chapter 4 financial statements

7/31/2019 Chapter 4 Financial Statements

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Financial Statements

Q.104 what do you mean by Final Accounts?OR What are financial statements?

Ans. Final accounts are also known as financial statements. Financial statementsare organized summaries of detailed information about operating results and

financial position of the concern. These are prepared at the end of the accounting

period, generally one year. Financial statements normally include the following:

i. Trading and Profit & Loss Account, andii. Balance Sheet.

Q.105 What are the objectives of preparing final accounts?

Ans. Financial statements are prepared to achieve the basic objectives of

accounting, which are :

To find out the profit earned or loss incurred by the firm during a givenperiod of time, and

To depict its financial position at a given point of time.

Q.108 What is meant by direct expenses? Give two examples.

Ans. Direct expenses are those expenses, which are directly related with the quantity

of goods produced. In this category, we include expenses incurred on purchase of

raw materials/goods and on manufacturing of goods.

Q.109 Important lists of direct expenses.

Ans. In financial accounting, following expenses are treated as direct expenses:

Expenses on purchase of goods. All expenses incurred on purchase of goods are

consider direct expenses and are a part of cost of goods purchased. These are:i. Freight, carriage and cartage on purchase of goods.

ii. Customs duty and octroi, etc.

iii. Landing and clearing charges. These are expenses relating to clearing

the goods purchased or imported.

iv. Dock dues/charges.

Manufacturing expenses. These are also called productive expenses. Following

expenses are treated as manufacturing expenses:

i. Wages or labour or productive wages or factory wages.

ii. Coal, gas and water.

iii. Fuel and power.Factory expenses. Factory expenses are also related to production of goods.

These may include.

Factory rent, rates and taxes.

Insurance premium of factory building, plant and machinery.

Factory lighting or electricity.

Consumable stores like, engine oil, lubricants, cotton waste.


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Packing charges to pack the goods manufactured to make it saleable

Q.69 What is depreciation?

Ans. Depreciation means decrease in the value of fixed assets due to their use in

business, passage of time or obsolescence. In accounting this term denotes

the permanent decrease in the book value of a fixed asset. Every asset has a

definite useful life, after which it becomes useless. It will be appropriate towrite off its cost over its life on the basis of benefit derived from it or on

some reasonable basis.

Q.70 What is depletion?

Ans. The term Depletion refers to the physical deterioration by the exhaustion of

natural resources, like, quarries, mines, oil-wells, etc. Due to mining or

extraction, the stock of minerals/oil, etc. is depleted/reduced. In case of such

assets, usually depreciation is charged on the basis of quantity produced.

Q.71 What is amortisation?

Ans. Amortisation refers to the economic deterioration of intangible assets like,

goodwill, patents, trademark, copyright etc. It is the practice to write off theintangible assets over a reasonable period. When a part of an intangible

assets is written off, it is called amortization.

Q.72 What is obsolescence?

Ans. The term Obsolescence refers to the economic deterioration of assets, due

to change in technology, invention of improved equipment, market decline

due to change in taste and fashion, etc., or inadequacy of existing plant tomeet the increased business. It is considered one of the causes of

depreciation. For example, a letter printing press have become obsolete, due

to the invention of offset printing press. Traditional copiers have become

obsolete, due to electronic copiers.

Q.73 What are the causes of depreciation?

Ans. Following are the important causes of depreciation:

i. Wear and tear. Fixed assets are purchased for use in business. Due to

constant use of fixed assets in business for generating income, the

value of such assets is decreased. It is called wear and tear. It is

main cause of depreciation.ii. Passage of time. Every assets has a certain economic useful life. With

the passage of time effective life of the assets goes on decreasing.

Certain assets like a lease, have a definite life. With the passage of

time, value of such assets goes down, even these are not used in the

business.


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iii. Obsolescence. Due to invention of new technology, the assets based

on old technology may become obsolete and out of date. Due to this

reason, their effectiveness is decreased and value also goes down.

iv. Depletion. Depletion is reduction of natural resources. In case of

wasting assets, depletion is also a cause of fall in the value of assets

like, mines, oils wells, quarries, etc.v. Accidents. Accidents may also cause a permanent fall in the useful

life as well as in the value of assets.

vi. Permanent fall in price. A permanent fall in the market value of

investments is recorded as depreciation. Other assets are depreciated

on the basis of its useful life.

Q.74 Explain Asset Disposal Account.

Ans. When depreciation is recorded by creating provision for depreciation, asset

disposal account may be prepared separately for an asset sold or discarded.

When any asset is sold, its cost is transferred from Fixed Asset A/c to AssetDisposal A/c. The accumulated depreciation on it, is transferred from

Provision for Depreciation A/c to Asset Disposal A/c. The sale proceeds of

asset sold are credited to Asset Disposal A/c. The balancing figure in theaccount on the debit side shows the profit and on the credit side shoes the

loss on sale of fixed asset, which is transferred to Credit of Debit side of

Profit & Loss Account, respectively.

Q.75 What is provision?

Ans. According to the Companies Act, the term provision means any amount

written off or retained by way of providing depreciation, renewals ordiminution in the value of assets or retained by providing for any known

liability of which the amount cannot be determined with substantial

accuracy.

Provision is a charge against profits to meet an anticipated loss for which

exact amount cannot be ascertained. It can be provided for depreciation, foroutstanding expenses, to meet heavy repairing and renewal charges,

fluctuations in the value of investments, for expected loss on accounts of bad

debts, or for discount to be allowed on debtors, or any other known liability,

for which amount cannot not be determined with substantial accuracy.

Q.76 What is the importance of making provisions?

Ans. The importance of making provisions is explained in brief as follows:

To ascertain true profits. To calculate the profits correctly, it is necessary

to charges all the expenses relating to the current year, whether paid

or not. Otherwise, profits calculated will not be true. It makes

necessary to make a provision for outstanding expenses.


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True and fair picture of financial position. The balance sheet will not

show true and fair picture of the financial position of the business, if

adequate provisions for anticipated losses, liabilities are not shown

either as liability or by deducting from the assets.

Arrangement of funds for future losses and expenses. If provisions are not

made, the whole profits shall be distributed and the firm may have toface the problem of shortage of funds to meet future liabilities and

losses.

Uniform charge against profits. Provision for certain heavy expenses

helps in uniform and equitable distribution of such expenses. For

example, heavy repairs and renewal charges expected in near future,

provision for depreciation, provision for fluctuation in the value of

investments, etc.

Q.76 Give three examples of provisions.

Ans. Following are the important examples of provisions (Any three):Provision for bad and doubtful debts. It is created on debtors to meet the

loss on account of possible bad debts. Amount to be provided depends

on the past experience.Provision for discount on debtors. It is created to meet the loss on account

of further cash discount to be allowed to debtors, while collecting

payment from them.

Provision for tax. It is created to meet the liability on account of income

tax on profits earned.

Provision for depreciation. It is made for decrease in the value of fixed

assets, due to their use in business, passage of time or obsolescence.Provision for repairs and renewals. Such provision is made to meet the

cost of repairs and renewals of fixed assets. It helps in appropriate

allocation of repairs and renewal cost.

Provision for fluctuations in investments. Such provision is made for

decrease in the market value of investment.

Q.77 What is reserve?

Ans. When a part of profits earned is set aside for the purpose of strengthening the

financial position of the business, it is called creation of reserves and the amount so

set aside is called reserve. It is an appropriation of profits. It may be created for a

specific purpose.

Q.78 What are the advantages of creation of reserves?

Ans. Following are the advantages of reserves:

Strengthening financial position. Amount equal to reserves created is

appropriated out of profits and retained in the business. It increases


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the working capital. It is cost free source of internal financing. It helps

in future to face financial problems.

Helps in future expansion. Creation of reserve improves financial

position, which helps in future expansion of the business without

depending much on borrowed funds.

Maintaining rate of dividend. Companies usually create dividendequalization reserve. If in any year, companys profits are not

sufficient to declare of dividend, dividend equalization reserve can be

used for the same.

Helps in redemption of liabilities. Reserve can be created to redeem

preference share capital or debentures. For this purpose, capital

redemption reserve or debenture redemption reserve is created.

Helps in meeting unforeseen contingencies. To meet any unknown loss of

business, the existing reserve can be used.

Q.79 What is General Reserve?Ans. General Reserve are created out of revenue profits to strengthen the general

financial position of the business. It is not created for any specific purpose.

These are also called free reserves as these are freely available fordistribution. Contingency reserve and undistributed balance of profit and loss

account is also the part of general reserve. Following are the important

objectives for which general reserves are created or utilised;

For strengthening the financial position of the business.

For expansion of business through internal financing.

For maintaining the rate of dividend over various years (in case of

companies).For meeting unforeseen losses.

Q.80 What is specific reserve?

Ans. When a reserve is created for a specific purpose and can be utilized only for

that purpose, it is called a specific reserve.

Q.81 What is reserve fund?

Ans. When the amount of reserve created is not retained in the business but

invested outside the business, it is called a revenue fund. For example, when

the amount of debenture redemption reserve is invested outside the business,

it is called Debenture Redemption Fund. In the following circumstances,the amount of reserve is invested outside the business by a company:

i. If ready cash is required on a particular date; or

ii. When the funds cannot be profitably invested in the business itself.

Q.82 What is Capital Reserve? State the example of capital profits.


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Ans. Capital reserve are created out of the profits of capital nature, which are not

normally available for distribution as cash dividend. Capital reserves are

usually used to write off capital losses. Following are some of the examples

of capital profits:

Profit on sale of fixed assets,

Profit on revaluation of fixed assets and liabilities,Profit on purchase of an existing business,

Profits earned prior to incorporation of a company,

Premium on issue of shares and debentures,

Profit on re-issue of forfeited shares,

Q.83 Distinguish between revenue reserve and capital reserve?

Ans. Difference between Revenue Reserve and Capital Reserve

Basis of difference Revenue Reserve Capital reserve

1. Nature of profits It is created out of revenue

profits.

It is created out of capital

profits.2. Use General reserve can be

used for any purpose.Specific reserves can be

used for specific purpose

only.

Capital reserve are used to

meet capital losses orpurpose specified in the

Companies Act.

3. Dividend Dividend can be

distributed out of general

reserves and dividends

equalization reserve.

Generally, no dividend can

be distributed out of

capital reserves.

Q.84 Distinguish between Reserves and Provisions.Ans. Difference between Reserves and Provisions.

Basis of difference Reserves Provisions

1. A charge or an

Appropriation

A reserve is an

appropriation of profit.

A provision is a charge

against the profits.

2. Objective A reserve is created to

strengthen the financial

position of the firm.

A provision is created to

meet a specific and known

liability.

3. Debited to A reserve is debited toProfit & Loss

Appropriation Account.

A provision is debited toProfit & Loss account.

4. Effect on profits A reserve reduces

divisible profits.

A provision is reduces net

profits.

5. Balance Sheet A reserve is shown on the

liability side of the

A provision is usually

deducted from the asset


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balance sheet. concerned.

6. Distribution of profits A reserve can be

distributed as profits.

A provision can never be

utilized for the distribution

of profits.

7. General and specific A reserve may be general

or specific.

A provision is always

specific.8. Necessity Creation of reserve is

discretionary and not

must.

Creation of provision is

must.

Q.85 Define Bill of exchange.Ans. In simple words, bill of exchange is an order instrument, written by a creditor

and accepted by a debtor to pay a certain amount on demand or after a certain

period. According to Indian Negotiable Instruments Act, 1881, A bill of exchange

is an instrument in writing, an unconditional order signed by the maker directing to

pay a certain sum of money only to or to the order of a certain person or to thebearer of the instrument.

Q.96 What do you mean by discounting of a bill?

Ans. If the drawer is in need of money, he can discount the bill with his bank and

receive the amount immediately. The bank will deduct the discount on the amount

of bill at a given rate for the outstanding period of the bill. For example, if a bill

dated January 1, 2000 for Rs. 10,000 of a period of three months is discounted withbank of February 1, 2000. The bank will deduct the discount for two months, i.e.,

for February and March, 2000. The discount deducted by the bank is actually

interest charged by the bank on the amount advanced by the bank against the billsreceivable. When a bill has been discounted, on due date payment shall by received

by the bank and not by the drawer as he has already received the payment.

Q.97 Explain dishonour of a bill.

Ans. When a bill is paid on due date by the drawee, it is said that the bill is

honoured. If the payment of the bill is not made on due date, the bill is said to be

dishonoured. Following are the possible reasons of the dishonour of a bill:

i. The drawee does not have sufficient funds to pay the bill.

ii. The bill was payable at bank, but drawee did not give instructions to

bank to honour the bill.iii. The drawee becomes insolvent.

Sometimes, the drawee himself may request the drawer to cancel the present

bill and draw a new bill. For the purpose of accounting, there is no difference

between dishonour and cancellation.

Q.98 What do you mean by Capital Expenditure?


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Ans. Capital expenditure is the expenditure which is incurred on purchase or

construction of fixed assets such as building, plant and machinery, furniture and

fixture, etc. It benefits the business for a long period. It helps in generating revenue

for the business. Normally the amount involved in capital expenditure is also

substantial. Following types of expenditure are generally treated as capital

expenditure:Acquisition of a permanent assets.

Expenditure on purchase of or on installation of a fixed asset.

Overhauling charges of a second hand asset purchased.

Extension of or improvement in fixed assets.

The purchase of right to carry on business.

Q.99 Give four example of capital expenditure.

Ans. Following are the example of capital expenditure:

Purchase of business premises,

Purchase of machinery,Acquisition of patent, copyright or a trade mark, and

Installation charges of machinery.

Q.100 What do you mean by Revenue Expenditure?

Ans. Revenue expenditure may be defined as an expenditure which benefits the

company for a short period. The benefits are normally derived within a year. Such

expenditure is necessary to maintain the assets and to generate the revenue income

in ordinary course of business. It is recurring in nature. It is necessary to generate

revenue income in ordinary course of business. It does not add to value of assets or

profit earning capacity.

Q.101 Give example of revenue expenditure.

Ans. Following are some of the examples of revenue expenditure:

i. Cost of materials and goods. In case of materials and goods purchased

only that part of revenue expenditure which has been consumed orsold during the year, is considered revenue expenditure for the current

year and the balance is carried to the next year.

ii. Manufacturing expenses such as wages, factory expenses, power and

fuel, etc.

iii. Office and administrative expenses such as salaries, rent, insurance,

electricity, telephone charges, postage and telegram, etc.

Q.102 Distinguish between capital expenditure and revenue expenditure.

Ans. Distinction between Capital Expenditure and Revenue Expenditure


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Basis of difference Capital Expenditure Revenue Expenditure

1.Objective It is incurred for the

purchase of tangible and

intangible fixed assets.

It is incurred for the

conduct of day-to-day

business activities.

2. Period Capital expenditure

benefits the firm for longperiod, usually more thanone year.

The benefits of revenue

expenditure are derivedimmediately or within oneyear.

3. Earning capacity Capital expenditureincreases the earning

capacity of the business.

It does not increase theearning capacity. It is

incurred for generating

revenue and maintaining

the fixed assets.

4. Accounting Capital expenditure is

shown as an asset in the

Balance Sheet.

Revenue expenditure is

shown on the debit side of

Trading and Profit &Loss A/c.

5. Depreciation Depreciation is charged

on capital expenditure.

No depreciation is charged

on revenue expenditure asit is fully written off in the

year of incurrence.

Q.103 What do you mean by Defferred Revenue Expenditure?

Ans. The expenditure for which payment has been made or a liability has been

incurred in the current year, but deferred from being charged against the income of

the current year is called deffered revenue expenditure. Such deference is based onthe presumption that it will be of benefit over a subsequent period or periods. Theseare written off over the period of benefits. For example, a large amount is spent on

advertising to launch a new

product or to explore a new market.

Q.106 State the meaning of closing entries.

Ans. Closing entries are the journal entries which are passed at the end of the yearto close the nominal accounts. All the nominal accounts are closed by transferring

their balance to trading and profit and loss account.

The nominal accounts having debit balance are closed by transferring to thedebit side of trading account or profit and loss account, as the case may be. The

nominal accounts having credit balance are closed by transferring to the credit side

of Trading Account or Profit and Loss Account.

Q.107 What is trading account?

Ans. Trading account is first part of income statement. It is prepared for

calculating the gross profit earned or gross loss incurred on account of trading


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activities of an enterprise. It shows the data relating to goods purchased for resale

and the goods sold. Expenses directly related with purchase of goods are also shown

in this account. If sale proceeds exceed the purchase price and related expenses of

goods sold, the difference is called gross profit. If purchased price and direct

expenses of goods sold are more than the sales, the difference is called gross loss.

.114 What is the difference between a Trading Account and Profit & Loss A/c?

Ans. Difference between Trading and Profit & Loss Account

Basis of Difference Trading Account Profit and Loss Account

Particulars Amount Particulars Amount

To Opening Stock XXX By Sales XXX

Less : Sales Returns XXX

To Purchases XXXLess : Purchase Return XXX

To Carriage Inward XXX

To Mfg. Expenses XXX

To Wages XXX By Closing Stock XXX

To Gross Profit XXX By Gross Loss XXX

Total XXXX Total XXXX

Performa for Trading Account


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1. Nature Trading Account shows

result of buying and

selling, i.e., gross profit or

gross loss.

Profit and Loss Account

shows the net result of the

business, i.e., net profit or

net loss.


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2. Items Opening Stock, net

purchases, direct

expenses, net sales and

closing stock are shown in

Trading Account.

Gross Profit/ Gross Loss,

other income and gains,

and all indirect expenses

are shown in Profit and

Loss Account.

3. Sequence Trading Account is thefirst part of income

statement.

Profit & Loss Account issecond part of income

statement and prepared

after trading account.

4. Transfer of balance The balance of trading

account, i.e., gross profit

or gross loss is transferred

to Profit and LossAccount.

The balance of Profit and

Loss Account, i.e., net

profit or net loss is

transferred to capitalaccount.


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Particulars Amount Particulars Amount

To Gross Loss XXX By Gross Profit XXX

To Travelling Expenses XXX By discount received XXX

To Printing and Stationery XXX By interest received XXX

To Discount allowed XXX By other misc incomes XXX

To Depreciation XXX

To Office Expenses XXX

To Salary XXX

To Interest XXX

To Telephone Expenses XXX

To Electricity Expenses XXX

To Carriage outwards XXX

To Advertisements XXX

To Postage XXX

To Rent XXX

To Insurance XXX

To Freight XXX

To Bad debts XXX

To General Expenses XXX

To Rates and Taxes XXXTo Repairs and maintenance XXX

To Manager's remuneration XXX

To Salesmens commission XXX

To Net profit XXX By Net Loss XXX


Performa for Profit and Loss Account


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Liabilities Amount Assets Amount

Capital XXX Fixed Assets : XXX

Add : Net Profit XXX Building XXX

Add : Capital introduced XXX Furniture XXX

Less: Drawings XXX Vehicles XXX

Less: Capital withdrawn XXX Plant and Machin XXX

Less: Net Loss XXX Fittings XXX

Computers XXXCreditors XXX

Loan from Bank XXX Current Asset XXX

Other Mortgage loans XXX Debtors XXX

Bills Payable XXX Prepaid Expenses XXX

Outstanding Expenses XXX Cash in hand XXX

Income received in advance XXX Cash at bank XXX

Bills Receivables XXX

Advances given XXX

Income due but not

received XXX


Performa for Balance Sheet


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Q.115 What is the concept of operating profit?

Ans. Operating profit is excess of sales over operating cost. Operating cost

includes cost of goods sold and operating expenses (i.e., administrative expenses

and selling and distributing expenses). Calculation of operating profit can be

presented in the form of following equation:

Operating Profit = Gross Profit Operating expenses (Office and administrativeexpenses + Selling and distribution expenses + financial expenses, excluding

interest on loan)

Q.116 Classify various assets.

Ans. Various assets are broadly classified into the following two categories:

1) Fixed assets. These assets are purchased for the purpose of operating

the business and not for resale as these are required in the business

permanently. Main example of these are land, building, plant and

machinery, furniture, etc.

2) Current assets. Current assets are kept for short term and are required

for day-to-day business activity. Stock of raw material, semi-finishedgoods ane finished goods, debtors, bills receivables, bank balance,

etc., are some of the examples of current assets.

Q.117 Distinguish between tangible assets and intangible assets.

Ans. Distinnction between Tangible Assets and Intangible Assets

Basis of difference Tangible Assets Intangible Assets

1. Physical existence Tangible assets havephysical existence.

Intangible assets have nophysical existence.

2. Fixed vs. Current Tangible assets may either

fixed or current assets.

These are usually fixed

assets.3. Depreciation or amortisation

Depreciation is chargedon fixed tangible assets.

Intangible assets areamortised.

4. Acceptance as security. Lenders assept tangibleassets as security against

loan advanced.

Intanible assets aregenerally not accepted as

security for a loan

advanced.

5. Risk of loss by fire,

accident, etc.

Such assets may be

lost/destroyed by fire,

accident, etc.

These assets cannot be

lost/destroyed by fire,

accident, etc.

Q.118 What is meant by fictitious assets?

Ans. Items shown as asset in the balance sheet, having no market value, are called

fictitious assets. for example, preliminary expenses, share issue expenses,

underwriting commission, accumulated losses, etc.

Q.119 Classify various liabilities.

Ans. Liabilities are broadly classified into the following two categories:


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1) Fixed or long-term liabilities. These liabilities are payable after a long

period, normally more then one year. For example, long-term loans,

mortgage loan, debentures, etc.

2) Current liabilities. These are obligations to be met in near future

(generally within one year). For example, creditors for goods,

outstanding expenses, bank overdraft, bills payable, short-term loans,etc.

Q.120 What is a Contingent liability?

Ans. There are some possible liabilities which are not actual liabilities on the date

of balance sheet, but which may become real liabilities after some time on

happening of certain contingency. If that contingency happens, a liability will come

into being, otherwise not. Such possible liabilities are termed as Contingent

Liabilities. The contingent liabilities are mentioned only by way of foot notes in

Balance Sheet.

Q.121 State the examples of contingent liabilities.

Ans. Following are some of the examples of contingent liabilities:

i. Claims against the company not acknowledged as debts;ii. Uncalled liability on partly paid shares;

iii. Arrears of fixed cumulative dividens;

iv. Estimated amount of contracts remaining to be executed but not

provided for;

v. Liabilities under a gurantee;

vi. Liability on Bills Receivable discounted but not matured.

Q.122 Distinguish between Trial Balance and Balance Sheet.

Ans. Difference between Trial Balance and Balance Sheet

Basis of difference Trial Balance Balance sheet

1. Purpose It is prepared to check the

arithmetical accuracy of

the books of accounts.

It is prepared to show the

financial position of the

business.

2. Format Trial balance has two

columns. One shows

accounts with their debit

balance and the othershows assets.

Balance sheet has two

sides. One shows

liabilities and the other

credit balance.

3. Contents All the accounts are

shown in a trial balance.

Only personal and real

accounts are shown in abalance sheet.

4. Period A trial balance preparednormally every month or

whenever desired.

Balance sheet is preparedusually at the end of the

accounting year.


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5. Relation with Profit and

Loss Account

Profit & Loss Account is

prepared with the help of

trial balance.

Balance sheet is prepared

after preparing Profit &

Loss account.

6. Result of the business It is not possible to know

the result of the business

just by seeing a trialbalance.

Result of the business (net

profit or net loss) is

adjusted in the capital andthus may be shown in

balance sheet.

7. Closing stock It is usually not shown in

a trial balance.

It is shown on the asset

side of the balance sheet.

8. Necessity It is not compulsory to

prepare a trial balance, but

it is indispensable.

It is a part of final

accounts and is necessary

to prepare.

9. Adjustments A trial balance is prepared

without making any

adjustment, such asunpaid and prepaidexpenses.

A balance sheet cannot be

prepared without making

adjustments.

10. Evidence A trial balance is notaccepted as documentary

evidence by the court.

It is accepted asdocumentary evidence by

the court and other

government departments.

Q.123 What is manufacturing account?

Ans. The firms producing goods need to know cost of production as it is the basis

of determining price. For the purpose, an account is prepared. This account is calledmanufacturing account or production account. Various components of cost ofproduction, such as, raw material consumed, productive wages or direct labour cost,

direct expenses, and factory overhead, are shown in this account to find the cost of

goods produced.

Adjustments at a Glance

Sl

No.

Adjustments Adjustment Entries Treatment in Final Accounts

1. Closing Stock Closing Stock A/c Dr.

To Trading A/c

Credit side of

Trading A/c.

Show on the assets

side of B/S

2. Outstanding or

unpaid expenses

Expenses A/c Dr.

To Outstanding exp.

a. Add to the concerned

item on the Debit side


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of Trading/Profit &

Loss A/c.

b. Liability side of

balance sheet.

3. Prepaid expenses

(or Une\xpiredexpenses)

Prepaid Expenses A/c Dr.

To Expenses A/c

a. Deduct from the

concernedexpenses on the

debit side of

Profit & Loss

A/c.

b. Show on theassets side of

B/s.

4. Accrued income Accrued Income A/c Dr.

To Income A/c

a. Add to the concerned

income on Credit side of Profit

and Loss A/c.b. Show on the assets side of

B/S.

5. Unearned Income

(Income received

in advance)

Income A/c Dr.

To Unearned Income A/c

a. Deduct from the concerned

income on the credit side of

Profit & Loss A/c.b. Show on the liabilities side

of B/S.

6. Depreciation Depreciaton A/c Dr.

To Asset A/c

a. Show on the debit side

of Profit & Loss A/c.

b. Deduct from theconcerned asset in the

Balance Sheet.

7. To write off bad

debts

Bad Debts A/c Dr.

To Debtors A/c

a. Debit side of P & L

A/c.

b. Deduct from debtors onthe assets side of B/S.

8. Provision for badand doubtful debts

P & L A/c Dr.To Provision for Bad Debts

A/c

a. Debit side of P & LA/c.

b. Deduct from debtors on

the assets side of B/S9. Provision for

discount on

debtors

P & L A/c Dr.

To Provision for

Discount on Debtors

A/c

Debit side of P & L A/c.

Deduct from debtors on

assets side of B/S.

10. Provision for

discount on

creditors

Provision for discount on

creditors A/c Dr.

To P & L A/c

Credit side of P & L A/c.

Deduct from creditors on

the liabilities side of


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B/S.

11. Interest on

Capital

Interest on Capital A/c

Dr.

To Capital A/c


A/c.

b. Add to capital on the

liabilities side of B/S.

12. Interest onDrawing

Capital A/c Dr.To Interest on DrawingA/c

Credit side of P & L A/c.Deduct from capital on the


13. Interest payable onloans (borrowed)

Interest on Loan A/c Dr.To Loan A/c

a. Debit side of P & LA/c.

b. Add to loan on the


14. Commission

payable to

manager

P & L A/c Dr.

To Commission payable

to Manager A/c


A/c.

b. Show on the liabilities

side of B/S.15. Abnormal loss of goods by fire, theft, accident, etc.

(a)

(b)

(c)

For gross loss

For insuranceclaim accepted, if

any

For net loss

Loss of Goods by. A/c Dr.

To Trading A/c

(or) To Purchases A/c

Insurance Claim Dr.To Loss of Goods by..

A/c

P & L A/c Dr.

To Loss of Goods by..A/c

a. Gross Loss;

Deduct from Purchases or

show on the credit side of

Trading A/c.

b. Net Loss :Debit side of P & L A/c.

c. Insurance Claim:

Assets side of B/S.

16. Goods in Transit Goods-in-Transit A/c Dr.

To Trading A/c.

Credit side of Trading A/c.

Show on the asset side of

B/S.

17. Goods sold on sale or return basis

(a) For Sale price Sales A/c Dr.

To Debtors A/c

a. Sale price: it will be

deducted from sales as

well as from debtors

b. Cost: Add to closing


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(b) For cost of goods Stock A/c Dr.

To Trading A/c

Stock.

18. Abnormal loss of fixed assets by fire, theft, accident, etc.

(a)

(b)

(c)

For gross Loss

For insuranceclaim accepted, if

any

For Net Loss

Loss of Asset by.A/c

Dr.

To Assets A/c

Insurance Co. Dr.To Loss of Asset by.

A/c

P & L A/c Dr.

To Loss of Asset by

A/c

a. Gross Loss: Deduct

from respective

asseton the assets side

of B/S.

b. Net Loss: Debit side ofP & L A/c.

b. Insurance Claim;

Assets side of B/S.

19. Goods taken bythe proprietor for

his personal use

Drawing A/c Dr.To purchases A/c

a. Deduct the amount ofgoods from the

purchases in Trading

A/c.

b. Deduct the amount

from the capital on the


20. Goods given as

charity

Charity A/c Dr.

To Purchases A/c

Deduct the amount from

the purchases on the

debit side of TradingA/c.

Shown on the debit side of

P & L A/c.

21. Goods distributed

as free Samples

Advertising A/c Dr.

To Purchases A/c

Deduct the amount of

goods from the


A/c.

Show on the debit side of P

& L A/c.

22. Use of goods inconstruction of an

asset for use in

business

Asset A/c Dr.To Purchases A/c

a. Deduct the amount ofgoods from the


A/c.b. Add to respective asset

on assets side of B/S.

23. To write off Profit & Loss A/c Dr. Show the amount to be


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deferred revenue

expenditure

To Deferred Rev. Expenses

A/c

written off on the debit

side of P & L A/c.

Show the balance amount

on the assets side of the

B/S.

Q. You are required to prepare Trading and Profit and Loss Account and BalanceSheet from the following balances and adjustments :

Particulars Debit

Rs.

Credit

Rs.

Purchases /Sales t

Cash in hand bs

Cash in bank bs

Stoct as on 01.01.97 tWages t

Returns tRepairs pl

Debtors/ Creditors bs

Bad Debts pl

Loan (12% p.a.) bsDiscounts pl

Capital bs

Interest on loan plSalaries pl

Sales Tax pl

Octroi tInsurance pl

Charity pl

Rent pl

Machinery bs

Total

1,30,295

500

9,500

40,00022,525

2,4001,675

30,00

2,310

800

6008,000

800

5001,000

125

2,000

16,000

2,69,030

1,80,500

195

30,305

20,000530

37,500

2,69,030

Adjustments :

a) Wages include Rs. 2,000 for erection of new machinery installed on 1.1.1997,b) Provide for Depreciation of Machinery @ 5% p.a,

c) Stock on 31.12.1997 is Rs. 40,925, t bs

d) Salaries unpaid Rs. 800,e) Further Bad Debts Rs. 400,

f) Make a provision of 5% on Debtors,


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g) Rent is paid upto 30th April, 1998,

h) Unexpired Insurance Rs. 300.

Q. The following Trial Balance was extracted from the books of M/s Bhim

Raj Devendra Kumar on 31st

December, 1994. You are required to prepare Tradingand Profit & Loss Account for the year ending on 31st December, 1994 and a Balance

Sheet as on that

date:

Particulars DebitRs.

CreditRs.

Capital

Drawing

Debtors and Creditors

Loan from bankInterest on Loan

Cash in hand

Provision for bad debtsStock (1.1.1994)

Motor Vehicle

Cash at BankLand and building

Purchases and Sales

ReturnsCarriage Outwards

Carriage InwardsSalariesRent and Insurance

General Expenses

Bad Debts

DiscountBills Receivable and Payable

Rent received

Total

--

5,000

20,000

--300

2,000

---6,800

10,000

3,50012,000

66,000

8,0002,500

3,0009,0003,000

6,900

500

--6,000

1,64,500

30,000

----

10,000

9,500

-----

700-

-

--

1,10,000

1,500------

5002,000

300

1,64,500

Adjustments :

a) Stock on 31-12-1994, Rs. 7,000.

b) Depreciation on Land and Building @ 2 and on Motor Vehicle @ 20% perannum,

c) Salaries outstanding Rs. 200,


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d) Prepaid insurance Rs. 200,

e) Provision for bad debts is to be maintained at 5% on debtors.

Q. From the following Trial Balance of Mr. Ajay Agrawal, prepare Trading and Profitand Loss Account for the year ending 31st March, 1997 and a Balance Sheets as on that

date

Debit Balance Rs. Credit Balances Rs.

Cash

Opening stock

WagesPurchases

Return Inwards

Repairs

Bad debtsInterest on Loan

Salaries

Sales TaxOctroi

Insurance

CharityRent

Machinery

Debtors

Total

10,000

40,800

22,5251,30,295

2,400

1,675

2,310600

8,000

800500

1,000

1252,000

16,000

30,000

2,69,030

Sales

Returns

Loan @ 12% (1-1-97 )Creditors

Discount

Capital

1,80,500

195

20,00030,305

530

37,500

2,69,030


24/29

Adjustments:

a) Wages include Rs. 2,000 for erection of new machinery on 1-4-96,b) Stock on 31st March. 1997 was Rs. 40,925.

c) Provide 5% depreciation on Machinery,

d) Salaries unpaid Rs. 800,e) Bad debts Rs. 400,

f) Create a provision at 5% on debtors.

g) Rent is paid upto 30-6-1997, i.e. for is months.

h) Insurance unexpired Rs. 300.

Q. From the following balances of Mr. Madan Mohan prepare Trading and Profit and

Loss A/c for the year ending 31st December, 1997 and a Balance Sheet as on that date :

Debit Balances Rs. Credit Balances Rs.

Cash

Opening stock

WagesPurchases

Return InwardsRepairsBad debts

Interest on loan

SalariesSales Tax

Octroi

Insurance

10,000

40,800

22,5251,30,295

2,4001,6752,310

600

8,000800

500

1,000

Sales

Returns

Loan @ 12% (1-1-97)Creditors

DiscountCapital

1,80,500

195

20,00030,305

53037,500


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Charity

RentMachinery

Debtors (including Ashok for

Dishonoured bill of Rs. 800)

125

2,00016,000

30,000

Adjustments :

a) Waes include Rs. 2,000 for erection of new Machinery on 1-1-97

b) Stock on 31st December, 1997 was Rs. 40,925c) Provide 5% Depreciation on Machinery

d) Salaries unpaid Rs. 800

e) Half the amount of Ashoks bill is irrecoverable

f) Create a provision at 5% on the Debtorsg) Rent is prepaid upto 30th April, 1998 Rs. 500

h) Insurance unexpired Rs. 300

Q. From the following ledger accounts of Mr. Rakesh Roshan prepare a trading and

profit and loss account and a balance sheet as on 31st Dec. 2,000 after making thenecessary adjustments.

Particulars Rs. Particulars Rs.

Trader expensesFreight and duty

Carriage outwardsSundry debtors

Furniture & Fixtures

Return Inwards

Printing and StatRent, Rates & Taxes

Sundry creditors

SalesReturn outwards

Postage & Telegrams

8002,000

50020,600

5,000

2,000

4004,600

10,000

1,20,0001,000

800

PurchasesStock

Plant (1.1.2000)Plant (additions on 1.7.2000)

Drawings

Capital

Reserve for Doubtful DebtsRent for premises sublet

Insurance

Salaries & wagesCash in hand

Cash in Bank

82,00015,000

20,0005,000

6,000

80,000

8001,600

700

21,3006,200

20,500

The items for adjustments are :

a) Stock on 31.12.2000 was Rs. 14,000.b) Write off Rs. 600 as bad debts.

c) The reserve fr doubtful debts is to be maintained at 5% of sundry debtors.


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d) Proveid depreciation furniture and fixtures at 5% p.a. and on plant and

machinery 20% p.a.

e) Insurance is to be carried forward to the extent of Rs. 100.f) A fir occurred on 5th Dec. 2000 in the godown and stock of the value of Rs. 5,000

was destroyed. It was insured and insurance company admitted the full claim.

Q. Prepare Trading and Profit & loss A/c for the year ending on 31st Dec. 1999 and aBalance Sheet as on that date from the following Trial Balance:

Debit Balances Rs. Debit Balances Rs.

Drawings

Plant & MachineryHorse & carts

Debtors

PurchasesWages

Cash at Bank

SalaryRepairs

Opening Stock

1,700

12,0002,600

3,600

2,000800

2,600

800190

1,600

Rent

Misc. ExpensesBad debts

Carriage Inwards

Credit BalancesCreditors

Sales

InterestCommission

Capital

450

150500

160

Rs.2,000

4,200

1,3501,600

20,000

Adjustments:

i. Closing Stock Rs. 1,600ii. Depreciate Plant & Machinery by 10% and Horse & Carts by 15%

iii. Allowed interest on capital at 5% per annum

iv. Rs. 150 are due for wages

v. Prepaid Rent Rs. 150vi. Accrued interest Rs. 150

vii. Commission received n Advance Rs. 200

viii. Interest on Drawings Rs. 100

ix. Further Bad debts Rs. 200.

T 193 4

Q. Prepare a Trading and P & L Account and a Balance sheet from the followinginformation :

Dr. Balances Rs. Cr. Balances Rs.

Stock on 1-1-99Purchases

Carriage

Wages

42,00068,250

600

12,000

SalesLoans

Discount

Commission

96,17060,000

850

680


27/29

Power

Furniture & fixturesInvestments

Free hold premises

Travelling expenses

DebtorsInterest

Bill receivabelTools

Plant & macinery

Bad debts

Drawing

1,800

4,0006,000

15,000

900

1,000400

1,8007,000

30,000

200

3,000

Sundry creditors

CapitalProvision for bad debts

6,000

30,000250

The following adjustments are to be made :Stock in hand on 31-12-99 was Rs. 7,860. Depreciate plant and machinery @ 10%

Wages Rs. 700 are outstanding. Discount receivable was Rs. 100.

Q. From the following trial balance extracted from the books of SURYA & CO.

prepare a trading account, profit and loss account for the year ending 31st December 1992

and a Balance Sheet as on that date:

Ledger Accounts Dr.(Rs. ) Cr. ( Rs. )

Capital

DrawingsPlant and machinery

Horses and CartsDebtors

Creditors

Purchases and salesWages

Cash at bank

SalariesRepairs

Stock

RentManufacturing expensesBills Payable

Bad debts

Carriage

1,70012,000

2,6003,600

2,000800

2,600

800190

1,600

450150

500

160

20,000

2,600

4,200

2,350


28/29

29,150 29,150

The following adjustments are to be made :a) Closing stock Rs. 1,600b) Depreciate Plant and Machinery by 10%, Horse and Carts by 15%,

c) Allow Interest on Capital @ 5% p.a.,

d) Wages Outstanding Rs. 150

e) Prepaid Rent Rs. 50.

Q. Prepare Trading and profit and loss account of Deepali & Sons for 1992 and his

balanceSheet on 31st December 1992 after making the necessary adjustments:

Ledger Accounts Dr.

Rs.

Cr.

Rs.

Opening stock on 1.1.1992Cash at bank

Purchases and sales

ReturnsBuildings

Capital Account

Furniture and fittingsDebtors and Creditors

Bad debts reserve

Petty cash and stamps in handCarriage inwards

Salaries

Sundry trade expenses

Interest charged by bankInsurance premium paid for a year upto 30.6.93

Telephone charges

Commission

10,0004,000

70,000

3,00030,000

7,00030,000

200800

11,000

6,000

5001,000

500

25,000

90,000

4,000

30,000

21,000

2,000

2,000

1,74,000 1,74,000

Also consider the following :

a) Stock of goods on 31.12.1992 Rs. 15,000.


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b) Building and furniture and fitting are to be depreciated @ 10% and 20%

respectively.

c) Bad debts Rs. 1,000 are to be written off and a reserve of 5% is to be kept onremaining debtors.

d) Commission received in advance Rs. 1,000.

chapter 4 financial statements

Documents