Preparation of Final Accounts from Incomplete Records (single entry system)

Table of contents

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Preparation of Financial Statements from Incomplete Records

Transactions are entered into by every organisation, and it is the primary function of accounting is to record the transactions in the books of accounts. This should be recorded in the books on a systematic and scientific manner following the double entry system. However, in many cases double entry recording is not followed. Such entities usually include the small-time traders such as grocery stores, kirana shops etc. The small entities record the transactions on a casual and sketchy manner, and thus results in incomplete recording of the transactions. This incomplete manner of recording the transactions is commonly referred to as single entry system of account keeping.

Single Entry System

Single entry system is an approach of recording transactions which does not follow the principles of double entry book-keeping system. Under this system, some transactions may be fully recorded, while some transactions get partially recorded and some other transactions may be entirely omitted to be recorded in the books of accounts. Thus, the term ‘single entry’ is a misnomer. It would rightly be referred to as incomplete records.

Features of Single Entry System

The salient features of single entry system are as under:

• It is an unscientific approach of recording transactions.
• It is a mixture of no entry, single entry and double entry.
• This system is usually followed by the small businesses, semi-skilled service providers and workers etc. who cannot maintain books under double entry system.
• There is no uniformity in recording of transactions.
• Usually, only the cash and personal accounts are recorded.
• In this system, the original vouchers of different transactions are kept for future references, though the relevant accounts are not prepared.

Limitations/ Defects of Single Entry system

Single entry system is a defective approach of recording transactions as it suffers from certain major limitations, which are as under:

1. As principle of double entry is not followed, the trial balance cannot be prepared. Hence, arithmetical accuracy cannot be guaranteed.
2. Profit or loss can be found out only by estimates as nominal accounts are not maintained.
3. It is not possible to make a balance sheet in absence of real accounts. 
4. It is very difficult to detect frauds or errors.
5. Valuation of assets and liabilities is not proper.
6. The external agencies like banks cannot use financial information. A bank cannot decide whether to lend money or not.
7. (vii) It is quite likely that the business and personal transactions of the proprietor get mixed.

Difference between single entry system and double entry system

The distinctions between double entry system and single entry system are as follows:

1. Single entry is a casual and unscientific approach of recording transactions, while double entry is the scientific approach of record keeping.
2. In double entry system, both the aspects (debit and credit) of all the transactions are recorded. But in single entry system, there is no record of some transactions. In this system, some transactions are recorded only in one of their aspects whereas some other transactions are recorded in both of their aspects.
3. Under double entry system, various subsidiary books such as sales book, purchases book etc. are maintained. Under single entry system, no such subsidiary books except cash book which is also considered as a part of ledger is maintained.
4. In the case of double entry system, there is a ledger which contains personal, real and nominal accounts. But in single entry system, the ledger contains cash account and some personal accounts only.
5. Under double entry system, preparation of trial balance is possible, whereas it is not possible to prepare a trial balance in single entry system. Hence accuracy of work is uncertain.
6. Under double entry system, Trading A/c, Profit & Loss A/c and the Balance Sheet are prepared in a scientific manner. But under single entry system, only a rough estimate of Profit or Loss is made and a Statement of Affairs is prepared which resembles a Balance Sheet in appearance but which does not present an accurate picture of the financial position of the business.
7. The possibility of fraud and misappropriation is greater under single entry system as compared to double entry system.
8. Double entry system of book-keeping is usually followed by most of the concerns, while single entry is followed by the small businesses, sole traders, partnership firms and professionals who cannot afford to maintain the formal books of accounts.

Accounting from Incomplete Records & Preparation of Final Accounts

The businesses which does not follow the formal double entry system of accounting do not have any uniformity in their practices. They record the transactions as per their own wish and requirements. Such entities do not maintain the regular books of accounts, and fail to draft the trial balance and the financial statements.

However, such smaller entities are also interested in determining the operating results and financial position at the end of every accounting period. It may not be possible for such entities to determine the correct operating results and reflect the true financial position at the end of an accounting period from such partial and incomplete records.

There are two recognised approaches of preparing the financial statements from such incomplete records. They are:

1. Balance sheet approach/ net worth approach/ comparison approach
2. Conversion approach.

Approach 1: Balance Sheet Approach/ Net Worth Approach/ Comparison Approach

Under this approach, the operating result of an entity is determined by comparing the net worth capital of the entity at two different points of time. As per this approach, the balances of capital/ net worth are determined by preparing the statement of affairs Using these capitals, the operating result is determined by comparing the amounts of capital/ net worth at two points of time. Hence, this approach is known as the balance sheet approach/ net worth approach/ comparison approach.

Under this approach, three statements are prepared:

• Statement of affairs: It is a statement of financial position that is prepared with the balances of various assets and liabilities to ascertain the capital/ net worth at the beginning and end of the accounting period.
• Statement of profit & loss: This statement is prepared for determination of the profit/ loss) of the entity. Firstly, the trading profit/loss is determined by comparing the capital / net worth as at the beginning and end of the accounting period. Thereafter, effect is to be given for the necessary adjustments for determination of the net profit/ loss for the accounting period.
• Final statement of affairs: This statement is to be prepared at the end of the accounting period with the closing balances of the assets and liabilities after providing for the necessary adjustments viz. Depreciation, provision for bad & doubtful debts etc. It is also known as the revised statement of affairs.

Steps for preparation of Final Accounts under ‘Balance Sheet/ Net Worth/ Comparison Approach’

Step 1: Preparation of ‘statement of affairs’ as at the beginning & end of the accounting period for determination of the amount of the opening and closing capital/ net worth.

Step 2: Preparation of ‘statement of profit & loss’ for determination of trading profit/ loss, and thereafter, the net profit/ loss.

Statement of profit and loss for the year ended

Particulars	(₹)	(₹)
Capital (at the end)	xx
Less :    Capital (at the beginning)	xx	xx
Add : Drawings		xx
		xx
Less : Further Capital Introduced (if any)		xx
Profit/Loss		xx
Less : Adjustments, if any say, Bad debts,
Depreciation etc.		xx
Net Profit/Loss for the Period		xx
Less: Appropriation Items :
(i) Interest on Partner’s Capital	xx
(ii) Partners’ Salaries etc.	xx	xx
Divisible? Profit		xx

Step 3: Preparation of ‘Final Statement of Affairs’ as at the end of the accounting period for disclosing the financial position of the entity.

Approach 2: Conversion Approach

An entity that does not maintain its books under double entry system records only some of the total transactions that it enters into. In such case, it would not be possible to ascertain the profit/ loss and reflect its financial position through the preparation of financial statements directly as the ledger balances are not available. However, such organisation’s financial statements may be prepared from such recorded data by recording them in relevant accounts under the double entry system of book keeping, and there after determining the ‘missing information’. Usually, the regular accounts like Debtors A/c, Creditors A/c, Cash book, Assets A/c etc. are prepared with the data available and relevant ledger balances are calculated.There is no fixed approach towards determination of such information, and the steps to be taken depends on the data available in each case. Since, as per this approach the data kept under single entry system are converted to double entry system, it is referred to as ‘Conversion Approach’.

Difference between ‘Statement of Affairs’ & ‘Balance Sheet’

Statement of Affairs	Balance Sheet
It is prepared by an entity following single entry system.	It is prepared by an entity following double entry system.
It is prepared for determining the Capital or Net Worth at two different points of time.	It is prepared for disclosing the financial position of an entity.
It reflects the estimated financial position.	It reflects the true financial position.
The information contained in the Statement of Affairs is comparatively less reliable.	The information contained in the Balance Sheet is more reliable.
The balance of Capital account is taken as the ‘excess of assets over liabilities’.	The balance of Capital account is available from regular accounting records.
It has no statutory format	Balance Sheet format is specified under various statutes viz. Companies Act, Banking Regulations Act etc.

Difference between ‘Statement of Profit & Loss’ & ‘Profit & Loss Account’

Statement of Profit & Loss	Statement of Profit & Loss
It is prepared by an entity following single entry system.	It is prepared by an entity following double entry system.
Profit/ loss is determined by comparing the capital/ net worth at two points of time.	Profit/ loss is determined by matching expenses/ losses against incomes / gains.
It reflects the estimated profit/ loss of an entity.	It reflects the true profit/ loss of an entity.
All items of expenses, losses, incomes and gains do not get properly disclosed.	All expenses, losses, incomes and gains get properly disclosed.
Information provided by the Statement of Profit & Loss is comparatively less reliable.	Information provided by the Profit & Loss Account is reliable.

 Illustration 23

Mr. Prakash keeps his accounts on single entry system. He has given following information about his assets and liabilities.

Item	On 31-3-20X1	On 31-3-20X2
Creditors	55,200	58,500
Cash at bank	600	1500
Bills payable	26,400	28,200
Bills receivables	16,200	18,300
Debtors	45,600	56,000
Stock in trade	31,000	47,300
Machinery	66,200	78,000
Computer	18,000	17,000

During the year, Prakash brought in additional Rs. 7,500 cash in business. He withdrew goods of Rs.2,100 and cash of Rs. 7,200 for his personal use. Interest on opening capital is to be given at 5% and interest on drawing is to be charged at 10%.

Prepare statement of profit or loss for the year ended 31-03-20X2.

Solution:

Here the information about opening and closing capital is not given. Both these figures can be computed based on statement of affairs as on 31-03-20X1 and 31-03-20X2. These can be worked out on the basis of information given. The balancing figures in both statements will represent capital figures as on those two days.

These figures will then be used together with the information to find out profit or loss. The interest on capital will increase it while, interest on drawings will result in decrease in capital. This will be included in the statement of profit or loss for the year ended 31-03-20X2.

Statement of Affairs as on 31-3-20X2

Liabilities	Amount (Rs.)	Assets	Amount (Rs.)
Creditors	55,200	Cash at Bank	600
Bills payable	26,400	Bills receivables	16,200
Capital (balancing figure)	96,000	Debtors	45,600
		Stock in trade	31,000
		Machinery	66,200
		Computers	18,000
	1,77,600		1,77,600

Statement of Affairs as on 31-3-20X2

Liabilities	Amount (Rs.)	Assets	Amount (Rs.)
Creditors	58,500	Cash at Bank	1,500
Bills payable	28,200	Bills receivables	18,300
Capital (balancing figure)	1,31,400	Debtors	56,000
		Stock in trade	47,300
		Machinery	78,000
		Computers	17,000
	2,18,100		2,18,100

Statement of profit or loss for the year ended 31-03-20X2

Particulars	Amount (rS.)
Closing Capital as per statement of affairs as on (31-3-20X1)	1,31,400
Less: Opening Capital as per statement of affairs as on (31-3-2013)	(96,000)
Increase or decrease in capital	35,400
Add: Drawings (goods + cash)	9,300
Add: Interest on drawings @ 10%on rS. 9,300	930
Less: Interest on opening capital @ 5% (96,000 * 5%)	(4,800)
Less: Fresh capital introduced	7,500
Net Profit or loss for the year	33,330

 Illustration 24

Mr. Kanan is running a business of readymade garments. He does not maintain his books of accounts under double entry system. While assessing the income of Mr. Kanan for the financial year 2020-21, Income Tax Officer feels that he has not disclosed the full income earned by him from his business. He provides you the following information:

On 31st March, 2020	(₹)
Sundry Assets	16,65,000
Liabilities	4,13,000
On 31st March, 2021
Sundry Assets	28,40,000
Liabilities	5,80,000
Mr. Kanan’s monthly drawings for the year 2020-21	32,000
Income declared to the Income Tax Office	9,12,000

During the year 2020-21, one life insurance policy of Mr. Kanan was matured and amount received ₹50,000 was retained in the business. State whether the Income Tax Officer’s contention is correct. Explain by giving necessary working.

Solution:

Determination of Capital balance of Mr. Karan on 31.03.2020 and on 31.03.2021

Particulars	31.03.2020 (₹)	31.03.2021 (₹)
Assets	16,65,000	28,40,000
Less: Liabilities	4,13,000	5,80,000
Capital	12,52,000	22,60,000

Determination of Profit by applying the method of the Capital Comparison

Particulars	(₹)
Capital Balance as on 31.3.2021	22,60,000
Less. Fresh Capital Introduces(matured life insurance policy amount)	(50,000)
	22,10,000
Add: Drawings ( ₹ 32,000 × 12)	3,84,000
	25,94,000
Less: Capital Balance as on 01.04.2020	(12,52,000)
Profit	13,42,000
Income Declared	9,12,000
Suppressed Income	4,30,000

The Income Tax Officer’s contention that Mr. Kanan has not declared his true income is correct. Mr. Kanan’s true income is in excess of the disclosed income by ₹ 4,30,000. 

 Illustration 25

The following information is available from Mrs. Sashi who maintains books of accounts on single entry system.

Particulars	01.04.2021 (₹)	31.03.2022 (₹)
Cash and Bank	20,000	21,000
Sundry Debtors	17,000	25,000
Stock	40,000	60,000
Furniture	29,000	29,000
Creditors	32,000	22,000
10 % Loan from Mrs. Sashi	30,000	30,000

Mrs. Sashi withdrew ₹ 5,000 from the business every month for meeting her household expenses. During the year She sold investments held by her privately for ₹ 35,000 and invested the amount in her business. At the end of the year 2021-2022, it was found that full years interest t on loan from Mrs. Sashi had not been paid. Depreciation @ 10% p.a was to be provided on furniture for the full year. Shop assistant was to be given a share of 5% on the profits ascertained before charging such share. Calculate profit earned during the year ended 31.03.2022 by Mrs. Sashi.

Solution:

Statement of Affairs

Particulars	(₹)	(₹)	Particulars	(₹)	(₹)
Capital (opening & closing)	44,000	83,000	Cash at Bank	20,000	21,000
(Bal. fig.)			Debtors	17,000	25,000
Creditors	32,000	22,000	Stock	40,000	60,000
Loan from Mrs. Sashi	30,000	30,000	Furniture	29,000	29,000
	1,06,000	1,35,000		1,06,000	1,35,000

Statement of Profit & Loss for the year ended 31.03.2022

Dr.					Cr.
Particulars	(₹)	(₹)	Particulars	(₹)	(₹)
Opening Capital		44,000	Closing Capital		83,000
Further Introduction of Capital		35,000	Drawings (5,000 × 12)		60,000
Trading Profit		64,000
		1,43,000			1,43,000
Depreciation(29,000 × 10%)		2,900	Trading Profit		64,000
Interest on Loan (30,000 ×  10%)		3,000
Net Profit		58,100
		64,000			64,000
Commission to Shop Assistant			Net Profit		58,100
(58,100 × 5%)		2,905
Net Profit		55,195
		58,100			58,100

Statement of Affairs for the year ended 31.03.2022

Particulars	(₹)	Particulars	(₹)
Capital	44,000	Cash at Bank	21,000
Further Capital Introduced	35,000	Debtors	25,000
Drawings	(60,000)	Stock	60,0000
Net profit	55,195	Furniture (₹29,000 – ₹2,900)	26,100
Creditors	22,000
Interest on Loan	3,000
Commission to Assistant	2,905
Loan from Mrs. Sashi	30,000
	1,32,100		1,32,100

Illustration 26

Ram Prakash, a small trader does not keep his books following Double Entry System. From the following information provided by him, prepare Trading and Profit & Loss Account for the year ended 31st March, 2022 and Balance Sheet as at that date:

Particulars	31.03.2021 (₹)	31.03.2022 (₹)
Furniture	1,00,000	1,20,000
Stock of Goods-in-Trade	60,0000	20,000
Sundry Debtors	1,20,000	1,40,000
Prepaid Expenses	-	4,000
Sundry Creditors	40,000	?
Unpaid Expenses	12,000	20,000
Cash	22,000	6000

 Receipts and Payments during the year were as follows:

Particulars	(₹)
Receipts from Debtors	4,20,000
Paid to Creditors	2,00,000
Transportation	40,000
Drawings	1,20,000
Sundry Expenses	1,40,000
Furniture Purchased	20,000

Other Information: There were considerable amount of Cash Sales. Credit Purchases during the year amounted to ₹ 2,30,000. Provide a provision for Doubtful Debts to the extent of 10% on Debtors

Solution:

Ram Prakash Trading and Profit and Loss Account for the year ended 31st March, 2022

Dr.				Cr.
Particulars		₹	Particulars	₹
To, Opening Stock		60,000	By, Sales:
To, Purchases		2,30,000	Credit (WN 1)	4,40,000
To, Transportation		40,000	Cash (WN 3)	84,000
To, Gross Profit c/d		2,14,000	By, Closing Stock	20,000
		5,44,000		5,44,000
To, Sundry Exp.	1,40,000
Less: Unpaid exp. For 2021	12,000
	1,28,000		By, Gross Profit b/d	2,14,000
Less: Prepaid Exp. 2022	4000
	1,24,000
	20,000	1,44,000
Add: Unpaid Exp. For 2022
To, Provision for Doubtful Debts.		14,000
To, Net Profit transferred to Capital A/c		56,000
		2,14,000		2,14,000

Balance Sheet as at 31st March, 2022

Liabilities	(₹)	(₹)	Assets	(₹)	(₹)
Creditors (WN 2)		70,000	Cash and balance		6,000
Unpaid Expenses		20,000	Debtors	1,40,000
Capital (WN 4)	2,50,000		Less: Provision for	14,000	1,26,000
Add: Net Profit	56,000		Doubtful Debts		20,000
	3,06,000		Closing Stock		4,000
Less: Drawing	(120,000)	1,86,000	Prepaid Expenses
			Furniture	1,00,000
			Add: Additions	20,000	1,20,000
		2,76,000			2,76,000

Working notes:

1. Calculation of Credit Sales:

Total Debtors Account

Particulars	(₹)	Particulars	(₹)
To, Balance b/d	1,20,000	By, Cash/Bank A/c	4,20,000
To, Sales A/c — credit (Bal. fig.)	4,40,000	By, Balance c/d	1,40,000
	5,60,000		5,60,000

2. Calculation of Closing Creditors Balance:

Total Creditors Account

Dr.			Cr.
Particulars	(₹)	Particulars	(₹)
To, Cash/Bank A/c	2,00,000	By, Balance c/d	40,000
To, Balance c/d (b/f)	70,000	By, Purchase A/c	2,30,000
		(Credit Purchases)
	2,70,000		2,70,000

3. Calculation of Cash Sales:

Cash Book

Dr.			Cr.
Particulars	(₹)	Particulars	(₹)
To, Balance b/d	22,000	By, Total creditors A/c	2,00,000
To, Total Debtors A/c	4,20,000	By, Drawings A/c	1,20,000
To, Sales A/c (b/f)	84,000	By, Sundry Exp. A/c	1,40,000
		By, Transportation A/c	40,000
		By, Furniture A/c	20,000
		By, Balance c/d	6,000
	5,26,000		5,26,000

4. Calculation of opening capital:

Statement of Affairs as at 31st March, 2021 

Particulars	(₹)	Particulars	(₹)
Creditors	40,000	Furniture A/c	1,00,000
Unpaid Expenses	40,000	Stock	60,000
Capital (B/F)	2,50,000	Debtors	1,20,000
		Cash in Hand	22,000
	3,02,000		3,02,000

Illustration 27

The following is the Balance Sheet of Chirag as on 31st March, 2021:

Balance Sheet as on April 1, 2021

Liabilities	(₹)	Assets	(₹)
Capital Account	48,000	Building	32,500
Loan	15,000	Furniture	5,000
Creditor	31,000	Motor Car	9,000
		Stock	20,000
		Debtors	17,000
		Cash in Hand	2,000
		Cash at Bank	8,500
	94,000		94,000

A riot occurred on the night of 31st March, 2022 in which all books and records were lost. The cashier had absconded with the available cash. He gives you the following information:

(a) His sales for the year ended 31st March, 2022 were 20% higher than the previous year’s. He always sells his goods at cost plus 25%; 20% of the total sales for the year ended 31st March, 2022 were for cash. There were no cash purchases.

(b) On 1st April, 2021 the stock level was raised to ₹ 30,000 and stock was maintained at this new level all throughout the year.

(c) Collection from debtors amounted to ₹ 1,40,000 of which ₹ 35,000 was received in cash, business expenses amounted to ₹ 20,000 of which ₹ 5,000 was outstanding on 31st March, 2022 and ₹ 6,000 was paid by cheques.

(d) Analysis of the Pass Book revealed the Payment to Creditors ₹ 1,37,500, Personal Drawing ₹ 7,500, Cash deposited in Bank ₹ 71,500 and Cash withdrawn from Bank ₹ 12,000.

(e) Gross Profit as per last year’s audited accounts was ₹ 30,000.

(f) Provide depreciation on Building and Furniture at 5% and Motor Car at 20%.

(g) The amount defalcated by the cashier may be treated as recoverable from him.

You are required to prepare the Trading and Profit and Loss Account for the year ended 31st March, 2022 and Balance Sheet as on that date. 

Solution:

Chirag Trading and Profit and Loss Account For the year ending on 31st March, 2022

Particulars	₹	₹	Particulars	₹
To, Opening Stock		20,000	By Sales	1,80,000
To, Purchase (Bal. fig.)		1,54,000	By Closing stock	30,000
To, Gross Profit old (@ 20% on sales)		36,000
		2,10,000		2,10,000
To, Sundry Business Expenses		20,000	By, Gross Profit b/d	36,000
To, Depreciation:
on Building	1,625
on Furniture	250
on Motor	1,800	3,675
To, Net Profit transferred to Capital A/c.		12,325
		36,000		36,000

Balance Sheet as at 31st March, 2022 

Liabilities	(₹)	(₹)	Assets	(₹)	(₹)
Capital Account:			Building	32,500
Opening Balance	48,000		Less: Depreciation	(1,625)	30,875
Add: Net Profit	12,325		Furniture	5,000
	60,325		Less: Depreciation	(250)	4,750
Less: Drawings	(7,500)	52,825	Motor Car	9,000
Loan		15,000	Less: Depreciation	(1,800)	7,200
Sundry Creditors [W.N. 2]		47,500	Stock in Trade		30,000
Outstanding expenses		5,000	Sundry Debtors [W.N. 1]		21,000
			Cash at Bank [W.N. 3]		22,000
			Sundry Advances [W.N. 3]		4,500
			(Amount recoverable from  cashier)
		1,20,325			1,20,325

Working Notes:

1.

Total Debtors Account

Dr.			Cr.
Particulars	(₹)	Particulars	(₹)
To, Balance b/d	17,000	By, Bank (₹1,40,000 – ₹35,000)	1,05,000
To, Sales (80% of ₹ 1,80,000)	1,44,000	By, Cash A/c	35,000
		By, Balance c/d	21,000
	1,61,000		1,61,000

2.

Total Creditors Account 

Dr.			Cr.
Particulars	(₹)	Particulars	(₹)
To Bank	1,37,500	By Balance b/d	31,000
To Balance c/d	47,500	By Purchases	1,54,000
	1,85,000		1,85,000

3.

Cash Book

Dr.					Cr.
Particulars	Cash (₹)	Bank (₹)	Particulars	Cash (₹)	Bank (₹)
To, Balance b/d	2,000	8,500	By, Business Expenses	9,000	6,000
To, Sales	36,000		By, Drawings		7,500
To, Sundry Debtors	35,000	1,05,000	By, Sundry Creditors		1,37,500
To, Cash (Contra)		71,500	By, Bank (Contra)	71,500
To, Bank (Contra)	12,000		By, Cash (Contra)		12,000
			By, Amount Recoverable	4,500
			from Cashier (Bal. fig.)		22,000
			By, Balance c/d (Bal. fig.)
	85,000	1,85,000		85,000	1,85,000

(iv) Last years Total Sales = Gross Profit × 100/20 = ₹ 30,000 × 100/20 = ₹ 1,50,000

(v) Current year’s Total Sales = ₹ 1,50,000 + 20% of ₹ 1,50,000 = ₹ 1,80,000

(vi) Current year’s Credit Sales = ₹ 1,80,000 × 80% = ₹ 1,44,000

(vii) Cost of Goods Sold = Sales – G.P. = ₹ 1,80,000 – 36,000 = ₹ 1,44,000

(viii) Purchases = Cost of Goods Sold + Closing Stock – Opening Stock

= ₹ 1,44,000 + ₹ 30,000 – ₹ 20,000 = ₹ 1,54,000. 

 Illustration 28

The Statement of affairs of Mr. R on Saturday, the 31st December 2021 was as follows: 

Particulars	(₹)	Particulars	(₹)
Capital	50,000	Fixed Assets	30,000
Sundry Creditors	10,000	Stock	10,000
Liability for Expenses	1,000	Debtors	15,000
		Bank	5,000
		Cash	1,000
	61,000		61,000

Mr. R did not maintain has books on the double entry system. But he carefully follows the following system:

(a) Every week he draws ₹200.

(b) After meeting his weekly sundry expenses (₹ 100 on average) and his drawings, the balance of weekly collection is banked at the commencement of. the next week.

(c) No cash purchase is made and creditors are paid by cheques.

(d) Sales are at fixed price which include 20% profit on sales.

(e) Credit sales are few and are noted in a diary. Payments are received in cheques only from such parties.

(f) Expenses other, than sundries and other special drawings are made in. cheques.

(g) All unpaid bills are kept in a file carefully.

The following are his bank transactions for 13 weeks: 

Particulars	(₹)	Particulars	(₹)
Balance on Jan. 1	5,000	Creditors Paid	40,000
Cheques Deposited	2,000	Rent Paid	600
Cash Deposited	42,000	Expenses (other than Sundry Expenses)	3,000
		Balance on April 1.	5,400
	49,000		49,000

After 13 weeks on 1st April (Monday) the entire cash was missing when it was to be deposited in the bank. The following further facts are ascertained:

(a) Stock on that day was valued at ₹ 4,000;

(b) Sundry Debtors amounted to ₹ 20,000 as per diary;

(c) Sundry Creditors were ₹ 8,000 as per unpaid bills file. Find out the amount of cash missing. 

Solution:

Sundry Debtors Account

DR.                                                                                                                                                                                                                                                                                                                                                                                                    CR.

Particulars	(₹)	Particulars	(₹)
To, Balance b/f	15,000	By, Bank A/c	2,000
To, Credit Sales (Bal. fig.) A/c	7,000	By, Balance c/f	20,000
	22,000		22,000

Sundry Creditors Account

DR.                                                                                                                                                                                                                                                                                                                                                                                                    CR.

Particulars	(₹)	Particulars	(₹)
To, Bank A/c	40,000	By, Balance b/f	10,000
To, Balance c/f	8,000	By, Credit Purchases (Bal. fig.)	38,000
	48,000		48,000

Cash Account 

DR.                                                                                                                                                                                                                                                                                                                                                                                                      CR.

Particulars	(₹)	Particulars	(₹)
To, Balance b/f	1,000	By, Drawing: (13 × ₹ 200)	2,600
To, Cash Sales	48,000	By, Sundry Expenses: (13 × ₹ 100)	1,300
		By, Bank A/c	42,000
		By, Balance being cash missing	3,100
	49,000		49,000

Note: Calculation of Cash Sales: 

Particulars	(₹)
Opening Stock	10,000
Add: Purchases	38,000
	48,000
Less: Closing Stock Cost of goods sold,	4,000
	44,000
Add: Gross Profit @ 20% on Sales i.e., 25% on cost	11,000
Total Sales	55,000
Less Credit Sales	7,000
Cash Sales	48,000

 Illustration 29

Mrs. Laxmi, a retail trader needs final accounts for the year ended 31-03-20X2 for the purpose of taking a bank loan. However, she informs you that the principle of double entry had not been followed. With following inputs, prepare a Profit & Loss A/c for the year ended 31-03-20X2 and Balance sheet as on 31-03-20X2. Details of receipts and payments:

(1) Cash deposited in bank ₹ 3,500

(2) Dividend on personal A/c deposited into bank ₹ 250

(3) Tuition fees of Laxmi’s daughter paid by cheque ₹ 4,500

(4) Rent for the year by cheque ₹ 9,000

(5) Cash received from debtors ₹ 52,500

(6) Paid to creditors ₹ 40,025

(7) Salaries & wages paid in cash ₹ 9,000

(8) Transportation in cash ₹ 2,750

(9) Office electricity in cash ₹ 6,600

(10) Electricity (house) in cash ₹ 7,200

(11) General expenses in cash ₹ 890.

Opening and closing balances of assets & liabilities:

Particulars	31-3-20X1	31-3-20X2
Stock	42,500	22,500
Bank	55,500	20,500
Cash	10,850	10,500
Debtors	16,800	14,800
Creditors	15,600	22,800
Investments	15,000	15,000

She also informs you that she draws ₹ 6,000 from bank on monthly basis and some debtors deposit cheques directly in bank.

Solution:

Stock Account

Dr.			Cr.
Particulars	Amount (Rs.)	Particulars	Amount (Rs.)
To Balance b/d	42,500	By Cost of sales (bal. fig)	90,135
To Purchases (credit)	47,225	By Balance c/d	22,500
To Cash (purchases)	22,910
	1,12,635		1,12,635

Bank Account

Dr.			Cr.
Particulars	Amount (Rs.)	Particulars	Amount (Rs.)
To Balance b/d	55,500	By Drawings (tuition fees)	4,500
To Cash A/c	3,500	By Rent	9,000
To Capital (dividend)	250	By Creditors	40,025
To Debtors (balancing figure)	86,775	By Drawings (@ ` 6,000 pm)	72,000
		By Balance c/d	20,500
	1,46,025		1,46,025

Cash Account

Dr.			Cr.
Particulars	Amount (Rs.)	Particulars	Amount (Rs.)
To Balance b/d	10,850	By Bank	3,500
To Debtors	52,500	By Salaries & wages	9,000
		By Transportation	2,750
		By Electricity	6,600
		By Drawings (electricity)	7,200
		By General expenses	890
		By Purchases (balancing figure)	22,910
		By Balance c/d	10,500
	63,350		63,350

Debtors Account

Dr.			Cr.
Particulars	Amount (Rs.)	Particulars	Amount (Rs.)
To Balance b/d	16,800	By Cash	52,500
To Sales (credit Sales) (balancing figure	1,37,275	By Bank	86,775
		By Balance c/d	14,800
	1,54,075		1,54,075

Creditors Account

Dr.			Cr.
Particulars	Amount (Rs.)	Particulars	Amount (Rs.)
To Bank	40,025	By Balance b/d	15,600
To Balance c/d	22,800	By Purchases (credit) (bal. fig.)	47,225
	62,825		62,825

Mrs. Laxmi’s capital Account

Dr.			Cr.
Particulars	Amount (Rs.)	Particulars	Amount (Rs.)
To Drawings (tuition fees)	4,500	By Balance b/d (bal. fig.)	1,25,050
To Drawings (electricity)	7,200	By Bank (dividend )	250
To Drawings (bank)	72,000
To Balance c/d	41,600
	1,25,300		1,25,300

Trading Account

Dr.			Cr.
Particulars	Amount (Rs.)	Particulars	Amount (Rs.)
To Opening stock A/c	42,500	By Sales A/c	1,37,275
To Purchases A/c	70,135	By Closing Stock A/c	22,500
To Gross profit c/d	47,140
	1,59,775		1,59,775

Profit & Loss Account

Dr.			Cr.
Particulars	Amount (Rs.)	Particulars	Amount (Rs.)
To Rent	9,000
To Salary & wages	9,000	By Gross Profit b/d	47,140
To Transportation	2,750
To Electricity	6,600
To General Expenses	890
To Net Profit c/d	18,900
	47,140		47,140

Balance sheet as on 31st March 2013

Dr.			Cr.
Particulars	Amount (Rs.)	Particulars	Amount (Rs.)
Creditors	22,800	Stock	22,500
Capital (balancing figure)	41,600	Bank	20,500
Net profit	18,900	Cash	10,500
		Debtors	14,800
		Investment	15,000
	83,300		83,300

Solved Case

Mr. M. Raja, is a graduate in Sociology who hails from a middle-class family in Madurai, Tamil Nadu. Since his childhood, Raja intended to be a businessman like Mr. P. Nageswar, father of his best friend N. Premnath. Accordingly, he started his personal sole proprietary business trading in coconut oil in the year 2019-20. Mr. Raja, not being very conversant with accounts of the business, approaches you for helping him with the finalisation of  the accounts of the financial year 2021-22. He furnishes you with the following bank summary for the year ended March 31, 2022: 

	(₹)	(₹)
Balance on April 1, 2021		11,000
Add: Deposits
Cash (out of cash sales)	1,25,000
Collection from Credit Customers	3,50,000
Income from personal investments	36,000	5,11,000
		5,22,000
Less: Deductions
Cash withdrawn for personal drawings	20,000
Shop expenses	40,000
Cheques issued to suppliers of:
Goods	3,50,000
Supplies	40,000
Cheques issued for personal purposes	55,000
Bank charges	500	5,05,500
Balance on March 31, 2022		16,500

Mr. Raja informs you that he had the following Assets and Liabilities (in addition to the Bank Balances) on March 31, the extracts of which are as under: 

	2021-22 (₹)	2020-21 (₹)
Assets:
Cash Balance	7,000	4,000
Amounts due from Customers	37,000	27,500
Unsold Inventory at Cost	13,000	10,000
Prepaid Expenses	3,000	2,000
	60,000	43,500
Liabilities :
Creditors for Goods	23,000	28,000
Creditors for Services	2,500	1,500
	25,500	29,500

He also informs you the following:

(a) He uses 75% of cash sale proceeds for making cash purchases; the remaining balance being deposited in Bank.

(b) He had allowed cash discount of ₹ 5,000 to his credit customers for prompt payment; he was allowed cash discount ₹ 7,000 by his suppliers of goods for prompt payment.

(c) Collections from credit customers and payments to suppliers of goods are invariable by crossed cheques.

1. What is the balance of Mr. M. Raja’s capital account as on April 1, 2021?

2. Ascertain the amounts of credit sales and credit purchases made by the business during the year 2021-22.

3. Determine the operating result of the business by preparing the Trading and Profit & Loss account for the year ended March 31, 2022.

4. Draft the Balance Sheet of the business as at March 31, 2022.

Solution:

1. Capital balance on 1.1.2021 is - ₹25,000

Balance Sheet as on 1.1.2021

Liabilities	(₹)	(₹)	Assets	(₹)	(₹)
Capital [Opening Capital: Bal. Fig.]		25,000	Inventory		10,000
Creditors for:			Due from Customers		27,500
Goods		28,000	Prepaid Expenses		2,000
Services		1,500	Bank		11,000
			Cash		4,000
		54,500			54,500

2. Credit Sales is - ₹3,64,500 and Credit Purchase is - ₹3,52,000

Customers Account 

Date	Particulars	(₹)	Date	Particulars	(₹)
	To, Balance b/f	27,500		By, Bank A/c	3,50,000
	To, Sales A/c [Credit Sales: Bal. Fig.]	3,64,500		By, Discount Allowed A/c	5,000
				By, Balance c/f	37,000
		3,92,000			3,92,000

Creditors Account

Date	Particulars	(₹)	Date	Particulars	(₹)
	To, Bank A/c	3,50,000		By, Balance b/f	28,000
	To, Discount Received A/c	7,000		By, Purchases A/c [Credit purchases: Bal. Fig.]	3,52,000
	To, Balance c/f	23,000
		3,80,000			3,80,000

3. Operating result - ₹65,000

Trading and Profit & Loss Accounts

for the year ended Dec. 31, 2022 

 

Particulars	(₹)	(₹)	Particulars	(₹)	(₹)
To, Opening Stock		10,000	By, Sales:
To, Purchases: Cash [WN:4]	3,75,000		Cash [WN:4]	5,00,000
Credit	3,52,000	7,27,000	Credit	3,64,500	8,64,500
To, Gross Profit c/d (Bal. fig.)		1,40,500	By, Closing Stock at Cost		13,000
		8,77,500			8,77,500
To, Expenses [WN:3]		77,000	By, Gross Profit b/d		1,40,500
To, Bank Charges		500	By, Discount Received		7,000
To, Discount Allowed		5,000
To, Capital A/c [Net Profit transferred] (Bal. fig.)		65,000
		1,47,500			1,47,500

4.                                                                                                                                                                            Balance Sheet as on Dec. 31, 2022                                                                                                                                                                            

Liabilities	(₹)	(₹)	Assets	(₹)	(₹)
Opening Capital	25,000		Inventory		13,000
Add: Net Profit	65,000		Due from Customers		37,000
Further Capital [income from personal investment]	36,000		Prepaid Expenses		3,000
	1,26,000		Bank		16,500
Less: Drawings [ 20,000 + 55,000]	75,000	51,000	Cash		7,000
Creditors for: Goods		23,000
Services		2,500
		76,500			76,500

Working Note:
1.

Books of Raja

Receipt and Payment Accounts for the year ended Dec. 31, 2022

 

Receipts	(₹)	Payments	(₹)
To, Opening Balance:		By, Cash Purchases [WN:4]	3,75,000
Cash	4,000	By, Payment to Suppliers	3,50,000
Bank	11,000	By Payments for Services: Cash	37,000
To, Cash Sales [WN:4]	5,00,000	Cheques	40,000
To, Collection from Customers	3,50,000	By, Bank Charges	500
Capital Introduces:		By, Drawings [20,000 + 55,000]	75,000
Income from Personal Investment	36,000	By Closing Balance:
		Cash	7,000
		Bank	16,500
	9,01,000		9,01,000

2. Expenses Paid during 2021-22

Cash Account 

Date	Particulars	₹	Date	Particulars	₹
	To, Balance b/f	4,000		By Purchases A/c [WN:4]	3,75,000
	To, Sales A/c [WN:4]	5,00,000		By Bank A/c [Amount deposited]	1,25,000
	To, Bank A/c [Withdrawn from bank for shop expenses]	40,000		By Expenses A/c [Expenses paid: Bal. Fig.]	37,000
				By Balance c/f	7,000
		5,44,000			5,44,000

3.     Expenses to be transferred to Profit & Loss Accounts        

Particulars	(₹)
Expenses Paid: Cash [WN:2]	37,000
Cheque	40,000
	77,000
Add: Prepaid Expenses on 31.12.2021	2,000
Outstanding Expenses on 31.12.2022	2,500
	81,500
Less: Prepaid Expenses on 31.12.2022	3,000
	78,500
Less: Outstanding Expenses on 31.12.2021	1,500
⸫ Expenses to be debited to Profit & Loss A/c	77,000

4.  Cash Sales & Cash Purchases during 2022      

75% of Cash Sale proceeds are used for Cash Purchases

 ⸫ 25% Amount of Cash Sale proceeds deposited into Bank

 ⸫ Cash Sales = Cash deposited × 100/25 = 1,25,000 × 100/25 = 5,00,000

 ⸫ Cash Purchases = 75% of Cash Sale proceeds = 5,00,000 × 75% = 3,75,000
           

Exercise

Numerical Questions

CMA book unsolved questions solution

Mr. Raja, a sole trader furnishes you with the following bank summary for the year ended December 31, 2022

	(₹)	(₹)
Balance on December 31, 2021		11,000
Add: Deposits
Cash (out of cash sales)	1,25,000
Collection from Credit Customers	3,50,000
Income from personal investments	36,000	5,11,000
		5,22,000
Less: Deductions
Cash withdrawn for personal drawings	20,000
Shop expenses	40,000
Cheques issued to suppliers of:
Goods	3,50,000
Supplies	40,000
Cheques issued for personal purposes	55,000
Bank charges	500	5,05,500
Balance on December 31, 2022		16,500

Raja informs you that he had the following Assets and Liabilities in addition to the Bank Balances described on December 31:

	2021-22 (₹)	2020-21 (₹)
Assets:
Cash Balance	7,000	4,000
Amounts due from Customers	37,000	27,500
Unsold Inventory at Cost	13,000	10,000
Prepaid Expenses	3,000	2,000
	60,000	43,500
Liabilities :
Creditors for Goods	23,000	28,000
Creditors for Services	2,500	1,500
	25,500	29,500

He also informs you the following:

(a) He uses 75% of cash sale proceeds for making cash purchases; the remaining balance being deposited in Bank.

(b) He had allowed cash discount of ₹ 5,000 to his credit customers for prompt payment; he was allowed cash discount ₹ 7,000 by his suppliers of goods for prompt payment.

(c) Collections from credit customers and payments to suppliers of goods are invariable by crossed cheques.

1. Receipt and payment account for the year ended December 31, 2022

2. Trading and Profit & Loss account for the year ended December 31, 2022

3. Draft the Balance Sheet of the business as at December 31, 2022.

Solution: 

1. Capital balance on 1.1.2021 is - ₹25,000

Balance Sheet as on 1.1.2021

Liabilities	(₹)	(₹)	Assets	(₹)	(₹)
Capital [Opening Capital: Bal. Fig.]		25,000	Inventory		10,000
Creditors for:			Due from Customers		27,500
Goods		28,000	Prepaid Expenses		2,000
Services		1,500	Bank		11,000
			Cash		4,000
		54,500			54,500

2. Credit Sales is - ₹3,64,500 and Credit Purchase is - ₹3,52,000

Customers Account 

Date	Particulars	(₹)	Date	Particulars	(₹)
	To, Balance b/f	27,500		By, Bank A/c	3,50,000
	To, Sales A/c [Credit Sales: Bal. Fig.]	3,64,500		By, Discount Allowed A/c	5,000
				By, Balance c/f	37,000
		3,92,000			3,92,000

Creditors Account

Date	Particulars	(₹)	Date	Particulars	(₹)
	To, Bank A/c	3,50,000		By, Balance b/f	28,000
	To, Discount Received A/c	7,000		By, Purchases A/c [Credit purchases: Bal. Fig.]	3,52,000
	To, Balance c/f	23,000
		3,80,000			3,80,000

3. Operating result - ₹65,000

Trading and Profit & Loss Accounts

for the year ended Dec. 31, 2022 

Particulars	(₹)	(₹)	Particulars	(₹)	(₹)
To, Opening Stock		10,000	By, Sales:
To, Purchases: Cash [WN:4]	3,75,000		Cash [WN:4]	5,00,000
Credit	3,52,000	7,27,000	Credit	3,64,500	8,64,500
To, Gross Profit c/d (Bal. fig.)		1,40,500	By, Closing Stock at Cost		13,000
		8,77,500			8,77,500
To, Expenses [WN:3]		77,000	By, Gross Profit b/d		1,40,500
To, Bank Charges		500	By, Discount Received		7,000
To, Discount Allowed		5,000
To, Capital A/c [Net Profit transferred] (Bal. fig.)		65,000
		1,47,500			1,47,500

4. Balance Sheet as on Dec. 31, 2022

Liabilities	(₹)	(₹)	Assets	(₹)	(₹)
Opening Capital	25,000		Inventory		13,000
Add: Net Profit	65,000		Due from Customers		37,000
Further Capital [income from personal investment]	36,000		Prepaid Expenses		3,000
	1,26,000		Bank		16,500
Less: Drawings [ 20,000 + 55,000]	75,000	51,000	Cash		7,000
Creditors for: Goods		23,000
Services		2,500
		76,500			76,500

Working Note:
1.

Books of Raja

Receipt and Payment Accounts for the year ended Dec. 31, 2022

 

Receipts	(₹)	Payments	(₹)
To, Opening Balance:		By, Cash Purchases [WN:4]	3,75,000
Cash	4,000	By, Payment to Suppliers	3,50,000
Bank	11,000	By Payments for Services: Cash	37,000
To, Cash Sales [WN:4]	5,00,000	Cheques	40,000
To, Collection from Customers	3,50,000	By, Bank Charges	500
Capital Introduces:		By, Drawings [20,000 + 55,000]	75,000
Income from Personal Investment	36,000	By Closing Balance:
		Cash	7,000
		Bank	16,500
	9,01,000		9,01,000

2. Expenses Paid during 2021-22

Cash Account 

Date	Particulars	₹	Date	Particulars	₹
	To, Balance b/f	4,000		By Purchases A/c [WN:4]	3,75,000
	To, Sales A/c [WN:4]	5,00,000		By Bank A/c [Amount deposited]	1,25,000
	To, Bank A/c [Withdrawn from bank for shop expenses]	40,000		By Expenses A/c [Expenses paid: Bal. Fig.]	37,000
				By Balance c/f	7,000
		5,44,000			5,44,000

3.     Expenses to be transferred to Profit & Loss Accounts        

Particulars	(₹)
Expenses Paid: Cash [WN:2]	37,000
Cheque	40,000
	77,000
Add: Prepaid Expenses on 31.12.2021	2,000
Outstanding Expenses on 31.12.2022	2,500
	81,500
Less: Prepaid Expenses on 31.12.2022	3,000
	78,500
Less: Outstanding Expenses on 31.12.2021	1,500
⸫ Expenses to be debited to Profit & Loss A/c	77,000

4.  Cash Sales & Cash Purchases during 2022      

75% of Cash Sale proceeds are used for Cash Purchases

 ⸫ 25% Amount of Cash Sale proceeds deposited into Bank

 ⸫ Cash Sales = Cash deposited × 100/25 = 1,25,000 × 100/25 = 5,00,000

 ⸫ Cash Purchases = 75% of Cash Sale proceeds = 5,00,000 × 75% = 3,75,000