UNIT 4

May 10, 2019 | Author: Ritesh Patel | Category: Debits And Credits, Deferral, Expense, Bad Debt, Business Economics
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SUBJECT: ACCOUNTING FOR MANAGEMENT/PPA [UNIT 4 FINAL AACOUNT] CLASS: FYBBA (GEN)/ FYBBA (HM/TTM) When a person starts a business he wishes to know the financial performance of his business. A convenient and universally accepted method of knowing this is to ascertain the profit or loss at yearly intervals (1st April to 31st March) and the financial position of the business on a given date. e can ascertain these by preparing the !inal Accounts" which is prepared on the basis of the #rial $alance. #he preparation of !inal Accounts is the last step in the accounting cycle and that is why they are called !inal Accounts. !inal Accounts include the preparation of  i) #rading and ii) %rofit and &oss Account ' and iii) $alance sheet. !inal accounts are the means of conveying the profitability and financial position to management" owners and interested outsiders of the business. !inal accounts have to be prepared every year" to make a continuous assessment of the business for a completed period. t must be kept in mind that epenses and incomes for the full accounting period are to be taken into account. *uppose" the firm closes its books on 31st March and rent for the month of March has not been paid" this epense (rent) has been incurred and yet to be paid. #herefore" it would be proper to include the rent for the month (March) along with the rent of the year to know the true profit. n a firm there will be a number of items"  both epenses and incomes" which have to be ad+usted. f such items are not ad+usted" the final accounts will not reveal the true and fair picture of the business performance. All such items which need to be brought into books of account at the time of preparing p reparing final accounts are called ,ad+ustments-. ournal entries passed to effect the re/uired ad+ustments are known as ad+usting entries. 1.1 Adjustments *ome important and common items" which need to be ad+usted at the time of preparing the final accounts are discussed below. 1. 0losing stock  . 2utstanding epenses 3. %repaid penses 4. Accrued incomes 5. ncomes received in advance 6. nterest on capital 7. nterest on drawings 8. nterest on loan 9. nterest on investment 1:. ;epreciation 11. $ad ;ebts 1. %rovision for bad and doubtful debts 13. %rovision for discount on debtors 14. %rovision for discount on creditors.  s.1"::":::.

 ?alue of closing stock will appear  i) on the credit side of trading account and ii) on the assets side of balance sheet. 1.1.2 Outstanding Expenses penses which have been incurred but not yet paid during the accounting period for which the final accounts are being prepared are called as outstanding epenses. ample= #rial balance shows salaries paid >s.":::. Ad+ustment= *alary for March ::4" >s."::: not yet paid.

Outstanding expenses will be shown i) on the debit side of %rofit and &oss account by way of additions to the particular epenses and ii) on the liabilities side of the $alance *heet. "#"#$ P%!pa&' Exp!! penses which have been paid in advance are called as prepaid (unepired) epenses. ample= #rial $alance for the period ending 31st March" ::4 shows >s.15"::: as insurance premium. Ad+ustment= %repaid nsurance premium >s.7"5::.

%repaid epenses will be shown i) on the debit side of the %rofit and &oss account by way of deduction from the particular epenses and ii) on the assets side of the $alance *heet. "#"#4 A**%+!' I*,m! ,% O+--a'&. I*,m! ncome which has been earned but not received during the accounting period is called as accrued income.

 Example: 0redit side of #rial $alance (31.3.::4) shows commission received >s.8":::. Ad+ustment= 0ommission accrued but not yet received >s.":::. Accrued income will be shown i) on the credit side of %rofit and &oss acc ount by way of addition to particular income and ii) on the assets side of the $alance *heet "#"# I*,m! R!*!&0!' & A'0a*! ncome received during a particular accounting period for the work to be done in future period is called as income received in advance.  Example: #rial $alance for the period ending 31st March" ::4 shows >en t received >s.5":::. Ad+ustment= >ent received in advance >s.5":::.

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 ncomes received in advance will be shown i) on the credit side of the %rofit and &oss account by way of deducting from the particular income and ii) on the liabilities side of the $alance sheet. "#"#1 I-!%!- , Cap&-a n order to see whether the business is really earning profit or not" it is desirable to charge interest on capital at a certain rate.  Example: As per #rial $alance" capital as on 31.3.::4 is >s.4"::":::. Ad+ustment= %rovide 6@ interest on capital.

#o bring interest on capital to %rofit and &oss accou nt" the following transfer entry is re/uired. nterest on capital will be shown i) on the debit side of %rofit and &oss account and ii) on the liabilities side of the $alance *heet by way of addition to the capital. "#"#2 I-!%!- , 3%a&. Amount withdrawn by the owner for his personal use is called as drawings. When interest on capital is allowed" then interest on drawings is charged from the owner. nterest on drawings is an income for the business and will reduce the capital of the owner.

ample= #he trial balance shows the following= >s. 0apital as on 31.3.::4 4"::"::: ;rawings as on 31.3.::4 3:"::: Ad+ustment = 0harge interest on drawings  5@. nterest on drawings will be shown i) on the credit side of %rofit and &oss acc ount and ii) on the liabilities side of the $alance *heet by way of addition to the drawings which are ultimately deducted from the capital. FORMAT OF TRA3ING ACCOUNT Pa%-&*+a% #o 2pening stock #o %urchases &ess= %urchases returns #o Wages Add= 2utstanding wages #o 0arriage nward

R

Pa%-&*+a% $y *ales &ess= *ales returns

R

$y 0losing *tock





  

#o Bross %rofit cCd (#ransferred to %rofit D &oss ACc) 

3 | P R E P A R E D B Y: R I T E S H H . P A T E L



%rofit and &oss account ;r. Pa%-&*+a% #o *alaries Add= 2utstanding *alaries nsurance premium &ess= %repaid nsurance %remium #o nterest on 0apital #o nterest on loan Add= nterest on loan outstanding #o ;epreciation on= !ied Assets" $uildings" Machinery !urniture etc. T, Ba' 3!5- (,')  Add: Bad Debts(New) (given in adjustment)

R   



R



 

 

  





Pa%-&*+a% $y Bross %rofit bCd (#ransferred from #rading ACc) $y 0ommission received Add= 0ommission accrued but not yet received $y >ent received &ess= >ent received in advance $y nterest on drawings $y ;iscount received $y eturn outwards %urchases 0ash at *hopk  $ank 2verdraft nterest on 2verdraft 0reditors *tock at the 0ommencement !reight >ent and #aes ;ebtors 0ommission !reehold %roperty *undry penses *alaries and wages &ife nsurance %remium nsurance %remium Motor ?ehicle #ypewriter  nterest 0arriage inwards 0arriage outwards %ower  Audit !ee &ighting

C%!'&- R#

1"8":: 1:"::: 1"8:"::: 4"::: 6"::: 1"5:"::: 1"6:: 15"::: 1"5:: 17"8:: 18"::: 8"5:: 7"::: 3"6:: 3"::: 3:"::: 3"9:: :"::: 1"8:: 1"6:: 39"8:: 8":::

"::

8:: "::: 8:: ":: 1"7:: ":::

#2#A&

3"5:":::

3"5:":::

0losing *tock valued on that date was >s. 15":::.

%>2$&M = F%,m -7! 8,,&. T%&a Baa*! ,8 G+%'!!p S&.7 a a- $"- 3!*!m5!%9 ;;29 p%!pa%! T%a'&. a' P%,8&- a' L, A**,+- a' Baa*! S7!!-: ;r. $alances 2pening *tock  &and and $uilding Machinery !urniture D !itures %urchases *alaries Beneral penses >ent %ostage and #elegrams *tationery Wages !reight on %urchases 0arriage on *ales

>s.

0r. $alances 15"5:: 35"::: 5:"::: 5"::: 1":6"::: 11"::: "5:: 3"::: 1"4:: 1"3:: 6"::: "8:: 4":::

0apital &oan from Mrs. Burdeep *ingh 9@ *undry 0reditors %urchase >eturns *ales ;iscount

5 | P R E P A R E D B Y: R I T E S H H . P A T E L

>s. 6:"::: 3:"::: 9"6:: "1:: ":7"3:: 1"::

>epairs *undry ;ebtors $ad ;ebts 0ash in and 0ash at $ank  *ales >eturns

4"5:: 3:"::: 6:: 1:: 6"4:: 5"1:: 3"1:"::

3"1:"::

#he following further information was given= 1) ) 3) 4)

Wages for ;ecember" ::7 amounting to >s. "1:: have not yet been paid. ncluded in Beneral penses is nsurance %remium >s. 6::" paid for the year ending 31st march" ::8. A provision for doubtful debts 5@ on debtors is necessary. ;epreciation is to be charged as follows= &and and $uilding @" Machinery 1:@ and !urniture and !itures 15@. 5) #he loan from Mrs. Burdeep *ingh was taken on 1st uly" ::7. nterest has not been paid yet. 6) #he value of stock on hand on 31st ;ec" ::7 was >s. 14"9::. P%,5!m $: T7! 8,,&. & -7! T%&a Baa*! ,8 M%# Geturns nward Account >eturns 2utward Account Wages Account !uel D %ower Account 0arriage on *ales Account 0arriage on %urchase Account *tock Account (1st uly" ::7) $uilding Account !reehold &and Account Machinery Account %atent Account *alaries Account Beneral ps. Account nsurance Account ;rawings Account 0apital Account *undry ;ebtors Account *undry 0reditors Account

R#

R#

54: "63: 4:"675 98"78: 68: 5:: 1:"48: 4"73: 3":: ":4: 5"76: 3:"::: 1:"::: :"::: 7"5:: 15"::: 3"::: 6:: 5"45 71"::: 14"5:: 6"3:: TOTAL

6 | P R E P A R E D B Y: R I T E S H H . P A T E L

"9219=;

"9219=;

#aking into account the following ad+ustments" %repare #rading Account and %rofit and &oss Account and the $alance *heet= (a) *tock on hand on 3:th une" ::7 is >s. 6"8::. (b) Machinery is to be depreciated at the rate of 1:@ and patents at the rate of :@. (c) *alaries for the month of une ::7 amounting to >s. 1"5:: were unpaid. (d) nsurance includes a premium of >s. 17: on a policy epiring on 31st ;ecember ::7. (e) Wages include a sum of >s. "::: spent on the erection of a cycle shed for employees and customers. (f) A provision for $ad and ;oubtful ;ebts is to be created to the etent of 5 per cent on *undry ;ebtors.  4# T7! 8,,&. -%&a 5aa*! & !x-%a*-!' 8%,m -7! 5,,> ,8 a m!%*7a- , $"- 3!*!m5!% ;;2: PARTICULARS

!urniture and !ittings Motor ?ehicles $uildings 0apital Account $ad ;ebts %rovision for $ad ;ebts *undry ;ebtors and 0reditors *tock on anuary 1" ::7 %urchases and *ales $ank 2verdraft *ales and %urchases >eturns Advertising nterest Account 0ommission 0ash #aes and nsurance Beneral penses *alaries

3R# R#

C%# R#

64: 6"5: 7"5:: 1"5:: 15 3"8:: 3"46: 5"475 :: 45: 118

:: "5:: 15"45: "85: 15

375 65: 1"5: 78 3"3:: 34":::

34":::

T7! 8,,&. a'?+-m!- a%! -, 5! ma'!:

(a)

*tock in and on 31st ;ecember" ::7 was >s. 3"5:.

(b) ;epreciate $uilding 5@" !urniture and !itting  1:@ and Motor ?ehicle  :@. (c)

>s. 85 is due for interest on bank 2verdraft.

(d) *alaries >s. 3:: and #aes >s. 1: are outstanding. (e)

nsurance amounting to >s. 1:: is prepaid.

(f)

2neEthird of the commission received is in respect of work to be done net year.

(g) Write off further >s. 1:: as $ad ;ebts and %rovision for $ad ;ebts is to be made e/ual to 5@ on *undry ;ebtors.

7 | P R E P A R E D B Y: R I T E S H H . P A T E L

%repare a #rading and %rofit and &oss Account for the year ending 31st ;ecember" ::7 and a $alance *heet as on that date. 6#  !rom the following #rial $alance prepared from the books of Burdeep on 31st ;ecember ::7" prepare #rading and %rofit and &oss Account for the year ending 31st ;ecember" ::7 and $alance *heet as on that date= Pa%-&*+a%

BurdeepFs drawings $ills >eceivable %lant and Machinery *undry debtors (ncluding Mr. Byan for dishonoured che/ueG>s. 1":::) Wages (Manufacturing) >eturns inward %urchases >ent and #aes *tock on 1st an" ::7 *alaries #ravelling epenses nsurance 0ash $ank  >epairs and renewals nterest of &oan nterest and discount $ad debts !itures and !ittings

R# P#

Pa%-&*+a%

1:"55: BurdeepFs 0apital 9"5:: &oan at 6@ p.a. 8"8:: *ales 0ommission received 6"::: *undry 0reditors 4:"97: "78: "56"59: 5"6: 89"68: 11"::: 1"88: 4:: 53: 18"97: 3"37: 1"::: 4"87: 3"6: 8"97: 91"9";;

R# P#

1"19"4:: :"::: 3"56"43: 5"64: 59"63:

91"9";;

#he following ad+ustments are to be made= (a) *tockEinEtrade in hand on ;ecember 31" ::7 >s. 1"8"96:. (b) Write off half of ByanFs che/ue. (c) 0reate a provision of 5@ on sundry debtors. (d) Manufacturing wages include >s. 1":: for erection of new machinery purchased. (e) ;epreciate plant and machinery by 5@ p.a. !or fitures and fittings by 1:@ per annum. (f) 0ommission not earned but received amounts to >s. 6::. 6# 1 O $"- 3!*!m5!%9 ;;2 -7! 8,,&. T%a& Baa*! a !x-%a*-!' 8%,m -7! 5,,> ,8 M%# H# Pa%-&*+a% 3%# Baa*! ;rawings *undry ;ebtors nterest on &oan 0ash in and *tock on 1st an" ::7 Motor ?ehicles

R# Pa%-&*+a%

3"::: :"1:: 3:: ":5: 6"839 1:":::

>ates #aes and nsurance Advertising Beneral penses $ills >eceivable C%# Baa*!: 0apital *undry 0reditors

8 | P R E P A R E D B Y: R I T E S H H . P A T E L

R#

"891 3"64 3"489 6"88 8"::: 1:"4:1

0ash at $ank  &and D $uildings $ad ;ebts %urchases *ales >eturns 0arriage 2utward 0arriage nward *alaries

3"555 1"::: 55 66"458 7"81 "4:4 "99 9":97

&oan on Mortgage $ad ;ebts >eserve *ales %urchases >eturns ;iscounts $ills %ayable >ent >eceived

9"5:: 71: 1"1:"43 1"346 54: "614 5:

%repare #rading and %rofit and &oss Account for the year ended 31 st ;ecember" ::7 and $alance *heet as on that date" after making ad+ustments for the following matters= 1. ;epreciate &and and $uilding at E1C @ and Motor ?ehicles at :@. . nterest on &oan at 6@ p.a. s unpaid for si months. 3. Boods costing >s. 5:: were sent to a customer on sale or return for >s. 6:: on 3:th ;ecember" ::7 and had been recorded in the books as actual sales. 4. *alaries amounting to >s. 75: and rates amounting to >s. 35: are outstanding. 5. %repaid nsurance amounted to >s. 15:. 6. #he provision for $ad ;ebts is to be maintained at 5@ on *undry ;ebtors. 7. %rovide for managerFs 0ommission at 1:@ on net profits after charging such commission. 8. *tock in hand on 31st ;ecember" ::7 was valued at >s. 6"5:. 6# 2 !rom the following balances etracted from the books of Mr. ardev *ingh" prepare trading and profit and

loss account for the year ended 31.3::7 and a balance sheet on that date=

Pa%-&*+a%

%urchases 0omputer at cost (bought on 31.3.::7) 0ash at $ank  0ash in and !urniture and fittings at cost >ent $ills receivable #rade 0harges *undry debtors ;rawings ;iscount Wages

3!5&- (R#) Pa%-&*+a%

71"8: 0apital account 0reditors 18"38: $ills %ayable 4"::: ;iscount "836 *ales 1"54: >eturns outwards 1"54: >ent due 6"7: 9: 34"156 5":: 54: 1"8::

9 | P R E P A R E D B Y: R I T E S H H . P A T E L

C%!'&- (R#)

6:"::: 13"::: 1:": "::: 6:"7: 11"43 3:

*alaries >eturns nwards

16"78: 1"::: "92291@

"92291@

A'?+-m!-:

1) *tock at the end at cost >s. 5"6:: (marketEvalue >s. 6"::). ) >s. 6"::: paid to Mrs. >ed against $ills payable were debited by mistake to Mr. BreenFs account and included in the list of sundry debtors. 3) #raveling epenses paid to sales representatives >s. 5"::: for the month of March ::7 were debited to his personal account and included in the list of sundry debtors. 4) ;epreciation on furniture and fittings shall be provided at 1:@ p.a. 5) %rovide for doubtful debts at 5@ on sundry debtors. 6) Boods costing >s. 1"5:: were used by the proprietor. 7) *alaries included >s. 1"::: paid to sales representative who is further entitled to a commission of 5@ on net sales. 8) *tationery charges >s. 1":: due on 31.3.::7. 9) %urchases included opening stock valued at cost >s. 7":::. 10) *ales representative further entitled to an etra commission of 5@ on net profit after charging his etra commission.

10 | P R E P A R E D B Y: R I T E S H H . P A T E L

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