i

Chapter 3
Financial Statements

Objectives:
To make the student understand the procedure of preparation of financial
statements.
To give them clarity about the link between each and every step of accounting
while preparing financial statements.
To make them get the clarity on Profit and Loss Statement and Balance Sheet
To make them well versed the corporate financial statements.
To give them an insight into understanding Annual report.
3.1 Introduction
We have discussed the procedure of accounting in the earlier chapter and also we
have discussed the steps up to preparation of Trial Balance. Once you are able to
understand the basis of preparation of Trial Balance and also the purpose for which
the Trial Balance is prepared, we have discussed that the Trial Balance serves as a
base for preparing the Financial statements. All the balance of the ledger accounts
indicate the balance left at the end of the year in terms of respective accounts. These
balances serve as a cushion to fine pout the performance in terms of profit or loss of
an enterprise and also the companys financial position in terms of what it owes and
how much it owns. All this and ,much more can be understood once you start
reading the following chapters.
Objective of Financial Statement:
Financial Statements are prepared to provide an information about the financial
position , performance , cash flow position etc to help the end users to carry out an
evaluation of the ability of the business enterprise to generate cash and cash
equivalents and also for forecasting the future requirements in order to increase the
ability of the business enterprise. Financial statements may not provide all the
information that is needed, but definitely they serve the purpose to meet the
common needs.
Financial Statements may not provide the entire information because of the following
reasons
They are largely based on the historical data and hence they reflect the past
events
They may provide a base for future decision making , it can not be taken as
hundred percent foolproof for future decision making.

Of course they do not provide any non financial information which may be of
some help while taking strategic decisions.
3.2 Classification of Financial Statements
Conventionally financial statements were classified under three categories;
1. Manufacturing or Trading Account
2. Profit and loss Account
3. Balance Sheet
Let us look into these first and then we will have detailed understating of the
corporate financial statements
Note: All the business enterprises have to prepare either Manufacturing
or Trading Account depending on their nature of business. But invariably
they have to prepare the remaining two account which reflects the
financial performance and also the financial position of the enterprise.
Manufacturing or Trading Account:
This account is mainly prepared by the enterprises which are into either
Manufacturing or Trading as the case may be. Basic objective of preparing the
account is to find out the residual after spending on the direct expenses that are
required to either manufacture or purchase the finished goods and the revenue
generated out of selling the same . All the expenses and income generated out
of the selling activity occupy a place in the manufacturing or trading account.
The following pro forma clearly explains the components of these accounts.
Points at a Glance:
Trading account is the first part of the Income statement of the trading
concerns.
It is prepared to ascertain the trading results of the business.
Opening stock, net purchases, wages, direct expenses are debited to the
account.
Net sales & closing stock is credited to the account.
Gross profit / Gross Loss earned is ascertained in trading account. The
amount is then transferred to the profit & loss account to find net profit / net
loss.
Proforma
Manufacturing or Trading Account
For the year ended xxxxxxxxxx
Dr.
Particulars
To Opening Stock
To Purchases
xxx
(Less) Returns
xxx
To Wage
xxx
(Add) Outstanding xxx
To Carriage Inward
To Gas, Water, & Fuel
To Factory rent
To Factory Lighting
To Trade Expenses
To Gross Profit*
Transferred to P&L A/c
Total

Amount Rs
xxx

Particulars
By Sales
(Less) Returns

Cr.
Amount Rs.
xxx
xxx

xxx

xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx

By Closing stock
By Gross Los*
Transferred to P&L A/c
Total

xxx
xxx
xxx

* Note: the business will have either the gross profit or gross loss.
e.g. From the following prepare the Trading Account for the year ending on 31 st
March, 2008.
a. Opening Stock Rs. 90,000
b. Cash sales Rs. 36,000
c. Credit Sales Rs. 7,20,000
d. returns Outwards Rs. 6,000
e. Wages & Salaries Rs. 2,400
f. Carriage Inward Rs. 1,200
g. Freight inward Rs.1,800
h. Cartage Inward Rs. 600
i. Cash Purchases Rs. 30,000
j. Credit Purchases Rs. 6,00,000
k. Returns Inward Rs. 12,000
l. Closing Stock as 31-03-2008 Rs. 50,400
Solution:
Trading Account
For the year ended 31st March, 2008
Dr.
Particulars
To opening Stock
To Purchases
Cash Purchases
30,000
Credit Purchases 6,00,000
Total Purc.
6,30,000
Less Returns
6,000
To Freight Inward
To Cartage Inward
To Carriage Inward
To Wages & Salaries
To Gross Profit Transferred to
P& L A/c
Total

Cr.
Amount Rs
90,000

6,24,000
1,800
1,200
600
2,400
74,400
794,400

Particulars
By Sales
Cash Sales
36,000
Credit Sales 7,20,000
Total Sales 7,56,000
Less Return 12,000
By Closing Stock

Amount Rs.

744,000
50,400

Total

7,94,400

3.4 Profit and Loss Account:

Second part of the income statement of the trading concern.
Prepared to find out net profit or net loss of the year.
Starts with Gross Profit on credit side or gross loss on the debit side.
All indirect incomes and gains of the year received or accrued on credit side.
All indirect expenses of the year whether paid out standing debited.
After entering all incomes and gains on credit side. and expenses on debit
side, the account is balanced.
If total of credit balances is more than total of debit balances, the difference
is Net Profit.
If total of debit balances is more than total of credit balances, the difference
is Net Loss.
Examples of Indirect Income

Discounts received
Commissions received
Interest received
Rent received etc.
Dividends received
Profit on sale of assets
Examples Of Indirect Expenses
Administrative expenses
Selling and distributive expenses
Financial expenses
Maintenance and depreciation expenses
Provisions

Uses of Profit and Loss Account

Shows the net profit / loss.
Compares previous years profits with present year profit. It will help the
management to take right decisions
Guides management in controlling expenses and to improve future profits
Calculates taxes payable to Government

Profit and loss Account

For the year ended xxxxxxx
Dr.
Particulars
To Gross Loss
To Salaries
xxx
(Add) Outstanding xxx
To Depreciation
To Rent Paid
xxx
(less) Prepaid xxx
To Printing and
Stationery
To Bad Debts

Particulars
By Gross Profit
By Interest Received

Cr.
Amount Rs.
Xxx
Xxx

xxx
xxx
xxx

By Dividend Received
By Rent Received

Xxx
Xxx

Xxx

By Discount Received

xxx

Xxx

By Provision for Bad

Debts
By Commission
Received
By Profit on Sales of
Fixed Assets
By Net Loss transferred
to Capital*

Xxx

Amount Rs.
(xxx)

To Carriage outward

xxx

To Rates and taxes

xxx

To Insurance Premium

Xxx

To Telephone Expenses
To Audit Fees
To Discount Allowed
To Freight Outward
To Commission Paid
To Traveling Expenses
To Bank Charges
To Legal Charges
To Repairs and

Xxx
Xxx
Xxx
xxx
xxx
Xxx
Xxx
Xxx
xxx

xxx
xxx

Maintenance
To Miscellaneous
Expenses
To Interest on Loan
To Advertising and
Publicity
To Packing Expenses
To Loss on sale of Fixed
Assets
To loss by theft
To loss by fire
To loss by
embezzlement
To Net Profit
Transferred to Capital*
Total

xxx
Xxx
Xxx
Xxx
Xxx
Xxx
Xxx
Xxx
xxx
Xxx

Total

XXX

e.g. From the following information prepare a Profit and Loss Account of a trader for
the year ending on 31st March, 2008
Particulars
Amount Rs.
Gross Profit
3,00,000
Salary & Wages
60,000
Wages & Salaries
600
Carriage Inwards
1,200
Carriage Outwards
3,000
Freight Inward
1,800
Freight outwards
3,000
Discount Allowed
600
Discount Received
1,200
Dividend Received
1,800
Commission allowed
1,200
Commission received
1,800
Interest allowed
1,800
Interest Received
2,400
Rent Paid
2,400
Rent Received
3,000
Apprenticeship Premium received
3,000
Apprenticeship premium paid
3,600
General expenses
600
Miscellaneous income
1,800
Brokerage Allowed
1,800

Solution:
Dr.
Particulars
To Salaries & Wages
To Carriage Outwards
To Freight outwards
To Discount Allowed
To Commission Allowed
To Interest Allowed
To Rent Paid
To Apprenticeship
Premium Paid
To General Expenses
To Brokerage Allowed
To Net Profit t/f capital
account
Total

Profit and Loss Account

For the year ended 31-032008
Amount Rs.
6,000
3,000
3,000
600
1,200
1,800
2,400
3,600

Particulars
By Gross Profit
By Discount Received
By Dividend Received
By Commission Received
By Interest Received
By Rent Received
By Apprenticeship
Premium Received
By Miscellaneous
Income

Cr.
Amount Rs.
3,00,000
1,200
1,800
1,800
2,400
3,000
3,000
1,800

600
1,800
2,91,000
3,15,000

Total

3,15,000

*The company will have either the Net Profit or Net loss at any given point
of time.
3.5
Balance sheet:
1 It is a statement with two columns.
2 All assets are entered on one side (right side)
3 All liabilities including the capital are entered in other side (left side)
4 It is prepared at the end of the accounting period on a specific date.
5 It shows the financial position of a firm. It shows the nature and value of
Assets, Liabilities and Capital.
Right Hand side: All the assets are written.
Left Hand side: All the liabilities including capital are written.
Total of the assets must be equal to the total of the liabilities, i.e. Right Hand
side = Left Hand Side
Balance Sheet is prepared only after the preparation of trading account and
profit and loss account.
All the accounts which have not been closed by transfer to either trading
account or profit and loss account, must appear in the Balance sheet
Is prepared in two ways

1. In the order of liquidity

2. in the order of permanence

Liabilities
Current Liabilities:
Bank Overdraft
Bills Payable
Outstanding Expenses
Sundry Creditors
Income received in
advance

Long Term Liabilities

Loan
Capital
Opening Capital xxx
Add:
Interest on capital xxx
Add: Net Profit xxx
Less: Drawings xxx

Total

Liabilities
Capital
Opening Capital xxx
Add:
Interest on capital xxx

Proforma -1
Balance Sheet
As on xxxxxxxx
Amount Rs. Assets
Current Assets
Xxx
Cash In Hand
Xxx
Cash In Bank
Xxx
Bills receivable
xxx
Sundry Debtors
xxx
Prepaid Expenses

Xxx

xxx

Xxx

Accrued Income
Closing Stock
Investments
Share
Fixed Assets (Tangible)
Furniture & Fixtures xxx
Depreciation
xxx
Plant & machinery xxx
Depreciation
xxx
Building
xxx
Deprecation
xxx
Fixed Assets
(Intangible)
Goodwill
Patents
Copyrights
Trademarks
Total

Proforma II
Balance Sheet
As on xxxxxxx
Amount Rs.
Assets
Fixed Assets
Fixed Assets
(Tangible)
Furniture
& Fixtures
xxx

Amount Rs.
Xxx
Xxx
Xxx
Xxx
Xxx
Xxx
Xxx
Xxx

Xxx

Xxx
Xxx

Xxx
Xxx
xxx
Xxx
xxx

Amount Rs.

Add: Net Profit xxx

Less: Drawings xxx
Long Term Liabilities
Loan
Current Liabilities:
Bank Overdraft
Bills Payable
Outstanding Expenses
Sundry Creditors
Income received in
advance

Total

Xxx

Xxx
Xxx
Xxx
xxx
xxx

Depreciation
xxx
Plant & machinery xxx
Depreciation
xxx
Building
xxx
Deprecation
xxx
Investments
Share
Current Assets
Cash In Hand
Cash In Bank

Xxx

Bills receivable
Sundry Debtors
Prepaid Expenses
Accrued Income
Closing Stock
Total

Xxx
Xxx
Xxx
Xxx
Xxx
xxx

xxx
Xxx

Xxx
Xxx
Xxx
Xxx
Xxx

e.g. From the following information , prepare a Balance Sheet of M/s ABC as on 31st
March, 2008 under both format of Balance Sheet.
Particulars
Plant & Machinery
Prepaid Expenses
Income received in advance
Bills Payable
Sundry Debtors
Bank Overdraft
Long-term form bank
Capital
Land
Drawings
Cash in -Hand
Furniture and Fixtures
Accrued Income
Outstanding Expenses
Bill Receivable
Sundry creditors
Investments in shares of X Ltd.
Closing Stock
Building
Goodwill
Net Profit
Cash at Bank

Amount Rs.
60,000
600
1,200
1,800
60,000
6,000
60,000
1,20,000
6,000
6,000
3,000
12,000
1,200
600
1,200
59,400
6,000
51,000
60,000
6,000
30,000
6,000

Balance Sheet
Of M/s ABC Ltd.
As on 31-03-2008

Liabilities
Current Liabilities
Bank Overdraft
Bills Payable
Outstanding Expenses
Sundry Creditors
Income Received in
Advance
Long Term Liabilities
Loan
Capital
Opening Balance 1,20,000
Add: Net Profit
30,000
Less: Drawings
6,000

Total

Liquidity Form
Amount Rs. Assets
Current Assets
6,000
Cash In Hand
1,800
Cash at Bank
600
Bills Receivable
59,400
Sundry Debtors
1,200
Prepaid Expenses

60,000

1,44,000

2,73,000

Accrued Income
Closing Stock
Investments
Shares of X LTd.
Fixed Assets
Furniture &
Fixtures
Plant & Machinery
Building
Land
Goodwill
Total

Balance Sheet
Of M/s ABC Ltd.
As on 31-03-2008
In the order of Permanence
Liabilities
Amount
Assets
Rs.
Capital
Fixed Assets
Opening Balance 1,20,000
Furniture &
Fixtures
Add: Net Profit
30,000
Plant & Machinery
Less: Drawings
6,000
1,44,000
Building
Long Term Liabilities
Land
Loan
60,000
Goodwill
Current Liabilities
Investments
Bank Overdraft
6,000
Shares of X LTd.
Bills Payable
1,800
Current Assets
Outstanding Expenses
600
Cash In Hand
Sundry Creditors
59,400
Cash at Bank
Income Received in
1,200
Bills Receivable
Advance
Sundry Debtors
Prepaid Expenses
Accrued Income
Closing Stock
Total
2,73,000
Total

Amount Rs.
3,000
6,000
1,200
60,000
600
1,200
51,000
6,000
12,000
60,000
60,000
6,000
6,000
2,73,000

Amount Rs.

12,000
60,000
60,000
6,000
6,000
6,000
3,000
6,000
1,200
60,000
600
1,200
51,000
2,73,000

3.6 Comprehensive Illustration:

From the following Trial Balance of Tirumala Traders, Kurnool prepare Trading and
Profit and Loss account and Balance Sheet as on 31-03-2009.
Particulars
Cash
Purchases
Opening Stock
Sundry debtors
Plant and machinery
Furniture
Bills receivable
Rent & taxes
Wages
Salaries
Capital
Bill payable
Sundry creditors
Sales
Provision for bad debts`

Debit ( Rs.)
2,200
1,25,000
34,000
40,000
70,000
10,000
15,000
3,800
21,000
33,000

2,000
3,56,000

Credit (Rs.)

1,10,000
24,000
22,000
2,00,000
------------3,56,000

Additional Information:
Stock as on 31/03/2009 is valued at Rs. 50,000/-.
Solution:
Trading Account
Of
Tirumala Traders Ltd.
For the year ended 31-03-2009
Particulars
Amount
Particulars
Amount
To opening stock
34,000
To purchases
125,000
To wages
21,000
To gross profit (transf. to 70,000
P&L a/c)
----------250,000
-----------

By sales
By closing
stock

200,000
50,000
----------250,000
-----------

Particulars

Profit And Loss Account

For the Year ended 31-03-2009
Amount
Particulars

To Rent and taxes

To Salaries
To Provision for bad debts
To Net profit ( tranfd. to
capital a/c)

Liabilities
Bills payable
Sundry creditors
Capital
110,000
Add. Net profit 31200
--------

3,800
33,000
2,000

By Gross profit

Amount
70,000

31,200
-----------70,000
------------

-----------70,000
------------

Balance Sheet
As on 31-03-2009
Amount
Assets

Amount

24,000
22,000
1,41,200
----------1,87,200
-----------

Cash
Sundry debtors
Closing stock
Plant & Mach.
Furniture
Bills receivable

2,200
40,000
50,000
70,000
10,000
15,000
----------1,87,200
------------

3.7 Additional Information or Adjustments:

The main object of final accounts is to find out exact Net profit / Loss and true
financial position of the firm

To get correct net profit / loss, all expenses incurred and incomes earned in
the year whether actually paid or to be paid or received (or to be received)
are brought into account

Certain expenses relating to the trading period may be due but not paid.
Similarly, certain expenses are paid in advance but not due.
There are some incomes earned during the trading period but not received.
Sometimes, incomes are received in advance but not earned in the trading
period.

Certain debts may become irrecoverable, which are to be written off. And
provision is to be made for bad and doubtful debts.
Depreciation is to be made on fixed assets.
The above are some of the cases, among many, which require adjustments.
Before preparing final accounts, adjustments are to be made to find out
exact net profit/loss.

Common Adjustments:
Note: All adjustments will have dual effect according to the dual aspect
Principle. As these adjustment are the ones which are not taken into
account at any of the steps of accounting. Hence we have to show two
effects.
Each adjustment will have first effect either on the Trading Account or
Profit and Loss Account or compulsorily on the Balance Sheet.

1. Closing Stock
Closing Stock is the stock which is left at the end of the year , which consist of
the stock of material, work in progress and finished goods.
If the closing stock is given in the Trial Balance it will be directly taken
on the Balance sheet.
If it is given as adjustment, two effects will be
Closing Stock

Cr. Side of The Trading Account

Current Asset side of the balance

Sheet

2. Depreciation:
Depreciation is the loss in the value of an asset; we have discussed various types
and reasons of depreciation in the earlier chapters. As the depreciation is worked out
at the year end it is given as an adjustment. The value has to be reduced from the
respective asset in order to show the book values of an asset as per the cost
concept.
Depreciation

Deduct from the Asset on the

Asset side of Balance Sheet

Dr. Side of Profit & Loss Account

3. Prepaid Expenses:
Prepaid expenses are the expenses which are paid in advance. These expenses
are supposed to be paid in the following accounting year but it has been paid in
this year. There are two possibilities of these kinds of expenses. One it may be
adjusted in the next year and two it may be paid back, but chances of the first
occurrence are more. This has to be adjusted in order to fulfill the requirements
of matching concept. e.g Rent, Insurance, Telephone charges etc.
Prepaid Expenses

Deduct from the respective item on the

Dr. Side of profit and Loss Account

Under Current Assets of Balance Sheet

4. Outstanding Expenses
Outstanding expenses are the expenses which are supposed to be paid in the
current accounting year, but have not been paid. Such expenses are called as
outstanding. According to the matching concept these expenses have to be
shown as the one which would have taken place in the same accounting year and
as a liability as it is yet to be paid.
Outstanding Expenses

Add to the respective account on the

Dr. side of either the Trading Account
Or the Profit and Loss Account.

Show on the liability side of the

Balance Sheet

5. Accrued Income:
Accrued income is the income which is earned but it is yet fall in the hands of the
organization. E.g. when the amount is received in the form of cheque , we make
an entry in the same date on which cheque is received, but in true parlance it will
not considered as earned in total until it gets realized. Again in order to stick to
the Matching Concept we have to show the two effects of the adjustment.

Accrued Income:

Add to the respective account on the

Cr. side of the Profit and Loss Account.

Show on the Current Asset side of the

Balance Sheet

6. Bad Debts:
Bad debts are the loses which occurs due to the non payment of the debts on
time. These are considered as the irrecoverable losses.
Bad Debts

Deduct form the Debtors on the Current

Asset of Balance Sheet

Show it on the Dr. Side of

Profit and Loss Account

Note:
If the bad debts are given in the Trial Balance , then it is considered as
the old bad debts and the one which is given in the form of adjustment is
considered as new bad debt. Old bad debt has to be taken on the Dr. Side
of Profit and loss Account and new bad debt has to added to the old bad
debt. Only the bad debt which is given as adjustment will have two
effects.
7. Provision for Bad Debts:
Provision for bad Debt means, creating a provision against the bad debts in order
to overcome the loss if at all there is any additional bad debts.
Provision for Bad Debts

Deduct from the Debtors on the

Current Asset side of Balance Sheet

Show it on the Dr. Side of

Profit and Loss Account.

Note: If Provision for Bad Debt is given in the Trial Balance it is

considered as the old provision. And while showing the effect new
provision has to be deducted from the old provision on the debit side of
profit and loss Account. Or old provision has to be shown on the credit
side of the Profit and loss account and new provision on the debit side of
the profit and loss accounts.
8. Discount on Debtors:
When discount is given for debtors it is considered as a loss. And accordingly it
has to be reflected in the accounting.
Discount on Debtors

Deduct it from Debtors on the Current

Asset side of Balance Sheet

Show it on the Dr. Side of Profit

and Loss Account

Note: When all the three adjustments are given i.e. additional Bad Debts,
additional Provision for Bad Debts and Discount on Debtors. Then it has to
be shown in the following sequence.
Debtors
Less: Bad Debts
Less: Provision For bad Debts
Less: Discount on Debtors
9. Income Received in Advance:
It is the income which the company was not supposed to receive in the current
accounting year, but it has received. Hence there will be two chances of this type
of income, one it may be given back to the parties or it can be adjusted in the
next accounting year. As we had already discussed in terms of the accrued
income the effect in this case will be reverse.

Income Received in Advance

Deduct from the Cr. Side of the Profit

And Loss Account

show it on the Liability

side of Balance Sheet

10.Goods Lost by Fire:

Whenever goods are lost by fire ,(it may not be a regular occurrence ) but
sometimes if the goods catch fire and if they are damaged, if the claim is
admitted with the insurance company for which , insurance company may pay the
entire amount or it may pay partially. If the partial payment is made in that case
the adjustment will have three affects. Otherwise it will have only two effects.
e.g. goods lost by fire Rs. 10,000 and insurance company has admitted a
claim of Rs. 8,000.
Goods Lost by Fire

Show It on the Cr. Side of the Trading

Account
(Total Loss- Rs. 10,000)

Show it on the Current

Asset side of Balance Sheet
(Only the amount admitted
By the Insurance Company
Rs. 8,000)

Dr Side of Profit and loss Account

(Actual Loss Rs. 2,000)
11.Managers Commission:
From the net profit of the company , suppose the manager of the firm is entitled
to a commission @ 5% on the net profit, it can be calculated in two ways
a. If the manager is allowed commission on the net profit before charging such
commission.
It can be calculated in the following manner
Commission
= Net Profit before charging such commission x rate of commission /
100

b. If the manager is allowed commission on the net profit after charging such
commission.
It can be calculated in the following manner
Commission
= Net Profit before charging such commission x rate of commission /
100 + Rate of Commission

Illustration: Preparation of Financial Statement based on the adjustment.

1. The following is the Trial Balance of Shri. Vinay as on 31st March, 2009
Particulars
Fixed Assets
Opening Stock
Debtors
Bills Receivable
12% Investments
(purchased on 1st July, 08)
Cash In Hand
Cash at bank
Drawings
Purchases
Sales Returns
Carriage Inwards
Carriage Outwards
Rent
Insurance
Office & Administration Exp
Discount Allowed
Bad Debts
Interest
Selling & Distribution Exp.
Total

Amount
Rs.
1,80,000
45,000
1,23,000
6,000
30,000

Particulars

Amount Rs.

Creditors
Bills Payables
Loan From Bank
Capital Account
Sales

60,000
3,360
2,400
3,00,000
3,78,000

3,000
6,000
6,000

Purchase Returns
Discount Earned
Bad Debts
Recovered
Interest

3,000
600
2,100

3,15,000
6,000
3,000
1,200
1,800
2,160
7,920
1,200
3,000
1,500
9,480
7,51,260

1,800

7,51,260

Additional Information:
1. Closing stock as on 31st March, 2009 was Rs. 25,200
2. Rent is payable at the rate of Rs. 180 per month
3. Insurance Premium was paid for the year ending on 30th June, 2009
4. Write off further Rs. 3,000 as bad Debts.
5. Create Provision for discount on debtors @ 2%
6. Provide for deprecation on fixed assets @ 10% p.a.
7. Create a provision for discount on creditor @ 2%
8. Create a provision for doubtful debts @ 10%

You are required to prepare Trading and Profit & Loss Account for the year ended,
31st ,March, 2009 and Balance Sheet as on that date.

Explanation of the additional information:

1. Closing stock as on 31st March, 2009 was Rs. 25,200

Cr. Side of Trading Account

Assets(Current Asset) Side of Balance Sheet

2. Rent is payable at the rate of Rs. 180 per month

Rent was supposed to be paid @ Rs. 180 Per month , for a period of 12 months total
rent would have been Rs. 2,160. But actual paid is only Rs. 1,800, hence the balance
amount is unpaid (Rs. 360).
Unpaid rent

Add to the Rent on Dr. side of Profit

And Loss Account as outstanding

Show it as the current liability

on the Balance Sheet

3. Insurance Premium was paid for the year ending on 30th June, 2009
Insurance was supposed to be paid only for 12 months Rs. 1,620 for the year
ended 31st march, 2009,but in the Trial Balance it is shown as Rs. 2,160 which
means the amount has been paid for the next three months also which falls
under the next accounting year. Hence which ever is not supposed to be paid in
this year is an advance payment. Insurance premium has been paid to the extent
of Rs. 540 as an advance. i.e Rs. 180 per month x 12= Rs. 2,160, three months
advance payment Rs.180 x 3= Rs. 540
Prepaid Insurance

Deduct From the Insurance on the

Dr. Side of Profit and loss Account
6

Show it on the Current Assets of the

Balance Sheet

Write off further Rs. 3,000 as bad Debts

Deduct from the Debtors

On the Balance Sheet

Show it on the Dr. Side of Profit and loss

Account as new bad debts.

5. Create Provision for discount on debtors @ 2%

Deduct from the Debtors

On the Balance Sheet

Show it on the Dr. Side of Profit and loss

Account as new bad debts.

6. Provide for deprecation on fixed assets @ 10% p.a.

Deduct from the fixed Assets

On the Balance Sheet
7.

Show it on the Dr. Side of the Profit and Loss

Account.

Create a provision for discount on creditor @ 2%

Deduct form Creditors on the

Liability side of Balance Sheet

Show on the Cr. Side of the Profit and A/c

8. Create a provision for doubtful debts @ 10%

Deduct form debtors from

Show it on the Dr. Side of Profit and Loss
Current Asset on the Balance Sheet
Account.
Solution:
Dr.
Particulars
To, Opening Stock
To Purchases 3,15,000
Less: Returns
3,000
To Carriage Inwards

Trading Account
For the year ended 31-03-2009
Amount Rs.
Particulars
45,000
By Sales
3,78,000
Less: Returns 6,000
3,12,000
By Closing Stock
3,000

Cr.
Amount Rs.
3,72,000
25,200

To Gross Profit T/f to P& L

Total

37,200
3,97,000

Total

3,97,000

Profit and Loss Account

Dr.
Particulars
To Carriage outward
To Rent Paid
1,800
Add: Outstanding 360
To insurance paid 2,160
Less: Prepaid
540
To office & Admn. Exp
To Discount
To Bad Debts 3,000 (Old)
+ New Bad debts 3,000
To interest
To Selling & Distribution Exp
To Provision doubtful Debts
To provision for discount
Debtors
To Depreciation on fixed assets
Total

Liabilities
Capital Account
Opening balance 3,00,000
Less: Net Loss
19,400
Less: Drawings
6,000
Loans:
Loan From Bank
Current Liabilities
Creditors
60,000
Less : Reserve for Discount
1,200
Bills payable
Outstanding Rent

Total

For the year ended 31-03-2009

Amount
Particulars
Rs.
1,200
By Gross Profit
By Discount
2,160
By Bad Debts Recovered
By Interest Received
1,800
1,620
Add: Accrued but not due 900*
7,920
By Reserve for Discount on
Creditors
1,200
By Net Loss Transferred to
Capital Account

Cr.
Amount
Rs.
37,200
600
2,100
2,700
1,200
19,440

6,000
1,500
9,480
12,000
2,160
18,000
63, 240

Total

Balance Sheet
As on 31-03-2009
Amount
Rs.

2,74,560
2,400

58,800
3,360
3,60

3,39,480

63,240

Assets

Fixed Assets
Fixed Assets
1,80,000
Less Depreciation 18,000
12% investments
Current Assets
Closing Stock
Debtors
1,20,000
Less: Provision for doubtful
debts
12,000
1,08,000
Less: Provision for Discount
2,160
Interest accrued but not due
Cash in hand
Cash In Bank
Bills Receivable
Prepaid Insurance
Total

Amount
Rs.

1,62,000
30,000
25,200

1,05,840
900
3,000
6,000
6,000
540
3.39,480

2. The following Trial Balance is extracted from the books of a merchant Mr. A.
Nageswara Rao on 31-03-2009.
Trial Balance
As on 31-03-2009
Particulars
Dr. Amount Rs.
Cr. Amount Rs.
Furniture & Fittings
640
Motor Vehicles
6,250
Buildings
7,500
Capital
12,500
Bad Debts
125
Provision for Doubtful Debts
200
Sundry Debtors & Creditors
3,800
2,500
Stock on 1-04-2008
3,460
Purchases and Sales
5,475
15,450
Bank Overdraft
2,850
Returns Inward and Outward
200
175
Advertising
450
Interest on Bank overdraft
118
Commission
375
Cash
650
Taxes and Insurance Premium
782
General Expenses
1,250
Salaries
3,300
Total
34,000
34,000
Adjustments:
1. Closing stock was valued at Rs. 3,250
2. Depreciate Building @5%, Furniture @ 10% and motor Vehicle @ 20% p.a.
3. Rs. 85 is due for interest on Bank Overdraft.
4. Salaries Rs. 300 and taxes Rs. 200 are outstanding
5. Insurance Premium amounting Rs. 100 prepaid
6. One -third of the commission received in respect of work to be done next year
7. Write off a further sum of Rs 100 as bad debts from Debtors and create
provision for Doubtful Debts @ 5% on Debtors.
You are required to prepare Trading and Profit & Loss Account and the Balance
Sheet.
Solution:
Explanation of the adjustments
1. Closing stock was valued at Rs. 3,250

Show on the credit side

Of Trading Account

Show on the current assets on the Balance Sheet

2. Depreciate Building @5%, Furniture @ 10% and motor Vehicle @ 20%

p.a.

Deduct from the respective fixed

Asset on the Balance Sheet

Show on the Dr. Side of

Profit and Loss Account

3. Rs. 85 is due for interest on Bank Overdraft.

Add to the Interest on Bank

Overdraft on the Dr. Side of
Profit and Loss A/c

Show as a current Liability

on the Balance Sheet as outstanding

4. Salaries Rs. 300 and taxes Rs. 200 are outstanding

Add to the respective item

on the Dr. Side of
Profit and Loss A/c

Show as a current Liability

on the Balance Sheet as outstanding

5. Insurance Premium amounting Rs. 100 prepaid

Deduct from Insurance Premium show as Current Asset

On the Dr. Side of Profit &
on the Balance Sheet
Loss Account
6. One -third of the commission received in respect of work to be done
next year.
Deduct from commission on the
Cr. Side of Profit & Loss A/c

Show as Current Liability on the Balance

Sheet

7. Write off a further sum of Rs 100 as bad debts from Debtors and
create.

Deduct from Debtors on the Asset

Side of Balance Sheet
Dr.
Particulars
To Opening Stock
To Purchases 5,475
- Returns
- 125
To Gross Profit T/f to
Profit & Loss A/c
Total

Show it in the Dr. side of Profit & Loss

account.

Trading Account
For The year ending 31-03-2009
Amount Rs.
Particulars
Amount Rs.
3,460
By Sales
15,450
- Returns
- 200
15,250
By Closing Stock
3,250
5,350
9,690
18,500

Total

Profit and
For the year
Particulars
Amount
Rs.
To Bad Debts
125
- New Bad Debts
- 100
- Provision New
- 185
410
- Old Provision
- 200
210
To Advertising
450
To Interest on Bank OD
118
+ Outstanding
+ 85
203
To General Expenses
1,250
To Salaries
3,300
+ Outstanding
+ 300
3600
To Ins. Premium
782
+ Outstanding
+200
982
- Prepaid Premium
- 100
882
To Depreciation
Buildings @ 5%
375
Furniture @ 10%
64
Motor Vehicle @ 20%
1,250
1,689
To Net Profit
1,656
Total
9,940
Dr.

Cr.

18,500

Loss Account
ended 31-03-2009
Particulars
By Gross Profit
By Commission
375
- Received in Advance - 125

Cr.
Amount
Rs.
9,690

250

9,490

Liabilities
Capital
12,500
+ Net Profit
+ 1,656
Sundry Creditors
Bank Overdraft

Balance Sheet
As on 31-03-2009
Amount Rs.
Assets
14,156
2,500
2,850

Outstanding Expenses
Salaries
300
Taxes
200
Interest on Bank OD 85
Commission received in
advance

Total

585
125

20,126

Amount
Rs.

Furniture & Fittings 640

- Dep @10%
- 64
Motor Vehicle
6,250
- Dep @ 20%
-1,250
Buildings
7,500
- Dep @ 5%
- 375
Sundry Debtors
3,800
- W/ off Bad Debts - 100
3,700
-5% Provision for DD-185
Cash
Closing Stock
Pre- paid Insurance
Premium
Total

576
5,000
7,125

3,515
650
3,250
100
20,126

3. From the following Trial Balance and additional information of Mr. Sri Ram
Rao, a proprietor. Prepare Trading and Profit & Loss Account for the year
ending on 31st March, 2009 and the Balance Sheet as on date:

Particulars
Bad Debts
Rent
Wages
Building
Machinery
Salaries
Debtors
(Including Rajs Dishonored
bill of Rs. 800)
Purchases/ Sales
Capital
Printing & Advertising
Commission Received
Creditors
Total
Additional Information:

Trial Balance
As on 31-03-2009
Dr. Amount Rs.
4,620
22,000
41,920
1,20,000
32,000
83,200
67,400
1,34,916

Cr. Amount Rs.

13,000

2,01,400
2,76, 856

29,200

5,35,256

6,000
38,000
5,35,256

a. Wages include a sum of Rs. 8,000 spent on the erection of a cycle shed for
employees customers, and Rs. 4,000 for erection of new machinery on 1.1.2009
b. Provide 5% depreciation on machinery and building
c. Remuneration of Rs. 4,000 paid to Dr. Pavan, a temporary employee, stands
debited to his personal account.
d. Sundry Creditors include an amount Rs. 11,000 received from Harish and
credited to his account. The amount was written off as a bad debt in the previous
year.
e. Goods costing Rs. 1,000 were taken by the proprietor for his personal use but
no entry has been made in the books of accounts.
f. Goods costing Rs. 1,200 were sent to a customer on sale or return for Rs.
1,400 on 30th March, 2009 and has been recorded in the books as actual sale.
g. A fire occurred on 25th March, 2009 in the godown and stock of Rs. 2,000 was
destroyed, it was fully insured but the insurance company admitted the claim to
the extent of 60% only.
h. Half the amount of Rajs Bill is irrecoverable
i. Create a provision of 5% on the other debtors
j. 50% of Printing and Advertising is to be carried forward as a charge in the
following year.
k. One third of the commission received is in respect of work to be done next
year.
m. Included amongst the Debtors is Rs. 6,000 due from Krishna and included
among the Creditors Rs. 2,000 due to him.
n. Provide for personal Income tax @ 10% of Net Profit in excess of Rs. 1,00,000
o. Stock in hand on 31st March was valued at Rs. 2,23,776
p. Manager is entitled to a commission of 5% on Net Profit after charging his
commission.
Explanation:
a. Wages include a sum of Rs. 8,000 spent on the erection of a cycle
shed for employees customers.

Deduct from wages on the Dr.

Side of Trading Accounting

Add to Building as the Fixed Asset

on the Balance Sheet

Rs. 4,000 for erection of new machinery on 1.1.2009

Deduct from wages on the

Dr.Side of Trading Accounting

Add to machinery as the Fixed Asset

on the Balance Sheet

b. Provide 5% depreciation on machinery and building

Deduct from the respective

Asset on the Balance sheet
As Depreciation

Show it on the Dr. Side of

Profit & Loss Account

c. Remuneration of Rs. 4,000 paid to Dr. Pavan, a temporary employee,

stands debited to his personal account.

Add to Salary on the Dr. Side of Profit

& Loss Account

Deduct from Debtors on the Balance

Sheet as current asset.

d. Sundry Creditors include an amount Rs. 11,000 received from Harish and
credited to his account. The amount was written off as a bad debt in the
previous year.

Deduct from Creditors

As current liability

Show it on the Cr. Side of the

Profit & Loss Account as bad
Debts recovered.
e. Goods costing Rs. 1,000 were taken by the proprietor for his personal
use but no entry has been made in the books of accounts.

Deduct from Purchases on the Dr.

Side of Trading Account

Deduct from capital as

Liability

f. Goods costing Rs. 1,200 were sent to a customer on sale or return for
Rs. 1,400 on 30th March, 2009 and has been recorded in the books as
actual sale.

Add to closing stock on the Dr.

Side Trading Account and Balance
Sheet as Current Asset

Deduct from Debtors

from Balance Sheet
(Rs. 1,400)

(Rs. 1,200)

g. A fire occurred on 25th March, 2009 in the godown and stock of Rs.
2,000 was destroyed, it was fully insured but the insurance company
admitted the claim to the extent of 60% only.

Show it on the Cr. Side Trading

Account .
(Full Amount Rs. 2,000)

Show as Current Asset on the Balance

Sheet Rs. 1,200
Dr. Side of P&L
Account Rs. 800

h. Half the amount of Rajs Bill is irrecoverable.

Deduct from Debtors on the

Balance Sheet as Bad Debts

Show on the Dr. Side of Profit

& Loss Account as Bad debts

i. Create a provision of 5% on the other debtors.

Deduct from Debtors on the

Balance Sheet

show as new provision on the Dr. Side

of Profit & Loss Account

j. 50% of printing and Advertising is to be carried forward as a charge in

the following year.

Deduct from printing & Stationery

On the Dr. side of P & L account

Show as a current Liability

k. One third of the commission received is in respect of work to be done

next year.

Deduct form commission received

On Cr. Side of P & L Account

Show as a current liability on

Balance Sheet

m. Included amongst the Debtors is Rs. 6,000 due from Krishna and
included among the Creditors Rs. 2,000 due to him.

Deduct from Debtors

Deduct form Creditors the
Amount respectively

show as a current liability and current asset

Respectively

n. Provide for personal Income tax @ 10% of Net Profit in excess of Rs.
1,00,000

Show on the Dr Side of P&L

Account

Deduct form capital

o. Stock in hand on 31st March was valued at Rs. 2,23,776.

Show on the Cr. Side of

Trading Account

Show as a current Asset

on the Balance Sheet

p. Manager is entitled to a commission of 5% on Net Profit after charging

his commission.

Work out form the profit

As explained in the adjustment

Show as current liability on the Balance Sheet

Trading Account For the Year Ended

31-03-2009
Particulars
Amount Rs.
Particulars
To Purchases
1,34,916
By Sales
2,01,400
- Goods Withdrawn
- Goods Sent on Approval
-1,000
1,33,916
- 1,400
To Wages
41, 920
By loss of stock by fire
-Wages for
Erection
- 8,000
- Wages Machines- 4,000
29,920
To Gross Profit C/D
2,63,140
By Closing Stock 2,23,776
- Goods Sent on
Approval
- 1,200
4,26,976
Dr

Profit and Loss Account

Dr.
For the year ended 31-03-2009
Particulars
Amount
Particulars
Rs.
To Salaries
83,200
By Gross Profit C/D
+ Salary to Pavan 4,000
87,200
To Dep on Building
6,400
By Bad Debts Recovered
To Dep on Machinery
1,800
By Commission received
6,000
- Unaccrued
-2,000
To loss of stock by fire
800
By Rent received 13,000
- Un accrued (1/3 ) 1,000
To bad Debts 4,620
+ 50% Due
800
+ New Provision 2,920
8,340
To Printing & Advt. 29,200
- Prepaid
- 14,600
14,600
To Rent Paid
22,000
+ O/S
2,000
24,000
To Managers Commission
(1,47,000 x 5/105)
7,000
To Net Profit t/f/ to Capital
A/c
1,40,000
Total
2,90,140
Total

Cr.
Amount Rs.
2,00,000
2,000

2,24,976
4,26,976
Cr.
Amount
Rs.
2,63,140
11,000
4,000
12,000

2,90,140

Liabilities
Capital
2,76,856
+ Net Profit
1,40,000
- Income Tax
4,000
- Drawings
1,000
Current Liabilities
Creditors
38,000
- Bad Debts
11,000
- Due to Pavan
2,000
Outstanding Rent
Unaccrued commission
Unaccrued rent

Balance Sheet
As on 31-03-2009
Amount
Assets
Rs.
Building
1,20,000
+ Wages for
Cycle shed
8,000
4,11,856
1,28,000
- Depreciation
6,400
Machinery
32,000
+ Wages for erection 4,000
25,000
- Deprecation
1,800
2,000
Current Assets:
2,000
Closing Stock
2,23,776
+ Stock with Customers
1,200
1,000
Debtors
67,400
- Salary to Pavan 4,000
- Goods sent on approval
1,400
- Bad Debts
800
- Due from Pavan 2,000
(set off against creditors)

Provision for Income Tax

4,000

Managers Commission

7,000

Total

4,52,856

59,200
- Provision @ 5%
2,920
Prepaid Printing & Stationery
Insurance Prepaid
Total

Amount
Rs.

1,21,600
34,200

2,24,976

56,280
14,600
1,200
4,52,856