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 statements are 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, and ii. 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 given period 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.

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 to write 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 the intangible 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 to meet 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.

iii. iv. v. vi.

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. 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. Accidents. Accidents may also cause a permanent fall in the useful life as well as in the value of assets. 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 Asset Disposal 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 the account 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 or diminution 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, for outstanding 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.

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 to face 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

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 dividend equalization 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 for distribution. 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.

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 It is created out of capital profits. profits. 2. Use General reserve can be Capital reserve are used to used for any purpose. meet capital losses or Specific reserves can be purpose specified in the used for specific purpose Companies Act. only. 3. Dividend Dividend can be Generally, no dividend can distributed out of general be distributed out of reserves and dividends capital reserves. equalization reserve. Q.84 Distinguish between Reserves and Provisions. Ans. Difference between Reserves and Provisions. Basis of difference Reserves 1. A charge or an A reserve is an Appropriation appropriation of profit. 2. Objective A reserve is created to strengthen the financial position of the firm. 3. Debited to A reserve is debited to Profit & Loss Appropriation Account. 4. Effect on profits A reserve reduces divisible profits. 5. Balance Sheet A reserve is shown on the liability side of the

Provisions A provision is a charge against the profits. A provision is created to meet a specific and known liability. A provision is debited to Profit & Loss account. A provision is reduces net profits. A provision is usually deducted from the asset

6. Distribution of profits 7. General and specific 8. Necessity

balance sheet. A reserve can distributed as profits.

be

A reserve may be general or specific. Creation of reserve is discretionary and not must.

concerned. A provision can never be utilized for the distribution of profits. A provision is always specific. 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 the bearer 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 with bank 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 bills receivable. 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?

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 or sold 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

Basis of difference 1.Objective 2. Period

3. Earning capacity

Capital Expenditure It is incurred for the purchase of tangible and intangible fixed assets. Capital expenditure benefits the firm for long period, usually more than one year. Capital expenditure increases the earning capacity of the business.

4. Accounting

5. Depreciation

Revenue Expenditure It is incurred for the conduct of day-to-day business activities. The benefits of revenue expenditure are derived immediately or within one year. It does not increase the earning capacity. It is incurred for generating revenue and maintaining the fixed assets. Capital expenditure is Revenue expenditure is shown as an asset in the shown on the debit side of Balance Sheet. Trading and Profit & Loss A/c. Depreciation is charged No depreciation is charged on capital expenditure. on revenue expenditure as it 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 on the presumption that it will be of benefit over a subsequent period or periods. These are 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 year to 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 the debit 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

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.

Performa for Trading Account

Particulars To Opening Stock To Purchases Less : Purchase Return To Carriage Inward To Mfg. Expenses To Wages To Gross Profit Total Amount Particulars XXX XXX XXX XXX XXX XXX XXX XXXX By Closing Stock By Gross Loss Total XXX XXX XXXX By Sales Less : Sales Returns Amount XXX XXX

.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

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.

2. Items

3. Sequence

Opening Stock, net purchases, direct expenses, net sales and closing stock are shown in Trading Account. Trading Account is the first part of income statement. The balance of trading account, i.e., gross profit or gross loss is transferred to Profit and Loss Account.

4. Transfer of balance

Gross Profit/ Gross Loss, other income and gains, and all indirect expenses are shown in Profit and Loss Account. Profit & Loss Account is second part of income statement and prepared after trading account. The balance of Profit and Loss Account, i.e., net profit or net loss is transferred to capital account.

Performa for Profit and Loss Account Particulars To Gross Loss To To To To To To To To To To To To To To To To To To To To To Travelling Expenses Printing and Stationery Discount allowed Depreciation Office Expenses Salary Interest Telephone Expenses Electricity Expenses Carriage outwards Advertisements Postage Rent Insurance Freight Bad debts General Expenses Rates and Taxes Repairs and maintenance Manager's remuneration Salesmens commission Amount Particulars XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX Total XXXX By Gross Profit By discount received By interest received By other misc incomes Amount XXX XXX XXX XXX

To Net profit

By Net Loss Total

XXX XXXX

Performa for Balance Sheet

Liabilities Capital Add : Net Profit Add : Capital introduced Less: Drawings Less: Capital withdrawn Less: Net Loss Creditors Loan from Bank Other Mortgage loans Bills Payable Outstanding Expenses Income received in advance Amount Assets Amount

XXX Fixed Assets : XXX XXX Building XXX XXX Furniture XXX XXX Vehicles XXX XXX Plant and MachineryXXX XXX Fittings XXX Computers XXX XXX XXX Current Assets XXX XXX Debtors XXX XXX Prepaid Expenses XXX XXX Cash in hand XXX XXX Cash at bank XXX Bills Receivables XXX Advances given XXX Income due but not received XXX XXXX Total XXXX

Total

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 administrative expenses + 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-finished goods 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 have Intangible assets have no physical existence. physical existence. 2. Fixed vs. Current Tangible assets may either These are usually fixed fixed or current assets. assets. 3. Depreciation or Depreciation is charged Intangible assets are amortisation on fixed tangible assets. amortised. 4. Acceptance as security. Lenders assept tangible Intanible assets are assets as security against generally not accepted as loan advanced. security for a loan advanced. 5. Risk of loss by fire, Such assets may be These assets cannot be accident, etc. lost/destroyed by fire, lost/destroyed by fire, accident, etc. 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:

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 It is prepared to show the arithmetical accuracy of financial position of the the books of accounts. business. 2. Format Trial balance has two Balance sheet has two columns. One shows sides. One shows accounts with their debit liabilities and the other balance and the other credit balance. shows assets. 3. Contents All the accounts are Only personal and real shown in a trial balance. accounts are shown in a balance sheet. 4. Period A trial balance prepared Balance sheet is prepared normally every month or usually at the end of the whenever desired. accounting year.

5. Relation with Profit and Profit & Loss Account is Loss Account prepared with the help of trial balance. 6. Result of the business It is not possible to know the result of the business just by seeing a trial balance. 7. Closing stock 8. Necessity 9. Adjustments

10. Evidence

It is usually not shown in a trial balance. It is not compulsory to prepare a trial balance, but it is indispensable. A trial balance is prepared without making any adjustment, such as unpaid and prepaid expenses. A trial balance is not It is accepted as accepted as documentary documentary evidence by evidence by the court. the court and other government departments.

Balance sheet is prepared after preparing Profit & Loss account. Result of the business (net profit or net loss) is adjusted in the capital and thus may be shown in balance sheet. It is shown on the asset side of the balance sheet. It is a part of final accounts and is necessary to prepare. A balance sheet cannot be prepared without making adjustments.

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 called manufacturing account or production account. Various components of cost of production, 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 Adjustments No. 1. Closing Stock Adjustment Entries Closing Stock A/c To Trading A/c Dr. Treatment in Final Accounts Credit side of Trading A/c. Show on the assets side of B/S a. Add to the concerned item on the Debit side

2.

Outstanding or Expenses A/c Dr. unpaid expenses To Outstanding exp.

3.

Prepaid expenses (or Une\xpired expenses)

4.

Accrued income

5.

Unearned Income (Income received in advance) Depreciation

6.

7.

To write off bad debts Provision for bad and doubtful debts Provision discount debtors Provision discount creditors for on for on

8.

9.

10.

of Trading/Profit & Loss A/c. b. Liability side of balance sheet. Prepaid Expenses A/c Dr. a. Deduct from the To Expenses A/c concerned expenses on the debit side of Profit & Loss A/c. b. Show on the assets side of B/s. Accrued Income A/c Dr. a. Add to the concerned To Income A/c income on Credit side of Profit and Loss A/c. b. Show on the assets side of B/S. Income A/c Dr. a. Deduct from the concerned To Unearned Income A/c income on the credit side of Profit & Loss A/c. b. Show on the liabilities side of B/S. Depreciaton A/c Dr. a. Show on the debit side To Asset A/c of Profit & Loss A/c. b. Deduct from the concerned asset in the Balance Sheet. Bad Debts A/c Dr. a. Debit side of P & L To Debtors A/c A/c. b. Deduct from debtors on the assets side of B/S. P & L A/c Dr. a. Debit side of P & L To Provision for Bad Debts A/c. A/c b. Deduct from debtors on the assets side of B/S P & L A/c Dr. Debit side of P & L A/c. To Provision for Deduct from debtors on Discount on Debtors assets side of B/S. A/c Provision for discount on Credit side of P & L A/c. creditors A/c Dr. Deduct from creditors on To P & L A/c the liabilities side of

11.

Interest on Capital Interest Drawing

Interest on Capital Dr. To Capital A/c

A/c

12. 13.

on Capital A/c Dr. To Interest on Drawing A/c Interest payable on Interest on Loan A/c Dr. loans (borrowed) To Loan A/c Commission payable manager P & L A/c Dr. to To Commission payable to Manager A/c

14.

B/S. a. Debit side of P & L A/c. b. Add to capital on the liabilities side of B/S. Credit side of P & L A/c. Deduct from capital on the liabilities side of B/S. a. Debit side of P & L A/c. b. Add to loan on the liabilities side of B/S. a. Debit side of P & L A/c. b. Show on the liabilities side of B/S. 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.

15. (a)

Abnormal loss of goods by fire, theft, accident, etc. For gross loss Loss of Goods by. A/c Dr. To Trading A/c (or) To Purchases A/c

(b)

For insurance Insurance Claim Dr. claim accepted, if To Loss of Goods by.. any A/c For net loss P & L A/c Dr. To Loss of Goods by.. A/c Goods-in-Transit A/c Dr. To Trading A/c.

(c) c. Insurance Claim: Assets side of B/S.

16. 17. (a)

Goods in Transit

Credit side of Trading A/c. Show on the asset side of B/S. a. Sale price: it will be deducted from sales as well as from debtors b. Cost: Add to closing

Goods sold on sale or return basis For Sale price Sales A/c Dr. To Debtors A/c

(b) 18. (a)

For cost of goods

Stock A/c Dr. Stock. To Trading A/c Abnormal loss of fixed assets by fire, theft, accident, etc. For gross Loss Loss of Asset by.A/c a. Gross Loss: Deduct Dr. from respective To Assets A/c asseton the assets side of B/S. For insurance Insurance Co. Dr. claim accepted, if To Loss of Asset by. any A/c For Net Loss b. Net Loss: Debit side of P & L A/c.

(b)

(c) 19.

20.

21.

22.

23.

P & L A/c Dr. b. Insurance Claim; To Loss of Asset by Assets side of B/S. A/c Goods taken by Drawing A/c Dr. a. Deduct the amount of the proprietor for To purchases A/c goods from the his personal use purchases in Trading A/c. b. Deduct the amount from the capital on the liabilities side of B/S. Goods given as Charity A/c Dr. Deduct the amount from charity To Purchases A/c the purchases on the debit side of Trading A/c. Shown on the debit side of P & L A/c. Goods distributed Advertising A/c Dr. Deduct the amount of as free Samples To Purchases A/c goods from the purchases in Trading A/c. Show on the debit side of P & L A/c. Use of goods in Asset A/c Dr. a. Deduct the amount of construction of an To Purchases A/c goods from the asset for use in purchases in Trading business A/c. b. Add to respective asset on assets side of B/S. To write off Profit & Loss A/c Dr. Show the amount to be

deferred revenue To Deferred Rev. Expenses expenditure 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 Balance Sheet from the following balances and adjustments :

Particulars Purchases /Sales t Cash in hand bs Cash in bank bs Stoct as on 01.01.97 t Wages t Returns t Repairs pl Debtors/ Creditors bs Bad Debts pl Loan (12% p.a.) bs Discounts pl Capital bs Interest on loan pl Salaries pl Sales Tax pl Octroi t Insurance pl Charity pl Rent pl Machinery bs Total

Debit Rs. 1,30,295 500 9,500 40,000 22,525 2,400 1,675 30,00 2,310 800 600 8,000 800 500 1,000 125 2,000 16,000 2,69,030

Credit Rs. 1,80,500

195 30,305 20,000 530 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,

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 Trading and Profit & Loss Account for the year ending on 31st December, 1994 and a Balance Sheet as on that date: Particulars Capital Drawing Debtors and Creditors Loan from bank Interest on Loan Cash in hand Provision for bad debts Stock (1.1.1994) Motor Vehicle Cash at Bank Land and building Purchases and Sales Returns Carriage Outwards Carriage Inwards Salaries Rent and Insurance General Expenses Bad Debts Discount Bills Receivable and Payable Rent received Total Debit Rs. -5,000 20,000 -300 2,000 --6,800 10,000 3,500 12,000 66,000 8,000 2,500 3,000 9,000 3,000 6,900 500 -6,000 1,64,500 Credit Rs. 30,000 ---10,000 9,500 ----700 1,10,000 1,500 ------

500 2,000 300 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% per annum, c) Salaries outstanding Rs. 200,

d) Prepaid insurance Rs. 200, e) Provision for bad debts is to be maintained at 5% on debtors.

Q. and date

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

Debit Balance Cash Opening stock Wages Purchases Return Inwards Repairs Bad debts Interest on Loan Salaries Sales Tax Octroi Insurance Charity Rent Machinery Debtors Total

Rs. 10,000 40,800 22,525 1,30,295 2,400 1,675 2,310 600 8,000 800 500 1,000 125 2,000 16,000 30,000 2,69,030

Credit Balances Sales Returns Loan @ 12% (1-1-97 ) Creditors Discount Capital

Rs. 1,80,500 195 20,000 30,305 530 37,500

2,69,030

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. Loss

From the following balances of Mr. Madan Mohan prepare Trading and Profit and A/c for the year ending 31st December, 1997 and a Balance Sheet as on that date : Rs. 10,000 40,800 22,525 1,30,295 2,400 1,675 2,310 600 8,000 800 500 1,000 Credit Balances Sales Returns Loan @ 12% (1-1-97) Creditors Discount Capital Rs. 1,80,500 195 20,000 30,305 530 37,500

Debit Balances Cash Opening stock Wages Purchases Return Inwards Repairs Bad debts Interest on loan Salaries Sales Tax Octroi Insurance

Charity Rent Machinery Debtors (including Ashok for Dishonoured bill of Rs. 800)

125 2,000 16,000 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. 40,925 c) 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 Debtors g) 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 the necessary adjustments. Particulars Trader expenses Freight and duty Carriage outwards Sundry debtors Furniture & Fixtures Return Inwards Printing and Stat Rent, Rates & Taxes Sundry creditors Sales Return outwards Postage & Telegrams Rs. 800 2,000 500 20,600 5,000 2,000 400 4,600 10,000 1,20,000 1,000 800 Particulars Purchases Stock Plant (1.1.2000) Plant (additions on 1.7.2000) Drawings Capital Reserve for Doubtful Debts Rent for premises sublet Insurance Salaries & wages Cash in hand Cash in Bank Rs. 82,000 15,000 20,000 5,000 6,000 80,000 800 1,600 700 21,300 6,200 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.

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 a Balance Sheet as on that date from the following Trial Balance: Rs. 1,700 12,000 2,600 3,600 2,000 800 2,600 800 190 1,600 Debit Balances Rent Misc. Expenses Bad debts Carriage Inwards Credit Balances Creditors Sales Interest Commission Capital Rs. 450 150 500 160 Rs. 2,000 4,200 1,350 1,600 20,000

Debit Balances Drawings Plant & Machinery Horse & carts Debtors Purchases Wages Cash at Bank Salary Repairs Opening Stock

Adjustments: i. Closing Stock Rs. 1,600 ii. 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. 150 vi. 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 following information : Dr. Balances Stock on 1-1-99 Purchases Carriage Wages Rs. 42,000 68,250 600 12,000 Cr. Balances Sales Loans Discount Commission Rs. 96,170 60,000 850 680

Power Furniture & fixtures Investments Free hold premises Travelling expenses Debtors Interest Bill receivabel Tools Plant & macinery Bad debts Drawing

1,800 Sundry creditors 4,000 Capital 6,000 Provision for bad debts 15,000 900 1,000 400 1,800 7,000 30,000 200 3,000

6,000 30,000 250

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 Capital Drawings Plant and machinery Horses and Carts Debtors Creditors Purchases and sales Wages Cash at bank Salaries Repairs Stock Rent Manufacturing expenses Bills Payable Bad debts Carriage Dr.(Rs. ) 1,700 12,000 2,600 3,600 2,000 800 2,600 800 190 1,600 450 150 500 160 2,600 4,200 Cr. ( Rs. ) 20,000

2,350

29,150

29,150

The following adjustments are to be made : a) Closing stock Rs. 1,600 b) 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 Opening stock on 1.1.1992 Cash at bank Purchases and sales Returns Buildings Capital Account Furniture and fittings Debtors and Creditors Bad debts reserve Petty cash and stamps in hand Carriage inwards Salaries Sundry trade expenses Interest charged by bank Insurance premium paid for a year upto 30.6.93 Telephone charges Commission

Dr. Rs. 10,000 4,000 70,000 3,000 30,000 7,000 30,000 200 800 11,000 6,000 500 1,000 500

Cr. Rs. 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.

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 on remaining debtors. d) Commission received in advance Rs. 1,000.