FA
UNIT 2FINAL ACCOUNTS
Q1) Explain trading account.A1) Trading accountTrade and manufacturing operating companies deal with the sale and purchase of goods. Therefore, only the manufacturing and trading entities prepare the trading account. Service providers do not prepare for this.Advantages of preparing a trading account formatIt is a very important statement from the point of view of the cost of goods. By preparing a trading account, an entity may take a decision to continue or discontinue a particular product, which helps to obtain maximum profit or reduce losses. With the help of a trading account, the sales tax authority can, in accordance with the sales tax declaration filed by the business. It also helps the excise duty authorities to assess the excise duty of a business enterprise. The management, having in mind the market competition, determines the price of the product with the help of a trading account. Items in trading account formatThe trading account contains the following details:Details of raw materials, semi-finished goods and finished products, opening stock. Close inventory details of raw materials, semi-finished products, and finished products. Total purchase of goods less purchase return. Total sales of goods less sales return. All direct costs associated with the purchase or sale or manufacture of goods. Item of income (Cr.Side)Less sales return than total sales of goods Close the stock of the product. Expenditure item (Doctor) side Item of expenditure (Dr.Side)Opening stock Total purchase of goods less purchase return All the direct cost like carriage interior & freight cost, rent, electricity and power cost, wages for godown or factory, packing cost, etc. for workers and supervisors. NotesThe trial count will not be displayed on the close. But, firstly, we need to show the amount of closing shares on the income side of the trading account, and secondly, on the balance sheet under current assets. We value closing inventory at either lower cost or market price. On the day of preparation of the trading account, we value the physically available closed shares. However, the trading account can also be prepared in horizontal form, but the content remains the same. Trading Account Format
Q2) Explain profit and loss accountA2) All companies generally prepare profit and loss accounts/statements at the end of the year to gain visibility of income, revenue, expenses, and losses incurred in a certain range of periods. It is important to prepare a profit and loss statement because this information helps organizations make the right business decisions, such as where to cut costs, from where the business can generate more profit, and which parts of the business are suffering from losses.Profit and loss accounts / statements Types of profit and loss Gross profit/gross loss Profit / loss Trading account is prepared to check gross profit/loss while profit and loss account is created to check profit and loss/net loss.Profit and loss accounts are made to check the annual profit or loss of a business. This account only shows overhead. All items of income and expenses, whether cash or non-cash, are considered in this account.Only revenue or expenses related to the current period are debited or credited to the profit and loss account. The profit and loss account starts with gross profit on the credit side and, if there is a total loss, appears on the debit side.Items not displayed in the profit and loss account formatDrawing: the drawing is not the company's expense. Therefore, we debit it to capital a/c, and not to profit and loss a/c.Income tax: for a company, income tax is an expense,but for a sole proprietor, it is his personal expense. Therefore, we debit it to the capital A/C.Discounts: as we know, discounts are of two types–trade discounts and cash discounts. We deduct the trade discount from the amount charged and therefore do not show it in the account books. On the other hand, if the customer pays the amount on a certain date, a cash discount will be possible. We view cash discounts in account books. Therefore, we debit it to the profit and loss account.Bad debt: it is because of the customer and the amount he does not pay it. We debit this amount to profit and loss a/c in the event that preparations have already been made for a bet that is worse than it is initially written off from it. When bad loans are recovered, it is again. Now it is not credited to the account of the party, but recovered account should be credited to the bad debt and is written on the credit side of the profit and loss accountProfit and Loss Account Format
Q3) Explain balance sheetA3) A balance sheet (also known as a financial statement) is a financial statement that shows the Assets, Liabilities and ownership interests of a business at a specific date. The main purpose of drawing up a balance sheet is to disclose the financial status of the enterprise at a certain date. The balance sheet can be prepared at any time, but it is prepared mainly at the end of the accounting period.Most of the information about Assets, Liabilities and owner's equity items is taken from the company's adjusted trial balance. Retained earnings are the part of the owner's equity section which is provided by the retained earnings statement.
Section of the balance sheetTo be widely considered about the balance sheet of the division part of assets part of liabilities main capital. For each department: Assets section In the balance sheet, assets with similar characteristics are grouped. The mainly adopted approach is to divide assets into current and non-current assets. Liquid assets include cash and all assets that can be converted into cash or expected to be consumed in a short period of time–usually one year. Examples of current assets include cash, cash equivalents, accounts receivable, prepayment costs or prepayment, short-term investments and inventories. All assets that aren't listed as current assets are grouped as non-current assets. A common feature of such assets is that they continue to provide profit for a long time-usually more than one year. Examples of such assets include long-term investments, equipment, plants and machinery, land and buildings, and intangible assets. Debt DivisionA debt is an obligation to a party other than the owner of the business. They are grouped as current and long-term liabilities in the balance sheet. Current liabilities are obligations that are expected to be met within a one-year period by using current assets of the business or by providing goods or services. Owner's equity divisionThe owner's interest is the obligation of the business to its owner. The term owner's equity is mainly used in the balance sheet of a business in the form of a sole proprietor and partnership. In the balance sheet of the company the term “ownership interest “is often replaced by the term “shareholder interest".When the balance sheet is created, the liabilities section appears first, and the owner's equity section appears later.Balance sheet format there are two formats on the balance sheet that present Assets, Liabilities and owner's ' equity–the account format and the report format.
In the account form, the balance sheet is divided into the left and right, like the t-account. Both liabilities and the owner's capital are listed on the right side of the balance sheet, while assets are listed on the left. If all the elements of the balance sheet are listed correctly, then the sum on the asset side (that is, on the left) is equal to the sum on the debt and the capital side of the owner (that is, on the right). BUSINESS CONSULTING COMPANYBALANCE SHEETAs at December 31, 2015 In reporting format, the balance table element is displayed vertically, the asset section is displayed at the highest, and therefore the liabilities and owner's equity sections are displayed below the asset section.The example below shows both formats.
Q4) Explain types of adjustmentA4) Types of adjustment entry for the final account Closing stocks: The value of the closing stock is checked at the end of the fiscal year, so it is displayed as an adjustment. It must be credited to the transaction a/c and displayed on the asset side of b/S.The adjustment entry is:Closing stock a/c ------ Dr.To trade A / cTrading account and balance sheet
Balance Sheet
2. Unpaid expenses:These are expenses incurred in the fiscal year,but no payments have been made. Any unpaid or unpaid expenses will be added to such expense a/c in P&L a/c and will be displayed as current liability in b/S. For example, monthly rent in May 2002Rs. 1,000 remains unpaid. A calendar year is an accounting year. Adjusting entries:Rent account Dr. Rs.1000To Outstanding Rent a/c Rs. 1,000 Profit and loss accounts
Balance Sheet as on 31st December 2002
3. Prepaid ExpensesThese are the costs paid, but part of the amount paid extends to the next year. It is also called “expiring expenses". The prepaid amount paid should be deducted from such expenses and displayed as current assets in the B/S.For example, Rs premium a total of 2,400 people were paid on July 1, 2002. A calendar year is an accounting year. The annual premium is paid for 1 month, so the 6-month premium concerns half of the current year and the other half the following year.Hence Rs. 1,200 must be treated as an upfront payment, deducted from the premium paid and displayed as an asset on b/S. Adjusting entries:Prepaid insurance a / c Dr Rs. 1, 200 To Premium A / c Rs. 1, 200 Profit and Loss Account
4. Accrued income:It is an income that has already been earned [i.e., the service has already been rendered], but no money has been received. For example, interest on investments accrued Rs. 1,200.Interest in the current year is due to the end of the year. That amount can actually be received in the next year. Currently, it represents income, which has become accounts receivable or accrued. Therefore, P&L is credited to a/c,IS accounts receivable and appears as an asset in b/S.Adjusting entries:Accrued interest a / c Dr. Rs. 1,200To be interested in a / c Rs. 1,200 Profit and Loss Account
Balance Sheet
5. Income received in advance:These are the income received during the current year, but part of the amount received is related to the following year. Such amounts must be deducted from the total amount received in P & L A / C and displayed on the debt side of B / S, which represents the amount that the business is obliged to return. For example, business concerns have received a three-year apprenticeship premium equivalent to Rs.6, 000. Rs in this amount.2, 000 IE, 1/3 of Rs.6, 000 is for the current year and must be credited to P&L a/c as income. And balance Rs.As business is obliged to return 4, 000 represents responsibility. Adjusting entries:Apprentice premium A / c Dr Rs. 4000To Apprentice premium received in advance Rs. 4000Profit and Loss Account
Balance Sheet
6. Depreciation of assets:Depreciation implies a decrease or decrease in the value of an asset due to its constant use. It may also occur due to wear and tear, the passage of time and obsolescence. It's a loss to business. It is usually calculated at a certain percentage to the value of the asset, and so the amount obtained is shown first on the debit side of the P & L A/C, and then subtracted from the original value of the asset of B/s. For example, a business has furniture worth Rs. At the end of the year 50, 000 it is depreciated by 5%. Adjusting entries:Depreciation A / c Dr Rs. 2,500 To Furniture A / c to Rs. 2,500[5% Rs 50,000 = 2,500] Profit and Loss Account
Balance Sheet
7. Bad debtsDebt represents money from the debtor [i.e., the uncollected portion of the credit sale]. When a debt becomes irretrievable, it becomes a bad debt and is treated as a loss. The amount of non-performing loans is debited to P&L a/c and deducted from the various debtors of B/S.For example, a trader's ledger balance on sundry debtors shows Rs with 20,000. 1,000 are estimated to be unrecoverable. Adjusting entries: Bad debts a / c Dr Rs. 1,000 To Sundry debtor a / c to Rs. 1,000 a) Provision for bad and doubtful debt:Every business has a lot of trading through margin trading. This gives rise to a significant amount of book debts or debtors. But 100% of these debts are rarely recovered. Therefore, it would be necessary to bring down the balance of the debtor to it true position. The usual practice is to calculate such a bad debt at a certain rate, based on the past experience of the debtor. It is called reserves or reserves for doubtful debts.However, the allowance for bad loans and bad debt is calculated on good debt, that is, after deducting previously unadjusted bad loans. For example:At the end of the year the sundries debtors of traders stood in the Rs.21, 000. It is estimated to be Rs. 1,000 is written off as bad loans and a 5% allowance is created for bad debt. Adjusting entries:Bad Debts a/c Dr. Rs. 1,000To Sundry Debtors a/c Rs. 1,000 To Profit and Loss a/c Dr. Rs. 2,000To Bad Debts a/c Rs. 1,000To Provision for Doubtful Debts 1,000 Profit and Loss Account
If there is an old provision for doubtful debts, it should be adjusted [deducted] against the new provision.Balance Sheet
b) Provision for discounts to debtors:Cash discounts are allowed to debtors to prompt quick payments. After providing bad loans and bad debts, the debtor's balance represents the debt from a healthy party. They may pay their dues on time and try to take advantage of the acceptable cash discounts themselves. Therefore, this discount should be expected and offered. It is, therefore, the usual practice in business is to offer debtors discounts at a certain percentage on good debt. For example:Suppose a trader has various debtors equivalent to rs.20, 000 and he estimates that a provision for a discount of 5% is desirable, after a provision of 2% for bad debts. Then about healthy debt, i ea provision of 19,000 at 2% has been made as a reserve for debtors ' discounts. Adjusting entries: Profit and Loss a/c Dr. Rs.380To Reserve for Discount on Debtors a/c Rs.380Profit and Loss Account
Balance Sheet
8. Provision for discounts to creditors:The creditor represents the amount paid by the business to the supplier of goods on credit. A healthy business concern is the creditor's goodwill and the practice of settling accounts with creditors in time to get the discounts allowed by them. In that case, the liability for various creditors can be reduced to the extent of the expected discount. Based on past practice, a certain percentage of the balance of receivables is calculated as a reserve for discounts and subtracted from the balance of receivables of B/S, and the same amount is calculated as the gain of P&L A/C. For example:Traders had various creditors at Rs. 10,000on31th December2002. It is desirable to *provide 3% for this amount for discounts. Adjusting entries: Discounts on creditors for Reserve a /c Dr Rs. 300 To Profit and loss a / c Rs. 300Profit and Loss Account
Balance Sheet
9. Interest on capital:Often, interest at the usual rate is allowed to the owner's capital, which is adopted in the business. This is necessary in order to assess the efficiency of the business. Otherwise, the profit will include interest and will be displayed at a higher rate.
So, the interest charged is a loss to the business and a profit to the owner. Thus, it is debited to profit and loss a/c and added to the capital of the balance sheet. Adjusting entries: a) Interest on Capital a/c Dr. To Capital a/cb) Profit and Loss a/c Dr. To Interest on Capital a/c 10. Interest in drawing:The drawing is the money that the owner has withdrawn from the capital. It charges interest on the drawing so that it allows business interest on capital. It's a profit to the business and a loss to the owner. Thus, it is credited to profit and loss a/c and deducted from the capital on the balance sheet.Profit and Loss Account
Balance Sheet
Adjustment of special items:1. Products distributed as free samples:To promote the products, free samples are supplied to experts in the field. For example, distributed a free sample of a book to a professor, a free sample of medicine to a doctor, etc. Since it is a promotional activity, the cost of such a sample should be treated as promotional costs, for example, advertising. Free sample distribution is equivalent to a decrease in purchase or sale without a monetary return. Thus, the adjusted entry is:
The net effect will be the reduction of purchases as promotional costs and the charge to the profit and loss account. 2. Goods sold or sold on an approval basis: sometimes goods are sold on an approval basis in order to gain the trust of customers about the quality of the goods. If the customer approves it, it becomes a sale. If the customer does not approve it, the sale is not completed and therefore cannot be treated as a sale. Suppose that at the end of the fiscal year, you have a specific product with the customer that was sent on an approval basis, and you need to pass the necessary entries for reconciliation.The adjustment entry is as follows: the treatment is as follows:
(A) As a deduction from sales at the selling price on the credit side of the trading account, and in addition to closing the shares at the cost price. (h) As a deduction from debtors on the asset side, and as the total inventory displayed at the cost on the asset side of the balance sheet (cost + finished stock in stock with authorized customers). 3. About shipping of products by consignment sale: Since consignment transactions are not sales transactions, they do not directly affect transactions and profit and loss accounts. Another consignment account is opened, and the goods sent to the consignment are debited to the consignment account. When an account sale is received, it is treated as a consignment sale, credited to the consignment account and debited to the consignment account. The consignment inventory remaining at the consignment is deposited into the consignment account, and after invoicing the consignment cost, the consignment fee, etc., the consignment profit is confirmed. However, the closing stock of the deposit is displayed on the asset side of the balance sheet,and the profit and loss of the deposit is credited to the profit and loss account (if there is a loss of the deposit, it is cancelled). The transfer input of consignment profit and loss is as follows:
4. Loss of stock due to fire: If the stock is destroyed by fire, the losses incurred will be treated differently under the following three possible circumstances: if the stock is not insured-the entire value of the stock destroyed by fire is treated as a loss, at the entry –
B. If the stock is fully insured-when the fully insured stock is destroyed, the company has a claim to the insurance company for the recovery of losses due to the goods destroyed by fire. Therefore, the claim takes precedence in the entry –
In practice, claims against the insurance company are treated as “debtors" and are indicated on the asset side of the balance sheet as payments from the insurance company. If the insurance company settled the dues, the entry would be In fact, the account of the insurance company does not appear on the balance sheet, since the cash/bank balance on the balance sheet increases with the settled claims. C. if the shares are partially insured-in this case, the total value of the destroyed shares will be credited to the trading account, that portion of the claim settled by the insurance company will be debited to the insurance company account, and the difference between the destroyed shares and the accepted insurance claim will be debited to the profit and loss account as a loss. The entries are as follows –
5. Deferred appropriations: A huge expenditure of the nature of the revenue generated at the initial stage of a business enterprise with the belief that it derives profit from such expenditure during subsequent years is considered a deferred revenue expenditure if the charge of such expenses is spread over the number of years in which the profit is expected to be derived. Part of such expenditure is charged as revenue for each year, and the rest is capitalized on the basis of the matching concept. For example, huge expenditures on “advertising" occur in the first year of the business and derive profits over an estimated period of ten years. Then one-tenth of that expenditure each year is charged to income over a decade period. The Important point here is that the expenditure that is not charged to the revenue is capitalized and appears as a fictitious asset on the balance sheet. For example, suppose that the ad cost incurred Rs.2, 00,000 will be able to bring benefits over five year’s term. Then a fifth of two, 00,000, i.e., Rs.40, 000 are going to be charged on revenue for the primary year and therefore the remaining Rs.1,60,000 are shown as fictitious assets. In the second year Rs.40, 000 are charged for earnings and 1,20,000 outstanding are shown as fictitious assets. This process lasts for five years until the full expenditure is written off. Entries passed in the first year are –
6. Creation of reserve funds: To strengthen the financial situation of the enterprise, a part of the net profit can be transferred to the reserve account by appropriation. The entries for creating a reserve fund are –
7. Committee of managers:Business companies sometimes offer profit incentives to managers in the form of commissions to motivate people to increase business profits. This fee is given as a percentage of net profit. There are two ways to provide this percentage of net profit.(a) The percentage of the commission against net profit before charging such fees;(b) The percentage of fees to net income after invoicing such fees; 8. Specific hidden tweaks:The adjustments are not given explicitly under the array of adjustments, but they need to be placed and adjusted. For example,the balance displays the subsequent items alongside other items at the top of Dec31, 2009: DR Cr10% loan January 1, 2009 - - Interest on loan 3,000 -(Paid during the year) If we carefully observe loans are obtained in March 1, 2009 at a rate of interest of 10%. That is, the interest paid on a one-year loan in December31, 2009 (Rs.50, 000×10/100) rupees.5, 000. But the interest paid is only Rs.3, 000 as shown in the trial balance. This indicates that interest is not paid (Rs.5, 000-3,000-2,000. Therefore, this should be considered as an adjustment. The entry is – Profit and Loss A/c Dr 2,000TO Interest payable A/c 2,000 Here, the total interest charged to the profit and loss account is Rs.Will you be given 3,000 trial balances plus interest expense? 2,000, which is completely equivalent to Rs.5,000. Interest expense Rs.2,000 will appear as liabilities on the balance sheet.Please note that there are many adjustments to different types of courses and preparations for the final. Their treatment is explained when they appear. WorksheetWhen all the necessary information for financial reporting is ready (that is, information on the trial balance and adjustment, officially aggregated without errors), the accountant prefers to draft a work sheet. The worksheet is a rough work and is not part of the financial statements. The worksheet is provided for convenience to ensure that the financial statements prepared in the debit and credit columns representing the trial balance, adjusted, adjusted trial balance, trading account, profit and loss account and balance sheet are in order. Q5) From the following ledger balance presented by Sen. on 31st March, 2016 prepare a trading account:
Other information:Closing value of stock for 31st March, 2016. 20,000 Unpaid wages reached Rs. 4,000 Gas and fuel were paid in advance for Rs. 1,000 A5) Trading account for the year ended 31st March, 2016Dr Cr
Q6) From the following details presented by Thilak for the year 31st March, 2017, we will prepare a profit and loss account.
Adjustment:The unpaid salary reached Rs. 4,000 The rent was paid for 11 months Interest expense reached Rs but was not received. 2,000. Prepaid insurance has reached Rs. 2,000 Depreciating buildings by 10% Further bad debts reached Rs. over 3,000 of 5%、 The fee received in advance reached Rs. 2,000 A6)Profit and Loss Account for the year ended 31st March, 2017Dr. Cr.
Working notes:Debtors: 40,000Less: further bad loans: 2,000: 38,000Allowance for bad and bad debt of 5%: 38,000x5 % =Rs. 1,900 Q7) Prepare a trading and profit and loss account from the following balances obtained from Siva books:
Adjustment:Closing value of the stock on 31st December, 2016 Rs 4,500 The manager is entitled to receive a commission@5% of the net profit after providing such a commission. A7)Dr. Trading and Profit and Loss Account for the year 31st December, 2016 Cr.
Working Note:Commission= Net profit before charging commissions x Rate of commissions/(100+ Rate of commissions) x 100Net profit = 14,000 – (3,500 + 1,000+1,200+1,800+1,700+600) = Rs 4,200Manager’s commission = 4,200 x 5/105 = Rs 200 Q8) Explain methods of depreciation.A8) Methods of computing depreciation: straight line method and diminishing balance methodStraight line methodWhat is the straight-line method?The straight-line method is the default method used to evenly recognize the carrying amount of fixed assets over their useful lives. This is used when there is no particular pattern in how an asset is used over time. The straight-line method is the easiest depreciation method to calculate and is highly recommended for use as it causes few calculation errors. The procedure for flat-rate calculation is as follows. Determines the initial cost of an asset recognized as a fixed asset. Subtract the estimated residual value of the asset from the amount recorded in the books. Determines the estimated useful life of an asset. It is easiest to use thestandard useful life for each class of asset. Divide the estimated useful life (yearly) by 1 to calculate the depreciation rate using the straight-line method. Multiply the depreciation rate by the cost of assets (minus salvage value). Once calculated, depreciation expense is recorded in accounting records as a depreciation expense account and a credit to the accumulated depreciation account. Accumulated depreciation is against assets. That is, it is paired with the fixed asset account and the depreciation is reduced. Formula:Depreciation = (Asset Cost – Net Residual Value) / Service LifeDepreciation rate = (annual depreciation cost x 100) / cost of capital Straight-line Journal Entries:1. Purchase of Assets A / c Dr. xxTo cash / bank / creditor A / cxx(Purchasing assets) 2. Depreciation of assets A / c Dr.xxTo asset A /cxx(Assets are subject to depreciation) 3. Transfer depreciation gains / losses A / c Dr. xxTo depreciation of asset A / cxx(Asset depreciation is transferred to the profit and loss account)Example 1Pensive Corporation will purchase a Procrastinator Deluxe machine for $ 60,000. It has an estimated salvage value of $ 10,000 and a useful life of 5 years. Pensive calculates the machine's annual flat-rate depreciation as follows: Solution$ 60,000 Purchase Cost – $ 10,000 Estimated Residual Value = $ 50,000 Depreciable Asset Cost 1/5-year useful life = 20% annual depreciation rate 20% depreciation rate x $ 50,000 depreciation asset cost = $ 10,000 annual depreciation Diminishing Balance MethodThe various depreciation methods are based on mathematical formulas. This formula is derived from a study of asset behaviour over a period of time. One such depreciation method is the depreciation method. Learn more about this method.According to the depreciation method, depreciation is charged at a fixed percentage of the book value of the asset. It is also known as depreciation or depreciation because its book value decreases each year.Since the book value decreases every year, the depreciation amount also decreases every year. This way, the value of the asset never goes to zero.If you plot the depreciation amount billed this way and the corresponding period on the graph, the line will move down.This method was previously based on the assumption that the cost of repairing an asset is low and therefore more depreciation costs must be charged. In addition, depreciation costs will decrease as repair costs increase in later years. Therefore, this method puts an equal burden on profits each year for the life of the asset.However, this method may not provide full depreciation at the end of the asset's useful life if the applicable depreciation rate is not appropriate.In addition, when applying this method, it is necessary to consider the period of use of the asset. If the asset is used for only two months in a year, depreciation will only be charged for two months.However, if the asset is used for more than 180 days for income tax purposes, you will be charged full-year depreciation. Income tax rules also allow you to depreciate using the depreciation method. The formula is:
Amount of depreciation=Book Value x Rate of Depreciation100 Q9) Explain change in depreciationA9) Accounting policies and principles need to be applied consistently when recording financial transactions. This is the principle of consistency. At the end of each fiscal year, management should consider depreciation methods. If there are significant changes in the pattern of future economic returns from the asset, the depreciation method will also need to change.Accounting Standard 1-According to the disclosure of accounting policies, changes in depreciation methods are changes in accounting estimates. Therefore, footnote quantification and full disclosure are required. You also need to disclose the legitimacy of the change and its economic impact.Therefore, the depreciation method can be changed without or with a retroactive effect. The lack of retroactive impact means that no adjustments have been made to past entries and only future depreciation will be billed in the new way. While having a retroactive effect, it means that the depreciation amount charged will be adjusted from the date of purchase of the asset. Q10) From the following details, we have prepared Madhu's balance sheet and finished 31st March, 2018. During the final account creation, the following adjustments were made:
Unpaid debt: salary Rs. 10,000; pay Rupees. 20,000; interest on bank overdraft Rs. Bank loan Rs 3,000 and interest. 6,000 Provide interest on capital@10%p.a. Bad debts reached Rs. Make provisions for bad debts of 10,000 and@10% to sundry debtors. Closing stock reached Rs. 1,20,000 Provide depreciation on car @10%p.a. Net profit for the year reached Rs. 96,000 after considering all the above adjustments. A10) In the book of MadhuBalance Sheet as on 31st March, 2018
Q1) Explain trading account.A1) Trading accountTrade and manufacturing operating companies deal with the sale and purchase of goods. Therefore, only the manufacturing and trading entities prepare the trading account. Service providers do not prepare for this.Advantages of preparing a trading account format
Particulars | Amount | Particulars | Amount |
To opening stock | xxx | By sales | xxx |
To purchase | xxx | Less: Returns | xxx |
Less: returns | xxx | By Closing stock | xxx |
To direct expenses: | xxx | By Gross loss c/d |
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Freight & carriage | xxx |
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Custom & insurance | xxx |
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Wages | xxx |
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Gas, water & fuel | xxx |
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Factory expenses | xxx |
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Royalty on production | xxx |
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To Gross profit c/d | xxx |
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Particulars | Amount | Particulars | Amount |
To Gross loss b/d | xxx | To Gross profit b/d | xxx |
Management expenses: | xxx | Income: | xxx |
To salaries | xxx | By Discount received | xxx |
To office rent, rates, and taxes | xxx | By Commission received | xxx |
To printing and stationery | xxx | Non-trading income: | xxx |
To Telephone charges | xxx | By Bank interest | xxx |
To Insurance | xxx | By Rent received | xxx |
To Audit fees | xxx | By Dividend received | xxx |
To Legal charges | xxx | By Bad debts recovered | xxx |
To Electricity charges | xxx | Abnormal gains: | xxx |
To Maintenance expenses | xxx | By Profit on sale of machinery | xxx |
To Repairs and renewals | xxx | By Profit on sale of investments | xxx |
To Depreciation | xxx | By Net Loss(transferred to Capital A/c) | xxx |
Selling distribution expenses: |
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To Salaries | xxx |
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To Advertisement | xxx |
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To Godown | xxx |
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To Carriage outward | xxx |
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To Bad debts | xxx |
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To Provision for bad debts | xxx |
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To Selling commission | xxx |
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Financial expenses: |
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To Bank charges | xxx |
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To Interest on loan | xxx |
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To Discount allowed | xxx |
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Abnormal losses: | xxx |
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To Loss on sale of machinery | xxx |
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To Loss on sale of investments | xxx |
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To Loss by fire | xxx |
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To Net Profit(transferred to capital a/c) | xxx |
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TOTAL |
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Section of the balance sheetTo be widely considered about the balance sheet of the division part of assets part of liabilities main capital. For each department: Assets section In the balance sheet, assets with similar characteristics are grouped. The mainly adopted approach is to divide assets into current and non-current assets. Liquid assets include cash and all assets that can be converted into cash or expected to be consumed in a short period of time–usually one year. Examples of current assets include cash, cash equivalents, accounts receivable, prepayment costs or prepayment, short-term investments and inventories. All assets that aren't listed as current assets are grouped as non-current assets. A common feature of such assets is that they continue to provide profit for a long time-usually more than one year. Examples of such assets include long-term investments, equipment, plants and machinery, land and buildings, and intangible assets. Debt DivisionA debt is an obligation to a party other than the owner of the business. They are grouped as current and long-term liabilities in the balance sheet. Current liabilities are obligations that are expected to be met within a one-year period by using current assets of the business or by providing goods or services. Owner's equity divisionThe owner's interest is the obligation of the business to its owner. The term owner's equity is mainly used in the balance sheet of a business in the form of a sole proprietor and partnership. In the balance sheet of the company the term “ownership interest “is often replaced by the term “shareholder interest".When the balance sheet is created, the liabilities section appears first, and the owner's equity section appears later.Balance sheet format there are two formats on the balance sheet that present Assets, Liabilities and owner's ' equity–the account format and the report format.
Assets | $ | Liabilities & Stockholder’s equity | $ |
Current assets: Cash Account receivable Prepaid building rent Unexpired insurance Supplies
Total current assets
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85,550 4,700 1,500 3,600 250
| Liabilities: Notes payable Accounts payable Salaries payable Income tax payable Unearned service revenue
Total liabilities |
5,000 1,600 2,000 3,000 4,400
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95.600 | 16,000 | ||
Non-current assets: Equipment 9,000 Acc. dep. –Equipment 3,600
Total assets |
5,400
| Stockholder’s equity: Capital stock 50,000 Retained earnings 35.000
Total liabilities & stockholder’s equity
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85,000
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101,200 | 101,000 | ||
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Assets Current assets:
Cash Account receivable Prepaid building rent Unexpired insurance Supplies
Total current assets
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85,500 4,700 1,500 3,600 250
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95,600
| |
Non-current assets: Equipment 9000 Acc. Dep- Equipment 3600
Total assets
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5,400
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101,000
| |
Liabilities & Stockholder’s Equity Liabilities Notes payable Accounts payable Salaries payable Income tax payable Unearned service revenue
Total liabilities
|
5,000 1,600 2000 3000 4,400
|
16,000 | |
Stockholder’s equity: Capital stock Retained earning
Total stockholder’s equity
Total liabilities and stockholder’s equity |
50,000 35,000
|
85,000
| |
101,00 |
Rs | |
| By Sales |
| By Trading Stock |
Liabilities | Rs | Assets | Rs |
|
| Closing Stock |
|
|
|
| Rs |
TO Rent Account Add: Outstanding | [11 month rent] [December] | 11,000 1,000 |
12,000 |
Liabilities | Rs | Assets |
|
Outstanding Expenses: Rent |
1,000 |
|
|
Balance Sheet | ||||||||
|
| By Interest on investment Add: Interest accrued | …… 1,200 |
|
Liabilities | Rs | Assets | Rs |
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| Interest accrued | 1,200 |
|
| Rs | Rs |
| By Apprentice Premium Less: Received in advance | 6,000 4,000 |
2,000 |
Liabilities | Rs | Assets | Rs |
Apprentice Premiu received in advance | 4,500 |
|
|
| Rs. |
|
To Depreciation a/c Furniture | 2,500 |
|
Liabilities | Rs | Assets |
| Rs |
|
| Furniture Less: Depreciation | 50,000 2,500 |
47,500 |
| Rs |
|
TO Bad Debts To Reserve for doubtful Debts | 1,000 1,000 |
|
Liabilities | Rs | Assets | Rs |
|
|
| Sundry Debtors Less: Bad Debts
Less: Provision for Doubtful Debts | 21,000 1,000 |
19,000 |
20,000 | ||||
1,000 |
| Rs |
|
To ad Debts To Reserve for Doubtful Debts To Reserve for Discount on Debtors |
1,000 380 |
|
Liabilities | Rs | Assets |
| Rs |
|
| Sundry Debtors Less: Provision for Doubtful on Debts
Less: Provision for Doubtful Debts | 20,000 1,000
19,000 380 |
18,620 |
| Rs |
| Rs |
|
| By Reserve for Discount on Creditors | 300 |
Liabilities | Rs |
|
|
|
Sundry Debtors Less: Reserve for Discount | 10,000 300 |
9,700 |
|
|
So, the interest charged is a loss to the business and a profit to the owner. Thus, it is debited to profit and loss a/c and added to the capital of the balance sheet. Adjusting entries: a) Interest on Capital a/c Dr. To Capital a/cb) Profit and Loss a/c Dr. To Interest on Capital a/c 10. Interest in drawing:The drawing is the money that the owner has withdrawn from the capital. It charges interest on the drawing so that it allows business interest on capital. It's a profit to the business and a loss to the owner. Thus, it is credited to profit and loss a/c and deducted from the capital on the balance sheet.Profit and Loss Account
| Rs |
| Rs |
To Interest on Capital |
| By Interest on Drawings |
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Capital Add: Interest on Capital Less: Drawings Interest on Drawings |
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7. Committee of managers:Business companies sometimes offer profit incentives to managers in the form of commissions to motivate people to increase business profits. This fee is given as a percentage of net profit. There are two ways to provide this percentage of net profit.(a) The percentage of the commission against net profit before charging such fees;(b) The percentage of fees to net income after invoicing such fees; 8. Specific hidden tweaks:The adjustments are not given explicitly under the array of adjustments, but they need to be placed and adjusted. For example,the balance displays the subsequent items alongside other items at the top of Dec31, 2009: DR Cr10% loan January 1, 2009 - - Interest on loan 3,000 -(Paid during the year) If we carefully observe loans are obtained in March 1, 2009 at a rate of interest of 10%. That is, the interest paid on a one-year loan in December31, 2009 (Rs.50, 000×10/100) rupees.5, 000. But the interest paid is only Rs.3, 000 as shown in the trial balance. This indicates that interest is not paid (Rs.5, 000-3,000-2,000. Therefore, this should be considered as an adjustment. The entry is – Profit and Loss A/c Dr 2,000TO Interest payable A/c 2,000 Here, the total interest charged to the profit and loss account is Rs.Will you be given 3,000 trial balances plus interest expense? 2,000, which is completely equivalent to Rs.5,000. Interest expense Rs.2,000 will appear as liabilities on the balance sheet.Please note that there are many adjustments to different types of courses and preparations for the final. Their treatment is explained when they appear. WorksheetWhen all the necessary information for financial reporting is ready (that is, information on the trial balance and adjustment, officially aggregated without errors), the accountant prefers to draft a work sheet. The worksheet is a rough work and is not part of the financial statements. The worksheet is provided for convenience to ensure that the financial statements prepared in the debit and credit columns representing the trial balance, adjusted, adjusted trial balance, trading account, profit and loss account and balance sheet are in order. Q5) From the following ledger balance presented by Sen. on 31st March, 2016 prepare a trading account:Particulars | Rs | Particulars | Rs |
Stock(1-4-2015) Purchase Wages Carriage inwards Freight inward | 10,000 1,60,000 30,000 10,000 8,000 | Sales Returns inward Return outward Gas and Fuel | 3,00,000 16,000 10,000 8,000 |
Particulars | Rs | RS | Particulars | Rs | Rs |
To Opening Stock To purchase Less: Return outwards To wages Add: Outstanding To carriage inwards To freight inwards To Gas and fuel Less: Prepaid To Gross profit c/d |
1,60,000 10,000 | 10,000
1,50,000
34,000 10,000 8,000
7,000 85,000
| By Sales Less: Returns inward BY Closing Stock | 30,00,000 16,000 |
2.84,000 20,000
|
| |||||
30,000 4,000 | |||||
8,000 1,000 | |||||
| |||||
3,04,00 | |||||
3,04,00 | |||||
|
|
Particulars | Rs | Particulars | Rs |
Gross profit Rent paid Salaries Commissions (Cr.) Discount received Insurance Premium paid | 1,00,000 22,000 10,000 12,000 2,000 8,000 | Interest received Bad debts Provisions for bad debts(1-4-2016) Sundry debtors Buildings | 6,000 2,000 4,000 40,000 80,000 |
Particulars | Rs | RS | Particulars | Rs | Rs |
To Rent Add: Outstanding (22,000x1/11) To Salaries Add: Outstanding To Insurance premium
Less: Prepaid insurance To Provision for bad and doubtful debts(closing)
Add: Bad debts Add: Further bad debts
Less: Opening provisions for bad and doubtful debts To Depreciate on building (80,000 x 10%)
To Net profit (transferred to capital A/c)
| 22,000 2,000 |
24,000
14,000
6,000
2,900 8,000 | By Gross profit b/d By Commission
Less: Received in advance By Discount received By interest received Add: Accrued | - 12,000 2,000 | 1,00,000
10,000 2,000
8,000
|
10,000 4,000 | 6,000
2,000 | ||||
8,000 2,000 | |||||
1,900 2,000 3,000
| |||||
6,900
4,000 | |||||
| |||||
65,100 | |||||
1,20,000 | |||||
1,20,000 |
Particulars | Rs | Particulars | Rs |
Stock on 01.01.2016 Purchase Sales Expenses on purchase Bank charges paid | 9,000 22,000 42,000 1,500 3,500 | Bad debts Sundry expenses Discount allowed Expenses on sale Repairs on office furniture | 1,200 1,800 1,700 1,000 600 |
Particulars | Rs. | Particulars | Rs |
To Opening stock To Purchase To Expense’s on purchase To Gross profit c/d
To Bank charges To Bad debts To Sundry expenses To Discount allowed TO Expense on sale To Repairs on office furniture TO Manager’s commission To Net profit (transferred to capital A/c) | 9,000 22,000 1,500 14,000 | By Sales By Closing stock
By Gross profit b/d | 42,000 4,500
|
46,500 | 46,500 | ||
3,500 1,200 1,800 1,700 1,000 600 200 4,000
| 14,000
| ||
14,000 | 14,000 |
|
Particulars | Rs | Particulars | Rs |
Capital Drawings Cash in hand Loan from Bank Bank over draft Investment Bills receivables | 2,00,000 40,000 15,000 40,000 20,000 20,000 10,000 | Sundry creditors Bill payable Goodwill Sundry debtor Land and Building Vehicles Cash at bank | 40,000 20,000 60,000 80,000 50,000 80,000 25,000 |
Particulars | Rs | Rs | Particulars | Rs | Rs |
Capital Add: Net profit Add: Interest on capital
Less: Drawings Loan from bank
Add: Interest outstanding Bills payable Sundry creditors Bank overdraft Add: Interest outstanding
Outstanding liabilities Salaries Wages | 2,00,000 96,000 20,000 |
2,76,000
46,000 20,000 40,000
23,000
30,000
| Good will Land and Building Vehicles Less: Depreciation
Investment Stock in trade Sundry debtors Less: Bad debts
Less: Provision for bad and doubtful debts
Bills receivable Cash at bank Cash in hand |
80,000 8,000 | 60,000 50,000
72,000 20,000 1,20,000
63,000
10,000 25,000 15,000
|
3,16,000 40,000 | |||||
80,000 10,000 | |||||
40,000
6,000 | |||||
20,000 3,000 | 70,000
7,000 | ||||
10,000 20,000 |
| ||||
4,35,000 | |||||
| 4,35,000 |
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