GSEB Class 11 Solutions Chapter 5 Financial Statements of Business Organisations

Text Book Questions and Answers

 

Question 1.1. Debit balance of Trading Account means
(a) Gross Profit
(b) Gross Loss
(c) Net Profit
(d) Net Loss
Answer: (b) Gross Loss
In simple words: When the expenses are more than the income in a Trading Account, it means the business has a Gross Loss. This shows that the cost of goods sold was higher than their selling price.

Exam Tip: Remember that a debit balance in the Trading Account always indicates a gross loss, while a credit balance shows a gross profit. This is a fundamental concept for final accounts.

 

Question 1.2. Credit balance of Profit and Loss Account means
(c) Net Profit
(d) Net Loss
Answer: (c) Net Profit
In simple words: A credit balance in the Profit and Loss Account means the business has earned more income than its total expenses, resulting in a Net Profit. This indicates a successful operational period.

Exam Tip: A credit balance in the Profit and Loss Account always signifies a net profit, reflecting that total incomes exceeded total expenses.

 

Question 1.3. Which balance of the following balances of trial balance is shown in the Profit and Loss Account?
(a) Salary-Wages
(b) Wages-Salary
(c) Outstanding Salary-Wages
(d) Outstanding Wages-Salary
Answer: (a) Salary-Wages
In simple words: From the given choices, the 'Salary-Wages' balance is usually recorded in the Profit and Loss Account as an expense. It reflects the cost of employee compensation during the accounting period.

Exam Tip: Clearly differentiate between items that go into the Trading Account (direct expenses related to goods) and those that go into the Profit and Loss Account (indirect expenses like salaries). Wages alone are often direct, but Salary-Wages combined usually implies an indirect expense.

 

Question 1.4. Where closing stock of stationery of trial balance is shown?
(a) Debit side of Trading Account
(b) Credit side of Profit and Loss Account
(c) Deducted from stationery expense in Profit and Loss Account
(d) Assets side of Balance Sheet
Answer: (d) Assets side of Balance Sheet
In simple words: The unused portion of stationery at the end of the year, known as closing stock of stationery, is treated as an asset. Therefore, it appears on the assets side of the Balance Sheet.

Exam Tip: Closing stock of consumables like stationery or fuel is treated as a current asset, as it represents future economic benefit to the business.

 

Question 1.5. Where provident fund interest of trial balance is shown?
(a) Credit side of Profit and Loss Account
(b) Debit side of Profit and Loss Account
(c) Added in provident fund investment on Asset side of Balance Sheet
(d) Added in provident fund on Liabilities side of Balance Sheet
Answer: (d) Added in provident fund on Liabilities side of Balance Sheet
In simple words: Interest earned on the provident fund is added to the provident fund amount. Since the provident fund itself is a liability, the interest also gets added to the liabilities side of the Balance Sheet.

Exam Tip: Provident fund contributions and interest are typically shown as a liability until disbursed, representing funds held in trust for employees.

 

Question 1.6. At which price closing stock is shown in the final accounts?
(a) Original Cost
(b) Cost Price
(c) Market Price
(d) Cost price or Market price whichever is lower
Answer: (d) Cost price or Market price whichever is lower
In simple words: Companies record their closing stock at the lower of its original cost or its current market value. This accounting rule ensures that assets are not overstated and reflects a conservative approach.

Exam Tip: The principle of "cost or market price, whichever is lower" (LCM rule) is a core accounting convention that aims to prevent overstatement of assets and reflect a prudent approach in financial reporting.

 

Question 1.7. Adjusted purchase means
(a) Purchase + Purchase expenses
(b) Purchase - Purchase return
(c) Opening Stock + Purchase - Closing stock
(d) Opening Stock + Purchase - Purchase return -Closing stock
Answer: (d) Opening stock + Purchase - Purchase return - Closing stock
In simple words: Adjusted purchase is calculated by taking the opening stock, adding new purchases, and then subtracting any goods returned and the closing stock. This calculation gives the true cost of goods sold.

Exam Tip: Adjusted purchase is a key figure used in preparing the Trading Account to find the cost of goods available for sale after considering all relevant adjustments.

 

Question 1.8. __________ shows the financial-economic position of the business.
(a) Trial Balance
(b) Trading Account
(c) Profit and Loss Account
(d) Balance Sheet
Answer: (d) Balance Sheet
In simple words: The Balance Sheet is a financial statement that gives a snapshot of a company's financial health. It shows assets, liabilities, and owner's equity at a specific point in time.

Exam Tip: The Balance Sheet is a statement of financial position at a given date, whereas the Trading and Profit & Loss Accounts show results over a period.

 

Question 1.9. If bad debt reserve is given only in trial balance then where its effect would appear in final accounts?
(a) Debit side of Profit and Loss Account
(b) Credit side of Profit and Loss Account
(c) Deducted from debtors, on Assets side of Balance Sheet
(d) Added in assets side of debtors in Balance Sheet
Answer: (c) Deducted from debtors on Assets side of Balance Sheet
In simple words: If a bad debt reserve is found only in the trial balance, it means it's already accounted for. So, its effect is shown by reducing the value of debtors on the assets side of the Balance Sheet.

Exam Tip: When a reserve for bad debts appears only in the trial balance, it implies that the provision has already been made, and its only effect in the final accounts is a deduction from debtors in the Balance Sheet.

 

Question 1.10. If goods destroyed by fire and Insurance company accepted a claim of full amount then where its effect would appear in final accounts?
(a) Only on the credit side of Trading Account
(b) On the debit side of Trading Account (deducted from purchase) and the debit side of Profit and Loss Account
(c) On the debit side of Trading Account (deducted from purchase) and the Assets side of Balance Sheet
(d) On the credit side of Trading Account, the debit side of Profit and Loss Account, and the assets side of the Balance Sheet
Answer: (c) On the debit side of Trading Account (deducted from purchase) and the Assets side of Balance Sheet
In simple words: When goods are destroyed by fire and the insurance company agrees to pay the full amount, two things happen. First, the value of the destroyed goods is removed from the purchases in the Trading Account. Second, the insurance claim, which is an amount receivable, is shown as an asset on the Balance Sheet.

Exam Tip: If an insurance claim is accepted for the full amount of goods destroyed by fire, it's treated as a reduction in purchases in the Trading Account and a current asset (claim receivable) in the Balance Sheet. Any loss not covered by insurance would go to the Profit and Loss Account.

 

Question 1.11. If depreciation on fixed assets is shown in the trial balance then where its effects would appear in the Balance Sheet?
(a) Debit side of Profit and Loss Account
(b) Added in Fixed assets on Assets side of Balance Sheet
(c) Deducted from Fixed assets on Assets side - of Balance Sheet
(d) Credit side of Profit and Loss account
Answer: (c) Deducted from Fixed assets on Assets side - of Balance Sheet
In simple words: When depreciation is already recorded in the trial balance, it means the expense has already been accounted for. Its impact on the Balance Sheet is to reduce the book value of the fixed assets on the assets side.

Exam Tip: If depreciation appears in the trial balance, it has already been treated as an expense in the books. Its only remaining impact in the final accounts is to reduce the asset's value on the Balance Sheet, usually through an accumulated depreciation account.

 

Question 2. Answer the following questions in one sentence:

 

Question 2.1. What are financial statements?
Answer: Financial statements are organized summaries that provide detailed information about an enterprise's financial position.
In simple words: Financial statements are key reports showing a company's money situation.

Exam Tip: Define financial statements clearly, highlighting their role in presenting an organized summary of financial data.

 

Question 2.2. What are closing entries?
Answer: At the end of the accounting year, entries are made in the 'Journal Proper' book to close goods accounts and nominal accounts, and these are known as closing entries.
In simple words: Closing entries are journal records done at year-end to shut down temporary accounts.

Exam Tip: Emphasize that closing entries happen at the end of the accounting period and are used to zero out nominal and goods accounts, preparing them for the next period.

 

Question 2.3. What are adjustment entries?
Answer: Adjustment entries are written at the end of the accounting year to find the correct profit or loss, show the accurate financial position, make necessary changes to recorded transactions, and record unrecorded entries while preparing the annual accounts.
In simple words: Adjustment entries are records made at year-end to update accounts for proper profit and financial position.

Exam Tip: Explain that adjustment entries ensure that revenues and expenses are recognized in the correct accounting period and that the Balance Sheet reflects the true financial status.

 

Question 2.4. What is an adjusted purchase?
Answer: Adjusted purchase refers to the value calculated by taking the opening stock, adding new purchases, and then subtracting any purchase returns and the closing stock.
In simple words: Adjusted purchase means you add beginning inventory to new buys, then subtract returns and ending inventory.

Exam Tip: Remember that adjusted purchase represents the net cost of goods available for sale, factoring in opening and closing inventory as well as purchase adjustments.

 

Question 2.5. What is Demurrage?
Answer: Demurrage is the amount of penalty that is payable for the late removal of goods from the railway or port.
In simple words: Demurrage is a fine you pay if you pick up goods late from a port or railway station.

Exam Tip: Define demurrage as a penalty incurred for delays in taking delivery of goods, typically from transportation hubs like ports or railways.

 

Question 2.6. What is Wharfage?
Answer: Wharfage is the amount of difference payable when a smaller freight charge is calculated from the point where goods are consigned.
In simple words: Wharfage is an extra payment needed if the original shipping cost from the consignment point was calculated too low.

Exam Tip: Understand wharfage in this context as an adjustment for undercharged freight from the point of consignment, not a standard port usage fee.

 

Question 3. Answer the following questions in details:

 

Question 3.1. State objectives of financial statement.
Answer: The primary goals of financial statements are as follows:
1. To know the Gross profit or Gross loss of an enterprise: At the conclusion of the accounting year, a Trading Account is prepared to determine the gross profit or gross loss of a business. This means that the gross profit or gross loss of the business can be found from the Trading Account.
2. To know the Net profit or Net loss of an enterprise: During an accounting period, a Profit and Loss Account is prepared. By comparing the business's revenue expenses and revenue incomes, the net profit and net loss can be determined from the Profit and Loss Account.
3. To know the financial position of an enterprise: At the accounting year's end, a Balance Sheet is prepared to understand an enterprise's financial standing. In the Balance Sheet, total assets and total liabilities are presented to give an idea of the enterprise's financial position.
4. For legal requirements: Financial statements are also prepared to meet various legal needs, such as for taxation purposes.
In simple words: Financial statements help us understand if a business made a gross profit or loss, its net profit or loss, its overall financial health, and to meet legal requirements like taxes.

Exam Tip: When listing objectives, ensure you cover profitability (gross and net), financial position (Balance Sheet), and regulatory compliance as key points.

 

Question 3.2. State the importance of financial statements.
Answer: The importance (usefulness) of the financial statements for various users is as under :
1. Directors: Information concerning short-term solvency, long-term solvency, the effectiveness of activities, and profitability is obtained from financial statements, enabling directors to make future investment decisions.
2. Short-term creditors: Short-term creditors require financial data to confirm if the amount owed to them will be paid on time and to determine whether to expand, maintain, or limit the credit flow to an enterprise. These decisions are made based on financial statements.
3. Long-term creditors: Long-term creditors need information to ensure their principal amounts and interest will be paid when due. This helps them decide whether to extend, maintain, or restrict the flow of credit to an enterprise.
4. Present investors: Current investors need data to decide whether to buy, sell, or hold shares. This information is obtained directly from financial statements.
5. Potential investors: Prospective investors require information to assess the enterprise's future prospects and to determine if they should invest. These decisions are made using financial statements.
6. Employees: Employees of an enterprise are interested in information about the company's stability and profitability. Financial statements provide details about the enterprise's ability to pay salaries, increments, and retirement benefits.
7. Tax authorities: Government tax authorities utilize the information from financial statements to assess the enterprise's tax liabilities.
8. Customers: Clients are interested in receiving information about the continued operation of the enterprise.
9. Government: The government can acquire information about the enterprise's activities from financial statements to formulate policies, particularly concerning taxation.
10. Public: The general public receives various types of information, such as the enterprise's contribution to the country's economy, employment opportunities at the local level, and social contributions, from financial statements.
11. Researchers: Researchers can obtain information from financial statements to analyze the profitability, liquidity, solvency, and other aspects of the enterprise.
In simple words: Financial statements help different groups like owners, lenders, employees, and the government make smart choices about the business. They show how well a company is doing and what its financial health is.

Exam Tip: For detailed questions on the importance of financial statements, list each user group and briefly explain their specific need for financial data to make informed decisions.

 

Question 3.3. Explain the meaning of Gross Profit, Operating Profit and Net Profit.
Answer:
1. Meaning of Gross Profit: Gross profit means the difference between the selling price and the cost price of goods sold. In other words, the credit balance of the trading account is known as Gross profit.
2. Meaning of Operating Profit: Operating profit means the difference between Gross profit and Operating expenses.
Where. Operating expenses = General administrative expenses + Selling and Distribution expenses + Depreciation
3. Meaning of Net Profit: Net profit means the difference between the total of all incomes and the total of all expenses. In other words, the credit balance of the Profit and Loss Account is known as Net profit.
In simple words: Gross profit is what's left after selling goods and covering their direct cost. Operating profit comes after taking out other business costs. Net profit is the final profit after all incomes and expenses are considered.

Exam Tip: Clearly define each profit type by its calculation method and the accounts involved (Trading Account for Gross Profit, Profit & Loss for Operating and Net Profit).

 

Question 3.4. Explain the difference between Trading Account and Profit and Loss Account.
Answer:

In simple words: The Trading Account shows the gross profit or loss from buying and selling goods, while the Profit and Loss Account shows the final net profit or loss after all other incomes and expenses.

Exam Tip: Focus on the primary purpose and the types of items recorded on the debit and credit sides of each account to highlight their differences.

 

Question 3.5. Explain the difference between Trial Balance and Balance Sheet.
Answer:

In simple words: A Trial Balance lists all account balances to check for arithmetic accuracy, whereas a Balance Sheet presents a company's financial health on a specific date by showing its assets, liabilities, and owner's equity.

Exam Tip: Differentiate clearly between the Trial Balance as a tool for checking arithmetic accuracy and the Balance Sheet as a statement of financial position.

 

Question 3.6. Explain objectives of Profit and Loss Account.
Answer: Objectives of Profit and Loss Account are as under:

• The Profit and Loss Account is prepared to ascertain the Net Profit and Net Loss incurred during the accounting period.
• An excess total on the credit side of the Profit and Loss Account is called Net profit.
• An excess total on the debit side of the Profit and Loss Account is called Net loss.
• The owner's capital will increase with a Net profit.
• The owner's capital will decrease with a Net loss.
• Other incomes and benefits of the business can be known from the Profit and Loss Account.
• By comparing the Net profit or Net loss proportion with the past results of the business, the development of the business can be known.

In simple words: The main aims of a Profit and Loss Account are to figure out the business's net profit or loss, show how that affects the owner's capital, and compare revenues and expenses. It also helps in understanding other incomes and tracking business growth by comparing results.

Exam Tip: When detailing the objectives, ensure you clearly link the Profit and Loss Account to the determination of net profit/loss and its impact on owner's equity, as well as its role in assessing business performance and growth.

 

Question 3.7. Explain the objectives of Balance Sheet.
Answer: Objectives of Balance Sheet are as under:

• The main objective of preparing Balance Sheet is to know the financial position of the business.
• To know the amount of Non-current assets and Current assets.
• To know the amount of Non-current liabilities and Current liabilities.
• To know the amount receivable from various debtors.
• To know the amount payable to various creditors.
• To know the amount of net capital in the business.
• To calculate the various ratios for the purpose of financial analysis.
• To know the Reserves and Surplus of the business.

In simple words: The Balance Sheet helps to understand a business's financial standing, including its assets, liabilities, capital, and reserves, allowing for financial analysis.

Exam Tip: For the Balance Sheet, emphasize its role in presenting a snapshot of assets, liabilities, and equity, and its usefulness for financial analysis and understanding solvency.

 

Question 3.8. What is Trading Account? Write the particulars to be shown in Trading Account and Closing entries for preparing Trading Account.
Answer: Trading Account: An account is prepared to determine the gross profit or gross loss of the business at the end of the accounting year, which is known as Trading Account. Trading Account shows profit or loss only for transactions related to goods. Therefore, the result is known as gross profit or gross loss.
Following particulars are to be shown in Trading Account:
1. Debit side: Opening stock of goods, Net purchases of goods (total purchases minus purchase returns and Goods going out other than sales), direct expenses related to the purchase of goods (like wages, carriage inward, freight, octroi, etc.) are shown and recorded on the debit side of the Trading Account.
Note: If it is a manufacturing unit, the expenses related to productions are also shown on the debit side of the Trading Account. For example, productive wages, royalty, factory expenses, depreciation of factory building, plant and machinery, oil, grease, etc.
2. Credit side: Net sales (total sales minus sales returns), sale of Scrap goods and Closing stock of goods are shown on the Credit side of Trading Account.
Closing Entries: A Trading account includes matters that are simply postings of some journal entries. These journal entries are the closing entries for accounts like purchase of goods, sales, purchase return, sales-return, direct expenses of purchase (accounts related to goods and expenses of purchase), etc. The Trading Account is prepared with the help of posting these accounts.
(1) The closing entry for opening stock, purchase, sales return, direct expenses of the purchase like wages, carriage inward, etc., which have a debit balance, is as follows:
Trading \( A/c \) Dr
To Opening stock \( A/c \)
To Purchase \( A/c \)
To Sales return \( A/c \)
To Wages \( A/c \)
To Carriage inward \( A/c \)
To Other direct expenses \( A/c \)
(Being the closing entry to close the accounts of debit side of Trading Account.)
Effect: As a result of this journal entry, all the accounts shown on the credit side (which have a debit balance) will be closed and written on the debit side of the Trading Account.
(2) The closing entry for sales, purchase return, goods going out for any other reason other than sales (like stolen away, burnt by fire, withdrawn for personal use, given for charity, given as samples), etc., which have a credit balance in the book, is as follows :
Sales \( A/c \) Dr
Purchase return \( A/c \) Dr
To Trading \( A/c \)
(Being closing entry to close the accounts of the credit side of Trading account.)
Effect: As a result of this journal entry, Sales \( A/c \), Purchase return \( A/c \) and goods going out for the other reason will be closed and the balance of the concern account will be recorded on the credit side of the Trading Account.
(3) For closing stock, brought into the books of accounts:
Closing stock \( A/c \) Dr
To Trading \( A/c \)
(Being the adjustment entry passed for the closing stock.)
Explanation: The closing stock of goods account is not present in any book. At the end of the accounting year, to prepare the final accounts, a list of the goods in stock is prepared, and their value is decided. This decided value is normally based on the purchase value. Therefore, when writing the account regarding closing stock value, the market value or book value, whichever is less, is to be considered. For this, a journal entry is to be passed, known as an adjustment entry. For the closing stock, one effect is to be given on the credit side of the Trading Account, and another effect is to be given on the Assets side of the Balance Sheet, because closing stock is considered an asset.
(4) A journal entry to close the Trading Account: If this account shows a credit balance, it is known as Gross profit, and if it shows a debit balance, it is known as Gross loss. By transferring the Gross profit or Gross loss to Profit and Loss Account, the Trading Account will be closed as below:
(A) If Gross profit is there :
Trading \( A/c \) Dr
To Profit and Loss \( A/c \)
(Being gross profit transferred to Profit and Loss account.)
(B) If Gross loss is there :
Profit and Loss \( A/c \) Dr
To Trading \( A/c \)
(Being gross loss transferred to Profit and Loss Account.)
In simple words: A Trading Account calculates the direct profit or loss from buying and selling goods. It lists things like opening stock, purchases, and direct expenses on the left, and sales and closing stock on the right. Closing entries help clear out these temporary accounts at year-end by moving their balances to other accounts. The value of closing stock is recorded at the lower of cost or market value, impacting both the Trading Account and the Balance Sheet.

Exam Tip: When describing the Trading Account, clearly separate its definition from the specific items posted to its debit and credit sides. For closing entries, explain their purpose in zeroing out temporary accounts and demonstrate the common journal entries for debit and credit balances. Remember to show how gross profit or loss is transferred to the Profit and Loss Account.

 

Question 3.9. State the specimen of Balance Sheet in order of permanency and liquidity.
Answer:

Balance Sheet in order of Permanency

Balance Sheet in order of Liquidity

In simple words: The Balance Sheet can arrange its items by how permanent they are (like land first) or how easily they can be turned into cash (like cash first). Permanency is common for firms, while liquidity helps banks.

Exam Tip: When presenting Balance Sheet specimens, clearly distinguish between the order of permanency and liquidity, explaining the typical application of each.

 

Question 10. What are Final Accounts? State the objectives of preparing Final Accounts.
Answer:
Final Accounts: At the close of the accounting year, to understand the business result and financial position of the business, accounts and statements are made ready. These are known as Final or Annual Accounts. Another way to define Final Accounts is to prepare the Trading Account, Profit and Loss Account, and Balance Sheet. Generally, these kinds of accounts are made at the end of the accounting year, so they are known as Final (Annual) Accounts. However, sometimes at the end of six or nine months, these types of accounts are also prepared. Institutions like banks prepare such interim accounts at the end of six months too, which are known as Final Accounts.

Objectives: As per the meaning, Final (Annual) Accounts have two main goals:
1. To know the business result, and
2. To know the financial position of the business.

1. To know the business result: At the close of the accounting year, to learn the result of the business, the Trading Account and Profit and Loss Account are prepared. By comparing the expenses and incomes of the business, profit or loss can be found out. From the Trading Account, Gross profit or Gross loss, and from the Profit and Loss Account, Net profit or Net loss can be determined.

2. To know the financial position of the business: At the close of the accounting year, a statement known as the Balance Sheet is prepared. In the Balance Sheet, total assets and total liabilities are displayed to get a clear idea of the business's financial position. A Balance Sheet is a statement showing the financial position of the business.

Other objectives: Additional objectives of the Final Accounts are explained below:

• To know the amount of Net capital in the business.
• To know the amount of Non-current Assets and Current Assets.
• To know the amount receivable from various debtors.
• To know the amount payable to various creditors.
• To know the Trading profit, Operating profit, and Abnormal gains and losses.
• To find out or ascertain the amount of various taxes, i.e., service tax, income tax, VAT, wealth tax, etc., payable to the State and Central Government.
• To calculate the various ratios for the purpose of financial analysis.
• To enable businessmen to take policy decisions regarding future business activities.

In the Final Accounts, Trading Account, Profit and Loss Account, and a Balance Sheet are prepared. Trading Account and Profit and Loss Account are accounts, while a Balance Sheet is a statement or a list.
In simple words: Final Accounts show a business's profit, loss, and overall financial health at the end of the year. They help owners, investors, and the government understand how well the business is doing and its financial standing.

Exam Tip: When discussing Final Accounts, always define them first, then clearly list and explain the main objectives of preparing these accounts, ensuring you cover both profitability and financial position.

 

Question 4. Pass adjustment entry for the following and also show its effect in final accounts: (1) Closing stock of Rs. 1,00,000 out of which Rs. 2,000 stationery stock. Out total goods of Rs. 50,000 required repairing expense of Rs. 2,000.
Answer:
Necessary calculation:
Total amount of closing stock = Rs. 1,00,000
- Closing stock of stationery = Rs. 2,000
Therefore, Closing stock of goods = Rs. 98,000
- Required repairing expense = Rs. 2,000
Net value of closing stock = Rs. 96,000

Adjustment Entry

Effect in final accounts:

Trading Account for the year ending on...

Profit and Loss Account for the year ending on...

Balance Sheet as on...

In simple words: First, calculate the net value of closing stock by subtracting stationery and repair costs. Then, record the closing stock and stationery stock in the journal. Show the closing stock on the credit side of the Trading Account and as an asset on the Balance Sheet. Stationery expense is recorded on the debit side of the Profit and Loss Account and as a current asset on the Balance Sheet.

Exam Tip: Remember to separate goods stock from stationery stock for proper accounting treatment. Closing stock is valued at the lower of cost or market price, and necessary repair expenses reduce its value.

 

Question 2. The following expenses are outstanding at the end of the year: Rent-taxes Rs. 5,000; Salary Rs. 3,000.
Answer:
Adjustment Entry

Effect in final accounts:

Profit and Loss Account for the year ending on...

Balance Sheet as on...

In simple words: We record unpaid rent-taxes and salary as outstanding liabilities. These are added to their respective expense accounts in the Profit and Loss Account and shown as current liabilities on the Balance Sheet.

Exam Tip: Outstanding expenses represent amounts due for services already received. They are added to the expense in the P&L account and shown on the liabilities side of the Balance Sheet.

 

Question 3. Following revenues are receivable at the end of the year: Trainee employee's premium Rs. 2,000; Commission Rs. 1,000.
Answer:
Adjustment Entry

Effect in final accounts:

Profit and Loss Account for the year ending on...

Balance Sheet as on...

In simple words: We record trainee employee premium and commission as receivable income. These amounts are added to their respective income accounts in the Profit and Loss Account and shown as current assets on the Balance Sheet.

Exam Tip: Accrued incomes (receivable) are revenues earned but not yet received. They are added to the relevant income in the P&L account and shown on the assets side of the Balance Sheet.

 

Question 4. Brokerage of Rs. 2,700 is received in advance.
Answer:
Adjustment Entry

Effect in final accounts:

Profit and Loss Account for the year ending on ...

Balance Sheet as on ...

In simple words: Brokerage received in advance is recorded as a liability. This amount is subtracted from the brokerage income in the Profit and Loss Account and shown as a current liability on the Balance Sheet.

Exam Tip: Income received in advance is unearned income, meaning it's a liability until the service is performed. It reduces the current year's income and increases liabilities.

 

Question 5. Proprietor's capital in the business is Rs. 3,00,000 on which 12 % interest is payable.
Answer:
Calculation of interest:
Interest on capital = \( \frac{3,00,000 \times 12 \times 1}{100} = \text{Rs. } 36,000 \)

Adjustment Entry

Effect in final accounts:

Profit and Loss Account for the year ending on ...

Balance Sheet as on ...

In simple words: We calculate 12% interest on the owner's capital. This interest is an expense for the business, shown on the debit side of the Profit and Loss Account, and it increases the owner's capital on the liabilities side of the Balance Sheet.

Exam Tip: Interest on capital is an appropriation of profit, not a charge against it. It's debited to the Profit and Loss Appropriation Account (or P&L if no appropriation account is maintained) and added to the Capital Account in the Balance Sheet.

 

Question 6. Drawings of proprietor after 9 months from the business amounted Rs. 40,000. Calculate interest on drawings at 12 %.
Answer:
Period for interest on drawings N = 12 months - 9 months = 3 months
Interest on drawings = \( 40,000 \times \frac{12}{100} \times \frac{3}{12} = \text{Rs. } 1,200 \)

Adjustment Entry

Effect in final accounts:

Profit and Loss Account for the year ending on...

Balance Sheet as on...

In simple words: We calculate interest on the owner's drawings for 3 months. This interest is a gain for the business, shown on the credit side of the Profit and Loss Account, and it increases the drawings amount, which reduces the owner's capital on the liabilities side of the Balance Sheet.

Exam Tip: Interest on drawings is a revenue for the business and reduces the owner's capital. Always consider the period for which drawings were made when calculating interest.

 

Question 7. Credit sale of Rs. 10,000 is recorded as credit purchase.
Answer:
Adjustment Entry

Credit sale of Rs. 10,000 is wrongly recorded as credit purchase.
Wrong entry:

True entry:

Effect in final accounts:

Trading Account for the year ending on...

Balance Sheet as on...

In simple words: When a credit sale is mistakenly recorded as a credit purchase, we need to correct the accounts. This involves reducing purchases and creditors, and increasing sales and debtors.

Exam Tip: For rectification entries, always identify the incorrect entry made and the correct entry that should have been made. The adjustment then accounts for the difference to bring both accounts to their true balance.

 

Question 8. Purchase return of 13,000 is recorded as credit sales.
Answer:
Adjustment Entry

Effect in final accounts:

Trading Account for the year ending on...

Balance Sheet as on...

In simple words: When a purchase return is mistakenly recorded as a credit sale, we must correct this. This means reducing sales and debtors, and increasing purchase returns and creditors.

Exam Tip: Errors of commission, like recording a transaction in the wrong account or with the wrong type, need careful rectification. Ensure both the original incorrect entry and the intended correct entry are considered to create a balancing adjustment.

 

Question 9. Fixed assets of Rs. 1,00,000 is purchased on dt. 1-07-'15. Accounting year of firm is ended as on 31-03-'16. Calculate depreciation at 12%.
Answer:
Amount of fixed assets = Rs. 1,00,000; Depreciation rate =12%;
Period for depreciation = From 1-7-15 to 31-3-16 = 9 months
Depreciation = \( 1,00,000 \times \frac{12}{100} \times \frac{9}{12} = \text{Rs. } 9,000 \)

Adjustment Entry

Effect in final accounts:

Profit and Loss Account for the year ending on...

Balance Sheet as on...

In simple words: We calculate depreciation on fixed assets for 9 months since the purchase date. This amount is recorded as an expense in the Profit and Loss Account and reduces the value of the fixed asset on the Balance Sheet.

Exam Tip: Always remember to calculate depreciation for the exact period the asset was in use during the accounting year, not for the full year, especially if purchased mid-year.

 

Question 10. Debtors are amounting to Rs. 1,00,000 out of which write off Rs. 10,000 as bad debts, provide 10% as bad debts reserve and 2 % as discount reserve on debtors.
Answer:
Necessary calculation :
Rs. 1,00,000 Total debtors
- Rs. 10,000 Bad debts (Adj.)
- Rs. 90,000 Doubtful debtors
- Rs. 9,000 10% Bad debts reserve on debtors of Rs. 90,000
- Rs. 81,000 Solvent debtors
- Rs. 1,620 2% discount reserve on debtors of Rs. 81,000

Adjustment Entry

Effect in final accounts:

Profit and Loss Account for the year ending on ...

Balance Sheet as on ...

In simple words: First, actual bad debts are written off from total debtors. Then, a reserve for bad debts and a reserve for discount on the remaining good debtors are created. All these are expenses in the Profit and Loss Account, and the reserves reduce the debtors' value on the Balance Sheet.

Exam Tip: Always calculate bad debts reserve and discount reserve on debtors sequentially: first deduct actual bad debts, then calculate bad debts reserve on the remaining good debtors, and finally calculate discount reserve on the debtors after deducting bad debts reserve.

 

Question 11. Goods of Rs. 10,000 destroyed by fire and Insurance company has accepted a claim of whole amount.
Answer:
Goods destroyed by fire = Rs. 10,000
Accepted a claim by Insurance company = Rs. 8,000
Therefore, Loss due to fire = Rs. 2,000

Adjustment Entry

Effect in final accounts:

Trading Account for the year ending on...

Profit and Loss Account for the year ending on...

Balance Sheet as on...

In simple words: When goods are lost to fire and an insurance claim is accepted, the loss is shared. The amount claimed from the insurance company is shown as an asset, the part of goods lost is reduced from purchases in the Trading Account, and any unrecovered loss is shown as an expense in the Profit and Loss Account.

Exam Tip: When goods are destroyed by fire, always ensure to reduce the purchase amount in the Trading Account by the cost of goods lost, show the insurance claim receivable as an asset, and transfer the net loss (if any) to the Profit and Loss Account.

 

Question 12. Rs. 1,000 labour charge of machinery installation is wrongly debited to labour account.
Answer:
Adjustment Entry

Effect in final accounts:

Trading Account for the year ending on...

Balance Sheet as on...

In simple words: Labour charges for machinery installation are capital expenses and should be added to the machinery's cost. If wrongly debited to the labour account, we correct this by crediting the labour account and debiting the machinery account. This reduces labour expenses in the Trading Account and increases the value of machinery on the Balance Sheet.

Exam Tip: Expenses incurred for the acquisition or installation of a fixed asset are capital expenditures and should be added to the cost of the asset. Failing to do so (treating them as revenue expenses) is an error of principle.

 

Question 5. While preparing final accounts of Suresh for the year ended 31-3-'15, close the following accounts and write journal entries to close the accounts:
(1) Wages-Salary A/c :
(2) Interest received A/c :
(3) Sales A/c:
(4) Suresh's Drawings A/c :
Answer:
Journal Proper of Suresh

Ledger of Suresh

Wages-Salary Account

Interest Received Account

Sales Account

Drawings Account

In simple words: Closing entries are made to transfer balances from temporary accounts (like expenses, incomes, sales, and drawings) to permanent accounts. Wages-Salary and Sales are closed to the Trading Account, Interest Received to the Profit and Loss Account, and Drawings to the Capital Account.

Exam Tip: Closing entries are crucial at the end of an accounting period to prepare accounts for the next period. Remember that revenue and expense accounts are closed to the Trading or Profit and Loss Account, while drawings are closed to the Capital Account.

 

Question 6. Prepare final accounts of Dipak from the following trial balance as on 31-3-'15.
Answer:
Trading Account of Dipak
for the year ending on 31-3-'15

Profit and Loss Account of Dipak for the year ending on 31-3-'15

Balance Sheet of Dipak as on 31-3-'15

Explanation: Following are the adjustment entries and effects in final accounts for every adjustment:

(1) Adjustment No. 1 :
Adjustment entry:
Loss due to theft A/c Dr 12,000
To Purchase A/c 12,000
Effect in final accounts:
Effect No. 1: On the debit side of Profit and Loss A/c, as loss due to theft - Debit effect
Effect No. 2: On the debit side of Trading A/c, deduct from purchase - Credit effect

(2) Adjustment No. 2 :
Adjustment entry:
Advertisement expense A/c Dr 15,000 To Purchase A/c 15,000
Effect in final accounts:
Effect No. 1: On the debit side of Profit and Loss A/c, added to Advertisement expense - Debit effect
Effect No. 2: On the debit side of Trading A/c, deduct from purchase - Credit effect
In simple words: This question involves preparing the Trading Account, Profit and Loss Account, and Balance Sheet for Dipak, incorporating various adjustments such as goods lost, distributed, or burnt, along with regular expenses and incomes. Each adjustment impacts specific accounts in the final statements.

Exam Tip: For comprehensive final accounts questions, always list all adjustments first. Then, systematically apply each adjustment to both its primary account (e.g., deducting goods lost from purchases in Trading Account) and its secondary account (e.g., showing loss due to theft in Profit and Loss Account).

 

Question 7. Prepare final accounts from the Trial Balance and adjustments of Pankaj as on 31-3-'15.

Adjustments:
(1) Closing Stock of Rs. 1,65,000, of which the market value of 50% of stock is 10% more and the market value of the remaining stock of goods is 10% less.
(2) Unrecorded credit purchase Rs. 60,000.
(3) Unrecorded credit purchase return Rs. 7,500.
(4) Unrecorded credit sales Rs. 75,000.
(5) Unrecorded credit sales return 22,500.
(6) Outstanding wages Rs. 15,000.
(7) Goods of 15,000 destroyed by fire and insurance company accepted a claim of the whole amount.
(9) Labour charges for installation of machinery 7,500 wrongly debited to labour charges.
Answer:

 

Trading Account of Pankaj for the year ending on 31-03-'15

Profit and Loss Account of Pankaj for year ending on 31-3-'15

Balance Sheet of Pankaj as on 31-3-'15

Explanation:
(1) Adjustment No. 1 :
Closing Stock Rs. 1,65,000
Stock of goods for advertisement Rs. 2,000
\( \implies \) Net stock of goods Rs. 2,00,000

Closing stock

50% of Stock
Cost Price Rs. 82,500
+ 10% more Rs. 8,250
Market value Rs. 90,750

Remaining 50% of Stock
Cost Price Rs. 82,500
- 10% Less Rs. 8,250
Market value Rs. 74,250

Cost Price Market value
Rs. 82,500 Rs. 90,750
Rs. 82,500 Rs. 74,250

Considered whichever is less
Rs. 82,500
+ Rs. 74,250

\( \implies \) Value of closing stock Rs. 1,56,750
Here, closing stock has been valued at Rs. 10,400 (Rs. 4,000 + Rs. 6,400).
(2) Adjustment No. 2: Unrecorded credit purchase of Rs. 60,000
Effect No. 1: On the debit side of Trading Account, added to purchase.
Effect No. 2: On the Liabilities side of Balance Sheet, added to Creditors.
(3) Adjustment No. 7 :
Effect No. 1: Amount of goods destroyed by fire is deducted from purchase, on the debit side of Trading Account.
Effect No. 2: Receivable amount from Insurance company is shown on the Asset side of Balance Sheet.
(4) Adjustment No.9: Installation labour charges of Rs. 7,500 has been wrongly debited to wages, so which has been deducted from wages amount, on the debit side of Trading Account and has been added to Machinery amount, on the Assets side of Balance Sheet.
In simple words: These explanations clarify how specific adjustments affect the final financial statements. They show where each adjustment is recorded in the Trading Account, Profit and Loss Account, and Balance Sheet, ensuring proper accounting treatment.

Exam Tip: Always clearly state both effects (debit and credit) for each adjustment in final accounts preparation to ensure accuracy and full marks.

 

Question 8. Following is the Trial Balance of R. K. Stores as on 31-3-'15:

Adjustments:
(1) Salary was paid up to 31-12-'14.
(2) Rs. 1,200 being insurance premium for the year ending on 30-9-'15.
(3) Commission of Rs. 2,000 is receivable.
(4) Calculate 10 % interest on Capital and 12 % interest on Drawings.
(5) Calculate depreciation at 5 % on furniture, at 10 % on building and at 20 % on motorcar.
(6) From debtor of Rs. 20,000 write off 50 %.
(7) Provide 5% bad debt reserve.
(8) Provide 2% debtors discount reserve.
(9) Transfer 10,000 to General Reserve.
Answer:

Profit and Loss Account of R. K. Stores for the year ending on 31-3-'15

Balance Sheet of R. K. Stores as on 31-3-'15

Explanation:
(1) Adjustment No. 1: Salary Rs. 54,000 shown in the trial balance, which is paid up to 31-12-'14, means it is paid for 9 months.
\( \implies \) Rs. 54,000 \( \div \) 9 = Rs. 6,000 is the salary of 1 month.
While salary for 3 months, i.e., from 1-1-'15 to 31-3-'15, is not paid.
\( \implies \) Unpaid salary for 3 months = Rs. 6,000 \( \times \) 3 = Rs. 18,000
(2) Adjustment No. 2: Insurance premium Rs. 1,200 is for the year ended on 30-9-'15.
Means, from Dt. 1-4-'15 to Dt. 30-9-'15, six months insurance premium is prepaid.
\( \implies \) Prepaid insurance premium = 1,200 \( \times \frac{6}{12} \) = 600
In simple words: These explanations detail the calculations and reasons behind key adjustments made to the financial statements for R. K. Stores. They clarify how amounts like unpaid salary and prepaid insurance are determined and recorded.

Exam Tip: When dealing with period-based adjustments like salary or insurance, always calculate the per-month or per-period amount first, then adjust for the unpaid or prepaid portion based on the exact dates.

 

Question 9. Prepare final accounts from the Trial Balance and adjustments of Pushpa Traders as on 31-3-'15:

Adjustments:
(1) Stock as on 31-3-'15 is Rs. 2,02,000 out of which Rs. 2,000 of stock was for advertisement goods stock and from the remaining stock the market value of 40% stock is 20% more. Market value of 30% stock is less by 20%. Whereas remaining stock needs to be repaired at the expenses of Rs. 5,000.
(2) Goods of Rs. 7,500 given as advertisement.
(3) Credit sales of Rs. 10,000 wrongly recorded as credit purchase.
(4) Write off 30,000 as bad debts from debtors and provide 10% bad debt reserve.
(5) Calculate 10% interest on Capital and 6% interest on Drawings.
(6) Calculate depreciation at 10% on fixed assets as per straight-line method.
(7) Goods of 15,000 destroyed by fire and insurance company accepted a claim of whole amount.
Answer:

Trading Account of Pushpa Traders for the year ending on 31-3-'15

Profit and Loss Account of Pushpa Traders for the year ending on 31-3-'15

Balance Sheet of Pushpa Traders as on 31-3-'15

Explanations:
(1) Adjustment No. 1:
Stock of goods on 31-3-'15 Rs. 2,02,000
- Stock of goods for advertisement Rs. 2,000
\( \implies \) Net stock of goods Rs. 2,00,000

Closing Stock Calculation

50% of Stock
Cost Price Rs. 80,000
+ 10% more Rs. 8,000
Market value Rs. 88,000

Remaining 50% of Stock
Cost Price Rs. 60,000
- 10% Less Rs. 6,000
Market value Rs. 54,000

Considered whichever is less
Rs. 80,000
+ Rs. 54,000

\( \implies \) Value of closing stock Rs. 1,34,000

(2) Adjustment No. 3: This adjustment is for rectification. Rectification entry:
Creditor A/c ... Dr 10,000
Debtors A/c ... Dr 10,000
To Purchase A/c 10,000
To Sales A/c 10,000

Effect

For Purchase
(1) On the debit side of Trading Account, deduct from purchase
(2) On the Liabilities side of Balance Sheet deduct from creditors

For Sales
(1) On the credit side of Trading Account, add to sales
(2) On the Assets side of Balance Sheet add to debtors

(3) Adjustment No. 6 :
Depreciation is to be calculated at 10% on fixed assets of Rs. 6,00,000 by straight-line method.
Amount of depreciation = Rs. 6,00,000 \( \times \frac{10}{100} \) = Rs. 60,000.
In simple words: These explanations provide detailed calculations and show the impact of different adjustments, like closing stock valuation and depreciation, on Pushpa Traders' financial statements. They also illustrate the rectification of errors and their dual effect.

Exam Tip: For complex adjustments like closing stock, always break down the calculation into smaller, understandable parts (e.g., different valuation methods) before arriving at the final figure.

 

Question 10. Prepare final accounts from the Trial Balance and adjustments of Nirmi as on 31-3-'15:

Adjustments:
(1) Closing stock as on 31-3-'15 was valued at Rs. 50,000.
(2) Fire occurred in business on 31-1-'15 due to which goods of Rs. 8,000 were destroyed and the insurance company accepted a claim of 70%.
(3) Out of debtors, Rs. 6,000 are not recoverable so they are to be written off. Provide Bad debt reserve 5% and discount reserve 2%.
(4) Credit purchases of Rs. 6,000 and Credit purchase return of Rs. 1,000 were not recorded.
(5) Calculate depreciation, at 10% on fixed assets.
(6) Insurance premium includes Rs. 3,200 for the next year.
(7) 50% commission is received.
Answer:

Trading Account of Nirmi for the year ending on 31-3-'15

Profit and Loss Account of Nirmi for the year ending on 31-3-'15

Balance Sheet of Nirmi as on 31-3-'15

Explanation:
(1) As the leasehold building is for 5 years.
\( \implies \frac{1}{5} \)th of its value is written off every year.
\( \implies \) Amount written off during the current year = \( \frac{45,000}{5} \) = Rs. 9,000
(2) 12% loan was taken from Dattu as on 1-10-'14.
\( \implies \) Interest on loan will be calculated for 6 months (from 1-10-'14 to 31-3-'15).
Interest on loan = 27,000 \( \times \frac{12}{100} \times \frac{6}{12} \) = Rs. 1,620
Outstanding interest on loan = Rs. 1,620
In simple words: These explanations for Nirmi clarify how calculations like leasehold building write-off and loan interest are determined. They provide the reasoning for each adjustment, making the financial statements accurate.

Exam Tip: For fixed assets with limited life, remember to calculate and apply depreciation or write-off amounts annually. For loans, always account for interest accrued during the period.

 

Question 12. Prepare final accounts from the following Trial Balance and adjustments of Baldev as on 31-3-'16: Trial Balance of Baldev as on 31-3-'16

Answer:**Adjustments:** (1) After preparing the trading account, it was found that Bhavesh had taken goods for personal use of Rs. 7,500, which was not recorded in the book. Outstanding Carriage inward Rs. 3,750. (2) Calculate interest on capital at 5%. (3) Outstanding Interest on Bank overdraft Rs. 750. (4) After preparing the trading account, it was found that Rs. 22,500 received from debtors, which was wrongly credited to the sales account. (5) Provide depreciation on fixed assets at 10 %. (6) Unrecorded credit purchases Rs. 12,000. (7) Goods of Rs. 22,500 were destroyed by fire, for which the Insurance company had accepted a claim of 90 % amount. (8) A fixed asset of Rs. 30,000 was sold for Rs. 22,500 for cash on Dt. 1-10-'15 which was not recorded in the book.

In preparing final accounts for Baldev, several adjustments are made to the trial balance. Goods taken for personal use by Bhavesh (Rs. 7,500) and outstanding carriage inward (Rs. 3,750) affect the trading account. Interest on capital is calculated at 5%, and outstanding interest on the bank overdraft is Rs. 750. Cash received from debtors (Rs. 22,500) was wrongly credited to sales and needs correction. A 10% depreciation is provided on fixed assets, and unrecorded credit purchases (Rs. 12,000) are added. Goods destroyed by fire (Rs. 22,500) with a 90% insurance claim are also accounted for, and a fixed asset sale (Rs. 30,000 sold for Rs. 22,500) on 1-10-'15 needs to be recorded.

Here are the final accounts with the necessary adjustments:

Adjusted Trading Account of Baldev for the year ending on 31-3-'16

Profit and Loss Account of Baldev For the year ending on 31-3-'16

Balance Sheet of Baldev as on 31-3-'16

In simple words: To prepare final accounts, first make adjustments for items like drawings, outstanding expenses, depreciation, and unrecorded transactions. Then, create the Trading Account to find gross profit, the Profit and Loss Account for net profit or loss, and finally, the Balance Sheet to show the overall financial health of the business.

Exam Tip: For complex questions involving many adjustments, always list all adjustments first, then create a separate column in your working notes for each account to track their impact on the Trading A/c, P&L A/c, and Balance Sheet.

 

Question 11. Prepare final accounts from the Trial Balance and adjustments of Sajan Readymade Stores as on 31-3-'15. Trial Balance of Sajan Readymade Stores as on 31-3-′15

Answer:**Adjustments:** (1) Closing stock is of Rs. 12,600, out of which goods worth Rs. 4,600 needs repairing of Rs. 600. Remaining stock's market value is less by 20%. (2) Unrecorded credit sales Rs. 4,400. (3) Expense incurred for an advertisement campaign on 1-10-'14 is transferred to advertisement suspense account. This expense is to be written off in 5 years. (4) Vehicles of Rs. 20,000 were purchased on 1-04-'09. Scrap Value of Vehicles is Rs. 4,000 and estimated life is 10 years. Depreciation is to be calculated by straight-line method. (5) Purchase of furniture of Rs. 2,000 is wrongly debited to purchase account. Furniture was purchased on 1-10-'14. Rate of depreciation on furniture is 20%. (6) Calculate interest on capital at 6 %. Additional capital of Rs. 8,000 was brought into business on 1-10-'14. (7) Calculate depreciation on building at 10 % and rate of depreciation on machinery is 20 %.

To accurately prepare the final accounts for Sajan Readymade Stores, several key adjustments must be made. These include accounting for closing stock after repairs and market value changes, recording unrecorded credit sales, and properly treating advertisement expenses over five years. Depreciation on vehicles, furniture, building, and machinery needs to be calculated using the straight-line method. Interest on both initial and additional capital at 6% must be computed. Finally, the incorrect debit of furniture purchase to the purchase account needs to be rectified.

Here are the final accounts with the necessary adjustments:

Trading Account of Pushpa Traders for the year ending on 31-3-'15

Profit and Loss Account of Pushpa Traders for the year ending on 31-3-'15

Balance Sheet of Pushpa Traders as on 31-3-'15

Explanations:

(1) Adjustment No 1:

Closing stock on 31-3-'15 Rs. 2,02,000. This includes stock of goods for advertisement Rs. 2,000. Net stock of goods Rs. 2,00,000.

The closing stock has been valued at Rs. 10,400 (Rs. 4,000 + Rs. 6,400).

(2) Adjustment No. 3: As Advertisement Suspense A/c is to be written off over 5 years. Therefore, the annual amount written off is \( \frac{4,000}{5} = \) Rs. 800. The amount written off for six months, i.e., from Dt. 1-10-'14 to 31-3-'15 is \( 800 \times \frac{6}{12} = \) Rs. 400.

(3) Adjustment No. 4: Depreciation is to be calculated on vehicles by the straight-line method. The amount of annual depreciation for vehicles is \( \frac{\text { Cost price – Scrap value }}{\text { Estimated life }} \). Therefore, \( \frac{20,000 - 4,000}{10} = \) Rs. 1,600.

(4) Adjustment No. 5: First, in the debit side of Trading A/c, purchase of furniture of Rs. 2,000 is deducted from Purchase A/c, and then, in the Assets of Balance Sheet, it is added to furniture.

Calculation of depreciation on furniture:

Depreciation on opening balance = Rs. 6,000 x 20 % = Rs. 1,200

+ Depreciation on new purchase furniture of Rs. 2,000 for 6 months = \( 2,000 \times \frac{20}{100} \times \frac{6}{12} = \) Rs. 200

Total Depreciation on total furniture = Rs. 1,400

(5) Adjustment No. 6: Additional capital of Rs. 8,000 was brought into business on 1-10-'14. Thus, the amount of opening capital on 1 – 4 – '14 = Total capital – Additional capital = Rs. 1,08,000 – Rs. 8,000 = Rs. 1,00,000.

Calculation of interest on capital:

Interest on opening capital = Rs. 1,00,000 x 6% = Rs. 6,000

+ Interest on addition capital for 6 months, i.e., from 1 – 10-'14 to 31 – 3-15 = \( 8,000 \times \frac{6}{100} \times \frac{6}{12} = \) Rs. 240

Total interest on total capital = Rs. 6,240

(6) Necessary note: For the bad debts reserve on debtors shown in the Trial Balance, nothing is mentioned in the adjustment, therefore it will be deducted from the debtors on the Assets side in the Balance Sheet.

In simple words: These explanations detail the specific accounting treatments for each adjustment, ensuring that all relevant financial items are correctly recorded in the Trading Account, Profit & Loss Account, and Balance Sheet.

Exam Tip: Always clearly state the two effects of each adjustment (one debit, one credit) and show how it impacts the final accounts to score full marks.

 

Question 13. The following balances are taken from the books of Vipul as on 31-3-'15. Prepare final accounts.

Adjustments:
(1) Stock of goods is Rs. 1,50,000 at the end of the year. From which the market value of 50 % goods is Rs. 80,000 and the market value of 50% goods is Rs. 70,000.
(2) Credit sales of Rs. 60,000 is not recorded.
(3) Calculate 20 % depreciation on furniture.
(4) Life Insurance premium of Vipul of Rs. 3,000 is included in the insurance premium.
(5) Write off additional bad debts of Rs. 15,000 and provide 5 % bad debt reserve on debtors.
(6) Additional capital of Rs. 17,000 brought in the business as on Dt. 1-10-'14. Calculate 10 % interest on capital.
(7) Invoice of Rs. 10,000 for purchase is received from the creditor which is not recorded by an error.

Answer:To prepare the final accounts for Vipul, it is important to incorporate all given adjustments into the Trial Balance. This includes valuing closing stock, recording unrecorded credit sales and purchases, and calculating depreciation on furniture at 20%. Life insurance premium paid by Vipul (Rs. 3,000) needs to be adjusted. Additionally, new bad debts (Rs. 15,000) must be written off, and a 5% bad debt reserve needs to be created. Interest on capital (including additional capital of Rs. 17,000 introduced on 1-10-'14) must be calculated at 10%. Correctly applying these adjustments will lead to accurate Trading, Profit and Loss, and Balance Sheet accounts.

Here are the final accounts with the necessary adjustments:

Trial Balance of Vipul for the year ending on 31-3-'15

Trading Account of Vipul for the year ending on 31-3-'15

Profit and Loss Account of Vipul for the year ending on 31-3-'15

Balance Sheet of Vipul as on 31-3-'15

Explanation:
(1) As the leasehold building is for 5 years. \( \implies \frac{1}{5} \)th of its value is written off every year. \( \implies \) Amount written off during the current year = \( \frac{45,000}{5} = \) Rs. 9,000

(2) 12% loan was taken from Dattu as on 1-10-'14. \( \implies \) Interest on loan will be calculated for 6 months (from 1-10-'14 to 31-3-'15). \( \implies \) Interest on loan = \( 27,000 \times \frac{12}{100} \times \frac{6}{12} = \) Rs. 1,620. Outstanding interest on loan = Rs. 1,620

In simple words: These explanations clarify the specific calculations and reasoning behind each adjustment, showing how they affect Vipul's financial statements.

Exam Tip: Always make sure to consider the effective period for interest and depreciation calculations, especially when assets are added or loans are taken mid-year.

 

Question 14. As on 31-3-'15, the ratio of capital and reserve is 4:1 in the business of Bhavna. The balances of other accounts on that date are as under. Prepare final accounts from the balances and adjustments.

Answer:**Adjustments:**
(1) Closing stock is Rs. 80,000, of which the market value of 10 % goods is 20 % less. Goods worth Rs. 10,000 needs to be repaired for Rs. 1,000.
(2) Goods of Rs. 5,000 are distributed as free sample, which is not recorded.
(3) Goods of Rs. 6,000 withdrawn by Bhavna for her personal use, which is recorded in the sales book. Purchase invoice of Rs. 4,000 is not recorded in the purchase book.
(4) Insurance premium of Rs. 3,000 paid for the year ending as on 30-06-'15 is included in the insurance premium.
(5) Out of total debtors, a debtor of Rs. 10,000 is declared insolvent and his receiver has declared a first and final dividend of 80 paise per rupee. Provide 5 % bad debt reserve on debtors.
(6) Calculate 20 % depreciation on machinery.
(7) Patents are to be revalued at Rs. 17,000.
(8) Office salary of Rs. 1,500 is outstanding which is included in office expenses.

To accurately prepare Bhavna's final accounts, it is essential to incorporate various adjustments. Key steps include adjusting for closing stock, which requires repair and valuation based on market price. Unrecorded transactions such as goods distributed as free samples, personal withdrawals, and unrecorded purchase invoices must be accounted for. The insurance premium needs to be adjusted for the prepaid portion. Bad debts should be written off, and a new bad debt reserve created. Depreciation on machinery at 20% needs to be calculated. Patents should be revalued, and outstanding office salary must be recognized.

In simple words: When preparing final accounts, you must consider all extra details and changes called 'adjustments'. These adjustments help ensure that the accounts truly reflect the business's financial situation. You'll make accounts like the Trading Account for gross profit, the Profit and Loss Account for net profit, and a Balance Sheet for overall financial health.

Exam Tip: Always read through all adjustments carefully before starting, as they often interact with multiple parts of the final accounts. Start with a clear worksheet to track each adjustment's debit and credit effects.

 

Question 14. As on 31-3-'15, the ratio of capital and reserve is 4:1 in the business of Bhavna. The balances of other accounts on that date are as under. Prepare final accounts from the balances and adjustments.
Answer: The final accounts for Bhavna as of 31st March 2015, considering the given trial balance and adjustments, are shown below.

Trial Balance of Bhavna as on 31-3-'15

Adjustments:

(1) Closing stock is Rs 80,000 out of which market value of 10 % goods is 20 % less. Goods of Rs 10,000 needs to be repaired for Rs 1,000.
(2) Goods of Rs 5,000 are distributed as free sample, which is not recorded.
(3) Goods of Rs 6,000 withdrawn by Bhavna for her personal use, which is recorded in the sales book. Purchase invoice of Rs 4,000 is not recorded in the purchase book.
(4) Insurance premium of Rs 3,000 paid for the year ending as on 30-06-'15 is included in insurance premium.
(5) Out of total debtors a debtor of Rs 10,000 is declared insolvent and his receiver has declared first and final dividend of 80 paise per rupee. Provide 5 % bad debt reserve on debtors.
(6) Calculate 20 % depreciation on machinery.
(7) Patents are to be revalued at Rs 17,000.
(8) Office salary of Rs 1,500 is outstanding which is included in office expenses.

Trading Account of Bhavna for the year ending on 31-3-'15

Profit and Loss Account of Bhavna for the year ending on 31-3-'15

Balance Sheet of Bhavna as on 31-3-'15

Explanation:

(1) Before listing the capital and reserve figures in the Trial Balance, the total debit balances were Rs 5,41,000 and the total credit balances were Rs 3,31,000. Thus, the difference between these two totals became Rs 2,10,000. Following the instructions provided, the ratio of Capital and Reserve is 4:1. This implies the Capital amount \( = 2,10,000 \times \frac{4}{5} = \) Rs 1,68,000, and the Reserve amount \( = 2,10,000 \times \frac{1}{5} = \) Rs 42,000.
(2) Regarding Adjustment No. 1: 10% of the Rs 80,000 stock totals Rs 8,000, and its market value is lower by 20%, equaling Rs 1,600 ( \( 8000 \times \frac{20}{100} \) ). Additionally, a repair cost of Rs 1,000 is required. Consequently, the closing stock's value has been calculated as Rs 80,000 - Rs 1,600 - Rs 1,000 = Rs 77,400.
(3) Concerning Adjustment No. 2: Its initial impact appears on the debit side of the Profit and Loss A/c, with Rs 5,000 being included in Advertisement expense. The subsequent impact occurs on the debit side of the Trading A/c, where Rs 5,000 is reduced from purchases.
(4) For Adjustment No. 4: The insurance premium includes Rs 3,000 for the period concluding on 30-06-2015. This implies that the advanced insurance premium for three months (from 1-4-2015 to 30-6-2015) is Rs 750 ( \( 3,000 \times \frac{3}{12} \) ).
(5) For Adjustment No. 5: A customer owing Rs 10,000 has been declared bankrupt, and their receiver has announced an initial and final payment of 80 paise per rupee. This suggests that the unrecoverable amounts are 20 paise per rupee. The total outstanding customers amount to Rs 94,000 (after accounting for the incorrect entry), with Rs 2,000 (20% of Rs 10,000) representing bad debts. Consequently, Rs 8,000 is anticipated to be collected.
(6) Regarding Adjustment No. 7: The recorded value of patents stands at Rs 20,000, while their updated value is Rs 17,000. Hence, the amount written off from the patents is Rs 3,000.
In simple words: These final accounts show a business's financial position at a specific time. They include a Trading Account (to find gross profit/loss), a Profit and Loss Account (to find net profit/loss), and a Balance Sheet (to show assets and liabilities). Each adjustment changes how these accounts are calculated to give an accurate financial picture.

Exam Tip: Remember to consider all adjustments carefully when preparing final accounts. Each adjustment will have at least two effects, impacting different accounts or sides of the same account.