Вы находитесь на странице: 1из 40
Final Accounts
Final Accounts

Study Note - 4

Final Accounts

This Study Note includes

Introduction

Profit and Loss Account

Balance Sheet

4.0 Introduction

Preparation of final accounts is the final destination of the accounting process. As discussed earlier these final accounts include two statements – Income statement which reflects the out- come of business activities during an accounting period (i.e. profit or loss) and the balance sheet which show the position of the business at the end of the accounting period (i.e. resources owned as assets and sources of funds as liabilities plus capital). The objective of financial state- ments is to provide information about the financial strength, performance and changes in fi- nancial position of an enterprise that is useful to a wide range of users in making economic decisions. Financial statements should be understandable, relevant, reliable and comparable. Reported assets, liabilities and equity are directly related to an organization’s financial posi- tion. Reported income and expenses are directly related to an organization’s financial perfor- mance.

Financial statements are intended to be understandable by readers who have “a reasonable knowledge of business and economic activities and accounting and who are willing to study the information diligently”.

The formats of these statements are standard. They depend on the need of each type of organi- zation and the requirement of information to be disclosed to the stakeholders. However, for company type of organizations, the formats are governed by the schedule VI to the companies’ act 1956. Students are advised to refer to this schedule. In this chapter, we will see how concep- tually these statements are prepared and what each of them contains.

a)

Profitability Statement – This statement is related to a complete accounting period. It shows the outcome of business activities during that period in a summarised form. The activities of any business will include, purchase, manufacture, and sell. To carry out these main activities company will require to spend money for other services such as labour, rent, insurance, advertising, travel etc, which are related to the same period.

b)

Balance sheet – Business needs some resources which have longer life (say more than a year). Such resources are, therefore, not related to any particular accounting period, but are to be used over the useful life thereof. The resources do not come free. One requires finance to acquire them. This funding is provided by owners through their investment, bank & other through loans, suppliers by way of credit terms. The Balance sheet shows

A 100

the list of resources and the funding of the resources i.e. assets and liabilities (towards

the list of resources and the funding of the resources i.e. assets and liabilities (towards owners and outsiders). It is also referred as Sources of funds (i.e. liabilities & capital) and application of funds (i.e. assets)

Let us discuss these statements in depth.

4.1 Profit and loss account

The income statement, as it is called, shows revenue items and expenses incurred to earn this revenue during the period. We see application of the concepts of matching and accounting period here. It must be ensured to match revenues and expenses to the accounting period to which they are related. As accounting exhibits the business activity in monetary terms, the P & L also follows the activity flow. For example, the details given in P & L a/c will be different depending on whether the business is engaged in manufacturing and selling or only trading or rendering services.

Based on the nature of business activity, the P & L a/c is split into one or more components. In case of a manufacturing business, the stakeholders will want to know the result of manufactur- ing activity first, then the result when the manufactured goods are sold and then the net results after deducting the indirect expenses from the sales revenue. A trading business will reflect only buying and selling as first component and then the net result. A service business will reflect results out of acquiring or generating a service and then the net result in terms of profit or loss.

This could be clear from the following:

Type of business

Information required

 

Components of P &

 

L

Manufacturing business:

1. Cost of Production

 

1.

Manufacturing a/c

Trading a/c

Activity is manufacturing articles from raw material, and then selling it.

2. Gross profit or Gross Loss on sales

2.

3. Net profit

3.

P & L a/c

Trading business: Activity is buying and selling of articles

1. profit

Gross

or

gross

loss

on

1.

Trading a/c

sales

2.

P & L a/c

2. Net profit or loss

   

Service business

1. Net profit or loss

 

1.

P & L a/c

Depending on these components, the detailing of the components can be done. The basic idea is, however, to show details of revenue earned from various streams and expenses incurred to earn that. Let us see these in depth.

a) 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. As per the accrual concept, income should be recognised as soon as it is accrued and not neces- sarily only when the cash is paid for. The Accounting standard 7 (in case of contracting

Final Accounts
Final Accounts

business) and Accounting standard 9 (in other cases) define the guidelines for revenue recognition. The essence of the provisions of both standards is that revenue should be recognised only when significant risks and rewards (vaguely referred to as ownership in goods) are transferred to the customer. For example, if an invoice is made for sale of goods and the term of sale is door delivery; then sale can be recognised only on getting the proof of delivery of goods at the door of customer. If such proof is pending at the end of account- ing period, then this transaction cannot be taken as sales, but will be treated as unearned income. In the P & L a/c sales are always shown as net of returns.

b) Stocks: In case of manufacturing business, there will be stock of raw material, work-in- process (W.I.P.) and finished goods. In case of trading business, there will be stocks of finished goods only. Stocks of raw material and WIP will be shown in the manufacturing a/c, whereas stock of finished goods will be shown in trading a/c

c) Cost of sales: This term refers to the cost of goods sold. The goods could be manufactured and sold or bought and sold. The cost of goods sold will include the basic cost of goods, and all the expenses that can be directly identified with goods. For example, consider the case of a TV dealer. He procures TV sets @ Rs 8500 per piece as the basic price. The expenses like freight paid to bring TV sets to the stores will be included as cost of goods sold. In case of manufacturing business, the examples of direct expenses to be included as cost of produc- tion are wages paid, power & fuel, factory expenses etc. The student must be able to distin- guish these expenses and show them in a proper component. The cost of sales will always include the cost of raw material or finished goods purchased for sale.

d) 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 distri- bution 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.

e) Other Incomes: The business will generate incomes other than from its main activity. These are purely incidental. It will include items like interest received, discount received, com- mission received, profit on sale of asset, scrap sales.etc.

The end result of one component of the P & L a/c is transferred over to the next compo- nent 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 organiza- tions, where ownership is widely distributed, the profit figure is separately shown in balance sheet.

A 102

Dr Manufacturing Account for the year ended ----- Cr Particulars Amoun t Particulars Amoun t

Dr

Manufacturing Account for the year ended -----

Cr

Particulars

Amount

Particulars

Amount

Opening stock Raw material Work in process

 

Closing stock Raw material Work in process

 

Purchases of raw material less purchase returns Factory rent Power & fuel Stores & spares consumed Wages Manufacturing expenses Depreciation on factory assets Total

Scrap sales

Cost of Production (transferred to Trading a/c)

 

Total

 

Dr

Trading Account for the year ended ---------

Cr

Particulars

Amount

Particulars

Amount

Opening stock

 

Sales less sales returns

 

Finished goods

Cost of production (transferred from manufacturing a/c)

Closing stock

Finished goods

Gross Profit (transferred to P & L a/c) Total

Gross Loss

(transferred to P & L a/c) Total

   
Final Accounts
Final Accounts

Dr

Profit and Loss Account for the year ended ------

 

Cr

Particulars

Amount

Particulars

Amount

Gross Loss

 

Gross Profit

 

(transferred

from

Trading

(transferred from Trading a/c)

a/c)

Administrative expenses Office salaries Communication Travel & Conveyance Office rent Depreciation of office assets Audit fees Insurance Repairs & maintenance

Other Income Interest received Commission received Profit on sale of assets Rent received.

Selling & Distribution expenses Advertising Salesmen commission Delivery van expenses Depreciation on delivery vans Bad debts

Financial expenses Bank charges Interest on loans

Loss on sale of assets

Net profit

Net loss

Total

 

Total

 

Profit and Loss Appropriation Account

We know that the net profit or loss is added to or deducted from owner’s equity. 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 re- maining surplus is added in owner’s equity.

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

A 104

Profit and Loss Appropriation Account for the year ended ———————- Particulars Amount Particulars

Profit and Loss Appropriation Account for the year ended ———————-

Particulars

Amount

Particulars

Amount

To proposed dividend

 

By Net profit transferred

 

To Transfer to General Reserve To surplus carried to Capital a/c

from P & L a/c

Total

 

Total

 

Please note these formats are illustrative only and details could change depending on the na- ture of business. Also, note that in trading a/c there could be either a gross profit or gross loss. Here, both are shown to enable students to understand where to reflect the same. Same is the case of net profit or net loss.

Many times these components are also shown in vertical format, mainly by company organiza- tions.

Illustration 1

Indicate where the following items will be shown in various components of P & L a/c:

1)

Wages

2)

Salaries to office staff

3)

Depreciation on office car

4)

Neon sign advertisement

5)

Power & fuel

6)

Repairs to machinery

7)

Maintenance of office building

8)

Purchase returns or return outwards

9)

Closing stock of WIP

10) Opening stock of finished goods

11) Interest received

12) Commission paid

13) Telephone

14) Travel & conveyance

15) Insurance

16) Audit fees

17) Carriage inward

18) Freight outward

19) Bad debts

20) Provision for outstanding rent

21) Return inwards or sales returns

22) Discount earned

23) Depreciation on delivery van

24) Printing and stationery

25) Sales

 
Final Accounts
Final Accounts

Item

Treatment

Where

Wages

Manufacturing a/c

Dr

Salaries to office staff

P

& L a/c

Dr

Depreciation on office car

P

& L a/c

Dr

Power & fuel

Manufacturing a/c

Dr

Repairs to machinery

Manufacturing a/c

Dr

Maintenance of office building

P

& L a/c

Dr

Purchase returns or return outwards

Trading a/c

Dr less from purchases

Closing stock of WIP

Manufacturing a/c

Cr

Opening stock of finished goods

Trading a/c

Dr

Interest received

P

& L a/c

Cr

Commission paid

P

& L a/c

Dr

Telephone

P

& L a/c

Dr

Travel & conveyance

P

& L a/c

Dr

Insurance

P

& L a/c

Dr

Audit fees

P

& L a/c

Dr

Carriage inward

Manufacturing a/c

Dr

Freight outward

P

& L a/c

Dr

Bad debts

P

& L a/c

Dr

Provision for outstanding rent

P

& L a/c

Dr

Return inwards or sales returns

Trading a/c

Cr less from sales

Discount earned

P

& L a/c

Cr

Depreciation on delivery van

P

& L a/c

Dr

Printing and stationery

P

& L a/c

Dr

Sales

Trading a/c

Cr

4.2 Balance Sheet

In a horizontal format, typical balance sheet has two sides viz. Assets and Liabilities. The term Liability here is used broadly to include owners’ capital and equity. Let us see the meaning of various items included therein. In vertical format also they are shown as one under the other.

Liabilities

In accounting nomenclature, all credit balances in personal accounts are called as liabilities. These are obligations of business or sources of funds.

1) Capital: This indicates the initial amount the owner or owners of the business contrib- uted. This contribution could be at the time of starting business or even at a later stage to satisfy requirements of funds for expansion, diversification etc. As per business entity concept, owners and business are distinct entities, and thus, any contribution by owners by way of capital is liability of the business. However, as this obligation is towards the owners, it is reflected separately in the balance sheet. In case of company organization, the capital is shown as “share capital”.

A 106

2) Reserves and Surplus: The business is a going concern and will keep making profit

2)

Reserves and Surplus: The business is a going concern and will keep making profit or loss year by year. The accumulation of these profit or loss figures (called as surpluses) will keep on increasing or decreasing owners’ equity. In case of non-corporate forms of business, the profits or losses are added to the capital a/c and not shown separately in the balance sheet. However, in case of corporate entities, the accumulated profits or losses are not added to ‘share capital’, but shown as a separate item in balance sheet. Reserves reflect profits kept aside for future exigencies. In case non-corporate as well as corporate entities, the reserves are to be shown as separate item in balance sheet.

3)

Long Term Liabilities: These are obligations which are to be settled over a longer period of time say 5-10 years. These funds are raised by way of loans from banks and financial insti- tutions. Such borrowed funds are to be repaid in installments during the tenure of the loan as agreed. Such funds are usually raised to meet financial requirements to procure fixed assets. These funds should not be generally used for day-to-day business activities. Such loan are normally given on the basis of some security from the business e.g. against a charge on the fixed assets. So, long term loan are called as “Secured Loan” also.

4)

Short Term or Current Liabilities: These are obligations that are to be settled within very short period of time which is normally within the year. These are used in running day-to- day running of business activities. Current liabilities comprise of:

a) Sundry Creditors - Amounts payable to suppliers against purchase of goods. This is usually settled within 30- 180 days.

b) Advances from customers – At times customer may pay advance i.e. before they get delivery of goods. Till the business supplies goods to them, it has an obligation to pay back the advance in case of failure to supply. Hence, such advances are treated as liabil- ity till the time they get converted to sales.

c) Outstanding Expenses: These represent services procured but not paid for. These are usually settled within 30 – 60 days e.g. phone bill of Sept is normally paid in Oct.

d) Bills payable: There are times when suppliers do not give clean credit. They supply goods against a promissory note to be signed as a promise to pay after or on a particular date. These are called as bills payable or notes payable.

e) Bank overdrafts: Banks may give fund facilities like overdraft whereby, business is permitted to issue cheques up to a certain limit. The bank will honour these cheques and will recover this money from business. This is a short term obligation.

Assets

In accounting language, all debit balances in personal and real accounts are called as assets. Assets are broadly classified into fixed assets and current assets.

1)

Fixed Assets: These represent the facilities or resources owned by the business for a longer period of time. The basic purpose of these resources is not to buy and sell them, but to use for future earnings. The benefit from use of these assets is spread over a very long period. The fixed assets could be in tangible form such as buildings, machinery, vehicles, comput- ers etc, whereas some could be in intangible form viz. patents, trademarks, goodwill etc.

Final Accounts
Final Accounts

The fixed assets are subject to wear and tear which is called as depreciation. In the balance sheet, fixed assets are always shown as “original cost less depreciation”.

Investments: These are funds invested outside the business on a temporary basis. At times, when the business has surplus funds, and they are not immediately required for business purpose, it is prudent to invest it outside business e.g. in mutual funds or fixed deposit. The purpose if to earn a reasonable return on this money instead of keeping them idle. These are assets shown separately in balance sheet.

3) Current Assets: These are assets held for running day-to-day business activities. They don’t remain in the same form. Typically, material stock when used in production gets converted to finished goods, which when sold either becomes cash or receivable. This cycle continues for relatively short period of time i.e. a year. Current assets comprise of:

a) Stocks: This includes stock of raw material, semi-finished goods or WIP, and finished goods. Stocks are shown at lesser of the cost or market price. Provision for obsoles- cence, if any, is also reduced. Generally, stocks are physically counted and compared with book stocks to ensure that there are no discrepancies. In case of discrepancies, the same are adjusted to P & L a/c and stock figures are shown as net of this adjustment.

They represent customer balances which are not paid. The bad debts or a

b) Debtors:

2)

provision for bad debt is reduced from debtors and net figure is shown in balance sheet.

c) Bills receivables: Credit to customers may be given based on a bill to be signed by them payable to the business at an agreed date in future. At the end of accounting period, the bills accepted but not yet paid are shown as bills receivables.

d) Cash in Hand: This represents cash actually held by the business on the balance sheet date. This cash may be held at various offices, locations or sites from where the busi- ness activity is carried out. Cash at all locations is physically counted and verified with the book balance. Discrepancies if any are adjusted.

e) Cash at Bank: Dealing through banks is quite common. Funds held as balances with bank are also treated as current asset, as it is to be applied for paying to suppliers. The balance at bank as per books of accounts is always reconciled with the balance as per bank statement, the reasons for differences are identified and required entries are passed.

f) Prepaid Expenses: They represent payments made against which services are expected to be received in a very short period.

g) Advances to suppliers: When amounts are paid to suppliers in advance and goods or services are not received till the balance sheet date, they are to be shown as current assets. This is because advances paid are like right to claim the business gets.

Please note that both current assets and current liabilities are used in day-to-day business activities. The current assets minus current liabilities are called as working capital or net current assets. The following report is usual horizontal form of balance sheet. Please note that the assets are normally shown in descending order of their liquidity. Also, capital, long term liabilities and short term liabilities are shown in that order.

A 108

The Balance Sheet as on ——————— Capital & Liabilities Amount Assets Amount    

The Balance Sheet as on ———————

Capital & Liabilities

Amount

Assets

Amount

   

Capital

 

Fixed Assets

(separate figures are shown for each owner)

Land less depreciation Building less depreciation Plant and Machinery less depreciation

Long term Liabilities

Loans from banks or financial institutions

Current Liabilities

Vehicles less depreciation Computer systems less depreciation Office equipments less depreciation

Sundry creditors Bills payable Advances from customers Outstanding expenses

Current Assets Stocks Sundry debtors less provisions Bills receivables Cash in hand Cash at bank Prepaid expenses Advances to suppliers

Total

 

Total

 

Illustration 2

Indicate where the following items will be shown in the balance sheet.

1)

Credit balance in the bank column of the cash book

2)

Debit balance to the account of A who is a customer

3)

Credit balance in a/c of B who is supplier

4)

Debit balance in a/c of C who is a supplier

Final Accounts
Final Accounts

5)

Credit balance in a/c of D who is a customer

6)

Outstanding rent

7)

Insurance paid for the next year

8)

Loan from HDFC bank for 7 years

9)

Interest due on loan

10) Provision for doubtful debtors

11) Net profit for the year

12) Machinery

13) Accumulated depreciation on vehicle

14) Cash at Bangalore office

15) Balance with Citi Bank

Answer:

1)

Credit balance in the bank column of cash book indicates a liability towards bank. This is actually a bank overdraft. Hence, it should be shown as current liability.

2)

Debit balance in A’s a/c mean amount due from him as a customer. To be shown as sundry debtors.

3)

Credit balance in supplier’s a/c is a liability, hence will be shown under current liabili- ties.

4)

Debit balance in supplier’s a/c reflects an advance given to supplier, hence will be shown under current asset.

5)

Credit balance in customer’s a/c means advance from customer, hence will be shown as current liability.

6)

Outstanding rent will be shown under current liability.

7)

Insurance paid for next year is ‘prepaid’ for current year, hence will be taken as current Asset

8)

Loan from HDFC is for 7 years which is a long term loan, hence will be shown as long term liability.

9)

Interest due on loan is current liability.

10) Provision for doubtful debts will be reduced from the sundry debtor’s amount under current assets as it denotes chances of not receiving the money from customers.

11) Net profit for the year will be added to the owners’ capital in balance sheet.

12) Machinery is a fixed asset.

13) Accumulated depreciation on vehicle is reduction in its value, so will be shown as de- duction from vehicle under fixed assets.

A 110

14) Cash at Bangalore office is a current asset. 15) Balance with Citi bank is

14) Cash at Bangalore office is a current asset.

15) Balance with Citi bank is current asset.

Mixed bag illustrations

Q 1: Complex Corporation operates in an industry that has a high rate of bad debts. On 31 st March 2005, the Accounts Receivables showed a balance of Rs 750000 before any year end adjustment and the balance in the Reserve of doubtful debts was Rs. 37500. The year end bal- ance in the reserve for doubtful debts a/c will be based on the following ageing schedule.

Days outstanding

Amount Rs.

Probability of collection

Less than 16

450000

0.99

16

– 30

150000

0.94

31

– 45

75000

0.80

46

– 60

45000

0.65

61

– 75

15000

0.50

Over 75

15000

0.00

Find out the appropriate balance in the Reserve for doubtful debts account as on 31 st March 2005. Show how Debtors balance be shown in the balance sheet. Calculate the effect of year end adjustment on account of reserve for doubtful debts.

Answer 1:

We need to work out the provision for doubtful debts based on the collection probability given e.g. in the first ageing band, the probability of collection is given as 0.99 which means 1% of the outstanding amount in this band is unlikely to be collected, so a provision of 1% will be needed. The total provision required based on the ageing is shown in the following table.

Days

Amount

Probability

Provision

Provision

outstanding

Rs.

of collection

required

Amount Rs

Less than 16

450000

0.99

1%

4500

16

– 30

150000

0.94

6%

9000

31

– 45

75000

0.80

20%

15000

46

– 60

45000

0.65

35%

15750

61

– 75

15000

0.50

50%

7500

Over 75

15000

0.00

100%

15000

Total

750000

   

66750

Final Accounts
Final Accounts

It will be seen that the existing provision in the books stands at Rs 37500, as against the re- quired provision of Rs 66750. This means additional provision of Rs 29250 will be required to be made as year end adjustment for the year ended 31-03-2005. The answer will be:

a) Appropriate balance in Reserve for doubtful debts a/c as on 31-03-2005 is Rs 66750.

b) Debtors amount will be shown in the balance sheet as under

Outstanding debtors

750000

Less: Reserve for doubtful debts

37500

Additional provision required

29250

66750

Net Debtors

683250

c) The effect of this additional provision of Rs 29250 will reduce the profit for the year by the same amount

Q 2 A property dealer owned many properties which it had acquired by taking bank loans. There were separate loan agreements for different properties. In some cases, interest was paid in advance and in other cases it was payable in arrears. These properties were let out to differ- ent tenants on various agreements. Some agreements provided for rentals in advance while the others provided for rent payable in arrears. The dealer has given the following balances:

 

31-03-2005

31-03-2006

Interest payable

12000

14500

Interest prepaid

8000

6400

Rentals due from tenants

15000

19000

Rentals received in advance

3000

2500

During the year 2005-06, the amount of interest payable transferred to P & L a/c was Rs 56000 and cash collected from tenants for rentals was Rs 116000. You are required to prepare Interest Payable a/c and Rental Income a/c for the year ended

2005-06

Answer 2: Please note although 4 different figures are given, we are asked to prepare only two accounts. This means the opening as well as closing balances will have to be written in these 2 accounts only. Thus, we should find out what these 4 figures represent. This is shown in fol- lowing table:

 

31-03-2005

31-03-2006

Opening

Closing

Interest payable

Liability

Liability

Interest prepaid

Asset

Asset

Rentals due from tenants

Asset

Asset

Rentals received in advance

Liability

Liability

A 112

Please be careful to notice how the opening and closing balances are shown. Now, students

Please be careful to notice how the opening and closing balances are shown. Now, students should be able to interpret the balancing figures in these accounts.

Dr

Interest payable

 

Cr

   

J.

Amount

   

J.

Amount

Date

Particulars

F.

Rs

Date

Particulars

F.

Rs

 

To Balance (prepaid) To Cash paid (balancing figure)

     

By balance b/d

   

8000

(due)

12000

51900

By P & L /ac By balance b/d

56000

To Balance (due)

14500

(prepaid)

6400

74400

74400

To Balance

 

By balance b/d

 

(prepaid)

6400

(due)

14500

Dr

Rentals Income

 

Cr

   

J.

Amount

   

J.

Amount

Date

Particulars

F.

Rs

Date

Particulars

F.

Rs

 

To Balance (receivable) To P & L a/c (balancing figure) To Balance (advance)

     

By balance b/d

   

15000

(advance)

3000

120500

By cash received

116000

By Balance

2500

(receivable)

19000

 

138000

138000

To Balance

 

By balance b/d

 

(receivable)

19000

(advance)

2500

The balancing figure in Interest payable a/c will reflect interest actually paid during the year, whereas the balancing figure in Rentals Income is the income taken to P & L a/c for the year.

Q 3 The book-keeper of a supermarket prepared a schedule of balances of individual sup- pliers’ accounts in the creditors’ ledger as on 31 st March 2005 and arrives at the total of Rs 6,923,062.40. The accountant was in charge of general ledger. He maintained the Sundry Credi- tors’ Account in the general ledger which is given below:

Final Accounts
Final Accounts

Dr

Sundry Creditors Control a/c

 

Cr

Date

Particulars

Amount Rs

Date

Particulars

Amount Rs

 

Purchase

       

30-Apr-05

returns

44,814.40

1-Apr-05

By balance b/d

7,141,690.40

30-Apr-05

Bank

7,705,016.00

30-Apr-05

Purchases

8,038,679.20

30-Apr-05

To balance c/d

6,775,064.80

30-Apr-05

Discount received Debtors control a/c

212,545.60

-

30-Apr-05

(contra)

243,980.00

15,404,895.20

15,620,895.20

Subsequently, on investigation, the accountant discovered several mistakes in the control a/c as well as individual creditors’ a/cs as given below:

1)

One supplier was paid Rs 817.60 out of petty cash. This was correctly recorded to his personal a/c, but was omitted to be posted to control a/c

2)

Credit side of a supplier’s a/c was under-cast by Rs 2400

3)

A supplier’s credit balance of Rs 43,851.20 was by mistake taken as Rs 46,752.80 while preparing the schedule of balances of all suppliers a/cs.

4)

There was an omission of a supplier credit balance of Rs 53,945.60 from the schedule.

5)

Discounts received of Rs 1004.80 and Rs 650.40 were posted to wrong side of suppliers’ a/cs.

6)

Goods of Rs 316.80 were returned to a supplier not entered in purchase return book.

7)

Debtors control contra represents the sale of goods to suppliers.

Prepare a statement rectifying the errors and prepare the control a/c.

Answer:

First of all, there’s a totaling error in the control a/c Total of debit side should be Rs 14,524,895.20 and credit side is Rs 15,636,895.20. This needs to be corrected. There is a difference of Rs 1,112,000 due to this. The revised credit balance should be Rs 7,887,064.80 instead of Rs 6,775,064.80 as shown in the control a/c.

In addition, the errors that have affected the control a/c should be corrected. These are:

a)

Discounts received will reduce the balance due to creditors, hence should appear on the debit side in control a/c. Here, it appears on credit side. We must show double the amount on credit side to rectify this error.

A 114

b) Payment to a supplier of Rs 817.60 were omitted hence, it must be written

b) Payment to a supplier of Rs 817.60 were omitted hence, it must be written on debit side of control a/c

c) Purchase return of Rs 316.80 omitted should be recorded.

The other errors will affect only individual a/cs and not control a/c. The revised control a/c is shown below:

Dr

Sundry Creditors Control a/c

 

Cr

Date

Particulars

Amount Rs

Date

Particulars

Amount Rs

30-Apr-05

Purchase returns

44,814.40

1-Apr-05

By balance b/d

7,141,690.40

30-Apr-05

Bank Discount received (rectified) Debtors control a/c ( contra) rectified Purchase returns (omission rectified) Bank (payment recorded)

7,705,016.00

30-Apr-05

Purchases

8,038,679.20

Discount

30-Apr-05

425,091.20

30-Apr-05

received

212,545.60

30-Apr-05

487,960.00

30-Apr-05

Debtors control a/c ( contra)

243,980.00

30-Apr-05

316.80

30-Apr-05

817.60

30-Apr-05

To balance c/d

6,972,879.20

15,636,895.20

15,636,895.20

The effect on individual accounts will be as follows:

Amount Rs

Total of the schedule as given

6,923,062.40

Add: under-casting of credit side

2,400.00

Add: omission of a supplier in schedule

53,945.60

Less: Wrong amount taken (43,851.20 – 46,752.80)

(2,901.60)

Less: Discounts received recorded on wrong side rectified

(3,310.40)

(1004.80)*2 & (650.4)*2

Less: purchase return omitted, now rectified

(316.80)

Revised balance in individual a/cs tallied with control a/c

6,972,879.20

Q 4 The accountant of Modern Manufacturing Company has given the following details from its ledger for the year ended 31 st March 2005

Final Accounts
Final Accounts

Item

Amount (Rs)

Advertising

160000

Depreciation on factory equipment

560000

Depreciation on office equipment

320000

Direct wages

3200000

Raw material purchases

16160000

Opening stock – Raw material

640000

Opening stock WIP

960000

Opening stock Finished goods

1920000

Sales

40992000

Stores and consumables

400000

Factory insurance

80000

Heating

1200000

Power

1600000

Salaries of factory staff

2000000

Electricity of office

1200000

General expenses

720000

Postage & telephone

232000

Office salaries

5600000

The closing stock as on 31 st March 2005 was valued as – raw material Rs 800000, WIP Rs 720000 and finished goods Rs 2400000. It was revealed that an advertising bill of Rs 80000 was due but not paid and Rs 120000 was paid for electricity charges in advance. These were not entered in books of a/c

Prepare the Manufacturing, Trading and P & L a/c clearly showing factory cost of production, gross profit and net profit.

Answer:

A 116

In the books of Modern Manufacturing Company Manufacturing Account for the year ended 31st March

In the books of Modern Manufacturing Company Manufacturing Account for the year ended 31st March 2005

 

Amount

 

Amount

Particulars

Rs.

Particulars

Rs.

Opening stock

 

Closing stock

 

Raw material

640,000

Raw material

800,000

Work in process

960,000

Work in process

720,000

Purchases of raw material

16,160,000

Factory Insurance

80,000

Power

1,200,000

Cost of Production (transferred to Trading a/c)

25,280,000

Heating

1,600,000

Stores & spares consumed

400,000

 

Wages

3,200,000

Salary of factory staff Depreciation on factory equipment

2,000,000

560,000

Total

26,800,000

Total

26,800,000

Trading Account for the year ended 31 st March 2005

 

Amount

 

Amount

Particulars

Rs.

Particulars

Rs.

Opening stock

 

Sales

40,992,000

Finished goods

1,920,000

less sales returns

Cost of production (transferred from manufacturing a/c)

Closing stock

25,280,000

Finished goods

2,400,000

Gross Profit (transferred to P & L a/c)

16,192,000

Total

43,392,000

Total

43,392,000

Final Accounts
Final Accounts

Profit and Loss Account for the year ended 31 st March 2005

 

Amount

 

Amount

Particulars

Rs.

Particulars

Rs.

Administrative expenses

 

Gross Profit (transferred from Trading a/c)

 

Office salaries Postage & Telephone Electricity (1200000 - 120000) Depreciation of office equipment General expenses Selling & Distribution expenses

5,600,000

16,192,000

232,000

 

1,080,000

320,000

720,000

240,000

Advertising (160000 + 80000) Net profit

8,000,000

Total

16,192,000

Total

16,192,000

Q 5 Following is the trial Balance of M/s Brijesh and Sons. Prepare final accounts for the year ended on 31 st March 2006.

Particulars

Debit Rs

Credit Rs

Stock as on 01-04-2005

200000

 

Purchases and sales

2200000

3500000

Bills receivables

50000

 

Returns

100000

50000

Carriage Inwards

50000

 

Debtors and creditors

200000

400000

Carriage Outwards

40000

 

Discounts

5000

5000

Salaries and wages

220000

 

Insurance

60000

 

Rent

60000

 

Wages and salaries

80000

 

Bad debts

10000

 

Furniture

400000

 

Brijesh’s capital

 

500000

Brijesh’s drawing

70000

 

Loose tools

100000

 

Printing & stationery

30000

 

Advertising

50000

 

Cash in hand

45000

 

Cash at bank

200000

 

Petty Cash

5000

 

Machinery

300000

 

Commission

10000

30000

Total

4485000

4485000

A 118

Adjustments: (1) Stock on 31 s t March was valued at Cost price Rs 420000

Adjustments: (1) Stock on 31 st March was valued at Cost price Rs 420000 and market price Rs 400000. (2) Depreciate furniture @ 10% pa and machinery @ 20% pa on reducing balance method. (3) Rent of Rs 5000 was paid in advance. (4) Salaries & wages due but not paid Rs 30000. (5) make a provision for doubtful debts @ 5% on debtors. (6) Commission receivable Rs 5000

Answer:

Trading Account for the year ended 31st March 2006

 

Amount

Amount

 

Amount

Amount

Particulars

(Rs.)

Rs.

Particulars

(Rs.)

Rs.

Opening stock

   

Sales

3,500,000

 

Finished goods

200,000

less sales returns

100,000

3,400,000

Purchases

2,200,000

Less purchases returns

50,000

2,150,000

Closing stock

Carriage inwards

50,000

Finished goods

400,000

Wages & salaries

80,000

Gross Profit c/d

1,320,000

Total

3,800,000

Total

3,800,000

Final Accounts
Final Accounts

Profit & Loss Account for the Year Ended 31st March 2006

   

Amount

Amount

 

Amount

Amount

 

Particulars

Rs.

Rs.

Particulars

Rs.

Rs.

Administrative

         

expenses

Gross Profit b/d

1,320,000

Salaries & wages

220,000

Discount received

5,000

Add unpaid

30,000

250,000

Commission received

30,000

Depreciation on

 

furniture

40,000

Add receivable

5,000

35,000

Depreciation of

 

Machinery

60,000

Insurance

60,000

Rent

60,000

Less paid in advance

5,000

55,000

Printing & Stationery Selling & Distribution expenses

 

30,000

Advertising

50,000

Carriage Outwards

40,000

Discounts

5,000

Bad debts

10,000

Commission Provision for doubtful debts

10,000

10,000

Net profit

740,000

Total

1,360,000

Total

1,360,000

A 120

 

The Balance Sheet as on 31st March 2006   Amount Amount   Amount Amount Capital

The Balance Sheet as on 31st March 2006

 

Amount

Amount

 

Amount

Amount

Capital & Liabilities

Rs.

Rs.

Assets

Rs.

 

Rs.

Brijesh's Capital

500,000

 

Fixed Assets

   

Less drawings Add Net Profit for the year Long term Liabilities

70,000

Furniture

400,000

740,000

1,170,000

Less depreciation

40,000

360,000

 

Machinery

300,000

 

Less depreciation

60,000

240,000

Current Liabilities

Loose tools Office equipments

 

100,000

Sundry creditors Outstanding salaries & wages

400,000

30,000

Current Assets

 

Stocks Sundry debtors Less provision for doubtful debts

400,000

200,000

10,000

190,000

Bills receivables

 

50,000

Cash in hand

45,000

Cash at bank

200,000

Petty cash

5,000

Prepaid Rent

5,000

Commission receivable

5,000

Total

1,600,000

Total

1,600,000

Final Accounts
Final Accounts

Notes:

1)

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

2)

Returns in debit column mean sales return, while that in credit column means purchase returns

3)

Discounts in debit column mean allowed (expense) and that in credit means received (income)

4)

Commission in debit column mean allowed (expense) and that in credit means received (in-

5)

come) There are two peculiar items given in the TB. One is Salaries & wages and the other is Wages and salaries. The interpretation is – where first reference is made to wages, it’s assumed to be directly for goods and taken to trading a/c. If the first reference is to salaries, it’s assumed to be related to office and taken to P & L.

Q 6

Mr. Arvindkumar had a small business enterprise. He has given the trial balance as on 31 st

March 2006 as below.

Particulars

Debit Rs

Credit Rs.

Mr. Arvinkumar’s capital

 

100000

Machinery

36000

 

Depreciation on machinery

4000

 

Repairs to machinery

5200

 

Wages

54000

 

Salaries

21000

 

Income tax of Mr. Arvindkumar

1000

 

Cash in had

4000

 

Land & Building

149000

 

Depreciation on building

5000

 

Purchases

250000

 

Purchase returns

 

3000

Sales

 

498000

Citi Bank

 

7600

Accrued Income

3000

 

Salaries outstanding

 

4000

Bills receivables

30000

 

Provision for doubtful debts

 

10000

Bills payable

 

16000

Bad debts

2000

 

Discount on purchases

 

7080

Debtors

70000

 

Creditors

 

62520

Opening stock

74000

 

Total

708200

708200

A 122

Additional information: 1) Stock as on 31 s t March 2006 was valued at Rs

Additional information:

1)

Stock as on 31 st March 2006 was valued at Rs 60000

2)

Write off further Rs 6000 as bad debt and maintain a provision of 5% on doubtful debt.

3)

Goods costing Rs 10000 were sent on approval basis to a customer for Rs 12000 on 30 th

4)

March 2006. This was recorded as actual sales. Rs 2400 paid as rent for office was debited to Landlord’s a/c and was included in debt-

5)

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

6)

commission. Works manager is to be given a commission at 12% of net profit before charging Gen- eral Manager’s commission and his own.

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

Answer :

In the books of Mr. Arvindkumar Trading Account for the year ended 31st March 2006

 

Amount

Amount

 

Amount

Amount

Particulars

Rs.

Rs.

Particulars

Rs.

Rs.

Opening stock

   

Sales less sent on approval

498,000

 

Finished goods

74,000

(12,000)

486,000

Purchases

250,000

   

Less purchases

returns

(3,000)

247,000

Closing stock

Carriage inwards

 

Finished goods Add sent on approval

60,000

Wages

54,000

10,000

70,000

Gross Profit c/d

181,000

   

Total

556,000

Total

556,000

Final Accounts
Final Accounts

Profit and Loss Account for the year ended 31st March 2006

     

Amount

   

Amount

 

Particulars

Rs.

Particulars

Rs.

Administrative expenses

   

Gross Profit b/d

 

181,000

Salaries

21,000

Discount received

7,080

Repairs to machinery Depreciation of Machinery

5,200

4,000

Depreciation of Building

5,000

Rent Selling & Distribution expenses

2,400

Bad debts

2,000

Additional bad debts Provision for doubtful debts

6,000

2,480

Less Provision opening Commission to works manager Commission to General Manager

(10,000)

480

 

18,000

12,000

Net profit

120,000

Total

188,080

Total

188,080

A 124

 

The Balance Sheet as on 31st March 2006   Amount Amount   Amount Amount Capital

The Balance Sheet as on 31st March 2006

 

Amount

Amount

 

Amount

Amount

Capital & Liabilities

Rs .

Rs

Assets

Rs .

Rs

Arvind kumar’s Capital Less drawings (income tax) Add Net Profit for the year Long term Liabilities

100,000

 

Fixed Assets

   

(1,000)

Land & building

149,000

120,000

219,000

Machinery

36,000

 

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 Less goods on approval

70,000

(12,000)

Citi Bank Overdraft

7,600

Less Bad debts Less related to landlord Less provision for doubtful debts

(6,000)

Bills payable

16,000

(2,400)

Commission payable

30,000

(2,480)

47,120

Bills receivables

 

30,000

Cash in hand

4,000

Accrued Income

3,000

Total

339,120

Total

339,120

Final Accounts
Final Accounts

Notes:

1)

The closing entries are passed for the items: depreciation, accrued income, outstanding salary.

2)

Hence, they are directly taken to the respective places in Balance sheet and P & L a/c. 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

150,000

Commission to works manager @ 12% on 150000

18,000

Profit after works manager’s commission

132,000

Commission to General Manager

12,000

Q 7

(132000/110 x 100) Jamnadas provides you with the following T. B. as on 31 st March 2005.

Particulars

Debit Rs

Credit Rs

Stock as on 1 st April 04

35000

 

Depreciation

5000

 

Accumulated depreciation

 

40000

Fixed asset

50000

 

Loss on sale of fixed asset

8000

 

Investments

125000

 

Profit on sale of investments

 

80000

Sales at 20% gross margin

 

800000

Purchases

750000

 

Customers’ accounts

100000

20000

Creditors’ accounts

5000

60000

Expenses

42000

 

Discount

18000

12000

Commission

50000

80000

Amounts due to principals

 

8000

Amounts due from dealers

75000

 

Deposits with Principals

100000

 

Deposits from Dealers

 

150000

Cash

7000

 

Income on investments

 

5000

Interest on deposits with Principals

 

12000

Interest on deposits from dealers

18000

 

Prepaid/outstanding expenses As on 31 st March 2004 As on 31 st March 2005

7000

13000

9000

6000

Fixed deposits with bank

200000

 

Interest on fixed deposits with bank

 

20000

Drawings/Capital

60000

300000

Banks

 

58000

Total

1664000

1664000

A 126

The cost of fixed assets sold is Rs 30000, accumulated depreciation being Rs 9000. Prepare

The cost of fixed assets sold is Rs 30000, accumulated depreciation being Rs 9000.

Prepare the financial statements. Also, separately show Accumulated depreciation a/c, and expenses a/c.

Answer:

Dr

Accumulated depreciation a/c

Cr

   

Amount

   

Amount

Date

Particulars

Rs

Date

Particulars

Rs

31-Mar-05

To Asset (sold)

9000

1-Apr-04

By balance b/d (balancing figure) By P & L (depreciation)

44000

31-Mar-05

5000

31-Mar-05

To Balance c/d

40000

 

49000

49000

 

By balance b/d

40000

Dr

Expenses a/c

 

Cr

   

Amount

   

Amount

Date

Particulars

Rs

Date

Particulars

Rs

1-Apr-04

To Balance (prepaid) To Cash paid (balancing figure) To Balance (due)

7000

1-Apr-04

By balance b/d (due)

13000

By P & L /ac (42000-

31-Mar-05

45000

31-Mar-05

13000+7000)

36000

By balance b/d

31-Mar-05

6000

31-Mar-05

(prepaid)

9000

 

58000

58000

To Balance

   

(prepaid)

9000

By balance b/d (due)

6000

Trading Account for the year ended 31st March 2005

 

Amount

 

Amount

Particulars

Rs.

Particulars

Rs.

Opening stock

 

Sales

800,000

Finished goods

35,000

-

Purchases

750,000

-

Closing stock

Finished goods

145,000

Gross Profit c/d Total

160,000