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Extra Questions

Question-1
What do you understand by Adjustment Entry? Why is it necessary to pass the
Adjustment Entries?
Solution:
In a firm there are a number of transactions related to expenses and incomes, which
have to be adjusted. If such items are not adjusted or brought into the current years
books of account, the Final Accounts will not reveal a true and fair picture of the
results. All such items which need to be brought into books of accounts at the time of
preparing Final Accounts are called adjustments. Journal entries are passed to effect
the required adjustments. These entries are known as Adjusting Entries.
Comment

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Question-2

If closing stock is given outside the Trial Balance, where will you show it in the Final
Accounts?
Solution:
Closing stock is valued at cost or market price whichever is lower and then
incorporated in the accounts by passing the following adjustment entry:
Closing Stock A/c Dr.
To Trading A/c
Thereafter, the closing stock is treated in the Final Accounts as follows:
On the Credit side of the Trading Account as a separate item and
On the asset side of the Balance Sheet as a separate item under Current Assets.

Comment

Question-3
What do you understand by Outstanding Expenses?
Solution:
Expenses which have been incurred during the year and whose benefit has been
derived during the year, but not paid for yet are called outstanding expenses.
Comment

Question-4
How are outstanding expenses shown in the Final Accounts?
Solution:
The adjusting entry for this is :

Expense A/c Dr.

To Outstanding Expenses A/c
Comment

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Question-5
What do you understand by prepaid expenses?
Solution:
In some cases, the benefit of the amount already spent will be available in the next
accounting year also. Such a part of the expense is called a prepaid expense.
Comment

Question-6
How are prepaid expenses shown in the final accounts?
Solution:
The adjusting entry for prepaid expense is

Prepaid Expense A/c Dr.

To Expense A/c
Comment

Question-7
What do you understand by depreciation?

Solution:
The value of fixed assets reduce after year because of usage and passage of time
which is known as depreciation.
Comment

Question-8
What are the methods of calculating depreciation?
Solution:
Straight line method and diminishing value method
Comment

Question-9
What do you understand by bad debts?
Solution:
Sometimes, some people fail to pay their dues either partially or completely. The
amount that is irrecoverable is a loss and known as Bad Debt.
Comment

Question-10
What do you understand by provision for doubtful debts?
Solution:
Out of the credit sales made during the particular year, some debts are likely to
become bad in the next year due to non payments. The correct accounting is to
make provision for such likely bad debts every year. This is known as provision for
doubtful debts.
Comment

Question-11
What do you understand by Provision for Discount on Debtors?
Solution:
Debtors outstanding at the end of the year make payment in the next year and they
may be entitled to cash discount if they make the payment by the due date. Because,
the debt has arisen during the year, the discount is to be taken as expense for the year.
Thus, a provision for discount on debtors is made.
Comment

Question-12
What is the entry for managers commission?
Solution:
Profit and Loss A/c Dr.
To Commission Payable or Outstanding commission A/c
Comment

Question-13

What is meant by capital?

Solution:
Funds invested by a proprietor to the business constitute the capital.
Comment

Question-14
Drawings is reduced from?
Solution:
Capital
Comment

Question-15
When should we pay interest on loan and how is it calculated?
Solution:
Interest must be paid on loans whether there is profit or loss. It is calculated by
referring to the rate of interest agreed to be paid by the firm and the amount and
period of the loan.
Comment

Question-16
What are outstanding expenses? What is its adjustment entry?
Solution:
Expenses which have been incurred during the year and whose benefit has been
derived during the year, but not paid for yet are called outstanding expenses. At the
end of the accounting year, all such expenses must be brought into the books;
otherwise the profit will be overstated. These include outstanding wages, salaries etc.


Outstanding Expenses are shown as liabilities in the Balance Sheet under liabilities.
The adjusting entry for this is :

Expense A/c Dr.

To Outstanding Expenses A/c
Comment

Question-17
What is meant by prepaid expenses? How is it adjusted in the Final accounts?
Solution:
In some cases, the benefit of the amount already spent will be available in the next
accounting year also. Such a part of the expense is called a prepaid expense.
Common examples of such expenses are unexpired insurance, interest paid in
advance, etc. in such situations, it is necessary to adjust unexpired part of expense in
the concerned expense in order to get the true and fair financial position of the
business.

The adjusting entry for prepaid expense is

Prepaid Expense A/c Dr.

To Expense A/c
Comment

Question-18
Define Accrued income? What is its adjusting entry?
Solution:
Accrued incomes are those incomes which have been earned during the accounting
period but have not been received till the end of the accounting period. Such incomes
are called Outstanding incomes or Incomes earned but not yet received. Common

examples of such incomes are commission receivable, income on investments due

but not yet received etc. As per the accrual concept of accounting, the full income of
the period, both received and yet to be received, should be shown in the Final
Accounts otherwise the profit and assets will remain understated. An adjusting entry
passed is :

Accrued Income A/c Dr.

To concerned Income A/c
Comment

Question-19
What is unearned income? How is it adjusted in the Final Accounts?
Solution:
Sometimes an amount is received during a year in respect of an income that relates
partially to the next year. The income which has been received during the current
accounting year but relates to the next accounting year is called Unearned Income or
Income Received in Advance. Adjusting entry for the income received in advance is
as follows:

Income A/c Dr.

To Income Received in Advance A/c
Comment

Question-20
What is the purpose of preparing a provision for the Doubtful debts account?
Solution:
A firm, makes provision at the end of the accounting year for likely bad debts in the
next year. This is for the simple reason that out of the credit sales made during the
particular year, some debts are likely to become bad in the next year due to non

payments. The correct accounting is to make provision for such likely bad debts every
year. The entry for creating a provision is:

Profit and loss A/c Dr.

To Provision for Doubtful Debts
Comment

Question-21
The Trial Balance of Mr. Gopal Das as on 31st March 2008 was as follows:

Heads of Account
Purchases/Sales

Dr. (Rs)
812525

Provision for Doubtful Debts

Sundry Debtors/Sundry Creditors

Cr. (Rs)
1262000

251000

Bills payable

26000
152630

19750

Opening Stock

133625

Wages

115685

Salaries

27875

Furniture

36250

Postage

21130

Power and Fuel

6750

Trade Expenses

29155

2625

Loan to Ram@10% (December 1 2007)

15000

Cash in Hand and at Bank

50000

Bad Debts

Trade Expenses accrued, but not paid

Drawings A/c / Capital A/c

22260

Outstanding Wages

50000

1523880

3500

10000
1523880

Prepare the Trading and Profit and Loss Account for the year ended March 31 2008
and the Balance Sheet as on that date after taking into considerations the following
information-

1. Stock on 31st March 2008 was Rs. 62750

Depreciation on furniture is to be charged @ 10%
Provision for doubtful debts is to be maintained @ 5% on sundry debtors
Sundry debtors include an item of Rs. 2500 due from a customer who has
become insolvent.
Goods of the value of Rs, 7500 have been destroyed by fire and insurance
company admitted a claim for Rs. 5000.
Received Rs. 6000 worth of goods on 27th March 2008 but the invoice of
purchase was not recorded in Purchases Book.

Solution:
Trading and Profit & Loss Account
for the year ended 31st March 2008
Particulars
To Opening Stock
To Purchases

Rs.

Rs.

Particulars

133,625

812,525

Rs.

Rs.

By Sales

1,262,000

By abnormal loss

7,500

by fire
Add: Omitted
Purchases

6,000

818,525

By Closing stock

62,750

To Wages

115,685

To Power and Fuel

6,750

To Gross Profit c/d

257,665

1,332,250

1,332,250

257,665

To irrecoverable loss
of stock

By Gross Profit

2,500

b/d
By Prov for

To Salaries

27,875

doubtful debts

26,000

To postage

21,130

Less: 5% provision

12,425

13,575

loan

500

By interest on
To Trade Expenses
To Bad Debts

29,155

2,625

Add: Further bad

debts

2,500

5,125

3,625

A/c

182,330

271,740

271,740

To Depreciation
To Net profit
transferred to capital

Balance Sheet
as at 31st March 2008
Liabilities

Rs.

Rs.

Assets

Current Liabilities

Current Assets

Creditors

Rs.

Rs.

152,630

Insurance Co.

5,000

6,000

158,630

Cash in Hand

50,000

19,750

closing stock

62,750

251,000

2,500

248,500

Add: Omitted
purchases
Bills payable

Sundry
Outstanding wages

10,000

Trade expenses

Debtors
Less: Bad

accrued

3,500

Capital

Opening Balance

50,000

Less: Provision

12,425

236,075

Less: Drawings

22,260

Loan to Ram

15,000

27,740

Add: Interest

500

15,500

182,330

210,070

Fixed Assets

36,250

3,625

32,625

Add Net Profit

Debts

Furniture
Less:

Depreciation

401,950

401,950

Comment

Question-22
The Trial Balance of M/s Taj & Co as on 31st December 2008 was as follows:

Ledger Accounts
Purchases

Dr. (Rs.)

Cr. (Rs.)

162500

Sales

252400

Reserve for Doubtful Debts

5200

Sundry Debtors

50200

Sundry Creditors

30526

Bills Payable

3950

Opening stock

26725

Wages

23137

Salaries

5575

Furniture

7250

Postage

4226

Power and Fuel

1350

Trade Expenses

5831

525

3000

10000

Bad Debts
Loan to Suraj @ 10% (1st September 2002)
Cash in Hand and at bank
Trade Expenses Accrued not paid

700

Drawings A/c

700

Capital A/c
Outstanding Wages

4452

2000

Prepare the Trading and Profit and Loss Account for the year December 2008 and
Balance Sheet after considering the following information1. Depreciation on furniture @ 10% to be charged.
Debtors include an item of Rs. 500 due from a customer who has become
insolvent.
Provision for bad debts @ 5% on Sundry Debtors is to be maintained.
Goods valued @ Rs. 1500 destroyed by fire and insurance company admitted

a claim for Rs. 1000.

Stock on 31st December 2008 was Rs. 12550.

Solution:
Trading and Profit & Loss Account
for the year ended 31st March 2008
Particulars

Rs.

Rs.

Particulars

To Opening Stock

26,725

To Purchases

162,505

To Wages

23,137

To Power and Fuel

To Gross Profit c/d

Rs.

Rs.

By Sales

252,400

By Goods lost by Fire A/c

1,500

By Closing stock

12,550

1,350

52,733

266,450

266,450

725

By Gross Profit b/d

52,733

5,200

To Depreciation on
Furniture

By Reserve for Doubtful

To Bad Debts

525

Debts
By Interest on Loan

Add: Further Bad Debts

500

(3000810/10084/12)

100

2,485

3,510

(1500-1000)

500

To Salaries

5,575

To Postage

4,226

To Trade Expenses

5,831

capital a/c

37,666

58,033

58,033

New Provision for Doubtful

Debts
(50200-500)5/100
To Goods lost by fire

To Net profit transferred to

Balance Sheet
as at 31st March 2008
Liabilities

Rs.

Rs.

Assets

Current Liabilities

Current Assets

Outstanding Wages

2,000

Trade expenses not

paid

700

Sundry creditors

30,526

Bills payable

Capital
Opening balance

Rs.

Rs.

Cash

10,000

Insurance Claim

1,000

Closing stock

12,550

3,950

Sundry Debtors

50,200

Less: Bad Debts

500

10,000

49,700

Less: Provision for

Less: Drawings

4,452

Doubtful Debts

5,548

(49700*5/100)

37,666

43,214

Add: Net Profit

2,485

Loan

47,215

3,000

Add: Interest on

loan

Fixed Assets

Furniture

Less: Depreciation

80,390

100

3,100

7,250

725

6,525

80,390

Comment

Question-23
From the following ledger balances of Mr. Charan Singh, prepare a Trading and Profit
and loss Account for the year ended 31st March 2008 and a Balance Sheet as on that
date after making the necessary adjustments.

Particulars

Rs.

Particulars

Rs.

Trade Expenses

800

Freight and duty

2000

Carraige outwards

500

Sundry Debtors

20600

Furniture and fixtures

5000

Printing and stationery

400

Sundry creditors

10000

Return outwards

1000

Purchases

82000

Plant and Machinery

5000

Return inwards

2000

Rent, Rates and taxes

4600

Sales

120000

Postage and telegraphs

800

Stock on 1.4.2007

20000

Drawings

6000

(additions on 1.10.2007)
Capital

80000

Reserve for doubtful

800

debts
Rent for premises sublet

1600

Salaries and wages

21300

Cash at bank

20500

Insurance charges

700

Cash in hand

6200

Adjustments:
1. Stock on 31st March 2008 was 14000
Provision for doubtful debts is to be maintained @ 5%
Provision for depreciation, furniture and fixtures @ 5% pa and on plant and
machinery at 20% pa.
Insurance prepaid was Rs. 100
A fire occurred in the godown and stock of the value of Rs. 5000 was
destroyed. It was insured and the insurance company admitted full claim.

Solution:
Trading and Profit & Loss Account
for the year ended 31st March 2008
Particulars
To opening stock
To Purchases

Rs.

Rs.

15,000

82,000

Particulars

Rs.

By Sales

120,000

2,000

118,000

5,000

By closing stock

14,000

Less: Return

Rs.

inwards
Less Return outwards

1,000

81,000

By loss of stock
by fire

To Freight and duty

2,000

To Gross Profit c/d

39,000

137,000

To Trade expenses

137,000

39,000

By Gross Profit

800

b/d
By Rent for

To Carraige outwards

500

premises

1,600

250

4,000

500

4,500

To printing and stationery

400

To rent, rates and taxes

4,600

To Insurance

700

Less: Prepaid

100

600

To salaries and wages

21,300

To Postage and telegraphs

800

debts (closing)

(20000*5/100)

1,000

600

1,600

800

800

Capital A/c

6,050

40,600

40,600

To depreciation on furniture
and fixtures
to dep on plant and
machinery
(20000*20/100)
(5000*20/100*6/12)

To provision for doubtful

Add: Further Bad Debts

Less Provision for doubtful

debts(opening)
To net profit transferred to

Balance Sheet
as at 31st March 2008
Liabilities

Rs.

Rs.

Assets

Rs.

Rs.

Current Liabilities

Current Assets

Sundry Creditors

10,000

Cash in hand

6,200

Capital

Cash at bank

20,500

Opening Balance

80,000

Sundry Debtors

20,600

600

20,000

Less: Further bad

Add Net Profit

6,050

debts

86,050

Less: Provision for

Less: Drawings

6,000

80,050

doubtful debts

1,000

19,000

Closing stock

14,000

Insurance claim

5,000

prepaid insurance

100

Fixed Assets

Furniture and Fixtures

Less: Depreciation

Plant and Machinery

Less: Depreciation

90,050

5,000
250

4,750

25,000

4,500

20,500

90,050

Comment

Question-24
From the following Trial Balance of Ram Narain as on 31st December 2008, prepare
the Trading and Profit and loss Account and the Balance Sheet.

Particulars

Rs.

Particulars

Rs.

Opening Stock

15500

Land and Buildings

35000

Machinery

50000

Furniture and Fixtures

5000

Purchases

106000

Salaries

11000

General Expenses

2500

Capital

60000

Loan from Mrs. Ram

30000

Sundry Creditors

9600

Purchases Returns

2100

Sales

207300

Discount

1200

Rent

3000

Postage and Telegrams

1400

Stationery

1300

Narain @ 9%

Wages

26000

Freight on Purchases

2800

Carraige on Sales

4000

Repairs

4500

Sundry Debtors

30000

Bad Debts

600

Cash in Hand

100

Cash at Bank

6400

Sales Returns

5100

The following further information was given:

1. Wages for December 2008 amounting to Rs. 2100 have not yet been paid
Included in general expenses is insurance premium Rs. 600, paid for the year
ending 31st March 2008.
A provision for doubtful debts @ 5% on debtors is necessary.
Depreciation is to be charged as follows:

a. Land and Building 2%

Machinery @ 10%
Furniture and Fixtures 15%
5. The loan from Mrs. Ram Narain was taken on 1st July 2008. Interest has not
been paid yet.
The value of stock at hand on 31st December 2008 was Rs. 14,900.
The manager is entitled to a commission on 10% of the net profit after
charging such commission.

Solution:
Trading and Profit & Loss Account
for the year ended 31st March 2008
Particulars

Rs.

Rs.

Particulars

Rs.

Rs.

To Opening Stock

15,500

By Sales

207,300

To Purchases

106,000

Less: Sales

5,100

202,200

Returns
Less Purchases Returns

2,100

103,900

By Closing stock

14,900

To Freight on Purchases

2,800

To Wages

26,000

Add outstanding wages

2,100

28,100

To Gross Profit c/d

66,800

217,100

217,100

By Gross Profit
To Salaries

11,000

b/d

66,800

To Rent

3,000

By Discount

1,200

Telegrams

1,400

To Stationery

1,300

To Repairs

4,500

To carraige on sales

4,000

To General Expenses

2,500

Less Prepaid insurance

600

1,900

To interest on loan @ 9%

1,350

To Bad Debts

600

debts

1,500

2,100

To depreciation on:

Land and Building

700

Plant and Machinery

5,000

Fixtures and Furnitures

750

6,450

To commission to
manager (Note)

2,818

capital a/c

28,182

68,000

68,000

To Postage and

Add: Provision for bad

To Net profit transferred to

Balance Sheet
as at 31st March 2008
Liabilities

Rs.

Rs.

Assets

Rs.

Rs.

Sundry Creditors

9,600

Current Assets

Wages outstanding

2,100

Cash in Hand

100

2,818

Cash at Bank

6,400

Manager's
commission (Note)

Mrs. Ram Narain's

Loan
30,000

Sundry Debtors

30,000

Less: Provision
Add: Interest on

for Doubtful

Loan
Capital

1,350

31,350

Debts
Closing stock

1,500

28,500

14,900

insurance

600

Fixed Assets

unexpired
Openign Balance

60,000

Add: Net Profit

28,182

88,182

Furniture and

Fixtures

5,000

Less:

Depreciation

Machinery

750
50,000

4,250

Less:

Depreciation

5,000

45,000

Land and

Building

35,000

Less:
Depreciation

134,050

134,050

700

34,300

Note: Profit before charging commission is Rs. 31000. commission payable @ 10% of
net profit after charging such commission.
Managers Commission
= Net Profit * % of commission/100 + % of commission
= Rs. 31000*10/110 = Rs. 2818.
Comment

Question-25

Prepare the Trading and Profit and Loss Account and the Balance Sheet from the
following balances, relating to the year ending 31st March 2008.

Details

Rs.

Capital

Details

100000

Rs.

Creditors

12000

Return outwards

5000

Sales

Bills payable

5000

Plant and Machinery

40000

Drawings

10000

Sundry Debtors

24000

Purchases

105000

Wages

50000

Repairs

500

164000

Return inwards

3000

Bank

10000

Stock 1.4.2007

20000

Rent

4000

Manufacturing expenses

8000

Trade expenses

7000

Bad Debts

2000

Carriage

1500

Fuel and Power

1000

Additional Information:
1. The closing stock was valued at Rs. 14500
Depreciate Plant and Machinery Rs. 4000
Allow 5% interest on capital and charge interest on drawings @ 6%
A sum of Rs. 400 is due for repairs
A cheque of Rs. 2000 deposited in the last week of December was reported to
have been dishonored.

Solution:
Trading and Profit & Loss Account
for the year ended 31st March 2008
Particulars
To opening stock
To Purchases

Rs.

Rs.

Particulars

20,000
105,000

By Sales

Rs.

Rs.

164,000

3,000

161,000

By Closing Stock

14,500

By Gross Loss

5,000

Less: Return
Inwards

Less: Return

5,000

100,000

50,000

outwards
To Wages

c/d

To Manufacturing

8,000

To Carriage

1,500

to Fuel and Power

1,000

180,500

180,500

600

Capital A/c

27,300

Expenses

By Interest on
To Gross Loss b/d

5,000

Drawings
By Net Loss
transferred to

To Repairs

500

Add: Unpaid Repairs

400

900

To Rent

4,000

To Trade expenses

7,000

To Bad Debts

2,000

5,000

4,000

To Interest on
capital
To Dep.on Plant and
Machinery

27,900

27,900

Balance Sheet
as at 31st March 2008
Liabilities

Rs.

Rs.

Assets

Rs.

Rs.

Current Liabilities

Current Assets

Creditors

12,000

Bank

10,000

Less:
Dishonoured
Bills Payable

5,000

Outstanding Repairs

400

cheque

2,000

17,400

Debtors

24,000

8,000

add: Dishonoured
Capital
Opening Balance

100,000

cheque

Closing Stock

2,000

26,000
14,500

Add: Interest on
capital
5,000

Fixed Assets

Plant and

105,000

Machinery

40,000

Less:
Less: Drawings

10,000

Depreciation

4,000

36,000

Drawings

600

Net Loss

27,300

67,100

Interest on

84,500

84,500

Comment

Question-26
From the following Trial Balance, extracted from the books of MMN, prepare a Trading
and Profit and Loss Account for the year ended 31st December 2008 and a balance
Sheet as on that date:

Particulars

Debit (Rs.

Capital
Drawings

Credit (Rs.)

90000

6480

Land and Buildings

25000

Plant and Machinery

14270

Furniture and Fixtures

1250

Carraige inwards

4370

21470

4670

Wages
Salaries
Provision for Bad Debts

2470

Sales

91230

Sales Returns

1760

Bank Charges

140

Coal, Gas and Water

720

Rates and Taxes

840

Discount

Purchases

120

42160

Purchases Returns

8460

Bills Receivable

1270

Trade Expenses

1990

Sundry Debtors

37800

Sundry Creditors

Stock (1st January 2008)

12170

26420

Apprentice premium

Fire insurance

500

490

Cash at Bank

13000

Cash in Hand

850

Total

204950

204950

Adjustments:
Charge depreciation on Land and Building @ 2 %, on Plant and Machinery account
@ 10% and on Furniture and Fixtures at 10%. Make a provision of 5% on debtors for
Bad Debts. Carry Forward the following unexpired amounts:
a. Fire insurance Rs. 125
Rates and taxes Rs. 240
Apprenticeship premium Rs. 400
Charge 5% interest on capital
Closing stock Rs. 29390

Solution:
Trading and Profit & Loss Account
for the year ended 31st March 2008
Particulars
To opening stock
To Purchases
Less: Return outwards

Rs.

Rs.

Particulars

26,420

42,160

8,460

33,700

By Sales
Less: Return Inwards
By Closing Stock

Rs.

Rs.

91,230

1,760

89,470

29,390

To Wages

21,470

To Carriage

720

To Coal, Gas and Water

4,370

To Gross Profit c/d

32,180

118,860

118,860

To Salaries

4,670

By Gross Profit

32,180

To Bank Charges

140

By Discount

120

premium

500

Less: Unexpired

400

100

doubtful Debts

2,470

By Apprentice
To Rates and Taxes

840

Less: Prepaid

240

600

By Old provision of
To Trade Expenses

1,990

To Fire insurance

490

Less: Prepaid

125

365

4,500

Doubtful debts

1,890

To Depreciation on

625

Plant and Machinery

1,427

furnitur and Fixtures

125

2,177

A/c

18,538

34,870

34,870

To Interest on capital
To Provision on

Land and Building

to Gross Profit
transferred to Capital

Balance Sheet
as at 31st March 2008
Liabilities

Rs.

Rs.

Assets

Rs.

Rs.

Current Liabilities

Current Assets

Creditors

12,170

Debtors

37,800

Apprentice
premium

Capital

400

Less: Provision

1,890

35,910

Bills Receivable

1,270

Opening Balance

90,000

Closing stock

29,390

Add: Net Profit

18,538

Cash at bank

13,000

108,538

cash in hand

850

125

Taxes

240

Fixed Assets

Add: Interest on

Prepaid Fire

Capital

4,500

Insurance
Perpaid Rates and

113,038

Less: Drawings

6,480

106,558

Plant and

Machinery

14,270

Less: Depreciation

1,427

Land and Buildings

25,000

Less: Depreciation

625

12,843

24,375

Furniture and

Fixtures

1,250

Less: Depreciation

119,128

125

1,125
119,128

Comment

Question-27
The following is the Trial Balance of Ram on 31st March 2008.
Heads of Accounts

Dr. (Rs)

Cr. (Rs)

Purchases

150000

Debtors

200000

Interest earned
Salaries
Sales

4000

30000

321000