Financial ing Part 7 44482y
This document was ed by and they confirmed that they have the permission to share it. If you are author or own the copyright of this book, please report to us by using this report form. Report r6l17
Overview 4q3b3c
& View Financial ing Part 7 as PDF for free.
More details 26j3b
- Words: 9,556
- Pages: 43
Financial and Management ing
Unit 7
Unit 7
Final s
Structure: 7.1
Final s – Introduction
7.2
Adjustments before preparing final s 7.2.1
Outstanding expenses
7.2.2
Prepaid expenses
7.2.3
Accured Income
7.2.4
Income received in advance
7.2.5
Depreciation
7.2.6
Bad Debts
7.2.7
Provision for doubtful debts
7.2.8
Reserve for Discount on Debtors
7.2.9
Reserve for discount on creditors
7.2.10 Closing Stock 7.3
Trading
7.4
Preparation of Trading
7.5
Profit and Loss
7.6
Preparation of Profit and Loss
7.7
Balance Sheet – Meaning
7.8
Preparation of Balance Sheet
Learning Objectives: After studying this unit, you should be able to understand the following: 1. To understand the process of preparing the final s of a business organization from Trial balance. 2. To incorporate such transactions left out and various adjustments with regard to transactions taking place after the trial balance but relating to the current period.
Page No.: 135
Financial and Management ing
Unit 7
7.1 Final s – Introduction The last step of ing process is preparation of final s. Final s are Trading and Profit and Loss with respect to any trading organization. If it is non trading organization like a club or an Educational Institution, Receipt and Payment and Income and Expenditure are the final s. In case of a manufacturing unit, a Manufacturing is prepared in addition to Trading . Profit and Loss is prepared by all trading and manufacturing units. Balance Sheet is closely associated with these final s. But Balance Sheet is not an . It is a statement of assets and liabilities of business organization prepared at the final stage of the ing process. Therefore balance sheet is regarded as a part of final s. The purpose of preparing final s is to find out the end result of business at the end of an ing period, may it be profit or loss. The basis for preparing final s is the Trial Balance. For Trial Balance, the ledger balances are the root. For ledger s, the journal entries or entries in the subsidiary books (Books of original entry) are the roots. Hence the final s reflect the original business transactions, which are systematically and scientifically recorded, classified, and analyzed. Final s provide bundle of information for decision making activities. Objectives: 1. To know the meaning and purpose of final s 2. To identify the items of Trading 3. To identify the items of Profit and Loss 4. To identify the items of assets and liabilities of a Balance Sheet and modes of preparing it. Page No.: 136
Financial and Management ing
Unit 7
5. To know the adjustments such as Reserve for bad debts, Reserve for discounts on Debtors, Reserve for discount on Creditors, bad debts out side the trial balance. 6. To understand the adjustments like depreciation on assets, closing stock, stock lost in fire, goods given as samples, goods used for personal purpose etc., 7. To know the adjustments of prepaid expenses, outstanding expenses, pre-received incomes, outstand incomes etc. 8. To prepare Balance Sheet without any adjustments from trial balance. 9. To prepare Balance Sheet with adjustments.
7.2 Adjustments before preparing final s The Generally Accepted ing Principles (GAAP) s the accrual basis of ing, according to which revenue is recognized when it is earned and expenses are recognized when they are incurred, irrespective of their actual receipt or actual payment. If the accrual basis of ing is used, adjusting entries are required at the end of the period to record any changes in assets, liabilities, revenue incomes, revenue expenses, previously unrecognized. Adjusting entries are regarded as internal transactions. For instance, salaries are paid in advance to a few employees and the excess paid in the current period, should be adjusted to the coming period and what is paid in advance now should not be charged against the revenues relating to the current period. Similarly, insurance paid in advance, rent paid in advance etc., Like wise incomes received in advance should not be considered for the current period. On the other hand, expenses yet to be paid for the current period should be charged against the current period’s income. On the same lines, incomes yet to be received for the current period should be considered as incomes Page No.: 137
Financial and Management ing
Unit 7
for the current period whether actually received in cash or not. Every asset is subject to wear and tear and the value of the asset gets reduced even if the loss on of this is not recorded by means of a journal entry. Some stock of goods at the end of the period is left over and it has to be valued and be taken to s for fair computation of profit. Such internal adjustments have to be made and recorded before preparing Trading , Profit and Loss and Balance Sheet. The adjustments to be incorporated are briefly described in the following paragraphs. Self Assessment Questions 1: 1. Final are prepared from trial balance, trial balance from ledger s and ledger from books of original entry. So final s are reflection of original transaction (state True / False ). 2. Final s speak about profit or loss as on a particular day ( state True and False ) 3. Balance sheet tells the value of assets and liability as standing an a the last day of ing period ? ( True / False ). 4. Adjustment in final s is necessitated because of accrual basis of ing (state True / False ). 5. Adjusting entries are also regarded as ______ . 6. Adjustments such as outstanding and prepaid / received items are needed to find out _____________. 7. Adjustment entries are made before preparing tracking and P & L and balance sheet (True/False ). 7.2.1 Outstanding expenses Expenses due but not yet paid are known as outstanding expenses. Wages, salaries, rent, commission etc payable in the current month are paid in the following month. If final s are prepared for year ending 31st December, then the expenses payable for December will be paid in January of next year. The extent to which the amount belongs to the current year but Page No.: 138
Financial and Management ing
Unit 7
payable in the next year is called outstanding expenses. To record that aspect, the journal entry drawn in the Journal proper is: Concerned Expenses Dr To outstanding Expenses . Outstanding expenses indicates liability for the current year and it will appear in the balance sheet. Example: ment
expenses for year 31-12-2003 outstanding is
Rs.5000. The journal entry is ment expenses
Dr
5000
To Outstanding expenses
5000
Self Assessment Questions 2: 1. Expenses due but not yet paid are known as ___________. 2. What is the entry if salaries are outstanding ? 3. If ‘outstanding expenses’ appear in trial balance, what does it mean ? 4. Outstanding expenses appear an assets side of balance sheet ( state True / False ). 7.2.2 Prepaid Expenses Expenses paid in advance are regarded as prepaid expenses. Prepaid expenses form an asset and therefore prepaid expenses is debited. For example, insurance is paid from April, 2004 to March, 2005 and the amount is Rs.3600. The financial year ends by 31st December, 2004. Therefore the relating to Jan, Feb and Mar of 2005 Rs.900 is said to have been paid in advance. To record this internal adjustment, the entry is Prepaid Expenses To Insurance
Dr 900 900
Note that outstanding or prepaid expenses s are regarded as personal s.
Page No.: 139
Financial and Management ing
Unit 7
Self Assessment Questions 3: 1. Expenses paid even before incurred. They are know as _____. 2. Prepaid expenses appear on the asset side of balance sheet. ( state True / False). 3. Opening balance of prepaid insurance is Rs 1000; insurance paid during the year Rs. 5600; Insurance paid in advance include in the above is Rs 800: Find out actual expenditure for insurance for the current year. 4. Prepaid expenses is a personal ( True / False). 7.2.3 Accrued Income Accrued income is also called outstanding income. Outstanding income is a personal and it represents an asset. This is credited and the concerned income is debited in the journal proper as an adjusting entry. The entry is Outstanding incomes Dr To Concerned income Example Interest accrued on Fixed Deposit of Rs 200000 at 12% simple interest on 31-12-2006, not yet received. The entry is Outstanding incomes Dr
24,000
To interest on FD
24,000
Outstanding Income appears as an asset in the balance sheet. Self Assessment Questions 4: 1. Income earned but not received is called ____________. 2. Outstanding income is an asset ( state True / False ). 3. Outstanding income is a personal . (True / False ).
Page No.: 140
Financial and Management ing
Unit 7
7.2.4 Income received in advance Just as income is accrued, there are instances where income is received in advance. The amount is shown as liability in the balance sheet and it shows a credit balance. The adjusting entry to record the income received in advance is Concerned item of income Dr To Income received in advance Example Rent received for one year from 1-4-2005 to 31-3-2006 Rs.48000. s are finalized on 31-12-2005. Therefore rent received for January, February and March of 2006 is said to have been received in advance Rs.12000. The entry is Rent received Dr
12000
To Income received in advance a/c
12000
Self Assessment Questions 5: 1. Any income received in advance is a liability (state True / False ). 2. What is the adjusting entry for rent received in advance ? 3. Income received in advance in the current year is ________ from the unearned item of income received. 7.2.5 Depreciation Depreciation is reduction in the value of an asset due to constant use of the same, which is called wear and tear. Fixed assets like, buildings, plant, machinery, furniture etc., are subject to depreciation. Whenever, an asset is depreciated, its value goes down and therefore it is a loss to the organization. Depreciation is debited and the concerned asset is credited. The item of depreciation may appear in the trial balance, which means that already the concerned asset is reduced by the amount of depreciation. If depreciation is given as an additional adjustment, Page No.: 141
Financial and Management ing
Unit 7
then the depreciation amount should be charged against profit and loss on one hand and the concerned asset is reduced on the other hand in the balance sheet. There are two popular methods of depreciation, namely fixed installment method and reducing balance method. In fixed installment method, depreciation is calculated on cost of the asset. In case of reducing balance method (Diminishing balance method), the depreciation is charged on the reducing balance of the book value of the asset. Reducing balance method is more popular and well recognized. Example Building is of the book value of Rs.400000. It is depreciated at 10% on fixed installment method. Show the journal entry and how does it appear in the balance sheet? Solution The entry for depreciation is Depreciation Dr 40,000 To Building
40,000
Depreciation being a loss is transferred to profit and loss and in the balance sheet, the value of Building is shown as Rs.400000 – 40000 = 360000. Note: For the second year the depreciation will be Rs.40000 if the asset is depreciated under fixed installment method. If it is depreciated under reducing balance method, the depreciation for the second year is Rs.36000 (10% of 360000). Self Assessment Questions 6: 1. Depreciation is for __________ of an asset. 2. What entry is drawn if depreciation is provided ? Page No.: 142
Financial and Management ing
Unit 7
3. When depreciation is transferred to P & L A/c , what entry do you draw ? 4. If depreciation to be provided in the adjustments, what do you understand by this ? 5. What is the method of depreciation recognized by Indian Income Tax Act? 6. If depreciation appears in the trial balance, what does it indicate ? 7.2.6 Bad Debts Bad debts are those debts which are not recovered. Bad debts form loss to the business and reduce the amount of debtors. Since bad debts are losses, they are debited and the debtor’s is credited because the outstanding amount of debtors comes down. If bad debts are identified well before preparing trial balance, then bad debts appear in the trial balance and they should be taken to the debit side of profit and loss . Since debtors is already reduced by the amount of bad debts, it does not require any further adjustment in the balance sheet. If bad debts are shown outside the trial balance, which means that they are identified after the preparation of Trial Balance, then two adjustments should be incorporated. One – bad debts should be charged against profits in P & L A/C and the second – the debtor’s should be reduced by the amount of bad debts in the balance sheet on the asset side. Example The sundry debtors for the year 2005 are Rs.50000. The bad debts amounted to Rs.4000 as on 31-12-2005 already shown in the trail balance. Write off further bad debts Rs5000. Show how the above internal adjustments appear in the final s. Page No.: 143
Financial and Management ing
Unit 7
Solution
There are bad debts shown in the trial balance Rs4000 and not shown in the trial balance Rs.5000. To incorporate those bad debts not yet shown in the trial balance, the adjusting entry is Bad debts
Dr
5000
To Debtor’s
5000
In the profit and loss of 2005, the total bad debts appearing on the debit side are Rs. 9000(4000 + 5000)
In the balance sheet, on the asset side, the amount of debtors is Rs45000(50000 -5000).
Self Assessment Questions 7: 1. Unrecovered debts are called ______. 2. Bad debts are not expenses but they form losses. (state True / false ) 3. What is the entry made in journal proper, if bad debts are recorded. 4. What entry do you make to close the bad debts ? 5. What impact bad debts have on profits ? 6. If bad debts are recovered, what entry can be drawn ? 7.2.7 Provision for Doubtful Debts Debts that can not be recovered are called bad debts but debts, the recovery of which is doubtful, are called doubtful debts. From the past experience of the business proprietor, what percentage of good debts may become bad in future, can be estimated and in the current year itself an equal amount of profit be set aside. This provision is known as Reserve for Bad Debts or Provision for Doubtful Debts or Reserve for Doubtful Debts. Since the provision for bad debts is a charge against current year profit, the adjusting entry is to debit P & L A/C and credit Provision for Bad Debts . Page No.: 144
Financial and Management ing
Profit and Loss
Unit 7
Dr
To Provision for bad debts Provision for bad debts is a liability to be incurred in future and so it should appear on the liability side of balance sheet. However, the convention is RBD (Reserve for Bad and Doubtful Debts) is deducted from the amount of good debtors. The important note here is that RBD is computed as a percentage of good debts, which means total debtors minus bad debts unadjusted. Provision for bad and doubtful debts is a running and every year the amount keeps on changing because from the provision made in the current year, bad debts occurring in the following year have to be adjusted and additional amount of provision to be made is calculated. Every year, the amount transferred to P & L A/C is B + N – O, where B stands for bad debts; N stands for new provision and O stands for old reserve. For example, the old reserve stands at Rs.15000 and bad debts to be adjusted is Rs4000 and new reserve to be maintained is Rs18000. The amount to be charged against profits in P&L A/C is Rs.7000 (4000 + 18000 – 15000). The formula can also be shown as N - O + B = 18000 – 15000 + 4000 = 7000 Self Assessment Questions 8: 1. What is the difference between Bad debts and doubtful debts? 2. Provision is made for Debts which have become bad (state True / False). 3. Provision for Doubtful debts is a change against the profits of the firm (state True / False ) 4. Bad debts incurred in the subsequent period are written off against reserve for bad debts (state True / False ). 5. What is the entry for writing off of bad debts against RBD? Page No.: 145
Financial and Management ing
Unit 7
6. If RBD is freshly to be provided, what entry can be draw? 7. RBD is calculated on debtors which are good and so any bad debts out side trial balance should be deducted out of total debtors (state True / False ). Illustration: On 1st January 2006, the RBD stood at Rs.9000 in the books of a merchant. The bad debts written off during the year ended 31st December, 2006 amounted to Rs.4800 and Sundry Debtors stood at Rs.480000. It was desired to maintain the reserve for bad debts at 5% on Debtors. During the year 2007 bad debts written off amounted to Rs.12000 and sundry debtors on 31st December 2007 amounted to Rs.380000.As usual 5% reserve was required. Show the journal entries for recording the above transactions and write up the bad debts reserve . Solution Journal Entries Date
Particulars
2006
LF
Bad debts st
Dec, 31
Dr
Debit
Credit
Rs.
Rs.
4800
To Sundry Debtors
4800
(Being the bad debts written off) st
Dec, 31
Bad Debts Reserve
Dr
4800
To Bad Debts st
Dec 31
4800
(Being bad debts set off against RBD) Profit and Loss
19800
Dr
19800
To Bad Debts Reserve (Being additional RBD made to bring the reserve to 5% of 480000) Bad debts
2007 st
Dec, 31
Dr
To Sundry Debtors
12000 12000
(Being bad debts written off ) Page No.: 146
Financial and Management ing
Unit 7
Bad debts Reserve Dr st
Dec 31
12000
To bad debts
12000
(Being bad debts written off against RBD) Profit and loss
Dr
To Bad debts reserve
Dec 31st
7000
7000
(Being additional RBD made to bring the reserve to 5% of 380000)
NOTE: On January 1st 2006, the RBD stands at Rs9000 and during the year the actual bad debts are Rs4800 and so there is unused balance of Rs.4200 (9000 -4800). It is desirable to have reserve of 5% of 480000 – Rs24000. Therefore additional reserve required to be provided in P & L A/C is Rs19800 (24000 – 4200). Similarly during 2007 the actual bad debts are Rs.12000 and the available reserve is used for writing it off. Still there is a balance left over is Rs.12000 (24000 – 12000). The additional reserve to be maintained is 5% of 380000, that comes to Rs19000. So the additional amount to be provided in P & L A/C in 2007 is Rs.7000 (19000 – 12000). Reserve for Bad Debts Dr
Cr
Date
Particulars
J F
Amount Rs.
J F
Particulars
Amount Rs.
2006
2006 Dec, 31
Date
st
To bad debts
4800
st
To balance c/d
24000
Total
28800
To bad debts
12000
Jan 1
To balance c/d
19000
Dec 31st
Total
31000
2007 Dec,31st
Jan, 1
Dec 31st 2007
By Balance b/d
9000
By P&L A/C
19800
Total
28800
By balance b/d
24000
st
By P&L A/C Total
7000 31000
Page No.: 147
Financial and Management ing
Unit 7
7.2.8 Reserve for Discount on debtors: There are two types of discounts allowed to customers in a business. One is trade discount and another is cash discount. Trade discount is given to customers to retain the customers and it is shown in the invoice itself. It means that trade discount does not come to ing records at all. But cash discount is allowed to customers to encourage them to pay cash promptly at the earliest. Normally cash discount gets recorded in cash . Out of experience, a businessman can guess how much of cash discount he may have to give on customer’s s. Cash discount given to debtors is always a loss and is shown as expenditure in the Profit and Loss . After anticipating the amount of cash discount allowable, a provision is made in the current year itself. In the subsequent years, the actual discount allowed is set off against the provision for discount on debtors. Every year, the amount of provision for discount on debtors is deducted from the profits. The entry for making the provision is Profit and Loss
Dr
To Provision for discount on debtors Just as in the case of provision for bad and doubtful debts, the bad debts are first written off against provision for bad debts and later the required amount of provision is provided in the P&L A/c, similar procedure takes place in the case of provision for discount on debtors. The following guide lines may be kept in mind while dealing with the reserve for discount on debtors 1. If a reserve for discount on debtors is not existing and cash discount is allowed, then transfer the discount to P&L . 2. Any fresh reserve for discount on debtors is to be made, debit the P&L A ccount with the amount of reserve.
Page No.: 148
Financial and Management ing
Unit 7
3. If provision for discount on debtors exists at the time of providing discount, then write off the discount from the provision already made for the purpose. 4. New provision should then be calculated and only as much as required to bring the existing provision to the new figure should be debited to P&L . 5. If the new provision required is lower than the provision already existing (old), then the difference shows profit and transfer the same to P&L . Self Assessment Questions 9: 1. what is the aim of giving cash discount ? 2. If discount is allowed against receivables, what entry do you draw in journal proper? 3. Provision for Discount on debtors is a charge against P & L a/c. (state True / False). 4. Provision for discount on debtors appears as a liablility in the balance sheet ( state True / False ) 5. What is the basis for calculating provision for discount an debtors? Illustration The following items are found in the trial balance of Praksh on 31st December 2000. Sundry Debtors
Rs. 160000
Bad Debts written off
9000
Discount allowed to Debtors
1800
Reserve for Bad and doubtful Debts 31-12-1999 Reserve for discount on Debtors 31-12-1999
16500 3200
Page No.: 149
Financial and Management ing
Unit 7
You are required to provide for the bad and doubtful debts at 5% and for discount on debtors at 2%. Give necessary journal entries and show bad debts , bad debts reserve , discount and provision for discount on debtors . Solution Date
Particulars
2000 st Dec, 31
RBD
LF
Debit
Credit
Rs.
Rs.
9000
Dr
9000
To Bad Debts (Being bad debts written off against existing RBD)
Dec 31st
P & L
Dr
500
To RBD
500
(Being addition to RBD to make the new RBD equal to 5% of 160000) st
Dec 31
Reserve for discount on debtors Dr To Discount on Drs A/c
1800
1800
(Being discount on debtors written off against Reserve for discount on Debtors) Dec 31st
P & L
Dr
1640
To Reserve for discount On debtors
1640
( Being additional reserve made to make the new reserve for discount on debtors to 2% of 152000)
NOTE: 1. The amount debited to P&L towards RBD is computed as follows Old RBD Less Bad debts
= =
Rs.
16500 9000 Page No.: 150
Financial and Management ing
Balance = New RBD @5% on160000 = RBD to be provided =
Unit 7
7500 8000 500 (8000-7500)
2. The amount debited to P&L towards Reserve for Discount on Debtors is computed as follows: Good Debtors = 160000 – 8000 (New RBD)=152000 Old Res for Dis On Drs = Rs. 3200 Less Discount on Drs = 1800 Balance Reserve = 1400 New Res for Disc at 2% On good drs 152000 = 3040 Res for Discount to be Provided now = 1640 (3040 -1400) Bad Debts Dr
Cr
Date
Particulars
JF
Amount Rs.
Particulars
JF
Amount Rs.
2000
2000 Dec, 31
Date
st
To Sundry debtors
9000
Total
9000
Dec 31st By RBD
9000
Total
9000
Reserve for Bad Debts Dr
Cr
Date
Particulars
JF
Amount Date
Particulars
Rs. 2000 Dec, 31
JF
Amount Rs.
2000 st
st
To bad debts
9000 Jan, 1
To balance c/d
8000 Dec 31st
Total
17000
By Balance b/d By P&L A/C Total
16500 500 17000
Page No.: 151
Financial and Management ing
Unit 7
Discount on Debtors Dr
Cr Date
Particulars
JF
Amount Rs.
2000 Dec, 31
Date
Particulars
JF
Amount Rs.
2000 st
Dr
To Sundry debtors
Dec 31st By Reserve for Discount on 1800 Debtors A/C
1800
Total
1800
1800
Total
Reserve for Discount on Debtors Date
2000 st Dec, 31
Particulars
To Discount on Debtors To balance c/d Total
JF
Amount Rs.
Date
Particulars
Cr JF
Amount Rs.
2000 st 1800 Jan, 1 By Balance b/d 3040 Dec 31st By P&L A/C
3200 1640
4840
4840
Total
In the balance sheet, the Sundry debtors are reduced by bad debts shown out side the trial balance, the new RBD, discount on debtors shown out side the trial balance and the new Reserve for discount on debtors. 7.2.9 Reserve for discount on creditors Just as reserve is for discount on debtors is created, reserve for discount on creditors is also created.
Businessman expects that he would receive
discounts from suppliers (creditors), when the businessman remits cash to them. Anticipating some percentage of creditors being received as discount in the coming year, the business proprietor makes a provision for the expected income in the current year itself. Discount on creditors is an income and therefore reserve for discount on creditors is debited and profit and loss is credited to show it as anticipated profit. In the subsequent year, when discount on creditors is actually received, it is first set of against provision for discount on creditors and the difference between the new provision for discount on creditors and the balance of old provision left over is carried to P&L . Page No.: 152
Financial and Management ing
Unit 7
Discount on creditors is income and to that extent the creditors due is reduced. So the journal entry to record them is Creditor’s
Dr
To discount on creditors Later if the discount received is adjusted against reserve for discount on creditors, the entry will be Discount on creditor’s
Dr
To Reserve for discount on creditors When provision for discount on creditors is made in P&L , the entry will be Reserve for discount on creditors Dr To Profit and loss The amount of provision for discount on creditors is calculated at a percentage on creditors. In the balance sheet, creditors are shown after deducting reserve for discount on creditors. Self Assessment Questions 10: 1. Discount on creditors is an item of income (state True / false ). 2. Provision for discount on creditors is shown as an anticipated income (State True/False ). 3. How do you treat provision for discount an creditors in balance sheet ? 4. Discount received from creditors subsequently is changed against provision for discount on creditors. (state True / False ). 7.2.10 Closing stock Stock of goods – raw materials, semi finished goods, finished goods – at the end of the ing year should be considered for preparing trading and balance sheet. It is an internal adjustment. Closing stock is normally valued at cost or market price which ever is lower, even though there are several other methods to value stock. Closing stock does not appear in the trial balance because the value of it is ascertained only after the preparation of trial balance. To bring to the records, a journal entry is Page No.: 153
Financial and Management ing
Unit 7
ed in journal proper by debiting closing stock and crediting trading . In the balance sheet, closing stock appears as an asset. Self Assessment Questions 11: 6. what is the popular valuation method of closing stock ? 7. what is the entry for adjusting the closing stock ? 8. what does happen in case closing stock is not considered for computing gross profit ? 9. Closing stock always appears as an asset in balance sheet. (state True / false).
7.3 Trading Trading shows gross profit or gross loss arising out of trading activities. Trade means buying and selling. The mainly focuses on finding the result of goods bought and goods sold. Interestingly, goods are bought for a cost and the proprietor incurs a few items of purchase expenses and the goods are sold at a price higher or lower than the cost incurred. At the end of ing period, some stock is left over and it should be valued so as to calculate the profit or loss from the cost of goods sold. Therefore, opening stock of goods, cost of purchases made, expenses on purchases are taken on debit side of the trading . On the credit side of the , the sales of goods and the value of closing stock are shown. The excess of credit over debit is gross profit and vice versa. The gross profit or gross loss is transferred to Profit and Loss . The format of a Trading is given below: Dr
Trading for the year ending- - - -
Particulars To opening stock To Purchases Less Purchasereturns/returns outwards To Carriage inwards To freight and octroi To wages
Cr
Rs. Particulars By sales Less returns inwards/sales returns By Closing stock
Rs.
Page No.: 154
Financial and Management ing
Unit 7
Add outstanding wages Less prepaid wages To fuel and power To Gas, coal, electricity for production To Import duty and clearing charges To stores consumed To factory rent, insurance, factory expenses To other direct expenses To Royalty paid To Profit and Loss A/c (Gross Profit)
Note: For every expenditure, outstanding and prepaid aspects must be considered. From the above , it is easy to learn the transferring entries made to close the s of expenses and incomes. The transferring entries are 1. Trading
Dr
To opening stock a/c To purchases a/c/ To Wages a/c To Royalty paid a/c
etc
(Being all expenses of trading transferred to trading ) 2. Sales
Dr
Closing stock
Dr
To Trading (Being sales and closing stock transferred to trading ) 3. Trading
Dr
To Profit and Loss (Being gross profit carried forward to P&L A/C) 4. Profit and Loss
Dr
To Trading (Being gross loss transferred to P&L )
Page No.: 155
Financial and Management ing
Unit 7
Self Assessment Questions 12: 1. Trading is an showing profit on cost of goods sold. (state True / False). 2. Cost of goods sold include opening stock + Purchase expenses – closing stock. (state True/ False ). 3. Gross profit is ______minus cost of goods sold. 4. Gross profit or loss is transferred to ___________ .
7.4 Preparation of Trading To prepare Trading , the following steps may be followed: a) Identify the items of expenses relating to trading and show them on the debit side of Trading . b) Effect the adjustments such as outstanding or prepaid to the relevant items of expenses c) Show the sales less returns and closing stock on the credit side of trading d) The difference is gross profit if credit total is more than debit and gross loss if debit total is more than credit. e) Transfer the gross profit or gross los to Profit and Loss as the case may be. Self Assessment Questions 13: 1. Do you consider gross purchases or net purchases, while preparing trading ? 2. Do trading concerns prepare manufacturing ?
Page No.: 156
Financial and Management ing
Unit 7
Illustration From the following balances extracted from Trial balance, prepare Trading . The closing stock at the end of the period is Rs. 56000
Amount in Rs.
Particulars Stock on 1-1-2004
70700
Returns inwards
2000
Returns outwards
3000
Purchases
102000
Debtors
56000
Creditors
45000
Carriage inwards
5000
Carriage outwards
4000
Import duty abroad
6000
on materials received from
7000
Clearing charges
12000
Rent of business shop
10000
Royalty paid to extract materials
2000
Fire insurance on stock
8000
Wages paid to workers
10000
Office salaries
1000
Cash discount
4000
Gas, electricity and water
250000
Sales
Page No.: 157
Financial and Management ing
Dr
Unit 7
TRADING FOR THE YEAR ENDING - - - -
Particulars
Rs 70700
To stock on 1-1-2004 To Purchases
By sales
Rs 250000
Less Returns
102000
Inwards
Less Returns Outwards
Particulars
Cr
99000
3000
To Carriage inwards
5000
To import duty
6000
To Clearing charges
7000
By Closing stock
3000
247000 56000
10000
To Royalty To Fire Insurance
2000
To Wages
8000
To Gas, electricity, water
4000 91300
To P & L (GP)
303000
303000
7.5 Profit and Loss Profit and los is an important final in the sense that the net result of the business in the form of net profit or net loss is disclosed by preparing the same. All business expenses like istrative expenses, office expenses, selling and distribution expenses are shown on the debit side of the . Besides, all provisions made for different purposes such as reserve for bad debts, reserve for discount on debtors, reserve for repairs, depreciation etc., also picture on the debit side of the . On the credit side of the , all incomes of revenue in nature, reserve for discount on creditors and gross profit carried from trading are mentioned. In this connection, it is important to note that Trading and Profit and Loss are regarded as revenue s. Any capital receipts or capital Page No.: 158
Financial and Management ing
Unit 7
payments are not considered while preparing them. In brief, revenue receipts are those which are received regularly arising out of day to day activities of the business and similarly revenue payments, which are known as expenses are incurred regularly and for every day functions of the business. Capital receipts are in the form of
sources of funds such as
capital received, sale of capital asset like building etc., Capital payments are those spent for acquisition of capital assets, incurring capital expenditure etc., The transferring entries are drawn to prepare Profit and loss . They are 1. Profit and Loss Dr To all expenses 2. All Incomes
Dr
To Profit and Loss 3. Profit and Loss
To Transfer Net Profit to Capital Dr
To Profit and Loss Dr
To Transfer all incomes
Dr
To Capital 4. Capital
To Transfer all expenses
To Transfer Net loss to Capital
Profit and Loss for the year ending ---
Particulars
Rs
To Trading (GL)
Particulars
To Salaries + Out standing –
By Interest earned + Accrued interest as per adjustments
as
Rs
By Trading (GP)
Prepaid
salaries
Cr
per
adjustments
By Commission earned
To Rent of the premises
By discount earned
To Travelling expenses
By Rent received
To Rates and Taxes
By Bad debts recovered
To Printing and stationery
By Interest on drawings
Page No.: 159
Financial and Management ing
To Postage and Telegram
By Reserve for discount on
To Telephone charges
Creditors
To Insurance –Prepaid
By Dividends received
amount as per adjustment
By Royalty Received
To Interest paid
By Capital ( Net Loss)
Unit 7
To Discount allowed To Sundry expenses To ment To Commission To Carriage outwards To Bad Debts To Reserve for Bad debts To Reserve for discount on Debtors To Depreciation To Legal charges To Audit fee To Interest on Capital To
Capital
(Net
Profit)
7.6 Preparation of Profit and Loss The following steps may help to prepare Profit and Loss 1. Identify the expenses and bring them to debit side of P&L 2. Identify the revenue incomes and put them on the credit side of P&L 3. Check whether all adjustments like outstanding, prepaid, pre received expenses and incomes as the case may be are brought to the 4. Check the transfer of reserves to the relevant sides of the 5. Transfer the net profit / net loss to the capital Self Assessment Questions 14: 1. What types of expenses are shown on the debit side of P & L ? Page No.: 160
Financial and Management ing
Unit 7
2. P & L is revenue showing the revenue net profit or loss for the ing period(state True / False ). 3. Painting for a new building, Installation expenses paid to install a plant, amount spent for advertising for promotion of sale of a product are revenue expenses (state True / False ). 4. Net profit / loss is carried to owners equity / capital (state True / False ) Illustration The following Trial Balance is extracted from the books of a merchant on 31-12-2004. Particulars Furniture and fittings
Rs 640
Motor Vehicles
6250
Buildings
7500
Capital
12500
Bad Debts
125
Provision for Bad debts
200
Sundry Debtors
3800
Sundry Creditors
2500
Stock on 1-1-2004
3460
Purchases
5475
Sales Bank Over Draft
15450 2850
Sales Returns
200
Purchase Returns
125
Advertising
450
Interest on Bank Over Draft
118
Commission
375
Cash
650
Taxes and Insurance General Expenses Salaries
1250 782 3300
Page No.: 161
Financial and Management ing
Unit 7
The following adjustments are to be made. 1. Stock in hand on 31-12-2004 was Rs3250 2. Depreciate Buildings at the rate of 5%, Furniture and fittings @ 10% and Motor Vehicles @ 20%. 3. Rs.85 is due for interest on bank overdraft. 4. Salaries of Rs300 and taxes Rs.120 are outstanding. 5. Insurance amounting to Rs.100 is prepaid 6. One-third of the commission received is in respect of work to be done next year 7. Write off a further sum of Rs.100 as bad debts and provision for bad and doubtful debts to be made equal to 10% on sundry debtors. 8. Prepare Trading and Profit and Loss . 9.
Dr
Trading for the year ending 31-12-2004
Particulars
Rs
To Stock on1-1-2004 To Purchases
To P & L A/C (GP)
125
5350
Rs
By Sales 15450 Les Returns 200
5475
Less returns Total
3460
Particulars
Cr
By Closing Stock
15250 3250
9690 18500
Total
18500
Page No.: 162
Financial and Management ing
Dr
Unit 7
Profit and Loss for the year ending 31-12-2004
Particulars
Rs
To Salaries
3300
Add Outstanding
300
3600 450
Add Outstanding Int
Particulars
Rs
By Trading (GP)
To Advertising To Interest on OD
Cr
By Commission
118 85
375
9690
Less Pre-received 125 250
203
To Taxes and Insurance Add Out standing tax Less Prepaid Insurance
1250 120 1370
1270
100
782
To General expenses
125
To bad debts To RBD(New)
370
Less old RBD balance
100
270
To Depreciation: On Bldgs @ 5% On FF
@ 10%
375 64
1689
On M Vehicles @20% 1250
1551
To Capital (NP) Total
9940
Total
9940
Note: Sundry Debtors are Rs.3800 and there have been bad debts outside TB Rs100. The good debtors are Rs.3700. The new RBD is 10% of 3700, i.e.Rs370. The old RBD unspent is Rs100 (200 -100). Therefore RBD to be charged against profit is Rs270
7.7 Balance Sheet Balance Sheet is the sum and substance of financial performance a business undertaking. It shows the assets and liabilities of business on a particular day.
It is not an but is a statement of affairs.
The
statement of assets and liabilities is prepared, having two sides, left side Page No.: 163
Financial and Management ing
Unit 7
containing capital and liabilities and on the right side, containing assets and properties. Often the statement is prepared vertically, mentioning sources of funds first and later application of funds. Sources of funds indicate capital and liabilities and application of funds indicate assets. Balance Sheet is prepared from Trial Balance. In case of sole trader organization and Partnership organization, the format of preparing Balance Sheet is arranged basing on liquidity of the assets. In case of Companies, the Companies Act, 1956 has specified a definite pattern of preparing Balance Sheet. Both the models of preparing Balance Sheet are stated here under. BALANCE SHEET FOR THE YEAR ENDING 31-12-2003 OF Mr. X Capital and Liabilities
Rs
Assets
Rs
Sundry Creditors Less Reserve for Discount on Creditors Bills Payable Bank Over Draft Loans Borrowed Outstanding Expenses Pre-received Incomes Capital (Opening) Add Additions to capital Add interest on capital if any Add Net profit as per P&L a/c Less personal drawings Less Net loss as per P&L A/C
Cash in hand Cash at Bank Land and Building Add Additions if any Less depreciation Plant and Machinery less depreciation Furniture and Fixtures less depreciation Sundry debtors Less Bad debts out side Trial Balance Less Reserve for Bad Debts Less Reserve for discount on Debtors Bills Receivable Loans and advances given to others + Interest outstanding Investments + outstanding income on investments Other outstanding incomes Pre-paid expenses Closing stock
Total
Total
Page No.: 164
Financial and Management ing
Unit 7
The Format of Balance Sheet of a Company Capital and Liabilities
Rs
Assets
Capital:
Fixed Assets:
Authorised, Issued, Subscribed,Called up, Paid-Up capital with adjustments
Goodwill, Land Buildings,Furniture, Fixtures, Equipment, Plant, Machinery, Copy Rights, Patents
Reserves and Surplus
Investments
Loans and Borrowings
Loans and Advances
Long Term Loans
Current Assets:
Short Term Loans
Debtors, B/R, Inventory, Cash, Bank, Outstanding incomes, Prepaid expenses etc
Current Liabilities: Sundry Creditors, B/P, Outstanding expenses, pre-received incomes, dividends payable, etc., Total
Rs
Total
Self Assessment Questions 15: 1. The two sides of a balance sheets are ____ and ___________. 2. balance sheet is prepared on the bases of trial balance. (state True / False ). 3. balance sheet portrays the financial soundness of a concern (state True / False).
7.8 Preparation of Balance Sheet A few guide lines are given here under to prepare balance Sheet of a business concern. Balance Sheet is not an and there is nothing like debit side and credit side. If Trial Balance tallies, naturally Balance Sheet also tallies: 1. Identify all assets from the trial balance. Assets are shown on the debit side of T.B 2. Identify all liabilities from the Trial Balance and they are on the credit side of TB. Page No.: 165
Financial and Management ing
Unit 7
3. Make a mark of items with respect to which adjustments are given out side the TB 4. All adjustments should find place in two places, one either in Trading or in Profit and Loss and another invariably Balance Sheet. For example, closing Stock given outside TB is first shown on the credit side of Trading and it is shown as an asset in the Balance Sheet. ‘Bad Debts Reserve to be provided’ appears in P&L and later shown as a deduction from Sundry Debtors in the Balance Sheet. Similarly depreciation is charged against profits first and later deducted from the book value of concerned asset in the balance sheet. Illustration 1 From the Trial Balance given in para 6, prepare Balance Sheet of the merchant as on 31-12-2004. Solution Balance Sheet as on 31-12-2004 Capital and Liabilities Sundry Creditors Bank Over Draft 2850 Add interest due 85 Commission received in advance Outstanding Taxes Outstanding Salaries Capital 12500 Add Net Profit 1551
Total
Rs 2500 2935 125 120 300 14051
20031
Assets
Rs
Cash Building 7500 Less Depreciation 375 Furniture and Fixtures 640 Less Depreciation 64 Motor Vehicle 6250 Less Depreciation 1250 Sundry Debtors 3800 Less bad debts as per Adjustments 100 Balance 3700 Less Reserve for Bad Debts(New) 370 Closing Stock Pre-Paid Insurance Total
650 7125 576 5000
3330 3250 100 20031
Page No.: 166
Financial and Management ing
Unit 7
NOTE: Every adjustment given outside Trial Balance finds place in two s –Trading / Profit and Loss and invariably in Balance Sheet. Self Assessment Questions 16: 1. What is the purpose of creating Reserve for Bad debts? 2. State the purpose of creating reserve for discount on creditors. 3. Insurance paid on 1-1-2000 up to 31-12-2000 Rs.4800. If the books are closed on 31-7-2000, what is the amount of prepaid insurance? 4. Select the most appropriate answer. i) Sales are equal to a) Cost of goods sold + Profit b) Cost of goods Sold – Gross Profit c) Gross Profit – Cost of Goods sold ii) Interest on Drawings is a) Expenditure for the business b) Expensef or the business c) Gain for the business iii) Goods given as samples should be credited to
b) Sales
a) ment
c) Purchases
iv) Out standing salaries are shown as
a) an expense
b) a liability
c) an asset v) Income tax paid by a sole trader on his business income should be a) debited to the Trading
b) debited to P&L
c) deducted from capital in the Balance Sheet 5. Stock at the end, if appears in the Trial Balance is taken only to the Balance Sheet – Yes or No? 6. Goods taken by the proprietor for personal use are credited to sales – Yes or No? 7. Salary paid in advance is not an expense because it neither reduces assets nor increases liabilities. – Yes or No? 8. Balance Sheet is an because it is included in the scope of final s – Yes or No
Page No.: 167
Financial and Management ing
Unit 7
Terminal Questions 1. In taking out a Trial Balance, a Book keeper finds that debit total exceeds the credit total by Rs.611. The amount is placed to the credit of a newly opened Suspense . Subsequently the following mistakes were discovered. You are required to the necessary entries for rectifying the mistakes, and show how Suspense . (a)
Sales day book was over cast by Rs.1000
(b)
A sale of Rs.50to Sri Ram was wrongly debited to Sri Krishna
(c)
General expenses Rs.180 were posted as 801
(d)
Cash received from Bhatt was debited to his RS.450
(e)
While carrying forward the total from one page of the Purchases book to the next, the amount of Rs.1235 was entered as Rs.1325.
2. Rectify the following errors: (i) Furniture purchases for Rs.2500 was debited to Purchases (ii) A sum of Rs.500 paid to Lalitha was debited to Shantha (iii) A bill receivable for Rs.1000 received from Kumar has been omitted to be entered. (iv) Goods worth Rs2040 taken away by the proprietor were debited to Bharath (v) An engine purchased for Rs.12500 had been posted to Purchases 3. An ant could not tally the Trial Balance. The difference was temporarily transferred to Suspense for preparing the final s. The following errors were later discovered. (a)
The sales book was under cast by Rs.500
(b)
Entertainment expenses Rs.950 though entered in the cash book were omitted to be posted in the ledger.
Page No.: 168
Financial and Management ing
(c)
Unit 7
Discount column of the receipt side of cash book was wrongly added as Rs114 instead of Rs.144.
(d)
Commission of Rs.250 paid, was posted twice, once to discount and once to Commission .
(e)
A sale of Rs.169 to Rama Murthy though correctly entered in sales book, was posted wrongly to his as Rs.196.
(f)
A purchase from Neeraj of Rs.290 though correctly entered in purchases book was wrongly debited to his personal .
You are required to 1. the necessary rectifying entries 2. Prepare Suspense 3. State the effect of each of the rectification on the profit. What would be the correct profit originally arrived at was Rs.10000? 4. The trial balance of Raj Bahadur of Vijayanagaram as on 31-12-2005 is given below.Prepare Trading , Profit and Loss and Balance
Sheet
for
year
ending
31-12-2005
after
taking
into
consideration the following adjustments. (a)
Stock on 31-12-2005 was 15000
(b)
Debts worth Rs.2000 should be written off as bad
(c)
Depreciate Machinery by 5% and Motor Van by 15%
(d)
Reserve for bad and doubtful debts should be increased by Rs.600
(e)
Commission accrued and not received Rs.500
(f)
Goods worthRs.500 were used by the proprietor for his personal use
(g)
On September,2005, a fire broke out in the shop and goods worth Rs.2000 were completely destroyed. The insurance company accepted a claim of Rs.1500 only and paid the amount on January 1st 2006.
Page No.: 169
Financial and Management ing
Unit 7
TRIAL BALANCE AS ON 31-12-2005 Particulars
Debit in Rs
Capital Drawings
Credit in Rs 85000
7500
Opening Stock
12000
Purchases and Sales
86000
170000
2000
1000
500
700
Returns Discounts Commission
1000 700
Income Tax paid Office Salaries
17300
Advertising
2000
Sundry Debtors and creditors
1700 85000
30000
Manufacturing Wages
8600
3000
Bills Receivable and Payable
5000
Reserve for Doubtful Debts
600
Carriage Machinery
40000
Motor Vans
7000
Land and Buildings
5000
10000
Office Expenses
1500
Cash at Bank
6000
Cash in Hand
2300 295700
295700
Ans: Gross Profit Rs.79300; Net Profit: 52350; BS163650
Page No.: 170
Financial and Management ing
Unit 7
5. On 31st December,2003 the following trial balance has been extracted. Rs Drawings
4000
Sundry Debtors
20500
Interest on loan
300
Rs Establishment
9100
Rent, rates and insurance
5000
ment
4160
Cash in hand
4000
Credit Balances
Stock (1-1-2003)
6050
Capital
50000
10000
Sundry creditors
12000
Loan on mortgage
15700
Motor Vehicles Cash at Bank
5600
Land and buildings
62000
Bad debts Provision
Purchases
97500
Sales
2000 170000
Salaries
8600
Purchase returns
Carriage in
4100
Discounts
Carriage out
2200
Bills payable
3000
General Expenses
5100
Rent received
600
Bills receivable
7050
1460 500
Adjustments 1. Depreciate land and buildings at 5% and Motor Vehicles at 15% 2. Interest on loan is at 5% taken on 1st January,2003 3. Salaries amounting to Rs.700 and Rates amounting to Rs.400 are due. 4. There has been a fire on 1st January, 2003 destroying goods worth Rs.200 5. The bad debts provision is to be brought up to 5% on Sundry debtors 6. The stock in hand on 31-12-2003 was valued at Rs16000 7. Goods costing Rs.1000 were taken away by the proprietor for his personal use, but no entry has been made in the books of s 8. Prepaid insurance amounted to Rs.500 9. Provide for Manager’s commission at 5% on net profit after charging such commission. Prepare Trading & P&L a/c and balance sheet. Page No.: 171
Financial and Management ing
Unit 7
6. A firm had the following Balances on 1st January 2000 (a) Provision for bad debts
Rs7500
(b) Provision for discount on debtors
3600
(c) Provision for discount on creditors
3000
During the year Bad debts amounted to Rs.6000, Discounts allowed were Rs300 and discounts received were Rs.600. During 2001, bad debts amounted to Rs.5000 and discounts allowed and received were respectively Rs.6000 and Rs1500. Total debtors on December 1st, 2000 were Rs.1,44,000 before writing off of bad debts, but after allowing discounts. On December 31st, 2000, the amount of debtors was Rs.57000 after writing off the bad debts but before allowing discounts. Total creditors on these two dates were Rs.60000 and Rs.75000 respectively. It is the firm’s policy to maintain a provision of 5% against bad and doubtful debts and 3 % for discount on debtors and a provision of 3% for discount on creditors. Show the s relating to provision on Debtors and provision on creditors for the year 2000 and 2001 (Ans: Provision for bad debts-2000 Rs.6900 and 2001 Rs.2850; Provision for discount on debtors – 2000 Rs.3933, 2001 Rs.1530; Provision for discount on creditors – 2000 Rs.1800, 2001 Rs2250) 7. In a business, Sundry debtors were Rs.40000 at the beginning of the year and there was 5%
Reserve for Doubtful Debts and also
5%Rreserve for Discount on Debtors. During the year the actual bad debts amounted to Rs.1600 and the discount allowed were Rs.1700. At the close of the year, the debtors were Rs.50000; and the percentage of the two reserves have to be maintained as at beginning. Show ledger s. Page No.: 172
Financial and Management ing
Unit 7
Answer for Self Assessment Questions. Self Assessment Questions 1: 1. True 2. False 3. True 4. True 5. Internal transactions 6. profit / loss for the ing period 7. True Self Assessment Questions 2: 1. Outstanding expenses 2. Salaries Dr To outstanding expenses 3. It means t hat they are already considered. 4. False. Self Assessment Questions 3: 1. Prepaid expenses 2. True 3. 1000 + 5600 – 800 = 5800 4. True. Self Assessment Questions 4: 1. Accrued or outstanding income 2. True 3. True Self Assessment Questions 5: 1. True 2. Rent Dr To Income received in advance 3. Deducted. Page No.: 173
Financial and Management ing
Unit 7
Self Assessment Questions 6: 1. Wear & tear / usage 2. Depreciation a/c Dr To asset 3. P & L a/c Dr To Depreciation a/c 4. It means that the concerned asset is get to be depreciated 5. Diminishing(Reducing) balance method. 6. It indicates that the asset is already depreciated and depreciation should be transferred only to P & L a/c. Self Assessment Questions 7: 1. Bad debts 2. True 3. Bad debts a/c Dr To Debtor a/c 4. P & L a/c Dr To Bad debts a/c 5. Profits are reduced. 6. Cash a/c Dr. To Bad-debts recovered a/c. Self Assessment Questions 8: 1. Bad debts are totally not recoverable, doubtful debts may be recovered. 2. False 3. True 4. True 5. R.B.D a/c Dr To bad debts . 6. P & L a/c Dr To R BD a/c 7. True Page No.: 174
Financial and Management ing
Unit 7
Self Assessment Questions 9: 1. To encourage customers to make quick & prompt payment. 2. Cash discount a/c Dr To Debtors a/c 3. True 4.
True
5. Good debtors (Meaning total debtors- Bad debts outside trial balanceRBD ) Self Assessment Questions 10: 1. True 2. True 3. Deduct the provision from the amount of creditors 4. True. Self Assessment Questions 11: 1. Cost on market price which ever is lower 2. Closing stock is debited and trading is credited 3. Gross profit is reduced by not considering unsold stock 4. True. Self Assessment Questions 12: 1. True 2. True 3. Sales 4. P & L
Self Assessment Questions 13: 1. Net purchases meaning (Total purchases – purchase returns – stock destroyed – stock used for personal use ). 2. No, because they do not manufacture any product. Page No.: 175
Financial and Management ing
Unit 7
Self Assessment Questions 14: 1. Indirect expenses office & istrative expenses, selling & distribution expenses etc. 2. True 3. False 4. True
Self Assessment Questions 15: 1. Assets, liabilities 2. True 3. True Self Assessment Questions 16: 1. To write off bad debts against the reserve and reduce the pressure on current profits. 2. to provide for anticipated profits. 3. Rs 2000 relating to 5 months ( 1.8.2000 to 31.12.2000) 4. i) a ii) c iii) c iv) b v) c 5. Yes 6. No 7. Yes 8. No Answer for Terminal Question: 1. Refer to unit 6.10. 2. Refer to unit 6.10. 3. Refer to unit 6.10. 4. Refer to unit 7.4, 7.6, 7.8. Ans: Gross profit Rs 79300, Net profit Rs 52350 Balance sheet Rs 163650. Page No.: 176
Financial and Management ing
Unit 7
5. Refer to unit 7.4, 7.6 & 7.8 Gross Profit Rs 81010; Net Profit Rs 40706; Commission Rs 2034; Balance Sheet Total Rs 1,20,025 6. Refer to unit 7.2.7, 7.2.8, 7.2.9 Answer : Provision for Bad debts 2000 – Rs 6900 ; 2001 – Rs 2850. Provision for discount on debtors 2000 – Rs 3933; 2001- Rs 1530 Provision for discount on creditors 2000 – Rs 1800; 2001 –Rs 2,250. 7. Refer to unit 7.2.7, 7.2.8 Closing Balance of RBD Rs 2,500 Closing Balance of Reserve for Discount on Debtors Rs 2,375. RBD Transferred to P & L Rs 2,100 Reserve for Discount Transferred to P & L Rs 2,175
Page No.: 177
Unit 7
Unit 7
Final s
Structure: 7.1
Final s – Introduction
7.2
Adjustments before preparing final s 7.2.1
Outstanding expenses
7.2.2
Prepaid expenses
7.2.3
Accured Income
7.2.4
Income received in advance
7.2.5
Depreciation
7.2.6
Bad Debts
7.2.7
Provision for doubtful debts
7.2.8
Reserve for Discount on Debtors
7.2.9
Reserve for discount on creditors
7.2.10 Closing Stock 7.3
Trading
7.4
Preparation of Trading
7.5
Profit and Loss
7.6
Preparation of Profit and Loss
7.7
Balance Sheet – Meaning
7.8
Preparation of Balance Sheet
Learning Objectives: After studying this unit, you should be able to understand the following: 1. To understand the process of preparing the final s of a business organization from Trial balance. 2. To incorporate such transactions left out and various adjustments with regard to transactions taking place after the trial balance but relating to the current period.
Page No.: 135
Financial and Management ing
Unit 7
7.1 Final s – Introduction The last step of ing process is preparation of final s. Final s are Trading and Profit and Loss with respect to any trading organization. If it is non trading organization like a club or an Educational Institution, Receipt and Payment and Income and Expenditure are the final s. In case of a manufacturing unit, a Manufacturing is prepared in addition to Trading . Profit and Loss is prepared by all trading and manufacturing units. Balance Sheet is closely associated with these final s. But Balance Sheet is not an . It is a statement of assets and liabilities of business organization prepared at the final stage of the ing process. Therefore balance sheet is regarded as a part of final s. The purpose of preparing final s is to find out the end result of business at the end of an ing period, may it be profit or loss. The basis for preparing final s is the Trial Balance. For Trial Balance, the ledger balances are the root. For ledger s, the journal entries or entries in the subsidiary books (Books of original entry) are the roots. Hence the final s reflect the original business transactions, which are systematically and scientifically recorded, classified, and analyzed. Final s provide bundle of information for decision making activities. Objectives: 1. To know the meaning and purpose of final s 2. To identify the items of Trading 3. To identify the items of Profit and Loss 4. To identify the items of assets and liabilities of a Balance Sheet and modes of preparing it. Page No.: 136
Financial and Management ing
Unit 7
5. To know the adjustments such as Reserve for bad debts, Reserve for discounts on Debtors, Reserve for discount on Creditors, bad debts out side the trial balance. 6. To understand the adjustments like depreciation on assets, closing stock, stock lost in fire, goods given as samples, goods used for personal purpose etc., 7. To know the adjustments of prepaid expenses, outstanding expenses, pre-received incomes, outstand incomes etc. 8. To prepare Balance Sheet without any adjustments from trial balance. 9. To prepare Balance Sheet with adjustments.
7.2 Adjustments before preparing final s The Generally Accepted ing Principles (GAAP) s the accrual basis of ing, according to which revenue is recognized when it is earned and expenses are recognized when they are incurred, irrespective of their actual receipt or actual payment. If the accrual basis of ing is used, adjusting entries are required at the end of the period to record any changes in assets, liabilities, revenue incomes, revenue expenses, previously unrecognized. Adjusting entries are regarded as internal transactions. For instance, salaries are paid in advance to a few employees and the excess paid in the current period, should be adjusted to the coming period and what is paid in advance now should not be charged against the revenues relating to the current period. Similarly, insurance paid in advance, rent paid in advance etc., Like wise incomes received in advance should not be considered for the current period. On the other hand, expenses yet to be paid for the current period should be charged against the current period’s income. On the same lines, incomes yet to be received for the current period should be considered as incomes Page No.: 137
Financial and Management ing
Unit 7
for the current period whether actually received in cash or not. Every asset is subject to wear and tear and the value of the asset gets reduced even if the loss on of this is not recorded by means of a journal entry. Some stock of goods at the end of the period is left over and it has to be valued and be taken to s for fair computation of profit. Such internal adjustments have to be made and recorded before preparing Trading , Profit and Loss and Balance Sheet. The adjustments to be incorporated are briefly described in the following paragraphs. Self Assessment Questions 1: 1. Final are prepared from trial balance, trial balance from ledger s and ledger from books of original entry. So final s are reflection of original transaction (state True / False ). 2. Final s speak about profit or loss as on a particular day ( state True and False ) 3. Balance sheet tells the value of assets and liability as standing an a the last day of ing period ? ( True / False ). 4. Adjustment in final s is necessitated because of accrual basis of ing (state True / False ). 5. Adjusting entries are also regarded as ______ . 6. Adjustments such as outstanding and prepaid / received items are needed to find out _____________. 7. Adjustment entries are made before preparing tracking and P & L and balance sheet (True/False ). 7.2.1 Outstanding expenses Expenses due but not yet paid are known as outstanding expenses. Wages, salaries, rent, commission etc payable in the current month are paid in the following month. If final s are prepared for year ending 31st December, then the expenses payable for December will be paid in January of next year. The extent to which the amount belongs to the current year but Page No.: 138
Financial and Management ing
Unit 7
payable in the next year is called outstanding expenses. To record that aspect, the journal entry drawn in the Journal proper is: Concerned Expenses Dr To outstanding Expenses . Outstanding expenses indicates liability for the current year and it will appear in the balance sheet. Example: ment
expenses for year 31-12-2003 outstanding is
Rs.5000. The journal entry is ment expenses
Dr
5000
To Outstanding expenses
5000
Self Assessment Questions 2: 1. Expenses due but not yet paid are known as ___________. 2. What is the entry if salaries are outstanding ? 3. If ‘outstanding expenses’ appear in trial balance, what does it mean ? 4. Outstanding expenses appear an assets side of balance sheet ( state True / False ). 7.2.2 Prepaid Expenses Expenses paid in advance are regarded as prepaid expenses. Prepaid expenses form an asset and therefore prepaid expenses is debited. For example, insurance is paid from April, 2004 to March, 2005 and the amount is Rs.3600. The financial year ends by 31st December, 2004. Therefore the relating to Jan, Feb and Mar of 2005 Rs.900 is said to have been paid in advance. To record this internal adjustment, the entry is Prepaid Expenses To Insurance
Dr 900 900
Note that outstanding or prepaid expenses s are regarded as personal s.
Page No.: 139
Financial and Management ing
Unit 7
Self Assessment Questions 3: 1. Expenses paid even before incurred. They are know as _____. 2. Prepaid expenses appear on the asset side of balance sheet. ( state True / False). 3. Opening balance of prepaid insurance is Rs 1000; insurance paid during the year Rs. 5600; Insurance paid in advance include in the above is Rs 800: Find out actual expenditure for insurance for the current year. 4. Prepaid expenses is a personal ( True / False). 7.2.3 Accrued Income Accrued income is also called outstanding income. Outstanding income is a personal and it represents an asset. This is credited and the concerned income is debited in the journal proper as an adjusting entry. The entry is Outstanding incomes Dr To Concerned income Example Interest accrued on Fixed Deposit of Rs 200000 at 12% simple interest on 31-12-2006, not yet received. The entry is Outstanding incomes Dr
24,000
To interest on FD
24,000
Outstanding Income appears as an asset in the balance sheet. Self Assessment Questions 4: 1. Income earned but not received is called ____________. 2. Outstanding income is an asset ( state True / False ). 3. Outstanding income is a personal . (True / False ).
Page No.: 140
Financial and Management ing
Unit 7
7.2.4 Income received in advance Just as income is accrued, there are instances where income is received in advance. The amount is shown as liability in the balance sheet and it shows a credit balance. The adjusting entry to record the income received in advance is Concerned item of income Dr To Income received in advance Example Rent received for one year from 1-4-2005 to 31-3-2006 Rs.48000. s are finalized on 31-12-2005. Therefore rent received for January, February and March of 2006 is said to have been received in advance Rs.12000. The entry is Rent received Dr
12000
To Income received in advance a/c
12000
Self Assessment Questions 5: 1. Any income received in advance is a liability (state True / False ). 2. What is the adjusting entry for rent received in advance ? 3. Income received in advance in the current year is ________ from the unearned item of income received. 7.2.5 Depreciation Depreciation is reduction in the value of an asset due to constant use of the same, which is called wear and tear. Fixed assets like, buildings, plant, machinery, furniture etc., are subject to depreciation. Whenever, an asset is depreciated, its value goes down and therefore it is a loss to the organization. Depreciation is debited and the concerned asset is credited. The item of depreciation may appear in the trial balance, which means that already the concerned asset is reduced by the amount of depreciation. If depreciation is given as an additional adjustment, Page No.: 141
Financial and Management ing
Unit 7
then the depreciation amount should be charged against profit and loss on one hand and the concerned asset is reduced on the other hand in the balance sheet. There are two popular methods of depreciation, namely fixed installment method and reducing balance method. In fixed installment method, depreciation is calculated on cost of the asset. In case of reducing balance method (Diminishing balance method), the depreciation is charged on the reducing balance of the book value of the asset. Reducing balance method is more popular and well recognized. Example Building is of the book value of Rs.400000. It is depreciated at 10% on fixed installment method. Show the journal entry and how does it appear in the balance sheet? Solution The entry for depreciation is Depreciation Dr 40,000 To Building
40,000
Depreciation being a loss is transferred to profit and loss and in the balance sheet, the value of Building is shown as Rs.400000 – 40000 = 360000. Note: For the second year the depreciation will be Rs.40000 if the asset is depreciated under fixed installment method. If it is depreciated under reducing balance method, the depreciation for the second year is Rs.36000 (10% of 360000). Self Assessment Questions 6: 1. Depreciation is for __________ of an asset. 2. What entry is drawn if depreciation is provided ? Page No.: 142
Financial and Management ing
Unit 7
3. When depreciation is transferred to P & L A/c , what entry do you draw ? 4. If depreciation to be provided in the adjustments, what do you understand by this ? 5. What is the method of depreciation recognized by Indian Income Tax Act? 6. If depreciation appears in the trial balance, what does it indicate ? 7.2.6 Bad Debts Bad debts are those debts which are not recovered. Bad debts form loss to the business and reduce the amount of debtors. Since bad debts are losses, they are debited and the debtor’s is credited because the outstanding amount of debtors comes down. If bad debts are identified well before preparing trial balance, then bad debts appear in the trial balance and they should be taken to the debit side of profit and loss . Since debtors is already reduced by the amount of bad debts, it does not require any further adjustment in the balance sheet. If bad debts are shown outside the trial balance, which means that they are identified after the preparation of Trial Balance, then two adjustments should be incorporated. One – bad debts should be charged against profits in P & L A/C and the second – the debtor’s should be reduced by the amount of bad debts in the balance sheet on the asset side. Example The sundry debtors for the year 2005 are Rs.50000. The bad debts amounted to Rs.4000 as on 31-12-2005 already shown in the trail balance. Write off further bad debts Rs5000. Show how the above internal adjustments appear in the final s. Page No.: 143
Financial and Management ing
Unit 7
Solution
There are bad debts shown in the trial balance Rs4000 and not shown in the trial balance Rs.5000. To incorporate those bad debts not yet shown in the trial balance, the adjusting entry is Bad debts
Dr
5000
To Debtor’s
5000
In the profit and loss of 2005, the total bad debts appearing on the debit side are Rs. 9000(4000 + 5000)
In the balance sheet, on the asset side, the amount of debtors is Rs45000(50000 -5000).
Self Assessment Questions 7: 1. Unrecovered debts are called ______. 2. Bad debts are not expenses but they form losses. (state True / false ) 3. What is the entry made in journal proper, if bad debts are recorded. 4. What entry do you make to close the bad debts ? 5. What impact bad debts have on profits ? 6. If bad debts are recovered, what entry can be drawn ? 7.2.7 Provision for Doubtful Debts Debts that can not be recovered are called bad debts but debts, the recovery of which is doubtful, are called doubtful debts. From the past experience of the business proprietor, what percentage of good debts may become bad in future, can be estimated and in the current year itself an equal amount of profit be set aside. This provision is known as Reserve for Bad Debts or Provision for Doubtful Debts or Reserve for Doubtful Debts. Since the provision for bad debts is a charge against current year profit, the adjusting entry is to debit P & L A/C and credit Provision for Bad Debts . Page No.: 144
Financial and Management ing
Profit and Loss
Unit 7
Dr
To Provision for bad debts Provision for bad debts is a liability to be incurred in future and so it should appear on the liability side of balance sheet. However, the convention is RBD (Reserve for Bad and Doubtful Debts) is deducted from the amount of good debtors. The important note here is that RBD is computed as a percentage of good debts, which means total debtors minus bad debts unadjusted. Provision for bad and doubtful debts is a running and every year the amount keeps on changing because from the provision made in the current year, bad debts occurring in the following year have to be adjusted and additional amount of provision to be made is calculated. Every year, the amount transferred to P & L A/C is B + N – O, where B stands for bad debts; N stands for new provision and O stands for old reserve. For example, the old reserve stands at Rs.15000 and bad debts to be adjusted is Rs4000 and new reserve to be maintained is Rs18000. The amount to be charged against profits in P&L A/C is Rs.7000 (4000 + 18000 – 15000). The formula can also be shown as N - O + B = 18000 – 15000 + 4000 = 7000 Self Assessment Questions 8: 1. What is the difference between Bad debts and doubtful debts? 2. Provision is made for Debts which have become bad (state True / False). 3. Provision for Doubtful debts is a change against the profits of the firm (state True / False ) 4. Bad debts incurred in the subsequent period are written off against reserve for bad debts (state True / False ). 5. What is the entry for writing off of bad debts against RBD? Page No.: 145
Financial and Management ing
Unit 7
6. If RBD is freshly to be provided, what entry can be draw? 7. RBD is calculated on debtors which are good and so any bad debts out side trial balance should be deducted out of total debtors (state True / False ). Illustration: On 1st January 2006, the RBD stood at Rs.9000 in the books of a merchant. The bad debts written off during the year ended 31st December, 2006 amounted to Rs.4800 and Sundry Debtors stood at Rs.480000. It was desired to maintain the reserve for bad debts at 5% on Debtors. During the year 2007 bad debts written off amounted to Rs.12000 and sundry debtors on 31st December 2007 amounted to Rs.380000.As usual 5% reserve was required. Show the journal entries for recording the above transactions and write up the bad debts reserve . Solution Journal Entries Date
Particulars
2006
LF
Bad debts st
Dec, 31
Dr
Debit
Credit
Rs.
Rs.
4800
To Sundry Debtors
4800
(Being the bad debts written off) st
Dec, 31
Bad Debts Reserve
Dr
4800
To Bad Debts st
Dec 31
4800
(Being bad debts set off against RBD) Profit and Loss
19800
Dr
19800
To Bad Debts Reserve (Being additional RBD made to bring the reserve to 5% of 480000) Bad debts
2007 st
Dec, 31
Dr
To Sundry Debtors
12000 12000
(Being bad debts written off ) Page No.: 146
Financial and Management ing
Unit 7
Bad debts Reserve Dr st
Dec 31
12000
To bad debts
12000
(Being bad debts written off against RBD) Profit and loss
Dr
To Bad debts reserve
Dec 31st
7000
7000
(Being additional RBD made to bring the reserve to 5% of 380000)
NOTE: On January 1st 2006, the RBD stands at Rs9000 and during the year the actual bad debts are Rs4800 and so there is unused balance of Rs.4200 (9000 -4800). It is desirable to have reserve of 5% of 480000 – Rs24000. Therefore additional reserve required to be provided in P & L A/C is Rs19800 (24000 – 4200). Similarly during 2007 the actual bad debts are Rs.12000 and the available reserve is used for writing it off. Still there is a balance left over is Rs.12000 (24000 – 12000). The additional reserve to be maintained is 5% of 380000, that comes to Rs19000. So the additional amount to be provided in P & L A/C in 2007 is Rs.7000 (19000 – 12000). Reserve for Bad Debts Dr
Cr
Date
Particulars
J F
Amount Rs.
J F
Particulars
Amount Rs.
2006
2006 Dec, 31
Date
st
To bad debts
4800
st
To balance c/d
24000
Total
28800
To bad debts
12000
Jan 1
To balance c/d
19000
Dec 31st
Total
31000
2007 Dec,31st
Jan, 1
Dec 31st 2007
By Balance b/d
9000
By P&L A/C
19800
Total
28800
By balance b/d
24000
st
By P&L A/C Total
7000 31000
Page No.: 147
Financial and Management ing
Unit 7
7.2.8 Reserve for Discount on debtors: There are two types of discounts allowed to customers in a business. One is trade discount and another is cash discount. Trade discount is given to customers to retain the customers and it is shown in the invoice itself. It means that trade discount does not come to ing records at all. But cash discount is allowed to customers to encourage them to pay cash promptly at the earliest. Normally cash discount gets recorded in cash . Out of experience, a businessman can guess how much of cash discount he may have to give on customer’s s. Cash discount given to debtors is always a loss and is shown as expenditure in the Profit and Loss . After anticipating the amount of cash discount allowable, a provision is made in the current year itself. In the subsequent years, the actual discount allowed is set off against the provision for discount on debtors. Every year, the amount of provision for discount on debtors is deducted from the profits. The entry for making the provision is Profit and Loss
Dr
To Provision for discount on debtors Just as in the case of provision for bad and doubtful debts, the bad debts are first written off against provision for bad debts and later the required amount of provision is provided in the P&L A/c, similar procedure takes place in the case of provision for discount on debtors. The following guide lines may be kept in mind while dealing with the reserve for discount on debtors 1. If a reserve for discount on debtors is not existing and cash discount is allowed, then transfer the discount to P&L . 2. Any fresh reserve for discount on debtors is to be made, debit the P&L A ccount with the amount of reserve.
Page No.: 148
Financial and Management ing
Unit 7
3. If provision for discount on debtors exists at the time of providing discount, then write off the discount from the provision already made for the purpose. 4. New provision should then be calculated and only as much as required to bring the existing provision to the new figure should be debited to P&L . 5. If the new provision required is lower than the provision already existing (old), then the difference shows profit and transfer the same to P&L . Self Assessment Questions 9: 1. what is the aim of giving cash discount ? 2. If discount is allowed against receivables, what entry do you draw in journal proper? 3. Provision for Discount on debtors is a charge against P & L a/c. (state True / False). 4. Provision for discount on debtors appears as a liablility in the balance sheet ( state True / False ) 5. What is the basis for calculating provision for discount an debtors? Illustration The following items are found in the trial balance of Praksh on 31st December 2000. Sundry Debtors
Rs. 160000
Bad Debts written off
9000
Discount allowed to Debtors
1800
Reserve for Bad and doubtful Debts 31-12-1999 Reserve for discount on Debtors 31-12-1999
16500 3200
Page No.: 149
Financial and Management ing
Unit 7
You are required to provide for the bad and doubtful debts at 5% and for discount on debtors at 2%. Give necessary journal entries and show bad debts , bad debts reserve , discount and provision for discount on debtors . Solution Date
Particulars
2000 st Dec, 31
RBD
LF
Debit
Credit
Rs.
Rs.
9000
Dr
9000
To Bad Debts (Being bad debts written off against existing RBD)
Dec 31st
P & L
Dr
500
To RBD
500
(Being addition to RBD to make the new RBD equal to 5% of 160000) st
Dec 31
Reserve for discount on debtors Dr To Discount on Drs A/c
1800
1800
(Being discount on debtors written off against Reserve for discount on Debtors) Dec 31st
P & L
Dr
1640
To Reserve for discount On debtors
1640
( Being additional reserve made to make the new reserve for discount on debtors to 2% of 152000)
NOTE: 1. The amount debited to P&L towards RBD is computed as follows Old RBD Less Bad debts
= =
Rs.
16500 9000 Page No.: 150
Financial and Management ing
Balance = New RBD @5% on160000 = RBD to be provided =
Unit 7
7500 8000 500 (8000-7500)
2. The amount debited to P&L towards Reserve for Discount on Debtors is computed as follows: Good Debtors = 160000 – 8000 (New RBD)=152000 Old Res for Dis On Drs = Rs. 3200 Less Discount on Drs = 1800 Balance Reserve = 1400 New Res for Disc at 2% On good drs 152000 = 3040 Res for Discount to be Provided now = 1640 (3040 -1400) Bad Debts Dr
Cr
Date
Particulars
JF
Amount Rs.
Particulars
JF
Amount Rs.
2000
2000 Dec, 31
Date
st
To Sundry debtors
9000
Total
9000
Dec 31st By RBD
9000
Total
9000
Reserve for Bad Debts Dr
Cr
Date
Particulars
JF
Amount Date
Particulars
Rs. 2000 Dec, 31
JF
Amount Rs.
2000 st
st
To bad debts
9000 Jan, 1
To balance c/d
8000 Dec 31st
Total
17000
By Balance b/d By P&L A/C Total
16500 500 17000
Page No.: 151
Financial and Management ing
Unit 7
Discount on Debtors Dr
Cr Date
Particulars
JF
Amount Rs.
2000 Dec, 31
Date
Particulars
JF
Amount Rs.
2000 st
Dr
To Sundry debtors
Dec 31st By Reserve for Discount on 1800 Debtors A/C
1800
Total
1800
1800
Total
Reserve for Discount on Debtors Date
2000 st Dec, 31
Particulars
To Discount on Debtors To balance c/d Total
JF
Amount Rs.
Date
Particulars
Cr JF
Amount Rs.
2000 st 1800 Jan, 1 By Balance b/d 3040 Dec 31st By P&L A/C
3200 1640
4840
4840
Total
In the balance sheet, the Sundry debtors are reduced by bad debts shown out side the trial balance, the new RBD, discount on debtors shown out side the trial balance and the new Reserve for discount on debtors. 7.2.9 Reserve for discount on creditors Just as reserve is for discount on debtors is created, reserve for discount on creditors is also created.
Businessman expects that he would receive
discounts from suppliers (creditors), when the businessman remits cash to them. Anticipating some percentage of creditors being received as discount in the coming year, the business proprietor makes a provision for the expected income in the current year itself. Discount on creditors is an income and therefore reserve for discount on creditors is debited and profit and loss is credited to show it as anticipated profit. In the subsequent year, when discount on creditors is actually received, it is first set of against provision for discount on creditors and the difference between the new provision for discount on creditors and the balance of old provision left over is carried to P&L . Page No.: 152
Financial and Management ing
Unit 7
Discount on creditors is income and to that extent the creditors due is reduced. So the journal entry to record them is Creditor’s
Dr
To discount on creditors Later if the discount received is adjusted against reserve for discount on creditors, the entry will be Discount on creditor’s
Dr
To Reserve for discount on creditors When provision for discount on creditors is made in P&L , the entry will be Reserve for discount on creditors Dr To Profit and loss The amount of provision for discount on creditors is calculated at a percentage on creditors. In the balance sheet, creditors are shown after deducting reserve for discount on creditors. Self Assessment Questions 10: 1. Discount on creditors is an item of income (state True / false ). 2. Provision for discount on creditors is shown as an anticipated income (State True/False ). 3. How do you treat provision for discount an creditors in balance sheet ? 4. Discount received from creditors subsequently is changed against provision for discount on creditors. (state True / False ). 7.2.10 Closing stock Stock of goods – raw materials, semi finished goods, finished goods – at the end of the ing year should be considered for preparing trading and balance sheet. It is an internal adjustment. Closing stock is normally valued at cost or market price which ever is lower, even though there are several other methods to value stock. Closing stock does not appear in the trial balance because the value of it is ascertained only after the preparation of trial balance. To bring to the records, a journal entry is Page No.: 153
Financial and Management ing
Unit 7
ed in journal proper by debiting closing stock and crediting trading . In the balance sheet, closing stock appears as an asset. Self Assessment Questions 11: 6. what is the popular valuation method of closing stock ? 7. what is the entry for adjusting the closing stock ? 8. what does happen in case closing stock is not considered for computing gross profit ? 9. Closing stock always appears as an asset in balance sheet. (state True / false).
7.3 Trading Trading shows gross profit or gross loss arising out of trading activities. Trade means buying and selling. The mainly focuses on finding the result of goods bought and goods sold. Interestingly, goods are bought for a cost and the proprietor incurs a few items of purchase expenses and the goods are sold at a price higher or lower than the cost incurred. At the end of ing period, some stock is left over and it should be valued so as to calculate the profit or loss from the cost of goods sold. Therefore, opening stock of goods, cost of purchases made, expenses on purchases are taken on debit side of the trading . On the credit side of the , the sales of goods and the value of closing stock are shown. The excess of credit over debit is gross profit and vice versa. The gross profit or gross loss is transferred to Profit and Loss . The format of a Trading is given below: Dr
Trading for the year ending- - - -
Particulars To opening stock To Purchases Less Purchasereturns/returns outwards To Carriage inwards To freight and octroi To wages
Cr
Rs. Particulars By sales Less returns inwards/sales returns By Closing stock
Rs.
Page No.: 154
Financial and Management ing
Unit 7
Add outstanding wages Less prepaid wages To fuel and power To Gas, coal, electricity for production To Import duty and clearing charges To stores consumed To factory rent, insurance, factory expenses To other direct expenses To Royalty paid To Profit and Loss A/c (Gross Profit)
Note: For every expenditure, outstanding and prepaid aspects must be considered. From the above , it is easy to learn the transferring entries made to close the s of expenses and incomes. The transferring entries are 1. Trading
Dr
To opening stock a/c To purchases a/c/ To Wages a/c To Royalty paid a/c
etc
(Being all expenses of trading transferred to trading ) 2. Sales
Dr
Closing stock
Dr
To Trading (Being sales and closing stock transferred to trading ) 3. Trading
Dr
To Profit and Loss (Being gross profit carried forward to P&L A/C) 4. Profit and Loss
Dr
To Trading (Being gross loss transferred to P&L )
Page No.: 155
Financial and Management ing
Unit 7
Self Assessment Questions 12: 1. Trading is an showing profit on cost of goods sold. (state True / False). 2. Cost of goods sold include opening stock + Purchase expenses – closing stock. (state True/ False ). 3. Gross profit is ______minus cost of goods sold. 4. Gross profit or loss is transferred to ___________ .
7.4 Preparation of Trading To prepare Trading , the following steps may be followed: a) Identify the items of expenses relating to trading and show them on the debit side of Trading . b) Effect the adjustments such as outstanding or prepaid to the relevant items of expenses c) Show the sales less returns and closing stock on the credit side of trading d) The difference is gross profit if credit total is more than debit and gross loss if debit total is more than credit. e) Transfer the gross profit or gross los to Profit and Loss as the case may be. Self Assessment Questions 13: 1. Do you consider gross purchases or net purchases, while preparing trading ? 2. Do trading concerns prepare manufacturing ?
Page No.: 156
Financial and Management ing
Unit 7
Illustration From the following balances extracted from Trial balance, prepare Trading . The closing stock at the end of the period is Rs. 56000
Amount in Rs.
Particulars Stock on 1-1-2004
70700
Returns inwards
2000
Returns outwards
3000
Purchases
102000
Debtors
56000
Creditors
45000
Carriage inwards
5000
Carriage outwards
4000
Import duty abroad
6000
on materials received from
7000
Clearing charges
12000
Rent of business shop
10000
Royalty paid to extract materials
2000
Fire insurance on stock
8000
Wages paid to workers
10000
Office salaries
1000
Cash discount
4000
Gas, electricity and water
250000
Sales
Page No.: 157
Financial and Management ing
Dr
Unit 7
TRADING FOR THE YEAR ENDING - - - -
Particulars
Rs 70700
To stock on 1-1-2004 To Purchases
By sales
Rs 250000
Less Returns
102000
Inwards
Less Returns Outwards
Particulars
Cr
99000
3000
To Carriage inwards
5000
To import duty
6000
To Clearing charges
7000
By Closing stock
3000
247000 56000
10000
To Royalty To Fire Insurance
2000
To Wages
8000
To Gas, electricity, water
4000 91300
To P & L (GP)
303000
303000
7.5 Profit and Loss Profit and los is an important final in the sense that the net result of the business in the form of net profit or net loss is disclosed by preparing the same. All business expenses like istrative expenses, office expenses, selling and distribution expenses are shown on the debit side of the . Besides, all provisions made for different purposes such as reserve for bad debts, reserve for discount on debtors, reserve for repairs, depreciation etc., also picture on the debit side of the . On the credit side of the , all incomes of revenue in nature, reserve for discount on creditors and gross profit carried from trading are mentioned. In this connection, it is important to note that Trading and Profit and Loss are regarded as revenue s. Any capital receipts or capital Page No.: 158
Financial and Management ing
Unit 7
payments are not considered while preparing them. In brief, revenue receipts are those which are received regularly arising out of day to day activities of the business and similarly revenue payments, which are known as expenses are incurred regularly and for every day functions of the business. Capital receipts are in the form of
sources of funds such as
capital received, sale of capital asset like building etc., Capital payments are those spent for acquisition of capital assets, incurring capital expenditure etc., The transferring entries are drawn to prepare Profit and loss . They are 1. Profit and Loss Dr To all expenses 2. All Incomes
Dr
To Profit and Loss 3. Profit and Loss
To Transfer Net Profit to Capital Dr
To Profit and Loss Dr
To Transfer all incomes
Dr
To Capital 4. Capital
To Transfer all expenses
To Transfer Net loss to Capital
Profit and Loss for the year ending ---
Particulars
Rs
To Trading (GL)
Particulars
To Salaries + Out standing –
By Interest earned + Accrued interest as per adjustments
as
Rs
By Trading (GP)
Prepaid
salaries
Cr
per
adjustments
By Commission earned
To Rent of the premises
By discount earned
To Travelling expenses
By Rent received
To Rates and Taxes
By Bad debts recovered
To Printing and stationery
By Interest on drawings
Page No.: 159
Financial and Management ing
To Postage and Telegram
By Reserve for discount on
To Telephone charges
Creditors
To Insurance –Prepaid
By Dividends received
amount as per adjustment
By Royalty Received
To Interest paid
By Capital ( Net Loss)
Unit 7
To Discount allowed To Sundry expenses To ment To Commission To Carriage outwards To Bad Debts To Reserve for Bad debts To Reserve for discount on Debtors To Depreciation To Legal charges To Audit fee To Interest on Capital To
Capital
(Net
Profit)
7.6 Preparation of Profit and Loss The following steps may help to prepare Profit and Loss 1. Identify the expenses and bring them to debit side of P&L 2. Identify the revenue incomes and put them on the credit side of P&L 3. Check whether all adjustments like outstanding, prepaid, pre received expenses and incomes as the case may be are brought to the 4. Check the transfer of reserves to the relevant sides of the 5. Transfer the net profit / net loss to the capital Self Assessment Questions 14: 1. What types of expenses are shown on the debit side of P & L ? Page No.: 160
Financial and Management ing
Unit 7
2. P & L is revenue showing the revenue net profit or loss for the ing period(state True / False ). 3. Painting for a new building, Installation expenses paid to install a plant, amount spent for advertising for promotion of sale of a product are revenue expenses (state True / False ). 4. Net profit / loss is carried to owners equity / capital (state True / False ) Illustration The following Trial Balance is extracted from the books of a merchant on 31-12-2004. Particulars Furniture and fittings
Rs 640
Motor Vehicles
6250
Buildings
7500
Capital
12500
Bad Debts
125
Provision for Bad debts
200
Sundry Debtors
3800
Sundry Creditors
2500
Stock on 1-1-2004
3460
Purchases
5475
Sales Bank Over Draft
15450 2850
Sales Returns
200
Purchase Returns
125
Advertising
450
Interest on Bank Over Draft
118
Commission
375
Cash
650
Taxes and Insurance General Expenses Salaries
1250 782 3300
Page No.: 161
Financial and Management ing
Unit 7
The following adjustments are to be made. 1. Stock in hand on 31-12-2004 was Rs3250 2. Depreciate Buildings at the rate of 5%, Furniture and fittings @ 10% and Motor Vehicles @ 20%. 3. Rs.85 is due for interest on bank overdraft. 4. Salaries of Rs300 and taxes Rs.120 are outstanding. 5. Insurance amounting to Rs.100 is prepaid 6. One-third of the commission received is in respect of work to be done next year 7. Write off a further sum of Rs.100 as bad debts and provision for bad and doubtful debts to be made equal to 10% on sundry debtors. 8. Prepare Trading and Profit and Loss . 9.
Dr
Trading for the year ending 31-12-2004
Particulars
Rs
To Stock on1-1-2004 To Purchases
To P & L A/C (GP)
125
5350
Rs
By Sales 15450 Les Returns 200
5475
Less returns Total
3460
Particulars
Cr
By Closing Stock
15250 3250
9690 18500
Total
18500
Page No.: 162
Financial and Management ing
Dr
Unit 7
Profit and Loss for the year ending 31-12-2004
Particulars
Rs
To Salaries
3300
Add Outstanding
300
3600 450
Add Outstanding Int
Particulars
Rs
By Trading (GP)
To Advertising To Interest on OD
Cr
By Commission
118 85
375
9690
Less Pre-received 125 250
203
To Taxes and Insurance Add Out standing tax Less Prepaid Insurance
1250 120 1370
1270
100
782
To General expenses
125
To bad debts To RBD(New)
370
Less old RBD balance
100
270
To Depreciation: On Bldgs @ 5% On FF
@ 10%
375 64
1689
On M Vehicles @20% 1250
1551
To Capital (NP) Total
9940
Total
9940
Note: Sundry Debtors are Rs.3800 and there have been bad debts outside TB Rs100. The good debtors are Rs.3700. The new RBD is 10% of 3700, i.e.Rs370. The old RBD unspent is Rs100 (200 -100). Therefore RBD to be charged against profit is Rs270
7.7 Balance Sheet Balance Sheet is the sum and substance of financial performance a business undertaking. It shows the assets and liabilities of business on a particular day.
It is not an but is a statement of affairs.
The
statement of assets and liabilities is prepared, having two sides, left side Page No.: 163
Financial and Management ing
Unit 7
containing capital and liabilities and on the right side, containing assets and properties. Often the statement is prepared vertically, mentioning sources of funds first and later application of funds. Sources of funds indicate capital and liabilities and application of funds indicate assets. Balance Sheet is prepared from Trial Balance. In case of sole trader organization and Partnership organization, the format of preparing Balance Sheet is arranged basing on liquidity of the assets. In case of Companies, the Companies Act, 1956 has specified a definite pattern of preparing Balance Sheet. Both the models of preparing Balance Sheet are stated here under. BALANCE SHEET FOR THE YEAR ENDING 31-12-2003 OF Mr. X Capital and Liabilities
Rs
Assets
Rs
Sundry Creditors Less Reserve for Discount on Creditors Bills Payable Bank Over Draft Loans Borrowed Outstanding Expenses Pre-received Incomes Capital (Opening) Add Additions to capital Add interest on capital if any Add Net profit as per P&L a/c Less personal drawings Less Net loss as per P&L A/C
Cash in hand Cash at Bank Land and Building Add Additions if any Less depreciation Plant and Machinery less depreciation Furniture and Fixtures less depreciation Sundry debtors Less Bad debts out side Trial Balance Less Reserve for Bad Debts Less Reserve for discount on Debtors Bills Receivable Loans and advances given to others + Interest outstanding Investments + outstanding income on investments Other outstanding incomes Pre-paid expenses Closing stock
Total
Total
Page No.: 164
Financial and Management ing
Unit 7
The Format of Balance Sheet of a Company Capital and Liabilities
Rs
Assets
Capital:
Fixed Assets:
Authorised, Issued, Subscribed,Called up, Paid-Up capital with adjustments
Goodwill, Land Buildings,Furniture, Fixtures, Equipment, Plant, Machinery, Copy Rights, Patents
Reserves and Surplus
Investments
Loans and Borrowings
Loans and Advances
Long Term Loans
Current Assets:
Short Term Loans
Debtors, B/R, Inventory, Cash, Bank, Outstanding incomes, Prepaid expenses etc
Current Liabilities: Sundry Creditors, B/P, Outstanding expenses, pre-received incomes, dividends payable, etc., Total
Rs
Total
Self Assessment Questions 15: 1. The two sides of a balance sheets are ____ and ___________. 2. balance sheet is prepared on the bases of trial balance. (state True / False ). 3. balance sheet portrays the financial soundness of a concern (state True / False).
7.8 Preparation of Balance Sheet A few guide lines are given here under to prepare balance Sheet of a business concern. Balance Sheet is not an and there is nothing like debit side and credit side. If Trial Balance tallies, naturally Balance Sheet also tallies: 1. Identify all assets from the trial balance. Assets are shown on the debit side of T.B 2. Identify all liabilities from the Trial Balance and they are on the credit side of TB. Page No.: 165
Financial and Management ing
Unit 7
3. Make a mark of items with respect to which adjustments are given out side the TB 4. All adjustments should find place in two places, one either in Trading or in Profit and Loss and another invariably Balance Sheet. For example, closing Stock given outside TB is first shown on the credit side of Trading and it is shown as an asset in the Balance Sheet. ‘Bad Debts Reserve to be provided’ appears in P&L and later shown as a deduction from Sundry Debtors in the Balance Sheet. Similarly depreciation is charged against profits first and later deducted from the book value of concerned asset in the balance sheet. Illustration 1 From the Trial Balance given in para 6, prepare Balance Sheet of the merchant as on 31-12-2004. Solution Balance Sheet as on 31-12-2004 Capital and Liabilities Sundry Creditors Bank Over Draft 2850 Add interest due 85 Commission received in advance Outstanding Taxes Outstanding Salaries Capital 12500 Add Net Profit 1551
Total
Rs 2500 2935 125 120 300 14051
20031
Assets
Rs
Cash Building 7500 Less Depreciation 375 Furniture and Fixtures 640 Less Depreciation 64 Motor Vehicle 6250 Less Depreciation 1250 Sundry Debtors 3800 Less bad debts as per Adjustments 100 Balance 3700 Less Reserve for Bad Debts(New) 370 Closing Stock Pre-Paid Insurance Total
650 7125 576 5000
3330 3250 100 20031
Page No.: 166
Financial and Management ing
Unit 7
NOTE: Every adjustment given outside Trial Balance finds place in two s –Trading / Profit and Loss and invariably in Balance Sheet. Self Assessment Questions 16: 1. What is the purpose of creating Reserve for Bad debts? 2. State the purpose of creating reserve for discount on creditors. 3. Insurance paid on 1-1-2000 up to 31-12-2000 Rs.4800. If the books are closed on 31-7-2000, what is the amount of prepaid insurance? 4. Select the most appropriate answer. i) Sales are equal to a) Cost of goods sold + Profit b) Cost of goods Sold – Gross Profit c) Gross Profit – Cost of Goods sold ii) Interest on Drawings is a) Expenditure for the business b) Expensef or the business c) Gain for the business iii) Goods given as samples should be credited to
b) Sales
a) ment
c) Purchases
iv) Out standing salaries are shown as
a) an expense
b) a liability
c) an asset v) Income tax paid by a sole trader on his business income should be a) debited to the Trading
b) debited to P&L
c) deducted from capital in the Balance Sheet 5. Stock at the end, if appears in the Trial Balance is taken only to the Balance Sheet – Yes or No? 6. Goods taken by the proprietor for personal use are credited to sales – Yes or No? 7. Salary paid in advance is not an expense because it neither reduces assets nor increases liabilities. – Yes or No? 8. Balance Sheet is an because it is included in the scope of final s – Yes or No
Page No.: 167
Financial and Management ing
Unit 7
Terminal Questions 1. In taking out a Trial Balance, a Book keeper finds that debit total exceeds the credit total by Rs.611. The amount is placed to the credit of a newly opened Suspense . Subsequently the following mistakes were discovered. You are required to the necessary entries for rectifying the mistakes, and show how Suspense . (a)
Sales day book was over cast by Rs.1000
(b)
A sale of Rs.50to Sri Ram was wrongly debited to Sri Krishna
(c)
General expenses Rs.180 were posted as 801
(d)
Cash received from Bhatt was debited to his RS.450
(e)
While carrying forward the total from one page of the Purchases book to the next, the amount of Rs.1235 was entered as Rs.1325.
2. Rectify the following errors: (i) Furniture purchases for Rs.2500 was debited to Purchases (ii) A sum of Rs.500 paid to Lalitha was debited to Shantha (iii) A bill receivable for Rs.1000 received from Kumar has been omitted to be entered. (iv) Goods worth Rs2040 taken away by the proprietor were debited to Bharath (v) An engine purchased for Rs.12500 had been posted to Purchases 3. An ant could not tally the Trial Balance. The difference was temporarily transferred to Suspense for preparing the final s. The following errors were later discovered. (a)
The sales book was under cast by Rs.500
(b)
Entertainment expenses Rs.950 though entered in the cash book were omitted to be posted in the ledger.
Page No.: 168
Financial and Management ing
(c)
Unit 7
Discount column of the receipt side of cash book was wrongly added as Rs114 instead of Rs.144.
(d)
Commission of Rs.250 paid, was posted twice, once to discount and once to Commission .
(e)
A sale of Rs.169 to Rama Murthy though correctly entered in sales book, was posted wrongly to his as Rs.196.
(f)
A purchase from Neeraj of Rs.290 though correctly entered in purchases book was wrongly debited to his personal .
You are required to 1. the necessary rectifying entries 2. Prepare Suspense 3. State the effect of each of the rectification on the profit. What would be the correct profit originally arrived at was Rs.10000? 4. The trial balance of Raj Bahadur of Vijayanagaram as on 31-12-2005 is given below.Prepare Trading , Profit and Loss and Balance
Sheet
for
year
ending
31-12-2005
after
taking
into
consideration the following adjustments. (a)
Stock on 31-12-2005 was 15000
(b)
Debts worth Rs.2000 should be written off as bad
(c)
Depreciate Machinery by 5% and Motor Van by 15%
(d)
Reserve for bad and doubtful debts should be increased by Rs.600
(e)
Commission accrued and not received Rs.500
(f)
Goods worthRs.500 were used by the proprietor for his personal use
(g)
On September,2005, a fire broke out in the shop and goods worth Rs.2000 were completely destroyed. The insurance company accepted a claim of Rs.1500 only and paid the amount on January 1st 2006.
Page No.: 169
Financial and Management ing
Unit 7
TRIAL BALANCE AS ON 31-12-2005 Particulars
Debit in Rs
Capital Drawings
Credit in Rs 85000
7500
Opening Stock
12000
Purchases and Sales
86000
170000
2000
1000
500
700
Returns Discounts Commission
1000 700
Income Tax paid Office Salaries
17300
Advertising
2000
Sundry Debtors and creditors
1700 85000
30000
Manufacturing Wages
8600
3000
Bills Receivable and Payable
5000
Reserve for Doubtful Debts
600
Carriage Machinery
40000
Motor Vans
7000
Land and Buildings
5000
10000
Office Expenses
1500
Cash at Bank
6000
Cash in Hand
2300 295700
295700
Ans: Gross Profit Rs.79300; Net Profit: 52350; BS163650
Page No.: 170
Financial and Management ing
Unit 7
5. On 31st December,2003 the following trial balance has been extracted. Rs Drawings
4000
Sundry Debtors
20500
Interest on loan
300
Rs Establishment
9100
Rent, rates and insurance
5000
ment
4160
Cash in hand
4000
Credit Balances
Stock (1-1-2003)
6050
Capital
50000
10000
Sundry creditors
12000
Loan on mortgage
15700
Motor Vehicles Cash at Bank
5600
Land and buildings
62000
Bad debts Provision
Purchases
97500
Sales
2000 170000
Salaries
8600
Purchase returns
Carriage in
4100
Discounts
Carriage out
2200
Bills payable
3000
General Expenses
5100
Rent received
600
Bills receivable
7050
1460 500
Adjustments 1. Depreciate land and buildings at 5% and Motor Vehicles at 15% 2. Interest on loan is at 5% taken on 1st January,2003 3. Salaries amounting to Rs.700 and Rates amounting to Rs.400 are due. 4. There has been a fire on 1st January, 2003 destroying goods worth Rs.200 5. The bad debts provision is to be brought up to 5% on Sundry debtors 6. The stock in hand on 31-12-2003 was valued at Rs16000 7. Goods costing Rs.1000 were taken away by the proprietor for his personal use, but no entry has been made in the books of s 8. Prepaid insurance amounted to Rs.500 9. Provide for Manager’s commission at 5% on net profit after charging such commission. Prepare Trading & P&L a/c and balance sheet. Page No.: 171
Financial and Management ing
Unit 7
6. A firm had the following Balances on 1st January 2000 (a) Provision for bad debts
Rs7500
(b) Provision for discount on debtors
3600
(c) Provision for discount on creditors
3000
During the year Bad debts amounted to Rs.6000, Discounts allowed were Rs300 and discounts received were Rs.600. During 2001, bad debts amounted to Rs.5000 and discounts allowed and received were respectively Rs.6000 and Rs1500. Total debtors on December 1st, 2000 were Rs.1,44,000 before writing off of bad debts, but after allowing discounts. On December 31st, 2000, the amount of debtors was Rs.57000 after writing off the bad debts but before allowing discounts. Total creditors on these two dates were Rs.60000 and Rs.75000 respectively. It is the firm’s policy to maintain a provision of 5% against bad and doubtful debts and 3 % for discount on debtors and a provision of 3% for discount on creditors. Show the s relating to provision on Debtors and provision on creditors for the year 2000 and 2001 (Ans: Provision for bad debts-2000 Rs.6900 and 2001 Rs.2850; Provision for discount on debtors – 2000 Rs.3933, 2001 Rs.1530; Provision for discount on creditors – 2000 Rs.1800, 2001 Rs2250) 7. In a business, Sundry debtors were Rs.40000 at the beginning of the year and there was 5%
Reserve for Doubtful Debts and also
5%Rreserve for Discount on Debtors. During the year the actual bad debts amounted to Rs.1600 and the discount allowed were Rs.1700. At the close of the year, the debtors were Rs.50000; and the percentage of the two reserves have to be maintained as at beginning. Show ledger s. Page No.: 172
Financial and Management ing
Unit 7
Answer for Self Assessment Questions. Self Assessment Questions 1: 1. True 2. False 3. True 4. True 5. Internal transactions 6. profit / loss for the ing period 7. True Self Assessment Questions 2: 1. Outstanding expenses 2. Salaries Dr To outstanding expenses 3. It means t hat they are already considered. 4. False. Self Assessment Questions 3: 1. Prepaid expenses 2. True 3. 1000 + 5600 – 800 = 5800 4. True. Self Assessment Questions 4: 1. Accrued or outstanding income 2. True 3. True Self Assessment Questions 5: 1. True 2. Rent Dr To Income received in advance 3. Deducted. Page No.: 173
Financial and Management ing
Unit 7
Self Assessment Questions 6: 1. Wear & tear / usage 2. Depreciation a/c Dr To asset 3. P & L a/c Dr To Depreciation a/c 4. It means that the concerned asset is get to be depreciated 5. Diminishing(Reducing) balance method. 6. It indicates that the asset is already depreciated and depreciation should be transferred only to P & L a/c. Self Assessment Questions 7: 1. Bad debts 2. True 3. Bad debts a/c Dr To Debtor a/c 4. P & L a/c Dr To Bad debts a/c 5. Profits are reduced. 6. Cash a/c Dr. To Bad-debts recovered a/c. Self Assessment Questions 8: 1. Bad debts are totally not recoverable, doubtful debts may be recovered. 2. False 3. True 4. True 5. R.B.D a/c Dr To bad debts . 6. P & L a/c Dr To R BD a/c 7. True Page No.: 174
Financial and Management ing
Unit 7
Self Assessment Questions 9: 1. To encourage customers to make quick & prompt payment. 2. Cash discount a/c Dr To Debtors a/c 3. True 4.
True
5. Good debtors (Meaning total debtors- Bad debts outside trial balanceRBD ) Self Assessment Questions 10: 1. True 2. True 3. Deduct the provision from the amount of creditors 4. True. Self Assessment Questions 11: 1. Cost on market price which ever is lower 2. Closing stock is debited and trading is credited 3. Gross profit is reduced by not considering unsold stock 4. True. Self Assessment Questions 12: 1. True 2. True 3. Sales 4. P & L
Self Assessment Questions 13: 1. Net purchases meaning (Total purchases – purchase returns – stock destroyed – stock used for personal use ). 2. No, because they do not manufacture any product. Page No.: 175
Financial and Management ing
Unit 7
Self Assessment Questions 14: 1. Indirect expenses office & istrative expenses, selling & distribution expenses etc. 2. True 3. False 4. True
Self Assessment Questions 15: 1. Assets, liabilities 2. True 3. True Self Assessment Questions 16: 1. To write off bad debts against the reserve and reduce the pressure on current profits. 2. to provide for anticipated profits. 3. Rs 2000 relating to 5 months ( 1.8.2000 to 31.12.2000) 4. i) a ii) c iii) c iv) b v) c 5. Yes 6. No 7. Yes 8. No Answer for Terminal Question: 1. Refer to unit 6.10. 2. Refer to unit 6.10. 3. Refer to unit 6.10. 4. Refer to unit 7.4, 7.6, 7.8. Ans: Gross profit Rs 79300, Net profit Rs 52350 Balance sheet Rs 163650. Page No.: 176
Financial and Management ing
Unit 7
5. Refer to unit 7.4, 7.6 & 7.8 Gross Profit Rs 81010; Net Profit Rs 40706; Commission Rs 2034; Balance Sheet Total Rs 1,20,025 6. Refer to unit 7.2.7, 7.2.8, 7.2.9 Answer : Provision for Bad debts 2000 – Rs 6900 ; 2001 – Rs 2850. Provision for discount on debtors 2000 – Rs 3933; 2001- Rs 1530 Provision for discount on creditors 2000 – Rs 1800; 2001 –Rs 2,250. 7. Refer to unit 7.2.7, 7.2.8 Closing Balance of RBD Rs 2,500 Closing Balance of Reserve for Discount on Debtors Rs 2,375. RBD Transferred to P & L Rs 2,100 Reserve for Discount Transferred to P & L Rs 2,175
Page No.: 177
Related Documents 171j1w
Financial ing Part 7 44482y
November 2019 41
Financial ing Part 3 1o2957
December 2020 0
Financial ing Part 3 1o2957
February 2022 0
Advanced Financial ing-part 2 3n1o1r
December 2019 56
Financial ing Chapter 7 Quiz 591a6g
December 2021 0