Preparation of Financial Statements of Companies

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Preparation of Financial Statements of Commercial Organisations

In addition to recording keeping, a major objective of accounting is determination of operating results and disclosure of the financial position. The determination of operating result of commercial form of organisations happen to be the ascertainment of the profit earned during a period or the amount of loss suffered. This requires the preparation of specific statements which are technically referred to as Financial Statements. The financial statements of a non-corporate commercial organisation broadly includes the Income Statement, Balance Sheet, and Cash Flow Statement. However, discussion on Cash Flow Statement is beyond the scope of this chapter. Thus, traditionally the term ‘Financial Statements’ includes only three basic statements – Income Statement and Balance Sheet.

3.1.1 Income Statement

The term ‘Income Statements’ is a generic term which refers to those components of financial states which are associated with determination of operating result i.e. ascertainment or profit earned or loss suffered. For noncorporate commercial organisations (i.e. proprietorship businesses, partnership firms etc.) the income statements include Trading Account, Profit & Loss Account (P/L A/c) and Profit & Loss Appropriation Account. To be specific, the income statements of different forms of business organisation are as under:

Form of Non-Corporate Commercial Organisation	Components of Income Statement
Proprietary organisation	Trading A/c, P/L A/c
Partnership organisation	Trading A/c, P/L A/c, P/L Appropriation A/c

 The components of income statements of non-corporate commercial organisations are discussed hereunder:

1. Trading Account: This is the first income statement prepared by a non-corporate trading business entity. It is prepared to determine the gross operating results (i.e. Gross Profit or Gross Loss). Its principle involves matching of the Cost of Goods Sold (COGS) of an accounting period against the corresponding Sales. It considers only the direct costs and direct income (i.e. Sales) for determination of Gross Profit/ Gross Loss. It is a nominal account, and is closed by transfer of the Gross Profit/ Gross Loss to the Profit and Loss A/c. The following items will appear in the debit side of the Trading Account:

1. Opening Stock: In case of trading concern, the opening stock means the finished goods only. The amount of opening stock should be taken from Trial Balance.
2. Purchases: The amount of purchases made during the year. Purchases include cash as well as credit purchase. The deductions can be made from purchases, such as, purchase return, goods withdrawn by the proprietor, goods distributed as free sample etc.
3. Other Direct expenses: It means all those expenses which are incurred from the time of purchases to making the goods in suitable condition. This expenses includes freight inward, octroi, wages etc.
4. Gross profit: If the credit side of Trading A/c is greater than debit side of Trading A/c gross profit will arise.

The following items will appear in the credit side of Trading Account:

1. Sales Revenue: The sales revenue denotes income earned from the main business activity or activities. The income is earned when goods or services are sold to customers. If there is any return, it should be deducted from the sales value. As per he accrual concept, income should be recognized as soon as it is accrued and not necessarily only when the cash is paid for.
2. Closing Stocks/Inventries: In case of trading business, there will be closing stocks of finished goods only. According to convention of conservatism, stock is valued at cost or net realizable value whichever is lower.
3. Gross Loss: When debit side of trading account is greater than credit side of trading account, gross loss will appear.

 The proforma of Trading Account is as follows

 Trading Account for the year ended ….

Dr.			Cr.
Particulars	(₹)	Particulars	(₹)
To, Opening Stock		By, Sales
To, Purchases		Less: Sales Returns
Less: Purchase return		By, Closing Stock
To, Wages		By, Profit and Loss A/c
To, Other Direct expenses		(Gross Loss transferred)
To, Profit and Loss A/c
(Gross Profit transferred)

 2. Profit & Loss Account: The second income statement is the Profit & Loss Account. It is drafted after the determination of Gross operating result i.e. Gross Profit or Gross Loss. This account determines the Net Profit or Net Loss of an organisation for a particular accounting period. It is prepared by charging the indirect expenses and losses against the Gross Profit and other indirect incomes. It is closed by transfer of the Net Profit or Net Loss to the Capital Account(s) of the proprietor or partners.

The following items will appear in the debit side of the Profit & Loss A/c:

1. Cost of Sales: This term refers to the cost of goods sold. The goods could be manufactured and sold or can be directly identified with goods.
2. Other Expenses: All expenses which are not directly related to main business activity will be reflected in the P & L component. These are mainly the Administrative, Selling and distribution expenses. Examples are salary to office staff, salesmen commission, insurance, legal charges, audit fees, advertising, free samples, bad debts etc. It will also include items like loss on sale of fixed assets, interest and provisions. Students should be careful to include accrued expenses as well.
3. Abnormal Losses: All abnormal losses are charged against Profit & Loss Account. It includes stock destroyed by fire, goods lost in transit etc.

The following items will appear in the credit side of Profit & Loss A/c:

1. Revenue Incomes: These incomes arise in the ordinary course of business, which includes commission received, discount received etc.
2. Other Incomes: The business will generate incomes other than from its main activity. These are purely incidental. It will include items like interest received, dividend received, etc .The end result of one component of the P & L A/c is transferred over to the next component and the net result will be transferred to the balance sheet as addition in owners’ equity. The profits actually belong to owners of business. In case of company organizations, where ownership is widely distributed, the profit figure is separately shown in balance sheet.

The proforma of Profit & Loss Account is as follows

Profit & Loss Account for the year ended ....

Dr.			Cr.
Particulars	(₹)	Particulars	(₹)
To, Trading A/c		By, Trading A/c
(Gross Loss transferred)		(Gross Profit transferred)
To, Administrative expenses		By, Other Income
To, Office salaries		By, Interest received
To, Communication		By, Commission received
To, Travel & Conveyance		By, Profit on sale of assets
To, Travel & Conveyance		By, Rent received
To, Advertising		By, Capital A/c
To, Audit fees		(Net loss transferred)
To, Insurance
To, Repairs & maintenance
To, Selling & Distribution expenses
To, Bad debts
To, Salesmen commission
To, Interest on loans
To, Depreciation and Amortisation
To, Financial expenses
To, Bank charges
To, Loss on sale of assets
To, Capital A/c
(Net profit transferred)

3. Profit & Loss Appropriation Account: This component of income statement shows the appropriation of the net profit among the partners of a partnership business. Sole proprietorship businesses are not required to prepare the P/L Appropriation account. The net profit may be used by the business to distribute dividends, to create reserves etc. In order to show these adjustments, a P & L Appropriation A/c is maintained. Distribution of profits is only appropriation and does not mean expenses. After passing such distribution entries, the remaining surplus is added in owner’s equity. 

The format of P & L Appropriation A/c is given below

Profit and Loss Appropriation Account for the year ended ....

Dr.			Cr.
Particulars	(₹)	Particulars	(₹)
To, Proposed dividend		By, P/L A/c
To, Reserves (Transfer)		(Net profit transferred)
To, Capital A/c

3.1.2 Balance Sheet

Balance Sheet is the financial statement that is prepared to show the financial position of the organisation on a specific date. It is prepared after drafting Income Statements i.e. Trading Account and P/L Account. It reflects the assets and liabilities of a concern at a particular point of time. The Balance Sheet may be drafted either in Horizontal format or in Vertical format. In the horizontal format, the Liabilities appear on the left-hand side, while the Assets appear on the right-hand side of the Balance Sheet. This is the traditional format followed by noncorporate commercial organisations. In the vertical format, the liabilities and assets appear in a top-down order.

The various items should appear in the Balance Sheet in a specific order which is known as Marshalling. When the assets which are most permanent in nature appear at the top, and the current assets appear below them, and for liabilities, the capital and long-term liabilities appear above the short-term liabilities, it is known as marshalling under Rigidity Order or Permanence Order. When the reverse ordering is followed as regards the assets and liabilities, it is known as marshalling under Liquidity Preference Order or Realisability Order.

Preparation of Final Accounts 

Final accounts of an organisation are prepared from the ledger balances. Each of the ledger accounts should be posted to any of the income statements (viz. Trading A/c or Profit & Loss A/c) of the Balance Sheet depending on its nature.

In addition to these, some adjustments may be required to be made for honouring the accounting principles, or rectifying some of the existing errors in the books, for which either adjustment entries or rectification entries may be required to be passed. Effect of these adjustments/ rectifications would be ‘double’ and get reflected either in the income statements and/ or Balance Sheet.

Some of the important adjustments include:

• Closing stock
• Outstanding expenses or Accrued expenses
• Prepaid expenses
• Accrued income
• Income received in advance
• Goods sold on approval basis
• Goods distributed as free samples
• Goods withdrawn by proprietor/ partner for personal use
• Depreciation and Amortisation
• Bad debts
• Provision for doubtful debts
• Provision for discount on debtors
• Abnormal loss of stock
• Interest on capital
• Interest on drawings etc.

The different components of financial statements are prepared in a sequential order, as follows:

Firstly, the Trading Account is prepared and its balance (reflecting Gross Profit or Gross Loss) gets transferred to Profit & Loss Account.

Thereafter, the Profit & Loss Account is prepared and its balance (reflecting Net Profit or Net Loss) is transferred to Capital Account (after drafting Profit & Loss Appropriation Account in case of partnership firms).

Finally, the Balance Sheet is drafted considering a ledger balances reflecting assets, liabilities and capital.

Illustration 1

Following are the ledger balances presented by M/s. P. Sen as on 31st March 20X2.

Particulars	Amount	Particulars	Amount
Stock (1.4.20X1)	10,000	Sales	3,00,000
Purchase	1,60,000	Return Inward	16,000
Carriage InwardsWages	10,000	Return Outward	10,000
Freight	30,000	Royalty on Production	6,000
	8,000	Gas and Fuel	2,000

Additional Information:

(1) Stock on 31.3.20X2: (i) Market Price ₹ 24,000; (ii) Cost Price ₹ 20,000;

(2) Stock valued ₹ 10,000 were destroyed by fire and insurance company admitted the claim to the extent of ₹ 6,000.

(3) Goods purchased for ₹ 6,000 on 29th March, 20X2, but still lying in-transit, not at all recorded in the books.

(4) Goods taken for the proprietor for his own use for ₹ 3,000.

(5) Outstanding wages amounted to ₹ 4,000.

(6) Freight was paid in advance for ₹ 1,000.

Solution:

In the books of M/s. P. Sen

Trading Account

For the year ended 31st March, 20X2.

Particulars	(₹)	(₹)	Particulars	(₹)	(₹)
To Openign Stock		10,000	By Sales	3,00,000
To Purchase	1,60,000		Less: Return Inward	16,000	2,84,000
Less: Return Outward	10,000		By Closing Stock	20,000
	1,50,000		Add: Stock Destroyed	10,000
Less: Goods taken by Proprietor	3,000			30,000
	1,47,000		Add: Goods-in-Transit	6,000	36,000
Add: Goods-in-transit	6,000	1,53,000
To Wages	30,000
Add: Outstanding	4,000	34,000
To Carriage Inwards		10,000
To Freight	8,000
Less: Prepaid	1,000	7,000
To Royalty on production		6,000
To Gas & fuel		2,000
To Profit & Loss A/c. - Gross profit transferred		98,000
		3,20,000			3,20,000

Note:

(a) Stock should be valued as per cost price or market price whichever is lower.

(b) The claim which was admitted by insurance company and the loss of stock, will not appear in Trading Account.

Illustration 2

From the following particulars presented by Mr. Shankar for the year ended 31st March 2022, prepare Profit and Loss Account after taking into consideration the given details:

Gross Profit ₹ 1,00,000, Rent ₹ 22,000; Salaries, ₹ 10,000; Commission (Cr.) ₹ 12,000; Insurance ₹ 8,000; Interest (Cr.) ₹ 6,000; Bad Debts ₹ 2,000; Provision for Bad Debts (1.4.2021) ₹ 4,000; Sundry Debtors ₹ 40,000; Discount Received ₹ 2,000; Plant & Machinery ₹ 80,000. 

Adjustments:

(a) Outstanding salaries amounted to ₹ 4,000;

(b) Rent paid for 11 months;

(c) Interest due but not received amounted to ₹ 2,000

(d) Prepaid Insurance amounted to ₹ 2,000;

(e) Depreciate Plant and Machinery by 10% p.a.

(f) Further Bad Debts amounted to ₹ 2,000 and make a provision for Bad Debts @5% on Sundry Debtors.

Solution: 

(g) Commissions received in advance amounted to ₹ 2,000.

Mr. Shankar

Profit and Loss Account

for the year ended 31st March 2022 

Dr.					Cr.
Particulars	(₹)	(₹)	Particulars	(₹)	(₹)
To, Rent	22,000		By, Trading A/c.		1,00,000
Add: Outstanding	2,000	24,000	-Gross Profit
” Salaries	10,000		” Commission	12,000
Add: Outstanding	4,000	14,000	Less: Received in advance	2,000	10,000
” Insurance	8,000		” Interest	6,000
Less: Prepaid	2,000	6,000	Add: Accrued Interest	2,000	8,000
” Bad Debts	2,000
Add: further Bad Debts	2,000	4,000	” Discount received		2,000
” Depreciation on Plant & Machinery @10% on  ₹80,000		8,000	” Provisions for Bad Debts	4,000
” Capital A/c  (Net Profit Transferred)		66,100	Less: New Provision @ 5%  on (₹40,000 – ₹2,000)	1,900	2,100
		1,22,100			1,22,100

 Illustration 3

 

X,Y and Z are three Partners sharing profit and Losses equally. Their capital as on 01.04.2021 were:

X ₹ 80,000 ; Y ₹ 60,000 and Z ₹ 50,000.

They mutually agreed on the following points (as per partnership deed):

(a) Interest on capital to be allowed @ 5% P.a.

(b) X to be received a salary @ ₹ 500 p.m.

(c) Y to be received a commission @ 4% on net profit after charging such commission.

(d) After charging all other items 10% of the net profit to be transferred General Reserve.

Profit from Profit and Loss Account amounted to ₹ 66,720.

Prepare a Profit and Loss Appropriation Account for the year ended 31st March, 2022.

Solution:

Profit & Loss Appropriation A/c 

for the year ended 31st March, 2022

DR.                                                                                                                                                                                                                                                                                                                                                                                                CR.

Particulars	(₹)	(₹)	Particulars	(₹)	(₹)
To, Interest on Capital:			By, Profit and Loss A/c		66,720
X	4,000		(Net profit transferred)
Y	3,000
Z	2,500	9,500
“ Salaries
X : (₹ 500 × 12)		6,000
“ Commission
Y [WN: 1]		1970
“ General Reserve [WN: 2]		4,925
“ Partners’ Capital A/c:  (Net Divisible Profit)
X	14,775
Y	14,775
Z	14,775	44,325
		66,720			66,720

Working Note: 

1. Net Profit before charging Y’s Commission  = ₹ [66,720 – (9,500 + 6,000)] = ₹ 51,220

    Less: Y’s Commission @ 4%  =  ( 4 / 104 ×₹ 51,220 ) = ₹ 1,970     

    = 49,250    

2. Transfer to General Reserve = ₹ 49,250 × 10% = ₹ 4,925 

 Illustrations 4

From the following Trial Balance of M/s BJ & Sons, prepare the final accounts for the year ended on 31st March 2022, and also the Balance sheet as on that date:

Particulars	Debit (₹)	Credit (₹)
Stock as on 01.04.2021: Finished goods	2,00,000
Purchases and Sales	22,00,000	35,00,000
Bills receivables	50,000
Returns	1,00,000	50,000
Carriage Inwards	50,000
Debtors and Creditors	2,00,000	4,00,000
Carriage Outwards	40,000
Discounts	5,000	5,000
Salaries and wages	2,20,000
Insurance	60,000
Rent	60,000
Wages and salaries	80,000
Bad debts	10,000
Furniture	4,00,000
BJ’s capital		5,00,000
BJ’s drawing	70,000
Loose tools	1,00,000
Printing & stationery	30,000
Advertising	50,000
Cash in hand	45,000
Cash at bank	2,00,000
Petty Cash	5,000
Machinery	3,00,000
Commission	10,000	30,000
Total	44,85,000	44,85,000

Adjustments: 

(i) Finished goods stock: Stock on 31st March was valued at Cost price ₹ 4,20,000 and Market price ₹ 400,000.

(ii) Depreciate furniture @ 10% p.a. and machinery @ 20% p.a. on reducing balance method.

(iii) Rent of ₹ 5,000 was paid in advance.

(iv) Salaries & wages due but not paid ₹ 30,000.

(v) Make a provision for doubtful debts @ 5% on debtors.

(vi) Commission receivable ₹ 5,000.

Solutoin:

 M/s BJ & Sons

Trading Account for the year ended 31st March 2022 

Dr.					Cr.
Particulars	(₹)	(₹)	Particulars	(₹)	(₹)
To, Opening Stock :			By, Sales	35,00,000
Finished Goods		2,00,000	Less: Sales Returns	1,00,000	34,00,000
To, Purchases	22,00,000
Less: Purchases Returns	50,000	21,50,000	By, Closing Stock
To, Carriage Inwards		50,000	Finished Goods		4,00,000
To, Wages & Salaries		80,000
To P/L A/c    (Gross Profit transferred)		13,20,000
		38,00,000			38,00,000

Profit & Loss Account for the year ended 31st March 2022    

Dr.					Cr.
Particulars	(₹)	(₹)	Particulars	(₹)	(₹)
To, Administrative expenses	-		Gross Profit b/d		13,20,000
To, Salaries & wages	2,20,000		Discount received		5,000
Add: Outstanding	30,000	2,50,000	Commission received	30,000
To, Depreciation:            on Furniture		40,000	Add : Receivable	5,000	35,000
on Machinery		60,000
To, Insurance		60,000
To, Rent	60,000
Less: Paid in Advance	5,000	55,000
To, Printing & Stationery		30,000
To, Advertising		50,000
To, Carriage Outwards		40,000
To, Discounts		5,000
To, Bad debts		10,000
To, Commission		10,000
To, Provision for Doubtful Debts		10,000
To, BJ’s Capital A/c   (Net Profit transferred)		740,000
		13,60,000			13,60,000

Balance Sheet as on 31st March 2022

Dr.					Cr.
Liabilities	(₹)	(₹)	Assets	(₹)	(₹)
BJ’s Capital	5,00,000		Fixed Assets:
Less : Drawings	70,000		Furniture	400,000
Add : Net Profit for the year	7,40,000	11,70,000	Less: Depreciation	40,000	3,60,000
Long Term Liabilities:		-	Machinery	300,000
			Less: Depreciation	60,000	2,40,000
Current Liabilities:			Loose Tools		1,00,000
Sundry Creditors		4,00,000
Outstanding Salaries & Wages		30,000	Current Assets:
			Stocks		4,00,000
			Sundry Debtors	200,000
			Less: Provision for Doubtful Debts	10,000	1,90,000
			Bills Receivables		50,000
			Cash in Hand		45,000
			Cash at Bank		2,00,000
			Petty Cash		5,000
			Prepaid Rent		5,000
			Commission Receivable		5,000
		16,00,000			16,00,000

Notes :

(1) Closing stock is valued at market price here as it is less than cost price (conservatism concept)

Illustration 5

Mr. Arvindkumar had a small business enterprise. He has given the trial balance as at 31st March 20X1.

Particulars	Debit (₹)	Credit (₹)
Mr. Arvinkumar’s Capital		1,00,000
Machinery	36,000
Depreciation on machinery	4,000
Repairs to machinery	5,200
Wages	54,000
Salaries	21,000
Income tax of Mr. Arvindkumar	1,000
Cash in hand	4,000
Land & Building	1,49,000
Depreciation on building	5,000
Purchases	2,50,000
Purchase returns		3,000
Sales		4,98,000
Citi Bank		7,600
Accrued Income	3,000
Salaries outstanding		4,000
Bills receivables	30,000
Provision for doubtful debts		10,000
Bills payable		16,000
Bad debts	2,000
Discount on purchases		7,080
Debtors	70,000
Creditors		62,520
Opening stock	74,000
Total	7,08,200	7,08,200

Additional information:

(1) Stock as on 31st March 20X1 was valued at ₹ 60,000

(2) Write off further ₹ 6,000 as bad debt and maintain a provision of 5% on doubtful debt.

(3) Goods costing ₹ 10,000 were sent on approval basis to a customer for ₹ 12,000 on 30th March, 20X1. This was recorded as actual sales.

(4) ₹ 2,400 paid as rent for office was debited to Landlord’s A/c and was included in debto₹

(5) General Manager is to be given commission at 10% of net profits after charging his commission.

(6) Works manager is to be given a commission at 12% of net profit before charging General Manager’s commission and his own.

You are required to prepare final accounts in the books of Mr. Arvindkumar.'

Solution:

In the books of Mr. Arvindkumar

Trading Account for the year ended 31st March 20X1

Particulars	Amount (₹)	Amount (₹)	Particulars	Amount (₹)	Amount (₹)
Opening stock:			Sales	4,98,000
Finished goods		74,000	Less: Sent on approval	(12,000)	4,86,000
Purchases	2,50,000		Closing stock:
Less: Purchases returns	(3,000)	2,47,000	Finished goods	60,000
Wages		54,000	Add sent on approval	10,000	70,000
Gross Profit c/d		1,81,000
		5,56,000			5,56,000

Profit and Loss Account for the year ended 31st March 20X1

Particulars	Amount (₹)	Amount (₹)	Particulars	Amount (₹)	Amount (₹)
Administrative expenses:			Gross Profit b/d		1,81,000
Salaries		21,000	Discount received		7,080
Repairs to machinery		5,200
Depreciation of Machinery		4,000
Depreciation of Building		5,000
Rent		2,400
Selling & Distribution expenses:
Bad debts	2,000
Additional bad debts	6,000
Provision for doubtful debts	2,480
Less: Provision opening	(10,000)	480
Commission to works manager		18,000
Commission to General Manager		12,000
Net profit		1,20,000
		1,88,080			1,88,080

Balance Sheet as on 31st March 20X1

Particulars	Amount (₹)	Amount (₹)	Particulars	Amount (₹)	Amount (₹)
Arvind kumar’s Capital	1,00,000		Fixed Assets:
Less: drawings (income tax)	(1,000)		Land & building		1,49,000
Add: Net Profit for the year	1,20,000	2,19,000	Machinery		36,000
Long term Liabilities:		-	Current Assets:
Current Liabilities:			Stocks	60,000
Sundry creditors		62,520	Add: Sent on approval	10,000	70,000
Outstanding salaries		4,000	Sundry debtors	70,000
			Less: Goods on approval	(12,000)
			Less: Bad debts	(6,000)
			Less: Related to landlord	(2,400)
			Less: Provision for doubtful debts	(2,480)	47,120
			Bills receivable		30,000
			Cash in hand		4,000
			Accrued Income		3,000
		3,39,120			3,39,120

Notes:

(1) The closing entries are passed for the items: depreciation, accrued income, outstanding salary. Hence, they are directly taken to the respective places in Balance sheet and P & L A/c.

(2) Income tax paid for Mr. Arvindkumar will be treated as drawings.

(3) Commission payable to works manager & general manager is computed as below:

	₹
Profit before charging any commission	1,50,000
Commission to works manager @ 12% on 1,50,000	18,000
Profit after works manager’s commission	1,32,000
Commission to General Manager (1,32,000/110 x 100)	12,000

Illustrations 6 

Abhay runs a small shop and deals in various goods. He has not been able to tally his trial balance and has closed it by taking the difference to Suspense A/c. It is given below.

Particulars (as on 31st March 20X1)	Debit (₹)	Credit (₹)
Abhay’s capital		1,50,000
Drawings	75,000
Fixed assets	1,35,000
Opening stock	36,500
Purchases & returns	6,75,000	13,500
Sales & returns	34,000	8,50,000
Due from customer & to creditors	95,000	3,25,000
Expenses	45,750
Cash		3,000
Bank deposits & interest earned	55,000	5,750
Suspense A/c		4,000
Advertising	2,00,000
Total	13,51,250	13,51,250

Mr. Abhay has requested you to help him in tallying his trial balance and also prepare his final accounts. On investigation of his books you get the following information:

(i) Closing Stock on 31st March 20X1 was ₹ 45,000 at cost and could sell over this value.

(ii) Depreciation of ₹ 13,500 needs to be provided for the year.

(iii) A withdrawal slip indicated a cash withdrawal of ₹ 15,000 which was charged as drawing. However, it was noticed that ₹ 11,000 was used for business purpose only and was entered as expenses in cash book.

(iv) Goods worth ₹ 19,000 were purchased on 24th March 20X1 and sold on 29th March 20X1 for ₹ 23,750. Sales were recorded correctly, but purchase invoice was missed out.

(v) Purchase returns of ₹ 1,500 were routed through sales return. Party’s A/c was correctly posted.

(vi) Expenses include ₹ 3,750 related to the period after 31st March 20X1.

(vii) Purchase book was over-cast by ₹ 1,000. Posting to suppliers’ A/c is correct.

(viii) Advertising will be useful for generating revenue for 5 years.

Solution:

Rectification of errors:

(a) Cash withdrawn was recorded as

Cash A/c	Dr	15,000
To Bank			15,000
But it was charged to drawing and ₹ 11,000 was recorded as expenses as well i.e.
Drawings A/c	Dr.	15,000
Expenses A/c	Dr.	11,000
To Cash			26,000
This resulted in negative cash of ₹ 11,000. The rectification entry to be passed is
Cash A/c	Dr	11,000
To Drawings			11,000

(b) Omitted transaction to be recorded

Purchases A/c	Dr	19,000
To Suppliers’ A/c			19,000

(c) Incorrect recording of purchase returns corrected by

Suspense A/c	Dr	3,000
To Purchase return A/c			1,500
To sales return A/c		1,500

(d) Incorrect expenses rectified by

Prepaid expenses A/c	Dr	3,750
To Expenses A/c			3,750

(e) Over-casting of purchase book rectified by

Suspense A/c	Dr	1,000
To Purchases			1,000

Based on these rectifications we can now proceed to complete the final accounts

Trading Account for the year ended 31st March, 20X1

Particulars	Amount (₹)	Amount (₹)	Particulars	Amount (₹)	Amount (₹)
To Opening stock	-	36,500	By Sales	8,50,000
To Purchases	6,75,000		Less: Returns	(34,000)
Less: Returns	(13,500)		Add: Rectification	1,500	8,17,500
Less: Additional returns	(1,500)		By Closing stock		45,000
Add: Purchases missed out	19,000
Less: Over-casting rectified	(1,000)	6,78,000
To Gross Profit c/d		1,48,000
		8,62,500			8,62,500

Profit and Loss Account for the year ended 31st March, 20X1

Particulars	Amount (₹)	Amount (₹)	Particulars	Amount (₹)	Amount (₹)
To Expenses	45,750		By Gross Profit b/d		1,48,000
Less : Prepaid	3,750	42,000
To Depreciation		13,500	By Interest on Bank deposits		5,750
To Advertising		2,00,000	By Net Loss		1,01,750
		2,55,500			2,55,500

Balance Sheet as on 31st March, 20X1

Liabilities	Amount (₹)	Amount (₹)	Assets	Amount (₹)	Amount (₹)
Abhay’s Capital	1,50,000		Fixed Assets
Add: Wrong charge to drawing	11,000		Gross Block	1,35,000
	1,61,000		Less: Depreciation	13,500	1,21,500
Less: Drawings	75,000	86,000	Current Assets:
Current Liabilities			Stocks		45,000
Sundry Creditors	3,25,000		Sundry Debtors		95,000
Add: Missed out purchase	19,000	3.44.000	Cash in hand	(3,000)
			Add: Rectification	11,000	8,000
			Fixed deposit with Bank		55,000
			Prepaid expenses		3,750
			Miscellaneous Expenditure:
			Profit & Loss (Dr.)		1,01,750
		4,30,000			4,30,000

Note : The expenditure incurred on intangible items after the date AS 26 became/becomes mandatory (01.04.2003 or 01.04.2004, as the case may be) would have to be expensed when incurred since these do not meet the definition of an ‘asset’ as per AS 26. Hence, full amount of Advertisement expense is charged to Profit & Loss Account.

Illustration 7

Mr. O maintains his accounts on Mercantile basis. The following Trial Balance has been prepared from his books as at 31st March, 2022 after making necessary adjustments for outstanding and accrued items as well as depreciation:

Trial Balance as at 31st March, 2022

Particulars	Debit (₹)	Credit (₹)
Plant and Machinery	2,12,500
Sundry Creditors		2,64,000
Sales		6,50,000
Purchases	4,20,000
Salaries	40,000
Prepaid Insurance	370
Advance Rent	2000
Outstanding Salary		6,000
Advance Salary	2,500
Electricity Charges	2,650
Furniture and Fixtures	72,000
Opening Stock (01.04.2021)	50,000
Outstanding Electricity Charges		450
Insurance	1,200
Rent	10,000
Miscellaneous Expenses	14,000
Cash in Hand	3,000
Investments	80,000
Drawings	24,000
Dividend from Investments		8,000
Accrued Dividend from Investments	1,500
Depreciation on Plant and Machinery	37,500
Depreciation on Furniture	8,000
Capital Account		2,11,970
Telephone Charges	6,000
Sundry Debtors	1,70,500
Stationery and Printing	1,200
Cash at Bank	65,000
Interest on Loan	8,000
Interest Due but Not Paid on Loan		1,500
Loan Account		90,000
	12,31,920	12,31,920

Additional Information:

(i) Salaries include ₹ 10,000 towards renovation of Proprietor’s residence.

(ii) Closing Stock amounted to ₹ 75,000. 

Mr. O, however, request you to prepare a Trading and Profit & Loss Account for the year ended 31st March, 2022 and a Balance Sheet as on that date following cash basis of accounting. 

Solution:

Mr. O

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

 

Dr.					Cr.
Particulars	(₹)	(₹)	Particulars	(₹)	(₹)
To, Opening Stock		50,000	By, Sales		6,50,000
To, Purchases		4,20,000	By, Closing Stock		75,000
To, Profit & Loss A/c.
– Gross Profit transferred		2,55,000
		7,25,000			7,25,000
To, Salaries	40,000		By, Trading A/c.
– Less: Outstanding	6,000		-Gross Profit transferred		2,55,000
	34,000		By, Dividend	8,000
– Add: Advance Salary	2,500		Less: Accrued Dividend	1,500	6,500
	36,500
– Less: Renovation (Drawings)	10,000	26,500
To, Insurance	1,200
– Add: Prepaid	370	1,570
To, Rent	10,000
– Add: Advance Rent	2,000	12,000
To, Electricity Charges	2,650
– Less: Outstanding	450	2,200
To, Miscellaneous Expenses		14,000
To, Stationery & Printing		1,200
To, Depreciation:
– Plant & Machinery	37,500
– Furniture & Fixtures	8,000	45,500
To, Interest on Loan	8,000
– Less: Outstanding	1,500	6,500
To, Telephone Charges		6,000
To, Capital Account
– Net Profit transferred		1,46,030
		2,61,500			2,61,500

Balance Sheet as at 31st March, 2022

Liabilities	(₹)	(₹)	Assets	(₹)	(₹)
Capital Account	2,11,970		Plant and Machinery  (at cost less depreciation)		2,12,500
Add: Net Profit	1,46,030		Furniture & Fixtures  (at cost less depreciation)		72,000
	3,58,000		Investments		80,000
Less: Drawings  (₹24,000 + ₹10,000)	34,000	3,24,000	Stock-in-Trade		75,000
Loan Account		90,000	Debtors		1,70,500
Sundry Creditors		2,64,000	Cash at Bank		65,000
			Cash in hand		3,000
		6,78,000			6,78,000

Illustration 8

The following Trial Balance has been prepared from the books of Mrs. Sexena as on 31st March, 2022 after making necessary adjustments for depreciation on Fixed Assets, outstanding and accrued items and difference under Suspense Account.

Trial Balance as at 31st March, 2022

Particulars	Debit  (₹)	Particulars	Credit (₹)
Machineries	1,70,000	Sundry Creditors	82,000
Furniture	49,500	Capital Account	2,45,750
Sundry Debtors	38,000	Outstanding Expenses:
Drawings	28,000	Salaries	1,500
Travelling Expenses	6,500	Printing	600
Insurance	1,500	Audit Fees	1,000
Audit Fees	1,000	Bank Interest	1,200
Salaries	49,000	Discounts	1,800
Rent	5,000	Sales (Less Return)	6,80,000
Cash in Hand	7,800
Cash at Bank	18,500
Stock-in-Trade (01.04.2021)	80,000
Prepaid Insurance	250
Miscellaneous Expenses	21,200
Discounts	1,200
Printing & Stationery	1,500
Purchase (Less Returns)	4,60,000
Depreciation:
Machineries	30,000
Furniture	5,500
Suspense Account	39,400
	10,13,850		10,13,850

On the subsequent scrutiny following mistakes were noticed:

(i) A new machinery was purchase for ₹ 50,000 but the amount was wrongly posted to Furniture Account as  ₹ 5,000.

(ii) Cash received from Debtors ₹ 5,600 was omitted to be posted in the ledger.

(iii) Goods withdrawn by the proprietor for personal use but no entry was passed ₹ 5,000.

(iv) Sales included ₹ 30,000 as goods sold cash on behalf of Mr. Thakurlal who allowed 15% commission on such sales for which effect is to be given.

You are further told that:

(a) Closing stock on physical verification amounted to ₹ 47,500.

(b) Depreciation on Machineries and Furniture has been provided @ 15% and 10%, respectively, on reducing balancing system.

Full year’s depreciation is provided on addition.

You are requested to prepare a Trading and Profit & Loss Account for the year ended 31st March 2022 and a Balance Sheet as on that date so as to represent a True and Correct picture. 

Solution:

Mrs. Sexena

Trading and Profit  and Loss Account

for the year ended 31st March, 2022 

Dr.					Cr.
Particulars	(₹)	(₹)	Particulars	(₹)	(₹)
To, Opening Stock		80,000	By, Sales  (₹ 6,80,000 - ₹ 30,000)		6,50,000
To, Purchases	4,60,000		By, Closing Stock		47,500
Less: Drawings	5,000	4,55,000
To, Profit & Loss A/c.
Gross Profit transferred		1,62,500			.
		6,97,500			6,97,500
To, Salaries:		49,000	By, Trading A/c.   (Gross Profit)		1,62,500
To, Rent		5,000	By, Bank Interest		1,200
To, Insurance		1,500	By, Selling Commission   (15% on ₹ 30,000)		4,500
To, Audit Fees		1,000	By, Discount Received		1,800
To, Printing & Stationery		1,500
To, Miscellaneous Expenses		21,200
To, Discount Allowed		1,200
To, Travelling Expenses		6,500
To, Depreciation:
Machinery	37,500
Furniture	5,000	42,500
To, Capital Account   (Net Profit transferred)		40,600
		1,70,000			1,70,000

Balance Sheet

as at 31st March, 2022

Liabilities	(₹)	(₹)	Assets	(₹)	(₹)
Capital Account	2,45,750		Machinery	2,50,000
Add: Net Profit	40,600		Less: Depreciation	37,500	2,12,500
	2,86,350		Furniture	50,000
Less: Drawings  (28,000+5,000)	33,000	2,53,350	Less: Depreciation	5,000	45,000
Sundry Creditors		82,000	Stock		47,500
Outstanding Liabilities :			Debtors (₹38,000 - ₹5,600)		32,400
Salaries	1,500		Cash		7,800
Audit Fees	1,000		Bank		18,500
Printing	600	3,100	Prepaid Insurance		250
Thakurlal’s A/c.   (₹30,000 – ₹4,500)		25,500
		3,63,950			3,63,950

Notes:

	(₹)
1. Machinery as per Trial Balance	1,70,000
Add: Depreciation	30,000
	2,00,000
Additions	50,000
	2,50,000
2. Furniture	49,500
Add: Depreciation	5,500
	55,000
Less: Wrong Debit	5,000
	50,000

Illustration 9

The following Trail Balance has been extracted from the books of Mr. Agarwal as on 31.3.20X2:

Trial Balance as on 31.3.20X2

Particulars	Dr. (₹)	Particulars	Cr. (₹)
Purchase	6,80,000	Sales	8,38,200
Sundry Debtors	96,000	Capital Account	1,97,000
Drawings	36,000	Sundry Creditors	1,14,000
Bad Debts	2,000	Outstanding Salary	2,500
Furniture & Fixtures	81,00	Sale of Old Papers	1,500
Office Equipments	54,000	Bank Overdraft (UBI)	60,000
Salaries	24,000
Advanced Salary	1,500
Carriage Inward	6,500
Miscellaneous Expenses	12,000
Travelling Expenses	6,500
Stationery & Printing	1,500
Rent	18,000
Electricity & Telephone	6,800
Cash In Hand	5,900
Cash at Bank (SBI)	53,000
Stock (1.4.20X1)	50,000
Repairs	7,500
Motor Car	56,000
Depreciation:
Furniture: 9,000
Office Equipment: 6,000	15,000
	12,13,200		12,13,200

Additional Information:

(i) Sales includes ₹ 60,000 towards goods for cash on account of a joint venture with Mr. Reddy who incurred ₹ 800 as forwarding expenses. The joint venture earned a profit of ₹ 15,000 to which Mr. Reddy is entitled to 60%

(ii) The motor car account represents an old motor car which was replaced on 1.4.20X1 by a new motor car costing ₹ 1,20,000 with an additional cash payment of ₹ 40,000 laying debited to Purchase Account.

(iii) UBI has allowed an overdraft limit against hypothecation of stocks keeping a margin of 20%. The present balance is the maximum as permitted by the Bank.

(iv) Sundry Debtors include ₹ 4,000 as due from Mr. Trivedi and Sundry Creditors include ₹ 7,000 as payable to him.

(v) On 31.3.20X2 outstanding rent amounted to ₹ 6,000 and you are informed that 50% of the total rent is attributable towards Agarwal’s resident.

(vi) Depreciation to be provided on motor car @ 20% (excluding sold item).

Mr. Agarwal requests you to prepare a Trading and Profit & Loss Account for the year ended 31.3.20X2 and a Balance Sheet as on that date.

Solution:

In the books of Mr. Agarwal

Trading and Profit and Loss Account

for the year ended 31st March, 20X2

Particulars	Amount (₹)	Amount (₹)	Particulars	Amount (₹)	Amount (₹)
To Opening Stock		50,000	By Sales	8,38,200
To Purchases	6,80,000		Less: Sale on account of Joint Venture	60,000	7,78,200
Less: Motor Car	40,000	6,40,000	By Closing Stock (W.N. 1)		75,000
To Carriage Inward		6,500
To Profit & Loss A/c - Gross Profit transferred		1,56,700
		8,53,200			8,53,200
To Salaries		24,000	By Trading A/c. -Gross Profit transferred		1,56,700
To Travelling Expenses		6,500	By Sale of old papers		1,500
To Printing & Stationery		1,500	By Profit on Joint Venture (40% of ₹ 15,000)		6,000
To Electricity & Telephone		6,800	By Profit on replacement of Motor Car (W. N. 2) [(1,20,000–(56,000 + 40,000)]		24,000
To Rent	18,000
Add: Outstanding	6,000
	24,000
Less: Drawings	12,000	12,000
To Bad Debts		2,00
To Miscellaneous Expenses		12,000
To Repairs		7,500
To Depreciation on:
Furniture	9,000
Office Equipment	6,000
Motor Car (W.N. 3)	24,000	39,000
To Capital Account - Net Profit transferred		76,900
		1,88,200			1,88,200

M/s  X  &  Y

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

Dr.					Cr.
Particulars	(₹)	(₹)	Particulars	(₹)	(₹)
To, Opening Stock		3,00,000	By, Sales	8,20,000
₹ Purchases	3,80,000		Less: Return Inwards	4,000	8,16,000
Less: Returns Outwards	3,000	3,77,000	₹ Closing Stock		1,20,000
₹ Wages		60,000
₹ Carriage Inward		4,000
₹ Profit & Loss A/c
₹ Profit & Loss A/c		1,95,000			.
		9,36,000			9,36,000
To, Salaries		40,000	By, Trading A/c.
₹ Carriage Outward		2,000	- Gross Profit		1,95,000
₹ Trade Charges		8,000	₹ Interest		1,000
₹ Depreciation on:
- Furniture		1,000
To, P&L Appropriation A/c.
- Net Profit transferred		1,45,000
		1,96,000			1,96,000

Profit and Loss Appropriation Account

for the year ended 31st March, 2022

Dr.					Cr.
Particulars	(₹)	(₹)	Particulars	(₹)	(₹)
To, Interest on Capital			By, Profit and Loss A/c
X	960		-Net Profit		1,45,000
Y	640	1,600
To, Salary   [ Y ]		4,800	By, Interest on Drawings:
To, Commission – X		16,400	X	360
₹ Reserve Fund (50%)		61,430	Y	300	660
To Partner’s Capital A/c
₹ Net Divisible Profit
X	30,715
Y	30,715	61,430
		1,45,660			1,45,660

Partners’ Capital Account 

Dr.					Cr.
Particulars	X (₹)	Y (₹)	Particulars	X (₹)	Y (₹)
To, Drawings	12,000	10,000	By, Balance b/d.	24,000	16,000
₹ Interest on Drawings	360	300	₹ Interest on Capital	960	640
₹ Balance c/d.	59,715	41,855	₹ Salary	-	4,800
			₹ Commission	16,400	-
			₹ Share of Profit	30,715	30,715
	72,075	52,155		72,075	52,155

Balance Sheet 

as at 31st March, 2022 

Liabilities	(₹)	Assets	(₹)	(₹)
Capital :		Land		11,000
X	59,715	Furniture	10,000
Y	41,855	Less: Depreciation	1,000	9,000
Reserve Fund	61,430
		Loan		20,000
		Closing Stock		1,20,000
		Cash		3,000
	1,63,000			1,63,000

 Illustration 11

From the following balances extracted from the books of Mr. S on December 31, 2021, prepare a Trading and Profit and Loss Account for the year ended on that date and also a Balance Sheet as on the same date:

Trial Balance as on 31.12.2021

Particulars	Dr. (₹)	Particulars	Cr. (₹)
Salaries	18,000	Sales	2,43,000
Debtors	1,26,000	8% Loan from Mr. Kumar (taken on 1.7.21)	60,000
Stock on 01.01.2021	30,000	Provision for Bad Debts	8,000
Machinery	2,00,000	Bills Payable	11,000
Furniture	85,000	Outstanding Salaries	3,000
Bad Debts	4,000	Capital Account	3,30,000
Purchases	1,50,000	Creditors	90,000
Printing & Stationery	5,300
Postage & Telephone	3,200
Rent	4,500
Cash in Hand	2,500
Bank Balance	72,500
Insurance	4,800
Bills Receivable	15,000
General Expenses	9,200
Drawings	10,000
Interest on loan	2,000
Wages	3,000
	7,45,000		7,45,000

Additional Information:

a. Closing Stock (as on 31.12.2021): Cost Price ₹ 50,000; Market Value ₹ 40,000.

b. An old furniture which stood at ₹ 12,000 in the books on Jan 1, 2021 was disposed of at ₹ 5,800 on June 30, 2021, in part exchange of a new furniture costing ₹ 10,400. A net invoice of ₹ 4,600 was passed through the Purchase Day Book.

c. Sales include ₹ 36,000 hire-purchase sales. Hire-purchase sales prices are determined after adding 25% on Hire-Purchase price. 30% of the installments have not fallen due yet. Profit or loss on hire-purchase sales is to be shown in the Profit and Loss Account.

d. Debtors include ₹ 7,500 due from Mr. M and Creditors include ₹ 6,000 due to him.

e. Insurance premium had been paid for the year ended December 31, 2021.

f. Depreciate the fixed assets as follow: Machinery @ 15% p.a. and Furniture @ 10% p.a.

g. Provide 5% for bad debts on debtors (excluding hire-purchase debtors).

Solution:

Mr. S

Trading and Profit & Loss Account for the year ended 31.12.2021

Dr.					Cr.
Particulars	(₹)	(₹)	Particulars	(₹)	(₹)
To, Opening Stock		30,000	By, Sales	2,43,000
To, Purchases	1,50,000		Less: Sales on Hire Purchase basis	36,000	2,07,000
Less: Exchange of Furniture [WN: 2]	4,600	1,45,400	By, Goods Sent on Hire Purchases  [₹36,000 × 75%]		27,000
To, Wages		3,000	By, Closing Stock [WN: 1]		40,000
To, Gross Profit		95,600
		2,74,000			2,74,000
To, Salaries		18,000
To, Bad Debts		4,000
To, Printing & Stationery		5,300
To, Postage & Telephone		3,200
To, Rent		4,500
To, Insurance	4,800
Less: Prepaid Insurance [4,800 × 3/12]	1,200	3,600
To, General Expenses		9,200
To, Interest on Loan	2,000
Add: Outstanding interest on loan  [(₹60,000 × 8% × 6/12) – 2,000]	400	2,400
To, Loss on Exchange [WN: 2]		5,600
To, Depreciation:
Machinery	30,000
Furniture [₹7,820 (WN: 4) + ₹600  (WN: 2)]	8,420	38,420
To, Provision for Bad debt (New)		5,460
To, Capital A/c [Net Profit transferred]		10,220
		1,09,900			1,09,900

Balance Sheet as on 31.12.2021

Liabilities	(₹)	(₹)	Assets	(₹)	(₹)
Capital	3,30,000		Machinery	2,00,000
Add: Net profit	10,220		Less: Depreciation @15%	30,000	1,70,000
	3,40,220		Furniture	85,000
Less: Drawings	10,000	3,30,220	Less: Net Exchange [WN: 2]	1,600
8% Loan from Mr. Kumar		60,000		83,400
			Less : Depreciation [WN: 4]	7,820	75,580
Creditors	90,000		Stock-in-Trade [WN: 1]		40,000
Less: Creditors for Furniture [WN: 2]	4,600		Hire Purchase Stock [WN: 3]		8,100
	85,400		Debtors	1,26,000
Less: Set-off	6,000	79,400	Less: Hire Purchase Debtors [₹36,000 × 30%]	10,800
Creditors for Furniture [WN: 2]		4,600		1,15,200
			Less: Set-off	6,000
Bills Payable		11,000		1,09,200
Outstanding Salaries		3,000	Less : Provision for Bad Debt	5,460	1,03,740
Outstanding Interest on Loan		400
			Bills Receivable		15,000
			Prepaid Insurance		1,200
			Bank Balance		72,500
			Cash in hand		2,500
		4,88,620			4,88,620

Working Notes:

1. Exchange of Furniture - Rectification Entry

	(₹)	(₹)
Creditors A/c                                                                                                                                                                                    Dr	4,600
Depreciation A/c                                                                                                                                                                              Dr	600
Loss on Exchange A/c                                                                                                                                                                      Dr.	5,600
To, Furniture A/c		1,600
To, Creditors for Furniture A/c		4,600
To, Purchases A/c		4,600

2. Goods sent and sold on Hire-purchase

HP Trading A/c 

Particulars	(₹)	Particulars	(₹)
To, Goods sent on HP A/c  [₹36,000 × 75%]	27,000	By, HP Sales A/c  [Matured Installment]	25,200
To, P/L A/c	6,300	By, Stock with H. P.  [₹36,000 × 30% × 75%]	8,100
	33,300		33,300

HP Sales A/c

Particulars	(₹)	Particulars	(₹)
To, HP Trading A/c   [₹36,000 × 75%]	25,200	By, Sales A/c	36,000
To, Balance c/f	10,800
	36,000		36,000

HP Debtors A/c

Particulars	(₹)	Particulars	(₹)
To, Debtors A/c	10,800	By, Balance c/f	10,800
	10,800		10,800

3. Depreciation on Furniture [to be deducted from Furniture in Balance Sheet]

	(₹)
On Old Furniture [₹83,400 – 10,400] × 10%	7,300
On Furniture acquired during the year [₹10,400 × 10% × 6/12]	520
	7,820

 Illustration 12

Mrs. Joshi has presented you the following Trial Balance as on 31st December 2021:

Trial Balance as on 31.12.2021 

Particulars	(₹)	Particulars	(₹)
Purchases	1,75,000	Sales	3,25,000
Interest	8,000	10 % Loan from UBI	1,00,000
Debtors	1,04,000	Bills Payable	86,000
Suspense A/c	8,000	Capital	4,87,000
Rent	6,600	Sundry Creditors	1,02,500
Plant & Machinery	5,30,000	Apprenticeship Premium Received	2,000
Furniture & Fixture	85,000	Purchase Return	1,500
Salaries	7,000
Wages	2,500
GST	6,000
Motor Car	70,000
Octroi	500
Insurance	10,000
Unexpired insurance	2,300
Factory Shed	30,000
Bills Receivable	25,000
Patent	32,100
Sales Return	2,000
	11,04,000		11,04,000

You are required to prepare a Trading and Profit & Loss account and a Balance Sheet as on 31st Dec 2021 after considering the following adjustment:

1. A sale of ₹ 25,000 made for cash had been credited to Purchase A/c.

2. Private purchase amounting to ₹ 600 had been included in Purchase Day Book.

3. The loan account in the books of proprietor appeared as follows: 

10% Loan from UBI Account

Date	Particulars	(₹)	Date	Particulars	(₹)
31.12.21	To Balanced c/f	1,00,000	1.1.21	By Balance b/f	50,000
			31.12.21	By Bank A/c	50,000
		1,00,000			1,00,000

Interest paid includes ₹ 3,000 interest paid to UBI Bank.

4. During the year goods worth ₹ 1,00,000 were invoiced on ‘sale on approval basis’ at cost plus 25%. Out of these, goods worth ₹ 20,000 accepted by the customers, ₹ 40,000 worth of goods were rejected and properly accounted for but no intimation has

    been obtained for the balance of the goods and its period is yet to expire.

5. Debtors were shown after deduction of Provision for Doubtful Debt of ₹ 2,000. It was decided that this debt was considered to be bad and should be written off and a provision of ₹ 1,000 should be made which was considered doubtful.

6. Suspense account represents money advanced to sales manager who was sent to Mumbai in August, 2021 for sales promotion. On returning to Kolkata submitted a statement disclosing that ₹ 2,000 was incurred for travelling, ₹ 1,200 for legal expenses

    and ₹ 1,800 for miscellaneous expenses. The balance lying with him is yet to be refunded.

7. Business is carried on in a two-storied rented house. The ground floor, being 50 per cent of the accommodation, is used for business. Mrs. Joshi lives with her family on the first floor.

8. The Furniture account represents old furniture which was replaced on 1.1.2021 by a new one, costing ₹ 1,20,000 with an additional cash payment of ₹ 80,000 lying debited to purchases account. However, the assets were put to use on 1.4.2021.

9. Depreciation is to be charged on Furniture @ 10% p.a., Plant & Machinery @ 5% p.a., Motor Car @ 5% p.a. 

10. The General manager is entitled to commission based on a percentage of net profit (such commission being charged to profit and loss account before ascertaining the net profits), calculated in the following manner :

On the first ₹ 30,000 of net profit                                    Nil

On the next ₹ 30,000 of net profit                                  10%

On the next ₹ 30,000 of net profit                                  20%

And on the balance of net profit                                   30%

11. Closing Stock was 31.12.2021 was 22,000.

Solution:

Mrs. Joshi

Trading and Profit & Loss Account for the year ended 31.12.2021    

Particulars	(₹)	(₹)	Particulars	(₹)	(₹)
To, Purchases	1,75,000		By, Sales	3,25,000
Less : Purchase Return	1,500		Less : Sales Return	2,000
	1,73,500			3,23,000
Add : Sales wrongly credited in Purchase	25,000		Add : Sales wrongly credited to Purchase	25,000
	1,98,500			3,48,000
Less : Private purchase	600		Less : Sale on approval basis	40,000	3,08,000
	1,97,900
Less : Payment for Furniture [WN: 2]	80,000	1,57,900	By, Closing Stock
To, Wages		2,500	In hand	22,000
To, Octroi		500	With Customer [WN: 1]	32,000	54,000
To, Gross Profit c/d		2,01,100
		3,62,000			3,62,000
To, Rent	6,600		By, Gross Profit b/d		2,01,100
Less: Rent of Personal portion (50%)	3,300	3,300	By, Apprenticeship Premium		2,000
To, Salaries		7,000	By, Provision for Bad Debt		2,000
To, GST		6,000
To, Insurance		10,000
To, Interest	8,000
Add : Outstanding  [(50,000 × 10%) – 3,000]	2,000	10,000
To, Bad Debt		2,000
To, Provision for Bad Debts		1,000
To, Depreciation:
Furniture	12,000
Plant & Machinery	26,500
Motor Car	3,500	42,000
To, Loss on Exchange [WN: 2]		45,000
To, Sales Promotion Expenses:
Travelling	2,000
Legal Expenses	1,200
Misc. Expenses	1,800	5,000
To, General Manager’s  Commission [WN:3]		16,140
To, Capital A/c [Net Profit transferred]		97,660
		2,41,100			2,41,100

Balance Sheet as on 31.12.2021 

Liabilities	(₹)	(₹)	Assets	(₹)	(₹)
Capital	4,87,000		Patent		32,100
Add : Net Profit	97,660		Factory Shed		30,000
	5,84,660		Plant & Machinery	5,30,000
Less : Drawings [Rent of Personal Accommodation]	3,300	5,81,360	Less : Depreciation @ 5%	26,500	5,03,500
10 % Loan from UBI		1,00,000	Furniture & Fixture	85,000
Bills Payable		86,000	Add: Net Exchange	35,000
Sundry Creditors	1,02,500			1,20,000
Less : Private purchase	600	1,01,900	Less : Depreciation @10%	12,000	1,08,000
Outstanding Interest		2,000
Outstanding Manger’s Commission		16,140	Motor Car	70,000
			Less : Depreciation @ 5%	3,500	66,500
			Stock-in-Trade:
			In hand	22,000
			With Customers [WN: 1]	32,000	54,000
			Debtors [1,04,000 + 2,000]	1,06,000
			Less : Sale on Approval basis [WN:1]	40,000
				66,000
			Less : Bad debt	2,000
				64,000
			Less : Provision for Bad Debts	1,000	63,000
			Bills Receivable		25,000
			Unexpired insurance		2,300
			Due from Sales Manager  [8,000 – 5,000]		3,000
		8,87,400			8,87,400

Working Notes:

1. Unexpired goods on Sale on approval basis

	(₹)
Invoice price of goods sent	1,00,000
Less: Goods accepted	(20,000)
Goods returned	(40,000)
∴ Invoice Vale of goods lying in the hands of customer	40,000
∴ Cost price of goods waiting approval = ₹ 40,000 × 100/125 = ₹ 32,000

2. Exchange of Furniture

	(₹)
Original Cost of new Furniture	1,20,000
Less: Payment made	80,000
∴ Exchange Value	40,000
∴ WDV of old Furniture	85,000
∴ Loss on Exchange	45,000

Rectification Entry 

	(₹)	(₹)
Furniture A/c	35,000
Loss on Exchange A/c	45,000
To Purchases A/c		80,000

3. General manager’s Commission

Net Profit before manager’s commission = ₹ 241,100 – ₹ 1,27,300 = ₹ 1,13,800

Net Profit	Rate of Commission	Commission (₹)
On first ₹ 30,000	-	-
On Next ₹ 30,000	10%	3,000	[30,000 × 10%]
On Next ₹ 30,000	20%	6,000	[30,000 × 20%]
On balance	30%	7,140	[1,13,800 – 90,000] × 30%
∴ Commission payable to General Manager		16,140

Exercise

Theoretical Questions:

Multiple Choice Questions

1.  Which of the following will not appear in P&L A/c?
    (a)  Capital
    (b)  Bad Debts
    (c)  Provision for Doubtful Debts
    (d)  Rent paid
   
   
2. Outstanding salaries is shown as 
   (a)  An Asset in the Balance Sheet
    (b)  A Liability in the Balance sheet
    (c)  By adjusting it in the P & L A/c
    (d)  Both (b) and (c) 
   
   

Answer :

1

a

2

d

Numerical Questions

Multiple Choice Questions

1. Following information is given:   (₹)
    Opening Stock - 2,13,000 
   Purchase - 16,55,000 
   Sales - 21,32,000 
   Carriage Inwards - 32,500
   Carriage Outwards - 38,600 
   Return Inwards - 38,000 
   The rate of gross profit is 25% on cost then value of closing stock will be –––––––––––.
   (a)  ₹ 2,57,800 
   (b)  ₹1,94,900
   (c)  ₹2,25,300 
   (d)  ₹ 3,30,000
   
   
2.  If opening capital is ₹70,000 and closing capital is ₹90,000, what is the amount of profit or loss?
    (a)  ₹ 20,000 Profit
    (b)  ₹ 20,000 Loss
    (c)  ₹ 70,000 Loss
    (d)  ₹ 90,000 Proft
   
   
3. A Charitable Institution has 250 members with a annual subscription of  ₹ 5,000 each. The subscription received during 2020-21 were  ₹ 11,25,000, which include  ₹ 65,000 and  25,000 for the years of 2019-20 and 2021-22 respectively. Amount of outstanding subscription for the 2020-21 will be: 
   (a)  ₹ 90,000 
   (b)  ₹ 1,25,000 
   (c)  ₹ 2,15,000 
   (d)  ₹ 1,90,000
   
   
4. If average inventory is ₹ 1,25,000 and closing inventory is  ₹ 10,000 less than opening inventory then the value of closing inventory will be:
    (a) ₹ 1,35,000
    (b) ₹ 1,15,000
    (c) ₹ 1,30,000 
   (d) ₹ 1,20,000

Answer:

1

c

2

a

3

c

4

d