Date: 25.07.

09

1. Classify the following items as income, expense, asset or liability. Mention also as to whether the listed item
could be more than one, under “Accrual system of Accounting”.

For example, interest expense is an expense as well as outstanding expense in case it is not paid.

Advance given for building

Provision for bad debts
Interest on loans given
Salaries and wages
Sale of scrap not received
Dividend on investment
Bank loan for machinery
Inventory
Share capital from owners
Interest on debenture investment not yet received
Telephone bill payable
Advance received against supply order from a customer

2. Impact of ‘Accrual system’ of accounting from the point of view of which account to be debited and
which account to be debited

Transaction 1 – Outstanding expenses

I have an outstanding rent expense of Rs.5,000/- Give the journal entries for the same now as well as
when the expense is met (cash or bank cheque paid)

At the time of incurring the expense:

Rent expense debited Rs. 5,000/- &

Outstanding expense credited Rs.5,000/-

Upon making the payment or meeting the liability

Outstanding expense debited (reversal) Rs.5,000/- (earlier entry reversed) &

Cash or bank (as the case may be) credited Rs.5,000/-

Transaction 2 – Outstanding income of interest of Rs.2,500/-

Upon recording income without receiving:

Outstanding income debited Rs.2,500/- &

Rent income credited Rs.2,500/-

Upon receiving the cash or cheque as the case may be:

Cash or bank debited Rs.2,500/- &

Outstanding income credited Rs.2,500/- (earlier entry reversed)

Transaction 3 – Lease rentals paid for six months Rs.60,000/- for the period 1.02.2009 to 31.07.09 – not
to be confused with ‘advance paid for expense’. Difference is that in the case of ‘prepaid expense’, the
amount paid is partly for the current financial year and partly for the next financial year. This is done in
accordance with the market practice like for example ‘Insurance’.

At the time of making the payment:

Lease rentals account debited (expense) Rs.20,000/-

Prepaid expenses account debited (asset) Rs.40,000/- &

Bank account credited Rs.60,000/- (It cannot be cash as the amount is in excess of Rs.20,000/-)

In the subsequent financial year, 2009-10, the entry is reversed:

This can be done even on the very first day of 2009-10, i.e., 01.04.2009,

Lease rentals (expense) account debited Rs.40,000/- &

Prepaid expenses account credited Rs.40,000/- (earlier entry reversed)

Transaction 4 – I am a newspaper agency giving economic dailies. I have received Rs.12,000/- from a
corporate client towards newspaper bill on an annual basis for the period 01.01.2009 to 31.12.2009.

Upon receiving the payment:

Cash or bank (as the case may be) debited Rs.12,000/-

Service income credited Rs.3,000/- &

Income received in advance credited Rs.9,000/-

 During the subsequent year:

Income received in advance debited Rs.9,000/- (entry reversed) &

Service income credited Rs.9,000/-

3. Sample balance sheet as at 31.03.2008 of Computers India (P) Limited (Figures in Lacs of Rupees):

Liabilities Assets

Share capital: 100 Fixed Assets: 60

Reserves: 150 Less: Depreciation 30

(Retained profits Net Fixed Assets 30

over a period of Investments: 80

time)

Net worth 250 Bills Receivable 100

Bank overdraft 30 Cash and Bank 35

Creditors for expenses 10 Other current assets 60

Other current liabilities 15 Total current assets 195

Total current liabilities 55

Total Liabilities 305 Total Assets 305

4. Sample Profit and loss for the year 2008-09 of Computers India (P) Limited (Figures in Lacs of
Rupees)

Income from operations 100

Other income 10

Total income 110

Operating expenses:
 Salaries 30

Repairs and maintenance 3

Depreciation 5

Office and general expenses 10

Less: prepaid expense 0.5

Actual office and general expenses 9.5

Marketing expenses

Including Commission 7

Interest and other

Charges 10

Provision for bad & doubtful debts 1.3

Total expenses 65.8

Profit before tax 44.2

Tax at 30% 13.26

Profit after tax 30.94

Dividend 11.94

Profit retained in business 19.0

(Retained earnings)

You have been given other figures as under:

1. Interest and other charges include Rs.2 lacs that is outstanding

2. Office and general expenses include Rs.1 lac that is outstanding

3. Other income includes Rs.1.5 lacs that is outstanding

4. Office and general expenses include Rs.0.5 lac that is ‘prepaid expense’

5. Prepare the balance sheet as at 31.03.2009 making all the required changes and state also the
linkages between the P&L for the year 2008-09 and the balance sheet as at 31.03.2009
 Linkages between P&L for a financial year and balance sheet as at the end of the financial year:

• Depreciation (fixed assets)

• Provision for bad & doubtful debts (debtors – current asset)

• Prepaid expenses (current asset)

• Outstanding income (current asset)

• Outstanding expenses (current liabilities)

• Income received in advance (current liability)

• Provision for tax (current liability)

• Dividend payable (current liability)

• Profit retained in business or ‘Retained earnings’ in the form of ‘Reserves & surplus’ (a part of
‘Net worth’; Net worth consists of share capital and reserves and surplus)

Now let us prepare the balance sheet as at 31.03.2009

Basic assumptions are:

1. There is no change in fixed assets

2. There are no other changes in other liabilities or assets excepting those stated above and the
footnote to ‘Profit and Loss’ account for the year 2008-09 (Figures in Lacs of Rupees)

Liabilities Assets

Share capital: 100 Fixed Assets: 60

Reserves: 150 Less: Depreciation till date 30

Add; Depreciation for the year 5

Total depreciation 35

(Retained profits Net Fixed Assets 25

over a period of Investments: 80

time)
 Add: Retained profits for the

Year 2008-09 19

Revised retained profits 169

Net worth 269 Bills Receivable 100

Less: provision for bad &

Doubtful debts 1.3

Revised bill receivable 98.7

Bank overdraft 30 Cash and Bank 35

Add: Excess for the year 51.5

Revised cash and bank 86.5

Creditors for expenses 10

Add: fresh outstanding: Other current assets 60

Add: Outstanding income 1.5

Prepaid expenses 0.5

Interest expense 2 Revised other current assets 62

Office & general expense 1

Total creditors 13

Other current liabilities 15

Add: Provision for tax 13.26 Total current assets 247.2

Dividend payable 11.94

Revised current liabilities 40.20

Total current liabilities 93.20

Total Liabilities 352.20 Total Assets 352.20

6. Examples of transactions affecting one side of the balance sheet:

a. Liabilities side:
 i. Creditors being paid out of overdraft:

Creditors debit & bank overdraft account credit

ii. Loan installment paid out of overdraft account:

Bank loan debit & overdraft account credit

iii. Capital being introduced into the bank account

Overdraft account debit & capital account credit

iv. Dividend is paid through overdraft account

Dividend payable debit & overdraft account credit

b. Assets side:

i. Debtors realizing and current account getting credited

Current account debit and debtors account credit

ii. Outstanding income realized and current account getting credited

Current account debit and outstanding income account credit

iii. Purchase of fixed asset from current account

Fixed asset account debit and current account credit

iv. Fixed deposit encashed and credited to current account

Current account debit and investment (fixed deposit) account credited

c. Transactions affecting both ‘Assets’ and ‘Liabilities’ sides:

i. Salary payable through current account

Salary payable account debit and current account credit

ii. Debtors realized and the amount goes to overdraft account

Overdraft account debit and debtors account credit

iii. Fixed asset being sold and overdraft account being credited

Overdraft account debit and fixed assets account credited

iv. Capital is being brought in, in the form of plant and machinery

Plant & Machinery account debit & capital account credit

Sadhana – 26.07.09

Batch: 2009-11 – Year 1 – Semester 1 – Basics of accounting and financial reporting – R.

Balachandran

Revision exercises for FCQ 1

1. Particulars Debit Credit
Rs Rs
Capital 50,000
Loans 10,000
Sales 70,000
Accounts Payable 8,000
Bills Payable 10,000
Purchase Returns 4,000
Dividends Payable 6,000
Plant and Machinery 26,000
 Buildings 34,000
Receivables 19,300
Purchases 36,000
Discount Allowed 2,400
Wages 14,000
Salaries 6,000
Travelling Expenses 1,500
Freight 400
Insurance 600
Commission Paid 200
Cash on Hand 200
Bank 3,200
Repairs 1,000
Interest on Loans 2,400
Opening Inventory 12,000

Total 1, 58,000 1,58,000

Additional Data:
1. Closing Inventory Rs 16,000
2. Depreciation on Plant and Machinery at 15% and 10% on Buildings
3. Provision for doubtful receivables Rs 1,000
4. Insurance Prepaid Rs 100
5. Outstanding Rent Rs 200
6. If any difference is there between the two, if it is in debit side, increase in
repairs and if it is in credit side, increase it in Purchase returns

Exercise: To prepare the Profit & Loss account & Balance sheet

2. Dr Rs Cr. Rs.
Opening Stock 8,000 Capital a\c on 1/1/2006 50,000
Purchases 20,000 Sales 80,000
Sales Return 1,500 Purchase Return 400
Packing 4,500 Bills Payable 2,500
Wages 6,300 Sundry Creditors 15,800
Salaries 5,500
Carriage inwards 1,200
Carriage outwards 2,500
Rent 1,100
Bad Debts 2,100
Printing & Stationery 250
Travelling Expenses 150
Premises 55,000
Furniture 2,500
Sundry Debtors 20,000
Investments 3,500
Cash in hand 250
Cash at bank 3,500
Loan given 5,000
Bills Receivable 3,000
Freight charges 2,400
Fire insurance
Premium 900
Rates & taxes 350

1,50,200 1,50,200

Adjustments to be made for the current period are:

1. Inventory in hand 31ST December,2006 Rs 7,000
2. Wages to laborers of RS 300 for the last month are outstanding.
3. Salaries to the clerk of the month of December, 2006 are outstanding Rs 500.
4. A stationary for Rs 30 remains unpaid
5. Depreciate Premises by 5%, Furniture by 10%.
6. Difference if any, increase Cash in hand if it is on debit side and in purchase return if
it is on credit side

Exercise: To prepare Profit and Loss Account & balance sheet