Financial Statements - I
i
d
I
r
of
ion
q
"
dt
ancia
eholders
eir
r
call fro
r
Ios o accou
f
ingfu
O
n
rind operating profit;
describe the concept of
bn/nnce sheet rind its
preparation;
”
en
^
i
ith e business. The stakes of various stakeholders
e monetary or non-monetary. The stakes can
be active or passive; or can be direct or indirect. The
owner and persons advancing loan to the business
would have monetary stake. The government,
consumer or a researcher will have non-monetary
state in the business. The stakeholders are also
called users who are normally classified as internal
and external depending upon whether they are inside
the business or outside the business. All users
have different objectives for joining business and
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Accountancy
278
consequently different types of information requirements from it. In nutshell,
the various users have diverse financial information requirements from the
business.
For example we have classified the following into the category of internal
and external users specifying their objectives and consequent information
requirements.
Name
Internal/
External
users
Objective for participating
in business
Accounting Infomintion requirements
Current
owners
Internal
To make investment in the
business and wealth grow.
Likes to know extent of profit in
last acc ou nting peri
e
sition of the assets /1iabi ’ s o
e
usiness.
Manager
Internal
For a career. They esse - A unting in m omice form
ally act as the age o
of f ancial sta e
Alike their
owners (their emp y
port card
t
e interested
in infor n o t both profits
fina
os ’on.
and
Government External
Its role is
lato
tries to la own t eTules
in the st bli nterest.
Prospective Ext
owner
e is expecting to m e He is interested in information about
vestments
business past profits and financial position as
ith a vie t
e his indicative of likely future performance.
invent
t grow.
Bank
1
External Bank ’nte sted in safety
of the pr
al as well as
eriodic return
(int est).
Its c cern rñthat the rights of all
st
h e are protected. Since the
ve ment levies taxes on the
in s, they are interested in
ation about profitability in
lar bes ide s 1ot of ot he r
Mformation.
Bank is interested in adequacy of
profits only as an assurance of the
return of principal and interest back
in time. Bank is equally concerned
about the form in which the assets
are held by the business. When more
assets are held in cash or near cash
form , the
as pe ct is knn own as
liquidity.
Fig. 8.1 : Analysis of various users of nccountiny information
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279
Financial Statements - I
Box 1
Accounting Process (up to Trial balance) :
1. Identify the transactions, which that are recorded.
2. Record transactions in journal. Only those transactions are recorded which are
measured in money terms. The system followed for recording is called double entry
system whereby two aspects (debit and credit) of every transaction are recorded.
Repeated transactions of same nature are recorded in subsidiary books, also called
special journals. Instead of recording all transactions in journal, they are recorded
in subsidiary books and the journal proper. For example, the business would record
all credit sales in sales book and all credit purchases in purchases book. The other
examples of subsidiary books are return inwards book, return outwards book.
other important special book is cash book, in which all cash and bank transacti
are recorded. The entries, which are not recorded in any of these books,
er
in a residual journal called journal proper.
3. The entries appearing in the above books are posted’
4. The accounts are balanced and listed in a
total amounts of debit and credit balance
arithmetical errors.
5. The trial balance forms the basis for
and profit and loss account and b
8.2 Distinction between Ca ital a
p
ñ
he respective account
ement called UI
gre
ccounts a ta n
s
nancial s
.
s
edger.
the
e from
ts, i.e. trading
evenue
A very important distincti
ounting be een capital and revenue
items. The distinction
tant impli
making of the trading and
profit and loss account a ba nce she e e ue items form part of the
trading and profit and loss ccount,
c
items help in the preparation
of a balance s
Whenever payment and
rice of an outlay are made for a purpose
other than the settlement a xisting liability, it is called expenditure. The
expenditures are incurred a viewpoint they would give benefits to the
business. The ben
an expenditure may extend up to one accounting
year or more
e ar. If the benefit of expenditure extends up to one
accounting pe i s termed as reren£te expenditure. Normally, they are
incurred o the -to-day conduct of the business. An example can be
payment alaries, rent, etc. The salaries paid in the current period will not
benefi b
ess in the next accounting period, as the workers have put
in thei eff ts in the current accounting period. They will have to be paid the
s
s he next accounting period as well if they are made to work. If the
b efit f expenditure extends more than one accounting period, it is termed
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280
Accountancy
as capital expenditure. An example can be payment to acquire furniture for use
in the business. Furniture acquired in the current accounting period will give
benefits for many accounting periods to come. The usual examples of capital
expenditure can be payment to acquire fixed assets and/or to make additions/
extensions in the fixed assets.
Following points of distinction between capital expenditure and revenue
expenditure are worth noting :
(a) Capital expenditure increases earning capacity of business whereas
revenue expenditure is incurred to maintain the earning capacity.
(b) Capital expenditure is incurred to acquire fixed assets for operatio
business whereas revenue expenditure is incurred on day-to-day con
of business.
(c) Revenue expenditure is generally rec ing expenditure a ca al
expenditure is non-recurring by natu
(d) Capital expenditure benefits more an
e accou ti
r
hereas
revenue expenditure normally b
one ccountin e
(e) Capital expenditure (subject t e
ia n) is r
i alance sheet
whereas revenue expenditur s ’ec adjustm fo utstanding and
prepaid amount) is tran e o ding and p t d loss account.
Sometimes, it becomes di cult t assify the e ture into revenue or
capital category. In norm u e e adver i
e
enditure is termed as
revenue expenditure. T
e
expenditur ’ri
on advertising is likely to
benefit the business fir r re than o e c o ting period. Such revenue
expenditures, which are li ly to giv e or more than one accounting
period, are ter a deferred revenue endilure.
It must b d
tood tha
endi ure is a wider term and includes
expenses. Expe
e is any o t
ade/incurred by the business firm. The
part of the expenditure,
ceived to have been used or consumed in
the current year, is terme s e pense of the current year.
Revenue expenditure is ated as an expense for the current year and
is shown in tradin a profit and loss account. For example, salary paid
by the busine
i reated as an expense of the current year. Capital
expenditures a h ged to income statement and are spread over to more
than one
untin period. Hence, furniture of T 50,000 if expected to be used
for 5 year
1 e treated as expense @ 1 10,000 per year. The name given for
the ex n i epreciation. The treatment of deferred revenue expenditure is
sa
apital expenditure. They are also written-off over their expected
io f benefit.
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281
Financial Statements - I
8.2.2 Receipts
The similar treatment is given to the receipts of the business. If the receipts
imply an obligation to return the money, these are capital receipts. The example
can be an additional capital brought in by the owner or a loan taken from the
bank. Both receipts are leading to obligations, the first to the owner (called
equity) and the other to the outsiders {called liabilities). Another example on a
capital receipt can be the sale of a fixed asset like old machinery or furniture.
However, if a receipt does not incur an obligation to return the money or is
not in the form of a sale of fixed asset, it is termed as revenue receipt. The
examples of revenue receipts sales made by the firm and interest on investment
received by the firm.
8.2.fl Zmportnnce o/ Distinction fietitieen Capital met Recienii
As stated earlier, the distinction between pital and reven it s has
important implications for the preparat‘
trading an&.
loss
account and the balance sheet as all ite of r nue val a to
shown
in the trading and profit and loss acc
the items o
1 nature in
the balance sheet. If any item is w gl assi ed, i.
i m of revenue
nature is treated as capital item v -ve a, the a c ai ent of profit or
loss will be incorrect. For exa , r enues earn d ing an accounting
period are T 10,00,000 and e ex e es shown e 8,00,000, the profit
shall work out as T 2,0 0 O crutiny
tails, you find that a
revenue item of T 20,0 a
diture on a‘ s of machinery) has been
treated as capital expe
dded to e s machinery and debited to
machinery account, not t pairs acc
h nce, does not form part of
the expenses fo
period. It mean
e ual expenses for the period are
Z 8,20,000 a
ot 8,00,000. So, t
correct profit is T 1,80,000, not
T 2,00,000. In
ords, th t has been over stated. Similarly, if any
capital expendi is wrongly o as revenue expenditure (for example,
purchase of furniture s
chases), it will result in under statement
of profits, and also an und ta ment of assets. Thus, the financial statements
will not reflect the true and view of the affairs of the business. Hence, it is
necessary to identi correct nature of each item and treat it accordingly
in the book of c u s. is also important from taxation point of view because
capital profits t differently from revenue profits.
8.3 £•’izza
al Stateznezzts
It has
phasised that various users have diverse informational
re uir e s. Instead of generating particular information useful for specific
u r
usiness prepares a set of financial statements, which in general
s fie the informational needs of the users.
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282
Accountancy
The basic objectives of preparing financial statements are :
(a) To present a true arid fair view of the firiancial performance of the
business;
(b) To present a true and fair view of the financial position of the business;
and
For this purpose, the firm usually prepares the following financial statements:
1. Trading and Profit and Loss Account
2. Balance Sheet l
Trading and Profit and Loss account, also known as Income statement,
shows the financial performance in the form of profit earned or loss sustai
by the business. Balance Sheet shows financial position in the form of as
liabilities and capital. These are prepared on the basis of trial b la
additional information, if any.
Example 1
Observe the following trial balance of Ankit and
accounts and you will notice that the debit b
losses and the credit balance represent eit e
[This trial balance of Ankit will be used
ou
of preparation of financial statements]
Trial Balanc
f An
ign
correctly t e
io
e
ents of
s re
sent eithe
ss
expenses/
bilities or r e / ins.
t the chapt
u
rs nd the process
on March ,
1
Debit
Amount
Cash
Capital
Bank
Sales
Wages
Creditors
Salaries
10% Long term loan (raised
Furniture
Commission ec i
Rent of buildi
Debtors
Bad de
Purc
e
1,000
12,000
5,000
1,25,000
8,000
15,000
25,000
5,000
pril 01, 2016)
15,000
5,000
13,000
15,500
4,500
75,000
1,62,000
'
1,62,000
e b nce sheet and profit and loss account are now called position statement and statement of profit
los in the company’s financial statements. Since Chapters 8 and 9 deal with the preparation of
fin cial statements of sole proprietorship firm, the terms balance sheet and profit and loss account
are retained.
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283
Financial Statements - I
Analysis of Trial Balance of Ankit as on March 31, 2017
Account Title
Elements
L.F.
Debit
Credit
A iourttAmourtt
Cash
Capital
Bank
Sales
Wages
Creditors
Salaries
10% Long-term loan
(raised on April 01, 2016)
Furniture
Commission received
Rent of building
Debtors
Bad debts
Purchases
1,000
Asset
Equity
Asset
Revenue
Expense
Liability
Expense
Liability
5,000
8,000
25,000
Asset
Revenue
Expense
Asset
Expense
Expense
12,000
1,25,000
15,000
5,00
15,000
13,000
15%OO
7 ,
5
0
1,62,000
8.4 Trading and Profit and
ss A
t
Trading and Profit and Lo a un
prepare
e mine the profit earned
or loss sustained by th us s terprise d ‘n
e accounting period. It is
basically a summary o
and exp
e business and calculates
the net figure termed as pr or loss. Pr
re n e leBB expenses. If expenses
are more than re es, the gure is te ed oss. Trading and Profit and Loss
account sum
ses he performance f
n accounting period. It is achieved
by transferrin t
nces of r
es and expenses to the trading and profit
and loss accou
the trial a e. Trading and Profit and Loss account
is also an account with
redit sides. It can be observed that debit
balances (representing ex se ) and losses are transferred to the debit side
of the Trading and a Profit a oss account arid credit balance (representing
revenues/gains) ar sfered to its credit side.
8. 4.1 Rele
n
e
trading and Prost and Loss Account
The diffe item ppearing in the trading and profit and loss account are
explained eunder:
Items
I
ebit side
g stock : It is the stock of goods in hand at the beginning of the
ounting year. This is the stock of goods which has been carried
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284
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
(ix)
(x)
Accountancy
forward from the previous year and remains unchanged during the year
and appears in the trial balance. In the trading account it appears on the
debit side because it forms the part of cost of goods sold for the current
accounting year.
Rirchnses less returns : Goods, which have been bought for resale appears
as purchases on the debit side of the trading account. They include both
cash as well as credit purchases. Goods which are returned to suppliers
are termed as purchases return. It is shown by way of deduction from
purchases and the computed amount is known as Net purchases.
Wage:s : Wages refer to renumeration paid to workers who are dire
engaged in factory for loading, unloading and production of goods
are debited to trading account.
Carriage inwards/Jreipht inmords: Th e expenses are the em of
transport expenses, which are incur on bringing a ri s oods
purchased to the place of business h items ar
r pect of
purchases made during the year re de ited to th ra account.
Fuel/Water/Poiuer/ Gas : The ‘te
are sed i t
ction process
and hence are part of expe s
Pncknpinp mnterinl rind P
tn
es : Cos of
ging material used
in the product are direc expen e as it re r
all containers which
form part of goods so
r, the p in e ers to the big containers
that are used for
rting the g s s regarded as an indirect
expense debited to o nd loss c
lSalaries : T ese inc de salari p
o the administration, godown
and war s taff for the servi rendered by them for running the
business
s
ies are p
kind by providing certain facilities (called
perks) to t ployees su s rit free accommodation, meals, uniform,
medical facilities s
e regarded as salaries and debited to the
profit and loss acco
bent paid : The e inclu e office and godown rent, municipal rates and
taxes, factory en rates and taxes. The amount of rent paid is shown
on the d s the profit and loss account.
Interest par terest paid on loans, bank overdraft, renewal of bills of
exe ge, etc. is an expense and is debited to profit arid loss account.
C
n pnid: Commission paid or payable on business transactions
de aken through the agents is an item of expense and is debited to
and loss account.
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285
Financial Statements - I
Repairs : Repairs and small renewals/ replacements relating to plant and
machinery, furniture, fixtures, fittings, etc. for keeping them in working
condition are included under this head. Such expenditure is debited to
profit and loss account.
{xii) Miscellaneous expenses : Though expenses are classified arid boolced
under different heads, but certain expenses being of small amount clubbed
together and are called miscellaneous expenses. In normal usage these
expenses are called Sundry expenBeB or Trade expense:S.
(xi)
Items on the credit side
(i) Hales less returns : Sales account in trial balance shows gross
t
sales{cash as well as credit) made during the year. It is show
n
credit side of the trading account. Goods returned by cus
er
re
called return inwards and are shown
deduction from to
s s and
the computed amount is known as
es.
Y
(ii) Other incomes : Besides salaries
oth
ains a
in m
are also
recorded in the profit and loss a
xamples of h comes are
rent received, dividend rece’ d i rest rece , c nt received,
commission received, etc.
8. 4. 2 Closing mines
The preparation of tradin
and loss a
u requires that the balances
of accounts of all conc
s are tr
r o it for its compilation.
• Opening stock acco
Purchas
o t, ages account,
Carriage
inwards acc
arid direct expen
a
nt are closed by transferring to
the debit s of t e trading and pro and loss account.
This is done b
ing the f ’ng entry :
Trading A c
Dr.
To Opening st
A
To Purchases A
To Wages
To Carri e i ards A/c
To A
h
ect expenses A/c
• The purchase urns or return outwards are closed by transferring its
balan o the purchases account. The following entry is recorded for this
pur e
Dr.
ur ases return A/c
rchases A/c
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286
Accountancy
•
Similarly, the sales returns or returns inwards account is closed by
transferring its balance to the sales account as :
Sales A/c
Dr.
To Sales return A/c
• The sales account is closed by transferring its balance to the credit side of
the trading and profit and loss account by recording the following entry:
Sales A/c
Dr.
To Trading A/c
Items of expenses, losses, etc. are closed by recording the following entries:
Profit arid Loss A/c
Dr.
To Expenses (individually) A/c
To Losses (individually) A/c
Items of incomes, gains, etc. are closed by rec ding the following e
Incomes (individually) A/c
r.
Gains (individually) A/c
To Profit arid Loss A/c
The posting for closing the seven ac
pens s
r e es as they
appear in the trial balance (in our a p
) are give elo
(i) For closing the accounts
:se
Trading A/c
Dr.
8 00
To Purchases A
75,000
To Wages A/
8,000
(ii) Profit and Loss A
r.
43,500
To Salaries
25,OOO
To Re
building
13,000
To B
eb s
4,500
(i) For clo:st
Sales A/c
Dr.
1,25,OOO
To Trading A/
1,25,000
(ii) Commission receive
c
Dr.
5,000
To Profit and Loss
c
5,000
The posting on ‘n ledger will appear as follows :
Purchases Account
Dr.
Cr.
iculars
Dale
B
nce b/d
J.F
Amount
Dale
75,000
75,000
Rationalised 2023-24
Particulars
Trading
J.F.
Amount
75,000
75,000
287
Financial Statements - I
Wagea Account
Date
Particulars
U.F
Balance b/d
Amount
Date
Parti‹nilarfS
U.F.
Trading
8,000
Amount
8,000
8,000
8,000
Salaries Account
Date
Particulars
J.F
Balance b/ d
Amount Date
Particulars
J.F.
25,000
Profit and Loss
25,000
Particulars
Balance b/d
J.F
Amourt/
25, 0
0
Rent of Building A
Date
Cr.
Amoiin
nut
g
Cr.
D
13,000
13,0
13,000
ad De ts Accoun
mount Date
Date
Balance b/d
4,500
Amount
Profit and Loss
4,500
4.500
4.500
ACCOURt
Date
Date
Trading
}25,000
Amount
Balance b/d
1,25,000
1,25,000
1,25,000
Commissioxz Received Accouxzt
Date
Date
t and Loss
5,000
5,000
Rationalised 2023-24
fftoLt III
Balance b/d
5,000
5,000
288
Accountancy
As result of the foregoing discussion, we will now learn how the trading
and profit and loss account can be prepared from the trial balance, the
format of which is shown in figure 8.2. However, this list is not exhaustive.
In real sense, there can be many more of other items, which we will be dealing
at the later stage and there you will notice how this format undergoes a change
with respect to each one of them.
Trading and Profit and Loss Account of ABC
for the year ended March 31, 2017
Opening stock
Purchases
Wages
Carriage inwards/
Freight inwards /cartage
Gross profit c/d'
Gross loss b/d’
Sales
+ i
G
Rent/rates and taxes
Salaries
Repairs and renewals
Bad debts
Net profit’ (transferred to
capital account)
' either of the ite
ted
Fig. 8.2 :
fo
8. 4. S Concept o/ Gross Pr
and 2\fet Prost
The trading and pr t
d loss can be seen as combination of two accounts,
viz. Trading ac
n
Profit and Loss account. The trading account or the
first part ascertai
e gross profit and profit and loss account or the second
part asce s net pro t.
Tradtn
The tr in account ascertains the result from basic operational activities
of
b ness. The basic operational activity involves the manufacturing,
p ha 'ng and selling of goods. It is prepared to ascertain whether the selling
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289
Financial Statements - I
of goods and/or rendering of services to customers have proved profitable for
the business or not. Purchases is one of the main constituents of expenses in
business organisation. Besides purchases, the remaining expenses are divided
into two categories, viz. direct expenses and indirect expenses.
Direct expenses means all expenses directly connected with the manufacture,
purchase of goods and bringing them to the point of sale. Direct expenses
include carriage inwards, freight inwards, wages, factory lighting, coal, water
and feul, royalty on production, etc. In our example- 1, besides purchases, four
more items of expenses are listed. These are wages, salaries, rent of building
and bad debts. Out of these items, wages is treated as direct expense w
the other three are treated as indirect expenses.
Similarly, snles constitute the main item of revenue for the bu in
excess of sales over purchases and direct expe ses is called gross p 1. e
amount of purchases including direct expen is more than the s es r nue,
the resultant figure is gross loss. The com
a
of gross rd t
shown
in the form of equation as :
Gross Profit = Sales —
The gross profit or the gross 1
rc
es
Dire
tran ferred t
s )
t
d loss account.
The tndirect expenses are ansfe to the d ‘t s
of the second part,
viz. profit and loss accoun A eve e/gains
sales are transferred
to the credit side of the r
oss acco . I he total of the credit side
of the profit and loss
s more t t otal of the debit side, the
difference is the net profi r the perio
h i is being prepared. On the
other hand, if t ta1 of t e debit s
is ore than the total of the credit
side, the differ e is e net loss incurre y the business firm. In an equation
form, it is sho
llows
Net Pro t = Gross o + ther Incomes — Indirect Expenses
Net profit or net loss co uted is transferred to the capital account in
the balance sheet by way o following entry :
(i) For transfer of
root
Dr.
Profit a d
sA c
To C
al
(ii) For tr sfer
et loss
Dr.
Ca al A/c
o
fit and Loss A/c
We e w redrafting the trading and profit and loss account to show gross profit
t of Ankit for the year ended March 31, 2017. The redrafted trading
a pr t and loss account will look like as shown is shown in figure 8.3.
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290
Accountancy
Trading and Profit and Loss Account of Ankit
for the year ended March 31, 2017
Dr.
Cr.
Expenses/Looses
Amount
fievertues/Gnirts
Purchases
Wages
75,000
8,000
Sales
Gross profit c/d
Amount
1,25,000
42,000
1,25,000
1,25,000
Salaries
25,000
Rent of building
Bad debts
Net Profit {transfered to
capital account}
Gross profit b/d
42,OOO
Commission received
47,000
Y
Fig. 8.3 : Shomin9 the computation of
us
I rind rtet
o
nk’
Gross profit, which represents the
i
ational activi
e business
is computed as T 42,000. The gross ofit
ransferre
g account to
profit and loss account. Besides g
ofi , usiness
a ed an income of
T 5,000 as commission receive
ent T 4 ,5
,OOO + T13,O00 +
T4,50O) on expenses/losses i ludin laries, ren n ad debts. Therefore,
the net profit is calculate s 4,5
ñlustrntion 1
Prepare a trading account fro
Opening stoc
Purchases
Sales
Wages
e following p
ar fo
he year ended March 31, 2017:
37,500
1, 05,0
2,70 0
30
O/UtlON
rading Account
r the year ended March 31, 2017
Amount
Opening
Purchases“
Gross
ofi
37,500
1,05,000
30,000
97,500
Sales
2,70,000
Rationalised 2023-24
2,70,000
2,70,000
Financial Statements - I
291
RluBtration 2
Prepare a trading account of M/s Prime Products from the following particulars pertaining
to the year 2016-17.
SO,000
1,10,000
5,000
3,00,000
7,000
30,000
40,000
Opening stock
Purchases
Return inwards
Sales
Return outwards
Factory rent
Wages
Solution
Books of Prime Products
Trading Account
for the year ended Marc
1, 2017
Opening stock
Purchases
Less : Return
outwards
Factory rent
Wages
Gross profit
OOO,
1,10,000
les
,o
OO
{7.000)
,0
2,95,OOO
inwar
OO
,OOO
72,000
2,95,00
2,95,000
Rluotration 6.
Prepare a tradin
31, 2017.
t of M/ s A
Opening stock
Purchases
Sales
Purchases re
Sales return
Carriage on pur
s
Carria
sales
Factory
t
Offi
t
Do an Clearing charges
i
d Octroi
Co Gas and Water
ur
O ’’
rom the following information related to March
6
00
,000
50,000
18,000
30,000
12,000
15,000
18,000
18,000
48,000
6,500
10,000
Rationalised 2023-24
Accountancy
292
TO(u/iOn
Books of Anjali
Trading Account
for the year ended March 2017
Dr.
Expenses/LosBes
Amount
Opening stock
60,000
Purchases
3,00,000
Less : Purchases return ( 18.000) 2,82,000
12,000
Carriage on purchases
Factory rent
18,000
Dock and Clearing charges
48,000
6,500
Freight and Octroi
10,000
Coal, Gas and Water
Gross profit
2,83,500
7,20,000
Ltlustratio fi 4
From the following information, prepare a pr
31, 2017.
Gross profit
Rent
Salary
Commission paid
Interest paid on loan
Advertising
Discount received
Printing and stationery
Legal charges
Bad debts
Depreciation
Interest receiv
Loss by fire
for tb
Cr.
Amount
Revenues/ Gains
Sales
7,50,000
Less : Sales return (30.000) 7,20,000
account for th
a
a
nding March
6
,OOO
,000
0
5,
00
,000
2,000
5,000
1,000
ro
azzd I.oss Accouzzt
ear exuded March 31, 2O 17
Revenues/ Gnins
Rent
Salary
Commissio
Intere p
oan
Adver ing
P
Stationery
gal arges
5,000
15,000
7,000
5,000
4,000
2,000
5,000
Gross profit
Discount received
Interest received
Rationalised 2023-24
60,000
3,000
4,000
293
Financial Statements - I
Bad debts
Depreciation
Loss by fire
Net profit (transferred to the
capital account)
1,000
2,000
3,000
18,000
67,000
67,000
Test Your Understanding - I
I State True or False :
(i) Gross profit is total revenue.
(ii) In trading and profit and loss account, opening stock appears on the debit
because it forms the p‹
t‘
Rent, rates and taxes i!
(iv) If the total of the credit
a t
of the debit side, the di
t
t.
II Match the items given un
at
1
orre
(i) Closing stock is credite
(ii) Accuracy of book of ac‹
iii) On returning the good*
d
t’
1
t
(iv) The financial position i
On receiving the ret, i
buyer, the seller seri g
8.4.4 Cost of Croods Sol
The trading an
information a
enterprise. It is
o
t
and loss account epared in figure 8.3 presents useful
profitabil’
om t e basic operations of the business
duced for
perusal.
ra
Dr.
N
frn‹2inp Account fietrisite‹2
nd Closi
for t
g Account of Ankit
r ended March 31, 2017
Expenses/Lonnes
Purchases
Wages
Gross
Amount
75, 000
Sales
8,000
42,000
1,25,000
Fig. 8.4 : In illutrative trading account ofAnkit
Rationalised 2023-24
1,25,000
1,25,000
294
Accountancy
If there is no opening or closing stock, the total of purchases and direct
expenses is taken as Coal of goods sold. In our example, notice that purchases
amount to I 75,000 and wages amounts to T 8,OOO. Hence, the cost of goods
sold will be computed using the following formula :
Cost of Goods Sold = Purchases + Direct Expenses
= 775,000 + 7 8,000
- 7 83,000
As there is rio unsold stock, the presumption here is that all the goods
purchased have been sold. But in practice, there is some unsold goods at the
end of the accounting period.
In our example, let us assume that out of the goods purchased amou
to Z 75,000 in the current year, Ankit is able to sell goods costing T
In such a situation, the business will have a unsold stock of go cos g
I 15,000 in hand, also called closing stock
e amount of est
sold
will be computed as per the following e
ion
Cost of Goods Sold = Purchase
t xpenses — s g Stock
= T 75,
+
000 — T 1
0
As a result, the amount of
o will also c n th the existence
of closing stock in business rom
,000 (as mp ed in figure 8.4) to
Z 57,000 (refer figure 8.5).
fo
e
ar ezzded
Purchases
Wages
Gross profit c/d
17
Sales
Closing stock
i
Salaries
Rent of buildin
Bad debts
Net Pro ( nsfere
capital ac
nt)
1,
o
,OOO
25,000
13,000
4,500
19,500
1,25,000
15,000
1,40,000
Gross profit b/d
Commission received
62,000
Fig. 8.5 : The trodin9 account o/Ankit
Rationalised 2023-24
57,000
5,000
62,000
295
Financial Statements - I
It may be noted that closing stock does not normally form part of trial
balance, and is brought into books with the help of the following journal entry :
Closing stock A/c
Dr.
To Trading A/c
This entry opens a new account of asset, i.e. closing stock T 15,000 which
is transferred to the balance sheet. The closing stock shall be an opening stock
for the next year and shall be sold during the year. In most cases, therefore,
the business shall have opening stock as well as closing stock every year, and
the cost of goods sold should be worked as per the following equation:
Cost of Goods Sold = Opening Stock+Purchases Direct Expenses—Closing S c
Look at Illustration 5 and see how it has been computed.
Illustration 5
Compute cost of goods sold for the year 2017 w
prepare trading account
Sales
Purchases
Wages
Stock (Apr. 01, 2016)
Stock (March 31, 2017
Freight inwards
the
of the fo1
20, 00,0
15, 0
1, ,000
3, ,000
OOO
!Solution
Computa o
f Cost of Goods Sold
Op
stock
A Phases
ect expenses :
reight inwards
Wages
O
3,00,OOO
15,00,000
Less Closing stock
1,00,OOO
1.00,OOO
2O,00,OOO
(4,O0,OOO)
Cost of goods sold
16,00,000
Rationalised 2023-24
i
’n or
tion and
Accountancy
296
Dr.
Trading Account
for the year ended March 31, 2017
Expenses/LoBBes
Opening stock
Purchases
Freight inwards
Wages
Gross profit
3,00,000
15,00,000
1,00,000
1,00,000
4,00,000
Sales
Closing stock
24,00,000
20,O0,OOO
4,OO,OOO
24,00,000
Illustration 6
From the following balances obtained from the few accounts of Mr. H. Balara
Trading and Profit and Loss Account.
Stock on Apr. 01, 2016
Purchases for the year
Sales for the year
Purchase expenses
Salaries and wages
Advertisement
8,000
22,000
42,000
2,500
3,5
Bad eb
’sc
allowed
miss on pai
ale xpenses
Re irs
p
1,200
1,200
600
1,100
600
600
Closing stock on March 31, 201 is T 4,50a
H. Balar
Trading Acco t
r ended
r
3
017
Dr.
Expenses/Loose
Opening stock
Purchases
Purchase expenses
Gross profit c/d
Salaries and Wages
Rent
Advertisement
Commission
Discount 11 wed
Bad debt
Sales e
n
Repai
Net
t
e
to capital account)
Amount
,000
6,500
3,500
1,200
1,000
1,100
600
1,200
600
600
4,200
evenueo/ Gains
Sales
Closing stock
42,000
4,500
Gross profit b/d
46,500
14,000
14,000
Rationalised 2023-24
14,000
297
Financial Statements - I
8.5 Operating Profit {EBITJ
It is the profit earned through the normal operations and activities of
the business. Operating profit is the excess of operating revenue over
operating expenses. While calculating operating profit, the incomes
and expenses of a purely financial nature are not taken into account.
Thus, operating profit is profit before interest and tax (EBIT). Similarly,
abnormal items such as loss by fire, etc. are also not taken into account. It
is calculated as follows:
Operating profit = Net Profit + Non Operating Expenses — Non Operating Incomes
Refer to the trial balance of Ankit in example 1 {Page no. 294), you
notice that it depicts ari item relating to 10% interest on long-term
i
on April 01, 2017. The amount of interest work ut to T 500 (T 5,000 / ),
which has been shown on the debit side
he trading and p
loss
account (figure 8.6).
Tradizzg azxd Profit
for the year
d
de
uzxt o A
ch 33., 2O 3.
Dr.
Cr.
ount ) Revenue
Expenses/LosBes
Purchases
Wages
Gross profit c/d
00
8,000
57,000
’n
ck
1,40,000
1,40,
2
Salaries
Rent of building
Bad debts
Interest
n fer)re
N capita ca u
1,25,000
15,000
Gross profit b/d
Commission received
S7,0OO
5,000
4 00
500
19,000
62,000
62,000
Fig. 8.6 : Shominy the treatment of interest on profit
The o
O
ra
ra
i
g profit will be :
rofit = Net profit + Non-operating expenses — Non-operating incomes
g profit= T 19,000+ 500 — nil
= 1 19,500
Rationalised 2023-24
298
Accountancy
Test Your Understanding - II
Choose the correct option in the following questions :
1. The financial statements consist of:
(i) Trial balance
(ii) Profit and loss account
(iii) Balance sheet
(iv) (i) & (iii)
(v) (ii) & (iii)
2. Choose the correct chronological order of ascertainment of the following profits from
the profit and loss account :
(i) Operating Profit, Net Profit, Gross Profit
(ii) Operating Profit, Gross Profit, Net Profit
(iii) Gross Profit, Operating Profit, Net Profit
(iv) Gross Profit, Net Profit, Operating Profit
3. While calculating operating profit, the followi are not taken into ac
nt.
(i) Normal transactions
(ii) Abnormal items
(iii) Expenses of a purely financial na e
(iv) (ii) & (iii)
(v) (i) & (iii)
4. Which of the following is corre
(i) Operating Profit = Oper
g pro
on-operat’ ex
s s — Non-operating
incomes
(ii) Operating profit = N
r
+
-operatio x
ses + Non-operating incomes
(iii) Operating profit - et
fi
on-operatin
p ses — Non-operating incomes
(iv) Operating profit
- Non-open E
uses + Non-operating incomes
oks of a trader ascertain gross profit, operating
Following balanc
profit and net pre
a
Sales
Pt i rrh o see
Purc
n
ing
S
r’
75,250
32,250
7,600
1,250
250
300
250
3,000
200
500
1,800
Rationalised 2023-24
299
Financial Statements - I
Commission paid
Office expenses
Wages
Profit on sale of investment
Depreciation
Dividend on investment
Loss on sale of old furniture
150
1,600
2,600
500
800
2,500
300
Closing stock (March 31, 2017) valued at I 8,000
Trading and Profit and Loss Account
for the year ended March 31, 2017
Dr.
Expenses/LooBez
Amount
Openingstock
Purchases
Lees: Purchases return
Wages
Gross profit c/d
7,600
32,250
(25_}0
Rent
Stationery and printing
Salaries
Misc. expenses
Travelling expenses
Advertisement expenses
Commission paid
Office expenses
Depreciation
Operating pro
Loss on sale of old furniture
Net Profit {transferred to capi
32,000
2,600
39,8
8 00
0
The b
the bu
re
Sale
Le : Sales return
fimO
75,250
1 25
OOO
,OOO
82,000
oss profit
39,800
OO
500
1,800
1
1,6
800
,200
,800
39,800
300
33,900
31,2OO
Operating profit b/d
Profit on sale of investment 500
Dividend on investment
2,500
34,200
34,200
accouzzt)
8.6 Bala
fievertues/Gnins
Sheet
et is a statement prepared for showing the financial position of
’ne
summarising its assets and liabilities at a given date. The assets
balances and liabilities (including capital) reflect credit balances.
Rationalised 2023-24
Accountancy
300
It is prepared at the end of the accounting period after the trading and profit
and loss account have been prepared. It is called balance sheet because it is
a statement of balances of ledger accounts that have not been transferred to
trading and profit and loss account and are to be carried forward to the next
year with the help of an opening entry made in the journal at the beginning
of the next year.
8. 6. 1 ?' reyarIztg Ba la rtce Skeet
All the account of assets, liabilities and capital are shown in the balance
sheet. Accounts of capital and liabilities are shown on the left hand side,
known as Liabilities. Assets and other debit balances are shown on the
hand side, known as As:set:s. There is no prescribed form of Balance s
t
for a proprietary and partnership firms. (However, SchedLtle III
I e
Companie:s Act £OJ S prescribes the format a the order in whic
t as ets
and liabilities of a company should be sho
he horizont@fo
hich
the balance sheet is prepared is shown
e
re 8.7.
Balance Sheet of
.
at
rch 3
Liabilities
Capital
Add Profit
Long-term loan
Short-term loan
Sundry creditors
Bills payable
Bank overdraft
Amou nt
1 Furnitur
Cash
Ba
o
u
btors
nd and Buildings
C ing stock
Fig. .7 • ormnt of a bnlnnce sheet
Refer to our ex e -1 you will observe that the trial balance of Ankit
depicts 14 accou o of which 7 accounts have been transferred to the
trading and pr a ss account {refer figure 8.3). These are the accounts
of revenues and e ses. The analysis of figure 8.3 shows that the business
has incu d total expenses of T 1,25,500 and revenues generated are
T 1,30,
g a profit of I 4,500. The remaining seven items in the trial
balan re cts the capital, assets and liabilities. We are reproducing the trial
b
mple -1) to show how the accounts of assets and liabilities of Ankit
Id presented in the balance sheet.
Rationalised 2023-24
301
Financial Statements - I
’I’ria1 Balance o£ Ankit as ozs March 31, 2017
L.F
Credit
Debit
Amount
Amount
Cash
Capital
Bank
Sales
Wages
Creditors
Salaries
10% Long-term loan
1,OOO
12,000
5,OOO
1,25,000
8,000
15,000
25,000
(raised on Apri1 01, 2016)
Furniture
Commission received
Rent of building
Debtors
Bad debts
Purchases
15,OOO
13,000
15,500
'
4,500
75,000
,62,000
Fig. 8.8 : Shominp the accoun
Balazxce
o/nsse
d liabi/itie
kit as at
e
IN
‘o/ bnlnnce of Ankit
rch 1, 2017
Amount
Liabilities
Capital
Add Profit
10 % Long-ter
Creditors
000
4 500
16,5
0
15 0
3
niture
Ca
Bank
Debtors
00
15,000
1,000
5,000
15,500
36,500
.9 : Shomin9 the bnlnnce sheet of Ankit
8. 6.2 Rele
n
e
”
tHe
Balanee Sfteet
Items wh’
(1) Co
re ge rally included in a balance sheet are explained below :
Assets: Current assets are those which are either in the form of
r an be converted into cash within a year. The examples of such
set are cash in hand/bank, bills receivable, stock of raw materials,
e -finished goods and finished goods, sundry debtors, short term
i estments, prepaid expenses, etc.
Rationalised 2023-24
302
Accountancy
(2)
Current Liabilities: Current liabilities are those liabilities which are
expected to be paid within a year and which are usually to be paid out of
current assets. The examples of such liabilities are bank overdraft, bills
payable, sundry creditors, short-term loans, outstanding expenses, etc.
Fixed A:s:set:s: Fixed assets are those assets, which are held on a long-term
basis in the business. Such assets are not acquired for the purpose of resale,
e.g. land, building, plant and machinery, furniture and fixtures, etc. Some
times the term fixed Block’ or ‘Block Capital’ is also used for them.
/ritnnpibIe As:sets :These are such assets which cannot be seen or touched.
Goodwill, Patents, Trademarks are some of the examples of intangible assets.
Inve:stments: Investments represent the funds invested in governs
securities, shares of a company, etc. They are shown at cost price. I
the date of preparation the balance sheet, the market price of inve
is lower than the cost price, a footnote to that effect may be a n to
the balance sheet.
Long-term Liabilitie:s : All liabilities o han the curynt
’ti s are
known as long-term liabilities. Su ’abi ’es are u a
a
le after
one year of the date of the balanc e he important m long term
liabilities are long-term loans
m nk a d ot
c institutions.
Capital: It is the excess of s s r liabili ‘e u to outsiders. It
represents the amount o
a c ributed by e
prietor/ partners
as increased by profits nd inte t on capi a decreased by losses
drawings and intres n aw’ gs.
Drau ing:s : Amou wi r y the pro ’eto is termed as drawings and
has the effect of
he balan
capital account. Therefore,
the drawings accou is closed b t s ri its balance to his capital
account.
ver it i shown
wa
deduction from capital in the
balance t.
(3)
(4)
(5)
(6)
(7j
(8)
8. O.G MarsAa
n‹Z Groii
Assets met LialM lilies
A major concern of acco
a out preparing and presenting the financial
statement. The informatio
vided should be decision useful for the users.
Therefore, it becomes necess that the items appearing in the balance sheet
should be properly o ed and presented in a particular order.
Mnrshnllinp o
e
Liabilities
In a balance s
, the assets and liabilities are arranged either in the order
of liquidit permanence. Arrangement of assets and liabilities in a particular
order i o s Marshalling.
In se f permanence, the most permanent asset or liability is put on the
to t ance sheet and thereafter the assets are arranged in their reducing
1 1 o ermanence.
Rationalised 2023-24
303
Financial Statements - I
In the balance sheet of Ankit you will find that furniture is the most
permanent of all the assets. Out of debtors, bank and cash, debtors will take
maximum time to convert back into cash. Bank is less liquid than cash. Cash
is the most liquid of all the assets. Similarly, on the liabilities side, the capital,
being the most important source of finance will tend to remain in the business
for a longer period than the long-term loan. Creditors being a liquid liability
will be discharged in the near future. The balance sheet of Ankit in the order
of permanence is shown in figure 8.10(a).
Balance Sheet of Ankit as ozi March 31, 2017 {in order of permanence}
Liabilities
Capital
12,000
Add Profit
4,500
10 % Long-term loan
Creditors
Fig. 8.
In case of i
manner woulc
accounts. The
in the busine:
accounts will
cash or cash ‹
The balance s
Furnitur
Debto
Ba
16,500
5,000
15,000
36,500
500
,OOO
1,000
36,500
rmnnnnce
0
e
e
e
e
th
t
r
e
e
n
on presented in this
he life of the various
tture would continue
ment or more liquid
are likely to become
t.
vn in figure 8.1O(b)
t7
Liabilities
15,000
5,000
Creditors
1 , 10
i0
16,500
Cash
Bank
Debtors
Furniture
36,500
Fig. 8.10 {bJ : Items of bala nce sheet shown in the order of liquidit g
Rationalised 2023-24
1,000
5,000
15,500
15,000
36,500
Accountancy
304
Grouping ofA:sseto and Liabilitie:s
The items appearing in the balance sheet can also be properly grouped. The
term grouping means putting together items of similar nature under a common
heading. For example, the balance of accounts of cash, bank, debtors, etc. can
be grouped and shown under the heading of ’current assets’ and the balances
of all fixed assets and long-term investment under the heading of ‘non-current
assets’.
Balance Sheet of Anirit as at March 31, 2017
{in order of permanenceJ
Amount
Liabilitieo
Omners Fundo
Capital
12,000
Add Profit
4.500
Non-Current Liabilities
Long-term loan
Current Liabilities
Creditors
Assets
ôn Ce
t Assets
000
16,500
15,500
5,000
1,000
5,000
a
15,0
,500
E‘ig. 8.10 (c): S
36,500
ne s and liabilitie
ge
ed in logical groupe
e following items in t
rder of both permanence
il
t em under logical heads :
’ it’
Lor
Bar
1
s
ayable
r s equity
term loans
undry creditors
O
AsfSetfS
Building
Cash in hand
Cash at bank
Bills receivable
Sundry debtors
Land
Finished goods
Work in progress
Raw material
Rationalised 2023-24
Financial Statements - I
305
Illustration 8
From the following balances prepare a trading and profit and loss account and balance sheet
for the year ended March 31, 2017
Carriage on goods
purchased
Carriage on goods sold
Manufacturing expenses
Advertisement
Excise duty
Factory lighting
Debtors
Creditors
Dock and Clearing charges
Postage and Telegram
Fire Insurance Premium
Patents
Income tax
Office expenses
8,000
3,500
42,000
7,000
6,000
4,400
80,000
61,000
5,200
800
3,600
12,00
24 0
,200
Cash in hand
Bank overdraft
Motor car
Drawings
Audit fees
Plant
Repairs to plant
Stock at e end
Purc
s less return
Co
is
on purch set
i ntal t de expens
t
t on invest
t
Ca ’tal
es less re n
alest t
Discou allo d
Did
rchases
Rationalised 2023-24
2,500
30,000
60,000
8,000
2,7
l,S3,
0
6,0
OOO
2,000
3,200
30,000
4,500
1,00,000
5,20,000
12,000
2,700
3,400
Accountancy
306
’I'rading axid Proht axed Loss Accouzzt
for the year ended March 31, 2017
Dr.
Cr.
Amount
Expenses/Losses
1,60,000
Purchases less return
Commission on purchases
2,000
Carriage on goods purchasesc
8,000
Manufacturing expenses
42,000
Factory lighting
4,400
Dock and Clearing charges
5,200
Gross profit c/d
2,98,400
Sales less return
s ›L
5,20,000
Carriage on sales
Advertisement
Excise duty
Postage and telegram
Fire Insurance premium
Office expenses
Audit fees
Repairs to plant
Incidental trading expenses
Sales tax paid
Discount allowed
Net profit
(transferred to
account)
3,500
7,000
6,000
800
3,600
7,200
2,7
2,
Gross pr fit b/d
,OOO
700
3,06,300
W,06,300
Balance S
a
arch 31, 2017
Assets
Bank overdraft
Creditors
Capital
Add Net profit
0
5,20,000
30,000 Cash in hand
61,000 Debtors
0,000
Closing stock
5,400
Investment
op5,4OO
Motor car
(8,000)
Plant
3,47400
Patents
(24,000) 3,23,400
4,14,400
Rationalised 2023-24
Amount
2,500
80,000
76,000
30,000
60,000
1,53,900
12,000
307
Financial Statements - I
Illustration 9
From the following balances prepare trading and profit and loss account and balance sheet
for the year ended March 31, 2017
Account Title
Account Title
Opening stock
Purchases
Sales
Returns (Dr.)
Returns(Cr)
Factory rent
Custom duty
Coal, gas & power
Wages and salary
Discount (Dr.)
Commission (Cr.)
Bad debts
Bad debts recovered
Apprenticeship premium
Production expenses
Adminstrative expenses
Carriage
15,310
82,400
256,000
4,000
2,400
18,000
11,OOO
6,000
36,600
7,500
1,200
5,850
2,000 p
4,80
2,6
, 00
8,700
'
4
The value of closing stoc
Capital
Drawings
Sundry debtors
Sundry creditors
Depreciation
Charity
Cash balance
Bank balance
Bank c
ges
Esta
ent expenses y
PI
as old b ’lding
ollecte
o
ill
at n s
demark
oan (Cr.)
Interests
2,50,000
48,000
57,000
12,000
4,2
'
4,
0
1
,600
2,000
,50,000
2,000
20,000
10,000
5,000
25,000
3,000
3I , 20 17
SOlutiOn
Dr.
'I‘rading azzd Proht
d Loss Accouzzt
:For the ye
ded arch 31, 2017
Expenses/LosBez
Opening stock
Purchases:
Less Returns :
Factory rent
Custom duty
Coal, gas
er
Wages an
lary
Produ ’
e
ses
Carri e
G s
c/d
Mount
15,310
82,400
400
80,000
18,000
11,500
6,000
36,600
2,600
8,700
98,690
Revenues/ Gnins
Sales:
Less Returns
2,56,OOO
(4 OOO) 2,52,OOO
Closing stock
25,400
2,77,400
Rationalised 2023-24
2,77,400
308
Accountancy
Discount (Dr.)
7,500
Bad debts
5,850
Administrative expenses
Depreciation
5,000
4,200
500
Charity
Bank charges
Establishment expenses
Interest on loan
Net profit
(transferred to capital account)
Gross profit b/d
Commission
Bad debts recovered
Apprenticeship premium
98,690
1,200
2,000
4,800
180
3,600
3,000
76,860
1,06,690
1,06,690
Balance Sheet as at March 31, 2017
Liabilities
Amount AsfSets
Sales tax collected
Sundry creditors
Loan
Capital
Add Net profit
2,000
12,00
25,0
Lees Drawings
2,50,000
76,860
3,26,860
48 000
2,78
alance
nce
debtors
si g s
sehol
lant
nk
Patents
Goods
Tr
3,17,860
4,460
4,000
57,000
25,400
1,50,000
42,000
10,000
5,000
20,000
3,17,860
8.7 Opening E
The balances
accounts alance sheet are carried forward from one
accounting per
another a
ing period. In fact, the balance sheet of
an accounting period beéning trial balance of the next accounting
period. Next year an op rig ntry is made which opens these accounts
contained in the balance str
Re:
:t shown in figure 8.1O(c). The opening entry with
regard
1 b or d as follows :
Dr.
15,000
Dr.
15,500
D
Dr.
5,000
B
'A c
C
Dr.
1,000
T
16,500
5,000
rm loan A/c
To Creditors A/c
15,000
Rationalised 2023-24
309
Financial Statements - I
they Ternts Jntrocfucecf in the Chapter
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Balance Sheet
Bills Payable
Capital
Capital Receipts
Carriage Outwards
Closing Entries
Current Assets
Purchases Return
Return Inwards
Revenue Expenditure
Discount Allowed
Cash
Factory Expenses
Fixed Assets
Gross Profit
Income Tax
Interest on Drawings
Net Profit
Order of Performanc
and Liquidity
Revenue Receip
Sales
Summary wi
1
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
e to Lea
Grouping and Marshalling
Bank Overdraft
Bills Receivable
Capital Expenditure
Carriage Inwards
Cash at Bank
Closing Stock
Currents Liabilities
Rent
Return Outwards
Depreciation
Discount Received
Trade Expenses
F’nancia1 Statements
reight
oss Loss
Y
In est on Ca ’ a
Net oss
venue x
’t
Salaries
Sales R
rn
Ope
g
ies
g
‘ecti c›es
Menninp, useJ/ne
s of urine’
t
nts : After the agreement of
the trial balance, a bu ess enterprise d o epare financial statements.
Financial st ments ar the statem ts, present periodic reports on the
process o si ss enterprises and t esults achieved during a given period.
Financi
at
nts includ
ding and profit and loss account, balance
sheet an
statements e lanatory notes, which form part thereof.
Information provided by a
atements is useful to management to plan
and control the bus s rations. Financial statement are also useful to
creditors, shareholder d ployees of the enterprise.
Menrtiny rteed nrt repar ion of trading and pro t and loss nccourtt : The profit
and loss acco
lights the profit earned or loss sustained by the business
entity in
se f business operation during a given period.
The need
re ring the trading and profit and loss account is to ascertain
the n t resu
business operations during a given period. The profit and
los ccount shows the items of revenue expenses and losses on the debit
items of gain and gross profit are shown on the credit side. For
e eparation of the trading and profit and loss account, closing entries are
co ed to transfer balances of account of items of expenses and revenues.
e profit or net loss shown by the profit and loss account is transferred to the
pital account.
Rationalised 2023-24
Accountancy
310
Menniny, chnrncteristic, need and structure o/ the bnlnnce sheet : The balance
sheet is a statement of assets and liabilities of a business enterprise and shows
the financial position at a given date Informations contained in a balance sheet
is true only on that date. The balance sheet is a part of the final account. But it
is not an account, it is only a statement. In a balance sheet the totals of assets
and liabilities are always equal. It portrays the accounting equation.
A balance sheet has to be prepared to know the financial position of the
business, and the nature and values of its assets and liabilities. All the accounts
which have not been closed till the preparation of the profit and loss account
are shown in the balance sheet. Assets and liabilities shown in the balance
sheet are marshalled in order of liquidity or in order of permanence.
Questions /or Practice
ShoJAnsiers
1.
2.
3.
4.
5.
6.
What are the objectives of preparing financ’ 1 statements ?
What is the purpose of preparing tradin
d profit and loss acc
t.
Explain the concept of cost of goods so
What is a balance sheet. What are it
ara
ristics?
Distinguish between capital and r
n expe iture and
te
e er the
following statements are items
c ’
venue ex
i e‘
(a) Expenditure
incurred
re ai and white
in
t he time of
purchase of an old bui
or r to make’ u
1
(b) Expenditure incur
o
v
one more e
in
cinema hall in
compliance with a overnme order.
(a) Registration fe p
at t time of p
e
building
(b) Expenditure in
e ’
e mainte
ce
a tea garden which will
produce te
years.
(c) Depreciation ar
on a plant
(d) The expenditur
curred in e ct
atform on which a machine will
be
(e) A
isi expenditure, the be
ts of which will last for four years.
What
ating profi
Lon#Ansiers
1.
2.
3.
4.
What are financia
te
ts? What information do they provide.
What are closing ent
ive four examples of closing entries.
Discuss the
d of pre aring a balance sheet.
What is me t
rouping and Marshalling of assets and liabilities. Explain
the w s ’
ic a balance sheet may be marshalled.
Numerical Quex
1.
m the following balances taken from the books of Simmi and Vimmi
Ltd. r
ar ending March 31, 2017, calculate the gross profit.
C ing stock
et sales during the year
Net purchases during the year
(+)
2,5O,OOO
40,0O,OOO
15,0O,OOO
Rationalised 2023-24
Financial Statements - I
2.
3.
4.
5
31 1
15,00,000
Opening stock
Direct expenses
80,000
(Ins. Gross profit T11,70,000)
From the following balances extracted from the books of M /s Ahuja and
Nanda. Calculate the amount of :
(a) Cost of goods available for sale
(b) Cost of goods sold during the year
(c) Gross Profit
Opening stock
25,000
Credit purchases
7,50,000
Cash purchases
3,00,000
Credit sales
12,00,000
Cash sales
4,00,000
Wages
1,00,000
Salaries
1,40,000
Closing stock
0,000
Sales return
50,000
Purchases return
0,000
(ins. (a) ¢ 11,65,000 ; (b) ¢1 1,35,00a) T4,
000
Calculate the amount of gross pr
a
era ing profit one
following balances extracted
f M/s
o
ended March 31, 2017.
his
of the
for the year
50
Opening stock
Net sales
1 1,00
Net purchases
Direct expe ses
Administra
ses
Selling and
ibu on expe
Loss due to fire
Cl
ock
70,000
(Ans. sts
p fit T4,60,000, Operas profit 13,50,000)
Operas earned by
rora & Sachdeva in 2016-17 was T17,00,000.
Its non ing income e ,50,000 and non-operating expenses were
T3,75,000. Calcutenant of net profit earned by the firm.
(Ans. Net profit T JO
The following are theftts from the trial balance of M/s Bhola & Sons as
on March 31, 2017 W
title
Openin
L'I
oc
Debit
2,00,000
8,10,000
10,10,000
Ontiems
g Stock as on date was valued at 13,00,000.
Rationalised 2023-24
Credit
10,10,000
10,10,000
Accountancy
312
You are required to record the necessary journal entries and show how the
above items will appear in the trading and profit and loss account and balance
sheet of M/s Bhola & Sons.
6. Prepare trading and profit and loss account and balance sheet as on
March 31, 2017 :
Account Title
Amount
Machinery
Sundry debtors
Drawings
Purchases
Wages
Sundry expenses
Rent & taxes
Carriage inwards
Bank
Openings stock
27,000
21,600
2,700
58,500
15,000
600
1,350
450
4,500
6,000
Account 'ritIe
Capital
Bills payable
Sundry creditors
Sales
60,000
2,800
1,400
73,500
Closing stock as on March 31, 2017 T22
[Ans. Gross profit Z15,950, L
7. The following trial balance is tr
31, 2017. You are requi
to
p
and the balance sheet
on
Accourid title
u ’
ding
e
175,500]
am on March
d loss account
Amount
Ac
Debtors
Purchase
Coal,
water
Facto
ag
Salar
Rent
Discount
Advertisement
Drawings
Loan
Petty cash
r
a
4,00 , Total
i m the boo
trading an
12,000
50,0
6,000
000
00
00
500
1,000
6,000
500
1,000
5,000
10,000
100
9,900
ship premium
Bank overdraft
Sales
Creditors
Capital
5,000
10,000
1,000
80,000
13,000
20,000
s. Gross profit: T 12,000, Net profit: 1 500, Total balance sheet:
43,400)
Rationalised 2023-24
Financial Statements - I
313
8. The following is the trial balance of Manju Chawla on March 31, 2017. You
are required to prepare trading and profit and loss account and a balance
sheet as on date :
Account title
Debit
Amount
Opening stock
Purchases and sales
Returns
Productive wages
Dock and Clearing charges
Donation and charity
Delivery van expenses
Lighting
Sales tax collected
Bad debts
Misc. incomes
Rent from tenants
Royalty
Capital
Drawings
Debtors and Creditors
Cash
Investment
Patents
Land and Mac
10,000
40,000
200
6,000
4,000
600
6,000
500
Credit
Amount
80,000
600
1,00
600
0
4,000
4
§
2,000
6,0000
3, 0
00
7,000
4, 0
Closing stock T 2,000.
(Ans.
rofit: T 18,400, Ne
ofit: 18,700, Total balance sheet: T
64,70 )
9. The fo
the trial b
e of Mr. Deepak as on March 31, 2017. You
are req
prepare tra
a ount, profit and loss account and a balance
sheet as on date
Accou fit title
Drawi
Insuran
eral ex enses
t and taxes
(factory)
T velling expenses
sh in hand
Bills receivable
Debit
36,000
3,000
29,000
14,400
2,800
7,400
12,600
5,000
Account title
Capital
Bills payable
Creditors
Discount recived
Purchases return
Sales
Rationalised 2023-24
2,50000
3,600
50,000
10,400
8,000
4,4O,OOO
314
Accountancy
Sundry debtors
Furniture
Plant and Machinery
Opening stock
Purchases
Sales return
Carriage inwards
Carriage outwards
Wages
Salaries
1,04,000
16,000
1,80,000
40,000
1,60,000
6,000
7,200
1,600
84,000
53,000
Closing stock T 35,000.
(Ans. Gross profit: I 1,83,000, Net profit : I 85,000, Total balanc s
T 3,52,600)
10. Prepare trading and profit and loss acc
t and balance shee ro
following particulars as on March 31
y
the
Account Title
Purchases and Sales
Return inwards and R urn out
Carriage inwards
Carriage outwards
Fuel and powe
Opening stock
Bad debts
Debtor
Creditors
Capit
Inves
Intere
vestment
ds
3,52,000
9,
0
3,
0
o
9,950
1,31,200
32,000
48,000
3,48,OOO
3,200
16,000
Loan
Repairs
General expenses
Wages and salaries
Land and
s
Cash
Miscel eou
ceipts
Sales tax
cted
,60,000
12,000
2,400
17,000
28,800
2,88,OOO
32,000
160
8,350
’n stock T 30,000.
s. ross profit: T 1,22,200, Net profit : T92,850, Total balance sheet:
T 13,200)
rom the following trial balance of Mr. A. Lal, prepare trading, profit and loss
account and balance sheet as on March 31, 2017.
Rationalised 2023-24
Financial Statements - I
315
Account Title
Stock as on April 01, 2016
Purchases and Sales
Returns inwards and outwards
Carriage inwards
General expenses
Bad debts
Discount received
Bank over draft
Interest on bank overdraft
Commission received
Insurance and taxes
Scooter expenses
Salaries
Cash in hand
Scooter
Furniture
Building
Debtors and Creditors
Capital
Closing stock I 15,000.
(Ans. Gross profit : T
1,03,200)
12. Prepare trading
p
Traders from th
Debit b
600,
Credit
A/nouns
16,000
67,600
4,600
1,400
2,400
600
1,12,000
3,200
1,400
10,000
600
1,800
4,000
200
8,800
4,000
,OOO
00
5,000
6,000
t a loss accoun
balances o
, 00
0,000
T al balance sheet: T
t profit: 1 2
en
Stoc
Cash
Bank
Carriage on pure
2,00,000
Purchases
Drawings
Wage
Machi
Debtors
age
dry expenses
n
F niture
Debit
Amou fit
d alance sheet of M/s Royal
31, 2017.
it balances
s
00
,0 0
O
1,500
Sales
Creditors
Bills payable
2,45,000
10,000
4,000
Capital
1,90,000
9,000
55,000
1,00,000
27,000
300
1,700
4,500
35,000
long stock T8,000
(Ans. Gross loss T 13,500, Net loss 1 20,000,
I 1,85,000)
Rationalised 2023-24
Total balance sheet
316
Accountancy
13.
Prepare trading and profit and loss account from the following particulars of
M/s Neema Traders as on March 31, 2017.
Account Title
Buildings
Plant
Carriage inwards
Wages
Purchases
Sales return
Opening stock
Machinery
Insurance
Interest
Bad debts
Postage
Discount
Salaries
Debtors
Debit
Amount
23,000
16,930
1,000
3,300
1,64,000
1,820
9,000
2,10,940
1,610
1,100
250
300
1,000
Account Title
Credit
Amount
Sales
Loan
Bills payable
Bank overdraft
Creditors
Capital
Purchases return
1,80,000
8,000
2,520
4,720
8,000
2,36,000
1,910
Stock on March 31, 2017 T16,000.
(Ans. Gross profit 117, ,
t Z 10,590,
al
balance sheet
T2,69,830)
14. From the following
a
s of
s Nilu Sare
rch 31, 2017. Prepare
trading and profit an os
ount and b nce heet as on date.
Account Title
Open’ stoc
Purc
Carria
ards
Salaries
Commission
Wages
Rent & taxes
Repairs
Telep
e s
Legal
ges
Sundry e
ses
in hand
or
c
ery
I estments
awings
Debit
10,000
00
,5
0
10,000
11,000
2,800
5,000
1,400
1,500
2,500
12,000
30,000
60,000
90,000
18,000
A
on
’tie
Sales
Capital
Interest
Commission
Creditors
Bills payable
Rationalised 2023-24
2,28,000
70,000
7,000
8,000
28,000
2,370
Financial Statements - I
317
Closing stock as on March 31, 2017 Z22,000.
(Ans. Gross profit I 1,56,500, Net profit 1 1,10,300, Total balance sheet
12,14,000)
15. Prepare trading and profit and loss account of M/ s Sports Equipments for
the year ended March 31, 2017 and balance sheet as on that date
Account Title
Debit
Amount
50,000
3,50,000
5,000
Opening stock
Purchases and sales
Sales returns
Capital
Commission
Creditors
Bank overdraft
Cash in hand
Furniture
Debtors
Plants
Carriage on purchases
Wages
Rent
Bad debts
Drawings
Stationery
Travelling expe
Insurance
Discount
Office e
es
Closing stoc
32,000
,OOO
00
0,000
2,000
8,000
0
6,
o
500
os T 41,500 , Total balance sheet T3,62,500)
’st
Test Your Under
2.
(i
(i)
0
2,000
ss \
I
II
4,21,000
3,0O,OOO
4,000
1,00,00
28,00
ar
Chr
Credit
Amount
Test F
g-I
)T
i)
(iii) F
(iii) e
(iv) T
(iv) c
7ndinp - II
Rationalised 2023-24
(v) d