Final Accounts of Sole Proprietors

Adjustments at the time of preparation of Final Accounts Adjustment entries are being passed at the time of preparation of final accounts to comply with the basic accounting concepts of periodicity, accrual, matching, conservatism, consistency, materiality, going concern. All adjustment entries are passed only for complying with the above concepts at the time of preparation of final accounts for an accounting period. Hence, after completion of the final accounts all the above entries are to be reversed in the next accounting year. 1) Closing Stock 2) Outstanding Expenses 3) Prepaid Expenses 4) Income Receivable 5) Income received in Advance 6) Interest on Capital 7) Interest on Drawings 8) Depreciation 9) Interest on Loan 10) Interest on Investment 11) Bad Debts 12) Provision for Doubtful Debts 13) Provision for Discount on Debtors 14) Provision for Discount on Creditors Closing Stock Closing Stock is the materials or goods available in hand at the date of closure of books of accounts in usable condition. The materials are the products, assets which are kept for the purpose of sales only and they are called as Stock in Trade. The available materials are identified during the time of stock taking at the time of year end (Closure of books of Accounts). The materials which are not usable for the future are discarded and reduced from the purchase cost. Entry for Closing Stock is 31st March Closing Stock Account Dr To Trading Account [Being closing stock accounted for the year ended based on the report on stock verification] Going Concern To the extent of Stock in Trade expected to be sold in future are only accounted as Closing Stock Cost Concept All the amount spent for bringing the stock in trade to the current position are all added with the value of goods. (Carriage Inward are added with the value of the closing stock) Realisation Concept Closing Stock is to be valued at lower of Cost or Market Price. Even though the cost of the material is high but currently they are not saleable in the market then they are to be valued at available market price only.

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Other Entries Entry for Usage of Stock for Personal Use of Owner Date of Drawings Account Dr Drawing To Purchases / Stock Account [Being stock in trade taken by the owner for personal use] Entry for Usage of Stock for Office Purpose (Conversion into Asset) Date of Car Account Dr Conversion To Purchases / Stock Account [Being Hyundai i10 converted in to Demo Car] Entry for Loss of Stock in Trade due to Accident Date of Loss due to Accident Account Dr Accident Insurance Claim Account Dr To Purchases / Stock Account [Being stock lost in accident and insurance claim accounted based on Insurance Report] Entry for Usage of Stock due to Theft, Pilferage 31st March Loss due to Theft Account Dr To Purchases / Stock Account [Being missing stock in trade identified in Stock verification accounted] Entry for giving Stock as Donation Date of Donation Account Dr Donation To Purchases / Stock Account [Being goods in hand issued for the Trust accounted] Entry for using stock as Advertisement / giving as Sample Date of Advertisement Account Dr Transaction To Purchases / Stock Account [Being goods in hand issued for sales promotion purpose accounted] Entry for using stock for Construction of Building Date of Building Account Dr Transaction To Purchases / Stock Account [Being goods in hand used for the construction of building accounted] Entry for using stock for Repairs & Maintenance Date of Repairs & Maintenance Account Dr Transaction To Purchases / Stock Account [Being goods in hand used for repairing the machineries now accounted]

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Interest on Capital Interest on Capital is provided to the owner of the business in lieu of Profit (in replacement for profit). It is not in addition to profit from the business. During the initial stages of business, expected profit cannot be available from the business. Hence, a small percentage of interest is provided to the owner of the business towards his contribution for the business as Capital. Once, the business starts earning profit, providing interest on capital will be stopped. Entry for Interest on Capital 31st March Interest on Capital Account Dr To Capital Account [Being interest on capital provided to the outstanding balances of Capital at 6%] Interest on Drawings Interest on Drawings is collected from the owner of the business towards the drawings made by him from the business for his personal use. The drawings may be cash or goods. Interest on drawings is collected irrespective of the profit from the business. Entry for Interest on Drawings 31st March Drawings Account Dr To Interest on Drawings Account [Being interest on Drawings collected for the outstanding balances of drawings at 6%] When there is systematic pattern of drawings, then the interest will be calculated as follows: Drawings at the beginning of the month Monthly Drawings X Rate of Interest Drawings at the middle of the month Monthly Drawings X Rate of Interest Drawings at the end of the month Monthly Drawings X Rate of Interest

X X X

6.5 6 5.5

Interest on Capital and interest on drawings are provided by considering the business and owner as separate based on the concept of business entity. Depreciation Depreciation is provided as a charge against profit towards the usage of fixed assets for earning the income. It is the reduction in value of the fixed assets over the period of time due to usage, wear and tear, obsolescence, change of model. It is a Non Cash Transaction. No cash goes out of business due to the entry of depreciation. It is a charge against profit and reduces the profit to the extent of usage of Fixed Assets.
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It is charged based on the concept of Matching. Every expenses incurred to earn the income for the accounting year should be matched against such income. Depreciation is reduction in value of asset incurred due to usage of asset for earning the income. Entry for Depreciation 31st March Depreciation Account Dr To Fixed Assets Account [Being Depreciation on Fixed Assets charged for the accounting year] Alternatively, if the business concern wants to disclose the fixed assets at its own cost and does not want to reduce its value, the following entry can be passed Entry for Depreciation 31st March Depreciation Account Dr To Provision for Depreciation Account [Being Provision for Depreciation on Fixed Assets created for the accounting year] Here, the Fixed Assets will be always shown at Cost in the balance sheet and provision for depreciation shown as a deduction from the fixed assets. Fixed Asset at Cost Less: Provision for Depreciation

Interest on Loan Based on the concept of accrual, Interest on loan has to be provided for the entire loan period during the accounting year whether debited by the bank or not. If loan is drawn on 01st May, 2012, interest has to be calculated for the loan amount outstanding from 01st May, 2012 to 31st March, 2013 (if the loan amount is not repaid during the year). Entry for Interest on Loan outstanding 31st March Interest on Loan Account Dr To Outstanding Expenses Account [Being Interest on Loan not debited by bank provided for the outstanding loan amount] Entry for actual debit of interest by bank Date of Outstanding Expenses Account Dr Transaction To Bank Account [Being interest on loan for the last accounting year debited by bank]

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Interest on Investment Similar to interest on loan, interest on investment has also to be accounted for the entire period of investment whether credited by the bank or not. Entry for Interest on Investment 31st March Interest Receivable Account / Accrued Interest Account To Interest Account [Being Accrued Interest on Investment accounted] Entry for actual Credit of interest by bank Date of Bank Account Transaction To Interest Receivable Account / Accrued Interest Account [Being interest receivable received from Bank] Dr

Dr

Bad Debts Bad Debts occur in business due to non payment of due amount by the debtors. Entry for Bad Debts is not an Adjustment entry. It is passed based on the instances confirming non recoverability of the due amount from the debtor. The instances confirming the non recoverability will be Absconding of the debtor, Insolvency petition by the debtor. Entry for Bad Debts Date of Bad Debts Account Dr Transaction Recoverable from Court Account Dr To Sundry Debtors Account [Being entry for Bad Debts passed based on the Court Order and amount recoverable through court debited to Recoverable Account] On receipt of Bad Debts from the Debtor after some point of time Entry for Bad Debts Date of Cash Account Dr Transaction To Bad Debts Recovered Account [Being amount received from the debtor considered as Bad Debt earlier] Provision for Doubtful Debts Based on the concept of conservatism and prudence, provision for doubtful debts is to be passed for the outstanding debtors towards expected percentage of non recoverability from the outstanding debtors. The expected percentage is calculated based on past experience. Entry for Provision for Doubtful Debts 31st March Profit & Loss Account Dr To Provision for Doubtful Debts Account [Being provision for doubtful debts created on the outstanding debtors @ 3%]
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Every year the created provision has to be checked with the outstanding debtors for the recoverability. If the expected percentage of non recoverability increases additional provision has to be created and if the expected percentage decreases, excess provision is to be reversed. Entry for Additional Provision for Doubtful Debts 31st March Profit & Loss Account Dr To Provision for Doubtful Debts Account [Being additional provision for doubtful debts created on the outstanding debtors] Entry for Reversal Provision for Doubtful Debts 31st March Provision for Doubtful Debts Account Dr To Profit & Loss account [Being excess provision for doubtful debts on the outstanding debtors reversed] Provision for Discount on Debtors Provision for Discount on Debtors can be created when we expect that the debtors will pay their due within due date and ask for discount on prompt payment. To the extent of the discount provided to the debtors, we will receive the amount is short. Hence, in Balance Sheet debtors are to be reduced to the extent of expected discount to them. Entry for Provision for Discount on Debtors 31st March Profit & Loss Account Dr To Provision for Discount on Debtors Account [Being provision for discount on debtors created on the outstanding debtors @ 1%] Both the provision for doubtful debts and provision for discount on debtors is to be shown as a reduction from debtors only in Balance Sheet and not reduced from the Debtors in the ledger account. Provision for Discount on Creditors Similar to expected discount to be provided to debtors, we can also expect a discount from our suppliers on prompt payment within due date. It is termed as Provision for Discount on Creditors. But based on the concept of Conservatism, Expect all losses but ignore all expected income, the provision for discount on creditors are not accounted.

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Questions for Discussion 1) Sundry Debtors ` 55,200; Bad Debts ` 200; Provision for Doubtful Debts 5%; Provision for discount on Debtors 2%. What will be the amount of provision for discount on debtors Bad Debts ` 3,000; Provision for Bad Debts ` 3,500; It is desired to make a provision of ` 4,000 at the end of the year. The amount debited to Profit & Loss account ? Opening Debtors ` 3,000; Credit Sales ` 80,000; Cash received from Debtors ` 60,000. Closing Debtors ? Opening Balance of Debtors is ` 35,000; Cash received from debtors is ` 30,000; cash sales is ` 20,000 which is 20% of total sales. Bills receivable received for ` 40,000 and discount allowed is 1% of cash collection. Find the closing debtors Opening Balance of Cash ` 4,000; Closing balance ` 7,000; Payment to creditors ` 80,000; Bills payable matured ` 6,000; Bills receivable discounted ` 9,000; sundry expenses ` 3,000; Drawings ` 12,000. What is the amount received from debtors? Net profit before the following adjustments ` 1,80,000; Outstanding salary ` 10,000; Prepaid insurance ` 13,000; Calculate the profit after adjustments Find the corrected net profit Profit before taking into account following adjustments was ` 7,00,000. i) ` 1,00,000 spent on purchase of motor car for business purpose, treated as expenses in profit & Loss account ii) ` 15,000 per month rent outstanding for the month of February and March not taken into account There was a stock of ` 5,500 out of which stock of ` 500 was burnt due to fire and was disposed off for ` 200. Remaining goods were sold at 25% above cost price. Find net profit Opening Capital ` 5,00,000; Profits during the year ` 1,00,000; Calculate the average capital of the year

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10) The manager of the firm is entitled to a commission of 10% on net profit after his commission. If the net profit of the firm before charging commission is ` 4,40,000, the amount of managers commission will be 11) At the end of the year 2012-13, the ledger of a firm shows following balances, prepare their balance sheetCapital ` 2,00,000 Net profit for the year 2012 - 2013 ` 1,50,000 Provision for taxes ` 75,000 Liabilities ` 1,00,000 Advance Tax paid ` 60,000 Sundry Assets ` 4,65,000 Total of Balance sheet will be
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12) On 31st March, 2013 Ram has loan of ` 50,000 and trade creditors of ` 80,000, fixed assets of ` 72,000, stock ` 90,000 and cash in hand ` 60,000. If he had started business on 01st April, 2012 with capital of ` 50,000. Compute profit earned by Ram for the year 2012 2013 13) Calculate the value of closing stock from the following Opening Stock ` 60,000 Purchases ` 90,000 Sales ` 1,20,000 Gross profit on cost 33.33%. Due to fire, stock costing ` 15,000 destroyed and insurance claim was accepted for ` 5,000. 14) Salaries paid in cash ` 2,00,000. It includes previous years outstanding ` 10,000 and salary paid in advance for the next year ` 20,000. Salary outstanding for the year is ` 15,000. Salary of ____ shall be debited in the profit & loss account 15) The fixed asset of the company is double of the current assets and half of capital. If the current assets are ` 3,00,000 and investment ` 4,00,000, calculate the current liabilities assuming that there are no other items in the balance sheet 16) Total Debtors on 31.03.2013 were ` 48,000 before writing off bad-debts but after allowing discounts. During the year bad-debts amounted to ` 2,000 and discount allowed were ` 100. It is the firms policy to maintain a provision of 5% against bad and doubtful debts. Find out the amount of provision for Bad and Doubtful debts as on 31.03.2013 17) Rajas Balance sheet as at 31st March, 2012 shows ` 6,800 as rent payable. His cash book shows total payment towards rent ` 50,000 during the year ending 31st March, 2013. Rent payable as at 31st March, 2013 is ` 5,000. Which of the following amount should go to his profit & loss account as rent 18) Units produced 5,000 @ ` 20. Direct expenses ` 5,000. 4/5th of the units were sold @ ` 25 per unit. What will be the profit 19) Goods purchased ` 90,000, sales ` 80,000, Margin 20% on sales, closing stock will be 20) Goods worth ` 5,000 were supplied to Mr X at an invoice price of 20% above cost and allowed trade discount at 10% on invoice price. At what price were the goods sold to X? 21) A sole trader has computed a net profit of ` 56,750. After that he found the following mistakes in the books of accounts: Discount received of ` 580 and discount allowed of ` 665 have been recorded on the wrong sides of the discount received and discount allowed accounts. What would be the actual net profit of trader? 22) An item of furniture was destroyed by fire whose cost was ` 18,000 against which a claim of ` 12,000 was accepted by the insurance company. The depreciation provision upto date of fire was ` 2,700. What amount to be recorded in account as
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loss by fire? 23) Rent paid on 01st October, 2011 for the period 01st October, 2011 to 30th September 2012 was ` 12,000 and rent paid on 01st October, 2012 for the period 01st October, 2012 to 30th September, 2013 was ` 18,000. Amount of rent in the profit & loss account for the year ended 31st March, 2013 would be 24) X sold goods to Y at a profit of 10% on cost and Y sold the goods to Z at a profit of 20% on sale value. If the cost of goods to X is ` 50,000, then at what value Y has sold the goods to Z? 25) Calculate the Gross profit if rate of gross profit is 20% on sales and cost of goods sold is ` 1,20,000 26) Opening stock ` 8,500; Purchases ` 30,700; Direct expenses ` 4,800; Indirect expenses ` 5,200; Closing stock ` 9,000. Cost of goods sold will be 27) A company wishes to earn a 20% profit margin on selling price. _____ is the profit marks up on cost, which will achieve the required profit margin? 28) Opening stock ` 22,000; Closing Stock ` 25,000; Purchases less returns ` 1,10,000. Gross profit margin on sales 20%. Sales of the company will be 29) Capital introduced in beginning by Ram ` 40,000; Further capital introduced during the year ` 1,000. Drawings ` 200 per month and closing capital ` 53,600. The amount of profit or loss for the year is 30) A sells goods at 33.33% above cost. His sales were ` 10,20,000 during the year. However, he sold damaged goods for ` 20,000 costing ` 30,000. This sale is included in ` 10,20,000. The amount of gross profit is 31) A person started business with capital of ` 50,000 and he takes loan from his relatives ` 5,000. Profit for the year is ` 10,000 and drawings ` 9,000. What will be the amount of closing capital? 32) Closing stock of previous year is overvalued by ` 50,000. Due to this a. Previous year profit is overstated and current year profit is understated b. Previous year profit is understated and current year profit is overstated c. Previous year profit is overstated and current year profit is overstated d. Previous year profit is understated and current year profit is understated

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