross Profit b/d

By Interest on investment

49,500

500

50,000 50,000

Balance Sheet as on March 31,2008

Liabilities Rs. Assets Rs.Capital 64,000 Add : Net Profit 45,900 1,09,900

Cash in handSundry Debtors 20,000

5,000


Bank Overdraft Sundry Creditors Outstanding Freight

3,500 35,000

100

Less : Provision 1,000 Building 50,000 Less : Depreciation 2,500 Investment GoodwillFixtures and Fittings 2,000 Less : Depreciation 100 Prepaid Advertising Closing Stock

19,000

47,500 5,000

20,000

1,900 100

50,0001,49,500 1,49,500

Illustration 8: Given below is the Trial Balance of M/s MASTER–MIND TRADERS:

TRIAL BALANCE AS ON 31.3. 2008

S.No. Particulars Dr. Amt. (Rs.)

Cr. Amt. (Rs.)

(1)(2)(3)(4)(5)(6)(7)(8)(9)(10)(11)(12)(13)(14)(15)(16)(17)(18)(19)(20)(21)(22)

DrawingCashPetty cashLeasehold landOpening stockSalarySundry debtorsWagesBankCapitalRentElectricityMotor carAdvertisingSundry creditorsPurchasesPostage and TelephoneSalesDiscountGeneral chargesPetty cash expensesSuspenses

16,0006,7601,000

20,00050,00012,00050,00040,00021,000

9,0008,000

10,2409,000

4,00,0003,000

11,4004,0009,600

34,000

35,000

6,00,000

10,0006,79,000 6,79,000

Additional Information :(i) Closing Stock – Rs 75000(ii) Petty cashier had vouchers for Rs. 400 for which reimbursement was not claimed.(iii) Discounts allowed amounting to Rs. 1000 had been posted to the debit of sundry debtors.(iv) Cash withdrawn from Bank Rs. 4000 had not been entered in the bank column of the cash book.(v) The sales account had been under cast on the credit side by Rs. 4000.(vi) The motor car which had been purchased in 1998–99 was being depreciated at 20 % on the reducing

balance method. The original cost of the car id Rs. 20000. It is now decided to charge depreciation @ 6 % on the straight–line method and to make this change effective from the year of purchase of the car.

(vii) Leasehold land was purchased during the year. On the date of purchase of the land, the unexpired period of the lease was five years.


(viii) No entry had been passed in the books for stock withdrawn from the business by the proprietor valued at Rs. 10000

(ix) Advertising includes cost of Rs. 6000 of a campaign run during the year. It is expected that the effect this campaign will be felt for at least three years.

(x) Telephone bill amounting to Rs. 1000 remained unpaid.

Prepare the Trading and Profit and Loss Accounts and Balance Sheet From above information.

Sol.Trading A/c of M/a Mastermind Traders

(for the year 2001–2002)

Particulars Rs. Particulars Rs.To Opening stockTo Purchase 4,00,000Less Drawings 10,000To WagesTo Gross Profit

50,000

3,90,00040,000

1,99,000

By sales 6,00,000Add: under cast of sales A/c 4,000By Closing Stock

6,04,00075,000

6,79,000 6,79,000

Profit and Loss A/c of M/s Masterminf Traders(for the year 2001–2002)

Particulars Rs. Particulars Rs.To SalaryTo RentTo ElectricityTo Advertising 9,000Less: carried over 4,000To Postage an telephone 3,000Add: Outstanding 1,000To Discounts 11,400Add: not debited 1,000To General chargesTo Depreciation on car.To Petty cash expenses 9,600Add : petty expenses not claimed 4,00To Lease hold Land w/offTo Net Profit

12,0009,0006,0005,000

4,000

12,4004,0002,240

10,0004,000

1,30,360

By Gross Profit 1,99,000

1,99,000 1,99,000


Balance Sheet as on 31st March 2002Liabilities Rs. Assets Rs.Capital 34,000Less: Drawing 16,000Less: goods withdrawn10,000

8,000Add: Net Profit 1,30,360Current LiabilitiesSundry CreditorsOutstanding BillPetty cash not claimedSuspense A/c

1,38,360

35,0001,000

4006,000

Fixed Assets :Leasehold land 20,000Less: Depreciation 4,000Motor Car 10,240Less: Depreciation 2,240Advertisement (carried over)Current Assets :Cash in handBank (21,000 – 4000)Petty cashClosing stockDebtor 50,000Less: Discount 1,000

16,000

8,0004,000

10,76017,0001,000

75,000

49,0001,80,760 1,80,760

Illustration 9 : The following is the Trial Balance of M/s Himalika Industries Ltd. as on 31st March, 2003. The company has an authorized capital of Rs. 3,00,000 shares of Rs. 10 each of which 20,000 shares have been issued and fully paid–up :

Dr. Balance Amount Rs.

Cr. Balance AmountRs.

Freehold premisesPlant and MachineryFurniture and FixturesStock (Opening)Sundry DebtorsInterim Divided (1.11.02)PurchasesCash in HandCash in BankWagesCarriage InwardsFuel and PowerPrelim ExpensesRepairs and RenewalsSalariesDirecror's FeesGeneral chargesDebenture Intt. paidBad Debts

1,50,0001,65,000

3,60037,50043,00010,00092,500

40028,80042,4005,3001,2002,5002,100

10,4002,8003,0009,0001,000

Paid–up–Capital12 % DebenturesP and L A/c. (1.4.2002)Sundry CreditorsSalesProv. for Bad Debts

2,00,0001,50,000

7,20044,000

2,07,5001,800

6,10,500 6,10,500

Prepare Trading, Profit and Loss Accounting for the year ended 31st March, 2008 and Balance–sheetas on the date, after taking into account the following adjustments:(1) Provide 10 % depreciation on plant and machinery and furniture and fixtures.(2) Write off Rs. 500 from preliminary expanses.(3) Create a provision for bad and doubtful debts @ 5 % on sundry debtors.(4) Stock as on 31–3–2003 was valued at Rs. 60,000.(5) Transfers Rs. 10,000 to General Reserve.(6) Directors have proposed a final dividend of 10 % on th subscribed capital of the company.


Sol.Trading and Profit & Loss A/c of M/s Himalika Ind. LTd.

(for the year ending 31st March 2008)



To Opening Stock To Purchases To Carriage Inward To Fuel & Power To WagesTo Repairs and RenewalsTo Gross Profit

37,50092,5005,3001,200

42,4002,100

86,500

By Sales By Closing Stock

2,07,50060,000

2,67,500 2,67,500To Salaries To Director's Fees To General Charges To Interest Paid on Debenture To BudgetsTo Preliminary Espenses Written To depreciation onPlant & Machinery 16,500 Furniture 360To Provision for Bad debtsNew 2,150 Less : Old 1,800To Net Profit

10,400 2,800 3,000 9,000

500 1,000

16,860

35042,590

By Gross Profit 86,500

86,500 86,500To Interim Dividend To Transfer to General Reserve To Final Dividend To Profit Transferred to Balance

10,00010,00020,0002,590

By Net Profit 42,590

42,590 42,590Balance Sheet of M/s Himalika Ind.LTd.

as on 31 stMarch,2003


Assets Amount Rs.

Authorized shares capitalIssued & Paid up capitalDebentures P & L A/c 7,200Add: Current Profit 2,590General ReserveCreditorsFinal Dividend

3,00,0002,00,0001,50,000

9,79010,00044,00020,000

Freehold premisesPlant& Machinery 1,65,000Less : Depreciation 16,500Furniture & Fixture 3,600Less : Depreciation 360StockCash in HandCash at BankSundry Debtors 43,000Less : Provision 2,150Preliminary Expenses 2,500Less: Written off 500

1,50,000

1,48,500

3,24060,000

40028,800

40,850

2,0004,33,790 4,33,790

Illustration 10 : The Trial Balance of Hindustan Biscuit Co. LTd. showed the following balances on the 31st December, 2008.


Trial Balance

Particulars Debit Rs. Credit Rs.Land and BuildingPlant and MachineryFurnitureMotor LorryElectric FittingsReserve FundSundry Debtors and CreditorsCash in handCash at BankDirector's FeesGeneral ExpensesPurchase and SalesInterest ReceivedUnclaimed DividendBank LoanInvestmentsStock on 01.01.2003Salaries to StaffProvident fundShare Capital (14,000 fully paid shares of 100)Interest on Bank LoanCalls in ArrearsProfit and Loss A./c (01.01.2003)

7,10,0006,75,000

40,00050,00015,000

3,00,0001,500

1,86,0003,000

90,0006,35,000

2,32,0003,00,0001,25,000

9,50050,000

2,65,0002,49,000

12,57,5006,0005,000

2,00,000

55,00014,00,000

84,000TOTAL 35,22,000 35,22,000

Taking account the following adjustments, prepare the Trading and Profit and Loss A/c, Profit and Appropriation A/c for the year ended 31st December, 2008 and a Balance Sheet of the company on that date :

(i) Closing Stock of biscuits on 31st December, 2003 Rs.3,25,000(ii) Depreciate Plant and machinery by Rs. 25,000, and Building by Rs. 15,000, Furniture by Rs.5,000 and

Motor Lorry by Rs.5,000.(iii) Rs.500 is to be received as interest on Investments.(iv) Transfers Rs.75,000 to Reserve Fund and make a provision for taxation on income Rs.40,000(v) Write of 50% of preliminary Expenses.(vi) The Authorized Capital of the Company is Rs. 15,00,000 divided into 15,000 shares of Rs. 100 each.


Sol.Trading A/c of Hindustan biscuits Co. Ltd.

(for the period ending 31.12.2008)

Particulars Rs. Particulars Rs.To Opening Stock To Purchases To Gross Profit c/d

3,00,0006,35,0006,47,500


12,57,5003,25,000

15,82,500

15,82,500

Profit and Loss A/c of Hindustan Biscuits Co. Ltd. (for the period ending 31.11.2008)

Particulars Rs. Particulars Rs.To Director's fees To General for Exp. To SalariesTo Provision for tax 40,000 To Depreciation on Plant 25,000 Furniture 5,000 Motor 5,000 Land and building 15,000To Preliminary Exp. written off Net Profit c/d

3, 00090,000

1,25,000

50,00050,000

2,86,500

By Gross Profit b/d By Interest 6,000 Add: Interest received 500

6,74,500

6,500

6,54,000 6,54,000

Profit and Loss Appropriation A/c(for the period ending 31.12.2008)

Particulars Rs. Particulars Rs.To Reserve fund transfer To balance c/d

75,0002,95,500

By net profit b/d By balance b/d

2,86,50084,000

3,70,500 3,70,500

Balance Sheet of Hindustan biscuits Co. Ltd. as on 31.12.2008

Liabilities Amount Assets AmountAuthorized share capital15,000 shares of Rs. 100 eachIssued and subscribed share capital14,000 shares of Rs. 100 each 14,00,000Less : Calls in arrears 50,000Reserve fundProfit and Loss A/cBank LoanCreditorsUnclaimed dividendProvident Fund

Provision for Tax

15,00,000

13,50,0003,40,0002,95,0002,00,0002,49,500

5,00055,000

40,000

Lands and building 7,10,000Less: Depreciation 15,000Plant 6,75,000Less: Depreciation 25,000

Furniture 40,000Less : Depreciation 5,000Motor Lorry 50,000Less : Depreciation 5,000Electric FittingInvestment 2,32,000Add : Interest received 5,00on InvestmentDebtorsCash in handCash at bankClosing stockPreliminary Expenses

6,95,000

6,50,000

35,000

45,00015,000

2,32,500

3,00,0001,500

1,86,0003,25,000

50,00025,35,000 25,35,000


Illustration 11. From the following balances extracts from the books of Messrs. Nirmala and Sons, Chandigarh and the adjoining information, you are required to prepare the Profit and Loss Account for the year ended 31st March, 2008 and also the Balance Sheet as on that data:

Trial balance

Particulars Debit Rs. Credit Rs.Opening StockPurchase SalesReturnsCapital AccountDrawings AccountLand and BuildingsFurniture and FittingsSundry Debtors and CreditorsCash in HandInvestmentsInterestCommissionTotal Direct ExpensesPostage and StationeryInsurance Premium SalariesBank Over Draft

60,50090,5002,000

4,50030,0008,000

25,0003,500

10,000

7,5002,5002,000

11,000

1,37,2001,300

30,000

45,000

5003,000

40,000TOTAL 2,57,000 2,57,000

Additional Information :(a) Closing stock on 31st March, 2004 was valued at Rs. 65,000.(b) Depreciation is to be provided on Land and Building @ 5 % and on furniture and fitting @ 10%.(c) 5% provision is to be provided on Sundry Debtors for Bad and Doubtful Debts, (id) The bank has charged

interest on the Overdraft @ 10 %.(e) Salary outstanding for the month of March, Rs. 1,000.Sol.

Trading AccountLiabilities Amount Assets AmountTo Opening stockTo Purchase 90,000 Less : Purchases Returns 1,300To Direct Expenses To Gross Profit

60,500

89,200 7,500

43,000

Closing stockBy Sales 1,37,200Less : Sales return 2,000

65,000

1,35,200

2,00,200 2,00,200Profit and Loss Account

Particulars Amount Particulars AmountTo PostageTo InsuranceTo Salary 11,000Add: Outstanding 1,000To interest on overdraftTo Depreciation:Land and Building 1,500Fixture and Furniture 800To Bad debtsNet Profit

2,5002,000

12,0004,000

2,30012,50022,450

By Gross Profit b/dBy InterestBy Commission

43,000500

3,000

46,500 46,500Balance Sheet

Particulars Amount Particulars Amount


Capital 30,000Add : Net Profit 22,450

52,450Less : drawing 4,500Creditors

Bank Overdraft 40,000Add 4,000Salary Outstanding

47,95045,000

44,0001,000

Land and Building 30,000Less : depreciation 1,500Sundry Debtors 25,000Less : 1,250Furniture and fixtures 8,000Less : depreciation 800Cash in handInvestmentClosing Stock

28,500

23,750

7,2003,500

10,0006,500

1,37,950 1,37,950

Illustration 12. The following trial balance is extracted from the books of M/S SLIKA TRADERS as on 31st March 2005.

Particulars Debit Rs. Credit Rs.Furniture and fittingsMotor VehiclesBuildingCapital Account Bad Debts •Provision of Bad Debts Sundry debtorsSundry Creditors Stock as on 1st JanuaryPurchases and SalesBank overdraft Sales and Purchases returnAdvertisingInterest on Bank overdraftCommission CashTaxes and insuranceGeneral EspensesSalaries

6406,2507,500……..

125……..3,800……..3,4605,475……..

200450118

……..650

1,250782

3,300

……..……..……..12,500……..

200……..2,500……..15,4502,850

125……..……..

375……..……..……..……..

TOTAL 34,000 34,000

The following adjustments are to be made :

(a) Stock in hand on 31st March 2005 was Rs. 3,250.(b) Depreciate Building ar the rate of 5 % Furniture and Fittings @ 10 % and Motor Vehicles @ 20 %.(c) Rs. 85 is due for interest on Bank Overdraft.(d) Salaries Rs. 300 and Taxes Rs. 120 are outstanding.(e) Insurance amounting to Rs. 100 is prepaid.(f) One–third of the commission on received is in respect of work to be done next year. (g) Write off a further sum of Rs. 100 as Bad Debt and Provision for Bad Debt to be made equal to 10 % on

Sundry Debtor. Prepare a trading and profit loss Account for the year ending 31st March and Balance Sheet as on data.

Sol.

Trading Account for the period ending 31st March 2005

Dr. Cr. Particulars Amount Particulars Amount


To Opening stock

To Purchases 5,475Less: Returns 125To Gross Profit c/d

3,460

5,3509,690

By Sales 200Less: Returns 15,450 By Closing Stock

15,2503,250

18,500 18,500

Profit and Loss A/C for the year ending 31st March 2005

Dr. Cr. Particulars Amount Particulars AmountTo Bad debts 125less : Old provision 200Add : New Bad debts 100Add: New Provision 370To Advertisement To Interest on Bank over draft 118 Add: outstanding 85To Taxes and Insurance To General Expenses To Salaries 3,300Add : outstanding 300To Depredation Building 375Furniture 64Motor Vehicle 1,250Net Profit

395450

2031,270

782

3,600

1,689

1,551

By gross Profit b/d By commission 375Less : 125

9,690

250

9,940 9,940

Balance Sheet as on 31st March 2005

Liabilities Amount Assets AmountCapital 12,500Add: Net Profit 1,551Sundry Creditors

Bank overdraft 2,850Add: outstanding 85CommisionOutstanding SalariesOutstanding Taxes

14,0512,500

2,935125300120

Furniture 640Less : Depreciation 64Motor Vehicle 6,250Less : Depreciation 1,250Building 7,500Less : Depreciation 375Debtors 3,800Less: 370Less: 100Prepaid InsuranceCashClosing Stock

576

5,000

7,125

3,330100650

3,25020,031 20,031

Illustration 13. The trial balance of Namita Engineering Works as on 31st December 2008 was as follows:Debit Rs.Stock—1 January 2008BuildingPurchasesWagesWages (unproductive)Manager's SalaryRent & TaxInterest on debentures

50,00060,000

1,00,00030,0007,0004,0006,000

900


InsuranceGoodwillDiscount & CommissionCarriage inwardBad debtsGeneral expensesRepairsCash and BankMachineryDebtors

1,40024,0009,5004,000

5005,6001,8002,200

54,00062,000

4,22,900

Credit Rs.CapitalRentTransfer feesSalesBad debts reserveCreditors

2,20,0001,700

601,80,000

1,64019,500

4,22,900Stock on 31st December 2008 amounted to Rs. 60,000.Prepare Trading and Profit and Loss a/c by considering the following adjusments:Depreciate Machinery by 7.5%,increase bad debt reserve upto 5%, Prepaid Insurance Rs. 1,200 and

outstanding rent & taxes Rs. 400. Create discount reserve at 2.5% on creditors. Solution :

TRADING AND PROFIT & LOSS ACCOUNT(for the year ending on 31st December, 2008)

Particulars Amount Particulars AmountTo Stock on 1–1–2008To PurchasesTo WagesTo Gross profit c/d

50,0001,00,000

30,00060,000

By SalesBy Stock on 31–12–2007

1,80,00060,000

2,40,000 2,40,000To Wages (unproductive)To Manager's salaryTo Rent & RatesTo Interest on debenturesTo InsuranceTo Discount and commissionTo Carriage outwardsTo General expensesTo RepairsTo B.D. ReserveTo Depreciation 7.5% on 54,000To Net Profit transferred toCapital a/c

7,0004,0006,400

900200

9,5004,0005,6001,8001,9604,050

16,838

To Gross Profit b/dBy RentBy Transfer FeesBy Reserve for Discount onCreditors

60,0001,700

60

488

62,248 62,248BALANCE SHEET (as on 31.12.2008)

Liabilities Amount Assets AmountCapital 2,20,000+ Net Profit 16,838Sundry creditors 19,500Less : Discount Reserve 488

19,012 + Expenses owing 400

2,36,838

19,412

GoodwillFreehold PremisesPlant & Machinery 54,000— Depreciation 4,050Stock

Sundry debtors : 62,000— B.D. Res. 3,100Cash in hand Prepaid Insurance

24,000 60,000

49,95060,000

58,9002,200 1,200


2,56,250 2,56,250Notes:1. B.D. Rs. 1.1.2005 1,640

– Bad debts written off 5001,140

+ 5% reserve on 62,000 (Total should be 3100) 1,9603,100

2. Depreciation on Plant an 7.5% or 7.5 on 54000 = 4050.3. Prepaid Expenses are always shown on asset side of the Balance Sheet.4. Outstanding expenses are shown on liability side of Balance Sheet.5. Discount on creditors has been deducted from creditors.

MANAGER'S COMMISSION1. If commission to factory manager is given at a certain percentage on gross profit, it will be calculated as

under—Gross Profit x Pencentage of Commission

1002. If percentage of commission of manager is to be given on net profit, it may be of two types–

(a) Commission to be paid before charging such commission—Net Profit x Percentage of Commission

100 (b) If commission is to be paid, after charging such commission—

Net Profit before charging commission x Percentage of Commission100 + Percentage of Commission

If commission is given in adjustments, then such commission is recorded in P/L A/C debit side and liability side of the Balance Sheet.Illustration 14. Prepare Manufacturing, Trading, Profit and Loss Account for the year ended on 31st December 2008 and a Balance Sheet—

Particulars Rs. Particulars Rs.CapitalDrawingsLoan 6%Factory BuildingPlant & MachinerySundry DebtorsSundry CreditorsPatent RightsPurchase of raw materialsSales less Sales returnFactory Rent of RatesWagesSalary of work managerCash in hand

70,00020,00012,00032,00024,00064,00072,00012,00070,000

2,00,0004,000

40,00012,0002,000

Stock on finished good 1.1.2008Stock of Raw materials 1.1.2008

Work in Progress 1.1.2008AdvertisementOffice rentOffice SalaryCarriage inwardDiscount allowedDiscount (credit)Bad debtsFactory expensesProvision for doubtful debts 1.1.08Cash at Bank

20,0006,000

8,0004,0008,000

12,0004,0002,0004,0002,0006,0002,0008,000

Adjustment–1. Closing stock of Raw materials Rs. 8,000, Work in Progress Rs. 10,000, Finished goods Rs. 40,000.2. Outstanding wages Rs. 2,000, Outstanding salaries Rs. 22,000.3. Bad debts to be written off are R.s. 2000, provision for doubtful debts @ 5% and provision for discount on

debtors @ 2.5%4. Depreciation on Building 2%, on Plant and Machinery 5%, on Patent Rights 10%.5. Interest on capital 5% per annum.6. No interest on drawings.7. Manager is entitled for 10% commission of such net profits which is found out after charging such

commission.Solution.

MANUFACTURING, TRADING AND PROFIT & LOSS ACCOUNT(For the year ending on 31st December, 2008)

Particulars Rs. Particulars Rs.To Opening stock— By Closing Stock—


Raw materials 6,000Work in Progress 8,000To Purchases of Raw materialTo Wages 4,0000Add : Outstanding 2,000To Carriage inwardsTo Factory expensesTo Salary of works managerTo Factory Rent & Rates

14,00070,000

42,0004,0006,000

12,0004,000

Raw materials 8,000Work–in–Progress 10,000By Cost of Production c/d

18,0001,34,000

1,52,000 1,52,000To Cost of Production b/dTo Opening Stock of finished goodsTo Gross Profit transferred to P&L

1,34,000

20,00086,000

By SalesBy Closing Stock offinished products

2,00,000

40,000

2,40,000 2,40,000To Office salary 12,000Add : Outstanding 22,000To AdvertisementTo Office RentTo DiscountTo bad debts 2,000Add : further 2,000 Bad debts 4,000Add : Provision for Doubtful debts 3,100

7,100Less : old provision for Doubtful debts 2,000To Provision for discount on debtorsTo Depreciation on Building 640 Plant of & Mach. 1200 Patents 1200To Interest on capitalTo Interest on LoanTo Manager's CommissionTo Net Profit transferred to capital a/c

34,0004,0008,0002,000

5,100

1,472

3,0403,500

7202,560

25,608

By Gross Profit transferred fromTrading a/cBy Discount

86,0004,000

90,000 90,000

BALANCE SHEET(as at 31st December, 2008)

Liabilities Amount Assets AmountCreditorsLoans 12,000Add : Interest 720Outstanding expenses : Wages 2,000 Salaries 22,000 Outstanding Commission to managerCapital 70,000Add : Interest on Capital 3,500Net Profit 25,608

99,108Less : Drawings 20,000

72,000

12,720

24,000

2,560

79,108

Cash in handCash in BankDebtors 64,000Less : Bad debts 2,000

62,000Less : Provision forDoubtful debts 3,100

59,900Less : Provision for discount 1,472 Closing Stock : Raw Materials 8,000 Work–in–Progress 10,000 Finished Product 40,000

2,0008,000

57,428

58,000


Patent 12,000Less : Depreciation 1,200Plant & Machinery 24,000Less : Depreciation 1,200Building 32,000Less : Depreciation 640

10,800

22,800

31,3601,90,388 1,90,388

Notes:1. Debtors 64,000

Less : Bad debts 2,000

62,000 =

62 , 000×5100 = Rs. 3,100

Less : B.D. Reserve 3,100

58,900 =

58 , 900×52×100

Less : Provision for Discount

1 , 47257 ,428

2. Depreciation:

Building =

32 , 000×2100 = Rs. 460

Plant & Machinery =

24 ,000×5100 = Rs. 1,200

Patent Rights =

12 , 000×10100 = Rs. 1,200

3. Commission to Manager =

28 , 168×10110 = Rs. 2,560

FINAL ACCOUNTS WITH SPECIAL ADJUSTMENTS

1. Dishonoured Cheques: The amount of such cheques is added to debtors and deducted from Bank.2. Credit Purchase of Machinery : This amount is added to machinery account and appears on the liability

side as an outstanding payment.3. Private Purchases: When it is given in adjustment it is deducted from purchases in Trading account and is

added in drawings and the amount of total drawings is deducted from capital on the liability side of Balance Sheet.

4. Closing Stock in Trial Balance : It is shown on the asset side of Balance Sheet only and not in trading account.

5. Valuation of Stock at Less than Cost Price : (a) When opening stock is valued at less than cost price, the amount is added in purchases and

recorded on the credit side of profit and loss account under the heading 'Adjustment of opening stock'.

(b) When closing stock is valued at less than cost price, the less amount will be added in it and then adjustment entry is made.

6. Opening Stock in Adjustment: If opening stock is given in adjustment, then it is treated as an information and not an adjustment. It means that opening stock is included in purchases and no record of it will be made.

7. Installation Charges of Machine : If it is given in adjustment, this amount is deducted from wages and added in machinery on the asset side of Balance Sheet.

8. Dishonoured B/R : If it is given in adjustment, it is added in debtors and deducted from B/R.Illustration 15. The following figures have been extracted from the records of Neha Fancy Stores, a proprietorship concern, as on 31st December, 2008


Particulars Rs.FurnitureProprietor's Capital AccountCash in HandOpening StockFixed DepositDrawingsProvision for bad debts Cash at Bank Purchases SalariesCarriage inwardsInsuranceRentSundry debtorsSalesAdvertisementsPostage & telephonesBad debtsPrinting & StationeryGeneral chargesSundry creditorsDeposits from customers

15,000 54,000 3,000

50,0001,34,600

5,000 3,000

10,0003,00,000

19,00041,0006,000

22,00060,000

6,00,00010,0003,4002,0009,000

13,00040,0006,000

Prepare Trading, Profit and Loss Account and Balance Sheet after taking into consideration the following further information :

(1) The closing stock as on 31st December 2008 was Rs. 10,000.(2) A sale of Rs. 25,000 made for cash had been credited to the purchases Account.(3) Salary of Rs. 2,000 paid to an employee had been entered in the Cash Book as Rs. 1,000.(4) Charge depreciation of furniture at 10%.(5) Furniture had been sold during the year for Rs. 10,000 and the proceeds had been credited to furniture

Account. The written down value of furniture sold was Rs. 5,000.(6) A sum of Rs. 10,000 received from a party which had purchased some stocks belonging to a separate

business of the proprietor was credited to sundry debtors Account.(7) The proceeds of a matured fixed deposit amounting to Rs. 25,400 had been credited to the Fixed Deposit

Account. The original amount of the deposit was Rs. 20,000.(8) There was an outstanding liability for Rent of Rs. 2,000.(9) An advance of Rs. 1,000 paid to an employee against his salary of January 2007 had been debited to salary

account.(10) The office premises were sub–let from December 2006 for a monthly rental of Rs. 1,000 but the rent for

December has not yet been received.

Solution :NEIIA FANCY STORES

TRADING AND PROFIT & LOSS ACCOUNT(for the year ending on 31st December, 2008)

Particulars Rs. Particulars Rs.To Opening stockTo Purchases 3,00,000 + 25,000To carriage inwardsTo Gross Profit transferred to P & L a/c

50,000

3,25,00041,000

2,19,000

By Sales 6,00,000 + 25,000By Closing stock

6,25,00010,000

6,35,000 6,35,000


To SalariesTo RentTo Printing & StationeryTo Postage & telephonesTo InsuranceTo General chargesTo DepreciationTo AdvertisementTo Bad debtsTo Net profit Transferred to Capital a/c

19,00024,0009,0003,4006,000

13,0002,000

10,0002,000

1,45,000

By Gross Profit Transferred from Trading a/cBy RentBy InterestBy Profit on sale of furnitureBy Provision for bad & doubtful debts

2,19,0001,0005,4005,000

3,000

2,33,400 2,33,400

BALANCE SHEET(as on 31–12–2008)

Liabilities Amount Assets AmountCapital 54,000Add :Fresh Receipt 10,000 64,000Add: Profit 1,45,000 2,09,000Less : Drawings 5,000Sundry creditorsExpenses outstandingDeposit from customers

2,04,00040,0002,0006,000

Furniture 20,000Less : Depreciation 2,000StockSundry DebtorsFixed DepositsCash at BankCash in handAdvance SalaryRent outstanding

18,00010,00070,000

1,40,0009,0003,0001,0001,000

2,52,000 2,52,000Notes:

(1) Rs. 1,000 has been added to salaries and deducted from Cash balance. Advance salary Rs. 1000 is to be shown on the assets side of Balance Sheet.

(2) Profit on furniture Sale Price Rs. 10,000 – Book value Rs. 5,000 (10,000 – 5, 000) Rs. 5,000 has been credited to P. & L. a/c.

(3) Rs. 25,000 has been added to sales and purchases also.(4) Sale of stock of different business has been added to the debtors and also to the capital a/c.(5) Interest received on Fixed deposit and credited to Fixed Deposit a/c has been credited to Interest Account

by a debit to the Fixed Deposit Account.(6) Outstanding Rent is to be shown on the asset side of Balance Sheet.

Illustration 16. Mr. Rachit, a trader has extracted the following Trial Balance from his books as on 31st March 2008 :

Particulars Dr.Rs.

Cr.Rs.

PurchasesSundry DebtorsCash in HandCah at BankRent, Rates and TaxesInsurance PremiumSalariesCarriage OutwardCarriage InwardSundry Creditors

4,00,0001,50,000

4,0008,0003,0009,000

42,00021,00018,000

50,000


Claims RecoverableAdvertisement SuspenseFurniture & FittingsDeposit with SupplierOffice EquipmentBills ReceivableBad DebtsSalesOpening StockElectricity Expenses

5,0009,000

23,0006,000

10,0006,0004,000

30,0002,000

7,00,000

7,50,000 7,50,000

The following further information is provided :

(1) A purchase Invoice for Rs. 15,000 received from a sundry creditor, has not been entered through oversight.(2) The claim recoverable has been settled with the insurance company for Rs. 2,000.(3) 50% of the Advertisement suspense account is to be written off this year. The amount represents the cost of

an advertising campaign conducted this year.(4) Depreciation is to be provided on straight line method on furniture and fittings and office equipment at 5%.

The original costs were :Furniture and fittings Rs. 30,000, office equipment Rs. 15,000.

(5) Goods costing Rs. 5,000 were despatched out on 29th March, 2006. The sale, however, took place on 2nd April 2006, when an invoice for Rs. 7,500 was raised against the customer.

(6) Insurance premium includes a prepaid amount of Rs. 1,000.(7) The deposit with a supplier was made on 1st October 2006. It carries interest @ 12% per annum.(8) Two bills receivable from customers of Rs. 700 and Rs. 1,300 were dishonoured on 30th March.

These had earlier been discounted with the bank,(9) Provide 2% on sundry debtors for doubtful debts.(10) Physical stock of goods on hand on 31st March 2008 at cost was Rs. 1,00,000. Prepare Trading, Profit and

Loss Account and Balance Sheet from the above information.

Solution :TRADING AND PROFIT & LOSS ACCOUNT

(for the year ending on 31st March 2008)

Particulars Rs. Particulars Rs.To Opening stockTo PurchasesTo Carriage inwardTo Gross Profit transferred to P & L a/c

30,0004,15,000

18,000

3,42,000

By SalesBy Closing Stock 1,00,000Add : Stock in transit 5,000

7,00,000

1,05,000

8,05,000 8,05,000To SalariesTo Rent, Rates & TaxesTo ElectricityTo AdvertisementTo ClaimsTo Insurance PremiumTo Carriage OutwardTo Bad debtsTo Provision for Bad debtsTo Depreciation on furnitureTo Depreciation on office equipmentTo Net Profit transferred to Capital a/c

42,0003,0002,0004,5003,0008,000

21,0004,0003,0401,500

7502,49,570

By Gross Profit transferred from Trading a/cBy Interest on deposit

3,42,000360


3,42,360 3,42,360

BALANCE SHEET(as on 31–03–2008)

Liabilities Amount Assets AmountCapital Nil+ Net Profit 2,49,570Sundry Creditors

2,49,57065,000

Furniture & Fitting 30,000Less: Depreciation 8,500Office EquipmentLess : Depreciation 5,750StockDebtors 1,52,000Less: Reserve 3,040Bills Receivable Claims Recoverable Deposit with Suppliers Cash in Hand Cash at Bank Accrued Interest Advertisement suspense Prepaid Expenses

21,50015,0009,250

10,500

1,48,9606,000 2,000 6,000 4,000 6,000

360 4,500 1,000

3,14,570 3,14,570Notes :(1) Rs. 2,000 of Bank balance has been credited on account of bills discounted having been dishonoured, the

amount has been added to debtors.(2) It is presumed that closing stock includes goods worth Rs. 15,000.(3) Accrued interest Rs. 360 is to be shown in Profit and Loss A/c credit side and asset side in Balance sheet.(4) Advertisement suspense is to be shown on asset side in Balance Sheet.(5) Prepaid expenses Rs. 1,000 is to be shown on asset side of Balance Sheet.

Illustration 17. Prepare Trading and Profit & Loss account from the following trial balance on 31st December. 2008.

Particulars Rs. Rs.CapitalPurchasesWagesSalesDiscountTravelling expensesSalariesCarriageInsuranceCommissionRent & TaxCash in HandCash at BankExpensesRepairsSundry expenses Loan Mortgage Interest on mortgage Building Machinery HorsesStock—1st January 2005 Debtors and Creditors

3,20,000 1,30,000

26,000 10,000 40,000 5,500 3,000 6,500

10,000 500

54,500 3,900 2,100 1,100

3,000 80,000 30,000 10,000

1,15,000 65,000

2,10,000

6,00,000

61,000

45,000


Rs. 9,16,000 Rs. 9,16,000Value of closing stock Rs. 1,21,500. Advance payment of Rent & tax Rs. 300. Depreciate 2.5% on

building, 5% on machinery, 7.5% on horses, create 5% reserve on bad debt reserve and 2.5% discount reserve on debtors. Outstanding Insurance Rs. 200.

Solution :TRADING AND PROFIT & LOSS ACCOUNT

(for the year ending on 31st December 2008)

Particulars Rs. Particulars Rs.To Stock 1.1.08To PurchasesTo WagesTo CarriageTo Gross Profit transferred to P & L a/c

1,15,0003,20,0001,30,000

5,500

1,51,000

By SalesBy Closing Stock

6,00,0001,21,500

7,21,500 7,21,500To Discount

To Rent & RatesTo Travelling ExpensesTo SalariesTo InsuranceTo CommissionTo Stable expensesTo RepairsTo Sundry ExpensesTo Interest on MortgageTo Depreciation on BuildingTo MachineryTo HorsesTo Bad Debt ReserveTo Discount ReserveTo Net Profit transferred to Capital a/c

26,000

9,40010,00040,0003,4006,5003,9002,1001,1003,0002,0001,500

7503,2501,544

37,606

By Gross Profit transferred from Trading a/cBy Reserve for Discount on creditors

1,51,000

1,050

1,52,050 1,52,050

BALANCE SHEET(as on 31–December–2008)

Liabilities Amount Assets AmountSundry Creditors 42,000(–) Discount Res. 1,050

Outstanding PremiumLoan including interestCapital 2,13,100(+) N/P 37,606

40,950

400 61,000

2,50,706

Cash in Hand Cash at BankSundry debtors 65,000(–) B.D. Reserve 3,250 61,750(–) Discount Res. 1,544

Stock Prepaid Rent Buildings 80,000(–) Dep. 2,000Machinery 30,000(–) Dep. 1,500Horses : 10,000

500 54,500

60,206

1,21,500600

78,000

28,500


(–) Dep. 750 9,2503,53,056 3,53,056

Notes:

(1) Discount on creditors has been deducted from creditors @ 2.5% or Rs. 1050.(2) Interest has been added in the amount of loans.(3) Outstanding premium has to be shown on the liability side of Balance Sheet.(4) 5% reserve on debtors. Rs. 3,250 has been deducted from debtors.(5) 2.5%depreciation on Building :

2.5% of 80,000 = 2,000 5% on Machinery = 1,500 7.5% on horse = 750

Illustration 18. The account of A closed on 31st December 2008 and the balances on 31st December 2008 are as under :

Particulars Rs. Particulars Rs.A's DrawingPurchasesGeneral expensesWagesSalariesBills ReceivableBad DebtsCash at BankCash in HandDebtorsTax and RatesStock 1.1.2006Land and BuildingPlant and MachineryReserve for discount on CreditorsDiscountDonation A/CRepairs A/C

3,50043,0002,500

40,0003,5001,375

50013,200

80015,250

50013,00016,00010,000

600450220130

A's Capital A./cSalesBills payableCreditorsLoan on MortgageDiscount Reserve on debtorsBad debts ReserveDonation ReserveRepairs ReserveDiscount

35,0001,09,000

1,87510,0006,000

4001,000

350400500

1,64,525 1,64,525

Prepare Profit and Loss A/C and Balance sheet on 31st December 2006. Before preparing the final accounts, the following adjustments are to be taken into consideration :

(1) Write off Rs. 250 as bad debts.(2) Create 6% reserve for doubtful debts.(3) Create 4% reserve for Discount on debtors and creditors.(4) Transfer a sum of Rs. 400 to repairs a/c and Rs. 350 to Donation a/c.(5) Rs. 250 due as Interest on loan.(6) Rs. 50 has been paid as advance for taxes.(7) The valuation of stock on 31st December 2008 was Rs. 20,000.

Solution :

TRADING AND PROFIT & LOSS ACCOUNT(for the year ending on 31st December 2008)

Particulars Rs. Particulars Rs.To Opening Stock 13,000 By Sales 1,09,000


To PurchasesTo WagesTo Gross Profit transferred to P & L A/c

43,00040,000

33,000

By Closing Stock 20,000

1,29,000 1,29,000To General ExpensesTo SalaryTo Bad Debts 500(+) New Bad Debts 250(+) New Reserve 900 1,650(–) Old Reserve 1,000To Tax & Rates 500(–) Prepaid 50To Donation 220(+) New Reserve 350 570(–) Old Reserve 350To Repair 130(+) New Reserve 400 530 (–) Old Reserve 400To Discount on Debtors 564(–) Old Reserve 400To Discount on Creditors To Interest on Loan To Net Profit transferred to Capital a/c

2,5003,500

650

450450

220

130

164600250

24,986

By Gross Profit transferred form Trading A/c By DiscountBy Discount on Creditors

33,000500400

33,900 33,900


Liabilities Amount Assets AmountCapital 35,000(+) Net Profit 24,986 59,986(–) Drawings 3,500

Bills payable Creditors 10,000

400

Loan on Mortagage 6,000(+) Interest 250Repairs Reserve Donation Reserve

56,486

1,875

9600

6,250400 350

Bills Receivable Cash at BankCash in Hand Debtors 15,250Less : Bad Debts 250 15,000 (–) Reserve 900

14,100(–) Discount 4% 564Land & Building Prepaid TaxStockPlant & Machinery

1,375 13,200

800

13,53616,000

5020,000 10,000

74,961 74,961

Notes:

(1) 6% reserve on debtors

= 15,250 – 250 =

15 , 000×6100 = 900

(2) 4% reserve discount on debtors


= 15,000 – 900 = 14,100,

14 , 100×4100 = 564

(3) Repair reserve and donation reserve are to be shown in Profit & Loss Account debit side and on liability on Balance Sheet.

(4) Advance tax Rs. 50 are to be deducted from tax in Profit & Loss Account and to be shown in asset side of Balance Sheet.

(5) Interest on loan Rs. 250 are to be shown on Profit & Loss Account debit side and liability side of Balance Sheet.

Illustration 18. The following is the trial balance of Rampuria Bros, as on 31st December, 2008. Prepare Trading, Profit and Loss Account and a Balance Sheet:

Particulars Rs. Rs.PurchasesBad DebtsSalesRepairsMiscellaneous ExpensesCoal & FuelSundry DebtorsCommission & SalariesDiscount AllowedTrade CreditorsStock 1st Jan. 2006Plant & MachineryCapital AccountDrawingsLoose ToolsRent ReceivedCashRent & TaxesCash at BankSalariesWagesDiscount ReceivedBuilding

1,86,8201,960

11,4009,200

10,40093,00013,0008,600

79,60070,000

15,00030,000

8007,600

31,2009,600

63,380

1,00,000

4,92,400

30,800

2,11,460

3,000

3,900

7,41,560 7,41,560

Create Bad Debts Reserve for Rs. 1,200, create 2.5% discount reserve on debtors, Depreciation 5% on plant & machinery. Stock on 31st December 2008 Rs. 33,720,outstanding wages Rs. 120. Charge 5% per annum Interest on capital.

Solution : TRADING AND PROFIT & LOSS ACCOUNT

(for the year ending on 31st December 2008)Particulars Rs. Particulars Rs.To Opening Stock To Purchases To Coal & Fuel To WagesTo Gross Profit transferred to P&L a/c

79,600 1,86,820

10,400 63,500

1,85,800


4,92,400 33,720

5,26,120 5,26,120To Repairs To Sundry Expenses To Salaries To Discount To Rent & Taxes To Salaries of Clerk To Bad Debts

11,400 9,200

13,000 8,600 7,600 9,600 1,960

By Gross Profit transferred from Trading a/c By RentBy Discount Received

1,85,8003,0003,900


To B.D. Reserve To Depreciation on Plant To Discount Reserve To Interest on Capital To Net Profits

4,600 3,500 2,210

10,573 1,10,4571,92,700 1,92,700


Liabilities Amount Assets AmountSundry Creditors Expenses Outstanding Capital Account Balance 2,11,460(+) Interest 10,573(+) Profit 1,10,457 3,32,490(–) Drawings 15,000

30,800120

3,17,490

Cash in Hand Cash at Bank Sundry Debtors 93,000(–) B.D. Reserve 4,600 88,400(–) Discount Reserve 2,210StockPlant & Machinery 70,000(–) Depreciation 3,500Loose Tools Buildings

800 31,200

86,19033,720

65,50030,000

1,00,0003,48,410 3,48,410

Notes :

(1) Bad debts and bad debts reserve both are to be shown on debit side of Profit and Loss Accounts.(2) Discount of debtors : = 93,000 – 4,600 or 88,400 @ 2.5% = 2,210.(3) 5% Depreciation on Plant and machinery 70,000 @ 5% = 3,500.(4) Interest on capital at 5% or 5% on 2,11,460 = 10,573.

Illustration 20. From the following Trial Balance, prepare the Trial Balance Sheet in its correct form :

Particulars Dr.Rs.

Dr.Rs.

Mohan CapitalMohan DrawingLand and LeaseSalesDebtorsPurchasesPurchase ReturnsBank LoanCreditorsTrade ExpensesCash at BankBills PayableSalary and WagesOpening StockRent & Tax etc.Sales Returns

564741

1,268264

528528142100598

464

1,556

2,756530

250

254

985,454 5,454


Solution :TRIAL BALANCE

Particulars Dr.Rs.

Dr.Rs.

Mohan CapitalMohan DrawingLand and LeaseSalesDebtorsPurchasesPurchase ReturnsBank LoanCreditorsTrade ExpensesCash at BankBills PayableSalary and WagesOpening StockRent & Tax etc.Sales ReturnsSuspense Account

564741

5301,268

528142

59825446498

267

1,556

2,756

264250528

100

5,454 5,454

There is still a difference of Rs. 267 on the debit side which may be written in suspense Account.

QUESTIONS

Essay Answer Type Questions :

1. What do you mean by Final Account ? Why is Balance Sheet included in final account not an account but a statement ?

2. Explain the classification of assets and liabilities.3. Explain the difference between Trial Balance and Balance Sheet.4. What do you understand by the terms, 'Grouping' and 'Marshalling' used in connection with the Balance

Sheet of a business ?


Numericals Problems :1. From the following trial balance, prepare the Trading, Profit and Loss Account for the year ended

on 31–12–2008 and the Balance Sheet as on that data :–

Particulars Dr. AmountRs.

Cr. AmountRs.

CapitalDrawingsLand & BuildingsMachinerySmall ToolsBills ReceivableStock of GoodsPurchases & ReturnsWagesCarriage on Purchases Carriage on SalesCoal & Fuel Salaries Rent & Rates Discount Account Bills Payable Bank Account Cash Account Debtors & Creditors RepairsPurchases of New Land Bad Debts Advertisement Sales & Sales Return Gas & Water Oils etc. Furniture Sundry Expenses Printing & Paper

15,000 90,000 40,000 3,000 3,000

40,000 51,000 20,000 1,000

5005,000 5,000 2,800 1,500

25,000 400

45,000 1,800 7,500 1,200

500 2,000

200 600

1,200 800 450

2,03,000

2,650

3,800

40,000

1,15,000

3,64,450 3,64,450Adjustments :(a) Depreciate Machinery at 5%, small tools at 15% and furniture at 5%.(b) Provide for bad debts at 5% on debtors and for discount at 2.5%.(c) Closing stock Rs. 60,000.(d) Unpaid wages Rs. 1,500 and Salary, Rs. 450.(e) Rs. 400 for tax up to 31 March 2008 for six months has been paid.

[Ans. G/P Rs. 56.350, N/P Rs. 35,731.25. B/S Rs.2.69.471.25]Hints :(a) Write depreciation 5% on machinery Rs. 2,000 and 15% on tools Rs. 400 and 5% on furniture Rs. 60 on the

debit side of Profit & Loss Account and deduct this sum in BI S from assets.(b) 5% reserve on debtors Rs. 2,250 and 2.5% discount reserve on debtors = 45,000 – 2,250 or 42,750 @ 2.5 %

= Rs. 1068.75.(c) Unpaid wages & salary are to be shown on debit side of Profit and Loss Account & on liability side of B/S.(d) Tax prepaid Rs. 200 to be deducted from Profit & Loss and shown in Balance Sheet towards assets side.(e) Carriage on purchase to be shown in Trading Account and carriage on sales in Profit and Loss Account.

2. Mr. Arun a shopkeeper had prepared the following trial balance from his ledger as on 31st March 2008

Particulars Rs. Rs.


Purchases and SalesStock of goods as on 1–4–2007Cash in HandCash at BankMr. Arun's CapitalDrawingsRates & TaxesSalariesPostage and TelephoneSalesman CommissionInsuranceAdvertisingFurniture & FittingsPrinting & StationeryMotor CarBad DebtsCash DiscountsGeneral ExpensesCarriage InwardsCarriage OutwardsWagesOutstanding Liabilities for ExpensesSundry CreditorsSundry Debtors

3,10,00050,0002,100

12,000

4,0005,000

32,00011,50035,0009,000

17,00022,0003,000

48,0002,0004,000

14,00010,00022,00020,00011,000

1,00,000

4,15,000

2,88,600

40,000

7,43,600 7,43,600

You are requested to prepare Trading and Profit and Loss Account for the year ended on 31st March, 2008 and Balance Sheet as on that date. You are also given the following further information : (a) Cost of goods in stock as on 31st March 2008 Rs, .1,45,000.(b) Mr. Arun had withdrawn goods worth Rs. 5,000 during the year.(c) Printing & stationery expenses of Rs. 11,000 relating to 2007–08 accounting year had not been provided in

that year but was paid in this year by debiting outstanding liabilities.(d) Purchases include purchase of furniture worth Rs. 10,000. (e) Debtors include Rs. 5,000 bad debts.(f) Creditors include a balance of Rs. 4,000 to the credit of LM. Corporation in respect of which it has been

decided and settled with the party of pay only Rs. 1,000.(g) Sales Include goods worth Rs. 15,000 sent out to S.M. & Co. on approval and remaining unsold as on 31st

March 2008. The cost of goods was Rs. 10,000.(h) Provision for bad debt is to be created at 5% on sundry debtors.(i) Depreciate furniture and fitting by 10%, Motor Car by 20%.(j) The salesman are entitled to a commission of 10% oh total sales.

[Ans. Gross Profit Rs. 1.80,000, N/P. Rs. 1.700. Balance Sheet Total 3.12,300.][Hint: Drawings Rs. 5,000; Deduct 10,000 from purchase; Deduct 15,000 from sales; 5% provisionon debtors, depreciation 10% on furniture = 2,200; 20% on Motor Rs. 9.600; 10% Commission onSales.]

3. The books of Mr. X, a trader in tea, showed the following balances on 31st March, 2008 :

Particulars Rs.Opening Stock of TeaPurchases—TeaSalaries PaidBuildingCash in HandCash at Bank

1,00,0004,00,000

80,00095,0002,000

1,35,000


Rent, Rates & TaxesInsurance Premium PaidMiscellaneous ReceiptsSalesCash Discount Allowed Bad Debts Repairs—Buildings Misc. Expenses AdvertisementCommission to Sales ManagerFurniture & FittingsAir ConditionersSundry DebtorsSundry CreditorsLoan on MortgageInterest Paid on AbovePrepaid ExpenseDrawingsBills PayableBank ChargesLegal ChargesMotor VehiclesTravelling & Conveyance

15,0003,000

10,0007,20,000

4,750 3,250 2,900 8,700

20,000 32,400 35,000 30,000

1,00,00080,000 70,000 3,000 4,000

18,000 30,000 2,000 6,000

80,000 10,000

The following further information was obtained :

(a) Closing Stock 55,000. (b) Legal charges include Rs. 5,000 for cost of stamps and registration of new building acquired during the

year.(c) Purchases include 4,000 Kgs. tea valued at Rs. 20,000 which was totally spoiled. Insurance claim lodged in

this respect is expected to realise Rs. 15,000.(d) Travelling and conveyance include proprietor's personal travelling for which he is to be charged with Rs.

4,800.(e) Loan on mortgage bears interest at 12% P.A. with monthly rests; The loan was taken on 1st June, 2008.

One instalment of Rs. 10,000 was repaid on 1st December 2006.(f) The Sales manager is entitled to a commission of 7.5% of total sales. However, the actual Bad debts

incurred during the year is deductible from such commission entitlements.(g) Debtors include–

(i) Rs. 10,000 due from M & Co. (Creditors include Rs. 18,000 due to the same party).(ii) Rs. 5,000 due on account of sales of furniture.(iii) Bad debts of Rs. 2,000.

(h) Provision for Bad debts is to be created at 20% of net outstanding debtors.(i) Depreciation is chargeable as on Building at 2.5%, furniture and fitting at 10%, Air conditioners at 15%,

Motor Vehicles at 20%.(j) Miscellaneous receipts represent sale proceeds of furniture, written down value of which was Rs. 12000.(k) Prepaid expenses include insurance premium of Rs. 1,000 for period from 1st April

2008 to 30th September 2008 paid in 2008–09. (l) Bills payable include a bill of Rs. 10,000 which fell due on 31st March 2008 and was paid by the bank as

per standing instructions. The Bank charges in this connection amounted to Rs, 100. (m) The balance as per Bank as on 31st March 2009 was Rs. 1,24,900. Prepare Trading and Profit and Loss Account for the year ended on 31st March 2009 and BalanceSheet as on that date from the above information.[Hints : Interest on loan on 80,000 @ 12% for 6 months = 4,800, on 70,000 @ 12% for 6 months = = 2.800, Total Interest 7,600, Manager's Commission = 7.5% on Sales Rs. 54,000, Actual bad debt Rs. 5,250, Sundry debtors 1,00.000–12,000–5,000 = 83,000 @ 2% = 1,660, Insurance premium prepaid Rs. 3,000.]


[Ans. G/P, Rs. 2,95,000, N/P, Rs. 57,290, B/S Rs. 4,95,440]

4. On 31st December 2008 the following Trial Balance Sheet has been extracted—

Dr. Cr.Particulars Rs. Particulars Rs.PurchasesSales ReturnCashCash at BankSalariesTax & InsuranceOpening StockGeneral ExpensesBad DebtsCarriage InwardDrawingsDebtorsBuildingDiscount

12,400120200

2,0001,600

4002,200

800250140580

2,1004,720

110

SalesCapitalCreditorsBills PayableCommissionInterest

15,8009,1201,540

45067040

27,620 27,620Prepare final accounts after taking into account the following adjustments :(a) Outstanding Salaries Rs. 150 and tax Rs. 50.(b) Prepaid insurance Rs. 50.(c) Advance commission received Rs, 150.(d) Charge depreciation of Building by 10%..(e) Create 3% Bad debts reserve on debtors. if) The value of closing stock being Rs. 3,580.

[Ans. G/P Rs. 4,520, N/P Rs. 1,235, B/S Rs. 12,115] .


5. The Trial Balance of Mr. Rakesh as on 31st December 2008 was as follows :Particulars (Dr.)

Rs.Particulars (Cr.)

Rs.PurchasesDebtorsOpening stockWagesSalariesFurniturePostagePower & fuelTrade expensesBad debtsLoan at 10% upto Sept. 2008Cash on handDrawing a/c

1,62,505

50,20026,72523,1375,5757,2504,2261,3505,831

5253,000

10,0004,452

SalesProvision for doubtful debtsSundry creditorsBills payableOutstanding WagesTrade expenses accrued butnot paidCapital a/c

2,52,4005,200

30,5263,9502,000

70010,000

3,04,776

3,04,776

Prepare Trading and P/La/c of the year ended 31 st December 2008 and the Balance Sheet, taking into account the following information :(а) Depreciation on furniture is total charged at 10% per annum.(b) Sundry debtors include an item of Rs. 500 due from a customer who has become insolvent and nothing is

recoverable from his estate.(c) Provision for doubtful debts is to be maintained at 5% on sundry debtors.(d) Goods of the value of Rs. 1,500 have been destroyed by fire and insurance company

has admitted the claim for Rs. 1,000. (e) Stock as at 31st December, 2008 was Rs. 12,550.

[Ans. G/P Rs. 52,733, N/P Rs. 39,666, B/S Rs. 80,3901

6. Given below is the Trial Balance of Mr. Ram Prakash as at 31st December 2008 ––Particulars Rs. Rs.Trade expensesDiscount receivedSalariesTravelling expensesDiscount allowedCapital A/c DrawingsPremisesFurnitureOpening StockCash at BankReserve for Doubtful debtsPurchasesSalesCarriage inwardsBad debtsSundry debtorsSundry creditorsBank chargesRent

2,025

9,2871,430

490

6,50040,0005,000

15,0004,500

66,235

2,1001,350

16,000

1341,500

1,370

60,100

720

94,000

15,421

1,71,611 1,71,611Prepare Trading, Profit and Loss Account after taking the following adjustments into consideration:


(a) Mr. Ram Prakash works in the business and is allowed a salary of Rs. 2,400 per annum. This amount has been included in Drawing a/c.

(b) Write Rs. 2,000 of premises and Rs. 500 of furniture.(c) The sundry debtors on 31st December 2008, 4% are irrecoverable and should be written off. The Reserve

for Doubtful debt should be maintained at 5%.(d) Rent due but not paid is Rs. 500 and the salaries include Rs. 250 paid as advance of staff.(e) Stock as on 31st December is valued at Rs. 15,500.

[Ans. G/P Rs. 26,165. N/P Rs.5,481, B/S Rs. 77,402]7. From the following Trial Balance, prepare Trading, Profit & Loss A/c and Balance Sheet as on 31st

December 2008 :

Particulars Rs. Rs.Stock on 1 st January, 2008PurchasesDrawingsReturn inwardsTrade expensesWagesSalariesTravelling expensesAdvertisementRent, Rates & InsuranceBad debtsDiscountInterest & CommissionPremisesPlant & MachineryFixture & fittingsSundry debtyorsCash in handCapitalSalesReturn outwardsCreditorsBank overdrafts

30,00075,00011,0002,700

6753,5005,600

660420

2,800400300245

6,00010,0005,000

46,0001,000

35,0001,25,000

1,30030,00010,000

2,01,300 2,01,300Adjustment:

(a) Stock on 31 st December 2008 Rs. 45,000.(b) Outstanding rent Rs. 250, and wages Rs, 200.(c) Insurance paid in advance Rs. 150 and Salaries were unpaid to the extent of Rs. 350.(d) Write off Rs. 400 as further bad debts and provide for doubtful debts at 5% on debtors.(e) Depreciation premises by 2.5%, Machinery at 7.5%, furniture & fittings at 10%.

[Ans. G/P Rs. 59,900, N/P Rs. 44,300, B/S Total Rs. 1,09,100]


8. The following Trial Balance was extracted from the books of Cooper as on 31st December, 2008 :

Particulars Rs. Particulars Rs.CapitalOffice ChargesPlant & MachineryStock on 1.1.2005PurchasesReturn outwardsOffice lightingInterest on loanTrade expensesCarriage inwardsPacking chargesDiscount (Cr.)Factory BuildingRent & Rates

2,65,500

19,8601,28,40

072,9402,92,62

04,290

2804,2502,9404,3103,420

78012,7502,710

SalesReturn inwardsLoan Secured (Cr.)WagesTravelling Exp.Coal, cokeRates & InsuranceFurnitureRepair to machineryRoyalty PaidBad debtsBook debtsCreditorsCashB/R

5,72,1403,210

85,0001,23,140

32,7604,2802,2205,0003,9804,7102,190

62,84019,71026,00017,860

Adjustment:

(a) Provide depreciation on Plant & Machinery at 10%, office furniture at 5%.(b) Provide for reserve of Doubtful debts up to Rs. 2,000.(c) Insurance Co. was liable for Rs. 2,400 for the accident for the engine. (d) Outstanding wages 3,210, Salaries 920.Prepare Trading, P/L and Balance Sheet on 31st December, 2008.

[Ans. G/P Rs. 65,790, N/P Rs. 19,430, B/S Rs. 3,54,910]

9. The Trial Balance of Metal Shop is given as under. Prepare Trading and Profit & Loss account and a Balance Sheet on that date.

Particulars Rs. Rs.Stock on 1.1.2008CreditorsBill PayableFurniture (including purchases on 1.7.2008 Rs. 1,000)PurchasesReturn InwardsSalariesCashBankBank of IndiaSalesCarriage inwardsReturn outwardsInvestmentIncome from investment RentCommissionTelephonePrinting and StationeryPostage

17,000

3,0001,00,000

6,00011,0001,0001,500

2,500

15,000

4,4002,400

4001,000

300

9,0002,000

5,0001,70,000

8,000

2,000


Bills ReceivableBad debtsProvision for Doubtful debtsSundry debtorsInsurance upto 30th June 2009DrawingsDiscountCapital

7,000800

50,0001,800

14,9003,000

2,500

44,5002,43,000 2,43,000

Adjustment:(а) Stock on 31st December 2008 Rs. 20,000.(b) Furniture is to be depreciated at 1.0% per annum.(c) Sold goods Rs. 5,000 on 29th December 2008, the sale bill was prepared on

1st January 2009.(d) The provision for doubtful debts is to be retained at 5% of debtors.

[Ans. G/P Rs., 87,500, N/P Rs. 69, 300, B/S Rs. 1,09,900]10. From the following Trial Balance prepare Trading, Profit & Loss a/c and Balance Sheet as on 31st

December 2008 :Particulars Rs. Rs.Capital A/cDrawing A/cFurniturePlant and MachineryPatent Rights (10 years) from 1.1.2008Stock on 1.1.2008PurchasesSalaries and wagesSundry debtorsSalesLoan at 6% on 1.7.2008Postage & telegramsRent, Rates & TaxesBad debtsSundry creditorsDiscountsTrade expensesInterest on loanInsuranceTravelling expensesSundry expensesCashBank

12,0004,000

30,00020,00020,00085,00022,40020,400

1,5003,600

400

200150800500300

3,05010,300

80,000

1,32,00010,000

12,000600

2,34,600 2,34,600Adjustment:(a) Stock on 31–12–08 Rs. 27,200.(b) A new machine was installed on 1 st October 2008 for Rs. 3000. No entry was passed. Wages Rs. 1000

paid for installing the Machine was debited to wages account.(c) Of the Sundry debtors 400 are bad.(d) Create a reserve of 5% on debtors.(e) Goods of Rs. 1000 were given away free as advertising matter.(f) Depreciate Plant by 20% per annum and furniture by 10% per annum.

[Ans. G/P Rs. 55,200, N/P Rs. 14,050, B/S Rs. 1,04,350]11. Prepare final accounts from the following for the year ending on 31st March, 2008 :

Particulars Rs. Particulars Rs.


Plant and MachineryDepreciation on PlantFixture & fittingsFactory Fuel & Power Office Salaries Salary outstandingLighting FactoryTravelling ExpensesCarriage salesCashTrade DebtorsPurchasesStock 31st March 2008Wages

49,5005,5001,720

5424,092

350392925960

2,31347,80066,71016,5809,915

Rent & TaxesRent outstandingOffice expensesCarriage on PurchasesDiscount allowedDrawingStock 1.4.2008Direct ExpensesSales returnsInsuranceCapitalSalesCreditorsReturn OutwardsBills Payable

1,951150

2,778897422

6,82021,7252,6807,422

57093,230

1,26,17722,6803,1726,422

Additional Information :(a) Depreciate fixtures at 10%.(b) Provision for Bad debts at 2.5% on debtors.(c) Insurance unexpired Rs. 70.(d) Outstanding wages Rs. 800.

[Ans. G/P Rs. 18,266, N/Lqss Rs.232, B/S Rs. 11,16,616]

12. Form the following Balance prepare, Trading, P/L Account and Balance Sheet as on 31st March 2008 :

Particulars Rs. Particulars Rs.Land & BuildingPurchasesReturn inwardsTravelling ExpensesPrintingCash at BankDiscount Misc. Exp. Debtors Postage FurnitureJoint venture. Suspense a/cCash in handMotor CarInvestmentDrawingBills ReceivableStock OpeningInterest on Bank LoanSalaries (including Advance for 1,500) Entertainment Exp. Carriage Inward Advertisement

40,0003,26,70

02,5006,9001,600

30,7901,800

18,620 64,000

800 8,000

800 4,900

16,000 12,000 10,000 4,800

63,680 3,000

22,000 1,800 3,000

16,000

SalesDividend12% Bank LoanCapital a/cBills PayableCreditorsReturn outwards

Discount

4,68,100960

40,00080,0002,600

63,1303,700

1,200

6,59,690

6,59,690

Additional Information


(a) Sales included a sum of Ra. 32,000 received from sales of goods on behalf of S. The cost was Rs. 20,000. A commission of 5% on sales is to be given and reimburse selling expenses which is Rs. 1,000 debited to Miscellaneous. Exp. A/c.

(b) On 1 st Sept. 2008 a joint Venture agreement was made with equal share and a purchase for it Rs. 33,000 was made, which was wrongly passed through the purchase Day book. These goods were sold at a profit of 25% on sales account. Rs. 1,500 spent on freight and Joint Venture suspense A/c represents the selling expenses.

(c) Goods involved Rs. 48,000 were sent to customers on approval on 31 st March 2008, 20% of these goods were with the customers. Invoice was made at cost plus 25%.

(d) Bills receivable for Rs. 2,000 endorsed on 1st December 2008 in favour of creditors became dishonoured but no entry was passed.

(e) 3/4th Advertisement expenses is to be carried forward.(f) Two cheques Rs. 1,200 and 1,800 were lying unrepresented on 31st March(g) Of the debtors a sum of Rs. 1,100 is Irrecoverable. Provide for doubtful debts at 2%.(h) Depreciate fixed assets by 10% except Motor, which is to be depreciated at 20% stock on 31 st March was

Rs. 45,000.[Ans. G/P Rs. 76,000, N/P Rs. 14,084, B/S Rs. 2,28,864,

Sales Rs. 3,82,500, Joint Venture. Profit Rs. 4,350]

13. Prepare Trading, Profit and Loss Account and Balance Sheet from the following as on 31st December, 2008 :

Particulars Rs. Particulars Rs.FurnitureCapitalCash in HandOpening StockFixed DepositsDrawingsProvisions for Bad DebtsCashPurchasesSalariesCarriage Inwards

15,00054,0003,000

50,0001,34,60

05,0003,000

10,0003,00,00

019,00041,000

InsuranceRentDebtorsSalesAdvertisementsPostageBad DebtsPrintingCreditorsDepositor with Customers

6,00022,00060,000

6,00,00010,0003,4002,0009,000

40,0006,000

Additional Information:(а) Closing Stock on 31st December 2008 Rs. 10,000.(b) A Sale of Rs. 25,000 for cash has been credited to Purchase Account.

Salary 2,000 paid to an employee entered in cash book as Rs. 1,000.(d) Charge depreciation of furniture of 10%.(e) Furniture sold for Rs. 10,000 and credited to the furniture account, the written down value Rs. 5,000.(f) A sum of Rs. 10,000 received from a party credited to the Sundry debtors account.(g) The proceeds of fixed deposit Rs. 25,400 had been credited to fixed deposit Account. The original amount

of the deposit was.Rs. 20,000.(h) Outstanding liability of rent of Rs. 2,000.(i) An advance of Rs. 1,000 paid to an employee against his salary of January, 2007 had been debited to the

salary account.(j) The office premises were sublet from December 2006 for a monthly rental of Rs. 1,000 but the rent for

December has not been received.

[Ans. G/P Rs. 2,19,000, N/P Rs. 1,42,000, B/S Rs. 2,49,000 Capital Rs. 2,01,000] 14. From the following information, prepare Trading, Profit and Loss Account and Balance Sheet as on

31st December 2008, after taking into consideration the additional information also–


Particulars Rs. Rs.CreditorsRentCash at BankCah in HandStock OpeningBad DebtsDiscountPurchases and SalesCarriage OutwardPlant Machinery–Sales ReturnsPurchase ReturnsCarriage InwardsFurniture ar d FixturesInsurance & Office ExpensesSalariesBills ReceivableDrawingsWagesProvision for Doubtful Debts Capital Account Sundry Debtors Commission Paid Discount Received

1,2003,0001,400

16,0001,000

4001,10,000

3,600 20,000 8,000

1,000 12,000 3,000 6,000

12,000 12,000 12,000

40,0008,400

46,000

1,68,000

4,000

2,00050,000

1,0002,71,000 2,71,000

Adjustments :(а) Depreciate Plant and Machinery at 10% and furniture and fixtures of 5%.(b) Insurance prepaid Rs. 200.(c) Salary and rent are outstanding to the extent of Rs. 1,000 and Rs. 200 respectively.(d) Maintain the provision for doubtful debts at 6% on sundry debtors.(e) Closing Stock was valued at Rs. 20,000. (f) Allow Interest on Capital at 5%.(g) Goods worth Rs. 1,000 were withdrawn for personal use but no record was made.

[Ans. G/P Rs. 46,000, N/P 16,900, B/S Rs. 1,03,600]

15. Prepare Trading and Profit and Loss account and Balance Sheet as on 31st March 2009 from the following balances.

Particulars Rs. Particulars Rs.Capital AccountBills ReceivableBills PayablePurchase Less ReturnsPlant and MachineryBank Loan at 6%Rent, Rates & TaxesSalaries and WagesInsuranceRepairs and RenewalsInterest and discount (Dr. Balance)Furniture and Fixtures

1,19,400

9,5009,630

3,56,590

28,80020,0005,620

11,000400

3,370

Drawing AccountSundry CreditorsSundry DebtorsSales Less ReturnsManufacturing WagesCommission ReceivedStock on Hand 1st April, 2008Travelling ExpensesCash in HandCash at BankBad Debts

10,50050,00062,000

3,53,65040,9705,640

89,6801,880

53018,9703,620


5,8708,970

Stock on Hand on 31st March, 2009 was Rs. 1,28,960. Write off Rs. 500 as Bad debts from Sundry Debtors, of Rs. 62,000. Prepaid insurance amounted to Rs. 150, create a reserve of 5 percent of the remaining sundry debtor, charge 5% interest on capital. Interest of Rs. 200 Bank Loan, is not paid. Manufacturing wages include Rs. 1,200 for erection of new machinery purchased last year and should therefore be transferred to plant and Machinery Account. Depreciate plant and Machinery by 5% and furniture and fixtures by 10 percent per annum. Commission earned but not received amounts to Rs. 600.

[Ans. G/P Rs. 96,750, N/P Rs. 59,058, B/S Rs. 2,53,708]

16. Prepare Trading and Profit & Loss account and Balance Sheet as on 31st March 2008 from the following balances :

Particulars Dr.Rs.

Particulars Cr. Rs.

Capital AccountSalariesTrade ExpensesCashBills PayableCarriage InwardWagesStock OpeningCreditorsReturn OutwardsBills Receivable

14,4151,470

75071

7852,9589,122

10,42014,890

525200

Fire Insurance PremiumBad DebtsLoanPurchasesDebtorsSalesPremisesPlantBankRentInterest & Discount

50135

3,00015,22513,49036,3006,1007,4001,515

804275

Stock on 31 March 2008 was Rs. 10,000, write off Depreciation on Premises at 5%, Plant at 10%, Provide 5% on sundry debtor Doubtful debts, and carry forward Rs. 25 of fire insurance premium to the following year.

[Ans. G/P Rs. 10,000, N/P Rs. 4,825, B/S Rs. 37,915] 17. From the following prepare Trading, Profit and Loss Account and Balance Sheet as on 31st

December 2008

Particulars Dr.Rs.

Particulars Cr. Rs.

DrawingsDebtorsPostageSales ReturnsCarriage OutwardWagesPrintingInsurance upto 30 June 2008PurchasesCredit PurchasesDiscount Furniture (Including Rs. 2,000 Purchases on April 1, 2008)Stock 1st January 2008ExpensesInterestBad DebtsCash in HandSalaries

12,0001,40,00

01,1004,2006,000

12,0001,400

80012,90070,0001,200

8,00030,0005,0001,0001,2003,900

CapitalCreditorsBank overdraftPurchase ReturnSalesDiscountLoan at 9% P.A. upto 30, June 2008 Provision for Doubtful Debts

1,00,00015,6001,5003,900

1,60,0003,000

30,0001,500


4,8003,15,50

03,15,500

(a) Depreciation of furniture at 10%.(b) Stock as on 31st December 2008, Rs. 65,000.(c) Provision for doubtful debts at 2%.

[Ans. G/P Rs. 99,800, N/P Rs. 77,300, B/S. Rs. 2,13,750] Prakash as on 31st December 2008 was as follows —

Particulars Rs. Particulars Rs.Purchases Debtors Opening Stock Wages Salaries Furniture Postage Power and fuel Trade Expenses Bad Debts Loan at 10% p.a. to September, 2008Cash 10,000 Drawing Account

1,62,505

50,20026,72523,1375,5757,2504,2261,3505,831

5253,000

4,452

SalesProvision for Doubtful DebtsCreditorsBills PayableOutstanding WagesTrade Expenses Accruedbut not paidCapital Account

2,52,4005,200

30,5263,9502,000

70010,000

3,04,776

3,04,776

Prepare Trading and Profit and Loss Account for the year ended 31 st December, 2008 and the balance sheet taking into account the following information– (a) Depreciation on furniture is to be charged at 10% p.a.(b) Sundry debtors include an item of Rs. 500 due from a customer who has become insolvent and nothing is

recoverable from his estates.(c) Provision for doubtful debts is to be maintained at 5% on Sundry debtors.(d) Goods of the value of Rs. 1.500 have been destroyed by fire and the insurance company has admitted the

claim for Rs. 1,000.(e) Stock as at 31st December 2008 was Rs. 12,550.

[Ans. G/P Rs. 52,733, N/P Rs. 37,666, B/S Rs. 80,390]

19. On 31st December, 2008 the Trial Balance of a trader is as under–

Particulars Rs. Particulars Rs.PurchasesCashBank Salaries Tax Insurance Stock Opening General ExpensesBad DebtsCarrige inwardDrawingsDebtorsBuildingWages

12,000200

2,0001,600

4002,200

800250140690

2,1004,720

400

SalesCapitalCreditors Bills Payable Commission Interest

15,8009,0001,540

45067040


27,500 27,500

Prepare Trading, Profit and Loss Account and Balance Sheet after taking into consideration the following adjustments–(a) Outstanding salary Rs. 150 and Tax Rs. 50, Prepaid insurance Rs. 50.(b) Goods Rs. 120 was returned by a customer, but no entry was passed so far.(c) Advance commission received for next year Rs. 150.(d) Depreciation on building at 10%.(e) Create bad debt reserve at 3% on debtors.(f) The value of closing stock on 31 st December 2008 Rs. 3,500.(g) Tax deducted as source out of wages Rs. 10.(h) Goods in transit Rs. 200

[Ans. G/P Rs. 4430, N/P Rs. 125,860, B/S Rs. 12,11,860]

20. Prom the following prepare Trading, Profit and Loss account and Balance Sheet.Particulars Rs. Particulars Rs.DebtorsMachineryClosing stockBuildingWagesMisc. ExpensesSalariesCashCost of goods sold

5,0002,0006,0004,100

8001,000

3006,000

19,000

CapitalReserveCreditorsOutstanding Salary Sales

9,0002,5002,400

30030,000

Adjustment:

Depreciation of building 10%, reserve on debtors 10%, debtors include a sum of Rs. 1,000 payable to Ram and creditors include a sum of Rs. 1000 due from Ram.


21. From the following balances, prepare Trading, Profit and Loss account and Balance Sheet as on 31st December 2008.

Particulars Rs. Particulars Rs.Stock OpeningWagesSalariesCarriage InwardPurchasesInterest on overdraftBills ReceivableOffice ExpensesDrawingsBills payableSalesDiscount of PurchaseRentPurchase Returns

96,00028,0004,0005,000

1,20,000200

6,0005,0006,5005,000

2,50,0004,0002,0001,500

MachineTrading ExpensesRepair to machineCashBankBuildingSales ReturnsDebtorsIncome TaxCapitalBank loanCreditors

20,0005,0001,600

2001,8005,0001,000

35,000500

50,0004,000

23,300

The value of stock on 31 st December 2008 Rs. 35,000, Bad Debts Rs. 3,000 and create a reserve of 5% on debtors. Depreciation of Machine at 10%. Interest on capital at 5%. Outstanding wages and salaries Rs. 1,500 and Rs. 450 respectively. Rent outstanding for two months at Rs. 2,000 per month.


[Ans. G/P Rs. 35,000, N/P Rs. 10,750, B/S Rs. 96,400, Suspense a/c Rs. 5,000]22. Prepare final accounts from the following Trial Balance of Narayan Das as on 31st December 2008–

Particulars Rs. Rs.Capital Account Drawing Account Machinery balance 1 Jan. 2008 Machinery purchased on 1–7–2008Opening StockPurchasesSales returnsDebtorsFurnitureCarriage Carriage on sales Rent & Taxes Printing Trade expensesSalesCreditorsPostage & telegramsProvision for doubtful debtsDiscountIncome from RentInsuranceSalariesManufacturing expensesCashCash at Bank

6,000 20,000 5,000

15,00080,0002,000

20,0005,0002,000

4004,000

8001,700

800

70021,2002,0006,000

20,600

80,000

1,20,00010,000

4001,8001,000

2,13,200 2,13,200

Adjustments :

(a) Stock was valued at Rs. 15,000 on 31st December 2008.(b) Write off Rs. 600 as bad debts.(c) Maintain the provision for doubtful debts @ 5%.(d) Make a provision for discount on debtors and creditors at 2%.(e) Depreciate furniture at 5% per annum and machinery at 20% per annum. (f) Prepaid Insurance Rs. 100.

[Ans. G/P Rs. 34,400, Net Profit Rs. 1,411, Balance Sheet Rs. 85,211]

23. The following is the Trial Balance of Swaroop Bros, as on 31st December 2008 :

Particulars Rs. Rs.CapitalDrawingPurchasesPurchases ReturnsSalesSales ReturnsStockSalary and WagesBuildingsCarriage Outward

76,0008,94,700

28,2001,14,600

62,8002,50,0001,69,400

9,00,000

42,40014,98,400


Carriag InwardOffice ExpensesPrinting and StationeryPostage & TelegraphsBad DebtsB.D. ReserveTax & InsuranceDiscountB/RDebtorsCreditorsCash at BankCash in HandFurnitureSalaries SalesmanPlant Rent received

23,10013,4006,6008,200

14,000

13,000

12,4006,29,700

1,24,00022,10035,00098,70070,000

32,400

1,900

1,68,800

21,00026,65,90

026,65,900

Take into consideration, the following adjustments and prepare final accounts :

Charge depreciation at 2.5% on Building, and 5% on furniture. Charge Rs. 4,000 for bad debt reserve. Outstanding salary Rs. 5,700 and Rs. 2,000 accrued rent. Charge 5% interest on capital , unexpired insurance Rs. 2,400. The value of closing stock Rs. 1,42,900.

[Ans. Gross Profit Rs. 4,53,700, Net Profit Rs. 1,98,000, Balance Sheet Rs. 12,42.500]

[Hint:(a) Carriage inward is to be shown in trading account(b) Outstanding Salary is to be added in salary.(c) Accrued Rent is to be added in Rent and to be shown on the credit side of P/L A/C and Rs. 2,000 to be

shown on the asset side of Balance sheet.(d) Rs. 2,400 is to be duducted from insurance. This amount is to be shown on the asset side of Balance sheet.(e) Closing stock is to be shown on the credit side of P/L A/C and on the asset side of Balance sheet.]


24. Prepare Trading and Profit and Loss a/c and balance sheet of M/s Jaywarrt Jadhav and Sons for the year ending 30 June 2008 :

Particulars Rs. Rs.DiscountCarriageMachineryRent, Rates and TaxesFurnitureStockPurchasesWagesFuelBuildingGoodwillDebtorsAdvertisingTrade ExpensesBad DebtsCash Interest on Loan 4% P.A. Paid up to 31st Dec. 2007 DrawingsBank chargesCapitalLoanBank OverdraftCreditorsSales

3,6006,900

45,0006,600

18,00079,800

1,47,9001,56,600

7,5602,40,000

20,10048,0609,900

12,3003,0602,1604,8006,0004,920

72,4202,40,000

90,84028,860

3,91,140Rs. 8,23,260 Rs. 8,23,260

Charge depreciation at 10% on building, 10% on furniture and 10% on machinery. Create 2.5% B.D. Reserve and discount on debtors 2.5%. Closing stock Rs. 42,900.

[Ans. G/P Rs. 35,280, Net Loss Rs. 43,917, Balance Sheet Rs. 3,82,203]

[Hint:

(a) 2.5% Bad debt reserve on debtors =

48 ,060×2.5100 = 1201.5

(b) 2.5% discount reserve on debtors =

45 ,480×2 .5100 = 1137

(c) Depreciation on building 10% =

2, 40 ,000×10100 = 24,000

(d) Depreciation on machinery 10% =

45 ,000×10100 = 4,5000

(e) On Furniture @ 10% =

18 , 000×10100 = 1,800

(f) Net loss is to be deducted from capital account and drawing Rs. 6,000 are to be duducted from capital account.]

25. Rearrange the assets and liabilities sides of the following Balance Sheet (i) in order of liquidity, and (ii) in order of permanence.


BALANCE SHEET AS ON 31ST DECEMBER 2008

Liabilities Rs. Assets Rs.Bank Loan Capital 50,000+ N/P 27,200 77,200– Drawings 6,500Bills Payable Sundry Creditors

8,000

70,7009,000

23,300

Bills ReceivablesPlant & MachineryCash in HandBuildingCash at BankSundry DebtorsClosing Stock

16,00020,000

20013,0001,800

25,00035,000

1,11,000 1,11,000

26. The following balances appeared in the books of a Cotton Mill on 31st December 2008 :

Stock on 1–1–2008 Rs.

Cotton 3,00,000Stores 60,000Yarn 50,000Cloth 3,00,000Wages 4,00,000

Purchases :Cotton 16,00,000Stores 1,40,000

Sales :Yarn 4,40,000Cloth 34,00,000Manufacturing Expenses 95,000

Stock on 31 December 2008 – Cotton Rs. 5,00,000; Stores Rs. 40,000; Yarn Rs. 60,000 & Cloth Rs. 1,00,000. Prepare Trading Account.

[Ans. Gross Profit Rs. 15,95,000]27. The following is the trial balance of Rampuria Bros, as on 31st December 2006. Prepare Trading,

Profit and Loss Account and a Balance Sheet:

Particulars Rs. Rs.PurchasesBad DebtsSalesRepairsMiscellaneous ExpensesCoal & FuelSundry DebtorsCommission & SalariesDiscount AllowedTrade CreditorsStock 1st Jan. 2006Plant & MachineryCapital AccountDrawingsLoose ToolsRent ReceivedCash

1,86,8201,960

11,4009,200

10,40093,00013,0008,600

79,60070,000

15,00030,000

800

4,92,400

30,800

2,11,460

3,000


Rent & TaxesCash at BankSalariesWagesDiscount ReceivedBuilding

7,60031,2009,600

63,380

1,00,0003,900

7,41,560 7,41,560

Create Bad Debts Reserve for Rs. 1,200; create 2.5% discount reserve on debetors, Depreciation 5% on plant & machinery, Stock on 31st December 2008 Rs. 33,720, outstanding wages Rs. 120. Charge .5% per annum Interest on capital.

[Ans. G/PRs. 1,85,800, N/P Rs. 1,13,772, B/S Rs. 3,57,725] 28. Prepare Trading, Profit and Loss a/c and Balance Sheet of Anand Prakash as on 31st December 2008

from the following – Particulars Rs. Rs.Capital of AnandDrawingsFreehold BuildingMachineryOpening StockFurniture & FittingsWagesCarriage on PurchasePurchasesGeneral ExpensesRent and TaxAdvertisementBad Debts ReserveSundry DebtorsSundry CreditorsSalaryMortgage on Freehold Building (interest 6% P.A.)SalesSales ReturnCashBank OverdraftInsurance

2,50012,0004,8207,8341,2009,675

95233,4371,766

77010,716

17,860

3,862

683100

326

30,000

500

10,733

5,00061,725

543

1,08,501 1,08501

Adjustments :(a) Closing stock Rs. 8,931(b) Create reserve on debtors at 5%.(c) Depreciation on Machinery at 10% and on furniture & fittings at 5%.(cl) Interest on mortgage has to be paid for a year, but no entry was made in the book.(e) One third of advertisement has to be written off.

[Ans. G/P Rs. 18,075, N/P Rs. 6,544, B/S Rs. 50,620]29. From the following Trial Balance of Om Prakash prepare Final Accounts as on 31st December 2008 :

Particulars Rs. Rs.CapitalPurchases and SalesCashDebtors and CreditorsBad Debts

70,0078,708

21,300300

55,31082,500

20,625


DepreciationFurnitureGeneral ExpensesOutstanding SalaryPlantsBad Debt ProvisionSales ReturnsSalaryOpening Stock

1,8004,500

700

25,000

5053,000

24,600

785

1,200

1,60,420 1,60,420Adjustments :(a) Closing Stock Rs. 21,599.(b) Credit purchases of Rs. 4,200 have not been recorded.(c) Write off Rs. 300 as bad debts and create bad debts reserve Rs. 1,000.(d) Furniture of Rs. 2,000 has wrongly been recorded in purchase book.

[Ans. G/P Rs., 6,787, N/P Rs. 1,687, B/S Rs. 82,707]

30. Prepare trading and Profit/Loss a/c and Balance Sheet from the following as on 31st December 2008–

Particulars Debit Rs.

Particulars Credit Rs.

Closing StockDebtorsPlant & MachineryAdvertisementSalaryDepreciationLand & BuildingTravelling ExpensesCost of Goods SoldCash

2,5002,000

900600200100

3,000250

9,5003,050

CapitalCreditorsReserveSalesOutstanding

5,0001,0001,000

15,000100

22,100 22,100

It was decided that–

(a) Create Bad debt Reserve at 10% on debtors. (b) Transfer Rs. 100 to Staff Bonus Fund, (c) Transfer Rs. 1500 in general reserve.

[Ans. G/P Rs., 5,500, N/P Rs. 2,550, B/S Rs. 11,250]


31. From the following prepare Trading, Profit and Loss A/c and Balance Sheet as on 31st December 2008 :

Particulars Rs. Particulars Rs.Opening StockPurchasesDrawingsTrade ExpensesDebtorsGoodwill

4,0007,0002,000

6006,0001,000

CashFurnitureCapitalCreditorsBills payableSales

1,4005,0007,0001,0009,000

10,000

On 10th December goods worth Rs. 800 was burnt by fire, which was insured for Rs. 1,000 but insurance company accepted claim for Rs. 600. Factory manager is paid commission 10% after charging commission to general manager and general manager gets commission at 25% on Profit, after payment of commission to factory manager. Personal purchases Rs. 200, which have been written in purchases book. Closing stock amounts to Rs. 4,000.


32. From the following figures extracted from the books of Mr. Gunny, you are required to prepare a Trading and Profit and Loss Account for the year ended 31st march 2008 and a Balance Sheet as on that date after making the necessary adjustments:

Rs. Rs.Shri Govind CapitalShri Govind's drawingsPlant and MachineryFreehold propertyPurchasesReturns outwardsSalariesOffice expensesOffice furnitureDiscount A/c (Dr.)Sundry DebtorsLoan to Shri Krishna@ 10% p.a. balanceon 1.4.2005Cash at BankSales

4,57,60026,400

1,98,0001,32,0002,20,000

2,20026,4005,500

11,0002,640

58,520

88,00058,520

4,62,880

Bills payableStock 1.4.2005WagesSundry CreditorsPostage and TelkegramsInsuranceGas and FuelBad DebtsOffice RentFreightLoose ToolsFactory LightingProvision for Doubtful DebtsInterest on loan to Shri KrishnaCash in hand

11,00077,00070,40088,0003,0803,5205,9401,3205,720

19,8004,4002,2001,7602,2005,280

Adjustments :(a) Stock 31st March 2008 was at Rs. 1,45,200.(b) A new machine was installed during the year costing Rs. 30,800 but it was not recorded in the books as no

payment was made for it. Wages Rs. 2,200 paid for its erection have been debited to wages account.(c) Depreciate plant and machinery by 33–1/3%, Furniture by 10%, Freehold property by 5%.(d) Loose tools were valued at Rs. 3,520 on 31.3.2008. (e) Of the Sundry debtors Rs. 1,320 are bad and should be written off. (f) Maintain a provision of 5% on Sundry Debtors for doubtful debts. (g) The manager is entitled to a Commission of 10% of the net profits after charging such commission.

[Ans. G/P Rs. 2,17,140, N/P Rs. 81,600, Total of B/S Rs. 6,50,760] 33. The following is the trial balance of Mr. Rain at 31st March 2008 and it is a desired to prepare final

accounts showing the results of the transactions of the year :

Particulars Dr. Rs. Cr. Rs.


Capital Account/Drawing Plant and Machinery Officer Furniture Stock 1 April 2007 Motor Van Sundry Debtors/Creditors Cash in hand Balance at Bank Wages—FactoryOffice Purchases/Sales Bills Receivable/Bills Payable ReturnsProvision for Doubtful DebtsRentLightingTelephoneInsuranceAdvertisementGeneral expensesBad debtsDiscount

12,000 1,02,000

5,200 96,000 24,00090,000

800 13,000

3,00,000 28,000

4,27,000 14,400 18,600

––12,000 1,600 2,700

600 12,700 2,000 5,000

13,000

82,000––––––––

1,04,000––––––––

9,60,000 11,200 11,000 5,000

––––––––––––––

7,40011,80,600 11,80,600

Adjustments

(a) Stock 31st March 2008 Rs. 1,04,000. (b) Rent due but not paid (31st March 2008 Rs. 4,000). (c) Lighting due but not paid Rs. 600. (d) Insurance paid in advance Rs. 200. (e) Depreciation to be written off Plant & Machinery @ 33–1/3%, Office Furniture @ 10%, Motor Van @ 33–

1/3%. (f) The provision for doubtful debts has to be increased to Rs. 6,000. (g) Discounts at 2–1/2% (two and half per cent) on debtors and creditors are to be provided.

[Ans. G/P Rs., 2,33,400, N/P Rs. 1,15,780, Total of B/S Rs. 3,02,980] 34. From the following balance taken from the Ledger of Mr. Kite on 31st March 2008 prepare the

Trading and Profit and Loss A/c for the year ended 31st March 2008 and the Balance Sheet as at 31st March 2008.

Rs. Rs.Sundry CreditorsBuildingsIncome TaxLoose ToolsCash at BankSundry ExpensesBank Interest (Cr.)PurchasesWagesCarriage InwardsSalesMotor VanCash in Hand

38,00030,0002,0502,000

32,4003,980

1503,14,000

20,0002,240

3,70,00025,000

670

Bad DebtsLoan from RamSundry DebtorsInvestmentProvision for Doubtful DebtsRent & RatesFurnitureStock (1.4.2008)CapitalDiscount allowedDividends receivedDrawingsBills Payable

2005,000

19,00013,0003,2001,7006,000

54,78094,7801,2601,0704,000

20,000Adjustments:


(a) Write off further Rs. 600 as bad out of Sundry Debtors and create a provision for Doubtful Debts @ 20% on Debtors.

(b) Dividends accrued and due on investments is Rs. 270, Rates paid in advance Rs. 200, Wages owing Rs. 900.

(c) On 31st March 2008 stock was valued at Rs. 30,000 and Loose Tools were valued at Rs. 1,600.(d) Write off 5 per cent for depreciation on Buildings and 40 per cent on Motor Van.(e) Provide for interest at 12 per cent per annum due on Loan taken on 1.6.2007. (f) Income tax paid has to be treated as Drawings.

[Ans. G/PRs. 8,160, N/L Rs. 10,770, Total of B/S Rs. 1,42,360]

35. From the following Trial Balance of Mr. Moon, prepare Trading and Profit and Loss Accounts for the ended 31st March 2008 and a Balance Sheet as on that date, after giving effect to the adjustments :

Debit Balances (Dr.) Rs. Credit Balances (Cr.) Rs.DrawingsOpening StockReturn InwardsCarriage InwardsDeposits with Mr.Y(Interest Free)Carriage OutwardsLoan to Mr. Z @ 5% given on 1.4.2007RentPurchasesDebtorsGoodwillAdvertisement ExpensesBad DebtsPatents and Trade MarksCash in handDiscount AllowedWagesPlant and Machinery(Purchased on 1.4.2007)

32,5001,74,450

5,54012,40013,750

7,25010,0008,200

11,29,70040,00017,3009,5404,0005,000

6203,3007,540

30,000

CapitalRent OutstandingReturns OutwardCreditorsProvision for Doubtful debts

SalesInterest on Loan

1,10,0001,3008,400

30,00012,000

12,79,140250

15,11,090 15,11,090

Adjustments :(a) Increase Bad Debts by Rs. 6,000. Make Provision for Doubtful Debts @ 10% and Provision for Discount

on Debtors @ 5%.(b) The value of the Closing Stock is Rs. 1,87,920.(c) Wages include Rs. 2,000 paid for erection of Machinery on 1.4.2007.(d) Provide depreciation on Machinery @ 10% p. a.

[Ans. G/PRs. 1,47,830, N/P Rs. 1,13,910, Total of B/S Rs. 2,92,710] 36. The following Trial Balance was extracted from the books of Mr. Selfish as on 31st March 2008–

Particulars Dr. Rs. Particulars Cr. Rs.Plant and MachineryManufacturing wagesSalariesFurnitureFreight on purchaseFreight on sales

2,00,0003,45,0001,58,5001,00,000

18,60021,400

Capital AccountSundry CreditorsBank LoanPurchase returnsSalesProvision for Doubtful debts

8,00,0004,45,0001,50,000

17,40025,08,500

20,000


BuildingsManufacturing expensesInsurance and taxGoodwillGeneral expensesFactory fuel and powerSundry debtorsFactory lightingStock (31st March 2007)Motor carPurchasesSales returnsBad DebtsInterests and bank ChargesCash at BankCash in hand

2,40,00095,00042,500

2,50,00082,00012,800

7,82,0009,500

3,42,0001,20,00010,20,00

031,00014,0004,000

42,00011,200

39,41,500

39,41,500

Required : Prepare the Trading and Profit and Loss Accounts for the year ended 31st March 2008 and Balance Sheet

as on that date taking into considration the following information :

(a) Stock in hand on 31st March 2008 was valued at Rs. 3,05,000(b) Depreciate Plant and Machinery by 10% p.a., Furniture by 5% p.a. and Motor car by Rs. 10,000.(c) Create provision for doubtful debts at 5% on Sundry Debtors.(d) A commission of 1% on the gross profit is to be provided to Works Manager.(e) General manager is to be allowed a commission @ 2% on net profit after charging Work Manager's and

before charging General Manager's Commission.

[Ans. G/P. Rs. 9,57,000, N/P. Rs. 5,59,510, Total of B/S Rs. 19,76,100]

37. On 31st March 2008 the following Trial Balance was extracted from the books of Mr. Ghayal.

Particulars Rs. Particulars Rs.Dr. BalancesDrawingsSundry DebtorsInterest on LoanCash in handStock on 1st April 2007Motor VehiclesCash at BankLand and BuildingsBad DebtsPurchasesSales ReturnsCarriage OutwardCarriage InwardSalaries

30,0002,01,000

2,85020,50068,390

1,00,00035,550

1,20,0005,250

6,64,58078,21024,19029,29090,970

Rates, Taxes and InsuranceAdvertisingGeneral ExpensesBills ReceivableCr. Balances :CapitalSundry CreditorsLoan on MortgageProvision for Doubtful DebtsSalesPurchases ReturnsDiscountsBills PayableRent Received

28,91032,64034,89068,820

2,80,0001,04,010

95,0007,100

11,02,43013,4605,400

26,1402,500

Required :Prepare Trading and Profit and Loss Account for the year ended 31st March 2008 and Balance Sheet as on

that date, after making adjustments for the following matters :(a) Depreciate Land and Buildings at 10 per cent and Motor Vehicles at 20 per cent;(b) Interest on Loan at 6 per cent annum is unpaid for six months.


(c) Goods costing Rs 5,000 were sent to a customer on a sale or return for R 6,000 on 30th March 2008 and bad been recorded in the books as actual sales.

(d) Salaries amounting to Rs 7,500 and rates amounting to Rs 3,500 are outstanding.(e) Prepaid Insurance amounted to Rs 1,500.(F) The provision for Doubtful Debts is to be maintained at 5 per cent on Sundry Debtors.(g) Provide for Manager's Commission at 10% on net profits after charging such (h) Stock in hand on 31st March 2008, was valued at Rs. 62,500.

[Ans. G/P. Rs. 3,36,920, N/P Rs. 79,200, Total of B/S Rs.]38. The Trial Balance of Mr. Sun as on 31st March 2008 was as follows:

Particulars Rs. Rs.Purchases/SalesProvision for Doubtful debtsSundry Debtors/Sundry CreditorsBills PayableOpening StockWagesSalariesFurniturePostagePower and fuelTrade expensesBad debtsLoan to Ram @ 10% (Dec. 1, 2007) Cash in hand and at Bank Trade expenses accrued, not paid Drawings A/c Capital A/c Outstanding Wages

16,25,050––

5,02,000––

2,67,250 2,31,370

55,750 72,500 42,260 13,500 58,310 5,250

30,000 1,00,000

––44,250

––

25,24,000 52,000

3,05,260 39,500

––––––––––––––––––––

7,000 1,00,000

20,000 30,47,760 30,47,760

Required : Prepare Trading and Profit and Loss Account for the year 31 March 2008 and the Balance Sheet as on that

date after taking into consideration the following information :

(a) Depreciation on furniture is to be charged @ 10%.(b) Sundry debtors include an item of Rs 5,000 due. from a. customer who has become insolvent.(c) Provision lor Doubtful debts is to be maintained @ 5% on sundry debtors.(d) Goods of the value of Rs 15,000 have been destroyed by fire and insurance company' admitted(e) Stock on 31st March 2008, was Rs 12,500.

[Ans. G/PRs. 5,27,330, N/PRs. 3,76,660, Total of B/S Rs. 8,03,900]

39. From the following balances for the year ending 31st March 2008 and additional information prepare Trading and Profit and Loss Account and the Balance Sheet of Messers SM & Sons :

Particulars Rs. Particulars Rs.CapitalPurchasesSalesPurchases returnBuildingAccumulated provision fordepreciation on buildingOpening StockSundry Debtors

8,00,0008,20,000

11,00,00010,000

4,50,000

80,0001,50,0002,01,000

Accumulated deprecitionon furnitureWagesRentSales Tax PayableCommission (Cr.)InsuranceSalariesBad Debts

20,00020,00051,000

1,00,00015,0006,000

1,40,0002,000


Sundry CreditorsFurniture

80,00070,000

Provision for Doubtful DebtsCash in handCash in Bank

5,00050,000

2,50,000

Additional Information :(a) Closing Stock was valued at Rs. 2,00,000.(b) Provide depreciation according to straight line on building @ 5% p.a. and furniture @ 10% p.a.(c) Outstanding Salaries Rs. 10,000.(d) Further bad debts Rs. 1,000.(e) Make provision for doubtful debts @ 3%.[Ans. G/P Rs., 3,20,000, N/P Rs. 94,500, B/S Rs. 10,84,500] [Hint. Sales Tax Payable is a Liability]

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