Chapter 4 Financial Statements
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Transcript of 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
Total XXXX Total XXXX
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
Total XXXX Total XXXX
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. Debit side of P & L
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
liabilities side of B/S.
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
liabilities side of B/S.
14. Commission
payable to
manager
P & L A/c Dr.
To Commission payable
to Manager A/c
a. Debit side of P & L
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
liabilities side of B/S.
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
purchases in Trading
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
purchases in Trading
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
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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
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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
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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.