BPOI-102

Fundamentals of
Indira Gandhi National Open University
School of Vocational Education & Training
Accounting

Part II
Final Accounts and Corporate Financial Statements

BLOCK 3
Financial Statements 3
BLOCK 4
Preperation of Corporate Financial Statements 59
 BPOI-102
Fundamentals of
Indira Gandhi
National Open University
Accounting
School of Social Work

Block 3
Financial Statements
UNIT 8
Accounting Concept of Income, Expenditure and 5
Receipts
UNIT 9
Final Accounts of Business Organization (Sole Trader) 17
UNIT 10
Adjustments in Final Accounts 51
UNIT 11
Final Accounts with Adjustments 74
Programme Design Committee
Prof. V. N. Rajasekharan Pillai Mr. Sanjay Dutt Prof. M.S. Senam Raju
Vice-Chancellor & Chairman MIC, Senior Vice President, Accenture Editor & Course Coordinator
IGNOU, New Delhi India & Ex Member, MIC Member SOMS, IGNOU New Delhi
Mr. Pankaj Vaish Mr. Sanjay Seth Mr. Ravi Gupta
Managing Director DCN BPO Senior Vice President, Accenture Vice President, Accenture India
Accenture India Mr. Arunima Kumar
Mr. P. G. Raghuraman Mr. Kannan Sundaresan General Manager, Accenture India
India BPO Lead Accenture India Lead. Finance BPO. Accenture Snehal Bhatt
& Member, MIC India & Member, MIC Manager, Accenture India
Dr. Latha Pillai Prof. P. S. Zacharias Prof. C. G. Naidu, Director
Pro Vice-Chancellor, Member, MIC Ex Vice-Chancellor & Member, MIC Program Coordinator
IGNOU, New Delhi Goa University SOVET, IGNOU, New Delhi
Course Expert Committee
Prof. C. G. Naidu, Director Prof. N.K. Majeshwari (Retd.) Mr. Manish Rustagi
Program Coordinator Principal, Somani College of Vice President, Accenture India
Commerce, SOVET, IGNOU Jodhpur
New Delhi Ms. Arunima Kumar
Prof. J. R. Monga
Sriram College of Commerce General Manager, Accenture India
Prof. A. K. Malhotra
Universaity of Delhi Ansal Institute of Technology, Mr. Snehal Bhatt
Gurgaon Manager, Accenture India
Prof. Obul Redy (Retd.)
Accenture Subject Matter Experts
Osmania University, Hyderabad Mr. Venkatraman Girish
Ms. Sudha Subramanian
Director, KPO, Academy, Bangalore
Dr. Sunil Kumar Gupta Mr. Chittaranjan Das
Editor & Course Coordinator Mr. P.K. Singh Mr. Haresh Rao
SOMS, IGNOU, New Delhi Director, Skillspan, New Delhi Mr. Sukhpreet Singh
Mr. Madhusudhan Dorasala
Prof. B.M. Lal Nigam (Retd.) Ms. Deepika Bhattacharya Mr. Brijesh Srivastava
Delhi School of Economics Vicwe President, Accenture India Mr. Kishan Bhat
University of Delhi Mr. Manoj Gupta
Prof. M.S. Senam Raju
Prof. R.K. Grover (Retd.) Mr. Srinivas Varanasi
SOMS, IGNOU
SOMS, IGNOU, New Delhi Mr. Pravin Krishnan Babu
Prof. C.S. Savita Mr. David Vinod
Shyamlal College, University of Delhi Mr. Praveen Kumar
Mr. Karthikeyan Shankaran
Mr. Bennet Solomon
Programme Revision Committee
Prof. Sanjeev Mittal Mrs. Deepika Bhattacharya Prof. M. S. Senam Raju
GGSIPU, New Delhi Vice President, Accenture India SOMS, IGNOU, New Delhi
Prof. Nawal Kishor Prof. Anju S. Gupta (SOH) Prof. P. V. Suresh
SOMS, IGNOU Director I/c, SOFL, IGNOU Director, SOCIS, IGNOU
Prof. C.G. Naidu Prof. R S P Singh Dr. Geetika S Johry
SOVET, IGNOU Director, SOVET,IGNOU (Programme Coordinator)
Mr. Ravi Rama Krishnan SOVET
Director, R Value, New Delhi
Course Revision Team
Course: BPOI-102 Course Updated and Edited Format Editing
Prof. M.S. Senam Raju, SOMS Prof. R S P Singh, SOVET
(Unit 1-13) Dr. Geetika S Johry, SOVET Dr. Geetika S Johry, SOVET
Language Editing Course and Proof Reading Coordinator
Dr. Geetika S Johry Dr. Geetika S Johry
SOVET, IGNOU SOVET, IGNOU
Mrs. Promila Soni
Assistant Registrar
MPDD, IGNOU
June, 2023

© Indira Gandhi National Open University, 2023

ISBN:

All rights reserved. No part of this work may be reproduced in any form, by mimeograph or any other means,
without permission in writing from the Indira Gandhi National Open University.

Further information on the Indira Gandhi National Open University courses may be obtained from the
University’s office at Maidan Garhi, New Delhi-110 068 or the official website of IGNOU at www.ignou.ac.in.

Figures in Unit 6 contributed by Ms. Meghana Segare and Mr. Aayush Salvi.

Printed and published on behalf of Indira Gandhi National Open University, New Delhi by the Registrar, MPDD,
IGNOU, New Delhi.

Laser Typeset by: Gita Offset Printers Pvt. Ltd., C-90, Okhla Indl. Area, Phase-I, New Delhi-20
Final Accounts and
Corporate Financial PART II FINAL ACCOUNTS AND
Statements
CORPORATE FINANCIAL
STATEMENTS
After recording and posting all business transactions in the books of account at
appropriate place and testing the arithmetical accuracy of these records with help of a
Trial Balance, and after location & rectification of errors we prepare the final accounts
consisting of Trading & Profit and Loss Account and Balance Sheet of the small business
unit. The Corporate Financial Statements are prepared under Part I and Part II of
schedules VI of Indian Companies Act, 1956.
In case of corporate entities preparation of financial statements is different from the sole
trading and partnership. It is mandatory to prepare the corporate financial statements
as per the Part I and Part II of schedule VI of the Companies Act, 1956. Thus Part II
of this course is devoted to Final Accounts and Corporate Financial Statements. This
part consists of the following 6 Units
Unit 8 Accounting Concept of Income, Expenditure and Receipts describes the
meaning, objectives and measurement of the business income, it also explains the nature
of capital and revenue expenditure, receipts, profits and losses along with their accounting
treatment while preparing the final accounts for preparing corporate financial statements.
Unit 9 Final Accounts of Business organisation (Sole Trader) discusses about the
gross profit and loss which arises out of the comparison of expenditure and income of
a particular period. It also explains the purpose and format of balance sheet and discusses
about various assets and liabilities to be recorded under different heads in the Balance
Sheet.
Unit 10 Adjustments in Final Accounts explains nature of various adjustments and
their accounting treatment in preparation of final accounts.
Unit 11 Final Accounts with Adjustments discusses various types of adjustments
which arise out of omission of recording the business transactions in the books of accounts
or recording wrong transactions.
Unit 12 Provision and Reserves deals with the meaning and purpose of provision
and reserves and discusses the different types of reserves that are usually created by
business firms.
Unit 13 Final Account of Company deals with the provision of Companies Act,
1956 which are related to the disclosure of financial information and gives the prescribed
format under Part II of Schedule VI. It also discusses the prescribed format of balance
sheet under Part I of Schedule IV.

6
 Accounting Concept of
UNIT 8 ACCOUNTING CONCEPT OF Income, Expenditure and
INCOME, EXPENDITURE AND Receipts

RECEIPTS
Structure
8.0 Objectives
8.1 Introduction
8.2 Meaning of Business Income
8.3 The Objectives of Income Measurement
8.4 Distinction between Capital and Revenue
8.5 Capital and Revenue Expenditures
8.5.1 Capital Expenditure
8.5.2 Revenue Expenditure
8.5.3 Revenue Expenditure Becoming Capital Expenditure
8.5.4 Deferred Revenue Expenditure

8.6 Capital and Revenue Receipts

8.7 Capital and Revenue Profits
8.8 Capital and Revenue Losses
8.9 Let Us Sum Up
8.10 Key Words
8.11 Answers to Check Your Progress
8.12 Terminal Questions / Exercise

8.0 OBJECTIVES
After studying this unit, learner should be able to:
 explain the meaning of business income and its procedure for measurement;
 describe the features and limitations of business income;
 identify the Capital and Revenue Expenditure, Capital and Revenue Receipts;
 identify capital and revenue profits/loss;
 describe the circumstances under which revenue expenditure become capital
expenditure;
 explain the meaning of deferred revenue expenditure; and
 identify correctly whether an item is of capital or revenue in nature.

7
Final Accounts and
Corporate Financial 8.1 INTRODUCTION
Statements
In the previous Units, you have already learnt about the procedure of recording and
posting various business transactions in the appropriate books of accounts and testing
the arithmetical accuracy of these records with the help of a trial balance.
Having recorded the transactions and tested the accuracy of books of accounts, we
prepare a summary at the end of the accounting period to ascertain the profit or loss
(also called income statement) and a balance sheet (also called Position Statement).
Before you can prepare these statements, it is necessary to understand the basic concepts
of income, expenditure and receipts which guide their preparation. Therefore in this
Unit you will learn about these concepts and try to understand how they influence the
final accounts.

8.2 MEANING OF BUSINESS INCOME

The primary purpose of a business enterprise is to earn income (or profit). Although the
owners ( or shareholders) have special interest in the amount of business income, other
groups such as managers, employees, creditors, investors etc. are also interested in the
profit-making ability of the business. The American Accounting Association defines
business income as: “the increase in net assets measured (determined) by the excess of
revenues over expenses.” Revenues are a measure of inflow of assets (increase in cash,
debtors, bills receivables or decrease in liabilities) arising from normal business activities
such as selling of goods, or providing of services or both. In fact, different forms of
business enterprises will generate different forms of revenues. The total expenses to
earn or generate revenues must also be calculated. Expenses represent the outflow of
assets (or increase in liabilities) which are incurred (or used up or consumed) in the
process of generating (or earning) revenues. The nature of business will therefore
determine the type of expenses which will be incurred. Examples are: cost of the goods
sold, salaries and wages, rent and rates, insurance, printing and stationery, depreciation
of assets and so on. The process of applying a quantitative (in terms of monetary unit)
amount to revenue and expenses is called measurement of income or simply income
measurement.
The profit and loss account (or income statement) for a given period simply shows the
total revenues earned during a particular accounting period and deductions from this
(revenues) the total expenses incurred in earning those revenues. The difference between
the total revenues and total expenses will represent either income or profit (If revenues
exceed expenses) or loss (if expenses exceed revenues).
Net Income (Profit) for the given period is equal to Total revenues minus total expenses
incurred to earn revenues.
In simple words, the net income is measured by comparing sales revenues and costs
related to sales revenue. It would be found that the business income causes an increase
in the resources of the business enterprise in the ordinary course of business activities.
In brief, business income is the net increase in the owner’s Capital resulting from operating
activities of the enterprise. It must be distinguished from the additional capital introduced
by the owner(s). Furthermore income is a net concept consisting of revenues earned by
the business less expenses and less losses that contribute to the earning of revenues.
8
 Accounting Concept of
8.3 THE OBJECTIVES OF INCOME Income, Expenditure and
MEASUREMENT Receipts

The measurement of business income is useful for more than one purpose and therefore
its objectives may be studied from different points of view:
(i) As a guide to future investment: The current income positively influences the
expectations about the future. The prospective investor looks to the income of
the business enterprises as a guide to his investment decisions of the future. The
investors attempt to maximize their returns on their investment and their decisions
will be guided by income. So the allocation of investment funds and selection of
securities depend upon income levels of an enterprise.
(ii) As a tax base: Though the Income Tax Act does not define income yet it does
specify what is taxable and what is deductible in arriving at the taxable income.
Accounting income provides income of a business enterprise. The tax authorities
can conveniently mobile the revenues through taxes which are one of the main
sources of the Government’s income.
(iii) As a guide to dividend policy: The dividend policy at present is directed to
determine the proportion of the current income which should be retained and the
proportion which should be distributed as dividends. So long as dividends are
paid out of current income, the rights of the creditors are adequately protected
since other resources of the business enterprise would not be used to pay dividends.
There are clear rules for the measurement of distributable profits in the Companies
Act with a view to protect the interests of the creditors.
(iv) As an indicator of managerial efficiency: The efficiency of management as
decision makers and as trustees of resources is judged by the reported income of
the current year. The auditors therefore certify that the income statement presents
true and fair view of operations results. The measurement of business income
therefore provides a suitable criterion for the efficiency of management in a
competitive economy.
(v) As a measure of overall efficiency and credit worthiness: Income is the
lifeblood of any business enterprise and therefore it provides the basic standard
by which the overall efficiency of the business is assessed. For creditors, profitable
enterprise faces no difficulty in making timely payments on its debts. Banks and
other credit institutions too depend upon current income levels as a guide about a
firm’s ability to repay loan out of future income.
(vi) As a guide to socio-economic decisions : A number of decisions affecting the
society and economy as a whole are taken keeping in mind the level of business
income. For instance, price increases are justified in terms of income levels. Trade
unions demand more wages for their employees on the basis of reported income
and employers too plead that increase in wages would have adverse effects on
the income. The economic policies of the Government are also guided by levels
of business income since it constitutes a major source of tax revenues.

9
Final Accounts and
Corporate Financial 8.4 DISTINCTION BETWEEN CAPITAL AND
Statements REVENUE
You know that the purpose of maintaining a detailed and systematic record of business
transactions is two-fold i.e.,
(i) To ascertain the net result of the trading activity for an accounting year, and
(ii) To ascertain the financial position of the business as at the end of the accounting
year.
Hence, we prepare an income statement called Profit and Loss Account for ascertaining
the net result, and a position statement called Balance Sheet for determining the financial
position. The Profit and Loss Account and Balance Sheet together are called Final
Accounts. You also know that before preparing the final accounts, we prepare another
statement called Trial Balance in order to check the arithmetical accuracy of the books
of accounts. The Trial Balance also forms the basis for the preparation of the Final
Accounts. All items appearing in the Trial Balance are transferred either to the Profit
and Loss Account or to the Balance Sheet. As per rules, items of revenue nature are
shown in the Profit and Loss Account and items of capital nature in the Balance Sheet.
In other words, whether an item will appear in Profit and Loss Account or in the Balance
Sheet depends upon the revenue and capital nature of the item.
If any item is wrongly classified i.e., if any item of revenue nature is treated as a capital
item or vice versa, the ascertainment of profit will be incorrect. For example, the revenues
earned during an accounting year are Rs. 2, 00,000 and the total cost is shown as Rs.
1, 80,000. Costs shown are item of Rs. 10,000 (an expenditure on repairs of machinery)
had been treated as a capital item (added to cost of machinery) and hence not included.
It means the actual costs are Rs. 1, 90,000 and not 1, 80,000. So the correct profit is
Rs, 10,000. In other words, the profit worked out earlier was overstated. Thus, it can
also be stated that if any capital expenditure is wrongly classified as revenue expenditure,
it would result in an understatement of profits. Let us also illustrate this. Assume that a
purchase of furniture worth Rs. 5,000 was wrongly passed through the Purchases Book
treating it as purchases of goods on credit. This would result in the boosting of costs by
Rs. 5,000 leading to an understatement of profits by Rs. 5,000 and also to an
understatement of assets, because addition of furniture will not be shown in assets of
balance sheet. As such the final accounts will not reflect the true and fair view of the
affairs of the business.
Thus you learn that wrong classification of items would lead to the wrong ascertainment
of profit and also the financial position. Hence, it is necessary to determine correctly
whether an item is of a capital or of a revenue nature. This distinction is also important
from taxation point of view because capital profits are taxed differently from revenue
profits.

8.5 CAPITAL AND REVENUE EXPENDITURES

You incur expenditure on various items every day. You buy food items, stationery,
cosmetics, utensils, furniture, etc. Some of them are consumables and some are durables.
The benefit of expenditure on consumables like stationery, cosmetics, etc. is derived
over a short period. But in case of durables like furniture, utensils, etc., the benefit
10
spreads over a number of years. Same thing is true of business also. In business you Accounting Concept of
incur expenditure on two types of items: (i) routine items like stationery, postage, repairs, Income, Expenditure and
Receipts
salaries etc., where the benefits is available for a short period, and (ii) fixed assets like
machinery, building, furniture, etc., whose benefit is available over a number of years.
In accounting terminology the first category of expenditure is called revenue
expenditure and the second one is called capital expenditure.
Let us now study the exact nature of capital and revenue expenditures.
8.5.1 Capital Expenditure
As stated above, when the benefit of expenditure is not exhausted in the year in which
it is incurred but is available over a number of years it is considered as capital expenditure.
The following expenditures are usually treated as capital expenditures.
i) Any expenditure which results in the acquisition of fixed assets such as land,
buildings, plant and machinery, furniture and fixtures, office equipment, copyright,
etc. You should note that such capital expenditure includes not only the purchase
price of the fixed asset but also the expenses incurred in connection with their
acquisition. Thus, the brokerage or commission paid in connection with the
acquisition of an asset, the freight and cartage paid for transportation of machinery,
the expenses incurred on its installation, the legal fees and registration charges
incurred in connection with purchase of land and buildings are also treated as
capital expenditure.
ii) Any expenditure incurred on a fixed asset which results in (a) its expansion, (b)
substantial increase in its life, or (c) improvement in its revenue earning capacity.
Improvement in the revenue earning capacity can be in the form of (i) increased
production capacity, (ii) reduced cost of production, or (iii) increased sales of the
firm.
Thus, cost of making additions to buildings and the amount spent on renovation of
the old machinery are also regarded as capital expenditures. If you buy second
hand machinery and incur heavy expenditure on reconditioning it, such expenditure
is also to be treated as capital expenditure. Similarly, expenditure on structural
improvements or alterations to existing fixed assets whereby their revenue earning
capacity is increased is also treated as capital expenditure.
iii) Expenditure incurred, during the early years on development of mines and land for
plantations till they become operational.
iv) Cost of experiments which ultimately result in the acquisition of a patent. The cost
of experiments which are not successful is not to be treated as capital expenditure.
It is treated as a deferred revenue expenditure which is written off within two to
three years.
v) Legal charges incurred in connection with acquiring or defending suits for protecting
fixed assets, rights etc.
8.5.2 Revenue Expenditure
When the benefit of expenditure is not likely to be available for more than one year, it is
treated as revenue expenditure. So all expenses which are incurred during the regular
course of business are regarded as revenue expenditures.
11
Final Accounts and The examples of such expenses are:
Corporate Financial
Statements i) Expenses incurred in day-to-day conduct of the business such as wages, salaries,
rent, postage, stationery, insurance, electricity, etc.
ii) Expenditure incurred for buying goods for resale or raw materials for manufacturing.
iii) Expenditure incurred for maintaining the fixed assets such as repairs and renewals
of building, machinery, etc.
iv) Depreciation on fixed assets. This can also be termed as revenue loss.
v) Interest on loans borrowed for running the business. You should note that any
interest on loan paid during the initial period before production commences, is not
treated as revenue expenditure. It is treated as capital expenditure.
vi) Legal charges incurred during the regular course of business such as legal expenses
incurred on collection from debtors, legal charges incurred on defending a suit for
damages, etc.
8.5.3 Revenue Expenditure Become Capital Expenditure
It is clear from the above explanation of Revenue and Capital expenditure that Revenue
expenditure is incurred to maintain profitability of business while capital expenditure is
incurred to increase the earning capacity of existing business, but under certain
circumstances expenditure of revenue nature becomes capital expenditure. Those
circumstances under which revenue expenditure becomes capital may be summarized
as under
(a) Repairs : Repair expenses is of a revenue nature but when an old machinery is
purchased and money is spent on its repairs to make it in working condition is
added to the cost of machinery and treated as capital expenditure.
(b) Wages: Wages paid is revenue expenditure but if it is paid to install the machinery
in factory or wages paid for construction of buildings, furniture etc. is treated as
capital expenditure.
(c) Legal Expenses: These are of revenue nature but if paid in consideration of
acquiring assets are treated as capital expenditure and are added to the cost of
assets.
(d) Transport Expenses: Transportation charges to bring assets to factory are added
to cost of assets and are treated as capital expenditure.
(e) Interest on Capital: Interest on Capital paid during establishment period of factory,
machinery and construction period of building are capital expenditure.
(f) Raw Material: Raw material used in construction of buildings or any other asset
is treated as capital expenditure.
(g) Brokerage and Commission: Brokerage and commission paid in respect of
purchases of assets are treated as capital expenditure and are added to cost.
8.5.4 Deferred Revenue Expenditure
Sometimes, certain expenditure which is normally treated as revenue may be unusually
heavy and its benefit is likely to be available for more than one year. In such a situation,
12 it is considered appropriate to spread the cost of the expenditure over a number of
accounting years. Hence, it is capitalized and only a portion of the total amount spent is Accounting Concept of
charged to the Profit and Loss Account of the current year. The balance is shown as an Income, Expenditure and
Receipts
asset which will be written off during the subsequent years.
1. Expenditure incurred on advertising campaign to introduce a new product in the
market.
2. Expenditure incurred on formation of a new company (preliminary expenses)
3. Brokerage charges, underwriting commission paid and other expenses incurred in
connection with the issue of shares and debentures.
4. Cost of shifting the plant and machinery to a new site. This may involve dismantling,
removing and re-erection of the plant and machinery.
Let us take the case of expenditure on advertising campaign. It is not a routine
advertisement and the amount involved is unusually heavy. Its benefit will not completely
exhaust in one accounting year but will continue over two to three years.
Hence, it is not proper to charge such expenditure to the Profit and Loss Account of
one year. It is better to distribute it carefully over three years. So, in the first year we
may charge one-third of the amount spent to the Profit and Loss Account and show the
balance in the Balance Sheet as an asset. In the second year again we may charge a
similar amount to-the Profit and Loss Account and show the balance as an asset. In the
third year, we may charge this balance to the Profit and Loss Account. Every expenditure
which is regarded as deferred revenue expenditure is treated in this way in the final
accounts.
Look at Illustration 1 and note how each expenditure has been treated and why.
Illustration 1
State whether the following items of expenditure would be treated as (a) capital
expenditure, (b) revenue expenditure, or (c) deferred revenue expenditure:
i) Carriage on goods purchased Rs. 25
ii) Rs. 2,000 spent on repairs of machinery
iii) Rs. 5,000 spent on white washing
iv) Rs. 8,000 paid for import duty and cartage on the purchase of machinery from
West Germany
v) Rs. 25,000 spent on issue of equity shares
vi) Rs. 14,000 spent on spreading new tiles on factory floors
vii) Rs. 4,000 spent on dismantling, transportation and reinstalling plant and machinery
to new site
viii) Rs. 60,000 spent on construction of railway siding
ix) Rs. 20,000 spent on some major alterations to a theatre which made it more
comfortable and attractive.
x) A-second hand machine was bought for Rs. 10,000 and an amount of Rs. 6,000
was spent on its overhauling.
13
Final Accounts and Solution:
Corporate Financial
Statements i) It is revenue expenditure as it relates to the goods for resale.
ii) It is revenue expenditure as it relates to the maintenance of a fixed asset.
iii) Same as no. (ii).
iv) It is a capital expenditure as it is spent in connection with the purchase of assets.
v) It would be treated as deferred revenue expenditure. It is a heavy amount incurred
in connection with rising of capital for the company and so capitalized.
Even under the Indian Companies Act and the Indian Income Tax Act this
expenditure is allowed to be written off over a number of years.
vi) It is revenue expenditure so it is treated as a sort of repairs not leading to any
increase in the earning capacity of a fixed asset.
Normally expenditure on transportation etc. is revenue in nature. But this
expenditure has been incurred on shifting to new site which is nonrecurring in
nature and involves a heavy amount. Hence it shall be treated as revenue
expenditure.
vii) It is a capital expenditure as it is incurred on the construction of railway siding, a
fixed asset.
viii) It is a capital expenditure as the alterations made the theatre more comfortable
and attractive which is likely to increase its collections.
ix) It is a capital expenditure as it is incurred on making the newly bought second
hand machinery operational.
Check Your Progress - A
1. Choose one of the alternative given within brackets and fill in the blanks.
i) Proper allocation of expenditure between capital and revenue is necessary
for ascertainment of.................................................. (Profit or Loss/Cash
in hand).
ii) All items of revenue nature are shown in the …………………………
(Profit and Loss Account/Balance Sheet)
iii) If revenue expenditure is treated as a capital expenditure, it will result in
………………………..of profits. (overstatement/understatement)
iv) Any expenditure where the benefit is spread over a number of years is
………………………….expenditure. (capital/revenue)
v) When a revenue expenditure is capitalized, it is called …………………..
...............expenditure. (capital/deferred revenue)
vi) Any expenditure incurred in acquiring a right like goodwill or patent is treated
as…………………. Expenditure, (capital/revenue)
2. State whether the following statements are True or False.
i) Every expenditure of large amount is a capital expenditure

14 ii) An expenditure incurred on acquisition of a fixed asset is a capital expenditure

 iii) Cartage paid on the new machine is revenue expenditure. Accounting Concept of
Income, Expenditure and
iv) Depreciation on fixed assets is a capital expenditure. Receipts
v) Cost of goods purchased for resale is revenue expenditure.
vi) Heavy expenditure on advertising campaign is deferred revenue expenditure.
vii) Deferred revenue expenditure is essentially an expenditure of capital nature.
viii) Expenditure incurred as preliminary expenses is a capital expenditure,
3. Identify the Various aspects which facilitate to differentiate Capital
Expenditure and Revenue Expenditure?

8.6 CAPITAL AND REVENUE RECEIPTS

Receipts refer to amounts received by a business i.e., cash inflows. Receipts may be
classified as Capital Receipts and Revenue Receipts. It is necessary to note this distinction
clearly because only the revenue receipts are taken to the Profit and Loss Account and
not the capital receipts.
Capital Receipts: Capital receipts are the amounts received in the form of (a) additional
capital introduced in the business, (b) loans received and (c) sale proceeds of fixed
assets. You are aware that a loan taken by the business is repayable sooner or later.
Similarly, additional capital received represents an increase in the proprietor’s claim
over the business assets. Thus these two items represent increase in liabilities of the
business and obviously are not incomes or revenues. These are capital receipts and
should be treated as such. The sale proceeds of a fixed asset are also treated as a
capital receipt because the amount received is not revenue earned in the normal course
of business. The capital receipts increase the liabilities or reduce the assets.
They do not affect the profit or loss.
Revenue Receipts: Revenue receipts are the amounts received in the normal and
regular course of business. They take the form of (a) sale proceeds of goods, and (b)
incomes such as interest earned, commission earned rent received etc. These receipts
are on account of goods sold or some services rendered by the business and as such
they are not repayable. All revenue receipts are treated as incomes and shown on the
credit side of the Profit and Loss Account.

8.7 CAPITAL AND REVENUE PROFITS

Revenue profits are those profits that are earned in the normal and ordinary course of
business i.e., through regular sales of goods or by way of income from investments.
Capital profits, on the other hand, are those profits which are not earned in the course
of regular trading. Such profits arise as a result of (i) selling some fixed assets at a profit
or (ii) shares issued at a premium. The revenue profits are credited to Profit and Loss
Account whereas the capital profits are transferred to capital reserve and shown in the
Balance Sheet.

8.8 CAPITAL AND REVENUE LOSSES

Revenue losses are those losses that arise during the normal course of business. The
capital losses are losses which arise on account of the sale of some fixed assets or on
15
issue of shares at a discount. Capital losses are not shown in the Profit and Loss Account.
Final Accounts and They are generally set off against capital profits. However, if the amount of capital loss
Corporate Financial is heavy and capital profits are not available for writing it off, the same is spread over a
Statements
number of years. It will be written off in installments.
The purpose of this discussion is to highlight the importance of the distinction between
capital and revenue items. Note that all revenue items are taken to the Profit and Loss
Account to determine the trading result while the capital items are shown in the Balance
Sheet to assess the financial position of the business.
Check Your Progress — B
1. State whether the following statements are True or False.
i) Expenditure is not the same thing as payment.
ii) Capital receipts are the amounts received in the normal course of the business
iii) Capital profit is shown in the Profit and Loss Account.
iv) Capital receipt is different from capital income.
v) Revenue expenditure and revenue loss mean one and the same thing
vi) Depreciation on fixed assets is an example of revenue loss.
vii) Money received from the sale of goods is a capital receipt.
viii) Money obtained by the issue of debentures is a capital receipt.

8.9 LET US SUM UP

Business income is the increase in net assets measured by the excess of revenue over
expenditure. Business income is based on actual transactions during the accounting
period. It refers to the financial performance of a given period. It ignores unrealized
profit. A definite period of time be decided for accounting period. It is based on continuity
concept. Matching of expenses with revenue is essential.
It is important to distinguish between capital and revenue because wrong classification
of items leads to an incorrect ascertainment of profit and financial position of the business.
When the benefit of expenditure is available for a number of years, such expenditure is
treated as capital expenditure. When the benefit is limited to one year, such expenditure
is treated as revenue expenditure. Sometimes, revenue expenditure may involve an
unusually large amount and its benefit may extend to future accounting years, such
expenditure is treated as deferred revenue expenditure. Capital receipts are those
receipts which either increase the liabilities of the business or represent sale proceeds
of fixed assets. Revenue receipts, on the other hand, are those receipts which were
received in the ordinary course of business. Profits which are not earned in the regular
course of business are capital profits while revenue profits represent the profits earned
during the normal course of business. Losses that arise during the regular course of
business are treated as revenue losses, while those which do not arise in the normal
course of business are treated as capital losses.

8.10 KEY WORDS

Capital Expenditure : An expenditure which results in the acquisition of a fixed
asset or addition to fixed asset, or improvement of the
16 earning capacity of the asset.
Capital Losses : Losses which do not arise in the normal course of Accounting Concept of
business. Income, Expenditure and
Receipts
Capital Profits : Profits not earned in the regular course of business.
Capital Receipts : Receipts in the form of additions to capital, liabilities or
sale proceeds of fixed assets.
Deferred Revenue : A revenue expenditure which involves a heavy amount
Expenditure and the benefit of which is likely to spread over a number
of years.
Revenue Expenditure : An expenditure whose benefit is limited to one year.
Revenue Losses : Losses that occur in the regular course of business.
Revenue Profits : Profits earned in the normal course of business.
Revenue Receipts : Receipts arising out of services rendered or goods sold.

8.11 ANSWERS TO CHECK YOUR PROGRESS

A 1 i) Profit or Loss, ii) Profit and Loss Account, iii) Overstatement,
iv) Capital, v) Deferred Revenue, vi) Capital.
2. i) False ii) True iii) False iv) False v) True vi) True vii) False
viii) False.
3. Nature of expenditure, Expenditure incurred on Assets, Recurring nature of
expenditure, Benefits, Liability, Expenditure in reference to capital, profit earning
capacity, disclosure.
B 1. i) True ii) False iii) False iv) True v) False vi) True vii) False
viii) True.

8.12 TERMINAL QUESTIONS/EXERCISES

1. What is meant by business income and how it is measured?
2. What are the main objectives of business income?
3. Distinguish between Capital Receipt and Revenue Receipt.
4. What is the difference between Capital Expenditure and Revenue Expenditure? ‘
5. Define the following:
(a) Revenue Expenditure (b) Capital Expenditure
(c) Deferred Revenue Expenditure
6. Give two examples of the following:
(a) Revenue Receipts (b) Capital Receipts
(c) Deferred Revenue Expenditure.

17
Final Accounts and Exercises
Corporate Financial
Statements 1. State with reasons whether the following expenditure are of capital or revenue
nature. ;
(a) A second hand machine was bought for Rs. 10,000 and Rs. 400 was spent
on its carriage and Installation.
(b) Rs. 800 spent as carriage on goods purchased.
(c) Rs. 2,000 spent on repairs to machinery.
(d) Rs. 20,000 spent for constructing an additional hall.
(e) Rs. 15,000 was spent for air-conditioning the office of the General Manager.
(f) A second hand truck was purchased for Rs. 30,000 and Rs. 10,000 was
spent on overhauling and converting it into a delivery van.
Answers: (a), (d), (e) and (f) are capital expenditures; (b) and (c) are
revenue expenditures.
2. State whether the following expenditures are capital or revenue.
a) Legal expenses incurred in raising additional capital by way of shares and
debentures.
(b) Brokerage paid in connection with the purchase of land.
(c) Taxes and insurance paid on factory premises.
(d) Expenditure in development of land for rubber plantations.
(e) Rs. 50,000 spent on an advertising campaign for a new product.
(f) Wages paid to own workers for manufacturing loose tools for use in the
factory.
Answers: (a), (b), (d) and (f) are capital expenditures; (c) revenue
expenditure; and (e) deferred revenue expenditure.
3. Explain how you would deal with the following:
(a) A sum of Rs. 25,000 was spent in overhauling the machinery. It increased
the machine life by 5 years.
(b) Rs. 2,000 was paid to an architect for drawing up the plans for the proposed
building.
(c) A sum of Rs. 800 was spent as legal charges for recovering dues from
debtors.
(d) Rs. 15,000 was spent on putting up a wooden partition in the existing building.
It resulted in enhancing the rents realizable.
(e) Rs. 5000 was spent on shifting the office to new premises.
(f) Old furniture was sold for Rs. 500. Its book value is Rs. 1,500. New furniture
costing Rs. 3,000 was bought for replacement.
Answers: (a), (b) and (d) are capital expenditures, (c) is revenue
expenditure,(e) is deferred revenue expenditure, (f) Rs. 3,000 being cost of
18 new furniture is a revenue expenditure and Rs. 1,000 is a revenue loss.
 Accounting Concept of
UNIT 9 FINAL ACCOUNTS OF BUSINESS Income, Expenditure and
ORGANIZATION (SOLE TRADER) Receipts

Structure
9.0 Objectives
9.1 Introduction
9.2 What is Gross Profit?
9.3 Trading and Profit & Loss Account
9.3.1 Trading Account
9.3.2 Manufacturing Account
9.3.3 Profit & Loss Account
9.4 Closing Entries
9.5 Balance Sheet
9.5.1 Objectives for preparation of Balance Sheet

9.5.2 Classification of Balance Sheet

9.5.3 Form of Balance Sheet

9.5.4 Arrangement of Balance Sheet

9.5.5 Difference of Balance Sheet

9.5.6 Important Point of Balance Sheet

9.6 Vertical Balance Sheet

9.7 Let Us Sum Up
9.8 Key Words
9.9 Answer to Check Your Progress
9.10 Terminal Questions/Exercise

9.0 OBJECTIVES
After studying this unit, leaner should be able to:
 ascertain the gross profit or gross loss of a trading concern;
 prepare trading account and manufacturing account; and
 pass closing entries in respect of the items that appear in the trading account.
 explain about the balance sheet and its purpose;
 classify different types of assets and liabilities;
 distinguish between profit and loss account and the balance sheet; and
 prepare final accounts in a vertical form
19
Final Accounts and
Corporate Financial 9.1 INTRODUCTION
Statements
In earlier units, you learnt about the accounting concepts of income, expenditure and
receipts, which guide the preparation of the accounts and distinguish between capital
and revenue which is important for proper ascertainment of the profit & loss and financial
position of a business. One of the main objectives of maintaining accounts is to know
the profit or loss made by the business and financial position during a given period
(Trading Period). Preparation of trail balance was discussed in unit 5 of this course. It
is not sufficient to find out the profit or loss and financial position of the business during
the trading period. After preparation of trial balance the business concern closes the
ledger accounts to know the gross profit, net profit and the financial position of the
business. Therefore, final accounts are prepared primarily for ascertaining the operational
result and the financial position of the business. They consist of [i] Profit and Loss
Account, and [ii] Balance Sheet. The Profit and Loss Account reveals the net profit
made or net loss suffered during an accounting period and the Balance sheet indicates
the financial position as at the end of the period.
The profit and Loss Account is usually divided into two sections. The first section is
called Manufacturing and/or Trading Account and the second section is called Profit
and Loss Account. The Trading Account is prepared for ascertaining the Gross Profit
and the Profit and Loss Account is prepared to find out the Net Profit. The Balance
Sheet is prepared for ascertaining the financial position of the business as on the date,
learn how various assets and liabilities are classified and shown in the Balance Sheet,
arrangement of assets and liabilities in the Balance Sheet, distinction between Profit and
Loss account and Balance Sheet. In this unit you will learn the accounting treatment for
preparation of Manufacturing and /or Trading account and Profit & Loss account to
ascertain the Gross/Net profit and preparation of vertical Balance Sheet to know the
financial position of the business concern.

9.2 WHAT IS GROSS PROFIT?

Every businessman would like to know the profit earned or loss incurred during an
accounting period. This is worked out in two stages. In the first stage the gross profit or
gross loss is worked out and in the second stage the net profit or net loss, is ascertained.
The net profit/net loss indicates the overall result of the business operations, whereas
the gross profit/gross loss reveals the difference between the sales revenue and the cost
of goods sold. If the amount of sales is higher than the cost of goods sold, the difference
would indicate gross profit. Suppose, a trader has purchased goods costing
Rs. 1,00,000. He sold them for Rs. 1, 50,000. The gross profit earned is Rs. 50,000
being the difference between the sales values (Rs. 1, 50,000) and the cost of the goods
sold (Rs. 1, 00,000). In other words, gross profit is the excess of sales value of the
goods sold over their cost. However, if the sales value of the goods sold is less than
their cost, the result is called gross loss. The purpose of working out gross profit/gross
loss is to ascertain the profit or loss from trading operations alone. It indicates whether
purchasing and selling of goods have proved to be profitable for the business or not.

9.3 TRADING AND PROFIT & LOSS ACCOUNT

You know that the Profit and Loss Account is prepared for ascertaining the net profit or
20 net loss of the business. This is worked out in two stages. In the first stage we work out
the gross profit or gross loss and in the second stage, the net profit or net loss. Hence, Final Accounts of
the Profit and Loss Account is divided into two sections. The first section is called Business Organization
(Sole Trader)
Manufacturing and Trading Account which shows the Gross Profit or Gross Loss. The
trading concern prepares trading account. They are those which purchase goods and
sell them at a profit. Whereas, the manufacturing concerns which prepare manufacturing
account, are those which purchase raw material and convert them into finished goods
and then sell it. Therefore, manufacturing account consists of Manufacturing and trading
account to ascertain the gross profit.
9.3.1 Trading Account
As stated above, the Trading Account is prepared for ascertaining the gross profit or
gross loss. The gross profit is defined as the excess of sales revenue over cost of goods
sold. This can be presented in the form of an equation as follow.
Gross Profit = Net Sales- Cost of Goods sold
Where i. Net Sales = Total Sales- Sales Returns
ii. Cost of Goods Sold = Opening Stock + Net Purchase
+ Direct Expenses - Closing Stock
You know the terms ‘Opening Stock’ and Closing Stock’ refer to the value of unsold
goods at the beginning of the year and at the end of the year respectively. Such stock
may also include the semi-finished goods and raw material. In order to arrive at the cost
of goods sold the opening stock is added to the net purchases while the closing stock is
deducted.
The term ‘Direct Expenses’ refer to those expenses which are incurred on the goods
purchased till they are brought to the place of business for sale. These include expenses
such as freight, insurance, import duty, dock dues, clearing charges, octroi duty, cartage,
etc. Expenses such as administrative expenses, selling and distribution expenses, interest
paid, etc. are termed as indirect expenses and, therefore, are excluded from the cost of
goods sold.
Look at Illustrations and study how cost of Goods sold and the Gross Profit are
computed.
Illustrations 1
On January 1, 2017 a firm had stock of goods valued at Rs.20, 000. During the year
the following transactions took place.
Rs.
Sales 5,00,000
Purchases 3,00,000
Carriage Inwards 3,000
Freight Inwards 5,000
Sales Returns 10,000
Clearing charges 22,000
Purchases Returns 5,000
The closing stock of goods on December 31, 2017 is Rs. 40,000. 21
Final Accounts and Solution
Corporate Financial
Statements Rs. Rs.
Sales 5,00,000
Less Sales Returns 10,000
Net Sales 4,90,000
Less Cost of Goods Sold:
Opening stock 20,000
Add Purchases 3,00,000
3,20,000
Less Purchases Returns 5,000
3,15,000
Add Carriage Inwards 3,000
Add Freight Inwards 5,000
Add Clearing Charges 22,000
3,45,000
Less Closing Stock 40,000 3,05,000
Gross Profit 1,85,000

Form of Trading Account: The equation for Gross Profit is also known as trading
account equation. This equation forms the basis of preparing the Trading Account. The
Trading Account, like any other account in the ledger, has two sides debit and credit.
The opening stock, purchases [less returns] and all direct expenses are shown on the
debit side of the Trading Account while sales [less returns] and the closing stock on the
credit. The gross profit appears as the last item on the debit side which, in fact is the
excess of the total of credit side over the total of debit side. If however, the total of the
debit side exceeds the total of the credit side, it will be treated as gross loss. This is
shown as the last item on the debit side of the Trading Account. The gross profit/gross
loss thus worked out is transferred to the Profit and Loss Account. Look at the below
figure for the form of Trading Account.
Figure: -
Form of Trading Account
Trading Account of…………………. (Period)
Dr. Cr.
Particulars Amount (Rs.) Amount (Rs.) Particulars Amount (Rs.) Amount (Rs.)
To opening Stock ………… By Sales …………

To Purchases …….. Less Sales ...........

Returns
Less: Returns
To Direct
Expenses[specify
individually]
To Gross Profit
[transferred to
Profit and Loss
22 Account]
Based on the data given in Illustrations 1, the Trading Account will be prepared as Final Accounts of
follow: Business Organization
(Sole Trader)
Trading Account of for the year ending December 31, 2018
Dr. Cr.
Particulars Amount Particulars Amount
Rs. Rs.
To Opening Stock 20,000 By Sales 5,00,000
To Purchases 3,00,000 Less Returns 10,000
Less Returns 5,000 2,95000 4,90,000
To Carriage Inwards 3,000
To Freight 5,000 By Closing Stock 40,000
To Clearing Charges 22,000
To Gross Profit
[Transferred to
P and L A/C 1,85000
5,30,000 5,30,000

Some important points to be kept in mind

Purchases: This item refers to the goods purchased for resale and includes both cash
and credit purchases. The purchases of assets which are meant for permanent use in
business such as machinery, furniture etc. is not included in the purchases. The amount
taken to Trading Account will be the net amount of purchases [after deducting purchase
return/returns outwards] If the proprietor has taken away some goods from the business
for his personal use, the same should also be deducted from the total purchases.
Sales: It includes both cash and credit sales of goods and refers to the net amount of
sales [after deducting sales returns inwards]. Sates of old furniture, car, machinery, etc.
are not included in the sales. Similarly, sale of old newspapers etc. are also excluded
from sales. Such items are shown as miscellaneous income in the Profit and Loss Account.
Wages: Wages are usually treated as a direct expense and are shown in the Trading
Account. The difficulty arises when wages are clubbed with salaries [an indirect expense]
and the Trial balance includes a single amount for ‘Wages and Salaries’. In such a
situation, the amount may be shown in the Trading Account. It is based on the assumption
that the item includes the salaries of the supervisory staff in the factory itself. But, if the
item in the Trial Balance reads ‘Salaries and Wages’ it will be taken to the Profit and
Loss Account on the assumption that the item includes wages of the office staff only.
It should be noted that wages paid in connection with the purchases of fixed assets or
the construction of building should not be charged to Trading Account. They are to be
included in the cost of the concerned fixed asset. There is another important aspect in
relation to wages which must be clarified. If a Manufacturing Account is prepared then
the wages paid to the factory labour is debited to Manufacturing Account about which
you will learn later in this unit.
Freight, Carriage and Cartage: When expenses are incurred in connection with
freight or carriage of goods purchased, they are shown in the Trading Account. Such
freight and carriage are also termed as ‘Freight Inwards’ and ‘Carriage Inwards’ 23
Final Accounts and respectively. ‘Freight outwards’ and ‘Carriage Outwards’ relate to sales and therefore
Corporate Financial taken to the debit of Profit and Loss Account.
Statements
Royalties: Royalties refer to the payments made for the use of copyright or patent.
The amount of royalty is generally based on the quantity produced. It is, therefore,
treated as a direct expense and charged to Trading Account. If is calculated on the
basis of quantity sold as in case of books, it is shown in the Profit and Loss Account.
Royalties are also paid to the Government for extraction of minerals such as coal,
diamond, gold, etc. These are charged to the Profit and Loss Account of the mining
companies. You will learn about the accounting of such royalties later under a separate
course.
9.3.2 Manufacturing Account
In case of trading concerns you can find out the cost of goods and the gross profit by
preparing a Trading Account. But a manufacturing concern has to first prepare another
account called Manufacturing Account with the help of which it works out the cost of
goods produced. The cost of goods produced is then transferred to the Trading Account
for ascertaining the cost of goods sold and the gross profit.
A manufacturing concern purchases raw materials from the market and converts them
into finished goods for sale. The cost of goods produced thus includes two major costs:
(i) cost of raw materials consumed, and (ii) cost of conversion. These are explained
below.
Cost of Raw Materials Consumed: This represents the cost of raw materials used in
the course of manufacture which can be worked out by adjusting the opening and
closing stocks of raw materials in the purchase of raw materials. For example, a firm
purchased raw materials worth Rs. 650000 during the period and its stock of raw
materials on January 1, 2017 (opening stock) was Rs. 70,000 and on December 31,
2017 (closing stock) was Rs. 90,000. The cost of raw materials consumed during
2017 will be worked out as follows:
Rs.

Opening Stock of Raw Materials 70,000

Add Purchases of Raw Materials 6,50,000

7,20,000

Less closing Stock of Raw Materials 90,000

Cost of Raw materials Consumed 6,30,000

The direct expenses incurred on the purchases of raw materials such as freight, import
duty, dock, cartage, etc. can also be included in the cost of raw materials consumed.
But the usual practice is to show them separately on the debit side of the Manufacturing
Account.
Cost of Conversion: This includes all expenses incurred in the factory such as wages
paid to labour, salaries of supervisory staff, factory rent and rates, motive power, repairs
to plant and machinery, depreciation on plant and machinery, etc. All these expenses
24 are debited to the manufacturing Account.
 Manufacturing Account Final Accounts of
Business Organization
Dr. Cr. (Sole Trader)

Particulars Amount Rs. Particulars Amount

To work in progress at By sale of scrap
the beginning By work-in progress at the end
To Raw materials
Consumed
Opening Stock of Raw By Cost of Goods Produced
materials (Transferred to Trading
Account)
Add Purchase of Raw
Materials
Less Closing Stock of
Raw Materials
To Carriage Inwards
To Freight, Import Duty,
Dock Dues, etc
To manufacturing wages
To motive power
To Coal, Gas and Water
To Oil and Grease
To Factory Lighting and
Heating
To Factory Insurance
To Repairs to Factory
Building
To Repairs to Plant and
Machinery
To Depreciation on
Factory Buildings
To Depreciation on
Plant and Machinery
Some Important Points
Scrap: The term ‘scrap’ is used for waste materials coming out of the manufacturing
process. Cuttings of cloth in readymade garments factory and metal cutting in engineering
factories are some example of scrap. Any amount realized from the sale of scrap must be
adjusted in the cost of goods produced. Hence, it is credited to the Manufacturing Account.
Work in Progress: It is quite likely that at the end of the year, there may be certain
goods which are still in the process of manufacture. Such goods are called ‘semi-
finished goods’ or ‘work –in-progress. There will always be some be some work-in-
progress at the beginning as well as at the end of the account year. Their cost must be
adjusted while working out the cost of goods produced. Hence, their opening work-in-
progress is shown on its credit side. 25
Final Accounts and Stock of Finished Goods: Besides the stock of raw materials and semi-finished goods,
Corporate Financial every firm will have the stock of finished goods. This is to be adjusted in the cost of
Statements
goods sold and not in the cost of goods produced. Hence, it is not shown in the
Manufacturing Account. As you learnt earlier, it will be shown in the Trading Account.
Prepare Manufacturing Account from the following particulars relating to the year 2018
Rs.
Purchased of Raw Materials 1,00,000
Stock on 1.1.2018
Raw materials 10000
Work in progress 5000
Finished goods 25000
Factory wages 15000
Factory Rent 5000
Fuel and Power 2000
Carriage Inwards 1000
Repairs of Plant 2000
Depreciation on Plant 5000
Sale of Scrap 500
Stock on 31.12.2018
Raw materials 20,000
Work in progress 7500
Finished goods 30000

Solution
Manufacturing Account for the year ended December 31, 2018
Dr. Cr.
Particulars Amount Particulars Amount
To work in Progress at 5000 By sale of scrap 500
the beginning
To Raw Materials By work in progress 7500
Consumed at the end
Opening stock 10,000 By cost of goods 1,17,000
produced (Transferred
to Trading Amount)
Add Raw Material 100000
purchased
110000
Less closing Stock 20000 90000
To Factory Wages 15000
To Factory Rent 5000
To Fuel and Power 2000
To Carriage inwards 1000
To Repairs of Plant 2000
To depreciation on Plant 5000
125000 125000
26
You will observe that the stock of finished goods has not been shown in the Manufacturing Final Accounts of
Account. As stated earlier, it is to be taken to the Trading Account. Now, suppose the Business Organization
(Sole Trader)
sales for the year 2017 were Rs.1, 60,000, the Trading Account will appear as follow:
Trading account …………………for the year ending December 31, 2018
Dr. Cr.
Particulars Amount Particulars Amount

To opening stock of finished 25000 By Sales 160000

Goods

To cost of Goods produced 117000 By Closing stock of Finished 30000

(transferred from Mfg. A/C) goods

To Gross Profit (Transferred 48,000 190000

to Profit and Loss A/C)

You have learnt that a manufacturing concern has to prepare Manufacturing Account
before preparing the Trading and Profit & Loss Account. Even though considered
desirable, many firms do not do so because it is not compulsory. You will also generally
be asked to prepare only the Trading Account without preparing the Manufacturing
Account. In such a situation you will show all items of Manufacturing Account in the
Trading Account itself. In other words, cost of raw materials consumed, expenses on
purchases of raw materials, all manufacturing expenses, the opening and closing work-
in-progress, sale of scrap, etc. will also be shown in the Trading Account. But, as per
common practice, items like depreciation and repairs to plant and machinery and factory
building will be shown in the Profit and Loss Account and not in the Trading Account.
9.3.3 Profit & Loss Account
After ascertaining the gross profit by preparing the Trading Account, the businessman
proceeds to prepare the Profit & Loss Account in order to work out the net profit/net
loss. You know that the net profit is the excess of gross profit and other incomes over
the indirect expenses and losses. So, while preparing the Profit & Loss Account we
show gross profit and other incomes such as rent received, discount received, commission
received, interest and dividends etc. on the credit side, and all indirect expenses and
losses on the debit side. Indirect expenses include all administrative, selling and distribution
expenses such as salaries, rent and taxes, postage and stationery, insurance, depreciation,
interest paid, office lighting, advertising, packing carriage outwards, etc. while losses
refer to items like loss by fire, loss by theft etc. The difference between the two sides of
the Profit & Loss Account represents either the net profit or net loss.
If the total of the credit side is higher than the total of the debit side, the difference is
called net profit. If the total of the debit side is higher than the total of the credit side, the
difference is called net loss. The net profit/net loss belongs to the proprietor and it is
therefore transferred to this capital account. Look at the Figure: 9.1, it shows various
expenses, losses, incomes etc, which usually appear in the profit and loss account.

27
Final Accounts and Figure: —
Corporate Financial
Statements Profit and Loss Account........
For the period ended...........
Dr. Cr.
Particulars Amount (Rs.) Particular Amount (Rs.)

To Gross Loss, if any By Gross Profit

[transferred from Trading [transferred from
Account] Trading Account]
To Salaries By Interest Received
To Rent, Rates and Taxes By Discount Received
To Postage and Telegrams By Rent Received
To Telephone Charges By Commission Received
To Printing and Stationery By Divided Received
To Legal Expenses By other Incomes and
Gains
To Insurance By Net Loss [Transferred
to Capital Account
To Office Lighting
To Depreciation
To Bad Debts
To Advertising
To Travelling Expenses
To Carriage Out words
To Trade Expenses
To Discount Allowed
To Interest Paid
To Repairs and Renewals
To Loss by Fire
To Loss by theft
To other Expenses and
Losses, if any
To Net Profit [transferred
to Capital Account]

Notes:
1. The heading for the Profit and Loss Account, as in the case of the Trading Account,
indicates the name of the business or proprietor and the period for which it is being
28
prepared.
2. In addition to the items shown in the above form, there are certain items such as Final Accounts of
depreciation, bad debts, provision for doubtful debts, interest on capital, interest Business Organization
(Sole Trader)
on drawings etc., which appear in the Profit and Loss Account as a result of the
adjustment entries.
Some Important Points
1. Rent, Rates and Taxes: These are charges levied by the municipal bodies on the
house property. It is a common item of indirect expenses debited to the Profit and
Loss Account.
2. Insurance: Generally, assets are insured to cover the risk of loss, say, by fire.
Premium paid to the insurance company should be treated as a business expense.
When assets such as factory building, factory machinery, etc. are insured, the
insurance premium should be debited to Trading Account. If on the other hand, the
premium is paid for insurance of assets in the office building, office furniture, etc., it
should be charged to Profit and Loss Account.
3. Bad Debts: Bad Debts denote the amount which could not be recovered from the
debtors to whom the goods were sold on credit. It is a loss and so debited to the
Profit and Loss Account.
4. Depreciation: Depreciation means decrease in the value of fixed asset such as
machinery, furniture, vehicle, etc. depreciates in value on account of its constant
use. Such reduction in their value is loss to the business and so charged to the Profit
and Loss Account. If, however, a Manufacturing Account is also prepared,
depreciation on machinery and factory building is charged to the Manufacturing
Account, while depreciation on office building, office furniture, office equipment,
etc. is charged to the Profit and Loss Account.
5. Trade Expenses: This item represents various small expenses incurred in the
business. They are also called General Expenses, Sundry Expenses or Miscellaneous
Expenses.
6. Packing: The Cost of packing materials such as polythene bags, wrapping materials,
etc. for delivery is a distribution expense and hence charged to Profit and Loss
Account. Where packing is essential to make the products fit for sale in the market
as in the case of cigarettes, biscuits, medicines, oil, etc. it is called ‘packaging’ and
such expenditure is charged to the Trading Account.
7. Samples: Generally, sample of goods are distributed free of charge to increase
sales. The cost of such sample should be treated as a selling expenses and so
debited to Profit and Loss Account.
8. Income Tax: It is the tax payable by a person on his income. In the case of a sole
trading concern, the tax paid by the proprietor on the profits of the business is
treated as a personal expense. Hence, it should be added to drawing or directly
from capital.
Illustration 2
Prepare Profit and Loss Account from the following balance extracted from the books
of a business for the year 2018.

29
Final Accounts and Rs.
Corporate Financial
Statements
Gross Profit 185000
Salaries 20000
Rent and Rates 5000
Stationery 1000
Postage 500
Insurance 2000
Repairs 1500
Depreciation 5000
Advertisement 5000
Discount [Dr] 500
Commission of Salesman 5000
Bad Debts 2000
Loss by Fire 2000
Interest on Investments 2500
Profit on sale of Investments 2500
Profit and Loss Account of ……………………………for the year ending
December 31, 2018
Dr. Cr.
Particulars Amount (Rs.) Particulars Amount (Rs.)
By Gross Profit 185000
[Transferred from
Trading Account]
To Salaries 20,000 By Interest Received 2500
To Rent and Rates 5,000 By Profit on Sale of 2500
Investments
To Stationery 1,000
To Postage 500
To Insurance 2000
To Repairs 1500
To Depreciation 5000
To Advertisement 5000
To Discount 500
To Commission of 5000
Salesman
To Bad Debts 2000
To Loss by Fire 2000
To Net Profit [transferred 140500
to Capital Account]

In practice the Trading Account and the Profit and Loss Account are combined and
one account called ‘Trading and Profit and Loss Account’ is prepared. This account is
divided into two parts. The first part shows the Gross Profit and the second part shows
the Net Profit.
Look at illustration and see how combined Trading and Profit and Loss Account will be
30 prepared.
Illustration 3 Final Accounts of
Business Organization
From the following figure prepare Trading and Profit and Loss Account of Lakshmi and (Sole Trader)
Co. for the year ended December 31, 2018.
Rs.
Stock on January 1,2018 40,000
Purchases 98,000
Commission Received 650
Rent, Rates and Taxes 8600
Salaries and Wages 12000
Sales 162100
Returns Inwards 2400
Returns Outwards 3000
Sundry Expenses 2500
Bank Charges 50
Discount Received 750
Carriage on Purchases 2000
Discount Allowed 530
Carriage on Sales 1700
Lighting and Heating 2200
Postage 300
Income from Investments 500
Commission Paid 1000
Interest paid on a Bank loan 550
Trading and Profit and Loss account of Lakshmi and Co. for the year ended
December 31, 2017.
Dr. Cr.
Particulars Amount Particulars Amount
Rs. Rs.
To Opening Stock 40,000 By Sales 162100
To Purchase 98,000 Less Returns 2400 1,59,700
Less Returns 3000 95,000
To Carriage on Purchase 2,000 By Closing Stock 26,000
To Gross Profit c/d 48,700
1,85,700 1,85,700
To Rent, Rates and Taxes 8,600 By Gross Profit b/d 48700
To Salaries Expenses 12,000 By Commission 650
To Sundry Expenses 2,500 Received
To Bank Charges 50 By Discount Received 750
To Discount Allowed 530 By Income from 500
To Carrige on Sales 1,700 Investments
To Postage 300
To Commission paid 1,000
To Interest paid on 550
bank loan
To Lighting and Heating 2,200
To Net Profit 21,170
50,600 50,600 31
Final Accounts and
Corporate Financial 9.4 CLOSING ENTRIES
Statements
You learnt in this Unit that all nominal account which represent items of expenses and
incomes are closed at the end of the accounting year by transfer to either the Trading
Account or to the Profit and Loss Account. The Journal entries passed for such transfer
are called closing entries. You also know that accounts relating to expenses and losses
always show debit balances while those representing incomes show credit balances.
In order to close an account which shows a debit balance and is to be transferred to the
Trading Account, we credit the account concerned with an amount equal to its balance
and debit the Trading Account. For example, the Carriage Inwards Account shows a
debit balance of Rs. 6,000. The closing entry for this will be as follows:
Trading A/c . Dr. Rs. 6000
To Carriage Inwards A/c Rs. 6000
Similarly, an account which shows a credit balance will be closed by debiting it with an
amount equal to the balance and crediting the Trading Account or Profit and Loss
Account, as the case may be. The Closing entries are passed in the Journal proper and
it is necessary to pass such entries for preparing the Trading and Profit and Loss Account.
The entries required for the items which are to be transferred to the Trading Account
are as follows:
1. Trading Account Dr
To Stock Account (Opening)
To Purchases Account
To Sales Returns Account
To Direct Expenses Accounts
(to be credited individually)
2. Sales Account Dr
Purchases Returns Account Dr
Stock Account (closing) Dr
To Trading A/c
3. Trading Account Dr
To Profit and Loss Account
(For Gross Profit)
Note: If there is gross loss, the closing entry will be just the reverse of the
above.
When the closing entry is passed for gross profit or gross loss the Trading Account
stands closed. The entries required for items to be transferred to the Profit and Loss
Account are as follows:
1. Profit and Loss Account Dr.
To Expenses/Losses Accounts
(To be debited individually)
2. Incomes/Gains Accounts Dr
(To be debited individually) Dr.
To Profit and Loss Account
32
3. Profit and Loss Account Dr Final Accounts of
To Capital Account Business Organization
(Sole Trader)
(For Net Profit)
Note: If there is net loss, the closing entry will be just the reverse of the above
Let us see how closing entries for the items given in illustration will be passed. These
are as follow.
Date Particulars L.F Dr. Amount Cr. Amount
2018 Rs. Rs.
Dec 31 Trading A/c Dr. 142400
To Opening Stock A/c 40000
To Purchase A/c 98000
To Sales Returns A/c 2,400
To Carriage Inwards A/c 2000
(Being closing entry)
Dec 31 Sales A/c Dr. 162100
Purchases Returns A/c Dr. 3000
Closing Stock A/c Dr. 26000
To Trading A/c 191100
(Being closing entry)
Dec 31 Trading A/c Dr. 48,700
To Profit and Loss A/c 48,700
(Being transfer of
gross profit)
Dec 31 Profit and Loss A/c Dr. 29430
To Rent, Rates and Taxes A/c 8600
To Salaries and Wages A/c 12000
To Sundry Expenses A/c 2500
To Bank Charges A/c 50
To Discount Allowed Ac 530
To Carriage outwards A/c 1700
To Postage A/c 300
To Commission paid A/c 1000
To Interest Paid A/c 550
To Lighting and Heating A/c 2200
(Being closing entry)
Dec 31 Commission received A/c Dr. 650
Discount Received A/c Dr. 750
Income from Inv. A/c Dr. 1500
To Profit and Loss A/c 2,900
(Being closing entry)
Dec 31 Profit and Loss Dr. 21,170
To Capital A/c (Being transfer
of net profit) 21,700
33
Final Accounts and Check Your Progress A
Corporate Financial
Statements 1. Distinguish between Direct and Indirect Expenses.
........................................................................................................................
........................................................................................................................
........................................................................................................................
2. What is the purpose of preparing a Trading Account?
........................................................................................................................
........................................................................................................................
........................................................................................................................
3. State whether the following statements are True or False.
(i) The gross profit is the difference between total sales and credit sales
(ii) Direct expenses are those expenses which are directly attributed to purchase
of goods for resale
(iii) Stock is valued at cost or market price whichever is lower
(iv) The net profit is the excess of gross profit and other incomes over the indirect
expenses and losses
(v) Income tax paid in case of a proprietary concern is charged to profit an Loss
Account
4. Fill in the blanks
(i) Carriage outwards is an example of ………………………….expenses.
(ii) Cost of goods sold is equal to opening stock plus...................................
less....................................
(iii) Cost of sample distributed free of cost are treated as ……………….expenses
(iv) All direct expenses are debited to …………………………….account.
(v) Loss on account of theft is ………………………………to profit and Loss
account.
(vi) Wages and salaries are charged to …………………………………..
5. Ascertain the cost of goods sold from the following data
Rs.
Direct Expenses 8000

Opening Stock 12,000

Purchase 80,000

Interest Paid 500

Closing stock 10,000

34
 Final Accounts of
9.5 BALANCE SHEET Business Organization
(Sole Trader)
Having prepared the Trading and Profit & Loss Account and ascertained the net profit
or net loss, the businessman proceeds to prepare a statement called balance sheet. The
main purpose is to ascertain the financial position of the business i.e., what it owns and
what it owes on a certain date, usually at the end of the accounting year. It is also called
Position Statement.
A Balance sheet is prepared from the Real Accounts and Personal Accounts. There will
be certain other newly opened accounts as well on account of adjustment entries, e.g.,
outstanding expenses or accrued income or accounts relating to deferred revenue
expenditures. Some of these open accounts may have debit balances and other credit
balances. A debit balance in a real account or a personal account represents an asset.
A credit balance in a personal account is called a liability. All such assets and liabilities
are shown in the balance sheet. It is divided into two halves; the liabilities are placed on
the left-hand-side and the assets on the right-hand-side. The capital account(s) that
represents liability to the owner(s) is shown in the liabilities side and the net profit is
added to and net loss deducted from it. The debit balance in the drawings account (that
represents proprietor(s)’s temporary debts to the business) is not shown as a separate
item in the assets side. Instead, drawing account is shown as a deduction from the
capital account. The total of the two sides must show equal amounts.
The balance sheet, therefore, may be described as a classified summary of debit and
credit balances existing in the trial balance (or ledger) after the trading and profit and
loss account has been prepared. A balance sheet is not an account in the ledger and
thus it has no debit and credit, nor are the items preceded by the words “To” and “By”.
The equality of amounts in the assets side and liabilities side is a proof of arithmetical
accuracy of the adjustments made for the purpose of the final accounts.
The purpose of a balance sheet is to show the financial position of a business enterprise
on a specific date. This is why the balance sheet has the heading: Balance Sheet As
At...as against the heading of Trading Account and Profit and Loss Account (or Trading
and Profit and Loss Account) which usually covers the business activity of a year.
Unlike trading and profit and loss account, a balance sheet is not a part of the double
entry book keeping system. A balance sheet should provide information in respect of:
(i) the nature and cost (or book value) of the assets; (ii) the nature and amount of
liabilities; (iii) the amount of capital; (iv) whether the firm is solvent and (v) whether the
firm is overtrading.
9.5.1 Objectives of Preparing Balance Sheet
1. The main objective of preparing a Balance Sheet is to know the financial position
on the last day of the year.
2. Balance Sheet discloses the types and values of different assets, on that basis
businessman may know cash and bank balance, fixed assets and what to be received
from debtors etc.
3. Balance Sheet also discloses all liabilities, their nature and value, on the basis of
which the trader can know the amount to be paid to Creditors, Bills payable,
Loans and his Capital.
4. On the basis of Balance Sheet opening entry is passed in the beginning of the year. 35
Final Accounts and 9.5.2 Classification of Balance Sheet (Assets & Liabilities)
Corporate Financial
Statements Classification of Assets: Assets are classified as under-
1. Fixed Assets: All assets those are of fixed nature and are used to earn income
and give service for many years to business and are not purchased for resale
purpose such as Land, Building, Plant and Machinery, Furniture and Fittings, Motor
Car etc. are included in fixed assets.
2. Wasting Assets: Natural resources such as oil wells, mines, quarries etc., which
get exhausted after extraction of their contents, are called wasting assets. A mine
becomes valueless as soon as all the minerals have been extracted.
3. Current or Floating Assets: Current assets include all those assets which are
bought for resale purpose or these are produced for sale and these change their
forms during production, e.g. raw material, semi finished goods, stock of Finished
Goods, Investments, Debtors, Bills Receivable, Prepaid Expenses, Bank Deposits
and Cash-in-Hand.
4. Liquid Assets: Current assets which remain in cash or equivalent or those can be
easily converted into cash are called liquid assets. Cash in hand, Cash at bank,
Debtors and B/R are included in liquid assets.
5. Fictitious Assets: In this type of assets such items are included which are not
actually assets but are such expenses and losses which have not yet been written
off in Profit and Loss account. Since these items have debit balances so these are
shown in asset side of Balance Sheet, e.g. preliminary expenses, special advertising
campaign, discount on issue of shares etc.
6. Intangible Assets: Intangible Assets are those assets which cannot be seen and
touched. For example Goodwill, Patents, Copyrights, Trademarks etc. These are
in the form of rights represented by some documents. Note that these assets have
value although without physical form.
Classification of Liabilities: The term liability covers the amount due to creditors and
the amount owing to the proprietor (capital). Hence, liabilities of a business may be
broadly classified into two categories:
i) Liabilities to proprietors — it refers to the claims of the proprietor in the form
of capital and reserves (undistributed profits). They are also called ‘Proprietors
Equity’.
ii) Liabilities to outsiders — are the amounts owing to various creditors such as
creditors for goods supplied, loan on mortgage, bills payable etc. They are also
referred to as outsiders’ equity.
Liabilities to outsiders may be sub-divided into:
Long Term Liabilities: Liabilities which are payable after a long period are categorized
as fixed liabilities. Such liabilities are payable after one or more years. These include
long term loans, debentures, mortgage loans etc.
Current or Short-term Liabilities: Liabilities which are payable within short period
or less than one year are called current liabilities. This includes Bills Payable, creditors,
bank overdraft, outstanding expenses etc.
36
9.5.3 Form of Balance Sheet Final Accounts of
Business Organization
The Balance Sheet is vertically divided into two parts. In practice, capital and various (Sole Trader)
liabilities (what the business owes) are shown on the left-hand side, and various assets
(what the business owns) are shown on the right-hand side. Thus, the Balance Sheet is
a blown-up version of the accounting equation viz., Capital + Liabilities = Assets. You
learnt about this accounting in earlier units. The first part of the equation is presented on
the left hand side of the Balance Sheet called ‘liabilities’ side and the second part of the
equation is presented on the right hand side of the Balance Sheet called ‘assets’ side.
As the total value of assets is always equal to the total claims of the proprietor (capital)
and the outsiders (liabilities), the two sides of the Balance Sheet must tally. Look at
figure to understand the form of a Balance Sheet.
Balance Sheet of..................
as on……………………
Liabilities Amount (Rs.) Assets Amount (Rs.)
Bank Overdraft ..................... Cash in hand .....................
Bills Payable ..................... Cash at bank .....................
Sundry Creditors ..................... Bills Receivable .....................
Loans ..................... Sundry Debtors .....................
Capital ..................... Stock in trade .....................
Vehicles .....................
Furniture .....................
Plant & Machinery .....................
Land & Buildings .....................
Goodwill .....................
Total Total
You should remember that the Balance Sheet is prepared to know the financial position
‘at a particular point of time’ and not ‘for a period’. Hence the heading of the Balance
Sheet always reads as ‘Balance Sheet as on …………………’ (Specific date). Thus,
a Balance Sheet with the heading ‘Balance Sheet as on December 31, 2018 indicates
the financial position of the Business on December 31, 2018. This is because the balance
keep on changing. The balances on December 31 will be different from those on
December 30, and so also from those on January 1, 2019. Even a single transaction
can effect a change in the values of assets and liabilities. Suppose, the total value of
assets of a concern on December 31, 2017 is Rs. 1,00,000 Capital on that is Rs.
60,000 and various liabilities Rs.40, 000. Now the firm purchased goods worth Rs.
10,000 on Credit on January 1, 2018. The effect of this credit purchase of goods
would increase the value of stock (asset) by Rs. 10,000 and so also the amount of
creditors (a liability) By Rs. 10,000. Thus the position of assets and liabilities on January
1, 2018 is different from what it was on December 31, 2017. Hence it is necessary to
write the last date of the accounting year to which the balance actually relates.
Check Your Progress B
1. Fill in the blanks.
a) Balance Sheet is a statement of ……………………………and liabilities. 37
Final Accounts and b) Assets represent …………………………..balances of real and personal
Corporate Financial accounts.
Statements
c) Liabilities represent ……………………..balances of all personal accounts.
d) Assets are shown on the ………………..side of the balance sheet.
e) Capital is shown on the liabilities side of the……………………………...
f) Total of assets and liabilities are always………………………………….
g) All liabilities which become due within one year are classified as……
............….. liabilities.
h) All liquid assets are a part of ……………………………………assets.
2. Classify the following assets as current and fixed assets.
Asset Types of Assets
i) Stock in Trade ...................................................
ii) Plant and Machinery ...................................................
iii) Short –term Investment ...................................................
iv) Furniture and Fixtures ...................................................
v) Loose Tools ...................................................
vi) Bills receivable ...................................................
vii) Cash at Bank ...................................................
viii) Goodwill ...................................................
ix) Vehicles ...................................................
x) Sundry Debtors ...................................................
3. Classify the following liabilities as current and long-term liabilities.
Liabilities Types of Liabilities
i) Bills Payable ...................................................
ii) Bank Overdraft ...................................................
iii) Loan on Mortgage ...................................................
iv) Sundry Creditors ...................................................
v) Debenture ...................................................
vi) Wages Payable ...................................................
4. a) What is Wasting Asset?
...............................................................................................................
...............................................................................................................
...............................................................................................................
b) What are Fictitious Asset?
...............................................................................................................
...............................................................................................................
...............................................................................................................
9.5.4 Arrangements of Assets and Liabilities in Balance Sheet
As stated earlier, the Balance Sheet is dividend in two parts. Left side is termed as
liabilities side and right side is termed as assets. There is no legal format of Balance
38
Sheet of individual and partnership firm. Even their assets and liabilities are shown in a
certain order which is called Marshalling of Balance Sheet. Balance Sheet may be Final Accounts of
prepared in two orders — (1) Liquidity order, and (2) Permanency order. Business Organization
(Sole Trader)
1. Order of Liquidity: In this order the priority in which assets can be converted
into cash are recorded. The asset which can be first of all convertible in cash is
recorded first, similarly liability which is payable (in priority) first is recorded the
top. Balance Sheet format in liquidity order is an under.
Balance Sheet
as on……………………

Liabilities Rs. Assets Rs.

Bank Overdraft Cash in Hand
Bills Payable Cash at Bank
Outstanding Bills Receivable
Expenses Sundry Debtors
Creditors Stock-in-Trade
Loan Stores
Capital Prepaid Expenses
Investment
Furniture
Plant and Machinery
Land and Buildings
Goodwill

2. Order of Permanency: In this order, fixed liabilities and fixed assets are recorded
first, thereafter current liabilities and current assets will be recorded. It is opposite
to liquidity order. The format under this order is given below.
Balance Sheet
as on………………………

Liabilities Rs. Assets Rs.

Capital Goodwill
Loan Land and Buildings
Creditors Plant and Machinery
Expenses Furniture
Outstanding Investment
Bills Payable Prepaid Expenses
Bank Overdraft Stores
Stock-in-Trade
Sundry Debtors
Bills Receivable
Cash at Bank
Cash in Hand
........................ ........................
39
Final Accounts and 9.5.5 Difference Between Profit & Loss Account and
Corporate Financial
Statements Balance Sheet
Sl. No. Basic Profit & Loss Account Balance Sheet

1. Format It is an account to ‘To’ and It is a statement to ‘To’

‘By’ words are used and ‘By’ words is not
used.
2. Accounts included All nominal accounts are Personal and real
recorded accounts are shown.
3. Sides It has ‘Debit’ and ‘Credit’ It has ‘Asset’ and
side. ‘Liabilities’ Side.
4. Order of showing There is no order of writing It is prepared in a certain
accounts accounts, i.e. no certain order either is liquidity or
sequence is followed. permanency.
5. Object To know profit or loss of a To know the financial
certain period of a business position of the business
on a certain day.
6. Transfer of Balance The balance of this account There is no balance
is transferred to Capital because assets and
account. liabilities remain equal.
7. Compulsion Balance Sheet is not Profit & Loss account is
necessary to prepare before prepared compulsorily
this account. before preparing Balance
Sheet.
9.5.6 Important Points While Preparing Final Accounts
1. Trial Balance is prepared if not given in question to ensure that totals of debit and
credit balances are equal and if not the difference is written in Suspense account
and the same would be shown in Balance Sheet.
2. The balances given in Trial Balance are shown only at one place either in Trading
and Profit & Loss account or in Balance Sheet.
3. The balances of nominal accounts having Dr. Balances would be recorded in Dr.
side of Trading or Profit and Loss account and having Cr. Balances would be
recorded in Cr. side of Profit & Loss account.
4. The balances of all personal and real accounts showing Dr. Balances are recorded
in Assets side and Cr. Balances in Liabilities side.
5. Personal accounts stating Dr. balances are clubbed and shown under the head
debtors in Assets side. Similarly accounts having Cr. Balances would be totalled
and be shown under the head Creditors in Liabilities side.
6. In Balance Sheet the Dr. Balance of Profit and Loss account, i.e. Net Loss is
deducted from capital while Cr. Balance of Profit and Loss account, i.e. Net Profit
is added to capital. Drawing made by proprietors during the year will be deducted
from capital and then adjusted net capital will appear in amount column as balance
40 of capital account.
7. Total of assets and liabilities columns must always be equal otherwise it would be Final Accounts of
indicative of incorrect final account. Business Organization
(Sole Trader)
Illustration —4
From the following Trial balance of Shri Mahesh Iron Store, prepare Trading and Profit
& Loss Account for the year ended 31" March 2018 and a Balance Sheet as on the
date.
Dr. Cr.
Rs. Rs.

Capital 50,000

Drawings 5,000

Furniture 15,000

Purchases and Sales 1, 50,000 2, 50,000

Debtors and Creditors 25,000 30,000

Returns 3,500 1,500

Bad Debts 500

Advertisement 1,000

Rent, Rates and Taxes 1,000

Bills Receivable and Bills Payable 15,000 7,000

Discount 250 500

Plant and Machinery 22,500

Carriage on Purchases 5,500

Carriage on sales 750

Opening Stock 34,000

Manufacturing Expenses 19,000

Trade Expenses 1,500

Salaries 5,500

Cash in Hand 14,500

Cash at Bank 17,500

Wages 2,000

Total 3, 39,000 3, 39,000

The Closing Stock on 31.03.2018 was Rs. 12, 500
41
Final Accounts and Solution:
Corporate Financial
Statements Trading and Profit & Loss Account
Dr. For the year ended 31st March, 2018 Cr.
Particular Amount Particulars Amount
Rs. Rs.
To Opening Stock 34,000 By Sales 2,50,000
To Purchase 1,50,000 Less: Sales Returns 3,500 2,46,000
Less: Purchases 1,500 By Closing Stock 12,500
Returns
1,48,500
To Carriage on Purchases 5,500
To Manufacturing Exp. 19,000
To Wages 2,000
To Gross Profit c/d 50,000
2,59,000 2,59000
To Bad Debts 500 By Gross Profit b/d 50,000
To Advertisement 1,000 By Discount 500
To Rent, Rates & Taxes 1,000
To Discount 250
To Carriage on Sales 750
To Trade Expenses 1,500
To Salaries 5,500
To Net Profit 40,000
(Transferred to Capital Account)
50,500 50,500
Balance Sheet as at 31st March, 2018
Liabilities Rs. Assets Rs.
Bills Payables 7,000 Cash in hand 14,500
Creditors’ 30,000 Cash at Bank 17,500
Capital 50,000 Bill Receivable 15,000
Add : Net Profit 40,000 Debtors 25,000
90,000 Stock 12,500
Less: Drawings 5,000 85,000 Furniture 15,000
Plant and Machinery 22,500
1,22,000 1,22,000

9.6 VERTICALPRESENTATION OF FINAL ACCOUNTS

Trading and Profit and Loss Accounts and the Balance Sheet have so far been presented
as a two-sided statement. But, in practice, you do not necessarily have to present the
final accounts in this form. Now-a-days many firms present them in a simpler and more
intelligible form which is called a narrative style or vertical presentation. According to
this style, the Trading and Profit and Loss Account is also presented in the form of a
statement. It first shows the various sources of incomes and then all the expenses.
Similarly, the Balance Sheet first shows various assets owned by the business and then
42 shows the liabilities. This form of presentation is adopted by many companies for
publications of their final accounts. This helps the users of such financial information to Final Accounts of
appreciate the significance of different items without any difficulty. They can easily interpret Business Organization
(Sole Trader)
the data and judge the profitability and the financial position of the company. Look at
the figures and study how various items are shown in the trading and profit and loss
account and the balance sheet in vertical form.
Trading and Profit and Loss account of...........
for the year ended December 31, 2018
Rs. Rs.
SALES .............................
Less Cost of Goods Sold:
Opening Stock ...........................
Add Purchases ...........................
Add Direct Expenses ...........................

Less Closing Stock ........................... ...........................

GROSS PROFIT
Add Other Income ...........................
Less Indirect Expenses: ...........................
Salaries ...........................
Rent ...........................
Sundry Expenses ...........................
Insurance ...........................
NET PROFIT ...........................

Balance Sheet of…………………………..

as on December 31, 2018
Rs. Rs.
Fixed Assets:
Opening Stock
Land Buildings ...........................
Plant and Machinery ...........................
Furniture and Fixtures ...........................
Vehicles ........................... ...........................
Current Assets:
Stock-in-hand ...........................
Debtors ...........................
Cash at bank ...........................
Cash in hand ...........................
Less Current Liabilities:
Creditors
…………………
Bill Payable
………………… ...........................
Working Capital ...........................
Financed by:
Capital:
Balance as on 1.1.2018
Add Net Profit for the year
Less Drawings ........................... ...........................
Loans ........................... 43
Final Accounts and Look at Illustration and study how Trading and Profit and Loss Account and the Balance
Corporate Financial Sheet have been prepared for vertical presentation.
Statements
Illustration 5
From the following Trail Balance of C. Ramachandran prepare in vertical form the
Trading and Profit and Loss Account for the year ended December 31, 2018 and
Balance Sheet as on that date.
Trial Balance of C. Ramachandran
For the year ended December 31, 2018
Name of the Account Dr. Balances Cr. Balances
Rs. Rs.
Capital 23,560
Stock on January 1, 2018 8,123
Sales 46,155
Purchases 28,450
Carriage 263
Advertising 277
Rates and Insurance 1,675
Motor Expenses 1,300
Salaries 5,375
Premises 13,750
Vehicle 3,000
Debtors 4,875
Creditors 3,845
Cash at bank 4,134
Cash in hand 100
Drawings 2,238
Total 73,560 73,560
Stock on December 31, 2018 was Rs.6, 370

44
Solution: Final Accounts of
Business Organization
Trading and profit and Loss Account of C. Ramachandran (Sole Trader)
For the year ended December 31, 2018
Dr. Rs. Rs. Cr.
Sales 46,155
Less Cost of Goods Sold:
Opening stock 8,123
Add Purchases 28,450
Add Direct Expenses 263
36,836
Less : Closing stock 6,370 30,466
GROSS PROFIT 15,689
Add other income
Less Indirect Expenses:
Salaries 5,375
Rates Insurance 1,675
Motor Expenses 1,300
Advertising 277
8,627
NET PROFIT
7,062
Balance Sheet of C. Ramachandran
as on December 31, 2018
Fixed Assets: Rs. Rs.
Premises 13,750
Vehicle 3,000
16,750
Current Assets:
Stock in hand 6,370
Debtors 4,875
Cash at bank 4,134
Cash in hand 100
15,479
Less Current Liabilities
Creditors 3,745
Working Capital 11634
Total 28,384
Financed by Capital 23,560
Balance as on 1.1.2018
Add Net Profit 7,062
30,622
Less Drawings 2,238 28,384
Total 28,384
45
Final Accounts and
Corporate Financial 9.7 LET US SUM UP
Statements
At the end of the accounting year the businessman prepares the final accounts with the
help of a Trial Balance. The final accounts consists of Profit and Loss Account and
Balance Sheet. Profit and Loss Account is prepared for ascertaining the net profit/net
loss of the business during the year and the Balance sheet is prepared for ascertaining
the financial position as at the end of the year.
The Profit and Loss Account is divided into two sections. The first section called Trading
Account which reveals the gross profit or gross loss and the second section called
Profit and Loss Account which shows the net profit or net loss. Gross profit is defined
as the excess of sales revenue over the cost of goods sold which also includes the direct
expenses. The net profit is worked out by crediting the Profit and Loss Account with
the amount of gross profit and other incomes and debiting it with all indirect expenses
and losses. In practice, we usually prepare a combined Trading and Profit and Loss
Account. It is also necessary to pass closing entries for transferring all expenses and
incomes to the Trading and Profit and Loss Account.
The Balance Sheet shows all assets and liabilities of the business. The assets represent
the debit balances of the real and personal accounts plus the unwritten off amounts of
deferred revenue expenses. The liabilities, on the other hand, represent the credit balances
of real and personal accounts including capital. The total assets should always be equal
to the total of liabilities plus the Capital.
The manufacturing concerns may also prepare a manufacturing account for ascertaining
the cost of goods produced, which is then transferred to the Trading Account for
ascertaining the cost of goods sold and the gross profit. This, however, is not compulsory.
Most manufacturing concerns prepare the Trading Account directly by showing all
expenses incurred in the factory (including cost of raw materials consumed) in the Trading
Account itself.
The Balance Sheet is prepared to know the financial position of the business on a
certain date. The Balance Sheet is vertically divided into two parts. Various assets are
shown on the right-hand side. Capital and various liabilities are shown on the left-hand
side. The two sides of the Balance Sheet must always tally. Assets are classified into: (i)
Fixed Assets, (ii) Current Assets, (iii) Liquid Assets, (iv) Tangible Assets, (v) Intangible
Assets, (vi) Wasting Assets and (vii) Fictitious Assets. Liabilities are classified into: (i)
Liabilities to the Proprietor, and (ii) Liabilities to Outsiders. Liabilities to outsiders are
sub-divided into (a) Short-term liabilities, and (b) Long-term liabilities. The assets may
be arranged in the Balance Sheet either in the order of liquidity or in the order of
permanence. The liabilities can also be arranged either in the order of discharge ability
or in the order of permanence.

9.8 KEY WORDS

Closing stock: Goods remaining unsold at the end of the accounting year.
Cost of Conversion: Expenses incurred in the factory (for converting raw materials
into finished goods).
Cost of Goods Sold: Difference between the cost of goods available for sale and the
cost of goods in stock.
46
Cost of Production: It is the cost of goods produced which includes cost of raw Final Accounts of
materials consumed and all manufacturing expenses. Business Organization
(Sole Trader)
Current Assets: Assets which are likely to be realized within a period of one year or
during the operating cycle. They are also called floating assets. These assets are held
for purposes of resale, consumption or conversion into cash.
Current Liabilities: Liabilities which are likely to be paid within one year or during the
operating cycle. They are also called short term liabilities.
Direct Expenses: Expenses incurred on the goods purchased till they are brought to
the place of business,
Fictitious Assets: Expenses and losses not yet written off and shown as assets in the
Balance sheet.
Fixed Assets: Assets acquired for use in the business for a long period. They are also
called non-current assets.
Gross Profit: Excess of sales revenue over the cost of goods sold.
Indirect Expenses: All expenses other than direct expenses. These include expenses
incurred in connection with general administration, financial matters and selling and
distribution of goods.
Intangible Assets: Assets in the form of rights which cannot be seen or touched such
as goodwill, patents, etc.
Net Profit: Excess of gross profit and other incomes over the indirect expenses and
losses in the business.
Non Current Liabilities: Liabilities payable after a long time (usually more than a
year). They are also called long-term liabilities.
Owner’s Capital: Claim of owners against the assets of the business. It is also called
owner’s equity and is equal to excess of assets over outside liabilities.
Opening stock: Stock of goods as at the beginning of the accounting year.
Scrap: Waste material which arises in the course of manufacture.
Tangible Assets: Assets which have physical form and can be seen and touched such
as buildings, machinery, etc.
Work in Progress: Goods in respect of which some work still remains to be done.
They are also called semi-finished goods.
Balance Sheet: A statement showing assets and liabilities of the business as at the end
of an accounting year.
Block: Total fixed assets.
Liquid Assets: Assets in the form of cash or those which can be readily converted’
into cash.
Long-term liabilities: Liabilities payable after a long period of time.
Marshalling of Balance Sheet: Arrangement of assets and liabilities in the Balance
Sheet in a proper order
47
Final Accounts and Wasting Assets: Assets which get exhausted as result of extraction of their contents.
Corporate Financial
Statements Opening Entry: Balances from the balance sheet of previous year are brought forward
at the beginning of the year through journal entry.

9.9 ANSWERS TO CHECK YOUR PROGRESS

A 3 i) False ii) True iii) True iv) False v) False vi) False
A 4 i) Indirect ii) Purchases, Closing Stockiii) Selling iv) Trading v) Debited
vi) Trading Account.
A 5 90, 0000
B 1 (a) assets (b) debit (c) credit (d) right-hand (e) Balance sheet
(f) equal (g) current (h) current
B 2 (i) Current (ii) Fixed (iii) Current (iv) Fixed (v) Fixed (vi) Current
(vii) Current (viii) Fixed (ix) Fixed (x) Current
B 3 (i) Current (ii) Current (iii) Long-term (iv) Current (v) Long-term
(vi) Current

9.10 TERMINAL QUESTIONS/EXERCISES

Questions
1. Distinguish between:
a. Cost of Goods Sold and Cost of Goods Processed
b. Gross Profit and Net Profit
c. Direct Expenses and Indirect Expenses
d. Trading Account and Manufacturing Account.
e. Profit and Loss Account and Balance Sheet.
2. Give closing entries for Trading and Profit and Loss Account.
3. What is a Balance Sheet? Describe different methods of arranging the assets and
liabilities in the Balance Sheet.
4. How would you classify various assets and liabilities? Explain with suitable
examples.
5. What do you mean by opening entries how it is posted in ledger?

48
Exercises Final Accounts of
Business Organization
1. Find out the Cost of Goods sold from the following figures extracted from the (Sole Trader)
books of Allied Ltd. For the Year 2018.
Rs.
Stock [1.1.2018] 50000
Purchases 1000000
Sales 1500000
Purchases Returns 50000
Stock [31-1-2018] 70000
Direct Expenses 60000
Indirect Expenses 100000
[Answer: 9, 90,000)
2. Find out the Cost of Goods Sold and Gross Profit from the following figures
Rs.
Inventory in the beginning 60000
Purchases Less Returns 600000
Carriage Inwards 20000
Carriage Outwards 30000
Cartage and Freight 10000
Wages 50000
Sales Less Returns 1200000
Inventory at the end 40000
[Answer: Cost of Goods sold Rs. 7, 00,000; Gross Profit Rs. 5, 00,000]
3. From the data given in questions No. 2 prepare Trading Account.
4. From the following balances of Shyam Sunder, prepare Profit and Loss Account
for the year ended March 31, 2018.
Rs.
Office expenses 5280
Advertising 3000
Legal Charges 5000
Postage and telephone Charges 6400
Salaries and Wages 60000
Travelling Expenses 2500
Interest Received 600
Rent, Rates and Taxes 20800
Insurance 2400
Office Lighting 1500
Stationery 1200
Repairs 920
Miscellaneous Income 800
Commission paid 4000
Bank Charges 200
The Gross Profit for the year was Rs. 73,000
49
Ans: Net Loss Rs. 38000
Final Accounts and 5. The following balances have been extracted from the books of Plaza Electricals
Corporate Financial Ltd. For the year 2018.
Statements
Rs.
Sales 500000
Purchases 300000
Return Inwards 10000
Return Outwards 15000
Opening Stock 30000
Wages 20000
Carriage Inwards 5000
Carriage Outwards 3000
Salaries 25000
General Expenses 10000
Rent and Rates 4000
Advertisement 5000
Bad Debts 3000
Insurance 3000
Trade Expenses 2000
Depreciation 5000
It was further given that the value of stock on December 31, 2018 was Rs. 50,000.
You are required to prepare Trading and Profit and Loss Account of Plaza Electrical
Ltd. for year ending December 31, 2018.
Answer: Gross Profit Rs. 2, 00,000; Net Profit Rs. 1, 40,000.
6. From the following data pertaining to the transactions of Mehta Bros for the year 2018,
prepare Trading and Profit and loss Account for the year ending December 31, 2018.
Rs.
Sales 1000000
Purchases 600000
Sales Returns 20000
Purchases Returns 10000
Inventory [beginning] 40000
Wages 50000
Carriage inwards 20000
Carriage outwards 15000
Trade expenses 10000
Cartage and Freight 5000
Salaries 30000
Insurance 6000
Rent and Rates 5000
Distribution Expenses 6000
Discount Received 1000
Discount Allowed 2000
Bad Debts 2000
Depreciation 8000
Interest on Investments 20000
Interest on Bank Deposits 1000
Interest on Bank Overdraft 500
Loss of Goods by Fire 2500
50
It was further given that the value of Inventory on December 31, 2018 was Rs. 80000 Final Accounts of
Business Organization
7. For the year ending September 30, 2018 Shyamlal has earned a net profit of Rs. (Sole Trader)
27,600. Other Balances in his ledger are given below:
Rs.
Cash in hand 2,400.00
Bank overdraft 5,600.00
Stock in trade 18,700.00
Sundry creditors 24,400.00
Sundry Debtors 19,500.00
Buildings 60,000.00
Machinery 40,000.00
Investment 10,000.00
Reserves 20,000.00
Drawings 6,000.00
Capital 85,200.00
Furniture 5,000.00
Life Insurance Premium 1,200.00
(Answer: Total of balance sheet Rs. 1, 55,600)
(Hint: Life insurance premiums should be related as drawings.)
8. From the following Trial balance of Shankarlal, prepare Trading and Profit and
Loss account for the year ended, March 31, 2018 and balance sheet as on that.
Trail Balance as on March 31, 2018
Name of the Account Dr. Balance (Rs.) Cr. Balance (Rs.)
Capital 48,800
Cash in Hand 700
Bank Loan 20,000
Purchases and Sales 80,000 1,90,000
Returns 3,000 1,500
Carriage 3,400
Stock on April 1, 2017 13,000
Bill Receivable 8,000
Bill Payable 6,000
Rent and Taxes 7,200
Salaries 24,000
Wages 12,000
Office Expenses 1,200
Trade Expenses 800
Discount 700 600
Sundry Debtors 29,600
Sundry Creditors 13,000
Machinery 72,000
Furniture 18,000
Drawings 4,800
Advertising 600
Bank Charges 100
Insurance 800
Total 2,79,900 2,79,900 51
Final Accounts and Closing stock was valued at Rs. 20,800
Corporate Financial
Statements (Answer: - Gross Profit Rs. 1, 00,100; Net Profit Rs. 66,100;
(Total of Balance Sheet Rs. 1, 49,100)
9. From the trial balance of Mr. Anil given below, prepare final accounts for the
period ending on 31 March 2018.
Trial Balance of Anil AS on 31 March 2018
Name of the Account Debit Rs. Credit Rs.
Anils’s capital account 1,01,500
Cash in hand 6,470
Cash in Bank 17,190
Opening stock 40,000
Furniture account 6,600
Sundry Debtors
Sound & Co. 18,500
Monohar Lal & Sons 4,000
Veer traders 3,400
Bill payable account 13,000
Advertising account 500
Trade expenses account 100
Salaries and wages account 2,000
Office stores account 1,200
Travelling charges account 50
Telephone charges account 250
Rent account 1,500
Stationery account 150
Discount allowed account 170
Discount received account 320
Bad debts account 3,000
Trade Creditors
Jony Limited 16,000
Rhytham corner 28,000
Modern electronics 4,000
Delite Safe Co. 1,600
Sales account 38,900
Purchases account 91,940
Sales returns account 2,000
Purchases returns account 3,200
Post-dated-cheque account 5,000
Drawings account 2,500
2,06,520 2,06,520
Stock on hand Goods Rs. 1, 00,000; Office stores Rs. 500.
(Ans: Gross profit Rs 8,160 Net profit Rs. 60 Balance Sheet Total Rs. 1, 61,000.)

52
 Adjustments in Final
UNIT 10 ADJUSTMENTS IN FINAL ACCOUNTS Accounts

Structure
10.0 Objective
10.1 Introduction
10.2 Need for Adjustments
10.3 Types of Adjustment Entries
10.3.1 Closing Stock

10.3.2 Outstanding Expenses

10.3.3 Prepaid Expenses

10.3.4 Accrued or Outstanding Incomes

10.3.5 Income Received in Advance

10.3.6 Depreciation

10.3.7 Interest on Capital and Drawings

10.3.8 Bad Debts

10.3.9 Provisions for Discount on Debtors and Creditors

10.3.10 Provisions for Discount on Debtors and Creditors

10.3.11 Manager’s Commissions

10.3.12 Abnormal Loss of Stock

10.3.13 Drawing of Goods by the Proprietor

10.4 Let Us Sum Up

10.5 Key Words
10.6 Answers to Check Your Progress
10.7 Terminal Questions/Exercise

10.0 OBJECTIVES
After Studying this unit, learner should be able to:
 Explain why adjustment entries are necessary at the time of preparing the final
accounts.
 List the items in respect of which adjustments are usually made; and
 Pass adjustment entries.

10.1 INTRODUCTION
You have learnt about the preparation of final accounts without any adjustments. Before
preparing the final accounts, it is necessary to find out whether the books of accounts
contains a complete record of all transactions relating to the year for which they are 53
Final Accounts and being prepared. In practice, generally, the accounts do not contain all items of expenses
Corporate Financial and incomes which relate to the current year. They may, on the other hand, contain
Statements
certain items which relates to the next year. Therefore, while preparing the final accounts,
it becomes necessary to make certain adjustments in respect of some items of expenses
and income.
In this unit, we will learn (i) which are the items that need adjustment (ii) how such
adjustments are made in the books of accounts, (iii) how final accounts are prepared
by taking into consideration various adjustments.

10.2 NEED FOR ADJUSTMENTS

1. To know the true net profit or loss of the business.
2. To know the true financial position of the business.
3. To make record of the transactions omitted from the books.
4. To rectify the errors committed in the books of accounts.
5. Recording of expenses which have accrued but have not been paid.
6. Recording of incomes which have accrued but have not been received.
7. Providing for depreciation and other provision.

10.3 TYPES OF ADJUSTMENT ENTRIES

Trial Balance adjustments are given below in the form of notes. While preparing final
accounts, these adjustments shall be deducted or added in related items given in the
Trial Balance. Generally adjustments are to be made in the following cases:
1. Closing Stock
2. Outstanding Expenses
3. Prepaid Expenses
4. Accrued / Outstanding income
5. Income received in advance
6. Depreciation
7. Interest on Capital
8. Interest on Drawings
9. Bad Debts
10. Provision for Doubtful Debts
11. Provision for Discount on Debtors
12. Provision for Discount on Creditors
13. Manager’s Commission on Profits
14. Abnormal Losses
15. Drawings of goods by proprietor.
Let us discuss the above adjustments in detail along with accounting treatment. Try to
understand the accounting treatment of these adjustments for preparation of Final
54 Accounts.
10.3.1 Closing Stock Adjustments in Final
Accounts
At the end of the year final accounts will not reflect accurate trading profit or loss and
financial position without including the value of unsold goods. Closing stock is valued at
lower of cost and market price on the date of balance sheet. For valuation of stock,
stock list is prepared which also includes the list of goods which are actually held with
other persons but owned by the business, e.g. goods sent on consignments, goods sent
on approval basis, goods in transit etc. The goods owned by other persons but held
with the business should not be included in the stock.
In the Final Accounts stock of goods on the last day of the financial year is included but
sometimes due to business difficulties it is not possible to count the stock on the last day
of the financial year. In such circumstances adjustments have to be done to find out the
actual stock position at the end of the financial year.
Closing Stock a/c Dr.
To Trading a/c
Closing stock should be shown on the credit side of the trading account and it also
shown on the asset side of balance sheet. Generally closing stock does not appear in
the trial balance. If it is given in trial balance, due to any reason, it should not be shown
anywhere except on the asset side of balance sheet.
10.3.2 Outstanding Expenses
Such expenses which are related to current year but have not been paid till the last date
of the year are known as outstanding expenses. For example-Rent, Salary, Wages
which have been utilised in the current year but whose payment has not been made till
the last date of the current year. So these items have not been recorded in the books.
To know the correct profitability, these expenses will be taken into books by debiting
relevant expenses and crediting outstanding expenses. This entry will increase the balance
of relevant expenses account. Amount of outstanding expenses will be added to relevant
expenses in the Trading and Profit & Loss Account and will be shown on the liability
side of Balance Sheet separately.
Example: One businessman makes a payment of Rs.5, 500 as wages during the year
ending 31st March, 2018. Wages of Rs.500 for the month of March, 2018 is paid in the
month of April, 2018. Adjustment entry for this transaction shall be as follows-

2018 Rs. Rs.

March 31 Wages a/c Dr. 500 500
To Outstanding Wages a/c
(Wages for March outstanding.)

Dr. Wages Account Cr.

2018 Rs. 2018 Rs.
March. 31 To Cash 5,500 Mar. 31 By Trading a/c 6,000
March. 31 To Outstanding 500
Wages a/c
6,000 6,000
55
Final Accounts and Dr. Outstanding Wages Account Cr.
Corporate Financial
Statements 2018 Rs. 2018 Rs.
March. 31 To Balance c/d 500 Mar. 31 By Wages a/c 500
500 April 1 By Balance b/d 500
2008
500

Dr. Trading and Profit & Loss Account Cr.

(For the year ended 31st March, 2018)

Rs. Rs. Rs.

To Wages 5,500
Add: outstanding Wages 500
6000
6,000
Balance Sheet
As at 31st March, 2018

Liabilities Amount Assets Amount

Rs. Rs.
Outstanding 500
500

10.3.3 Prepaid Expenses

Normally payment of certain expenses like-Insurance, Rent of shop etc. is paid in
advance. Such expenses are termed as advance or prepaid expenses. Benefit of such
expenditure may spread across a period which may roll into the next financial/accounting
year. An adjustment entry in financial statement needs to be made at the end of the
financial year. The amount should be deducted from the relevant expenditure in Trading
and Profit &Loss account and should be shown as an asset in the Balance sheet
separately.
Example: On 1st July, 2017 Rs.1, 200 were paid as Insurance premium for the shop
for the whole year. Final account have to be prepared on 31st March, 2018.Adjustment
entry for this transaction shall be as follows:
Solution: Insurance premium for the whole year for the shop has been paid on 1st July
2017. It means advance payment has been made for the period 1st April, 2018 to 30th
June, 2018. Adjustment entry for the amount of Rs.300 for this period will be passed
as follows-

2018 Rs. Rs.

31-Mar Prepaid Insurance Premium a/c Dr. 300
To Insurance Premium a/c 300
(Three month premium paid in advance)

56
Dr. Insurance Premium Account Cr. Adjustments in Final
Accounts
2017 Rs. 2018 Rs.
July 1 To Cash 1,200 Mar.31 By Prepaid Insurance a/c 300

Mar.31 By P.& L.a/c 900

1,200 1,200

Dr. Prepaid Insurance Premium Account Cr.

2018 Rs. 2018 Rs.
31, March To Insurance Premium A/c 300 Mar.31 By Balance c/d 300
300 300
1, April To Balance b/d 300

Profit and Loss Account

(For the year ended 31st March, 2018)
Rs. Rs. Rs.
To Insurance Premium 1200 900
Less Prepaid Ins. Premium 300

Balance Sheet as on 31st March, 2018

Liabilities Amount Assets Amount
Rs. Rs.
Prepaid Insurance Premium 300

10.3.4 Accrued or Outstanding Incomes

Accrued incomes are those incomes which have been earned during the current
accounting year but not yet received till end of the current accounting year. They are
also called incomes earned but not yet received. Examples of such incomes are
commission receivable, income on investments due but not yet received etc.
The following adjustment entry is passed in respect of the accrued income.
Accrued Income A/c Dr.
To Concerned Income A/c
The Accrued income is treated in final accounts as follows:
i) Added to the concerned income in the Profit and Loss Account, and
ii) Shown on the asset side of the Balance Sheet as a separate item under Current
Assets.
Example: On 1st July, 2017 10% debentures of Rs.10,000 were purchased on which
Rs.500 were received as interest for six month on 31st December, 2017. Final account
every year are prepared on 31st March 2018. Adjustment entry for this transaction
shall be passed in following manner-
Rs. 250 was earned as interest for the period 1st January, 2018 to 31st March, 2018
though not actually received. Adjustment entry for this transaction shall be passed in the
following manner- 57
Final Accounts and 2018 Rs. Rs.
Corporate Financial
Statements 31-Mar Accrued Interest a/c Dr 250
To Interest a/c
(Interest accrued but not received) 250

Dr. Accrued Interest Account Cr.

2018 Rs. 2018 Rs.
Mar.31 To Interest a/c 250 Mar.31 By Balance c/d 250
1-Apr-18 250 250
To Balance b/d 250

Dr. Interest Account Cr.

2018 Rs. 2018 Rs.
Mar.31 To P. & L. a/c 750 Dec.31 By Cash a/c 500
2018
Mar.31 By Accrued 250
Interest a/c
750 750

Dr. Profit and Loss account for the year ended 31st March, 2018 Cr.
Rs. Rs. Rs.
By Interest 500
Add: Accrued Interest 250 750
Balance Sheet
As on 31st March, 2018
Liabilities Amount (Rs.) Assets Amount (Rs.)
Accrued Interest 250

10.3.5 Income Received In Advance

Any income which belongs to the next accounting year but has been received during the
current accounting year is called income received in advance. It is the income in respect
of which the service is yet to be provided. For example, Rent, Commission etc. can be
received in advance. In such a situation, the unearned portion of the income will have to
be adjusted while preparing the final accounts.
The following adjusting entry is passed in respect of the unearned income.
Concerned Income A/c
To Income Received in Advance A/c
(Being the income earned in advance)
The unearned income is treated in the final accounts as:
58
i) Deducted from the concerned income in the profit and loss account, and Adjustments in Final
Accounts
ii) Shown on the liabilities side of the balance sheet as a separate item under Current
liabilities.
Example: On 1st January, 2018 a trader let out a portion of his business premises at a
monthly rent of Rs. 500 and received and advance of Rs.3, 000 for six month. The
following adjustment entry will be made in books of accounts closing on 31st March,
2018. Rs. 3,000 received on 1st January, 2018 is advance rent up to the period 30th
June, 2018, 3 months’ rent of Rs. 1,500 i.e. up to 31 st March, 2018; is related with
current year and remaining Rs. 1,500 for next year and its adjustment entries shall be
made in the following manner
2018 Rs. Rs.
31-Mar Rent a/c Dr. 1,500
To Unearned Rent a/c 1,500
(Rent received in advance)

Dr. Rent Account Cr.

2018 Rs. 2018 Rs.
31-Mar To Profit and Loss A/C 1,500 Jan. 1 By Cash a/c 3,000
To Unearned Rent a/c 1,500
(Rent received in advance)
3,000 3,000

Dr. Unearned Rent Account Cr.

2018 Rs. 2018
31-Mar To Balance c/d 1,500 Mar. 31 By rent a/c 1,500
1,500 1-Apr 1,500
By Balance b/d 1,500

Dr. Profit and Loss Account for the year ended 31 st March, 2018 Cr.
Rs. Rs. Rs.
By Rent 3,000
Less: Unearned Rent a/c 1,500 1,500

Balance Sheet as at 31st March, 2018

Liabilities Amount (Rs.) Assets Amount (Rs.)
Unearned Rent 1,500

Check Your Progress A

1. What is an outstanding expense? Explain with an example.
........................................................................................................................
........................................................................................................................
59
Final Accounts and 2. What do you mean by prepaid expense? Give an example.
Corporate Financial
Statements ........................................................................................................................
........................................................................................................................
3. What do you mean by outstanding incomes?
........................................................................................................................
........................................................................................................................
4. What do you understand by incomes received in advance?
........................................................................................................................
........................................................................................................................
5. Choose one of the following alternatives and tick (  ) the correct answer,
a) Outstanding Salaries are shown in the Balance Sheet as
i) a long-term liability ()
ii) an asset ()
iii) a current liability ()
b) While making an adjustment entry in respect of closing stock, we debit
i) Closing Stock Account ()
ii) Trading Account ()
iii) Purchases Account ()
c) In case the closing stock appears in Trial Balance, it is shown in the
i) Trading Account ()
ii) Manufacturing Account ()
iii) Balance Sheet ()
d) While making an adjustment entry for Prepaid expenses, we debit prepaid
insurance and credit
i) Profit and Loss Account ()
ii) Insurance Account ()
iii) Trading Account ()
e) Income received in advance are shown in Balance Sheet as
i) a current liability ()
ii) a current asset ()
iii) a fictitious asset ()
10.3.6 Depreciation
Due to continuous use of fixed assets in business, value of these assets keeps on
decreasing every year like-Building, Machine, Furniture etc. This is called the
depreciation. This is a trading loss for business because depreciation occurs due to the
use of fixed assets in business whose accounting treatment must be done at the end of
the year. Following adjustment entry is passed regarding depreciation-
60
Depreciation a/c Dr. Adjustments in Final
Accounts
To Asset a/c
(Depreciation written off on……)
While preparing final account, depreciation will be debited in Profit and Loss Account
as a loss and it will be deducted from the value of related asset in the Balance Sheet.
Depreciation is calculated on original cost or written down value of fixed assets at fixed
rates. The rate is given in percentage. If the rate is given as percent per annum then the
depreciation will be calculated for the period in which the asset actually used during the
current accounting year. But if per annum word is not given with the rate of depreciation
then in this case depreciation will be calculated for the whole accounting year. If
depreciation account is given in Trial Balance then it will be shown in Profit & Loss
Account only but shall not be deducted in the value of fixed asset in the Balance
Sheet.
Example: A machine purchased Rs. 1, 00,000 on 1st April, 2017. At the end of the year
it was decided to charge depreciation at the rate of 5% per annum on machine. The
adjustment entry for depreciation will be passed as follow –
Journal
2018 Rs. Rs.
Mar-31 Depreciation a/c Dr. 5,000
To Machinery a/c 5,000
(Depreciation charged on machinery.)

Dr. Depreciation Account Cr.

2018 Rs. 2018
Mar. 31 To Machinery a/c 5,000 Mar. 31 By P.&L.a/c 5,000

Dr. Machinery Account Cr.

2017 Rs. 2018 Rs
1-Apr To Cash a/c 1,00,000 31-Mar By Depreciation a/c 5,000
31-Mar By Balance c/d 95,000
1,00,000 1,00,000
2018
1-Apr To Balance b/d 95,000
Profit and Loss Account
Dr. For the year ended on 31st March, 2018 Cr.
Rs. Rs.
To Depreciation on Machinery 5,000
Balance Sheet
As at 31st March, 2018
Liabilities Amount (Rs.) Assets Rs. Amount (Rs.)
Machinery 1,00,000
Less : Dep. 5,000 95,000
61
Final Accounts and 10.3.7 Interest on Capital and Drawings
Corporate Financial
Statements Generally every businessman expects to earn more profit on capital invested as compared
to normal rate of interest available in the market. To know as to how much extra profit
has been earned over and above the normal rates of interest on capital is loss for
business. Therefore for interest amount, interest account is debited and capital account
is credited.
If owner of business draws any amount for his personal use from business, it is called
drawing. Due to drawings, the capital of the business is reduced as such the business
charges interest for such drawings. This is a gain for the business. For this drawings
account will be debited and interest on drawings account will be credited at the time of
preparation of Final Account interest on capital will be added in capital and interest on
drawings will be deducted from capital.
Example: On 1st April, 2018 books of a businessman showed a balance of Rs. 50,000
in capital account. He withdrew Rs.4,000 on 1st April 2018. Interest has to be charged
at the rate of 5% p.a. on capital and drawings. For this, adjustment entries and final
account shall be written as follow
Journal
2018 Rs. Rs.
Mar. 31 Interest a/c Dr. 2,500
To Capital a/c 2,500
(Interest on Capital allowed.)
Mar. 31 Drawing a/c Dr. 200
To Interest a/c 200
(Interest charged on drawings.)

Dr. Interest Account Cr.

2018 Rs. 2018 Rs.
Mar. 31 To Capital a/c 2,500 Mar. 31 By Drawings a/c 200
Mar. 31 By P.& L. a/c 2,300
2,500 2,500

Dr. Drawings Account Cr.

2018 Rs. 2018 Rs.
1-Apr To Cash a/c 4000 Mar. 31 By Capital a/c 4,200

Mar. 31 To Interest a/c 200

4,200 4,200

62
 Dr. Capital Account Cr. Adjustments in Final
Accounts
2018 Rs. 2018 Rs.
Mar. 31 To Drawings a/c 4,200 1-Apr By Balance b/d 50,000
Mar. 31 To Balance c/d 48,300 31-Mar. By Interest a/c 2,500
52,500 52,500
Dr. Profit and Loss Account for the year ended 31st March, 2018
Rs. Rs.
To Interest on 2,500 By Interest on 200
Capital Drawings

Balance Sheet as on 31st March, 2018

Liabilities Amount Assets Amount
Rs. Rs. Rs.
Capital 50,000
Add: Interest on Capital 2,500
52,500
Less: Drawings 4,000
Interest on
Drawings 200 4,200 48,300

Check Your Progress B

1. What is depreciation?
......................................................................................................................
......................................................................................................................
2. Name the two causes of depreciation?
......................................................................................................................
......................................................................................................................
3. Why do we bring interest on interest on capital and interest on drawing into the
account
......................................................................................................................
......................................................................................................................
10.3.8 Bad Debts
Due to insolvency of some of the customers or due to closing of their business or having
shifted elsewhere, there is no hope of recovery of balance of amount due from them.
This non-recoverable amount is called bad debt. Bad debts is a loss for the business so
to write off it, the following entry is passed
Bad Debts A/c Dr.
To Debtors A/c
(Being amount of bad debts written off.)

63
Final Accounts and If these are given in the adjustments, the accounting treatment is as follows:
Corporate Financial
Statements i) Show as addition to bad debts already written off on the debit side of Profit and
Loss Account.
ii) Deduct from the Sundry debtors on the asset side of the balance sheet.
10.3.9 Provision for Doubtful Debtors
There can be some debtors from whom there may not be a possibility to recover
complete balance of dues. The amount due on such debtors is termed as doubtful
debts. While preparing the final accounts at the end of the accounting year after giving
due thought to the economic status of such debtors, estimates are made for such likely
non recoverable amount. An account is opened for estimated doubtful debts. It is called
‘Provision for Bad and Doubtful Debts Account’. Provision is made every accounting
year for a fixed percentage for such doubtful debtors.
Following Journal entry is passed to make such provision
Profit and Loss A/c Dr.
To Provision for Doubtful Debts A/c
(Provision for doubtful debts created.)
You will notice that when a debit is irrecoverable it is written off by crediting it to the
personal account of the respective customer. But, when a debt is doubtful of recovery, the
personal account of the customer will not be credited as the recovery is still possible.
Hence, the creation of provision for bad debts does not affect the balance of debtors’
personal accounts. However, while showing sundry debtors in the Balance Sheet the
amount of such provision is subtracted there from. When provision for bad debts already
exists in the books, the provision created for doubtful debts at the end of a particular year
will be carried forward to the next year and it will be used for meeting the loss due to bad
debts incurred during the next year. The provision for bad debts brought forward from the
previous year is called ‘opening provision’ or ‘old provision’. When such provision already
exists, the loss due to bad debts during the current year will be adjusted against the same,
and while making provision for bad debts required at the end of the current year called
‘new provision’ the balance of old provision should also be taken into account.
In this connection you should note the following points.
1. If some bad debts are given in adjustments (further bad debts) they should also
be taken into account.
2. The new provision should be calculated on sundry debtors after adjusting the
amount of further bad debts.
3. In Balance Sheet only the further bad debts as given in adjustments and the new
provision for bad debts should be subtracted from sundry debtors.
Important Note
i) The provision for doubtful debts should be calculated on sundry debtors after
deducting the bad debts from the sundry debtors, if the bad debts are given in the
adjustments.
ii) If new provision for doubtful debts is more than the old provision for doubtful
debts, the difference should be shown on the debit side of the profit and Loss
64
 account. If new provision for doubtful debts is less than the old provision for Adjustments in Final
doubtful debts, the difference should be shown on the credit side of the profit and Accounts

loss account. It should be remembered that always new provision for doubtful
debts should be deducted from the debtors on the asset side of the balance sheet.
Recovery of Bad Debts: - Sometimes last year’s amount of bad and doubtful
debts written off is recovered. It is a Profit for the business. It has been explained
earlier that while writing off bad debts, debtors account is credited so that his
account is closed as such on recovery of such bad debts, his account is not credited
again but this amount of recovery is credited into Bad Debts Recovered account.
On receipts of bad debts amount, the following Journal entry is made-
Cash or Bank a/c Dr.
To Bad Debts Recovered a/c
(Amount of previously written off bad debts recovered.)
The balance of Bad Debts Recovered Account is transferred to Profit and Loss Account.
When there is Provision for Bad Debts account the balance of bad debts recovered
account is transferred to this account.
Illustration:-The book debts of a firm on 31st March, 2018 amounted to Rs.40, 000.In
the previous year a provision for Bad and Doubtful Debts was made for Rs.1, 800. On
15th February, 2018, Rs.500 was received on account of a debt previously written off
as bad. The actual bad debts during the book debts. Show these adjustments in Journal,
Ledger and Final Accounts.
Solution: Journal
2018 Rs. Rs.
Feb. 15 Cash a/c Dr. 500
To Bad Debts Recovered a/c 500
(Amount received from bad debts previously
written off.)
Mar.31 Provision for Bad and Doubtful Debts a/c Dr. 1,000
To Bad Debts a/c 1,000
(Balance of Bad Debts a/c transferred.)
Mar.31 Bad Debts Recovered a/c Dr. 500
To Provision for Bad & Doubtful Debts a/c 500
(Balance of Bad Debts a/c transferred.)
Mar.31 Profit and Loss a/c Dr. 700
To Provision for Bad &Doubtful Debts a/c 700
(New Provision made.)
LEDGER
Dr. Bad Debts Recovered Account Cr.
2018 Rs. 2008 Rs.
Mar.31 To Provision for Bad & 500 Feb.15 By Cash a/c 500
Doubt ful Debts a/c 65
Final Accounts and Dr. Bad Debts Account Cr.
Corporate Financial
Statements 2018 Rs. 2018 Rs.
Mar.31 To Sundry Debtors a/c 1,000 Mar.31 By Provision for 1,000
Bad & Doubt full
Debts a/c
Dr. Provision for Bad and Doubtful Debts Account Cr.
2018 Rs. 2017 Rs.
Mar.31 To Bad Debts a/c 1,000 1-Apr By Balance b/d 1,800
2018
Mar.31 To Balance c/d 2,000 31 Mar By Bad Debts 500
Recovered a/c
31 Mar By P.& L. a/c 700
(Balancing figure)
3,000 3,000
Profit and Loss Account
Dr. For the year ended 31st March, 2018 Cr.
To Bad Debts 1,000 Rs. Rs.
Add: New Provision 2,000
Less: Bad Debts
Recovered 500
Old Provision 1,800 2,300 700

Balance Sheet
As on 31st March, 2018
Liabilities Amount Assets Amount
Rs. Rs. Rs.
Sundry Debtors 40,000
Less: Provision
for Bad And
Doubtful Debts 2,000 38,000

10.3.10 Provision for Discount on Debtors and Creditors

Discount is allowed to customers on timely payments or payments received before due
date. Similarly discount is also received from creditors on the timely payments made to
them. Money receipt and payment from customers and creditors can also go into next
year. In such a case discount can be allowed or received in the next year. For such
transactions provision is made for discount for the next year. Provision is made for
debtors and creditors both.
(i) Provision for Discount on Debtors: According to convention of conservatism
provision for discount is made on those debtors from whom the whole payment
will be received in time. The amount of provision for discount is calculated after
deducting bad debts and provision for bad debts from debtors at a fixed percentage
66 given as per past tradition. This provision is made to write off the amount of loss,
 so Profit & Loss Account is debited and provision for discount is credited. Actual Adjustments in Final
discount is written off out of this. Provision for discount on debtors is deducted Accounts

from debtors in the Balance Sheet.

(ii) Provision for Discount on Creditors: Creditors are allowed discount in case
payment is made on or before due date to them. This discount is a profit for
business. Provision is made on creditor’s amount at a fixed percentage. Provision
for discount on creditors account will be debited will be debited by the amount of
provision made and Profit & Loss Account will be credited. Actual discount is
deducted from this provision. Provision for discount will be deducted from creditors
on the liability side of the Balance Sheet.
Making a provision for discount on creditors is treated as a violation of convention of
conservatism. Therefore, in practice this provision is not made.
Illustration 2: In the books of Messrs Damoh-Panna, Tikamgarh Ltd,the reserve for
discount on Creditors showed a debit balance of Rs.10, 000 on 1st January, 2017.They
received discount to the extent of Rs.8,000 from their creditors during the year 2017.
On 31st December of the same year, their creditors amounted to Rs.6, 00,000. Show
the account of Reserve for discount of creditors for the year 2017, keeping the reserve
for discount 2.5% on the creditors.
Solution
Dr. Reserve for Discount on Creditors Account Cr.
2017 Rs. 2017 Rs.
Jan.1 To Balance b/d 10,000 Dec.31 By Discount a/c 8,000
Dec.31 To P.& L a/c 13,000 Dec.31 By Balance c/d 15,000
23,000 23,000
Illustration: Pass necessary adjustment entries for the following for the following
adjustments as at 31st March, 2018;
(i) Stock on 31st March, 2018 was Rs.7, 000.
(ii) Salaries at the rate of Rs. 500 p.m. were paid for 11 month only.
(iii) Insurance paid Rs.400 (including premium of Rs. 300 up to 30th June, 2018
(iv) Apprenticeship premium received on 30th September, 2017 Rs.9, 000 was for
three years.
(v) Interest accrued on securities Rs.500.
(vi) Depreciation at 10% on office furniture of Rs.4, 000 and at 15% on plant valued
at Rs.20, 000.
(vii) Bad debts during the year amounted to Rs.800.
(viii) Make provision for doubtful debts on debtors at 5%. As per trial balance debtors
were Rs. 40,000.
(ix) Make provision for discount on debtors and creditor at 2.5%.Creditors as per
Trial Balance were Rs.20, 000.
67
Final Accounts and 2018 Rs. Rs.
Corporate Financial
Statements Mar. 31 Stock a/c Dr. 7,000
To Trading a/c 7,000
(Closing stock transferred to trading account.)
Mar.31 Salaries a/c Dr. 500
To Outstanding Salaries a/c
(Outstanding salary for on e month brought into a/c 500
Mar.31 Prepaid Insurance a/c Dr. 75
To Insurance a/c 75
(Insurance paid in advance for 3 month.)
Mar.31 Profit & Loss a/c Dr. 325
To Insurance a/c 325
(Transfer of Insurance a/c.)
Mar.31 Apprenticeship Premium a/c Dr. 7,500
To Apprenticeship Premium Suspense’s a/c
(Apprenticeship Premium for two and half
year Transferred to apprenticeship Premium 7,500
Mar.31 Accrued Interest a/c Dr. 500
To Interest a/c
(Accrued interest on securities brought into a/c) 500
Mar.31 Depreciation a/c Dr. 3,400
To Office Furniture a/c 400
To Plant a/c 3,000
(Depreciation Provided.)
Mar.31 Bad Debts a/c Dr. 800
To Debtors a/c 800
(Bad Debts written off.)
Mar.31 Profit & Loss a/c Dr. 1,960
To Provision for Doubtful Debts a/c 1,960
(Provision for doubtful Debts at 5% on
Rs. 39,200 Created)
Mar.31 Profit &Loss a/c Dr. 931
To Provision for Doubtful Debts a/c 931
(Provision for discount on Debtors made at
2.5% on Rs.37,240)
Mar.31 Provision for Discount on Creditors a/c Dr. 500
To Profit and Loss a/c 500
(Provision for discount on creditors made at
2.5% on Rs. 20,000.)

68
Working Note Adjustments in Final
Accounts
Calculation of the amount of Provision for discount on debtors:
Rs.
Total Debtors 40,000
Less: Bad Debts 800
39,200
Less: Provision for Bad Debts 1,960
Good Debtors 37,240
Provision for Discount at 2.5% on Rs.37, 240= Rs.931
10.3.11 Manager’s Commission
Sometimes, the manager may also be entitled to a commission on profits earned by the
business. Such commission is usually calculated as a fixed percentage on profits. ’
Suppose the Net profit of a firm after taking into consideration all expenses except the
manager’s commission is Rs.60, 000. The manager is entitled to a commission of 5%
on profits before charging such commission. His Commission will work out as Rs.3.000.
However, it is still to be paid and therefore should be treated as an outstanding expense.
It will be debited to Profit and Loss Account and also shown as a current liability in the
Balance Sheet.
In the above example, manager’s commission has been calculated on profits before
charging the commission. But, sometimes, it is to be calculated on profit after charging
such commission. In such situation, the commission will be calculated by the following
formula:
Percentage of Commission
Commission= ————————————— X Net Profit before commission
100 + Percentage of commission
If in the above example, the manager’s commission were to be calculated on profits
after charging such commission, it will be as follows.
Commission = 5 x 60,000 = 5 x 60,000 = Rs.2, 857
100+5 105
The above amount can also be verified. After charging manager’s commission the net
profit will work out to Rs. 57,143 (Rs. 60,000 — Rs. 2,857). Now calculate 5% on
Rs. 57,143. It works out to Rs. 2,857. This means the amount of commission calculated
by the given formula is correct.
10.3.12 Abnormal Loss of Stock
In the course of business some loss of stock may also occur. It may occur in transit or
at the godown. Such loss of stock may be normal or abnormal, Normal loss is due to
inherent characteristic of goods such as evaporation, subdivision, drying up of goods,
etc. On the other hand, if the loss occurs on account of reasons which are accidental or
very rare, the loss is termed as abnormal loss. The examples of such losses are theft of
goods, destruction of goods by fire etc.
The normal loss does not require any special treatment in the books of account. It is
69
Final Accounts and absorbed by the remaining units whose cost is inflated by such loss. But, the abnormal
Corporate Financial loss has to be shown separately in the books of account. After the amount of such loss
Statements
is ascertained, the following adjustment entry is passed.
Loss by Fire A/c Dr.
To Trading Account
(Being stock lost by fire)
To avoid the burden of loss due to abnormal circumstances the businessmen may get
the stock insured. Thus, the loss may be
1. Uninsured,
2. Fully insured, or
3. Partially insured.
Let us see what will be the accounting treatment in the above three situations.
1. When the stock’s is not insured: In case the stock is not insured the total
abnormal loss will be transferred to the Profit and Loss Account and the following
entry will be passed.
Profit and Loss A/c Dr.
To Loss by Fire A/c
2. When the stock is fully insured: When the stock is fully insured, the total
amount of loss is paid by the insurance company. In that case the company does
not suffer any loss. So, nothing is debited to the profit and Loss Account. The
journal entry passed.
Insurance Company Dr.
To Loss by Fire A/c
3. When the loss is partially insured: In case the loss is partially insured the amount
of insurance claim is debited to Insurance Company’s Account and the remaining
loss (the amount to be borne by the business) is debited to Profit and Loss Account.
The following journal entry is passed.
Insurance Company Dr.
Profit and Loss A/c Dr.
To Loss by Stock A/c
Thus, the treatment of abnormal loss in final accounts is as follows.
a) Credit the Trading Account with the total loss
b) i) Incase of uninsured stock debit profit and loss Account with full amount.
ii) In case of fully insured loss, insurance claim will be shown as an asset in the
Balance Sheet.
iii) In case of partially insured loss, the amount of insurance claim is shown as an
asset in the Balance Sheet and the remaining amount of loss is debited to the
Profit and Loss Account.
70
10.3.13 Drawing of Goods by the proprietor Adjustments in Final
Accounts
You know when the proprietor takes away some goods from the business for his personal
use it is recorded in book of account by passing the following journal entry.
Drawings Account Dr.
To Purchases Account
So, if you find that it has not been recorded in the books of account, you have to make
the necessary adjustment in final accounts. The Treatment in final accounts will be as
follows:
i) On the Debit side of the Trading Account: Deduct it from purchases.
ii) On the Liabilities side of the Balance Sheet: Deduct it from capital either as a
separate item or by including it in drawings.
Check Your Progress-C
1. Fill in the blanks.
a) If bad debts appear as an adjustment outside the Trail Balance, they are
adjusted by debiting Bad Debts Account and crediting............................. .
b) The amount of bad debts given in the Trial Balance is shown only in..........
c) Provision for Bad Debts is calculated as a certain percentage on Sundry
Debtors after deducting.......
d) Provision for Bad Debts is created by.........................the Profit and Loss
Account.
e) Provision for Discount on Debtors is calculated as a fixed percentage on
Sundry Debtors after deducting…………………
f) Provision for Discount on Creditors is made by ..............................Profit
and Loss Account.
2. Following is an extract from Trial Balance of a Trader:

Rs.
Bad Debts 3,000
Provision for Bad Debts 40,000
Sundry Debtors 50,000
The adjustments required are
i) Additional Bad Debts amounted to Rs.2,000
ii) Provision for Bad Debts is to be maintained at 5% on Debtors
Compute: a) New Provision for Bad Debts
b) Amount to be debited to Profit and Loss Account
c) Net amount of Debtors to be shown in the Balance Sheet
After studying the above, for accounting treatment for the adjustments in the final account,
go through the below table carefully which helps you in further understanding to prepare
the final accounts.
71
Final Accounts and Table 1: Treatment of Adjustment Item in Final Account
Corporate Financial
Statements SI. No Item Treatment in Final Account If given in Trial
If given in adjustments Balance Itself

1 Closing I. Credit side of Trading A/c: Assets side of

Shown as a separate item. Balance Sheet only

II. Assets side of Balance sheet:

Shown as a separate item under
current Assets

2 Outstanding I. Debit side of Trading A/c or Liabilities side of

Profit and loss A/c: Balance Sheet only.
Added to the concerned expense

II. Liabilities side of Balance sheet.

Shown as a separate item under
Current Liabilities.

3. Prepaid I. Debit side of profit and loss A/c: Assets side of

Expenses Deducted from the concerned Balance Sheet only.
expenses.

II. Assets side of Balance Sheet:

Shown as a Separate item under
Current Assets

4. Outstanding I. Credit side of Profit and Loss A/c: Assets side of

Incomes Added to the concerned income Balance Sheet only.

II. Assets side of Balance Sheet:

Show as a separate item under
current Assets

5. Income I. Credit side of Profit and Loss A/c: Liabilities side of

Received in Deducted from concerned income Balance Sheet only
Advance II. Liabilities side on Balance Sheet.
Shown as a Separate item under
Current Liabilities

6. Depreciation I. Debit side of Profit and Loss A/c: Debit side of

Shown as a separate item. Trading &Profit and
II. Assets side of Balance Sheet: Loss Account only
Deducted from the concerned
fixed asset

7. Interest on I. Debit side of profit and loss A/c: Debit side of profit
Capital Shown as a separate item and Loss Account
II. Liabilities side of Balance sheet: only.
Added to capital

72
 Adjustments in Final
8. Interest on I. Credit side of Profit and Loss A/c: Credit side of profit Accounts
Drawings Shown as a separate item and loss Account
II. Liabilities side of Balance Sheet: only.
Deducted from Capital

9. Interest on I. Debit side of Profit and Loss A/c: Debit side of Profit
Loan Shown as a separate item and Loss account
II. Liabilities side of Balance Sheet: only
Added to loan.

10. Bad Debts 1. Debit side of Profit and Loss A/c: Debit side of profit
Added to Bad Debts and Loss Account
2. Assets side of Balance sheet: only.
Deducted from Sundry Debtors

10.4 LET US SUM UP

1. It is necessary to make adjustments with regard to certain item such as prepaid
expenses, depreciation, etc at the time of preparing the final accounts so as to
arrive at the current profit or loss and the correct financial position.
2. The adjustments are always made by means of suitable journal entries known as
‘adjustments entries’.
3. Every adjustment is shown at two places in the final account. The following shows
the adjustment entries and their treatment in the final accounts for different item.

10.5 KEY WORDS

Adjustment Entry : Journal entry passed to make an adjustment in the
relevant account.
Adjustment Item : An item given outside the Trial Balance which requires
adjustment at the time preparing final account.
Adjustment Purchases : Amount of purchases after adjusting both the opening
the closing stocks.
Bad Debts : Debts which cannot be recovered.
Depreciation : A permanent decrease in the value of a fixed asset
caused by wear and tear or the passage of time.
Outstanding Expenses : Incomes earned during the accounting year but not
yet received.
Prepaid Expenses : Expenses paid but the benefit of which is yet to be
received.
Provision for Bad Debts : A Provision made for loss expected to arise from
doubtful debts.
Provision for Discount : A provision made for anticipated gains on account of
on Creditors discount receivable from creditor. 73
Final Accounts and Provision for Discount : A provision made for anticipated gains on account of
Corporate Financial on Debtors discount receivable from creditors.
Statements

Unearned Incomes : Income in respect of which the services are yet to be

rendered.

10.6 ANSWERS TO CHECK YOUR PROGRESS

A 5 (a) iii (b) i (c) iii (d) ii (e) i

C 1 a) Sundry Debtors
b) Profit and Loss Account
c) Further or additional bad debts.
d) Debiting
e) Provision for Bad Debts
f) Crediting
2 a) Rs. 2,400
b) Rs. 3,400
c) Rs. 45,600

10.7 TERMINAL QUESTIONS/EXCERCISES

Questions –
1. Why adjustment entries are necessary at the time of preparing final accounts?
Name any two items of adjustment and explain how they will be shown in the final
accounts.
2. Distinguish between:
a) Outstanding Expenses and Prepaid Expenses
b) Interest on Capital and Interest on Drawings
c) Outstanding Income and Unearned Income.
3. What is meant by Provision for Bad Debts? Explain the treatment of Provision for
Bad Debts in the final accounts. .
4. What do you mean by Provision for Discount on Debtors and Creditors? Explain
their treatment in the final accounts.
Exercises
1. Give Journal entries for the following adjustments:
a) Salaries Outstanding Rs. 3, 000.
b) Prepaid Rent Rs.600.
c) Commission earned but not yet received Rs.500.
74 d) Depreciation at 5% on Furniture of Rs.20, 000.
2. Give Journal entries for the following adjustments: Adjustments in Final
Accounts
i) Interest at 5% on Capital of Rs.80, 000.
ii) Interest on Drawings Rs.120.
iii) Provision for Discount at 2% on Debtors totalling Rs.30, 000.
iv) Provision for Discount at 1.5% on Creditors totalling Rs.20,000
3. On January 1, 2018 the provision of Bad Debts stood at Rs1, 000. The total
debtors on December 31, 2017 as Rs.20, 600 but out of which Rs.600 were bad
and had to be written off. The provision is to be maintained at 5% of the debtors.
Give journal entries and show the Bad Debts Account and the Provision for Bad
Debts Account. Also show how these items will appear in the final accounts.
(Answer: New Provision for Bad Debts Rs.1, 00,000; Debit Profit and Loss
Account with Rs.800)
4. State the effect of the following adjustments on the profits of a trader.
i) Rs.2, 400 for salaries owing to staff
ii) Insurance prepaid Rs.710
iii) Furniture valued at Rs.12, 000 to be depreciated by 10%
iv) Create Provision for Bad Debts Rs.2, 000
v) Rent Receivable Rs.350
Before making the above adjustments the net profit was Rs.20, 000.
(Answer: i) Reduction in profit ii) Addition to profit
iii) Reduction in profit iv) Reduction in profit
v) Addition to Profit
Net Effect: Profits will decrease to Rs.15, 460)

Note: These questions and exercises will help you to understand the unit better;
Try to write answers for them. But do not send your answers to the University.
They are for our practice only.

75
Final Accounts and
Corporate Financial UNIT 11 FINAL ACCOUNTS WITH
Statements
ADJUSTMENTS
Structure
11.0 Objectives
11.1 Introductions
11.2 An Overview
11.3 Some Practical Hints
11.4 Some Other Adjustments
11.5 Adjustment Items given in Trial Balance
11.6 Let Us Sum Up
11.7 Answers to Check Your Progress
11.8 Terminal Questions/Exercises

11.0 OBJECTIVES
After studying this unit, learner should be able to:
 Compute commission payable to Manager when it is based on profits;
 drawing of goods by proprietor
 deal with adjustment items if given in trial balance;
 prepare final accounts with adjustments; and
 list out the important points which are to be kept in mind while preparing the final
accounts.

11.1 INTRODUCTION
In the previous unit, you learnt about various adjustments which are usually made at the
time of preparing final accounts. You know the Journal entry passed for each item of
adjustment and also how each item is treated in the final accounts. In this unit, you will
learn how to prepare final accounts when you are given a Trial Balance along with some
adjustments. We shall also take up a few more items at may need adjustment and
provide some practical hints which may be useful in solving various problems on final
accounts.

11.2 AN OVERVIEW
Let us briefly review what we have learnt earlier.
The purpose of recording business transaction is two-fold: (i) to know the net result of
business activities, and (ii) to know the financial position of business.
This two-fold objective is achieved by preparing final accounts which consist of 3
Trading and Profit and Loss Account and a Balance Sheet. The final accounts are
76
usually prepared annually.
The Trading and Profit & Loss Account is usually divided into two sections. The first Final Accounts with
section is called Trading Account and the second section is called Profit and Loss Adjustments

Account. The Trading Account reveals Gross Profit or Gross Loss and the Profit and
Loss Account shows Net profit or Net Loss.
In the case of a trading concern the opening stock, purchases (net), and direct expenses
are shown on the debit side of the Trading Account and sales (net) and closing stock on
its credit side. If the total of the credit side is higher than the total of the debit side, the
difference is treated as Gross Profit. If the total of the debit side is higher than the total
on the credit side, the difference is regarded as Gross Loss. The Gross Profit or Gross
Loss is transferred to the Profit and Loss Account.
In the case of manufacturing concern, we also prepare a Manufacturing Account. The
Purpose of preparing the Manufacturing Account is to ascertain the Cost of Goods
Manufactured and the same is transferred to Trading Account.
The Profit and Loss Account is prepared to find out the Net Profit or Net Loss. The
Gross Profit transferred from the Trading Account is shown on the credit side of the
Profit and Loss Account and the indirect expenses and revenue losses on its debit side.
If there are some other gains, they are also shown on its credit side. The Profit and Loss
Account will generally show a credit balance which represents ‘Net Profit’. But, if it
shows a debit balance; it means there is ‘Net Loss’. The Net Profit or Net Loss is
transferred to the Capital Account of the proprietor.
In the Balance Sheet all assets are shown on the right-hand-side and all liabilities including
capital on the left-hand-side. The totals on two sides of the Balance Sheet must tally. At
the time of preparing the final accounts we also have to make adjustments in respect of
various items in order to arrive at the true profit or loss and the true financial position.

11.3 SOME PRACTICAL HINTS

The following hints will help you to work out the problems on final accounts:
1. Read the problem carefully and find out what exactly you are required to do.
Normally, you are asked to prepare the Trading and Profit & Loss Account and
the Balance Sheet. Hence, it is not necessary to prepare the Manufacturing Account
unless you are specifically asked to do so.
2. Sometimes, Gross Profit is given in the Trial Balance. This indicates that the Trading
Account has already been prepared and you are to prepare only the Profit and
Loss Account and the Balance Sheet. In such a situation you will find that the
closing stock also appears inside the Trial Balance. This is to be shown only on the
assets side of the Balance Sheet.
3. There is no need to pass closing and adjustment entries, unless it is specifically
asked. All adjustments should be treated directly in the final accounts.
4. You are aware that some of the items given in the Trial Balance are shown in Trading
Account, some in Profit and Loss Account and others in Balance Sheet. Hence, in
Trial Balance, mark the items related to Trading Account with ‘T’, those related to
Profit and Loss Account with ‘P’ and the Balance Sheet items with ‘B’. Use ‘M’ for
Manufacturing Account items, if you are also required to prepare the same.
5. A few adjustments are always given outside the Trial Balance. Find out the items
which need adjustment and mark them in the Trial Balance with additional mark ‘A’. 77
Final Accounts and 6. Now proceed to prepare the final accounts as learnt earlier. Do not forget to write
Corporate Financial the headings. Follow the order in which various items are usually presented in the
Statements
final accounts.
7. Put a tick mark against each item in the Trial Balance and also in the adjustments as
and when you show it in the final accounts. You know that the items given in the
Trial Balance are shown in the final accounts only at one place. But each item given
in adjustments is to be shown in the final accounts at two places. Hence, put two
tick marks against each item of adjustment given outside the Trial Balance after
both the aspects of adjustment are treated in the final accounts.
8. If all items given in the Trial Balance and adjustments are properly shown in the
final accounts, the Balance Sheet will tally. If it does not tally, it would only mean
that you have committed some mistakes. In such a situation, recheck your solution
item by item, find out the mistakes and correct them. After the mistakes have been
corrected, the Balance Sheet will tally.
Look at Illustration 1 and study how final accounts are prepared with various adjustments
Illustration 1
From the following Trial Balance of Gopinath prepare Trading and Profit and Loss
Account for the year ended December 31, 2018 and Balance Sheet as on that date.
Name of the Account Dr. Balance Cr. Balance
Rs. Rs.
Capital 27,000
Drawings 4,260
Furniture 5,700
Stock on January 1, 2018 8,760 71,436
Purchases and Sales 62,172 1,746
Returns 1,260
Salaries 2,640
Rent 720
Carriage 1,500
Rates and Taxes 1,200
Apprentice Premium 750
Bank Overdraft 1,200
Bad Debts 1,032
Sundry Debtors 19,200
Cash in hand 288
Sundry Creditors 6,000
Provision For Bad Debts 600
Bill Receivable 1,400
Bill Payable 1,080
Discount 360
110,172 110,172

You are required to consider the following adjustments:

1. Stock on December 31, 2018 was valued at Rs.10, 200.
2. Provide for doubtful debts at 5% on Sundry Debtors and for Discount on Creditors
78
at 2%
3. Rent due was Rs.160. Final Accounts with
Adjustments
4. Taxes of Rs.320 were paid in advance.
5. Depreciate Furniture at 10% per annum.
6. Apprentice Premium of Rs.120 was to be carried forward.
7. Calculate interest on capital at 5% per annum.
Trading and Profit and Loss Account of Gopinath
For the year ended December 31, 2018
Dr. Cr.
Particulars Amt Amt Particulars Amt Amt
Rs. Rs. Rs. Rs.
To Opening Stock 8,760 By Sales 71,436
To Purchases 62,172 Less Returns
Less Returns Outwards 1,746 Inwards 1,260
60,426 70,0176

To Carriage 1,500
To Gross Profit c/d 9,690 By Closing Stock 10,200
80,376 80,376
To Salaries 2,640 By Gross Profit 9,690
b/d
By Apprentice 750
Premium
Less Amount 120 630
Carried Forward
To Rent 720
Add Outstanding 160 880

To Rates and Taxes 1,200 By Discount 360

Received
Less Taxes paid in Advance 320 880 By Provision For 120
Discount on
Creditors
To Provision for Bad Debts: 960
Provision required
Add Bad Debts 1,032
1,992
Less Existing Provision 600
1,392
To Depreciation on 570
Furniture
To Interest on Capital 1,350
To Net Profit
(Transferred to Capital 3,088
Account
10,800 10,800

79
Final Accounts and Balance Sheet of Gopinath
Corporate Financial As on December 2018
Statements
Liabilities Amount Amount Assets Amount Amount
Current Liabilities Current Assets:
Rent Outstanding 160
Cash in hand 288
Apprentice Premium
Carry Forward 120
Bill Receivable 1,440
Sundry Debtors 19,200
Bank Overdraft 1,200 Less Provision for
Doubtful Debts 960 18,240
Bills Payable 1,080
Sundry Creditors 6,000
Less Provision for 120
Discount Closing Stock 10,200
5,880 Prepaid Taxes 320
Long –term
Liabilities
Capital Fixed Assets 5,700
Balance on 27,000 Furniture 700
1-1-2018 Less Depreciation
at 10%
Add:
Interest on Capital 1,350 5,130
Add Net Profit for 3,088
the year
31,438
Less:
Drawing 4,260
27,178
35,618 35,618

Notes:
1. Carriage: It is not given whether expenses on carriage relate to purchases or
sales. In such situation it is assumed that they relate to purchases and so debited to
Trading Account.
2. Apprentice Premium: It is an item of income. In adjustments it is stated that the
Apprentice Premium of Rs. 120 is to be carried forward. It means that out of the
total income of Rs. 750 received as Apprentice Premium, Rs.120 relate to 2018-
19. Hence it is treated as unearned income and adjusted accordingly in the final
accounts.
80
3. Discount: It is not clear whether the discount is paid or received. Since it is shown Final Accounts with
as a credit item, it means it is an income and so treated as Discount Received. Adjustments

4. Provision for Bad Debts: It is calculated at 5% on Sundry Debtors of

Rs.19, 200. It works out Rs.960.

11.4 SOME OTHER ADJUSTMENTS

Hidden Interest
Sometimes separate information is not given for interest receivable and interest payable
but essential information has been given trial balance. This is called Hidden Adjustment.
Suppose following information is given in trial balance:
Trial Balance as at 31st March, 2018
Dr. Cr.
Rs. Rs.
18% Investment (1.4.2017) 1,00,000
24% Loan (30.9.2017) 2,00,000
Interest on Investments 9,000
Interest on Loans 18,000

It is clear from above information that interest on investment is not charged for the
whole year. One year interest comes to Rs. 18,000@ 18%p.a whereas per trial balance
information only Rs.9, 000 is received as interest. It means Rs.9, 000 is accrued interest.
For that following journal entry will be passed:
Dr. Cr.
Rs. Rs.
Accrued Interest on Investment a/c Dr. 9,000
To Interest on Investment a/c 9,000
In the same way interest on loan is due is due for 6 months. Six month interests comes
to Rs.24,000@24% p. a whereas per trial balance information only Rs. 18,000 is
paid within one year as interest. It means Rs.6, 000 is outstanding. For that following
journal entry is passed:
Dr. Cr.
Rs. Rs.
Interest on Loan a/c Dr. 6,000
To Outstanding Interest on Loan a/c 6,000
Prior Period Item
As per revised Accounting Standard 5 Prior period items are income or expenses
which arises in the current period as a result of error or omission in the preparation of
the financial statements at one or more prior period. The nature and amount of incomes
or expenses or prior period should be separately disclosed in the statement of Profit
and Loss in a manner that their impact on the current profit or loss can be perceived.

81
Final Accounts and Commission Payable to Manager on Profit:
Corporate Financial
Statements Sometimes to motivate the manager of business to work hard certain percentage of
profit is given as commission in addition to salary. The percentage rate of commission
may be given on net profit before charging commission or it may be on net profit after
charging his commission. If the commission is to be given on net profit before charging
his commission then the net profit before commission will be calculated in Profit &Loss
account and then amount of commission will be calculated on such net profits at a
percentage given as follow-
Commission = Percentage Rate x Net Profit before Commission
100
In case commission is to be calculated on net profit after charging his commission the
following formula is used.
Commission = Percentage Rate x Net Profit before Commission
100+Percentage Rate
Illustration 2
The net profit before charging any commission but after charging all other expenses in
Rs. 21,000. Find out the commission payable if:
i) The General Manager is entitled to a commission of 10% on net profits before
charging such commission;
ii) The General Manager is entitled to a commission of 10% on net profits after
charging such commission;
iii) The General Manager is entitled to a commission of 10% on net profits after charging
the commission of Works Manager and the Works Manager is entitled to a
commission of 5% on net profit after charging the commission to General Manager.
Solution:
i) Since General Manager is entitled to a commission of 10% on net profit, as such
his commission on Rs. 21,000 net profit @ 10% shall be
ii) Since General Manager is entitled to 10% commission on net profit charging his
commission as such commission amount shall be as follows
As per the question on a net profit of Rs. 100 his commission works out to Rs. 10.
Thus, net profit prior to commission shall be Rs. 100 + 10 = Rs. 110. Accordingly
on a net profit of Rs. 21,000 the commission amount shall be
iii) Since calculation of commission for General Manager and Works Manager has to
be made on net profit after deduction of commission of each other so the following
two equations will be formed to find out the commission of both.
Assuming that General Manager’s commission is ‘x’ and Works
Manager’s commission is ‘y’
X = 10% of (Rs. 21,000 -Y) and Y = 5% of (Rs. 21,000 –X)
Or x = 2,100 – 105 + x or x – x = 1995
100 200
82
Both equations will be arranged as follows - x= 1 (21,000 – y) Final Accounts with
10 Adjustments
y = 1 (21,000 – x)
20
Substituting the value of y in (i) equation –
x= 1 21,000 – 1 (21,000 – x)
10 20
x= 1,995 X 200 or 2,005
199
Substituting the value of x in (ii) equations –
y = 1 (21,000 – 2,005) or y = 1 (18,995) = 950
20 20
Thus commission of General Manager will be Rs. 2,005 and Works Manager Rs. 950.
Accidental Losses:
Quite a few times business has to suffer losses on account of fire, theft & loots, earth-
quakes, other natural factors, besides business activities. Such losses can be related
with goods or fixed assets. The following journal entry is passed in case of goods
destroyed
Loss by (Particular Accident) A/c Dr
To Purchases A/c
Following entry is passed for the destruction of fixed asset
Loss by (Particular Accident) A/c Dr
To (Particular) Asset A/c
Loss of goods will be deducted from the purchases in trading account and debited to
Profit & Loss account. Loss on fixed assets will be debited in Profit & Loss account
and it will be deducted from the fixed asset account in the Balance Sheet. When the
claim of loss is admitted by the Insurance Company the entry will be as follows
Insurance Company A/c Dr
To Loss by (Particular Accident) A/c
Check Your Progress A
1. Following figures relate to a firm:
Rs.
Gross Profit 60,000
Indirect Expenses 38,000
Compute Manager’s Commission under the following situation:
a) If he is entitled to 10% on net profit before charging such commission.
b) If he is entitled to 10% on net profits after charging such commission.
83
Final Accounts and 2. Following is an extract from the Trial Balance of a trader:
Corporate Financial
Statements Name of the Account Dr. Cr.
Rs. Rs.
12% loan (taken on July 1,2017 1,200
Interest on loan 20,000
Work out interest outstanding and explain how you will show it in final accounts.
3. If you find an item in adjustment stating that the proprietor took away goods costing
Rs. 1,500 for personal use, how would you deal with it in the final accounts?
To find out the actual position the following adjustments are also made in the final
account in addition to the above adjustment
(i) Other Use of goods: Besides selling of goods, they may also be used by the
proprietor, may be distributed as free samples and may be given as charity
or may be used in creation of fixed asset. The following entry shall be made
for these types of transactions
Drawings a/c Dr.
Advertisement a/c Dr.
Charity a/c Dr.
Asset a/c Dr.
To Purchases a/c
Amount of all such uses of goods is deducted from the Purchases account. Drawings
account will be deducted from Capital Account. Advertisement and Charity account
will be debited in Profit & Loss account. Goods utilized for creation of fixed assets will
be added to Assets account.
Sending goods on Sale or Return basis
In case goods are sold on the condition that the customer shall keep them if he is
satisfied completely; otherwise he is at liberty to return the goods. Under such
circumstances if the consent of the customer is not received, no entry is passed regarding
sale up to the end of accounting year. In case due to oversight or mistake entry is made,
assuming it having been sold then at the end of the year reverse entry will have to be
passed to cancel the wrong entry. Following adjustment entry shall be passed for such
transactions-
(a) Sales a/c Dr (at selling price)
To Debtors a/c
(b) Stock with customer a/c Dr (at cost price)
To Trading a/c
Selling price of such goods will be deducted from debtors and actual cost will be
credited in trading account and on the assets side of the Balance Sheet.
Illustration 3: The following facts were revealed while scrutinizing the books of accounts
for the year ending on 31" March, 2018:
(i) Goods used for personal purpose worth Rs. 200, distributed as free samples
84 worth Rs. 1,500 and gave to the office staff for their personal use worth Rs. 800.
(ii) Goods worth Rs. 1,800 were destroyed by fire for which the insurance company Final Accounts with
has admitted the claim for Rs, 1,500. Adjustments

(iii) Included in the sales were sales of goods of Rs. 5,000 on ‘sale on approval’
basis, for which consent of the customer was not received up to 31 st March,
2018. Goods sold included profits at 25% on cost.
(iv) Included in the creditors account are stationary Rs. 140 and coal Rs. 50 owing
by the proprietor. These items have been debited to advertisement and fuel
accounts respectively.
(v) In Trial Balance debtors appear at Rs. 42,000 including the amount of Rs. 2,000
in respect of a bankrupt whose estate is expected to realize 50 paise in a rupee.
A Provision for doubtful debts is to be made at 5% on debtors.
(vi) Rs. 500 being the cash lost stands debited to suspense account in the books.
(vii) Material costing Rs. 1,000 and wages Rs. 500 used in connection with repair of
a Temple by way of charity are included in purchases and wages respectively.
(viii) Investment costing Rs. 3,200 was sold for Rs.3, 700 and was passed through
sales book.
Pass necessary Journal entries for the above adjustments.
Solution:
Journal Entries
Rs. Rs.
(i) Drawings a/c Dr. 200
Advertisement a/c Dr. 1,500
Salaries a/c Dr. 800
To Purchases a/c 2,500
(Goods used for personal use, distribution of free
Sample and personal use of office staff.)
(ii) Insurance co. a/c Dr. 1,500
Loss by Fire a/c Dr. 300
To Purchases a/c 1,800
(Goods destroyed by fire.)
(iii) Sales a/c Dr. 5,000
To Customer’s a/c 5,000
(Goods sent on ‘sale on approval’ basis wrongly
treated as sales now corrected.)
Stock with Customer a/c Dr. 4,000
To Trading a/c 4,000
(Cost of the goods lying customers included in stock.)
(iv) Drawing a/c Dr. 190
To Advertisement a/c 140
To Fuel a/c 50
(Stationery and coal used by the proprietor wrongly
debitedTo advertisement and fuel account now
corrected.)
85
Final Accounts and (v) Bad Debts a/c Dr. 1,000
Corporate Financial
Statements To Sundry Debtors a/c 1,000
(Bad debts written off.)
(vi) Profit and Loss a/c Dr. 1,750
To Provision from Doubtful Debts a/c 1,750
(Provision for doubtful debts created at 5% on
Rs.35,000 of goods debts.)
(vii) Cash Lost a/c Dr. 500
To Suspense a/c 500
(Cash lost wrongly debited to suspense account
now corrected.)
(viii) Charity a/c Dr. 1,500
To Purchases a/c 1,000
To Wages a/c 500
(Materials and wages used for repairs of a temple
by way of charity.)
(ix) Sales a/c Dr. 3,700
To Investment a/c 3,200
To Profit and Loss a/c 500
(Sales of Investments wrongly passed through sales
book now corrected.)
Illustration 4: From the under mentioned Trial Balance of Murthy &Sons prepare
trading and Profit &Loss Account for the year ending 31st March, 2018 and Balance
Sheet as on that date.
Dr. Balance Cr. Balance
Rs. Rs.
Furniture and Fittings 3,400 Capital Account 100,000
Land and Buildings 21,700 Discount Received 2,000
Drawings 2,400 Loan from Bank 10,000
Cash at Bank 2,470 Purchases Returns 970
Wages 31,250 Sales 191,940
Discount Allowed 2,640 Sundry Creditors 12,450
Bank Charges 90 Provision 800
Office Salaries 4,260
Purchases 132,700
Opening Stock 40,200
Cash in hand 150
Sales Returns 1,250
Carriage Inwards 3,400
Plant and Machinery 14,600
Sundry Debtors 43,800
Bad Debts 1,000
Insurance 1,250
86
 Final Accounts with
Rent and Taxes 2,450
Adjustments
Bill Receivable 2,500
General Expenses 1,350
Advertisement 3,500
3,18,160 3,18,160

You are required to make the following adjustments:

(i) Stock on 31st March, 2018 is Rs.30,000; (ii) Anew machine has been purchased
for Rs.3,000 on 1st October, 2017 but was not paid for nor any entry has been
passed in the books; (iii) Wages include Rs. 500 paid for the erection of machinery;
(iv) Provision for bad debts has to be raised to Rs.1,400 and write off a further bad
of Rs. 300; (v) In the month of Feb; 2018 a fire broke out and destroyed stock of
the value of Rs.8,000. The insurance company admitted a claim for the loss of Stock
to the value of Rs.5,000; only and the amount was paid in April, 2018 (vi) Outstanding
Wages Rs.700, Salaries Rs.500; (vii) Prepaid insurance Rs.250 and advertisement
Rs.500; (viii) Depreciate machinery by 10% and furniture by 15%.
Trading and Profit & Loss Account of Murthy & Sons
For the year ended March 31st, 2018
Rs. Rs. Rs. Rs.
To Opening Stock 40,200 By Sales 191940
To Purchases 1,32,700 Less: Returns 1250 190,690
Less: Returns 970 131,730
To Wages 31,250
Less: Paid for erection Machinery 500 By Loss by Fire 8,000
30,750 By Closing Stock 30,000
Add: Outstanding 700 31,450
To Carriage Inwards 3,400
To Gross Profit c/d 21,910
228,690 228,690
To Discount Allowed 2,640
To Bank Charge 90 By Gross Profit b/d 21,910
To Office Salaries 4,260 By Discount Received 2,000
Add: Outstanding 500 4,760
To Bad Debts 1,000
Add: Further bad-debts 300
New Provision 1,400
2,700 1,900
Less: Old Provision 800
To Insurance 1,250
Less: Prepaid 250 1,000
To Rent and Taxes 2,450
To General Expenses 1,350
To Advertising 3,500
Less: Prepaid 500 3,000
To Loss By fire 3,000
To Depreciation on :
Machinery 1,810
Furniture 510 2,320
To Net Profit (Transferred to Capital a/c) 23,910 23,910 87
Final Accounts and Balance Sheet as at 31st March, 2018
Corporate Financial
Statements Liabilities Amount Assets Assets
Rs. Rs. Rs. Rs.
Sundry Creditors 12,450 Cash in hand 150
Cash in Bank 2,470
Outstanding Expenses: Bill receivable 2,500
Wages 700
Salaries 500 1,200 Sundry Debtors 43,800
Less:Further bad 300
debts
Machinery Supplier 3,000 43,500
Loan from Bank 10,000
Capital Account 1,00,000 Less New 1,400 42,100
Add Net Profit 1,400 Provision
1,01,400
Less: Drawings 4,200 Closing Stock 30,000
Furniture & 3,400
Fitting
97,200 Less: Dep. 510 2,890
Plant & 18,100
Machinery
Less: Dep. 1,810 16,290
Land and Buildings 21,700
Prepaid Expenses:
Insurance 250
Advertisement 500 750
Insurance Co. 5,000
123,850 123,850

Working Note:
The amount of Plant &Machinery has been calculated as follow:
Rs.
Balance as per Trial Balance 14,600
Add: Cost of Machine purchased 3,000
Wages for Machine installation 500
Total amount 18,100

Illustration 5: From the following balances and information received from the books
of Mr. Bahl on 31st March, 2018 you are required to prepare the final accounts:

88
 Dr. Cr. Final Accounts with
Adjustments
Rs. Rs.
Capital 50,000
Plant and Machinery 18,000
Depreciation on Plant and Machinery 2,000
Repairs to Plant 1,600
Wages 28,000
Salaries 4,000
Income Tax 500
Cash in Hand 2,000
Land and Building 74,500
Depreciation on Building 2,500
Purchases less Returns and Sales 1,23,500 2,49,000

Bank Overdraft 3,800

Accrued Income 1,500
Salaries Outstanding 2,000
Bill Receivable and Bill Payable 10,000 3,000
Provision for Bad Debts’ 6,000
Bad Debts 1,000
Discount on Purchases 4,000
Debtors and Creditors 35,000 23,300
Stock on 01.04.2011 37,000

3,41,100 3,41,100

Other Information:
1. Stock on 31st March, 2018 was Rs. 30,000;
2. Write off Rs. 3,000 bad debts and maintain a provision of 5% on debtors;
3. Goods costing Rs.5, 000 was sent to a customer on sale or return basis on 1 st
March, 2015. This was recorded as actual sales. The rate or of Gross profit was
1/6th of sales;
4. Rs.1,200 paid as rent of the office were debited to landlord account and were
included in the list of debtors
5. General Manager is to be given commission at 10% of net profit after charging the
commission of Works Manager and his own:
6. Works Manager is to be given commission at 5% on gross profit

89
Final Accounts and Solution:
Corporate Financial
Statements Trading and Profit &Loss Account of Mr. Bahl
For the year ended March 31, 2018
Rs. Rs. Rs.
By Sales 2,49,000
To Opening Stock 37,000 Less :Sales on approval
basis 6,000
To Purchases 123,500 243,000
By Stock With Customers (cost) 5,000
To Wages 28,000 By Closing Stock 30,000
To Gross Profit c/d 89,500
278,800 278,000
To Depreciation on:
Plant & Machinery. 2,000 By Gross Profit b/d 89,500
Building 2,500 4,500 By Discount on Purchases 4,000
To Repairs of Plant 1,600 By Provision for Bad Debts 760
To Salaries 4,000
To Rent 1,200
To Outstanding Commission:
Work Manager 4,475 11,610
General Manager 7,135
Net Profit 71,350
94,260 94,260

Balance Sheet as at 31st March, 2018

Liabilities Rs. Assets Rs.
Rs. Rs.
Bill Payable 3,000 Cash in hand 2,000
Sundry Creditors 23,300 Bills Receivable 10,000
Bank Overdraft 3,800 Debtors 24800
Outstanding Expenses: Less: Provision for Doubt Debts: 1240
Salaries 2,000 23,560
Stock 30,000
Work manager’s Commission 4,475 Stock with Customers 5,000

Gen. manager’s Commission. 13,610

7,135 Accrued Income 1,500
Capital 50,000 Plant & Machinery 18,000
Add: Net Profit 71,350 Land and Building 74,500
1,21,350
Less: Drawings 1,20,850
(Income Tax) 500
1,64,560 1,64,560

90
Working Notes: Final Accounts with
Adjustments
1. Selling price of goods sent on approval: Profit is 1/6 of Sales and its cost price is
Rs.5, 000 since cost of one rupee sales is (1-1/6) =5/6, so selling price of
Rs. 5,000 will be 5,000 *6/5 or Rs.6,000.
2. Calculation of Total Debtors: Rs. Rs.
Debtors as per Trial Balance 35,000
Less: Debtors for sale on approval 6,000
Further bad Debts 3,000
Landlord for Rent 1,200 10,200
Total Debtors 24,800
3. Provision of Bad and Doubtful Debts: 24,800 X 5/100 = Rs.1,240
Provision for Doubtful Debts A/c
Rs. Rs.
To Bad Debts a/c 1,000 By Balance B/d 6,000
To Further Bad Debts 3,000
To P.& L. a/c (Balance figure) 760
To Balance c/d 1,240
6,000 6,000

4. Commission of Works Manager: 89,750x5

= Rs. 4,475
100
5. Commission of General Manager Rs.
Net Profit for Commission of G.M. 82,960
Less: Works Manager’s Commission 4,475
Net Profit for Commission of G.M. 78,485
General Manager is to be given commission of 10% of Net Profit after charging the
commission of Works Manager and his own. So commission of General Manager will
be –
Net Profit available X Rate of Commission
100 + Rate of Commission
78,485 X 10
100 + 10
Or
78,485 X 10
110

11.5 ADJUSTMENT ITEMS GIVEN IN TRIAL BALANCE

So for you have learnt how to deal with various adjustments in the final accounts when
they are given outside the Trial Balance. Every adjustment is shown at two places in the
91
final accounts so as to complete the double entry.
Final Accounts and Sometimes you may find that few adjustment items such as depreciation, Outstanding
Corporate Financial Expense, Prepaid Expenses, Outstanding Incomes etc., are given in the Trial Balance
Statements
itself and not shown as adjustment outside the Trial Balance. This happens when their
adjusting entries have already been passed and their postings made in the concerned
accounts in the ledger. You know when an adjusting entry is passed, one aspect is
posted to an existing account and for the other aspect a new account has to be opened
in the books. For example, when you make a Journal entry for depreciation on machinery
you debit Depreciation Account and credit Machinery Account.
The Machinery Account already exists in the ledger and the amount of depreciation is
posted to its credit side. But the Depreciation Account does not exist in the ledger. It
will be a new account to which the amount will be debited. Similarly, when you pass a
journal entry for outstanding salaries, you debit Salaries Account and credit Outstanding
Salaries Account. The Salaries Account already exists in the ledger but you have to
open the Outstanding Salaries Account before posting can be done. If the postings
have been made, the balances of such new accounts will now appear in the Trial Balance.
When you find items like Depreciation and Outstanding Salaries in the Trial Balance
you have to show them only at one place in the final accounts. Normally, when they are
given in adjustments you show them at two places in the final accounts. For example,
depreciation when given in the adjustments is first shown on debit side of Profit and
Loss Account and then on the assets side of the Balance Sheet by way of deduction
from the concerned fixed asset. But when it is given in Trial Balance, it will only be
shown on the debit side of Profit and Loss Account because it is a loss. It will not be
deducted from the concerned fixed asset in the Balance Sheet because the asset account
has already been credited with the amount of depreciation. The balance of the asset
account given in the Trial Balance is in fact a reduced balance. Similarly, when
Outstanding Salaries Account is given in the Trial Balance, it will be shown only on the
liabilities side of the Balance Sheet. It need not be added to salaries on the debits side
of the Profit and Loss Account because salaries appearing in the Trial Balance are
inclusive of the outstanding salaries.
Thus, if any item of adjustment appears in the Trial Balance, it will be shown only once
at the appropriate place in the final accounts. Look at the Table below, it shows how
each item of adjustment will be treated if given in the Trial balance.
Treatment of Adjustment Item if Given in Trial Balance
Adjustment Item Treatment in Final Account
1 Closing Stock Assets side of Balance Sheet
2 Outstanding Expenses Liabilities side of Balance Sheet
3 Outstanding Income Assets side of Balance Sheet
4 Prepaid expenses Assets side of Balance Sheet
5 Unearned Incomes Liabilities side of Balance Sheet
6 Depreciation Debit side of Profit and Loss a/c
7 Interest on Capital Debit side of Profit and Loss a/c
8 Interest on Drawings Credit side of Profit and Loss a/c
92
Check Your Progress B Final Accounts with
Adjustments
Tick () the correct answers.
a) When wages Outstanding are given in the Trial Balance, they are
i) debited to Trading Account ( )
ii) shown on the liabilities side of Balance Sheet ( )
iii) shown on the assets side of Balance Sheet ( )
b) When Depreciation is given in the Trial Balance, it is
i) debited to Profit and Loss Account ( )
ii) deducted from the concerned asset in the Balance Sheet ( )
iii) credited to Profit and Loss Account ( )
c) Income Received in Advance, if given in Trial Balance, is
i) deducted from the concerned income in the Profit and Loss
Account ( )
ii) credited to Profit and Loss Account ( )
iii) shown on the liabilities side of Balance Sheet. ( )
d) Interest on Drawings, if given in Trial Balance, is
i) credited to Profit and Loss Account ( )
ii) debited to Profit and Loss Account ( )
iii) deducted from capital in the Balance Sheet ( )
Illustration 6
From the following Trial Balance of V. Raj Kumar prepare his final account for the year
ended December 31, 2018.
Name of the Account Dr. Cr.
Capital 70,000
Drawings 1,000
Adjusted Purchases 2,32,500
Sales 2,95,000
Cash in hand 3,800
Cash in bank 12,800
Salaries 18,000
Freight 1,200
Advertising 800
General Expenses 5,400
Furniture 10,800
Expenses Outstanding 2,500
Depreciation 2,200
Building Discount 39,000
Discount 700 800
Insurance 600
Prepaid Insurance 300
93
Final Accounts and Rent Received 6,000
Corporate Financial
Statements Rent Received in Advance 3,000
Trade Debtors 14,100
Trade Creditors 24,600
Loss by Fire 2,000
Commission 1,500
Stock on December 31, 2006 49,200
Total 4,03,400 4,03,400

Trading and Profit and Loss Account of V. Raj Kumar

For the year ended December 31, 2018
Particulars Amount Particulars Amount
Rs. Rs.
To Adjustments Purchases 232500
To Freight 1200 By Sales 295000
To Gross Profit c/d 61300
295000
To Salaries 18000 By Gross Profit b/d 295000
To General Expenses 5400 By Rent Received 61300
To Insurance 600 By Discount Received 6000
To Advertising 800 By Commission 800
To Discount Allowed 700 Received 1500
To Depreciation 2200
To Loss of Fire 2000
To Net Profit (Transferred To
Capital Account) 39900
Total 69600 69600

Balance Sheet of V. Raj Kumar as on December 31, 2018

Liabilities Amount Amount Assets Amount Amount
Rs. Rs. Rs. Rs.
Current Liabilities: Current
Assets:
Expenses Outstanding 2,500 Cash in hand 3,800
Cash at Bank 12,800
Rent Received in Advance 3,000 Trade 14,100
Debtors
Trade Creditors 24,600 Closing Stock 49,200
Long-term Liabilities Prepaid 300
Capital: Insurance
Balance on 1-1-2006 70,000 Fixed Assets:
Add Net profit for the Furniture 10,800
year 39,900 Building 39,000
109,900
Less Drawing 10,000 99,900

130,000 130,000
94
Notes: Final Accounts with
Adjustments
1. The item given in the above Trial Balance clearly indicates that it is prepared after
making necessary entries in the relevant accounts in the ledger. Hence, the item
such as Expenses Outstanding, Depreciation, Prepaid Insurance and Rent Received
in advance which appear in the Trial Balance have been shown at one place in the
final accounts.
2. The Closing Stock has not been shown in the riding Account. It is shown in the
Balance Sheet because it appears in the Trial Balance along with adjusted Purchases.
This means the closing Stock has already been adjusted in the Purchases.

11.6 LET US SUM UP

1. While preparing final accounts with adjustments, each item given outside the Trial
Balance is shown at two places in the final accounts. But, if any adjustment item
appears in the Trial Balance itself, this will be shown only at one place in the final
accounts.
2. Manager may be entitled to commission on profits. It is calculated as a fixed
percentage either on net profits before charging commission or on net profits after
charging such commission.
3. When rate of interest and the date on which loan was taken is given, it must be
ensured that proper amount of interest is shown in the final accounts.
4. When the proprietor takes away goods from the business for personal use and the
same has not been recorded, it is necessary that its cost is adjusted in purchases
and also included in drawings.

11.7 ANSWERS TO CHECK YOUR PROGRESS

A 1 (a) Rs. 2,200 (b) Rs. 2,000
2 Rs. 600
(i) add to interest on loan on debit side of Profit and Loss Account, and
(ii) show it on the liabilities side of the Balance Sheet under current liabilities.
3 (i) deduct it from purchases on the debit side of Trading Account, and
(ii) deduct it from capital in the Balance Sheet.
B (a) ii (b) i (c) iii (d) i

11.8 TERMINAL QUESTIONS/EXERCISES

Question
1. What are the important practical hints one has to keep in mind while preparing the
final accounts?
Exercises
1. The following balance were extracted from the books of A. Anand on March 31,
2018 95
Final Accounts and Name of the Account Dr. Cr.
Corporate Financial
Statements Rs. Rs.
Capital 80,000
Drawing 10,000
General Expenses 5,240
Building 5,200
Machinery 38,000
Stock 22,400
Coal and Power 5,400
Taxes and Insurance 2,600
Wages 14,400
Sundry Debtors 12,400
Sundry Creditors 1,500
Discount 1,000 1,200
10% Loan 15,000
Sales 160,800
Purchases 94,000
Furniture 2,300
Provision for Bad Debts 1,800
Bill Payable 8,700
Commission 2,400
Salaries 13,600
Cash in hand 260
Bank Overdraft 9,600
Charity 200
Total 294,500 294,500

Prepare the final accounts for the year ended March 31, 2018 after giving effect to the
following adjustments:
a) Stock on March, 31 2018 was valued at Rs.54, 000.
b) Outstanding Salaries Rs.1, 400.
c) Unexpired Insurance Rs.100.
d) Write off Rs.400 as Bad Debts, and maintain the Provision for the Bad Debts at
5%on Debtors.
e) Depreciate Building by 2.5% Machinery by 5% and Furniture by 10%
(Answer: Gross Profit Rs.78,600; Net Profit Rs.52,060; Balance Sheet
96 total Rs.1,73,260)
2. Motilal Trial Balance appeared as follows on December 31, 2018. Final Accounts with
Adjustments
Name of the Account Dr. Cr.
Capital 100,000
Creditors 29,500
Bill Payable 7,300
Sales 182,600
Provision for Bad Debts 1,500
Salaries 19,600
Cash at bank 16,500
Cash in hand 1,700
Purchases 122,200
Interest on Investments 200
Motor Truck 62,000
Furniture 24,000
Debtors 33,000
Opening Stock 14,500
Bill Receivable 5,600
Carriage Inwards 1,500
Carriage Outwards 900
General Expenses 5,600
Insurance 800
Bad Debts 900
Traveling Expenses 600
Discount 1,200
Sales Returns 500
6% Investments 10,000
Total 321,100 321,100
Prepare the Trading and Profit and Loss Account for the year ended December
31, 2018 and a Balance Sheet as on that date, after making the following
adjustments:
i. Stock on December 31, 2018 was valued at Rs.22, 400.
ii. Depreciate Motor Truck by 20% and Furniture by 5%.
iii. Maintain Provision for Doubtful Debts at 5%.
iv. A commission of 10% on Net Profit after charging such commission is to
be provided for he General Manager.
(Answer: Gross Profit Rs. 66,300; Net Profit Rs.21, 409 Commissions
to General Manager Rs.2, 141; Balance Sheet Total Rs.1, 60,350)
Illustration: From the following balances extracted at the close of the accounting
year ended on 31 March, 2018, prepare Trading Account, Profit and Loss
Account and Balance Sheet at that date giving effect to the under-mentioned
adjustments- 97
Final Accounts and Rs. Rs.
Corporate Financial
Statements Capital (01. 04.17) 50,000 Business Premises 55,000
Stock on (01.04.17) 8,000 Furniture & Fixtures 2,500
Purchases 2,000 Bill Receivable 3,500
Sales 80,000 Bills Payable 2,500
Returns Inwards 1,500 Sundry Debtors 2,000
Returns Outwards 400 Sundry Creditors’ 15,800
Wages 6,900 Packing Machinery 4,500
Advertisement 5,500 Smith’s Loan (Dr.)
Apprenticeship Premium 1,200 10% on 1.4.2017 5,000
Interest on Smith’s Loan 300 Investment 3,000
Proprietor’s Withdrawals 30,000 Cash in hand 250
Office Expenses 8,050 Cash at Bank 3,500

Adjustments:
(1) Stock in hand on 31st March, 2018 Rs.7,000;
(2) Apprenticeship Premium are for three years, received in advance on 1st April,
2017
(3) Interest on Capital to be allowed at 5% for the year
(4) Interest on drawings to be charged for the year Rs.80
(5) Out of the advertisement expenses are to be carried forward
(6) Stock valued at Rs.3,000 destroyed by fire on 25.3.2018 but the Insurance Co.
admitted a claim of Rs.2,000 only and paid it in April,2018
(7) The manager is entitled to a commission of 10% of the Net Profit after charging
such commission
(8) Includes in sales is an amount of Rs.10,000 representing goods on ‘sales or return’
the customer still having the right to return the goods. The goods were invoiced
sharing a profit of 20% on sales
( 9) the stock include materials worth Rs.1,000 for which bills had not been received
and therefore not yet accounted for.

(Answer: Gross Profit Rs.51, 000; Net Profit Rs.36,300; Manager outstanding
commission Rs.3, 650)

Note: These question and exercises will help you to understand the unit better. Try
to write answer for them. But do not send your answer to the University. They are
for your practice only.

98