The Income Statement

The Balance Sheet

The Statement of Cash Flows
The Statement of Retained Earnings

Trading A/c
Only direct revenue and direct expenses are considered in it. Trading account is prepared
mainly to know the profitability of the goods bought by the businessman.

Closing Entries of Trading A/c

Trading A/c is a ledger account. Hence, no direct entries should be made in the trading
account. Several items such as Purchases, Sales are first recorded in the journal and then posted
to the ledger. The Same accounts are closed by the transferring them to the trading account.
Hence it is called as closing entries.

Advantages of Trading Account

1. The result of Purchases and Sales can be clearly ascertained
2. Gross Profit ratio to Sales could also be easily ascertained. It helps to determine Price.
3. Gross Profit ratio to direct Expenses could also be easily ascertained. And so, unnecessary
expenses could be eliminated.
4. Comparison of trading account details with previous years details help to draw better
administrative policies.

Followings are the items which are included in the credit side of the
trading account.

1.Sales

Sales include both cash sales and credit sales. Both types of sales are recorded in the
credit side while preparing the trading account of the business firm.

2.Sales returns

Sales returns must be deducted from total sales and to be shown in the credit side of
trading account. Sales returns are the sold goods which are returned from
customers.

3.Closing stock

Closing stock means the value of goods which are remain unsold in a
particular accounting period. Closing sock may be in the form of raw materials ,.
work in progress or finished goods. Closing stock is valued at cost or market price. It
also appears in the credit side of trading account.
PROFIT AND LOSS ACCOUNT

Advantages Of Profit And Loss Account

The main advantages of profit and loss account are as follows:

1. To Obtain Net Result

Profit and loss account gives the actual information about net profit or net loss of the
business for an accounting period. So, it is very useful to know the financial
condition of the firm.

2. To Know Total Expenses

Profit and loss account gives the actual information about indirect expenses.

3. Determination Of Ratio
Profit and loss account serves to determine the ratio between net profit to sales and
the ratio between net profit to operating expenses. It helps to understand the
operational efficiency of the firm.

5. Controlling

Profit and loss account helps in controlling indirect expenses by providing important
information about these expenses.
Items appearing on Debit side of the Profit & Loss A/c
The Expenses incurred in a business is divided in too parts. i.e. one is Direct expenses are
recorded in trading A/c., and another one is Indirect expenses, which are recorded on the debit
side of Profit & Loss A/c. Indirect Expenses are grouped under four heads:
1. Selling Expenses: All expenses relating to sales such as Carriage outwards, Travelling
Expenses, Advertising etc.,
2. Office Expenses: Expenses incurred on running an office such as Office Salaries, Rent, Tax,
Postage, Stationery etc.,
3. Maintenance Expenses: Maintenance expenses of assets. It includes Repairs and Renewals,
Depreciation etc.
4. Financial Expenses: Interest Paid on loan, Discount allowed etc., are few examples for
Financial Expenses.
Items appearing on Credit side of Profit and Loss A/c.
Gross Profit is appeared on the credit side of P & L. A/c. Also other gains and incomes of
the business are shown on the credit side. Typical of such gains are items such as Interest
received, Rent received, Discounts earned, Commission earned.

Items Included In The Debit Side Of Profit And Loss Account

Followings are the items which are included in the debit side of profit
and loss account.
1. Gross Loss
Gross loss is the debit balance of trading account which transferred to the profit
and loss account.
2. Selling and distribution expenses

Expenses incurred for the promotion of sales and distribution of sold goods are
selling and distribution expenses. Packing charge, carriage , freight outward, sales
tax, forwarding charge , export duty , travelling expenses etc are the examples of
selling and distribution expenses.
3.Administrative Expenses

Administrative expenses are those expenses which are incurred for day to day
running of office management.
4. Financial Expenses

Financial Expenses are incurred for arranging fund to run the business. Cash
discount allowed, interest on capital, interest on loan discount on bill etc. are the
examples of financial expenses. These expenses are recorded in the debit side while
preparing profit and loss account.
5. Maintenance Expenses

Expenses incurred for maintaining the fixed assets are called fixed expenses. Repair
and renewable depreciation of assets are some examples
of maintenance expenses.
6. Abnormal Losses

Abnormal losses are those losses which are incurred due to the carelessness of the
management. Loss on sale of asset , stock lost by fire etc are the examples of
abnormal losses. All abnormal losses are appeared in the debit side of P & L Account.

Items Included In The Credit Side Of Profit and loss Account

Items included in the credit side of profit and loss account

1. Gross Profit

Gross profit is transferred from trading account and it is the beginning item of profit
and loss account.

2. Non-trading Income

Interest received from bank,incomes received from outside investments like share
and debenture are known as non-trading incomes. These kind of incomes are
recorded in the credit side of profit and loss account.
Profit And Loss Account: Items Debited and
Advantages
By preparing the trading account, it is possible to find out the gross
profit or gross loss made during the given period. The next step is
the preparation of the Profit and Loss Account to ascertain net profit
earned or net loss suffered during a given period of time. The
balance of Trading Account is brought down to Profit and Loss
Account.

Then, the Profit and Loss Account is credited with other incomes
and debited with all indirect expenses. Then the Profit and Loss
Account may be balanced and the balance is (net profit/net loss) to
be transferred to Capital Account, in case of sole trading or
partnership firms.

Items Debited in Profit and Loss Account:

The following items are debited in the profit and loss
account:
1. Administrative expenses/Management expenses:
Office salaries, Office Rent, Office Lighting, Printing, Stationary,
and Telephone Rent, Directors’ fees, Auditor’s fee, Legal Expenses,
Postage, Insurance, Repairs, Interest and other similar expenses
connected with the office.

2. Financial expenses:
Interest on loan, Discount Allowed, Interest on Capital, Bad Debts,
Bank Expenses, Discount on Bills etc.

3. Sales Expenses:
Salesmen Salaries, Travelling Expenses, Advertising, Selling
Commission, Brokerage, Free Samples, Trade Expenses etc.

4. Distribution expenses:
Carriage out, Warehouse expenses, Warehouse Insurance, Ware-
house rent, Delivery Van Expenses, packing expenses etc.

5. Depreciation of assets, various provisions etc.

A proforma of a Profit and Loss Account is given below:
Advantages of Profit And Loss Account:
It provides the following advantages:
1. Various expenses can be effectively controlled by comparing
various expenses, year after

2. The net result – profit or loss, revealed by the Profit and Loss
Account is an index by which progress can be measured.

3. Profitability is the basis and helps in planning future course of

action.

Illustration 1:
Income and Expenditure Account
and Profit and Loss Account
The following are the points of distinction between
Income and Expenditure Account and Profit and Loss
Account:
Income and Expenditure Account:
(i) It is prepared by charitable institutions like clubs, hospitals, and
schools etc. which are run not for earning profits.

(ii) Its credit balance is known as surplus or excess of income over

expenditure.

ADVERTISEMENTS:

(iii) Its debit balance is referred to as deficit i.e. excess of

expenditure over income.

(iv) Surplus or deficit revealed by it is transferred to capital fund.

Profit and Loss Account:

(i) It is prepared by concerns run for earning a profit.

(ii) Its credit balance is known as net profit.

ADVERTISEMENTS:

(iii) Its debit balance is called net loss.

(iv) Net profit or net loss disclosed by it is transferred to capital

account in the case of a sole proprietorship concern and to capital
accounts of the partners in profit sharing ratio in case of a
partnership firm.

In case of a joint stock company, net profit is shown as a separate

item under ‘Reserves and Surplus’ while net loss is adjusted in
revenues. If net loss exceeds total of all revenue reserves, the
difference is shown as a negative reserve.

Difference between Profit and Loss Account and Balance

Sheet
The upcoming discussion will update you abut the difference between profit and

loss account and balance sheet.

Difference # Profit and Loss Account:

1. A Profit and Loss Account presents the result of the undertaking at a particular date.

2. It takes all the nominal accounts.

3. Profit and Loss Account is itself an account.

4. All the nominal accounts are closed by transferring to Profit and Loss Account, i.e.

these accounts do not exist.

5. The difference in Profit and Loss Account represents net profit or net loss.

6. The left hand side of Profit and Loss Account is the Expenditure side and the right

hand side is the Income side.

Difference # Balance Sheet:

1. A Balance Sheet exhibits the financial position as a whole at a particular date.

2. A Balance Sheet takes all the real and personal accounts.

3. It is a statement.

4. Balance Sheet is prepared by taking the real and personal accounts and their balances

are brought forward in the next year.

5. No such difference arises in Balance Sheet,

6. The left hand side of the Balance Sheet is known as Liabilities whereas the right hand

side is called the Assets side.

Balance Sheet: Definition, Functions and Limitations

Definition:

A Balance Sheet is a statement of the financial position of a firm at a given date. The

given date is the date at which the final accounts are prepared. Transactions are first

recorded m journal. Entries in the journal are posted to ledgers.

Ledger accounts are balanced and the balances are recorded in a Trial Balance Trial

Balance consists of all Accounts-Personal, Real and Nominal. From the Trial Balance,

nominal accounts are transferred to Trading or Profit and Loss Account and the

remaining balances are taken to Balance Sheet.

However, Balance Sheet is a summary of whole of the accounting record. This is because

the nominal accounts are transferred to Revenue Accounts, and Revenue account is

closed by shifting the balance to the Balance Sheet. Balance Sheet is also known as a

statement of Assets and Liabilities.

Balance Sheet is the last and the most important link in the chain of Final Accounts and

Statements. It describes the financial position of a business in a systematic standard

form. It is a mirror of a business.

When the assets exceed the liabilities, one can conclude that the business is sound and

solvent. The function of the Balance Sheet is to show the true picture of the business on

a particular date.

Form of Balance Sheet:

It has two sides left hand side (liabilities) and right hand side (assets). It is not an

account It is a statement. ‘To’ and ‘By’ should not be used in the Balance Sheet. The left

hand side contains the credit balances of all personal accounts while right hand side

contains debit balances of real and personal accounts. The two sides of the Balance

Sheet must always agree.

Functions of a Balance Sheet:

1. A Balance Sheet exhibits the true financial position of a firm at a particular date.

2. Financial position can be ascertained clearly with the help of Balance Sheet.

3. It provides valuable information to the management for taking better decision

through ratio analysis.

4. Balance Sheet helps in knowing past and present position of an enterprise. It may be

called the horoscope of the concern.

5. It is a mirror of a business.

Limitations of Balance Sheet:

1. It is prepared on a historical cost basis. Changes in prices are not considered.

2. Window-dressing may be done in Balance Sheet.

3. Historical Cost of Balance Sheet does not convey fruitful information.

4. Different assets are valued according to different rules.

ADVERTISEMENTS:

5. It cannot reflect the ability or skill of staff.

6. It is measured in terms of money or money’s worth. That is, only those assets are

recorded in it which can be expressed in money.

7. In inflationary trend, if the readers are not expert may mislead.

8. Balance Sheet has some fictitious assets, which have no market value. Such items are

unnecessarily inflate the total value of assets.

Difference between Funds Flow Statement and Balance Sheet!

Funds Flow Statement:

1. Fundi Flow Statement is a dynamic one as it is a statement of changes in financial

position.

2. It exhibits the sources and applications of funds at a particular date.

3. A statement of changes in working capital is prepared before preparing Funds Flow

Statement.

4. It is presented to ascertain the changes in financial position between two accounting

periods.
5. No doubt, it helps the management to take decisions relating to financial matter.

6. Funds Flow Statement is almost free from window-dressing of Balance Sheet, i.e. not

manipulated.

7. A Funds Flow Statement is prepared from two Balance Sheets and from other relevant

information.

8. No prescribed format is necessary for preparation.

9. Data are taken from P & L A/c and Balance Sheet.

Balance Sheet:

1. Balance Sheet is static in nature as it is a statement of financial position.

2. It exhibits the assets and liabilities of a firm at a particular date.

3. A Profit and prepared.

4. It is prepared to exhibit the financial position at a particular date.

5. It does not help the management much in taking decisions relating to financial

matters.

6. Balance Sheet may frequently be window-dressed by manipulating the values of

assets and liabilities.

7. A Balance Sheet is prepared from a Trial Balance.

8. Prescribed format must be followed for its preparation.

9. Data are taken from balance of ledger accounts from Trial Balance.
EXPLANATION OF BALANCE SHEET

Balance Sheet is a statement not an account. Balance Sheet shows financial

position of a business on particular date. It consists of two side’s viz. Assets
and Liabilities. Right Hand Side is an Asset Side and Left Hand Side is an
Liabilities Side. Assets consist of all types of properties whether tangible or
intangible owned by the business. Liabilities consist of long term liabilities and
short term liabilities.

1. Fixed assets:-
2. a) Tangible Assets:-

Tangible assets are those fixed assets which can be physically seen. They are
capable of being transferred. These are purchased for long period. For e.g.
Land & Building, Plant & Machinery, Electric installation, Furniture & Fittings,
Vehicles Live Stock etc.

1. b) Intangible Assets:-

Intangible assets are those fixed assets which can not be seen and which do not
have physical existence e.g. Goodwill, Patents, Trade Marks, Copy rights etc.
 2. Current assets:-
3. a) Quick Assets:-

Quick assets are those current assets which are quickly and easily convertible in
cash within very short period. Quick assets are also called as liquid assets e.g.
cash balance, bank balance, sundry debtors, bills receivable and short term
investment.

“ALL QUICK ASSETS ARE CURRENT ASSETS, BUT ALL CURRENT ASSETS ARE NOT
QUICK ASSETS”

QUICK ASSETS = CURRENT ASSETS – STOCK – PREPAID EXPENSE/ADVANCES

PAID

1. b) Non quick Assets:-

Those current assets which can not be converted into cash easily are called
other current assets or non liquid assets e.g. stock in trade, prepaid expenses,
advance to employees, advance tax.

3. Fictitious Assets:-

Those expenses which are incurred for the purpose of getting benefit for the
period which is more than one year are called as fictitious assets. These are
shown in the balance sheet on assets side. E.g. preliminary expenses, profit &
loss A/c Debit Balance, discount on issue of shares and debentures, heavy
advertisement expenditure, underwriters commission etc.
 1. Long Term Liabilities:-

These are the liabilities of the business which are repayable after a long period
of time for e.g. Debentures, Bank loan, Loan from financial institution etc.

2. Current liabilities:-

Dues payable in one year are termed as current liabilities. E.g. Sundry Creditors,
Bills Payable, Bank Overdraft, Outstanding Expenses, Provision for Taxation,
Unclaimed Dividend.

1. a) Quick Liabilities:-

All current liabilities except bank overdraft are called quick liabilities

QUICK LIABILITIES = CURRENT LIABILITIES – BANK OVERDRAFT

Closing Entries:

The accounting treatment of the adjustments to be given effect to the various accounts

for the preparation of financial statements has been discussed above. The next stage in

the preparation of financial statements is the recording of the closing journal entries for
the drawing up of the trading and profit and loss accounts.

While the balance sheet is a mere listing of the assets and liabilities, the trading and
profit and loss accounts are prepared in the form of ledger accounts and postings can
be made into such accounts only if they have been entered in the book of prime entry

of Journal. The trading and profit and loss accounts are nominal accounts and all

expenses and incomes are transferred to this account. While expenses are shown on the
debit side, the incomes are posted on the credit side.

Entries for the Preparation of Trading Account:

(i) The purchases and sales returns must be transferred to the purchases and sales

accounts respectively so that the net purchases and net sales can be determined. The
entries for the transfer of returns are,

Purchases Returns A/c Dr.

To Purchases A/c

Sales A/c Dr.

To Sales Returns A/c.

(ii) For the transfer of opening stock, purchases and other direct expenses such as
carriage inwards, wages etc., the entry is

Trading A/c Dr.

To Opening Stock A/c

To Purchase A/c

To Direct Expenses A/c

(iii) For the transfer of net sales to trading account, the entry is,

Sales A/c Dr.

 To Trading A/c

(iv) The balance in the trading account is known and the gross profit/loss is determined.

For transferring the gross profit/gross loss to profit and loss account, the entry is:
(a) In case of gross profit

Trading A/c Dr.

To Profit and Loss A/c

(b) In case of gross loss

Profit and Loss A/c Dr.

To Trading A/c

Entries for Preparation of Profit and Loss Account:

(i) For transfer of all expenses, other than direct expenses, to profit and loss account the
entry is,

Profit and Loss A/c Dr.

To Expenses A/c

(ii) For transfer of all income, other than sales and related income, to profit and loss
account the entry is,

Income A/c Dr.

To Profit and Loss A/c

(iii) The credit balance in the profit and loss account represents the net profit earned
and belongs to the proprietors. The entry for the transfer of net profit is,

Profit and Loss A/c Dr.

To Capital A/c

The debit balance in profit and loss account represents the net loss. The entry for the
transfer of net loss is

Capital A/c Dr.

To Profit & Loss A/c

Adjustments in the Capital Account:

The capital account of the proprietor as shown in the balance sheet should reveal the
net amount owning to him by the business as on the closing date.

The opening balance of the capital account must be adjusted for:

(i) Drawings

(ii) Net Profit earned during the year/Net loss occurred during the year

(iii) Salary, if any, due to the proprietor

(iv) Interest on capital, if any, due to the proprietor

(v) Interest on drawings, if any, due from the proprietor

We have already seen the entry needed to transfer the net profit/net loss to the capital
account.
The entries for the other adjustments will be as under:
For Transfer of drawings,

Capital A/c Dr.

To Drawings A/c

For providing for salary payable to proprietor

Proprietor’s Salary A/c Dr.

To Capital A/c

The Proprietor’s salary will be shown as an expense in the profit and loss account.

For interest on capital

Interest on Capital A/c Dr.

To Capital A/c

The interest on capital will be shown as an expense in the profit and loss account.

For interest on drawings,

Capital A/c Dr.

To Interest on Drawings A/c

The interest on drawings will be shown as an income in the profit and loss account.
While the entries for the adjustment of drawings and net profit/net loss in the capital

account are in the nature of closing entries, all other items will be entered in the capital
account only with the help of adjusting entries.

With the completion of the positing of adjusting and closing entries in the general

ledger, balances will exist only for the assets, liabilities and capital account. These
balances will be carried forward to the next accounting period.

At the beginning of the subsequent accounting period, when a new general ledger is

brought into use, the opening assets and liabilities will be brought into the ledger
through an opening journal entry. The opening journal entry is,

Assets A/c Dr.

To Liabilities A/c

To Capital A/c

Capital and Revenue Receipts and Expenditures:

After explaining the adjusting and closing entries, it would be appropriate to discuss

separately the different types of receipts and expenditures whose understanding are
useful while preparing the financial statement of a business enterprises.

Expenditure:

Expenditure can be classified into three categories:

1. Capital Expenditure:

It means an expenditure which has been incurred for the purpose of acquiring an asset

to be held in business on long term basis which results in increasing the earning
capacity of the business.
Some examples of capital expenditure are:

(a) Expenditure incurred on the purchase of furniture, plant, copyright, patents, goodwill
etc.

(b) Expenditure incurred in increasing the capacity or efficiency of a fixed asset.

(c) Expenditure incurred on purchase of shares and debentures of other companies for a
long duration.

2. Revenue Expenditure:

Expenditure incurred in running the business is termed as revenue expenditure.

Examples of revenue expenditure are: rent, salaries, office expenses, cost of

manufacturing and selling the product, repairs, depreciation etc.

3. Deferred Revenue Expenditure:

It is that revenue expenditure which is incurred in one accounting period but the benefit

of which is available in future periods, e.g., Development costs in mines and plantations,

discount on debentures in limited companies, market research, and cost of experiments.

Deferred revenue expenditure is written off over a number of years.

Receipts:

Receipts are of two types:

(1) Capital Receipts, and

(2) Revenue Receipts.

1. Capital Receipts:

Capital receipts consist of payments made to the enterprises either by share holders, or

by proprietors of business, receipts from sale of fixed assets of a business or loan raised.
It may be noted here that capital receipt is different from capital profit. For example if
the price of machinery costing Rs. 20,000/- is sold for Rs. 21,000/-, there is a capital

receipt of Rs. 21,000/- but capital profit is only Rs. 1,000/-. Suppose the same machinery

is sold for Rs. 15,000/- then there is a capital receipt of Rs. 15,000/- but there is a capital
loss of Rs. 5,000/-

2. Revenue Receipts:

Any receipt which is not a capital receipt is termed as revenue receipt. Examples of

revenue receipts are, Amount from sale of goods, Amount received from rendering
services to other parties, Interest received, commission received.

Capital receipts and Capital expenditure is not shown in Trading and Profit and Loss a/c.

It is only revenue receipts and revenue expenditure of the current year which are shown

in trading and profit and loss a/c. It may also be noted that capital profit is transferred

to Capital Reserve whereas capital loss is charged to profit and loss a/c of the same year

or over a few years in case it occurs in the course of purchase and sale of goods and
services.

Preparing Trading Account:

Trading Account is prepared to know the gross profit/gross loss of a business enterprise

arising out of trading operations. Then all administrative and selling expenses are

deducted from gross profit to determine the net profit. Whether or not a separate

Trading Account is prepared to determine gross profit or loss, the Net Profit/Net Loss

remains the same. It is necessary to emphasize here that trading account is prepared on
‘Accrual Basis’. The following is a simple example of a Trading Account.
Important Points:

Opening inventory is debited to Trading Account. Closing inventory is credited to

Trading Account. (The information relating to opening inventory is usually provided in

trial balance. The Closing stock figures are indicated in the ‘Adjustments’ outside the
Trial Balance).

Purchases (Less Returns) are debited to Trading Account. Sales (less returns) are credited
to Trading Account.

All expenses relating to trading and manufacturing activities are debited to Trading
Account.

The Gross Profit (or Loss) is then transferred to Profit and Loss account.

Note that there is no hard and fast rule about segregation of expenses between Trading

Account and Profit and Loss account. What is indicated above is based on generally
accepted accounting principles.
However, in specific circumstances it may become necessary to adopt a flexible

approach. The question of segregation of expenses does not arise where only the Profit
and Loss account is prepared without a separate Trading Account.

Preparing Profit and Loss Account:

Given below is a simple example of a Profit and Loss Account. You may notice that it

starts with gross profit (on credit side). If there is no separate Trading Account prepared,

all the debits and credits of trading account appear individually in the Profit and Loss

account. Where a separate Trading Account is prepared, only the figure of gross profit

(or loss as the case may be) appears in the Profit and Loss account as a starting point.

The Profit and Loss account shown below is not a exhaustive list of expenses and

incomes. It is a simplified version of a typical Profit and Loss account without taking any
“adjustments” to be made into account.

Profit and loss account may be prepared in the ‘T’ form (as shown above) or in the

vertical form. If the profit and loss is prepared in the vertical form, the revenue are
shown first and all expenses are shown as a deduction from the total revenues.

A sample of vertical format is shown below:

Profit and Loss Account of……………………..for the year ended:

Revenue:
Sales

Other (Dividends, Interest etc.)

Expenses:
Raw Materials Cost

Employee’s remuneration and benefits

Other Expenses

Depreciation

Profit before Interest:

Interest

Previous year’s adjustment

Profit before Taxation:

Income Tax

Net Profit available for appropriation

Appropriation:
Interim dividend

Proposed final dividend

Transfer to General Reserve

Illustration 1:

From the following figures, you are required to show:

(a) Provision for doubtful debts account

(b) Bad Debts account

(c) Profit and Loss account

Provision for Doubtful Debts 1.4.2012 Rs. 1,000

Provision for Doubtful Debts 31.3.2013 Rs. 2,000

Debts Written off in 2012-2013 Rs. 1,200

Illustration 2:

On 1st January, 2011 the reserve for Doubtful Debts account showed a balance of Rs.
10,000. During the year the bad debts written off amounted to Rs. 10,000/- and the
Sundry Debtors at the end stood at Rs. 2,40,000/- on which the provision for doubtful
debts was to be 5%.

During 2012 the bad debts written off amounted to Rs. 4,000/- and the closing balance

of debtors was Rs. 1, 40,000/-. The concern continued to provide for doubtful debts at

5% on closing balance of debtors. Show the provisions for doubtful debts account for
2011 and 2012. All bad debts written off are adjusted through the Provision Account.

Illustration 3:

There were Rs. 2,500 bad debts during the year ended 31st March, 2012. An amount of

Rs. 3,000/- for provision of bad debts is brought forward from last year. During the year
ended at 31st March, 2012 provision of Rs. 1,750/- was made for bad and doubtful
debts. Prepare bad debts account and provision for bad & doubtful debts account.
Illustration 4:

The following figures appear in the books of a firm:

Provision for doubtful debts on 1.1.2012 Rs. 6,500

Bad debts written off during the year Rs. 4,000

Sundry debtors on 31.12.2012 Rs. 75,000. Of the sundry debtors Rs. 2,000 was bad and

the provision for doubtful debts was to be maintained at 5% on sundry debtors. Pass
Journal entries.

Illustration 5:
The following balances appear in the trial balance of Joshi & Co. relating to the

accounts for the year ending December 31, 2012:

Wages a/c Rs. 30,000

Salaries a/c Rs. 40,000

Rent a/c Rs. 5,000

Advertising a/c Rs. 17,000

It is found that following adjustments have not been made in the books:
1. Wages due but not paid Rs. 3,000

2. Salaries paid in advance Rs. 2,000

3. Unpaid Rent Rs. 1,000

4. Advertising expenses not recorded in the books Rs. 2,000

You are required to pass necessary journal entries to adjust these items. Also show how
these items would appear in trading and profit and loss accounts and balance sheet.
Illustration 6:

The following balances appeared in the trial balance of X on December 31, 2012.
Debtors Rs. 1, 00,000

Bad Debts Rs. 5,000

Provision for bad debts (1.1.2012) Rs. 6,000

It was found that bad debts worth Rs. 3,000 were not recorded in the books till Dec. 31,

2012. It was decided that a provision for bad debts equal to 8 per cent on the closing

debtors will be adequate. You are required to prepare bad debts accounts and provision

for bad debts account. Also show how these items would appear in profit and loss
account and balance sheet.
Illustration 7:

A firm had the following balances on April 1, 2006:

Provision for doubtful debts Rs. 6,500

Provision for discount on debtors Rs. 3,200

Reserve for discount on creditors Rs. 4,800

During the year ended March 31, 2007, bad debts amounted to Rs. 4,500, discounts

allowed were Rs. 15,800 and discount received were Rs. 9,700. During the year 2007-08,

bad debts amounting to Rs. 2,300 were written off while discount allowed and received

were Rs. 12,500 and Rs. 8,900 respectively. Sundry debtors were Rs. 1, 50,000 on
31.3.2007 and Rs. 90,000 on 31.3.2008.
Sundry creditors were Rs. 1, 05,000 and Rs. 1, 26,000 on 31.3.2007 and 31.3.2008

respectively. It is the firm’s policy to maintain a provision of 5 percent against bad and

doubtful debts and 3 percent for discount on debtors and reserve of 2 percent on
creditors. Show the necessary accounts for the year 2006-2007 and 2007- 2008.
Illustration 8:
A machinery item was bought on 16.2.2002 and was sold on 15.10.2007.

The following relevant information is available:

1. Cost of purchase of the machinery – Rs. 4, 00,000

2. Transportation and installation costs – Rs. 20,000

3. Estimated useful life at the time of acquisition in 20 years.

4. Estimated scrap value at the time of disposal Rs. 1,000

5. The firm closes its books of account on March 31, every year

6. Depreciation was provided on the straight-line method; in the year of

acquisition/disposal it is the policy of the firm to provide one-half of a year’s

depreciation.

7. Amount realised from sale of machine – Rs. 1, 50,000

The accounting treatment for purchase and sale would be:

(a) Record Rs. 4, 00,000 in machinery account as cost on acquisition and charge Rs. 1,
44,300 as loss on sale.

(b) Record Rs. 4, 20,000 in machinery account as cost on acquisition and charge Rs. 1,
44,300 as loss on sale.

(c) Record Rs. 4, 19,000 in machinery account as cost on acquisition and charge Rs. 1,
44,300 as loss on sale.

(d) Debit Rs. 4, 00,000 to machinery account on acquisition and credit Rs. 1, 50,000 to
the same account on sale.

(e) None of the above.

Required:
Among the above choices, which one is correct?

Solution:
Capitalisation of Machinery = Rs. (4, 00,000 + 20,000)

= Rs. 4, 20,000

Depreciation per year on straight line basis = Rs. (4, 20,000 – 1,000)/20

= Rs. 20,950
Illustration 9:

A company had sales of Rs. 1, 50,000 during 2007; receivable account has opening

balance of Rs. 17,500 and provision for doubtful debts Rs. 2,500. Data for 2007:

Collections on account receivable Rs. 1,35,000. Bad Debts expenses were estimated at
2% on credit sales. Write-offs of bad debts during 2007 were Rs. 3,500.

The balance on 31.12.2007 in the accounts receivable account and provision for

doubtful debts account respectively were:

(a) Rs. 3, 25,000 (debit) and Rs. 89,000 (credit)

(b) Rs. 3, 54,000 (debit) and Rs. 94,000 (credit)

(c) Rs. 29,000 (debit) and Rs. 2,000 (credit)

(d) Rs. 29,000 (debit) and Rs. 3,000 (credit)

(e) None of the above

Solution:

The closing balances of the receivable accounts and provision for doubtful debts
accounts can be ascertained by preparing these ledger accounts.
Choice (c) is correct.

Illustration 10:
In a firm a shortage of stock has arisen during the year ended September 30, 2011.

The firm gathers the following information:

Opening Stock – Rs. 87,500

Purchases – Rs. 2, 87,500

Closing Stock (on physical verification) – Rs. 50,000

The goods are sold at a uniform mark-up of 20 per cent on selling price.

The following details regarding Sundry Debtors are available:

The shortage of stock is:

(a) Rs. 80,000

(b) Rs. 55,000

(c) Rs. 5,000

(d) Rs. 25,500

(e) None of the above.

Shortage of stock is Rs. 5,000. Hence, choice (c) is correct.

Illustration 11:

The stocks held by a firm at their go-down were completely damaged by fire on
February 1, 2012.

The books of accounts show the following information:

Illustration 12:

The sundry debtors account and sundry creditors’ account of a company are given

below which are incomplete:

The following further information is made available:

(i) While the opening stock was Rs. 9,000, the closing stock has been ascertained at Rs.
12,500.
(ii) Expenses during the year:

Carriage inwards, Rs. 1,000

Salaries, Rs. 6,000

Depreciation, Rs. 1, 77,500

(iii) You may take the opinion that closing balances of the sundry debtors and sundry
creditors accounts given above as correct.

The Gross Profit for the year ended March 31, 2012 would be:
(a) Rs. 1, 04,600

(b) Rs. 1, 28,100

(c) Rs. 1, 34,100

(d) Rs. 1, 29,000

(e) None of the above